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The Federal Reserve
System
Federal Reserve Bank of New York
January, 1935.
The Federal Reserve
System
Federal Reserve Bank of New York
January, 1935
Foreword
This booklet was prepared under the auspices
of the Federal Reserve Agents' Conference primarily to furnish banks and trust companies interested in membership in the Federal Reserve System
with a brief summary, in non-technical language,
of the essential facts regarding the System itself,
and with a general outline of the requirements for
membership. The need for a description of the
Federal Reserve System on the part of the many
individuals who are interested in learning the reasons for its establishment and in acquiring a general knowledge of its methods of operation was
another consideration in the preparation of this
booklet.
TABLE OF CONTENTS
Page
Foreword
3
Origin of the Federal Reserve System
5
Defects of ihc Financial Sysleni Prior to the Passage of the
Federal Reserve Act
5
Improvements Resulting from ihc Federal Reserve Aet
What the Federal Reserve System Is
The Federal Reserve Board
The Federal Reserve Ranks
The Member Banks
Facilities and Privileges of a Member Bank
The Federal Advisory Council
The Federal Open-Market Committee
The Work of the Federal Reserve Banks
Holding Reserves of Member Banks
Extension of Credit by Federal Reserve Banks
Currency
Exchange: Check Collection
Collection of Notes, Drafts, Bonds, Coupons, Etc
Exchange Drafts
Gold Settlement Fund
Fiscal Agency
Informational Services of the Federal Reserve System
Insurance of Deposits for Members of the Federal Reserve
System
General Information Regarding Membership in the Federal
Reserve System
Capital Required
Stock Subscription
Reserve Requirements
Voluntary Withdrawal
Examinations and Reports
Branches of Member Banks
Limitation on Interest Paid on Deposits
Miscellaneous Provisions
Conditions of Membership
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6
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IS
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19
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2C
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SO
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The Federal Reserve System
OIITOTN OF Tin:
FEDEKAL RESERVE SYSTEM
The Federal Reserve System originated with the passage
of the Federal lleserve Act, approved December 23, 1913, the
purposes of which, as slated in the preamble, are: "To provide
for the establishment of "Federal reserve banks, to furnish an
elastic currency, to afford means of rediscounting commercial
paper, to establish a more effective supervision of banking in
the United States, and for other purposes." This act has been
amended numerous times, and extensive changes have recently
been made by the Dunking Act of 11)33 and the Gold Deserve
Act of 1934/
Following the panic of 1907, Congress on May 30, 1908,
created the National Monetary Commission to inquire into and
report to Congress as to changes deemed necessary or desirable
in the banking system of the United States. The banking and
financial conditions of this and other countries were analyzed
in an exhaustive way by the Commission, which rendered its
report January 8, 1012. Movements for revision of the Federal banking system were promptly organized and culminated
in the passage of the Federal Deserve Act.
DEFECTS OF THK FINANCIAL SYSTEM PKIOTI TO T H E PASSAGE
OF T H E FEDERAL RESERVE A err
The report of the National Monetary Commission listed
numerous defects in the then existing banking system, of which
the more important were the following:
An inelastic currency which was not responsive to the
needs of commerce, industry, and agriculture.
N o instrumentality for the mobilization of the reserves of
the banks of the country, with the result that in times of stress
these reserves could be neither replenished nor used because of
restrictive laws and the lack of a means of cooperative action
among banks.
Lack of an established discount market for agricultural,
industrial, and commercial paper, and of equality in credit
facilities between different sections of the country, resulting in
5
6
THE FEDERAL RESERVE SYSTEM
interest rates which fluctuated unduly, varied widely between
various parts of the country, and in some areas were unreasonable.
An inefficient and costly system of domestic exchange or
transfer of funds between different localities, reflected in indirect routing of checks to avoid "exchange" charges.
No instrumentality to deal effectively with international
gold movements and other relationships in the foreign field.
The method of collecting and disbursing Government
funds through the Sub-Treasury system, which resulted in the
irregular withdrawal from and return of such funds to circulation and bank reserves.
IMPROVEMENTS RESULTING FROM T H E FEDERAL RESERVE A C T
The defects existing prior to the passage of the Federal
Reserve Act have been greatly reduced under the Federal
Reserve System by:
Establishment of an elastic currency system resulting in a
more stable money market and in improved facilities for dealing with currency crises.
Providing an instrument of cooperative strength for all
national banks and those State banks which may elect to
become members of the System.
Greater effectiveness of bank reserves through concentration in Federal Reserve banks.
Creation of rediscount and direct borrowing facilities for
member banks, and provision for mobilization of credit on a
national scale through rediscounting between Federal Reserve
banks themselves.
Providing a market at the Federal Reserve banks for, and
thus increasing the liquidity of notes, drafts, bills of exchange,
and bankers' acceptances. Seasonal fluctuations in certain
typical money rates have been less pronounced since the establishment of the Federal Reserve System than was the case
before, as the accompanying chart shows.
Providing clearing facilities on a national scale which
save time and expense in the movement, collection, and transfer
of funds.
Centralization of the fiscal agency operations of the United
States Government.
Providing an agency to review the currency and credit
needs of the nation in a broad way and to influence the volume
THE FEDERAL RESERVE SYSTEM
7
of credit in the public interest in the light of the general domestic business situation as well as the international one.
COMMERCIAL PAPER RATE
PERCENT
( 4 - 6 MONTHS, CHOICE DOUBLE NAME,NEW YORK CITY)
PER CENT
[115
115;
A \
110
110
\
*t
K>5
105
TYPICAL SEASONAL
MOVEMENT UNDER THE
FEDERAL RESERVE
1914-1932
I
100
95
100
/TYPICAL SEASONAL
/ MOVEMENT BEFORE
.'THE FEDERAL RESERVE
1894-1913
95
90
90
85
est
JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC
W H A T T H E FEDERAL RESERVE SYSTEM I S
The Federal Reserve System comprises several elements
including:
The Federal Reserve Board
Twelve Federal Reserve banks with 25 branches
Member banks, numbering more than 6,000.
Within the System, moreover, there are other organizations
with specialized functions, sue* as the Federal Advisory Council and the Federal Open-Market Committee.
The Federal Reserve Board—The Federal Reserve Board,
with headquarters in Washington, is the coordinating body
which supervises the work of the Federal Reserve System. I t
is composed of eight members, two of which—the Secretary of
the Treasury and the Comptroller of the Currency—are members ex-officio, while the other six are appointed by the President of the United States, by and with the advice and consent
of the Senate. I n selecting the six appointive members, the
8
THE FEDERAL RESERVE SYSTEM
President is required to have due regard to a fair representation of the financial, agricultural, industrial, and commercial
interests, and of the geographical divisions of the country; and
no two appointive members may be from the same Federal
Reserve district.
Among the more important duties of the Federal Reserve
Board are the formulation, in cooperation with the Federal
Reserve banks, of credit policies; the review and determination
of discount rales charged by the Federal Reserve banks on
their discounts and advances; and supervision of the openmarket operations of the Federal Reserve banks. Such openmarket operations are conducted under regulations adopted by
the Federal Reserve Board with a view to accommodating commerce and business and with regard to their bearing upon the
general credit situation of the country.
In connection with its supervision of Federal Reserve
banks the Federal Reserve Board is also authorized to make
examinations of such banks; to require statements and reports
from such banks; to require the establishment or discontinuance
of branches of such banks; to supervise the issue and retirement of Federal Reserve notes; and to exercise special supervision over all relationships and transactions of the Federal
Reserve banks with foreign banks or bankers.
I n addition to these important supervisory functions over
the Federal Reserve banks, the Federal Reserve Board passes
on applications
for the admission of State banks and trust companies
to membership in the Federal Reserve System and
on withdrawals therefrom;
for permits to holding company affiliates to vote the
stock of member banks;
for permits covering certain relations between member banks and organizations dealing in securities;
for permits granted under authority of the provisions
of the Clayton Anti-Trust Act* relating to interlocking bank directorates;
for authority to national banks to exercise trust powers, to establish branches in foreign countries and
dependencies or insular possessions of the United
States, and to invest in the stock of banks or other
corporations engaged in international or foreign
banking.
THE FEDERAL RESERVE SYSTEM
9
Furthermore, the Board
receives condition reports and earnings reports from
Slate member banks and reports of their affiliates;
issues regulations limiting the rate of interest which
may be paid by member banks on time and savings
deposits;
prescribes rules and regulations under authority of
the Securities Exchange Act of 1934 governing
the margin requirements for credit extended on
listed securities;
maintains and operates the Gold Settlement F u n d
by which debits and credits between the various
Federal lleserve banks arising out of their own
transactions, those of their member banks, and
those of Ihe United States Government are settled
in Washington without physical shipments of currency.
The Hoard is empowered
to prescribe regulations relating to the formation and
operation of corporations organized under Federal
law to engage in international and foreign banking;
to examine member banks and the affiliates of State
member banks;
to suspend a member bank from the use of the credit
facilities of the Federal lleserve System whenever,
in the judgment of the Federal lleserve Board, the
bank is making undue use of bank credit for speculative purposes or for any other purpose inconsistent with the maintenance of sound credit conditions ;
to remove officers and directors of member banks for
continued violations of law, or because of unsafe or
unsound practices in conducting the business of
their banks;
to alter under certain circumstances the reserve requirements of member banks.
I n exercising its supervisory functions over the Federal
lleserve banks and member banks, the Federal Reserve Hoard
promulgates regulations, pursuant to authority granted by
THE FEDERAL RESERVE SYSTEM -
10
the Federal Reserve Act, governing certain of the abovementioned activities of Federal Reserve banks and member
banks.
To meet its expenses and to pay the salaries of its members and its employes, the Hoard makes semi-annual assessments upon the Federal Reserve banks in proportion to their
capital stock and surplus.
The Federal Reserve Banks—The country is divided geographically into twelve Federal Reserve districts, in each of
which there is a Federal Reserve bank bearing the name of the
city of its location. Ten of the Federal Reserve banks among
them operate 25 branches, and one Federal Reserve bank has
established two agencies, one of which is in Havana, Cuba. The
territory included in each district and the locations of the Federal Reserve banks and branches are shown on the accompanying map.
The Federal Reserve districts and banks, with their
branches, are as follows:
Location of Federal
Reserve Bank
District Number
Location of Branch
1
New York
Buffalo. New York
4
Cleveland
Cincinnati, Ohio
Pittsbu rah, Pennsylvania
5
Richmond
6
Atlanta*
8
St. Louis
0
3
, . .
Baltimore, Maryland
Charlotte, North Carolina
Binnin;!h;i.:n, Alabama
Jacksonville, Florida
Nashville, Tennessee
New Orleans, Louisiana
Detroit,' Michigan
Little Rock. Arkansas
Louisville, Kentucky
Memphis, Tennessee
Minneapolis
Kansas City
11
Helena, Montana
...
Denver, Colorado
Oklahoma City, Oklahoma
Omaha, Nebraska
El Paso, Texas
Houston, Texas
San Antonio, Texas
1 San Fiancisco..
Los Angeles. California
Portland. Oregon
! Salt Lake City, Utah
Seattle, Washington
Spokane, Washington
• I n addition to the branches named, the Federal Reserve Bank of Atlanta has an agency at
Savannah, Georgia, and another at Havana, Cuba.
FEDERAL RESERVE DISTRICTS
X
»=]
K
O
H
>
r1
S3
M
W
B
H
M
K
•—••BOUNDARIES OF FEDERAL RESERVE DISTRICTS
• - — B O U N D A R I E S OF FEDERAL RESERVE BRANCH TERRITORIES
$
FEDERAL RESERVE BANK CITIES
•
FEDERAL RESERVE BRANCH CITIES
O rEOCRAL RESERVE BANK AGENCY
12
THE FEDERAL RESERVE SYSTEM
Each Federal Reserve bank was established pursuant to
the provisions of the Federal Reserve Act and is under the
general supervision of the Federal Reserve Board. The
United States Government does not own any of the stock of
the Federal Reserve banks, but all of the stock of each such
bank is owned by its member banks.
Each Federal Reserve bank lias a board of directors
whose members are residents of the respective district and perform the usual duties of bank directors with some limitations
fixed by the Federal Reserve Act. The bank's board of directors appoints its officers and employes, defines their duties, and
fixes their salaries subject to the approval of the Federal
Reserve Hoard.
The board of directors of each Reserve bank is composed
of nine members, equally divided into three classes, designated
Class A, Class R, and Class C. The member banks in each
Federal Reserve district are divided by the Federal Reserve
Hoard into three groups, and each group, consisting as nearly
as possible of banks of similar size, chooses one Class A director
and one Class H director. I n other words, the member banks
elect six of the nine directors. Class A directors must be representative of the stockholding banks and may be and usually are
active executive officers of member banks. Class B directors
may not be officers, directors, or employes of any bank and
must be "actively engaged in their district in commerce, agriculture or some other industrial pursuit." The three Class C
directors are appointed by the Federal Reserve Hoard and may
not be either officers, directors, employes, or stockholders of
any bank. One of the Class C directors is designated by the
Federal Reserve Hoard as chairman of the board of directors
and Federal Reserve agent. As Federal Reserve agent, he is
the official representative of the Federal Reserve Hoard and is
required to maintain a local office of the Federal Reserve Hoard
on the premises of the bank. The Federal Reserve Hoard also
designates another of the Class C directors as deputy chairman, who exercises the powers of the chairman when necessary. The terms of office of all directors are three years, so
arranged that the term of one director of each class expires
each year.
The various officers of a Federal Reserve bank have
responsibilities divided among them in much the same manner
as those in a commercial bank. The chief executive officer of a
Federal Reserve bank is called the governor and his senior
assistants, deputy governors.
THK FEDERAL UESKltVH SYSTEM
13
Federal Reserve banks have certain powers of lending,
investment, currency issue, deposit banking for banks and the
United States Government, collection, safekeeping, and other
functions which are described in the following sections.
The Federal Ileserve banks derive their funds for loans,
investments, and maintenance of cash reserve chiefly from the
following sources:
1. Payments on capital stock by member banks.
2. Reserve deposits of member banks.
3. Deposits of other banks to establish check collection
relations, and deposits of foreign banks.
4. Deposits of the United States Government.
5. The power to issue Federal Reserve notes and Federal
Reserve bank notes.
6. Earnings set aside as surplus.
Federal Reserve banks are not operated for profit. I t
was the intention of Congress in enacting the Federal Reserve
Act that the activities of the Federal Reserve banks be directed
toward influencing credit conditions for the best interests of
industry, agriculture, and commerce. Consequently, these
banks in ordinary times have a large volume of non-earning
assets and unused lending power. Since the Reserve banks
hold the ultimate reserves of the banking system, it is important that the assets of these banks be at all times liquid and
available to meet not only the seasonal demands of trade and
industry but also unusual, requirements that may arise in
exceptional circumstances.
After all necessary expenses of a Federal Reserve bank
have been paid or provided for, its stockholding member banks
are entitled to receive an annual dividend of six per cent on the
paid-in capital stock, which dividend is cumulative. I n 193-t
the paid-in stock of the Reserve banks held by the member
banks totaled $147,000,000, and dividends paid on this stock in
1988 were $8,874,202. After dividend claims have been fully
met, the net earnings are paid into the surplus fund of the
Federal Reserve bank. I n case of liquidation or dissolution
of a Federal Reserve bank, any surplus remaining after payment of all debts, dividend requirements, and the paid-in value
of its outstanding capital stock, is to be paid to the United
States Government.
The M e m b e r Banks—All national banks in the continental United States are required by law to be members of the
Federal Reserve System, and eligible State banks and trust
H
THE FEDERAL RESERVE SYSTEM
companies may, with the approval of the Federal Reserve
Board, become members. Pertinent information with respect
to requirements which a bank must meet to become a member
of the Federal lleserve System is given in another section.
About 40 per cent of the commercial banks in the United
States were members of the System on June 30, 1934, and
these member banks had resources amounting to about twothirds of the total banking resources of all banks in the country
and more than 85 per cent of the resources of all banks in the
country exclusive of mutual savings banks. There were 0,375
active member banks on June 30, 1934, of which 5,417 were
national banks and 958 were State banks. The State bank
members ranged in size from banks with $25,000 capital to
some of the Largest banks in the United States.
Facilities and Privileges of a Member Bank—Among
the privileges which a bank enjoys as a member of the Federal
Reserve System are the following:
1. Rediscounting eligible paper and obtaining advances
on promissory notes.
2. Obtaining currency and coin when needed.
3. Direct use of Federal Reserve check collection system.
4. Direct use of Federal Reserve non-cash collection
service.
5. Transferring funds by telegraph.
6. Drawing drafts on Federal Reserve bank, including
Federal Reserve exchange drafts, for which immediate credit at par may be obtained in thirty-seven
Federal Reserve bank and branch bank cities.
8. Continuation, jifter July 1, 1937, of privilege of membership in the Federal Deposit Insurance Corporation.
The importance of these privileges to member banks is made
clear in the discussion of the work of the Federal Reserve
banks.
The Federal Advisory Council—The Federal Advisory
Council is composed of twelve members, one from each Federal
Reserve district, selected annually by the board of directors of
the Federal Reserve bank of the district. The Council is
required to meet in Washington at least four times each year,
4
THK FEDERAL RESERVE SYSTEM
15
or oftener if called by the Federal Reserve Board, and may
hold such other meetings in Washington or elsewhere as it may
deem necessary. The Council acts in an advisory capacity,
conferring directly with the Federal Reserve Board on general business and financial conditions and making recommendations concerning matters within the Board's jurisdiction and
the general affairs of the System.
The Federal Open-Market Committee—The Federal
Open-Market Committee is composed of one member from
each Federal Reserve district, selected annually by the board
of directors of each Federal Reserve bank. The Committee
meets in "Washington at least four times a year to make recommendations to the Federal Reserve Board with respect to the
policy of the Federal Reserve banks in the purchase or sale of
United States Government obligations, bankers' acceptances,
and other paper which can be acquired in the open market by
the Federal Reserve banks. The Federal Reserve banks may
engage in open-market operations only in accordance with
regulations of the Federal Reserve Board.
Decisions in regard to purchases and sales of United
States Government obligations are made with reference to
general credit conditions. When there is evidence of speculation or undue use of credit, the Reserve banks may sell securities in the open market and thus withdraw funds from the
market. Member banks then would have either to curtail
their own operations or borrow from the Reserve banks and
thus become subject to the discount rate. On the other hand,
when business is receding and credit demand is low, the Reserve
banks may buy United States Government obligations in the
open market and thereby place funds at the disposal of the
market, thus enabling member banks to make additional loans
or investments without having to borrow from the Reserve
banks. Open-market operations, therefore, exert an important
influence on the volume of credit available in the market, and
on the cost of this credit, that is, on interest rates.
T H E W O R K OF T H E FEDERAL RESERVE BANKS
Among the principal functions of the Federal Reserve
banks are holding the ultimate reserve of the banking system,
supplying an elastic currency, making discounts for or loans to
member banks, purchasing investments of the kinds and in
the amounts permitted under the law, clearing and collecting
checks for member banks, and acting as fiscal agents for the
1C
THE FEDERAL RESERVE SYSTEM
Treasury. With some exceptions, it is from banks that Reserve banks receive deposits and to banks that they make loans,
and their customers are their member banks. The relation
of a member bank to the Federal Reserve bank of its district is
similar in many respects to the relation of an individual to his
bank.
Holding Reserves of Member Banks—Every member
bank is required by law to keep with its "Federal Reserve bank
a sum which bears a specified relation to its deposits. This is
known as its reserve and, among other things, is responsible
for the name, "Reserve" banks. In the case of a member bank
not located in a reserve city or central reserve city, S3 is
required as a reserve for every $100 of time deposits and $7
for every $100 of net demand deposits. The reserve requirements for member banks located in reserve or central reserve
cities are given on page 29. The Reserve banks themselves
are required by law to maintain a reserve of 35 per cent in
gold certificates or lawful money against their deposits.
The Federal Reserve banks may be thought of as a
system of twelve reservoirs, each holding the reserve deposits
of member banks and prepared to serve the credit needs of
their respective districts. Credit available at Reserve banks is
an assurance to a well managed bank of its capacity to render
better service to its industrial, commercial, and agricultural
customers.
A member bank's reserve account at the Reserve bank
may be increased by depositing currency or checks, by transfers
from a correspondent bank, by borrowing at the Federal Reserve bank, or by the sale to the Reserve bank of United States
Government obligations, bankers' acceptances, or other paper
eligible for purchase in the open market. Checks deposited,
however, are not credited to the member bank's reserve account
until sufficient time has elapsed for their collection by the
Reserve bank of the district in which the drawee bank is
located. The reserve balance may be checked against by the
member bank, but any deficiency in the required balance must
be restored.
^ No interest is paid on member bank reserve deposits.
This is important. If interest were paid on such deposits,
Reserve banks would need to operate at a profit and would
necessarily have to keep their funds fully invested, thus placing
them in direct competition with commercial banks. The public
interest, however, requires that the operations of the Reserve
THK FEDERAL RESKRVE SYSTEM
17
banks be conducted with reference to the general condition of
credit and business rather than to the need for earnings, and
they are always so conducted.
Extension of Credit by Federal Reserve Banks—Credit
is extended consistent with good judgment by Federal Reserve
banks on those types of assets which Federal Reserve banks are
permitted to acquire under the Federal Reserve Act. The
original act contemplated, that the type of earning assets
acquired by Federal Reserve banks should be limited in general to Government obligations and paper of a self-liquidating
nature. I t was required that such paper, in the first instance,
should grow out of actual commercial or agricultural transactions, including purchasing, carrying, or marketing goods,
or out of one or more of the steps of the process of production,
manufacture, or distribution of crops, live stock, or other commodities. Negatively stated, eligible paper could not, with
limited exceptions, be paper representing permanent or fixed
investments. Legislation of recent years has modified this
general principle somewhat, but only to a limited extent.
The power of the Federal Reserve banks to extend credit
is of great importance to the business public. The description
of an actual case may best serve to show the character of credit
facilities growing out of the establishment of Federal Reserve
banks.
Let us take as an example a grocer in Austin, Texas, who
wishes to buy 50 barrels of flour. A t the moment his bank
account is not sufficient to cover such a purchase, so he applies
to his local bank for a loan. The bank, satisfied with the
grocer's credit rating, makes him a 90-day loan on his note,
and the grocer then buys the flour and sells it barrel by barrel.
As his customers pay their bills, the grocer accumulates funds
to retire his note. I n ordinary circumstances a bank's resources
are sufficient to meet its customers' requirements, but the
grocer's application for a loan may reach his bank at a time
when many other customers need business loans. If the bank
expands its loans at this time, it will in turn be forced to borrow. Before the establishment of the Federal Reserve System
the Austin bank in borrowing would have applied for a loan
from some other bank with which it had an account. I n ordinary circumstances, correspondents can meet requirements of
this character coming from their bank customers. If, however, money happens to be scarce, the correspondent bank
might not be in a position to expand its loans.
18
THE FEDERAL RESERVE SYSTEM
Since the passage of the Federal Reserve Act, the Austin
bank, if a member of the Federal Reserve System, is in a much
better position, since it has facilities to which it can turn—the
Reserve Rank of Dallas. I t may offer to the Reserve Rank of
Dallas the grocer's note, together with other customers' paper.
The Federal Reserve Rank of Dallas then examines the notes
as to their eligibility under the law and as to their soundness
and acceptability, and, if satisfied with the paper, rediscounts
it and puts the Austin bank in funds.
The rate of interest charged the member bank by the Federal Reserve bank is called the "discount rate." which is a
published rate applying uniformly to all member banks in the
district on paper of like character. The discount rate is subject to review and determination by the Federal Reserve
Board and is usually lower than the rate charged its customers
by a member bank. The member banks' lending rate at any
particular moment is determined, subject to State law, largely
by custom and business conditions. On the other hand, the
discount rate at a Federal Reserve bank is determined from
time to time largely with reference to credit conditions. Discount rates are likely to be advanced when there is evidence of
excessive growth of credit or the development of speculative
activity and reduced when business is inactive and the demand
for credit is low.
Later, when the grocer's note approaches maturity, the
Federal Reserve bank sends it back to the Austin member
bank and receives payment for it. The Austin bank in turn
receives payment from the grocer and gives him back his note
and thus the circle is completed. Meanwhile the grocer has
been able to carry on his business. The Austin member bank,
with the funds it borrowed from the Federal Reserve bank, has
been able better to serve its customers than would have been
the case if the reserve reservoir had not been available to draw
upon.
Important types of lending operations in which the Federal Reserve banks may engage may be described in summary
form. Reserve banks are authorized to discount for their member banks notes, drafts, bills of exchange, and bankers' acceptances of short maturities arising out of commercial, industrial,
and agricultural transactions, and short-term paper secured
by obligations of the United States. They are authorized to
make advances to their member banks upon their promissory
notes for periods not exceeding ninety days upon the security
of paper eligible for discount or purchase and for periods not
THE FEDERAL RESERVE SYSTEM
19
exceeding fifteen days upon the security of obligations of the
United States and certain other securities.
Federal Reserve banks, in certain exceptional circumstances and under certain prescribed conditions, are authorized
to make advances upon other kinds of security to groups of
member banks, and until March 3, 1935, to individual member
banks. They are authorized in unusual and exigent circumstances, when authority has been granted by a vote of at least
five members of the Federal Reserve Board, to discount for
individuals, partnerships, or corporations, under certain prescribed conditions, notes, drafts, and bills of exchange of the
kinds and maturities made eligible for discount for member
banks; to make advances to individuals, partnerships, or corporations upon their promissory notes secured by direct obligations of the United States for periods not exceeding ninety
days; under certain prescribed conditions, to grant credit
accommodations to furnish working capital for established
industrial or commercial businesses for periods not exceeding
five years, either through the medium of financing institutions
or, in exceptional circumstances, directly to such businesses,
and to make commitments with respect to the granting of such
accommodations; to purchase and sell in the open market
bankers' acceptances and bills of exchange of the kinds and
maturities eligible for discount, and obligations of the United
States as well as a few other types of securities specifically
designated by statute.
Currency—Currency in this country has become the "small
change" of business. The greater part of the country's transactions are settled by check, and until the autumn of 1930,
when banking disturbances resulted in hoarding of currency
by the public, the amount of currency in circulation varied
chiefly with the need for cash in making retail purchases and in
paying wages.
The Federal Reserve banks are the principal currency
reservoirs of the United States and their own note issues afford
the elastic element in the American currency supply. Member banks obtain the currency that they pay out, except their
own circulating notes in the case of national banks, from the
Federal Reserve bank of their district. Nonmember banks
usually obtain their currency from their correspondent banks,
which "are members of the Federal Reserve System and order
the currency in turn from the Federal Reserve bank.
Currency transactions between a member bank and a Fed
20
THE FEDERAL RESERVE SYSTEM
eral lleserve bank are much the same as those between an
ordinary bank and its depositors. When an individual needs
currency, he draws a check on his bank and cashes it. If he
does not have a sufficient balance in the bank to obtain funds
in this manner, he may be forced to borrow- Similarly, when
a member bank requires currency to pay out to its customers,
it in effect draws and cashes a check on its Federal lleserve
bank. The member bank may find it necessary to borrow at
the Federal Reserve bank for lliis purpose. "Public demand
for currency is, in fact, one of the principal factors in the
demand for Federal Reserve credit.
On the other hand, when an individual has more currency
than he needs, he deposits it at his bank, perhaps paying off M
loan. Likewise if a member bank is accumulating currency
from its customers, it will return the currency to the Reserve
bank for credit in its account, whether il consists of obligations
of Federal Reserve banks or currency of other forms. The
increase or decrease in the volume of currency in circulation
does not depend upon the initiative of the Federal Reserve
banks but upon the needs of the member banks. Their needs,
in turn, are determined bv the needs of their customers.
In order to be able to supply all calls for currency without delay, the Federal Reserve banks keep on hand large
stocks of all denominations of currency and coin, and additional
stocks of paper currency are maintained at the Bureau of
Engraving and Printing in Washington, D . C.
As banks of issue, Federal Reserve banks may furnish
two kinds of notes: Federal lleserve notes and Federal Reserve
bank notes. Federal Reserve notes constitute the major portion of the money used in the United States today, more than
$3,000,000,000 being in circulation on J u n e 30* J 931. All
Federal Reserve banks are permitted by law to issue Federal
Reserve notes under certain conditions at the discretion of the
Federal Reserve Board. These notes are obligations of the
United States and are a first and paramount lien on all the
assets of the issuing Federal Reserve bank. They are now
legal tender for all public and private debts.
A n y Federal Reserve bank may make application to its
Federal Reserve agent for Federal Reserve notes. They are
issued through the Federal Reserve agent against the security
of gold certificates and of commercial and agricultural paper
discounted or purchased by Federal Reserve banks, and, until
March 3,1935, or for such additional period not exceeding two
years as the President may prescribe, when authorized by the
ISSUE AND RETIREMENT OF FEDERAL RESERVE NOTES
FEDERAL RFSERVE ECABD
FEDERAL RESERVE AGENT
S'OtTK IN TREAS---RV VAULTS
HESTRvE STOC*
T O AGENT O N
SEOL-ISIT-ON
NOTES ISSUES TO
PrStPVE ::ANKCN
A=PL-CATION
ACCOM PA MED
BY CCLLA1E-.AL
FEDERAL RESERVE BANK
STOCK OF TJOTLS
PAY.'NG TELLER
COLLATERAL
KFEPS STOCK OF
NOTES FOR PAYING
COLLATERAL R ! >
LEASFD CN ADVICE
OF CESTRUpr
FAYS CUTORSysS.
"NOTESTO u'ANK'S
ELREAU OF
ENGRAVING* FRIKTINC
1
2*.
WEM5ER HANKS
i
ARViCE CF
v
> 7;.^:A DESTRUCTION
^STARTV-
yHEREy
NOTES PRINTED 1
AND rfEPT IN
TREASURY VAULTS
GENERAL C.RCULATJCN
FEDERAL RESERVE BANK
REDEMPTION DIVISION
WASHINGTON
*
CANCELLING MACHINE
NOTES DESTROYED.
ADVICE TO FEDERAL
RESERVE AGENT
N0TE5 CAN-CELLED
AND SENT TO
WASHINGTON
CURRENCY SORTING
RECEIVING TELLER
fVLMULM. BANKS
RECEIVES NOTES
TIT NOTS RETURNED
TO STOCK, UNFIT
MOTES SENT TO
CANCELLING MACHINE
'.'
""FROMETANKS" KEY
NEW NOTES
—
FIT NOTES
UNFIT NOTfS — - -
22
THE FEDERAL RESERVE SYSTEM
Federal Reserve Hoard, may also be secured by direct obligations of the United States. Every Federal Reserve bank is
required to maintain reserves in gold certificates of not less
than 40 per cent against its Federal Reserve notes in actual
circulation and is also required to maintain reserves in gold
certificates or lawful money of not less than 35 per cent against
its deposits. A fund of 5 per cent in gold certificates must be
maintained with the Treasurer of the United States for the
redemption of its Federal Reserve notes, but this may be
counted as part of the 40 per cent gold reserve.
The collateral pledged with the Federal Reserve agent by
the Federal Reserve bank for Federal Reserve notes must not
be less than the amount of notes applied for. The Federal
Reserve agent is required daily to report the issues and retirements of Federal Reserve notes to the Federal Reserve Board,
and the latter may at any time call upon the Federal Reserve
bank for additional security to protect Federal Reserve notes
issued to it.
Every Federal Reserve bank is required to redeem in lawful money its own Federal Reserve notes and the notes issued
by other Federal Reserve banks, but it may not place the notes
of other Federal Reserve banks in circulation again under a
penalty of a tax of 10 per cent upon the face value of the notes
so paid out. It is required to return promptly to every other
Federal Reserve bank for credit or redemption the notes of
such other Federal Reserve bank, or, upon direction of that
bank, to forward them to the Treasurer of the United States
for retirement. Badly worn and mutilated notes are canceled
and forwarded by the Federal Reserve bank receiving them to
Washington for destruction. Notes which are still fit for use
may be returned by a Federal Reserve bank to the custody of
its Federal Reserve agent, and the former is then entitled to
the return of an equivalent amount of collateral. Returned
notes may again be obtained from the Federal Reserve agent
on the presentation of collateral as required for the issue of
new notes. The costs of engraving, printing, issuing, and
retiring Federal Reserve notes, together with insurance and
shipping costs, are paid by the Federal Reserve banks.
Federal Reserve bank notes are the obligations of the
Federal Reserve bank procuring them and are redeemable in
lawful money of the United States on presentation at the
United States Treasury or at the bank of issue. They are
issued against the security of direct obligations of the United
States in an amount equal to the face value of such obligations
THE FEDERAL RESERVE SYSTEM
23
and against the security of notes, drafts, bills of exchange, and
bankers' acceptances in an amount equal to not more than
ninety per cent of the estimated value thereof. Each Federal
Reserve bank maintains on deposit in the Treasury of the
United States in lawful money a redemption fund equal to five
per cent of its liability on Federal Reserve bank notes in actual
circulation, or such additional amount as may be required by
the Treasurer of the United States with the approval of the
Secretary, of the Treasury, and is required to pay a tax of onefourth of one per cent each half year upon the average amount
of its Federal Reserve bank notes in circulation. No such
Federal Reserve bank notes may be issued after the President
shall have declared by proclamation that the emergency recognized by him in his proclamation of March G, 1933, has terminated, unless such notes are secured by the deposit of bonds of
the United States of certain classes which are eligible as
security for national bank notes. Only a small amount of
Federal Reserve bank notes is now in circulation.
The facilities provided by the Federal Reserve System for
borrowing on sound assets to obtain currency represent one of
the most important improvements made in the American financial system by the Federal Reserve Act. Previously, when
there was a sudden increase in demand for currency, a large
supply was difficult to obtain: first, because facilities for issuing
sufficient currency to meet emergency demands did not exist;
and second, because there was no central pool from which
banks could borrow, while in times of banking difficulty large
scale sales of investments or borrowing from other banks was
impossible. Inflexibility of the currency wTas one of the principal causes of the panics of 1873, 1893, and 1907, when many
banks suspended payments to depositors, notwithstanding the
fact that they were in possession of sound assets. The Federal
Reserve System established an elastic currency system, which
made it possible to meet the unprecedented withdrawals of
cash in the years 1930-1933.
The demand for currency is one of the principal sources
of the demand for Reserve bank credit. This is shown by the
chart on page 25, on which one line represents the total of
credit extended by Reserve banks from January 1929 through
October 1934; a second line, volume of money in circulation; a
third line, stock of monetary gold; and a fourth line, reserve
balances of member banks. The close relationship of Reserve
bank credit and currency is at once evident, particularly in the
similarity of the ordinary monthly changes that are repeated
year after year.
21
THE FEDERAL RESERVE SYSTEM
Exchange: Check Collection—Under regulations prescribed by the Federal Reserve Board, the twelve Federal
Reserve banks act as a nation-wide clearing house for their
member banks and for such nonmember banks as maintain
appropriate balances with the Reserve banks. Out-of-town
checks drawn on banks in the same Federal Reserve district
deposited with a Federal Reserve bank are usually sent directly
to places where payable and as a rule directly to banks on
which drawn. Checks drawn on banks in another Federal
Reserve district, however, arc ordinarily sent to the Reserve
bank of that district for presentation. Direct forwarding and
settlement through the gold settlement fund of inter-district
items have reduced materially the average time formerly
required to collect out-of-town checks under the old indirect
routing. The more prompt availability of the proceeds of
checks represents an important saving to business and banking
in this country, since upwards of 90 per cent of all commercial
transactions are settled by checks. Moreover, checks are collected by the Federal Reserve banks without payment of the
old "exchange" charge, that is, a charge made by the bank on
which the check is drawn; and this is another saving to commerce.
Collection of Notes, Drafts, Bonds, Coupons, Etc.—The
Federal Reserve banks also collect miscellaneous items such as
notes, drafts, bonds, coupons, etc., collection being made
through direct routing and presentation in much the same
manner as checks.
Exchange Drafts—A member bank which has occasion to
furnish customers with drafts on places where it has no account
against which it can draw may arrange to draw what is called
an exchange draft on its own Federal Reserve bank for an
amount not exceeding $50,000, which will be accepted at any
other Federal Reserve bank or branch for immediate credit,
subject to final payment by the member bank's own Federal
Reserve bank.
Gold Settlement Fund—Member banks wishing to create
balances or pay funds in another part of the country may do
so by means of wire transfers through their Reserve banks
without loss of time and, if transfers are for multiples of $100,
at no cost to member banks except where made for the benefit
of a designated customer, when a charge is made for the cost
of the telegram. The transfers are accomplished by means of
wire advices from the sending to the receiving Federal Reserve
THE FEDERAL RESERVE SYSTEM
25
RESERVE BANK CREDIT AND RELATED ITEMS
Weekly b«is: Wednesday series
NiL'JONS OF DOLLARS
MILLIONS OF DOLLARS
6000
eooo
7000
6000
5000
3000
2000
1000
1929
1930
1931
1932
1933
1934
bank and through the medium of the gold settlement fund,
deposited in Washington by the twelve Federal Reserve banks.
The leased telegraphic wire system connecting the various
Federal Reserve banks facilitates this sen'ice. Each Federal
Reserve bank advises Lhe Federal Reserve Board daily by wire
of its credits to each of the other eleven Reserve banks and
their branches, whether those credits arise from the wire transfers mentioned here or from other transactions, and appropriate
entries are made in the books of the gold settlement fund.
The daily settlement between the Reserve banks through this
26
THE FEDERAL RESERVE SYSTEM
fund contributes to saving time in realizing on the proceeds of
checks payable in other Federal Reserve districts.
Fiscal Agency—The Reserve banks act as fiscal agents of
the Government in the issue, transfer, exchange, conversion, or
redemption of United States Government obligations, and in
the administration of special deposit accounts of the Government in member and nonmember banks. Functions formerly
performed by the Sub-Treasuries of the United States in connection with the exchange and redemption of money for the
public are handled now by the Reserve banks. They are also
called upon to serve as fiscal agents for various agencies established by the Government, as for example, the Reconstruction
Finance Corporation. The Fiscal Agency Department of a
Federal Reserve bank is a convenience to banks and the public
having occasion to deal with the Government in these matters.
Informational Services of the Federal Reserve System—
Important work is carried on in the Federal Reserve Board
as well as in the Federal Reserve banks in the collection and
analysis of banking, financial, and business data of national as
well as international scope. Accurate and current information
of this character is essential to the officials of the System who
are responsible for the System's credit policies. The material
thus assembled is made public as far as possible for the benefit
of member banks and business in general.
The official publication of the Federal Reserve Board, the
Federal Reserve Bulletin, is issued monthly and is supplied
free of charge to all member banks, and at a subscription rate
of $2.00 per year to cover printing costs, to the general public.
I t is a source for statistical material dealing with general business conditions, the operations of the Federal Reserve banks
and member banks, money market developments in this country, and foreign banking data, including exchange rates, gold
holdings of central banks and governments, reports of central
banks, and similar material.
A monthly review of business conditions in its district is
issued by each Federal Reserve bank. These reviews are based
in part on reports received from firms representing the major
lines of industry, and are designed to include the type of information currently useful to bankers in their lending activities.
In addition to the monthly reviews of business conditions, a
large amount of statistical matter for the use of officers and
directors is prepared in each Federal Reserve bank. Several
of the Reserve banks maintain libraries which are open to the
THE FEDERAL RKSRRVE SYSTEM
27
public, affording access to collections of well-selected hooks,
pamphlets, and current periodicals on economic and financial
subjects.
Insurance of Deposits for Members of the Federal Reserve System—All licensed members of the Federal Reserve
System were required by law to participate, effective January
1, 1934, in a plan of deposit insurance .administered by the
Federal Deposit Insurance Corporation. A temporary insurance fund was provided which insured each depositor of a participating bank in an amount not in excess of $2,500 between
January 1 and June 30, 1931, and in an amount not in excess
of $5,000 between July 1, 1931, and July 1, 1935, except in
the case of certain mutual savings banks. Nonmembcr banks
were permitted to participate upon meeting certain requirements.
The permanent plan of insurance becomes effective July 1,
1935. The right to participate after that date in the case of
both banks which are members of the Federal Reserve System
and those not members depends on whether their assets are
adequate to enable them to meet all of their liabilities to depositors and other creditors, Reginning July 1, 1937, only members of the Federal Reserve System will be eligible for participation. Under the permanent plan the net amount due to the
owner of any claim arising out of a deposit liability of a closed
bank shall equal 100 per cent of such net amount not exceeding $10,000, and 75 per cent of the amount, if any, by which
such net amount exceeds $10,000 and does not exceed $50,000,
and 50 per cent of the amount, if any, by which such net
amount exceeds $50,000.
The working funds of the Federal Deposit Insurance
Corporation are derived from three sources: The United States
Treasury subscribed for stock in the amount of $150,000,000;
the Federal Reserve banks subscribed for an amount equal to
one-half of their surplus as of January 1, 1933, approximately
$139,000,000; and under the temporary plan all participating
banks are subject to assessment based upon the total amount
of their insured deposit liabilities. Under that plan, participating banks were assessed in the first instance one-half of one
per cent of the amount of their insured deposits, although only
one-half of such assessment was called. The Corporation has
the power to levy in all for the needs of the temporary fund
total assessments of not more than one per cent of the aggregate of insured deposits,
28
THE FEDERAL RESERVE SYSTEM
GENERAL INFORMATION REOARDTNG MKMHKUSTTIP
I N T H E FEDERAL RESERVE SYSTEM
As staled above, all national banks are required to become
members of the Federal llcserve System. I n the ease of State
institutions interested in becoming members, applications are
addressed to the Federal Reserve agent at the Federal Reserve
bank in the district in which the applicant bank is located. The
Federal Reserve agent investigates the condition of the bank
and makes recommendations to the Federal Reserve Board,
which must pass on each application for membership.
I n acting upon the application of a State institution for
membership, the Federal Reserve Board is required by law to
consider specifically:
1. The financial condition of the applying bank.
2. The general character of its management.
3. Whether powers authorized in its charter or by
State law and exercised by it are consistent with
the purposes of the Federal Reserve Act.
Some of the important statutory provisions regarding
membership are outlined below.
Capital Required—To be eligible for membership in the
Federal Reserve System, a State bank or trust company,
including Morris Flan banks and other incorporated banking
institutions engaged in similar business but excepting mutual
savings banks having no capital stock, must have a paid-up
unimpaired capital sufficient to entitle it to become a national
bank in the place where it is situated, except that this requirement does not apply to certain State banks and trust companies having a capital of not less than $25,000.
A mutual savings bank having no capital stock must, to
be eligible, have surplus and undivided profits not less than the
amount of capital required to organize a national bank in the
same place.
The minimum capital requirements with respect to new
national banks are as follows:
In cities having population of:—
6,000 or less
Over 0,000 but not over 50,000
Over 50,000
'.....
Except that in the outlying districts of a city of over 50,000, where the State laws
penr.it the organisation of State banks with a capital of $100,000 or less, national
banks may. with the approval of the Comptroller of the Currency, have a capital
of not less than $100,000.
Capital required
$ 50,000
100,000
200,000
THE FEDERAL RESERVE SYSTEM
29
Stock Subscription—An applying bank is required to subscribe for stock in the Federal Reserve bank of the district in
an amount equal to ($ per cent of its paid-up capital and surplus, except that a mutual savings bank must subscribe for an
amount of stock equal lo six-tenths of one per cent of its total
deposits. Only one-half of the par value of the stock is paid,
the other half remaining subject to call by the Federal Reserve
Hoard. Upon the amount paid in, the Reserve bank pays
cumulative dividends at the rate of G per cent per annum.
Reserve Requirements—A member bank must maintain
with its Federal Reserve bank as a reserve balance a certain
proportion of its deposits. This proportion varies according to
the class of the deposit and the location of the bank as follows:
McinJjcr banks:—
Net demand
deposits
Time:
deposits
13%
10%
7%
3%
3%
'<S%
If located in an outlying district of a reserve city, however, a member bank may, upon approval of the Federal Reserve Board, have its reserve requirements reduced to those
specified in (c), and, if located in an outlying district of a central reserve city, may, with the approval of the Federal Reserve
Board, have its reserve requirements reduced to those specified
in (b) or (c).
The law provides that no new loans may be made or dividends paid by a member bank if its reserve is deficient. A
penalty prescribed by the Federal Reserve Board may be
assessed if there is a deficiency in a bank's reserve. Penalties
are computed on the basis of the average daily net deposit
balances for semi-weekly, weekly, or semi-monthly periods for
banks located in Federal Reserve and branch cities, reserve
cities, and elsewhere, respectively.
Voluntary Withdrawal—Any State member bank or trust
company may withdraw from membership after six months'
written notice has been given to the Federal Reserve Board,
upon the surrender and cancellation of all of its holdings of
Federal Reserve bank stock, and, in exceptional circumstances,
such six months* notice may be waived by the Board. The law
provides, however, that no Federal Reserve bank shall, except
upon express authority of the Federal Reserve Board, cancel
within the same calendar year more than 25 per cent of its
80
THE FEDERAL RESERVE SYSTEM
capital stock on account of such voluntary withdrawals during
that year,
Examinations][andBReports—National banks and their
affiliates are examined by the Comptroller of the Currency and
copies of the reports are furnished the Reserve bank. State
member banks and their affiliates are examined by the Federal
Reserve banks, and whenever the directors of a Federal
Reserve bank approve examinations made by the State authorities, such examinations and the reports thereof may be accepted
in lieu of examinations made by examiners for the Federal
Reserve bank. The Federal Reserve Hoard deems it desirable
to have, at least, one regular examination of each State member
bank, including its trust department, made during each calendar year by examiners for Federal Reserve banks either independently or jointly with State banking authorities. The laws
of some States authorize the acceptance of the reports of
examiners for the Federal Reserve banks in lieu of examinations by State examiners.
A State member bank is required to furnish its Federal
Reserve bank semi-annual reports of earnings and dividends
and not less than three reports of condition each year, including
reports of its affiliates other than member banks. A national
bank sends to its Federal Reserve bank copies of similar reports
which it submits to the Comptroller. A member bank must also
furnish its Reserve bank with periodical reports of daily net
deposit balances for reserve computation purposes.
Branches of Member Banks—A national bank, with the
approval of the Comptroller of the Currency, may establish
and operate branches within the State in which it is located if
the State law specifically authorizes State banks to do so. A
national bank establishing such branches, however, must comply
with certain specified capital requirements. Under certain
conditions also and with the consent of the Federal Reserve
Board, a national bank may establish branches in foreign countries, dependencies, or insular possessions of the United States.
State member banks may operate branches on the same conditions and subject to the same limitations as those applicable
to national banks.
Limitation on Interest Paid on Deposits—No member
bank of the Federal Reserve System may pay interest on any
deposit which is payable on demand with certain specified exceptions; and the Federal Reserve Board, in accordance with a
THE FEDERAL RESERVE SYSTEM
81
requirement of the law, limits by regulation the rate of interest
which may be paid by member banks on time and savings
deposits.
Miscellaneous Provisions—There are a number of other
provisions of Federal law relating to different aspects of operations of national banks as well as State banks which become
members of the Federal Reserve System. Each member bank
must have not less than 5 nor more than 25 directors. There
are provisions prohibiting loans to a bank's own executive
officers; providing for the removal of any director or oflicer
for violation of law or for continued unsafe or unsound banking practices; limiting the degree to which directors, officers,
or employes of member banks may serve other banks or securities organizations; and imposing penalties with respect to embezzlements, false entries, and similar matters.
Other important provisions prohibit member banks from
lending on or purchasing their own stock; prohibit payment of
unearned dividends; limit activities with1 respect to purchasing,
selling, underwriting, and holding investment securities and
stock; regulate the relation of a member bank to holding company affiliates; prohibit affiliation with any organization engaged principally in the issue, underwriting, or distribution of
securities; limit loans on stock or bond collateral; limit loans
to or investments in stock of affiliates; and limit the investment
in bank premises.
Conditions?Jof Membership—The Federal Reserve Board
prescribes for each State institution applying for membership
conditions to which the institution must agree before it is admitted to the System. These conditions are designed to maintain sound conditions in member banks and to insure that
powers exercised after their admission will be consistent with
the provisions of the Federal Reserve Act. Furthermore, the
Hoard prescribes such special conditions in each case as may
be determined after consideration of all of the circumstances
involved to be desirable to correct unsatisfactory conditions in
the bank or to prevent the exercise of powers which the bank
might have under its charter or under State law that are not
consistent with the purposes of the Federal Reserve Act and
are considered undesirable in a commercial banking institution. The Federal Reserve agent in each district is prepared
to furnisli on request full information as to the procedure to
be followed and forms to be used in applying for membership.
y
THE
f
FEDERAL RESERVE
SYSTEM TODAY
/^•"
THE
FEDERAL RESERVE SYSTEM
TODAY
Federal Reserve Bank of N e w York
March 1936
nF^PPTRRrrsisn:
mm
•*•»*--Jo ^ * n E E a n n B F R
RBRflflBBH
Jtf-^^rJL^M
Architect** Drawing of Nciv Tiuildinfj of the Board of Governors
of the Federal Reserve System, Washington, D. C.
-IM
FOREWORD
This booklet was prepared under the auspices
of the Federal Reserve Agents' Conference primarily to give the essential facts regarding the System
itself, and to furnish banks with a general outline
of the requirements for membership.
TABLE OF CONTENTS
Page
Foreword
3
The Federal Reserve System Today
Board of Governors of the Federal Reserve System
Federal Open Market Committee
The Federal Reserve Banks
The Member Banks
Federal Advisory Council
6
6
8
10
M
14
The Work of the Federal Reserve Banks
Holding Reserves of Member Banks
Extension of Credit by Federal Reserve Banks
Credit Facilities for Member hanks
Credit Facilities for Others
Open-Market Investments
Currency
Interdistrict Settlement Fund
Check Collection
Collection of Notes, Drafts, Bonds, Coupons, etc
Wire Transfers of Funds
Fiscal Agency
Informational Services of the Federal Reserve System..
15
15
19
22
23
24
24
30
31
33
33
33
34
General Information Regarding Membership in the Federal
Reserve System
35
Capital Required
36
Stock Subscription
36
Reserve Requirements
57
Voluntary Withdrawal
37
Examinations and Reports
38
Branches of State Member Banks
38
Limitation on Interest Paid on Deposits
39
Miscellaneous Provisions
39
Conditions of Membership
39
[41
THE FEDERAL RESERVE SYSTEM TODAY
The Federal Reserve System was created by the Federal
Reserve Act, approved December 23, 1913. The twelve Reserve banks opened their doors for business on November 16,
1914.
Coming into existence within a few months after the outbreak of the World War, the System has been faced throughout
its history with problems of operation and of policy arising from
abnormal economic and financial conditions throughout the
world. In surmounting resultant difficulties and notably in
helping the Government to finance its participation in the World
War, the System met successive tests of its strength and soundness. Both in the period of rapid expansion during the war and
in the subsequent contraction during the post-war depression
of 1920 and 1921, the System's adaptability to changing conditions and its capacity for meeting demands upon its resources
were put to a severe test.
In the succeeding eight years, the System was confronted
with changed but no less difficult conditions. A steady flow of
gold from abroad furnished a basis for a vast expansion of credit
which was sufficient not only to meet all legitimate needs of
trade, but also to finance speculative activity in the securities
markets, in real estate, and in other fields. The collapse of this
speculative boom was followed by a period of world-wide business and industrial stagnation of unprecedented severity, culminating in the almost complete paralysis of this country's
banking machinery. During the depression, the System cushioned the decline by an easy money policy and, upon the reopening of the banks after the proclamation of the national
banking holiday, the System actively cooperated in the rehabilitation of the banking structure and in the restoration of economic and financial confidence.
Experience gained during two decades of the System's operations aiTorded a valuable basis for further adapting its functions
£5]
and administration to serve the public interest. With the passage of the Banking Act of 1935, the System's responsibilities
were broadened and more clearly defined and allocated. The act
embodied numerous changes, some of which were fundamental
in character, reflecting a broader conception of the System's
place in the nation's economic life than existed when it was
established. Machinery for the formulation and execution of
open-market policies was simplified and responsibility for openmarket operations, as well as for discount rates and reserve requirements, was clearly fixed with a view to enlarging the
System's ability to maintain sound credit conditions and to
serve the needs of trade and industry.
THE FEDERAL RESERVE SYSTEM TODAY
The Federal Reserve System comprises several parts, including:
1. The Board of Governors of the Federal Reserve
System.
2. The Federal Open Market Committee.
3. Twelve Federal Reserve banks with 25 branches.
4. Member banks, numbering about 6,500.
5. Federal Advisory Council.
Board of Governors of the Federal Reserve System—Broad
supervisory powers are vested in the Board of Governors of
the Federal Reserve System which has its offices in Washington. The Board of Governors is composed of seven members
appointed by the President with the advice and consent of the
Senate. In selecting these seven members, the President is required to have due regard to a fair representation of the financial, agricultural, industrial, and commercial interests, andgeographical divisions of the country. No two members may
be from the same Federal Reserve district.
Among the many responsibilities of the Board of Governors,
those concerning the credit policies of the System arc the most
important. The discount rates charged by the Reserve banks,
which are established by the boards of directors of these banks,
are subject to the review and determination of the Board of
Governors. The Board may, within certain limitations and in
order to prevent injurious credit expansion or contraction,
[6]
change the requirements as to reserves to be maintained by
member banks against deposits. After March 1, 1936, each
member of the Board of Governors will also be a member of
the Federal Open Market Committee, which is charged with
the responsibility of determining policy in connection with
purchases and sales of bills and securities in the open market—
an operation which is discussed more fully in a later paragraph.
Actions along these lines must be taken with a view to accommodating commerce and business and with regard to their bearing upon the general credit situation of the country.
For the purpose of preventing the excessive use of credit
for the purchase or carrying of securities, the Board of Governors is authorized to regulate the amount of credit that may
be initially extended and subsequently maintained by brokers,
banks, and others on any security (with certain exceptions)
registered on a national securities exchange. Certain other
powers have been conferred upon the "Board which are likewise
designed to enable it to prevent an undue diversion of funds
into speculative operations.
,
In connection with its supervision of Federal Reserve banks,
the Board of Governors is also authorized to make examinations
of such banks; to require statements and reports from them; to
require the establishment or discontinuance of their branches;
to supervise the issue and retirement of Federal Reserve notes;
and to appoint some of the directors of each Reserve bank and
to approve the appointment of the chief executive officers, as
described in later paragraphs.
In connection with its supervision of member banks, the
Board is authorized among other things (1) to pass on the
admission of State banks and trust companies to membership
in the Federal Reserve System and on the termination of membership of such banks; (2) to examine member banks and receive condition reports from State member banks and their
affiliates; (3) to limit by regulation the rate of interest which
may be paid by member banks on time and savings deposits;
(4) to issue voting permits to holding company affiliates of
member banks entitling them to vote the stock of such banks
at any or all meetings of shareholders of the member banks;
(5) to regulate interlocking relationships between member
banks and organizations dealing in securities or, under the
Clayton Antitrust Act, between member banks and other banks;
(6) to remove officers and directors of a member bank for con-
[7]
till tied violations of law or unsafe or unsound practices in conducting the business of such bank; (7) to suspend member banks
from the use of the credit facilities of the Federal Reserve System for making undue use of bank credit for speculative purposes or for any other purpose inconsistent with the maintenance
of sound credit conditions; (8) to pass on applications of State
member banks to establish out-of-town branches; (9) to pass
on applications of national banks for authority to exercise
trust powers or to act in fiduciary capacities; (10) to grant
authority to national banks to establish branches in foreign
countries or dependencies or insular possessions of the United
States, or to invest in the stock of banks or corporations engaged in international or foreign banking; (11) to supervise the
organization and activities of corporations organized under
Federal law to engage in international or foreign banking. In
exercising its supervisory functions over the Federal Reserve
banks and member banks, the Board of Governors promulgates
regulations governing certain of the activities of Federal Reserve banks and member banks.
To meet its expenses and to pay the salaries of its members
and its employees, the Board makes semi-annual assessments
upon the Federal Reserve banks in proportion to their capital
stock and surplus.
The Board of Governors is required under the Banking Act
of 1935 to keep a complete record of its actions on all questions
of policy together with the votes taken and the reasons underlying such actions, and to include this record in its annual report to Congress.
Federal Open Market Committee — Federal Reserve banks
are authorized to buy and sell in the open market bonds and
short-term obligations of the United States, bankers' acceptances, and other assets listed in a later paragraph. Such purchases and sales may only be made in accordance with the direction and regulation of the Federal Open Market Committee.
Effective March 1,1936, the Federal Open Market Committee
consists of the seven members of the Board of Governors of
the Federal Reserve System and five representatives of the
federal Reserve banks who are to be elected annuallv. One
member is elected by the boards of directors of the "Federal
[8]
Reserve Banks of Boston and New York, one by the Federal
Reserve Banks of Philadelphia and Cleveland, one by the Federal Reserve Banks of Chicago and St. Louis, one by the Federal
Reserve Banks of Richmond, Atlanta, and Dallas, and one by
the Federal Reserve Banks of Minneapolis, Kansas City, and
San Francisco.
Decisions in regard to open-market purchases and sales are
made with reference to general credit conditions. When there
is evidence of undue use of bank credit, or indications of heavy
speculative demands for credit that are tending to create unsound conditions, the Reserve banks, under the direction of and
regulations adopted by the Federal Open Market Committee,
may sell securities in the open market, payment for which results in a reduction in the reserve deposits of member banks
in their Federal Reserve bank. In order to prevent injurious
credit expansion, the Board of Governors may also, with certain
limitations, increase reserve requirements. The sale of securities in the open market or the increase of reserve requirements
would normally have the effect of requiring member banks
either to curtail their own operations or borrow from the Reserve banks. The Federal Reserve banks may exert further
pressure on borrowing banks by raising discount rates, with the
approval of the Board of Governors, making it more expensive
for member banks to borrow.
On the other hand, when business is receding and credit
demand is low, the Reserve banks, under the direction and regulations of the Open Market Committee, may buy securities in
the open market and thereby increase "the reserve deposits of
member banks., thus enabling them to make additional loans or
investments without having to borrow from the Reserve banks.
Open-market operations, therefore, exert an important influence
on the volume of credit available to business and investors and
on interest rates, that is, on the cost of this credit.
Under the Banking Act of 1935, a complete record is kept,
of the actions taken by the Federal Open Market Committee
upon questions of policy, together with the votes taken and the
reasons underlying the Committee's actions. This record will
be published in the Annual Report of the Board of Governors
of the Federal Reserve System.
[9]
The Federal Reserve Banks — The country is divided into
twelve Federal Reserve districts, in each of which there is a
Federal Reserve bank bearing the name of the city of its location. There arc also in operation 25 branches of Federal Reserve banks and 2 agencies, as listed below:
Location of Federal
Reserve Hank
District Number
Location of Hranch
Boston
New York
fluffalo, New York
Philadelphia.
ft
Cleveland....,
Cincinnati, Ohio
Pittsburgh, Penna.
Richmond....
Haiti mo re, Maryland
Charlotte, N. C.
Atlanta1
Tlirrninghani, Alabama
Jacksonville, Florida
Nashville, Tennessee
New Orleans, Louisiana
Chicago
Detroit, Michigan
8
St. Louis
Little Rock, Arkansas
Louisville, Kentucky
Memphis, Tennessee
9..
Minneapolis
Helena, Montana
Kansas City...
Denver, Colorado
Oklahoma City, Okla.
Omaha, Nebraska
Dallas
F.l Paso, Texas
Houston, Texas
San Antonio, Texas
10..
Los Angeles, California
Portland, Oregon
Salt Lake City, Utah
Seattle, Washington
Spokane, Washington
San Fiaucisco.
« . . V " ^dJilmi t0 , xh* branches named, the Federal Reserve Hank of Atlanta has an
Cuba
Savannah, deorgia, and operates another agency for the System at Havana,
The Federal Reserve banks are under the general supervision
of the Board of Governors of the Federal Reserve System. The
capital of the Federal Reserve banks is supplied by the member
banks, each of which is required to subscribe to the capital
stock of its respective Reserve bank in an amount related to its
own paid-up capital and surplus.
[10]
[11]
Each Federal Reserve bank has a board of nine directors
whose members are residents of the respective district and are
required to administer the affairs of the Federal Reserve bank
fairly and impartially. The terms of office of all directors are.
three years, so arranged that the term of one director of each
class expires each year. Six of the nine directors are elected
by the member banks of the district. These six include: three
Class A directors, who must be representative of the member
banks and who are usually active officers of member banks;
and three Class B directors, who may not be officers, directors,
or employees of any bank, but who must be actively engaged
in their district in commerce, agriculture, or industry. For the
election of directors, member banks are divided into three groups
according to size of capital and surplus—small banks, mediumsize banks, and large banks. Each group of member banks
elects one Class A director and one Class B director.
The remaining three directors, who are called Class C
directors, are appointed by the Board of Governors of the
Federal Reserve System and may not be either officers, directors, employees, or stockholders of any bank. One of the Class
C directors is designated by the Board of Governors of the
Federal Reserve System as chairman of the board of directors
and. Federal Reserve agent. As Federal Reserve agent, he is
the official representative of the Board of Governors and is
required to maintain a local office of that body on the premises
of the Federal Reserve bank. He administers such parts of
banking law as are delegated to him, maintains a stock of Federal Reserve notes, and holds the collateral for such notes when
issued. Examiners appointed with the approval of the Board
of Governors of the Federal Reserve System examine State
member banks. The Federal Reserve Agent keeps himself fully
informed of the condition of all member banks, and issues periodical reviews of banking and business conditions in his district.
Looking at the make-up of a Reserve bank board of directors in another way, Class A directors represent lenders of funds,
Class B directors represent borrowers, and Class C directors
represent the interests of the general public.
The chief executive officer of a Federal Reserve bank, effective March 1, 1936, is the president who, together with the
first vice-president, is appointed for a term of S years by the
board of directors with the approval of the Board of Governors
of the Federal Reserve System. Other officers may be appointed
by the board of directors of the Federal Reserve bank.
[12]
The Federal Reserve banks derive their funds for advances
to member banks and for open-market purchases principally
from the power conferred upon them by Congress to receive deposits and also to issue Federal Reserve notes. The principal
sources of deposits of the Reserve banks are the member banks,
which are required to keep with the Reserve banks reserve balances bearing a specified percentage relationship to the member
banks' own deposit liabilities, and the United Slates Government.
The Reserve banks must hold a 40 per cent reserve in gold
certificates against Federal Reserve notes in circulation and a
35 per cent reserve in gold certificates or other lawful money
against deposits. When deposits with the Reserve banks are
made in the form of gold certificates or lawful money, they add
to the reserves of the Reserve banks and consequently increase
their lending power by approximately two and one-half times
the amount of the deposit. Deposits at the Reserve banks, however, may also be obtained by member banks through borrowing from the Reserve banks, or as a result of open-market purchases by these banks. Deposits obtained in these ways do not
add to the reserves of the Reserve bank, or to their lending
power, but. on the contrary, utilize some of the reserves and consequently absorb some of their lending power.
Federal Reserve banks are not operated for the purpose of
making profits. Tt was the intention of Congress in enacting the
Federal Reserve Act that the activities of the Federal Reserve
banks be directed toward influencing credit conditions for the
best interests of industry, agriculture, and commerce. Consequently, these banks in ordinary times have a large volume of
cash assets and unused lending power. Since the Reserve banks
hold the ultimate reserves of the banking system, it is important that the lending power of these banks be at all limes adequate to meet not only the seasonal demands of trade and industry but also unusual requirements that may arise in exceptional circumstances.
After all necessary expenses of a Federal Reserve bank have
been provided for, its stockholding member banks are entitled
to receive a cumulative annual dividend of six per cent on the
paid-in capital stock. On December 31, 1935, the paid-in slock
of the Reserve banks held by the member banks totaled
$130,512,000, and dividends paid on this stock in 1935 were
$8,504,974. After dividend claims have been fully met, the net
earnings are paid into the surplus fund of the Federal Reserve
. { 13 ]
bank, which strengthens the position of the bank and increases
its ability to serve the public. More than one-fourth of the
aggregate net earnings of the Reserve banks since their organization was paid to the Government as a franchise tax, approximately one-fourth was paid in dividends to member banks,
nearly one-fourth, under act of Congress, was contributed to
the capital of the Federal Deposit Insurance Corporation, and
a fourth remains in the surplus accounts of the Reserve banks.
In case of liquidation or dissolution of a Federal Reserve
bank, any surplus remaining after payment of all debts, dividends, and the par value of its capital stock is to be paid to the
United States Government.
The Member Banks—All national banks in the continental
United States are required by law to be members of the Federal
Reserve System, and eligible banks and trust companies operating under State charters may, with the approval of the Board
of Governors of the Federal Reserve System, become members.
Pertinent information with respect to membership in the Federal Reserve System is given in a later section.
About 40 per cent of the commercial banks in the United
States were members of the System on December 31, 1935, and
these member banks had resources amounting to about fourfifths of the total banking resources of all commercial banks in
the country.- There were 6,387 member banks on December 31,
1935, of which 5,386 were national banks and 1,001 were State
banks. The State bank members ranged in size from banks
with $25,000 capital to some of the largest banks in the United
States.
The relation of a member bank to the Federal Reserve bank
of its district is similar in many respects to the relation of an
individual to his bank. It is chiefly from member banks that
Reserve banks receive deposits and to member banks that they
make loans and supply currency.
Federal Advisory Council—The Federal Advisory Council is
composed of twelve members, one from each Federal Reserve
district, selected annually by the board of directors of the Federal Reserve bank of the district. The Council is required to
meet in Washington at least four times each year, or oftencr if
called by the Board of Governors of the Federal Reserve System, and may hold such other meetings in Washington or elsewhere as the Council may deem necessary. The Council acts
in an advisory capacity, conferring directly with the Board of
[14]
Governors of the Federal Reserve System on general business
and financial conditions and making recommendations concerning matters within the Hoard's jurisdiction and the general
affairs of the System.
THE WORK OF THE FEDERAL RESERVE BANKS
Among the principal functions of the Federal Reserve banks
are holding the basic reserves of the banking system, issuing
Federal Reserve notes, making discounts for or advances to
member banks, purchasing and selling investments of the kinds
permitted under the law, making direct loans to business and
industry under certain conditions, clearing and collecting checks
for member banks, safekeeping of securities for member banks
outside of Reserve bank and branch cities, and acting as fiscal
agents for the United States Treasury.
Holding Reserves of Member Banks—Every member bank
is required by law to keep on deposit with its Federal Reserve
bank a sum which bears a specified relation to its deposits. This
is known as the member bank's reserve and, among other things,
is responsible for the name, "Reserve" banks. Reserves required
on time deposits are S3 per $100 in all classes of banks, while
reserves required on demand deposits at the time this pamphlet
was prepared were 13 per cent in central reserve city banks, 10
per cent in reserve city banks, and 7 per cent in other banks,
known as "country banks."
Changes in the volume of reserve balances carried by member banks with the Reserve banks are one of the most important
indicators of credit conditions. Since member banks arc required
to hold a prescribed minimum proportion of reserves in relation to their deposit liabilities, and since in ordinary times banks
do not carry a larger amount of idle funds, changes in the
volume of reserve balances ordinarily correspond to proportionate changes in deposits held by member banks. When
member bank reserves increase because of gold imports or
through purchases by the Reserve banks in the open market,
the banks tend to increase their loans and investments, and consequently their deposits, until their volume is as large as the
new reserve balances are permitted to support. On the other
hand, if reserve balances are diminished through gold exports,
sales of securities by the Reserve banks in the open market, or
through a domestic demand for currency, member banks must
either liquidate some of their loans and investments or borrow
[15]
from the Reserve banks in order to bring their reserves up to
the minimum required by law.
Since the reserves constitute only a fraction of the deposits
that they are permitted to support, changes in reserves tend to
be accompanied by changes in member bank deposits of several
times the amount of the change. It is for this reason that reserve balances are sometimes referred to as "high power
dollars."
The lower portion of the accompanying chart shows the
course of member bank reserve balances from 1918 to 1935.
Prior to 1932 these balances rarely exceeded the reserves required by law. Periods when reserve balances increased were
periods when member banks were increasing their own loans
and investments and deposits. Periods when member bank reserves diminished were periods when bank credit, as measured
either by loans and investments or by deposits, declined. Increases in reserves, therefore, were indicative of periods of credit
expansion, and decreases in reserves of periods of credit liquidation or contraction.
Not only changes in the volume of reserves of member banks
are significant, but also the means that bring about these
changes. Tf increases in reserves arc caused by gold imports or
open-market operations by the Reserve banks, they come to the
member banks without causing them to borrow money, and
consequently they result in a tendency on the part of the banks
to find outlets for the new funds. In these circumstances credit
conditions are easy and interest rates lend to decline. If, however, the member banks, in order to have the required amount
of reserves, must borrow from the Reserve banks, then they are
likely to make efforts to get out of debt, and may sell investments or call loans. Credit conditions become tight and interest
rates advance..
For these reasons, the Reserve banks can exert an important
influence on credit conditions by increasing or decreasing the
volume of member bank reserves by buying or selling securities
in the open market.
Since 1932 the demand for bank credit by business has been
inactive, while reserves of member banks have been greatly increased, first, through open-market operations by the Reserve
banks, and later through large imports of gold from abroad.
As a consequence, member bank reserve balances with the Federal Reserve banks have been much larger than the minimum
[!<"»]
MEHBER BANK RESERVES AND RELATED FACTORS
MONTHLY AVERA6E5 OF DAILY FIGURES
BILLIOHS OF DOLLARS
lOf
BILLIONS OF OOILAR3
i - i — J J O
FJH^BMCI^
1918 l9iSTT920 19211922 1923 1924 1925' 1926' 1927 1928' 1929 1930" 1931' 1932' 1933' 19341935'
RESERVE BANK CREDIT
BILLIONS OF M U M S
4!
'
'"
'
"
BILLIONS OF DOLLARS
"
1918'1919 l^0'l92ri922T923'T924'|9Z5 > l926V927'l928 1929 1930 I93F 1932 1933 1934 1935
BILLIONS OF DOLLARS
EXCESS RESERVES OF MEHBER B4KKS
BILLIONS OF DOLLARS
1918 1919 1920 1921 1922 1923 1924 1925 1926 1927 1928 1929 1930 1931 193Z 1933 19341935
[17]
required by law. These reserves above legal requirements are
known as excess reserves. The continued expansion of these
excess reserves was in accordance with the Federal Reserve
System's policy of easy money pursued for the purpose of lowering- prevailing money rates and encouraging the recovery of
business.
Some of the principal factors, changes in which influence the
volume of member bank reserve balances, arc also shown on the
chart.* Gold stock and Reserve bank credit may be considered
as primary sources of reserve funds. If other factors do not
change, additions to the countryfs gold stock increase bank
reserves and ease conditions in the money market, while reductions in gold stock have the opposite effect. Like effects follow
increases or decreases of Reserve bank credit. The principal
components of Reserve bank credit arc shown in the middle
section of the chart and comprise bills discounted for member
banks, bills bought in the open market by the Reserve banks,
and holdings of United States Government securities by the
Reserve banks. As already indicated, it makes a difference
whether changes in icserves are caused by open-market purchases by the Reserve banks, or reflect borrowing by member
banks from the Reserve banks.
"Money in circulation" and "Treasury cash and deposits with
Federal Reserve banks," which are also shown on the chart, are
sometimes spoken of as factors making use of reserve funds.
Increases and decreases in these work in the opposite direction
from changes in gold and Reserve bank credit. A member bank
needing currency to meet customers' demands may get it from
a Reserve bank and have the amount charged to its reserve
account. On the other hand, a member bank with surplus currency on hand may deposit it, receiving credit in its reserve
account. Additions to funds withdrawn by the Treasury from
the banks and held on deposit with the Federal Reserve banks
or as cash in the Treasury vaults result in a decrease in reserve
balances of member banks or an increase in their borrowings,
while disbursements of such funds by the Treasury have the
opposite effect.
The Federal Reserve banks may be thought of as a system
of twelve reservoirs, each holding the reserve deposits of member banks and prepared lo make loans lo meet the credit needs
* A full discussion of the derivation of this chart and the significance of its constituent items may he found in the Federal Reserve Bulletin, July 1935, and in "Money
Kates and Money Markets in the United States," l»y Wiiilielil W. Riefler, Harper &
brothers, Publishers, 1930.
[18]
of its respective district. Facilities for borrowing on sound
assets at its Reserve bank are an assurance to a well-managed
bank of its capacity to render better service to its industrial,
commercial, and agricultural customers.
In actual practice, a member bank's reserve account at the
Reserve bank may be increased by depositing currency or checks,
by transfers from a correspondent bank, by borrowing at the
Reserve bank, or by the sale to the Reserve bank of bankers'
acceptances, or under certain circumstances, by the sale to the
Reserve bank of Government securities or other assets which the
Reserve banks may purchase. The reserve balance may be
checked against by the member bank, but any deficiency in the
required balance must be restored.
No interest is paid on member bank reserve deposits. If
interest were paid on such deposits, Reserve banks would need
to be so operated as to earn the interest and would have to keep
their funds more fully invested, thus competing directly with
commercial banks for loans and investments. Since the public
interest requires that the operations of the Reserve banks be
conducted with reference to the general condition of credit and
business rather than to the need for earnings, the Reserve banks
arc not permitted to pay interest on deposits.
Extension of Credit by Federal Reserve Banks—The power
of the Reserve banks to extend credit is of great importance to
the business public. Let us take as an example a grocer in
Austin, Texas, who wishes to buy a carload of flour. At the
moment his bank account is not sufficient to cover such a purchase, and so he applies to his local bank for a loan. The bank,
satisfied with the grocer's credit rating, makes him a 90-day loan
on his note, and the grocer then buys the flour. As he sells it
and his customers pay their bills, the grocer accumulates funds
to retire his note.
In ordinary circumstances, a bank's resources are sufficient
to meet its customers' requirements, but the grocer's application
for a loan may reach his bank at a time when many other customers need business loans. If the bank expands its loans at
this time, it may in turn be forced to borrow. Before the establishment of the Federal Reserve System the Austin bank would
have applied for a loan from some other bank with which it had
an account. Usually, correspondent banks can meet requirements
of this character coming from their bank customers. However,
the correspondent bank similarly might not be in a position to
expand its loans.
[19]
ATLANTA
ST. LOUIS
!H a
BHBOnRH
nniinniaii
S "nnnnnn
v
KANSAS CITY
MINNEAPOLIS
http://fraser.stlouisfed.org/
DALLAS
Federal Reserve Bank of St. Louis
SAN FRANCISCO
r
Since the passage of the Federal Reserve Act, the Austin
bank, if a member of the Federal Reserve System, is in a much
more secure position, since it can always turn to the Reserve
Bank of Dallas. It may offer to the Reserve bank the grocer's
note. The Reserve bank then examines the note as to its
eligibility under the law and as to its soundness, and, if satisfied
with the loan, resdiscounts it and places the proceeds in the
reserve account of the Austin bank.
Later, when the grocer's note matures and is paid, it is returned to him and thus the circle is completed. Meanwhile,
the grocer has been able to carry on his business. The Austin
member bank, with the funds it borrowed from the Reserve
bank, has been better able to serve its customers than would
have been the case if the reserve reservoir had not been available to draw upon.
The rate of interest charged the member bank by the Reserve
bank is called the "discount rate." The discount rate for each
class of paper is required to be established every fourteen days
by each Reserve bank, or oftener if deemed necessary by the
Board of Governors of the Federal Reserve System, and is subject to review and determination by the Board of Governors.
Such rate is applied uniformly to all member banks in the district on paper of like character and is usually lower than the
rate charged its customers by a member bank.
The member bank's lending rate at any particular moment
is determined, subject to State law, largely by custom and business conditions. On the other hand, the discount rate at a
Reserve bank is determined largely with reference to credit
conditions. Discount rates are advanced when there is evidence
of excessive growth of credit or the development of speculative
activity and reduced when business is inactive and the demand
for credit is low.
Federal Reserve banks may borrow from each other by rediscounting loans which they have made.
Important types of credit extension in which the Federal
Reserve banks may engage are described below in summary
form:
Credit Facilities for Member Banks—Reserve
banks are
authorized to discount for their member banks eligible paper
which consists of notes, drafts, bills of exchange, and bankers'
acceptances of short maturities arising out of commercial, industrial, and agricultural transactions, and short-term paper secured
[22]
by obligations of the United States. They arc authorized to
make advances to their member banks upon the promissory
notes of the latter for periods not exceeding ninety days upon
the security of paper eligible for discount or purchase and for
periods not exceeding fifteen days upon the security of obligations of the United States and certain other securities.
Federal Reserve banks may also make advances to member
banks on other kinds of security, namely, upon any assets of the
member bank whether otherwise eligible or not, which will
secure the loan to the satisfaction of the lending Reserve bank.
Such loans may have a maturity of not more than four months
and bear interest at a rate of not less than Y* of 1 per cent per
annum higher than the highest discount rate at (he time in
effect at such Reserve bank. Under certain prescribed conditions,
advances may also be made to groups of member banks upon
collateral other than eligible paper.
Credit Facilities for Others — Federal Reserve banks may
make working capital loans direct to established industrial or
commercial businesses which are unable to secure needed credit
from their usual sources. These loans may be for periods
not exceeding five years. Federal Reserve banks may also participate with member banks or other financial institutions in
making such loans. A third form of this Federal Reserve bank
assistance to industry is for a member or nonmember bank to
make the loan, first protecting itself by securing a commitment
from the Federal Reserve bank. The commitment binds the
Federal Reserve bank to take over the loan at the request of
the lending bank and to assume an agreed proportion of any
loss, in no case exceeding 80 per cent of the loan.
Federal Reserve banks may also make advances to individuals, partnerships, or corporations upon their notes secured by
direct obligations of the United States for periods not exceeding
ninety days. In unusual and exigent circumstances, the Board
of Governors of the Federal Reserve System may authorize a
Federal Reserve bank under certain conditions to discount for
individuals, partnerships, or corporations notes, drafts, and bills
of exchange of the kinds and maturities made eligible for discount for member banks. Federal Reserve banks may discount
short-term agricultural paper for Federal Intermediate Credit
banks.
[23]
Open-Market Investments— Federal Reserve banks, in accordance with the direction and regulations of the Federal Open
Market Committee, may purchase and sell in the open market
bankers' acceptances, cable transfers, and bills of exchange of
the kinds and maturities eligible for discount, and direct obligations of the United States or obligations which are fully
guaranteed by the United States as to principal and interest, as
well as certain short-term obligations of Federal Intermediate
Credit banks, of National Agricultural Credit Corporations, and
of States in the continental United States and political subdivisions thereof. These operations are an important phase of
the System's credit-extension activities.
Currency—Currency in this country has become the "small
change" of business. The greater part of the country's transactions is settled by check, and except when banking disturbances have resulted in hoarding of currency by the public, the
amount of currency in circulation has varied chiefly with the
need lor cash in making retail purchases and in paying wages.
The Federal Reserve banks arc the principal currency reservoirs of the United States, and their own note issues afford the
elastic element in the American currency supply. Member banks
obtain the currency that they pay out from the Federal Reserve
bank of their district. Nonmember banks usually obtain their
currency from their correspondent banks, which are members
of the Federal Reserve System and order the currency in turn
from the Federal Reserve bank.
Currency transactions between a member bank and a Federal
Reserve bank are much the same as those between an ordinary
bank and its depositors. When an individual needs currency, he
draws a check on his bank and cashes it. If he does not have a
sufficient balance in the bank to obtain funds in this manner,
he may be forced to borrow. Similarly, when a member bank
requires currency to pay out to its customers, it in effect draws
and cashes a check on its Federal Reserve bank. The member
bank may find it necessary to borrow at the Federal Reserve
bank for this purpose.
On the other hand, when an individual has more currency
than he needs, he deposits it at his bank, perhaps paying ofT a
loan. Likewise, if a member bank decides that it lias more
currency than it needs, it will return the surplus currency to the
Reserve bank for credit to its account. Thus, the increase or
decrease in the volume of currency in circulation does not depend
[24]
upon the initiative of the Federal Reserve banks but upon the
needs of the member banks. Their needs, in turn, are determined
by the needs of their customers.
The entire cost of shipping- currency to and from member
banks is paid by the Federal Reserve banks.
In order to be able to supply all calls for currency without
delay, the Federal Reserve banks keep on hand large stocks of
all denominations of currency and coin. Additional stocks of
paper currency are also maintained at the Bureau of Engraving
and Printing in Washington, D. C.
As banks of issue, the Federal Reserve banks have had outstanding both Federal Reserve notes and Federal Reserve bank
notes. Federal Reserve notes constitute the major portion of
the currency used in the United States today, about $3,700,000,000
being in circulation during December 1935. Federal Reserve
bank notes, however, have been issued only under special conditions. The amount outstanding at any time has been relatively
small and those issued duringthe 1933 banking emergency are
rapidly disappearing from circulation.
A cardhoard carton of currency being strapped for shipment hy a
Reserve hank to a member hank. Steel hands are placed around each
package while it is compressed between the jaws of the machine.
'
[25]
Federal Reserve notes are obligations of the United States
and are a first and paramount lien on all the assets of the issuing
Federal Reserve bank. They are legal tender for all public and
private debts.
Any Federal Reserve bank may make application to its
Federal Reserve agent for Federal Reserve notes. They are
issued by the Federal Reserve agent against the security of gold
certificates and of commercial and agricultural paper discounted
or purchased by Federal Reserve banks, and, until March 3, 1937,
may also be secured by direct obligations of the United States
when authorized by the Board of Governors of the Federal Re-
Thc packages shown in the above illustration arc new and used Federal
Reserve notes being issued by the Federal Reserve agent to the Federal
Reserve bank.
serve System. Every Federal Reserve bank is required to maintain reserves in gold certificates of not less than 40 per cent
against its Federal Reserve notes in circulation. A small fund in
gold certificates is maintained with the Treasurer of the United
States for the redemption of its Federal Reserve notes, but this
may be counted as part of the 40 per cent reserve.
[26]
ISSUE AND RETIREMENT OF FEDERAL RESERVE NOTES
FEDEV.. RESr^VE BOARD
STOCK N T=.tASLSr VAULTS
*o'es fc«2rded
:o agt- c i
re^isi! en
FEDERAL RESERVE AGcNT
RESFfrE STOCK
Nc'es issted to
reserve ban* ct
i;slic3!.cn actoxand
by cslVslcral
£ £ v f BANK
STOCK C-F SCTLS
FAflKG TELLiR
Colld'e'fl released
' c~337icri»r
I -dest'Lttic-T
EbHEAU 0- LNG^A
tl
Nc'es pnr.'ed
and >epr r
"reasury Vi_!-s
ILATCh
lej
Ne* rc!o
Ft no'es
Ln- • K'a
• ••«
—"—-
The collateral pledged with the agent by the Reserve bank
for Federal Reserve notes must not be less than the amount of
notes applied for. The Board of Governors of the Federal Reserve System may at any time call upon the Federal Reserve
bank for additional security to protect Federal Reserve notes
issued to it.
Every Reserve bank is required to redeem in lawful money
its own Federal Reserve notes and the notes issued by other
Reserve banks, but it may not place the notes of other Federal
Reserve banks in circulation again under a penalty of a tax of
10 per cent upon the face value of the notes so paid out. It is
required to return promptly to every other Reserve bank the
notes of such other Reserve bank, or, upon direction of that
bank, to forward them to the Treasurer of the United States for
retirement. Badly worn and mutilated notes are canceled and
returned by the Federal Reserve bank receiving them to Washington. Notes which are still fit for use may be returned by a
Reserve bank to the custody of its Federal Reserve agent, and
the former is then entitled to the return of an equivalent amount
Cun-ency returned to the Reserve banks is sorted by machines of the type
shown in this illustration.
[28]
of collateral. Returned notes may again be obtained from the
agent on the presentation of collateral as required for the issue
of new notes. The costs of engraving, printing, issuing, and
retiring Federal Reserve notes, together with insurance and shipping costs, are paid by the Reserve banks.
Vurrenvy which returns to the Reserve banks unfit for further use, is cut
in two by this machine and the two Jialven sent in separate shipments to
Washington.
The facilities provided by the Federal Reserve System for
borrowing on sound assets to obtain currency represent one of
the most important improvements made in the American financial system by the Federal Reserve Act. Previously, when there
was a sudden increase in the demand for currency, a large supply
was difficult to obtain: First, because facilities for issuing sufficient currency to meet emergency demands did not exist; and
second, because there was no central pool from which banks
could borrow, while in times of banking difficulty large-scale
sales of investments or borrowing from other banks was impossible. The impossibility of increasing the supply of currency
was one of the principal causes of the panics of 1873, 1893, and
1907, when many banks suspended payments to depositors, notwithstanding the fact that they owned sound assets of the types
[29]
on which the Federal Reserve banks now extend credit. The
Federal Reserve System established an clastic currency system,
which made it possible to meet the unprecedented withdrawals
of cash in the years 1930-1933.
The demand for currency is one of the principal sources of
the seasonal demand for Reserve bank credit. This is shown
by the chart on page 17, on which one line represents the total
of credit extended by Reserve banks from January 1918 through
December 1935, and a second line, volume of money in circulation. The close relationship of the seasonal fluctuations in Reserve bank credit and in currency is at once evident.
A coin-counting machine in a Reserve hank. In 11)34 nearly $300,000,000
of coin wan received and counted at the twelve Reserve banks.
Interdistrict Settlement Fund—Each Federal Reserve bank
has a deposit of gold certificates with the Board of Governors
at Washington. The sum of the twelve deposits is called the
Interdistrict Settlement Fund, which was created to assist Federal Reserve banks in settling their transactions with each other.
Private or leased wires connect all Federal Reserve banks and
branches, and at the close of each day the Reserve banks wire
[30]
to Washington the total of the amounts that they owe the other
Reserve banks. The Interdistrict Settlement Fund combines
these figures and transfers sums from one bank's account in the
fund to another's account to pay the net amount of these interbank transactions. In this way check collections, transfers of
funds for member banks and the Treasury, Federal Reserve bank
investments, and an enormous mass of other interdistrict business are transacted merely by bookkeeping entries and without
physical shipments of currency. In 1935, business totaling
$91,000,000,000 was handled through the Interdistrict Settlement
Fund.
Check Collection—Under regulations prescribed by the Board
of Governors of the Federal Reserve System, the twelve Federal
Reserve banks act as a nation-wide clearing house for their
member banks and for such nonmember banks as maintain appropriate balances with the Reserve banks. For these banks the
Federal Reserve banks will collect checks drawn on all banks
in the United States which do not deduct an "exchange charge"
for paying checks on themselves received through the mail. Outof-town checks drawn on banks in the same Federal Reserve
Ftundlea of incoming checks being opened in the mail department of a
Reserve hank.
[31]
district deposited with a Reserve bank are usually sent directly
to the banks on which drawn. Checks drawn on banks in another Federal Reserve district, however, are ordinarily sent to
the Reserve bank of that district for presentation. This payment
between Federal Reserve banks for the proceeds of check collections is made by telegraph through the Interclistrict Settlement Fund. Direct forwarding of checks and settlement of
interclistrict items through the Interclistrict Settlement Fund have
reduced materially the average time formerly required to collect out-of-town checks under the old indirect routing practice.
Since upwards of 90 per cent of all commercial Iransations are
settled by checks, the more prompt availability of the proceeds
of checks represents an important saving to business and banking in this country. Moreover, checks are collected by the
Federal Reserve banks without payment of the old "exchange
charge" and this represents a large saving to commerce.
Sorting U. S. Treasury checks in a Reserve bank. Kach pile of checks is
drawn for a different purpose and by a different dishurttiny officer of the
Government.
[321
Collection of Notes, Drafts, Bonds, Coupons, etc.—The Federal Reserve banks also collect miscellaneous items such as
notes, drafts, bonds, coupons, etc., collection being made through
direct routing and the use of the Interdistrict Settlement Fund
in much the same manner as checks.
Wire Transfers of Funds—Member banks wishing to create
balances or pay funds in another part of the country may do
so by means of wire transfers through their Reserve banks without loss of time and, if transfers are for multiples of $100, at no
cost to member banks except where made for the benefit of a
designated customer, when a charge is made for the cost of the
telegram. These transfers are accomplished by means of wire
advices from the sending to the receiving Federal Reserve bank,
and payment is made through the medium of the Interdistrict
Settlement Fund.
A clerk in a Federal Reserve hank counting coupons from various V, 8.
Treasury securities after redemption hy the Reserve hank as Fiscal Agent
for the Government.
Fiscal Agency—The Reserve banks act as fiscal agents of
the Government in the issue, transfer, exchange, conversion, and
redempiion of United States Government securities, arid in the
administration of special deposit accounts of the Government in
[33]
member and nonniembcr banks. Functions formerly performed
by the Sub-Treasuries of the United States in connection with
the exchange and redemption of money for the public are handled now by the Reserve banks. They are also called upon to
serve as fiscal agents for various agencies and corporations
established by the Government, as for example, the Reconstruction Finance Corporation. The Fiscal Agency Department of
a Federal Reserve bank is a convenience to banks and the public
having occasion to deal with the Government in these matters.
Informational Services of the Federal Reserve System—Important work is carried on by the Board of Governors of the
Federal Reserve System as well as at the Reserve banks in the
collection and analysis of financial and business data of local,
national, and international scope. Accurate and current information of this character is essential to the officials of the System
who are responsible for national credit policies. The material
thus assembled is made public as far as possible for the benefit
of member banks and business in general.
The official publication of the Board of Governors of the
Federal Reserve System, the Federal Reserve Bulletin, is issued
monthly and is supplied free of charge to all member banks, and
at a subscription rate of $2.00 per year to cover printing costs,
to the general public. Tt is a source for statistical material dealing with general business conditions, the operations of the Federal Reserve banks and member banks, money market developments in this country, and foreign banking data, including
exchange rates, gold holdings of central banks and governments,
reports of central banks, and similar material.
A monthly review of business conditions in his district is
issued by each Federal Reserve agent. These reviews are based
in part on reports received from banks and from firms representing the major lines of industry, and are designed to include the
type of information currently useful to bankers in their lending
activities. In addition to the monthly reviews of business conditions, a large amount of statistical matter for the use of officers
and directors is prepared at each Federal Reserve bank. Several
of the Reserve banks maintain libraries which are open to the
public, affording access to collections of well-selected books,
pamphlets, and current periodicals on economic and financial
subjects.
[34]
GENERAL INFORMATION REGARDING MEMBERSHIP
IN THE FEDERAL RESERVE SYSTEM
Among the privileges which a bank enjoys as a member of
the Federal Reserve System are the following:
1. Facilities for rcdiscounting eligible paper and obtaining advances on promissory notes.
2. Obtaining currency and coin promptly when needed.
3. Direct use of Federal Reserve check collection facilities.
4. Direct use of Federal Reserve non-cash collection
service.
5. Transferring funds by telegraph.
6. Drawing drafts on Federal Reserve bank.
7. Safekeeping of securities by the Federal Reserve bank
for member banks located outside of Federal Reserve
bank and branch cities.
8. Use of the emblem
<TFEDERALRESERVE^
[•hh^ SYSTEM^^J|
9. Member bank deposits are automatically insured by
the Federal Deposit Insurance Corporation up to
$5,000 for any one depositor.
As stated above, all national banks in the continental United
States are required to become members of the Federal Reserve
System. In the case of Slate banking institutions interested in
becoming members, applications should be addressed to the
Federal Reserve agent at the Reserve bank in the district in
which the applicant is located. The Federal Reserve agent
investigates the condition of the bank and makes recommendations to the Board of Governors of the Federal Reserve System,
which must pass on each application for membership.
Jn acting upon the application of a State institution for
membership, the Board gives special consideration to:
(1) The financial history and condition of the applying
bank and the general character of its management;
(2) The adequacy of its capital structure and its
future earnings prospects;
[35]
(3) The convenience and needs of the community to be
served by I he bank; and
(4) Whether its corporate powers are consistent with the
purposes of the Federal Reserve Act.
Some of the important statutory provisions regarding membership are outlined below.
Capital required—To be eligible for admission to membership in the Federal Reserve System, a Stale bank or trust company, including Morris Plan banks and other incorporated banking institutions engaged in similar business but excepting mutual
savings banks having no capital stock, must have a paid-up,
unimpaired capital sufficient to entitle it to become a national
bank in the place where it is situated, except that this requirement does not apply to certain State banks and trust companies
having a capital of not less than $25,000.
After the year 1941 the above requirement may be waived
by the Board of Governors of the Federal Reserve System with
respect to the Stale banks and trust companies having average
deposits of $1,000,000 or more, which after that year are required
to be members of the Federal Reserve System, in order to have
the benefits of deposit insurance.*
A mutual savings bank having no capital stock must, to be
eligible, have surplus and undivided profits of not less than the
amount of capital required to organize a national bank in the
same place.
The minimum capital requirements with respect to new
national banks are as follows:
Ju cities having population of:
0,000 or less
Over 6,000 but not over 50,000
Over 50,000 (except as slated below)..
Tu an outlying district of a city with a population exceeding 50,000
inhabitants; provided State law permits organization of State banks
in such location with a capital of 5100,00!) or less
.
Minimum
Capital Retuiiittl
$ 50.000
100,000
200,000
100,000
Stock Subscription—An applying bank is required to subscribe for stock in the Federal Reserve bank of the district in an
amount equal to 6 per cent of its paid-up capital and surplus
(including capital notes and debentures sold to the Reconstruction Finance Corporation), except that a mutual savings bank
• Savings banks, mutual savings banks, Morris Plan banks and oilier incorporated
banking institutions engaged only in business similar to that transacted by Morris Plan
banks, State trust companies doing no commercial banking business, and banks located
in Hawaii, Alaska, Puerto Kico, or t'ne Virgin Islands, are not required to become
members of the Federal Reserve System in order to have deposit insurance.
[36]
must subscribe for an amount of stock equal to six-tenths of one
per cent of its total deposits. Only one-half of the par value of
the stock is paid, the other half remaining subject lo call by
the Board of Governors of the Federal Reserve System. Upon
the amount paid in, the Reserve bank pays cumulative dividends
at the rate of 6 per cent per annum.
Reserve Requirements -A member bank must maintain with
its Federal Reserve bank as a reserve balance a certain proportion of its deposits. This proportion varies according to the
class of the deposit and the location of the bank, as follows:
Member it a nl; s:
(a) In central reserve cities
(b) Tn reserve cities
(c) Elsewhere
,
Net Demand. Time
Deposits* Deposits
tt<?o
3% t
3Tc 1-
7%
3^0 *•
* Gross demand deposits less balances due from other banks and cash items in
process of collection payable immediately upon presentation in the United States.
Tf located in an outlying district of a reserve city, however,
a member bank may, upon approval of the Board of Governors
of the Federal Reserve System, have its reserve requirements
reduced to those specified in (c), and, if located in an outlying
district of a central reserve city, may, with the approval of the
Board of Governors of the Federal Reserve System, have its
reserve requirements reduced to those specified in (b) or (c).
The Board of Governors of the Federal Reserve System may,
in order to prevent injurious credit contraction or expansion,
change the requirements for reserves of member banks located
in reserve and central reserve cities or of those located elsewhere
or of all member banks, but such reserves shall not be less than
the percentages of deposits shown in the above schedule nor
more -than twice such percentages.
The law provides that no new loans may be made nor any
dividends paid by a member bank if its reserve is deficient.
Penalties which are prescribed by the Board of Governors of
the Federal Reserve System are assessed for deficiencies jn a
bank's reserves. Deficiencies are computed on the basis of the
average daily net deposit balances for semi-weekly, weekly, or
semi-monthly periods for banks located in Federal Reserve and
branch cities, reserve cities, and elsewhere, respectively.
Voluntary Withdrawal—Any State member bank or trust
company may withdraw from membership after six months'
written notice has been given to the Hoard of Governors of the
[37-]
Federal Reserve System, upon the surrender and cancellation
of all of its holdings of Federal Reserve bank stock, but, in
exceptional circumstances, such six months' notice may be
waived by the Board in individual cases. The law provides,
however, that no Federal Reserve bank shall, except upon express authority of the Board, cancel within the same calendar
year more than 25 per cent of its capital stock on account of
such voluntary withdrawals during that year.
Examinations and Reports—National banks and their affiliates are examined by the Comptroller of the Currency and
copies of the reports arc furnished the Reserve bank. State
member banks and their affiliates are examined by examiners
appointed with the approval of the Board of Governors of the
Federal Reserve System; and, whenever the directors of a
Federal Reserve bank approve examinations made by the State
authorities, such examinations and the reports thereof may be
accepted in lieu - of examinations made by examiners so appointed and approved. The Board of Governors of the Federal
Reserve System deems it desirable lo have at least one regular
examination of each State member bank, including its trust department, made during each calendar year by a Federal Reserve
bank's examiners either independently or jointly with State
banking authorities. The laws of some States authorize the
acceptance of the reports of examiners for the Federal Reserve
banks in lieu of examinations by State examiners.
A State member bank is required to furnish its Federal Reserve bank semi-annual reports of earnings and dividends and
not less than three reports of condition each year, including
reports of its affiliates (with certain exceptions), and to publish
such reports of condition. A national bank sends to its Federal
Reserve bank copies of similar reports which it submits to the
Comptroller of the Currency. A member bank must also furnish
its Reserve bank with periodical reports of daily net deposit
balances for reserve computation purposes.
Branches of State Member Banks—State member banks may
establish and operate branches on the same conditions and subject to the same limitations as those applicable to national banks,
subject to the provisions of the laws of the State in which they
are located, and subject also to the approval of the Board of
Governors of the Federal Reserve System with respect to the
[38]
establishment of out-of-town branches. The Board's approval is
not required for branches within the city, town, or village in
which the parent bank is situated.
Limitation on Interest Paid on Deposits—Xo member bank
of the Federal Reserve System may pay interest on any deposit
which is payable on demand, with certain specified exceptions;
and the Board of Governors of the Federal Reserve System is
required by law to limit by regulation the rate of interest which
may be paid by member banks on time and savings deposits.
Miscellaneous Provisions—There are a number of other provisions of Federal law relating to different aspects of operations
of national banks as well as State banks which become members
of the Federal Reserve System. Each member bank must have
not less than 5 nor more than 25 directors. There are provisions
regulating loans to a bank's own executive officers; providing
for the removal of any director or officer for violation of law
or for continued unsafe or unsound banking practices; limiting
the degree to which directors, officers, or employes of member
banks may serve other banks or securities organizations; and
imposing penalties with respect to embezzlements, false entries,
and similar matters.
Other important provisions prohibit member banks from
lending on or purchasing their own stock; prohibit payment of
unearned dividends; limit activities with respect to purchasing,
selling, underwriting, and holding investment securities and
stock; regulate the relation of a member bank to holding company affiliates; prohibit affiliation with any organization engaged
principally in the issue, underwriting, or distribution of securities ; limit loans on stock or bond collateral; limit loans to or
investments in stock of affiliates; and limit the investment in
bank premises.
Conditions of Membership—The Board of Governors of the
Federal Reserve System prescribes for each State institution
applying for membership conditions to which the institution
must agree before it is admitted to the System. These conditions
are designed to maintain high standards in member banks and
to insure that powers exercised after their admission will be
consistent with the provisions of the Federal Reserve Act.
The Federal Reserve agent in each district is prepared to
furnish on request full information as to the procedure to be
followed and forms to be used in applying for membership.
C &•]
In its more than twenty years of operation and development,
the Federal Reserve System has become an integral part of
American business and finance. Through the Intcrdistrict Settlement Fund it has made possible the more efficient, less costly,
and speedier handling by member banks of check collections and
transfers of funds. It has provided an elastic and adequate
supply of currency, a concentration of bank reserves for greater
usefulness, and an efficient fiscal agency for the Treasury. The
ability of member banks to borrow on business paper which
provides a ready market for the loans of customers, large and
small, has tended to equalize the credit supply in all parts of
the country, to eliminate seasonal credit strain, and give greater
assurance that member banks can supply the credit requirements
of their communities. Machinery has been set up to provide a
national credit policy administered in the public interest and to
insure unified action by the banking system in carrying out this
policy.
[40]
The First
Ten Years
of the
Federal Reserve Bank
of New York
Its growth
and.services
1924
T h e First Ten Years
of the
Federal Reserve Bank
of New York
Photograph of Liberty and Nassou Street corner
of the new bunk building
T h e First T e n Years
of the
Federal Reserve Bank
of New York
The Bank
and the System
The Federal Reserve Bank of New York is the
largest of the lc2 Federal Reserve Ranks and
carries on about one-third of their aggregate
operations. It first opened its doors for business
ten years ago, on November 16,1014.
The Federal Reserve Ranks perform for the
banks of the country much the same service that
the banks themselves perform for their customers.
They receive deposits from banks; they furnish
the currency and coin which banks require; they
collect checks; they transfer funds; and in addition they do much financial service for the United
States Government.
By bringing together in their vaults the previously scattered gold reserves of the member
banks, and by their power to issue currency
backed by these* reserves and by commercial
paper, the Reserve Ranks are able to provide
currency and credit to meet the country's fluctuating needs for currency and credit. When
active business presses the banks of the country
for funds, or when the banks face a money
stringency such as in the past sometimes led to
panics, they borrow at the Federal Reserve Ranks.
When business is less active and funds flow back
to the banks, they repay their borrowings at the
Reserve Banks. The Federal Reserve system
gives the country elastic currency and credit,
adapted to the changing needs of commerce, industry and agriculture.
Size of the System's Operations
Naturally the operations of the Reserve Banks
are much larger in volume than the operations of
commercial banks. Their customers are not indi1
viduals but banks, cacli with its own thousands
of customers. The money which these customers
use, the Government, securities they buy, many
of the checks they draw, and a part of the commercial paper upon which they borrow pass
through the Reserve Banks. In 1023, for example,
the 1:2 Reserve Hanks received and counted between three and four billion separate pieces of
currency and coin with a value of more than 10
billion dollars; they handled for collection 700
million checks valued at more than £00 billion
dollars; they issued, redeemed, or exchanged
more than 100 million United States certificates,
notes, or bonds valued at eight billion dollars.
HILL IONS
OF DOLLARS
W/r 1915 191G 1917 191c) lc)19 1920" 1921" 1922 1923 lya*
Growth of tiie Batik** Reserves
Opening of the New York Bank
When the Federal Reserve Bank of New York
began operations in November 1014, it had a
staff of 7 officers and 8;> other employees, consisting largely of workers lent to the new organization by neighboring New York City banks. The
first quarters were a small rented building at
02 Cedar Street. In succeeding weeks the temporary employees were gradually replaced by a
permanent staff which consisted on January 1,
1015, of 5 ofliccrs and 30 other employees. The
first activity of the bank was taking into custody
the funds which all National banks in the district
were required by law to maintain with it as
reserve. There was no considerable expansion in
duties or in personnel until 1917.
War Expansion
The World War put to the test the mechanism
of the Reserve Banks for currency and credit
elasticity. Banks borrowed billions from the
Reserve Banks, and these billions provided funds
whereby the war was financed, wages paid, war
materials bought, and loans made to France,
England and Italy. While many other countries
made vast issues of irredeemable paper money,
the Reserve Banks met new needs for currency
in the L'nitcd States by issuing Federal Reserve
notes, secured by gold and commercial paper, and
always redeemable.
1914 ;91:i 19:6 1917 \9\(i 19 iV 1950' mi 1922"1923 1924"
Loans and Note Circulation, End of Each Month
As bankers for the Government the Reserve
Banks liandled Government war disbursements
and receipts and the sale of 21 billion dollars of
Liberty bonds and Victory notes and 42 billions
of short-time loans.
Located at the country's principal money center,
the Federal Reserve Bank of New York felt the
full impact of war and post-war demands. Its
loans rose to well over a billion dollars, its currency
3
issues to 900 million, its distribution of war
securities to 25 billion, and the number of employees increased to three thousand.
Development of
Regular Services
In addition to emergency war services there
grew up as natural developments of the system,
both during the war and after it, a series of activities, more permanent in their nature.
Side by side with the emergency issue of currency were developed the day to day functions of
the Reserve Banks as currency banks. Practically
all of the bills and coin in circulation in this
country reaches the users through the Reserve
Banks, and is from lime to time presented to
those banks for redemption. The receiving,
counting, wrapping, and shipping of currency have
come to assume large proportions.
Saving Time, Expense, and Hazard
Check collection in the United States had long
been unorganized and was each year imposing
on business and agriculture a burden of expense
and inconvenience. The 12 Federal Reserve
Banks and their 23 branches, with a central
jointly owned gold fund in Washington for the
settlement of accounts between districts, formed
S1LLIONS
Or DOLLARS
l_
j
I
I
I
I
!
I I I !
1914 1915 1916 1917 1913 1919 1920 1921'l92Z 1923 1924
Checks Collected Each Month
4
-•1 Section of the Transit Division Where 378 Clerks in
Three Shifts Handle Checks #i Haunt Each Day
an effective organization for the transfer of funds
about the country and the rapid, direct and economical routing and collection of checks. The
transfer of funds by telegraphic advice arid book
settlement largely replaced expensive and dangerous shipments and reshipments of currency
and coin by express. The Federal Reserve check
collection system cut in half the average, time
required to collect checks, and greatly reduced
the cost.
As the exigencies of war finance passed, more
of the activities of the Reserve Banks centered
in these ordinary services. By the end of December 1921, about 95 per cent, of the employees of
the New York Reserve Bank were engaged in
work aside from the lending functions.
Volume of
Operations
The gold reserve of the Federal Reserve Rank
of New York amounts to one-tenth of all the
monetary gold in the world and compares with
the largest amount ever held by a European
central bank; yet it is about a third of the gold
held by the 12 Federal Reserve Banks combined.
Making Loans and Investments
Even in recent years when the amounts of loans
and investments of the bank have been much
smaller than during the war period, loan and
investment transactions have totaled more than
20 billion dollars u year. The 1028 figures were:
DISCOUNTS AND ADVANCKH TO MKMIIHK
HAXKH:
Number of items handled
Amount
72,000
$17,052,000,000
ACCEPTANCES AND GOVEICNMKNT OHLI-
C!AT!ON8 purchased from time lo
ti mc during the year for the account
of this bank and other Federal
Reserve Banks.
Amount
$»,">28f000f000
In 1920 when the post-war business and price
expansion reached its highest point the amount
of bills discounted during the year was 50 billion
dollars. The dollar amounts run to very large
figures because loans arc made for such short
periods, VI days on the average. The loans made
by the bank thus turn over 30 times a year and
are completely liquid, a necessary condition in a
bank which is the custodian of reserve funds.
Supplying Coin and Currency
Every year there flows through the money
department of the bank, to be counted and sorted,
retired from circulation, or to be paid out again,
a sum of money which in the aggregate turnover
is larger by a billion dollars than all the money in
Compressing and Binding Money with Electrically
Welded Steel Hands
(}
Two Tons of Coin at the Door of One of the Twenty-two
Coin Counting Rooms
circulation in the United Stales at any one time.
The average employee doing this work sorts,
inspects, counts and wraps every day 10,000
separate bills. The average employee counting
coin handles in a year an average weight of 200
tons. The volume of Uh2S transactions was as
follows:
I ' A P E K CUItltKNCY l'AII) OUT, UECKIVHI),
OR UI:UEEMED:
Individual notes counted and recounted
Amount paid and received
477,000,000
$5,807,207,000
COIN PAID OUT on HKCEIVF.D, a service
previously performed largely by
the Sublrcasury, but now entirely
in the hands of the Federal Reserve
Bank.
Number of coins counted
Tons of coins counted
Amount paid out and received
810,000,000
4,300
9228,800,000
Collecting Checks, Drafts, Notes, and Coupons
Each year there are drawn in the United States
checks with a total value of about 000 billion
dollars. About one-third of these checks, or
most of the out-of-town checks, totaling 200
billion dollars, passes through the Federal Reserve
collection system, and one-third of this amount,
or 65 billion dollars, is handled by the Federal
Reserve Rank of New York. Thus the employees
of the check department of the bank handle in
7
the course of their daily work more than onetenth (in value) of all the cheeks that are drawn
each day in the United States. An average day's
work is 400 thousand separate cheeks, or about
one thousand checks a day for each employee
engaged in handling checks. For this work a
force is employed continuously day and night to
secure all possible speed in collection. Totals for
10:28 for both cash and non-cash items follow:
CAHII ITEMS, mostly checks, handled
for hanks in all parts of the country:
Number of items
128,400,000
Amount
#<!•>,.518,000.000
NON-CASH ITKMS, handled for collec-
tion, including drafts, notes, and
coupons:
Number of items
Amount
2,177,000
*l,9iJl,000,000
In addition to handling checks and other collection items, the llescrve Bank facilitates the
collection of large amounts of other checks presented through local clearing houses, by seLtling
collection balances on the Keservc Bank books
instead of by cash.
The Hunk's llraneh PostoJp.ee Which Rccvhcs Mail Direct
from and Dispatches Direct to the Mail Trains
In transferring funds to and from other districts, in addition to settlements for check and
note collections, the bank transfers by telegraph,
settling through the Gold Settlement Fund in
«
Washington, a sum of money greater each year
than the total cost of the W7orld War to the United
States, as indicated by these 1923 figures:
T E I . K G K A P I I I C TltAK&KEIlS OF FUNDS t o
all parts of the country. This service is performed over the telegraph wires of the Federal Reserve
system, and is used by the Treasury
Department and member banks:
Number of transfers
284,000
Amount
$28,0tfl,000,000
hi L LION'S
Of COLLARS
.MUMBER.
in-mousANDS
60
ol_
1914- 1915 1916 1917 1916 1919 19201921 1922 1923 1924Furuls Transferred by Telegrapfi Each Month
In Connection with Government Loans
The task of selling, redeeming and exchanging
Government war issues has grown less since the
war but slill involves large operations, as 11)215 figures show:
UNITED STATES GOVERNMENT SECUKI-
TIKH (including bonds, notes, and
certificates of indebtedness) issued,
redeemed or handled in connection
with conversion, exchange, or registration:
Number of items
Amount
2,260,000
84,281,000,000
COUPONK PAID ON GOVKUNMENT SKCUItITIES:
Number of coupons
Amount
17,68-1,000
$337,344,000
9
In addition to these operations for the Treasury,
the bank performs a large amount of other work
for the Government connected with the issuance
and redemption of currency, Ihe collection of
checks, the custody, purchase and sale of securities, the transfer of funds, etc.
A Wholesale Bank
The great volume of operations arises from the
fact that the Reserve Hank deals not with individuals, but with banks and with the Government. It handles money, checks, credit instruments and securities not in retail, but in wholesale
volume. The mechanical equipment required for
the work of the Reserve Bank is correspondingly
larger than is required by the commercial bank.
The equipment includes, for example, 100 adding
machines, 280 adding typewriters, 0.5 bookkeeping
machines, 20 coin counting and wrapping machines, a bindery for daily reports, more than
400 standard typewriters, and about 150 other
machines of various special types for canceling
currency, endorsing checks, mascerating and baling waste paper, banding money, etc.
Bank
Premises
For nearly 10 years the bank occupied at different times rented quarters, on Cedar Street, on
Wall Street, in the Equitable Building, and in
various other buildings in the vicinity. At one
time eight floors of the Equitable Building were
occupied in whole or in part, with additional space
elsewhere, and 1IJ vaults were in use in six separate
buildings. These working conditions were uneconomical, dangerous to health and morale because of overcrowding, and unsafe in view of the
amounts of funds handled. The vault arrangements, for example, made necessary hundreds of
transfers of cash and securities daily through the
streets and corridors of office buildings.
The first step toward] the construction of a
bank building was the adoption by the board of
10
In the Coupon Collection Division Showing the Desks
Specially Designed for Coupon Handling
directors on October 24, 1017, of a resolution
looking toward the purchase of a site and the
erection of a building.
Actual building operations were postponed by
reason of the concentration of the nation on war
activities in 1917 and 11)18, and later by prohibitive costs for building undertakings. In June
1918, a plot of land extending from Liberty Street
to Maiden Lane and running eastward from
Nassau Street, and from February to June 1911),
additional parcels, making a total area of 40,000
square feet, were purchased and in May 1921,
the demolition of the buildings occupying this
site was begun. On May 31, 19:25?, the cornerstone was laid, and early in June 1924, the eighth
floor of the building was occupied by certain
departments of the bank.
The Bank's New Building
The new building is 14 stories above ground
and ,r) stories below ground, including the vaults,
which occupy parts of 3 stories at the western
end of the building. The exterior is Indiana limestone and Ohio sandstone, characterized by color
markings, which lend variety lo the exterior, but
was less expensive than similar stone without such
11
markings. In the construction of the interior the
purpose has been to secure dignity and simplicity,
with the maximum of utility and convenience.
Every feature of the building has received exhaustive study. In the case of the vaults, for example,
a new type of construction was designed and
adopted after thorough tests by various types
of drilling implements and explosives. As a
result the vaults arc not only exceptionally
secure, but cost less than half as much to build
as the usual construction.
Provision for the Staff
Ample provision has been made in the building
for the welfare of the bank's 2,500 employees.
There arc cafeteria arrangements and rest rooms
for men and women employees, ample locker
facilities, a complete artificial ventilating system,
provision for medical service, and space adapted
for activities under the auspices of the employees'
organization, known as the Federal lieserve Club.
EMPLOYEES
IU_L..-L_„L
1914 1915 1916 ;<>17 19!8 1919 1920 1921 1922 1923 1924
The Slaf of the Hank
The building can house a staff of 5,000 people—
twice as many as the present staff. For more than
50 y ears the volume of operations of American
banks has been increasing at the rate of about
7 per cent, a year; they double in size about every
12
10 years. In planning a building for Ihe Federal
Reserve Bank, it was wise lo prepare for a rate
of increase in operations somewhat proportionate
to the rate of increase of banking in the country
as a whole. While constructed for the particular
needs of the Federal Reserve Bank, the typical
floors can be used also for commercial purposes,
and space not required immediately will be
rented.
Earnings
and Expenses
The Federal Reserve Banks are owned by the
banks which are members of the Federal Reserve
system. Thus all the stock of the Federal
Reserve Bank of New York is owned by the 850
member banks in New York Stale, northern New
Jersey, and Fairfield County, Connecticut. These
member banks elect, from the bankers and business men of the district, 6' of the J) directors who
determine the policies of the bank; the other 3
directors are appointed by the Federal Reserve
Board in Washington, which is charged with
general .supervision of the operations of the Federal
Reserve system. The board of directors thus
represents business, finance and government.
The Federal Reserve Rank, while not a Government institution, is under the supervision of a
governmental body, acts as fiscal agent for the
(lovernmcnt and performs currency functions
delegated by the Government.
Not Operated for Profit
The Federal Reserve Bank is organized and
operated not for the purpose of making profits,
but, as the title of the Federal Reserve Act slates,
"to furnish an elastic currency, to afford means
of rediscounling commercial paper, to establish
a more effective supervision of banking in the
United States, and for other purposes." Accordingly, the provisions of the Federal Reserve Act
dealing with earnings arc so framed as to make
13
the public interest the sole consideration determining its policy. The Act provides that the
member banks shall be entitled to a 6 per cent,
annual dividend on the paid-in-capilal stock.
Earnings beyond expenses and dividends are to
he paid into a surplus fund until that fund equals
the subscribed capital of the bank, and beyond
that amount 10 per cent, of net earnings in excess
of expenses and dividends is paid each year into
a surplus fund. All remaining net earnings
are paid to the United States Government as a
franchise tax which takes the place of the tax
on note issues which governments customarily
levy when I hey delegate the note issuing power.
These provisions relieve Federal Reserve policy
from any pressure for profits and make public
service the sole aim.
Earnings Related to Lending Activity
The earnings of the bank since its inception
have responded directly to its use as a seasonal
or emergency institution. The heaviest earnings
reflected the large borrowings of the war and
post-war years. Under more normal conditions
the bank has earned little, if any, beyond its
expenses and dividends. At times when earnings
have been particularly heavy the Government has
received as a franchise tax a large portion of
those earnings.
Notwithstanding an increasing volume of operations the bank has been able in recent years,
through improvements in organization and management, and increasing efficiency on the part
of individual workers, to decrease the number of
employees by about one-eighth. This decrease
in the staff and other economies have been
reflected in a decrease in the current expenses.
The future growth of the bank will depend on
the growth of banking in the Second District
and on the demands of business and agriculture,
through the banks, for Reserve Bank service.
11
The
Federal Reserve
Today
Its Relations
with Business
*An -Mdriu
if PlERRE JAY
before the Chamber of Commerce of the Untied States
MAY
2 0 , 1925
There has been a fundamental change during the
past ten years in the general atmosphere under which
American business is carried on. Business used to
be conducted in an atmosphere of fear—fear of financial stringencies and currency panics. Si?ice the
establishment of the Reserve System business is condueled in an atmosphere of confidence.
Leonard P. Ay rex, Vice President of the
Cleveland Trust Company, speaking before
Hie Chamber of Commerce of the United Stales.
The Federal Reserve Today
AMERICAN institutions arc judged not alone by
Jx tlicir accomplishments, but also by the picture which people form of them in their minds.
Few Americans have any picture of the Reserve
Banks, because relatively few come in direct contact with them. To most people they are merely
an idea because they do not deal directly with
the public but deal only with the banks. Because
of this remoteness 1 want to try to give you a
picture of what we arc, how we are organized
and controlled, and what we have been trying to
do, through the banks, for the business men and
farmers of the country.
Physical
Organization
In the first place, far from being a mere idea,
we arc a fairly robust physical organization. The
system consists of 12 banks with 23 branches, or
35 offices in all, covering every section of the
country. These banks are not governmental
bodies but private corporations owned by the
member banks who arc tlicir stockholders. Most
of the Reserve Banks are housed in their own
buildings, built with their own money, not that
of the government. They have an aggregate staff
of 10,500 clerks and officers and 108 directors.
To the latter should be added the 100 directors
of branches. These directors, officers, and clerks
operate the banks and their branches under the
Federal Reserve Act and subject to the general
supervision of the Federal Reserve Board, composed of 8 members and its staff, sitting continuously in Washington.
What the
Reserve Banks Do
Most of you here, I imagine, have never been
inside a Federal Reserve Bank. Many of you,
perhaps, have never met an officer of a Reserve
l
Bank. But every day, in ways of which you arc
probably unconscious, you have contact with the
operations of the Reserve Banks.
Currency
liOok over the paper money in your pockctbook
and you will find that many of the bills it contains
are Federal Reserve notes issued through Federal
Reserve Banks. Not only thai, but probably
every coin or bill that you carry has been handled
by a Reserve Bank. For the Reserve Banks have
taken over the functions of the old subtreasuries
and practically all the money used in the United
States is furnished through them. Banks return
their worn or surplus money to the Reserve
Banks, which in turn issue them clean money.
There is a huge daily flow of currency into and
out of the Reserve Banks. During the year this
aggregates over $10,000,000,000, or more than
twice the amount of currency in circulation in the
country. To handle so large a volume smoothly
and to provide against emergencies, the Reserve
Banks carry a large reserve supply of currency in
Washington and at their 35 offices. Practically
no bank is distant more than 24 hours, and the
vast majority of banks arc distant only overnight, from one of these currency depots. Thus
currency shortages are provided against and currency panics, like that of 1007, are eliminated.
But the Reserve Banks do more than handle the
mechanics of the flow of currency; their credit
operations also give elasticity to its volume. The
amount of money in circulation now increases at
certain seasons and decreases at other seasons in
accordance with business and agricultural requirements.
Check Collections
The next time you receive your canceled checks
back from your bank, if you will examine the
indorsements you will find that a large part of all
the checks you sent out of town carry the indorsement of one or more Reserve Banks. Indeed, the
Reserve Banks now collect practically all out-oftown checks; over two million of them every day.
2
They have cut in half the time and expenses of
collecting such checks, thereby greatly reducing
any risks which business men run in accepting
them in payment of invoices. As a result the vast
majority of country checks are now paid at par
and are so generally acceptable that most business
concerns receive them readily and no longer
require payment of their invoices in New York
or other city funds.
Transfer of Funds
In the same way, the Reserve Banks' system
for transferring funds by telegraph and at pur
from any member bank to any other member bank
in the country has eliminated the domestic exchange markets which formerly used to flourish,
together with the premiums they used to charge
for such transfers which acted as barriers to the
free flow of funds throughout the country. Last
year about $08,000,000,000 was thus transferred
over our wires. A number of the large business
concerns arc effecting great economies through
using these facilities.
Discounting Paper
Of course, our rcdiscounting of business and
agricultural paper is the most important thing we
do, through our member hanks, for business. For
thereby member banks may augment their own
resources at times to extend credit to their customers or obtain currency for them. Some of you
may have noticed, when you took up your notes
at your bank, that they had at one time been
indorsed over to a Federal Reserve Bank. This
means that your bank borrowed for a time at its
Reserve Bank on the security of your note, and
during this time your note was part of the security
behind Federal Reserve currency. In making
these rediscounts the smallest bank in the district
gets exactly the same rate as the largest bank and
the same is true of the actual notes themselves.
In the New York district, the largest note we
have rediscounted was $147,000,000, and the
smallest $2.81. There arc about 9,600 member
s
banks. At the peak of the war borrowing, some
7,500 of them borrowed. During the last three
years, a period of greatly reduced borrowing, about
0,000 member banks borrowed each year, seasonally or occasionally, showing the extent to which
member banks call upon their Reserve Banks for
a few clays, weeks, or months for loans to maintain
the reserves which the law requires them to keep.
It is through such borrowing that the country
bank now enjoys clastic credit conditions as well
as an clastic currency.
Mobilization of Gold
Our whole currency and bank credit system, of
course, is based upon the pooling of the gold
reserves of the country. Lack of this was formerly the great weakness in our banking structure. Our gold reserves were scattered in the
vaults of 27,000 individual banks and there was
no way they could be brought together for the
common use in times of need. Besides, their use
as a basis for credit was largely influenced by
competition and a desire for profits on the part
of .the 27,000 banks. No one was directly responsible for general credit conditions. When
panics and emergencies arose, emergency leadership had to be developed. Other countries had
their banks of issue which gave continuous leadership to banking policy but it was only in the
stress of a panic that banking leadership and
unity of action could be achieved in the United
States.
An American
Banking Policy
The creation of the Reserve system gave the
opportunity for the first time for the development
of an American banking policy. The gold reserves
were diverted from the 27,000 individual banks,
devoting their attention largely to profit-making,
into 12 new institutions, the Federal Reserve
Banks, created for the primary purpose of administering these reserves, not for profit, but in
4
the public interest. This was a great measure of
centralization of responsibility. Yet compared to
the centralized systems of other countries it
seemed almost decentralization. It was an essentially American plan. Just before the Federal
Reserve Banks opened, President Wilson said in
a letter to Senator Underwood:
"No group of bankers anywhere can get control.
. . . No one part of the country can concentrate
the advantages and conveniences of the system upon
itself for its own selfish advantage. . . . I think we
are justified in speaking of this as a democracy of
credit. Credit is at the disposal of every man who
can show energy and assets. Each region of the
country is set to study its own needs and opportunities and the whole country stands by to assist.
It is self-government as well as democracy."
Local Self-Government
The principle of local self-government prevails
throughout. While no bank or group or section
can get control of the Reserve system, on the
other hand the Reserve system itself in no way
attempts to control the individual banks which
arc its members. No Reserve Hank says to any
of its member banks what loans they shall or
shall not make to their customers. Member banks
are as free in all respects as they were before, but
the system gives them improved facilities for
transacting their customers' business and adds a
factor of safety to their operations which they
never before enjoyed. In the same way each
Reserve Rank in dealing with its member banks
is quite autonomous. No one from Washington
or from any other district ever tells a Reserve
Rank how much or how little it shall lend to a
member bank.
Coordination in Credit Policy
Yet there are certain countrywide functions of
the Reserve Banks in which uniformity is necessary, such as their system of collecting checks, of
transferring funds by telegraph, and of effecting
the daily settlement of balances between the
5
VI districts. A certain coordination, but not
uniformity, of credit policy is also necessary.
Therefore the law provides that the Federal
Reserve Board shall finally determine the discount rale initiated in each district, so that no
Reserve Hank may extend credit at a rate entirely
out of line with general conditions. For the same
reason coordination of policy is also necessary in
dealing in acceptances and government securities
in the money markets. Much confusion would
arise if each of the Reserve Banks acted entirely
independently.
These things, the discount rate, the rate for the
purchase of bankers acceptances, and the dealings
in short United Slates Government securities, are
the expressions of Federal Reserve credit policy.
I shall not attempt to discuss the aim and application of this policy in recent years beyond saying
that, as I have sensed it, it has been directed
toward steadying general credit conditions in the
face of the heaviest inflow of gold any country has
ever experienced. But I think you might be
interested in knowing who decide these things and
the considerations by which their decisions are
guided, particularly as you will find that business
men and business welfare play a large part in
these decisions.
Who Decide Policies?
At each Federal Reserve Bank the discount rate
is initiated by its directors, in consultation with
its officers. This rale, as I have said, is subject
to the review and determination of the Federal
Reserve Board. Let us take the personnel of the
Board first. The Act provides that the Secretary
of the Treasury and the Comptroller of the Currency shall be members ex-ofiicio and that of its
six appointed members not more than one shall
come from any one Federal Reserve District.
Also that they must represent fairly the financial,
agricultural, industrial, and commercial interests
of the country. The occupations of the present
six appointees, before appointment, were banker,
c
farmer, merchant, newspaper publisher, lawyer,
economist; a widely diversified group.
Business Men
Predominate
Coming now lo the nine directors which each
Federal Reserve Hank has, the member banks
elect six of these, of which three may be bankers
and three must be actively engaged in commerce,
agriculture or industry in the district. The remaining three arc appointed by the Federal
Reserve Hoard. Of the 108 present diredors of
the 12 banks 12 are the chairmen of the boards,
men of banking experience devoting their entire
time to the Reserve Hanks; 3(5 are active bankers,
but many of them also engaged in business or
agriculture; while the remaining GO, constituting
the majority, at present have the following
occupations:
10
13
4
3
3
3
3
2
manufacturers
merchants
farmers
lumbermen
insurance
investment bankers
retired business men
publishers
2
2
1
1
1
1
1
1
lawyers
railroads
contractor
public utilities
mining
quarrying
banker
vacancy
Here again, the business directors of the banks
are a widely diversified group, and comprise many
of the leading men of the various districts. For
example, the five business men on our board in
New York are:
William L. Saunders, chairman Ingersoll Rand
Drill Co.,
Clarence M. Woollev, chairman American Radiator
Co.,
Samuel W\ Rcyburn, president Lord & Taylor,
Theodore F. Whitmarsh, president F. 11. Leggctt &
Co.,
Owen D. Young, chairman General Electric Co.
The same is true of the branch directors, whose
jurisdiction in credit matters, however, is limited
to passing on loans to member banks in the territories served by the branches.
7
In each of the 12 districts it is men of this type,
the majority of them drawn from the district,
familiar with its conditions and having its interests at heart, who are responsible for the management and control of the Reserve Rank of the
district and the loans it makes to the banks of
the district.
Transactions in bankers acceptances and short
government securities in the open market arc
coordinated through a committee of Reserve Rank
officers appointed by the Federal Reserve Roard
and acting under the approval and authority of
the directors of those Reserve Banks which may
from time to time participate in such transactions.
Impartial Decisions
The board of directors meets weekly, fortnightly
or monthly, as their custom may be, together with
the governor of the bank and some of its principal
officers. In passing upon its lending and other
relations with the member banks the philosophy
of the Reserve Rank is quite different from that
of the commercial bank. There is no question
of getting or retaining customers; there are no
special arrangements for particular customers.
The law specifically prohibits "discrimination in
favor of or against any member bank." The
smallest borrows at the same rate as the largest.
In establishing the discount rate and making other
decisions relating to credit, the directors have
before them statistical information gathered by
the Reserve Roard and the Reserve Ranks which,
when supplemented by their own active contacts,
is perhaps as complete information about credit
and business conditions as is anywhere available.
What Considerations
Guide Policy?
What are the principles on the basis of which
the directors approach decisions on Federal
Reserve credit policy? The Federal Reserve Act
says that discount rates shall be fixed "with a
view of accommodating commerce and business."
8
The Federal Reserve Board lias laid down the
principle "that the lime, manner, character and
volume of open market investments purchased by
Federal Reserve Banks be governed with primary
regard to the accommodation of commerce and
business and to the effect of such purchase or sales
upon the general credit situation."
These arc the considerations upon which, in the
light of the best available information, credit
policy is based. You will note that the earnings
of the Reserve Banks and the earnings of member
banks are not among the considerations. The
accommodation of business, using business in its
largest sense, and the general credit situation, are
the considerations.
The Gold
Standard
The past ten years, which measure the life of
the Reserve Banks, have been among the most
abnormal, from a credit point of view, in the
history of the world. Credit decisions have been
most difficult to make. The first seven years
were abnormal on account of the war and the
readjustments which followed it. The last three
years have been more normal, yet the constant
inflow of gold has maintained an abnormal credit
background. And through practically the entire
ten years the free movement of gold has been suspended and the foreign exchanges have been
unstable and depreciated. The absence of free
international gold movements, which used to
operate fairly automatically to balance credit
disparities between the nations, has added greatly
to the difficulties of the Reserve system in steadying credit conditions. Fluctuating and depressed
exchanges have also added greatly to the difficulties of our commerce with other nations, increasing the uncertainties and hazards, and decreasing the purchasing power of other countries,
for our surplus foodstuffs and raw materials which
they must buy and wc must sell. Indeed, at no
time since the armistice have our governmental
0
bodies, our hankers, our business men and our
farmers ceased to urge* the stabilization of the
exchanges as an essential prerequisite to the
development of our foreign trade.
British Gold Resumption
Three weeks ago, however, the British Government took a step which goes a long way toward
removing these difficulties and uncertainties.
They announced on April 28 that a fret; gold
market had been reestablished in London.
The British Chancellor in the course of his
announcement said:
"Our exchange with the United Stales for .some
time has been stable, and is at the moment buoyant.
We have no immediate heavy commitments across
the Atlantic. We have entered a period on both sides
the Atlantic when political and economic stability
seems lo be more assured than it lias been for some
years. If this opportunity were missed it might not
recur soon, and the whole finance of the country
would be overloaded during that period by the
important factor of uncertainty. Now is the appointed time."
This decision is momentous for them, for us and
for the entire world. Momentous because it
points clearly to the gradual resumption of the
gold standard throughout the world. Equally
momentous also because, as the Chancellor indicates, failure to lake the decision would have
pointed to a further unlimited period of u^settlement, uncertainty, and impaired purchasing power
abroad.
Federal Reserve Cooperation
In connection with this decision, the Bank of
England requested Federal Bcserve cooperation
in a material way. For the reasons I have just
indicated, we welcomed an opportunity which
combined assistance to the Bank of England, our
agent and correspondent, with the discharge of
our domestic responsibility to the general credit
situation. We arranged, in conjunction with other
10
Reserve Banks, to place $500,000,000 gold at the
disposal of the Bank of England for two years, if
desired.
It is our Lope that this may prove an effective
aid toward general resumption of gold payments.
And it is our belief that in no way could the
system accommodate American commerce and
business more thoroughly than by assisting such
a general resumption.
An Influence
for Stability
Now, having quoted from a letter written by
President Wilson just before the Reserve system
was inaugurated, expressing his conception of
what the system should be, may I close by quoting
from a letter written by President Coolidgc seven
months ago, on the tenth anniversary of the
system, and giving his view of the effect of the
system's operations upon the monetary stability
we have been discussing. The President said:
"That the business of the country has been able,
after the disorganizing influences of war, to adjust
iLself so readily to the new conditions and prepare
a sound basis for orderly development is due in no
small measure to the stabilizing influence of the
Federal Reserve system. While the credit and
currency systems of many countries have? remained
since the war in a stale of chaos and instability which
is deadly to economic development, our own country
has already made the necessary readjustments and
reached a degree of strength and stability that insures
healthful business expansion."
11
Fifteen
Years
of the
Federal Reserve Bank
of New York
Its growth
and services
1930
Fifteen Years
of the
Federal Reserve Bank
of N e w York
Photograph of Liberty tin J Nassau StieeL corner
of the Federal Reserve Hank building
Fifteen Years
of the
Federal Reserve Bank
of New York
The Bank
and the System
The Federal Reserve Bank of New York is the
largest of the 12 Federal Reserve Banks and
carries on about one-lhird of their aggregate
operations. It first opened its doors for business
on November 16, 1914.
The Federal Reserve Hanks perform for the
banks of the country much the same service that
the banks themselves perforin for their customers. They receive deposits from banks; they
furnish the currency and coin which banks require; they collect checks; they transfer funds;
they make loans; and in addition they are fiscal
agents for the United Stales Government.
By bringing together in their vaults the previously scattered gold reserves of the member
banks, and by their power to make loans and
to issue currency backed by these reserves and
by commercial paper, the Reserve Banks are
able to ensure currency and credit to meet Ihc
country's fluctuating needs. When active business presses the banks of the country for funds,
or when the banks face a money stringency such
as in the past sometimes Jed to panics, they
borrow at the Federal Reserve Banks. When
business is less active and funds flow back to the
banks, they repay their borrowings at the Reserve Hanks. The Federal Reserve System gives
the country clastic currency and credit, adapted
to the changing needs of commerce, industry,
and agriculture. It provides, moreover, a means
of regulating somewhat the volume of credit to
prevent excesses or deficiencies of credit.
Size of the Si/stem's Operations
The operations of the Reserve Banks tend to
be larger than the operations of commercial
1
banks. Their customers are not individuals but
banks, each with its own thousands of customers.
The money which these customers use, the Government securities they buy, many of the checks
they draw, and a part of the commercial paper
upon which they borrow pass through the Itescrve Banks. In 1020, for example, the 12
Reserve Banks received and counted between
five and six billion separate pieces of currency
and coin with a value of close to 10 billion dollars; they handled for collection 025 million
•checks valued at more than '507 billion dollars;
they issued, redeemed, or exchanged almost two
million United Stales certificates, notes, or bonds
valued at about seven billion dollars.
MILLIONS OF DOLLAR!
1500:
Hrfffl
l+STEfc WfTliEtflsr
•liM* i W ) iW7 ItffftBTff
Growth of the New York Bank's Reserves
Opening of I he Ncu: York Bank
The Federal Reserve Bank of New York began
operations in November 1014, with a staff of 7
officers and 85 other employees, consisting largely
of workers lent to the new organization by
neighboring New York City banks. The first
quarters were a small rented building at 62
Cedar Street. In succeeding weeks the temporary employees were gradually replaced by
a permanent staff which consisted on January 1,
1915, of 5 officers and 36 other employees. The
first activity of the bank was taking into custody
the funds which all National banks in the district were required by law to maintain with it as
o
reserve. Oilier func:Lions of the bank developed
gradually. There was no considerable expansion
in duties or in personnel until 1017, but in these
early years a groundwork for later growth was
laid by the working out of principles and methods of opera Lions. A branch office was opened
in Buffalo in 1919.
War Expansion
The World War put to the test the mechanism
of the Reserve Banks for currency and credit
elasticity. Banks borrowed billions from Lhc
Reserve Banks, and these billions provided funds
whereby the war was financed, wages paid, war
materials bought, and loans made to France*
England, and Italy.
MILLIONS OF DOLLARS
1500.-
,
.
,
__
,
li.J4 i.JJ LlTITIin
Loans and Note Circulation, Federal Reserve Hank
of New York
As bankers for the Government the Reserve
Banks handled Government war disbursements
and receipts and the sale of 21 billion dollars of
Liberty bonds and Victory notes and 42 billions
of short-lime loans.
Located at the country's principal money center, the Federal Reserve Bank of New York felt
the full impact of war and post-war demands.
Its loans rose to well over a billion dollars, itscurrency issues to 900 million, its distribution of
war securities to 25 billion, and the number of
employees increased to three thousand.
8
Development of
Regular Services
In addition to emergency war services other
activities, more permanent in their nature, were
greatly expanded during and following the war
period.
Side by side with the emergency issue of currency were developed the day to day funci ions of
the Reserve Hanks as currency banks. They
gradually took over from the Subtreasury the
payment and redemption of Government currency and issues of Federal Reserve notes increased as prices rose. As a result of these
changes a very large proportion of all the bills
and coin in circulation in this country now reach
the users through the Reserve Banks, and are
from time to time redeposited in those banks.
Check collection in the United States had long
been unorganized and was each year imposing
on business and agriculture a burden of expense
and inconvenience. The 12 Federal Reserve
Banks and their 25 branches, with a central
jointly owned gold fund in Washington for the
settlement of accounts between districts, formed
an effective organization for the transfer of funds
about the country and the rapid, direct, and economical routing and collection of checks. The
transfer of funds by telegraphic advice and book
settlement has largely replaced expensive and
4
WS8B&5*
A Section of the Transit Division Where $#() Clerks in
Three Shifts Handle Checks 24 Hours Each Day
dangerous shipments and resliipments of currency and coin by express. The Federal Reserve
check collection system has cut in half the average lime required to collect checks, and greatly
reduced the cost.
Volume of
Operations
The gold reserve of the Federal Reserve Bank
of New York amounts to about 000 million dollars or about one-twelfth of the monelary gold
in the world; it is close to a third of the gold
held by the 12 Reserve Hanks combined.
Making Loans and Investments
In recent years, when the amounts of loans
and investments of the bank have been much
smaller than during the war period, loan and
invest men! transactions have tola led more than
23 billion dollars a year. The H>\*9 figures were:
Diescoi.-NT.s AND ADVANCES TO MEMHEK
HANKS:
Number of items handled
Amount
50,000
$23,002,000,000
ACCEJ'TAN'CKS AND (lOVKRNMENT Oil LIGATIONS purchased from time to
time during the year for the account of this bank and other
Federal Reserve Hanks:
*
i
85.853.000.000
Amount
wwtf,ww«,«w
<)
In 1020, when the post-war business and price
expansion reached their highest points, the
amount of bills discounted during the year was
50 billion dollars. The dollar amounts ran to
large figures because loans arc made for such
short periods, 7 days on the average. The loans
made by the bank thus turn over about 50 limes a
year and are completely liquid, a necessary condition in a bank which is the custodian of reserve
funds.
Supplying Coin and Currency
Every year there flows through the money
department of the bank, to be counted and sorted,
retired from circulation, or to be paid out again,
a sum of money which in the aggregate turnover
is larger by a billion dollars than all the money in
circulation in the United States at any one time.
Each employee doing this work sorts, inspects,
counts, and wraps every day, with the help of
specially designee! machines, from 20,000 to '$0,000
separate bills. The average employee counting
coin handles in a full working day nearly a ton
of coin. The volume of 1929 transactions was as
follows:
Compressing and IliutUnq Money with F.kctrically
W'rltlctl Steal Hands
6
Two Tons of Coin at the Door of One of the. Twentytiro Coin Counting Rooms
PATER CUKRKNCY HANDLED:
Individual notes received a n d
counted
Amount received and counted
710,000,000
$5,280,000,000
COIN HANDI-LI), a service previously
performed lurgcly by the Subtreasury, but now entirely in the
hands of the Federal Jtcscrve
Hank:
Number of coins received and
counled
Tons of coins received
Amount received and counled
1,571,000,000
8,085
8821,000,000
Colliding Chirks, Drafts, Xukft, and Coupons
Knch year there are drawn in Ihe United Slates
checks with a total value of 800 to 1,000 billion
dollars. About one-third of these checks, or
most of the out-of-town checks, totaling 300 to
330 billion dollars, passes through the Federal
Reserve collection system, and around one-third
of this amount, or 100 to 150 billion dollars, is
handled by the Federal Reserve Hank of New
York. Thus the employees of the check department of the bank handle in the course of their
daily work more than one-tenth (in value) of all
the checks that arc drawn each day in the United
States. An average clay's work is COO thousand
separate checks, or about twelve hundred checks
a day for each employee engaged in handling
T
checks. For this work a force is employed continuously day and night to secure nil possible
speed in collection. Totals for 10:29 for both
cash and non-cash items follow:
CASH ITT.MS, mostly checks, handled
for hanks in all purls of the
country:
Number of items
100,100,000
Amount
8ir>o\<U¥,000,000
NON-CASH TTF.MH, handled for collec-
tion, including draft .s, notes, and
coupons:
Number of items
Amount
2,(100,000
$2,01)0,000,000
In addition to handling checks and other collection items, the Reserve Bank facilitates the
collection of large amounts of other checks presented through local clearing houses, by settling
collection balances on the Reserve Rank books
instead of by cash.
The Bank's Branch Post Office Which Receives Mail Direct
from and Dispatches Direct to the Mail Trains
In transferring funds to and from other districts, in addition to settlements for check and
note collections, the bank transfers by telegraph,
settling through the Gold Settlement Fund in
Washington, a sum of money greater each year
than the total cost of the World War to the
United States, as indicated by these 1929 figures:
8
TELEGRAPHIC TIIANHFEKS OF FUNDS* to
all purls of Hie country. This
service is performed over the telegraph wires ol" the Federal Reserve
System, and i.s used by the Treasury Department and member
banks:
Number of transfers
U5,000
Amount
$07,4*0,000.000
v=r=* rj Tfic;uSA»o:
! I i r\Mc\ I -rrr M i l
Funds Transferred by Telegraph Kach Month
In Connection with Government Loans
The Lask of selling, redeeming, and exchanging
Government issues has grown steadily less since
the war, but still involves large operations, as
1029 figures show:
UNITKO
STATI'.S (lOVKIt.VMKNT SLCUJtl-
Tins (including bonds, notes, bills,
and certificates of indebtedness)
issued, redeemed, or handled in
connection with conversion, exchange, or registration:
Number of items
Amount
514,000
§3,15.5,000,000
COUPONS PAID ON GOVERNMENT RUCURITIEft:
Number of coupons
Amount
5,507,000
$237,010,000
In addition to these operations for the Treasury, the bank performs a large amount of olhcr
work for the Government connected with the issuance and redemption of currency, the collection
of checks, the custody, purchase and sale of
securities, the transfer of funds, etc.
9
In the Coupon Collection Division, Showing the Desks
Specially Designed for Coupon Handling
A Wholesale Bank
The great volume of operations arises from the
fact that the Reserve Hank deals not with individuals, but with batiks and with the Government. It handles money, checks, credit instruments, and securities not in retail, but in wholesale volume. The mechanical equipment required
for the work of the Reserve Hank is correspondingly larger than is required by the commercial
bank. The equipment includes, for example, 619
adding machines, 79 adding typewriters, 62 accounting machines, 18 calculating machines, 124
machines for counting paper money, 40 machines
for conn ling and wrapping coin, 91 check endorsers, 390 standard Lypewrilers, a bindery for
daily reports, and about 02 other machines of
various special types for canceling currency and
bonds, macerating and baling waste paper, banding money, etc.
Hank
Premises
For nearly ten years the bank occupied at different times rented quarters, on Cedar Street, on
Wall Street, in the Equitable Building, and in
various other buildings in the vicinity. At one
time eight floors of the Equitable Uuildiug were
occupied in whole or in part, with additional
10
Mutilating Old Currency Ilefore It is Shipped to
Washington
space elsewhere, and 13 vaults were in use in
six separate buildings.
The first step toward the construction of a
bank building was the adoption by the board of
directors on October 24, 1017, of a resolution
looking toward the purc1ia.se of a site and the
erection of a building. Actual building operations were postponed by reason of the concentration of the nation on war activities in 1917
and 1018, and later by prohibitive costs for
building undertakings. In June 1018, a plot
of land extending from Liberty Street to Maiden
Lane and running eastward from Nassau Street,
and from February to June 1010, additional
parcels, making a total area of 46,000 square
feet, were purchased and in May 1021, the
demolition of the buildings occupying this site
was begun. On May 31, 1022, the cornerstone
was laid, and in the summer and early autumn
of 1024 the building was occupied. The Buffalo
Branch used rented quarters until a suitable
building was purchased in 1028.
Building
The New York building is 14 stories above
ground and o stories below ground, including the
vaults, which occupy parts of 3 stories at the
western end of the building. The exterior is
11
Indiana limestone and Ohio sandstone, characterized by color markings, which lend variety to
the exterior, but were less expensive than similar
stone without such markings. In the construction of the interior the purpose has been to
secure dignity and simplicity, with the maximum
of utility and convenience. The general style of
the building is Florentine. Every feature of the
building received exhaustive study. In the
case of the vaults, for example, a new type of
construction was designed and adopted after
thorough tests by various types of drilling implements and explosives. As a result the vaults are
not only exceptionally secure, but cost less than
half as much to build as the type of construction
usual prior to that time. They set a new standard for vault construction.
Provision for the Staff
Provision has been made in the building for
the welfare of the bunk's 2,300 employees in New
York. There are cafeteria arrangements and rest
rooms for men and women employees, locker
facilities, a complete artificial ventilating system,
provision for medical service, and space adapted
for activities under the auspices of the employees
organization, known as the Federal Kcscrve Club
The Interior Loading Platform Where Trucks Are
Loaded and Unloaded in Complete Security
12
The building can house a staff of 5,000 people
—over twice as many as the present staff. In
planning a building for the Federal lleservc Bank,
the work of which will grow proportionately with
the country's banking operations, it was necessary to prepare for a large future growth.
IN THOUSANDS
The Staff of the Bank
Earnings
and Expenses
The Federal Reserve Hanks arc owned by the
banks which are members of the Federal Reserve
System. Thus all the stock of the Federal Reserve Bank of New York is owned by the 031
member banks in New York State, northern New
Jersey, and Fairfield County, Connecticut. These
member banks elect, from the bankers and business men of the district, 0 of the 0 directors who
determine the policies of the bank; the other \\
directors arc appointed by the Federal Reserve
Hoard in Washington, which is charged with
general supervision of the operations of the Federal Reserve System. The board of directors
thus represents business, finance, and Government. The Federal Reserve Banks, while not.
Government institutions, are under the supervision of a governmental body, act as fiscal
agents for the Government, and perforin currency functions delegated by the Government.
Not Operated for Profit
The Federal Reserve Ranks are organized and
operated not for the purpose of making profits,
13
but, as the title of the Federal Reserve Act slates,
"to furnish an clastic currency, to afford means
of rediscounting commercial paper, to establish
a more effective supervision of banking in the
United States, and for other purposes." Accordingly, the provisions of the Federal Reserve Act .
dealing with earnings are so framed as to make
the public interest the sole consideration determining its policy. The Act provides that the
member banks shall be entitled to a 0 per cent
annual dividend on the paid-in-capital stock.
Earnings beyond expenses and dividends of each
Federal Reserve Hank are to be paid into a
surplus fund until that fund equals the subscribed capital of the bank, and beyond that
amount 10 per (rent of net earnings in excess
of expenses and dividends is paid each year into
a surplus fund. All remaining net earnings
arc paid to the United Stales Government as a
franchise tax which lakes the place of the tax
on note issues which governments customarily
levy when they delegate the note issuing power.
These provisions relieve Federal Reserve policy
from any pressure for profits and make public
service the sole aim.
Earnings Related to Lending Activity
The earnings of the bank since its inception
have responded directly to its use as a seasonal
or emergency institution. The heaviest earnings
reflected the large borrowings of the war and
post-war years. Under more normal conditions
the bank has earned only moderate amounts
beyond its expenses and dividends, and the surplus has not yet been built up to a sum equal to
the subscribed capital.
Notwithstanding an increasing volume of operations the bank has been able in recent years,
through improvements in organization and management, and increasing efficiency on the part
of individual workers, to keep the number of
employees and current expenses relatively constant.
14
(3M-:J3)
This document contains internal or confidential information and has
been removed.
Author(s): Federal Reserve Bank of New York
Title: The Fed
Date: May 9, 1956
Page Numbers: 1-8
This document contains internal or confidential information and has
been removed.
Author(s): Federal Reserve Bank of New York
Title: The Fed
Date: September 28, 1955
Page Numbers: 1-8
FEDERAL. RESERVE BANK
OF NEW YORK
M I S C . 4C,M3M'6-!SJ
OFFICE
CORRESPONDENCE
nATF
To.
Miss Adams
FROM
B. Voigt, Sec'y. to
Mr. Treiber
February 8, 195*1.
SUBJECT.
Mr. Treiber has asked me to tell you that he has
carefully looked through Mr. Sproul!s file on Benjamin Strong
and there is little in it that is of any interest other than
the letter by Mr. Warren, copy of which you have. There is
also a memorandum written by Mr. Treiber to Mr. Sproul on
April 12, 1 9 ^ * and extracts of this memorandum which are
pertinent are listed on the attached sheet.
BV
Att.
/ ^ 9 ^
MISC. 140 B
tM...«c. t4o D .i-3o M - 0 - S z.
TREASURY DEPARTMENT
Washington 25
Received 5/24/44
(Undated)
Dear H.\ Sproul:
This is just a note to bring you up to date on the Strong
papers. It is preliminary to what I shall call a progress report,
I told you that I had found, what was called Mr. Strong's
personal file, disappointing. It was like a series of footnotes for which there was no text. V/it?i Miss Dillistin's aid,
I am gradually finding the text. As the filing system is partly
personal and partly topical, the location of the papers is quite
a task. But, when unravelled, it provides a remarkably rich
record.
As I see the undertaking at the moment, the best continued
story is that of Strong' s program of international central bank
cooperation. The story begins in 19l6f and ends in 1931, after
his death. It was his idea; and it was a noble undertaking.
It had its moments of success; and in the end it becomes the
narrative of the final phase of the gold standard, ana, for the
present at least, of the independence of central banking.
But, as I go through the papers, I encounter a number of
minor themes, each important in its data. For example, there
is a technical story of the development of the theory of the
Federal Reserve note; the story of the gold policy (the so-called
sterilization program); the story of the credit policy of 1919;
the early doctrine of the acceptance market -- to mention only
a few. There were problems when theory and operational practice
met. Then there is a thread of comment of a more abstract
character, such as Strong's understanding of the function of a
discount rate in various markets. Any one of these would make
a long memorandum or a short monograph.
In short, there is a wealth of material, such as has never
before been available, for Strong was a Jeffersonian correspondent. His correspondence with Dr. Adolph Miller alone runs to
hundreds of pages.
My first undertaking will be to assemble the scattered
material that properly should be classified as the "Strong
Papers" -- a much larger mass than the "personal flle:l. This
is, first, to make them available to myself; second, to. make
them available to persons in the Bank who might be interested;
and, third, to make them available zo future"students -- for there
are many and different veins of ore.
MISC. 140 D
.
M
.,C.,40D.,
3CM
O S
2,
^
^
My second undertaking will be to write the storyfof central
bank cooperation. This was Strong's bJg idea; and one which is
the germ of the current effort. (By the way, Strong would have
endorsed Dr. Williams 1 "Key currency" plan.)
The first undertaking will require quite a long time —
just how long, I cannot tell; and it will make rather heavy
demands on Miss Dlllistin, and may require some visits to or
by Hiss Bleecker. It probably will involve some conversation
with persons who figured in Mr. Strong's life -- such as Dr.
Miller, Dr. Sprague, George Harrison, Russell Leffingwell,
James Brown (if he is N still living), and, if possible, Jack
Morgan. 6w? *;.-w)
.^ ,,;,,* A ' ;• >/
For purposes of reference, this undertaking can be referred
to as the arranging of the Strong Papers; and I should like to
do this in such a way that the same thing could be done to
Harrison's; and establish a pattern for a set of Bank Archives
as distinct from the "files" -- that is, to design a model for
a self-perpetuating or automatic history of the Bank. One or
two large corporations have done this; the best, I believe, by
the Burlington Railway. I understand that this has been done
so successfully that it is actually used by trio officers and
directors of the road. To construct an interior history that is
useful, usable, and used Is an achievement.
As I said, I shall have to make rather heavy demands on
Miss Dlllistin, who Is most cooperative; and It may be that at
some time I shall need the services of a typist. Some of the
early carbon copies are so smudgy that they are hardly legible;
and in 10 years more they will be indecipherable.
Sincerely,
/ s / Robert 3. Warren
Robert B. "Warren
Mr. Allan Sproul, President
Federal Reserve Bank of New York
33 Liberty Street
New York, New York
Internal Memorandum
January ^0, 195U
Benjamin Strong
The Strong files in the Federal Reserve Bank of New York occupy
five (5) file drawers in the regular consolidated files room on the 7th floor.
They are under the care of Cora Dilistin, Chief.
The first three (3) drawers
are classified according to the names of men with whom Mr. Strong was corresponding There are perhaps 75 headings in aLl#
One drawer contains Mr. Strong's
diaries and red folders of his correspondence with Mr. Montague Norman for the
years 1922 to 1928.
The fifth drawer contains his observations on foreign
trips.
There is correspondence of Governor Strong to and from the following:
officers of the bank, Messrs. Case, Curtis, Harrison, Jay, Kenzel, S. Morgan,
Snyder and Tremanj members of the Federal Reserve Board, Messrs. Delano, Hamlin,
Harding, Miller and Warburg; various Secretaries and Under Secretaries of
the Treasury, Messrs. Gilbert, Glass, Leffingwell, McAdoo, and Winston; and
several economists of the time, Messrs. Bullock, Kremmerer, Sprague and
Withers*
There are several files on such subjects as the Budget System Commission, the Cotton Loan Fundl9lU-l6, the Monetary Commission 1911-lh* International Chamber of Commerce 1921-28, the Unemployment Conference 1921-22 and
the Joint Commission of Agricultural Inquiry - U. S. Congress.
There are also copies of Governor Strong's addresses, as well as
files of inter-office memoranda which he sent to the officers during the yearsThere is also correspondence with important officials of foreign
countries, viz: Sir Basil P. Blackett and W. M. Bailey of India; Sir George
Faish, Georges Pallain of the Bank of France; Dr. Schacht of the Reischsbank;
E. Fukai and J. Inouye of the Bank of Japan; S. imanura of the Sumitomo Bank;
and Lord Cunliff, Sir Brian Cokayne and Montague Norman of the Bank of Sngland*
Governor Strong made trips to Europe in 1916, 1919, 1925, 1926,and
-21928.
In each case there is a file of correspondence and a diary or journal
which he wrote covering his various impressions and conferences.
visited Japan, India and Java.
In 1920 he
A receiption was given him in Japan.
A copy
of Governor Inouye's speech is here as well as one written in longhand in
English, and also in Japanese, which Governor Strong gave in Japan.
There is a file on Reparations containing correspondence with Messrs.
Gilbert, Jay, ^effingwell, Jas. A. Logan, Jr. and ^cGarrah.
There are many letters in this collection written in longhand.
Copies
of some of the typewritten ones are scattered through the bank files under
the various subject headings but this is the only place where Governor Strong's
correspondence with any particular individual is grouped together.
In addition to this material there is said to be Pre Federal
Reserve Bank information assembled in preparation of speech delivered at
Bankers Convention, New Orleans 1911*
This was given to Mr. Burgess*
The material in these five (5) drawers came from the so called
personal files of % . Strong.
filing.
The Governor believed firmly in central
He was active in the process of setting up the present system,a task
done under the supervision of Miss Mary Pucker, now retired and living in
Philadelphia.
Over the course of the years the great bulk of his work went
into the central files.
The exception was a personal file kept in his office*
Information fron Mr. Benja-nin Strong Jr. and Miss Dilistin indicates
that after his death his papers were separated into two groups; those which had
to do with bank affairs and those which were personel.
that now contained in the five
The former group is
drawers described above.
The latter group
of papers concerned with personal matters (some of them said by Mr. Strong
Jr. to be marginal and sometimes touching on phases of bank work) were sent
to the Strong home.
After that was sold Mr. Benjamin Strong Jr. again went
through them and destroyed those of a highly personal and intimate nature*
remaining papers are now in the Lincoln Storage Warehouse in New York.
The
It is
-3probable that there may be amonr them data bearing on bank affairs, but MrStrong Jr. thinks there would not be very much.
In addition to this segregated material there is in the bank
files a vast amount of StrongTs memoranda scattered through the entire filing
system.
The banks files are set up on the Dewey decimal system which depends
on a classification more frequently used in Libraries than in filing systems.
Mr. Strong's papers will therefore be found under all the subject headings
with which he dealt that is; discount rate, expenses, victory loans, branch
banking and all the rest of the bank's business.
An early file on the Federal Reserve Act itself (classification
No. 010) contains valuable early material on policy matters differences of
opinion within banking circles, memoranda, and so forth.
would be true of a number of subjects.
This same thing
There is, for example, in the early
file under the heading 010 a letter of August 9, 1915 written by Governor
Strong in which he looks ahead to the possibility that the United States
might enter the war and comments on the strain on the then young Federal
Reserve System which would result.
Anyone desiring to work on the Strong files would have to cover
not only the five file drawers and possibly the material in the Lincoln Storage
Warehouse, but should also be prepared to seek permission to dealve into
regular files under subject headings with which Mr. Strong was known to be
dealing.
It is probable that leads to the latter would be found by going
through the file drawers, but clearly that in itself would not be sufficient.
The very stuff of creation both for the New York Bank and the system lives
within these files.
There may also be in Princeton material which is relevant.
Mr.
Strong was active in establishing the International Finance Section of the
Economics Department at Princeton University.
There he deposited a collection
of World War I material including clippings from four (U) New York newspapers
from the war's start to its end.
world to get material.
He sent the Librarian, Mr. Gerould .around the
This material should certainly be looked into-as there
may be in the Princeton Library material which bears on the development
of International Relations in this fields
12/20//*9
"Location of material
Governor Strong's correspondence fills four file cabinet drawers and
is kept in the Correspondence Files Division on the seventh floor. This material
was kept separate by Mr. Strong in his office during his lifetime• Many of the
letters are originals signed by him or addressed to him* Other letters are copies,
the originals or other copies of which are probably on the general bank files pertaining to the particular subject involved.
Hature of material
The files referred to above contain correspondence of Governor Strong
to and from the following: officers of the bank, Messrs. Case, Curtis, Harrison,
Jay, Kenzel, S. Morgan, Snyder and Tremanj members of the Federal Reserve Board,
Messrs, Delano, Hamlin, Harding, Miller and Warburg; various Secretaries and
Under Secretaries of the Treasury, Messrs. Gilbert, Glass, Leffingwell, McAdoo,
and Winstonj and several economists of the time, Messrs. Bullock, Keramerer, Sprague
and Withers*
There are several files on such subjects as the Budget System Commission,
the Cotton Loan Fund 1914-16, the Monetary Commission I9H-14, International Chamber
of Commerce 1921-28, the Unemployment Conference 1921-22 and the Joint Commission
of Agricultural Inquiry - U.S. Congress.
There are also copies of Governor Strong's addresses, as well as files
of inter-office memoranda which he sent to the officers during the years.
There is also correspondence with important officials of foreign
countries, vizi Sir Basil P. ^lackett and W. M. Hailey of Indiaj Sir George Paish,
Georges Pallain of the Bank of France; Dr. Schacht of the Reichsbankj E. Fukal and
J. Inouye of the Bank of Japan; S. Imanura of the Sumitomo Bank; and Lord Cunliff,
Sir Brian Cokayne and Montague Norman of the Bank of England. There is a sub*
stantial amount of personal correspondence with Governor Herman covering the years
1922*28.
Governor Strong made trips to Siropo in 1916, 1919, 1925, 1926, and 1928.
In each case there is a file of correspondence and a diaxy or journal which he wrote
covering his various impressions and conferences. In 1920 he visited Japan, India
and Java. A reception was given him in Japan. A copy of Governor Inouye" s speech
is here as well as one written in longhand in English, and also in Japanese, which
Governor Strong gave in Japan.
There is a file on Reparations containing correspondence with Messrs.
Gilbert, Jay, Leffingwell, Jas. A. Logan, Jr. and McGarrah.
There are many letters in this collection written in longhand. Copies
of some of the typewritten ones are scattered through the bank files under the
various subject headings but this 1 Q the only place where Governor Strong's correspondence with any particular individual is grouped together.
Unless one has in mind some particular material it would probably not be
worth while to search the regular bank files for letters, memorandum and other material
written by Mr. Strong.11
Extracts from Mr. Tr eiber's memorandum to Mr. Sproul dated April 12, 1944.
MISC. 3. LJ-tiOM 8-40
FEDERAL RESERVE BANK
OF N E W YORK
C O P Y
OFFICE CORRESPONDENCE
DATESUBJECT:—
TO-
FROM-
y/^/v4
•"NaLurfc; oi m a t e r i a l '
^LAJ^'V
Tho filea* lcfui'i'ud. Uo^bovo-ouiiUalii* correspondence of Governor Strong t o
and from the following: o f f i c e r s of the^bank, Messrs. Case, C u r t i s , Harrison,
Jay, Kenzel, S. Morgan, Snyder and Treman; members of t h e Federal Reserve Board,
Messrs. Delano, Hamlin, Harding, M i l l e r and Warburg; v a r i o u s S e c r e t a r i e s and
Under S e c r e t a r i e s of the Treasury, Messrs. G i l b e r t , Glass, Leffingwell,
McAdoo, and Vn'instonj and s e v e r a l economists of t h e t i m e , Messrs. fiullock,
Kemmerer, Sprague and Withers*
There a r e s e v e r a l f i l e s on such s u b j e c t s as t h e Budget System Commission,
t h e Cotton Loan Fund 191U-16, t h e Monetary Commission 1911-lU, I n t e r n a t i o n a l
Chamber of Commerce 1921-28, t h e Unemployment Conference 1921-22 and t h e J o i n t
Commission of A g r i c u l t u r a l I n q u i r y - U . S . Congress.
There a r e a l s o copies of Governor S t r o n g ' s a d d r e s s e s , as well as f i l e s
of i n t e r - o f f i c e memoranda which he sent t o t h e o f f i c e r s during the y e a r s .
There i s a l s o correspondence with important o f f i c i a l s of foreign c o u n t r i e s ,
v i z : S i r B a s i l P . B l a c k e t t and V>\ M. B a i l e y of I n d i a j S i r George P a i s h , Gecrges
P a l l a i n of t h e Bank of Francej Dr. Schacht of t h e Reichsbank; E. Fukai and J .
Inouye of t h e Bank of Japan; S. Imanura of t h e Sumitomo Bank} and Lord Cunliff,
S i r Brian Cokayne and Montague Norman of the Bank of England. Th&rc io cu
^abs4>a«^qra^nmQUttt of •» BnrGonal^^3WI^gs^ponll^ll^^jl,wi Mr'SOtrgiTraTTtOl'liuiii1 mjvwieng*
Governor Strong made t r i p s t o Europe i n 1916, 1919, 192£, 1926, and 1928.
In each case t h e r e i s a f i l e of correspondence and a diary or journal which he
wrote covering h i s v a r i o u s impressions and conferences. In 1920 he v i s i t e d
Japan, India and J a v a . A r e c e p t i o n was given him i n Japan. A copy of
Governor Inouye f s speech i s h e r e as w e l l as one w r i t t e n i n longhand i n English,
and a l s o i n Japanese, which Governor Strong gave i n Japan.
There i s a f i l e on Reparations containing correspondence with Messrs.
G i l b e r t , Jay, Leffingwell, J a s . A. Logan, J r . and McGarrah.
There a r e many l e t t e r s i n t h i s c o l l e c t i o n w r i t t e n i n longhand. Copies o f
some of t h e t y p e w r i t t e n ones a r e s c a t t e r e d t h r o u g i the bank f i l e s under
t h e various s u b j e c t headings b u t t h i s i s the o n l y p l a c e where Governor S t r o n g ' s
correspondence with any p a r t i c u l a r i n d i v i d u a l i s grouped t o g e t h e r .
This document is protected by copyright and has been removed.
Author(s): Eugene Lokey
Article Title: [Excerpt from] Along the Highways of Finance: The Governor's Reminder
Journal Title: New York Times
Volume Number:
Date:
November 18, 1934
Page Numbers:
Issue Number:
THE FEDERAL RESERVE BANK OF NEW YORK
AND THE W
JULY,
1944
FEDERAL RESERVE BANK
OF N E W YORK
To All Employees:
This booklet is a revised edition of a booklet first
distributed in February 1943 entitled "The Federal
Reserve Bank of New York and the War". It is
intended to tell you how the work of the Federal
Reserve Bank of New York, and of the nearly 5,000
members of its staff (3,100 of whom have come to.
the bank since December 7, 1941), contributes directly
and indirectly to the war effort. You are working
in a real war industry. Your service to your country
is less obvious than building airplanes or ships or
tanks, but it is none the less important.
The Federal Reserve System has grave responsibilities in this, the second world war in which the System
has played a significant part. Your bank has correspondingly grave responsibilities. It is the biggest
bank in the Federal Reserve System; it is the central
bank in the principal financial center of the country;
it serves a district which is making a heavy contribution to war production. Drawing on its experience in
the last war, and during two decades of uneasy peace,
the Federal Reserve Bank of New York is performing
a variety of war-time tasks, and carrying forward its
peace-time work in the service of war-time commerce
and industry and agriculture.
Some of the things we are doing are outlined in this
booklet. They could not be carried through without
the understanding and the willing work of all members
of the staff. Each of you in your own job is making
a vital contribution to what is presently the main job
of the bank—helping to win the war.
ALLAN SPROUL,
July 31, 1944.
President.
THE FEDERAL RESERVE BANK
OF NEW YORK AND THE WAR
The Federal Reserve Bank of New York—your bank—
acting in the public interest, directly serves the Second
Federal Reserve District which includes New York State, Northern New
Jersey, and Fairfield County, Connecticut. In a larger sense, it serves
the whole country.
On July 1, 1944, the staff of the bank, including the Buffalo Branch,
numbered 4,886. It has increased more than 100% since December 7,
1941 when this country entered the war.
By July 1,1944, 778 members of the staff had entered military service.
Federal Reserve Bank men are serving in all branches of the service, at
home and overseas. Nine of its women have joined the WACS, 24 have
joined the WAVES, 4 have joined the SPARS, aiid 2 have joined
the MARINES.
INCREASE IN PERSONNEL
JANUARY, 1940
JULY, 1944
)
€ € € ) € € © €
1784 MEN
;
iiiili£iiiis
|M W M W W M W W W/ W W/ W.^'
3102 WOMEN
Each symbol represent 250 employees
PAGE 3
WAR FINANCING . . .
The United States Government is now spending nearly
$2 billion a week—$260 million a day. To meet these
expenditures during the 12 months ending June 30,
1944, the Treasury had to raise about $95 billion. Taxes and other
income provided about $44 billion. This left about $51 billion to be
borrowed, but the Treasury actually borrowed about $62 billion, increasing its working balance by nearly $11 billion.' Since December 1942
the major part of the Treasury's borrowing has been accomplished in
a series of War Loan Drives directed primarily toward securing funds
from investors other than commercial banks. These drives have been
the largest financing operations ever undertaken by any country at
any time. During the First World War the greatest amount raised in
any one drive in this country was slightly less than $7 billion. That
was in the Fourth Liberty Loan in October 1918. In the Fourth War
Loan Drive, which ended in February 1944, the Treasury raised nearly
$17 billion, and in the Fifth War Loan Drive, ending July 1944, it raised
over $20 billion.
Purchasers of Government Securities
The Government can sell its securities to all types of investors or it
can rely mainly on the commercial banks to supply it with funds. The
latter would be much easier than selling securities to individuals, corporations, insurance companies and other non-bank investors, but it has
great disadvantages. When commercial banks purchase1 Government
securities from the Treasury the purchasing power of the people throughout the country is increased by the amount of such purchases, whereas
if the securities are purchased by individuals or organizations other than
commercial banks there is no increase in purchasing power.
When John Doe buys a $100 Government bond, his cash on hand or
on deposit in his bank is reduced by $100, and he no longer has that
amount to spend. The Government soon pays out the $100 it has borrowed
from John Doe, and it goes into the pocket or the bank account of
Richard Roe. Mr. Roe now has $100 to spend but this increase in his
purchasing power merely offsets the decrease in John Doe's purchasing
power. There is no increase in the purchasing power of the entire
country as a result of such Government borrowing and spending.
PAGE 4
If, however, a commercial bank buys a $100 Government bond, it
ordinarily pays for it by crediting the Treasury with that amount on its
books. This credit is drawn upon by the Government and the money is
used to buy war materials, or for other purposes. In this way Richard
Roe again gets $100 but without John Doe's having put it up in the first
place. As a result of the entire transaction, therefore, the people of the
United States have $100 more than they had before. On the other hand,
the supply of goods for civilian consumption has continued to diminish in
view of the devotion of so much of our production facilities to war purposes. The increased use of bank credit on a large scale in the purchase
of Government securities thus carries with it the threat of extensive
inflation, which, putting aside technicalities, means simply that demand—
backed by the money, the spending power in the hands of the people—is
outrunning the supply of things to be bought. Every one knows what
happens when demand outruns supply. Whether it is butter, eggs or
tickets to the World Series—prices go up. That is the way it is with
inflation, except that inflation is general. It affects all prices.
To lessen the threat of inflation the Government wants to sell as many
of its securities as possible to individuals and organizations other than
commercial banks. The Federal Reserve Bank of New York is helping
with this job—
1. Through the aid it gives and the services it performs for the State
War Finance Committees of the Distinct.
2. Through your participation in the payroll allotment plan of the
bank, and your purchases of Government bonds for cash during
war loan drives.
Due to the vast Government financing program, however, it has not
been possible for the Government to obtain all its borrowed funds from
investors other than commercial banks. In the Government financing of
marketable securities outside the war loan drives the commercial banks
have stood ready to buy whatever amounts could not be sold to other
investors. In addition, they have been active in purchasing securities sold
in the open market by other investors. The reserves of these banks must
be maintained so that they can continue to perform this important function of assuring the success of Treasury financing. Your bank, as part
of the Federal Reserve System, helps to see to it that the commercial
banks have the reserves they need for this purpose.
I'AGE 5
B?UIONS| $ 5 0
J
1940
$8.4
$31.2
$60.0
1941
1942
1943
The Federal Reserve Bank of New York has many other important
jobs in connection with the Government's financing. The issue, distribution and redemption of Government securities are done largely through
the twelve Federal Reserve Banks, as fiscal agents of the United States.
Government securities are printed by the Bureau of Engraving and
Printing in Washington, D. C. Their wholesale distribution is the job
of the Federal Reserve Banks.
In the case of most Treasury issues, other than Savings Bonds, 40% or
more of the dollar volume of sales for the entire country are made in the
Second Federal Reserve District. The Federal Reserve Bank of New
York in due course delivers most of these securities and also some
securities sold in other districts. The number of pieces (individual
certificates, notes, bonds, etc.) delivered by the bank in connection with
original issue, and the total issue price of such securities for the last
four and one-half years were approximately as follows:
PAGE 6
N U M E R OF P I E C E S
Year
1940
1941
1942
1943
1944 (first half)
Savings Bonds
310,000
2,340,000
Other Treasury Issues
107,000
556,000
Total
417,000
2,896,000
17,330,000
32,063,000
18,974,000
848,000
931,000
630,000
18,178,000
32,994,000
19,604,000
Year
1940
$ 73,503,000
1941
674,232,000
1942
1,549,259,000
1943
2,025,592,000
1944 (first half) 1,164,462,000
$ 4,954,183,000
7,756,006,000
29,649,259,000
58,030,565,000
34,291,577,000
$ 5,027,686,000
8,430,238,000
31,198,518,000
60,056,157,000
35,456,039,000
ISSUE PRICE
The increase in number of pieces from 417,000 in 1940 to 32,994,000
in 1943 and 19,604,000 in the first six months of 1944 is one big reason
why the size of the bank's staff has increased so rapidly during the
war years.
0.9
Other Securitiesn
Showing Growth in Number of
Pieces of U. S. Government Securities
Delivered by this Bank
. 0.8
Other Securities1
Savings
Bonds
0.5
Other Securities^
TOTAL IN]
MILLIONS V n A
OF PIECES 0 - 4
32.9
1943
PAGE 7
Issuance of Savings Bonds
Savings Bonds were first offered for sale through the post offices in
1935. Beginning in June 1936, they were also issued by the Treasury
Department and the Federal Reserve Banks. Savings Bonds of Series E,
which were first announced in April 1941, are now issued by the Treasury
Department, the Federal Reserve Banks, and post offices. They are also
issued by banking institutions and many other organizations which have
been qualified by the Reserve Banks as issuing agents. These other
types of organizations include business corporations operating payroll
allotment plans for their employees, savings and loan associations, retail
stores, radio stations, theatres and newspapers.
The Federal Reserve Bank of New York issues all Series F and G
bonds sold in the district, and handles all Series E bonds sold in the
district except those sold by post offices. It issues all Series E bonds for
which it receives orders, and it supplies qualified issuing agents in the
district with supplies of unissued Series E bonds and handles their
remittances and reports of bonds sold.
Sales of Savings Bonds have increased tremendously since the entry
of the United States into the war in December 1941, and the number of
employees engaged in the sale, distribution and redemption of such bonds
has shown a corresponding growth. On May 1, 1941, the number of
employees in the Government Bond Department was approximately 75,
but only a few of them were working with Savings Bonds. On July 1,
1944, there were 1,198 employees in the Government Bond Department
and the Savings Bond Redemption Department, of whom more than 90%
were engaged in work pertaining to Savings Bonds. In spite of the
increased staff, it has frequently been necessary for these departments
to work overtime (as has also been the case in many places throughout
the bank), and in peak periods as many as 750 persons have been
borrowed at one time from other departments. The bank's job is to get
these bonds out without delay, and it prides itself on keeping this work
up to date. The amounts of Savings Bonds issued by the bank and
issuing agents qualified and serviced by it, during the years these bonds
have been sold, have been as follows:
PAGE 8
Period
Issued by Reserve Bank
Pieces
Dollars
1936 (7mos.)
17,500 $ 6,743,600
1937
60,000
16,652,100
1938
96,700
22,578,500
1939
220,200
51,231,900
1940
309,900
73,503,300
1941
654,000 489,644,600
1942
2,686,000 742,966,100
1943
2,522,000 790,119,100
1944 (first half)
985,200 389,036,500
1
Issued by Agents
Pieces
Dollars
—
—
—
—
—
1,685,70c1
14,644,300
29,541,200
17,988,900
—
—
—
—
—
$184,587,3001
806,293,000
1,235,472,700
775,425,200
First issuing agents qualified in May 1941.
About 3,000 issuing agents had been qualified by the bank as of July
1, 1944. Such agents and their 1,400 branches provide approximately
4,400 sales outlets in the Second Federal Reserve District. These agents
receive nothing for their services but are reimbursed for actual out-ofpocket expenses in returning stubs and spoiled bonds to the Reserve
Bank. About 775 corporations, which operate payroll allotment plans
for their employees, are among the issuing agents. The increase in sales
by agents, both actually and in relation to the volume of direct sales by
the Reserve Bank, is attributable principally to the development of payroll allotment plans during the past three years.
Issuance of Government Securities
Other than Savings Bonds
Your bank prints and distributes announcements describing all new
Treasury issues, receives subscriptions for such issues, notifies purchasers
of the amount of securities they are to receive on allotment, receives payment for the securities, and makes delivery of them.
Exchanges, Transfers and Payment of
Government Securities
t
Your bank makes denominational exchanges of various types of Government securities, handles registered securities where there is a transfer
from one name to another, and pays matured securities and coupons.
Redemptions, Corrections and Reissues of Savings Bonds
The Savings Bond Redemption Department pays most Savings Bonds
presented for redemption; forwards the others to the Treasury for payment; and makes changes in form of registration of Savings Bonds
which have been issued by the bank or by other issuing agents. This
department and its staff of 630 now occupy six floors at 51 Pine Street,
one of the three annexes of the bank in New York City.
PAGE 9
OPEN MARKET OPERATIONS
One of our jobs is to keep constantly in touch with the Government
securities and money markets. The bank studies developments in these
markets, reports on them to the Treasury and the Federal Open Market
Committee of the Federal Eeserve System (this Committee is composed
of the members of the Board of Governors of the Federal Eeserve System
and five representatives of the Federal Reserve Banks, including the
President of the Federal Reserve Bank of New York) ; and participates
in the formulation and execution of fiscal and credit policies.
Under the direction of the Federal Open Market Committee, the
Federal Reserve Banks buy and sell Government securities in the open
market. These purchases and sales currently are undertaken primarily
to help maintain orderly market conditions and to assist commercial
banks in maintaining and adjusting their reserves, thus making it possible
for them to continue to give their support to the war financing program
and to meet demands for currency.
These open market operations are carried out by your bank, on behalf
of all the Federal Reserve Banks, in what is called the System Open
Market Account. In addition to these operations for System Account,
your bank also deals in Treasury bills for its own account, under the
direction of the Federal Open Market Committee. Any holder of Treasury bills, which are a type of Government security sold on a discount
U. S. Government Securities Held by
Reserve Banks and
Money in Circulation
$22.4
$20.4
(IN BILLIONS OF DOLLARS)
Money in
Circulation
$11.1
CTJAN. 1, 1942_l
PAGE 10
CJAN. 1, 1943-J
t - J A H 1, 1944-J
UUNE 28.1944 J
basis and usually maturing in 91 days, may sell such bills directly to
any Federal Reserve Bank at a stated rate of discount, and the seller
may, if he wishes, retain an option to repurchase the bills at the same rate.
THE TRADING ROOM
The actual purchases and sales of Government securities for the System Account, and of Treasury bills for account of the bank, are handled
by the Securities Department. This department maintains a "trading
room" from which there are direct wires connecting with the principal
Government security dealers in New York City. It keeps constantly in
touch with the Government securities market both here and out of town,
studies market conditions, maintains records regarding the securities
purchased and sold by it, allocates the securities held in the System
Account among the twelve participating Federal Reserve Banks pursuant to the directions of the Federal Open Market Committee, and does
the general bookkeeping for the System Account.
The increase in the holdings of Government securities by the Federal
Reserve Banks since Pearl Harbor is indicated in the following table:
Bate
Amount
January 1, 1942
$ 2,254,000,000
January 1, 1943
5,863,000,000
January 1, 1944
11,543,000,000
June
28, 1944
15,080,000,000
This large increase is one reflection of the need of the commercial
banks for additional reserve funds during this period.
PAGE 11
CURRENCY . . .
With expanded employment, with higher wages, and with
the public holding and carrying much more cash than ever
before, the amount of money in circulation has increased to record figures.
It has grown proportionately more rapidly than consumer expenditures
and has outstripped the rate of growth of wages and salaries. Since the
outbreak of war in Europe in September 1939 the amount of coins and
$1, $2 and $5 bills in circulation has increased at a moderate rate and is
now approximately $4 billion. On the other hand, the amount of $10 and
$20 bills outstanding has more than tripled during the same period and is
now nearly $12 billion. The amount of $50 bills and over has also more
than tripled and is now more than $6 billion. The total of all paper
currency and coin in the hands of the public and the banks at the end
of June, 1944, was over $22 billion—over $6% billion higher than at
the beginning of 1943. This is $160 for every man, woman and child in
the United States as compared with $50 on January 1, 1938, and $115
on January 1,1943. Apparently, the public is doing much more banking
"on the h i p " or "in the mattress" than has been customary in the past,
and there is also reason to believe that some currency is used in black
market operations and for tax evasion purposes. To stamp out these
latter practices is in the interest of all of us.
The Federal Reserve Bank of New York supplies the money used in
the Second Federal Reserve District, takes it in, counts it, examines it
for fitness, returns it to circulation or retires it—a never ending process.
f JSm\
GOVERNMENT ACCOUNTS . . .
LLLLLItiiiLLLLLI
—r—^——
Just as John Doe uses his local bank, so member banks of
the Federal Reserve System and the United States Government use the Federal Reserve Banks. The Federal Reserve Banks are
the principal bankers for the Government. When the Government receives
cash and checks resulting from the payment of taxes, from the sale of
securities and from various other sources, it deposits the cash and checks
in the Federal Reserve Banks. By drawing checks on these deposits, it
pays its bills; bills for war supplies and other materials, for the services
of its soldiers and sailors, for the services of its civilian employees. It
also pays the interest it owes on its debts, and when the bonds and other
obligations representing these debts come due, it pays the principal.
These transactions involve huge amounts. Incoming checks (excludPAGE 12
ing those in payment for Government securities) deposited by the
Government in the Federal Reserve Bank of New York during 1942
numbered nearly 9 million and amounted to nearly $5 billion. During
1943 they numbered more than 12 million and amounted to more than
$8 billion. During 1942 the bank handled nearly 22,000,000 checks
drawn by the Government. It handled over 60,000,000 such checks in
1943 and oyer 43,000,000 in the first 6 months of 1944. Over 65% of
these checks handled during the last 18 months were issued in " punchcard' ' form so that they could be sorted and tabulated by machine. Most
of these card checks were in payment of allotments and allowances made
by the Army and Navy, and over 3,800,000 were paid out by the Brooklyn
Navy Yard to civilian workers on its payroll. Nearly 3,000,000 were
issued by the Treasury Regional Disbursing Officer in New York City
covering social security payments, refunds of withheld taxes, veterans'
pensions and other governmental disbursements.
Number of U. S. Government Checks Handled by
Federal Reserve Bank of New York
#»
ing Federal income taxes which employers are required
to withhold from the wages and salaries of their employees under the
Current Tax Payment Act of 1943, which became effective June 11, 1943.
During July 1943 your bank qualified 817 banks in this district as Depositaries for Withheld Taxes, supplied them with appropriate instructions
PAGE 13
and forms, and commenced receiving from them deposits of withheld
taxes. Employers are required to deposit withheld taxes in a depositary
bank which credits the amount so deposited to an account in the name of
the Federal Reserve Bank as fiscal agent of the United States. The balance in such accounts is remitted periodically to the Federal Reserve
Bank for account of the Treasurer of the United States.
By July 1, 1944, 932 banks had been qualified as depositaries in the
Second Federal Reserve District, and your bank had received from such
depositaries a total of $1,428,866,000, represented by 689,700 separate
depositary receipts. Over 543,750 depositary receipts representing tax
payments of $1,107,852,000 had been verified against duplicates received
from Collectors of Internal Revenue.
In this way your bank has aided in putting into effect a new plan
of tax collection, important to every one of us, in that our tax payments
are now as nearly as possible on a current basis.
l ^ S I
CHECK CLEARING
AND COLLECTION
One of the important peace-time functions of the Federal
Reserve Banks is the handling and clearing of checks on behalf of the
commercial banks of the country. This is the unseen efficient mechanism
which permits business transactions in all parts of the country to be
settled on bank books without actual shipments of coin and currency. Its
peace-time importance is intensified in Avar. The greatly expanded
production and distribution of war goods and foods move along as
smoothly as in normal times, in so far as financial payments are concerned, because of the highly developed check clearing and collection
machinery of the Federal Reserve Banks. The volume of this work has
increased substantially as production has doubled and redoubled to meet
our nation's military needs. The number and dollar amount of checks
(exclusive of checks drawn by the Government) handled by the bank in
its clearing and transit operations during the past four and one-half
years are as follows:
Year
1940
1941
1942
1943
1944 (first h a l f ) . . . .
PAGE 14
Numoer of Checks
Dollar Amount
190,214,680
204,636,295
207,040,293
220,787,359
115,234,593
$49,860,769,097
63,180,335,620
75,832,071,636
95,707,001,375
47,209,959,220
RATION BANKING . . .
The widening war-time rationing program has placed a new
task upon the banking system and upon your bank. In
January 19437 there was put into effect a plan to clear checks representing ration points through banking channels on a country-wide basis, in
somewhat the same manner as dollar checks are cleared. Only sugar,
coffee2 and gasoline were initially included in the plan, but the clearing
system has since been extended to ration checks covering meats and fats,
processed foods, shoes, and fuel oil, as these commodities were added to
the ration list. Consumers continue to turn over their coupons and
stamps to retail merchants in the usual way in making purchases of
rationed articles. As such coupons and stamps are received by larger
retailers or are turned over by retailers to wholesalers, they are deposited
in special ration bank accounts in the commercial banks throughout the
country. It might be said that a new unit of value, the ration unit, has
taken its place alongside your dollars and is required to supplement your
dollars.
A' dealer in food, for example, has a special ration account or accounts
in the bank which carries his regular dollar checking account. He may
have a ration bank account for sugar stated in pounds and another for
processed foods stated in points. He deposits in these accounts the
coupons and stamps which he receives from customers when selling
rationed commodities. Special checkbooks are provided so that the dealer
in replenishing his stock of sugar or other rationed merchandise can
8
Coffee rationing M'as suspended in July 1943.
Thousands of Check i
600
MAY
V
JUNE
JULY
AUG.
1943
SEPT
OCT. NOV. DEC. JAN. FEB. MAR. APRIL
-J
v
1944
MAY JUNE
'
RATION CHECKS CLEARED
PAGE 15
transfer to his suppliers, simply by drawing checks, the amount of ration
points required for such replenishment up to the balance in his ration
account in the particular commodity. His suppliers deposit these checks
in their ration accounts at their own banks and receive credit in their
accounts for the number of pounds or points represented by the checks.
These ration checks are cleared through the Check Department of
your bank in the same way that ordinary checks are cleared. In February 1943, 17,876 ration checks were cleared. In May 1943, when the
meats and processed food program got under way, the volume reached
570,596. During the remainder of the year 1943 the volume averaged
nearly 580,000 per month. The total volume for the year amounted to
almost 5,000,000. During the first half of 1944 all frozen foods, and some
fruit juices, vegetables and meats were removed from the list of rationed
foods and the volume of ration checks cleared by your bank declined
accordingly. In June 1944 the'volume of checks cleared had declined
to 394,692.
i
J
CUSTODIAN AND OTHER SERVICES . .
Another job which has been performed by the Federal
Reserve Banks for many years, and which has taken on
certain war-time aspects, is the safekeeping of securities. The Federal
Reserve Bank of New York holds in safekeeping securities belonging to
member banks located outside of New York- City and to various Government accounts, and it purchases and sells securities for such accounts.
Such safekeeping services relieve the member banks of the details of
handling Government securities purchased and owned by them and thus
further facilitate the Government's financing program. Maturing coupons are cut from securities held in safekeeping and the proceeds are
paid into the account of the member bank for which the securities are
held. Similarly, when the securities become due, the proceeds are
collected and are paid into the member bank's account. If in the meantime the member bank wishes to use the securities as collateral for a loan
from the Reserve Bank, the securities are instantly available for that
purpose.
PAGE 16
LOAN AND DISCOUNT OPERATIONS . . .
For several years prior to the inauguration of the Government financing program incident to the war the banks of
the country were in general amply supplied with reserve funds and,
accordingly, bank borrowing from the Federal Reserve Banks was relatively small. About a year before Pearl Harbor total reserves of all
member banks of the Federal Reserve System reached a peak of over $14
billion with excess reserves of nearly $7 billion. By May 31, 1944, these
excess reserves had declined to $700 million. This reduction has come
about primarily as a consequence of increased currency circulation and
increased investment by the banks in Government securities. The Federal Reserve Bank of New York kept the bank lending machinery oiled
throughout the years when total excess reserves were large by making
loans from time to time to a few small banks which had occasion to
borrow to obtain necessary reserve funds. Within the last year there
has been a revival of bank borrowing. Beginning with some of the
banks in New York City, it has spread gradually throughout the district. During the past few months the number of large banks in the
district which borrowed from the Federal Reserve Bank, at least for
brief periods, was the highest in a number of years. At the end of May
1944 member bank borrowings were the largest in over a decade. Our
purchases and sales of Treasury bills at fixed rates during the last two
years have also constituted a form of "borrowing". On Treasury
bills commercial banks are now "borrowing" from your bank at % of
one per cent. On other Government securities maturing within a year,
member banks may borrow at % of one per cent. The regular discount
rate is one per cent.
*****
A J J J M V9 VT AND T LOANS . ...^••^'^
Since April 1942 your bank has had an active part in
another phase of: the war effort—the financing of businesses engaged
in war production. Acting under an Executive Order issued by the
President of the United States on March 26, 1942, the Federal Reserve
Banks, on behalf of the War Department, the Navy Department, and
the Maritime Commission, have assisted in arranging for loans by member banks and other financing institutions to businesses engaged in war
production and in guaranteeing to the financing institutions the ultimate
PAGE 17
repayment of a stated percentage of such loans. General rules for the
guidance of the Reserve Banks in handling such loans are prescribed
in Regulation Y of the Board of Governors of the Federal Reserve
System and thus these loans have come to be known as " V " loans.
In September 1943, the program was extended to meet the needs of
businesses which do not immediately require credit but may wish to make
arrangements in advance in order that they may be sure of having cash
resources available after the termination of their war production contracts and pending the settlement of their claims in connection therewith.
Commitments to make cash available to these businesses in the future are
issued by financing institutions and the repayment of a stated percentage
of the loans made by the financing institutions pursuant to such commitments is guaranteed by the War Department or the Navy Department
acting through your bank. These credits are commonly referred to as
YT loans.
In this program the Reserve Bank, as fiscal -agent of the United
States, is the connecting link between the commercial banks and other
financing institutions and the Government. Members of the Credit
Department interview prospective applicants for such guarantees,
receive applications, investigate and analyze the financial condition of
the businesses, and transmit the applications together with the recommendations of the bank to Washington for consideration. Upon receipt
of authorization from the Government departments in Washington, the
bank issues guarantees and undertakes to service the loans in certain
respects. In the case of certain loans it is not necessary for the bank
to refer the application to Washington for approval in advance. The
servicing of loans by the bank includes periodic reviews of the financial
condition of the borrowers. In the case of borrowers who are experiencing financial difficulties the bank collaborates with the financing institution and the Government department in determining the best procedure
for maintaining an uninterrupted flow of vital war material and the
liquidation of the loan.
By July 1, 1944, more than 1,300 applications for Y loans had been
received by your bank, and more than 1,000 had been approved. By the
same date approximately 90 applications for YT loans had been submitted
and 70 had been approved. Included in the Y loans is one commitment
to lend a single concern up to $1 billion. This credit is participated in
by almost four hundred commercial banks throughout the country. It is
the largest credit which has ever been arranged at one time for a private
concern. Approximately one-third of the loans, however, are for $100,000
PAGE.18
or less, meeting the credit needs not only of large primary contractors but
also of small subcontractors who previously may have found it difficult to
obtain adequate credit accommodation.
The " Contract Settlement Act of 1944'' approved July 1, 1944, pro*
vides among other things for interim financing in connection with the
settlement of claims arising from terminated war contracts. Your bank,
subject to such regulations as the Board of Governors of the Federal
Reserve System may prescribe, is authorized to act, on behalf of the
contracting agencies, as fiscal agent of. the United States in carrying out
the purposes of this Act. Loans made pursuant to this Act will be known
as " T " loans and it is anticipated that our operations thereunder will
be somewhat similar to those performed in connection with " V " and
" V T " loans.
CONSUMER CREDIT . . .
We have talked about this bank's part in one aspect of the
fight against inflation, namely, the sale of Government
securities to the public rather than to banks. Another
aspect of this fight in which we are all engaged, as part of the war effort,
is the control of instalment debt. Under the authority of an Executive
Order of the President of the United States made August 9, 1941, the
Board of Governors of the Federal Reserve System in Washington on
August 21,1941, issued its Regulation W, placing restrictions upon instalment sales of a comprehensive list of durable and semi-durable goods for
civilian consumption, and upon instalment loans. In May 1942 the list
of goods subject to the regulation was greatly enlarged and the regulation was extended to practically all types of consumer credit, whether
in the form of instalment sales and instalment loans, or in the form of
charge accounts and single-payment loans.
The Credit Department of the bank has the responsibility of administering and enforcing the regulation in this district. It answers inquiries
regarding the regulation; receives registration statements from business
concerns the activities of which are subject to the regulation; issues
registration certificates; conducts investigations; and carries on an
educational program designed to inform people subject to the regulation
regarding its terms. The Research Department collects substantial
statistical material regarding consumer credit.
PAGE 19
FOREIGN OPERATIONS . . .
Many foreign central banks and a few foreign governments maintain deposit accounts and security and gold
custody accounts at the Federal Reserve Bank of New
York. Ordinarily these accounts serve international trade and finance;
now they largely serve the United Nations' war program. Since the
United States Treasury also maintains accounts at the bank, a large
volume of financial transactions between our Government and other
governments can be readily effected. Nearly every day the Treasury
Department, acting for the War, Navy and State Departments, instructs
the Federal Reserve Bank to transfer funds to the accounts of foreign
central banks or governments for the purpose of making money available
for the use of our armed forces and the American consulates in various
parts of the world. Similarly, the Federal Reserve Bank effects payment
for various goods and commodities which our Government is purchasing
throughout the world.
Among the various services which your bank, through the Foreign
Department, performs for the United States Stabilization Fund, has
recently been the opening and maintenance with the central banks of
several countries of accounts denominated in foreign currencies. In
accordance with arrangements made by our Treasury Department with
the treasuries of foreign countries, foreign currencies are acquired abroad
and paid into such accounts. Payments from our accounts abroad, for
the use of our armed forces and Government agencies abroad, are ordered
by this bank, acting on behalf of the United States Treasury.
9
FOREIGN FUNDS CONTROL . . .
One important weapon used in the economic war against
our enemies, which supports the war of arms, is the control of foreign property in this country i By an Executive
Order issued by the President of the United States on April 10, 1940,
and amended from time to time, all property in the United States in
which any of the countries named in the Order, or their citizens or residents, have any interest is "frozen" or "blocked", that is, transactions
involving such property are prohibited except as permitted by licenses
issued by the Secretary of the Treasury.
PAGE 20
Freezing control extends to the Axis nations, to all of Continental
Europe except Turkey, and to other countries which have been overrun
by the Axis. As an aggressive weapon of economic warfare, it has among
its objectives the following:
(a) preventing the Axis from deriving any benefit from blocked
assets j
(b) facilitating the use of certain blocked assets such as patents, ships,
factories, etc., in the war effort of the United Nations;
(c) protecting American banks and business institutions in transactions involving blocked assets;
(d) protecting Americans who have claims against foreign governments and their nationals, having in mind post-war negotiations and settlements.
Your bank, as agent of the Treasury Department, assists in the
administration of the Executive Order, the formulation of policy under
the Order and the preparation of public documents carrying out such
policy. Imported currency and securities, which are required under the
freezing control to be impounded in a Federal Reserve Bank pending
investigation of ownership, are handled by the Cash Department and the
Safekeeping Department, respectively. With these and one or two other
minor exceptions the duties assigned to the bank as fiscal agent are performed by the Foreign Funds Control Department.
This department of the bank receives applications for licenses relating
to transactions involving blocked countries or their nationals. The
applications are reviewed by specialists in the kind of transaction
involved, are approved or denied directly by the bank under authority of
the Treasury Department, or are referred to the Treasury. Over six
hundred thousand applications have been handled by the bank to date.
The bank receives and checks reports covering transactions under licenses,
and receives inventory reports of property in the United States owned by
foreigners and of American-owned property abroad.
Your bank also assists the .Treasury Department in the detection and
prevention of financial transactions on the part of the Axis or others
which might interfere with the war effort. Without relaxing its efforts
in this respect, the Foreign Funds Control Department has recently also
been studying methods and problems incident to the "defrosting'' of
frozen assets after the war.
The Foreign Funds Control Department occupies the fifth and part
of the sixth floor of 70 Pine Street. The personnel of the department
is now about 130.
PAGE 21
FISCAL AGENT, CUSTODIAN AND
DEPOSITARY FOR RECONSTRUCTION
FINANCE CORPORATION . . .
The Reconstruction Finance Corporation and its various subsidiaries
are now engaged almost exclusively in war activities, including the
making of loans for the manufacture of Avar materials, the construction
of production facilities for the manufacture of war materials, the procurement of stock piles of strategic materials, the operation of the
Government's war damage insurance program, and other projects
directly related to the war effort.
The Federal Reserve Banks, acting as fiscal agents, custodians and
depositaries for the Reconstruction Finance Corporation, actively participate in the administrative aspects of the various programs of the Corporation and its subsidiaries.
Your bank disburses, by checks drawn on the Treasurer of the United
States, the amounts of loans, subsidies and other payments for account
of the Corporation and its subsidiaries, and receives, examines, and holds
borrowers' notes and collateral as well as invoices, shipping documents,
warehouse receipts and documents evidencing title to commodities
purchased.
The Defense Plant Corporation, a subsidiary of the R.F.C., purchases
and leases plants for war production and makes such facilities available
to others engaged in war work. The bank receives, examines, and holds
invoices and other documents, and makes and receives payments, in connection with such activities. The bank also prepares and maintains
complete inventory records of the machinery and equipment owned by
the Defense Plant Corporation and used by the lessees of over 300 plants.
As many as 150,000 separate items of machinery and equipment may be
recorded in the inventory of a single plant. As equipment is transferred
from one plant to another it is necessary for the bank to make numerous
adjustments of such inventories.
The Defense Supplies Corporation, the Metals Reserve Company, the
Rubber Development Corporation, the Rubber Reserve Company and
the U. S. Commercial Company, all of which are subsidiaries of the
R.F.C., are primarily engaged in purchasing, holding and selling strategic and critical materials and supplies. Your bank receives, examines
and holds documents and makes and receives payments incident to the
purchases and sales of more than 100 different materials for account of
the Defense Supplies Corporation and the U. S. Commercial Company,
PAGE 22
and of more than 50 different metals for account of the Metals Reserve
Company. Similar services are also performed by your bank for the
Commodity Credit Corporation in connection with its purchases and
sales of more than 200 different commodities.
In July 1942, the War Damage Corporation undertook to insure
buildings and other tangible property against loss or damage resulting
from enemy attack or action of our own armed forces in resisting enemy
attack. Subsequently, coverage was also made available for money and
securities when shipped by registered mail or express and under certain
other circumstances. This insurance is written through the offices and
facilities of hundreds of regular fire insurance, casualty and surety
companies throughout the country which act as fiduciary agents of the
Corporation. The bank receives from such companies, statements
regarding insurance written by them and premiums received in respect
of such insurance less certain commissions and service fees. The bank
verifies the computations, collects the checks and reports with respect
thereto to the Corporation. Since July 1942, the bank has received
for verification and filing approximately 8,000,000 tickets or advices
relating to approximately 2,150,000 war damage insurance policies writ*
ten in the Second Federal Reserve District. The bank also records
changes of title to real property insured under these policies.
All of this work is performed through the R.F.C. Custody Department, whose employees now number 330. Some of the work of the department is performed in the bank's Annex Building at 95 Maiden Lane
as well as in the main bank building.
BUFFALO BRANCH . . .
The Buffalo Branch—which directly serves the ten westerly
counties of New York State, including the Cities of Buffalo
and Rochester—also performs most of the functions performed by the
head office of the bank in New York City. The Branch pays out and
receives currency, receives deposits for account of the Government,
handles and clears ordinary dollar checks and ration checks, handles
withheld taxes, and issues Treasury Savings Notes and all series of
Savings Bonds, and redeems Series E and earlier series of Savings Bonds.
It also makes loans to member banks, performs custodian and other
services for member banks, administers the consumer credit regulation,
performs custodian, disbursing and other services for the Reconstruction
PAGE 23
Finance Corporation and the Defense Plant Corporation, and in other
ways serves the financial community and banking institutions in western
New York.
As in the case of the head office, the operations of the Buffalo Branch
have expanded to meet the demands of war. The number of employees
of the Branch has increased from 116 on January 1, 1940, to 209 on
July 1, 1944. A still larger staff would have been necessary were it not
for the fact that the Branch is now operating on a work week of 48 hours.
This longer work week was generally adopted, in the Spring of 1943, by
war industries in Buffalo and other critical areas in accordance with the
program of the War Manpower Commission.
In 1943 the issue price of Savings Bonds issued by the Branch totaled
more than $18 million compared with $1 million in the preceding year.
In 1943 the Branch handled over $1 billion of Government checks,
received 22,500 depositary receipts for withheld taxes amounting to
$45 million, disbursed $290 million in cash, handled nearly 700,000
ration checks, and examined 95,000 instalment sales transactions and
52,000 charge sales transactions. Last year the peace-time function of
handling and clearing checks for commercial banks reached an all-time"
peak of 16 million items totaling $61/-> billion. These statistical highlights illustrate the important service the Buffalo Branch performs for
the territory served by it.
OTHER FUNCTIONS OF THE BANK . . .
Increased work in old departments and the war-born establishment
of new departments, described above, have meant that all of the employees
of the bank have felt the pressure of war work. This has been true in the
personnel, legal, research, accounting, disbursing, auditing, bank examinations, bank relations, press and circular, service, mail, protection,
building operating and other departments, even though their work has
not been discussed in detail. While some of these departments are more
directly involved than others in the performance of the work described
above, all of them perform functions which are necessary to enable the
bank to carry out its responsibilities. If the boilers in the basement are
not working, if the elevators are not running, if the telephone switchboard is out of order, the whole bank slows down or stops. This is a
community enterprise in which everyone plays his part. This is a real
war job. The Federal Reserve Bank of New York is a war industry for
the duration.
PAGE 24
"Where liberty dwells, there is my
country/'
@FedFRASER