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BANKING STUDIES

BANKING
STUDIES

By Members of the Staff
Board of Governors of the
Federal

Reserve System

Published August 1941

COMPOSED AND PRINTED AT THE

WAVERLY PRESS, INC.
BALTIMORE, U. S. A.

PREFACE
The seventeen papers in this book were written by members of
the staff of the Board of Governors of the Federal Reserve System,
under the editorial supervision of a staff committee. They are
published in the hope that such light as they cast upon the past
and present in the field of money and banking may help to illuminate
the approach to the future. The purpose has been to present in
brief form and simple language the substance of a large mass of
information bearing on banking and monetary problems that the
Federal Reserve System has accumulated during its quarter century
of operation, and particularly during the past decade.
Although in a field as controversial as this it is impossible for an
author to remain entirely neutral, the aim throughout has been to
present the material in an objective and impartial manner. The
seventeen papers cover a wide range, and therefore inevitably
traverse ground that is beset by controversy and sharp differences
of opinion. The authors of the studies have specialized in the par
ticular subjects of which they write, and in the preparation of their
papers they have sought to present facts and not opinions. These
studies, while assembled in one volume, were not intended to be a
series of related chapters of a book, but to be, as the title indicates,
separate studies of some of the important aspects of this country’s
banking and monetary system and of the role that it plays in the
functioning of the economy.
The authors and editors are indebted to a number of economists,
bankers, and other students to whom early drafts of the papers
were submitted for comment and criticism. Particular thanks are
due to Robert B. Warren and to Donald B. Woodward for their
help in organizing the studies into a series which it is hoped, not

PREFACE

withstanding separate approaches by individual authors, neverthe
less has some features of an organic whole. Acknowledgment is also
made to Marie Butler Leven for editing the studies and preparing
them for publication.
It is hardly necessary to add that the points of view and the dis
tribution of emphasis in the studies are those of the authors, and
do not necessarily reflect the views of the Board of Governors or
of the Editorial Committee.

S t a f f E d it o r ia l C o m m it t e e
E . A. Goldenweiser

Elliott Thurston
Bray Hammond
Washington, D. C.
August, 1941.

CON TEN TS
Preface.........................................................................................................
Historical Introduction.

Bray H ammond..........................................

Federal Banking Legislation.

Walter W yatt ..................................

PAGE
v
5
39

Currency System of United States.

Victor M. L ongstreet..........

Banking Structure of United States.

John E. H orbett..................

Branch, Chain, and Group Banking.

C. E. Cagle ..........................

113

Credit and Savings Institutions Other Than Banks.
D avid M. K ennedy..........................................................................

143

Commercial Bank Operations.

R oland I. R obinson........................

169

Supervision of the Commercial Banking System.
R obert F. L eonard ..........................................................................

189

Policy and Procedure in Bank Examination.

Leo H. Paulger. . . .

213

E. A. Goldenweiser............

231

Edward L. Smead......................

249

Deterrents to Membership in the Reserve System.
B. M agruder W ingfield..................................................................

273

Money System of United States.

W oodlief Thomas......................

295

W oodlief T homas..............................................

323

Public Nature of the Reserve Banks.
Operations of the Reserve Banks.

Monetary Controls.

Work of the Board of Governors.

Carl E. Parry ............................

353

System Organization: Determination of Credit Policy.
Ca r l E. Parry ....................................................................................

373

Instruments of Federal Reserve Policy.

E. A. Goldenweiser........

391

Tables..........................................................................................................

417

Appendices.................................................................................................

461

In d ex............ ...............................................................................................

479

CHARTS
Bank Notes and Deposits..................................................................................
Commercial Banks in the United States.........................................................
Currency in Circulation, by K in d ....................................................................
Gold and Treasury Currency in Circulation...................................................
Number and Deposits of Banks, by Kind, December 31, 1939..................
Percentage Distribution of Assets of Insured Commercial Banks, Decem
ber 31, 1939..................................................................................................
Commercial Banks, by Number and Size, December 31, 1939....................
Maximum Areas for Operation of Branches in the Various States,
August 15, 1939............................................. .............................................
Banks Operating Branches and Their Branches.............................................
Branches inside and outside Head-Office C ity................................................
Geographic Distribution of Branch Banking, December 31, 1939..............
Geographic Distribution of Chain Banking, December 31, 1939.................
Geographic Distribution of Group Banking, December 31, 1939................
Multiple Banking Offices in Each State as Percentages of All Banking
Offices, December 31, 1939........................................................................
Credit and Savings Institutions Other Than Banks......................................
Time and Total Deposits of Commercial Banks............................................
Assets of Member Banks.................................................................................
Member Bank Earnings and Profits................................................................
Supervision of the Commercial Banking System...........................................
Location of the Federal Reserve Banks and Their Branches......................
Reserve Bank Dividends in Relation to Gross Earnings, 1914-1939...............
Checks Handled by Federal Reserve Banks...................................................
Currency Received and Counted by Federal Reserve Banks.......................
Expenses of Federal Reserve Banks as Fiscal Agents and Depositaries of
the United States........................................................................................
Bills and Securities Held by Federal Reserve Banks....................................
Disposition of Net Earnings of Federal Reserve Banks................................
Some of the Principal Provisions of Federal Statutes Regulating the
Principal Classes of Banks.........................................................................
Geographic Distribution of Non-par Banks, December 31,1939..................
Banks with Capital Stock Inadequate for Federal Reserve Membership,
December 31, 1939......................................................................................
Important Differences between State and Federal Laws Pertaining to
Banking............................................................. ...........................................
Bank Deposits and Currency............................................................................

Page
13
15
74
81
90
99
101
115
118
120
123
129
135
139
144
172
177
184
199
232
238
251
255
261
268
269
275
277
279
291
304

CHARTS

Member Bank Reserves and Related Item s.....................................................308
Process of Deposit Expansion.............................................................................314
National Income and Volume and Turnover of Bank Deposits.................. .333
Member Bank Reserves and Deposits, 1929 and 1940...................................343
Standard Federal Reserve Charts..................................................................... .365
Organization of Federal Reserve System with Reference to Instruments of
Credit Policy................................................................................................ .376
System Holdings of Discounts and United States Government Securities. .. 380
Relations between Money Rates........................................................................383
Place of Discount Rate in the Rate Structure.................................. ............. .396
Application of Federal Reserve Discount Policy............................................ .399
Member Bank Reserve Situation...................................................................... 408

BANKING STUDIES

HISTORICAL IN T R O D U C T IO N

Page
I n tr o d u ctio n ..........................................................................
F ormation
of

of the

F irst B a n k

A uthorization

F r ee B a n k in g , 17 82 -1 838......................................

A uthorization

F ree B a n k in g

to the

A ct , 18 63 -1 9 1 4 ...................

the

N ational

B a n k A ct , 1 8 38 -1 863......................................................
T he N atio n al B a n k A ct to

F ederal R eserve

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

Pr esent , 1913-1940.

S u m m a r y ....................................................................................

F ederal R eserve A ct to

the

B r a y H am m ond

Chief
Correspondence and Publications Section

HISTORICAL INTRODUCTION
There are four principal events which may conveniently be taken
as dividing American banking history into periods. The first was
establishment in 1782 of the Bank of North America, the first bank
in the United States. This occurred at the end of the Revolutionary
War and a few years before the formation of a Federal Government
under the Constitution.
The second event was adoption in New York State of the Free
Banking Act of 1838, a statute which profoundly influenced sub
sequent American banking practice, banking supervision, and the
banking structure as a whole. Close to this event in time were the
discontinuance in 1836 of the Bank of the United States as a
Federal institution, the panic of 1837, the original establishment of
the Independent Treasury System in 1840, and enactment of the
Louisiana Banking Law of 1842.
The third event was establishment of the national banking system
in 1863. This coincided roughly with discontinuance of note issue
by State banks, the shift from bank notes to bank deposits, the
War between the States, and the beginning of a new phase of
industrial and westward territorial expansion.
The fourth event was establishment of the Federal Reserve
System in 1913. The System’s operations began in 1914, the year
war broke out in Europe. The period from then to the present, 1940,
has been crowded with developments whose course has not yet
been concluded and whose significance can not yet be appraised.
FORM ATION OF THE FIRST BANK TO AUTHORIZATION OF FREE
BANKING, 1782-1838

In a rudimentary way, banking functions were performed in this
country before there were any banks and before there was any
banking legislation. It was performed by colonizing companies,
colonial governments, merchants, and others who were in position
to extend credit. The first bank in a modern sense was the Bank of
North America, established in Philadelphia in 1782.

BANKING STUDIES

Changes in Banking Practice. Aside from governmental con
nections, the Bank of North America and other banks formed during
its early years were distinctly commercial. They grew out of the
needs of merchants who hitherto had lent to one another— a mer
chant temporarily in funds advancing them for short periods to
others who had payments to make and at other periods becoming a
borrower himself. From this practice of lending and borrowing
among themselves, it was a direct step to pooling their several
stocks of cash into one for the formation of a bank from which each
might borrow at greater convenience. Robert Morris, Financier of
the Revolution, who was a prime mover in the organization of the
Bank of North America, spoke of their “ clubbing together” their
funds. The loans that they had made to one another as merchants
were necessarily short-term loans, secured by goods in process of ex
change and liquidated at completion of the sale of the goods. They
were in the strict sense short-term, self-liquidating, commercial ad
vances. It was obligations of this type—not counting loans to
Government—that filled the portfolios of the first banks in this
country and that for a long time remained the specialty of certain
banks in commercial centers.
Conditions in these few centers were by no means typical of
American conditions as a whole, however. Between the seaboard
cities and beyond them to the advancing frontier was a growing
population bringing more and more land under cultivation, develop
ing mineral resources, establishing foundries and mills. These
pursuits absorbed larger numbers of the expanding population than
did mercantile pursuits. Banks increased in number in response to
the insistent demand for credit to which the abundant opportunities
offered by the country gave rise, but they had no other choice than
to lend on terms suitable to the condition and prospects of their
customers. The interests of these customers were not predominantly
commercial but agricultural and industrial. The demand for long
term credit became greater than the demand for short-term credit
and made it impossible for most banks to confine themselves to the
mercantile banking tradition. This tradition continued for more
than a century to have great weight in banking theory and in bank
ing legislation, but practice persistently diverged from it.

HISTORICAL INTRODUCTION

In early American banking the process of extending credit resulted
in an enlargement of bank note circulation and not, as at present,
in an enlargement of deposits. When loans were made, the borrowers
customarily received the amount in bank notes. These notes,
transferred from hand to hand, constituted the greater part of the
public’s means of monetary payment. Today when banks make
loans (or purchase securities), they enter the amount in the deposit
accounts of the borrowers (or sellers of the securities) and the
expansion of bank credit becomes reflected in an enlarged volume
of bank deposits. These deposits, transferred by check from hand
to hand, constitute the greater part of the public’s means of mone
tary payment.
Bank notes and bank deposits are to be regarded as interchange
able forms of bank liability, differing obviously from one another
in certain respects yet essentially alike in origin and in use. It is
sometimes the difference that is significant and sometimes the
resemblance. Note issue was the outstanding function of banks in
the earlier periods of American banking history; the deposit function
became outstanding in the later periods. Notes are no longer issued
by privately managed banks.
The First Bank of the United States. In 1791 the Federal
Congress chartered the first Bank of the United States, an institu
tion in which the Federal Government held stock and which acted
as fiscal agent of the United States. The Bank continued in opera
tion until 1811. The large scale of its operations, conducted in the
leading cities of the country, distinguished it from the State banks
which were its local competitors and mostly of much smaller size.
The Bank was opposed by many on the ground that Congress had
no constitutional authority to charter it. This opposition reflected
also the self-interest of the State banks. Its Federal charter was not
renewed; its head office was sold and reorganized as a private bank
ing house, and its various branches were either liquidated or became
local banks.
The Second Bank of the United States. In 1816 Congress
enacted another charter creating the second Bank of the United
States. The second Bank encountered intense opposition, notably
upon constitutional and political grounds. Its constitutionality was

BANKING STUDIES

affirmed by the Supreme Court in 1819 and again in 1824, but these
decisions did not end the controversy. The act of Congress renewing
the charter was vetoed and in 1836 the Bank discontinued as a
Federal institution. It sold the business of its branches and con
tinued the business of its head office in Philadelphia under a
Pennsylvania charter.
State Banks. Controversy as to the constitutionality of a bank
charter granted by the Federal Government was accompanied by
controversy as to the constitutionality of bank charters granted by
the States. It was contended that since the States were bound by
the Constitution not to “ coin money” or issue “ bills of credit,”
they had no legal power to charter banks for the purpose of issuing
circulating notes. In 1837, however, the Supreme Court affirmed
the constitutionality of State bank charters.
For the greater part of the period from the establishment of the
Bank of North America in 1782 to expiration of the Federal charter
of the second Bank of the United States in 1836, there was one bank
under Federal charter, while the number of banks under State
charter grew to about 700. The notes of State banks constituted a
large if not the larger part of the money in circulation, yet the
Federal Government exercised no jurisdiction over them and itself
issued only the coined currency.
The charter powers, the control, and the functions of the State
banks frequently differed in important respects from what they are
today. A State was itself sometimes sole proprietor of a bank, or
part owner of one or more; and banks were frequently chartered for
the main purpose of financing some enterprise of a public nature, for
example, a turnpike, a canal, a railway, or a toll bridge. The property
itself or a lien upon it would be one of the bank’s principal assets,
and against this and other assets circulating notes would be issued.
This common method of financing public works had its worst abuse
in the period culminating in the panic of 1837.
Unincorporated Banks. Meanwhile, not all banking was cor
porate. There were numerous unincorporated banking houses owned
by individuals and partnerships, and commonly called “ private”
banks because they had not the association with the Government
that corporate charter implied. Being without corporate charters,

HISTORICAL INTRODUCTION

they might be at a disadvantage in putting their notes into circula
tion; in fact, some State legislation expressly forbade their doing so.
The right to issue notes was not indispensable in the operation of a
bank, however, especially in the commercial centers where deposit
banking was further developed than elsewhere. Various considera
tions doubtless made many bankers prefer to operate under common
law without a charter. Such unincorporated banking houses seem
as a class to have been no less reputable and sound than were the
incorporated banks taken as a class.
The New York Safety Fund Act, 1829. In 1829 New York
adopted a measure—the Safety Fund Act—which sought to protect
noteholders by requiring banks to contribute to a fund for the re
demption of the notes of banks that failed. The protection offered
was similar in principle to present day deposit insurance, which
came a century later. The Safety Fund was in existence about forty
years *and then was dissolved. Various conditions were adverse to
its success, among the most important being defective provisions
in the law, which, however, were subsequently remedied by amend
ment. The scope of the fund was gradually diminished by decline
in the relative importance of note issue, and by the rise of the “ free
banks,” to whose notes it was not applicable. Despite these things,
the fund was a significant and influential experiment in banking
control.
The New York Free Banking Act, 1838. During the entire
period up to 1837-1838 a bank charter was procurable only by a
special legislative act, and this gave semi-monopolistic advantages
to banks already in existence. Such a situation did not accord, how
ever, with the vigorous democratic spirit of the times nor with the
aggressive spirit of enterprise stimulated by the rapid growth of
population, the rapid extension of settlement westward, and the
rapid development of rich natural resources. While the borrowing
public felt dissatisfaction with restrictions on the number of banks
from which credit might be obtained, the public as creditor felt
parallel dissatisfaction with the frequent failure of banks to honor
their circulating notes. Banking was found to be too rigid in some
respects and too weak in others. In 1838 New York adopted a
measure—the Free Banking Act—aimed at a radical improvement

BANKING STUDIES

in both directions.1 It was an act authorizing any one to procure a
charter and engage in the banking business upon compliance with
certain general conditions without obtaining a special legislative act.
In effect, it changed corporate banking from a monopolistic privilege
to a business open to all. It provided that banks pledge securities
with the supervisory authorities against their circulating notes.
It reflected the popular reaction against the privileged character
of special charters, the desire for greater opportunity to invest in
bank stock, the pressure for more liberal and abundant supplies
of bank credit for economic expansion, and the need for a better
circulating medium.
AUTHORIZATION OF FREE B AN K IN G TO TH E NATIONAL BAN K
ACT, 1838-1863

The free banking movement, starting with the New York Act of
1838, was regarded by both its advocates and its opponents as a
movement to liberalize credit. It was intended to increase the
number of banks and release credit from so-called monopoly control.
Gallatin said that the New York Act bore “ internal evidence that
it was prepared by speculators.”
Abuses and Restrictions. Free banking spread rapidly to other
States. In the West it degenerated into “ wildcat” banking; banks
were established in remote, inaccessible places where it was alleged
that only wild cats throve and where there was little chance that
circulating notes would find their way for redemption. Speculators
and swindlers took advantage of frontier ignorance of investment
securities and made it a regular practice to purchase bonds of little
worth, pledge them in exchange for their face value in circulating
notes, and vanish. There arose an intense opposition to banks, for
which free banking abuses were only partly responsible. On one
ground or another, hostility to incorporated banks and to their
issuance of notes had always been active. The State constitution of
Iowa prohibited them from 1846 to 1857, when banking was made
a State monopoly. The constitution of Texas, adopted in 1845,
forbade the creation of any corporate body “ with banking or dis
1While free banking legislation was still pending in New York, a measure based
upon it was enacted in Michigan in 1837.

HISTORICAL INTRODUCTION

counting privileges.” In Illinois a movement to prohibit banks failed
in 1847 by only a narrow margin. At various times, legislation in
still other States reflected a distrust of banks and in particular of
their note issue function, though neither the scope nor the effect of
the measures is in all cases clear.
Indiana, Ohio, and Iowa (after abandonment in 1857 of the
prohibition of banks) maintained a system of branch banks com
prising as a whole what was known as the “ State Bank,” the
branches being limited in number and operating to some extent as
independent institutions. Eventually, these States, as well as those
that prohibited banking, adopted free banking statutes. These
statutes set the pattern of banking legislation, Federal and State,
still in effect. The “ freedom” to engage in banking as originally
contemplated by these statutes, however, has been greatly limited.
Administrative authorities, who had no power in the early days of
free banking to refuse charters, now generally have the responsi
bility of issuing charters only in those cases where the proposed
bank has competent management and reasonable prospects of
successful operation.
Bank Reserves. The first legislative requirements as to reserves
were enacted by various States in 1837, 1838, and 1839. They
applied to circulating notes alone. The New York Free Banking
Act required reserves of 12J per cent against notes, but the require
ment was repealed in 1844. In 1842, Louisiana adopted banking
legislation which was strikingly at variance with the free banking
principle. It made no provision for an increased number of banks.
It required each bank to maintain cash assets equal to one-third of
its combined note and deposit liabilities and liquid assets equal to
the other two-thirds. These liquid assets were to comprise promis
sory notes and other obligations maturing in not more than three
months and not renewable. Only capital funds of banks might be
invested in long-term obligations.
When in the panic of 1857, the banks of New Orleans stood out
among the few in the country that did not suspend, the reserve
requirements under which they operated received much favorable
attention in the North. In 1858 Massachusetts adopted a 15 per
cent reserve requirement against notes and deposits. Although

BANKING STUDIES

many banks voluntarily maintained conservative reserve ratios, it
was only in Louisiana and Massachusetts that there were statutory
reserve requirements relative to deposits as well as notes when the
National Bank Act, with such requirements, was adopted in 1863.
Meanwhile an important change had come about in the composi
tion of reserves. Originally each bank’s reserves comprised the
specie in its own vaults. Later these reserves came to include funds
which a bank might have on deposit with another bank in a financial
center. These funds constituted what are still known as correspondent
balances. They tended to concentrate in New York City, where they
became an important factor in the money market and by the same
token subject to the conditions governing that market.
Bank Notes and Deposits. During the period between the
inauguration of free banking under State law in 1838 and its estab
lishment under Federal law in 1863, bank deposits achieved
precedence over bank notes. This development, which has already
been referred to, is traced in the accompanying chart. In 1834, when
the record begins, and for most of the twenty years following, the
amount of bank notes in circulation exceeded the amount of bank
deposits. In the years preceding, this excess of notes over deposits
had probably been much greater. In 1855 deposits permanently
took the lead. After 1875 bank notes began to decline in volume,
their place being taken increasingly by other forms of currency and
by bank deposits. On August 1, 1935, the power of privately man
aged banks to issue notes came to an end with redemption of the
only remaining Government obligations authorized to be used as
security for national bank notes.
This development reflects a great change in the character of
economic life. When American banking began, monetary transac
tions had relatively less importance than they have in modern
economic life. Goods changed hands less frequently and were less
subject to transport from place to place. But with the development
of large-scale enterprise and of improved means of transportation
and communication, the volume of transactions and the number of
out-of-town payments increased. Deposits subject to check came
to be used instead of currency as more convenient for the bulk of
monetary payments. Concurrently, as already explained, the pro

HISTORICAL INTRODUCTION

vision of bank credit in the form of deposits instead of circulating
notes became the principal function of banks.
Independent Treasury System. When in 1836 the Bank of the
United States ceased to be a Federal institution and to act as fiscal
agent of the Treasury, it became necessary to devise new means of
decentralizing the Treasury’s transactions with the public. In an
attempt to meet this need without recourse to the services of banks,
which the Administration distrusted, the Independent Treasury
System was authorized—first but abortively in 1840, later and
B a n k N otes an d D eposits ®
MILLIONS OF DOLLARS

MILLIONS OF DOLLARS

a For data, see Table 1, p. 417.

permanently in 1846—and subtreasuries were set up in different
parts of the country. This arrangement contemplated the retention
of all Government funds in Government vaults and not in banks.
But the constant physical transfers of cash that this policy entailed
were costly and inconvenient. Consequently the idea of completely
divorcing the Treasury from the banks began to be abandoned
before the Civil War, and, while the subtreasuries were retained,
the use of banks was resumed. The Independent Treasury System
was maintained in form for three quarters of a century before final
transfer of subtreasury functions to the twelve Federal Reserve
Banks in 1920.

BANKING STUDIES

The National Bank Act, 1863. Even after bank notes fell
behind bank deposits in volume, they continued to constitute the
greater part of the paper currency in use and about half the total
circulating medium. The paper currency used by the public, that is,
comprised mainly the issues of about 1500 banks, operated under
the jurisdiction of the several States. Senator Sherman of Ohio
described the banking and currency situation in an address to the
Senate, January 8, 1863.
I next stated the objections to local banks. The first was the great number
and diversity of bank charters___ We had every diversity of the bank system
in this country that has been devised by the wit of man, and all these banks
had the power to issue paper money. With this multiplicity of banks,. . . it
was impossible to have a uniform national currency, for its value was constantly
affected by their issues. There was no common regulator; they were dependent
on different systems.. . . There was no check or control over these banks.
There was a want of harmony and concert among them. Whenever a failure
occurred . . . it operated like a panic in a disorganized army. . . .2

Senator Sherman and Secretary Chase of the Treasury proposed
that the Federal Government enact a general banking measure,
based mainly on the banking laws of New York and Massachusetts,
so that the circulating notes issued by banks under Federal charter
and secured by Federal obligations might replace State bank notes
as the country’s circulating medium.
With enactment in 1863 of this legislation— subsequently known
as the National Bank Act—the Federal Government again assumed
banking jurisdiction, which it had temporarily assumed twice before
in chartering the first and second Banks of the United States. It
did not now defer to the States. The new act aimed at bringing all
bank charters under Federal authority. “ The national banks,”
Sherman told the Senate, “ were intended to supersede the State
banks. Both can not exist together.. . . ” To this end, in 1865, a
prohibitive tax was imposed on State bank notes. As a result, the
majority of State banks were replaced by national banks, but some
being banks of deposit only were unaffected by the tax and con
tinued under their State charters.
* John Sherman, Recollections of Forty Years, pp. 236-37.

HISTORICAL INTRODUCTION

THE NATIONAL BANK ACT TO THE FEDERAL RESERVE ACT,
1863-1914

For about thirty years following establishment of the National
Banking System, national banks were more numerous than State
banks, as shown in the accompanying chart. In 1892 State banks
became the more numerous and have remained so ever since.
This development was possible because the provision of bank
credit in the form of deposits subject to check, which was open to
C o m m e r c ia l B a n k s

1830

1840

1850

I860

1870

in the

1880

1890

U n it e d St a t e s ®

1900

1910

1920

1930

1940

a For data, see Table 2, p. 418.

State banks, became of far greater importance than the provision
of bank credit in the form of circulating notes, which was open to
national banks only. Moreover, while the right under national
charter to issue notes became in practice almost negligible, there
were certain substantial rights under State charter which national
charters did not convey. In the rural West, the laws usually per
mitted State banks to organize with small capital and to make
real-estate loans. In the East, large banks found State charter
attractive because it authorized them to act as trustees. Some
States permitted the operation of branches. Some had no organized

BANKING STUDIES

supervision of banks and some had very little. Taking into account
these varying advantages and disadvantages of State charters and
national charters, bankers might choose whichever seemed to offer
them the most. In the majority of cases they chose State charters.
In the early years of the national banking system, the number
of incorporated banks (State and national combined) and of unin
corporated banks seems to have been about equal. After 1892,
unincorporated banks became less numerous than State banks and
after 1905 less numerous than national banks. This development
reflected the fact that advantages of the corporate form of organiza
tion prevailed for banking as for business enterprise in general.
Incorporation limited the proprietors’ liability, it facilitated invest
ment by numerous participants with small holdings as well as large,
and it facilitated the raising of more capital than was ordinarily
possible for individual proprietors. Furthermore, incorporated
banks, because they had a definite legal status and were subject to
restrictions and supervision, had in general a competitive advantage
over unincorporated, or “ private,” banks. Under these conditions,
the number of unincorporated banks ceased to grow as fast as the
number of incorporated banks and for many years now has steadily
declined.
Besides incorporated and unincorporated banks there must be
mentioned the large number of diverse institutions that are also
engaged in savings, lending, and investment and that to a greater
or less degree, therefore, are competitors of banks. These are prob
ably more numerous and important now than ever before. They
include older types of corporations mostly under State charter, such
as insurance companies, savings and loan societies, building and loan
associations, and in more recent years finance companies and pro
duction credit corporations.
New Approach to Banking Problems. During the first hundred
years of American banking, the problems involved in banking and
currency were repeatedly approached and decided in a spirit of
partisanship. In the latter part of the nineteenth century, the
conflict, so far as jurisdictions were concerned, gave way to com
promise, and the lasting result was a complex of banking jurisdiction
and banking legislation. It was commonly recognized that the

HISTORICAL INTRODUCTION

banking system was weak and inefficient. Credit was at times
extended carelessly, and at other times, when most needed, became
unavailable. It might be abundant and cheap in financial centers
while unreasonably scarce and dear in agricultural regions. The
machinery for currency supply would break down under strain.
Bank suspensions were common and in successive panics or crises
had been epidemic. At the same time the Treasury’s operations were
accommodated to the banking situation with difficulty, the Inde
pendent Treasury System being a sort of fifth wheel that gave the
Treasury no independence and gave banks no protection from the
deflating and inflating effect of the Treasury’s collections and
disbursements.
In the last decade of the nineteenth century, these defects in the
banking and currency situation began to receive more scientific
attention from economists, bankers, and legislators than ever before,
and a concerted effort was made to work out constructive reforms.
As a result, three principal changes were advocated that in the light
of subsequent experience are of most interest. One was that branches
be more generally authorized so that banks of large size might main
tain offices in places not able independently to make adequate
credit available at reasonable rates. Another was that a more elastic
currency be provided, so that the volume of money in circulation
might be responsive to changes in the public demand. Another was
that central banking facilities be provided, so that excessive expan
sion and contraction of bank credit might be avoided.
The first of these suggestions—that small communities be served
by branches of large banks—encountered opposition from bankers
who feared that small banks would be put at a competitive dis
advantage with large ones. Nevertheless over a period of time both
Federal and State laws have been liberalized in this respect and
maintenance of branches under various restrictions has more and
more been authorized.
The suggestions with respect to an elastic currency and central
banking facilities, after consideration in and out of Congress for
about twenty years, resulted eventually in adoption in 1913 of the
Federal Reserve Act. The act provided for the creation and absorp
tion of reserve funds in accordance with the credit and currency

BANKING STUDIES

needs of the public and the ability of banks to meet those needs.
This is the essential function of a central banking organization.
Background of the Federal Reserve System. American bank
ing experience had already afforded many illustrations of the need
of a reserve or central banking organization and at least a few
conspicuous examples of the improvisation of central banking
functions in emergencies. These need to be reviewed as part of the
background of the Federal Reserve System; they center around the
Bank of the United States, the Suffolk Bank of Boston, the corre
spondent relationship, the clearing house, and the United States
Treasury.
The Bank of the United States as a Central Bank. In 1817, when the
second Bank of the United States was organized, the majority of
banks were not redeeming their circulating notes and had not been
doing so for some time. This reflected an unsound credit condition.
The paper money of the country was current at varying discounts
and the fiscal operations of the Government as well as the transac
tions of private business were impeded. The Treasury Department
had made various efforts to mend the situation, but Secretary Dallas
had reported to Congress that formation of a Federal bank was
“ the only efficient remedy for the disturbed condition of our circu
lating medium.” Promptly after its organization, the Bank of the
United States drew up an agreement with the State banks by which
they bound themselves to resume redemption of their notes in coin,
and it bound itself to discount for them.
The Bank’s performance of this central banking action was
facilitated by its size, its close association with the Government,
for which it was fiscal agent, and the fact that it stood apart from
other banks and could, if necessary, exert pressure upon them to
meet their obligations.
The Suffolk Bank of Boston as a Central Bank. The Suffolk Bank
of Boston, a State chartered bank in operation from 1818 to 1858,
performed a similar function by different means. The Bank of the
United States customarily maintained a creditor relation toward
other banks as a means of regulating their note issues—it accumu
lated their circulating notes and demanded payment. The Suffolk

HISTORICAL INTRODUCTION

Bank, on the other hand, cultivated a debtor relation. It arranged
for banks to maintain balances with it to which their notes might
be charged when received. Banks that did not maintain such
balances were called on to redeem their notes in coin. Many if not
most New England banks chose to maintain the balances and ap
preciated the advantage of the arrangement. The Suffolk Bank thus
exercised an effective regulatory power. If it believed expansion was
justified, it could lend to its banks for replenishment of their
balances; if it felt expansion was unsound, it could refuse to lend.
Its powers of restriction were much greater than its powers of
expansion, however.
The Correspondent Relationship. The correspondent relationship
is almost as old as banking itself in this country. Banks in outlying
places soon found it convenient or necessary to maintain balances
with banks in financial and commercial centers, and the city banks
found it profitable to hold such balances. The balances might be
drawn on for currency by the country banks, for the payment of
checks, for the purchase of investments, and for monetary transfers
at the convenience of bank customers.
The importance of the correspondent relationship became great
est in the latter part of the nineteenth century, when bank liabilities
were taking the form of deposits rather than circulating notes, when
the use of checks was growing, when economic activity, with new
means of transportation and communication, was becoming nation
wide as well as local and regional. Because of its practical impor
tance, the correspondent relationship received statutory recogni
tion; both national and State banks outside of certain large cities
were permitted to count, as a portion of their legal reserves, the
balances they kept on deposit with city correspondents.
For many years—until the payment of interest on demand
deposits was forbidden by law in 1933—the city correspondent
banks paid interest on the reserve funds deposited with them.
These funds found active employment in the New York call-loan
market, which became the central reservoir of the country’s bank
reserves. Small banks kept their correspondent balances with larger
banks in cities of intermediate size, and the latter kept their own

BANKING STUDIES

correspondent balances in New York banks. Under these conditions
the volume of reserves of the New York City banks became a
money market index of national significance.
An important feature of the correspondent relationship was the
understanding that country banks might borrow from their city
correspondents when their balances became inadequate, either
because of currency requirements or because their customers were
making heavy payments by check. This arrangement worked satis
factorily so long as relatively few country banks wanted to borrow.
When they all wanted to borrow at once, the case was different.
Every summer, for example, the banks in agricultural regions had
to draw on their reserve balances for funds with which to finance the
crops. This made it necessary for many of them to borrow. The cur
rency which the city banks had to supply constituted their own re
serves, and the reduction of these reserves curtailed their lending
power. It made them not only less able to meet the demands of
their country correspondents but less able to meet the demands of
their local borrowers in New York City.
The city banks might do their best to meet the responsibilities
of a national money market, but there was one essential power they
did not have. They could not create reserve funds. They could and
on occasion did engage funds abroad for the replenishment of the
American money market, but they had no powers adequate to
meet the general demand that a market must sustain when it
becomes the central reservoir of a nation’s bank reserves. What
was needed was a power to expand reserves. For the banks of the
country as a whole there was a relatively fixed aggregate volume of
reserve funds—which in 1906 was about 3 billion dollars—com
prising gold and other lawful money. The banks of the country
had to get along with this amount whether or not it was adequate
to meet all needs.
In the panic of 1907 it was not adequate. Faced by an unusual
demand upon their reserves and by an inability to procure more,
the city banks in a natural impulse of self-preservation froze on to
what they had. The result was like a sudden paralysis. Banks
ceased to function normally. Each held grimly to the reserves it
had, hoping thereby to maintain its own solvency. There was no

HISTORICAL INTRODUCTION

lender of last resort to which it might go for replenishment of its
reserves. The correspondent relationship provided for the con
centration and distribution of existing funds, but not for the
creation of new and additional ones.
The Clearing House. The clearing house—another important
factor in the development of present-day central banking powers—
is a voluntary association of neighboring banks for the primary
purpose of clearing the checks each receives upon the others. The
oldest clearing house in the United States is that of the New York
City banks, established in 1853.
It was a basic expectation that each clearing-house bank be able
to pay instantly the checks drawn on it. For collective protection,
therefore, the clearing house usually kept informed of the condition
of each of its members and might impose drastic discipline upon
them. It early became apparent, however, that inability to make
prompt settlement might arise from general conditions which
individual banks could not control— that is, from a general insuf
ficiency of reserve funds.
As early as the crisis of 1860, the New York City clearing house
took action which in subsequent crises was frequently repeated. It
provided its members with certificates, issued in exchange for
promissory notes and other obligations, which might be used in
settlement of indebtedness to the clearing house. The effect of this
action was to enlarge the existing volume of reserve funds. The new
funds were not themselves legal reserves, but they spared the use
of legal reserves.
The more important subsequent uses of clearing-house certificates
occurred in 1873, 1890, 1893, and 1907. The certificates were not
always, as at first, confined to use in settlement of clearing-house
obligations; in some crises they were issued to circulate among the
public as currency. They were so frequently resorted to in crises
that they came to have a recognized place in monetary policy.
Their issue was legalized in 1908 in the Aldrich-Vreeland Act,
the terms of which expired after the Federal Reserve Act came
into effect.
The Treasury. Another important factor in the evolution of the
central banking function is the United States Treasury, which by

BANKING STUDIES

its operations frequently gives occasion for exercise of central
banking powers and at times has exercised such powers itself.
The disturbing effect of Treasury operations on banking conditions
was recognized from the very beginning, and the policy was adopted
of tempering the effect as much as possible—by avoiding, for
example, sudden transfers of Treasury funds. The Treasury some
times went further and sought by the transfer and deposit of funds
to relieve a banking situation for which its operations were not
responsible. With establishment in 1846 of the Independent Treas
ury System, which sought to diminish the Treasury’s contacts with
banks, this policy of accommodation was for a time practically
reversed.
As already indicated, the Treasury’s need of banks very soon
impelled serious modification of the theory of independence, and
by the time of the Civil War the Treasury was again borrowing
from banks, depositing its funds in banks, and utilizing the facilities
of banks in making payments. In the succeeding sixty years the
Treasury’s use of banks varied from period to period but in general
tended to be greater and greater. Yet so long as it lasted, the
Independent Treasury System entailed sudden withdrawals of
large amounts of cash from the banking community, the locking
up of this cash to lie in idleness in the Treasury’s vaults for an
extended period, and then a restoration of cash to the banks.
As a result the ability of banks to extend credit was from time to
time abruptly decreased or increased without reference to the need
for credit. This condition was described in 1910 by a contemporary
student of the subject in the following words:
The waste involved in the idleness of public funds is less objectionable than
the successive expansion and contraction of reserves which result from the
receipt and disbursement of revenue. One phase of this movement may be
illustrated by the simple case of a pension disbursement. On August 4th the
Treasury drew pension checks amounting to $14,970,000, and distributed them
throughout the country. About half of this sum was drawn upon the Assistant
Treasurer at New Y o r k .. . . In a few days this mass of checks is presented to
the New York sub treasury through the clearing house and an equivalent amount
of money is transferred from the subtreasury to the banks, whose combined
reserves, in the absence of countervailing debits, are increased $7,000,000.
Without any alteration in the aggregate wealth of the country or even of New

HISTORICAL INTRODUCTION

York City the lending power of New York banks is raised about $28,000,000.
In order that this new source of profit may be utilized, since nothing in the
situation operates immediately to stimulate the demand from commercial
sources, the competition of banks in an effort to place their funds lowers the
call-loan rate. This reduces the cost of carrying stocks and stimulates specula
tion for the rise in Wall Street.
To reverse the illustration let us suppose that the collection of duties at the
port of New York in a given week reaches the not uncommon sum of
$10,000,000. This amount of money is drawn from local banks and trust com
panies and locked up in the sub treasury. In as far as the effect on reserves and
lending power is concerned, it might quite as well have been sunk in New York
harbor. The rate for call loans rises, stocks fall or commercial paper which
otherwise would have found a ready market remains unsold and the production
and exchange of goods may be curtailed.3

These disturbances caused by Treasury operations were one
aspect of the general problem—another aspect was involved in the
use of Treasury funds to correct conditions not caused by Treasury
operations. There were numerous and important instances of
such use.
In his annual report for 1856, Secretary Guthrie said: “ The
independent treasury, when over-trading takes place, gradually
fills its vaults, withdraws the deposits, and, pressing the banks, the
merchants and the dealers, exercises that temperate and timely
control which serves to secure the fortunes of individuals and pre
serve the general prosperity.” This was central banking action, its
objective being to contract the reserves of banks so as to prevent
an over-expansion of credit, or “ over-trading,” to use the older
term. In the following year, 1857, Secretary Cobb had occasion
to use his powers in the opposite direction. In order to supply
additional reserve funds to the banks and relieve the crisis that had
developed, he made purchases of Government bonds in the open
market, paying out funds for them which found their way directly
into bank reserves.
In subsequent years, the deposit of funds in banks seems to have
been a more typical form of Treasury interposition than purchase
of securities. Furthermore the practice of allowing Government
3 Murray S. WUdman, “ The Independent Treasury and the Banks,” Annals of the
American Academy, November 1910, pp. 578-79.

BANKING STUDIES

funds to accumulate in banks was more common than the practice
of directly transferring deposits to the banks from the subtreasuries.
Either practice, however, like the purchase of securities by the
Treasury and the issuance of certificates by clearing houses, had the
effect of maintaining or enlarging the aggregate volume of reserve
funds and was, therefore, helpful in time of stringency. But the
Treasury, like the clearing houses, had neither the authority nor
the means to interpose regularly for the relief of the money market.
Thus, in 1857 the Treasury had to cease its purchases before their
objective was accomplished, because its funds were needed for
other purposes.
The policy which the Treasury followed toward the banks and the
money market varied with different Secretaries. While interposition
was not in conflict with the letter of the law, it was a departure
from the ideal of a complete divorce that the original sponsors of
the Independent Treasury System had sought—an ideal based on
a distrust of banks and a conviction that the Government should
not use their facilities in its fiscal affairs. Secretary Windom, in
his report of 1889, stated that the deposit of funds in the banks
in amounts largely in excess of the needs of the public service was
“ wholly unjustifiable.,, “ Such a policy,” he wrote, “ is contrary to
the spirit of the act of August 6, 1846, which contemplates a sub
treasury independent of the banks.” He announced that he would
reduce the deposits.
But under subsequent secretaries the trend was again the other
way. In 1898 Secretary Gage put into effect a policy of using Gov
ernment deposits as a means of regulating continuously the con
dition of the money market. Redemption of Government obligations
and prepayment of interest were also utilized to the same end. He
later stated his belief that a central banking institution should be
established for such purposes, but since there was none, he thought
the Treasury should do what it could even though it was able to
perform the central banking function only “ in a crude way.”
During the incumbency of Secretary Shaw, from 1902 to 1907,
the policy of using the Treasury’s powers to stabilize credit con
ditions was carried still further. Funds accumulated in the Treasury
were deposited in banks in the crop-moving season and subsequently

HISTORICAL INTRODUCTION

withdrawn into the Treasury. The object was not to alleviate a
crisis but to ease a normal seasonal strain.
There was much controversy over this practice. Secretary Shaw
was praised on the one hand for doing what it was thought had to
be done, and condemned on the other for exceeding his authority
and the province of the Treasury. He came to the conclusion,
contrary to his predecessor’s, that the Treasury, if authorized,
could do even better than a central banking institution. He sug
gested in his report of 1906 that the Secretary be “ given 100 million
dollars to be deposited with the banks or withdrawn as he might
deem expedient” ; and that he be given “ authority over the reserves
of the several banks, with power to contract the national bank
circulation at pleasure.” If this were done, he said, he believed that
“ no panic, as distinguished from industrial stagnation, could
threaten either the United States or Europe that he could not
avert.” He said further: “ No central or Government bank in the
world can so readily influence financial conditions throughout the
world as can the Secretary of the Treasury under the authority
with which he is now clothed.”
Establishment of the Federal Reserve System, 1913. The
instances that have been recounted illustrate certain related and
recurring needs that for more than a century had been met now
in one way, now in another. Means were needed to assure better
protection from over-expansion of credit, greater availability of
bank reserves when necessary, a more elastic currency, and better
facilities for handling Government funds without credit disturbance.
The first and second Banks of the United States had provided
fiscal agency and depository services, and they had sought to
restrain over-extensions of credit by the State banks and to regu
late their note issues by insisting upon note redemption. The
Suffolk Bank of Boston, a privately managed institution, had acted
as a regulator of the currency in the New England region and had
exercised a wholesome influence upon the extensions of credit by
local banks. Either Bank of the United States—or even the Suffolk
Bank—might have evolved in time into a modern central banking
organization, had it continued in existence. In the absence of such
an organization, the needed services came to be performed princi

BANKING STUDIES

pally by city correspondent banks, by clearing houses, and by the
United States Treasury. None of these was adequately empowered
or properly situated to perform the service. The city correspondent
banks lacked the essential power to expand reserves, and their abil
ity to lend diminished just when crisis made additional reserves
most needed. Clearing houses had the power to expand reserves,
but their fields of action were local. The Treasury could also expand
bank reserves but was without authorization or power to conduct
central banking operations regularly.
In 1908, following the panic of 1907, Congress created a National
Monetary Commission to investigate the whole subject and recom
mend legislation. The resulting proposal was that a single in
stitution be established for performance of the central banking
function. This gave way to the idea of the present regional system
of Reserve Banks supervised and coordinated by a Government
board in Washington. The Federal Reserve Act, embodying this
plan, was approved December 23, 1913. It provided for exercise
of the powers with respect to bank reserves that history indicated
were necessary. The following year the twelve Federal Reserve
Banks and the Federal Reserve Board (since 1935 designated the
Board of Governors of the Federal Reserve System) were organized
and went into operation.
In form of organization the Federal Reserve System differs
widely from the older central banks in other countries, although
the powers bestowed upon it are substantially the same as those
possessed by central banks in general. The Reserve System owes
fully as much to American experience as to foreign example. It has
in fact been imitated in other countries. It departs, for instance,
from older central banking practice in that only balances main
tained with the Federal Reserve Banks constitute legally required
reserves. This arrangement has since been adopted in several
other countries, some of which have also adopted the principle,
original with the Federal Reserve Act, of authorizing changes to
be made by administrative action in the ratio of reserves required
against deposits.

HISTORICAL INTRODUCTION

FEDERAL RESERVE ACT TO THE PRESENT, 1913-1940

Establishment of the Reserve System, although it made great
changes in respect to function, accomplished little or no alteration of
the banking and credit structure. The System was superimposed
upon the existing structure. The supervisory powers of the Reserve
System were added to those of the Comptroller of the Currency
and the forty-eight State authorities. All national banks were
required to become members of the System and to supply the
capital funds of the Reserve Banks, and State banks were per
mitted to do so. This has given the System two classes of member
banks. While certain services of the Reserve Banks are directly
accessible to member banks only, nevertheless the operations of
the Reserve System are of a public nature and all banks are bene
ficiaries of them to some extent, whether members or not.
Bank Suspensions and Emergency Measures. It has already
been indicated that suspension became a common phenomenon
early in the history of American banking. In the period when note
issue was more important than deposits, suspension was possibly
even more general than it subsequently became, but not always so
severe. This was because it usually meant suspension of specie
payments, that is, refusal or inability to redeem circulating notes.
The notes might still be used, though at a discount. Much less
frequently suspension meant outright bankruptcy. Specie payments
were suspended throughout the country in 1814, 1818, 1837, 1841,
and 1857. After note issue was taken away from State banks and
given to national banks in 1865, suspension of note redemption
ceased to occur, note issues being fully covered. Suspensions that
occurred thereafter meant inability to repay depositors.
During the period from 1892 to 1920 the number of banks
rapidly increased. Concurrently, bank suspensions, which some
times bulked large in panic years, averaged nearly seventy a year.
In 1920 the number of suspensions rose sharply, and from 1921
through 1929 averaged about 600 a year. There were 1,292 sus
pensions in 1930 and 2,213 in 1931.4 They were most numerous in
4See Table 3, p. 419.

BANKING STUDIES

the Middle West and involved principally small banks not mem
bers of the Federal Reserve System.
During the period 1908-1917, several States attempted to check
bank suspensions by providing for guaranty of deposits. Eight
States—Oklahoma, Kansas, Texas, Nebraska, Mississippi, South
Dakota, North Dakota, and Washington—established guaranty
systems. All of these systems were abandoned. In part this was
because the problem at which deposit guaranty aimed was a
national one and no adequate action by the separate States was
possible.
The initial efforts of the Federal Government to meet the growing
weakness of the banking structure were in the direction of providing
new credit facilities for banks and bank borrowers. In the early
1920’s the War Finance Corporation, which had been in process
of liquidation, was revived for the purpose of emergency agricul
tural financing, including advances to banks, both members of the
Federal Reserve System and nonmembers. The Corporation was
revived for this purpose presumably because it was thought that
the Reserve Banks should operate only in the field of short-term
commercial credit—a conception which called for separate in
stitutions to operate in other fields of credit. The War Finance
Corporation has since been liquidated, but it was an important
example of the tendency to divide related functions among an
increasing number of institutions and authorities. Another case in
point is that, in the development of the Federal farm loan system,
the Federal Intermediate Credit Banks were authorized to discount
agricultural paper for banks.
In February 1932 a more intense national emergency brought the
Reconstruction Finance Corporation into being. The Corporation
began operations with authority to make Federal funds available
to banks, both State and national, on any kind of security, including
that on which the Federal Reserve Banks were authorized by law to
make advances as well as that on which they were not authorized.
It advanced 850 million dollars to banks that year, and for a time
the number of suspensions fell. It is to be observed that in establish
ing the Reconstruction Finance Corporation, as in establishing the
Reserve Banks, no change was made in the existing structure of

HISTORICAL INTRODUCTION

banking and supervision; a new organization was added to the
congeries already in operation.
In December 1932 suspensions again increased. The situation had
worked to the point where the stronger banks were being dragged
down by the weaker banks, partly because the latter drew on the
former for reserves and partly because the forced liquidation of
portfolios by banks in difficulties impaired the value of portfolios
of all other banks. Individual States endeavored to meet the situa
tion by the declaration of banking holidays and moratoria. These
efforts to stem universal contraction were unsuccessful, however,
and on March 6, 1933, all banks were closed by Presidential proc
lamation after similar action had been taken by State authorities.
Thus, for the time being, Federal authority was extended over all
banks. Member banks of the Federal Reserve System were licensed
by the Secretary of the Treasury to reopen upon complying with
such requirements as were deemed necessary in each case. Non
member banks were permitted to reopen under the regulations of
the State authorities.
In June 1933 the Federal Deposit Insurance Corporation was
authorized, and on January 1, 1934, insurance of bank deposits
became effective. It was made obligatory for banks belonging to
the Federal Reserve System and optional for others. In setting
up deposit insurance, no change was undertaken in the complicated
structure of banking and supervision already in existence.
Under a series of measures culminating in the Gold Reserve Act,
the Government in January 1934 took possession of all monetary
gold, including that held by the Federal Reserve Banks, and
marked up its value from $20.67 to $35.00 an ounce. This legisla
tion, which also set up the Stabilization Fund and made new
provisions for the issue of United States notes and the purchase
of silver, gave the President and the Treasury powers which parallel
and under some conditions exceed the central banking powers
already assigned to the Federal Reserve authorities.
Bank Reserves and Credit Demand. The period since the banking
moratorium in 1933 has been in many respects anomalous, from
causes partly connected with that crisis and partly independent.
An outstanding development has been the gravitation of most of

BANKING STUDIES

the world’s gold stock to the United States. Prior to 1934, the
amount of gold in this country seldom exceeded 4 billion dollars.
At the end of 1940 it was 22 billions. This enormous increase in
the monetary gold stock has been due mainly to disturbed con
ditions abroad; about 14 billions of it reflects transfers of capital
funds and settlements of net balances due the United States on
current account. As a result, American banks now have a volume
of reserves which has no reasonable relation to domestic credit
needs—a volume of reserves which is several times larger than what
the banks had when they were financing American economic
expansion in its most active and speculative periods. In spite of
the presence of these bank reserves greatly in excess of require
ments, the demand for speculative and productive credit has not
increased as would be expected from former experience. There has,
however, been a greatly increased demand for refinancing and
rehabilitation credit, which has been met to a considerable extent
by Government lending agencies with funds borrowed in large
part from banks.
The situation as a whole is marked by many exceptional and
contradictory conditions. There are banks that have little or no idle
reserves. Outside the larger cities interest rates have not fallen very
much; there are banks in agricultural regions that still obtain 8
per cent or more on local loans while banks in metropolitan centers
obtain as little as one and one-half per cent. Many banks have
extended their business into lending fields not previously cul
tivated by commercial banks. They have made more loans secured
by mortgages, life insurance policies, and by installment sale
contracts, and more so-called personal loans with co-signers and
chattel mortgage security. They have acquired Government
securities in unprecedented volume. Although the demand by
private enterprise for credit does not begin to make full use of the
enormously increased reserves, nevertheless, the total loans and
investments of banks have expanded very greatly.
International Relations. The Reserve System’s original pros
pects were almost wholly domestic, but in August 1914, before the
Reserve Banks began operations and while they were still in process
of organization, war broke out in Europe. This event put a strain

HISTORICAL INTRODUCTION

upon the American credit structure to which the Reserve au
thorities had to give immediate attention. Three years later the
United States entered the war, and the System was called on to
perform fiscal services of vital importance. Ever since the System’s
establishment, its operations have been conditioned by international
as well as domestic developments. The Federal Reserve Banks
carry accounts and hold gold under earmark for numerous foreign
central banks and governments. In this capacity and as fiscal agents
of the United States Treasury, they are called upon to engage
in a large volume of transactions arising from international move
ments of goods, services, and capital. These transactions, which
are subject to constant change resulting from changes in world
wide economic and political conditions, have tended to increase in
importance in the course of time. In the present posture of world
affairs and considering the defense program of the United States,
it is to be expected that their importance and volume will increase
still further.
The Nature of Reserve Bank Credit. In the light of the Federal
Reserve System’s first quarter century of operations, certain con
ceptions of banking have undergone changes which rank in im
portance with the events, already recounted, that helped to bring
them about. One of the foremost of these changes has occurred with
respect to the nature of Federal Reserve Bank credit.
When the System was established and for many years later, the
Reserve Banks were usually regarded as a means of “ pooling” or
“ mobilizing” the reserve funds of member banks. To a certain
extent this view was correct. But it fell far short of recognizing the
full and unique nature of Reserve Bank lending power and Reserve
Bank credit. The Reserve Banks are more significant as sources of
funds than as reservoirs of funds. In extending credit, either by
lending or by purchasing securities, they do not use funds already
deposited with them. Their lending power is independent of the
funds deposited with them. When they extend credit, they increase
both their assets and their liabilities; they originate the funds they
lend and the funds they pay for securities.
Reserve Bank credit owes its existence to the provisions of the
Federal Reserve Act. It supplements gold and currency as a source

BANKING STUDIES

of bank reserves. In supplying it, the Reserve authorities perform
a function which it is not possible for correspondent banks to per
form and which relieves clearing houses and the Treasury from
the necessity of interposition to supply additional reserves to the
banking system in emergencies.
When the Reserve System was established, the lending power of
the Reserve Banks was thought to resemble the lending power of
city correspondent banks; but it has become apparent that the
two powers are essentially unlike. Extensions of Reserve Bank
credit, issues of clearing-house certificates, transfers of currency
from the Treasury’s vaults, and deposits of gold all resemble each
other in the essential fact that they originate reserve funds not
previously existing and therefore augment the aggregate volume
of bank reserves, upon which the multiple expansion of bank credit
is based. Lending by a city bank to its country correspondent, on
the other hand, merely utilizes funds already existing. It reduces
the aggregate volume of bank reserves available for credit extension,
while lending (and purchases of securities) by a Reserve Bank en
larges that aggregate.
Increasing the aggregate volume of bank reserves, as already in
dicated, makes it possible for the volume of bank credit to be
expanded. This is true no matter whether the increase in reserves
arises from additional amounts of Reserve Bank credit or from
additional receipts of gold. Similarly, decreases in the aggregate
volume of bank reserves reduces the amount of credit that can be
extended by banks; the effect being the same whether the decrease
in reserves results from diminution in the amount of Reserve Bank
credit or from export of gold. The difference is that changes in the
amount of Reserve Bank credit are much more susceptible to control
than are changes in the amount of gold. This susceptibility to
control is the reason for the existence of Reserve Bank credit;
control of the amount of such credit gives some measure of control,
in principle, over the extension of the volume of commercial bank
credit.
The history of the Federal Reserve System, however, demon
strates nothing more clearly than the limitations on this principle.
Provision of an enlarged volume of bank reserves gives no assurance

HISTORICAL INTRODUCTION

that the enlarged volume will be put to use and that an increase of
commercial bank credit will follow. And the more that bank reserves
derive from gold, the less use there tends to be for Reserve Bank
credit, and the less effective becomes control over extensions of
commercial bank credit. In recent years this limitation might have
interfered seriously with the exercise of central banking powers
had not the large growth of the monetary gold stock been accom
panied by a slack demand for credit.
The Function of Reserves. It is apparent from the foregoing
that the conception of bank reserves has also greatly changed.
Originally the purpose of reserves was to assure the ability of a
bank to redeem its obligations to note holders and depositors.
Maintenance of reserves for this purpose, as already indicated,
came to be required by law. But in the course of time it grew
apparent that reserves which a bank was required to maintain
were not reserves which it could pay out. The requirement that
the reserves be maintained did not, therefore, assure the ability of a
bank to honor its obligations on demand. The requirement did,
however, effect a restraint upon the freedom of banks to grant credit
to their customers, because lending had to be curtailed when reserves
got down to the minimum required. By the same token, lending
might be expanded when reserves were replenished. Recognition
of these facts gave bank reserves a new significance; instead of
being regarded mainly as the individual bank’s guaranty of readi
ness to honor its obligations, they are now regarded as the means
by which the central banking authorities may either curtail or
augment, as public interest directs, the ability of banks to extend
credit.
Meanwhile it has also become realized that banks have other
means of assuring their ability to meet their deposit obligations
that are more efficient than maintenance of large cash reserves.
To the extent that their earning assets are sound, they can depend
upon the lending facilities of the Federal Reserve Banks for re
plenishment of their reserves to any required extent.
The Individual Bank and the Banking System. Out of Federal
Reserve operations has also developed a conception of the banking
system as a whole that differs greatly from the conception of it as

BANKING STUDIES

merely aggregating a large number of individual banks. In the
transactions of individual banks competition is an ever present,
compelling factor. The individual bank is constantly losing reserve
funds to other banks through the checking transactions of its
depositors, and unless it can gain as much as it loses, its ability to
extend credit is impaired. By the same token, unless it can gain
reserves, it can not enlarge its extensions of credit.
In the light of these facts, reserves used to be thought of only
as individual bank transactions, and in the early days of the
Reserve Banks their extensions of credit to their member banks
were considered significant only with respect to the particular
banks that borrowed. But experience made it apparent that the
Reserve Bank credit granted to an individual bank is not retained
by that bank but becomes transferred to other banks. The trans
action must be measured, not merely in terms of a particular
bank’s reserves, but in terms of the aggregate reserve funds avail
able to the banking system as a whole. The effect of the transaction
is like that produced by pouring water into a pond; the water does
not pile up at the point where it falls into the pond, and the level
at that point is not made perceptibly higher than the level as a
whole. The increase is diffused and the whole level rises.
Since reserves are only a fraction of deposits, any increase in
the volume of reserves as a whole serves as a basis for an expansion
of bank credit several times as great. This expansion is not within
the power of any particular bank, except to the extent that the
bank shares the increased reserves with its competitors. As its
reserves increase with the rise in the level of reserves as a whole,
its power to meet any enlarged demand for credit increases. This
increase may come about slowly and irregularly—in fact it will
most probably come about in that way—with the result that a
bank’s expansion of credit will be tentative and dependent upon
a net gain from its daily receipts and losses of reserve funds. So,
while an increase in the volume of bank reserves makes possible
a much greater increase in the volume of bank credit, it is impossible
to say to what extent competition may permit any given bank or
banks to share the increase.
From another point of view this principle reflects the fact that

HISTORICAL INTRODUCTION

banking has come to constitute a system of interdependent units in
action. The typical early American bank was of necessity more
nearly self-sufficient than its typical successor of the present. Its
capital and its cash in vault had to be relatively larger than is now
necessary, for it stood more or less by itself. Today the operations
of individual banks are closely interknit, and to a greater extent
than is true of other forms of business, banks suffer rather than
gain from one another’s weaknesses. In the light of these conditions
it has become more and more apparent that banking can not be
understood so long as it is viewed from the point of view of the
single institution; it must be viewed as an organic system of in
stitutions in which the whole is far more than merely the sum of
its individual parts.
Accordingly, while the Reserve Banks have as close and necessary
relations with their individual member banks as ever, it has become
clear that Reserve policy must be determined with reference funda
mentally to the banking system as a whole and the general economy.
SUM M ARY

American banking in the course of more than a century and a
half has changed from the function of supplying means of payment
in the form of bank notes to the function of supplying means of
payment in the form of bank deposits subject to check. It has
changed from a privileged business for which there was little
governing legislation to a competitive business subject to an enor
mous mass of legislative and supervisory conditions. It has changed
from an activity of individual institutions with relatively little
inter-relation to an activity of individual institutions drawn
closely together in an organic system. Yet the American banking
system is not homogeneous. It includes national banks, member
State banks, insured nonmember State banks, and noninsured
nonmember State banks—leaving aside numerous other classes
of institutions, State and Federal, which compete with banks.
It is under the divided and overlapping authority of the super
visory agencies of the forty-eight States and of four or five major
agencies or departments of the Federal Government.
American banking has been remarkable for the number and

BANKING STUDIES

variety of forms developed. At one time or another banking has
been prohibited, has been a monopoly, and has been free to all.
At times, Federal and State governments have assumed proprietary
responsibility in banks; at other times, they have dissociated
themselves even from supervisory responsibility. The Federal
Government and the States have vied with each other for juris
diction, and the Federal Government has at different times with
drawn from the field, re-entered it with the idea of asserting ex
clusive jurisdiction, and shared it with the States. Legal require
ments of reserves have at times been little more than nominal and
at times drastic. Protection for bank creditors has been sought
by widely varying means in different periods and different juris
dictions.
The discontinuity of American banking evolution has also been
remarkable. In the field of central banking, for example, there are
instances of repeated and unrelated attempts at control of the
reserve problem through the media of currency redemption, cor
respondent banking, clearing-house action, and Treasury action;
and the present system of regional Reserve Banks bears little
resemblance in organization and form of action to preceding at
tempts in the same field. The number and variety of experimental
developments has to some extent arisen from periodic breakdowns
and to some extent has helped to bring on breakdowns. Some
experiments have failed and some have succeeded. Nearly all have
been notable for their originality and for their independence of
banking tradition and banking practice in other countries.
Banking is not independent of the general economy it serves;
while it contributes by its own strength or weakness to the strength
or weakness of the economy as a whole, it is itself subject to shocks
and strains from other parts of the economy. In the United States,
its development has followed a pattern of economic expansion
and contraction. It has been led to excesses in periods of expan
sion, and in periods of contraction it has had to throw the burden
of losses upon depositors and stockholders, and indirectly upon the
general public. The history, in other words, does not indicate a
steady evolution from weakness to strength but a series of ups
and downs.

FEDERAL BANKING LEGISLATION

Page
I n t r o d u c t io n .......................................................................
T h e B an k

th e U n ited S t a t e s ................................. 39

T he I nterim — 1836-1863..................................................

F ree B ank in g — 1838-1863............................................... 42
T he N a tio n a l Bank A c t .................................................. 43
T he N ational M onetary C ommission ...................... 46
T h e F e d e r a l R e se r v e A c t ............................................. 47
N e w T rends

F ederal L e g i s l a t i o n .....................

E m ergency L oans

B a n k s ........................................... 52

T h e B ank H o lid a y o f 1933............................................
T h e B an k in g A ct

1933................................................ 56

O ther L e g is l a t io n ..............................................................
T h e B an k in g A ct

1935................................................ 59

Su m m a r y .................................................................................... 61

W alter W yatt

General Counsel

FEDERAL BANKING LEGISLATION
During the early period of American banking there were no
general banking laws. Banks were created by special acts of Congress
or State legislatures establishing particular banks and prescribing
their powers.
The first bank charter in America was granted by the Continental
Congress in 1781 when it chartered the Bank of North America in
Philadelphia. However, there was much doubt whether the Congress
had legal authority to grant a corporate charter and the bank
obtained charters also from the States of Pennsylvania, Delaware,
New York, and Massachusetts. Its operations were conducted
mainly under its Pennsylvania charter, and the Congressional
charter was used very little, if at all. In 1784, Massachusetts
chartered the Bank of Massachusetts, and in 1791 New York
chartered the Bank of New York, which however had been or
ganized in 1784. These three institutions were in operation before
adoption of the Federal Constitution.
THE BAN K OF THE UNITED STATES

The Constitution did not grant Congress any express authority
to charter banks or other corporations; but the First Congress
under the Constitution chartered the Bank of the United States
in 1791. Its establishment was recommended by Alexander Hamil
ton, Secretary of the Treasury, as a means of meeting the Govern
ment’s need of a fiscal agency to facilitate Federal Government
financing and the collection, safekeeping, and disbursement of
Federal funds. Hamilton also emphasized the importance of the
Bank to private business enterprise. It would provide discounts
for merchants, and its circulating notes and deposits transferable
by check would furnish the community means of monetary pay
ments.
At the time, as well as for years later, there was opposition
to banks in many quarters both on the general ground of social

BANKING STUDIES

expediency and on the specific ground of constitutionality. The
objection was also made that the proposed bank would tend to
interfere with the powers of the States with respect to banks.
Notwithstanding these objections, a charter was granted and the
Bank went into operation. Its corporate existence, however, was
limited to twenty years and, when an effort was made to extend it,
the opposition prevailed and the Bank’s corporate existence expired.
The loss of the Bank’s services as fiscal agent resulted in serious
hindrance to Treasury operations, and efforts to reestablish a
“ national bank,” as it was called, were renewed. They met strong
opposition; but a charter was granted and the new bank—also
known as the Bank of the United States—was established in 1816.
The belief was widely held that the charter of the Bank was
unconstitutional; the States where branches were situated were
jealous of the Bank’s presence; and the State banks, which by then
had become numerous, .were generally incensed at the Bank’s
insistence that they redeem their notes in specie. Maryland at
tempted to tax the Bank’s Baltimore branch; the Bank appealed;
and in 1819 the Supreme Court, in one of its most momentous
decisions (.McCulloch v. Maryland, 4 Wheat. 316) upheld the right
of Congress to charter a bank as a convenient, appropriate, and
useful instrumentality to aid the Federal Government in the
performance of its functions. The Court further held that, except
with the consent of Congress, a State could not interfere by taxa
tion or otherwise with the operations of a bank created by Con
gress. This position was reaffirmed in 1824 in Osborne v. United
States, 9 Wheat. 738.1
1 In these decisions the Court held that the power of Congress to charter a bank
is derived from a group of great powers, including the powers to lay and collect taxes,
to borrow money, to regulate commerce, to declare and conduct wars, to raise and
support armies and navies, and “ To make all Laws which shall be necessary and proper
for carrying into execution the foregoing Powers, and all other Powers vested by this
Constitution in the Government of the United States, or in any Department or Officer
thereof.” These decisions definitely established the right of Congress to charter
banks and to endow them with all powers necessary or appropriate to enable them
to maintain themselves and to compete with other institutions. They also
established the principle that, except with the consent of Congress, a State
can not interfere by taxation or otherwise with the operation of a bank created
by Congress. These doctrines have been reaffirmed and their application extended in
subsequent decisions, a few of which are summarized in later footnotes.

FEDERAL BANKING LEGISLATION

Although the question of constitutionality was settled by these
decisions, political opposition to the Bank continued, and Andrew
Jackson vetoed the bill renewing its charter. In 1836 the Bank
acquired a State charter and terminated operations as a Federal
instrumentality. The power to charter banks was not exercised
again by Congress until 1863. In the meantime, the only banks
were State banks and the only banking legislation was State
legislation.
THE IN TE RIM , 1836-1863

To provide the Treasury with facilities which would take the
place of those formerly provided by the Bank of the United States
as fiscal agent and depositary, and to make the Treasury inde
pendent of State banks and their unsatisfactory note issues, Con
gress in 1840 adopted a subtreasury act. The following year the
act was repealed, but in 1846 another measure to the same effect
was enacted. In effect, it involved a refusal of the Government to
accept either the circulating notes or the deposit obligations of
the State banks, and this refusal was a step toward eventual pro
vision for a national currency and banking system. On the other
hand, operations under the terms of the subtreasury law reacted
disturbingly upon credit conditions. The collection and disburse
ment of Government funds alternately withdrew funds from banks
and then restored them to banks; and the fluctuations thus pro
duced in the volume of bank funds caused fluctuations in the
lending power of banks without reference to the credit needs of
agriculture, commerce, and industry.
The phase of banking which attracted the most attention during
this period was the issuance of circulating notes, and most State
banking legislation was designed to prevent abuses of the note
issue privilege and to assure the redemption of the notes. One of
the most interesting laws of this kind was that enacted in New
York in the year 1829 establishing a safety fund system for the
mutual insurance of banks for the protection of their creditors.
It required all banks to make annual contributions to a fund to be
used in paying off liabilities of insolvent banks; but it was found
that the fund was insufficient to cover both deposit and note

BANKING STUDIES

liabilities and the law was later amended so as to insure only
liabilities for circulating notes, which was the original intention.
FREE BANKING, 1838-1863

In 1838 the New York legislature enacted a “ free banking” law,
which established a principle that was accepted in nearly all sub
sequent banking legislation, Federal and State. Viewed in this
light, the New York Free Banking Act was one of the most im
portant pieces of legislation in American banking history. It was
based upon the principle that banking should not be the privilege
of the few but should be open to all like other business and it gave
American banking the distinguishing characteristic of a large
number of individual banks instead of a few large banks such as
there are in most other countries. It provided that any group of
persons might organize an association to engage in the banking
business by entering into articles of association and filing them with
certain State officials. By designating these new banks as “ associ
ations,” a term still used in both Federal and State banking laws,
it distinguished them from the older banks incorporated by special
charter. It also provided that upon depositing certain securities
with the State Comptroller, any person or association of persons
might receive circulating notes to be issued as money. It provided
for uniform regulation of the banks organized under its terms and
contained a requirement of reserves against note liabilities—
apparently the first reserve requirement in American banking
legislation—but this requirement was repealed a few years later.
The widespread adoption of free banking legislation in other
States and the rapid growth in the number oi banks in regions not
yet sufficiently developed to maintain a sound banking system
resulted in numerous bank failures and large losses to note holders
and other creditors. There resulted a gradual development of
legislation providing safeguards against the abuse of the note issue
privilege and various measures designed to enforce adherence to
the principles of sound banking. These included, among other
things, requirements that a minimum amount of capital be paid in
by the organizers, restrictions on the amount of notes which might
be issued, requirements that they be secured by the pledge of

FEDERAL BANKING LEGISLATION

securities with State officials, requirements that banks maintain
reserves against their note issues and deposits, restrictions on the
kind and amount of loans that could be made, and provisions for
examination and supervision by public officials.
In spite of such measures by certain States, the condition of the
currency throughout the country became chaotic. By 1863 over a
thousand banks had power to issue notes and the great majority
were exercising it. Each bank had its own form of note. In the
confusion of forms and multiplicity of issues, counterfeit notes,
spurious notes, and notes of failed banks were everywhere in
circulation. Some notes were worth par, others were worth nothing,
and still others were good only at varying discounts.
THE NATIONAL BANK ACT

In the belief that the situation called for national measures,
legislation was introduced in Congress patterned after the pro
visions of the New York Free Banking Act. This legislation is now
known as the National Bank Act.2 It was originally enacted in 1863
and was revised in 1864. Besides providing for a sound currency
which would circulate at a uniform value throughout the country,
the act was intended also to aid the Federal Government in financing
the War by stimulating the sale of Government bonds to be used
as security for the bank notes put into circulation.
The provisions regarding circulation were carefully drawn and
contained many features designed to avoid the imperfections which
experience had disclosed in the State laws. Probably the most
important difference between the New York law and the National
2 The constitutionality of the National Bank Act was upheld on the same grounds
as that of the act creating the Bank of the United States, and the Supreme Court held
that the power to create a banking system carries with it the power to preserve it.
Farmers and Mechanics National Bank v. Dearing (1875), 91 U. S. 29. National banks
are subject to the paramount authority of the United States and any attempt by a
State to define the duties of a national bank or to control the conduct of its affairs is
absolutely void whenever such attempt conflicts with the laws of the United States,
frustrates the purpose of the national legislation, or impairs the efficiency of these
agencies to perform the functions for which they were created. Davis v. Elmira Savings
Bank (1896), 161 U. S. 275. Congress has the sole power to regulate and control the
exercise of their functions by national banks and the States can not interfere with them
or their officers in the exercise of the powers conferred upon them by Congress. Easton
v. Iowa (1903), 188 U. S. 220.

BANKING STUDIES

Bank Act was that the State did not guarantee the payment of
State bank notes but left their payment to depend upon the
solvency of the banks and the value of the securities pledged with
the State officials; whereas the United States Government guaran
teed the payment of national bank notes and undertook to reim
burse itself from the proceeds of its own bonds, which were pledged
to secure the notes, and from the other assets of the bank, which
were subjected to a first and paramount lien to secure its cir
culating notes.
With regard to the organization of banks, the National Bank Act
followed the pattern of the free banking laws of New York, Ohio,
and other States. Any number of persons not less than five could
organize an association for carrying on the general banking business
by entering into articles of association and filing them with the
Comptroller of the Currency, the head of a newly created bureau
in the Treasury Department. They could not commence business
until they had obtained a certificate from the Comptroller; but
he was not authorized to withhold such a certificate except for
noncompliance with the specific requirements of the Statute or on
the ground that he had reason to suppose that the association
had been formed “ for any other than the legitimate objects con
templated by this act.” The law did not require the organizers to
satisfy the Comptroller that they were qualified to engage in the
banking business, that additional banking facilities were needed, or
that the proposed bank had reasonable prospects of success.
The act prescribed the minimum amount of capital which a bank
must have and required half to be paid in before the bank com
menced business and the remainder in not more than ten monthly
installments. It also required the banks to maintain reserves of
15 or 25 per cent of the aggregate amount of their circulating
notes and deposits, depending upon their location, but permitted
three-fifths of the reserves of banks in certain cities to consist of
balances due from national banks in certain other cities. The
amount of real estate which a national bank could own and the
amounts of loans to individual borrowers were strictly limited;
the shareholders were made personally liable for the obligations of
the bank to the extent of the par value of their stock in addition

FEDERAL BANKING LEGISLATION

to the amount invested therein; banks were forbidden by implica
tion to make loans on real estate and were expressly forbidden to
make loans on the security of their own stock; the total amount
of their indebtedness was strictly limited; they were required to
make periodic reports of their condition to the Comptroller of
the Currency; and provision was made for examinations.
It was expected that the national banks would supersede the
State banks and provision was made for the easy conversion of
State banks into national banks without interruption to their
business and without losing their corporate identities; but these
expectations were not realized.
By the Act of March 3, 1865, later reenacted as the Act of July
13, 1866, Congress imposed a tax of 10 per cent on the circulating
notes of State banks. The avowed purpose of this legislation was
to create a uniform currency by driving the circulating notes of
State banks out of existence and, if necessary, by forcing all State
banks into the national banking system.3 The constitutionality
of this act was upheld by the Supreme Court in 1869 in the case
of Veazie Bank v. Fenno (8 Wall. 533), on the ground that, “ Having
thus, in the exercise of undisputed constitutional powers, under
taken to provide a currency for the whole country, it can not be
questioned that Congress may, constitutionally, secure the benefit
of it to the people by appropriate legislation.”
This ended State bank circulation but not the State bank system.
The National Bank Act created an additional system of individual
unit banks operating under national law alongside various State
systems. In each State we have one system of banks organized
* In his report to Congress dated Nov. 28, 1863, the first Comptroller of the Cur
rency said that “ the idea has at last become quite general among the people that the
whole system of State banking, as far as circulation is regarded, is unfitted for a com
mercial country like ours.” In his report of Nov. 24, 1864, he said that “ as long as the
two systems are contending for the field . . . the Government can not restrain the issue
of paper money.” In presenting to the Senate the bill imposing a 10 per cent tax on
State bank notes, Senator Sherman, Chairman of the Finance Committee, said that
“ with the terrible lessons of 1815 and 1837 staring us in the face, no one was bold
enough to advise us to make as a standard of value the issues of 1500 banks founded
upon as many banking systems as there were States.. . . The national banks were in
tended to supersede the State banks. Both can not exist together.. . . ” Congressional
Globe, 38 Cong. 2 sess., pp. 1138,1139.

BANKING STUDIES

under State law and supervised primarily by State officials and
another system of banks organized under Federal law, supervised
by Federal officials and free from any interference by the State
officials.
Between 1864 and 1913 Congress passed over sixty acts amend
ing the National Bank Act, but most of these dealt with matters
of detail and none of them made any important changes in the
fundamental characteristics of the national banking system.
THE NATIONAL M ON ETARY COMMISSION

The country continued to have recurring crises, panics, and de
pressions which resulted from time to time in the suspension of
specie payments by most or all of the banks. Following the panic
of 1907 Congress passed the Aldrich-Vreeland Act of May 30, 1908,
which sought to lend elasticity to the currency by permitting the
issuance of currency based on commercial paper and State and
municipal bonds, and also provided for the appointment of a
National Monetary Commission consisting of senators and rep
resentatives to study our system of finance and banking and recom
mend remedial legislation.
The National Monetary Commission submitted a report on
January 8, 1912, in which it indicted the banking system on
seventeen counts. Among other things, it found that the bondsecured currency was too rigid and inelastic; that we had no pro
vision for the mobilization of the cash reserves of the banks and
their use wherever needed in times of trouble; that we lacked means
to insure effective cooperation between the banks in times of stress
or crisis; that we had no instrumentality that could effectively
deal with the broad questions which affected the credit and status
of the United States from an international standpoint; that the
surplus money of all sections was sent to New York where it was
usually lent on call on stock-exchange securities, tending to pro
mote dangerous speculation and inevitably leading to serious
disturbances in reserves; that we had no power to enforce the
adoption of uniform standards with regard to capital, reserves,
examinations, and the character and publicity of reports of all
banks in different sections of the country; and that the Inde

FEDERAL BANKING LEGISLATION

pendent Treasury System resulted in irregular withdrawals of
money from circulation in periods of excessive Government revenues
and in the return of these funds to circulation only in periods of
deficient revenues.
THE FEDERAL RESERVE ACT

The report of the National Monetary Commission was referred to
the Banking and Currency Committee of the House of Representa
tives and a subcommittee headed by Honorable Carter Glass
undertook the work of revising the currency system. It had before
it the report of the National Monetary Commission and collected,
examined, and analyzed other existing data and proposals. Many
plans were examined and rejected. Finally a new bill was drafted
in which it was sought to combine the best features of all plans
which had been proposed, together with various new ideas. A new
Banking and Currency Committee was appointed on June 3, 1913,
and reported the bill on September 9. The majority report sub
mitted by Mr. Glass, as chairman, contains a valuable exposition
of the philosophy and purposes of the legislation. The bill was
enacted on December 23, 1913, with some amendments, and is
known as the Federal Reserve Act.
The Federal Reserve Act sought to tie the multitude of individual
banks together and to provide for a measure of coordination and
cooperation among them by erecting a superstructure consisting
of twelve regional Reserve Banks which were in turn tied together
by the Federal Reserve Board in Washington.
Each national bank was required to become a member of the
Federal Reserve Bank of its district by subscribing to the stock
thereof and depositing its reserves therein, and eligible State
banks and trust companies were invited to do likewise. It was
stated at the time that the Federal Reserve Banks were to be
“ bankers’ banks,” serving their member banks in much the same
way that commercial banks serve their depositors. In addition
to holding the reserve deposits of their member banks, they were
to rediscount commercial paper and collect checks for them and
supply coin and currency to them. They were also to act as de

BANKING STUDIES

positaries and fiscal agencies of the Government, and the sub
treasuries were abolished in 1920.
The only factor of nation-wide centralization provided for in
the Federal Reserve Act was the Federal Reserve Board, which
was to be “ a strictly Government organization” created for the
purpose of supervising the twelve Federal Reserve Banks, “ in
order that they may pursue a banking policy which shall be uni
form and harmonious for the country as a whole.” 4 It was first
proposed to vest this power in the Comptroller of the Currency;
but President Wilson objected on the ground that it was too much
power to vest in one man and suggested that it be placed in a
board.
A flexible currency was provided through the issuance of Federal
Reserve notes, which are obligations of the United States as well
as of the Federal Reserve Banks, protected by a gold reserve and
secured by a first and paramount lien on all of the assets of the
Federal Reserve Banks. A requirement that these notes also be
secured by the specific pledge of commercial paper was intended
to insure that the volume would expand and contract in response
to the changing needs of business. The existing national bank notes
were to be retired gradually over a period of twenty years.
The existing system of pyramided reserves was to be abolished
and the reserves of the banking system were to be concentrated
mainly in the Federal Reserve Banks, whose business it was to be
to keep them available for use when needed in any part of the coun
try and to replenish them when necessary by extending credit to
member banks.
Banking facilities for foreign trade were to be provided for by
4 The report of the House Committee on Banking and Currency (H. rep. 69, 63
Cong. 1 sess., p. 18) said, “ The only factor of centralization which has been provided
in the Committee’s plan is found in the Federal Reserve Board, which is to be a strictly
Government organization created for the purpose of inspecting existing banking institu
tions and of regulating relationships between Federal Reserve Banks and between
them and the Government itself.. . . It is proposed that the Government shall retain a
sufficient power over the Reserve Banks to enable it to exercise a directing authority
when necessary to do so, but that it shall in no way attempt to carry on through its
own mechanism the routine operations of banking which require detailed knowledge
of local and individual credit and which determine the actual use of the funds of the
community in any given instance.”

FEDERAL BANKING LEGISLATION

authorizing national banks to establish branches abroad; national
banks were given trust powers; some of the more obvious defects
in the National Bank Act were corrected by detailed amendments;
and efforts were made to stiffen the examination requirements by
placing the examiners on a salary instead of a fee basis, requiring
the Comptroller of the Currency to have at least two thorough
examinations made each year of every State member bank as well
as every national bank, and authorizing the Federal Reserve Banks
and the Federal Reserve Board to make additional examinations of
all member banks.
In the Committee’s report to the House of Representatives on
the original Federal Reserve Act it was proposed to “ make the
Comptroller of the Currency in all respects answerable to the
Federal Reserve Board” ; but a compromise was later agreed upon
by which the only coordination provided was to make the Comptrol
ler an ex officio member of the Board, to place his functions regard
ing Federal Reserve notes under the direction of the Board, and
to give the Board certain control over salaries of national bank
examiners.
The Federal Reserve Act has been amended by fifty-eight dif
ferent acts of Congress during the twenty-seven years that the Sys
tem has been in operation. None of them has altered the funda
mental characteristics of the Federal Reserve System, but many
have changed the act in important particulars.
NEW TRENDS IN FEDERAL LEGISLATION

The Federal Reserve Act and the amendments thereto initiated
two new tendencies in Federal banking legislation: (1) to make new
statutes of a regulatory nature applicable to State member banks
as well as national banks, since State banks could be members of
the Federal Reserve System only on the terms and conditions
prescribed by Congress;5 and (2) to vest new powers of regulation
and supervision in the Federal Reserve Board instead of the Comp
5 The Supreme Court has held that State member banks, having chosen to come into
the Federal Reserve System created by Congress and to enjoy the benefits of the
System, are subject to such laws as Congress may enact for the protection or regulation
of the System. Westfall v. United Stales (1927), 274 U. S. 256.

BANKING STUDIES

troller of the Currency. Even the administration of some laws
applicable to national banks alone was vested in the Federal
Reserve Board, so that there was an increasing tendency to divide
the supervision of national banks between the Board and the
Comptroller.
There also developed a conflict between two underlying policies.
Repeated efforts were made to put national banks on a basis of
competitive equality with State banks by increasing their powers
and by subjecting State member banks to some of the restrictions
applicable to national banks; but this policy was not followed con
sistently, because the desire to make membership in the Federal
Reserve System attractive to State banks made Congress hesitate
to impose additional restrictions upon them and caused it to repeal
some originally imposed.
Thus, the war-time Act of June 21, 1917, which was designed to
mobilize the financial resources of the country by inducing more
State banks to join the Federal Reserve System, exempted them
from examination by the Comptroller of the Currency and from
compliance with certain provisions of the National Bank Act to
which they previously had been subjected in order to prevent them
from having unfair competitive advantages over national banks.
It also provided that, while enjoying the benefits of membership
in the System, they could continue to exercise the corporate powers
granted to them by State laws and might withdraw from the
System on six months’ notice whenever they chose to do so.
The Act of September 26,1918, amended the Federal Reserve Act
in several different places; but the only amendment of importance
was the one which broadened and strengthened the right of national
banks to engage in the trust business. Thus, while the Act of June
21, 1917, increased the competitive disadvantage of national banks
by repealing some of the restrictions on State member banks, the
Act of September 26, 1918, sought to improve the competitive
position of national banks by facilitating their entry into a field
which had been reserved to State banks until the enactment of
the Federal Reserve Act.6
8The Supreme Court sustained the grant of trust powers to national banks on the
ground that a State may not by legislation create a condition as to a particular business

FEDERAL BANKING LEGISLATION

The so-called McFadden Act of February 25, 1927, resulted from
the efforts of the Comptroller of the Currency to obtain legislation
which would “ put new life into the national banking system.”
The preceding years had witnessed a rapid increase in the total
number of State banks, a rapid spread of branch banking, and a
tendency for national banks to convert into State banks or merge
with them under State charters. This resulted partly from the
fact that national banks were not permitted to establish branches
and partly from the fact that the State banks could obtain the
benefits of membership in the Federal Reserve System while con
tinuing to enjoy the broader powers granted to them under State
laws.
Although called an act to “ modernize” the National Bank Act,
the McFadden Act made no attempt at a comprehensive revision
of the National Bank Act but consisted of a large number of detailed
amendments. It granted indeterminate charters to national banks
and Federal Reserve Banks; enlarged the power of national banks
to make real-estate loans; modified the limitations on the amount
which a national bank could lend to a single borrower; recognized
the right of national banks to purchase investment securities;
improved the procedure for the consolidation of State banks with
national banks under the charter of the latter; and made a number
of other detailed amendments to the Natibnal Bank Act and the
Federal Reserve Act. It served the immediate purpose of checking
defections from the national banking system; but it fell far short
of eliminating all of the competitive disadvantages under which
national banks were laboring.
With respect to branch banking, it endeavored to place national
banks on a basis of competitive equality with State member banks
of the Federal Reserve System by authorizing national banks to
which would bring about actual or potential competition with the business of national
banks and at the same time deny the right of Congress to enable the national banks
to meet such competition, even through the exercise of powers which would not other
wise be considered inherently susceptible of being included in the powers which Con
gress may confer upon national banks. First National Bank v. Union Trust Company
(1917), 244 U. S. 416. The Court also held that, although there is nothing over which a
State has more exclusive authority than the jurisdiction of its courts, a State can not
use this power to prevent national banks from competing with State banks for trust
business. State of Missouri v. Duncan (1924), 265 U. S. 17.

BANKING STUDIES

establish branches within the corporate limits of the places in which
they were located and by forbidding State member banks to es
tablish branches outside of the corporate limits of the places in
which their head offices were located; but it made no effort to
restrict the establishment of branches by State banks which were
not members of the Federal Reserve System.
EM ERGEN CY LOANS TO BANKS

The failure of many State banks and trust companies to join the
Federal Reserve System and the lack at individual banks of ade
quate amounts of paper eligible for rediscount at Federal Reserve
Banks were among the important factors which led to the revival
of the War Finance Corporation to make emergency loans to banks
and others during the depression of the early 1920,s;7 and the first
emergency legislation occasioned by the depression of the early
1930’s was the Reconstruction Finance Corporation Act of Janu
ary 22, 1932, which created a corporation to extend financial
assistance during the emergency to banks, trust companies, savings
banks, insurance companies, and other financial institutions which
were in distress. This Corporation was capitalized with 500 million
dollars subscribed by the Government and was given very broad
powers to make loans on any kind of adequate security. Origi
nally, its lending powers were to last for only one year, unless the
President extended them for an additional year; but these powers
have been extended and enlarged from time to time. While it was
not given any express power to supervise banks, its lending opera
tions and the rights acquired as an incident thereto made it a major
factor in the banking field.
7 In its report on the Agricultural Credits Act of 1923 (S. rep. 998, 67 Cong. 4 sess.,
page 8), which created a special system of banks to extend credits to agriculture, the
Senate Committee on Banking and Currency said: “ The Committee is impressed with
the fact that the most important problem now’ confronting the banking system of the
United States is the inclusion in the Federal Reserve System of the large number of
State banks which are not now members. The Federal Reserve System was established
by Congress for the benefit of all sections of the United States, and of all types of
commercial, industrial, and agricultural activity. It has appeared, however, from
testimony before this Committee that especially in the agricultural sections a great
majority of the State banks are not members of the System and hence are unable to
take advantage of the rediscount facilities which the System affords . . . and have thus
deprived communities which they serve of the facilities which Congress has provided.”

FEDERAL BANKING LEGISLATION

The Federal Reserve Banks did not have sufficiently broad
statutory authority at the time to enable them to meet these
emergencies. They were not permitted to extend credit to non
member banks and there were thousands of State banks which
had not become members of the System. The circumstances at
tending the emergencies had so weakened the banks that many
of the nonmember banks might not have qualified for membership
if they had applied. In extending credit to member banks, the Fed
eral Reserve Banks were restricted by law as to the type of paper
they could accept and many of the member banks had inadequate
amounts of eligible assets. The Federal Reserve Act could have been
amended and later was amended; but there was considerable
resistance to amendments designed to enable the Federal Reserve
Banks to meet such emergencies, because the assets of the Federal
Reserve Banks constituted the backing for member bank reserves
and Federal Reserve notes and the opinion was held by many that
the Federal Reserve Banks were not the appropriate agencies to
render adequate emergency assistance to the banks under the cir
cumstances then prevailing.
Intensification of the banking emergency, however, led to the
enactment of a number of emergency amendments to the Federal
Reserve Act, the first of which was the Glass-Steagall Act of Febru
ary 27, 1932, which authorized the Federal Reserve Banks, for a
limited period, to make advances to member banks on their promis
sory notes secured by any assets satisfactory to the Federal Re
serve Bank. This provision was subject to rigid limitations and
restrictions and was availed of to only a limited extent; but its
life was extended and its restrictions modified from time to time
until it was made permanent and practically all of the restrictions
were removed by the Banking Act of 1935. The Glass-Steagall Act
also authorized emergency loans to groups of five or more member
banks which had exhausted their eligible paper; but this provision
was never used, although its life was not limited and it is still
upon the statute books. It also amended the Federal Reserve Act
so as to permit the use of Government obligations as collateral for
Federal Reserve notes. This authority was to have expired March
3, 1933, but has been extended by successive amendments to June
30, 1943.

BANKING STUDIES

TH E BANK HOLIDAY OF 1933

The banking situation, which had been steadily growing worse,
reached a crisis in the early part of 1933. The panic produced in the
minds of depositors by the increasing number of bank failures
resulted in runs, which precipitated the insolvency of banks in a
weakened condition and forced even solvent banks to close. These
difficulties were intensified by the fact that thousands of non
member banks held a large part of their reserves in the form of
balances with city correspondents and even member banks had
large balances on deposit with other banks. The failure of a large
bank in a financial center, in addition to disrupting the business
of its commercial depositors and other customers, was likely to
precipitate the failure of many of its country correspondents.
Desperate measures were taken to stem the tide of bank failures.
They usually took the form of proclamations declaring legal holi
days for the purpose of making it lawful for all banks in the State
to suspend payment without committing acts of insolvency. In
some States legislation was enacted authorizing banks to restrict
withdrawals by their depositors.
The problem of meeting this emergency was complicated by the
fact that in each State there were two classes of banks, one subject to
Federal laws and one subject only to State laws. It was doubtful
whether State authorities had the legal power to close national
banks or to authorize them to restrict the withdrawal of deposits,
and action taken by the State authorities for the protection of
State banks might leave national banks unprotected and concen
trate the fire upon them. In an effort to solve this problem, Congress
enacted a joint resolution on February 25, 1933, temporarily au
thorizing the Comptroller of the Currency to exercise with respect
to national banks any powers which State officials might have
with respect to State banks; but the situation was changing so
rapidly that it was impossible for the Comptroller to ascertain,
interpret, and apply the emergency powers of the authorities in
forty-eight different States quickly enough to meet the emergency.
By March 4, 1933, practically all of the banks in the country
had been closed under holidays declared by the State Governors;

FEDERAL BANKING LEGISLATION

and on March 6, the President, acting under emergency powers,8
issued a proclamation forbidding any bank in the United States,
until further notice, to pay out any coin or currency or to transact
any other business except to the extent permitted by regulations
of the Secretary of the Treasury.
A special session of Congress convened on March 9, 1933, and
passed an Emergency Banking Act on the same day. It ratified and
confirmed the President’s action in declaring a bank holiday and
the regulations issued thereunder, clarified the President’s emer
gency authority over banking, and prohibited member banks of the
Federal Reserve System during any such emergency period from
transacting any banking business except in accordance with the
regulations, limitations, and restrictions prescribed by the Secretary
of the Treasury with the approval of the President. As the emer
gency proclamation has not been terminated, member banks con
tinue to operate subject to the terms of licenses issued by the Secre
tary of the Treasury.
One title of the Emergency Banking Act, designated as the “ Bank
Conservation Act,” provides a legal means of suspending the busi
ness of banks in difficulties, conserving their assets, preventing
preferences, and permitting the transaction of a limited business
pending reorganization, reopening, or final liquidation. Although
this was an exercise of the very broad power of Congress to enact
laws relating to bankruptcies, it was made applicable only to
national banks. State banks needing to suspend operations pending
rehabilitation were left to rely upon State laws.
As a further means of facilitating the reorganization of banks
having insufficient or impaired capital, provision was made for the
purchase of preferred stock in national banks and State banks by
the Reconstruction Finance Corporation upon the request of the
Secretary of the Treasury. This facilitated the rehabilitation of
banks but increased the responsibilities of the Secretary of the
Treasury and the Reconstruction Finance Corporation in the field
of Federal bank supervision.
8 Sec. 5 (b) of the Act of Oct. 6,1917 (40 Stat. 411), as amended by the Act of Sept.
24, 1918 (40 Stat. 966).

BANKING STUDIES

By a rider, popularly known as the “ Thomas Amendment,” to
the Act of May 12,1933, the President was authorized to direct the
Secretary of the Treasury to enter into agreements whereby the
Federal Reserve Banks would purchase and “ hold in portfolio”
obligations of the United States in the aggregate amount of 3
billion dollars in addition to those already held. It provided that, if
the Secretary of the Treasury was unable to obtain such an agree
ment or if for any other reason “ additional measures are required,”
the President might direct the Secretary of the Treasury to issue
currency in the form of United States notes in the amount of 3
billion dollars.
In recognition of the danger that the bill might lead to inflation,
an attempt was made to guard against it by two provisions: one
authorized the Federal Reserve Board, with the approval of the
Secretary of the Treasury, to require the Federal Reserve Banks
“ to take such action as may be necessary, in the judgment of the
Board and of the Secretary of the Treasury, to prevent undue credit
expansion.” The other authorized the Federal Reserve Board, upon
the affirmative vote of not less than five of its members and with the
approval of the President, to declare “ that an emergency exists by
reason of credit expansion” and to increase or decrease from time to
time in its discretion the reserve balances required to be maintained
against either demand or time deposits. The latter provision was
revised by the Banking Act of 1935 and the power to change reserve
requirements is now regarded as one of the established instruments
of credit policy.
TH E BANKING A CT OF 1933

The Banking Act of 1933 was essentially a reform measure aimed
at the prevention of specific abuses which had been disclosed by the
events leading to the bank holiday.9 Of its forty-eight sections and
9 In its report on the Banking Act of 1933 (S. rep. 77, 73 Cong. 1 sess., p. 2), the
Senate Banking and Currency Committee said: “ . . . the Committee. . . felt that
immediate emergencies were so great that it was wise to defer the preparation of a
completely comprehensive measure for the reconstruction of our banking system, such
as had been urged by some responsible men. Hence the Committee resolved to construct
a bill to correct manifest immediate abuses, and to bring our banking system back
into a stronger condition. Thus, for example, it seems to be the consensus of opinion

FEDERAL BANKING LEGISLATION

subsections, twenty-one amended the Federal Reserve Act, nine
amended the National Bank Act, five amended miscellaneous other
acts of Congress, and thirteen were not made parts of any existing
laws.
It erected safeguards against certain abuses, strengthened the
hands of the bank supervisory authorities, increased the controls
over the volume and use of bank credit, provided for the insurance
of bank deposits, and provided that after July 1, 1936, insurance of
State banks should be limited to those that were members of the
Federal Reserve System.10
The provisions for deposit insurance were made an integral part
of the Federal Reserve Act, the Federal Reserve Banks were re
quired to contribute half of their surplus to the capital of the Fed
eral Deposit Insurance Corporation, and all member banks of the
Federal Reserve System were required to have their deposits in
sured; but the activities of the Federal Deposit Insurance Corpora
tion were made entirely independent of those of the Federal Reserve
Board.
The reform provisions of the Banking Act of 1933 in almost every
case were applied to all member banks. However, one provision
was not confined to member banks, or even to insured banks, but
was made applicable to all banks and bankers. This was the prohibi
tion against the receipt of deposits by any person who is engaged in
the business of underwriting, selling, or distributing securities or
who does not publish reports of condition and submit to examina
tion by State or Federal banking authorities. In enacting this sec
tion, Congress assumed jurisdiction over every “ person, firm, cor
poration, association, business trust, or other similar organization”
in the United States which engages “ to any extent whatever in the
business of receiving deposits. . . . ”
among banking authorities that the United States will never have a complete and
strong system until such time as it shall succeed in fully harmonizing and adjusting
State and Federal laws on banking questions. This might involve a constitutional
amendment or some equally far-reaching measure necessitating a long postponement of
action.”
10 The effective date of this requirement was postponed from time to time, banks
with deposits of less than one million dollars were exempted by the Banking Act of
1935, and the requirement was repealed entirely by the Act of June 20,1939.

BANKING STUDIES

OTHER LEGISLATION

The Gold Reserve Act of 1934, approved January 30, 1934, con
centrated all of the gold, including that held by the Federal Reserve
Banks, in the hands of the Treasury. Of the “ profit” resulting from
the reduction of the gold content of the dollar, 2 billion dollars were
set aside on the books of the Treasury in a fund to be operated by
the Secretary of the Treasury, with the approval of the President,
“ for the purpose of stabilizing the exchange value of the dollar” ;
but it was also provided that:
The fund shall be available for expenditure, under the direction of the
Secretary of the Treasury and in his discretion, for any purpose in connection
with carrying out the provisions of this section, including the investment and
reinvestment in direct obligations of the United States of any portions of the
fund which the Secretary of the Treasury, with the approval of the President,
may from time to time determine are not currently required for stabilizing the
exchange value of the dollar*

The Securities Exchange Act, approved June 6, 1934, was based
primarily upon the broad power of Congress to regulate interstate
commerce and was designed to provide for the regulation of securi
ties exchanges and brokers and dealers in securities and to prevent
manipulative and unfair practices in the securities markets. Among
other things, it undertook to regulate margin requirements “ for
the purpose of preventing the excessive use of credit for the pur
chase or carrying of securities” ; and a question arose as to whether
this power should be vested in the Securities and Exchange Com
mission, to which was to be committed the administration of the
provisions relating to the registration of exchanges and securities
and to the regulation of trading practices, or in the Federal Reserve
Board. It was finally decided to place the power to fix margin re
quirements in the Federal Reserve Board, on the ground that this
power is in closer relation to the regulation of credit than to the
regulation of trading practices and on the further ground that the
Board was “ the most experienced and best equipped credit agency
of the Government.” Under the power thus conferred, the Board
has prescribed margin requirements not only for brokers and dealers
in securities but also for all banks in the United States, including

FEDERAL BANKING LEGISLATION

nonmember noninsured State banks over which the Board had pre
viously exercised no authority.
By exempting common trust funds from taxation as corporations
(thereby avoiding double taxation of the beneficiaries) only when
they are maintained in conformity with the regulations of the Board
of Governors of the Federal Reserve System pertaining to the col
lective investment of trust funds by national banks, Congress has
also made it necessary as a practical matter for all banks operating
common trust funds to comply with the Board’s regulation on this
subject, regardless of whether they are members of the Federal
Reserve System and regardless of whether their deposits are insured.
THE B AN K IN G ACT OF 1935

The Banking Act of 1935 made a number of important amend
ments to the Federal Reserve Act, principally for the purpose of
concentrating responsibility for national credit policies and strength
ening the power of the Federal Reserve Board to coordinate the
activities of the twelve Federal Reserve Banks. It enlarged the
supervisory powers of the Federal Deposit Insurance Corporation
and made a few provisions of the Federal banking laws applicable
to all insured banks. In addition it made a large number of technical
amendments to existing banking laws for the purpose of correcting
defects in them, tightening them in some respects and liberalizing
them in others, so that they would more effectually accomplish the
purposes for which they were intended without necessarily hamper
ing the banks on matters of detail. It amended the National Bank
Act in nineteen places and the Federal Reserve Act in thirty-six
places.
It changed the name of the Federal Reserve Board to “ Board of
Governors of the Federal Reserve System/’ removed the Secretary
of the Treasury and the Comptroller of the Currency from the
Board, and reconstituted the Board with seven full-time members
having terms of office running from two to fourteen years, with a
provision that their successors shall be appointed for terms of
fourteen years.
The Federal Open Market Committee was reorganized so as to
consist of the seven members of the Board of Governors of the

BANKING STUDIES

Federal Reserve System and five representatives elected on a
regional basis by the Federal Reserve Banks and was given complete
control over the open-market operations of the Federal Reserve
Banks, thus definitely fixing the responsibility for open-market
operations.
All other responsibility for national credit policies formerly
vested in the Federal Reserve Board was continued in the Board of
Governors of the Federal Reserve System, which retained the
authority over margin and reserve requirements and over the
rates of interest which might be paid by member banks on time and
savings deposits and the final authority over the discount rates of
the Federal Reserve Banks.
By extending the protection of certain Federal criminal laws to
all insured banks and authorizing the Federal Deposit Insurance
Corporation to regulate the payment of interest on deposits by
insured nonmember banks, Congress recognized that it could extend
Federal banking legislation to all insured nonmember banks;11 but
very few of the restrictive and regulatory provisions were so ex
tended, and insured nonmember banks are permitted to enjoy much
greater freedom from Federal regulation than member banks.
One amendment made by the Banking Act of 1935 constitutes
a substantial modification of the principle of free banking. It
requires the Federal Deposit Insurance Corporation before insuring
a nonmember State bank, the Board of Governors of the Federal
Reserve System before admitting a noninsured State bank to
membership in the Federal Reserve System, and the Comptroller
of the Currency before granting a newly organized national bank
a permit to commence business, to consider “ the financial history
11The courts have held that insured nonmember State banks, having chosen to
come into the insurance system created by Congress and to enjoy the benefits of the
system, are subject to such laws as Congress may enact for the protection or regulation
of the system. United States v. Doherty (1937), 18 Fed. Supp. 793; 94 Fed. (2d) 495;
certiorari denied, 303 U. S. 658; Weir v. United States (1937), 92 Fed. (2d) 634; certiorari
denied, 302 U. S. 761. The distinction between a State member of the Federal Reserve
System and a nonmember State bank which participates in and enjoys the benefits of
Federal deposit insurance, is of no substance so far as the applicability of Federal
laws is concerned. Weir v. United States (1937), supra. See also opinion on “ Constitu
tionality of Legislation Providing a Unified Commercial Banking System for the
United States,” Federal Reserve Bulletin, March 1933, p. 166.

FEDERAL BANKING LEGISLATION

and condition of the bank, the adequacy of its capital structure,
its future earnings prospects, the general character of its manage
ment, the convenience and needs of the community to be served
by the bank, and whether or not its corporate powers are consistent
with the purposes of this section.” However, this Federal require
ment has no effect upon the organization of noninsured, nonmember
State banks.
The requirement that nonmember banks of a certain size must
become members of the Federal Reserve System in order to retain
their deposit insurance was repealed entirely by the Act of June
20, 1939.
SUM M ARY

The adoption of the principle of free banking about a hundred
years ago has resulted in a multitude of independent banks, some
created and supervised by the Federal Government and some
created and supervised by the governments of the forty-eight
States. The Congress and the State legislatures have made repeated
efforts to enforce good management and adherence to sound banking
principles by statutory restrictions and by provisions for examina
tion and supervision. This has resulted in a large volume of compli
cated State and Federal banking laws and has created complexity
in the structure of our banking system and in the system of bank
supervision.
Upon this complicated structure the Federal Reserve System was
superimposed in 1913 and the system of Federal deposit insurance
in 1933 as two separate superstructures.
There has been no complete revision of the Federal banking laws
since the National Bank Act was revised in 1864; but there have
been countless detailed amendments.
The supervision of our commercial banking system is divided
between the Federal Government and the forty-eight States; and
that part which is vested in the Federal Government is divided
among the Secretary of the Treasury, the Comptroller of the Cur
rency, the Board of Governors of the Federal Reserve System, the
Federal Deposit Insurance Corporation, and the Reconstruction
Finance Corporation.

BANKING STUDIES

Inequities and inconsistencies in Federal banking laws result
largely from the fact that Congress first legislated only for national
banks, later extended some of its regulatory and restrictive provi
sions to State member banks of the Federal Reserve System, later
extended only a few of them to nonmember insured banks, and has
extended only two or three provisions to all banks, so that we have
four competing classes of banks subject in varying degrees to regu
lations and restrictions prescribed by Congress.
The present banking system of the United States is a complicated
structure resulting from a process of evolution covering a period of
a century. The existing banking laws are the product of the same
evolutionary process and many of them were enacted to meet
emergencies or specific competitive conditions as they arose from
time to time. A comprehensive review of the entire field should dis
close those respects in which our banking laws and our system of
banking and bank supervision could be improved, simplified, co
ordinated, and better equipped to serve the public interest.

CURRENCY SYSTEM OF UNITED STATES

Page
I ntro duction .......................................................................... 65
E stablishment

of the

Paper C urrency

G old D o l l a r ......................... 65

before the

N ational B an k in g

Sy s t e m .................................................................................... 67
O rigin o f F ederal Paper C u r r e n c y .........................

F ederal R eserve C u r r e n c y .......................................... 76
C urrency D evelopments
C hanges

C omposition

since
of the

1933.........................

C u r r e n c y ............82

Su m m a r y .................................................................................... 83

V ic t o r M. L o n g s t r e e t

Division of Research and Statistics

CURRENCY SYSTEM OF UNITED STATES
The present efficiency of the currency system is a comparatively
modern development. Before the Civil War, paper currency was
issued almost entirely by banks chartered by the States and much
of it was depreciated in value over considerable periods. National
bank notes and United States notes, or greenbacks, which the
Government began to issue in 1862 as a temporary war measure,
marked the beginning of a Federal paper currency of nationally
uniform value and of general acceptability. National bank notes,
however, failed to meet completely the need for an adequate
amount of currency at all times because of the rigidity in their
supply. They could not increase beyond the outstanding amount
of those United States Government bonds that were permitted by
law to serve as collateral against their issuance. Establishment of
the Federal Reserve System, which provided for the issuance of
Federal Reserve notes against commercial and agricultural paper,
went a long way toward correcting this defect. Recent legislation
authorizing the use of United States Government obligations as
collateral for issuance of Federal Reserve notes contributed further
to the elimination of rigidity in the currency system.
ESTABLISHMENT OF TH E GOLD DOLLAR

The first steps in the establishment of the currency system were
selection of the dollar as the monetary unit and of gold as the stand
ard money. In colonial days the public had become accustomed to
two monetary units, the English pound and the Spanish dollar.
Use of the English pound was due to the previous custom of the
English colonists and to the large volume of trade with the mother
country. Widespread use of the Spanish dollar grew out of the im
portant trade with the Spanish colonies, principally the West
Indies. Although business accounts were kept predominantly in
pounds, the “ bills of credit” issued by the Continental Congress in
1775 to meet its expenses were printed in dollar denominations.
These bills came to be generally used as money. Under the Articles

BANKING STUDIES

of Confederation, Congress in 1785 adopted the dollar as the
monetary unit.
The Bimetallic Standard and the Contest between Silver and
Gold. The new Government, by the Act of 1792, continued the
dollar as the national monetary unit and provided for its coinage
in both silver and gold. Under this law, anyone could present un
limited amounts of gold and silver at the mint for coinage into legal
tender money at the rate of 24.75 fine grains per dollar for gold and
371.25 fine grains for silver. These rates were recommended by
Alexander Hamilton on the basis of the approximate weight of
Spanish dollars then in use and on the basis of what he believed to
be the customary ratio at which the two metals were interchange
able among merchants. Though both gold and silver coin were
legal tender, and remained the only legal tender until the Civil
War, there was a long contest between the two as to which would
remain in actual use.
In order for both gold and silver to circulate under a bimetallic
standard, it is essential that the relative values of the two metals at
the mint remain substantially the same as their relative values for
purposes other than domestic coinage. The Act of 1792 gave silver
a higher coinage value relative to gold than it had in either the
world market or the mints of foreign countries. As a result Americans
receiving payments from abroad preferred foreign silver coin to
foreign gold coin: a given sum in foreign silver coin could be re
coined into more dollars than the equivalent sum of foreign gold
coin. Conversely foreigners preferred to receive their payments
from America in gold coin. Gold therefore flowed out of the country
and silver flowed in. In time the legal tender currency was composed
almost entirely of silver coin; such gold coin as was in circulation
commanded a premium.
Gold Displaces Silver after 1834. In order to eliminate the
premium on gold and to stimulate its monetary use, the fine content
of the gold dollar was reduced to 23.20 grains in the Act of June 28,
1834, while the fine content of the silver dollar was left unchanged
at 371.25 grains.1This completely reversed the former situation, for
1A technical change relating to alloy in the coins was made in 1837 that increased
the fine content of the gold dollar to 23.22 grains.

CURRENCY SYSTEM OF UNITED STATES

now a given sum in foreign gold coin could be recoined into more
dollars than the equivalent sum of foreign silver coin. Consequently,
silver flowed out of the country and gold flowed in. Gold thereafter
completely replaced silver as legal tender currency and came to
be, despite the legal provisions for a bimetallic standard, the actual
standard money of the country.
PAPER CURRENCY BEFORE THE NATIONAL BANKING SYSTEM

Paper money issued by the colonies had been in general use long
before the Revolution, and during the war large amounts of notes
were issued by the Continental Congress. By 1780, however, these
“ Continentals” had lost practically all their value, causing losses to
creditors and those receiving fixed incomes. Consequently, the new
Federal Government, according to contemporary interpretations of
the monetary provisions of the Constitution, was not authorized to
issue paper money. Not until the Legal Tender Cases of 1871 and
1884 was it finally decided by the Supreme Court that Congress had
the Constitutional power to issue paper money.
Authority to issue paper money was given to private banks char
tered by the new Congress and by the various States. These banks,
particularly the first and the second Bank of the United States,
played an important part in the history of our currency up to the
time of the Civil War.
First Bank of the United States, 1791-1811. The first Bank of
the United States was founded in 1791 as a part of Alexander
Hamilton’s plan for establishing the finances of the new Govern
ment on a firm basis. The importance of this bank in the history of
our currency was twofold: it furnished a considerable share of the
country’s circulating medium for a period of twenty years and it
forced other banks to maintain the redemption of their notes,
thereby aiding in the maintenance of a currency of more or less
uniform value throughout the country.
The amount of notes that the first Bank of the United States
could legally issue was limited to the amount of its capital stock.
Its notes were receivable for all payments to the Government so
long as the Bank redeemed them in specie. Notes issued by the
Bank were at a level of about 5 million dollars during most of its

BANKING STUDIES

life. This was roughly one-fifth of the country’s total note circula
tion, most of which was furnished by banks chartered by the various
States.
Under conservative management, the first Bank of the United
States accumulated enough specie to cover its note issue almost 100
per cent. Moreover, for its own protection, it promptly presented for
redemption all notes of other banks deposited with it, thus forcing
the State banks to maintain more strict standards of liquidity. As a
result of this action, however, the Bank incurred the severe hostility
of State banks in expanding sections of the country that suffered
from a shortage of capital. By 1811 the question of the Bank’s
continued existence had become a political issue and Congress
allowed the charter to expire in that year.
After the restrictive influence of the first Bank of the United
States was lifted, the number of banks chartered by the States in
creased rapidly. Their loans also expanded, often for speculative
purposes, and their note issues increased. A depreciation of over
one-third in the notes of many State banks became not at all uncom
mon. The War of 1812 contributed to the chaos; Government credit
was extremely weak; and many banks suspended their operations
altogether. The general financial system of the country was in a
state of collapse.
Second Bank of the United States, 1816-1836. These chaotic
conditions reduced political opposition to a Federal bank, and the
second Bank of the United States was established in 1816. Broadly
speaking, the currency provisions of its charter were similar to
those of the charter for the first Bank. Notes of the Bank in denomi
nations under $100 were redeemable in specie on demand and,
though not legal tender, were receivable in all payments to the
Government. Notes in denominations over $100 were not redeem
able until sixty days after the date of issue, but very few of them
were issued.
One of the main purposes of the second Bank of the United States
was to restore some order in the country’s currency by forcing State
banks to redeem their notes in specie. But when the State banks
strongly resisted, the new Bank acquiesced and even dodged re
demption of its own notes. Furthermore, it soon expanded its own

CURRENCY SYSTEM OF UNITED STATES

loans considerably, many of doubtful soundness. It was not until
after a change in management in 1819 that the Bank began to
exercise a salutary influence on the disorganized currency situation.
In the process of improving the quality of the Bank’s loans the
new management forced a considerable liquidation of bank credit
which was felt particularly in those sections of the country that
were developing most rapidly but were suffering from shortages of
capital. In addition to restoring its own capital and credit position,
the Bank compelled the redemption of notes by many State banks,
and thereby the resumption of specie payments. Apparently, how
ever, the Bank was not as successful as the first Bank of the United
States in establishing a fairly general par redemption of the note
issues of State banks. The management was also accused of playing
politics.
In the end the Bank encountered the same resistance that had
defeated the first Bank. Andrew Jackson won a reelection to the
Presidency in 1832 on a platform that called for winding up the
Bank when its charter expired in 1836. This election gave the signal
for a large credit expansion by State banks. Along with the forma
tion of many new State banks there was a rapid increase in specula
tive loans, and during the ensuing panic of 1837 specie payments
were generally suspended.
Suffolk Banking System. New England, New York, and Louisiana
also experimented with different types of currency systems that
greatly influenced subsequent currency legislation, in particular
the provisions adopted in the National Banking Act.
In Massachusetts the Suffolk Banking System of redemption of
note issues was an entirely voluntary arrangement on the part of
Boston banks. Boston was an active trade center and large quanti
ties of notes issued by country banks in the State moved in and out
of the city. As a measure of self-protection the larger Boston banks
joined together in 1824 under the leadership of the Suffolk Bank and
created a system for maintaining the par redemption of notes issued
by country banks. This Bank offered to hold deposits for country
banks for the purpose of redeeming any of their notes that were
presented to it. Country banks that failed to maintain such de
posits ran the risk of having the Suffolk Bank accumulate their

BANKING STUDIES

notes and present large amounts for redemption at one time. This
system served to maintain a currency that was generally acceptable
throughout New England.
In 1858 another organization for similar purposes was formed
by a large group of country banks in New England. This was
the Bank of Mutual Redemption, with which the Suffolk Bank
later shared its redemption and clearing functions.
New York Free Banking System. A landmark in the evolution
of the currency system was the New York Free Banking Act of
1838. Previously the State had required a new bank to have a special
charter. Under the Free Banking Act any individual or group could
form a bank that could receive notes printed under its own name
from the Comptroller of the State upon deposit with him of an
equivalent amount of collateral. Eligible securities included bonds
of the United States, bonds of the State of New York and of certain
other States, and mortgages of a specified type on improved, pro
ductive, and unencumbered real estate.2 In case of the failure of
the bank, its collateral securities could be sold by the Comptroller
for the redemption of its notes. The Free Banking Act set the
precedent for the issuance of notes under the national banking
system upon the deposit of Government securities with the Treas
urer of the United States.
Notes issued under the Free Banking Act were basically no better
than the securities pledged against them. Debt repudiation on the
part of most States soon made their bonds undesirable as note col
lateral. Consequently it was not long before the securities of
States other than New York, and even Federal securities, were
ruled out of the list acceptable as collateral against the notes.
Efforts to secure the value of notes by requiring high-grade col
lateral were unsuccessful. Many New York banks failed and their
notes were redeemed only at a discount.
* Banks operating under special charters could continue to issue notes without
specific security, but under the Safety Fund Act of 1829 such banks were required
to make annual payments into a fund used for the redemption of notes as well as the
payment of other debts of insolvent banks. The inadequacy of the fund during the
wave of bank failures in 1837, however, destroyed confidence in the Safety Fund
System, and by 1842, when the fund was completely liquidated, th€ bulk of the notes
were being issued by banks operating under the Free Banking Act.

CURRENCY SYSTEM OF UNITED STATES

Eventual success under the Free Banking System was due in
large part to another important development; namely, the banding
together by banks in New York City to protect their own interests
in much the same way as the Boston banks had cooperated in the
formation of a system of note redemption under the Suffolk Bank.
In 1851 the New York City banks organized a system of central
par redemption of notes of other banks and in 1853 began daily
redemption of their own notes by establishing the clearing house.
By 1860 the notes of New York banks had a high standing in ad
joining States. The Free Banking System was widely copied as a
means of correcting unsatisfactory currency conditions. It met with
less success in other States, however, because current redemption
was not enforced and notes were often issued against speculative
securities.
Louisiana Banking System. After a long period of bad banking,
Louisiana passed a general banking act in 1842. The bearing of this
law on the evolution of the currency lay chiefly in its requiring: (1)
a minimum reserve in specie equal to one-third of total notes and
deposits; (2) a backing of ninety-day commercial paper against the
notes and deposits not covered by specie; (3) a quarterly examina
tion of the condition of the banks by State officials; and (4) monthly
publication of condition statements. In the State banking system
set up by the law, no bank could pay out the notes of another bank
and each bank had to settle weekly for its balances due to other
banks in the system. This law in conjunction with the favorable
trading position of New Orleans, which built up the banks’ supply
of specie and short-term bills, enabled Louisiana banks to weather
the panic of 1857 without suspending specie payments. By 1860 the
amount of specie held by banks in the State was second only to the
holdings of New York banks.
Condition of the Currency in 1860. The condition of the note
circulation just prior to the Civil War has been summarized by
an authority as follows:
The New England banks had entered into a voluntary combination to secure
the daily redemption of their circulation, and this, together with the general
soundness of their assets, maintained their notes in good credit. The greater
number of the New York banks were established under a general law which

BANKING STUDIES

required a deposit of public stocks with the State government as security for
the redemption of their circulation. But this provision for ultimate payment
did not answer the same purpose as the New England system of securing the
immediate convertibility of the circulation, and it was accordingly only by the
voluntary adoption of a similar system that the New York banks secured for
their currency full confidence. In some of the Middle States, and in a large
part of the West, the New York system of a secured circulation had been
adopted, but with great looseness of detail, and currency had been poured
out based upon stocks of uncertain value and without provision for its prompt
redemption. In the South, three States, Florida, Arkansas, and Texas, forbade
the establishment of banks within their limits, others had followed the New
York system, while Louisiana, availing herself of the peculiar course of South
western trade which then made New Orleans a natural entrepdt for specie, had
established her banks on a more solid foundation of coin than any others in the
United States.3
ORIGIN OF FEDERAL PAPER CURRENCY

Federal paper currency owes its existence directly to the Civil
War. Before the war the Treasury had issued only interest bearing
notes in certain emergencies—during the War of 1812, the financial
crisis of 1837, the Mexican War of 1846, and the political crisis of
1860-1861. Although generally receivable by the Government for
certain payments, these notes were not legal tender and were never
intended to pass as money. Owing to the poor condition of the
State bank issues, however, these notes did on occasion serve as
money in some sections of the country, being printed in denomina
tions as small as $3.00.
When war began in 1861, the Federal Treasury had little cash
and the market for its securities was weak. The Government began
to issue paper money and in 1863-1864 Congress passed legislation
that strengthened the market for Government bonds by authorizing
the formation of national banks that were required to pledge the
bonds as security for their note issues. These types of Federal cur
rency rapidly replaced the circulation of highly diversified issues of
State bank notes.
United States Notes. Shortly after the outbreak of war in 1861,
8 Charles Franklin Dunbar, Economic Essays, The Macmillan Company, New York,
1904, pp. 270-71.

CURRENCY SYSTEM OF UNITED STATES

the Treasury began to issue demand notes redeemable in gold.
These notes were called in at the beginning of 1862 and United
States notes were issued in their stead. These new notes, or “ green
backs,” were irredeemable noninterest bearing demand notes and
legal tender for the payment of all private debts.
The legal tender quality of greenbacks assured their general
acceptance, but since they were irredeemable and the amount
issued increased rapidly, their value in specie declined severely.
After deterioration of the Union finances in 1861, they depreciated
like the State bank notes on which redemption had generally been
suspended. Sharp rises in commodity prices and the fear that paper
money might eventually become worthless aroused strong opposi
tion to a continued financing of the war with greenbacks. By 1866,
the amount in circulation exceeded 325 million dollars and, for over
a decade, greenbacks comprised nearly half of the total currency.
National Bank Notes. In 1861 the Secretary of the Treasury
had recommended a national system of bank notes secured by bonds
of the United States Government. In this way he hoped to give the
country a currency of wide acceptability. Although shelved during
the extreme financial emergencies at the outbreak of the war, this
plan became the basis of the National Banking Acts of 1863 and
1864. It was hoped that the plan thus enacted into law would, in
addition to providing a uniform currency, extend the market for
Government bonds and thus obviate the necessity of financing the
war through the issuance of more greenbacks.
State banks withdrew their notes from circulation because every
bank had to pay a Federal tax of 10 per cent on all State bank notes
paid out after July 1, 1866. A State bank that became a national
bank, or any new national bank, was permitted to issue bank notes
to the extent of 90 per cent (later 100 per cent) of the face value of
certain Government bonds it deposited with the Treasury.4
By 1870 national bank notes in circulation, as shown in the
chart on page 74, amounted to about 300 million dollars, which
4There were also other limitations; for example, no bank could issue notes in excess
of its paid-in capital stock and the total issue for all banks was limited to 300 million
dollars until 1870 and to 354 million dollars until 1875, when the limitation was re
moved.

BANKING STUDIES

was over one-third of the total currency circulation. In time the
new currency came to be recognized as important chiefly because
of its nationally uniform quality rather than because of the market
it afforded for Government bonds.
Silver Certificates. During the Civil War most of our gold and
silver coin was exported and throughout the 1870’s very little
specie was in circulation. Even fractional silver coin, though
relegated to a subsidiary position in 1853 by a reduction in fine
C u r re n cy in C ir cu latio n , b y K in d *

I860

1870

1880

1890

1900

1910

1920

1930

1940

* SERES REVISED.

» For data, see Table 4, pp. 420-21.

silver content, had become scarce. For about forty years it had not
been profitable to bring silver to the mint for coinage, and when the
coinage legislation was overhauled in 1873, the free coinage of silver
dollars was suspended. By 1876, however, the market price of silver
had fallen sharply. Agitation for resuming the coinage of silver
dollars resulted in compromise legislation in 1878 and again in 1890
directing the Treasury to buy silver in stated amounts for coinage
into standard silver dollars and authorizing the issuance of silver
certificates. This legislation was repealed in 1893. By that time

CURRENCY SYSTEM OF UNITED STATES

nearly 400 million dollars of silver dollars and certificates had been
issued under the silver purchase program.
Resumption of Specie Payments, 1879. In 1878 the amount of
greenbacks then outstanding, $346,681,016, was fixed as the total
greenback issue, and in the following year the Government in
stituted redemption of greenbacks in specie. When redeeming Fede
ral currency the Secretary of the Treasury had the option of paying
out either silver or gold coin. It appears, however, that with only
one exception in 1885, the Treasury had followed the practice of
redeeming only in gold, which put the country on a de facto gold
standard. The Act of 1900 legally established this standard by
requiring that the Secretary of the Treasury maintain all forms of
money issued or coined by the United States at parity one with
another. Thus the Secretary was obligated to redeem in gold coin
if the price of gold threatened to rise to a premium.
Inelasticity of the Currency. The chief defect of the currency was
the inelasticity in its supply. The stock of monetary gold varied as
gold flowed in and out of the country. But the amount of United
States notes that could be issued was limited by law; the amount
of national bank notes was limited, among other things, by the
amount of certain Federal securities outstanding; and the amount
of silver dollars and silver certificates was determined largely by
the Government’s program of purchasing silver.
Thus, the supply of currency was limited by factors that were
not directly related to the public’s need for currency and the banks
were unable to expand the supply when the public’s requirements
increased from time to time. There are pronounced seasonal move
ments in the demand for currency.5 For example, before Christmas,
when the volume of retail trade is expanding, large amounts of addi
tional currency are required for cash purchases. Under the National
Banking System the position of the banks was especially serious
when seasonal upswings in the demand for currency coincided with
periods of financial strain. The banks could meet the currency
drain only by paying out their currency reserves; and, when these
8For a complete description of seasonal movements in the demand for currency see
the Federal Reserve Bulletin, August 1939, pp. 641-44, and December 1932, pp. 735-40.

BANKING STUDIES

were exhausted, they could not use good assets as a basis for increas
ing their reserves or note issue. It was this inability of the currency
supply to expand that constituted the main fault in the currency
system and at times necessitated emergency action.
Currency in circulation can always contract. Contraction has
never been a problem, for the public has never kept any more
currency than it wanted. Currency can always be redeposited in
banks. Decreases, as well as increases, in the amount of currency
in circulation, however, have significant effects on the banking
system and on the general credit situation because they affect the
reserve position of banks—an increase in circulation reducing bank
reserves and a decrease in circulation building up reserves. Thus
changes in the public’s demand for currency have at times had un
desirable effects in producing alternative shortages and superfluities
in bank reserves. This was, however, not so much a currency prob
lem as a problem of adequate control over bank reserves.
About 1860, the clearing houses established by banks in various
cities first issued loan certificates backed by Government securities
as well as other assets. Such certificates were frequently issued in
periods of financial strain and were accepted by the local banks, in
lieu of cash, as payment for claims made through the clearing
house. The most extensive use of such certificates occurred during
the panic of 1907, when they were even paid out to the public for
circulation. Precedents of this sort were the basis of the AldrichVreeland Act of 1908, which temporarily provided, pending more
thorough legislation, that small groups of national banks could
form national currency associations through which the Treasury
could issue notes to banks on the deposit of commercial paper and
of bonds other than Government bonds. About 300 million dollars
of Aldrich-Vreeland currency was issued in 1914 during the crisis
that came with the outbreak of war in Europe.
FEDERAL RESERVE CURRENCY

One of the express purposes of the Federal Reserve Act of Decem
ber 23, 1913, was to provide the country with an elastic currency,
that is, a currency that would change in amount as the public’s
demand for it changed. It was intended that the new currency,
Federal Reserve notes, would merely supplement the existing cur

CURRENCY SYSTEM OF UNITED STATES

rency supply, which was composed chiefly of United States notes,
national bank notes, gold coin and certificates, and silver coin and
certificates. By 1920, however, the new currency surpassed in
amount all other types of currency combined, as shown by the
chart on page 74.
Federal Reserve Notes. The Reserve Act sought to insure the
elasticity of Federal Reserve notes by providing that they could be
secured by collateral consisting of notes, drafts, bills of exchange, or
acceptances acquired by the Reserve Banks through rediscount for
member banks or purchase in the open market. It was believed that
the available volume of such paper usually increased or decreased
in accordance with changes in the volume of general business pay
ments and that its eligibility as collateral would relate the volume
of available note collateral to the current need for circulating
currency.
In practice, however, it was found that there was no dependable
connection between the Reserve Banks’ holdings of eligible paper
and the demand for circulating currency. Holdings of eligible paper
depended chiefly on the borrowing of member banks and sometimes
showed little change or even declined when the need for currency
increased. Other provisions of the Federal Reserve Act, however,
supplied the necessary means of meeting the public demand for
currency at such times.
To the extent that Federal Reserve notes were not secured by the
specified collateral, the act as amended in 1917 provided that they
might be issued against gold reserves held by the Reserve Banks.
Since the gold supply was adequate, the lack of eligible paper did
not prevent the Federal Reserve Banks from issuing notes. Nor did
member banks need eligible paper in order to procure currency from
the Federal Reserve Banks because member banks could secure
currency to meet the demands of their customers by drawing upon
their reserve balances at the Reserve Banks. Member banks could
replenish these balances without discounting eligible paper in either
of two ways: by borrowing from the Reserve Banks on the security
of Government bonds, which were not themselves eligible as col
lateral for Federal Reserve notes; or by depositing funds arising
from open-market purchases of securities by the Federal Reserve
authorities. Until the business depression of the early 1930’s, these

BANKING STUDIES

provisions of the act were sufficient to furnish the public with all
of the currency it demanded.
During the depression, however, there was a large demand for
currency by the public for hoarding in addition to a large export of
gold, both of which exerted a heavy pressure on the reserves of
member banks. In order to assist banks in meeting the demands
upon them without unduly increasing their indebtedness to the
Reserve Banks, the Federal Reserve System purchased a consider
able volume of United States Government securities in the open
market. Since these securities were not eligible as collateral against
the increased volume of Federal Reserve notes outstanding, and
since the Reserve Banks did not have sufficient commercial and
agricultural paper as backing for the additional currency, it was
necessary for them to segregate a larger amount of their gold re
serves as collateral against the additional notes. Consequently the
amount of gold available for other use by the Federal Reserve
Banks was reduced by nearly one billion dollars. This situation
greatly restricted the amount of additional Government securities
that the Federal Reserve Banks could purchase in order to ease
monetary conditions or to offset gold outflows or currency hoarding,
both of which developed on a large scale in 1931.
To meet this situation the Glass-Steagall Act was adopted in
1932. It permitted the use of Government securities as collateral
against Federal Reserve notes for a period of one year. This provi
sion has been periodically renewed and under present law will
expire on June 30, 1943.
Under the Federal Reserve Act as modified by the Glass-Steagall
amendment it is improbable that the public’s requirements for cur
rency could ever be too great for the currency system to meet.
Thus the central objective of a currency system, which is to furnish
a supply of currency for circulation that will fluctuate obediently
with the public’s requirements, is accomplished by existing law.
Federal Reserve Bank Notes. The original Federal Reserve
Act also provided for Federal Reserve Bank notes. They were to be
issued by the Reserve Banks under almost the same conditions as
the notes of national banks, which they were expected to replace
eventually. They never became a permanent part of the currency,

CURRENCY SYSTEM OF UNITED STATES

however, because it was found that increases in the demand for cur
rency for circulation could be met by Federal Reserve notes. In
1918 as much as 250 million dollars of Federal Reserve Bank notes
were issued under the Pittman Act to replace silver certificates
withdrawn from circulation as a result of the sale of monetary silver
to Great Britain for the support of the Indian rupee. These notes
were retired in the early 1920’s. Again, following the banking emer
gency of 1933, over 200 million dollars of Federal Reserve Bank
notes were issued, but they are now being retired as fast as they are
returned from circulation.
CURRENCY DEVELOPMENTS SINCE 1933

Under the Federal Reserve Act as amended by the Glass-Steagall
Act, the currency system, as distinct from the banking and general
monetary system, has been improved to the point where it can with
stand severe strain. It functioned successfully during the banking
difficulties of 1932 and the opening months of 1933, when the wide
spread failure of banks brought about a general loss of confidence in
the banking system and an unprecedented hoarding of currency.
A bank depositor could get all the currency he wanted so long
as his deposits, or in other words the assets of his bank, were good.
There was a real question as to the worth of some of these deposits
and assets; in fact many deposits became frozen in closed banks and
these of course could not be withdrawn in currency. This, however,
was not due to defects in the currency system. It was a general
banking problem or, stated even more broadly, a national eco
nomic problem.
Owing partly to economic difficulties during the early 1930’s,
important alterations were made in the monetary system. Although
the principal effects of these changes were on the monetary and
banking system as a whole, they had some influence on the currency
system.
Revaluation of Gold. The outstanding monetary event since
1933 has been the revaluation of gold. Under authority of the Gold
Reserve Act of January 30,1934, the President on January 31,1934,
reduced the gold content of the dollar from 25xiy grains to 15/T
grains of gold nine-tenths fine, thereby raising the Treasury’s gold
price from $20.67 to $35.00 a fine ounce. This action fixed the value

BANKING STUDIES

of the dollar in the foreign exchange market at about the level to
which it had depreciated during the previous year.
Governmental action prevented revaluation from having any
important effects so far as the holders of gold and currency were
concerned. A series of executive orders and Treasury regulations
issued in 1933 in accordance with the Emergency Banking Act of
March 9,1933, made it unlawful for banks and the general public to
hold gold coin and certificates. On January 30, 1934, the day before
revaluation, title to all gold held by the Federal Reserve Banks was
transferred to the United States Government at the old price of
$20.67 a fine ounce, the Banks receiving Treasury credits payable
in gold certificates. Thus the Federal Treasury’s cash increased by
the full mark-up in the value of gold which amounted to over 2.8
billion dollars. No profit accrued to the banks or the public from
revaluation; it all accrued to the United States Treasury.
Retirement of National Bank Notes. Part of the profit aris
ing from the revaluation of gold was used by the Treasury in 1935
in retiring the only two bond issues that could then be legally
pledged by national banks as collateral for their circulating notes.
Provision for issuing national bank notes ceased by August 1, 1935.
For some time the banks had in fact failed to issue notes to the full
amount permitted by the volume of bonds bearing the circulation
privilege. When the bonds were retired national banks deposited
enough funds with the Treasury to cover their notes outstanding
and the Treasury thereupon assumed the liability for the notes,
which are being cancelled as rapidly as they are received. Retire
ment of the bonds that had been held as collateral against the notes
furnished banks with funds to deposit for redemption of the notes.6
Silver Purchases. While gold certificates, national bank notes,
and Federal Reserve Bank notes in circulation have been decreasing
in volume, silver certificates have been increasing as shown by the
chart on page 81. This growth has been due to the Silver Purchase
Act, which became law June 19, 1934. This act declared it to be
the Government’s policy to increase the proportion of silver to
•For a description of the retirement of the national bank notes see the Federal
Reserve Bulletin for August 1935, pp. 496-97, and the Annual Report of the Board of
Governors of the Federal Reserve System for 1935, pp. 27-28.

CURRENCY SYSTEM OF UNITED STATES

gold in the monetary stock of the United States with the ultimate
objective of having one-quarter of the monetary value of such stock
in silver. To attain this objective the Secretary of the Treasury was
directed to purchase silver under certain conditions at a price not in
excess of $1.29 a fine ounce, its coinage value when made into
standard dollars. The act required that silver certificates be issued
in an amount not less than the total cost of the silver purchased.
G old

and

T reasury Currency

C i r c u l a t io n ®

* KCVI6ED TO EXCLUDE GOLD COIN

* For data, see Table 5, pp. 422-23.

These certificates have been issued in place of Federal Reserve
notes, so that the silver program has altered the composition of the
currency but has not affected the total volume of currency in circu
lation. The most important effects of the silver purchases, however,
have been not on the currency system, but on the volume of mem
ber bank reserves, which they increase in the same way as gold
purchases.
Provision to Issue 3 Billion Dollars of Greenbacks. Under
the so-called “ Thomas Amendment” of May 12,1933, the President
may direct the Secretary of the Treasury to issue 3 billion dollars of
greenbacks for the retirement of Federal debt. This power has not

BANKING STUDIES

been utilized. If it were it would not influence the responsiveness
of the volume of currency in circulation to the changing needs of
the community, and therefore, though it would affect the compo
sition of currency in circulation, it would not affect its total volume.
However, the use of this power would increase the already swollen
volume of member bank reserves.
C u r r e n c y in C i r c u l a t i o n in S e l e c t e d Y e a r s , b y K in d *

(Amounts outside Federal Reserve Banks and Treasury, as of June 30)

KIND .OF CURRENCY

AMOUNT
(i n m i l l i o n s o f d o l l a r s )

1860
State Bank Notes.................................
Gold and Treasury Currency...............
Gold coin and certificates...............
Silver dollars and certificates..........
United States notes.........................
Subsidiary and minor coin..............
National Bank Notes.............................
Federal Reserve Currency.....................
Federal Reserve notes.....................
Federal Reserve Bank notes...........
Total Circulation.............................

1870

1914

207
228

2
481

_
_
2,744 2,497

207
—
—
21
—

113

1,638
551
338
217

—

325
43

289

715

—

—
—

—

435

772

1940

67
1,629
248
553

PERCENTAGE DISTRIBUTION

1860

1870

1914

1940

47.6
52.4

.3
62.3

_
79.3

_
31.8

47.6

14.6

—

47.4
15.9
9.8
6.3

.9
20.8
3.2
7.0

165
5,185

—
4.8
—
—

5,163
22

—

42.1
5.6

37.4

20.7

—
—
—

—

2.1
66.1

65.8
.3

3,459 7,848 100.0 100.0 100.0 100.0

a For sources and description, see notes to Tables 4 and 5, pp. 421 and 423.

CHANGES IN COMPOSITION OF TH E CURRENCY

Changes since 1860 in the main elements composing the currency
circulation are shown in the preceding charts and in the accompany
ing table. In 1860 circulation was about equally divided between
gold and State bank notes. By 1870 the importance of gold had been
greatly reduced and State bank notes had virtually disappeared.
United States notes had become the largest component of the cur
rency, over 40 per cent of the total, with national bank notes a
close second.
By 1914, the monetary gold stock had increased by such large
amounts that gold coin and certificates formed nearly 50 per cent of
the currency in circulation. Silver dollars and certificates accounted
for about IS per cent, having increased as a result of the Govern
ment’s silver purchases under the legislation of 1878 and 1890.

CURRENCY SYSTEM OF UNITED STATES

National bank notes had reached their peak of about 700 million
dollars, and accounted for about 20 per cent of the currency. A
substantial amount of United States notes continued in circulation
but, because of increases in gold and national bank notes, they had
slipped definitely into a secondary role.
From 1914 to 1934 all of the growth in the currency circulation
was in Federal Reserve notes. Since 1934 this growth has been
shared by silver certificates. Federal Reserve notes account for
5.2 billion dollars or 66 per cent of the total circulation. Silver dol
lars and silver certificates account for about 20 per cent, and sub
sidiary and minor coin, for which the percentage has not changed
much since 1860, account for 7 per cent. The relative importance of
United States notes has dwindled to about 3 per cent, while national
bank notes and Federal Reserve Bank notes are disappearing from
circulation.
SUM M ARY

After a century and a half of evolution this country’s system of
providing currency for circulation has been so organized that the
volume of currency is sensitively responsive to changes in the
public’s demands. The Federal Reserve System is in a position to
meet all the currency demands that are likely to arise. Some
problems, however, still remain. There are administrative problems
of efficiency and economy in distributing cash. More important
are the unnecessary complications and overlapping authorities in
connection with the issuance of the different kinds of currency.
But the most serious currency problems that remain to be solved
have to do with the effects of currency issues on bank reserves and
on the general credit situation. These problems are discussed in
other papers in this volume.

BANKING STRUCTURE OF UNITED STATES

Page
I ntro duction ..........................................................................

K in d s

B a n k s .....................................................................

C ommercial B a n k s ..............................................................

R elationships

am ong

B a n k s .......................................... 105

Su m m a r y ....................................................................................

John E . H orbett

Assistant Chief
Division of Bank Operations

107

BANKING STRUCTURE OF UNITED STATES
The banking structure of the United States is a product of
evolutionary changes peculiar to this country. It differs in important
respects from the banking structure of other leading countries.
It comprises thousands of relatively small single-office banks, some
very large banks, and a considerable number of banks, small and
large, with branches. Bank charters may be issued by either Federal
or State authorities. Banks are regulated and supervised primarily
by the chartering authority, but the great majority of State char
tered banks are also under Federal supervision. Banks are mostly
independent operating units, locally owned, but they make ex
tensive use of correspondent relationships. About 90 per cent of
the banks participate in Federal deposit insurance; about 40 per
cent of them, holding over 70 per cent of all bank deposits, are
also members of the Federal Reserve System.
Banking in other leading countries is conducted by a relatively
few large banks with many branches. In those countries there is
less supervision of banks by governmental authorities and close
internal supervision (of branches by the head office). There is no
governmental provision for deposit insurance. In some foreign
countries the central banks, particularly those with many branches,
deal directly with the general public to a considerable extent. Some
of them also provide general collection and clearing facilities as the
Reserve Banks here do for their member banks, but generally
speaking these facilities abroad are supplied by the private com
mercial banks rather than by the central banks.
American banks taken as a whole render a wide range of services.
While some of them confine their operations to a narrow field, others
render such a variety of services as to be termed “ department
store” banks. Those that provide savings facilities have to meet the
competition of other institutions operating in the same general
field—building and loan associations, for example. In some of their
lending activities banks compete with a variety of money-lending

BANKING STUDIES

agencies operating in more or less specialized fields, some sponsored
or regulated by the Government. Some of these money-lending
organizations look to the banks as important sources of the money
which they lend.
KINDS OF BANKS

The line of demarcation between banks and other types of insti
tutions that lend money or provide savings facilities is constantly
shifting. It is difficult, therefore, to formulate an absolute rule by
which banks might be clearly distinguished from all other financial
institutions. For present purposes, however, it may be said that a
bank is a financial institution which accepts money from the general
public for deposit in a common fund, subject to withdrawal or to
transfer by check, and makes loans to the general public. This
definition comprehends national banks, State banks, trust com
panies, mutual and stock savings banks, industrial banks, and “ pri
vate” or unincorporated banks. It excludes building and savings
and loan associations, mortgage companies, finance companies,
insurance companies, and credit agencies owned in whole or in part
by the Federal Government.1
In order to throw light on the composition of our banking struc
ture, this paper will be devoted largely to a discussion, first, of the
significant differences between the principal types of banks and,
second, of the characteristics of so-called commercial banks (defined
later on).
Unit and Multiple Office Banks. Although the banking struc
ture of the United States is essentially a system composed of thou
sands of “ unit” or single-office banks serving their respective local
communities, in many sections of the country there has been some
development of multiple office banking.2 This has manifested itself
in two forms—the establishment of branches and the formation of
bank “ groups” and “ chains.” For statistical purposes a bank group
or chain is usually regarded as consisting of three or more separately
chartered banks brought together under some sort of common con
1 JW k discussion of these financial institutions see the paper on “ Credit and Sav
ing! Institutions Other Than Banks.”
^^for details see the paper on “ Branch, Group, and Chain Banking.”

BANKING STRUCTURE OF UNITED STATES

trol which is exercised by a key bank, a holding company, an indi
vidual, or a small group of individuals.
At the end of 1939 the American banking structure included, in
addition to approximately 15,000 banks of all kinds, about 3,600
branches (operated by approximately 1,000 banks). About half of
the 3,600 branches were located in the same cities as their head
offices, while the remainder served other communities. Nearly 60
per cent of the total number of branches were located in five States,
the establishment of branches being prohibited or restricted as to
location in many States.
At the end of 1939, also, 851 banks were members of so-called
“ groups” or “ chains,” of which there were 137. Some of the group
and chain banks are the key banks in their respective groups and
chains and are of considerable size, and some of them are also among
the principal branch operating systems. Most group and chain
banks are concentrated in a relatively small number of States.
Seven large banks, located in New York, Boston, and San Fran
cisco, operate one or more branches abroad. At the end of 1939 there
was a total of ninety-two such branches or offices located in sixtytwo cities in twenty-two foreign countries or dependencies or insular
possessions of the United States. One bank had sixty-two foreign
branches, another eleven, a third nine, a fourth seven, and three
others had one branch each. Because of the disturbances brought
about by the war some of these branches have, since the end of 1939,
been temporarily or permanently discontinued.
Distribution of Banks by Supervisory Jurisdiction. From the
standpoint of supervisory jurisdiction, banks may be classified
as national banks, State banks,3 and private banks; as member
banks of the Federal Reserve System and nonmember banks; and
as insured banks and noninsured banks. Each of these three classifi
cations comprehends all of the banks. The “ insured banks” group
is, however, the most inclusive, because it embraces all national
banks, all other member banks of the Federal Reserve System, and
the great majority of nonmember banks.
3 The .term “ State banks” is used here in its broadest sense and comprehends all
banks operating under State charters. See Appendix Table 6, note b, p. 423.

N u m b e r a n d D e p o s it s o f B a n k s , b y K in d , D e c e m b e r 31, 1939a
BY FUNCTION

BY SUPERVISORY JURISDICTION
PER CENT
OF ALL BANKS

100

“

PER CENT
OF ALL DEPOSITS

100

“

PER CENT
OF ALL DEPOSITS

PER CENT
OF ALL BANKS

lOOP

1100

20
MUTW
SAVIN

INSURED NON INSURED

BANKS

15,034

DEPOSITS

$ 68, 229,000,000

ft For data, see Table 6, p. 423.

BANKS

15,034

INSURED NONINSURED

DEPOSITS

$ 68,229,000,000

BANKING STRUCTURE OF UNITED STATES

Insured and Noninsured Banks. It will be observed from the
accompanying chart that the American banking structure is com
posed of approximately 15,000 banks, of which about 90 per cent
are insured and consequently operate at least in part under the
supervision of the Federal Government.4 Insured banks in Decem
ber 1939 held about 57.5 billion dollars or 84 per cent of the aggre
gate deposits of all banks in the country. Of the 10.8 billion dollars
of deposits of noninsured banks, 9.1 billions were carried by mutual
savings banks, which are concentrated largely in the Northeastern
States. From 85 to 100 per cent of all banks (excluding mutual
savings banks) in every State except Rhode Island, Kansas, Georgia,
and South Carolina were participating in Federal deposit insurance
at the end of 1939.5
All national banks and all other member banks of the Federal
Reserve System are required by law to be members of the Federal
Deposit Insurance Corporation. Banks that are not members of the
Federal Reserve System may be admitted to Federal deposit insur
ance upon meeting certain prescribed conditions. Deposits in an
insured bank are insured up to $5,000 for each depositor. Since more
than 98 per cent of all deposit accounts in insured banks are of $5,000
or less, all but a small percentage of depositors are fully protected by
deposit insurance. Large deposit accounts, however, comprise a big
proportion of total deposits. Consequently only about 45 per cent
of the dollar amount of all deposits in insured banks is protected by
insurance.6
Member Banks and Nonmember Banks. Member banks comprise
all national banks in the continental United States, as required by
law, and such State banks and trust companies as have applied for
and been admitted to membership upon complying with certain
prescribed conditions. At the end of 1939 there were 6,362 member
banks, or approximately 42 per cent of all banks in the country;
they held 72 per cent of the total deposits of all banks.
The relative proportions of member and nonmember banks in
4 See the paper on “ Supervision of the Commercial Banking System.”
6 The percentages by States appear in the 1939 Annual Report of the Federal Deposit
Insurance Corporation pp. 90-97.
*Ibid., 1938, p. 79.

BANKING STUDIES

individual States vary considerably. In the Northeastern States,
taken as a whole, about three-fourths of all banks other than mutual
savings banks are members of the Federal Reserve System.7 In
most of the Middle Western and Southern States the proportion of
nonmember banks is larger than member banks, in some instances
being over three-fourths of the banks.8 Deposits of member banks
exceed deposits of nonmember banks (other than mutual savings
banks) in all but one State (Mississippi) and in some States are
many times as large. Nearly all of the larger banks are members of
the Federal Reserve System.
To be eligible for Federal Reserve membership a State bank must
meet the capital requirements prescribed by law for the organization
of a national bank, except that the minimum capital requirement
for membership of a State bank is $25,000 compared with $50,000
for the organization of a new national bank. At the end of 1939
about 60 per cent of the 8,000 nonmember banks (other than
mutual savings banks) were eligible for membership on the basis of
minimum statutory capital requirements.
National and State Banks. Under our dual banking system a bank
may, with the approval of the appropriate authority, be organized
either as a national bank under the provisions of Federal law or as a
State institution under State law. A State bank may also be con
verted into a national bank, and vice versa. National banks operate
under the supervision of only Federal authorities; State banks that
are members of the Federal Reserve System or have their deposits
insured by the Federal Deposit Insurance Corporation operate
under both Federal and State supervision; other State banks are
supervised by State authorities. For reasons explained elsewhere,
the number of State banking institutions has for years greatly
exceeded the number of national banks.9 At the end of 1939, how
ever, national banks comprised about one-third of all banks in the
7 Up to the end of 1940 no mutual savings bank had joined the Federal Reserve
System.
8The considerations that deter banks from joining the Federal Reserve System are
discussed in another paper, ‘ ‘Deterrents to Membership in the Reserve System.”
•See the “ Historical Introduction.”

BANKING STRUCTURE OF UNITED STATES

country and held about 55 per cent of all deposits in banks other
than mutual savings banks.10
Private Banks. So-called “ private” or unincorporated banks were
formerly a very important part of the banking structure, but they
have declined greatly in number and volume of business. In 1900
the number of unincorporated banks was about 5,000, which
equalled the number of State banks and exceeded the number of
national banks. In 1921, when the total number of banks was at its
peak, there were about 1,200 unincorporated banks. Federal law
took no cognizance of unincorporated banks until the Banking Act
of 1933 prohibited any bank from receiving deposits unless it sub
mitted to examination by State or Federal banking authorities.
This seems to have deprived unincorporated banks of any substan
tial advantage they may have had over incorporated banks. At the
end of 1939 there were only sixty-three unincorporated banks re
porting to State banking authorities, and their deposits amounted
to 750 million dollars.11
Distribution of Banks by Function. A broad functional dis
tinction is commonly made between “ mutual savings banks” and
all other banks, commonly termed “ commercial banks.” This dis
tinction is based on the substantially different kinds of deposit
business cultivated, either mainly or exclusively, by these two
groups of banks.
Mutual Savings and Commercial Banks. Mutual savings banks
carry only savings and other time deposits (with some unimportant
exceptions). All of them are State chartered institutions. Commer
cial banks— as a group— carry checking accounts and other deposits
10There are some considerable differences by States in the relative number and
deposits of national banks and State banks, respectively, but they are not particularly
significant because many State banks, particularly the larger ones, have come under
Federal supervision by joining the Federal Reserve System rather than by converting
into national banks.
11By June 29, 1940, deposits of private banks had declined to only 146 millions,
because the largest unincorporated bank had meantime converted into a trust com
pany. Reports indicate that in three or four States there are a number of small private
banks that do not report to State banking departments in spite of the provisions
of Sec. 21 (a) of the Banking Act of 1933, as amended, but adequate statistical data
thereon are not available.

BANKING STUDIES

subject to withdrawal on demand. Commercial banks include both
Federal chartered and State chartered institutions and the group,
therefore, cuts across the classification of banks by jurisdiction.
The term “ commercial bank” is somewhat of a misnomer, since the
great majority of such banks also carry varying proportions of
savings and time deposits. At the end of 1939 there were 551 mutual
savings banks with total deposits of approximately 10.5 billion
dollars. On the same date there were 14,483 commercial banks with
deposits of 57.7 billion dollars, of which 15.5 billions were savings
and other time deposits.
Stock Savings Banks. The great majority of so-called “ stock
savings banks” carry both demand and time deposits and transact
the same kinds of business as national and State commercial banks.
Consequently, as a group, stock savings banks are classed as com
mercial banks.12Like mutual savings banks, all stock savings banks
are State chartered institutions. Ownership of stock savings banks,
however, is represented by capital stock, whereas mutual savings
banks are owned by their depositors, and are managed by boards of
trustees, which usually are self-perpetuating bodies..
Industrial Banks. So-called industrial banks (of the Morris Plan
type) are now usually counted as commercial banks. Some of them
operate under the general banking codes of the States in which they
are located and are authorized to do the same kinds of business as
other banks. Others operate largely or entirely in the personal
installment loan field and accept no deposits other than savings
deposits. Many commercial banks now make personal installment
loans on the same general basis as industrial banks. At the end of
1939, according to available data, the banking structure included
105 industrial banks with total deposits of 180 million dollars. These
figures do not include so-called industrial loan companies, which in
general make the same kinds of loans as industrial banks but do not
accept deposits.
Trust Companies. Most trust companies transact a general bank
12 Separate statistics on stock savings banks are no longer published for the country
as a whole. They were last shown in the 1935 Annual Report of the Comptroller of the
Currency. That report (p. 756) shows 341 stock savings banks (306 of which were in
Iowa).

BANKING STRUCTURE OE UNITED STATES

ing business, the same as national and State commercial banks. For
this reason they are counted as commercial banks.13 Trust com
panies, however, are authorized by their charters to act in fiduciary
capacities, whereas national banks—and, in general, any State
banks which under State law may obtain trust powers—must make
special application to the banking authorities to act in fiduciary
capacities.
Cash Depositories. Cash depositories (located only in South
Carolina) perform limited commercial banking functions; they
carry only demand deposits. Their deposits must be carried in cash
or redeposited in banks, except that excess funds may be invested in
securities of the United States Government or the State of South
Carolina and its political subdivisions, or in cotton producers’
notes eligible for sale to the Commodity Credit Corporation. The
depositories make a monthly service charge on a fee basis for services
rendered.
COM M ERCIAL BANKS

Although the approximately 14,500 commercial banks (hereto
fore defined as all banks other than mutual savings banks) with
which the remainder of this paper will deal have been distinguished
from other banks because as a group they hold checking or other de
mand deposit accounts, there is a wide variation in the character of
their business. Some idea of the individual variation can be given by
breaking down the commercial banks within the major bank classifi
cations already given in several ways—by proportions of demand
and time deposits, character of assets, size of banks, and so on.
Character of Deposits. If commercial banks were defined as
those which hold exclusively demand deposits, only a small per
centage could be so classified. An analysis made in December 1935
13 Of the trust companies included in the banking statistics, seventy-three do not
engage in banking operations and consequently have no deposits, though some of
them have the power to do a general banking business. (Two national banks exercise
only fiduciary functions.) A few of the non-deposit trust companies are members of the
Federal Reserve System and a few others have their uninvested trust funds insured by
the Federal Deposit Insurance Corporation. Consequently, the seventy-three non
deposit trust companies have not been segregated from the trust companies that
perform banking functions but are counted as commercial banks.

BANKING STUDIES

disclosed that there were only about 500 such banks, that only one
out of every ten commercial banks had as much as 90 per cent of its
deposits in the form of demand deposits, and that about 40 per cent
P e r c e n t a g e D i s t r i b u t i o n o f C o m m e r c ia l B a n k s a n d T h e i r D e p o s it s B y R a t i o
o f D e m a n d D e p o s it s t o T o t a l D e p o s it s , D e c e m b e r 31,1935a
RATIOS OF DEMAND DEPOSITS TO TOTAL
DEPOSITS
CLASS OF BANK

Less
50 and
90 and
Less
Less
70 and
over
over
over
than 10 than 30 than 50
(per cent) (per cent) (per cent) (percent) (percent) (percent)

Percentage distribution of banks:
National................................
State member........................
Nonmember...........................

0.2
0.4
0.9

14.4
9.6
9.7

43.2
42.2
35.8

56.8
57.8
64.2

30.1
27.9
34.5

9.7
9.2
10.2

All commercial banks........

0.6

11.4

38.9

61.1

32.4

10.0

Percentage distribution of de
posits:
National................................
State member........................
Nonmember................. .........

0.1
0.2
5.2

5.1
2.0
20.1

23.2
16.8
50.2

76.8
83.2
49.8

61.8
68.7
24.1

17.1
46.9
8.7

All commercial bank de
posits ..............................

0.9

6.2

25.0

75.0

58.7

25.1

* These percentage distributions were derived from the number and total deposits of banks, dis
tributed according to ratio of demand to total deposits, published in the August 1937 issue of the Federal
Reserve Bulletin, pp. 785-86. A number of banking institutions which are included in the Dec. 31, 1939,
statistics used elsewhere in this paper are excluded here. The percentage distribution would not be ap
preciably affected, however, by the inclusion of such banking institutions. An analysis made of member
bank data as of Dec. 31, 1939, does not differ much from the percentage distribution as of Dec. 31, 1935,
given in this table.

of all commercial banks held more time deposits than demand
deposits. Some of the commercial banks—including some national
banks—held less than 10 per cent of their deposits in the form of
demand deposits.14
14 See Federal Reserve Bulletin, August 1937, p. 785. A few banks with no demand
deposits are included in the category “ commercial banks,” which, as already explained,
actually comprehends all banks other than mutual savings banks. In December 1935
there were twenty-seven banks with no demand deposits classified as commercial
banks; their deposits aggregated about 78 million dollars—about .2 of one per cent of
all deposits held by banks classified as commercial. The largest of these institutions,
with time deposits of 50 million dollars in 1935, was a trust company which, upon the
establishment of Federal deposit insurance, transferred its commercial business to a
newly organized and affiliated national bank, but continued its savings and trust de
partments.

BANKING STRUCTURE OF UNITED STATES

The figures in the accompanying table show that about 43 per
cent of the national banks, 42 per cent of the State member banks,
and 36 per cent of the nonmember commercial banks held more time
than demand deposits. In other words, there is little difference in
the general character of deposits carried by member banks and
nonmember banks, respectively. Member banks, however, include
the largest commercial banks in the country, most of which have a
preponderance of demand deposits. Consequently, the dollar volume
of demand deposits is a much larger proportion of aggregate de
posits of member banks than of nonmember banks.
There are some big differences by States and regions in the relative
volume of demand and time deposits held by individual commercial
banks of all classes.15 In the Northeastern States, where there exists
a highly developed system of mutual savings banks with 10 billion
dollars of savings and other time deposits, the average commercial
bank nevertheless holds a relatively much larger proportion of time
deposits than, for example, the average commercial bank in the
Southern and Western States. Such regional differences in the pro
portions of time and demand deposits carried by individual banks
are, of course, due to a variety of factors. Among them are the
character and extent of economic development; the relative impor
tance of the various kinds of agencies and means for accumulation
and utilization of savings; the influence of existing and, perhaps
more important, of former provisions of State and national banking
laws; and the habits of the bankers and the general public.
Character of Assets. In recent years the demand for bank loans
has declined far below the level of the 1920% and commercial banks
now hold an abnormal volume of idle cash reserves and a heavy
portfolio of Government securities. A current classification of com
mercial banks by character of assets will not, therefore, have the
same significance as in the 1920’s. Moreover, commercial banks have
been enabled, by legislation enacted since that time, to go much
further into the field of real-estate financing than they formerly
could. Many of them, also, have opened personal installment loan
departments, through which they make installment loans of the
kinds made by industrial banks and finance companies.
16Ibid.

BANKING STUDIES

A distribution of the assets of the principal classes of commercial
banks as of December 31, 1939, is shown in the accompanying
chart, together with a distribution of aggregate loans among their
component parts. It will be observed that member banks in the two
central reserve cities (New York and Chicago) held about 40 per
cent of their assets in the form of cash (including reserves and bank
balances), compared with 27-34 per cent held by the other principal
classes of member and nonmember commercial banks. The higher
percentage of cash assets held by banks in the two principal financial
centers reflects in part their higher legal reserve requirements. It is
also due to the fact that legal reserves of nonmember banks and
uninvested funds of country banks are in large part deposited at
banks in the financial centers, which under present conditions hold a
substantial portion of such balances uninvested.
Member banks in the two central reserve cities had a smaller
percentage of their assets in the form of loans than any of the other
classes of commercial banks—20 per cent in New York and 16 per
cent in Chicago, compared with averages ranging between 27 and 37
per cent elsewhere. Contrariwise, central reserve city banks held
somewhat larger portfolios of securities in relation to total assets—
37 per cent in New York and 43 per cent in Chicago, compared with
31-35 per cent elsewhere. The average maturity of securities held
by member banks in the two central reserve cities was much shorter
than in the case of banks outside these cities: about 50 per cent of
all securities held by New York and Chicago member banks ma
tured in five years or less, compared with 30-36 per cent at the other
commercial banks. United States Government obligations consti
tuted a much larger proportion of the securities portfolio of central
reserve city and reserve city banks than of country banks. A sub
stantial portion of the “ other securities” held by country banks
were obligations of States and political subdivisions.
In some respects the distribution of the principal classes of loans,
in relation to total loans, is more significant than the distribution
of total assets, because at the present time such a large portion of
bank assets are idle funds awaiting loan and investment oppor
tunities. The accompanying chart shows that about 60 per cent of
total loans of member banks in the central reserve cities were

BANKING STRUCTURE OF UNITED STATES

commercial, industrial, and agricultural loans, compared with about
30-47 per cent at other classes of member and nonmember com
mercial banks. Member banks in New York City also held a much
larger proportion of loans for purchasing and carrying securities,
mostly to brokers and dealers. These differences between classes of
banks in the volume of commercial, industrial, agricultural, and
security loans are largely offset by the variations in the volume of
P e r c e n t a g e D i s t r ib u t io n

A sse t s

D ecem ber
ALL ASSETS
PER CENT OF TOTAL

I n s u r e d C o m m e r c ia l B a n k s ,

31, 1939a
LOAN ASSETS

PER CENT OF TOTAL

OTHER LOANS

REAL- ESTATE LOANS

MEMBER BANKS

NEW YORK CHICAGO RESERVE COUNTRY INSURED
CENTRAL RESERVE CITY
CITY
NONMEMBER
__________________' BANKS
MEMBER BANKS

a For data, see Table 7, p. 424.

real-estate loans. Only 4 per cent of the loans of central reserve
city banks were real-estate loans, compared with 25-40 per cent at
other commercial banks. The relatively high percentage shown for
reserve city member banks does not, of course, signify that banks
in all reserve cities hold a relatively large volume of real-estate
loans. There is, in fact, a wide variation in the ratio of real-estate
loans to total loans among individual reserve cities.
The group “ all other loans” represents personal loans to indi
viduals and unclassified loans. Such loans amounted to 14 per cent
of total loans at central reserve city banks, and to 22-26 per cent
at other classes of commercial banks.

100

BANKING STUDIES

The foregoing percentages are averages for all of the banks in
each of five groups of commercial banks. Within each of these groups
there are great differences in the relative proportion of the various
kinds of assets held by individual banks. An appended table, which
shows how the distribution of assets varies for member banks hav
ing different amounts of deposits, illustrates the possibilities of
variation within one class of banks.16
Fourteen per cent of all member banks had less than $20 of each
$100 of total assets invested in loans, but another 14 per cent had
at least $50 of each $100 of total assets in the form of loans. The
most common proportion was $30-$40 per $100 of total assets. The
proportion of bank funds invested in loans declined as the size of
bank increased: 28 per cent of all member banks in the smallest-size
group had at least half of their assets in the form of loans; no bank
in the largest-size group had such a high proportion of its funds
invested in loans.
About 31 per cent of all member banks had $40 or more of every
$100 of total assets invested in securities, 23 per cent had $20-$30
so invested, and another 23 per cent had $30-$40. In general, the
proportion of bank funds invested in securities increased as the size
of bank increased, but at least 10 per cent of the banks in every size
group except that consisting of the smallest banks held securities
equal to at least half of total assets.
Sixteen per cent of all member banks held cash assets amounting
to at least $40 in every $100 of total assets. About 30 per cent of all
banks in the largest-size group held this proportion of cash assets.
The most common proportion of cash assets was from $20 to $30.
There was considerable variation in the proportion of cash assets
held by banks within each size group, but in general the larger banks
held a relatively larger proportion of cash assets.
Size of Banks. Most of the 14,500 commercial banks are of
relatively small size, but some are among the largest banks in the
world. The accompanying chart shows the number and deposits of
each principal class of commercial banks (other than private banks)
grouped according to size of bank. About 9,500 commercial banks,
18See Table 8, p. 425.

101

BANKING STRUCTURE OF UNITED STATES

or two-thirds of the total number, had deposits of less than one
million dollars each. The aggregate deposits of these banks were 3.8
billion dollars, or approximately 7 per cent of the aggregate deposits
of all commercial banks. There were over 3,000 banks with deposits
of less than $250,000 each. This group of small banks, amounting
to about 22 per cent of all commercial banks, held somewhat less
than one per cent of the aggregate deposits of all commercial banks.
C o m m e r c ia l B a n k s ,

um ber and

BANKS

31, 1939a

DEPOSITS
NUMBER

250
250
AND
TO
UNDER 500

Si z e , D e c e m b e r

BILLIONS OF DOLLARS

500 1,000 2,000 5,000 OVER
TO
TO
TO
TO 50,000
1.000 2p00 5,000 50,000

500 1,000 2,000 5,000 OVER
TO
TO
'TO
TO 50,000
1,000 2,000 5000 5Q000

DEPOSIT CLASSES IN THOUSANDS OF DOLLARS

a For data, see Table 9, p. 426.

Among the large banks are three with deposits of 2 to 3 billion
dollars, and five others with deposits of over one billion dollars each.
There were 133 commercial banks with deposits of 50 million dollars
and over. This group of banks was less than one per cent of the total
number of commercial banks, but it held 58 per cent of the aggregate
deposits of all commercial banks.
The larger banks are, of course, located in the financial centers
and nearly all of them are members of the Federal Reserve System.
As the size of bank increases, the proportion of member banks
increases. Most of the smaller banks, for reasons explained in
another paper, are not members of the Federal Reserve System.

102

BANKING STUDIES

Size of Bank Cities. The distribution of commercial banks ac
cording to the size of the city in which they are located follows the
same general pattern as the size-of-bank distribution just given,
because in general the banks having a relatively small amount of
deposits are located in small places. There are, of course, exceptions.
In some large cities, for example, particularly where branch banking
is prohibited, there are considerable numbers of relatively small
neighborhood banks. On the other hand, some banks of considerable
size, though located in small cities or towns, may serve surrounding
areas of considerably larger population, either directly or through
branches. By and large, however, there is a direct relationship be
tween the size of the bank and the population of the city or town in
which it is located.17 There are relatively more member banks than
nonmember banks in the larger cities, and more nonmember banks
in the small towns and cities.
The banking structure is made up predominantly of thousands
of relatively small single-unit banks, usually located in places having
small populations. There has, however, been a considerable growth
in the number of branches, both in large cities and in small places.
Of the 18,000 commercial banking offices (banks plus branches) at
the end of 1939, over half were located in places with a population
of 2,500 or less.18 At the other extreme, about 8 per cent of all com
mercial banking offices were located in places with a population of
500,000 or more. The census shows that 44 per cent of the total
population is in rural territory or urban places with populations of
2,500 or less, and 17 per cent in places with populations of 500,000
or more. Thus the average number of persons served by a banking
office located in a big city is, as might be expected, considerably
larger than the number of persons served by a bank or branch
located in a small community.
Earnings. Rates of bank earnings reflect the wide variations in
the character of bank assets and deposits already described. Perhaps
in a more important degree, they also reflect differences in the level
17A cross classification by size of bank and population as of Dec. 31, 1935, appears
in the Federal Reserve Bulletin for August 1937, p. 793. A later cross classification has
not been made.
18 See Appendix Table 10, p. 427.

103

BANKING STRUCTURE OF UNITED STATES

of interest rates prevailing in the different sections of the country.
There is, consequently, a wide range in the rates which banks earn
on their assets and on their capital funds, as may be seen from the
accompanying table.
In 1939 net current earnings (current earnings less current ex
penses) of all insured commercial banks taken as a whole amounted
to 75 cents on every $100 of total assets.19 Taken individually, the
most common rates were from $1.00 to $1.50 per $100 of total assets,
but rates of 50 cents to $1.00 were nearly as common. In relation to
P e r c e n t a g e D i s t r ib u t i o n o f I n s u r e d C o m m e r cia l B a n k s b y R a t e s o f N e t
C u r r e n t E a r n in g s a n d N e t P r o f i t s D u r in g 1939a

SATE PER $100 OP TOTAL
ASSETS

Less than $0.50b............
$0.50-0.99....................
$1.00-1.49....................
$1.50-1.99....................
$2.00-2.49....................
$2.50 and over..............
Total..........................

PERCENTAGE OP
BANKS HAVING
SPECIFIED RATES
OP NET CURRENT
EARNINGS ON
TOTAL ASSETS

8.0
27.2
33.5
18.7
7.7
4.9
100.0

RATE PER $100 OP TOTAL
CAPITAL ACCOUNTS

PERCENTAGE OP
BANKS HAVING
SPECIFIED RATES OP
EARNINGS AND
PROPITS ON CAPITAL
ACCOUNTS

Net
current
earnings

Net
profits

Less than $5.00b...........
$5.00-$9.99..................
$10.00-$14.99..............
$15.00 and over............

17.6
43.3
26.2
12.9

35.0
36.9
19.4
8.7

Total..........................

100.0

a Annual Report of the Federal Deposit Insurance Corporation, 1939, pp. 184 and 57.
b Including some banks with net losses.

invested capital, net current earnings of all insured commercial
banks in 1939 amounted to approximately $7.00 per $100 of capital
accounts. Net profits (the excess of all earnings, profits, and re
coveries over expenses, losses, and depreciation charges) amounted
to approximately $6.00 for each $100 of capital accounts. Taken
individually, the most common rates of net current earnings per
$100 of capital accounts were from $5 to $10, but nearly 40 per cent
of the banks reported higher rates. The most common rates of net
profits per $100 of capital accounts also were from $5 to $10, but
19 Corresponding data for noninsured banks are not available.

104

BANKING STUDIES

about one-third of the banks reported rates below this range and
many reported higher rates.
In general, rates of net current earnings on assets decrease as the
size of bank increases.20 This is due to a number of factors. As
already indicated, the larger banks hold relatively more non-earn
ing assets (mostly cash assets) than the smaller banks and a greater
part of their earning assets are in the form of securities, the average
rates of return on which are considerably lower than on loans. They
also operate in more highly competitive money markets and conse
quently make their loans at lower average interest rates and hold a
bigger volume of short-term low interest rate securities. The result
ing wide differences by size of bank in rates of net current earnings
on assets do not, however, carry over into the rates of return on
capital; in fact, net current earnings of the big banks in relation to
capital accounts are somewhat higher on the average than those of
very small banks. This is largely a result of the fact that capital
funds of the large banks are much lower in relation to assets and
deposits than are capital funds of the small banks.
There is considerable correspondence between the section of the
country in which a bank is located and the rate of gross earnings
on assets. This is particularly true in the case of the smaller banks,
because there are bigger differences in the level of interest rates
charged by small banks in the different parts of the country than in
rates charged by large banks wherever located. Differences in rates
of gross earnings of banks located in the various sections of the
country are generally reflected in somewhat higher rates of net
earnings. In the three Eastern Federal Reserve districts, for ex
ample, member banks with deposits of $250,000-$500,000 averaged
in 1939 approximately $4.00 gross per $100 of total assets, com
pared with about $4.80 in some of the Southern and Western
districts. These differences were carried in part into net earnings,
because the somewhat higher rate of operating expenses of the small
banks in the South and West did not entirely offset their higher
rate of gross earnings. The higher rate of net current earnings on
total assets was, in turn, reflected in a higher rate of return on capital
accounts at small banks in the South and West.
10 See Table 11, p. 427.

BANKING STRUCTURE OF UNITED STATES

105

The proportion of savings and other interest bearing time deposits
is also an important factor in the rate of return that a bank makes
on its capital investment. In 1939 the average member bank with
less than one-fourth of its deposits in the form of savings and time
accounts reported net current earnings of $9.20 per $100 of total
capital accounts, compared with $6.20 reported by the average
member bank with three-fourths or more of its deposits in savings
and other time accounts. This differential does not, however, hold
true in all sections of the country. In the Northeastern States mem
ber banks with relatively large time deposits reported higher rates
of net current earnings on capital accounts than banks with low
proportions of time deposits. In other sections of the country,
however, member banks with relatively large time deposits reported,
on the average, lower net earnings on capital accounts than banks
with low proportions of such deposits.21
RELATIONSHIPS AMONG BANKS

Since the vast majority of the 15,000 commercial and savings
banks in the United States are single-office institutions, locally
owned and controlled, they operate independently of one another
at least in providing the primary banking services of receiving de
posits and making loans. Banks do, however, have business rela
tionships with one another, if for no other reason than to provide
some of the broader banking services which are required even in
the smaller communities. These interbank contacts are exemplified
in the vast network of correspondent banking relationships. In
addition, banks in the larger cities are generally associated for their
mutual interest in local clearing-house associations, and banks
throughout the country are associated with one another through
membership in such groups as the American Bankers Association
and State bankers associations.
Correspondents. Early in the history of American banking,
banks found it convenient and in many cases necessary for business
purposes to maintain deposit accounts (interbank balances) with
other banks. Generally speaking, the smaller banks would maintain
accounts in New York and in their respective regional trade centers,
21See “ Member Bank Operating Ratios, 1939,” Federal Reserve Bulletin, June 1940,
pp. 588-601.

106

BANKING STUDIES

while the larger banks would maintain balances in New York and
in a number of other trade and financial centers. Prior to the
establishment of the Federal Reserve System, nearly all banks were
permitted to count interbank balances as part of their legal reserves.
National banks and State member banks are now required to carry
all their legal reserves with the Reserve Banks. Since the Banking
Act of 1933 prohibited the payment of interest on demand deposits,
correspondent balances have ceased to be a source of revenue to the
depositing banks, but correspondent banking relationships are still
an important part of our banking system.
City banks perform some services for their country correspondents
which are similar to services performed by the Federal Reserve
Banks for member banks. Banks send checks, maturing notes,
bonds, and coupons to their correspondent banks for collection and
credit. They draw drafts on the city correspondent and thus provide
local customers with acceptable exchange for making out-of-town
payments. They use the safekeeping facilities of the city corre
spondent, including the clipping and collection of maturing coupons.
City banks also perform some services for their correspondents
which the Federal Reserve Banks do not perform for member banks.
For example, they may furnish their correspondents investment
counsel and advice, credit information, etc.
At the end of 1939 over 3.5 billion dollars of interbank balances
were on deposit in New York banks, nearly 900 million dollars in
Chicago, about 3.6 billions in other reserve city banks, and about 600
millions at country member banks. The total of interbank balances
in June 1940 was over 9 billion dollars. These balances are not
generally maintained with nonmember banks; the total amount of
bank balances on deposit at all insured nonmember commercial
banks was only about 100 million dollars. Balances on deposit with
city correspondents are, in so far as member banks are concerned,
quickly convertible into reserve balances with Federal Reserve
Banks, by means of the telegraphic transfer facilities of the Federal
Reserve System.
Clearing Houses. The local clearing house is an association of
banks in the same city (sometimes in two or more adjacent cities)
founded for the primary purpose of exchanging checks among the

BANKING STRUCTURE OF UNITED STATES

107

participating banks and thereby facilitating prompt collection.
Beyond this purely mechanical function, the local clearing-house
association frequently serves as a medium for united action on
problems affecting the common welfare of the associated banks,
such as the regulation of interest payments on deposits, adoption of
schedules of service charges, and fixing of business hours. Some
clearing-house associations have maintained an examining force for
the purpose of assuring themselves of the solvency of the associated
banks, but this practice has been largely discontinued. Some main
tain central credit files for the use of the associated banks.
In addition to purely local or city clearing houses, there have been
formed, particularly in the more recent years, clearing-house associa
tions covering a county or even a larger trade area.
Bankers Associations. By and large each bank is an independent
unit solely responsible for its own policies and operations. There
are, however, many occasions for bankers to discuss their com
mon problems. Apart from the opportunities for such discussion
that arise from correspondent and clearing-house relationships,
there are opportunities presented by the numerous State, national,
and regional meetings of the bankers associations and affiliated
organizations. These meetings not only provide a forum for the
discussion of problems of common interest, but they afford bankers
a means of giving effective expression to their views on banking
legislation and other matters of similar nature. The educational
work of the bankers associations, through the Graduate School of
Banking, the State university conferences, and the local American
Institute of Banking chapters, provides an opportunity for bringing
about a considerable degree of uniformity in the banker’s approach
to his problems and a generally higher standard of banking practices.
SUM M ARY

The American banking structure is composed of 15,000 banks.
The banks are chiefly small, locally owned institutions, with no
branches. Some of them, however, are quite large, and a few have
numerous branches, the total number of branches being 3,600.
About a third of the banks are Federal chartered, i.e., national
banks, but 90 per cent of all banks are under some degree of Federal

108

BANKING STUDIES

supervision because of membership in the Federal Reserve System
or participation in Federal deposit insurance. Insured banks com
prise all national banks, all other member banks of the Federal
Reserve System, and the great majority of nonmember banks.
Approximately 42 per cent of all banks in the country are members
of the Federal Reserve System, and they hold 72 per cent of the
deposits of all banks.
A broad functional distinction is made between mutual savings
banks and all other banks. The latter are commonly termed “ com
mercial banks” ; there are about 14,500 of them. Mutual savings
banks, of which there are about 500, do not accept demand depos
its. Most commercial banks accept both demand and time deposits.
About 40 per cent of them hold more time deposits than demand
deposits. Only a relatively small number hold exclusively demand
deposits. There is little difference in the character of deposits carried
by member banks and nonmember banks respectively.
Between 30 and 40 per cent of the assets of commercial banks are
in the form of reserves, vault cash, and bank balances. Another
30-40 per cent consist of United States Government and other
securities. Loans average about 20-40 per cent of assets. Banks in
the leading financial centers hold a larger proportion of commercial
and industrial loans, and loans for purchasing or carrying securities,
than do other banks; they hold a smaller proportion of real-estate
loans and “ all other” loans.
Approximately two-thirds of the commercial banks have deposits
of less than one million dollars each. Over 3,000 have deposits of less
than $250,000 each. Three banks have deposits of between 2 and 3
billion dollars. In December 1939 there were 133 incorporated
commercial banks with deposits of 50 million dollars or more. They
held 58 per cent of the deposits in all commercial banks.
The great majority of banks are single-office units located in
places with small populations. Over one-half of the 18,000 com
mercial banking offices (banks plus branches) are located in places
with populations of 2,500 or less. About 8 per cent are located in
places with a population of 500,000 or more. Relatively many more
nonmember banks than member banks are located in the small
towns and cities.

BANKING STRUCTURE OF UNITED STATES

109

There is a wide range in the rates of bank earnings on assets and
on invested capital. In 1939 net current earnings of insured com
mercial banks amounted to 75 cents per $100 of assets and to $7.00
per $100 of capital accounts. Net profits were approximately $6.00
per $100 of capital accounts. The most common rate of net current
earnings per $100 of capital accounts was between $5 and $10.
Rates of earnings on assets are considerably lower at large banks
than at small banks. In relation to capital accounts, however, net
earnings of the larger banks are not much below those of the smaller
banks.
To provide interregional banking services banks have extensive
correspondent relationships. Banks generally maintain substantial
balances with correspondent banks in regional trade centers and
leading financial centers. These city correspondents perform a
variety of services for out-of-town banks. Many banks are asso
ciated with one another through local clearing houses, the primary
function of which is the exchange of checks among the participating
banks. Banks are also associated with one another through member
ship in national, regional, and State bankers associations.

B R A N C H , C H A IN , A N D G ROU P B A N K IN G

Page
I ntro duction ..........................................................................

113

B ranch B a n k in g ................................................................... 113
C h a in B a n k in g ......................................................................

125

G roup B a n k in g .....................................................................

130

Su m m a r y .................................................................................... 138

C. E. Cagle
A ssistant Chief
Division of Examinations

BRANCH, CHAIN, AND GROUP BANKING
About one in nine of the banks in the United States are organiza
tions or parts of organizations that conduct operations in more than
one place of business. They are parts of so-called multiple office
banking systems.
The types of transactions handled by multiple office banks differ
very little from those handled by unit banks. Multiple office banks
are governed by the same general laws that govern other banks but
in most instances are also subject to certain special provisions of
law. One of the principal factors that differentiates multiple office
banks from unit banks is the maintenance and operation of a number
of banking offices under common ownership or direction.
There are three types of multiple office banking, usually referred
to as branch, chain, and group banking. These are described sepa
rately in the following pages. No attempt is made to discuss the
various controversial issues that surround this subject or to appraise
the advantages and disadvantages, or the merits and demerits, of
each type. Instead an effort is made to present briefly pertinent facts
concerning the legal status, the development over a period of years,
and the present position in our banking structure of each type of
multiple office banking.
BRANCH BANKING

Branch banking is a type of multiple office banking under which
a bank as a single legal entity operates more than one banking office.
If a bank operates a single branch office, irrespective of size, it is
included in the statistics for branch banking. Slightly more than
three-fourths of the banks in the United States that operate
branches have only one or two branches each and in many cases these
are situated in the same or nearby towns. They are often erroneously
referred to as branch banking systems but they are in no sense real
branch banking systems, certainly not as that term is used in

113

114

BANKING STUDIES

reference to branch banking in Canada and certain European
countries.
The branch banking form of organization occupied a relatively
important position in the early years of banking in the United
States. However, it failed to maintain a definite place for itself in
the banking structure, particularly toward the end of the nineteenth
century, when the number of unit banks increased greatly. In fact,
in some instances opposition to branch banking crystallized into
restraining legislation or adverse interpretation of existing banking
laws. Since the beginning of the present century, however, notably
during the 1920’s, there has been considerable growth in the number
of branches. Significant changes in banking laws have made this
growth possible.
Legal Status of Branch Banking. The right of a bank to have
more than one place of business is subject to many restrictions under
Federal and State laws. Federal law concerning branch banking
defers to State law in some important respects but is more restrictive
in others. The present situation is the result of repeated attempts
by authorities to eliminate, and no doubt in some cases to retain or
acquire, the competitive advantages accruing to institutions operat
ing under different banking conditions and different banking laws
within the same State.
State Laws. From practically the beginning of banking in the
United States, occasional mention of branch banking is found in
State laws, but since 1900 the amount of legislation on the subject
has greatly increased. At the present time, thirty-five States and
the District of Columbia specifically authorize branch banking and
thirteen other States prohibit it or have no permissive statutes.
Variations in State laws respecting branch banking are so numer
ous that generalizations concerning them are inadequate. The
accompanying map shows the maximum areas within which branch
systems may operate under the statutes of the respective States.
Of the thirty-five States now authorizing branch banking under
widely varying circumstances, eighteen permit the establishment
of branch offices throughout the State, nine beyond the lines of the
head-office county but not throughout the State, six only within
the county in which the head office is located, and two only within
the head-office city.

BRANCH, CHAIN, AND GROUP BANKING

115

Other points of variation in State laws arise from attempts to
consider the relation of branches to the needs of a community for
banking services. These are embodied in conditions and limitations
with reference to the population of the head-office city and branch
towns and with reference to the existence of other banking institu
tions in the community to be served by a proposed branch.
There are also many variations in State laws with respect to
minimum capital requirements, particularly since these requireM

a x im u m

A reas

for

O p e r a t io n

A ugust

B ranches

in t h e

V a r io u s S t a t e s

15, 1939a

STATEWIDE

a No significant changes have been noted since the date this map was prepared.
For details, all of which could not be shown on this map, see Federal Reserve Bulletin
for October 1939, pp. 851-70.

ments are usually related to the population and geographic factors
referred to above. In most of the State laws that authorize branches,
the minimum capital required for their establishment outside
the head-office city is less than that required for national or State
member banks under the provisions of Federal statutes.1 This
fact, together with different definitions of the word “ branch,” has
1 The laws of Alabama, Connecticut, and Idaho are exceptions.

116

BANKING STUDIES

had an important bearing upon membership in the Federal Reserve
System. Some States authorize “ additional offices,” “ stations,”
“ agencies,” etc., as distinguished from full-power branches, and
some impose limitations and restrictions upon the functions per
formed at branches, offices, and agencies. Under Federal law
“ branches” only are authorized and the term is broadly defined and
specifically includes any branch place of business “ at which deposits
are received, or checks paid, or money lent.”
Federal Laws. Although the Federal charters of the first and the
second Bank of the United States provided for the operation of
branches, the National Bank Act passed in 1863 contained no
specific mention of branch banking. An amendment in 1865, how
ever, providing for the conversion of State banks into national
banks, permitted converted banks to retain previously established
branches under certain conditions. With this exception, for more
than half a century the act was construed to prohibit national banks
from having branches.
The Federal Reserve Act of 1913 extended the privilege of mem
bership in the System to State banks without prohibiting them
from operating branches. However, it did not accord national banks,
for which membership was compulsory, the right to establish
branches. A policy promulgated by the Federal Reserve Board in
1915 and formulated into a regulation in 1924 narrowed the differ
ential to the extent that State member banks were required to
obtain the Board’s approval before establishing additional branches.
Moreover, in 1922 the Comptroller of the Currency, by administra
tive interpretation of the general laws of the United States, departed
from precedent and permitted national banks to establish additional
offices, or branches presumably with limited powers, in head-office
cities in States where State banks were permitted to operate
branches.
The McFadden Act of 1927 contained specific provisions con
cerning branches which were applicable to both State member and
national banks. It permitted State banks which were members of
the Federal Reserve System, or which subsequently became mem
bers of the Federal Reserve System under their own charters or by
conversion into national institutions, to retain all branches legally

BRANCH, CHAIN, AND GROUP BANKING

117

established prior to the date of approval of the act, regardless of
location, but forbade them to establish any new branches outside
the corporate limits of their head-office cities. It specifically author
ized national banks to retain branches established prior to the date
of the act and to establish new branches in their head-office cities
where State banks in the same location were permitted to do so
under State law. In this way, requirements concerning branches of
national and State member banks were brought closer together.
The Banking Act of 1933 amended the Federal Reserve Act so
as to empower national and State member banks to establish
branches outside of their head-office cities where permitted by the
laws of the State in which the banks operated. This deference to
the provisions of State laws defining the areas in which branches
might be established in effect left the further development or restric
tion of branch banking to the initiative of the several States.
However, because of the minimum capital requirements prescribed
by the act for national and State member banks, which are con
siderably larger than corresponding requirements for nonmember
banks in many States, many national and State member banks have
been practically precluded, and others have been inclined to re
frain, from establishing branches outside of their head-office cities
even though authorized to do so.
When permanent insurance of bank deposits was provided by
the Banking Act of 1935, Federal control over branch banking
was further extended. Although the act contained no prohibitions
against the retention of all branches established by State nonmem
ber banks prior to admission to insurance, it provided that such
banks (with the exception of those located in the District of Colum
bia) must obtain the written consent of the Federal Deposit
Insurance Corporation before moving a branch from one location
to another or opening a new one, and set forth certain factors for
consideration by the Corporation in granting or withholding its
consent. It contained no minimum capital requirement for each
branch such as is prescribed in the law with respect to branches of
national and State member banks. The establishment of branches
by noninsured State banks is still under the exclusive jurisdiction
of the respective States.

118

BANKING STUDIES

Development of Branch Banking. Changes in Federal and State
laws have been accompanied by changes in both the number
of banks operating branches and the number of branches operated.
Most of these changes have occurred since the beginning of the
present century. The accompanying chart shows this development
as well as the distribution between national and State banks. The
number of banks operating branches has increased from 87 in 1900
to 934 at the end of 1939, and the number of branches has increased
from 119 to 3,491.
B an ks O pe ra tin g B ranches an d T h e ir B ranch es *

a For data, see Table 12, p. 428.

In 1921 there were over six times as many banks operating
branches, and over twelve times as many branches, as there were in
1900, and practically all of the increase was accounted for by State
banks. During this period the national banking laws were inter
preted to prohibit branch banking while the laws of several States
permitted it. During the years 1922-1928 the number of banks
operating branches continued to increase, rising from 547 to 774,
or by 227. National banks accounted for almost two-thirds of this
growth. The number of branches more than doubled, this increase
being almost equally divided between national and State banks.

BRANCH, CHAIN, AND GROUP BANKING

119

The change in policy of the Comptroller of the Currency— that is,
his refusal to continue to interpret the laws so as to deny national
banks the right to establish limited power branches in head-office
cities in States with laws permitting State banks to operate branches
— and the McFadden Act of 1927 were dominant factors in this
development.
In the years 1929-1933 the aggregate number of banks operating
branches declined appreciably for the first time since 1900. The
bulk of this decline was accounted for by State banks, which had
shown small declines in 1925 and in 1927. Events culminating in
the banking holiday of 1933 seriously affected the banking business,
causing widespread failures among various types of banks. After
1933 the upward trend in the number of banks operating branches
was renewed. Since 1937 the rate of increase has been only slight.
Both State and national banks have participated in this growth.
Although the increase in the number of branches operated by
national banks has exceeded the increase of State bank branches
during the period since 1933, the increase in the number of banks
operating branches has been much greater for State banks than for
national banks. This is due in large measure to the establishment of
limited power branches, or agencies, by State banks, mostly in
Iowa, Wisconsin, North Carolina, and a very few other States.
The location of branches in relation to the head office of the
operating bank has received much consideration in the formulation
and administration of State laws relating to banking. All branches
fall into two general classes; that is, branches located within the
corporate limits of the city or town in which the head office of the
operating bank is located (head-office city) and branches located
in other places (outside the head-office city).
As shown in the chart on page 120, head-office city branches of
State and national banks combined steadily increased in number from
1900 until about the end of 1930, but since that time have decreased
in the aggregate. This decrease was most noticeable in the case of
State institutions, particularly in 1932 and 1933. At the end of 1939
there were 1,623 head-office city branches. Over 1,100 of these were
operated by banks which had no outside head-office city branches,
including over 380 branches of New York City banks.

120

BANKING STUDIES

The aggregate number of outside head-office city branches has
steadily increased, except during 1932 and 1933. National banks did
not participate to any appreciable extent in this growth until 1927.
Since then the increase in the number of outside head-office city
branches has been greater for national banks than for State banks,
although State banks still operate the majority of such branches.
In 1937 the number of outside head-office city branches exceeded
for the first time since 1910 the number of head-office city branches.
B r a n c h e s in s id e a n d o u t s id e H e a d - O f f i c e C it y 1
1
NUMBER

NUMBER

a For data, see Table 12, p. 428.

This situation still prevailed at the end of 1939, when there were
1,868 outside head-office city branches. As shown in the accompany
ing chart, this change was due in part to a great decline in headoffice city branches during the depression and a notable increase in
outside head-office city branches after 1933. It will be remembered
that the Banking Act of 1933 permitted national and State member
banks to establish or acquire outside head-office city branches
in States where nonmember banks were permitted by State laws
to do so.
As shown by the chart on page 118, the number of branches has

BRANCH, CHAIN, AND GROUP BANKING

121

usually fluctuated with the number of banks operating branches,
although not in the same proportions. However, the number of
banks operating branches, both national and State, began to decline
in 1929 and continued to do so into 1933, while the aggregate number
of branches continued to increase until 1931. The number of
branches of State banks decreased in 1931 while the number of
branches of national banks did not decrease until 1933. Except for
the years 1931-1933, branch banking in the aggregate has increased.
The ratio of branches to total banking offices has, with one or two
exceptions, continued to increase steadily during the last two
decades. Although the conversion of unit banks into branches
accounts for over 37 per cent of all branches in existence at the end
of 1939, and for more than 46 per cent of all outside head-office city
branches, the increase in branch banking has had no clearly defined
relationship to the numerical increase or decrease of unit banks.
Present Extent and Distribution of Branch Banking. At the end
of 1939 there were 934 banks that operated branches, about 6.5
per cent of all commercial banks in the United States. They had
deposits aggregating 30.8 billion dollars or about 54.1 per cent of
all commercial bank deposits. With their 3,491 branches, they
accounted for 24.7 per cent of the 17,911 commercial banking
offices in the United States.
These banks operate branches in forty States and the District of
Columbia. As shown by the upper map on page 123, the number of
branch banking offices is much greater in certain States along the
Eastern Seaboard, around the Great Lakes, and in the Pacific
Coast States than in many other States of the Union. California
and New York together account for about 43 per cent of all
branches. In Iowa, Wisconsin, and North Carolina “ offices,”
“ stations,” or “ agencies” predominate. These States restrict such
offices to communities having no banks and in certain respects limit
the type of transactions they may conduct.
By reference to the lower map on page 123 it may be noted that
branches constitute a larger percentage of all banking offices in
the Pacific Coast and several Eastern States than in most of the
Central and Rocky Mountain States. Branches constitute more
than half of all of the banking offices in three States and the District

122

BANKING STUDIES

of Columbia, and between one-fourth and one-half in eleven other
States. There are nineteen States in which branches account for
less than 10 per cent of all banking offices, and eight of these States
have no branches at all. Although there are but very few branches in
some States, they constitute a high percentage of all banking offices
in those States. This, of course, is due to the small number of banks
in those States, such as Arizona, Nevada, and Idaho.
The relative importance of branches is greatest in States where
the laws are least restrictive. Some important restrictions relate to
the extent of the area in which branches may be operated, some to
minimum capital (especially the Federal laws affecting national and
State member banks), some to the existence of other banking
facilities, and some to population. California, New York, Connecti
cut, and Virginia furnish interesting illustrations.
Banks operating branches, like other commercial banks, are of
several different kinds. When grouped within the major classes of
banks, together with their branches and deposits, they show the
following distribution:
Banks
Operating
Branches

National...................
State member...........
Insured nonmember.
Noninsured...............
T otal................

195
165
549
25
934

Branches
Outside
Head-Office
City

In HeadOffice City

681
771
165
6
1,623

837
231
762
38
1,868

Deposits
(In millions
of dollars)

14,924
13,869
1,845
175
30,813

Over 20 per cent of all banks with branches are national banks and
they operate about 44 per cent of all branches. State member banks %
account for only 18 per cent of the banks with branches and 29 per
cent of the branches, a large proportion of the latter being located
in head-office cities. Insured nonmember banks comprise nearly 60
per cent of all banks with branches but operate only 26 per cent of
all branches. The average insured nonmember bank operates fewer
branches than the average State member bank, but over 80 per cent
of these branches are outside the head-office city. Noninsured banks
comprise less than 3 per cent of all banks with branches and
operate a little over one per cent of all branches.

BRANCH, CHAIN, AND GROUP BANKING
G e o g r a p h ic D

is t r ib u t io n o f

B r a n c h B a n k in g , D

ecem ber

1. Number of Head Offices and Branches

2. Branches as Percentages of All Banking Offices

a For data, see Table 13, p. 429.

123

31, 1939a

124

BANKING STUDIES

Almost half of the deposits in banks maintaining branches are
held by national banks, and most of the remainder by State member
banks. Insured nonmember banks have less than 6 per cent of the
aggregate deposits of all branch operating banks while noninsured
banks account for only a fraction of one per cent.
The distribution of banks according to the number of branches
each operates shows the number of branches operated and the
deposits held to be as follows:
Banks
Operating
Branches

1 branch...............................
2 branches.............................
3-10 branches.......................
11-20 branches.....................
21-50 branches.....................
51-100 branches....................
Over 100 branches................
Total..............................

557
152
173
31
13
6
2
934

Number
of
Branches

557
304
804
433
401
382
610
3^91

Deposits
(In millions
of dollars)

3,600
5,473
6,267
3,783
5,432
4,198
2,060
3^813

Of all banks with branches, about 76 per cent operate only one
or two branches each. These banks and their branches differ but
little from unit or single-office banks. They do not constitute branch
banking systems in the usual sense and can not properly be taken
as evidence of a greater development of such systems than has
actually occurred. Banks with one or two branches have about 25
per cent of the branches and almost 30 per cent of the deposits
included in all branch banking statistics. Most of these banks are
small, only twenty-three having deposits of more than 50 million
dollars each. The other extreme of branch banking is represented by
the eight banks which operate more than fifty branches each and
have slightly more than 20 per cent of the total deposits of all banks
with branches. The intermediate groups include 217 banks that
account for about 47 per cent of the branches and 50 per cent of
the deposits.
Both in terms of amount of deposits held and size of community
served, a large majority of banks with branches are small.2 Only
about 28 per cent have deposits in excess of 10 million dollars each
* For details, see Table 14, p. 430.

BRANCH, CHAIN, AND GROUP BANKING

125

and 36 per cent have their head offices in cities of 50,000 or more
inhabitants. As would be expected, these larger banks account for
over 88 per cent of all head-office city branches. Outside headoffice city branches are a little more evenly distributed between
large and small banks, but about 56 per cent of them are operated
by 261 banks each of which has more than 10 million dollars in
deposits. Over 87 per cent of all outside head-office city branches
are situated in communities with populations of less than 50,000
and over 76 per cent in communities with populations of less than
10,000; in many cases these branches constitute the only banking
facilities available.
From the foregoing very brief description, it is apparent that
banks with branches differ among themselves as do unit or single
office banks. Any attempt at full description would involve many
details and complexities with respect to both the legal and ad
ministrative phases.
CHAIN BANKING

Chain banking is a type of multiple office banking through which
the operations or policies of a number of independently incorporated
banks are controlled by one or more individuals. This control may
be accomplished through stock ownership, common directors, or
in any other manner permitted by law. Chain banking differs from
branch banking in two important respects; namely, legal form and
type of control. Each bank in a chain is a separate legal entity and
has its own stockholders and directors. Branches, on the other
hand, are merely offices of the institution to which they belong.
Chain and branch banking are not mutually exclusive. Of the 934
banks described in the preceding section, thirty are in chains and
operate seventy-five branches. Since only a small proportion of the
banks and deposits of the country are included in chain banking,
its importance is largely structural.
Legal Status. The manner in which ownership or control is exer
cised in chain banking has made it less susceptible to regulations
and restrictions than branch or group banking.
State Laws. Only one State (Mississippi) definitely prohibits chain
banking. The laws of five other States contain provisions that may

126

BANKING STUDIES

be regarded as regulating or restricting it, or at least certain promo
tional schemes, in varying degrees, but they do not appear definitely
to prohibit it.3 The other forty-two States (and the District of
Columbia) have no laws pertaining directly to it. Except in a limited
number of cases, chain banking is much less subject to State regula
tion than branch banking.
Federal Laws. The only Federal statute which might be regarded
as restricting or affecting chain banking as such is the Clayton
Antitrust Act. It affects chain banking only to the extent that the
banks involved might be regarded as linked together through inter
locking directors, officers, or employees and then only if one of the
banks is a member of the Federal Reserve System. Many insured
and noninsured banks, which are not affected, are larger and more
important than many member banks which are affected by the act.
An amendment contained in the Banking Act of 1935 removed any
restrictions with respect to interlocking directorates of banks not
located in the same, adjacent, or contiguous cities or towns. The
act is not applicable in cases where a majority of the stock of the
banks in question is owned by the same shareholders.
Development of Chain Banking. Information concerning the
development of chain banking is fragmentary. In the absence of
important regulatory measures, there appeared to be no official
necessity for collecting statistics. It is apparent, however, that the
early development of chain banking was mostly in agricultural
regions. About 1884, the first reported chain originated in North
Dakota and other systems later sprang up in the Northwest and in
Oklahoma, Texas, Arkansas, and Tennessee. Some of the earliest
banking services in several Pacific Coast and Mountain States were
rendered by chain banks. In California particularly there was
extensive development until about 1920, when branch banking
became more prominent. The usual method of control over a chain
in these States was for one individual or small group to acquire a
majority, or at least a substantial portion, of the stock of newly
organized banks.
The chain having the largest number of banks on record originated
3Arkansas, Kansas, Kentucky, Pennsylvania, and West Virginia.

BRANCH, CHAIN, AND GROUP BANKING

127

in Georgia in the 1890’s and continued until 1926. At its peak this
system is said to have included about 200 banks, most of which were
small. A majority of these banks were located within the State, but
a number were in Florida and a few as far north as New York and
New Jersey. The control was partly through stock ownership but
mostly through special service contracts between the chain organizer
and the several banks.
Although banks belonging to chains have been located largely in
agricultural areas, some urban chains have been established in States
where branch banking was prohibited. Some of the outstanding
cases of urban chain banking occurred in Chicago and one large
chain, effected through interlocking directorates and stock owner
ship, was reported in New York City. These chains are no longer in
existence, and there was no extensive development of this type of
banking in other large cities.
From time to time, particularly during the 1920’s, banks in
chains were reported to have been discontinued or converted into
group or branch banking systems. During the past decade there has
been a marked decrease in the number of chain systems and the
number of banks belonging to chains.
Present Extent and Distribution of Chain Banking. In many
cases it is difficult to determine whether a given bank is in a chain
system, but on the basis of information carefully considered by the
Federal Reserve Banks and their branches there were ninety-six
chain systems in the United States as of December 31, 1939,
with deposits totalling 883 million dollars.
Most chain systems operate within a small area and at only a few
places within the area. As many as seventy-eight of the ninety-six
systems now in existence do not extend beyond the boundaries of
one State. Twelve have banks in two States and only six operate in
three or four States. The twelve chains that operate in two States
have but one bank each in the second State, and in five of these
chains the bank in the second State is near the State line and close
to one or more of the other banks in the chain. A large portion of the
chains (eighty-three of ninety-six) have banks in no more than five
towns, twelve more in from six to twelve towns, and only one in as
many as thirty-five towns.

128

BANKING STUDIES

Generally speaking, chain systems are built around a key bank
that is considerably larger than the other banks in the chain. In
fifty-five of the ninety-six systems the principal bank has more
deposits than all of the other banks.
The greatest concentration of chain banking is in a few Middle
Western States, particularly where branch banking is prohibited or
restricted. Chain banks were never numerous in States where the
laws were favorable to branch banking and in other States were
often converted into branches after the relaxation of legal deterrents
to branch banking. As may be noted from the maps on page 129, there
are no chain banking offices in nineteen States or the District of
Columbia, and only a scattering in the States outside the region
mentioned above.
When compared with the banking system as a whole, banking
offices operating within chains are of relatively minor importance.
As may be seen from the lower map, they account for 10 per cent or
more of all banking offices in only five States (Nevada, Idaho, North
Dakota, Minnesota, and Florida), Nevada leading with 24 per cent.
As in the case of branch banking, numerical and relative importance
are not necessarily synonymous. In Nevada, for instance, five chain
banking offices comprise 24 per cent of all banking offices.
Forty per cent of all chain banks, with over 66 per cent of the
deposits of chain banks, are national banks, and 46 per cent of the
banks and almost 22 per cent of their deposits are in the insured
nonmember bank classification. State member and noninsured
banks are of negligible importance to chain banking.4
Both in terms of amount of deposits held and size of community
served, the average chain bank is very small. This is shown by the
fact that 66 per cent of all chain banks have deposits of one million
dollars or less, and only 4 per cent have more than 10 million dollars
each. Likewise, over 67 per cent of all chain banks operate in
communities having fewer than 5,000 inhabitants. Even in the West
North Central States, where there is the greatest concentration of
chain banking, average deposits are small.
It would seem that, whatever the angle of approach, chain bank4For data, See Table 16, p. 432.

BRANCH. CHAIN, AND GROUP BANKING
G e o g r a p h ic D

i s t r ib u t io n o f

C h a in B a n k in g , D

ecem ber

1. Number of Chain Banking Offices

* For data, see Table 15, p. 431.

129

31, 1939“

130

BANKING STUDIES

ing was more important in the past than it is now. Part of its field of
operation has been taken over by branch banking and part has been
incorporated within group banking.
GROUP BANKING

Prior to the late 1920’s no distinction was made between chain
and group banking. The two terms are still often used interchange
ably. In some cases at present it is difficult to determine definitely
that a bank is a group bank or a chain bank. It was the perceptible
increase in the controlling ownership of banks by corporations
that led to differentiation between these two types of multiple office
banking. Corporate as contrasted with personal control is accepted
as the chief point of difference.
Group banking is regarded as that form of multiple office banking
in which independently incorporated banks are controlled directly
or indirectly by a corporation, business trust, association, or similar
organization. The term “ holding company” is often applied to the
controlling company. In some cases the key bank in a group is the
holding company, either directly or through trustees or a separate
nonbanking corporation set up for the purpose. In other cases a
nonbanking corporation or association is the holding company and
controls the key bank as well as the smaller banks in the group.6
Stock ownership is the usual but not necessarily the only form of
control. Included in some of the group systems are banks that
operate for all practical purposes as parts of the group, although
only associated with it through minority stock ownership or com
mon directors with other organizations in the group. Branches are
found within group systems as within chains.
Legal Status. The fact that control of group banking is in the
hands of organizations rather than individuals makes it subject
to some regulations and restrictions that have not been made
applicable to chain banking.
State Laws. By far the majority of the States have no laws which
prohibit, restrict, or regulate group banking through holding com8This statement is concerned only with holding companies that control banks. No
account is taken of companies that confine their control to nonbanking corporations.

BRANCH, CHAIN, AND GROUP BANKING

131

panies that are not banks. However, laws pertaining to the holding
of bank stocks by various classes of banks are in force in most of the
States and impose varying degrees of restrictions.
Mississippi is the only State that prohibits group banking in
specific language, and eleven other States have laws apparently
designed to restrict or discourage it.6 This is done by limiting the
proportion of the stock in any one bank that may be held by a
company, placing restrictions on the business transactions between
the company and the banks in which it holds stock, providing for
examination and supervision of the group, or in some other way.
The banking laws of thirty-six States have no specific provisions
relating to holding companies other than banks.
State laws pertaining to ownership by banks of the stock of other
banks are far from uniform. The purchase of SO per cent or more of
the stock of any other bank is illegal for commercial banks in thirtythree States and the District of Columbia, for trust companies in
twenty-five States and the District, and for savings banks in thirtythree States and the District. This does not necessarily mean that
bank stocks can not be acquired in settlement of outstanding debts.
Most, if not all, of the States permit such transactions but usually
require that stocks so obtained be disposed of within limited periods.
A few States place no specific restriction upon the acquisition of
bank stocks by any class of banks.
Federal Laws. Provisions for the examination and supervision of
group banking, as such, were enacted in the Banking Act of 1933.
They apply only to holding companies which control banks that are
members of the Federal Reserve System. Such holding companies,
which may be either banking or nonbanking organizations, are
termed “ holding company affiliates” and, as defined in the law, may
include not only corporations but business trusts, associations, and
similar organizations.
For several years prior to 1924, the Federal Reserve Board had
recognized the trend toward multiple office banking. As a result,
in cases where the facts and circumstances seemed to warrant, the
Board had required State banks, before admission to membership
8Arkansas, Indiana, Kansas, Kentucky, Minnesota, New Jersey, Oregon, Penn
sylvania, Washington, West Virginia, and Wisconsin.

132

BANKING STUDIES

in the Federal Reserve System, to accept a condition of membership
designed to prevent such banks from acquiring, either directly or
through affiliated corporations or otherwise, more than 20 per cent
of the capital stock of any other bank. This condition was in
corporated in Regulation H as a general condition of membership
in 1924 and remained in effect until 1928, when it was revised to
prevent such banks from acquiring any interest in any other bank
or trust company through the purchase of stock. This condition
was made unnecessary by provisions of the Banking Act of 1933
which prohibited member banks from purchasing corporate stocks.
The Board had no means other than conditions of membership
through which to control the acquisition of bank stocks by corpora
tions. Early in January 1926, in a letter to Chairman McFadden of
the House Committee on Banking and Currency, the Board sug
gested an amendment to existing banking laws which would require
that detailed information regarding the condition and operation of
institutions affiliated with member banks be furnished to the
Board by means of simultaneous examination reports or such other
means as might be deemed satisfactory by the Federal Reserve
Board. This suggestion was not incorporated in the legislation
which resulted, the McFadden Act of 1927, although the act con
tained provisions liberalizing branch banking to a certain extent.
The rapid rise of group banking after 1926 resulted in several
Congressional investigations and finally the incorporation in the
Banking Act of 1933 of provisions for the regulation of group
banking which affected the control of banks belonging to the
Federal Reserve System. These provisions require holding com
pany affiliates to obtain permits before voting the stock of member
banks within their control.7
In order to obtain a voting permit, a holding company affiliate
must make application to the Board of Governors of the Federal
Reserve System. In acting on the application, the Board is required
7 In the Banking Act of 1935, there were excepted from these provisions all cor
porations whose stock is owned by the Federal Government and also all organizations
determined by the Board of Governors of the Federal Reserve System not to be en
gaged, directly or indirectly, in the business of holding the stock of, or managing or
controlling, banking organizations.

BRANCH, CHAIN, AND GROUP BANKING

133

to consider the financial condition of the applicant, the general
character of its management, and the probable effect of the granting
of the voting permit upon the affairs of the member bank. In order
to obtain a permit, the applicant must execute a standard form of
application that contains a number of conditions and agreements
designed to supplement the provisions of the statutes in several
important respects. It must possess or acquire under certain condi
tions specified reserves of marketable assets bearing a specified ratio
to all the bank stocks controlled. It must agree to examination of
itself and of each of its controlled banks and other organizations and
to the publication of statements of condition of such banks, if
required. It must also agree to terminate connections with any
securities company and to declare dividends only out of actual net
earnings. In addition, it must agree to standard conditions pre
scribed by the Board and to such special conditions as are deemed
necessary. The purpose of all conditions is that the holding company
and its subsidiary banks and other organizations shall maintain a
sound financial condition and proper operating principles, including
those involving inter-company transactions and relationships.
The most effective regulatory provisions in the statutes with
respect to bank holding companies are applicable only to such hold
ing companies as control member banks and voluntarily elect to
file applications for voting permits and accept them under the
conditions and regulations prescribed.
There are, however, certain provisions of law that affect holding
company affiliates that do not apply for or obtain voting permits.
The Banking Act of 1933 provides for submission and publication
of reports of affiliates of member banks, sets up specific limits and
collateral requirements for member bank loans to affiliates, and
subjects the affiliates to examination. If a holding company happens
to be a subsidiary of a member bank, or is otherwise an “ affiliate”
of a member bank, it is subject to these requirements.8 Moreover,
8 The Banking Act of 1933 distinguishes between “ holding company affiliate”
and “ affiliate.” By definition, the former is a holding company that has a controlling
interest in a member bank and the latter includes a holding company in which a
member bank, or the controlling stockholders thereof, have a controlling interest.
This is a somewhat simplified distinction but it is sufficient for the purposes of this
paper.

134

BANKING STUDIES

if not technically an “ affiliate” but within the definition “ holding
company affiliate,” it is subject to all the requirements except
examination.
There is one other way in which Federal law indirectly affects
group banking. Section 5136 of the Revised Statutes prohibits
banks that are members of the Federal Reserve System from
purchasing stock of corporations, including banks. The existence
of this provision of Federal law, however, has not prevented member
banks from legally controlling holding companies. They can do so
through acquiring stock in such companies in the settlement of
outstanding debts, or in other ways, such as retaining stock held
before the prohibitory regulations became applicable. Without
violating this provision of the law, moreover, a few member banks
dominate holding companies through control over their trustees or
management.
Development of Group Banking. As in the case of chain bank
ing, little is known about the early development of group banking.
The ownership of a bank by a nonbanking corporation for the
purpose of facilitating financial transactions or protecting the
deposits of employees and customers is no new phenomenon, having
been known to exist as early as 1892. This type of control bore a
structural resemblance to group banking; but, since it did not repre
sent an effort to develop a group of banks under common manage
ment, it lacked an essential element of the present-day bank
holding company.
A more direct line of descent is from chain banking, itself of
obscure origin. There is record of one instance before 1900 where the
individual organizers of a chain banking system transferred their
holdings to a corporation organized for the purpose of acquiring
and holding bank stocks. This was the forerunner of several similar
cases prior to 1920. The extensive development of group banking did
not occur until 1927, however, and by far the majority of the group
banking systems operating today came into existence during the
years 1927-1930.
The first organized data relating to group banking, although
rough, indicate that at the end of 1931 there were ninety-seven
group banking systems in existence. There were included in these

135

BRANCH, CHAIN, AND GROUP BANKING
G e o g r a p h ic D i s t r ib u t io n

G ro up B a n k in g , D e c e m b e r

31, 1939a

1. Number of Group Banking Offices

O HOLDING COMPANY (NONBANK).
® HOLDING COMPANY (BANK).

2. Group Banking Offices as Percentages of All Banking Offices

a For data, see Table 18, pp. 433-34.

136

BANKING STUDIES

systems 978 banks having 1,219 branches and total loans and
investments of over 8.7 billion dollars. Comparison of these figures
with corresponding data for 1939 indicates that there has been a
marked decline in group banking since 1931. The conversion of
banks within groups into branches has accounted for a considerable
part of the decrease, but mergers, voluntary and involuntary liquida
tion, and sale of the controlling interest in banks have also contrib
uted to the decline.
Present Extent and Distribution of Group Banking. On December
31,1939, there were forty-one group banking systems in the United
States. They included 427 banks (sixty being banks having 869
branches) and nearly 5.4 billion dollars in loans and investments.
The twenty leading groups had all been in existence since 1931
and included 346 banks, 831 branches, and aggregate loans and
investments of over 4.7 billion dollars.
In about 85 per cent of the banks the holding companies own a
majority of the common stock. Because of the existence of preferred
stock in many of the banks, however, actual voting control of such a
large percentage is not owned by the holding company. Further
more, the banks comprising the other 15 per cent included twentysix key banks which alone held well over half of all the deposits and
total loans and investments within group banking systems.®
The geographic distribution of group banks and their branches is
shown on page 135, together with their ratio to total banking offices
in each State. By comparing the accompanying maps with those for
branch and chain banking previously shown, two general conditions
may be noted: (1) group and chain banking both exist in States
where there is no branch banking; (2) group banking is much more
prevalent than chain banking in States where branch banking has
considerable development. In regions like the Pacific States, how
ever, where branch banking is well developed, group banking has
many more branches than banks.
The relative proportion of banking offices within groups is great
est in the Far Western States and in Massachusetts and Rhode
Island. In all of these States, however, a very large portion of these
banking offices are branches of the group banks.
9 For data, see Table 17, p. 433.

137

BRANCH, CHAIN, AND GROUP BANKING

The different group banking systems are of various sizes. Twenty
of the forty-one groups have less than six banks each, while one
has eighty-five banks and another seventy-five. Most of the groups
operate in only one State, although eight have banks in from two to
seven States.10 The principal operating offices of the forty-one groups
are located in eighteen different States while their banks are located
in thirty-one States.
As in the case of the other two types of multiple office banking,
various classes of banks are found within group systems. The follow
ing table shows the number of banks and amount of deposits within
each major bank classification that are accounted for by groups:

Banks

National..................
State member.........
Insured nonmember,
Noninsured.............
Total

248
44
121

_14
427

Deposits
(In millions of
dollars)

5,495
1,348
267
63
7,173

It may be noted that national and State member banks account for
over 68 per cent of all group banks and 95 per cent of their deposits.
Insured nonmember banks comprise over 28 per cent of all group
banks, but they hold only a very small proportion of the deposits.
Noninsured banks are unimportant in terms of both number and
deposits.
When classified by amount of deposits or size of community
served, group banks on the average are larger and are situated in
larger communities than chain banks. Only 32 per cent of the group
banks, as against 66 per cent of the chain banks, have deposits
of one million dollars or less. Only 24 per cent of the group banks,
as compared with 53 per cent of the chain banks, are located
in towns having less than 2,500 inhabitants, although many of their
branches are located in small communities. The corresponding per
centages for cities of 100,000 or more inhabitants are 21 and 7,
respectively.11
On the whole, although there is no great difference between the
10 For data, see Table 19> pp. 434r-35.
11For data, see Tables 16 and 19, pp. 432 and 434-35.

138

BANKING STUDIES

number of systems and banks included within chain and group
banking, respectively, group banking is the more important because
it includes larger banks and more deposits than chain banking.
Also, it includes a great many more branches and hence a larger
proportion of all banking offices.
SUMMARY
The banking system of the United States, although primarily
composed of single-office banks, includes three types of multiple
office banking. Branch banking, the earliest type to appear, accounts
for more banking offices and deposits than either of the two other
types. Except as a special type of banking structure, chain banking
is of but little importance, since it has not developed with, and in
many instances has been replaced by, branch or group banking.
Group banking, the corporate equivalent of chain banking, occupies
an intermediate position. It accounts for an appreciable number of
all multiple banking offices and for no small amount of their depos
its, even though many banks within group banking systems have
been converted into branches.
Branch, chain, and group banking combined account for less
than 12 per cent of the commercial banks in the United States and,
including branches, for about 29 per cent of the banking offices.
The latter percentage is based upon very wide State-to-State varia
tions, as shown by the accompanying map. From SO to 84 per cent
of the banking offices in nine States and the District of Columbia
are in multiple office systems, from 25 to 50 per cent in seventeen
States, and less than 25 per cent in twenty-two States.
The proportion of deposits held in multiple office systems also
varies from State to State. It ranges up to one-third in sixteen
States, and exceeds two-thirds in thirteen States. For the nation
as a whole it amounts to over 59 per cent. If banks having only one
or two branches were omitted, the proportion would be reduced to
43 per cent; or, if all multiple office systems operating in only
one city were omitted, the proportion would be only about 19 per
cent.
The present situation is for the most part the result of events
during the past four decades. The gradual moderation of State and

BRANCH, CHAIN, AND GROUP BANKING

139

Federal restrictions on branch banking has been conducive to
considerable growth, while the depression of the 1930’s gave rise
to a number of branches in areas where banking services had been
curtailed by failures. Chain and group banking, although subject to
very few legal restrictions, are now considerably less important
than they were a decade ago, several systems having been converted
completely into branch systems. Branch banking, the most prevM

u l t ip l e

B a n k i n g O f f ic e s

E a c h St a t e

B a n k i n g O f f ic e s , D e c e m b e r

P ercentages

A ll

31, 1939a

a This map is based upon the data for branch, chain, and group banking given
separately in Tables 13, 15, and 18, pp. 429-34. Duplications arising from the inclusion
of branch systems within chain or group systems have been eliminated, however.

alent type of multiple office banking, is continuing to grow, but
since 1937 at a decreasing rate.
Branch banking and chain or group banking are not mutually
exclusive. There are a few relatively small banks operating branches
in chain systems. Several important group banking systems still in
existence have converted some of their banks into branches of other
banks in the group. This situation naturally raises the question
why these chain and group systems have not been converted entirely
into branch systems. An important factor, especially in the smaller

140

BANKING STUDIES

chains and groups, is the large minimum capital prescribed by law
for the establishment of branches by national and State member
banks, and by nonmember banks in some States. Another important
reason is that under specific provisions of law branches may not be
operated beyond State lines and are limited to smaller areas in
many States.12
Except to the extent that group systems may be prohibited from
doing so by the Board of Governors of the Federal Reserve System
in the discharge of its responsibilities for the administration of the
holding company affiliate law, under existing legislation neither
group nor chain systems are prohibited from taking in banks from
the Atlantic to the Pacific. Although no chain or group system
operates banks from coast to coast, many have banking offices in
several States.
12 There are two exceptions to the first part of this statement. The Bank of Cali
fornia National Association operates three branches outside the State of California,
and the First Camden National Bank and Trust Company operates one outside New
Jersey. In both instances, the branches were acquired before State laws took cognizance
of them and were retained after conversion from State to national charter.

CREDIT AND SAVINGS INSTITUTIONS
OTHER THAN BANKS
Page
I ntro duction ..........................................................................
I nstitutions
L oans

and

A gencies

under

F ederal L a w s . 145

C redit A gencies Operating

w ith in

G overnment U n i t s .........................................................
State C hartered I nstitutions
rated

and

B an k in g

I nstitutions

158

w ith

Sim ilar F u n c t io n s ..........................................................
R elationship

154

U nincorpo

F ir m s ........................................................................

I nfluence

143

F ederal R eserve B a nk s

161

O ther I nstitu tio n s ........................................................

164

Su m m a r y ....................................................................................

165

D a v id M. K e n n e d y

Division of Bank Operations

CREDIT AND SAVINGS INSTITUTIONS
OTHER THAN BANKS
Banking functions—the receipt of deposits and the making of
loans and investments—are performed by many institutions outside
the banking system. Some of these institutions compete for the
same type of loans and investments made by banks, some extend
credit on terms and security that could not be accepted by banks,
some accept deposits or provide savings facilities broadly equivalent
to the savings facilities of banks, and some render services to
banks as well as to the public. While the problems of banking
legislation, bank supervision, and monetary policy that are of
immediate concern lie within the field of money and banking, these
other institutions that are not banks and yet bear directly upon
the business of banks and affect their supervision must be taken
into account as a part of the banking picture. Because of the large
numbers and classes of institutions outside the banking system
performing one or more of the traditional banking functions and
the various conditions under which they operate, it will not be
practicable in the space allotted to discuss their operations in detail.
The purpose here will be to enumerate the principal institutions
concerned, describe them briefly in order to differentiate them
from banks, and at the same time show how they affect banking
and bank supervision.
The credit and savings institutions to be considered in this paper
are not chartered as banks under State or Federal law and are not
subject to the supervision of State or Federal banking authorities.
They operate under general incorporation laws of the several States,
as unincorporated or private firms, or as part of Federal agencies
that have instituted credit or savings services—generally as part of
broader programs. They are listed in the accompanying chart under
two headings, those operating under Federal law and those operat-

143

C RED IT AND SAVINGS INSTITUTIONS OTHER TH AN BANKS

CREDIT AND SAVINGS INSTITUTIONS

145

ing under State law. The activities of all of the former are carried
on within some unit of the Federal Government, most of them being
under the jurisdiction of the Department of Agriculture or the
Federal Loan Agency. The latter are more or less familiar institu
tions operated by individuals or firms under the general laws of the
several States.
INSTITUTIONS AND AGENCIES UNDER FEDERAL LAWS

The organizations performing banking functions under Federal
laws other than banking laws are numerous. Many of them operate
over the entire country. Their operations bulk large in dollar vol
ume and touch nearly every phase of banking. With few important
exceptions, most of the Government sponsored institutions in this
field were created to render emergency service in the face of the
severe economic depression of the 1930’s. The exceptions are the
Postal Savings System, the Federal Land Banks, and the Federal
Intermediate Credit Banks, which were in existence many years
before. Some of the agencies remain “ temporary,” their life being
extended from time to time by Congressional action, but many
others have been given more or less permanent status. Because
this development of Government credit agencies performing bank
ing functions is a comparatively recent one, the place of many
of the institutions in respect to banking and credit and the ultimate
effect of their operations upon commercial banking are not yet
clearly determined.
Credit Agencies under the Supervision of the Department of
Agriculture. The Department of Agriculture has general super
vision of the Farm Credit Administration, the Farm Security
Administration, the Commodity Credit Corporation, and the Rural
Electrification Administration. All of these Government units
extend credit in one form or another.
Farm Credit Administration. The Farm Credit Administration
has under its supervision a nation-wide system of farm mortgage
and agricultural credit units, in part permanent and in part of an
emergency nature. The first of the farm credit agencies, the Federal
Land Banks, were created in 1917. These institutions were to fur
nish long-term agricultural credit at lower rates and more reasonable

146

BANKING STUDIES

terms than had previously prevailed. In 1923, the Federal Inter
mediate Credit Banks were created to provide a reservoir of inter
mediate and short-term credit for agricultural purposes, including
the production and marketing of agricultural products. In 1933 the
farm loan system was reorganized and expanded into the Farm
Credit Administration. The Federal Land Banks and Federal
Intermediate Credit Banks were granted additional powers and in
January 1934 the Federal Farm Mortgage Corporation was organ
ized. A system of production credit corporations and cooperative
banks also was established. In July 1939, under the President’s
reorganization plan, the Farm Credit Administration was placed
under the general supervision of the Secretary of Agriculture.
The following is a list of the agencies included under the Farm
Credit Administration and the number in existence at the end of
1939
Federal Land Banks........................................................................
12
Federal Farm Mortgage Corporation...........................................
1
Federal Intermediate Credit Banks..............................................
12
Production Credit Corporations........ ...........................................
12
District Banks for Cooperatives....................................................
12
Central Bank for Cooperatives (Washington, D . C . ) ................
1
National farm loan associations.................................................... 3,722
Production credit associations................................... ................
528
Federal credit unions...................................................................... 3,197

For the purpose of making agricultural credit available to farmers
through agencies supervised by the Farm Credit Administration,
the country is divided into twelve farm credit districts. There is a
Federal Land Bank, a Federal Intermediate Credit Bank, a Pro
duction Credit Corporation, and a Bank for Cooperatives in each
district. In each district there are also national farm loan associa
tions and production credit associations, all chartered by the Farm
Credit Administration.
1 Regional agricultural credit corporations and Joint Stock Land Banks are not
included because they are in liquidation. The Farm Credit Administration also handles
the emergency crop, feed, and drought loans for which Congress has made direct
appropriations. These loans are made through eleven regional offices, eight of which
are located in cities where other district units of the Farm Credit Administration are
located.

CREDIT AND SAVINGS INSTITUTIONS

147

Farmers in each farm credit district have access to farm mortgage
loans, ordinarily through their local national farm loan associations.
These associations handle both Federal Land Bank loans and socalled Land Bank Commissioner or Federal Farm Mortgage Cor
poration loans. Farmers obtain loans for crop and livestock
production from their local production credit associations, which
are supervised by the Production Credit Corporation of the district.
Farmers’ marketing and purchasing cooperatives may borrow
money from the District Bank for Cooperatives. A Central Bank
for Cooperatives extending credit to large regional or national
cooperatives is located in Washington.
The Farm Credit Administration also charters and supervises
Federal credit unions. Credit unions are institutions owned coopera
tively by a group of persons bound together by common business
or fraternal interests. They are organized to make small and
moderate size loans to their members out of funds derived from
the sale of shares to members. Shares of credit unions are analogous
in some respects to savings deposits in banks. They are as a practical
matter redeemable at the credit union with little or no notice.
Farm Security Administration. The Farm Security Administra
tion, which is distinct from the Farm Credit Administration but also
under the Department of Agriculture, was created in 1937 as the
successor to the Resettlement Administration. It makes long-term
loans to farm tenants, farm laborers, and share-croppers for the
purpose of enabling them to become farm owners; rehabilitation
loans to destitute and low-income farm families for the purchase of
farm supplies and equipment, for refinancing indebtedness, and for
family subsistence; and loans to complete the suburban and rural
resettlement projects begun by the Resettlement Administration.
Commodity Credit Corporation. The Commodity Credit Corpora
tion, also under the Department of Agriculture, was organized in
1933 primarily to make loans to producers of agricultural commodi
ties for the purpose of financing the carrying and orderly marketing
of these commodities. Loans by the Corporation are usually made
pursuant to arrangements whereby banks and other lending agencies
finance the producers in the first instance. The Corporation agrees
with the lending agencies to purchase the loans from them if

148

BANKING STUDIES

tendered on or before a fixed date. Where local credit facilities are
unavailable for any reason, the Corporation makes direct loans.
An important feature of the loans made by the Commodity Credit
Corporation is that the Corporation places a fixed collateral value
on the commodities pledged for the loans and waives recourse
against the borrowers in case later sale of the collateral nets less
than the amount of the loans. This collateral value is usually higher
than the current market price and is fixed with a view to enabling
producers to avoid selling excessive crops on the market at depressed
price levels. Since the loan is made without recourse, in effect the
producer sells the commodity to the Commodity Credit Corpora
tion but retains an option to “ repurchase” upon payment of the
note, carrying charges, and accrued interest. Most of the loans made
by the Commodity Credit Corporation have been on cotton, corn,
and wheat.
Rural Electrification Administration. The Rural Electrification
Administration, created in 1936 and under the Department of
Agriculture since July 1939, is authorized to make loans to facilitate
the introduction of electrical services to rural areas.2 For this pur
pose it may lend up to the entire cost of building rural electrification
distribution systems, including generator and transmission equip
ment. The Administration is also authorized to finance the wiring
of dwellings and other buildings in rural areas, and the acquisition
and installation of electrical and plumbing equipment.
Credit Agencies under the Supervision of the Federal Loan
Agency. The Federal Loan Agency was created in 1939 and given
general supervision over the following Government credit agencies:
the Federal Home Loan Bank Board, the Reconstruction Finance
Corporation, the RFC Mortage Company, the Federal National
Mortgage Association, the Disaster Loan Corporation, the ExportImport Bank of Washington, and the Electric Home and Farm
Authority.
Federal Home Loan Bank Board. By act of July 22, 1932,
Congress created the Federal Home Loan Bank Board for the pur
2 The present organization superseded the emergency agency by the same name
created by executive order in 1935.

CREDIT AND SAVINGS INSTITUTIONS

149

pose of establishing and supervising a nation-wide home loan system.
By virtue of this and subsequent acts the Board now has under its
supervision the twelve Federal Home Loan Banks, over 1,400 Fed
eral savings and loan associations, the Federal Savings and Loan
Insurance Corporation, and the Home Owners’ Loan Corporation
(in liquidation). Membership in the Federal Home Loan Bank
System, which is required for Federal savings and loan associations,
is open on a voluntary basis to State chartered building and loan
associations, homestead associations, cooperative banks, savings
banks, and insurance companies that are engaged in making long-term
home mortgage loans. About 2,500 of these institutions, principally
State chartered building and loan associations, have joined the
System in order to borrow from the Federal Home Loan Banks;
some 800 also have their accounts insured by the Federal Savings
and Loan Insurance Corporation.
The Federal Home Loan Banks, twelve in number and each serving
a territory fixed by the Board, were the first of these home loan
institutions to function. Their purpose is to furnish a permanent
reservoir of credit for local thrift and home financing institutions
such as savings and loan associations and savings banks. They do not
lend to individuals. In the field of home mortgage credit the twelve
Federal Home Loan Banks perform somewhat the same function
that the Federal Reserve Banks perform as a credit reserve for
commercial banks and that the Federal Land Banks and Federal
Intermediate Credit Banks perform in the field of farm finance.
The Home Loan Banks make secured and unsecured loans and
advances to credit institutions that join the Home Loan Bank
System, and receive deposits from such institutions. Such loans are
secured by assignment of home mortgage loans held by the borrower
and by a lien on the stock in the local Home Loan Bank subscribed
to by the borrower when it became a member of the Federal Home
Loan Bank System. Institutions that join the System are subject
to examination by the Federal Home Loan Bank Board. The Home
Loan Banks may lend to nonmember institutions upon the security
of home mortgages insured by the Federal Housing Administration.
Federal savings and loan associations, established under authority
of legislation enacted in 1933, are similar to State chartered building

ISO

BANKING STUDIES

and loan associations, except that they are chartered and supervised
by the Federal Home Loan Bank Board instead of by the respective
States. Provision was made for the conversion of State chartered
institutions into Federal savings and loan associations, and, of the
more than 1,400 Federal associations in operation at the end of 1939,
over half were converted associations. Federal savings and loan
associations make urban home mortgage loans. Their funds are
supplied primarily through the sale of repurchasable shares to the
public and by borrowings from the Federal Home Loan Banks.
Share accounts of Federal savings and loan associations have
many of the characteristics of savings deposits of banks. Payments
on the share accounts are usually credited and withdrawals debited
in pass books similar to savings pass books. While notice of in
tended withdrawal of share accounts is provided for by the by
laws of the associations, in normal times shares are repurchased
at the offices of the associations on demand. Because of the simi
larity between share accounts of savings and loan associations and
savings deposits of banks, they are frequently confused in the
public mind.
The Federal Savings and Loan Insurance Corporation was organ
ized pursuant to the National Housing Act of 1934 for the purpose of
insuring share accounts of Federal savings and loan associations
and voluntary members of the Federal Home Loan Bank System.
Share accounts in an insured institution are insured up to $5,000
for each investor. The Federal Savings and Loan Insurance Cor
poration does not make loans except under limited circumstances
such as to prevent the default of an insured institution, or to restore
an insured institution in default to normal operations. It serves
savings and loan associations in somewhat the same capacity as the
Federal Deposit Insurance Corporation serves banks.
The Home Owners’ Loan Corporation was established in 1933 to
make loans to distressed urban home owners and to refinance home
mortgages held by banks and other lending institutions. Its primary
purpose was to protect small home owners from foreclosures result
ing from the depression, or from losing their property because of
inability to pay taxes or assessments. It ceased its lending operations
in June 1936 and is now in liquidation.

CREDIT AND SAVINGS INSTITUTIONS

151

Reconstruction Finance Corporation? The Reconstruction
Finance Corporation, which now comes under the Federal Loan
Agency, was organized in 1932, along the lines of the War Finance
Corporation.4 It was given broad powers to purchase preferred
stock, capital notes, and debentures of banks, and to make loans to
banks and other financial institutions as well as to individuals and
corporations on any security deemed adequate by the Corporation.
It has also provided the loan funds for some Government agencies,
such as the Rural Electrification Administration, the RFC Mort
gage Company, the Export-Import Bank of Washington, and
the Disaster Loan Corporation. The Corporation functions through
a principal office in Washington and loan agencies in nearly all of
the thirty-six Federal Reserve Bank and branch cities.
The Reconstruction Finance Corporation has certain contractual
supervisory or regulatory powers over the banks in which it acquires
part ownership through the purchase of capital notes, debentures,
and preferred stock. These powers are superimposed upon the
powers exercised by the Comptroller of the Currency, the Federal
Reserve authorities, the Federal Deposit Insurance Corporation,
and the State banking departments.
RFC Mortgage Company and Federal National Mortgage Associa
tion. The RFC Mortgage Company was organized in 1935 by the
Reconstruction Finance Corporation to make loans to individuals or
corporations on urban income producing properties, loans to dis
8This discussion reflects the situation as of the end of 1939. During 1940, as part
of the national defense program, Congress authorized several changes and enlarge
ments in the operations of some of the Government corporations and credit agencies.
Five new corporations (the Rubber Reserve Company, Metals Reserve Company,
Defense Plant Corporation, Defense Supplies Corporation, and Defense Homes
Corporation) were organized by the Reconstruction Finance Corporation to acquire
strategic and critical materials and to aid in the production of defense materials. The
principal developments during 1940 in the operations of United States Government
corporations and credit agencies are summarized in an article in the April 1941 Federal
Reserve Bulletin, pp. 297-307.
4 The War Finance Corporation was established during the first World War and
given broad powers to make loans to banks, bankers, trust companies, building and
loan associations, and directly to industries. Its operations were temporarily suspended
after the war but they were revived during the agricultural depression which began
in the early 1920’s. The Corporation then made a large volume of loans to member
banks of the Federal Reserve System, to nonmember banks, and to livestock com
panies throughout the country. It was placed in liquidation on Jan. 1,1925.

152

BANKING STUDIES

tressed holders of first mortgage real-estate bonds, and mortgage
loans on low-cost housing projects approved by the Federal Housing
Administration. The Corporation is also authorized to purchase
and sell mortgages insured under Titles I and II of the National
Housing Act.
The Federal National Mortgage Association, organized in 1938
by the Reconstruction Finance Corporation under the provisions of
the National Housing Act, buys and sells insured mortgages and
makes large-scale housing loans.
Other Institutions under the Federal Loan Agency.6 The Disaster
Loan Corporation was established in 1937 to make available special
loan assistance to persons and corporations in regions suffering from
catastrophies such as earthquakes, hurricanes, and floods. The
Export-Import Bank of Washington was established in 1934 with
authority to make loans to exporters and importers to facilitate
trade with the possessions and foreign countries. The Electric Home
and Farm Authority was established in 1935 and contracts with
retail appliance dealers to purchase from them time-payment notes
executed by consumers. The present organization superseded the
Electric Home and Farm Authority, Inc., organized in January
1934 under an executive order.
Other Institutions that Operate under Federal Laws. Although
the Department of Agriculture and the Federal Loan Agency have
general supervision of the largest number of credit institutions
created and regulated by the Federal Government, other depart
ments and agencies are charged with supervision of some credit
and savings services. These include the Post Office Department, the
Public Works Administration, the United States Housing Au
thority, the Maritime Commission, and the Veterans’ Adminis
tration.
Postal Savings System. The Postal Savings System, which oper
ates within the Post Office Department, is the oldest of the Federal
institutions performing banking functions. It was established in
1910 to provide savings facilities, administered by the Federal
8 The Federal Loan Agency also has supervision over the Federal Housing Adminis
tration. The Administration does not make loans but is important in the lending field
because it insures mortgage loans.

CREDIT AND SAVINGS INSTITUTIONS

153

Government, in small as well as large localities. The Postal Savings
System grew very slowly until 1930, when its depositors numbered
less than half a million and its deposits amounted to only about
175 million dollars. From 1930 to 1933 its depositors increased
in number to 2.3 millions and its deposits to a total of almost
1.2 billion dollars. Since 1933 there has been little growth in the
Postal Savings System. At the end of 1939 it had about 2.8 million
depositors and deposits aggregating about 1.3 billion dollars.
The Postal Savings System does not make loans. Five per cent
of its funds are kept in the United States Treasury as a reserve
against deposits, the remainder being deposited in banks or invested
in United States securities. Banks are required to pay 2.5 per cent
on such deposits except where the maximum rate on time deposits
established by supervisory authorities is less. In recent years an
increasing proportion of Postal Savings funds has been invested in
Government securities. In 1931 about 86 per cent was redeposited
in banks and about 8 per cent invested in Government securities,
whereas in 1939 only about 4 per cent was redeposited in banks and
about 90 per cent invested in Government securities.
Public Works Administration. This organization was established
in 1933 as part of the Federal program to create employment
through construction activity. In addition to making loans and
outright grants to States and other public bodies for financing
public works projects, it was authorized to make loans to industry
for such purposes as the development and improvement of railroads.
The Administration operates as part of the Federal Works Agency.
Its program at present is limited to projects under construction,
most of which are substantially completed.
United States Housing Authority. The Housing Authority was
organized in 1937 to make loans and grants to public housing
agencies and to assist in the acquisition, development, and ad
ministration of low-rent or slum-clearance projects. It now functions
within the Federal Works Agency and has taken over somewhat
similar activities formerly handled by the Public Works Ad
ministration.
United States Maritime Commission. This Commission, which
was established in 1936 when the former United States Shipping

154

BANKING STUDIES

Board Merchant Fleet Corporation was dissolved, is authorized to
grant construction and operating differential subsidies and con
struction loans to American owned and operated merchant marine
companies. It is an independent agency, having no administrative
connection with any other Government department. It receives its
appropriations direct from Congress.
Veterans’ Administration. Through the Government Life Insur
ance Fund which it administers, the Veterans’ Administration makes
loans to war veterans on policies issued by that fund.
LOANS B Y C RE D IT AGENCIES OPERATING W IT H IN
GOVERNM ENT UNITS

From the foregoing very brief description of the credit institutions
operating within Government units it is apparent that their lending
activities cover many classes and types of loans. The Federal Land
Banks and the Federal Farm Mortgage Corporation operate in the
farm mortgage field. Certain other agencies supervised by the Farm
Credit Administration provide short and intermediate term credits
to farmers and livestock men for practically all agricultural pur
poses. These agencies operate in every section of the country. Fed
eral savings and loan associations make home mortgage loans, and
the Home Owners’ Loan Corporation (now liquidating) refinanced
a large volume of home mortgage loans during 1933-1936. In recent
years, particularly, such Government sponsored agencies as the
Reconstruction Finance Corporation, the Public Works Adminis
tration, and the United States Housing Authority have been
authorized to make loans to public bodies and to corporations.
The volume of loans outstanding on December 31, 1939, at each
of the principal Federal lending institutions, is shown in the accom
panying table (in millions of dollars) :6
Department of Agriculture:
Farm Credit Administration—
Federal Land Banks..........................................................
Federal Farm Mortgage Corporation.............................

1,905
691

6 No total is shown because of duplications resulting from the inclusion of Federal
Intermediate Credit Banks and Federal Home Loan Banks. These institutions are
banks of discount for other institutions in the list.

CREDIT AND SAVINGS INSTITUTIONS

Federal Intermediate Credit Banks...............................
Production credit associations.........................................
Central Bank for Cooperatives and district banks for
cooperatives...................................................................
Federal credit unions........................................................
Farm Security Administration........ ...................................
Commodity Credit Corporation..........................................
Rural Electrification Administration..................................
Federal Loan Agency:
Federal Home Loan Bank Board—
Federal Home Loan Banks................ .............................
Home Owners’ Loan Corporation...................................
Federal savings and loan associations............................
Reconstruction Finance Corporation (including pre
ferred stock purchased but excluding inter-agency
transactions)...................................................................
RFC Mortgage Company....................................................
Federal National Mortgage Association............................
Disaster Loan Corporation..................................................
Export-Import Bank of Washington..................................
Electric Home and Farm Authority...................................
Federal Works Agency:
Public Works Administration..............................................
United States Housing Authority.......................................

155

200
154
76
37
257
235
183

181
2,038
1,271

1,562
57
147
19
40
11
72
123

United States Maritime Commission.........................................

Veterans’ Administration (June 30, 1939)...............................

151

In addition to the loans listed above, the Joint Stock Land Banks
had loans of 63 million dollars, the regional agricultural credit
corporations loans of 8 millions, and the Agricultural Marketing
Act Revolving Fund loans of 87 million dollars outstanding at the
end of 1939. These institutions and loans are being liquidated under
the Farm Credit Administration. Emergency crop, feed, and drought
loans made by the Farm Credit Administration under appropria
tions by Congress amounted to 168 million dollars at the end of 1939.
When grouped according to the principal source of their loan
funds, the credit and savings institutions operating within Federal
departments appear as follows:7
7 This classification is based on the principal source of funds for each of the Govern
ment credit agencies. Frequently the agencies have obtained substantial amounts from

156

BANKING STUDIES

Deposits or Share Accounts:
Postal Savings System (deposits)
Federal savings and loan associations8
(repurchasable shares, usually sold to the public but in some
cases to Federal Government agencies; may also borrow from
Federal Home Loan Banks)
Federal credit unions8
(repurchasable shares sold to members; sometimes also borrow
from other credit unions, banks, or others)
Bonds or Notes Issued to Private Investors (capital stock owned
in whole or in part by Treasury or other Government agencies):
Federal Land Banks
(also stock owned by national farm loan associations; bonds
issued to Federal Farm Mortgage Corporation; paid-in surplus
from Treasury)
Federal Farm Mortgage Corporation9
Federal Intermediate Credit Banks
Commodity Credit Corporation9
(also payments from Treasury to restore capital impairment)
Federal Home Loan Banks
(also stock owned by member institutions)
Home Owners’ Loan Corporation (in liquidation)9
Federal National Mortgage Association
(also notes issued to Reconstruction Finance Corporation)
United States Housing Authority9
Electric Home and Farm Authority
Reconstruction Finance Corporation9
Stocks, Bonds, or Notes Issued to Other Government Agencies:
Production credit associations8
(Class “ A ” stock owned by Production Credit Corporations;
discounts from Federal Intermediate Credit Banks)
Banks for Cooperatives
(stock owned by Farm Credit Administration; discounts
from Federal Intermediate Credit Banks)

other sources, as indicated parenthetically. In addition, a few of the agencies have
borrowed from the United States Treasury when they were in need of funds to carry
them over temporary situations. The Reconstruction Finance Corporation formerly
financed most of its operations with borrowings from the Treasury which have now
been liquidated. Some of the agencies have built up substantial surpluses out of earn
ings from operations.
8 Institutions formed by private individuals, chartered and supervised by Federal
agencies.
9 Securities guaranteed by the United States Government.

CREDIT AND SAVINGS INSTITUTIONS

157

Rural Electrification Administration
(to Reconstruction Finance Corporation; also direct appro
priations)
RFC Mortgage Company
(to Reconstruction Finance Corporation)
Export-Import Bank of Washington
(to Reconstruction Finance Corporation)
Disaster Loan Corporation
(to Reconstruction Finance Corporation)
Direct Appropriations by the Government of the United States:
Farm Credit Administration emergency crop, feed, and drought
loans
Farm Security Administration
Public Works Administration
(also resale of obligations acquired)
United States Maritime Commission

It will be noted that the method of financing these institutions
has taken a variety of forms. Some agencies, particularly those of
a temporary or emergency character, have received direct appropria
tions from the Government. Others have received funds through
the purchase of stock by the Treasury or other Government agen
cies; still others through the sale of notes, debentures, and bonds,
with or without the guaranty of the Federal Government. A large
volume of funds is obtained from banks, which are important
purchasers of these securities. At the end of 1939 all insured banks
held 3.8 billion dollars of the approximately 7.8 billions of outstand
ing obligations issued by Government corporations and agencies.
Production credit associations obtain most of their loan funds,
and banks for cooperatives some of theirs, by discounting with
Federal Intermediate Credit Banks, which sell their own deben
tures to the investing public. The Federal savings and loan associa
tions obtain the major part of their funds through investment by
the public in their share accounts, but they also borrow from the
Federal Home Loan Banks and sell their shares to the Home Own
ers’ Loan Corporation and to the Treasury. Federal credit unions
also rely chiefly upon the sale of share accounts, but the total
amount invested in them does not bulk large. The Postal Savings

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BANKING STUDIES

System receives deposits from the public.10None of the institutions,
however, accepts demand deposits as contrasted with savings
deposits.
STATE CHARTERED INSTITUTIONS AND
UNINCORPORATED FIRMS

The organizations under State charter or without charter, with
functions similar to banking, include building and loan associa
tions, sales finance companies, personal finance companies, credit
unions, stock-exchange brokers,, and insurance companies. There
are many others, but those listed are the principal ones and a brief
discussion of their operations will serve to illustrate their im
portance. Most of the State chartered and unincorporated firms
have been in operation over a much longer period than the institu
tions under Federal sponsorship.
Building and Loan Associations. Building and loan associations
originated as local institutions to provide facilities for financing the
building and purchase of homes through the pooled resources of
individuals. The first in the United States of which there is any
record was established in an outlying section of Philadelphia in
1831. The great majority of building and loan associations are small
local institutions. Prior to the Home Owners’ Loan Act, approved
on June 13, 1933, they were all State institutions. Now there are
Federal savings and loan association, chartered by the Federal Home
Loan Bank Board, as well as State chartered building and loan
associations. At the end of 1939, there were 6,300 State and 1,400
Federal associations. About 2,500 of the State associations had
joined the Federal Home Loan Bank System and consequently were
entitled to borrow from the Federal Home Loan Banks. Of this
number about 800 State chartered associations had their share
accounts up to $5,000 insured by the Federal Savings and Loan
Insurance Corporation. Mortgage loans of all State chartered
building and loan associations at the end of 1939 amounted to 2.8
billion dollars and private repurchasable share accounts aggregated
10 United States Savings Bonds now being sold by the Treasury partake of the
nature of savings certificates redeemable without notice.

CREDIT AND SAVINGS INSTITUTIONS

159

3.2 billions.11 Share accounts of building and loan associations, like
those of Federal savings and loan associations, are similar in many
respects to savings deposits of banks.
Sales Finance Companies. The business of sales finance companies
consists principally of the purchase of conditional sales contracts
from dealers in automobiles, household appliances, and other con
sumption goods. The finance companies obtain their loan funds
partly from invested capital and accumulated surplus, but princi
pally by the sale of debentures, collateral trust notes, and short
term open-market paper, and by direct borrowings from banks.
While figures are not available for all sales finance companies, the
three large national companies had total loans of 980 million dollars
outstanding at the end of 1939.
Most sales finance companies operate under general incorporation
laws. One of the three largest of such companies, however, is in
corporated under the banking laws of New York. It is supervised by
the State banking authorities, although not included in the bank
statistics of that State. Its California offices, however, are supervised
and counted as banks under State law.
Personal Finance Companies. Personal finance companies oper
ate in the small-loan field under the so-called uniform smallloan law adopted by most of the States. Their loans are made up
to a maximum of $300 at rates ranging from 2 per cent to 3.5 per
cent a month on unpaid balances. Personal finance companies
procure their funds by sale of stock and by borrowing from banks.
Over 4,000 personal finance companies or offices operate in the
States that have adopted the uniform small-loan law or similar
legislation. Their loans outstanding at the end of 1939 totalled
about 430 million dollars.
Credit Unions. Credit unions are institutions owned coopera
tively by a group of persons having a common business, fraternal,
or other interest. They are organized to make small loans to their
members out of funds derived from the sale of shares to members
11 This indudes 360 million dollars of deposits and investment securities. In a few
States building and loan associations reported a relatively small amount of deposits
and investment certificates as of the end of 1939.

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BANKING STUDIES

and from a relatively small amount of borrowings. Loans for small
amounts are made solely on the credit of the member. Loans for
larger amounts are required to be made on co-maker notes or to be
secured in some form. The customary rate of interest charged by
credit unions is one per cent a month on the outstanding balance.
Most credit unions operate under State charter, but since 1934 many
Federal credit unions have been chartered by the Farm Credit
Administration. At the end of 1939, State chartered credit unions
numbered about 4,700 and Federal chartered credit unions about
3,200. The amount of loans outstanding at the end of 1939 at all
credit unions was about 150 million dollars.
Brokers and Dealers in Securities. Brokers and dealers in
securities make loans for the purpose of enabling their customers
to finance purchases of securities on margin. They in turn borrow
the greater part of what they lend from banks, pledging as collateral
the securities purchased for their margin customers. Members of
the New York Stock Exchange had loans to customers outstanding
at the end of 1939 in the amount of 900 million dollars. It is esti
mated that these firms furnish about 90 per cent of the credit
extended to customers by all brokers and dealers in securities in
the United States. Brokers hold substantial amounts of their cus
tomers’ funds. These funds held by brokers, which are generally
referred to as “ free credit balances,” amounted to about 265 million
dollars at the end of 1939.
The Board of Governors of the Federal Reserve System, under
the Securities Exchange Act of 1934, regulates margin requirements
on credit extended by brokers, dealers, and banks to finance the
purchase or carrying of securities.
Insurance Companies. The primary function of insurance com
panies, of course, is to provide life, fire, indemnity, and other types
of insurance. They are included in this study because life insurance
companies, particularly, make a large volume of real-estate loans.
They also make policy loans, hold a substantial volume of securities,
and provide savings facilities for the public. The reserves of the 49
legal reserve life insurance companies that hold about 92 per cent
of the assets of all such companies in the United States amounted
to about 24 billion dollars at the end of 1939. This amount repre
sents accumulated savings to the public. It has been set aside out

CREDIT AND SAVINGS INSTITUTIONS

161

of premiums and other income, usually pursuant to requirements
of law, and constitutes the amount that policy holders would be
lent upon request or paid upon surrender of the policies. At the
end of 1939 these 49 companies had over 5 billion dollars outstand
ing in mortgage loans and 3 billions in policy loans. They owned
securities valued at 15.5 billion dollars.
INFLUENCE ON BANKING OF INSTITUTIONS
W ITH SIM ILAR FUNCTIONS

It is apparent from the foregoing discussion that the operations
of credit and savings institutions outside the banking system are
important both from the standpoint of numbers and types of institu
tions engaged in one or more banking functions and from the stand
point of volume of business handled. While the institutions,
considered one by one, may be distinguished from banks, there is
considerable similarity between some of their functions and the
functions of banks. It is true that most of these institutions make
many types of loans and on terms that banks could not make. But
the cumulative effect of their operations does have an important
influence on banking and bank supervision. The extent and potency
of this influence are difficult to determine, because the development
and expansion of most of these institutions is comparatively recent.
Although it is beyond the scope of this paper to appraise or even
describe all the ways in which banking practices are affected by the
operation of these institutions, a few examples are given in the
following paragraphs. No attempt will be made to show individual
situations where a given institution or a particular type of loan is
in direct competition with banks.
Interest Rates Charged on Loans and Paid on Deposits. Many
factors must be taken into account in a consideration of interest
rates. An important one, but one that as yet can not be accurately
measured, is the influence of Government lending agencies whose
rates are frequently fixed by law or regulation. For example, Con
gress and the Farm Credit Administration prescribe by law or
regulation the rates of interest which farm credit institutions may
charge on farm mortgage and agricultural loans, and Congress
and the Federal Home Loan Bank Board prescribe the rate on the

162

BANKING STUDIES

home mortgage loans made by the Home Owners’ Loan Corporation.
The Federal Housing Administration prescribes the rates that may
be charged on insured mortgage loans and the Commodity Credit
Corporation sets the rates on its loans. The Reconstruction Finance
Corporation, which has a wide range of lending powers and a large
volume of loans outstanding, fixes the rates charged on its loans.
The rates fixed by Congress or these institutions may vary from
the prevailing rates in different communities for similar types of
loans. It should be borne in mind that the rates charged by these
institutions are frequently fixed with the view of making credit
available in certain situations at a low rate in order to ease or
stimulate conditions in a given field. As a long-run proposition it is
possible that this practice would affect rates not only on identical
types of bank loans but on related types as well.
Related to the regulation of interest charged on loans is the regu
lation of interest paid on deposits. The Board of Governors of the
Federal Reserve System, under the provisions of the Federal Re
serve Act, has fixed the maximum rates of interest payable on time
and savings deposits by member banks. Like action has been taken
by the Federal Deposit Insurance Corporation with respect to
insured banks that are not members of the Federal Reserve System.
In prescribing these rates, the Board and the Corporation could not
ignore the rates paid by other institutions in the field, for the regu
lations of any banking authority are necessarily affected by the
action of institutions not subject to the regulations. Thus the rates
paid by the Postal Savings System, the United States Treasury
(through the sale of United States Savings Bonds), Federal savings
and loan associations, building and loan associations, and credit
unions have a direct bearing upon regulatory action as to the rates
of interest payable by banks that are members of the Federal Re
serve System and that have Federal deposit insurance.
Liquidity of Bank Assets. The Federal Reserve Banks serve
as credit reservoirs for member banks, and under certain circum
stances for nonmember banks. Some of the institutions included in
this discussion also serve to maintain the liquidity of certain bank
assets. For example, the Commodity Credit Corporation will take
over loans from banks when such loans are made with the approval

CREDIT AND SAVINGS INSTITUTIONS

163

of and commitment from the Corporation. The RFC Mortgage
Company and the Federal National Mortgage Association are
authorized to buy mortgages insured under the National Housing
Act. Federal Intermediate Credit Banks may discount agricultural
paper for banks. The Reconstruction Finance Corporation has
purchased preferred stock and capital notes and debentures of
banks and has made loans to banks and commitments to take over
loans from banks.
Loans to refinance bank loans were made by the Home Owners’
Loan Corporation (now in liquidation) in its large-scale refinancing
operations during the depression. The banks received bonds and
cash in exchange for the mortgage loans. A substantial volume of
the loans made by Federal Land Banks and the Federal Farm
Mortgage Corporation was to refinance loans previously held by
banks.
In addition to loans and commitments made to banks themselves,
loans made by Government and other lending agencies to others
than banks have an indirect effect on the liquidity of bank assets.
Part at least of the funds received may be used to repay bank loans.
Changing Character of Banking. At the same time that institu
tions other than banks have entered the traditional field of bank
ing, banks have extended their operations outside that field;
with the result that distinctions and border-lines have become
obscured. The liabilities of many institutions that are not banks
closely resemble the deposit liabilities of institutions that are banks.
The classes of assets now held by banks include many that in the
past were held primarily by institutions other than banks. Invest
ment securities, such as Government obligations, direct and
guaranteed, and corporate obligations, have to a considerable
extent taken the place of commercial loans in bank portfolios.
Mortgage loans, especially those of home owners, are held by banks
to a greater extent than formerly. Personal and installment loans—
formerly left almost entirely to sales or personal finance companies—
are now made also by banks. These and other changes in the char
acter of banking may be attributed in large part to the operations
of other institutions— Government sponsored and private—operat
ing in the same or closely related fields.

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BANKING STUDIES

RELATIONSHIP OF FEDERAL RESERVE BANKS TO
OTHER INSTITUTIONS

The Federal Reserve Banks, which are primarily concerned with
the services and credit functions they perform for banks, also
under certain circumstances perform services for and extend credit
to the institutions discussed in this paper. The Federal Reserve
Banks perform various fiscal agency and depositary services for
some Government credit agencies. Among these are the Federal
Farm Mortgage Corporation, the Federal Land Banks, the Federal
Intermediate Credit Banks, and the Commodity Credit Corpora
tion, all of which are under the supervision of the Department of
Agriculture; the Reconstruction Finance Corporation, the Federal
Home Loan Banks, and the Home Owners’ Loan Corporation, all of
which are under the Federal Loan Agency; and the United States
Housing Authority and the Public Works Administration, which
are under the supervision of the Federal Works Agency. For some
of these organizations the Federal Reserve Banks issue, exchange,
and redeem securities; pay coupons; and disburse payments.
These services and other operations of the Federal Reserve Banks
are described in another paper.
The Federal Reserve Banks may extend credit to Federal and
State institutions outside the banking system under authority of
certain provisions of law permitting credit to be extended to any
individual, partnership, or corporation. For example, when author
ized by the Board of Governors, the Federal Reserve Banks may
make such advances for periods not exceeding ninety days on
promissory notes secured by direct obligations of the United States.
Also, when authorized by the Board of Governors in unusual and
exigent circumstances, the Reserve Banks may discount for indi
viduals, partnerships, or corporations, any paper eligible for dis
count by banks that are members of the Federal Reserve System.
In the case of such discounts, however, the Reserve Banks are
required to assure themselves that the applicants are unable to
secure adequate credit accommodations from other banking insti
tutions.
The Federal Reserve Banks may discount for any financing
institution obligations having maturities not exceeding five years

CREDIT AND SAVINGS INSTITUTIONS

165

and entered into for the purpose of providing working capital for
established industrial or commercial businesses. The Reserve Banks
may also make loans or advances direct to financing institutions
on the security of such obligations, and may make commitments
with regard to such loans or advances.
The Federal Reserve Banks may rediscount agricultural paper
for the Federal Intermediate Credit Banks, provided such paper
does not bear the endorsement of a nonmember State bank that
is eligible for membership in the System. The Federal Reserve
Banks may discount notes payable to Federal Intermediate Credit
Banks covering loans or advances made by such banks if the notes
have maturities at the time of discount of not more than nine
months and are secured by paper eligible for rediscount by the
Federal Reserve Banks.
The Federal Reserve Banks may purchase, in the open market,
at the direction of or subject to regulations adopted by the Federal
Open Market Committee, bonds, notes, or other obligations fully
guaranteed by the United States Government as to principal and
interest.
Mention should also be made of the fact that the obligations of
Federal and State credit institutions other than banks may provide
the security for credit extended to member banks of the Federal
Reserve System by the Reserve Banks.
SUM M ARY

There are many institutions under varying degrees of Federal
and State sponsorship and authority that perform one or more
banking functions. The activities of these institutions have expanded
considerably in recent years, and many new ones have been estab
lished, mostly by the Federal Government. Some receive deposits,
or what are broadly equivalent to savings deposits, and many make
loans. Commercial banks, through the purchase of securities, have
furnished part of the funds with which these loans were made.
Since these institutions lie outside the general framework of the
banking structure, they are subject either not at all or only in part
to the legislation and supervision imposed upon the banking system.
It is evident that the performance of banking functions by institu

166

BANKING STUDIES

tions that are not banks and not amenable to banking laws and
supervision introduces an additional element of complexity into a
situation already complex from the point of view of banking alone.
It presents a problem not only to banks but to the authorities
charged with the supervision of banks and administration of bank
ing laws. The operations of these institutions, therefore, should
be taken into account in a study of banking problems proper.

COMMERCIAL BANK OPERATIONS

Page
I n tro duction ..........................................................................

169

C ommercial B ank s

D epo sitaries ..........................

169

How C ommercial B ank s E mploy T heir F u n d s . ..

176

O th e r Services

Com m ercial B a n k s....................

183

C ommercial B a n k s ....................................

183

Su m m a r y ....................................................................................

186

P rofits

oland

I. R

o b in s o n

Division of Research and Statistics

COMMERCIAL BANK OPERATIONS
Commercial banks are part of the economic organization of the
nation. They operate as business concerns and earn a living by
rendering services to the public. By lending and investing money,
they assist productive processes; by providing checking account
services they facilitate and expedite the settlement of financial
obligations. There are numerous other banking services, but most
of them are related to the primary banking functions of making
loans and investments and handling deposits. All these services
and operations have to do with money, which may be viewed as
the stock in trade of banks.
The money with which a commercial bank operates comes from
one or more of three sources—invested capital, borrowing, and
deposits.1 The chief function of capital is to protect depositors
from loss and it is not an important source of funds for day-today bank operations. Likewise borrowing, although sometimes
important in the past, is now rarely a means of carrying on current
operations. Hence deposits, which in themselves give rise to many
banking services in connection with the transfer of funds, are
indirectly the basis for the credit and investment operations through
which banks serve commerce and industry.
COMM ERCIAL BANKS AS DEPOSITARIES

The kind of deposits handled by a bank and the habits of de
positors are determining factors in all bank operations. They in
fluence a bank’s lending and investment policies as well as its
routine service operations. The kinds and special characteristics of
deposits described below, although infrequently concentrated in
1 This paper is confined to a discussion of the operations of individual banks and
it is, therefore, appropriate to say that deposits are the source of bank funds. A sub
sequent paper, “ Money System of United States,” will show that the commercial
banking system as a whole generates deposits.

169

170

BANKING STUDIES

a single bank, have an important bearing upon the operations
of all the banks within the commercial banking system.
Kinds of Deposits. Deposits in commercial banks are main
tained by individuals and business firms for a variety of purposes.
They serve primarily either as working cash balances, always avail
able for use in making payments, or as a form of investment for
savings. Typically the depositor who wishes to make frequent use
of his account carries a demand deposit while the one who desires
to accumulate savings carries a time or savings deposit. In general,
the former type of account is very much more active than the latter
and requires a bank to do more work. There is considerable inter
change in the uses to which the two types of accounts are put, how
ever, and so no definite line can be drawn between their functions.
Moreover, while banks reserve the right to require advance notice
of withdrawals from savings accounts, in practice they seldom exer
cise the right and almost always honor requests for withdrawals
immediately. Owing to regulatory requirements, however, time
deposits other than savings accounts usually can not be paid on
request.
Demand deposits have given rise to banking services over a long
period. As stated in a subsequent paper, a large part of all money
payments are now made by means of checks drawn on deposit
accounts.2 Nearly all large payments are so made. The use of checks
in effecting payments developed for a variety of reasons. In
the first place, checks are safer than cash because they are negoti
able only by the payee. They are more convenient than legal tender
currency because they are drawn in exact amounts, are not bulky,
and do not require making change. They are a particularly con
venient, inexpensive, and safe means of making payments at great
distances; and they constitute a legal receipt of payment. These con
veniences and safeguards have their origin in the services banks
render in connection with demand deposits.
A bank has to employ tellers, bookkeepers, and clerks to record
and handle all transactions passing through the deposit accounts
entrusted to its care. Deposits and withdrawals of funds must be
s “ Money System of United States.”

COMMERCIAL BANK OPERATIONS

171

entered on the individual deposit account affected, and checks
deposited by customers must be collected. A check drawn on the
same bank in which it is deposited or cashed is settled by a charge
to the account of the drawee. Checks received by a bank drawn on
other banks in the same community can be collected by messenger
or by the institution known as the clearing house. Out-of-town
checks can be and sometimes are collected directly by mailing them
to the bank on which they are drawn. The more usual practice,
however, is for these checks to be collected through correspondent
banks located in the more important centers, or through the Federal
Reserve Banks. Correspondent banks undertake this task in return
for deposit balances left with them by the collecting banks.3 More
often than not, checks can be cleared without recourse to the use
of cash, for the majority of payees prefer to take credit in their
deposit accounts rather than to handle cash.
Time and savings deposits have become important sources of
commercial bank services and funds within the past few decades.
Although savings banks, insurance companies, and building and
loan associations have long served as intermediaries between
small savers and the investment market, it was not until the turn
of the century that commercial banks increased their savings
business considerably. They are now one of the two or three most
important types of savings institutions and have developed services
and practices especially adapted to their new function. The in
creased importance of time deposits in commercial banks is shown
in the chart on page 172.
Time and savings deposits, being on the whole much less active
than demand deposits, occasion less work. Since they are carried
primarily as a liquid form of investment rather than as working
cash balances, they tend to fluctuate less in amount than demand
8Further consideration of the correspondent banking relationship is given on
pp. 174-76. Soon after the Federal Reserve System was organized, the Reserve Banks
undertook to provide collection service not only for their members but for such non
members as wished to participate. Some of the problems involved in this change have
been discussed in “ The Par Collection System of the Federal Reserve Banks,” Federal
Reserve Bulletin, February 1940, pp. 89-96. It is sufficient to mention at this point that
the Federal Reserve System has only partly displaced the correspondent system of
check collection, and that at present a considerable proportion of the out-of-town
collections are still effected through correspondent banks.

172

BANKING STUDIES

deposits and to be subject to fewer deposits and withdrawals.4
They draw interest, however, and thus give rise to a cost item that
banks do not incur in connection with demand accounts.6At present
banks whose deposits are insured by the Federal Deposit Insurance
Corporation are not permitted to pay more than 2.5 per cent on time
and savings accounts, and the prevailing rates are below this legal
maximum. In former periods, when the entire interest rate structure
was at higher levels, 3 or 4 per cent or even higher rates were paid.
T im e an d T o tal D eposits of C o m m ercial B an k s *

a For data, see Table 20, p. 436.

It is feasible for banks to pay interest on time and savings balances
but not on demand accounts because the former cost less to handle
than the latter and because banks with large amounts of time de
4Time and savings accounts are more stable than demand accounts in that there
are relatively fewer deposits and withdrawals and less variation in aggregate balances
from week to week and month to month. Over longer periods, however, it does not
appear that time deposits are a great deal more stable than demand deposits. In a
prolonged decline such as occurred in 1930-1933, time deposits decreased almost as
much relatively as demand deposits.
5In former years, banks frequently paid interest on demand balances. Insured
banks, however, which have most of the demand deposit business, are now prohibited
from doing so.

COMMERCIAL BANK OPERATIONS

173

posits generally can safely invest a larger proportion of their avail
able funds and for longer terms than those with few such deposits.
Characteristics of Demand Deposit Accounts. In the previous
section demand deposits were described as being subject to more
frequent deposits and withdrawals than time or savings deposits,
and to greater fluctuations in their balances. These same differences
are found also within the general class of demand deposits. Some
banks have a predominance of highly seasonal business accounts
so that in some parts of the year deposits are high while in others
they are low. Other banks primarily serve businesses that are
strongly influenced by business prosperity or depression and have
deposit balances that fluctuate accordingly. Still other banks de
pend on industries, such as the food business, that are less influenced
by cyclical factors. Bank managers take such deposit movements
into account when planning their lending and investing policies.
A bank with many depositors who make sudden and unpredictable
withdrawals from their demand accounts must keep larger cash
reserves, for instance, than a bank with depositors who habitually
carry fairly constant balances in their accounts.
While the individuals who carry checking accounts for personal
convenience are the most numerous class of demand depositors,
the aggregate dollar amount held by them is not a major part of
all bank deposits, and these checking accounts do not greatly
influence the investment programs of commercial banks. Deposits
and withdrawals from such checking accounts are likely to be
regular and roughly equal. Customers frequently have certain
levels at which they prefer to maintain their checking accounts
and banks often set up minimum balance requirements. Very large
deposits for individuals of substantial wealth behave somewhat
differently. Large amounts may be on deposit for considerable
periods and furnish the bank a source of lending funds. In making
its plans, however, the bank must allow for sizable and sudden
withdrawals for investment or other use by the depositor.
The business depositor furnishes a very large proportion of the
dollar volume of demand deposits handled by commercial banks.
These business accounts frequently have special seasonal and
cyclical characteristics. The deposits of automobile manufacturers

174

BANKING STUDIES

and sales agencies, of cement and brick producers, of clothing
manufacturers, of department stores and mail-order houses, of
canneries, and of wheat farmers and truck gardeners are likely to
run low at some seasons and high at others. The commercial
banker anticipates and prepares for these seasonal changes in
deposits, adjusting his investment portfolio from time to time so
as to provide the proper amount of liquidity.6 The general level
of business activity also affects business deposits. Current produc
tion and distribution processes are partly financed by funds bor
rowed from banks and deposited in demand accounts. In times of
depression, when production and distribution are at a low ebb
and business does not require much working capital, bank loans
are likely to be paid off and deposits automatically reduced. Con
versely, in times of prosperity, bank credit is needed to finance
current activity and the proceeds are added to bank deposits.
During a period in which industrial activity is increasing, funds may
move out of financial centers and become diffused in deposits held
by corporations in various places where plants, factories, and
warehouses are located. In slack periods the funds tend to return
to the financial centers. Extended periods of loss deplete these
balances and periods of profits restore them. The timing of long
term financing and of plant expansion and improvement also in
fluences business deposit balances.
Commercial banks themselves appear on the books of other com
mercial banks as depositors. This situation arises from the fact
that long ago bankers recognized the need of keeping cash reserves
available in proportion to their short-term liabilities (including
their customers’ demand deposits).7 Experience disclosed that banks
needed to keep only part of their reserves in their own tills in
currency and that the remainder could be deposited in other banks
where it was readily available.
The holding of bankers’ deposits became a profitable business,
particularly to banks in New York City and other financial centers.
6 Bankers can borrow to meet seasonal declines in deposits but they prefer to provide
for them in some other way.
7 Although at first maintained voluntarily in proportions deemed sufficient by in
dividual banks, reserves are now required by law.

COMMERCIAL BANK OPERATIONS

175

It furnished large amounts of funds for which banks competed by
paying substantial rates of interest and offering a large variety
of free services. Although the payment of interest on these and
other demand deposits is no longer permitted by law, many of the
free services are still performed. One of the more important of
these is the collection of checks at par. Another is the buying and
selling of securities for country correspondents and the furnishing
of investment advice. City correspondent banks also are in a posi
tion to send business to their country correspondents.
Prior to the creation of the Federal Reserve Banks, city cor
respondent banks undertook to perform elementary central banking
functions. In addition to assuming the responsibility of meeting
all calls on the demand deposits of their country correspondents,
they assumed, inferentially, some responsibility for making loans
to these correspondents in time of need. With the concentration
of reserve balances in financial centers, the liquidity of the banking
system came to depend to a large extent on the ability of the city
correspondents to meet these responsibilities. On a number of
occasions they were unable to do so, and banks in other parts of the
cpuntry were severely handicapped in obtaining necessary funds.
Under the Federal Reserve Act, only deposits in the Federal
Reserve Banks can be counted as legal reserves for member banks.
Nonmember banks are permitted by State law to carry their reserve
balances with other commercial banks and they continue to do so.
Member banks also continue to carry balances in correspondent
banks even though they can not count them as legal reserves.
At the present time correspondent balances probably are not
profitable to the banks holding them. The city correspondent
can not use the balances to very good advantage because of the
low rates prevailing in the money market and the scarcity of
short-term liquid securities; the country correspondent can not
receive interest on the balances and receives only certain free
services, as outlined above. But custom is strong, and since many
country banks are unable to put all of their funds to work, inter
bank deposits are now approaching all-time peaks.
Another type of depositor from whom commercial banks obtain
funds is the public agency; that is, the town, city, State, or other

176

BANKING STUDIES

unit of government. Despite efforts to synchronize receipts and
expenditures, deposits in public accounts increase substantially at
certain times of the year (tax due-dates, for instance) and decline
at other times when expenditures are heavy. In so far as an in
dividual bank holds the deposits of taxpayers and of recipients of
government checks, the activity of its public accounts merely
results in a transfer of funds from one deposit to another within
the bank. This sort of coincidence can not be counted upon, how
ever, and banks customarily offset their public deposit accounts
by an unusual degree of liquidity in their assets.
Foreign banks and business concerns, as well as citizens of other
countries, often deposit money in the United States. The activity
of their deposits is less predictable than that of domestic accounts,
since it is directly influenced by a wider range of political, economic,
and military developments. Consequently, banks are reluctant to
invest funds from these accounts and are disposed to keep them
more liquid than domestic accounts. New York City commercial
banks carry most of these accounts.
HOW COM M ERCIAL BANKS EM PLOY T H E IR FUNDS

Banks get most of their income from lending or investing money.
In putting money to work they constantly have to observe require
ments of safety— safety in two different senses. Banking safety
in the more commonly recognized sense means that money must be
lent or invested only where there is reasonable assurance that it
will be returned. It means safety against undue risks of default
or delayed payment.
But banking safety must be considered in another sense. The
preceding section dealing with bank deposits and their char
acteristics showed that the levels of deposits might be expected to
vary considerably from one time to another. In order to be prepared
for periods in which deposits are lost, a bank must have cash or
access to cash. Loans and investments, safe in the sense that they
will be repaid ultimately, can usually be used for borrowing to
meet deposit losses so that a bank with secure earning assets is
reasonably well protected. But banks do not like to borrow; they
prefer to have cash, or assets that can be readily sold for cash.

177

COMMERCIAL BANK OPERATIONS

If banks maintained adequate cash reserves to meet any possible
requirement, they could employ no more than a small fraction of
their funds. In practice, banks hold some loans and investments
that can be converted into cash at almost any time without loss.
Such assets are called secondary reserves.
Bank assets, therefore, may be divided into three broad classes:
cash (which produces no income), secondary reserves (in which
some income has been sacrificed for the sake of availability), and
A ssets of M em ber B anks *
BILLIONS OF DOLLARS

1928

1930

BILLIONS OF DOLLARS

1932

1934

1936

1938

1940

* EXCLUDES THOSE HELD IN SECONDARY RESERVES.

a For data, see Table 21, pp. 436-37.

loans and investments acquired primarily for income purposes.8
The distribution of the funds of member banks among these classes
during the past decade is shown on the accompanying chart. The
proportion that an individual bank must keep in each of these
classes depends on its specific position. Banks that have large
proportions of very active balances, such as correspondent accounts,
8 This classification differs from the conventional division of bank assets into cash,
loans, and investments. Investments more often conform to the character of secondary
reserves than loans do. Both of these classifications omit banking quarters and equip
ment, which are usually only a small fraction of bank assets.

178

BANKING STUDIES

the deposits of foreign interests, and deposits of highly fluctuating
businesses, need a high degree of liquidity. A large part of the
funds need to be in cash form or in secondary reserves. Banks lo
cated in stable communities with a large proportion of time de
posits can put much larger parts of their funds in income assets.
Cash. In this country, banks hold cash not only for reasons of
prudence but because such “ reserves” are required by law.® Only
a small part of bank cash, however, is actual legal tender currency—
till money. Most bank cash represents deposits with other banks.
Member banks keep all of their required reserves, and more be
sides, as deposits at the Federal Reserve Banks. The levels of
balances at the Reserve Banks are influenced by factors discussed
in other papers.
The levels of correspondent balances, although influenced by
the liquidity that banks think they should have, are also affected by
other factors. It has already been pointed out that a large proportion
of out-of-town checks are collected through correspondent banks.
Since collection of such checks is a costly service, the city cor
respondent banks expect to be compensated for doing it by the
maintenance of profitable deposit accounts. Therefore, some
country banks maintain city correspondent balances, not wholly
to provide liquidity, but in order to form the basis for securing
the free service of collection.
Secondary Reserves. The assets traditionally known as “ second
ary reserves” have been bankers’ acceptances, stock-exchange call
loans, and short-term Treasury securities. In former periods call
loans were favorite secondary reserve assets among banks. Now
the market supplies of these loans and of most forms of secondary
reserve except Treasury short-term securities are greatly reduced.
Bank liquidity has nevertheless increased in recent years since cash
reserves are currently so much in excess of legal requirements.
Excess reserves have become a kind of substitute for the call loan.
Income Assets. Although the major responsibility for providing
liquidity is presumed to rest on cash and secondary reserve assets,
•The present importance of legal reserves in another connection is discussed in
other papers in this volume. See “ Monetary Controls” and “ Instruments of Federal
Reserve Policy.”

COMMERCIAL BANK OPERATIONS

179

it is also considered desirable for income producing assets to hold
some promise of ready convertibility into cash. The paramount
consideration in connection with such assets, however, is how to get
the most interest income with the least risk. Loans are the tradi
tional employment for bank funds, but investments have become
increasingly important in recent years.
Loans. The form of loan most favored by tradition is the short
term commercial loan; that is, a credit based on a productive or
distributive process which, in its fruition, provides the funds with
which to repay the loan. The commercial loan has many advantages.
It is usually for short periods of time and the transaction it covers
supplies security for the loan. The appraisal of credit risk in such a
loan is comparatively easy.10 Although highly regarded, the com
mercial loan has come to be a progressively smaller proportion of
bank assets. For one thing, business enterprise has been centralized
more in corporations that are able to get favorable financing from
the long-term securities market. In addition, improvement in
transportation and changes in inventory practices have reduced
the requirements for short-term commercial credit. As a result,
banks have had to seek employment for their funds elsewhere.
One of the most important non-commercial employments of bank
funds has been lending on securities. Such securities, being market
able, in normal times furnish a convenient kind of collateral.
Security loans have been at various times a substantial proportion
of bank portfolios. This was particularly true during the late 1920’s,
when there was a great deal of speculative activity in the securities
markets.
Real-estate loans have also employed a considerable fraction
of bank funds. These loans, typically being for long periods, are not
liquid and in some periods have been out of favor. During the receht
depression, for example, the lack of liquidity in real-estate loans was
very frequently believed to be the cause of banking difficulties.
10 In addition to being satisfactory outlets for the funds of individual banks, it has
been claimed by those adhering to the so-called banking school that commercial loans
have a general monetary or credit merit in that they occasion the creation of com
mercial bank credit only in response to increased business activity or production, thus
guarding against price inflation.

180

BANKING STUDIES

In the past few years, however, there has been some rehabilitation
of the real-estate finance market and such lending, insured by the
Federal Housing Administration, has furnished an outlet for a
substantial volume of commercial bank funds.
Banks have made loans to provide longer term working capital.
In the past these loans were frequently in short maturity form but
were kept outstanding for long periods by repeated renewals.
This arrangement was not very satisfactory either for the bank or
the borrower. More recently these loans have been contracted for
longer periods, with provision that they be retired by periodic pay
ments. These are the much discussed “ term” loans.
The preference of banks for loans is wholly logical. Loans generally
yield better returns than investments, and banks are uniquely fitted
to judge their credit risk. For many years there has been a common
but mistaken impression among certain groups that bankers grant
loans grudgingly. This view ignores the fact that a good loan is the
most profitable asset a bank can have. The reason bankers appear to
hesitate about making loans is that they must avoid difficult col
lections as well as defaults. This requires a careful analysis of the
credit risks presented by each loan application. Much of the suc
cess of a bank depends on how collectible its loan portfolio is. It
may be, however, that in some cases banks have acquired the habit
of insisting on certain well-established kinds of security that may
not be as easily obtainable as in the past and may not always be
necessary for safety.
Credit analysis, as practiced by banks, is a highly developed
art. Its practitioners have devised elaborate statistical measures
involving balance sheet and income statement ratios. Large banks
have specially trained staffs for this sort of work. Small banks,
particularly those in compact and more or less self-contained
communities, are in a position to depend largely upon intimate
knowledge of local conditions and borrowers.
The success of banks in judging credit risks is evidenced by the
comparatively small rate of loss bank loans have produced. After
allowance for recoveries, the losses on loans by operating member
banks during the past decade and a half, including several years
of severe depression, have been at the annual rate of only about

COMMERCIAL BANK OPERATIONS

181

half a per cent of loans. In general, the risks involved in recessions
of business activity have caused banks more difficulty than those
associated with such credit factors as the ability and willingness
of borrowers to repay their loans under ordinary circumstances.
As a result of the shrunken demand for credit, banks have had
to become much more aggressive in seeking out loans than in former
periods, and they have had to employ substantial proportions of
their funds in the purchase of securities.
Investments. Many banks have entered into the large-scale
purchasing of securities reluctantly. One reason is that they enjoy
no such special advantages as they do in the making of local loans.
Securities must be purchased competitively with other institutional
and private investors. Most of the institutional investors, such as
insurance companies and investment trusts, because they average
large in size, can afford to have regular staffs of investment and
business analysts. A small bank with a few employees can not afford
such expensive programs of investment research and must look to
correspondents and professional investment counselors for advice.
Another problem that banks must face in purchasing securities
is the remote maturity of most issues. As a rule securities traded in
the market do not mature for a considerable period of time, often
for many decades. The market price of such long-term securities
reflects changes in long-term interest rates. Thus in purchasing
securities a bank assumes an interest risk in addition to the credit
risk which characterizes commercial and other loans of shorter
duration. A relatively short-term loan made just before a rise in
interest rates represents a potential loss in interest for a short time;
but the purchase of securities at such a time commits a bank to a
small return for a long period or possibly to selling at a discount
on the market.
If banks held their securities to maturity, the risk of rising
interest rates would not be very important. The returns on securities
purchased in high-price, low-yield periods and those purchased in
low-price, high-yield periods would average out. But banks do
not necessarily plan— and may not be able— to hold their secur
ities to maturity. They definitely prefer loans and like to be able
to substitute them for securities when occasion permits. Moreover,

182

BANKING STUDIES

even if it be remote, there is always the chance that banks will
need to sell securities to maintain liquidity.
As a result, bankers are inclined to be sensitive to abrupt
changes in market quotations even though they do not contem
plate the immediate sale of securities. Since they do not usually
sell securities in advance of need for the proceeds, there is always
the chance that widespread demand for loans or withdrawal of
deposits will bring about a mass selling of securities that will
contribute to a decline in prices and thus aggravate losses. Bankers
are aware of this possibility and many try to anticipate the general
movement by selling in advance of other bankers in order to avoid
loss. The liquidity and position of any one bank may be improved
by this process, but the stability of the securities market and the
condition of other banks may be adversely affected.
If there were ample market supplies of short-term securities,
bankers could avoid the interest rate risk associated with long-term
securities. A frequent but somewhat impractical recommendation
is that banks should own only securities that will mature within
five years. Aside from the fact that there are not enough of them
to supply all banks, short-term securities now yield very low rates.
Many banks maintain “ spaced” or “ staggered” securities port
folios. This means that their security accounts consist of roughly
equal portions of short, intermediate, and long maturity issues.
Once such a program has been established most of the new securities
purchased can be of long maturity. The passage of time brings the
whole portfolio nearer to maturity, but at spaced intervals, and
the securities reaching maturity from time to time provide cash
for reinvestment or other bank uses as circumstances require.
Changes in security prices are of particular concern to banks be
cause of their special capital position. In recent years banking capital
has been small in proportion to total assets. As a result a moderate
decline in the price of securities may represent a paper loss equal
to a fairly large proportion of capital accounts. This is not a true
“ impairment” of capital, but conservative bankers frequently
think of it as such. As a result, many banks with slender capital
equities may be disinclined to purchase and hold the longer term
securities that might jeopardize their book solvency.

COMMERCIAL BANK OPERATIONS

183

OTHER SERVICES OF COM M ERCIAL BANKS

Although deposit-lending-investing operations are their prin
cipal functions, commercial banks do many other things. Almost
all of them have safe deposit space for rent. Many banks in large
and middle-size cities act as corporate trustees, a service that is
readily adaptable to banking because it makes additional use of
existing investment and legal facilities. The trust business of some
banks furnishes a substantial part of their income. Banks also buy
and sell securities and foreign exchange for customers, act as travel
agents, and deal in mortgage loans. In small communities they
frequently sell insurance and “ clerk” auction sales, picking up a
few desirable loans in the process. Banks frequently are landlords.
Some own banking quarters with excess space to rent. Banks that
make real-estate mortgage loans sometimes have to take possession
of properties which, unless they can be disposed of promptly, are
usually rented.
PROFITS OF COM M ERCIAL BANKS

The earnings of banks, which would appear to be of primary
importance to bank stockholders only, have a long-run bearing on
the stability of the banking system as well. Earnings should be
sufficient to insulate capital against the losses that banks must
anticipate and to maintain capital funds for the protection of
depositors. They must, of course, be sufficient to pay expenses,
and the degree of this sufficiency greatly influences the quality of
personnel that can be attracted to the banking business. Earnings
and prospects for earnings also determine whether an individual
bank or the banking system as a whole can obtain new capital
from the investment markets.
At the present time, in the absence of any considerable demand
for new banks, the ability to raise capital is of importance mainly
to going institutions. With the redundancy of reserves and low
interest rates now prevailing, banks have little incentive to add
to their capital except in cases where the management or super
visory authorities think it desirable for the protection of depositors.
As a basis of continuance of banks as business institutions, it is
important that their earnings be large enough to attract investors.

184

BANKING STUDIES

A simple account of bank earnings for the years 1919-1939 is
contained in the accompanying chart, in which commercial banks
are represented by operating member banks. Gross earnings, net
earnings after expenses but before losses and recoveries, and net
profits are related to total assets (roughly equivalent to capital
accounts plus deposits and borrowed money). The spread or
difference between the lines showing gross and net earnings rep
resents total expenses; the spread between net earnings and net
M em ber B a n k E arn in gs an d P ro fits *

(As percentages of total assets)

1920

1925

1930

1935

1940

1 For data, see Table 22, p. 437.

profits represents net losses and charge-offs, or the excess of gross
losses and charge-offs over recoveries and profits on securities sold.
Although bank earnings are influenced by many factors, three
have been of particular importance in the past two decades: the
rates of interest received from earning assets, the interest rates
paid on deposits, and the amounts and timing of charge-offs and
losses.
In the past decade there has been a sharp drop in the average
rate of bank income from interest, a drop to less than 55 per cent

COMMERCIAL BANK OPERATIONS

185

of the 1929 average. The rates on both loans and investments have
declined, but the rate on these two combined has dropped even
more because of a shift from loans, the higher rate form, to invest
ments.11 This drop explains most of the decline in bank gross
revenue, since noninterest earnings have remained fairly constant
and the total value of earning assets now held is not much less
than it was a decade ago. Although the decline of bank interest rates
has been general, there are many banks that have not reduced their
loan rates a great deal in the past ten years. In 1939, for instance,
nearly 1,400 member banks, about 23 per cent of the total, were
receiving an average of more than 7 per cent on their loans.
About five-eighths of the decline in interest received by banks
has been offset by the decline in interest paid on deposits. Part of
the reduction of interest cost is the result of the discontinuance
of interest on demand deposits and part is due to the reductions in
rates paid on time and savings deposits. Although insured banks
are prohibited from paying interest on demand deposits and the
amount they can pay on time and savings deposits is limited by
regulation, it appears that banks in any event would have volun
tarily reduced the amounts paid. At present the rates at many
banks, perhaps at a majority of them, are in fact below the maxi
mum levels permitted by regulation.
Even under the most careful credit and investment management,
banks usually have some charge-offs and losses. During periods of
severe depression, charge-offs are likely to equal or even exceed
profits. There appear to be greater differences among banks in this
respect than in other matters of earnings and profits. The success
or lack of success of most individual banks appears to depend more
on ability to hold losses within reasonable bounds than on any other
factor.
Consistent, even if moderate, profits are particularly character
istic of the banking business. Few banks make large profits but
few are losing enterprises. In the past five years about five-sixths
of all operating member banks have made some profit. This is a
more consistent record than that of most lines of business endeavor.
11 For more detailed treatment see “ Trend of Member Bank Earnings and Profits,”
Federal Reserve Bidletin, May 1940, pp. 396-97.

186

BANKING STUDIES

SUMMARY
The preceding pages have presented a brief description of com
mercial banking functions—mainly the depositary and lendinginvesting services. It has been pointed out that, in one way or
another, banks serve many persons and most businesses. Without
banks a large part of the complex system of producing and distribut
ing income would slacken or even halt. The universal difficulties
at the time of the 1933 banking holiday illustrate how dependent
everyone, even though not a depositor or borrower, is on banking
services. It is for this reason that bank operations are not solely
a concern of those who manage banks but a matter of public
interest. It has been the purpose of this paper, therefore, to look
mainly at the banking functions which affect that interest. The
broader credit function of the banking system as a whole and its
primary role in the money system will be discussed in a later paper.12
12“ Money System of United States.”

SUPERVISION OF THE COMMERCIAL
BANKING SYSTEM
Page
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189

R easons

Su p e r v is io n .................................................

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for

O bjectives

L imitations

Su p e r v isio n ............................................

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A gencies

Su per visio n ..................................................

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F unctions

Supervision . .............................................

198

I ncidence

Supervision

I ndividual B ank s ..

207

Su m m a r y ....................................................................................

209

R. F. L e o n a r d
Assistant Chief
Division of Examinations

SUPERVISION OF THE COMMERCIAL
BANKING SYSTEM
Supervision of banks by governmental authorities began early
in the development of our banking system, over a century ago.
From extremely modest beginnings, it has become a major govern
mental activity, with several Federal agencies and departments of
the forty-eight States engaged in the work. The present form and
scope of bank supervision result from the multiplicity of banks and
chartering authorities existing in the American system of free bank
ing, from the troubles encountered by individual banks, and from
the frequency and magnitude of general banking crises. This
combination has produced over the years numerous supervisory
bodies, various types of supervision, and manifold supervisory
activities. While each supervisory agency operates within boundaries
drawn by statute, the boundaries overlap considerable areas and
in these areas jurisdiction becomes a problem of inter-departmental
arrangement.
Bank supervision comprehends more than the examination of
banks, although that is a most important phase of the work.
Other phases of the supervisory function have to do with: organi
zation and liquidation of banks; issuance, interpretation, and en
forcement of regulations; steps taken to effect correction of unsatis
factory conditions disclosed by examinations; submission and review
of reports of condition and of earnings and expenses. Changes in
capital or corporate structure and grants of authority for the estab
lishment of branches and for the exercise of fiduciary and certain
other powers also come within the scope of supervision.
The extensive development of bank supervision by State and
Federal governmental agencies is largely the product of two closely
related outstanding characteristics peculiar to our commercial
banking system. These are:

189

190

BANKING STUDIES

1. The great number of commercial banks, some 14,500 as of December 31,
1939 (in the early 1920’s the total was approximately twice that figure).1
These 14,500 banks range from village banks with assets of less than $100,000,
serving the immediate vicinity, to metropolitan banks with assets more than
twenty thousand times that amount, whose activities extend over wide areas
of the country and even to foreign fields.
2. The mass and diversification of legislation, both general and detailed,
evidencing the effort to control banking operations in the public interest
through statutory provisions.
REASONS FOR SUPERVISION

The primary reasons for bank supervision lie in the fact that,
by the very nature of their business, banks are quasi-public insti
tutions; and in the further fact that, at times, some banks have
failed to meet their obligations and responsibilities, with serious
consequences to the public. Banks are the principal source of com
mercial credit and of the means of payment (formerly in the form
of bank notes and later in the form of deposits) through which most
of the business of the country is carried on. The ability of banks to
meet the credit needs of the country has a great and direct influence
upon all types of business and productive enterprises and upon the
prosperity of the country as a whole. Failures of banks have effects
far beyond the immediate fortunes of the individual depositors or
borrowers and frequently have disturbing effects beyond the reaches
of the immediate territory served by the banks. The banking busi
ness, therefore, has long been regarded by the Federal Government,
the States, the public generally, and the bankers themselves, as
one that is properly subject to governmental supervision.
Banking troubles and crises have been a major factor in the
development of bank supervision. The establishment of the national
banking system, with its provisions for the examination and super
vision of national banks, was preceded by an era of wildcat banking
and of confusion and instability in the currency system. One of the
purposes of the Federal Reserve Act, which followed the money
panic of 1907, was to establish a more effective supervision of
1 In these papers, the term “ commercial bank” is used broadly to apply to national
banks and State banks and trust companies exclusive of mutual savings banks. See
discussion in the paper “ Banking Structure of United States.”

SUPERVISION OF COMMERCIAL BANKING SYSTEM

191

banking. The collapse of the banking system in 1933 was a direct
cause of the measures subsequently taken to strengthen supervision
and make it more effective.
Another reason for bank supervision lies in the necessity of
giving effectiveness to the great mass of detailed legislation and of
regulations issued under general legislation affecting banks. The
administration of such measures has become a part of the super
visory function.
The fundamental reason for the type of supervision developed in
this country and for much of the banking legislation is the great
number of banks, which, in turn, is the outgrowth of the policy of
free banking adopted by many of the States in the early days and
continued in the National Bank Act. A result of this development is
the problem of obtaining competent management for so many
banks. To a great extent banking has been regarded in this country
as a business rather than as a profession requiring special training,
with the result that ability in other fields has often been regarded
as sufficient and proper training and qualification for the manage
ment of a bank. Frequently such managements work out surpris
ingly well, but too often men who are successful in other fields have
not been successful as bank managers. “ Too many banks and not
enough bankers” has often been said to have been one of the causes
for the great number of failures during the years following the
World War. A direct cause of the type of bank supervision, with its
detailed laws, regulations, and examinations, that has developed
in this country, is the fact that the management of banks has been
frequently entrusted to men without particular training for banking
and the further fact that the earnings of many banks have been too
small to permit the employment of well-trained and capable officers.
OBJECTIVES OF SUPERVISION

Briefly stated, the fundamental objective of bank supervision is
the maintenance of a sound banking system—a system that is not
only in a position to meet its liabilities without difficulty, but is
also in a position to serve properly the legitimate credit demands
which may be made upon it. So far as the individual banks are con
cerned, such a system means strong individual units with sound

192

BANKING STUDIES

assets and adequate capital, operated in accordance with banking
principles and applicable banking laws and regulations; in short, a
system composed of individual banks in strong financial condition,
under proper management.
The fundamental purpose of supervision is sometimes described
as the maintenance of sound banks, and this raises the question
whether measures appropriate to maintain or improve the sound
ness of individual banks are always sufficient for, or conducive to,
the maintenance of a sound banking system as a whole. For example,
an individual bank is generally regarded as having strengthened its
position if, at the first sign of weakness or impending weakness in
prices or values, it sells bonds and calls loans. If such a policy,
however, is followed by many banks at the same time, either on
their own volition or because of supervisory action, it may cause
such a decline in values as to weaken the system as a whole, includ
ing the very banks which first undertook to protect themselves.
The same question may be raised in connection with upswings
as well as downswings. At times credit extensions altogether sound
from the point of view of the individual bank, in that the loans are
well secured and collectible, may be part of a general expansion
producing inflated values and a resultant collapse and drastic
deflation affecting the banking system as a whole. A striking example
of this was the general expansion of call loans on the stock exchange
in the late 1920,s. The direct losses sustained by individual banks
from such loans on securities were comparatively insignificant, but
the expansion of such loans in the aggregate was an important factor
in the disastrous stock-market speculation.
Thus, supervisory measures and policies need be considered in
their relation both to the individual bank and to the banking system
as a whole.
LIM ITATIONS OF SUPERVISION

In stating that the objective of supervision is the maintenance of
a sound banking system there is no intent to over-emphasize the
powers of supervision. It is fully recognized that supervision is no
substitute for management and that of itself it can not insure the
maintenance of a sound banking system. It can only contribute
to that end.

SUPERVISION OF COMMERCIAL BANKING SYSTEM

193

With respect to loans and investments of individual banks,
supervision can and does exert restraints through the administration
of applicable laws and regulations which contain restrictions and
limitations. Supervision, moreover, can and does exert some re
straining influence through the classification of loans in reports of
examination and through comments and criticisms by examiners
and supervisory authorities as to individual loans and investments
and as to investment, lending, and collection policies. On the other
hand, supervision can not force an expansion of loans and invest
ments. Even if banks could be compelled to make certain loans or
investments or expand their totals, such compulsion would be no
proper part of the supervisory function. Supervision can, however,
adapt itself to changing circumstances, keep pace with the de
velopments in the banking and economic fields, and see to it that
banks are not hampered in the proper discharge of their credit
functions by unnecessary supervisory restrictions or the attitude
of the supervisory authorities and examiners in the field.
An aim of bank supervision has been and is to minimize bank
failures and their disastrous effects. That bank supervision has
not prevented bank failures is all too clear. Undoubtedly, however,
it has prevented many failures that would otherwise have occurred.
As might be expected, its record in this respect has been more
successful in dealing with individual cases where the problems are
due principally to local conditions than where the problems are
due to general and drastic declines in values or freezing of assets
over extensive areas. Bank supervision can properly be expected to
exert a strong influence toward holding banks up to the average in
normal times, and toward raising that average; but it is not reason
able to expect it to prevent wholesale failures in times of general
economic distress and general collapse of values.
AGENCIES OF SUPERVISION

There are three Federal agencies actively and directly engaged
in bank supervision as a major part of their work. Other Federal
agencies, in connection with their regular work, incidentally enter
to some degree into the work of bank supervision. The forty-eight
States also have departments engaged in the work of supervising
banks.

194

BANKING STUDIES

As regards supervision, there are four classes of banks in our
commercial banking system: national, State member, nonmember
insured, and nonmember noninsured banks. The supervisory
agencies and the general scope of their fields are as follows:
The State Agencies. Among these are the oldest agencies of
supervision, the history of some of them going back to the early
days of the previous century. The direct and primary responsibility
for the supervision of all State banks, whether members of the
Federal Reserve System or not, and whether insured banks or not,
rests with the supervisory agencies of the respective States. State
banks are chartered by the State, operate under the supervision of
the State authorities, and, in the event of liquidation, have their
activities terminated in accordance with provisions of State law.
Comptroller of the Currency. Established in 1863, the Bureau
of the Comptroller of the Currency is the oldest Federal agency
engaged primarily in bank supervision. The currency function
with which it was originally associated is now a comparatively unim
portant part of its work. Although the Federal Reserve Act and
the Banking Acts of 1933 and 1935 have given the Federal Reserve
and the Federal Deposit Insurance Corporation broad powers of
examination and supervision, the Comptroller of the Currency
remains under the law directly and primarily responsible for the
supervision of national banks. National banks obtain their charters
from the Comptroller of the Currency and are liquidated under the
provisions of the National Bank Act administered by the Comptrol
ler, who alone among the supervisory agencies has the power to
appoint a conservator for a national bank or place it in receivership.
Under the law the Comptroller is required to examine each national
bank at least twice a year and oftener if considered necessary. In
one important respect the supervisory powers of the Comptroller
of the Currency extend to State member banks; the Investment
Securities Regulation issued by the Comptroller of the Currency is
applicable to all member banks, State as well as national.
Federal Reserve. With its responsibilities for influencing the
supply and cost of bank credit, the Board of Governors of the
Federal Reserve System is interested in all phases of supervision
and the Board and the Federal Reserve Banks which were created
in 1913 have broad powers of examination and supervision.

SUPERVISION OF COMMERCIAL BANKING SYSTEM

195

Although authorized to examine all member banks, as a matter
of practice neither the Federal Reserve Banks nor the Board of
Governors examines national banks since the Comptroller of the
Currency is directly charged with that responsibility by law and
reports of such examinations are furnished the respective Federal
Reserve Banks and made available to the Board of Governors.
State member banks, however, are examined by the Federal Re
serve Banks, each of which has a bank examination department.
Under the policy of decentralization of administration which has
been followed, the examination work has been carried on by the
Federal Reserve Banks under the ultimate responsibility of the
Board. Under that policy the supervisory relationships of the
individual member bank are with the Federal Reserve Bank of its
district rather than with the Board in Washington.
In the discharge of its responsibilities the Board has issued a
number of regulations; some affecting the banking system as a
whole, and others bearing primarily upon the operations of indi
vidual banks. While most of the regulations apply to member
banks, one (Regulation U relating to loans for the purpose of
purchasing or carrying stocks registered on a national securities
exchange) applies to all banks, including nonmember noninsured
banks. Regulation F (Trust Powers of National Banks) is directed
to national banks; and Regulation H, which relates to State bank
membership, is applicable only to State member banks.
Federal Deposit Insurance Corporation. Created in 1933 to
provide deposit insurance, the Federal Deposit Insurance Corpora
tion also has supervisory functions. It regularly examines all insured
nonmember banks, and exercises certain supervisory powers with
respect to them. With all member banks examined and supervised
by either the Comptroller of the Currency or the Federal Reserve,
all insured banks are thus brought under the examination and
supervision of a Federal agency. The Federal Deposit Insurance
Corporation is also empowered to examine national banks and
State member banks, but only with the written consent of the Comp
troller of the Currency or the Board of Governors of the Federal
Reserve System as the case may be. Such examinations have been
rare and have been made usually only in anticipation of financial

196

BANKING STUDIES

assistance by the Federal Deposit Insurance Corporation in a re
habilitation program or where a member bank desires to continue
as an insured bank after ceasing to be a member of the Federal
Reserve System.
The Corporation, however, has broad powers of supervision over
all insured banks since it reviews reports of examination of national
banks made by the Comptroller of the Currency and reports of
examination of State member banks made by the Federal Reserve
authorities and can institute proceedings for termination of in
surance whenever it finds that an insured bank has not, after cita
tion, effected corrections of unsafe or unsound practices or violations
of law or regulation. Upon the termination of the insurance of a
national bank by the Corporation, the Comptroller of the Currency
is required to appoint a receiver for the bank; and upon termination
by the Corporation of insurance of a State member bank, the Board
of Governors is required to terminate the bank’s membership in
the System. Other broad supervisory provisions require the approval
of the Corporation for the merger or consolidation of an insured
bank with a noninsured bank or the assumption of the liabilities
of a noninsured bank by an insured bank, or vice versa, and authorize
the Corporation to issue certain regulations and to require reports.
The Treasury. No bank, national or State, that is a member of
the Federal Reserve System, can operate except under a license
issued by the Secretary of the Treasury. Since the licenses are
revocable and their provisions are subject to change, the Secretary
of the Treasury has extensive potential powers of supervision. In
addition, the Reconstruction Finance Corporation can not make
a capital investment in a bank except with the approval of the
Secretary of the Treasury. The Treasury reviews all recapitalization
and rehabilitation programs involving the purchase of preferred
stock and capital notes and debentures by the Reconstruction
Finance Corporation, and as a result of such review grants or with
holds its approval or suggests modifications of the plan previously
agreed upon by the management of the bank, the Reconstruction
Finance Corporation, and the regular supervisory agencies.
The office of the Comptroller of the Currency is a bureau of the
Treasury. The Comptroller is appointed by the President with the

SUPERVISION OF COMMERCIAL BANKING SYSTEM

197

advice and consent of the Senate, but the Deputy Comptrollers are
appointed by the Secretary of the Treasury, who also exercises
certain authority with respect to other personnel of the office. The
legal work of the Bureau is under the General Counsel of the
Treasury and the Treasury participates on occasion in the handling
of certain supervisory situations.
Reconstruction Finance Corporation. Through contract the
Reconstruction Finance Corporation has acquired certain super
visory or quasi-supervisory powers over the banks in which it has
a capital investment. These include the authorization to examine,
require reports, and make certain requirements with respect to
corrections and management. As a matter of fact, the Corporation
seldom examines banks itself but reviews reports of examination
made by the respective Federal agencies of banks in which the
Corporation is interested. A most important supervisory role is
that played in connection with recapitalization and rehabilitation
programs involving banks in which the Corporation has a capital
interest or is being requested to make an investment. In such cases,
the Corporation frequently has a determining voice both as to the
broad outline and the details of the program.
Other Agencies. Under the Trust Indenture Act of 1939, the
Securities and Exchange Commission was given authority with
respect to important phases of trust department activities of banks
in connection with the approval of trust indentures under which
securities are issued. Under the Public Utility Holding Company
Act of 1935, no registered holding company or subsidiary may have
as an officer or director any officer, director, or representative of a
bank, except in such cases as rulings and regulations of the Securities
and Exchange Commission may permit.
While the National Labor Relations Board and the Wages and
Hours Division of the Department of Labor can not be said to be
bank supervisory agencies, since their activities are not directed
toward banks as such, nevertheless their rulings may affect bank
operations and practices and represent a development through
which activities of nonmember, as well as member, banks may be
brought further within the field of Federal jurisdiction.

BANKING STUDIES

198

FUNCTIONS OF SUPERVISION

The functions of supervision are many and varied and throughout
its life a bank is subject to supervision in one or more phases. The
principal supervisory relationships in the commercial banking sys
tem are shown in the accompanying chart.
Chartering. A national bank receives its charter from the
Comptroller of the Currency and a State bank receives its charter
from State authorities. For many years the belief was widely
shared that any group of men with a certain, and generally rather
limited, amount of capital had an almost undeniable right to estab
lish a bank, and over a long period charters were freely granted.
Out of the harsh experiences of the banking troubles leading up to
the bank holiday of 1933, however, has come the realization that
charters should be granted much less freely.
As a result of legislation enacted following the bank holiday, a
national bank becomes an insured bank from the time it is author
ized to commence business, and the Comptroller of the Currency
is required to certify to the Federal Deposit Insurance Corporation
that, in authorizing the new bank to commence business, considera
tion has been given to the following factors:
1.
2.
3.
4.
5.

The financial history and condition of the bank;
The adequacy of its capital structure;
Its future earnings prospects;
The general character of its management;
The convenience and needs of the community to be served by the
bank;and
6. Whether or not its corporate powers are consistent with the purposes
of Section 12B of the Federal Reserve Act.

State authorities have also recognized the situation and on their
part have endeavored to be more restrictive in the granting of
charters, and the National Association of Supervisors of State
Banks has gone on record as to the necessity of avoiding past errors
in the free granting of charters. As a result of the cooperation of the
various Federal and State agencies, it can be said that it is the
general aim of all to grant charters only where there is demonstrable
need for the bank and reasonable assurance of its success.

SUPERVISION OF THE COMM ERCIAL BAN K IN G SYSTEM
Principal Relationships

48 STATES
FEDERAL RESERVE
TREASURY

BOARO OF GOVERNORS
FEDERAL RESERVE BANKS

COMPTROLLER
OF THE

CURRENCY
(BUREAU OF THE TREASURY)

FEDERAL
DEPOSIT
INSURANCE
CORPORATION

RECONSTRUCTION
FINANCE
CORPORATION

STATE BANK
SUPERVISORY
AUTHORITIES

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NATIONAL BANKS
(MEMBERS)

STATE MEMBER BANKS

---------- SUPERVISORY RELATIONSHIPS.
---------- SUPERVISORY RELATIONSHIPS AUTHORIZED, BUT NOT ORDINARILY EXERCISED.
---------- RELATIONSHIPS BY CONTRACT ONLY.

INSURED NONMEMBER
BANKS

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OC UJ

NONINSURED BANKS

200

BANKING STUDIES

Liquidation. As supervision plays an important role at the
beginning of a bank’s life, so it does at the end. In the case of
national banks, the Comptroller of the Currency is empowered to
appoint a conservator under certain conditions or to appoint a
receiver. State authorities have similar powers and responsibilities
in the case of State banks.
If the Comptroller of the Currency places a national bank in
receivership, he is required to appoint the Federal Deposit In
surance Corporation as receiver whenever the bank has been closed
on account of inability to meet the demands of its depositors. The
Corporation is also authorized to serve as receiver for insured State
banks if so appointed by the State authority.
During the Operating Life of a Bank. It is during the period
of active operation that banks are subject to most phases of super
vision. The field of supervision, however, is separate and apart from
that of management. The operation and management of a bank
are the responsibility of its directors and officers. The responsibili
ties of supervision during the active life of a bank are: (1) to as
certain the solvency and condition of the bank; (2) to determine the
character and ability of the management; (3) to issue regulations
as authorized; (4) to administer applicable banking laws and regu
lations; and (5) to take appropriate and effective steps toward
obtaining correction of hazardous or unsatisfactory conditions.
The following supervisory functions are of general and continuing
applicability to bank operations. Functions of more limited and
occasional applicability will be described later.
Regulations, Rulings, and Instructions. A distinctive character
istic of our banking system is the mass of banking legislation. In
some important respects the legislation, moreover, is supplemented
by formal regulations issued by various agencies under responsi
bilities delegated by law.2 It is important to note that in some
cases one supervisory agency issues regulations affecting banks under
the immediate supervision of other agencies. Thus the Comptroller of
the Currency issues a regulation regarding the purchase of invest
ment securities to which State member banks are subject as well
2 For a list of the regulations issued by the various agencies, see pp. 461-63.

SUPERVISION OF COMMERCIAL BANKING SYSTEM

201

as national banks. So far as the State member banks are concerned,
administration and enforcement of the regulation rest with the
Federal Reserve authorities rather than with the Comptroller of
the Currency. On the other hand, the Board of Governors issues a
regulation that pertains to the operations of national banks
(Regulation F, Trust Powers of National Banks) but enforcement
of the regulation rests with the Comptroller of the Currency. The
Federal Deposit Insurance Corporation has issued one regulation
that is applicable only to insured nonmember banks and others that
are applicable to all insured banks.
Having the same general effect as regulations, but differing
somewhat in form, are the instructions issued from time to time
by the various supervisory agencies, such as instructions for prepa
ration of call reports of condition, reports of earnings, reports of
deposits for computation of reserves, reports of deposits for compu
tation of assessment of deposit insurance, etc.
Closely related to regulations and instructions are rulings issued
by the various supervisory agencies interpreting provisions of
applicable banking laws, regulations, and instructions. Such ad
ministrative rulings form a part of the code under which banks
operate and to which their practices must be adjusted.
Examinations. Examination is only one of the functions of super
vision. Its purpose is to ascertain the facts; if unsatisfactory condi
tions are disclosed, other phases of supervisory activity are then
concerned with obtaining the necessary corrections. Information
obtained through examinations serves a threefold purpose: (1) as a
basis for supervisory action with respect to the particular situation;
(2) as a basis for corrective action by the bank management itself
after consideration of the information thus disclosed and brought
to the attention of the officers and directors of the bank; (3) as a
guide to the supervisory authorities in the framing of general regu
lations and supervisory policies.
The information gained through bank examinations, along with
that obtained from periodic reports of condition and from other
sources, constitutes part of the data necessary for the intelligent
formulation of broad national credit and banking policies.
An important phase of examination procedure as followed in

202

BANKING STUDIES

this country is the appraisal by supervising agencies of the assets
of banks. The importance of such appraisals has greatly increased
with the decline in the ratio of capital to liabilities. In 1875 approxi
mately 34 per cent of the total resources of all commercial banks
was furnished by the capital accounts. By 1900 the figure had
dropped to 20 per cent, and by 1925 to 12 per cent. As of December
31,1939, capital accounts amounted to but slightly more than 10 per
cent of the resources of all commercial banks.
In this connection it may be noted that the great decline in true
commercial credits and the growth in securities holdings of banks
that have been so marked during the past decade have added to the
difficulties of supervision as well as management. Both had been
geared primarily to the extension of short-term credit direct to
borrowers. The general expansion of activity of banks in the field
of investments brought problems for which neither had been fully
prepared by experience.
Corrective Requirements. A most important function of supervision
is the review of the condition of banks as disclosed by reports of
examination; the determination of what, if any, corrective action
by the supervisory authorities is needed in any case; and the obtain
ing of the necessary corrections. Typical of the matters which come
within this field are compliance with applicable laws and regulations,
compliance with sound banking practices, elimination of losses,
provision of adequate capital, strengthening of active management
or directorates, rehabilitation programs, and mergers and consoli
dations.
Reports. Since early days banks have been required to submit
reports to governmental agencies. The accompanying table shows
the principal reports required of banks by the supervisory agencies
today. A detailed list of the reports and information as to the
frequency of submission is contained in the appendix.®
Counsel and Advice. Although not established by law, the giving
of counsel and advice has become an important supervisory function.
This does not mean that examiners or other supervisory officials con
sider themselves more capable than bank directors and officers.
* See pp. 464-66.

203

SUPERVISION OP COMMERCIAL BANKING SYSTEM
P r in c ip a l

R eports

R e q u ir e d

B anks

I n d ic a t e d

S u p e r v i s o r y A u t h o r i t i e s 11
CLASS OF BANK AND SUPERVISORY AGENCY
REPORTS

Report of condition.........
Certified statement of
deposits........................
Report of earnings and
dividends......................

Report of deposits and
reserves required..........
Weekly condition report
of banks in selected
cities.............................

Noninsured
Insured
Nonmember Nonmember

National

State Member

Comptroller1*

Reserve Bank0
State

F.D.I.C.
State

F.D.I.C.

Comptroller5
R.F.C.d

Reserve Bank0
State
R.F,C.d

F.D.I.C.
State
R.F.C.d

Reserve Bank

State

State
R.F.Cd

a Reports required generally of all corporations, such as tax returns and reports to the Social Security
Board, Wages and Hours Administration, etc., are not included in this table.
b Copies are also furnished to the appropriate Federal Reserve Bank.
0 Reports are submitted in duplicate to the respective Federal Reserve Banks, which furnish copies to
the Board of Governors.
d If bank has sold preferred stock, capital notes, or debentures to the Reconstruction Finance Cor
poration.
6 Requirements vary as between States.

However, because of the experience gained from close association
with many banks and their varied problems, and of the advantages
offered by a detached point of view, the supervisory agencies are
often in a position to offer valuable and constructive advice and
counsel. This has been generally recognized and such services have
been freely availed of, particularly by the smaller banks.
The following supervisory functions are of limited and occasional
applicability as distinguished from those of general and continuing
applicability. The supervisory functions with respect to applications
for deposit insurance, admission to membership in the Federal
Reserve System, establishment of branches, certain extensions of
activities, and changes in corporate structures are somewhat anal
ogous to the functions of chartering.
Admissions to Membership in the Federal Reserve System. State

204

BANKING STUDIES

banks become members of the Federal Reserve System after ap
proval by the Board of Governors of their applications for member
ship. National banks, on the other hand, become members of the
Federal Reserve System upon organization. They are, in effect,
admitted to membership in the System by the Comptroller of the
Currency without any action by the Board of Governors.
Admissions to Benefits of Deposit Insurance. A similar situation
prevails in connection with admissions to the benefits of insurance.
National banks become insured banks upon authorization by the
Comptroller of the Currency to commence business. State banks
become insured banks either automatically upon admission to
membership in the Federal Reserve System or upon approval by
the Federal Deposit Insurance Corporation in the case of non
member banks. Only in the latter case, however, does the Federal
Deposit Insurance Corporation have statutory authority to pass
upon additions to the list of insured banks. Before approving the
application of a nonmember bank for insurance, the directors of the
Federal Deposit Insurance Corporation are required to give con
sideration to the same factors which the Comptroller of the Currency
is required to consider before authorizing a new national bank to
commence business (see page 198). Likewise, in the case of admis
sion of a noninsured bank to membership in the Federal Reserve
System, the law requires that the Board of Governors certify to
the Federal Deposit Insurance Corporation that consideration has
been given to the same factors.
Branches. The establishment of branches is subject to approval
by supervisory agencies. For establishment by national banks of
either out-of-town branches or branches within the head-office city,
the approval of the Comptroller of the Currency is required. The
approval of the Board of Governors, however, is required for the
establishment by national banks of branches in foreign countries
or dependencies or insular possessions of the United States. Under
the provisions of the Federal Reserve Act, State member banks are
required to obtain approval of the Board of Governors for the
establishment of out-of-town branches in this country and the
establishment of branches abroad. The act, however, does not
cover the establishment of branches within the head-office city.

SUPERVISION OP COMMERCIAL BANKING SYSTEM

205

Under other provisions of the Federal Reserve Act nonmember
insured banks are required to obtain the approval of the Federal
Deposit Insurance Corporation for the establishment of any branch,
wherever located. Establishment of branches by State banks,
whether member, insured nonmember, or noninsured nonmember,
is also subject to requirements of the respective State laws and
regulations.
Trust Powers. For permission to exercise trust powers, national
banks must obtain authorization from the Board of Governors.
State member banks that were not exercising trust powers at the
time their applications for membership were approved are required
under conditions of membership to obtain the permission of the
Board of Governors to exercise trust powers. This is in addition to
any authorization necessary under State law.
Changes in Capital Structure. The requirements of the respective
chartering authorities must be met in connection with changes in
capital. Reductions of capital may come within the field of super
visory agencies, whether they were the chartering agencies or not.
Specific approval by the Comptroller of the Currency is required
for reduction of capital by national banks, and approval of the
Federal Deposit Insurance Corporation is required for reduction of
capital by nonmember insured banks. There is no provision in law
requiring approval by a Federal supervising agency for reduction of
capital by State member banks. However, under conditions of
membership that have been prescribed for several years, State
member banks are required to obtain approval of the Board of
Governors for reductions of capital.
Mergers and Consolidations. The merger or consolidation of a
noninsured bank with an insured bank, or the assumption of liabili
ties of a noninsured bank by an insured bank, or vice versa, is subject
to approval by the Federal Deposit Insurance Corporation. Other
mergers, consolidations, or absorptions may or may not require
approval of supervisory agencies. As part of their regular super
visory function, however, the agencies endeavor to keep informed
as to all such developments—encouraging those which are con
structive and discouraging those which are not.
Holding Company Affiliates. The provisions of the Banking Act

206

BANKING STUDIES

of 1933 with respect to holding company affiliates of member banks
added new supervisory functions affecting both the banks and the
holding company affiliates controlling them.
As a means of regulating group banking, the Banking Act of 1933
provides that holding company affiliates may not vote the stock
which they own or control of their subsidiary member banks with
out first obtaining voting permits from the Board of Governors of
the Federal Reserve System. The law authorizes the Board, in its
discretion, to grant or withhold such permits, as the public interest
may require, but sets up certain minimum requirements for the
issuance of the permits, including submission of the holding com
pany affiliate to examination by examiners authorized to examine
its controlled banks, maintenance of reserves of readily marketable
assets by the holding company affiliate for the protection of its
banks, complete divorcement of the holding company affiliate from
securities companies, and restriction of dividend payments by the
holding company affiliate to its actual net earnings. In the exercise
of its discretion in the granting of voting permits, the Board has
adopted a standard form of agreement which it requires each hold
ing company affiliate to execute before receiving a general voting
permit. In this manner more specific provisions are made for the
regulation of financial relationships between organizations in the
bank group and to further the development and maintenance of
sound financial condition and management policies of the holding
company affiliate and its subsidiary and affiliated organizations.
Revocation of a voting permit involves penalties upon both the
holding company affiliate and its subsidiary member banks.
Supervision of holding company affiliates was first provided for
by the Banking Act of 1933. Certain additional administrative
responsibilities with respect thereto were vested in the Board by
the Banking Act of 1935, the Revenue Acts of 1936 and 1938, and
the Investment Company Act of 1940.
The statutory definition of a holding company affiliate includes
only corporations and other organizations which control member
banks, and the regulation of group banking provided by the law
does not apply to organizations which control only nonmember
banks, whether insured or noninsured.

SUPERVISION OF COMMERCIAL BANKING SYSTEM

207

IN CIDEN CE OF SUPERVISION ON IN DIVIDU AL BANKS

So far bank supervision has been discussed almost entirely from
the point of view of the public and the governmental agencies. Some
consideration of the matter from the point of view of the individual
bank would seem appropriate.
National Banks. In the course of its regular operations, a national
bank has dealings with the following bank supervisory agencies:
the Comptroller of the Currency, the Federal Reserve, the Federal
Deposit Insurance Corporation, and the Reconstruction Finance
Corporation if the Corporation has a capital interest in the bank.
Twice a year, and more frequently in special circumstances, the
bank is examined by national bank examiners. Requests for cor
rective action considered desirable in the light of the examination
come from the Comptroller of the Currency, and discussions and
negotiations may be carried on with either the District Chief
National Bank Examiner or the Comptroller’s Office in Washington,
through either correspondence or personal visits. Three times a year
or oftener, as called for, the bank forwards a report of condition to
the Comptroller and a copy to the Reserve Bank of the district.
If the bank is one of the 400 weekly reporting member banks, it
also submits a condensed statement of condition weekly to the
Reserve Bank, where all the figures are summarized for publication
by the Board of Governors. Semi-monthly, weekly, or semi-weekly,
depending on its location, the bank submits a statement of deposits
to its Reserve Bank in connection with its report of reserve require
ments. Semi-annually the bank submits a report of deposits to the
Federal Deposit Insurance Corporation. Under the law, however,
deposits as reported for reserve purposes and in reports of condition
are not the same as reported for assessment purposes. Twice a year
the bank sends a report of earnings and dividends to the Comptroller
of the Currency and a copy to the Federal Reserve Bank. If the
Reconstruction Finance Corporation has a capital investment in the
bank, a similar report is furnished to that Corporation.
If the bank wishes to establish a branch within the city or State
in which it is located, it applies to the Comptroller of the Currency
for permission. If it wishes to establish a foreign branch, it applies
through the Federal Reserve Bank to the Board of Governors for

208

BANKING STUDIES

permission. If it wishes to exercise trust powers, it makes applica
tion to the Board of Governors, also through the Federal Reserve
Bank of the district.
In the regular operations of his bank, the national banker must
be familiar with or consult a great many statutory provisions and
rules and regulations. These include the many detailed statutory
provisions regarding his lending and investment operations; the
regulation of the Comptroller of the Currency regarding the pur
chase of investment securities; the regulations of the Federal De
posit Insurance Corporation regarding reports of deposits and
advertising; and the regulations of the Board of Governors relating
to reserves, trust powers (if the bank exercises such powers), check
clearing and collection, loans to executive officers, payment of
interest on deposits, and loans for the purpose of purchasing or
carrying stocks registered on a national securities exchange. If the
bank acts or anticipates acting as trustee under security issues, the
banker must also be familiar with the requirements of the Trust
Indenture Act administered by the Securities and Exchange Com
mission. In the case of directors or proposed directors, the question
frequently arises whether the relationship is permissible under
various Federal laws or the regulations of the Board of Governors
and, in some cases, whether it is authorized by the Securities and
Exchange Commission.
It is in connection with major corrective, rehabilitation, or
recapitalization programs, however, that the relationships become
more involved. The banker then finds himself at various times
dealing with representatives of the Comptroller of the Currency,
the Reconstruction Finance Corporation, the Federal Deposit In
surance Corporation, and the Federal Reserve.
Insured State Banks. With insured State banks, the situation
is similar in many respects but even more complicated. The bank
is examined by Federal examiners as well as by State, either jointly
or independently at different times. In either event, the banker may
receive reports of examination reflecting materially different classi
fications and conclusions. Both the State authorities and the
Federal authorities (the Federal Reserve in the case of State mem
ber banks and the Federal Deposit Insurance Corporation in the

SUPERVISION OF COMMERCIAL BANKING SYSTEM

209

case of insured nonmember banks) may enter the discussions or
negotiations for correction. In the case of a State member bank
the banker may have to deal both with the Federal Reserve and
the Federal Deposit Insurance Corporation.
An insured State bank is required to submit reports of condition
to both the State and Federal agencies (the Federal Reserve Bank
in the case of member banks and the Federal Deposit Insurance
Corporation in the case of insured nonmember banks). In most of
the States, agreement has been reached between the Federal agen
cies and the State authorities upon a form of report, the submission
and publication of which satisfy both the State and Federal require
ments. In six States, however, a State member bank is required to
publish a statement of condition in one form in response to Federal
requirements and a statement of condition in another form, perhaps
on the same day, as required by State authorities.4
SUM M ARY

Banking legislation, from which all supervision of banks by
governmental agencies stems, reflects the cumulative results of
attempts to meet specific situations, emergencies, and competitive
conditions. As a consequence the development of the functions and
mechanism of supervision has been piecemeal in character and not
in accordance with comprehensive plans made with reference to the
country’s banking needs as a whole. The Federal Government and
the forty-eight States share the responsibility for bank supervision.
Within the Federal Government authority over the banks is scat
tered among several agencies. The Comptroller of the Currency has
the responsibility for the chartering and closing of national banks
4 The Federal statutes with respect to publication of reports of condition differ
as between State member and State nonmember insured banks. The law requires State
member banks to submit and publish reports of condition in a form approved by the
Board of Governors. Insured nonmember banks are required under the law to submit
reports of condition to the Federal Deposit Insurance Corporation in a form approved
by that Corporation. The Corporation is authorized to require the publication of such
reports, but has not made such requirements. The forms of condition reports issued
by the Corporation and the Board are practically identical but the question as to
single joint publication or publication of two reports, one to meet State requirements
and one to meet Federal requirements, arises only in connection with State member
banks.

210

BANKING STUDIES

and the primary responsibility for their examination and super
vision while in operation. The Federal Reserve System has some
degree of supervision over all member banks, but in matters relating
to national banks the primary responsibility is with the Comptroller,
and in those pertaining to State banks, member as well as non
member, it is with State supervisory authorities. The examination
and related supervisory powers of the Federal Reserve are exercised
primarily with respect to State member banks. The Federal Deposit
Insurance Corporation has responsibilities in regard to all insured
banks, and exercises its examination and supervisory powers particu
larly in the case of insured banks which are not members of the
Federal Reserve System. There is no definite sharp line of demarca
tion between the areas of the three agencies. In some respects each
agency has responsibilities for banks which are primarily under
the supervision of another agency. The Treasury Department, under
the emergency laws of 1933, has the responsibility for licensing
member banks and for approval of the purchase of bank stock by
the Reconstruction Finance Corporation. This Corporation, because
of its authority to make loans to banks and to purchase preferred
stock and debentures from them, has proprietary and contractual
powers of supervision over such banks as receive loans or capital
from the Corporation.
There are three groups that have a direct and vital interest in
the proper and efficient supervision of the banking system:
1. The authorities charged with responsibility for supervision;
2. The banks subject to supervision;
3. The public, to serve whose interests both the banks and the
supervisory agencies were created.
Bank supervision is only a means to an end and has been adapted
in times past to meet changed or changing conditions. The broad
aim of supervision seems well established. The question, however,
of what procedure, practices, and allocation of responsibilities will
be most effective in the accomplishment of this purpose, not
only with respect to individual banks and their particular problems,
but also with respect to problems affecting the banking system as a
whole and the general economic situation, remains to be answered.

POLICY AND PROCEDURE IN BANK EXAMINATION

P age
I n t r o d u c t i o n ..............................................................................

213

P o l i c y i n B a n k E x a m i n a t i o n ...........................................

213

O r g a n iz a t i o n f o r B a n k E x a m i n a t i o n ........................

217

T h e B a n k E x a m i n e r i n t h e F i e l d ................................

219

S u m m a r y .........................................................................................

227

L e o H. P atjlger

Chief
Division of Examinations

POLICY AND PROCEDURE IN BANK EXAMINATION
Bank examination is a part of the work of bank supervision,
which also includes among its principal activities the issuance of
regulations, enforcement of legislative and administrative require
ments, and analysis and publication of reports. The purpose of
bank examination is to determine and appraise the facts with respect
to the operation of individual banks. It involves verification and
appraisal of assets, determination of liabilities as far as practicable,
investigation of compliance with legal requirements, and appraisal
of the ability and character of management.
Examinations are conducted in the interest of (1) the public,
because a sound banking system is essential to the national economy
and sound banks make a sound banking system; (2) the individual
depositor, the safety of whose money depends on the character of
the assets in which the bank’s funds are invested and the way in
which they are administered; (3) the stockholder, who invests in
the banking business in the hope that his money will bring a return
as a result of successful banking operations and will not have to be
used to absorb losses; (4) the directors, who accept grave responsi
bility for the direction and supervision of the affairs of the bank
and to whom the examiner’s report gives an independent view of
its condition; and (5) the officers and operating personnel, who
may find the examiner’s observations helpful in the performance of
their duties. Examinations also serve to protect good banks from
the competition of banks that without the restraint of examina
tion might be improperly operated and from the effects of failure
of such institutions.
POLICY IN BAN K EXAM INATION

The general banking laws of the several States and the United
States prescribe the limits within which the several supervisory
authorities may make policy decisions with regard to the examina
tion of banks. Such laws usually express broad public policy with

213

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BANKING STUDIES

regard to bank assets and management through provisions such as
those fixing minimum capital requirements, restricting the amount
and kinds of loans to be made by banks or the amount and kinds
of collateral to be accepted, specifying the character and amount
of securities a bank may purchase, providing for the removal of
officers and directors for cause, and requiring a, minimum number
of periodic examinations to check upon compliance with the law.
Many banking laws are necessarily expressed in general terms,
however, and authorize the supervisory authorities to define and
implement their provisions by issuing necessary rules and regula
tions, and to exercise a certain amount of discretion in the process.
Nevertheless, neither legal restrictions nor general regulations and
rulings of the supervisory authorities attempt to define in detail
the circumstances and conditions under which all loans and invest
ments must be made. Bank management must exercise its own
discretion and credit judgment within the framework of prescribed
limitations and is alone responsible for decisions within that
framework.
The frequency with which particular institutions should be ex
amined, selection and assignment of examiners, and review and
action upon appraisals of bank assets and management contained
in examiners’ reports are matters involving policy decisions by
supervisory authorities. As will be shown later, the bank examiner
participates in policy action when he appraises and reports on bank
assets and management. By virtue of the review of all reports by
the supervisory authorities, the practices of the different examiners
are coordinated with one another and with the policy and practice
of the authorities. The constant review of reports on many banks
often discloses the need for changes in broad policies even as the
review of examinations of individual banks serves as a basis for
supervisory policy with respect to single institutions. Thus, al
though examination is largely a fact-finding function, it is con
stantly involved, as a part of the supervisory process, in the formu
lation of policy with respect to individual banks and sometimes
points the way to necessary changes in the general policy expressed
in banking laws.
As was indicated in the preceding paper, there is no one super

POLICY AND PROCEDURE IN BANK EXAMINATION

215

visory authority to decide matters of policy with respect to the
supervision and examination of all banks. Consequently, banking
institutions sometimes fall within the jurisdiction of more than one
set of supervisory rules and regulations. The basic objectives of all
supervisory authorities are substantially the same, however, and
fundamental policies are similar. Through an agreement reached in
June 1938 the three Federal agencies empowered by Congress to
examine banks established a uniform treatment of loans and invest
ments in their administration of bank examinations. A large number
of State supervisory authorities have adopted the same or similar
procedure.
The Board of Governors of the Federal Reserve System, one of
the parties to the agreement, has commented as follows upon the
policy underlying the prescribed treatment of loans and investments:
. . . the principle is clearly recognized that in making loans, whether for work
ing capital or fixed capital purposes, the banks should be encouraged to place
the emphasis upon intrinsic value rather than upon liquidity or quick maturity.
Similarly, the revised examination procedure recognizes the principle that
bank investments should be considered in the light of inherent soundness rather
than on a basis of day-to-day market fluctuations. It is based on the view that
the soundness of the banking system depends in the last analysis upon the
soundness of the country’s business and industrial enterprises, and should not
be measured by the precarious yardstick of current market quotations which
often reflect speculative and not true appraisals of intrinsic worth.1

It was agreed that the captions “ Slow,” “ Doubtful,” and “ Loss,”
long used in classifying bank assets, should be abandoned, and
that all assets should be classified as I, II, III, or IV. The meaning
of the classifications as applied to loans is set forth in the following
definitions:
I. Loans or portions thereof, the repayment of which appears assured. These
loans are not classified in the examination report.
II. Loans or portions thereof which appear to involve a substantial and un
reasonable degree of risk to the bank by reason of an unfavorable record or
other unsatisfactory characteristics noted in the examiner’s comments. There
exists in such loans the possibility of future loss to the bank unless they receive

1Federal Reserve Bulletin, July 1938, pp. 563-66.

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BANKING STUDIES

the careful and continued attention of the bank’s management. No loan is so
classified if ultimate repayment seems reasonably assured in view of the sound
net worth of the maker or endorser, his earning capacity and character, or the
protection of collateral or other security of sound intrinsic value.
III. Loans or portions thereof, the ultimate collection of which is doubtful
and in which a substantial loss is probable but not yet definitely ascertainable
in amount. Loans so classified should receive the vigorous attention of the
management with a view to salvaging whatever value may remain.
IV. Loans or portions thereof regarded by the examiner for reasons set forth
in his comments as uncollectible and as estimated losses. Amounts so classified
should be promptly charged off.

The procedure under the agreement broadly divides securities
into those of investment character and those of speculative char
acter. The former are listed in Group (not classification) I, the
latter in Group II. Defaulted bonds are listed in Group III and
stocks in Group IV. The agreement contains the following defi
nitions:
Group I securities are marketable obligations in which the investment char
acteristics are not distinctly or predominantly speculative. This group includes
general market obligations in the four highest grades and unrated securities of
equivalent value.
Group II securities are those in which the investment characteristics are
distinctly or predominantly speculative. This group includes general market
obligations in grades below the four highest, and unrated securities of equiva
lent value.

Group I securities are listed at book value but, as in the case of
all securities, where book value includes a premium, the premium
must be properly amortized. Securities in Group II are appraised
at their average market price for eighteen months just preceding
the examination, and Group III and Group IV securities at current
market price.
Net depreciation in Group II securities, determined on the basis
of the appraisal described, is classified III and net market depre
ciation of securities in Groups III and IV is classified IV.
Although the agreement does not touch upon all the practices
that involve decisions on policy, it does provide uniform general
standards for the appraisal of important bank assets.

POLICY AND PROCEDURE IN BANK EXAMINATION

217

ORGANIZATION FOR BANK EXAM INATION

The inspection or examination of banks originated as an exercise
of sovereignty by the chartering authority for the purpose of
determining that the charter powers granted were not being abused,
especially those related to note issue. Unfavorable experience from
time to time, emphasized by the expansion of banking activity to
meet the needs of an expanding national economy, led to more
elaborate means of control and the creation of State and Federal
agencies specifically charged with supervision and, as a necessary
detail, with examination of banks. There are now fifty-one agencies
engaged in the examination of banks: the supervisory authority of
each of the forty-eight States and the three Federal agencies—the
Comptroller of the Currency, the Federal Deposit Insurance Corpo
ration, and the Federal Reserve System.
In practice, an individual bank is examined by only one or,
except in extraordinary circumstances, not more than two of such
agencies. National banks are examined by the Comptroller of the
Currency, member State banks by the State authorities and by the
Federal Reserve Bank of the district in which they are located,
nonmember insured State banks by the State authorities and the Fed
eral Deposit Insurance Corporation, and noninsured State banks by
the State authorities.
With the consent of the Comptroller of the Currency in the case
of national banks, and of the Board of Governors of the Federal
Reserve System in the case of member State banks, the Federal
Deposit Insurance Corporation may examine or participate in the
examination of such banks. Noninsured State banks are examined
by the Federal Deposit Insurance Corporation before being ac
cepted for insurance of their deposits except when admitted to the
Federal Reserve System or converted to a national bank. Non
member State banks are examined by the Federal Reserve authori
ties prior to admission to membership in the System. State banks
converting to national banks are examined by the Comptroller
prior to conversion and national banks converting to State banks
are usually examined prior to conversion by the appropriate State
authority. They may also be examined by the Federal Deposit
Insurance Corporation if they are to become nonmember insured

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BANKING STUDIES

banks, or by the Federal Reserve authorities if they are to become
State bank members of the Federal Reserve System. In such
unusual circumstances a bank may be examined simultaneously or
independently within a short period by as many as three agencies.
In some cities the operations of the clearing-house association
include examination of the members by examiners for the asso
ciation. The members subject themselves to such examinations
voluntarily for their mutual protection and benefit.
Each of the State supervisory authorities maintains a central
office, usually in the State capital, and each of the Federal agencies
has a central office in Washington. In some States district offices
are maintained under deputy State bank commissioners or super
visors. The several Federal Reserve Banks maintain bank examina
tion departments and examine member State banks in their re
spective districts; the field examiners for the Comptroller of the
Currency operate under district chief national bank examiners having
offices in each Federal Reserve district, located in the city in which
the Federal Reserve Bank for the district is located; and the Federal
Deposit Insurance Corporation has district offices in charge of a
supervising examiner in districts generally conforming but not al
ways coterminous with the Federal Reserve district.
At each Federal Reserve Bank the work of the vice president in
charge of examinations and of his office staff consists largely in the
direction of the work of field examiners and other supervisory
activities such as the review and analysis of reports of examination
and direct supervisory contact with the banks examined, including
the formulation of corrective requirements and follow-up to deter
mine compliance therewith. Likewise, the district representatives
of the Comptroller of the Currency and the Federal Deposit In
surance Corporation direct the operations of field examiners in their
respective districts and operate as the direct contact with the banks
therein. In each of the districts the field examiners may be assigned
to certain zones within the district. State authorities also in some
cases have district organization within the State.
As a rule the central office of each supervisory authority directs
in general and reviews in detail the process of examination as a
part of its supervisory activity. These offices coordinate the activi

POLICY AND PROCEDURE IN BANK EXAMINATION

219

ties of the district offices with a view to uniformity of procedure.
The district offices may operate with a greater or less degree of
autonomy, more marked in the case of the Federal Reserve Banks,
and take steps to secure corrections of at least minor or routine
nature without direction from the central office. Through the dis
trict offices the operations of field examiners are coordinated with a
view to uniformity.
Field examiners report to the district offices and the district
offices to the central office, the field examiners usually being the
direct contact with individual banks. The relationship is not inflexi
ble, however, and the central office may and, in varying degree,
does maintain direct contact with the banks examined, particularly
in the matter of securing corrections. The Comptroller of the Cur
rency and the several State authorities customarily maintain more
direct contacts, the central office of the Federal Deposit Insurance
Corporation less direct. As previously indicated, the Board of
Governors of the Federal Reserve System leaves the matter of
direct contact with the banks examined in the hands of the several
Federal Reserve Banks as far as practicable.
THE BANK E X A M IN E R IN THE FIELD

The bank examiner has been described as the eyes and ears of the
supervisory agencies. The justice and effectiveness of the actions and
the rulings of such agencies depend in large measure upon the accu
racy of the examiner’s findings and the soundness of his judgment.
Therefore, careful evaluation of the qualifications of individual ex
aminers and the tasks assigned them is one of the chief concerns of
the supervisory authority.
A large portion of the work of bank examiners consists of verifica
tion and computation of a clerical nature that may be performed by
junior examiners, usually designated as assistant examiners. The
appraisal of assets and management, on the other hand, requires a
greater amount of experience and training and often a high degree of
specialization. Thus examiners at the central offices and in the field
may be further designated as chief examiners, senior examiners, trust
examiners, supervisory examiners, review examiners, etc., indicating
their responsibility and the nature of their work. The types of ex

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BANKING STUDIES

aminers usually participating in the examination of an individual
bank of considerable size are senior examiners, trust examiners,
examiners, and assistant examiners. The designation “ senior” is
seldom used except within the department or agency.
The examiner who conducts the examination of a small bank with
out assistance must be competent to complete all phases of his work
in the particular institution. Such competence would hardly be
expected of an assistant examiner. For larger institutions there must
be examiners qualified to handle highly technical matters, such as
lists of investment securities, or trust and foreign departments.
Some examiners may be specialists or experts in a particular field but
not qualified in all phases of bank operations; others may be well
qualified to examine small rural banks but not qualified to examine
large banks. A competent judge of the credits usual in a region
producing cotton, for instance, might not be a competent judge of
credits in an industrial region or in one producing wheat or cattle.
One examiner may be able to complete the examination of a small
bank in a day or less, except for the compilation and preparation of
his report, but larger banks may require an increasing number of
examiners as the volume of assets and liabilities and the complexity
of operations increase. Each examination of a bank of sufficient size
to require the services of more than one examiner is in charge of a
designated examiner who signs the report.
It should be noted that the examination of a bank does not con
stitute a full audit. An audit includes the verification of all liabilities
as well as assets. To make a full audit of a bank it would be necessary
to verify all depositors’ accounts through direct contact with the
depositors and to trace many items or entries through the books
from their inception. Also, the examiner can not verify the genuine
ness of the signatures on every note nor insure the accuracy of every
figure entered on the books. When he satisfies himself that the
assets of the bank are of the kind and amount indicated by the
records, he must assume that the entries giving rise to the grand
totals are correct unless errors or false entries are discovered in
ordinary course or upon investigation after cause for suspicion.
Banks are usually protected in this respect by fidelity bonds and
insurance against fraud.

POLICY AND PROCEDURE IN BANK EXAMINATION

221

The examiner’s purpose is to verify and appraise assets as shown
by the bank’s books, to verify liabilities in so far as this may be
practicable through comparing subsidiary record totals with general
ledger control accounts or through direct verification with creditors,
to determine compliance or failure to comply with statutory and
regulatory limitations and requirements, to appraise the manage
ment, and to give consideration to any and all factors affecting the
solvency and successful operation of the bank.
The examiner must be familiar with the banking laws to be en
forced by the supervisory authority with which he is connected. If he
represents a Federal Reserve Bank and is engaged in examining a
State member bank, for instance, he checks for compliance with the
Federal Reserve Act and the regulations of the Board of Governors,
appropriate sections of the National Bank Act and the regulations
of the Comptroller of the Currency, and the State banking laws.
Initial Steps in Bank Examination. Having been assigned to
the examination of a bank, the examiner presents his credentials to
an officer of the bank and proceeds to establish effective control over
the assets and records of the bank. Since the examiner’s report will
cover the condition of the bank as of the close of business on a given
day, he usually begins work after the bank has closed its doors and
its books for the day’s business or before it opens the following
morning.
First of all, the examiner seals all vaults or vault compartments
containing cash, securities, or notes, and takes physical pos
session of the cash and other assets at the counters and of the general
ledger accounts. The counter cash and securities and items for clear
ing and collection are verified promptly in order that the routine
operations of the bank may suffer as little interruption as possible.
Assets under seal are then verified and the seals removed with all
possible dispatch with the same purpose in view.
The physical inspection and count of a bank’s assets include
verification of any assets held by others for the account of the bank.
The amount of securities held in safekeeping by city correspondents,
for instance, is verified by direct correspondence with the holders.
As part of the process of verification, subsidiary ledgers and
records of the bank are totalled and the totals checked against the

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BANKING STUDIES

general ledger control accounts. The securities and notes held by the
bank are listed for later appraisal. After the physical inspection of
assets and cross checks to insure correct entries, the examiner can
release his control over the physical assets and records to the operat
ing personnel of the bank. At this point he takes up an appraisal of
the bank’s assets, in connection with which he observes the general
caliber of bank management as expressed by the condition of the
assets and compliance with legal and regulatory restrictions.
Except with respect to necessary fundamentals, the process of
examination varies in accordance with the kind and variety of assets
held by the bank and of course varies from time to time and place to
place to meet special conditions. The following abbreviated descrip
tion of the examiner’s procedure with respect to two of the principal
items appearing in a bank statement will indicate the character of
work involved.
Cash on Hand and Due from Banks. This item includes actual cash,
cash items,2 checks on other banks, and balances on deposit in other
institutions.
Currency and coin held by the bank are, of course, subject to
actual count and tally against bank records. Amounts due from
other banks are verified by correspondence with the banks involved.
Checks held by the bank on other banks in the same city for direct
presentation or collection through the clearing house are verified and
forwarded under seal with the request that any items returned un
paid be returned to the examiner in order that he may check for
irregularities.
A cash item generally represents (1) an extension of credit, (2)
an unabsorbed expense, or (3) an unacknowledged loss carried in the
cash account on a temporary basis. Cash items representing exten
sions of credit may consist of checks or other items, such as coupons,
returned unpaid for various reasons and awaiting presentation to the
endorser or depositor; checks held to avoid overdrafts; and miscella
neous advances. Unabsorbed expense items may represent advances
to employees for travel or other expense to be incurred on behalf of
2 These are miscellaneous items held in the cash account, not to be confused with
checks in the usual process of collection.

POLICY AND PROCEDURE IN BANK EXAMINATION

223

the bank, small items of expense to be held for entry on the books of
the bank as a single item, or miscellaneous items held as a matter
of convenience for later entry. Fraudulent or worthless checks,
counterfeit money, or other worthless items may represent unac
knowledged losses. The carrying of actual but unacknowledged losses
at value is, of course, never justified and all items carried tem
porarily as cash must be carefully scrutinized. In general, they are
subject to criticism unless they are readily convertible into cash and
their existence can be reasonably justified.
The legal limitations and requirements to be considered in con
nection with the cash account are (1) reserve requirements, (2)
limitations upon the balances to be carried with any other one bank
or any other bank of a particular kind, and (3), in connection with
cash items representing extension of credit as described above, legal
limitations upon such extensions.
Loans and Discounts. This item includes all notes, secured and
unsecured, including mortgage loans and discounted paper. It may
also include bills of exchange, such as trade acceptances and bankers
acceptances held by the bank.
The examiner first lists the actual notes or other obligations in the
bank’s portfolio and proves the totals against the bank’s records. He
then checks all collateral to determine its physical existence and
negotiability, and examines all documents pertaining to loans
secured by real estate or other property that can not be physically
held in the bank. In connection with certain types of loans the
validity of the pledge of collateral and the condition of the loan can
be determined only after the consideration of a number of matters.
For instance, a real-estate mortgage and accompanying documents
must be examined to determine whether evidence is in file that the
borrower’s title to the property mortgaged is clear, whether the
mortgage has been properly recorded and constitutes a valid lien
against the property, whether taxes have been paid, and whether
sufficient insurance is in force and properly assigned to protect the
interest of the bank.
Because of the many limitations upon the making of loans it is
necessary to make a number of groupings of the items in the loan
portfolio. Therefore, it is customary for the examiner to place perti

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BANKING STUDIES

nent data with respect to each loan on a separate card or form that
can be arranged and rearranged in different groups to obtain any
desired breakdown of aggregate loans. By means of this technique
he can readily determine whether a bank has violated legal limita
tions upon the amount of loans of any particular kind or origin. All
loans to one borrower, for instance, can be assembled in order to
determine whether the total exceeds the amount permitted by law.
The determination of the total amount lent directly and indirectly
to each borrower is also necessary in the process of appraisal of
assets in considering the soundness of the credit extended.
A State bank is subject to the laws of the State from which it
receives its charter with respect to making loans, and a national
bank to the applicable Federal statutes. State member banks and
insured State banks become subject to certain Federal laws and
regulations. Some Federal regulations, such as that with reference
to loans for the purpose of purchasing and carrying stocks registered
on a national securities exchange, are applicable to all banks.
The following is a list of the Federal limitations upon loans,
presented in three groups as a matter of convenience:
1. Prohibited Loans and Prohibited Practices in Connection with Loans
New loans made while the bank’s reserves are deficient. Applicable to all
member banks.
Loans on, or purchase of, own stock. Applicable to all member banks.
Loans to bank examiners. Applicable to all member banks and all insured
nonmember banks.
Loans to, or purchase and sale of securities of, defaulting foreign govern
ments. Applicable to all banks.
Loan of trust funds to a director, officer, or employee. Applicable to national
banks.
Making security loans for others. Applicable to all member banks.
Accepting commissions and fees for procuring loans from a member bank.
Applicable to any officer, director, employee, or attorney of a member bank.
Accepting commissions and fees for procuring loans from a Federal Reserve
Bank. Applicable to any person.
Borrowing by brokers or dealers on registered securities from nonmember
banks, unless they have filed an agreement to comply with certain regulations.
2. Classes of Loans Restricted as to Aggregate Amount
General limitation upon the use of credit for speculative purposes or any
purpose inconsistent with the maintenance of sound credit conditions. Appli
cable to all member banks.

POLICY AND PROCEDURE IN BANK EXAMINATION

225

Loans on stock or bond collateral. Applicable to all member banks.
Loans on stock of corporation holding bank premises. Applicable to all
member banks.
Loans to affiliates or on their obligations. Applicable to all member banks.
Loans on real estate. Applicable to national banks.
Loans for building construction. Applicable to national banks.
3. Loans to One Borrower Restricted in Amount
Loans to any one person, firm, or corporation. Federal and all State laws
contain such limitations. A Federal Reserve Bank may not rediscount for a
national bank that part of a line of credit that is in excess of Federal limitations
nor any part of an excess line for a State member bank.
Loans on stock or bond collateral. Applicable to all member banks.
Loans to corporation holding bank premises. Applicable to all member banks.
Loans by a bank to its affiliate or on the affiliate’s obligations. Applicable to
all member banks.
Loans on real estate. Applicable to national banks.
Industrial (or 13b) loans. Applicable to all banks.
Loans or extensions of credit to executive officers or to partnerships in
which one or more executive officers have a majority interest. Applicable to all
member banks.

The foregoing list is incomplete since restrictions contained in the
State laws are not listed. Also, it should be noted that it does not
contain the restrictions imposed upon the extension of credit through
bankers acceptances, repurchase agreements, investment in securi
ties, etc. It will serve, however, to illustrate some of the detail
involved in the procedure of the examiner before he undertakes
the appraisal of loans and other assets.
Appraisal of Assets. As in the process of verification of assets
and the process of determining compliance with legal restrictions,
the procedure of the examiner in appraising assets is complex.
The process of appraisal is largely an exercise of judgment after
consideration of all pertinent information available. On the basis
of credit data in the files of the bank and information secured
from officers and directors or from any other available source,
including the history of the obligor’s relations with the bank and,
perhaps, other institutions, the examiner must form his estimate of
the soundness and value of credits extended and investments made
by the bank.

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In general, the examiner applies the same criteria in appraising
loans and investments as those applied by a careful bank manager in
making loans and investments. His appraisal is made in the light of
current conditions, however, and in view of future probabilities then
apparent rather than on the basis of conditions that may have been
existing at the time the loan or investment was made. Market
quotations facilitate the appraisal of securities and the determina
tion of the sufficiency of collateral in the form of stocks and bonds or
commodities. Reliable independent appraisals may be available with
respect to real property owned or pledged. In connection with un
secured credits and the appraisal of many items with respect to
which no market quotations or acceptable independent appraisals
are available, the examiner must apply his experience and judgment
to the information available and must include consideration of
applicable facts regarding local and general economic conditions in
reaching his determination.
Having reached his conclusions with respect to the appraisal of
assets, the examiner classifies them in accordance with the uniform
agreement previously discussed.
Appraisal of Management. An examiner’s procedure in apprais
ing the quality of bank management depends upon so many elements
that it is not susceptible of exact description. The condition of the
bank, as revealed by the techniques already described, is perhaps
the most tangible evidence of the character of management. Specu
lative tendencies, lack of credit judgment, poor collection policy,
and other managerial defects soon affect assets and thus make an
appearance in a bank’s records. Ability or inability to take ad
vantage of suggested changes and to correct former errors or weak
nesses often becomes apparent in the interim between examina
tions and serves to guide the examiner in his appraisal of the wisdom
and discernment of a bank’s officials. In addition to these more or
less tangible evidences, in any given case the intangible factors
bearing upon the situation may be legion.
Preparation of Reports of Examination. The effectiveness of
bank examination is dependent to a considerable extent on the
accuracy and clarity of the examiner’s report to the supervisory
authorities. As previously stated, recommendations for corrective

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227

action addressed to banks or disciplinary action taken against them
usually emanate from the district or central supervisory office. Unless
the examiner reports fully and clearly upon the conditions he finds
in a particular bank, the central office may not have sufficient in
formation to justify the exercise of supervisory discretion. In prepar
ing a report of examination, therefore, the examiner is careful to
give all the facts pertaining to the condition of a bank as well as his
appraisal of these facts. Since a copy of his report is sent to the
managers of the bank in question, his ability to present facts and
appraisals clearly may greatly influence the future policy of man
agement.
SUM M ARY

Bank examination is the fact-finding function of the supervisory
authorities provided for in State and Federal banking laws. It is
conducted in accordance with the broad public policies expressed
through legislation as defined and implemented by rules and regula
tions prescribed by the supervisory authorities. It involves, also, the
exercise of judgment in the appraisal of assets and management. The
field examiner, through reports based upon detailed analysis and
appraisal of the condition of individual banks, furnishes the factual
material upon which the central supervisory office bases its decisions
concerning the need for corrective action in particular instances.
Continuous study of reports for many banks in turn enables the
central authority to make necessary changes in rules and regulations
and sometimes to recommend changes in the broad policy embodied
in legislation.
The purpose of bank examination is to safeguard the sound opera
tion of individual banks and thus to strengthen the banking system
as a whole. Within its limited sphere, examination has furthered this
objective. It is recognized, however, that many of the factors bear
ing upon the condition of the banking system are not susceptible to
control through examination. Acute and sustained economic depres
sion, for instance, impairs the condition of banks by its inroads upon
other branches of economic activity. In such times concerted action
on many fronts is necessary to remove the fundamental causes.

PUBLIC NATURE OF THE RESERVE BANKS
Page
I n t r o d u c t io n ..........................................................................231
O rig in

P u r p o se ...........................................................231

and

O w n e r sh ip

and

C o n tr o l .......................... *.................... ..233

Su p e r v is io n ............................................................................ ..237
E ar n in g s
I ssuance
of

an d
of

T h e ir D is t r ib u t io n ..........................237

C ur r en cy

D e p o s i t s .................

S ources

and

C reatio n

............................................... ..239

L ending P o w e r ........................................243

Su m m a r y .................................................................................. ..245

E. A.

G o l d e n w e is e r

Director
Division of Research and Statistics

PUBLIC NATURE OF THE RESERVE BANKS
The Federal Reserve Banks are the operating end of the Federal
Reserve System, which is charged by Congress with important
responsibilities for national monetary and credit conditions. The
operations of these Banks are guided by credit policies formulated
principally by a governmental body in accordance with public
policies stated in the Federal Reserve Act and developed by ex
perience over a quarter of a century. The public interest and not
private gain is the purpose of operation. Although the Reserve
Banks pay legally prescribed dividends on their capital stock, the
making of profits is not the purpose of their existence nor the basis
for determining the character of their operations. Unlike commercial
banks, they are not primarily business undertakings.
Important structural and functional differences between the
Federal Reserve Banks and commercial banks are largely the result
of the public nature of the Reserve Banks. The following pages
indicate the principal differences and the ways in which the Reserve
Banks are especially adapted to the furtherance of public policies.
Descriptions of the operations of the Reserve Banks, including the
public functions they perform for the Federal Government, and of
the policies pursued by the Federal Reserve System are presented
in other papers.
ORIGIN AND PURPOSE

The Reserve Banks were created by Congress, and their number
and location were determined by public authorities. Unlike com
mercial banks, they can not be organized by private individuals and
they can not be dissolved without action by Congress. The Federal
Reserve Act provided for the establishment of no less than eight and
no more than twelve Reserve Banks, leaving final decision as to the
exact number within these limits to the Federal Reserve Board, the
members of which are appointed by the President with the advice

231

232

BANKING STUDIES

and consent of the Senate.1 After the number was once determined
as twelve it could not be changed by the Board.
In furtherance of the purpose that all parts of the United States
should have convenient access to the Reserve System, Congress
specified that the Reserve Banks should be located in different
sections of the country. It appointed an official committee to select
the cities in which the Banks should be established, and to determine
the areas or districts which each should serve, “ with due regard for
the convenience and customary course of business” but not necesL o c a t io n

of th e

F ederal R eserve B ank s

and

T h e ir B r a n c h e s

sarily with reference to State lines Provision was made in the Fed
eral Reserve Act for the establishment or discontinuance of branches
of the individual Reserve Banks, but only with the approval of the
Board of Governors. Thus private enterprise was given no choice
in the creation of the Reserve Banks and their branches or in
determining their number and location.
Twelve Reserve Banks, twenty-four branches, and one agency
have been established in twelve trade areas in the United States. The
location of the Banks and branches, together with the boundaries
1 Since the Banking Act of 1935 officially designated the Board of Governors of the
Federal Reserve System.

PUBLIC NATURE 0E THE RESERVE BANKS

233

of the Federal Reserve districts and branch areas they serve, is
shown in the accompanying map. These Banks deal with member
banks within their respective districts rather than with the general
public. In doing so they serve the nation by furnishing an elastic
currency, affording means of rediscounting commercial paper, and
establishing a more effective supervision of banking in the United
States, thus carrying out purposes of the Federal Reserve Act
specifically named by Congress in the preamble. All of these pur
poses, together with the establishment of the Reserve Banks, are
closely related to the basic purpose of Congress in establishing the
Federal Reserve System as a whole.
As stated in the Federal Reserve Act, the guiding principle of all
Federal Reserve policies and operations is “ the accommodation of
commerce and business with due regard to general credit condi
tions.’ ’ The content of this principle has been broadened in the light
of experience to mean that the powers of the Reserve System shall
be used in such a way as to contribute to the continuous employment
of the nation’s productive resources and to diminish disturbing
fluctuations in the volume of business. Operating in accordance with
this general policy, the Federal Reserve Banks are primarily con
cerned with serving the public interest and not with making profits.
Commercial banks also serve the public, but they do so as business
undertakings organized and operated primarily for the purpose of
deriving profits from their activities.
OWNERSHIP AND CONTROL

Ownership of the stock of the Federal Reserve Banks is private,
but it differs fundamentally from the usual type of stock ownership.
It is subject to special Congressional regulations and requirements
formulated to preserve the public nature of the Banks by limiting
the owners’ control over management and participation in earnings.
Ownership. Ownership of the stock of the Federal Reserve Banks
is restricted by law to banks that join the Federal Reserve System.
As a condition of membership prescribed by Congress, a bank must
subscribe to the stock of the Federal Reserve Bank of its district in
an amount equal to 6 per cent of its own paid-up capital and surplus
and must maintain this percentage as long as it continues to be a

234

BANKING STUDIES

member bank. One half of the subscribed amount must be fully paid
in and the remainder is subject to call by the Board of Governors.
A member bank can not vary the amount of its holdings of Re
serve Bank stock except as the amount of its own capital and surplus
undergoes change. It can not purchase additional stock in order to
increase its earnings or its influence over the management of the
Reserve Bank; it can not reduce its required holdings in order to
release funds for more profitable use; it can not hypothecate the
stock in order to borrow. It can and must vary the amount of its
investment in the stock of its Reserve Bank only with changes in
the amount of its own capital and surplus. From the point of view
of the member bank, ownership of stock in a Federal Reserve Bank
is more in the nature of a compulsory participation in a public
enterprise than an investment acquired for income purposes.
National banks are the principal owners of Federal Reserve Bank
stock. Membership in the Reserve System is compulsory for them
and they constitute over 80 per cent of all member banks. State
banks, for which membership is optional, own a relatively small part
of the aggregate amount of Federal Reserve Bank stock. As a part
of the process of becoming members, they acquire the stock and
subject themselves to many legal requirements and to general su
pervision by the Board of Governors.
In commercial banks, the board of directors on behalf of the
owners determines dividend rates from year to year. In contrast to
this, holders of stock of the Federal Reserve Banks have no voice in
determining the rate of return they receive. Dividends are specifi
cally fixed by law. The Federal Reserve Act specifies that the yield
to stockholders of the Federal Reserve Banks shall be at the rate of
6 per cent per annum on paid-in stock and shall be cumulative.
Congress may change the rate at any time. Thus the yield member
banks obtain on their stock in the Federal Reserve Banks depends
upon Congressional action rather than managerial decision regard
ing the distribution of profits.
Control. Government influence over the operations of the Federal
Reserve Banks extends far beyond control of dividends. It affects
every policy decision that might react upon national credit condi
tions and, through its effect upon the choice of officers and directors,

PUBLIC NATURE OF THE RESERVE BANKS

235

is an important factor in local management. This also differentiates
the Reserve Banks from commercial banks.
The most important differences between the control of Federal
Reserve Banks and commercial banks pertain to the way in which
credit policies are determined. In cognizance of the public character
of the Reserve Banks, Congress provided that policy decisions
affecting the national economy should be made by national bodies
and not by Bank directors or officers. The local managements of the
twelve Federal Reserve Banks participate through representation
in some of these decisions, but the machinery is such as to insure
decisions made with reference to the interests of the country as a
whole and not of any particular region or separate element of the
population.
An important matter of policy on which the individual Reserve
Banks can take the initiative is the establishment of the discount
rate to be charged to borrowing member banks. The Reserve Banks’
decisions on discount rates, however, are subject to “ review and
determination” by the Board of Governors. This language has been
construed by the Attorney General to mean that the Board not only
must pass on rates proposed by the Reserve Banks before they
become effective, but also has power to establish rates on its own
initiative.
The Reserve Banks are the legal depositaries of the reserve ac
counts of member banks. The amount of required reserves, however,
is prescribed by law, with authority in the Board of Governors to
change requirements within certain limits. Responsibility for super
vising the policy of the Federal Reserve Banks in their international
financial transactions is vested in the Board of Governors. In
purchasing or selling securities or other paper in the open market,
the Federal Reserve Banks act pursuant to decisions made by the
Federal Open Market Committee, a national body, which consists
of the seven members of the Board of Governors and five representa
tives of the Reserve Banks elected regionally.
With respect to business relationships with member banks within
the twelve Reserve districts, the Reserve Banks have a maximum
degree of autonomy. They determine to what member banks credit
accommodations and other services shall be extended. When local

236

BANKING STUDIES

matters are of a nature that might directly or indirectly affect
the credit structure of the nation—the payment of interest on
time deposits and determination of the amount of loans a member
bank may make on a given volume of security, for instance—the
Reserve Banks act within limits set by the Board of Governors.2
They are also guided by direct mandates from Congress. The Fed
eral Reserve Act requires that “ each Federal Reserve Bank shall
keep itself informed of the general character and amount of the
loans and investments of its member banks with a view to ascertain
ing whether undue use is being made of bank credit for the specula
tive carrying of or trading in securities, real estate, or commodities,
or for any other purpose inconsistent with the maintenance of sound
credit conditions; and, in determining whether to grant or refuse
advances, rediscounts or other credit accommodations, the Federal
Reserve Bank shall give consideration to such information.”
The Government also has a voice in the selection of the officers
and directors of the Reserve Banks. Each Federal Reserve Bank
is required by law to have nine directors, six elected by the stock
holding member banks of the district in which the Reserve Bank
is located, and three appointed by the Board of Governors. The
Chairman and Deputy Chairman of the Board of Directors of
each Reserve Bank are designated by the Board of Governors from
its appointees on the directorate. Of the six directors elected by the
member banks, the law requires that three shall be representative of
member banks and three shall be engaged in commerce, agriculture,
or some business pursuit other than banking within the district.
Also, two of the six are to be elected by small banks; two by medium
size banks; and two by large banks. The Board of Governors has
power to remove any or all of the directors for cause.
The two chief executive officers of each Bank, the President and
First Vice President, are appointed by the directors for five-year
periods, subject to approval by the Board of Governors. All officers
and employees of the Banks are appointed by the local boards of
directors but are subject to removal by the Board of Governors
2 For more extensive treatment of credit policy, see the last two papers in this
volume.

PUBLIC NATURE OF THE RESERVE BANKS

237

for cause, and all salaries and expenses are subject to review by
the Board.
In actual practice the local contacts of the Reserve Banks with
member banks and with the business men of the Federal Reserve
districts, through the directors, officers, and otherwise, are of great
value to the Federal Reserve System. They are a source of its
fundamental strength. In day-to-day affairs the Reserve Banks are
a part of the local community. They have an opportunity to exercise
financial leadership in their districts. They are also in a position to
keep the Board in Washington informed of local conditions and to
explain national policies to bankers and business men of the districts.
Autonomy in local matters, under public supervision, and deter
mination of national policies by public bodies, after consultation
with local representatives, are the essential characteristics of the
Federal Reserve System.
SUPERVISION

Unlike commercial banks, the Federal Reserve Banks have power
to examine other banks. They examine State member banks within
their respective districts and banks applying for membership in the
Reserve System. In doing so they proceed in accordance with poli
cies formulated by the Board of Governors, one of the authorities
charged with responsibility for the supervision of member banks.
The Reserve Banks are in turn examined by the Board of Governors,
which exercises full supervisory authority over them.3
EARNINGS AND TH E IR DISTRIBUTION

The earnings and expenses of the Reserve Banks are determined
by considerations and processes different from those that prevail in
commercial banks. Earnings are an incidental result of policy deci
sions made by the Federal Reserve authorities with the aim of
influencing the volume and cost of the nation’s supply of money;
they are not the result of policies adopted by representatives of the
stockholders with the aim of producing profits. Expenses are subject
to regulation and scrutiny by the Board of Governors and arise
8For further information, see “ Supervision of the Commercial Banking System”
and “ Policy and Procedure in Bank Examination.”

238

BANKING STUDIES

mainly from services performed in pursuance of the public purposes
for which the Reserve Banks were established; they are not governed
by decisions made primarily for the purpose of reducing operating
costs and thus increasing profits for stockholders.
R e s e r v e B a n k D i v id e n d s

R e l a t io n

G r o s s E a r n in g s

1914-1939“

* For data, see Table 27, p. 445.

Until July 1933, the law required that the earnings of the Reserve
Banks, after deduction of expenses and the annual 6 per cent cumu
lative dividend on paid-in capital stock, should be allocated in fixed
proportions to surplus and to the franchise tax paid to the United
States Government. At that time Congress appropriated 140 million
dollars of the accumulated surplus for contribution to the capital

PUBLIC NATURE OF THE RESERVE BANKS

239

stock of the Federal Deposit Insurance Corporation, abolished the
franchise tax, and provided that in the future the net earnings of
each Reserve Bank should be paid into its surplus. While the Re
serve Banks continue in operation— and they can not suspend with
out Congressional action—they may draw upon surplus to absorb
losses and to meet expenses and dividends when earnings are low. In
case of liquidation the surplus becomes the property of the United
States Government.
From their establishment in 1914 through June 1939 the Federal
Reserve Banks earned about 1.3 billion dollars. Of this amount more
than one-half was disbursed to meet expenses incurred in performing
the public services prescribed by Congress. Of the other half, onefourth was paid as franchise tax to the Government, principally
during 1920 and 1921 when the volume of discounts was large and
discount rates high. The remainder was distributed in roughly equal
parts in dividends to member banks, as a contribution to the stock
of the Federal Deposit Insurance Corporation, and as additions to
surplus.
In the aggregate, as shown by the accompanying chart, over
twenty-five years only about one-eighth of the Reserve Banks’ gross
earnings has been paid to the stockholders. The remaining seveneighths has been used directly or indirectly for a public purpose, or
remains in a surplus that strengthens the position of the Reserve
Banks while they are in operation and would pass to the United
States Government in case of their dissolution.
ISSUANCE OF CURRENCY AND CREATION OF DEPOSITS

Supplying currency to the public and handling deposits are func
tions of the Reserve Banks as well as of commercial banks. In per
forming both, however, the Reserve Banks act as central banking
institutions subject to the mandates of Congress and the policy
decisions of governmental bodies. Their purpose is to carry out the
basic principle of the Federal Reserve Act—that the volume of
money available to commerce and industry shall be directly related
to the needs of the economy as a whole and the general credit condi
tions of the country. In the accomplishment of this purpose, the
Reserve Banks can draw upon a power no commercial bank can

BANKING STUDIES

exercise. This is the power to create money in the form of either
currency or bank deposits.
Issuance of Currency. One of the purposes of Congress in cre
ating the Federal Reserve System was to provide an elastic currency
for the nation—that is, a currency that would expand and contract
in volume in response to changing economic needs. The reason for
doing so was to avoid a shortage of money that might unduly restrict
business activity or an oversupply that might encourage speculative
expansion. In order to accomplish this purpose, Congress authorized
the Federal Reserve System, through the Reserve Banks, to issue
and retire Federal Reserve notes. These notes, backed by a 40 per
cent gold reserve, can be issued in exchange for certain prescribed
types of assets. The Federal Reserve Banks are the only banking
institutions in the United States that can issue currency. Com
mercial banks can release existing currency for circulation but they
can not create a new supply. The way in which Federal Reserve
notes are issued and retired in response to the needs of the general
economy has been explained elsewhere.4
Creation of Deposits. The other money creating power of the
Federal Reserve Banks is the power to create deposits. As the
currency issuing function results in elasticity of the currency supply,
the deposit creating function results in the elasticity of bank depos
its. By granting the power to create deposits to a central banking
system, Congress provided for the expansion and contraction in
response to the public needs of the form of money that is in much
more common use than currency. Checks drawn upon deposit
accounts comprise the bulk of all payments in a modern economy.
Deposits can be created by commercial banks as well as by
Federal Reserve Banks, but the deposit creating power of the Re
serve Banks differs from that of commercial banks in three vital
respects. (1) A commercial bank, when it pays for a loan or an
investment by deposit credit on its books, can do so only if it has or
can borrow funds with which to meet a withdrawal of the deposit so
4“ Money System of United States,” pp. 308-12. As this paper indicates, the United
States Treasury is also empowered to issue currency, which consists of silver certificates,
United States notes, and coins. Federal Reserve notes, however, are the chief form of
currency now in use in the United States.

PUBLIC NATURE OF THE RESERVE BANKS

241

created. A Federal Reserve Bank is not so limited. (2) To meet a
probable withdrawal of deposits a commercial bank must have
funds, usually in the form of balances with a Federal Reserve Bank
or with other banks, while a Federal Reserve Bank can meet a
withdrawal of deposits by paying out Federal Reserve notes—
which can be issued for the purpose. In other words, a Federal
Reserve Bank can create the funds with which to meet a deposit
withdrawal, while a commercial bank can not. (3) The deposits of
the Reserve Banks, which in large part consist of the legal reserves
of member banks, can serve as the basis of an expansion of several
times their volume in deposits in the banking system as a whole.
No such multiple expansion can occur on the basis of deposits in a
commercial bank.
The second of these differences is self-explanatory and the third
is explained elsewhere in this volume.5 The difference in regard to
withdrawal of deposits, however, requires a somewhat fuller dis
cussion at this point. Deposits in a commercial bank are subject to
withdrawal on little or no notice and the bank must be prepared to
pay out cash in the event of a withdrawal. It has no way of knowing
whether checks drawn by its depositors will return in the process of
interbank clearing, or whether they will become deposits in another
bank and necessitate an outlay of cash. For this reason a commercial
bank must never expand deposits beyond the point where it can
cover possible cash withdrawals with funds already in its possession
or available by borrowing. Deposits are liabilities which a com
mercial bank must be prepared to meet in cash at any time. Al
though experience has shown that as a rule there are some compensa
tions in interbank movement of funds, deposits being gained as well
as lost in the process, there is always the possibility that the net
result will necessitate the payment of large amounts of cash or,
more likely, the transfer to other banks of reserves at the Federal
Reserve Banks.
If there were only one commercial bank in the nation and it
held all existing deposits, the situation would be different. The bank
would know that when checks were drawn against its deposits in
Ubid., pp. 312-18.

242

BANKING STUDIES

favor of other depositors there would be no occasion for parting with
cash. The checks would necessarily be redeposited with it and would
merely result in a transfer of funds from one depositor in the bank
to another. There would be no change in the total amount of deposits
held by the bank.
In this respect the Federal Reserve Banks are in the position
a commercial bank would occupy if it held all deposits in the nation.
The Federal Reserve Act requires that each member bank deposit
as reserves with the Federal Reserve Bank of its district a prescribed
percentage of its own deposits. These Reserve balances comprise
the bulk of all deposits held by the Reserve Bank, which is required
by law to carry a 35 per cent reserve against them. Since member
banks customarily deposit excess as well as required reserves with
the Reserve Bank, and nonmember banks deposit their reserves
with member banks, the Reserve Bank holds the ultimate reserves
of all banks in the district. Within its district, it is in the position
of a commercial bank that holds all existing deposits.
If reserves move from one Reserve district to another, which
occurs constantly but in much smaller amount than movements
within a district, a Reserve Bank is affected in the same way as
commercial banks are affected by interbank movement of funds.
But resulting losses to one Reserve Bank appear as gains to another
and, since all the Reserve Banks operate as one System, the only
adjustment that might become necessary is a reallocation of assets
between the Banks. The position of the twelve Banks as a whole is
not affected.
Member banks are required by law to keep a certain percentage
of their deposits as required reserves, which are in the form of
deposits at the Federal Reserve Banks, and they have no incentive
to withdraw their excess reserves unless they have an opportunity to
make a profitable loan or investment. If they do so, the proceeds of
the loan or investment become bank deposits somewhere else in the
banking system and a corresponding amount of reserves is trans
ferred to the bank that receives them. The total amount of deposits
in the Reserve Banks does not decline. A transfer of title to deposits
on the books of the Reserve Banks is all that occurs. Consequently,
the Federal Reserve Banks can not only create deposits but can

PUBLIC NATURE OP THE RESERVE BANKS

243

keep them after they have been created. This, together with the
authority to issue Federal Reserve notes, constitutes the Federal
Reserve Banks’ power to create money.
SOURCES OF LEN DIN G POWER

The lending power of the Reserve Banks rests upon this ability
to create money. It does not depend upon money already in the
possession of the Banks or on the possibility of borrowing. This is a
fundamental difference between the source of lending power of
Reserve Banks and commercial banks. Customers of commercial
banks do not borrow money in order to keep it idle on deposit in a
bank. They borrow because they need funds for business or per
sonal disbursements, which means that they usually withdraw
the proceeds shortly after consummation of the loan.6 Since a
commercial bank is only one of several thousand similar institutions
and deposits constantly flow from one to another in the usual course
of business, it must be prepared to part with deposits created by
loans to customers.
The typical borrower from the Reserve Banks is a member bank
that needs to increase its reserves.7 It is not likely, as is a borrower
from a commercial bank, to withdraw the resulting deposit. More
important, if it does so by check, the funds will nevertheless remain
with the Reserve Banks since they will reappear as the deposits of
another member bank; and if it does so in cash, the Federal Reserve
Bank can issue its own liabilities, Federal Reserve notes, to meet
the withdrawal.
The power to issue currency supplements deposit creation in the
lending activities of the Reserve Banks. This may be illustrated
by an extreme example. If the member banks should withdraw all
of their deposits from the Reserve Banks (which they could not do
under the law), the lending power of the Reserve Banks would
decline only fractionally. They could pay the member banks in
6Some commercial banks make a practice of requiring borrowers to leave a part
of the proceeds of a loan on deposit as long as the loan is outstanding. The principal
effect of this practice is indirectly to increase the cost of the available proceeds of
the loan.
7 The Reserve Banks can also extend credit by open-market operations determined
by the Federal Open Market Committee.

244

BANKING STUDIES

Federal Reserve notes issued for the purpose, for the notes are legal
tender and would be readily acceptable by the member banks. The
Reserve Banks’ liability on deposits would be replaced by an equal
amount of liability on Federal Reserve notes. Since reserves required
against notes are 40 per cent, as compared with 35 per cent for
deposits, the Reserve Banks’ lending power would be diminished
by the additional 5 per cent, and that is all. Similarly, if all Federal
Reserve notes were returned to the Reserve Banks in exchange for
deposit credit, the Reserve Banks’ lending power would increase
only to the extent of the reduction in their reserve requirements
from 40 to 35 per cent.
There is only one way, other than through the process of ex
tending credit itself, in which the power of the Reserve Banks to
extend additional credit could be seriously diminished. That is the
cashing in gold of deposits or Federal Reserve notes. Under ordinary
circumstances a Reserve Bank is not likely to have enough reserves
to pay all its deposits or redeem all its notes in gold without liquidat
ing some of its earning assets. Since the essence of a Reserve Bank’s
lending power is that it is required to hold only 40 per cent of gold
reserves against notes and 35 per cent of gold or lawful money
against deposits, it is inevitable that, except under very unusual
conditions such as prevail at present, a withdrawal of all deposits
or redemption of all notes in gold would seriously reduce the lending
power of the Reserve Banks. Under existing law gold can not be
withdrawn except under special license for export purposes, and
there is no prospect of any substantial reduction in the Reserve
Banks’ lending power from this cause. If, however, it should threaten
to become a limiting factor at some future time and if this should
occur at a time when the national economy would be adversely
affected by a restriction of credit, the Board of Governors could
exercise its power of suspending reserve requirements against both
deposits and Federal Reserve notes. Thus even the reserve require
ments imposed on the Reserve Banks need not be a limiting factor
on their credit extension if such a restriction is contrary to the
public interest.
As there is only one way to decrease a Reserve Bank’s lending
power there is only one way, other than by a reduction in their

PUBLIC NATURE OP THE RESERVE BANKS

245

own credit, to increase it; namely, by the acquisition of additional
reserves, principally gold. In the ordinary course of events reserves
come to the Reserve Banks through deposit by member banks or
by the Treasury. Under existing law commercial banks must sell to
the Treasury all gold received and the Treasury sooner or later
places it to the credit of the Reserve Banks. In earlier days
the Reserve Banks could, if they wished, take the initiative in
acquiring new reserves. They could buy gold in the market and
pay for it in deposit credit or in Federal Reserve notes. In the
former case 35 per cent and in the latter case 40 per cent of the
reserves so obtained would be tied up as required reserves against
the new deposits or notes, and 65 or 60 per cent, respectively,
would be available as a basis for additional extension of credit.
Thus the Reserve Banks had the power, on their own initiative,
to acquire such reserves as they required for the extension of addi
tional credit, and were not dependent for their reserves on the
deposit with them of gold or other reserve cash.
SUM M ARY

Fundamental differences in the purpose of their operations are
reflected in the many ways in which Federal Reserve Banks differ
from commercial banks. Public service rather than private profit is
the reason for the existence of the Reserve Banks. It is expressed in
the legislation that brought them into existence, in the manner of
their management and control, and in the ends to which all their
activities are directed.
The Reserve Banks are endowed with power to create money.
It is from this power that they derive their ability to extend credit
in the form of loans to member banks or of purchases in the open
market. The funds for these operations originate in the power to
create deposits, which are legal reserves of member banks, and to
issue Federal Reserve notes, which are legal tender and universally
acceptable currency. The deposits of the Federal Reserve Banks,
furthermore, are high-power money, because they can become the
basis of a multiple expansion of bank credit. The powers of the
Federal Reserve Banks are essential to and derived from the central
banking functions for which Congress has established them. Similar

246

BANKING STUDIES

functions are performed on the basis of law or custom by central
banks in many important countries of the world, all of which have
found them to be an indispensable piece of financial machinery in a
modern economy.
Congress made the “ accommodation of commerce and business
with due regard to general credit conditions” the guiding principle
of Federal Reserve policy and action. In bestowing unusual powers
upon the System it safeguarded their use. Decisions of the Federal
Reserve Banks, the stock of which is owned by member banks, are
confined to local matters and are subject to the law and to super
vision and regulation by the Board of Governors. The formulation
and execution of all policies and operations touching the national
interest are placed in the hands of national bodies and are beyond
the control of private or sectional interests.

OPERATIONS OF THE RESERVE BANKS

Page
I n tro d u ctio n .......................................................................... 249
C ollection

Checks

C ollection

M aturing N otes , B ills ,

and

D r a f t s ............................

249

C o u p o n s ..................................................................... 252

C urrency O p e r a t io n s ........................................................ 253
D iscount O p e r a t io n s ......................................................... 256
O p en -M ark et O p e r a t io n s ............................................... 260
F iscal A gency , C ustodianship ,

and

D epositary

O p e r a t io n s .......................................................................... 260
O ther O p e r a t io n s ...............................................................
E arnings

and

A d aptability

265

E x p e n s e s .................................................... 266
to

C h a n g e s .............................................. 270

E d w a r d L. S h e ad

Chief
Division of Bank Operations

OPERATIONS OF THE RESERVE BANKS
In November 1914 twelve Federal Reserve Banks were established
in important cities in different sections of the country. These Banks,
together with their twenty-four branches and one agency, serve in
a triple capacity. They are the principal medium through which
the credit policies and general supervisory powers of the Federal
Reserve authorities are carried out; they perform for member banks
many of the services which commercial banks perform for the
public; and they are fiscal agents, depositaries, and custodians for
the United States Treasury and other Government units.
The operations of the Federal Reserve Banks might be discussed
from several angles. Among their most important functions is par
ticipation with other Federal Reserve authorities in implementing
Federal Reserve credit policy and in supervising banks.1 These
operations, however, require much less time and personnel than do
other functions of the Federal Reserve Banks. This paper deals
primarily with these other functions, which occupy the major part
of the Reserve Banks’ time from day to day.
COLLECTION OF CHECKS AND DRAFTS

A nation-wide system for the collection of checks and other cash
items is conducted by the Federal Reserve Banks for the benefit of
member banks and nonmember clearing banks.2 As a clearing and
collection medium the Federal Reserve Banks offer commercial
banks a service for collecting out-of-town checks payable in any part
of the United States comparable to that furnished by clearing-house
associations for checks payable locally. Federal Reserve Banks do
1 For treatment of these subjects in their proper settings, see the following papers
in this volume: “ Work of the Board of Governors,” “ Supervision of the Commercial
Banking System,” “ System Organization: Determination of Credit Policy,” and
“ Instruments of Federal Reserve Policy.”
2 A nonmember clearing bank is one that maintains a balance with a Federal Reserve
Bank sufficient to offset items in transit held for its account by the Federal Reserve
Bank.

249

250

BANKING STUDIES

not ordinarily handle local checks since banks can exchange them
daily, usually through a clearing-house association. In most cities
having a Federal Reserve Bank or branch, however, settlement for
clearing-house balances is made on the books of the Federal Reserve
Bank. In some cases the clearings are actually conducted by the
Federal Reserve Bank or branch, or the clearing house has quarters
in the Federal Reserve building.
Before the Federal Reserve Banks were established the collection
of out-of-town checks frequently involved circuitous routing and
hence delay in collection. The following illustration indicates the
direct and economical manner in which the Reserve Banks now
perform this function:
A distributor in Duluth, Minnesota, purchases some mechanical equipment
from a manufacturer in Trenton, New Jersey, and sends a check in payment
drawn on his bank in Duluth. The manufacturer deposits this check in his bank
in Trenton, which sends it, together with other out-of-town checks received
that day, to the Federal Reserve Bank of Philadelphia. The Federal Reserve
Bank of Philadelphia forwards the check, together with others payable in Min
nesota, direct to the Federal Reserve Bank of Minneapolis. If the Trenton
bank receives a large number of checks drawn on banks in the Minneapolis
Federal Reserve District, it may shorten the collection time still further by
sending them direct to the Minneapolis Reserve Bank, supplying the Phila
delphia Reserve Bank with the details of the items sent.3 Upon receipt, the
Minneapolis Reserve Bank sends the check to the bank in Duluth on which
drawn. The bank in Duluth sends a draft on its reserve account to the Federal
Reserve Bank in Minneapolis in payment for this item and others received
that day from the Reserve Bank. The Federal Reserve Bank of Minneapolis
credits the Federal Reserve Bank of Philadelphia by wire through the Inter
district Settlement Fund maintained by the Board of Governors and sends a
mail advice covering the details of the credit to the Philadelphia Reserve Bank.
Upon receipt of the check the Federal Reserve Bank of Philadelphia gives
the Trenton bank credit in a deferred deposit account. Transfers from the
deferred account to the bank’s reserve account are made in accordance with a
published time schedule.

Member banks are not compelled to use the Federal Reserve col
lection facilities. They can, if they choose, clear their out-of-town
8Banks following this practice are known as direct sending banks. When a member
bank has a sufficient volume of cash items payable in other Federal Reserve districts
to justify direct routing, the Reserve Bank may decline to accept such items for col
lection unless they are routed direct to the Federal Reserve Banks and branches of
such other Federal Reserve districts.

OPERATIONS OE THE RESERVE BANKS

251

checks through correspondents or in any other way they consider
advantageous, using the Federal Reserve collection system only
occasionally or not at all. As a matter of practice about half of the
member banks regularly send their out-of-town items to the Reserve
Banks for collection. Many member banks, particularly those not
situated in Federal Reserve Bank or branch cities, find it more con
venient to clear cash items through a city correspondent. One reason
is that they can send all their out-of-town checks to a city corre
spondent and thus avoid sorting out checks drawn on banks that
Checks H and led
NUMBER

F ederal R eserve B a n k s®
VALUE

a For data, see Table 23, p. 438.

will not remit at par, which the Federal Reserve Banks can not
handle.4 City correspondents, however, use the Federal Reserve
collection system to collect out-of-town checks drawn on par banks
received from their country correspondents.
The Federal Reserve Banks give immediate credit, or credit
within one or two days after receipt, for most checks received from
member banks and nonmember clearing banks for collection. Since
September 1, 1939, the maximum period of credit deferment for a
4 For a discussion of the par clearance problem, see the paper “ Deterrents to Mem
bership in the Reserve System.”

252

BANKING STUDIES

check payable anywhere in the United States has been three days.
The time actually required to collect checks often exceeds the period
during which credit is deferred by the Reserve Banks under their
time schedules, and as a result the Reserve Banks are constantly
giving member banks credit for a substantial amount of cash items
(approximately SO million dollars daily on the average) in advance
of actual collection.
The number and amount of checks handled by the Federal Re
serve Banks from 1917 through 1939 are shown in the chart on page
251. During 1939 the total was over 1.1 billion checks amounting
to about 256 billion dollars. One-fifth of the personnel of the Reserve
Banks, or about 2,300 employees, were engaged in collecting these
checks and other cash items.
COLLECTION OF M ATU RIN G NOTES, BILLS, AND COUPONS

In addition to providing for the collection of checks and drafts,
the Federal Reserve Act authorizes Federal Reserve Banks to re
ceive from member banks and nonmember clearing banks maturing
notes and bills for collection. These “ noncash” items include matur
ing notes, bills, securities, coupons, etc. (other than obligations of
the United States and its agencies that are redeemed by Federal
Reserve Banks as fiscal agents).
The Federal Reserve Banks either present noncash items for pay
ment direct to the person, firm, or corporation on which they are
drawn, or forward them for collection through other banking institu
tions. If payable outside the district of the Federal Reserve Bank
receiving them for collection, they are ordinarily forwarded to the
Reserve Bank or branch in the appropriate locality. Member banks
having a substantial volume of noncash collections are encouraged to
route them direct to the Federal Reserve Banks and branches of the
districts in which they are payable.
Except for security collections in a few cities, the Federal Reserve
Banks make no charge for their own services in collecting noncash
items.6They only receive reimbursement for telephone and telegraph
6 In order to discourage the use of their collection facilities for the presentation of
“ dunning drafts,” however, the Federal Reserve Banks charge 15 cents on certain col
lection items returned unpaid and unprotested.

OPERATIONS OF THE RESERVE BANKS

253

costs and for charges incurred in forwarding valuable items by
registered insured mail. Consequently an item payable in a city
where there is a Federal Reserve Bank or branch is ordinarily col
lected at par. Any bank selected by a Federal Reserve Bank as its
agent for collecting items payable outside Federal Reserve Bank
and branch cities may, however, make a charge for the service
rendered. When such a charge is made the Federal Reserve Bank
remits for the net proceeds.
During the year 1939 the Federal Reserve Banks handled 6.2
million noncash collection items having an aggregate value of 5.4
billion dollars. About 400 employees were engaged on this work.
CURRENCY OPERATIONS

Through member and nonmember banks the Federal Reserve B anks
supply the currency required by the public, maintaining at all times
supplies of paper money and coin adequate to meet demands upon
them. They are the medium through which Federal Reserve notes
are issued, and all other kinds of United States money, paper and
coin, are put into circulation. They are also the institutions through
which currency no longer needed by the public is withdrawn from
circulation. The amounts and kinds of currency in circulation, that is,
outside the vaults of the Treasury and the Federal Reserve Banks,
on December 31,1939, were as follows (in millions of dollars) :6
Federal Reserve notes.......................................
Silver certificates...............................................
United States notes...........................................
Silver dollars......................................................
Subsidiary silver coin........................................
Minor coin ........................ .................................
Treasury notes of 1890.....................................
Gold certificates.................................................
National bank notes.........................................
Federal Reserve Bank notes............................

4,912
1,554
272
45
381
164
1
70
175
24

T ota l............................................................

7,598

Gold certificates, national bank notes, Federal Reserve Bank notes,
e For the history of the various kinds of currency, see the paper “ Currency System
of United States.”

254

BANKING STUDIES

and Treasury notes of 1890 are in process of retirement from circu
lation.
Member banks obtain currency from their Federal Reserve Banks
and have it charged to their deposit (reserve) accounts with the
Reserve Banks just as individual depositors at commercial banks
obtain currency and have it charged to their deposit accounts. In
Federal Reserve cities, member banks obtain currency over the
counter at the Reserve Banks and branches; elsewhere they receive
it by mail or express from their Reserve Bank or branch. To place
all member banks on essentially the same footing in obtaining
currency, shipping expenses are borne by the Federal Reserve
Banks. Member banks return unfit and excess currency to their
Federal Reserve Banks, which absorb the shipping charges.
Currency requirements of nonmember banks are met through
correspondent member banks, which supply the currency or arrange
for shipment from the Federal Reserve Banks direct to the non
member banks. Shipping costs incurred by the Federal Reserve
Banks in such cases are collected from the correspondent member
banks. Nonmember banks deposit unfit and excess currency with
their correspondent banks, or ship it direct to the Federal Reserve
Banks either for the account of correspondent banks or in payment
of checks sent to them by the Federal Reserve Banks for collection
and remittance.
When currency is returned to a Reserve Bank from circulation it
is counted and sorted as to classes and fitness for further circulation.
The fit currency (except Federal Reserve notes of other Reserve
Banks) is then paid out again, as occasion requires, along with new
currency. Unfit paper money is cancelled and sent to Washington
for destruction, and light-weight and mutilated coin is sent to a
United States mint for melting and recoinage.
In accordance with provisions of the Federal Reserve Act, which
prohibits (under penalty of a tax of 10 per cent) Federal Reserve
Banks from paying out notes of other Federal Reserve Banks,
Federal Reserve notes issued through one Federal Reserve Bank and
received by another are promptly returned for credit to the issuing
Bank; or if they are worn and unfit for further use, they are shipped
to the United States Treasury to be retired. Notes returned to other
Federal Reserve Banks or to the Treasury for their account are

OPERATIONS OE THE RESERVE BANKS

255

charged to these Banks in the daily note settlement conducted by
the Board of Governors through the Interdistrict Settlement Fund.7
In meeting requests for currency the Federal Reserve Banks pay
out whatever kinds of paper money and coin they have on hand,
depending upon their existing supplies and the denominations
requested. Reserve stocks of silver certificates and United States
notes are maintained by the United States Treasury at Washington,
while reserve stocks of Federal Reserve notes are maintained by the
Federal Reserve Agents (representatives of the Board of Governors
at the Federal Reserve Banks) as well as by the Treasury. Reserve
C u r r e n c y R e c e iv e d

and

C ounted

F ederal R eserve B an k s*

a For data, see Table 23, p. 438.

stocks of coin are maintained at the various mints. When the Re
serve Banks receive shipments of silver certificates, United States
notes, or coin from Washington or a United States mint, they credit
the amount to the Treasurer of the United States. When they obtain
Federal Reserve notes from the Federal Reserve Agents they deposit
with the Agents the required collateral, which may consist of eligible
paper acquired either by discount or purchase, of gold certificates on
7
For a discussion of the Interdistrict Settlement Fund, see the paper “ Work of the
Board of Governors.”

256

BANKING STUDIES

hand and due from the United States Treasury, or (until June 30,
1943) of direct obligations of the United States. In recent years, the
amount of gold certificates pledged with the Federal Reserve Agents
as collateral has actually been in excess of the amount of Federal
Reserve notes outstanding.
The cost of printing and shipping Federal Reserve notes, including
insurance and postage, is paid by the Federal Reserve Banks. They
also pay the cost of redemption of these notes by the Treasury
Department. In recent years the combined total of these costs has
averaged 1.7 million dollars a year. In addition, expenses incurred by
the Reserve Banks in handling currency, including shipping costs to
and from member banks, have amounted to approximately 4 million
dollars a year.
The number of pieces of paper money and coin received and
counted by the Federal Reserve Banks during the period 1920-1939
is shown in the chart on page 255. During the year 1939 the total
was about 2.1 billion pieces of paper money having a face value of
9.3 billion dollars, and 2.6 billion coins having a face value of 277
million dollars. On the average, the Reserve Banks received and
counted about 7 million pieces of paper money and about 8 million
coins (approximately 51 tons) per day. These and other activities
connected with currency operations required the services of over
1,000 employees.
DISCOUNT OPERATIONS

An important operation of the Federal Reserve Banks, though one
which at the present time is small in volume and requires the time
of a relatively small number of employees, is the making of loans and
advances to member banks and others. Discounts for member banks
have been made ever since the Reserve Banks began to operate in
1914, but loans to nonmember banks and commercial and industrial
enterprises are a comparatively recent development.
Discounts for Member Banks. One of the chief reasons for the
establishment of the Reserve System was to provide a means for
rediscounting short-term agricultural, industrial, and commercial
paper. Member banks rediscount their customers’ notes with the
Federal Reserve Banks or borrow on their own collateral notes for

OPERATIONS OF THE RESERVE BANKS

257

the purpose of maintaining with the Federal Reserve Banks the re
quired reserves against deposits. Reductions in a member bank’s re
serve balance normally result from withdrawals of currency by the
member bank or from payments of checks drawn against it. Growth
of a member bank’s deposits increases the amount of reserves it is
required to maintain and may necessitate borrowing from the
Federal Reserve Bank.
Until the early 1930’s, member banks had no appreciable amount
of excess reserves, and rediscounting to meet seasonal and other
demands was common. Since then member bank reserve balances
have generally been far in excess of requirements, and relatively few
member banks have needed to borrow from their Federal Reserve
Bank. During 1920, when discount operations of the Federal Reserve
Banks were at a peak, average daily holdings of discounted paper
amounted to 2.5 billion dollars, while in 1939 such holdings amounted
to only 5.1 million dollars.
A member bank requiring discount accommodation submits an
application to its Federal Reserve Bank on an appropriate form
tendering either eligible short-term commercial, industrial, or agri
cultural paper for rediscount, or its own promissory note secured by
such eligible paper, by United States Government obligations, or by
other satisfactory collateral. Paper of a member bank’s customers
offered for rediscount or as collateral for the member bank’s own
promissory note is examined by the Federal Reserve Bank to ascer
tain whether it is eligible and also whether it is acceptable from a
credit standpoint. If the offering is found to be satisfactory and there
is no policy reason for denying credit, the paper is discounted by the
Reserve Bank at the established rate and the proceeds are credited
to the member bank’s reserve account. Member banks may obtain
credit accommodation at the Federal Reserve Banks for varying
periods, depending upon the class of paper offered for rediscount or
as collateral to their own promissory notes.
In general, eligible commercial, industrial, and agricultural paper
may be used to obtain accommodation for periods up to ninety days,
either by rediscount or as security for an advance, except that agri
cultural paper may be rediscounted with maturities up to nine
months. At the present time the discount rate on such paper is one

258

BANKING STUDIES

per cent at the Boston and New York Reserve Banks and 1.5 per cent
at all other Reserve Banks. Advances secured by United States
Government obligations may be made for periods up to ninety days.
The discount rate on advances to member banks secured by Govern
ment obligations is one per cent at Boston, New York, Atlanta,
Chicago, St. Louis, Kansas City, and Dallas, and 1.5 per cent at the
other Reserve Banks.
At the time of the passage of the Federal Reserve Act, national
banks were primarily commercial banks. Over two-thirds of their
earning assets were in the form of short-term loans to commerce,
industry, and agriculture. Since that time, and particularly in the
late 1920,s, the larger business enterprises have financed a con
siderable part of their needs through bond and stock issues or out of
accumulated surpluses and have reduced their borrowings from
banks. This circumstance, together with large purchases by member
banks of United States Government securities floated during and
since the World War, has changed the character of the earning assets
of member banks so that about three-fifths of them now consist of
securities. In addition, the member banks have acquired substantial
amounts of long-term real-estate loans.
As a result of the decline in short-term commercial and agri
cultural paper in their portfolios, some member banks in the early
1930’s lacked a sufficient amount of eligible short-term paper with
which to obtain needed credit at the Reserve Banks. To remedy the
situation Congress amended the Federal Reserve Act so as to author
ize the Federal Reserve Banks to make advances to member banks
on their promissory notes secured by any collateral satisfactory to
the Reserve Banks. Such advances may be made for periods up to
four months at rates which, under the law, must not be less than
one-half per cent per annum higher than the highest discount rate in
effect at the Reserve Bank. The rate on such advances is now 2 per
cent at all Federal Reserve Banks.
Advances to Commercial and Industrial Enterprises. Under
the provisions of Section 13b of the Federal Reserve Act (added by
the Act of June 19, 1934), the Federal Reserve Banks may make
advances to established commercial or industrial enterprises for the

OPERATIONS OF THE RESERVE BANKS

259

purpose of supplying working capital. Such advances are made by
the Reserve Banks either direct or in participation with a member or
nonmember bank, but they may be made direct by the Reserve
Banks only if the borrower is unable to obtain the requisite financial
assistance on a reasonable basis from the usual sources.
The great majority of advances under this section of the act are
made by member and nonmember banks with commitments on the
part of the Federal Reserve Banks to discount the paper on demand
without recourse, except that the member or nonmember bank must
obligate itself for at least 20 per cent of any loss that may be
sustained. If such loans are made jointly by a Federal Reserve
Bank and a member or nonmember bank, the latter must likewise
obligate itself for at least 20 per cent of any loss. Up to December 27,
1939, the Federal Reserve Banks had approved 2,800 applications
for industrial advances and commitments in the aggregate amount of
188 million dollars. In recent months the Federal Reserve Banks
have received relatively few applications for industrial advances and
commitments, owing in part to the fact that the authority of the
Reconstruction Finance Corporation to make loans of this type has
been made much broader than that of the Federal Reserve Banks.
Advances to provide working capital for established commercial
and industrial businesses may be made for periods up to five years.
The rates applicable to industrial advances range from 2.5 to 6 per
cent, while commitments to make such advances bear rates of from
one-half to 2 per cent.
Loans to Individuals, Partnerships, and Corporations. Under
the Emergency Banking Act of March 9, 1933, Federal Reserve
Banks have power to make loans to individuals, partnerships, and
corporations on the security of direct obligations of the United
States Government. Such advances may be made for periods up to
ninety days. Under this provision of law nonmember banks are now
permitted to borrow from the Reserve Banks on direct obligations
of the United States Government at the rates charged member
banks, that is, one or 1.5 per cent. Rates on such advances to indi
viduals, partnerships, and corporations other than banks range from
2.5 to 4 per cent.

260

BANKING STUDIES

OPEN-M ARKET OPERATIONS

In the early years of the System each Federal Reserve Bank
initiated and carried out its own open-market operations. In the
early 1920,s, however, it became increasingly evident that coordina
tion of the open-market programs of the individual banks was essen
tial to the execution of a unified credit policy for the nation as a
whole. Ultimately Congress assigned full responsibility for all such
transactions to the Federal Open Market Committee, composed of
the seven members of the Board of Governors and five representa
tives chosen by the Federal Reserve Banks.8 At the present time,
although the Federal Reserve Banks do not individually buy and sell
securities in the open market for their own accounts, they participate
through their representatives on the Open Market Committee in the
planning and execution of open-market purchases and sales. The
System’s holdings of Government securities are apportioned among
the individual Reserve Banks on the basis of their expense and
dividend requirements.
The Federal Reserve Bank of New York acts as the agent of the
Federal Open Market Committee. It has a special department de
voted to executing the buying and selling orders of the Committee.
FISCAL AGENCY, CUSTODIANSHIP, AND DEPOSITARY
OPERATIONS

The facilities of the Federal Reserve Banks, including their ex
perienced personnel, vaults, etc., have always been used extensively
by the Government. During the years 1917-1919 the Federal Re
serve Banks handled the sale of Liberty bonds, Victory notes,
and Treasury certificates of indebtedness. In 1920 and 1921, at the
direction of the Secretary of the Treasury, the Federal Reserve
Banks assumed most of the functions of the subtreasuries, which
were discontinued in accordance with an act of Congress. The loca
tion of the Federal Reserve Banks and branches in all sections of
the country has facilitated the field work of the Treasury and of
many of the recently created Federal emergency agencies.
8 For a discussion of the nature and purpose of the Federal Open Market Com
mittee, see the papers “ System Organization: Determination of Credit Policy” and
“ Instruments of Federal Reserve Policy.”

OPERATIONS OF THE RESERVE BANKS

261

About 3,100 employees, or one-fourth of the total personnel of the
Federal Reserve Banks, devote their time to fiscal agency, custo
dianship, and depositary operations for the United States Treasury
and other Government departments and agencies. This situation
has not always existed. In 1932, for example, the proportion of the
total personnel of the Federal Reserve Banks engaged in fiscal
E xpenses

Federal R eserve B anks
D

e p o s it a r ie s

of t h e

F is c a l A g e n t s

and

U n i t e d St a t e s 4

a For data, see Table 24, p. 438.

agency operations was about 10 per cent and in 1925 it was only
6 per cent.
In 1939 the total fiscal agency, custodianship, and depositary
expenses of the Federal Reserve Banks amounted to 6 million dol
lars, of which 4.9 millions were reimbursable. Fiscal agency, custo
dianship, and depositary expenses for the period 1917-1939, together
with amounts reimbursable, are shown in the accompanying chart.
Services for the United States Treasury. The principal activities
carried on by the Reserve Banks for the Treasury Department are

262

BANKING STUDIES

those incident to the issuance, exchange, and redemption of Govern
ment securities and the payment of Government checks and
coupons. About 1,000 employees are engaged in these tasks.
Under instructions from the Secretary of the Treasury, the Fed
eral Reserve Banks print the announcements describing new Treas
ury issues, distribute them among all banking institutions and others
interested, receive the subscriptions, and make allotments and
deliveries of the securities. An unissued stock of each issue of coupon
securities is maintained by the Reserve Banks for use in making
exchanges. For example, the holder of a $5,000 bond may request
five $1,000 bonds instead, or may desire to exchange a registered
bond for a coupon bond. Exchanges necessitating the issuance of
registered bonds must be completed in Washington. Upon redemp
tion by the Reserve Banks, Government securities are cancelled and
shipped to Washington, and the amount paid out is charged to the
Treasurer’s general account on the books of the Reserve Banks.
The principal fiscal agency operations now handled for the Treasury,
in addition to those pertaining to periodic financing, are the sale and
redemption of United States Savings bonds and the redemption of
Adjusted Service bonds.
During the year 1939 the Federal Reserve Banks handled the
issuance of 1.1 million United States bonds, notes, and bills having a
face value of 9.4 billion dollars; exchanged 861,000 securities
amounting to 6.1 billion dollars; and redeemed 1.6 million securities
amounting to 9 billion dollars. Incidental to these issues, exchanges,
and redemptions, the Federal Reserve Banks held 187,000 United
States Savings bonds in safekeeping for owners at the end of 1939,
and handled during the year 92,000 pieces of securities deposited by
banks as collateral to special deposits of public moneys under the
Act of Congress approved September 24,1917.
Depositary operations performed by the Federal Reserve Banks
for the Treasury comprise for the most part the cashing of Govern
ment checks and the payment of Government coupons. Telegraphic
transfers of Government funds from one Federal Reserve Bank to
another are made by the Reserve Banks at the request of the United
States Treasury. During the course of a year, the Federal Reserve
Banks receive deposits of many millions of checks for collection for

OPERATIONS OF THE RESERVE BANKS

263

account of various Government officials, such as collectors of in
ternal revenue. Interest, pension, and other Government checks are
cashed by the Reserve Banks for member banks. During the year
1939 the Federal Reserve Banks cashed 60 million Government
checks totalling 14 billion dollars and paid 12 million Government
coupons totalling over 757 million dollars.
In addition to their ordinary depositary operations the Reserve
Banks, in accordance with special Treasury Department instruc
tions, perform work incident to the examining and final payment of
emergency work relief checks, which are drawn on the Treasurer of
the United States payable through the Reserve Banks. During the
year 1939, 74 million emergency relief checks amounting to 2.1
billion dollars were handled by the Reserve Banks.
Operations of Federal Reserve Banks as fiscal agents, custodians,
and depositaries of the United States were in relatively small volume
prior to 1917 and were then conducted without expense to the Treas
ury Department. When, in 1917, the Government began to issue
securities to finance the war, fiscal agency operations of the Reserve
Banks increased tremendously, and provision was made by the Treas
ury for reimbursing the Federal Reserve Banks for practically all
expenses incurred by them in handling security transactions. At the
request of the Treasury, the Federal Reserve Banks in 1921 agreed
to limit their requests for reimbursement of fiscal agency expenses
to those incurred in connection with new issues of securities. The
term “ new issues,” or “ current issues” as now used, means securities
issued during the current or immediately preceding Government
fiscal year. Inasmuch as a large portion of redemptions and ex
changes are of securities issued prior to the preceding fiscal year the
Reserve Banks absorb considerable expense in making redemptions
and exchanges of Treasury issues.9
Federal Reserve Banks have never received reimbursement for
expenses incurred as depositaries of the United States or for per
forming currency operations formerly handled by the subtreasuries.
The Reserve Banks, however, receive reimbursement for their ex
9 Since July 1, 1940, the Reserve Banks have received reimbursement for expenses
incurred in redeeming United States Savings Bonds regardless of the date of their issue.

264

BANKING STUDIES

penses incurred in handling emergency work relief checks. In this
connection they perform the examining and accounting work
incident to final payment, after which the cancelled checks are
shipped direct to the General Accounting Office in Washington
instead of to the Treasury Department, as is the case with other
Government checks.
In addition to the major activities described above, the Federal
Reserve Banks perform other operations as fiscal agents and custo
dians of the United States, including (1) operations relating to gold
and silver under the Gold Reserve and Silver Purchase Acts of 1934;
(2) operations, as designated agencies under executive orders and
regulations, relating to transactions in foreign exchange; (3) certi
fying rates of foreign exchange to the Secretary of the Treasury in
accordance with the provisions of Section 522 of the Tariff Act of
1930; and (4) executing orders for the purchase and sale of Govern
ment securities for the account of the Treasury Department.
Services for Government Units Other Than the Treasury.
Upon request the Federal Reserve Banks act as fiscal agents, custo
dians, and depositaries for departments and agencies of the United
States Government other than the United States Treasury. At the
present time the Federal Reserve Banks perform various services
for the Federal Farm Mortgage Corporation, Federal Land Banks,
Federal Intermediate Credit Banks, Commodity Credit Corpora
tion, and Federal Crop Insurance Corporation, all of which are
under the supervision of the Department of Agriculture; for the
Reconstruction Finance Corporation, Federal Home Loan Banks,
Home Owners’ Loan Corporation, and Federal Housing Administra
tion, all of which are under the supervision of the Federal Loan
Agency; for the United States Housing Authority and Public Works
Administration, which are under the supervision of the Federal
Works Agency; and for the Federal Deposit Insurance Corporation.
The Federal Reserve Banks receive reimbursement for expenses
incurred in serving these agencies. For some of these agencies the
Federal Reserve Banks issue, exchange, and redeem securities
and pay coupons. For some they perform special work such as
closing and disbursing loans, holding collateral in safe-keeping, and
receiving and applying payments.

OPERATIONS OE THE RESERVE BANKS

265

From the standpoint of personnel, the operations handled for the
Reconstruction Finance Corporation and the Commodity Credit
Corporation rank next to those performed for the Treasury Depart
ment. The time of about 800 employees is devoted to work for the
Reconstruction Finance Corporation and that of about 1,200 em
ployees to work for the Commodity Credit Corporation. Work for
the Commodity Credit Corporation includes the custody of hun
dreds of thousands of notes of producers of agricultural and other
products together with the accompanying documents. The Federal
Reserve Banks perform a considerable amount of detail work in con
nection with these loans, such as the computation of interest, ware
house charges, etc.
OTHER OPERATIONS

In addition to the operations of the Federal Reserve Banks al
ready described, there are numerous other important activities that
should be mentioned. Among these are (1) examining State member
banks and banks that apply for membership in the Reserve System;
(2) keeping informed of the general character and amount of the
loans and investments of member banks with a view to ascertaining
whether undue use is being made of bank credit for speculative or
other purposes inconsistent with the maintenance of sound credit
conditions; (3) receiving and analyzing applications from national
banks to exercise trust powers, and from holding companies to vote
the stock of member banks; (4) receiving and checking call reports of
condition and of earnings and dividends from State member banks;
(5) maintaining deposit accounts and performing other services for
foreign central banks; (6) administering most of the regulations
issued by the Board of Governors of the Federal Reserve System and
giving advice as to their interpretation; (7) administering certain
features of the Securities Exchange Act relating to margin require
ments on security loans by banks, and by brokers and dealers in
securities; (8) making telegraphic transfers of funds for member
banks; (9) holding securities in safekeeping for out-of-town member
banks; and (10) keeping informed of economic developments in their
districts and publishing monthly reviews of business conditions.
Another paper in this volume deals with the examination and

266

BANKING STUDIES

supervision of banks and related subjects.10 It may be pointed out
here, however, that in some cases the district headquarters of the
examiners for the Comptroller of the Currency and the Federal De
posit Insurance Corporation are located in Federal Reserve Bank
buildings. This arrangement facilitates the coordination of the ac
tivities of the three Federal bank supervisory agencies.
While the various operations already described or referred to in
this paper consume a large part of the time of the officers of the
Federal Reserve Banks, there are other important subjects to which
they must give considerable attention. Among these are banking and
business conditions, particularly within their respective districts,
and the problems with which member banks are currently faced.
Considerable information along these lines is gained by officers of
the Reserve Banks from contacts with bankers and others who come
to the Reserve Banks, from attendance at bankers’ conventions and
conferences, and from personal visits to member and nonmember
banks. In recent years the managements of the Reserve Banks, par
ticularly the senior officers, have been devoting an increasing
amount of time to such personal visits throughout their districts.
These visits serve a dual purpose. The managements of the Reserve
Banks, and through them the Board in Washington, gain a better
understanding of banking and business conditions in their districts;
and bankers and bank directors become better acquainted with the
objectives and policies of the Federal Reserve System and the ways
in which the System can serve them and the business and agri
cultural interests of their communities. The Federal Reserve Banks
also cooperate with and extend their facilities and services to groups
of banks that are studying investment and other banking problems.
EARNINGS AND EXPENSES

The Federal Reserve Banks are not operated for profit, but they
have been self-supporting, as it was contemplated they should be.
A large portion of their total assets is held in the form of idle cash,
since they are required bylaw to maintain a reserve of not less than
40 per cent in gold certificates against their note liabilities (Federal
Reserve notes in circulation) and a reserve of not less than 35 per
10 “ Supervision of the Commercial Banking System.”

OPERATIONS OF THE RESERVE BANKS

267

cent in gold certificates or lawful money against their deposit liabili
ties. Because of the general banking situation and large gold imports
in recent years, reserves actually maintained have for some time
been greatly in excess of these minimum requirements. At the end of
1939 cash reserves of the Federal Reserve Banks amounted to 16
billion dollars, compared with reserve requirements of 7 billions.
The nature and amount of Federal Reserve Bank earnings depend
largely upon the demand for Reserve Bank credit on the part of
member banks and upon Federal Reserve policy as to open-market
operations. The demand for Reserve Bank credit by member banks
is dependent upon the extent of the credit demands of their cus
tomers and upon the existing level of their reserves with the Federal
Reserve Banks. When the demand for credit by the public is large
and member banks in the aggregate hold only such reserves with
the Federal Reserve Banks as the law requires, as was the case in
1920 for example, member bank borrowings at the Reserve Banks
expand and earnings of the Federal Reserve Banks are correspond
ingly large. When, as at present, member bank reserves are far in
excess of legal requirements, member bank borrowings at the Federal
Reserve Banks are negligible, and earnings of the Reserve Banks
arise chiefly from their holdings of securities bought in the open
market. The amount and composition of the bills and securities held
by the Federal Reserve Banks since their organization in 1914
through 1939 are shown in the chart on the following page.11
Reserve Bank credit was at its peak in 1920 and consisted almost
entirely of discounts for member banks, made at rates yielding from
4.5 to 6 or 7 per cent. This situation is in marked contrast to that of
recent years, during which Reserve Bank credit has again been rela
tively high but has consisted almost entirely of United States
Government securities purchased in the open market and yielding
about 1.5 per cent.
Expenses of the Federal Reserve Banks are incurred principally in
performing the operations hereinbefore described. That the Federal
Reserve Banks are organized for rendering service rather than for
making profits is evidenced by the fact that most of their expenses
11 The statement of condition of the twelve Federal Reserve Banks combined for
Dec. 31, 1939, is given in Table 26, p. 444.

268

BANKING STUDIES

are incurred in collecting checks, supplying currency, and performing
other operations from which no earnings are derived. Only a rela
tively small portion of their expenses is incurred in performing
operations connected with discounts and with purchases of United
States securities, which supply practically all their earnings.
Gross earnings of the Federal Reserve Banks from their organi
zation in 1914 to the end of 1939 amounted to 1,316 million dollars,
of which 666 millions were from discounted bills, 450 millions from
B il l s

and

1915

S e c u r it ie s H e l d

1920

1925

F ederal R eserve B an k s*

1930

1935

1940

a For data, see Table 25, pp. 439-44.

United States Government securities, and 149 millions from pur
chased bills. The chief items of expense have been salaries, 361 mil
lion dollars; postage, expressage, and insurance on shipments of
currency and securities, 60 millions; depreciation and charge-offs on
bank premises, 54 millions; issuing and redeeming Federal Reserve
currency, 51 millions; local taxes, 23 millions; and assessments for
the expenses of the Board of Governors, 22 millions. Net earnings
since organization have amounted to 622 million dollars.
The disposition of net earnings of the Federal Reserve Banks for

OPERATIONS OF THE RESERVE BANKS

269

each year from 1914 through 1939 is shown in the accompanying
chart. During 1920 and 1921 net earnings were unusually large, 149
and 82 million dollars, respectively. In consequence the franchise
tax paid to the United States amounted to nearly 61 million dollars
in 1920 and 60 millions in 1921, the payments for these two years
alone representing over 80 per cent of all franchise taxes paid during
the eighteen years when net earnings of the Reserve Banks were
subject to such a tax. During recent years net earnings have not
D i s p o s it io n

E a r n in g s

F ederal R eserve

B a n k s 11

* For data, see Table 27, p. 445.

been much in excess of dividend requirements. In 1933 the franchise
tax was discontinued by Congress and at the same time the Federal
Reserve Banks were required to subscribe for capital stock of the
Federal Deposit Insurance Corporation in an amount equal to onehalf of their accumulated surplus on January 1, 1933. The 139
million dollars thus paid to the Federal Deposit Insurance Corpora
tion is in the nature of a contribution to its capital, inasmuch as the
stock acquired by the Reserve Banks does not bear dividends. Its
ownership gives the Federal Reserve Banks no voice in the manage

270

BANKING STUDIES

ment of the Corporation, and the stock can not be sold. Accordingly,
the Federal Reserve Banks have deducted the cost of the stock from
their surplus.
In the aggregate the net earnings of the Federal Reserve Banks
have been disposed of as follows:
Amount
(In millions)

Percentage

Dividends paid....................................... ..............
U. S. franchise ta x .................................
Payment for stock of F.D.I.C.............. ..............
Net earnings retained........................... ..............

$178
150
139
155

28.6
24.1
22.4
24.9

T otal................................................ ..............

$622

100.0

A little over one-fourth of the total net earnings of the Federal Re
serve Banks has been paid to member banks as the 6 per cent divi
dend provided by law on their paid-in holdings of Federal Reserve
Bank stock; almost one-half has been paid to the United States
Government as a franchise tax and for stock of the Federal Deposit
Insurance Corporation; the remaining fourth has been retained by
the Federal Reserve Banks and added to their surplus. The surplus
of the Federal Reserve Banks is not distributable to member banks.
The law provides that should a Federal Reserve Bank be dissolved
or go into liquidation, any surplus remaining after the payment of
all debts, unpaid dividends, and the par value of its capital stock
shall belong to the United States.
A D A PTA BILITY TO CHANGES

Services now being performed by the Federal Reserve Banks
demonstrate their adaptability to uses much wider and more varied
than those contemplated at the time of the establishment of the
Federal Reserve System. The history of the Federal Reserve Banks
is a record of continuous evolution to meet new demands and new
situations. They have constantly adjusted their policies and prac
tices to new conditions and to the ever changing requirements of
business and the Government.
Changes in the law have been found necessary from time to time
to enable the Federal Reserve System to meet changing banking and
business conditions, and further changes may be necessary if the
System is to continue to be useful.

DETERRENTS TO MEMBERSHIP IN
THE RESERVE SYSTEM
Page
I n t r o d u c tio n .........................................................................

273

P ositive D eterren ts

273

N eg ative D eterren ts

M e m b e r s h ip ...................

M e m b e r s h i p ................. 287

S u m m a r y ...................................................................................

B. M a g r u d e r W in g f ie l d
Assistant General Counsel

290

DETERRENTS TO MEMBERSHIP IN
THE RESERVE SYSTEM
The effectiveness of the Federal Reserve System is dependent
largely upon the extent of its membership. Membership is not com
pulsory, and 57 per cent of the banks that are of the kind that may
be members have chosen not to join the System or for some reason
can not join it.1
The reasons why banks remain outside the System may be
divided into two groups: positive reasons resulting from statutory
requirements that individual banks are unable or unwilling to
meet; and negative reasons that result from the fact that some
of the advantages of membership may be obtained without in
curring its requirements. These two groups of deterrents will be
given separate consideration in the following pages.
This paper does not undertake to pass judgment on the validity
of the banks’ reasons for not joining the System or on their wisdom
in not doing so. Neither does it present concrete recommendations
for overcoming the deterrents. What has been attempted is a
factual survey of conditions and attitudes as they exist.
POSITIVE DETERREN TS TO MEM BERSHIP

The positive deterrents to membership arise from the numerous
differences in the character and extent of statutory controls that
govern the activities of banks. These variations arise principally
out of the fact that member banks and nonmember insured banks
are subject to different Federal statutory requirements, and also
because State statutes applicable to State banking institutions
differ in important respects from Federal statutes applicable to
1 If a bank elects to operate under a national charter, it must also become a member
of the Federal Reserve System; for banks under State charter, including trust com
panies, stock savings banks, mutual savings banks, and Morris Plan banks, membership
is permissible but not required.

273

274

BANKING STUDIES

member banks. The following facts indicate, in general, these statu
tory differences that condition interbank competition.
National banks are subject to provisions of the National Bank Act, since
they are chartered by the Federal Government; they are also subject to the
provisions of the Federal Reserve Act applicable to member banks, because
they are members of the Federal Reserve System; and they are further subject
to provisions of the Federal laws relating to deposit insurance, because they are
insured by the Federal Deposit Insurance Corporation.
State member banks are subject to State law; to provisions of the Federal
Reserve Act applicable to State member banks; to many provisions of the
National Bank Act; and to provisions of the Federal laws relating to deposit
insurance, because they are insured by the Federal Deposit Insurance Cor
poration.
Insured nonmember banks are subject to State laws and to such Federal
banking laws as apply to insured banks.

The Federal Government thus undertakes to regulate three
principal classes of banks— national banks, State member banks,
and nonmember insured banks.2 Some of the principal provisions of
Federal statutes which are applicable to each of these classes of
banks are shown in the accompanying chart. It will be observed
that in the case of member banks the number of Federal statutory
restrictions is markedly greater than in the case of nonmember
insured banks, thirty-one instances of this kind being shown by the
chart. Incidentally, even as to member banks, it will be observed
that in a number of important instances statutory requirements
have been placed upon national banks which have not been made
applicable to State member banks.
A result of the different application of provisions of Federal law
to different classes of banks subject to Federal regulation is dis
closed by the fact that while, as of December 31, 1939, there were
2,818 banks whose capital was not sufficient to enable them to
become members of the Federal Reserve System, at the same time
there were 5,622 nonmember State banks whose capital was not
2 Noninsured State banks are subject to only a few Federal banking laws. Among
these are provisions of law regulating loans for the purpose of purchasing or carrying
securities registered on national securities exchanges, and provisions granting certain
tax advantages in connection with the operation of a common trust fund if operated
in conformity with the regulations of the Board of Governors.

275

DETERRENTS TO MEMBERSHIP
So m e

of t h e

P r in c ip a l P r o v is io n s
the

F e d e r a l St a t u t e s R e g u l a t in g

P r in c ip a l C la s s e s

Banks®

LIST OF FEDERAL STATUTORY PROVISIONS
Applicable to national banka only
Restrictions on real estate loans
Regulations governing exercise of trust powers
Restrictions on actincr as insurance agent
Restrictions on acting as real estate loan broker
Requirement that one-tenth of earnings be transferred to surplus
until surplus equals common capital
Prohibition against holding "other real estate for more than five
yean
Restrictions on absorption of another bank
Limitations on indebtedness which bank may incur
Applicable to national banks and
Slate aaember bank* only
Limitations on total loans to one borrower *
Regulations governing purchase of investment securities
Prohibition against purchasing stocks
. . .
Prohibition against engaging >« underwriting of investment se
curities and stocks
Restrictions on toans to executive officers
Restrictions on dealings with directors
Restrictions on interlocking directorates or other interlocking
relations with other banks
Restrictions on interlocking directorates or other interlocking
relations with securities companies
Prohibition against bank having less than 5 or mow than 25
directors
Provision authorising supervisory authority to remove ofScers dr
directors for continued violations of law or continued unsafe
or unsound practices
Prohibition against affiliation with securities company
Restrictions on holding company affiliates
Restrictions on bank stock representing stock of other corporations
Limitations on loans to affiliates
..................
Requirements for reports of affiliates and publication thereof
Requirements for examinations of affiliates
Limitations on investment in bank premises
Minimum capital requirements
Minimum capital requirements for branches
Prohibition against loaning ou or. purchasing own stock
Restrictions on withdrawal of capital and payment of unearned
dividends '
Requirement that reserves specified in Federal Reserve Act be
maintained
Prohibiticn against making loans or paying; dividends while
reserves deficient
Requirements for specific number of condition reports annually
and for publication thereof
Requirements in connection with par clearance collection system
Prohibition against false certification of checks
Limitations oa acceptance powers
Prohibition against acting as agent for nonbanking institutions
in msdringiaans to brokers or dealers in securities
limitations mi leans to one borrower on stocks or bonds
Limitation oaaggregate loans to all borrowers on stocks or bonds
Limitatkm ondeposit* with nenmember banks
A fflca U ) tm srtsssl h—fca. State vntm bet bank* and
bMred sessMsker bosJss
Requirement forapproval of establishment of branches
Restrictions on rnesolidating or merging with noninsured bank,
assuming liability for such bank’s deposits, or transferring
assets to soeh bank for assumption of deposits
Restrictions on payment of interest on deposits
Restrictions on paying time deposits before maturity or.waiving
notice before payment of savings deposits
Prohibition against payment of dividends while delinquent on
<*«p3sit insurance assessment
Prohibition acaiast loans or gratuities to bank examiners
Provision antnorfariisg supervisory authority to publish examina
tion report if bank does not follow recommendation based
Provtskm authorising supervisory authority to require that bank
td indemnity against burglary, defalcation

PROVISIONS APPLICABLE TO«

NATIONAL
BANKS

STATE
MEMBER
BANKS

INSURED
NONMEMBER
BANKS

a There are a few Federal banking laws that apply to all banks, including non
insured banks. Among them are provisions regulating loans for the purpose of pur
chasing or carrying securities registered on national securities exchanges, and those
granting certain tax advantages in connection with the operation of a common trust
fund if operated in conformity with the regulations of the Board of Governors.
* The making of loans by State member banks is not subject to the limitations ap
plicable to national banks on loans to one borrower, but loans in excess of the limit
fixed by the National Banking Act may not be discounted with a Federal Reserve
bank by a State member bank.

276

BANKING STUDIES

sufficient to enable them to become national banks.8 Banks are not
required by statute to have any specific amount of capital in order
to be insured by the Federal Deposit Insurance Corporation.
The fact that numerous Federal statutory restrictions are made
applicable to member banks but not to insured nonmember banks
undoubtedly is an important deterrent to membership, and it may
cause many individual banks to feel that the price of membership
is high when compared with the price of deposit insurance.
It may possibly be suggested that the importance of this deter
rent is not great, from a practical standpoint, because an insured
nonmember bank that was considering membership would, in
many cases, already be subject to State laws comparable to the
Federal laws applicable to member banks. This is not the case in a
number of important respects, however; and the remainder of this
section will be devoted to comparing the extent to which the laws
of the various States do not contain restrictions comparable to
certain of the more important restrictions in the Federal laws
applicable to member banks.
Par Clearance. One of the reasons why many State banks do
not join the Federal Reserve System and why banks occasionally
withdraw from the System is that member banks are not permitted
by Federal statute to make exchange charges on checks forwarded
to them by the Federal Reserve Banks for payment. However,
nonmember banks can become insured without giving up the prac
tice of making such charges.
None of the State laws prohibits banks from charging exchange
for the payment of checks. In seven States (Mississippi, Louisiana,
North Carolina, Alabama, Tennessee, Florida, and South Dakota),
the laws specifically authorize such charges.
The Federal Reserve System maintains a list of banks that are
willing to pay the full amount of checks drawn on them, without
deduction for exchange, and these banks are known as being on the
par list. As of December 31, 1939, as many as 2,629 nonmember
8 There were also 293 State bank members of the Federal Reserve System with capi
tal less than the amount required for the organization of national banks in the places
in which such State bank members were located.

DETERRENTS TO MEMBERSHIP

277

commercial banks were not on the par list and presumably, there
fore, were charging exchange.4 Of these, 2,398 were insured.
The geographic distribution of non-par banks is shown below.
It will be observed that in twenty-nine States there are one or more
banks of the kind that may be members of the Reserve System
which are not on the par list, and that there is an especially heavy
concentration of such banks in the South and the Middle West.
G e o g r a p h ic D is t r ib u t io n o f N o n -P a r B a n k s, D e c e m b e r

31, 1939a

To many smaller banks, exchange charges are a source of sub
stantial revenue they are reluctant to do without and, in many in
stances, state they can not do without. In view of these facts and
the differences in Federal and State laws with respect to par clear
ance, it is clear that the requirement that checks be paid in full by
member banks is an important obstacle to membership in the Re
serve System, particularly since no such requirement is applicable
to nonmember insured banks.5
4 This figure does not include mutual savings banks.
6 A statement prepared by George B. Vest, Assistant General Counsel to the
Reserve Board, describing in detail the par clearance problem, is published in the
Federal Reserve Bulletin for February 1940, p. 89.

278

BANKING STUDIES

Minimum Capital Requirements. A bank applying for mem
bership is required to have a fixed minimum amount of capital in
accordance with the size of the place in which it is located—the
highest requirement being that, if located in a city of more than
50,000 inhabitants, it must have a capital of $200,000. There is no
fixed Federal capital requirement for insured nonmember banks,
however, the Federal Deposit Insurance Corporation being re
quired to consider each case on its merits.
Under the laws of the various States, banks may be organized
with different amounts of capital depending upon the size of the
place in which located. In many instances, the amount of capital
required by the State laws for the organization of a new bank or
for an established bank is less than the amount required for eligi
bility for membership in the System.
As of December 31,1939, there were 2,389 nonmember banks of
the kind that might be members whose capital was less than the
amount required for eligibility for membership in the Federal
Reserve System.6 Yet of these 2,389 banks, 1,887 had obtained
Federal deposit insurance.
When classified according to the amount of their capital stock,
the 2,389 banks that have insufficient capital for membership
in the System are distributed as follows:
Less than $15,000 ............................................................................
$15,000-$24,900...............................................................................
$25,000..............................................................................................
$25,100-$49,900...............................................................................
$50,000..............................................................................................
$50,100-$99,900...............................................................................
$100,000................. ............................................................................
$100,100-$199,900.................................... ........................................
$200,000 and ov e r.............................................................................

614
1,070
109
127
179
120
97
67
6

It will be seen that about 70 per cent of the ineligible banks
have less than $25,000 capital, while less than 8 per cent have
$100,000 or more. The remainder are fairly evenly distributed
among the intermediate classes.
•This figure does not include banks with out-of-town branches and insufficient
capital for membership; these cases will be discussed later in this section.

279

DETERRENTS TO MEMBERSHIP
B anks

w ith

C a p ita l

S tock

In a d eq u a te

fo r

F ed era l

R eserve

M e m b e r s h i p , D e c e m b e r 31, 1939a

1. Because of Minimum Statutory Requirements for Operation in One
City Only

2. Because of Special Minimum Statutory Requirements for Operation
of Out-of-Town Branches

a For data, see Table 28, p. 446.

280

BANKING STUDIES

The distribution among the various States of banks ineligible
for membership owing to deficiency of capital is shown in the upper
map on page 279. The greatest concentration is in the States of Min
nesota, Missouri, and Kansas, but there is considerable dispersion
among other States, particularly those in the Central and South
eastern parts of the United States.
How membership capital requirements operate in practice is
illustrated by the following case. An insured nonmember State bank,
interested in membership in the Federal Reserve System, is located
in a community of about 7,000 inhabitants. It has capital stock of
$50,000, surplus and undivided profits of approximately $25,000,
and deposits of approximately $600,000. The bank’s management
desires to have it become a member of the System but does not feel
that its deposits warrant an increase in its capital stock to $100,000,
the amount required for admission to membership. In the same
place there is another State bank that is a member of the Federal
Reserve System and may continue to be, in spite of the fact that it
has a capital stock of $75,000, surplus and undivided profits of ap
proximately $45,000, and deposits of slightly more than $1,000,000.
This bank was admitted to membership at a time when the popula
tion of the place was such that the bank was not required to have
a capital of $100,000, and there is no statutory requirement that its
capital as a member shall be increased. In other words, a bank that
has already joined the System may have a smaller amount of capital
than is required of one that wishes to join the System.
Minimum Capital Requirements for Member Banks with
Branches. A member bank is permitted to have branches only in
States where branches are authorized by State law, and then, if it
establishes out-of-town branches, only if it has at least $500,000
capital.7 There is no Federal capital requirement for the establish
ment of branches by insured nonmember banks, however, the
adequacy of the capital of a bank being decided on its merits by the
Federal Deposit Insurance Corporation.
7 This requirement is subject to limited exceptions relating to banks located in States
having a population of less than 1,000,000 and 500,000, respectively. In such States,
member banks establishing out-of-town branches are required to have capital of
$250,000 and $100,000, respectively.

DETERRENTS TO MEMBERSHIP

281

The laws of thirty-three States authorize the establishment of
out-of-town branches, but only in the case of Alabama, Connecticut,
and Idaho is the capital required by State law equal to or greater
than the capital required by Federal law for the establishment of
branches by member banks. In most States the requirements of the
Federal law greatly exceed the requirements of State law.
As of December 31, 1939, there were 429 nonmember banks hav
ing one or more out-of-town branches but lacking sufficient capital
to become members of the Federal Reserve System. Of these, 414
had obtained Federal deposit insurance. The location of these banks,
by States, is shown in the lower map on page 279.
It is apparent from the facts described in the preceding pages
that the statutory capital requirements for membership constitute
one of the more important deterrents to membership in the System.
Reserves. Member banks are required to carry 5 per cent re
serves against time deposits, and additional reserves, which vary
with location, against demand deposits. In so-called “ central
reserve cities,” the required percentage is 22| per cent; in “ reserve
cities,” 17\ per cent; and elsewhere (locations of so-called “ country
banks” ), 12 per cent. Certain limited exceptions are applicable to
banks in outlying districts of central reserve cities and reserve
cities. All of the required reserves of member banks must be car
ried with their respective Federal Reserve Banks. They can not
take the form of cash in vault, of balances with correspondent banks,
or of investments. There is no Federal requirement for the main
tenance of reserves by insured nonmember banks.
Reserve requirements under the laws of the various States are
computed on such diverse bases that it is impossible to compare
them directly with the Federal requirements applicable to member
banks. In some States (for example, Illinois, New Hampshire,
South Dakota, and Washington), the requirements are based on
aggregate deposits. In other States (for example, California, Mis
sissippi, Missouri, and Nebraska), the requirements are based upon
the population of the place in which the bank is located; whereas
in still others (for example, New Hampshire, New Jersey, New
Mexico, South Carolina, and Washington), the requirements are
the same for all banks in the State regardless of the size of the

282

BANKING STUDIES

place in which located. In at least one State (Kansas), a different
requirement is applicable to banks on the one hand and trust
companies receiving deposits on the other.
One of the major practical differences between reserve require
ments for member and nonmember banks, respectively, has to do
with the variety of ways in which nonmember banks are permitted
to maintain their reserves. In all but two States (Illinois and New
Mexico), nonmember banks may carry all or part of the required
reserves in the form of cash in their own vaults—all in the case of
seventeen States, and one-fifth or more in thirty-eight States. Also,
the laws of seventeen States permit the carrying of a part of the
required reserves in the form of investments (usually United States
or State obligations). In all of the States the reserves of nonmember
banks (except the portion consisting of cash in vault or invested in
securities) may be carried with other commercial banks.8
Under the provisions of the Federal Reserve Act, the amount of
reserves required of member banks may be increased or reduced by
the Board of Governors within specified limits. The amount of
reserves required of nonmember banks, on the other hand, is fixed
in the statutes of the various States and is not subject to change
by the supervisory authorities in any of the States except Illinois,
Massachusetts, Michigan, and Pennsylvania.
In view of the many differences between the reserve requirements
contained in the Federal statutes applicable to member banks and
the requirements contained in the laws of the States applicable to
nonmember banks, it is believed to be a fair statement that sub
stantial differences between the reserve requirements of member and
nonmember banks exist in all of the States. Such differences do not
exist as between noninsured banks and nonmember insured banks.
Officers, Directors, and Employees. The Clayton Antitrust
Act provides with limited exceptions that no officer, director, or
employee of a member bank may serve any other banking institu
tion in the same community. Officers, directors, and employees of
a member bank are also prohibited with limited exceptions from
serving as officers, directors, or employees of any securities com
8 The practice of carrying balances with other banks is a governing factor in the
correspondent relationships later described as a negative deterrent to membership.

DETERRENTS TO MEMBERSHIP

28 3

pany. The Federal laws applicable to insured nonmember banks
contain no such prohibitions.
Neither do the statutes of thirty-six States contain any restric
tions upon the services of officers, directors, or employees of banks
comparable to those contained in the Clayton Act. The statutes of
nine States contain comparable provisions applicable to directors
or officers of savings banks but not to directors or officers of com
mercial banks or trust companies. Only three States have provisions
comparable to those contained in the Clayton Act, which are ap
plicable to banks and trust companies generally.
The statutes of forty-five States do not have provisions com
parable to those applicable to officers, directors, and employees of
member banks prohibiting their service of securities companies.
Purchase of Investment Securities and Stocks. Banks that
are members of the Federal Reserve System are restricted in the
kinds of securities they may purchase, and a member bank may not
invest more than 10 per cent of its capital and surplus in securities
of any one obligor. These restrictions are not contained in the
Federal law governing nonmember insured banks.
A majority of the State statutes are much more liberal than the
Federal statute regulating the purchase of securities by member
banks. The statutes of thirty-two States permit the purchase of any
bonds; two permit the purchase only of municipals and public
utilities; and two provide that a bank may purchase any securities
authorized by its charter. Only twelve States have statutory require
ments comparable to or more restrictive than those of the Federal
statute applicable to member banks. These twelve comprise five
States that have virtually the same requirements as the Federal
statute; two that permit the purchase of “ investment securities,,;
and five that permit the purchase of securities of the State and its
subdivisions and of the Federal Government.
It appears that only a small minority of the State statutes pro
hibit a bank from purchasing investment securities of any one
obligor in excess of 10 per cent of capital and surplus. However, it
is possible that in some States the statutory limitations on loans
to one borrower may apply also to investments in the securities of
one obligor.

284

BANKING STUDIES

With limited exceptions, Federal law prohibits the purchase of
corporate stocks by member banks, but permits it in the case of
insured nonmember banks. The laws of nineteen States (including
three that permit purchase of any stock except bank stock and two
that permit purchase of bank stock only), allow nonmember banks
to purchase corporate stocks.
Affiliates of Banks. Banks that are members of the Federal
Reserve System and that have affiliates are subject to a number
of requirements and restrictions relating to the affiliates which do
not apply to insured nonmember banks. In a large majority of the
States there are no statutory provisions relating to bank affiliates
and hence no restrictions that are comparable to the various Federal
provisions relating to affiliates of member banks.
Under the provisions of Section 23A of the Federal Reserve Act,
loans to or investments in affiliates by member banks, with certain
exceptions, are restricted in the case of any one affiliate to 10 per
cent of the capital stock and surplus of the member bank and in
the case of all affiliates to 20 per cent of the capital stock and surplus
of the member bank. Within these limitations, loans or extensions
of credit to affiliates must be secured by collateral.
Only one State (Indiana) has statutory provisions comparable to
Section 23A of the Federal Reserve Act. The State of New York
applies similar restrictions to affiliated securities corporations but
not to other affiliates. A number of States limit the amount of bank
loans which may be made to corporations owned or controlled by
officers or directors of the lending bank,9 but the Federal statute
would apply even if no officer or director of the bank had any con
nection with the affiliate.
Sections 9 and 21 of the Federal Reserve Act subject affiliates of
State member banks and national banks to examination by the
Federal Reserve System and the Comptroller of the Currency, re
spectively. The statutes of only seven States (Arkansas, Indiana,
Kansas, Maryland, New York, Pennsylvania, and Virginia) contain
comparable provisions relating to affiliates of banks.
9 These provisions are usually contained in a section of the State statute limiting
loans to officers of the bank.

DETERRENTS TO MEMBERSHIP

285

Section 9 of the Federal Reserve Act and Section 5211 of the
Revised Statutes require State member banks and national banks to
furnish not less than three reports annually of their affiliates and
such reports must be published under the same conditions as govern
the member bank’s own condition reports.10
Indiana is the only State that has enacted comparable pro
visions relating to the furnishing and publication of reports of
affiliates of banks.
Section 20 of the Banking Act of 1933 prohibits member banks
from being affiliated with securities companies. The statutes of only
two States (Michigan and Maryland) contain comparable restric
tions for banks.
Federal law does not permit holding company affiliates of member
banks to vote their stock in these banks without obtaining a voting
permit from the Board of Governors. The Board is given certain
regulatory powers in connection with the granting of these permits,
and holding companies must comply with certain requirements of
the Board in connection with obtaining the permits. Federal law
does not impose such requirements on the holding by corporations
of stock of nonmember insured banks.
There are no similar State requirements except in Indiana. A
Kansas statute, however, requires any corporation owning bank
stock to deposit security for its shareholder’s liability and provides
that if it does not deposit such security it can not vote its shares.
Possibly Pennsylvania should be included with the States named
in some of the preceding paragraphs because a Pennsylvania statute
gives the Department of Banking the power to impose the same
restrictions, limitations, and regulations on affiliates of State banks
as are imposed upon affiliates of member banks by any Federal law
or regulation.
Reports of Condition. The Federal law requires State member
banks and national banks to make not less than three reports of
condition annually to the Federal Reserve Banks and to the Comp
10 State member banks furnish these reports to the Federal Reserve System, and
national banks to the Comptroller of the Currency. Both of these agencies may exercise
discretion in waiving the reports as well as examinations of affiliates.

286

BANKING STUDIES

troller of the Currency, respectively, and to publish such reports of
condition. Although nonmember insured banks are required to make
and publish such reports of condition as the Federal Deposit In
surance Corporation deems necessary, they are not required by
statute to make any specific number of reports during any one year
or to publish such reports. It is the practice of the Federal Deposit
Insurance Corporation to require the submission of only two of these
reports annually and the Corporation does not now make any
requirement with respect to publication.
The statutes of thirteen States (Alabama, Arkansas, Florida,
Georgia, Kentucky, Maine, Massachusetts, New Hampshire, New
Jersey, Pennsylvania, Tennessee, Texas, and Vermont) do not
require banks to submit or publish as many as three reports of
condition annually.
The Federal Reserve Act contains specific requirements with
reference to the furnishing and publication of reports of condition
by the State member banks without regard to corresponding State
requirements. Arrangements have finally been made for the single
joint publication of condition reports by State member banks in all
but seven States (Connecticut, Massachusetts, Pennsylvania, Lou
isiana, Tennessee, Illinois, and California), but negotiations to this
end extended over a long period. It was first necessary to devise a
standard form of report that would serve the purposes of the Fed
eral banking agencies and most of the State banking departments.
Loans to Executive Officers. The Federal Reserve Act pro
hibits a member bank from extending credit in excess of $2,500 to
any executive officer of the bank. This prohibition is not made
applicable under Federal law to insured nonmember banks.
Two States do not restrict loans of a bank to its executive officers
in any way. Twenty-five other States require that loans to officers
of banks be approved by the directors of the bank but place no
limitation on the amount of the loans. Thirteen States require that
loans made by banks to their officers be secured and approved by
the directors of the bank but place no limitation on the amount of
the loans. Eight States absolutely prohibit banks from making loans
to their officers.
Limitations on Loans to One Borrower. Federal law does not

DETERRENTS TO MEMBERSHIP

287

permit national banks to lend to one borrower a sum in excess of
10 per cent of the capital and surplus of the bank, subject to certain
exceptions. Although State member banks are not subject to this
limitation, they are not permitted to discount with a Federal Re
serve Bank any part of a loan to one borrower which is in excess of
the limitation prescribed for national banks.
In general, State laws are more liberal than the Federal law with
respect to limits on individual loans and such limitations are sub
ject to fewer exceptions. Federal limitations apply whether a loan
is secured or unsecured (unless the security is of a kind described
in one of the exceptions) but in many States a larger limit is ap
plicable if the loan is secured.
The limitation contained in State statutes on loans that are not
secured and that do not come within any exception is 10 per cent
of capital and surplus in twenty States, 15 per cent in twelve States,
20 per cent in thirteen States, and 25 per cent in three States. If
the loan is secured and does not come within an exception, the
limit is 10 per cent in ten States, 15 per cent in ten States, 20 per
cent in thirteen States, 25 per cent in nine States, 30 per cent in
one State, 50 per cent in one State, and unlimited in four States.
In view of the fact that the exceptions in the various State laws
are different from the exceptions contained in the Federal law, it
is difficult to make a direct comparison between them. Without
reference to exceptions, however, it appears from the figures given
above that, under the statutes of twenty-seven States, banks may
make unsecured loans to a single borrower in relatively greater
amounts than under the Federal laws. It also appears that banks
may make secured loans in relatively greater amounts to a single
borrower under the statutes of thirty-eight States than under the
Federal laws.
NEGATIVE DETERRENTS TO MEMBERSHIP

In the previous section an analysis was made of positive reasons
that may influence individual banks not to become members of the
Federal Reserve System. This section will be devoted to an examina
tion of the negative reasons why banks do not become members.
Member banks are entitled to use the facilities of the Federal

288

BANKING STUDIES

Reserve Banks for such purposes as obtaining credit extensions and
supplies of currency and coin, making telegraphic transfers of funds,
collecting checks and non-cash items, and placing securities in safe
keeping. They benefit from the expert examining services rendered
by the Reserve Banks and may call upon them for information
and advice.
The need for these services, together with the importance of
maintaining the Reserve System as an essential part of our banking
machinery, is no doubt considered by many banks when they com
pare the advantages and disadvantages of membership in the Re
serve System. Accordingly, the fact that some of the services of the
System may be obtained from the Reserve Banks themselves, or
from outside sources, without incurring the requirements of mem
bership, may well be an important reason why numerous banks have
not become members.
Reserve System Services Available to Nonmember Banks.
The following services of the Reserve System are made available
to nonmember banks by various sections of the Federal Reserve Act:
1. Nonmember banks that maintain balances sufficient to offset
items in transit are permitted to deposit money, checks, and drafts
payable upon presentation, and maturing notes and bills with Fed
eral Reserve Banks for the purpose of exchange or of collection.
(Sec. 13, par. 1.)
2. Federal Reserve Banks may discount for nonmember banks
paper that would be eligible if held by a member bank, provided
the nonmember banks are unable to obtain adequate credit accom
modations from other banking institutions. This privilege is subject
to affirmative authorization by the Board of Governors in unusual
and exigent circumstances and to such limitations and regulations
as the Board shall prescribe. (Sec. 13, par. 3.)
3. Federal Reserve Banks may make advances to nonmember
banks on their promissory notes secured by direct obligations of the
United States, subject to limitations and regulations prescribed by
the Board of Governors. (Sec. 13, par. 13.)
4. Federal Reserve Banks may participate with nonmember
banks in making loans for the purpose of furnishing working capital
to established industrial or commercial businesses and may make

DETERRENTS TO MEMBERSHIP

289

commitments to discount for nonmember banks loans made by
them for such a purpose, provided that the nonmember banks bear
at least 20 per cent of any loss sustained on such a loan. (Sec. 13b,
par. 2.)
5.
Member banks, with the permission of the Board of Governors,
may act as media or agents of nonmember banks in applying for
and receiving discounts from Federal Reserve Banks. (Sec. 19,
par. 8.)
Correspondent Relationships. Services rendered by corre
spondents are felt by some banks to be more flexible than services
they could obtain through membership in the Federal Reserve
System and yet of approximately equal value. These services in
clude credit facilities, check and non-cash collection facilities, in
vestment advice, absorption of exchange charges, safe-keeping
facilities, etc.
Through correspondents, nonmember banks indirectly receive
the benefit of the expeditious check collection facilities of the
Federal Reserve Banks. They send collection items to their corre
spondent banks which, in turn, usually forward all items payable
outside of their city to the Federal Reserve Banks for collection.
Also a nonmember bank can obtain its supply of currency and coin
from its correspondent by paying the necessary shipping charges.
At the request of the correspondent, in many cases the currency is
shipped direct to the nonmember bank by a Federal Reserve Bank.
Miscellaneous Deterrents. Banks occasionally give one or
more of the following reasons for abstaining from membership in
the Reserve System: unwillingness to be subject to both Federal
and State bank regulations, supervision, and examination; opinion
that the Federal Reserve System’s power to regulate is too broad;
opposition to increasing governmental control; belief that the
Federal Reserve examiners are too severe in their criticism; belief
that the Federal Reserve System encourages branch banking, to
which they are opposed; assumption that the Federal Reserve Sys
tem is opposed to the dual banking system, which they wish to
have continued; fear that their applications might be turned down
because of presence of undesirable assets; belief that membership
would subject them to an excessive amount of inconvenience and

290

BANKING STUDIES

red tape, and put them to extra work on account of the numerous
reports to be filled out, etc.
SUM M ARY

1. The differences in laws applicable to different groups of banks
are not pointed out in this paper for the purpose of indicating that
sound requirements for member banks should be abandoned. All
requirements should be reviewed, however, to determine whether
some of them are nonessential and might properly be abandoned
or modified.
2. The differences in the Federal laws applicable to national banks,
State member banks, and insured nonmember banks indicate the
desirability of reviewing the provisions of the Federal laws in order
to coordinate their application to the three principal classes of banks
supervised by the Federal Government and to eliminate discrimi
nations.
3. The differences between Federal and State laws applicable to
banks indicate the desirability of determining some sound basis of
eliminating discriminations and unnecessary requirements.
4. The provisions of the Federal Reserve Act that make the
facilities of the Federal Reserve System available to nonmember
banks, in some cases only in emergencies, indicate that the Reserve
Board has some responsibility for nonmember banks. The fact that
the Board is also charged with some regulatory authority over non
member banks adds to this responsibility. The existence of such
responsibility raises a question as to what authority need be vested
in the Board in order that it may adequately carry out its responsi
bility in time of need.
5. The existence of nonstatutory reasons that may influence banks
not to become members of the Reserve System indicates the desir
ability of reviewing the basis for these reasons and determining what
steps should be taken to eliminate them.
6. Different groups of banks are subject to different types of
limitations, restrictions, and requirements without any discernible
logic for the differentiation. The rigidities of the provisions have
prevented many banks from joining the Federal Reserve System,
tend to prevent coordination of State and Federal supervision of

DETERRENTS TO MEMBERSHIP

291

banks, and may be driving some of the functions of banking out of
the banking system itself into nonbanking agencies.
Im p orta n t D iffe r e n c e s b e tw e e n S ta te an d F e d e r a l L aw s
P e r ta in in g t o

B a n k i n g *1

a For par clearance, important differences are indicated only in States where one
or more banks were affected on Dec. 31, 1939; for both types of capital requirements
the corresponding date is Dec. 31, 1935. Indication of important differences in laws
relating to one borrower is based only on limitations on unsecured loans, without
consideration of exceptions contained in the various statutes.
The number of banks shown in the left-hand columns excludes mutual savings
banks, private banks, branches of foreign banks, and a few inactive banks and mis
cellaneous financial institutions sometimes included in State banking statistics.

7.
Of the approximately 8,000 nonmember commercial banks
that are of the kind that might be members of the System, it appears

292

BANKING STUDIES

from available statistics that more than one-half may be prevented
from becoming members of the Reserve System by statutory
requirements. This estimate is based on the number of nonmember
banks that either charge exchange or have insufficient capital to
be eligible for membership, and is merely suggestive of the impor
tance of the statutory deterrents to membership.
8. The tabulation on the preceding page shows, as of December
31, 1939, the number of member and nonmember banks located in
each State and indicates in each of the States important differences
in State and Federal laws of the kind discussed in this paper. The
purpose of this tabulation is to portray concisely these important
differences in each State that may be preventing banks from becom
ing members of the Federal Reserve System. In order to obtain a
composite picture of the important differences in State and Federal
laws, this tabulation should be studied along with the chart on
page 275, which graphically shows the differences in Federal laws
applicable to different classes of banks.
9. It appears from the tabulation on the preceding page that in
all forty-eight States there are important differences between
Federal and State laws which may be preventing banks from becom
ing members of the Federal Reserve System. In one State there are
twelve such differences; in three States, eleven; in eighteen States,
ten; in eleven States, nine; in seven States, eight; in five States,
seven; and in three States, six.

MONEY SYSTEM OF UNITED STATES

Page
I n t r o d u c t i o n .............................................................................. 295

W hat Is M
C hanges

o n e y ? ..................................................................

V olume

Bank

D eposits

296

and

C u r r e n c y ............................................................................. 304

How

the

on ey

Supply I s I ncreased

D e

c r e a s e d .................................................................................

305

Su m m a r y .................................................................................... 318

W o o d l ie f T h o m a s

Assistant Director
Division of Research and Statistics

MONEY SYSTEM OF UNITED STATES
Our modern economic system is frequently called a money
economy. All price and debt contracts are drawn and paid in money
units, and income and wealth are computed in terms of money. Al
though in the end the supply and flow of goods and services measure
real wealth and income, these are affected by the supply and flow
of money. Each of these flows—of goods and of money—is influenced
by the other and is essential to the smooth operation of the other.
Our present-day complex industrial organization could not function
without the agency of money, and money without goods and services
would serve no purpose at all. Availability of money at rates per
mitting profitable business operations is necessary for the proper
functioning of the economy. For this reason the smooth operation
of the monetary system is of vital concern to all members of the
general public.
Previous papers have described the organization and operation
of the banking system. Money may be said to be the stock in trade
of banks. It is also in a sense their product, because at the request of
borrowers or of sellers of securities banks convert other forms of
wealth or claims to wealth or prospective income into money that is
available for current use as purchasing power. It is a part of the
task of the banking system to make money available for sound
purposes and so far as possible to avoid making it available for un
sound purposes.
This paper and the one that follows are concerned with a descrip
tion of the organization and operation of the money system in this
country. They will endeavor to provide answers to a number of
important questions about money and to give basic information
necessary for considering a number of others. How should money be
defined? What important distinctions are there between the various
kinds of money that exist in our system? How does each kind come
into being or cease to exist? What are the forces and limitations
that govern changes in their supply? What relations are there

295

296

BANKING STUDIES

between changes in the supply of money and changes in other
aspects of our economic mechanism, such as employment, income,
production, prices? What variations are there in the use of money
and how are they related to other economic factors? T o what
extent may the supply and use of money be controlled and what
mechanisms of control may be effectively employed? What should
be the standards and objectives of control? These are fundamental
questions, and in a sense all matters relating to our money and
banking system stem out from them.
W HAT IS M ONEY?

Money is a term freely used to cover a number of different kinds
of instruments and a variety of different concepts. For example, the
two questions, “ How much money do you have in your pocket?”
and “ How much money are you worth?” cover different concepts
of money. Defined in terms of its functions, money is a medium of
exchange and a common denominator of value, as well as a store of
value and a standard of deferred payments. One economist in
answer to the question, “ What is money?” has given the simple
answer that money is what buys things—purchasing power. Prob
ably the most common definition in ordinary practice is that money
is means of payment.
These simple definitions can be accepted for general purposes,
but it is difficult on the basis of available information to find a
measure of the supply of money that satisfies the definitions and
at the same time does not cover too broad a scope to be practicable.
Because of the many uses the term “ money” may comprehend, no
single measurement of the money supply will be adequate in the
consideration of all matters of public policy on monetary matters.
In dealing with different problems, different ways of measuring the
amount of money may best serve. It is essential, however, that
there be no misunderstanding about what concept of money is
adopted in each case.
In our modern monetary system there are several different kinds
of instruments that serve one or more of the many purposes of
money. The various means of payment that may serve as money
include much more than the coins and paper money that we carry

MONEY SYSTEM OF UNITED STATES

297

in our pocket and use to make current small cash payments. The
largest proportion of monetary payments is effected by means of
credit instruments—primarily checks drawn against bank deposits.
The storage of means of payment awaiting spending or other use
may also be represented by credits on the books of banks or by
more complicated credit instruments. There is a great variety of
such credit instruments—ranging from bank deposits and mercan
tile book credits to complex bonded obligations of corporations and
public bodies. Which of these may we call money? The following
is a list of various evidences of wealth which fulfill some of the
functions of money, classified into broad groups according to their
monetary capacity:
1. Basic or reserve money
Gold (and to a limited extent silver)
Deposits with Federal Reserve Banks
Currency (coin and paper money) in banks
2. Current media of exchange
Currency (coin and paper money) in circulation
Demand deposits in banks
3. Other liquid claims
Time and savings deposits in banks
Credit balances with brokers and other financial or commercial
establishments, payable on demand or after short notice
Open lines of credit with banks or merchants—represent potential
purchasing power
Highly liquid credit instruments, generally marketable without loss
of principal, e.g., bankers’ acceptances, Treasury bills, brokers’
loans
Shares in savings and loan associations, credit unions, and similar
organizations, and cash values of life insurance policies
Readily marketable securities—actively traded in and easily sal
able, generally at little variation in price

Reserve money serves certain special and important functions
in the monetary system. The current media of exchange include the
instruments more commonly known as money. The liquid claims
are generally not included in measures of the money supply, al
though they may at times play an important part in the operation
of the money system.
Certain types of money are considered more basic than other

298

BANKING STUDIES

types. In earlier times most basic money was metallic and as other
forms of money came to be issued they were generally made con
vertible into a basic metal or metallic money. By custom or by law
issuers of other types of money followed the practice of carrying
reserves of metallic money which generally equalled only a part
of the issues outstanding. The reason for this practice or require
ment was to facilitate convertibility in case of question as to
the value of the money issued. In the course of time types of reserves
other than metal came to be acceptable.
In the United States at present gold coin or bullion serves directly
or indirectly as the reserves of the Treasury behind its currency
issues and of the Federal Reserve Banks behind their note issues
and deposits. All commercial banks that belong to the Fed
eral Reserve System must carry basic reserves in the form of de
posits with Federal Reserve Banks. Banks not members of the
Federal Reserve System carry reserves in part in the form of cur
rency in their own vaults but to a larger extent as balances with
other banks, mostly member banks. In effect, therefore, the Federal
Reserve Banks hold the basic reserves of the banking system.
Gold, gold certificates, and deposits with Federal Reserve Banks
in general serve only as reserves and are not available for use by the
general public as money. Currency, issued by the Treasury or by
the Federal Reserve Banks, is used to some extent as bank reserves,
but more largely as ordinary means of payments. Currency is freely
convertible into reserve money, and to obtain currency from the
Reserve Banks or the Treasury banks must draw upon their
reserves. Thus currency has some of the qualities of basic or reserve
money.
Gold and Silver. Gold at one time freely circulated as money
and was the basic form into which all other types of money could
generally be converted, but now it does not circulate in most coun
tries nor may it be held by the general public as money. Gold still
serves as money, however, and performs important functions in
our monetary system. Besides providing the reserve basis for the
Federal Reserve Banks, it is used to meet international payments—
it is international money.
When gold comes into the country or is produced, it is sold to

MONEY SYSTEM OF UNITED STATES

299

the Treasury at approximately $35 an ounce. The Treasury pays
for the gold by drawing upon its balances with the Federal Reserve
Banks, and generally in the course of time replenishes these balances
by issuance of gold certificates against the gold purchased and
depositing the certificates to the credit of the Reserve Banks.
These processes result in increases in bank deposits, in member
bank reserves, in Reserve Bank gold certificate reserves, and
in the Treasury’s gold stock. An outflow of gold would result in
corresponding reductions in these items. Treasury purchases of
silver are handled in a somewhat similar manner, with differences
as to uniformity of price paid, as to amounts held against the issu
ance of silver certificates, and as to the circulation of the certifi
cates.1 Silver certificates are generally not held as reserves by the
Federal Reserve Banks but are paid out into public circulation to
meet the demand for currency. Another important difference be
tween gold and silver is that silver is less widely acceptable for
meeting international payments.
The effect of the issuance of silver certificates, as of gold certifi
cates, is to increase both bank deposits and bank reserves. It is
important to recognize that the gold and silver stocks held by the
Treasury as collateral for certificates are not inactive or idle; the
money which they back directly or indirectly is part of the stream
of money that belongs to the Reserve Banks or to the public and is
available for active use.
On June 30, 1940, the monetary gold stock of the United States,
valued at $35 an ounce, amounted to about 20 billion dollars, of
which 17.8 billions were held by the Treasury as collateral against
gold certificates belonging to the Federal Reserve Banks. The
remainder was held in the cash balance of the Treasury and included
1.8 billions belonging to the Stabilization Fund. At the same time
there were about 1.9 billion dollars of silver certificates outstanding,
most of which were in circulation.
1 Silver is purchased at about 70 cents an ounce for newly produced domestic silver
and 35 cents for foreign silver, but silver certificates are issued against silver at the
statutory monetary value of about $1.29 an ounce. In practice the Treasury has issued
certificates in a dollar amount corresponding approximately to that paid for the
purchase of silver, leaving the additional silver bullion in its vaults.

300

BANKING STUDIES

Deposits with Federal Reserve Banks. Deposits with Federal
Reserve Banks provide another form of basic money. These deposits
include member bank reserve balances, Treasury deposits, certain
foreign deposits, and special types of nonmember bank deposits.
On June 30, 1940, Reserve Bank deposits were as follows (in
millions of dollars):
Member bank reserve balances.................................................
United States Treasury—general account..............................
Foreign bank deposits.................................................................
Other deposits..............................................................................

13,781
234
681
517

T ota l......................................................................................

15,213

Member bank reserve balances, which comprise the bulk of Re
serve Bank deposits, are not used by the general public as money,
but are held by member banks as reserves against their deposits.2
Of the reserve balances held on June 30, 1940, about 6.9 billion
dollars, or about half, represented required reserves; the remainder
were excess reserves. Reserve balances are a more high powered
form of money than ordinary bank deposits in that an increase in
reserves provides banks with additional funds which they may lend
and, through shifts from bank to bank, relend until new deposits
are created to several times the amount of additional reserves.
Conversely a decrease in reserve balances below requirements may
make it necessary for member banks, as a group, to borrow at the
Reserve Banks or else to liquidate assets and thereby reduce
deposits by an amount equal to several times the reserves lost.3
Currency. Currency, as the term is used in this statement,
includes coin and paper money issued by the Government or by
*
Under existing law and regulation minimum reserves required to be held are as
follows: against demand deposits, 22f per cent for central reserve city banks, 17J
per cent for reserve city banks, and 12 per cent for other banks; against time deposits,
5 per cent for all banks. The minimum requirements stated in the law are 13, 10, 7,
and 3 per cent respectively, and the Board of Governors of the Federal Reserve System
has the power to raise them to twice these amounts. In this and the following paper the
term “ reserves” as applied to member banks refers to reserve balances with Federal
Reserve Banks. Individual banks carry other types of asset reserves in the form of
cash, balances with other banks, or liquid assets which are readily available for other
uses or for meeting claims of depositors, but for the banking system as a whole these
secondary reserves may not generally be used as a basis for further credit expansion.
1There is further discussion of the nature and significance of member bank reserves
in the latter part of this paper and in the one following on “ Monetary Controls.”

MONEY SYSTEM OF UNITED STATES

301

banks under Government authority. In this country at present
currency is issued only through the Federal Reserve Banks and the
Treasury. Currency has a special significance because it is legal
tender and because it is more generally acceptable and more
conveniently used for certain types of payments than are other
forms of money. As already pointed out, it also has some of the
qualities of basic reserve money. For many payments, however,
and also as a store of value, currency is much less convenient than
bank deposits, and the amount of currency in circulation represents
a relatively small part of the total money supply of this country.
Under the present money system, currency and bank deposits are
generally interchangeable.
The term “ money in circulation,” as it is called on the official
Treasury statement, or “ currency in circulation,” as it may be more
narrowly designated, includes all United States money held outside
the United States Treasury and Federal Reserve Banks. It includes
all coin and paper money held by the public in the United States
and used in day-to-day transactions, i.e., cash carried in pockets of
individuals and held in cash registers and tills o f .merchants and
businessmen. The official figures also include some currency that
strictly speaking does not circulate, e.g., cash in vaults of commercial
and savings banks, money in hoards, paper currency lost or de
stroyed, United States coin carried abroad by travellers and not
appearing in the official export figures, and United States paper
currency in foreign countries. Since no accurate current measure
ments of the amount of this inactive currency are available, it is
not possible to exclude it from the current statistics on money
in circulation; ordinarily it may be presumed not to change greatly
in amount except perhaps over very long periods of time. On June
30, 1940, approximately 7.8 billion dollars of currency was reported
as in circulation, including about 5.2 billions of Federal Reserve
notes and 1.6 billions of silver certificates; the remainder consisted
of coin and various kinds of paper money formerly issued and not
yet retired.
Bank Deposits. The type of money most commonly used in
making payments is the demand deposit at banks. It is also a
convenient means of holding money in readily available and safe

302

BANKING STUDIES

form. In many cases the money supply is narrowly defined to in
clude only currency and demand deposits, excluding time and sav
ings deposits, which must be converted into demand deposits or
currency before being used as means of payment. This narrow
combination of currency and demand deposits has the advantage of
being simple, precise, and easily measurable, and is adequate as an
indication of the amount of money immediately available as media
of exchange.
Classification of savings and time deposits is an important border
line question involved in adopting a measure of the money supply.
These deposits include savings that have been set aside as an
investment on which income is received and that may be considered
as in somewhat the same class as the ownership of securities, but
they may also include a considerable volume of funds held for
current uses. An interest return is received but at the same time
the funds can be readily converted into demand deposits. In
practice, savings deposits in banks are almost as promptly available
as demand deposits and are frequently so considered by depositors.
The degree of availability of time deposits for use as current
money has varied considerably from time to time. In the 1920’s
they could be easily withdrawn from many banks, and sometimes
included current funds that might otherwise have been in demand
deposits. In recent years, on the other hand, time deposits have
become less attractive. Interest rates paid on them have been low,
and banks have often refused to pay any interest upon large time
balances. Service charges imposed on demand deposits and gradu
ated according to size of balance and activity of account, have
encouraged the holding of a larger portion of funds in checking
accounts rather than in time accounts. Savings have also been held
in large amounts in the form of hoarded currency. These develop
ments have had the effect of increasing the amount of funds held
in demand deposits or as currency and decreasing relatively the
volume of time deposits. The total of demand deposits and currency,
therefore, indicates a larger growth than has actually occurred in
the volume of current money since the 1920’s. Consequently it
does not accurately reflect changes in the people’s ability and
willingness to spend.

MONEY SYSTEM OF UNITED STATES

303

From still another angle, it is difficult to distinguish between
the monetary functions of demand and time deposits. Both are a
part of the banking mechanism and are available to individual banks
receiving them as a source of funds for making new loans and
investments. Moreover, when banks make new loans and invest
ments the funds may eventually be deposited in either checking
or time accounts. Both types of deposits participate in the ex
pansion of deposits resulting from extension of bank credit.
Other Liquid Claims. If the concept of the money supply is
to be considered as an important economic force, reliance upon
demand deposits and currency as the sole measure of that supply
will at times prove misleading. The availability of funds in forms
readily convertible into demand deposits or currency—such as
excess reserves held by banks, time deposits, Treasury bills held by
corporations, and lines of credit—and likewise the constant shifting
of funds from one use to another may be fully as significant from
the standpoint of the effect upon economic developments as the
holding of demand deposits or currency.
The various liquid claims, other than demand deposits and cur
rency, listed in the tabulation on page 297, are under normal condi
tions practically the same as money to their owners because they
may be quickly converted into current media of exchange or be
used directly as means of payment. Open lines of credit for bank
loans or for mercantile charge accounts, where available for im
mediate use, may be as effective as existing deposits, but they can
be used only for limited purposes and, moreover, are difficult to
measure. Because these various liquid claims are generally con
verted into bank deposits or currency before being used as means of
payment, they are frequently not considered as a part of the avail
able supply of money. Their existence, however, may have a
monetary significance fully as important as the existence of demand
deposits in banks, because they can be so easily converted into
demand deposits or used to obtain existing deposits that would
not otherwise be used. Any analysis or theory that postulates the
supply of money as an economic force must, therefore, take into
consideration liquid claims of these kinds as well as the supply of
currency, bank deposits, and gold.

304

BANKING STUDIES

CHANGES IN VOLUME OF BAN K DEPOSITS AND CURRENCY

All things considered, the total of bank deposits, both demand
and time, and of currency in circulation outside of banks, with some
adjustments to avoid double counting, provides the best available
indication of the functioning of banks in our monetary system.
This particular measure includes the elements that pass through
banks in the process of their creation or extinguishment. The
accompanying chart shows available data for these items for the
period 1890 to 1940 inclusive. In interpreting these figures, it is
B a n k D eposits an d C u r re n cy *
BILLIONS OF DOLLARS

I 70

60
50

50
TCfTi\ L DEPOSITS
ANI0 CURREN'BY

J
J

TW E DEPOSI1S

.....

OEM;\ND DEPOSM T S ^
iADJUSTED
1
1
CUFIRENCY OUTSIDE BANKS

1890

1895

1900

1905

1910

1915

r:.r.Ti^Z

1920

1925

1930

1935

10
1940

* For data, see Table 29, p. 447.

important to keep in mind the many other elements that serve the
functions of money. Any of these items may at times assume a
role of great significance in the operation of the money system.
It is clear from the chart that in the past half century the amount
of actual currency in circulation has been a relatively small part
of the total supply of money. It has been estimated that currency
payments probably comprise not over 10 per cent of total money
payments in this country. The chart also shows that the volume of
bank deposits has generally grown much more rapidly than the

MONEY SYSTEM OF UNITED STATES

305

amount of currency in circulation. This growth in deposits was
continuous until 1920, with an acceleration in the war period,
and after a small drop in 1921 it was resumed. Probably the largest
decline in bank deposits in the history of the country occurred in
the early 1930’s, in part because of bank failures and accompanying
heavy withdrawals of deposits in the form of currency and also
because of a substantial liquidation of bank loans. Since 1933 the
tremendous inflow of gold to this country and the increase in bank
holdings of United States Government securities has brought bank
deposits to new high levels, and at the same time there has been a
gradual increase in currency held by the public.
HOW THE M ONEY SUPPLY IS INCREASED OR DECREASED

Modern money systems are elastic. The supply of money, whether
defined broadly or narrowly, is not an unchanging amount but
varies more or less in response to changes in the public’s demand
for cash and deposits. In addition there may be considerable vari
ation in the rate of use of the available supply. There are at times
difficulties that prevent a smooth adjustment of money supply to
economic need, and sometimes speculative developments may call
forth excessive expansion in the supply and use of money that
results in undue price rises or unbalanced productive activity. Any
attempt to control these forces must be exercised in part through
the various factors that bring about increases and decreases in the
supply of deposits and currency and in part through those factors
that influence the use of money or its substitutes in any of their
various forms.4
Changes in Bank Reserves. Since bank deposits, and to some
extent currency, are required to have reserves held against them,
the supply of bank reserves is an important key to expansion and
contraction of other forms of money. In general the reserves of an
individual bank are increased by deposits of currency and of checks
drawn on other banks, and reduced by withdrawals of currency or
through the deposit in other banks of checks drawn on it. While
shifts of reserve funds among banks are important for the individual
4These controls are discussed in the following paper on “ Monetary Controls.”

306

BANKING STUDIES

banks affected, they do not add to or subtract from the total volume
of reserves of all banks. Reserves of the banking system as a whole
are increased or decreased only by deposits or withdrawals of
reserve funds from outside the banks themselves.
Federal Reserve Bank reserves are increased or decreased primarily
only as a result of changes in the country’s gold stock.5 These
changes in turn are determined by domestic gold production and
by shifts in the country’s balance of international payments. New
gold, produced in this country or imported, when the Treasury
acquires it and issues gold certificates against it, increases bank
deposits, member bank reserve balances at Federal Reserve Banks,
Reserve Bank gold certificate reserves, and the monetary gold stock
of the Treasury. The Reserve Bank reserves and the Treasury’s
gold stock are available in case individuals or banks wish to convert
their deposits into gold for export to meet a shift in the country’s
international balance of payments and are primarily useful for that
purpose.
In general the aggregate gold reserves of the Federal Reserve
Banks can not be increased or decreased by action of the Reserve
Banks themselves or of their depositors, except when gold is im
ported or exported or the Treasury acquires domestic gold.6 A de
positor may withdraw his balance only in the form of currency,
of gold for export, or of a check or draft. If it is withdrawn in cur
rency, the Reserve Bank may issue Federal Reserve notes to supply
the demand; if withdrawn by check, that check will come into the
possession of some member bank and increase that bank’s balance
at the Reserve Bank, with no change in total Reserve Bank de
posits. A member bank reserve balance may be drawn upon to pay
a loan at a Reserve Bank, and a new loan or a purchase of securities
5 Federal Reserve Banks are required by law to hold reserves of gold certificates
or lawful money (currency) equal to at least 35 per cent of their deposits and to hold
reserves of gold certificates equal to at least 40 per cent of their Federal Reserve notes
in circulation. Gold comprises by far the most important part of the reserves actually
held by the Reserve Banks. In general they hold only such amounts of currency as are
needed to supply the currency demands of member banks and the public. Factors
affecting Reserve Bank reserves are further discussed in the following paper.
8 Lawful money reserves could be varied somewhat by practices followed by the
Reserve Banks with respect to the payment into circulation of Treasury currency
received.

MONEY SYSTEM OF UNITED STATES

307

by a Reserve Bank will add to the reserve balances of one or more
member banks, but these transactions do not affect the aggregate
of Federal Reserve Bank reserves.7
Reserves of member banks, i.e., their balances with Federal Re
serve Banks, may in the aggregate be increased by additions to
monetary stocks of gold, by the issuance of silver certificates, and
by a reduction in the volume of currency in circulation; they may
be reduced by an outflow of gold and by an increase of currency in
circulation. They may also be increased by Federal Reserve Bank
loans to member banks and by Federal Reserve Bank purchases of
securities or acceptances in the open market; or they may be reduced
by the repayment of member bank borrowings or the sale of bills
or securities from the Reserve Banks’ portfolios. Changes in
Treasury cash balances have from time to time had a temporary
effect on reserves.8 Individual member banks may increase their
reserves by obtaining them from other banks, but changes in total
reserve balances result only from the factors mentioned.
Month-to-month variations in the volume of member bank re
serves and in the factors affecting them for the period since 1918
are shown in the chart on page 308. Member bank reserves in
creased somewhat from 1918 to 1924, then were relatively stable
until 1931. Throughout this period changes in reserves resulting
from gold and currency movements were largely balanced by
changes in Reserve Bank credit. Reserves fluctuated somewhat
during the period of banking difficulties from 1931 to 1933, and
7 Changes in member bank deposits at the Reserve Banks, except those resulting
from gold movements, therefore, do not affect Reserve Bank reserves. Nor do they
determine the potential ability of the Reserve Banks to make loans or purchase se
curities. This ability is based in the final analysis upon the Reserve Banks* power to
create deposits and issue notes and is limited, under present statute, by the amount
of reserves which the Reserve Banks hold in relation to their note and deposit liabilities.
These reserve requirements are at present not an effective limitation. A further dis
cussion of this subject is given in the following paper.
8 The factors of increase and decrease of reserve funds and their operations in the
past are described in Chaps. V and VIII of The Federal Reserve System—Its Purposes
and Functions, published in 1939 by the Board of Governors of the Federal Reserve
System. See also “ Supply and Use of Member Bank Reserve Funds,” and “ History
of Reserve Requirements for Banks in the United States,” Federal Reserve Bulletin,
July 1935 and November 1938, respectively. These articles are also available as re
prints.

308

BANKING STUDIES

since 1933 they have shown a sixfold growth primarily as a result
of exceptional gold acquisitions.
The reserves of banks not belonging to the Federal Reserve
System may be increased or decreased as a result of the same forces
that affect member bank reserves, but since nonmember banks
directly or indirectly carry a large part of their reserves with mem
ber banks, most changes in nonmember bank reserves are reflected
in those for member banks. Thus new reserve funds coming into

M ember B ank R eserves and R elated I tems *
Sb"

16
12

4
0

1918 1920 1922 1924 1926 1928 1930 1932 1934 1936 1938 1940
* For data, see Table 30, pp. 448-52.

the hands of nonmember banks are likely also to result in an in
crease in member bank reserves, and a loss of reserves by a non
member bank may result in a withdrawal from a member bank.
Issuance and Retirement of Currency. Currency is issued by
the Federal Reserve System and the Treasury and most of it goes
into or out of circulation through the Federal Reserve Banks.
Partly because of the special legal tender quality of currency, the
machinery of the Federal Reserve System and the Treasury for
issuing and retiring currency is designed to enable the general

MONEY SYSTEM OF UNITED STATES

309

public to convert other types of money into currency in the de
nominations desired.9 When more currency is required, the public
obtains it from local banks and the latter obtain it, directly or in
directly, from the Federal Reserve Banks. Contrariwise, the public
deposits currency in excess of current needs in local banks, which
in turn deposit it with the Federal Reserve Banks. The Federal
Reserve Banks and the Treasury play a passive role in these opera
tions. The regional organization of the Federal Reserve System with
its twelve main offices and twenty-four branches provides con
venient facilities to its 6,400 member banks for supplying and
retiring currency in response to public demands. Nonmember banks
obtain currency through member bank correspondents.
The demand for currency is determined by various conditions. A
certain amount is required for day-to-day cash expenditures of
individuals; a certain amount is required for payrolls. There are
times when personal expenditures rise, as during holidays, and there
are times when payrolls rise to produce seasonal products. Certain
individuals, businesses, and communities have their own periods
when they need more or less cash than ordinarily. The net effect of
all of these factors is a normal and regularly repeated cycle of
demand for currency year after year—slack after the first of Janu
ary, when retail trade falls off following the holidays; larger during
the succeeding spring months, when payrolls increase and outdoor
industries become active; slack again in midsummer; and steadily
increasing during autumn and early winter to a regular peak at
Christmas. These seasonal variations normally cover a range of as
much as 400 million dollars in the course of a year.
In addition to the seasonal movements, the demand for currency
also responds to increases and decreases in the dollar volume of trade
and payrolls as the amount of business done by the country in
creases or decreases or as prices change. The demand for currency
is also affected by the various considerations that determine the
9 There are various statutory requirements as to conditions of issuance and redemp
tion of, and as to reserves and collateral that must be maintained against, the different
kinds of currency. Some of these are discussed in the following paper. The mechanism
of currency operations of the Federal Reserve Banks is described in the paper “ Opera
tions of the Reserve Banks.” The history of currency in this country is summarized
in “ Currency System of United States.”

310

BANKING STUDIES

choice of individuals as to whether they hold their money in cur
rency or on deposit with banks. Some of these considerations are
distrust of the solvency of banks, convenience of banking facilities,
service charges and other restrictions imposed by banks on checking
accounts, amount of interest paid on savings accounts, and the
desire for concealment of wealth or income. At times hoarding is an
especially important factor in increasing the demand for currency.
Changes in vault cash held by banks also affect the volume of cur
rency reported in circulation.
In the course of a few weeks prior to the banking holiday in 1933
the Federal Reserve Banks furnished the public with as much as
2 billion dollars of additional currency, a large part of which sub
sequently returned. During the past ten years there has been a
considerable increase in the holding and use of currency, with the
result that the amount reported as in circulation early in 1940 was
some 2.5 billion dollars greater than it was in the late 1920’s. This
amount is relatively small compared with the volume of bank de
posits but is large in terms of its effects on bank reserves. This
growth has been due to a number of factors, the more important of
which have been: (1) the increased use of currency rather than bank
deposits for current payments with the growth of service charges
on deposit accounts; (2) the holding of savings in the form of cur
rency; (3) the attempt for various reasons to conceal wealth or in
come by holding currency instead of bank deposits; and (4) the
increased vault cash holdings of banks.
Neither the Federal Reserve Banks nor the Treasury have under
ordinary circumstances any direct way of keeping in circulation a
larger amount of currency than the public requires or of reducing
the amount of currency that the public needs to finance its current
operations. The Treasury may issue currency and use it to meet
Government expenditures, but this operation does not necessarily
add to the need for currency, and other types of currency in circu
lation are likely to decrease correspondingly. Any redundant supply
of currency is deposited in banks, and by them in the Reserve
Banks, which retire Federal Reserve notes by the amount of the
redundancy. Currency is paid out by member banks or by the
Reserve Banks only in exchange for something of equal value—

MONEY SYSTEM OF UNITED STATES

311

generally charges against deposit accounts. Any one having a
deposit in a bank or able to obtain one may get currency. From the
standpoint of the general public, deposits and currency are freely
interchangeable; both are money. The amount of currency which the
public is able to obtain from banks is, of course, limited by the
amount of bank deposits or claims on such deposits which persons
wishing currency have or are able to obtain. The ability of banks in
turn to obtain currency depends on the amount of balances with
Reserve Banks they have or can obtain by sale of assets or by
borrowing. In general the upper limits imposed by these restrictions
are far above the effective demand for currency, although in some
cases they may be important.
Under the Federal Reserve System the amount of currency in
circulation at a given time represents the part of its money which
the public collectively wants to hold in the form of currency. Cur
rency always moves out of the Federal Reserve Banks when the
demand for it increases and returns to them when the demand sub
sides. This is what is meant by an elastic currency. The public— not
the banks, the Federal Reserve System, or the Treasury— determines
the amount of currency in circulation.
From the standpoint of the effect on bank reserves and, therefore,
on the general credit situation, changes in the volume of currency
have a special significance different from that caused by changes in
deposits. When deposits are shifted from one bank to another or
are used to repay bank loans, reserves may move from bank to
bank but there is no decrease in the total supply of bank reserves.
When deposits are withdrawn in the form of currency, however,
some member banks must draw down their reserve balances. Unless
they borrow from the Reserve Banks to maintain these balances,
the total volume of bank reserves is decreased. Conversely a return
flow of currency from circulation may increase bank reserves, as
well as bank deposits. Additional issues of Treasury currency in
crease both bank deposits and bank reserves, because they provide
the Treasury with new money to spend not obtained from the
public by taxation or borrowing and provide the public with new
money not obtained by borrowing from banks. Through such cur
rency issues the Treasury exercises monetary powers independent

312

BANKING STUDIES

of those of the Federal Reserve authorities. Under existing law and
practices these powers are used only for the purpose of acquiring
gold and silver.
Because of their effect on bank reserves, changes in the volume
of currency in circulation and in the amount of Treasury currency
outstanding may have and at times have had an important influ
ence on money markets and money rates. Prior to the establish
ment of the Federal Reserve System substantial increases in the
demand for currency generally caused sharp rises in money rates,
because bank reserves were drawn down. This was a usual occur
rence in the autumn of each year. With their powers to extend
credit directly to member banks or through the open market,
Federal Reserve Banks may supply banks with currency or reserves
as needed; they may also absorb redundant supplies of currency.
For over twenty-five years the Reserve Banks have met the
normal demands of the country for currency; they have also fully
met peak demands both in times of prosperity and in times of
depression hoarding, and they have made it possible for the volume
of currency to decline automatically when the public demand for
it declined. They have by lending to member banks or by openmarket operations to some extent offset the effect of changes in
the volume of currency on bank reserves and thus have helped to
stabilize money markets.
Expansion and Contraction of Bank Deposits. It has been
seen that bank deposits comprise a much larger portion of the total
money supply than currency, and that a much larger volume of
money payments is made with checks drawn against bank deposits
than with currency. The volume of bank deposits, moreover, in
modern monetary systems may be more easily expanded or con
tracted than currency. This is because the banking system, in
order to obtain a given amount of currency, loses a corresponding
amount of reserves, whereas by lending and relending, the banking
system can expand the same volume of reserves into many times
that amount of deposits.
The fact that through banking operations the deposit money for
the community can be expanded does not mean, however, that
each individual bank can create the deposits it wishes to lend by

MONEY SYSTEM OE UNITED STATES

31 3

giving deposit credits on its books in exchange for customers’ notes.
A common misconception in this respect is responsible for much
agitation against banks. The fact is that an individual bank can
lend only money already on hand as cash or on deposit with other
banks, or money which it is in a position to acquire by the liquida
tion of another asset or by borrowing from another bank. This is
because the customer who borrows the money does so for the purpose
of using it, and when he chooses to draw it out by withdrawing cash
or by checking against his deposit, the bank must be prepared to
supply cash, or to settle through the clearing house for a check
deposited in another bank. As explained later, banks may count
upon their losses of deposits being largely offset by gains from other
banks, and, therefore, can often make loans in excess of immediately
available resources, but this can not be true for all banks at the
same time. It is also important to recognize that banks can expand
credit only to the extent that they can find satisfactory borrowers
or sellers of acceptable securities.
The way in which the process of deposit expansion works is
shown graphically in the chart on page 314. The example shown
is figured on the basis of present reserve requirements, which average
for all member banks about 15 per cent.
Let us assume that a bank receives a new deposit of $15,000,000 arising, not
out of a transfer of funds from another bank, but, let us say, out of an import
of gold which adds to the reserves not only of the individual bank but of the
banking system. This transaction is shown in the lower section of the chart on
page 314 by the first solid black bar at the extreme left-hand side.
When the original depositor puts the $15,000,000 in the first bank he re
ceives a deposit credit. He has exchanged his $15,000,000 in cash money for
$15,000,000 of deposit money. But the bank is able to lend or invest a large
part of the cash it has received from him. There are three conditions that enable
it to do this: (1) banks in the early stages of their development found by experi
ence that, on the average, a large part of the deposits brought to them in cash
or checks is left with them for a considerable time; (2) the law requires a bank
to keep only a portion of a deposit as reserves (assumed in the example to be
15 per cent) and it can, therefore, utilize the remainder (85 per cent in the exam
ple) to make loans and investments; and (3) in case withdrawals of deposits
should exceed the funds held as reserves by the bank, it can turn to its Federal
Reserve Bank and borrow enough to make up the difference.
Because of these three factors a bank, having given the original depositor

BANKING STUDIES

314

$15,000,000 in deposit money for his cash money, can proceed to lend someone
else $12,750,000—i.e., $15,000,000 less 15 per cent. This amount of $12,750,000,
together with the $2,250,000 of reserves retained by the bank, is shown in the
second bar in the lower section of the chart—the loan by the cross-hatched
area and the reserves by the small black area at the top. The borrower then
has $12,750,000 in deposit money, or, if he prefers, in cash. The bank has,
therefore, increased the amount of money by 85 per cent, from $15,000,000 to
$27,750,000.
P r o c e s s o r D e p o s i t E x p a n s io n *1

Illustrative Example on Basis of $15,000,000 of New Reserve Funds and
Reserve Requirements of 15 Per Cent
MILLIONS OF DOLLARS

1st

3rd

4 tm

5th

6 th

7th

8 th

9 th IO th II th

12™ 13th

I4 t«

15th 16th 17™ 18™ 19™ 20™

INDIVIDUAL BANKS

The borrower, in turn, is likely to check or pay out his money: the fact that
he has borrowed it proves that he needs it for some purpose. The persons in
whose favor he makes out checks, or to whom he turns over the cash, then
proceed to increase their bank deposits. For the purposes of this illustration
we assume that the full amount of the loan, $12,750,000, is deposited in the
second bank—illustrated by the second solid black bar on the chart. This bank
receives the deposit and collects the checks through the clearing house, with
the consequence that its deposits increase by $12,750,000 and an equal amount
is added to its reserves. In case the deposits were in cash, the net result is the
same. Then all the forces mentioned in connection with the first bank get into
operation once more. The second bank, after giving a deposit credit of $12,-

MONEY SYSTEM OF UNITED STATES

315

750,000 for the checks or cash deposited with it by persons to whom the bor
rower from the first bank has turned over the proceeds of his loan, sets aside 15
per cent, or $1,912,500, as reserves, and proceeds to lend or invest the remaining
$10,837,000. By this time the original $15,000,000 of money has been increased
by $12,750,000 and $10,837,500 to a total of $38,587,500.
The first bank increased the original amount of deposits by 85 per cent, and
the second bank increased the amount that was passed on to it by 85 per cent,
and this process continues as an ever diminishing amount of the original deposit
is passed on from one bank to another, until the amounts involved for successive
banks become negligibly small. The process is shown for twenty banks by the
series of solid black and of combined black and cross-hatched bars in the lower
section of the chart.
In the upper section of the chart the long single-hatched bars represent the
cumulative totals of all deposits that have been made in all banks as a result
of the original deposit of $15,000,000 of reserve funds and the lending and re
lending of these funds. There has been at each stage a similar but somewhat
smaller expansion of loans and investments, and there has always been a total
of $15,000,000 of reserve funds; but for simplicity the cumulative totals of
these for each separate stage have not been shown on the chart. The two bars
at the extreme right-hand side of the upper section of the chart represent the
cumulative totals of deposits and of loans and investments that may be built
up by the whole process if carried to completion.

On the basis of the figures shown in the chart, the lending or
investment of all funds not required for reserves results in about a
seven-to-one expansion of deposits for the banking system as a
whole, or a total of 100 million dollars in deposits and of 85 millions
in loans and investments on the basis of 15 millions of new reserves.
This means that every addition to reserves enables the banking
system as a whole to supply the public with additional deposits
many times the amount of new reserves.
Contraction of bank credit and deposits resulting from a reduction
in the supply of reserve funds would operate in a similar manner. A
bank whose reserves were reduced to or below its minimum require
ments would be under pressure to withdraw balances from corres
pondents or to call loans and sell investments, and would thus
draw money from other banks and force them in turn to contract.
Contraction might be slower than expansion, because member banks
short of reserves might prefer to replenish them by borrowing
from the Reserve Banks rather than to liquidate outstanding loans
and investments. Banks, however, have not generally liked to bor

316

BANKING STUDIES

row, and when in debt they have usually been inclined to liquidate
loans and investments in order to reduce borrowings.
For the sake of simplicity certain assumptions have been made
in the example presented which do not correspond to actual experi
ence. The discrepancies, however, do not change the general char
acter of the process or impair the validity of the principle that,
while an individual bank can generally lend or invest only such
funds as it has, the banking system as a whole, through lending
and investing, can expand a given amount of bank reserves to
many times that amount of deposits. A statement of the principal
assumptions, however, is necessary for accuracy.
One assumption is that the proceeds of the loan are completely
withdrawn from the lending bank and deposited in another bank.
In actual practice, it is not unusual for borrowers to maintain a part
of the proceeds of a loan as a deposit with the bank; in fact, some
banks require that a definite part, say 20 per cent, be maintained
as long as the loan is outstanding. To this extent the bank which
makes the loan and creates the deposit does not need to have funds
available for withdrawal. It retains that amount of reserves and can
use them to make another loan, just as another bank could have
done had they been redeposited in it.
In the second place, even if the original borrower should with
draw all the proceeds of his loan, a part of the checks that he would
draw might get into the hands of a depositor in the same bank. To
the extent that checks are deposited in the bank against which they
are drawn, that bank does not lose reserves but has disposable funds
for additional loans and investments, just the same as another bank
would have if the checks had been deposited in it. Also, a bankmay
count on gaining funds from other banks in the clearing process
that will more or less offset its losses of deposits, and thus a bank
may continue to make loans in excess of its immediately available
resources and not run into difficulties. This may happen when banks
in general have excess reserves and are expanding credit, but if the
supply of reserves is limited some bank will find itself short and
have to liquidate or borrow.
A more important difference in the way the procedure works in
practice arises from the fact that there are different reserve require

MONEY SYSTEM OF UNITED STATES

317

ments against different types of deposits and against demand de
posits in different localities. The original deposit of cash may have
been made on time and required only a 5 per cent reserve, whereas
the resulting deposits may be on demand and require a 12, 17§,
or 22f per cent reserve, depending upon the reserve classification
of the bank in which it was deposited. Or it may be the other way
around. The percentage used in the example is an average—the
ratio for all banks of total required reserves to all deposits subject
to reserves— so that on the average, although not in individual
cases, the situation would be approximately as outlined.
Perhaps the most important assumption made in the example,
which does not correspond to the facts as they exist today, is the
assumption that the bank will always lend or invest all the funds
that it has available. The supply of reserves has been indicated as
the factor determining the limits of the movement. It is not, how
ever, the only or always the principal factor of change. The process
is carried on by means of loans and investments, and banks, in
order to expand available reserves into additional deposits, must be
able to find borrowers to which they are willing to lend or securities
that they are willing to purchase. Monetary theory, supported by
past experience, has generally assumed that banks could and would
always find uses for idle funds, but experience in recent years, when
banks have held large amounts of reserves in excess of requirements,
indicates that this is not always the case. In such circumstances the
rate of expansion on the basis of a cash deposit would be much less
than the possible maximum; in fact there might be no expansion
at all.
Nor can it be assumed that a reduction in reserves will always
result in a contraction in bank credit by the maximum amount;
banks may prefer to replenish their loss of reserves by borrowing
from the Reserve Banks rather than to liquidate loans or invest
ments, particularly if business prospects seem favorable and there
is a strong demand for loans at profitable rates. At times when the
state of business is unfavorable and the credit standing of borrowers
uncertain, banks are less willing to extend credit and more anxious
in case they lose reserves to call loans or sell securities rather than
borrow.

318

BANKING STUDIES

It follows, therefore, that expansion and contraction of bank
credit and the money supply depends not only upon the volume of
bank reserves but also upon the availability of suitable loans and
investments and upon the standards of suitability followed by banks
and by supervisory authorities.
The principal conclusion from this discussion is that an individual
bank can not ordinarily lend or invest any larger amount of funds
than it has in its possession or can borrow, but that the banking
system as a whole, provided there is a sufficient demand for funds,
can make loans and investments approximately six times as large
as any additions that it may receive to its reserves. The extent to
which banks will expand credit within this potential maximum
depends on the availability of suitable loans and investments.
SUM M ARY

Money is used for a variety of purposes, and the concept of money
is not a simple one, nor is there a single definition that fits all the
uses of the term. Figures for bank deposits, together with those for
currency, provide the best measures of the functioning of banks in
the monetary system. In any analysis of economic developments,
however, consideration must be given to many other elements that
influence the monetary system.
Banks not only hold money for the public but they also supply
money by extending credit in the form of loans and investments,
and these credits then take the form of bank deposits. Ability of
banks to extend credit depends in part on the supply of basic or
reserve money, which in turn is derived principally from gold,
although it may also be supplied through the extension of Reserve
Bank credit or through the issuance of currency by the Treasury.
By lending and investing reserve funds the banking system may
expand the volume of deposits to many times the supply of reserves.
It is not correct to assume that an individual bank by itself has
the power to create money out of nothing and to use that money to
its own profit. An individual bank can lend or invest in general only
amounts equal to cash held in excess of required reserves, and the
amounts actually put to use depend on the availability of suitable
loans and investments. The banks receive interest on their earning

MONEY SYSTEM OF UNITED STATES

319

assets and from that must pay the expenses of running the banking
system before having profits for stockholders.
The importance of supply, availability, cost, and use of money
in the operation of the economic system and the effectiveness of the
various instruments of monetary regulation are discussed in the
next paper.

MONETARY CONTROLS

Page
I n t r o d u c t i o n .......................................................................... 323
F unction

O bjectives

M o n ey

in the

E c o n o m y ....................... 324

M on etar y R e g u la t io n ...................... 334

I n s t r u m e n t s o f M o n e t a r y R e g u l a t i o n ................ 336
D iscretionary

P olicies

F ederal

R eserve

A uth o r it ies ........................................................................ 348
Su m m a ry.................................................................................... 349

o o d l ie f

homas

Assistant Director
Division of Research and Statistics

MONETARY CONTROLS
In preceding papers it has been shown that banks supply an
important part of the money needed for the functioning of our eco
nomic system. Partly to insure convertibility into other forms of
money and partly because of the potential effect of the issuance of
currency and the expansion of bank deposits upon economic de
velopments, limitations have been imposed by law and custom upon
the exercise of these powers. Some of these limitations are mechani
cal in nature and fixed by statute, such as requirements as to con
vertibility, reserves, and collateral; some are discretionary, for in
stance, Reserve Bank credit policy and bank supervisory powers;
and some arise outside the money system proper, for example, the
demand for loans.
Much emphasis has been placed in monetary theory and some
times in policies of public monetary authorities upon the supply of
money, and the measurement of the money supply for these pur
poses has often been narrowly defined. The use that is actually made
of money is a more potent economic force than the actual supply
on hand, and while use may be influenced by the mere quantity of
this supply it is also influenced by the availability and cost of new
money and by many factors of a nonmonetary nature.
Economic well-being is determined by the flow and distribution
of income, by the decisions of consumers and producers as to expend
itures and savings. These decisions in turn are influenced by mone
tary and credit factors and also by factors of a nonmonetary nature,
such as price and cost relationships, public and business confidence,
industrial and labor policies, tax and other fiscal measures, weather,
or war. At times monetary and credit controls may be decisive;
at other times the various nonmonetary factors are jointly or
separately decisive. For a smooth operation of the economy it is
necessary that monetary and credit policies be flexible, and that
they and other governmental and private policies and actions be

323

324

BANKING STUDIES

coordinated. Economic problems overlap and can not be effectively
dealt with by action in any one field taken alone.
FUNCTION OF M ONEY IN THE ECONOM Y

Before discussing specific monetary controls this paper will deal
briefly with the functions of money in our economy and the relation
ship that exists between the availability, volume, cost, and activity
of money and other factors that affect the course of economic life.
Then the influence of monetary control upon the operation of these
factors will be considered.
It is a truism to say that money in itself is not an end but only
a means to an end. However, because money can be converted into
commodities and services and because it is used as a common
denominator in measuring economic values, it is sometimes con
fused with these values and undue importance is often attached to
the volume and behavior of money as a motivating factor in eco
nomic well-being. A more significant element in the economy than
the supply and cost of money is the flow and distribution of income,
which is largely dependent upon decisions of consumers and pro
ducers as to expenditures and savings.
National income, though generally expressed in terms of money,
can either decrease or increase with no corresponding change in the
existing supply of money or even in the face of a change in the
opposite direction. For example, in 1939 the amount of money, no
matter how measured, was larger than in 1929, but the national
income was considerably smaller. National income represents the
net money value of commodities and services produced by the
nation’s economic system.1 The volume of money payments made
in producing a given amount of national income may be made from
a larger or a smaller stock of monetary units, depending on how
many times the same units change hands in the course of the year.
A great source of confusion in discussions of this subject is the
inclination to consider that two developments occurring at the same
1The word “ net” indicates that the gross value of output of all commodities and
services is reduced by the value of commodities consumed in the process of production.
This definition is taken from Simon Kuznets, National 1ncome and Capital Formation,
1919-1935, National Bureau of Economic Research, Inc., New York, 1937.

MONETARY CONTROLS

325

time or successively must necessarily have a causal relationship to
each other. For example, it is true that, if you take all the goods,
services, property, and other values that are paid for in the course
of a year and multiply them by their price, and if you then add
the value of those payments that can not be expressed in pricequantity terms, such as gifts, insurance payments, annuities, inter
est, etc., the figure thus obtained will equal the average volume of
money outstanding times the number of transfers of that volume
in the course of the year. But this does not mean that the volume
of money or its turnover determines either the amount of goods
and services that change hands or the price at which they are ex
changed. There are many complex factors, physical, economic, and
psychological, that determine the course of economic activity, the
level of prices, and the volume of national income. Monetary and
nonmonetary factors enter into the equation; neither necessarily
determines the course of the other. They interact upon each other,
and which at a particular period is predominantly a cause and
which predominantly an effect depends on a whole series of complex
forces that it is difficult and often impossible to disentangle.
It is not intended, however, to minimize the importance of money
in our economy, which after all is a money economy in the sense that
nearly all economic activities involve money and are measured by
it as the common denominator. But money is only one facet of the
economy and should be considered in its relationship to other
facets. Nevertheless, it may be at times a powerful and controlling
element, and it is the element for which monetary authorities have
the primary responsibility.
Availability of Money. Perhaps the most important single con
cept in relation to money as a factor in the economy is availability.
In order to make the commitments necessary for carrying on eco
nomic activity, persons engaged in commerce, industry, and agri
culture must be assured that they can obtain the funds necessary
to finance their operations. This is a more important causative
factor than the volume of money. A business man in planning his
operations, after considering prospective profitability, is guided not
only by the amount of money that he has on hand, or on deposit,
but also by his knowledge of what funds he may count on when the

32 6

BANKING STUDIES

need arises. His line of credit at the bank, his ability to raise funds
in the capital market, his credit standing with the firms from which
he must make purchases, the amount of readily marketable securi
ties he owns, as well as his actual deposits in banks, measure the
availability of money to him, and he makes his plans in accordance
with his estimate of such availability.
There are no precise statistical measurements of the availability
of money, but there are ways by which monetary authorities can
exert an influence on it. The two principal factors determining
availability are the ability and willingness of banks and of other
holders of investable funds to make loans and investments, and
the ability and willingness of the public to borrow from banks or
in the capital market. The ability of banks to lend or invest can be
influenced by monetary authorities in various ways—principally by
increasing or decreasing available bank reserves, by taking steps
to put banks into or out of debt, and by raising or lowering dis
count rates. It can also be influenced by the policies of bank super
visory agencies with regard to bank loans and investments. In a
period of active business, availability of money can be influenced
to a considerable extent by the authorities, and it is one of the
functions of these authorities to encourage availability of money
at times when the demand appears to arise out of the needs of
production and distribution of commodities. When, on the con
trary, the demand for money appears to arise from uneconomic
speculative activity, monetary and banking authorities can use
their influence to diminish the availability of money.
Volume of Money. Although the more significant purpose of
policies pursued by monetary and banking authorities is to influence
the availability of money, it is the volume of money in existence
that indicates the extent to which money has actually been made
available. Because the most important elements in the volume of
money can be measured, while its availability can not, more atten
tion is generally paid to volume.
The volume of money in existence at a given time depends in
part on the supply of bank reserves and in part on the amount of
loans and investments of banks, and this is true whether the money
is in the form of deposits or of currency. The amount of currency

MONETARY CONTROLS

327

used by the public is much smaller than the amount of deposits,
and the extent to which the public keeps its money in the form of
currency or of deposits reflects the public’s preference, which changes
from day to day, from month to month, and from year to year. It
is not a matter of primary importance under our present system.
Both currency and credit reach the public principally through the
banks and are largely represented at the banks by loans and invest
ments. In recent years, however, increases in the money supply have
resulted to a considerable extent from additions to the country’s
gold stock, in turn reflected in expanding bank reserves.
The way in which banks can increase or decrease the volume of
money by making loans and investments was explained in the
preceding paper. It is important to remember that the banks in
this matter are only one of the parties to the transaction, the other
being the borrowing public. Banks can be more or less willing to
lend or to invest money, they can have preferences as to the amounts
and character of their loans and investments, but they can make
loans only when there are acceptable borrowers and they can pur
chase investments only when acceptable securities are to be had.
It is primarily through their influence on the willingness and
ability of the public to borrow and on the safety of investment
securities available for banks that nonmonetary factors influence
the volume of money. At a time when employment is ample, na
tional income is rising, and consumer purchasing power is large,
there are plenty of good borrowers from banks and in the capital
market. If the lending power of banks is ample they utilize it
freely at such times and the volume of money increases. At a time
when business prospects are poor, on the other hand, although the
banks may have plenty of lending power, good borrowers may be
less willing to borrow. Banks, moreover, may become apprehensive
and begin to call loans and sell investments. Under such circum
stances banks may be unable to find other acceptable loans and
investments in sufficient volume to replace those repaid or sold,
and the volume of money may diminish—even though banks have
unused resources. The resulting decline in the volume of money
may not only reflect but accelerate a further decrease in business
activity and a general deflationary movement.

32 8

BANKING STUDIES

Cost of Money. A factor that may be important in determining
the willingness of borrowers to obtain loans is the cost of money,
i.e., the level of interest rates. The actual effect of the level of interest
rates upon the volume of borrowing differs from time to time. Low
interest rates will ordinarily encourage borrowing and high interest
rates will discourage it. It is true that in actual experience the
demand for loans is usually large when interest rates are high and
small when rates are low, but this is because interest rates advance
as the result of an active demand for loans pressing against the
limits of the banks’ lending capacity, and decline when the demand
falls short of the supply.
It is generally true that a period of very high interest rates is
followed by a business recession, while a period of low interest rates
is likely to be followed by business recovery. This may be due in
part to the restrictive or stimulating effects of high or low interest
rates, but it also means that high interest rates are an indication of
a tendency for business to over-expand while low interest rates
reflect a contraction in activity—tendencies that are likely to
change in the course of time. Much variation occurs in the length
of time that low or high rates prevail before a turn takes place in
the demand for loans. It is likely that difficulty in obtaining funds,
that is, low availability, of which high interest rates are a result,
is more important in restricting borrowing at the peak of a cycle
than is the mere cost of borrowing, which is not an important
limiting factor if large profits are in prospect. At the bottom of the
cycle even exceptionally low interest rates are not an inducement to
borrowing unless there are prospects for the profitable use of the
borrowed funds. In other words, fluctuations in interest rates are
the result of variations in the supply of and demand for loan funds,
which in turn are likely to move in accordance with the state of
business. The level of interest rates, however, has some effect upon
business decisions as to the use of money and this effect is especially
important in the field of long-term borrowing, such as mortgages
and bond issues.
In recent years interest rates have been lower in this country
than at any time in history. This has been accompanied by an
abundance of funds available for lending and investing and a low

MONETARY CONTROLS

329

level of demand for loans. The principal acceptable borrower has
been the United States Government. Short-term rates have de
clined much more sharply than long-term rates, and rates on readily
marketable paper or on loans to borrowers with the highest credit
ratings have declined more than those on the general run of bank
loans to their customers. These widening differentials have been due
primarily to the desire of banks and other investors to place their
funds where they can be quickly converted into cash to take ad
vantage of better opportunities for profitable investment if they
should arise. Preference for short-term investment in a period of
low rates is emphasized by the fact that a rise in rates results in a
substantial decline in principal value of long-term obligations pur
chased at low yields. Bonds entered on the books at high prices
would be subject to paper losses in case of a rise in interest rates.
This situation has created problems for banks and for banking and
credit authorities.
As a result of the low level of interest rates, or more particularly
of the shortage of investment outlets relative to supply of funds
seeking investment, the income of investors—individuals and insti
tutions—has declined in the past decade, creating other problems.
Although the low level of interest rates has not brought about a
substantial increase in borrowing, it has no doubt been an influence
working toward economic recovery. It has enabled the Govern
ment to finance its recovery program at relatively low costs. It has
enabled corporations, particularly utilities, to refund outstanding
indebtedness at lower interest rates, thus reducing their costs of
doing business. The decline in rates on home mortgages, together
with other reductions in financing costs that have been effected,
has encouraged the buying and building of homes.
The possible effect of low interest rates if a substantial borrowing
demand should develop will raise some questions. The problem of
limiting the injurious effects of such a development is made diffi
cult by the fact that low interest rates were largely brought about
by the rapid expansion of bank reserves and deposits resulting from
the large gold inflow and that these factors are hard to control under
existing monetary powers.
Use of Money. Deposits as such may in effect not be money

330

BANKING STUDIES

in an active sense and may represent nothing more than funds
hoarded by the owners. It can not be assumed that all bank deposits
are considered or used as purchasing power by their owners or that
the proportion so used remains unchanged. The total volume of
money payments, that is, the turnover of money, is a more im
portant measure of economic activity than the supply of money.
Turnover of money is the resultant of all the economic forces,
monetary and nonmonetary, that determine the amount of spending
and investing. Because of the importance of nonmonetary factors,
turnover of money can not be controlled directly by monetary means
in the way that the supply and cost of money can be controlled,
although monetary policies and particularly the policies of banks
as to their loans and investments may have an important influence
on the extent and manner of the use of money. A full discussion of
the various forces that determine the use of money and of how they
operate is beyond the scope of this paper.
There are no exact measures of the turnover of money as a whole.
In view of the relatively small amount of currency outstanding,
much larger changes in its turnover than probably occur in practice
would have little effect on the turnover of all money. Turnover of
bank deposits may be measured by the amount of checks drawn
against them, the figures for which are compiled and published under
the title “ debits to deposit accounts.” The rate of turnover or
velocity is computed by dividing the volume of debits in a given
period by the average amount of deposits outstanding during the
period. The resulting figure attempts to measure the extent to which
deposits are used in transactions of all kinds, including many dupli
cate entries and transactions, arising out of goods or other values
passing many times from hand to hand in the process of marketing
or in the course of speculative activity.* Turnover of money meas
* Debits figures used in this statement represent estimates of all transactions for
which payment is made by check, including payments made for goods at various stages
of the production and distribution process, payments for services, and financial transac
tions of various sorts, such as trading in securities, commodities, real estate, etc., loan
repayments, and deposit shifts. In reporting debits banks are instructed to include
all charges to accounts of individuals, partnerships, corporations, the Federal, State,
and local governments, debits to postal and other savings accounts, payments from
trust accounts on deposit in the banking department, and payments of certificates of

MONETARY CONTROLS

331

ured in this manner, when considered in connection with other
information, may be a good indication of the development of
unhealthy speculation. Such measures are, therefore, of value to
monetary authorities.
Comparison of the volume of outstanding bank deposits in com
mercial banks with estimated total debits against these deposits and
with national income by years from 1919 to 1939 is made in the
upper section of the chart on page 333. The figures are plotted on a
ratio scale so that equal vertical distances represent equal percentage
changes, making it easier to compare relative changes. The figures
for deposits differ somewhat from those for total deposits at all
banks shown in the chart on page 304 in the preceding paper, for
reasons explained in a footnote to the appendix table referred to in
the accompanying chart.
Prior to 1926 debits in each year remained close to twenty times
the average amount of deposits outstanding in the year, i.e., these
deposits consistently showed a rate of turnover of about twenty
times a year. In the same period national income was approximately
twice as large as the amount of deposits and showed movements
closely similar to those of commercial bank debits and deposits.
From 1926 to 1929 debits increased much more rapidly than de
posits, but national income rose somewhat less than deposits.
Turnover of total deposits as measured by debits increased to about
thirty times a year in 1929.
In the depression period debits declined most sharply and de
posits least, and since 1933 deposits have increased faster than
debits. As a consequence the rate of turnover of deposits declined
sharply in the depression and has not increased since. In fact in
1939 it reached a new low level of less than fourteen times a year.
National income has increased since 1933 more than either deposits
or debits, but like debits, it has continued below the high levels of
1925-1930, while deposits have risen above previous maximum
levels.
What is the significance of the fluctuations in these figures and
deposit. They are asked to exclude debits to the accounts of other banks or in settlement
of clearing-house balances, payments of certified and officers’ checks, charges to ex
pense and miscellaneous accounts, corrections, and similar charges.

332

BANKING STUDIES

of their differences? The sharpness of the rise in debits in the late
1920’s was primarily due to the effects of security market activity.
Financial transactions, which as a rule involve large payments,
comprise an important portion of debits, and changes in transac
tions of this nature are likely to have a marked effect on the volume
of debits. This is illustrated in the lower section of the accompanying
chart, which shows estimated rates of turnover of deposits in three
different groups of commercial banks. From this chart it is evident
that most of the sharp spurt in debits in the late 1920’s was in
New York City, where security market activity is largely concen
trated. Banks in other places showed only moderate increases in
turnover.
This development in 1928 and 1929 is an example of an economic
force which was reflected in increased turnover of money, and was
largely beyond the control of usual monetary and credit regulations.
These regulations at the time were directed toward restricting bank
credit expansion and resulted in raising money rates. In those years
many corporations, investment trusts, and individuals had large
amounts of available funds which they lent to brokers to finance
stock-market margin accounts. The funds were paid by brokers to
sellers of securities, who may have been corporations floating new
issues or traders or investors taking profits or withdrawing from
the market. These recipients in turn deposited the funds in banks
or spent or reinvested them. The net result, simplifying the process
somewhat, was a shift of bank deposits from one group of holders
to another. These transactions did not result in an increase in bank
credit and, therefore, none in bank deposits. The effect on the use
of money, however, was the same as if the brokers had borrowed
from banks, while the other lenders held their funds idle. When the
money was lent on call to brokers, it was still available to the lend
ing corporations and investors almost as readily as if it were on
deposit in a bank, because the loans could be called for almost im
mediate payment at any time. Had no other lenders been available,
New York City banks would presumably have taken over the loans.
In fact they did just that during the stock-market break in October
1929 and in subsequent months, when nonbanking lenders withdrew
funds from the market. In this case economic forces made an exist-

MONETARY CONTROLS

333

N ational I ncome and V olume and T urnover

or B ank D eposits *
1. Volume of National Income and of Bank Debits and Deposits

BILLIONS OF DOLLARS

2. Rate of Turnover of Bank Deposits

a For data, see Table 31, p. 453.

334

BANKING STUDIES

ing supply of bank deposits turn over more rapidly to do the amount
of business required; the same result could have been achieved by a
larger volume of money turning over less rapidly.
Declines in turnover of deposits after 1929 were greatest in New
York City but were pronounced elsewhere, falling generally to new
low levels. It is significant that during recent years of business
recovery rates of turnover outside New York City have increased
somewhat from the lowest levels of depression years, although re
maining lower than in the 1920’s, while in New York City the rate
of turnover of deposits has continued to decline.
This continued decline in rate of turnover of deposits in New
York City reflects in part the substantial decrease of activity in
financial markets during the past decade. Another factor of con
siderable importance is the accumulation of large idle balances in
New York City. Demand deposits, other than interbank balances,
in New York City banks exceeded 8 billion dollars at the end of 1939,
whereas in 1929 they amounted to less than 5 billions. Many of
these deposits represent large bank balances being held by corpora
tions, institutional investors, and individuals, including a large
number of foreigners, until satisfactory outlets for investment or
other uses are found. In other words, deposits which under existing
circumstances have exceedingly low rates of turnover comprise a
large proportion of existing deposits in New York City banks. To
a smaller extent the same is true of banks in other cities, while in
many rural regions the volume of deposits i§ still somewhat smaller
than in the 1920’s, and these deposits are almost as active as in the
earlier period.
OBJECTIVES OF M ON ETARY REGULATION

Efforts to regulate the supply, the availability, and the cost of
money, and to some extent the way it is used in extending credit,
are the direct concern of governmental monetary and banking
authorities. The principal monetary function of the Federal Reserve
System is to see that banks have adequate reserves to supply the
public’s legitimate demands for money and to restrain banks from
supplying excessive demands. Through the use of monetary and
credit powers that influence the volume of reserves and the cost of

MONETARY CONTROLS

335

borrowing additional reserves, limitations may be placed on the
availability and cost of money, and through the use of various
supervisory powers both the availability of money and the uses to
which it may be put can be influenced.
Early laws and regulations pertaining to money and banking were
directed largely toward maintaining the convertibility of one form
of money into another more universally acceptable form. This objec
tive required attention to the amount of reserves and collateral back
of currency and to the adequacy of assets behind the notes and
deposits of individual banks. In the course of time, however, con
vertibility has become a less important objective of monetary regu
lation, and broader economic aims, expressed through regulation of
the supply, availability, and use of money, have become dominant.
These aims require attention not only to individual banks but to
the operation of the banking system as a whole and also to non
monetary developments.
Under customary rules of convertibility paper currency is gener
ally convertible into metallic coin, and bank deposits are convertible
into currency. Although the primary purpose of these rules is to
protect holders of currency or deposits against eventual loss, they
have also had important supplementary effects. Through making
different kinds of money more universally acceptable and placing
limitations on expansion, they have influenced general economic
developments, as well as helped to further their original purpose.
Limitations imposed by rules designed to assure convertibility,
however, are not necessarily suited to the broader objectives of eco
nomic policy and have at times operated in conflict with more
desirable aims. Convertibility of currency into gold, for example, is
not needed from the standpoint of domestic uses of money, as long
as other forms of money are sound. Gold is of primary importance
for purposes of settling international balances, and the use of gold
domestically might at times interfere with its need internationally.
Since 1933 all the gold stock in this country is held by the Treasury,
and gold is released only for export. Gold—newly produced or im
ported—is readily convertible into dollars at what has been for
practical purposes a fixed price, and for international usage dollars
may be converted into gold at approximately the same price.

336

BANKING STUDIES

It is essential for the smooth functioning of our monetary system
that bank deposits be both convertible into currency and readily
shiftable from one bank to another. These privileges of depositors
are safeguarded by established standards of banking practice, as
well as by rules and regulations as to bank assets, which endeavor
to assure the ability of individual banks to exchange these assets
for currency or for claims on other banks. The quality of bank
assets and the ability of banks to liquidate them, however, depend
not only upon the wisdom of individual bank managers and super
visors but also upon economic conditions over which these indi
viduals have no control. Action on the part of banks, taken as a
whole, in either expanding credit or in liquidating assets has an
important bearing on the general economic situation, and it is
necessary that such action either be directed toward broadly desir
able ends or that its effects be offset by other action. The aims of
monetary regulation are, within limits of its powers, to safeguard
the soundness of the monetary and banking system, and to direct
the activities of that system along lines that will promote the
attainment and maintenance of a high degree of national well-being.
INSTRUM ENTS OF M ON ETARY REGULATION

The principal instruments of monetary regulation include rules
as to collateral, control over the availability of reserves, the fixing
of discount rates on borrowed reserves, and restrictions on the types
of loans and investments that banks may make. One of the simplest
and most direct forms of limiting the issuance of any form of money
is to fix by rule or statute an absolute maximum that may be issued,
but this type of limitation is not widely used.3
Some of these instruments are more or less absolute restrictions
imposed by statute; some are exercised through regulations issued
under legal authority upon discretion of regulatory agencies; while
others are largely matters of current actions based upon policy
decisions. Absolute rules imposed by statute as to issuance of money
or extension of credit have at times proved to be unsatisfactory.
8The only actively circulating money so limited by law in this country is United
States notes—so-called greenbacks—and they may, as a result of recent legislation,
be expanded under certain emergency conditions.

MONETARY CONTROLS

337

They have often failed to serve as restrictions at times when undue
expansion was in process and have been unnecessarily restrictive
when contraction was not wanted. For this reason there has been
a growing tendency toward vesting discretionary powers with
responsible authorities.
Collateral Requirements. Issues of currency are generally
required by law to be backed by certain collateral and often also by
fractional reserves in the form of more basic money. Bank deposits
are also in effect backed by collateral consisting of the assets of the
banks.
The principal types of currency that the Treasury may now issue
are gold and silver certificates. Against these notes the Treasury
is required to hold a corresponding amount of the respective metals,
valued at statutory prices. The amounts of gold and silver certifi
cates actually issued correspond closely to the values of gold and
silver purchased by the Treasury.4 Collateral requirements in these
cases serve the useful purpose of limiting the amount of Treasury
currency that is issued to the amount of gold and silver acquired
by the Treasury.
Federal Reserve notes, which are issued by the Board of Gov
ernors through the Federal Reserve Agents at the twelve Reserve
Banks, are required by law to be backed by 100 per cent collateral.
This collateral must be in the form of gold certificates, eligible
paper representing advances to or discounts for member banks,
bankers’ acceptances, or, under a temporary provision of the law,
United States Government obligations. Gold certificates deposited
as collateral may at the same time be counted as reserves required
against notes, but not as reserves against deposits.
Collateral requirements for Federal Reserve notes were originally
intended not only to serve as a safeguard against over-issuance of
notes but, through their inter-connection with eligibility require
ments, to act also as a limitation on the type of paper against which
4 The statutory prices of gold and silver, the relation of statutory and market prices
for silver, and the procedures for issuing gold and silver certificates are discussed in the
immediately preceding paper, as well as in “ Currency System of United States.” The
latter paper also describes the collateral and reserve requirements of other forms of
United States currency.

338

BANKING STUDIES

member banks could borrow at the Reserve Banks, and thus indi
rectly to influence member banks in their lending policies. That they
have not served this purpose will be explained later.
Statutory requirements as to collateral for currency have at
times proved unduly restrictive. National bank notes, which before
the Federal Reserve Act were the principal element in our currency
system that could be expanded or contracted, could be issued only
against United States Government bonds as collateral. The limited
supply of such bonds prevented expansion in the issuance of cur
rency when additional money was demanded by the public. The
Federal Reserve Act provided for the issuance of an elastic currency
in the form of Federal Reserve notes, but the collateral requirements
of the act as first passed placed limitations on the issuance of these
notes that had no relation to the public’s need for currency.
Late in 1931 and early in 1932, when a gold outflow and currency
hoarding reduced bank deposits and reserves and increased the
amount of Federal Reserve notes in circulation, these collateral re
quirements for notes limited the ability of the Reserve Banks to
relieve the pressure on member banks through open-market opera
tions. Had the Reserve Banks bought Government securities and
thus enabled member banks to reduce their indebtedness, which
provided eligible paper to be used as collateral against notes, then it
would have been necessary to substitute gold as collateral, and there
might not have been sufficient gold to serve this purpose, to provide
reserves against deposits, and to meet further possible export de
mands. The Glass-Steagall Act passed in February 1932 temporarily
permitted the Reserve Banks to pledge Government securities as
collateral for Federal Reserve notes and thus removed the difficulty;
this permission has been extended from time to time by subsequent
legislation.
Since individuals may by borrowing, or by selling securities to
banks, obtain in return claims payable in currency, it seems reason
able that banks should be able to borrow against these assets to
obtain currency and that the Reserve Banks in turn should be able
to issue a sufficient amount of notes to supply these demands with
out having to restrict credit. Although reserve and collateral require

MONETARY CONTROLS

339

ments for Federal Reserve notes continue to be more restrictive than
rules as to loans and investments that banks may make, it can be
said that, with the Reserve Banks’ large gold reserves and increased
lending powers, member banks with sound assets could at present
obtain from the Federal Reserve Banks currency enough to pay off
all their deposits.
Reserves and Reserve Requirements. In most money systems
it has been customary for the issuers of money, other than coins, to
maintain a reserve in money of a kind considered to be basic or more
acceptable—generally a unit fixed by law as the standard. During
the past half-century or more the principal basic reserve in most
countries has been gold. In the United States, as explained, member
banks are required to hold balances with Federal Reserve Banks as
reserves against their deposits, while the Federal Reserve Banks in
turn hold against their deposit and note liabilities reserves consisting
principally of gold certificates, which are direct claims on gold in the
Treasury. The difference between the supply of reserves held and
the amounts required to be held and the ability to obtain additional
reserves when needed are important factors in influencing credit
expansion and contraction.
Reserves of Federal Reserve Banks. The supply of Federal Reserve
Bank reserves is primarily dependent upon the size of the monetary
gold stock, or more precisely upon that part of the gold stock against
which the Treasury has issued gold certificates. Changes in the gold
stock in turn reflect largely domestic gold production and the coun
try’s balance of international payments. Practically the only discre
tionary instrument for regulating the supply of Reserve Bank reserves
is Treasury action with respect to the issuance of gold certificates
against gold acquired. In 1937 and 1938 the Treasury followed the
policy of not issuing gold certificates and of paying for gold acquisi
tions by borrowing in the market. This action sterilized the gold in
its effect upon bank reserves. Treasury issues of silver certificates or
other forms of currency may have the effect of increasing the non
gold reserves of the Reserve Banks, but these reserves are minor. In
practice the Reserve Banks generally pay out such currency into
circulation in lieu of Federal Reserve notes. Member banks can not

340

BANKING STUDIES

in any way, other than through gold imports or exports, control the
amount of reserves held by the Federal Reserve Banks.6
It is often thought that one of the purposes of reserve require
ments for Federal Reserve Banks is to place limitations on the poten
tial expansion of Reserve Bank credit. It is true in principle that the
ability of the Federal Reserve System to extend credit or to meet
gold drains is limited by the amount of gold certificate reserves held
in excess of reserve and collateral requirements, and at times in the
past this limitation has been of some practical importance. The need
for such a limitation, however, may be questioned. Nations have
found it necessary to apply other standards of control over domestic
monetary and credit policies than solely the quantity of gold on
hand. When a country has an abundance of gold the possibility that
gold may be demanded to meet international payments at some time
in the future is not likely to be a restriction on excessive expansion of
money. When there is a scarcity of gold, on the other hand, strict
requirements as to gold reserves may be unduly restrictive from the
standpoint of domestic considerations. Ability to convert domestic
money into gold is important for the purpose of meeting interna
tional movements of funds, but a country’s gold stock is not neces
sarily an arbiter of domestic monetary requirements.
The Reserve Banks might at some time, as have central banks in
many other countries, find themselves with inadequate reserves and
be forced to contract credit even though contraction at that time
were not desirable. This possibility is at present of only theoretical
importance, because the supply of gold reserves held by the Reserve
Banks is greatly in excess of requirements. Federal Reserve notes in
circulation and reserve deposits could be more than doubled on the
basis of present gold reserves. Under these circumstances the reserve
requirements are not a limitation on the power of the Reserve au
thorities to issue currency or to extend additional Federal Reserve
Bank credit and thereby create new reserve funds. The practical
limitation on the first of these powers is the public’s demand for cur
5 The relation between member bank deposits with Reserve Banks and the reserves
and lending power of the Reserve Banks is discussed briefly in the preceding paper,
“ Money System of United States” ; see especially footnote 7, p. 307. It is discussed
more fully in the paper “ Public Nature of the Reserve Banks.”

MONETARY CONTROLS

341

rency and on the second is the policy that the Reserve authorities
find it advisable to follow in the public interest.
Member Bank Reserves. Banks belonging to the Federal Reserve
System must maintain with Federal Reserve Banks balances of not
less than stated proportions of their deposit liabilities.6As explained
in the preceding paper, when an individual member bank obtains
a deposit of new reserve funds, it leaves a portion of it as a reserve
balance with its Federal Reserve Bank and is free to lend or invest
the remainder. The more a bank can lend or invest the greater will
be its profits. Banks, therefore, generally endeavor to keep employed
all funds available to them. As long as banks follow this policy,
control over reserve requirements and the supply of reserves may
serve as a limitation on expansion of bank loans and investments.
Banks’ reserves are, therefore, the principal medium through
which Federal Reserve authorities exercise their policies to accel
erate or retard credit expansion. These policies may be exercised,
within limitations, by increasing or decreasing the supply of reserves,
by changing requirements as to the amount of reserves that must be
maintained, or by changing the rate of interest charged on borrowed
reserves.7
Although their relation to credit expansion and contraction is to
day considered to be the major function of bank reserves, they still
serve to some extent their original purpose of protecting depositors.
This is because reserves are readily convertible into other forms of
money at their face value, whereas other assets may depreciate in
value, particularly if banks find it necessary to liquidate them under
adverse conditions. The percentage of deposits covered by required
reserves, however, is for most banks not sufficiently large to be a
major factor of safety.
In recent years, member bank reserve balances have grown so
rapidly with the inflow of gold, and at the same time satisfactory
6The actual percentages of reserve requirements were given in footnote 2 on p.
300 of the preceding paper. For a brief discussion of the history and purpose of reserve
requirements and of the function of reserves, see the Annual Report of the Board of
Governors of the Federal Reserve System, 1936, pp. 16-21.
7The ways in which the Federal Reserve authorities use the various instruments of
monetary policy are discussed in other papers in this volume, particularly in “ Instru
ments of Federal Reserve Policy.”

342

BANKING STUDIES

loans and investments have been so limited, that banks have not
followed the policy of investing all available funds. As a result banks
hold tremendous amounts of excess reserves. Member bank reserve
balances and deposits outstanding in June 1929 and June 1940 are
compared in the accompanying chart. The deposit figures have been
adjusted to eliminate duplications resulting from interbank transac
tions and do not correspond precisely to the deposits against which
reserve requirements are computed. The bar for reserves in June
1940 has been divided into two sections— the lower representing the
amount of reserves that member banks were required to hold against
their deposits, and the upper representing excess reserves available
for further credit expansion. There has been superimposed on the bar
showing deposits for June 1940 an area indicating the additional ex
pansion that could take place on the basis of the existing volume of
excess reserves, of their current distribution among different classes
of banks, and of present reserve requirements.
It will be noted that in 1940 member banks had nearly 14 billion
dollars of reserve balances, compared with 2.4 billions in 1929.
Practically all of the balances held in 1929 were required against the
30 billion dollars of adjusted deposits at these banks, and member
banks had practically no excess reserves available for further credit
expansion. In fact at that time they were borrowing about a billion
dollars from the Federal Reserve Banks in order to maintain their
reserves at the required level. In June 1940, on the other hand, only
half of the total of member bank reserve balances were required
against 40 billions of adjusted deposits, leaving excess reserves that
could provide the basis for a doubling of the already large volume of
member bank deposits. This computation does not include the in
crease in deposits that could occur at nonmember banks indirectly
on the basis of these same reserves.
It is clear that at present reserve requirements do not act as an
effective limitation on the expansion of bank credit and deposits.
The real limitation is the availability of loans and investments satis
factory to banks. When, however, conditions again become favorable
for an increase in banks loans and investments, there will be no
effective means, under existing law, of exerting through reserves a
restraining influence over a possible injurious credit expansion.

343

MONETARY CONTROLS

It may be seen that, although bank reserve requirements provide a
way of exercising an influence over expansion of bank credit, fixed
M e m b e r B a n k R e s e r v e s a n d D e p o s it s ,
BILLIONS OF DOLLARS

RESERVES

and

1940

BILLIONS OF DOLLARS

DEPOSITS

JUNE 30, 1929
*

1929

RESERVES

DEPOSITS

JUNE 30, 1940

NO EXCESS RESE R VES AND
NO PO TENTIAL EXPANSION OF DEPOS5TS

and unchanging reserve requirements may not always be in accord
ance with economic needs. It is necessary to be able to vary the

344

BANKING STUDIES

supply of reserves that banks have in excess of requirements. Fed
eral Reserve authorities, therefore, have the power to increase or
decrease bank reserves by lending or by open-market operations
when necessary in the public interest. They also have power to
change the reserve requirement percentages within prescribed limi
tations and thus to increase or decrease the portion of existing re
serves that is available for credit expansion by banks. This power,
under existing provisions of law, has been used almost to its fullest
by increases in reserve requirements made by the Board of Gover
nors in 1936 and 1937 and, therefore, is not sufficient to absorb the
existing large volume of excess reserves.
Nonmember Bank Reserves. Banks not members of the Federal Re
serve System are subject to a variety of reserve requirements im
posed by the laws of the different States.8 In most States these
requirements are somewhat smaller than the present increased re
quirements for member banks, especially when it is considered that
nonmember bank required reserves may include cash in vault and
balances with correspondents, which are held to some extent by all
banks regardless of reserve requirements.
Although there is no single central authority exercising control
over the reserve requirements of nonmember banks, the supply of
reserve funds available to these banks is derived to a large extent
from the same sources as member bank reserves— that is gold,
Treasury currency, and (indirectly) Reserve Bank credit. In addi
tion nonmember banks may obtain reserves by borrowing from other
banks, and the only control the Reserve authorities have over this
practice is through restrictions on the lending power of member
banks. Reserves of nonmember banks may also be increased by
transfers of deposits from member banks. On the basis of such funds,
nonmember banks may expand their loans and investments, thus
contributing to the pyramiding of deposits for the banking system
as a whole.
Discount Rates. Traditionally the discount rate of the central
bank has been the most familiar instrument of monetary regulation.
8 A summary of State laws relating to bank reserves was published in the Federal
Reserve Bulletin for March 1937.

MONETARY CONTROLS

345

This is the rate of interest charged by the central bank for borrowed
reserves. Any member bank may borrow from its Federal Reserve
Bank by rediscounting the notes of customers or by discounting the
Bank’s own note secured by Government securities or by other paper
as collateral. The latter method is simpler and is more commonly
used. The loan is paid off as soon as the bank has adequate reserve
funds or is renewed if necessary.
When member banks are borrowing heavily, an increase in dis
count rates places a heavier penalty on such borrowing while a de
crease in rates lowers the cost. It is difficult to determine the effec
tiveness of discount rate changes, because of the fact that borrowing
in itself is disliked by member banks and they are inclined to take
measures to get out of debt regardless of the discount rate charged.
In recent years during which member banks have had excess re
serves and, in general, have not needed to borrow, the Reserve Bank
discount rates have been largely inoperative.
Restrictions on Bank Loans and Investments. The amount of
possible expansion in bank deposits is limited by the availability of
acceptable loans and investments for banks, as well as by reserves.
In a sense loans and investments, together with reserve balances and
other assets, may be considered as collateral against deposits. Since
under our present monetary system bank deposits comprise the most
important part of the money supply, and bank deposits are ex
panded and contracted as a result of changes in bank loans and
investments, restrictions on the types of loans and investments that
banks can make may at times serve to prevent excessive monetary
expansion.
Regulation of bank assets can affect the quality as well as the
quantity of bank credit. In other words the regulations might be
designed to safeguard the soundness of individual banks and to
insure their ability to meet demands upon them, and also they might
be directed toward preventing banks in large numbers from making
loans and investments of a speculative character in excessive
amounts. Thus such regulation might be employed to safeguard the
economy as a whole against effects of injurious credit developments.
Requirements of the Federal Reserve Act as to paper that may be
used by member banks for borrowing at the Reserve Banks represent

346

BANKING STUDIES

an indirect attempt to impose standards on individual member
banks as to loans and investments. Some influence over bank lending
and investment practices has also been exerted through standards
imposed by bank supervisory authorities. This form of regulation
operates not only through direct prohibitions but also indirectly by
influencing the lending and investment policies of the bankers them
selves. Another specific device for regulating bank loans is margin
requirements; these are now imposed by the Board of Governors on
certain classes of security loans, under authority of the Securities
Exchange Act of 1934. By raising margin requirements the amount
of borrowing to finance stock-market speculation may be restricted.
Eligibility requirements as to paper that may be used by member
banks for borrowing at the Reserve Banks have not been particularly
restrictive in times of favorable business conditions when expansion
was occurring. At such times banks have had an adequate supply of
eligible paper to satisfy any borrowing they might need to do and
have felt free to place other funds in loans and investments not
eligible as a basis for borrowing at the Reserve Banks. In June 1929,
for example, when member banks were borrowing substantial
amounts, they had loans eligible for rediscount at Federal Reserve
Banks amounting to about four times their borrowings. Eligible
paper comprised about one-eighth of total loans and investments,
and United States Government obligations, on which banks could
also borrow, comprised another eighth. Thus eligibility requirements
neither prevented a large volume of borrowing nor restricted bank
credit to eligible paper.
When banking difficulties developed during the depression, how
ever, and banks needed to borrow substantial amounts to meet
deposit withdrawals, a number of member banks exhausted their
supply of assets which met the requirements as to eligibility and
were unable to borrow from the Reserve Banks. Another agency—
the Reconstruction Finance Corporation—was set up in part for the
purpose of making loans to banks. Not only nonmember banks,
which had no access to the Federal Reserve Banks, but also member
banks borrowed from this Corporation.
It was because of experience in these periods that the Banking Act
of 1935 authorized the Reserve Banks to lend to member banks on

MONETARY CONTROLS

347

any sound assets. Under this amendment the Board in 1937 issued a
revision of its Regulation A, which provided for broader rules as to
loans by the Reserve Banks. At the same time the Board stated that
the guiding principle underlying the discount policy of Federal Re
serve Banks should be the advancement of the public interest. In
times of business recession a liberal extension of credit to member
banks may be desirable, but when credit expansion is proceeding at a
rate that calls for restraint, the Reserve Banks should be less liberal.
Lending by the Federal Reserve Banks should not be automatic but
should be used as an instrumentality of the System’s general credit
policy. In deciding upon their discount policy the Reserve Banks are
expected to take into consideration the general business situation as
well as the general conduct and management of the applying bank.
Fixed and automatic rules regarding types of bank loans and in
vestments can be unnecessarily restrictive. It is important that high
standards of soundness of credit be maintained, but rigid rules,
imposed either by supervisory authorities or by bank managers
themselves, as to form of paper that banks may hold do not neces
sarily insure soundness and may at times be unduly restrictive.
These rules, for example, may not prevent excessive expansion of
particular types of loans, which are individually sound but which if
made by many banks at the same time might lead to broad economic
difficulties—examples are found in the expansion of brokers’ loans in
the late 1920’s and in that of commercial loans in 1919. Or these rules
may prohibit loans or investments of types that have furnished
difficulties in the past because of over-extension or broad economic
collapse, but which under other conditions and in moderate amounts
are perfectly sound. Current credit standards too often represent
hindsight without consideration of changed or changing situations.
In 1938 the Federal bank supervisory authorities adopted a revised
and uniform examination procedure and new rules as to loans and
investments of banks, which were designed, without lowering stand
ards of quality, to modify rules and policies that had previously
unnecessarily restricted banks in making sound loans and in
vestments.9
9 See also “ Policy and Procedure in Bank Examination.”

348

BANKING STUDIES

DISCRETION ARY POLICIES OF FEDERAL
RESERVE AUTHORITIES

In view of the difficulties that have arisen from the imposition of
fixed and automatic restrictions on the issuance of money and exten
sion of credit, control of these matters has come to be vested with
responsible governmental authorities that are permitted to exercise
a degree of discretion in the use of their powers. In order to provide
for changes constantly taking place in an evolving economy, it has
been recognized that monetary policies should be flexible and that
bank supervisory authorities should be permitted a considerable
amount of discretion in the exercise of their functions.
The Federal Reserve System was established twenty-seven years
ago for the purpose of furnishing a greater degree of flexibility in our
monetary system. The form of banking structure existing at that
time was not changed; the new System was imposed on that struc
ture. The Federal Reserve authorities were given new powers of
regulation over monetary developments in this country and certain
automatic safeguards were imposed on the use of these powers. The
Federal Reserve Act, through implication as well as through specific
language, also clothed the Reserve authorities with broad discre
tionary powers that could be exercised in regulating the supply,
availability, and cost of money. These discretionary powers, as im
plemented in policies adopted by the Federal Reserve authorities,
have had to be used more often than the automatic restrictions
imposed in the act. The latter, as shown, have often been completely
ineffective in time of need and have sometimes been unduly re
strictive when there was no reason for limiting credit expansion.
In the quarter century of their history, Federal Reserve authori
ties have had to adjust their policies to deal with many diverse
problems. These have included the financing of the World War and
the resulting inflation and post-war recession; the stock-market
boom of the late twenties; the prolonged business depression of the
early thirties, with its gold outflow, emergency currency demands,
insolvent banks, and banking holiday; and then the gold inflow of
recent years with excess reserves, idle funds, and increased bank
holdings of long-term bonds bought at rising prices. At the present
time war once more is creating new problems. Each epoch in the

MONETARY CONTROLS

349

System’s history has called for a new focus of policy. Responsibility
for the exercise of flexible policies vested by Congress in the Federal
Reserve authorities has made possible some adjustment of policies
and instruments to these changed situations.
SUM M ARY

Various restrictions have been imposed by law and custom upon
the exercise of monetary functions. Experience has indicated that
monetary regulation must be flexible to permit adjustment to con
stantly changing economic conditions. Whereas many rules are fixed
by statute, growing use has been made of discretionary powers
exercised by responsible public authorities.
Mechanisms of regulation need to be related and adjusted to the
various ways in which money affects the economy. Regulation has
been directed to a large extent toward controlling the volume of
money, but the economic effectiveness of money depends more
largely on the use that is made of it. Use of money is affected not
only by supply of money but also by its availability and cost and
by many factors of a nonmonetary nature. Changes in the volume
of production and income and in the level of prices are determined
by the spending and investment policies of businessmen and the
general public. These policies are influenced by both monetary and
nonmonetary factors. At times monetary factors have been more
important, and policies of banking and credit authorities have been
more effective than at other times. It is necessary at all times that
monetary policies and other governmental and private policies and
actions be coordinated, because they all affect the flow and distribu
tion of national income.
In recent years the money supply has been the largest on record,
with ample funds available to satisfactory borrowers, and interest
rates have been at the lowest levels in history. Commodity prices,
however, and the flow of goods and services through the channels of
production and distribution remained below previous levels.
Under these conditions factors of a nonmonetary nature are more
important determinants of the level of national income than are
monetary factors. It should not be forgotten, however, that in some
circumstances monetary action can be effective and will be needed to

350

BANKING STUDIES

exercise proper controls. Constant study of the factors involved, the
maintenance of effective powers of control, and cooperation between
authorities responsible for monetary and for nonmonetary policies
are necessary prerequisites for achieving a stable and rising level of
economic well-being.

WORK OF THE BOARD OF GOVERNORS

Page
E s s e n t i a l N a t u r e o f t h e B o a r d .................................. 353
O r g a n i z a t i o n o f t h e B o a r d a n d I t s S t a f f ............. 353
P a r t i c i p a t i o n i n B a n k O p e r a t i o n s .............................. 355
E x a m i n a t i o n o f B a n k s ........................................................

356

O t h e r W o r k R e l a t i n g t o I n d iv id u a l I n s t it u
t i o n s ............................................................................................

357

I s s u a n c e a n d M a i n t e n a n c e o f R e g u l a t i o n s .........

360

D e v e l o p in g D a t a f o r U se in P o l ic y M a k in g . . .

363

R e s o l v in g Q u e s t io n s o f G e n e r a l C r e d i t P o l i c y .

367

M a i n t a i n i n g L i a i s o n w i t h R e l a t e d A g e n c ie s . . .

368

E d u c a t i o n a l a n d M is c e l l a n e o u s A c t i v i t i e s ____ 369
D i v e r s i t y o f t h e B o a r d ’ s W o r k ...................................

Carl E. Parry
Chief

Division of Security Loans

370

W O R K OF T H E B O A R D OF G O VERN O RS
The Board of Governors of the Federal Reserve System is both a
distinct part of the Federal Reserve System and a distinct part of
the Federal Government, and it is in this twofold capacity that the
Board carries on its work.
Unlike the commercial banks and the Reserve Banks whose
operations have been described in other papers in this volume, the
Board is not a corporation and does no banking business; it has no
capital, accepts no deposits, makes no loans. Consisting of seven
members appointed by the President and confirmed by the Senate,
the Board is not an agency of the member banks or of the Reserve
Banks but an agency of the Federal Government. Being an inde
pendent establishment, however, the Board is not a part of the
Treasury or any other Government department. It reports directly
to Congress. The funds by which it is supported are derived not
from Federal appropriations but from assessments levied on the
Reserve Banks.
Comprehensively considered, the work of the Board includes not
only that of the Board acting as a whole but also that of its indi
vidual members, its staff, and its official statutory representative at
each of the twelve regional Reserve Banks (the Chairman and Fed
eral Reserve Agent). It does not include the work done by the
Federal Reserve Banks or, except to the extent that members of the
Board and its staff participate, by the Federal Open Market
Committee.
The purpose of the following statement is to give, from the ad
ministrative point of view, a summary analysis of the principal
responsibilities of the Board and a brief description of the work that
is done by the Board’s organization to discharge these respon
sibilities.
ORGANIZATION OF THE BOARD AND ITS STAFF

Legislation enacted in 1935 provides that each member of the
Board shall hold office for a term of fourteen years. Until this leg

353

354

BANKING STUDIES

islation becomes fully effective, however, appointments for shorter
terms are to be so made by the President that not more than one will
expire in any two-year period. Two of the members of the Board are
designated by the President to serve, for terms of four years, as
Chairman and Vice Chairman. It is the statutory duty of the Chair
man, subject to the Board’s supervision, to be the Board’s active
executive officer. Every member of the Board is required by law to
devote his entire time to the work of the Board, and may not while
in office be an officer, director, or stockholder of any banking institu
tion. All the members of the Board, in their individual capacities, are
members of the Federal Open Market Committee, a statutory policy
making body (discussed elsewhere) which includes in addition five
representatives of the Federal Reserve Banks. By action of the Com
mittee, three of the members of the Board, including the Chairman,
are members of the standing subcommittee of the Federal Open
Market Committee that is known as its executive committee, and
the Chairman of the Board is Chairman of the Open Market Com
mittee and of its executive committee.
The regular staff of the Board includes altogether about 425 per
sons, most of whom are members of one or another of the seven
administrative divisions into which the staff is divided. These seven
administrative divisions are as follows: Office of the Secretary; Office
of General Counsel; Division of Research and Statistics; Division of
Examinations; Division of Bank Operations; Division of Security
Loans; and Office of Fiscal Agent.1 Several members of the staff of
the Board—including its Secretary, its General Counsel, and the
Director of its Division of Research and Statistics—are in addition,
by action of the Federal Open Market Committee, members of the
staff of the Committee.
The offices of the Board of Governors include, first, its principal
office, which is required by law to be in the District of Columbia and
is in fact in the Federal Reserve Building in Washington, and, sec
ond, its offices on the premises of the twelve Reserve Banks located
in important cities throughout the country. The Federal Reserve
1A condensed statement of the principal functions of each of these divisions is
given in the appendix, pp. 467-69.

WORK OF THE BOARD OF GOVERNORS

355

Building is the place where meetings of the Board are held, where the
Board and its staff are located, and where the activities of the
Board’s organization are centered. So are meetings of the Federal
Open Market Committee, which are required by law to be held in
Washington at least four times each year. The Board’s local offices,
maintained on the premises of each Federal Reserve Bank, are pri
marily for the use of the Chairman and Federal Reserve Agent,
whose position is statutory, in his capacity as official representative
of the Board.
The work of the Board’s organization, as thus constituted, is to
be summarily described in what follows. The order of arrangement is
determined largely by the convenience of describing first the more
concrete activities. Another consideration has been that of grouping
together in one place certain activities that have to do with indi
vidual banks and with particular situations, which consist chiefly of
“ case work,” and grouping together in another place such other and
different activities as promulgating rules and regulations and de
termining questions of general credit policy.
p a r t ic ip a t io n in b a n k o peratio n s

The Board’s organization, though not itself engaged in the bank
ing business, does take some part in the bank operations which are
going on continuously at all the Federal Reserve Banks, such as the
provision of currency for circulation and the collection of checks.
Specifically, if the whole field of Reserve Bank operations be con
sidered, the participation of the Board’s organization includes: (1)
preparing the schedules for printing Federal Reserve notes at the
Government’s Bureau of Engraving and Printing in Washington,
together with arranging for and supervising the distribution from
Washington of Treasury currency (United States notes and silver
certificates) to the twelve Reserve Banks and their branches and the
distribution of Federal Reserve notes to the twelve Federal Reserve
Agents—who keep on hand locally stocks of the necessary denomina
tions of such notes and issue them locally, according to prescribed
procedure, to the Federal Reserve Banks; (2) sharing, through the
Federal Reserve Agents, with each of the twelve Federal Reserve
Banks, custody of the collateral which the Reserve Banks are re

356

BANKING STUDIES

quired by law to deposit with the Agents as a condition for the
Banks’ obtaining Federal Reserve notes; and (3) operating the Inter
district Settlement Fund, the mechanism designed and used—by
means of a telegraph system that connects the Board’s offices with the
Federal Reserve Banks and their twenty-four branches—for the
purpose of facilitating transfers of funds from one Federal Reserve
district to another and transfers of funds between the Reserve Banks
and the Treasury. This work includes the making of the various
debits and credits on the books of the Interdistrict Settlement Fund
to effect daily settlement among the Federal Reserve Banks and the
accounting relative to current settlements with the Treasury for re
demption of notes or transfers of balances. Items going through the
Fund commonly aggregate, for an average business day, more than
300 million dollars.
The three matters enumerated are the only ones that involve con
tinuous day-to-day participation in banking transactions by any
part of the Board’s organization in the actual operations of the Fed
eral Reserve Banks. The Board does, however, have certain contacts
with other Reserve Bank operations in the exercise of its functions
with respect to regulation/examination, etc., which are discussed
elsewhere in this paper.
E X A M IN A TIO N OF BANKS

The work of the public authorities in the United States in super
vising banks, of which an important but nevertheless limited part
consists in the examination of banks from time to time, is at present
divided among several different agencies. The examination of the
twelve Federal Reserve Banks, however, together with their twentyfour branches and one agency, is exclusively in the hands of the
Board’s own organization. Under instructions of the Board, both
general and specific, a field force of about twenty-five spends its
entire time in the examination of the Reserve Banks.
The System’s work in examining member banks covers only, for
reasons explained in other papers in this volume, the State member
banks of the System, which now number about 1,200. It is under the
general supervision of the Board that this work is done by the Fed
eral Reserve Banks—commonly in cooperation with the State au

WORK OF THE BOARD OF GOVERNORS

357

thorities. The Board’s work includes: (1) the formulation and de
velopment, in collaboration with the examiners of the Reserve
Banks, of principles relative to examination policies and procedures
that will harmonize with the Board’s general policies; (2) the study,
either as part of the regular examination of the Reserve Banks or
otherwise, of the personnel, procedures, and policies of their exami
nation departments; and (3) the review of examination reports
furnished to the Board by the Federal Reserve Banks and the followup, through the Reserve Banks, of any reports that indicate the
need for corrective action.
The Board also has occasion, in a special connection to be ex
plained presently, to review and follow up examination reports
relating to individual member and nonmember banks that belong
to “ affiliate groups” —reports that are made by the examiners of the
several Federal Reserve Banks, by the Comptroller of the Currency,
by the Federal Deposit Insurance Corporation, or by State au
thorities.
OTHER W ORK RELATIN G TO INDIVIDU AL INSTITUTIONS

Examination work represents an important part, but only a part,
of the work done by the Board’s organization with respect to par
ticular institutions. A considerable amount of other work— called in
a general way “ supervisory” —involves consideration of the condi
tion or other characteristics of individual banks or of the circum
stances affecting particular situations. Part of this relates to Federal
Reserve Banks, part to national or State member banks, part to
nonmember banks, and part to bank holding companies or other
“ affiliates.”
Federal Reserve Banks. At appropriate intervals, the Board
has to appoint all three of the Class “ C” directors for each of the
twelve Reserve Banks, and certain directors of each of the twentyfour branches. For this purpose the Board must collect and organize
a great deal of information concerning possible appointees. The
Board has to classify the member banks in each district into the
three groups— “ large,” “ medium,” and “ small” —which elect direc
tors of Reserve Banks. The Board designates the Chairman and
Deputy Chairman of each Reserve Bank. It also passes upon the

358

BANKING STUDIES

appointment and the salary of the President and first Vice President
of each Reserve Bank. The compensation of all directors, officers,
and employees of the Reserve Banks is subject to approval of the
Board. The Board has authority, which it exercises upon occasion, to
readjust the boundaries of Federal Reserve districts, and to permit
or require a Reserve Bank to establish or discontinue a branch office
or agency. The Board exercises special supervision over all relation
ships and transactions entered into by any Federal Reserve Bank
with any foreign bank or banker.
The Board obtains from each Reserve Bank, on forms prescribed
by the Board, periodic reports with respect to the Bank’s expenses.
These reports show separately the expense for each of a number of
designated functions and for each operating unit. The Board makes
comparisons among the itemized expenses as between one Reserve
Bank and another, from time to time conducts field surveys that
bear on the subject, and where possible makes recommendations for
effecting economies or increasing efficiency. The writing off of doubt
ful or worthless assets by the Reserve Banks is subject to the ap
proval of the Board. The Board reviews the semiannual recom
mendations of the Reserve Banks for dividend declarations and their
annual recommendations regarding charge-offs, the setting up of
special depreciation allowances, reserves for estimated losses, etc.
Certain daily reports are received from each Federal Reserve Bank
that show separately every discount operation (including industrial
advances and commitments) and every open-market operation.
Individual Member Banks. The work of the Board (other than
that of examination) with respect to individual member banks re
lates in part to national banks but in the main to State member
banks. The work with national banks arises largely from the fact
that national banks must apply to the Board for permission to exer
cise trust powers or to establish foreign branches. In passing on these
applications, the Board’s organization must analyze and review,
among other sources of information, examination reports made
available for the purpose by the Comptroller of the Currency. As to
State member banks, analysis of examination reports and other
sources of information must be made in connection with (1) applica
tions of State banks for membership in the Federal Reserve System,

WORK OF THE BOARD OF GOVERNORS

359

which necessitate review of the financial condition of the bank and
the character of its management; (2) consolidations and mergers
involving State member banks; and (3) applications for the estab
lishment of out-of-town branches by State member banks. State
member banks submit to the Board three or four times a year reports
of condition and twice a year reports of earnings and expenses, and
from these reports general banking statistics are compiled.
Bank Holding Companies, etc. The work of the Board with
respect to certain corporations that are “ holding company affiliates”
of one or more member banks also occasions study of individual
banks. Such holding companies, notwithstanding their ownership of
stock in a member bank, are not permitted by law to vote their
holdings for any purpose without a permit from the Board. The con
sideration of applications for voting permits, especially when the
number of banks in the “ affiliate group” is very large, has often
been a laborious matter. It involves in each instance analysis and
review of one or more examination reports of every bank in the
“ affiliate group,” regardless of whether or not the bank is a member
of the Federal Reserve System.2 This work serves a dual purpose: It
keeps the Board informed regarding the condition, management, and
operations of the holding companies and their affiliated institutions;
and it affords a check on whether the affiliated organizations are
complying with the statutory requirements and the agreements with
and regulations of the Board.
Some work of similar nature is done with reference to (1) the
establishment of foreign branches by national and State member
banks, and (2) call reports of condition submitted by the five foreign
banking corporations that come within the jurisdiction of the Board.
These are one corporation operating under the so-called Edge Act
and four corporations organized under State law and operating
under agreements with the Board made in accordance with Section
2 The examination reports—except those covering State member banks, which
regularly come to the Board from the Reserve Banks—are furnished to the Board for
the purpose (1) by the applying corporation so far as one class of banks is concerned
(State nonmember banks that <io not belong to the Federal Deposit Insurance Cor
poration), (2) by the Comptroller of the Currency (as to national banks), and (3)
by the Federal Deposit Insurance Corporation (as to insured nonmember State banks).

360

BANKING STUDIES

25 of the Federal Reserve Act. The Board examines the one foreign
banking corporation that has been organized under Section 25(a)
of the act.
Prior to 1935 the Board’s organization had to do a large amount
of work on applications from individuals for permission to serve as
directors, officers, or employees of two or more banks. Beginning in
1916, the Clayton Antitrust Act prohibited such interlocking rela
tionships in certain circumstances except by permission of the Board.
The prohibition was at first of limited application, but in 1933 it was
made applicable to all national banks and was also extended to apply
not only to interlocking relationships with other banks but also with
any corporation or partnership making loans on stock or bond col
lateral. In approving applications for permits, the Board had to
make certain findings—at first, that the banks involved were not “ in
substantial competition,” and after 1928 that the granting of the
permit would not be “ incompatible with the public interest.” The
investigation necessary for passing on a single application was often
burdensome, and the number of applications was large. During the
ten years ending with 1933, the average number of applications per
year was about 340, but during 1934 there were nearly 2,300. The
burden of individual applications was removed by the Banking Act
of 1935, when Congress prohibited such interlocking relationships
except in specified classes of cases and authorized the Board to make
additional exceptions by regulations of general applicability.
ISSUANCE AND M AINTEN AN CE OF REGULATIONS

It has long been the practice of Congress, in connection with regu
latory legislation that may itself specify certain requirements, to
assign to an administrative agency, upon conditions and under gen
eral rules laid down by statute, the formulation of supplementary
requirements. In accordance with this practice, the Board has been
authorized, or in some instances both authorized and required, to
adopt and promulgate rules and regulations relating to a variety of
subjects. In consequence the preparation, issue, interpretation, and
revision of regulations has always been an important and far-reaching part of the Board’s work. The present section of this paper will
indicate the variety and scope of the regulations that have been

WORK OF THE BOARD OF GOVERNORS

361

issued by the Board, give some summary classifications, outline the
steps that are commonly taken by the Board in the process of issuing
or revising a regulation, and indicate the method by which a con
tinuing watch is kept on the workings of each regulation.
The Board’s power to issue rules and regulations rests in part
upon a general provision of the Federal Reserve Act which directs
the Board to “ perform the duties, functions or services specified in
this act and make all rules and regulations necessary to enable said
Board effectively to perform the same.” It rests also upon specific
provisions of the Federal Reserve Act and other legislation—alto
gether some forty-seven different provisions of law. Pursuant to such
statutory authority, and acting always with advice of counsel, the
Board has issued twenty-one regulations that are now in effect.
These are designated by successive letters of the alphabet from
Regulation A (first issued in 1914) to Regulation U (first issued in
1936). They are enumerated by title in the appendix, with indication
in each instance as to when the regulation was first issued and, in
case it has been amended, when it was last amended.3
For the purpose of obtaining a general view, the Board’s regula
tions may be summarily classified in various ways. One of these dis
tinguishes six classes, relating respectively to—
(1) The Federal Reserve Banks (Regulations A, B, E, G, J, N, S);
(2) All member banks (Regulations C, D, I, L, O, Q, R ), or some one class
of member banks such as national (Regulation F) or State (Regulation H );
(3) All banks, both member and nonmember (Regulation U);
(4) Certain corporations designated as “ holding company affiliates” (Regu
lation P );
(5) All members of any “ national securities exchange” and all brokers or
dealers who “ transact a business in securities through the medium of any such
member” (Regulation T ); and
(6) Corporations desiring to establish banking offices abroad (Regulation K).

Another significant summary classification, excluding in this in
stance the seven regulations that govern the Federal Reserve Banks
themselves, is based on subject matter:
(1) Reserve requirements (Regulation D );
(2) Maximum interest rates payable on time deposits (Regulation Q);
8 See pp. 470-71.

362

BANKING STUDIES

(3)
(4)
(5)
(6)
(7)

Margin requirements (Regulations T, U);
Powers of member banks (Regulations C, F, 0 ) ;
Membership of State institutions in the System (Regulation H );
Foreign banking business (Regulations K, M ); and
Interlocking directorates, affiliations, etc. (Regulations L, P, R ).

The preparation of a regulation for issuance involves, as a general
rule, detailed research and preparation by the Board and its staff,
supplemented by criticisms and suggestions by the Reserve Banks
and by the member banks or other persons to whom the regulation
is to relate.
In the preparation of Regulation U, for example, which relates to
loans by any member or nonmember bank for the purpose of pur
chasing or carrying listed stocks, the following stages were observed:
(1) The staff, by direction of the Board, did a considerable amount of pre
liminary work on the legal and other problems involved in Regulation U, based
in part on the Board’s experience with Regulation T (which governs loans by
brokers), and during the course of this preliminary work informal discussions
were held with members of the staffs of certain Federal Reserve Banks and
with operating officers of member banks;
(2) A series of tentative drafts of the regulation were prepared and dis
cussed until one was obtained that was considered good enough to submit
to outsiders;
(3) This tentative draft was then sent to all of the Federal Reserve Banks,
which were requested both to forward their own comments and criticisms and
to submit copies of the draft, for comment and suggestion, to member and non
member banks, representatives of securities exchanges, and other inter
ested persons— and at the same time copies of the draft were forwarded by
the Board to the Securities and Exchange Commission, the Federal Deposit
Insurance Corporation, the Comptroller of the Currency, the Secretary of the
Treasury, and the President of the American Bankers Association;
(4) Suggestions received from all of these sources, including special com
mittees appointed by clearing-house associations in several different parts of
the country and a special committee of the American Bankers Association,
were assembled, analyzed, and digested;
(5) Members of the Board and members of the Board’s staff met with
the special committee of the A.B.A. to discuss the problems involved in the
proposed regulation— and other discussions were held with individual bankers
and groups of bankers with reference to particular problems, while close contact
was maintained with the Securities and Exchange Commission and other in
terested governmental agencies;

WORK OF THE BOARD OF GOVERNORS

36 3

(6) A revised draft was then prepared in the light of the various suggestions
and discussions;
(7) Members of the committee of the American Bankers Association dis
cussed this draft at a second meeting with members of the Board and the staff;
(8) The Board, after careful consideration of the revised draft and the
comments which had been received, and after making certain modifications,
adopted the regulation to become effective about thirty days after adoption.

The object of such elaborate procedure is not only to prevent the
hasty promulgation of regulations but also to enable the Board to
assure itself that its regulations, in addition to being effective, will be
reasonable and workable from the point of view of the persons who
are to be governed by them.
It does not often happen, nevertheless, that a regulation can re
main in force indefinitely without amendment or revision. Changes
become necessary or desirable from time to time for a variety of
reasons—in order to incorporate the results of experience, to adjust
the regulation to changed conditions, or to conform (as is frequently
the case) to changes in the underlying statutes. The Board’s organi
zation must therefore keep a close watch on every regulation. It
must weigh and consider queries, protests, and information obtained
by visitation, correspondence, or interview. This work is supple
mented by research carried forward by members of the Board or of
the staff concerning matters over which they have special respon
sibility. When amendment or revision is undertaken, the procedure
is roughly similar to that followed in issuing a regulation; as a rule,
however, accumulated experience lessens the necessity for extensive
consultation with outsiders.
DEVELOPING DA TA FOR USE IN POLICY M AKIN G

Of all the responsibilities of the Board of Governors of the Federal
Reserve System, the most important have to do with resolving ques
tions of general credit policy, such as raising or lowering the discount
rates of the Reserve Banks, increasing or decreasing the reserve re
quirements to which the member banks are subject, etc. All such
questions arise out of, and their determination may affect the course
of, developments in the general credit situation and the general busi
ness situation. These developments must consequently be continu-

364

BANKING STUDIES

ously followed by the Board’s organization for the purpose of laying a
factual basis for policy making. Much of the work of the Board’s"
organization is accordingly devoted to the assembling and organiz
ing of economic data, to the tracing of their relations to policy
making, and to the development of methods of presenting them in
summary form, graphically or otherwise, to the Board and other
policy making or advisory bodies of the System, to Congress, and to
the public.
This part of the Board’s work comprises, in the main, (1) the
operation, development, and refinement of reporting services rela
tive to the current course of Reserve Bank credit, member bank
credit, money rates, and related factors, and the organization of data
relative to capital issues, corporate profits, Treasury receipts and ex
penditures, gold movements, and foreign exchange rates; (2) the
creation and maintenance, on a very extensive scale, of index num
bers of production, employment, and the like; and (3) the persistent
search, largely through cumulative consideration of recurring prob
lems, for appropriate methods of analyzing the credit and business
situation—methods that will be most illuminating to the Board in
the light of the particular circumstances, frequently unprecedented
in the history of central banking, in which the Federal Reserve
System is called upon to take action in the field of general credit
policy.
A concrete indication, in summary form, of some of the principal
subject matters to which organized investigation is regularly ad
dressed, as well as a fair illustration of certain of the methods of sum
marizing business data that are utilized, is afforded by the accom
panying set of charts, which gives in miniature a reproduction of
fifteen charts. These have been selected from a much larger number
of the Board’s standard charts that have been brought together, in
slightly different form, in a chart book which is maintained for the
use of Federal Reserve officials and has been made available in recent
years to the general public. In the form of wall charts, the more
important of them, together with many others on other subjects,
have a permanent place on the walls of the rooms in which the
Board holds its meetings or in other places in the Board’s general
offices.

WORK OF THE BOARD OF GOVERNORS

365

S ta n d a rd F e d e r a l R e s e r v e C h a r ts

15 Selected Charts
MEMBER BANK RESERVES

MEMBER BANK RESERVES AND RELATED ITEMS

■fs

EXCESS RESERVES OF MEMBER BANKS

“ ......
F-sss?

Cjs?

I'h *

tar-

ALL MEMBER BANKS
___ m < "T W }
-----------

s a » » 4'

MEMBER BANKS IN 101 LEADING CITIES

MONEY RATES IN NEW YORK CITY

d ff

~“F—
.
to

INOUSTRIAL PRODUCTION

- J ^v
a tcf -J= t

P^ur--L

MANUFACTURING PRODUCTION

—

Ji
y u 'p v

H :

—7 2

^-A

■J-

DEPARTMENT STORE SALES AND STOCKS

FREIGHT-CAR LOADINGS

CONSTRUCTION CONTRACTS AWARDED

—

\At
kyv

,00^H

A«

—

J v

,00

NATIONAL INCOME PAYMENTS

WHOLESALE PRICES

F7
N
/V n
«J9

no*

1937

....“ roc

r ^

\
00c :

SSa

n»

-.r

- UO

i*u

ae»

366

BANKING STUDIES

The work that underlies the Board’s regular reporting service, in
addition to the compilation from day to day or month to month of
the necessary current statistics, may be illustrated by two historical
examples, each of which relates to series of figures that appear on one
of the miniature charts shown on the preceding page. The chart
entitled “ Member Bank Reserves and Related Items,” which shows
at a glance how an increase or decrease in these reserves during any
given period is to be accounted for, has now been available in sub
stantially its present form for about thirteen years, but it took a
considerable amount of work during several of the preceding years to
bring the matter to that stage. It was necessary to develop the analy
sis on which the chart is based, to study out suitable methods of
deriving from the raw data the exact figures necessary to perfect the
analysis, to arrange for the prompt and regular receipt of the current
figures from the Treasury and the Reserve Banks, and to find suit
able ways of bringing home the significance of the analysis to the
public.4 Underlying the chart entitled “ Industrial Production,”
which shows—by months— the Board’s general index of industrial
production, is research work that goes back as far as 1920. At that
time the only available index of industrial production was on an
annual basis, not of much value for policy making, and the develop
ment of monthly series was necessary, with suitable adjustment for
seasonal variations. Since the index was first published in 1922,
several thoroughgoing revisions have become necessary because of
changes in industry or other pertinent developments, and all of these
revisions have been described in detail in the Federal Reserve
Bulletin.6
The two instances cited will serve to illustrate the fact that in
order to have the information needed for policy formulation the
Board finds it continually necessary (1) to develop statistics suited
to its special purposes, (2) to keep these statistics in technically
sound and significant condition by appropriate adjustment for
changes in the national economy and for improvements in available
scientific methods, and (3) to analyze the meaning and significance
4 Important stages in this prolonged development are listed in the appendix, pp.
472-73.
5 These revisions are summarized in the appendix, pp. 474-76.

WORK OF THE BOARD OF GOVERNORS

367

of the statistics, both for the short term and for the long term, from
the standpoint of Federal Reserve policies and related economic
developments.
It should be added that a substantial part of the work of the Board
in research includes a continuing study of international financial con
ditions, including gold movements to this country and the reasons
underlying them, the condition of foreign central banks, etc. De
signed chiefly to keep the Board informed on these matters because
of their bearing on policy questions, this work also relates to the
Board’s responsibility under recent legislation (Banking Act of 1933)
to exercise special supervision over the relations of the Reserve
Banks with foreign banks and bankers. Many of the more significant
statistics are published currently in the Federal Reserve Bulletin.
RESOLVING QUESTIONS OF GENERAL CREDIT POLICY

Resolving questions of general credit policy, although it has called
into being the facilities just described and constitutes the Board’s
most important function, is not an activity that can be well described
in terms of the amount of work involved. The questions themselves
are discussed at length elsewhere.6It should be noted, however, that
since these questions arise out of developments in the general credit
and business situation, the Board must keep itself continually in
formed of these developments and ready at all times to consider
whether the situation calls for any action in the field of credit policy.
Experience has shown that in this field the proper timing of action
is of the utmost importance. Whether the situation calls for any
action by the System, or is likely to call for any in the near future,
must consequently be before the Board all the time, even though
long intervals may take place between one policy action and the
next or even between one specific proposal for action and the next.
In these circumstances the consideration and discussion that
precede the making of such a proposal merge into the consideration
and discussion that follow a proposal and precede Board action.
The information or advice that may, in that connection, be sought
from the staff (or from representatives of the Reserve Banks or
other persons) is usually analogous to that which has been forth
6 Especially in the last two papers in this volume.

368

BANKING STUDIES

coming all along. In the end, any decision arrived at has ordinarily
involved group consideration and discussion that have absorbed a
great deal of time and effort over an extended period.
M AINTAINING LIAISON W IT H RELATED AGENCIES

No small part of the time of members of the Board and its staff is
regularly given over to conferences with representatives of related
agencies and to maintaining the liaison that is essential to effective
cooperation. There is preparation for and attendance at meetings of
the Federal Open Market Committee and of its executive com
mittee, to which reference has already been made, and attendance at
conferences held from time to time by members of the Committee
with representatives of the Treasury, in connection with Treasury
financing and other matters. The Board meets at intervals with the
Conference of Chairmen of the Federal Reserve Banks and the
Conference of Presidents of the Reserve Banks, and quarterly with
the Federal Advisory Council. The Chairman of the Board, other
members of the Board, and members of the staff are called upon from
time to time to testify before committees of Congress in connection
with pending legislation. The Chairman or Vice Chairman, other
members of the Board, and members of the staff are frequently in
consultation with various Government departments, sometimes in
connection with the work of some temporary interdepartmental com
mittee. Members of the Board, as well as members of the staff, have
frequent occasion to confer or consult with members of Congress
desiring information on the general credit situation, questions of
banking, amendments of Federal statutes, new legislation, and other
matters concerning which the Board has responsibilities.
Members of the Board and its staff also confer and consult, more
or less frequently, with the Comptroller’s Office and the Office of the
Federal Deposit Insurance Corporation, with representatives of
banking associations and less formal groups, and with individual
bankers and other persons. Members of the staff also participate
informally in periodic conferences on the business outlook held by
the Department of Agriculture, and from time to time consult
specialists in that department on agricultural conditions. There are
also continuing relations with the Department of Commerce (par
ticularly the Bureau of Foreign and Domestic Commerce and the

WORK OF THE BOARD OF GOVERNORS

36 9

Bureau of the Census), the Department of Labor (particularly the
Bureau of Labor Statistics), and other agencies of the Government
concerned with economic matters. There are frequent or occasional
conferences with representatives of the Department of State, the
Office of the Attorney General, the Reconstruction Finance Cor
poration, or the Securities and Exchange Commission.
All these relations, as well as others which could be mentioned,
are in addition to the regular and continuous cooperation of the
Board’s organization with the twelve Federal Reserve Banks—
which itself involves, among other things, System conferences from
time to time between specialists from the Board and from all the
Reserve Banks, such as operating officers, lawyers, bank examiners,
auditors, statisticians, and the like.
EDUCATIONAL AND MISCELLANEOUS ACTIVITIES

Much of the work done by the Board for the purpose of informing
and educating itself, in line of duty, is extended in one way or an
other in the direction of informing and educating the public—
through personal discussion with visitors by members of the Board
or its staff, extensive educational correspondence, and publication
in the Federal Reserve Bulletin of the results of special studies, both
economic and legal. One of the most important media used by the
Board is the leading article, called “ Review of the Month,” which
appears in every issue of the Federal Reserve Bulletin. This article is
frequently devoted to analysis of the current credit situation, of legis
lation recently enacted, or other current developments. In addition,
the Board has recently brought out for use by the general public a
booklet, “ The Federal Reserve System—Its Purposes and Functions”
There are also many periodic releases to the press—usually weekly
or monthly—giving current statistics relative to Reserve Bank
credit, member bank credit, or business conditions in the United
States. All of this material, together with much more, is published
currently in the Federal Reserve Bulletin. A partial list of the
Board’s publications is given at the end of this book.
The determination of legal questions relating to the activities
of the Board is a fundamental and pervasive part of the Board’s
work. Few matters come before the Board that do not involve
interpretation of the laws which set forth the Board’s statutory

370

BANKING STUDIES

responsibilities, define its powers, or regulate some phase of the
banking business. Such interpretation often involves the prepara
tion of legal opinions by the Office of General Counsel of the Board’s
staff. When bills for amending the banking laws are pending in
Congress, the appropriate committees of the Senate and House of
Representatives frequently request the Board to present pertinent
comments or suggestions.
Some miscellaneous matters which are included in the work of
the Board, but which have not been covered elsewhere in this paper,
are as follows: Supervision of the statistical work of the Federal
Reserve Banks and of the monthly reviews of business conditions
published by the Reserve Banks; compilation of statistics for
particular purposes, such as disclosing, at a time when a proposed
change in member bank reserve requirements is under consideration,
how every member bank would be affected by the change; main
tenance of a current card record for every member and nonmember
bank and branch in the United States, showing the present status
of the bank and any changes that have resulted from mergers, etc.,
over a period of years; preparation of comprehensive records
including the preparation for publication, as required by statute,
of a special record (with reasons) of actions taken on policy ques
tions by the Board and the Federal Open Market Committee.
DIVE RSITY OF THE BOARD’S W ORK

As indicated by the foregoing analysis, the work carried on by
the Board is of many kinds, which differ very widely from one
another both in purpose and in technique. They range between such
extremes as determining whether to raise or lower the reserve
requirements applicable to all the member banks and deciding (on
the basis of detailed information on the particular case) whether
to grant the application of a State member bank in a given State to
establish an out-of-town branch in a specified town or city. Such
great diversity gives rise to difficult problems of organization and
management. In attacking these problems the Board draws exten
sively, within the limitations set by law or dictated by sound
principle, upon the assistance of the Board’s permanent staff, the
Chairmen and Federal Reserve Agents, and the several Federal
Reserve Banks.

SY ST E M O R G A N IZ A T IO N : D E T E R M IN A T IO N
OF C R E D IT P O LIC Y

Page
I ntro duction ..........................................................................373
I nstruments

F ederal R eserve Credit P olicy 373

D istribution

A uthority

over

I nstruments

C redit P o l ic y ...................................................................
H istory

375

F ederal O pen M arket C ommittee . .. 379
P olicy I nstrum en ts ...................... 382

C oordination

R ole

F ederal R eserve B a n k

of the

N ew

Y o r k ....................................................................................... 384
P osition
N ote

of the

M em ber B a n k s .................................. 387

C on clu sio n ........................................................... 388

Carl E. Parry
Chief

Division of Security Loans

SYSTEM ORGANIZATION: DETERMINATION
OF C R E D IT P O LIC Y
From the policy making point of view, the principal statutory
bodies composing the Federal Reserve System, which are sometimes
referred to collectively as the Federal Reserve authorities, are the
Board of Governors, the Federal Open Market Committee, and
the several Federal Reserve Banks. A related advisory body is
the Federal Advisory Council.
The Board, consisting of seven members, is appointed by the
President and confirmed by the Senate. The Federal Open Market
Committee, consisting of twelve members, comprises the seven
members of the Board of Governors and five representatives of the
Federal Reserve Banks who are elected by the directorates of these
Banks. The principal authorities of the several Federal Reserve
Banks are their officers, especially their presidents, and their direc
torates which choose these officers. The responsibility for the prin
cipal policy decisions of the System is shared, in ways to be de
scribed later in detail, between the Board, the Federal Open Market
Committee, and the directorates of the several Federal Reserve
Banks.
INSTRUMENTS OF FEDERAL RESERVE C REDIT POLICY

The System’s principal instruments of credit policy, enumerated
in the order in which they were first actually used, include (1)
discount rates, (2) open-market operations, (3) maximum interest
rates on time and savings deposits, (4) margin requirements, and
(5) reserve requirements. They are called instruments of credit
policy because they can be used to influence the general credit
situation, which means to influence, directly or indirectly, the supply
of bank credit, the cost of bank credit, or the demand for bank
credit. The ones that work primarily on the supply of bank credit
are reserve requirements and open-market operations, both of
which may be used to influence the reserve position of the member

373

374

BANKING STUDIES

banks, upon which the lending power of the member banks depends.
Control of discount rates and control of interest rates on time
deposits work primarily on the cost of credit, the first by affecting
the rates at which member banks may borrow at their Reserve
Banks and the second more indirectly by affecting the alternative
rate of return that depositors can get on their money if, instead of
investing it, they allow it to remain on deposit in banks. The only
instrument that works directly on the demand for bank credit is
the control of margin requirements on security loans, which may be
used to cut down in greater or less degree the borrowing power of
persons borrowing on securities for the purpose of purchasing or
carrying securities.
All of these instruments of credit policy have been employed
by the Federal Reserve authorities at one time or another and almost
all of them have been used not in one direction only but in both
directions.
D is c o u n t R a t e s . Discount rates are the rates at which the Reserve Banks
make loans to their member banks. First used as an instrument of credit policy
at least as long ago as 1919, they have varied between 7 per cent at several
of the Federal Reserve Banks in 1920 or 1921 and one per cent at the Federal
Reserve Bank of New York since the autumn of 1937 and at some of the other
Reserve Banks since the autumn of 1939.
O p e n - m a r k e t O p e r a t i o n s . An open-market operation has been technically
defined as consisting in the purchase or sale in the general or open market by a
Reserve Bank of such classes of investments as a Reserve Bank is authorized
by law to buy or sell. Open-market operations include the purchasing and selling
of United States Government securities by the Reserve Banks and the conse
quent placing of funds in the market and withdrawal of funds from the market.
Though engaged in as early as 1914, open-market operations were first used
as an instrument of credit policy in 1923, and since the middle of that year the
System’s portfolio of United States Government securities has been as low as
90 million dollars (autumn of 1923) and as high as 2.9 billions (autumn of 1939).
M a x i m u m I n t e r e s t R a t e s o n T i m e a n d S a v i n g s D e p o s i t s . These maxi
mum rates became subject to the control of the Board in 1933, were fixed at
the level of 3 per cent in the autumn of 1933, and were reduced to 2.5 per cent
early in 1935 (with further reductions on January 1, 1936, for certain classes of
time deposits payable in less than six months).
M a r g i n R e q u i r e m e n t s . Margin requirements became subject to the control
of the Board in 1934. They were fixed in October 1934 on a sliding scale that
varied for different securities from 25 to 45 (later 55) per cent but since the

DETERMINATION OF CREDIT POLICY

375

spring of 1936 they have been expressed in terms of a single flat percentage
which has been adjusted by action of the Board between levels as high as 55
per cent (from the spring of 1936 to the autumn of 1937) and as low as 40
per cent (since the autumn of 1937). The definition of margin requirements
may be indicated by an illustration: When a broker or a bank makes a loan to
a customer on the basis of a 40 per cent margin requirement, against securities
having a current market value of $100 and for the purpose of purchasing those
securities, the customer borrows $60 against those securities and provides the
other $40 of the purchase money in some other way.
R e s e r v e R e q u i r e m e n t s . Reserve requirements—which became subject to
change “ with the approval of the President” in 1933 and became subject to
the full control of the Board (within statutory limits) in 1935—were raised in
1936 and again in the spring of 1937 and then lowered in the spring of 1938
to the present level of 5 per cent on time deposits and, for the several classes
of banks, 12, 17£, and 22J per cent on net demand deposits.
DISTRIBUTION OF AUTHORITY OVER INSTRUMENTS
OF CREDIT POLICY

The distribution of authority over matters of credit policy
is illustrated by the chart on page 376. The figure at the extreme
left represents the Board of Governors of the Federal Reserve Sys
tem (consisting of seven members appointed by the President and
confirmed by the Senate) and the one at the extreme right represents
the member banks (about 6,400 altogether, located in the twelve
Federal Reserve districts). Another figure represents the Federal
Reserve Banks—twelve Banks operating twenty-four branches
(and one agency)—each having its own directorate and its own
officers. Between the Board on the one hand and the Federal Re
serve Banks on the other is the Federal Open Market Committee,
comprising the seven members of the Board and five representatives
of the Reserve Banks.
With respect to the member banks, the chart brings out, in
addition to the fact that the member banks contribute capital
to the Reserve Banks, the fact that the member banks in each dis
trict—as divided into three size groups: large, medium size, and
small—elect six of the directors of the Reserve Bank. Not more
than three of these may be and actually are bankers and three
must be businessmen. Besides these six directors elected by the
member banks, each of the Reserve Banks has three “ public”

O r g a n iz a t io n
board

F ederal R eserve

Sy s t e m

w it h

R eference

I n stru m en ts

FEDERAL RESERVE BANKS

EXERCISES GENERAL SUPERVISION

12 BANKS OPERATING 24 BRANCHES ANO I AGENCY)

GOVERNORS
AOVISES

SEVEN MEMBERS

FEDERAL
ADVISORY COUNCIL

APPOINTED BY

(12 MEMBERS)

THE PRESIDENT OF

ESTABLISH DISCOUNT RATE

THE UNITED STATES
AND CONFIRMED
BY THE SENATE

MAXIMUM
INTEREST
RATES ON
TIM E
DEPOSITS

MARGIN

RESERVE

DISCOUNT

REQUIREMENTS

RATES

OPEN
MARKET
OPERATIONS

C r e d i t P o l ic y

DETERMINATION OF CREDIT POLICY

377

directors appointed by the Board—making nine directors in all.
The Board designates one of the three directors appointed by it as
Chairman and Federal Reserve Agent and appoints another as
Deputy Chairman.
These nine directors, besides selecting for their Federal Reserve
district a member of the Federal Advisory Council, appoint all
the officers and employees of the Reserve Bank, among them the
President and First Vice President of the Bank (who must be
approved by the Board of Governors). In addition, the directorates
of the twelve Reserve Banks, which collaborate for the purpose in
prescribed regional groups, elect five members of the Federal Open
Market Committee, who are as a matter of fact selected from among
the Presidents of the Reserve Banks.
The several instruments of credit policy (of which the three in
heavier outline are in most circumstances the more important) are
represented at the bottom of the chart by five squares, and each of
these is joined by a line with the agency or agencies that make the
policy decisions with reference to that instrument. Over three of the
instruments the power of decision resides exclusively in the Board
of Governors—maximum interest rates on time deposits, margin
requirements, and reserve requirements. Authority over one of the
instruments, the discount rate, is shared between the directorates
of the Reserve Banks by which the rate must be “ established”
and the Board of Governors by which it must be “ reviewed and
determined.” Policies with respect to open-market operations are
decided neither by the Board nor by the directorates of the Reserve
Banks but by the Federal Open Market Committee.
The Federal Advisory Council is shown on the chart, but not
among the agencies having authority over instruments of credit
policy. The Council consists as a rule of one member banker from
each Federal Reserve district, who is chosen annually by the
directorate of the Reserve Bank. As provided by the Federal Re
serve Act, the Council stands in an advisory relation to the Board,
is authorized to confer directly with the Board, and must meet in
Washington at least four times each year. This provides within the
legal framework of the System a standing arrangement through
which representatives from all sections of the country are enabled

378

BANKING STUDIES

to present their views directly to members of the Board and to
carry back to their several communities information obtained
directly from the Board concerning such matters as the purpose
and method underlying official System policies and actions.
The chart shows in broad outline the statutory organization
of the System as it is at the present time, incorporating the changes
that have been made by Congress during the twenty-seven years
of the System’s life. The more important changes, all of which were
made in 1933, 1934, or 1935, have affected both the Board of
Governors and the Federal Reserve Banks.
So far as the Board of Governors is concerned, the principal
changes have been (1) to remove from the Board its two ex-officio
members, the Secretary of the Treasury and the Comptroller of the
Currency, and thus to make all the members of the Board full-time
members; (2) to give statutory status to the Federal Open Market
Committee and give the seven members of the Board places on the
Committee; (3) to give the Board authority to approve or disap
prove for five-year terms the appointments of the Presidents and
First Vice Presidents of the Federal Reserve Banks; and (4) to
give to the Board exclusive authority over the new instruments of
credit policy that were given to the System in 1933,1934, and 1935—
interest rates on time deposits, margin requirements, and reserve
requirements.
So far as the Federal Reserve Banks are concerned, the principal
changes have been (1) to provide that the appointments of the
President and First Vice President be subject to the approval of
the Board of Governors; (2) to provide that the President shall be
the chief executive officer of the Bank; (3) to vest complete control
over the open-market operations of the Reserve Banks in the Fed
eral Open Market Committee; and (4) to provide that the Com
mittee, which had previously consisted of one representative of each
of the twelve Federal Reserve Banks, shall consist of the seven
members of the Board and five representatives of the Reserve
Banks, elected annually, and that in electing these five representa
tives the directorates of the twelve Reserve Banks shall go together
in five designated groups—Boston and New York; Philadelphia
and Cleveland; Chicago and St. Louis; Richmond, Atlanta, and
Dallas; Minneapolis, Kansas City, and San Francisco.

DETERMINATION OF CREDIT POLICY

37 9

HISTORY OF FEDERAL OPEN M ARK ET COM M ITTEE

The Federal Open Market Committee, though not given statutory
status until 1933 and not endowed with plenary powers until 1935,
has a history that goes back to 1922. In 1921 and 1922, at a time
when the earning assets of the Reserve Banks in the form of dis
counts for member banks were declining rapidly, the Federal Re
serve Banks resorted to buying Government securities, each Re
serve Bank on its own initiative and at times of its own choosing
but virtually all in one place, New York City. This tended to dis
turb the central market for Government securities and was conse
quently of concern to the Treasury. It was also of concern to the
Federal Reserve Bank of New York because the money put into
the market by the out-of-town Reserve Banks was used by the
member banks in New York City, directly or indirectly, to pay down
their borrowings at the Federal Reserve Bank of New York. Finally,
it was of concern to the Federal Reserve Board and all the other
Federal Reserve Banks because to ease credit conditions in New
York tended to ease them everywhere.
The actual relationship between discount policy and open-market
policy, which first became evident about 1922 or 1923, was then
called the “ compensatory tendency.” The “ compensatory tendency”
is illustrated by the chart on page 380. The chart shows for a
period of years Federal Reserve Bank holdings of “ Bills Dis
counted,” which represent member bank borrowings at all Federal
Reserve Banks combined, and Reserve Bank holdings of “ United
States Government Securities,” which represent securities acquired
through open-market operations. It will be noted from the chart
that when the Reserve Banks increased their holdings of Govern
ment securities, their holdings of bills discounted usually went
down, as happened conspicuously in 1922, 1924, 1929, and 1932-33,
and when they decreased their holdings of Government securities,
their holdings of bills discounted went up, as happened conspicu
ously in 1922-23, late 1924, and 1928. At times, as indicated on the
chart, this inverse correlation did not hold, but these were times
when other factors such as gold imports upset it, as will be explained
in a subsequent paper. The point for present purposes is that as
early as 1922 it had begun to be evident that the matter of openmarket operations, instead of being a regional matter, is a national

380

BANKING STUDIES

or System matter, requiring for its proper handling close coordina
tion among the several Federal Reserve Banks.
Recognition of this fact in 1921 and 1922 led the Federal Reserve
Banks, acting through the “ Governors’ Conference” and under the
leadership of the Federal Reserve Bank of New York, to set up
early in 1922 a nonstatutory System committee to deal with openmarket operations; and the committee system of dealing with this
matter has had continuous existence ever since. The first Open
System H oldings of D iscounts an d U n ited States
G overnm ent Securities 8
BILLIONS OF DOLLARS

BILLIONS OF DOLLARS

a For data, see Table 25, pp. 439-43.

Market Committee, as selected by the “ Governors’ Conference,”
consisted of the Governors of the Federal Reserve Banks of New
York, Boston, Philadelphia, and Chicago. Its original purpose
was to provide for the execution of orders from all the Federal
Reserve Banks in a systematic manner, so as not to upset the mar
ket, but in October 1922 it entered the field of policy when it began,
by agreement among the Governors of the Reserve Banks, to make
recommendations from time to time to the several Reserve Banks.
This first Committee, like all of its successors prior to 1935, had

DETERMINATION OF CREDIT POLICY

381

advisory functions only; it had no power of decision in respect to
any Federal Reserve Bank, as that power remained with the direc
torate of each Reserve Bank. The first Committee was succeeded
in April 1923 by the second, called the “ Open Market Investment
Committee,,, which was, like the first, a nonstatutory advisory
organization composed of the Governors of several Federal Reserve
Banks (Boston, New York, Philadelphia, Cleveland, and Chicago).
The Committee had a new status, however, in two important
respects. By action of the Board supplemented by agreement
between the Board and the several Reserve Banks, (1) the Federal
Reserve Banks were not to engage in open-market operations on
any material scale except with the approval of the Board, and (2)
open-market policies were made subject to a certain governing
principle, which was substantially the same as then applied under
the law to the determination of discount rates: “ That the time,
manner, character, and volume of open-market investments pur
chased by Federal Reserve Banks be governed with primary regard
to the accommodation of commerce and business and to the effect
of such purchases and sales on the general credit situation.”
The “ Open Market Investment Committee” functioned for
about seven years, throughout the period from 1923 to 1930, when
it was succeeded by the “ Open Market Policy Conference,” of
which the membership comprised, instead of the Governors of five
of the Federal Reserve Banks, the Governors of all twelve of the
Federal Reserve Banks. The Banking Act of 1933 gave the Con
ference legislative status under its present name of the Federal
Open Market Committee, incorporated into law the rule of policy
to which open-market operations had been subject informally
since 1923, and provided that one member of the Committee should
be elected by the directorate of each of the twelve Federal Reserve
Banks. This act of 1933, although it forbade any Federal Reserve
Bank to engage in any open-market operations except “ in ac
cordance with” regulations of the Board, did not give either the
Board or the Committee authority to require any Reserve Bank
to engage in such operations. The Banking Act of 1935, as already
stated, gave this authority to the Committee and provided that
the Committee should be constituted to include, as it does at

38 2

BANKING STUDIES

present, the seven members of the Board and five representatives
of the Reserve Banks.
The chief landmarks in the history of the Federal Open Market
Committee have been the arrangement made in 1923 by which
open-market operations came to be officially recognized as an
instrument of System credit policy and the legislation of 1935 by
which the Committee was reconstituted and given mandatory
powers.
COORDINATION OF POLICY INSTRUM ENTS

In addition to the problem of coordinating open-market opera
tions as between the different Reserve Banks, there have been
similar problems relating to (1) the coordination of changes in
discount rates as between the different Reserve Banks and (2)
the coordination of System action as between one instrument of
credit policy and another.
Changes in the discount rates of the Federal Reserve Banks
were in the early days conceived to be primarily a regional matter,
but in due time experience showed that these changes, like openmarket operations, are usually of national or System consequence.
This is because the result of easing the discount rate at any Reserve
Bank, if actually effective, is in course of time transmitted by com
petition among commercial banks to other districts, and any
tightening at one Reserve Bank tends to cause borrowing to move
away from that district to other districts. An even more constant
and pervasive national influence, however, arises from the fact that
member banks everywhere have long made it a practice to use the
New York money market for adjusting their reserve positions, with
the consequence that under normal conditions the discount rates of
the Federal Reserve Banks can not be effective unless closely
related to the prevailing open-market rates in New York City—
which comprise the rates on call and time loans secured by stockexchange collateral, the yields on bankers’ acceptances and on
Government securities, and the rate on commercial paper purchased
in the open market.
The accompanying chart, entitled “ Relations between Money
Rates,” illustrates this point. The chart shows the relations between

DETERMINATION OF CREDIT POLICY

383

open-market rates and average rates charged by banks to their
customers for the nineteen-year period 1919-1937. The course of
open-market rates is represented on the chart by a curve for the
open-market rate on commercial paper, which is the heaviest of
the four curves, while average rates charged by member banks to
their customers are represented by three curves, one for New York
City, one for a group of Northern and Eastern cities, and one for a
group of Southern and Western cities, the cities being Reserve Bank
R e l a t io n s

1920
SERIES

1922

1924

betw een

1926

1928

oney

1930

R ates®

1932

1934

1936

REVISED.

a For data, see Table 32, pp. 454-58.

and branch cities from which banks have reported their rates to
the Board for many years. The chart indicates that these averages
of rates charged customers, although they have differed considerably
in level from one part of the country to another, have in all parts
of the country moved up and down year after year in fairly close
relation with the open-market rates at New York City. This is
one of the fundamental facts of the rate structure of the United
States. It is the general framework to which the discount rates of
all the Federal Reserve Banks must be adjusted; the discount

384

BANKING STUDIES

rates in the different Federal Reserve districts, whether or not they
are at the same level, can be in touch with the market only if they
follow a single course. Thus the determination of discount rates,
like the determination of open-market policies, has been found in
practice to be primarily a national matter, notwithstanding the
fact that these rates are not those of a single lending agency but
those of twelve distinct institutions lending in as many different
parts of the country.
A similar problem relates to the coordination of System action
as between one instrument of credit policy and another. The nature
of this problem can be illustrated by observing the interdependence
of reserve requirements and open-market operations. It is obvious
that the effect of an increase or decrease in reserve requirements on
the volume of member bank reserves could be wholly or partly
offset by open-market operations of the opposite tenor. The au
thority to change reserve requirements is vested in the Board of
Governors and the authority over open-market operations is vested
in the Federal Open Market Committee. Consequently, in order to
be effective, any policy action which involves the use of either of
these instruments must be based on agreement as to policy between
the Board and the Committee.
System credit policies must be formulated on a national basis.
This can be, and to a considerable extent is, achieved by informal
contacts and cooperation among the different groups that constitute
the Federal Reserve authorities. Members of the Board and officers
of the regional Reserve Banks have long been in the habit of taking
up questions of credit policy more or less informally as System
questions to be discussed as such—by means of correspondence,
conversations over the telephone and otherwise, and exchange of
views at meetings of the Presidents’ Conference and on other occa
sions. In this way, tentative decisions may be, and often have been,
arrived at by common agreement—and then put into effect by the
authority having power in the matter.
ROLE OF TH E FEDERAL RESERVE B AN K OF NEW Y O R K

In other leading countries of the world, as is well known, deter
mination of national credit policy is the principal and characteristic

DETERMINATION OF CREDIT POLICY

385

concern of a bank, called the “ central bank” of the country. In the
United States performance of this function has not been entrusted
to a single bank, or even to a number of regional banks which per
form the function by collaboration. It has been entrusted to an
institution—the Federal Reserve System—which comprises (1)
certain central organs (the Board of Governors and the Federal
Open Market Committee) which are not banks but which have
policy making powers, and (2) certain regional organs (the Federal
Reserve Banks) of which none has authority to determine by
itself a credit policy for its own region and each has authority to
take part, but not without the central organs, in the determination
of credit policy for the country as a whole.
In creating such a system, Congress did not disregard the experi
ence of England and other countries having central banks. Congress
decided against the creation of a central bank for the United
States because of the belief that such an institution would not be
suited to American conditions. In creating a Federal Reserve Bank
for each region of the country, for example, instead of providing like
certain European countries that there be one central bank with
regional branches, Congress recognized the traditional desires of
the several regions for a substantial measure of autonomy. Each
Federal Reserve Bank, therefore, has the same statutory rights and
powers, including the same statutory right to participate in making
national credit policy, as every other Federal Reserve Bank.
In the practical operation of the System, however, the Federal
Reserve Bank of New York, because of its location in the financial
center of the country, has played a somewhat different role in
the policy counsels of the System than any other Federal Reserve
Bank. The Federal Reserve Bank of New York is larger than any
of the others and has among its stockholding member banks the
largest commercial banks in the United States with the most exten
sive correspondent relations. The importance of New York in
Federal Reserve policy was increased by the development of openmarket operations as an instrument of credit policy. These opera
tions were of necessity conducted at the central market in New
York and the local Federal Reserve Bank acted there both on its
own account and as agent for all the other Reserve Banks and for

38 6

BANKING STUDIES

the Treasury. One effect of the establishment, first informally and
later by Congress, of the Federal Open Market Committee, with
the provision that no Federal Reserve Bank shall engage in openmarket operations except in accordance with a policy adopted by
this Committee, was to provide machinery for determining System
policy with reference to the needs and points of view of all sections
of the country rather than to the special needs and point of view of
the central money market.
A further step in this direction was taken by the Banking Act of
1935. Until 1935, it lay with the directorate of every Federal Reserve
Bank to decide whether that Reserve Bank would engage in any
given instance in an open-market operation, but in that year the
law was so changed as to transfer that power for all Federal Reserve
Banks to the Federal Open Market Committee and give to members
of the Board seven of the twelve places on the Committee.
The Federal Reserve Bank of New York has also occupied a
central position within the System in the field of international
financial relations. It is at New York that transactions in foreign
exchange are centered, also most of the gold imports and exports
of the country, and in New York that many foreign financial institu
tions have their American correspondents. With the consent of the
Board and subject to regulations prescribed by it, all the Federal
Reserve Banks have long had authority to establish and maintain
correspondent relationships with foreign central banks, and it is
through the Federal Reserve Bank of New York that such relation
ships have been established and maintained. In connection with
such relationships, officers of the Federal Reserve Bank of New York
have exchanged visits and conducted negotiations with the officers
of foreign central banks. In 1927, an important conference on mone
tary policy was held in this country at which representatives of the
Federal Reserve Bank of New York conferred with representatives
of the Bank of England, the Bank of France, and the Reichsbank.
In 1929, the Deputy Chairman and the Assistant Federal Reserve
Agent of the Federal Reserve Bank of New York were among those
who took an important part in Paris in formulating plans for the
establishment in Switzerland of the Bank for International Settle
ments. In 1933 Congress authorized and required the Board of

DETERMINATION OF CREDIT POLICY

3 87

Governors to exercise “ special supervision” over all relationships
and transactions entered into by “ any Federal Reserve Bank” with
any foreign bank or banker and provided, among other things of
similar purport, that no representative of any Federal Reserve
Bank should conduct negotiations of any kind with representatives
of any foreign bank without first obtaining the permission of the
Board.
In two important matters, therefore, open-market operations
and relations with foreign banks, the general trend of legislation
and of administrative development within the Federal Reserve
System has been to diminish the influence of the Federal Reserve
Bank of New York, as the representative of the central money
market, and to increase the authority of the Board, as the repre
sentative of the country as a whole.
As to matters other than the formulation of national credit
policy, however, Congress has shown no tendency to transfer powers
from the Federal Reserve Banks to other parts of the System’s
organization. In particular, all the Federal Reserve Banks continue
to have general control over all business relations between the
Reserve Bank and the member banks under rules and regulations
prescribed by the Board of Governors. It is always the Reserve
Bank, for example, not the Board of Governors, that actually makes
loans to the member banks, and in negotiating such loans passes
judgment not only on the eligibility of their paper as a matter of law
and regulation, but also on the acceptability of their paper as a
matter of business risk. Numerous other matters of similar nature
that have always been, and still remain, within the sphere of the
several Federal Reserve Banks as marked out by Congress, are
described in detail in the paper entitled “ Operations of the Reserve
Banks.”
POSITION OF THE M EM BER BANKS

All the capital of the Federal Reserve Banks, as distinguished
from their surplus, has always been furnished by the member
banks, which have consequently always been the sole owners of the
capital stock of the Reserve Banks. They have never had, however,
all the legal rights that ordinarily belong to the stockholders of

388

BANKING STUDIES

a corporation. Acting as stockholders, the member banks elect six
of the nine directors of each Reserve Bank, and these directors have
substantial powers, but they do not have the power to manage the
Reserve Banks, as private business is commonly managed, with a
view to making profits for the stockholders. As a safeguard against
this, the law provides that the directors may not pay to the stock
holders (the member banks) dividends in excess of 6 per cent per
annum and that all net earnings in excess of this amount shall be
carried to surplus. This surplus, moreover, is not owned by the
member banks, in any proper sense of the term, since (1) it may
not be paid out to them except as it is drawn upon to meet dividend
payments in years when net earnings are less than 6 per cent, and
(2) all the surplus must, in the event that a Federal Reserve Bank
should be liquidated, go to the Government of the United States.
Other important limitations on the powers of the stockholders of
the Reserve Banks have been made apparent in the discussion of
the agencies that determine Federal Reserve policy. Under these
limitations, the Federal Reserve Banks are obliged to operate as
institutions impressed with a public trust and not as private institu
tions seeking profits.
NOTE IN CONCLUSION

It is not within the province of this statement to undertake a
critique of the present organization of the Federal Reserve System,
or to propose or advocate any changes in that organization. The
whole discussion, however, has been based on the generally accepted
view that of all the functions of the System the determination of
credit policy is the one that puts the System to its severest tests.
According to this view, an appropriate basis for suggestions for
improving the organic structure of the System would be careful
study of the merits and demerits of the credit policies pursued by the
System during the course of its life, with particular reference to
the relation of these merits and demerits to the structure of the
System.

INSTRUMENTS OF FEDERAL RESERVE POLICY

Page
I n t r o d u c t i o n ..............................................................................

391

C o n d it i o n s P r i o r t o F e d e r a l R e s e r v e S y s t e m . .

391

T h e D is c o u n t R a t e ...............................................................

393

O p e n - M a r k e t O p e r a t i o n s ..................................................

397

D ir e c t A c t io n p r i o r t o
D i r e c t A c t io n i n

1929.................................... 400

1929............................................... 403

M a r g i n R e q u i r e m e n t s .........................................................

405

P o l i c y d u r in g D e p r e s s i o n ................................................

406

C h a n g e s i n R e s e r v e R e q u i r e m e n t s ...........................

409

R e l a t i o n t o C a p i t a l M a r k e t .........................................

411

L i m i t a t i o n s o n E x i s t i n g P o w e r s ..................................

412

E. A. G o l d e n w e is e r
Director
Division of Research and Statistics

INSTRUMENTS OF FEDERAL RESERVE POLICY
This paper will outline the evolution of Federal Reserve instru
ments of credit policy from the organization of the System to the
present time. In brief review it will be brought out that during the
war period reliance was placed solely on the discount rate, and that
beginning with 1922 and 1923 until 1929 discount policy was supple
mented by open-market operations. In 1929 for a brief period these
two instruments were supplemented further by so-called direct
action. From 1930 to 1933 both the discount rate and open-market
operations were again used to carry out a policy of monetary ease.
After the autumn of 1933 these instruments were not usable, be
cause the banks were out of debt and had a large volume of excess
reserves. The banks were, therefore, largely independent of the
Federal Reserve System and could not be influenced by the System’s
traditional methods of credit regulation. In an attempt once more
to reestablish contact with the money market, the System, under
authority acquired in 1933 and 1935, increased reserve requirements
in 1936 and 1937. Continued inflow of gold, however, has increased
excess reserves of member banks to a point where the Federal Re
serve System, under existing authority, would be powerless to re
strain through action on reserves an inflationary movement if one
should develop.
CONDITIONS PRIOR TO FEDERAL RESERVE SYSTEM

For many years prior to the establishment of the Federal Reserve
System it was apparent that some machinery for supplementing
activities of individual banks was necessary to moderate violent
fluctuations that occurred at irregular intervals in the country’s
currency and credit conditions. Sporadic and uncoordinated action
to accomplish this purpose had, in fact, been taken by different
institutions and agencies throughout the country’s history. For
example, as explained in the “ Historical Introduction,” the great
metropolitan banks, with correspondents throughout the country,

391

392

BANKING STUDIES

performed some of the functions now performed by the Federal
Reserve Banks. These banks held a considerable portion of the
reserves of country correspondents. In and out of these banks flowed
idle funds of country banks, as local demands for credit fell and rose,
and it was to these banks that country correspondents turned for
loans when their own supply of funds was insufficient.
To a considerable degree the city banks had developed a sense
of responsibility for national credit conditions and, so far as their
own resources permitted, acted as dispensers of supplementary
credit in times of need to the banking system of the country. Clear
ing-house associations of banks in leading cities gave some of the
elements of combined strength to the individual banks that consti
tuted them. But these metropolitan banks were themselves operated
as private business enterprises and their primary responsibility
had perforce to be to their own depositors and stockholders. Conse
quently, when country banks were in the greatest need of assistance,
the city banks, being under pressure themselves, were not always
able to help them. At times disaster was averted only by the inter
cession of the Secretary of the Treasury, who would come to the
rescue by making deposits of public funds or using other means to
ease a critical situation; at other times banks issued emergency
currency through the clearing house; and at times private banks,
under forceful leadership, would obtain assistance from abroad.
The need for a more specialized institution, under Government
regulation and partial control, with definite responsibility for general
credit conditions, became increasingly apparent and a vigorous
national movement for its establishment was organized. It was out
of this need and this agitation that the Federal Reserve System
finally emerged.
The System itself has undergone a decided evolution since its estab
lishment over a quarter of a century ago. It was viewed originally
in the main as a provider of elastic currency and a dispenser of
emergency funds to meet seasonal and other temporary requirements
of member banks. This concept was gradually enlarged. As the
System has accumulated experience it has come to recognize that
it has major responsibility to contribute to the formulation of
national credit policies with a view to moderating booms and
depressions.

INSTRUMENTS OF FEDERAL RESERVE POLICY

393

The evolution of instruments of Federal Reserve policy, which
is the subject of this paper, is parallel to and interrelated with this
gradual clarification and enlargement of the conception of the Sys
tem’s function in our economy.
THE DISCOUNT RATE

In the conception of the framers of the Federal Reserve Act,
based on past experience here and abroad, the principal instrument
of credit control was the discount rate. It was assumed that, when
member banks had made all the loans to customers that their
funds permitted, and when additional customers with legitimate
claims for accommodation presented themselves, the banks would
go to the Federal Reserve Bank and rediscount some of their paper,
thereby obtaining additional funds for lending to customers. When
this occurred the Federal Reserve Bank could discourage or encour
age additional lending by raising or lowering the discount rate.
In the early years of the Federal Reserve System circumstances
were such that broadly speaking Federal Reserve policy found its
principal and almost sole expression in changes of the discount rate.
During the first two years of the System’s existence, however, there
was little demand for Federal Reserve Bank credit. Money condi
tions were extremely easy. Reserves had been released through
the reduction in legal requirements in the Federal Reserve Act
and in addition there was a large inflow of gold from abroad, reflect
ing purchases of American products by European belligerents in
the World War.
With the entry of the United States into the war in April 1917
this situation changed sharply. Demand for a great many kinds of
products rapidly increased. The Government floated Liberty bonds
for the purpose of financing the war. In large part these bonds were
purchased by the public through the use of bank credit and the
banks in turn borrowed from the Federal Reserve Banks on the
security of these bonds. The Federal Reserve Banks cooperated
in every way with the Government to help finance the war and
established rates of discount on paper secured by Government
obligations that were somewhat lower than the coupon rates on the
securities themselves. Consequently, member banks were able
to let purchasers of Liberty and later Victory bonds acquire them

394

BANKING STUDIES

on a partial payment basis at a rate of interest corresponding to the
coupon rate, so that it did not cost customers anything for the
privilege of buying their bonds on time. Member banks, in turn,
were able to obtain the funds at a slightly lower rate from the
Reserve Banks, the margin being sufficient to pay for the member
banks’ expenses in handling the business. The result was a large
increase in discounts at the Federal Reserve Banks, which went up
rapidly and continuously from less than 100 million dollars early in
1917 to about 2.1 billions in the latter part of 1919, and 2.8 billions
in 1920.
This large increase in the assets of the Reserve Banks was re
flected on the liability side principally in a growth in Federal Re
serve notes caused by an increase in business activity, in prices,
and in the cost of living, which necessitated a large use of currency.
Discount rates during this period remained low in relation to
the general level of money rates. Until the latter part of 1919, when
war financing was completed, there was an expansion of bank credit
supported by an expansion of Federal Reserve Bank credit incurred
for the purpose of financing the war. Normal peace-time central
banking policies were inapplicable and so were not taken into
consideration. Beginning with the autumn of 1919, however, the
Federal Reserve authorities began to consider the potentialities
of the situation and to move toward arresting the unprecedented
over-expansion of credit, which had been accompanied by a doubling
of prices since pre-war days. In the early autumn months of 1919
the question of raising discount rates was considered by Federal
Reserve authorities but action was delayed pending completion of
war financing by the Treasury. Nevertheless, in November the
discount rate at the New York Bank was advanced from 4 to 4 f
per cent. In January 1920 it was raised to 6 per cent and in May
1920 to 7 per cent. Rate advances were made at all the other banks
as well. At that time the ratio of reserves to liabilities at the Federal
Reserve Banks had fallen close to the minimum permitted by law,
commodity speculation was widespread, with much bank credit
extended on the basis of inflated prices. Action to tighten credit
appeared to be unavoidable. In this instance, as in many others,
the problem of correct timing was the central one in connection

INSTRUMENTS OF FEDERAL RESERVE POLICY

395

with determination of credit policies at the time of their adoption
as well as in discussions of past policy.
By the middle of 1922 discounts of the Federal Reserve Banks
had declined to 400 million dollars. The great liquidation had been
brought about in almost equal measure by an inflow of gold from
abroad and by the decline of money in circulation which had accom
panied the fall in domestic prices.
In connection with the discussion of discount-rate policy it
should be pointed out that discount rates are generally related to
rates on short-term money in the open market rather than to rates
charged by banks to their customers. This is brought out by the
chart on page 396, which shows the relationship of the three rates
over a period of years at the Federal Reserve Bank of New York,
as the principal money market, and at the Federal Reserve Bank
of Kansas City, as representative of Reserve Banks in the interior.
That discount rates are more closely related to open-market rates
than to customers’ rates reflects the fact that banks borrow from
the Reserve Banks principally for the purpose of replenishing their
reserves when they fall below the legal minimum and not for the
purpose of relending at a higher rate. Habitual borrowing for the
latter purpose would be contrary to banking tradition, to the spirit
of the Federal Reserve Act, and to the policy of the Federal Reserve
authorities.
When a bank finds itself short of reserves it has the choice of
borrowing from the Federal Reserve Bank at the discount rate, or of
liquidating some of its assets. The assets that it would be likely to
liquidate, in the absence of other considerations, are those that bring
the smallest return and are not connected with established customer
relationships; that is, short-time open-market paper. For this
reason, the discount rate is related primarily to the rate on this
type of paper. Discount-rate policy with reference to prevailing
open-market rates can in normal conditions exert a powerful influ
ence on the expansion or contraction of bank credit.
This relationship between discount rates at the twelve Federal
Reserve Banks and open-market rates, which are nation-wide in
their influence, emphasizes the fact that discount-rate policy, in

396

BANKING STUDIES

P lace

1922

1924

R ate

is c o u n t

1926

1928

the

1930

R a t e St r u c t u r e *

1932

1934

1936

1938

1940

K A f 4SA

s cI T Y

\
n

««

CUSTCIMERS ' LOAN% BY BANKS(
i
« ! iti*n eIT«$ 1
SOi

1
\

■J

MSCOUlNT RA1re

Jf t

/
I OPEN -MARI't£T RiM E

C
m'•
c4
i:tf>r*N
0*0

A
\

1 ,

‘ lJ
1 i
\
1
1*—
1

I N
i

i
V\i i\s i
\■W

-'" I
1920

» tfcRIES

1922

1924

1926

1928

REVISED.

* For data, see Table 32, pp. 454-58.

1930

1932

1934

1936

1938

1940

INSTRUMENTS OF FEDERAL RESERVE POLICY

397

order to be effective, must not be determined solely with reference
to regional considerations but must be national in scope.
OPEN-MARKET OPERATIONS

In 1922 with credit and economic conditions somewhat more
normal, with discounts of the Reserve Banks at a relatively low
level and their reserve ratio well above the required minimum, a
new phase in credit policy began to develop. It was at this time
that open-market operations as a supplement to discount rates
became a recognized part of Federal Reserve System policy. Such
operations by the Bank of England had been known in the London
market for a long time and were sometimes referred to as the hidden
hand which influenced conditions in the money market. They were
used principally to make Bank rate, as the discount rate is called
in England, effective.
In 1922 the individual Reserve Banks bought Government
securities on their own initiative, without System consultation.
Their purpose was to build up their earnings, which were declining
with the liquidation of discounts. This action led to several diffi
culties. In the first place, the competition of the different Reserve
Banks for Government securities was disorganizing the Government
security market. Treasury officials indicated that they would be
glad if the actions of the individual Reserve Banks could be co
ordinated.
In the second place, Government securities were bought for the
most part in the New York market and created reserves there that
were used to liquidate discounts at the New York Reserve Bank.
It became apparent that purchases of Government securities by the
Reserve Banks at a time when the volume of discounts was large
did not increase total earning assets of the System, but merely
substituted Government securities for discounts. Member banks
that were in debt at the Reserve Banks and received reserve funds
through purchases of Government securities by the Reserve Banks
were likely to use these funds to repay their indebtedness. Conse
quently, when there was a substantial volume of member bank
indebtedness, purchases of Government securities might increase

398

BANKING STUDIES

the earning assets of individual Reserve Banks without increasing
the earning assets of the System as a whole.
Recognition of this fact led to the appointment of a System Open
Market Committee, consisting of five Governors of the Reserve
Banks, for the purpose of coordinating open-market purchases.
In the spring of 1923 this Committee was reorganized and a broad
principle for the conduct of open-market operations was adopted.
Not only was disorganization of the Government security market
to be avoided, but sales and purchases in the open market were to
be guided by the same considerations as those stated in the law in
connection with discount rates. Henceforth open-market operations
were to be conducted with regard to existing credit conditions and
with a view to accommodating commerce and business. This marks
an important step forward because it indicates a clearer recognition
by the Federal Reserve System of the fact that the various instru
ments in its possession have a relationship to one another and must
be employed on the basis of the same general guiding principles.
Recognition of an Open Market Committee consisting of the twelve
Governors of the Federal Reserve Banks was incorporated in the
law by the Banking Act of 1933, together with the principles by
which the Committee should be guided. By the Banking Act of
1935 the Committee was reconstituted to consist of the seven mem
bers of the Board of Governors and five representatives of the
Federal Reserve Banks elected regionally. The Committee was
given power to determine upon purchases and sales in the open
market by the Federal Reserve Banks, which are required to parti
cipate in such operations. This enactment constitutes a complete
recognition in law of the national significance of open-market opera
tions and of the need of national control over them.
In the discussion of open-market operations no reference is
made to purchases and sales of bankers’ acceptances by the Federal
Reserve Banks. Acceptances are similar to discounts in that they
are acquired by the Reserve Banks at the initiative of member
banks (or dealers) and not of the Reserve Banks themselves. On
the other hand, they are similar to United States Government
obligations in that their acquisition by the Reserve Banks tends to
reduce the indebtedness of member banks. Broadly speaking,

399

INSTRUMENTS OF FEDERAL RESERVE POLICY
A p p l ic a t io n

F ederal R eserve D

is c o u n t

P o l ic y *

1. System Holdings of Discounts and United States Government
Securities

1918

1920

1922

1924

1926

1928

1930

1932

1934

1936

1938

1940

2. Discount Rate, Federal Reserve Bank of New York

1918

1920

1922

1924

J926

1928

1930

1932

1934

1936

a For data, see Table 25, pp. 439-44 and Table 32, pp. 454-58.

1938

1940

400

BANKING STUDIES

acceptance policy has seldom been a factor of first importance in
the System’s policy, and its omission from most of this discussion
for the purpose of brevity and simplicity sacrifices nothing essential.
Throughout the 1920’s the discount rate and open-market opera
tions were used as twin instruments of credit regulation. In the early
spring of 1923, and again in 1925 and 1928, when conditions indi
cated that the System should exercise a restraining influence, it sold
Government securities in order to make it necessary for the banks to
increase their borrowings at the Reserve Banks, and then increased
the discount rate to make the borrowing more expensive. It thus
attempted to make its policy more effective by coordinating the
use of the two instruments of credit policy. This is shown in the
chart on page 399, in which bills discounted and United States
Government securities respectively represent member bank bor
rowings and System open-market operations. On the other hand,
when the System wished to ease credit conditions, as in 1924 and
in 1927, it purchased Government securities in the open market and
simultaneously reduced the discount rate at the Reserve Banks.
It thus provided member banks with reserve funds to reduce their
indebtedness at the Reserve Banks and also made such indebtedness
as remained less burdensome to the member banks. This policy was
intended to put member banks in a position and a frame of mind
to be more liberal in extending credit. A necessary condition for the
effectiveness of such a policy is that the volume of excess reserves
at the disposal of member banks be limited. When they have a
large amount of reserves in excess of requirements this technique
ceases to be applicable.
One important observation to be made about the entire period
from 1922 to 1927 is that to an increasing extent credit policy was
viewed as joint action of the twelve Federal Reserve Banks and
the Board, and independent and separate action in the general
credit field by individual Reserve Banks was increasingly subordi
nated to national credit policy.
D IR E C T ACTION PRIOR TO 1929

The culmination of discount and open-market policy as the
principal elements in Federal Reserve policy came in 1928 and 1929.

INSTRUMENTS OF FEDERAL RESERVE POLICY

401

At that time there also emerged another instrument of credit policy;
namely, direct action by the Reserve Banks in controlling credit
extended by individual member banks. Direct action had been used
in a limited way by the Federal Reserve Banks in their relationship
with member banks for many years. A study made in 1926 showed
that many of the Reserve Banks were in constant contact and corre
spondence with their members and when a bank was using Reserve
Bank credit too freely or too continuously Reserve Bank officials
would look into the situation and suggest that the bank handle the
matter either by restricting its lines of credit or by acquiring addi
tional capital. The Federal Reserve Act specifies that advances to
individual member banks shall be made with reference to the rights
of other member banks, and the Federal Reserve Banks have always
interpreted this provision to mean that no individual bank should
lean on a Federal Reserve Bank continuously when such action
amounted to borrowing capital from the Federal Reserve Bank.
Some passages from the Annual Report of the Federal Reserve
Board for 1926 may be quoted in this connection:
. . . Though there are circumstances that may explain and justify continuous
borrowing by a member bank over a considerable period of time, particularly
if the need for the borrowing arises from general economic conditions in the
borrowing bank’s locality, the funds of the Federal Reserve Banks are primarily
intended to be used in meeting the seasonal and temporary requirements of
members, and continuous borrowing by a member bank as a general practice
would not be consistent with the intent of the Federal Reserve Act. In most
cases the member bank can make adjustments of different kinds in its own
affairs, which will enable it to repay its borrowings at the Reserve Bank and
at the same time to strengthen its own position. The bank may find it advisable,
for example, to increase its own capital or to bring about a better adjustment
of the volume and maturities of its investments to the credit requirements of its
local customers.
*

. . . [By taking these factors into consideration] the Reserve Banks are not only
discharging their responsibility to the member banks under the act, but are
also exerting their influence toward sounder general banking conditions in the
interests alike of the member banks, their depositors, and the public.

402

BANKING STUDIES

The matter was discussed again in the 1928 Annual Report,
which pointed out the distinction between what was at that time
called banking policy, dealing primarily with individual banks,
and credit policy, which had to be impersonal and to apply to all
banks alike. To quote from this report:
Influence exerted by a Reserve Bank on the loan and investment policy
of an individual member bank is ordinarily exercised only over banks that are
borrowers from the Reserve Banks. It is in the nature of banking supervision,
and is akin in many respects to the bank examination function of the Reserve
System. This phase of Reserve Bank policy may be called banking policy, as
distinguished from credit policy, which deals with more general developments
of banking in relation to the credit needs of the country. Banking policy ordi
narily has but limited effect on credit conditions as a whole, because no class
of borrowers is confined for accommodation to any single bank or group of
banks, and because of the general mobility of bank credit. When one member
bank, for example, on its own initiative or at the instance of the Reserve Bank,
repays indebtedness to the Reserve Bank by withdrawing funds lent on the
stock exchange, the effect may be to cause the borrower to seek accommoda
tion at another bank, member or nonmember, that is not indebted to the Re
serve Bank. . . . The importance of banking policy lies in promoting the
soundness of member banks, and cooperation of these banks with the Federal
Reserve System in carrying out banking policy is essential to the maintenance
of sound banking conditions. For influencing general credit conditions, however,
the Federal Reserve System relies on credit policy rather than on banking policy.
Credit policy is essentially impersonal and finds expression chiefly through
the influence that the Federal Reserve System may exert on the volume and
cost of bank credit through its policy of sales or purchases in the open market
and through discount rates on member bank borrowings and buying rates on
acceptances. In determining upon credit policy the Federal Reserve System
is always under the necessity of balancing the advantages and disadvantages
that are likely to follow a given course of action. Low money rates may have a
favorable effect on domestic business, but at the same time may stimulate
speculation in securities, commodities, or real estate. High money rates, on
the other hand, may exert a moderating influence on speculation, but at the
same time may result in a higher cost of credit to all lines of business, and thus
be detrimental to commerce and industry; ultimately they may draw gold from
abroad, which would tend to ease the domestic situation. It is impossible to
foresee all the effects of a credit policy and difficult to appraise them even after
they have developed. It is certain, however, that the Federal Reserve System
must steer its course with reference to broader developments and longer time
objectives than day-to-day or month-to-month changes in any particular line
of credit.

INSTRUMENTS OF FEDERAL RESERVE POLICY

403

D IR E C T ACTION IN 1929

In 1929 the approach to direct action was somewhat different
both because it was a part of credit or monetary policy rather than
a procedure related entirely to the behavior of individual banks and
because it was originated by the Federal Reserve Board rather than
by the Federal Reserve Banks. In 1928 and early 1929 the Federal
Reserve Banks sold all the Government securities held in the System
account (although about 150 million dollars continued to be held
by individual Reserve Banks outside of that account), and gradually
advanced the discount rate from 3.5 to 5 per cent. This was done as a
part of a policy of restraint in the face of a rapid expansion of
member bank credit, particularly in brokers’ loans, and a general
speculative situation. In the first half of 1928 there had been an
outflow of gold and this, together with the sales of Government
securities by the Reserve Banks, had resulted in indebtedness of
member banks in the aggregate exceeding a billion dollars.
The two traditional instruments of credit policy were in full
operation. The Reserve Banks had sold United States securities
in the open market for the purpose of putting the member banks in
debt and had advanced the discount rate in order to increase the
cost to member banks of acquiring additional funds. There was,
however, no evidence of slackening in the expansion in speculative
activity, which was being financed in considerable part by loans on
securities by corporations other than banks. On the contrary, early
in 1929 it was increasing at a feverish rate. In the circumstances
the question was whether to raise discount rates still further or to
pursue some other policy. In later years it has been the view of some
students of the period that with business, and particularly construc
tion activity, beginning to show signs of slowing down it might
have been the best policy for the Federal Reserve System in 1929
to ease credit conditions and to let the stock market fall of its own
weight while the System took action to support business activity.
There are other students who believe that there was over-expansion
in some lines of business and that credit restraint would have been a
salutary corrective. At the time, in 1929, the overwhelming weight
of opinion was that a policy of restraint was essential, and discussion

404

BANKING STUDIES

centered on the particular method of restraint that would be most
effective and would best serve the public interest.
There was a difference of opinion between the Federal Reserve
Banks and the Board as to whether an immediate and rapid increase
in the discount rate would be the best policy, or whether it would be
better to leave the discount rate unchanged and to attempt to
control the speculative expansion by insisting that such member
banks as were in debt to the Reserve Banks should either liquidate
their indebtedness or reduce their street loans. The Board in advo
cating this direct action felt that an increase in discount rates was
likely to penalize business throughout the country, which the Board
was not willing to do for the sole purpose of controlling stockmarket speculation. The Board believed that the speculative situa
tion could be reached by more direct methods.
Pressure by the Federal Reserve Board and the Reserve Banks
on member banks to liquidate their street loans or their indebted
ness to the Reserve Banks accentuated the sharp rise in moneymarket rates which reflected the vigorous demand for speculative
loans; high rates paid for money in the stock market in turn at
tracted funds from all over the country and resulted in a rise in
interest rates charged to business. The Board’s policy, which was
continued through the spring, resulted in some liquidation of Federal
Reserve credit and some decrease in brokers’ loans but was accom
panied by a very sharp rise in money rates. In the summer the
policy of direct action was discontinued and shortly thereafter the
discount rate at the New York Bank was raised to 6 per cent. At
the same time, however, the Federal Reserve Banks reduced their
buying rate on acceptances so that there was no substantial tight
ening in the credit situation.
Direct action as a part of monetary policy, therefore, had a
short and somewhat inconclusive trial in 1929. Since that time it
has become more definitely recognized in the law, which in 1933
prescribed that, in determining whether to grant or refuse advances
to member banks, the Federal Reserve Bank shall take into con
sideration “ whether undue use is being made of bank credit for
the speculative carrying of or trading in securities, real estate, or
commodities, or for any other purpose inconsistent with the

INSTRUMENTS OF FEDERAL RESERVE POLICY

405

maintenance of sound credit conditions.” The Banking Act of
1933 also prohibited banks from placing loans on account of
nonbanking lenders, a practice which had contributed to the diffi
culties of control in 1929.
M ARG IN REQUIREMENTS

A further provision for regulating a particular class of loans
without directly affecting the general volume or cost of money was
incorporated in the Securities Exchange Act of 1934. This law,
which grew largely out of the experience of 1924-1929, directs the
Board of Governors to determine the amount of collateral that shall
be required on loans made by brokers and dealers for the purpose of
purchasing or carrying registered securities, and authorizes the
Board to make similar determination with respect to loans made by
banks and other lenders and in addition to prescribe margin re
quirements for short sales. This provision of the law enables the
Board to influence the effective demand for a certain type of loan
directly through determining the loan value of securities, without
limiting the supply of lendable funds.
The machinery for applying this device to brokers and dealers
was set up by the Board in the autumn of 1934, as required by the
Securities Exchange Act. The margin requirements prescribed by
the Board were those formulated in the act. They were on a sliding
scale, differing for different securities between 25 per cent and 45
per cent of the current market price of the security, according to
the amount by which the current market price had advanced from
its lowest price for the three preceding years. Under this formula,
the margin requirement for purchasing or carrying a given stock
would automatically increase with the advance in its price, but not
to a level above 45 per cent. The advance in the market that began
in the spring of 1935 had by the end of the year brought the require
ment for many stocks to this maximum. Early in 1936, at a time
when the market was advancing further and with increased rapid
ity, the Board increased the maximum to 55 per cent, as a precau
tionary measure. This action had the effect of increasing the
requirement on the stocks which had been advancing most rapidly.
Shortly thereafter, when the market was still advancing, this figure

406

BANKING STUDIES

was made uniformly applicable to all registered securities. At the
same time, margin requirements were extended to cover banks as
well as brokers and dealers. The 55 per cent level was retained until
the autumn of 1937, when a reaction in the market and a sharp
recession in general business showed that there was no longer any
current need to restrain speculation in securities for the rise. Margin
requirements were then reduced to the 40 per cent level. At the
same time a requirement of 50 per cent was prescribed for short
sales.
Margin requirements have served a useful public purpose, and
some light has been thrown upon both their possibilities and their
limitations as an instrument of policy. Experience has not been
sufficient, however, to test their effectiveness thoroughly.
POLICY DU RIN G DEPRESSION

In the autumn of 1929 the stock market collapsed and the whole
economic picture changed rapidly from one of upswing to one of
decline. The New York banks were subjected to enormous pressure
as nonbanking corporations and other private lenders to brokers
withdrew their funds, and the banks took over the loans in order
to prevent wholesale bankruptcy by the brokers. The Federal Re
serve System promptly began to buy Government securities to ease
the situation and also reduced discount rates. After 1929 the
System’s policy was one, first, of easing credit conditions, and
later, of permitting the inflow of gold to exert its full easing influ
ence. This policy was pursued in order to counteract the deflationary
process that was under way and of encouraging credit expansion
with a view to promoting business recovery. Discount rates were
gradually reduced from 6 per cent in 1929 to between one and one
and a half per cent in 1937 and the Federal Reserve Banks’ holdings
of United States Government securities were increased from 150
million dollars in the autumn of 1929 to 2.5 billions in the autumn
of 1933.
During the period of deflation security purchases by the Federal
Reserve Banks resulted chiefly in helping member banks to get out
of debt and to meet the constantly growing demand for currency
for hoarding and for gold for export. While the System’s general

INSTRUMENTS OF FEDERAL RESERVE POLICY

407

credit policy was one of promoting monetary ease, money remained
tight and many prospective borrowers found it difficult to obtain
credit. This condition was aggravated by a general collapse in
values, which made it necessary for banks to call many loans, and
reduced the number of people whose credit standing was such as
to enable them to borrow from the banks. In fact, credit liquidation
on a gigantic scale was in progress. It was not until after the middle
of 1932 that member banks began to accumulate a substantial
volume of excess reserves.
The policy of monetary ease was temporarily interrupted in
September 1931 when England went off the gold standard and a
rapid outflow of gold from this country occurred. For a time dis
count rates were raised and acceptance rates were also advanced
with the consequence that acceptance holdings of the Federal Re
serve Banks decreased sharply and member bank discounts tem
porarily increased.
During the period of credit liquidation and general deflation in
1930, 1931, and 1932, the Federal Reserve Banks had been handi
capped in their ability to assist the member banks and to arrest
the deflation both by the rigid eligibility requirements for redis
counting laid down in the Federal Reserve Act and by the require
ment that collateral against Federal Reserve notes must consist of
gold and eligible paper. In order to enable the Reserve Banks better
to function in the emergency, the Glass-Steagall Act passed in
February 1932 permitted the Reserve Banks under certain restric
tions to make advances to member banks on any sound collateral
and temporarily permitted the use of United States Government
obligations as collateral for Federal Reserve notes. These provisions
gave the Federal Reserve Banks greater flexibility in using their
resources to serve the public interest. The power to make advances
to member banks on any sound assets was incorporated into perma
nent law by the Banking Act of 1935, but the power to pledge
United States Government obligations against Federal Reserve
notes, after several extensions, expires under present law on June 30,
1943. Collateral requirements had done fully as much as eligibility
rules in preventing the Federal Reserve System in the years 1930
to 1932 from effectively combating a disastrous deflation.

408

BANKING STUDIES

By the autumn of 1933 member bank indebtedness had dimin
ished to a small amount, discount rates were low, and the member
banks had about 800 million dollars of excess reserves. By 1935
discounts had disappeared almost altogether and excess reserves had
M em ber B a n k R ese r v e S itu atio n *

1. Total Reserves and Their Principal Sources
BILLIONS OF DOLLARS

1932

1933

BILLIONS OF DOLLARS

1934

1935

1936

1937

1938

1939

1940

» For data, see Table 25, pp. 439-44 and Table 30, pp. 448-52.

increased to 2.8 billion dollars as the result almost entirely of an
inflow of gold from abroad following revaluation of the dollar at the
end of January 1934.
Excess reserves and the principal sources of member bank reserves
over the period 1932-1939 are shown in the accompanying chart.

INSTRUMENTS OF FEDERAL RESERVE POLICY

409

This chart indicates clearly that member bank reserve balances
were increased up to the end of 1933 principally by purchases of
United States Government securities by the Reserve Banks and
after that chiefly by the inflow of gold from abroad.
CHANGES IN RESERVE REQUIREMENTS

In view of the large increase of excess reserves the question arose
as early as 1935 whether it would not be wiser for the Federal Re
serve System to absorb some of these excess reserves while they
were unused and widely distributed, rather than allow them to
become the basis of an excessive credit expansion. The so-called
Thomas Amendment adopted in May 1933 introduced an additional
instrument of credit control by authorizing the Board to raise or
lower member bank reserve requirements in order to prevent an
injurious expansion of credit. This provision, however, made the
authority to change requirements dependent on the President’s
declaring the existence of an emergency and also upon the approval
of the Secretary of the Treasury. The Banking Act of 1935 clarified
this matter, removed the emergency provision, and placed authority
entirely in the hands of the Board of Governors. On the other hand
it limited the power to raise reserve requirements by prescribing
that they could not be made more than double the ratios stated in
the law.
In the summer of 1936 the Board of Governors of the Federal
Reserve System decided that it would be in accordance with the
spirit of the law to raise reserve requirements at that time, since
this action would reduce the volume of excess reserves without
putting banks in debt, and would thus prevent the large volume of
excess reserves from becoming the basis of a possible injurious credit
expansion. Consequently, reserve requirements were raised by 50
per cent for all classes of member banks and all classes of deposits.
The increase made no noticeable difference in the credit situation,
as money rates remained low and banks continued to have ample
funds at their disposal. Gold continued to come in and by the end of
1936 the volume of excess reserves again exceeded 2 billion dollars.
At the end of 1936 economic activity was increasing rapidly.
Inventories were accumulating, a wave of buying was in progress,

410

BANKING STUDIES

and the prices of certain industrial raw materials were going up
rapidly. Capital expenditures of manufacturing industries were
growing apace and prices of securities were at the highest level
since the early part of the depression, notwithstanding an increase
in margin requirements for security loans imposed early in 1936.
In the light of these conditions the Board decided in January 1937
once more to raise reserve requirements and this time to the limit
permitted by law; namely, to increase them by one-third for all
classes of banks and deposits, which in the aggregate would bring
the required reserves to double the basic amount stated in the law.
In the meantime the Treasury toward the end of 1936 adopted a
policy of accumulating gold received from abroad in a so-called
inactive account, against which no gold certificates were issued. As
a consequence, current gold imports were not reflected in additions
to member bank reserves but only in the amount of gold in the
inactive account.
In raising reserve requirements for the second time the Board
made it clear that this was not a reversal of the policy of monetary
ease pursued since the beginning of the depression. After meeting
the increased requirements member banks in the aggregate still had
an ample volume of reserves. The Board’s action was precautionary
in character and placed the System in a position where an injurious
credit expansion if it should occur could be controlled by openmarket operations and discount-rate policy. To quote from the
statement issued by the Board at the time:
. . . The section of the law which authorizes the Board to change reserve re
quirements for member banks states that when this power is used it shall be
“ in order to prevent injurious credit expansion or contraction.” The significance
of this language is that it places responsibility on the Board to use its power to
change reserve requirements not only to counteract an injurious credit expan
sion or contraction after it has developed, but also to anticipate and prevent
such an expansion or contraction.
It is the Board’s expectation that, with approximately 500 million dollars
of excess reserves remaining with the banks, credit conditions will continue to
be easy. At the same time the Reserve System will be in a position to take
promptly such action as may be desirable to ease or tighten credit conditions
through open-market and rate policy.
. . . The Board’s action does not reduce the large volume of existing funds

INSTRUMENTS OF FEDERAL RESERVE POLICY

411

available for investment by depositors, and should not, therefore, occasion an
advance in long-term interest rates or a restrictive policy on the part of institu
tional and other investors in meeting the needs for sound business, industrial
and agricultural credit.

In the spring of 1937, the rapid expansion of business slowed
down and there was a sharp slump in the Government security
market. The Board, as already mentioned, had raised reserve
requirements as a precautionary measure in order to place itself
in closer touch with the market, at the same time leaving the banks
a substantial aggregate volume of excess reserves. In order to arrest
the tendency of individual banks to meet temporary actual or
anticipated shortages of reserves through liquidation of securi
ties, the Federal Reserve System in April increased its hold
ings of Government securities by about 100 million dollars, in
accordance with the policy, announced when reserve requirements
were increased, of using open-market operations as a means of
regulating conditions in the money market.
In the spring of 1938, as part of a general move by the Govern
ment to combat a rapid decline in business activity, the United
States Treasury abandoned the policy of placing incoming gold in
an inactive account and discontinued that account, and the Board
of Governors at the same time reduced by about one-eighth, or
750 million dollars, the reserve requirements for member banks.
Since that time excess reserves of these banks have increased to
more than 6 billion dollars.
RELATION TO CAPITAL M A RK ET

In the last few years the Federal Reserve System has had little
occasion or opportunity to exercise an influence on credit conditions.
The extremely low level of interest rates and the large volume of
excess reserves and of deposits have made further easing unneces
sary, while at the same time the incompleteness of business recovery
and the absence of speculative developments have made it unneces
sary and undesirable to do anything to tighten credit conditions.
In these years the System’s operations have been directed largely
toward contributing to the maintenance of orderly conditions in the
bond market. Recognition of the System’s measure of responsibility

412

BANKING STUDIES

for these conditions is indicated by the following quotation from
the Annual Report for 1937:
. . . In recent years the bond market has become a much more important seg
ment of the open money market, and banks, particularly money-market banks,
to an increasing extent use their bond portfolios as a means of adjusting their
cash position to meet demands made upon them. At times when the demands
increase they tend to reduce their bond portfolios and at times when surplus
funds are large they are likely to expand them. Since prices of long-term bonds
are subject to wider fluctuations than those of short-term obligations, the
increased importance of bonds as a medium of investment for idle bank funds
makes the maintenance of stable conditions in the bond market an important
concern of banking administration.
LIM ITATIONS ON E XISTIN G POWERS

So long as business activity does not increase to a more normal
level, and there is no evidence of speculative developments or of
excessive use of credit, the accumulation of excess reserves at mem
ber banks does not in itself constitute a dangerous development,
even though it may contain elements of danger in the future.
Consequently the System’s open-market operations in recent years
have been confined chiefly to shifts from short- to long-term securi
ties in its portfolio, or the reverse, in accordance with conditions
in the bond market. In the summer of 1939 the System’s portfolio
of United States Government securities declined somewhat, because
it was decided to permit maturing Treasury bills to be repaid
without replacement whenever such replacement would either re
quire paying a premium above a no-yield basis or would cause
disturbance in the money market. United States Government
securities during the period have been strong at the highest level
of prices and the lowest level of yields on record. At the time of
the outbreak of the present World War, there was a sharp fall in
the prices of United States Government securities, and the Federal
Reserve System made large purchases of these securities in the
open market for the purpose of preventing disorderly conditions
and contributing to stability in the capital market. Since that time
United States Government security prices have advanced steadily,
there has been a strong demand for them in the market, and the
system has disposed of some of its holdings.

INSTRUMENTS OF FEDERAL RESERVE POLICY

413

As the result principally of world conditions that have brought
a huge amount of gold to this country, member bank reserves in
recent years have increased to a point where these banks are in
position to double their outstanding volume of credit without hav
ing to resort to the Federal Reserve Banks. On the basis of their
own reserves the Federal Reserve Banks have almost unlimited
power of further expanding the credit base, and the United States
Treasury also has authority in various ways to add to bank reserves.1
On the side of restraint, however, existing powers are limited. The
Treasury can not contract the credit base without increasing the
public debt, and the Federal Reserve System’s power to absorb
bank reserves is limited to its unused power of raising reserve
requirements, the use of which would absorb about one billion
dollars of reserves, together with its power to dispose of the 2.2 bil
lion dollars of securities in its portfolio. As against existing excess
reserves of 6 billion dollars and probable further additions through
gold imports, the System’s powers of absorbing reserves are clearly
inadequate. If an injurious credit expansion should get under way,
the Federal Reserve System would not be in position to prevent its
development.
The funds accumulating in the member banks are not inflationary
so long as they are held in cold storage. The amount of deposits and
of reserves in existence at the present time is the largest in the
history of the country, and a large part of them are held in idleness.
In fact, there appears to have developed among some bankers a
feeling that it is prudent to maintain a substantial volume of
reserves in excess of legal requirements. If, however, this situation
and attitude should change and an inflationary development should
get started, the System would be powerless to arrest its progress.
1In the early 1930’s the Secretary of the Treasury and the President were given
many different powers to combat the disastrous deflation which was raging at that
time. The powers, the exercise of which would add to member bank reserves, have
remained largely unused. Theoretically their use to the maximum authorized by law
could add at the present time as much as 14 billion dollars to the existing volume of
member bank reserves. Of this amount about 4 billions could result from disbursing
the Stabilization Fund and the issuance of silver certificates against present holdings
of silver bullion, and 10 billions from the issuance of 3 billions of United States notes,
authorized by law, plus the revaluation to the maximum permitted of the gold and the
silver dollar and the disbursement of the resulting increments.

414

BANKING STUDIES

This state of affairs presents the following alternative courses of
action: (1) to give the monetary authorities sufficient powers to
control the volume of reserves and of deposits, either by finding
some way of reducing existing bank reserves, or by authorizing the
authorities to absorb them into required reserves; (2) to give
banking authorities much greater powers than now exist to regulate
directly the volume and character of bank loans and investments,
that is, further to limit private discretion in banking; or (3) to
permit reserves and deposits to expand without restraint in the
hope that a dangerous inflation can be prevented by other than
monetary means. It is not the object of this paper to discuss the
possible techniques or the relative wisdom of these three courses
of action.

TABLES
(Throughout these studies December 31, 1939 is used as the termination
date for annual figures and June 30, 1940 for monthly and daily figures.)

1. B a n k N otes

and

D eposits , 1834-1890

(In millions of dollars)
Y eah*

B ank N otes1*

D eposits®

547
657
657
689
673

1870..........
1871..........
1872..........
1873..........
1874..........

291
313
331
340
341

679
817
875
908
886

1875..........
1876..........
1877..........
1878. .
1879..........

342
317
302
313
321

948
898
958
863
1,144

110

1880..........
1881..........
1882..........
1883..........
1884..........

337
350
352
348
331

1,143
1,417
1,506
1,557
1,507

1885..........
1886..........
1887..........
1888..........
1889..........

309
308
277
245
207

1,653
1,688
1,995
2,019
2,296

1890..........

182

2,442

76
83
115
127
85
90

1840..
1841..
1842..
1843..
1844..

107
107
84
59
75

76
65
62
56
85

1845..
1846..
1847..
1848..
1849..

90
106
106
129
115

1850..
1851..
1852 .
1853..
1854..

131
155
161
146
205

1855..
1856..
1857..
1858..
1859..

187
196
215
155
193

190
213
230
186
260

1860..
1861..
1862..
1863..
1864..

207

254
257
296
394
427

210

D eposits®

289
296
291
298
294

95
104
140
149
116
135

184
239

B ank N otes’5

1865..........
1866..........
1867..........
1868..........
1869..........

1834..
1835..
1836.
1837..
1838..
1839..

202

YEA*a

97
92
103
91
129
137
146
188

a Data for June 30 or nearest available date.
b Data are aggregates for State and national banks, compiled as follows: for 1834-59 from the Annual
Report of the Comptroller of the Currency, 1931, Vol. II, p. 1018; for 1860-90 from the Annual Report of the
Secretary of the Treasury, 1928, p. 554.
0 Data are aggregates for State and national banks, compiled as follows: State banks, for 1834-51 and
1853-63, from the Annual Report of the Comptroller of the Currency, 1920, p. 847; for 1852 and 1864-74, partly
estimated; for 1875-90, Report of the National Monetary Commission, Vol. 21, p. 31. Deposits of unincor
porated and of all savings banks are excluded for 1864-90; such deposits are not believed to have been
large prior to that time. While all figures for bank deposits in the early period are known to be fragmen
tary, they are considered adequate for the purpose of this study.
National banks, for 1864-66, derived from the Annual Report of the Comptroller of the Currency,
1879, Vol. I, p. 3, and represent all deposits of national banks less interbank deposits; for 1867-90 the
figures represent a total of individual bank deposits of national banks as shown in Report of the National
Monetary Commission, Vol. 21, p. 31, plus Government deposits at all banks as shown in the Annual Report
of the Comptroller of the Currency, 1919, Vol. I, p. 187. Comparisons reveal that Government deposits
reported as held by banks were largely in the possession of national banks.

417

418

feANkiNG STtJ&iES

2.
YEA*b

Commercial B anks in t h e U n ite d S ta te s , 1834-1940*
State
B anks0

N ational
B anks

Unincor
porated
B anks**

1834....

506

1835....
1836....
1837....
1838....
1839....

704
713
788
829
840

—
—
—
—
—

1840....
1841....
1842....
1843....
1844....

901
784
692
691
696

—
—
—
—
—

1845....
1846....
1847....
1848....
1849....

707
707
715
751
782

—
—
—
—
—

1850....
1851....
1852....
1853....
1854....

824
879
815
750
1,208

—
—
—
—
—

1855....
1856....
1857....
1858....
1859....

1,307
1,398
1,416
1,422
1,476

—
—
—
—
—

1860....
1861....
1862....
1863....
1864....

1,562
1,601
1,492
1,466
1,089

—
—
—
66
467

1865....
1866....
1867....
1868....
1869....

349
297
272
247
259

1,294
1,634
1,636
1,640
1,619

1870....
1871....
1872....
1873....
1874....

325
452
566
277
368

1,612
1,723
1,853
1,968
1,983

1875....
1876....
1877....
1878....
1879....

586
671
631
510
648

2,076
2,091
2,078
2,056
2,048

2,432
2,586
2,545

1880....
1881....
1882....
1883....
1884....

650
683
704
788
852

2,076
2,115
2,239
2,417
2,625

2,573
2,799
3,107
3,306
3,458

1885....
1886....
1887....
1888....
1889....

1,015
891
1,471
1,523
1,791

2,689
2,809
3,014
3,120
3,239

3,456
3,689
3,966
4,064
4,215

For footnotes, see bottom of opposite page.

YEARb

State
B anks 0

N ational
B anks

Unincor
porated
B anks*!

1890....
1891....
1892....
1893....
1894....

2,250
2,743
3,773
4,188
4,188

3,484
3,652
3,759
3,807
3,770

4,305
4,230
4,004
4,031
3,844

1895....
1896....
1897....
1898....
1899....

4,369
4,279
4,420
4,486
4,738

3,715
3,689
3,610
3,581
3,582

3,924
3,810
3,806
3,853
4,168

1900....
1901....
1902....
1903....
1904....

5,007
5,651
6,171
6,890
7,970

3,731
4,163
4,532
4,935
5,327

5,187
5,060
4,976
5,417
5,484

1905....
1906....
1907....
1908....
1909....

9,018
10,220
11,469
12,803
13,421

5,664
6,046
6,422
6,817
6,886

5,291
4,823
4,947
4,576
4,407

1910....
1911....
1912....
1913....
1914....

14,348
15,322
16,037
16,841
17,498

7,138
7,270
7,366
7,467
7,518

3,669
3,683
3,406
3,213
3,062

1915....
1916....
1917....
1918....
1919....

17,748
18,253
18,710
19,404
19,646

7,597
7,571
7,599
7,699
7,779

2,737
1,968
1,852
1,846
1,817

1920....
1921....
1922....
1923....
1924....

20,635
21,267
20,789
20,654
20,028

8,024
8,150
8,244
8,236
8,080

1,736
1,242
1,157
1,080
1,008

1925....
1926....
1927....
1928....
1929....

19,573
18,994
18,119
17,440
16,728

8,066
7,972
7,790
7,685
7,530

915
860
792
737
685

1930....
1931....
1932....
1933....
1934....

15,798
14,323
12,137
8,908
9,604

7,247
6,800
6,145
4,897
5,417

598
504
428
330
236

1935....
1936....
1937....
1938....
1939....

9,752
9,682
9,585
9,409
9,262

5,425
5,368
5,293
5,242
5,203

246
136
85
73
64

1940....

9,238

5,164

419

TABLES

3. Suspensio n s

YEAEb

1892.
1893.
1894.

N ational
B anks
12

69
23

I n co rpo rated C o m m e r c ia l B a n k s
U n it e d St a te s , 1892-1939*

State B anks0

32
228
39

1895.
1896..
1897..
1898..
1899.

34
34
28

1900.
1901..
1902..
1903.
1904.

5
9
4
13

14
15
30

20
6

25
34
58
83
37

1905..
1906..
1907..
1908..
1909.
1910..
1911..
1912..
1913.
1914..

64
19

19
8
6

5
6

13
15

40
58
51
75
107

YEA*b

N ational
B anks

in the

State B anks0

1915.
1916.
1917.
1918.
1919.

1920.
1921.
1922.
1923.
1924.

7
52
49
90
122

136
409
294
533
616

1925.
1926.
1927.
1928.
1929.

118
123
91
57
64

461
801
545
422
564

1930.
1931.
1932.
1933.
1934.

161
409
276
1,101
1

1,131
1,804
1,140
2,790
43

1935.
1936.
1937.
1938.
1939.

4
1
4

30
42
54
51
37

2
2

93
32
29
35
59

a Data for 1892-1920 compiled by the Federal Reserve System Committee on Branch, Group, and
Chain Banking and incorporated in an unpublished study, Bank Suspensions in the United States, 18921932, p. 132; for 1921-1939, by the Board of Governors and published in the Federal Reserve Bulletin for
September 1937, pp. 869-871, and for December 1940, p. 1292. In making comparisons between State and
national bank suspensions it should be remembered that in almost all years there were many more State
than national banks in existence. See Table 2, p. 418.
Figures are annual totals for the years ending December 31 and are for continental United States
only.
0 Excludes unincorporated and mutual savings banks.

Footnotes for Table 2 on opposite page:
a Data for the years 1834-1931 compiled by the Federal Reserve System Committee on Branch,
Group, and Chain Banking and incorporated in an unpublished study, Changes in the Number and Size
of Banks in the United States, 1834-1931, pp. 91-93; for the years 1932-1940, by the Board of Governors and
published in current issues of the Federal Reserve Bulletin, except data for unincorporated banks for the
years 1932 and 1933, which are based on figures appearing in annual reports of the Comptroller of the
Currency.
b All figures as of June 30 or nearest available date.
0 Excludes mutual savings banks.
d Data for years prior to 1877 not available.

420

BANKING STUDIES
4. C urrency

C ircu lation ,

K in d , 1860-1940*

(In millions of dollars)
YEAXb

A ll K inds0

State B ank
N otes

N ational
B ank N otes

Gold and
T reasury
Currency0

F ederal
R eserve
C urrency

1860...........
1861...........
1862...........
1863...........
1864...........

435
484
603
838
838

207
202
184
239
179

__
—
—
—

228
282
419
599
629

1865...........
1866...........
1867...........
1868..........
1869..........

847
777
736
743
737

143
20
4
3
3

146
276
287
294
292

558
481
444
445
443

—
—
—

1870...........
1871...........
1872...........
1873...........
1874...........

772
793
828
838
863

2
2
2
1
1

289
311
329
339
340

481
480
497
497
522

__
—
—
—
—

1875...........
1876...........
1877...........
1878..........
1879..........

833
807
814
820
819

1
1
1
1
—

341
316
301
312
321

492
489
511
507
498

__
—
—
—
—

1880...........
1881...........
1882...........
1883...........
1884...........

973
1,114
1,174
1,230
1,244

__
—
—
—
—

337
350
352
348
331

636
764
821
882
913

__
—
—
—
—

1885...........
1886...........
1887...........
1888...........
1889......

1,293
1,253
1,318
1,372
1,380

__
—
—
—
—

309
308
277
245
207

984
945
1,042
1,127
1,172

__
—
—
—
—

1890...........
1891...........
1892...........
1893...........
1894...........

1,429
1,497
1,601
1,597
1,661

__
—
—
—
—

182
162
167
175
200

1,248
1,335
1,434
1,422
1,461

—
—
—
—
—

1895...........
1896...........
1897...........
1898..........
1899...........

1,602
1,506
1,641
1,838
1,904

__
—
—
—
—

207
215
226
223
238

1,395
1,291
1,415
1,615
1,666

—
—
—
—
—

1900..........
1901...........
1902...........
1903...........
1904...........

2,081
2,203
2,279
2,400
2,553

_
—
—
—

300
345
345
400
433

1,782
1,858
1,934
2,000
2,120

__
—
—
—

1905...........
1906...........
1907 .........
1908...........
1909...........

2,623
2,775
2,814
3,079
3,149

480
548
589
632
666

2,143
2,227
2,225
2,447
2,483

1910......... .
1911...........
1912...........
1913...........
1914...........

3,149
3,263
3,335
3,419
3,459

684
688
705
716
715

2,466
2,575
2,630
2,703
2,744

For footnotes, see p. 421.

—
—

—
—
—
—
—
—

—

__
—
—

—
—

—
—.
—
__

—
—
—

—

421

TABLES
4. C urrency

C irculation ,

K in d , 1860-1940*— Continued

(In millions of dollars)
YEAEb

A ll K inds0

1915...........
1916...........
1917...........
1918...........
1919...........

3,320
3,649
4,066
4,482
4,877

1920...........
1921...........
1922...........
1923...........
1924...........

5,468
4,911
4,463
4,823
4,849

1925...........
1926...........
1927...........
1928...........
1929...........

4,815
4,885
4,851
4,797
4,746

1930...........
1931...........
1932...........
1933...........
1934...........

4,522
4,822
5,695
5,721
5,373

1935...........
1936...........
1937...........
1938...........
1939...........

5,567
6,241
6,447
6,461
7,047

1940...........

7,848

N ational
B ank N otes

Gold and
T reasury
Currency0

F ederal
R eserve
Currency

—

782
716
691
691
639

2,467
2,782
2,865
2,081
1,632

71
151
510
1,709
2,605

—

690
721
728
711
734

1,528
1,460
1,524
1,857
2,262

3,250
2,730
2,211
2,255
1,853

—

682
651
650
650
653

2,490
2,549
2,494
2,515
2,396

1,643
1,685
1,707
1,630
1,696

—

651
648
701
920
902

2,466
2,462
2,211
1,614
1,262

1,405
1,711
2,783
3,187
3,210

—

704
366
269
217
186

1,558
1,821
1,971
2,100
2,351

3,304
4,054
4,206
4,144
4,510

165

2,497

5,185

State B ank
N otes

_
—
—
—
_
—
—
—
_
—
—
—
_
—
—
—
_
—
—
—

a Data compiled by the Secretary of the Treasury and published in his annual report for 1928, pp.
554-555, and for 1940, p. 810. For 1860-1914 the figures include currency outside the Treasury and for
1915-1940, currency outside the Treasury and Federal Reserve Banks. In all cases a dash indicates zero.
Figures as of June 30 or nearest available date.
0 Includes in 1862 an estimated 50 million dollars of demand notes which were not “ greenbacks” (see
p. 40 of pamphlet issued by the Treasury Department, Information Respecting United States Bonds,
Paper Currency and Coin, Production of Precious Metals, etc., revised July 1,1915); excludes for 1862-1878
Treasury paper currency (shown on p. 554 of the Annual Report of the Secretary of the Treasury, 1928) on
the ground that it represents interest-bearing notes not payable on demand; excludes for 1934-1940 gold
coin amounting to 287 million dollars previously reported as in circulation (see Annual Report of the
Federal Reserve Board, 1934, p. 67, Note 2).

BANKING STUDIES

5. i

T re a s u ry C u rre n c y in C ir c u la tio n , 1860-1940*

(In millions of dollars)
fEAR1

Gold C oin and
Certificates

Silver D ollars
and Certificates 0

United States
N otes

_
—
—
•—

_
—

Subsidiary and
M inor C oin 6

—

123
312
415

21
16
13
27
29

—
—
—
—

379
328
319
329
315

30
33
33
35
36

113
90
103
97
97

—
—
—
—

325
343
346
348
372

43
47
48
52
53

1875.
1876.
1877.
1878.
1879.

82
99
no
110
126

—
—
1
9

350
331
338
321
302

60
59
63
75
61

1880.
1881.
1882.
1883.
1884.

234
321
363
405
412

26
68
87
108
137

328
328
325
323
319

48
47
46
46
45

1885.
1886.
1887.
1888.
1889.

468
434
468
512
494

141
141
198
257
311

331
324
327
308
316

44
46
49
50
51

1890.
1891.
1892.
1893.
1894.

505
527
550
501
562

354
407
482
525
514

335
343
339
331
326

54
58
63
65
59

1895.
1896.
1897.
1898.
1899.

528
497
555
694
712

488
478
493
547
556

319
256
307
310
329

60
60
60
64
69

1900.
1901.
1902.
1903.
1904.

812
877
939
995
1,112

550
544
545
546
545

318
330
334
334
334

102
107
116
125
129

1905.
1906.
1907.
1908.
1909.

1,136
1,185
1,162
1,396
1,414

538
556
558
547
554

332
336
342
339
340

137
150
163
165
175

1910.
1911.
1912
1913
1914,

1,394
1,520
1,554
1,612
1,638

555
529
542
544
551

335
339
338
337
338

182
187
196
210
217

1915
1916
1917
1918
1919

1,409
1,675
1,749
1,048
803

530
545
542
449
244

310
328
312
292
274

218
234
262
292
311

1920
1921

734
648
589
790
1,194

176
226
325
423
420

278
259
292
303
298

340
327
318
341
350

1860.
1861.
1862.
1863.
1864.

207
266
283
260
185

1865.
1866.
1867.
1868.
1869.

149
120
92
81
92

1870.
1871.
1872.
1873.
1874.

continuation of table on p. 423.

423

TABLES
5. G old

and

T r easur y C ur rency

C irculation , 1860-1940*— Continued

(In millions of dollars)
Gold C oin and
Certificates

Silver D ollars
and Certificates 0

United States
N otes

Subsidiary and
M inor C oin ®

1925............
1926............
1927............
1928............
1929............

1,407
1,449
1,392
1,396
1,303

438
431
426
432
432

283
295
292
29tf
262

362
374
384
389
399

1930............
1931............
1932............
1933............
1934............

1,352
1,360
1,168
586,
150

427
412
384
390
433

288
299
289
269
280

399
391
370
369
399

YEARb

1935............
1936............
1937............
1938............
1939............

117
101
88
79
72

735
991
1,117
1,271
1,497

285
278
281
262
266

421
451
485
488
516

1940............

1,629

248

553

a See note a of preceding table.
b Figures as of June 30 or nearest available date.
0 Includes Treasury notes of 1890.
See note c of preceding table.
e Includes fractional currency.

6. B a n k s a n d T h e i r

D e p o s i t s , D e c e m b e r 31, 1939a

By Kind of Bank
Percentage D istribution

B ank

B anks

D eposits
(I n M illions )

Banks

Deposits

All Banks.................

15,034

$68,229

100.0

Insured..................................
Federal Reserve member:
National...................
Stateb.......................
Nonmember:
Mutual savings........
Other Stateb.............

13,585

57,478

90.4

84.2

5,187
1,175

31,559
17,781

34.5
7.8

46.2
26.0

51
7,172

1,409
6,729

0.4
47.7

9.9

Noninsured..... ....................
Mutual savings...............
Other Stateb...................
Private0..........................

1,449

10,751

9.6

15.8

9,114

3.3
5.9
.4

13.4
1.3

Kind

500
887
62d

886

751®

2.1

1.1

a Data compiled by the Board of Governors.
b The statistics of insured and noninsured “ State” banks include stock savings banks, trust companies
(73 with no deposits), 44 cash depositories (all in South Carolina), 105 Morris Plan and other industrial
banks, 10 branches of foreign banks, and 21 inactive banks, trust companies, and miscellaneous financial
institutions. The last two groups are included because they are counted as “ State banks” by the banking
departments of the States in which they are located. Their inclusion does not appreciably affect the totals,
but their exclusion would make it difficult to reconcile the State bank totals with those published by
various State banking departments.
0 Comprises only private banks operating under some degree of State supervision. Reports indicate
that in three or four States there are a number of small private banks that do not report to State banking
departments in spite of the provisions of Sec. 21(a) of the Banking Act of 1933, as amended, but adequate
statistical data thereon are not available.
d One private bank is insured and it is included in “ other State” banks under “ insured” banks.
6 Reduced to 146 million dollars by June 29, 1940, because the largest private bank had converted
into a trust company.

424

B A N K IN G

7. P ercentage D istribution

S T U D IE S

A ssets

D iffer ent C lasses

I nsured

C ommercial B a n k s , D ecem ber 3 1 , 1939a

1. Percentage Distribution of Assets, by Type

Class

B ank

Central reserve city member:
New York.....................................
Chicago.........................................
Reserve city member..........................
Country member.................................
Insured nonmember............................

Cash
A ssets®

L oans

40.8
40.2
34.4
30.9
26.9

20.1
15.8
27.1
30.4
37.3

United
States
G overn
ment
Securities0

29.1
33.5
26.4
20.2
15.9

Other
Securities

Other
A ssets

7.7
9.2
8.9
14.7
15.5

2.3
1.3
3.2
3.8
4.4

2. Percentage Distribution of Loans, by Type

Class

B ank

Commercial ,
I ndustrial ,
and A gri
cultural
L oans®

Central reserve city member:
New York.......................
Chicago...........................
Reserve city member............
Country member...................
Insured nonmember..............

57.5
68.3
46.5
37.9
29.5

L oans for
P urchasing
or C arrying
Securities

R eal -E state
L oans

A ll Other
L oans

24.3
18.8
6.4
5.1
4.1

4.0
2.3
25.0
31.0
40.7

14.2
10.6
22.1
26.0
25.7

a For underlying statistical data, including statistics by States, see Member Bank Call Report
and Assets and Liabilities of Operating Insured Banks, both as of Dec. 30,1939. Corresponding distri
butions for noninsured commercial banks are not available, but noninsured banks hold only about 3
per cent of the total assets of all commercial banks.
b Comprises vault cash, reserve balances with Federal Reserve Banks, balances with other banks, and
cash items in process of collection.
0 Direct and guaranteed.
d Includes open-market paper.

425

TABLES

8. P e r c e n t a g e

D is t r i b u t i o n

M em ber

B anks

R a t io s

L oans,

S e c u r it ie s , a n d C a s h A s s e t s t o T o t a l A s s e t s , a n d b y Siz e o f
Bank,

1939a

Percentage D istribution
R atio of Specified
A ssets to $100 of
T otal A ssets

Loans...........................
Less than $10........
10-20.......................
20 30.......................
30 40.......................
40-50.......................
50 60.......................
60 and over..........

Securities....................
Less than $10........
10-20.......................
20 30.......................
30 40.......................
40-50.......................
50-60.......................
60 and over..........

Cash assets...............
Less than $10........
10
20
30
40
50
60

20.......................
30.......................
40.......................
50.......................
60.......................

and over...........

All Member B anks

$250,000

$1,000,000

among

D eposit Groups

$5,000,000

All Deposit

$250,000

Groups

and Under

$1,000,000

$5,000,000

$50,000,000

100.0
1.7
12.7
24 7
27.0
20.1
9.6
4.2

100.0
.6
3.5
11.9
26.0
29.9
19.0
9.1

100.0
1.3
8.4
19.9
27.2
24.2
12.7
6.3

100.0
1.8
16.1
29.5
26.6
17.0
6.8
2.2

100.0
2.8
20.6
32.2
28.3
12.4
3.0
.7

100.0
3.3
27.5
38.3
25.9
5.0

100.0
5.8
16.5
22.9
23.5
18.0
9.6
3.7

100.0
17.7
24.5
31.0
16.2
8.0
2.6

100.0
7.3
22.0
23.7
22.0
14.5
7.7
2.8

100.0
3.6
11.7
20.8
24.5
21.2
12.7
5.5

100.0
1.5
9.4
21.8
28.5
24.4
11.2
3.2

100.0

100.0
.1
19.9
37.0
26.9
12.0
3.3
.8

100.0

100.0
b
21.3
37.4
26.3

100.0
.1
21.3
38.9
25.1
10.7
3.1
.8

100.0

—
—

14.1
38.1
28.1
14.3
5.0
.4

11.0
3.1
.9

—

16.5
32.2
30.7
15.8
3.6
1.2

Over
$50,000,000

—
—

—

5.8
22.5
32.5
29.2
7.5
2.5
—

3.3
22.5
44.2
25.0
4.2
.8

a Data compiled by the Federal Reserve Banks and the Board of Governors. Dash indicates zero.
b Less than .1 per cent.

426

BANKING STUDIES

9. C o m m e r c ia l B a n k s

and

T h e ir D epo sits , D e c e m b e r 31, 1939a

By Kind and Size of Bank
K ind

and^Size of

B ank

BANKSb

D eposits
(I n M illions )

P ercentage D istribution

Banks

Deposits

All commercial............................................
Deposits of $250,000 and under...........
250,000- 500,000............................
500,000- 1,000,000............................
1,000,000- 2,000,000............................
2,000,000- 5,000,000............................
5,000,000-50,000,000............................
Over $50,000,000..................................

14,389
3,239
3,226
3,052
2,240
1,497
947
133

$56,758
501
1,173
2,168
3,148
4,563
12,272
32,933

100.0
22.6
22.5
21.3
15.6
10.5
6.6
.9

100.0
.9
2.1
3.8
5.6
8.0
21.6
58.0

National.......................................................
Deposits of $250,000 and under...........
250,000- 500,000.............................
500,000- 1,000,000.............................
1,000,000- 2,000,000.............................
2,000,000- 5,000,000............................
5,000,000-50,000,000............................
Over $50,000,000..................................

5,187
362
890
1,260
1,161
875
559
78

31,559
66
336
916
1,631
2,678
6,968
18,964

100.0
7.0
17.1
24.3
22.4
16.9
10.8
1.5

100.0
.2
1.1
2.9
5.1
8.5
22.1
60.1

State member............ .................................
Deposits of $250,000 and under...........
250,000- 500,000............................
500,000- 1,000,000............................
1,000,000- 2,000,000............................
2,000,000- 5,000,000............................
5,000,000-50,000,000............................
Over $50,000,000...................................

1,175
70
185
258
200
192
218
48

17,781
13
69
187
286
611
3,198
13,417

100.0
6.0
15.8
22.0
17.1
16.4
18.6
4.1

100.0
.1
.4
1.1
1.6
3.4
18.0
75.4

Nonmember.................................................
Deposits of $250,000 and under...........
250,000- 500,000............................
500,000- 1,000,000............................
1,000,000- 2,000,000.............................
2,000,000- 5,000,000............................
5,000,000-50,000,000............................
Over $50,000,000..................................

8,027
2,807
2,151
1,534
879
430
170
7

7,418
422
768
1,065
1,231
1,274
2,106
552

100.0
35.2
27.0
19.2
11.0
5.4
2.1
.1

100.0
5.7
10.3
14.4
16.6
17.2
28.4
7.4

* Data compiled by the Board of Governors. Excludes 63 private banks, 10 branches of foreign banks,
and 21 inactive institutions sometimes included in State banking statistics. (See Table 6, note b, p. 423.)
The totals in this column include 2 national banks, 4 State member banks, and 49 nonmember banks
which have no deposits or for which deposit figures are not available. To this extent the “ Banks” column
is not comparable with the “ Deposits” column.

427

TABLES
10. C ommercial B a nk ing O ffices , D ecember 31, 1939*

By Kind of Bank and by Population of Place in Which Located
B ranches
B anks P lus
B ranches

B anks

All commercial........................
Under 500 population.............
500999.......................
1,000- 2,499.......................
2,500- 9 ,9 9 9 ....................
10,000- 49,999........................
50,000- 99,999.......................
100,000-499,999.......................
500,000 and over.....................

17,880
3,029
2,824
3,421
3,542
1,951
512
1,074
1,527

14,389
2,636
2,517
3,083
3,140
1,677
369
601
366

1,623

National.........................................
Under 500 population.............
500999.......................
1,000- 2,499.......................
2,500- 9,999.......................
10,000- 49,999.......................
50,000- 99,999.......................
100,000-499,999.......................
500,000 and over.....................

6,705
340
705
1,397
1,836
1,075
232
482
638

5,187
303
626
1,227
1,588
923
168
234
118

681

State member................................
Under 500 population.............
500999........................
1,000- 2,499.......................
2,500- 9,999.......................
10,000- 49,999.......................
50,000- 99,999.......................
100,000-499,999.......................
500,000 and over.....................

2,177
94
136
272
357
276
110
274
658

1,175
81
116
237
282
198
55
97
109

771

Nonmember...................................
Under 500 population.............
500999.......................
1,000- 2,499.......................
2,500- 9,999.......................
10,000- 49,999.......................
50,000- 99,999.......................
100,000-499,999.......................
500,000 and over.....................

8,998
2,595
1,983
1,752
1,349
600
170
318
231

8,027
2,252
1,775
1,619
1,270
556
146
270
139

B ank

and

Population Groups

In Head-Office
Cities
—
—

3
11
60
73
409
1,067

Outside HeadOffice Cities
1,868
393
307
335
391
214
70
64
94
837
37
79
170
246
125
40
50
90

—
—
—

2
27
24
198
430

231
13
20
35
73
58
22
9
1

—
—
—

2
20
33
168
548
171

800
343
208
130
72
31
8
5
3

—
—

3
7
13
16
43
89

a Data compiled by the Board of Governors. Excludes 63 private banks, 10 branches of foreign banks,
and 21 inactive institutions sometimes included in State banking statistics.

11. M e m b e r B a n k E a r n i n g s

and

C a p it a l R a t io s ,

1939a

By Size of Bank
A verage N et Current E arnings
Size Group—T otal D eposits

$250,000 and under.................................
250,000- 1,000,000..............................
1,000,000- 5,000,000..............................
5,000,000-50,000,000..............................
Over $50,000,000................. ..................
All member banks..........................

T otal Capital
Accounts per $100
of T otal A ssets

Per $100 of Total
Assets

Per $100 of Total
Capital Accounts

$1.40
1.20

1.00
.80
.70

$7.10
9.00
8.70
8.10
7.40

$21.30
14.60
12.80

1.10

8.60

13.90

11.00
9.70

a Ratios compiled by the Board of Governors. Corresponding data for all nonmember banks are not
available. Ratios shown are averages of ratios computed for each member bank. (For further details, see
Federal Reserve Bulletin for June 1940, pp. 588-601.)

428

BANKING STUDIES

12. B anks O p e ra tin g B ran ch es and T h e ir B ran ch es, 1900-1939®
B ranches0

B anks Operating
Branches

State

National
Y ear 15
All
Banks

Na
tional

State

All
Branches

Total

In
Outside
Head- HeadOffice
Office
City
City

Total

In
HeadOflice
City

Outside
HeadOffice
City

1900....
1905....
1910....
1915....

87
196
292
397

5
5
9
12

82
191
283
385

119
350
548
785

5
5
12
26

1
1
1
15

4
4
11
11

114
345
536
759

24
134
270
420

90
211
266
339

1920....
1921....
1922....
1923....
1924....

530
547
610
671
706

21
23
55
91
112

509
524
555
580
594

1,281
1,455
1,801
2,054
2,297

63
72
140
204
256

41
50
118
181
233

22
22
22
23
23

1,218
1,383
1,661
1,850
2,041

732
854
1,038
1,146
1,281

486
529
623
704
760

1925....
1926....
1927....
1928....
1929....

719
743
739
774
763

130
148
153
171
167

589
595
586
603
596

2,524
2,701
2,912
3,136
3,349

318
421
723
934
995

296
384
433
595
650

22
37
290
339
345

2,206
2,280
2,189
2,202
2,354

1,428
1,493
1,525
1,545
1,623

778
787
664
657
731

1930....
1931....
1932....
1933...
1934....

750
722
680
584
724

166
164
157
146
176

584
558
523
438
548

3,518
3,463
3,191
2,780
3,002

1,042
1,110
1,220
1,121
1,243

703
714
831
677
691

339
396
389
444
552

2,476
2,353
1,971
1,659
1,759

1,684
1,585
1,233
998
976

792
768
738
661
783

1935....
1936....
1937....
1938....
1939....

816
853
903
917
934

181
188
194
194
195

635
665
709
723
739

3,151
3,266
3,407
3,440
3,491

1,329
1,398
1,485
1,499
1,518

686
679
690
687
681

643
719
795
812
837

1,822
1,868
1,922
1,941
1,973

958
960
956
943
942

864
908
966
998
1,031

a Data for 1900-1931 compiled by the Federal Reserve System Committee on Branch, Group, and
Chain Banking and incorporated in an unpublished study Branch Banking in the United States, pp. 3
and 6; for 1932-1939 compiled by the Board of Governors and published in the Federal Reserve Bulletin.
Mutual savings and private banks and their branches are excluded. Morris Plan and other industrial
banks operating branches are included as follows: Prior to 1933 only those reported in the abstracts
published by State banking departments; in 1933 and 1934,12 banks operating 27 branches in head-office
city and 9 branches outside head-office city; in 1935 and 1936, 13 banks operating 27 branches in headoffice city and 11 branches outside head-office city; in 1937,13 banks operating 29 branches in head-office
city and 11 branches outside head-office city; in 1938,12 banks operating 29 branches in head-office city
and 10 branches outside head-office city, and in 1939, 13 banks operating 31 branches in head-office city
and 11 branches outside head-office city.
b Prior to 1924 the figures are not for any uniform month. For 1924 and 1927-1931 they are for June,
and for 1925-1926 and 1932-1939, for December
0 Some State laws make a distinction between “ branches” and other types of “ additional offices.”
This table adheres to the definition of “ branch” given in Sec. 5155, U.S.R.S., which includes “ any
branch bank, branch office, branch agency, additional office, or any branch place of business... .at
which deposits are received, or checks paid, or money lent.”

Footnotes for Table 13 on opposite page:
a Data compiled by the Board of Governors. Mutual savings banks and private banks and their
branches are excluded, but 10 branches of foreign banks and 21 inactive institutions sometimes in
cluded in State banking statistics are included here. In the latter respect the totals for commercial
banks and banking offices differ from those in Tables 9 and 10, pp. 426-27. In all cases a dash in
dicates zero.
b See note c, Table 12 above.
c Includes all banks and branches.

429

TABLES

13. G e o g r a p h i c D i s t r i b u t i o n o f B r a n c h B a n k i n g , D e c e m b e r 31,1939*

(Deposits in thousands of dollars)
A ll Commercial
B anks
State

and Geographic
D ivision

Num
ber

Deposits

Commercial
B anks Operating
Branches

Num
ber

Deposits

BRANCHESb
A ll
Com

Branches
A s a Per
centage

of
mercial .
Out
In
Com
B anking
side
mercial
Head- HeadOffice Office Total Offices0 B anking
Offices
City
City

934

30,812,734

1,623

1,868

3,491

17,911

19.5

3,424,548
204,581
90,323
111,667
2,050,278
323,853
643,846

89
20
2
8
42
11
6

2,054,063
84,461
1,141
19,506
1,430,873
276,436
241,646

118
4
—
—
92
17
5

121
53
2
12
24
21
9

239
57
2
12
116
38
14

801
126
66
88
314
64
143

29.8
45.2
3.0
13.7
36.9
59.4
9.8

Middle Atlantic.................
New York...................
New Jersey.................
Pennsylvania..............

2,184 24,155,612
742 17,264,589
365 1,815,699
1,077 5,075,324

178
87
49
42

17,999,573
14,844,504
985,039
2,170,030

770
601
85
84

82
39
30
13

852
640
115
97

3,036
1,382
480
1,174

28.1
46.3
23.9
8.2

East North Central............
Ohio............................
Indiana........................
Illinois........................
Michigan.....................
Wisconsin....................

3,054 10,785,601
688 2,489,941
937,017
492
848 4,781,174
452 1,622,290
955,179
574

206
39
39
—
47
81

3,176,222
1,367,612
265,932
—
1,141,945
400,733

292
121
25
—
128
18

229
48
39
—34
108

521
169
64
—
162
126

3,575
857
556
848
614
700

14.6
19.7
11.5
—
26.4
18.0

West North Central...........
Minnesota...................
Iowa............................
Missouri......................
North Dakota.............
Nebraska.....................
Kansas........................

3,388
680
646
633
167
165
423
674

4,169,287
956,224
672,649
1,617,246
76,598
99,399
334,973
412,198

149
2
117
—
14
14
2
—

451,197
288,081
108,229
—
3,317
34,105
17,465
—

8
6
—
—
—
—
2
—

211
—
159
—
20
32
—
—

219
6
159
—
20
32
2
—

3,607
686
805
633
187
197
425
674

6.1
0.9
19.8
—
10.7
16.2
0.5
—

South Atlantic....................
Delaware.....................
Maryland....................
District of Columbia..
Virginia.......................
West Virginia.............
North Carolina...........
South Carolina............
Georgia........................
Florida........................

1,573
44
177
22
315
181
228
150
285
171

3,818,065
205,245
732,173
361,541
635,325
296,837
508,060
163,370
503,837
411,677

143
6
25
11
40
1
43
6
10
1

1,793,758
158,554
471,897
274,919
285,566
1,024
235,419
71,695
294,146
538

112
2
37
30
21
—
8
3
11
—

256
10
41
—
51
1
118
19
14
2

368
12
78
30
72
1
126
22
25
2

1,941
56
255
52
387
182
354
172
310
173

20.0
21.4
30.6
57.7
18.6
0.5
35.6
12.8
8.1
1.1

East South Central............
Kentucky....................
Tennessee....................
Alabama......................
Mississippi..................

1,134
412
300
217
205

1,607,245
487,338
577,454
331,971
210,482

59
13
19
3
24

513,264
170,250
238,187
75,792
29,035

40
20
17
3
—

99
8
32
17
42

139
28
49
20
42

1,273
440
349
237
247

10.9
6.4
14.0
8.4
17.0

West South Central..........
Arkansas.....................
Louisiana....................
Oklahoma....................
Texas...........................

1,595
217
145
393
840

2,825,135
200,818
551,354
461,307
1,611,656

42
14
28
—
—

362,780
15,452
347,328
—
—

21
—
21

47
15
32

1,663
232
198
393
840

4.1
6.5
26.8
—
—

Mountain...........................
Montana......................
Idaho...........................
Wyoming.....................
Colorado.....................
New Mexico................
Arizona........................
Utah............................
Nevada.......................

488
111
51
58
145
41
12
59
11

1,028,723
149,910
102,443
70,034
344,499
66,136
91,127
163,565
41,009

21
—
6
—
4
4
5
2

215,156
—
68,139
—
—
5,070
66,927
41,071
33,949

15.0
—
38.6
—

Pacific................................
Washington.................
Oregon.........................
California....................

442
140
74
228

5,137,555
506,299
318,356
4,312,900

47
9
4
34

4,246,721
354,899
249,086
3,642,736

United States....................
New England.....................
Maine..........................
New Hampshire..........
Vermont......................
Massachusetts.............
Rhode Island..............
Connecticut................

South Dakota..............

14,420 56,951,771
562
69
64
76
198
26
129

For footnotes, see bottom of opposite page.

—

68
15
53
—
—

1
1
1

83
—
32
—
—
6
25
11
9

86
—
32
—
—
6
26
12
10

574
111
83
58
145
47
38
71
21

12.8
68.4
16.9
47.6

259
15
11
233

740
67
55
618

999
82
66
851

1,441
222
140
1,079

69.3
36.9
47.1
78.8

—

—
—
—

—

430

BANKING STUDIES

14. C lassification

B anks O perating B ranches

and of

T h e ir B ranches

D ecember 3 1 , 1939a

1. By Size of Bank
B ranches
Size Group—T otal D eposits

B anks

D eposits
(I n T housands)

In HeadOffice City

Total

$250,000 and under...................
250,001500,000................
500,001- 1,000,000................
1,000,001- 2,000,000................
2,000,001- 5,000,000................
5,000,001- 10,000,000................
10,000,001- 50,000,000................
50,000,001-100,000,000................
100,000,001-200,000,000................
J00,000,001-500,000,000................
>00,000,001 and over......................

30b
119
164
134
123
103
167
37
33
11
13
934

All Groups....................................

Outside
Head-Office
City

$5,692
45,283
119,116
189,118
418,017
756,641
3,714,735
2,568,614
4,489,294
3,392,252
15,113,972

36
139
208
202
201
224
655
212
474
243
897

6
10
59
107
360
168
334
184
393

34
139
202
192
142
117
295
44
140
59
504

$30,812,734

3,491

1,623

1,868

2
—

2. By Population of Place in Which Located0
B ranches
P opulation Group

Banks

Total

In Head-Office
City

_
—

Outside HeadOffice City

Under 500.........................
500999.................
1,000- 2,499.................
2,500- 9,999.................
10,000- 49,999.................
50,000- 99,999.................
100,000-499,999.................
500,000 and over..............

86
92
135
155
132
69
150
115

393
307
338
402
274
143
473
1,161

3
11
60
73
409
1,067

393
307
335
391
214
70
64
94

All Groups.....................

934

3,491

1,623

1,868

a Data compiled by the Board of Governors. Mutual savings and private banks and their branches
are excluded. In all cases a dash indicates zero.
Includes one trust company without deposits.
0 Each branch classified by the size of place in which located; therefore, a branch included in
a given population group is not necessarily operated by a bank included in the same population group.

Footnotes for Table 15 on opposite page:
a Data compiled by the Board of Governors. Mutual savings and private banks and their branches are
excluded. In all cases a dash indicates zero.
b Chains operating in more than one State assigned to State containing “ key” or largest bank, or
majority of banks.
0 For data on all banking offices see column 8 of Table 13, p. 429.
d Includes actual number of chain banks operating within the State regardless of whether chain has
been assigned to another State. Head-office banks operating within chains are included.
6 These data included in figures for branch banking given in Table 13 on p. 429.

431

TABLES
15. G166rAphiC D istribution

C h ain B a n k in g , D ecember 31, 1939®

(Deposits in thousands of dollars)
B anking Offices
State

and Geographic
D ivision

N umber
CHAINSb

Total

Chains

Banks'*

% of All
Number Banking Number Deposits
Offices0

N umber of
B anks with
B ranches
Branches® Included
in Chains ®

United States.......................

499

2.7

424

883,005

New England.......................
Maine............................
New Hampshire............
Vermont........................
Massachusetts...............
Rhode Island.................
Connecticut..................

1
—
—
—
1
—
—

6
—
—
—
6
—
—

.8
—
—
—
1.9
—
—

4
—
—
—
4
—
—

7,492
—
—
—
7,492
—
—

2
—
—
—
2
—
—

Middle Atlantic...................
New York......................
New Jersey....................
Pennsylvania.................

6
4
2
—

30
16
14
—

1.0
1.2
2.9
—

21
14
7
—

71,508
24,276
47,232
—

9
2
7
—

3
1
2
—

2.0

142,341

3
20
11

—
2,925
121,356
18,060

—
35
3

—
10
2

East North Central.............
Unio..............................
Indiana..........................
Illinois...........................
Michigan.......................
Wisconsin......................

8
_
1
5
2

3
55
14

_
.4
9.0
2.0

West North Central.............
Minnesota.....................
Iowa..............................
Missouri........................
North Dakota...............
South Dakota................
Nebraska.......................
Kansas..........................

47
16
7
6
2
2
5
9

230
77
35
23
22
10
22
41

6.4
11.2
4.3
3.6
11.7
5.1
5.2
6.1

217
77
26
23
18
10
22
41

337,613
112,508
28,604
50,337
8,784
2,491
41,511
93,378

13
—
9
—
4
—
—
—

7
—
6
—
1
—
—
—

South Atlantic......................
Delaware.......................
Maryland .....................
District of Columbia__
Virginia.........................
West Virginia................
North Carolina.............
South Carolina.............
Georgia.........................
Florida...........................

7
—
1
—
—
1
—
—
1
4

32
—
2
—
—
5
—
—
7
18

1.6
—
.8
—
—
2.7
—
—
2.3
10.4

32
—
2
—
—
5
—
—
7
18

55,593
—
7,996
—
—
5,735
—
—
4,755
37,107

—
—
—
—
—
—
—
—
—

East South Central..............
Kentucky......................
Tennessee......................
Alabama........................
Mississippi.....................

4
—
—
4
—

13
—

1.0
—

13
—

—

13
—

5.5
—

13
—

8,272
—
—
8,272
—

West South Central.............
Arkansas........................
Louisiana.......................
Oklahoma......................
Texas.............................

3.4

63,610

—
—

Mountain..............................
Montana........................
Idaho.............................
Wyoming.......................
Colorado.......................
New Mexico..................
Arizona.........................
Utah..............................
Nevada..........................
Pacific..................................
Washington...................
Oregon...........................
California......................

6
5

37
19

9.4
2.3

37
19

40,288
23,322

36
2
11
2
10
1

6.3
1.8
13.3
3.4
6.9
2.1

30
2
6
2
10
1

171,314
6,114
13,422
10,725
113,487
120

—

1
1
2
—
—

—

—
—

—

__
—
—
—

—
—
—

—
6
—

5
—
—
—
—
—

3
—

2
—
—
—
—
—

3
1

5
5

7.0
23.8

5
4

23,215
4,231

4
1

24
6

1.7
2.7

17
6

25,262
2,847

7
—

3
—

1.7

22,415

For footnotes, see bottom of opposite page.

—
—

—

432

BANKING STUDIES

16. C l a s s i f i c a t i o n

1. B y

C h a in B a n k in g , D e c e m b e r

I n A bsolute F igures
C lass

31, 1939*

Major Classes of Banks
Percentage D istribution

B ank

Banks

Deposits
(In thousands)

State Member.........
Insured Nonmember
Noninsured State...

170
28
198
28

All C lasses........

424

N ational...................

Banks

Deposits

$586,619
97,238
192,864
6,284

40.1
6.6
46.7

66.4

6.6

21.9
0.7

$883,005

100.0

11.0

2. By Amount of Deposits of Individual Banks
I n A bsolute Figures
Size GroupT otal D eposits

P ercentage D istribution

Banks

Deposits
(In thousands)

Banks

$150,000 and under.......................
150,001- 250,000......................
250,001- 500,000......................
500,001- 1,000,000......................
1,000,001- 2,000,000......................
2,000,001- 5,000,000......................
5,000,001-10,000,000......................
10,000,001-50,000,000......................
50,000,001 and over........ .............

41
49
97
93
73
36
17
16
2

$4,074
9,646
34,742
65,244
101,363
106,082
117,934
316,047
127,873

9.7
11.5
22.9
21.9
17.2
8.5
4.0
3.8
0.5

0.5
1.1
3.9
7.4
11.5
12.0
13.3
35.8
14.5

All Classes.....................................

424

$883,005

100.0

Deposits

3. By Population of Place in Which Located
I n A bsolute F igures

P ercentage D istribution

P opulation Group
Banks

Deposits
(In thousands)

Under 500..........................................
500- 999.............................
1,000- 2,499...................................
2,500- 4,999...................................
5,000- 9,999......... . .......................
10,000-24,999...................................
25,000-49,999...................................
50,000-99,999...................................
100,000 and over..............................

64
70
92
59
50
32
12
15
30

$14,609
23,753
53,959
58,530
72,499
99,820
63,823
74,879
421,133

15.1
16.5
21.7
13.9
11.8
7.6
2.8
3.5
7.1

1.7
2.7
6.1
6.6
8.2
11.3
7.2
8.5
47.7

All Classes.....................................

424

$883,005

100.0

Banks

Deposits

a Data compiled by the Board of Governors. Mutual savings and private banks and their branches are
excluded.

433

TABLES

17. D istribution o r G roup B anks and R elated I tems b y T h eir R elation
ship to a H olding C ompany , D ecember 31, 1939*

(Dollar items in thousands)
B anks

B ranches

D eposits

L oans and
I nvestments

All group banks...........................................

427

869

$7,173,385

$5,397,553

Controlled through voting of common stockb:
Key banks ...........................................
Other banks.......................................... •

364
12
352

245
78
167

3,175,233
998,401
2,176,832

2,328,545
680,766
1,647,779

63
26
37

624
610
14

3,998,152
3,869,682
128,470

3,069,008
2,966,029
102,979

R elationship

H olding C ompany

Associated with but not controlled by hold
ing company0,:..........................................
Key banksd ..........................................
Other banks..........................................

a Data compiled by the Board of Governors. Mutual savings and private banks and their branches are
excluded.
b Owing to the ownership of preferred stock by the Reconstruction Finance Corporation, the holding
company does not have actual voting control of some of these banks.
° Holding company owns less than a majority of the common stock.
d Includes banks that are holding companies.

18.

G e o g r a p h ic D is t r ib u t io n

G roup

B a n k in g , D e c e m b e r

(Dollar items in thousands)

31, 1939*

T otal B anking
Offices in Groups
Group
B anks

B ranches
of Group
B anks'*

United States...........................

427

869

1,296

7.2

$7,173,385

$5,397,553

New England............................

31
3
4

82
3

—
—

113
6
4

—

14.1
4.8
6.1

1,138,840
10,093
10,060

750,109
8,660
9,500

86
17
—

27.4
26.6
—

989,423
129,264
—

624,672
107,277

—

65
14
—

70
28

91
78

161
106

5.3
7.7

1,700,546
537,440

1,382,950
423,799

4.7

1,163,106

959,151

63
30

1.8
3.5

440,114
119,071

301,380
93,292

State

and Geographic
D ivision

M aine...................................
New Hampshire..................
Vermont...............................
Massachusetts.....................
Rhode Island.......................
Connecticut.........................

Middle Atlantic........................
New Y ork ............................
New Jersey..........................
Pennsylvania.......................

East North Central..................
Ohio.......................................
Indiana.................................
Illinois..................................
Michigan..............................
W isconsin.............................

West North Central.................
Minnesota.............................
Iowa......................................
Missouri................................
North Dakota......................
South Dakota......................
Nebraska..............................
Kansas..................................

—

21
3

—

33
17

—

30
13

—

D eposits

L oans and
Invest
ments

—

—
—

1
15

3
14

4
29

0.7
4.1

5,891
315,152

4,243
203,845

26
6

175
96
5
6
30
31
7
—

4.9
14.0
0.6
0.9
16.0
15.7
1.6
—

991,618
601,774
58,168
203,193
35,362
39,566
53,555
—

673,829
412,707
37,171
127,781
28,603
30,534
37,033
—

149
90
5
6
30
11
7
—

—
—
—

—

For footnotes, see continuation of table on p. 434.

Percent
Number age of All
Banking
Offices0

—
—

434

BANKING

s t u d ie s

18. G e o g r a p h ic D is t r ib u t io n o f G rou p B a n k in g , D e ce m b e r i i , 1939*—"
Continued

(Dollar items in thousands)
T otal B anking
Offices in Groups
State

Group
B anks

and Geographic
D ivision

South Atlantic..........................

—
_
—

Georgia.................................
Florida..................................

East South Central..................
Kentucky..............................
Tennessee.............................
Alabama...............................
Mississippi...........................

—

4
27
27

2.3
8.7
15.6

20,686
176,206
217,685

11,735
112,845
137,414

20
6
14

22
8
14

42
14
28

3.3
3.2
8.0

203,782
56,291
147,491

141,050
43,953
97,097

—

_
_

_
_
_

Montana...............................
Idaho.....................................
W yoming..............................
Colorado...............................
New M exico.........................
Arizona...............................
Utah......................................
N evada.................................

23
1
1
—
—
2
6

Pacific .........................

31
13
5
13

—

2.2

0.4

—

6,137

—

_
_

152,008

4,496

—

—
102,525
__

—

0.8

152,008

102,525

12.0
20.7
16.9
1.7
—
—
13.2

240,100
80,266
28,331
1,796
—

165,237
52,265
23,513
1,224
__

21,277
75,331

15,401
50,538

23
14
1
—
—
5
14

8
9
573

57.1

33,099

604

41.9
10.4

1,885,663

23
46
535

10
41

522

19.7

—

—
_
—

—

—
13
—
—
—
3

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

—
—
—

266,490

—

Mountain..................................

Oregon....................

420,714

3
9
—

—

Washington

3.2

—
—
—
—

ments

1
18
27

Arkansas...............................
Louisiana.............................
Oklahoma.............................
Texas.................................

—
—
—

L oans and
Invest

—

West South Central.................

62
_

D eposits

—
—
—
—
—

South Carolina..................

Pecentage of All
Number Banking
Offices®

12
_

Delaware..............................
Maryland.............................
District of Columbia.........
Virginia.................................
West Virginia......................
North Carolina...................

California

Branches
of Group
B anks1*

32.9
49.6

43,521

115,716
1,726,426

—

22,296
1,613,983
32,097
87,491
1,494,395

a Data compiled by the Board of Governors. Mutual savings and private banks and their branches
excluded. In all cases a dash indicates zero.
These data included in figures for branch banking given in Table 13 on p. 429.
0 For data on all banking offices see column 8 in Table 13, p. 429.

19. C l a s s i f i c a t i o n o f G r o u p B a n k i n g , D e c e m b e r 31, 1939a
1. By Number of Banks in Each Group
I n A bsolute F igures
B anks

Percentage D istribution

Group

Groups

Banks

Branches

5 or under.....................
6-10................................
11-18 ...............................
21....................................
75....................................
85....................................

20
11
7
1
1
1

69
75
102
21
75
85

60
68k
645b
67
8
21

Total........................

427

869

For footnotes, see p. 435.

Groups
48.8
26.8
17.1
2.4+
2.4+
2.4+
100.0

Banks

Branches

16.1
17.6
23.9
4.9
17.6
19.9

6.9
7.9
74.2
7.7
0.9
2.4

100.0

435

TABLES

19. C la s s ific a t io n o f G rou p B a n k in g, D ecem b er 31, 1939a— Continued
2. By Number of Places in Which Group Operates
Groups Operating
One State

Only

Places or
Operation

Groups Operating in from T wo to Seven
States

Deposits
(In thou
sands)

Groups

Banks

1 ..................
2 .................
3 .................
4-10............
11-20............
21.................
24.................
36.................
71.................
93.................
354.................

6
5
1
15
4
1
—
1
—
—
—

20
16
3
82
52
13
—
21
—
—
—

1
8
—
81
36
47
—
67
—
—
—

$1,070,219
416,080
3,909
1,031,430
490,080
775,973
—
485,143
—
—
—

Total.......

207

240

$4,272,834

Branches

Groups

_
■
-

Banks

Branches

_
—
—

—

Deposits
(In thou
sands)

_
—
—

1
1
1

16
24
—
5
—
75
85
15

—
16
—
21
—
8
21
563

$13,556
224,474
—
71,242
—
429,358
442,030
1,719,891

220

629

$2,900,551

2
2

-1

3. By Size of Deposits of Individual Banks
I n A bsolute F igures
Size GroupT otal D eposits
Banks

Deposits
(In thousands)

Percentage D istribution
Banks

Deposits

No deposits.......................................
$250,000 and under..........................

250,001500,000.................
500,001- 1,000,000.................
1,000,001- 2,000,000.................
2,000,001- 5,000,000.................
5,000,001- 10,000,000.................
10,000,001- 50,000,000.................
50,000,001-100,000,000.................
100,000,001-200,000,000.................
200,000,001-500,000,000.................
500,000,001 and over.....................

3
10
46
78
86
90
41
50
4
14
3
2

$1,832
17,329
56,398
119,779
273,449
289,950
1,149,426
277,639
1,965, 112
876,761
2,145,710

0.7
2.3
10.8
18.3
20.1
21.1
9.6
11.7
0.9
3.3
0.7
0.5

0.0
0.2
0.8
1.7
3.8
4.1
16.0
3.9
27.4
12.2
29.9

T otal...........................................

427

$7,173,385

100.0

4. By Population of Place in Which Located
I n A bsolute F igures

Percentage D istribution

P opulation Group

Banks

Deposits0
(In thousands)

Banks

Deposits0

Under 500.......................................
500- 999................................
1,000- 2,499................................
2,500- 4,999................................
5,000- 9,999................................
10,000-24,999................................
25,000-49,999................................
50,000-99,999................................
100,000 and over............................

9
29
63
51
60
71
36
18
90

$3,377
12,691
41,933
53,392
122,830
340,098
263,420
317,477
6,018,167

2.1
6.8
14.8
11.9
14.1
16.6
8.4
4.2
21.1

0.05
0.18
0.58
0.74
1.71
4.74
3.67
4.43
83.90

Total.......................................

427

$7,173,385

100.0

100.00

a Data compiled by the Board of Governors. Mutual savings and private banks and their branches
are excluded. In all cases a dash indicates zero.
b Includes 494 branches of one bank.
0 Total deposits of group banks that operate branches are shown opposite population groups of cities
in which the head offices are located.

436

BANKING STUDIES

20. R a t io o f Tim e t o T o t a l D e p o s its o f C om m ercia l B anks, 1900-1940*
(Deposits in millions of dollars)
Y ear
(June 30)

T otal
D eposits

Tno
D eposits

R atio op
T ime to
T otal
D eposits
(P er Cent )

Y ear
(June 30)

T otal
D eposits

R atio of
T ime to
T otal
D eposits®
D eposits
(P er Cent)
T ime

1,368

13.1
13.0
13.7
14.1
14.8

1920.
1921.
1922.
1923.
1924.

36,261
32,877
35,164
37,765
40,804

10,637
11.014
11,636
13,270
14,487

29.3
33.5
33.1
35.1
35.5

1,648
1,786
2.187
2,314
3,001

15.6
15.3
17.8
19.3
22.3

1925.
1926.
1927.
1928.
1929.

44,634
46,267
48,444
49,491
48,664

16,045
17.015
18,894
20,168
20,017

35.9
36.8
39.0
40.8

14,179
15,076
16.056
16,318
17,389

3,407
3,693
4,101
4,423
4,839

24.0
24.5
25.5
27.0
27.8

1930.
1931.
1932.
1933.
1934

50,416
46,574
35,122
31,600
36,621

20,169
19,003
14,626
11,597
12,655

40.0
40.8
41.7
36.7
34.6

18,015
22,096
25,909
28,006
32,787

5.188
6,061
7,060
7,257
8,628

28.8
27.4
27.2
25.9
26.3

1935
1936.
1937.
1938.
1939.

41,419
47,997
49,280
48,835
53,793

13,315
13,992
14,811
15,216
15,450

32.1
29.2
30.1
31.2
28.7

1940.

60,138

15,930

26.5

1900
1901
1902
1903
1904

6,375
7,610
8,211
8,631
9,229

1905
1906
1907
1908
1909

10,568
11,273
12,271
12,020
13,482

1910
1911
1912
1913
1914
1915
1916
1917
1918
1919

833
992
1,121
1,220

41.1

a Compiled from data contained in the annual reports of the Comptroller of the Currency. Excludes
mutual savings banks but includes stock savings and private banks.
Partly estimated.

21. A ssets

em ber

B a n k s , 1928-1940a

(In millions of dollars)
C all D ate

1928—Oct.

3 ...................

Dec. 31...................

1929—Mar. 27...................
June 29..................
Oct. 4 ..................
Dec. 31...................
1930-Mar. 27..................
June 30...................
Sept. 24...................
Dec. 31...................
1931-Mar. 25...................
June 30...................
Sept. 29..................
Dec. 31...................
1932—June 30...................
Sept. 30...................
Dec. 31...................
1933—June 30...................
Oct. 25...................
Dec. 30...................
1934—Mar. 5 . . . . ............
June 30...................
Oct. 17...................
Dec. 31...................
1935—Mar. 4 ...................
June 29...................
Nov. 1...................
Dec. 31...................

CASHb

Secondary
R eserves0

Other L oans

Other
I nvestments

7,548
9,762
8,067
7,017
7,982
8,996
7,153
8,852
7,246
8,449
7,160
7,921
6,370
6,255
5,544
5,928
6,472
6,133
6,007
6,250
7,097
8,015
8,757
9,629
9,793
9,939
11,605
12,114

4,015
4,632
4,004
3,779
3,439
3,151
4,048
3,964
4,130
3,221
3,830
3,754
3,095
2,227
2,501
3,436
3,616
4,653
4,376
4,508
6,116
6,309
6,614
7,140
7,053
7,170
8,023
8,499

21,788
21,998
22,451
23,187
23,889
23,908
22,022
22,101
21,476
21,638
20,386
19,536
19,182
18,244
15,651
14,797
14,124
11,475
11,563
11,389
11,068
10,747
10,702
10,432
10,346
10,353
10,400
10,477

9,296
9,245
9,117
8,902
8,720
9,015
9,139
9,721
9,982
10,136
10,657
10,802
10,913
10,196
9,950
9,903
9,820
8,767
9,216
9,543
9,548
10,354
10,536
10,875
11,129
11,444
11,048
11,215

For footnotes, see continuation of table on p. 437.

437

TABLES
21. A s se ts o f M em b er B ank s, 1928-1940*— Continued
(In millions of dollars)
Call D ate

1936—Mar.
June
Dec.
1937-Mar.
Tune
Dec.
1938—Mar.
June
Sept.
Dec.
1939—Mar.
June
Dec.
1940-June

4 ...................
30..................
31..................
31..................
30..................
31...................
7..................
30..................
28..................
31...................
29..................
30..................
30..................
29............. .

CASHb

Secondary
R eserves0

Other L oans

Other
I nvestments

11,949
12,261
13,721
12,562
12,827
13,174
12,721
14,588
14,254
15,318
15,652
17,448
19,622
21,707

8,698
8,266
7,560
7,001
7,254
6,485
6,559
5,210
5,227
5,260
4,341
4,487
4,191
4,359

10,386
10,907
11,582
11,834
12,371
12,578
12,265
11,922
11,922
11,792
11,782
11,990
12,717
13,072

11,418
13,290
14,061
13,875
13,272
12,855
12,881
13,813
14,670
15,188
16,141
16,302
17,193
17,143

“ Compiled from Member Bank Call Report, Nos. 41-84, inclusive.
b Includes vault cash, deposits in Federal Reserve Banks, demand balances in other banks, and cash
items in process of collection.
0 Includes open-market loans, Treasury notes and bills, time balances in banks in the United States,
and all balances in banks in foreign countries.

22. E a r n in g s
Calendar
Y ear

and

P r o fits

N et
Gross
EARNINGSb E arnings 5

N et
P rofits

em ber

T otal
A ssets0

In Millions of Dollars

B a n k s , 1919-1939®
Gross
N et
E arnings5 E arnings5

N et
P rofits

As Percentages of Total Assets

1919....

1,436

455

351

29,770

4.83

1.53

1.18

1920....
1921....
1922....
1923....
1924....

1,804
1,744
1,652
1,720
1,763

577
534
506
487
498

396
293
349
337
356

32,374
31,278
31,414
34,099
36,385

5.57
5.58
5.26
5.04
4.91

1.78
1.71
1.61
1.43
1.39

1.22
.94
1.11
.99
.99

1925....
1926....
1927....
1928....
1929....

1,919
2,028
2,014
2,194
2,399

551
586
498
580
715

420
432
447
504
557

39,304
41,094
42,800
45,596
47,533

4.88
4.94
4.71
4.81
5.05

1.40
1.43
1.16
1.27
1.51

1.07
1.05
1.05
1.11
1.17

1930....
1931....
1932....
1933....
1934....

2,158
1,841
1,554
1,237
1,244

554
506
410
378
394

307
12
-255
-356
-225

47,164
43,991
37,042
33,367
37,176

4.58
4.19
4.19
3.71
3.35

1.17
1.15
1.11
1.13
1.06

.65
.03
- .69
-1.07
- .61

1935....
1936....
1937....
1938....
1939....

1,207
1,271
1,321
1,274
1,296

374
399
419
384
401

212
465
337
265
347

41,613
45,904
47,510
47,434
52,129

2.90
2.77
2.78
2.69
2.49

.90
.87
.88
.81
.77

.51
1.01
.71
.56
.68

a Compiled from the Federal Reserve Bulletin and annual reports of the Comptroller of the Currency.
b Through 1926 include profits on securities sold, which were thereafter treated as offsets to losses and
charge-offs. The resulting inconsistency is not believed to be very great.
0 Averages of assets reported by all member banks for each call date in the calendar year and the final
call date in the preceding year, except that for 1933 only averages for the last three call dates in year
were included.

438

BANKING STUDIES

23. C hecks H andled

and

C ur rency R eceived

an d

C ounted

the

F ederal R eserve B a n k s , 1917—1939*

(In thousands)
P ieces

Checks H andled

Calendar
Y ear

of Currency R eceived
and C ounted

Amount

Paper Money

Coin

1917............
1918............
1919............

84,697
172,843
341,594

$51,593,771
121,511,151
156,901,015

0
0
0

1920............
1921............
1922............
1923............
1924............

504,198
574,921
638,634
697,502
742,878

179,505,223
130,482,253
160,472,450
207,719,529
219,832,179

1,085,459
1,353,020
1,424,849
1,722,877
1,838,279

0
1,647,677
1,945,453
2,076,075
2,186,737

1925............
1926............
1927............
1928............
1929............

778,686
822,907
862,275
887,997
924,449

258,611,276
272,945,160
278,399,627
301,703,814
367,215,123

1,947,419
2,099,605
2,194,608
2,270,555
2,427,330

2,329,014
2,590,057
2,691,184
2,929,091
3,239,709

1930............
1931............
1932............
1933............
1934............

904,975
864,615
734,538
688,933
818,847

324,883,021
248,172,956
176,591,791
157,833,692
179,544,488

2,441,989
2,269,292
2,025,552
2,013,459
2,067,835

3,325,555
2,900,462
2,654,787
2,497,928
2,565,164

1935............
1936............
1937............
1938............
1939............

885,190
1,009,264
1,044,553
1,098,115
1,157,140

202,989,742
234,417,787
255,453,609
231,820,217
255,937,980

2,148,485
2,232,980
2,257,892
2,089,987
2,134,908

2,590,859
2,665,190
2,730,387
2,676,248
2,644,418

Numberb

* Data compiled by the Board of Governors and published in its annual reports.
Two or more checks handled as a single item counted as one “ piece.”
0 Not available.

24. E xpenses

F ederal R eserve B a nk s

D epositaries
Calendar
Y ear

of the

F iscal A gents

and

U nited States , 1917-1939*

TOTALb

R eimbursable

1917.........
1918.........
1919

$3,094,750
16,256,689
16,626,016

1920.........
1921.........
192 2
192 3
1924

6,215,356
3,855,693
2,741,780
3,109,653
1,320,589

6,215,356
2,609,754
1,183,815
1,912,483
444,067

1925.........
1926.........
1927.........
1928.........
1929.........

870,915
678,465
897,930
922,210
615,402

167,330
124,422
355,800
371,335
150,675

Calendar
Y ear

TOTALb

R eimbursable

1930..........
1931..........
193 2
193 3
1934..........

$566,293
606,297
1,640,639
2,689,629
4,098,806

$161,086
219,399
1,245,772
2,257,456
3,649,004

193 5
193 6
1937..........
1938..........
1939..........

6,308,164
6,903,091
4,736,896
5,043,754
5,973,877

4,297,083
5,940,021
3,838,789
4,020,726
4,874,174

ft Compiled from information on file at the Board of Governors.
Expenses of handling Government checks and coupons and of maintaining space for fiscal agency
activities not included in the total prior to 1935.

TABLES
25. B ills

and

Securities H eld

b y the

439

F ederal R eserve B anks , 1914-1939*

(Monthly averages of daily figures, in thousands of dollars)
Y eas

and

M onth

TOTALb

B ills
D iscounted

B ills B ought

United States
Government
Securities

1914—November.................
December.................

5,944
9,627

5,871
9,525

1915—January....................
February..................
March.......................
April..........................
M ay...........................
June...........................
July...........................
August......................
September................
October.....................
November................
December.................

19,942
32,336
48,750
58,394
62,772
54,395
58,873
68,777
75,879
78,567
80,178
81,141

11,743
16,634
20,341
21,632
23,132
24,695
27,136
27,860
29,674
28,355
29,237
31,511

301
7,550
13,222
10,994
9,840
9,666
12,328
12,664
13,958
14,030
19,883

1,020
4,310
6,413
6,801
6,845
7,246
7,855
8,628
9,081
10,106
11,939
14,683

1916—January....................
February..................
March.......................
A pril..........................
M ay...........................
June..........................
July...........................
August......................
September................
October.....................
November.................
December.................

91,795
101,434
125,805
148,658
167,252
163,920
187,016
191,941
186,742
185,811
186,423
220,454

28,640
21,981
21,526
21,770
20,066
20,612
25,092
27,905
27,087
22,060
19,715
32,844

26,125
28,307
35,247
43,775
50,489
62,484
78,429
81,052
81,592
80,698
94,925
121,247

18,534
26,489
36,632
47,481
54,936
56,750
56,991
55,214
55,229
52,804
50,461
53,761

1917—January....................
February..................
March.......................
A pril..........................
M ay...........................
June..........................
July...........................
August......................
September................
October.....................
November.................
December................

196,703
196,482
183,526
228,900
274,120
433,445
422,998
367,839
438,554
612,103
879,793
1,028,824

20,861
18,237
18,528
25,169
42,980
155,199
151,191
134,253
181,476
320,178
562,522
682,625

110,266
114,886
98,418
77,271
97,346
162,136
196,966
158,774
167,830
179,173
191,574
243,032

55,140
47,779
50,261
111,292
119,116
111,516
72,625
73,564
89,034
112,489
124,373
101,850

1918—January....................
February..................
March.......................
A pril..........................
M ay...........................
June...........................
July...........................
August......................
September................
October.....................
November.................
December.................

1,027,810
1,002,906
1,122,797
1,238,085
1,260,904
1,275,567
1,435,710
1,602,534
1,919,653
2,160,793
2,263,569
2,325,307

612,235
528,779
536,591
751,398
896,711
938,909
1,162,031
1,332,661
1,603,675
1,683,268
1,760,406
1,765,209

265,613
288,468
315,087
312,749
278,137
238,939
208,321
216,782
249,207
354,158
373,565
345,698

148,678
184,834
270,590
173,402
85,520
97,465
65,297
53,027
66,703
123,320
129,569
214,379

1919—January....................
February..................
March........................
April..........................
M ay...........................
June..........................
July...........................
August......................
September................
October...................
November.................
December.................

2,209,020
2,225,220
2,318,167
2,340,658
2,391,263
2,322,011
2,471,285
2,440,330
2,468,296
2,707,123
2,902,459
2,990,525

1,731,412
1,765,051
1,862,833
1,919,808
1,976,150
1,839,610
1,864,386
1,798,207
1,776,228
2,067,889
2,140,368
2,114,527

278,042
273,875
260,795
207,467
187,056
246,555
357,973
371,892
350,648
343,369
454,820
548,767

199,557
186,290
194,535
213,382
228,057
235,846
248,926
270,231
341,420
295,865
307,271
327,231

For footnotes, see end of table, p. 444.

—

440

BANKING STUDIES

25. B i l l s an d S e c u r itie s H e ld b y t h e F e d e r a l R e s e r v e B ank s
1914-1939a— Continued

(Monthly averages of daily figures, in thousands of dollars)
United States
Government
Securities

TOTALb

B ills
D iscounted

B ills B ought

1920—January....................
February...................
March................ .......
April..........................
M ay...........................
June...........................
July...........................
August......................
September................
October.....................
November.................
December.................

3,031,729
3,147,513
3,200,219
3,175,888
3,248,474
3,202,163
3,194,416
3,224,046
3,316,086
3,386,934
3,357,709
3,299,186

2,136,317
2,297,199
2,376,800
2,430,952
2,535,955
2,455,672
2,513,420
2,596,291
2,667,312
2,779,537
2,761,937
2,718,122

569,567
540,971
479,709
413,315
410,548
399,710
362,185
324,250
310,268
302,592
275,781
241,577

325,845
309*343
343,710
331,621
301,971
346,781
318,811
303,505
338,506
304,805
319,991
339,487

1921—January.....................
February..................
March.......................
A pril..........................
M ay...........................
June...........................
July...........................
August......................
September................
October.....................
November.................
December.................

3,020.804
2,856,434
2,729,718
2,515,487
2,345,973
2,166,918
2,006,448
1,834,393
1,736,358
1,634,192
1,515,123
1,511,915

2,523,195
2,400,425
2,296,742
2,129,247
1,958,591
1,810,540
1,719,058
1,547,817
1,442,390
1,370,531
1,227,699
1,180,169

199,778
168,741
137,274
109,559
84,270
54,448
26,303
38,064
39,805
56,229
79,002
105,198

297,831
287,268
295,702
276,681
303,112
301,930
261,087
248,512
254,163
207,427
208,161
226,290

1922—January....................
February..................
M arch.......................
A pril..........................
M ay...........................
June...........................
July.............. .........
August......................
September................
O ctober.....................
N ovem ber................
Decem ber.................

1,298,100
1,213,444
1,189,212
1,185,783
1,186 051
1,163,717
1,125,037
1,052,272
1,114,796
1,185,840
1,208,589
1,299,693

961,966
768,836
638,208
572,466
479.100
437,436
425,399
395,588
417,251
486,155
623,372
660,427

98,195
87,507
92,318
93,003
103,452
135,591
152,550
159,490
211,538
251,534
259,871
259,296

237,637
356,906
458.584
520,224
603,499
590,690
547,083
497,185
485,989
448,129
325,319
379,939

1923—January....................
February..................
March........................
A pril..........................
M ay...........................
June...........................
July...........................
August......................
September................
October.....................
November.................
December.................

1,185,994
1,153,721
1,177,417
1,158,872
1,169,918
1,119,010
1,116,638
1,074,252
1,120,964
1,149,747
1,147,191
1,200,916

547,058
608,165
627,799
657,730
705,312
741,246
834,084
808,870
845,227
873,142
798,529
771,034

217,939
189,819
233,753
272,439
271,333
224,313
186,002
175,351
173,909
184,838
264,951
323,901

420,977
355,737
315,848
228,664
193,224
153,395
96,533
90,016
101,690
91,450
83,456
105,893

1924—January....................
February..................
March........................
A pril.........................
M ay...........................
June...........................
July...........................
August......................
September................
October.....................
N ovem ber................
December.................

991,382
921,228
948,007
932,736
836,507
838,062
827,001
838,956
931,595
1,006,986
1,087,235
1,220,693

573,865
513,920
475,712
488,558
432,613
370,159
315,343
268,475
261,655
240,200
228,236
307,085

299,914
272,678
228,101
170,525
79,995
50,376
43,878
29,532
91,617
179,735
268,346
357,504

117,576
134,611
244,121
273,601
323,557
416,251
466,530
539,409
575,360
585,118
587,666
554,048

Y eas

and

M onth

For footnotes, see end of table, p. 444.

441

TABLES
25. B ills

and

Securities H eld

b y the

F ederal R eserve B anks

1914-1939®— Continued

(Monthly averages of daily figures, in thousands of dollars)
Y ear

and

M onth

T otal5

B ills
D iscounted

B ills B ought

United States
G overnment
Securities

1925—January....................
February..................
M arch.......................
April.........................
M ay...........................
June..........................
July...........................
August......................
September................
October.....................
November................
December.................

1,070,746
1,050,935
1,076,506
1,057,215
1,050,034
1,058,393
1,061,438
1,092,215
1,165,601
1,254,747
1,289,509
1,427,225

275,227
350,753
400,111
413,266
407,852
447,677
490,605
555,665
602,034
626,148
602,418
696,133

329,258
313,419
298,177
287,322
279,054
263,497
231,122
205,401
225,728
298,211
351,751
368,659

463,722
383,790
375,566
354,984
361,261
344,969
337,667
329,091
335,425
327,685
331,962
359,242

1926—January....................
February..................
March.......................
A pril.........................
M ay...........................
June..........................
July..........................
August......................
September................
October....................
November.................
December.................

1,221,575
1,175,626
1,171,970
1,155,739
1,153,771
1,134,860
1,165,286
1,157,013
1,223,551
1,267,776
1,267,825
1,377,175

526,769
532,809
564,742
545,690
519,248
480,278
552,628
555,331
639,508
663,296
614,501
668,453

323,874
304,816
267,833
234,409
232,219
243,233
229,923
245,117
264,813
295,249
348,365
384,603

367,789
334,816
335,742
370,754
398,201
407,896
379,618
353,192
315,530
306,189
302,434
321,540

1927—January....................
February..................
March.......................
A pril..........................
M ay...........................
June..........................
July...........................
August......................
September................
October.....................
November................
December.................

1,138,106
1,005,923
1,024,251
1,038,857
999,504
1,033,123
1,026,152
1,021,830
1,139,342
1,213,191
1,331,008
1,513,119

480,622
392,996
424,543
447,286
472,984
428,563
453,997
409,439
422,192
424,413
415,216
528,624

343,448
304,071
252,722
248,429
233,224
205,273
189,774
173,122
215,926
281,903
335,908
377,712

310,486
306,606
344,922
341,081
291,495
397,754
381,081
438,511
500,637
506,177
579,238
605,841

1928—January....................
February..................
March.......................
A pril..........................
M ay...........................
June..........................
July...........................
August......................
September................
October.....................
November................
December.................

1,350,322
1,236.649
1,271,525
1,371,048
1,441,788
1,494,972
1,488,065
1,449,136
1,533,941
1,584,146
1,610,442
1,766,080

465,275
470,680
513,233
660,927
835,502
1,018,735
1,089,579
1,060,811
1,064,302
975,204
897,309
1,013,003

372,538
359,883
342,790
358,026
348,600
243,540
185,018
177,951
226,033
367,595
470,638
482,704

511,852
405,551
414,681
351,105
256,686
231,907
212,978
209,610
240,429
236,914
238,335
262,776

1929—January....................
February..................
March.......................
A pril..........................
M ay...........................
June..........................
July...........................
August......................
September................
October.....................
November.................
December.................

1,569,902
1,467,584
1,442,079
1,338,364
1,265,468
1,268,295
1,328,469
1,336,065
1,378,568
1,396,471
1,585,581
1,582,498

859,223
889,207
971,493
1,010,294
960,253
978,009
1,095,623
1,043,467
969,000
884,501
952,640
803,352

472,543
384,662
265,430
155,686
144,899
99,489
74,815
124,441
229,395
337,121
296,212
319,997

228,528
184,241
196,746
165,311
152,870
179,370
147,473
154,513
164,579
154,462
315,289
446,066

For footnotes, see end of table, p. 444.

442

BANKING STUDIES

25. B i l l s and S e c u r itie s H e ld b y t h e F e d e r a l R e s e r v e B anks
1914-1939®— Continued

(Monthly averages of daily figures, in thousands of dollars)
Y eas

and

M onth

TOTALb

Bills
D iscounted

Bills B ought

United States
Government
Securities

1930—January....................
February..................
March........................
A pril..........................
M ay...........................
June...........................
July...........................
August......................
September................
October.....................
November.................
December.................

1,312,650
1,155,734
1,068,975
1,036,403
965,664
969,172
970,167
973,882
989,642
989,840
1,010,357
1,242,650

500,780
377,644
273,517
231,172
246,890
251,237
226,041
213,987
188,700
196,388
220,769
337,557

313,839
285,152
245,562
266,141
181,725
141,173
153,896
152,898
196,630
185,470
184,212
256,596

484,818
480,121
539,513
529,989
528,636
571,175
582,889
598,649
597,030
601,582
599,065
643,880

1931—January....................
February..................
March.......................
A pril..........................
M ay...........................
June...........................
July...........................
August......................
September................
October.....................
November.................
December.................

1,109,208
921,206
903,664
927,878
906,092
925,660
930,258
1,076,009
1,288,255
2,061,855
2,013,608
1,921,952

252,886
215,757
176,431
154,658
162,765
189,939
169,036
223,252
281,936
614,242
695,081
774,471

205,841
102,076
123,293
172,897
143,759
120,740
78,896
134,549
259,257
691,723
560,341
340,157

647,348
603,373
603,940
600,280
598,559
609,537
673,593
712,254
736,190
733,054
726,612
776,954

1932—January....................
February..................
March........................
A pril..........................
M ay...........................
June...........................
July...........................
August......................
September................
October.....................
November.................
December.................

1,841,655
1,768,437
1,635,314
1,676,091
1,945,188
2,247,624
2,407,016
2,344,078
2,273,617
2,217,745
2,203,625
2,174,871

827,998
847,619
714,142
605,054
486,470
494,992
522,888
450,771
386,918
327,537
313,048
282,188

220,824
150,817
105,358
52,174
41,013
49,990
59,771
37,066
33,639
33,518
34,394
33,760

759,252
742,816
809,087
1,014,032
1,412,611
1,697,121
1,818,465
1,850,216
1,847,777
1,851,306
1,850,772
1,853,509

1933—January....................
February..................
March............, ..........
A pril.........................
M a y...........................
June..........................
July...........................
August......................
September................
October.....................
November................
December.................

2,098,480
2,216,298
3,258,096
2,501,938
2,276,636
2,199,418
2,203,363
2,232,136
2,348,162
2,483,026
2,567,616
2,651,533

255,274
306,547
998,768
428,506
338,932
249,872
169,624
158,923
137,647
119,495
114,001
116,868

32,108
101,516
378,576
230,443
85,901
12,475
15,982
7,522
7,076
6,739
15,088
100,820

1,806,410
1,804,034
1,875,208
1,837,423
1,846,383
1,933,428
2,015,642
2,063,839
2,201,627
2,355,148
2,436,957
2,432,290

1934—January....................
February..................
March.......................
A pril.........................
M ay...........................
June..........................
July...........................
August......................
September................
October.....................
November................
December.................

2,647,830
2,590,422
2,532,804
2,498,794
2,473,404
2,457,700
2,460,797
2,458,140
2,460,181
2,452,532
2,461,586
2,457,616

100,619
70,063
55,350
43,141
35,879
28,140
23,221
20,588
21,876
12,165
17,960
9,958

113,348
86,699
39,632
16,441
6,153
5,194
5,261
5,191
5,431
5,954
5,807
5,661

2,432,469
2,432,433
2,437,216
2,438,628
2,430,737
2,423,839
2,431,832
2,431,681
2,431,100
2,430,065
2,429,834
2,430,214

For footnotes, see end of table, p. 444.

443

TABLES

25. B i l l s

and

Se c u r it ie s H e l d b y t h e F e d e r a l R e s e r v e B a n k s

1914-1939®— Continued
(Monthly averages of daily figures, in thousands of dollars)
Y ear

and

M onth

TOTALb

B ills
D iscounted

B ills B ought

United States
Government
Securities

1935—January....................
February..................
M arch.......................
A pril.........................
M a y...........................
June..........................
July...........................
August......................
September................
October.....................
Novem ber................
December.................

2,459,154
2,460,574
2,463,386
2,466,662
2,472,483
2,470,105
2,470,504
2,471,945
2,474,962
2,475,675
2,474,246
2,474,193

7,845
6,240
6,810
6,371
6,761
7,518
7,256
7,403
10,010
8,481
6,607
6,310

5,570
5,506
5,401
5,135
4,700
4,705
4,682
4,689
4,686
4,680
4,676
4,671

2,430,410
2,430,419
2,431,045
2,430,804
2,434,371
2,430,541
2,430,386
2,430,621
2,430,413
2,430,233
2,430,159
2,430,365

1936—January....................
February..................
March.......................
A pril.........................
M a y...........................
June..........................
July...........................
August......................
September................
October.....................
Novem ber................
December.................

2,473,189
2,474,832
2,471,746
2,471,016
2,470,044
2,469,286
2,466,379
2,468,488
2,469,432
2,467,251
2,465,880
2,468,938

5,924
7,842
5,954
5,618
4,880
5,750
3,342
6,271
7,521
7,176
6,393
7,077

4,660
4,671
4,674
4,683
4,420
3,078
3,087
3,093
3,097
3,094
3,088
3,090

2,430,285
2,430,264
2,430,349
2,430,269
2,430,282
2,430,258
2,430,227
2,430,227
2,430,227
2,430,227
2,430,227
2,433,527

1937—January....................
February..................
March.......................
A pril.........................
M ay...........................
June..........................
July...........................
August......................
September................
October.....................
Novem ber................
December.................

2,460,645
2,460,380
2,464,510
2,516,286
2,568,817
2,568,115
2,564,685
2,568,086
2,573,895
2,571,173
2,585,969
2,602,390

2,883
3,319
6,415
9,912
15,831
14,548
13,319
17,486
24,002
22,033
18,751
15,877

3,088
3,080
3,145
3,533
4,617
5,172
3,481
3,075
3,052
2,826
2,831
2,753

2,430,490
2,430,513
2,432,109
2,479,973
2,525,731
2,526,271
2,526,190
2,526,512
2,526,190
2,526,648
2,545,306
2,565,352

1938—January....................
February..................
M arch.......................
A pril..........................
M ay...........................
June..........................
July.............. ............
August......................
September................
October.....................
November................
December.................

2,593,735
2,592,683
2,593,214
2,597,716
2,589,701
2,586,162
2,588,778
2,587,102
2,596,283
2,587,999
2,586,960
2,587,187

11,170
10,539
10,257
10,780
8,354
9,265
7,949
6,703
7,739
8,060
7,166
7,059

543
548
544
549
541
535
539
539
539
541
545
549

2,564,127
2,564,015
2,565,104
2,569,409
2,564,015
2,559,727
2,564,015
2,564,015
2,572,226
2,563,950
2,564,016
2,564,016

For footnotes, see end of table, p. 444.

25. B il l s

and

Se c u r it ie s H e ld

by the

F ederal R eserve B a nks

1914-1939*— Continued
(Monthly averages of daily figures, in thousands of dollars)
Y eas

and

M onth

TOTALb

B ills
D iscounted

1939—January...................
February.................
March.....................
April.......................
May.........................
June........................
July.........................
August....................
September...............
October..................
November...............
December................

2,588,237
2,587,420
2,584,691
2,583,830
2,581,699
2,580,275
2,545,279
2,453,759
2,750,111
2,781,059
2,669,732
2,529,121

4,569
5,383
3,455
2,999
3,922
4,310
4,836
4,826
5,948
6,123
6,916
7,971

1940—January...................
February.................
March.....................
April.......................
May........................
June........................

2,496,738
2,494,369
2,489,958
2,479,239
2,484,167
2,486,015

6,891
6,622
3,143
2,463
2,780
2,495

B ills B ought

553
553
555
560
560
558
554
556
545
294
—

__
—
—
—
—

—

United States
G overnment
Securities

2,567,748
2,566,802
2,566,532
2,566,603
2,564.446
2,562,980
2,527,385
2,436,699
2,731,951
2,762,843
2,651,230
2,509,976
2,478,981
2,477,271
2,476,368
2.466,873
2,472,125
2,474,488

*
Data compiled by Board of Governors; through 1934 published in its annual reports; figures (in
millions of dollars) for bills discounted, bills bought, and United States Government securities published
in annual reports 1935-1937 and thereafter in current issues of the Federal Reserve Bulletin. In all cases a
dash indicates zero.
b Includes municipal warrants, Federal Intermediate Credit Bank debentures, industrial advances,
etc., whenever held.

26. St a t e m e n t

C o n d it io n of t h e T w e l v e F e d e r a l R e se r v e B a nk s
C o m b in e d , D ec em b er 3 1 ,1939a
(In thousands of dollars)

ASSETS
Gold certificates on hand and
due from U. S. Treasury...... 15,199,120
Redemption fund—F. R. notes.
9,903
Other cash.................................
315,194
Total reserves............................
15,524,217
Bills discounted:
Secured by U. S. Gov’ t obliga
tions, direct and guaranteed
Other bills discounted..........
Total bills discounted................
Industrial advances..

LIABILITIES
F. R..notes in actual circula
tion11. . . .................................
4,958,546
Deposits:
Member bank—reserve
account.............................. 11,653,232
U. S. Treasurer—General
634,270
account..............................
Foreign bank........................
397,443
Other deposits......................
255,836
Total deposits...........................
12,940,781

574
6,191
6,765

Deferred availability items__
Other liabilities including ac
crued dividends....................
TOTAL LIABILITIES..........

11,044

U. S. Government securities,
direct and guaranteed:
Bonds................................. 1,351,045
Notes.................................. 1,133,225
Total U. S. Gov't securities,
direct and guaranteed__ ___ 2,484,270
Total bills and securities...........
2,502,079
Due from foreign banks...........
F. R. notes of other F. R. Banks
Uncollected items.....................
Bank premises..........................
Other assets..............................
TOTAL ASSETS......................

776,665
2,558
18,678,550

CAPITAL ACCOUNTS
Capital paid in .........................
135,599
Surplus (Section 7)..................
151,720
Surplus (Section 13b)..............
26,839
Other capital accounts............
34,627
348,785
TOTAL LIABILITIES AND
19,027,335
CAPITAL ACCOUNTS.

47
33,454
867,206
41,749
58,583 1,001,039
19,027,335

Contingent Liability:
Commitments to make in
dustrial advances.............

9,070

* Annual Report of Board of Governors of the Federal Reserve System, 1939, pp. 34-35.
b Includes Federal Reserve notes held by the United States Treasury or by a Federal Reserve Bank other than
the issuing Bank.

444

445

TABLES

27. D isp o s itio n o f N e t E a rn in g s o f t h e F e d e r a l R e s e r v e B anks
1914-1939a

(In thousands of dollars)
D isposition
Calendar
Y ear

Gross
E arnings

N et
E arnings

Franchise
Dividends Tax Paid
to U. S.
Paid
Treasury

Total-1914-1939 1,315,810

622,257

178,316

1914-15.................
1916.........................
1917.........................
1918.........................
1919.........................

2,173
5,218
16,128
67,584
102,381

-141
2,751
9,580
52,716
78,368

218
1,743
6,802
5,541
5,012

2,704

1920.........................
1921.........................
1922.........................
1923.........................
1924.........................

181,297
122,866
50,499
50,709
38,340

149,295
82,087
16,498
12,711
3,718

5,654
6,120
6,307
6,553
6,682

60,725
59,974
10,851
3,613
114

1925.........................
1926.........................
1927.........................
1928.........................
1929.........................

41,801
47,600
43,024
64,053
70,955

9,449
16,612
13,049
32,122
36,403

6,916
7,329
7,755
8,458
9,584

59
818
250
2,585
4,283

1930.........................
1931.........................
1932.........................
1933.........................
1934.........................

36,424
29,701
50,019
49,487
48,903

7,988
2,972
22,314
7,957
15,232

10,268
10,030
9,282
8,874
8,782

2,011

1935.........................
1936.........................
1937.........................
1938.........................
1939.........................

42,752
37,901
41,233
36,261
38,501

9,437
8,513
10,801
9,582
12,243

8,505
7,830
7,941
8,019
8,111

149,138

_
—
1,134
—

—
—
—
_
—
—
—
—

N et E arnings

Paid to
U. S.
Treasury
(Sec. 13b)

Trans
ferred to
Surplus
(Sec. 13b)

Trans
ferred to
Surplus
(Sec. 7)

846

—708b

294,665°

_
—
—
—
—
_
—
—
—
—
_
—
—
—
—
_
—
—
—
—

_
—
—
—
—
_
—
—
—
—
_
—
—
—
—
_
—
—
—

_
—

-6 0

-2,297
-7,058
11,021
-917
6,510

298
227
177
120
24

27
103
67
-419
-426

607
353
2,616
1,862
4,534

1,134
48,334
70,652
82,916
15,993
-660
2,545
-3,078
2,474
8,465
5,044
21,079
22,536

B Data compiled by the Board of Governors and published in its annual report for 1939, pp. 42-43.
In all cases a dash indicates zero.
b On Dec. 31, 1939, surplus relating to funds received from the Secretary of the Treasury under Sec.
13b of the Federal Reserve Act, for the purpose of making loans to industry, amounted to $26,839,000
($27,546,000 received from the Secretary of the Treasury, plus $1,000 direct net credits, minus the $708,000
debits shown here).
0 On Dec. 31,1939, surplus accumulated pursuant to Sec. 7 of the Federal Reserve Act amounted to
$151,720,000, the following deductions having been made: $139,300,000 to charge off the cost of non
dividend stock of the Federal Deposit Insurance Corporation, $500,000 special charge-off on bank prem
ises, $3,145,000 transferred to reserves for contingencies.
Footnotes for Table 28 on following page:
a Data compiled by the Board of Governors; exclude mutual savings banks, private banks, branches
of foreign banks, and a few inactive banks and miscellaneous financial institutions sometimes included
in State banking statistics. Non-par banks and banks with inadequate capital are not mutually exclus
ive. Dash indicates zero.
b Banks with out-of-town branches established after Feb. 25, 1927, are subject to special capital re
quirements. The first column under this heading comprises banks with no out-of-town branches estab
lished since that date; the second column comprises banks with one or more such branches.

446

BANKING STUDIES

28. G eographic D istribution oe C erta in G roups of C ommercial B anks
I nelig ible for M embership in the F ederal R eserve

System, D ecember 31,1939a

Banks with I nadequate C apital j o
M eet M inimum R equirements "
State

and

Geographic D ivision

N on-P ar B anks

For Operation in
One City

For Operation of
Out-of-Town
Branches

United States........................................

2,629

2,389

429

New England.........................................

__
_
_
_
_
_

12
4
1
2
3
2

Pennsylvania......................................

_
_
_

54
15
17
22

6
3
1
2

East North Central................................

188

Ohio.....................................................
Indiana................................................
Illinois.................................................
Michigan.............................................
Wisconsin............................................

3
27

225
36
30
71
16
72

130
10
28

Maine...................................................
New Hampshire
Verm ont..............................................
Massachusetts....................................
Rhode Island ...................................
Connecticut .....................................

Mlddl* Atlanta .........
New Y ork ........................................
New Jersey......................................

West North Central...............................
Minnesota...........................................
Iowa.....................................................

Missouri..........................................

158
996
411
no

Nebraska.........................................

106
114
93
161

South Atlantic........................................

580

North Dakota....................................
South Dakota....................................
Kansas

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

Delaware.............................................
Maryland............................................

District of Columbia......................
Virginia...........................................
West Virginia..................................
North Carolina..................................

South Carolina................................
Georgia............................................
Florida............................................
East South Central................................
Kentucky............................................

Tennessee........................................
Alabama..........................................
Mississippi..........................................

West South Central...............................
Arkansas..........................................
Louisiana........................................
Oklahoma............................................

Texas...............................................
Mrmntwin....................................................

Montana..........................................
Idaho...............................................
Wyoming......... .............................
Colorado.............................................

New Mexico....................................
Arizona............................................
Utah................................................
N evada ............................................
Pacific....................................................
Washington.....................................
Oregon.............................................
California........................................

For footnotes, see bottom of preceding page.

3
1
3
4
15

1,094
265
102
241
43
38
117
288

21
71
141
117
14
10

126
119
199
87

309
5
20
4
32
11
45
74
80
38

488
12
171
130
175

285
114
83
30
58

36
7
10

326
111
104
12
99

287
50
10
124
103

25
12
13

23
20

48
2
6
9
25
3

_
_

43
6

2
1

7
18
1
32
3
1
1

9
_
_

4
2
3

28
25
3

61
31
17
13

1
2
4

_
_

29. B a n k D e p o sits an d C u r r e n c y , 1890-1940

(In millions of dollars)

Y ear*

D epo sits 1*

T otal
D e po sits
C u rrency

C urrency
o u tside

and

T o ta l

A djusted
D em and

U nited States
Governm ent

Tim e

Banks

1890................
1891................
1892................
1893................
1894................

4,860
5,060
5,500
5,500
5,460

3,990
4,140
4,570
4,510
4,590

2,260
2,330
2,620
2,510
2,580

30
30
10
10
10

1,700
1,780
1,940
1,990
2,000

870
920
930
990
870

1895................
1896................
1897................
1898................
1899................

5,700
5,710
5,880
6,630
7,590

4,830
4,850
4,990
5,610
6,550

2,730
2,690
2,750
3,200
3,870

10
20
20
50
80

2,090
2,140
2,220
2,360
2,600

870
860
890
1,020
1,040

1900................
1901................
1902................
1903................
1904................

8,290
9,340
10,170
10,780
11,250

7,110
8,100
8,910
9,420
9,880

4,210
4,960
5,370
5,540
5,850

100
100
120
150
110

2,800
3,040
3,420
3,730
3,920

1,180
1,240
1,260
1,360
1,370

1905................
1906................
1907................
1908................
1909................

12,560
13,400
14,350
14,040
15,120

11,130
11,860
12,870
12,560
13,670

6,560
6,860
7,110
6,520
7,440

80
90
180
130
70

4,490
4,910
5,580
5,910
6,160

1,430
1,540
1,480
1,480
1,450

1910................
1911................
1912................
1913................
1914................

16,180
16,990
18,180
18,700
19,640

14,710
15,550
16,690
17,130
18,110

8,280
8,810
8,870
8,810
10,060

50
50
60
50
70

6,380
6,690
7,760
8,270
7,980

1,470
1,440
1,490
1,570
1,530

1915................
1916................
1917................
1918................
1919................

20,460
24,010
28,110
31,640
35,520

18,880
22,130
25,830
28,340
31,910

9,900
12,250
12,570
13,780
16,980

50
40
830
1,570
960

8,930
9,840
12,430
12,990
13,970

1,580
1,880
2,280
3,300
3,610

1920................
1921................
1922................
1923................
1924................

39,820
37,840
39,140
42,520
44,620

35,690
34,140
35,780
38,760
40,960

19,080
17,030
17,990
18,860
19,570

300
420
170
330
190

16,310
16,690
17,620
19,570
21,200

4,130
3,700
3,360
3,760
3,660

1925................
1926................
1927................
1928................
1929................

48,030
50,290
52,480
54,750
55,210

44,440
46,670
48,900
51,100
51,550

21,150
21,610
22,250
22,340
22,620

180
230
230
270
380

23,110
24,830
26,420
28,490
28,550

3,590
3,620
3,580
3,650
3,660

1930................
1931................
1932................
1933................
1934................

54,530
52,940
45,470
41,720
45,890

51,150
49,270
40,830
36,930
41,210

21,870
19,910
15,670
14,450
16,650

320
440
420
850
1,740

28,960
28,920
24,740
21,630
22,820

3,380
3,670
4,640
4,790
4,680

1935................
1936................
1937................
1938................
1939................

49,970
55,170
57,420
56,740
60,950

45,160
49,910
51,890
51,270
54,940

20,540
23,860
25,260
24,390
27,350

820
1,150
670
610
790

23,800
24,900
25,960
26,270
26,800

4,810
5,260
5,530
5,470
6,010

1940................

66,960

60,260

31,960

830

27,470

6,700

a Figures as of June 30 or nearest available date.
Data for adjusted demand and time deposits for the years 1890-1918 derived from estimates
published by Professor James W. Angell in The Behavior of Money) for the years 1919-1940, from reports
of condition of all banks in the United States. In all cases interbank deposits were excluded and demand
deposits were adjusted for items in process of collection. Deposits in the Postal Savings System and in
mutual savings banks were included in time deposits.
0 Treasury’s published figures for money in circulation, adjusted to exclude vault cash of banks and
$287,000,000 of gold coin reported in circulation Jan. 31, 1934 as follows: for period 1880-1897,16,580,000
of gold coin deducted annually on a cumulative basis; for period 1898-1913, $10,530,000 deducted annually
on a cumulative basis; for period 1914-1933, the entire $287,000,000 deducted. In 1934 gold in circulation
was dropped from the reported figures (see Annual Report of the Federal Reserve Board, 1934, p. 67, Note 2).

447

448

BANKING STUDIES
30. M

em ber

B a n k R e s e r v e s a n d R e l a t e d I t e m s , 1918-1939*

(Monthly averages of daily figures, in millions of dollars)
T reasury
M ember B^>nk R eserve
C ash and
B al / INCES
D eposits
with Federal
R eserve
Total
Excessd
B anks

R eserve
B ank
Credit 5

Gold
Stock0

M oney in
C ircula
tion 0

1918—January...............
February............
M arch........ ......
A pril....................
M ay.....................
Ju n e.. ...............
Ju ly.....................
August................
September........
October...............
N ovember. . . . . .
December...........

1,170
1,143
1,263
1,381
1,412
1,554
1,631
1,750
2,073
2,355
2,416
2,491

2,865
2,872
2,875
2,876
2,876
2,875
2,874
2,870
2,869
2,864
2,868
2,869

4,019
3,993
4,086
4,136
4,114
4,161
4,233
4,379
4,624
4,847
4,896
4,956

364
341
351
361
362
418
443
408
422
417
422
376

1,467
1,468
1,466
1,504
1,482
1,512
1,448
1,459
1,507
1,539
1,520
1,586

1919—January..............
February............
M arch.................
A p ril...................
M.ay.....................
June....................
J u ly.....................
August................
September..........
October...............
N ovem ber..........
D ecem ber.. . . . . .

2,359
2,341
2,480
2,451
2,498
2,467
2,599
2,559
2,636
2,847
3,038
3,203

2,873
2,875
2,874
2,879
2,889
2,882
2,800
2,827
2,856
2,833
2,783
2,734

4,763
4,645
4,655
4,683
4,654
4,604
4,609
4,626
4,702
4,819
4,921
5,055

378
467
526
439
470
470
494
456
453
497
479
441

1,635
1,612
1,652
1,656
1,686
1,696
1,719
1,740
1,769
1,793
1,837
1,820

1920—January..............
F ebruary.. . —
M arch.................
A p ril...................
M ay.....................
June....................
J u ly.....................
August................
September..........
O ctober...............
Novem ber..........
December...........

3,205
3,314
3,413
3,364
3,385
3,382
3,344
3,353
3,495
3,522
3,467
3,442

2,674
2,622
2,572
2,534
2,548
2,567
2,575
2,568
2,560
2.568
2,586
2,607

4,944
4,998
5,111
5,085
5,127
5,161
5,191
5,222
5,313
5,386
5,375
5,371

443
449
348
279
271
257
236
239
268
238
236
256

1,883
1,858
1,878
1,870
1,853
1,853
1,840
1,807
1,817
1,815
1,782
1,758

1921—January..............
February............
M arch.................
A pril...................
M ay.....................
June....................
J u ly.....................
August................
September. . . . . .
O ctober...............
November..........
December...........

3,110
2,918
2,798
2,564
2,386
2,211
2,049
1,863
1,767
1,669
1,544
1,548

2,644
2,688
2,753
2,830
2,910
2,967
3,015
3,105
3,192
3,260
3,308
3,356

5,114
4,976
4,917
4,791
4,755
4,649
4,570
4,484
4,465
4,434
4,386
4,431

246
272
310
285
250
238
233
251
266
271
260
266

1,773
1,728
1,694
1,665
1,657
1,664
1,639
1,621
1,629
1,652
1,663
1,673

1922—January..............
February............
M arch.................
A pril...................
M ay.....................
June............. .......
J u ly.....................
August................
September..........
October...............
N ovem ber..........
December...........

1,326
1,233
1,207
1,210
1,208
1,192
1,170
1,102
1,180
1,246
1,265
1,377

3,385
3,417
3,449
3,469
3,481
3,489
3,516
3,553
3,573
3,597
3,609
3,630

4,240
4,164
4,196
4,195
4,163
4.142
4,156
4,161
4,265
4,356
4,384
4,540

288
313
263
272
280
262
267
258
256
241
266
250

1,707
1,689
1,711
1,733
1,783
1,820
1,812
1,799
1,811
1,836
1,825
1,840

Y ear

and

M onth

For footnotes, see p. 452.

449

TABLES

30. M em ber B a n k R e s e r v e s an d R e l a t e d Item s, 1918-1939*— Continued

(Monthly averages of daily figures, in millions of dollars)
T reasury
M ember B ank R eserve
C ash and
B al a lNCES
D eposits
with Federal
R eserve
Total
Excessd
B anks

R eserve
B an k .
Credit ®

G old
Stock0

M oney in
C ircula
tion 0

1923—January..............
February............
M arch.................
April...................
M ay.....................
June....................
J u ly....................
A u g u st..............
September..........
October .............
Novem ber..........
December...........

1,249
1,205
1,228
1,214
1,222
1,178
1,179
1,127
1,184
1,204
1,204
1,260

3,655
3,673
3,679
3,688
3,706
3,753
3,774
3,810
3,836
3,868
3,895
3,939

4,392
4,385
4,426
4,444
4,477
4,492
4,525
4,546
4,614
4,654
4,666
4,784

239
263
290
276
254
252
244
249
260
250
249
238

1,918
1,901
1,873
1,869
1,874
1,867
1,867
1,835
1,848
1,864
1,875
1,882

1924—January..............
February............
M arch.................
A p ril...................
M ay.....................
June........... .........
J u ly.....................
August................
September..........
October...............
Novem ber..........
December...........

1,041
955
990
981
879
886
879
881
983
1,057
1,135
1,288

3,979
4,015
4,053
4,096
4,146
4,184
4,216
4,229
4,228
4,219
4,230
4,220

4,560
4,545
4,583
4,599
4,579
4,543
4,523
4,513
4,566
4,604
4,683
4,801

260
253
267
297
251
260
254
255
254
264
250
257

1.911
1,892
1,915
1,905
1,922
2,001
2,046
2,072
2,120
2,141
2,164
2,182

1925—January..............
February............
M arch.................
A p ril...................
M ay.....................
June....................
J u ly.....................
August................
September..........
October...............
N ovem ber..........
December...........

1,125
1,094
1,122
1,110
1,100
1,118
1,118
1,143
1,227
1,321
1,352
1,507

4,181
4,105
4,053
4,053
4,066
4,073
4,074
4,085
4,099
4,104
4,120
4,110

4,576
4,518
4,527
4,516
4,504
4,503
4,507
4,530
4,621
4,658
4,673
4,832

261
247
237
244
244
255
228
247
236
246
246
240

2,194
2,159
2,137
2,123
2,132
2,141
2,160
2,151
2,161
2,203
2,221
2,219

1926—January..............
February............
M arch.................
A pril...................
M ay.....................
June....................
J u ly.....................
August................
September..........
October...............
N ovem ber..........
December...........

1,279
1,218
1,216
1,204
1,200
1,185
1,221
1,203
1,278
1,322
1,318
1,445

4,120
4,138
4,157
4,161
4,147
4,151
4,173
4,180
4,184
4,185
4,190
4,194

4,604
4,567
4,577
4 595
4,584
4,594
4,629
4,625
4,682
4,714
4,7J8
4,844

234
261
274
262
241
215
233
229
236
243
236
243

2,236
2,208
2,198
2,183
2,199
2,206
2,212
2,201
2,211
2,219
2,214
2,218

1927—January..............
February............
M arch.................
April....................
M ay.....................
June....................
J u ly....................
August................
September..........
October...............
N ovem ber..........
December...........

1,186
1,043
1,055
1,087
1,041
1,081
1,115
1,093
1,187
1,254
1,377
1,568

4,240
4,289
4,308
4,314
4,364
4,319
4,288
4,298
4,297
4,279
4,203
4,129

4,616
4,556
4,569
4,592
4,573
4,544
4,564
4,562
4,630
4,644
4,649
4,761

230
235
228
236
233
227
223
223
227
227
214
209

2,243
2,212
2,240
2,248
2,262
2,301
2,289
2,283
2,300
2,326
2,373
2,399

Y eas

and

M onth

For footnotes, see p. 452.

BANKING STUDIES
k

R ese r v e s

and

R e l a t e d I t e m s , 1918-1939*

lint

;hly averages of daily figures, in millions of dollars)
R ese rv e
B ank
C r e d it "

G old
S tock

M o n e y in
C ir c u la
t io n

T r ea su ry
M em ber B a
C a sh and
B ala
D e po sits
w it h F e d e ra l
R e se rv e
Total
B anks

£ se :

tcess

1,388
1,264
1,295
1,405
1,472
1.531
1.531
1,485
1,581
1,621
1,653
1,824

4,090
4,086
4,048
4,000
3,920
3,832
3,826
3,831
3,838
3,846
3,864
3,855

4,498
4,422
4,423
4,443
4,435
4,449
4,459
4,456
4,517
4,549
4,573
4,721

227
229
225
229
229
215
223
233
220
225
224
222

2,426
2,368
2,365
2.396
2,388
2.355
2,324
2,274
2.314
2.332
2,352
2,367

1,613
1,502
1,481
1,377
1,303
1,317
1,380
1,376
1,427
1,450
1,631
1,643

3,828
3,856
3,879
3,939
4,005
4,024
4,048
4,064
4,081
4,094
4,087
4,037

4,461
4,399
4,422
4,392
4,397
4,400
4,477
4,490
4,524
4,523
4,558
4,656

223
226
220
230
231
240
227
226
240
229
235
226

2,387
2,357
2,337
2,308
2,296
2.314
2.334
2,322
2.335
2.386
2,521
2,395

53
46
41
37
33
42
42
36
34
42
65
48

1,357
1,181
1,095
1,072
996
1,003
998
1,016
1,020
1,033
1,273

3,996
4,030
4,107
4,156
4,218
4,241
4,245
4,209
4,216
4,233
4,266
4,296

4,365
4,267
4,245
4,231
4,210
4,202
4,196
4,189
4,206
4,214
4,241
4,536

238
241
225
242
244
249
235
238
242
240
235
234

2.349
2,305
2,330
2.350
2.356
2.392
2,417
2.392
2.397
2.407
2.433
2,415

45
53
56
42
45
54
74
52
59
59
52
73

1,129
936
921
952
926
945
954
1,107
1,313
2,088
2,035
1,950

4,335
4,369
4,395
4,424
4,480
4,578
4,671
4,688
4,661
4,160
4,076
4,163

4,408
4,311
4,303
4,360
4,392
4,463
4,549
4,660
4,846
5,191
5,231
5,324

242
245
248
255
240
263
239
259
255
256
260
249

2.433
2,370
2.386
2,376
2.387
2,404
2.407
2,345
2.333
2,256
2,118
2,069

105
57
67
56
67
129
124
101
120
129
57
60

1,864
1,785
1,652
1,694
1,959
2,262
2,422
2,353
2,282
2,231
2,211
2,192

4,165
4,097
4,085
4,094
3,986
3,669
3,654
3,743
3,853
3,939
4,005
4,142

5,358
5,340
5,244
5,165
5,169
5,243
5,464
5,432
5,398
5,356
5,356
5,412

264
262
267
272
272
271
276
281
304
285
277
287

1,979
1,907
1,899
1,996
2,138
2,062
2,003
2,073
2,181
2,307
2,378
2,435

35
44
59
152
277
234
204
270
346
436
482

1,000

452.

451

TABLES
30. M ember B a n k R eserves

and

R elated I tems , 1918-1939®— Continued

(Monthly averages of daily figures, in millions of dollars)
T reasury
M ember B ank R eservi
C ash and
B alances
D eposits
with Federal
R eserve
Total
Excessd
B anks

R eserve
B ank
Credit

Gold
Stock0

M oney in
Circula
tion 0

1933—January..............
February............
M arch.................
A p ril...................
M a y ....................
June....................
J u ly....................
August................
September..........
October...............
Novem ber..........
December...........

2,110
2,224
3,237
2,515
2,286
2,208
2,211
2,239
2,358
2,492
2,574
2,669

4,260
4,204
3,974
4,014
4,026
4,030
4,032
4,036
4,040
4,037
4,036
4,036

5,344
5,605
6,711
5,850
5,589
5,455
5,388
5,329
5,345
5,369
5,394
5,524

303
314
359
390
371
353
347
316
328
333
349
357

2,516
2,291
1,914
2,086
2,125
2,211
2,268
2,375
2,489
2,590
2,629
2,616

1934—January..............
February............
M arch.................
A pril...................
M ay.....................
June....................
J u ly.....................
August................
September..........
October...............
Novem ber..........
December...........

2,656
2,597
2,535
2,507
2,479
2,464
2,469
2,463
2,469
2,457
2,466
2,472

4,036
7,138
7,602
7,736
7,759
7,821
7,893
7,971
7,971
7,989
8,047
8,191

5,382
5,339
5,368
5,366
5,355
5,341
5,350
5,355
5,427
5,473
5,494
5,577

397
3,448
3,298
3,222
3,083
3,054
2,999
2,976
3,054
3,011
2,970
3,120

2,764
2,822
3,361
3,594
3,695
3,790
3,928
4,045
3,947
3,964
4,100
4,037

866
891
1,375
1,541
1,623
1,685
1,789
1,884
1,754
1,731
1,834
1,748

1935—January..............
February............
M arch.................
April...................
M ay.....................
June....................
J u ly....................
August................
September..........
October..............
Novem ber..........
December...........

2,465
2,462
2,461
2,471
2,476
2,479
2,473
2,476
2,480
2,482
2,482
2,494

8,284
8,465
8,552
8,641
8,755
9,025
9,128
9,180
9,246
9,545
9,777
10,072

5,411
5,439
5,477
5,500
5,507
5,522
5,550
5,576
5,651
5,704
5,770
5,897

3,053
2,965
3,122
3,209
2,942
2,989
3,032
2,795
2,734
2,693
2,630
2,869

4,355
4,601
4,452
4,436
4,778
4,979
4,970
5,232
5,243
5,469
5,757
5,716

2,035
2,237
2,065
2,026
2,297
2,438
2,385
2,636
2,628
2,820
3,061
2,983

1936—January..............
February............
M arch.................
A p ril...................
M a y.....................
June....................
J u ly.....................
August................
September..........
October...............
N ovem ber..........
December...........

2,484
2,493
2,484
2,480
2,476
2,478
2,474
2,474
2,479
2,480
2,472
2,498

10,158
10,164
10,172
10,202
10,324
10,514
10,629
10,674
10,764
10,983
11,116
11,220

5,757
5,779
5,857
5,892
5,918
6,062
6,203
6,191
6,258
6,321
6,401
6,563

3,058
2,981
3,278
3,384
3,133
3,372
2,998
2,691
2,619
2,559
2,459
2,512

5,780
5,808
5,420
5,300
5,638
5,484
5,861
6,181
6,345
6,594
6,785
6,665

3,033
3,038
2,653
2,510
2,800
2,593
2,907
2,458
1,852
2,043
2,219
2,046

1937—January..............
February............
M arch.................
A pril...................
M a y ....................
June....................
J u ly....................
August................
September..........
October...............
November..........
December...........

2,485
2,475
2,472
2,522
2,577
2,578
2,574
2,573
2,584
2,583
2,592
2,628

11,310
11,399
11,503
11,686
11,901
12,189
12,404
12,512
12,653
12,782
12,788
12,765

6,400
6,369
6,391
6,397
6,426
6,435
6,475
6,500
6,558
6,566
6,558
6,618

2,650
2,736
2,887
3,022
3,154
3,453
3,669
3,867
3,808
3,731
3,767
3,810

6,716
6,747
6,704
6,824
6,932
6,878
6,845
6,701
6,854
6,954
6,919
6,879

2,093
2,152
1,371
1,552
927
876
876
750
900
1,043
1,104
1,071

Y eas

and

M onth

For footnotes, see p. 452.

584
248d
379
319
363
436
566
675
758
794
766

452

BANKING STUDIES

30. M e m b e r B a n k R e s e r v e s

and

R e l a t e d I t e m s , 1918-1939*— Continued

(Monthly averages of daily figures, in millions of dollars)

Y e a s and M onth

1938—Jan uary................
Febru ary.............
M a r c h ..................
A p r il............. .
M a y .......................
Jun e......................
J u ly .......................
A u gu st.................
S eptem ber..........
O c t o b e r .________
N ov em b er ...........
D ecem ber............

1939—Jan uary................
F ebru ary.............
M a r c h ..................
A p r il.....................
M a y .......................
Tune......................
J u ly ......................
A u gu st.................
Septem ber...........
O cto b e r ................
N ov em b er...........
D ecem ber............

1940—Jan uary................
F eb ru a ry.............
M a r c h ...................
A p r il.....................
M a y .......................
Jun e......................

T reasu ry
M em ber B a n k R ese rv e
C ash and
B alances
D epo sits
w it h F ederal
R e serve
T o ta l
Excessd
B a nk s

R eserve
B ank
C r e d it ®

G old
Stock ®

M on ey in
C ircu la
t io n ®

2,602
2,598
2,597
2,606
2,594
2,592
2,599
2,590
2,610
2,598
2,592
2,618

12,756
12,768
12,778
12,829
12,891
12,946
12,985
13,057
13,441
13,940
14,162
14,416

6,397
6,319
6,338
6,387
6,415
6,433
6,464
6,482
6,570
6,668
6,750
6,888

3,757
3,794
3,779
3,669
3,542
3,250
3,035
3,166
3,421
3,447
3,254
3,396

7,183
7,230
7,326
7,469
7,587
7,878
8,167
8,119
8,196
8,546
8,727
8,745

1,353
1,406
1,524
2,071
2,525
2,762
3,026
2,955
2,920
3,143
3,276
3,226

2,598
2,594
2,590
2,593
2,582
2,591
2,569
2,467
2,794
2,832
2,722
2,612

14,599
14,778
15,014
15,509
15,878
16,028
16,182
16,390
16,823
17,002
17,217
17,518

6,712
6,697
6,764
6,867
6,919
6,966
7,051
7,098
7,249
7,328
7,413
7,609

3,553
3,813
3,875
3,704
3,589
3,497
3,314
3,127
2,864
2,597
2,768
3,018

9,029
8,925
9,021
9,624
9,997
10,085
10,321
10,659
11,443
11,862
11,688
11,473

3,484
3,373
3,432
3,926
4,212
4,246
4,402
4,607
5,198
5,490
5,259
5,011

2,542
2,546
2,539
2,527
2,529
2,542

17,804
18,061
18,310
18,608
18,974
19,560

7,443
7,426
7,488
7,532
7,617
7,752

2,945
2,961
2,974
2,881
2,671
2,480

11,985
12,215
12,362
12,703
13,086
13,596

5,464
5,626
5,734
6,003
6,288
6,696

a Data compiled by the Board of Governors; figures through September 1935 published in the pamph
let Supply and Use of Member Bank Reserve Funds, and thereafter in current issues of the Federal Reserve
Bulletin.
b Includes bills discounted and bills bought, United States Government securities, and other forms
of credit extended by the Federal Reserve Banks.
c Excludes for the entire period 287 million dollars of gold coin reported as in circulation prior to
Jan. 31, 1934. (See Annual Report of the Federal Reserve Board, 1934, p. 67, note 2.)
d Figures for excess reserves not available prior to 1929 and since April 1933 are for licensed member
banks only. The figure for March 1933 has been estimated.

453

TABLES

31. N a t io n a l I nco m e

and

V olu m e

and

T u rnover

B a n k D e p o sit s

1919-1939
(Dollar amounts in millions)
A n n u a l R ate op T u rn o v e r op
D epo sits ®
C alen dar
Y ear

N atio n a l
I ncome ®

D e b it s
at A ll
C ommercial
BANKSb

D e p o s it s
at A ll
C om m ercia l
B anks

A t W eekly R eporting
M em ber Banks
In N ew
Y ork C ity

In 100 Other
Leading
Cities

At N on
reporting
Banks

1919..........

$67,300

$663,000

$27,070

53.2

24.1

15.7

1920.........
1921.........
1922..........
1923.........
1924..........

69,300
52.300
60.100
69,700
69,600

721,000
591,000
643,000
685,000
716,000

30,420
28,410
29,740
32,780
34,310

56.0
51.4
55.3
56.1
56.8

27.0
22.3
21.4
21.7
20.8

14.5
12.7
13.2
12.7
12.5

1925.........
1926.........
1927.........
1928.........
1929..........

74,400
76,500
75,800
79,600
82,900

820,000
872,000
952,000
1,114,000
1,276,000

37,320
38,970
40,480
42,410
42,630

60.8
65.2
70.4
85.3
99.5

21.3
21.3
21.6
22.1
23.8

13.0
13.0
13.3
14.2
15.8

1930.........
1931.........
1932.........
1933.........
1934.........

68,900
54,300
40,100
42,400
50,300

931,000
685,000
471,000
437,000
491,000

41,640
37,750
31,510
28,660
30,580

61.3
45.0
31.7
29.7
27.8

19.8
16.4
13.6
13.5
14.3

13.1
11.3
10.2
10.8
12.6

1935.........
1936.........
1937.........
1938.........
1939.........

55,900
65,200
71,200
63,600
69,400

547,000
628,000
650,000
566,000
592,000

34.770
38,910
40,540
40,560
43,650

28.3
29.7
27.5
23.5
20.3

14.7
15.4
16.0
13.8
13.5

11.6
11.6
11.9
10.6
10.9

a Basic data for 1919-1928 from Simon Kuznets, National Income and Capital Formation, p. 8. Figures
there given have been so used as to make them as comparable as possible with the estimates prepared by
the Department of Commerce for 1929 and later years.
b Data compiled by the Board of Governors. The figures include the annual volume of debits to de
mand and time deposits, excluding interbank accounts, as reported by commercial bank members of
some 250 clearing houses. These debits were adjusted to include estimated debits at other banks.
c Data compiled by the Board of Governors. The figures include the average volume of total deposits
at all commercial banks minus interbank deposits and cash items in process of collection. These figures
are partly estimated.
d Data compiled by the Board of Governors. The turnover rate at weekly reporting member banks is
based on actual figures of debits and deposits, exclusive of interbank deposits and collection items, re
ported by these banks in 101 leading cities. The turnover rate for nonreporting banks is based on debit
and deposit figures which are subject to the conditions mentioned in notes b and c.

32. M oney R ates , 1919-1939

(Per cent per annum)
R ates Charged Customers
by B anks*
Y ea s

and

M onth

F ederal R eserve
B ank D iscount
RATEb

In New
York
City

In
Northern
and
Eastern
Cities

1919—January.............
February...........
March................
A pril..................
M a y....................
June...................
July....................
August..............
September.........
October.............
November.........
December..........

5.54
5.36
5.46
5.56
5.43
5.45
5.49
5.49
5.49
5.63
5.56
5.61

5.79
5.67
5.66
5.72
5.59
5.70
5.75
5.75
5.76
5.76
5.77
5.86

6 .11

1920—January.............
February...........
M arch................
A pril..................
M ay....................
June...................
July....................
August...............
September.........
October..............
Novem ber.........
December..........

5.93
6.00
6.00
6.09
6.00
6.00
6.43
6.36
6.57
6.57
6.71
6.36

5.99
6.15
6.32
6.68
6.79
6.98
7.01
7.01
6.98
7.00
7.00
6.97

6.16
6.26
6.43
6.47
6.56
6.88
7.00
6.99
7.07
7.04
7.08
7.07

(23) 6
6
6
6
6
(1) 7
7
7
7
7
7
7

1921—January.............
February...........
March................
April..................
M ay....................
June...................
July....................
August...............
September.........
October.............
November.........
December..........

6.71
6.78
6.70
6.64
6.68
6.43
6.21
6.25
6.11
5.93
5.96
5.68

6.99
6.95
6.94
6.99
6.94
6.97
6.93
6.59
6.62
6.65
6.32
6.19

7.10
7.11
7.13
7.12
7.06
7.05
7.04
7.03
6.96
6.85
6.74
6.67

7
7
7
7
(5) 6J
(16) 6
(21 5*
5f
(22) 5

1922—January.............
February...........
M arch................
A pril..................
M a y....................
June...................
July....................
August...............
September.........
October.............
N ovember.........
December..........

5.50
5.48
5.43
5.46
5.06
4.93
5.16
4.66
4.70
4.74
4.82
4.86

6.08
5.89
5.77
5.46
5.43
5.43
5.31
5.27
5.12
5.20
5.38
5.44

6.56
6.46
6.35
6.22
6.23
6.13
6.04
6.02
5.94
5.89
5.94
5.90

41
4
44
44

1923—January.............
February...........
M arch................
A pril..................
M ay....................
June...................
July....................
August...............
September.........
October..............
November.........
December..........

4.82
4.91
4.98
5.32
5.27
5.21
5.29
5.18
5.33
5.37
5.39
5.21

5.34
5.38
5.52
5.49
5.54
5.45
5.47
5.64
5.59
5.57
5.51
5.48

5.90
5.91
5.83
5.94
5.92
5.91
5.96
5.98
5.94
5.95
5.99
5.99

In
Southern
New York
and
City
Western
Cities

6.02
6.01
6.00

5.91
5.98
5.94
5.93
5.96
5.95
6.10

For footnotes, see p. 458.

454

41
44
44
44
44
4*
44

4
4
4
4
4
4
4

6.03

4
4
(3) 4f
41

(3) 4*
4*

4|
(22) 4
4
4
4
4
4
4
4
(23) 4|
44

4f
4I
4*
4*
44

Kansas
City

44
44

N ew Y ork N ew Y o r k
R ate on
R a te on
Open OpenM arket
M a rk e t
P rime
Prime
B ankers’
Commer
A ccept
c ia l
ances ,
Paper,
90-D ay ° 4-6 M onths 0
4.25
4.25
4.25
4.25
4.25
4.25
4.26
4.28
4.25
4.25
4.52
4.95

5.44
5.41
5.50
5.50
5.50
5.66
5.55
5.50
5.50
5.50
5.62
6.00

(3) 5*
(23) 6
6
6
6
6
6
6
6
6
6
6

5.37
5.50
6.00
6.00
6.13
6.25
6.25
6.25
6.25
6.25
6.23
6.25

6.06
6.53
6.88
6.97
7.38
7.95
8.09
8.25
8.16
8.12
8.08
8.00

6
6
6
6
6
6
6
6
6
6
(2) 5
5

5.94
5.97
5.98
5.67
5.69
5.59
5.25
5.00
4.94
4.49
4.27
4.16

7.75
7.75
7.75
7.50
7.00
6.50
6.25
6.25
6.00
5.75
5.25
5.00

5
5
5
5
5
5
5
(12) 4f

3.95
4.00
3.73
3.32
3.18
3.07
3.00
3.00
3.12
3.72
4.00
4.00

4.75
5.00
4.75
4.50
4.25
4.25
4.00
4.00
4.25
4.50
4.75
4.75

3.98
3.99
4.00
4.14
4.13
4.13
4.13
4.13
4.13
4.13
4.13
4.13

4.50
4.75
5.00
5.13
5.00
5.00
5.00
5.25
5.38
5.25
5.00
4.88

4f
44
44

(4) 5

4*
44
4*
4|
44
44
44
44
44
44
44
44
44
44

32. M

oney

R a t e s , 1919-1939 — Continued

(Per cent per annum)
R ates Charged Customers
by B anks *
Y ear

and

M onth

In New
York
City

Federal R eserve
B ank D iscount
R ate 5

Northern Southern
New York
and
and
City
Eastern Western
Cities
Cities

1924—January.............
February...........
March................
A pril..................
M ay...................
June...................
July....................
August...............
September.........
October.............
November.........
December..........

5.21
5.07
5.06
4.98
4.89
4.64
4.21
4.09
4.20
4.41
4.13
4.29

5.53
5.38
5.37
5.31
5.26
5.12
5.09
4.80
4.87
4.87
4.80
4.87

6.02
5.91
5.89
5.89
5.79
5.69
5.63
5.57
5.55
5.47
5.53
5.53

1925—January.............
February...........
March................
A pril..................
M ay...................
June...................
July....................
August...............
September.........
October.............
November.........
December..........

4.16
4.43
4.53
4.48
4.38
4.36
4.46
4.36
4.57
4.62
4.61
4.70

4.80
4.79
4.89
4.92
4.95
4.95
4.90
4.98
5.04
5.16
5.20
5.17

5.57
5.55
5.61
5.61
5.58
5.59
5.59
5.60
5.55
5.53
5.55
5.61

3
(27) 3*
34
3i
3$
3*

1926—January.............
February...........
M arch................
A pril..................
M ay...................
June...................
July....................
August...............
September.........
October.............
November.........
December..........

4.64
4.68
4.62
4.62
4.66
4.58
4.38
4.62
4.81
4.85
4.79
4.79

5.14
5.11
5.15
5.17
5.07
4.87
4.92
4.91
5.08
5.15
5.07
5.09

5.56
5.65
5.62
5.65
5.61
5.55
5.54
5.56
5.60
5.66
5.67
5.68

(8) 4
4
4
(23) 3*
3*
3f
3*
(13) 4
4
4
4
4

1927—January.............
February...........
March................
^4>ril
M ay....................
June...................
July....................
August..............
September.........
October.............
November.........
December..........

4.66
4.56
4.56
4.63
4.63
4.60
4.56
4.41
4.44
4.49
4.35
4.50

4.99
4.98
4.88
4.90
4.95
4.93
4.90
4.87
4.77
4.79
4.82
4.76

5.72
5.71
5.65
5.57
5.59
5.54
5.52
5.53
5.61
5.56
5.56
5.60

1928—Januaryd ...........
February...........
M arch................
A pril..................
M a y....................
June........ .......
July....................
August...............
September.........
October.............
November.........
December..........

4.38
4.25
4.38
4.50
4.63
4.88
5.25
5.38
5.50
5.50
5.38
5.50

4.52
4.59
4.74
4.69
4.87
5.12
5.39
5.42
5.62
5.64
5.66
5.70

5.25
5.18
5.23
5.23
5.22
5.34
5.50
5.51
5.52
5.59
5.64
5.70

...........

For footnotes, see p. 458.

455

4t
41
(1) 4
(12) 3*
3i
(8) 3
3
3
3
3

3*
3«
3$
3f
3*

4
4
4
4
4
4
4
(5)

Si ‘
3}
3
3‘
31

3*
(3) 4
4
4
(18) 4*
4*
(13) 5
5
5
5
5
5

Kansas
City

4}
4$
4*
4|
4|
4*
(1) 4
4
4
4
4
4

N ew Y ork N ew Y ork
R ate on
R ate on
Open OpenM arket
M arket
Prime
Prime
Commer
B ankers’
A ccept
cial
ances,
P aper ,
90-D ay° 4-6 M onths®
4.09
4.07
4.04
3.95
3.29
2.45
2.01
2.10
2.33
2.21
2.37
2.89

4.75
4.75
4.63
4.50
4.38
3.63
3.38
3.13
3.25
3.13
3.38
3.62

4
4
4
4
4
4
4
4
4
4
4
4

3.00
3.08
3.25
3.14
3.17
3.25
3.25
3.27
3.50
3.50
3.50
3.50

3.50
3.75
4.00
4.00
3.88
3.88
3.88
4.13
4.25
4.38
4.38
4.38

4
4
4
4
4
4
4
4
4
4

3.67
3.63
3.63
3.42
3.20
3.32
3.38
3.57
3.88
3.88
3.79
3.83

4.37
4.25
4.37
4.37
4.00
4.00
4.13
4.37
4.63
4.63
4.50
4.50

4
4
4
4
4
4
(29) 34
3f
3*
3}
3*
3}

3.69
3.69
3.63
3.63
3.63
3.63
3.50
3.13
3.13
3.25
3.25
3.25

4.25
4.13
4.13
4.13
4.13
4.25
4.25
4.00
4.00
4.00
4.00
4.00

3*
(10) 4
4
4
4
(7) 4

3.38
3.50
3.50
3.75
4.00
4.06
4.25
4.63
4.50
4.50
4.50
4.50

4.00
4.00
4.13
4.38
4.50
4.88
5.13
5.38
5.63
5.50
5.38
5.38

32. M

oney

R a t e s , 1919-1939— Continued

(Per cent per annum)
R ates Charged Customers
by B anks*
Yeas

and

M onte
In New
York
City

In
In
[Northern Southern
New York
and
and
City
Eastern Western
Cities
Cities

1929—January.............
February...........
March I..............
April..................
M ay...................
June........... ; . . .
July....................
August...............
September.........
October.............
November.........

5.50
5.48
5.57
5.72
5.76
5.79
5.80
6.03
6.09
6.11
5.70

5.70
5.64
5.71
5.75
5.79
5.85
5.80
5.92
6.01
5.99
5.93

5.73
5.77
5.80
5.86
5.88
5.97
5.98
6.03
6.04
6.08
6.07

December..........

5.54

5.78

5.93

1930—January.............
February...........
March................
April..................
M ay...................
June...................
July....................
August...............
September___
October.............
N ovem ber.. —
December..........

5.43
5.10
4.91
4.61
4.44
4.28
4.22
4.14
4.00
3.92
3.79
3.82

5.72
5.55
5.30
4.98
4.93
4.89
4.53
4.47
4.44
4.49
4.38
4.38

5.90
5.80
5.73
5.56
5.42
5.36
5.31
5.25
5.15
5.18
5.17
5.01

1931—January.............
February...........
March................
April..................
M ay...................
June...................
July....................
August...............
September.........
October.............

3.74
3.89
3.67
3.67
3.57
3.66
3.70
3.58
3.50
3.82

4.23
4.31
4.29
4.22
4.19
4.15
4.08
4.10
4.09
4.30

5.01
4.96
4.90
4.93
4.74
4.89
4.72
4.75
4.76
4.85

November.........
December..........

4.55
4.48

4.53
4.60

5.18
5.15

1932—January.............
February...........
March................
April......... .........
M ay...................
June...................
July....................
August...............
September.. . . . .
October.............
November.........
December..........

4.51
4.52
4.53
4.46
4.24
4.38
4.22
4.14
3.94
4.01
3.66
3.78

4.86
4.93
4.93
4.89
4.89
4.92
4.80
4.88
4.71
4.68
4.60
4.61

5.26
5.25
5.29
5.25
5.22
5.18
5.20
5.29
5.20
5.07
5.07
5.19

1933—January.............
February...........
March................
April..................
M ay...................
June...................
July....................
August...............
September.........
October.............
November.........
December..........

3.62
3.66
4.79
3.94
3.71
3.51
3.29
3.32
3.00
2.96
2.80
2.61

4.53
4.38
5.14
4.88
4.66
4.68
4.50
4.31
4.20
4.05
4.07
4.09

5.11
5.05
5.35
5.25
5.27
5.15
4.99
5.00
4.95
4.82
4.74
4.76

For footnotes, see p. 458.

F ederal R eserve
B ank D iscount
R ate ®

456

5
5
5
5
5
5
5
(9) 6
6
6
(1) 5
(15) 44
4*
(7)
(14)
(2)
(20)

4*
4
3*
3i
3
24
2}
24

24
2}
(24) 2
2
2
2
2
(8) 1*

if
i*
if

(9) 2*
(16; 3*
3*
3*
3*
(26) 3
3
3
3
(24) 24
2*
2*

2*
2*

(3) 3}
(7) 3
(26) 2
2
2
2

(20) 2

2
2

Kansas
City

4}
4}
4*
(6) 5
5
5
5
5
5
5

N ew Y ork N ew Y ork
R ate on
R ate on
O penO pen M arket
M arket
P rime
P rime
C ommer
B ankers’
A ccept
cial
ances ,
P aper ,
90-D ay° 4-6 M onths0
4.88
5.13
5.38
5.50
5.50
5.50
5.13
5.13
5.13
5.13
4.19

5.38
5.50
5.88
6.00
6.00
6.00
6.00
6.13
6.25
6.25
5.75

(20) 4*

3.88

5.00

(15) 4
4
4
4
4
4
(15) 3*
3*
34
3*
3§

3.94
3.81
3.13
2.94
2.50
2.13
1.88
1.88
1.88
1.88
1.88
1.88

4.88
4.75
4.25
3.88
3.75
3.50
3.25
3.00
3.00
3.00
2.88
2.88

3}
3$
34
34
(21) 3
3
3
3
3
(23) 31

1.56
1.44
1.50
1.50
1.00
.88
.88
* .88
1.06
2.25

2.88
2.63
2.50
2.38
2.13
2.00
2.00
2.00
2.00
3.13

\\
3i

3.06
3.00

4.00
3.88

31
3*
3#
34
34
34
34
34
34
34
34
34

2.88
2.81
2.50
1.50
1.00
.88
.75
.75
.75
.63
.50
.38

3.88
3.88
3.63
3.50
3.13
2.75
2.50
2.25
2.13
2.00
1.63
1.50

3J
3
3
3
3
3t
3\
3f
3
3
3t
3f

.31
.44
2.38
.88
.50
.38
.44
.44
.25
.25
.38
.63

1.38
1.38
3.00
2.63
2.13
1.75
1.63
1.50
1.38
1.25
1.25
1.38

;

32. M o n e y R a te s, 1919—1939— Continued

(Per cent per annum)

R ates Charged Customers
by B anks ®
Y ear

and

M onth
In New
York
City

In
Northern
and
Eastern
Cities

1934—January.............
February...........
March................
A pril..................
M a y...................
June...................
J u l y ..................
August...............
September.........
October ...........
November.........
December..........

2.81
2.62
2.61
2.50
2.55
2.34
2.33
2.42
2.32
2.36
2.32
2.27

4.17
3.98
3.94
3.97
3.68
3.59
3.55
3.53
3.56
3.56
3.48
3.45

4.74
4.60
4.65
4.60
4.46
4.24
4.25
4.00
4.10
4.12
4.01
4.03

1935—January.............
February...........
M arch................
A pril..................
M ay...................
June..................
July....................
August...............
September.........
October ...........
November.........
December..........

1.79
1.81
1.81
1.74
1.81
1.79
1.74
1.76
1.66
1.73
1.73
1.78

3.57
3.55
3.57
3.53
3.41
3.34
3.46
3.26
3.29
3.32
3.16
3.22

4.12
3.92
3.94
3.85
3.94
3.80
3.65
3.67
3.53
3.57
3.52
3.65

1936—January.............
February...........
March................
April..................
M a y ...................
June...................
July....................
August...............
September.........
October ...........
November.........
December..........

1.71
1.71
1.74
1.71
1.71
1.71
1.67
1.74
1.70
1.70
1.74
1.74

3.12
3.16
3.14
2.96
2.99
3.02
3.09
3.02
2.97
3.07
3.05
2.94

3.50
3.56
3.55
3.46
3.43
3.51
3.45
3.29
3.33
3.25
3.27
3.14

1937—January.............
February...........
March................
A pril..................
M ay....................
June...................
July....................
August...............
September.........
October.............
November.........
December..........

1.75
1.75
1.75
1.75
1.73
1.73
1.73
1.73
1.65
1.73
1.70
1.70

2.93
2.95
2.87
2.93
3.01
2.79
2.82
2.76
2.83
2.93
2.98
2.72

3.23
3.15
3.17
3.28
3.25
3.29
3.27
3.26
3.30
3.28
3.26
3.23

1938—January.............
February...........
March................
A pril..................
M ay...................
June...................
July....................
August...............
September.........
October ...........
November.........
December..........

1.70
1.70
1.65
1.70
1.70
1.70
1.70
1.67
1.70
1.70
1.70
1.70

2.92
2.65
2.64
2.60
2.64
2.78
2.78
2.71
2.74
2.90
2.68
2.95

3.28
3.21
3.28
3.25
3.20
3.31
3.35
3.28
3.26
3.21
3.20
3.23

In
Southern
New York
and
City
Western
Cities

For footnotes, see p. 458.

Federal R eserve
B ank D iscount
R ate ®

457

2
(2) H
1}

(27)

n
i§
i*
H
H
i*
lj
i§
H
l*
i*
n
H
H
H
i|
l*
i*
11
H
*1
1*
H
H
l*
li
l*
l*
H
i*
H
l*
n
H
H
H
H
l
l
l
l
1
1
1
l
1
1
1
l
1
1
1
1
1

Kansas
City

N ew Y ork N ew Y ork
R ate on
R ate on
Open O penM arket
M arket
Prime
Prime
Bankers'
Commer
Accept
cial
ances,
P aper ,
90-D ay° 4-6 M onths0

3*
(9) 3
3
3
3
3
3
3
3
3
3
(21) 2*

.50
.50
.38
.19
.19
.19
.19
.19
.19
.16
.13
.13

1.38
1.38
1.13
1.13

.13
.13
.13
.13
.13
.13
.13
.13
.13
.13
.13
.13

.88
.75
.75
.75
.75
.75
.75
.75
.75
.75
.75
.75

2
2
2
2
2
2
2
2
2
2
2
2

.13
.13
.13
.13
.13
.13
.16
.19
.19
.19
.19
.19

.75
.75
.75
.75
.75
.75
.75
.75
.75
.75
.75
.75

2
2
2
2
2
2

.22
.31
.44
.56
.53
.47
.44
.44
.44
.44
.44
.44

.75
.75
.88

2*
2*
2*
(10) 2
2
2
2
2
2
2
2

(3) 1*

1*
1*
n

1*
1*
li
1*
1*
1*
1*
1*
1*
li
1*

.44
.44
.44
.44
.44
.44
.44
.44
.44
.44
.44
.44

1.00
.88
.88
.88
.88
.88
.88
.88

1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
1.00
.88
.88
.88
.88
.75
.75
.69
.69
.69
.63

458

BANKING STUDIES

32. M o n e y R a t e s , 1919-1939— Continued
(Per cent per annum)
R ates C harged C ustomers
BY BANKSa

Y ea s

and

M onth

City

Eastern
Cities

Western
Cities

Federal R eserve
B ank D iscount
R ate ®

In New Northern Southern New York Kansas
York
and
and

1939—January__
February..
March"......
April..........
May...........
June..........
July...........
August.__
September.
October___
November.,
December..

1.73
1.70
2.13

2.97
2.69
3.05

3.32
3.26
3.77

2.15

3.05

3.62

2.04

2.78

3.31

1.96

2.59

3.32

1940—January..
February.
March___
April.
May..
June..

2.03

2.67

3.35

2.00

2.49

3.38

City

N ew Y ork N ew Y ork
R ate on
R ate on
Open Open M arket
M arket
Prime
P rime
B ankers*
C ommer
A ccept
cial
P aper ,
ances,
90-Day ° 4-6 M onths®

.44
.44
.44
.44
.44
.44
.44
.44
.44
.44

.56
.56
.56
.56
.56
.56
.56
.56
.69
.69
.63
.56

.44
.44
.44
.44
.44
.44

.56
.56
.56
.56
.56
.56

a Data compiled by the Board of Governors and published in its annual reports and in current issues
of the Federal Reserve Bulletin. Figures from 1919 to 1928 are averages of prevailing rates reported monthly
by banks in 36 cities (New York City, 8 other Northern and Eastern cities, and 27 Southern and Western
cities) on commercial paper eligible for rediscount at Reserve banks and demand and time loans on
securities; from 1928 to February 1939, averages of prevailing rates reported monthly by banks in 19 cities
(New York City, 7 other Northern and Eastern cities, and 11 Southern and Western cities) on com
mercial paper eligible for rediscount at the Reserve banks; from March 1939 to date, quarterly averages
for the first half of March, June, September, and December of rates charged by banks in 19 cities on
new commercial and industrial loans. For a description of the series see Federal Reserve Bulletin for
November 1939, pp. 963-69.
b Data for 1919-1921 represent rates on rediscounts of commercial and agricultural paper maturing
within 15 days, as published by the Federal Reserve Board in 1922 in the pamphlet Discount Rates of the
Federal Reserve Banks, 1914-1921; for 1922-1939 the rates apply to commercial and agricultural paper of all
maturities and were compiled from the Board's annual reports and current issues of the Federal Reserve
Bulletin. The figures in parentheses represent the day of the month on which the change of rate became
effective.
0Data compiled by the Board of Governors and published in its annual reports and in current issues
of the Federal Reserve Bulletin. Figures are monthly averages of prevailing rates.
d Change in series; see note a above.

APPENDICES

BANK ING REGULATIONS ISSUED B Y FEDERAL SUPERVISORY
OR QUASI-SUPERVISORY AGENCIES
(Only regulations which related to commercial banking as of
December 31, 1940, are indicated below. The term “ regulations” is
here used in its strict sense as meaning the more or less formalized
supplements to a statute which are issued by an administrative
agency pursuant to specific authorization in the statute. All agencies
from time to time necessarily issue various interpretations and rulings
with respect to the statutes they administer. Such interpretations and
rulings are very similar to regulations and often fully as important.)
B oar d o r G o v e r n o r s o f

the

F e d e r a l R e s e r v e S y st e m

Regulation A— Discounts for and Advances to Member Banks by Federal
Reserve Banks (as revised effective October 1, 1937).1
Regulation C— Acceptance by Member Banks of Drafts and Bills of Exchange
(as reprinted May 15,1930).
Regulation D — Reserves of Member Banks (as revised effective January 1,
1936).
Supplement to Regulation D —Reserves Required to be Main
tained by Member Banks with Federal Reserve Banks (effective
April 16, 1938).
Regulation F— Trust Powers of National Banks (as amended effective June
1, 1940).
Regulation G— Collection of Noncash Items (effective February 1, 1940) }
Regulation H— Membership of State Banking Institutions in the Federal
Reserve System (as amended effective November 20, 1939).
Regulation I— Increase or Decrease of Capital Stock of Federal Reserve
Banks and Cancellation of Old and Issue of New Stock Certifi
cates (as revised effective January 1, 1936).
Regulation J— Check Clearing and Collection (as amended effective September
1, 1939).1
Regulation L—Interlocking Bank Directorates under the Clayton Act (as
amended effective February 1, 1940).
Regulation M — Foreign Branches of National Banks and of Corporations
Organized under the Provisions of Section 25(a) of the Federal
Reserve Act (effective August 14, 1937).
1 Does not regulate commercial banks in the sense of imposing any direct require
ments upon them. However, it is important to banks because it states the conditions
under which certain facilities of the Federal Reserve Banks are made available to them.
461

462

BANKING STUDIES

Regulation 0 —Loans to Executive Officers of Member Banks (as amended
effective July 1, 1939).
Regulation P—Holding Company Affiliates— Voting Permits (as revised
effective January 1, 1936).
Regulation Q— Payment of Interest on Deposits (as amended effective Feb
ruary 11, 1937).
Supplement to Regulation Q—Maximum Rates of Interest
Payable on Time and Savings Deposits by Member Banks of
the Federal Reserve System (effective January 1, 1936).
Regulation R — Relationships with Dealers in Securities under Section 32 of
the Banking Act of 1933 (as revised effective January 4,1936).
Regulation T — Extension and Maintenance of Credit by Brokers, Dealers,
and Members of National Securities Exchanges (as amended
to M ay 22,1939).
Supplement to Regulation T (effective January 1, 1938). This
supplement specifies the maximum loan values for long posi
tions and the margin requirements for short sales.
This regulation applies to banks only under the provisions of
its Section 5 which, among other things, prescribes the form of
agreement to be filed by nonmember banks which wish to
qualify to make certain loans to brokers.
Regulation U—Loans by Banks for the Purpose of Purchasing or Carrying
Stocks Registered on a National Securities Exchange (as
amended to September 1, 1937).
Supplement to Regulation U (effective November 1, 1937).
This supplement specifies the maximum loan values.
C o m ptroller

oe t h e

Currency

(The following are the only “ regulations,” in the strict sense of
the term, issued by the Comptroller of the Currency. As previously
indicated, however, he necessarily issues various interpretations and
rulings with respect to statutory provisions which he administers.)
Investment Securities Regulation, promulgated June 27, 1938.
Regulation for National Banks Acting as Insurance Agents and as Brokers
or Agents in Making or Procuring Loans on Real Estate, promulgated
December 1,1916.
F e d e r a l D e p o s it I n s u r a n c e C o r p o r a t io n

(References are to regulations as published in the Code of Federal
Regulations, Title 12.)
Part 301— Bank Obligations Prescribed as Deposits.
Part 302—Assessments.
Part 303— Advertisement of Membership.

463

APPENDICES

Part 304— Payment of Deposits and Interest Thereon by Insured Non
member Banks.
Part 305— Recognition of Deposit Ownership Not on Bank Records.
Part 307— Insurance of Trust Funds.
P r e s id e n t ia l P ro c l a m a t io n s
C onnected

w it h

and

E x e c u t iv e O r d e r s

1933 B a n k H o l id a y

Under Presidential proclamations and executive orders which were issued
in connection with the 1933 bank holiday, and which are still in effect, each
member bank of the Federal Reserve System must have a license to operate
issued by the Secretary of the Treasury, and all banks, whether or not member
banks, are forbidden to pay out currency for hoarding.
B ureau

I nternal R evenue

Regulations 103
Sec.
Sec.
Sec.
Sec.

19.169-1— Common Trust Fund of Banks Defined.
19.169-2—Income of Participants in Common Trust Fund.
19.169-3— Computation of Common Trust Fund Income.
19.169-4— Admission and Withdrawal of Participants from the Common
Trust Fund.
Sec. 19.169-5—Returns of Common Trust Funds.
S e c u r it ie s

and

E x c h a n g e C o m m ission

General Rules and Regulations under the
Public Utility Holding Company Act of 1935
Rule U-3A3-1— Exemption of Certain Banks as Holding Companies.
Rule U-9A2-1— Exemption of Certain Banks as Affiliates.
Rule U-17C-1, U-17C-2, U-17C-3— Exemptions from the Act for Officers and
Directors of Operating and Nonoperating Companies (affect
ing such persons as may be connected with banks).

REGULAR REPORTS TO SUPERVISORY AUTHORITIES B Y
SPECIFIED KINDS OF BANKS
C om ptroller o r

the

Currency

by
N a t io n a l B a n k s

1. Report of Condition (Form 2130). Together with
2. Schedule 0 —Loans and Advances to Affiliates and Investments in and
Loans Secured by Obligations of Affiliates, if bank has one or more affiliates
(Form 2131).
3. Report of Affiliate or Holding Company Affiliate, unless waived by
Comptroller of the Currency (Form 2130-E).
These three reports are required by law at least three times a year; in
practice, usually four times a year. Copies are sent to Reserve Bank of
district.
4. Branch Bank Report of Condition (Form 2130-B). Submitted annually.
5. Trust Department Balance Sheet, if reporting bank has trust department
(Form 2130-D). Submitted annually.
6. Report of Earnings and Dividends (Form 2129). Submitted semi
annually; copy sent to Reserve Bank of district.
7 a. Notification of Dividend Declared (Form 2133). Submitted whenever
a dividend is declared. Or
b. Notification of Dividend Declared and/or Preferred Stock to be Re
tired (Form 2133-A). Submitted whenever a dividend is declared, and to indi
cate intention to make each retirement of preferred stock.
8. List of Directors (Form 1963). Submitted annually.
9. List of Shareholders (Form 1911). Submitted annually.
F e d e r a l R e se r v e B anks

by
A l l M e m b e r B a n k s , N a t io n a l

and

St a t e

1.
Report of Deposits for Reserve Computation Purposes. Submitted
semi-weekly by banks in Federal Reserve Bank and branch cities; weekly
by banks in other reserve cities; semi-monthly by country banks.

464

465

APPENDICES

F ederal R eserve B anks — Continued

by
R e p o r t in g M e m b e r B a n k s , N a t io n a l

and

St a t e

2. Weekly Condition Report— About 400 Member Banks in 101 Leading
Cities (Form F.R. 416). Submitted weekly.
by
St a t e M e m b e r B a n k s

(In addition to reports required of all member banks)
3. Report of Condition (Form F.R. 105). Together with
4. Schedule 0 —Loans and Advances to Affiliates and Investments in and
Loans Secured by Obligations of Affiliates, if bank has one or more affiliates
(Form F.R. 105b).
5. Report of Affiliate or Holding Company Affiliate, unless waived by Board
of Governors (Form F.R. 220).
These three reports are required by law at least three times a year; in
practice, usually four times a year.
6. Branch Bank Report of Condition (Form F.R. 105h). Submitted annually.
7. Report of Earnings and Dividends (Form F.R. 107). Submitted semi
annually.
Items 3-7, inclusive, are filed in duplicate with Reserve Bank of district,
which sends one set to Board of Governors.
by
R e p o r t in g M e m b e r

and

N onm em ber B an ks

C l e a r in g -H ouse C it ie s

(Some cities without clearing houses included)
8. Bank Debits to Individual Accounts (reported weekly by approximately
1,350 banks).
F e d e r a l D e p o sit I n s u r a n c e C o r p o r a t io n

by
I n sured N onm em ber B anks

1. Report of Condition (Form 64). Submitted semi-annually.
2. Annual Report of Earnings and Dividends (Form 73). Submitted
annually.
3. Location of Offices (Form S-14; report of titles, locations, and deposits).
Submitted annually.
by
A l l I nsured B anks

4. Certified Statement (of deposits). (Part One— Form 545, Part Two—
Form 555). Submitted semi-annually.

466

BANKING STUDIES
R e c o n s tr u ct io n F in a n c e C o r p o r a t io n

by
B anks

W h ic h R.F.C. H as C a p it a l I n v e s t m e n t

Report of Earnings and Dividends (R.F.C. Form L-157). Submitted semi
annually.
St a t e Su p e r v is o r y A u t h o r it ie s

by
St a t e B a n k s

Generally, State banks submit reports of condition and of earnings and
expenses to the appropriate State supervisory authorities. Frequency of sub
mission of these reports, as well as requirements for the submission of addi
tional reports, varies from State to State.

BOARD OF GOVERNORS AND STAFF; ADM IN ISTRATIVE DIVISIONS
AND TH E IR FUNCTIONS

(As of December 31, 1940)

Marriner S. Eccles, Chairman
Ronald Ransom, Vice Chairman
M. S. Szymczak
John K. McKee
Chester C. Davis
Ernest G. Draper

Lawrence Clayton, Assistant to the Chairman
Elliott Thurston, Special Assistant to the Chairman
Chester Morrill, Secretary
Liston P. Bethea, Assistant Secretary
S.
R. Carpenter, Assistant Secretary
Fred A. Nelson, Assistant Secretary
Walter Wyatt, General Counsel
J. P. Dreibelbis, Assistant General Counsel
George B. Vest, Assistant General Counsel
B. Magruder Wingfield, Assistant General Counsel
E. A. Goldenweiser, Director, Division of Research and Statistics
Woodlief Thomas, Assistant Director, Division of Research and Statistics
Leo H. Paulger, Chief, Division of Examinations
R. F. Leonard, Assistant Chief, Division of Examinations
C. E. Cagle, Assistant Chief, Division of Examinations
Edward L. Smead, Chief, Division of Bank Operations
J. R. Van Fossen, Assistant Chief, Division of Bank Operations
J. E. Horbett, Assistant Chief, Division of Bank Operations
Carl E. Parry, Chief, Division of Security Loans
Philip E. Bradley, Assistant Chief, Division of Security Loans
O. E. Foulk, Fiscal Agent
Josephine E. Lally, Deputy Fiscal Agent

467

468

BANKING STUDIES

Secretary and Office of the Secretary. Secretary: Performs such duties as may
be assigned to him by the Chairman or by the Board. Serves as chief admin
istrative officer of the Board in its relations with the divisions of its staff and
with the Federal Reserve Banks. Exercises general supervision over activities
of the Secretary’s office. Office of the Secretary: Conducts official correspondence
of the Board. Prepares minutes covering the proceedings of the Board and a
record of actions taken by the Board and the Federal Open Market Committee
on matters of policy. Administers matters relating to the Boards personnel
and payroll, supplies and equipment, telephone and telegraph, purchasing,
accounting, budget, mail, duplicating, filing, and messenger service, as well
as the operation and maintenance of the Board’s building and grounds. Con
ducts administrative audit of vouchers covering expenditures by the Board.
Handles distribution of Federal Reserve Bulletin and other publications of the
Board.
Office of General Counsel. Advises the Board regarding legal questions arising
in the conduct of its business and passes upon legal aspects of matters coming
before the Board. Prepares communications involving legal questions, and
opinions and other legal papers, including regulations, amendments thereto,
and interpretations thereof. Prepares proposed amendments to the law; ana
lyzes and reports to Board on pending legislation on banking and related
subjects; and prepares compilations of laws relating to the Federal Reserve
System and digests of State laws on certain banking subjects. Prepares reports
on applications for interlocking directorates between banks under Clayton
Antitrust Act; passes upon legal aspects of applications of national banks for
trust powers and of State banks for membership in the Federal Reserve System;
and passes upon legal aspects of organization of corporations under Federal
law to engage in international or foreign banking. Collects and disseminates
among counsel for Federal Reserve Banks information regarding litigation of
general interest involving Federal Reserve Banks and consults with and renders
assistance to Federal Reserve Bank counsel in more important litigation.
Division of Research and Statistics. Keeps Board informed of developments
in industry, commerce, agriculture, and finance that have a bearing on formula
tion of credit policy. Exercises supervision over similar work at the twelve
Federal Reserve Banks. Prepares statistics and charts and currently interprets
developments in production and distribution of commodities, employment,
payrolls, and the course of prices, as well as in banking, capital markets, inter
national trade, and the foreign exchanges. Makes special studies of fiscal and
other economic problems from the monetary point of view. Also keeps the
Board advised of principal financial and economic developments abroad. Has
major responsibility for content of Federal Reserve Bulletin and for preparation
of the Boards annual reports, and has supervision over monthly reviews of
the twelve Federal Reserve Banks. Has charge of the Boards general library.

APPENDICES

469

Division of Examinations. Examines Federal Reserve Banks, corporations
(foreign banking) organized under Section 25(a) of Federal Reserve Act, and,
when directed by the Board, corporations operating under agreements with the
Board made in accordance with Section 25 of the act. Analyzes, and prepares
reports with recommendations to the Boardpn, applications and data regarding
(1) State banks for membership in the Federal Reserve System, (2) holding
company affiliates for voting permits, (3) national banks for trust powers,
(4) consolidations, mergers, etc., involving State member banks. Reviews
reports of examination of State member banks. Reviews and follows the ex
amination and supervisory activities of the Federal Reserve Banks with a
view to furthering coordination of policies and practices under the general
policies of the Board. Reviews the activities of the auditing departments of
the Reserve banks. Prepares and reviews communications regarding such
matters.
Division of Bank Operations. Handles matters coming before the Board
relating to the condition, operation, and personnel of the Federal Reserve
Banks. Operates Interdistrict Settlement Fund and maintains books and
records thereof. Prepares production schedules for printing Federal Reserve
notes, and supervises distribution of other currency among the Federal Reserve
Banks. Prepares for publication the weekly condition statements of the Federal
Reserve Banks and of about 400 reporting member banks in leading cities,
the weekly statement of debits to individual accounts by banks in about 270
leading cities, the quarterly member bank call report, and banking statistics
published in the Federal Reserve Bulletin and the Board’s annual reports.
Obtains, examines, and tabulates reports of Federal Reserve Banks relating
to their personnel, earnings, expenses, condition and operations, and of member
banks relating to their condition, earnings and expenses. Maintains a record
of all banks and branches in the United States and of changes in the status
thereof, and compiles data with respect to the organization, consolidation, sus
pension and liquidation of member and nonmember banks, bank branches,
affiliates, etc. Compiles statistics of money in circulation, including data on
kinds and denominations thereof. Answers inquiries received through Reserve
Banks relating to financing and other problems connected with Defense con
tracts, replies being based largely on information obtained from the War and
Navy departments. Serves as liaison between Defense Contract officers at
Reserve Banks and representatives of the Defense agencies in Washington.
Division of Security Loans. Carries on activities arising from certain pro
visions of the Securities Exchange Act of 1934 which authorizes the Board to
regulate, by fixing margin requirements and otherwise, the amount of credit
that may be extended and maintained by brokers, banks, and others for the
purpose of purchasing or carrying securities.
Office of the Fiscal Agent. Collects and deposits all moneys and funds receiv
able by the Board and makes payment of expenses and other disbursements of
Board. Maintains records of Board’s cash receipts and disbursements and
certain subsidiary general ledger accounts.

REGULATIONS OF THE BOARD OF GOVERNORS
(As of December 31,1940)
(Dates following each regulation show (1) year of issue, sometimes
with a different title, and (2) year of the latest amendment.)
Regulation A —Discounts for and Advances to Member Banks by Federal
Reserve Banks. (1) 1914; (2) 1937.
Regulation B— Open Market Purchases of Bills of Exchange, Trade Accept
ances, and Bankers’ Acceptances under Section 14. (1) 1915;
(2) 1923.
Regulation C— Acceptance by Member Banks of Drafts and Bills of Exchange.
(1) 1915; (2) 1923.
Regulation D — Reserves of Member Banks. (1) 1914; (2) 1936.
Regulation E— Purchase of Warrants. (1) 1915; (2) 1923.
Regulation F— Trust Powers of National Banks. (1) 1915; (2) 1940.
Regulation G— Collection of Noncash Items. (1) 1940; no amendments.
Regulation H—Membership of State Banking Institutions in the Federal
Reserve System. (1) 1914-15; (2) 1939.
Regulation I— Increase or Decrease of Capital Stock of Federal Reserve Banks
and Cancellation of Old and Issue of New Stock Certificates.
(1) 1914-15; (2) 1936.
Regulation J— Check Clearing and Collection. (1) 1915-16; (2) 1939.
Regulation K —Banking Corporations Authorized to D o Foreign Banking
Business under the Terms of Section 25(a) of the Federal
Reserve Act. (1) 1920; (2) 1937.
Regulation L— Interlocking Bank Directorates under the Clayton Act. (1)
1916; (2) 1940.
Regulation M — Foreign Branches of National Banks and of Corporations
Organized under the Provisions of Section 25(a) of the Federal
Reserve Act. (1) 1937; no amendments.
Regulation N— Relations with Foreign Banks and Bankers. (1) 1933; no
amendments.
Regulation O—Loans to Executive Officers of Member Banks. (1) 1936;
(2) 1939.

470

APPENDICES

471

Regulation P—Holding Company Affiliates—Voting Permits. (1) 1933; (2)
1936.
Regulation Q—Payment of Interest on Deposits. (1) 1933; (2) 1937.
Regulation R —Relationships with Dealers in Securities under Section 32 of
the Banking Act of 1933. (1) 1933; (2) 1936.
Regulation S— Discounts, Purchases, Loans, and Commitments by Federal
Reserve Banks to Provide Working Capital for Established
Industrial or Commercial Businesses. (1) 1934; no amendments.
Regulation T —Extension and Maintenance of Credit by Brokers, Dealers,
and Members of National Securities Exchanges. (1) 1934;
(2) 1939.
Regulation U—Loans by Banks for the Purpose of Purchasing or Carrying
Stocks Registered on a National Securities Exchange. (1) 1936;
(2) 1937.

DEVELOPMENT OF STATISTICAL SERIES
The work of the Board of Governors in developing and presenting economic
data to serve as a factual basis for policy making is illustrated by the history
of the two important statistical series presented below. Adjustment to changing
economic conditions and utilization of improved methods and data are basic
considerations in the preparation of all series issued by the Board, but the pro
cedure followed differs in accordance with developments affecting specific series.
MEMBER BANK RESERVES AND RELATED ITEMS
Origin of the Basic Analysis (Prior to 1925). The basic analysis, illustrated by
reference to the major factors (demand for currency; gold movements) in the
changes in the volume of Reserve Bank credit outstanding (called at that time
“ Earning assets of the Reserve banks” ), appeared as early as 1923— in the
Federal Reserve Bulletin (see issues for February, page 146, and April, page 540)
and, more succinctly, in the 1923 Annual Report of the Federal Reserve Board (see
chart on page 24). The same treatment, further elaborated, appeared in (1) the
Bulletin for 1924 (see issues for April, page 248, and July, pages 529-530 and
571) and the 1924 Annual Report (see pages 3-8 ); (2) the Bulletin for 1925 (see
issue for July, page 482, where three separate charts that appear together show
for the period 1919-1925 Reserve bank credit, money in circulation, and gold
movements) and the 1925 Annual Report (see chart on page 19 which shows, on
single chart, Reserve Bank credit and money in circulation); and (3) book by
E. A. Goldenweiser published by McGraw-Hill Book Company, Inc., in 1925,
Federal Reserve System in Operation (see pages 66-72).
Developing for Major Items Satisfactory Statistical Series Covering a Period of
Years and Perfecting the Analysis on a Balance-sheet Basis (1926-1928). For the
major items, monthly averages of daily (or other) figures, more representative
than figures for single dates, were developed over a period of time and presented
in the Bulletin for 1926 (see January issue, table on page 30; July issue, chart on
page 463 and table on page 506), the 1926 Annual Report (see Tables 105-106
for monthly averages back through 1922), and the 1927 Annual Report (see
Tables 1,17, and 21,for monthly averages back through 1914). The analysis was
expounded, with special reference to the relation between currency and Reserve
Bank credit, in the Bulletin for July 1926, in an article (pages 467-478) entitled
“ Currency under the Federal Reserve System.” In the Bulletin for September
1927, the analysis was extended to include— in addition to the major items
(Reserve Bank credit, gold stock, money in circulation, member bank reserve

472

APPENDICES

473

balances)— all the other items (minor items), and was published, with full ex
planation, with all the figures necessary to presentation of the completed analy
sis on a balanced basis. The 1927 Annual Report (pages 17-20) included the
analysis in a form that is both complete and balancing—for the period from
December 1926 through December 1927 and for the longer period covering the
life of the System (1914-1927). The analysis was used in a book by Winfield W.
Riefler dated September 1929 and published by Harper & Brothers in 1930,
Money Rales and Money Markets in the United Stales, and a description of the
methods used in deriving the figures was published (for the first time in complete
detail) in an appendix of that book (pages 237-259).
Devising Acceptable Methods of Graphic Presentation (1926-1936). Graphic
presentation of the analysis, by means of a chart on which the major items are
plotted on a uniform scale, went through about four stages: (1) a chart with four
curves, one of them showing (as a rule) Reserve Bank credit and gold stock
combined, with scales staggered so as to bring related curves close together was
used from time to time in the Bulletin during 1926,1927, and most of 1928; (2) a
simplified chart, standardized late in 1928, which used a single scale and was
entitled “ Reserve Bank Credit Outstanding and Principal Factors in Changes,”
was published continuously in the Bulletin from December 1928 through Febru
ary 1934; (3) a chart, substantially the same except for a change of title to
“ Reserve Bank Credit and Related Items” and the inclusion of an additional
curve for “ Treasury Cash and Deposits with Federal Reserve Banks,” was
published in the Bulletin from March 1934 through March 1936; (4) beginning
with April 1936, the chart has been called “ Member Bank Reserves and Related
Items” and has been accompanied by another, in effect a lower panel of the same
chart, showing “ Required Reserves” and “ Excess Reserves.”
Since the summer of 1931, the standard chart has been one of the charts
included, whenever it has special significance, in the “ National Summary of
Business Conditions” that is prepared by the Board and published in the
monthly reviews of the twelve Federal Reserve Banks.
Regular Weekly Publication. In May 1930 the Board inaugurated regular
weekly publication of the figures, in summary form and on a balancing basis, on
the first page of the Board’s “ Weekly Condition Statement of the Federal
Reserve Banks” and the Board has continued this practice ever since. The
figures were described and the analysis explained in a statement for the press
attached to the weekly condition statement for May 28, 1930, and published
in the Federal Reserve Bulletin for June 1930, with reference back to an earlier
description in detail that appeared in the Bulletin for July 1929 (when the
current publication of the complete balancing analysis, on a monthly basis, was
inaugurated).

474

BANKING STUDIES

INDEX OF INDUSTRIAL PRODUCTION
(References are to Federal Reserve Bulletin)
1922, December, pages 1414-1421. Article entitled “ Index of Production in
Basic Industries” presents index and describes it. Index, base 1919 = 100, ad
justed for seasonal variation, covers by months period January 1913-October
1922. Combination of 22 individual series. Part of introduction is as follows:
“ Accurate and current information concerning the trend of production is funda
mental to an interpretation of business conditions and to the shaping of business
policy. Such information, in order to have practical value, must be as nearly
current as possible, and it is with special reference to this need that the construc
tion of a new monthly index of production in the United States, described in
this article, was undertaken.”
Note. The “ Index of Production in Basic Industries,” introduced in D e
cember 1922, is not to be confused with certain “ indexes of domestic business”
(three indexes: agricultural movements, mineral products, production of manu
factured goods, not adjusted for seasonal variation, that were introduced in
March 1922, and published currently in the Bulletin— together with the “ Index
of Production in Basic Industries” — until February 1927, when the Board’s
“ Index of Industrial Production” was introduced).
1927, February, pages 100-103; March, pages 170-177. Article in February
entitled “ A New Index of Industrial Production” introduces the new index and
gives a general description of it; article in March entitled “ The New Index of
Industrial Production” gives a technical description. This index, base 1923-25
= 100, adjusted for seasonal variation, covered the period 1919-1926, and
comprised two component indexes, one of manufactures and the other of min
erals. Selected extracts from the two articles cited: “ For the past four years the
Federal Reserve Board has compiled and published currently an index of pro
duction in basic industries, which has served as an approximate measure of
changes in the volume of the country’s industrial and mineral output. The
growth in recent years in the amount of information currently collected by
various agencies and in the promptness with which it becomes available has
made it possible for the Board to construct at this time a more comprehensive
index, which will be called an index of industrial production. The new index,
which is presented in detail for the first time in this article, is broader in scope
than the index of production in basic industries, which it supersedes, and the
methods of its construction have been improved in many respects on the basis of
experience.”
“ The index of industrial production is made up of two component indexes,
one of manufactures and the other of minerals, and represents directly and
indirectly nearly 80 per cent of the total industrial production of the United
States. The greater comprehensiveness of the new index of industrial production,
as compared with the old index of production in basic industries, is indicated by
the fact that it is derived from 60 individual series, measuring production in

APPENDICES

47 5

about 35 industries, and indirectly representing production in many more,
while the old index included 22 series, measuring production in about 20 indus
tries. The principal additional industries included in the new index are motor
vehicles, petroleum products, rubber tires, plate glass, and boots and shoes.
The importance of these industries, with the exception of boots and shoes, has
grown in recent years, and this has made their inclusion in a current index of
production increasingly desirable/’
“ The principal characteristics of the new index, as described in some detail
in this article, may be summarized as follows:
(1) Employment of primary data, of considerable variety, all of which
provide current indications of the volume of production of principal industries,
expressed in physical quantity units.
(2) A base period (1923-1925 = 100) that is recent and broad.
(3) Adjustment of primary data, reported for the calendar month, for
changes from month to month in the number of working days.
(4) Computation of the index by the so-called aggregative method, which is
considered to be more accurate than other methods and has certain other
technical advantages.
(5) Assignment to series for given industries of such weights as enable these
series to have an influence on the index in proportion to the importance not
only of the industries directly represented, but also of certain related industries
for which satisfactory series are not currently available.
(6) Combination of indexes computed by different sets of weights, derived
from available primary data for different years, in such a way as to allow, so far
as possible, for changes during recent years in the importance of different
industries relative to one another.
(7) Adjustments for usual seasonal variations by the use of data for a period
that extends to the end of 1926 and by methods that have been developed
during recent years.”
1932, March, pages 194-196. Note describes revisions completed in February
1932, for period 1923-1931. Revisions were made in seasonal indexes for 20
series, including steel ingots, cotton consumption, pneumatic tires, etc. In addi
tion, certain series formerly included in the index for a part of the period—
including oak flooring and face brick—were excluded for the entire period, and
necessary adjustments in the base were made. There were also minor revisions
and corrections in certain basic data.
1933-1939 revisions. Other revisions are described in the following issues of
the Bulletin: 1933, September, page 585; 1936, November, page 911; 1937,
March, page 256; 1938, October, page 912; 1939, January, pages 20-21. Series
of which, at the end of 1939, separate publication was being withheld pending
revision, included shipbuilding, silk-loom activity, production of book paper,
wrapping paper, fine paper, boxboard mechanical wood pulp, chemical wood
pulp, paper boxes, lumber.
1940, August, pages 753-771 and 825-882; September, pages 912-924. Article

476

BANKING STUDIES

in August entitled “ New Federal Reserve Index of Industrial Production”
describes a major revision, the purpose of which was to provide a broader and
more accurate measure of current changes in the physical volume of industrial
output ; article in September entitled “ Measurement of Production” discusses
some of the theoretical and practical problems involved in attempting to
measure the course of production.

INDEX

INDEX
Acceptances, Bankers’ :
Discount rates, open market:
1919-1939, 454
Chart of, 396
Affiliates:
Bank supervisory functions as to, 205
Board of Governors supervision of, 132,
359
Restrictions as deterrent to Reserve
membership, 284
State statutory restrictions, 284
Agricultural Credits Act of 1923, footnote,
52
Agriculture Department, Credit agencies
under supervision of, 145
Aldrich-Vreeland Act of 1908, 46, 76
Assets:
Bank examiner appraisal of, 225
Classification of:
Cash, 178
Investments, 181
Loans, 179
Secondary reserves, 178
Commercial banks:
Character of assets and liabilities,
97-100
Insured commercial banks:
Percentage distribution by types:
Dec. 31, 1939, 424
Chart of, 99
Discussion of, 97-100
Liquidity of bank assets, 162
Member banks:
1919-1939, calendar year dates, 437
1928-40, call dates, 436
Chart of, 177
Percentage distribution by type:
Dec. 31, 1939, 424
Chart of, 99
Discussion of, 97-100
Ratios of loans, securities and cash
to total assets, 100
See also Condition statements.

Bank Conservation Act, 55
Bank debits. (See Debits to individual
accounts.)
Bank directorates, Interlocking: Board
of Governors supervision of, 360
Bank examinations:
Bank supervisory function, 201, 213
Classification of loans and securities,
216
Examiner in the field:
Assets, Appraisal of, 225
Management, Appraisal of, 226
Procedure, 221-227
Reports of examinations, 226
Federal Reserve Banks, 237, 356
Organization for, 217-219
Policy in, 213-216
Procedure in examining a bank, 221—
227
Purpose of, 213
State member banks, 237, 356
Bank holding companies. (See Holding
company affiliates.)
Bank holiday of 1933, 29, 54-56, 463
Bank notes:
1834r-1890:
Chart of, 13
Discussion of, 12
Table of figures, 417
Circulation, by kinds, 1860-1940, 420
Issuance important in early banking, 7,
8, 9, 41
New York Safety Fund Act, 9
Taxation of State bank notes, 45
Bank of Massachusetts, Chartering of, 39
Bank of Mutual Redemption, 70
Bank of New York, Chartering of, 39
Bank of North America, Establishment
of, 5-6, 39
Bank of the United States, First:
Establishment of, 7, 39
Note issues, 67-68

479

480

INDEX

Bank suspensions. (See Banks: Suspen
Bank of the United States, Second:
sions.)
Central bank functions of, 18
Bankers’ associations, 107
Establishment of, 7, 40
Banking, Changing character of, 163
Note issues, 68-69
Bank mergers. (See Banks: Consolida Banking Act of 1933:
Branch banking provision, 117
tions, mergers, etc.)
Holding company affiliates provision,
Bank services, 169-183
205
Bank stock purchases:
Reconstruction Finance Corporation,
Provisions of, 56-57
Banking Act of 1935:
55
Branch banking provisions, 117
Bank supervision:
Agencies of:
Provisions of, 59-61
Chart of, 199
Banking history:
Federal Reserve Act to Present, 1913—
Comptroller of the Currency, 194
1940, 27-35 .
Federal Deposit Insurance Corpora
First bank to Free Banking, 1782—
tion, 195
Federal Reserve, 194
1838, 5-9
Free Banking, 1838-1863, 9-14, 42, 70
Reconstruction Finance Corporation,
197
National Bank Act to Federal Reserve
Reports submitted to, 202-203, 207Act, 1863-1913, 14-27
209, 464-466
Banking holiday of 1933, 29, 54r-56, 463
Securities and Exchange Commis Banking legislation:
sion, 197
Banking Act of 1933:
State agencies, 194
Branch banking provision, 117
Treasury, 196
Holding company affiliates provision,
Commercial banking system, 189-210
205
Functions of:
Provisions
of, 56-57
Branches, 204
Banking Act of 1935:
Capital structure, Changes in, 205
Branch banking provisions, 117
Chartering, 198
Provisions of, 59-61
Corrective requirements, 202
Branch banking, 51, 114-117
Counsel and advice, 202
Chain banking, 125
Deposit insurance, Admissions to
benefits of, 204
Deposit insurance, 57
Examinations, 201, 213
Differences between State and Federal
Federal Reserve membership, 203
laws:
Holding company affiliates, 205
Affiliates, 284
Liquidation, 200
Capital requirements, 278, 280
Regulations, rulings and instructions,
Chart of, 291
200
Condition reports, 285
Reports required, 202-203, 207-209,
Investments, 283
464-466
Loans to officers, 286
Trust powers, 205
Loans to one borrower, 286
Individual banks, Incidence of super
Officers, directors and employees, 282
vision on, 207-209
Par clearance, 276
Limitations of, 192
Reserve requirements, 281
Objectives of, 191
I Emergency Banking Act, 55
Reasons for, 190

INDEX

Banking legislation—Cont.:
Federal Reserve Act:
Amendments:
Banking Act of 1933, 56
Banking Act of 1935,59
Glass-Steagall Act of Feb. 27,
1932, 53
Miscellaneous, 49
Enactment of, 26
Provisions of, 47-49
Federal Reserve membership, Federal
statutory controls as deterrent to,
273
Federal statutes regulating banks,
Charts of, 275, 291
Free Banking Act of 1838, 9,11, 42
Gold Reserve Act of 1934,58
Group banking, 130
National Bank Act:
Enactment of, 14, 43
Supreme Court decisions on, 45
Reconstruction Finance Corporation,
52
Reserve requirements, 11
Securities Exchange Act, 58
State, 9-11, 28, 41, 42
“ Thomas Amendment” , 56
Trust powers of national banks, 50
Banking offices:
Chain banks, Dec. 31, 1939, by geo
graphic distribution, 431
Charts of, 123,129,135, 139
Commercial banks, Dec. 31, 1939, by
kind of bank and by population
of location, 427
Group banks, Dec. 31, 1939, by geo
graphic distribution, 433
Number of:
Dec. 31, 1939, by geographic distri
bution, 429
Discussion of, 102,119,120
“ Banking Structure of the United
States” , 87-109
Banks:
Branches. (See Branch banking.)
Chain banks. (See Chain banks.)
Consolidations, mergers, etc., Bank
supervisory functions as to, 205

48 1

Banks—Cont.:
Definition of a bank, 88
Distribution by functions, 93-95
Distribution by supervisory jurisdic
tion, 89
Group banks. (See Group banks.)
Kinds of, 88-95
Number of:
Dec. 31, 1939:
By geographic distribution, 429
By kind of bank, 423
Charts of, 15,90,101
Commercial banks:
1834-1940, 418
Dec. 31, 1939:
By kind and size:
Discussion of, 100
Table of figures, 426
By kind of bank and by popula
tion of location, 427
Capital insufficient for Reserve
membership, 446
Discussion of, 15-16, 88-95
Operating branches:
Chart of, 118
Deposits, Dec. 31, 1939:
By geographic distribution, 429
By size of bank and population of
lo

Full text of Banking Studies

FRASER