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F ederal R eserve B ank OF D A LLA S December 31, 1923. TO THE BANK ADDRESSED: The enclosed pamphlet describes and illustrates, in a very interesting way, the manner in which the Federal Reserve System serves the banks and business interests of the country. It was compiled and published to meet the need for bringing about a better understanding of the functioning of the Federal Reserve System, and we are mailing it to the eligible non-member state banks in this district believing that it will prove of interest to them. Yours very truly, This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) -o fs e r v ic e to bank§ & business The Federal Reserve System *llll|?r? ttfm ta ttn maum, 011 j? ptaph p m a lj.” CHARTS com prising exhibit o f Federal reserve system at annual con vention o f Am erican Bankers’ A ssociation September 24-27, 1923 Inclusive of tabular matter and two charts which could not be prepare in time for exhibit at the convention CONTENTS T h e F u n c t io n in g F e d e r a l R o f t h e S e s e r v e M O B IL IZ A T IO N y s t e m PAGE NUMBER : OF G O L D RESERVES: M o b iliz a t io n o f reserves 2 R e d u c t io n in reserve re q u ire m e n ts 4 R e le a s e o f fu n d s f o r in v e s tm e n t 5 M e m b e r s h ip in th e sy stem E 3 C a s h a n d reserves o f n a tio n a l b a n k s 6 l a s t ic it y o f C r e d it : E la stic cu rre n cy 7 R e d is c o u n tin g 8 F in a n c in g trad e t h r o u g h b a n k e r s ’ a ccep ta n ces 9 S ta b iliz a tio n o f in terest rates 10 P rices a n d lo a n a c c o m m o d a t io n s 11 T R A N S F E R A B IL IT Y O F C R E D IT : C h e c k c o lle ctio n s 12 N o n -c a s h c o lle c tio n s a n d w ire tran sfers 13 G o l d s e ttle m e n t fu n d 16 In te rd istrict b o r r o w in g 17 R E SU L T S OF O P E R A T IO N : D is p o s it io n o f g ro ss ea rn in g s 18 R ate o f retu rn o n e a rn in g assets 18 E xp en ses co n tra ste d w ith v o lu m e o f o p e r a tio n s 19 R e s e rv e ratio 19 F actors a ffe c tin g reserves 20 E a r n in g assets 20 P a y m e n t o f in terest o n reserve d e p o sits 21 R e p o rts o n b u sin ess c o n d it io n s 22 GENERAL: F in a n c in g an im p o r t tr a n sa ctio n b y b a n k e r s ’ a ccep ta n ces C h i e f s u p p o r t o f b ill m a rk e t 14 a n d 15 23 R eserve re q u ire m e n ts u n d e r state law s L o c a t io n o f F ed era l reserve b a n k s a n d b ra n ch es 1 2 4 t o 27 28 MOBILIZATION OF RESERVES Bank reserves formerly were widely sca tte re d among individual banks. In times of need each bank had to look out for itself and was loath to part with its holdings, and any large withdrawal of reserve funds from city depositories led to strained conditions. Now reserves of member banks are their balances in the Federal reserve banks. These great gold re se rv e s practically sustain the re se rves of every member, as from that great reservoir assistance may flow to member banks in any part of the country through the rediscount system. ff IN UNION THERE IS STRENGTH ” REDUCTION IN RESERVE REQUIREMENTS Increased liquidity of bank re so u rce s due to new form of reserves introduced by Federal reserve system permitted large decreases in the percentage of reserves to be carried by member b an ks. Three facto rs made this p o ssib le- the mobilization of re se rv e s at the reserve banks; the fact that these reserves are actual collected funds, and that means for rediscounting are available. The funds thus released add considerably to loaning power of member b an ks. Many states now permit state member banks to keep re se rv e s in a cco rd an ce with provisions of Federal Reserve Act. 3 CASH AND RESERVES OF NATIONAL BANKS CARRIED UNDER FEDERAL RESERVE A C T ON JUNE 3 0 , 1 9 2 3 IN CONTRAST WITH REQUIREMENTS IF NATIONAL BANK ACT HAD CONTINUED IN FORCE Deposits of national banks more than doubled from i9 i4 to 1923. However, the lower reserve requirements of the Federal Reserve Act enabled these banks to carry largely increased deposits with an actual decrease in their reserves. Cash now counts only as till money and has been reduced from 1,021 millions in 1914 to 290 millions in 1923, or 12 per cent. If the National Bank Act was in effect today these banks would have to hold reserves of 1,753 millions in cash and 1,242 millions on deposit with other banks, or 2,995 millions. Required cash reserves alone under the National Bank Act therefore would have been much larder than the present combined total of reserve at reserve Banks and cash in vault. 4 RELEASE OF FUNDS FOR INVESTMENT The Federal Reserve Act has released a vast amount of cash which was formerly held as reserve under the National Bank Act. From 1,021 millions (without Alaska and Hawaii) in 1914, a reduction has been made to only 290 millions in 1923. The difference-7 3 1 millions— has gone largely into the reserve banks a s part of the legal reserve of 1,128 millions now required to be held there. A striking comparison not generally realized is that the casn in vault of all national banks was 13.635 per cent of deposits in 1914, where as combined cash and required reserves were only 9.414 per cent of deposits in 1923 under the Federal Reserve Act. RATIO REQUIRED RESERVE AT FEDERAL RESERVE BANKS TO DEPOSITS .RATIO CASH IN VAULT I TO DEPOSITS 5 MEMBERSHIP IN THE SYSTEM Membership formerly restricted to banks with paid-up unimpaired capital a s follows: Cities of 3,000 people Or leSS-$ 25 , 000 ; 3,001 to 6,000-$ 50, 000 ; 6,001 to 50,000-$ 100,000; over 50,000-$200,000. Banks may now become members having capital equal to 6 0 % of amounts given provided mat they increase cap ital to requirem ents within five y e a rs. Excluding mutual savings banks, 3 3 % of all banks on June 3 0 ,19 2 2 were member banks, and these members had 7 3 % of total resources. PER CEN TA G E OF R ESO U RCES OF MEMBER BANKS “TO TO T A L BANKING RESO URCES OF EA CH S T A T E ■ □ Member banks hold s o % o r more of the banking resources. Member banks hold between 2 5 % and 5 0 % of the banking resources. In no states do member banks hold less than 2 5 % of the banking resources. 6 ELASTIC CURRENCY Money in circulation prior to passage of Federal R eserve Act responded little to changing needs of business. It had little power of expansion or co n tra ctio n . Federal Reserve A ct created a c u rre n c y secured by goid and busin ess paper. This c u rre n cy expands and con tra c ts almost autom atically a s borrowings fluctuate. Federal re se rv e notes now constitute almost one half of total money in circulation. Close relation to volume of b u sin e ss is indicated in ch art. REDISCOUNTING Inflexible re se rv e s under national bank a c t permitted reserves to be used only to meet withdrawal of deposits. Loaning power was rigidly limited, there being no elas ticity in loaning power to meet emergencies. Federal Reserve Act does not encourage any institutions in doing business beyond their resources, but it does provide means through rediscounting for meeting all legitimate requirements of business. REDISCOUNTS BY FEDERAL RESERVE BANKS NUMBER OF BANKS 6,000 5 .0 0 0 4 .0 0 0 3 .0 0 0 2.000 1.000 1919 1920 1921 8 1922 FINANCING TRADE THROUGH BANKERS’ ACCEPTANCES The Federal Reserve Act, by permitting national banks to accept drafts or bills of exchange and to issue letters of c re d it, provided a new method of finan cing in this country and made available to banks a desirable form of investm ent. The financing of foreign trade, which heretofore had almost entirely been done abro ad , was g re atly facilitated. The reserve banks have been steady p u rc h a se rs of bankers’ bills. 9 STABILIZATION OF INTEREST RATES Prior to the Federal reserve system interest rates ex hibited marked seasonal .variations,- low at one sea son and high at another. Now banks may care for seasonal credit and currency needs by rediscounting at their reserve bank and thus avoid drawing heavily on funds already in use elsewhere. This elasticity minimizes seasonal fluctuations in interest rates. FLUCTUATIONS IN INTEREST RATES MINIMIZED IN D E X 120 115 1 10 105 YEARLY 10 0 AVERAGE 95 90 85 FIR S T QUARTER J A N -F E B -M A R SECOND QUARTER APR -M A Y JUN THIRD QUARTER JU L -A U G -S E P 10 FOURTH OUARTER O C T-N O V -D E C PRICES AND LOAN ACCOMMODATIONS The decline in prices which began in 1920 brought about six months later a reduction in both Federal reserve note circulation and rediscounted bills held by reserve banks. 11 CHECK COLLECTIONS 92 percent of the banks now cooperate in the Federal reserve par check collection system, through which more than 1,800,000,000 checks amounting to over $560,000,000,000 were collected in the last four years. The more direct routing of checks and more immediate payment has effected a tremendous saving in the transaction of the country’s business. The check collection problem does pot stop with the mere question;“ Shall exchange be paid”? It involves necessarily the further question of whether checks shall continue to be promptly collected, or whether we shall go back to the old system of circuitous routing to avoid exchange charges. ROUTE OF A CHECK BEFORE TH E FEDERAL RESERVE Check on North Birmingham bank was deposited in Birmingham bank 4 Miles Sent to bank in Jacksonville Florida 488 » Sent to bank in Philadelphia s i7 • • Sent to bank in Birmingham 941 (To avoid payment of exchange] (To avoid payment of exohange) (To avoid payment of exchange) Sent to bank in North Birmingham 4 • > CHECK NOT PA 10 ANO Returned to Birmingham bank 4 ” Returned to Philadelphia bank 941 ” Returned to Jacksonville bank s in Returned to Birmingham bank 488 • > ” Returned by Birmingham bank to depositor Distance traveled 4500 miles Time in tra n s it 14 days UNDER TH E FEDERAL RESERVE Collection would be made by mail directly in 2 days 12 NON-CASH COLLECTIONS AND WIRE TR ANSFERS Collection of non-cash items and wire tr a n s fe r of funds for member banks supplement the check collection system . By u se of wire tra n sfe rs, banks may promptly re sto re b a la n c e s by draw ing upon th eir accounts in other sectio n s of the country, and the rapidity of transfer, by reducing the “ float’,’ m akes bank statements more reflect ive of tru e condition. NON-CASH COLLECTIONS AND WIRE TRAN SFERS B ILLIO N S OF D O LLA R S 70 60 50 40 30 20 10 1920 1921 1922 1920 13 1921 1922 FINANCING AN IMPORT TRANSACTION BY BANKERS ACCEPTANCES FOREIGN BANK To finance import of merchandise obtains letter of credit from bank and sends it to foreign exporter Forwards funds to bank prior to maturity of acceptance. 14 15 GOLD SETTLEM ENT FUND All tran sa ctio n s between Federal re serve banks are cleared through the gold settlem ent fund at Wash ington. Daily settlements expedite the transfer of balances and avoid physical shipments of money. Transactions in 1922, amounting to $76,490,000,000 were handled at a cost of approximately 65/100 of a cent per $1,000 of funds transferred. If gold is shipped a s sh o rt a distance as from New York to Pittsburgh, the express and insurance ch arg es alone would be $1.35 per $1,000. GOLD SETTLEMENT FUND TRANSACTIONS 1916 1917 1918 1919 16 1920 1921 1922 INTERDISTRICT BORROWING A re s e rv e bank which has extended credit up to the limit allowed by its r e s e rv e s may replenish its re se rv e s by rediscounting with other reserve banks. In this way the re so u rce s of all reserve banks are made availab le to all member banks throughout the country. Rediscounts between re se rve banks amounted to over seven billions of d o llars in the years ieis to 1921 inclusive. REDISCOUNTING BETWEEN FEDERAL RESERVE BANKS 1919 1920 17 1921 RATE OF RETURN ON EARNING ASSETS OF FEDERAL RESERVE BANKS 1916 1917 1918 1919 18 1920 1921 1922 EXPENSES OF FEDERAL RESERVE BANKS CONTRASTED WITH VOLUME OF OPERATIONS CURRENT EX P EN SES CURRENCY COUNTED $40,000,000 30.000. . . 20 000 000 000 10,0 0 0 ,0 0 0 1920 1921 CHECKS HANDLED 1922 COLLECTION ITEMS HANDLED 19 TRANSFERS OF FUNDS 20 PAYMENT OF INTEREST ON RESERVE DEPOSITS Reserve Banks are organized for service and not for profit. To pay interest on re serve deposits it would be necessary for reserve banks to maintain large earning assets. For example, in 1922 their earning assets would have had to average $ 1,800,000,000 to enable them to pay expenses, 2 % interest on deposits, and 6 % in dividends. T h e ir earning a s s e ts during that year actually averaged $1,187,000,000. In other words they would have had to keep over $600,000,000 additional constantly invested to enable them to pay interest. It is obvious that they could not have done this without entering into active competition with member banks. Moreover, such a practice would curtail their ability to accommodate member banks with discounts as needed. 21 REPORTS ON BUSINESS CONDITIONS Each reserve bank keeps in close touch with business and agricultural conditions in its district and publishes monthly reports for free distribution. These reports, which are largely sum m aries of facts ascertained at first hand, are issued in the interest of better business through the dissemination of sound information. The Federal Reserve Bulletin, published by the Federal Reserve Board, contains extensive and authoritative information on finance and trade throughout the world. 22 CHIEF SUPPORT OF BILL MARKET F ederal r es e r v e Banks and F oreign T rade FEDERAL RESERVE BANK MONTHLY PUBLICATIONS FOREIGN TRADE BANK A cceptances Executed in U S during 1922 (esti $4,000.000.000 Of which F ederal reserve Banks Purchased 4 9 % - t .aoo.ooo 948 23 R e se r v e R e q u ire m e n ts U n d e r S ta te L a w s States printed in red do not permit state member banks to substitute reserve requirements of Federal Reserve Act. Figures in parentheses refer to footnotes D istribution R eserves required to be held upon RESTRICTIONS A labam a: A ll banks Demand deposits Aggregate deposits None 15% - None 50,000 or over under 50,000 __ __ H Vs — — __ 20% 15% None 100,000 or over 50,000-99,999 Under 50,000 __ __ __ 18% 15% 12% — — — M H H Vs H Vs Vs U (38) None - None N one 5% __ Vs Vs Vs 5% - 5 % (38) — (3) (4) (3) H (5) H — Vs Vs Vs (38) 15% — 10% — 20% (2) 25% 20 % Vi Vi Vi Vi V (39) (39) H __ — 12% None None None Vi Vi Vi Vi 5% — --- — (38) V — — — C olorado: Savings banks Reserve agents (35) Other banks — — Balances with de positaries - — Cash in vault __ None None C a l if o r n ia : Savings banks Commercial banks - __ — 10% 20% 15% A r k a n sas: Reserve agents (35) Other banks Savings deposits _ A r iz o n a : Savings banks Other banks Tim e deposits % (1) C o n n e c t ic u t : State banks and trust com panies D elaw are: Hanks and trust companies Savings banks _ 5 % (38) — F l o r id a : All banking companies None 20% - - - (6) G e o r g ia : All banks None 15% - 5 % (7) State banks Trust companies None None (38) 5 % (7) _ I daho : 15% 15% — Vo Vs (8) — (38) Vs Vs I l l in o is : Ranks and trust companies Chicago Elsewhere 25 % (9) 15% (9) — I n d ia n a : All banks and banking com panies None 12H % (10) — — (38) (38) (38) (38) - - (38) (38) Io w a : State banks, trust com- 1 panies, and savings | banks doing commer cial business J Other savings banks K — 20% 15% None — ansas: State banks ( 11 ) ( 12 ) Trust companies K 3,000 or over Under 3,000 50,000 or over Under 50,000 Under 50,000 Under 1,000 None 8% 8% 8% 8% M o M o xM o — — 8% M o 17 o A 10% 10% 7% 25% 3% 3% 3% 3% 10% — — — — _ — ----— 7% _ H H H H 1A o 7 2 A H ■ ?$ (14) M (13) *$(14) Vs entu cky: State banks and trust com panies Central reserve cities (15) 13% 3% — H V Reserve cities (15) Elsewhere — 10% — — 7% 3% 3% — H H V H None - 20% - - Vs ( 1 6 ) H L o u is ia n a : State banks M a in e : Trust and banking com panies None 15% (17) - 24 - - - All (18) R e se r v e R e q u ir e m e n ts U n d e r S ta te L a w s R eserves D r e q u ir e d to b e h e l d u p o n is t r ib u t io n o f R eser ve s P o p u l a t io n RESTRICTIONS M aryland: State banks Trust companies M a ssach u setts: Trust companies M ic h ig a n : Commercial banks Savings banks M in n e so t a : State banks M i s s i s s ip p i : State banks M M None None In Boston! within 3 1 miles of [ State House J Elsewhere 100,000 or over Under 100,000 None Savings deposits Cash in vault Balances with de positaries - H 2 A All (19) - Yu (20) H (20) 15% H (20) H (20) — (38) (38) (38) (38) (38) (38) M Vi H H (38) (38) (38) (38) V\s H (38) 1Vis (21) (21) (21) (21) Aggregate Demand deposits deposits — 15% 15% - 20% Time deposits 20% 12% 12% - - — — - Res. cities (35) Elsewhere - 15% 12% 5% 5% Over 50,000 Elsewhere - 25% 10% 10% 1-5% 7% 7% 200,000 or over 25,000 to 199,999 Under 25,000 - 18% 15% 15% - is s o u r i : State banks and trust com panies ontana : State banks Res. cities (35) Elsewhere - — 15% 10% - - STATES PRINTED IN RED DO NOT PERMIT STATE MEMBER BANKS TO SUBSTITUTE RESERVE REQUIREMENTS OF FEDERAL RESERVE ACT. 25 Ys (38) R e se r v e R e q u ir e m e n ts U n d e r S ta te L a w s R eserves RESTRICTIONS N ebrask a: State banks Savings banks N EVADA: Reserve agents (35) Other banks Savings banks and trust companies not doing general banking business r e q u i r e d to b e h e l d u p o n Aggregate Demand deposits deposits D is t r i b u t i o n of R e serves None None 25% i5% ; None 15% (37) None None — None 12% : —• —• ' — — ft ft ft ft ft ft 10% None ---— — ■ 20% 15% Savings deposits — — --- - . ' ---- • Over 25,000 Elsewhere None — — — 5% Cash in vault Balances with de positaries Time deposits n ft (38) Vs ft (38). N e w H a m p s h ir e : All banks N ew Jersey: State banks Trust companies N ew M e x ic o : All banks N ew Y ork: State banks « Trust companies “ “ “ Private bankers “ “ Boroughs of 2,000,000 or over Boroughs of 1,000,000 to 1,999,999 (23) Elsewhere Boroughs of 2,000,000 or over Boroughs of 1,000,000 to 1,999,999 (23) 1st and 2nd class cities under 1,000,000 Elsewhere Cities of 1st class Elsewhere — — ft. ft — — —• — Vs H Vs Vs --- - — (25) All ft (24) ft f t (24) f t (24) ft ft 15% % (24) ft 13% Vis (24) M3 — 15% (22) 15% — 18% 15% 12% — — — — 10% 10% 15% 10% — — — — — —• — — ?7 (24) 5 V o (24) Mo Mo Vs Mo Vl 0 Vl 0 None — 15% — 5% (25) (38) None — 20% 10% 8% (26) 7% 5% (27) ft Vs Vs Vs None 15% Vis demand Vis time 'V is demand [V is time Vl 5 demand Vi o time ftis demand V o time — — — N orth C a r o l in a : Banks and trust companies N orth D akota : Savings banks State banks O h io : Commercial banks 15% O klahoma: (28) State banks “ “ Reserve banks Savings banks not doing general business 10% — ---- Savings banks and trust companies 20% 15% 20% — — — — — ---— ft ft ft 2 /l5 ft ft 20% Over 2,500 Under 2,500 None — — — ft f t (6) 15% 10% 10% Oregon: State banks and trust companies None All banks R hode ft H f t demand time (30) P e n n s y l v a n ia : f t demand (29) time (30) Vs None — 15% (22) 7f t None 15% — — — ft None — 7% 3% — (38) (38) None 20% 17 ft% — — — (38) (38) (38) (38) I slan d: State banks and trust companics So u th C a r o l in a : All banks South D akota: Reserve banks (35) Other banks ’ 26 R e se r v e R e q u ir e m e n ts U n d e r S ta te L a w s R e s e r v e s r e q u i r e d to b e h e l d u p o n P o p u l a t io n RESTRICTIONS T Time deposits Savings deposits is t r ib u t io n of R eserves Cash in vault Balances with de positaries en n essee: State banks and trust com panies T Aggregate Demand deposits deposits D None _ _ 10% _ _ _ _ (38) (38) None None — 15% 20% — — (38) (38) (38) (38) 50,000 or over Under 50,000 None — 15% 34 — — — Vs 10% — — — None — 15% (10) — 3% None — 10% 3% — (38) (38) None 15% (33) _ _ _ (38) (38) exas: Banks— capital $25,000 or over Other banks Utah: Commercial banks Savings banks 20% — — Vs Vs 34 H V erm ont: All banks V ir g in ia : State banks (32) W est (29) V ir g in ia : State banks and trust com panies Savings banks W Vs a s h in g t o n : State banks and trust com panies W 34 (31) None 5% (34) All (34) 3 A — — — None 20% — — — (38) (38) « 12% — _ _ _ _ — — — 5% (38) (38) (38) (38) 10% 10% (38) (38) (38) (38) i s c o n s in : Reserve banks Other state banks and trust companies Mutual savings banks 2 /~ 15% — W y o m in g : Commercial banks and trust companies Savings banks None 20% (36) (1) Or in U. S. bonds. (2) Deposits other than savings. (3) 6% deposits may be in Liberty bonds. (4) 7 )4 % deposits may be in Liberty bonds. (5) 34 of balances may be in approved bonds. (6) Or approved bonds. (7) Reserve against time and savings deposits may be in unpledged U. S. or Georgia bonds. (8) Not less than 5% as cash in vault. (9) Ruling of auditor— not state law. (10) Commercial deposits payable on demand and subject to check. (11) Banks having 20% or more of deposits due to banks. (12) Banks having less than 20% of deposits due to banks. (13) 34 of reserves as cash with approval of banking commissioner. (14) U. S. bonds and demand loans secured by U. S. or municipal bonds accepted as reserve. (15) As designated by Federal Reserve Act. (16) Member banks’ balances with Federal reserve bank accepted as cash in vault. (17) Including deposits subject to notice within 10 days. (18) 34 may be in U. S. or Maine bonds. (19) y3 may be in bonds. (20) Yi of cash and )4 of balances, or in all % of total reserve, may be in approved bonds. (21) Such portion of reserve as directors may determine may be on deposit with approved reserve agents, balance in cash. (22) All items or claims payable on demand. (23) If bank does not have office in borough of preceding class. (24) Prescribed percentage may be on deposit with Federal reserve bank. (25) No requirements as to cash in vault; all may be carried with reserve agents. (26) Total deposits on time certificates. (27) Deposits subject to notice as provided by law. (28) No specific law exists permitting state member banks to substitute Federal reserve in lieu of state requirements, but state authorities do not criticize such substitution. (29) 34 of balances may be in approved bonds. (30) 34 in approved bonds, % in cash or balances. (31) 34 of cash may be deposited in bank in same town or county. (32) State law by implication permits state member banks to comply with reserve requirements of federal Reserve Act. (33) Reserve of 100% required against uninvested trust funds. (34) Set aside from profits and held as cash. (35) As defined by state law. (36) Liability to depositors other than savings. (37) D e p o s its in banking or com m ercial departm ent. . . (38) Reserves consist of cash in vault and balance with approved reserve agents, no provision being made for definite distribution between the tw o . . (39) Upon approval of banking commissioner one-half of reserves may be in bonds or other obligations of the United States. 27