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Contents
The Federal Reserve Act of 1913..................
Immediate O rigins of the S y s te m ..................
The Banking System in 1914...........................
A Note on Gold in 1 9 1 4 ...................................
Incorporation of the Federal Reserve Bank
of New Y o r k ...................................................
Early Response of the Commercial B a n k s ..
Organization and First Actions of the Board
Chairman Jay and Governor S tro ng ............
Opening Day, Monday, November 16, 1914..
Sixty-Two Cedar S tre e t...................................
Early Problems of Check Clearing
and C o lle c tio n ...............................................
Naming of Reserve Banks as Treasury
Depositories and Fiscal A g e n ts ..............
Early History of Earnings and Expenses___
Chairmen of the Federal Reserve Bank
of New Y o r k ...................................................
Bank S u p e rv is io n .............................................
Presidents of the Federal Reserve Bank
of New Y o r k ...................................................
The Federal Reserve T o d a y..........................
Buffalo Branch .................................................

1
2
3
4
4
7
8
10
10
12
14
15
15
17
18
19
20
21

1914-1964
In 1964 the Federal Reserve Banks m arked the
Fiftieth Anniversary of their opening. Through­
out the year most of us have been learning, in
one way or another, something about the early
days of the System.
The year in which the banks opened, 1914,
was one of turm oil and uncertainty. War had
broken out in Europe in August, and the stock
m arket was closed. As the holiday season ap­
proached, business was slow and jobs scarce.
Against this setting, the Federal Reserve Bank
of New Y o rk -a n d the other 11 Reserve B a n k s opened for business on Monday, November 16,
nearly a year after President Wilson signed the
Federal Reserve Act.




The opening was spoken of as an occasion
“ m arking the foundation of financial em ancipa­
tio n " and as the start of a new era in United
States banking. But even the most optim istic
observers were unable to foresee the vital role
the System was to play in the economy of the
country and the world. It was the half century
that follow ed that showed the System’s value
and potential.
A fter one day of business, the assets of the
Federal Reserve Bank of New York totaled $105
m illion. At the close of business exactly 50 years
later, on November 16, 1964, assets exceeded
$14.6 billion. But this difference is m erely sug­
gestive of the evolution of this Bank and of the
entire System.
0
Most of the sketches in this booklet trace the

origins of Federal Reserve functions and show
how they have developed over the years. These
v ig n e tte s o rig in a lly a pp ea re d in this B a n k ’s
Monthly Review throughout 1964. They appear
here with some additional m aterial giving a vivid
picture of the early days of the System and of
this Bank.
It is with sincere pleasure and a touch of pride
that we present you with this memento of our
Golden Anniversary.

December 1964

A lfred Hayes,
President

Harris & E w ing

December 23, 1963, marked the fiftieth anniver­
sary of President W ilson’s signing of the Federal
Reserve Act. This action by the President fo l­
lowed many years of concern over the problem
of freeing our growing and increasingly com ­
plex economy from the inflexible currency and
credit structure that existed under the National
Banking Act. The money panic of 1907 under­
scored the problem and the need for action.
Less than seven months after the peak of the
crisis, Congress passed the Aldrich-Vreeland
Act, which created a comm ission to study and
report on central banking systems. By 1912 a
commission proposal—the A ldrich B ill-w a s in­
troduced into Congress. This first legislative
effort was unacceptable, prim arily because it
called for a single central bank.
In 1913 Representative Carter Glass, C hair­
man of the House Banking and Currency Com­
mittee, introduced what became the Federal
Reserve A c t—providing for a system of regional
reserve banks with supervisory power vested in
a Board in W ashington. On September 18, 1913,
this bill passed the House, and on December 19
it received approval of the Senate.

Carter Glass

President Wilson

Harris
& E w ing




The Federal Reserve Act of 1913

The w ork of organizing the Federal Reserve
System took almost the full year 1914. By April 2,
a comm ittee consisting of the Secretary of the
Treasury, the Secretary of Agriculture, and the
C om ptroller of the Currency had determ ined
that there were to be twelve Reserve Banks,
had designated the twelve cities in which the
Reserve Banks would be located, and had de­
fined their districts.
The d istrict to be served by the New York
Bank o riginally included only the State of New
York (the northern counties of New Jersey were
added in 1915 and Fairfield County, C onnecti­
cut, in 1916). By mid-August 1914, the national
banks in New York had elected six directors of
the full nine-man board of the New York Bank.
The remaining three directors of the New York
Bank were appointed by the Federal Reserve
Board on Septem ber 30.
The Federal Reserve B o a rd ^ ty a t^ b ^ p fully
constituted on August 10, follow ing Senate ap­
proval of five members appointed by the Presj&\
/it'
dent; the other two member^ wer&The S ecretary
of the Treasury and the C om ptro lle r1of the
Currency.
All the Reserve Banks operife<[1&t I^0 v6^be r
16, 1914. At the close of business^on Tfiat first

LIBRARY

1

day the balance sheet of the New York Bank
showed assets of $105 million, consisting of
$103 m illion in gold and lawful money and
$2 m illion in bills discounted for member banks.

Immediate Origins of the System
In the decades p rior to the establishm ent of the
Federal Reserve System, it became increasingly
apparent that the country’s financial system
failed to meet fully the needs of a growing econ­
omy. These shortcom ings were most dram ati­
cally revealed in fairly frequent “ money panics.”
New York City was the fulcrum of the banking
system operating under the National Bank Act.
Many out-of-town banks kept large deposits
with New York banks, which in turn employed

a large part of these funds in stock market call
loans. In most years, seasonal currency w ith ­
drawals from the New York banks during the
autumn harvest time were met w ithout m ajor d if­
ficulty. Occasionally, however, the w ithdraw als
were so great or came at such a tim e that they
triggered a money panic. In the absence of a
“ lender of last resort,” the New York banks,
undergoing heavydem ands fo rc u rre n c y -w h ic h
co n s titu te d th e ir le g a lly req u ire d reserves
against demand deposits—would restrain w ith ­
drawals by their correspondent banks. Failure
by out-of-town banks to meet demands for cash
would then often follow. With the outflow of cur­
rency from New York, moreover, banks would
w ithdraw funds from stock m arket financing,
interest rates would rise to extraordinary levels,

The New York Times: October 23, 1907

Sinter

xk
1907. GIRLS.
J e s Insti> le g e .
1
was anlobei t N.
:ity, who

TW ENTY

PAG ES.

ONE

2

nstructe4
if Chrisy sect Is
nds, but
reference

Fair to-day and to-m orrow ; fresh
northw est to w est winds.

CENT

In G re a te r N ew Y ork,
J e rse y City, a n d N ew ark,

the train for New York, telegraphing first
to tho local Sub-Treasury to release $8,000,000 of Government money to the banlcs
of this city upon thoir deposit with the
Sub-Treasury of collateral.
The statement which was given out In
Washington ran as follows:
“ The Secretary of the Treasury Is keep­
ing In close touch with the business condi­
tions throughout the country. In the
matter of public deposits he will at times
consult the needs of legitimate business
Interests and will not hesitate to deal
promptly and adequately with any situa­
tion that may arise."
After the Secretary had gone there was
given out at the department a statement
showing that there still remain outstand­
ing only $6,070,000 of the 4 per cent, bonds,
which are being redeemed under the cir­
cular of April 2. In some quarters this
was taken to mean that the $6,000,000 re­
ported from New York to have been de­
posited had been sent there for the re­
demption of these 4 per cent, bonds.

I E lsew here,
I TW O CTCNT8.

KNICKERBOCKER
WILL NOT OPEN

It Has Twelve Millions, and as

Conference of Bankers Deems It
Unwise to Aid the Trust Com­
pany Further To-day.

rard Coliively for
effective
>w Mrs.
,
I will be
the city
vlth that
ided the
le world,
i bequest
II not be
mlnatlon.
shall be
■cullar or

WEATHER.

AID TRUST CO.
OF AMERICA

ast week,
jtlon for

THE

Much as May Be Needed
Is Pledged.
J.

P.

M O RG A N

IS

TO

HELP

With Other Financiers He Acts
at

N ig h t

M eeting

with

Secretary Cortelyou.
THE

S IT U A T IO N




CLEARING

T h e E x a m in a tio n .
While the flnunclnal community was
busy yesterday In watching closely the
efforts which were being made to re­
habilitate the affairs of the Knickerbock­
er Trust Company. If possible, the State

E IG H T M IL L IO N S W IT H D R A W N
Attorney

General

Jacksont

Though, Will T ak e No Step
to Close the Institution.
S T IL L HO PE S FOR T H E B ES T

and prices of stocks and bonds would drop
sharply.
The nation experienced some or all of these
conditions in 1873, 1884, 1893, 1901, 1903, and
1907, but each occurrence except the last led
to only m inor legislative changes. In 1907, the
economy was in a recession and stock prices
were trending downward over much of the year.
As the seasonal demand for currency and credit
built up at crop-harvesting time, a large trust
company in New York experienced difficulties
and suspended operations on October 23. Runs
developed on two other New York trust com ­
panies, and correspondent banks stepped up
th e ir w ith d ra w a ls of c u rre n c y from national
banks. The net losses of currency from New
York banks to the rest of the country increased
fourfold over seasonal norms during October
and remained at peak levels through November.
New York banks strongly discouraged or even
rationed currency payments to correspondents,
and the usual widespread disruption of pay­
ments followed. Call loan rates at one point
w ere rep orte d at 125 per ce nt per annum,
and price declines in the securities markets
worsened rapidly.
Eventually, the panic was stemmed. Gold
flowed in from abroad, partially reflecting a
balance-of-trade improvement and higher inter­
est rates. Treasury deposits of currency in New
York banks reduced the pressure on the central
money market. Clearing houses served as self­
assistance groups for local banks by placing
the credit of the group behind each member.
Nevertheless, in New York City alone three
national banks, eight state banks, and four trust
companies, with total deposits and other lia b ili­
ties of about $110 million, had either failed or
tem porarily suspended operations.
The panic of 1907 spurred serious study of
the basic problem. By May 30, 1908, a means of
creating an emergency currency to stem panics
had been provided in the Aldrich-Vreeland Act.
This act of Congress also established the Na­
tional Monetary Commission, to consist of nine
Senators and nine Representatives, for the pur-

pose of examining the monetary and banking
system and reporting on needed changes. The
monumental study of this commission (twentyfour volumes of published material) and its rec­
om m endations for a central banking system
became—in a greatly m odified form —the basis
for the Federal Reserve Act of 1913 which was
“ to furnish an elastic currency, to afford means
of rediscounting com m ercial paper, [and] to es­
tablish a more effective supervision of banking
in the United States.”

The Banking System in 1914
In early 1914, the nation’s com m ercial banking
system was very different from the system we
know today. For one thing, there were almost
tw ice as many com m ercial banks—25,500, com ­
pared w ith 13,400 to da y. A b o u t 7,500 had
national charters; the remaining 18,000 were
chartered by states.
Demand deposits and currency totaled $11.6
billion in 1914, compared with the current money
supply of about $160 billion. Currency then in­
cluded national bank notes, gold coin, and gold
c e rtific a te s -a ll of which have now disappeared
—as well as the still-fa m iliar United States notes,
silver certificates, and silver and m inor coins.
Federal Reserve notes, the bulk of today’s cur­
rency, were of course unknown.
Banking services were neither as flexible nor
as diversified as they are today. Bankers’ ac­
ceptances, which were often used in Europe to
finance dom estic and foreign trade, were not
commonly created by national banks until after
passage of the Federal Reserve Act, or by New
York State banks until shortly afterward. The
Federal Reserve Act contains specific authori­
zation for national banks to create bankers’ ac­
ceptances. In New York, the State Banking Law
of 1914 contains sim ilar authorization for New
York banks. At the time these acts were passed,
one-third of the nation’s exports and more than
one-half its im ports passed through the port of
New York.

Markets in which banks could readily obtain


and dispose of short-term earning assets were
poorly developed by to da y’s standards. Most of
the relatively small amount of United States
G overnm ent s e c u ritie s held by c o m m e rcia l
banks was unavailable for trading, because
these securities were required as legal backing
for the outstanding notes of national banks.
Even in 1914, payments by check were esti­
mated to account for about 90 per cent of all
b u s in e s s paym en ts. Loca l c le a rin g -h o u s e
arrangements were efficient, but the collection
of out-of-town checks often proved slow and
costly. Many banks, particularly those outside
financial centers, deducted exchange fees from
the facevalue of checks drawn on theirdeposits.
To avoid these charges, banks sought to route
checks only to correspondent banks, and some

of the travels of individual checks through these
correspondent links proved absurdly tim e con­
suming.
Lending co n siste d p rim a rily of s h o rt-te rm
com m ercial financing based on promissory
notes or secured by m arketable staples. These
notes were generally not very liquid; corre­
spondent relationships - under which sm aller
banks could rediscount this paper with larger
banks when pressed for funds—were of extreme
importance in providing what liquidity there
was. Correspondent deposits and discounting
concentrated in money centers—especially New
York C ity—where the banks did not themselves
have ready access to a source of liquidity in
times of stress. One of the purposes of the new
Reserve System was to fill this void. As the
Wall Street, Panic of 1907

Reserve Bank Organization Committee, estab­
lished under the Federal Reserve Act, began to
deliberate on how many Reserve D istricts to
create (the law specified a maximum of twelve
and a minimum of eight) and where to locate
the Federal Reserve Banks, it was certain that
New York City would have one of the Federal
Reserve Banks.

A Note on Gold in 1914

4

Gold played a key role in the dom estic as well
as in the international payments system in 1914.
This brief note touches on only a few facets of
a vast and complex subject.
As a result of the resumption of specie re­
dem ption in 1879 (follow ing its suspension dur­
ing the Civil War) and with the enactment of
the Gold Standard Act of 1900, the United States
was on a full gold standard, characterized by
free coinage and circulation of gold and the
convertibility of paper currency into gold coin.
In November 1914, as the Federal Reserve
Banks prepared to open for business, the United
States had an estimated $1,835 m illion of mone­
tary gold. Of this amount, $666 m illion was in
the form of gold coin held by com m ercial banks
and the public, $256 m illion in uncommitted
Treasury balances, and $913 m illion in circu ­
lating gold certificates issued to the public and
secured 100 per cent by gold in the Treasury.
Gold coin and certificates outside the Treasury
—roughly $1.6 b illio n -m a d e up more than 40 per
cent of the nation's supply of coin and cur­
rency. An estimated $800 m illion of the gold and
certificates outside the Treasury was held by
banks, serving as part of their legally required
reserves.
The first Annual Report of the Federal Re­
serve Bank of New York stated that “ gold is the
most uneconom ical medium of hand-to-hand
circulation since, when held in bank reserves,
it w ill support a volume of credit equal to four
or five times its own volum e.” The Federal Re­
serve Act made possible more effective use of
gold as a foundation for the dom estic payments




system. The expectation was that this improve­
m ent—and the base for a “ more fle xib le ” cur­
rency provided by Federal Reserve rediscount­
ing of com m ercial paper—would contribute to
the avoidance of money panics.
The Federal Reserve Act required that capital
subscriptions of member banks be paid in gold
or gold certificates. The Federal Reserve Board
also urged m em ber-banks-to-be to pay as much
as possible of their required reserve deposits
in gold or gold certificates. By December 31,
1914, the Reserve Banks held $229 m illion in
these a s s e ts -m o re than 12 per cent of the
nation’s monetary gold. Required by the Federal
Reserve Act to maintain gold reserves equiva­
lent to at least 40 per cent of their outstanding
notes and 35 per cent of their deposit liabilities,

Resolution adopted by the New York
Clearing House Association, Nov. 13, 1914

"RESOLVED, The Federal Reserve Bank of
New York having applied for the clearing
facilities of the Clearing House, the Clearing
House Comm ittee is hereby authorized to
arrange the details to accomplish this ob­
ject, under such regulations and for such
annual compensation as the Comm ittee may
prescribe.”

the Reserve Banks had, on this basis, excess
gold reserves of about $138 million. One of the
uses to which the Reserve Banks applied their
gold was the establishm ent of an Interdistrict
Settlement Fund, maintained in Washington. It
was easy and inexpensive to settle payments
between d istricts arising from check collections
by notifying the Fund to transfer gold reserves
from the account of one Reserve Bank to an­
other. In time, these transfers replaced the ex­
pensive and cumbersome shipments of gold and
gold certificates around the country that were
co m m on p rio r to th e e s ta b lis h m e n t of the
System.

Incorporation of the
Federal Reserve Bank of New York
The seal of the Bank indicates that the Federal
Reserve Bank of New York was incorporated
on May 18, 1914. This m ajor step toward the
opening of the Bank for business on November
16, 1914 required a number of prelim inary ac­
tions. For example, the Organization Committee
established by the Federal Reserve A c t—com ­
posed of the Secretary of the Treasury, the
Secretary of Agriculture, and the C om ptroller of
the Currency —had to com plete the w ork of
designating Federal Reserve D istricts and of
fixing the location of the new Reserve Banks
w ithin the Districts. The Com m ittee then had to
file with the C om ptroller a certificate containing
this information.
National banks, which were required to be­
come members of the new system if they were
to keep their national charters, had been given
sixty days follow ing passage of the act in which
to signify their acceptance of its terms and pro­
visions. The action was not required of state
banks and trust companies, which were free to
decide individually w hether or not to apply for
membership. By April 2, 1914, when the lines of
the new D is tric ts and lo c a tio n s of Reserve
Banks were announced, 477 national banks had
subm itted their assent in this District, which
then encompassed only New York State. Based

C ircular No. 1 of the Bank, which was
addressed to the Presidents of the member
banks, set November 2, 1914, as the date for
payment of the first installm ent on the
capital stock of the Bank allotted to them.
As the circu la r points out, the law required that
 be made in gold or gold certificates.
payment


C ir c u l a r N

o. i .

FEDERAL RESERVE BANK O F NEW YORK
TEM PORARY

O F F IC E .

27

P IN E

STREET

N e w Y o rk C i t y , O ctober 28, 1914.
To

th e

P r e s id e n t ,

D e a r S ir

:

R eferrin g to the notice sent you by the Federal Reserve Board, calling for payment on
N ovem ber 2, 1914, o f the first installment on the amount of capital stock o f the Federal Reserve
Bank o f N ew Y o rk allotted to your bank by the O rganization Comm ittee, you are now advised
that the amount to be paid should be one-sixth o f the par value o f the am ount allotted to you
without regard to any changes which m ay have occurred in the amount o f the capital stock or
surplus o f yo u r bank since the date o f allotment.
T h e law requires this payment to be made in gold or gold certificates, and you are requested
to make such payment, so fa r as m ay be practicable, in gold certificates of large denominations
from the reserves held in you r own vaults.
These should be delivered on N ovem ber 2d, to the Federal Reserve Bank o f N ew Y o rk at
the office o f the N ew Y o rk Clearing H ouse Association, N o. 77 Cedar Street, N ew Y o rk C ity,
where, through the courtesy o f that Association, arrangem ents have been made to receive the pay­
ment o f the first installment o f the capital stock.
Fractional amounts which cannot be paid in gold or gold certificates m ay be paid in law ful
money.
T h e Federal Reserve Board has authorized the Federal Reserve Banks to pay the express
charges involved in m aking this payment.

T h e amount o f such charges should not be deducted

from the amount remitted, but a statement o f the amount paid fo r expressagc should be rendered
a fte r N ovem ber 16th, fo r which rem ittance will be made or credit given in you r account.
Unless otherw ise requested, certificates o f payment

(w hich

are not transferable)

w ill be

m ailed to member banks, at their risk w ithout registration.
A form o f letter to be returned with you r remittance is herewith enclosed, which you are
requested to complete by filling in the blanks.
In accordance with the desire which the Secretary of the T reasu ry has expressed to the
Board o f D irectors o f this bank, that the operation of the Federal R eserve system shall be
declared established on N ovem ber 16th, the D irectors are endeavoring to complete the neces­
sary organization to receive the reserves to be transferred by member banks, and to transact
such business as w ill be undertaken at the outset.

Further notice in relation to the transfer

o f reserves w ill be sent you at an early date.
FEDERAL

RESERVE

BANK

OF

NEW

YORK,

B e n j . S t r o n g , J r .,

Governor.

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This C ertificate form ally authorized the
Federal Reserve Bank of New York to
“ comm ence business and to exercise all
pow ers granted to it by law .” John Skelton
W illiams, C om ptroller of the Currency, and also
a m em ber of the Federal Reserve Board,
signed the certificate on Saturday, November
14, 1914, two days before the Bank opened.
The No. 2 at the top of the ce rtifica te refers to
the Second Federal Reserve D istrict.

on the provision that subscriptions equal 6 per
cent of capital stock and surplus of each mem­
ber bank, the capital subscription of this Bank
was estimated to exceed $20 m illion.
With the minimum subscription requirem ent
($4 m illion for each Federal Reserve Bank) thus
satisfied, the Organization Committee desig­
nated as incorporators five of the com m ercial
banks which had filed applications for mem­
bership. The five incorporators of the New York
Bank, in the order of their listing, were the
National Commercial Bank, Albany; National
Park Bank, New York; Marine National Bank,
Buffalo; First National Bank, Syracuse; and
Irving National Bank, New York. (As a result of
various changes in organization, none of these
banks survives under the same name today.)
These incorporators executed a certificate of
organization specifying the name, the ju ris d ic ­
tion, the capital structure, the membership, and
other attributes of the new Bank. The certificate
also stated that it “ 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 [Federal Reserve] act.”
The completed certificate was filed with the
C om ptroller of the Currency on May 18, 1914.
Under the term s of the Reserve Act, incorpora­
tion was autom atic upon this filing.
Although the corporate life of this Reserve
Bank began on that day, much remained to be
done before the November opening. In the in­
tervening time, positions on the Board of D irec­
tors were filled as prescribed by the Federal
Reserve Act, bylaws were adopted, and account­
ing procedures established.
The franchises of the Reserve Banks were
o rig in a lly g ranted fo r a sp e c ifie d p erio d of
twenty years—perhaps an echo of the historical
controversies involving the first and second
Banks of the United States, and quite possibly
also a reflection of the uncertainty of how the
new System
 would work out. This lim iting fea­
ture was removed by Congress in 1927.


Incorporators of the
Federal Reserve Bank of New York
None of the five incorporator banks that ex­
ecuted the Certificate of Organization of the
Federal Reserve Bank of New York is doing
business under the same name today.
■ The National Com m ercial Bank, Albany, is
now the National Com m ercial Bank andTrust
Company, Albany.
■

National Park Bank, New York, merged

into the Chase National Bank, which is now
The Chase Manhattan Bank.
■ M arine National Bank, Buffalo, converted
to a state bank and is now the M arine Trust
Company of W estern New York.
■ First N a tio n al Bank, S yracu se, m erged
into the First Trust and Deposit Company of
Syracuse.
■ Irving National Bank, New York, converted
to a state bank called the Irving Bank of New
York, which is now the IrvingTrust Company.

Early Response
of the Commercial Banks
During 1914, as the Federal Reserve System
was about to be launched, one of the m ajor
questions was how well the System would be
accepted by prospective member banks. There
existed considerable evidence that not all im­
portant com m ercial banking interests were in
a c c o rd w ith the p rin c ip le s o f th e F ed era l
Reserve Act. W hile the measure was being dis­
cussed in Congress in 1913, an apparent con­
sensus among bankers had favored the earlier
A ldrich proposal, which had pointed toward a
more centralized institution with greater repre­
sentation for banking interests. Even Benjamin
Strong, then president of Bankers Trust Com­
pany, New York, and shortly to become the first
Governor of the Federal Reserve Bank of New

York, had expressed serious m isgivings about
the Federal Reserve System as it had emerged
from Congressional debate.
In addition to disagreem ents on principles,
there were also practical questions of potential
disadvantages of membership, such as the ab­
sence of interest payments on reserves de­
posited with a Federal Reserve Bank and the
expected adoption of a par check collection
mechanism among member banks by the Fed­
eral Reserve System. Under the earlier National
Banking Act and existing state banking laws, a
considerable portion of required reserves could
be—and usually w a s—deposited in earning ac­
counts. Furthermore, the sm aller banks in par­
ticu la r looked with disfavor at the possibility of
par check collection, since many obtained a
sizable portion of th eir earnings from exchange
fees deducted from the face value of the checks
sent to them by other banks for payment. These
banks were also apprehensive over the addi­
tional supervision of the Federal Reserve au­
th o ritie s , w h ile b o th la rg e and s m a ll sta te chartered banks felt further uncertainty as to
whether or not they could legally w ithdraw from
the System once they had accepted membership.
There were, of course, powerful factors w ork­
ing toward broad bank membership. These in­
cluded the service fa cilitie s that the new System
was about to develop, and the knowledge that
membership contributed to an over-all strength­
ening of the com m ercial banking structure. Of
even greater im portance was potential access
to the Federal Reserve “ discount w indow .” The
previous absence of a “ lender of last resort”
had often led to embarrassm ent for individual
banks and had contributed to damaging money
panics affecting the entire financial system.
The first evidence of the response of the
banking com m unity proved highly encouraging.
By April 2, 1914, no less than 7,471 national
banks had applied for stock in the Federal Re­
serve Banks, leaving only 15 choosing to relin­
quish their charters rather than join the System.
Since national banks held about half of the
banking system ’s deposits, acceptance of

7

m embership by this overwhelm ing m ajority was
of critica l importance.
The pace of entry proved considerably slower
among the estimated 9,000 state banks and trust
com panies who met the Reserve A ct’s capital
requirem ents for membership. By the end of
1916, 37 state-chartered institutions had joined
the System and 119 more had become members
by converting or reorganizing as national banks.
Meanwhile, however, evidence was accum ulat­
ing that membership did provide tangible bene­
fits to offset some of the apparent disadvan­
tages. Moreover, the passage of an amendment
to the Reserve Act on June 21, 1917—when the
number of state-chartered members had risen
to 53—assured state members that they could
w ithdraw if they desired. Between that date and
the year end 197 banks entered the System, and
in 1918 an additional 686 became members.
By the fall of 1919, five years after the inaugu­
ration of the Federal Reserve System, it was
clear that com m ercial banks generally sup­
ported the System. Its m embership included
almost one-third of all com m ercial banks, and
these members held over 70 per cent of all de­
posits in such banks. Today, a half century
later, 45 per cent of all com m ercial banks, ac­
counting for over 83 per cent of com m ercial
bank deposits, are Federal Reserve members.

Organization and First Actions
of the Board
Many im portant Washington figures gathered in
the office of the Secretary of the Treasury on
Monday morning, August 10, 1914, to witness
swearing-in of the new Federal Reserve
/
Board.. It must have been a solemn occasion.
War had broken out in Europe the previous
week, bringing with it great uncertainty and
perplexing financial problems.
The men who were to confront these prob­
lems had come to W ashington from different
backgrounds and regions. The Federal Reserve
8 LtfltfPnad specified that no two of the five men



Second District M em bership
National
Year

State Banks

Banks

& Trust C o ’s.

Total

1914

480

0

480

1915

615'

1

616

1916

6232

2

625

1917

624

43

667

1918

622

101

723

1919

636

122

758

1 131 banks in New Jersey added through re­
adjustm ent of district boundary to include
the eleven northernmost counties.
2 15 banks in Fairfield County, Conn., added
as a result of change in district boundary.

appointed by the President could come from
the same Federal Reserve D istrict and that two
should be experienced in banking or finance.
The new body was to exercise general super­
vision over the Federal Reserve Banks.
President Wilson had spent several months
making the selections, and the Senate did not
confirm all the appointm ents until the end of
July. Charles S. Hamlin, a Boston lawyer who
was then serving as an Assistant Secretary of
the Treasury, was designated Governor of the
Board (equivalent to the present Chairman).
The Vice Governor (Vice Chairman) was to be
Frederick A. Delano, a railroad executive from
Chicago. Paul M. W arburg, a member of a
New York banking firm, and W. P. G. Harding,
president of a national bank in Birmingham,
Alabama, were selected as the members with
banking or financial experience. The fifth ap­
pointee was A. C. Miller, a form er professor of
econom ics at the University of C alifornia, who
was serving as Assistant to the Secretary of the
Interior.
Under the new law the Secretary of the Treasury and the C om ptroller of the Currency were
ex-officio members. Thus, Secretary W illiam
Gibbs McAdoo and John Skelton W illiam s com ­
pleted the “ Supreme Court of Finance,” as the
Board was inform ally called. (The Federal Re­
serve Act was amended in 1935, removing the
provision for ex-officio membership, making all
seven positions appointive, and changing the
official title to the Board of Governors of the
Federal Reserve System.)
When the members of the new Board assem­
bled for th eir first meeting the Thursday after
being sworn in, they had to make a choice be­
tween im m ediately com pleting the organization
of the Reserve Banks or developing emergency
program s to counteract the financial d isturb­
ances caused by the war. The latter course was
adopted, resulting in the establishm ent of a
gold pool and a cotton loan fund.
One of the earliest and most trying financial
consequences of the war was a highly abnormal
condition in the foreign exchange market. The

balance-of-paym ents position was deteriorating
seriously in August 1914, with both the trade
and capital accounts contributing to a large
deficit. Exports declined sharply because of the
disorganization of ocean shipping and the v ir­
tual collapse of European credit markets, the
usual source for United States export financing.
At the same tim e Europeans were dum ping
holdings of Am erican securities in the New
York market, and a large amount of Am erican
obligations held by foreigners was scheduled
to mature in the near future. Discussing this
situation, the first Annual Report of the Federal
Reserve Board observed: “ The securities mar­
kets were badly dem oralized, prices fell with
alarm ing rapidity, and the country was exposed
to a serious and disastrous drain of g old.”
In response to th is problem the Federal
Reserve Board took the initiative in calling a
conference of private bankers to discuss emer­
gency action. The larger banks throughout the
country agreed to subscribe $100 m illion to a
gold pool, which could be used to settle Am er­
ican debts to Europe and thus help restore con­
fidence in the dollar.
In addition, a very serious problem confronted
the cotton-producing states. Since 60 per cent
of American cotton production was norm ally
exported, interruption of Atlantic shipping and
the closing of the United States and British
cotton exchanges resulted in a m ajor financial
crisis in the South. Cotton exporters needed
credit to finance their higher-than-norm al in­
ventories, but Southern banks were already
overextended.To provide relief, the m ajor banks
in the North, cooperating with the Federal Re­
serve Board, agreed to establish a $100 m illion
cotton loan fund, from which credit could be
made available to the cotton exporters.
Operations actually required under the gold
exchange fund were small, and under the cotton
loan fund virtually zero. However, the two plans
had a highly beneficial psychological impact.
Thus, even before the Reserve Banks opened,
the new System had dem onstrated its useful­
ness to the country.



The original Federal Reserve Board, 1914.
Standing: Paul M. Warburg, M em ber; John
Skelton Williams, C om ptroller of the Currency,
Mem ber; W. P. G. Harding, Mem ber; A. C. M iller,
Member. Seated: Charles S. Hamlin, Governor;
William G. M cAdoo, Secretary of the Treasury;
Frederick A. Delano, Vice Governor.

9

Opening Day,
Monday, November 16, 1914

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Pierre Jay, this Bank’s first Chairman and

At 10 a.m., Monday, November 16, 1914, the
Federal Reserve Bank of New York opened for
business. The Bank had been incorporated
May 18, 1914 and its d irectors elected and ap­
pointed by September 30. Pierre Jay had be­
come Chairman of the Board of D irectors and
Federal Reserve Agent. At the first board meet­
ing, on October 5, Benjamin Strong, Jr., Presi­
dent of Bankers Trust Company of New York,
was elected Governor of the Bank. An acting
deputy governor and a secretary-counsel also
w ere a p p o in te d d u rin g O ctober. T em porary
offices were located at 27 Pine Street.
On O ctober 26, Secretary of the Treasury

Benjamin Strong, Jr., was founder and prin­

Federal Reserve Agent, served in those offi­

cipal guiding spirit of this Bank in the form­

ces 12 years — longer than any other man.

ative years of the Federal Reserve System.

At the time of his appointm ent by the new

The Bank’s directors at their first meeting

Federal Reserve Board on Septem ber 30,

named Mr. Strong as Governor. That was

1914, he was vice president of the Bank of

six weeks before the Bank opened for busi­

The Manhattan Company. He left the Fed­

ness. Governor Strong was 42 then and pres­

eral Reserve Bank of New York at the end

ident of Bankers Trust Company.

of 1926, when he was appointed American

Governor Strong was a man of energy and

m em ber of the Transfer Comm ittee of the

c ou rag e. H isto rian s say no one ex e rte d
more influence on the early developm ent of

Reparation Commission.
Chairman Jay was credited with making

the R eserve System and that no c entral

scholarly and painstaking studies of a mul­

banker has been more influential to this day.

titude of novel and com plex problems of

During his 14 years as Governor of the Bank,

early Federal Reserve operations. One of

he was a dominant force in Am erican mone­

these was explaining to the banking com­

tary and banking policies.

munity and various sectors of the public the

During the 1920’s, G overnor Strong was

significance of the new Federal Reserve

the leader of a move to promote more effec­

System.

tive cooperation among the w orld’s central

Benjamin Strong said that he worked so
quietly and modestly that few people outside
his imm ediate circle of associates realized
the influence he exerted in the Bank, the

banks, and he traveled extensively to carry
out this objective.
Governor Strong kept this rem inder in the
top draw er of his desk:

System, and the whole business community.

To th e G o vern o r of this B a n k : N e v e r fo rg e t

Chairman Jay had a broad knowledge of

th at it was c re a te d to se rv e the e m p lo y e r

econom ic matters, fine analytical abilities,

a n d the w o rkin g m an, th e p ro d u c e r an d the

and

c o n s u m e r, th e im p o rte r a n d th e e x p o rte r,

was

a master of tactful

diplomacy.

He was 79 when he died in 1949.

th e c re d ito r a n d th e d e b to r; a ll in the in te r­
e s t o f the co u n try as a w h ole.

Governor Strong died in office in 1928.

10




The telegram on the rig h t was the Bank’s
authority to “ commence business’’ on Monday
morning, November 16, 1914. It was sent
from Washington at 6:40 p.m. on the Saturday
before. The certificate or charter that the
telegram refers to is reproduced on page 6.
Note the typographical e rror in the Bank's
name on the second line of the telegram.

W. G. McAdoo notified the twelve Reserve Banks
that the C om ptroller of the Currency planned
to authorize their opening on November 16.
Chairman Jay replied that he would endeavor
to assemble a tem porary organization so that
the Bank could, in fact, begin to operate that
day. Governor Strong wired Secretary McAdoo
that the need to provide suitable safeguards
for handling the amount of money involved in
the Bank’s opening m ight make it impossible
to com ply literally with the opening date an­
nouncement. Mr. Jay and Governor Strong
promised, however, to do everything possible
to meet the date.
Two weeks before the scheduled opening
banking rooms were subleased at 62 Cedar
Street. (The site of that building —a block from

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the Bank’s present 33 Liberty Street a d d re s s was on what is now the Chase Manhattan Plaza.)
The Bank moved into the Cedar Street quarters
only one week before opening day. On Satur­
day, N ovem ber 14, John S kelton W illiam s,
C om ptroller of the Currency, signed the cer­
tificates authorizing the twelve Banks to open,
as provided for in the Federal Reserve Act.
Secretary McAdoo commented that the open­
ing of the Banks marked a new era in the his­
tory of business and finance in this country.
Paul M. W arburg, closely identified with the
birth of the System and a member of the first
Federal Reserve Board, declared that coming
generations would comm em orate the date as
the beginning of financial em ancipation. The
Wall Street Journal said the openings marked

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FEDERAL RESERVE. ACT HAS BEEN

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RESERVE BANKS BY THE MORNING

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THE/ RECEIPT OF THE CERTIFICATE REFER?EB TO FOR THE «*EDE*AL RESERVE OF
NEWYORK TO COMMENCE BUSINESS
ON THE MORNING OF NOVEMBER
SIXTEENTH NINETEEN FOURTEEN.
JOHN SKELTON WILLIAMS COMPTROLLER OF THE
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a new banking era and commented, “ with the
opening of the Federal Reserve Banks through­
out the country today the consummation of the
long standing agitation for currency reform in
the United States may be said to have been
attained.”
Seven officers and eighty-five employees,
mostly borrowed from banks and the subtreas­
ury, made up the New York Bank’s opening day
staff. A permanent staff was organized during
the next eight weeks. The main business dur­
ing the opening day was accepting reserve de­
posits from Second D istrict member banks. The
National City Bank of New York was the first
city member to deposit reserves ($21 m illion
including $16 m illion in gold). By the end of
the day, 221 of 480 Second D istrict members
had deposited about $100 m illion in reserves,
including $82 m illion in gold and gold c e rtifi­
cates and $11 m illion in silver and silver cer­
tificates.
The Chemical National Bank of New York
made the first application for rediscounting for
the stated purpose of dem onstrating its desire
to support and use the fa cilitie s of the new
reserve banking system. The bills subm itted
and accepted for rediscount under this a pp li­
cation totaled $2,182,500—the largest such oper­
ation by the New York Reserve Bank in its first
year. At the close of business the first day the
Bank had total assets of $105 million, including
payments on capital subscriptions received
earlier in the month. By 8 p.m. the books had
been proved and balanced, and the first daily
report and balance sheet were sent to Wash­
ington. Chairman Jay and Governor Strong
were quoted in the newspapers the next m orn­
ing as comm enting that everything had gone off
as sm oothly as if the Bank had been open for
six months.
Years later, Governor Strong recalled the
early days of the Bank in these w ords: “ ...w e
were a lot of ‘greenhorns’ with no guide or
compass, no experience, no cohesion —with
everything to learn and, frankly, everything to
lose as the result of our inexperience.”

11

Sixty-Two Cedar Street

12

The first banking office of the Federal Reserve
Bank of New York was at 62 Cedar Street. The
building was a six-story, white marble struc­
ture considered “ well a ppointed" in its day. It
was located on the south side of Cedar, between
Nassau and W illiam Streets. Across the street
was the main office of Mutual Life Insurance Co.,
which built 62 Cedar for Harvey Fisk and Sons
in 1903. The site of the old Fisk building is now
part of Chase Manhattan Plaza, only a block
from the present home of the New York Reserve
Bank at 33 Liberty Street.
The Bank subleased from Fisk the basement
and a vault, the ground floor banking rooms, the
mezzanine, and a second floor board room. The
lease, dated November 6, only 10 days before
opening day, called for an initial annual rental
of $39,000, with increases to $41,000 for the
final year ended May 1, 1918. There was con­
siderable discussion over price, and at one
point negotiations were suspended.
These negotiations and other organizational
work were carried on from tem porary quarters
at 27 Pine Street, the first home of the Bank.
Clinton and Russell, New York City architects
who designed 62 Cedar, told the Bank before
the move that the structure was built “ in accord­
ance with the very best modern practices. It is
thoroughly substantial and extra strong . . . no
expense was spared in the construction of this
building, and the workm anship and m aterials
which entered into it were of the very best.’’
“ We know of no building in the city of New
York that is better constructed than this build­
ing,” the architects wrote the Bank.
The building had a private elevator connect­
ing the basement, ground floor, mezzanine, and
second floor. The elevator was “ capable of
carrying four people and specie and securities
from one floor to another,” one description said.
But the Bank soon found the elevator inade­
quate for its needs, and a new one was installed.
Veteran employees can still remember the old
elevator getting stuck between floors.




62 Cedar St. is the second building on the right.
Office area

During the first year at 62 Cedar, the Bank
spent $9,644 for alterations, improvements and
changes. On December 16, 1915, a little more
than a year after moving in, the Bank signed a
lease for larger offices at 15 Nassau Street,
which is at the Pine and Nassau corner of the
Equitable Building.
In 1918 the Bank acquired the m ajor portion
of the site of its present quarters at 33 Liberty
Street. The cornerstone was laid May 31, 1922
and the building finished and in full use on
October 6, 1924. Some years later, a small par­
cel of land at the W illiam Street end of the
present site was acquired, and an addition to
the building was erected. This addition was
completed in 1936.
Board room




Vault

Officers of Bank on Opening Day
Benjamin Strong, Jr., Governor
(form erly President, Bankers Trust Company,
New York)
W illiam W oodward, Acting Deputy Governor
(form erly President, Hanover N ational Bank)
An executive office

James F. Curtis, Secretary and Counsel
G. E. Gregory, Acting Cashier
(form erly Cashier, National City Bank of New
York)
B. W. Jones, Acting Assistant Cashier
(form erly Assistant Secretary, Bankers Trust
Company)
R. H. Giles, Acting Assistant Cashier
(form erly Assistant Treasurer, Bankers Trust
Company)
S. A. Welldon, Acting Assistant Cashier
(form erly Assistant Cashier, First N ational Bank
of New York)
__________________________________________ 13

Early Problems of Check Clearing
and Collection
The use of checkbook or deposit money was
firm ly established in this country by the time
the Federal Reserve Banks began operations
in 1914. Five years earlier a National Monetary
Commission study estimated that 95 per cent
of the deposits received by banks was in the
form of checks. The system of clearing and co l­
lecting checks nevertheless left much to be
desired.
In most m ajor cities the banking community
had established adequate fa cilitie s for clearing
and collecting local checks. But problems arose
when checks had to move from one city or
region to another. Many banks levied exchange
charges on these out-of-town ch e cks—“ nonpar
co lle ctio n .” These charges were defended on
the ground that payment of out-of-town checks
involved costs, including maintenance of outof-town balances with other banks and the
shipm ent of currency.
In an effort to avoid such charges, banks
would often send checks to banks with which
they had par collection agreements (collection
at face value), rather than to the banks on which
the checks were drawn. In extreme cases, the
results were ludicrous. For example, Governor
W. P. G. Harding, one of the original members
of the Federal Reserve Board, gave the fo llo w ­
ing illustration:
I recall an instance where a national bank in
Rochester, New York, sent a check drawn on a
bank in North Birm ingham , Alabama, to a cor­
respondent bank in New York City, by which
it was sent to a bank in Jacksonville, Florida,
which sent it for collection to a bank in Phila­
delphia, which in turn sent it to a bank in B alti­
more, which forw arded it to a bank in Cincinnati,
which bank sent it to a bank in Birmingham , by
which bank final collection was m ade.1

14

Such circuitous routing was costly for the
banking system as a whole, since the interm e­
diate banks were burdened with unnecessary
expenses in the handling of checks. Moreover,




Birm ingham

C incinnati
Rochester

Philadelphia

New York

some bank customers, confident that checks
would wander around for a week or more, drew
checks on nonexistent deposits in the expecta­
tion of depositing the money before the checks
were presented.
After the new Reserve Banks opened for
business, the necessity of establishing an effi­
cient national clearing and collection fa cility
was quickly recognized, and par collection be­
came one of the System ’s m ajor operational
goals. To achieve this end, the costs regarded
by banks as justification for exchange charges
had to be minimized or elim inated. Since each
member bank had to maintain a balance (re­
serve account) with its Reserve Bank, checks
could easily be paid by debiting these accounts,
thereby reducing the member bank’s need for
correspondent balances and cutting the related
costs. Thus, with the creation of the Federal
Reserve System and its centralization of reserve
balances, one im portant reason for exchange
charges was elim inated in the case of member
banks.
The Federal Reserve Banks, nonetheless,
moved only cautiously tow ard the goal of actu­
ally requiring par collection. By June 1915, each
Federal Reserve Bank had established a system

of par check collection for its members. But
participation in these clearing systems was vol­
untary, and by the end of 1915 only 25 per cent
of the member banks had agreed to par co l­
lection.
In 1916 the Reserve Banks began to absorb
the charges on currency shipments from mem­
ber banks to cover reserve deficiencies caused
by check clearance. This elim inated a second
cost justification for exchange charges. There­
upon, and in the same year, the Federal Reserve
Board adopted a regulation requiring member
banks to pay at par all checks drawn upon
th e m s e lv e s and p re s e n te d by the R eserve
Banks.
To broaden the par collection system further,
Congress amended the Federal Reserve Act in
1917 to perm it a nonmember bank to use the
System ’s collection facilities, provided it main­
tained a clearing balance at its d istrict Reserve
Bank and paid at par checks received from the
Reserve Bank.
These early efforts to establish a national par
collection system were quite successful. By
1921, all member banks and 91 per cent of some
'W . P. G. H arding, The Form ative P e rio d o f the Federal
Reserve System (Boston, 1925), p. 51.

20,000 nonmember banks were paying checks
at par. Today, in addition to the 6,200 member
banks, there are 5,800 nonmember banks clear­
ing at par, 125 of which keep clearing balances
at a Reserve Bank. There are still some 1,600
nonmember banks which do not remit at par.

Naming of Reserve Banks
as Treasury Depositories and
Fiscal Agents
The authors of the Federal Reserve Act were
aware that the methods employed in managing
the Treasury’s finances had serious defects.
Many of the Governm ent’s fiscal affairs were
handled by the Independent Treasury System,
which had been established in 1846 to provide
places other than private banks for the safe­
keeping of Government funds. The defects of
that system had been described in a study pub­
lished by the National Monetary Commission.
Most of the Treasury’s revenues from cus­
toms and taxes were collected in currency and
coin, and it was Treasury practice during most
of the pre-W orld War I period to hold this
money in the subtreasury offices located around
the country until it was needed for disburse­
ments. Hence, w henTreasury receipts exceeded
disbursements and the surplus was held in the
subtreasury vaults, money in circulation de­
clined. Since currency and coin were also an
im portant com ponent of bank reserves, its w ith ­
drawal from the banks contracted the reserve
base, and there was no central banking m echa­
nism through which this effect could have been
offset at tim es when reserve w ithdraw als were
inappropriate in the light of current econom ic
developments.
Successive Secretaries of the Treasury had
attempted on occasion to relieve undesirable
contractions of the bank reserve base by trans­
fe rrin g funds from the su b tre a su rie s to the
national banks, which had been used as de­
positories since the passage of the National
Banking Act. These attempts were only par­
tially successful. The establishm ent of the Fed­



eral Reserve System itself was, of course, a
m ajor step in com bating this and other inflex­
ibilities in the co un try’s money and banking
structure.
An early version of the Federal Reserve bill
required that all general funds of the Treasury
be deposited in the Federal Reserve Banks
within twelve months after passage of the act.
This provision was successfully opposed by
Secretary of the Treasury McAdoo as being too
rigid. Thus, the final version of the bill left the
amount and tim ing of the transfer of funds up
to the discretion of the Secretary of the Treas­
ury, thereby perm itting him to continue using
the subtreasuries and national banks as de­
positories. This earlier draft of the bill also
appointed the Federal Reserve Banks as fiscal
agents, whereas the final act authorized the
Secretary of the Treasury to require the Banks
to act as fiscal agents at his discretion. In actual
fact, the Secretary of the Treasury began using
the new Reserve Banks as depositories in 1915
and as fiscal agents in January 1916.
At first, the fiscal services perform ed by the
Reserve Banks were lim ited to receiving de­
posits of Government collectors of customs and
internal revenue and to paying checks and w ar­
rants drawn upon the United States Treasury.
However, after the United States entered W orld
War I, Secretary M cAdoo turned to the Reserve
Banks for other services. In particular, the
Banks were authorized to sell, issue, exchange,
and convert Liberty bonds, and they became the
focal points for local Liberty Loan committees,
which made a vital contribution to the financing
of the war.
Another useful service perform ed by the
Federal Reserve Banks was the transfer of
money around the country by w ire and book­
keeping entries. This procedure — made pos­
sible through the deposit of gold and gold
certificates by each Reserve Bank in the gold
settlem ent fund in W ashington—elim inated the
necessity for expensive shipments of coin and
currency between subtreasuries.
It soon became evident that the Reserve

System could perform many of the fiscal agency
functions at least as efficiently as subtreasuries,
and that having both was an unnecessary ex­
pense. In May 1920, therefore, Congress passed
a bill directing the discontinuance of the nine
subtreasuries on or before July 1, 1921. The
Secretary of the Treasury proceeded to carry
out this task by transferring many of the re­
maining fiscal agency functions from the sub­
treasuries to the Reserve Banks. The last sub­
treasury, located in C incinnati, was closed on
February 10, 1921.

Early History of Earnings
and Expenses
Relying in part on the experience of other cen­
tral banks, the legislators and banking experts
who drafted the Federal Reserve Act expected
that the earnings of the new Reserve Banks
would tend to average higher than their ex­
penses. The distribution of these earnings was
therefore carefully specified in the act.
First there was provision for a 6 per cent
cum ulative dividend on capital stock purchased
by member banks. Earnings in excess of these
dividend payments were then to be paid to the
United States Treasury (except that one-half of
the excess was to be retained until the surplus
account equaled 40 per cent of paid-in capital).
Until 1933 these payments to the Treasury rep­
resented a “ franchise tax.” In that year the tax
was repealed to perm it the Federal Reserve
Banks to replenish th eir surplus, which was
substantially reduced when an act of Congress
required the Banks to subscribe $139 m illion
to the capital of the new Federal Deposit Insur­
ance C orporation. Since 1947, payments to
the Treasury have been made as “ interest on
Federal Reserve notes.”
Although the sources of potential Reserve
Bank earnings—loans and rediscounts for mem­
ber banks and interest on securities acquired
in open m arket operations —were well known
from the outset, a few member banks were pes­
sim istic about the prospect of receiving the

15

16

return specified by the statute. In New York
State, the directors of one member bank stated
p ublicly that they were w riting down to zero
the value of their Reserve Bank stock since
they did not foresee any dividend payments.
In late 1914 and through 1915, such pessi­
mism proved tem porarily justified as total earn­
ings of the Federal Reserve Banks were in fact
small. The Federal Reserve Act had lowered
reserve requirem ents of national banks, and
this step, coupled with an inflow of gold, brought
about conditions of monetary ease so that there
was little need for rediscounting. Through the
end of 1915, the twelve Reserve Banks accom ­
modated 2,073 member banks, but these dis­
counts had totaled only $183 m illion.
With respect to the acquisition of earning
assets through open m arket operations, the New
York Federal Reserve Bank noted that suitable
investments were in strong demand, causing in­
terest rates to decline. In its first Annual Report,
the Bank stated:
Realizing the influence which the reserve
bank m ight have upon these rates if it pressed
its funds upon the m arket, it has been the p o l­
icy of the bank to follow rather than lead the
m arket in its decline. In these circum stances,
no thought could be given to earning dividends.
Thus, from the beginning, the System felt
that central bank decisions should not be in­
fluenced by considerations of earnings.
In the aggregate, current expenses of all the
Reserve Banks exceeded earnings by $141,000
between the beginning of operations in Novem­
ber 1914 and the end of 1915. Reflecting re­
gional conditions, results varied among the
Banks and two Banks actually posted sufficient
earnings after expenses to initiate dividend
payments. However, it was estimated that addi­
tional net earnings of approxim ately $3.4 m illion
would have been needed to meet dividend re­
quirem ents of all twelve Banks.
In 1916, earnings of the Banks rose while
expenses, no longer affected by organizational
outlays, rem ained steady. The tw elve Banks
were therefore able to declare partial dividends




of $1.7 m illion on member bank stock. In 1917
war financing swelled earnings, and at the year
end the Reserve Banks made their first trans­
fers to surplus and payments to the Treasury.
By June 1918 all the Reserve Banks had brought
dividend payments up to date.
Since that time, there have been four years
in which Reserve Bank earnings have not cov­
ered expenses and dividends. Over the past
fifty years as a whole, however, the System has
paid into the Treasury more than $9.3 b illio n —
an amount that far exceeds the $590 m illion in
dividends paid to member banks on capital
stock during the same period. In 1964 the Re­
serve Banks’ current earnings were $1.34 billion,
their current expenses $197 m illion, dividends
$31 million, and payments to the Treasury $1.58
billion.

Statement of Condition of the
Federal Reserve Bank of New York
(In millions of dollars)
November 16,

November 16,
ASSETS

1914

Gold certificate a c c o u n t ......................

1964

55

3,366

Redemption fund for F. R. n o t e s .........

—

345

Total gold certificate reserves . . . .

55

3,711

F. R. notes of other B a n k s ..................

—

165

Other cash .................................................

6

39

Discounts and a d v a n c e s ......................

2

185

LIA BILITIES

1914

Federal Reserve n o t e s ...........................

8,057

102

4,650

Deposits:
M em ber bank reserves ....................
U. S. Treasurer—general account .

—

83

Foreign

—

32

....................................................

Other ........................................................
Total deposits ..................................

Acceptances:

1964

—

-

132

102

4,897
1,236

Bought o u t r ig h t ....................................

—

40

Deferred availability cash it e m s .........

—

Held under repurchase agreem ent

-

32

O ther liabilities and accrued dividends

—

28

102

14,218

Total Liabilities ...............................
CAPITAL ACCO U NTS

U. S. Governm ent securities:
Bought outright—
Bills ......................................................

-

C e rtific a te s ........................................

—

1,263
-

Capital paid i n ..........................................

3

137

Surplus

........................................................

—

264

O ther capital accounts .........................

—

22

105

14,641

Notes ...................................................

—

5,897

Bonds

.................................................

—

1,225

Total bought o u trig h t....................

—

8,385

Held under repurchase agreem ent

—

210

Total U.S. Governm ent securities

—

8,595

to deposit and F.R. note liabilities

Total loans and s e c u r itie s ...........

2

8,852

combined

Cash items in process of collection . .

42a

1,805

Bank p re m is e s ...........................................

—

8

O ther assets .............................................

—

61

Total A s s e ts ......................................

105

14,641

Total Liabilities
and Capital A c c o u n ts ....................
Ratio of gold certificate reserves
............................................... 5 4 .2% b 28.6%

a Represents total of “Clearing House Certificates.”
b If calculated as done currently (this figure was not
computed at the time).

Chairmen of the
Federal Reserve Bank of New York

Gates W. McGarrah was named to succeed
Chairman Jay in 1927, when Mr. Jay ac­
cepted appointm ent to the Reparation Com­
mission’s

Transfer

Comm ittee.

The

new

chairman, then 64, resigned as chairman
of the executive com mittee of the Chase
National Bank to accept the appointment.
The next year, upon the death of Governor
Strong, he was appointed Acting Governor.
He remained chairman until 1930, when he
becam e Am erican Director of the Bank for
International Settlements.
Upon his departure, fellow Reserve Bank
directors lauded

Mr. McGarrah

for “ rare

judgm ent and an unselfish loyalty to the
public good; sound and unswerving in prin­
ciple, yet very cooperative in attitude.” Be­
fore serving with the Federal Reserve, Mr.
M cG arrah had been president of the New
York Clearing House Association in 1917-19
and Am erican m em ber of the Reichsbank’s
General Council in Berlin. He was a class A
director of this Bank from 1923 through 1925.
Mr. M cG arrah started in banking as a
clerk at the Goshen National Bank, was
president of the Leather M anufacturers Na­
tional Bank of New York and then chair­
man of the M echanics and Metals National
Bank until it was merged with Chase. He
died in 1940.




Besides Pierre Jay, only two others served as fu ll­
time chairmen of this Bank: Gates W. McGarrah,
whose tenure ran from 1927 to 1930; and J.
Herbert Case, who served from 1931 through
part of 1936.
When signed into law in 1913 the Federal Re­
serve Act required the “ chairman of the Board
of D irectors of the Federal Reserve Bank and
‘Federal Reserve A gent’ ” to maintain a local
office, make regular reports to the Federal Re­
serve Board, act as its official representative,
and carry out other official duties. His chief
statutory jobs related to the custody and issu­
ance of Federal Reserve Notes, and holding
collateral behind them. At the direction of the
Federal Reserve Board, the Chairman and Fed­
eral Reserve Agent assumed responsibility for
the bank supervision and the research (then
called statistics) functions, as well as for mak­
ing reports under several Board regulations.
When the chief executive officer of each
Reserve Bank was given the title of President
under the Banking Act of 1935, the Chairman
and Federal Reserve Agent ceased to be a fu ll­
tim e officer. Today, the Chairman in his other
capacity as Federal Reserve Agent is respon­
sible chiefly for representing the Board of Gov­
ernors in the custody and issuance of Federal
Reserve Notes, and holding collateral.
Chairmen of this Bank since the office ceased
to be a full-tim e position were:
Owen D. Young, (1938-1940), Honorary Chair­
man of the Board, General Electric Company.
Beardsley Ruml, (1941-1946), Chairman, R. H.
Macy & Co., Inc.
Robert T. Stevens, (1948-1953), Director, J. P.
Stevens & Co., Inc.
Jay E. Crane, (1954-1956), Vice President,
Standard Oil Company (New Jersey).
John E. Bierw irth, (1957-1959), Chairman, Na­
tional D istillers and Chemical Corporation.
Philip D. Reed, (1960), Former Chairman
of the Board, General Electric Company.

J. Herbert Case, who is now 92 and living
in Plainfield, N. J., served the Bank almost
20 years. He was named Deputy Governor
in 1917 and in 1930 becam e a class C direc­
tor, Chairman and Federal Reserve Agent.
Mr. Case spent his entire business life in
banking. A native of Elizabeth, N. J., his
first job was as a clerk with the City Na­
tional Bank of Plainfield, N. J., in 1887. Fif­
teen years later he helped

organize the

Plainfield Trust Co. which

he served as

secretary and executive vice president for
15 years. In 1906, he was instrumental in
organizing the Peoples Bank and Trust Co.
of Westfield, N. J. He later becam e vice
president of the Franklin Trust Co. of New
York and the Farmers Loan and Trust Co.
of New York.
During his years as Deputy G overnor of
this Bank, Mr. Case served many times as
Acting

G overnor during

the

absence

of

Governor Strong. As Chairman, he had an
important role in World W ar I and post-war
financing operations of the Treasury. When
he left the Bank, Mr. Case joined the invest­
ment banking firm of R. W. Pressprich & Co.
His son Everett N. was named Deputy Chair­
man of the Bank’s Board of Directors effec­
tive January 1, 1965.

17

Bank Supervision
The fundamental objective of bank supervision
is to foster and maintain a sound banking sys­
tem. One of the basic purposes of the Federal
Reserve System, as stated in the pream ble of
the Federal Reserve Act, was “ to establish a
more effective supervision of banking’’ in the
United States. “ More effective” were the key
words, because banking had long been under
the supervision of state and Federal govern­
m ents when the Federal Reserve A ct was
passed in 1913.
Some banks had been operating under vary­
ing degrees of state supervision since the early
and mid-1800’s, when a number of states passed
laws relating to bank chartering and opera­
tions. Indeed, the unique nature of banking
tended to stim ulate governmental supervision
although many states were slow to react.
The National Bank Act was a m ajor step to­
ward improved supervision. Nevertheless, na­
tional bank exam ination methods had left some­
thing to be desired. In pre-Federal Reserve
days, national bank examiners worked under a
system of fixed fees for each examination, a
faulty system in the opinion of John Skelton
W illiam s who, as C om ptroller of the Currency,
was responsible for the adm inistration of the
National Bank Act.
In the C om ptroller’s annual report for 1915,
it was stated that, under this arrangement, “ the
exam iner necessarily made either a very super­
ficial and hasty exam ination of the bank or
remained for closer consideration, at his own
expense, to perform a gratuitous service for
the Governm ent.”
The Federal Reserve Act authorized the Board
of Governors of the Federal Reserve System,
upon recomm endation of the C om ptroller of the
Currency, to fix salaries for national bank exam­
iners. Later the act was amended to direct the
C om ptroller to set these salaries. The act also
gave the new Reserve Board the power to “ ex­
amine at its discretion the accounts, books, and
18 for FRASER
Digitized affairs o f...e a c h member bank and to require


such statements and reports as it may deem
necessary.”
The process of bank exam ination is prim arily
concerned with an evaluation of assets, pro­
cedures, policies, and the effectiveness of man­
agement. Examinations also provide the bank
supervisory authorities with the basic inform a­
tion necessary to perform other functions such
as issuance, interpretation, and enforcem ent of
regulations; merger and branching decisions;
and decisions concerning capital and corporate
structure requirements.
The intim ate inform ation on bank operations
derived from bank exam inations also is useful
in the form ulation of monetary policy.
Actually the System was slow to move into
the field of supervision. Regular exam inations
of nationally chartered member banks were
being made by national bank examiners. In 1917
the Federal Reserve Banks were specifically
authorized to accept exam inations by state
authorities of state member banks in place of
exam inations made by Board-appointed exam­
iners. The same year, the directors of the
Federal Reserve Bank of New York authorized
the acceptance of exam inations and reports
made by state authorities in the Second Reserve
District.
For the next decade and a half, the Reserve
Banks confined themselves largely to special
credit investigations of member banks, gener­
ally undertaken in cooperation with state au­
thorities but sometimes independently. These
credit checks consisted m ainly of a review of
the quality of member bank loan portfolios. In
addition to serving as a method of supervision,
they provided the Reserve Banks with supple­
mental inform ation that could be used when
the member banks applied for discounts or
advances.
In 1933, when it became apparent that a
strengthening in supervision was necessary—
especially with respect to trust operations —
the Board asked the Reserve Banks to expand
their examining facilities.
The follow ing year, the Federal Reserve

Board directed that at least one regular ex­
amination of each state member be made
yearly by Federal Reserve examiners, inde­
pendently or in conjunction with state authori­
ties. Joint state-Federal Reserve exam ination of
state member banks continues today, w hile na­
tional bank members are still examined by the
C om ptroller’s national examiners.
The System ’s supervisory responsibilities as
delineated by the Federal Reserve Act in 1913
have been expanded by various acts of Con­
gress. The additional supervisory functions, to
name a few, include the processing of merger
applications of state member banks, the char­
tering and supervision of com panies organized
by banks to do a foreign banking and financing
business, the registration of bank holding com ­
panies, and regulation of bank loans for pur­
chasing or carrying listed securities.
The absence of restrictive definitions of the
supervisory duties and responsibilities of the
Federal Reserve System and the gradual broad­
ening of the Congressional mandate have been
helpful in perm itting the System to adapt its su­
pervisory functions to the far-reaching changes
in banking that have taken place since the pas­
sage of the Federal Reserve Act.

Presidents of the
Federal Reserve Bank of New York

George L. Harrison becam e ch ie f e xecu tive
officer of the Bank upon the death of Governor
Strong in 1928. For 13 years, first as Governor,
and then as President when the title was
changed, he guided the Bank through the trou ­
bled tim es of the stock market collapse in 1929,
the Banking Holiday of 1933, the m ajor revisions
in organization and operations in 1935, and into
the start of W orld War II. Mr. Harrison left the
Bank in 1940 to become president of the New
York Life Insurance Company.
After graduating from Yale, and the Harvard
Law School, Mr. Harrison for a year was legal
secretary to Justice O liver Wendell Holmes of
the United States Supreme Court. He joined the
Federal Reserve System in W ashington in the
fall of 1914, two weeks before the opening of




the 12 Reserve Banks, and was general counsel
of the Federal Reserve Board before coming to
this Bank as Deputy Governor in 1920. Mr.
Harrison was instrumental in solving many
problems concerning foreign relationships of
the Federal Reserve. He died in 1958.
Allan Sproul has been called one of our out­
standing central bankers. He spent almost 36
years in the Federal Reserve System, all but 10
at this Bank.
Mr. Sproul was President of the Bank for 15
years, from Januaty 1, 1941 to June 30, 1956, a
period covering W orld War II and the Korean
conflict. He has been credited with making
m ajor contributions to our knowledge of mone­
tary problems and policies.
Mr. Sproul joined the Federal Reserve System
in 1920 as head of the Division of Analysis and
Research of the Federal Reserve Bank of San
Francisco. He came to this Bank in 1930 as
Assistant Deputy Governor and Secretary. Six
years later he was named Deputy Governor, and
in 1936 when official titles were changed, he
was appointed First Vice President. He was
named Vice Chairman of the Federal Open
Market Com m ittee in 1941.

In 1956, Mr. Sproul resigned to return to his
native California, where he is serving as d irec­
tor of a bank and an industrial corporation.
Alfred Hayes became President of the Bank on
August 1, 1956. He came from the New York
Trust Com pany—now the Chemical Bank New
York Trust Com pany—where he had been vice
president in charge of the Foreign Division for
seven years.
He is a native of Ithaca, New York, and the
son of a professor who taught constitutional
law at Cornell. Mr. Hayes graduated from Yale.
After a year at the Harvard Business School
he received a Rhodes Scholarship and spent
two years at New College, Oxford, studying
economics.
He began his banking career in 1933 as an
analyst in the Investment Department of the
City Bank Farmers Trust Company. Seven years
later he transferred to the Bond Department of
the National City Bank, and in 1942 he joined
the New York Trust Company as Assistant Sec­
retary in the Investment Department.
Mr. Hayes has been Vice Chairman of the
Federal Open Market Committee since becom ­
ing President of the Bank.

19

The Federal Reserve Today

20

Today’s Federal Reserve System includes the
Board of Governors, the Federal Open Market
C om m ittee, and the tw elve Federal Reserve
Banks. Also included is the Federal Advisory
Council. Membership in the System totals about
6,200 co m m e rcia l banks, w hich a cco u n t fo r
about 85 per cent of the nation’s com m ercial
bank assets.
The Board of Governors has seven members
who are appointed for 14-year term s by the
President of the United States, with the advice
and consent of the Senate. The Board is an
agency of the Federal Government, reporting
directly to the Congress. Besides fillin g a m ajor
role in form ulating monetary and credit policy,
the Board has certain supervisory responsibili­
ties over the Federal Reserve Banks and the
com m ercial banks that are members of the
System.
The Board has a role in the adm inistration of
all the monetary instruments of the Federal
Reserve. The seven Governors are members of
the Federal Open Market Committee which is
responsible for the form ulation of policy d irec­
tives governing Federal Reserve buying and
selling operations in the Government securi­
ties market, and since 1962, in the foreign ex­
change m arket as well. The Board has always
had the responsibility of reviewing and deter­
mining discount rates established by the d irec­
tors of the Reserve Banks. Since 1933, the Board
has been responsible for establishing, w ithin
the lim its authorized by Congress, the amounts
that member banks are required to maintain as
reserves in relation to their deposits. Prior to
the Banking Act of 1933, a change in reserve
re q u ire m e n ts needed C on gre ssio na l action.
Since the mid-1930’s, the Board has been re­
sponsible for establishing stock m arket margin
requirements.
The Federal Open Market Committee as we
know it today dates essentially from 1935. It has
become the prim ary policym aking body of the
System. It com prises the seven members of the




Board of Governors, the President of the New
York Bank, and four of the other Bank Presi­
dents, who serve on a rotational basis. The other
Presidents regularly attend all meetings, how­
ever, which in recent years have been held at
intervals of approxim ately three weeks.
Today’s FOMC is a descendant of a Com m it­
tee of Governors of four, and later five, of the
Reserve Banks appointed by the Governors of
the twelve Banks in 1922. The task of the Com­
m ittee was to coordinate purchases and sales
of Government securities at the request of vari­
ous Reserve Banks. The Com m ittee was estab­
lished in 1922 after what was called an almost
accidental discovery that Reserve Bank pur­
chases of Government securities, which were
being made at the tim e partly to improve earn­
ings, could be used, because of their effect on
the level of com m ercial bank reserves, as an
instrum ent of monetary policy.
A fter about a year of operation, the Com m it­
tee of Governors became the Open M arket In­
vestment Committee, consisting of five Reserve
Bank Governors appointed by the Federal Re­
serve Board. This Committee, unlike the first,
was under the general supervision of the Board
and was directed by the Board to conduct its
purchases of securities “ with prim ary regard
to the accom m odation of comm erce and busi­
ness, and to the e ffe c t...o n the general credit
situation.”
Later, the Committee was enlarged to include
the Governors of the twelve Banks and was re­
named the Open Market Policy Conference. At
this time, it was still possible for individual Re­
serve Banks to w ithdraw from participation in
any operation recommended by the Committee.
The Banking Act of 1933 narrowed the possi­
b ility somewhat, but the Banking Act of 1935
removed the possibility com pletely.
The Federal Reserve Banks issue Federal Re­
serve notes and introduce other currency and
coin into circulation. The twelve Banks and their
24 Branches operate a nationw ide check co lle c­
tion system and a system for other transfers of
money and securities. They are bankers for the

Government and for banks. They are the Sys­
tem ’s direct links with the 6,200 member com ­
m ercial banks in the Federal Reserve’s super­
vision of banks.
The Boards of D irectors of the Banks have
responsibility, as noted, for establishing dis­
count rates, subject to the review and deter­
m ination of the Board of Governors. Since the
passage of the Banking Act of 1935, the d irec­
tors of each Reserve Bank are required to es­
tablish a discount rate for the d istrict at least
once every 14 days.
The directors of each Bank appoint a repre­
sentative to the Federal Advisory Council, the
twelve members of which meet in W ashington
at least four times a year and advise the Board
of Governors on m atters affecting the affairs of
the System.
The Federal Reserve today embodies many
changes that have occurred during the last half
century. Perhaps the most significant of these
is described by W. Randolph Burgess, a form er
Vice President of this Bank and Manager of the
System Open M arket Account, who wrote in this
Bank’s M onthly Review for November 1964:
Over the fifty years of its life, the Federal
Reserve System has gradually been forged into
one of the most im portant instrum ents fo r m ak­
ing money serve the econom ic goals of dem oc­
racy. Nowhere is this process better depicted
than in open m arket operations. For in them are
interwoven two great endeavors.
One of these has been the effort to manage
money in the pub lic interest rather than treat
it as a sem iautom atic and somewhat occult
mechanism.
The se con d s tru g g le has been to s u b je c t
money m anagement to an effective unified con­
trol, while preserving the local and practical
particip a tion which is inherent in our concept
of dem ocracy. This is, in effect, the story of how
the twelve Federal Reserve Banks, conceived in
the dem ocratic tradition as regional in spirit,
learned to act in coordination with a Govern­
m ent Board, as one unit, inspired wholly by
pub lic motives.

Buffalo Branch
In 1919, four and a half years after the Bank
opened, a Branch was established at Buffalo
“ to make the fa cilitie s of the Federal Reserve
Bank more readily available to banks in the
western part of New York State.”
The Annual Report of this Bank for 1919 stated
that ‘‘the Branch was placed in Buffalo a city
of more than 500,000 people whose industries
are unusually diversified because of its com m er­
cial and banking im portance.”
For many years the te rrito ry of the Branch
covered the 10 westernm ost counties of the
State; in 1954 it was expanded to in c lu d e 4 more.
There were 75 member banks in the te rrito ry
when the Branch opened.
The Branch was first located in the Buffalo
Chamber of Com m erce Building at 240 Main
Street. Nine years later it moved to a building
on the same block at the Swan Street corner.
The present building was com pleted in 1958.
The Branch opened with a staff of 40. At the
end of the first year, it totaled 113. Today, it
numbers 236.
There were 53 member banks in the Branch
te rrito ry at the end of 1964.
Buffalo Branch, 160 Delaware Avenue




Form er Location at Main and Swan Streets

21





Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102