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T H E A B C OF T H E




RESERVE

FEDERAL

SYSTEM

THE A B C OF THE FEDERAL
RESERVE SYSTEM
WHY

THE

CALLED

FEDERAL

INTO

RESERVE SYSTEM

BEING, T H E

MAIN

WAS

FEATURES

OF ITS O R G A N I Z A T I O N , A N D H O W I T

WORKS

BY

EDWIN WALTER KEMMERER, PH.D.
PROFESSOR OF ECONOMICS AND FINANCE IN PRINCETON
UNIVERSITY AND MEMBER OF THE BOARD OF REGENTS
OF THE AMERICAN INSTITUTE OF BANKING

With a Preface by
BENJAMIN STRONG, LL.D.
GOVERNOR OF THE FEDERAL RESERVE BANK OF NEW YORK

FIFTH EDITION

PRINCETON UNIVERSITY PRESS
PRINCETON, N. J.




LONDON! H U M P H R E Y

MILFORD

OXFORD UNIVERSITY PRESS

1922

COFYIICHT,
PRINCETON

1920.

UNIVERSITY

PIXSS

Princeton, N . J.
Published September,

1918

Revised December, 1918
Revised March,

1919

Second printing April,
Third edhicr., November,

1919
1919

Fourth Edition, April, 1920
Fifth

Edition,

January,

1922

Printed in the United States of America




CONTENTS
PAGES
PREFACE.

B y B E N J A M I N STRONG

ix-XIII

C H A P T E R
PURPOSE A N D P L A N

I
*

Lack of familiarity with federal reserve system on part
of public, and its dangers, 1.—Purpose of book, 2.—
Plan of book, 2.
C H A P T E R

1-2

II

DECENTRALIZATION OF A M E R I C A N B A N K I N G PRIOR TO FEDERAL
RESERVE S T STEM

Banks lacked organization and effective leadership in
time of crisis, 3-4.-—Reserves widely scattered, 4-6.—Reserves immobile, 7.
C H A P T E R
INELASTICITY OF A M E R I C A N
RESERVE SYSTEM

BANK

III

CREDIT PRIOR TO FEDERAL

Extent to which bank credit is used as a medium of
exchange, 8-10.—Why circulating bank credit should be
elastic, 10-ll.^Bank-note inelasticity over long periods
under old banking system, 11-13.—^Seasonal inelasticity
of bank notes, 13-15.—Bank-note inelasticity in times of
crisis, 15-17,—Inelasticity of deposit credit, 17.—Evil results of credit inelasticity, 18.
C H A P T E R

The "float** and the practice of routing checks, 19-21.—
Checks in transit commonly counted as legal reserve
money, 21-22.—Large domestic shipments of currency required under old banking regime, 22-23.—Foreign exchange
difficulties, 2 3 - 2 4 .
C H A P T E R

19-24

V

DEFECTIVE B A N K I N G M A C H I N E R Y FOR FEDERAL G O V E R N M E N T . .

Difficulty of apportioning government funds among nine
sub-treasuries and over fifteeen hundred depositary banks,

2 5 - 2 6 . — F o u r evil results o f p r a c t i c e , 2 6 - 2 7 . — S u m m a r y o f

defects of old banking system, 27.

£-18

IV

DEFECTIVE E X C H A N G E A N D TRANSFER SYSTEM




3-7

25-27

vi

CONTENTS
PAGES

C H A P T E R
How

VI

THE FEDERAL RESERVE SYSTEM IS REMEDYING T H E

OLD

E V I L OF THE DECENTRALIZATION OF AMERICAN B A N K I N G . .

Division of country into twelve federal reserve districts, 28-29.—Membership in federal reserve system.
29-31,—Democracy of federal reserve banks* plan of organization, 31-34.—Coordination of twelve federal reserve
banks and centralization of their control provided for by
means of federal reserve board, advisory council, and class
C directors of federal reserve banks, 34-36.™District centralization of bank reserves, 36-39.—Mobilization of reserves, 30-40.—Inter-district mobility of reserves, '40.—
Rediscounting by one federal reserve bank for another,
'40-43.—Open-market operations, 43-45.—Creation of a
broader discount market for commercial paper, 4 5 - 4 6 . —
Increasing use of the trade acceptance, and advantages of
trade acceptance over open-book account credit, 4 6 - 4 1 . —
The bank acceptance, 47-49.—Inter-district mobility of
reserves promoted by increasing use of trade acceptances
and bank acceptances, 48-49.—Intra-district mobility of
reserves increased by federal reserve system, 4 9 - 5 0 .
CHAPTER

28-50

VII

CREDIT ELASTICITY UNDER T H E FEDERAL RESERVE SYSTEM

Provisions of federal reserve act for bond-secured
national bank notes, 51-52.—The federal reserve bank
note, 52.—Federal reserve notes, 52-53.—Their elasticity,
53-58,—Elasticity of deposit currency obtained in a number of ways: Removal of old rigid legal reserve requirements, 58. New legal reserve requirements less rigid
and may be suspended in times of emergency, 59-63.
Privilege of rediscounting at federal reserve banks, 6364. Privilege of borrowing on collateral notes with short
maturities, 64.—Contractility of circulating credit under
federal reserve system, 6 5 - 6 6 .
C H A P T E R

VIII

DOMESTIC AND FOREIGN E X C H A N G E UNDER T H E FEDERAL
SERVE SYSTEM

51-66

RE-

Provisions of federal reserve law concerning domestic
exchange, 67-70.—Early experiments of the federal reserve
authorities as regards the clearing and collection of
checks, 70. Present clearning and collection system,
71-76.—The gold settlement fund, 76-79.—Foreign exchange, foreign agencies and branches of American banki
organized for foreign business under the new banking
system, 8 0 - 8 4 .




67-84

CONTENTS
C H A P T E R

I X

T H E FEDERAL RESERVE S Y S T E M A X D T H E FEDERAL T R E A S U R Y . .

Federal reserve banks authorized by law to be depositaries of government funds, 85-86.—Extensively used as
depositaries by Secretary of the Treasury, 85-88.—Federal reserve banks as fiscal agents of Government render
invaluable services in the financing of the war, 89.




vii

85-98




PREFACE
By
BENJAMIN STBONG, L L J X

Governor of the Federal Reserve Bank of New
York
The federal reserve banks came into being in
the month of November, 1914. The passage of
the legislation by which they were created had
been preceded by five years of discussion, following the financial upheaval of the fall of 1907,
such as might have been expected to prepare the
way for the considerable changes in banking
methods contemplated by the new law.
Notwithstanding, however, that American
bankers had gained a better understanding of the
deplorable defects in the American banking and
currency system, the managers of the new federal reserve banks soon found that the welcome
accorded to them by the banks of the country
was, to say the least, cool. Business men generally welcomed the change for the better, recognizing the protection which the reserve system afforded them; but nevertheless both bankers and
ix




xii

PREFACE

business men were regrettably ignorant of what
it all meant.
It was the influence of the war which demanded that the federal reserve banks be organized as
promptly as possible. The best banking machinery and the best banking talent in the country seemed to be required to protect the interests
of both bankers and business men. Much was
expected from the new system, once it was started* Very shortly, however, immense imports of
gold from abroad, general business prosperity
stimulated by war profits, and reasonably comfortable conditions in credit and banking, appeared to put the federal reserve banks for the
first two and one-half years of their existence into the class of expensive luxuries; in fact, they
were regarded as examples of governmental interference with business which were tolerated
but, nevertheless, were not appreciated by many
bankers.
During this interval, November, 1914, to
April, 1917, the system, by slow stages of progress, found itself. The machinery for conducting actual operations was designed and developed
far beyond the requirements of the moment. The
terms of the Act were perfected where need was
discovered, the men engaged in the work became
better acquainted with their duties and with each




PREFACE

xi

other, skilled clerks were engaged and trained,
and accounting methods were perfected, so that
when the test came as a result of our entry into
the war, in April, 1917, the Federal Reserve
banks were in large measure prepared for the
grave tasks and responsibilities at once to be assumed.
During the first twelve months of our country's participation in the war the reserve system
became established upon a basis of confidence
and respect, even in fact of admiration, among
both bankers and business men; and its future
therefore seems assured so long as good management deserves the support now enjoyed.
During these four jTears, however, the work
of organization, and during the last year and a
half the work assumed by the Federal Reserve banks as fiscal agents of the Government,
have so occupied the time of all connected with
the system that it has been difficult to overcome,
in a comprehensive way, much of the ignorance
and misunderstanding of the functions of the
system. It is widely accepted as successful and
necessary, but, with some exceptions, it is still
hardly possible to say that it is understood. It
has come as an enlargement of the scope of a
great banking machine which had become complicated by the dual development of two classes




xii

PREFACE

of banks, national and state; and, in the case of
state banks, a development which covered a vast
field of business activity not confined to commercial banking. Under the influence of the new
system of twelve closely allied banks of reserve
and of discount, the tendency will be toward unification and simplicity which will be brought
about by the state institutions, in increasing numbers, becoming stockholders and depositors in
the reserve banks.
Until, however, through evolution in methods
and many changes in both state and national
laws, we have a truly unified system, banking in
this country will be a puzzle and a mystery to the
casual observer, to the business man, and to
bankers abroad, unless its various features are
presented in a concise and comprehensive form,
stripped of the technicalities of economic discussion. It is much more difficult to present a complex problem in concise form than in extended
detail. This task, however, Professor Kemmerer
has undertaken with distinct success. A n account of the functions assumed by the federal
reserve banks as fiscal agents of the United
States Government, and of the handling of war
bonds, certificates of indebtedness and government funds would have complicated, and, possibly, rendered less clear the description of the




FREtfACE

xiii

position the federal reserve system occupies in the
banking field. It would have involved, further,
a discussion of the long felt necessity for a modification of the independent treasury system.
These subjects, therefore, have properly not been
enlarged upon.
i t is a public service to undertake the difficult
task of preparing an account of this great change
in our fiscal system so as to combine accuracy
with a comprehensive survey of the subject and,
at the same time, to avoid technical details. All
that is required to give the reader an understanding of the fundamentals of the new regime of
American banking is contained in the following
pages, which will be read with attention and interest by many who have been seeking this information during the past five years.







T H E

A

B

C

OF

T H E

RESERVE

F E D E R A L

SYSTEM

CHAPTER

I

PUBPOSE AND P L A N OF BOOK

This book is an attempt to set forth in nontechnical language the chief reasons why the federal reserve system was called into being, the
main features of its organization, and how it
works. Although the federal reserve act of 1913
is one of the most important pieces of financial
legislation enacted in modem times, and although
it has been in operation several years, comparatively few people are familiar with its elementary
principles. It is looked upon by the majority of
people as too technical and complicated a matter
to be understood by persons other than bankers
and economists. As a consequence there has been
a surprising lack of public interest in the workings of the system and in the important legislative and administrative modifications which the
system has undergone since its establishment.
This unfamiliarity is not surprising when one
considers the complex character of much of the




i

FEDERAL RESERVE SYSTEM 11
federal reserve machinery and the technical language in which this machinery is usually described. In a democracy, however, widespread
ignorance, among the voters, of the country's
financial system is fraught with danger,
America's leading manufacturing, transportation and commercial concerns years ago attained
heights of economic efficiency which made them
the envy of foreigners. None, however, envied
us our banking system. None followed it except
soon regretfully to turn back. This was true,
despite the fact that our old American banking
system had many substantial merits. It was
reasonably safe, it yielded good profits, it was
adaptable to the local needs of widely varying
communities, and it developed the check and
clearing system to a degree of perfection found
in few if any other countries. Along with these
meritorious features, however, it contained a
number of very serious defects. The chief of
these may be grouped conveniently under four
heads: I. Decentralization. II. Inelasticity of
credit. I I I . Cumbersome exchange and transfer
system. I V . Defective organization as regards
relationship with federal treasury. In the four
succeeding chapters these four groups of defects
will be considered, and in the following four chapters will be discussed the respective remedies provided by the federal reserve system.




CHAPTER II
DECENTRALIZATION

OF

AMERICAN

BANKING

PRIOR TO FEDERAL RESERVE SYSTEM

In 1912 the United States had many times
more commercial banks than any other country
in the world, and these banks averaged much
smaller than those of any other important country. Official figures at that time placed the number of independent banking establishments of all
kinds in the United States at approximately 80,000, and of this number something like 28,000
were banks whose business was wholly or partly
of a commercial character. These commercial
banks were owned for the most part by the residents of the communities in which they were
placed, and the business of most of them was
chiefly local in character. The great majority of
national banks were national in nothing but name.
Except for the rather loose association of the
banks in the clearing houses of our principal cities
and a growing community of interest, most of
these banks were independent units, each working for itself. There was little team work. In




3

10

THE A B C OF THE

times of threatened panic the different parts of
the system worked at cross purposes. They were
without effective leadership at those times when
prompt cooperation under national leadership
was urgently needed.
Reserves Scattered
The most serious feature of this decentralization was the scattering of reserves. Thirty thousand different banks meant 30,000 cash reserves,
and these reserves for the commercial banks were
more than the mere "till money" which the "cash
balances" of most foreign banks represent. They
were actual reserves, substantial in amount, upon
which the banks placed their prime dependence
for times of emergency. It is true that most
banks had so called ^deposited reserves," namely, funds on deposit in other banks, which they
were allowed to count as part of their "legal
reserves"; and they had so called "secondary reserves," namely, funds invested in securities and
call loans, which were supposed to be quick assets
that could be liquidated at once in time of need.
Strictly speaking, however, neither of these "reserves" was a reserve at all. The deposited reserve was after all merely a deposit in another
bank, which the depository bank loaned out—
commonly at call on the stock exchange—and




FEDERAL RESERVE SYSTEM 11
against which it held its own reserve, a reserve
which in turn was often further attenuated by
being placed on deposit in a third bank, there
again to be loaned out on stock exchange collateral. In times of emergency, therefore, the "deposited reserve" could be realized upon only to
the extent that call loans could actually be called,
and this meant to the extent that stock exchange
securities could be sold. Invested "secondary reserves" could be realized upon, likewise, only to
the extent that securities could be sold. In times
of threatened panic, however, stocks and bonds
can not be sold on any extensive scale except at
great sacrifices and at the risk of financial collapse. Experience has shown that securities are
not sold to any large extent by banks at such
times. The losses involved would be too great.
The result was that in times of serious danger the
banks of the country were forced to rely to a
very large extent upon their own cash reserves,
which, as a consequence, had to be maintained at
a high level—higher than in other advanced
countries. This situation gave the vault reserve
in American commercial banks an importance
not found in the commercial banks of Europe.
European joint-stock banks normally carry little
cash in vault; they place their reliance for
emergency funds directly or indirectly upon the




10

THE A B C OF THE

central banks. In America bank reserves were so
scattered and so jealously guarded that in times
of threatened panic they were comparatively ineffective in staying the storm. The situation was
analogous to what would happen today if after
drilling our American army to a high point of
fighting efficiency, we should scatter the men in
small units all over the United States to protect
the country from a threatened invasion. Each
community would be jealous of its own squad of
soldiers, but the invader would come and the efficiency of our well drilled soldiers would be practically nil. The point of the illustration will be
clear to everyone recalling the mad scramble for
reserve money on the part of banks throughout
the country at the time of the panic of 1907. Our
supply of reserve money was large. In fact we
had at that time in the United States the largest
supply of gold in the world. It was ineffective,
however, because widely scattered; hence, suspension of cash payments throughout the country, currency premiums, the breakdown of our
domestic exchanges, the illegal issue of millions
of dollars of money substitutes, and all the other
disgraceful accompaniments of an American
panic.




FEDERAL RESERVE SYSTEM 11
Reserves Immobile
Obviously a country's reserve money must to
a large extent be concentrated in one reserve or,
at most, in a few large reserves, if it is to be effective. It must be marshalled in armies, not
scattered in small squads. But these armies must
be mobile so that they can be quickly moved
singly or in combinations to places of threatened
attack. An army's mobility is a big factor in its
efficiency—a truth which the great mobility of
the armies of the Central Powers in the recent
war has emphasized. Our American bank reserves were not only scattered, they were also immobile. There was no effective way of quickly
gathering them together and massing them at the
points of financial danger.
These then were the three most serious phases
of our banking decentralization: (1) Absence of
a responsible national conservator of our money
market, like the Bank of France or the Bank of
England. (2) Scattered bank reserves.
(8)
Immobile bank reserves.




CHAPTER III
INELASTICITY OF AMERICAN B A N K CREDIT PRIOR
TO FEDERAL RESERVE SYSTEM

The second group of defects of the old banking system, defects closely related to those of decentralization, were those of credit inelasticity.
A very large part of the country's current business is carried on by means of funds borrowed
from commercial banks. These borrowed funds
are left on deposit with the banks, and the deposits are circulated by means of checks, the
debits and credits of individual accounts being
offset in such a way that the total commercial deposits of the country do not normally vary
greatly in short periods of time.
Extent to which Bank Credit is Used as a
Medium of Exchange
The point may be illustrated by a few figures,
and, inasmuch as conditions have been very abnormal since the outbreak of the European War,
thefiguresused will be those for the year 1918.
Reports made to the Comptroller of the Cur8




FEDERAL RESERVE SYSTEM 11
rency show that on June 4, 1913, the loans and
discounts of commercial banks which reported to
the Comptroller (exclusive of loans classified as
real-estate loans) amounted to approximately
8J billion dollars. Estimates made by Professor Irving Fisher give a rate of deposit turnover for the United States in 1913 of approximately 54, which means that for each checkdeposit balance, maintained in a commercial
bank, averaging throughout the year $1,000,
approximately $54,000 in checks were drawn and
paid. The average deposit balance of 8f billions
dollars would mean therefore check transactions
to the extent of 54 times 8f billions dollars or
472 billions dollars in 1913. Investigations made
for the National Monetary Commission in 1909
by Professor David Kinley showed that between
80 and 85 per cent of the country's total business
was transacted by means of checks. If we accept
the latter figure as the more representative one
for 1913, we arrive at 83 billions dollars (namely,
15/85 of the amount of business done by means
of checks), as the amount of business in that
year performed by means of cash. In June,
1913, of the total amount of money in circulation
in the United States, 21 per cent, or $716 millions
consisted of bank notes. Although from the
public's point of view bank notes are money, from




10

THE A B C OF THE

the issuing bank's point of view they are a form
of bank credit. If we treat them as a form of
bank credit, and add to the $472 billions of check
business 21 per cent of the $83 billions of money
business we arrive at approximately 490 billion
dollars worth of business in 1913, representing
88 per cent of the country's total business transactions, as the amount performed by means of
bank credit—checks and bank notes.
The amount of money and of deposit currency
which a country needs to carry on its business, at
a price level in equilibrium with the price levels
of other countries, depends largely upon the
amount of business or of money work to be done.
In years of active business a larger supply of
circulating media is needed than in years of business depression. Furthermore, in a country like
the United States, in which agriculture is a particularly important industry, there are very pronounced seasonal fluctuations in the amount of
business to be done, and consequently in the demand for cash and for deposit currency. One
important postulate of a good banking system is
its capacity to adjust the supply of deposit and
bank-note currency to variations in trade demands, increasing it, for example, at the time of
the heavy crop-moving demands in the fall and
reducing it at the time of the period of inactive




FEDERAL RESERVE SYSTEM

11

business, which normally sets in shortly after the
opening of the new year. Capacity to contract
the circulating media when business demands decline is as important as capacity to expand them
when these demands increase.
Under the old regime our American bank
credit, both note and deposit, was peculiarly inelastic, although the seasonal character of much
of the country's business is such as to make credit
elasticity a desideratum of unusual importance in
the United States.
Bank-Note Inelasticity
Our national bank notes, which should have
furnished the elastic element in the country's
hand to hand money, were notoriously inelastic.
National banks were authorized to issue these
notes by depositing with the Government United
States bonds equal in par value to the notes issued.1 The banks were supposed to realize a
"double profit" on the bank notes, namely, interest on the bonds, and interest on the notes
when they were loaned out as money. After 1900
the bonds used, however, were mostly two per
cent bonds of 1930, and as the issue of bank notes
i If the market value were below the par
bonds were to be deposited so as to make the
least equal to the notes issued. In recent years
of these bonds has been usually above the par




value* additional
market value at
the market value
value.

10

THE A B C OF THE

involved a number of incidental expenses, including a semiannual tax of one-fourth of one per
cent upon the amount of notes issued, the double
profit was usually not a very substantial one.
Inasmuch as not more than $100 in notes could
be issued against $100 par value of bonds regardless of how high a premium the bonds bore in the
market, and inasmuch as the bonds had been in
recent years practically always at a substantial
premium, the banks usually realized considerably
less than
per cent net interest on the bonds.
Obviously the higher the premium paid on the
bonds, other things equal, the lower the net interest yield; and the lower the premium, the higher
the yield. The result was a tendency for the
banks to increase their bank-note circulation when
the price of bonds declined and to decrease it
when the price rose. In other words, the expansion and contraction of the bank-note circulation
was not, as it should have been, in response to
variations in trade demands, but in response to
variations in the price of the government debt.
This often gave an inverse elasticity, since the
price of government bonds often declined at
times when business was slack and the currency
was already redundant, and often rose at times
when business was active and an increase in the
bank-note circulation was desirable. In other




FEDERAL RESERVE SYSTEM

11

words, the bank-note circulation frequently declined at just the time when business needs demanded an increase, and increased when the business situation called for a decline. The character
of these fluctuations will be seen from the following chart.3
From season to season the bank-note circulation was very irresponsive to varying trade demands. There was considerable delay and redtape involved in obtaining the necessary bonds,
depositing them at Washington and obtaining
bank notes for circulation; and these obstacles,
together with the expenses involved and the restrictions upon the subsequent retirement of notes
once issued,8 made it impracticable for banks to
meet temporary needs for additional currency,
like those of the crop-moving period, by issuing
additional notes. About all that can be said favorable to the seasonal elasticity of the national
bank notes is that banks intending to increase
permanently their bank-note circulation tended
to make the increase in the fall when the demands
for currency were normally largest. In the matter of seasonal elasticity our national bank-note
D
* Figures plotted O the chart do not include the issues of Aidrich-Vreeland emergency notes. See note 4, page 15.
» Down to May 30, 1908, the law limited the amount of national
bank notes that could be withdrawn in any one calendar month
to $3,000,000. On that date the law raised the limit to $9,000,000.




PRICE

aim

00
m

C
D
ih

00
IH

Cg

i*

2
**

ffotfemal Banfc-not. Circulation and P r i c „



S
S
ClIAlT I

of VniUd

I W N

O
i-l

O

o
^

O
^

O
^

o
^

Bond*. Dates of Compter-, CalU ISSO-m*

FEDERAL RESERVE SYSTEM

11

circulation showed up very unfavorably in comparison with the bank-note circulation of Canada,
which, under the system of branch banks and an
asset bank-note currency, was highly responsive
to seasonal variations in currency needs. The
contrast will be made clear by the following chart
(Chart II) showing the variations in the monthly
bank-note circulation of the two countries prior
to November, 1914, the date when the federal
reserve banks were opened,4
In times of crisis national bank notes could not
be depended upon to provide additional currency.
Government bonds were usually difficult to secure on favorable terms at such times, and the
machinery for taking out new circulation worked
too slowly. Some progress was made in the direction of improving the old system in this regard
during the latter years of the old regime; and,
under the spur of strong appeals to the banks and
active assistance from the Treasury Department,
there was some helpful increase in the national
bank-note circulation at the times of the panic of
1907 and the crisis of 1914. A t best, however,
* The figures plotted on the chart do not include the circulation of the so-called Aldrich-Vreeland emergency notes, which were
first issued in August, 191'4, reached their maximum in October,
and were all retired by the following July. Legal authority to
issue such emergency notes expired by limitation June 30, 1915.
Federal Reserve Act, section 37.







Elasticity of Bank-note Circulation in United States and Canada 1904-1914

FEDERAL RESERVE SYSTEM

11

the bond-secured notes were a weak reed to rest
upon in time of crisis.
Inelasticity of Deposit Credit
Our loan and deposit credit was likewise deficient in the quality of elasticity. Rigid legal
minima for bank reserves set up an obstacle to
loan and deposit expansion at times of increasing
business activity. Banks which were "loaned up"
and could not make further advances to regular
customers of good standing were prevented from
loaning their credit to these customers by accepting bills, which the customers might draw
upon them, as is the common custom in Europe,
because our courts had ruled that bank acceptances were illegal. The rediscount business
among our banks was almost negligible, and most
of that which existed was done on the quiet and
under cover. Rediscounting was frowned upon
by bankers and business men, and there was no
central institution like the central banks of Europe, whose business it was to rediscount the paper of other banks in times of need. Our American commercial paper was largely local paper and
we had comparatively little that could be sold in
distant markets, either at home or abroad. In
other words, rigidity rather than elasticity was a
characteristic feature of our American deposit
credit.




FEDERAL RESERVE SYSTEM 11
Evil Results of Credit Inelasticity
To this defect of credit elasticity coupled with
that of decentralization were to be attributed
largely the frequent and widefluctuationsin the
interest rates un call and short-time loans, for
which American money markets were notorious,
the alternation of periods of excessive speculation stimulated by redundancy of currency and
credit with periods of stringency and liquidation brought on by scarcity. For this rigidity
of our credit system the business men and the
farmers paid the price of higher interest rates;
the farmer suffered through the necessity of
selling his staple crops largely in the fall when
a tight money market was depressing prices, and
of buying his supplies largely in the early spring
when easy money conditions tended to make
prices abnormally high; the banker was compelled to keep large reserves and to tie up an excessive amount of his commercial deposits in capital investments, such as the purchase of bonds
and the making of call loans on stock exchange
collateral; while upon all classes in the community an uncertain and unstable money market,
which was wont to collapse frequently in panics,
imposed the burden of greatfinancialanxiety.




C H A P T E R

IV

DEFECTIVE E X C H A N G E AND TRANSFER SYSTEM

A third group of defects in our old banking
system consisted in certain cumbersome features
—unnecessary wheels and bolts as it were—in
our domestic and foreign exchangev mechanism.
These features greatly interfered with the efficient operation of the machine and at the same
time added to the expense. This subject is a
large and complicated one and can only be
touched upon here. It may be divided into two
parts, that relating to domestic exchange, and
that relating to foreign exchange.
Domestic Exchange
Of the hundreds of billions of dollars in checks
drawn every year, a very large proportion are
for local payments, and, being settled promptly
through local clearing houses or directly between
the banks concerned, offer no difficulties. Our
American clearing house machinery is a marvel
of perfection for the settlement of local checks.
In addition to the checks drawn for purely local




19

10 THE A B C OF THE
payments, however, checks whose span of life is
but one day and which are born, live and die
within the narrow limits of one town or city, there
are millions of checks drawn daily for out-oftown payments, checks whose span of life often
covers many days and which in the range and
speed of their movements excel the proverbial
American tourist party in Europe. The supply
of these checks that is continually in transit, recently estimated to amount at any one time to
about $300 millions, is what is known among
bankers as the "float." The problem of efficiently and cheaply handling this float and of equitably apportioning the expense was for years a
perplexing one. Some clearing houses, as for
example that of New York, imposed certain definite charges for the collection of checks on points
beyond a certain radius from New York City.
Other clearing houses imposed no charges. The
Boston clearing house developed a system for the
parring of checks throughout New England,
thereby eliminating all collection charges on items
drawn on banks entering the system. Similar
devices were adopted in a number of other sections of the country, notably in the middle west.
Some cities, like Albany for example, became
known as free cities and others were notorious
for their high collection charges. Many banks




FEDERAL RESERVE SYSTEM

11

imposed exchange charges—some high and some
low—for the collection of out-of-town checks received over their counters, and some made a
charge for the collection of checks drawn upon
themselves when presented from out-of-town
sources. These practices led among other evils
to the practice of routing checks, which means
that checks in the process of collection would often be sent by roundabout and devious routes in
order to avoid or reduce collection charges. In
this way the length of time in which checks were
in transit was increased and the economic cost to
the community for the collection of checks was
made heavier.
One serious phase of the practice of routing
checks was the manner in which it padded legal
reserves. Competition among large-city banks
for the accounts of country banks led the city
banks to give an immediate credit to the country
banks for out-of-town checks, checks which sometimes took the city bank a week or more to collect. The country bank counted as legal reserve
out-of-town checks sent to the reserve city bank
for collection as soon as they were mailed. The
reserve city bank in turn would send some of
these same checks to the central reserve city bank
and count them as reserve money as soon as they
were put in the mail. In this way one check in




10 THE A B C OF THE
transit frequently counted as legal reserve for
both a country bank and a reserve city bank. Occasionally such a check, after performing a yeoman service in being counted as legal reserve
money by two banks for several days, would be
returned as worthless marked "no funds."
Another defect of the domestic exchange system was the expense and trouble, for which it
was largely responsible, of requiring heavy shipments of currency back and forth over the country. As previously noted, American money
markets are subject to pronounced seasonal
swings. At one season of the year the relative
demand for bank funds is heaviest in the cotton
belt of the south; at another time it is heaviest in
the great cereal producing sections of the west
and middle west; and at another season it is
heaviest in the leading financial centers of the
east. This heaviest demand often shifts from one
section to another within a very brief period of
time. Under our old banking system these shifts
carried with them large shipments of currency
—shipments amounting in the course of a year
to hundreds of millions of dollars—and frequently a shipment would hardly be received and unpacked before a shift in the monetary demand
would require it to be sent to another section or
perhaps to be returned to the place whence it




FEDERAL RESERVE SYSTEM

11

came. All this involved expense, including packing, shipping, abrasion, insurance and interest
items.
A second phase of the exchange difficulties under the old banking system was that relating to
the foreign exchanges.
Foreign Exchange Difficulties
Our foreign trade wasfinancedlargely through
London, and those parts of the trade which were
with the Orient and with South America were
financed almost entirely through London. London is the world's financial center and it is but
natural that we should utilize to a substantial extent her unrivalled facilities forfinancingoversea
trade. The trouble was not that we utilized them,
but that we utilized them too much and were
unduly dependent upon them. This involved
several difficulties, only two of which need be
mentioned here. In the first place, payments
through London gave rise to an additional foreign exchange operation, which normally added
to both the expense and the risk of financing a
shipment of goods. In the second place, the fact
that invoices, bills of lading and other documents
passed through the hands of foreign banks and
of South American or oriental branches of foreign banks gave to our foreign competitors "in-




FEDERAL RESERVE SYSTEM 11
side" information concerning our foreign business—information that was often used to their
advantage in competition with our own citizens.
W e now come to the fourth and last of the defects in our old banking system, which were outlined at the beginning of this book. That is a
defect which is concerned with the relations of
our banking system to the federal treasury.




C H A P T E R

V

DEFECTIVE BANKING MACHINEBY FOE FEDEEAL
GOVERNMENT

The general funds of the treasury were kept in
part in the country's nine sub-treasuries, and in
part in national banks, which qualified as depositories of government funds. There were 1,584
such national bank depositories at the close of the
fiscal year 1914. The apportionment of the funds
between the sub-treasuries and the banks on the
one hand, and among the depository banks on the
other hand, was entrusted to the Secretary of the
Treasury. The treasury funds to be thus apportioned varied widely from year to year and from
season to season.
In a number of respects this system worked
badly. Briefly summarized, the defects were
as follows: (1) It led to the continual hoarding in treasury vaults of large sums of money
involving substantial administrative expenses
and a heavy loss of interest. (2) A t certain
seasons of the year the Government's receipts
greatly exceed its disbursements, as for example
u




10 THE A B C OF THE
at the times when tax payments are heaviest;
while at other seasons, as for example when
pension money or interest on the public debt
is being paid, the disbursements exceed the
receipts. In the former case the money market
was disturbed by the Government's suddenly
withdrawing large sums from circulation and
thereby contracting the currency. In the latter
case it was disturbed by the sudden pumping into circulation of large sums of money. These
operations, when on any substantial scale, tended
to affect the interest rates on call loans and the
prices of speculative securities. The task imposed upon the Secretary of the Treasury, therefore, of apportioning these large government balances among the banks and the sub-treasuries was
a difficult one and one which placed too great
power and responsibility over the money market
in the hands of a government official. It also
led to criticism and jealousy among depository
banks.
(3) The system caused depository
banks to rely unduly upon the Secretary of the
Treasury for aid in the form of increased government deposits in times of financial pressure, instead of depending upon themselves and keeping
"their houses in order" so as to be ready for
emergencies. "The grandfatherly attitude of
the Secretary of the Treasury toward the banks"




FEDERAL RESERVE SYSTEM

11

in the matter of government deposits was an expression frequently heard.
The four chief defects of our American banking system as it existed prior to the enactment of
the federal reserve law have now been briefly described. They were decentralization, inelasticity
of credit, cumbersome transfer system, and defective government depository system.
To
remedy these defects the federal reserve system
was created by the law of December 23, 1913;
and federal reserve banks opened their doors for
business November 16, 1914. Since that date
the system has developed rapidly under the management of administrative boards and under the
influence of a number of important amendments
to the organic law. It is not our task here to
trace this interesting development, but rather to
answer briefly the question: How is the federal
reserve system as now developed remedying the
defects of the old banking system? Let us consider the remedy in its relation to the four general defects in the order in which they have been
discussed.




CHAPTER VI
H o w THE FEDERAL RESERVE SYSTEM IS REMEDYING THE OLD E V I L OF THE DECENTRALIZATION OF AMERICAN B A N K I N G

The federal reserve act does not destroy our
American system of small independent banks
with its prestige of over a half century of growth
and usefulness, and with its great merit of local
adaptability to the needs of a country of magnificent distances and of widely varying economic
activities. The federal reserve law continues
these thousands of independent banks with all
their essential functions, but federates them into
a unified system which is democratic in its organization and nationwide in its field of operation—
a system dedicated to public service.
Federal Reserve Districts
There are twelve federal reserve banks, each
of which operates in one of the federal reserve
districts into which the country is divided. In
determining the boundaries of these districts the
authorities were required to have "regard to the




58

FEDERAL RESERVE SYSTEM

11

convenience and customary course of business,"
to make each district large enough to provide the
minimum capital of $4,000,000 required by law,
and to make none so large as to dominate the
others thereby endangering the federal principle
which the law sought to establish. A map showing the boundaries of the twelve federal reserve
districts and the location in each district of the
federal reserve city, namely, the city in which the
main office of the federal reserve bank is located,
is given below.1
The fact that the number of banks and the
amount of banking capital in different sections
of the country vary so widely explains the great
differences in the geographic sizes of the federal
reserve districts.
Plan of Organization
All national banks are required to be members
of the system, and state banks and trust companies (which conform to certain standards as
to size and character of business) are encouraged
to join. Comparatively few state institutions
joined during the first two years of the system,
but the liberal policies of the federal reserve
iThe map is a reproduction of the one published in the
Federal Reserve Bulletin of November, 1931.







FEDERAL RESERVE SYSTEM

11

authorities, together with later amendments to
the law and a growing feeling that it is the patriotic duty of state institutions to join the system
in these times of national emergency, these factors have all made the state institutions more
favorably disposed toward the system and they
have lately been joining in ever increasing numbers.
Member banks are required to subscribe to the
capital stock of the federal reserve bank in their
district to an amount equal to six per cent of the
member bank's capital and surplus. Only onehalf of this subscription has so far been called,
giving the federal reserve banks a paid-in capital
of $103,166,000 on November 16, 1921, but the
other half may be called at any time by the federal reserve authorities.2
There are two noteworthy features of a federal
reserve bank's plan of organization. They are
first, its democracy, and second, its recognition of
the quasi-public nature of the banking business
through its grant to the public of participation
in the bank's management.
The administrative control of a federal reserve
bank is democratic. "One bank, one vote" is the
rule. Furthermore, in order to prevent the large
2 Provisions for the establishment of federal reserve branch banks
are contained in the federal reserve act (section S). Up to
November, 1921, twenty-three branch banks had been established.




10 THE A B C OF THE
banks from dominating the small ones by reason
of their greater prestige and to assure the small
banks of representation on the board of directors,
there is a device by which all the member banks
are divided according to their capital into three
groups, which, reminiscent of the three bears in
the Goldylock story, may be called big banks, little banks, and middle-sized banks. All the member banks in a federal reserve district are classified into these three groups. Each of the groups
was originally required to contain approximately
the same number of banks, but by the amendment of September 26,1918 this requirement was
discontinued. At present the federal reserve
board has authority to determine the number of
banks which shall constitute each group, being
merely subject to the requirement that "each
group shall consist as nearly as may be of banks
of similar capitalization." The largest bank in
the group of little banks is therefore normally
smaller than the smallest one in the group of middle-sized banks, and the largest one in the group
of middle-sized banks is normally smaller than
the smallest one in the group of big banks* A
week after the above amendment was passed the
federal reserve boards made a reclassification of
member banks for the twelve districts, which,
when taken by totals for all districts, placed 515




FEDERAL RESERVE SYSTEM

11

banks or 6.4 per cent of the total number of member banks at that time (i.e., 8,099 banks) in group
I, the large bank group; 2,384 banks or 29.4 per
cent of the total number in group II, the middlesized-bank group; and 5,200 banks or 64.2 per
cent of the total number in group I I I , the smallsized-bank group. After this reclassification of
member banks was made the capital and surplus
of the member banks in each group became as
follows:
Group
I

Amount
000,000
$1,577

Per cent of Total
61.3

II

625

24.3

III

372

14.4

Total

$2,574

100

On the basis of the one bank one vote principle,
each group elects two directors, one of whom,
called a Class A director, is a banker and represents the stock-holding banks, while the other,
called a Class B director, is a business man or
farmer and represents the business community.
To these six directors so elected there are added
three others known as Class C directors, who are
appointed by the central federal reserve authorities
at Washington to represent the interests of the
federal government and of the general public.
One of these Class C directors, who is required to




10

THE A B C OF THE

be a person of "tested banking experience," is
designated by the central authorities as Chairman of the Board, and is known as federal reserve agent. The board thus consists of nine directors, who hold office for three years (the term
of office of one director of each class terminating
each year), and who are broadly representative
of different interests among the American public.
Crowning the arch of which the twelve federal
reserve banks constitute the structural stones and
forming its keystone, is the central board at
Washington, known as the federal reserve boardThis board consists of seven members, including
the Secretary of the Treasury and the Comptroller of the Currency, who are ex-officio members,
andfivemembers appointed by the President of
the United States with the advice and consent of
the Senate, who hold office for a period of ten
years. At least two of these five members the
law says must be "experienced in banking or finance." The Secretary of the Treasury is exofficio chairman of the federal reserve board. The
board is assisted by a federal advisory council,
consisting of twelve members appointed respectively by the boards of directors of the twelve
federal reserve banks. The advisory council
meets with the federal reserve board at least four
times each year and oftener if called by the
board.




FEDERAL RESERVE SYSTEM

11

The appointment by the federal reserve board
of three of the nine directors (including the chairman) of each of the federal reserve banks and
the appointment by each federal reserve bank of
a member of the federal advisory council federate
together the twelve federal reserve banks under
the federal reserve board and give a common
knowledge and a unity of purpose. Conferences
from time to time of the governors of the twelve
federal reserve banks and of the federal reserve
agents of the banks, and occasional conferences
of the governors and the federal reserve agents
with the federal reserve board have added much
to the smooth and unified working of the system.
In matters of general policy the federal reserve
bnard is given large powers and is the directing
head of the system.®
Here then is the centralizing machinery which
is bringing order into our banking system, and
is making possible the development of broad
•The board's control is strengthened by its statutory powers:
(1) "To examine at its discretion the accounts, books and affairs
of each federal reserve bank and of each member bank and to require such statements and reports as it may deem necessary. .
(2) "To suspend or remove any officer or director of any federal reserve bank. .
(S) "To suspend, for the violation of any of the
provisions of this act, the operations of any federal reserve bank,
to take possession thereof, administer the same during the period
of suspension, and, when deemed advisable, to liquidate or reorganize such bank." (4) 4"To exercise general supervision over
said federal reserve banks." Federal Reserve Act, Section 1L




10

THE A B C OF THE

financial policies which can be carried out with
promptness and continuity.
In considering the manner in which the old evil
of decentralization is being remedied by the federal reserve system, we may now pass from the
administrative machinery of centralization to the
methods by which the old evils of scattered and
immobile reserves are being eliminated.
District Centralization of Bank Reserves
The federal reserve act as originally passed
provided for the gradual withdrawal of legal
reserve money from deposit in the banks of reserve and central reserve cities. All such deposited legal reserves were to be withdrawn by
the end of a three-year period beginning with the
date of the inauguration of the federal reserve
system. Accordingly, after November 16, 1917,
all legal reserve money of member banks, the
law required to be held "in the vaults of the member banks or in the federal reserve bank, or in
both, at the option of the member bank" (section
19 of Act). In conformity with this requirement
the percentage of the legal reserves of member
banks kept on deposit in the banks of reserve and
central reserve cities declined very much by the
summer of 1917. On June 21,1917, an amendment was passed to the federal reserve act requiring every bank, banking association or trust com-




FEDERAL RESERVE SYSTEM

11

pany belonging to the federal reserve system to
maintain its entire legal reserve in the form of a
deposit at the federal reserve bank of its district.
Thus by about five months the time was anticipated when legal reserve money of member banks
should cease to be kept on deposit in banks other
than federal reserve banks. The time therefore
arrived in the summer of 1917 when commercial
banks belonging to the federal reserve system
ceased tying up their legal reserve money by depositing it in the banks of our money market
centers there to be loaned out at call to speculators on the stock and produce exchanges. This
divorcing of the legal reserves of over 9,800
commercial banks from the speculative and capital loans of the stock market—mainly that of
Wall Street—is one of the big achievements of
the federal reserve system. The federal reserve law, as amended, recognizes only one form
of legal reserve, and that is a member bank's deposit in its federal reserve bank. Member banks
may keep as much or as little cash on hand for
till money as they wish to. They may keep balances in other banks if it suits their convenience
to do so—all that is their own affair4 for which
* A member bank is prohibited by law from keeping on deposit
with any state bank or trust company which is not a member bank
a sum in excess of 10 per cent of its own paid-up capital and
surplus.




10

10 THE A B C OF THE

their responsibility is to their stock holders and
their customers—but their legal reserve, the reserve which the Government looks upon as the
minimum below which the public interest demands that banks should not go, that reserve
must all be kept on deposit in federal reserve
banks, the nation's reservoirs of reserve money.
For reasons that will soon be made clear the
concentration of the country's reserve money in
a few large reservoirs makes possible a much
more efficient use of each dollar of reserve money
than under the old system of scattered reserves,
and, as a result, the legal reserve requirements
have been greatly reduced. The percentage
reserves at present required against demand deposits and time deposits are as follows :5
Demand Deposits, Time Deposits,
Le.f Deposits Pay- Le., Deposits Payable Within
able After SO
Banks
SO Days
Days Notice
Central reserve city banks,
13
S
Reserve city banks,
10
8
Country banks,
S
T
e Banks located in the outlying districts of a ccntral reserve
city or a reserve city, or banks located in territory added to such
a city by the extension of its corporate charter, may, upon the
affirmative vote of five members of the federal reserve board, reduce their legal reserves to the percentages required of country
banks. In the case of banks located in central reserve cities the
reduction may be authorized to the percentage required of country banks or merely to that required of reserve dty bank*.




FEDERAL RESERVE SYSTEM

11

On November 1,1918, the twelve federal reserve
banks held deposited reserves of other banks to
the amount of $1,442 millions. Reserve money
collected in a few large reservoirs is quickly
available in large quantities either for export or
for domestic use, and the fact that it is readily
available in large quantities inspires public confidence and lessens the danger of financial panic.
When the public knows that gold in abundance
is available on demand it does not want it,
except to meet the normal demands of international trade. The federal reserve banks, of
course, do not keep on hand all the reserve money
deposited by member banks. Like other banks,
they invest it. The law, however, requires them
to keep a reserve of thirty-five per cent against
deposits,® and it is their established policy to
maintain reserves much larger than this normal
legal minimum.
Mobilization of Reserves
A corollary to the district centralization of reserves is their mobilization. Reserve money must
not only be piped into a few large reservoirs, but
these large reservoirs must be piped together, and
there must be a pumping engine of sufficient
power to force the reserves promptly and in large
quantities to any place desired. The federal re« See pages 59-61.




10

THE A B C OF THE

serve system creates just this machinery. It provides numerous devices by which reserve money
can be quickly moved from places of redundancy
to places of scarcity. A few of the more important of these devices will be briefly described here,
while others will be discussed later in connection
with the general topics of currency and credit
elasticity and the transfer system. Let us consider first the inter-district mobility of reserve
money, namely the movabilitv of reserves from
one federal reserve district to another; and second, the intra-district mobility of reserves, or the
movability of reserves within the boundaries of
one district.
Inter-District Mobility
Broadly speaking there are three ways in which
the federal reserve law has increased the interdistrict mobility of reserve money. They are:
(1) Rediscounting by one federal reserve bank
for another. (2) Open market operations of federal reserve banks. (3) Creation of a broader
discount market for commercial paper.
Rediscounting by one Federal Reserve Bank for
Another
Under the old banking system, as we have seen,
in time of emergency, each bank held tight its
own reserves, or, to change the figure, "sat firmly




FEDERAL RESERVE SYSTEM

11

on the lid." In the controversy for banking reform, which culminated in the federal reserve act,
the advocates of a single central bank contended
that a system of eight to twelve banks like that
proposed in the federal reserve bill would perpetuate the old evil by leading to the same sort
of scramble for reserves, in time of emergency,
among the different federal reserve banks, that
had formerly existed among the individual banks
of the country. Specifically to meet this danger
a provision was inserted in the act (Section I I )
empowering the federal reserve board "to permit,
or, on the affirmative note of at least five members of the reserve board to require federal reserve banks to rediscount the discounted paper of
other federal reserve banks at rates of interest to
be fixed by the federal reserve board." This
means that in case there is an exceptionally heavy
demand for reserve monej7- in any section of the
country—a demand heavier than the banks of
that section can reasonably meet—the reserve
banks in other sections where money is more
plentiful will come to the rescue, either voluntarily or under compulsion of the federal reserve
board, and will rediscount the paper of the reserve
bank in the section under financial stress. This
process, of course, will cause a flow of cash from
the reserves of the former banks to the reserve of




10 THE A B C OF THE
the latter, thereby easing the money market in the
threatened section.
After the United States entered the war there
developed a strong tendency for a compensatory
movement of reserves among the federal reserve
banks. Reserves of some of the banks frequently
fall rapidly while those of others are rapidly rising, often with little or no change in the reserve
position of the twelve federal reserve banks as o
whole. This compensatory movement is due
largely to operations of the government which
often result in heavy withdrawals of funds from
banks in one section of the country for the making of payments in another. This situation has
made it desirable from time to time that one federal reserve bank should make advances to another. At times the federal reserve board has
taken the initiative in this matter, but apparently
the banks, in most cases, have willingly complied
with the board's request. The twelve federal reserve banks have so far worked very harmoniously, thanks largely to the frequent conferences of
the governors and the federal reserve agents with
the federal reserve board, so that it seems improbable that compulsion by the board will often be
necessary to require the more favorably situated
banks to come to the rescue of those less favorably situated, in time of danger. The reserves of




FEDERAL RESERVE SYSTEM

11

the twelve reserve banks are so closely piped together, particularly since the formation of the
gold settlement fund (to be described later, pages
7G-80), that they may reasonably be considered to
be closely connected tanks of a single reservoir.
Open-Market Operations
While the federal reserve banks are essentially
bankers' banks, since their stock is owned exclusively by member banks and since their only
regular domestic customers are banks and the
federal government, it is none the less true that
Congress found it necessary to confer upon these
banks certain limited rights of dealing with the
outside public. The possession of such rights by
the federal reserve banks appeared necessary,
first, as part of the machinery for conserving the
American money market and making their discount rates effective7 and second, as a method of
7 If, for example, a federal reserve bank raises its discount
rate in order to prevent dangerous loan expansion on the part of
member banks or to prevent an undue outflow of gold from the
country, it may happen that the member banks may not be convinced of the need of such precautionary measures, and, not being in need of securing funds from the federal reserve bank by
way of rediscount, may ignore the efforts of the federal reserve
bank to conserve the money market

The banks may accordingly

continue the policy of loan expansion at low discount rates.
Under such circumstances the federal reserve rate would be said
to be "ineffective."

To meet this situation and force the banks

"into line" the federal reserve bank may go into the open market
and sell bank acceptances, commercial bills, municipal warrants



10

10 THE A B C OF THE

profitably employing their funds in times of easy
money, when member banks are making few calls
upon them for rediscount.8 The dealings with
the outside public so authorized are known as
"open-market operations," and are provided for
in section 14 of the Act. Into the details of this
important section we need not go. For our purposes it is sufficient to note that federal reserve
banks may buy and sell in the open market either
at home or abroad commercial bills of exchange,
bankers' acceptances, and certain specified kinds
of government obligations. Under this authority
a federal reserve bank in one section of the country may buy and sell eligible commercial paper
and government securities in any other section of
the country. Such dealings, of course, tend to
cause a flow of reserve money from the district of
the buyer to that of the seller. If the San Francisco federal reserve bank, for example, buys
$1,000,000 worth of trade acceptances, bank acceptances and municipal warrants in the open
and government bonds, and, by withdrawing from the market the
funds received in payment therefor, may tighten the market, and
force up the discount rate thereby bringing the market rate into
harmony with the federal reserve rate.
s In the early days of the federal reserve system when the
member banks were making very little call upon the federal reserve banks for rediscounts or other advances, the federal reserve banks invested substantial sums in municipal warrants and
bank acceptances in the open market, and by that means covered
a large part of their running expenses.




FEDERAL RESERVE SYSTEM

11

market in New York, its settlement check to
whomever paid is likely to be deposited in a New
York bank, and for that bank to be collected by
the New York federal reserve bank from the San
Francisco federal reserve bank. Unless offset by
payments in the other direction, the payment by
San Francisco will necessitate a transfer of reserve money, presumably through the "gold settlement fund,"9 from San Francisco to New
York. If the New York bank, in which the million dollar check was originally deposited, leaves
the proceeds on deposit with the New York federal reserve bank, federal reserve "reserve
money" will be transferred from the bank in San
Francisco to the bank in New York. In this
manner open market operations transfer reserve
money from places of redundancy to places of
scarcity, and tend to maintain a national equilibrium in our money rates.
Creation of a Broader Discount Market for Commercial Paper
The third method by which the federal reserve
system is rendering more mobile our reserve
money is through the creation of a broader discount market for commercial paper. As we have
already seen, under the old banking system the
great bulk of American commercial paper was
» The gold settlement fund is described on pages 76-80.




10

THE A B C OF THE

essentially local paper with little or no market
outside of the community in which it was created.
The federal reserve system has provided the
machinery by which high grade commercial paper
can be rediscounted throughout the United
States, and, in this connection, has sought to encourage by preferential discount rates and otherwise the use of trade acceptances and bank acceptances—credit devices widely used in Europe.
When the seller of merchandise draws a trade
bill upon the buyer at, say, 60 days sight for the
amount of the bill, and the buyer writes across
its face "accepted" and signs his name with the
date of acceptance, a credit instrument is created
which has very pronounced advantages over the
open-book account, from the standpoint of the
seller, the buyer and the bank. The seller has a
definite acceptance of the goods which the buyer
cannot question in the future without very good
reason; he has a promise from the buyer to pay at
a definite date; and he has the buyer's obligation
expressed in the form of a negotiable instrument
which is highly liquid, and which enjoys preferential rediscount rates at all federal reserve banks
and therefore presumably at the seller's local
bank and in the open market. The buyer of the
merchandise who accepts the bill places his credit
standing at a higher level than it would be if he
bought on open book account. His improved




FEDERAL RESERVE SYSTEM

11

credit should enable him to buy on better terms.
Having his accounts thus given definite maturities he is less likely to be tempted to overbuy than
he would be under the loose open-book account
method. The buyer is also a seller, and if he
uses trade acceptances in connection with his purchases he is in a stronger position to demand
them in connection with his sales. From the
banker's point of view the trade acceptance is an
ideal form of commercial paper. It bears two
names, usually carries with it evidence that it
represents a self-liquidating commercial transaction and not an accommodation loan, it is almost
certain to be paid at maturity and not to seek
renewal, is not subject to the provision of the
national banking law which prohibits a national
bank from loaning to one customer an amount in
excess of ten per cent of the bank's capital and
surplus (Revised statutes, section 5200), and it
is very easy to turn into cash before maturity
either by sale in the open market or by rediscount
at a federal reserve bank because of the preferential discount rates given such paper. The trade
acceptance is therefore incomparably more liquid
than the open-book account, and, other things
equal, is more liquid than one-name paper.
Even more liquid than the trade acceptance,
because the acceptor is ordinarily of more widely
recognized financial standing, is the domestic




10

10 THE A B C OF THE

bank acceptance authorized by the federal reserve law.10 The bank acceptance is similar to the
trade acceptance. It differs, however, in the fact
that the seller of the merchandise draws his bill
not upon the buyer but upon the buyer's bank,
which accepts the bill for the buyer whose financial standing is known to the bank and who has
arranged with the bank in advance to lend him
its credit in this way. The seller of the merchandise having received an acceptance of the bill
from the buyer's bank may discount the bill at his
own bank or sell it in the open market if he does
not wish to hold it until maturity. The type of
domestic bank acceptance made eligible for rediscount at federal reserve banks covers bills having not more than 90 days, exclusive of days of
grace, to run which grow out of transactions involving the domestic shipment of goods, provided
that documents conveying or securing title are attached at the time of acceptance; and it covers
bills not exceeding the above-mentioned maturity
which are secured at the time of acceptance by a
warehouse receipt or other such document conveying or securing title covering readily marketable staples.
Inasmuch as bank acceptances and high grade
trade acceptances have a wide market, their ini°The statutory provisions concerning bank acceptances will
be found in section 13, paragraph 5 of the federal reserve act




FEDERAL RESERVE SYSTEM

11

creasing use is causing more and more paper to
flow away from the banks in sections of the country where the discount rate is relatively high to be
discounted in the banks of those sections where
the rate is relatively low. Such a flow of commercial paper from the dear markets to the cheap
ones, obviously causes a counter-flow of bank reserves from the cheap markets to the dear ones
and thereby tends to reestablish an equilibrium in
discount rates. Of course, this flow is not an absolutely free one and perfect equilibrium is never
obtained. The point is, however, that the widening marketability of our commercial paper under
the federal reserve system is making this flow of
reserve money much less sluggish than it was
formerly.
Intra-District Mobility of Reserves
The forces, which act for the increasing mobility of reserve money within the boundaries of
a federal reserve district, are essentially the same
as those just explained for that between districts.
Obviously paper of wide acceptability flows from
place to place within a district more freely than
paper whose merits are less widely recognized;
and, within a district as between districts, the
widely marketable paper flows from the places
where discount rates are high and bank funds are
scarce to the places where the rates are low and
funds are more plentiful. Furthermore, the




10

THE A B C OF THE

bank reserves of the district which have been
piped to the one reservoir, namely, the federal reserve bank, can be readily pumped to the banks
of any section where funds are in heavy demand.
If banks throughout the district were rediscounting in moderate sums with the federal reserve
bank, and if a sudden emergency should cause an
exceptionally heavy demand for funds in any section, the federal reserve bank could raise its rate
of discount, thereby reducing the rediscount demands of the banks less urgently in need of
funds, and could then turn larger amounts into
the section where the demand was heaviest. Additional funds could be secured by the federal reserve bank within the district (as well as outside)
by the sale in the open market of securities held
in its "secondary reserve."
In the illustrations so far given we have assumed afixedamount of banking funds, and have
shown how these funds can be readily mobilized
under the federal reserve system and concentrated
at the points where they are most needed. The
problem of meeting unusual calls for banking
funds is, however, an easier one under the federal
reserve system than the above discussion implies.
The reason is that under the new svstem there
exist in addition certain elastic elements in our
supply of bank funds. These will be considered
in the next chapter.




CHAPTER
CREDIT ELASTICITY

VII

UNDER THE FEDERAL, R E -

SERVE SYSTEM

Both bank-note currency and deposit or check
currency are more elastic under the new system
than under the old.
Bond-Secured Bank Notes
In order to prevent the alleged danger of an
undue contraction of the currency and to protect
from loss the banks owning the two per cent
bonds, which were largely pledged with the Government as security for national bank-note circulation and which by reason of the circulation
privilege had a value far above their investment
value, the Government decided not to withdraw
from circulation at once the old bond-secured
bank notes. The federal reserve law accordingly
continued the circulation of these notes, but contained provisions looking toward their gradual retirement. From the time of the enactment of the
federal reserve act (December 23, 1913), however, to November 1, 1921, the national bank




51

10

10 THE A B C OF THE

notes in circulation have actually increased from
$726 millions representing about 21 per cent of
our total monetary circulation to $743 millions,
representing about 13 per cent. To this sum
there should be added, to be accurate, $123 millions of so-called federal reserve bank notes winch
are merely bank notes of the old type that are
issued by the federal reserve banks instead of by
the national banks. They are secured by a specific deposit, with the United States treasurer, of
bonds or of certain short-time obligations of the
United States. Up to the early fall of 1918 these
federal reserve bank notes were of comparatively
little consequence, but with the gradual substitution of them, for silver certificates and silver dollars in circulation, after that time, under the provisions of the Pittman act of April 23,1918, they
assumed increasing importance, reaching a maximum net circulation of $261 millions in December 1919. Their retirement from circulation has
been in process since May 1920 when the government began to repurchase silver under the Pittman act and to replace federal reserve bank notes
in circulation by silver certificates.
Federal Reserve Notes
The notes upon which the federal reserve system places its sole reliance for bank-note elas-




FEDERAL RESERVE SYSTEM

5S

ticity are the so-called federal reserve notes.
These notes, which are obligations of the United
State Government and are a first and paramount
lien on all the assets" of the issuing federal reserve banks, including double liability of member
banks on their subscriptions to federal reserve
bank stock, have back of them, specifically pledged
with the federal reserve agents, to the amount of
at least 100 per cent certain forms of high
grade collateral. This collateral may consist of:
(1) Paper endorsed by member banks and drawn
for strictly commercial, industrial or agricultural
purposes, or for the purpose of carrying or trading in securities of the United States Government, in other words, paper of the type hereafter
described1 which is eligible for rediscount at a
federal reserve bank. (2) Bills of exchange endorsed by a member bank and bankers' acceptances bought by the federal reserve bank in the
open market. (3) Gold and gold certificates.
Except under special circumstances, to be considered later,2 a gold reserve of not less than 40
per cent must be kept by each federal reserve
bank against its outstanding federal reserve
notes. Gold specifically pledged with the federal
reserve agent as collateral for the notes may be
1 Pages 63-65.
2 Pages 56-57.




10 THE A B C OF THE
counted in making up this 40 per cent reserve, as
may also gold kept in the redemption fund with
the treasurer of the United States at Washington for the redemption of the notes.
"Elasticity of Federal Reserve Notes
As regards the matter of elasticity, these notes
have in a high degree the quality of expansibility, namely, of having their circulation easily increased in times of need. If member banks in a
given section of the country need an increased
supply of currency to meet local demands, they
may rediscount eligible paper with their federal
reserve bank and take the proceeds of the rediscounts in federal reserve notes, which pass readily as hand-to-hand money and are satisfactory
till money for the banks. The federal reserve
bank, if its supply of notes is inadequate, secures,
on application to the federal reserve agent, additional notes by depositing with the agent the rediscounted paper or other eligible paper in its
portfolio. This process may continue as long
as the federal reserve bank has paper available
for deposit with the federal reserve agent and
its gold reserve does not fall below the normal
legal minimum of 40 per cent. In case of great
emergency, however, the federal reserve board
may permit a reduction of the note reserve below




FEDERAL RESERVE SYSTEM

5S

40 per cent, provided it imposes a graduated tax
upon the amount of the deficiency—a tax which
must be added to the rates of interest and discount fixed by the federal reserve board. Furthermore, to meet extreme emergencies the board
is authorized "to suspend for a period not exceeding thirty days, and from time to time to renew
such suspension for periods not exceeding fifteen
days any reserve requirement" specified by the
Act. It is thus seen that the federal reserve notes
have ample power of expansion in time of emergency and that there no longer exists a stone-wall
limit beyond which expansion cannot go and go
promptly. There is no fixed limit, but after the
gold reserve ratio has declined below 40 per cent
further expansion of note circulation can be secured only at an increasing expense to those wishing the notes.
The notes issued by federal reserve agents
to the twelve federal reserve banks amounted
to $2,717 millions on November 16, 1921. Back
of these notes there was held by the twelve federal reserve agents the following collateral:




10

10 THE A B C OF THE
(1)
(2)
(3)
(4)

Millions
Gold and gold certificates
$450
Gold in redemption fund at
Washington
123
Gold settlement fund—federal
reserve board
1,237
Eligible paper, (representing
$310 millions above the minimum
required by law)
1,217
Total

$3027

The figures show therefore that 67 per cent of the
federal reserve notes outstanding, or 75 per cent
of the notes in actual circulation, were backed
dollar for dollar by gold as collateral.
Eor the purpose of contracting the circulation
of federal reserve notes when the business demands for currency decline, the machinery is as
follows. When the demand for notes in the
pockets of the people and the tills of merchants
falls off, as it does, say, after the harvesting season in the autumn, the surplus notes are deposited
by the public in the banks. Inasmuch as national
banks cannot count these notes in their vaults as
legal reserve money, they will tend to send to
their federal reserve banks for deposit any notes
they receive in excess of the amount needed for
till money. Transportation charges on such




FEDERAL RESERVE SYSTEM

5S

shipments of notes are paid by the federal reserve bank. Notes which were issued by the federal reserve bank of the district may thus be withdrawn from circulation. Notes so received which
were issued by other federal reserve banks are
sent back to the issuing banks. On this subject
the law says: "Whenever federal reserve notes
issued through one federal reserve bank shall be
received by another federal reserve bank, they
shall be promptly returned for credit or redemption to the federal reserve bank through which
they were originally issued or, upon direction of
such federal reserve bank, they shall be forwarded
direct to the Treasurer of the United States, to
be retired. No federal reserve bank shall pay
out notes issued through another under penalty
of a tax of ten per centum upon the face value of
notes so paid out" (Section 16). This requirement that federal reserve banks shall send back
promptly the notes of other federal reserve banks
will obviously increase in its effectiveness as a
means of currency contraction with the increase
in the number of branches of federal reserve
banks established throughout the country.
Another device calculated to encourage the retirement from circulation of bank notes whenever
they become redundant is the provision of the
law authorizing the federal reserve board to




58

THE A B C O F THE

charge such a rate of interest as it may deem desirable on federal reserve notes uncovered by
gold or gold certificates issued to federal reserve
banks. Up to the present time such an interest
charge has never been imposed.
The fact that federal reserve notes are not
legal tender is believed by some to exercise an influence in the direction of causing their retirement when they become redundant. In view of
the fact, however, that the question of legal tender is rarely raised in connection with money
which is not depreciated, it is doubtful if the lack
of legal tender adds anything to the "homing
quality" of the notes.
Elasticity of Deposit Currency
Elasticity of deposit currency, although it has
not received the attention in our economic literature received by elasticity of bank-note currency, is of greater importance because the
amount of business done by means of deposit currency is many times larger than that done by
means of bank notes.8 Prior to the establishment
s The estimates of Professor Irving Fisher for the year 1913,
the last antebellum year, give the average rate of monetary
turnover for the country as 21, and the total amount of business
effected by deposit currency as $440 billions. The bank-note circulation for July 1 of that year was $759 millions, which multiplied by the average rate of monetary turnover would give the
total business transacted by means of bank notes at $16 billions,




FEDERAL RESERVE SYSTEM

5S

of the federal reserve system, as we have seen,4
our deposit currency, although not as inelastic as
our bank-note currency, was none the less deficient in the quality of elasticity. How has the
federal reserve system remedied this defect?
W e have just seen how by increasing the mobility of bank reserves, the federal reserve system
has enabled bank funds in the form of deposit
credits to flow quickly to any section of the country where bank funds are much needed. This
mobility of funds is often spoken of as depositcredit elasticity. In the present discussion, however, we are using the word elasticity in its stricter
sense of "expansibility and contractility," and
do not include in the term mere mobility of funds,
namely, their capacity to move quickly and with
little friction from one place to another.
The federal reserve system increases the elasticity of our deposit currency in a number of
ways. In the first place, it has removed the rigid
legal reserve requirements of our former national
banking system and has put in their place much
less rigid ones. The only legal reserves now required of national banks are the deposited reserves in the federal reserve bank. For till money
or a sum equal to only 1/27 of that transacted by means of deposit currency.
4 See pages 17-18.




10

THE A B C OF THE

banks are permitted to hold in their own vaults
as much or as little money as they individually
need, and the kinds of money they desire.
Federal reserve banks in turn are required to
keep against deposits a legal reserve of lawful
money equivalent to 35 per cent. Unlike member banks, however, the federal reserve banks are
not strongly pressed by competition and by the
desire for profits to take up all the slack and reduce their reserves in ordinary times to this normal legal minimum. There has been no evidence
that federal reserve banks will keep their credit
extended to the legal limit, as individual banks
have so widely done in the past. Despite the
urgent need of funds brought about by after-war
conditions, our federal reserve banks have adopted the policy of maintaining reserves well above
the legal minimum. They have little profiteering
motive to reduce their reserves to a dangerously
low figure, because all the profits of federal reserve banks above a six per cent cumulative dividend to the stock owned by member banks go to
the Government.5 Fortunately there has ap®The law (as amended March S, 1919) provides that after the
6 per cent cumulative dividend claims have been met, the net
earnings of each bank shall be paid to the United States as a
franchise tax; except that the whole of such net earnings shall
be paid into a surplus fund until the surplus Bhall amount to 100
per cent of the subscribed capital stock. After this 100 per cent




FEDERAL RESERVE SYSTEM

5S

peared no evidence of competition among the
federal reserve banks to see which can show the
largest profits. Under the leadership of the federal reserve board, the great emphasis has been
on competition for public service. The result is
that the federal reserve banks have been conserving their strength for times of emergency.
Under such circumstances the federal reserve
banks should have substantial powers of credit
expansion to call upon in times of emergency,
before their reserve position is forced down to
anything like the 85 per cent legal limit.
This limit itself, however, is not a rigid one.
It may be passed in times of extreme emergency,
although only by paying a price. The federal
reserve law provides, as we have previously
noted, that the federal reserve board may "suspend for a period not exceeding thirty days, and
from time to time . . . renew such suspension for
surplus is accumulated, 10 per cent of the net earnings, above 6
per cent dividend charges Is to be added annually to the surplus.
Upon the liquidation of a federal reserve bank or the withdrawal
of a member bank none of this surplus goes to the member banks.
Ultimately it all goes to the Government.
Although the federal reserve banks are administered with
the primary object of public service rather than profit, they have
none the less realised good profits on the capital invested.

For

the year 1917 the net earnings for all 12 banks represented 18.9
per cent of the average paid-in capital, for the year 1918 72.6
per cent, for the year 191-9 96.2 per cent, and for the year 1920
161 per cent




10 THE A B C OF THE
periods not exceeding fifteen days, any reserve
requirement specified in this act: provided, that
it shall establish a graduated tax upon the
amounts by which the reserve requirements"
against deposits are permitted to fall below the
level of 35 per cent (Section 11). Inasmuch as
this tax would presumably be added to the rate of
discount charged by the reserve bank, there would
be an increasingly heavy charge upon loans made
when the reserve was below the normal legal
minimum. None the less, such loans could be
made without limit to those who could give the
security and would pay the price.
The most important device of the federal reserve system for securing elasticity of deposit
currency, as well as of bank-note currency,® is
found in the machinery enabling member banks
to borrow funds of their federal reserve bank.
« A member bank, say a country bank, whose reserve is in
danger of running below the 7 per cent of demand deposits, and
3 per cent of time deposits, required by law, or which is in need
of more cash for till money, may take, say $10,000 of its eligible
commercial paper to its federal reserve bank and have it rediscounted for, say, 60 days at 4ya per cent The proceeds would
be $9,925, which at 7 per cent would represent a legal reserve
sufficient for $141,714 of demand deposits, and would therefore
greatly increase the bank's lending power. Any part of the proceeds of the rediscount In excess of that needed to maintain the
bank's 7 per cent legal reserve with the federal reserve bank
could be checked against and taken in cash, presumably in federal reserve notes, for the bank's till money.




FEDERAL RESERVE SYSTEM

5S

Funds so borrowed, when left on deposit with the
federal reserve bank, serve as legal reserve money
for the member banks. The making of such loans
to member banks is one of the chief functions of
federal reserve banks. Broadly speaking the
loans are of two kinds, rediscounts, and loans on
collateral. Let us consider briefly each of these
types of loans.
Rediscount
Federal reserve banks always stand ready to
rediscount in time of need eligible paper for member banks.
For the purpose of keeping the assets of federal reserve banks liquid, the law and the administrative regulations of the federal reserve
authorities place rigid limitations upon the kinds
of paper eligible for rediscount. These limitations have reference both to the length of time
the paper is to rim, and to the purpose for which
it is issued. As to time, notes rediscounted must
have a maturity at the time of rediscount of not
more than 90 days (exclusive of days of grace);
except that a limited amount of bills drawn for
agricultural purposes or based on live stock may
be rediscounted, provided they have a maturity
not exceeding six months (exclusive of days of
grace). As to the purpose for which the bills are




10

10 THE A B C OF THE

issued, the law limits rediscounts to two classes of
paper. They are: (1) Notes, drafts and bills of
exchange bearing the endorsement of a member
bank and "arising out of actual commercial transactions,'" that is, issued or drawn "for agricultural, industrial, or commercial purposes, or the
proceeds of which have been used, or are to be
used for such purposes"; and (2) Notes, drafts
and bills of exchange bearing the endorsement of
a member bank and issued or drawn for the purpose of carrying or trading in "bonds and notes
of the Government of the United States." Except for United States Government securities,
the law specifically prohibits the rediscounting
by federal reserve banks of paper issued or
drawn "for the purpose of carrying or trading in
stocks, bonds, or other investment securities."
Collateral Loans
The second type of loan is the discount of collateral notes of member banks. These notes must
be for periods not exceeding fifteen days, and the
only permissible collateral is "such notes, drafts,
bills of exchange, or bankers' acceptances as are
eligible for rediscount or for purchase by federal
reserve banks," and bonds or notes of the United
States Government. There was no provision in
the original act for collateral loans, but experi-




FEDERAL RESERVE SYSTEM

5S

ence soon showed that member banks frequently
wished to secure from federal reserve banks advances for brief periods, so brief that they were
reluctant to rediscount customers' paper for the
purpose. To meet the difficulty an amendment
to the federal reserve act was passed September
7, 1916, authorizing these short-time collateral
loans. The authority to make such loans proved
to be particularly useful in connection with
the financing by the banks of Liberty bond and
certificate of indebtedness purchases either for
themselves or for their customers—purchases
which were likely to involve heavy drain upon the
banks for very brief periods. During the years
1917, 1918, 1919, and 1920 these collateral loans
constituted by far the most important form of
advance made by federal reserve banks to member banks. The great bulk of them were secured
by United States certificates of indebtedness and
Liberty bonds. Since the summer of 1920,
however, there has been a great decline in the
amounts of short-time loans collateraled by the
public debt which are held by federal reserve
banks.
Contraction of Circulating Credit
So far we have been speaking of the elasticity
of deposit currency under the new banking sys-




10

10 THE A B C OF THE

tem in the direction of expansion in times of increasing currency demand. The contraction of
deposit currency, as soon as the need for it
falls off, is brought about by the pressure of
high discount rates, to which the pressure of the
graduated tax is added. This double pressure
encourages borrowers to pay off their loans.
This fact, and the increasing restrictions which
federal reserve banks place upon rediscounts as
money market conditions become easier, tend
to contract the circulation of deposit currency
and restore the reserves to a normal condition.
In this respect a great public responsibility
rests upon the federal reserve authorities to
conserve the banking strength of the country
in times of easy money, so that it can be called
upon in times of emergency.
There is no question but that the federal reserve system has added greatly to the elasticity of
both our deposit currency and our bank-note
currency.




C H A P T E R

VIII

DOMESTIC AND FOREIGN E X C H A N G E UNDER THE
FEDERAL RESERVE SYSTEM

We may now pass to the consideration of how
the federal reserve system is meeting the difficulties of the old banking regime as regards domestic and foreign exchange. Domestic exchange will be considered first.
Domestic Exchange
Under the old regime the collection and clearing of out-of-town checks for country banks was
handled largely by the banks in reserve and central reserve cities, which were the depositories of
the legal reserves of the country banks. The service of collecting these out-of-town checks was
rendered to the country bank as a partial compensation for the use of its reserve deposits at a
low rate of interest, and as a lure to secure other
business from the country bank, competition having been keen among large banks in money market centers for the accounts of out-of-town banks.
When Congress decided, therefore, that the sys-




67

10

10 THE A B C OF THE

tem of pyramiding the legal reserves of national
banks by permitting them to be deposited to a
large extent in other national banks was a bad
one and should be done away with, it was naturally forced to provide a machinery to take the
place of the reserve and central reserve city correspondent banks for the work of collecting outof-town checks. If the country bank was no
longer to be permitted to count a deposit with its
city correspondent as legal reserve money, but
was to be compelled to maintain its entire legal
reserve on deposit with its federal reserve bank,
it would naturally withdraw or at least greatly
reduce its deposit balance with its correspondent
banks. But under such circumstances who would
collect its out-of-town checks and otherwise serve
it in connection with out-of-town business? The
city bank, no longer holding the country bank's
reserve deposits, would no longer be disposed to
perform without charge these services for the
country bank; and further, having ceased to be
the country bank's reserve agent, the city bank
would be very likely to compete for some of the
country bank's most attractive business. Obviously if the new federal reserve banks were to
displace city correspondent banks as the holders
of the country banks' deposited reserves, they
should also perform for the country banks the




FEDERAL RESERVE SYSTEM

5S

service of collecting or clearing their out-of-town
checks.1 To this end the federal reserve act provides that the federal reserve board "may at its
discretion exercise the functions of a clearing
house for . . . federal reserve banks, or may
designate a federal reserve bank to exercise such
functions, and may also require each such bank to
exercise the functions of a clearing house for its
member banks" (Section 16). The same section
of the law also requires federal banks to "receive
on deposit at par from member banks or from
federal reserve banks checks and drafts drawn
upon any of its depositors, and when remitted by
a federal reserve bank, checks and drafts drawn
by any depositor in any other federal reserve
bank or member bank upon funds to the credit of
said depositor in said reserve bank or member
bank."
Member banks are permitted to make reasonable collection and exchange charges, to cover the
expenses involved in the collection and remittance
of funds. These charges, however, are subject
1 Dr. H. Parker Willis, formerly Secretary of the Federal Reserve
Board, states concisely the distinction between collecting and
clearing checks, as follows; "A check is said to be collected when
it is sent home to the bank on which it is drawn, and arrangement is made to remit the proceeds; it is said to be cleared when
the bank receiving it offsets it against checks in favor of the institution by which it is to be paid, and then collects or remits
only the balance, if any." The Federal Reserve, page 233.




70

THE A B C O F THE

to the regulation of the federal reserve board, and
may not in any case exceed 10 cents per $100 or
fraction thereof, based on the total of checks and
drafts presented at any one time. The law specifically provides that no such collection or exchange charges "shall be made against the federal reserve banks."
The problem of establishing a satisfactory
clearing and collection system was looked upon
as perhaps the most difficult and complicated one
confronting the federal reserve authorities in the
early days of the new system. A t first they
moved slowly and allowed the different reserve
banks a wide discretion in the matter of arrangements for the clearing and collection of checks.
Moreover, in most districts the utilization of the
clearing and collection system established by the
federal reserve banks was optional with member
banks. Some joined the system and many did
not. It early became evident that to be really
effective a clearing and collection system needed
to be approximately uniform in its workings
throughout the country and to embrace the largest possible number of banks; a system in
which a moderate number of banks utilized the
federal-reserve clearing and collection system and
a large number handled their checks in the old
way was unsatisfactory. I t meant a wasteful




FEDERAL RESERVE SYSTEM

5S

duplication of machinery analogous to that which
exists when a city has two separate telephone
services. After nearly two years of experimentation, therefore, the federal reserve board promulgated a clearing and collection system, which was
put into operation July 5, 1916, in all federal
reserve districts—a system whose privileges,
under certain limitations, were extended by an
amendatory act of June 21, 1917, to qualifying
banks which are not regular members of the
federal reserve system.
Present Clearing and Collection System
Briefly summarized, the main features of the
new plan, as revised to date (December, 1921)
are as follows:2
Each federal reserve bank exercises the functions of a clearing house in its district for member banks and for qualified non-member banks,
known as "clearing member banks." From such
banks in its district the federal reserve bank will
receive at par "checks drawn on all member and
clearing member banks and on all other nonmember banks, which agree to remit at par
through the federal reserve bank of their dis2 The Federal Reserve Board's revised regulations concerning
the clearing and collection of checks constitute "Regulation J,
Series of 1920," and are published in th Annual Report of the
Federal Reserve Board for 1920, pages 305-S06.




10

10 THE A B C OF THE

trict." Clearing and collection services for member and clearing member banks and for other federal reserve banks are also rendered by each federal reserve bank in the case of checks received
from outside the district, which are drawn upon
member and clearing member banks of the district and upon all non-member banks of the district, whose checks can be collected at par by
the federal reserve bank. These two provisions
make the field of the par clearing and collection
system coextensive with the United States and
provide a machinery for the handling of checks
received from practically all important points
without the district as well as from within the district. All banks belonging to the clearing system
are required to pay without deduction checks
drawn upon themselves wThen presented by a federal reserve bank. On October 15, 1921, there
were on the par list of the federal reserve clearing system 9,803 member banks and 18,388 nonmember banks,3 together representing 93 per cent
of the incorporated banks of the country in number, exclusive of mutual savings banks, but including almost all the commercial banking power
of the country, since the commercial banks remaining outside the system are for the most part
small ones. The 2,200 incorporated commercial
• Federal Reserve Bulletin, November, 1921, page 1S65.




FEDERAL RESERVE SYSTEM 5S
banks which are still refusing to remit at par to
the federal reserve bank for checks drawn upon
them are almost all situated in a half dozen
southern states. In October, 1921, the federal reserve clearing system was handling about 1,781,000 checks daily (exclusive of those forwarded to
other federal reserve banks, and their branches)
representing approximately $400,000,000, or a
sum equal to over a third of the total clearings of
all the clearing houses of the country.
The old evil previously described (pages 20-22)
of carrying the "float" as a part of a bank's legal
reserve is eliminated by a provision to the effect
that, although checks received by the federal reserve bank will be immediately credited (subject
to final payment) to the bank sending them, the
proceeds thereof will not be counted as part of
the minimum reserve, nor become available to
meet checks drawn against them until a sufficient
time has elapsed to allow for their actual collection. If the bank sending in checks is not to
be permitted to draw against the credit which
they create until a sufficient time has elapsed
for their collection, obviously the checks should
not be charged by the federal reserve bank
against the reserve account of the bank upon
which they are drawn until sufficient time has
elapsed "for the checks to have reached the mem-




10

10 THE A B C OF THE

ber bank and for returns in due course to have
reached the federal reserve banks."4 This is the
rule now in force.
If a bank's deposit at the federal reserve bank
is insufficient to cover its legal reserve requirement and in addition to meet an adverse balance,
which arises against it out of clearing operations,
it is authorized to ship currency or specie from
its own vaults at the expense of its federal reserve
bank in order to cover the deficiency. In case of
a deficient balance at the federal reserve bank,
the member bank, of course, also has the privilege of making good the deficiency by rediscounting eligible paper or by discounting with the federal reserve bank its own fifteen day notes secured by eligible collateral. If a member bank,
despite these facilities for maintaining its legal
minimum reserve, permits its reserve at the federal reserve bank to fall below this minimum, the
federal reserve board imposes as a basis penalty
a charge on the amount of the deficiency of two
per cent per annum above the 90-day discount
rate of the federal reserve bank of the district.
Progressively heavier penalties may be imposed
* See Third Annual Report of Federal Reserve Board, 191«,
pages 9-12.




FEDERAL RESERVE SYSTEM

5S

for subsequent deficiencies in the reserve of the
same member bank.
In handling items for member and clearing
member banks, a federal reserve bank acts as
agent only.
Under the federal reserve clearing and collection system checks are sent to federal reserve
banks and to member and clearing member banks
by the most direct routes, and the number of par
collection points in the United States is made
almost equal to the number of places of any considerable size where commercial banks are located. The result is that the new system is rapidly doing away with the old evil of routing
checks.
The cost of collecting and clearing checks for
member and clearing member banks is borne by
the federal reserve banks. For some time service charges of so much per item were imposed.
But these charges, so far as they relate to cash
items, were discontinued by an order of the federal reserve board effective June 15, 1918.®
Banks which formerly charged their customers excessive rates for collection are being forced
by competition or by the federal reserve board's
regulations to reduce their charges, while an increasing number of banks appear to be giving up
3

See Federal Reserve Bulletin, May 1, 1918, pages 371-373.




10

10 THE A B C OF THE

all collection charges on demand items. They
may, as a compensation, require customers to
carry larger balances, or they may find the expense a productive one as an item of advertising.
Recently the collection service has been extended to items other than checks such as promissary notes, trade bills, time drafts, coupons, acceptances and the like, an obvious need if the federal reserve banks are to serve member banks as
adequate substitutes for the member banks' former reserve agents. Such items, when payable at
places where the federal reserve banks have satisfactory arrangements for collecting checks
through banks, are collected by federal reserve
banks for member banks without any charge
other than any exchange charge that may be made
by the collecting bank. Upon items returned unpaid, however, there is imposed an additional
charge of 15 cents, with the object of preventing
the clogging of the federal reserve collection system with dunning drafts.
The Gold Settlement Fund
One serious difficulty of the old collection system, as we have seen (pages 22-23), was the need
of numerous and expensive shipments of currency back and forth over the country as the seasonal stresses in the trade demands for currency




FEDERAL RESERVE SYSTEM

5S

shifted from one section to another. The new
system absolutely eliminates the necessity of a
large proportion of these currency shipments and
both reduces the expense of those shipments
which do take place and lightens its burden by
distributing it.
The mechanism by which the necessity of a
large proportion of these currency shipments is
avoided is that of the Gold Settlement Fund, and
the separate but similar Federal Reserve Agents'
Fund.
The gold settlement fund, although
planned in its essentials early in 1914?, was not
established until June, 1915. The order of the
federal reserve board establishing this fund0 required each federal reserve bank to forward to
the treasury or the nearest sub-treasury of the
United States for credit to the account of the
gold settlement fund $1,000,000 in gold or gold
certificates, and in addition an amount at least
equal to its indebtedness due to all federal reserve banks. These sums are made payable to
the order of the federal reserve board. Each federal reserve bank is required to maintain a balance in the fund of not less than $1,000,000. As a
matter of fact all the banks carry balances very
many times as large as this minimum. Credit
on the books of the gold settlement fund is
counted as a part of a federal reserve bank's legal




10

10 THE A B C OF THE

reserve. The settlement of balances between
federal reserve banks is effected daily, through
the instrumentality of telegrams sent to the federal reserve board, by transfers of debits and
credits on the books of the gold settlement fund.
A separate fund similarly constituted is the
Federal Reserve Agents' Fund. Federal reserve
agents, it will be recalled, have large sums in
their custody, representing gold pledged with
them as security for federal reserve notes.
Through the machinery of the gold settlement
fund and the federal reserve agents' fund, transfers may be made among all the federal reserve
banks, between any federal reserve bank and any
federal reserve agent, and between any federal
reserve bank or any federal reserve agent and the
treasury of the United States.
By means of the gold settlement fund, and of
the other transfer facilities of the federal reserve
banks, these banks are now enabled to make telegraphic transfers of funds to any part of the
United States for their members without any
charge whatever. They have also been able to
inaugurate a system of federal reserve exchange
drafts, according to which a member bank may
draw special drafts on its federal reserve bank
for amounts not exceeding $5,000, which are re« Regulation L. Series of 1H5.




FEDERAL RESERVE SYSTEM

5S

ceivable for immediate availability at any other
federal reserve bank.
The gold settlement fund system of transfers
has almost eliminated the necessity of shipping
money (other than federal reserve notes) between federal reserve banks. On November 23,
1921, that fund amounted in round numbers to
$426 millions, while the federal reserve agents'
fund amounted to $1,811 millions, making a total
of $2,237 millions. The daily settlements of the
gold settlement fund alone usually amount to
over a billion dollars in a week. These operations involve very small changes in the ownership
of gold in the funds, sometimes less than 2 per
cent of their amount.
The federal reserve clearing and collection system is therefore providing a means of eliminating
the evils of the old system. Excessive collection
charges are rapidly becoming things of the past.
Banks are enabled to dispense with the necessity
of tying up large sums in scattered deposits with
correspondent banks at low rates of interest for
the purpose of securing for themselves adequate
facilities for the collection of checks. These deposits can now be brought home and the funds
loaned out at much better interest rates. The
routing of checks is being eliminated and the
"float" is being greatly reduced, all of which are




10

10 THE A B C OF THE

important gains to the public. Heavy currency
shipments are avoided, and the expenses of a
large part of the currency shipments that do take
place are assumed by the federal reserve banks
for the member banks. These economies that are
being realized by the new system are an important factor in the forces that have made possible the recent great reduction in the reserve requirements of American banks, a reduction which
involves a saving of many millions of dollars annually.
Foreign Exchange
The federal reserve law has brought about important reforms in the matter of financing our
foreign trade. The rediscount machinery created by our twelve federal reserve banks is doing
much toward developing an American discount
market. This development has been expedited by
the heavy demands for American funds on the
part of foreign nations, caused by the war and
by reconstruction needs and by the disruption of
foreign money markets. Much of our foreign
trade that was formerlyfinancedthrough letters
of credit, under which sterling bills were drawn, is
now being financed directly by means of dollar
exchange, namely, bills drawn on banks and business houses in the United States and payable in




FEDERAL RESERVE SYSTEM

5S

dollars. Banks are willing to buy such paper
drawn in connection with our import and export
trade, because there is now a ready market for
its sale and rediscount—a market created largely
by the federal reserve system. Furthermore,
bank acceptances in connection with foreign
trade are now legalized in the United States,
under certain restrictions, and importers may
now arrange with American banks to have their
foreign exporters draw bills in dollars directly
on the importer's bank in the United States;
while foreign importers may open credits in
American banks upon which American exporters may draw, the bills being accepted by the
American bank and sold in the American discount market.
Federal reserve banks have established agencies abroad, in England with the Bank of England; in France with the Bank of France; in the
Philippines, with the National Bank of the Philippines; in Italy with the Bank of Italy; in Japan
with the Bank of Japan; in Sweden with the
National Bank of Sweden; and in Norway with
the Bank of Norway. The foreign exchange
division created by the federal reserve board in
December, 1917, rendered valuable service during the war in stabilizing exchange both with our
allies and with neutrals.




10

10 THE A B C OF THE

Under the provisions of the federal reserve act,
national banks with a capital and surplus of a
million dollars or over may be authorized under
certain restrictions to establish branches abroad;
and many such branches have already been
established. National banks may furthermore
invest to an amount not exceeding 10 per cent
of their capital and surplus in the stock of banks
chartered in the United States and principally
engaged in international or foreign banking or
banking in American dependencies, or engaged
in such phases of international or foreign financial operations as may be necessary to facilitate
our foreign export trade. In this way a number of banks have been established which are
owned either wholly or in part by groups of
national banks.
In order to encourage American trade and
the investment of American capital in foreign enterprises, there was added to the Federal Reserve Act on December 24, 1919, an important
amendment popularly known as "the Edge
Amendment."1
This amendment authorizes
the organization of corporations "for the purpose of engaging in international or foreign
banking or other international or foreign financial operations." The field of operation extends
iThc amendment is given in full as Sec 25 (a) of the Federal Keserve A c t Appendix, p. 161.




FEDERAL RESERVE SYSTEM

5S

to insular possessions of the United States. Corporations organized under this amendment mayconduct their business either directly or through
the agency, ownership, or control of local institutions abroad. They may not carry on any part
of their business in the United States except such
as, in the judgment of the Federal Reserve
Board, shall be incidental to their international
or foreign business. The minimum capital of
these corporations is $2,000,000. In addition to
the right of receiving deposits outside of the
United States, they are specifically granted the
right "to issue debentures, bonds, and promissory
notes," but in no event may a corporation have
liabilities outstanding in the form of such obligations exceeding ten times its capital stock and
surplus.
There are two important respects in which corporations organized under this Edge Amendment
will be affiliated with the Federal Reserve system,
although these corporations cannot become regular member banks. In the first place, they operate under the supervision of the Federal Reserve
Board which is given by the law large powers of
examination and control.2 In the second place,
2 The federal reserve board on March 23, 1930, issued its Regulation K, Series of 1920, governing the organization and operation
of corporations organized under the Edge Amendment. See also
Annual Report of Federal Reserve Board for 1950, pages 25*26.




10

10 THE A B C OF THE

any national bank may invest in the stock of these
corporations, subject to the restriction that its
total investment in the stock of these corporations
and of other banks incorporated in the United
States for foreign business shall not exceed ten
per cent of the subscribing bank's capital and
surplus.
This Edge Amendment has been on the statute
books only about two years, and it is therefore too
early to say much concerning its workings. As
early as February 1921 two international financial corporations had been organized under the
Edge Amendment, one with a capital stock of
$2,100,000 and the other with a capital stock of
$7,500,000. More recently another such corporation has been organized with a capital stock of
$100,000,000.
As a result of the war and of recent changes
in our banking system, we are now financing
directly a large proportion of our foreign trade,
and while this proportion may decline in the
future, it will probably never go back' to the old
pre-war figures. As regards the financing at
home of our foreign trade, the federal
reserve system was established at the opportune time- It is proving to be a great influence in the internationalizing of American trade
and American finance.




CHAPTER IX
T H E FEDERAL RESERVE SYSTEM AND TIIE FEDERAL TREASURY

The fourth and last of the general defects of
the old banking system, which were discussed in
the early part of this book, was the defective organization of the old system from the standpoint
of the federal treasury. How is the federal reserve system remedying this defect?
The provisions of the federal reserve act concerning the deposit of government funds are in
section 15. They are: "The moneys held in the
general fund of the treasury, except the five per
centum fund for the redemption of outstanding
national-bank notes, and the funds provided in
this act for the redemption of federal reserve
notes may, upon the direction of the Secretary of
the Treasury, be deposited in federal reserve
banks, which banks, when required by the Secretary of the Treasury, shall act as fiscal agents of
the United States; and the revenues of the Government or any part thereof may be deposited in
st




10

THE A B C OF THE

such banks, and the disbursements may be made
by checks drawn against such deposits.
"No public funds of the Philippine Islands, or
of the postal savings,1 or any government funds,
shall be deposited in the continental United
States in any bank not belonging to the system
established by this act;2 provided, however, that
nothing in this act shall be construed to deny the
right of the Secretary of the Treasury to use
member banks as depositories."
Many of the advocates of the federal reserve
system believed that this section did not go far
enough. They believed that the practice of depositing government funds in thousands of
banks scattered over the country was a vicious
and expensive one, and wished the new law to
make the federal reserve banks the depositories
of practically all general funds, dispensing with
the use of individual banks as depositories and
ultimately with the independent treasury system.
It was felt by many, however, that the immediate adoption of such a plan would be moving too
rapidly and that it was undesirable to limit so
narrowly the Secretary of the Treasury, who is
*Tbe law was later amended so as to authorize* under certain
conditions, the deposit of postal sayings funds in banks not
members of the federal reserve system. See E. W. Kemmerer,
Postal Savings, pages 112-116.
2 But see pages 89-90.




FEDERAL RESERVE SYSTEM

5S

responsible for the safety of government funds.
The extent to which the Secretary of the Treasury should keep general funds in the federal reserve banks, in member banks, and in the subtreasuries was, therefore, left to his discretion.
There appears, however, to have been a widespread belief that the federal reserve banks would
become to an increasing extent the depositories of
federal funds, and that national banks and the
sub-treasuries would, as time went on, receive an
ever declining proportion of these funds. The
Secretary of the Treasury is a member of the
federal reserve board, and there is much to be
said in favor of the proposition that banks desiring government funds should present their claims
for advances to their federal reserve bank, and
should receive such funds only by the ordinary
method of rediscount. This would simplify the
problem, remove from the Secretary of the Treasury the onerous task of apportioning funds
among thousands of individual banks, and discourage the banks from depending upon the Secretary of the Treasury as a sort of grandfather
for aid in time of need. The federal reserve
bank, which is having continual dealings with all
its member banks, would presumably be in a better position to judge the comparative needs of
different banks than would the Secretary of the




88

THE A B C O F THE

Treasury, Moreover, how could a federal reserve bank place adequate pressure on member
banks to conserve their strength in time of need,
by advancing discount rates, contracting loans,
etc., if the member banks could " g o around" the
federal reserve bank and the federal reserve board
and get funds directly from the Secretary of the
Treasury?
For these and other reasons it was expected
that the Secretary of the Treasury, in the exercise of the discretion granted him by the law,
would deposit his funds to a large and increasing
degree in federal reserve banks. Events pointed
clearly in this direction prior to our entrance into the war. Governor Strong of the New York
Federal Reserve Bank writes me: "The first deposit of government funds made by the treasury
with the federal reserve banks was on September
4, 1915, when certain special deposits were made
in a number of banks. Later, arrangements
were made to have the collectors of customs
and collectors of internal revenues in the twelve
federal reserve bank cities deposit all of their
funds in the federal reserve banks and as a matter of fact, for a long period prior to the passage of the bond act of April 24, 1917, which
altered the status of public deposits, the federal
reserve banks had been receiving the principal




FEDERAL RESERVE SYSTEM

5S

revenues of the Government outside of postal
funds and had been paying a very large proportion of government checks and warrants. The
limitation of this fiscal agency service in the collection of revenues and payment of checks to the
twelve federal reserve bank cities was, of course,
due to the inconvenience of extending these operations to places where federal reserve banks had
not yet established branches. The plan therefore
of actively employing the federal reserve banks
asfiscalagents had been put into operation some
time before the first bond bill was passed and was
an important and very active part of the work
of the reserve banks almost immediately after
the arrangement was established."
The abnormal conditions, however, created by
the European War set up obstacles in the way of
the Government's discontinuing the use of individual banks as depositaries of government funds.
During the early days of the war the heavy demands for funds in America to meet obligations
due abroad and the frenzied condition of the
money markets throughout the world naturally
prevented the inauguration of a policy of withdrawing government funds from individual
banks and depositing them in the federal reserve
banks. Later the heavy buying in this country
by European belligerents discouraged such »




10

THE A B C OF THE

policy. Such was .not a time for withdrawing
large sums from individual banks. Finally our
own entrance into the war and thefloatingof our
huge Liberty loans rendered a transfer of this
kind out of the question. In the interest of reducing to a minimum the disturbance to the money
market involved in thefloatingof these loans, the
Government wisely adopted the policy of keeping
the funds widely scattered and to as large an extent as practicable in the banks of the communities where they were received. The result was that
during 1917 and 1918 there were more government
funds in individual banks than at any previous
period in our history. The deposit of government funds, moreover, is no longer limited to
banks that are members of the federal reserve system, since the law under which all government
bonds and certificates of indebtedness have been
issued since we entered the war provides for the
deposit of their proceeds in qualified national
banks and state banks and trust companies
against certain approved collateral. Numerous
nonmember banks therefore have qualified as
depositories in connection with our Liberty loans
and issues of certificates of indebtedness.
What will be the Government's policy in this
matter after the abnormal conditions resulting
from the war have passed, of course, it is impossible to say at this time.




FEDERAL RESERVE SYSTEM

5S

A provision in the appropriation act of May
29, 1920, abolished the subtreasuries from and
after July 1, 1921. Several of them were closed
before this date. The law authorized the Secretary of the Treasury to transfer any or all of the
duties of the subtreasuries to the Treasurer of the
United States, or the mints or assay offices, or to
utilize any of the federal reserve banks for the
purpose of performing any or all of such duties
and functions. Pursuant to regulations made by
the Secretary of the Treasury under the authority of this act, all the functions and duties previously performed by the nine subtreasuries, with
two exceptions, have been transferred to the federal reserve banks. The two exceptions are the
issuance of gold order certificates on gold deposits
—a function which will be performed by the
Treasurer of the United States—and "the keeping in custody of reserve and trust funds consisting of gold coin and bullion and standard silver
dollars securing gold and silver certificates respectively and held against United States notes."3
Everyone knows what happened in regard to
receipts and expenditures of public moneys during the years 1917-18-19. The figures jumped to
proportions never dreamed of before. The public
debt in 1916 was approximately $1,000,000,000,
3

Seventh Annual Report Federal Reserve Board, pages 75-73.




10 THE A B C OF THE
and in 1919 it was $24,500,000,000; internal
revenue receipts increased from $513,000,000 to
over $3,800,000,000 in 1919, and to approximately $5,400,000,000 in 1920; ordinary government disbursements from $724,000,000 in 1916
to over $15,000,000,000 in 1919. Liberty bond
issues and certificate of indebtedness issues combined amounted to over $65,000,000,000 up to
October 31, 1920. The total amount of money
in circulation in this country in 1919 was only
between $5,000,000,000 and $6,000,000,000 and
the federal Government was receiving over its
own counters in one year five to six times the total
amount of money in circulation in the country.
It could not hold this money out of circulation.
As fast as it received the money, it put it back
into circulation and did all that it could do to
avoid withdrawing it from circulation again
sooner than it needed it. The enormous fiscal
operations of the Government during this period
were very largely handled by the federal reserve
banks. During the year 1919 there passed
through the federal resex-ve banks and their
branches in round numbers thirty-three million
government checks, amounting to $14,500,000,000.
Deposits were kept as nearly as possible in the




FEDERAL RESERVE SYSTEM 5S
places where the funds were received by the Government. The work of handling this fell largely
on the twelve federal reserve banks. The Government had enough to do and it passed this task
on to the newly created federal reserve banks. So
the federal reserve banks were asked to select the
banks that were to handle the government funds,
to allot deposits to the banks in proper amounts;
to examine the collateral that such banks offered;
to care for this collateral; to withdraw funds from
the bank as they were needed by the Government
and to allot new funds. Practically all that work
in connection with the depository banks' enormous deposits and withdrawals of government
funds fell upon the federal reserve banks.
Then the Government, in trying to avoid
money market disturbances, adopted a number
of other devices. For example, in order to minimize the disturbances due to the withdrawal of
funds representing payments of income taxes and
excess profits taxes, arrangements were made in
New York whereby the seven collectors of internal revenue in the district deposited their receipts
in cash, checks and certificates of indebtedness
with the federal reserve bank, and then the federal reserve bank took all the checks which were
drawn on any of the depository banks in the district, sorted them out and deposited them right




10

10 THE A B C OF THE

back in the depository bank from which they
came. When it received from the collector of
internal revenue a bunch of checks, coming, say,
from Rochester, it sorted out those checks and
sent them back for deposit in the proper banks in
Rochester.
Another device, and a most important one, used
to prevent disturbances in the money market was
the device of issuing certificates of indebtedness.
These are short-time government loans paying
low rates of interest. There were sometliing like
forty-one series of them issued up to the middle
of 1919, and eighty-four series in all issued up to
June 15, 1921. The amounts issued aggregated
up to June 1921 forty-four billion dollars. These
certificates were issued mostly in anticipation of
liberty loans and in anticipation of receipts from
income and excess profits taxes.
Let us take the first. The object of issuing
certificates in anticipation of liberty loans was
a twofold one. In thefirstplace, the Government
needed the money and needed it promptly. It
took time to get money in from Liberty bonds, and
so in anticipation of these funds the Government
borrowed money by the issuing of these shorttime certificates with the expectation of paying
back the money so borrowed as soon as the Liberty
bonds were sold. It thus got money months in




FEDERAL RESERVE SYSTEM

5S

advance of its receipts from Liberty bond sales
and paid off the certificates when the Liberty
bond money came in. In the second place, by this
procedure the Government could prevent Liberty
bond sales from greatly disturbing the money
market. If it should have thrown on the market
billions of dollars in Liberty bonds and have received payment for them in a short period of
time, it would have tied up the money market.
Here was a procedure whereby these receipts
were spread out over a considerable period of
time.
The Government received its money when it
issued these certificates and then by the time the
Liberty bond receipts began to come in the certificates were due. The Government had to pay the
public on the certificates at the same time the
public were to pay the Government for the Liberty
bonds. Government receipts and disbursements
were synchronized and we avoided disturbances
that would otherwise have arisen from the periodical withdrawing of funds and the periodical
pumping of other funds into circulation. The
same principle was applied in connection with
the tax certificates. People knowing that they
would have taxes due in June would buy these
certificates, receiving on them a low rate of interest, months ahead of the time the taxes were




10

10 THE A B C OF THE

due. The purchaser of the certificates could pay
his taxes when they fell due by means of the certificates; or, if he held the certificates solely as an
investment, the Government would pay off the
certificates at the time the public was paying its
taxes, the one cancelling the other. One of the
finest pieces of work that this Government did was
the synchronizing of these disbursements and receipts during the war so that one tended to cancel the other. These heavy transactions fell on
the federal reserve banks.
The sale of the certificates of indebtedness was
another task entrusted to the federal reserve
banks, likewise the allotment of them to the different banks when they were subscribed for, their
payment and the depositing of the proceeds. The
great work offloatingthe Liberty loans fell to no
small degree upon the twelve federal reserve
banks. They were the first institutions called in
to help organize this work. It was the federal
reserve banks that were the headquarters of the
publicity campaigns. It was they that distributed the bonds to a very large extent, that converted the bonds, that handled the interest
payments and that made the advances to the
banks in the way of loans, which made possible
the buying of so many of the bonds.




FEDERAL RESERVE SYSTEM

5S

Thefiguresof liberty loan transactions went to
heights that most people had no idea of. The
total volume of bonds exchanged during 1918 by
the New York federal reserve bank alone was
over $1,100,000,000, and the number of pieces
handled was over four million odd received and
one million six hundred thousand paid out.
There are a number of other ways in which the
federal reserve banks assisted the Government as
fiscal agents. There was the work of the Capital
Issues Committee and of the War Finance Corporation. Federal reserve banks played an important part in rendering fiscal aid to the government in advancing money. More than once a
federal reserve bank found that the Government's
account was short—in the language of the street
there was a government overdraft—and the Government met that overdraft by a temporary certificate, a loan for a day or two. In the New
York federal reserve bank alone in one year the
total amount of those short-time certificates issued
was $3,000,000,000. The banks helped the Government also in the floating of the war savings
stamps and thrift stamps. In the earlier days
that work was left to other hands; but in later
days it was entrusted to the federal reserve banks.
The Secretary of the Treasury said in his report of 1918: "Much of the great work has been




10

10 THE A B C OF THE

done by the federal reserve banks. The federal
reserve system has been of incalculable value
during this period of war financing on the most
extensive scale ever undertaken by any nation in
the history of the world. It would have been impossible to carry through these unprecedented
financial operations under our old banking system. Great credit is due to the federal reserve
banks for their broad grasp of the situation and
their intelligent, comprehensive cooperation."
One shudders when he thinks what might have
happened if the war had found us with our former decentralized and antiquated banking system. Think of pouring the crisis of 1914-1918
into bottles that broke with the crisis of 19071




APPENDIX A
COMBINED BALANCE SHEET OF T W E L V E FEDERAL RESERVE BANKS, NOVEMBER SO, 1921,
AND BRIEF EXPLANATIONS OF T H E
VARIOUS ITEMS
Resources

Gold coin and certificates in vault1
Gold settlement fund—federal reserve
board2
Gold with foreign agencies8
Total gold held by banks
Gold with federal reserve agents4
Gold redemption fund5
Total gold reserve

465,236,000

954,153,000
1,779,605,000
115,639,000
2,849,397,000

Legal tender notes, silver, etc.*
Total reserves

139,745,000
2,989,142,000

Bills discounted:7
Bills secured by government war obligations
"
All others
Bills bought in open market8
Total bills on hand

476,360,000
705,941,000
72,954,000
1,255,255,000

U. S. Government bonds and notes9
U. S. Government certificates of indebtedness10 *
Onc-vcar certificates (Pittman act)

AH others

Municipal warrants11

32,253,000

000,000

' J} o S
9

Total earning assets




$488,917,000

1,459,866,000
99

APPENDIX A

100

Bank premises12
Uncollected items1"
Five per cent redemption fund against federal reserve bank notes14
All other resources15
Total resources

33,241,000
531,872,000
7,941,000
19,334,000
5,044,396,000

Liabilities

Capital paid-in10
Surplus17
Reserved for govt, franchise taxls
Deposits:
Government10
Member banks—reserve account20
All other21
Total

103,104,000
213,824,000
55,119,000
45,913,000
1,670,362,000
26,555,000
1,742,830,000

items22

Deferred availability
Federal reserve notes in actual circulation23
Federal reserve bank notes in actual circulation—net liability24
All other liabilities25
Total liabilities

162,795,000
2.366,006,000
75,862,000
24,856,000
$5,044,396,000

Ratio of gold reserves to deposit and federal reserve note liabilities combined
Ratio of total reserves to deposit and federal reserve note liabilities combined
Ratio of total reserves to federal reserve notes in
circulation after setting aside 3 5 % against
deposit liabilities

69.4/c
72.7%

100.6%

iThis represents reserve money held in the vaults of federal
reserve banks against deposits and federal reserve notes. Sec
text, pp. 53, 59-fil; and Act, sec. 1G, par. 3.
2 This is a gold fund held in the United States treasury by the
federal reserve board, in trust for the federal reserve banks, ana




APPENDIX A

101

the money it contains is transferred from one federal reserve
bank to another or to or from the treasurer of the United States
by means of debits and credits on books kept by the federal reserve board in Washington. Gold held in the fund to the credit
of any federal reserve bank is counted as lawful reserve money
against federal reserve notes or deposits. See text, pp. 76-79; .and
Act, sec. 2, 3d, and 4th pars, from last
a Federal reserve banks have established agencies in a number
of foreign countries, and, as a matter of convenience as well as
to avoid shipping risks and expenses, some of the federal reserve
banks from time to time keep gold in the vaults of these foreign
agencies. See text, p. 81; and Act, sec. 11, par. (c).
«This is gold deposited with federal reserve agents as collateral
for the issue of federal reserve notes. See text, pp. 55-54; and
Act, sec. 16, pars. S-7.
5 The gold redemption fund here mentioned is a fund held by
the treasurer of the United States for the redemption of federal
reserve notes in gold on demand. It is made up of deposits of
gold from each federal reserve bank. Each bank's deposit must
be sufficient in the judgment of the Secretary of the Treasury for
the redemption of such federal reserve notes of the bank as are
likely to be presented at the treasury for redemption; but in no
case can the fund be less than five per cent of the total amount
of notes issued less the amount of gold held by the federal reserve agents as collateral security for notes. Gold in the redemption fund is counted as part of the legal reserve required
against federal reserve notes. See text, pp. 52-51; and Act, sec.
16, par. 4.
6 This item covers all kinds of money held by federal reserve
hanks except gold coin, gold certificates, federal reserve notes
and federal reserve hank notes.
7 This represents advances made by federal reserve banks to
member banks. It consists of short-time bills, notes, and bank
acceptances, which have been rediscounted for member banks,
and of one to fifteen clay loans made to member banks against
their notes collateralcd \ v United States government securities and by commercial paper. The Federal Reserve Bulletin
of each month gives an analvsis of the kinds and maturities of
the paper held. Sec text, pp. 62-<>5; Act, sec. 13, pars.
and
Regulation A of Regulations issued by the federal reserve board,
Series of 1920.
8 The kinds of open-market operations which federal reserve
banks may carry on arc described in section 14 of the A c t See
also text, pp. '13-15; and Regulation B of Regulations issued by
the federal reserve board, Scries of 1920.
0 These are chicflv Liberty bonds and Victory notes owned by
federal reserve banks.




102

APPENDIX A

10 These are usually short-time treasury certificates of indebtedness issued in anticipation of taxes or as backing for federal
reserve bank notes under the Pittman Act. See text, pp. 52-53;
89-90; 93-9G.
n These municipal warrants are bought by federal reserve banks
as investments in the open market. See Act, sec. 14, par. (b) and
text, pp. 43 and 44, note 8.
12 Many of the federal reserve banks own their own premises
and most of the others are planning to do so. For particulars,
see Seventh Annual Report, Federal Reserve Board, pp. 93-97.
These are items in process of collection, chiefly under the
federal reserve clearing and collection system. Sec text, pp. 19-23;
Act, sec. 16, pars. 14-18; and Regulation J of Regulations issued
by federal reserve board, Series of 1920.
1* Federal reserve bank notes are bond-secured bank notes, issued by federal reserve banks, in place of bond-secured national
bank notes and silver certificates retired. (See note 24 below.)
Except for the fact that they are issued by federal reserve banks,
they are essentially like national bank notes. As in the case of
the latter, the law requires that, for the purpose of their redemption in "Washington, a five per cent redemption fund be
maintained by the issuing bank in the United States treasury.
See text, pp. 51-52; Act, sec. 18, par. 6; Act of June 20, 1874,
sec. S; and Act of April 23, 1918, sees. 5-8 (Appendix E ) .
1 This represents the net debit balance on a variety of ac®
counts, including profit and loss account, gross earnings account,
expense account, depreciation account, suspense account, unearned
discount account, and the like.
i«The law requires every member bank to subscribe to stock
in the federal reserve bank of its district to the amount of six
per cent of the member bank's paid-in capital and surplus. One
half of this subscription has already been paid and the other
half is subject to the call of the federal reserve board. This
item in the balance sheet accordingly represents three per cent
of the combined paid-in capital and surplus of all member banks.
See text, p. 31; and Act, sec. 2, par. 3.
IT This surplus has been accumulated out of profits. See text,
p. 60, note 5; and Act, sec. 7, par. 1.
is See text, p. 60, note 5.
is The law authorizes the Secretary of the Treasury to use federal reserve banks as depositaries of public funds, except of certain specified trust funds. The Secretary began depositing public funds in federal reserve banks as early as September 4, 1915,
and since that time has continually and extensively employed
federal reserve banks as depositaries. See text, pp. 85-91; and
Act, sec. 15; also Act of April 24, 1917, sec. 7; and Act of
September 24, 1917, sec. 8.
20 Member banks are required by law to keep their entire legal
reserves on deposit in the federal reserve bank of their district
See text, pp. 36-39; and Act, sec. 19.




APPENDIX A

103

21 This covers deposit credits of certain non-member banks in
the United States, of certain foreign banks of which the federal
reserve banks are the American agencies, and of certain foreign
governments. Sec text, pp. 72-73, 81-84; Act, sec. 14, par. ( e ) ; and
Regulation J of Regulations issued by the federal reserve board,
Series of 1920.
22 These are liabilities of federal reserve banks to member
banks and clearing-member banks arising out of the federal reserve clearing and collection system. They represent items in
process of collection, the proceeds of which are not yet available
to be drawn upon by the creditor banks. See text, pp. 71-76; and
references cited in note 13 above.
23 This item represents the total amount of federal reserve
notes issued to the federal reserve banks and now outstanding
(exclusive of the amount held in the vaults of the federal reserve
banks. See text, pp. 52-58; and Act, sec. 16.
These are the federal reserve bank notes described above in
note 14. The net liability represents the total amount outstanding less the amount of cash deposited with the treasurer of the
United States for the retirement of such notes. See text, p, 52;
Act of March 4, 1907, sec. 4 amending Act of July 12, 1882.
25 This represents the net credit balance on a variety of miscellaneous accounts. It includes the excess of earned and unearned discount and interest over expenses, and certain unproductive assets. Compare note 15 above.




APPENDIX B
FEDERAL

RESERVE

(APPROVED D E C . 2 3 ,
As

amended

Aug.

4, 1014

225);

Aug.

15,

252);

Mar.

3,

03);

Sept.

7,

June

402);

21,

1014

(38

Stat.,

(38

Stat.,

(<?£
2026'

(3.9

S/af.,

1017

(40

Stat.,

W W ;

DF-C.

1021;

Chap.

June

601;

Chap.
Chap.

752;

Chap.

Chap.

30);

2^2-9; &Yjif. J 7,

J .<);/);

and

682;

Ste/.,

2,926'; 3/arr/i
27,

ACT

1913)

1U20;

lJf,

Feb.

J 1*21.

An Act 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*
Be

it

enacted

Representatives

by
of

the

the

Senate

United

and
States

House
of

of

America

in Congress assembled,
That the short title of
this Act shall be the "Federal Reserve Act."
Wherever the word "bank" is used in this
Act, the word shall be held to include State
Definitions bank, banking association, and trust company,
' terms.
except where national banks or Federal reserve
banks are specifically referred to.
The terms "national bank" and "national
banking association" used in this Act shall be
held to be synonymous and interchangeable.
The term "member bank" shall be held to mean
any national bank, State bank, or bank or trust
company which has become a member of one
of the reserve banks created by this Act. The
term "board" shall be held to mean Federal Re-




104

105

APPENDIX A
serve Board; the term ''district" shall be held
to mean Federal reserve district; the term "reserve bank" shall be held to mean Federal reserve bank.
federal

reserve

districts

Sec. 2. As soon as practicable, the Secretary of the Treasury, the Secretary of Agriculture and the Comptroller of the Currency, acting as "The Reserve Bank Organization Committee/' shall designate not less than eight nor
more than twelve cities to be known as Federal
reserve cities, and shall divide the continental
United States, excluding Alaska, into districts,
each district to contain only one of such Federal reserve cities. The determination of said organization committee shall not be subject to review except by the Federal Reserve Board
when organized: Provided, That the districts
shall be apportioned with due regard to the convenience and customary course of business and
shall not necessarily be coterminous with any
State or States. The districts thus created may
be readjusted and new districts may from time
to time be created by the Federal Reserve
Board, not to exceed twelve in all. Such districts shall be known as Federal reserve districts
and may be designated by number. A majority
of the organization committee shall constitute a
quorum with authority to act.
Said organization committee shall be authorized to employ counsel and expert aid, to take
testimony, to send for persons and papers, to
administer oaths, and to make such investigation as may be deemed necessary by the said
committee in determining the reserve districts
and in designating the cities within such districts where such Federal reserve banks shall be
severally located. The said committee shall su-




Dctenainaof

dis*

106

APPENDIX A

pervise the organization in each of the cities
designated of a Federal reserve bank, which
shall include in its title the name of the city
in which it is situated, as "Federal Reserve
Bank of Chicago."
Under regulations to be prescribed by the
banks 1 ^cqufr? organization committee, every national banking
ed to join sys- association in the United States is hereby reb C a n k s*and quired, and every eligible bank in the United
5S? pcmitfed States an( * ^ e r y trust company within the Disto join.
trict of Columbia, is hereby authorized to signify in writing, within sixty days after the passage of this Act, its acceptance of the terms and
provisions hereof. When the organization committee shall have designated the cities in which
Federal reserve banks are to be organized, and
fixed the geographical limits of the Federal reserve districts, every national banking association within that district shall be required within
thirty days after notice from the organization
committee, to subscribe to the capital stock of
such Federal reserve bank in a sum equal to six
per centum of the paid-up capital stock and surplus of such bank, one-sixth of the subscription
to be payable on call of the organization c o m m i t •criptions
tee or of the Federal Reserve Board, one-sixth
within three months and one-sixth within six
months thereafter, and the remainder of the subscription, or any part thereof, shall be subject
to call when deemed necessary by the Federal
Reserve Board, said payments to be in gold or
gold certificates.
The shareholders of every Federal reserve
Double 1U- bank shall be held individually responsible,
hiSSetl* ,tOCk" e ( l u a l l y a n d ratably, and not one for another, for
all contracts, debts, and engagements of such
bank to the extent of the amount of their subscriptions to such stock at the par value thereof
in addition to the amount subscribed, whether




APPENDIX A

107

such subscriptions have been paid up in whole
or in part, under the provisions of this Act.
Any national bank failing to signify its acceptance of the terms of this Act within the
sixty days aforesaid, shall cease to act as a reserve agent, upon thirty days' notice, to be given
within the discretion of the said organization
committee or of the Federal Reserve Board.
Should any national banking association in
Nationthe United States now organized fail within
hanks not
one year after the passage of this Act to become t^m"* forfeit
a member bank or fail to comply with any of their dm***the provisions of this Act applicable thereto, all
of the rights, privileges, and franchises of such
association granted to it under the national-bank
Act, or under the provisions of this Act, shall
be thereby forfeited. Any noncompliance with
or violation of this Act shall, however, be determined and adjudged by any court of the
United States of competent jurisdiction ill a
suit brought for that purpose in the district or
territory in which such bank is located, under
direction of the Federal Reserve Board, by the
Comptroller of the Currency in his own name
before the association shall be declared dissolved. In cases of such noncompliance or violation, other than the failure to become a member bank under the provisions of this Act, every a
director who participated in or assented to the with act.
same shall be held liable in his personal or individual capacity for all damages which said
bank, its shareholders, or any other person shall
have sustained in consequence of such violation.
Such dissolution shall not take away or impair any remedy against such corporation, its
stockholders or officers, for any liability or penalty which shall have been previously incurred.
Should the subscriptions by banks to the stock Jtodc^ta be
of said Federal reserve banks or any one or d c r
certain
more of them be, in the judgment of the organi- contm^exicie*.




APPENDIX A

108

U . S.
ernment

Govmay

Itodclf5banks
and public fail
adequately. C

zation committee, insufficient to provide the
amount of capital required therefor, then and in
that event the said organization committee may,
under conditions and regulations to be prescribed by it, offer to public subscription at par
such an amount of stock in said Federal reserve
banks, or any one or more of them, as said committee shall determine, subject to the same conditions as to payment and stock liability as provided for member banks.
No individual, copartnership, or corporation
other than a member bank of its district shall be
permitted to subscribe for or to hold at any time
more than $25,000 par value of stock in any
Federal reserve bank.
Such stock shall be
known as public stock and may be transferred
on the books of the Federal reserve bank by the
chairman of the board of directors of such bank.
Should the total subscriptions by banks and
the public to the stock of said Federal reserve
banks, or any one or more of them, be, in the
judgment of the organization committee, insufficient to provide the amount of capital required
therefor, then and in that event the said organization committee shall allot to the United States
such an amount of said stock as said committee
shall determine. Said United States stock shall
be paid for at par out of any money in the Treasury not otherwise appropriated, and shall be
held by the Secretary of the Treasury and disposed of for the benefit of the United States in
such manner, at such times, and at such price,
not less than par, as the Secretary of the Treasury shall determine.
Stock not held by member banks shall not be
entitled to voting power.
The Federal Reserve Board is hereby empowered to adopt and promulgate rules and regulations governing the transfers of said stock.




APPENDIX A

109

No Federal reserve bank shall commence
business with a subscribed capital less than $4,000,000. The organization of reserve districts
and Federal reserve cities shall not be construed
as changing the present status of reserve cities
and central reserve cities, except in so far as
this Act changes the amount of reserves that
may be carried with approved reserve agents located therein. The organization committee shall
Expenses of
have power to appoint suclrassistants and incur c^minee*
such expenses in carrying out the provisions of
this Act as it shall deem necessary, and such
expenses shall be payable by the Treasurer of
the United States upon voucher approved by the
Secretary of the Treasury, and the sum of $100,000, or so much thereof as may be necessary, is
hereby appropriated, out of any moneys in the
Treasury not otherwise appropriated, for the
payment of such expenses.
branch

offices

Sec. 3.1 The Federal Reserve Board may
permit or require any Federal reserve bank to
establish branch banks within the Federal reserve district in which it is located or within the
district of any Federal reserve bank which may
have been suspended. Such branches, subject
to such rules and regulations as the Federal Reserve Board may prescribe, shall be operated
under the supervision of a board of directors to
consist of not more than seven nor less than
three directors, of whom a majority of one shall
be appointed by the Federal reserve bank of the
district, and the remaining directors by the Federal Reserve Board. Directors of branch banks
shall hold office during the pleasure of the Federal Reserve Board.
1 As amended by act approved June 21, 1917 (40
Stat., chap. 32).




APPENDIX A

110

federal reserve

banks

Sec. 4.2 When the organization committee
shall have established Federal reserve districts
as provided

in section

frvo

of

this

Act,

&

cerli&-

ciate shall be filed with the Comptroller of the
Currency showing the geographical limits of
such districts and the Federal reserve city designated in each of such districts. The Comptroller of the Currency shall thereupon cause to
be forwarded to each national bank located in
fo*WmmS5?- ^ a c h district, and to such other banks declared
ship.
to be eligible by the organization committee
which may apply therefor, an application blank
in form to be approved by the organization committee, which blank shall contain a resolution to
be adopted by the board of directors of each
bank executing such application, authorizing a
Subscription to the capital stock of the Federal
Reserve bank organizing in that district in accordance with the provisions of this Act.
When the minimum amount of capital stock
prescribed by this Act for the organization of
any Federal reserve bank shall have been subCertificates Scri bed and allotted, the organization committee
of organiza*
shall designate any fivs banks of those whose
tlon*
applications have been received, to execute a certiorate of organization,

&nd thereupon

the banks

so designated shall, under their seals, make an
organization certificate which shall specifically
state the name of such Federal reserve bank,
the territorial extent of the district over which
the operations of such Federal reserve bank are
to be carried on, the city and State in which
said bank is to be located, the amount of capital
stock and the number of shares into which the
same is divided, the name and place of doing
business of each bank executing such certificate,
2 As amended by acts approved June 21, 1917 (40
Stat, chap. 33), and Sept. 36, 19ia




APPENDIX A
and of all banks which have subscribed to the
capital stock of such Federal reserve bank and
the number of shares subscribed by each, and
the fact that the certificate is made to enable
those banks executing same, and all banks which
have subscribed or may thereafter subscribe to
the capital stock of such Federal reserve bank,
to avail themselves of the advantages of this
Act
The said organization certificate shall be acknowledged before a judge of some court of record or notary public; and shall be, together
with the acknowledgment thereof, authenticated
by the seal of such court, or notary, transmitted
to the Comptroller of the Currency, who shall
file, record and carefully preserve the same in
his office.
Upon the filing of such certificate with the
Comptroller of the Currency as aforesaid, the serve
said Federal reserve bank shall become a body
corporate, and as such, and in the name designated in such organization certificate, shall have
power—
First. To adopt and use a corporate seal.
Second. To have succession for a period of
twenty years from its organization unless it is
sooner dissolved by an Act of Congress, or unless its franchise becomes forfeited by some violation of law.
Third. To make contracts.
Fourth. To sue and be sued, complain and
defend, in any court of law or equity.
Fifth. To appoint by its board of directors
such officers and employees as are not otherwise
provided for in this Act, to define their duties,
require bonds of them and fix the penalty thereof, and to dismiss at pleasure such officers or
employees.
Sixth. To prescribe by its board of directors,




111

bank*,

1 %%

APPENDIXB125

by-laws not inconsistent with law, regulating the
manner in which its general business may be
conducted, and the privileges granted to it by
law may be exercised and enjoyed.
Seventh. To exercise by its board of directors,
or duly authorized officers or agents, all powers
specifically granted by the provisions of this
Act and such incidental powers as shall be necessary to carry on the business of banking withFederal
re- i n the limitations prescribed by this Act.
bank
notes
Eighth. Upon deposit with the Treasurer of
the United States of any bonds of the United
States in the manner provided by existing law
relating to national banks, to receive from the
Comptroller of the Currency circulating notes in
blank, registered and countersigned as provided
by law, equal in amount to the par value of the
bonds so deposited, such notes to be issued
under the same conditions and provisions of law
as relate to the issue of circulating notes of national banks secured by bonds of the United
States bearing the circulating privilege, e x c e p t
that the issue of such notes shall not be limited
to the capital stock of such Federal reserve
bank.
But no Federal reserve bank shall t r a n s a c t
any business except such as is incidental and
necessarily preliminary to its organization until it has been authorized by the Comptroller of
the Currency to commence business under the
provisions of this A c t
boa^'MecEvery Federal reserve bank shall be contors.
ducted under the supervision and control of a
board of directors.
The board of directors shall perform the duties usually appertaining to the office of directors of banking associations and all such duties
as are prescribed by law.
Said board shall administer the affairs of said




APPENDIX B

126

bank fairly and impartially and without discrimination in favor of or against any member
bank or banks and shall, subject to the provisions of law and the orders of the Federal Reserve Board, extend to each member bank such
discounts, advancements and accommodations as
may be safely and reasonably made with due
regard for the claims and demands of other
member banks.
Such board of directors shall be selected as
constitution
hereinafter specified and shall consist of nine j[ rcc ^ s rd o !
members, holding office for three years, and divided into three classes, designated as classes
A, B, and C.
Class A shall consist of three members, who
shall be chosen by and be representative of the
stock-holding banks.
Class B shall consist of three members, who
at the time of their election shall be actively engaged in their district in commerce, agriculture
or some other industrial pursuit.
Class C shall consist of three members who
shall be designated by the Federal Reserve
Board. When the necessary subscriptions to
the capital stock have been obtained for the organization of any Federal reserve bank, the
Federal Reserve Board shall appoint the class
C directors and shall designate one of such directors as chairman of the board to be selected.
Pending the designation of such chairman, the
organization committee shall exercise the powers and duties appertaining to the office of
chairman in the organization of such Federal
reserve bank.
No Senator or Representative in Congress
shall be a member of the Federal Reserve Board
or an officer or a director of a Federal reserve
bank.
No director of class B shall be an officer, director, or employee of any bank.




1 %%

APPENDIX B 127

No director of class C shall be an officer, director, employee, or stockholder of any bank.
Directors of class A and class B shall be
chosen in the following manner:
The federal reserve board shall classify the
Method of
choosing direc- member banks of the district into three general
and cUss*!? A S1"011?3 o r divisions, designating each group by
c
'
number. Each group shall consist fas nearly as
may be of banks of similar capitalization. Each
member bank shall be permitted to nominate to
the chairman of the board of directors of the
Federal reserve bank of the district one candidate for director of Class A and one candidate
for director of Class B. The candidates so
nominated shall be listed by the chairman, indicating by whom nominated, and a copy of said
list shall, within fifteen days after its completion, be furnished by the chairman to each member bank. Each member bank by a resolution
of the board or by an amendment to its by-laws
shall authorize its president, cashier, or some
other officer to cast the vote of the member bank
in the elections of Class A and Class B directors.
Within fifteen days after receipt of the list
of candidates the duly authorized officer of a
member bank shall certify to the chairman his
first, second, and other choices for director of
Class A and Class B, respectively, upon a preferential ballot upon a form furnished by the
chairman of the board of directors of the Federal reserve bank of the district. Each such officer shall make a cross opposite the name of the
first, second, and other choices for a director of
Class A and for a director of Class B, but shall
not vote more than one choice for any one candidate. No officer or director of a member bank
shall be eligible to serve as a Class A director
unless nominated and elected by banks which are




18 5

APPENDIX B 128
members of the same group as the member bank
of which he is an officer or director.
Any person who is an officer or director of
more than one member bank shall not be eligible
for nomination as a Class A director except by
banks in the same group as the bank having the
largest aggregate resources of any of those of
which such person is an officer or director.
Any candidate having a majority of all votes
cast in the column of first choice shall be declared elected. If no candidate have a majority
of all the votes in the first column, then there
shall be added together the votes cast by the
electors for such candidates in the second column
and the votes cast for the several candidates in
the first column. If any candidate then have a
majority of the electors voting, by adding together the first and second choices, he shall be
declared elected. If no candidate have a majority of electors voting when the first and second choices shall have been added, then the
votes cast in the third column for other choices
shall be added together in like manner, and the
candidate then having the highest number of
votes shall be declared elected. An immediate
report of election shall be declared.
Class C directors shall be appointed by the
Federal Reserve Board. They shall have been
for at least two years residents of the district
for which they are appointed, one of whom shall
be designated by said board as chairman of the
board of directors of the Federal reserve bank
and as "Federal reserve agent." He shall be a
person of tested banking experience, and in addition to his duties as chairman of the board of
directors of the Federal reserve bank he shall
be required to maintain, under regulations to be
established by the Federal Reserve Board, a
local office of said board on the premises of the




rectors,

1 %%
se£ed w a t "

Assistants to
federal reserve
agent.

Compensa*
tion of direc*
tors.

APPENDIX B 129
Federal reserve bank. He shall make regular
reports to the Federal Reserve Board and shall
act as its official representative for the performance of the functions conferred upon it by this
act. He shall receive an annual compensation
to be fixed by the Federal Reserve Board and
paid monthly by the Federal reserve bank to
which he is designated. One of the directors of
class C shall be appointed by the Federal Reserve Board as deputy chairman to exercise the
powers of the chairman of the board when necessary. In case of the absence of the chairman
and deputy chairman, the third-class C director
shall preside at meetings of the board.
Subject to the approval of the Federal Reserve Board, the Federal reserve agent shall appoint one or more assistants. Such assistants,
who shall be persons of tested banking experience, shall assist the Federal reserve agent in
the performance of his duties and shall also
have power to act in his name and stead during
his absence or disability. The Federal Reserve
Board shall require such bonds of the assistant
Federal reserve agents as it may deem necessary for the protection of the United States.
Assistants to the Federal reserve agent shall receive an annual compensation, to be fixed and
paid in the same manner as that of the Federal
reserve agent.
Directors of Federal reserve banks shall receive, in addition to any compensation otherwise
provided, a reasonable allowance for necessary
expenses in attending meetings of their respective boards, which amount shall be paid by the
respective Federal reserve banks. Any compensation that may be provided by boards of
directors of Federal reserve banks for directors,
officers or employees shall be subject to the approval of the Federal Reserve Board.
The Reserve Bank Organization Committee
may, in organizing Federal reserve banks, call




18 5

APPENDIX B 130
such meetings of bank directors in the several
districts as may be necessary to carry out the
purposes of this Act, and may exercise the functions herein conferred upon the chairman of the
board of directors of each Federal reserve bank
pending the complete organization of such bank.
At the first meeting of the full board of directors of each Federal reserve bank, it shall be
the duty of the directors of classes A, B, and C,
respectively, to designate one of the members
of each class whose term of office shall expire in
one year from the first of January nearest to
date of such meeting, one whose term of office
shall expire at the end of two years from said
date, and one whose term of office shall expire
at the end of three years from said date. Thereafter every director of a Federal reserve bank
chosen as hereinbefore provided shall hold office
for a term of three years. Vacancies that may
occur in the several classes of directors of Federal reserve banks may be filled in the manner
provided for the original selection of such directors, such appointees to hold office for the
unexpired terms of their predecessors.
stock issues; i n c r e a s e a n d decrease o f

capital

Sec. 5. The capital stock of each Federal
reserve bank shall be divided into shares of
$100 each. The outstanding capital stock shall
be increased from time to time as member banks
increase their capital stock and surplus or as
additional banks become members, and may be
decreased as member banks reduce their capital
stock or surplus or cease to be members. Shares
of the capital stock of Federal reserve banks
owned by member banks shall not be transferred
or hypothecated. When a member bank increases its capital stock or surplus, it shall
thereupon subscribe for an additional amount
of capital stock of the Federal reserve bank of
its district equal to six per centum of the said
increase, one-half of said subscription to be




Terms of ofof

'ir-

1 %%

APPENDIX B 131
paid in the manner hereinbefore provided for
original subscription, and one-half subject to
call of the Federal Reserve Board. A bank applying for stock in a Federal reserve bank at
any time after the organization thereof must
subscribe for an amount of the capital stock of
the Federal reserve bank equal to six per centum of the paid-up capital stock and surplus of
said applicant bank, paying therefor its par
value plus one-half of one per centum a month
from the period of the last dividend. When the
capital stock of any Federal reserve bank shall
have been increased either on account of the increase of capital stock of member banks or on
account of the increase in the number of member banks, the board of directors shall cause to
be executed a certificate to the Comptroller of
the Currency showing the increase in capital
stock, the amount paid in, and by whom paid.
When a member bank reduces its capital stock it
shall surrender a proportionate amount of its
holdings in the capital of said Federal reserve
bank, and when a member bank voluntarily
liquidates it shall surrender all of its holdings
of the capital stock of said Federal reserve bank
and be released from its stock subscription not
previously called. In either' case the shares
surrendered shall be canceled and the member
bank shall receive in payment therefor, under
regulations to be prescribed by the Federal Reserve Board, a sum equal to its cash-paid subscriptions on the shares surrendered and onehalf of one per centum a month from the period
of the last dividend, not to exceed the book
value thereof, less any liability of such member
bank to the Federal reserve bank.

m e m ^ e r bank shall be de**
clared insolvent and a receiver appointed thereb^k* bSwmes f o r > t h e s t o c k h e l d b y i l i n s a i d Federal reserve
insolvent.
bank shall be canceled, without impairment of

Stock

justmcnts

ad

in




APPENDIX B

119

its liability, and all cash-paid subscriptions on
said stock, with one-half of one per centum per
month from the period of last dividend, not to
exceed the book value thereof, shall be first applied to all debts of the insolvent member bank
tc the Federal reserve bank, and the balance,
if any, shall be paid to the receiver of the insolvent bank. Whenever the capital stock of a
Federal reserve bank is reduced, either on account of a reduction in capital stock of any member bank or of the liquidation or insolvency of
such bank, the board of directors shall cause to
be executed a certificate to the Comptroller of
the Currency showing such reduction of capital
stock and the amount repaid to such bank.
DIVISION"

OF

EARNINGS

7.1 After all necessary expenses of a
Dividendi
Federal reserve bank have been paid or pro- and «urplua.
vided for, the stockholders shall be entitled to
receive an annual dividend of six per centum on
the paid-in capital stock, which dividend shall
be cumulative. After the aforesaid dividend
claims have been fully met, the net earnings
shall be paid to the United States as a franchise
tax except that the whole of such net earnings,
including those for the year ending December
thirty-first, nineteen hundred and eighteen, shall
be paid into a surplus fund until it shall amount
to one hundred per centum of the subscribed capital stock of such bank, and that thereafter ten
per centum of such net earnings shall be paid
into the surplus.
The net earnings derived by the United States ^DhpcaUio^
from Federal reserve banks shall, in the discre- ?ngs neaccA1ing
tion of the Secretary, be used to supplement gJJ^s. G v
o
the gold reserve held against outstanding
United States notes, or shall be applied to the
reduction of the outstanding bonded indebtedness of the United States under regulations to
1 As amended by act of March 3, 1919.
Sec.




1 %%

Tax
tion*

APPENDIX B 133

excmp-

be prescribed by the Secretary of the Treasury.
Should a Federal reserve bank be dissolved or
go into liquidation, any surplus remaining, after the payment of all debts, dividend requirements as hereinbefore provided, and the par
value of the stock, shall be paid to and become
the property of the United States and shall be
similarly applied.
Federal reserve banks, including the capital
stock and surplus therein, and the income derived therefrom shall be exempt from Federal,
State, and local taxation, except taxes upon real
estate.

Sec. 8. Section fifty-one hundred and fiftyfour, United States Revised Statutes, is hereby
amended to read as follows:
A n y bank incorporated by special law of any
may^be bcSn*
or
ticmaf bank*na*
United states or organized under
na
n
the general laws of any State or of the United
States and having an unimpaired capital sufficient to entitle it to become a national banking
association under the provisions of the existing
laws may, by the vote of the shareholders owning not less than fifty-one per centum of the
capital stock of such bank or banking association, with the approval of the Comptroller of
the Currency be converted into a national banking association, with any name approved by the
Comptroller of the Currency:
Provided, however, That said conversion shall
not be in contravention of the State law. In
such case the articles of association and organization certificate may be executed by a majority
of the directors of the bank or banking institution, and the certificate shall declare that the
owners of fifty-one per centum of the capital
stock have authorized the directors to make
such certificate and to change or convert the
bank or banking institution into a national as-




APPENDIX B 134
sociation. A majority of the directors, after
executing the articles of association and the organization certificate, shall have power to execute all other papers and to do whatever may be
required to make its organization perfect and
complete as a national association. The shares
of any such bank may continue to be for the
same amount each as they were before the conversion, and the directors may continue to be directors of the association until others are elected
or appointed in accordance with the provisions
of the statutes of the United States. When the
Comptroller has given to such bank or banking
association a certificate that the provisions of
this Act have been complied with, such bank or
banking association, and all its stockholders,
officers, and employees, shall have the same powers and privileges, and shall be subject to the
same duties, liabilities, and regulations, in all
respects, as shall have been prescribed by the
Federal Reserve Act and by the national banking Act for associations originally organized as
national banking associations.
state

banks

as

members

Sec. 9.1 Any bank incorporated by special
law of any State, or organized under the general laws of any State or of the United States,
desiring to become a member of the Federal Reserve System, may make application to the Federal Reserve Board, under such rules and regulations as it may prescribe, for the right to subscribe to the stock of the Federal reserve bank
organized within the district in which the applying bank is located. Such application shall
be for the same amount of stock that the applying bank would be required to subscribe to as a
national bank. The Federal Reserve Board,
subject to such conditions as it may prescribe,
1 As amended by act approved June 21, 1917 (40
Stat., chap. 39).




18 5

1 %%

Qualifications

mcmberihfp.r

APPENDIX B
may permit the applying bank to become a
stockholder of such Federal reserve bank.
In acting upon such applications the Federal
Reserve Board shall consider the financial condition of the applying bank, the general character of its management, and whether or not the
corporate powers exercised are consistent with
the purposes of this act.
Whenever the Federal Reserve Board shall
permit the applying bank to become a stockholder in the Federal reserve bank of the district its stock subscription shall be payable on
call of the Federal Reserve Board, and stock
issued to it shall be held subject to the provisions of this act.
All banks admitted to membership under authority of this section shall be required to comply with the reserve and capital requirements
of this act and to conform to those provisions
of law imposed on national banks which prohibit such banks from lending on or purchasing
their own stock, which relate to the withdrawal
or impairment of their capital stock, and which
relate to the payment of unearned dividends.
Such banks and the officers, agents, and employees thereof shall also be subject to the provisions of and to the penalties prescribed by
section fifty-two hundred and nine of the Revised Statutes, and shall be required to make
reports of condition and of the payment of dividends to the Federal reserve bank of which they
become a member. Not less than three of such
reports shall be made annually on call of the
Federal reserve bank on dates to be fixed by the
Federal Reserve Board. Failure to make such
reports within ten days after the date they are
called for shall subject the offending bank to
a penalty of $100 a day for each day that it
fails to transmit such report; such penalty to be




APPENDIX B

185

collected by the Federal reserve bank by suit
or otherwise.
As a condition of membership such banks shall 0f sSe"bank»!
likewise be subject to examinations made by direction of the Federal Reserve Board or of the
Federal reserve bank by examiners selected or
approved by the Federal Reserve Board.
Whenever the directors of the Federal reserve
bank shall approve the examinations made by
the State authorities, such examinations and the
reports thereof may be accepted in lieu of examinations made by examiners selected or approved by the Federal Reserve Board: Provided, however, That when it deems it necessary the board may order special examinations
by examiners of its own selection and shall in
all cases approve the form of the report. The
expenses of all examinations, other than those
made by State authorities, shall be assessed
against and paid by the banks examined.
If at any time it shall appear to the Federal
Reserve Board that a member bank has failed
to comply with the provisions of this section or
the regulations of the Federal Reserve Board
made pursuant thereto, it shall be within the
power of the board after hearing to require
such bank to surrender its stock in the Federal
reserve bank and to forfeit all rights and privileges of membership. The Federal Reserve
Board may restore membership upon due proof
of compliance with the conditions imposed by
this section.
Any State bank or trust company desiring to
withdraw from membership in a Federal reserve £ r ? ^ £ 2 3 5 ?
bank may do so, after six months* written no- «hip.
tice shall have been filed with the Federal Reserve Board, upon the surrender and cancellation of all of its holdings of capital stock in the
Federal reserve bank: Provided, however, That
no Federal reserve bank shall, except under ex-




1 %%

APPENDIX B 137

press authority of the Federal Reserve Board,
cancel within the same calendar year more than
twenty-five per centum of its capital stock for
the purpose of effecting voluntary withdrawals
during that year. All such applications shall
be dealt with in the order in which they are
filed with the board. Whenever a member bank
shall surrender its stock holdings in a Federal
reserve bank, or shall be ordered to do so by
the Federal Reserve Board, under authority of
law, all of its rights and privileges as a member
bank shall thereupon cease and determine, and
after due provision has been made for any indebtedness due or to become due to the Federal
reserve bank it shall be entitled to a refund of
its cash paid subscription with interest at the
rate of one-half of one per centum per month
from date of last dividend, if earned, the amount
refunded in no event to exceed the book value
of the stock at that time, and shall likewise be
entitled to repayment of deposits and of any
other balance due from the Federal reserve bank.
No applying bank shall be admitted to membership in a Federal reserve bank unless it possesses a paid-up, unimpaired capital sufficient
to entitle it to become a national banking association in the place where it is situated under
the provisions of the national-bank act.
Banks becoming members of the Federal Res e r v e
«ndrir«tncSystem under authority of this section
tions applying shall be subject to the provisions of this section
wbiStebecaon£ a n d t o ^ose °f this act which relate specifically
members.
to member banks, but shall not be subject to
examination under the provisions of the first
two paragraphs of section fifty-two hundred and
forty of the Revised Statutes as amended by
section twenty-one of this act.1 Subject to the
provisions of this act and to the regulations of
the board made pursuant thereto, any bank becoming a member of the Federal Reserve Sysi Amending section 21 of this act




APPENDIX B 138
tem shall retain its full charter and statutory
rights as a State bank or trust company, and
may continue to exercise all corporate powers
granted it by the State in which it was created,
and shall be entitled to all privileges of member banks: Provided, however, That no Federal
reserve bank shall be permitted to discount for
any State bank or trust company notes, drafts,
or bills of exchange of any one borrower who
is liable for borrowed money to such State bank
or trust company in an amount greater than ten
per centum of the capital and surplus of such
State bank or trust company, but the discount
of bills of exchange drawn against actually existing value and the discount of commercial or
business paper actually owned by the person negotiating the same shall not be considered as
borrowed money within the meaning of this section. The Federal reserve bank, as a condition
of the discount of notes, drafts, and bills of exchange for such State bank or trust company,
shall require a certificate or guaranty to the
effect that the borrower is not liable to such
bank in excess of the amount provided by this
section, and will not be permitted to become
liable in excess of this amount while such notes,
drafts, or bills of exchange are under discount
with the Federal reserve bank.
It shall be unlawful for any officer, clerk, or
agent of any bank admitted to membership under authority of this section to certify any
check drawn upon such bank unless the person
or company drawing the check has on depouit
therewith at the time such check is certified an
amount of money equal to the amount specified
in such check. Any check so certified by duly
authorized officers shall be a good and valid obligation against such bank, but the act of any
such officer, clerk, or agent in violation of this
section may subject such bank to a forfeiture of




138

1 %%

APPENDIX B 139
its membership in the Federal Reserve System
upon hearing by the Federal Reserve Board.
FEDERAL USSSIIVE BOARD

A Federal Reserve Board is hereof boffice tand ^y created which shall consist of seven memcompensation
bers, including the Secretary of the Treasury
O members.
f
a n d t h e Comptroller of the Currency, who shall
be members ex officio, and five members appointed by the President of the United States,
by and with the advice and consent of the Senate. In selecting the £ve appointive members
of the Federal Reserve Board, not more than
one of whom shall be selected from any one
Federal reserve district, the President shall have
due regard to a fair representation of the different commercial, industrial and geographical
divisions of the country. The five members of
the Federal Reserve Board appointed by the
President and confirmed as aforesaid shall devote their entire time to the business of the
Federal Reserve Board and shall each receive
an annual salary of $13,000, payable monthly
together with actual necessary traveling expenses, and the Comptroller of the Currency, as ex
officio member of the Federal Reserve Board,
shall, in addition to the salary now paid him as
Comptroller of the Currency, receive the sum
of $7,000 annually for his services as a member
of said board.
The Secretary of the Treasury and the Comptroller of the Currency shall be ineligible during
the time they are in office and for two years
thereafter to hold any office, position, or employment in any member bank. The appointive members of the Federal Reserve Board shall be ineligible during the time they are in office and for
two years thereafter to hold any office, position,
or employment in any member bank, except that
this restriction shall not apply to a member who
has served the full term for which he was ap1 As amended by act approved March 3, J9J9.
Constitution




Sec.

10.1

APPENDIX B

127

pointed. Of the five members thus appointed by
the President at least two shall be persons experienced in banking or finance. One shall be
designated by the President to serve for two,
one for four, one for six, one for eight, and
one for ten years, and thereafter each member
so appointed shall serve for a term of ten years
unless sooner removed for cause by the President. Of the five persons thus appointed, one
shall be designated by the President as governor and one as vice governor of the Federal Reserve Board. The governor of the Federal Reserve Board, subject to its supervision, shall be
the active executive officer. The Secretary of
the Treasury may assign offices in the Department of the Treasury for the use of the Federal
Reserve Board. Each member of the Federal
Reserve Board shall within fifteen days after
notice of appointment make and subscribe to
the oath of office.
The Federal Reserve Board shall have power Federal reto levy semiannually upon the Federal reserve b e ^ s e ^ d for
of
banks, in proportion to their capital stock and
surplus, an assessment sufficient to pay its estimated expenses and the salaries of its members and employees for the half year succeeding the levying of such assessment, together
with any deficit carried forward from the preceding half year.
The first meeting of the Federal Reserve
Board shall be held in Washington, District of
Columbia, as soon as may be after the passage
Restrictions
of this Act, at a date to befixedby the Reserve on members of
Bank Organization Committee. The Secretary board*
of the Treasury shall be ex-officio chairman of
the Federal Reserve Board. No member of the
Federal Reserve Board shall be an officer or
director of any bank, banking institution, trust
company, or Federal reserve bank nor hold
stock in any bank, banking institution, or trust
company; and before entering upon his duties




1 %%

APPENDIX B 141

as a member of the Federal Reserve Board he
shall certify under oath to the Secretary of the
Treasury that he has complied with this reVacancies.
quirement. Whenever a vacancy shall occur,
other than by erpiration of term, among the five
members of the Federal Reserve Board appointed by the President, as above provided, a
successor shall be appointed by the President,
with the advice and consent of the Senate, to
fill such vacancy, and when appointed he shall
hold office for the unexpired term of the member whose place he is selected to fill.
The President shall have power to fill all
vacancies that may happen on the Federal Reserve Board during the recess of the Senate, by
granting commissions which shall expire thirty
days after the next session of the Senate convenes.
Nothing in this Act contained shall be construed as taking away any powers heretofore
vested by law in the Secretary of the Treasury
which relate to the supervision, management,
and control of the Treasury Department and
bureaus under such department, and wherever
any power vested by this Act in the Federal
Reserve Board or the Federal reserve agent appears to conflict with the powers of the Secretary of the Treasury, such powers shall be exercised subject to the supervision and control
Annual re- o f t h e Secretary,
port.
The Federal Reserve Board shall annually
make a full report of its operations to the
Speaker of the House of Representatives, who
shall cause the same to be printed for the information of the Congress.
Section three hundred and twenty-four of the
ofComptro»er
rency.
Revised Statutes of the United States shall be
amended so as to read as follows: There shall
be in the Department of the Treasury a bureau




APPENDIX B 142

18 5

charged with the execution of all laws passed
by Congress relating to the issue and regulation
of national currency secured by United States
bonds and under the general supervision of the
Federal Reserve Board, of all Federal reserve
notes, the chief officer of which bureau shall be
called the Comptroller of the Currency and shall
perform his duties under the general directions
of the Secretary of the Treasury.
Sec. II. 1 The Federal Reserve Board shall
be authorized and empowered:
(a) To examine at its discretion the accounts,
0 *
books and affairs of each Federal reserve bank
and of each member bank and to require such serve Board,
statements and reports as it may deem necessary. The said board shall publish once each
week a statement showing the condition of each ^ ^
Federal reserve bank and a consolidated state- Federal^ T e "
ment for all Federal reserve banks. Such state- serve banks,
ments shall show in detail the assets and liabilities of the Federal reserve banks, single
and combined, and shall furnish full information regarding the character of the money held
as reserve and the amount, nature and maturities of the paper and other investments owned
or held by Federal reserve banks.
TFederaT?^
eb£ik 'to
(b) To permit, or, on the affirmative vote of
at least five members of the Reserve Board to ^ s c o u n t for
require Federal reserve banks to rediscount the
discounted paper of other Federal reserve banks
at rates of interest to be fixed by the Federal
Reserve Board.
(c) To suspend for a period not exceeding re5 ^ c susp r ^ d .
thirty days, and from time to time to renew such qu irements.
suspension for periods not exceeding fifteen
days, any reserve requirements specified in this
1 As amended by act approved Sept. 7, 1916 (39
Stat, 752, chap. 461), and act approved February 37,
1921.




1 %%

APPENDIX B 143

Act: Provided, That it shall establish a graduated tax upon the amounts by which the reserve
requirements of this Act may be permitted to
fall below the level hereinafter specified: And
provided further, That when the gold reserve
held against Federal reserve notes falls below
forty per centum, the Federal Reserve Board
shall establish a graduated tax of not more than
one per centum per annum upon such deficiency
until the reserves fall to thirty-two and onehalf per centum, and when said reserve falls below thirty-two and one-half per centum, a tax
at the rate increasingly of not less than one and
one-half per centum per annum upon each two
and one-half per centum or fraction thereof that
such reserve falls below thirty-two and one-half
per centum. The tax shall be paid by the reserve bank, but the reserve bank shall add an
amount equal to said tax to the rates of interest
T o supervise an<* discount fixed by the Federal Reserve
f Fed- Board.
issue
eral reserve
(d) To supervise and regulate through the
note*.
bureau under the charge of the Comptroller of
the Currency the issue and retirement of Federal reserve notes, and to prescribe rules and
regulations under which such notes may be delivered by the Comptroller to the Federal reserve agents applying therefor.
T o reclassify
(e) To add to the number of cities classified
cities
as
re
garda
reserve as reserve and central reserve cities under exrequirements.
i s t i n g l a w i n w h i c h n a t i o n a l banking associations are subject to the reserve requirements
set forth in section twenty of this Act; or to
reclassify existing reserve and central reserve
cities or to terminate their designation as such.
( f ) To suspend or remove any officer or director of any Federal reserve bank, the cause of
such removal to be forthwith communicated in
writing by the Federal Reserve Board to the
removed officer or director and to said bank.




APPENDIX B 144

18 5

(g) To require the writing off of doubtful
or worthless assets upon the books fend balance
sheets of Federal reserve banks.
(h) To suspend, for the violation of any of
MiarelUn.
the provisions of this Act, the operations of any cou« power*
Federal reserve bank, to take possession thereof,
administer the same during the period of suspension, and, when deemed advisable, to liquidate or reorganize such bank.
(i) To require bonds of Federal reserve
agents, to make regulations for the safeguarding of all collateral, bonds, Federal reserve
notes, money or property of any kind deposited
in the hands of such agents, and said board shall
perform the duties, functions, or services specified in this Act, and make all rules and regulations necessary to enable said board effectively
to perform the same.
( j ) To exercise general supervision over said
Federal reserve banks.
(k) To grant by special permit to national
banks applying therefor, when not in contraven- se^Boardto
tion of State or local law, the right to act as authorize na-

J.

l

.

.

.

.

.

.

.

* ttonal banks to

trustee, executor, administrator, registrar of exercise certain
stocks and bonds, guardian of estates, assignee, £ l o c D 0 s m p a n y
receiver, committee of estates of lunatics, or in
any other fiduciary capacity in which State
banks, trust companies, or other corporations
which come into competition with national banks
are permitted to act under the laws of the State
in which the national bank is located.
Whenever the laws of such State authorize
or permit the exercise of any or all of the foregoing powers by State banks, trust companies,
or other corporations which compete with national banks, the granting to and the exercise of
such powers by national banks shall not be
deemed to be in contravention of State or local
law within the meaning of this A c t
National banks exercising any or all of the




APPENDIX B

1 %%

powers enumerated in this subsection shall segregate all assets held in any fiduciary capacity
from the general assets of the bank and shall
keep a separate set of books and records showing in proper detail all transactions engaged in
under authority of this subsection. Such books
and records shall be open to inspection by the
State authorities to the same extent as the books
and records of corporations organized under
State law which exercise fiduciary powers, but
nothing in this Act shall be construed as authorizing the State authorities to examine the books,
records, and assets of the national bank which
are not held in trust under authority of this subsection.
No national bank shall rcceive in its trust
department deposits of current funds subject to
check or the deposit of checks, drafts, bills of
exchange, or other items for collection or exchange purposes. Funds deposited or held in
trust by the bank awaiting investment shall be
carried in a separate account and shall not be
used by the bank in the conduct of its business
unless it shall first set aside in the trust department United States bonds or other securities approved by the Federal Reserve Board.
In the event of the failure of such bank the
owners of the funds held in trust for investment
shall have a lien on the bonds or other securities so set apart in addition to their claim against
the estate of the bank.
Whenever the laws of a State require corporations acting in a fiduciary capacity, to deposit securities with the State authorities for the
protection of private or court trusts, national
banks so acting shall be required to make similar deposits and securities so deposited shall be
held for the protection of private or court trusts,
as provided by the State law.




APPENDIX B
National banks in such cases shall not be required to execute the bond usually required of
individuals if State corporations under similar
circumstances are exempt from this requirement.
National banks shall have power to execute
such bond when so required by the laws of the
State.
In any case in which the la^s of a State require that a corporation acting as trustee, executor, administrator, or in any capacity specified in this section, shall take an oath or make
an affidavit, the president, vice president, cashier, or trust officer of such national bank may
take the necessary oath or execute the necessary
affidavit.
It shall be unlawful for any national banking association to lend any officer, director, or
employee any funds held in trust under the
powers conferred by this section. Any officer,
director, or employee making such loan, or to
whom such loan is made, may be fined not
more than $5,000, or imprisoned not more than
five years, or may be both fined and imprisoned,
in the discretion of the court
In passing upon applications for permission
to exercise the powers enumerated in this subsection, the Federal Reserve Board may take
into consideration the amount of capital and
surplus of the applying bank, whether or not
such capital and surplus is sufficient under the
circumstances of the case, the needs of the
community to be served, and any other facts
and circumstances that seem to it proper, and
may grant or refuse the application accordingly: Provided, That no permit shall be issued
to any national banking association having a
capital and surplus less than the capital and
surplus required by State law of State banks,
trust companies, and corporations exercising
such powers.




18 5

1 %%

APPENDIX B 147
(1) To employ such attorneys, experts, assistants, clerks, or other employees as may be
deemed necessary to conduct the business of the
board. All salaries and fees shall be fixed in
advance by said board and shall be paid in the
same manner as the salaries of the members of
said board. All such attorneys, experts, assistants, clerks, and other employees shall be appointed without regard to the provisions of the
Act of January sixteenth, eighteen hundred and
eighty-three (volume twenty-two, United States
Statutes at Large, page four hundred and
three), and amendments thereto, or any rule or
regulation made in pursuance thereof: Provided,
That nothing herein shall prevent the President
from placing said employees in the classified
service.
(m) Upon the affirmative vote of not less than
five of its members, the Federal Reserve Board
shall have power to permit Federal Reserve
banks to discount for any member bank notes,
drafts, or bills of exchange bearing the signature
or endorsement of any one borrower in excess of
the amount permitted by section nine and section
thirteen of this Act, but in no case to exceed
twenty per centum of the member bank's capital
and surplus: Provided, however, That all such
notes, drafts, or bills of exchange discounted for
any member bank in excess of the amount permitted under such sections shall be secured by
not less than a like face amount of bonds or
notes of the United States issued since April
twenty-fourth, nineteen hundred and seventeen,
for which the borrower shall in good faith prior
to January 1, 1921, have paid or agreed to pay
not less than the full amount thereof, or certificates of indebtedness of the United States:
Provided further, That the provisions of this
subsection (m) shall not be operative after Oc-




18 5

APPENDIX B 148
tober thirty-first, nineteen hundred and twentyone.
F E D E R A L ADVISORY

COUNCIL

Sec. 12. There is hereby created a Federal
Advisory Council, which shall consist of as
many members as there are Federal reserve districts. Each Federal reserve bank by its board
of directors shall annually select from its own
Federal reserve district one member of said
council, who shall receive such compensation
and allowances as may be fixed by his board of
directors subject to the approval of the Federal
Reserve Board. The meetings of said advisory
council shall be held at Washington, District of
Columbia, at least four times each year, and
oftener if called by the Federal Reserve Board.
The council may in addition to the meetings
above provided for hold such other meetings in
Washington, District of Columbia, or elsewhere,
as it may deem necessary, may select its own
officers and adopt its own methods of procedure, and a majority of its members shall constitute a quorum for the transaction of business.
Vacancies in the council shall be filled by the
respective reserve banks, and members selected
to fill vacancies, shall serve for the unexpired
term.
The Federal Advisory Council shall have
power, by itself or through its officers, (1) to
confer directly with the Federal Reserve Board
on general business conditions; (2) to make oral
or written representations concerning matters
within the jurisdiction of said board; (3) to
call for information and to make recommendations in regard to discount rates, rediscount business, note issues, reserve conditions in the various districts, the purchase and sale of gold or
securities by reserve banks, open-market opera-




^ How

cottiti-

p0wen.

1 %%

APPENDIX B 149
tions by said banks, and the general affairs of
the reserve banking system.
POWERS OF

FEOERAL

RESERVE

BANKS

SEC. IS.1 Any Federal reserve bank may
receive from any of its member banks, and from
the United States, deposits of current funds in
lawful money, national-bank notes, Federal reserve notes, or checks, and drafts, payable upon
presentation, and also, for collection, maturing
notes and bills; or, solely for purposes of exchange or of collection, may receive from other
Federal reserve banks deposits of current funds
in lawful money, national-bank notes, or checks
upon other Federal reserve banks, and checks
and drafts, payable upon presentation within its
district, and maturing notes and bills payable
within its district; or, solely for the purposes of
exchange or of collection, may receive from any
nonmember bank or trust company deposits of
current funds in lawful money, national-bank
notes, Federal reserve notes, checks and drafts
payable upon presentation, or maturing notes
and bills: Provided, Such, nonmember bank or
trust company maintains with the Federal reserve bank of its district a balance sufficient to
offset the items in transit held for its account by
the Federal reserve bank: Provided further,
That nothing in this or any other section of this
Act shall be construed as prohibiting a member
or nonmember bank from making reasonable
charges, to be determined and regulated by the
Federal Reserve Board, but in no case to exceed 10 cents per $100 or fraction thereof, based
on the total of checks and drafts presented at
any one time, for collection or payment of checks
*As amended by act approved Mar. 3, 1915 (38
Stat., 958 chap. 93) ; act approved Sept. 7, 1916 (39
Stat, 752, chap. 461); act approved June 21, 1917
(40 Stat., chap. 33).




APPENDIX B 150
and drafts and remission therefor by exchange
or otherwise; but no such charges shall be made
against the Federal reserve banks.
Upon the indorsement of any of its member
banks, which shall be deemed a waiver of demand, notice and protest by such bank as to its
own indorsement exclusively, any Federal reserve bank may discount notes, drafts, and bills
of exchange arising out of actual commercial
transactions; that is, notes, drafts, and bills of
exchange issued or drawn for agricultural, industrial, or commercial purposes, or the proceeds of which have been used, or are to be used,
for such purposes, the Federal Reserve Board
to have the right to determine or define the
character of the paper thus eligible for discount,
within the meaning of this Act. Nothing in
this Act contained shall be construed to prohibit
such notes, drafts, and bills of exchange, secured
by staple agricultural products, or other goods,
wares, or merchandise from being eligible for
such discount; but such definition shall not include notes, drafts, or bills covering merely in-,
vestments or issued or drawn for the purpose of
carrying or trading in stocks, bonds, or other
investment securities, except bonds and notes of
the Government of the United States. Notes,
drafts, and bills admitted to discount under the
terms of this paragraph must have a maturity
at the time of discount of not more than ninety
days, exclusive of days of grace: Provided,
That notes, drafts, and bills drawn or issued
for agricultural purposes or based on live stock
and having a maturity not exceeding six months,
exclusive of days of grace, may be discounted
in an amount to be limited to a percentage of
the assets of the Federal reserve bank, to be
ascertained and fixed by the Federal Reserve
Board.




18 5

Rediscount

1 %%

APPENDIX B 151

The aggregate of such notes, drafts, and bills
bearing the signature or indorsement of any one
borrower, whether a person, company, firm, or
corporation, rediscounted for any one bank shall
at no time exceed ten per centum of the unimpaired capital and surplus of said bank; but
this restriction shall not apply to the discount
of bills of exchange drawn in good faith against
actually existing values.
Any Federal reserve bank may discount acceptances of the kinds hereinafter described,
which have a maturity at the time of discount
of not more than three months' sight, exclusive
of days of grace, and which are indorsed by at
least one member bank,
bant* m * \c
a*
^ ^ member bank may accept drafts or bills
c enp*t°fbreSrn
exchange drawn upon it having not more than
bufi domcitic six months' sight to run, exclusive of days of
grace, which grow out of transactions involving
the importation or exportation of goods; or
whieh grow out of transactions involving the domestic shipment of goods provided shipping
documents conveying or securing title are attached at the time of acceptance; or which are
secured at the time of acceptance by a warehouse receipt or other such document conveying
or securing title covering readily marketable
staples. No member bank shall accept, whether
in a foreign or domestic transaction, for any one
person, company, firm, or corporation, to an
amount equal at any time in the aggregate to
more than ten per centum of its paid-up and unimpaired capital stock and surplus, unless the
bank is secured either by attached documents or
by some other actual security growing out of the
same transaction as the acceptance; and no bank
shall accept such bills to an amount equal at any
time in the aggregate to more than one-half of
its paid-up and unimpaired capital stock and




APPENDIX B 152

152

surplus: Provided, however, That the Federal
Reserve Board, under such general regulations
as it may prescribe, which shall apply to all
banks alike regardless of the amount of capital
stock and surplus, may authorize any member
bank to accept such bills to an amount not exceeding at any time in the aggregate one hundred per centum of its paid-up and unimpaired
capital stock and surplus: Provided, further,
That the aggregate of acceptances growing out
of domestic transactions shall in no event exceed
fifty per centum of such capital stock and surplus.
Any Federal reserve bank may make advances jg^jjk^bjyJfj
to its member banks on their promissory notes may loan on
for a period not exceeding fifteen days at rates fabt0c?afnotcl01*
to be established by such Federal reserve banks,
subject to the review and determination of the
Federal Reserve Board, provided such promissory notes are secured by such notes, drafts, bills
of exchange, or bankers' acceptances as are
eligible for rediscount or for purchase by Federal reserve banks under the provisions of this
Act, or by the deposit or pledge of bonds or
notes of the United States.
Section fifty-two hundred and two of the ReLimitation!
vised Statutes of the United States is hereby ™as™f
amended so as to read as follows: " N o national
banka.
banking association shall at any time be indebted, or in any way liable, to an amount exceeding the amount of its capital stock at such
time actually paid in and remaining undiminished by losses or otherwise, except on account
of demands of the nature following:
First Notes of circulation.
Second. Moneys deposited with or collected
by the association.
Third. Bills of exchange or drafts drawn
against money actually on deposit to the credit
of the association, or due thereto.




1 %%

Additional
toWnaStiongalVCn

APPENDIX B 153
Fourth.
Liabilities to the stockholders of
the association for dividends and reserve profits.
Fifth. Liabilities incurred under the provisions of the Federal reserve Act.
The discount and rediscount and the purchase
and sale by any Federal reserve bank of any
bills receivable and of domestic and foreign bills
of exchange, and of acceptances authorized by
this Act, shall be subject to such restrictions,
limitations, and regulations as may be imposed
by the Federal Reserve Board.
That in addition to the powers now vested by
* a w l n national banking associations organized
under the laws of the United States any such
association located and doing business in any
place the population of which does not exceed
five thousand inhabitants, as shown by the last
preceding decennial census, may, under such
rules and regulations as may be prescribed by
the Comptroller of the Currency, act as the
agent for any fire, life, or other insurance company authorized by the authorities of the State
in which said bank is located to do business in
said State, by soliciting and selling insurance
and collecting premiums on policies issued by
such company; and may receive for services so
rendered such fees or commissions as may be
agreed upon between the said association and
the insurance company for which it may act as
agent; and may also act as the broker or agent
for others in making or procuring loans on real
estate located within one hundred miles of the
place in which said bank may be located, receiving for such services a reasonable fee or
commission: Provided, however, That no such
bank shall in any case guarantee either the principal or interest of any such loans or assume or
guarantee the payment of any premium on insurance policies issued through its agency by




APPENDIX B

18

5

its principal: And provided further, That the
bank shall not guarantee the truth of any statement made by an assured in filing his application for insurance.
Any member bank may accept drafts or bills
Acce Unces
of exchange drawn upon it having not more than by member10
three months' sight to run, exclusive of days of
of au, Jg£
grace, drawn under regulations to be prescribed drawn f r o m
by the Federal Reserve Board by banks or bankers in foreign countries or dependencies or insular possessions of the United States for the
purpose of furnishing dollar exchange as required by the usages of trade in the respective
countries, dependencies, or insular possessions.
Such drafts or bills may be acquired by Federal reserve banks in such amounts and subject
to such regulations, restrictions, and limitations
as may be prescribed by the Federal Reserve
Board: Provided, however, That no member
bank shall accept such drafts or bills of exchange referred to this paragraph for any one
bank to an amount exceeding in the aggregate
ten per centum of the paid-up and unimpaired
capital and surplus of the accepting bank unless
the draft or bill of exchange is accompanied by
documents conveying or securing title or by
some other adequate security: Provided further,
That no member bank shall accept such drafts
or bills in an amount exceeding at any time the
aggregate of one-half of its paid-up and unimpaired capital and surplus.
OPEN-MARKET

OPERATIONS

14.1 Any Federal reserve bank may.
Commercial
under rules and regulations prescribed by the gf e pe [ ra ^ r ^"
Federal Reserve Board, purchase and sell in the
SEC.

1 A s amended by act approved Sept. 7, 1916 (39
Stat., 752, chap. 461); act approved June 81, 1917
(40 Stat., chap. 33), and act approved April 13, 1920.




APPENDIX B

1 %%

Gold
coin
and bullion.

Government
securities.

Bills of
change.

Discount
rates.

ex*

open market, at home or abroad, either from or
to domestic or foreign banks, firms, corporations, or individuals, cable transfers and bankers' acceptances and bills of exchange of the
kinds and maturities by this Act made eligible
for rediscount, with or without the indorsement
of a member bank.
Every Federal reserve bank shall have power:
(a) To deal in gold coin and bullion at home
or abroad, to make loans thereon, exchange
Federal reserve notes for gold, gold coin, or
gold certificates, and to contract for loans of
gold coin or bullion, giving therefor, when necessary, acceptable security, including the hypothecation of United States bonds or other securities which Federal reserve banks are authorized to hold;
(b) To buy and sell, at home or abroad, bonds
and notes of the United States, and bills, notes,
revenue bonds, and warrants with a maturity
from date of purchase of not exceeding six
months, issued in anticipation of the collection
of taxes or in anticipation of the receipt of assured revenues by any State, county, district,
political subdivision, or municipality in the continental United States, including irrigation,
drainage, and reclamation districts, such purchases to be made in accordance with rules and
regulations prescribed by the Federal Reserve
Board;
(c) To purchase from member banks and to
sell, with or without its indorsement, bills of exchange arising out of commercial transactions,
as hereinbefore defined;
(d) To establish from time to time, s u b j e c t
to review and determination of the Federal Reserve Board, rates of discount to be charged by
the Federal reserve bank for each class of paper, which shall be fixed with a view of accom-




APPENDIX B
modating commerce and business and which,
subpect to the approval, review, and determination of the Federal Reserve Board, may be
graduated or progressed on the basis of the
amount of the advances and discount accommodations extended by the Federal reserve bank to
the borrowing bank.
(e) To establish accounts with other Federal
reserve banks for exchange purposes and, with
the consent or upon the order and direction of
the Federal Reserve Board and under regulations to be prescribed by said board, to open
and maintain accounts in foreign countries, appoint correspondents, and establish agencies in
such countries wheresoever it may be deemed
best for the purpose of purchasing, selling, and
collecting bills of exchange, and to buy and sell,
with or without its indorsement, through such
correspondents or agencies, bills of exchange
(or acceptances) arising out of actual commercial transactions which have not more than
ninety days to run, exclusive of days of grace,
and which bear the signature of two or more
responsible parties, and, with the consent of the
Federal Reserve Board, to open and maintain
banking accounts for such foreign correspondents or agencies. Whenever any such account
has been opened or agency or correspondent has
been appointed by a Federal reserve bank, with
the consent of or under the order and direction
of the Federal Reserve Board, any other Federal reserve bank may, with the consent and approval of the Federal Reserve Board, be permitted to carry on or conduct, through the Federal
reserve bank opening such account or appointing such agency or correspondent, any transaction authorized by this section under rules and
regulations to be prescribed by the board.




143

Foreign
correspon- ™
dent9-

1

%%

APPENDIX B
GOVERNMENT

DEPOSITS

SEC. 15. The moneys held in the general
fund of the Treasury, except the five per centum
fund for the redemption of outstanding nationalbank notes and the funds provided in this Act
for the redemption of Federal reserve notes may,
upon the direction of the Secretary of the
Treasury, be deposited in Federal reserve banks,
which banks, when required by the Secretary of
the Treasury, shall act as fiscal agents of the
United States; and the revenues of the Government or any part thereof may be deposited in
such banks, and disbursements may be made by
checks drawn against such deposits.
No public funds of the Philippine Islands, or
of the postal savings, or any Government funds,
shall be deposited in the continental United
States in any bank not belonging to the system
established by this Act: 1 Provided, however,
That nothing in this Act shall be construed to
deny the right of the Secretary of the Treasury
to use member banks as depositories.
NOTE
Notes

u

are

s a n ?edeem-

ondemand8°ld

ISSUES

S E C . 16.®
Federal reserve notes, to be issued at the discretion of the Federal Reserve
*or
purpose of making advances to

Federal reserve banks through the Federal rej e c t i o n 7 of the act approved April 34, 1917,
known as "An act to authorize an issue of bonds to
meet expenditures for the national security and defense, and, for the purpose of assisting in the prosecution of the war, to extend credit to foreign governments, and for other purposes," authorizes the
Secretary to deposit proceeds of sale of such bonds in
non-member banks under certain circumstances. For
full text of Section 7, see Appendix D, pp. 191-192.
a As amended by act approved Sept 7, 1916 (39
Stat., 752, chap. 461); act approved June 21> 1917
(40 Stat., chap. S3).




APPENDIX B 158
serve agents as hereinafter set forth and for no
other purpose, are hereby authorized. The said
notes shall be obligations of the United States
and shall be receivable by all national and member banks and Federal reserve banks and for all
taxes, customs, and other public dues. They
shall be redeemed in gold on demand at the
Treasury Department of the United States, in
the city of Washington, District of Columbia, or
in gold or lawful money at any Federal reserve
bank.
Any Federal reserve bank may make application to the local Federal reserve agent for such
amount of the Federal reserve notes hereinbefore provided for as it may require. Such application shall be accompanied with a tender
to the local Federal reserve agent of collateral
in amount equal to the sum of the Federal reserve notes thus applied for and issued pursuant
to such application. The collateral security
thus offered shall be notes, drafts, bills of exchange, or acceptances acquired under the provisions of section thirteen of this Act, or bills of
exchange indorsed by a member bank of any
Federal reserve district and purchased under
the provisions of section fourteen of this Act,
or bankers* acceptances purchased under the
provisions of said section fourteen, or gold or
gold certificates; but in no event shall such collateral security, whether gold, gold certificates,
or eligible paper, be less than the amount of
Federal reserve notes applied for. The Federal
reserve agent shall each day notify the Federal
Reserve Board of all issues and withdrawals of
Federal reserve notes to and by the Federal reserve bank to which he is accredited. The said
Federal Reserve Board may at any time call
upon a Federal reserve bank for additional se-




18 5

h0 d
C J^Jj 0 n s
0
note issue,

"j

1 %%

APPENDIX B 159

curity to protect the Federal reserve notes issued to it.
Every Federal reserve bank shall maintain
Reserve re- r e s e r v e s i n gold or lawful money of not less than
quirements of thirty-five per centum against its deposits and
banks! an?reserves in gold of not less than forty per centum
no?estion °f
against its Federal reserve notes in actual circulation: Provided, however, That when the
Federal reserve agent holds gold or gold certificates as collateral for Federal reserve notes issued to the bank such gold or gold certificates
shall be counted as part of the gold reserve
which such bank is required to maintain against
its Federal reserve notes in actual circulation.
Notes so paid out shall bear upon their faces a
distinctive letter and serial number which shall
be assigned by the Federal Reserve Board to
each Federal reserve bank. Whenever Federal
reserve notes issued through one Federal reserve bank shall be received by another Federal
reserve bank, they shall be promptly returned
for credit or redemption to the Federal reserve
bank through which they were originally issued
or, upon direction of such Federal reserve bank,
they shall be forwarded direct to the Treasurer
of the United States to be retired. No Federal
reserve bank shall pay out notes issued t h r o u g h
another under penalty of a tax of ten per centum
upon the face value of notes so paid out. Notes
presented for redemption at the Treasury of the
United States shall be paid out of the redemption fund and returned to the Federal reserve
banks through which they were originally issued, and thereupon such Federal reserve bank
shall, upon demand of the Secretary of the
Treasury, reimburse such redemption fund in
lawful money or, if such Federal reserve notes
have been redeemed by the Treasurer in gold or
gold certificates, then such funds shall be reim-




APPENDIX B 160
bursed to the extent deemed necessary by the
Secretary of the Treasury in gold or gold certificates, and such Federal reserve bank shall,
so long as any of its Federal reserve notes remain outstanding, maintain with the Treasurer
in gold an amount sufficient in the judgment of
the Secretary to provide for all redemptions to
be made by the Treasurer. Federal reserve
notes received by the Treasurer otherwise than
for redemption may be exchanged for gold out
of the redemption fund hereinafter provided and
returned to the reserve bank through which they
were originally issued, or they may be returned
to such bank for the credit of the United States.
Federal reserve notes unfit for circulation shall
be returned by the Federal reserve agents to the
Comptroller of the Currency for cancellation
and destruction.
The Federal Reserve Board shall require each
Federal reserve bank to maintain on deposit in
the Treasury of the United States a sum in gold
sufficient in the judgment of the Secretary of
the Treasury for the redemption of the Federal
reserve notes issued to such bank, but in no
event less than five per centum of the total
amount of notes issued less the amount of gold
or gold certificates held by the Federal reserve
agent as collateral security; but such deposit of
gold shall be counted and included as part of
the forty per centum reserve hereinbefore required. The board shall have the right, acting
through the Federal reserve agent, to grant in
whole or in part or to reject entirely the application of any Federal reserve bank for Federal
reserve notes; but to the extent that such application may be granted the Federal Reserve
Board shall, through its local Federal reserve
agent, supply Federal reserve notes to the banks
so applying, and such bank shall be charged




1 %%

APPENDIX B 161
with the amount of notes issued to it and shall
pay such rate of interest as may be established

by the Federal Reserve Board on only that
amount of such notes which equals the total
amount of its outstanding Federal reserve notes
less the amount of gold or gold certificates held
by the Federal reserve agent as collateral security. Federal reserve notes issued to any such
bank shall, upon delivery, together with such
notes of such Federal reserve bank as may be
issued under section eighteen of this act upon
security of United States two per centum Government bonds, become a first and paramount
lien on all the assets of such bank,
and
lawful*
^ ^ Federal reserve bank may at any time
o depos™°ney reduce its liability for outstanding Federal ren
^servcageat s e r v e 110t e s by depositing with the Federal reserve agent its Federal reserve notes, gold, gold
certificates, or lawful money of the United
States. Federal reserve notes so deposited shall
not be reissued, except upon compliance with the
conditions of an original issue,
T h e F e d e r a l reserve agent shall hold such
of wSSKSd011
with federal
gold, gold certificates, or lawful money available
reserve agent exclusively for exchange for the outstanding
Federal reserve notes when offered by the reserve bank of which he is a director. Upon the
request of the Secretary of the Treasury the
Federal Reserve Board shall require the Federal
reserve agent to transmit to the Treasurer of the
United States so much of the gold held by him
as collateral security for Federal reserve notes
as may be required for the exclusive purpose of
the redemption of such Federal reserve notes,
but such gold when deposited with the Treasurer
shall be counted and considered as if collateral
security on deposit with the Federal reserve
agent.
Any Federal reserve bank may at its discre-




APPENDIX B 162

18 5

tion withdraw collateral deposited with the local
Federal reserve agent for the protection of its
Federal reserve notes issued to it and shall at
the same time substitute therefor other collateral
of equal amount with the approval of the Federal reserve agent under regulations to be prescribed by the Federal Reserve Board. Any
Federal reserve bank may retire any of its Federal reserve notes by depositing them with the
Federal reserve agent or with the Treasurer of
Retirement
the United States, and such Federal reserve of federal rebank shall thereupon be entitled to receive back serve no es*
the collateral deposited with the Federal reserve
agent for the security of such notes. Federal
reserve banks shall not be required to maintain
the reserve or the redemption fund heretofore
provided for against Federal reserve notes which
have been retired. Federal reserve notes so deposited shall not be reissued except upon compliance with the conditions of an original issue.
All Federal reserve notes and all gold, gold
certificates, and lawful money issued to or deposited with any Federal reserve agent under
the provisions of the Federal reserve act shall JjJJ*0^ os°itf
hereafter be held for such agent, under such ^ w i t h ^ d e r rules and regulations as the Federal Reserve JgC^serve
Board may prescribe, in the joint custody of
himself and the Federal reserve bank to which
he is accredited. Such agent and such Federal
reserve bank shall be jointly liable for the safekeeping of such Federal reserve notes, gold,
gold certificates, and lawful money. Nothing
herein contained, however, shall be construed to
prohibit a Federal reserve agent from depositing gold or gold certificates with the Federal
Reserve Board, to be held by such board subject to his order, or with the Treasurer of the
United States for the purposes authorized by
law.




1 %%

APPENDIX B 163

In order to furnish suitable notes for circua s Federal reserve notes, the Comptroller
denominations of the Currency shall, under the direction of the
wrvl^noTis."' Secretary of the Treasury, cause plates and dies
to be engraved in the best manner to guard
against counterfeits and fraudulent alterations,
and shall have printed therefrom and numbered
such quantities of such notes of the denominations of $5, $10, $20, $50, $100, $500, $1000,
$5000, $10,000, as may be required to supply
the Federal reserve banks. Such notes shall
be in form and tenor as directed by the Secretary of the Treasury under the provisions of
this Act and shall bear the distinctive numbers
of the several Federal reserve banks through
which they are issued.
When such notes have been prepared, they
shall be deposited in the Treasury, or in the
subtreasury or mint of the United States nearest the place of business of each Federal reserve bank and shall be held for the use of
such bank subject to the order of the Comptroller of the Currency for their delivery, as
provided by this Act.
The plates and dies to be procured by the
Comptroller of the Currency for the printing of
such circulating notes shall remain under his
control and direction, and the expenses necessarily incurred in executing the laws relating to
the procuring of such notes, and all other expenses incidental to their issue and retirement,
shall be paid by the Federal reserve banks, and
the Federal Reserve Board shall include in its
estimate of expenses levied against the Federal
reserve banks a sufficient amount to cover the
expenses herein provided for.
The examination of plates, dies, bed pieces,
and so forth, and regulations relating to such
examination of plates, dies, and so forth, of
characte? 1 and




APPENDIX B 164

18 5

national-bank notes provided for in section fiftyone hundred and seventy-four, Revised Statutes,
is hereby extended to include notes herein provided for.
Any appropriation heretofore made out of the
general funds of the Treasury for engraving
plates and dies, the purchase of distinctive paper, or to cover any other expense in connection with the printing of national-bank notes or
notes provided for by the Act of May thirtieth,
nineteen hundred and eight, and any distinctive
paper that may be on hand at the time of the
passage of this Act may be used in the discretion of the Secretary for the purposes of this
Act, and should the appropriations heretofore
made be insufficient to meet the requirements of
this Act in addition to circulating notes provided for by existing law, the Secretary is hereby authorized to use so much of any funds in
the Treasury not otherwise appropriated for the
purpose of furnishing the notes aforesaid: Provided, however, That nothing in this section contained shall be construed as exempting national
banks or Federal reserve banks from their liability to reimburse the United States for any
expenses incurred in printing and issuing circulating notes.
S e c . 1 7 . Every Federal reserve bank shall
clearing and
receive on deposit at par from member banks ^ c t i o n ,y**
or from Federal reserve banks checks and
drafts drawn upon any of its depositors, and
when remitted by a Federal reserve bank, checks
and drafts drawn by any depositor in any other
Federal reserve bank or member bank upon funds
to the credit of said depositor in said reserve
bank or member bank. Nothing herein contained shall be construed as prohibiting a member bank from charging its actual expense incurred in collecting and remitting funds, or for




APPENDIX B 165

Gold settlement fund.

exchange sold to its patrons. The Federal Reserve Board shall, by rule, fix the charges to be
collected by the member banks from its patrons
whose checks are cleared through the Federal
reserve bank and the charge which may be imposed for the service of clearing or collection
rendered by the Federal reserve bank.
The Federal Reserve Board shall make and
promulgate from time to time regulations governing the transfer of funds and charges therefor among Federal reserve banks and their
branches, and may at its discretion exercise the
functions of a clearing house for such Federal
reserve banks, or may designate a Federal reserve bank to exercise such functions, and may
also require each such bank to exercise the functions of a clearing house for its member banks.
^ a t ^ Secretary of the Treasury is hereby
authorized and directed to receive deposits of
gold coin or of gold certificates with the Treasurer or an assistant treasurer of the United
States when tendered by any Federal reserve
bank or Federal reserve agent for credit to its
or his account with the Federal Reserve Board.
The Secretary shall prescribe by regulation the
form of receipt to be issued by the Treasurer
or Assistant Treasurer to the Federal reserve
bank or Federal reserve agent making the deposit, and a duplicate of such receipt shall be
delivered to the Federal Reserve Board by the
Treasurer at Washington upon proper advices
from any assistant treasurer that such deposit
has been made. Deposits so made shall be held
subject to the orders of the Federal Reserve
Board and shall be payable in gold coin or gold
certificates on the order of the Federal Reserve
Board to any Federal reserve bank or Federal
reserve agent at the Treasury or at the Subtreasury of the United States nearest the place




APPENDIX B 166
of business of such Federal reserve bank or such
Federal reserve agent: Provided, however, That
any expense incurred in shipping gold to or
from the Treasury or subtreasuries in order to
make such payments, or as a result of making
such payments, shall be paid by the Federal Reserve Board and assessed against the Federal
reserve banks. The order used by the Federal
Reserve Board in making such payments shall
be signed by the governor or vice governor, or
such other officers or members as the board may
by regulation prescribe. The form of such order shall be approved by the Secretary of the
Treasury.
The expenses necessarily incurred in carrying out these provisions, including the cost of
the certificates or receipts issued for deposits
received, and all expenses incident to the handling of such deposits shall be paid by the Federal
Reserve Board and included in its assessments
against the several Federal reserve banks.
Gold deposits standing to the credit of any
Federal reserve bank with the Federal Reserve
Board shall, at the option of said bank, be
counted as part of the lawful reserve which it is
required to maintain against outstanding Federal reserve notes, or as a part of the reserve
it is required to maintain against deposits.
Nothing in this section shall be construed as
amending section six of the Act of March fourteenth, nineteen hundred, as amended by the
Acts of March fourth, nineteen hundred and
seven, March second, nineteen hundred and
eleven, and June twelfth, nineteen hundred and
sixteen, nor shall the provisions of this section
be construed to apply to the deposits made or
to the receipts or certificates issued under those
Acts.




1 %%

APPENDIX B 167

S e c . I T ^ S o much of the provisions of section
fifty-one hundred and fifty-nine of the Revised
Statutes of the United States, and section four
of the Act of June twentieth, eighteen hundred
Deposit
o f and seventy-four, and section eight of the Act of
tionai bybanks July twelfth, eighteen hundred and eighty-two,
o t ^ e r P r o y * s i° n s
of % ^ s ^ a " !
existing statutes
condition
of as require that before any national banking ascommencing
sociation shall be authorized to commence bankbusmess
no
, n
t - i i
.
longer remg business it shall transfer and deliver to the
quired.
Treasurer of the United States a stated amount
of United States registered bonds, and so much
of those provisions or of any other provisions
of existing statutes as require any national
banking association now or hereafter organized
to maintain a minimum deposit of such bonds
with the Treasurer is hereby repealed.
refunding

bonds

Sec. 18. After two years from the passage
of this Act, and at any time during a period of
twenty years thereafter, any member bank desiring to retire the whole or any part of its
circulating notes, may file with the Treasurer
of the United States an application to sell for
its account, at par and accrued interest, United
States bonds securing circulation to be retired.
The Treasurer shall, at the end of each quarterly period, furnish the Federal Reserve Board
with a list of such applications, and the Federal
Reserve Board may, in its discretion, require
the Federal reserve banks to purchase such
bonds from the banks whose applications have
been filed with the Treasurer at least ten days
before the end of any quarterly period at which
the Federal Reserve Board may direct the pur*As amended by act approved June 01, 1917 (40
Stat, chap. 32).




APPENDIX B

155

chase to be made: Provided, That Federal reserve banks shall not be permitted to purchase
an amount to exceed $25,000,000 of such bonds
in any one year, and which amount shall include
bonds acquired under section four of this Act by
the Federal reserve bank.
Provided further, That the Federal Reserve
Board shall allot to each Federal reserve bank
such proportion of such bonds as the capital
and surplus of such bank shall bear to the aggregate capital and surplus of all the Federal
reserve banks.
Upon notice from the Treasurer of the amount
of bonds so sold for its account, each member
bank shall duly assign and transfer, in writing,
such bonds to the Federal reserve bank purchasing the same, and such Federal reserve bank
shall, thereupon, deposit lawful money with the
Treasurer of the United States for the purchase
price of such bonds, and the Treasurer shall pay
to the member bank selling such bonds any balance due after deducting a sufficient sum to redeem its outstanding notes secured by such
bonds, which notes shall be canceled and permanently retired when redeemed.
The Federal reserve banks purchasing such
bonds shall be permitted to take out an amount
of circulating notes equal to the par value of
such bonds.
Upon the deposit with the Treasurer of the
Federal reUnited States of bonds so purchased, or any
bonds with the circulating privilege acquired *e0rt™ bank
under section four of this Act, any Federal reserve bank making such deposit in the manner
provided by existing law, shall be entitled to
receive from the Comptroller of the Currency
circulating notes in blank, registered and countersigned as provided by law, equal in amount
to the par value of the bonds so deposited. Such




1 %%

Substitution
bonds of r 30 C - n t
cent bonds and
one-year 3 per
cent

notes.

APPENDIX B 169
notes shall be the obligations of the Federal reserve bank procuring the same, and shall be in
form prescribed by the Secretary of the Treasury, and to the same tenor and effect as national-bank notes now provided by law. They
shall be issued and redeemed under the same
terms and conditions as national-bank notes except that they shall not be limited to the amount
of the capital stock of the Federal reserve bank
issuing them.
Upon application of any Federal reserve
b a n k > approved by the Federal Reserve Board,
Secretary
^he Treasury may issue, in exchange for United States two per centum gold
bonds bearing the circulation privilege, but
against which no circulation is outstanding, oneyear gold notes of the United States without
the circulation privilege, to an amount not to
exceed one-half of the two per centum bonds so
tendered for exchange, and thirty-year three per1
centum gold bonds without the circulation privilege for the remainder of the two per centum
bonds so tendered: Provided, That at the time
of such exchange the Federal reserve bank obtaining such one-year gold notes shall enter into
an obligation with the Secretary of the Treasury binding itself to purchase from the United
States for gold at the maturity of such oneyear notes, an amount equal to those delivered
in exchange for such bonds, if so requested bv
the Secretary, and at each maturity of one-year
notes so purchased by such Federal reserve
bank, to purchase from the United States such
an amount of one-year notes as the Secretary
may tender to such bank, not to exceed the
amount issued to such bank in the first instance,
in exchange for the two per centum United
States gold bonds; said obligation to purchase




APPENDIX B 170

18 5

at maturity such notes shall continue in force
for a period not to exceed thirty years.
For the purpose of making the exchange herein provided for, the Secretary of the Treasury
is authorized to issue at par Treasury notes in
coupon or registered form as he may prescribe
in denominations of one hundred dollars, or any
multiple thereof, bearing interest at the rate of
three per centum per annum, payable quarterly,
such Treasury notes to be payable not more
than one year from the date of their issue in
gold coin of the present standard value, and to
be exempt as to principal and interest from the
payment of all taxes and duties of the United
States except as provided by this Act, as well
as from taxes in any form by or under State,
municipal, or local authorities. And for the
same purpose, the Secretary is authorized and
empowered to issue United States gold bonds
at par, bearing three per centum interest payable thirty years from date of issue, such bonds
to be of the same general tenor and effect and
to be issued under the same general terms and
conditions as the United States three per centum
bonds without the circulation privilege now issued and outstanding.
Upon application of any Federal reserve bank,
approved by the Federal Reserve Board, the
Secretary may issue at par such three per centum bonds in exchange for the one-year gold
notes herein provided for.
bank

reserves

Sec, 19. 1 Demand deposits within the Smc* deposits,
meaning of this Act shall comprise all deposits
payable within thirty days, and time deposits
shall comprise all deposits payable after thirty
l A s amended by act approved Aug. 15, 1914 (38
Stat., 691, chap. 253); act approved June 21, 1917
(40 Stat, chap. 32).




1 %%

APPENDIX B 171
days, all savings accounts and certificates of deposit which are subject to not less than thirty
days' notice before payment, and all postal savings deposits.2
Every bank, banking association, or trust company which is or which becomes a member of
any Federal reserve bank shall establish and
maintain reserve balances with its Federal re-

"ccfuntry"

°f

S e r v e

b a n k

a S

f o l l o w s :

banks."

(a) If not in a reserve or central reserve
city, as now or hereafter defined, it shall hold
and maintain with the Federal reserve bank of
its district an actual net balance equal to not
less than seven per centum of the aggregate
amount of its demand deposits and three per
Reserves of c e n * u m
time deposits,
reserve
city
(&) If in a reserve city, as now or hereafter
banks.
defined, it shall hold and maintain with the Fed :
eral reserve bank of its district an actual net
balance equal to not less than ten per centum
of the aggregate amount of its demand deposits
and three per centum of its time deposits: Provided, however, That if located in the outlying
districts of a reserve city or in a territory added to such a city by the extension of its corporate charter, it may, upon the affirmative vote
of five members of the federal reserve board,
hold and maintain the reserve balances specified in paragraph (a) hereof.
Reserves of
(c) If in a central reserve city, as now or
W f f i L S t ™ h e r e a £ t e r defined, it shall hold and maintain
with the Federal reserve bank of its district an
actual net balance equal to not less than thirteen
per centum of the aggregate amount of its demand deposits and three per centum of its time
deposits: Provided, however, That if located in
2 Government deposits other than postal savings deposits not subject to reserve requirements. See section
7 of act approved April 24, 1917, Appendix, p. 191.




APPENDIX B 172
the outlying districts of a central reserve city
or in territory added to such city by the extension of its corporate charter, it may, upon
the affirmative vote of five members of the federal reserve board, hold and maintain the reserve balances specified in paragraphs (a) or
(b) thereof.
No member bank shall keep on deposit with
any State bank or trust company which is not
a member bank a sum in excess of ten per centum of its own paid-up capital and surplus. No
member bank shall act as the medium or agent
of a nonmember bank in applying for or receiving discounts from a Federal reserve bank under the provisions of this Act, except by permission of the Federal Reserve Board.
The required balance carried by a member
bank with a Federal reserve bank may, under
the regulations and subject to such penalties as
may be prescribed by the Federal Reserve
Board, be checked against and withdrawn by
such member bank for the purpose of meeting
existing liabilities: Provided, however, That no
bank shall at any time make new loans or shall
pay any dividends unless and until the total balance required by law is fully restored.
In estimating the balances required by this
Act, the net difference of amounts due to and
from other banks shall be taken as the basis for
ascertaining the deposits against which required
balances with Federal reserve banks shall be determined.
National banks, or banks organized under local laws, located in Alaska or in a dependency
or insular possession or any part of the United
States outside the continental United States may
remain nonmember banks, and shall in that
event maintain reserves and comply with all the
conditions now provided by law regulating them;




18 5

ing reserves,

1 %%

APPENDIX B 173

or said banks may, with the consent of the Reserve Board, become member banks of any one
of the reserve districts, and shall in that event
take stock, maintain reserves, and be subject to
all the other provisions of this Act.
Sec. 20. So much of sections two and three
of the Act of June twentieth, eighteen hundred
Five per
and seventy-four, entitled " A n Act fixing the
t£? w e m no amount of United States notes, providing for a
abifeL art1of re<^stribution
the. national-bank currency, and
legal reserve.0
other purposes," as provides that the fund
deposited by any national banking association
with the Treasurer of the United States for the
redemption of its notes shall be counted as a
part of its lawful reserve as provided in the
Act aforesaid, is hereby repealed. And from
and after the passage of this Act such fund of
five per centum shall in no case be counted by
any national banking association as a part of
its lawful reserve.
bank

examinations

Sec. 21. Section fifty-two hundred and forty,
United States Revised Statutes, is amended to
read as follows:
Examination
The Comptroller of the Currency, with the
^member
approval of the Secretary of the Treasury, shall
Appoint examiners who shall examine every
member bank1 at least twice in each calendar
year and oftener if considered necessary: Provided, however, That the Federal Reserve Board
may authorize examination by the State authorities to be accepted in the case of State banks and
trust companies and may at any time direct the
holding of a special examination of State banks
or trust companies that are stockholders in any
i Except banks admitted to membership in the system under authority of section 9 of this act See
section 9 of this act as amended by act approved
June 31, 1917.




18 5

APPENDIX B 174
Federal reserve bank* The examiner making
the examination of any national bank, or of any
other member bank, shall have power to make
a thorough examination of all the affairs of the
bank, and in doing so he shall have power to
administer oaths and to examine any of the officers and agents thereof under oath and shall
make a full and detailed report of the condition
of said bank to the Comptroller of the Currency.
The Federal Reserve Board, upon the recommendation of the Comptroller of the Currency,
shall fix the salaries of all bank examiners and
make report thereof to Congress. The expense
of the examinations herein provided for shall be
assessed by the Comptroller of the Currency
upon the banks examined in proportion to assets or resources held by the banks upon the
dates of examination of the various banks.
In addition to the examinations made and
conducted by the Comptroller of the Currency,
-n

-i

i

*

i

^r

every Federal reserve bank may, with the approval of the Federal reserve agent or the Federal Reserve Board, provide for special examination of member banks within its district.
The expense of such examinations shall be
borne by the bank examined. Such examinations shall be so conducted as to inform the
Federal reserve bank of the condition of its
member banks and of the lines of credit which
are being extended by them. Every Federal reserve bank shall at all times furnish to the Federal Reserve Board such information as may
be demanded concerning the condition of any
member bank within the district of the said
Federal reserve bank.
No bank shall be subject to any visitorial
powers other than such as are authorized by
law, or vested in the courts of justice or such as
shall be or shall have been exercised or directed




Additional
examinations
by federal reserve

authori-

tiea authorized,

1 %%

APPENDIX B 175

by Congress, or by either House thereof or by
any committee of Congress or of either House
duly authorized.
Examination
The Federal Reserve Board shall, at least
serveebanks.rC o n c e e a c b year, order an examination of each
Federal reserve bank, and upon joint application of ten member banks the Federal Reserve
Board shall order a special examination and
report of the condition of any Federal reserve
bank.
Sec. 22.1 No member bank and no officer,
impose'd^upon director, o r employee thereof shall hereafter
bank officials, make any loan or grant any gratuity to any
examiners. and bank examiner.
Any bank officer, director, or
employee violating this provision shall be
deemed guilty of a misdemeanor and shall be
imprisoned not exceeding one year or fined not
more than $5,000, or both; and may be fined a
further sum equal to the money so loaned or
gratuity given.
(a) Any examiner accepting a loan or gratuity
from any bank examined by him or from an
officer, director, or employee thereof shall be
deemed guilty of a misdemeanor and shall be
imprisoned one year or fined not more than
$5,000, or both; and may be fined a further sum
equal to the money so loaned or gratuity given,
and shall forever thereafter be disqualified from
holding office as a national-bank examiner.
(b) No national-bank examiner shall perform
any other service for compensation while holding such office for any bank or officer, director,
or employee thereof.
No examiner, public or private, shall disclose
the names of borrowers or the collateral for
loans of a member bank to other than the proper
officers of such bank without first having obi A s amended by acts approved June 21, 1917 (40
Stat, chap. 32), and Sept. 26, 1918.




APPENDIX B 176
tained the express permission in writing from
the Comptroller of the Currency, or from the
board of directors of such bank, except when
ordered to do so by a court of competent jurisdiction, or by direction of the Congress of the
United States, or of either House thereof, or
any committee of Congress, or of either House
duly authorized. Any bank examiner violating
the provisions of this subsection shall be imprisoned not more than one year or fined not
more than $5,000, or both.
(c) Except as herein provided, any officer,
director, employee, or attorney of a member
bank who stipulates for or receives or consents
or agrees to receive any fee, commission, gift,
or thing of value from any person, firm, or corporation, for procuring or endeavoring to procure for such person, firm, or corporation, or for
any other person, firm, or corporation, any loan
from or the purchase or discount of any paper,
note, draft, check, or bill of exchange by such
member bank shall be deemed guilty of a misdemeanor and shall be imprisoned not more than
one year or fined not more than $5,000, or both.
(d) Any member bank may contract for, or
purchase from, any of its directors or from any
firm of which any of its directors is a member,
any securities or other property, when (and not
otherwise) such purchase is made in the regular course of business upon terms not less favorable to the bank than those offered to others, or
when such purchase is authorized by a majority
of the board of directors not interested in the
sale of such securities or property, such authority to be evidenced by the affirmative vote or
written assent of such directors: "Provided, however, That when any director, or firm of which
any director is a member, acting for or on behalf
of others, sells securities or other property to &




APPENDIX B185
member bank, the Federal Reserve Board by
regulation may, in any or all cases, require a
full disclosure to be made, on forms to be prescribed by it, of all commissions or other considerations received, and whenever such director or firm, acting in his or its own behalf, sells
securities or other property to the bank the
Federal Reserve Board, by regulation, may require a full disclosure of all profit realized from
such sale.
Any member bank may sell securities or
other property to any of its directors, or to a
firm of which any of its directors is a member,
in the regular course of business on terms not
more favorable to such director or firm than
those offered to others, or when such sale is
authorized by a majority of the board of directors of a member bank to be evidenced by
their affirmative vote or written assent: Provided, however, That nothing in this subsection
contained shall be construed as authorizing member banks to purchase or sell securities or other
property which such banks are not otherwise
authorized by law to purchase or sell.
(e) No member bank shall pay to any director, officer, attorney, or employee a greater
rate of interest on the deposits of such director,
officer, attorney, or employee than that paid to
other depositors on similar deposits with such
member bank.
( f ) If the directors or officers of any member bank shall knowingly violate or permit any
of the agents, officers, or directors of any member bank to violate any of the provisions of
this section or regulations of the board made
under authority thereof, every director and officer participating in or assenting to such violation shall be held liable in his personal and individual capacity for all damages which the




APPENDIX B 178
member bank, its shareholders, or any other persons shall have sustained in consequence of such
violation.
Other than the usual salary or director's fee
paid to any officer, director, employee, or attorney of a member bank, and other than a reasonable fee paid by said bank to such officer,
director, employee, or attorney for services rendered to such bank, no officer, director, employee, or attorney of a member bank shall be
a beneficiary of or receive, directly or indirectly,
any fee, commission, gift, or other consideration
for or in connection with any transaction or
business of the bank: Provided, however, That
nothing in this act contained shall be construed
to prohibit a director, officer, employee, or attorney from receiving the same rate of interest
paid to other depositors for similar deposits
made with such bank: And provided further,
That notes, drafts, bills of exchange, or other
evidences of debt executed or indorsed by directors or attorneys of a member bank may be
discounted with such member bank on the same
terms and conditions as other notes, drafts, bills
of exchange, or evidences of debt upon the affirmative vote or written assent of at least a majority of the members of the board of directors
of such member bank. No examiner, public or
private, shall disclose the names of borrowers
or the collateral for loans of a member bank to
other than the proper officers of such bank without first having obtained the express permission
tn writing from the Comptroller of the Currency, or from the board of directors of such
bank, except when ordered to do so by a court
of competent jurisdiction, or by direction of the
Congress of the United States, or of either
House thereof, or any committee of Congress
or of either House duly authorized. Any per-




1 %%

APPENDIX B 179
son violating any provision of this section shall
be punished by a fine of not exceeding $5,000
or by imprisonment not exceeding one year, or
both.
Except as provided in existing laws, this provision shall not take effect until sixty days after the passage of this Act.

Double lia
bility of stockholders.

^ e stockholders of every national
banking association shall be held individually
responsible for all contracts, debts, and engagements of such association, each to the amount
of his stock therein, at the par value thereof in
addition to the amount invested in such stock.
The stockholders in any national banking association who shall have transferred their shares
or registered the transfer thereof within sixty
days next before the date of the failure of such
association to meet its obligations, or with
knowledge of such impending failure, shall be
liable to the same extent as if they had made
no such transfer, to the extent that the subsequent transferee fails to meet such liability; but
this provision shall not be construed to affect in
any way any recourse which such shareholders
might otherwise have against those in whose
names such shares are registered at the time of
such failure.
loans

on

farm

lands

Sec. 24.1 Any national banking association
not situated in a central reserve city may make
loans secured by improved and unencumbered
farm land situated within its Federal reserve
district or within a radius of one hundred miles
of the place in which such bank is located, irrespective of district lines, and may also make
loans secured by improved and unencumbered
*As amended by act approved Sept. 7, 1916 (39
Stat, 752, chap. 461).




APPENDIX B185
real estate located within one hundred miles of
the place in which such bank is located, irrespective of district lines; but no loan made
upon the security of such farm land shall be
made for a longer time than five years, and no
loan made upon the security of such real estate
as distinguished from farm land shall be made
for a longer time than one year nor shall the
amount of any such loan, whether upon such
farm land or upon such real estate, exceed fifty
per centum of the actual value of the property
offered as security. Any such bank may make
such loans, whether secured by such farm land
or such real estate, in an aggregate sum equal
to twenty-five per centum of its capital and surplus or to one-third of its time deposits and
such banks may continue hereafter as heretofore to receive time deposits and to pay interest
on the same.
The Federal Reserve Board shall have power
from time to time to add to the list of cities in
which national banks shall not be permitted to
make loans secured upon real estate in the manner described in this section.
foreign

branches

Sec. 25. 1 Any national banking association
possessing a capital and surplus of $1,000,000
or more may file application with the Federal
Reserve Board for permission to exercise, upon
such conditions and under such regulations as
may be prescribed by the said board, either or
both of the following powers:
First. To establish branches in foreign countries or dependencies or insular possessions of
the United States for the furtherance of the
foreign commerce of the United States, and to
*As amended by act approved Sept 7, 1916 (30
Stat., 752, chap. '461), and act approved Sept 17,1919.




APPENDIX B185
act if required to do so as fiscal agents of the
United States.
Second. To invest an amount not exceeding
in the aggregate ten per centum of its paid-in
capital stock and surplus in the stock of one or
more banks or corporations chartered or incorporated under the laws of the United States or
of any State thereof, and principally engaged
in international or foreign banking, or banking
in a dependency or insular possession of the
United States either directly or through the
agency, ownership, or control of local institutions in foreign countries, or in such dependencies or insular possessions.
Until January 1, 1921, any national banking
association, without regard to the amount of
its capital and surplus, may file application
with the Federal Reserve Board for permission, upon such conditions and under such
regulations as may be prescribed by said board,
to invest an amount not exceeding in the aggregate 5 per centum of its paid-in capital and
surplus in the stock of one or more corporations chartered or incorporated under the laws
of the United States or of any State thereof
and, regardless of its location, principally engaged in such phases of international or foreign financial operations as may be necessary
to facilitate the export of goods, wares, or merchandise from the United States or any of its
dependencies or insular possessions to any foreign country: Provided, however, That in no
event shall the total investments authorized by
this section by any one national bank exceed
10 per centum of its capital and surplus.
Such application shall specify the name and
capital of the banking association filing it, the
powers applied for, and the place or places
where the banking or financial operations pro-




APPENDIX B 182

18 5

posed are to be carried on. The Federal Reserve
Board shall have power to approve or to
reject such application in whole or in part if
for any reason the granting of such application is deemed inexpedient, and shall also have
power from time to time to increase or decrease
the number of places where such banking
operations may be carried on.
Every national banking association operating
Supervision
foreign branches shall be required to furnish in- bran^helf1
formation concerning the condition of such
branches to the Comptroller of the Currency
upon demand, and every member bank investing
in the capital stock of banks or corporations described above shall be required to furnish information concerning the condition of such
banks or corporations to the Federal Reserve
Board upon demand, and the Federal Reserve
Board may order special examinations of the
said branches, banks, or corporations at such
time or times as it may deem best.
Before any national bank shall be permitted Re*triction»
to purchase stock in any such corporation the b?a°nchei°reiffn
said corporation shall enter into an agreement
or undertaking with the Federal Reserve Board
to restrict its operations or conduct its business
in such manner or under such limitations and
restrictions as the said board may prescribe for
the place or places wherein such business is to
be conducted. If at any time the Federal Reserve Board shall ascertain that the regulations
prescribed by it are not being complied with,
said board is hereby authorized and empowered
to institute an investigation of the matter and
to send for persons and papers, subpoena witnesses, and administer oaths in order to satisfy
itself as to the actual nature of the transactions referred to. Should such investigation
result in establishing the failure of the corpo-




1 %%

APPENDIX B 183
ration in question, or of the national bank or
banks which may be stockholders therein, to
comply with the regulations laid down by the
said Federal Reserve Board, such national
banks may be required to dispose of stock
holdings in the said corporation upon reasonable
notice.
Every such national banking association shall
conduct the accounts of each foreign branch independently of the accounts of other foreign
branches established by it and of its home office, and shall at the end of each fiscal period
transfer to its general ledger the profit or loss
accrued at each branch as a separate item.
Any director or other officer, agent, or employee of any member bank may, with the approval of the Federal Reserve Board, be a director or other officer, agent, or employee of
any such bank or corporation above mentioned
in the capital stock of which such member bank
shall have invested as hereinbefore provided,
without being subject to the provisions of section eight of the Act approved October fifteen,
nineteen hundred and fourteen, entitled "An
Act to supplement existing laws against unlawful restraints and monopolies, and for other
purposes."

Banking

SSSSed'to
do foreign
ranking busi*
ness.

Sec. 251

(a). Corporations to be organized for

^ purpose of engaging in international or foreign banking or other international or foreign
n

. i

,.

,

, .

,1

nnancial operations, or in banking or other
financial operations in a dependency or insular
possession of the United States, either directly
or through the agency, ownership, or control of
local institutions in foreign countries, or in such
dependencies or insular possessions as provided
This section which is known as the Edge Amendment was enacted Dec. 24, 1919, and amended February 27,1921, and June 14, 1921.




APPENDIX B 184
by this section, and to act when required by the
Secretary of the Treasury asfiscalagents of the
United States, may be formed by any number
of natural persons, not less in any case than
five: Provided, That nothing in this section
shall be construed to deny the right of the Secretary of the Treasury to use any corporation
organized under this section as depositaries in
Panama and the Panama Canal Zone, or in the
Philippine Islands and other insular possessions
and dependencies of the United States.
Such persons shall enter into articles of association which shall specify in general terms
the objects for which the association is formed
and may contain any other provisions not inconsistent with law which the association may
see fit to adopt for the regulation of its business and the conduct of its affairs.
Such articles of association shall be signed
by all of the persons intending to participate
in the organization of the corporation and,
thereafter, shall be forwarded to the Federal
Reserve Board and shall be filed and preserved
in its office. The persons signing the said articles of association shall, under their hands,
make an organization certificate which shall
specifically state:
First. The name assumed by such corporation, which shall be subject to the approval of
the Federal Reserve Board.
Second. The place or places where its operations are to be carried on.
Third. The place in the United States where
its home office is to be located.
Fourth. The amount of its capital stock and
the number of shares into which the same shall
be divided.
Fifth. The names and places of business or
residence of the persons executing the certificate




18 5

and
organization
ecrtificate-

1 %%

Corporate
powers.

APPENDIX B 185
and the number of shares to which each has
subscribed.
Sixth. The fact that the certificate is made to
enable the persons subscribing the same, and all
other persons, firms, companies, and corporations, who or which may thereafter subscribe to
or purchase shares of the capital stock of such
corporation, to avail themselves of the advantages of this section.
The persons signing the organization certific a ^ e s h a l l d u l y acknowledge the execution thereof
before a judge of some court of record or notary
public, who shall certify thereto under the seal
of such court or notary, and thereafter the certificate shall be forwarded to the Federal Reserve Board to be filed and preserved in its
office. Upon duly making and filing articles of
association and an organization certificate, and
after the Federal Reserve Board has approved
the same and issued a permit to begin business,
the association shall become and be a body corporate, and as such and in the name designated
therein shall have power to adopt and use a corporate seal, which may be changed at the pleasure of its board of directors; to have succession
for a period of twenty years unless sooner dissolved by the act of the shareholders owning
two-thirds of the stock or by an Act of Congress
or unless its franchises become forfeited by
some violation of law; to make contracts; to sue
and be sued, complain, and defend in any court
of law or equity; to elect or appoint directors,
all of whom shall be citizens of the United
States; and, by its board of directors, to appoint
such officers and employees as may be deemed
proper, define their authority and duties, require
bonds of them, and fix the penalty thereof, dismiss such officers or employees, or any thereof,
at pleasure and appoint others to fill their




APPENDIX B 186

18 5

places; to prescribe, by its board of directors,
by-laws not inconsistent with law or with the
regulations of the Federal Reserve Board regulating the manner in which its stock shall be
transferred, its directors elected or appointed,
its officers and employees appointed, its property transferred, and the privileges granted to
it by law exercised and enjoyed.
Each corporation so organized shall have
power, under such rules and regulations as the
Federal Reserve Board may prescribe:
(a) To purchase, sell, discount, and negotiate, with or without its indorsement or guaranty, notes, drafts, checks, bills of exchange,
acceptances, including bankers' acceptances,
cable transfers, and other evidences of indebtedBni g
a kn
ness; to purchase and sell, with or without its P®**"*
indorsement or guaranty, securities, including
the obligations of the United States or of any
State thereof but not including shares of stock
in any corporation except as herein provided;
to accept bills or drafts drawn upon it subject
to such limitations and restrictions as the Federal Reserve Board may impose; to issue letters
of credit; to purchase and sell coin, bullion, and
exchange; to borrow and to lend money; to issue
debentures, bonds, and promissory notes under
such general conditions as to security and such
limitations as the Federal Reserve Board may
prescribe, but in no event having liabilities outstanding thereon at any one time exceeding ten
times its capital stock and surplus; to receive
deposits outside of the United States and to
receive only such deposits within the United
States as may be incidental to or for the purpose
of carrying out transactions in foreign countries
or dependencies or insular possessions of the
United States; and generally to exercise such
powers as are incidental to the powers conferred




APPENDIX B

174

Branches
and agencies
abroad.

Power to
hold stock in
certain other
corporations
domestic and
foreign.

by this Act or as may be usual, in the determination of the Federal Reserve Board, in connection
with the transaction of the business of banking
or other financial operations in the countries,
colonies, dependencies, or possessions in which it
shall transact business and not inconsistent with
the powers specifically granted herein. Nothing
contained in this section shall be construed to
prohibit the Federal Reserve Board, under its
power to prescribe rules and regulations, from
limiting the aggregate amount of liabilities of
any or all classes incurred by the corporation
and outstanding at any one time. Whenever a
corporation organized under this section receives
deposits in the United States authorized by this
section it shall carry reserves in such amounts
as the Federal Reserve Board may prescribe,
but in no event less than 10 per centum of its
deposits.
(b) To establish and maintain for the transaction of its business branches or agencies in
foreign countries, their dependencies or colonies,
and in the dependencies or insular possessions
of the United States,, at such places as may be
approved by the Federal Reserve Board and under such rules and regulations as it may prescribe, including countries or dependencies not
specified in the original organization certificate.
(c) With the consent of the Federal Reserve
Board to purchase and hold stock or other certificates of ownership in any other corporation
organized under the provisions of this section,
or under the laws of any foreign country or a
colony or dependency thereof, or under the laws
of any State, dependency, or insular possession
of the United States but not engaged in the
general business of buying or selling goods,
wares, merchandise or commodities in the United States, and not transacting any business in




APPENDIX B 188

18 5

the United States except such as in the judgment of the Federal Reserve Board may be incidental to its international or foreign business:
Provided, however, That, except with the approval of the Federal Reserve Board, no corporation organized hereunder shall invest in any
one corporation an amount in excess of 10 per
centum of its own capital and surplus, except
in a corporation engaged in the business of banking, when 15 per centum of its capital and surplus may be so invested: Provided further, That
no corporation organized hereunder shall purchase, own, or hold stock or certificates of ownership in any other corporation organized hereunder or under the laws of any State which is in
substantial competition therewith, or which holds
stock or certificates of ownership, in corporations
which are in substantial competition with the
purchasing corporation.
Nothing contained herein shall prevent corporations organized hereunder from purchasing
and holding stock in any corporation where
such purchase shall be necessary to prevent a
loss upon a debt previously contracted in good
faith; and stock so purchased or acquired in
corporations organized under this section shall
within six months from such purchase be sold
or disposed of at public or private sale unless
the time to so dispose of same is extended by
the Federal Reserve Board.
No corporation organized under this section
shall carry on any part of its business in the operation*
United States except such as, in the judgment limited to .
of the Federal Reserve Board, shall be inci^ ^
dental to its international or foreign business:
And provided further, That except such as is
incidental and preliminary to its organization
no such corporation shall exercise any of the
powers conferred by this section until it has




176

APPENDIX B

been duly authorized by the Federal Reserve
Board to commence business as a corporation
organized under the provisions of this section.
No corporation organized under this section
shall engage in commerce or trade in commodities except as specifically provided in this secmay n T ? 1 ^ 0 ^ tion, nor shall it either directly or indirectly
Crftrolo£thcom c o n * r ° l o r
o r attempt to control or fix the
modities.
price of any such commodities. The charter of
any corporation violating this provision shall
be subject to forfeiture in the manner hereinafter provided in this section. It shall be unlawful for any director, officer, agent, or employee of any such corporation to use or to
conspire to use the credit, the funds, or the
power of the corporation to fix or control the
price of any such commodities, and any such person violating this provision shall be liable to a
fine of not less than $1,000 and not exceeding
$5,000 or imprisonment not less than one year
and not exceeding five years, or both, in the discretion of the court.
No corporation shall be organized under the
Amount of
Provisions of this section with a capital stock
capital stock,
of less than $2,000,000, one-quarter of which
must be paid in before the corporation may be
authorized to begin business, and the remainder
of the capital stock of such corporation shall
be paid in installments of at least 10 per centum
on the whole amount to which the corporation
shall be limited as frequently as one installment
at the end of each succeeding two months from
the time of the commencement of its business
operations until the whole of the capital
stock shall be paid in: Provided, however, That
whenever $2,000,00 of the capital stock of any
corporation is paid in the remainder of the corporation's capital stock or any unpaid part of
such remainder may, with the consent of the




APPENDIX B

177

Federal Reserve Board and subject to such regulations and conditions as it may prescribe, be
paid in upon call from the board of directors;
such unpaid subscriptions, however, to* be included in the maximum of 10 per centum of the
national bank's capital and surplus which a national bank is permitted under the provisions
of this Act to hold in stock of corporations engaged in business of the kind described in this
section and in section 25 of the Federal Reserve
Act as amended: Provided further, That no such
corporation shall have liabilities outstanding at
any one time upon its debentures, bonds, and
promissory notes in excess of ten times its paidin capital and surplus. The capital stock of
any such corporation may be increased at
any time, with the approval of the Federal Reserve Board, by a vote of two-thirds of its
shareholders or by unanimous consent in writing of the shareholders without a meeting and
without a formal vote, but any such increase of
capital shall be fully paid in within ninety days
after such approval; and may be reduced in
like manner, provided that in no event shall
it be less than $2,000,000. No corporation,
except as herein provided, shall during the time
it shall continue its operations withdraw or permit to be withdrawn, either in the form of dividends or otherwise, any portion of its capital.
Any national banking association may invest
in the stock of any corporation organized un- ba^fsticSJy in.
der the provisions of this section, but the aggre- vest in stock,
gate amount of stock held in all corporations
engaged in business of the kind described in
this section and in section 25 of the Federal
Reserve Act as amended shall not exceed 10
per centum of the subscribing bank's capital and
surplus.




178

Shft0
tro?

APPENDIX B
A majority of the shares of the capital stock
of any such corporation shall at all times be
held and owned by citizens of the United
States,. by corporations the controlling interest
in which is owned by citizens of the United
States, chartered under the laws of the United
S t a t e s o r o f a S t a t e o f t h e United States, or by
C° firms or companies, the controlling interest in
which is owned by citizens of the United States.
The provisions of section 8 of the act approved
October 15, 1914, entitled " A n act to supplement existing laws, against unlawful restraints
and monopolies, and for other purposes," as
amended by the acts of May 15, 1916, and
September 7, 1916, shall be construed to apply
to the directors, other officers, agents, or employees of corporations organized under the
provisions of this section: Provided, however,
That nothing herein contained shall (1) prohibit any director or other officer, agent or employee of any member bank, who has procured
the approval of the Federal Reserve Board
from serving at the same time as a director
or other officer, agent or employee of any corporation organized under the provisions of this
section in whose capital stock such member bank
shall have invested; or (2) prohibit any director
or other officer, agent, or employee of any corporation organized under the provisions of this
section, who has procured the approval of the
Federal Reserve Board, from serving at the
same time as a director or other officer, agent
or employee of any other corporation in whose
capital stock such first-mentioned corporation
shall have invested under the provisions of this
section.
No member of the Federal Reserve Board
shall be an officer or director of any corporation
organized under the provisions of this section, or




APPENDIX B 192

18 5

of any corporation engaged in similar business
organized under the laws of any State, nor hold
stock in any such corporation, and before entering upon his duties as a member of the Federal Reserve Board he shall certify under oath
to the Secretary of the Treasury that he has
complied with this requirement.
Shareholders in any corporation organized under the provisions of this section shall be liable Liability of
for the amount of their unpaid stock subscrip- shareholdcrs*
tions. No such corporation shall become a member of any Federal reserve bank.
Should any corporation organized hereunder
violate or fail to comply with any of the provisions of this section, all of its rights, privileges, Penalties,
and franchises derived herefrom may thereby be
forfeited.
Before any such corporation shall
be declared dissolved, or its rights, privileges,
and franchises forfeited, any noncompliance
with, or violation of such laws shall, however,
be determined and adjudged by a court of the
United States of competent jurisdiction, in a suit
brought for that purpose in the district or territory in which the home office of such corporation is located, which suit shall be brought by
the United States at the instance of the Federal
Reserve Board or the Attorney General. Upon
adjudication of such noncompliance or violation,
each director and officer 'who participated in,
or assented to, the illegal act or acts, shall be
liable in his personal or individual capacity for all damages which the said corporation
shall have sustained in consequence thereof. No
dissolution shall take away or impair any remedy against the corporation, its stockholders, or
officers for any liability or penalty previously
incurred.
Any such corporation may go into voluntary
liquidation and be closed by a vote of its shareholders owning two-thirds of its stock.




1 %%
.

APPENDIX B 193
.

Whenever the Federal Reserve Board shall become satisfied of the insolvency of any such
corporation, it may appoint a receiver who shall
take possession of all of the property and assets
of the corporation and exercise the same rights,
privileges, powers, and authority with respect
thereto as are now exercised by receivers of national banks appointed by the Comptroller of
the Currency of the United States: Provided,
however, That the assets of the corporations
subject to the laws of other countries or jurisdictions shall be dealt with in accordance with
the terms of such laws.
Meetings,
Every corporation organized under the prorecords, re. .
h i*
1 1 1 11
1
f
ports and ex- visions of this section shall hold a meeting of its
aminations.
stockholders annually upon a date fixed in its
by-laws, such meeting to be held at its home
office in the United States. Every such corporation shall keep at its home office books
containing the names of all stockholders thereof,
and the names and addresses of the members of
its board of directors, together with copies of all
reports made by it to the Federal Reserve
Board. Every such corporation shall make reports to the Federal Reserve Board at such times
and in such form as it may require; and shall
be subject to examination once a year and at
such other times as may be deemed necessary
by the Federal Reserve Board by examiners appointed by the Federal Reserve Board, the cost
of such examinations, including the compensation of the examiners, to be fixed by the Federal Reserve Board and to be paid by the corporation examined.
Dividends
The directors of anv corporation organized
r
a lon"

and

surplus.

j

.,

. .

i ., .

°

under the provisions of this section may, semiannually, declare a dividend of so much of the
net profits of the corporation as they shall
judge expedient; but each corporation shall,




APPENDIX B

181

before the declaration of a dividend, carry onetenth of its net profits of the preceding half
year to its surplus fund until the same shall
amount to 20 per centum of its capital stock.
Any corporation organized under the provisions of this section shall be subject to tax by
the State within which its home office is located
^ ^ ^
in the same manner and to the same extent as
other corporations organized under the laws of
that State which are transacting a similar character of business. The shares of stock in such
corporation shall also be subject to tax as the
personal property of the owners or holders
thereof in the same manner and to the same
extent as the shares of stock in similar State
corporations.
Any corporation organized under the provisions of this section may at any time within
the two years next previous to the date of the
expiration of its corporate existence, by a vote period of corof the shareholders owning two-thirds of its
^
stock, apply to the Federal Reserve Board for
its approval to extend the period of its corporate
existence for a term of not more than twenty
years, and upon certified approval of the Federal Reserve Board such corporation shall have
its corporate existence for such extended period
unless sooner dissolved by the act of the shareholders owning two-thirds of its stock, or by an
Act of Congress or unless its franchise becomes
forfeited by some violation of law.
Any bank or banking institution, principally
engaged in foreign business, incorporated hy
special law of any State or of the United States 0f existing
or organized under the general laws of any J^ t s io ^ to uc£r*
State or of the United States and having an un- der this act
impaired capital sufficient to entitle it to become
a corporation under the provisions of this section may, by the vote of the shareholders own-




1 %%

APPENDIX B 195
ing not less than two-thirds of the capital stock
of such bank or banking association, with the
approval of the Federal Reserve Board, be converted into a Federal corporation of the kind
authorized by this section with any name approved by the Federal Reserve Board: Provided, however, That said conversion shall not be
in contravention of the State law. In such case
the articles of association and organization certificate may be executed by a majority of the
directors of the bank or banking institution, and
the certificate shall declare that the owners of
at least two-thirds of the capital stock have authorized the directors to make such certificate
and to change or convert the bank or banking
institution into a Federal corporation. A majority of the directors, after executing the articles of association and the organization certificate, shall have power to execute all other papers
and to do whatever may be required to make its
organization perfect and complete as a Federal
corporation. The shares of any such corporation may continue to be for the same amount
each as they were before the conversion, and
the directors may continue to be directors of
the corporation until others are elected or appointed in accordance with the provisions of
this section. When the Federal Reserve Board
has given to such corporation a certificate that
the provisions of this section have been complied
with, such corporation and all its stockholders,
officers, and employees shall have the same powers and privileges, and shall be subject to the
same duties, liabilities, and regulations, in all
respects, as shall have been prescribed by this
section for corporations originally organized
hereunder.

Penalties.

Every officer, director, clerk, employee, or
agent of any corporation organized under this




APPENDIX B
section who embezzles, abstracts, or willfully
misapplies any of the moneys, funds, credits,
securities, evidences of indebtedness or assets of
any character of such corporation; or who, without authority from the directors, issues or puts
forth any certificate of deposit, draws any
order or bill of exchange, makes any acceptance,
assigns any note, bond, debenture, draft, bill of
exchange, mortgage, judgment, or decree; or
who makes any false entry in any book, report,
or statement of such corporation with intent,
in either case, to injure or defraud such corporation or any other company, body politic or
corporate, or any individual person, or to deceive
any officer of such corporation, the Federal Reserve Board, or any agent or examiner appointed
to examine the affairs of any such corporation;
and every receiver of any such corporation and
every clerk or employee of such receiver who
shall embezzle, abstract, or wilfully misapply
or wrongfully convert to his own use any
moneys, funds, credits, or assets of any character which may come into his possession or under his control in the execution of his trust or
the performance of the duties of his employment; and every such receiver or clerk or
employee of such receiver who shall, with
intent to injure or defraud any person,
body politic or corporate, or to deceive or
mislead the Federal Reserve Board, or any
agent or examiner appointed to examine the
affairs of such receiver, shall make any false
entry in any book, report, or record of any matter connected with the duties of such receiver;
and every person who with like intent aids or
abets any officer, director, clerk, employee, or
agent of any corporation organized under this
section, or receiver or clerk or employee of such
receiver as aforesaid in any violation of this sec-




183

1 %%

APPENDIX B 197
tion, shall upon conviction thereof be imprisoned
for not less than two years nor more than ten
years, and may also be fined not more than
$5,000, in the discretion of the court
Whoever being connected in any capacity
with any corporation organized under this section represents in any way that the United
States is liable for the payment of any bond
or other obligation, or the interest thereon, issued or incurred by any corporation organized
hereunder, or that the United States incurs any
liability in respect of any act or omission of the
corporation, shall be punished by a fine of not
more than $10,000 and by imprisonment for not
more than five years.

Gold

stand-

ard reaffirmed

Sec. 26. All provisions of law inconsistent
with or superseded by any of the provisions of
this Act are to that extent and to that extent
01&y
hereby repealed: Provided,
Nothing in
this Act contained shall be construed to repeal
the parity provision or provisions contained in
an Act approved March fourteenth, nineteen
hundred, entitled " A n Act to define and fix the
standard of value, to maintain the parity of all
forms of money issued or coined by the United
States, to refund the public debt, and for other
purposes," and the Secretary of the Treasury
may, for the purpose of maintaining such parity
and to strengthen the gold reserve, borrow gold
on the security of United States bonds authorized by section two of the Act last referred to
or for one-year gold notes bearing interest at
a rate of not to exceed three per centum per
annum, or sell the same if necessary to obtain
gold. When the funds of the Treasury on hand
justify, he may purchase and retire such outstanding bonds and notes.




APPENDIX B

18 5

Sec. 27.1 The provisions of the Act of May
thirtieth, nineteen hundred and eight, authorizing national currency associations, the issue of
additional national-bank circulation, and creat"Aldriching a National Monetary Commission, which ex- Vreeiand
pires by limitation under the terms of such Act aS'^Stended
on the thirtieth day of June, nineteen hundred \glsJUaSd 11'and fourteen, are hereby extended to June thir- vised,
tieth, nineteen hundred and fifteen, and sections
fifty -one hundred and fifty-three, fifty-one hundred and seventy-two, fifty-one hundred and
ninety-one, and fifty-two hundred and fourteen
of the Revised Statutes of the United States,
which were amended by the Act of May thirtieth, nineteen hundred and eight, are hereby reenacted to read as such sections read prior to
May thirtieth, nineteen hundred and eight, subject to such amendments or modifications as are
prescribed in this Act: Provided, however, That
section nine of the Act first referred to in this
section is hereby amended so as to change the
tax rates fixed in said Act by making the portion applicable thereto read as follows:
National banking associations having circulating notes secured otherwise than by bonds
of the United States, shall pay for the first
three months a tax at the rate of three per
centum per annum upon the average amount of
such of their notes in circulation as are based
upon the deposit of such securities, and afterwards an additional tax rate of one-half of one
per centum per annum for each month until a
tax of six per centum per annum is reached, and
thereafter such tax of six per centum per annum upon the average amount of such notes:
Provided further, That whenever in his judgment he may deem it desirable, the Secretary
1 As amended by act approved Aug. 4, 1914 (3?
Stat, 682, chap. 225).




1 %%

APPENDIX B 199
of the Treasury shall have power to suspend the
limitations imposed by section one and section
three of the Act referred to in this section,
which prescribe that such additional circulation
secured otherwise than by bonds of the United
States shall be issued only to National banks
having circulating notes outstanding secured by
the deposit of bonds of the United States to an
amount not less than forty per centum of the
capital stock of such banks, and to suspend also
the conditions and limitations of section five of
said Act except that no bank shall be permitted
to issue circulating notes in excess of one hundred and twenty-five per centum of its unimpaired capital and surplus. He shall require
each bank and currency association to maintain
on deposit in the Treasury of the United States
a sum in gold sufficient in his judgment for the
redemption of such notes, but in no event less
than five per centum. He may permit National
banks, during the period for which such provisions are suspended, to issue additional circulation under the terms and conditions of the
Act referred to as herein amended: Provided
further, That the Secretary of the Treasury, in
his discretion, is further authorized to extend
the benefits of this Act to all qualified State
banks and trust companies, which have joined
the Federal reserve system, or which may contract to join within fifteen days after the passage of this Act.

Reduction of

meiSlr^anic..

SEC. 28.

Section fifty-one hundred and
of the Revised Statutes is hereby
amended and reenacted to read as follows:
Any association formed under this title may, by
the vote of shareholders owning two-thirds of its
capital stock, reduce its capital to any sum not
below the amount required by this title to

forty-three




APPENDIX B 200
authorize the formation of associations; but no
such reduction shall be allowable which will
reduce the capital of the association below the
amount required for its outstanding circulation,
nor shall any reduction be made until the amount
of the proposed reduction has been reported to
the Comptroller of the Currency and such reduction has been approved by the said Comptroller of the Currency and by the Federal Reserve Board, or by the organization committee
pending the organization of the Federal Reserve
Board.
Sec. 29. If any clause, sentence, paragraph,
or part of this Act shall for any reason be adjudged by any court of competent jurisdiction
to be invalid, such judgment shall not affect,
impair, or invalidate the remainder of this Act,
but shall be confined in its operation to the
clause, sentence, paragraph, or part thereof directly involved in the controversy in which such
judgment shall have been rendered.
Sec. SO. The right to amend, alter, or repeal this Act is hereby expressly reserved.




APPENDIX C
Provisions
of the Farm Loan Act,
approved
July 17, 1916, which affect Federal
Reserve
Banks and member banks of the Federal
Reserve
System.
farm

loan

act

An Act To provide capital for agricultural
development, to create standard forms of investment based upon farm mortgage, to equalize rates of interest upon farm loans, to furnish a market for United States bonds, to create
Government depositaries and financial agents
for the United States, and for other purposes.
capital
Sec.
*

stock

5.—

of

federal

*

*

land
*

banks
*

At least twenty-five per centum of that part
of the capital of any Federal land bank for
which stock is outstanding in the name of national farm loan associations shall be held in
quick assets, and may consist of cash in the
vaults of said land bank, or in deposits in member banks of the Federal reserve system, or in
readily marketable securities which are approved under rules and regulations of the Federal Farm Loan Board: Provided, That not less
than five per centum of such capital shall be
invested in United States Government bonds.
government

depositaries

Sec. 6. That all Federal land banks and
joint stock land banks organized under this




188

APPENDIX C
Act, when designated for that purpose by the
Secretary of the Treasury, shall be depositaries
of public money, except receipts from customs,
under such regulations as may be prescribed by
said Secretary; and they may also be employed
as financial agents of the Government; and they
shall perform all such such reasonable duties, as
depositaries of public money and financial
agents of the Government, as may be required
of them. And the Secretary of the Treasury
shall require of the Federal land banks and
joint stock land banks thus designated satisfactory security, by the deposit of United States
bonds or otherwise, for the safekeeping and
prompt payment of the public money deposited
with them, and for the faithful performance of
their duties as financial agents of the Government. No Government funds deposited under
the provisions of this section shall be invested
in mortgage loans or farm loan bonds.
powers

op

federal

land

banks

Sec. IS. That every Federal land bank
shall have power, subject to the limitations and
requirements of this Act—
*

*

*

*

*

Fifth. To deposit its securities, and its current funds subject to check, with any member
bank of the Federal Reserve System, and to
receive interest on the same as may be agreed.
investment

in farm l o a n

bonds

Sec. 27. That farm loan bonds issued under the provisions of this Act by Federal land
banks or joint stock land banks shall be a lawful investment for all fiduciary and trust funds,
and may be accepted as security for all public
deposits.
Any member bank of the Federal Reserve




1 %%

APPENDIXB203
System may buy and sell farm loan bonds issued under the authority of this Act.
Any Federal reserve bank may buy and sell
farm loan bonds issued under this Act to the
same extent and subject to the same limitations
placed upon the purchase and sale by said
banks of State, county, district, and municipal
bonds under subsection (b) of section fourteen
of the Federal Reserve Act approved December twenty-third, nineteen hundred and thirteen.




APPENDIX D
Section 7 of "An act to authorize an issue of
bonds to meet expenditures for the national
security and defense, and, for the purpose of
assisting in the prosecution of the war, to
extend credit to foreign governments,
and
for other purposes, approved April
1917,
which affects Federal Reserve
Banks and
member banks of the Federal Reserve
System."

Sec. 7. That the Secretary of the Treasury,
in his discretion, is hereby authorized to deposit in such banks and trust companies as he
may designate the proceeds, or any part thereof, arising from the sale of the bonds and certificates of indebtedness authorized by this
Act, or the bonds previously authorized as described in section four of this Act, and such deposits may bear such rate of interest and be
subject to such terms and conditions as the Secretary of the Treasury may prescribe: Provided,
That the amount so deposited shall not in any
case exceed the amount withdrawn from any
such bank or trust company and invested in such
bonds or certificates of indebtedness plus the
amount so invested by such bank or trust company, and such deposits shall be secured in the
manner required for other deposits by section
fifty-one hundred and fifty-three, Revised Statutes, and amendments thereto: Provided further, That the provisions of section fifty-one
hundred and ninety-one of the Revised Statutes,
as amended by the Federal Reserve Act and the
amendments thereof, with reference to the reserves reguired to be kept by national banking




1 %%

APPENDIXB205
associations and other member banks of the Federal Reserve System, shall not apply to deposits of public moneys by the United States in
designated depositaries.




APPENDIX E
The "Pittman Act" of April 28,1918,
which provides for the substitution
of federal
reserve
bank notes for silver
certificates.

An Act to conserve the gold supply of the
United States; to permit the settlement in silver
of trade balances adverse to the United States;
to provide silver for subsidiary coinage and for
commercial use; to assist foreign governments
at war with the enemies of the United States;
and for the above purposes to stabilize the price
and encourage the production of silver.
Be it enacted by the Senate and House
of
Representatives
of the United States of America

in Congress assembled, That the Secretary of
the Treasury is hereby authorized from time to doFlar/'to be
time to melt or break up and to sell as bullion
bulfiojj
not in excess of three hundred and fifty million and
silver
standard silver dollars now or hereafter held in g ^ g ^ L t0
the Treasury of the United States. Any silver
certificates which may be outstanding against
such standard silver dollars so melted or broken
up shall be retired at the rate of $1 face amount
of such certificates for each standard silver dollar so melted or broken up. Sales of such bullion shall be made at such prices not less than
$1 per ounce of silver one thousand fine and
upon such terms as shall be established from
time to time by the Secretary of the Treasury.
Sec. 2. That upon every such sale of bullion from time to time the Secretary of the
Treasury shall immediately direct the Director
of the Mint to purchase, in the United States,
of the product of mines situated in the United
States and of reduction works so located, an
193




1 %%

APPENDIXB207

amount of silver equal to three hundred and seventy-one and twenty-five hundredths grains of
pure silver in respect of every standard silver
dollar so melted or broken up and sold as bullion.
Equivalent Such purchases shall be made in accordance with
purchases
oi the then existing regulations of the Mint and at
made
Director
Mint at
price
of
per ounce.

by the fixed price of $1 per ounce of silver one
of thousand fine, delivered at the option of the Difixed

_

-

^r

1

<ni .*

i

* .

$1 rector of the Mint at New York, Philadelphia,
Denver, or San Francisco. Such silver so purchased may be resold for any of the purposes
hereinafter specified in section three of this
Act, under rules and regulations to be established by the Secretary of the Treasury, and
any excess of such silver so purchased over and
above the requirements for such purposes, shall
be coined into standard silver dollars or held
for the purpose of such coinage, and silver certificates shall be issued to the amount of such
coinage. The net amount of silver so purchased,
after making allowance for all resales, shall not
exceed at any one time the amount needed to
coin an aggregate number of standard silver dollars equal to the aggregate number of standard
silver dollars theretofore melted or broken up
and sold as bullion under the provisions of this
Act, but such purchases of silver shall continue
until the net amount of silver so purchased, after making allowance for all resales, shall be
Sufficient to coin therefrom an aggregate number
of standard silver dollars equal to the aggregate
number of standard silver dollars theretofore
so melted or broken up and sold as bullion.
Sec. 3. That sales of silver bullion undei
authority of this Act may be made for the purpose of conserving the existing stock of gold ic
the United States, of facilitating the settlement
in silver of trade balances adverse to the United
States, of providing silver for subsidiary coin




APPENDIXB208

18 5

age, and for commercial use, and of assisting
foreign governments at war with the enemies of
the United States. The allocation of any silver
to the Director of the Mint for subsidiary coinage shall, for the purposes of this Act, be regarded as a sale or resale.
Sec. 4. That the Secretary of the Treasury
is authorized, from any moneys in the Treasury
not otherwise appropriated, to reimburse the
Treasurer of the United States for the difference
between the nominal or face value of all standard silver dollars so melted or broken up and
the value of the silver bullion, at $1 per ounce
of silver one thousand fine, resulting from the
melting or breaking up of such standard silver
dollars.
Sec. 5. That in order to prevent contraction
of the currency, the Federal reserve banks may issue of
be either permitted or required by the Federal
Bank
Reserve Board, at the request of the Secretary notes
of the Treasury, to issue Federal reserve bank
5
notes, in any denominations (including denomi- j^d^siiver111"
nations of $1 and $ 2 ) authorized by the Fed- certificates
eral Reserve Board, in an aggregate amount not rctiredexceeding the amount of standard silver dollars
melted or broken up and sold as bullion under
authority of this Act, upon deposit as provided
by law with the Treasurer of the United States
as security therefor, of United States certificates of indebtedness, or of United States oneyear gold notes. The Secretary of the Treasury
may, at his option, extend the time of payment
of any maturing United States certificates of
indebtedness deposited as security for such Federal reserve bank notes for any period not exceeding one year at any one extension and may,
at his option, pay such certificates of indebtedness prior to maturity, whether or not so extended. The deposit of United States certifi-




1 %%

APPENDIXB209

cates of indebtedness by Federal reserve banks
as security for Federal reserve bank notes under
authority of this Act shall be deemed to constitute an agreement on the part of the Federal
reserve bank making such deposit that the Secretary of the Treasury may so extend the time
of payment of such certificates of indebtedness
beyond the original maturity date or beyond any
maturity date to which such certificates of indebtedness may have been extended, and that
the Secretary of the Treasury may pay such
certificates in advance of maturity, whether or
not so extended.
Sec. 6. That as and when standard silver
Federal
dollars shall be coined out of bullion purchased
Gote e s r V e to B a be u n d e r authority of this Act, the Federal reserve
retired
when banks shall be required by the Federal Reserve
dollars"1 Sll I« Board to retire Federal reserve bank notes isffo'm
bullion suec * u n c * e r aut hority oi section five of this Act,
purchased.
if then outstanding, in an amount equal to the
amount of standard silver dollars so coined, and
the Secretary of the Treasury shall pay off and
cancel any United States certificates of indebtedness deposited as security for Federal reserve
bank notes so retired.
Sec. 7. That the tax on any Federal reserve
bank notes issued under authority of this Act,
secured by the deposit of United States certificates of indebtedness or United States one-year
gold notes, shall be so adjusted that the net
return on such certificates of indebtedness, or
such one-year gold notes, calculated on the face
value thereof, shall be equal to the net return on
United States two per cent bonds, used to secure
Federal reserve bank notes, after deducting the
amount of the tax upon such Federal reserve
bank notes so secured.
Sec. 8. That, except as herein provided,
Federal reserve bank notes issued under author-




APPENDIX C
ity of this Act shall be subject to all existing
provisions of law relating to Federal reserve
bank notes.
Sec. 9. That the provisions of Title VII of
an Act approved June fifteenth, nineteen hundred and seventeen, entitled "An Act to punish
acts of interference with the foreign relations,
the neutrality, and the foreign commerce of the
United States, to punish espionage, and better
to enforce the criminal laws of the United
States, and for other purposes," and the powers
conferred upon the President by subsection (b)
of section five of an Act approved October sixth,
nineteen hundred and seventeen, known as the
"Trading with the Enemy Act," shall, in so far
as applicable to the exportation from or shipment from or taking out of the United State of
silver coin or silver bullion, continue until the
net amount of silver required by section two of
this Act shall have been purchased as therein
provided.




INDEX TO FEDERAL RESERVE ACT AND ITS
AMENDMENTS1
A

SECTION

Acceptances:
By foreign banks under U. S. charter
25-a
By member banks in foreign transactions
13
By member banks in domestic transactions
13
By member banks to furnish dollar exchange
13
Purchase of, by Federal Reserve Banks
14
Rediscount of, by Federal Reserve Banks
13
Acts amended, repealed, or otherwise referred to:
Act of June 20, 1874
17, 20
Act of July 12, 1882
17
Act of January 16, 1883
11-1
Act of March 14, 1900
16, 26
Act of March 4, 1907
16
Act of May 30, 1908
16, 27
Act of March 2, 1911
16
Act of October 15, 1914
25
Act of June 12, 1916
16
United States Revised Statutes, 324
10
United States Revised Statutes, 5143
28
United States Revised Statutes, 5153
27
United States Revised Statutes, 5154
8
United States Revised Statutes, 5159
17
United States Revised Statutes, 5172
27
United States Revised Statutes, 5174
16
United States Revised Statutes, 5191
27
United States Revised Statutes, 5202
13
United States Revised Statutes, 5209
9
United States Revised Statutes, 5214
27
United States Revised Statutes, 5240
9, 21
Agents. (See Federal Reserve Agent.)
Amendments, this act subject to
S
O
Applications:
For cancellation of stock
9
For establishment of foreign branches
25
For Federal Reserve notes
For membership in Federal Reserve Banks
4
Of State banks for membership
9
Articles of association, provisions concerning, for corporations organized under "Edge Amendment"
25-a
Assessments. (See Federal Reserve Banks.)
Assistants to Federal Reserve Agent
4
*This index was compiled and officially published under the
direction of the Federal Reserve Board. It has been slightly revised and extended to cover the year 1918 by the author.
198




INDEX TO

TEXT

218
B CT X
E TO

B
Balances. (See Reserve).
19
To be maintained with Federal Reserve Banks
13
Banks. (See also State Banks, Federal Reserve Banks,
Member Banks, National Banks and "Edge Amendment"
Banks.)
Acceptance of terms of Federal Reserve act
%
Conversion of State banks into national banks
8
Definition
1
Federal Reserve Bank. (See Federal Reserve Banks.)
Reserve banks defined
1
Bank acceptances (see also Acceptances), purchase of
14
Bank examinations. (See Examinations.)
Bank reserves. (See Reserve.)
Board:
Definition
1
Federal reserve. (See Federal Reserve Board.)
Bonds:
Deposit requirement of national banks repealed.......
17
Exchange of 3 per cent for 3 per cent
18
Federal Reserve Agents
1—
1 I
Federal Reserve Banks must purchase
18
Limitation on amount to be purchased
18
Notes against bonds purchased
18
Officers and employees of Federal Reserve Banks
4
Refunding
18
Repurchase of 1-year bonds from year to year.
18
Revenue bonds, purchase by Federal Reserve Banks..
14
See also Federal Reserve Bank notes, "Pittman Act"
Appendix E, and "Edge Amendment" sec. 25-a.
Branch banks of Federal Reserve Banks.....
S
Branches and agencies in foreign countries of banks organized in U. S
25-25-a
C
Capital stock. (See stock.)
Central reserve cities:
Classification by Federal Reserve Board
Previous status not changed
Reserves for banks in outlying districts of
Certifying checks against insufficient funds
Validity of checks certified against insufficient funds..
Clearing house:
Federal Reserve Bank to act as
Federal Reserve Board may act as
Federal Reserve Board to fix charges
Collections:
By Federal Reserve Banks
Expenses of




11-e
9
19-c
9
9
16
16
16
IS
15

200

INDEX TO

TEXT

fticnox
Comptroller of Currency:
Authorizing Federal Reserve Banks to commence business
*
Ex-officio member of Federal Reserve Board
10

D

Debentures and bonds may be issued by banks organized
under "Edge Amendment"
25-a
Demand deposits, definition
19
Deposits. (See also Government deposits.)
Demand
19
Reserve against (See Reserve.)
Time
19
What deposits accepted by Federal Reserve Bank....
13
Deputy chairman:
Appointment
4
Duties
*
Directors:
Branch banks
8
Federal Reserve Bank—
Appointment of Class C
4
Classes B and C not to be officers, directors, or employees of banks.
*
Classification
*
Duties
4
Election of Classes A and B
4
Expenses
4
4
Nomination
Qualifications
*
Senators and Representatives ineligible
*
Term of office
*
Vacancies to be
filled
*
Member banks—
Fees or commission prohibited
22
Interest on deposits allowed
99
Member of Federal Reserve Board ineligible
10
Penalty for accepting fees or commissions
National banks, personal liability for noncompliance
with the act
2
Removal of
lH
Discounts:
{See also Rediscounts.)
Of member banks* own paper
13
Rate subject to regulation of Federal Reserve Board..
14
Federal advisory council to recommend rate
Dissolution:
Effect
9
National bank, for failure to comply with the act
®
Survival of remedies and penalties against dissolved
bank
9




INDEX TO ACT
District:
Definition
Federal Reserve. (Set Federal Reserve District)
District reserve electors
Dividends, Federal Reserve Banks

£

201
1CI K
X TO
1
4
7

Earnings:
Federal Reserve Banks, how distributed
7
7
Franchise tax on Federal Reserve Banks
Surplus fund of Federal Reserve Banks
7
United States earnings, how applied
7
"Edge Amendment1' Banks: must have a minimum capital of $2,000,000, 25-a; cannot carry on business in U.
S., 25-a; powers of, 25-a; national banks may purchase
stock of, 25-a; supervised by Federal Reserve Board.. 25-a
Elections:
Directors of Federal Reserve Banks
4
Emergency currency: Limitations of, act of May 30, 1908,
extended to June 30, 1915
27
Examinations:
Expenses
21
Federal Reserve Banks
21
Federal Reserve Board given power to examine all
member banks
11-a
Member banks
.
21
Other visitatorial powers
21
Special examinations by Federal Reserve Bank
21
State banks
9
State examinations may be accepted
21
Examiners:
Accepting loan or gratuity.
22
Appointment
21
Disclosure of confidential information
22
Disqualification
22
Loans and gratuities must not be made to
22
Other services shall not be performed by
22
Penalty for accepting loan or gratuity
22
Penalty for disclosure of confidential information
22
31
Powers
Salary
21
Exchange:
Not to be charged against Federal Reserve Banks
13
Not prohibited In certain cases
13
Regulated by Federal Reserve Board
13
Exemption of Federal Reserve Banks from taxation
7
F
Farm lands. (See Loans on farm lands.)
Federal Advisory Council:
Creation
12




202

INDEX TO

TEXT

ixeriox
Members
13
Meetings
13
Powers
13
Vacancies, how
filled
13
Federal Reserve Agent:
Appointment
4
Assistants
4
Bond
H-i
Compensation
4
Deposits with
16
Deposits by, with Secretary of Treasury
16
Duties in general
4
Holding deposits required by Federal Reserve A c t , . . .
16
Holding money for redemption of Federal reserve notes
16
Notice to board of issuance and withdrawal of Federal
reserve notes
16
Office
4
Qualifications
4
Redeposit of money deposited with him with Board or
Treasurer
Reports
*
4
Federal Reserve Bank Notes.....
18
See also "Pittman Act," Appendix E.
Federal Reserve Banks:
Absence of chairman or deputy chairman
4
Accounts with other Federal Reserve Banks
14
Advances to members
13
Assessments by Federal Reserve Board for expenses..
10
Authority to commence business
.
4
Banks in Alaska and dependencies and possessions may
become members
1®
Board of directors. (See also Directors)
4
Chairman of board of directors
4
Clearing and collection charges regulated by Federal
Reserve Board
16
Clearing checks
1
®
Collections
13
Deposits
13
Deputy chairman of board of directors
4
Designation
3
Directors.
Directors.)
Discounts for member banks
13
Dividends
7
7
Exemptions from taxation
Fiscal agents
9
Forfeiture of membership in
Foreign accounts
Foreign agencies
14
1
Franchise tax




216

INDEX TO

TEXT
Bicnoif

Information to be furnished Federal Reserve Board...
Initial capital
.
Liquidation
Location
Name
Officers, ineligibility of Senators and Representatives..
One in each reserve city
Open market operations
Organization
Powers
Rediscounts. (See Rediscounts.)
Shareholders. (See Shareholders.)
Special examinations of members
Stock. (See Stock.)
Supervision by Federal Reserve Board
Surplus, additions to from net earnings
Surplus left upon liquidation goes to United States....
Suspension or liquidation by Federal Reserve Board...
Suspension or removal of officers and directors
Title
Weekly statement of conditions by Federal Reserve
Board
Writing off doubtful assets
Federal Reserve Board:
Additional limitations on farm loans
Allotment of refunding bonds
Annual report
Applications for cancellation of stock
Appointment of class C directors by
Appointment of Federal Reserve Agent by
Appointment of
Approval of directors' compensation
Assessments against federal Reserve Banks to pay expenses
Chairman, Secretary of Treasury ex officio
O w i n g house may act as
*
Creation of new districts.........
Deposits with Secretary of Treasury subject to order
of
Designation or requirement of Federal Reserve Bank
to act as clearing house
Ex officio members
Expenses
Expenses of handling deposits with Secretary of Treasury
Expenses of money shipments
Federal ileserre notes, regulation of issue
First meeting
GovernorAppointment




81
3
7
9
3
4
$
14
3
13

SI
11—j
7
7
11-h
11-f
9
11-a
11-g
24
18
10
9
4
4
10
4
10
16
#
16

204

I N D E X TO ACT
SCX X
X TO

Duties
10
MembersAppointment
Expenses . .
10
Ineligible for office or employment in member
banks or with Federal reserve banks
10
No two from same district
10
Qualifications
10
Salary
10
Shall devote entire time to business of board
10
10
Term of office
Number of .members
10
Offices
10
Powers
11
Powers in conflict with those of Secretary of Treasury
10
Readjustment of districts
3
Regulations—
Charges for collections
16
Checking against reserve and member banks
19
Clearing-house activities
16
Dealings in commercial paper
13
Foreign branches
Rates of discount
1*
Rediscounts
11-b, 13
Transfers of stock
3
Removal of Federal Reserve Bank officers or directors 11-f
Reports of
10
Representation by members of commercial, industrial,
and geographical divisions of country
10
Representatives in Congress ineligible
4
Review of organization committee's determinations....
9
Secretary of Treasury ex officio chairman
10
Senators ineligible
*
Staff, employment and expenses of
H-l
Supervision of banks chartered by U. S. government for
foreign business
25-a
Supervision of Federal Reserve Banks
H-j
Supervision of foreign accounts
1*
Suspension of reserve requirements
H-c
Vacancies, how
filled
10
Vice governor
10
Weekly statement of condition of Federal Reserve
Banks
11-*
Federal reserve cities:
Designation
?
Number
9
Review of organization committee's determination.....
2
Selection of
8
Federal reserve districts:
Apportionment
*




INDEX TO

TEXT

218

„
.
«£cnoK
Creation
g
Creation of new districts
!.•!!!!!!!
%
Designation
g
Original number
g
Readjustment
g
Total number
g
Federal reserve notes:
Additional security may be required
16
Cancellation and destruction
16
Collateral security
16
Custody, pending issue
16
16
Custody, plates and dies
Deposits against
16
Deposits with Treasurer to cover redemptions
16
Discretion of Board to grant application for issue....
16
Distinctive letter and number
16
Engraving and printing
16
Expenses of issue and retirement
16
Interest on
16
Issue
16
Lien on assets of bank....
16
Must not be paid out by Federal Reserve Bank not issuing them
16
Notice to Board of issues and withdrawals..
16
Power of bank to issue
4
IT
Purposes for which issued
Redemption of
16
Reduction of liability for
16
Reserve against
16
Retirement of
16
Return or retirement by another Federal Reserve Bank
16
Status as currency
16
Supervision and control of issue and retirement
11-d
Tax on deficiency in gold reserve
11-c
Withdrawal of collateral
16
Fiduciary powers, national banks
11-k
Foreign accounts, Federal Reserve Banks
14
Foreign agencies, Federal Reserve Banks
14
Foreign banking, branches may be established abroad by
National Banks for, 25; National Banks may invest in
stock of American Banks, organized for, 25 and 25-a;
corporations may be organized under "Edge Amend25"a
ment" for
Foreign branches:
Accounts kept separate
Agreement to comply with regulations of Federal Reserve Board
Application to establish
*5
Establishment
*5
Failure to comply with regulations
»




206

INDEX TO ACT
SECTION'

Information must be furnished...
Investigation by Federal Reserve Board of failure to
comply with regulations..
May be appointed fiscal agents of United States
National banks may establish
Officers or employees of member banks may serve....
Special examinations
Forfeitures. (See Penalties and forfeitures.)
Franchise tax:
Secretary of Treasury to maintain
Tax on deficiency
G
Government deposits:
Funds to be deposited
In Federal Reserve Banks
In member banks
*
In non-member banks. (See Appendix D.)

I

35
25

25
25
25
35
2G
H^0

I5

16

Inconsistent laws repealed
Invalidity of part of act not to invalidate all

96
29

L
Loans on farm lands:
Amount
Limitations may be added by Federal Reserve Board.
National banks not in Central Reserve cities may make
Time to run

24
24
34

M
Member banks:
Acceptances by
I3
Banks in Alaska or other dependencies or possessions
may become members
1
®
Cancellation of stock in Federal Reserve Bank upon
6
insolvency
Definition
1
Discount of paper for directors, officers, or employees
23
Examinations of, by Federal Reserve Board
11-a
Fees or commissions to officers or directors for loans
prohibited
33
Forfeiture of membership
•
Increasing capital stock must increase holdings of Fed5
eral Reserve Banks' stock
Insolvency *
®
Interest on deposits of officers, directors, or employees
23
Limitations on amount of deposits with nonmember
banks
19
Loans or gratuities to bank examiners prohibited
23




220

INDEX TO

TEXT
SECTIOK

Officers and employees may serve foreign branches....
Reserves of. (See "Reserves")..
Sale of bonds securing notes to be retired
Shall make no new loans or dividends while reserve not
maintained
Shall not act as medium of nonmember banks in securing discounts from Federal Reserve Banks without
consent of Federal Reserve Board
Stock in Federal Reserve Banks not to be transferred
Surrender of stock in Federal Reserve Banks upon reduction of its own capital or upon liquidation.......
Visitatorial powers to which subject

35
19
18
19
19
5
5
31

N
National banks *
Acceptance of terms of Federal Reserve Act
3
Bond deposit requirements repealed
17
Converted from State banks
8
Definition
1
Directors personally liable for results of noncompliance
with act
3
Dissolution for noncompliance with act
9
Foreign branches. (See Foreign branches.)
Indebtedness limited
13
Loans on farm lands
94
May act as insurance agent or broker, when
IS
May hold stock in banks organized in U. S. for foreign
business
25-25a
Penalty for failing to accept terms of act
9
Personal liability of stockholders
33
Reduction of capital stock
38
Subscription to capital stock of Federal Reserve Banks 2, 4
Survival of remedies and penalties against
3
Transfer of shares before failure
33
Trustees, executors, administrators, and registrars of
11_k
stocks and banks
National Banking Association, definition
1
Notes. (See Federal Reserve notes.)
Notes against bonds purchased:
May be issued by Federal Reserve Banks
18
Issue and redemption
18
Limitations on amounts
Organization committee.
committee.)

0

(See Reserve bank organization

P

Penalties and forfeitures:
Certified checks against insufficient funds
Examiners disclosing confidential information




9
33

208

INDEX TO ACT
SECTION'

Failure of State bank to make reports
9
Forfeiture of membership
9
Loans or gratuities to examiners
22
Noncompliance with act
$
Penalty against Federal Reserve Bank for paying out
notes of another
16
Survival of penalties against dissolved banks
9
Public stock:
Definition
8
Limitation of amount held by single shareholder
3
Subscription to
2
Transfer of
3
R
Rediscounts:
Acceptances
13
Agricultural paper
13
Conditions of
®
Limitations on amount
13
Limitations on amounts for State banks
9
Paper subject to
13
11-b, 13
Regulation by Federal Reserve Board
Remedies, survival against dissolved bank
9
Repayment of deposits upon withdrawal of State banks...
9
Reports:
By State banks
*
Federal Reserve Board. (See Federal Reserve Board.)
Reserves:
Banks in Alaska, dependencies or possessions
20
Federal Reserve Bank—
Against deposits
16
Against Federal reserve notes
16
Gold deposits may be counted as part of
16
How maintained
16
Member banks—
Amount required
19
Computation of balances
19
How maintained
19
May be checked against
19
Limitation on amount deposited with nonmember
bank
19
Must be maintained
19
Permission to carry in Federal reserve banks instead
of in vault
H-m
Suspension of Reserve requirements by Federal Reserve Board
11-c
Tax upon delinquencies
ll-c
Reserve bank (see also Federal Reserve Bank), definition.
1
Reserve Bank Organization Committee:
Allotment of United States stock
9




222

INDEX TO
«

TEXT
SECTION

Calling meetings of bank directors
4
Certificates of designation of reserve districts and reserve cities
4
Exercise functions of chairman of board of directors
of Federal Reserve Banks pending organization
$
Expenses
2
Fixing geographical limits of districts
2
General powers
3
Offer of stock to public subscribers
2
Quorum
ft
Supervision of organisation of Federal Reserve Banks
2
Reserve cities:
Control of classification by Federal Reserve Board
11-e
Previous status not changed
2
Reserves required of banks in outlying districts of
19-b

6

Secretary of Treasury:
16
Deposits with, by Federal Reserve Bank or agent
Ex officio member of Federal Reserve Board
10
Expenses of handling deposits
16
Gold reserve to be maintained by
26
Management of United States stock....
2
Shareholders (see also Stock), individual liability:
Federal Reserve Banks
2
National banks
23
Silver certificates, substitution of federal reserve bank notes
for, tee "Pittman Act," Appendic E.
State banks:
Cancellation of stock in Federal Reserve Bank
9
Certificates as to liabilities of debtors
9
Certifying checks against insufficient funds
9
Conditions of membership
9
Converted into national banks
8
Depositories of government funds, see Appendix D.
Eligibility for membership
9
Examination. (See "Examinations")
9
Examinations, not subject to requirements of section 21
9
9
Forfeiture of membership
May become members of Federal Reserve Bank
9
Must be eligible for conversion into national banks...
9
Penalties for failure to make reports
9
Qualifications required to become members
9
Regulations
®
Retain powers under State charters
9
State examinations may be accepted
9, 21
Subject to provisions and penalties of Revised Statutes
5209, upon becoming members
9
Subject to section of Federal Reserve Act applied to
member banks; but not subject to section 31
9




210

INDEX TO ACT
SECTION'

Subscription to stock in Federal Reserve Banks
9
Withdrawal from membership
9
Stock:
(it* also Shareholders.)
Of Federal Reserve BanksAmount to be held by single member or shareholder
9
Calls on subscriptions
9
Cancellation of stock held by insolvent member
banks
6
5
Increase
Increase of subscriptions required on increase of
member banks' capital stock
&
Limitation on cancellations
9
National banks must subscribe
9
Payments on subscriptions
9
Public subscriptions
9
Reduction
0
Shares owned by member banks not to be transferred
$
Subscription
9
Subscription by national banks
9, 4
Subscription by State banks
9
Subscription required of new members
5
Surrender upon reduction of capital or liquidation
of member banks
$
Transfer of
9
Voting power
9
Of banks organized in U. S. for foreign business, . . . . 25-a
May be owned by national banks
25-25-a
Of member banks—
Increase
&
Reduction
5
Of national banks—
Reduction
99
Transfer of before failure
93
Surplus. (See Federal Reserve Banks.)
T
Tax upon delinquencies in reserves
11-c
Time deposits, definition
19
Trust companies, acceptance of terms of Federal Reserve
Act
9
Trust powers of national banks.
11-k

U

United States stock:
Allotment by organization committee
Management by Secretary of the Treasury




9
9

INDEX TO TEXT
Acceptances, trade acceptances and bank acceptances, may be
purchased by federal reserve banks in open market, 43-45;
may be rediscounted by federal reserve banks, 45-49. See
also bank acceptances and trade acceptances.
Advisory Council, how constituted, 33-34.
Agricultural paper, eligible for rediscount at federal reserve
banks, 63.
Bank acceptances, nature of, 47-19; advantages of, 47-49; rediscountable by federal reserve banks, 48-49; use of, in connection
with foreign trade, 80-81.
Bank credit, extent to which used as a medium of exchange in
1913, 8-10.
Bank note, bond-secured, under federal reserve law, 51-52; federal
reserve bank note, 52. See also federal reserve note and bank
reserves.
Bank-note inelasticity, under old banking system, 11-17; seasonal,
chart showing, 16.
Branches of national banks, may be established in foreign countries
82-83.
Canadian bank notes, elasticity of, compared with that of U. S.
national bank notes, 13-16.
Capital of federal reserve banks, minimum amount of, 28-29;
amount paid-in, 31; how subscribed, 31.
Capital required of banks organized for foreign trade, 82-83.
Centralization of bank reserves in respective federal reserve
districts, 36-39.
Central reserve city banks, reserve requirements of, 38.
Certificates of indebtedness of U. S., used to prevent disturbances
to money market, 94-96.
Class A directors of federal reserve banks, who and how elected,
31-33.
Class B directors of federal reserve banks, who and how elected,
32-33.
Class C directors of federal reserve banks, who and how chosen,

32-3*.

Clearing-member banks, defined, 71-72.
Clearing out-of-town checks, under old banking system, 19-23;
under federal reserve system, 71-76; cost of, how met, 75-76;
system extended to cover promissory notes, trade bills, time
drafts and similar items, 76; services rendered by system, 79-80.
Collateral loans, character of, which may be made by federal
reserve banks, 64-65.
311




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INDEX TO TEXT

Collection of out-of-town checks. See clearing out-of-town checks.
Commercial paper, creation of a broader discount market for,
45-49; kinds of, eligible for rediscount by federal reserve banks,
63-64.
Comptroller of the currency an ex-officio member of federal reserve board, 34.
Contractility of circulating credit under federal reserve system,
65-66.
Country banks, reserve requirements of, 38.
Credit elasticity under federal reserve system, 51-66.
Credit inelasticity under old banking system, evil results of, 18.
Currency shipments, heavy under old banking sjjstem, 22-23; may
be made by member banks, at expense of federal reserve banks,
to settle adverse balances arising out of clearing and collection
system, 74.
Decentralization of American banking prior to federal reserve
system, 3-7.
Defects of old banking system summarized, 2.
Deposit currency, inelasticity of, under old system, 17; elasticity
of, under federal reserve system, 58-66.
Deposit-turnover, rate of, in 1913, 9-10.
Depositaries, government, apportionment of funds among, under
old banking system, 25-27; use of federal reserve banks as,
85-94; use of individual banks as, during war, 89-90.
Directors of federal reserve banks, classes of, 31-34.
Discount market, a broader one being created by federal reserve
system, 45-49.
Discount rates of federal reserve banks, how made effective,
43n; tendency of, to equilibrium throughout country, 44-45.
Domestic exhange under federal reserve system, G7-80.
Earnings of federal reserve banks, their distribution, 60*61.
"Edge Amendment" character and powers of banks organized
thereunder, 82-84.
Elasticity, credit, under old banking system, 8-18; under federal
reserve system, 51-66. See also bank-note inelasticity and
deposit-currency inelasticity.
Exchange and transfer system, defective prior to federal reserve
system, 19-24; under federal reserve system, 67-84.
Exchange charges, formerly imposed by federal reserve banks on
member banks to cover expenses of clearing and collection system, 72-75; discontinued in 1918, 75; reasonableness of exchange
charges of member banks and clearing member banks to be determined by federal reserve board, 75-76.
Federal reserve agent, position of, 33-34.
Federal reserve agents' fund, described, 78.
Federal reserve bank agencies in foreign countries, 81.
Federal reserve banks, capital stock of, 31; subscriptions to, re-




226 INDEX TO TEXT
quired of member banks, 31; plan of organization of, 81-34;
the sole depositaries of member banks' legal reserve money,
J
36-39.
Federal reserve bank notes, deescribed, 52.
Federal reserve board, how constituted, 34; powers of, 35;
may permit reserve held against federal reserve notes to fall
below 40 per cent in times of emergency, 54-55; must impose a
deficiency tax when reserve falls below 40 per cent, 54-55; may
suspend for brief periods, in times of emergency, all reserve
requirements of act, 55; may impose a special rate of interest
on issues of federal reserve notes uncovered by gold, 57-58;
supervisory powers of over banks organized under "Edge
Amendment," 82-83.
Federal reserve clearing and collection system, 71-80.
Federal reserve districts, how determined, 28-29; map of, 30.
Federal reserve notes, described, 52-54; collateral eligible for, in
hands of federal reserve agent, 52-54; gold reserve required
against, 53-54; elasticity of, 54-58; legal minimum reserve for,
may be reduced in time of emergency, on payment of a graduated deficiency tax, 54-55; amount of, outstanding, and character
of collateral held against, 55-56; of one federal reserve bank
may not be paid out by another, 57-58.
Fiscal agents of Government, federal reserve banks serve as, 8898; render valuable services as, in war financing, 91-98.
Fisher, Irving, cited, 9, 58.
"Float," how handled under old banking system, 20-23; evils of,
largely eliminated by federal reserve clearing and collection
system, 73-7*4, 79-80.
Foreign agencies established by federal reserve banks, 81.
Foreign branches of American national banks established, 81-82.
Foreign exchange, difficulties with, prior to federal reserve system, 23-24; under federal reserve system, 80-81; services with
reference to, rendered by federal reserve system, 80-84.
Foreign trade, banks organized under federal charters to
carry on, 83-84.
Gold, amount of, held against federal reserve note issues, 55-56.
Gold reserve required against federal reserve notes, may be reduced in time of emergency, 54-55.
Gold sctttlement fund, described, 76-79.
Government, old banking system ill adapted to fiscal needs of,
25-27; participation of, in profits of federal reserve banks, 6061; services to, rendered by federal reserve system during war,
89-98.
Government depositaries, federal reserve banks serve as, 85-90;
banks which serve as, under war conditions, 89-90.
Inelasticity of bank notes under old banking system, 11-17; charts
showing, 14-16,




214

INDEX TO TEXT

Inelasticity of credit under old banking system, 8-18; evil results
of, 18.
Inelasticity of deposit credit under old banking system, 17.
Interest, a special rate of, may be imposed by federal reserve
board on issues of federal reserve notes uncovered by gold, 5758. See also discount rates.
Kinley, David, cited, 9.
Leadership, absence of, for country's banks in times of emergency prior to federal reserve act, 3-4.
Legal reserve, see reserves.
Liberty bond financing by federal reserve banks, 90-95; 91-97;
extensive use of collateral loans in, 64-65.
Live-stock paper eligible for rediscount at federal reserve banks,
63.
London, the financing of a declining proportion of our foreign
trade through, as a result of federal reserve system, 80-81.
Membership in federal reserve system, 29-31; importance of, in
time of war, 89-98.
Member banks must purchase stock in federal reserve bank, 31;
are grouped into three classes for electing federal reserve bank
directors, 32.
Mobility of reserves, inter-district, 40-19; intra-district, 49-50.
Mobilization of reserves under federal reserve system, 39-40.
National banks, as depositaries of government funds, 26-27; must
join federal reserve system, 29; may own stock in banks organized under "Edge Amendment," 83-84.
National bank notes under federal reserve law, 51-52.
Open-market operations of federal reserve banks, 43-45.
Out-of-town checks, see clearing and collection system, "float,"
and "routing of checks."
Par-clearing and collection system, description of, 71-70; membership in, 72-73.
Profits of federal reserve banks, how distributed, 60-61.
Promissory notes, collectible under federal reserve clearing and
collection system, 76.
Rediscounting, negligible under old banking system, 17; by one
federal reserve bank for another, the law, 40-42; the practice,
42-43; by federal reserve banks, kinds of paper eligible for, 6365; facilities for, at federal reserve banks, not open to paper
drawn for dealing in stocks or bonds (other than U. S. government bonds), 64.
Reserve, gold, required against federal reserve notes, may be
reduced in time of emergency, 54-55.
Reserve agents, national banks discontinued as, by federal reserve law, 36-38.
Reserve city banks, reserve requirements of, 38.
Reserves, cash, importance of, in old banking system, 4; scattered
prior to federal reserve system, and therefore ineffective, 4-7;




INDEX TO TEXT

218

immobile under old banking system, 7; deposited in reserve city
and central reserve city banks difficult to realize upon, in times
of emergency, 4-7; district centralization of, under federal reserve systems, 3G-39; legal percentages required of member
banks, 38; mobilization of, under federal reserve system, 39-40;
of member banks, legal, must all be kept on deposit in federal
reserve banks, 36-39; inter-district, mobility of, 40-49; legal,
against deposits of federal reserve banks, 59-61; intra-district,
mobility of, 49-50; legal, requirements for, less rigid under federal reserve law than formerly, 59-60; legal, against federal, reserve deposits, may be reduced in times of emergency, 61-62; of
member banks, how increased by rediscounting with federal
reserve banks, 63-G4.
Routing of checks, under old regime, 21-22; how practice padded
reserves, 21-22; evils of, largely eliminated by federal reserve
system, 73, 79.
Secretary oi Treasury, difficult task of, of apportioning government
funds among depositaries, under old banking system, 25-27; an
ex-officio member of federal reserve board and chairman, 34.
Speculation, paper used for, not rediscountable or purchaseable
by federal reserve banks, 64.
State banks and trust companies, may join federal reserve system, 29.
Sterling bills, decline in relative importance of, as compared with
bills drawn in dollars, 80-81.
Subtreasuries as depositariees of government funds, 25-26; abolished, 91.
Surplus of federal reserve banks, manner of accumulation, and
size, 60-61.
Tax, graduated deficiency, on reserve held against federal reserve
notes, 54-55; graduated, to be imposed upon deficiency in legal
reserve against deposits of federal reserve banks, 61-62.
Trade acceptances, 46-17.
Trade bills collectible under federal reserve clearing and collection system, 76.
United States Government bonds and notes, paper used for purchasing, rediscountable at federal reserve banks, 64. See also
government.
Willis, H. Parker, cited, 69, note.





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