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THE-A B C OF THE FEDERAL 
 RESERVE SYSTEM- 
 
 WHY THE FEDERAL RESERVE SYSTEM WAS 
 CALLED INTO BEING, THE MAIN FEATURES 
 OF ITS ORGANIZATION, AND HOW.IT WORKS 
 
 EDWIN WALTER KEMMERER, Ph.D. 
 
 PROFESSOR OF ECONOMICS AND FINANCE 
 IN PRINCETON UNIVERSITY 
 
 WITH A PREFACE BY 
 BENJAMIN STRONG, LL.D. 
 
 Governor of the Federal Reserve Bank of New York 
 
 PRINCETON UNIVERSITY PRESS 
 PRINCETON 
 
 LONDON: HUMPHREY MILFORD 
 
 OXFORD UNIVERSITY PRESS 
 
 1918 
 
.■> 
 
 
 Pbtncbton University Press 
 Princeton, N. J. 
 
 Published September, 1918 
 Printed in the United States of America 
 
 'i^ 7 \ ' 
 
 y 
 
CONTENTS 
 
 PAGES 
 
 Preface. By Bek jamin Strong ix-xiii 
 
 CHAPTER I 
 
 Purpose and Plan 1-2 
 
 Lack of familiarity with federal reserve system on part 
 of public, and its dangers, 1. — Purpose of book, 2. — 
 Plan of book, 2. 
 
 CHAPTER n 
 Decentralization of American Banking Prior to Federal 
 
 Reserve System 3-7 
 
 Banks lacked organization and effective leadership in 
 time of crisis, 3-4. — Reserves widely scattered, 4-6. — Re- 
 serves immobile, 7.. 
 
 CHAPTER in 
 Inelasticity of American Bank Credit Prior to Federal 
 
 Reserve System .■^. » . .T. . . '. 8-18 
 
 Extent to which bank credit is used as a medium of 
 exchange, 8-10. — Why circulating bank credit should be 
 elastic, 10-11. — Bank-note inelasticity over long periods *^ 
 under old banking system, 11-13. — Seasonal inelasticity 
 of bank notes, 13-15. — Banl^-note inelasticity in times of 
 crisis, 15-17. — Inelasticity of deposit cr'edit, 17. — Evil re- 
 sults of credit inelasticity, 18. 
 
 CHAPTER IV 
 
 Defective Exchange and Transfer System 19-24 
 
 The "float" and the practice of routing checks, 19-21. — 
 Checks in transit commonly counted as legal reserve 
 money, 21-22. — Large domestic shipments of currency re- 
 quired under old banking regime, 22-23. — Foreign exchange 
 difficulties, 23-24. 
 
 CHAPTER V 
 
 Defective Banking Machinery for Federal Government. 25-27 
 Difficulty of apportioning gcTVernment funds among nine 
 sub-treasuries and over fifteeen hundred depositary banks, 
 25-26. — Four evil results of practice, 26-27. — Summary of 
 defects of old banking system, 27. 
 
 V 
 
vi CONTENTS 
 
 PAGES 
 
 CHAPTER VI 
 How THE Federal Reserve System is Remedying the Old 
 Evil of the Decentralizatiok of American Banking. . 2&-49 
 
 Division of country into twelve federal reserve dis- 
 tricts, 28-^.— ^Membership in federal reserve system, 
 29-31. — Democracy of federal reserve banks' plan of or- 
 ganization, 31-33. — Coordination of twelve federal reserve 
 banks and centralization of their control provided for by 
 means of federal reserve board, advisory council, and class 
 C directors of federal reserve banks, 33-35. — District cen- 
 tralization of bank reserves, 35-38. — Mobilization of re- 
 serves, 38-39. — Inter-district mobility of reserves, 39. — 
 ' Rediscounting by one federal reserve bank for another, 
 39-41. — Open-market operations, 41-44. — ^Creation of a 
 broader discount market for commercial paper, 44. — In- 
 creasing use of the trade acceptance, and advantages of 
 trade acceptance over open-book account credit, 44-46. — 
 The bank acceptance, 46-47. — ^Inter-district mobility of 
 reserves promoted by increasing use of trade accecptances 
 and bank acceptances, 47-48. — ^Intra-district mobility of 
 reserves increased by federal reserve system, 48-49. 
 
 CHAPTER VII 
 
 Credit Elastictty under the Federal Reserve System 50-65 
 
 Provisions of federal reserve act for bond-secured 
 national bank notes, 50-51. — The federal reserve bank 
 note, 51.-»^ederal reserve notes, 51-52. — ^Their elasticity, 
 52-57. — Elasticity of deposit currency obtained in a num- 
 ber of ways: Removal of old rigid legal reserve require- 
 ments, 57-58. New legal reserve requirements less rigid 
 and may be suspended in times of emergency, 58-61. 
 Privilege of rediscounting at federal reserve banks, 61- 
 62. Privilege of borrowing on collateral notes with short 
 maturities, 62-63. — Contractility of circulating credit un- 
 der federal reserve system, 64-65. 
 
 CHAPTER VIII 
 Domestic and Foreign Exchange under the Federal Re- 
 serve System 66-81 
 
 Provisions of federal reserve law concerning domestic 
 exchange, 66-69. — Early experiments of the federal reserve 
 authorities as regards the clearing and collection of 
 checks, 69-70. — Present clearing and collection system, 
 70-75.— The gold settlement fund, 76-79.— Foreign ex- 
 change under the new banking system, 79-81. 
 
CONTENTS vii 
 
 CHAPTER IX 
 The Federal Reserve System and the Federal Treasury. . 82-88 
 Federal reserve banks authorized by law to be deposi- 
 taries of government funds, 82-83. — Extensively used as 
 depositaries by Secretary of the Treasury, 83-87. — Fed- 
 eral reserve banks as fiscal agents of Government render 
 invaluable services in the financing of the war, 88. — 
 President Wilson's appeal to non-member banks to join 
 federal reserve system as a matter of patriotic duty ^ 
 89-90. J-^ 
 
 APPENDIX A 
 Combined Balance Sheet of Twelve Federal Reserve 
 Banks as of March 28, 1918, and Brief Explanations 
 OF THE Various Items 92-95 
 
 APPENDIX B ' 
 Federal Reserve Act as Amended to May 1, 1918, With a 
 Marginal Index and with Citations of Amendatory 
 Acts 96-159 
 
 APPENDIX C 
 
 Provisions of the Farm Loan Act, Approved July 17, 1916, 
 which affect Federal Reserve Banks and Member 
 Banks of the Federal Reserve System 160-162 
 
 APPENDIX D 
 Section 7 of "An act to Authorize an Issue of Bonds to 
 Meet Expenditures for the National Security and 
 Defence, . . . Approved April 24, 1917, which Af- 
 fects Federal Reserve Banks and Member Banks of the 
 
 Federal Reserve System" 163-164 
 
 Index to Federal Reserve Act and its Amendments 165-167 
 
 Index to Text of Book 178-182 
 
PREFACE 
 
 By 
 
 Benjamin Strong, LL.D. 
 
 Governor of the Federal Reserve Bank of New 
 
 York 
 
 The federal reserve banks came into being in 
 the month of November, 1914. The passage of 
 the legislation by which they were created had 
 been preceded by five years of discussion, fol- 
 lowing the financial upheaval of the fall of 1907, 
 such as might have been expected to prepare the 
 way for the considerable changes in banking 
 methods contemplated by the new law. 
 
 Notwithstanding, however, that American 
 bankers had gained a better understanding of the 
 deplorable defects in the American banking and 
 currency system, the managers of the new fed- 
 eral reserve banks soon found that the welcome 
 accorded to them by the banks of the country 
 was, to say the least, cool. Business men gener- 
 ally welcomed the change for the better, recogniz- 
 ing the protection which the reserve system af-' 
 forded them; but nevertheless both bankers and 
 
 ix 
 
X PREFACE 
 
 business men were regrettably ignorant of what 
 it all meant. 
 
 It was the influence of the war which demand- 
 ed that the federal reserve banks be organized as 
 promptly as possible. The best banking ma- 
 chinery and the best banking talent in the coun- 
 try seemed to be required to protect the interests 
 of both bankers and business men. Much was 
 expected from the new system, once it was start- 
 ed. Very shortly, however, immense imports of 
 gold from abroad, general business prosperity 
 stimulated by war profits, and reasonably com- 
 fortable conditions in credit and banking, ap- 
 peared to put the federal reserve banks for the 
 first two and one-half years of their existence in- 
 to the class of expensive luxuries; in fact, they 
 were regarded as examples of governmental in- 
 terference with business which were tolerated 
 but, nevertheless, were not appreciated by many 
 bankers. 
 
 During this interval, November, 1914, to 
 April, 1917, the system, by slow stages of prog- 
 ress, found itself. The machinery for conduct- 
 ing actual operations was designed and developed 
 far beyond the requirements of the moment. The 
 terms of the Act were perfected where need was 
 discovered, the men engaged in the work became 
 better acquaint'ed with their duties and with each 
 
PREFACE xi 
 
 other, skilled clerks were engaged and trained, 
 and accounting methods were perfected, so that 
 when the test came as a result of our entry into 
 the war, in April, 1917, the Federal Reserve 
 banks were in large measure prepared for the 
 grave tasks and responsibilities at once to be as- 
 sumed. 
 
 During these first twelve months of our coun- 
 try's participation in the war the reserve system 
 has become established upon a basis of confidence 
 and respect, even in fact of admiration, among 
 both bankers and business men; and its future 
 therefore seems assured so long as good manage- 
 ment deserves the support now enjoyed. 
 
 During these three and one-half years, how- 
 ever, the work of organization, and during the 
 last year the work assumed by the Federal Re- 
 serve banks as fiscal agents of the Government, 
 have so occupied the time of all connected with 
 the system that it has been difficult to overcome, 
 in a comprehensive way, much of the ignorance 
 and misunderstanding of the functions of the 
 system. It is widely accepted as successful and 
 necessary, but, with some exceptions, it is still 
 hardly possible to say that it is understood. It 
 has come as an enlargement of the scope of a 
 great banking machine which had become com- 
 plicated by the dual development of two classes 
 
xii PREFACE 
 
 of banks, national and state; and, in the case of 
 state banks, a development which covered a vast 
 field of business activity not confined to commer- 
 cial banking. Under the influence of the new 
 system of twelve closely allied banks of reserve 
 and of discount, the tendency will be toward uni- 
 fication and simplicity which will be brought 
 about by the state institutions, in increasing num- 
 bers, becoming stockholders and depositors in 
 the reserve banks. 
 
 Until, however, through evolution in methods 
 and many changes in both state and national 
 laws, we have a truly unified system, banking in 
 this country will be a puzzle and a mystery to the 
 casual observer, to the business man, and to 
 bankers abroad, unless its various features are 
 presented in a concise and comprehensive form, 
 stripped of the technicalities of economic discus- 
 sion. It is much more difficult to present a com- 
 plex problem in concise form than in extended 
 detail. This task, however. Professor Kemmerer 
 has undertaken with distinct success. An ac- 
 count of the functions assumed by the federal 
 reserve banks as fiscal agents of the United 
 States Government, and of the handling of war 
 bonds, certificates of indebtedness and govern- 
 ment funds would have complicated, and, pos- 
 sibly, rendered less clear the description of the 
 
PREFACE xiii 
 
 position the federal reserve system occupies in the 
 banking field. It would have involved, further, 
 a discussion of the long felt necessity for a modi- 
 fication of the independent treasury system. 
 These subjects, therefore, have properly not been 
 enlarged upon. 
 
 It is a public service to undertake the difficult 
 task of preparing an account of this great change 
 in our fiscal system so as to combine accuracy 
 with a comprehensive survey of the subject and, 
 at the same time, to avoid technical details. All 
 that is required to give the reader an understand- 
 ing of the fundamentals of the new regime of 
 American banking is contained in the following 
 pages, which will be read with attention and in- 
 terest by many who have been seeking this infor- 
 mation during the past three and one-half years. 
 
 Federal Reserve 
 
 Bank of New York, 
 
 May 28, 1918. 
 
THE A B C OF THE FEDERAL 
 RESERVE SYSTEM 
 
 CHAPTER I 
 Purpose and Plan of !&ook 
 
 This book is an attempt to set forth in non- t\ 
 technical language the chief reasons why the fed- 
 eral reserve system was called into being, the 
 main features of its organization, and how it* 
 works. Although the federal reserve act of 1913 
 is one of the most important pieces of financial 
 legislation enacted in modern times, and although 
 it has been in operation several years, compara- 
 tively few people are f amihar with its elementary 
 principles. It is looked upon by the majority of 
 people as too technical and complicated a matter 
 to be imderstood by persons other than bankers 
 and economists. As a consequence there has been 
 a surprising lack of public interest in the work- 
 ings of the system and in the important legisla- 
 tive and administrative modifications which the 
 system has undergone since its establishment. 
 This unfamiliarity is not surprising when one 
 considers the "complex character of much of the 
 
2 FEDERAL RESERVE SYSTEM 
 
 federal reserve machinery and the technical lan- 
 guage in which this machinery is usually de- 
 scribed. In a democracy, however, widespread 
 ignorance, among the voters, of the country's 
 financial system is fraught with danger. 
 
 America's leading manufacturing, transporta- 
 tion and commercial concerns years ago attained 
 heights of economic efficiency which made them 
 the envy of foreigners. None, however, envied 
 us our banking system. None followed it except 
 soon regretfully to turn back. This was true, 
 despite the fact that our old American banking 
 system had many substantial merits. It was 
 reasonably safe, it yielded good profits, it was 
 adaptable to the local needs of widely varying 
 communities, and it developed the check and 
 clearing system to a degree of perfection found 
 in few if any other countries. Along with these 
 meritorious features, however, it contained a 
 number of vfery serious defects. The chief of 
 these may be grouped conveniently under four 
 heads: I. Decentralization. II. Inelasticity of 
 credit. III. Cumbersome exchange and transfer 
 system. IV. Defective organization as regards 
 relationship with federal treasury. In the four 
 succeeding chapters these four groups of defects 
 will be considered, and in the following four chap- 
 ters will be discussed the respective remedies pro- 
 vided by the federal reserve system. 
 
CHAPTER II 
 
 Decentralization of American Banking 
 Prior to Federal Reserve System 
 
 In 1912 the United States had many times 
 more commercial banks than any other country 
 in the world, and these banks averaged much 
 smaller than those of any other important coun- 
 try. Official figures at that time placed the num- 
 ber of independent banking establishments of all 
 kinds in the United States at approximately 30,- 
 000, and of this number something like 28,000 
 were banks whose business was wholly or partly 
 of a commercial character. These commercial 
 banks were owned for the most part by the resi- 
 dents of the communities in which they were 
 placed, and the business of most of them was 
 chiefly local in character. The great majority of 
 national banks were national in nothing but name. 
 Except for the rather loose association of the 
 banks in the clearing houses of our principal cities 
 and a growing community of interest, most of 
 these banks were independent units, each work- 
 ing for itself. There was little team work. In 
 
 3 
 
4 THE A B C OF THE 
 
 times of threatened panic the different parts of 
 the system worked at cross purposes. They were 
 without effective leadership at those times when 
 prompt cooperation under national leadership 
 was urgently needed. 
 
 Reserves Scattered 
 
 The most serious feature of this decentraliza- 
 tion was the scattering of reserves. Thirty thou- 
 sand different banks meant 30,000 cash reserves, 
 and these reserves for the commercial banks were 
 more than the mere "till money" which the "cash 
 balances" of most foreign banks represent. They 
 were actual reserves, substantial in amount, upon 
 which the banks placed their prime dependence 
 for times of emergency. It is true that most 
 banks had so called "deposited reserves," name- 
 ly, funds on deposit in other banks, which they 
 were allowed to coimt as part of their "legal 
 reserves" ; and they had so called "secondary re- 
 serves," namely, funds invested in securities and 
 call lo^ns, which were supposed to be quick assets 
 that could be liquidated at once in time of need. 
 Strictly speaking, however, neither of these "re- 
 serves" was a reserve at all. The deposited re- 
 serve was after all merely a deposit in another 
 bank, which the depository bank loaned out — 
 commonly at call on the stock exchange — and 
 
FEDERAL RESERVE SYSTEM 6 
 
 against which it held its own reserve, a reserve 
 which in turn was often further attenuated by 
 being placed on deposit in a third bank, there 
 again to be loaned out on stock exchange collat- 
 eral. In times of emergency, therefore, the "de- 
 posited reserve" could be realized upon only to..,^ 
 the extent that call loans could actually be called, 
 and this meant to the extent that stock exchange 
 securities could be sold. Invested "secondary re- 
 serves" could be realized upon, likewise, only to 
 the extent that securities could be sold. In times 
 of threatened panic, however, stocks and bonds 
 can not be sold on any extensive scale except at 
 great sacrifices and at the risk of financial col- 
 lapse. Experience has shown that securities are 
 not sold to any large extent by banks at such 
 times. The losses involved would be too great. 
 The result was that in times of serious danger the 
 banks of the country were forged to rely to a 
 very large extent upon their own cash reserves, 
 which, as a consequence, had to be maintained at 
 a high level — higher than in other advanced 
 countries. This situation gave the vault* reserve 
 in American commercial banks an importance 
 not found in the commercial banks of Europe. 
 European joint-stock banks normally carry little 
 cash in vault; they place their reliance for 
 emergency funds directly or indirectly upon the 
 
6 THE A B C OF THE 
 
 central banks. In America bank reserves were so 
 scattered and so jealously guarded that in times 
 of threatened panic they were comparatively in- 
 effective in staying the storm. The situation was 
 analogous to what would happen today if after 
 drilling our American army to a high point of 
 fighting efficiency, we should scatter the men in 
 small units all over the United States to protect 
 the country from a threatened invasion. ]Each 
 community would be jealous of its own squad of 
 soldiers, but the invader would come and the effi- 
 ciency of our well drilled soldiers would be prac- 
 tically nil. The point of the illustration will be 
 clear to everyone recalling the mad scramble for 
 reserve money on the part of banks throughout 
 the country at the time of the panic of 1907* Our 
 supply of reserve money was large. In fact we 
 had at that time in the United States the largest 
 supply of gold in the world. It was ineffective, 
 however, because widely scattered; hence, sus- 
 pension of cash payments throughout the coun- 
 try, currency premiums, the breakdown of our 
 domestic exchanges, the illegal issue of millions 
 of dollars of money substitutes, and all the other 
 disgraceful accompaniments of an American 
 panic. 
 
FEDERAL RESERVE SYSTEM 7 
 
 Reserves Immobile 
 
 Obviously a country's reserve money must to 
 a large extent be concentrated in one reserve or, 
 at most, in a few large reserves, if it is to be ef- 
 fective. It must be marshalled in armies, not 
 scattered in small squads. But these armies must 
 be mobile so that they can be quickly moved 
 singly or in combinations to places of threatened 
 attack. An army's mobility is a big factor in its 
 efficiency — a truth which the great mobility of 
 the armies of the Central Powers in the present 
 war has emphasized. Our American bank re- 
 serves were not only scattered, they were also im- 
 mobile. There was no effective way of quickly 
 gathering them together and massing them at the 
 points of financial danger. 
 
 These then were the three most serious phases 
 of our banking decentralization : ( 1 ) Absence of 
 a responsible national conservator of our money 
 market, like the Bank of France or the Bank of 
 England. (2) Scattered bank reserves. (3) 
 Immobile bank reserves. 
 
CHAPTER III 
 
 I 
 
 Inelasticity of American Bank Credit Prior 
 TO Federal Reserve System 
 
 The second group of defects of the old bank- 
 ing system, defects closely related to those of de- 
 centralization, were those of^^credit inelasticity. 
 A very large part of the country's current Busi- 
 ness is carried on by means of funds borrowed 
 from commercial banks. These borrowed funds 
 are left on deposit with the banks, and the de- 
 posits are circulated by means of checks, the 
 debits and credits of individual accounts being 
 offset in such a way that the total commercial de- 
 posits of the country do not normally vary 
 greatly in short periods of time. 
 
 Extent to which Bank Credit is Used as 
 Medium of Exchange 
 
 The point may be illustrated by a few figures, 
 and, inasmuch as conditions have been very ab- 
 normal since the outbreak of the European War, 
 the figures used will be those for the year 1913^ 
 Reports made to the Comptroller of the Cur- 
 
 8 
 
FEDERAL RESERVE SYSTEM 9 
 
 rency show that on June 4, 1913, the loans and 
 discounts of commercial banks which reported to 
 the Comptroller (exclusive of loans classified as 
 real-estate loans) amounted to approximately 
 8j billion dollars. Estimates made by Profes- 
 sor Irving Fisher give a rate of deposit turn- 
 over for the United States in 1913 of approxi- 
 mately 54, which means that for each check- 
 deposit balai\ce, maintained in a commercial 
 bank, averaging throughout the year $1,000, 
 approximately $54,000 in checks were drawn and 
 paid. The average deposit balance of 8 J billions 
 dollars would niean therefore check transactions 
 to the extent of 54 times 8| billions dollars or 
 472 billions dollars in 1913. Investigations made 
 for the National Monetary Comnyssidn in 1909 
 by Professor David Kinley showed that between 
 80 and 85 per cent of the country's total business 
 was transacted by means of checks. If we accept 
 the latter figure as the more representative one 
 for 1913, we arrive at 83 bilHons dollars (namely, 
 15/85 of the amount of business done by means 
 of checks), as the amount of business in that 
 year performed by means of cash. In June, 
 1913, of the total amount of money in circulation 
 in the United States, 21 per cent, or $716 millions 
 consisted of bank notes. Although from the 
 public's point of view bank notes are money, from 
 
10 THE A B C OF THE 
 
 the issuing bank's point of view they are a form 
 of bank credit. If we treat them as a form of 
 bank credit, and add to the $472 biUions of check 
 business 21 per cent of the $83 bilhons of money- 
 business we arrive at approximately 490 biUion 
 dollars worth of business in 1913, representing 
 88 per cent of the country's total business trans- 
 actions, as the amount performed by means of 
 bank credit — checks and bank notes. 
 
 The amount of money and of deposit currency 
 which a country needs to carry on its business, at 
 a price level in equilibrium with the price levels 
 of other countries, depends largely upon the 
 amount of business or of money work to be done. 
 In years of active business a larger supply of 
 circulating media is needed than in years of busi- 
 ness depression. Furthermore, in a country like 
 the United States, in which agriculture is a par- 
 ticularly important industry, there are very pro- 
 nounced seasonal fluctuations in the amount of 
 business to be done, and consequently in the de- 
 mand for cash and for deposit currency. One 
 important postulate of a good banking system is 
 its capacity to adjust the supply of deposit and 
 bank-note currency to variations in trade de- 
 mands, increasing it, for example, at the time of 
 the heavy crop-moving demands in the fall and 
 reducing it at the time of the period of inactive 
 
 I 
 
FEDERAL RESERVE SYSTEM 11 
 
 business, which normally sets in shortly after the 
 opening of the new year. Capacity to contract 
 the circulating media when business demands de- 
 cline is as important as capacity to expand them 
 when these demands increase. 
 
 Under the old regime our American bank 
 credit, both note and deposit, was peculiarly in- 
 ^astic; "although the seasonal character of much 
 of the country's business is such as to make credit 
 elasticity a desideratum of unusual importance in 
 the United States. 
 
 Bank-Note Inelasticity 
 
 Our national bank notes, which should have 
 furnished the elastic element in the country's 
 hand to hand money, were notoriously inelastic. 
 National banks were authorized to issue these 
 notes by depositing with the Govemment^United 
 States bonds equaU i]uj)aiLJKalue to the notes isr 
 sy^.^ The banks were supposed to realize a 
 "double profit" on the bank notes, namely, in- 
 terest on the bonds, and interest on the notes 
 when theywereioaiiedjnit as money. After 1900 
 fFe~¥onS^iised, however, were mostly two per 
 cent bonds of 1930, and as the issue of bank notes 
 
 1 If the market value were below the par value, additional 
 bonds were to be deposited so as to make the market value at 
 least equal to the notes issued. In recent years the market value 
 of these bonds has been usually above the par value. 
 
12 THE A B C OF THE 
 
 involved a number of incidental expenses, includ- 
 ing a semiannual tax of one-fourth of one per 
 cent upon the amount of notes issued, the double 
 profit was usually not a very substantial one. 
 Inasmuch as not more than $100 in notes could 
 be issued against $100 par value of bonds regard- 
 less of how high a premium the bonds bore in the 
 market, and inasmuch as the bonds had been in 
 recent years practically always at a substantial 
 premium, the banks usually realized considerably 
 less than Ij per cent net interest on the bonds. 
 Obviously the higher the premium paid on the 
 bonds, other things equal, the lower the net inter- 
 est yield; and the lower the premium, the higher 
 the yield. The result was a tendency for the' 
 banks to increase their bank-note circulation when 
 the price of bonds declined and to decrease it 
 when the price rose. In other words,|the expan- 
 sion and contraction of the bank-note circulation 
 was not, as it should have been, in response to 
 variations in trade demands, but in response to 
 variations in the price of the government debt. 
 This often gave an inverse elasticity, since the 
 price of government bonds often declined at 
 times when business was slack and the currency 
 was already redundant, and often rose at times 
 when business was active and an increase in the 
 bank-note circulation was desirable. In other 
 
FEDERAL RESERVE SYSTEM 13 
 
 words, the bank-note circulation frequently de- 
 clined at just the time when business needs de- 
 manded an increase, and increased when the busi- 
 ness situation called for a decline. The character 
 of these fluctuations will be seen from the fol- 
 lowing chart.^ ^ "^^ '^ 
 
 From season to season the bank-note circula- 
 tion was very irresponsive to varying trade de- 
 mands. There was considerable delay and red- 
 tape invnivpri in nhtflining the Tl^of^^^^^ bouds, ^M^^^^* 
 
 depositing them at Washington and obtaining 
 bank notes for circulation; and these obstacles, 
 together with the expenses involved and the re- . 
 strictions upon the subsequent retirement of notes ^ 
 once issued,^ made it impracticable for banks to 
 meet temporary needs for additional currency, 
 like those of the crop-moving period, by issuing 
 additional notes. About all that can be said_fa-' 
 vorable to the seasonal elasticityof the national 
 bank notes is that banks intending to increase 
 permanently their bank-note circulation tended 
 to make the increase in the fall when the demands 
 for currency were normally largest. In the mat- 
 ter of seasonal elasticity our national bank-note 
 
 2 Figures plotted on the chart do not include the issues of Aid- 
 rich- Vreeland emergency notes. See note 4, page 15. 
 
 8 Down to May 30, 1908, the law limited the amount of national 
 bank notes that could be withdrawn in any one calendar month 
 to $3,000,000, On that date the law raised the limit to $9,000,000. 
 
SI JM <-« 
 
FEDERAL RESERVE SYSTEM 15 
 
 circulation showed up very unfavorably in com- 
 parison with the bank-note circulation of Canada, 
 which, under the system of branch banks and an 
 asset bank-note currency, was highly responsive 
 to seasonal variations in currency needs. The 
 contrast will be made clear by the following chart 
 {Chart II) showing the variations in the monthly 
 bank-note circulation of the two countries prior 
 to November, 1914, the date when the federal 
 reserve banks were opened.^ 
 
 In times of crisis national bank notes could not 
 be depended upon to provide additional currency. 
 Government bonds were usually difficult to se- 
 cure on favorable terms at such times, and the 
 machinery for taking out new circulation worked 
 too slowly. Some progress was made in the di- 
 rection of improving the old system in this regard 
 during the latter years of the old regime; and, 
 under the spur of strong appeals to the banks and 
 active assistance from the Treasury Department, 
 there was some helpful increase in the national 
 bank-note circulation at the times of the panic of 
 1907 and the crisis of 1914. At best, however, 
 
 *The figures plotted on the chart do not include the circula- 
 tion of the so-called Aldrich-Vreeland emergency notes, which were 
 first issued in August, 19r4, reached their maximum in October, 
 and were all retired by the following July. Legal authority to 
 issue such emergency notes expired by limitation June 30, 1915. 
 Federal Reserve Act, section 27. 
 
TF-I 
 
 s i 
 
FEDERAL RESERVE SYSTEM 17 
 
 the bond-secured notes were a weak reed to rest 
 upon in time of crisis. 
 
 Inelasticity of Deposit Credit 
 
 Our loan and deposit credit was likewise defi- 
 cient in the quality ofs elasticity. Rigid legal 
 minima for bank reserves set up an obstacle to 
 loan and deposit expansion at times of increasing 
 business activity. Banks which were "loaded up" 
 and could not make further advances to regular 
 customers of good standing were prevented from 
 loaning their credit to these customers by ac- 
 cepting bills, which the customers might draw 
 upon them, as is the common custom in Europe, 
 because our courts had ruled that bank accept- 
 ances were illegal. The rediscount business 
 among oui^ banks was almost negligible, and most 
 of that which existed was done on the quiet and 
 under cover. Rediscounting was frowned upon 
 by bankers and business men, and there was no 
 central institution like the central banks of Eu- 
 rope, whose business it was to rediscount the pa- 
 per of other banks in times of need. Our Ameri- 
 can commercial paper was largely local paper and 
 we had comparatively little that could be sold in 
 distant markets, either at home or abroad. In 
 other words, rigidity gather than elasticity was a 
 characteristic feature of our Amencan deposit 
 credit. 
 
18 FEDERAL RESERVE SYSTEM 
 
 Evil Results of Credit Inelasticity 
 
 To this defect of credit elasticity coupled with 
 that of decentralization were to be attributed 
 largely the frequent and wide fluctuations in the 
 interest rates on call and short-time loans, for 
 which American money markets were notorious, 
 the alternation of periods of excessive specula- 
 tion stimulated by redundancy of currency and 
 credit with periods of stringency and liquida- 
 tion brought on by scarcity. For this rigidity 
 of our credit system the business men and the 
 farmers paid the price of higher interest rates;, 
 the farmer suffered through the necessity of 
 selling his staple crops largely in the fall when 
 a tight money market was depressing prices, and 
 of buying his supplies largely in the early spring 
 when easy money conditions tended to make 
 prices abnormally high; the banker was com- 
 pelled to keep large reserves and to tie up an ex- 
 cessive amount of his commercial deposits in capi- 
 tal investments, such as the purchase of bonds 
 and the making of call loans on stock exchange 
 collateral; while upon all classes in the commun- 
 ity an uncertain and unstable money market, 
 which was wont to collapse frequently in panics, 
 imposed the burden of great financial anxiety^ 
 
CHAPTER IV 
 
 Defective Exchange and Transfer System 
 
 A third group of defects in our old banking 
 system consisted in certain cumbersome features 
 — unnecessary wheels and bolts as it were— in 
 our doniiestic and foreign exchange mechanism. 
 These features greatly interfered with the effi- 
 cient operation of the machine and at the same 
 time added to the expense. This subject is a 
 large and complicated one and can only be 
 touched upon here. It may be divided into two 
 parts, that relating to domestic exchange, and 
 that relating to foreign exchange.- 
 
 Domestic Exchange 
 
 Of the hundreds of billions of dollars in checks 
 drawn every year, a very large proportion are 
 for local payments, and, being settled promptly 
 through local clearing houses or directly between 
 the banks concerned, offer no difficulties. Our 
 American clearing house machinery is a marvel 
 of perfection for the settlement of local checks. 
 In addition to the checks drawn for purely local 
 
 19 
 
20 THE A B C OF THE 
 
 payments, however, checks whose span of life is 
 but one day and which are born, live and die 
 within the narrow limits of one town or city, there 
 are millions of checks drawn daily for out-of- 
 town payments, checks whose span of life often 
 covers many days and which in the range and 
 speed of their movements excel the proverbial 
 American tourist party in Europe. The supply 
 of these checks that is continually in transit, re- 
 cently estimated to amount at any one time to 
 about $300 millions, is what is known among 
 bankers as the "float." The problem of efficient- 
 ly and cheaply handling this float and of equit- 
 ably apportioning the expense was for years a 
 perplexing one. Some clearing houses, as for 
 example that of New York, imposed certain defi- 
 nite charges for the collection of checks on points 
 beyond a certain radius from New York City. 
 Other clearing houses imposed no charges. The 
 Boston clearing house developed a system for the 
 parring of checks throughout New England, 
 thereby eliminating all collection charges on items 
 drawn on banks entering the system. Similar 
 devices were adopted in a number of other sec- 
 tions of the country, notably in the middle west. 
 Some cities, like Albany for example, became 
 known as free cities and others were notorious 
 for their high collection charges. Many banks 
 
 m 
 
FEDERAL RESERVE SYSTEM 21 
 
 imposed exchange charges — some high and some 
 low — for the collection of out-of-town checks re- 
 ceived over their counters, and some made a 
 charge for the collection of checks drawn upon 
 themselves when presented from out-of-town 
 sources. These practices led among other evils i 
 to the practice of routing checks, which means/ 
 that checks in the process of collection would of- 
 ten be sent by roundabout and devious routes in 
 order to avoid or reduce collection charges. In 
 this way the length of time in which checks were 
 in transit was increased and the economic cost to 
 the community for the collection of checks was 
 made heavier. 
 
 One serious phase of the practice of routing » 
 checks was the manner in which it padded legal [ 
 reserves. Competition among farge-city banks \ 
 for the accounts of country banks led the city 
 banks to give an immediate credit to the country 
 banks for out-of-town checks, checks which some- 
 times took the city bank a week or more to col- 
 lect. The country bank counted as legal reserve 
 out-of-town checks sent to the reserve city bank 
 for collection as soon as they were mailed. The 
 reserve city bank in turn would send some of 
 these same checks to the central reserve city bank 
 and count them as reserve money as soon as they 
 were put in the maiL...Jn this way one check in 
 
22 THE A B C OF THE 
 
 transit frequently counted as legal reserve for 
 both a country bank and a reserve city bank. Oc- 
 casionally such a check, after performing a yeo- 
 man service in being counted as legal reserve 
 money by two banks for several days, would be 
 returned as worthless marked "no funds," 
 
 Another defect of the domestic exchange sys- 
 tem was the expense and trouble, for which it 
 was largely responsible, of requiring heavy ship- 
 ments of currency back and forth over the coun- 
 try. 'As previously noted, American money 
 markets are subject to pronounced seasonal 
 swings. At one season of the year the relative 
 demand for bank funds is heaviest in the cotton 
 belt of the south ; at another time it is heaviest p 
 the great cereal producing sections of the west 
 and middle west; and at another season it is 
 heaviest in the leading financial centers of the 
 east. This heaviest demand often shifts from one 
 section to another within a very brief period of 
 time. Under our old banking system these shifts 
 carried with them large shipments of currency 
 — shipments amounting in the course of a year 
 to hundreds of milhons of dollars — and frequent- 
 ly a shipment would hardly be received and un- 
 packed before a shift in the monetary demand 
 would require it to be sent to another section or 
 perhaps to be returned to the place whence it 
 
FEDERAL RESERVE SYSTEM 23 
 
 came. All this involved expense, including pack- 
 ing, shipping, abrasion, insurance and interest 
 items. 
 
 A second phase of the exchange difficulties un- 
 der the old banking system was that relating to 
 the foreign exchanges. 
 
 Foreign Exchange Difficulties 
 
 Our foreign trade was financed largely through 
 London, and those parts of the trade which were 
 witli the Orient and with South America were 
 financed almost entirely through London. Lon- 
 don is the world's financial center and it is but 
 natural that we should utilize to a substantial ex- 
 tent her unrivalled facilities for financing oversea 
 trade. The trouble was not that we utilized them, 
 but that we utilized them too much and were 
 unduly dependent upon them. This involved 
 several difficulties, only two of which need be 
 mentioned here. In the first place, payments 
 through London gave rise to an additional for- 
 eign exchange operation, which normally added 
 to both the expense and the risk of financing a 
 shipment of goods. In the second place, the fact 
 that invoices, bills of lading and other documents 
 passed through the hands of foreign banks and 
 of South American or oriental branches of for- 
 eign banks gave to our foreign competitors "in- 
 
24 
 
 FEDERAL RESERVE SYSTEM 
 
 side" information concerning our foreign busi- 
 ness^riformation that was often used to their 
 advantage in competition with our own citizens. 
 We now come to the fourth and last of the de- 
 fects in our old banking system, which were out- 
 lined at the beginning of this book. That is a 
 defect which is concerned with the relations of 
 our banking system to the federal treasury. 
 
CHAPTER V 
 
 Defective Banking Machinery foe Federal 
 Government 
 
 The general funds of the treasury were kept in 
 part in the country's nine sub-treasuries, and in 
 part in national banks, which qualified as deposi- 
 tories of government funds. There were 1,584 
 such national bank depositories at the close of the 
 fiscal year 1914. The. apportionment of the funds 
 between the sub-treasuries and the banks on the 
 one hand, and among the depository banks on the 
 other hand, was entrusted to the Secretary of the 
 Treasury. The treasury funds to be thus appor- 
 tioned varied widely from year to year and from 
 season to season. 
 
 In a number of respects this system worked 
 badly. Briefly summarized, the defects were 
 as follows: (1) It led to the continual hoard-""' 
 ing in treasury vaults of large sums of money |'^ 
 involving substantial administrative expenses 
 and a heavy loss of interest. (2) At certain 
 seasons of the year the Government's receip 
 greatly exceed its disbursements, as for exampl 
 
 25 
 
 uses j I 
 tain I \ 
 liptaGL) 
 nple 1/ 
 
26 THE A B C OF THE 
 
 at the times when tax payments are heaviest; 
 while at other seasons, as for example when 
 pension money or interest on the public debt 
 is being paid, the disbursements exceed the 
 receipts. In the former case the money market 
 was disturbed by the Government's suddenly 
 withdi^awing large sums from circulation and 
 thereby contracting the currency. In the latter 
 case it was disturbed by the sudden pumping in- 
 to circulation of large sums of money. These 
 operations, when on any substantial scale, tended 
 to affect the interest rates on call loans and the 
 prices of speculative securities. The task im-' 
 posed upon the Secretary of the Treasury, there- 
 fore, of apportioning these large government bal- 
 ances among the banks and the sub-treasuries was 
 a difficult one and one which placed too great 
 power and responsibility over the money market 
 in the hands of a government official. It also 
 led to criticism and jealousy among depository 
 banks. (3) The system caused depository 
 banks to rely unduly upon the Secretary of the 
 Treasury for aid in the form of increased govern- 
 ment deposits in times of financial pressure, in- 
 stead of depending upon themselves and keeping 
 "their houses in order" so as to be ready for 
 emergencies. "The grandfatherly attitude of 
 the Secretary of the Treasury toward the banks" 
 
 M 
 
FEDERAL RESERVE SYSTEM 27 
 
 in the matter of government deposits was an ex- 
 pression frequently heard. 
 
 The four chief defects of our American bank- 
 ing system as it existed prior to the enactment of 
 the federal reserve law have now been briefly de- 
 scribed. They were decentralization, inelasticity 
 of credit, cumbersome transfer system, and de- 
 fective governijient depository system.. To 
 remedy these defects the federal reserve system 
 was created by the law of December 23, 1913; 
 and federal reserve banks opened their doors for 
 business November 16, 1914. Since that date 
 the system has developed rapidly under the man- 
 agement of administrative boards and under the 
 influence of a number of important amendments 
 to the organic law. It is not our task here to 
 trace this interesting development, but rather to 
 answer briefly the question: How is the federal 
 reserve system as now developed remedying the 
 defects of the old banking system? Let us con- 
 sider the remedy in its relation to the four gen- 
 eral defects in the order in which they have been 
 discussed. 
 
/ 
 
 CHAPTER VI 
 
 How THE Federal Reserve System is Remedy- 
 ing THE Old Evil of the Decentral- 
 ization OF American Banking 
 
 The federal reserve act does not destroy our 
 American system of small independent banks 
 with its prestige of over a half century of growth 
 and usefulness, and with its great merit of local 
 adaptabihty to the needs of a country of magnifi- 
 cent distances and of widely varying economic 
 activities. The federal reserve law continues 
 these thousands of independent banks with all 
 their essential functions, but federates them into 
 a unified system which is democratic in its organi- 
 zation and nationwide in its field of operation — 
 a system dedicated to pubhc service. 
 
 Federal Reserve Districts 
 
 There are twelve federal reserve banks, each 
 of which operates in one of the federal reserve 
 districts into which the country is divided. In 
 determining the boundaries of these districts the 
 authorities were required to have "regard to the 
 
FEDERAL RESERVE SYSTEM 29 
 
 convenience and customary course of business," 
 to make each district large enough to provide the 
 minimum capital of $4,000,000 required by law, 
 and to make none so large as to dominate the 
 others thereby endangering the federal principle 
 which the law sought to establish, A map show- 
 ing the boundaries of the twelve federal reserve 
 districts and the location in each district of the 
 federal reserve city, namely, the city in which the 
 main office of the federal reserve bank is located, 
 is given below. ^ 
 
 The fact that the number of banks and the 
 amount of banking capital in different sections 
 *^of the country vary so widely explains the great 
 differences in the geographic sizes of the federal 
 reserve districts. 
 
 Plan of Organization 
 
 All national banks are required to be members 
 of the system, and state banks and trust com- 
 panies (which conform to certain standards as 
 to size and character of business) are encouraged 
 to join. Comparatively few state institutions 
 joined during the first two years of the system, 
 but the liberal policies of the federal reserve 
 
 1 The map is a reproduction of the one published in the Third 
 Annual Report of the Federal Reserve Board (1916), opposite 
 page 133. 
 
 // 
 
^ r- 
 
 l%\ 
 
 ■:..\j\'' 
 
 Ci' 
 
 •E \ 
 
 V, 
 
 d' 
 
 \ 
 
 / <d 
 
 tf I 
 
 >: 
 
 .H. 
 
 ^^«h'^- 
 
 -•• — r 
 
 i J 
 
 oCDj 
 
 H- 
 
 1 
 
 7j 
 
 I 
 
FEDERAL RESERVE SYSTEM 31 
 
 authorities, together with later amendments to 
 the law and a growing feeling that it is the patri- 
 otic duty of state institutions to join the system 
 in these times of national emergency, these fac- 
 tors have all made the state institutions more 
 favorably disposed toward the system and they 
 have lately been joining in ever increasing num- 
 bers, i-'y^-'j^r- 
 
 Member banks are required to subscribe to the 
 capital stoct of the federal reserve bank in their 
 district to an amount equal to six per cent of the 
 member bank's capital and surplus: Only one- 
 half of this subscription has so' far been called, 
 giving the federal reserve banfe a paid-in capital 
 of $73,401,000 on Marchl, 1918,^ but the other 
 half may be called at any time by the federal 
 reserve authorities. " 
 
 There are two noteworthy features of a federal 
 reserve bank's plan of organization. They are, • 
 first, its democracy^ and second, its recognition of 
 the quasi-public nature of the banking business ^ » y 
 through its grant to the public of participation y / / 
 in the bank's management* » /' 
 
 The control of a federal reserve bank is as 
 democratic as our American democracy itself. 
 "One bank, one vote" is the rule, and the vote of 
 
 2 The surplus was $1,134,000 on that date which had been ac- 
 cumulated out of profits. 
 
38 THE A B C OF THE ^ 
 
 the First National Bank of Jacksonville, with 
 its $25,000 capital counts as much as that of the 
 National City Bank of New York with a capital 
 and surplus 2,880 times as large. Furthermore, 
 in order to prevent the large banks from domi- 
 nating the small ones by reason of their greater 
 prestige and to assure the small banks of repre- 
 
 '"<'"' sentation on the board of directors, there is a 
 
 device by which all the member banks are divided 
 
 according to their capital into three classes, 
 
 which, reminiscent of the three bears in the 
 
 ^^Goldylock story, may be called big banks, little 
 
 Vt^^ banks, and middle-sized banks. All the member 
 banks in a federal reserve district are grouped 
 into these three classes, the largest bank in the 
 group of little banks being smaller than the 
 smallest one in the group of middle-sized banks, 
 and the largest one in the group of middle- 
 sized banks being smaller than the smallest one 
 in the group of big banks. On the basis of 
 the one bank one vote principle, each grqup 
 elects^two directors, one of whom, called a Class 
 A director, is a banker and represents the 
 stock-holding banks, while the other, called a 
 Class B director, is a business man or farmer and 
 represents the business community. To these 
 six directors so elected there are added three 
 others known as Class C directors, who are ap- 
 
FEDERAL RESERVE SYSTEM 33 
 
 pointed by the central federal reserve authorities 
 at Washington to represent the interests of the 
 federal government and of the general public* 
 One of these Class C directors, who is required to 
 be a person of "tested banking experience," is 
 designated by the central authorities as Chair- 
 man of the Board, and is known as federal re- ^ 
 j serve agent. The board thus consists of nine di- ^ ^j 
 rectors, who hold office for three years (the temi ^^r ^^ 4 
 of office of one director of each class terminating W 
 
 each year), and who are broadly representative 
 of different interests among the American public. 
 Crowning the arch of which the twelve federal 
 reserve banks constitute the structural stones and 
 f forming its keystone, is the central board at 
 ' Washington, known as the federal reserve board. 
 This board consists of seven members^ including 
 the Secretary of the Treasury and the Comptrol- 
 ler of the Currency, who are ex-officio members, 
 and %^Q members appointed by the President of 
 the United States with the advice and consent of 
 the Senate, who hold office for a period of ten 
 years. At least two of these five members the 
 law says must be "experienced in banking or fi- 
 nance." The Secretary of the Treasury is ex- 
 officio chairman of the federal reserve board. The 
 board is assisted by a federal advisory council, 
 consisting of twelve members appointed respec- 
 
84 THE A B C OF THE 
 
 tively by the boards of directors of the twelve 
 
 federal reserve banks. The advisory council 
 
 yf meets with the federal reserve board at least four 
 
 \ times each year and oftener if called by the 
 
 ' board. ^ J., .f' ' . 
 
 / I The appointment by the federal reserve board 
 
 _ / I of three of the nine directors (including the chair- 
 
 ' man) of each of the federal reserve banks and 
 
 the appointment by each federal reserve bank of 
 
 a member of the federal advisory council federate 
 
 V \ \\ together the twelve federal reserve banks under 
 
 ^^ « ^ the federal reserve board and give a common 
 
 knowledge and a unity of purpose^ Conferences 
 
 from time to time of the governors of the twelve 
 
 federal reserve banks and of the federal reserve 
 
 agents of the banks, and occasional conferences 
 
 of the governors and the federal reserve agents 
 
 with the federal reserve board have added much 
 
 to the smooth and unified working of the system. 
 
 In matters of general policy the federal reserve 
 
 board is given large powers and is the directing 
 
 head of the system^^ 
 
 3 The board's control is strengthened by its statutory powers: 
 
 (1) "To examine at its discretion the accounts, books and affairs 
 of each federal reserve bank and of each member bank and to re- 
 quire such statements and reports as it may deem necessary. . ." 
 
 (2) 'To suspend or remove any officer or director of any federal re- 
 serve bank. . ." (3) "To suspend, for the violation of any of the 
 provisions of this act, the operations of any federal reserve bank, 
 to take possession thereof, administer the same during the period 
 
FEDERAL RESERVE SYSTEM 35 
 
 Here then is the centralizing machinery which 
 is bringing order into our banking system, and 
 is making possible the development of broad 
 financial policies which can be carried out with 
 promptness and continuity. 
 
 In considering the manner in which the old evil 
 of decentralization is being remedied by the fed- 
 eral reserve system, we may now pass from the 
 administrative machinery of centralization to the 
 methods by which the old evils of scattered and 
 imniobile reserves are being eliminated. 
 
 District Centralization of Bank Reserves 
 
 The federal reserve act as originally passed 
 provided for the gradual withdrawal of legal 
 reserve money from deposit in the banks of re- 
 serve and central reserve cities. All such de- 
 posited legal reserves were to be withdrawn by 
 the end of a three-year period beginning with the 
 date of the inauguration of the federal reserve 
 system. Accordingly, after November 16, 1917, 
 all legal reserve money of member banks, the 
 law required to be held "in the vaults of the mem- 
 ber bankiS or in the federal reserve bank, or in 
 both, at the option of the member bank" (section 
 
 of suspension, and, when deemed advisable, to liquidate or re- 
 organize such bank." (4) "To exercise general supervision over 
 said federal reserve banks." Federal Reserve Act, Section 11. 
 
36 THE A B C OF THE 
 
 19 of Act) . In conformity with this requirement 
 the percentage of the legal reserves of member 
 banks kept on deposit in the banks of reserve and 
 central reserve cities declined very much by the 
 summer of 1917. On June 21, 1917, an amend- 
 ment was passed to the federal reserve act requir- 
 ing every bank, banking association or trust com- 
 pany belonging to the federal reserve system to 
 maintain its entire legal reserve in the form of a 
 deposit at the federal reserve bank of its district* 
 Thus by about five months the time was antici- 
 pated when legal reserve money of member banks 
 should cease to be kept on deposit in banks other 
 /than federal reserve banks. The time therefore 
 / arrived in the summer of 1917 when commercial 
 / banks belonging to the federal reserve system 
 ' ceased tying up their legal reserve money by de- 
 positing it in the banks of our money market 
 centers there to be loaned out at call to specu- 
 lators on the stock and produce exchanges. This 
 divorcing of the legal reserves of nearly 8,000 
 commercial banks from the speculative and capi- 
 tal loans of the stock market — ^mainly that of 
 Wall Street — is one of the big achievements of 
 the federal reserve system-. The federal re- 
 serve law, as amended, recognizes only one form 
 of legal reserve, and that is a member bank's de- 
 posit in its federal reserve bank. Member banks 
 
FEDERAL RESERVE SYSTEM 37 
 
 may keep as much or as little cash on hand for 
 till money as they wish to. They may keep bal- 
 ances in other banks if it suits their convenience 
 to do so — all that is their own affair for which 
 their responsibility is to their stock holders and 
 their customers — but their legal reserve, the re- 
 serve which the Government looks upon as the 
 minimum below which the public interest de- 
 mands that banks should not go, that reserve 
 must all be kept on deposit in federal reserve 
 banks, the nation's reservoirs of reserve money. 
 For reasons that will soon be made clear the 
 concentration of the country's reserve money in 
 a few large reservoirs makes possible a much 
 more efficient use of each dollar of reserve money 
 than under the old system of scattered reserves, j 
 and, as a result, the legal reserve requirements 
 have been greatly reduced. The percentages 
 reserves at present required against demand de- 
 posits and time deposits are as follows: 
 
 Demand Deposits, 
 
 Time Deposits, 
 
 i.e., Deposits Pay- 
 
 i.e., Deposits Pay- 
 
 able Within 
 
 able After 30 
 
 Banks 30 Days 
 
 Days Notice 
 
 Central reserve city banks, 13 
 
 3 
 
 Reserve city banks, 10 
 
 3 
 
 CJountry banks, 7 
 
 3 
 
 On March 1, 1918, the twelve federal reserve 
 banks held deposited reserves of other banks to 
 
 \ 
 
38 THE A B C OF THE 
 
 the amount of $1,388 millions. Reserve money 
 collected in a few large reservoirs is quickly 
 available in large quantities either for export or 
 for domestic use, and the fact that it is readily 
 available in large quantities inspires public con- 
 fidence and lessens the danger of financial panic. 
 When the public knows that gold in abundance 
 is available on demand it does not want it, 
 except to meet the normal demands of interna- 
 tional trade. The federal reserve banks, of 
 course, do not keep on hand all the reserve money 
 deposited by member banks. Like other banks, 
 they invest it. The law, however, requires them 
 to keep a reserve of thirty ^five per cent against 
 deposits,^ and it is their established policy to 
 maintain reserves much larger than this normal 
 legal minimum. ^J 
 
 Mobilization of Reserves ^ 
 
 A corollary to the district centralization of re- 
 serves is their mobilization. Reserve money must 
 not only be piped into a few large reservoirs, but 
 these large reservoirs must be piped together, and 
 there must be a pumping engine of sufficient 
 power to force the reserves promptly and in large 
 quantities to any place desired. The federal re- 
 serve system creates just this machinery. It pro- 
 
 4 See pages 59-60. 
 
FEDERAL RESERVE SYSTEM 39 
 
 vides numerous devices by which reserve money 
 can be quickly moved from places of redundancy 
 io places of scarcity. A few of the more import- 
 ant of these devices will be briefly described here, 
 while others will be discussed later in connection 
 with the general topics of currency and credit 
 elasticity and the transfer system. Let us con- 
 sider first the inter-district mobility of reserve 
 money, namely the movability of reserves from 
 one federal reserve district to another; and sec- 
 ond, the intra-district mobihty of reserves, or the 
 movability of reserves within the boundaries of; 
 one district. 
 
 Inter-District Mobility 
 
 Broadly speaking there are three ways in which 
 the federal reserve law has increased the inter- 
 district mobility of reserve money, 'fhey are: 
 (1) Rediscounting by one federal reserve bank 
 for another. (2) Open market operations of fed- 
 eral reserve banks. (3) Creation of a broader 
 discount market for commercial paper. 
 
 Rediscounting by one Federal Reserve Bank for 
 Another 
 
 Under the old banking system, as we have seen, 
 in time of emergency, each bank held tight its 
 own reserves, or, to change the figure, "sat firmly 
 
 y 
 
40 THE A B C OF THE 
 
 on the lid." In the controversy for banking re- 
 form, which cuhninated in the federal reserve act, 
 the advocates of a single central bank contended 
 that a system of eight to twelve banks hke that 
 proposed in the federal reserve bill would per- 
 petuate the old evil by leading to the same sort 
 of scramble for reserves, in time of emergency, 
 among the different federal reserve banks, that 
 had formerly existed among the individual banks 
 of the country. Specifically to meet this danger 
 a provision was inserted in the act ( Section II ) _ 
 empowering the federal reserve board "to permit, 
 or, on the affirmative note of at least five mem- 
 bers of the reserve board to require federal re- 
 serve banks to rediscoun^Jhe discounted paper of 
 other federal reserve banks at rates of interest to 
 be fixed by the federal reserve board." This I 
 means that in case there is an exceptionally heavy | 
 demand for reserve money in any section of the \ 
 coimtry — a demand heavier than the banks of > 
 that section can reasonably meet — the reserve'^ 1 
 banks in other sections where money is more 
 plentiful will come to the rescue, either voluntar- \ 
 ily or under compulsion of the federal reserve \ 
 board, and will rediscount the paper of the reserve I 
 bank in the section under fijiancial stress. This 
 process, of course, will cause a flow of cash from 
 the reserves of the former banks to the reserve of 
 
FEDERAL RESERVE SYSTEM 41 
 
 the latter, thereby easing the money market in the 
 threatened section. The twelve federal reserve 
 banks have so far worked so harmoniously, 
 thanks largely to the frequent conferences of the 
 governors and the federal reserve agents both 
 among themselves and with the federal reserve 
 board, that it seems improbable that compulsion 
 by the board will often be necessary to require the 
 more favorably situated banks to come to the 
 rescue of those less favorably situated, in time of 
 danger. So far the board has exercised compul- 
 sion in only two instances. The reserves of the 
 twelve reserve banks are so closely piped togetiier, 
 particularly since the formation of the gold set- 
 tlement fund (to be described later, pages 76-77) , 
 that they may reasonably be considered to be 
 closely connected tanks of a tingle large reser- 
 voir. 
 
 Ml. 
 
 Open-Marke^npShifions 
 
 While the federal reserves' banks are essentially 
 bankers' banks, since their stock is owned ex- 
 clusively by member banks and since their only 
 regular domestic customers are banks and the 
 federal government, it is none the less true that 
 Congress found it necessary to confer upon these 
 banks certain limited rights of dealing with the 
 outside pubhc. The possession of such rights by 
 
42 THE ABC OF THE 
 
 the federal reserve banks appeared necessary, 
 first, as part of the machinery for conserving the 
 American money market and making their dis- 
 count rates eflPective^ and second, as a method of 
 profitably employing their funds in times of easy 
 money, when member banks are making few calls 
 upon them for rediscount.^ The dealings with 
 the outside public so authorized are known as 
 "open-market operations," and are provided for 
 in section 14 of the Act. Into the details of this 
 important section we need not go. For our pur- 
 
 5 If, for example, a federal reserve bank raises its discount 
 rate in order to prevent dangerous loan expansion pn^ the part of 
 member banks or to prevent an undue outflow of gqld^rom the 
 country, it may happen that the member banks may.-Jiot be con- 
 vinced of the need of such precautionar^measures, and, not be- 
 ing in need of securing funds from the federal reserve bank by 
 way of rediscount, may^gnore th# efforts of the federal reserve 
 bank to conserve the money market. The banks may accordingly 
 continue the policy oi^^^^ expansion at low discount rates. 
 Under such circumstantj^^Bj^e^eral reserve rate would be said 
 to be "ineffective." JUJj^^^B^is situation and force the banks 
 "into line" the fe€erWf^KKm33,nk may go into the open market 
 
 'and sell bank •acceptaipK^W)mmercial biUs, municipal warrants 
 and government bonds, and, by withdrawing from the market the 
 funds received in payment therefor, may tighten the market, and 
 foj'ce up the discount rate thereby bringing the market rate into 
 harmony with the federal reserve rate. 
 
 6 In the early days of the federal reserve system when the 
 member banks were making very little call upon the federal re- 
 serve banks for rediscounts or other advances, the federal re- 
 serve banks invested substantial sums in municipal warrants and 
 bank acceptances in the open market, and by that means covered 
 a large part of their running expenses. 
 
FEDERAL RESERVE SYSTEM 43 
 
 poses it is sufficient to note that federal reserve 
 banks may buy and sell in the open market either 
 at home or abroad commercial bills of exchange, 
 bankers' acceptances, and certain specified kinds 
 of government obligations. Under this authority 
 a federal reserve bank in one section of the coun- 
 try may buy and sell eligible commercial paper 
 and government securities in any other section of 
 the country. Such dealings, of course, tend to 
 cause a flow of reserve money from the district of 
 the buygr to that of the seller. If the San Fran- 
 cisco federal reserve bank, for example, buys 
 $1,000,000 worth of trade acceptances, bank ac- 
 ceptances and municipal warrants in the open 
 market in New York, its settlement check to 
 whomever paid is likely to be deposited in a New 
 York bank, and for that bank to be collected by 
 the New York federal reserve bank from the San 
 Francisco federal reserve bank. Unless offset by 
 payments in the other direction, the payment by 
 San Francisco will necessitate a transfer of re- 
 serve money, presumably through the "gold set- 
 tlement fund,'-"^ from San Francisco to New 
 York. If the New York bank, in which the mil- 
 lion dollar check was originally deposited, leaves 
 the proceeds on depf'sit with the New York fed- 
 eral reserve bank, federal reserve "reserve 
 
 7 The gold settlement fund is described on pages 76-77. 
 
44 THE A B C OF THE 
 
 money" will be transferred from the bank in San 
 Francisco to the bank in New York. In this 
 manner open market operations transfer reserve 
 money from places of redundancy to places of 
 scarcity, and tend to maintain a national equi- 
 librium in our money rates. 
 
 ^Creation of a Broader Discount Market for Com- 
 mercial Paper 
 
 The third method by which the federal reserve 
 system is rendering more mobile our. reserve 
 money is through the creation of a broader dis- 
 count market for conmiercial paper. As we have 
 already seen, under the old banking system the 
 great bulk of American conmiercial paper was 
 essentially local paper with little or no market 
 outside of the community in which it was created. 
 The federal reserve system has provided the 
 machinery by which high grade commercial paper 
 can be rediscounted throughout the United 
 States, and, in this connection, has sought to en- 
 courage by preferential discount rates and other- 
 wise the use of trade acceptances and bank ac- 
 ceptances — credit devices widely used in Europe, 
 
 When the seller of merchandise draws a trade 
 bill upon the buyer at, say, ^0 days sight for the 
 amount of the bill, and t>.. buyer writes across 
 its face "accepted" and J?igns his name with the 
 
FEDERAL RESERVE SYSTEM 45 
 
 date of acceptance, a credit instrument is created 
 which has very pronounced advantages over the 
 open-book |^ c n()iiQ^ .4frnTn the standpoint of the 
 seller, the buyer and the bank. The seller has a 
 definite acceptance of the goods which the buyer 
 cannot question in the future without very good 
 reason ; he has a promise from the buyer to pay at 
 a definite date ; and he has the' buyer's obligation 
 expressed in the form of a negotiable instrument 
 which is highly liquid, and which enjoys prefer- 
 ential rediscount rates at all federal reserve banks 
 and therefore presumably at the seller's local 
 bank and in the open market. The buyer of. the 
 merchandise who accepts the bill places his credit 
 standing at a higher level than it would be if he 
 bought on open book account. His improved 
 credit should enable him to buy on better terms. 
 Having his accounts thus given definite* maturi- 
 ties he is less Hkely to be tempted to overbuy than 
 he would be under the loose open-book account 
 method. The buyer is also a seller, and if he 
 uses trade acceptances in connection with his pur- 
 chases he is in a stronger position to demand 
 them in connection with his sales ^ From the 
 banker's point of view the trade acceptance is an 
 ideal form of commercial paper* It bears two 
 names, usually carries with it evidence that it 
 represents a self-hquidating commercial transac- 
 
46 THE A B C OF THE 
 
 tion and not an accommodation loan, it is almost 
 certain to be paid at maturity and not to seek 
 renewal, is not subject to the provision of the 
 national banking law which prohibits a national 
 bank from loaning to one customer an amount in 
 excess of ten per cent of the bank's capital and 
 surplus (Revised statutes, section 5200), and it 
 is very easy to turn into cash before maturity 
 either by sale in the open market or by rediscount 
 at a federal reserve bank because of the prefer- 
 ential discount rates given such paper. The trade 
 acceptance is therefore incomparably more liquid 
 than the open-book account, and, other things 
 equal, is more liquid than one-name paper. 
 
 Even more liquid than the trade acceptance, 
 because the acceptor is ordinarily of more widely 
 recognized financial standing, is the domestic 
 bank acceptance authorized by the federal re- 
 serve law.^ The bank acceptance is similar to the 
 trade acceptance. It differs, however, in the f act^ 
 that the seller of the merchandise draws his biir 
 not upon the buyer but upon the buyer's bank, 
 which accepts the bill for the buyer whose finan- 
 cial standing is known to the bank and who has 
 arranged with the bank in advance to lend him 
 its credit in this way. The seller of the merchan- 
 
 8 The statuatory provisions concerning bank acceptances will 
 be found in section 13, paragraph 5 of the federal reserve act. 
 
FEDERAL RESERVE SYSTEM 47 
 
 disc having received an acceptance of the bill 
 from the buyer's bank may discount the bill at his 
 own bank or sell it in the open market if he does 
 not wish to hold it until maturity. The type of 
 domestic bank acceptance made eligible for re- 
 discount at federal reserve banks covers bills hav- 
 ing not more than 90 days, exclusive of days of 
 grace to run and which grow out of transactions 
 involving the domestic shipment of readily 
 marketable staple goods, provided that docu- 
 ments conveying or securing title are attached at 
 the time of acceptance. 
 
 Inasmuch as bank acceptances and high grade 
 Jirade acceptajices. enjoying as they do preferen- 
 ^tial rates of discomit at the federal reserve banks, 
 have a wide market, their increasing use is caus- 
 ing more and more paper to flow away from the 
 banks in sections of the country where the dis- 
 count rat^ is relatively high to be discounted in 
 the banks of those sections where the rate is rela- 
 tively low. Such a flow of commercial paper 
 from the dear markets to the cheap ones, obvi- 
 ously causes a counter-flow of bank reserves from 
 the cheap markets to the dear ones and thereby 
 tends to reestablish an equilibrium in discount 
 rates. Of course, this flow is not an absolutely 
 free one and perfect equilibrium is never ob- 
 tained. The point is, however, that the widening 
 
48 THE A B C OF THE 
 
 marketability of our commercial paper under the 
 federal reserve system is making this flow of re- 
 serve money much less sluggish than it was for- 
 merly. 
 
 Intra-Distnct Mobility of Reserves 
 
 The forces, which act for the increasing mo- 
 bility of reserve money within the boundaries of 
 a federal reserve district, are essentially the same 
 as those just explained for that between districts. 
 Obviously paper of wide acceptability flows from 
 place to place within a district more freely than 
 paper whose merits are less widely recognized; 
 and, within a district as between districts, the 
 widely marketable paper flows from the places 
 where discount rates are high and bank funds are 
 scarce to the places where the rates are low and, 
 funds are more plentiful. Furthermore, the 
 bank reserves of the district which have been 
 piped to the one reservoir, namely, the federal re- 
 serve bank, can be readily pumped to the banks 
 of any section where funds are in heavy demand. 
 If banks throughout the district were rediscount- 
 ing in moderate sums. with the federal reserve 
 bank, and if a sudden emergency should cause an 
 exceptionally heavy demand for funds in any sec- 
 tion, the federal reserve bank could raise its rate 
 of discount, thereby reducing the rediscount de- 
 
FEDERAL RESERVE SYSTEM 49 
 
 mands df the banks less urgently in need of 
 funds, and could then turn larger amounts into 
 the section where the demand was heaviest. Ad- 
 ditional funds could be secured by the federal re- 
 serve bank within the district (as well as outside) 
 by the sale in the open market of securities held 
 in its "secondary reserve." 
 
 In the illustrations so far given we have as- 
 sumed a fixed amount of banking funds, and have 
 shown how these funds can be readily mobilized 
 under the federal reserve system and concentrated 
 at the points where they are most needed. The 
 problem of meeting unusual calls for banking 
 funds is, however, an easier one under the federal 
 reserve system than the above discussion implies. 
 The reason is that under the new system there 
 exist in addition certain elastic elements in our 
 supply of bank funds. These will be considered 
 in the next chapter. 
 
CHAPTER VII 
 
 Credit Elasticity Under the Federal Re- 
 serve System 
 
 Both bank-note currency and deposit or check 
 currency are more elastic under the new system 
 than under the old. 
 
 Bond-Secured Bank Notes 
 
 In order to prevent the alleged danger of an 
 undue contraction of the currency and to protect 
 from loss the banks owning the two per cent 
 bonds, which were largely pledged with the Gov- 
 ernment as security for national bank-note circu- 
 lation and which by reason of the circulation 
 privilege had a value far above their investment 
 value, the Government decided not to withdraw 
 from circulation at once the old bond-secured 
 bank notes. The federal reserve law accordingly 
 continued the circulation of these notes, but con- 
 tained provisions looking toward their gradual re- 
 tirementv From the time of the enactment of the 
 federal reserve act (December 23, 1913) to 
 March 1, 1918, the national bank notes outstand- 
 
 50 
 
FEDERAL RESERVE SYSTEM 51 
 
 ing were reduced from $725 millions represent- 
 ing about 21 per cent of our total monetary cir- 
 culation to $718 millions, representing about 14 
 per cent. To this sum there should be added, to 
 be accurate, $12 millions of so called federal re- 
 serve bank notes, rwhich are authorized by the 
 federal reserve act^andWhich are merely bond- 
 secured bank notes of the old type that have been 
 taken over by the federal reserve banks and are 
 issued by them instead of by the national banks. 
 So far they h^ve been of comparatively little im- 
 portance. 
 
 Federal Reserve Notes 
 
 The notes upon which the federal reserve sys- 
 tem places its sole reliance for bank-note elas- 
 ticity are the so-called federal reserve notes. 
 These notes, which are obligations of the United 
 States Government and are "first and paramount 
 lien on all the assets" of the issuing federal re- 
 serve banks, have back of them specifically 
 pledged with the federal reserve agent to the 
 amount of 100 per cent certain forms of high 
 grade collateral^ This collateral may consist of : 
 (1) Paper endorsed by member banks and drawn 
 for strictly commercial, industrial or agricultural 
 purposes, or for the purpose of carrying or trad- 
 ing in securities of the United States Govern- 
 
52 THE A B C OF THE 
 
 ment, in other words, paper of the type hereafter 
 described^ which is ehgible for rediscount at a 
 federal reserve bank. (2J Bills of exchange en- 
 dorsed by a member bank and bankers' accept- 
 ances bought by the federal reserve bank in the 
 open market. (3) Gol3 and gold certificates, 
 
 Except under special circumstances, to be con- 
 sidered later,^ a gold reserve of not less than 40 
 per cent must be kept by each federal reserve 
 bank against its outstanding federal reserve 
 notes. Gold specifically pledged with the federal 
 reserve agent as collateral for the notes may be 
 counted in making up this 40 per cent reserve, as 
 may also gold kept in the redemption fund with 
 the treasurer of the United States at Washing- 
 ton for the redemption of the notes. 
 
 Elasticity of Federal Reserve Notes 
 
 As regards the matter of elasticity, these notes 
 have in a high degree the quality of expansibil- 
 ity, namely, of having their circulation easily in- 
 creased in times of need. If member banks in a 
 given section of the country need an increased 
 supply of currency to meet local demands, they 
 may rediscount eligible paper with their federal 
 reserve bank and take the proceeds of the redis- 
 
 1 Pages 61-63. 
 
 2 Pages 53-54. 
 
FEDERAL RESERVE SYSTEM 63 
 
 counts in federal reserve notes, which pass read- 
 ily as hand-to-hand money and are satisfactory 
 till money for the banks. The federal reserve 
 bank, if its supply of notes is inadequate, secures, 
 on application to the federal reserve agent, addi- 
 tional notes by depositing with the agent the re- 
 discounted paper or other eligible paper in its 
 portfolio. This process may continue as long 
 as the federal reserve bank has paper available 
 for deposit with the federal reserve agent and 
 its gold reserve does not fall below the normal 
 legal minimum of 40 per cent. In case of great 
 emergency, however, the federal reserve board 
 may permit a reduction of the note reserve below 
 40 per cent, provided it imposes a graduated tax 
 upon the amount of the deficiency — a tax which 
 must be added to the rates of interest and dis- 
 count fixed by the federal reserve board. Fur- 
 thermore, to meet extreme emergencies the board 
 is authorized "to suspend for a period not exceed- 
 ing thirty days, and from time to time to renew 
 such suspension for periods not exceeding fifteen 
 days any reserve requirement" specified by the 
 Act. It is thus seen that the federal reserve notes 
 have ample power of expansion in time of emer- 
 gency and that there no longer exists a stone-wall 
 limit beyond which expansion cannot go and go 
 promptly. There is no fixed limit, but beyond a 
 
64 THE A B C OF THE 
 
 certain point further expansion can be secured 
 only at a rapidly increasing expense to those 
 wishing the notes. 
 
 The note issue of the twelve federal reserve 
 banks amounted to $1,465 miUions on March 1, 
 1918. Back of these notes there was held by the 
 twelve federal reserve agents the following col- 
 lateral : 
 
 Millions 
 
 (1) Gold coin and certificates $277 
 
 (2) Gold in redemption fund at 
 Washington 50 
 
 (3) Gold with federal resei*ve board 559 
 
 (4) Eligible paper, (representing 
 $204 millions above the minimum 
 required by law) 783 
 
 Total $1669 
 
 These figures show that 53 per cent of the fed- 
 eral reserve notes outstanding were backed dol- 
 lar for dollar by gold collateral. The total gold 
 resources of the twelve federal reserve banks on 
 the above date were $1,777 millions, which on the 
 basis of the 40 per cent reserve required by law 
 would represent a gold reserve sufficient for 
 $3,333 millions federal reserve notes, after set- 
 ting aside the legal minimum lawful money re- 
 
FEDERAL RESERVE SYSTEM 55 
 
 serve of 35 per cent against deposits. This 
 would more than double the amount at present 
 outstanding. Obviously there still resides in the 
 federal reserve system the power of very great 
 note expansion — a power which, in the present 
 conditions of currency and credit inflation, should' 
 be used with great caution. 
 
 For tjie purpose of contracting the circulation 
 of federal reserve notes when the business de- 
 mands for currency decline, the machinery is as 
 follows. When the demand for notes in the 
 pockets of the people and the tills of merchants 
 falls off, as it does, say, after the harvesting sea- 
 son in the autumn, the surplus notes are deposited 
 by the public in the banks. Inasmuch as national 
 banks cannot count these notes in their vaults as 
 legal reserve money, they will tend to send to \ 
 their federal reserve baijks for deposit any notes 
 they receive in excess of the amount needed for 
 till money. Notes wliich were issued by the fed- 
 eral reserve bank of the district may thus be with- 
 drawn from circulation. Notes so received which 
 were issued by other federal reserve banks 8T*e 
 sent back to the issuing banks. On this subject 
 the law says: "Whenever federal reserve notes 
 issued through one federal reserve bank shall be 
 received by another federal reserve bank, they 
 shall be promptly returned for credit or redemp- 
 
56 THE A B C OF THE 
 
 tion to the federal reserve bank through which 
 they were originally issued or, upon direction of 
 such federal reserve bank, they shall be forwarded 
 direct to the Treasurer of the United States, to 
 be retired. No federal reserve bank shall pay 
 out notes issued through another under penalty 
 of a tax of ten per centum upon the face value of 
 notes so paid out" (Section 16). This require- 
 ment that federal reserve banks shall send back 
 promptly the notes of other federal reserve banks 
 will obviously increase in its effectiveness as a 
 means of currency contraction with the increase 
 in the number of branches of federal reserve 
 banks established throughout the country. 
 
 Another device calculated to encourage the re- 
 tirement from circulation of bank notes whenever 
 they become redundant is the provision of the 
 law authorizing the federal resei^ve board to 
 charge such a rate of interest as it may deem de- 
 sirable on federal reserve notes uncovered by 
 gold or gold certificates issued to federal reserve 
 i)anks. 
 
 The fact that federal reserve notes are not 
 nder is believed by some to exercise an in- 
 liuence in the direction of .'pausing their retire- 
 ment when they ber*nr>i,- redundant. In view of 
 the fact, however i question of legal ten- 
 
 der is rarely rai^^ onnectlon \\ith money 
 
 J^A' 
 
FEDERAL RESERVE SYSTEM 57 
 
 which is not depreciated, it is doubtful if the lack 
 of legal tender adds anything to the "homing 
 .quality" of the notes. 
 
 Elasticity of Deposit Currency 
 
 Elasticity of deposit currency, although it has 
 not received the attention in our economic liter- 
 ature received by elasticity of bank-note cur- 
 rency, is of greater importance because the 
 jamount of business done by means of deposit cur- 
 rency is many times larger than that done by 
 means of bank notes.* Prior to the establishment 
 of the federal reserve system, as we have seen,* 
 our deposit currency, although not as inelastic as 
 our bank-note currency, was none the less defi- 
 cient in the quality of elasticity* How has 'he 
 federal reserve system remedied this defect? 
 
 We have just seen how by increasing the mo- 
 bility of bank reserves, the federal reserve system 
 has enabled bank funds in the form cf deposit 
 
 3 The estimates of Professo*- Irving Fisiier give for the year 
 1913, the last antebellum >K,.tr, the average rate of monetary- 
 turnover for the country as 21, and the total amount of business 
 effected by deposit currency as $440 billion. The bank-note cir- 
 culation for July 1 of that year was $759 million, which multi- 
 plied by the average rate of monetary turnover would give the 
 total business transacted by means of bank notes as $16 billion, 
 or a sum equal to only 1/27 of that transacted by means of de- 
 posit currency. 
 
 4 See pages 17-18. 
 
58 THE A B C OF THE 
 
 credits to flow quickly to any section of the coun- 
 try where bank funds are much needed. This 
 mobility of funds is often spoken of as deposit- 
 credit elasticity. In the present discussion, how- 
 ever, we are using the word elasticity in its stricter 
 sense of "expansibihty and contractility," and 
 do not include in the term mere mobility of funds, 
 namely, their capacity to move quickly and with 
 little friction from one place to another. 
 
 The federal reserve system increases the elas- 
 ticity of our deposit currency in a number of 
 ways. In the first place, it has removed the rigid 
 legal reserve requirements of our former national 
 banking system and has put in their place much 
 l»^ss rigid ones. The only legal reserves now re- 
 qi ired of national banks are the deposited re- 
 serves in the federal reserve bank. For till money 
 banks are permitted to hold in their own vaults 
 as muci? or as little money as they individually 
 need, and the kinds of money they desire. 
 
 Federal N^serve bank.5 in turn are required to 
 keep against deposits a legal reserve of lawful 
 money equivalent to 35 per cent. Unlike mem- 
 ber banks, however, the federal reserve banks are 
 not strongly pressed by competition and by the 
 desire for profits to take up all the slack and re- 
 duce their reserves in ordinary times to this nor- 
 mal legal minimum. There has been no evidence 
 
FEDERAL RESERVE SYSTEM 59 
 
 that federal reserve banks will keep their credit 
 extended to the legal limit, as individual banks 
 have so widely done in the past. Despite the 
 urgent need of funds brought about by war con- 
 ditions, our federal reserve banks have adopted 
 the policy of maintaining reserves far above the 
 legal minimum. They have little profiteering 
 motive to reduce their reserves to a dangerously 
 low figure, because all the profits of federal re- 
 serve banks above a six per cent cumulative divi- 
 dend to the stock owned by member banks go to 
 the Government.^ Fortunately there has ap- 
 peared no evidence of competition among the 
 federal reserve banks to see which can show the 
 largest profits. Under the leadership of the fed- 
 eral reserve board, the great emphasis has been 
 on competition for public service. The result is 
 that the federal reserve banks have been con- 
 serving their strength for times of en ergency. 
 Under such circumstances the federal reserve 
 banks should have substantial powers of credit 
 expansion to call upon in times of emergency, 
 before their reserve position is forced down to 
 anything like the 35 per cent legal limit. 
 
 5 The law provides for the accumulation out of profits of a 40 
 per cent surplus ; but upon the liquidation of a federal reserve 
 bank or the withdrawal of a member bank none of this surplus 
 goes to the member banks. Ultimately it all goes to the Govern- 
 ment. 
 
60 THE A B C OF THE 
 
 ^ , , , , 
 This limit itself, however, is not a rigid one. 
 
 It may be passed in times of extreme emergency, 
 although only by paying a price. The federal 
 reserve law provides, as we have previously 
 noted, that the federal reserve board may "sus- 
 pend for a period not exceeding thirty days, and 
 from time to time . . . renew such suspension for 
 periods not exceeding fifteen days, any reserve 
 requirement specified in this act: 'provided y that 
 it shall establish a graduated tax upon the 
 amounts by which the reserve requirements" 
 against deposits are permitted to fall below the 
 level of 35 per cent (Section 11). Inasmuch as 
 this tax would presumably be added to the rate of 
 discount charged by the reserve bank, there would 
 be an increasingly heavy charge upon loans made 
 wheii the reserve was below the normal legal 
 minimum. None the less, such loans could be 
 made wj'^^hout limit to those who could give the 
 security and would pay the price. 
 
 The most important device of the federal re- 
 serve system for securing elasticity of deposit 
 currency, as well as of bank-note currency,^ is 
 
 6 A member bank, say a country bank, whose reserve is in 
 danger of running below the 7 per cent of demand deposits, and 
 3 per cent of time deposits, required by law, or which is in need 
 of more cash for till money, may take, say $10,000 of its eligible 
 commercial paper to its federal reserve bank and have it re- 
 discounted for, say, 60 days at 4^4 per cent. The proceeds would 
 
FEDERAL RESERVE SYSTEM 61 
 
 'found in the machinery enabling member banks 
 to borrow funds of their federal reserve bank. 
 Funds so borrowed, when left on deposit with the 
 federal reserve bank, serve as legal reserve money 
 for the member banks, ^he making of such loans 
 to member banks is one of the chief functions of 
 federal reserve banks. Broadly speaking the 
 loans are of two kinds, rediscounts, and loans on 
 collateral. Let us consider briefly each of these 
 types of loans. 
 
 ' Rediscount 
 
 Federal reserve banks always stand ready to./ 
 rediscount in time of need eligible paper for mem- 
 ber banks. 
 
 For the purpose of keeping the a^^sets of fed- 
 eral reserve banks liquid, the law and the ad- 
 ministrative regulations of the federal reserve 
 authorities place rigid limitations upon the kinds 
 of paper eligible for rediscount. These limita- 
 tions have reference both to the length of time 
 the paper is to run, and to the purpose for which 
 it is issued. As to time, notes rediscounted must 
 
 be $9,925, which at 7 per cent would represent a legal reserve 
 sufficient for $141,714 of demand deposits, and would therefore 
 greatly increase the bank's lending power. Any part of the pro- 
 ceeds of the rediscount in excess of that needed to maintain the 
 bank's 7 per cent legal reserve with the federal reserve bank 
 could be checked against and taken in cash, presumably in fed- 
 eral reserve notes, for the bank's till money. 
 
62 THE A B C OF THE 
 
 have a maturity at the time of rediscount of not 
 more than 90 days (exclusive of days of grace) ; 
 except that a Hmited amount of bills drawn for 
 agricultural purposes or based on live stock may 
 be rediscounted, provided they have a maturity 
 not exceeding six months (exclusive of days of 
 grace) . As to the purpose for which the bills are 
 issued, the law limits rediscounts to two classes of 
 paper. They are : ( 1 ) Notes, drafts and bills of 
 exchange bearing the endorsement of a member 
 bank and "arising out of actual commercial trans- 
 actions," that is, issued or drawn "for agricul- 
 tural, industrial, or commercial purposes, or the 
 proceeds of which have been used, or are to be 
 used for such purposes"; and (2) Notes, drafts 
 and bills of exchange bearing the endorsement of 
 a member bank and issued or drawn for the pur- 
 pose of carrying or trading in "bonds and notes 
 of the Government of the United States." Ex- 
 cept for United States Government securities, 
 the law specifically prohibits the rediscounting 
 by federal reserve banks of paper issued or 
 drawn "for the purpose of carrying or trading in 
 stocks, bonds, or*other investment securities." 
 
 > / Collateral Loans 
 The second type of loan is the discount of col- 
 vilateral notes of member banks. These notes must 
 be for periods not exceeding fifteen days, and the 
 
 i 
 
FEDERAL RESERVE SYSTEM 63 
 
 only permissible collateral is "such notes, drafts, 
 bills of exchange, or bankers' acceptances as are 
 eligible for rediscount or for purchase by federal 
 reserve banks," and bonds or notes of the United 
 States Government. There was no provision in 
 the original act for collateral loans, but experi- 
 ence soon showed that member banks frequently 
 wished to secure from federal reserve banks ad- 
 vances for brief periods, so brief that they were 
 reluctant to rediscount customers' paper for the 
 purpose. To meet the difficulty an amendment 
 to the federal reserve act was passed September 
 7, 1916, authorizing these short-time collateral 
 loans. The authority to make such loans has 
 proven to be particularly useful in connection 
 with the financing by the banks of Liberty bond 
 purchases either for themselves or for their cus- 
 tomers — purchases which are likely to involve 
 heavy drains upon the banks for very brief per- 
 iods. During the year 1917 these collateral loans 
 constituted by far the most important form of 
 advance made by federal reserve banks to mem- 
 ber banks. "^ ^ 
 
 7 "Discounts for the calendar year 1917 aggregated 8,968.8 mil- 
 lions, as against 307.9 millions in 1916. Of the total for the more 
 recent year, 7,744.5 millions, or 86.3 per cent, were collateral 
 notes, while 37.5 millions were reported as trade acceptances, 
 12.9 millions as commodity paper, and 1,11^.9 millions as custo- 
 
'i 
 
 \ 
 
 64 THE A B C OF THE 
 
 Contraction of Circulating Credit 
 So far we have been speaking of the elasticity 
 of deposit currency under the new banking sys- 
 tem in the direction of expansion in times of in7 
 creasing currency demand. The contraction of 
 deposit currency, as soon as the need for it 
 I IJ falls off, is brought about by the pressure of 
 high discount rates, to which the pressure of the 
 graduated tax is added. This double pressure 
 encourages borrowers to pay off their loans^ 
 This fact, and the increasing restrictions which 
 federal reserve banks place upon rediscounts as 
 money market conditions become easier, tend 
 ^o contract the circulation of deposit currency 
 and restore the reserves to a normal condition. 
 In this respect a great public responsibility 
 rests upon the federal reserve authorities to 
 conserve the banking strength of the country 
 in times of easy money, so that it can be called 
 upon in times of emergency. Some critics of the 
 
 mers' paper, including bills secured by Liberty bonds and certifi- 
 cates of indebtedness." 
 
 About the end of the year 1917 there was a substantial decline 
 in the amount of these collateral notes discounted — a decline "due 
 apparently in part to the provision in the war revenue act of 
 October 3, effective December 1, which imposes a tax of 2 cents 
 per $100 or any fractional part thereof on promissory notes 
 (held to include collateral notes tendered for discount to fed- 
 eral reserve banks)." See Federal Reserve Bulletin, February 1, 
 1918, pages 134-135. 
 
FEDERAL RESERVE SYSTEM 65 
 
 federal reserve system believe that the machinery 
 it provides for contracting both deposit and bank- 
 note currency, in times of currency redundancy, 
 needs strengthening. Upon this subject it is 
 difficult as yet to pass a safe judgment because 
 times have been so abnormal since the system 
 went into operation. 
 
 There is no question but that the federal re- 
 serve system has added greatly to the elasticity of 
 both our deposit currency and our bank-note 
 currency. 
 
CHAPTER VIII 
 
 Domestic and Foreign Exchange Under the 
 Federal Reserve System 
 
 We may now pass to the consideration of how 
 the federal reserve system is meeting the difficul- 
 ties of the old banking regime as regards do- 
 mestic and foreign exchange. Domestic ex- 
 change will be considered first. 
 
 Domestic Exchange 
 
 Under the old regime the collection and clear-""" 
 ing of out-of-town checks for country banks was 
 handled largely by the banks in reserve and cen- 
 tral reserve cities, which were the depositories of 
 the legal reserves of the country banks. The ser- 
 vice of collecting these out-of-town checks was 
 rendered to the country bank as a partial com- 
 pensation for the use of its reserve deposits at a 
 low rate of interest, and as a lure to secure other 
 business from the country bank, competition hav- 
 ing been keen among large banks in money mar- 
 ket centers for the accounts of out-of-town banks. 
 When Congress decided, therefore, that the sys- 
 
 66 
 
FEDERAL RESERVE SYSTEM 67 
 
 tern of pyramiding the legal reserves of national 
 banks by permitting them to be deposited to a 
 large extent in other national banks was a bad 
 one and should be done away with, it was natur- 
 ally forced to provide a machinery to take the 
 place of the reserve and central reserve city cor- 
 respondent banks for the work of collecting out- 
 of-town checks. If the country bank was no 
 longer to be permittee- to count a deposit with its 
 city correspondent as legal reserve money, but 
 was to be compelled to maintain its entire legal 
 reserve on deposit with its federal reserve bank, 
 it would naturally withdraw or at least greatly 
 reduce its deposit balance with its correspondent 
 banks. But under such circumstances who would 
 collect its out-of-town checks and otherwise serve 
 it in connection with out-of-town business? The 
 city bank, no longer holding the country bank's 
 reserve deposits, would no longer be disposed to 
 perform without charge these services for the 
 country bank; and further, having ceased to be 
 the country bank's reserve agent, the city bank 
 would be very likely to compete for some of the 
 country bank's most attractive business. Obvi- 
 ously if the new federal reserve banks were to 
 displace city correspondent banks as the holders 
 of the country banks' deposited reserves, they 
 should also perform for the country banks the 
 
68 THE A B C OF THE 
 
 service of collecting or clearing their out-of-town 
 ^h'ecks/ To this end the federal reserve act pro- 
 vides that the federal reserve board "may at its 
 discretion exercise the functions of a clearing 
 house for . . . federal reserve banks, or may 
 designate a federal reserve bank to exercise such 
 functions, and may also require each such bank to 
 exercise the functions of a clearing house for its, 
 member banks" (Section 16). The same section 
 of the law also requires federal banks to "receive 
 on deposit at par from member banks or from 
 federal reserve banks checks and drafts drawn 
 upon any of its depositors, and when remitted by 
 a federal reserve bank, checks and drafts drawn 
 by any depositor in any other federal reserve 
 bank or member bank upon funds to the credit of 
 said depositor in said reserve bank or member 
 Ijank." 
 
 Member banks are permitted to make collec- 
 tion and exchange charges on customers sufficient 
 to cover the actual expenses involved in the col- 
 lection and remittance of funds. The federal re- 
 
 1 Dr. iH. Parker Willis, Secretary of the Federal Reserve 
 Board, states concisely the distinction between collecting and 
 clearing checks, as follows: "A check Is said to be collected when 
 it is sent home to the bank on which it is drawn, and arrange- 
 ment is made to remit the proceeds; it is said to be cleared when 
 the bank receiving it oflFsets it against checks in favor of the in- 
 stitution by which it is to be paid, and then collects or remits 
 only the balance, if any." The Federal Reserve, page 223. 
 
FEDERAL RESERVE SYSTEM 69 
 
 serve board is authorized to fix collection charges 
 for items handled through federal reserve banks. 
 The problem of establishing a satisfactory- 
 clearing and collection system was looked upon 
 as perhaps the most difficult and complicated one 
 confronting the federal reserve authorities in the 
 early days of the new system. At first the fed- 
 eral reserve authorities moved slowly and allowed 
 the different reserve banks a wide discretion in 
 the matter of arrangements for the clearing and 
 collection of checks. Moreover, in most districts 
 the utilization of the clearing and collection sys- 
 tem established by the federal reserve bank was 
 optional with member banks. Some joined the 
 system and many did not. It early became evi- 
 dent that to be really effective a clearing and col- 
 lection system needed to be approximately imi- 
 f orm in its workings throughout the country and 
 to embrace the largest possible number of banks ; 
 a system in which a moderate number of banks 
 utilized the federal-reserve clearing and collec- 
 tion system and a large number handled their 
 checks in the old way was unsatisfactory. It 
 meant a wasteful duplication of machinery an- 
 alogous to that which exists when a city has two 
 separate telephone services. After nearly two 
 years of experimentation, thereTorej the federal 
 reserve - board promulgated a clearing and col- 
 
70 THE A B C OF THE 
 
 lection system, which was put into operation July 
 5, 1916, in all federal reserve districts — a system 
 whose privileges under certain limitations were 
 extended by an amendatory act of June 21, 1917, 
 to qualifying banks which are not regular mem- 
 bers of the federal reserve system. 
 
 Present Clearing and Collection System 
 
 Briefly summarized, the main features of the 
 new plan, as revised to date (March 1, 1918) 
 are as follows:^ 
 
 Each federal reserve bank exercises the func- 
 tions of a clearing house in its district for mem- 
 ber banks and for qualified non-member banks, 
 known as "clearing member banks." From such 
 banks in its district the federal reserve bank will 
 receive at par "checks drawn on all member and 
 clearing member banks and on all other non- 
 member banks, which agree to remit at par 
 through the federal reserve bank of their dis- 
 trict." Clearing and collection services for mem- 
 ber and clearing member banks and for other fed- 
 eral reserve banks are also rendered by each fed- 
 eral reserve bank in the case of checks received 
 from outside the district which are drawn upon 
 
 2 The Federal Reserve Board's revised regulations concerning 
 the clearing and collection of checks constitute "Regulation J, 
 Series of 1917," and are published in the Federal Reserve Bulle- 
 tin of July 1, 1917, pages 549-550, 
 
FEDERAL RESERVE SYSTEM 71 
 
 member and clearing member banks of its dis- 
 trict and upon all other non-member banks of its 
 district, whose checks can be collected at par by 
 the federal resi^re bank. These two provisions 
 make the field of the par clearing and collection 
 system coextensive with the United States and 
 provide a machinery for the handling of checks 
 received from practically all important points 
 without the district as well as from within the dis- 
 trict. All banks belonging to the clearing system 
 are required to pay without deduction checks 
 drawn upon themselves, when presented at their 
 own counters. On January 15, 1918, there be- 
 longed to the federal reserve clearing system 
 7,622 member banks and 8,130 clearing member 
 banks, together representing approximately half 
 the banks of the country.^ At that time the fed- 
 eral reserve clearing system was handling about 
 360,000 checks daily (exclusive of those drawn 
 on the Treasurer of the United States) repre- 
 senting approximately $270,000,000, or a sum 
 equal to between one-third and one- fourth of the 
 total clearings of all the clearing houses of the 
 country. 
 
 The old evil previously described ( pages 21-22) 
 of carrying the "float" as a part of a bank's legal 
 reserve is eliminated by a provision to the effect 
 
 3 Federal Reserve Bulletin, February 1, 1918, page 75. 
 
72 THE A B C OF THE 
 
 that, although checks received by the federal re- 
 serve bank will be immediately credited (subject 
 to final payment) to the bank sending them, the 
 proceeds thereof "will not be counted as part of 
 the minimum reserve, nor become available to 
 meet checks drawn until actually collected." If 
 the bank sending in checks is not to be permitted 
 to draw against the credit which they create until 
 they have been collected, obviously the checks 
 should not be charged by the federal reserve bank 
 against the reserve account of the bank upon 
 which they are drawn until sufficient time has 
 elapsed "for the checks to have reached the mem- 
 ber bank and for returns in due course to have 
 reached the federal reserve banks."* This is the 
 rule now in force. 
 
 If a bank's deposit at the federal reserve bank 
 is insufficient to cover its legal reserve require- 
 ment and in addition to meet an adverse balance, 
 which arises against it out of clearing operations, 
 it is authorized to ship currency or specie from 
 its own vaults at the expense of its federal reserve 
 bank in order to cover the deficiency. In case of 
 a deficient balance at the federal reserve bank, 
 the member bank, of course, also has the privi- 
 lege of making good the deficiency by rediscount- 
 
 4 See Third Annual Report of Federal Reserve Board, 191(5, 
 pages 9-13. 
 
FEDERAL RESERVE SYSTEM 73 
 
 ing eligible papey or by discounting with the fed- 
 eral reserve bank its own fifteen day notes se- 
 cured by eligible collateral. 
 
 In handling items for member and clearing 
 member banks, a federal reserve bank acts as 
 agent only. 
 
 Under the federal reserve clearing and collec- 
 tion system checks are sent to federal reserve 
 banks and to member and clearing member banks 
 by the most direct routes, and the number of par 
 collection points in the United States is made 
 almost equal to the number of places of any con- 
 siderable size where commercial banks are lo- 
 cated. The result is that the new system is rap- 
 idly doing away with the old evil of routing 
 checks. * ' ' 
 
 The cost of collecting and clearing checks is 
 borne by the banks receiving the benefit and in 
 proportion to the service rendered. An account 
 is kept by each federal reserve bank of the cost 
 of performing the service, and the federal reserve 
 board fixes the charge at so much per item that 
 may be imposed for the service. A charge not 
 exceeding 2 cents per item has been authorized 
 by the board. Up to date the usual charge is 
 Ij cents per item; although in some cases it is as 
 low as 1 cent and in some as high as 2 cents.*^ 
 
 5 See Federal Reserve Bulletin, July 1, 1916, page 31*4. 
 
74 THE A B C OF THE 
 
 Inasmuch as qualified banks may use the federal 
 reserve clearing and collection system or not, as 
 they wish, and to the extent that they wish, it fol- 
 lows that the charge can be assessed against a 
 bank only to the extent that it has elected to 
 avail itself of the facilities offered. As the sys- 
 tem comes to be more widely used, as its mechan- 
 ism becomes perfected, and as the number of 
 branches of federal reserve banks increases, these 
 collection charges will probably be reduced. The 
 expense per item of doing this business already 
 seems to be a declining one. 
 
 The new system does not deny to member 
 banks and clearing member banks the right to 
 make a charge against other banks (aside from 
 federal reserve banks) and against their own 
 customers for the collection of out-of-town 
 checks and drafts received over their counters. 
 It does require, however, that these charges shall 
 be reasonable, the reasonableness to be determ- 
 ined by the federal reserve board, and that in no 
 event shall it exceed one-tenth of one per cent. 
 
 Banks which formerly charged their custo- 
 mers excessive rates for collection are according- 
 ly being forced by competition or by the board's 
 regulations to reduce their charges, while an in- 
 creasing number of banks appear to be giving up 
 all collection charges on demand items. They 
 
 I 
 
FEDERAL RESERVE SYSTEM 75 
 
 may, as a compensation, require customers to 
 carry larger balances, or they may find the ex- 
 pense a productive one as an item of advertising. 
 Recently the collection service has been ex- 
 tended to items other than checks such as promis- 
 sary notes, trade bills, time drafts, and the like, 
 an obvious need if the federal reserve banks are 
 to serve member banks as adequate substitutes 
 for the member banks' former reserve agents. 
 Referring to a cji^cular on this subject transmit- 
 ted by the federal reserve board to all federal 
 reserve banks, August 11, 1917, the Federal Re- 
 serve Bulletin says:^ "The present plan con- 
 templates that every federal reserve bank give 
 notice that it will undertake the collection of ma- 
 turing notes and bills which are payable at any 
 town or city where the federal reserve bank has 
 satisfactory arrangements for collecting checks 
 through banks, and that a similar notice be sent 
 to every other federal reserve bank that such col- 
 lection will be made for other federal reserve 
 banks on satisfactory banking points in its own 
 district. The banks are to let it be known that 
 these collections will be made subject to the usual 
 limitations as to liability, the actual cost of col- 
 lection to be deducted when the proceeds are ac- 
 counted for, while for their protection they may 
 exact a moderate service charge." 
 
 « Federal Reserve Bulletin, September 1, 1917, page 656. 
 
76 THE A B C OF THE 
 
 The Gold Settlement Fund 
 
 One serious difficulty of the old collection sys- 
 tem, as we have seen (pages 22-23) , was the need 
 of numerous and expensive shipments of cur- 
 rency back and forth over the country as the sea- 
 sonal stresses in the trade demands for currency 
 shifted from one section to another. The new 
 system absolutely eliminates the necessity of a 
 large proportion of these currency shipments and 
 both reduces the expense of those shipments 
 which do take place and lightens its burden by 
 distributing it. 
 
 The mechanism by which the necessity of a 
 large proportion of these currency shipments is 
 avoided is that of the Gold Settlement Fund, and 
 the separate but similar Federal Reserve Agents' 
 Fund. The gold settlement fund, although 
 planned in its essentials early in 1914, was not 
 established until June, 1915. The order of the 
 federal reserve board establishing this fund^ re- 
 quires each federal reserve bank to forward to 
 the treasury or the nearest sub-treasury of the 
 United States for credit to the account of the 
 gold settlement fund $1,000,000 in gold or gold 
 certificates, and in addition an amount at least 
 equal to its indebtedness due to all federal re- 
 
 7 Regulation L. Series of 1915. 
 
 I 
 
FEDERAL RESERVE SYSTEM 77 
 
 serve banks. These sums are made payable to 
 the order of the federal reserve board.. Each fed- 
 eral reserve bank is required to maintain a bal- 
 ance in the fund of not less than $1,000,000. As a 
 matter of fact all the banks carry balances very 
 many times as large as this minimum. Credit 
 on the books of the gold settlement fund is 
 counted as a part of a federal reserve bank's legal 
 reserve. The settlement of balances between 
 federal reserve banks is effected once a week 
 through the instrumentality of telegrams sent to 
 the federal reserve board, by transfers of debits 
 and credits on the books of the gold settlement 
 fund. 
 
 A separate fund similarly constituted is the 
 Federal Reserve Agents' Fund. Federal reserve 
 agents, it will be recalled, have large funds in 
 their custody, representing gold pledged with 
 them as security for federal reserve notes. 
 
 Through the machinery of the gold settlement 
 fund and the federal reserve agents' fund, trans- 
 fers may be made among all the federal reserve 
 banks, between any federal reserve bank and any 
 federal reserve agent, and between any federal 
 reserve bank or any federal reserve agent and the 
 treasury or any sub-treasury of the United 
 States. 
 
 The gold settlement fund system of transfers 
 
78 THE A B C OF THE 
 
 has almost eliminated the necessity of shipping- 
 money (other than federal reserve notes) be- 
 tween federal reserve banks. On February 21, 
 1918, that fund amounted in round numbers to 
 $378 millions, while the federal reserve agents' 
 fund amounted to $534 millions, making a total 
 of $912 millions. The combined clearings and 
 transfers for these funds sometimes amount to 
 over a billion dollars in a week. These opera- 
 tions involve very small changes in the ownership 
 of gold in the funds, sometimes less than 2 per 
 cent of their amount.^ 
 
 The federal reserve clearing and collection sys- 
 tem is therefore providing a means of eliminating 
 the evils of the old system. Excessive collection 
 charges are rapidly becoming things of the past. 
 Banks are enabled to dispense with the necessity 
 of tying up large sums in scattered deposits with 
 correspondent banks at low rates of interest for 
 the purpose of securing for themselves adequate 
 facilities for the collection of checks^ These de- 
 posits can now be brought home and the funds 
 loaned out at much better interest rates. The 
 routing of checks is being eliminated and the 
 "float" is being greatly reduced, all of which are 
 important gains to the public. The expense of 
 heavy currency shipments is avoided and the 
 economies realized by the new system are an im- 
 
FEDERAL RESERVE SYSTEM 79 
 
 portant factor in the forces that have made pos- 
 sible the recent great reduction in the reserve re- 
 quirements of American banks, a reduction which 
 involves a saving of many hundreds of millions 
 of dollars. 
 
 Foreign Exchange ^r" 
 
 The federal reserve law has brought about im- 
 portant reforms in the matter of financing our 
 foreign trade. The rediscount machinery cre- 
 ated by our twelve federal reserve banks is doing 
 much toward developing an American discount 
 market. This development is being expedited by 
 the heavy demands for American funds on the 
 part of foreign nations, caused by the war and 
 by the disruption of foreign money markets. 
 Much of our foreign trade that was former ly 
 financed through letters of credit, under _which, 
 bills expressed i n sterling were drawn, is now 
 Ibeinp financed directly by means of dollar ex- 
 change, na mely, bi lls _drawn on banks apd biisi- 
 ness h ouses in the United States and payable in 
 dollars. Banks are willing to buy such paper 
 drawn in connection with our import and export 
 trade, because there is now a ready market for 
 its sale and rediscount — a market created largely 
 by the federal reserve system. Furthermore, 
 bank acceptances in connection with foreign 
 
80 THE A B C OF THE 
 
 trade are now legalized in the United States, 
 under certain restrictions, and importers may 
 now arrange with American banks to have their 
 foreign exporters draw bills in dollars directly 
 on the importer's bank on the United States; 
 while foreign importers may open credits in 
 American banks upon which American export- 
 ers may draw, the bills being accepted by the 
 American bank and sold in the American dis- 
 count market. 
 
 Federal reserve banks have established agen- 
 cies abroad, in England with the Bank of Eng- 
 land, in France with the Bank of France, in the 
 Philippines with the National Bank of the Phil- 
 ippines, in Italy with the Bank of Italy, in Japan 
 with the Bank of Japan, and in Holland with 
 the Netherlands Bank. The foreign exchange 
 division created by the federal reserve board in 
 December, 1917, is rendering valuable service in 
 stabilizing an exchange both with our allies and 
 with neutrals. 
 
 Under the provisions of the federal reserve act, 
 national banks with a capital and surplus of a 
 million dollars or over may be authorized under 
 certain restrictions to establish branches abroad; 
 and a number of such branches have already been 
 established. National banks may furthermore* 
 invest to an amount not exceeding 10 per cent 
 
 I 
 
FEDERAL RESERVE SYSTEM 81 
 
 of their capital and surplus in the stock of banks 
 chartered in the United States and principally- 
 engaged in international or foreign banking or 
 banking in American dependencies, and enjoyi- 
 ing the privilege of establishing branches abroad. 
 In this way a number of banks have been estab- 
 lished which are owned either wholly or in part 
 by groups of national banks, and one of them 
 already has 48 national banks as stockholders. 
 
 As a result of war conditions and of these 
 changes in our banking system, we are now 
 financing directly an increasing proportion of 
 our foreign trade, and while this proportion may 
 decline after the war, it will probably never go 
 back to the old pre-war figures. As regards the 
 financing at home of our foreign trade, the fed- 
 eral reserve system was established at the op- 
 portune time. It is proving to be a great influ- 
 ence in the internationalizing of American trade 
 and American finance. 
 
 %^ 
 
CHAPTER IX 
 
 The Federal Reserve System and the Fed- 
 eral Treasury 
 
 The fourth and last of the general defects of 
 the old banking system, which were discussed in 
 the early part of this book, was the defective or- 
 ganization of the old system from the standpoint 
 of the federal treasury. How is the federal re- 
 serve system remedying this defect? 
 
 The provisions of the federal reserve act con- ! 
 cerning the deposit of government funds are in 
 section 15. They are: "The moneys held in the 
 general fund of the treasury, except the five per 
 centum fund for the redemption of outstanding 
 national-bank notes, and the funds provided in 
 this act for the redemption of federal reserve 
 notes may, upon the direction of the Secretary of 
 the Treasury, be deposited in federal reserve 
 banks, which banks, when required by the Secre- 
 tary of the Treasury, shall act as fiscal agents of 
 the United States ; and the revenues of the Gov- 
 ernment or any part thereof may be deposited in 
 
FEDERAL RESERVE SYSTEM 83 
 
 such banks, and the disbursements may be made 
 by checks drawn against such deposits. 
 
 "No pubhc funds of the Phihppine Islands, or 
 of the postal savings,^ or any government funds, 
 shall be deposited in the continental United 
 States in any bank not belonging to the system 
 established by this act :,^ provided, however, that 
 nothing in this act shall be construed to deny the 
 right of the Secretary of the Treasury to use 
 member banks as depositories." 
 
 Many of the advocates of the federal reserve 
 system believed that this section did not go far 
 enough. They believed that the practice of de- 
 positing government funds in thousands of 
 banks scattered over the country was a vicious 
 and expensive one, and wished the new law to 
 make the federal reserve banks the depositories 
 of practically all general funds, dispensing with 
 the use of individual banks as depositories and 
 ultimately with the independent treasury system. 
 It was felt by many, however, that the immedi- 
 ate adoption of such a plan would be moving too 
 rapidly and that it was undesirable to limit so 
 narrowly the Secretary of the Treasury, who is 
 
 1 The law was later amended so as to authorize, under certain 
 conditions, the deposit of postal savings funds in banks not 
 members of the federal reserve system. See E. W. Kemmerer, 
 Postal Savings, pages 112-116. 
 
 2 But see pages 86-87. 
 
84 THE A B C OF THE 
 
 responsible for the safety of government funds. 
 The extent to which the Secretary of the Treas- 
 ury should keep general funds in the federal re- 
 serve banks, in member banks, and in the sub- 
 treasuries was, therefore, left to his discretion. 
 There appears, however, to have been a wide- 
 spread belief that the federal reserve banks would 
 become to an increasing extent the depositories of 
 federal funds, and that national banks and the 
 sub-treasuries would, as time went on, receive an 
 ever declining proportion of these funds. The 
 Secretary of the Treasury is a member of the 
 federal reserve board, and there is much to be 
 said in favor of the proposition that banks desir- 
 ing government funds should present their claims 
 for advances to their federal reserve bank, and 
 should receive such funds only by the ordinary 
 method of rediscount. This would simplify the 
 problem, remove from the Secretary of the Treas- 
 ury the onerous task of apportioning funds 
 among thousands of individual banks, and dis- 
 courage the banks from depending upon the Sec- 
 retary of the Treasury as a sort of grandfather 
 for aid in time of need. The federal reserve 
 bank, which is having continual dealings with all 
 its member banks, would presumably be in a bet- 
 ter position to judge the comparative needs of 
 different banks than would the Secretary of the 
 
FEDERAL RESERVE SYSTEM 86 
 
 Treasury. Moreover, how could a federal re- 
 serve bank place adequate pressure on member 
 banks to conserve their strength in time of need, 
 to advance discount rates, to contract loans, etc., 
 if the member banks could "go around" the fed- 
 eral reserve bank and the federal reserve board 
 and get funds directly from the Secretary of the 
 Treasury? 
 
 For these and other reasons it was expected 
 that the Secretary of the Treasury, in the ex- 
 ercise of the discretion granted him by the law, 
 would deposit his funds in a large and increasing 
 degree in federal reserve banks. Events pointed 
 clearly in this direction prior to our entrance in- 
 to the war. Governor Strong of the New York 
 Federal Reserve Bank writes me: "The first de- 
 posit of government funds made by the treasury 
 with the federal reserve banks was on September 
 4, 1915, when certain special deposits were made 
 in a number of banks. Later, arrangements 
 were made to have the collectors of customs 
 and collectors of internal revenues in the twelve 
 federal reserve bank cities deposit all of their 
 funds in the federal reserve banks and as a mat- 
 ter of fact, for a long period prior to the pas- 
 sage of the bond act of April 24, 1917, which 
 altered the status of public deposits, the federal 
 reserve banks had been receiving the principal 
 
86 THE A B C OF THE 
 
 revenues of the Government outside of postal 
 funds and had been paying a very large propor- 
 tion of government checks and warrants. The 
 limitation of this fiscal agency service in the col- 
 lection of revenues and payment of checks to the 
 twelve federal reserve bank cities was, of course, 
 due to the inconvenience of extending these oper- 
 ations to places where federal reserve banks had 
 not yet established branches. The plan therefore 
 of actively employing the federal reserve banks 
 as fiscal agents had been put into operation some 
 time before the first bond bill was passed and was 
 an important and very active part of the work 
 of the reserve banks almost immediately after 
 the arrangement was established." 
 ^ i The abnormal conditions, however, created by 
 • the European War set up obstacles in the way of 
 the Government's discontinuing the use of indi- 
 vidual banks as depositaries of government funds. 
 During the early days of the war the heavy de- 
 mands for funds in America to meet obligations 
 due abroad and the frenzied condition of the 
 money markets throughout the world naturally 
 prevented the inauguration of a policy of with- 
 drawing government funds from individual 
 banks and depositing them in the federal reserve 
 banks. Later the heavy buying in this country 
 by European belligerents discouraged such a 
 
 I 
 
FEDERAL RESERVE SYSTEM 87 
 
 policy. Such was not a time for withdrawing 
 large sums from individual banks. Finally our 
 own entrance into the war and the floating of our 
 huge Liberty loans rendered a transfer of this 
 kind out of the question. In the interest of caus- 
 ing a minimum of disturbance to the money 
 market in the floating of these loans, the Govern- 
 ment wisely adopted the policy of keeping the 
 funds widely scattered and to as large an extent 
 as practicable in the banks of the communities 
 where they were received. The result is that in 
 recent times there have been more government 
 funds in individual banks than at any previous 
 period in our history. The deposit of govern- 
 ment funds, moreover, is no longer limited to 
 banks that are members of the federal reserve sys- 
 tem, since the law under which all government 
 bonds and certificates of indebtedness have been 
 issued since we entered the war provides for the 
 deposit of their proceeds in qualified national 
 banks and state banks and trust companies 
 against certain approved collateral. Numerous 
 nonmember banks therefore have qualified as 
 depositories in connection with our Liberty loans. 
 What will be the Government's pohcy in this 
 matter after the abnormal conditions arising from 
 the war have passed, of course, it is impossible to 
 say at this time. 
 
88 THE A B C OF THE 
 
 As fiscal agents of the Government, the federal 
 reserve banks have rendered the nation services 
 of incalculable value since our entrance into the 
 war, services in connection with the issuance of 
 our large Liberty loans and our ad-interim treas- 
 ury notes, with a minimum disturbance to our 
 money markets. They have aided greatly in the 
 conservation of our gold resources, in the regu- 
 lation of our foreign exchanges, and in general 
 in the centralization and efficient utilization of 
 our financial energies. In this time of great 
 emergency the federal reserve system has been a 
 bulwark to our national finance. One shudders 
 when he thinks what might have happened if the 
 war had found us with our former decentralized 
 and antiquated banking system. Think of pour- 
 ing the crisis of 1914-1918 into bottles that broke 
 with the crisis of 1907! 
 
 The present war demands of us in financial 
 matters the maximum of efficiency. If we are 
 to win we must make every dollar count to the 
 utmost. This means the coordination of all parts 
 of our banking system. It means integration 
 under a responsible central control, and it means 
 administration with sole regard to national wel- 
 fare. Upon this subject we may conclude this 
 book with the words of President Wilson, made 
 publicOctober 13, 1917: 
 
FEDERAL RESERVE SYSTEM 89 
 
 "It is manifestly imperative that there should 
 be a complete mobilization of the banking re- 
 serves of the United States. All who are famil- 
 iar with financial operations must appreciate the 
 importance of developing to the maximum our 
 banking power and of providing financial ma- 
 chinery adequate for meeting the very great 
 financial requirements imposed upon our country 
 by reason of the war. A vigorous prosecution 
 and satisfactory termination of the war will de- 
 pend in no small degree upon the ability of the 
 Government not only to finance itself, but also to 
 aid the governments associated with it in the 
 war, which must be kept supplied with muni- 
 tions, fuel, food, and supplies of all kinds. The 
 banking problem involved is one which concerns 
 all banks alike. Its solution does not depend 
 upon the national banks alone, nor upon the 
 state banks. The burden and the privilege must 
 be shared by every banking institution in the 
 country. . . . 
 
 "The extent to which our country can with- 
 stand the financial strains for which we must be 
 prepared will depend very largely upon the 
 strength and staying power of the federal re- 
 serve banks. . . . 
 
 "Many of the largest state banks and trust 
 companies are now becoming members, realiz- 
 
90 FEDERAL RESERVE SYSTEM 
 
 ing that to win the war we must conserve all 
 of the physical, financial, and moral resources 
 of our country — that our finances must rest on 
 the firmest possible foundation, and that they 
 must be adequately and completely conserved so 
 as to respond instantly to every legitimate de- 
 mand. How can this necessary condition be 
 brought about and be made permanently effec- 
 tive better than by the concentration of the bank- 
 ing strength of our country in the federal re- 
 serve system? . . . 
 
 "I believe that cooperation on the part of 
 the banks is a patriotic duty at this time, and that 
 membership in the federal reserve system is a 
 distinct and significant evidence of patriotism." 
 
APPENDIX A 
 
 COMBINED BALANCE SHEET OF TWELVE FED- 
 ERAL RESERVE BANKS, MARCH 28, 1918, 
 AND BRIEF EXPLANATIONS OF THE 
 VARIOUS ITEMS 
 
 Resources 
 
 Gold coin and certificates in vault' $489,948,000 
 
 Gold settlement fund — federal reserve 
 
 board^ 399,568,000 
 
 Gold with foreign agencies'^ 52,500,000 
 
 Total gold held by banks 942,016,000 
 
 Gold with federal reserve agent* 852,192,000 
 
 Gold redemption fund' 21,496,000 
 
 Total gold reserve 1,815,704,000 
 
 Legal tender notes, silver, etc.® ,. 58,359,000 
 
 Total reserves 1,874,063,000 
 
 W ':■ 
 
 ¥ Bills discounted for member banks' 583,228,000 
 
 Bills bought in open market^ 304,065,000 
 
 Total bills on hand 887,293,000 
 
 U. S. Government long-term securities®. . . . 58,190,000 
 
 U. S. Government short-term securities^".. 252,579,000 
 
 All other earning assets" 3,523,000 
 
 Total earning assets 1,201,585,000 
 
92 APPENDIX A 
 
 Due from other federal reserve banks — 
 
 net^2 26,945,000 
 
 Uncollected items^^ 339,130,000 
 
 Total deductions from gross deposits 366,075,000 
 
 Five per cent redemption fund against fed- 
 eral reserve bank notes^* 537,000 
 
 All other resources^^ 3,724,000 
 
 Total resources 3,445,984,000 
 
 Liabilities 
 
 Capital paid in^® $74,223,000 
 
 Surplus" 1,134,000 
 
 Government deposits^^ 104,086,000 
 
 Due to members — reserve account^*' 1,499,400,000 
 
 Collection items-^ 216,897,000 
 
 Other deposits, including foreign govern- 
 ment credits^^ 81,059,000 
 
 Total gross deposits 1,901,442,000 
 
 Federal reserve notes in actual circulation^^ 1,452,838,000 
 Federal reserve bank notes in circulation, 
 
 net liability's 7,978,000 
 
 All other liabilities'* 8,369,000 
 
 Total liabilities 3,445,984,000 
 
 1 This represents reserve money held in the vaults of federal 
 reserve banks against deposits and federal reserve notes. See 
 text, pp. 52, 5S-59; and Act, sec, 16, par. 3. 
 
 2 This is a gold fund held in the United States treasury by the 
 federal reserve board, in trust for the federal reserve banks, and 
 the money it contains is transferred from one federal reserve 
 bank to another or to or from the treasurer of the United States 
 by means of debits and credits on books kept by the federal re- 
 serve board in Washington. Gold held in the fund to the credit 
 of any federal reserve bank is counted as lawful reserve money 
 against federal reserve notes or deposits. See text, p. 76; and 
 Act, sec. 2, 3d, and 4th pars, from last. 
 
 3 Federal reserve banks have established agencies in a number 
 of foreign countries, and, as a matter of convenience as well as 
 
APPENDIX A 93 
 
 to avoid shipping risks and expenses, some of the federal reserve 
 banks keep gold in the vaults of these foreign agencies. See text, 
 p. 80; and Act, sec. 14, par. (e). 
 
 * This is gold deposited with federal reserve agents as collateral 
 for the issue of federal reserve notes. See text, p. 52; and 
 Act, sec. 16, pars. 2-7. 
 
 5 The gold redemption fund here mentioned is a fund held by 
 the treasurer of the United States for the redemption of federal 
 reserve notes in gold on demand. It is made up of deposits of 
 gold from each federal reserve bank. Each bank's deposit must 
 be sufficient in the judgment of the Secretary of the Treasury for 
 the redemption of such federal reserve notes of the bank as are 
 likely to be presented at the treasury for redemption; but in no 
 case can the fund be less than five per cent of the total amount 
 of notes issued less the amount of gold held by the federal re- 
 serve agents as collateral security for notes. Gold in the re- 
 demption fund is counted as part of the legal reserve required 
 against federal reserve notes. See text, pp. 51-52; and Act, sec. 
 16, par. 4. 
 
 6 This item covers all kinds of money held by federal reserve 
 banks except gold coin and gold certificates. 
 
 7 This represents advances made by federal reserve banks to 
 member banks. It consists of short-time conmiercial bills, notes, 
 and bank acceptances, which have been rediscounted for member 
 banks, and of one to fifteen day loans made to member banks 
 against their notes coUateraled by United States government se- 
 curities and by commercial paper. The Federal Reserve Bulle- 
 tin of each month gives an analysis of the kinds and maturities 
 of the paper held. See text, pp. 61-63 ; Act, sec. 13, pars. 2-6 ; and 
 Regulation A issued by the federal reserve board, June 22, 1917, 
 Federal Reserve Bulletin, July 1, 1917, pp. 539-541. 
 
 8 The kinds of open-market operations which federal reserve 
 banks may carry on are described in section 14 of the Act. See 
 also text, pp. 41-4'4; and Regulation B issued by the federal re- 
 serve board, June 22, 1917, Federal Reserve Bulletin July 1, 1917, 
 pp. 541-542. 
 
 9 These are United States government bonds, chiefly Liberty 
 bonds, owned by federal reserve banks. 
 
 10 These are short-time treasury certificates of indebtedness 
 issued in anticipation of Liberty bond issues. See Federal Re- 
 serve Bulletin March 1, 1918, pp. 153-154. 
 
 11 This item usually consists largely of municipal warrants. 
 I'sThis item represents simply the difference between the 
 
 amounts due to and due from other federal reserve banks. If 
 all entries were passed simultaneously there would obviously be 
 no balance. 
 
 13 These are items in process of collection, chiefly under the 
 federal reserve clearing and collection system. See text, pp. 19-22. 
 
94 APPENDIX A 
 
 ; Act, sec. 16, pars. 14-18; and Regulation J issued by fed- 
 eral reserve board, June 22, 1917, Federal Reserve Bulletin, July 
 1, 1917, pp. 549-550. 
 
 14 Federal reserve bank notes are bond-secured bank notes, is- 
 sued by federal reserve banks, in place of bond-secured national 
 bank notes retired. Up to date the amount of federal reserve 
 bank notes issued has been very small. (See note 23 below). 
 Except for the fact that they are issued by federal reserve banks, 
 they are essentially like national bank notes. As in the case of 
 the latter, the law requires that, for the purpose of their re- 
 demption in Washington, a live per cent redemption fund be 
 maintained by the issuing bank in the United States treasury. 
 See text, p. 51; Act, sec. 18, par. 6; and Act of June 20, 1874, 
 sec. 3. 
 
 15 This represents the net debit balance on a variety of ac- 
 counts, including profit and loss account, gross earnings account, 
 expense account, depreciation account, suspense account, unearned 
 discount account, and the like. 
 
 16 The law requires every member bank to subscribe to stock 
 in the federal reserve bank of its district to the amount of six 
 per cent of the member bank's paid-in capital and surplus. One 
 half of this subscription has already been paid and the other 
 half is subject to the call of the federal reserve board. This 
 item in the balance sheet accordingly represents three per cent 
 of the combined paid-in capital and surplus of all member banks. 
 See text, p. 31; and Act, sec. 2, par. 3. 
 
 17 The law provides that member banks shall receive out of the 
 earnings of their federal reserve bank an annual, six per cent, 
 cumulative dividend on their paid-in capital stock, and that the 
 balance of the net earnings shall be paid to the United States 
 Government as a franchise tax, "except that one-half of such net 
 earnings shall be paid into a surplus fund until it shall amount 
 to forty per centum of the paid-in capital stock of such bank." 
 Act, sec. 7, par. 1. 
 
 18 The law authorizes the Secretary of the Treasury to use fed- 
 eral reserve banks as depositaries of public funds, except of cer- 
 tain specified trust funds. The Secretary began depositing pub- 
 lic funds in federal reserve banks as early as September 4, 1915, 
 and since that time has continually and extensively employed 
 federal reserve banks as depositaries. Legal reserve require- 
 ments do not apply to deposits, of government funds. See text, 
 pp. 83-87; and Act, sec. 15; also Act of April 24, 1917, sec. 7; 
 and Act of September 24, 1917, sec. 8. 
 
 19 Member banks are required by law to keep their entire legal 
 reserves on deposit in the federal reserve bank of thir district. 
 See text, pp. 35-38; and Act, sec. 19, 
 
 20 These are liabilities of federal reserve banks to member 
 banks and clearing-member banks arising out of the federal re- 
 
APPENDIX A 96 
 
 serve clearing and collection system. They represent balances 
 kept by these banks over and above those maintained to meet 
 legal reserve requirements — ^balances kept for clearing and col- 
 lection purposes. See text, pp. 70-74; and references cited in note 
 13 above. 
 
 21 This covers deposit credits of certain non-member banks in 
 the United States, of certain foreign banks of which the federal 
 reserve banks are the American agencies, and of certain foreign 
 governments. See text, pp. 70, 80; Act, sec. 14, par. (e); and 
 Regulation J issued by the federal reserve board June 22, 1917, 
 Federal Reserve Bulletin, July 1, 1917, pp. 549-550. 
 
 22 This item represents the total amount of federal reserve 
 notes issued to the federal reserve banks and now outstanding 
 (exclusive of the amount now held by federal reserve banks. See 
 text, pp. 51-57; and Act, sec. 16. 
 
 23 These are the federal reserve bank notes described above in 
 note 14. The net liability represents the total amount outstand- 
 ing less the amount of cash deposited with the treasurer of the 
 United States for the retirement of such notes. See Act of 
 March 4, 1907, sec. 4 amending Act of July 12, 1882. 
 
 24 This represents the net credit balance on a variety of mis- 
 cellaneous accoimts. It includes the excess of earned and un- 
 earned discount and interest over expenses and certain unproduc- 
 tive assets. Compare note 15 above. 
 

 of terms. 
 
 APPENDIX B 
 
 FEDERAL RESERVE ACT 
 
 (Approved Dec. 23, 1913) 
 As amended Aug. 4 1914. {S8 Stat, 682; Chap. 
 226); Aug. 15, 1914 {SB Stat., 691; Chap. 
 252); Mar. 3, 1915 {38 Stat., 958; Chap. 
 93); Sept. 7, 1916 (39 Stat., 752; Chap. 
 461); June 21, 1917 (40 Stat., Chap. 32). 
 
 An Act To provide for the establishment of 
 Federal reserve banks, to furnish an elastic cur- 
 rency, to afford means of rediscounting commer- 
 cial paper, to establish a more effective super- 
 vision of banking, in the U^ted States, and for 
 other purposes. 
 
 Be it enacted by the Senate and House of 
 Representatives of the United States of America- 
 in Congress assembled. That the short title of 
 this Act shall be the "Federal Reserve Act." 
 
 Wherever the word "bank" is used in this 
 
 ^Definitions Act, the word shall be held to include State 
 
 bank, banking association, and trust company, 
 
 except where national banks or Federal reserve 
 
 banks are specifically referred to. 
 
 The terms "national bank" and "national 
 banking association" used in this Act shall be 
 held to be synonymous and interchangeable. 
 The term "member bank" shall be held to mean 
 any national bank. State bank, or bank or trust 
 company which has become a member of one 
 of the reserve banks created by this Act. The 
 term "board" shall be held to mean Federal Re- 
 
tricts. 
 
 APPENDIX B 97 
 
 serve Board; the term "district" shall be held 
 to mean Federal reserve district; the term "re- 
 serve bank" shall be held to mean Federal re- 
 serve bank. 
 
 FEDERAL RESERVE DISTRICTS 
 
 Sec. 2. As soon as practicable, the Secre- 
 tary of the Treasury, the Secretary of Agricul- Determina- 
 ture and the Comptroller of the Currency, act- Jjon_ of Ris- 
 ing as "The Reserve Bank Organization Com- 
 mittee," 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, excluding Alaska, into districts, 
 each district to contain only one of such Feder- 
 al reserve cities. The determination of said or- 
 ganization committee shall not be subject to re- 
 view except by the Federal Reserve Board 
 when organized: Provided, That the districts 
 shall be apportioned with due regard to the con- 
 venience 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 dis- 
 tricts shall be known as Federal reserve districts 
 and may be designated by number. A majority 
 of the organization committee shall constitute a 
 quorum with authority to act. 
 
 Said organization committee shall be author- 
 ized to employ counsel and expert aid, to take 
 testimony, to send for persons and papers, to 
 administer oaths, and to make such investiga- 
 tion as may be deemed necessary by the said 
 committee in determining the reserve districts 
 and in designating the cities within such dis- 
 tricts where such Federal reserve banks shall be 
 severally located. The said committee shall su- 
 
98 
 
 APPENDIX B 
 
 pervise 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." 
 
 Under regulations to be prescribed by the 
 
 ban ks ^ Vequff! "Organization committee, every national banking 
 
 .ed to join _izE. association in the United States is hereby re- 
 
 g~yTnr s"^^_q"^r^^^ and every eligible bank in the United 
 
 Trust compa- States and every trust company within the Dis- 
 
 ,fb"join . 
 
 Double lia; 
 bility of stock- 
 holders. 
 
 trict of Columbia, is hereby authorized to sig- 
 nify in writing, within sixty days after the pas- 
 sage of this Act, its acceptance of the terms and 
 provisions hereof. When the organization com- 
 mittee shall have designated the cities in which 
 Federal reserve banks are to be organized, and 
 fixed the geographical limits of the Federal re- 
 serve districts, every national b ankingassocia- 
 tion within th^t distri(; t, <ihall he required within 
 thirty days after notice from the organization 
 committee, to subscribe to the capital sto ck of 
 such Fed exi^y y^sp^^e^biank]jflL.A-^ um equaTloj ix 
 per centum of tb p paid-^ ip capita l^tock and^ur- 
 plus of such bank, q ne^sixt h of ^le subscrip tion 
 to be payabl e on calT of the organ ization commi t- 
 ^'eSeri 
 
 ^eTBoard, one-sixth 
 
 within lhree monthsand _one: §ixth wi thin six 
 :^gsths[jh£reafter7jndjb^ rema inder of_ thesub- 
 gcriptio nror"an y^_pa be subject 
 
 T:o calF when deemed" necessary J ?J^ tJT? Efideral 
 "Reserve Boardj^Sajd pay ments to be in go\ ^.,Jix 
 _^d~c ertificates T 
 
 The shareholders of every Federal reserve 
 bank shall be held individually responsible, 
 equally and ratably, and not one for another, for 
 all contracts, debts, and engagements of such 
 bank to the extent of the amount of their sub- 
 scriptions to such stock at the par value thereof 
 in addition to the amount subscribed, whether 
 
 
APPENDIX B 99 
 
 such subscriptions have been paid up in whole 
 or in part, under the provisions of this Act. 
 
 Any national bank failing to signify its ac- 
 ceptance of the terms of this Act within the 
 sixty days aforesaid, shall cease to act as a re- 
 serve agent, upon thirty days' notice, to be given 
 within the discretion of the said organization 
 committee or of the Federal Reserve Board. 
 
 Should any national banking association in Nation 
 the United States now organized fail within a l . b anks nn t 
 
 ^ 1 A joining sya- 
 
 one year after the passage of this Act to become tem "Torfek 
 a member bank or fail to comply with any of JH!05!l!!5?' 
 the provisions of this Act applicable thereto, all 
 of the rights, privileges, and franchises of such 
 association granted to it under the national-bank 
 Act, or under the provisions of this Act, shall 
 be thereby forfeited. Any noncompliance with 
 or violation of this Act shall, however, be de- 
 termined and adjudged by any court of the 
 United States of competent jurisdiction in a 
 suit brought for that purpose in the district or 
 territory in which such bank is located, under 
 direction of the Federal Reserve Board, by the 
 Comptroller of the Currency in his own name 
 before the association shall be declared dis- 
 solved. In cases of such noncompliance or vio- 
 lation, other than the failure to become a mem- 
 ber bank under the provisions of this Act, every noncompTiLfS 
 director who participated in or assented to the with act. 
 same shall be held liable in his personal or in- 
 dividual capacity for all damages which said 
 bank, its shareholders, or any other person shall 
 have sustained in consequence of such violation. 
 
 Such dissolution shall not take away or im- 
 pair any remedy against such corporation, its 
 stockholders or officers, for any liability or pen- 
 alty which shall have been previously incurred, scripdons ^'t^o 
 
 Should the subscriptions by banks to the stock stock to be 
 of said Federal reserve banks or any one or d" r°""ertain 
 more of them be, in the judgment of the organi- contingencies. 
 
100 
 
 APPENDIX B 
 
 U. S. Gov- 
 ernment may 
 subscribe for 
 stock if banks 
 and public fail 
 to subscribe 
 adequately. 
 
 zation committee, insufficient to provide the 
 amount of capital required therefor, then and in 
 that event the said organization committee may, 
 under conditions and regulations to be pre- 
 scribed by it, offer to public subscription at par 
 such an amount of stock in said Federal reserve 
 banks, or any one or more of them, as said com- 
 mittee shall determine, subject to the same con- 
 ditions as to payment and stock liability as pro- 
 vided for member banks. 
 
 No individual, copartnership, or corporation 
 other than a member bank of its district shall be 
 permitted to subscribe for or to hold at any time 
 more than $25,000 par value of stock in any 
 Federal reserve bank. Such stock shall be 
 known as public stock and may be transferred 
 on the books of the Federal reserve bank by the 
 chairman of the board of directors of such bank. 
 
 Should the total subscriptions by banks and 
 the public to the stock of said Federal reserve 
 banks, or any one or more of them, be, in the 
 judgment of the organization committee, insuffi- 
 cient to provide the amount of capital required 
 therefor, then and in that event the said organi- 
 zation committee shall allot to the United States 
 such an amount of said stock as said committee 
 shall determine. Said United States stock shall 
 be paid for at par out of any money in the Treas- 
 ury not otherwise appropriated, and shall be 
 held by the Secretary of the Treasury and dis- 
 posed of for the benefit of the United States in 
 such manner, at such times, and at such price, 
 not less than par, as the Secretary of the Treas- 
 ury shall determine. 
 
 Stock not held by member banks shall not be 
 entitled to voting power. 
 
 The Federal Reserve Board is hereby empow- 
 ered to adopt and promulgate rules and regula- 
 tions governing the transfers of said stock. 
 
APPENDIX B 101 
 
 No Federal reserve bank shall commence 
 business with a subscribed capital less than $4,- 
 000,000. The organization of reserve districts 
 and Federal reserve cities shall not be construed 
 as changing the present status of reserve cities 
 and central reserve cities, except in so far as 
 this Act changes the amount of reserves that 
 may be carried with approved reserve agents lo- 
 cated therein. The organization committee shall Expenses of 
 have power to appoint such assistants and incur commitfee?" 
 such expenses in carrying out the provisions of 
 this Act as it shall deem necessary, and such 
 expenses shall be payable by the Treasurer of 
 the United States upon voucher approved by the 
 Secretary of the Treasury, and the sum of $100,- 
 000, or so much thereof as may be necessary^ is 
 hereby appropriated, out of any moneys in the 
 Treasury not otherwise appropriated, for the 
 payment of such expenses. ' 
 
 BRANCH OFFICES 
 
 Sec. 3} The Federal Reserve Boar d may 
 lAs amended by act approved June 2l7~iyi7 (4U 
 Stat, chap. 32). 
 
 permit or rpgnirp gny ^ederal reserve hank tq 
 establish bran ch banks within the FedprAl rp - 
 ' ^rve dis trict in whichjt is located or within the 
 arstrict _M ^iiy~Tederal r eserv e bank which ma y 
 have been suspend ed. Such branches, subject 
 to such rules and regulations as the Federal Re- 
 serve Board may prescribe, shall be operated 
 under the supervision of a board of directors to 
 consist of not more than seven nor less than 
 three directors, of whom a majority of one shall 
 be appointed by the Federal reserve bank of the 
 district, and the remaining directors by the Fed- 
 eral Reserve Board. Directors of branch banks 
 shall hold ojSice during the pleasure of the Fed- 
 eral Reserve Board. 
 
102 
 
 APPENDIX B 
 
 Applidations 
 for member- 
 ship. 
 
 Certificates 
 of organiza- 
 tion. 
 
 FEDERAL RESERVE BANKS 
 
 Sec. 4.^ When the organization committee 
 2 As amended by act approved June 21, 1917 (40 
 Stat., chap. 32). 
 
 shall have established Federal reserve districts 
 as provided in section two of this Act, a certifi- 
 cate shall be filed with the Comptroller of the 
 Currency showing the geographical limits of 
 such districts and the Federal reserve city des- 
 ignated in each of such districts. The Comp- 
 troller of the Currency shall thereupon cause to 
 be forwarded to each national bank located in 
 each district, and to such other banks declared 
 to be eligible by the organization committee 
 which may apply therefor, an application blank 
 in form to be approved by the organization com- 
 mittee, which blank shall contain a resolution to 
 be adopted by the board of directors of each 
 bpnk executing such application, authorizing a 
 subscription to the capital stock of the Federal 
 reserve bank organizing in that district in ac- 
 cordance with the provisions of this Act. 
 
 When the minimum amount of capital stock 
 prescribed by this Act for the organization of 
 any Federal reserve bank shall have been sub- 
 scribed and allotted, the organization committee 
 shall designate any five banks of those whose 
 applications have been received, to execute a cer- 
 tificate of organization, and thereupon the banks 
 so designated shall, under their seals, make an 
 organization certificate which shall specifically 
 state the name of such Federal reserve bank, 
 the territorial extent of the district over which 
 the operations of such Federal reserve bank are 
 to be carried on, the city and State in which 
 said bank is to be located, the amount of capital 
 stock and the number of shares into which the 
 same is divided, the name and place of doing 
 business of each bank executing such certificate, 
 
APPENDIX B 103 
 
 and of all banks which have subscribed to the 
 capital stock of such Federal reserve bank and 
 the number of shares subscribed by each, and 
 the fact that the certificate is made to enable 
 those banks executing same, and all banks which 
 have subscribed or may thereafter subscribe to 
 the capital stock of such Federal reserve bank, 
 to avail themselves of the advantages of this 
 Act. 
 
 The said organization certificate shall be ac- 
 knowledged before a judge of some court of rec- 
 ord or notary public; and shall be, together 
 with the acknowledgment thereof, authenticated 
 by the seal of such court, or notary, transmitted 
 to the Comptroller of the Currency, who shall 
 file, record and carefully preserve the same in 
 his office. 
 
 Upon the filing of such certificate with the Y' Si7"M^ ' 
 Comptroller of the Currency as aforesaid, the serve bankl^ 
 said Federal reserve bank shall become a body 
 corporate, and as such, and in the name desig- 
 nated in such organization certificate, shall have 
 power — 
 
 First. J^j^ndnpt and use a corporate seal. 
 
 Second. T o have suc cessio n for a period o f 
 twenty -years from its organization unless it is 
 sooner dissolvedibv ^n Act of Congress, or un - 
 less Its francliise becomes forfeited by sorng jido- 
 TgrgrnffTlawr" 
 
 TKirrJ "rn make ^nntr flftR. 
 
 Fourth. "To sue and be sue d, compla i n and 
 defend, inany court oT law or _ equity . 
 
 Fifth. T o appo i iin)y its bo^d of director s 
 such officer^ ^and en iployees_iis-.aJ^ not othfrwinr 
 
 Jjrovided for in this ActT tn rlefinp fheir finfiesj 
 require bnTids n^ \herr\ ^;nd fiy the penalfy there- 
 
 gSf and to dismiss at pleasure such officers or 
 employees. 
 
 Sixth. T" p^pffff nbe by its b oard nf diref^tgr^ 
 
104 APPENDIX B 
 
 by-laws not inconsistent with law, regulating the 
 manner in which its general business may be 
 conducted, and the privileges granted to it by 
 law may be exercised and enjoyed. 
 
 Seventh. To exerci s e by i ts board of directors, 
 nrjinly frnthnri zed offic ers or agents , all p owers 
 specifically granted by' the^ provisions of this 
 Act and such incidental powers as shall be nec- 
 essary to carry on the business of banking with- 
 in the limitations prescribed by this Act. 
 Federal re- Eighth. Ulpon^dep o^^jgith the Treasurer of 
 notS ^*°^ the United States of any ^b onds of the Unit ed 
 States in the mann erjirgYi^^^ ^y pvigj^^ing T?»w 
 rel ating to natfen a PKanks, to recE Jre from the 
 
 omptroller of the_ Curre iicy circulating notes^in 
 "blank, regTstered'a ii d countersigned as provided 
 " byTaw, eqttal in amount to_gie^at~value[oTjEe 
 l^nnds s o d^ osite'dr"~sii(?b nntps to' 1^e issued 
 under the same'conditions and provisions of law 
 as relate to the issue of circulating notes of na- 
 tional banks secured b^ bonds 15f the United 
 States bearing the circulating privilege, except 
 that the issue of sitch notes shall riot be limited 
 to the capital stock of such Federal reserve 
 bank. 
 
 But no Federal reserve bank shall transact 
 any business except such as is incidental and 
 necessarily preliminary to* its organization un- 
 til it has been authorized by the Comf)troller of 
 the Currency to commen(!fe business under the 
 provisions of this Act. 
 Duties of Every Federal reserve bank shall be con- 
 
 tor"*^ °* ^"^' ducted under the supervision and control of a 
 board of directors. 
 
 The board of directors shall perform the du- 
 ties usually appertaining to the office of direc- 
 tors of banking associations and all such duties 
 as are prescribed by law. 
 
 Said board shall administer the affairs of said 
 
directors. 
 
 APPENDIX B 105 
 
 bank fairly and impartially and without dis- 
 crimination in favor of or against any member 
 bank or banks and shall, subject to the provis- 
 ions of law and the orders of the Federal Re- 
 serve Board, extend to each member bank such 
 discounts, advancements and accommodations as 
 may be safely and reasonably made with due 
 regard for the claims and demands of other 
 member banks. 
 
 Such board of directors shall he splpptpd as Constitutix>n 
 her PJTif^ftpr yppnifiprl ind shall f>nTi<;i<st nf ninp of board of 
 
 members, h oldi ng office for three years, and di- 
 vided in to three classes. Hpsi p rnafpH «« rlassQ fi 
 A^grandC 
 
 Class A shall consist of three members, who 
 shall be choseiT Bv and be representative of the 
 stock-holding banks . 
 
 jJJass ij shall consist of three members, who 
 
 "UJl^ t^'m^ "^ thpir plpptinn fihaU he- a^fivply pn- 
 
 ^aged _in their di strirt in ^nmpnprp e. agriculture 
 or some o ther industrial pvrsiii|.. 
 
 Qa ss C, sh«^^ '"ons^^t ^ f three members who 
 shal l Ibedesignated by the Federal Keserve 
 JBoarB— When the necessary subscriptions to 
 tHecapital stock have been obtained for the or- 
 ganization of any Federal reserve bank, the 
 Federal Reserve Board shall appoint the class 
 C directors and shall designate one of such di- 
 rectors as chairman of the board to be selected. 
 Pending the designation of such chairman, the 
 organization committee shall exercise the pow- 
 ers and duties appertaining to the office of 
 chairman in the organization of such Federal 
 reserve bank. 
 
 No Senator or Representative in Congress 
 shall be a member of the Federal Reserve Board 
 or an officer or a director of a Federal reserve 
 bank. 
 
 No director of class B shall be an officer, di- 
 rector, or employee of any bank. 
 
106 APPENDIX B 
 
 No director of class C shall be an officer, di- 
 rector, employee, or stockholder of any bank. 
 
 Directors of class A and class B shall be 
 chosen in the following manner: 
 
 The chairman of the board of directors of the 
 Federal reserve bank of the district in which 
 the bank is situated or, pending the appointment 
 Method of of such chairman, the organization committee 
 tors'oTciasrA shall classify the member banks of the district 
 and class B. Jjj^.q three general groups or divisions. Each 
 group shall contain as nearly as may be one- 
 third of the aggregate number of the member 
 banks of the district and shall consist, as nearly 
 as may be, of banks of similar capitalization. 
 The groups shall be designated by number by 
 the chairman. 
 
 At a regularly called meeting of the board of 
 directors of each member bank in the district it 
 shall elect by ballot a district reserve elector 
 and shall certify his name to the chairman of 
 the board of directors of the Federal reserve 
 bank of the district. The chairman shall make 
 lists of the district reserve electors thus named 
 by banks in each of the aforesaid three groups 
 and shall transmit one list to each elector in 
 each group. 
 
 Each member bank shall be permitted to nom- 
 inate to the chairman one candidate for director 
 of class A and one candidate for director of 
 class B. The candidates so nominated shall be 
 listed by the chairman, indicating by whom 
 nominated, and a copy of said list shall, within 
 fifteen days after its completion, be furnished 
 by the chairman to each elector. 
 
 Every elector shall, within fifteen days after 
 the receipt of the said list, certify to the chair- 
 man his first, second, and other choices of a di- 
 rector of class A and class B, respectively, upon 
 a preferential ballot, on a form furnished by the 
 
APPENDIX B 107 
 
 chairman of the board of directors of the Fed- 
 eral reserve bank of the district. Each elector 
 shall make a cross opposite the name of the 
 4— GAL.— ABC FED. RESERVE— 13182 
 first, second, and other choices for a director of 
 class A and for a director of class B, but shall 
 not vote more than one choice for any one candi- 
 date. 
 
 Any candidate having a majority of all votes 
 cast in the column of first choice shall be de- 
 clared elected. If no candidate have a majority 
 of all the votes in the first column, then there 
 shall be added together the votes cast by the 
 electors for such candidates in the second column 
 and the votes cast for the several candidates in 
 the first column. If any candidate then have a 
 majority of the electors voting, by adding to- 
 gether the first and second choices, he shall be 
 declared elected. If no candidate have a ma- 
 jority of electors voting when the first and sec- 
 ond choices shall have been added, then the 
 votes cast in the third column for other choices 
 shall be added together in like manner, and the 
 candidate then having the highest number of 
 votes shall be declared elected. An immediate 
 report of election shall be declared. 
 
 Class C directors shall be appointed by the 
 Federal Reserve Board. They shall have been Appointment 
 for at least two years residents of the district rectoM.^ 
 for which they are appointed, one of whom shall 
 be designated by said board as chairman of the 
 board of directors of the Federal reserve bank 
 and as "Federal reserve agient." He shall be a 
 person of tested banking experience, and in ad- 
 dition to his duties as chairman of the board of 
 directors of the Federal reserve bank he shall 
 be required to maintain, under regulations to be 
 established by the Federal Reserve Board, a 
 local office of said board on the premises of the 
 
108 
 
 APPENDIX B 
 
 Federal re- 
 serve agent. 
 
 Assistants to 
 federal reserve 
 agent. 
 
 Compensa- 
 tion of direc- 
 tors. 
 
 Federal reserve bank. He shall make regular 
 reports to the Federal Reserve Board and shall 
 act as its official representative for the perform- 
 ance of the functions conferred upon it by this 
 act. He shall receive an annual compensation 
 to be fixed by the Federal Reserve Board and 
 paid monthly by the Federal reserve bank to 
 which he is designated. One of the directors of 
 class C shall be appointed by the Federal Re- 
 serve Board as deputy chairman to exercise the 
 powers of the chairman of the board when nec- 
 essary. In case of the absence of the chairman 
 and deputy chairman, the third-class C director 
 shall preside at meetings of the board. 
 
 Subject to the approval of the Federal Re- 
 serve Board, the Federal reserve agent shall ap- 
 point one or more assistants. Such assistants, 
 who shall be persons of tested banking exper- 
 ience, shall assist the Federal reserve agent in 
 the performance of his duties and shall also 
 have power to act in his name and stead during 
 his absence or disability. The Federal Reserve 
 Board sh^ require such bonds of the assistant 
 Federal ^Werve agents as it may deem neces- 
 sary fojPne protection of the United States. 
 Assistaares to the Federal reserve agent shall re- 
 ceive an annual compensation, to be fixed and 
 paid in the same manner as that of the Federal 
 reserve agent. 
 
 Directors of Federal reserve banks shall re- 
 ceive, in addition to any compensation otherwise 
 provided, a reasonable allowance for necessary 
 expenses in attending meetings of their respec- 
 tive boards, which amount shall be paid by the 
 rf^pective Federal reserve banks. Any com- 
 pensation that may be provided by boards of 
 directors of Federal reserve banks for directors, 
 ofiicers or employees shall be subject to the ap- 
 proval of the Federal Reserve Board. 
 
APPENDIX B 109 
 
 The Reserve Bank Organization Committee 
 may, in organizing Federal reserve banks, call 
 such meetings of bank directors in the several 
 districts as may be necessary to carry out the 
 purposes of this Act, and may exercise the func- 
 tions herein conferred upon the chairman of the 
 board of directors of each Federal reserve bank 
 pending the complete organization of such bank. 
 
 At the first meeting of the full board of di- 
 rectors of each Federal reserve bank, it shall be Terms of of- 
 the duty of the directors of classes A, B, and C, fi"^ oi direc- 
 respectively, to designate one of the members ^^j 
 
 of each class whose term of office shall expire in T 
 
 one year from the first of January nearest to * 
 
 date of such meeting, one whose term of office 
 shall expire at the end of two years from said 
 date, and one whose term of office shall expire 
 at the end of three years from said date. There- 
 after every director of a Federal reserve bank 
 chosen as hereinbefore provided shall hold office 
 for a term of three years. Vacancies that may 
 occur in the several classes of directors of Fed- 
 eral reserve banks may be filled ii^he manner 
 provided for the original selectionBf such di- 
 rectors, such appointees to hold ot^k for the 
 unexpired terms of their predecessors^ 
 
 STOCK ISSUES ; INCREASE AND DECREASE OF CAPITAL 
 
 Sec. 5. The capital stock of eac h Feder al . 
 re serve bank shall be divided into shares o f 
 $100 _each._ The o utstanding capital stock shal l 
 b e increased from time to time as member banks 
 iriprpgsp f]}Mr capi tal stock and surplus or as. 
 additi onal banks become members, a n d may be 
 decreased_as membf ir banks reduce ^S ieir cajptal 
 st ock or surplus or cease to be members.^ Shares 
 of the capital stock of Federal reserve banks ^^ 
 owned by member banks shall not be transferred |B 
 or hypothecated. When a member bank in- ml 
 
 .<" 
 
110 APPENDIX B 
 
 creases its capital stock or surplus, it shall 
 thereupon subscribe for an additional amount 
 of capital stock of the Federal reserve bank of 
 its district equal to six per centum of the said 
 increa se, one-half of said subscription to be 
 paid In the maniipy TiprpinV>pfr>3;a-jgHHwi4^f} for 
 Crigiiral'jubscrip tion , and one-ii hall _subj ect to 
 ciair~6Tthe Federal Reserve Board. A bank ap- 
 plying' for stock in a FederaLxeserye bank at 
 airytime after the orga^nh!aU£n_Jhereof^_must 
 subsei-ib^ for"an Amount of^the capital stock of 
 thr f edgrai reserg^a'nk" equal to_ six pe r cent- 
 um of the paid-up capital sto ck and surp lus of 
 said" appltcailt "15ank7 l^gy^^g "tiS eref or its par 
 value"prus dne-halFof one p er centum a m onth 
 fromThe pertod'oT'tKeTast dividendi^ When the 
 capltal~sto^ck of any Tederal reserve bank shall 
 have been increased either on account of the in- 
 crease of capital stock of member banks or on 
 account of the increase in the number of mem- 
 ber banks, the board of directors shall cause to 
 be executed a certificate to the Comptroller of 
 the Currency showing the increase in capital 
 stock, the amount paid in, and by whom paid. 
 When a membe'r 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" suffenffer all of its holdings 
 af"the capital stock of said Federal reserye„bank 
 and 1)6 releasedr from its stock subscriptioa^n 
 previously caIled".TTn either case the shares 
 surrehdered shall be canceled and the member 
 bank shall receive in payment therefor, under 
 regulations to be prescribed by the Federal Re- 
 serve Board, a sum equal to its cash-paid sub- 
 scriptions on the shares surrendered and one- 
 ^i-:^ half of one per centum a month from the period 
 '^ of the last dividend, not to exceed the book 
 
 •5 
 
APPENDIX B 111 
 
 value thereof, less any liability of such member 
 bank to the Federal reserve bank. 
 
 Sec. 6. If any member^ bank shall be de- ^f^J^g^^^ *f^" 
 clared insolvent and a receiver appointed. Jihere- case a member 
 for, the stocrHeTdY3MtTn'lSa "ra^r^^ Svenr^™" 
 
 bank shall be canceled, wTtlidut imjgairinent of 
 its liability, and alF^sIP^id^subscriptions on 
 said stock, with one^IialFof ^ne jger ^entum per 
 month froml;lie "period oFlast dividend, not to 
 exceed the F6oEj[aIue_ thereo f , shall be "first ap- 
 plied to all debts of th£_insolvent. member bank 
 to the, FederaJLxeserve^ bank^aod-ihe balance, 
 if any, shall be paid to the receiver of the in- 
 solvent bank. Whenever the capital stock of a 
 Federal reserve bank is reduced, either on ac- 
 count of a reduction in capital stock of any mem- 
 ber 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. 
 
 DIVISION OF EARNINGS 
 
 Sec. 7. After all nec essary expenses _Q f_^ Dividends 
 
 T-i J 1 "^ — n r — r T"^ ^ and surplus. 
 
 hederal r^f^f^jye. hflT]k have, hppn paid nr nrn- 
 
 for, the stockholders shall be entitle d_t9 
 
 rpppivp ar^a^nn^^a^ rlivifif^ud Of SJX per C ejjjTim On,. 
 
 th e paid-in capital stock, whic h dividend shall 
 ' Be^ cumu la tive^ After the aforesaid dividend 
 claims have been fully met, all the net earnings 
 shall be paid to the United States as a fran-_ 
 chi se tax, except tha t one- half of such net earn^ ^ 
 
 Ings sh all be p aid into a surplus tund until it 
 ^all amount to" forty per centum of the paid-in 
 " oapitalstock ot such ban£ ! 
 
 The net earnings derived by the United States ^Disposition 
 from Federal reserve banks shall, in the discre- ings accruing 
 tion of the Secretary, be used to supplement gjament.' ^^ 
 the gold reserve held against outstanding 
 
tion. 
 
 118 APPENDIX B 
 
 United States notes, or shall be applied to the 
 reduction of the outstanding bonded indebted- 
 ness of the United States under regulations to 
 be prescribed by the Secretary of the Treasury. 
 Should a Federal reserve bank be dissolved or 
 go into liquidation, any surplus remaining, af- 
 ter the payment of all debts, dividend require- 
 ments as hereinbefore provided, and the par 
 value of the stock, shall be paid to and become 
 the property of the United States and shall be 
 similarly applied. 
 Tax exemp- Federal reserve banks, including the capital 
 stock and surplus therein, and the income de- 
 rived therefrom shall be exempt from Federal, 
 State, and local taxation, except taxes upon real 
 estate. 
 
 Sec. 8. Section fifty-one hundred and fifty- 
 four. United States Revised Statutes, is hereby 
 amended to read as follows: 
 
 Any bank incorporated by special law of any 
 
 may 'be "con- State or of the United states or organized under 
 
 Jierted mto^na- ^he general laws of any State or of the United 
 
 States and having an unimpaired capital suffi- 
 
 ci ent to entitle it to become a natio nal banking 
 
 association under the provision^ of the existing 
 
 laws~may^"15y~tEe~vote dfthe share holders ~own- 
 
 -ing not less than fifty^one~per centu m of the 
 
 capitaTgock^ ijf_;gnc|rjyg|ik~or banking ass ocla- 
 
 "Tion, with tiie approval of the^Cqmptrd^r of 
 
 lile^piifrencv^binco ^ a national ba akr 
 
 ing association, wi th an^ name approved by t he 
 
 Comptroller ot tiie Currenpx: 
 
 Provided, however, Thaijsaid conversion shall 
 not be in contravention of the State law. In 
 suctrcasethe articles of association and organi- 
 zation certificate may be executed by a majority 
 of the directors of the bank or banking institu- 
 tion, and the certificate shall declare that the 
 
 State banks 
 
APPENDIX B 113 
 
 owners of fifty-one per centum of the capital 
 stock have authorized the directors to make 
 such certificate and to change or convert the 
 bank or banking institution into a national as- 
 sociation. A majority of the directors, after 
 executing the articles of association and the or- 
 ganization certificate, shall have power to exe- 
 cute all other papers and to do whatever may be 
 required to make its organization perfect and 
 complete as a national association. The shares 
 of any such bank may continue to be for the 
 same amount each as they were before the con- 
 version, and the directors may continue to be di- 
 rectors of the association until others are elected 
 or appointed in accordance with the provisions 
 of the statutes of the United States. When the 
 Comptroller has given to such bank or banking 
 association a certificate that the provisions of 
 this Act have been complied with, such bank or 
 banking association, and all its stockholders, 
 officers, and employees, shall have the same pow- 
 ers and privileges, and shall be subject to the 
 same duties, liabilities, and regulations, in all 
 respects, as shall have been prescribed by the 
 Federal Reserve Act and by the national bank- 
 ing Act for associations originally organized as 
 national banking associations. 
 
 STATE BANKS AS MEMBERS 
 
 Sec. 9.^ Any bank incorporated by special 
 1 As amended by act approved June 21, 1917 (40 
 Stat., chap. 32). 
 
 law of any State, or organized under the gener- 
 al laws of any State or of the United States, 
 desiring to b ecome a member of the Federal Re- 
 serT^~System, may make Application" to the Fed- 
 era TTK^serve Boa rds, un3eF"such rules~and regu- 
 la tions as it may p_rescri be, for tTie"rTgh t tcTVub- 
 scribe to the stock of the Federal re^erve~Bank~ 
 
114 APPENDIX B 
 
 organized within the district in which the ap- 
 pl7ing^-hank-T5~ttrcated. Such application shall 
 be" for the same amount ot stock that the apply- 
 ing bank would be required to subscribe to as a 
 national bank. The Federal Reserve Board, 
 subject to such conditions as it may prescribe, 
 may permit the applying bank to become a 
 stockholder of such Federal reserve bank. 
 
 In acting upon such applications the Federal 
 Reserve Board shall consider the financial con- 
 dition of the applying bank, the general char- 
 acter of its management, and whether or not the 
 corporate powers exercised are consistent with 
 the purposes of this act. 
 
 Whenever the Federal Reserve Board shall 
 permit the applying bank'~ta become a stock- 
 Qualifications holder in the Federal fesefve^^^B^tl^IiEfi^ dis- 
 necessary for trict its st6clc~subscfiption_^an^J^^^ payable on 
 mem ers ip. caHof the federal Reserve Bgard^_and_stock 
 issued to it yhail fee TJeU sub j ect to the^ovi- 
 sibns of this "act. 
 
 Ail banks admitted to membership under, au- 
 thority of this section shalljbe required to .com- 
 ply with the reserve and capital_requirements 
 of this act and to conform to_ those provisions 
 of law imposed on national banks which pro- 
 hWiOuch liaiiksf rom lending on or purchasing 
 tKSr^owir~stbck, ^dirch-Trelate~^l;hejv^ 
 orTSpatlTnent of thejf "cajnt^^ which 
 
 relate to~ the payment of unearned—dividends. 
 Such banfes^nd the officers. j;gentSj and employ- 
 ^es^thereof shall also be subject to the pro- 
 visions of and to the penalties prescribed by 
 section fifty-two hundred and nine of the Re- 
 vised Statutes, and shall be required to make 
 reports of condition and of the payment of divi- 
 dends to tiie Federal reserve .bank_i)£lwJii^ 
 become a member. Not less than three q|_ such 
 reports shall be made annually (HncaE_of_^fL 
 
 I 
 
of state banks. 
 
 APPENDIX B 116 
 
 Federal reserve bank on dates to be fixed by the 
 Federal Reserve Board. Failure to make such 
 reports within ten days after the date they are 
 called for shall subject the offending bank to 
 a penalty of $100 a day for each day that il 
 fails to transmit such report; such penalty to be 
 collected by the Federal reserve bank by suit 
 or otherwise. 
 
 As a condition of membership such banks shall Examination 
 likewise be subject to examinations made by di- 
 rection of the Federal Reserve Board or of the 
 Federal reserve bank by examiners selected or 
 approved by the Federal Reserve Board. 
 
 Whenever the directors of the Federal reserve 
 bank shall approve the examinations made by 
 the State authorities, such examinations and the 
 reports thereof may be accepted in lieu of ex- 
 aminations made by examiners selected or ap- 
 proved by the Federal Reserve Board: Pro- 
 vided, however. That when it deems it neces- 
 sary the board may order special examinations 
 by examiners of its own selection and shall in 
 all cases approve the form of the report. The 
 expenses of all examinations, other than those 
 made by State authorities, shall be assessed 
 against and paid by the banks examined. 
 
 If at any time it shall appear to the Federal 
 Reserve Board that a member bank has failed 
 to comply with the provisions of this section or 
 the regulations of the Federal Reserve Board 
 made pursuant thereto, it shall be within the 
 power of the board after hearing to require 
 such bank to surrender its stock in the Federal 
 reserve bank and to forfeit all rights and privi- 
 leges of membership. The Federal Reserve 
 Board may restore membership upon due proof 
 of compliance with the conditions imposed by 
 this section. 
 
 Any State bank or trust company desiring to 
 
116 APPENDIX B 
 
 from^^member! withdraw from membership in a Federal reserve 
 ship. bank may do so, after six months' written no- 
 
 tice shall have been liled with the Federal Re- 
 serveriBgard7" upon the surrei ider and cancella- 
 tion of all bflts^hTJidtffgs of capital stock in the 
 Fedeifarreser ve batik: Provided, however. That 
 no Federal reserve_bank^shallj eYcept under ex- 
 press^ author ity of_ the FederaLReserve Board, 
 cancel withi n the same calen dar year more than 
 twenty-five per c entum of its capi taT^tock for 
 the purpose_of^^effectingjrolm]^^ 
 durTngnthat yeai^j All such applications shall 
 be~3^1t with m the order in which they are 
 filed with the board. Whenever a member bank 
 shall surrender its stock holdings in a Federal 
 reserve bank, or shall be ordered to do so by 
 the Federal Reserve Board, under authority of 
 law, all of its rights and privileges as a member 
 bank shall thereupon cease and determine, and 
 after due provision has been made for any in- 
 debtedness due or to become due to the Federal 
 reserve bank it shall be entitled to a refund of I 
 its cash paid subscription with interest at the 
 rete of one-half of one per centum per month 
 from date of last dividend, if earned, the amount 
 refunded in no event to exceed the book value 
 of the stock at that time, and shall likewise be 
 entitled to repayment of deposits and of any 
 other balance due from the Federal reserve bank. 
 No applying bank shall be admitted to mem- 
 bership in a Federal reserve bank unless it pos- 
 sesses a paid-up, unimpaired capital sufficient 
 to entitle it to become a national banking asso- 
 ciation in the place where it is situated under 
 the provisions of the national-bank act. 
 
 Banks becoming members of the Federal Rc' 
 
 Privileges scrve System under authority of this section 
 
 tk.ns"^*pMng shall be subject to the provisions of this section 
 
 to state banks and to thosc of this act which relate specifically 
 
 members.^*""'"'' to member banks, but shall not be subject to 
 
APPENDIX B 117 
 
 examination under the provisions of the first 
 two paragraphs of section fifty-two hundred and 
 forty of the Revised Statutes as amended by 
 section twenty-one of this act.^ Subject to the 
 provisions of this act and to the regulations of 
 the board made pursuant thereto, any bank be- 
 coming a member of the Federal Reserve Sys- 
 tem shall retain its full charter and statutory 
 rights as a State bank or trust company, and 
 may continue to exercise all corporate powers 
 granted it by the State in which it was created, 
 and shall be entitled to all privileges of mem- 
 ber banks: Provided, however. That no Federal 
 reserve bank shall be permitted to discount for 
 any State bank or trust company notes, drafts, 
 or bills of exchange of any one borrower who 
 is liable for borrowed money to such State bank 
 or trust company in an amount greater than ten 
 per centum of the capital and surplus of such 
 State bank or trust company, but the discount 
 of bills of exchange drawn against actually ex- 
 isting value and the discount of commercial or 
 business paper actually owned by the person ne- 
 gotiating the same shall not be considered as 
 borrowed money within the meaning of this sec- 
 tion. The Federal reserve bank, as a condition 
 of the discount of notes, drafts, and bills of ex- 
 change for such State bank or trust company, 
 shall require a certificate or guaranty to the 
 effect that the borrower is not liable to such 
 bank in excess of the amount provided by this 
 section, and will not be permitted to become 
 liable in excess of this amount while such notes, 
 drafts, or bills of exchange are under discount 
 with the Federal reserve bank. 
 
 It shall be unlawful for any officer, clerk, or 
 agent of any bank admitted to membership un- 
 der authority of this section to certify any 
 
 1 Amending section 21 of this act. 
 
118 
 
 APPENDIX B 
 
 check drawn upon such bank unless the person 
 or company drawing the check has on deposit 
 therewith at the time such check is certified an 
 amount of money equal to the amount specified 
 in such check. Any check so certified by duly 
 authorized officers shall be a good and valid ob- 
 ligation against such bank, but the act of any 
 such officer, clerk, or agent in violation of this 
 section may subject such bank to a forfeiture of 
 its membership in the Federal Reserve System 
 upon hearing by the Federal Reserve Board. 
 
 FEDERAL RESERVE BOARD 
 
 ^Constitution g^c. 10. A Federal Reserve Board is her e- 
 
 of office and bj__£rf fl^^^ ^>^^cli _shail consist of seven m em- 
 
 orm^mberr bcrs, including thT^cretary of the__ Tre^usuiy 
 
 and the jUomptroiler of th e Currency, who^. aIiall 
 
 )e memb ers ex officio, and &»e members ap- 
 pointed by tEe Jf resident of the United States, 
 by and with the advice and consent of the Sen- 
 ate. In selecting the five appointive members 
 of the Federal Reserve Board, not more than 
 one of whom shall be selected from any one 
 Federal reserve district, the President shall have 
 due regard to a fair representation of the dif- 
 ferent commercial, industrial and geographical 
 divisions of the country. The five members of 
 the Federal Reserve Board appointed by the 
 President and confirmed as aforesaid shall de- 
 vote their entire time to the business of the 
 Federal Reserve Board and shall each receive 
 an annual salary of $12,000, payable monthly 
 together with actual necessary traveling expen- 
 ses, and the Comptroller of the Currency, as ex 
 officio member of the Federal Reserve Board, 
 shall, in addition to the salary now paid him as 
 Comptroller of the Currency, receive the sum 
 of $7,000 annually for his services as a member 
 of said board. 
 
APPENDIX B 119 
 
 The members of said board, the Secretary of 
 the Treasury, the Assistant Secretaries of the 
 Treasury, and the Comptroller of the Currency 
 shall be ineligible during the time they are in 
 office and for two years thereafter to hold any 
 office, position, or employment in any member 
 bank. Of the five members thus appointed by 
 the President at least two shall be persons ex- 
 perienced in banking or finance. One shall be 
 designated by the President to serve for two, 
 one for four, one for six, one for eight, and 
 one for ten years, and thereafter each member 
 so appointed shall serve for a term of ten years 
 unless sooner removed for cause by the Presi- 
 dent. Of the five persons thus appointed, one 
 shall be designated by the President as gover- 
 nor and one as vice governor of the Federal Re- 
 serve Board. The governor of the Federal Re- 
 serve Board, subject to its supervision, shall be 
 the active executive officer. The Secretary of 
 the Treasury may assign offices in the Depart- 
 ment of the Treasury for the use of the Federal 
 Reserve Board. Each member of the Federal 
 Reserve Board shall within fifteen days after 
 notice of appointment make and subscribe to 
 the oath of office. 
 
 The Federal Reserve Board shall have power 
 to levy semiannually upon the Federal reserve serve banks "to 
 banks, in proportion to their capital stock and ^« assessed for 
 
 ' Jr f r' _ ^ expenses of 
 
 surplus, an assessment suincient to pay its esti- board. 
 mated expenses and the salaries of its mem- 
 bers and employees for the half year succeed- 
 ing the levying of such assessment, together 
 with any deficit carried forward from the pre- 
 ceding half year. 
 
 The first meeting of the Federal Reserve 
 Board shall be held in Washington, District of 
 Columbia, as soon as may be after the passage 
 of this Act, at a date to be fixed by the Reserve Restrictions 
 Bank Organization Committee. The Secretary boaS!"" ^" ° 
 
1^0 
 
 APPENDIX B 
 
 Vacancies. 
 
 Annual 
 port. 
 
 of the Treasury shall be ex-officio chairman of 
 the Federal Reserve Board. No member of the 
 Federal Reserve Board shall be an officer or 
 director of any bank, banking institution, trust 
 company, or Federal reserve bank nor hold 
 stock in any bank, banking institution, or trust 
 company; and before entering upon his duties 
 as a member of the Federal Reserve Board he 
 shall certify under oath to the Secretary of the 
 Treasury that he has complied with this re- 
 quirement. Whenever a vacancy shall occijrj 
 other than by erpiration of term, among the five 
 members of the Federal Reserve Board ap- 
 pointed by the President, as above provided, a 
 successor shall be appointed by the President, 
 with the advice and consent of the Senate, to 
 fill such vacancy, and when appointed he shall 
 hold office for the unexpired term of the mem- 
 ber whose place he is selected to fill. 
 
 The President shall have power to fill all 
 vacancies that may happen on the Federal Re- 
 serve Board during the recess of the Senate, by 
 granting commissions which shall expire thirty 
 days after the next session of the Senate con- 
 venes. 
 
 Nothing in this Act contained shall be con- 
 strued as taking away any powers heretofore 
 vested by law in the Secretary of the Treasury 
 which relate to the supervision, management, 
 and control of the Treasury Department and 
 bureaus under such department, and wherever 
 any power vested by this Act in the Federal 
 Reserve Board or the Federal reserve agent ap- 
 pears to conflict with the powers of the Secre- 
 tary of the Treasury, such powers shall be ex- 
 ercised subject to the supervision and control 
 of the Secretary. 
 
 The Federal Reserve Board shall annually 
 make a full report of its operations to the 
 
APPENDIX B 121 
 
 Speaker of the House of Representatives, who 
 shall cause the same to be printed for the infor- 
 mation of the Congress. 
 
 Section three hundred and twenty-four of the comiptroller 
 Revised Statutes of the United States shall be of the Cur- 
 amended so as to read as follows: There shall ^^^^^' 
 be in the Department of the Treasury a bureau 
 charged with the execution of all laws passed 
 by Congress relating to the issue and regulation 
 of national currency secured by United States 
 bonds and under the general supervision of the 
 Federal Reserve Board, of all Federal reserve 
 notes, the chief officer of which bureau shall be 
 called the Comptroller of the Currency and shall 
 perform his duties under the general directions 
 of the Secretary of the Treasury. 
 
 Sec. 11.^ The Federal Reserve Board shall 
 be authorized and empowered: 
 
 (a) To examine at its discretion the accounts, 
 
 books and affairs of each Federal reserve bank Powers of 
 and of each member bank and to require such Federal Re- 
 statements and reports as it may deem neces- 
 sary. The said board shall publish once each 
 week a statement showing the condition of each 
 Federal reserve bank and a consolidated state- To supervise 
 ment for all Federal reserve banks. Such state- fc*i-vYtanks.* ' 
 ments shall show in detail the assets and lia- 
 bilities of the Federal reserve banks, single 
 and combined, and shall furnish full informa- 
 tion regarding the character of the money held 
 as reserve and the amount, nature and maturi- 
 ties of the paper and other investments owned 
 or held by Federal reserve banks. _ . 
 
 (b) To permit, or, on the affirmative vote of one Federal re- 
 at least five members of the Reserve Board to Jedlscount'^ f or 
 require Federal reserve banks to rediscount the another. 
 
 1 As amended by act approved Sept. 7, 1916 (39 
 Stat, 752, chap. 461). 
 
122 
 
 APPENDIX B 
 
 To suspend 
 reserve r e - 
 quirements. 
 
 To supervise 
 issue of Fed- 
 eral reserve 
 notes. 
 
 To reclassify 
 cities as re- 
 gards reserve 
 requirements. 
 
 discounted paper of other Federal reserve banks 
 at rates of interest to be fixed by the Federal 
 Reserve Board. 
 
 (c) To suspend for a period not exceeding 
 thirty days, and from time to time to renew such 
 suspension for periods not exceeding fifteen 
 days, any reserve requirements specified in this 
 Act: Provided, That it shall establish a gradu- 
 ated tax upon the amounts by which the reserve 
 requirements of this Act may be permitted to 
 fall below the level hereinafter specified: And 
 provided further. That when the gold reserve 
 held against Federal reserve notes falls below 
 forty per centum, the Federal Reserve Board 
 shall establish a graduated tax of not more than 
 one per centum per annum upon such deficiency 
 until the reserves fall to thirty-two and one- 
 half per centum, and when said reserve falls be- 
 low thirty-two and one-half per centum, a tax 
 at the rate increasingly of not less than one and 
 one-half per centum per annum upon each two 
 and one-half per centum or fraction thereof that 
 such reserve falls below thirty-two and one-half 
 per centum. The tax shall be paid by the re- 
 serve bank, but the reserve bank shall add an 
 amount equal to said tax to the rates of interest 
 and discount fixed by the Federal Reserve 
 Board. 
 
 (d) To supervise and regulate through the 
 bureau under the charge of the Comptroller of 
 the Currency the issue and retirement of Fed- 
 eral reserve notes, and to prescribe rules and 
 regulations under v/hich such notes may be de- 
 livered by the Comptroller to the Federal re- 
 serve agents applying therefor. 
 
 (e) To add to the number of cities classified 
 as reserve and central reserve cities under ex- 
 isting law in wj&ich national banking associa- 
 tions are subject' to the reserve requirements 
 
Miscellan- 
 eous powers. 
 
 APPENDIX B 123 
 
 set forth in section t.wenty of this Act; or to 
 reclassify existing reserve and central reserve 
 cities or to terminate their designation as such. 
 
 (f) To suspend or remove any officer or di- 
 rector of any Federal reserve bank, the cause of 
 such removal to be forthwith communicated in 
 writing by the Federal Reserve Board to the 
 removed officer or director and to said bank. 
 
 (g) To require the writing off of doubtful 
 or worthless assets upon the books and balance 
 sheets of Federal reserve banks. 
 
 (h) To suspend, for the violation of any of 
 the provisions of this Act, the operations of any 
 Federal reserve bank, to take possession thereof, 
 administer the same during the period of sus- 
 pension, and, when deemed advisable, to liqui- 
 date or reorganize such bank. 
 
 (i) To require bonds of Federal reserve 
 agents, to make regulations for the safeguard- 
 ing of all collateral, bonds. Federal reserve 
 notes, money or property of any kind deposited 
 in the hands of such agents, and said board shall 
 perform the duties, functions, or services speci- 
 fied in this Act, and make all rules and regula- 
 tions necessary to enable said board effectively 
 to perform the same. 
 
 (j) To exercise general supervision over said 
 Federal reserve banks. 
 
 (k) To grant by special permit to national 
 banks applying therefor, when not in contraven- 
 tion of State or local law, the right to act as 
 trustee, executor, administrator, or registrar of 
 stocks and bonds under such rules and regula- 
 tions as the said board may prescribe. 
 
 (1) To employ such attorneys, experts, as- 
 sistants, clerks, or other employees as may be 
 deemed necessary to conduct the business of the 
 board. All salaries and fees shall be fixed in 
 advance by said board and shall be paid in the 
 
1«4 APPENDIX B 
 
 same manner as the salaries of the members of 
 said board. All such attorneys, experts, assist- 
 ants, clerks, and other employees shall be ap- 
 pointed without regard to the provisions of the 
 Act of January sixteenth, eighteen hundred and 
 eighty-three (volume twenty-two. United States 
 Statutes at Large, page four hundred and 
 three), and amendments thereto, or any rule or 
 regulation made in pursuance thereof: Provided, 
 That nothing herein shall prevent the President 
 from placing said employees in the classified 
 service. 
 
 (m) Upon the affirmative vote of not less than 
 five of its members the Federal Reserve Board 
 shall have power, from time to time, by general 
 ruling, covering all districts alike, to permit 
 member banks to carry in the Federal reserve 
 banks of their respective districts any portion 
 of their reserves now required by section nine- 
 teen of this Act to be held in their own vaults. 
 
 FEDERAL ADVISORY COUNCIL 
 
 How consti- Sec. 12. Therc-Js- Jiereby created a Feder al 
 
 A^rf^^nry r.rt^inrj], whl>^ — sTiflll ponsist pf ftS 
 
 many memb ers as there are Federal reserve dis - 
 tricts. Each Feder al^ reserve bank bv its bo ard 
 oij\irpo\^nrfi fihfi]\^nr}}}a}}j s.elect _from Jts ^ wn 
 Federal reserve distr ict one m ember of said 
 council7~who shall" receive sucir~cbmpensation 
 "and allowances as may b e fixed by Bi sHSoaid of 
 airec^f5 _gubj_ectlEo^he appragal-^f-the- JFeder al 
 Reserve Board. The meetings of said advisory 
 council shall "Be held at Washington, District of 
 Columbia, at least four times each year, and 
 oftener if called by the Federal Reserve Board. 
 The council may in addition to the meetings 
 above provided for hold such other meetings in 
 Washington, District of Columbia, or elsewhere, 
 as it may deem necessary, may select its own 
 
 tuted 
 
APPENDIX B 
 
 1^5 
 
 officers and adopt its own methods of pro- 
 cedure, and a majority of its members shall con- 
 stitute a quorum for the transaction of business. 
 Vacancies in the council shall be filled by the 
 respective reserve banks, and members selected 
 to fill vacancies, shall serve for the unexpired 
 term. 
 
 The Federal Advisory Council shall have 
 power, by itself or through its officers, (1) to 
 confer directly with the Federal Reserve Board 
 on general business conditions; (2) to make oral 
 or written representations concerning matters 
 within the jurisdiction of said board; (3) to 
 call for information and to make recommenda- 
 tions in regard to discount rates, rediscount busi- 
 ness, note issues, reserve conditions in the va- 
 rious districts, the purchase and sale of gold or 
 securities by reserve banks, open-market opera- 
 tions by said banks, and the general affairs of 
 the reserve banking system. 
 
 Powers. 
 
 POWERS OP FEDERAL RESERVE BANKS 
 
 Sec. 13.^ Any Federal reserve bank may 
 r eceive from any of its member ba tiks, arid from 
 t he Uni ted States, deposi ts ot current funds in 
 lawf ul money, n ational-bank note s. F ederal re- 
 ser ve notes , or checks, an d drafts/payable upon 
 presentation, a nd also, for collection, maturing 
 notes and bills : or, solely for purposes of ex- 
 
 ch ange or of coll ection, may receive from" other" 
 Federal reserve b anks deposits of current funds 
 in lawfuTmoney, n a tional-bank note s, or_cb£jcks 
 upon other Federal reserve banks7 and checks 
 and _dratts, pa Y abIe"upon presentation withinH sL. 
 district, and maturing notes and bills payable 
 wi tfim its d istri ct; or, solely for the purposes of 
 
 1 As amended by act approved Mar. 3, 1915 (38 
 Stat., 958 chap. 93) ; act approved Sept. 7, 1916 (39 
 Stat, 752, chap. 461); act approved June 31, 1917 
 ('40 Stat., chap. 32). 
 
 Deposit. 
 
126 APPENDIX B 
 
 exchange or of coll ection, may receive from a ny 
 ii<jiimeiiib€F' 15ank ~or trust company deposits of 
 cur rent~ |uiids in lawful mon^ ^s:. na tional-bank 
 notes. Fe deral resery£.jiates, ^ecks and drafts 
 payable u pon pres entation, or maturing notes 
 and mlis: Provided, "Such nonmember Fank or 
 trust c ompany maintains^ with the .b'ecieral re- 
 sigfvenS ank of its d istrict a "Balance^ sufficient to 
 offse t the ite ms in transit held for its account by 
 tlie^Jb'ederal reserve" bank: Jt^roxnded further^ 
 That nothing iii'thTs"oF any other secti on of this 
 Act sTTairbe construe3~as pr ohibiting a mem ber 
 or nonmember bank horn making reasonable 
 cKairgesT^onbe H^elefmined'Vnd regulated lay the 
 F ederst "1^eser"ve"^6arg^~Bur'm n^ case to ex- 
 ceed'TO cents per $lQO^or fraction thereof, based 
 on thdotaT of checks and drafts presented at 
 any one time, ~for-e^€ction or payment of checks 
 and drafts and remission therefor by exchange 
 or otherwise ; but no such charges shall be made 
 agaiAst the FederaTlreserve banksT ' " 
 
 Rediscount. Upon t he indorsement of any of its mem ber 
 banks, which shall be deemed a waiver of de- 
 inand, notic e and protest by such bank as to its 
 own m5orsement exclusively, any Federal r e- 
 serve bank may discount notes, drafts, and bil ls 
 of_excEan^gearising out^ of actual commerc ial 
 tra nsactions ; that^s, not es, drafts, and bills of 
 e'xchange issued or dra wn for agricultural, in- 
 dustfiat; or commercial purposes, or jhe pr o- 
 ceeds'of wliich ha.v6 been us ed, "of "are to be use d, 
 for such" purposes, the Federal3fsPT'YP. Board 
 to have~The "fighT to determine or dje^iie_±Le 
 chsracter-oi -the 'paper thus eligible f orjdiscaunt, 
 within the meaning of this Act. Nothing in 
 thrs~A.cf ccmtarrfed" stoll^^e^ 
 
 such notes, drafts, and bills of exchange^_secured 
 by staple agricultural products, or other goods, 
 w^es^or merchandise fr6m^eing"eligible for 
 
APPENDIX B in 
 
 such discount; but such definition shall not in- 
 clude h otespdraf ts, or bills covering mer^^'y in- 
 vestme nts or issued or drawn for the purpose of 
 carrjin^_or_ trading in stocks, bonds, or other 
 in\j£stment securities, ex cept bonds a nd notes of 
 the Go vernment of the Unit e d State s. Notes, 
 d^ftsT and bills admitted to d iscount mider the 
 terms of this_ j»aragraph mustTiave a jnaturity 
 at the time of discount of not more^ than^mnety 
 days,_jgxcHsiverof daZS__ojL grace : P rovided, 
 That notes, dr afts, and bills ^rawn or issued 
 for agricult uraFpurpose s or based on live stock 
 and having a maturity n ot ex ceeding six montlis , 
 
 exBuSl Ve jyf Aaja^nf graof^j may hft dlsCOUntcd 
 
 in an amount to be limited to a percentage of 
 
 the assefs^of the. ^F pd pra l refipJrp hfl"n1c7~Tn~ tip 
 
 ascertained and_fixed^ J)y^ the Federal Reserve 
 Beewd. 
 
 The aggregate of such nflte^,, drafts, and bills 
 bearing the sign ature or indorseme nt of any one 
 borrower, w hether a person, comp any, firm, or 
 corporation, rediscounted for any one bank shall 
 at no time exceed ten per cfentum of the unim- 
 paired capital and surplus oi saM Eankj But 
 this restriction shall no t apply to the discount 
 of bills of exchange drawn in good fai th again st 
 acluallj^ exi sting -viiTiies. -c 
 
 Any Fede ral reserve b ank may discount ac- 
 jceptancea.- oi Ihe, kind^ hereinafter described , 
 which haye^ a maturity at the time of discount 
 of not more than three months' sight,_excliisi3Jfi- 
 of days of ^race^ and which are indorsed by at 
 least one member bank^^ 
 
 Any member bank may ac cept djafts or bil ls 
 of excTiange dr^wn upo n it having not m ore than banks^may ac*- 
 six months' sight to run, exclusive of days of c e p t foreiRn 
 
 T . V . e . .. . 1 . and domestic 
 
 grace, which grow out oi transactions involving bills. 
 
 the importation or exportation of goods; or 
 
 which grow out of transactions involving the do- 
 
128 APPENDIX B 
 
 mestic shipment of goods provided shipping 
 doraments~TbnveyTng" or securing title are at- 
 — tarched^~at the^Tme'of accejpFanc^^r \vhich are 
 secured at the time" of acceptance by a ware- 
 h<m5e fe1cHpt~of~ot^er~sucl^ 
 
 or securing title covering^ readil y mark etable 
 staples^ InV member bank shairaccept^jwhetKer 
 TnaT foreign or domestic transaction, for any one 
 person, company7 ~firm^,'~X)jr~C07rpGrSiti6n^ to an 
 amount equal at any time in the "aggregate to 
 more than ten per centum of Its paid-up and un- 
 impaired capital stock and surplus, unless the 
 bank is secured either by attached documents or 
 by some other actual security growing out of the 
 same transaction as the acceptance; and no bank 
 shall accept such bills to an amount equal at any 
 time in the agg regate t o more th flrrmTp-haJf of 
 itr'"pai(l-up~a^^ unimp aired_c.api1-al sto ck; and 
 surplus^: Provided, h owever. That the Fed eral 
 Iteserve T^oaf?T7ViTuTf^r si-f^>[^ grpnpv al re gulations 
 as it may prescribejt_which shall ap ply t o all 
 banks alike^egardless of the amount of capi tal 
 stock and surplus, may authorize any member 
 bank ^' a'ccept~such;;;bffl5;2l!?rr^^ amounl no? ex- 
 ceedin^ at any time Jnthe aggregate one hun- 
 dred per Centum of its paid-up and unimpaired 
 capital stock and surplus: Provided, further. 
 That the aggregate of acceptances growing out 
 of domestic transactions shall in no event exceed 
 Federal re- ^^^7 P^^ ccntum of such capital stock and sur- 
 
 serve banks plug. 
 
 Sort-tim" co" Any F ederal reserve^ban k may m ake advances 
 lateral notes. ^^ its mem5e r]]banks .011^ their prpmisspry notes 
 fof'^arperiod not exceedin^^fteen days at rates 
 to~be~eStaBTishe3^"by such Fe deral reserve. hanks,.. 
 •^nbjeeTfo" the review and determination, ^ofJthe 
 F^^deraT^Eese^F^qard^^rovided suci^ pxomis- 
 soryHtiote s are secur ed by such not^s^jira£t&»-bilIs,. 
 of exchange, or bankers' ^ceptancea ., as arfi. 
 
APPENDIX B 129 
 
 eligi ble for redisc ount or for purchase by Fed- 
 eral reserve banks under the provisions of this 
 A ct/ o r hy the deposit or pTedge~d T"bon3s or 
 no tes oTthe United State"3r~ ~~ 
 
 Section fifty-two hundred and two of th e Re^ on^lndlht'S?' 
 vised Statutes of the United States is Hereby ness of nation- 
 amended~s o~as to read as~t qliows: "No iiatio naT ^^ *° ^' 
 banking association shall at any timenSe in- 
 debted^r in any way liable, to an ambunf ex-^ 
 ceeding the amount of its capital sfock aT sucIT' 
 tinie'~actually paid in and remaining undim in- 
 is hed by losses or otherwise, except on account 
 of demands of tEel nature following: ; ~' 
 
 First. N otes o f circulation. 
 
 Second. Moneys deposited^with or collected 
 by the association. 
 
 Third. Bills_pf exchange or drafts drawn 
 agfjingf ino^f^y artiT?.^y /^ rlppngit in tlip^ credit 
 ofjth£_.assDciation^ or due thereto. 
 
 Fourth. Liabilities to the stockholde rs of 
 the association for dividends and reserve profits. 
 
 Fifih^^ LiablUlieH iiH!Uf]*ed under the prov i- 
 sions prtEe Federal reserve Act. 
 
 The discount and r edisc ount and the purchase 
 and sale by an y Federa l re serve ban k of any 
 bills receivabl e and of domestic and foreign bills 
 of exchange, and o f acceptances a uthorized by 
 this A ct, shall be subject to such rest rictions^, 
 limitajjoTTR^^arifj rpgnlfliinns as may be imposed 
 byJEhe Federal Reserve Board. - 
 
 That in addition to the powers now vested by_ Additional 
 la w in natijpnaL- banking associations organized . tn^natinnai 
 under tHe laws of the United States any su ch ^^nks. 
 association l ocated and doing business in any 
 place the population of which d oes not e x ceed , 
 five thous and iniiabitants, as shown bv the last T 
 precedij qg decennial census, may, under suc h- 
 rules and regulations as may be prescribed^ by 
 the CoifTprrnllpr -iiL.j iie Currency, act as lTthe 
 
130 
 
 APPENDIX B 
 
 agent for any fire, life, or other insurance com- 
 pany~aUlliorized "ByThe auiHoHtTes of the State 
 in which said bank is locate3~To'"do business in 
 said S^tate, T)y~^'sbliciting~and selling insurance 
 and collecting premiums~on poli cies is sued by 
 such c^6mpliiiyjra»irini^y"FeEeIyeI so 
 
 rendered such fees^jor commissions_a s ma y be 
 agreed upon between the sai3 ~association and 
 the riisurahce c6mpany~for win ch it may act_^s 
 ageiil; and may als^o act as tjie broker or agent 
 for others in making or procuring loans on real 
 el;ta±e~iucated withlnon'e hundred miles of the 
 place in which said bank may be located, re- 
 ceiving for such services a reasonable fee or 
 commission: Provided, however. That no such 
 hank shall in any case- gnarSjaEeaJSther-Uie- prin- 
 cipal or interest of any sucl^ioans or assume or 
 guarantee the pay^mentjof .ajay pr^^ on in- 
 
 surance policies issued through its agency by 
 its principal: And provided further. That the 
 bank shall not guarantee the truth^f any state- 
 ment made by an assured in filing Hs applica- 
 tion for insurance. 
 
 Any member bank may accept draft s-QJi-bills 
 
 of exchange drawn up on it havi ngjgatjnitfe- than 
 
 ized of bills three montKs^'sight to run, exclusive of days of 
 
 drawn from *2 r—i-; -^ 
 
 places outside g^ce, drawn under regukLtigns to^^pxescribed 
 Dy~nieTederal Reserve Board by banks or bank- 
 ers in foreign countries or dependenciesjor^m- 
 sular possessions oT tlie UmJeiJ^Bla^^^ the 
 
 purpose of furnishing doflar exchange as re- 
 quired by the usages of trade in the respective 
 countries, dependencies, or insular possessions. 
 Such-dra£ts-Qi^^ills m ay be acquire d^ by Fed- 
 eral r^^ve banks in such amounts^ and subject 
 to such regulations, resfrrctlons, and limitations 
 as may be prescribed by the Federal Reserve 
 Board: Provided, however. That no member 
 bank shall accept such drafts or bills of ex- 
 
 Acceptances 
 
 by member 
 banks author 
 
 of country. 
 
APPENDIX B 131 
 
 change referred to this paragraph for any one 
 bank to an amount exceeding in the aggregate 
 ten per centum of the paid-up and unimpaired 
 capital and surplus of the accepting bank unless 
 the draft or bill of exchange is accompanied by 
 documents conveying or securing title or by 
 some other adequate security: Provided further. 
 That no member bank shall accept such drafts 
 or bills in an amount exceeding at any time the 
 aggregate of one-half of its paid-up and unim- 
 paired capital and surplus. 
 
 OPEN-MARKET OPERATIONS 
 
 Sec. 14.^ Any Federal reserve bank may. Commercial 
 under rules an d regulations prescribed by the Ef e^^transfers^ 
 Federal iteserve ±Soard, purcha se and sell in the 
 open mai'k^t, at home or abroad, either from o r 
 ttrdomestic or lorei gn banks, firms, c orpora- 
 tions., or individuals, cable transfers and bank- 
 ers' "acceptances an d bi lls of exchange of the 
 kT i^s and maturit ies by this Act made eligible 
 foF"rediscounty with or without the indorsement 
 of a member bank. ~ 
 
 Every Federal reserve ba nk shall have pow er^ 
 
 (a) To dealinTgol d com and bullion at ho me, Gold coin 
 or abr oad, to m a ke loans thereon, exchan ge ^^ " '°°' 
 Fede ral reserve notes for gold, gold coin, or 
 
 gold certificates, and to cont ract f or JoaiLa-of 
 go Td coin or bullion, giving therf fpr, wfipn np^- 
 e ssary, acceptable security, including the hy - 
 po thecation of United St a tes bonds or other se- 
 cu rities which Federal reserve banks are author - 
 i zed tO - hold ; 
 
 (b) To buy and sell, at home or abroad, bonds 
 
 and notes of the United States, and bills, notes, Government 
 revenue bonds, and warrants with a maturity securities. 
 
 1 As amended by act approved Sept. 7, 1916 (39 
 Stat., 752, chap. 461); act approved June 21, 1917 
 (40 Stat., chap. 32). 
 
132 
 
 APPENDIX B 
 
 Bills of ex- 
 change. 
 
 Discount 
 rates. 
 
 from date of purchase of not exceeding six 
 months, issued in anticipation of the collection 
 of taxes or in anticipation of the receipt of as- 
 sured revenues by any State, county, district, 
 political subdivision, or municipality in the con- 
 tinental United States, including irrigation, 
 drainage, and reclamation districts, such pur- 
 chases to be made in accordance with rules and 
 regulations prescribed by the Federal Reserve 
 Board; 
 
 (c) To purchase from member banks and to 
 sell, with or without its indorsement, bills of ex- 
 change arising out of commercial transactions, 
 as hereinbefore defined; 
 
 (d) To establish from time t o^time^isubject 
 to review and determinat£on^_of3lie-J Feder al Re- 
 serve .boards rates~or"3iscount to be charged by 
 the Federal reserve bank for each class of pa- 
 perpvrhtch sliaH Te"Fxe^~wiffi^^ 
 modating commerce and business ;.J- 
 
 (e) TojestajbBsh accounts with other Federal 
 reserve "banks_for_exchange purp oses and, with 
 the'consent o r upon the ord er and direction oj T 
 the "Federal Res erve Board and nndf.^ rg^rnla- 
 tio ns to be prescribed by said hoards to open 
 a nd mai n tain acco nn f-s in foreign countries^^ - 
 
 agencies and point corres pondents, and establish a gencies in 
 dents!^"** such countries where soever it may~ T? e deem ed 
 
 best'foFthe f^v^pos£jii_]^uxsih.s^singj selling, and 
 coirectrrigT)ills of exchange, and to buy and sell, 
 with or without its indorsement, through such 
 correspondents or agencies, bills of exchange 
 (or acceptances) arising out of actual commer- 
 cial transactions which have not more than 
 ninety days to run, exclusive of days of grace, 
 and which bear \he signature of two or more 
 responsible parties, and, with the consent of the 
 Federal Reserve Board, to open and maintain 
 banking accounts for such foreign correspond- 
 
 Foreign 
 
APPENDIX B 133 
 
 ents or agencies. Whenever any such account 
 has been opened or agency or correspondent has 
 been appointed by a Federal reserve bank, with 
 the consent of or under the order and direction 
 of the Federal Reserve Board, any other Fed- 
 eral reserve bank may, with the consent and ap- 
 proval of the Federal Reserve Board, be permit- 
 ted to carry on or conduct, through the Federal 
 reserve bank opening such account or appoint- 
 ing such agency or correspondent, any transac- 
 tion authorized by this section under rules and 
 regulations to be prescribed by the board. 
 
 GOVERNMENT DEPOSITS 
 
 Sec. 15. The moneys held in the general 
 fund of the Treasury, except the five per centum 
 fund for the redemption of outstanding national- 
 bank notes and the funds provided in this Act 
 for the redemption of Federal reserve notes may, 
 upon the direction of the Secretary of the 
 Treasury, be deposited in Federal reserve banks, 
 which banks, when required by the Secretary of 
 the Treasury, shall act as fiscal agents of the 
 United States; and the revenues of the Govern- 
 ment or any part thereof may be deposited in 
 such banks, and disbursements may be made by 
 checks drawn against such deposits. 
 
 No public funds of the Philippine Islands, or 
 of the postal savings, or any Government funds, 
 shall be deposited in the continental United 
 States in any bank not belonging to the system 
 established by this Act:^ Provided, however, 
 
 1 Section 7 of the act approved April 34, 1917, 
 known as "An act to authorize an issue of bonds to 
 meet expenditures for the national security and de- 
 fense, and, for the purpose of assisting in the prose- 
 cution of the war, to extend credit to foreign gov- 
 ernments, and for other purposes," authorizes the 
 Secretary to deposit proceeds of sale of such bonds in 
 non-member banks under certain circumstances. For 
 full text of Section 7 see Appendix, p. 
 
134 APPENDIX B 
 
 That nothing in this Act shall be construed to 
 deny the right of the Secretary of the Treasury 
 to use member banks as depositories. 
 
 NOTE ISSUES 
 Notes are 
 
 obligations of Sec. 16.^ Federal reserve notes, to be is- 
 ab'ie in^ goTd sued^at the discretion of the Fe deraTReserve 
 on demand. Boa rd for the purpose of making~advances to 
 "" ^derai reserve banks through the Federal re - 
 serve agen ts as hereinafter set forth and for no 
 other purp ose, are hereby authorized.^ The said 
 notes shall be obligations of the United States 
 and shall be receivable by all national and mem- 
 ber banks and Federal reserve banks and for all 
 taxes, customs, and other public dues. They 
 shall be redeemed in gold on demand at the 
 Treasury Department of the United States, in 
 the city of Washington, District of Columbia, or 
 in gold or lawful money at any Federal reserve 
 bank. 
 Method and Any.FederaLxe&erv-e. b an k m ay^^ nak o applica - 
 note ^^ss"^ °^ Jip^ to the local^Federal^eserye agent for such 
 amount of the jFederal reserve notes hereinbe- 
 fPTe^' provIdeSr for as~Tr may require .^ Such ap- 
 plication shall be accompanied with a tender 
 to the local Federal reserve agent of collateral 
 in amount equal to the sum of the Federal re- 
 serve notes thus applied for and issued pursuant 
 to such application. The collateral security 
 thus offered shall be notes, drafts, bills of ex- 
 change, or acceptances acquired under the pro- 
 visions of section thirteen of this Act, or bills of 
 exchange indorsed by a member bank of any 
 Federal reserve district and purchased under 
 the provisions of section fourteen of this Act, 
 or bankers' acceptances purchased under the 
 
 2 As amended by act approved Sept. 7, 1916 (39 
 Stat., 752, chap. 461); act approved June 21, 1917 
 (40 Stat, chap. 33). 
 
APPENDIX B 135 
 
 provisions of said section fourteen, or gold or 
 gold certificates; but in no event shall such col- 
 lateral security, whether gold, gold certificates, 
 or eligible paper, be less than the amount of 
 Federal reserve notes applied for. The Federal 
 reserve agent shall each day notify the Federal 
 Reserve Board of all issues and withdrawals of 
 Federal reserve notes to and by the Federal re- 
 serve bank to which he is accredited. The said 
 Federal Reserve Board may at any time call 
 upon a Federal reserve bank for additional se- 
 curity to protect the Federal reserve notes is- 
 sued to it. 
 
 Every Federal reserve bank shall maintain 
 reserves in gold or lawful money of not less than Reserve re- 
 thirty-five per centum against its deposits and federal reserve 
 reserves in gold of not less than forty per centum banks, and re- 
 
 » . ^ , . demption of 
 
 against its Jt^ederal reserve notes m actual cir- notes, 
 culation: Provided, however. That when the 
 Federal reserve agent holds gold or gold certifi- 
 cates as collateral for Federal reserve notes is- 
 sued to the bank such gold or gold certificates 
 shall be counted as part of the gold reserve 
 which such bank is required to maintain against 
 its Federal reserve notes in actual circulation. 
 Notes so paid out shall bear upon their faces a 
 distinctive letter and serial number which shall 
 be assigned by the Federal Reserve Board to 
 each Federal reserve bank. Whenever Federal 
 reserve notes issued through one Federal re- 
 serve bank shall be received by another Federal 
 reserve bank, they shall be promptly returned 
 for credit or redemption to the Federal reserve 
 bank through which they were originally issued 
 or, upon direction of such Federal reserve bank, 
 they shall be forwarded direct to the Treasurer 
 of the United States to be retired. No Federal 
 reserve bank shall pay out notes issued through 
 another under penalty of a tax of ten per centum 
 
136 APPENDIX B 
 
 upon the face value of notes so paid out. Notes 
 presented for redemption at the Treasury of the 
 United States shall be paid out of the redemp- 
 tion fund and returned to the Federal reserve 
 banks through which they were originally is- 
 sued, and thereupon such Federal reserve bank 
 shall, upon demand of the Secretary of the 
 Treasury, reimburse such redemption fund in 
 lawful money or, if such Federal reserve notes 
 have been redeemed by the Treasurer in gold or 
 gold certificates, then such funds shall be reim- 
 bursed to the extent deemed necessary by the 
 Secretary of the Treasury in gold or gold cer- 
 tificates, and such Federal reserve bank shall, 
 so long as any of its Federal reserve notes re- 
 main outstanding, maintain with the Treasurer 
 in gold an amount sufficient in the judgment of 
 the Secretary to provide for all redemptions to 
 be made by the Treasurer. Federal reserve 
 notes received by the Treasurer otherwise than 
 for redemption may be exchanged for gold out 
 of the redemption fund hereinafter provided and 
 returned to the reserve bank through which they 
 were originally issued, or they may be returned 
 to such bank for the credit of the United States. 
 Federal reserve notes unfit for circulation shall 
 be returned by the Federal reserve agents to the 
 Comptroller of the Currency for cancellation 
 and destruction. 
 
 The Federal Reserve Board shall require each 
 Federal reserve bank to maintain on deposit in 
 the Treasury of the United States a sum in gold 
 sufficient in the judgment of the Secretary of 
 the Treasury for the redemption of the Federal 
 reserve notes issued to such bank, but in no 
 event less than five per centum of the total 
 amount of notes issued less the amount of gold 
 or gold certificates held by the Federal reserve 
 agent as collateral security; but such deposit of 
 
APPENDIX B 137 
 
 gold shall be counted and included as part of 
 the forty per centum reserve hereinbefore re- 
 quired. The board shall have the right, acting 
 through the Federal reserve agent, to grant in 
 whole or in part or to reject entirely the appli- 
 cation of any Federal reserve bank for Federal 
 reserve notes ; but to the extent that such appli- 
 cation may be granted the Federal Reserve 
 Board shall, through its local Federal reserve 
 agent, supply Federal reserve notes to the banks 
 so applying, and such bank shall be charged 
 with the amount of notes issued to it and shall 
 pay such rate of interest as may be established 
 by the Federal Reserve Board on only that 
 amount of such notes which equals the total 
 amount of its outstanding Federal reserve notes 
 less the amount of gold or gold certificates held 
 by the Federal reserve agent as collateral se- 
 curity. Federal reserve notes issued to any such 
 bank shall, upon delivery, together with such 
 notes of such Federal reserve bank as may be 
 Issued under section eighteen of this act upon 
 security of United States two per centum Gov- 
 ernment bonds, become a first and paramount 
 lien on all the assets of such bank. 
 
 Any Federal reserve bank may at any time lawful money 
 reduce its liability for outstanding Federal re- on deposit 
 serve notes by depositing with the Federal re- reserve agent, 
 serve agent its Federal reserve notes, gold, gold 
 certificates, or lawful money of the United 
 States. Federal reserve notes so deposited shall 
 not be reissued, except upon compliance with the 
 conditions of an original issue. s h • ' 
 
 The Federal reserve agent shall hold such of collateral 
 gold, gold certificates, or lawful money available ^eggrve^^agent 
 exclusively for exchange for the outstanding 
 Federal reserve notes when offered by the re- 
 serve bank of which he is a director. Upon the 
 request of the Secretary of the Treasury the 
 
138 
 
 APPENDIX B 
 
 Federal Reserve Board shall require the Federal 
 reserve agent to transmit to the Treasurer of the 
 United States so much of the gold held by him 
 as collateral security for Federal reserve notes 
 as may be required for the exclusive purpose of 
 the redemption of such Federal reserve notes, 
 but such gold when deposited with the Treasurer 
 shall be counted and considered as if collateral 
 security on deposit with the Federal reserve 
 agent. 
 
 Any Federal reserve bank may at its discre- 
 tion withdraw collateral deposited with the local 
 Federal reserve agent for the protection of its 
 Federal reserve notes issued to it and shall at 
 the same time substitute therefor other collateral 
 of equal amount with the approval of the Fed- 
 eral reserve agent under regulations to be pre- 
 scribed by the Federal Reserve Board. Any 
 t ?S*^'^^*"^"* Federal reserve bank may retire any of its Fed- 
 
 oi federal re- t -, . . ■, 
 
 era! reserve notes by depositing them with the 
 Federal reserve agent or with the Treasurer of 
 the United States, and such Federal reserve 
 jbank shall thereupon be entitled to receive back 
 the collateral deposited with the Federal reserve 
 agent for the security of such notes. Federal 
 reserve banks shall not be required to maintain 
 the reserve or the redemption fund heretofore 
 provided for against Federal reserve notes which 
 have been retired. Federal reserve notes so de- 
 posited shall not be reissued except upon com- 
 pliance with the conditions of an original issue. 
 All Federal reserve notes and all gold, gold 
 fundr"deposit- certificates, and lawful money issued to or de- 
 af r^sSv?*^^'^ posited with any Federal reserve agent under 
 the provisions of the Federal reserve act shall 
 hereafter be held for such agent, under such 
 rules and regulations as the Federal Reserve 
 Board may prescribe, in the joint custody of 
 himself and the Federal reserve bank to which 
 
 serve notes. 
 
 Custody o f 
 
 agent. 
 
APPENDIX B 139 
 
 he is accredited. Such agent and such Federal 
 reserve bank shall be jointly liable for the safe- 
 keeping of such Federal reserve notes, gold, 
 gold certificates, and lawful money. Nothing 
 herein contained, however, shall be construed to 
 prohibit a Federal reserve agent from deposit- 
 ing gold or gold certificates with the Federal 
 Reserve Board, to be held by such board sub- 
 ject to his order, or with the Treasurer of the 
 United States for the purposes authorized by 
 law. 
 
 In order to furnish suitable notes for circu- 
 lation as Federal reserve notes, the Comptroller character* and 
 of the Currency shall, under the direction of the denominations 
 Secretary of the Treasury, cause plates and dies serve notes. 
 to be engraved in the best manner to guard 
 against counterfeits and fraudulent alterations, 
 and shall have printed therefrom and numbered 
 such quantities of such notes of the denomina- 
 tions of $5, $10, $20, $50, $100, as may be re- 
 quired to supply the Federal reserve banks. 
 Such notes shall be in form and tenor as di- 
 rected by the Secretary of the Treasury under 
 the provisions of this Act and shall bear the 
 distinctive numbers of the several Federal re- 
 serve banks through which they are issued. 
 
 When such notes have been prepared, they 
 shall be deposited in the Treasury, or in the 
 subtreasury or mint of the United States near- 
 est the place of business of each Federal re- 
 serve bank and shall be held for the use of 
 such bank subject to the order of the Comp- 
 troller of the Currency for their delivery, as 
 provided by this Act. 
 
 The plates and dies to be procured by the 
 Comptroller of the Currency for the printing of 
 such circulating notes shall remain under his 
 control and direction, and the expenses neces- 
 sarily incurred in executing the laws relating to 
 
140 APPENDIX B 
 
 the procuring of such notes, and all other ex- 
 penses incidental to their issue and retirement, 
 shall be paid by the Federal reserve banks, and 
 the Federal Reserve Board shall include in its 
 estimate of expenses levied against the Federal 
 reserve banks a sufficient amount to cover the 
 expenses herein provided for. 
 
 The examination of plates, dies, bed pieces, 
 and so forth, and regulations relating to such 
 examination of plates, dies, and so forth, of 
 national-bank notes provided for in section fifty- 
 one hundred and seventy-four. Revised Statutes, 
 is hereby extended to include notes herein pro- 
 vided for. 
 
 Any appropriation heretofore made out of the 
 general funds of the Treasury for engraving 
 plates and dies, the purchase of distinctive pa- 
 per, or to cover any other expense in connec- 
 tion with the printing of national-bank notes or 
 notes provided for by the Act of May thirtieth, 
 nineteen hundred and eight, and any distinctive 
 paper that may be on hand at the time of the 
 passage of this Act may be used in the discre- 
 tion of the Secretary for the purposes of this 
 Act, and should the appropriations heretofore 
 made be insufficient to meet the requirements of 
 this Act in addition to circulating notes pro- 
 vided for by existing law, the Secretary is here- 
 by authorized to use so much of any funds in 
 the Treasury not otherwise appropriated for the 
 purpose of furnishing the notes aforesaid: Pro- 
 vided, however. That nothing in this section con- 
 tained shall be construed as exempting national 
 banks or Federal reserve banks from their lia- 
 bility to reimburse the United States for any 
 expenses incurred in printing and issuing circu- 
 lating notes. 
 
 Every Federal reserve bank shall receive on 
 
APPENDIX B 141 
 
 deposit at par from member banks or from Fed- ^J^illtion^ sy^ 
 eral reserve banks checks and drafts drawn upon tem. 
 any of its depositors, and when remitted by a 
 Federal reserve bank, checks and drafts drawn 
 by any depositor in any other Federal reserve 
 bank or member bank upon funds to the credit 
 of said depositor in said reserve bank or mem- 
 ber bank. Nothing herein contained shall be 
 construed as prohibiting a member bank from 
 charging its actual expense incurred in collect- 
 ing and remitting funds, or for exchange sold 
 to its patrons. The Federal Reserve Board 
 shall, by rule, fix the charges to be collected by 
 the member banks from its patrons whose checks 
 are cleared through the Federal reserve bank 
 and the charge which may be imposed for the 
 service of clearing or collection rendered by the 
 Federal reserve bank. 
 
 The Federal Reserve Board shall make and 
 promulgate from time to time regulations gov- 
 erning the transfer of funds and charges there- 
 for among Federal reserve banks and their 
 branches, and may at its discretion exercise the 
 functions of a clearing house for such Federal 
 reserve banks, or may designate a Federal re- 
 serve bank to exercise such functions, and may 
 also require each such bank to exercise the func- 
 tions of a clearing house for its member banks. 
 
 That the Secretary of the Treasury is hereby Gold settl* 
 authorized and directed to receive deposits of "*^°* ^""*** 
 gold coin or of gold certificates with the Treas- 
 urer or an assistant treasurer of the United 
 States when tendered by any Federal reserve 
 bank or Federal reserve agent for credit to its 
 or his account with the Federal Reserve Board. 
 The Secretary shall prescribe by regulation the 
 form of receipt to be issued by the Treasurer 
 or Assistant Treasurer to the Federal reserve 
 bank or Federal reserve agent making the de- 
 
142 APPENDIX B 
 
 posit, and a duplicate of such receipt shall be 
 delivered to the Federal Reserve Board by the 
 Treasurer at Washington upon proper advices 
 from any assistant treasurer that such deposit 
 has been made. Deposits so made shall be held 
 subject to the orders of the Federal Reserve 
 Board and shall be payable in gold coin or gold 
 certificates on the order of the Federal Reserve 
 Board to any Federal reserve bank or Federal 
 reserve agent at the Treasury or at the Sub- 
 treasury of the United States nearest the place 
 of business of such Federal reserve bank or such 
 Federal reserve agent: Provided, however. That 
 any expense incurred in shipping gold to or 
 from the Treasury or subtreasuries in order to 
 make such payments, or as a result of making 
 such payments, shall be paid by the Federal Re- 
 serve Board and assessed against the Federal 
 reserve banks. The order used by the Federal 
 Reserve Board in making such payments shall 
 be signed by the governor or vice governor, or 
 such other officers or members as the board may 
 by regulation prescribe. The form of such or- 
 der shall be approved by the Secretary of the 
 Treasury. 
 
 The expenses necessarily incurred in carry- 
 ing out these provisions, including the cost of 
 the certificates or receipts issued for deposits 
 received, and all expenses incident to the hand- 
 ling of such deposits shall be paid by the Federal 
 Reserve Board and included in its assessments 
 against the several Federal reserve banks. 
 
 Gold deposits standing to the credit of any 
 Federal reserve bank with the Federal Reserve 
 Board shall, at the option of said bank, be 
 counted as part of the lawful reserve which it is 
 required to maintain against outstanding Fed- 
 eral reserve notes, or as a part of the reserve 
 it is required to maintain against deposits. 
 
APPENDIX B 143 
 
 Nothing in this section shall be construed as 
 amending section six of the Act of March four- 
 teenth, nineteen hundred, as amended by the 
 Acts of March fourth, nineteen hundred and 
 seven, March second, nineteen hundred and 
 eleven, and June twelfth, nineteen hundred and 
 sixteen, nor shall the provisions of this section 
 be construed to apply to the deposits made or 
 to the receipts or certificates issued under those 
 Acts. 
 
 Sec. 17.^So much of the provisions of section 
 fifty-one hundred and fifty-nine of the Revised 
 Statutes of the United States, and section four 
 of the Act of June twentieth, eighteen hundred 
 and seventy-four, and section eight of the Act of ^fP°'jj* ° * 
 July twelfth, eighteen hundred and eighty-two, tional ^banks 
 and of any other provisions of existing statutes ^^'^^ *^s*^as"a 
 as require that before any national banking as- condition of 
 sociation shall be authorized to commence bank- Smfsr^" n 
 ing business it shall transfer and deliver to the longer re 
 Treasurer of the United States a stated amount ^***" 
 of United States registered bonds, and so much 
 of those provisions or of any other provisions 
 of existing statutes as require any national 
 banking association now or hereafter organized 
 to maintain a minimum deposit of such bonds 
 with the Treasurer is hereby repealed. 
 
 REFUNDING BONDS 
 
 Sec. 18. After two years from the passage 
 of this Act, and at any time during a period of 
 twenty years thereafter, any member bank de- 
 siring to retire the whole or any part of its 
 circulating notes, may file with the Treasurer 
 of the United States an application to sell for 
 its account, at par and accrued interest, United 
 States bonds securing circulation to be retired. 
 
 lAs amended by act approved June 21, 1917 (40 
 Stat., chap. 32). 
 
 n o 
 
144 APPENDIX B 
 
 The Treasurer shall^ at the end of each quar- 
 terly period, furnish the Federal Reserve Board 
 with a list of such applications, and the Federal 
 Reserve Board may, in its discretion, require 
 the Federal reserve banks to purchase such 
 bonds from the banks whose applications have 
 been filed with the Treasurer at least ten days 
 before the end of any quarterly period at which 
 the Federal Reserve Board may direct the pur- 
 chase to be made: Provided, That Federal re- 
 serve banks shall not be permitted to purchase 
 an amount to exceed $25,000,000 of such bonds 
 in any one year, and which amount shall include 
 bonds acquired under section four of this Act by 
 the Federal reserve bank. 
 
 Provided further. That the Federal Reserve 
 'Board shall allot to each Federal reserve bank 
 such proportion of such bonds as the capital 
 and surplus of such bank shall bear to the ag- 
 gregate capital and surplus of all the Federal 
 reserve banks. 
 
 Upon notice from the Treasurer of the amount 
 of bonds so sold for its account, each member 
 bank shall duly assign and transfer, in writing, 
 such bonds to the Federal reserve bank purchas- 
 ing the same, and such Federal reserve bank 
 shall, thereupon, deposit lawful money with the 
 Treasurer of the United States for the purchase 
 price of such bonds, and the Treasurer shall pay 
 to the member bank selling such bonds any bal- 
 ance due after deducting a sufficient sum to re- 
 deem its outstanding notes secured by such 
 bonds, which notes shall be canceled and per- 
 manently retired when redeemed. 
 
 The Federal reserve banks purchasing such 
 bonds shall be permitted to take out an amount 
 of circulating notes equal to the par value of 
 such bonds. 
 
 Upon the deposit with the Treasurer of the 
 
APPENDIX B 
 
 145 
 
 United States of bonds so purchased, or any 
 bonds with the circulating privilege acquired 
 under section four of this Act, any Federal re- 
 serve bank making such deposit in the manner 
 provided by existing law, shall be entitled to 
 receive from the Comptroller of the Currency 
 circulating notes in blank, registered and coun- 
 tersigned as provided by law, equal in amount 
 to the par value of the bonds so deposited. Such 
 notes shall be the obligations of the Federal re- 
 serve bank procuring the same, and shall be in 
 form prescribed by the Secretary of the Treas- 
 ury, and to the same tenor and effect as na- 
 tional-bank notes now provided by law. They 
 shall be issued and redeemed under the same 
 terms and conditions as national-bank notes ex- 
 cept that they shall not be limited to the amount 
 of the capital stock of the Federal reserve bank 
 issuing them. 
 
 Upon application of any Federal reserve 
 bank, approved by the Federal Reserve Board, 
 the Secretary of the Treasury may issue, in ex- 
 change for United States two per centum gold 
 bonds bearing the circulation privilege, but 
 against which no circulation is outstanding, one- 
 year gold notes of the United States without 
 the circulation privilege, to an amount not to 
 exceed one-half of the two per centum bonds so 
 tendered for exchange, and thirty-year three per* 
 centum gold bonds without the circulation privi- 
 lege for the remainder of the two per centum 
 bonds so tendered: Provided, That at the time 
 of such exchange the Federal reserve bank ob- 
 taining such one-year gold notes shall enter into 
 an obligation with the Secretary of the Treas- 
 ury binding itself to purchase from the United 
 States for gold at the maturity of such one- 
 year notes, an amount equal to those delivered 
 in exchange for such bonds, if so requested by 
 
 Federal re- 
 serve bank 
 notes. 
 
 Substitution 
 for 2 per cent 
 bonds of 30- 
 year 3 per 
 cent bonds and 
 one-year 3 per 
 cent notes. 
 
146 APPENDIX B 
 
 the Secretary, and at each maturity of one-year 
 notes so purchased by such Federal reserve 
 bank, to purchase from the United States such 
 an amount of one-year notes as the Secretary 
 may tender to such bank, not to exceed the 
 amount issued to such bank in the first instance, 
 in exchange for the two per centum United 
 States gold bonds; said obligation to purchase 
 at maturity such notes shall continue in force 
 for a period not to exceed thirty years. 
 
 For the purpose of making the exchange here- 
 in provided for, the Secretary of the Treasury 
 is authorized to issue at par Treasury notes in 
 coupon or registered form as he may prescribe 
 in denominations of one hundred dollars, or any 
 multiple thereof, bearing interest at the rate of 
 three per centum per annum, payable quarterly, 
 such Treasury notes to be payable not more 
 than one year from the date of their issue in 
 gold coin of the present standard value, and to 
 be exempt as to principal and interest from the 
 payment of all taxes and duties of the United 
 States except as provided by this Act, as well 
 as from taxes in any form by or under State, 
 municipal, or local authorities. And for the 
 same purpose, the Secretary is authorized and 
 empowered to issue United States gold bonds 
 at par, bearing three per centum interest pay- 
 able thirty years from date of issue, such bonds 
 to be of the same general tenor and effect and 
 to be issued under the same general terms and 
 conditions as the United States three per centum 
 bonds without the circulation privilege now is- 
 sued and outstanding. 
 
 Upon application of any Federal reserve bank, 
 approved by the Federal Reserve Board, the 
 Secretary may issue at par such three per cent- 
 um bonds in exchange for the one-year gold 
 notes herein provided for. 
 
APPENDIX B 147 
 
 BANK RESERVES 
 
 Sec. 19.^ Demand deposits within the positT^and ^ 
 meaning of this Act shall comprise all deposits **™^ deposits. 
 payable within thirty days, and time deposits 
 shall comprise all deposits payable after thirty 
 days, all savings accounts and certificates of de- 
 posit which are subject to not less than thirty 
 days' notice before payment, and all postal sav- 
 ings deposits.^ 
 
 Every bank, banking association, or trust com- 
 pany which is or which becomes a member of 
 any Federal reserve bank shall establish and 
 maintain reserve balances with its Federal re- 
 serve bank as follows: 
 
 (a) If not in a reserve or central reserve „ Reserves of 
 city, as now or hereafter defined, it shall hold banks. '^ 
 and maintain with the Federal reserve bank of 
 its district an actual net balance equal to not 
 less than seven per centum of the aggregate 
 amount of its demand deposits and three per 
 centum of its time deposits. 
 
 (6) If in a reserve city, as now or hereafter 
 defined, it shall hold and maintain with the Fed- ^eft^T^ci t°y 
 eral reserve bank of its district an actual net banks. 
 balance equal to not less than ten per centum 
 of the aggregate amount of its demand deposits 
 and three per centum of its time deposits. 
 
 (c) If in a central reserve city, as now or Reserves of 
 hereafter defined, it shall hold and maintain eft"y "ink"'''^' 
 with the Federal reserve bank of its district an 
 actual net balance equal to not less than thirteen 
 per centum of the aggregate amount of its de- 
 mand deposits and three per centum of its time 
 deposits. 
 
 lAs amended by act approved Aug. 15, 1914 (38 
 Stat., 691, chap. 252); act approved June 21, 1917 
 (40 Stat., chap. 32). 
 
 2 Government deposits other than postal savings de- 
 posits not subject to reserve requirements. See sec- 
 tion 7 of act approved April 24, 1917, Appendix, p. 51. 
 
mg reserves. 
 
 148 APPENDIX B 
 
 No member bank shall keep on deposit with 
 any State bank or trust company which is not 
 a member bank a sum in excess of ten per cent- 
 um of its own paid-up capital and surplus. No 
 member bank shall act as the medium or agent 
 of a nonmember bank in applying for or receiv- 
 ing discounts from a Federal reserve bank un- 
 der the provisions of this Act, except by permis- 
 sion of the Federal Reserve Board. 
 Other pro- The required balance carried by a member 
 
 visions regard- bank with a Federal reserve bank may, under 
 
 met reserves. * •' 
 
 the regulations and subject to such penalties as 
 may be prescribed by the Federal Reserve 
 Board, be checked against and withdrawn by 
 such member bank for the purpose of meeting 
 existing liabilities: Provided, however. That no 
 bank shall at any time make new loans or shall 
 pay any dividends unless and until the total bal- 
 ance required by law is fully restored. 
 
 In estimating the balances required by this 
 Act, the net difference of amounts due to and 
 from other banks shall be taken as the basis for 
 ascertaining the deposits against which required 
 balances with Federal reserve banks shall be de- 
 termined. 
 
 National banks, or banks organized under lo- 
 cal laws, located in Alaska or in a dependency 
 or insular possession or any part of the United 
 States outside the continental United States may 
 remain nonmember banks, and shall in that 
 event maintain reserves and comply with all the 
 conditions now provided by law regulating them ; 
 or said banks may, with the consent of the Re- 
 serve Board, become member banks of any one 
 of the reserve districts, and shall in that event 
 take stock, maintain reserves, and be subject to 
 all the other provisions of this Act. 
 
 Sec. 20. So much of sections two and three 
 of the Act of June twentieth, eighteen hundred 
 
APPENDIX B 14.9 
 
 and seventy-four, entitled "An Act fixing the cent ^* redemp- 
 amount of United States notes, providing for a tion fund no 
 redistribution of the national-bank currency, and ^bil^L par"°o*f 
 for other purposes," as provides that the fund legal reserve, 
 deposited by any national banking association 
 with the Treasurer of the United States for the 
 redemption of its notes shall be counted as a 
 part of its lawful reserve as provided in the 
 Act aforesaid, is hereby repealed. And from 
 and after the passage of this Act such fund of 
 five per centum shall in no case be counted by 
 any national banking association as a part of 
 its lawful reserve. 
 
 BANK EXAMINATIONS 
 
 Sec. 21. Section fifty-two hundred and forty, 
 United States Revised Statutes, is amended to 
 read as follows: 
 
 The Comptroller of the Currency, with the ^Exammation 
 approval of the Secretary of the Treasury, shall banks. 
 atppoint examiners whfo shall examine every 
 member bank^ at least twice in each calendar 
 year and oftener if considered necessary: Pro- 
 vided, however. That the Federal Reserve Board 
 may authorize examination by the State authori- 
 ties to be accepted in the case of State banks and 
 trust companies and may at any time direct the 
 holding of a special examination of State banks 
 or trust companies that are stockholders in any 
 Federal reserve bank. The examiner making 
 the examination of any national bank, or of any 
 other member bank, shall have power to make 
 a thorough examination of all the affairs of the 
 bank, and in doing so he shall have power to 
 administer oaths and to examine any of the offi- 
 cers and agents thereof under oath and shall 
 
 1 Except banks admitted to membership in the sys- 
 tem under authority of section 9 of this act. See 
 section 9 of this act as amended by act approved , 
 
 June 21, 1917. 
 
150 
 
 APPENDIX B 
 
 Additional 
 examinations 
 by federal re- 
 serve authori- 
 ties authorized. 
 
 Exanrination 
 of federal re- 
 serve banks. 
 
 make a full and detailed report of the condition 
 of said bank to the Comptroller of the Currency. 
 
 The Federal Reserve Board, upon the recom- 
 mendation of the Comptroller of the Currency, 
 shall fix the salaries of all bank examiners and 
 make report thereof to Congress. The expense 
 of the examinations herein provided for shall be 
 assessed by the Comptroller of the Currency 
 upon the banks examined in proportion to as- 
 sets or resources held by the banks upon the 
 dates of examination of the various banks. 
 
 In addition to the examinations made and 
 conducted by the Comptroller of the Currency, 
 every Federal reserve bank may, with the ap- 
 proval of the Federal reserve agent or the Fed- 
 eral Reserve Board, provide for special exami- 
 nation of member banks virithin its district. 
 The expense of such examinations shall be 
 borne by the bank examined. Such examina- 
 tions shall be so conducted as to inform the 
 Federal reserve bank of the condition of its 
 member banks and of the lines of credit which 
 are being extended by them. Every Federal re- 
 serve bank shall at all times furnish to the Fed- 
 eral Reserve Board such information as may 
 be demanded concerning the condition of any 
 member bank within the district of the said 
 Federal reserve bank. 
 
 No bank shall be subject to any visitorial 
 powers other than such as are authorized by 
 law, or vested in the courts of justice or such as 
 shall be or shall have been exercised or directed 
 by Congress, or by either House thereof or by 
 any committee of Congress or of either House 
 duly authorized. 
 
 The Federal Reserve Board shall, at least 
 once each year, order an examination of each 
 Federal reserve bank, and upon joint applica- 
 tion of ten member banks the Federal Reserve 
 
APPENDIX B 
 
 151 
 
 Restrictions 
 imposed upon 
 
 Board shall order a special examination and 
 report of the condition of any Federal reserve 
 bank. 
 
 Sec. 22.^ No member bank or any officer, 
 director, or employee thereof shall hereafter 
 make any loan or grant any gratuity to any bank officials, 
 bank examiner. Any bank officer, director, or eSm^inlrs. ^""^ 
 employee violating this provision shall be 
 deemed guilty of a misdemeanor and shall be 
 imprisoned not exceeding one year or fined not 
 more than $5,000, or both; and may be fined a 
 further sum equal to the money so loaned or 
 gratuity given. Any examiner accepting a loan 
 or gratuity from any bank examined by him or 
 from an officer, director, or employee thereof 
 shall be deemed guilty of a misdemeanor and 
 shall be imprisoned not exceeding one year or 
 fined not more than $5,000, or both; and may 
 be fined a further sum equal to the money so 
 loaned or gratuity given; and shall forever 
 thereafter be disqualified from holding office as 
 a national-bank examiner. No national-bank 
 examiner shall perform any other service for 
 compensation while holding such office for any 
 bank or officer, director, or employee thereof. 
 
 Other than the usual salary or director's fee 
 paid to any officer, director, employee, or at- 
 torney of a member bank, and other than a rea- 
 sonable fee paid by said bank to such officer, 
 director, employee, or attorney for services ren- 
 dered to such bank, no officer, director, em- 
 ployee, or attorney of a member bank shall be 
 a beneficiary of or receive, directly or indirectly, 
 any fee, commission, gift, or other consideration 
 for or in connection with any transaction or 
 business of the bank: Provided, however. That 
 nothing in this act contained shall be construed 
 
 1 As amended by act approved June 21, 1917 (40 
 Stat., chap. 32). 
 
152 APPENDIX B 
 
 to prohibit a director, officer, employee, or at- 
 torney from receiving the same rate of interest 
 paid to other depositors for similar deposits 
 made with such bank: And provided further, 
 That notes, drafts, bills of exchange, or other 
 evidences of debt executed or indorsed by di- 
 rectors or attorneys of a member bank may be 
 discounted with such member bank on the same 
 terms and conditions as other notes, drafts, bills 
 of exchange, or evidences of debt upon the affir- 
 mative vote or written assent of at least a ma- 
 jority of the members of the board of directors 
 of such member bank. No examiner, public or 
 private, shall disclose the names of borrowers 
 or the collateral for loans of a member bank to 
 other than the proper officers of such bank with- 
 out first having obtained the express permission 
 in writing from the Comptroller of the Cur- 
 rency, or from the board of directors of such 
 bank, except when ordered to do so by a court 
 of competent jurisdiction, or by direction of the 
 Congress of the United States, or of either 
 House thereof, or any committee of Congress 
 or of either House duly authorized. Any per- 
 son violating any provision of this section shall 
 be punished by a fine of not exceeding $5,000 
 or by imprisonment not exceeding one year, or 
 both. 
 
 Except as provided in existing laws, this pro- 
 vision shall not take effect until sixty days af- 
 ter the passage of this Act. 
 
 bih?°"of^ tock ^^^' ^^' "^^^ stockholders of every national 
 holders. banking association shall be held individually 
 
 responsible for all contracts, debts, and engage- 
 ments of such association, each to the amount 
 of his stock therein, at the par value thereof in 
 addition to the amount invested in such stock. 
 The stockholders in any national banking asso- 
 
APPENDIX B 163 
 
 elation who shall have transferred their shares 
 or registered the transfer thereof within sixty 
 days next before the date of the failure of such 
 association to meet its obligations, or with 
 knowledge of such impending failure, shall be 
 liable to the same extent as if they had made 
 no such transfer, to the extent that the subse- 
 quent transferee fails to meet such liability; but 
 this provision shall not be construed to affect in 
 any way any recourse which such shareholders 
 might otherwise have against those in whose 
 names such shares are registered at the time of 
 such failure. 
 
 LOANS ON FARM LANDS 
 
 Sec. 24.^ Any national banking association 
 not situated in a central reserve city may make 
 loans secured by improved and unencumbered 
 farm land situated within its Federal reserve 
 district or within a radius of one hundred miles 
 of the place in which such bank is located, ir- 
 respective of district lines, and may also make 
 loans secured by improved and unencumbered 
 real estate located within one hundred miles of 
 the place in which such bank is located, irre- 
 spective of district lines; but no loan made 
 upon the security of such farm land shall be 
 made for a longer time than five years, and no 
 loan made upon the security of such real estate 
 as distinguished from farm land shall be made 
 for a longer time than one year nor shall the 
 amount of any such loan, whether upon such 
 farm land or upon such real estate, exceed fifty 
 per centum of the actual value of the property 
 offered as security. Any such bank may make 
 such loans, whether secured by such farm land 
 or such real estate, in an aggregate sum equal 
 
 lAs amended by act approved Sept. 7, 1916 (39 
 Stat, 752, chap. 461). 
 
164 APPENDIX B 
 
 to twenty-five per centum of its capital and sur- 
 plus or to one-third of its time deposits and 
 such banks may continue hereafter as hereto- 
 fore to receive time deposits and to pay interest 
 on the same. 
 
 The Federal Reserve Board shall have power 
 from time to time to add to the list of cities in 
 which national banks shall not be permitted to 
 make loans secured upon real estate in the man- 
 ner described in this section. 
 
 FOREIGN BRANCHES 
 
 Sec. 25.^ Any national banking association 
 possessing a capital and surplus of $1,000,000 
 or more may file application with the Federal 
 Reserve Board for permission to exercise, upon 
 such conditions and under such regulations as 
 may be prescribed by the said board, either or 
 both of the following powers: 
 
 First. To establish branches in foreign coun- 
 tries or dependencies or insular possessions of 
 the United States for the furtherance of the 
 foreign commerce of the United States, and to 
 act if required to do so as fiscal agents of the 
 United States. 
 
 Second. To invest an amount not exceeding 
 in the aggregate ten per centum of its paid-in 
 capital stock and surplus in the stock of one or 
 more banks or corporations chartered or incorp- 
 orated under the laws of the United States or 
 of any State thereof, and principally engaged 
 in international or foreign banking, or banking 
 in a dependency or insular possession of the 
 United States either directly or through the 
 agency, ownership, or control of local institu- 
 tions in foreign countries, or in such depend- 
 encies or insular possessions. 
 
 1 As amended by act approved Sept. 7, 1916 (39 
 Stat., 752y chap. 461). 
 
APPENDIX B 166 
 
 Such application shall specify the name and 
 capital of the banking association filing it, the 
 powers applied for, and the place or places 
 where the banking operations proposed are to 
 be carried on. The Federal Reserve Board 
 shall have power to approve or to reject such 
 application in whole or in part if for any reason 
 the granting of such application is deemed in- 
 expedient, and shall also have power from time 
 to time to increase or decrease the number of 
 places where such banking operations may be 
 carried on. 
 
 Every national banking association operating Supervision 
 foreign branches shall be required to furnish in- J^^^^^J^'j^" 
 formation concerning the condition of such 
 branches to the Comptroller of the Currency 
 upon demand, and every member bank investing 
 in the capital stock of banks or corporations de- 
 scribed under subparagraph two of the first 
 paragraph of this section shall be required to 
 furnish information concerning the condition of 
 such banks or corporations to the Federal Re- 
 serve Board upon demand, and the Federal Re- 
 serve Board may order special examinations of 
 the said branches, banks, or corporations at 
 such time or times as it may deem best. 
 
 Before any national bank shall be permitted Restrictions 
 to purchase stock in any such corporation the branches. 
 said corporation shall enter into an agreement 
 or undertaking with the Federal Reserve Board 
 to restrict its operations or conduct its business 
 in such manner or under such limitations and 
 restrictions as the said board may prescribe for 
 the place or places wherein such business is to 
 be conducted. If at any time the Federal Re- 
 serve Board shall ascertain that the regulations 
 prescribed by it are not being complied with, 
 said board is hereby authorized and empowered 
 to institute an investigation of the matter and 
 
156 APPENDIX B 
 
 to send for persons and papers, subpoena wit- 
 nesses, and administer oaths in order to satisfy 
 itself as to the actual nature of the transac- 
 tions referred to. Should such investigation 
 result in establishing the failure of the corpo- 
 ration in question, or of the national bank or 
 banks which may be stockholders therein, to 
 comply with the regulations laid down by the 
 said Federal Reserve Board, such national 
 banks may be required to dispose of stock 
 holdings in the said corporation upon reasonable 
 notice. _ 
 
 Every such national banking association shall 
 conduct the accounts of each foreign branch inJ 
 dependently of the accounts of other foreigJ 
 branches established by it and of its home of- 
 fice, and shall at the end of each fiscal period 
 transfer to its general ledger the profit or loss 
 accrued at each branch as a separate item. 
 
 Any director or other officer, agent, or em- 
 ployee of any member bank may, with the ap- 
 proval of the Federal Reserve Board, be a di- 
 rector or other officer, agent, or employee of 
 any such bank or corporation above mentioned 
 in the capital stock of which such member bank 
 shall have invested as hereinbefore provided, 
 without being subject to the provisions of sec- 
 tion eight of the Act approved October fifteen, 
 nineteen hundred and fourteen, entitled "An 
 Act to supplement existing laws against unlaw- 
 ful restraints and monopolies, and for other 
 purposes." 
 
 ard'^reaffirmed ^^^* ^^' ^^^ provisions of law inconsistent 
 with or superseded by any of the provisions of 
 this Act are to that extent and to that extent 
 only hereby repealed: Provided, Nothing in 
 this Act contained shall be construed to repeat 
 the parity provision or provisions contained i*" 
 
APPENDIX B 
 
 157 
 
 an Act approved March fourteenth, nineteen 
 hundred, entitled 'An Act to define and fix the 
 standard of value, to maintain the parity of all 
 forms of money issued or coined by the United 
 States, to refund the public debt, and for other 
 purposes," and the Secretary of the Treasury 
 may, for the purpose of maintaining such parity 
 and to strengthen the gold reserve, borrow gold 
 on the security of United States bonds author- 
 ized by section two of the Act last referred to 
 or for one-year gold notes bearing interest at 
 a rate of not to exceed three per centum per 
 annum, or sell the same if necessary to obtain 
 gold. When the funds of the Treasury on hand 
 justify, he may purchase and retire such out- 
 standing bonds and notes. / 
 
 Sec. 27.' The provisions of the Act of May vrldand"^' 
 thirtieth, nineteen hundred and eight, authoriz- emergency 
 
 ^. 1 ' .' J^^l • r act" extended 
 
 ing national currency associations, the issue of to June 30, 
 additional national-bank circulation, and creat- ^^^l^ *"** "' 
 ing a National Monetary Commission, which ex- 
 pires by limitation under the terms of such Act 
 on the thirtieth day of June, nineteen hundred 
 and fourteen, are hereby extended to June thir- 
 tieth, nineteen hundred and fifteen, and sections 
 fifty-one hundred and fifty-three, fifty-one hun- 
 dred and seventy -two, fifty-one hundred and 
 ninety-one, and fifty- two hundred and fourteen 
 of the Revised Statutes of the United States, 
 which were amended by the Act of May thir- 
 tieth, nineteen hundred and eight, are hereby re- 
 enacted to read as such sections read prior to 
 May thirtieth, nineteen hundred and eight, sub- 
 ject to such amendments or modifications as are 
 prescribed in this Act: Provided, however. That 
 section nine of the Act first referred to in this 
 
 1 As amended by act approved Aug. 4, 1914 (38 
 Stat., 682, chap. 225). 
 
158 APPENDIX B 
 
 section is hereby amended so as to change the 
 tax rates fixed in said Act by making the por- 
 tion applicable thereto read as follows: 
 
 National banking associations having circu- 
 lating notes secured otherwise than by bonds 
 of the United States, shall pay for the first 
 three months a tax at the rate of three per 
 centum per annum upon the average amount of 
 such of their notes in circulation as are based 
 upon the deposit of such securities, and after- 
 wards an additional tax rate of one-half of one 
 per centum per annum for each month until a 
 tax of six per centum per annum is reached, and 
 thereafter such tax of six per centum per an- 
 num upon the average amount of such notes: 
 Provided further. That whenever in his judg- 
 ment he may deem it desirable, the Secretary 
 of the Treasury shall have power to suspend the 
 limitations imposed by section one and section 
 three of the Act referred to in this section, 
 which prescribe that such additional circulation 
 secured otherwise than by bonds of the United 
 States shall be issued only to National banks 
 having circulating notes outstanding secured by 
 the deposit of bonds of the United States to an 
 amount not less than forty per centum of the 
 capital stock of such banks, and to suspend also 
 the conditions and limitations of section five of 
 said Act except that no bank shall be permitted 
 to issue circulating notes in excess of one hun- 
 dred and twenty-five per centum of its unim- 
 paired capital and surplus. He shall require 
 each bank and currency association to maintain 
 on deposit in the Treasury of the United States . 
 a sum in gold sufficient in his judgment for the j 
 redemption of such notes, but in no event less * 
 than five per centum. He may permit National 
 banks, during the period for which such pro- 
 visions are suspended, to issue additional cir- 
 culation under the terms and conditions of the 
 
APPENDIX B 169 
 
 Act referred to as herein amended: Provided 
 further. That the Secretary of the Treasury, in 
 his discretion, is further authorized to extend 
 the benefits of this Act to all qualified State 
 banks and trust companies, which have joined 
 the Federal reserve system, or which may con- 
 tract to join within fifteen days after the pas- 
 sage of this Act. 
 
 Sec. 28. Section fifty-one hundred and ca^tal" by " °^ 
 forty-three of the Revised Statutes is hereby member banks, 
 amended and reenacted to read as follows: 
 Any association formed under this title may, by 
 the vote of shareholders owning two-thirds of its 
 capital stock, reduce its capital to any sum not 
 below the amount required by this title to 
 authorize the formation of associations; but no 
 such reduction shall be allowable which will 
 reduce the capital of the association below the 
 amount required for its outstanding circulation, 
 nor shall any reduction be made until the amount 
 of the proposed reduction has been reported to 
 the Comptroller of the Currency and such re- , 
 duction has been approved by the said Comp- 
 troller of the Currency and by the Federal Re- 
 serve Board, or by the organization committee 
 pending the organization of the Federal Reserve 
 Board. 
 
 Sec. 29. If any clause, sentence, paragraph, 
 or part of this Act shall for any reason be ad- 
 judged by any court of competent jurisdiction 
 to be invalid, such judgment shall not affect, 
 impair, or invalidate the remainder of this Act, 
 but shall be confined in its operation to the 
 clause, sentence, paragraph, or part thereof di- 
 rectly involved in the controversy in which such 
 judgment shall have been rendered. 
 
 Sec. 30. The right to amend, alter, or re- 
 peal this Act is hereby expressly reserved. 
 
APPENDIX C 
 
 Provisions of the Farm Loan Act, approved 
 July 17, 1916, which affect Federal Reserve 
 Banks and member hanks of the Federal Re- 
 serve System. 
 
 FARM LOAN ACT 
 
 An Act To provide capital for agricultural 
 development, to create standard forms of in- 
 vestment based upon farm mortgage, to equa- 
 lize rates of interest upon farm loans, to fur- 
 nish a market for United States bonds, to create 
 Government depositaries and financial agents 
 for the United States, and for other purposes. 
 
 capital stock of federal land banks 
 
 Sec. 5. — 
 
 * * * * * 
 
 At least twenty-five per centum of that part ,! 
 of the capital of any Federal land bank for \ 
 which stock is outstanding in the name of na- \ 
 tional farm loan associations shall be held in 
 quick assets, and may consist of cash in the \ 
 vaults of said land bank, or in deposits in mem- ' 
 ber banks of the Federal reserve system, or in 
 readily marketable securities which are ap- 
 proved under rules and regulations of the Fed- 
 eral Farm Loan Board: Provided, That not less 
 than five per centum of such capital shall be 
 invested in United States Government bonds. 
 
 GOVERNMENT DEPOSITARIES \ 
 
 Sec. 6. That all Federal land banks and 
 joint stock land banks organized under this 
 160 I 
 
 J 
 
APPENDIX C 161 
 
 Act, when designated for that purpose by tHe 
 Secretary of the Treasury, shall be depositaries 
 of public money, except receipts from customs, 
 under such regulations as may be prescribed by 
 said Secretary; and they may also be employed 
 as financial agents of the Government; and they 
 shall perform all such «uch reasonable duties, as 
 depositaries of public money and financial 
 agents of the Government, as may be required 
 of them. And the Secretary of the Treasury 
 shall require of the Federal land banks and 
 joint stock land banks thus designated satisfac- 
 tory security, by the deposit of United States 
 bonds or otherwise, for the safekeeping and 
 prompt payment of the public money deposited 
 with them, and for the faithful performance of 
 their duties as financial agents of the Govern- 
 ment. No Government funds deposited under 
 the provisions of this section shall be invested 
 in mortgage loans or farm loan bonds. 
 
 POWERS OF FEDERAL LAND BANKS 
 
 Sec. 13. That every Federal land bank 
 shall have power, subject to the limitations and 
 requirements of this Act — 
 
 * * * * * 
 
 Fifth. To deposit its securities, and its cur- 
 rent funds subject to check, with any member 
 bank of the Federal Reserve System, and to 
 receive interest on the same as may be agreed. 
 
 INVESTMENT IN FARM LOAN BONDS 
 
 Sec. 27. That farm loan bonds issued un- 
 der the provisions of this Act by Federal land 
 banks or joint stock land banks shall be a law- 
 ful investment for all fiduciary and trust funds, 
 and may be accepted as security for all public 
 deposits. 
 
 Any member bank of the Federal Reserve 
 
im APPENDIX C 
 
 System may buy and sell farm loan bonds is- 
 sued under the authority of this Act. 
 
 Any Federal reserve bank may buy and sell 
 farm loan bonds issued under this Act to the 
 same extent and subject to the same limitations 
 placed upon the purchase and sale by said 
 banks of State, county, district, and municipal 
 bonds under subsection (b) of section fourteen 
 of the Federal Reserve Act approved Decem- 
 ber twenty-third, nineteen hundred and thirteen. 
 
APPENDIX D 
 
 Section 7 of '^An act to authorize an issue of 
 bonds to meet expenditures for the national 
 security and defense, and, for the purpose of 
 assisting in the prosecution of the war, to 
 extend credit to foreign governments, and 
 for other purposes, approved April 2Jf., 1917, 
 which affects Federal Reserve Banks and 
 member banks of the Federal Reserve Sys- 
 tem/' 
 
 Sec. 7. That the Secretary of the Treasury, 
 in his discretion, is hereby authorized to de- 
 posit in such banks and trust companies as he 
 may designate the proceeds, or any part there- 
 of, arising from the sale of the bonds and cer- 
 tificates of indebtedness authorized by this 
 Act, or the bonds previously authorized as de- 
 scribed in section four of this Act, and such de- 
 posits may bear such rate of interest and be 
 subject to such terms and conditions as the Sec- 
 retary of the Treasury may prescribe : Provided,, 
 That the amount so deposited shall not in any 
 case exceed the amount withdrawn from any 
 such bank or trust company and invested in such 
 bonds or certificates of indebtedness plus the 
 amount so invested by such bank or trust com- 
 pany, and such deposits shall be secured in the 
 manner required for other deposits by section 
 fifty-one hundred and fifty-three. Revised Sta- 
 tutes, and amendments thereto: Provided fur- 
 ther. That the provisions of section fifty-one 
 hundred and ninety-one of the Revised Statutes, 
 as amended by the Federal Reserve Act and the 
 amendments thereof, with reference to the re- 
 serves required to be kept by national banking 
 
 163 
 
164 APPENDIX D 
 
 associations and other member banks of the Fed- 
 eral Reserve System^ shall not apply to de- 
 posits of public moneys by the United States in 
 designated depositaries. 
 
INDEX TO FEDERAL RESERVE ACT AND ITS 
 AMENDMENTS^ 
 
 SECTION 
 
 A 
 
 Acceptances: 
 
 By member banks in foreign transactions 13 
 
 By member banks in domestic transactions 13 
 
 By member banks to furnish dollar exchange 13 
 
 Purchase of, by Federal Reserve Banks 14 
 
 Rediscount of, by Federal Reserve Banks 13 
 
 Acts amended, repealed, or otherwise referred to: 
 
 Act of June 20, 1874 17, 20 
 
 Act of July 12, 1882 17 
 
 Act of January 16, 1883 11-1 
 
 Act of March 14, 1900 16, 26 
 
 Act of March 4, 1907 16 
 
 Act of May 30, 1908 16, 27 
 
 Act of March 2, 1911 16 
 
 Act of October 15, 1914 25 
 
 Act of June 12, 1916 16 
 
 United States Revised Statutes, 324 10 
 
 United States Revised Statutes, 5143 28 
 
 United States Revised Statutes, 5153 27 
 
 United States Revised Statutes, 5154 8 
 
 United States Revised Statutes, 5159 17 
 
 United States Revised Statutes, 5172 27 
 
 United States Revised Statutes, 5174 16 
 
 United States Revised Statutes, 5191 27 
 
 United States Revised Statutes, 5202 13 
 
 United States Revised Statutes, 5209 9 
 
 United States Revised Statutes, 5214 27 
 
 United States Revised Statutes, 5240 9, 21 
 
 Agents. (See Federal Reserve Agent.) 
 
 Amendments, this act subject to 30 
 
 Applications : 
 
 For cancellation of stock 9 
 
 For establishment of foreign branches 25 
 
 For Federal Reserve notes 16 
 
 For membership in Federal Reserve Banks 4 
 
 Of State banks for membership 9 
 
 iThis index was compiled and officially published under the 
 direction of the Federal Reserve Board. 
 
 165 
 
166 INDEX TO ACT 
 
 Assessments. (See Federal Reserve Banks.) 
 Assistants to Federal Reserve Agent 
 
 1^ 
 
 B 
 
 Balances. (See Reserve) 19 
 
 To be maintained with Federal Reserve Banks 13 
 
 Banks. (See also State Banks, Federal Reserve Banks, 
 Member Banks, and National Banks.) 
 
 Acceptance of terms of Federal Reserve act 2 
 
 Conversion of State banks into national banks 8 
 
 Definition 1 
 
 Federal Reserve Bank. (See Federal Reserve Banks.) 
 Reserve banks defined 
 
 Bank acceptances (see also Acceptances), purchase of 14 
 
 Bank examinations. (See Examinations.) 
 
 Bank reserves. (See Reserve.) 
 
 Board: 
 
 Definition 
 
 Federal reserve. (See Federal Reserve Board.) 
 
 Bonds: 
 
 Deposit requirement of national banks repealed 17 
 
 Exchange of 2 per cent for 3 per cent 18 
 
 Federal Reserve Agents 11-1 
 
 Federal Reserve Banks must purchase 18 
 
 Limitation on amount to be purchased 18 
 
 Notes against bonds purchased 18 
 
 Officers and employees of Federal Reserve Banks 4 
 
 Refunding 18 
 
 Repurchase of 1-year bonds from year to year 18 
 
 Revenue bonds, purchase by Federal Reserve Banks . . 14 
 
 Branch banks of Federal Reserve Banks 3 
 
 C 
 
 Capital stock. (See stock.) 
 
 Central reserve cities: 
 
 Classification by Federal Reserve Board 11-e 
 
 Previous status not changed 2 
 
 Certifying checks against insufficient funds 9 
 
 Validity of checks certified against insufficient funds . . 9 
 
 Clearing house: 
 
 Federal Reserve Bank to act as 16 
 
 Federal Reserve Board may act as 16 
 
 Federal Reserve Board to fix charges 16 
 
 Collections: 
 
 By Federal Reserve Banks 13 
 
 Expenses of 16 
 
INDEX TO ACT 167 
 
 BECnOK 
 
 Comptroller of Currency: 
 
 Authorizing Federal Reserve Banks to commence busi- 
 ness 4 
 
 Ex-oflEicio member of Federal Reserve Board 10 
 
 D 
 
 Demand deposits, definition 19 
 
 Deposits. {See also Government deposits.) 
 
 Demand 19 
 
 Reserve against. (See Reserve.) 
 
 Time 19 
 
 What deposits accepted by Federal Reserve Bank 13 
 
 Deputy chairman: 
 
 Appointment 4 
 
 Duties 4 
 
 Directors : 
 
 Branch banks 3 
 
 Federal Reserve Bank — 
 
 Appointment of Class C 4 
 
 Classes B and C not to be officers, directors, or em- 
 ployees of banks 4 
 
 Classification 4 
 
 Duties 4 
 
 Election of Classes A and B 4 
 
 Expenses 4 
 
 Nomination 4 
 
 Qualifications 4 
 
 Senators and Representatives ineligible 4 
 
 Term of office 4 
 
 Vacancies to be filled '4 
 
 Member banks — 
 
 Fees or commission prohibited 22 
 
 Interest on deposits allowed 22 
 
 Member of Federal Reserve Board ineligible 10 
 
 Penalty for accepting fees or commissions 22 
 
 National banks, personal liability for noncompliance 
 
 with the act 2 
 
 Removal of 11-f 
 
 Discounts : 
 
 (See also Rediscounts.) 
 
 Of member banks' own paper 13 
 
 Rate subject to regulation of Federal Reserve Board.. 14 
 
 Federal advisory council to recommend rate 12 
 
 Dissolution: 
 
 Effect 3 
 
 National bank, for failure to comply with the act 3 
 
 Survival of remedies and penalties against dissolved 
 
 bank 9 
 
168 INDEX TO ACT 
 
 BECTIOSr 
 
 District: 
 
 Definition 1 
 
 Federal Reserve. (See Federal Reserve District.) 
 
 District reserve electors 4 
 
 Dividends, Federal Reserve Banks 7 
 
 E 
 
 Earnings : 
 
 Federal Reserve Banks, how distributed 7 
 
 Franchise tax on Federal Reserve Banks 7 
 
 Surplus fund of Federal Reserve Banks 7 
 
 United States earnings, how applied 7 
 
 Elections : 
 
 Directors of Federal Reserve Banks 4 
 
 Emergency currency: Limitations of, act of May 30, 1908, 
 
 extended to June 30, 1915 27 
 
 Examinations : 
 
 Expenses 21 
 
 Federal Reserve Banks 21 
 
 Federal Reserve Board given power to examine all 
 
 member banks 11-a 
 
 Member banks 21 
 
 Other visitatorial powers 21 
 
 Special examinations by Federal Reserve Bank 21 
 
 State banks 9 
 
 State examinations may be accepted 21 
 
 Examiners: 
 
 Accepting loan or gratuity 22 
 
 Appointment 21 
 
 Disclosure of confidential information 22 
 
 Disqualification 22 
 
 Loans and gratuities must not be made to 22 
 
 Other services shall not be performed by 22 
 
 Penalty for accepting loan or gratuity 22 
 
 Penalty for disclosure of confidential information 22 
 
 Powers 21 
 
 Salary 21 
 
 Exchange : 
 
 Not to be charged against Federal Reserve Banks 13 
 
 Not prohibited in certain cases 13 
 
 Regulated by Federal Reserve Board 13 
 
 Exemption of Federal Reserve Banks from taxation 7 
 
 F 
 Farm lands. (See Loans on farm lands.) 
 Federal Advisory Council: 
 
 Creation 12 
 
INDEX TO ACT 169 
 
 8ECTI0K 
 
 Members 13 
 
 Meetings 12 
 
 Powers 12 
 
 Vacancies, how filled 12 
 
 Federal Reserve Agent: 
 
 Appointment 4 
 
 Assistants 4 
 
 Bond 11-i 
 
 Compensation 4 
 
 Deposits with 16 
 
 Deposits by, with Secretary of Treasury 16 
 
 Duties in general 4 
 
 Holding deposits required by Federal Reserve Act .... 16 
 
 Holding money for redemption of Federal reserve notes 16 
 Notice to board of issuance and withdrawal of Federal 
 
 reserve notes 16 
 
 Office 4 
 
 Qualifications 4 
 
 Redeposit of money deposited with him with Board or 
 
 Treasurer 16 
 
 Reports 4 
 
 Federal Reserve Banks: 
 
 Absence of chairman or deputy chairman 4 
 
 Accounts with other Federal Reserve Banks 14 
 
 Advances to members 13 
 
 Assessments by Federal Reserve Board for expenses.. 10 
 
 Authority to commence business 4 
 
 Banks in Alaska and dependencies and possessions may 
 
 become members 19 
 
 Board of directors. (See also Directors) 4 
 
 Chairman of board of directors 4 
 
 Clearing and collection charges regulated by Federal 
 
 Reserve Board 16 
 
 Clearing checks 16 
 
 Collections 13 
 
 Deposits 13 
 
 Deputy chairman of board of directors 4 
 
 Designation 3 
 
 Directors. (See Directors.) 
 
 Discoimts for member banks 13 
 
 Dividends 7 
 
 Exemptions from taxation 7 
 
 Fiscal agents 15 
 
 Forfeiture of membership in 9 
 
 Foreign accounts 14 
 
 Foreign agencies 14 
 
 Franchise tax 7 
 
170 INDEX TO ACT 
 
 SECTION 
 
 Information to be furnished Federal Reserve Board ... 21 
 
 Initial capital 2 
 
 Liquidation 7 
 
 Location 2 
 
 Name 2 
 
 Officers, ineligibility of Senators and Representatives.. 4 
 
 One in each reserve city 2 
 
 Open market operations 14 
 
 Organization 2 
 
 Powers 13 
 
 Rediscounts. (See Rediscounts.) 
 Shareholders. (See Shareholders.) 
 
 Special examinations of members 21 
 
 Stock. (See Stock.) 
 
 Supervision by Federal Reserve Board 11-j 
 
 Surplus, additions to from net earnings 7 
 
 Surplus left upon liquidation goes to United States. ... 7 
 
 Suspension or liquidation by Federal Reserve Board... 11-h 
 
 Suspension or removal of ofl&cers and directors 11-f 
 
 Title 2 
 
 Weekly statement of conditions by Federal Reserve 
 
 Board 11-a 
 
 Writing off doubtful assets 11-g 
 
 Federal Reserve Board: 
 
 Additional limitations on farm loans 24 
 
 Allotment of refunding bonds 18 
 
 Annual report 10 
 
 Applications for cancellation of stock 9 
 
 Appointment of class C directors by 4 
 
 Appointment of Federal Reserve Agent by 4 
 
 Appointment of members 10 
 
 Approval of directors' compensation 4 
 
 Assessments against Federal Reserve Banks to pay ex- 
 penses 10 
 
 Chairman, Secretary of Treasury ex officio 10 
 
 Clearing house may act as 16 
 
 Creation of new districts 2 
 
 Deposits with Secretary of Treasury subject to order 16 
 
 of 16 
 
 Designation or requirement of Federal Reserve Bank 
 
 to act as clearing house 16 
 
 Ex officio members 10 
 
 Expenses 10 
 
 Expenses of handling deposits with Secretary of Treas- 
 ury 16 
 
 Expenses of money shipments 16 
 
 Federal Reserve notes, regulation of issue 16 
 
 I 
 
INDEX TO ACT 171 
 
 BKCnON 
 
 First meeting 10 
 
 Governor — 
 
 Appointment 10 
 
 Duties 10 
 
 Members — 
 
 Appointment 10 
 
 Expenses . .; 10 
 
 Ineligible for oflSce or employment in member 
 
 banks or with Federal reserve banks 10 
 
 No two from same district 10 
 
 Qualifications 10 
 
 Salary 10 
 
 Shall devote entire time to business of board 10 
 
 Term of office 10 
 
 Number of members 10 
 
 Offices 10 
 
 Powers 11 
 
 Powers in conflict with those of Secretary of Treasury 10 
 
 Readjustment of districts 2 
 
 Regulations — 
 
 Charges for collections 16 
 
 Checking against reserve and member banks 19 
 
 Clearing-house activities 16 
 
 Dealings in commercial paper 13 
 
 Foreign branches 25 
 
 Rates of discount 14 
 
 Rediscounts 11-b, 13 
 
 Transfers of stock 2 
 
 Removal of Federal Reserve Bank officers or directors 11-f 
 
 Reports of 10 
 
 Representation by members of commercial, industrial, 
 
 and geographical divisions of coimtry 10 
 
 Representatives in Congress ineligible 4 
 
 Review of organization committee's determinations 2 
 
 Secretary of Treasury ex officio chairman 10 
 
 Senators ineligible '4 
 
 StaflF, employment and expenses of 11-1 
 
 Supervision of Federal Reserve Banks 11-j 
 
 Supervision of foreign accounts 14 
 
 Suspension of reserve requirements 11-c 
 
 Vacancies, how filled 10 
 
 Vice governor 10 
 
 "Weekly statement of condition of Federal Reserve 
 
 Banks 11-a 
 
 Federal reserve cities: 
 
 Designation 9 
 
 Number 3 
 
172 INDEX TO ACT 
 
 BECnOK 
 
 Review of organization committee's determination 2 
 
 Selection of 2 
 
 Federal reserve districts: 
 
 Apportionment 2 
 
 Creation 3 
 
 Creation of new districts 9 
 
 Designation 2 
 
 Original number 2 
 
 Readjustment 2 
 
 Total number 2 
 
 Federal reserve notes: 
 
 Additional security may be required 16 
 
 Cancellation and destruction 16 
 
 Collateral security 16 
 
 Custody, pending issue 16 
 
 Custody, plates and dies 16 
 
 Deposits against 16 
 
 Deposits with Treasurer to cover redemptions 16 
 
 Discretion of Board to grant application for issue 16 
 
 Distinctive letter and number 16 
 
 Engraving and printing 16 
 
 Expenses of issue and retirement 16 
 
 Interest on 16 
 
 Issue 16 
 
 Lien on assets of bank 16 
 
 Must not be paid out by Federal Reserve Bank not is- 
 suing them 16 
 
 Notice to Board of issues and withdrawals 16 
 
 Power of bank to issue 4 
 
 Purposes for which issued 16 
 
 Redemption of 16 
 
 Reduction of liability for 16 
 
 Reserve against 16 
 
 Retirement of 16 
 
 Return or retirement by another Federal Reserve Bank 16 
 
 Status as currency 16 
 
 Supervision and control of issue and retirement 11-d 
 
 Tax on deficiency in gold reserve 11-c 
 
 Withdrawal of collateral 16 
 
 Fiduciary powers, national banks 11-k 
 
 Foreign accounts, Federal Reserve Banks 14 
 
 Foreign agencies. Federal Reserve Banks 14 
 
 Foreign branches: 
 
 Accounts kept separate 25 
 
 Agreement to comply with regulations of Federal Re- 
 serve Board 25 
 
 Application to establish 25 
 
INDEX TO ACT 173 
 
 Establishment 35 
 
 Failure to comply with regulations 25 
 
 Information must be furnished 25 
 
 Investigation by Federal Reserve Board of failure to 
 
 comply with regulations 25 
 
 May be appointed fiscal agents of United States 25 
 
 National banks may establish 25 
 
 Officers or employees of member banks may serve.... 25 
 
 Special examinations 25 
 
 Forfeitures. (See Penalties and forfeitures.) 
 
 Franchise tax: 
 
 Secretary of Treasury to maintain 26 
 
 Tax on deficiency 11-c 
 
 G 
 
 Government deposits: 
 
 Funds to be deposited 15 
 
 In Federal Reserve Banks 15 
 
 In member banks 15 
 
 I 
 
 Inconsistent laws repealed 26 
 
 Invalidity of part of act not to invalidate all 29 
 
 L 
 
 Loans on farm lands: 
 
 Amount 24 
 
 Limitations may be added by Federal Reserve Board. 24 
 
 National banks not in Central Reserve cities may make 24 
 
 Time to run 24 
 
 M 
 
 Member banks: 
 
 Acceptances by 13 
 
 Banks in Alaska or other dependencies or possessions 
 
 may become members 19 
 
 Cancellation of stock in Federal Reserve Bank upon 
 
 insolvency 6 
 
 Definition 1 
 
 Discount of paper for directors, officers, or employees 22 
 
 Examinations of, by Federal Reserve Board 11-a 
 
 Fees or commissions to officers or directors for loans 
 
 prohibited 22 
 
 Forfeiture of membership 9 
 
 Increasing capital stock must increase holdings of Fed- 
 eral Reserve Banks' stock 5 
 
 Insolvency 6 
 
174 INDEX TO ACT 
 
 Interest on deposits of officers, directors, or employees 22 
 Limitations on amount of deposits with nonmember 
 
 banks 19 
 
 Loans or gratuities to bank examiners prohibited 22 
 
 Officers and employees may serve foreign branches 25 
 
 Reserves of. (See "Reserves") 19 
 
 Sale of bonds securing notes to be retired 18 
 
 Shall make no new loans or dividends while reserve not 
 
 maintained 19 
 
 Shall not act as medium of nonmember banks in secur- 
 ing discounts from Federal Reserve Banks without 
 
 consent of Federal Reserve Board 19 
 
 Stock in Federal Reserve Banks not to be transferred 5 
 Surrender of stock in Federal Reserve Banks upon re- 
 duction of its own capital or upon liquidation 5 
 
 Visitatorial powers to which subject 21 
 
 N 
 
 National banks: 
 
 Acceptance of terms of Federal Reserve Act 2 
 
 Bond deposit requirements repealed 17 
 
 Converted from State banks 8 
 
 Definition 1 
 
 Directors personally liable for results of noncompliance 
 
 with act 2 
 
 Dissolution for noncompliance with act 2 
 
 Foreign branches. (See Foreign branches.) 
 
 Indebtedness limited 13 
 
 Loans on farm lands 24 
 
 May act as insurance agent or broker, when 13 
 
 Penalty for failing to accept terms of act 2 
 
 Personal liability of stockholders 23 
 
 Reduction of capital stock 28 
 
 Subscription to capital stock of Federal Reserve Banks 2, 4 
 
 Survival of remedies and penalties against 2 
 
 Transfer of shares before failure 23 
 
 Trustees, executors, administrators, and registrars of 
 
 stocks and banks 11-k 
 
 National Banking Association, definition 1 
 
 Notes. (See Federal Reserve notes.) 
 
 Notes against bonds purchased: 
 
 May be issued by Federal Reserve Banks 18 
 
 Issue and redemption 18 
 
 Limitations on amounts 18 
 
 O 
 
 Organization committee. (See Reserve bank organization 
 committee.) 
 
INDEX TO ACT 176 
 P 
 
 Penalties and forfeitures: 
 
 Certified checks against insufficient funds 9 
 
 Examiners disclosing confidential information 22 
 
 Failure of State bank to make reports 9 
 
 Forfeiture of membership 9 
 
 Loans or gratuities to examiners 22 
 
 Noncompliance with act 2 
 
 Penalty against Federal Reserve Bank for paying out 
 
 notes of another 16 
 
 Survival of penalties against dissolved banks 2 
 
 Public stock: 
 
 Definition 2 
 
 Limitation of amount held by single shareholder 2 
 
 Subscription to 2 
 
 Transfer of 2 
 
 R 
 
 Rediscounts : 
 
 Acceptances 13 
 
 Agricultural paper 13 
 
 Conditions of 9 
 
 Limitations on amount 13 
 
 Limitations on amounts for State banks 9 
 
 Paper subject to 13 
 
 Regulation by Federal Reserve Board 11-b, 13 
 
 Remedies, survival against dissolved bank 2 
 
 Repayment of deposits upon withdrawal of State banks ... 9 
 Reports: 
 
 By State banks 9 
 
 Federal Reserve Board. (See Federal Reserve Board.) 
 Reserves : 
 
 Banks in Alaska, dependencies or possessions 20 
 
 Federal Reserve Bank — 
 
 Against deposits 16 
 
 Against Federal reserve notes 16 
 
 Gold deposits may be counted as part of 16 
 
 How maintained 16 
 
 Member banks — 
 
 Amount required 19 
 
 Computation of balances 19 
 
 How maintained 19 
 
 May be checked against 19 
 
 Limitation on amount deposited with nonmember 
 
 bank 19 
 
 Must be maintained 19 
 
 Permission to carry in Federal reserve banks instead 
 of in vault 11-m 
 
176 INDEX TO ACT 
 
 Suspension of Reserve requirements by Federal Re- 
 serve Board 11-c 
 
 Tax upon delinquencies 11-c 
 
 Reserve bank (see also Federal Reserve Bank), definition. 1 
 
 Reserve Bank Organization Committee: 
 
 Allotment of United States stock 2 
 
 Calling meetings of bank directors 4 
 
 Certificates of designation of reserve districts and re- 
 serve cities 4 
 
 Exercise functions of chairman of board of directors 
 
 of Federal Reserve Banks pending organization '4 
 
 Expenses 2 
 
 Fixing geographical limits of districts 2 
 
 General powers 2 
 
 Offer of stock to public subscribers 2 
 
 Quorum 2 
 
 Supervision of organization of Federal Reserve Banks 2 
 
 Reserve cities: 
 
 Control of classification by Federal Reserve Board 11-e 
 
 Previous status not changed 2 
 
 S 
 
 Secretary of Treasury: 
 
 Deposits with, by Federal Reserve Bank or agent 16 
 
 Ex officio member of Federal Reserve Board 10 
 
 Expenses of handling deposits 16 
 
 Gold reserve to be maintained by 26 
 
 Management of United States stock 2 
 
 Shareholders (see also Stock), individual liability: 
 
 Federal Reserve Banks 2 
 
 National banks 23 
 
 State banks: 
 
 Cancellation of stock in Federal Reserve Bank 9 
 
 Certificates as to liabilities of debtors 9 
 
 Certifying checks against insufficient funds 9 
 
 Conditions of membership 9 
 
 Converted into national banks 8 
 
 Eligibility for membership 9 
 
 Examination. (See "Examinations") 9 
 
 Examinations, not subject to requirements of section 21 9 
 
 Forfeiture of membership 9 
 
 May become members of Federal Reserve Bank 9 
 
 Must be eligible for conversion into national banks ... 9 
 
 Penalties for failure to make reports 9 
 
 Qualifications required to become members 9 
 
 Regulations 9 
 
 Retain powers under State charters 9 
 
 State examinations may be accepted 9, 21 
 
INDEX TO ACT 177 
 
 Subject to provisions and penalties of Revised Statutes 
 
 5209, upon becoming members 9 
 
 Subject to section of Federal Reserve Act applied to 
 
 member banks; but not subject to section 21 9 
 
 Subscription to stock in Federal Reserve Banks 9 
 
 Withdrawal from membership 9 
 
 Stock: 
 
 (see also Shareholders.) 
 
 Of Federal Reserve Banks — 
 
 Amount to be held by single member or shareholder 2 
 
 Calls on subscriptions 2 
 
 Cancellation of stock held by insolvent member 
 
 banks 6 
 
 Increase 5 
 
 Increase of subscriptions required on increase of 
 
 member banks' capital stock 5 
 
 Limitation on cancellations 9 
 
 National banks must subscribe 2 
 
 Payments on subscriptions 2 
 
 Public subscriptions 2 
 
 Reduction 6 
 
 Shares owned by member banks not to be transfer- 
 red 5 
 
 Subscription 2 
 
 Subscription by national banks 2, 4 
 
 Subscription by State banks 9 
 
 Subscription required of new members 5 
 
 Surrender upon reduction of capital or liquidation 
 
 of member banks 5 
 
 Transfer of 2 
 
 Voting power 2 
 
 Of member banks — 
 
 Increase 5 
 
 Reduction 5 
 
 Of national banks — 
 
 Reduction 38 
 
 Transfer of before failure 23 
 
 Surplus. {See Federal Reserve Banks.) 
 
 T 
 
 Tax upon delinquencies in reserves .- 11-c 
 
 Time deposits, definition 19 
 
 Trust companies, acceptance of terms of Federal Reserve 
 
 Act 2 
 
 Trust powers of national banks 11-k 
 
 U 
 United States stock: 
 
 Allotment by organization committee 9 
 
 Management by Secretary of the Treasury 9 
 
INDEX TO TEXT 
 
 Acceptances, trade acceptances and bank acceptances, may be 
 
 purchased by federal reserve banks in open market, 42-43; 
 
 may be rediscounted by federal reserve banks, 44-47. See 
 
 also bank acceptances and trade acceptances. 
 Advisory Council, how constituted, 34. 
 Agricultural paper, eligible for rediscoimt at federal reserve 
 
 banks, 62. 
 Bank acceptances, nature of, 46 ; advantages of, 46-47 ; rediscount- 
 able by federal reserve banks, 47; use of, in connection with 
 
 foreign trade, 79-80. 
 Bank credit, extent to which used as a medium of exchange in 
 
 1913, 8-10. 
 Bank note, bond-secured, under federal reserve law, 50-51 ; federal 
 
 reserve bank note, 51. See also federal reserve note and bank 
 
 reserves. 
 Bank-note inelasticity, under old banking system, 11-17; seasonal, 
 
 chart showing, 16. 
 Branches of national banks, may be established in foreign countries 
 
 80-81. 
 Canadian bank notes, elasticity of, c^pared with that of U. S. 
 
 national bank notes, 15-16. '^' 
 
 Capital of federal reserve banks, minimum amount of, 29; amount 
 
 paid-in, 31; how subscribed, 31. 
 Centralization of bank reserves in respective federal reserve 
 
 districts, 35-38. 
 Central reserve city banks, reserve requirements of, 37. 
 Class A directors of federal reserve banks, who and how elected, 
 
 32. 
 Class B directors of federal reserve banks, who and how elected, 
 
 S2. 
 Class C directors of federal reserve banks, who and how chosen, 
 
 32-33. 
 Clearing-member banks, defined, 70. 
 Clearing out-of-town checks, under old banking system, 19-22; 
 
 under federal reserve system, 70-74; charges permissible for, 73; 
 
 cost of, how met and apportioned among participating banks, 
 
 73-74; system extended to cover promissory notes, trade bills, 
 
 time drafts and similar items, 75; services rendered by system, 
 
 78-79. 
 
 178 
 
INDEX TO TEXT 179 
 
 Collateral loans, character of, which may be made by federal 
 reserve banks, 62-63. 
 
 Collection of out-of-town checks. See clearing out-of-town checks. 
 
 Commercial paper, creation of a broader discount market for, 
 44-48; kinds of, eligible for rediscoxmt by federal reserve banks, 
 61-62. 
 
 Comptroller of the currency an ex-officio member of federal re- 
 serve board, 33. 
 
 Contractility of circulating credit under federal reserve system, 
 64-65. 
 
 Country banks, reserve requirements of, 37. 
 
 Credit elasticity under federal reserve system, 50-65. 
 
 Credit inelasticity under old banking system, evil results of, 18. 
 
 Currency shipments, heavy under old banking sjjstem, 22-23; may 
 be made by member banks, at expense of federal reserve banks, 
 to settle adverse balances arising out of clearing and collection 
 system, 72. 
 
 Decentralization of American banking prior to federal reserve 
 system, 3-7. 
 
 Defects of old banking system summarized, 2. 
 
 Deposit currency, inelasticity of, under old system, 17; elasticity 
 of, under federal reserve system, 57-65. 
 
 Deposit-turnover, rate of, in 1913, 9-10. 
 
 Depositaries, government, apportionment of funds among, under 
 old banking system, 25-27; use of federal reserve banks as, 
 82-89; use of individual banks as, during war, 87. 
 
 Directors of federal reserve banks, classes of, 32-33, 
 
 Discount market, a broader one being created by federal reserve 
 system, 44-48. 
 
 Discount rates of federal reserve banks, how made effective, 
 42n; tendency of, to equilibrium throughout country, 43-44. 
 
 Domestic exchange under federal reserve system, 66-79. 
 
 Elasticity, credit, under old banking system, 8-18; under federal 
 reserve system, 50-65. See also bank-note inelasticity and 
 deposit-currency inelasticity. 
 
 Exchange and transfer system, defective prior to federal reserve 
 system, 19-24; under federal reserve system, 66-81. 
 
 Exchange charges, imposed by federal reserve banks on member 
 banks to cover expenses of clearing and collection system, 73-74; 
 reduced since inauguration of federal reserve clearing and col- 
 lection system, 73; reasonableness of, to be determined by fed- 
 eral reserve board, 74. 
 
 Federal reserve agent, position of, 33. 
 
 Federal reserve agents' fimd, described, 76. 
 
 Federal reserve bank agencies in foreign countries, 80. 
 
 Federal reserve banks, capital stock of, 31; subscriptions to, re- 
 
180 INDEX TO TEXT 
 
 quired of member banks, 31; plan of organization of, 31-32; 
 the sole depositaries of member banks' legal reserve money, 
 35-38. 
 
 Federal reserve bank notes, described, 51. 
 
 Federal reserve board, how constituted, 33-34; powers of, 34; 
 may permit reserve held against federal reserve notes to fall 
 below '40 per cent in times of emergency, 53; must impose a 
 deficiency tax when reserve falls below 40 per cent, 53; may 
 suspend for brief periods, in times of emergency, all reserve 
 requirements of act, 53; may impose a special rate of interest 
 on issues of federal reserve notes uncovered by gold, 56. 
 
 Federal reserve clearing and collection system, 70-79. 
 
 Federal reserve districts, how determined, 28-29; map of, 30. 
 
 Federal reserve notes, described, 51; collateral eligible for, in 
 hands of federal reserve agent, 51-52; gold reserve required 
 against, 52; elasticity of, 52-57; legal minimum reserve for, 
 may be reduced in time of emergency, on payment of a gradu- 
 ated deficiency tax, 53; amount of, outstanding, and character 
 of collateral held against, 54; possibility of further expansion 
 of, 54-55; of one federal reserve bank may not be paid out by 
 another, 55-56; machinery for contracting circulation of, ques- 
 tion of its adequacy, 55-57. 
 
 Fiscal agents of Government, federal reserve banks serve as, 88; 
 render valuable services as, in war financing, 88. 
 
 Fisher, Irving, cited, 9, 57. 
 
 "Float," how handled under old banking system, 20-22; evils of, 
 largely eliminated by federal reserve clearing and collection 
 system, 71-73, 78. 
 
 Foreign agencies established by federal reserve banks, 80. 
 
 Foreign branches of American national banks established, 80-81. 
 
 Foreign exchange, difficulties with, prior to federal reserve sys- 
 tem, 23-24; under federal reserve system, 79-81; services with 
 reference to, rendered by federal reserve system, 79-81. 
 
 Gold, amount of, held against federal reserve note issues, 54, 
 
 Gold reserve required against federal reserve notes, may be re- 
 duced in time of emergency, 53. 
 
 Gold settlement fund, described, 76. 
 
 Government, old banking system ill adapted to fiscal needs of, 
 25-27; participation of, in profits of federal reserve banks, 59. 
 
 Government depositaries, federal reserve banks serve as, 82-86; 
 banks which serve as, under war conditions, 86-87. 
 
 Inelasticity of bank notes under old banking system, 11-17; charts 
 showing, 14-15. 
 
 Inelasticity of credit under old banking system, 8-18; evil results 
 of, 18. 
 
 Inelasticity of deposit credit under old banking system, 17. 
 
 Interest, a special rate of, may be imposed by federal reserve 
 
 I 
 
INDEX TO TEXT 181 
 
 board on issues of federal reserve notes uncovered by gold, 5S. 
 See also discount rates, 
 
 Kinley, David, cited, 9. 
 
 Leadership, absence of, for country's banks in times of emer- 
 gency prior to federal reserve act, 3-4. 
 
 Legal reserve, see reserves. 
 
 Liberty bond financing by federal reserve banks, 88; extensive 
 use of collateral loans in, 63. 
 
 Live-stock paper eligible for rediscount at federal reserve banks, 
 62. 
 
 London, the financing of a declining proportion of our foreign 
 trade through, as a result of federal reserve system, 79-80. 
 
 Membership in federal reserve system, 29-31; importance of, in 
 time of war, 88-90; President Wilson urges on non-member 
 banks as a patriotic duty, 89-90. 
 
 Member banks must purchase stock in federal reserve bank, 31; 
 are grouped into three classes for electing federal reserve bank 
 directors, 32. 
 
 Mobility of reserves, inter-district, 39-48; intra-district, 48. 
 
 Mobilization of reserves under federal reserve system, 38-39. 
 
 National banks, as depositaries of government funds, 26-27; must 
 join federal reserve system, 29. 
 
 National bank notes under federal reserve law, 50-51. 
 
 Open-market operations of federal reserve banks, 41-44. 
 
 Out-of-town checks, see clearing and collection system, "float," 
 and "routing of checks." 
 
 Par-clearing and collection system, description of, 70-75; mem- 
 bership in, 70. 
 
 Profits of federal reserve banks, how distributed, 59. 
 
 Promissory notes, collectible under federal reserve clearing and 
 collection system, 75. 
 
 Rediscounting, negligible under old banking system, 17; by one 
 federal reserve bank for another, the law, 39-41; the practice, 
 41; by federal reserve banks, kinds of paper eligible for, 61-62; 
 facilities for, at federal reserve banks, not open to paper drawn 
 for dealing in stocks or bonds (other than U. S. government 
 bonds), 62. 
 
 Reserve, gold, required against federal reserve notes, may be 
 reduced in time of emergency, 53. 
 
 Reserve agents, national banks discontinued as, by federal re- 
 serve law, 35-57. 
 
 Reserve city banks, reserve requirements of, 37. 
 
 Reserves, cash, importance of, in old banking system, 4; scattered 
 prior to federal reserve system, and therefore ineflfective, 4-7; 
 immobile under old banking system, 7 ; deposited in reserve and 
 central reserve city banks dilficult to realize upon, in times of 
 emergency, 4-7; district centralization of, under federal reserve 
 
182 INDEX TO TEXT 
 
 system, 35-38; legal, percentages required of member banks, 37; 
 mobilization of, mider federal reserve system, 38-38; of member 
 banks, legal, must all be kept on deposit in federal reserve 
 banks, 35-38; inter-district, mobility of, 39-48; legal, against 
 deposits of federal reserve banks, 58-59; intra-district, mobility 
 of, 48; legal, requirements for, less rigid under federal reserve 
 law than formerly, 58; legal, against federal, reserve deposits, 
 may be reduced in times of emergency, 60; of member banks, 
 how increased by rediscounting with federal reserve banks, 
 60-61. 
 
 Routing of checks, under old regime, 21-23; how practice padded 
 reserves, 22; evils of, largely eliminated by federal reserve sys- 
 tem, 73, 78. 
 
 Secretary of Treasury, difficult task of, of apportioning government 
 funds among depositaries, under old banking system, 26-27; an 
 ex-officio member of federal reserve board and chairman, 33. 
 
 Speculation, paper used for, not rediscountable or purchaseable 
 by federal reserve banks, 62. 
 
 State banks and trust companies, may join federal reserve sys- 
 tem, 29 ; urged by President Wilson to join system as a patriotic 
 duty, 89-90. 
 
 Sterling bills, decline in relative importance of, as compared with 
 bills drawn in dollars, 79-80. 
 
 Subtreasuries as depositaries of government funds, 25-26. 
 
 Tax, graduated deficiency, on reserve held against federal reserve 
 notes, 53; graduated, to be imposed upon deficiency in legal 
 reserve against deposits of federal reserve banks, 60. 
 
 Trade acceptances, character of, 44-45; advantages of, 45-46. 
 
 Trade bills collectible under federal reserve clearing and collec- 
 tion system, 75. 
 
 United States Government bonds and notes, paper used for pur- 
 chasing, rediscountable at federal reserve banks, 62. See also 
 government. 
 
 WiUis, H. Parker, cited, 68. 
 
 Wilson, President, appeals to non-member banks to join federal 
 reserve system as a patriotic duty, 89-90. 
 
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