/// iSiiii ^\v PENDING BANKING LEGISLATION I^etters by oflleers of THF. ^NATIONAL CITY HANK OF NEW YORK to tlie Banklny: iiutl C'urreuey Comiultteas ot the Congrress of the United States. Also Copy of the bill as introduced June 26, 1913 PUBLISHED IJY THE NATIONAL CITY BANK OF Ni:W YOKK 1913 Communications addressed to the Hon. Robert L. Owen, and the Hon. Carter Glass, Chairmen, Respectively, of the Committees on Banking and Currency of the United States Senate and House of Representatives. Sir: Students of our banking situation are, I believe, ill substantial agreement upon the main principles that should govern sound financial legislation. Briefly stated, the objects aimed at should be, (a) The mobilization of bank reserves. (b). The retirement of our present bond-secured circulation by a method fair to the banks which have been forced by law to buy Government bonds above their investment market value. (c) The authorization of a bank-note currency which will be responsive in volume to the demands ^ of conmierce, and which will lay upon commerce no ^^ unnecessary burden of tax through the fact that busi- ' ness men find it desirable at certain seasons to borrow the credit of a bank in the form of circulating notes instead of bank deposits. In this connection it should be clearly kept in mind that the main ])usiness of a bank is to exchange its credit for the credit of its customers. The customers' credit is known to but a small circle. The bank's credit is known to a wider circle. The business of banking is to exchange the obligation of the bank for the obligation of the bank's customer. Usually the customer prefers the bank's obliga- tion in the form of a deposit balance, against which -^' 389083 Officers Letters. he can write checks. At certain times he may find it necessary to have credit in a form fit for wider circulation, and then he wants the bank's credit in the form of circulating notes. The volume of bank checks, by reason of their daily redemption, abso- lutely conforms to the needs of commerce. Legisla- tion framed on correct principles will create a bank- note currency that will as truly conform to the demands of commerce, avoiding alike redundancy and insufficiency. (d) The creation of a discount market. Legisla- tion properly providing for acceptances and for the rediscount of such acceptances by a reserve bank will give to commerce the use of several hundred millions of capital that now forms the secondary reserve of commercial banks, and that must be so loaned that a bank can at any time shift the investment into other hands and convert the loan into reserve. The present call loan market is the inevitable result of that neces- sity on the part of all commercial banks for a secon- dary reserve, and of their inability under our present laws to invest that part of their funds in commercial paper and then dispose of that investment if the exigencies of the bank's business require a draft on the bank's secondary reserve, for the replenishment of cash reserves. Aside from the economic principles directly in- volved there are two or three other considera- tions that legislators must bear in mind in formulating legislation. There is no other statute of so much importance as the National Bank Act that has been on our books for fifty years without substantial alteration. We have grown used to its operations; to its advantages, and to its shortcomings. The shortcomings have been obvious, but the conservatism of Congress and of business in- terests has been such that there has been no sub- stantial change in the law. It would now be one thing to take a clean sheet of paper and write an ideal banking law, but it becomes quite another thing Officers Letters. to recognize that the business of this great country is moving in channels of banking service that have been worn by fifty years of use. Opportunity to create new channels would undoubtedly be better in some respects. Nevertheless, account must be taken of our long-established methods and system, and it should be the aim of legislators to do as little violence to these established methods as is consonant with legislation along the lines of sound principles. There is another feature of great importance that must be kept in mind. There is a fundamental dif- ference between new legislation affecting the existing banking system and legislation designed to control public utilities. A bank and a railroad each per- form public service, but there is a distinction in the nature of the two which legislators must recognize. There is no more fixed form of investment than a railroad. It cannot be moved; it must be operated; its owners cannot withdraw their capital and retire from the field or change the corporate form upon which the life of their investment rests. The railroad has obtained rights essential to its life by public grant, and it performs public service of a character making it peculiarly subject to Governmental control. On the other hand, there is no more liquid form of investment than a good bank. The total invest- ment can be promptly liquidated and the capital retired from the field. A national bank has received no charter rights which make it impossible or even difficult for it to change the form of its charter and reorganize imder state jurisdiction. On the whole, bank investors have in recent years favored the state charter over the national charter. The evidence of that is found in the far more rapid growth in the number of state banks as compared with national banks. In 1896 the number of state banks and na- tional banks w^as exactly the same. There w^ere 3,700 banks imder each form of charter. Thirteen years later the number of national banks was imder 7,000, the number of state banks over 11,300. Officers Letters. A national bank has enjoyed only four advantages from its national charter: 1st. Prestige which resulted from the supposedly sound supervision given national banks through the comptroller's examination. Banks in the smaller com- munities have found this prestige of considerable value and would not lightly give it up. It is of much less or no weight, in the case of the larger institutions, and the improved state banking super- vision has in all cases tended to make the distinction between state and national banks grow much less in the public mind. 2nd. The right to issue bond-secured bank-note circulation. That has been of no great advantage, because the bank always had to expend more of its casli for bonds than it received back in bank notes. It has shown some ostensible profit. In practice, however, the calculated profit has been much more than offset by the loss resulting from the decline in the price of Government bonds in the last few years. The 2% bonds have owed at least 20% of their market value to their availability as a basis for circulation. Banks that have recognized the great risk run in buying a bond at a market price 20% or more above its investment value in order to obtain the small profit that could be made from keeping out circulating notes have appreciated the note issuing privilege at its proper worth. 3rd. The right of national banks in reserve and central reserve cities to act as reserve agents for otiier national banks has been an important advan- tage. 4th. The ability of a national bank to obtain de- posits of ])ublic money has been of some advantage, althoup:]i the profit of such deposits was always in part offset by the fact that a bank must expend more for ])0)uls with which to secure those deposits than the amount of the maximum deposit obtained. Recently the advantage of obtaining public deposits has been 6 (Jtticcrs Letters. wholly olt'set when hanks were eonipelled to pay 'l'-/o interest in addition to offering hond seeurity for the deposit. The foregoing advantages, such as they have heen and such as they have become, have for some years been recognized as insufficient to determine the or- ganization of new banks under national charters, and the natural result has been, as before indicated, far more rapid growth of state banks. If legislation should be enacted which tended still further to reduce the value of the special advantages under a national charter, it is obvious that there would also have to be new and important advantages granted or the con- sideration that would bind existing institutions to the national form of charter would be very slight indeed. In the light of the foregoing considerations, it be- comes interesting, therefore, to examine the proposed bill for reorganizing the banking and currency system of the United States. The most needed thing to be accomplished, the principle of overshadowing im- portance to be recognized, is a provision for the effective mobilization of reserves. The proposed measure has partially done this in the creation of a number of federal reserve banks, deposits in which may be counted by member banks as a part of their legal reserve. In one way the sj^stem of regional reserve banks has an advantage over the National Reserve Association proposed by the National Mone- tary Commission. The plan for a National Reserve Association provided that there should be a uniform rate of discount throughout the United States. The present plan for regional reserve banks contemplates that the rate of discount will vary in different sec- tions of the country at the same time. Such variation of rate is sound banking. The greatest defect of our present system is that there are as many unrelated and distinct reserve centers as there are banks. The most important tiling that legislation can accomplish is to relate all these 7 Officers Letters. reserves one to another by placing the reserves in a common reservoir. The proposed measure fails to ac- complish this effective mobilization because it creates a considerable number of reserve centers which would compete one against another in just the same manner as the twenty thousand individual banks now com- pete, but the competition might become even more fierce and dangerous for the power of these several regional reserve institutions would be immeasurably greater in a sectional struggle for reserves because their strength would be greater than is the strength of the existing numerous units. The framers of the bill have recognized that danger, and for that reason, and perhaps for some other disingenuous reasons, have created a board of control which is given sweeping power over the man- agement of the several federal reserve banks. It is obvious that a central power is necessary if the reserves are to be effectively mobilized. There must be a central power with a view broader than the ad- ministration of each of the regional reserve centers in order to harmonize and synchronize the administra- tion of those reserve centers. In a word, there must, in fact, be a central bank, and that is what the pro- posed measure creates. The fundamental objection to the plan is the character of the control which is provided. The powers that are granted to this federal reserve board are in the main, but with some exceptions, such as would of necessity be granted to the Directors of a central bank. They are such powers as are essential to the complete mobilization of reserves and to the operation of the other necessary functions of a central bank. It is well frankly to recognize that broad powers and great authority are necessary to the successful operation of the plan and that those powers must, in effect, be the sort of powers that would be granted to the management of a central bank. No matter what circumlocution is used, we Oftlccrs Letters. must recognize that the effective mobilization of re- serves can only be accomplished through what is sub- stantially a central bank, and that the proposed measure is in effect establishing a central bank with the most sweeping authority and power given to the board of control. The objection is not to the powers granted but to the hands in which they are placed. Nor does that objection lie solely against the fact that the pro- posed federal reserve board is political in its char- acter, although obviously both financial and political history, as well as the operation of our present-day commissions, furnish ample illustration of the danger, the ineffectiveness, the inadequacy of a politically appointed board for a responsibility of this sort. The objection, however, is even deeper. If the appointing power lay with the banks themselves and the detached character of the board was maintained, a board could not be created which would be com- petent to assume the responsibilities. The trouble lies in separating the management of a financial in- stitution from its ownership. A management so separated, no matter how appointed, could not re- main intelligently in touch with conditions and per- form the vastly important and extremely complicated functions that are entailed under this plan, and which must be inherent in any plan which will successfully mobilize the banking reserves of the country. We might as well expect legislators not responsible to their constituency to represent wisely the interests of their constituency. The objection may be made that a management is needed that will represent the interests of the people and not those of the owners of the banks. That seems to me a misconception both of the relation of the owners of the banks to their in- vested capital and to the interests of the whole people. It must not be forgotten that the men who control the capital invested in the banking business can and will withdraw that capital if the conditions of the Officers Letters. business do not, in their opinion, warrant the con- tinuance of the investment. It should be recognized, too, that the men who have invested money in the banking business are intelligent enough to know that continued success in banking can come only when accompanied by continued prosperity of the whole country. The interests of the general public and the interests of the bank owners are identical. There cannot be, over any considerable period, prosperous banking without prosperous business. The conduct of this central bank can never be suc- cessful unless the men who have the powder, the author- it}^ and the responsibility, are in close, active, working touch with the every-day problems, conditions and at- mosphere of the financial world. If such a board as is proposed were formed by appointing the seven lead- ing bankers of the United States — whoever they may be — and these men became dissociated from the daily conduct of actual affairs and sat in Washing- ton, directing at arms' length the operation of the several reserve banks, they would very rapidly lose the power to direct wisely. How much more certain, then, must it be that a board having on it only one man of technical banking experience, and subject to all the vicissitudes of political pressure and party trading in its make-up, will fail to assume success- fully these responsibilities. Here then is the fundamental weakness of the pro- posed legislation, and it is so fundamental that we may better have no legislation at all than to have legislation in which the control of the credit system of this country is dissociated from the active re- sponsibility of bank management. It is with the deepest regret that I reach this conclusion, for I believe I see as clearly as anyone the profound need for legislation and the tremendous impetus that will be given our commerce and industry if a banking system can be created that rests on correct economic principles. 10 Officers Letters. It seems to me that the only proper method of control must be through a board composed of ex- perienced practical bankers in direct touch with current business, who are selected for short terms by the member banks and who are responsible to those banks in the same way that the executive offi- cers of a national bank are responsible to the stock- holders. Tliere may well be a Government Board whose sole function should be to see that all statutes are obej^ed by the management. The Board that has to exercise discretion in the management must be re- sponsible to the stockholders; the Board that exer- cises supervino7i, should be composed of government officials, but their sole function should be such super- vision as will insure the most scrupulous observance of the statutes, and those statutes should be so specific that the Board charged with the management knows clearly the lines within which it may exercise dis- cretion. In making the provisions of this act compulsory u])on the national banks, under pain of the forfeiture of their charter life, the framers of the measure have clearly recognized that banks w^ould not freely sub- ject themselves to the regulations imposed even in order to gain the tremendous advantages of mobilized reserves and central institutions for rediscount. If the measure were on the w'hole one that would be beneficial to existing national banks, there would be no need for compulsion, but I have heard no advocate of it express the opinion that it w^ould be feasible to pass the measure and leave the banks a choice as to their course of action in joining or refraining from joining the federal reserve banks. This seems answer enough to the question of whether the proposed measure is advantageous to individual banks. Holding the views that I do in regard to the fundamental essential of control, it is of little ad- vantage to take up for analysis the detail features of the measure. Many of them I believe are excellent, 11 Officers Letters. and under proper control would work to the great advantage of every citizen of this country and to the position of the nation in international affairs. Some of them, I think, rest on misconception and some are obviously formulated without knowledge of banking practice. With proper control estab- lished, however, I believe the measure could, without great difficulty, be made to conform to correct eco- nomic principles and could be fitted to existing bank- ing conditions. The one point in the detail of the bill from which I w^ould most sharply dissent is in the creation of Federal Treasury notes instead of bank notes. It seems to me that there is a misconception of the func- tion of bank-note currency behind this idea of a new issue of Federal Treasury notes, a misconcep- tion that is far more complete than was the miscon- ception of the functions of bank-note currency which gave us a bond-secured circulation having no re- sponsive relation to commerce. It is clearly the func- tion of government to coin money and to super- vise the issues of paper representing coined money. In doing that it is an auditor. It does not create money nor influence its volume. It audits the cor- rectness of coinage as to weight and fineness, return- ing as much gold as it receives. If it holds coin on deposit it audits the issue of paper currency which constitutes merely warehouse receipts for coin stored. In addition it may issue fiat money, as we have done with our greenbacks. But the distinction between money should be kept clear, and where that distinc- tion is clearly apprehended it seems to me, it be- comes plain that the government's function is to audit the issue of money and the bank's function to use its credit in the form of a circulating note when their customers prefer that form to a deposit balance. While I believe the idea of such a Treasury note issue as the bill proposes is an economic error, still I am of the opinion that we could operate under such a system as is proposed if the proper 12 Officers Letters. authority were Icl't free to exereise its judgment iu regard to the vohime. The proper authority is tlie people. No bank management and no board of con- trol can tell how much currency is needed at any given time for the conduct of the business of the country. That will be determined if the people are left free to determine it with just the same accuracy that the nimiber of checks afloat is determined. Clear vision as to the function of currency, as distinct from the function of credit, is needed in order to appre- hend this fact. A man will carry no more currency in his pocket than he needs for the daily conduct of his affairs. If there be a surplus, it will naturally find its way into banks. If it has no reserve value and there are ample redemption facilities, it will quickly find its way back to its source of issue and disappear. Complete redemption facilities will take care of any danger of inflation, and the amount of such notes in circulation will be correctly gauged by the com- bined judgment of all persons in the country who use currency if there is freedom of issue and certainty of easy redemption. The subject of the redemption of bonds now held as a basis for bank-note circulation is one of national honor and fair play, but is not involved in the essential economic principles that must underlie sound legisla- tion. It would be unfair to cause banks to lose money because they have been forced under the opera- tion of existing laws to invest in bonds at prices far above the investment value of the bonds, but if Con- gress chooses to pass legislation that is unfair in tliat respect it will not necessarily interfere with the opera- tion of a banking measure that is otherwise correct. A fairer plan woidd be to immediately refund the two per cent, bonds into three per cents, allowing the circulation privilege to remain with them as at present, but add one per cent, to the tax on circulation, when secured by these refunded bonds. An added value wliieli would tend to maintain them Officers Letters. at i)ar would thus be given to these new threes which are not in the circulation account of the banks. This arrangement might also make it possible for national banks to go out of the system if they so desire with- out facing a loss on the bonds they would withdraw from their circulation account. The added cost to the government would be an added one per cent, interest only on such bonds of this class as are not included in the circulation account, and the aggregate of such bonds is comparatively small. Respectfully, F. A. Vanderlip. Julv, 1913. 'A ( ) III errs Letters. July, 19i;j. c ; 111 response to the invitation extended to bankers generally for eomiiients and expressions of their opinions coneerning the provisions of the bill (S. 'liV.M)) introduced in the Senate June 26th, 1913, and referred to the Committee on Banking and Cur- rency, providing for the establishment of Federal reserve banks, and for other purposes, I have the honor to submit herewith for the consideration of your Committee an analysis and a discussion of cer- tain important features and sections of the bill, with suggestions made from practical banking and busi- ness points of view. I deem it unnecessary to add that these comments and suggestions would not be worthy of your consideration, nor would they be offered, were they based upon, or did they involve, local, sectional or selfish interests. Aside from an acceptance, at the outset, of the inherent soundness of the economic principles em- braced in the provisions of any measure proposed for the reconstruction of our national currency and banking systems, in order that a plan shall inspire confidence and command public support, there are other questions first to be considered and agreed upon. These questions are, of course: (1), an exposition of the principal defects in our existing system; (2) a determination beyond all doubt as to whether a proposed plan would permanenth^ cure these defects, (3) without giving rise to other and perhaps greater evils or dangers. The principal defects in our system generally are agreed to be: 1. (a) The decentralization of bank reserves and the lack of means for their mobilization, (b) To a certain but less dangerous extent, the duplication or "pyramiding" of bank reserves. 15 Officers Letters. These defects give rise to a condition of systemic incohesiveness, involving a constant struggle among individual banks for the maintenance of their legal reserves. This, of course, is destructive of all possi- bility of common support or of mutual cooperation between banks except in circumstances necessitating the suspension of currency payments. 2. The absence of a discount market where short- time, self-liquidating current credits growing out of trade transactions may be economically utilized. 3. Bank-note issues based upon practically a fixed amount of Government bonds and thereby deprived of the essential quality of flexibility. The result of this is that as trade naturally rises and falls in volume, there are constantly recurring periods of scarcity of currency at one time or of a redundancy at another. Rarely is the amount of currency in circulation at any time exactly balanced to the needs of trade. Such an adjustment takes place only during brief and infrequent intervals, and merely as a coincidence when passing from one ab- normal condition or extreme to another. To the extent that any plan certainly would remedy these defects without introducing other dangers, it may be said to be good and to merit support; to the extent that any plan certainly would fail to accom- plish these benefits, or that it would in all probability introduce other and possibly greater evils, such plan may be said to be bad and to deserve condemnation. Applying these tests to the bill under considera- tion, it may be said that with modifications of a few sections which involve the elementals of sound cur- rency and banking legislation the plan may be made, if not ideal, certainly practical and workable. So modified it would be a long step in the direction of a sound and unified system of banks whereimder there would be supplied a true bank-note currency of auto- matic flexibility and of adequate volume. The points must be made clear, however, that the modifications 16 Officers Letters. suggested are essential to the successful conduct of any plan; and lliat although the proposed plan does in part recognize and embody certain of these ele- mental principles without which no plan would be safe or sound, at the same time the recognition ac- corded them generally is narrow or limited. Ap- parently the recognition is granted with misgiv- ings or distrust. In almost every case where these principles are involved the plan might be strength- ened and made better or more useful by their uncon- ditional acceptance and their broader applications. To clarify the meaning of the foregoing paragraph I shall particularize a few instances: 1. The plan is good in that it recognizes the ne- cessity for the mobilization of bank reserves, but it is not so strong as it might be made in this particu- lar, because it temporizes with the imnciple itself and provides for not less than twelve Federal reserve banks (each with a number of small and more or less weak branches) in which the reserves of mem- ber banks are to be placed and held and thus nec- essarily scattered, instead of accepting and adopting the whole principle at once, and in accordance there- with establishing one strong, impregnable central bank having as many correspondingly strong branches as may be required. Under the plan pro- posed, many member banks no doubt will be stronger in capitalization, and probably also in resources, than are the branches with which such banks are required to do business. This certainly is not calculated to inspire confidence nor to induce the larger banks to accept memberships with attendant risks and re- sponsibilities. 2. The plan is good in that it provides for the establishment of a discount market; but it is weak in confusing short-time commercial assets with in- vestment securities as a basis for note issues. It is also weak in granting to the Federal reserve board the discretionary power to authorize loans against 17 Officers Letters. investment securities ; and also in granting the Board power to fix minimum discount rates for Federal reserve banks. The plan is good in that it seeks to bind together the several Federal reserve banks under one central control. This is sound and abso- lutely necessary; but it is bad in placing the central control absolutely in the hands of political appointees. The necessity for a central head is recognized, but the fatal mistake is made that that head shall be a political body. 3. The plan is good in that it grants to one Federal reserve bank the power to lend to another such bank ; but it is unsound and dangerous in giving to the Federal reserve board power to compel a Fed- eral reserve bank to make loans to another such bank. 4. The plan is good in the general provisions which are made for note issues by Federal reserve banks against short-time, liquid assets supported by strong gold reserves ; but it is weak, if not actually deceptive, in certain of the conditions imposed upon the issue of the notes, and in failing to insure their prompt and automatic redemption. 5. The plan is good in that memberships in the Federal reserve banks are open upon equal terms to national and state banks alike. But it condemns itself and betrays a lack of confidence on the part of its proponents in that membership on the part of national banks is made compulsory and a condition of their remaining in the national banking system. It would be difficult to imagine a weaker or less de- fensible position, for a great constructive undertak- ing. Acknowledging and commending the strong and desirable features of the })ill, (but before going into a critical analysis of its details) we appear now to have reached a point where upon abstract questions of principle, involving not more than two or three points, upon which hinge the success or the failure 18 Officers Letters. of the whole sclieine, ^\'e I'eel that we may take broad issue and draw clearly the lilies of* deniareation be- tween the soundness and the unsoundness of the bill itself, and between the questions of approval or of disapproval. These vital points are: I. (1) The political character of the entire mem- bership of the board of control. (2) The unlimited and uncontrolled powers of this board in respect of their own discretionary acts, over the management of the Federal reserve banks and of the conditions of note issues. (S) The dangerous nature of certain of these powers. (4) The possible abuse and, at times, certainly unwise use of these powers when placed in inexperienced hands or when used by politicians under stress of party pressure, or for party advantage. II. (1) The character of the organization and management of the Federal reserve banks. (2) The domination by the Federal Reserve Board of the boards of directors of Federal reserve banks, (a) through their appointments of three members (Class "C") out of each board of nine directors, one of which class in each case shall be chairman of the board of directors and be designated as "Federal Reserve Agent." The salary of this agent is fixed by the Federal reserve board. He is their direct representative and agent and is removable at their pleasure without notice; (b) through their power to remove three members elected by the banks (Class "B"). (3) The resulting minority representation of stockholders on the boards of Federal reserve banks. That is to say, the Federal reserve board has the appointing power of three members (includ- ing the chairman) of the board of each Federal re- serve bank, and the power to remove three other members; thus giving the Federal reserve board control of the directorate of each Federal reserve 19 Officers Letters. bank, and thereby insuring the political character of each such board. III. (1) The control by the Government through a political board of all bank-note* issues, including the power at the discretion of the board to charge interest for the use of such notes at a rate to be fixed by the Board. (2) The "purport- ing" that such notes are obligations of the Govern- ment, when in fact they are obligations of the Federal reserve banks and are secured directly by segregated, selected assets, and are secured also by a general prior lien on all assets of the Federal reserve bank which issues them and supported by a specific gold reserve carried by that particular bank. Incidentally only is the Government a redemption agent for the bank, and for this purpose it carries a 5% redemption fund deposited by the bank issuing the notes. (3) The Government being merely a guarantor and standing (as it does in the case of existing national bank notes) merely as a redemption agent of the bank of issue, it is not clear what good reason exists for a deception of the public by a false "purport" on the face of the bank notes. Considering the points here raised, the following questions seem clearly defined. Shall the control and domination of the banking business of the United States, including note issues, bank credits and the cash reserves of the banks, be surrendered uncon- ditionally into the hands of a board of seven mem- bers a])pointed by the President, the authority of which board is supreme and whose acts are subject to no review or appeal? Is there any reason why such control of the banking business should be placed in the hands of any politically appointed group of men? Is there wisdom or safety in placing such power in the hands of a board of seven individuals having no personal interest in the banks or in their safe conduct? By reason of a lack of personal in- terest in the banks on the part of the members of the Federal reserve board and of their failure to rep- 20 Officers Letters. resent, directly or indirectly, the stockholders of the banks, is it not reasonable to suppose that their official acts might be influenced by personal or political con- siderations? Is it conceivable that the officers, di- rectors or stockholders of any individual bank, whether national or state, v^^ould voluntarily assent to such a proposal on its behalf alone; and if not, why should such banks assent to it collectively? Why should not the banks which are required to contribute all the capital of the Federal reserve banks and to assume all the risks of the conduct of their business be given a voice in the board of control, and if not, why not? Shall the national banks be com- pelled, and will the state banks voluntarily propose, to become members of Federal reserve banks, con- tributing their capital and placing the whole or a greater part of their cash reserves absolutely and unconditionally under the control of any political board? Would any bank alone do this; or in the case of share-holders would they consent to do so with their own private fortunes ? Would any private corporation or individual do so, and if not why should the banks collectively be called upon or compelled to do so? These questions are suggestive of others which might be asked along the same lines, but they answer themselves so definitely that no arguments seem nec- essary. It does not seem possible to conceive of any reason not grounded in political designs or based upon political prejudices why such provisions of a banking and currency bill should be presented and made compulsory upon the banks. It would seem absolutely necessary that these and similar political features must be modified and brought into harmony with the practices and customs of sound business enterprises or the whole plan might better be aban- doned. If there be any who honestly believe that there arc two sides to the question as to whether a politically 21 Officers Letters. controlled bank can be kept permanently out of poli- tics, they need go no further than to review the histor- ies of the first and second Bank of the United States. The questions of note issues and of Governmental control of note-issuing banks are not new ones. Con- gress has struggled with these questions unsuccess- fullj^ and nearly hopelessly, for more than one hun- dred and twenty years. The problem is still Avith us in all its phases. It is involved to-day in the identical political complications which beset it during the heated debates (which were twenty-five years apart) preceding the establishment of the first and second Bank of the United States. Aside from the question of constitutionality which was hotly debated before the establishment of the first bank but which was not affirmatively settled until shortly before the end of the existence of the second bank, the political antagonisms were then such as to lead to charges that the bank would be the creature of what was even then called "The Money Power," that it would benefit only the wealthy classes, and that it could not serve alike and impartially the interests of the seaboard and those of the interior. History is here repeating itself. There existed then the same confusion of thought and the same preju- dice in respect of the banking business, the same di- versity of opinions and conflicts of political interests which we find to-day. All the turmoil and scheming centered then, as they do now, largely about the questions of Governmental control and the issue of notes. In these respects we do not appear to have made any progress, nor does it seem that a century and more of bitter and costly experience by the people, for want of a sound banking and currency system have taught our statesmen a way out of the councils of darkness. The fact that both the first and second Bank of the United States were established after heated and protracted political debates would make it but natural 22 Olllccrs Letters. iliiit opposition should have survived and continued, and that both banks should eventually have become stoiin centers of strife and ended by being engulfed in political vortices. In the light of history can any doubt remain that if this, the third Bank of the United States, wliich is now proposed shall be established under political control and after a period of heated debate, that it can long remain free from political cntanQ-lements; or that when it shall become the center of ])olitical strife, as it inevitably must, that its fate will be different from that of its predecessors? It will matter little whether the affairs of the bank shall be sound or not, if it shall be launched now as the creature of any party and placed under party control. Charges of corruption and of the abuse of power will be made and the end must in- evitably be the same. Since the quality of our states- manship has remained imchanged through more than a century, what reason is there to believe that of a sudden the character of a j^olitically appointed board of control shall become different or better, and less amenable to political influences than similar bodies have been in the past? In the very framing of this bill, the fact is everywhere apparent that however meri- torious any plan might be made, it could not be divorced from tlie influences of politics. This one has not been. I^et it not be understood that this protest against the unwise proposal to concentrate the regulation and control of credits, and of the business of ])anking in the United States, in the hands of a few politicians implies any unwillingness on the part of the bankers to accord the Government a large voice in the afl^airs of the reserve banks. If such representation be non- partisan, it not only will be welcome but is desired. Bankers and the business public would cheerfully concede that the representation of the Government should go so far as to be dominant in respect of all matters relating to the banks, which properly are the subjects of Governmental regulation and control: 23 Oiticers Letters. such, for example, as the powers now exercised by the officers of the Government in respect of national banks in determining their soundness and the lawfid conduct of their business. But, in respect of the managerial functions in- volving discretionary acts which require in all such cases the exercise of knowledge based upon practical experience in the business of banking, the protest is repeated and emphasized that such powers cannot in safety be entrusted to inexperienced or incom- petent hands. To do so is not only to invite disaster, but to insure it. In view of these representations the following sug- gestion is respectfully offered: Why not have the Federal Reserve Board composed of two coordinate branches, working together, but acting independently within their respective spheres, much as do separate committees on ordinary boards of directors ? ( 1 ) The Supervisory or Government branch to consist, let us say, of six members, all ex officio, and to be, respectively, the Secretary of the Treasury, the Sec- retary of Agriculture, the Comptroller of the Cur- rency, the Treasurer of the United States, and the respective Chairmen of the Committees on Banking and Currency of the Senate and the House of Rep- resentatives. The duties and powers of this branch should not be discretionary. They should be fixed by statute and be sufficiently broad and ample to compel the conduct of the Federal Reserve Banks according to law. (2) The Administrative or Busi- ness branch to consist of five members, all to be ex- perienced bankers elected by the Boards of Directors of the several regional banks, not more than one mem- ber to be chosen from any district, and from their numbers to be selected the governor, the vice-gov- ernor and other officers of the federal board of con- trol. The duties and powers of this branch should be purely administrative, and, broadly, should em- brace all the discretionary and executive powers now sought to be placed in inexperienced hands. Certain 24 officers Letters. general powers, such for examples as the appoint- ments of federal reserve agents, the appointments of directors of "Class C" of federal reserve banks, questions relating to the establishment of branches, etc. might properly be made joint and rest in the whole board, of which the Secretary of the Treasury should be Chairman. This would seem to leave the Government in com- plete SUPERVISORY CONTROL of the banks, with ample power to compel observance of the law, and at the same time would place the business administration of the affairs of the regional banks in experienced hands. And, moreover, such an arrangement would take the banks entirely out of politics. In this manner the Executive Department of the Government and Congress itself through the Chair- men of the Committees on Banking and Currency would be always fully aware of the condition of the banks, and would be assured of their proper and lawful conduct; w^iile the financial responsibility for the conduct of the business affairs of the banks would rest wiiere it properly belongs, in the hands of chosen representatives of the shareholders. The ex officio officers should, of course, receive no additional salaries, with the possible exception of the Comptroller of the Currency; while the salaries of the members of the administrative branch might be fixed either by the whole board or by the votes of the directors of the regional banks, or in any other equitable manner so as to make certain of the services of experienced men. That tlie time is ripe and the need pressing for the establishment of a third Bank of the United States, whether it be in the form of one great central bank or of a dozen regional banks under central con- trol, there is no reasonable doubt. But that the af- fairs of such a bank, or banks, should be beyond the reach of politicians and without the bounds of political intrigues, ambitions or entanglements, there can be no question whatever. 25 Officers Letters. "The modern facilities for communication and trans- portation and the rapidity with which commercial transactions are consummated have caused the vol- ume of trade to increase by leaps and bounds, and have thrown upon credit all over the world a con- stantly increasing strain. Periods of acute financial stress are becoming, therefore, more frequent and more or less chronic, resulting occasionally in crises which may be resolved only by greater and greater losses and disasters unless we shall reorganize our monetary and banking systems and adapt them scien- tifically to our needs. The accomplishment of so great an undertaking requires a combination of the scientific knowledge of economists with the practical knowledge of experienced bankers, supported by con- structive non-partisan statesmanship of the highest order. It is a discouraging commentary upon the practical common sense of our people and upon our acknowledged capacity for solving business problems, that we have been unable thus far to rally this nec- essary combination of elements in support of sound and permanent banking and ciu'rency legislation. The present seems the opportunity of a century. The people need, desire and expect such legislation. They intend to have it. The party Avhich possesses the courage and statesmanship to rise above the petty advantages of ephemeral political expediency and give the people a soimd measure free from political prejudices will merit the confidence and will receive the support and gratitude of the people. Very respectfully, Joseph T. Talbert. 26 Officers Letters. July, 1913. Sir: For thirteen years I served as an offieer of a coun- try bank. Later 1 became an active officer of an in- terior reserve city bank and am now a Vice-President of The National City Bank of New York. It has been in the line of my duty constantly to meet country bankers. As President of the Texas State Bankers Association I have come to know most of the bankers of that state and have supplemented that acquaintance by meeting a large number of those outside of Texas and throughout the southwest. I have had, I believe, an exceptional opportunity to get in touch with the sentiment of country bankers with regard to financial legislation. I have condensed the opinions of correspon- dent banks in the smaller towns and cities throughout the United States, gathered by personal interviews, by correspondence and otherwise, respecting the pending currency bill, and the following reflects their attitude towards it. They disapprove the political features of thc^ bill and unite in saying that in considering the relations between country national banks and the proposed Federal banks accoimt should be taken of the pecu- liar chai'acter of the services performed generally by those banks for their clients. The facilities extended the public by what are usually termed "country banks" are for the most part seasonal and usually consist of loans, made to farmers, matiwing shortlj'' after the estimated time for harvesting their crops: and of advances to cattle-men and live-stock raisers maturing at times when young stock usually is sold or when fattened cattle are sent to the markets; and of loans made to merchants and dealers who ordin- arily extend mercantile credits to farmers, cattle-men and others. Debtors of all these classes naturally prefer that their obligations should be made to ma- ture at dates when their collections normally should be made in sufficient amounts to enable them prompt- ly to retire their notes as they fall due. This con- dition applies more particularly to the debtors of 27 Ofhcers Letters. ba^ks in the South, Southwest, West and Northwest. Such are the seasonal demands for funds in those re- gions that in the most prosperous districts the local banks have on hand idle money only for a compara- tively brief season in each year. Necessarily, these banks are not large or frequent buyers of what is termed "commercial paper," because they find it to their interest to maintain, when they have idle funds, liberal balances with correspondent banks in the larger cities in order that they may create there a substantial and dependable basis for credit to be available during four or five months of the year when it is necessary for the accommodation of their cus- tomers and properly to serve their communities with banking credits. Those who have had experience in managing the affairs of country banks know that farmers, live- stock raisers, country merchants and small dealers are slow to execute notes maturing at times when they know it will entail the greatest inconvenience and often a serious sacrifice to retire the paper. In con- sequence, they generally insist upon having their notes made to mature not less than fifteen or twenty days after the date when they expect to have funds in hand to meet their obligations. Such borrowers may occasionally be slow but they are conservative and are good. Assuming that the Federal reserve board would classify paper of the character here described as eligi- ble for rediscount at Federal reserve banks, and which would probably be the case, it may readily be seen that not many country banks, especially those in the sections named, would have sufficient amounts of eligible paper on hand (maturing within the time required under the provisions of the bill) in the natural course of business to permit them to place full dependence upon the Federal reserve bank of their district for their rediscount requirements. This need arises ordinarily from three to five months in advance of the maturity of the great portion of the 28 Officers Letters. paper held by countrj'' banks. It might be contended that member banks should arrange *with customers so as to fix their maturing notes at earlier periods, granting, if necessary, promises of renewal, and thus provide sufficient amounts of paper rediscountable at Federal reserve banks for their seasonal needs. If the dealings of such classes of customers were con- fined to national banks alone, this contention might have some weight, but borrowers having the knowl- edge that they can secure their needed advances from competing state banks upon maturities which they could reasonably expect to meet, it is not probable that they would be willing to execute notes to national banks maturing at dates which they know in advance would be inconvenient, if not impossible, to meet, thereby placing themselves at the mercy of national banks if payment should be demanded and promised renewals not granted. Experienced country bankers know how difficult it is to induce their customers of the classes named to execute notes of maturities which are not acceptable to the borrower, and it might as well be understood that so long as such advances can be, and are obtain- able from competing state banks on the customary and convenient maturities, notes for other and shorter maturities would not be given to national banks. Based upon these considerations, the custom of years has led the country banks to place dependence upon their reserve agents for seasonal accommoda- tions, and these in view of the good average balances maintained by good banks with their correspondents are, as a rule, usually obtained without question and without the formality which would be experienced in offering paper for rediscount at Federal reserve banks, especially where the paper offered for discount necessarily must meet technical statutory require- ments. Under the proposed law the reserve requirements" would make it difficult for country national banks to remain in the system and at the same time to main- 29 Officers Letters. tain sufficient balances with their reserve agents to entitle them to receive the advancement of their cus- tomary borrowing requirements against such paper as they had. If they did maintain such balances, it would necessarily reduce to a considerable degree the earning capacity of the country banks because it would necessitate a curtailment of their loans in order to maintain such balances. This would be a source of dissatisfaction to stockholders by reason of decreased earnings, and at the same time it would be a disad- vantage to the banks themselves because they would not be in a position to perform their duties in loaning adequately to their customers. These reasons alone would be sufficient to cause countrj^ banks to give serious consideration to the question of taking out state charters, under which they would enjoy all the A^aluable privileges they now have as national banks, and would still be left on a basis of equality with their competitors. That is to say, the proposed law holds out unsufficient induce- ments to small country banks to remain in the system. There is a source of considerable profit now en- joyed by country banks which under the new system would be partly, if not entirely, cut off. That is the exchange charges which they have customarily made in remitting to their correspondent banks for items received from them for collection. These exchange charges frequently amount to sums sufficient in the aggregate to cover a not inconsiderable portion of the annual expenses of country banks. This source of revenue will not be given up without much protest and opposition. It is not the cit}^ bank, but the coun- try bank, which lias derived a profit from these charges heretofore. Tliis ])rofit has been two-fold: First, the benefit derived from the deposits while the customers' checks were afloat, and. Second, from the exchange charged when the checks were presented for collection and remittance. Country bankers as a rule have not given careful thought to all tlic details of the proposed bill, but 30 OfTiccrs Letters. those who have done so and are alive to the question are so far as I have come in contact with them n earl 3^ unanimously of the opinion that they would prefer a bill providing ample rediscount privileges available to their reserve agents in the larger cities, thus insur- ing to the small banks, through their reserve agents no matter what the financial conditions might be, a certain dependable source of borrowing in the ])ro- portion to wliich their balances might entitle them, without on the part of the country bank reference to legal technicalities and restrictions and without pub- licity in respect of their borrowings. Should the bill be passed as proposed, many coun- try national banks will be obliged for competitive reasons to convert into state banks and many will do so by choice. In these circumstances it would be well to amend the bill so tliat national banks would be permitted to subscribe to the capital stock of their Federal reserve banks for their respective districts, but leaving membership in every case optional and not compulsory. It is certain that few country national banks would view with favor tlie investment of 10% of their capi- tal, with a possible additional call of 10%, in a Fed- eral reserve bank, from which investment they could expect to receive not more than five per cent, returns per annum, as well as necessitating the tying up of a considerable portion of their reserve funds with no substantial ])enefits in return not already enjoyed at the hands of their city correspondents. It is not prob- able that country state banks in considerable numbers would desire to become members of the Federal re- serve banks so long as they have the assurance that their borrowing needs would be cared for by their city corraspondcnts, because they already have and enjov considerable advantaires over national bank competi- tors in various wavs. Therefore, on the whole the bill offers nothing attractive to country state banks. The provisions of Section 27 of the bill authoriz- ing country national banks to make loans against 31 Ofiicers Letters. improved and unencumbered farm lands to the ex- tent of 50% of their values, for a period not exceed- ing nine months, would be of advantage to them in but one way, and that is to permit a farmer to mort- gage his land to secure his current yearly borrowing needs. Farm loans are usually sought and obtained upon a basis of from three to five years' time, with permission to pay all or any portion of the principal at any annual interest date. Therefore, the provi- sions of the bill in respect of farm loans would be of no particular benefit to the farming community or to country banks. There are few substantial farmers owning imencumbered lands subject to mortgage who cannot obtain all their seasonal requirements from local banks upon their plain notes of hand without mortgages or other security. Taking it all in all, it cannot be said that the provisions of the new bill requiring country national banks to become members of the system, or permitting state banks to do so, will when fully understood appeal favorably to them. The advantages appear to be in the opposite direction. The small, independent, country bank fortified by its citj" bank connections is the bone and sinew of our system of banking, so far as the country is concerned. It is essential to the welfare of the National banking system that these units should remain members of the system. In the opinion of country bankers, there appears to be no question that if the small country national banks were not required to take stock in the proposed Federal reserve banks for their districts, but were permitted to remain in the system without hampering their present relations with reserve agents and with their local customers, and the proposed law was so amended as to make it attractive and desirable to banks in reserve cities to lend their support to the plan, the option being given the country national banks to be, or not to be, members of the Federal re- serve banks, as they chose, equally as good if not much better results would be obtained, while the re- quirements of the country banks would be served more to their advantage and to their satisfaction. 32 Otliccrs Letters. Country l)anks, wliich as a rule are conservative, will not look with favor upon the proposed appoint- ment of the three directors of "Class C," none of whom need be experienced hankers nor even residents in the district, and one of whom shall serve as chair- man of the board of directors of the Federal bank of that district. Country banks do not approve and wall not support a political board having control over the banking business of the colmtr3^ They express an unwilling- ness to submit their own affairs to such control, and for the most part they will, I believe, decline to accept it. Respectfully, H. R. Eldridge. iZ GENERAL DISCUSSION Analysis of Special Provisions of the Bill The most important features of the bill and those which are so extraordinary, radical and sweeping in their character as to provide for a revolution in the banking business of this country relate to the creation of the Federal Reserve Board, the vast powers con- ferred upon it, its political composition, and the power of the Board to regulate and control bank credits and note issues. In view^ of these extraordi- nary powers, it seems still more remarkable that there should be no provisions for an appeal by the reserve banks from the decisions, acts or rulings of the Board, nor any accountability to which the Board or its members may be held, nor any penalties to which they may be subjected, nor, indeed, any authority to which they shall be required even to make reports. The sole authority in restraint of their acts would seem to lie in the general power of the President to re- move from office for cause persons appointed by him. In the face of power so great and unprecedented, subject to no control and to practically no restric- tions, it follows necessarily that all other provisions of the bill are of secondary importance and, for the most part, of minor consequence. THE FEDERAL RESERVE BOARD The Federal Reserve Board as provided shall con- sist of seven members. Three ex-officio members are the Secretaries of the Treasury and Agriculture and the Comptroller of the Currency. Four others are appointed by the President w^ith the consent of the Senate, and of these one shall be a person experienced in banking, and from these four shall be chosen the Governor and vice-Governor of the Board. Mem- ber banks supplying the capital of all Federal re- serve banks have no representation whatever on 34 ( I cue nil JJiscitssit)n. the Federal Keserve Board nor any voice in its com- position. General Powers of the Board In addition to the large number of important spe- cial powers conferred upon the Federal Reserve Board (which are enumerated and commented upon elsewhere) the following are its general powers: (a) To examine the affairs of the Federal reserve banks and to require reports. (b) To require or, on application, to permit a Federal reserve bank to rediscount paper of another Federal reserve bank. The pov/er to permit such rediscount is proper, but the authority to require a loan to be made by one bank to another is entirely too great and might be subject to grave abuses. (c) To suspend for not more than thirty days, and indefinitely to renew suspension for periods of not more than fifteen days, all reserve requirements. Some such power might be useful in panics, but it is so great that it cannot in safety be delegated to persons inexperienced in finance and not of proved ability; and certainly not to any body of men unless they were free from all possible political influence. (d) To supervise and regulate the issue and re- tirement of Treasury notes to Federal banks. This likewise is a dangerous power. The retire- ment of bank-notes should be, and easily can be, made automatic. (Fully explained below). (e) To add to the number of cities classified as reserve and central reserve cities, and to reclassify such cities and to designate banks therein as country banks at its discretion. The last clause is a joker. No good purpose can be served by placing such power in the hands of any board, but in the hands of politicians it would be sub- ject to oppressive and dangerous abuses. Since the power is restricted to reserve and central reserve 35 General Discussion. cities, it necessarily is aimed at banks in the large cities. None but political considerations could have inspired or can defend such an arbitrary, useless and unnecessary power. (f ) To require the removal of officers of Federal reserve banks. (g) To require the writing off of doubtful and worthless debts. (h) To suspend the operations of any Federal reserve bank. (i) To perform the duties specified in the Act. The following are some of the additional powers conferred upon the Federal reserve board: I. To fix regulations for the establishment of branches. Such power should be limited or subject to some control because of the manifest possibilities of abuse. II. To create new districts or readjust old ones upon the application of ten or more national banks. There does not appear to be any just reason for ex- cluding state banks which might be members, from joining in such applications. III. The power to remove tlu'ee directors of the Federal reserve banks in "Class B," representative of commercial, agricultural and business interests, at the discretion of the Federal reserve board. This power gives control of the board of directors of every Federal reserve bank to the Federal reserve board, because in addition to the power of removal they have the power to appoint three additional di- rectors of "Class C," making six out of nine. The POWER OF REMOVAL AT DISCRETION WITH NO RIGHT OF APPEAL MEANS CONTROL. IV. The power to appoint three directors of "Class C," one of whom shall be chairman of the Federal reserve board, designated as "Federal Reserve 36 General Discussion. Agent," and who is the ofHcial agent and representa- tive of the board of control. His office is maintained nnder regulations of the Federal board, his com- ])ensation is fixed by them, and his reports are made to them. His removal is at their discretion, without notice. It would be difficult to organize the Fed- eral reserve banks in respect of their directors so as to leave the minority of three directors represent- ing the stock-holding banks more helpless. V. The Federal reserve board may cancel the membership of a state bank and, by inference, (al- though the language is not entirely clear) the mem- bership of a national bank. In the case of a state bank the alternative would be to go out of business entirely and surrender its char- ter as a state bank, with of course the privilege of re- organizing as a state bank under some other name. In the case of a national bank the alternative might be to surrender its national charter and go out of business or to reorganize as a state bank. VI. The Federal reserve board is composed of seven members, the Secretaries of the Treasury and Agriculture and the Comptroller of the Currency being ex-of!icio members. The four additional mem- bers are chosen by the President, of whom one shall be a person of experience in banking. Of these four appointees one shall be the governor, who shall be the acting managing officer of the board, and one the vice-governor. Thus if is apparent that cither the governor of the Federal reserve hoard or the vice-governor may not he a hanker of an?/ experience whatever. VII. The power to levy upon Federal reserve banks in proportion to their capital, an assessment to pay estimated expenses and to cover deficits carried for- ward. 37 389083 General Discussion. This power is absolute and no limit seems to be set upon the amount of expenses which the board may incur or upon the percentage of assessment which may be levied semi-annually upon the capital stock of member banks. VIII. The power to determine or define, with certain exceptions, the character of paper eligible for re-discount. This is sound, but the bill unfortunately confuses self-liquidating commercial assets ivith investment securities J and gives to the Federal board discretion- ary power to authorize loans to be made directly by Federal reserve banks to their members against bonds and other specified securities, which is unsound both in theory and in practice. Bank notes cannot safely be issued against invest- ment securities. We cannot drift away even in times of panic from the secure anchorage of inherent liq- uidity in all assets against which circulating notes are issued, if the notes are to he maintained on a basis of gold redemption on demand. Therefore, borrow- ing by individual banks against investment securi- ties or unliquid assets of anj^ character should be left not at the discretion of the Federal reserve board but a matter for the banks to arrange amongst them- selves with their correspondents outside the Federal reserve banks. The lending bank, in turn, if required to supply notes to its borrowing correspondents should be required to procure such notes from the Federal reserve bank out of its own funds, or by pledging its own liquid assets, thus assuring always to the Federal reserve bank among its assets nothing but quickly maturing mercantile paper. Herein lies the reason for keeping all classes of discountable paper at very short maturities. If this elemental principle be ignored the Federal re- serve banks will find themselves as surely and hope- lessly embarrassed in a panic as any individual mem- ber bank will be, because the assets of the Federal 38 deitcral Discussion. reserve banks will be equally as unresponsive to immediate demands because of inability to maintain their oivn reserves. All of Section 14 and that part of Section 13 relating to the discount by Federal re- serve banks of paper backed by investment securities should be eliminated. To insure the quality of elasticity emphasis must be laid upon the fact that one Federal reserve bank should not put out the notes of another bank. The contention of one against the others to keep notes in circulation will always exactly balance the amount of notes outstanding to the amount required. The best illustration of this may be found in the working of the Suffolk Bank System in New England, which gave this country the best and soundest bank-note issues it has ever enjoyed. There a number of banks located in different states, operating imder the laws of their respective states, were for the most part subjected to no restrictions, or very loose ones re- specting the amoimt of note issues, or reserves of gold to be held against them, the sole condition being the ability of a bank to redeem its notes at par on de- mand in Boston. The system was sound and for years gave the coimtry a safe, elastic and perfectly satisfactory bank note issue. The principle which provided that elasticity was not statutory, but natural and fundamental IX. To prescribe rules and regulations for the purchase and sale of bills of exchange, cable transfers, etc., by Federal reserve banks. This is an entirely unnecessary power, and one which should be left at the discretion of the Federal reserve banks, according to their own necessities, or the requirements of trade. X. The power to review and determine mininuim discount rates for all classes of paper, discountable at Federal reserve banks. 39 General Discussion. This also is an unnecessary power, and one which should be reserved to the boards of directors of the respective Federal reserve banks according to their circumstances and the status of their respective re- serves. Consent of the Federal reserve board, must be obtained by Federal reserve banks before opening accounts and establishing agencies or banking connections or doing business in foreign countries. This also is an iinnecessar}^ power, sub- ject to possible abuse, and one which ought to be left at the direction of the management of the Federal reserve banks and their respective boards of directors. XI. The currency provided by the bill shall be issued at the discretion of the Federal board. Here it may be well to lay down a few principles respecting legislation in reference to the issue of bank notes. The chief cause of conflict of opinion respecting important details of currency legislation is a general lack of understanding of the very restricted functions of true bank-note issues; and a confusion of these functions with those of latcful money. A false view of the nature of bank notes identifies them tcith money and fails to recognize them as merely credit instruments pass- ing as the temporary substitutes for money. Bank notes, in fact, are substitutes exactly as a bank check or a draft is a substitute and takes the place of so much actual cash in a given transaction. A bank note does not rightly possess, and should not be given, any of the qualities whatever of lawful money, nor be available as reserves for any bank. It is true that a bank note does pass from hand to hand with- out endorsement and performs certain useful func- tions of money, but it does not in any respect differ from the functions performed by checks or bank drafts where bank-note issues are scientifically put out. It follows, in consequence, that the relations of 40 (iCiicral Discussion. the (rovenimeiit towards banks of issue iicecl not consist in a regulative interference. When a bank note once has circulated and is pre- sented for redemption or for credit, it is a proof that the work of that particular note is finished and the note itself should be immediately cancelled, for pre- cisely the same reasons that a check is cancelled wlien it is presented and paid. To re-issue checks and force them out after being once redeemed would constitute inflation. It would be dangerous to force such credits again into use, for precisely the same reason that it would be to put out redundant issues of bank notes. Let the idea be kept clearly in mind that a bank note is no more nor less than a bank credit. It differs in form from a cashier's check, or from a bank draft, or from a deposit on the books of the bank, but it is none the less a demand liability of the bank and redeemable as such. The difference is in form, but not in substance. The matters of securing bank notes by collateral and of regulating their issue by the Government, are truly no more the proper business of the Government than that of regulating the amount of the deposits of a bank or of its outstanding demand liabilities in other forms. Until this principle is understood, and so long as the Government attempts to fix or regulate the volume of notes issued by the banks, we shall always have either too much or too little currency. Such currency may be sound, but we can never have an amount which automatically adjusts itself to busi- ness requirements as' do cashiers' checks, certified checks, bank drafts and other such instruments. A res^ulative control of the business of banking and of notes issued by Federal reserve banks ought not to be attempted by the Government as it cannot be successfully and scientifically carried out. All such attempts necessarily result in too much or too little currency. As potential evils there is little choice be- tween these conditions. 41 General Diseiissioii. PRINCIPLES OF BANKING AND CURRENCY LEGISLATION. The following are some of the main principles which should underlie banking and currency legisla- tion so far as the Government is concerned. 1. The establishment of reserve banks with large capital and having as many branches as may be re- quired. 2. Sound provisions for the free flux and reflux of bank notes, supported by strong gold reserves and covered by liquid assets of short maturities. 3. Adequate provisions for automatic redemption ; and provision of means of forcing every bank to con- vert its notes into gold on demand or to go into bank- ruptcy. In addition to these simple regulative measures, the concern of the Government should extend only to two or three points and these should be covered with the utmost care. They involve: (1) the strictest pub- licity of the transactions of the bank ; ( 2 ) compulsory examinations; (3) frequent reports; (4) strict re- sponsibility on the part of the directors and manag- ing officers; (5) restrictions concerning the character of loans to be made by banks of issue and the amounts to be loaned to any other bank or borrower. These simple provisions abundantly cover every point of governmental concern in a sound bank note issue. XII. The Federal reserve board has the power to accc]:)t in whole or in part, or to reject, the applica- tion of Federal reserve banks for notes. (This is in conflict with the proper functions of government in respect of bank note issues, as explained above). XIII. To fix the rate of interest to be charged by the government for the use of notes issued by Federal reserve banks. This provision strikes at and undermines the foun- dations of sound bank note issues. 42 General Diseussion. Laying aside tlic question as to whether the govern- ment should, or should not, reeeive a rate of hiterest for such notes, the provisions of the bill are such that so far as the government is concerned it is immaterial. It is proposed that all the profits over and above a small return to members on the capital investment shall after the establishment of a nominal surplus fund go to the government. It follows, therefore, that if a tax shall be laid upon the notes at the time of their issue, the tax will come out of the profits of the Federal reserve banks; and consequently, in the end so much less profit will be returned to the gov- ernment. This view is predicated upon the assump- tion that the Federal bank would absorb the initial cost in this case incident to the issue of notes, but in or- dinary business practice such an assumption is false, for the cost of procuring the notes would be laid upon the users of them, which of course would be the public ; and consequently any initial tax is unnecessary and lays upon trade and commerce just so much of a useless burden. The outflow and inflow of bank notes should be free and responsive to trade require- ments. Any obstructions and burdens laid unon their issue, or upon their retirement are costly to trade and involve dangers especially grave Avhen facilities for redemption are not automatic and in continuous operation. XIV. The board shall make regulations govern- ing the transfer of funds at par among Federal re- serve banks. This in theory is highly desirable but in actual business practice would be impossible. It might be accomplished to a certain extent in the case of one central bank with numerous branches by making book entries at the head office, crediting one branch and charging another, where no expense woulcJ be involved in the actual transfer of funds: but in the case of a number of independent Federal reserve banks this would be impracticable because of the seasonal flow outward of currency into tlie country 43 General Discussion. and of its flow backward for redemption at the sea- son's end. Such flux and reflux cannot be accom- pHshed by book entries. They must be made by and through the actual physical transfers of currency, and this entails expense. At certain seasons, under vrhatever regulations the board might impose, there would be large accumulations of credit balances at certain Federal reserve banks, and of debits at other points. In other seasons the reverse would be the case and in the meantime such debits and credits could not be settled by a mere arbitrary command to one regional bank to remit to others at par, for this would become an intolerable and quite likely an impossible burden, making large inroads upon the earnings of such a bank. Particu- larly would this be so in the case of Federal reserve banks located in the interior and crop-growing sec- tions, where currency would be required in large quantities at one time and not at another. The whole question of terms and conditions upon which one regional bank shall remit to another should be left to those banks to settle between themselves. This, however, need not interfere with some equitable arrangement whereby the Federal bank in any par- ticular district might act as clearing agent for its own members, but not for banks in other districts nor for other regional banks. It is as unsound to compel by law a fixed parity of exchange at par be- tween New York and San Francisco, at all times, regardless of trade movements as it would be to try to maintain such a parity between New York and London. XV. The Federal reserve board has power at its discretion to exercise the functions of a clearing house and to require each federal reserve bank to act as a clearing house for its members. (The comments made under the preceding paragraph also apply licrc) . XVI. The Federal reserve board has the power to 44 General Discussion. order special examinations of members, and to lix the salary of examiners. XVII. The board has power to prohibit any bank establishing foreign branches if deemed inexpedient, even though the bank applying for such privilege shall be qualified under the Act. It will be seen from the foregoing that the powers of the Federal reserve board are practically unlimited^ and inasmuch as they are subject to the regulation or control of no superior body these powers are of too broad and sweeping a character to be safely en- trusted to a small body of politically appointed men, but one of whom is required to have knowledge of banking or experience in business. The mere sug- gestion seems beyond belief. BRANCHES. Federal reserve banks are permitted to have a number of branches not exceeding one for each $500,- 000 of paid-in capital of the Federal reserve bank. Considering the powers and functions of the Fed- eral reserve banks and the fact that they are to hold the cash reserves of the banks of the whole country, the proposed minimum of capital for branches is en- tirely too small to be safe. By reason of the constantly fluctuating capital of Federal reserve banks due to the withdrawals of members or to decreases in their capital and to failures, it is conceivable that in view of the small apportionment of capital to a branch, a parent Federal reserve bank might find itself violating the statute b}'- having a larger number of branches than its capital warranted. For instance, at a critical time the withdrawal or failure of a mem- ber bank having, say, $5,000,000 capital would of course necessitate a proportionate reduction in the capital of the Federal reserve bank of which the failed bank was a member; and might entail in con- 45 General Discussion. sequence, the summary closing of one or more branches of that Federal reserve bank so as to bring the number of branches within the law. This would be an awkward embarrassment and it demonstrates the necessitj^ for a high average proportion of capital to be assigned to each branch. A bank becoming a member of a Federal reserve bank appears to have no w^ay to relinquish such mem- bership except (a) in the case of a national bank, to convert into a state bank and take out a new charter; (b) in the case of a state bank to surrender its charter and liquidate or to reorganize as a state bank under some other title. DIVISIOX OF EARNINGS ^lembers of Federal reserve banks will be entitled to receive 5% cumulative dividends on their capital invested, and no more. The government appropri- ates the remainder of the earnings after a surplus fimd of 20% of the capital of the Federal reserve bank has been established. xMtliough suppljang none of the capital, and paying the expenses of its appointed board and of the administration of the affairs of the Federal reserve banks, (through the reserve board) by assessment upon the member banks, the government appropriates the whole of the remainder of the earnings, reserving at the same time the right to cliarge interest on notes issued and also collecting interest on government deposits. It is difficult ta justify the theory or to defend the ethics of this ])lan as a business proposal. Any well managed bank through a series of years may earn at least 5% on its capital. If it cannot do this it might better go out f)f business, for the shareholders as individuals might use their money to as good or better advantage. How, then, can it be expected that national ])anks should willinglv become mem- bers f)f lY'deral Reserve banks, and be thus deprived 46 ('iC)icnil J )isciissi())i. of at least as good returns upon their capital as they might themselves earn? Will not this arbitrary ap- propriation of profits by the government tend to keep well managed banks out of the system, and will it not restrain good state banks from becoming share- holders unless the loss shall be offset by benefits not now apparent in the plan? The salaries of the four appointed members of the reserve board are to be paid by assessment on Federal reserve banks. The wise discharge of the res^^onsibilities and the prudent exercise of the great powers placed in the hands of the Federal re- serve board call for ability of the highest order on the part of individual members of the board. Salaries of $10,000 a year cannot command the services of such men. Appointments on a board commanding such salaries become attractive only to a class of men ambitious for themselves politically or other- wise. It must })e admitted, however, that any larger salaries would {if the appointments are to re- main political) tend only to increase the scramble for the offices as political prizes ; and while augment- ing the dangers as salaries might be increased, w^ould not insure the selection of a higher class of men. This constitutes another strong reason why the Federal reserve board should at all events be composed of capable, and experienced men selected for their fit- ness ; and that they should be chosen in some manner from among the ablest and most experienced officers and directors of the subscribing banks. This is quite apart from any contention by the member banks as to the right of such representation on the governing board. REDISCOUXTS Section 13 defines the character of })a])er eligible for discount at Federal Reserve banks by members. The general provisions so far as they relate to the discount of short-time, self-liquidating paper 47 General Discussion. growing out of trade transactions are good and suffi- cient. They should be left as they are. But a grave mistake is made in giving the Federal Reserve board discretion to permit the discount of other paper secured by bonds. This is fundamentally wrong in that it confuses two different classes of banking. The assets of commercial banks should consist of short-time, self-liquidating mercantile assets, while investment banking contemplates the possession of sound but long-time, unliquid securi- ties. Such securities are not a sound basis for cur- .rency issues. The mistake is repeated in Section 14, which provides for emergency note issues, and these have no place in a sound bank note currency. NOTE ISSUES The authorized issue of Federal reserve treasury notes is $500,000,000 plus the amount of national bank notes retired after the passage of the act. These notes "purport" on their faces to be obligations of the United States government. They are issued only to Federal reserve banks at the discretion of the Federal reserve board and are redeemable on de- mand at the United States Treasury out of a 5% redem])tion fund held for that purpose, and also at the Federal reserve banks. These notes are obtain- able only on application to the Federal reserve board through the local Federal reserve agents of the regional banks. They are to be secured by collateral in the form of notes, bills and acceptances of a class designated in the bill for rediscount by Federal re- serve banks. These collaterals may be substituted. Interest may be charged for the use of notes at the discretion of the Federal reserve board. Such notes are a paramount lien on all the assets of the Federal reserve bank putting them out. As already pointed out, the notes should not pur- port on their faces to be what they are not, for it is a dcce])tiori of the public. They should state on their faces that they are notes of the particular Federal 48 Ceiicral I)iscitssiu)i. reserve bank which issues them. Each bank should be given a number and all notes put out by or through a bank should bear its number. The notes should not be intended to have the functions of money, but only those of a true bank note issue, which is but an- other form of bank credit, differing in no respect from a credit on the books of a bank, except in that a note may and does pass from hand to hand. There is no objection to regulation and super- vision on the part of the Government concerning the manner in which the notes are issued, nor is there any objection to their being fully secured by liquid assets and gold reserve. Neither is there any sound objection to giving the notes a prior lien on all the assets of the issuing bank. But if this shall be done there is no reason for lodging in the hands of the Federal reserve agent segregated ser^urities. The prior lien carried by the notes would cover such se- curities as well as all others. Consequently, the segre- gation is an unnecessary formality. However, no objection is raised on that point. The great thing to be desired is that the redemption facilities shall be ample ; and that strong reserves of gold shall be kept against the notes and that the remaining cover shall be liquid, and that they shall be redeemable on demand in gold beyond peradventure. The quality of elas- ticity can only be given by forbidding one Federal reserve bank to pay out the notes of ailother such bank, or to hold the notes of another bank as a poT- tion of its required reserves, or to deduct such notes from its liabilities when computing reserves. Notes issued by one Federal reserve bank should be re- deemable at the pleasure of the holder at par, in gold, at any other Federal reserve bank. But the bank so redeeming them should at once return the notes either to the bank of issue and take credit there- for or require redemption in gold or otherwise, as might best suit its convenience;, or return them to the Treasury Department for redemption out of the 5% fund of the bank which issued them and 49 General Discussion. thereby take them out of circulation. This plan of redemption would insure the circulation at all times of an amount of notes exactly in proportion to trade requirements. The moment a note has done its work and is turned in to any Federal reserve bank for redemption or credit by any member, the life of that note is completed and it should not be put out again, nor held on hand for any purpose. Under the pro- posed plan there is no incentive to Federal reserve banks to j^resent for redemption the notes of other banks. In this respect the proposed currency would be subject to almost the same objections as to in- elasticity which are now urged against the national bank notes. The Federal reserve board may reject the applica- tion of any bank for notes. This is an unnecessary power and one which not only would be subject to abuses but might occasion the greatest embarrassment to a Federal reserve bank and its members. As already stated, the flux and reflux of bank notes should be free and should be subject to no regulations except the natural de- mand for the notes by the public, conditioned upon the ability of the Federal reserve bank to maintain the required reserve of gold and the additional cover of short-time liquid assets. The proper method to pre- vent inflation is not by laying an initial tax either as interest or otherwise upon the notes at their time of issue: but to begin with a high normal reserve of gokl, and to begin laying a tax upon the deficiency in the reserves on a scale increasing in proportion to the amount that the gold reserves fall below the normal. REFUNDING BOXDS. The plan proposes that United States 2% bonds deposited to secure circuhition sliall be refunded into three ])er cent 2()-year bonds which sliall })e ex- changed at ])ar, and that each bank shall give up a proportionate amount of its circulating privileges annually for 20 years. 50 Ljcncral Discussion. While it is probable that ehaiigcs are yet euiitein- plated in respeet of this provision, the broad prineiple may be laid down that the good faith of the Govern- ment is pledged to redeeni these 2% bonds eventually at par. This might easily be done without refunding if the redemption of the whole amount shall be spread over a period of twenty years as proposed. That is to say, the Government out of its eurrent reeeipts might easily retire $35,000,000 of bonds a year for the next twenty years and in all probability be under no necessit}^ of refunding any part of the issue, either in three per cents, or otherwise. But, if it should come about that we should go to war, or for any other reason it shoidd become necessary for the Government to issue bonds, then such bonds could be put out upon their merits as an investment security when and as the Government might need to borrow. The (iovernment intends to, and will, redeem its ob- ligations at par, and for present purposes that might well be an end of the matter. But while the 2% re- main outstanding let the present circulating priv- ileges remain unchanged at least imtil existing bank charters expire. In all such cases, as charters cease the bonds should be called at par. The provisions of the bill respecting the amounts of reserves both in the Federal reserve banks and of the members of the three classes, country banks, re- serve cities and central reserve cities, seem to be ade- quate and unobjectionable. It would strengthen the Federal reserve banks if they should be required to begin with larger normal reserves than 33 1/3% ; and to lay a tax upon the deficiency in reserves as they fall below the normal amount; fixing 30% as the ulti- mate minimum of reserves against demand liabilities which must be maintained at all events. A reserve fixed permanently at any point is open to strong ob- jections. The provision of the bill that the reserves carried by member banks in the Federal Reserve banks shall never fall heloic the amounts specified, 51 General Discussion. tie up the reserves of the banks and make them as useless as if they were composed of lead. The theory is utterly unsound. BANK EXAMINATIONS. The bill provides that examination of national banks shall be made by the Comptroller of the Cur- rency at least twice a year and as often as the Fed- eral reserve board may require. The Secretary of the Treasury may also direct special examinations. The salaries of the examiners are fixed by the Federal reserve board and are paid by assessments on the banks in proportion to their assets. These requirements seem reasonable and in accord- ance with sound practice. But, in addition, the Fed- eral reserve banks may conduct special or periodical examinations of their members, and also the Federal reserve board may as often as desired, and not less than four times a year, order examinations of national banks in reserve cities. While no well managed bank objects to frequent examinations or to the most rigid scrutiny of its affairs and welcomes them when thor- oughly and competently done, we seem here to have the business of inquisition reduced to an absurdity. Power to examine national banks is vested in no less than four separate Governmental authorities, the Comptroller of the Currency, the Secretary of the Treasury, the Federal reserve board and the Fed- eral reserve banks. In the case of national banks located in reserve cities there are no less than six compulsory examinations yearly under Federal au- thority, two by the Comptroller, four by the Federal reserve board, and as many more as they may choose to make, all of which are to be paid for by the bank under examination. These six Governmental exam- inations together with those which are already con- ducted in many cities under Clearing House author- ity, and also by the directors of all well managed 52 General Discussion. bunks in their own behalf, would keep banks in the larger eities praetieally under eontinuous examination at great and unnecessary expense, to the confusion of business and to the detriment of good banks by rea- son of the suspicion under which they would be brought at home and abroad through continuous de- mands for the reconcilement of accounts. Two com- pulsory examinations a j^ear under Government au- thority (made by the Comptroller) and one on the part of the directors — including an audit by chartered accountants — with power on the part of the Comptroller to examine oftener if necessary, would meet all reasonable requirements. Certainly this would be sufficient with authorit}' on the part of Federal reserve banks to conduct exam- inations in special cases for their own information. For the most part, all the information desired or necessary could be obtained by Federal reserve banks, by the Secretary of the Treasury, and by the Federal reserve board from the reports of examinations made under authority of the Comptroller. These provisions respecting the examination of re- serve city banks afford a fair illustration of the ap- parent suspicion and distrust entertained by the fram- ers of the bills tow^ards a class of the best managed banks in the country, and indicate an unwillingness to believe that such banks can be, or are, honestly and efficiently administered according to the law. SECTION 25. The second paragraph of Section 25 provides that no officer or director of a national bank shall be the beneficiary, directly or indirectly, of any transaction made by or in behalf of a national bank of which he is such an officer or director. Presumably, this is in- tended to relate only to fees, commissions, gifts or like considerations which might be given to an officer or director for loans made by a bank; if so and it be so construed, no reasonable objection could be raised to it. But the language appears to be so broad as to cover all transactions; such for instance, as a legiti- 53 Goicral Discussion. mate loan made bj^ a bank officer or director to a mercantile or manufacturing company in which such officer or director might be even a small shareholder. This certainly goes too far, for it would preclude the best men in every business community from becom- ing officers or directors of local banks. Their serv- ices as such are highly to be desired and are essen- tial to the sound conduct of banks. Their influence, their knowledge and their experience of local busi- ness affairs are invaluable to every bank, and to pre- clude them (because they happen to be directors or officers) from permitting companies in which they may be shareholders to do business with the bank would manifestly be an injustice and one which the law ought not to impose. The apparent objects of the paragraph under consideration might well be retained, and for good reasons, but the language should be so changed as not to prevent legitimate transactions with business concerns whose share- holders might happen to be officers or directors of a national bank. Xinety and nine honest persons should not be thus punished or penalized in order to catch the one possible rascal of the himdred average men. STOCKHOLDERS LIABILITY. The provision holding the shareholders liable to assessments sixty days after transferring their stock in good faith is unfair. It makes investments in na- tional bank shares less attractive to responsible share- holders. The liability after transfers of stock should be continuous only when there is reason to suspect a fraud or lack of good faith, and in that event the liabiHty shoiikl be practically unlimited as to time; or, at least, it should continue for a period of three or more years. Knowledge of the condition of a bank or reasonable opportunity to possess such knowledge, as, for example, in the case of an officer or a director, should (when a stockholder's liability is to be asserted) be prima facie evidence of bad faith 54 General Discussion. where such officer or dirccUn- Jiiis truiLsrerred his stock, and in such a case this presumptive knowledge should fix his liability indefinitely. FOREIGN BRANCHES. Except in respect of the discretionary powers given to the board of control, the provisions of the bill for establishing branches in foreign countries would do much towards promoting and developing foreign trade. The ])rinciple of establishing branch banks is re- cognized in the bill both in the right granted to Fed- eral reserve banks to establish branches and in the privilege accorded to national banks having a capi- talization of one million dollars or more to establish branches in foreign countries. It would be highly de- sirable to extend the privilege further to national banks in reserve cities and to permit all such banks having a capital of not less than $1,000,000 to estab- lish branches in the city where they are located. With- in prudent limitations there are no good reasons why such branches might not be established with benefit to the banks and with increased safety to the public. These limitations ought to be : 1. No branch to have less than the minimum cap- ital now required for the organization of an inde- pendent national bank in the city in which the branch is located. 2. The requisite ca])ital to be s])ecifically set aside by the parent bank for each branch. 3. All limitations of the National Bank Act should be made to ap])ly in respect of loans made by branches and should be based upon their own capital in the same manner as if they were inde])endent banks. 4. ^All loans made by branches to any person, firm or individual should constitute a ])ortion of the loans included in the statutory limitations applying to the parent bank. 55 General Discussion. 5. Parent bank should be liable for all debts of branches. 6. Branches should be permitted to have local ad- visor}^ boards, but the control and responsibility for the conduct of branches should rest with the board of directors of the parent bank under existing statutes. Branches so established and conducted would be stronger and in the large cities would be assured bet- ter and more experienced management, and would afford the depositing public more safety and offer better banking facilities than is possible at present in the case of a large number of small, independent outlying banks, whether state or national. The extension of this privilege to national banks in reserve cities would be attractive and would con- stitute a strong incentive for their remaining in the sj^stem. Through such branches might be found a means of regaining the losses of reserve deposits now held for the account of other banks. The certain loss of these deposits eventually, and the absence of any special compensating features offered in the proposed bill, are among the strong reasons for inducing the most important national banks in the reserve cities to abandon the national banking system. The chief in- ducements heretofore offered to national banks in Reserve cities to remain in the system have been ; ( 1 ) , the privilege of issuing circulating notes in which there has been a small but diminishing profit; and (2), the right to hold the reserves of other banks. Now it is proposed that both privileges shall be taken away gradually. The most logical, useful and attractive benefit therefore, which could be offered in compensation to national banks in reserve cities would be the privilege of establishing local branches in their own cities; and without this the national system completely loses the special advantages which it has heretofore offered, and in fact, all advantages whatever. 56 A BILL To provide for the establishment of Federal reserve banks, for furnishing an elastic currency, affording means of rediscounting commercial paper, and to establish a more effective supervision of banking in the United 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 tlie "Federal Reserve Act.'' FEDERAL RESERVE DISTRICTS. Sec. 2. That within ninety days after the passage of this Act, or as soon thereafter as practicable, the Secretary of the Treasury, the Secretary of Agriculture, and the Comptroller of the Currency, acting as "The Eeserve-Bank Organization Committee," sliall designate from among the reserve cities now authorized by law a number of such cities to be known as Fed- eral reserve cities, and shall divide the continental United States into districts, each district to contain one of such Federal reserve cities: Provided, That the districts shall be appor- tioned with due regard to the convenience and customary course of business of the community and shall not necessarily coincide with tlie area of such State or States as may be wholly or in part included in any given district. The districts thus created may be readjusted and new districts may from time to time be created by the Federal Eeserve Board hereinafter estab- lished, acting upon a joint application made by not less than ten national banks situated within one of the existing districts. The districts thus constituted shall be known as Federal reserve districts and shall be designated by number according to the pleasure of the organization committee. The organization committee shall, in accordance with regulations to be established bv itself. ]iroceed to organize in 57 The Bill each of the reserve cities designated as hereinbefore specified a Federal reserve bank. Each such Federal reserve bank shall include in its title the name of the city in which it is situated, as "Federal Keserve Bank of Chicago,'"' and so forth. The total number of reserve cities designated by the organization com- mittee shall be not less than twelve, and the organization com- mittee shall be authorized to employ counsel and expert aid, to take testimony, to send for persons and papers, to administer oaths, and to make such investigations as may be deemed neces- sary by the said committee for the purpose of determining the number of reserve cities to be designated. Every national bank located within a given district shall be required to subscribe to the capital stock of the Federal reserve bank of that district a sum equal to twenty per centum of its unimpaired capital, one-half of such subscription to be paid in under the terms and conditions prescribed by the national banking Act with reference to subscriptions to the stock of na- tional banking associations. The remainder of the subscrip- tions or any part thereof shall become a liability of the sub- scribers, subject to call and payment thereof whenever neces- sary to meet the obligations of the Federal reserve bank under such terms and in accordance with such regulations as the board of directors of said Federal reserve bank may prescribe : Provided, That no Federal reserve bank shall be organized with a paid-up and unimpaired capital at the time of beginning business less in amount than $5,000,000. The organization committee shall have power to appoint such assistants and incur 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, STOCK ISSUES. Sec. 3. That the capital stock of each Federal reserve bank shall be divided into shares of $100. The outstanding capital stock shall be increased from time to time as subscrib- ing banks increase their capital or as additional banks become subscribers, and shall be decreased as subscril)ing banks reduce their capital or leave the organization. Each Federal reserve bank may establish branch offices under regulations of the Federal Reserve Board at a point within the Federal reserve district in which it is located: Provided, That the total num- ber of snoli branches shall not exceed one for each $500,000 of the capital stock of said Federal reserve bank. 58 The Bill. FEDERAL RESERVE BANKS. Sec. 4. That upon duly making and filing with the Comptroller of the Currency a certificate in the form required and described in sections fifty-one Imndred and thirty-four and fifty-one hundred and thirty-five, Hevised Statutes of the United States, such Federal reserve bank shall become a body cor])orate and as such and in the name designated, respectively, in the organization certificate shall have power to perform all those acts and to enjoy all those privileges and to exercise all those powers described in section fifty-one hundred and thirty- six. Revised Statutes, save in so far as the same shall be limited or extended, as the case may be, by the provisions of this Act. The Federal reserve bank so incorporated shall have succession for a period of twenty years from its organization, unless sooner dissolved by Act of Congress. Every Federal reserve bank shall be organized and con- ducted under the oversight and control of a board of directors, whose powers shall be the same as those conferred upon the boards of directors of national banking associations under exist- ing law, except in so far as expressly provided to the contrary in this Act. Such board of directors shall be constituted and elected as hereinafter specified and shall consist of nine mem- bers, holding office for three years and divided into three classes, designated as classes A, B, and C. Class A shall consist of three members, who shall be chosen by and be representative of the stock-holding banks. Class B shall consist of three members, who shall be repre- sentative of the general public interests of the reserve district. Class C shall consist of three members, who shall be desig- nated by the Federal Reserve Board. Directors of class A shall be chosen in the following manner : It shall be the duty of the chairman of the board of di- rectors of the Federal reserve bank of the district in which each such bank is situated to classify the member banks of the said district who are stockholders in the said Federal reserve bank into three general groups or divisions. Each such group shall contain as nearly as may be one-third of the aggregate number of the banks holding stock in the Federal reserve bank of the said district and shall consist of banks of similar capitalization. The said groups shall be designated by number at the pleasure of the chairninn of the Federal reserve bank. At a regularly called directors' meeting of each national bank in the Federal reserve district aforesaid, the board of directors of sueli nioinl^er liank shall elect bv ballot one of its The Bill. own members as 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 said chairman shall establish lists of the district reserve electors, class A, thus named by banks in each of the aforesaid three groups and shall transmit one list to each such elector in each group. Every elector shall, within fifteen days of the receipt of the said list, select and certify to the said chairman from among the names on the list pertaining to his group, transmitted to him by the chair- man, one name, not his own, as representing his choice for Federal reserve director, class A. The name receiving the great- est number of votes, not less than a majority, shall be designated by said chairman as Federal reserve director for the group to which he belongs. In case no candidate shall receive a majority of all votes cast in any district, the chairman aforesaid shall establish an eligible list, including the three names receiving the greatest number of votes on the first ballot, and shall trans- mit said list to the electors in each of the groups of banks established by him. Each elector shall at once select and certify to the said chairman from among the three names submitted to him his choice for Federal reserve director, class A, and the name receiving the greatest number of such votes shall be desig- nated by the chairman as Federal reserve director, class A. Directors of class B shall be chosen at the same time and in the same manner hereinbefore prescribed for directors of class A, except that they shall in no case be officers or directors of an}' bank or banking association, and shall not accept office as such during the term of their service as directors of the Fed- eral reserve bank. They shall be fairly representative of the commercial, agricultural or industrial interests of their respec- tive districts. The Federal Eeserve Board shall have power at its discretion to remove any director of class B in any Fed- eral reserve bank, if it should appear at any time that such director does not fairly represent the commercial, agricultural or industrial interests of his district. Three directors belonging to class C shall be chosen directly by the Federal Eeserve Board one of whom shall be designated by said board as chairman of the board of directors of the Federal reserve bank of the district to which he is appointed and shall be designated as "Federal reserve agent." In addi- tion to his duties as chairman of the board of directors of the Federal reserve bank of the district to which he is appointed, he shall be required to maintain under regulations to be estab- lished by the Federal Eeserve Board a local office of said board which shall be situated on the premises of the Federal reserv? bank of the district. He shall make regular reports to the Federal Eeserve Board, and shall act as its official representative 60 The Bill. for the peri'oriuancc oi' the functions conrerrud upon it by this Act. He shall be paid an annual compensation to be fixed by the Federal Reserve Board and to be paid hira monthly by the Federal reserve bank to which he is designated. The Keserve Bank Organization Committee may, in or- ganizing Federal reserve banks for the first time, call such meetings of bank directors in the several districts as may be necessary to carry out the purposes of this Act and may exer- cise the functions 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 directors of each Federal reserve bank subsequent to the organization of such bank it shall be the duty of the directors of classes A and B and C each to designate one of its members whose term of office shall expire in 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. Thereafter every director of a Federal reserve bank chosen as hereinbefore provided shall hold office for a term of three years but the chairman of the board of directors of each Federal re- serve bank designated by the Federal Eeserve Board, as herein- before described, shall be removable at the pleasure of the said board without notice, and his successor shall hold office during the unexpired term of the director in whose place he was appointed. INCREASE AND DECREASE OF CAPITAL. Sec. 5. That shares of the capital stock of Federal re- serve banks shall not be transferable, nor be hypothecated; in case a subscribing bank increases its capital, it shall thereupon subscribe for an additional amount of capital stock of the Federal reserve bank of its district equal to twenty per centum of the bank's own increase of capital, paying therefor the then book value of the shares of the reserve bank as shown by the last published statement of said bank. A bank applying for stock in a Federal reserve bank at any time after the formation of the latter must subscribe for an amount of the capital of said reserve bank equal to twenty per centum of the capital of said subscribing bank, paying therefor its then book value as shown by the last published statement of said reserve bank. "\Mien the capital of any Federal reserve bank has been in- creased, either on account of the increase of capital of the banks holding stock therein or on account of the increase in the num- ber of stockholding banks, the board of directors shall make and execute a certificate to the Comptroller of the Currency show- 61 The Bill. ing said increase in capital, the amount paid in, and by wnom paid. In case a subscribing bank reduces its capital it shall surrender a proportionate amount of its holdings in the capital of said Federal reserve bank, and if a bank goes into voluntary liquidation it shall surrender all of its holdings of the capital of said Federal reserve bank. In either case the shares sur- rendered shall be canceled and the bank shall receive in pay- ment therefor a sum equal to their then book value as shown by the last published statement of said Federal reserve bank. Sec. G. That if any shareholder of a Federal reserve bank shall become insolvent and a receiver be appointed the stock held by it in said Federal reserve bank shall be canceled, and the balance of its value, after paying all debts due by such insolvent banlv to said Federal reserve bank, shall be paid to the receiver of the insolvent bank. Whenever the capital stock of a Federal reserve bank is reduced, either on account of a reduction in capital of the banks holding its stock or of the liquidation or insolrency of any such bank holding stock therein, the board of directors shall make and execute a certificate to the Controller of the Currency showing such reduction of capital stock and the amount repaid to each bank. DIVISION OF EARNINGS. Sec. 7. That the earnings of each Federal reserve bank shall be disposed of in the following manner : After the payment of all expenses and taxes, the share- holders shall be entitled to receive an annual dividend of five per centum on the paid-in capital, which dividend shall be cumu- lative. One-half of the net earnings, after dividend claims, as hereinbefore provided, have been met, shall be paid into the surplus fund until said fund shall amount to twenty per centum of the paid-in capital of such bank, and the remaining one- half shall be paid to the United States ; and whenever and so long as the surplus fund of such Federal reserve bank amounts to twenty per centum of the paid-in capital and the share- holders shall have received the dividends at the rate of five per centum per annum hereinbefore provided for, all excess earnings shall be paid to the United States. Every Federal reserve bank incorporated under the terms of this Act shall be exempt from Federal, State, and local taxa- tion, except in respect to taxes upon real estate. Sec. 8. That any national banking association heretofore organized may at any time within one year from the passage of this Act, and with the approval of the Comptroller of the Currency, be granted, as herein provided, all the rights, and be siihjort to nil the liabilities, of national banking associations 62 The Bill. organized subsequuiiL to the passage ol' tliis Act: Provided, That such action on the part of such associations shall be authorized by the consent in writing of shareholders owning not hss than a majority of the capital stock of the association. Any national Ijanking association now organized which shall not, within one year after the passage of this Act, become a national banking association under the provisions hereinbefore stated, or which shall fail to comply^ with any of the provisions of tliis Act, shall be dissolved; but such dissolution shall not take away or impair any remedy against such corporation, its stockholders or officers, for any liability or penalty which shall have previously been incurred. Sec. D. That any bank or banking association incorpor- ated by special law of any State or of the United States, or organized under the general laws of any State of the United States, and having an unimpaired capital suffi- cient to entitle it to become a national banking association under the jirovisions of this Act, may, by the consent in writing of the shareholders owning not less than fifty-one per centum of the capital stock of such bank or banking association, and with the approval of the Comptroller of the Currency, become a national banking association under its former name or by any name approved l)y the comptroller. The directors thereof may continue to be the directors of the association so organized until others are elected or appointed in accordance with the provisions of the law. 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 powers and privileges, and shall be subject to the same duties, liabilities, and regulations, in all respects, as shall have been prescribed for associations originally organized as national bank- ing associations under this Act. STATE BANKS AS MEMBERS. Sec. 10. That from and after the passage of this Act any bank or banking association or trust company incorporated by special law of any State, or organized under the general laws of any State or the United States, may make application to the Federal Eeserve Board hereinafter created for the right to sub- scribe to the stock of the Federal reserve bank organized within the Federal reserve district where located. The Federal Re- serve Board may. at its discretion, subject to the provisions of this section, entitle such applying bank to become a stockholder in the Federal reserve bank of the district in which such apply- ing bank is located, or at its discretion may reject such applicn 63 ^ The Bill. tion or cancel the membership of a bank. Whenever the Federal Reserve Board may entitle such an applying bank to become a stockholder in the Federal reserve bank of the district in which the applving bank is located, stock shall be issued and paid for under the rules and regulations in this Act provided for na- tional banks which become stockholders in Federal reserve banks. It shall be the duty of the Federal Reserve Board to estab- lish by-laws for the general government of its conduct in act- ing upon applications made by the State hanks and banking associations and trust companies hereinbefore referred to for stock ownership in Federal reserve banks. Such by-laws shall require of applying banks not organized under Federal law that they comply with the reserve requirements and submit to the inspection and regulation provided in this Act. No such applying bank shall be admitted to stock ownership in a Fed- eral reserve bank unless it possesses 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 banking Act, and conforms to the provisions herein prescribed for national banking associations of similar capitalization and to the regulations of the Federal Reserve Board. If at any time it shall appear to the Federal Reserve Board that a banking association or trust company organized under the laws of any State or of the United States has failed to comply with the provisions of this section or the regulations of the board, it shall be within the power of the said board to require such banking association or trust company to surrender its stock in the Federal reserve bank in which it holds shares upon receiving from such bank the then book value of the said shares in current funds, and said Federal reserve bank shall upon notice from the Federal Reserve Board be required to suspend the designated banking association or trust company from fur- ther privileges of membership, and shall within thirty days of such notice cancel and retire its shares and make payment.there- for in the manner herein provided. FEDERAL RESERVE BOARD. Sec. 11. That tlicre shall be created a Federal Reserve Board, which shall consist of seven members, including the Sec- retary of the Treasury, the Secretary of Agriculture, and the Comptroller of the Currency, who shall be members ex officio, and four members chosen by the President of the United States, by and with the advice and consent of the Senate. The four members of the Federal Reserve Board chosen by the President and confirmed as aforesaid shall each receive an annual salary 64 The Bill. of $10,000; and the Comptroller of the Currency, as ex officio member of said Federal Eeserve Board, shall, in addition to the salary now paid him as comptroller, rt'ceive the sum of $5,000 annually for his services as a member of said l)oard. Of those thus appointed l)y the President at least one shall be a person experienced in banking; and one shall serve for two, one for four, one for six, and one for eight years, respectively, and thereafter each member so appointed shall serve for a term of eight years unless sooner removed for cause by the President. Of the four persons thus appointed, one shall be designated governor and one vice governor of the Federal Keserve Board. The governor of the Federal Reserve Board, subject to the supervision of the Secretary of the Treasury and board, shall be the active managing officer of the Federal Reserve Board. The Federal Reserve Board shall have power to levy semi- annually upon the Federal reserve banks, in proportion to capital, an assessment sufficient to pay its estimated expenses for the half year succeeding the levying of such assessment, together with any deficit carried forward from the preceding 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, and after the organization of Fed- eral reserve banks in the several districts, as herein provided, at a date to be fixed by the Reserve Bank Organization Com- mittee hereinbefore created. The Secretary of the Treasury shall be ex officio chairman of the Federal Reserve Board. No member of the Federal Reserve Board shall continue to hold office or to act as a director of any bank or banking institution or Federal reserve bank ; 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 requirement. Wlienever a vacancy shall occur among the four members of the Federal Reserve Board chosen by the Presi- dent, 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 chosen, shall hold office for the unexpired term of the member whose place he is selected to fill. Section three hundred and twenty-four of the Revised Statutes of the United States shall be amended so as to read as follows : "There shall be in the Department of the Treasury a bureau charged, except as in this Act otherwise provided, with the execution of all laws passed by Congress relating to the issue and regulation of currency issued by national banking associations, the chief officer of which bureau shall be called the Comptroller of the Currency, and shall perform his duties under the general direction of the Secretary of the Treasury, acting as the chairman of the Federal Reserve Board." 65 • The Bill. Sec. 12. That the Federal Eeserve Board hereinbefore established shall be authorized and empowered: (a) To examine at its discretion the accounts, books, and affairs of each Federal reserve bank and to require such state- ments and reports as it may deem necessary, (b) To require or on application to permit a Federal reserve bank to rediscount the paper of any other Federal re- serve bank. (c) To suspend for a period not exceeding thirty days (and to renew such suspension for periods not to exceed fifteen days) any and every reserve requirement specified in this Act: (d) To supervise and regulate the issue and retirement of Treasury notes to Federal reserve banks. (e) To add to the number of cities classified as reserve and central reserve cities under existing law in which national banking associations are subject to the reserve requirements set forth in section twenty-one of this Act ; or to reclassify exist- ing reserve and central reserve cities and to designate the banks therein situated as country banks at its discretion. (f) To require the removal of officials of Federal reserve banks for incompetency, dereliction of duty, fraud, or deceit. (g) To require the writing off of doubtful or worthless assets upon the books and balance sheets of Federal reserve banks. (h) To suspend the further operations of any Federal re- serve bank and appoint a receiver therefor. (i) To perform the duties, functions, or services specified or implied in this Act. REDISCOUNTS. Sec. 13. That any Federal reserve bank may receive from any of its stockholders deposits of current funds in lawful money, national-bank notes, Federal reserve notes, or checks and drafts upon solvent banks, domestic and foreign, or ac- ceptances authorized by this Act. Upon the indorsement of any member bank any Federal reserve bank may discount notes and bills of exchange arising out of commercial transactions; that is, notes and bills of ex- change issued or drawn for agricultural, industrial, or com- mercial purposes, the Federal Reserve Board to have the right to determine or define the character of the paper thus eligible for discount, within the meaning of tliis Act; but such defini- tion shall not include notes or bills issued or drawn for the purpose of carrying or trading in stocks, bonds, or other invest- ment securities, except notes or bills having a maturity of not 66 ///,- II Ul. exccL'cling lour iiionllis and seeiircd by I iiited ^States bonds or bonds issued by any State, county, or municipality of the United States. Notes and hills admitted to discount under the terms of this paragraph must have a maturity of not more than forty- five days. Upon the indorsement of any member bank any Federal reserve bank may discount the paper of the classes hereinbefore described having a maturity of more than forty-five and not more than one hundred and twenty days, when its own cash reserve exceeds thirty-three and one-third per cent, of its total outstanding demand liabilities; but not more than fifty per cent, of the total paper so discounted for any depositing bank shall have a maturity of more than sixty days. Upon the indorsement of any member bank any Federal reserve bank may discount acceptances of such banks which are based on the exportation or importation of goods and Avhich mature in not more than ninety days and bear the signature of at least one member bank in addition to that of the acceptor. The amount so discounted shall at no time exceed one-half the capital of the bank for which the rediscounts are made. The aggregate of such notes and bills bearing the signature or in- dorsement of any one person, company, firm, or corporation rediscounted for any one bank shall at no time exceed ten per centum of the unimpaired capital and surplus of said bank. Any member bank may, at its discretion, accept drafts or bills of exchange drawn upon it having not more than six months sight to run and growing out of transactions involving the importation or exportation of goods ; but no bank shall ac- cept such bills to an amount equal in the aggregate to more than one-half the face value of its paid-up and unimpaired capital. Sec. 14. Whenever in the opinion of the Federal Eeserve Board the public interest so requires, the Federal Eeserve Board may authorize the reserve bank of the district to discount the direct obligations of member banks, secured by the pledge and deposit of satisfactory securities ; but in no case shall the amount so loaned by a Federal reserve bank exceed three-fourths of the actual value of the securities so ]iledged or one-half the amount of the paid-up and unimpaired capital of the memlu'r Itank. OPEN-MARKET OPERATIONS. Sec. 15. That any Federal reserve bank may, under rules and regulations prescribed by the Federal Eeserve Board, pur- chase and sell in the open market, either from or to domestic or foreign banks or individuals, bankers' bills, cable transfers, 67 The Bill. and bills of exchange of the kinds and maturities by this Act made eligible for rediscount. Every Federal reserve bank shall have power (a) to deal in gold coin and bullion both at home and abroad, to make loans thereon, and to contract for loans of gold coin or bul- lion, giving therefor, when necessary, acceptable security, in- cluding the hypothecation of United States bonds; (b) to invest in United States bonds and in short-time obligations of the United States or its dependencies or of any State or foreign Government; (c) to purchase from member banks and to sell, with or without its indorsement, checks or bills of exchange arising out of commercial transactions, as hereinbefore defined, payable in foreign countries; but such bills of exchange must have not exceeding ninety days to run and must bear the signa- ture of two or more responsible parties, of which the last shall be that of a subscribing bank; (d) to establish each week, or as much oftener as required, subject to review and deter- mination of the Federal Eeserve Board, a minimum rate of discount to be charged by such bank for each class of paper, which shall be made with a view to accommodating the com- merce of the country and promoting a stable price level; and (e) with the consent of the Federal Eeserve Board, to open and maintain banking accounts in foreign countries and establish agencies in such countries wheresoever it may deem best for the purpose of purchasing, selling, and collecting foreign bills of exchange, and to buy and sell with or without its indorsement, through such correspondents or agencies, checks or prime foreign bills of exchange arising out of commercial transactions which have not exceeding ninety days to run and wbicli bear the signature of two or more responsible parties. GOVERNMENT DEPOSITS. Sec. 16. That all moneys now held in the general fund of the Treasury shall, upon the direction of tlie Secretary of the Treasury, within twelve months of the passage of this Act, be deposited in Federal reserve banks, which shall act as fiscal agents of the United States ; and thereafter the revenues of the Government shall be regularly deposited in such banks, and disbursements shall be made by checks drawn against such deposits. The Secretary of the Treasury shall, from tiinc to time, apportion the funds of the Government among tlio said Federal reserve banks, and may, at his discretion, cliarge interest thereon and fix, from month to month, a rate which shall be regularly paid by the banks holding such deposits: Provided, That no Federal reserve bank shall pay interest upon any deposits except those of the United States. 68 The Bill. The Government of the United States and the banks de- positing in the Federal reserve banks shall be the only depos- itors in said reserve banks. All domestic transactions of the Federal reserve banks involving a rediscount operation or the creation of deposit accounts shall be confined to the Govern- ment and the depositing ])anks, with the exception of the pur- chase or sale of Government or State securities, or securities of foreign Governments, or of gold coin or bullion. NOTE ISSUES. Sec. 17. That an issue of Federal Eeserve Treasury notes not to exceed $500,000,000 and in addition thereto a sum equal to the difference between the total amount of national bank notes outstanding at any given moment and the amount of such notes outstanding at the passage of this Act is hereby authorized. The said notes shall purport on their faces to be the obligations of the United States, and shall be issued, at the discretion of the Federal Eeserve Board, and solely for the purpose of making advances to Federal reserve banks, as hereinafter set fortlu They shall be receivable for all taxes, customs, and other public dues, and shall be redeemed in gold on demand at the Treasuiy Department in the city of Washington, District of Columbia, or at any Federal reserve bank; and when deposited witli siicli bank for redemption may be charged off by said bank against Treasury balances on its books, or may be paid out of its law- ful money funds specifically set apart for their redemption. Any Federal reserve bank may, upon vote of its directors, make application to the Federal Eeserve Board through the local Federal reserve agent for such amount of the Treasury notes hereinbefore provided for as it may deem best. Such application shall be accompanied with a tender to the local Federal reserve agent of collateral security to protect the notes for which application is made, equal in amount to the sum of the notes thus applied for. The collateral security thus offered shall be notes and bills accepted for rediscount under tlic pro- visions of sections thirteen, fourteen, and fifteen of this Act, and the Federal Eeserve Board shall be authorized at any time to call upon a Federal reserve bank for additional deposits of security. Whenever any Federal reserve bank shall pay out or dis- burse Federal reserve Treasury notes of the issue herein pro- vided it shall segregate in its own vaults and shall carry to a special account on its books gold or lawful money equal in amount to thirty-three and one-third per centum of the Treas- ury notes so paid (nit by it. The Federal Eeserve Board shall have ]iower. in its discretion, to require Federal reserve banks 69 The Bill. to maintain on deposit in the Treasury of the United States a sum in gold or lawful money equal to five per centum of such amount of Federal Eeserve Treasury notes as may be issued to them under the provisions of this Act ; but such five per centum sli^ll be counted and included as part of the thirty-three and one-third per centum reserve hereinbefore required. The said Board shall also have the right to grant in whole or in part or to reject entirely the application of any Federal Reserve bank for Federal Eeserve Treasury notes; but to the extent and in the amount that such application may be granted the Federal Eeserve Board shall, through its local Federal reserve agent, deposit Treasury notes with the bank so applying, and such bank shall be charged with the amount of such notes and shall pay such rate of interest on said amount as may be established by the Federal Eeserve Board, and the amount of such Treasury notes so issued to any such bank shall, upon delivery, become a first and paramount lien on all the assets of such bank. Any Federal reserve bank may at any time reduce its lia- bility for outstanding Federal reserve Treasury notes by the deposit of Federal reserve Treasury notes whether issued to such bank or to some other member bank, other lawful money of the United States, or gold bullion, with the Federal reserve agent or with the Treasurer of the United States, and such reduction shall be accompanied by a corresponding reduction in the re- serve fund of lawful money set apart for the redemption o* said notes and by the release of a corresponding amount of tne collateral security deposited with the local Federal reserve agent. Any Federal reserve bank may at its discretion withdraw collateral deposited with the local Federal reserve agent J'or the protection of Federal reserve Treasury notes deposited witb it and shall at the same time substitute other collateral of equal value approved by the Federal reserve agent under regulations to be prescribed ])y the Federal Eeserve Board. It shall be the duty of every Federal reserve bank to re- ceive on deposit, at par and without charge for exchange or collection, checks and drafts drawn upon any of its depositors or by any of its depositors upon any other depositor and checks and drafts drawn by any depositor in any other Federal reserve 1)ank upon funds to the credit of said depositor in said reserve bank last mentioned. The Federal Eeserve Board shall make and promulgate from time to time regulations governing the transfer of funds at par among Federal Eeserve Banks, and may at its discretion exercise the functions of a clearing house for sucb Federal reserve banks, and may also require each such bank to exercise the functions of a clearing house for its share- holding banks. 70 The Bill. Sec. 18. ThiiL no naiiunal banking association shall Ijc entitled to receive from the Comptroller of the Currency or to issue circulating notes in excess of the total amount of such notes which such bank may have outstanding at the passage of this Act, and no national banking association which may in future reduce its outstanding circulating notes in the manner ' prescribed by law shall hereafter be entitled to receive from the Comptroller of the Currency or to issue circulating notes in excess of tlie sum to whicli its outstanding notes shall have been reduced by such withdrawals. Skc. 19. That 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 July twelfth, eighteen hundred and eighty-two, and of any other provisions of existing statutes, as require that before any national banking association shall be authorized to com- mence banking business it shall transfer and deliver to the Treasurer of the United States United States registered bonds to an amount, where the capital is $150,000 or less, not less than one-fourth of its capital stock, and $50,000 where the capital is in excess of $150,000, be, and the same is hereby, repealed. REFUNDING BONDS. Sec. 20. Upon application the Secretary of the Treasury shall exchange the two per centum bonds of the United States l)caring the circulation privilege theretofore deposited l)y any national banking association with the Treasurer of the United States as security for circulating notes for three per centum bonds of the United States without the circulation privilege, payable after twenty years from date of issue, and exempt from Federal, State, and municipal taxation both as to income and principal. When and in proportion as the outstanding two per centum bonds deposited with the Treasurer shall be thus ex- changed or refunded, the power of national banks to issue circu- lating notes secured by United States bonds shall cease and terminate. Every national bank may continue to apply for and receive from the Comptroller of the Currency circulating notes under the conditions provided by this Act. but no national bank shall be permitted to issue circulating notes of any description or to issue or to make use of any substitute for such circulating notes in the form of clearing-house certificates, cashier's checks, or other obligation not specifically provided for under this Act, and no national bank shall, without consent of the Sec- retary of the Treasury, in any one year present two per centum bonds for exchange in the manner hereinbefore provided to an 71 The Bill. amount exceeding five per centum of the total amount of bonds on deposit with the Treasurer by said bank at the time of the passage of this Act. At the expiration of twenty years from the passage of this Act every holder of United States two per centum bonds then outstanding shall receive in exchange three per centum bonds of like denomination payable twenty years from date of issue, and without the circulation privilege. After twenty 3'ears from the date of the passage of this Act national- bank: notes still remaining outstanding shall be recalled and redeemed by the national banking associations issuing the same within a period and under regulations to be prescribed by the Federal Eeserve Board, and notes still remaining in circulation at the end of such period shall be secured by an equal amount of lawful money deposited in the Treasury of the United States by the banking associations originally issuing such notes. BANK RESERVES. Sec. 21. That within sixty days from and after the date when the Secretary of the Treasury shall have officially an- nounced, in such manner as he shall elect, the fact that a Fed- eral reserve bank has been established, every national banking association shall establish with the Federal reserve bank of its district a credit balance on the books of the latter institution equal to not less than three per centum of its own total demand liabilities, exclusive of circulating notes, and at the end of fourteen months from the date fixed by the Secretary of the Treasury shall increase the said three per centum to five per centum. Such balance may at any time be increased, but shall at no time be allowed to fall below the amounts aforesaid. From and after the date set by the Secretary of the Treas- ury and officially announced by him as hereinbefore provided, it shall be the duty of national banking associations now classified as country banks and situated outside of central reserve and reserve cities to maintain a reserve equal to fifteen per centum of the aggregate amount of their deposits. Such reserve shall consist of five per centum of lawful money lield actually in their own vaults and for a period of fourteen months from the date aforesaid shall consist of at least three per centum and there- after of at least five per centum, with its district Federal re- serve bank. The remainder of the fifteen per centum reserve hereinbefore required may for a period of thirty-six months from and after the date set by the Secretary of the Treasury, as here- inbefore provided, consist of balances due to a national bank in reserve or central reserve cities as now defined by law. From and after a date thirty-six months subsequent to the date set by the Sccrctiiry of the Treasury, as hercinliefore provided, the 72 The BUI. said reiiuiiuder oi' the lil'lecii per centum reserve required of country banks shall consist either of lawful money in its own vaults or of balances on deposit with the Federal reserve bank of its district or both : Provided, That the Federal Reserve Board may, in its discretion, permit said remainder of fifteen per centum reserve required of country banks to consist of balances on deposit with any l)ank in a reserve or central re- serve city as defined by law. BANKS IN RESERVE CITIES. From and after the date set by the Secretary of the Treas- ury for the incorporation of the Federal reserve bank within such district it shall be the duty of the national banks in such reserve cities to maintain for a period of twenty-six months a reserve of twenty-five per centum of their outstanding deposits and for twelve months thereafter a reserve of twenty-two and one-half per centum, and at the end of thirty-eight months, and permanently thereafter, a reserve of twenty per centum of their outstanding deposits. For sixty days from the date set by the Secretary for the organization of the reserve bank in such dis- trict each national bank in the reserve cities shall maintain in its own vaults, in lawful money, a sum equal to twelve and one-half per centum of its outstanding deposits and thereafter a sum of lawful money equa^ to ten per centum of its deposits. Tlie additional legal reserve above the lawful money required in its own vaults may be kept either with the Federal reserve bank or with a reserve agent in the central reserve cities, for ft period not exceeding thirty-six months from the organization of the Federal reserve bank in such district: Provided, lioio- ever. That the requirement of a balance of three per centum and five per centum, respectively, of its deposits with the Fed- eral reserve bank of its district, as hereinl-)efore provided, shall not be diminished. CENTRAL RESERVE CITY BANKS. The national banks in central reserve cities, for a period of fourteen months, shall maintain a reserve, in lawful money, equal to twenty-five per centum of their deposits and there- after, for a further period of twelve months, a reserve in lawful money equal to twenty-two and one-half per centum of their deposits and after twenty-six months they shall maintain a reserve in lawful money equal to twenty per centum of their outstanding deposits. For a period of sixty days after the passage of this Act each such bank shall maintain^ in its own vaults, in lawful money, a sum e(iual to twenty per centum of The Bill. its deposits, and thereafter, in lawful money, ten per centum of its deposits. It shall be optional with such banks to keep their reserve, in addition to the lawful money required to be kept by them as aforesaid, either in their own vaults or as a deposit with the Federal reserve bank of the district in which such national bank is located: Provided, however, That the re- ((Uirement of a balance of three per centum and five per centum respectively, with the Federal reserve bank of its district, as hereinbefore provided, shall not be diminished. Sec. 22. That so much of sections two and three of the Act of June twentieth, eighteen hundred and seventy-four, en- titled "An Act fixing the amount of United States notes, pro- viding for a redistribution of the national bank currency, and for other purposes," as provides that the fund 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, be, and the same 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. Sec. 23. That every Federal reserve bank shall at all times have on hand in its own vaults, in gold or lawful money, a sum equal to not less than thirty-three and one-third per centum of its outstanding demand liabilities. BANK EXAMINATIONS. Sec. 24. That the examination of the affairs of every national banking association authorized by existing law shall take place at least twice in each calendar year and as much oftener as the Federal Eeserve Board shall consider necessary in order to furnish a full and complete knowledge of its con- dition. The Secretary of the Treasury may, however, at any time direct the holding of a special examination. The person assigned to the making of such examination of the affairs of any national banking association shall have power to call together a quorum of the directors of such association, who shall, under oath, state to such examiner the character and circumstances of such of its loans or discounts as he may designate; and from and after the passage of this Act all bank examiners shall re- ceive fixed salaries, the amount whereof shall be determined by the Federal Reserve Board and shall be annually reported to Congrfss. But the expense of the examinations herein provided for shall be assessed by the Federal Reserve Board upon the associations examined in proportion to assets or resources held by such associations upon a date during the year in which said 74 The Bill. examinations arc lifkl to be established by the i^'ederal Ueservc Board. The Comptroller of the Currency shall so arrange the duties of national bank examiners that no two successive ex- aminations of any association shall be made by the same examiner. In addition to the examinations made and conducted by the Comptroller of the Currency, every Federal reserve bank may, with the approval of the Federal Reserve Board, arrange for special or periodical examination of the member banks within its district. Such examination shall be so conducted as to inform the Federal reserve bank under whose ausj)ices it is carried on 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 be bound to furnish to the Federal Eeserve Board such information as may be demanded by the latter concerning the condition of any national l)anking asso- ciation organized within the district in which the said Fed- eral reserve bank is located, and it shall have power at all times to order special examinations without notice, for the purpose of ascertaining the condition of a member bank. The Federal Eeserve Board shall as often as it deems best, and in any case not less 'frequently than four times each year, order an examination of national l)anking associations in reserve cities. Such examinations shall show in detail the total amount of loans made by each bank on demand, on time, and the differ- ent classes of collateral held to protect the various loans. Sec. 25. That no national bank shall hereafter make any loan or grant any gratuity to any examiner of such bank. Any bank offending against this provision shall be deemed guilty of a misdemeanor and shall be fined not more than $1,000, and a furtlier sum equal to the money so loaned or gratuity given ; and the oflficer or ofhcers of a bank making such loan or granting such gratuity shall be likewise deemed guilty of a misdemeanor and shall be fined not to exceed $500. Any examiner accepting a loan or gratuity from any bank examined hy him shall be deemed guilty of a misdemeanor and shall be fined not more than $500, and a further sum equal to the money so loaned or gratuity given, and shall forever thereafter he disqualified from holding office as a national bank examiner. Xo national bank cxaminor shall perform any other service for compensation while holding such office. No officer or director of a national bank shall receive or be beneficiary, either directly or indirectly, of any fee. brokerage, commission, gift, or other consideration for or on account of any loan, purchase, sale, payment, exchange, or transaction made by or on belialf of a national bank of which 7h The BUI. he is such officer or director. Any person violating any provision of this Act shall be punished by a line of not exceeding $5,000, or by a term in the penitentiary not exceeding three years, or both such fine and imprisonment. Sec. 26. That from and after the passage of this Act the stockholders of every national banking association shall be held individually responsible for all contracts, debts, and engagements 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 association 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 shall be liable to the same extent as if they had made no such transfer; but this provision shall not be con- strued to affect in any way any recourse which such share- holders might otherwise have against those in whose names such shares are registered at the time of such failure. Sec- tion fifty-one hundred and fifty-one, Eevised Statutes of the United States, is hereby reenacted except in so far as modi- fied by this section. LOANS ON FARM LANDS. Sec. 27. That any national banking association not situated in a reserve city or central reserve city may make loans secured by improved and unencumbered farm land, and so much of section fifty-one hundred and thirty-seven of the Eevised Statutes as prohibits the making of such loans by banks so situated shall be, and the same is hereby, repealed ; but no such loan shall be made for a longer time than nine months, nor for an amount exceeding fifty per centum of the actual value of the property offered as security, and such property shall be situated within the Federal reserve district in which the bank is located. Any such bank may make such loans in an aggregate sum equal to twenty-five per centum of its capital and surplus, or fifty per centum of its time deposits. The Federal Eescrve 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 manner described in this section. FOREIGN BRANCHES. Sec. 28. That any national banking association possess- ing a capital of $1,000,000 or more may file application with 76 The Hill. the Federal lieserve Board, upon such eoudilioiis and under such circumstances as may be prescribed by the said board, for the purpose of securing authorization to establish branches in foreign countries for the furtherance of the foreign com- merce of the United States and to act, if required to do so, as fiscal agents of the United States. Such application shall specify, in addition to the name and capital of the banking association filing it, the foreign country or countries or the dependencies of the United States where the banking opera- tions proposed are to be carried on and the amount of capital set aside by the said banking association fding application for the conduct of its foreign business at the branches proposed b}-^ it to be establislied in foreign countries. The Federal Eeserve Board shall have power to reject such application if, in its judgment, the amount of capital proposed to be set aside for the conduct of foreign Inisiness is inadequate or if for other reasons the granting of such application is deemed inexpedient. Every national banking association wliich shall receive authorization to establish ])ranches in foreign countries shall be required at all times to furnish information con- cerning the condition of such branches to the Comptroller of the Currency upon demand, and the Federal Reserve Board may order special examinations of the said for- eign branches at such time or times as it may deem best. Every such national banking association, Bhall conduct the accounts of each foreign branch independently of the accounts of other foreign branches established by it and of its home office, and shall at the end of each fiscal period transfer to its general ledger the profit or loss accruing at each such branch as a separate item. Sec. 29. That all provisions of law inconsistent with or superseded by any of the provisions of this Act be, and the same are hereby, repealed. 77 vmmm^m^m^m UNIVERSITY OF CALIFORNIA AT LOS ANGELES LOS ANGli^Ll-S 1 I ''I'A^J^Y HG 2481 National N19p city bank of i\ew xorK - Pending: banking le,^;islalia^. DEMCO 2»4N HG 2481 Nl9p i5""Tl58 01158 5790 UC SOUTHERN RFGIONAL LIBRARY FACILITY 1 jlMt III '" ill ||{|l| i|iii|il AA 001 115815 .ri