STACK ANNEX 5 036 799 THE ALDRICH CURRENCY SYSTEM ose OS aiiiornu legional 'acility THE ALDRICH CURRENCY REFORM SYSTEM ANALYSED How the proposed system would work in practice What its application would mean for the large and small banks of the United States The creation of a discount market The gradual elimination of the bond secured currency and the granting of emergency loans in time of need An interpretation of the most extraordinary proposal yet made for reforming the currency system of the United States 1911 WITH THE COMPLIMENTS OF THE FOURTH NATIONAL BANK OF THE CITY OF NEW YORK n: TROW PRESS HEW YORK SENATOR ALDRICH'S PROPOSAL No suggestion made in the last decade for reforming the currency system of the United States has elicited the general interest excited by the extraordinary system pro- posed by Senator Aldrich in his letter to the National Monetary Commission under date of January 16th last. Its provisions have since been carefully studied by bankers throughout the United States and in Europe. The pro- posal was necessarily informal, and as yet nothing has been done toward drafting a bill enacting its essential fea- tures. Before anything along that line is accomplished a great deal of educational work will have to be undertaken in the effort to familiarize the people of the whole country with the advantages of the proposed service, and its adapt- ability for strengthening the weak spots of a banking sys- tem that is made up of some 22,000 separate institutions conducted under national and state supervision. The problem, then, is as big as the country. It concerns the welfare of every business man who has relations with a bank. For that reason the question should be studied without prejudice and with appreciation of its importance to this and future generations. The panic of 1907 empha- sized the defects of our present currency system in a way that was little realized until the scramble for reserve money and the unprecedented currency famine disclosed the utter lack of co-operation among the banks as a whole. Senator Aldrich's proposal, as made, apparently guar- antees the mobility of reserves, the elasticity of note issues, and the creation of a discount market similar to that which has contributed so largely to London's com- mercial prestige. Many points remain to be worked out notably those providing for the organization of national trust companies, federal savings banks, and foreign banks whose stock would be controlled by banks in the United States and it is possible that new features may be added. [Page 3] 2003546 Senator Aldrich's Proposal In the effort to show what Senator Aldrich's system would mean in actual practice the following analysis of the important provisions has been attempted. The pro- visions are viewed so differently by different experts as to insure continued discussion for months to come. In the following pages the subject matter is divided into sec- tions, so as to make the different provisions instantly ac- cessible. To this end an index on the last pages will be helpful. The aim is to give in each paragraph the gist of Sena- tor Aldrich's suggestion, with such comment as shall make clear its real significance. The intention, therefore, is not to speak for or against the plan, but rather to inter- pret its essential features in the light of current discussion. [Page4j PART I.-MACHINERY The Reserve Association of America (1) The Reserve Association of America is the cen- The tral organization of the whole system. Its functions need Central to be kept clearly in mind by all who wish to gain a broad-gauge view of Senator Aldrich's elaborate pro- posal for currency reform. Headquarters of the Asso- ciation will be at Washington at the seat of the national government, just as, in the case of the great state banks of Europe, the head office is usually located in the capital city. Since the Reserve Association of America will act as the Government's fiscal agent it will do virtually all of the Government's business that is now transacted by the national banks. It will be, to all intents and purposes, a bank of banks. Besides this, it will be the parent insti- tution of fifteen branches, each branch being the head- quarters for the affiliated national banks of a separate dis- trict. While the authorized capitalization of the Reserve Association of America is placed at $300,000,000, only half of this amount, or $150,000,000, is to be actually paid in. If the state banks and trust companies, with the national banks, should enter the system in large num- bers, the maximum paid-in capitalization might easily be required. The Association will be exempt from state and local taxation, except taxes upon real estate owned by it. Its charter will run for fifty years. (2) Any national bank may, but none shall be obliged stock; how to, subscribe for the capital stock of the Reserve Asso- DUtributed ciation of America. The subscription of each national bank must equal no more and no less -20 per cent, or one-fifth, of its (the bank's) capital stock. In other words, a national bank capitalized at, say, $25,000, could [Page 5] The Aldrich Currency System Proportion. Ownership Always Maintained Dividend* subscribe for $5,000 of the capital stock of the Reserve Association of America. Only half of this subscription, or $2,500, would be paid in at once ; the remaining $2,500 would remain a liability of the stockholders, subject to call. (3) None but national banks (this term includes all state institutions that take out Federal charters under the terms of this proposal) can own stock in the Re- serve Association of America, and then only to the extent of one-fifth of their own capital stock. This proportion- ate interest of each bank affiliated with the Reserve Asso- ciation of America must always be maintained. Where a bank increases its capital stock it shall subscribe for additional shares in the Reserve Association of America to the extent of one-fifth of that increase. Where a bank decreases its capital stock it must surrender shares in the Reserve Association of America to an amount equal to one-fifth of that decrease. If a bank goes into liquida- tion it must surrender all its holdings of the stock of the Reserve Association of America. In cases where a bank increases or decreases its capital stock after joining the Reserve Association of America, the adjustment for the new shares subscribed for, or the old shares surrendered, shall be on the basis of the then book value (of the Reserve Association's stock) as shown on the balance sheet of the Reserve Association of Amer- ica. In cases where the shares of the Reserve Association of America are surrendered they must be immediately canceled. (4) The Reserve Association of America shall dis- tribute, after all expenses and taxes are paid, 4 per cent cumulative dividends. When more than 4 per cent is earned one-half of the excess shall go to surplus, until that surplus reaches 20 per cent of the paid-in capital; one-fourth shall be paid to the Government of the United States, and one-fourth to the stockholders, or, in other words, to the banks affiliated with the Reserve Associa- tion of America. [Page 6] The Aldrich Currency System No larger dividends than 5 per cent shall be declared by the Reserve Association of America. All excess earn- ings must thereafter go, one-half to surplus and one-half to the Government. After the maximum dividend rate of 5 per cent has been reached and the surplus of the Reserve Association of America amounts to 20 per cent of its paid-in capital, all excess earnings shall go to the United States Government. Local Associations of National Banks (5) All subscribing banks shall join what is known as Organization a " Local Association of National Banks." Each such organization shall be composed of ten or more banks hav- ing a capital and surplus of not less than $5,000,000. All these associations shall be grouped in fifteen divisions to be known as "districts." (See Section 1.) These associations must cover the entire territory in which all of the country's 7,218 or more national banks are located. Every bank that belongs to the Reserve Association of America must join the local association of the territory in which it is located. (6) The scheme of control for the local associations is Directors very ingenious. Senator Aldrich provides that the num- of Local ber of directors may be determined by the by-laws of the Associations local association. Three-fifths of that number shall be chosen by ballot cast by the members of the local asso- ciation, each member bank, irrespective of its size, having one vote. Two-fifths of the whole number of directors of the local association shall be elected by the voting rep- resentatives of these banks, but in voting for these addi- tional directors each voting representative (of a member bank) shall be entitled to cast as many votes as are rep- resented by the number of shares in the Reserve Asso- ciation of America that his bank holds. There shall be no proxies at these elections. All voting must be done by either the president, vice president, or cashier of the banks represented. [Page 7] The Aldrich Currency System In effect this scheme would work out as follows: Say that a local association comprised of one hundred banks had fifteen directors. Three-fifths of this number, or nine directors, would be elected by the votes of the one hun- dred banks, while the remaining two-fifths of the whole number, or six directors, would be chosen chiefly by the banks having the greatest capitalization, or on the basis of pro rata ownership, in the Reserve Association of America. In this way the control of the local association must rest inevitably with the majority of the banks and not with those having the greatest capitalization. The rep- resentative character of the organization is thus assured. Branches of the Reserve Association of America (7) In each of the fifteen districts in which the coun- try's national banks are divided shall be located a branch office of the Reserve Association of America. Each of these fifteen branch offices shall have a board of directors equal in number to the number of local asso- ciations in the branch district. The directors of each local association shall select by ballot one director of the Reserve Association of America. In addition there shall also be selected, on the basis of pro rata stock representa- tion, a group of directors equal to two-thirds the number of local associations in the district where the branch is located. Another group, consisting of one-third the number of members of the first group and " representing the indus- trial, commercial, agricultural, and other interests of the districts," shall be elected by the directors of the first two groups, each director thus voting having one vote. In this way each branch of the Reserve Association shall ultimately have a number of directors equal to twice the number of local associations in the Reserve branch district. These directors shall not be officers of banks. The manager of the branch shall be ex officio a member of the board of directors of the branch and shall act as its chairman. At the first meeting of this board the [Page 8] The Aldrich Currency System directors shall be classified into three groups, serving respectively one, two, and three years. Thereafter the board shall be elected for a term of three years. * Directors of the Reserve Association of America (8) The board of directors of the Reserve Association The chief of America shall consist of forty-five members. Governing (a) Six of these shall be ex officio members, the Gov- y ernor of the Reserve Association, who shall be chairman of the board; two deputy governors of the Reserve Association, the Secretary of the Treasury, the Secre- tary of Commerce and Labor, and the Comptroller of the Currency. (b) Fifteen directors shall be elected by ballot by the board of each branch of the Reserve Association of Amer- ica. Each director (of the branch of the Reserve Asso- ciation of America) shall have one vote. (c) Twelve directors shall be elected by the voting representatives, one representing the banks embraced in each district. (See Section 6.) Each voting represent- ative shall cast a number of votes equal to the number of shares in the stock of the Reserve Association of America held by all the banks in the district which he represents. (d) The board as thus constituted shall then elect twelve additional directors who shall " fairly represent the industrial, commercial, agricultural, and other interests of the country," and shall not be officers of banks. Direc- tors of the banks shall not be regarded as officers. At the first meeting of this board all members except Term of office the ex officio members shall be classified into three classes, and the terms of office of these three classes shall be, re- spectively one, two, and three years. Thereafter the board shall be elected for a term of three years. No member of any national, state, or legislative body shall be a director of the Reserve Association of America, or any of its branches, or of any local association. [Page 9] The Aldrich Currency System (9) The directors of the Reserve Association of Amer- ica shall annually elect an Executive Committee and such other committees as the by-laws of the Reserve Associa- tion may provide. The Executive Committee shall con- sist of nine members, of which the governor of the Reserve Association of America shall be ex officio chair- man, and the two deputies and the Comptroller of the Currency shall be ex officio members. That provides for all but five members of the Executive Committee. (10) The Aldrich plan provides that the "executive committee shall have all the authority which is vested in the board of directors, except such as may be specifically delegated by the board to other committees or to its executive officers." This would unquestionably be the most influential com- mittee in the United States. (11) There shall be a board of supervision elected by the directors from among its members, of which the Sec- retary of the Treasury shall be ex officio chairman. Noth- ing is said concerning the normal strength of this board or its special duties or tenure of office. (12) The executive officers of the Reserve Associa- tion of America shall consist of a governor, two deputy governors, a secretary, and such subordinate officers as may be provided for by the by-laws. The governor and deputy governors shall be appointed by the President of the United States from a list submitted by the board of directors. The governor shall be subject to removal by the Presi- dent of the United States for cause. The term of office of the deputies shall be seven years, but the two deputies first appointed shall be for terms of four years and seven years respectively. In the absence of the governor, or his inability to act, the senior deputy shall act in his stead. Nothing is said as to the salary that the governor of the Reserve Association should receive. The general idea [Page 10] The Aldrich Currency System is that it should be from $50,000 to $100,000 a year. He ought to be made financially independent, so that his whole energies could be devoted to the work in hand. (13) Each branch shall have a manager and a deputy. Officer, of They shall be appointed by the governor of the Reserve Branches Association with the approval of the Executive Committee. Their powers and those of the various committees of the branches shall be prescribed by the by-laws of the Reserve Association of America. PART II.-FUNCTIONS Local Associations (.14) Any bank-member of the local association may How to apply for a guaranty of the commercial paper which it Rediscount desires to rediscount, at the branch of the Reserve Asso- p *P er ciation of America located in its district. For this guar- anty the bank shall pay the local association a commis- sion that is fixed by the board of directors. The feeling prevails among bankers, however, that this privilege would rarely be utilized by the banks except in times of panic or great disturbance. Some who have given most careful study to the plan say that the local associations would seldom, if ever, meet. But the ma- chinery has been devised for the express purpose of afford- ing to banks of all communities precisely the facilities which are available in time of need to banks located in cities where there are well-organized clearing houses. It is conceivable, therefore, that the local associations might be of great public service. (15) In the event of loss the guaranty (by the local Profit and association) shall be met by the members of the local asso- L* ciation in proportion to the ratio that their capital and surplus bear to the aggregate capital and surplus of the local association. Profits representing the excess of com- [Page 11] The Aldrich Currency System Maximum of Guarantee mission received over losses and expenses incurred shall be distributed on the same basis. (16) The local association shall be authorized to re- quire additional security from any member offering paper for guaranty. It may also decline applications for such guaranties. The total of all guaranties given by a local association to the Reserve Association of America shall not at any time exceed the capital and surplus of the banks offering the guaranty. Banks and Government the only Depositors May Buy and Sell Securities Privileges of Reserve Association Open to All (17) All the privileges and advantages of the Reserve Association of America shall be equitably extended to every national bank which shall subscribe for its propor- tion of the stock of the Reserve Association of America and which shall conform to its requirements. * (18) None but the government of the United States and national banks owning stock in the Reserve Associa- tion of America shall be depositors with the Reserve Association. (19) All domestic transactions of the Reserve Asso- ciation of America shall be confined to the government and the subscribing banks, the purchase or sale of gov- ernment or state securities, or the securities of foreign governments, or of gold coin and bullion. (20) The government of the United States shall de- posit its cash balance with the Reserve Association, and thereafter all receipts of the government shall be depos- ited with the Reserve Association and (where necessary) with national banks which the government may designate for that purpose in cities where there is no branch of the Reserve Association. All disbursements by the Govern- ment shall be made through the Reserve Association. [Page 12] The Aldrich Currency System This means that at least the banks of fifteen prominent cities (including New York City) shall surrender all government money that they now hold. Very little gov- ernment money under the proposed system will be depos- ited outside the Reserve Association of America, as the branches of the Reserve Association of America will be located at convenient points throughout the United States. (21) The Reserve Association of America shall pay no Not to take interest whatever on deposits. Business away This is a vital provision of Senator Aldrich's scheme. Its possible effect has been viewed differently by different bankers. Some still feel that the Reserve Association of America will offer sufficient competition with banks of New York, Chicago, St. Louis, and other reserve cities, to force the withdrawal of deposits now lodged with these banks by interior institutions. This point, however, does not seem to be well taken. The banks will deposit with the Reserve Association of America nothing but a portion of their surplus funds. That is to say, an institution that is accustomed to carry, for instance, $100,000 cash surplus in its vault, will retain only $20,000 in cash, or whatever is needed as " till money," and surrender the balance to the Reserve Asso- ciation of America. There is no reason why it should do anything else. There certainly would be no incentive for it to cut down the balance carried with a bank in a reserve city on which it was receiving the usual 2 per cent interest allowance. It is well to remember, also, that the discount facilities of the Reserve Association of America are in no way dependent upon, or regulated by, the amount of bal- ance carried with the Reserve Association of America by the borrowing bank. Any affiliated bank possessing the proper paper can secure accommodation from the Reserve Association of America. [Page IS] The Aldrich Currency System PART HI-DISCOUNT FACILITIES f (22) Senator Aldrich provides in these words (the exact language being here quoted) for the unique dis- count facilities of the Reserve Association of America: " 28-Day n " The Reserve Association may rediscount notes and Bilu bills of exchange arising out of commercial transactions, for and with the indorsement of any bank having a de- posit with it. Such notes and bills must have a maturity of not more than twenty-eight days, and must have been made at least thirty days prior to the date of rediscount. The amount so rediscounted shall in no case exceed the capital of the bank applying for the rediscount. The aggregate of such notes and bills bearing the signature or indorsement of any one person, company, corpora- tion, or firm, rediscounted for any one bank, shall at no time exceed 10 per cent of the capital and surplus of said bank. other Bills " The Reserve Association may also rediscount for any depositing bank, notes and bills of exchange, arising out of commercial transactions, having more than twenty- eight days, but not exceeding four months, to run, but in such cases the paper must be guaranteed by the local association of which the bank asking for the rediscount is a member. Direct " Whenever, in the opinion of the Governor of the Re- Obiigations serve Association, the public interests so require, such opinion to be concurred in by the Executive Committee of the Reserve Association and to have the definite approval of the Secretary of the Treasury, the Reserve Association may discount the direct obligation of a depositing bank, indorsed by its local association, provided that the indorse- ment of the local association shall be fully secured by the pledge and deposit with it of satisfactory securities, which shall be held by the local association for account of the Reserve Association ; but in no such case shall the amount loaned by the Reserve Association exceed two-thirds of the actual value of the securities so pledged. [Page 14] The Aldrich Currency System " The rate of discount of the Reserve Association, which Uniform shall be uniform throughout the United States, shall be interest Rate fixed from time to time by the Executive Committee and duly published." These features of Senator Aldrich's plan will excite whataDis- more discussion than any other provisions. Such facili- count Market ties would undoubtedly create a discount market for the Would Mean United States similar to that provided at London and in other important foreign cities. Such a system might conceivably bring about important changes in American business methods. They would simplify commercial paper operations and make it much easier and cheaper for mer- chants to market their paper. v* With such a discount system the banks of tile larger Secondary cities could invest in commercial paper much of the money Reserves which they now lend in Wall Street. In other words, they would, with a well-organized discount market at hand, be able to make much larger investments in commercial paper than they do to-day. This would be a manifest advantage to hundreds of banks that have now " no sec- ondary reserve " whatever except what is employed in the Wall Street loan market or that which is tied up in high-grade bonds that are often difficult to dispose of at forced sale. There is little doubt but that the ultimate tendency of such a system would be to make money rates easier for the merchant. The out-of-town banks would not, under such a plan, advance from $100,000,000 to $400,000,000 to Wall Street borrowers on stock-exchange collateral as they did in 1906 and as they have done on various other occasions in recent years. It is worthy of special note that only paper arising out of " commercial transactions " may be rediscounted with the Reserve Association of America. Except in times of stress when, " in the opinion of the Governor of the Re- serve Association, the public interests so require, such opinion to be concurred in by the Executive Committee of the Reserve Association, and to have the definite approval of the Secretary of the Treasury," the direct obligations [Page 15J The Aldrich Currency System of a depositing bank shall not be discounted. In no such case shall the amount loaned exceed two-thirds of the value of the securities pledged. This makes it impossible for a bank to secure from the Reserve Association of Amer- ica any loan on securities or stock-exchange collateral except when its paper is indorsed by the local association, or when the situation is so grave as to justify the Gov- ernor of the Reserve Association and the Secretary of the Treasury in making what are virtually " emergency loans." When these emergency loans are made, the affiliated banks have to guarantee them and, in addition, $100,000 of acceptable collateral must be pledged against every $06,000 advanced. That would make these loans precisely similar to those made through the medium of clearing-house loan certificates in the panic of 1907. (23) Senator Aldrich's plan also provides: To Purchase " The Reserve Association may, whenever its own con- Acceptances dition and the general financial conditions warrant such investment, purchase to a limited amount from a deposit- ing bank acceptances of banks or houses of unquestioned financial responsibility. Such acceptances must arise from commercial transactions and have a maturity not exceed- ing ninety days, and must be of a character generally known in the market as prime bills. Such acceptances shall also bear the indorsement of the depositing bank selling the same, which indorsement must be other than that of the acceptor. " The Reserve Association may invest in United States bonds and in short-term obligations that is, obligations having not more than one year to run of the United States, or of any state, or of certain foreign governments to be named in the act. " The Reserve Association shall have power at home Gold, etc. and abroad to deal in gold coin or bullion, to grant loans thereon, and to contract for loans of gold coin or bullion, giving, when necessary, acceptable security for their re- payment. [Page 16] May Invest in Bonds The Aldrich Currency System " The Reserve Association shall have power to purchase Dealings in from its depositors and to sell, with or without its indorse- Enange ment, checks or bills of exchange payable in England, France, or Germany, and in such other foreign countries as the board of the Reserve Association may decide. These bills of exchange must arise from commercial trans- actions and be of a maturity not exceeding ninety days, and shall bear the signatures of at least three responsible parties, of which the last one shall be that of a deposit- ing bank. " The Reserve Association shall have power to open Foreign and maintain banking accounts in foreign countries and Agencies to establish agencies in foreign countries for the purpose of purchasing and selling and collecting foreign bills of exchange, and it shall have authority to buy and sell, through such agencies, prime foreign bills of exchange arising from commercial transactions, running for a period not exceeding ninety days, and bearing the signatures of two or more responsible parties." (24) Any bank having a balance with the Reserve Transfer of Association of America may, on notification to the officers Balance* of the Association, transfer any part of its balance to any other branch or to any affiliated bank. The executive committee of the Reserve Association shall fix rates and terms for such transfers by mail or telegraph. (25) National banks are permitted to accept properly Acceptances secured commercial paper arising out of commercial trans- by .National actions, provided the paper has not more than ninety days Bank * to run. These acceptances must not exceed in amount one-half the capital and surplus of the accepting bank. This is a very radical departure in the banking busi- ness in this country and, if permitted, it will require the utmost diligence on the part of the Comptroller's office to see that the privilege is not abused, and will also neces- sitate many changes in methods of handling the credits of the Nation. National banks shall have authority to establish branches For Branch in the cities or towns where they are located. [Page 17] The Aldrich Currency System PART IV. PROVISIONS FOR FOREIGN BANKS, TRUST COMPANIES, AND SAVINGS BANKS (26) A very interesting proposal relates to the organ- ization of three new classes of banks. (a) The first of these is to do business in foreign coun- tries. The stock of such banks may be held by existing national banks. These new banks may have an office in the United States, but they shall not compete with national banks for domestic business that is not directly connected with the business done in foreign countries. (b) Another class, which is to have a specially desig- nated name, is to operate savings departments and make loans on real estate. These loans must not exceed a cer- tain proportion of the time and savings deposits held by these banks. The reserve requirement shall not be as severe against term deposits as against demand deposits. (c) The organization of national banks having all the powers of trust companies and now operating under state laws, is provided for. These shall have a special name which shall distinguish them from other banks. They shall be national institutions and shall be subject at all times to the usual inspection and supervision by the Fed- eral authorities. They shall enjoy virtually all the privi- leges now provided by state law, including length of charter, etc. Special regulations may have to be pro- vided, however, so as to bring them into the system on an equal footing with the national banks. Senator Aldrich does not more than suggest the for- mation of the specially organized banks. He has not worked out the details, and it is evident, from the rather vague provisions made, that the proposal is a suggestion only and will be developed later on as seems best. The suggestion is highly interesting, however, for the reason that it opens the way for the Federal system to take in the great state banks, savings institutions, and trust ' companies. Inasmuch as provision has been made (in the preced- [Page 18] The Aldrich Currency System ing section) for the operation of branches by national banks, this proposal will make it possible for the very strong state banks of New York City to enter the na- tional system and to continue to operate the branches that are now supervised by the New York State Banking Department. With a Federal charter the savings banks would also reach out for new business and extend their operations all over the United States. Inasmuch as the national banks have now more than $500,000,000 on deposit in the so- called " savings departments " and carried as " special deposits," on which a relatively high rate of interest is allowed, it may be pertinent to ask whether the existing banks, or those not specially organized under the special classification herein provided as savings banks, would be allowed to continue this class of business. The fact that these specially organized savings banks would be allowed to make loans on real estate is highly interesting. Reports to the Comptroller " The Reserve Association shall make a report, showing the principal items of its balance sheet, to the Comptroller of the Currency once a week. These reports shall be made public. In addition, full reports shall be made to the Comptroller of the Currency coincident with the five reports called for each year from the national banks. " All reports of national-bank examiners in regard to Publicity the condition of national banks shall hereafter be made in duplicate, and one copy shall be filed with the Reserve Association for the confidential use of its executive officers. " National banks of all classes shall hereafter make a Weekly weekly report to the Comptroller of the Currency show- ing the principal items of their balance sheets, such reports to be available for the use of the executive officers of the Reserve Association." (27) All deposits made with the Reserve Association Reservei of by a national bank shall be counted as a part of the legal National Bank* [Page 19] The Aldrich Currency System reserve. Otherwise, the reserve requirements now con- trolling the national banks shall prevail, except as other- wise modified. PART V. NOTE-ISSUING POWERS (28) No national bank shall take out new bank-note circulation, and whenever a bank retires any part of its existing issue the notes shall not be reissued. As to taking over the $700,000,000 of United States bonds now held by the national banks as a basis for bank- note circulation, Senator Aldrich makes this proposal, his exact language being quoted : TO Buy Bonds " The Reserve Association must, for a period of one from Banks year, offer to purchase at (a price not less than par and accrued interest) the 2 per cent bonds now held by national banks and deposited to secure their circulating notes. The Reserve Association shall take over these bonds with the existing currency privilege attached and assume responsibility for the redemption (upon presenta- tion) of outstanding notes secured thereby. The Reserve Association shall issue, on the terms herein provided, its own notes as fast as the outstanding notes secured by such bonds so held shall be presented for redemption, it being the policy of the United States to retire as rapidly as pos- sible, consistent with the public interests, bond-secured circulation and to substitute therefor notes of the Reserve Association of a character and secured and redeemed in the manner provided for in this act. May Sell " The Reserve Association agrees to hold, for a period $50,000,000 o f no t } ess than ten years, the bonds so purchased, or any government security which may be exchanged for them by refunding or otherwise. The Reserve Association, however, shall have the right, with the approval of the Secretary of the Treasury, after two years to dispose an- nually of $50,000,000 of the bonds held by it to secure circulation. The Government reserves the right at all times to purchase at par from the Reserve Association, [Page 20] The Aldrich Currency System through the trustees of the postal savings bank or other- wise, any or all of such bonds so held. " If the Government should adopt the policy of issuing Higher interest- securities at a higher rate of interest than 2 per cent, the B Reserve Association shall have the right to exchange at Secuntie par the Government bonds which it may have acquired from the national banks, previously held by them to secure circulation, for any bonds bearing interest at a rate not exceeding 3 per cent, but in that event the amount of annual taxes to be paid on notes based upon such new securities shall be as much greater as the interest rate of the new securities shall exceed 2 per cent. " To illustrate: If the Government should decide here- after to issue a 2% per cent bond, the rate of taxation on currency issued by the Reserve Association thereon would be 1 per cent, instead of one-half of 1 per cent, as on the existing twos, and upon a 3 per cent bond the rate of taxation would be 1% per cent." (29) The Reserve Association may issue additional Additional notes other than those that replace outstanding bank Circulation notes, on the basis of a 3 per cent yearly tax for the first $100,000,000 of these -additional notes; above $100,000,- 000, and not more than $200,000,000, the tax shall be 4 per cent ; above $200,000,000, and not more than $300,- 000,000, the tax shall be 5 per cent; and above $300,000,000 the tax shall be 6 per cent. In the words of Senator Aldrieh: " All note issues of the Reserve Association must be Reserve covered to the extent of at least one-third by gold or other Against Notes lawful money, and the remaining portion by bonds of the United States or bankable commercial paper as herein defined, or both. (It should be provided either that the Reserve Association may also hold in its reserve for- eign coin, or that the Treasury will issue gold certifi- cates against foreign coin.) The notes are to constitute a first lien upon all the assets of the Reserve Associa- tion, and adequate provision must be made for their im- mediate redemption in lawful money on presentation at [Page 21] The Aldrich Currency System the head office of the Reserve Association or any of its branches. " The notes of the Reserve Association shall be received at par in payment of all taxes, excises, and other dues to the United States, and for all salaries and other debts and demands owing by the United States to individuals, cor- porations, or associations, except obligations of the Gov- ernment which are by their terms specifically payable in gold, and for all debts due from or by one national bank to another, and for all obligations due to a national bank. " The Reserve Association shall at once, upon applica- tion and without charge for transportation, forward its circulating notes to any depositing bank against its credit balance." (30) A very interesting controversy is certain to arise over the proposal to make the notes of the Reserve Asso- ciation available as bank reserve money. Some of the best-known bankers in the United States maintain that since a balance carried by a bank with the Reserve Asso- ciation is counted as reserve, it would be absurd to refuse to take the note of the Reserve Association, which is nothing but a deposit in bearer form, as reserve also. Other bankers, equally well known, say that the notes of the Reserve Association should not be available as reserve money for the national banks. However this may be, the question is certain to be discussed at every bankers' convention during the coming summer and fall. There is reason to believe that the Reserve Association of America would at all times have a very large cash reserve, such as the Bank of England now maintains. Senator Aldrich does not specifically say what this reserve should be, but the suggestion has come from good sources that it would range from 50 to 80 per cent. It would certainly be large enough to afford ample protection. [Page 22] INDEX FABAGRAPH Acceptances by national banks 25 Purchase of 23 Amount of capital stock of Reserve Association, which a bank may subscribe 2 Associations of national banks 5 Formation of 6 Minimum capital 5 Bills of Exchange; character of 22 Purchase and sale of, by Reserve Association 22 Board of supervision ; provision f or . . 11 Bends; purchase by Reserve Associ- ation 28 How handled 28 Purchased by Government 28 Branches of Reserve Association. ... 7 Qualifications and election of direc- tors 7 Number and location of 7 Cancellation of surrendered capital stock of the Reserve Association. 3 Capital stock of Reserve Association . 1 What banks may subscribe for .... 2 Proportion which any bank may subscribe 3 Limitations on ownership of 3 Additional subscriptions 3 Charter, length of 1 Commercial paper held by local as- sociations 14 Accepted by national banks 25 Deposit balance with Reserve Asso- ciation 27 Transfer of 24 No interest to be paid on 21 Directors of branches, qualifications and manner of election 7 Directors of Reserve Association qualifications 8 Discount of direct obligations of banks ... .22 PARAGRAPH Discount rate to be uniform 22 Districts, designation of 7 Division of the country into 7 Earnings of the Reserve Association, distribution of 4 Executive committee of board of directors of the 10 Exemption from State and local tax- ation 1 Fiscal agent of the Government, to act as 1 Foreign banks 26 Foreign accounts of Reserve Asso- ciation 23 Government and banks the only de- positors with Reserve Associa- tion 18 Government balances and receipts to be deposited with Reserve Association 20 Government, purchase of bonds by Reserve Association 28 Guaranties of commercial paper, lim- itations on 16 Head office, location of 1 Length of charter 1 Local associations of national banks, minimum number of banks com- posing, and minimum capital of 5 Location of branches 7 Members of State Legislatures and of Congress prohibited from being directors of the Reserve Associ- ation, or of the branches, or of any local association 8 Name of central organization 1 National bank holding stock of the Reserve Association 2 Stock to be surrendered in case of reduction of capital or liquida- tion by the bank 3 [Page 23] Index PARAGRAPH National bank increasing capital after subscribing for stock of the Reserve Association, must make additional subscription 3 National bank note issues to be stopped 28 National banks, creation of a special class of, with savings depart- ments 26 Formation of associations by 5 Only may subscribe for stock of the Reserve Association 3 Subscribing to capital stock of Reserve Association must be a member of a local association of national banks 5 Note issues by national banks, pro- hibition of 28 Note issues of the Reserve Associa- tion provision for redemption. . 28 Security for 29 Notes issued by Reserve Association, how taxed 29 Notes of Reserve Association, for what to be received 29 To be forwarded to depositing banks against their credit bal- ance 24 Notes outstanding may be retained, but notes retired must not be Officers of the Reserve Association. . . 12 Ownership of shares of capital stock of Reserve Association limited to national banks 3 Rate of discount, uniform 22 Real estate loans by national banks . . 26 Rediscounts by Reserve Association. 22 Reports of national banks to be made to Reserve Association, to be made weekly 26 Reports to be made by the Reserve Association to the Comptroller of the Currency 26 Reserve Association, accounts and agencies 23 [Page 24] PARAGRAPH To deal in bills of exchange 23 Board of supervision of 11 Branch of, to be located in each dis- trict 7 Branches, how organized 7 Branches, officers of 13 Executive committee of 10 Directors of qualifications and how elected 8 Distribution of earnings of 4 Issue of notes by 28 May invest in United States bonds and short-term obligations, of any State or certain specified governments 23 Reserve Association as fiscal agent of the Government 1 Officers of 12 Privileges of, to be extended to all banks subscribing to capital stock of, and otherwise conform- ing to provisions of act 17 Cannot pay interest on deposits . . 21 Purchase and sale of gold coin and bullion and loans on 23 Purchase of bonds held to secure circulation 28 To handle receipts and disburse- ments of the Government and to have custody of the Govern- ment's balances 20 To report to the Comptroller of theCurrency 26 Reserve requirements of national banks with savings depart- ments 26 Reserves of national banks 27 Savings departments authorized .... 26 Secretary of the Treasury 11 Surrender of stock by national banks 3 Taxation, exemption from 1 Tax on notes issued by Reserve As- sociation 29 Transfer of deposits 24 Trust companies 26 A 000018353 3 University of California SOUTHERN REGIONAL LIBRARY FACILITY Return this material to the library from which it was borrowed. 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