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X-8010 (Superseding X-7631) FEDERAL RESERVE SYSTEM The F e d e r a l Reserve System was e s t a b l i s h e d pursuant to a u t h o r i t y contained i n the Act of December 23, 1913, known as t h e F e d e r a l Reserve Act, t h e purposes of which, as s t a t e d i n the promable, a r e "To provide ?or t h e establishment of Federal r e s e r v e 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 s u p e r v i s i o n of banking i n the United S t a t e s , and f o r other 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, nhich a c t s i n an advisory capacity t o the Federal Reserve Board, the twelve Federal r e s e r v e 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 , the Federal Open Market Committee, and the member 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 as have v o l u n t a r i l y a p p l i e d to the Federal Reserve Board f o r membership and have been admitted to t h e System. The F e d e r a l r e s e r v e banks a r e located i n Boston, Hew York, P h i l adelphia , Cleveland, Richmond, A t l a n t a , Chicago, S t . Louis, Minneapolis, 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 i n o p e r a t i o n t w e n t y - f i v e branches and two agencies of the Federal r e s e r v e banks, a l l of which a r e l o c a t e d i n other c i t i e s of the United S t a t e s , except one agency i n Havana, Cuba. The c a p i t a l stock of t h e 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 t h e Federal Reserve System was r e q u i r e d to subscribe to the c a p i t a l stock of t h e Federal r e s e r v e bank of i t s d i s t r i c t i n an amount equal to s i x per cent of t h e s u b s c r i b i n g b a n k ' s c a p i t a l and surplus . A l i k e amount of Federal r e - X-8010. - 2 - serve bank stock must "be subscribed f o r by every n a t i o n a l bank organized s i n c e t h a t time and by every S t a t e bank or t r u s t company (except mutual savings banks) 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 i n the same p r o p o r t i o n . A mutual savings bank which i s ad- mitted to membership i n t h e Federal Reserve System must s u b s c r i b e f o r Federal r e s e r v e bank stock i n an amount equal to s i x - t e n t h s of one per centum of i t s t o t a l deposit l i a b i l i t i e s ; and t h e r e a f t e r such s u b s c r i p t i o n must be a d j u s t e d semi-annually on t h e same percentage b a s i s . One h a l f of t h e s u b s c r i p t i o n of each member bank must be f u l l y p a i d and t h e 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 t h e remainder has not been made. A f t e r a l l necessary expenses of a Federal r e s e r v e ban]: have been paid or provided f o r , i t s stockholding member banks a r e e n t i t l e d to r e c e i v e an annual dividend of s i x per cent on the p a i d - i n c a p i t a l s t o c k , which d i v i dend i s cumulative. A f t e r these dividend claims have been f u l l y met, the net earnings a r e p a i d i n t o the surplus fund of t h e Federal r e s e r v e bank. Federal r e s e r v e banks, i n c l u d i n g t h e c a p i t a l stock 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 , S t a t e 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 r e s e r v e bank i s composed of nine members, e q u a l l y divided i n t o t h r e e c l a s s e s , designated Class A, Class B and Class C. ber banks. D i r e c t o r s of Class A a r e r e p r e s e n t a t i v e of the stockholding memD i r e c t o r s of Class B 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 other 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 cers , d i r e c t o r s or employees of any bank. Digitized cers for FRASER , directors, Class C d i r e c t o r s may not be o f f i - employees, or stockholders of any bank. The s i x Class A X-8010 _3_ and B d i r e c t o r s a r e e l e c t e d by t h e stockholding member banks, Federal Reserve Board appoints the t h r e e Class 0 d i r e c t o r s . 1 3 0 while the 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 t h e term of one d i r ector of each c l a s s expires each y e a r . One of the Class C d i r e c t o r s appointed "by t h e Board i s designated as chairman of the hoard of d i r e c t o r s of the Federal r e s e r v e bank and as Federal r e s e r v e 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 r e q u i r e d to maintain a l o c a l o f f i c e of the Federal Reserve Board on the premises of t h e Federal r e s e r v e bank. Another Class C d i r e c t o r i s appointed by the Federal Reserve Board as deputy chairman. Federal r e s e r v e banks a r e a u t h o r i z e d , among other 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 ' a c c e p t ances of s h o r t m a t u r i t i e s a r i s i n g out of commercial, i n d u s t r i a l 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 manber banks upon t h e i r promissory notes f o r periods not exceeding n i n e t y days upon t h e s e c u r i t y of paper e l i g i b l e f o r d i s count or purchase and f o r periods not exceeding f i f t e e n days upon the s e c u r i t y of o b l i g a t i o n s of t h e United S t a t e s and c e r t a i n other s e c u r i t i e s ; i n 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 , t o 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 , 1935, to i n d i v i d u a l member banks; 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 , t o grant c r e d i t accommodations t o f u r n i s h working c a p i t a l f o r e s t a b l i s h e d indust r i a l or commercial b u s i n e s s e s f o r p e r i o d s not exceeding f i v e y e a r s , e i t h e r through the medium of f i n a n c i n g i n s t i t u t i o n s o r , i n e x c e p t i o n a l circumstances, d i r e c t l y to such b u s i n e s s e s , and to make c o m i t n e n t s w i t h r e s p e c t t o t h e granting of such accommodations; i n unusual and exigent circumstances when a u t h o r i t y has been granted by a t l e a s t f i v e members of t h e F e d e r a l Reserve X-8010 131 - 4 Board, to discount 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 "bills of exchange of the kinds and m a t u r i t i e s m d e e l i g i b l e f o r discount f o r e m b e r 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 corporations upon t h e i r promissory n o t e 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 i n the open market bankers 1 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 , o b l i g a t i o n s of the United S t a t e s and c e r t a i n other s e c u r i t i e s ; to r e c e i v e and hold on deposit the r e s e r v e balances of nsober banks; to i s s u e Federal r e s e r v e notes and Federal r e s e r v e 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 nonmenber banks, i n the c o l l e c t i o n of checks and other i n s t r u m e n t s ; to a c t as d e p o s i t a r i e s and f i s cal agents of the United S t a t e s ; and to exorcise other banking f u n c t i o n s s p e c i f i e d i n tho Federal Reserve Act. Federal r e s e r v e notes 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 Federal r e s e r v e banks through which they a r e i s s u e d 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 c e r t i f i c a t e s and of commercial and a g r i c u l t u r a l paper discounted or p u r chased by Federal r e s e r v e banks, and, u n t i l March 3, 1935, or u n t i l t h e e x p i r a t i o n of such a d d i t i o n a l period not exceeding two years as the P r e s i d e n t may p r e s c r i b e , 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 t h e 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 c e r t i f i c a t e s of not l e s s than f o r t y per cent a g a i n s t i t s Federal r e s e r v e notes i n 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 quired to maintain r e s e r v e s i n gold c e r t i f i c a t e s or l a w f u l money of not l e s s than t h i r t y - f i v e per cent a g a i n s t i t s d e p o s i t s . X-8010. | - 5 Federal r e s e r v e "bank notes a r e the o b l i g a t i o n s of t h e F e d e r a l r e s e r v e "bank p r o c u r i n g them and a r e redeemable i n l a w f u l money of t h e 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 t h e bank of i s s u e . They a r c issued 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 t h e United S t a t e s i n 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 per cent of the estimated value t h e r e o f . Each Federal r e s e r v e bank maintains on deposit i n the Treasury of t h e United S t a t e s i n lawf u l money a redemption fund equal to f i v e per cent of i t s l i a b i l i t y on Federal r e s e r v e bank notes i n a c t u a l c i r c u l a t i o n , or such o t h e r amount as may be r e quired by the Treasurer of t h e United S t a t e s with t h e approval of the S e c r e t a r y of t h e Treasury, and i s r e q u i r e d to pay a t a x of o n e - f o u r t h of one per cent each h a l f year upon t h e average amount of i t s Federal r e s e r v e bank notes i n circulation. Ho such Federal r e s e r v e bank notes may be i s s u e d a f t e r the P r e s i - dent 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 i n M s proclamation of March 6, 1933, has terminated, u n l e s s such notes a r e s e cured by the deposit of bonds of t h e United S t a t e s of c e r t a i n c l a s s e s which a r e e l i g i b l e as 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 v e s t e d i n t h e Federal Reserve Board, which has i t s o f f i c e s i n Wshington. The law designates t h e S e c r e t a r y of the Treasury and the Comptroller of the Currency as e x - o f f i c i o members, and provides f o r the appointment of s i x msabers by t h e P r e s i d e n t with t h e advice and consent of the Senate. In s e l e c t i n g these s i x members, t h e 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 t h e 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 , a n d geographical d i v i s i o n s of the country. No two a p p o i n t i v e members may be from the same Federal r e s e r v e X-8010 . 6 - 1 8 3 district. 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 t h e Federal r e s e r v e banks on t h e i r d i s c o u n t s and advances and s u p e r v i s i o n over t h e open market operations of the Federal r e s e r v e banks. Such open market o p e r a t i o n s a r e conducted under r e g u l a t i o n s adopted "by the Federal Reserve Board with a view to accommodating commerce and "business and with r e g a r d t o t h e i r "bearing upon the general c r e d i t s i t u a t i o n of the country. The Federal Open Market Com- m i t t e e , which makes recommendations w i t h regard to open market o p e r a t i o n s , was c r e a t e d "by the law and c o n s i s t s of twelve members, one member being s e l e c t e d annually by t h e board of d i r e c t o r s of each Federal r e s e r v e bank. The meetings of the Committee a r e held i n Washington a t l e a s t four times each year upon the c a l l of t h e Governor of the Federal Reserve Board or a t the request of any t h r e e members of t h e Committee. In connection with i t s supervision of Federal r e s e r v e banks the Federal Reserve Board i s a l s o authorized 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 e s t a b l i s h ment or discontinuance of branches of such banks; to supervise t h e 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 e x e r c i s e s p e c i a l s u p e r v i s i o n over a l l r e l a t i o n s h i p s and t r a n s a c t i o n s of the Federal r e s e r v e banks ^ i t h f o r e i g n banks or bankers. For the purpose of preventing the excessive use of c r e d i t f o r t h e purchase or c a r r y i n g of s e c u r i t i e s , tho Federal Reserve Board i s a u t h o r i z e d to r e g u l a t e t h e amount of c r e d i t t h a t may be i n i t i a l l y extended and subsequently maintained 011 any s e c u r i t y (with c e r t a i n exceptions) r e g i s t e r e d on a n a t i o n a l s e c u r i t i e s exchange. C e r t a i n other powers have been c o n f e r r e d 134 X-8010 -7upon the Board which a r e likewise designed to enable i t t o prevent an undue d i v e r s i o n of funds i n t o s p e c u l a t i v e o p e r a t i o n s . The Federal Reserve Board a l s o passes on the admission of S t a t e banks and t r u s t companies to nsaber ship i n the Federal Reserve System and on the termination of membership of such banks; i t has the power to examine member banks and a f f i l i a t e s of member banks; i t r e c e i v e s c o n d i t i o n r e p o r t s from S t a t e member banks and t h e i r a f f i l i a t e s ; i t l i m i t s by r e g u l a t i o n the r a t e of i n t e r e s t which may be paid by member banks on time and savings dep o s i t s ; i t i s a u t h o r i z e d , i n i t s d i s c r e t i o n , to i s s u e v o t i n g permits t o holding company a f f i l i a t e s of member banks e n t i t l i n g them to vote the s t o c k of such banks a t e l e c t i o n s of d i r e c t o r s and i n deciding questions a t meetings of shareholders and to i s s u e permits covering c e r t a i n r e l a t i o n s between member banks and organizations dealing i n s e c u r i t i e s ; i t has the power to remove o f f i c e r s and d i r e c t o r s of a member bank f o r continued v i o l a t i o n s of law or u n s a f e or unsound p r a c t i c e s i n conducting the business of such bank; i t may, i n i t s d i s c r e t i o n , suspend member banks from the use of the c r e d i t f a c i l i t i e s of the Federal Reserve System, f o r making undue use of bank c r e d i t f o r specul a t i v e purposes or f o r any other purpose i n c o n s i s t e n t with t h e maintenance of sound c r e d i t c o n d i t i o n s ; i t passes 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 t o 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 grant a u t h o r i t y to n a t i o n a l banks t o e s t a b l i s h branches i n 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 possessions of the United S t a t e s , or to i n v e s t i n the s t o c k of banks or corporations engaged i n i n t e r n a t i o n a l or f o r e i g n banki n g ; i t s u p e r v i s e s the organization and a c t i v i t i e s of c o r p o r a t i o n s organized under Federal law to engage i n 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 X-8010 - 8 135 - p e 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 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 o p e r a t i o n of a settlement f u n d , "by which "balances due to and from the v a r i o u s F e d e r a l r e s e r v e "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 t r a n s a c t i o n s of t h e i r manber "banks or of the United S t a t e s Government a r e s e t t l e d i n Washington through t e l e g r a p h i c t r a n s f e r of funds without p h y s i c a l shipments of currency. 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 r e s e r v e "banks and member banks, the Federal Reserve 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 F e d e r a l r e s e r v e banks i n proportion 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 opera- 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 a s r e q u i r e d by law. The Federal Advisory Council a c t s i n an advisory c a p a c i t y , c o n f e r r i n g " i t h the Federal Reserve Board on general business conditions 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 n and the general a f f a i r s of the Federal Reserve System. The Council i s composed of twelve members, one from each Federal r e s e r v e d i s t r i c t being s e l e c t e d annually by the board of d i r e c t o r s of t h e Federal r e s e r v e bank of the d i s t r i c t . The Council i s r e q u i r e d t o meet i n Washington a t l e a s t f o u r times each year and o f t e n e r i f c a l l e d by the Federal Reserve Board. September 1, 1934.
@FedFRASER