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X-7403 j 4 (Superseding X-7239) FEDERAL HE SERVE SYSTEM She Federal Reserve System was established, pursuant to a u t h o r i t y contained i n the Act of December 23, 1913, known a s the Federal Reserve Act, the purposes of which, a s s t a t e d in the preamble, a r e "To provide f o r the establishment of Federal reserve banks, to f u r n i s h an e l a s t i c currency, to a f f o r d means of r e d i s c o u n t i n g commercial paper, to e s t a b l i s h a more e f f e c t i v e supervision of banking in the United S t a t e s , and f o r o t h e r p u r p o s e s . " The System comprises the Federal Reserve Board, which e x e r c i s e s supervisory f u n c t i o n s , the Federal Advisory Council, which a c t s in an a d v i s o r y c a p a c i t y to the Federal Reserve Board, the twelve Federal reserve banks s i t u a t e d i n d i f f e r e n t s e c t i o n s of the United S t a t e s , and the nember banks, which include a l l n a t i o n a l banks and such S t a t e banks and t r u s t companies a s have volunt a r i l y a p p l i e d to the Itederal Reserve Board f o r membership and have been admitted to the System. The Federal reserve banks a r e l o c a t e d i n Boston, Hew York, P h i l a d e l p h i a , Cleveland, Richmond, A t l a n t a , Chicago, S t . Louis, Minnepolis, Kansas City, D a l l a s and San F r a n c i s c o . There a r e a l s o in o p e r a t i o n twenty- f i v e branches and two agencies of the Federal r e s e r v e banks, a l l of which are l o c a t e d i n o t h e r c i t i e s of the United S t a t e s , except one agency in Havana, Cuba. The c a p i t a l stock of the Federal r e s e r v e banks i s e n t i r e l y owned by the member banks and may not be t r a n s f e r r e d or hypothecated. Every n a t i o n a l bank i n e x i s t e n c e a t the time of the establishment of the Federal Reserve System was r e q u i r e d to subscribe to the c a p i t a l s t o c k of the Federal X-7403 -ijj c ^-*5 ,M ™ 2 reserve t a n k of i t s d i s t r i c t in an amount equal to s i x p e r c e n t of the s u b s c r i b i n g b a n k ' s c a p i t a l and s u r p l u s . A l i k e amount of Federal reserve bank stock must be subscribed f o r by every n a t i o n a l bank organized since t h a t time and by every S t a t e bank or t r u s t company upon becoming a member of the Federal Reserve System; and, when a member bank i n c r e a s e s i t s c a p i t a l or s u r p l u s , i t i s r e q u i r e d to subscribe f o r a d d i t i o n a l stock in the same p r o p o r t i o n . One h a l f of each s u b s c r i p t i o n mast be f u l l y paid and the remainder i s s u b j e c t to c a l l by the Federal Reserve Board; but c a l l f o r payment of the remainder has never been made. A f t e r a l l necessary expenses of a Federal r e s e r v e bank have been p a i d or provided f o r , the stockholding member banks are e n t i t l e d to receive an annual dividend of six per cent on the p a i d - i n c a p i t a l s t o c k , which dividend i s cumulative. A f t e r t h e s e dividend claims have been f u l l y met, the net e a r n i n g s a r e paid i n t o a surplus fond, u n t i l i t amounts to 100 p e r cent of the subscribed c a p i t a l of the bank. T h e r e a f t e r 10 p e r cent of such earnings i s p a i d i n t o the s u r p l u s , and the remaining n e t e a r n i n g s are p a i d to the United S t a t e s a s a f r a n c h i s e t a x . Federal r e s e r v e banks, including the c a p i t a l s t o c k and s u r p l u s t h e r e i n and the income derived therefrom, a r e exempt from F e d e r a l , State and l o c a l t a x a t i o n , except taxes upon r e a l e s t a t e . The board of d i r e c t o r s of each Federal reserve bank i s composed of nine members, e q u a l l y divided i n t o three c l a s s e s , designated Class A, Class B and Class C. member banks. D i r e c t o r s of Class A are r e p r e s e n t a t i v e of t h e stockholding D i r e c t o r s of Class 3 must be a c t i v e l y engaged i n t h e i r d i s t r i c t i n commerce, a g r i c u l t u r e or some o t h e r i n d u s t r i a l p u r s u i t , and may not be o f f i c e r s , d i r e c t o r s or employees of any bank. Class C d i r e c t o r s may X—7403 - 3 - -5- 4 8 not "be o f f i c e r s , d i r e c t o r s , employees, or stockholders of any bank. Six of the nine d i r e c t o r s , those of Class A and Class B a r e e l e c t e d by the stockholding member banks, while the f e d e r a l Reserve Board a p p o i n t s the t h r e e Class C d i r e c t o r s . The term of o f f i c e of each d i - r e c t o r i s t h r e e y e a r s , so arranged t h a t the terra of one d i r e c t o r of each c l a s s e x p i r e s each y e a r . One of the Class C d i r e c t o r s appointed by the Board i s d e s i g nated a s chairman of the board of d i r e c t o r s of the Federal r e s e r v e bank and a s Federal reserve a g e n t , and i n the l a t t e r c a p a c i t y he i s required to m a i n t a i n a l o c a l o f f i c e of the Federal Reserve Board on the premises of the Federal reserve bank. Another Class C d i r e c t o r i s appointed by the Federal Reserve Board a s deputy chairman. Federal reserve banks a r e authorized, among o t h e r t h i n g s , to discount f o r t h e i r member banks n o t e s , d r a f t s , b i l l s of exchange and b a n k e r s ' acceptances of short m a t u r i t i e s a r i s i n g out of commercial and a g r i c u l t u r a l t r a n s a c t i o n s , and s h o r t term paper secured by o b l i g a t i o n s of the United S t a t e s ; to make advances to t h e i r member banks f o r p e r i o d s not exceeding f i f t e e n days upon c o l l a t e r a l s e c u r i t y of c e r t a i n p r e s c r i b e d c l a s s e s ; in c e r t a i n exceptional circumstances and under c e r t a i n p r e s c r i b e d c o n d i t i o n s , to make advances upon other kinds of s e c u r i t y to groups of member banks and, u n t i l March 3, 1934, or f o r such a d d i t i o n a l p e r i o d not exceeding one y e a r a s the P r e s i d e n t may p r e s c r i b e , to i n d i v i d u a l member banks; to make l o a n s , u n t i l the P r e s i dent s h a l l otherwise d e c l a r e and in no event a f t e r March 24, 1934, to nonmember banks or t r u s t companies under c e r t a i n p r e s c r i b e d cond i t i o n s upon s e c u r i t y which may or may not be e l i g i b l e f o r r e d i s c o u n t ; X-7403 147 ~ 4 ~ i n unusual and exigent circumstances when a u t h o r i t y has "been g r a n t e d by a t l e a s t f i v e members of the Federal Reserve Board, to d i s c o u n t f o r i n d i v i d u a l s , p a r t n e r s h i p s or c o r p o r a t i o n s , under c e r t a i n p r e s c r i b e d c o n d i t i o n s , n o t e s , d r a f t s and b i l l s of exchange of the kinds and m a t u r i t i e s made e l i g i b l e f o r discount f o r member banks; to make advances to i n d i v i d u a l s , p a r t n e r s h i p s or c o r p o r a t i o n s secured by d i r e c t o b l i g a t i o n s of the United S t a t e s f o r p e r i o d s not exceeding n i n e t y days; to purchase and s e l l in the open market bankers' acceptances and b i l l s of exchange of the kinds and m a t u r i t i e s e l i g i b l e f o r d i s c o u n t , and o b l i g a t i o n s of the United S t a t e s ; to deal in gold coin and b u l l i o n ; to r e c e i v e and hold on d e p o s i t the reserve b a l a n c e s of member banks; to issue Federal reserve notes and Federal reserve bank n o t e s ; to a c t as c l e a r i n g houses and as c o l l e c t i n g agents f o r t h e i r member banks, and under c e r t a i n conditions f o r nonmember banks, in the c o l l e c t i o n of checks and o t h e r instruments; to a c t as d e p o s i t a r i e s and f i s c a l agents of the United S t a t e s ; and to e x e r c i s e o t h e r banking f u n c t i o n s s p e c i f i e d i n the Federal Reserve Act. Federal reserve n o t e s a r e a f i r s t and paramount l i e n on a l l the a s s e t s of the I n d e r a l reserve banks through which they a r e issued and a r e a l s o o b l i g a t i o n s of the United S t a t e s . They a r e i s s u e d a g a i n s t the s e c u r i t y of gold and of conmercial and a g r i c u l t u r a l paper discounted or purchased by Federal reserve banks, and u n t i l March 3, 1934, when a u t h o r i z e d by the Federal Reserve Board may a l s o be secured by d i r e c t o b l i g a t i o n s of the United S t a t e s . Every Federal r e s e r v e bank i s r e q u i r e d to maintain r e s e r v e s i n gold of not l e s s than 40 p e r cent a g a i n s t i t s X - 5 - -7403 1 4 8 Federal r e s e r v e n o t e s in a c t u a l c i r c u l a t i o n and i s a l s o r e q u i r e d to maintain r e s e r v e s i n gold or l a w f u l money of not l e s s than 35 p e r cent against i t s deposits. Federal reserve bank notes are the o b l i g a t i o n s of the Federal reserve bank p r o c u r i n g then and are redeemable in l a w f u l money of the United S t a t e s on p r e s e n t a t i o n a t the United S t a t e s Treasury or a t the bank of i s s u e . They are i s s u e d a g a i n s t the s e c u r i t y of d i r e c t o b l i g a t i o n s of the United S t a t e s in an amount equal to the f a c e value of such o b l i g a t i o n s and a g a i n s t the s e c u r i t y of n o t e s , d r a f t s , b i l l s of exchange and b a n k e r s ' acceptances i n an amount equal to not more than n i n e t y p e r cent of the estimated value t h e r e o f . Each Federal reserve bank maintains on deposit in the Treasury of the United S t a t e s in l a w f u l money a redemption fund equal to f i v e p e r cent of i t s l i a b i l i t y on Federal Reserve bank n o t e s i n a c t u a l c i r c u l a t i o n , or such other amount a s may be r e q u i r e d by the Treasurer of the United S t a t e s with the approval of the Secretary of the Treasury, and i s required to pay a tax of o n e - f o u r t h of one p e r cent each h a l f year upon the average amount of i t s Federal reserve bank notes i n c i r c u l a t i o n . No such Federal r e s e r v e bank notes may be issued a f t e r the P r e s i d e n t s h a l l have d e c l a r e d by proclamation t h a t the emergency recognized by him in h i s proclamation of March 6, 1933, has terminated, u n l e s s such n o t e s a r e secured by the d e p o s i t of bonds of the United S t a t e s of c e r t a i n c l a s s e s which are e l i g i b l e a s s e c u r i t y f o r n a t i o n a l bank n o t e s . Broad supervisory powers a r e vested i n the Federal Reserve Board, which has i t s o f f i c e s in Washington. The law d e s i g n a t e s the Secretary of the Treasury and the Comptroller of the Currency a s e x - o f f i c i o members, and X-7403 - 6 - provides f o r the appointment of s i x members by the P r e s i d e n t with the advice and consent of the Senate. In s e l e c t i n g these s i x members, the P r e s i d e n t i s r e q u i r e d to have a due regard to a f a i r r e p r e s e n t a t i o n of the f i n a n c i a l , a g r i c u l t u r a l , i n d u s t r i a l and commercial i n t e r e s t s , and geographical d i v i s i o n s of the country. No two appointive members may be from the same Federal reserve d i s t r i c t . Among the more important d u t i e s of the Federal Reserve Board a r e the review and determination of discount r a t e s charged by the Federal reserve banks on t h e i r d i s c o u n t s and advances and supervision over the open market o p e r a t i o n s of the Federal r e s e r v e banks. In connection with i t s s u p e r v i s i o n of Federal reserve banks the Board i s a l s o a u t h o r i z e d to make examinations of such banks; to r e q u i r e statements and r e p o r t s from such banks; to r e q u i r e the establishment or discontinuance of branches of such banks; to supervise the i s s u e and r e t i r e m e n t of Federal r e s e r v e n o t e s ; and to supervise the f o r e i g n operations of the Federal reserve banks. The Federal Reserve Board a l s o p a s s e s on the admission of S t a t e banks and t r u s t companies to membership in the Federal Reserve System and on the t e r m i n a t i o n of membership of such banks; i t has the power to examine member banks e i t h e r through i t s own personnel or i n cooperation with n a t i o n a l and State banking a u t h o r i t i e s ; i t r e c e i v e s condition r e p o r t s from S t a t e member banks; i t p a s s e s on a p p l i c a t i o n s of n a t i o n a l banks f o r a u t h o r i t y to e x e r c i s e t r u s t powers or to a c t i n f i d u c i a r y c a p a c i t i e s ; i t may g r a n t a u t h o r i t y to n a t i o n a l banks to e s t a b l i s h branches in f o r e i g n c o u n t r i e s or dependencies or i n s u l a r p o s s e s s i o n s of the United S t a t e s , or to i n v e s t in the stock of banks or c o r p o r a t i o n s engaged i n i n t e r n a t i o n a l or f o r e i g n banking'; X-7403 -iti:- - 7 i t supervises the o r g a n i z a t i o n and a c t i v i t i e s of corporations organized under Federal law to engage in i n t e r n a t i o n a l or f o r e i g n "banking; and i t i s s u e s p e r m i t s under the a u t h o r i t y granted by the p r o v i s i o n s of the Clayton A n t i t r u s t Act r e l a t i n g to i n t e r l o c k i n g bank d i r e c t o r a t e s . Another f u n c t i o n of the Board i s the operation of the gold s e t t l e m e n t fund, "by which "balances due to and from the various Federal reserve "banks a r i s i n g out of t h e i r own t r a n s a c t i o n s or those of t h e i r member "banks a r e s e t t l e d i n Washington without p h y s i c a l shipments of g o l d . In e x e r c i s i n g i t s supervisory f u n c t i o n s over the Federal reserve "banks and member "banks, the Federal Reseirve Board promulgates r e g u l a t i o n s , pursuant to a u t h o r i t y granted "by the Federal Reserve Act, governing c e r t a i n of the above-mentioned a c t i v i t i e s of Federal r e s e r v e "banks and member banks. To meet i t s expenses and to pay the s a l a r i e s of i t s members and i t s employees, the Board makes semi-annual assessments upon the Federal r e s e r v e banks in p r o p o r t i o n to t h e i r c a p i t a l stock and s u r p l u s . Annual r e p o r t s of the o p e r a t i o n s of the Board a r e made to the Speaker of the House of R e p r e s e n t a t i v e s f o r the information of Congress as r e q u i r e d by law. The Federal Advisory Council a c t s in an advisory c a p a c i t y , conf e r r i n g w i t h the Federal Reserve Board on g e n e r a l business c o n d i t i o n s and making recommendations concerning m a t t e r s w i t h i n the Board's j u r i s d i c t i o h and the g e n e r a l a f f a i r s of the Federal Reserve System. The Council i s composed of twelve members, one from each Federal reserve d i s t r i c t being s e l e c t e d a n n u a l l y by the board of d i r e c t o r s of the Federal r e s e r v e bank of the d i s t r i c t . The Council i s required to meet in Washington a t l e a s t f o u r times each y e a r and o f t e n e r i f c a l l e d by the Federal Reserve Board. A p r i l 10, 1933.