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FEDERAL RESERVE
SYSTEM IN OPERATION

Qraw-Olill

Book

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FEDERAL
RESERVE SYSTEM
IN OPERATION

E . A.

GOLDENWEISER

FIRST

EDITION

M c G R A W - H I L L BOOK C O M P A N Y , INC.
NEW YORK: 370 SEVENTH AVENUE
L O N D O N : 0 & 8 B O U V E R I E S T . , E . C. 4

1925

INC.

PRINTED IN THE UNITED STATES OP AMEBIC A

THE MAPLE PRESS COMPANY, YORK, PA.

PREFACE
This book is intended to serve as an introduction to the study
of the Federal reserve system by college classes in banking and by
business and professional men who wish to have a general idea
of the purposes, structure, and functions of the system. It has
been the writer's endeavor to collect and present on the workings
of the Federal reserve banks and the Federal Reserve Board
material which, though most of it can be found scattered in
different books, reports and periodicals, has not been conveniently available in any one publication. The book is not a
treatise on the principles of Federal reserve banking and does
not undertake to define the limits within which Federal reserve
policy can influence the course of the business cycle; neither does
it attempt to give a detailed technical account of the system's
operations. It merely describes the most important functions
of the system, points out the principal problems with which it is
confronted, and outlines the methods developed or in process of
development for the solution of these problems.
One-half of the twenty-year duration of the Federal reserve
banks' charters has now elapsed, and the system has gone
through an evolution during its eventful decade of operation
which makes it different in many, particulars, both as a matter
of law and of practice, from the plan contemplated by the
framers of the Federal Reserve Act. This volume presents
a picture of the system as it appears today at the mid-point of
its span of life under its original charter, and deals particularly
with developments in 1922, 1923, and 1924, when the system for
the first time since the spring of 1917 functioned under conditions
not influenced primarily by the war and its aftermath.
In the preparation of this study the writer has made use of
files of the Federal Reserve Bulletin and of the Annual Reports
of the Federal Reserve Board and has freely drawn upon information and ideas developed in discussion with fellow members of
the Federal Reserve Board's staff. For ideas thus acquired it
v

PREFACE

has been impossible to give specific credit, and the writer takes
this occasion to acknowledge his indebtedness to his associates
on the staff. He wishes to make it clear, however, that this
book is in no sense official and that no one but himself is responsible for the opinions here expressed. Neither can anyone,
except the writer, be held accountable for the shortcomings of
this study. If the book succeeds in stimulating interest in the
system and leads to further study by the readers, the author's
purpose will be accomplished.
The appendices contain a summary of the principal provisions
of the Federal Reserve Act arranged topically, with many details
omitted; the text of the regulations issued by the Federal Reserve
Board; certain reviews of the month reproduced from the Federal
Reserve Bulletin; extracts from the Tenth Annual Report of the
Federal Reserve Board; statistical tables showing the principal
items in the Federal reserve bank statement from the establishment of the system to date; portions of articles by A. C. Miller
of the Federal Reserve Board, and Professor W. 0 . M. Spraguc
of Harvard University; a sample of the weekly condition statement of the Federal reserve banks, and other illustrative material
to which reference is made in the appropriate places in the text.
The text has been checked for technical accuracy by J. R. Van
Fossen; the charts, many of which are reproduced from the
Federal Reserve Bulletin and from Annual Reports of the Federal
Reserve Board, have been prepared by Miss Nora V. Elder.
The statistical tables are the work of Miss Dorothy Deeds, to
whom the writer is also indebted for constant assistance in the
preparation of the volume. He wishes also to thank Walter W.
Stewart for numerous valuable suggestions, both as to form and
substance, made at different stages of the composition. To all
these persons grateful acknowledgment is made; without their
assistance this book could never have been completed.
WASHINGTON, D .

January, 1925.

E- A-

G-

CONTENTS
PAGE
v

PREFACE

CHAPTER I
INTRODUCTION

Scope of This Study—The System before and during the W a r —
Post-war Developments—Problems Facing the Federal Reserve
System.
CHAPTER II
STRUCTURE OF FEDERAL RESERVE SYSTEM

Ownership of the Federal Reserve Banks—Administration of the
Federal Reserve Banks—The Loan
Committee—Operations
of the Federal Reserve Banks—Relation to Member and
Non-member Banks, the Government, and the Public—Federal
Reserve Banks, Branches, and Agencies—Fiscal Agency and Other
Functions—The Federal Reserve Board—Federal Advisory Council—Conferences with Governors and Federal Reserve Agents.
C H A P T E R III
DISCOUNTS

Source of Reserve Banks' Lending Power—Economy of Reserves—
Character of Paper Discounted—Rediscounts and Collateral
Notes—Paper Secured by United States Obligations—Post-war
Economic Boom—Collapse of the Boom in 1920—Gold Movements
—Liquidation in Industrial and in Agricultural Districts—End of
Liquidation in July, 1922—Inter-reserve Bank Borrowing.
C H A P T E R IV
DISCOUNT RATES

Discount Rate Policy Prior to the Autumn of 1919—Advances in
Discount Rates in 1919 and 1920—Progressive Rates—Reduction
of Discount Rates since 1920—-Place of Discount Rate in Rate
Structure—Comparison with the Bank of England Rate—Relation
of Discount Rate to Member Bank Earnings—Summary of
Experience with Discount Rates.
vii

CONTENTS

viii

CHAPTER V
Page

OPBN->IABKET OPERATIONS

The Federal Reserve Banks and the Acceptance Market—Acceptances of Agricultural Cooperative Associations—Acceptance
Market Still Limited in Scope—Purchase and Sale of United
States Securities—Developments in 1922 and 1923—Open-market
Policy a System Matter—Recent Developments in Open-market
Policy,
CHAPTER VI
FEDEBAX. RESERVE NOTES

Elasticity of Federal Reserve Notes—What Makes Federal Reserve
Notes Elastic ?—Relation of Federal Reserve Note Circulation to
Changes in the Volume of Business—Relation between Federal
Reserve Notes and Federal Reserve Bank Assets—Federal Reserve
Notes and Gold—Effect of Recent Gold Imports—Paying out
Gold into Circulation—Gold Imports, Currency Demand, and
Federal Reserve Bank Earning Assets—Legal Status of the Federal
Reserve Note—Machinery of Issue and Redemption—Gold
Redemption Fund and Agents* Gold Fund—Relation of Federal
Reserve Board to the Issue of Federal Reserve Notes—Federal
Reserve Bank Notes.
CHAPTER

VII

DEPOSITS OF THE RESERVE B A N K S — M E M B E R B A N K RESERVES

Reserve Requirements Prior to the Establishment of the Federal
Reserve System—Reserve Requirements under Federal Reserve
Act—Volume of Reserve Balances—Hon- Banks Replenish Their
Reserves—Constancy of Reserve Balances—Availability of
Reserves—Changes in Lending Power of One Bank and of All
Banks Combined—Effect of Currency Demand—Increased Loaning Power on the Basis of a Reserve Dollar.
CHAPTER VIII
RESEBVES OF THE RESERVE B A N K S .

Legal Provisions—Elasticity of Reserve Requirements—Free
Gold—What Affects the Reserve Position?—Actual and Adjusted
Reserve Ratios—Gold Reserves and Gold in Circulation—Effect of
Imported Gold—Gold Used for Liquidation and as Basis for New
Credit—Gold Imports and the Reserve Ratio—Reserve Ratio Less
Significant at Present.

CONTENTS
CHAPTER I X

PAGE
C H E C K C L E A R I N G AND COLLECTION AND O T H E R SERVICES

101

Principles Underlying the Clearing of Checks—Growth of the
Clearing Service—The Par Clearance Controversy—Volume of
Business—Fiscal Agency Operations and Other Services.
CHAPTER X
E A R N I N G S AND E X P E N S E S

112

Distribution of Earnings—Sources of Earnings of the Reserve
Banks—Factors Affecting Earnings of Reserve Banks—Can the
Reserve Banks Control Their Own Earnings?—Expenses of the
Federal Reserve Banks—Services Rendered by the Reserve Banks
—Economy and Efficiency—How Can the Reserve Banks Meet
Their Expenses?
CHAPTER X I
M E M B E R S H I P I N THE F E D E R A L R E S E R V E S Y S T E M

124

Growth of Membership—Distribution of Membership—Banking
Power Outside the Federal Reserve System—Relation of
Non-member Banks to the Federal Reserve System—Eligible
Non-member Banks—Reserve Requirements, Member and Nonmember—Interest on Reserve Balances—Effect of Increased
Membership on Federal Reserve System.
CHAPTER X I I
ORGANIZATION OF THE F E D E R A L R E S E R V E B O A R D

136

Composition of the Board—Functions of Governor and Other
Members—Federal Reserve Board's Relation to Problem of
Branch Banking—Other Functions of the Federal Reserve Board—
The Gold Settlement Fund—The Federal Reserve Agents' Gold
Fund—The Counsel and the Chief Examiner—Division of Bank
Operations.
CHAPTER X I I I
R U L I N G S AND R E G U L A T I O N S OF THE F E D E R A L R E S E R V E B O A R D .

147

Eligibility and Acceptability of Paper—Loans for Productive
Purposes—The Board's Regulations—Maturity of Paper—Rulings
on Open-market Operations.
CHAPTER X I V
C O N F E R E N C E AND R E S E A R C H W O R K

The Federal Advisory Council—Conferences with Governors and
Federal Reserve Agents—The Conference of May, 1920—Division
of Research and Statistics—The Federal Reserve Bulletin.

154

CONTENTS

CHAPTER X V

Pa«E

ELEMENTS OF RESERVE B A N K CREDIT POLICY

.101

The Federal Reserve Board and the Federal Reserve Banks—Discretion in the Granting of Loans—Determination of Discount
Rates—Open-market Policy—Growth of American Banking
Tradition.
APPENDICES
APPENDIX A . PRINCIPAL PROVISIONS OF THE FEDERAL RESERVE A C T

109

APPENDIX B . REGULATIONS OF THE FEDERAL RESERVE BOARD, 1 9 2 4

200

APPENDIX C . FEDERAL RESERVE B A N K DEVELOPMENTS, 1 9 1 4 - 1 9 2 4 .

250

APPENDIX D .

W E E K L Y CONDITION STATEMENT OF FEDERAL RESERVE

BANKS, SEPT. 2 4 , 1 9 2 4

202

APPENDIX E . AGRICULTURAL CREDIT FACILITIES U N D E R THE FEDERAL
RESERVE A C T
APPENDIX F .

205

DECISION OF SUPREME COURT OF THE UNITED STATES IN

RICHMOND P A R CLEARANCE C A S E

270

APPENDIX G . CLASSIFICATION OF EXPENSES O* OPERATION OF FEDERAL
RESERVE B A N K OF N E W Y O R K , 1 9 2 3
APPENDIX H .

2S0

MEMBERSHIP OF THE FEDERAL RESERVE BOARD,

1914-

1924
APPENDIX

283
I . EXTRACT

FROM

ARTICLE

DISCOUNT

POLICY

FEDERAL RESERVE BANKS, BY O . M . W . SPRAGUE

285

APPENDIX J. EXTRACT FROM ARTICLE ON FEDERAL RESERVE POLICY,
BY A . C . M I L L E R
APPENDIX K .
1923.

294

REVIEWS OF THE M O N T H FOR M A R C H , APRIL, AND M A Y ,

(FROM FEDERAL RESERVE BULLETIN)

300

APPENDIX L . EXTRACT FROM A N N U A L REPORT OF THE FEDERAL RESERVE
BOARD FOR 1 9 2 3

INDEX

327

341

FEDERAL RESERVE SYSTEM
IN OPERATION
CHAPTER I
INTRODUCTION
More than a decade has elapsed since the passage of the Federal
Reserve Act on Dec. 23, 1913, and the Federal reserve banks,
which opened their doors for business on Nov. 16, 1914, have been
in operation for over 10 years. Only during the past 3 years,
however, have economic and financial conditions sufficiently
recovered from the influence of the World War to make it
possible for the Federal reserve system to enter upon the performance of its normal peace-time functions. During this
period many of the problems with which the system will be
constantly confronted have had to be considered, and credit
policies, to be pursued under normal conditions, have had to be
developed. From the point of view of a consideration of the
permanent place of the Federal reserve system in the banking
organization of this country, therefore, the system's operations
during the past 3 years present the most fruitful field of study.
Scope of This Study.—The Federal reserve system was inaugurated late in 1914 and grew out of grave dissatisfaction with the
previously existing banking and monetary system whose defects
were forcibly brought out once more by the panic of 1907. It is
not the purpose of this study to discuss the growth of the Federal
reserve idea, or the evils which it was intended to cure. This
has been done in many other publications. Nor is it the writer's
purpose to describe in detail the workings of the Federal reserve
system during the war when banking principles were inevitably
subordinated to the exigencies of financing the requirements of
the Government. The present study will be concerned chiefly
1

FEDERAL

RESERVE SYSTEM

OPERA

77OA'

with developments after 1919, and more particularly with a
description of the Federal reserve system's activities during the
past 3 years of relatively normal business and credit conditions.
The System before and during the War,—Prior to our participation in the war the Federal reserve banks were essentially in a
quiescent state. During this period the system was largely
occupied by the difficult and important task of initial organization. The Federal reserve districts had to be defined, the boards
of directors and the officers and staffs of the banks selected, and
the methods of operation formulated* In accordance with the
provisions of the Act, the reserve banks took over some of the
reserves of the member banks. The reserve banks' capital was
being paid in and relatively small amounts of currency were
issued. The bank's discounts were small, because of the abundance of funds at the disposal of member banks arising out of the
reduction of reserve requirements by the Federal Reserve Act
and the inflow of gold sent by the belligerents to pay for American
supplies. The reserves of the reserve banks were in excess of
their note and deposit liabilities. This situation was radically
changed when the United States entered the war in April, 1917.
An amendment to the Federal Reserve Act passed in June of
that year provided that the entire reserves of member banks
must be kept on deposit with the reserve banks, nothing counting as lawful reserves except deposit credit with the reserve banksOther amendments further reduced the amount of reserves
required by member banks against deposits, and liberalized the
provisions relating to the issue of Federal reserve notes.
Throughout the period of hostilities the principal function of
the Federal reserve banks was to assist the Treasury in floating
government securities. This was done by liberally discounting
paper secured by United States obligations and by putting into
effect preferential discount rates on this class of paper. This
procedure enabled the member banks to sell government securities to customers on the instalment or other deferred payment
plans on liberal terms without other charge than the interest
borne by the securities themselves. It is through the operation
of this system that it was possible for the government to sell in
less than two years over $20,000,000,000 worth of bonds, an
amount far in excess of the nation's savings during the period.

INTRODUCTION

In the following table are shown the principal items in the
condition of the Federal reserve banks on Mar. 30, 1917, prior to
the entry of the United States into the World War; on Nov. 29,
1918, soon after the cessation of hostilities; on Oct. 29, 1920,
when the peak of post-war credit expansion was reached; on
July 31, 1922, when the subsequent liquidation came to an end;
and on Sept. 10, 1924, the latest available date.
PRINCIPAL RESOURCES AND LIABILITIES OF THE T W E L V E FEDERAL RESERVE
B A N K S COMBINED ON SELECTED

DATES

(In millions of dollars)
Mar.
Nov.
Oct.
July
Sept.
30, 1917 29, 1918 29, 1920 31, 1922 10, 1924

Resources
Cash Reserves
Bills Discounted, total
Secured by U. S. obligation
All other
Purchased Acceptances
U. S. Securities and Other
Earning Assets
Total Earning Assets.
Liabilities
Federal Reserve Notes in
Circulation
Deposits
Ratio of Reserves to Deposit and Note Liabilities, per cent

$947
20

$2,120
1,815

$2,168
2,801

$3,048
406

$3,172
261

20
84

1,412
403
375

1,204
1,597
299

132
.274
140

85
176
93

122

296

537

570

$168

$2,312

$3,396

$1,083

$358
707

$2,569
1,668

$3,351
1,675

$2,132
1,847

$1,751
2,200

89.0

50.0

43.1

79.9

80.3

924

At the conclusion of the war the reserve banks had accumulated a large amount of cash and had discounted over $1,800,000,000 of paper for member banks, $1,400,000,000 of which was
secured by government obligations. Deposits, consisting chiefly
of members' reserve deposits, were large, and Federal reserve
note circulation was in excess of §2,500,000,000.
Post-war Developments—Subsequent activities of the Federal
reserve banks must be discussed with reference to their condition

FEDERAL RESERVE SYSTEM

OPERA

77OA'

at the close of the war. During 1919 and 1920, government
securities found their way in large volume into the hands of
more permanent investors; instalments on Liberty and Victory
loans were being paid up and the volume of so-called war paper,
i.e., notes of persons purchasing government securities on credit
and pledging these securities as collateral for loans covering a
large part of the purchase price, began to diminish both in the
hands of the member banks and of the reserve banks. In place
of this type of paper, ordinary commercial paper arising out of
business transactions began to become increasingly important.
From 78 per cent of total discounts on Nov. 29, 1918, paper
secured by United States government obligations declined to
43 per cent at the end of October, 1920, and even this reduced
total included a large volume of loans for commercial purposes
obtained on the basis of United States obligations merely for
convenience or on account of the preferential rates which wTere
still applicable to this class of paper.
In order to understand banking developments after the armistice it is important to keep in mind that the business and speculative boom, which developed in 1919 and 1920 largely as a result
of the release of war-time energies and the lifting of war controls
and inhibitions, was dependent for its credit requirements upon a
banking system which had already undergone an enormous
expansion in financing the war, and that even in 1919 the financial
needs of the government continued to be the principal factor in
the credit situation. The Victory loan, it will be remembered,
was not floated until May, 1919, and instalments on this loan
continued to fall due until late in the autumn of that year. The
rapidly growing demand for commercial credit, which developed
in 1919 and 1920, thus had to be met by the banks at a time
when they were already carrying a heavy load of loans granted
for the financing of the war.
It is not surprising, therefore, that in spite of the fact that the
gold reserves of the United States had increased by about SI,000,000,000 since 1914, and that most of these reserves were in the
possession of the Federal reserve banks, the reserve ratio of these
banks i.e., the ratio of combined note and deposit liabilities to
reserves, fell in 1920 almost to the legal minimum, being at times
below 42 per cent. Indeed, some of the reserve banks, where

INTRODUCTION 15

the demand for credit was particularly heavy, would have had
reserves far below the legal requirement had it not been for the
assistance they were able to obtain from other reserve banks.
The volume of inter-reserve bank accommodation in 1920
reached $267,000,000 before the change in the business situation
relaxed the strain and permitted the borrowing reserve banks to
begin to repay the loans obtained from other reserve banks.
It was not until May, 1920, that the inevitable reaction in
business began, and it was about six months later, in the autumn
of the same year, that liquidation of loans both at member banks
and at Federal reserve banks got under way. Between that
time and the summer of 1922, loans and discounts of member
banks decreased by about 11 per cent, and the volume of their
accommodation at the reserve banks declined by about 80
per cent.
Beginning with the middle of 1922, the growth of business
activity, which had begun to be manifest nearly a year earlier,
resulted in an increased demand for credit and currency to finance
the enlarged volume of trade and industry. The volume of member bank credit in use once more increased at a rapid rate, but the
banks were able to meet this increased demand of their customers
without the use of additional reserve bank credit. This ability of
the banks resulted from the fact that gold in large volume was
coming to this country from abroad. Thus between 1922 and
1924, as in 1915 and 1916, the growth of member bank credit was
based on the use of gold imported from abroad rather than on an
increased volume of accommodation at the reserve banks. In
fact, in 1924, a slackening of business activity and a consequent
decrease in currency requirements, together with a continued
inflow of gold from abroad, caused the volume of reserve bank
credit in use to decline to the lowest level since 1917.
Problems Facing the Federal Reserve System.—Under conditions prevailing at the present time the Federal reserve system
is endeavoring to develop new banking policies and to establish a
new banking tradition in a financial world different in many
respects from that in which the system was originally conceived
and organized. The system cannot depend for guidance in its
credit policy upon its reserve position, the traditional indicator
of credit conditions in pre-war days, and must function without

FEDERAL RESERVE SYSTEM

OPERA

77OA'

relying on international gold movements as semi-automatic
equalizers of financial conditions in the different money markets
of the world. Gold movements during and since the outbreak of
the war have been larger than ever before in history, but they
have not been in settlement of trade balances, as was the case
formerly, and have been one-sided, flowing principally to the
United States in payment for food and other products purchased
in this country. The stock of gold in the United States has
increased by more than §2,000,000,000, and this increase,
together with the continued inflow of gold, has had a profound
effect on our banking and credit situation. The accumulation
of gold in this country, which has been caused by the disorganization of financial conditions abroad rather than by credit developments at home, has deprived the reserve position of the reserve
banks of a large part of its significance as an indicator of domestic
credit conditions.
In formulating its domestic credit policy the Federal reserve
system must, therefore, look for other less well-known indicators
of credit trends. It must observe changes in the volume of
production, employment, trade and prices, in their relation to
changes in the demand for credit. The task confronting the
system is to develop a body of facts reflecting current economic
and financial conditions, and a better understanding of the bearing of these facts upon credit policy. It is also a part of its
problem to encourage the growth in the banking and business
community, and among the general public, of a better knowledge
of the functions and principles of operation of the Federal
reserve system, with a view to a closer cooperation between the
system, the member banks, and the business public. The ultimate
success of the system depends upon such cooperation, and upon
an understanding by the public of the service that the Federal
reserve banks perform for the community.

CHAPTER II
STRUCTURE OF FEDERAL RESERVE SYSTEM
In order to be able to follow the discussion in the subsequent
chapters, which deal with the principal operations of the reserve
banks and the functions of the Federal Reserve Board, it is necessary to have some knowledge of the manner in which the reserve
banks and the Board are organized. In the present chapter,
therefore, is presented an outline of the structure of the Federal
reserve system and of its different parts. This chapter is necessarily schematic in content, but those unfamiliar with the system
will find in it a description of the skeleton around which the
body of the system is built and of the organs through which its
operations are performed.
Ownership of the Federal Reserve Banks.—Federal reserve
banks are owned by the member banks. All the national banks
are required by law to be members of the Federal reserve system, and state banks and trust companies are eligible to membership if they comply with the prescribed requirements as to
amount of capital and as to the nature of their business.1 Member banks must subscribe 6 per cent of their capital and surplus
to the capital stock of the Federal reserve bank of their district;
one-half of this subscribed amount must be paid in and the
remainder is subject to call. Member banks are the only stockholders of the Federal reserve banks. The Federal reserve bank
is thus a banker's bank not only because its functions are primarily to serve other banks, but more literally because it is
owned by its member banks. In this respect the Federal reserve
banks differ from the Central banks of European countries.
1 The requirements as to capital vary from $25,000 in cities of not more
than 3,000 inhabitants to $200,000 in cities of 50,000 inhabitants or more.
Requirements as to capital have been made more liberal by the Agricultural
Credits Act of March, 1923, which provides that state banks having 60
per cent of the required capital may join the system, provided they undertake to make up the additional capital in a reasonable period of time.

18 FEDERAL RESERVE SYSTEM

OPERA

77OA'

Administration of the Federal Reserve Banks—While member banks own the Federal reserve banks, these arc not entirely
controlled by their members. Each Federal reserve bank has
nine directors, of which three are appointed by the Federal
Reserve Board and six are elected by the member banks. The
government directors include the Federal reserve agent, who
acts as chairman of the board, the deputy agent, and one additional so-called "unattached" director, while of the six directors
elected by the member banks three must represent the commerce
and industry of the district and three must be connected with
banking. In electing the three business directors and the three
banking directors, the banks of a district are divided into three
groups, the first representing large banks, the second mediumsize banks, and the third small banks, each of these groups
being entitled to one of the banking directors and to one of the
business directors.
The management of a Federal reserve bank is in the hands of
the board of directors. They appoint the officers and staff,
though the salaries paid are subject to approval by the Federal
Reserve Board; they control the discount rate policies of the
banks, though rates of discount must also be approved by the
Federal Reserve Board and eligibility of paper for discount is
defined by that Board. Within the bank's organization the
board of directors is supreme. The executive head of a Federal
reserve bank is known as its governor and there are one or more
deputy governors. Under these the bank is divided into its
various departments, the heads of the departments being known
by different names at the several banks.
The Loan Committee.—In every reserve bank there is a loan
committee, consisting of some of the higher officers, which passes
upon each piece of paper presented to the bank for discount.
This committee must first ascertain whether the paper is eligible
under the law and the regulations of the Federal Reserve Board,
and second, whether it is acceptable, i.e., whether the credit
back of it is good; whether the particular member bank which
presents it is entitled to more credit, etc. This distinction
between eligibility and acceptability of paper presented for discount to the Federal reserve bank is important and is not
always appreciated.

STRUCTURE

OF FEDERAL RESERVE

SYSTEM

Eligibility is a matter of law and regulation. In order to be
eligible paper must comply with definite standards as to the
transactions which gave it origin and as to maturity, .while its
acceptability is entirely independent of these matters and rests
on the credit standing of the signers, the availability of funds,
the question of whether the particular member bank has
exhausted its legitimate quota of credit, whether experience has
shown that the bank is using Federal reserve bank accommodation for improper or undesirable purposes, and a number of other
considerations which are not definitely formulated but are
entirely within the discretion of each loan committee and board of
directors, subject to the legal limitation that the Federal reserve
bank shall grant accommodation to each member bank with
"due regard to the rights of other member banks" and with a
view to " accommodating commerce and business."
Operations of the Federal Reserve Banks.—The discount of
paper for member banks either in the form of notes made out
by the bank's customers and then rediscounted by the member
banks with the Federal reserve bank, or in the form of fifteen-day
bills payable by the member banks themselves, secured by eligible paper or by government securities, constitute the principal
part of the loan activities of the reserve banks. They also have
authority under Sec. 14 of the Act to go into the open market
and purchase from anyone who offers them "cable transfers and
bankers' acceptances and bills of exchange of the kinds and
maturities by this Act made eligible for rediscount," and government securities. Open-market operations of the reserve banks
are managed by different officers or committees in the different
banks, but always subject to general control by the board of
directors.
The chairman of the board of directors, as has been stated
above, is appointed by the Federal Reserve Board, is known as
the Federal reserve agent, and his function in addition to presiding over the meetings of the board of directors is to act as a
liaison officer between the Board and the bank. He represents
the Board in all matters relating to the bank's business and is
entrusted by law with the function of handling the issue of
Federal reserve notes. The Federal reserve agent obtains the
notes from the Comptroller of the Currency and holds them in
readiness against the demands of the reserve bank. When the

FEDERAL RESERVE SYSTEM

OPERA

77OA'

reserve banks wish to issue Federal reserve notes in response to a
demand from member banks for currency they apply to the
Federal reserve agent and turn over to him sufficient collateral
to cover the notes. The collateral must consist of gold or eligible
paper amounting to not less than 100 per cent of the notes.
The reserve bank is required to hold a gold reserve of not less
than 40 per cent against its Federal reserve notes in circulation,
the gold offered as collateral against notes issued to the bank
counting as,part of this reserve. The Federal reserve agent
holds the collateral in joint custody with the Federal reserve
bank, and when notes are returned releases an equivalent amount
of the collateral either in the form of eligible paper or of gold, as
the reserve bank may desire.
Relation to Member and Non-member Banks, the Government, and the Public.—This general sketch of the operations of a
Federal reserve bank may be illustrated by the chart (see Fig. 1)
on page 11. The chart shows that the public comes to member
banks and to non-member banks, generally speaking, with one or
two things—either with money-or checks to deposit, or with some
kind of credit instrument, whether a note, a draft, or an acceptance, upon which to borrow. The public can come with these
demands to any one of the 10,000 member banks or to the
20,000 non-member banks. In return for its promise to pay or
for its money, the public obtains from the bank cash or deposit
credit. Non-member banks may come to member banks for
the same kind of service as the latter give to the public, i.e.,
the non-member bank may come to a member bank with cash,
usually in the form of drafts, or with notes, in order to obtain a
deposit credit or a supply of cash, so that, broadly speaking, the
member banks receive deposits and grant loans both to the
public and to non-member banks. This is an important point to
remember because it is a connecting link between the nonmember banks and their customers and the Federal reserve
system. Member banks may also deposit with, or borrow from,
non-member banks, but since most of the large banks are members and most of the non-member banks are small, the old relationship between country banks and city correspondents exists
in most cases between non-member country banks and city
members. Besides, the member bank can generally obtain
credit from a reserve bank on as good, if not better, terms than

FEDERAL RESERVE SYSTEM
CENTRAL BANKING FUNCTIONS
Co

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Fio. 1.—General outline of the operations of the Federal reserve banks and of their relation to member and
non-member banks, to the government and to the general public. The chart brings out the fact that
Federal reserve banks can be used in the same general way by non-member banks as by the public.

FEDERAL RESERVE SYSTEM

OPERA

77OA'

from any non-member bank, and so a member bank does not
usually borrow from a non-member. One member may, and
frequently does, however, borrow from another member, but
these transactions, taking place between member banks, are not
represented in the chart.
When a member bank, to meet the demands of its customers,
either individuals or non-member banks, desires currency or
additional credit, it applies to the Federal reserve bank of its
district. The law provides that each member bank must keep
reserves of specified amounts against its deposits, and that these
reserves must be kept entirely on deposit with the Federal
reserve bank. The member bank can grant loans to its customers and give them deposit credit to an amount limited, in
addition to banking prudence, by the legal requirement that it
must keep a specified proportion of its deposits as reserves with
the reserve bank. As a matter of fact, the bank frequently
borrows from the reserve bank in order to increase its deposit
credit with that bank up to the necessary minimum required by
law. The machinery works in the following way: When a
member bank desires cash or funds for out-of-district payments
it obtains Federal reserve notes from the reserve bank, draws a
draft against its Reserve account, or effects a telegraphic transfer
through the agency of that bank, the amount withdrawn being
charged to its deposit account. This reduction in the deposit
account may impair the bank's reserve balance, i.e., reduce it
below the legally required minimum, in which case the member
bank will replenish its reserves by borrowing from the reserve
bank. The members' reserve deposit may also become too low,
without being actually reduced, when a member bank grants
credit to a customer and increases its own deposit liabilities to a
point where its reserve balance with the reserve bank is below
the minimum required by law. In such a case, also, the member
bank applies for accommodation from the reserve bank in order
to bring its reserve deposit up to the legal minimum. Thus in
the Federal reserve system the members' reserves are not cash,
but a credit on the books of a reserve bank, and the cash reserves
which the reserve bank keeps against its own deposits are,
therefore, the ultimate and the only legal hard cash reserves
back of all the deposits of the member banks. The law requires
the reserve bank to have not less than 35 per cent in gold or lawful

STRUCTURE

OF FEDERAL RESERVE SYSTEM

money as reserve against its deposits. The Federal Reserve Act
greatly reduced the amount of reserves that member banks must
carry, and by transferring these reserves to the reserve banks
made them available as a basis for further credit operations.
Turning once more to the chart, it appears that the public and
the non-member banks may come directly to the reserve bank
and sell acceptances and government securities. In return they
may receive gold or Federal reserve notes. The government
also deals with the reserve banks by depositing cash or checks, or
by selling its own securities and receiving in return deposit credit
or Federal reserve notes in accordance with its requirements.
Federal Reserve Banks, Branches, and Agencies.—There are
twelve Federal reserve banks, located in Boston, New York,
Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis,
Minneapolis, Kansas City, Dallas, and San Francisco (see
Fig. 2). Each of these banks serves one of the twelve Federal
reserve districts shown on the map. Several of the banks have
branches which operate in different parts of the districts, usually
having a certain portion of the district assigned to them. There
are at present twenty-three branches and one domestic agency
in operation.
In addition to permitting the establishment of branches in this
country the Federal Reserve Act authorizes the reserve banks
to open accounts in foreign countries, to appoint correspondents,
and to establish agencies abroad for the purpose of purchasing,
selling, and collecting bills of exchange.. Under the authority
of this legal provision the reserve banks have established correspondent relationships with many foreign central banks and have
acted as agents of such banks in the purchase and sale of acceptances and government securities in this country. During the
summer of 1923, the Federal Reserve Board authorized two of
the Federal reserve banks to establish agencies in Cuba. The
relations of the United States with Cuba are unique, because of
provisions of the Piatt Amendment, which gives the United
States a control over Cuba's foreign loans, and because Cuba
is dependent for its monetary requirements almost entirely on
American currency, the Federal reserve note being legal tender
in Cuba though not in the United States * Agencies in Cuba were
authorized for the Federal Reserve Bank of Atlanta, which had
for some time supplied most of Cuba's currency needs, and the

FEDERAL RESERVE DISTRICTS

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V'V1

fOUNOAmt5 Of FEDERALftESCflveOtSTNtCTS

. . . . . MUNOAMES or FCOEKAI RESERVE BRANCH TERRITORIES
$
FEDERAL RESERVE SANK cmcs
• FEDERAL RESERVE BRANCH ernes
O FEDERAL RESERVE SANK AGENCY

FIG. 2.—There are 12 Federal reserve banks, 23 branches, and one domestic agency (in Savannah, Ga.)«
are also two agencies in Cuba.

There

STRUCTURE

OF FEDERAL RESERVE SYSTEM

Federal Reserve Bank of Boston, because there are active commercial relations between New England and the Island of Cuba.
The principal occasion for the establishment of these agencies
was that much of the money in circulation in Cuba was in bad
condition because there was no efficient machinery for its redemption. Currency presented to the Cuban agencies of the reserve
banks for the purchase of cable transfers is sorted, and unfit currency is sent back to this country for replacement by new currency.
The new money is then put into circulation through the purchase,
by the Cuban agencies of the reserve banks, of bills of exchange
from the banks operating in Cuba and through the payment
to banks in Cuba of funds on account of cable transfers sold by
the Federal reserve banks to member banks in the United States.
The Federal Reserve Board has issued regulations prescribing
in detail the manner in which the Cuban agencies shall operate.
These agencies opened their doors for business on Sept. 1, 1923.
Fiscal Agency and Other Functions.—In addition to performing
the functions already described, the Federal reserve banks act
as fiscal agents of the government, and render many other services
such as the clearing and collection of checks, the supplying of the
cash requirements of member and non-member banks and other
matters. These activities, which theoretically are not an essential part of the operations of a central banking organization,
have assumed a large measure of importance in the reserve banks'
organization because they involve much expense which is not
proportional to the volume of the banks' credit operations.
These functions need only be referred to here in order to make it
clear that in addition to their fundamental operations the reserve
banks perform a great many others, not so fundamental to their
original purpose, but which employ a large part of their personnel
and occasion a large proportion of their expenditures.
The Federal Reserve Board.—As a general supervisory body
over these twelve Federal reserve banks, there is established by
law a Federal Reserve Board of eight persons, six of whom are
appointed by the President with the advice and consent of the
Senate and two who serve ex-officio. The ex-officio members
are the Secretary of the Treasury and the Comptroller of the
Currency, the former acting as Chairman of the Board. No
two of the appointed members may be from the same Federal

FEDERAL RESERVE SYSTEM

OPERA

77OA'

reserve district. The law provides that in selecting the sixappointive members the President shall have due regard to a fair
representation of the financial, agricultural, industrial, and
commercial interests, and geographical divisions of the country.
The salaries of Board members are fixed by law at 812,000
per annum, and they must give their entire time to the business
of the Federal Reserve Board. The term of office is 10 years.
From among the six appointive members the President designates a governor and a vice-governor. The governor acts as
executive officer of the Board. The Board's expenses are met
by an assessment on the Federal reserve banks in proportion to
their capital and surplus.
Among the most important functions of the Board arc the
definition of the eligibility of paper under the law, and the
approval of discount rates. The Board holds frequent meetings
and has worked out an elaborate code of definitions of the terms
of the law, and this code constitutes something in the nature of a
central banking law of the country. The main principles of
this code are incorporated in the Board's regulations which are
reprinted in Appendix B, but these regulations are constantly
supplemented by rulings made upon questions arising out of
the actual operations of the banks. The function of the Board in
defining eligibility was more arduous in the beginning of the
system's operation, when terms had to be newly defined, than it
is at present, when the fundamental problems have been solved
and questions of eligibility arise only occasionally. Of the other
functions of the Board several should be mentioned here. The
Board has control of the machinery of clearing between the
reserve banks, i.e., the reserve banks clear the checks between
their own member banks, and the Federal Reserve Board through
the gold settlement fund acts as a clearing house for the different
reserve banks, thereby completing the clearing machinery and
reducing the necessity for actual cash shipments to a minimum.
The Federal Reserve Board also has complete control over
rediscounts between the different reserve banks, i.e., when the
reserves of one reserve bank become depleted and it is under the
necessity of obtaining a loan from another reserve bank, it applies
to the Reserve Board which has the power to request or to require
another reserve bank to grant the desired accommodation. The

STRUCTURE

OF FEDERAL

RESERVE

SYSTEM

Federal Reserve Board, through its division of examinations,
regularly examines the twelve Federal reserve banks and branches,
the law providing that each reserve bank must be examined at
least once a year. Examinations of non-national banks are
generally conducted by the reserve banks, often in cooperation
with state banking authorities, while national banks are examined
by the Comptroller of the Currency.
Another function of the Board is obtaining daily condition
reports of the reserve banks, publishing them weekly in accordance with the requirements of the law, and preparing and submitting its annual report to Congress. These activities of the
Board, in collecting and publishing information, have been
considerably expanded and enlarged into the collection of much
research and statistical material, which is intended to afford a
basis for credit policies for the Board and the reserve banks and
to keep the member banks informed of the general business and
credit situation. The Reserve Board also publishes a monthly
bulletin which contains information on many phases of domestic
and foreign business and credit conditions.
Federal Advisory Council.—In addition to the Federal Reserve
Board, the law provides for a Federal Advisory Council consisting
of one man from each Federal reserve district appointed by the
Boards of Directors of the twelve reserve banks. This council
meets not less than four times a year, considers problems of
importance to the Federal reserve system, and makes a report
to the Board incorporating its advice and recommendations.
The Advisory Council has no other powers than the submission
of this advisory report, but the Council consists of men prominent in the banking field and its reports command considerable
respect and attention from the Board and the banks, as well as
from the general public.
Conferences with Governors and Federal Reserve Agents.—
In order to keep in close touch with the developments in the
different districts the Federal Reserve Board, not less than
twice a year, invites the governors to Washington, and once a year
also invites the agents of the twelve Federal reserve banks, and
on occasion some of the directors. At these conferences many
of the problems confronting the system are discussed first by
the twelve agents and the twelve governors meeting in separate

FEDERAL RESERVE SYSTEM

OPERA

77OA'

conferences, and later by all the twenty-four officials meeting
with the members of the Board. Much progress is made at these
meetings toward the establishment of consistent policies and the
development of what has been called a "common language"
for the Federal reserve system, so that the different officers
of the system learn to understand exactly what certain terms and
concepts mean.
The system is new, the principles of Federal reserve banking
are not yet generally understood or fully developed, and the semiannual conferences help toward such an understanding and development of principles. There are also committees of the governors
and of the agents of the different banks entrusted with the handling of specific problems. Thus, for instance, an agent's committee has recently made a report on deposit reserves and the
advisability of changing some of the legal provisions on this
matter. Another committee consisting of some of the officers of
the banks and members of the Board is working to establish
methods of cost accounting and uniform economy and efficiency
procedure in the twelve banks, a subject which is of particular
importance in view of the reduced earnings of the system in the
past few years.

CHAPTER III
DISCOUNTS
" A n Act to provide for the establishment of Federal reserve
banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes."
This is the full title of the Federal Reserve Act approved Dec.
23, 1913. It indicates that next to the creation of elastic currency the framers of the Act considered " t o afford means of
rediscounting commercial paper" as the most important purpose
of the Act.
Source of Reserve Banks' Lending Power.—It is pertinent
to begin the discussion of discounts with the question: Whence
arises the ability of a reserve bank to rediscount paper for a
member bank? In an ordinary commercial bank ability to
discount paper for a customer is derived from two principal
sources: the capital contributed by the stockholders; and the
deposits entrusted to the management of the bank by its customers. Broadly speaking, a bank can lend to its customers whether
in lawful money, its own bank notes if a note-issuing bank,
or in deposit credit, only as much money as it receives from
them and from its stockholders, less the reserves which the law
and banking prudence dictate that it shall hold. In so far,
however, as a bank is itself able to borrow funds from other
banks, it can extend its loaning power. That this is true is
evidenced by the fact that the total loans, investments, and
reserves of banks are about equal to their capital, surplus, total
deposits, and borrowings.1
1 This is not inconsistent with the accepted doctrine that a deposit in
most cases is merely a book entry resulting from a loan transaction. A
deposit credit may result from the actual deposit of cash or from the negotiation of a loan; it represents on the part of the customer the exchange of
cash or of a claim on himself at some future day for an immediate claim
on the bank, and on the part of the bank, the assumption of a deposit
liability in exchange for cash or a claim on the customer.

FEDERAL

RESERVE

SYSTEM

OPERA

77OA'

A Federal reserve bank is fundamentally in the same position.
Its capital, however, constitutes but a small part of its lending
power, representing only 3 per cent of the capital and surplus
of the member banks and amounting altogether to about $100,000,000 for the twelve Federal reserve banks combined. In
addition the reserve banks have built up a surplus of about $200,000,000 which also is available as loanable funds. It is not from
its capital and surplus, however, that the reserve bank derives
the larger part of its lending power. A larger portion of the
funds originally turned over to the reserve bank by the member
banks was for the purpose of creating reserve deposits. The
law provides that the member banks must keep with the reserve
banks a certain proportion of their deposits.1 These reserve
deposits were paid in by the member banks in currency and coin
and in addition the reserve banks received considerable sums of
gold and lawful money in exchange for Federal reserve notes.
The reserve deposits, which on Aug. 27, 1924 were about 19
times as large as the capital of the reserve banks, are the principal
source of the reserve banks' lending power. Furthermore, the
reserve banks have authority to issue Federal reserve notes in an
amount 23^ times as large as their reserves (after setting aside
35 per cent against deposit liabilities), and this note-issuing power
enables the reserve banks to meet the member banks' demands
for currency as well as their requirements for deposit credit.
Economy of Reserves.—The Reserve Act reduced materially
the reserve requirements of member banks, and it did so for the
reason that it was thought, and justly, that the concentration
of reserves in a central institution, where they would be available
for any emergency anywhere in the district, reduced the chances
of calls upon a bank which it would be unable to meet and,
therefore, reduced the amount of reserves necessary in order to
conduct the banking business on a safe basis. As a consequence
of this reduction in reserve requirements the member banks can
lend a larger proportion of their funds than they could before
the establishment of the system. Furthermore, the reserves
kept with the reserve bank need not be idle, as the reserve bank
is not required to keep all the member banks' reserve deposits
in its vaults. The reserves required against deposits are only
1

Reserve requirements are discusscd in detail on p. 79.

DISCOUNTS

35 per cent, so that 05 per cent of these deposits are available
for lending to member banks. The reserve bank also has
authority to issue Federal reserve notes to the member banks in
the ratio of $2,50 of notes to SI of reserves, so that when a member
bank deposits $100 in cash with a reserve bank, the latter must
keep $35 as a reserve against the deposit and may lend on the
basis of the remaining $65 in the form of Federal reserve notes
times that amount, or $162,50 or in the form of deposits, 2.85
times the amount, or $185.25.1
1 Money borrowed from the reserve bank may in turn be lent by the
member bank to a customer. Thus a member bank having received a cash
deposit of $100 from a customer may deposit it with the reserve bank and
thereby increase the latter's lending power by $162.50, which the member
bank may then borrow and lend to its customers. The lending power of
the member bank may be increased still further if the loan to its customer
merely gives rise to a deposit account and not to a cash payment, for
against a deposit the member bank needs to keep on the average only a
10 per cent reserve with the reserve bank. Thus the $100 in cash deposited
by being turned over to the reserve bank enables the member bank to lend
$1,000 additional to its customers in the form of deposit credit. At the
same time this addition of $100 to the reserves of the reserve bank increases
the latter's own lending power, for after setting aside $35 as reserve against
the $100 deposit the reserve bank can lend in the form of deposit credit an
additional $185 (2.85 times 65). This additional loan of $185 will increase
the member bank's reserves by this amount and the latter in turn will be
able to increase its own lending of deposit credit by ten times this amount,
that is, by $1,850, so that the $100 deposited in cash with the member bank
has increased its lending power directly by $1,000, and through borrowing
at the reserve bank by $1,850 more, the total increased lending power thus
amounting to $2,850. The difference between the $1,000 and the $2,850
represents the additional lending power introduced into the situation by
the Federal reserve bank. But this is predicated upon all the borrowing
being in the form of deposit credit. If, on the contrary, the customer
wishes to withdraw his entire loan in cash, the reserve bank will be able
to issue on the basis of the $100 deposit (less the 35 per cent reserve) $162
of Federal reserve notes, and this amount and no more the member bank
will be able to lend to its customers. Whether, therefore, a deposit of
$100 with a member bank will increase that bank's lending power by $162
or by $2,850 will depend on what form its own lending will take. The
larger the proportion of this lending that will be withdrawn in cash
the smaller the added lending power, and vice versa. The proportion of the
funds that is withdrawn in cash varies in accordance with the business
situation and with the demand for currency, so that the volume of lending power of a reserve bank on the basis of $100 deposited with it depends,
within the broad limits of from $162 to $2,850, upon the demand of the

FEDERAL

RESERVE

SYSTEM

OPERA

77OA'

Character of Paper Discounted.—Section 13 of the Federal
Reserve Act provides that a Federal reserve bank may discount
notes, drafts, and bills of exchange arising out of actual commercial transactions; that is, notes, drafts, and bills of exchange
issued or drawn for agricultural, industrial, or commercial
purposes, or the proceeds of which are used for such purposes.
This positive authority is accompanied by the inhibition—"but
such definition shall not include notes, drafts, or bills covering
merely investments, or issued or drawn for the purpose of
carrying or trading in stocks, bonds, or other investment securities,
except bonds and notes of the government of the United States/'
A further limitation is added in regard to maturity, paper not
being eligible for discount by the reserve bank unless it has a
maturity at the time of discount of not more than 90 days exclusive of days of grace; the only exception is that paper issued for
agricultural purposes or based on livestock may be discounted
with a maturity not exceeding 9 months. These provisions of
the Act indicate the fundamental nature of the discount activity
of Federal reserve banks. These discounts must originate in a
demand in the commercial market for purposes of production or
distribution. The reserve banks thus are intended to create
only circulating credit and not credit to be used for capital purposes or for speculation. The liquid nature of the discounts is
further assured by the requirement that the paper (except
agricultural paper) must mature within 90 days. A loan to
be repaid in 90 days must originate in transactions which are
consummated approximately in 90 days or in transactions which,
though they take a longer time, have only 90 days of their duration left at the time of discount. A person may, for example,
borrow money for the purpose of carrying merchandise in his
store, the turnover in this particular class of goods being 6 or
9 months. The member bank may carry this paper for 6 months
in its own portfolio and then take it to the Federal reserve bank
and have the Federal reserve bank carry it for the last 3 months
before maturity.
business community for currency. (The difference in this respect between
an individual member bank and all the member banks combined is discussed on page 83. At this point it is assumed for the sake of simplicity
that all the member banks are a unit.)

DISCOUNTS

The framers of the Federal Reserve Act intended to make it
possible for the member banks to issue more credit through the
instrumentality of the reserve banks than was possible by the
banks acting individually. But the Act was so designed as to
make the paper in the hands of the reserve banks of a strictly
self-liquidating character, i.e., originating in transactions whose
consummation would automatically produce the funds for the
liquidation of the loan. If a man borrows money for the purpose
of shipping cotton he will need the loan while the cotton is in
transit, and when it reaches its destination and is paid for the
shipper will be in funds and in a position to repay his loan.
Similarly, if a farmer borrows money for the purpose of feeding
a load of steers, he expects to be able to repay the loan as soon
as the steers have been fattened and sold. The 9 months'
limit permitted for agricultural paper is a concession to agriculture in recognition of the fact that the agricultural turnover is
slower than the industrial turnover and that 9 months' paper
offers no greater facilities to agriculture than 3 months' paper
offers to commerce and industry.
Rediscounts and Collateral Notes.—Loans by the reserve
banks to member banks may be made in two general ways:
upon customers' paper offered for rediscount by the member
banks; and on the member bank's own collateral notes secured
by customers' paper or by government obligations. The limit
of maturity on collateral notes is 15 days. The amendment
authorizing collateral loans, approved on Sept. 7, 1916, was for
the purpose of enabling banks to obtain immediate credit for
short terms. A large part of the reserve banks' discounts is in
the form of collateral notes, most of which are secured by government obligations. Collateral notes are used chiefly by the large
banks in financial centers, where commercial banks do a great
deal of business for short terms and where they can easily adjust
their borrowings from time to time to immediate requirements.
For purposes of this kind of borrowing, collateral notes are much
more convenient than customers' notes, which generally have
longer maturities. By borrowing on its own note made out for a
relatively large amount in a round figure, such as $1,000,000,
$5,000,000, or $10,000,000, the member banks can save a great
deal of bookkeeping and clerical work. On the other hand, the

FEDERAL

RESERVE

SYSTEM

OPERA

77OA'

smaller banks, which find themselves short of funds, are more
likely to rediscount one or more of the customers' notes in their possession with the reserve bank, which will carry them until
maturity.
It should be kept in mind that the difference in methods of
borrowing just described is a purely technical one and the choice
of methods depends simply upon the member bank's convenience.
In either case the bank obtains accommodation at the reserve
bank, i.e., passes to that bank a part of the loans which it has
itself extended to its customers.
Paper Secured by United States Obligations—It has been
stated that the reserve banks were intended primarily to finance
current short-term transactions arising out of the production and
distribution of goods. In the definition of paper which member
banks are permitted to discount, however, there is included a
proviso to the effect that, while the banks are not permitted to
carry paper drawn for the purpose of trading in investment
securities, this does not apply to trading in bonds, notes, or other
obligations of the government of the United States. This proviso,
which can generally be found in the charters of central banks
having the note-issue privilege, has played a more prominent
part in the operations of the reserve banks than could have been
anticipated by the framers. The table below shows total discounts of the Federal reserve banks at different dates from
November, 1918, to November, 1921:
TOTAL FEDERAL RESERVE B A N K DISCOUNTS AND DISCOUNTS SECURED BY
UNITED STATES

OBLIGATIONS

(In millions of dollars)

Date

Nov.
Nov.
Nov.
Nov.

15,
14,
19,
16,

1918
1919
1920
1921

Total
discounts

SI,798
2,140
2,673
1,198

Secured by United States
obligations
Amount

Per cent of total

$1,359
1,701
1,159
432

76
80
43
36

Up to the entry of the United States into the war the Federal
reserve banks had very small amounts of discounts. The war

DISCOUNTS

began in Europe in 1914, shortly before the opening of the doors
of the Federal reserve banks, and resulted in an enormous
demand for munitions and other supplies by the European belligerents, and in the shipment of 81,000,000,000 of gold into the
United States in payment for these supplies. Money in this
country was, therefore, abundant; business was booming and
there was little demand for reserve bank credit. The reserve
banks issued moderate amounts of Federal reserve notes,
indirectly in exchange for gold, of which there was an abundance.
The situation changed, however, when the United States
entered the war. In the first place, the allies ceased to pay
cash for supplies obtained in the United States and instead
obtained credits from the United States Treasury, paying for
their purchases with funds thus secured. In the second place,
the United States government itself was immediately in need of
funds for the carrying on of the war. To meet this demand for
funds, both on the part of its allies and for its own needs, the
government, in addition to adopting measures of additional
taxation, proceeded to float a series of loans generally known as
Liberty loans. The amounts of these loans, together with the
dates of their flotation are shown in the following statement:
AMOUNTS OF LIBERTY AND VICTORY L O A N ISSUES, AND R A T E OF INTEREST,
TOGETHER WITH D A T E S OF T H E I R

First Liberty loan
Second Liberty loan
Third Liberty Joan
Fourth Liberty loan
Victory loan
Total

FLOTATION

Amount

Rate of
interest,
per cent

Date

$ 1,989,456,000
3,807,865,000
4,175,650,000
6,964,581,000
4,495,373,000

W2
4
4K
4K
m

June 15, 1917
Nov. 15, 1917
May 9, 1918
Oct. 24, 1918
May 20, 1919

$21,432,925,000

It is clear that the American people could not pay for this vast
amount of Liberty bonds out of their current earnings. They
were obliged to buy them on time, i.e., to borrow upon them while
accumulating the funds to pay the principal. The banks of

FEDERAL

RESERVE

SYSTEM

OPERA

77OA'

the country were thus called upon to lend large amounts of
money to the public for the purpose of enabling it to purchase
government securities. It is at this point that the Federal
reserve system entered into the equation and enabled the government to carry its fiscal program through to success. There was
nothing to prevent member banks from discounting with the
reserve banks paper secured by United States government
obligations. In fact, the reserve banks, in their desire to uphold
the government, charged lower rates on such paper, so that
members were able to borrow from the reserve bank on paper
secured by Liberties at a rate no higher and sometimes even
slightly lower than that carried by the bonds themselves. This
margin compensated the banks for the expense of handling the
bonds and for the clerical work of keeping books for large numbers of customers, and made it possible to lend money to the
customers purchasing bonds at a rate corresponding to the
coupon rate. In this way the purchaser of bonds on time paid
no interest on the unpaid balance of his purchase, as the coupon
attached to the bond paid the interest on his loan from the bank.
The following statement shows, for the dates of flotation of
Liberty bonds and Victory notes, the rates charged by the
reserve banks on paper secured by government obligations, as
compared with the rates of interest paid by the bonds themselves,
and with the discount rates on commercial paper:
RATES

CHARGED BY FEDERAL RESERVE

UNITED

STATES

OBLIGATIONS,

RATES

BANKS
BORNE

ON PAPER
BY

THE

SECURED

SECURITIES,

AND THE DISCOUNT R A T E ON COMMERCIAL PAPER AT THE FEDERAL
RESERVE BANK

Date

June 15, 1917.
Nov. 15, 1917
May 9, 1918.
Oct. 24, 1918
May 5, 1919

OF N E W

YORK

Rate charged on
commercial
paper,
per cent

4
4
m
m

Rate charged on
paper secured
by government
obligations,
per cent

Bond
rate,
per
cent

3H
3H
4J4
4 H
4 H

3K
4
4H
4H
m

DISCOUNTS

Figures 3 and 4 show the effect of war developments on Federal
reserve bank activity. It will be noted that the discounts of
the banks rose from almost nothing at our entry into the war
to $2,800,000,000 in October, 1920. It will also be observed
that up to the middle of 1919, when the Victory loan was floated,
the bulk of the discounts of the reserve banks consisted of paper
secured by government obligations which at that time was
generally known as "war paper." It is only after the consummation of the Victory loan in 1919 and the completion of instalment payments on account of that loan that war paper began
to decline both in absolute amount and relatively to total discounts. Soon after that time the reserve banks began to abolish
the preferential rates on government paper. The war was over
and steps were being taken looking to a return of peace-time
banking.
Post-war Economic Boom.—Hostilities came to an end in
November, 1918 but expenditures for war purposes continued for
some time, and until after the Victory loan was launched in
the summer of 1919 the character of credit developments was
much the same as during the war. As a matter of fact, the peak
of government debt was not reached until August, 1919. In the
second half of 1919 there developed a distinct tendency for
speculation, a general feeling of release from war-time restraints,
and a consequent display of recklessness and extravagance which
affected the entire nation.
The economic boom of 1919-1920 was the result of many factors,. whose relative importance it would be difficult to estimate,
but whose combined effect on business and credit conditions
has become a matter of history.1 Among these factors there
was the indulgence of appetites long held in restraint by wartime controls; there was a general celebration of the abolition of
meatless and wheatless days; there was the necessary replenishing
of stocks exhausted during the war period. The shelves of retail
merchants were bare and needed restocking; the wardrobes of a
large portion of the population were in need of renovation;
1 For discussion of this period from the point of view of credit and banking developments see Pt. II of the Report of the Joint Commission of Agricultural Inquiry (Sixty-seventh Congress, First Session, Report No. 408)
also Appendices I and J to this volume.

1
fa
tw

&
£
3
Co

1
so
o

FIG. 3.—Earning assets and Federal reserve notes followed a similar course between 1917 and 1920, when
the volume of reserve bank credit was rapidly increasing; in 1921 earning assets declined much more than Federal reserve notes, because gold imported from abroad was used by member banks to repay borrowings at
the reserve banks. This is reflected also in a rapid growth of cash reserves.

FEDERAL RESERVE BANK RESERVE POSITION

8
§
3

FIG. 4.—During 1917-1920 liabilities increased rapidly and the reserve ratio declined; in 1921 the ratio
rose both because Federal reserve note circulation decreased and because reserves increased. The chart brings
out also the relative stability of deposits compared with the wide fluctuations in Federal reserve notes.

^
so

FEDERAL RESERVE SYSTEM

OPERA

77OA'

there was also a heavy demand for new dwellings, as building
activities for private use had been on a greatly reduced scale
during the war.
With the war emergency over, and with the continuance of
full employment at high wages the people of the United States
were freely spending their income by buying clothes, investing
in homes, and purchasing automobiles. The returned soldiers,
with their discharge pay to spend, also added to the buying power
of consumers. The increased demand for goods arising from all
these sources was reflected, upon the removal of price controls,
in a rapid rise in prices. The country's improved credit
machinery made it possible for the banks to supply the funds
required to finance the rapidly growing volume of business.
Speculation in securities and commodities was widespread, and
to the earlier growth of bank credit caused by the necessities of
war was added a further expansion on a large scale arising out
of the requirements of the post-war boom.
Collapse of the Boom in 1920.—It became clear in the summer
and fall of 1919 that credit was expanding at an alarming rate.
The Federal Reserve Board recognized the fact but was not free
to raise rates while the government was floating the Victory loan
and did not wish to have obstacles thrown in the way of the
success of this issue. The Board, however, issued several warnings telling the banks that the situation was serious and should
be controlled. But this good advice was accorded the customary treatment of good advice and remained unheeded. Speculation continued unabated. At last in November, 1919, after
the date for the payment of the last instalment on the Victory
loan,^the reserve banks adopted moderate advances in discount
rates. Credit expansion, however, continued, as is clearly
seen from the chart on page 28.
In 1920 the early rumblings of approaching catastrophe were
heard when the silk market in Japan collapsed, and it seems
difficult to realize in retrospect that few people in America were
far-sighted enough to see that a collapse was imminent. Several
Federal reserve banks raised their rates to 6 per cent, others to
7 per cent, and still others adopted systems of progressive rates.
In May, 1920 occurred a definite turn in the tide. While
the country's productive plant was still employed nearly to

DISCOUNTS

capacity, the foreign demand for American goods collapsed
with the exhaustion of public and private credits granted to
exporters, transportation facilities were no longer adequate for
the prompt distribution of the output, serious freight congestion
developed, goods were not moving to market in an orderly
manner and their accumulation at distributing points together
with the growing unwillingness of consumers to continue buying
at the prevailing level of prices were among the factors resulting
in a reversal of the price movement.
The liquidation, which began in the late fall of 1920, continued
until the beginning of 1922, and for many banks until the fall of
that year. This liquidation, which is reflected in the steep
declines of the discount and Federal reserve note curves in the
chart on page 28 was the basis of the accusation that the reserve
banks were deflating the country, forcing liquidation, and bringing about a paralysis of business. As a matter of fact, the process
of liquidation was world-wide and was brought about by the
inevitable work of economic forces which, when a period of
inflation reaches its peak/brings about a reversal, and after the
turn comes accelerates the decline until the pendulum once
more swings in the opposite direction. During the period of
advancing prices business accumulates a large number of weak
concerns which are kept afloat merely by the fact that the value
of their inventories advances continuously. Anyone can make
money on a rising market, and many did in 1918 and 1919, and
congratulated themselves upon their wisdom. This self-congratulatory spirit was part of the reason for the rapidity of the subsequent decline as it encouraged men to buy larger and larger
stocks so long as these stocks constantly increased in value.
When confidence was once shaken and prices began to decline
these accumulated stocks began to be thrown on the market,
thereby accelerating the price declines and drawing more and
more concerns into the movement. A trade and credit contraction, like an avalanche, grows as it moves forward, and gathers
unto itself continuous accretions which are carried along by the
momentum of the moving mass.
Gold Movements.—Gold movements, which had been away
from the United States during the months following the removal
of the gold embargo in June, 1919, began to be in the direction

FEDERAL RESERVE SYSTEM IX OPERA

77OA'

of this country in the fall of 1920 as foreign debtors began to
pay for their obligations incurred in the United States. The
liquidation of borrowings from the Federal reserve banks was
due approximately as much to the repayment of foreign as of
domestic debts. Roughly, domestic liquidation is measurable
by the reduction in Federal reserve note circulation, and foreign
liquidation by the increase in gold reserves. The following
statistical statement will bring out this point:
T O T A L RESERVES, FEDERAL R E S E R V E X O T E S IN CIRCULATION,
AND RESERVE R A T I O OF FEDERAL R E S E R V E

B A N K S ON

DEPOSITS,

SELECTED

DATES

(End-of-month figures in millions of dollars)

Total
reserves

Federal reserve notes in
circulation

Deposits1

Reserve
ratio,
per cent

1920:
October

§2,168

S3,351

§1,675

43.1

1921:
January
April
July
October

2,320
2,505
2,685
2,937

3,091
2,830
2,538
2,409

1,643
1,726
1,695
1,739

49.0
55.0
63.4
70.8

1922:
January
April
July

3,059
3,125
3,181

2,184
2,158
2,127

1,779
1,833
1,888

77.2
78.3
79.2

» Net deposits to March, 1921; total deposits beginning with that date.

Domestic concerns paid their indebtedness in the final analysis
by Federal reserve notes, as this is the only elastic part of our
circulation that can be easily retired when the demand for it
decreases, while foreign concerns paid their balances by the only
available international means of cash payment, that is, gold.
Liquidation in Industrial and in Agricultural Districts.—While
liquidation proceeded through the country and in all classes of
communities, it is notable that it was at first much more pronounced in industrial centers than in agricultural districts. This

DISCOUNTS

was due in part to the fact that much of the speculation and
industrial expansion occurred in the cities, while agricultural
credit was utilized for productive purposes. It is also due
to the fact, however, that in the cities speculators whose ventures
had been unsuccessful were obliged immediately to take their
losses. Their loans were of a nature which enabled the banks to
dispose of the collateral when payment was not forthcoming at
maturity. In country districts, on the other hand, where the
relationship between the banker and the customer is closer, and
where it was clear that to sell out an overdue debtor would mean
ruin to him and a severe loss to the bank, there was frequently
manifested unwillingness to use drastic measures, and an inclination to renew loans. This resulted in the accumulation of a
large amount of so-called frozen loans. A study of loans in
agricultural, semi-agricultural, and non-agricultural counties in
the spring of 1920 and 1921 shows that liquidation in urban
communities was much more drastic than in rural communities,
and that Federal reserve bank accommodation, which had
decreased decidedly in the urban communities during this year
of contraction, had actually increased in the rural counties.
The larger increase in borrowing in the cities, and the subsequent
rapid liquidation was also caused in part by the withdrawal of
funds by rural correspondents during the stringency and the
building up of balances when money became more abundant.
The city banks were obliged in 1920 to lean on the reserve
banks partly in order to help them stand the drain caused
by withdrawals of country bank deposits, and in 1921 and 1922
used the funds redeposited by the country banks to reduce
their indebtedness at the reserve banks.
End of Liquidation in July, 1922.—Liquidation ran its course,
and, as far as Federal reserve bank discounts are concerned, came
to an end in July, 1922. After that time there was a considerable
increase in discounts due to industrial revival. At the end of
July, 1923, total discounts of the reserve banks were 1826,000,000,
compared with $380,000,000 at the end of July, 1922. During
the remainder of 1923 discounts continued at about the level
reached in July, but in 1924, owing to a business recession with
the consequent decrease in the demand for currency and to the
continued inflow of gold from abroad, discounts at the reserve

FEDERAL

RESERVE

SYSTEM

OPERA 77OA'

banks declined rapidly, and at the end of August of that year
totaled only $263,000,000.*
To sum up the history of discounts at the Federal reserve
banks: There was first a period of inactivity prior to our entry
into the war; then a period of war-time inflation followed by one
of post-war expansion, culminating in a rapid liquidation which
came to a halt in July, 1922 and gave place to a temporary revival to the end of 1923, followed by further liquidation in 1924.
In considering the curve of expansion and contraction of Federal
.MEMBER BANK AND R E S E R V E B A N K C R E D I T
PER car

ISO

130

140

WfYZ&AHK3

130

ISO

120
110

BAKKS
M£MB£*

100

120
110

100

\v . .

80
70

»0
•0
70

•0

40
— LOAfts AMD ivesmt
It
;
ZA&ANKl
tenor tlEJixmt1GMEM5
. H0LDIN
as or* rt.&AN*
f3

20
10

30
20
10

0
1919

1920

1921

Fio. 5.—Since the Federal reserve banks supply only the excess credit after
member banks have exhausted their own lending power, the volume of reserve
bank credit fluctuates much more widely than the volume of member bank
credit.

reserve bank discounts, it should be clearly kept in mind that
loans by the Federal reserve banks represent only the overflow of
loans granted by member banks. The volume of reserve bank
credit starts at close to nothing, rises to a great height in periods
of strain, and then contracts to a small amount as the strain
relaxes. Reserve banks do not deal directly with the business
J The decline in discounts in 1924 was also due in part to purchases of
U . S. securities by the reserve banks (see page 58).

DISCOUNTS

man—they deal with member banks. The demand for credit
originates with business and reaches the reserve bank only when
the member banks have not sufficient funds to finance their customers. This causes the contrast between the reserve bank loan
curve and the member bank loan curve on the chart (see Fig. 5).
The great bulk of the nation's business is done by the member
banks on the basis of their own lending capacity, and even the
great periods of expansion and contraction cause relatively small
waves on the top of the great volume of the nation's credit.
This is brought out by the contrast between the relatively even
course of the member bank loan curve and the rapid rise and
fall of the reserve bank loan curve.
Inter-reserve Bank Borrowing,—An important feature of the
reserve system is inter-reserve bank borrowing, which assumed
large proportions in 1920, and which forms the last link in the
chain that in case of need welds the entire credit structure of
the United States into a unified whole. Each reserve bank in
normal times does business with its own members and depends
upon its own resources, but when the credit conditions in some
parts of the country become more strained than in others, as
was the case in 1920, there is a possibility of mutual aid. Some
of the industrial districts in 1920 and 1921 were not as severely
affected as were the agricultural districts. As a consequence,
when the reserve banks in the agricultural districts found that
they could no longer accommodate their members on the basis
of their own reserves, there were other reserve banks with large
excess reserves which were able to assist the agricultural banks,
and these in turn were enabled to accommodate many more of
their own customers. The seasonal demands for crop-moving
superimposed upon the heavy credit strain made inter-reserve
bank borrowing, in the fall of 1920, very heavy. It was not a
demand for Federal reserve notes that caused the large volume of
inter-district accommodation. In fact, the volume of these notes
in the agricultural districts was not increasing during the period
of the greatest strain. It was chiefly the fact that payments for
crops were slow and at relatively low prices, while payments for
agricultural and other supplies had to be promptly met, so that
funds were constantly moving out of the agricultural districts
and were not offset by equivalent amounts which normally come

FEDERAL RESERVE SYSTEM IX OPERA

77OA'

in payment for the crops. These unfavorable balances of trade
payments caused the member banks in the agricultural districts
to borrow from the reserve banks to meet out-of-district payments,
and it is borrowings for this purpose that exhaust reserves most
rapidly, as is explained on page 92. It is this movement of funds
from agricultural to industrial districts that partly accounts for the
more rapid financial recovery of the manufacturing sections of the
country. A table is here inserted showing the amounts of interreserve bank borrowing and a chart (Fig. 6) illustrates this table:
TOTAL

INTER-RESERVE B A N K ACCOMMODATION* AT E N D OF E A C H

MONTH

DURING 1 9 2 0 AND 1 9 2 1

(In thousands of dollars)
1920

January
February
March
April
May
June
July
August
September
October
November
December

SI14,460
106,156
96,480
163,084
148,552
126,167
148,704
215,455
250,296
260,440
168,435
122,174

1921

S91,365
36,552
16,222
25,942
32,520
47,429
60,412
68,304
60,208
41,950
14,812
none

By the end of 1921 all of the inter-reserve bank loans were
liquidated, and in 1922 there were no inter-reserve bank loans
outstanding.
The Federal reserve system has thus demonstrated that
cooperation between member banks for the purpose of strengthening each other in times of stress is practicable. The system
has helped the country go through a period of great expansion
followed by sharp contraction, with much loss and suffering, to be
sure, but without a panic and without wholesale bankruptcy of
banks and business enterprises. The Federal reserve system
has been tested and found effective as an instrument for the
support of government finance during the war, and as a means

DISCOUNTS

INTERDISTR1CT A C C O M M O D A T I O N
N E T AMOUNT OF ACCOMMODATION BETWEEN FEDERAL RESERVE BANKS
END OF MONTH HOLDINGS, 1920 A N D 1921
A B O V E B A S E L I N E : ACCOMMODATION EXTENDED
B E L O W B A S E L I N E : ACCOMMODATION R E C E I V E D
••BOSTON
NEW Y O R K
ESS PHILADELPHIA

MCLEVELAND
E S 3 RICHMOND
^ATLANTA

EESCHICAGO
^ ^ ST. LOUIS
MINNEAPOLIS

1771 KANSAS C I T Y
E S 3 DALLAS
1 S A N FRANCISCO

Fio. 6.—In 1920 all the reserve banks participated in inter-district accommodation either as lenders or as borrowers. In 1921 the volume of such accommodation was much smaller, and by the end of December of that year—all the
reserve banks had retired the entire amount of their borrowings from other
reserve banks.

FEDERAL

RESERVE SYSTEM

OPERA

77OA'

for helping the country's business over the peak of a business
cycle. The problem upon the solution of which reserve banking
has now entered is how it can best serve business in a period of
more normal fluctuations in business volume and credit demand,
and to what extent it can be instrumental in still further moderating these fluctuations. Upon the solution of this problem
depends the future character and scope of Federal reserve
banking in the United States.

CHAPTER IV
DISCOUNT RATES
In central banking tradition the principal phase of credit
policy is the determination of the discount rate. American
experience with the reserve banks has been relatively brief,
extending, as it does, only over a decade during a part of which
the war interfered with the development of a rate policy formulated solely with a view to prevailing credit and banking conditions. Much of the discussion of discount rates in this country has,
therefore, been based on analogies with the experience of foreign
countries, and especially of Great Britian, where the official
discount rate of the Bank of England has long been an important
factor in the money market, and where the technique of credit
control through the discount rate has reached the highest degree
of development. It is proposed in this chapter to summarize
the history of discount rates in the Federal reserve system,
to describe the place of the reserve bank rate in the general
structure of money rates, to point out the conditions that distinguish the situation in this country from that in England, and
to outline some of the principles of rate policy that appear to
have grown out of American experience during the first decade of
the operation of the Federal reserve system.
Discount Rate Policy Prior to the Autumn of 1919—During
the first years of the system's operation prior to the entry of the
United States into the World War there was but little borrowing
by member banks from the Federal reserve banks, a large part
of whose operations consisted in the purchase of acceptances
and government securities. The reduction of reserve requirements for member banks by the Federal Reserve Act and the
large gold imports resulted in an abundance of loanable funds at
the disposal of member banks which, therefore, were applying
for but little accommodation at the reserve banks. In these
circumstances the rates charged by the reserve banks were of
39

FEDERAL

RESERVE

SYSTEM

OPERA

77OA'

relatively small importance and need not be discussed in this
study. During the period of our participation in the war, when
the government was floating its war loans, and for about a year
after the armistice when war financing continued to be the
principal factor in the credit situation, the Federal reserve banks
were guided in their rate policy chiefly by the necessity for
supporting the Treasury. The level of discount rates was kept
low and preferential rates were granted on loans secured by
government obligations. As stated in the preceding chapter, a
large part of the borrowing at the reserve banks during 1917,
1918, and the first half of 1919 was of this character, and the
discount rate was thus not used as a means of credit control—
but as a method of helping the government to raise the funds
necessary for the prosecution of the war. It was not until the
summer of 1919 that the use of the discount rate as a means of
credit control received serious consideration.
Advances in Discount Rates in 1919 and 1920—It became
apparent early in 1919 that the recession in prices and the
volume of business activity, which had followed the armistice,
were short-lived, and that the country was entering upon a
period of rapid business and credit expansion and of price
advances. There was evidence of a growth of speculative activity, and the Federal Reserve Board issued several warnings to the
reserve banks and the member banks pointing out that a continued growth of bank credit, especially for speculative purposes,
would endanger the soundness of the banks of the country.
Little heed was paid to these warnings, however, and the growth
of the volume of bank credit in use continued at a rapid rate.
Thus total loans of all the member banks increased from about
$14,000,000,000 on Mar. 4, 1919 to §15,500,000,000 on June 30,
and §17,500,000,000 on Nov. 17 of the same year, an increase of
25 per cent in a period of a little more than 9 months. During
the same period the earning assets of the Federal reserve banks
increased by about $700,000,000. While the Federal Reserve
Board and the reserve banks were cognizant of this credit expansion and fully realized its dangers, they did not feel free to raise
discount rates, as at that time the Treasury was engaged in
the flotation of the Victory loan upon which the instalments
were still being paid by the purchasers. It was not until Novem-

DISCOUNT

RATES

ber, 1919, that the first rate advances were made by the Federal
reserve banks.
On Nov. 3, the Federal Reserve Bank of New York raised its
discount rate on commercial paper from 4 to 4 % per cent, and
rate advances were also made by other Federal reserve banks.
These advances have an important historical significance, as
they mark the beginning of discount rate action independent of
the interests of the Treasury and thus are the first step in the
direction of reserve bank policy based upon prevailing credit
conditions. The establishment of higher discount rates was
taken by the public to mean that the Federal reserve system was
seriously concerned about existing credit trends and was prepared
to take such action as the conditions might demand. There
followed a flurry on the stock exchange and an abrupt rise in
call money rates to 30 per cent, but credit expansion both at
member banks and at the reserve banks continued.
In view of these developments, together with the fact that
gold was leaving the country in considerable quantities, as the
result of withdrawals by South American and Oriental countries
of balances built up during the war,1 the Federal reserve system,
early in 1920, considered the desirability of further rate advances.
At that time the ratio of reserves, at the reserve banks, to the
combined deposit and note liabilities was only about 42 per
cent, and was thus approaching its legally required minimum,
and at some of the reserve banks it would have been below the
minimum had they not built up their reserves by borrowing
from other reserve banks. Toward the end of January a general
advance in discount rates was put into effect, the rate in New
York rising from 4 % to 6 per cent.
The same tendencies, however, continued to be manifest in
the credit situation during the spring months of 1920. At a
meeting in May between the Federal Reserve Board, the Federal
Advisory Council, the governors of the Federal reserve banks,
and the banking directors (Class A) the credit situation was
carefully canvassed and it was decided that further rate advances
were necessary. At this conference, the minutes ,of which have
since been made public,2 the governor of the Federal Reserve
1
2

Between Sept. 10, 1917 and July 9, 1919, gold exports were prohibited.
Senate Document 310, Sixty-seventh Congress, Fourth Session.

FEDERAL RESERVE SYSTEM

OPERA

77OA'

Board stated that the banks of the country were facing a serious
situation as the result of a rapid expansion of credit, and the
prevailing wave of extravagance and speculation, that a turn
in the business situation was inevitable, that the Federal reserve
banks must cooperate with other banks and with the public to
bring about gradual liquidation, but that there must be no
attempt at radical or drastic deflation which would result in a
serious disturbance of business. The conference expressed
itself in general agreement with the governor, and the governors
and directors upon returning to their banks necommended to the
boards of directors a general advance of the discount rates. On
June 1 the rate at the New York bank .was advanced to 7 per
cent; at about the same time rates at the other reserve banks
were raised to 6 or 7 per cent, and four of the banks adopted
systems of progressive rates.
Progressive Rates.—Progressive rates were authorized by an
amendment to the Federal Reserve Act passed during the preceding winter, which gave the reserve banks the right to charge
individual member banks a graduated rate of discount increasing
in proportion as the volume of their borrowing above a specified
amount, known as the basic line, increased. The principle of
progressive rates is in accordance with the proviso in the Act
that credit extended to each member bank shall be granted
"with due regard for the claims and demands of other member
banks." The adoption of progressive rates in 1920 was for the
purpose of distributing Federal reserve bank credit more evenly
among the member banks, and of discouraging excessive borrowings by a small number of banks. The basic lines were determined differently in the several banks adopting progressive rates,
but the principle and purpose of the system was the same in all
cases. Though these rates accomplished some of the purposes
for which they were adopted, and resulted in a wider and more
equitable use of reserve bank credit, they caused hardship to some
individual member banks and were probably not worked out and
administered in the most effective manner. The rates were
in force a relatively short time, and when they were abolished
and flat rates substituted all charges to any member bank in
excess of 12 per cent wrere refunded. The Agricultural Credits

DISCOUNT

RATES

Act of 1923 repealed the amendment authorizing the charging
of progressive rates.1
Reduction of Discount Rates since 1920.—For about a year
the high rates established in May, 1920, continued to be in
effect. In the meantime the country passed from a period of
business and credit expansion and price advances into a period
of business depression, credit liquidation, and falling prices.
Though the rates were raised in May the use of member bank and
reserve bank credit continued to grow until the autumn months
of 1920. Prices, however, began to decline rapidly in June,
had fallen by about 27 per cent before the end of the year, and
continued to decline throughout 1921. While bank loans to
domestic borrowers were being repaid in 1921 as a result of lower
prices and smaller currency and credit requirement of business,
there was also a large volume of liquidation of advances to foreign
countries through the heavy inflow of gold which began late in
1920, came in large volume in 1921, and has continued to
the present time (August, 1924). The reserve position of the
reserve banks was rapidly improving, and the volume of interreserve bank accommodation was constantly diminishing. In
view of all these developments the reserve banks began, in the
spring of 1921, a gradual reduction of their discount rates. The 7
per cent rate, which had been in effect at six of the reserve banks,
was discontinued by May, 1921, and the rates continued an
uninterrupted decline for over a year, so that at the end of July,
1922, the rates were 4 per cent in Boston, New York, and San
Francisco, and
per cent at nearly all the other banks. The
rates prevailing at all the reserve banks at the end of each month
from November, 1919 to October, 1924, are shown in the table
on page 53.
In the early months of 1923 the rates at Boston, New York,
and San Francisco were raised to 4 ^ per cent in view of the fact
that at that time there was evidence of speculation and expansion
at the financial centers, and from March, 1923 to May, 1924
a uniform rate of
P®r cent prevailed at all the reserve banks
and on all classes of paper. This was the only period of
1 For discussion of the experience with progressive rates see 67th Congress,
4th Session, Senate Document, 291, reprinted in H. P. WILLIS' " T h e
Federal Reserve System," p. 1354.

FEDERAL RESERVE SYSTEM

OPERA

77OA'

such uniformity of rates in the history of the Federal reserve
system.
In 1924, the continued inflow of gold and the reduced demand
for currency caused by a recession in the volume of business
activity resulted in extremely easy conditions in the money
market, and in the lowest level of money rates in more than a
decade. In view of these conditions the discount rate at the
New York reserve bank was reduced gradually from 4Yi to 4,
then to
and finally to 3 per cent, the lowest rate since the
establishment of the system, and rates at all the other reserve
banks were reduced to 4 or 3 K per cent. At its present level,
the discount rate at the New York bank is lower than the rate at
any other central bank in the world.
Place of Discount Rate in Rate Structure.—In the general
structure of money rates the discount rate of the Federal reserve
banks has not as yet found a definite or permanent position, but
its relationship to certain important money rates is gradually
becoming established. The rate charged by Federal reserve
banks on discounts for member banks is almost invariably
lower than the rate charged by the latter on loans to their
customers. The spread between these rates differs at different
times and particularly in different places, but almost never does
the rate charged by the reserve banks exceed the rate on customers' loans. Thus, for instance, in December, 1923, when the
discount rate was uniformly 4 ^ per cent at all Federal reserve
banks, the average rate charged by member banks on paper
rediscounted with the Federal reserve banks averaged 5.60 per
cent and varied by districts as follows:
PER
CENT
BOSTON

PEK
CENT

5.30

CHICAGO

6.00

N E W YORK

5.38

ST. LOUIS

6.03

PHILADELPHIA

5.51

MINNEAPOLIS

7.99

CLEVELAND

5.71

KANSAS C I T Y .

7.04

RICHMOND

6.10

DALLAS

8.21

ATLANTA

6.20

SAN FRANCISCO

5.86

In the financial centers, where there is keener competition
between banks for borrowers, rates charged to customers are
lower and the spread between customer rates and the reserve
bank discount rate is less than 1 per cent, while in the agricultural

DISCOUNT

RATES

districts rates are much higher and the spread is as much as 4
per cent. That this difference between Federal reserve districts
is in part a reflection of differences between banks in large
cities and in country towns is indicated by the fact that during
the same month the average rate charged to customers was
5.44 per cent in cities of 100,000 or more inhabitants, 6.34 per cent
in cities between 15,000 and 100,000 inhabitants, and 7.54 per
cent in cities and towns of less than 15,000 inhabitants. This
difference between city banks and country banks is due in part
to the smaller competition between country banks, partly to
the greater risk incurred by banks in the less developed parts
of the country, and partly to the relatively greater cost of conducting the banking business in country districts where the volume
of operations is smaller and overhead expenses per dollar loaned

F i g . 7.—The discount rate of the New York Federal Reserve Bank is generally between the yield on treasury certificates and the open-market rate on prime
commercial paper.

Discount rates are thus universally lower than rates on customer loans. The position of the discount rate in relation to the
open-market rate on prime commercial paper and to the yield
on Treasury certificates in the New York market is illustrated by
the chart (Fig. 7). The discount rate is generally below the
commercial paper rate and above the yield on Treasury certifi-

FEDERAL RESERVE SYSTEM

OPERA

77OA'

cates; it is also above the rate on bankers' acceptances, which is
only slightly above the yield on certificates. Thus the discount
rate tends to be higher than the rate on the most liquid kind of
short-term paper, and below the rate on one-name commercial
paper. The chart shows that when early in 1922 the commercial rate fell below, the discount rate, the latter was reduced
from 4M to 4 per cent, and that in February, 1923, when this
spread was widening, the discount rate was advanced once more
to 4}4 per cent. In 1924 the series of reductions in the discount
rate at the New York reserve bank has been preceded by declines
in open-market rates. The inference from these observations
is not that the discount rate is deliberately adjusted to market
rates, but that both rates reflect the influence of the same set of
financial developments, and that for the past 3 years a fairly
definite relationship has existed between the different interest
and discount rates.
Comparison with the Bank of England Rate.—Bank rate in
England has traditionally been above the open market-rate, and
this relationship has been considered as an essential part of
credit administration by a central institution. This rate relationship is based on the principle that the central bank must not
be resorted to by the market, except at times of real necessity
and at some expense to the borrower, who must pay more for
money obtained from the central bank than he receives from his
customers on his own loan. There are, however, important
differences between the banking structure and practice in Great
Britain and in the United States. In London the joint stock
banks do not rediscount paper with the Bank of England.
Instead, when their funds are low they call their loans to brokers
and discount houses, and these turn to the Bank of England to
obtain the funds needed to pay their borrowings from the joint
stock banks. The paper that is rediscounted with the central
bank consists almost entirely of acceptances bearing a rate lower
than bank rate, as the official minimum rate charged by the Bank
of England is called. Line of credit loans by the joint stock
banks to their customers in England are made in the form of
book entries, or overdrafts, which do not result in the creation of
negotiable instruments and are, therefore, not available for
rediscount. These advances generally bear a rate higher than

DISCOUNT

RATES

bank rate, and in many cases customers have a definite agreement with their banks that their advances will bear a rate 1 or
\XA per cent above bank rate. Thus the class of loans in England,
corresponding to those on which member banks borrow from the
Federal reserve banks in this country, bears a higher rate of
interest than is charged by the central bank and, as seen above,
acceptances in this country, which correspond to the paper
rediscounted in London with the Bank of England, bear a lower
rate than the discount rate of the reserve banks. It appears,
therefore, that when comparison is made between similar classes
of loans, the rate structure in this country and in England is
essentially similar. There remains, however, this difference:
In London, borrowing from the Bank of England is done on paper
bearing a rate below bank rate, while in this country, borrowing
from the reserve banks is done on paper bearing a higher rate
than the reserve bank discount rate. This difference arises
partly out of the different importance of acceptances in the London
and in the New York market, and partly out of the difference in
banking structure and tradition in the two countries. From one
point of view, however, this is merely a difference in technique: In
both markets when money is borrowed from the central bank, it
bears a rate higher than the rate on the most liquid form of openmarket paper, but lower than the rate charged to customers by
commercial banks. In the final analysis the principal difference
is that in England there is one, highly centralized money market
with the Bank of England, an independent, privately owned
institution, at its apex, while in this country there are twelve
Federal reserve districts, with highly different economic and
financial conditions, served by twelve autonomous reserve
banks, which are owned and managed, with government participation and supervision, by the member banks. The conclusion
from this comparison is, that while there are many analogies
between banking conditions and practices in this country and in
England, there are sufficient differences in the nature of the
money market and in the character of services rendered by the
Bank of England and the Federal reserve banks, to make it
impossible to follow British precedents in American banking
practice. The fact is that, though the British maxim that
bank rate should be higher than market rate has generally been

FEDERAL RESERVE SYSTEM IX OPERA

77OA'

quoted with approval in American banking discussion, in practice, Federal reserve bank discount policy has been adjusted
to American conditions to which this maxim has not been
applicable.
Relation of Discount Rate to Member Bank Earnings.—Since
member banks can borrow at the reserve banks at a lower rate
than they receive from their customers, the question arises why
member banks do not borrow as much as possible on the basis of
available eligible paper and United States securities in order to
profit by the margin between the discount rate and their own
rate to customers. This is due in part to a banking tradition
which has not been altogether destroyed by war-financing experience, that a bank must not borrow, except in emergencies, and
that heavy borrowings by a bank reflect unfavorably on its
standing. It is also due to the fact that the Federal reserve
banks disapprove the practice of borrowing reserve bank funds,
which are a joint reserve of credit belonging to all the members,
for the purpose of increasing the earnings of an individual bank.
When a reserve bank finds that a member bank is borrowing
for such a purpose it uses its influence against the continuance of
such borrowing. But the reserve banks, especially at financial
centers, are not in a position to know in every case to what purpose funds obtained from them are put, and the fact that borrowing from the reserve banks for profit is a rare occurrence needs
further explanation. That it is infrequent and unimportant in
amount is evident from the fact that the volume of discounts at
the reserve banks declines rapidly whenever the member banks
have funds available for the reduction of their borrowings. On
Aug. 27, 1924, for instance, total discounts of all the member
banks were only §263,000,000, compared with §816,000,000 a
year earlier, and nearly §3,000,000,000 at the peak of credit
demand in 1920. The chart (Fig. 8) shows the relation between
the discount rate at the Federal Reserve Bank of New York and
the volume of discounts for member banks. It brings out the
fact that member bank borrowings continued to increase in 1920
after the rate was advanced to 7 per cent, and continued to
decline in 1921 and 1922 and also in 1924, in spite of successive
rate reductions. The volume of borrowing at the reserve banks
is thus not immediately and directly responsive to changes in the

DISCOUNT

RATES

discount rate as it would be if member banks were in the habit of
borrowing as much as they could lend at a rate higher than the
discount rate.
The reasons why banks do not, to any great extent, use reserve
bank funds to increase their earnings are different in the financial
centers and in other sections of the country. In the financial centers, where, as has been pointed out, the spread between discount
rates and customer rates is relatively narrow, the banks find that,

Fio. S.—Holdings of discounted paper at the New York Reserve Bank continued to increase after the discount rate was raised to 7 per cent in 1920—and
continued to decline between 1921 and 1924, with a rally in 1922, while the
rate was gradually reduced to 3 per cent.

as a rule, they cannot borrow from the reserve banks with
profit after allowance is made for the expenses of the loan and of
the resulting deposit account, except when the credit requirements of their customers are in excess of funds available out of
the banks' own resources. In a period like the summer of 1924,
when money conditions were so easy that the banks had difficulty
in finding profitable employment for their funds, borrowings
from the reserve bank in New York were reduced to a negligible
amount. On the other hand, during the period of the greatest
credit demand in 1920, member banks in certain cases borrowed

FEDERAL

RESERVE SYSTEM

OPERA

77OA'

from the reserve bank at 7 per cent in order to accommodate
important customers of long standing with loans at lower rates.
In the country districts, where a much wider spread exists
between the discount rate and rates charged to customers, there
is a more definite limit to the credit required by the business of
the community, and member banks cannot lend money borrowed
from the reserve bank in excess of local needs without reducing
the general level of rates and thus cutting into their own earnings.
It is true that the banks could borrow from the reserve bank and
invest the money in the open market, but the margin between
discount rates and open-market rates is generally insufficient
to make such a transaction profitable. The fact is that in practice, as well as in theory, on account of tradition, reserve bank
policy, and conditions in the money market, the funds borrowed
from the reserve banks are used " t o accommodate commerce
and business/' and not for the profit of any individual member
bank.
Summary of Experience with Discount Rates—Discount
rate policy independent of Treasury needs has not had a sufficiently long period of development in this country to result in
the formulation of definite rules upon which rate changes are
based. Certain observations, however, may be derived from the
system's experience during the past 5 years. It is apparent, in
the first place, that discount rates are advanced when the reserve
position approaches its legal minimum, as was the case in 1920.
On the other hand, under present conditions of abnormal gold
movements resulting from the disorganization of international
financial relations, the mere existence of a high reserve ratio is not
considered a sufficient reason for a reduction of discount rates.
Thus rates were advanced in 1923 at three reserve banks, in
spite of a high level of the reserve ratio, and subsequently
remained unchanged for over a year at all reserve banks at a
time when the reserve ratio was rising. In existing circumstances
the reserve ratio has no direct bearing on the domestic credit
situation, as has been pointed out by the Federal Reserve Board
in a review printed in Appendix K .
Discount rate advances have been made in the past for individual member banks, which at a time of credit strain were using
more than their share of reserve bank credit. The principle of

DISCOUNT

RATES

graduated charges, or progressive rates, was considered to be in
accordance with the spirit of the Federal Reserve Act and with
the purposes of the establishment of the Federal reserve system,
since the reserve banks could not supply all their members with
their just quota of assistance out of the common fund if individual
members were allowed to use up a disproportionate amount of
available funds. Under the present law, however, since the
repeal in 1923 of the amendment authorizing progressive rates,
the reserve banks will be able to cope with such a situation, if
it arises again, only by the use of discretion in granting accommodation to certain banks and not through the application of variable rates to the borrowings of individual member banks.
An important relationship exists between reserve bank discount rates and money rates prevailing in the open market.
Since 1919, when government financing ceased to be the dominant factor in rate policy, discount rates at the reserve banks
have not been, for any length of time, out of line with openmarket money rates, occupying, most of the time, a position
above the yield on short-term government obligations and the
rate on acceptances, and below the rate on commercial paper
and on line of credit loans of member banks to their customers.
Theie is nothing sacred or final in the present rate structure, but
it appears to be adapted to credit conditions prevailing in the
United States during the past few years. To what extent
market rates are influenced by changes in the discount rate, and,
conversely, how much changes of rates in the open market are
reflected in reserve bank rate advances or declines is a problem
that requires much further study before a definite conclusion
can be reached. It suffices for the present purpose to call
attention to the existence of the relationship without undertaking
to determine the extent and manner in which it is a causal
relationship.
During the past few years, and particularly since 1922, there
has been an increasing tendency to relate reserve bank rate
policy more directly to the prevailing relationship between the
volume of production, employment, and trade, on the one hand,
and changes in the volume of bank credit, on the other. Discount policy of the reserve banks in 1922 and 1923, and the
development of guides to credit policy were discussed in the

FEDERAL

RESERVE

SYSTEM

OPERA

77OA'

Tenth Annual Report of the Federal Reserve Board, portions of
which are reprinted in the Appendix on page 327. At times when
the volume of credit is increasing in response to the growing
volume of physical production and trade, in other words, when
the demand is for productive credit, it has been considered
unnecessary to restrain the growth of credit; and it is only at
times when production has been constant or receding and credit
growth has represented an increase in speculative activity and
in competitive bidding for a limited supply of goods, that it has
been deemed advisable to consider the desirability of rate
advances.
In the same report the Board discusses the relation between
credit and prices and reaches the conclusion that, though there
is an intimate relation between changes in the volume of credit
in use and in the price level, this relationship is not one of cause
and effect, and that price changes, which reflect an accomplished
fact, are not an adequate guide to credit policy which, in order
to be effective, must be timely and must anticipate conditions
that tend ultimately to result in changes of the price level. It
is to the development of more complete data on current business
trends, and to an improved technique of interpretation of their
relation to credit conditions, that the system is looking for the
gradual establishment of guides to discount rate policy.
It should be mentioned in conclusion, that during the past 2
years there has developed a more complete adjustment of discount rate policy to open-market operations of the reserve banks,
and that these two phases of reserve bank credit policy must be
considered as mutually supplementary. A discussion of openmarket policy is presented in the following chapter.

DISCOUNT

RATES

DISCOUNT H A T E S ON COMMERCIAL, AGRICULTURAL, AND LIVESTOCK PAI>ER
WITH A M A T U R I T Y FROM 3 1 TO (50 D A Y S :

1919-1924

(Rate prevailing at the end of each month)
e
b.

Month and year
c

C S
Ji °S tei °<y
^ o ^
H o ti o
— B > h.
5 f"o
ZJ w
c;
—
X" C. - c. J C.

5
.- 5 C
o c •3 e c
A S
" o 3
5
« ° c o =
u a«O
= ^ -H
U KI -1 h
c; . c .S u § s

1919:
November-December
1920:
January
February-May
June-October
November-December. . . .
1921:
January
February—March
April
May
June
July
August
September
October
November
1922:
January

4K 4H
G
6
7
7
7
. 7
G
G
G

March
April
May
June
July
August-December
1923:
January
February
March-December
1921:
January-April
May
June
July
August-September
October-December

G
0
G
7

G
G
7
7

G
G
6
G

G
6
7
7

G
6
G
G

5
6
0
G

4^
G
G
6

7
7
7

G
G
G
G
G

5
5

5M
5

G
G
0
G
G
G
G
G
G
5
5

G
G
G
G
G

4H
AH

G
G
G
G
G
G
G
G
G
5

G
7
7

7
7
7
G
6
G
G
0
G

7
7
7
GK

5H
5

6
G
G
G
6
G
G
G
G

7
7
7

m
M

G
G
G
G
G
G
5K

5
4>*

5
5

m
G

4>$
4^

4>*
4H

4Vz
4«

4H 4H

4
4
4
4

4>S
4
4
4
4

4H
4M
4M
4 H
4M

4M
4M

4H 4H 4}6
4
4H 4H

3H 3

5
f>
5
5
r»
5

4H
4H

4>a

3>*
3>S
3>SJ
3 K

4H 4H 4 «

4
4
3H
3H

5
5
5
5
5
5

4M
4
4
4
4

4M
4H
4M
4H

4W
4
4
4
4

4H 4>s
4 H 4H
4«

5
5

5
5
5
r>
5
5
5
4>*

5
5

VA
5K

oH
m

5
5
5

4M
4M
4M

G
5K

4M
4M
4>*
4M
4M

4H
4H

OH
G
G
G
6
G

1M 4 H
4>i 4 H
4 M 4>S
4H 4H
4M 4 H
4 H 4M

W
4H

3>a
3

CM
6
6
G
6
5
5

5
5
4H 4 K
4M 4 H
4H 4 H
4 >S 4 M
4 ^ 4H
4>S 4>2

4>i
4>S

3>2

G
6
0
G

4H
4H iy2
4
4
4
4
4
4

4H
W

G
G
G
6

4>S

G
G
G
G

4H 4H *H
4H

G
G
7
7

5H 5 M
r>H 5 M
5
5
5
5
4 H 4H
4H 4H

4«

4
4
4

4
4
•1

4M
4M
5
5
4
4
4
4
4H
4M
4
4
3>S

1 The following banks had progressive rates in effect for the periods indicated: Atlanta,
from M a y 1, 1920, to Nov. 1, 1920; St. Louis, from M a y 20, 1920, to Juno 23, 1921; Kansas
City, from April 19, 1920, to Aug. 1, 1921; Dallas, from M a y 21, 1921, to Feb. 15, 1921.

CHAPTER V
OPEN-MARKET OPERATIONS
In discounting paper the role of the reserve banks is purely
passive as the initiative in the transaction lies entirely with the
member banks. In order to enable the reserve banks to operate
in the market on their own initiative when conditions make it
desirable, the Federal Reserve Act in Sec. 14 gives these banks
authority to "purchase and sell in the open market, at home or
abroad, either from or to domestic or foreign banks, firms, corporations, or individuals, cable transfers and bankers' acceptances and bills of exchange of the kinds and maturities by this
Act made eligible for rediscount;" and also to deal in gold coin
and bullion, and to buy and sell obligations of the United States
government and certain specified kinds of securities issued by
state and local governments. It is to be noted, that the reserve
banks do not have authority to purchase corporate securities,
nor to buy in the open market ordinary promissory notes, of the
kinds that constitute the bulk of the paper discounted for member banks. The two classes of paper to which open-market
operations of the reserve banks are restricted come, broadly
speaking, under two general heads: acceptances, and government securities.
The Federal Reserve Banks and the Acceptance Market.—
Acceptances arc a form of credit which, prior to the enactment
of the Federal reserve law, was hardly known in the United
States. Business in this country was, and still is, usually transacted on the basis of open book accounts or of promissory
notes given by the purchaser of goods to the seller, who in turn
discounts the notes with his bank. A large part of bank credit
extended to business men is in return for such notes or one-name
paper, which is the staple credit instrument in our money market.
As compared with the promissory note the acceptance, which is
in much wider use in foreign countries than in the United States,

OPEN-MARKET

OPERATIONS

lias the advantage of greater negotiability and liquidity. An
acceptance is a bill drawn by the seller of goods upon the purchaser or upon his bank, and accepted through indorsement
either by the purchaser or on his behalf by his bank. In the
former case it is called a trade acceptance and in the latter a
banker's acceptance. In either case it has the signature and
backing of the credit both of the purchaser or his bank and of the
seller of the goods, and in case it is a banker's acceptance
it partakes of the increased prestige and credit of the bank,
which by accepting it has guaranteed its liquidation on
maturity.
One purpose of the introduction of acceptances into the system
of credit used in the United States was to create a broader discount market. It was expected that the existence of a large
volume of credit instruments of unquestioned liquidity and
negotiability, which could be bought and sold in the open market
somewhat like stocks and bonds, would exert an equalizing influence upon interest rates throughout the country. The acceptance was intended also to afford employment for temporarily
idle funds of banks and other institutions and individuals, and
to provide to business organizations a means of obtaining funds
to finance certain of their operations without borrowing at their
regular bank or banks. Up to the present time the bulk of
acceptances executed in this country is for the purpose of financing transactions in foreign trade.
In order to encourage the development of the acceptance
market the Federal reserve banks, and especially the Federal
Reserve Bank of New York, have always stood ready to buy or
discount acceptances offered for sale, and have made it possible
for acceptance houses and bill brokers to operate with a relatively
small capital in the assurance that they can always dispose of
their acceptance holdings to the Federal reserve bank. In 1919,
when foreign trade was at its height and money rates were high,
the acceptance holdings of the Federal reserve banks reached
about §600,000,000. After that time they declined to only
about §20,000,000 in the middle of 1921, owing partly to the
reduced volume of foreign trade and consequently of acceptances
outstanding, and partly to the easier money conditions which
made it possible for dealers to obtain funds for handling accept-

FEDERAL RESERVE SYSTEM

IX OPERA TIOX

anccs without assistance from the reserve banks. Another
factor was the increasing familiarity of the investing public with
acceptances which made it easier for the dealers to find investors
for the bills in their possession. From the minimum of about
S20,000,000 in the middle of 1021, acceptance holdings of the
reserve banks increased again to about 8250,000,000 at the end
of 1922, chiefly because the stiffening of money rates induced
dealers to dispose of acceptances to the Federal reserve banks,
but also for the reason that the Federal reserve banks, having
large amounts of excess funds available and but a small volume
of discounts, purchased acceptances on their own initiative.
Throughout 1923 the reserve banks held a substantial amount of
acceptances, and in the latter part of the year they further
increased their holdings so that on Dec. 2G the total amounted
to §355,000,000. In 1924 acceptance holdings of the reserve
banks declined as a result of the extreme ease in the money
market, and at the middle of August the total volume of bills
bought in the open market was only SIS,000,000. Since that
time acceptance holdings increased once more in response to the
autumn demand for credit and currency and at the end of
December the total was 8387,000,000.
Acceptances of Agricultural Cooperative Associations.—A
class of acceptances, which has recently become of some importance, is that of agricultural marketing associations. In its
desire to be of assistance to agriculture the Federal Reserve
Board, during the past two or three years, has made several
rulings favorable to drafts of such associations. Whenever
these associations are organized according to the Sapiro Plan,
whose principal characteristics are that they are mutual nonprofit-making organizations and that they acquire property
rights in the products when these are turned over to the association, the paper of such associations, when accepted by a bank,
has been held by the Board to be eligible for purchase or rediscount with the reserve banks as agricultural paper with a maturity of 6 months (since 1923—9 months) when the proceeds of the
acceptance are to be used for agricultural purposes, and as
commercial paper with a maximum maturity of 90 days when
the proceeds are to be used for other purposes. Some of the
provisions of the Agricultural Credits Act of 1923 have further

OP EX-MA RKET

OPERA

TfOXS

expanded the system's authority in the purchase of acceptances
of cooperative associations.1
Acceptance Market Still Limited in Scope—While the Federal
reserve banks have done whatever they could towards the
encouragement of the acceptance business, and while there has
been some development in this direction, the market for accepted
bills being considerably wider than a few years ago, acceptances
still constitute a minor part of our credit machinery which
continues to be based primarily on the one-name promissory
note. In this respect credit conditions here differ materially
from those prevailing in England, where there is a constant supply
of highly standardized acceptances with a well-organized market,
and where, when money becomes tight, a stream of these acceptances flows into the Bank of England. A different type of credit
machinery has grown up in this country and appears to be
adapted to the requirements of our business organizations,
with the consequence that the acceptance market has had a
relatively slow growth and that no discount market national in
scope has as yet been established. Interest rates vary in
different sections of the country, and there is no evidence of a
tendency toward standardization of these rates. In this particular the accomplishment of the Federal reserve system has not
come up to the most sanguine expectations of the framers of
the Act.
Purchase and Sale of United States Securities.—Turning
now to the other class of open market operations in which the
reserve banks are authorized to engage, the purchase and sale
of government securities, it is found that until the past 2 or 3
years the reserve banks' dealings in government obligations were
on a limited scale, though, as has been pointed out before, the
reserve banks during the Liberty and Victory loan campaigns,
and more recently, have carried large amounts of paper secured
by government obligations.
Such government securities as were purchased were chiefly
of three types: Pitt man certificates; temporary Treasury certificates to cover overdrafts; and government obligations acquired
under repurchase agreements. Pittirian certificates were held
1 See Appendix E on Agricultural Credit Facilities under the Federal
Reserve Act.

FEDERAL

RESERVE

SYSTEM

OPERA TIOX

as security for Federal reserve bank notes in circulation, as is
explained on page 77. Temporary certificates are bills issued
by the Treasury of the United States to cover overdrafts, principally around income tax dates when large amounts of Treasury
tax certificates come clue and must be promptly redeemed by the
government, while income tax checks may require several days
for collection. These overdraft certificates are renewed each day
and generally do not remain outstanding for more than a few
days. Government obligations acquired under repurchase
agreement represent securities bought from a non-member bank
or a bill broker with the understanding that these securities will
be repurchased by the seller after a short period, usually 15
days. The volume of such securities, the purchase of which
constitutes in substance a method by which others than member
banks can borrow from the reserve banks, has not been large at
any time.
From the organization of the Federal reserve system to the
closing months of 1921, government securities, except for the
periodical brief appearance of overdraft certificates, were a
fairly constant item in the earning assets of the reserve banks,
and did not fluctuate in response to credit conditions. It was
not until the early part of 1922 that this item in the statement
began to show considerable fluctuations. At that time member
banks were rapidly repaying their borrowings from the reserve
banks and the latter's total earning assets were at a relatively
low level and rapidly declining. In these circumstances the
reserve banks invested in government securities in considerable
volume partly for the purpose of assuring to themselves sufficient
earnings to meet their expenses and dividends. During the
preceding years of rapid growth the system's expenses had become
heavy, largely on account of services not connected with the
discounting of paper; and the continuance of these expenses
at a time when earning assets were rapidly diminishing induced
the reserve banks to endeavor to build up their earnings through
the purchase of government securities.
Developments in 1922 and 1923.—Experience in 1922, however,
indicated that earning assets cannot always be increased through
the purchase of securities in the open market. There appeared
at that time to be a definite relationship between Federal reserve

OPEN-MARKET

OPERATIONS

bank purchases in the open market and the volume of discounts.
As the volume of securities increased there was a corresponding
decline in discounts, and total earning assets remained relatively
constant. This was for the reason that total earning assets
of the Federal reserve banks, including their discounts, acceptances, and government securities, measure the volume of reserve
bank credit in use, and this total is continuously in process of
adjustment to the demand for such credit. At a time when
there is a large volume of discounts for member banks and a
diminishing demand for credit and currency, the addition of
funds to the market through the purchase of securities increases
the volume of surplus funds and leads to further liquidation of
indebtedness to the reserve banks. The chart (Fig. 9) shows
MILLIONS OF DOLLARS

MILLIONS OF DOLLARS

t
COMPOSITION OF
FEDER/\L RESERVE BANKASSETS
1 Total Earrjing Assets

1200

^Discounts
600

if/
V a V - Z / X AJ |i'1 KJ
AJr
V
1
' \t .
hi ^ Vv Acceptances
-\* U.S.Sec.., w
/ \ AK/»/
V
V
/

. . .

1922

1923

600

1924-

FIG. G.—During 1922 and 1923 the volume of earning assets of the Federal
reserve banks remained fairly constant, but their composition changed, as
purchases in the open market were accompanied by reductions in discounts, and
sales in the open market—by increases in discounts. In 1924 discounts declined
more than open-market purchases increased, with the consequence that the
volume of earning assets tended downward.

graphically the compensatory movement of discounts and openmarket securities in 1922 and 1923. After the middle of 1922,
and especially in the early part of 1923, when discounts at the
reserve banks were increasing, and the reserve banks began
to dispose of their security holdings, the changes in the volume

FEDERAL

RESERVE

SYSTEM

IX OPERA TIOX

of the two classes of reserve bank credit continued to offset each
other, and total earning assets of the reserve banks showed
relatively narrow fluctuations. Thus for a period of more than
a year, the total volume of reserve bank credit fluctuated around
81,200,000,000.. and remained within a range of from 81,000,000,000 to 81,350,000,000. During that period discounts fluctuated
between 81,000,000,000 and less than 8400,000,000, and government security holdings between 8225,000,000 and 8000,000,000.
This relationship is explained by the fact that in 1022, when
the reserve banks purchased government securities, this resulted
in an inflow into the credit reservoir of reserve bank funds in
excess of the requirements of the business community, and the
excess was utilized to reduce the indebtedness of member banks
to the reserve banks, i.c., in a decrease in the volume of discounts.
On the other hand, in the early part of 1923 when the reserve
banks disposed of their open-market holdings, the result was a
shortage of funds leading to the need of additional discounts by
member banks. During the period under discussion, therefore,
there was a constant adjustment of the amount of reserve bank
credit required and the amount in use, with the consequence
that purchases and sales of the reserve banks in the open market
were balanced in the total of earning assets by equivalent declines
and increases in the volume of discounts held.
Open-market Policy a System Matter.—The compensatory
relationship between open-market purchases and discounts which
obtained for the system as a whole in 1922 and 1923 did not,
however, prevail for each individual reserve bank. There were
large purchases of government securities by certain reserve banks
in the interior without corresponding declines in discounts for
their own member banks. But the fact that for the twelve
banks combined earning assets remained comparatively constant
throughout this period, indicates that a corresponding liquidation took place at other reserve banks. This was due largely to
the concentration of open-market dealings at the financial
centers. Purchases and sales of open-market obligations were
effected largely in the New York market, and the sale of government securities by the Federal Reserve Bank of Dallas, for
instance, while it left the volume of that bank's discounts
unchanged was reflected in a shortage of funds in the New York

OPEN-MARKET

OPERATIONS

market with a consequent increase in the discounts at the Federal
Reserve Bank of New York. And, conversely, opcn-rnarket
purchases by a bank in the interior resulted in an overabundance
of funds in New York and in a reduction of discounts at the
New York bank.
A recognition of this close inter-relationship of open-market
operations of the twelve Federal reserve banks and of their
effect upon the discount holdings of the system as a whole,
emphasized the desirability of coordinating more closely the
open-market operations of the several reserve banks and led to
a discussion of open-market policy at a conference of the Federal
Reserve Board with the governors of the reserve banks, held
in March, 1923. The Federal Reserve Board's position in the
matter was indicated by the adoption of the following principle
with respect to open-market investment operations of the
Federal reserve banks:
That the time, manner, character, and volume of open-market investments purchased by Federal reserve banks, be governed with primary
regard to the accommodation of commerce and business and to the
effect of such purchases or sales on the general credit situation.

At the same time a committee of governors of the reserve banks
was appointed to supervise, in conjunction with the Board, the
open-market operations of all the reserve banks.1
Recent Developments in Open-market Policy.—In the first
half of 1924 the reserve banks once more purchased a considerable volume of government securities, so that in the middle of
that year earning assets consisted of securities in more than
twTice the amount of discounts for member banks. The year
wras one of recession in business, with a consequent decrease in
the demand for currency, and of continued gold imports in
larger volume than during either of the two preceding years.
As a consequence, there was a diminished demand for reserve
bank credit, and its outstanding volume in the summer of 1924
was smaller than at any time since early in 1917.
Security purchases in these circumstances resulted in the building up at the reserve banks of a portfolio of United States obli1 See Review of the Month for May, 1023, reprinted in Appendix Iv on
p. 318.

FEDERAL

RESERVE

SYSTEM

OPERA TIOX

gations, and thus put the Federal reserve banks in a position
by the subsequent sale of these securities to cause member
banks to discount paper with the reserve banks. Experience
has demonstrated that open-market sales, when properly timed,
can be used effectively to support the discount policy of the
reserve banks. Thus early in 1923, when there was evidence
of a speculative boom in the financial centers and the discount
rate was advanced in New York and Boston from 4 to 434 per
cent, the reserve banks at the same time sold securities, thus
making it necessary for the member banks to borrow from the
reserve banks at the higher rate, if they wished to continue
to employ an undiminished volume of reserve bank credit.
It is believed that at that time this action of the reserve
banks, together with the cautious attitude of the business community, prevented the occurrence of an unhealthy credit expansion. Thus the sale of securities, when properly timed, may
support the discount policy of the reserve banks, and the proper
management and timing of open-market operations consequently constitutes a part of the technique of an effective
credit policy.

CHAPTER VI
FEDERAL RESERVE NOTES
Greater elasticity of our currency was one of the essential
purposes for which the Federal reserve system was established.
Next to the organization of the Federal reserve banks, themselves, " t o furnish an elastic currency" is the first purpose
mentioned in the title of the Federal Reserve Act. In this
respect the Act followed the precedents established by practically all laws organizing central banking institutions: The noteissuing function is universally considered an important part of a
central bank's operations, in many instances it is for this purpose
primarily that the bank was established, and it is largely through
the monopoly of note issue shared in some countries with the
government that most of the central banking institutions have
attained their position of influence. The Federal reserve banks,
however, are not the exclusive dispensers of currency in the
United States, as both the government and the national banks
continue to enjoy the privilege of issuing paper money. It is in
the elastic quality of the currency issued by the reserve banks,
the Federal reserve note, that lies the characteristic which distinguishes it from other forms of money in circulation in the
United States.
Elasticity of Federal Reserve Notes—Elastic currency may
be defined as paper money whose volume in circulation is at all
times responsive to the demand of the community for cash.
By this test the Federal reserve note is a highly elastic form of
currency, for the volume of these notes in circulation under
normal circumstances is in continuous process of adjustment to
the public's cash requirements. Not only major changes in
currency demand developing from month to month and from
year to year, but even minor fluctuations occurring from day to
day find a reflection in the volume of Federal reserve note circulation. Thus the increase in retail purchases before the Christmas

FEDERAL

RESERVE

SYSTEM

OPERA TIOX

holidays, the cash requirements of vacation travel on the fourth
of July and on other holidays, and the larger currency needs at
the crop-marketing season are all clearly reflected in changes of
the amount of Federal reserve notes in use.
What Makes Federal Reserve Notes Elastic?—Elasticity of
Federal reserve notes, compared with the inelastic character
of other kinds of money in circulation, is due to the fact that
Federal reserve notes rnav be issued against eligible commercial
paper, that is, they may be supplied in response to a demand
which has given rise to borrowing for the purpose of obtaining
currency, and may be retired when such borrowing is repaid. A
simple illustration will make this point clear. During the week
preceding the Christmas holidays a large amount of currency is
required by the public for the purpose of purchasing Christmas
gifts. The public at that time of the year withdraws large
amounts of currency from the banks. But the banks do not
keep on hand a sufficient supply of cash to meet this seasonal
demand, and they, therefore, turn to the reserve banks which
lend them enough money in Federal reserve notes to meet the
temporary requirements. The reserve banks issue Federal
reserve notes to the member banks in return for promissory
notes either of these banks themselves or of their customers.
The volume of currency in circulation thus increases in response
to the public demand. Examination of the chart (Fig. 4) on
page 29 will show that, in fact, Federal reserve note circulation
increases in the latter part of December of every year. After
the holiday has passed, the retail merchants deposit at their
banks the money spent in their stores by Christmas shoppers,
and the banks in turn, having no need of this additional amount
of cash, deposit it with the Federal reserve banks and use the
balances thus created to pay off a part of their borrowings at the
reserve banks. Federal reserve note circulation, in fact, declines
during the last week of December and in January. " Thus money
in circulation decreases as the demand for it by the public declinesThis responsiveness to public demand is what constitutes the
elastic character of Federal reserve notes. '
Relation of Federal Reserve Note Circulation to Changes
in the Volume of Business.—In the illustration there was shown,
for purposes of simplicity, the effect upon Federal reserve note

FEDERAL RESERVE

NOTES

circulation of the regular annual short-lived demand for currency before the Christinas holidays. But the volume of Federal
reserve note circulation responds also to longer-term changes in
the demand for currency arising from changes in the volume of
productive and trade activity and from the level of wages and
commodity prices. At a time when industry is active, employment is general and prices are advancing, manufacturers require
large amounts of currency to meet their weekly or bi-weekly
payrolls. At such times the wage earners have larger earnings
and their purchases together with rising prices result in increased
activity and larger till money requirements at the retail stores.
Manufacturers and merchants, therefore, find it necessary to
borrow from their banks and to withdraw their borrowings in
cash. The banks in turn use the promissoiy notes thus received
from their customers for obtaining accommodation at the reserve
banks, which issue Federal reserve notes on the basis of these
notes. Thus once more a demand for currency by the public
results in increased issues of Federal reserve notes. On the
contrary, when business is less active, when unemployment
increases, and pay rolls decline, manufacturers require less currency and their cash withdrawals from the banks become smaller
than their cash deposits. At the same time merchants do less
business as retail trade suffers from the decreased buying power
of the workers, till money requirements become smaller and the
cash thus released flows into the banks. Cash holdings of the
banks, being swelled by a return flow from their industrial and
commercial customers, become too large for the banks' requirements and the excess is used to retire borrowings at the reserve
banks. Consequently, there is a decline in the volume of Federal
reserve notes in circulation. These longer-term, so-called
cyclical swings, in the volume of Federal reserve notes are clearly
illustrated by the chart (Fig. 4) on page 29, which shows the
large increase of Federal reserve note circulation from 1917 to
1920, during the period of expanding business activity, and the
rise in prices; the decline in 1921 and the early part of 1922
when business was less active and prices were declining; and
the subsequent rise in the last half of 1922 and early part of 1923
when business activity was once more on the up-grade. Postponing for the moment a discussion of more recent developments,

FEDERAL

RESERVE

SYSTEM

OPERA TIOX

which introduced other factors into the situation, it is clear that
the volume of Federal reserve note circulation is affected both by
seasonal and longer-term changes in the demand for currency
and is, therefore, highly elastic.
Relation between Federal Reserve Notes and Federal Reserve
Bank Assets.—In discussing the changes in the demand for
currency in the preceding paragraphs it was mentioned that,
when member banks are in need of additional currency they
borrow from the Federal reserve banks, and that when the
demand for currency declines, member banks reduce their
indebtedness at the reserve banks. It follows from this that the
volume of borrowings at the reserve banks is influenced to a
considerable extent by changes in the demand for currency.
The chart (Fig. 3) on page 28 shows that, as a matter of fact,
throughout the larger part of the period covered there is a close
correspondence between the fluctuations in the volume of
reserve bank earning assets and of Federal reserve note circulation. This close correlation is explained in part by the nature of
the circumstances that cause member banks to borrow from the
reserve banks. Member banks seek reserve bank accommodation, broadly speaking, for three reasons: (1) When their own
deposit liabilities increase and make it necessaiy for them to
have larger reserve balances in order to comply with the law;
(2) when transfers of funds to other districts or withdrawals
of gold for export reduce their reserve balances below the legal
minimum; and (3) when their customers require an increased
amount of currency. Borrowing for the purpose of providing
sufficient reserves for increased deposit liabilities is in relatively
small volume for the reason that reserve requirements constitute
on the average only about one-tenth of deposit liabilities, so
that an increase of 810,000,000 in deposits causes an increase of
only §1,000,000 in required reserves. Borrowings for the purpose
of replenishing reserves depleted through the transfer of funds to
other Federal reserve districts during certain periods have constituted a large part of the accommodation at some of the
reserve banks, but funds transferred from member banks in one
district to member banks in another district, while they increase
borrowings in the first district, are likely to reduce them in the
second, so that for the system as a whole there is not likely to

FEDERAL

RESERVE

NOTES

result any considerable change in the volume of member bank
borrowing. Withdrawals of gold for export would cause an
equivalent amount of borrowing at the reserve banks, but the
system has had little experience with an export demand for gold.
In 1919 and the early part of 1920, when this country was losing
gold, the demand for this gold was added to the other cause for
the increased use of reserve bank credit, but throughout most of
its history the Federal reserve system has operated at a time
when gold was either not moving in large quantities, as during our
participation in the World War, or was moving into this country,
as in 1915-1916 and in 1921-1924. With borrowings caused by
increased deposit liabilities quantitatively unimportant, with
transfers of funds not affecting the system as a whole, and gold
withdrawals relatively rare, the principal occasion for borrowing at
the reserve banks during the first 10 years of their operation has
been the need for additional currency. This is due to the fact
that a demand for $10,000,000 of currency causes a member
bank to borrow from the reserve bank—not 31,000,000, as in the
case of increased deposit liabilities, but the entire amount of
S10,000,000.1 It is for these reasons that there has been a close
correspondence between the volume of reserve bank assets and of
Federal reserve note circulation, as shown by the chart, and it is
this relationship that caused the Federal Reserve Board to say
that "Federal reserve banks . . . , from the point of view of
the chief use made of their credit, may be regarded as currencysupplying banks." 2
Federal Reserve Notes and Gold.—Federal reserve notes,
on account of the fact that they may be issued against eligible
paper, or earning assets, are sometimes referred to as asset
currency. In the experience of the Federal reserve system during
the first decade of its operation Federal reserve notes, whose
volume during much of the time has corresponded closely to the
volume of earning assets, have had a close relationship also to
the volume of gold in circulation. During the first few years
after the establishment of the Federal reserve system prior to
our participation in the World War there was little need of borrow1 The effect of different kinds of credit and currency demand on the
reserve position of the reserve banks is discussed on p. 93.
* Annual Report of the Federal Reserve Board, 1923, p. 2S.

FEDERAL

RESERVE

SYSTEM

OPERA TIOX

ing at the reserve banks for the purpose of obtaining currency.
The capital of the reserve banks was paid in gold and most of
the reserve balances, which under the law were gradually being
transferred from member banks to the reserve banks, were in
the form of gold. Large amounts of gold were, furthermore,
entering the United States from Europe in payment for munitions
and supplies purchased by the belligerents. It was the policy
of the Federal reserve banks, in anticipation of possible participation in the war, to "mobilize the gold," that is to encourage its
concentration at the reserve banks and to substitute Federal
reserve notes for the gold withdrawn from circulation. Thus
from the establishment of the system to our entry into the war,
about S350,000,000 of Federal reserve notes were added to circulation, most of which directly or indirectly took the place of gold
coin or gold certificates acquired by the Federal reserve banks.
During the period of our belligerency and especially during 1917
Federal reserve notes were also issued in exchange for gold, but
at that time the demand for currency was growing rapidly and a
large volume of Federal reserve notes was issued also against
eligible paper, mostly promissory notes secured by Liberty bonds
and other United States government obligations. It was more
particularly during the war and the two years following the armistice that Federal reserve notes were, to a large extent, an asset
currency. Between Apr. 1, 1917 and Dec. 1, 1920, the volume
of Federal reserve notes in circulation increased by over 83,000,000,000 and of this amount more than one-half was a net addition to circulation. Of the collateral pledged against Federal
reserve notes at that time nearly three-fourths consisted of
eligible paper.1
Effect of Recent Gold Imports.—In the autumn of 1920 began
the heavy movement of gold into the United States, which still
continues and which has brought to this country in less than 4
years a net addition to its stock of gold of 81,500,000,000. This
gold in 1921 and the first part of 1922 was used bv member
1 This is not equivalent to saying that the gold reserve against Federal
reserve notes in circulation was only 25 per cent, since there was a large1
amount of excess collateral, and a considerable volume of Federal reserve
notes was in the hands of the Federal reserve hanks, against which collateral was required, but no reserve was necessary.

FEDERAL

RESERVE

NOTES

banks largely for the purpose of reducing their indebtedness at
the reserve banks. Thus borrowings at the reserve banks, which
had been incurred for the purpose of obtaining Federal reserve
notes, were being repaid by the use of gold imported from abroad.
As a consequence, while earning assets of the reserve banks
were rapidly declining, the decrease in Federal reserve notes
was not so large and a spread of about SI,000,000,000 appeared
between earning assets and Federal reserve note circulation.
This is clearly brought out in the chart (Fig. 3) on page 28.
Thus gold drove a wedge between the assets of the Federal
reserve banks and the Federal reserve notes, and once more
converted these notes from an asset secured currency into a
currency secured largely by gold.
Paying Out Gold into Circulation.—During the past two years
the process of mobilizing gold, which had occurred in 1915-1917,
was reversed and gold was paid into circulation to take the place
of Federal reserve notes. The policy of paying out gold into
circulation has been in operation at some of the Federal reserve
banks since the middle of 1922 and it has had an important effect
on the composition of our currency and on the volume of Federal
reserve notes in circulation. These effects may best be considered by a study of the chart (Fig. 10) on page 70, and by an
examination of the following figures:
MONEY

CIRCULATION

(In millions of dollars)

Kind of money

Gold and gold certificates
Silver and silver certificates1
United States notes
Federal reserve notes
Federal reserve bank notes
National bank notes
Total
1

Including Treasury notes of 1890.

July 1,
1922

Aug. 1,
1924

Increase

590
555
292
2,139
72
72S

SI,19S
(iSO
302
1,746
10
729

SG08
125
10

34,376

S4,G()5

S289

Decrease

S393
02
1

FEDERAL

RESERVE SYSTEM

OPERA TIOX

During the period of 25 months covered by the table, total
money in circulation increased by §289,000,000, while Federal
reserve notes in circulation decreased by $393,000,000. Gold
and silver paid into circulation was sufficient not only to meet
the country's increased demand for currency but also to take
the place of a large volume of Federal reserve notes and other
currency. The chart brings out clearly that from 1917 to the

FIG. 10.—Since the summer of 1922, when the treasury and certain Federal
reserve banks began to pay out gold, changes in the volume of Federal rcservo
notes arc no longer indicative of changes in the country's currency requirements. Such changes are now reflected only in the fluctuations of total money
in circulation.

middle of 1922 changes in total money in circulation were
paralelled by similar changes in Federal reserve notes, but
since that time Federal reserve notes have declined—while total
money increased reflecting additions to "other money," largely
gold, in circulation.
The policy of paying out gold into circulation has thus had the
effect of changing the composition of our currency, reducing the

FEDERAL RESERVE

NOTES

share of Federal reserve notes from about 50 per ccnt to about
37 per cent, and increasing the share of gold and gold certificates
from about 13 per ccnt to about 26 per cent. This policy has
also had the effect of making changes in total money in circulation,
rather than of Federal reserve notes alone, reflect the changes in
the country's demand for currency.' Its effect upon the condition
of the Federal reserve banks has been to reduce their gold reserves
and their liability on Federal reserve note circulation by about
the same amount, without materially changing the ratio of
reserves to liabilities. On the relation between member banks
and the reserve banks the policy has had no effect whatever, as
the member banks must still turn to the reserve banks for their
supply of currency, and it is immaterial to them whether their
requirements are met by the paying out of gold or of Federal
reserve notes. The important thing to keep in mind is that under
present conditions changes in Federal reserve note circulation
do not indicate changes in the demand for currency, which are
reflected only in the total volume of money in circulation.
Gold Imports, Currency Demand, and Federal Reserve
Bank Earning Assets.—While the policy of paying out gold has
broken the connection between changes in the demand for
currency and Federal reserve note circulation, it has had no
effect on the relationship between the demand for currency and
the earning assets of the Federal reserve banks. This relationship has, however, been influenced by the constant inflow of
gold from abroad. The imported gold, when deposited by member
banks with the reserve banks, creates balances in favor of these
banks which enable them to meet a demand for additional
currency from their customers by drawing upon the balances
without being under the necessity of increasing the volume of
their borrowings. During 1923, for instance, net gold imports
amounted to §294,000,000, and were sufficient to meet the
increased demand for currency, with the consequence that the
earning assets of the Federal reserve banks remained approximately constant. During the first 7 months of 1924 gold imports
continued, but there was no demand for additional currency as
business activity had slowed down and prices were tending downward. Money in circulation, in fact, declined by about S286,000,000 between the opening of the year and the beginning of August.

FEDERAL

RESERVE SYSTEM

OPERA TIOX

This return flow of currency, together with the importation of
over 8200,000,000 of gold, resulted in a decline of more than
S-100,000,000 in the earning assets of the Federal reserve banks.
Thus, under existing conditions, the volume of reserve bank
assets, though no longer related to the volume of Federal reserve
notes in circulation, is still largely dependent upon changes in
the demand for currency in this country and upon the volume of
gold imported from abroad.
Legal Status of the Federal Reserve Note.—In the preceding
portion of this chapter there was given an account of the place
occupied by the Federal reserve note in our currency system,
and of its relationship to the condition of the Federal reserve
banks. In the remaining paragraphs it is proposed to give a
brief account of the legal status of the Federal reserve note and
of the machinery of its issue and redemption.
Federal reserve notes are issued in denominations of So or
multiples thereof; they arc an obligation of the United States
government, are secured by the collateral pledged against them,
and are also a first lien on all the assets of the issuing reserve
banks. In addition, the reserve banks are required to keep a
40 per cent gold reserve against the reserve notes in actual circulation. The security back of the notes is thus ample and the
public has at all times accepted them unquestioningly and has
never shown any preference for other kinds of money. Federal
reserve notes are receivable in payment of all public dues, but
are not legal tender, except, curiously enough, in Cuba. In
some states Federal reserve notes are acceptable as part of the
legal reserves of state banks, while in others the notes are not
eligible for that purpose. Federal reserve notes are redeemable
in gold at the Treasury, and in gold or lawful money at any
Federal reserve bank. In line with the principle of the Federal
Reserve Act that each of the twelve Federal reserve districts
shall ordinarily be served by its own reserve bank alone, the Act
contains a proviso to the effect that a reserve bank shall not pay
out over its counter reserve notes issued by another reserve
bank. Such notes the reserve bank must return to the issuing
bank for payment. This proviso tends to maintain a relationship between the currency requirements of a Federal reserve

FEDERAL RESERVE

NOTES

district and the volume of Federal reserve notes in circulation
within the district.
Machinery of Issue and Redemption.—The machinery of
issue and redemption of Federal reserve notes, and the custody
of the collateral, is in charge of the Federal agent, who is also
the chairman of the board of directors of the reserve bank and
the representative of the Federal Reserve Board at the bank.
This officer, who is under heavy bond, obtains Federal reserve
notes from the Comptroller of the Currency, who has them
printed in the Bureau of Engraving and Printing in AVashington.
The Federal reserve agent issues these notes to the reserve banks
in return for gold and other collateral, of which he becomes the
joint custodian with the reserve bank. The reserve banks then
issue the notes to the member banks as required. When the
reserve banks find that they have in their possession more
reserve notes than they need the}' return them to the reserve
agent and he releases to them a corresponding amount of collateral. The collateral must equal at least 100 per cent of the
notes. As a matter of fact, the reserve banks make it a practice
to pledge practically all their eligible paper with the reserve
agent, so that there is always a considerable amount of excess
collateral in the hands of the agent. The reason for this practice
is that it is immaterial to the reserve banks whether their customers' paper is held in vault under their sole control, or under
the joint control of the bank and the Federal reserve agent, and
the latter course has the advantage of making it possible to
obtain additional notes, when required, more expeditious^.
The following statement shows the Federal reserve agents7
account on a recent date:

FEDERAL

RESERVE

SYSTEM

OPERA TIOX

F E D E R A L R E S E R V E A G E N T S ' ACCOUNTS AT C L O S E OF B U S I N E S S ,
SEPT. 2 1 ,

1924

(In thousands of dollars)
Resources

TOTAL

Federal reserve notes on hand
S 923,047
Federal reserve notes outstanding
2,230,419
Collateral security for Federal reserve notes outstanding:
Gold and gold certificates
331,504
Gold redemption fund
114,009
Gold fund—Federal Reserve Board
1, 5S5,233
Eligible paper:
Amount required
205,013
Excess amount held
130,207
Total

So,532,152
Liabilities

Net amount of Federal reserve notes received
from Comptroller of the Currency
S3,159,400
Collateral received from Federal reserve bank:
Gold
2,031,400
Eligible paper
341,280
Total

S5,532,152

It will be seen from this statement that the Federal reserve
agent has in his possession Federal reserve notes not yet issued
to the banks but held in readiness to meet the demand as it
arises. The notes issued by the agent to the reserve banks are
technically known as notes "outstanding" as distinguished from
notes "in actual circulation/' the latter term including only
such notes as have been actually paid out by the reserve banks.
The difference between notes outstanding and notes in circulation
is the amount held by the reserve banks in their own vaults, or in
transit from other reserve banks or to the United States Treasury
for redemption. On Sept. 24, 1924, this item amounted to
§507,000,000. Collateral against Federal reserve notes must,
under the law, cover the volume of notes outstanding, but the
40 per cent note reserve requirement applies only to notes in
circulation, i.e., outside the Federal reserve system, since the
banks are not required to have reserves against notes in their
own possession. The agent holds gold in the form of coin or

FEDERAL

RESERVE

NOTES

certificates in his own vault, and gold credits in the redemption
fund and in the Federal Reserve Board's gold fund, the functions of which are described below. In addition, he holds the
paper pledged as collateral, the amount required and the excess
amount pledged being shown separately in the statement. The
entire amount of gold held by the agent and the gold held in the
bank's redemption fund must be counted as reserves against
Federal reserve notes in circulation, and appears in Federal
reserve bank statement (see page 262) as "gold held exclusively
against Federal reserve notes." Gold in the banks' own vaults,
on the other hand, and in the gold settlement fund with the
Federal Reserve Board may be counted as reserves either against
Federal reserve notes or against deposits at the option of the
reserve banks.
Gold Redemption Fund and Agent's Gold Fund.—In the
Federal reserve agent's account there are two gold credits:
"gold redemption fund," and "gold fund—Federal Reserve
Board." The redemption fund is kept with the Treasurer of the
United States and is for the purpose of redeeming Federal reserve
notes that are presented. The law requires the reserve banks
to keep a 5 per cent gold redemption fund with the Treasurer of
the United States against the reserve notes that are not covered
by gold deposited with the agent, and the reserve agent in
practice keeps an approximately equal proportion of gold against
notes that are covered by gold,1 so that the Treasurer of the
United States has at all times, in gold, a sum equal to 5 per cent
of the amount of Federal reserve notes in circulation held for
the purpose of redeeming such notes.
The term "gold fund—Federal Reserve Board" refers to gold
which the agents have turned over to the Federal Reserve Board
for safe-keeping. The Board actually entrusts the gold to the
Treasury of the United States which keeps it wherever it finds it
safe and convenient to do so, giving the Federal Reserve Board a
receipt for it. This gold fund is used in conjunction with the
gold settlement fund of the reserve banks to effect transfers of
gold between the banks and the agents by simple book entries.
1 The law does not require a 5 per cent redemption fund from the agent,
but leaves the determination of the required proportion to the United
States Treasury.

FEDERAL

RESERVE

SYSTEM

IX OPERA TIOX

The workings of the gold settlement fund will be discussed in a
subsequent chapter. When a reserve bank returns a million
dollars in notes to the agent, and wishes to have them redeemed
in gold, the agent instructs the Federal Reserve Board to have a
million dollars charged to his fund and credited to the bank in
the settlement fund. And, vice versa, when a reserve bank
wishes to obtain Federal reserve notes or to redeem eligible
paper held by the agent through the payment of gold it instructs
the Board to transfer the desired amount from the gold settlement fund to the agent's gold fund. In this way transactions
involving large sums are effected between the reserve banks and
the agents by mere book entries, without the physical transfer of
the gold. The title to the gold changes, while the actual gold is
kept in the custody of the United States Treasury.
Relation of Federal Reserve Board to the Issue of Federal
Reserve Notes.—As has been stated, the issue and redemption of
Federal reserve notes is under the immediate supervision of
the twelve Federal reserve agents. These agents, in turn, are the
local representatives of the Federal Reserve Board, so that the
Board has a particular responsibility for the manner in which
the note-issuing function of the Federal reserve banks is performed.
The law provides, in fact, that the Board "shall have the right, acting through the Federal reserve agent, to grant in whole or in
part, or to reject entirely, the application of any Federal reserve
bank for Federal reserve notes." The Federal Reserve Board
also has authority to pass upon the adequacy of collateral offered
for Federal reserve notes and to request additional collateral
when it deems it necessary. The placing of the note issue under
the direct control and supervision of the Federal Reserve Board
is in accordance with the general principle that the supply of
currency is an especial concern of the government.
Under the authority granted by law the Federal Reserve
Board could thus, if circumstances appeared to demand it,
exercise direct control over the volume of currency to be issued
by the reserve banks and over the nature of the collateral to
be accepted for Federal reserve notes. The Board, however,
has never made use of this power and has considered the issue of
notes against acceptable security as a practically automatic
function of the Federal reserve agent. In its views on this

FEDERAL RESERVE

NOTES

matter the Board has been influenced by the consideration that
the demand for currency arises later in the course of business
developments than the demand for credit, and that when the
currency demand reaches the Federal reserve banks these banks
must meet the demand in so far as it is backed by acceptable
security. In other words, in practice the Board has treated the
note-issuing function of the reserve banks as a part of their
credit-issuing power, and as such, subject to general regulation
under the bank's discount and open-market policj'.
Federal Reserve Bank Notes.—In addition to Federal reserve
notes, Federal reserve banks are authorized to issue Federal
reserve bank notes, which were originally intended to take the
place of national bank notes. The bank notes are secured by
government obligations and it was intended that the reserve
banks should gradually buy the security back of national bank
notes, thus retiring these notes without reducing the amount
of money in circulation. So far, however, there has been no
use made of this power to substitute Federal reserve bank notes
for national bank note circulation. The provision for Federal
reserve bank notes served an entirely different purpose during
the war. In 1918 Great Britain was in great need of silver to
support the Indian rupee, and the United States agreed, in order
to help an ally, to melt and sell not to exceed 208,000,000 ounces
of silver stored in the Treasury as silver dollars and to turn the
silver over to Great Britain. Authority for this action was
granted by the Pittman Act. A corresponding amount of silver
certificates was retired, and to take their place in the circulation
the reserve banks were authorized to issue Federal reserve bank
notes in small denominations to be secured by Treasury certificates generally known as Pittman certificates. The circulation
of Federal reserve bank notes at one time reached the substantial
amount of §260,000,000. The Pittman Act provides for the
purchase by the Treasury of an equivalent amount of silver as
soon as the silver shall be obtainable at SI an ounce. Since
July 21, 1921, the Treasury has bought all the silver required to
replace the amount that had been melted and the volume of
Federal reserve bank notes in circulation is now insignificant.

CHAPTER VII
DEPOSITS OF THE RESERVE BANKS—MEMBER BANK
RESERVES
In the discussion of credit and currency functions of the
reserve banks, which has chiefly occupied our attention so far,
little has been said of the role these banks play as the holders of
the central reserves of the nation's banking system. And yet
this is one of the most important functions of the system and one
of the chief reasons for its establishment.
Reserve Requirements Prior to the Establishment of the
Federal Reserve System.—Prior to the passage of the Federal
Reserve Act the reserve requirements of national banks were
regulated by the National Bank Act, which provided that a
certain proportion of a bank's deposits must be kept absolutely
liquid for the purpose of meeting emergency demands for currency. The required proportion of reserves to deposits varied
in accordance with the character of the city. Country banks,
i.e., banks outside of so-called reserve and central reserve cities,
were required to have 15 per cent reserves, only G per ccnt of
which had to be kept in their own vaults, while the remaining
9 per ccnt might be kept on deposit with their city correspondents. Banks in reserve cities were required to keep 25 per ccnt
reserves, of which one-half might be kept on deposit with the
banks in central reserve cities, while banks in these latter cities, of
which there were three—New York, Chicago, and St. Louis—*1
were obliged to keep 25 per cent reserves, all in cash, in their
own vaults. In this way the reserves of country banks formed
part of the deposits of the banks in the reserve cities and portions
of the reserves of the latter became deposits in the central reserve
cities. Under these arrangements, a stringency of funds in the
central reserve cities was felt promptly throughout the country.
All the banks would endeavor to hold on to their cash reserves,
1

Since July, 1922, St. Louis is no longer a ccntral reserve city.

DEPOSITS

OF TIIE

RESERVE

BANKS

country banks would have difficulty in withdrawing their reserve
deposits from reserve city banks, and the public would have
difficulty in withdrawing its own deposits. This plan, which
might be called a system of interlocking reserves, was one of the
important defects in our banking structure which the Federal
reserve system was intended to correct.
Reserve Requirements under Federal Reserve Act.—The
Federal Reserve Act, as originally drawn, reduced reserve requirements somewhat and provided that the reserves of individual
banks should be kept in part with the Federal reserve bank.
Soon after the entry of the United States into the World War
the Act was amended so as to reduce reserve requirements still
further, making them 7, 10, and 13 per cent on demand deposits
in the three respective classes of cities, and 3 per cent uniformly
on time deposits.1 It was thought that this reduction in reserves
was safe because the member banks' position was strengthened
through the concentration of the reserves in the reserve banks,
which were easily accessible and which had the note-issuing
privilege guaranteeing the availability of currency whenever it
was required. The amendment of the Act in June, 1917, also
provided that all of the reserves of the member banks must be
kept with the reserve banks and that nothing, not even gold,
shall count as reserves when kept in the vaults of member banks
or in any other place, except on deposit with a reserve bank.
This provision completed the centralization of reserves and produced a system which differs from any other system in the world
in that the central banks are the holders of the entire lawful
reserves of their members, the proportion of reserves to deposits
being fixed by law. The determination of the amount of cash
that the member banks must keep in their own vaults to be used
as till money is left to the discretion of the banks themselves.
The fact that Federal reserve notes are always easily available
has greatly reduced the cash requirements of the member banks,
especially in Federal reserve bank and branch cities, where notes
can be obtained by messenger without delay.
Volume of Reserve Balances.—Reference to a balance sheet
of the twelve Federal reserve banks2 will show that members'
1 Demand deposits are defined by the Act as those payable within 30
days upon demand, and time deposits as those payable after 30 days.
2 See p. 262.

FEDERAL

RESERVE

SYSTEM

IX OPERA TIOX

reserve deposits amounting to over §2,000,000,000 arc the principal source of reserve bank funds. Capital and surplus arc relatively small items when compared with this huge reserve fund
kept by the Federal reserve system in trust for all the members.
The volume of reserve deposits at the reserve banks shows relatively slight fluctuations over longer periods of time, but from
day to day it changes considerably as the result of daily settlements of balances between banks. The long-term trend of
reserve deposits reflects directly the increases or decreases in the
member banks' own deposits against which the reserves are held.
Member banks do not as a rule permit their reserves to remain
below legal requirements because in case of deficiency penalties
are assessed at rates higher than the prevailing discount rate,
so that a member bank finds it more economical to replenish its
reserves by borrowing from the reserve bank rather than to pay
the penalty for deficient reserves. These penalties are generally
assessed at the end of a 2-week period and apply to the average
deficiency for the period. The way the machinery has actually
worked has been generally as follows: When a member bank
grants a loan to a customer and gives him a corresponding deposit
credit on its books, it examines its reserve account and, if this
account is inadequate to cover the additional deposit, the bank
arranges for accommodation at the reserve bank and thus
increases its reserve balance.1
How Banks Replenish Their Reserves.—When a member
bank's reserves become insufficient cither in consequence of
an increase in its own deposits or because it was obliged to draw
on its deposit with the reserve bank to obtain currcncy, to pay
an out-of-town balance, or to draw out gold for export, the
member bank can replenish its reserves only in one of two ways:
by borrowing from the reserve bank; or by depositing with it
checks oil other banks, gold, Federal reserve notes, or other
currency. Ordinarily, except in a period of falling prices, the
bank will not have currency available for this purpose, since the
amount of cash required for circulation does not change rapidly
and the public withdraws about as much cash from the bank as
it deposits, leaving only a working balance sufficient for till1 In pruetiee the hanks, of course, do not adjust their reserves after every
loan, hut only at stated periods varying from 1 day to 2 weeks.

DEPOSITS OF TIIE RESERVE

BANKS

money requirements. A deposit of a check on another bank
only transfers the problem to that bank without changing the
situation for the system as a whole, so that in a period of steady
prices and in the absence of gold imports the member banks
taken as a whole can replenish depleted reserves only by borrowing from the reserve banks. As a matter of fact, in the period
of rapid credit growth during and immediately after the war,
member banks supplied the growing credit and currency needs
of the public largely on the basis of borrowings from the reserve
banks, as is seen by reference to the chart on page 28.
Late in 1920 and throughout 1921 and the first half of 1922 the
country was going through a period of falling prices and credit
liquidation accompanied by large gold imports, and member
banks had large amounts of Federal reserve notes, no longer
needed in circulation, and of gold imported from abroad, available for deposit with the reserve banks. The balances arising
from the deposit of gold and of notes were used by the member
banks to reduce their indebtedness to the reserve banks. This
is indicated on the chart by the growth of reserves and the decline
of Federal reserve notes in circulation and is reflected in a rapid
decline in discounts of the reserve banks. At the same time the
deposits of member banks increased, as is generally the case in a
period of depression when business men build up bank balances
against the future revival of activity-. Consequently, the deposits
of reserve banks also increased. After the middle of 1922, when
the demand for credit and for currency began to respond to
revived business activity, Federal reserve note circulation and
discounts again increased, while deposits remained fairly steady.
In 1924 the rapid growth of deposits of member banks, and particularly of demand deposits, against which a larger proportion of
reserves is required by law, resulted in a growth of deposits at
the reserve banks to the largest total on record.
Constancy of Reserve Balances.—The chart shows in general
that deposits are the least fluctuating item of those included in
the picture. The reason for this relative steadiness is that
members' reserve deposits equal a fraction (7, 10, or 13 per cent,
as the case may be) of the members7 own deposits and that,
therefore, changes in deposits of member banks are reflected
on a much reduced scale in changes of the reserve banks' deposit

FEDERAL RESERVE

SYSTEM

OPERA TIOX

liabilities. A corollary from this is that even relatively small
changes in reserve deposits at the reserve banks are significant
because they correspond to changes in member banks' deposits
that arc on the average ten times as large. It may be stated,
therefore, that while changes in the volume of Federal reserve
discounts give an exaggerated impression of changes in the
country's credit requirements, changes in Federal reserve deposits, on the contrary, minimize the changes in the volume of credit.
Because the discounts represent the overflow of credit from the
member banks, they grow and decline, in the absence of disturbing factors like gold imports, much more rapidly than the total
volume of credit in use, as measured by the volume of member
bank loans; and because the reserve deposits bear a fixed
fractional relationship to the deposits of member banks, they
change by much smaller amounts than do these deposits. The
absolute changes in reserve bank deposits arc, therefore, relatively small, but their percentage changes, and the general
contour of the deposit curve, reflect accurately the changes in
the volume of deposits held by member banks.
Availability of Reserves.—The establishment of the Federal
reserve system has done away with scattered reserves, jealously
guarded by every bank at times when these reserves were most
needed. Since the inauguration of the reserve system there
has never been a shortage of currency. Each of the twelve
Federal reserve banks holds the reserves of all of the members
in its district and the members can promptly obtain the currency
required for the accommodation of their customers. When
the demands upon the members in a district become so heavy
that the Federal reserve bank cannot take care of their needs out
of its own resources, it can obtain additional reserves by borrowing from another Federal reserve bank. Thus the system makes
the reserves of member banks in the entire country available for
use at any point where the need for them may arise. During
1920, when the rapid decline in agricultural prices resulted
in a widespread inability of farmers to meet their current obligations at the banks, these banks turned to the reserve banks
for assistance which was granted in large volume. When on
top of these frozen loans was superimposed the necessity of
making heavy out-of-district payments, because purchases in

DEPOSITS OF TIIE RESERVE

BANKS

other districts continued while the sale of agricultural products
was delayed, the reserve banks in the agricultural districts were
not able to meet their local requirements without resorting to
the assistance of reserve banks in industrial sections where the
demand for credit was less acute. Thus in October, 1920,
the southern and western reserve banks were borrowing from
eastern banks an aggregate of S267,000,000. This amount was
gradually reduced through the period of liquidation in 1921 and
by December, 1921, all of it was paid off. This actual experience
demonstrated that in a period of stress the reserve banks can
stand together as one united system. Since, owing to the great
variety of industries and conditions in the United States, it is
unlikely that an equally heavy credit demand will occur in all the
parts of the country at the same time, preventing one section
from coming to the assistance of another, the Federal reserve
system makes the occurrence of a money panic highly
improbable.
Changes in Lending Power of One Bank and of All Banks
Combined.-—It has been stated that when a member bank finds
itself short of reserves it borrows from the reserve bank and
obtains an advance credited to its reserve balance. This
addition to the reserve balance need not be larger on the average
than about one-tenth of the amount of the new deposit account.
In actual practice, however, when a bank lends money to an
individual and credits his deposit account with the proceeds the
borrower is not likely to leave the funds thus obtained on deposit
for any length of time. He borrows because he needs the money
and he proceeds to draw it out by check with the consequence
that his bank loses funds through clearings, and since clearings
are generally effected through the reserve bank, the member
bank loses a part of its reserve deposit and must replenish it,
presumably by borrowing from the reserve bank. This indicates
that, while it is true that a bank which increases its own deposits
by a given amount needs to increase its reserve balance by only
one-tenth of this amount, it is not true that an individual bank
can lend to its customers ten times as much as it borrows from
the reserve bank. If the bank were to do this it would not be
able to place at the customer's disposal the funds to which his
deposit credit entitled him.

FEDERAL

RESERVE

SYSTEM

OPERA TIOX

If, however, there were only one bank in existenee, then the
customer's checks would result simply in transfers of deposits
from his account to the accounts of those to whom he makes
payments. The bank's total deposits would not change and no
funds would be withdrawn from it. If we had only one bank,
therefore, which by law was required to keep a 10 per cent reserve
against its deposits, this bank could lend to its customers in the
form of deposit credit ten times as much as it borrowed from the
reserve bank. During a time of general credit expansion a
member bank's borrowings from a reserve bank and the additional
deposit reserves thus created become gradually diffused throughout the system, and at such a time the lending power of all the
banks together increases about as much as would that of one
bank, if in it were combined the deposits of all the banks.1
Thus, while an individual bank can increase its lending power
through borrowing from a reserve bank by only slightly more than
the amount it borrows, the lending power of the banking system
increases by approximately ten times that amount.
Effect of Currency Demand.—It has been assumed so far that
increased borrowing from the reserve bank has been resorted to
solely for the purpose of obtaining additional reserves made
necessary by additional deposits arising from new loans to customers. But increased borrowings by customers indicate growing
business activity, larger payrolls, more active retail trade, and
larger till-moncy and pocket-money requirements. All these
developments result in a demand for additional currency, so that
the deposits created by the new loans will be withdrawn at least
in part in cash, rather than by checks in favor of other depositors.
The member bank will, therefore, need Federal reserve notes and
will have to borrow from the reserve bank to obtain them. And
there is this difference between borrowing by a bank to replenish
its reserves, and borrowing to withdraw notes: In the first case
a member bank needs to borrow only one-tenth of the increase in
its deposit liabilities, while in the latter case it needs to borrow
the full amount of the funds withdrawn in cash. It is for this
reason that credit expansion can never be in a ratio of 10 to 1 to
the amount borrowed from the reserve banks. In the natural
course of events a larger or smaller part of the funds borrowed
* See P h i l i p s , C. A.: "Hank Credit," p. 59.

DEPOSITS

OF TIIE RESERVE

BANKS

will bo required in the form of cash, so that the ]0 to 1 growth
can apply only to that portion of the discounts which remains on
deposit with the reserve bank and constitutes the basis for additional deposit credit at the disposal of the member banks.
The foregoing can be illustrated concretely. When a man
borrows SI,000 from a bank, if he takes the money out in notes the
member bank, since it has in its vaults no more cash that it requires,
will have to rediscount the customer's note or some other note in
order to obtain this amount in cash from the reserve bank. The
result will be an increase in the borrowings from the reserve
bank equal to 100 per cent of the original loan granted by the
member bank. On the other hand, if the customer of the member
bank leaves all of the proceeds ofhis loan ondeposit with the member bank, then the member bank will need no additional currency
and will need onty S100 of additional reserve deposits (assuming
that its legal reserve requirements are 10 per cent, as is the case
on the average for all member banks), so that it would borrow
from the reserve bank not more than S100. What occurs in
practice lies between these two extremes. Most of the borrowers
from banks leave part of their proceeds on deposit with these
banks, and to this extent the reserve deposits of the member
banks increase only by one-tenth of the new loan. But part of
the funds created by the loan are withdrawn in the form of currency, and these withdrawals result in an increase in the borrowings from the Federal reserve banks to the full amount of the
cash withdrawn. The extent of growth of member bank credit on
the basis of SI of reserve bank credit, therefore, depends within
broad limits upon the extent of the existing demand for currency.
While member banks do not permit their reserve deposits to
fall below the legal limit on account of the penalties for deficient
reserves, neither do they carry any considerable amount of
excess reserves. Whenever their reserves exceed the legal
minimum they find employment for the excess funds either in
additional loans or in investments. The ratio of member banks'
reserve deposits to their own deposits has, as a matter of fact,
remained practically constant at 10 per cent throughout the
recent periods of credit expansion and contraction.1 Thus in
1 The 10 per cent ratio is based on a calculation in which time deposits are
reduced to a demand deposit basis with respect to reserve requirements.

FEDERAL

RESERVE

SYSTEM

OPERATION

our banking practice the minimum reserves required equal
the maximum reserves carried by the member banks.
Increased Loaning Power on the Basis of a Reserve Dollar.—
It is too early to appraise all the phases of loan expansion made
possible by the Federal reserve system, but there is no doubt
that owing to the reduced reserve requirements for member
banks and to the fact that the reserve banks themselves must
keep only 35 per cent reserves against the members7 reserve
deposits and 40 per cent against notes, the ability of our banking
system to expand its loans has been greatly increased. This
increase in possible expansion, or to put it in another way, this
enhanced efficiency of the reserve dollar, like any mechanical
improvement, creates new responsibilities and new dangers
taking the place of the defects inherent in the superseded system
of numerous unlinked banking units. The new system creates
the possibility of proceeding much farther than was possible
before in the direction of credit inflation without being arrested
by the shortage of reserves. It, therefore, necessitates more
careful and more expert administration of the country's banking
system.

CHAPTER VIII
RESERVES OF THE RESERVE BANKS
In the preceding chapter the discussion dealt with the reserve
requirements of member banks and their reserve balances with
the Federal reserve banks. In this chapter the legal reserve
requirements upon the reserve banks themselves will be considered.
Legal Provisions.—These reserves are against two classes of
liabilities: against Federal reserve notes, and against deposits.
The legal provision on this point is contained in Sec. 10 of the Act,
the wording of the clause being "every Federal reserve bank
shall maintain reserves in gold or lawful money of not less than
35 perccntum against its deposits and reserves in gold of not
less than 40 percentum against its Federal reserve notes in actual
circulation." The first observation which this legal provision
invites is the distinction that is made between Federal reserve
notes and deposits. The reserve requirements against notes
are more severe than those against deposits in two particulars.
In the first place, note reserves must consist entirely of gold,
while deposit reserves may consist of gold or lawful money,
which includes silver dollars, silver certificates, and United
States notes known as greenbacks; and in the second place,
reserves against notes must be maintained at 40 per cent, while
reserves against deposits need be only 35 per cent.
This distinction is in line with the general recognition of the
fact that notes, owing to their wide circulation and the necessity
of absolute confidence in them on the part of the public, must
be protected with the greatest possible care. Consequently,
the reserves against notes have been fixed at 40 per cent, all of
which must be in gold. The second provision, excluding from
the note reserve all that is not gold, carries out the principle
that no other credit instrument should be counted as reserve
against paper money, which itself is a fiduciary document. The
only money in the United States which involves no element of
credit is gold (including gold coin and gold certificates). The

FEDERAL

RESERVE

SYSTEM

OPERA TIOX

silver dollar contains only about GO cents' worth of silver, the
silver certificate is exchangeable for the silver dollar and is,
therefore, on a par with it. United States notes, of which there
are about S347,000,000, are secured by $153,000,000 in gold, the
security for the remainder being the good faith and credit of
the United States government. All of this money is good and the
public trusts it and does not discriminate between the different
kinds of currency. But in providing reserves against the new
kind of currency great care was taken to throw sufficient safeguards around the Federal reserve note.
Elasticity of Reserve Requirements.—While the liabilities
of the reserve banks are thus protected by what is generally considered adequate reserves, it was not intended to make the
reserve provisions so rigid as not to permit the reserve banks to
utilize their reserves in case of emergency. A reserve which
cannot be drawn upon in emergencies does not serve its purpose,
or at least fails of an important part of its purpose, which is to
be mobilized and requisitioned in case of emergency. Reserves
have been compared to hospital beds kept vacant for emergencies
and not assigned to patients arriving in the regular course of the
day's work. Such beds arc always kept in readiness, clean and
vacant for the purpose of being available in case of an accident
or an unusual epidemic, so that the hospital may be able to
meet an unexpected demand. It is clear that this implies both
the keeping of the beds vacant in ordinary- times and their
utilization on extraordinary occasions. The same principle
applies to bank reserves. They should be kept inviolate in
ordinary times, but should be called upon to avert panic or
disaster in times of stress.
Recognizing this principle the framcrs of the Federal Reserve
Act put in a provision, Sec. 11 (c), which gives the Federal
reserve Board authority.
. . .

to suspend for a period not exceeding 30 days, and from time

to time to renew such suspension for periods not exceeding 15 days,
any reserve requirements specified in this act, provided: that it shall
establish a graduated tax upon the amounts by which the reserve
requirements of this act may be permitted to fall below the level hereinafter specified; and provided further: that when the gold reserve held
again;*! Federal reserve notes falls below 40 pcrccntum the Federal

RESERVES

OF THE RESERVE

BANKS

Reserve Board shall establish a graduated tax of not more than 1 percentum per annum upon such deficiency until the reserves fall to 32
percentum, and when said reserve falls below 32J£ percentum a tax at
the rate increasingly of not less than one-half of one pcrcentum per
annum upon the 2y> percentum or fraction thereof that such reserves
fall below 32>£ percentum.

The tax shall be paid by the reserve bank,

but the reserve bank shall add an amount equal to said tax to the rate
of interest and discount fixed by the Reserve Board.

It will be seen that the Reserve Board has authority to suspend
all reserve requirements when the situation demands it, but in
doing so it must levy a tax upon the reserve banks which in turn
pass it on to the member banks in order to discourage the exhaustion of the reserves and to bring about the speed\r cancellation of
the excess credits which caused the necessity for the suspension.
In their anxiety to protect Federal reserve notes the framers of
the Act provided a rate of progression for penalties for deficient
reserves against notes, but did not specify a penalty in the case
of insufficient deposit reserves. In this way the law partly
defeats itself, because the reserve bank could count all the existing gold reserves as reserves against notes and apply the remainder towards reserves against deposits; and in case these fell short
of the required 35 per cent the Reserve Board would be in a
position to levy whatever deficiency rate it deemed wise, either
higher or lower than that prescribed in the law, or even only
a nominal amount. The legal penalty would have to be
administered only if there was not sufficient gold in the bank to
cover 40 per cent of Federal reserve notes alone, which would
not be likel}- to occur, as it would mean that the bank had no
reserves against its deposits and less than 40 per cent against its
Federal reserve notes in circulation.
In the 10 years of operation of the Federal reserve banks no
occasion for suspending reserve requirements has arisen, owing
largely to the fact that when individual reserve banks were under
heavy stress they were able to replenish their reserves by borrowing from other reserve banks. At no time was the so-called free
gold, i.e., the amount of reserves held above the legal minimum,
for the system as a whole, below 3200,000,000.
Free Gold.—A chart is here presented (Fig. 11) showing the
reserves of the Federal reserve banks, their deposit and note

FEDERAL

RESERVE

SYSTEM

OPERA T I O X

liabilities, the amount of reserves required against these liabilities,
and the free gold. The chart shows that in 1920 the margin
was quite narrow, that in 1921, when liquidation set in and the
gold movement to this country got under way, the amount of
free gold constantly and rapidly increased and continued to
increase at a slower rate throughout 1922. At the present
time the free gold in the Federal reserve system is about
§1,700,000,000 and the question of adequate reserves is, for the
time being, a purely academic one.

was never less than $200,000,000, increased rapidly in 1921, and was fairly
constant at more than SI,500,000,000 in 1922 and 1U23.

Another chart (Fig. 12) shows gold imports into the United
States from 1914 to 1924. During this period over §2,000,000,000 of gold was imported into this country, the first billion
coming before the entry of the United States into the World
War, when belligerent countries were buying large amounts of
war materials and paying for them in gold; and the second billion
coming since the fall of 1920, largely as the result of currency
and financial disorganization abroad.1 That there was r e l a t i v e l y
1

Sec Appendix K, p. 313.

^
to
fcs
£
Co
S

1
fa

ss
»

s
g

§
Cq

FIO. 12.—The gold movement to the United States in the past decade can be divided into two periods: 1915-1916, and 1921—
1924. The effect of these gold imports on the credit situation in the United States is discussed in Chapter V I I I , page 95,
and in Appendix K t page 313.

FEDERAL

RESERVE

SYSTEM

OPERA TIOX

little increase after the middle of 1922 in the gold reserves or in
the free gold of the reserve banks, in spite of the large gold
imports, was due to the policy of reserve banks to pay gold,
rather than Federal reserve notes, into circulation.
What Affects the Reserve Position?—Changes in the reserve
position of reserve banks may be caused by changes in three
items of its balance sheet: deposits, Federal reserve note circulation, and reserves, for deposits and notes are the two classes of
liabilities against which reserves are required by law. Changes
in any of these items at the reserve bank are brought about by
changes in some phase of the demand made by the public upon
member banks. An increase in the deposit liabilities of Federal
reserve banks is caused by an increased demand for deposit
credit by customers of the member banks, as the reserve banks'
deposits constitute the lawful reserves of the member institutions.1
An increase in the reserve banks' note liability results from
an increase in the public's demand for currency and a reduction
in the reserve banks' reserves occurs in response to a demand for
gold either for export or for out-of-district payments through
the gold settlement fund.
This statement refers to developments making for increased
demands upon the reserves of the reserve banks; changes in the
opposite direction would have the opposite effect and would
correspondingly strengthen the reserve position of the reserve
banks. While a public demand for either additional deposit
credit, currency, or gold, results in an increasing utilization of
central reserves, the effect of the three kinds of demand upon the
reserves is different in extent. An increase of §100 in the deposits
of member banks necessitates, on the average, an increase of
§10 in the deposits of reserve banks, and against these S10 the
reserve bank must keep a 35 per cent reserve, so that its reserve
requirements increase by §3.50. An increase of S100 in the
public's demand for currency translates itself into an increase of
1 The reserve banks carry in addition to members' reserve balances also
deposits for the United States government and "other deposits" consisting
largely of foreign government credits, cashiers' checks, and non-member
banks' clearing accounts. But members' reserve balances are by far the
largest part of total deposits (see balance sheet reprinted in Appendix D,
p. 262), and in the discussion reference is made to these deposits alone.

RESERVES OF THE RESERVE

BANKS

§100 in the Federal reserve note liability of the reserve bank, which
must keep a 40 per cent reserve against this increased liability,
so that the reserve requirements increase by $40. A demand for
S100 in gold, for export or for transfer out of the district, results
in a direct reduction of §100 in the reserves of the reserve bank.
Thus the ratios of demand by the public to the resultant effect
upon the reserves of the reserve banks are 100 to 3.5 in case of
deposits, 100 to 40 in case of Federal reserve notes, and 100 to
100 in case of gold or out-of-district drafts.
From this discussion it is clear that increases in the deposits
of member banks are a relatively unimportant influence upon the
reserve position of reserve banks, that a growing demand for
currency is more than 10 times as influential, and that a demand
for gold or gold drafts is about 30 times as powerful. This
explains the fact, mentioned above (see page 35), that it was
the demand for out-of-district drafts that caused the exhaustion
of reserves in agricultural districts in 1920 and resulted in a heavy
volume of borrowing from reserve banks in industrial districts.
Actual and Adjusted Reserve Ratios—The chart on page
94 (Fig. 13) shows the reserve ratios of each reserve bank
and of the twelve banks combined in 1920 and 1921. Two lines
are shown: the solid line indicates the position of the reserve
ratio as it was actually recorded; and the broken line, what the
position would have been if the reserve banks had not borrowed
from each other. The chart shows how low the reserves of some
of the banks in agricultural districts would have been in 1920 had
it not been possible for them to obtain accommodation at other
reserve banks. It also brings out the fact that, for the system
as a whole, a fairly steady level of reserves at about 42 per cent
was maintained throughout the period of the greatest credit
strain.
Gold Reserves and Gold in Circulation—Prior to 1922 the
amount of gold in the United States outside of the United States
Treasury and the reserve system was relatively small, about
$400,000,000, scattered widely among non-member banks and
in small amounts held by many thousands of people in their
homes. Between the middle of 1922 and August, 1924, however,
the amount of gold in circulation increased by over $600,000,000,
as a result of the policy of some of the reserve banks of paying

FEDERAL

RESERVE

SYSTEM

OPERA TIOX

RESERVE RATIO OF FEDERAL RESERVE BANKS
1 9 2 0 - 1921
( END OF MONTH FIGURES )
nn
CIHT

70
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50
40
30

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4 I I S

ACTUAL
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60
70

1920

•

BOSTON _

/ V

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40
30
10

0
ADJUSTED

70
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40
30

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10

100
90

nn
CtNT

PHILADELPHIA

N E W VrtRK

\S.

Jmj*

1921

50
40
30
20
TO

n*
CtNT

SYSTEM

T -T T

T• • i • - r
RICHMOND

CLEVELAND

100
90

ATLANTA

*»v

eo
so •i/ /

40
30
20
10

(*, *

•d
/

10
o

100
90

CHICAGO

70
60
50
40
30
20
10

ST. L O U I S

MINNEAPOLIS

/v'

V*.

J
I

4
1
\

\ J

100
90
60
70
60
50
40
30
20
10
0

K A N S A S CITY

— — i — i — i — i — r

•

SAM m i N C l S C O -

DALLAS

A
m*

; ^A 5 £
^^
o
f
1920

1921

$ IS
1920

eo
so
40
30

100
90
BO
70
60
60
40
30
20
10
0
100
90
BO
70
60
50
40
30
10
o

1921

1920

1921

Adjusted percentages ore calculated after increasing or reducing reserves h*ki~ by t
of accommodation extended to or received from other federal Heserve BonJta.
FIG. 13.—In 1920 the actual reserve ratios of all the reserve banks were kept
above legal requirements by means of interdistrict accommodation, though
adjusted ratios, i.e., ratios as they would have been had there been no interdistrict borrowing, were at times very low for some of the reserve banks.

RESERVES OF THE RESERVE

BANKS

out gold certificates into circulation. The reason for paying
out gold was partly to restore gold to its former place in the
country's circulation, as it was thought that it would have a
good effect upon the minds of the people once more to see yellowbacks, which had been practically out of circulation since 1917.
Another object was to slow down the growth of Federal reserve
bank reserves, which were becoming very large and causing a
great deal of comment. Imported gold comes to the United
States consigned to a member or non-member bank. It is turned
over to the United States Assay Office, which assays its actual
gold content. The receipt for this gold is then deposited with the
reserve bank, which gives the depositing bank a deposit credit.
In case the consignee bank is not a member it generally operates
through a member bank, though the reserve bank also has
authority to buy gold direct from the non-member bank. Whatever the process in detail the final result is that the gold becomes
part of the reserves of the reserve system.
Effect of Imported Gold.—This is of great importance in connection with the developments of the last years, when gold moved
to the United States in large volume increasing the reserves
of the Federal reserve banks. This increase in reserves did not
represent domestic loan liquidation, but the payment of obligations to American interests by foreigners, who were scraping the
bottom of their barrel and shipping to America whatever acceptable liquid assets they could gather, which in many cases meant
gold.
The United States has absorbed in the last 2 or 3 years practically all of the new gold produced in the world and in addition
has received large amounts from some of the European reserves
(see Fig. 12). The gold did not come from the Bank of England
or the Bank of France, which have not diminished their reserves
and in fact have somewhat increased them. But it came from
the German Reichsbank reserves, a portion of which was paid
to the United States through the United States Grain Corporation in return for food sent to Germany after the armistice,
another portion coming to the United States in the summer of
1923 in connection with reparation payments. A large part of
the gold reserves of the Russian State Bank, which prior to the
war had the biggest gold hoard in the world amounting to over

FEDERAL

RESERVE

SYSTEM

OPERA TIOX

$600,000,000, also came to the United States. A part of this
hoard was dissipated before the Bolsheviki came into power,
but much of what was left found its way indirectly to the United
States. Much Russian gold was sent to Sweden, was there
restamped in order to overcome the objection of the United States
government against receiving gold from the Bolshevik government, and was then shipped to the United States. Much gold also
found its way to France, where it was impounded and equivalent
amounts of non-Russian gold shipped to the United States.
This absorption of the Russian reserve accounts for much of
the S691,000,000 of gold received in the United States during
1921.
In this way the stock of gold in the United States increased
by over §1,500,000,000 since the conclusion of the war. This
great amount added to our gold reserves came as the result
of European disaster, and European countries may sooner
or later demand the return of all or a part of this gold to serve as
a basis of financial and monetary reconstruction. In a sense,
therefore, the United States is trustee for the gold and must
neither permit it to be dissipated or to form the basis of a credit
structure, as in such case the eventual loss of the gold might
create serious financial disturbances in this country.
Gold Used for Liquidation and as Basis for New Credit.—
The effect of gold imports on the banking situation in the United
States differed in accordance with business conditions prevailing here at the time of the gold's arrival. In 1921 the gold was
used largely to pay the member banks' indebtedness to the
reserve banks. During that time business and credit in this
country were going through a period of contraction, domestic
debts were liquidated by the reduction in Federal reserve note
circulation, while the gold coming from abroad liquidated foreign
accounts owed to the banks and industrial corporations of this
country and was used by the banks in reducing their debt to
the reserve banks. The repayment of reserve bank loans was
accomplished in approximately equal degree through foreign
liquidation and through domestic liquidation as is shown by the
fact that reserve bank discounts declined between their peak on
Nov. 5,1920, and their trough on July 26,1922, by $2,400,000,000;
during the same period gold reserves of the reserve banks

RESERVES OF THE RESERVE

BANKS

increased by over §1,000,000,000 and Federal reserve note circulation contracted by §1,200,000,000.
Since mid-summer, 1922, the gold coming to the United States
has played a different part in our credit developments. In 1922
the country's productive plant was working at full blast, business
activity had revived, the demand for bank credit and for currency was growing and member banks were increasing their
borrowings from the reserve banks. The gold coming from
abroad during this period was no longer used to retire obligations
at the reserve banks. Instead it became available for increased
loan extension by member banks without recourse to the reserve
banks. It is, in fact, the continuing, though diminished flow of
gold to the United States that enabled member banks to meet
the growing credit and currency requirements of their customers
between July, 1922 and the end of 1924 without using additional
reserve bank credit. During this period the loans and investments of member banks increased by §5,000,000,000, while the
earning assets of the reserve banks remained practically
unchanged. Thus part of the gold went into circulation, satisfying the demand for additional currency, and the other part was
added to the reserves of the Federal reserve banks, constituting
at the same time the basis for the increasing volume of member
bank deposits. During both periods gold imports tended to
reduce the earning assets of the reserve banks, but the effect on
member banks and on the credit situation was different: during
the period of liquidation it helped the member banks to melt
some of their frozen loans and to get out of debt to the reserve
banks, and during the period of growing credit demand it enabled
the banks to expand their loans and yet remain independent of
the reserve banks. In 1924, in the absence of currency demand
and with a relatively small volume of indebtedness at the reserve
banks, gold imports have been used by member banks as a basis
of additional loans and investments reflected in a rapid growth
of deposits. Thus the effect of gold imports on the relation
between member banks and the reserve banks differs in accordance
with the existing demand for currency and credit and with the
extent of member bank indebtedness to the reserve banks.
Gold Imports and the-Reserve Ratio.—Gold imports also
had an important effect upon the significance of the ratio of the

FEDERAL

RESERVE

SYSTEM

OPERA TIOX

reserve banks' reserves to their deposits and note liability as ail
indicator of domestic credit conditions and as a guide to credit
policy. A reserve ratio of over 75 per cent would give the
impression that credit is plentiful and should, therefore, be easily
available for all enterprises. But when such a high ratio has
been brought about not by conditions in the United States but
by conditions abroad, it is not an indication of the possibility
of using additional bank credit safely and effectively as has
been frequently stated, and as is explained in the Board's
Review af the Month reprinted in Appendix K, page 313.
When in 1920 the reserve ratio went down to 42 per cent it
was easy to explain to the public that the reserve banks were
obliged to raise their discount rates because their reserves
were threatened. But in 1924 the amount of gold in the
reserve banks was so abundant that the danger of inadequate
reserves had become very remote and credit policy had to be
based on other less familiar economic indicators. Among these
indicators is the volume of member bank borrowings from the
reserve banks, market rates for money, and the volume of production and trade in its relation to changes in the price level.
While the Federal reserve banks continue to calculate and make
public their reserve ratios, these ratios are no longer watched
with the keen interest which they inspired in 1920 and have
become a matter of routine. This situation has given rise to
various proposals with the object of bringing the reserve ratio
into closer touch with current credit developments. One of
these proposals is to set aside a part of the gold as a reserve
against future exports, another to set aside 100 (or nearly 100)
per cent as a reserve against Federal reserve notes, thereby
reducing the reserves available against deposits. The latter
plan has much in its favor, as it is based on the principle of
separating deposit reserves, for which the reserve banks are
primarily responsible, form note reserves held by the Federal
reserve agent and in the redemption fund with the Treasury,
the responsibility for note issues and for the collateral back of
the notes resting with the Federal Reserve Board and the Federal
reserve agent as the Board's representative. This segregation of
reserves, which is in accordance with* earlier practice abandoned
late in 1917, would have the advantage of reducing the deposit

RESERVES

OF THE RESERVE

BANKS

reserve and making it more responsive to changes in domestic
credit conditions and of keeping the gold received from abroad
impounded in the note reserve. Had this gold not come, the
collateral back of Federal reserve notes would have consisted to a
larger extent of commercial paper, and if the gold is re-exported
this will lead to a substitution of eligible paper for gold in the
note reserve. Under the plan of separate reserves the gold
received from abroad would be to a considerable extent kept out
of the domestic credit situation and in readiness for re-export
whenever a demand for gold from abroad would assume considerable proportions.
Reserve Ratio Less Significant at Present.—So long, however,
as gold continues to come to this country in large quantities the
reserve position of the reserve banks cannot adequately reflect
the domestic credit situation. And it is essential for the public
to learn to disregard gold altogether as an indicator of the volume
of credit that may safely be extended and to direct its attention
to other and more significant factors. The public must come
to appreciate the fact that additions to our reservoir of credit,
which have not arisen out of business conditions in this country,
have introduced a complicating factor into our credit situation
and have made the task of credit control more difficult than it
would have been if credit expansion could not proceed without
increased borrowings from the reserve banks.1 So long as the
banks are constantly receiving additions to their funds independently of the reserve system it will be more than ordinarily difficult
to detect and to control credit expansion. In normal times such
a development could not proceed far without setting in operation
a number of corrective forces. Interest rates in this country
would fall, money would flow into countries where rates are higher,
exchange rates would be against the United States, and the
movement of gold to America would cease and presently would be
reversed. But at the present time, with the world off the gold
basis and heavily indebted to the United States, these correctives
are slow to assert themselves. During 1922, gold shipments were
indeed made to Canada as a result of such developments, the
exchange value of the pound sterling also advanced nearly to parity,
and that of some of the neutral European countries even rose above
par. This was caused by the unusually easy money conditions
1

See appendix K, p. 306.

100

FEDERAL

RESERVE

SYSTEM

OPERA TIOX

and the rise in prices in the United States not accompanied by
corresponding rises in other countries. Still gold continued
to come to the United States because no other country was in a
position to bid against the United States in the gold market.
Favorable trade developments in India have enabled her to
divert some of the gold to herself, but the bulk of the new gold
has come to the United States. In 1923 new gold imports were
S294,000,000 compared with $238,000,000 in 1922, and in the first 7
months of 1924 gold came at the rate of more thanS1,000,000 a day.
During the last five months of 1924 considerable gold takings
by India directly from the South African mines, together with a
large volume of foreign loans floated in the United States, diminished the inflow of gold to this country to relatively small
proportions. The foreign loans were facilitated by the fact that
interest rates in New York were considerably lower than in
London and much lower than in Continental Europe. Thus
the low level of money rates in this country, caused partly by the
abundance of funds arising out of previous gold imports, was
a factor in reducing the volume of gold imports in the latter part
of 1924. In December of that year there wrere furthermore
substantial exports of gold, chiefly to Germany which withdrew
in gold a part of the proceeds of the 8110,000,000 loan floated
under the provisions of the Dawes plan for the settlement of
reparations. As a result there was in the closing month of 1924
a net export of gold from the United. States for the first time
since the autumn of 1920. While this outward movement of
gold did not reflect a definite change in the conditions that caused
gold to flow to the United States in the past four years, Vindicated
that, with the return of greater currency stability in Europe and
with the reestablishment of the relationship between certain
European currencies and gold, international gold movements
might be expected to be increasingly influenced by differences in
money rates and in price levels in different countries. The year
1924, therefore, which witnessed definite progress in the direction
of more normal currency conditions in many countries, also
saw a beginning of more normal gold movements. If these
developments continue they will have an important effect on the
Federal reserve system by tending to reestablish the relationship
between changes in the reserve position of the Federal reserve
banks and in the general credit situation.

CHAPTER I X
CHECK

CLEARING

AND

COLLECTION

AND

OTHER

SERVICES
It is hard to talk about a technical matter like check-clearing
and collection, the very sound of which is forbidding to the layman, in such a manner as to interest the general reader. But
technical as the matter may be in some of its phases, the function
is one that concerns every business man and in the final analysis
every person living in this country, no matter what his occupation
may be. Prior to the organization of the Federal reserve system,
payments by persons in one city of the United States to be made
in another city were in many respects on the same level as payments in a foreign country. Such a person had to buy a bill of
exchange and if the supply of bills was short, he had to pay a
premium, which sometimes was considerable. In many cases
a bank would accept out-of-town checks without charge, but
then the bank itself would have to secure exchange, and the cost
to the community was the same. Furthermore, final settlements
of balances between the cities had to be made by the actual shipment of cash. This cumbersome machinery of settling bills
between districts has been largely scrapped as a result of the
inauguration of the check-clearing service of the Federal reserve
banks. Member and non-member banks are now privileged to
deposit with a Federal reserve bank any checks that they may
have upon other banks, and to receive credit for these checks in
accordance with the time schedule based upon the actual length
of time that the collection of these checks normally requires.
The banks do not have to draw on other cities, and need not
maintain balances for the purpose of covering such drafts. They
leave all this to the Federal reserve banks which make settlements
among themselves through the gold settlement fund.
Principles Underlying the Clearing of Checks.—The fundamental principle underlying check collection is that over a con-

101

102

FEDERAL

RESERVE

SYSTEM

OPERA TIOX

siderable period of time the volume of purchases of goods or
services by a community from the outside must substantially
equal the volume of sales of services and goods by that community. In other words, no town can permanently purchase
more than it sells any more than an individual can continually
receive things from others without offering some equivalent in
return. There may be seasonal differences, so that a district or
a community may purchase a great deal during one part of the
year, and during that time may make a much larger volume of
payments outside of the district than it receives from the outside. But such a season must be balanced by another season
when the conditions are reversed. Broadly speaking, the agricultural districts make their purchases in the early part of the year
when they buy machinery, and fertilizers, as well as personal supplies, such as clothing, etc. In the fall months, on the other hand,
when crops mature, these districts sell their products and receive
payment from industrial centers. An undeveloped community
may, for a considerable time, purchase more goods from the
outside, because the older communities may invest money in the
new one and, so long as the volume of new investment continues
to be larger than interest and amortization payments, there
may be a continuous flow of goods to the district in exchange for
claims upon it in the form of securities or open accounts. But
interest must be paid upon such advances and ultimately the
principal will mature, so that in the long run the volume of
incoming and outgoing payments must balance. The movement
of funds between communities responds to an innumerable
variety of forces, but, broadly speaking, when the total volume
of purchases by a community is compared with the total volume
of its sales the difference, which may be called the balance of
payments, is generally small even over a period of time so short
as a year. If this were not so it would not be of much use to
establish a system of check-clearing because large unfavorable
balances would accumulate and wTould have to be settled by the
shipment of cash. Since, however, the accounts balance approximately, it saves a great deal of time and money to cancel the
payments and receipts of each community, before settling the
ultimate balance. This is what the Federal reserve clearing
system attempts to do, and it is clear from this exposition that

CHECK CLEARING

AND COLLECTION

103

the more nearly all-inclusive the system is the more effectively it
can function. An ideal system would include all payments
from all districts, and such an all-inclusive system would result
in a very large proportion of cancellations and a very limited
volume of balances. In substance the idea is the same as that
upon which is based the operation of a clearing house between
banks in one city. It is well known that balances that banks
must pay to each other are a small fraction of the volume of
clearings, and that even these balances accruing each day gradually cancel each other, so that the amounts held for the credit of
the individual banks with the clearing house remain fairly steady
over long periods of time. The Federal reserve banks and
branches act as clearing houses in the cities where they are
situated and in addition clear and collect out-of-town checks
deposited with them.
Growth of the Clearing Service.—The framers of the Federal
Reserve Act intended through the operation of the reserve banks
to improve the facilities for check clearing. They were not,
however, originally inclined to include banks other than member
banks in the benefits of the system, but on June 21,1917, the Act
was so amended as to permit the reserve banks to receive on
deposit checks and drafts payable upon presentation without
reference to the character of the banks upon which the checks
were drawn, substituting this proviso for one which permitted
the banks to receive checks only on solvent member banks. Out
of the application of this provision of Sec. 13 of the Reserve Act
there has grown a controversy between certain small banks,
particularly in the South, and the reserve system. These banks
derived a substantial part of their income from exchange charges
and they have been reluctant to dispense with this source of
income. What it amounted to was this: If a person, say Mr.
Jones, a resident of Mobile, Alabama, bought a book in New
York, and in payment sent a check upon his bank in Mobile,
the book store in New York would deposit the check with its
own bank in New York and that bank would transfer it to the
Mobile bank which would send a draft for the amount to the New
York bank. Under the system of exchange charges the Mobile
bank would refuse to pay the full amount of the check but
would deduct a commission of one-tenth of 1 per cent or more

104

FEDERAL

RESERVE

SYSTEM

OPERA TIOX

for its services. This charge would, of course, make it neccssary
for the New York bank to pass the exchange charge on to the
depositing book-seller, who in turn would add it to the selling
price of the book, so that the ultimate result would be an increase
in the price of New York books to a purchaser in Mobile. In
order to avoid the payment of exchange charges banks receiving
out-of-town checks would often send them for collection to city
correspondents, with whom they may have had an agreement for
full credit for checks sent in. In this way, checks instead of going
direct from the bank where they were deposited to that upon
which they were drawn, would travel around through many
hands seeking to avoid the exchange charge. This indirect
routing of checks resulted in a loss of time and in needless expense
and was one of the evils that the check-clearing service of the
reserve banks was intended to correct.
The exchange charges with which the check-clearing system is
concerned should not be confused with exchange charges by a
bank upon checks on other cities deposited with it. It is customary and fair that a bank in Washington receiving on deposit a
check for $10 on a San Francisco bank should withhold credit for
the check until collection at San Francisco has been made and
the proceeds received, and possibly also charge something for the
service involved in the correspondence and the handling of the
check. There has been no controversy about charges by banks
which make distant collections. The difficulty is concerned with
the charges made by banks for honoring checks of their own
depositors who have made out-of-town payments and whose
checks are presented for collection by representatives of the
out-of-town payees.
The Par Clearance Controversy.—The Federal Reserve Act
contains the following clause:
That nothing in this or any other section of this Act shall be construed as prohibiting a member or non-member bank from making
reasonable exchange charges to be determined and regulated by the
Federal Reserve Board, but in no case to exceed 10 cents on $100 or
fraction thereof, based on the total of checks and drafts presented at
any one time for collection or payment of checks and drafts and remission therefor by exchange or otherwise; but no such charges shall be
made against the Federal reserve banks.

CHECK

CLEARING

AND

COLLECTION

105

This last clause means that the Federal reserve banks may not
pay exchange charges, and therefore, if a member bank charges
exchange, the Federal reserve bank must either refuse to collect
checks upon that bank, or must collect them through other
banks or by presenting them over the counter. The handling
of such checks involves considerable trouble and expense to the
reserve banks. This was the incentive for a campaign for
universal par collection, which was actively pursued by the
reserve banks and the Reserve Board in 1919 and 1920. One
reason was that it was troublesome and expensive for banks
clearing through the reserve banks to sort out checks on banks
not remitting at par and to collect such checks by other methods.
The Board also felt that it would be a decided step in the direction
of greater smoothness and efficiency in our business machinery,
if the banks were enabled to deposit with the reserve banks for
clearing and collection all the checks brought to them by their
customers. This effort, however, encountered a determined
opposition on the part of many small banks, and the legislatures
of some states passed bills making the collection of checks through
the Federal reserve system more difficult. Such acts were passed
by the legislatures of Mississippi, North Carolina, Louisiana,
South Dakota, Georgia, and Alabama.
One point involved in the matter is this: If a check upon a
bank is brought to it and presented over the counter, the bank
is obliged to cash it so long as the drawer of the check has a
balance to meet the amount of the check, since otherwise the
bank would be defaulting upon its lawful liabilities. The
Federal reserve banks in some districts made use of this obligation
to honor checks presented over the counter and made it a practice to have agents in the small towns, and when checks would
come in on banks which refused to remit at par by draft, the
reserve banks sent these checks to their local agents who would
present them for payment at the drawee banks. In this way the
reserve banks expected to encourage the small banks to join the
par collection system by agreeing to remit at par. The banks,
however, took exception to this action. They accused the reserve
banks of using unfair means by saving up large amounts of checks
and presenting them at times when this was embarrassing to the
bank, The matter came to trial in the well-known Atlanta case,

106

FEDERAL

RESERVE

SYSTEM

OPERA TIOX

in which certain banks in Fulton County, Georgia, were endeavoring to restrain the Federal Reserve Bank of Atlanta from collecting, otherwise then through the mails, checks drawn on the
plaintiff banks. This suit was tried in the lower courts and
decided in favor of the reserve bank. When it reached the
Supreme Court, this court held that if the facts in the case indicated a malicious intent on the part of the reserve bank its action
may not have been lawful, even though the collection of each
individual check by the method of direct presentation be entirely,
legitimate. The case was remanded to the Court of Appeals
of the Fifth Circuit which sustained the position of the reserve
bank, holding that no evidence of malicious intent had been
presented and that the reserve bank had acted within the law
and in the public interest. Upon this finding the Supreme Court
sustained the action of the Federal Reserve Bank of Atlanta and
dismissed the complaint.1
There has also been litigation to determine the constitutionality
of check collection acts passed by the state legislatures. The
legislature of North Carolina in 1921 passed a law entitled " A n
Act to Promote the Solvency of State Banks," Sec. 2 of which
reads as follows:
That in order to prevent accumulation of unnecessary amounts of
currency in the vaults of the banks and trust companies chartered by
this State, all checks drawn on said banks and trust companies, shall,
unless specified on the face thereof to the contrary by the maker or
makers thereof, be payable at the option of the drawee bank, in exchange
drawn on the reserve deposits of said drawee bank when any such
check is presented by or through any Federal reserve bank, post office,
or express company, or any respective agents thereof.
The Act also authorizes banking institutions chartered by the
state to charge a fee not in excess of one-eighth of 1 per cent on
remittances covering checks, the minimum fee on any remittance
therefor to be 10 cents. The constitutionality of this act was
questioned on several grounds. It was claimed that it violates
the constitutional provision prohibiting a state from making
anything except gold and silver coins a tender in payment of
1 American Bank and Trust Company et al., Appellants, vs. Federal Reserve
Bank of Atlanta el al. No. 717, October Term, 1922. Decision rendered on
June 11, 1923.

CHECK

CLEARING

AND

COLLECTION

107

debts, that it is contrary to the due process and the equal protection clauses of the constitution, and that it is in conflict with
the Federal Reserve Act because it prevents the Federal reserve
banks from collecting checks of such state banks as do not
acquiesce in the plan for par clearance, and interferes with the
duty of the Federal Reserve Board to establish in the United
States a universal system of par clearance and collection of
checks. The court's opinion in this case was delivered by Justice
Brandeis.1 The court held on the principal issue that par collection was not obligatory on the Federal Reserve Board or the
reserve banks, and that the North Carolina Act did not interfere
with any but optional activities of the Federal reserve system,
and was, therefore, not contrary to the constitution of the United
States. This decision by the Supreme Court of the United States
means that the reserve banks, in the absence of additional legislation, will have to refuse to handle checks drawn upon banks not
remitting at par. It also means that adherence to the par collection system on the part of any non-member bank is voluntary
and that the further spread of the system will have to depend upon
an increasing realization by the banks that it is to their ultimate
advantage to further the prompt and economical clearance and
collection of checks.
Volume of Business.—In order to give an idea of the amount
of business done by the reserve banks in the collection of checks,
the following table is introduced showing the total number of
checks handled and the amounts collected during 1920-1923.
Another table shows the number of banks on the par list and the
number that had not joined the par list in July, 1924. To be
on the par list a bank must signify its willingness to remit at
par for any check drawn upon it and presented for collection by
a reserve bank either by mail or otherwise.
1

Reprinted in Appendix F.

CLEARING OPERATIONS OF FEDERAL RESERVE B A N K S :

(Numbers in thousands.

1920-1923

Amounts in thousands of dollars)

Number of items handled

ta
»

Amount of items handled

Class of item

Zt
1920

Total items handled
Items drawn on banks in:
Federal reserve bank city
Federal reserve branch cities
Same district outside Federal
reserve bank and branch
cities
Other Federal reserve districts
Items drawn on United States
Treasurer

1921

1922

1923

1920

1921

1922

1923

fet
£

452,116 522,676 5S4,882 639,204 $156,509,264 $119,160,048 $150,506,500 $196,636,073
63,599

78,374

97,517

94,643

72,494,620

58,365,281

87,098,642

108,470,604

23,447

33,142

39,544

42,842

20,22S,821

16,297,746

17,320,887

35,411,949

337,62S 377,856 413,679 465,736

57,083,187

3S,S25,254

40,423,947

48,140,789

104

162

190

23,593

22,017

48,641

S5,996

27,367

33,200

33,9S0

35,803

6,679,043

5,649,747

5,014,3S3

4,511,735

U3
t*J

CHECK

CLEARING AND

COLLECTION

109

NUMBER OF M E M B E R BANKS AND OF NON-MEMBER BANKS ON P A R LIST
AND N O T ON PAR L I S T : JULY,

1924

Non-member banks
Federal reserve district

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total

Member
banks

On par
list

422

231

849

370

Not on
par list

731

519

874

1,076

627

793

691
1,109

527

379

1,428

3,988

187

629

2,273

306

930

1,682

664

1,097

2,765

201

842

886

136

785

858

9,741

15,820

3,353

Fiscal Agency Operations and Other Services.—Another
important function that the Federal reserve banks perform is their
operations as fiscal agents of the government. The banks during
the war acted as the agents of the government in issuing bonds
and certificates, in paying coupons, etc. Recently the subtreasuries of the United States have been abolished and the
reserve banks are now the sole fiscal agents of the government.
This involves the redemption of all classes of government currency, the cashing of coupons, and the redemption of maturing
government obligations. The government keeps most of its
funds at member banks and calls on these banks when it requires
funds. The banks then turn over the amount called for to the
reserve bank, the government paying its obligations by check on
the reserve bank. The Treasury compensates the reserve banks
for part of the expense involved in thesefiscalagency functions, butr

110

FEDERAL

RESERVE

SYSTEM

OPERA TIOX

much of the work for the government is done gratuitously and is
absorbed into the reserve banks' expenses.
The reserve banks also perform an important service in supplying currency to all member and non-member banks. Any bank
desirous of obtaining cash can do so by applying to the reserve
bank and offering suitable payment for the cash. The banks
also send surplus money to the Federal reserve banks and in
return receive credit on the books of the reserve bank, or else
receive new currency. Receipts and shipments of currency by
the reserve banks total about 87,000,000,000 a year.
The reserve banks also examine the condition of member banks
in their district, particularly of non-national member banks,
since the national banks are under the general supervision of the
Comptroller of the Currency who has a large examining force
of his own. In the examination of state bank and trust company members the reserve banks generally cooperate with the
state authorities and in many cases accept the result of examinations made by these authorities, but the reserve banks retain
the privilege of independent examinations and not infrequently
make use of this privilege.
Still another service performed by the reserve banks is their
acting as collection agents for member banks in connection with
items other than checks. This service is free, except that a
small charge is made on items returned unpaid and unprotested.
The charge is for the purpose of discouraging the use of the reserve
banks' collection facilities for the presentation of mere "dunning
drafts." In cases where a reserve bank collects an item through
some other bank any reasonable collection charge made by that
bank is deducted by the reserve bank from the face amount of
the item before remitting the proceeds to the member bank from
which the item was received for collection. The reserve banks
also act as custodians of securities. This function grew out of
the fact that the banks had to undertake the custody of securities
offered by the member banks as collateral for discounts. Since
the reserve banks had to take care of these securities and had to
have adequate facilities for their safekeeping, the banks undertook to take care of any other securities that the member banks
wished to entrust to their care. The reserve banks clip and
cash the coupons attached to the securities held in custody for

CHECK

CLEARING

AND

COLLECTION

111

their customers, thus saving the owners the trouble of doing it.
These services involve a large amount of work and of expenditure
without being related to the volume of earning assets of the
reserve banks.
In the next chapter there is presented a discussion of the
earnings and expenses of the Federal reserve banks.

CHAPTER X
EARNINGS AND EXPENSES
Federal reserve banks, like most central banks, arc owned by
their stockholders. But the stock of the reserve banks, in contrast to most other banks of issue, is held entirely by the member
banks, which are required by law to subscribe 6 per cent of their
own capital and surplus as their share of the stock of the Federal
reserve bank. Three per cent of this subscription has been
paid in and the other three per cent is subject to call. Thus the
reserve banks are owned by their member banks, which are
required by law to supply their share of the reserve banks'
capital. The earnings of the reserve banks, after current
expenses and a 6 per cent cumulative dividend on the capital
stock has been met, are divided between the government and
the surplus account. The present law provides that the banks
may build up surplus accounts equal to their subscribed capital
before they need to turn over any part of their earnings to the
government. When the surplus equals the subscribed capital,
10 per cent of net earnings continues to be added to this account
and the remainder is paid to the government as a franchise tax.
Distribution of Earnings.—The following table shows gross and
net earnings of the twelve Federal reserve banks combined and
their distribution from 1914 to 1923. The surplus account of
all the banks, with the exception of Dallas, has equaled their
subscribed capital and consequently they have all paid franchise
taxes. In 1920 and 1921 the total franchise tax amounted to
§60,000,000, but in 1922, owing to a much smaller volume of
discounts, it amounted to only 811,000,000, and in 1923 to only
S3,600,000. In the latter year the earnings of three reserve
banks, those of Cleveland, Dallas, and San Francisco, did not
exceed their expenses and dividends and their payments into
surplus account and these banks, therefore, paid no franchise
tax for that year. In 1924, with earning assets at the lowest

112

GROSS

AND

NET

EARNINGS *OF THE

FEDERAL

RESERVE

BANKS,

ALSO

DISPOSITION

MADE

NET

EARNINGS,

1914-1923
Earnings

Disposition of net earnings

Year
Net

Gross

1914
1915
1916
191 7
191 8
191 9
1920.
192 1
192 2
192 3
Total

63,145
2,110,107
5,217,937
16,128,339
67,584,417
102,380,583
181,297,338
122,864,605
50,490,739
50,708,566

$598,845,776

Dividend
payments

310,287
168,828
2,750,998
9,579,607
52,716,310
78,367,504
149,294,774
82,087,225
16,497,736
12,711,286

$403,863,981

217,463
1,742,774
6,801,726
5,540,684
5,011,832
5,654,018
6,119,673
6,307,035
6,552,717

$43,947,922

Transferred to
surplus

1,134,234
48,334,341
70,651,778
82,916,014
15,993,086
-659,904
2,545,513

$220,915,062

Franchise tax
paid to United
States
government

1,134,234
2,703,894
60,724,742
59,974,466
10,850,605
3,613,056

$139,000,997

Profit ( + ) or
loss ( —)
carried
forward

-$
310,287
48,635
+ 1,008,224
+
509,413
- 1,158,715

114

FEDERAL

RESERVE

SYSTEM

OPERA TIOX

level since 1917, several reserve banks may have to pay no franchise tax and it is uncertain how many of the banks will be
able to meet their expenses and dividend requirements out of
current earnings.
Sources of Earnings of the Reserve Banks.—Income-producing
operations of the reserve banks are largely of three kinds—the
discount of bills for member banks, and the purchase in the open
market of acceptances and of government securities. Other
sources, including the receipt of penalties imposed on member
banks for deficient reserves and miscellaneous earnings, are
relatively unimportant. In the following table are shown the
earnings of the reserve banks from different sources for the years
1920-1923, and for the first 6 months of 1924.
SOURCES OF EARNINGS OF THE FEDERAL RESERVE

BANKS

(In thousands of dollars)

Source

1920

1921

1922

1923

1924 (6
months)

Discounted bills
$149,060 8109,599 $26,523 $32,956 $10,709
3,815
Purchased acceptances
5,234
9,371
22,020
5,629
5,035
United States securities
7,141
7,444
6,254 16,682
214
Deficient reserve penalties...
1,573
521
1,178
603
630
Miscellaneous
1,503
416
600
1,053
Total earnings

$181,297 $122,865 $50,490 $50,708 $20,403

Discounts for member banks were the principal source of
income of the reserve banks throughout the period shown in the
table, and also for earlier years, with the exception of the period
prior to our entry into the World War when acceptances and
government securities were the chief source of earnings. The part
played by acceptances as a source of earnings varied considerably
from year to year, and government securities also furnished a
different proportion of earnings in different years. The latter
proportion was larger in 1922 than in any of the other complete
years shown in the table, but during the first 6 months of 1924

EARNINGS AND

EXPENSES

115

this proportion increased continuously and indications are that
more than one-half of the reserve banks' earnings during that
year will be derived from government securities.
Factors Affecting Earnings of Reserve Banks.—In view of the
sources of the reserve banks' earnings, as they have been shown
above, it is evident that the amount of these earnings depends on
the volume of discounts and open-market purchases made by the
banks and on the rate of discount or interest earned by the bills
and securities. The average daily holdings of the different
classes of earning assets and the average rate of earnings thereon
are shown in the table on the following page for the years 19201923 and the first 6 months of 1924.
In 1920 and 1921 the large earnings of the reserve banks were
the result chiefly of the large volume of discounts for member
banks and the prevailing high level of discount rates. Holdings
of acceptances and government securities were relatively small,
and the rate of earnings on the latter was low, owing to the fact
that these earnings consisted, to a large extent, of 2 per cent
Pittman certificates held as cover for Federal reserve bank
notes. In 1922 and 1923 the average holdings of discounts
were much smaller and the average earnings on discounted
paper declined from about 6 to about 4y 2 per cent. In 1922
government securities were a more important source of earnings,
both because their holdings increased and because the yield was
considerably higher. During the first half of 1924 the rate of
earnings was lower and the average volume of earning assets
was smaller than in any of the years from 1920 to 1923. Government securities constituted a larger part of the earning assets
than at any other time except in 1922.
Can the Reserve Banks Control Their Own Earnings?—With
these factors determining the amount of earnings of the Federal
reserve banks, the question arises: To what extent can these
banks increase their annual income by adding to one or the other
class of earning assets? The volume of discounts held by the
reserve banks depends on the demand for reserve bank credit by
the member banks, which in turn reflects chiefly the demand for
currency by the public. The reserve banks cannot directly
influence this demand, and the volume of discounts they hold is,
therefore, controlled largely by influences other than their own

l—l

A V E R A G E HOLDINGS OF E A R N I N G

ASSETS AND R A T E

OF E A R N I N G S

Daily average holdings (millions of dollars)

OF THE F E D E R A L R E S E R V E

BANKS

Annual rate of earnings (per ccnt)

Class of earning assets
1920

Discounted bills
Purchased acceptances...
United States securities..

$2,530
389
324

$1,804
92
264

Total earning assets 1 ...

$3,243

$2,160

$1,187

1923

1922

1921

573
159
455

1924 (6
months)

1920

1921

1922

1923

1924 (6
months)

738
227
186

$180
185
251

5.88
5.66
2.21

6.07
5.70
2.37

4.63
3.54
3.67

4.46
4.14
4.01

4.47
4.14
4.02

$1,151

$916

5.50

5.61

4.11

4.33

4.28

Including small amount of municipal warrants and Federal Intermediate Credit Bank debentures.

EARNINGS AND

EXPENSES

117

desires in the matter. The rate of discount, which is the other
factor determining the amount of earnings, is fixed with reference
to credit conditions and with no consideration whatever of its
effect upon the reserve banks' earnings. The situation in
respect to acceptances is somewhat similar. Though the reserve
banks have authority to purchase acceptances in the open market
on their own initiative, the volume of acceptances available for
purchase depends upon the volume executed, which in turn is
affected by the condition of our foreign trade, and upon the level
of rates prevailing in the money market, which influences dealers
in acceptances in their decision whether to sell their bills to the
reserve banks or to the investing public. In actual practice the
reserve banks have, as a rule, purchased such acceptances as
have been offered to them, and have only, to a relatively small
extent, entered the acceptance market upon their own initiative.
In acceptance operations, as in discount operations, the reserve
banks are, therefore, conducted with a view to "accommodating
commerce and business" rather than with reference to their
own earnings.
It is by the purchase of United States obligations that reserve
banks can more directly increase their earnings, as the supply of
these securities under present conditions is abundant, and as the
reserve banks have no direct responsibility for the government
security market. But even in this class of operations the reserve
banks, under ordinary conditions, can influence their own earnings only to a limited extent. As has been pointed out in another
chapter,1 the purchase of securities by the reserve banks, both in
1922 and in 1924, has had the effect of placing funds at the disposal
of member banks which used these funds to reduce their borrowings at the reserve banks, so that the total volume of earning
assets of the reserve banks and of their earnings was not materially affected by the purchases. So long as the total volume of
reserve bank credit in use adjusts itself to the market demand
for reserve bank funds, the reserve banks can influence the
volume of their earning assets, and consequently of their earnings, only to an extremely limited extent. Only at a time when
the member banks are practically out of debt to the reserve
banks, so that funds placed in the market by the reserve banks
1

P. 58.

118

FEDERAL

RESERVE

SYSTEM

OPERATION

through the purchase of securities cannot be returned to thein
in reduction of discounts, can these banks make substantial
additions to their earnings by purchases in the open market.
In view of these considerations, it becomes evident that the
criticism directed against the reserve banks on account of their
large earnings in 1920 and 1921 is based on a misunderstanding
of the Federal reserve system. The factors determining the
income of reserve banks are so largely the outcome of general
credit conditions, that the banks' own attitude toward earnings
has been, during most of the time since the establishment of the
system, a negligible factor in the situation. It will be remembered also, that net earnings above the 6 per cent dividend are
turned over to the government, so that the reserve banks have
but a small incentive to make efforts to increase their income,
especially at a time when it exceeds their requirements for
dividends and expenses. A discussion of the volume and
character of the reserve banks' expenses is presented in the
following pages.
Expenses of the Federal Reserve Banks.—Federal reserve
bank activities increased rapidly as the volume of their operations expanded, especially after 1917, and expenses of the
reserve banks assumed large proportions in the past 6 years. In
round figures the total expenses have been as follows:
1914
1915
1916
1917
1918
1919
1920
1921
1922
1923
1924 (6 months)

373,000
1,941,000
2,467,000
6,549,000
14,848,000
24,013,000
32,003,000
40,777,000
33,993,000
37,997,000
14,703,000

Expenses of the reserve banks were at their maximum of over
840,000,000 in 1921, and declined somewhat after that year, but
in 1923 the total was still about §38,000,000. Thus, in spite of
a decrease in reserve bank credit in use from about $3,000,000,000
to about $1,000,000,000 and a decline in the total volume of

EARNINGS

AND

119

EXPENSES

discount and open-market operations from $96,000,000,000 in
1920 to $29,000,000,000 in 1922 and $44,000,000,000 in 1923,
expenses of.the reserve banks have been only slightly reduced
from the level reached at the time of the largest demand for
reserve bank credit. This relative constancy of expenditures
is due to the fact that a large part of the reserve banks' outlays is
in departments not directly related to the loaning operations
of the banks. Following is a condensed table showing the principal items of expense at the Federal Reserve Bank of New York
in 1923. A more detailed statement of these expenses is shown
on page 280.
Maintaining the accounts of the bank
Supplying currency and coin
Making loans
Collecting checks, etc.
Supplementary services
Services in connection with government loans
General or supervisory expenses
Executive salaries
.
$203,640
Work of the Federal reserve agent
352,575
Maintaining the general audit
260,226
Directors' fees and traveling expenses
21,664
Share of the expenses of the Federal Reserve
Board
190,847
Total

211,363
1,919,226
418,017
2,207,061
447,207
648,310
1,028,952

$6,880,136

The statement brings out the fact that the check-clearing
service accounts for the largest item of expense and the supplying
of currency for the next largest, while the cost of making loans is
one of the minor items amounting to only about 6 per cent of the
total expenses. It is because the banks' expenses are due largely
to other activities than credit extension that they continue heavy
in years of relatively small demand for reserve bank credit.
Cost of Services Rendered by the Reserve Banks—Mention
has already been made of the reserve banks' work in connection
with check clearing and collection, and with the supplying of banks
with currency and coin. In addition the reserve banks perform
for their members many of the services that as city banks render
to their country correspondents. The reserve banks store
securities for their member banks and cash the coupons attached

120

FEDERAL RESERVE SYSTEM

OPERATION

to these securities; they collect many non-cash items, making
a small charge only in case of non-collection in order to discourage
member banks from using the reserve banks as dunning agents;
they make wire transfers of money between member banks in
different districts; and they supply member banks with information on credit and business developments by issuing monthly
reviews of economic and banking conditions. In addition to
their services for the member banks the reserve banks act as
fiscal agents of the government and are reimbursed only for
a small part of their expenditures in this connection.
These large expenditures of the reserve banks for gratuitous
services have become a matter of serious consideration, particularly since the earnings of the banks have declined materially in
the past few years. The question has been raised whether the
reserve banks should not curtail some of these services, and
certain minor moves in this direction have been effected. No
substantial economy, however, is likely to be brought about by
this method so long as the banks continue to perform the most
expensive services, namely, the collection of checks and the
supplying of currency to member and non-member banks. The
desirability of charging for some of the services now rendered
gratuitously has also been considered, but here again relatively
little can be accomplished, unless a charge is made for the collection of checks. The adoption of such a policy, however, is
unlikely, as the check collection service is one rendered to
the whole community and one that has resulted in the disappearance of numerous delays and undesirable practices, such as the
indirect routing of checks, which prevailed prior to the establishment of the system's clearing and collection service, and would
reappear again if this service were to be curtailed or ceased
to be gratuitous. While certain economies may be effected
in the system's expenditures through the curtailment of certain
non-essential services and through the imposition of cost-covering
charges for certain others, no large reduction in expenses is likely
to be accomplished by these methods. It is through the development of more efficient methods of operation that the largest
reduction in the system's costs is likely to be brought about.
Economy and Efficiency.—Considerable progress in the direction of economy and efficiency of operation has been made by

EARNINGS

AND

EXPENSES

121

the system in recent years. The reserve banks and the Reserve
Board are making every effort toward performing their functions
as economically as is consistent with good service. The growth
of the banks' operations was very rapid, and while they have been
administered as efficiently as was possible under the circumstances, there was not time thoroughly to systematize their
operations and to avoid unnecessary motion and duplication of
effort in every detail. The appointment by the Board of a
joint committee of Board Members and operating officials on
economy and efficiency and the careful scrutiny of the expenses
of the different departments of the banks, with unit cost comparisons, etc., has already resulted in a material reduction in operating costs, and continued efforts along these lines are expected
still further to curtail the system's expenses.
There has been a great deal of criticism of the reserve banks for
extravagance, especially in the payment of salaries and in the
construction of buildings. A thorough study of the subject of
salary payments made by the Board and presented to the Senate
showed that the banks do hot pay salaries as high as member
banks of similar size in the same districts.1 The Board's report
points out that the reserve banks, in order to compete with the
member banks for the services of men competent to bear the
heavy responsibilities of conducting the affairs of the reserve
banks, must pay sufficient salaries to induce these men to remain
at their posts. The reserve banks are able to retain their personnel, notwithstanding somewhat lower salaries than those paid
by member banks, because positions with the reserve bank carry
a certain amount of security and prestige which makes able men
willing to serve for lower compensations than they could obtain
elsewhere, but the banks cannot afford to adopt a level of salaries
that would result in a constantly shifting and a less efficient
personnel than is had by other important banking institutions.
True economy does not lie in that direction.
Another phase of Federal reserve bank expenditures which
has been subject to serious attack is the construction of Federal
reserve bank buildings. This kind of criticism has led to the
enactment of a law limiting the expenditures of a reserve bank
in the construction of branch bank buildings, without consent of
1 67th

Congress 1st Session Senate Document No. 75,

122

FEDERAL RESERVE SYSTEM

OPERATION

Congress, to 8250,000. In this respect, also, the rapid growth
of the banks created a serious situation by making it difficult for
them to secure adequate quarters, with the consequence that
they suffered seriously from overcrowding. The banks, therefore, have deemed it expedient to build quarters of their own with
sufficient capacity to take care of the peaks of their business, in
some cases with the intention of renting unused portions of the
buildings during times of lessened activity. It so happened
that reserve bank building operations were at their height when
business was going through a period of depression in 1920 and
1921 and the banks were, therefore, criticized for extravagance
at a time of general distress. Criticism on this score has, however, largely subsided, and the efficiency of the banks' operations
has increased since they have become established in more adequate quarters.
How Can the Reserve Banks Meet Their Expenses?—The
Federal reserve system, even after all possible economies of
operation will have been effected, will require a large annual
budget for carrying on its activities. The system's earnings, on
the other hand, since they depend on the extent of the demand
for reserve bank credit, are likely to undergo considerable fluctuations and in some years to fall below the amount required to
cover the expenses and dividends of the reserve banks. The
banks can do but little to increase their income through openmarket operations, as has been explained already, though at
times, when member banks have liquidated practically their
entire indebtedness to the reserve banks, security purchases by
these banks may result in a net increase of their earning assets.
In view of the position taken by the Federal Reserve Board,
however, that open-market operations shall be conducted solely
with a view to their effect on credit conditions,1 it is not to be
anticipated that the reserve banks will endeavor to maintain
their earning assets for the sole purpose of being able to meet
expenses. It is, therefore, probable that there will be years
when some of the banks will show a deficit as a result of their
year's operations. A means for reducing the likelihood of such
an occurrence would be the development of methods of allotting
earning assets to the various reserve banks in accordance with
1

See

p. 61,

EARNINGS

AND

EXPENSES

123

their requirements; in other words, in time of need to treat the
system as a unit in the matter of meeting expenses, just as it is
considered as a unit in meeting the demand for credit when the
limits of lending power at some of the banks are exceeded. Steps
in this direction have been made by the appointment and through
the activities of the inter-reserve bank committee on openmarket operations.
In case, however, the earnings of the system as a whole for a
given year should fall below its expenses, the system would
have no choice other than to meet the deficit out of surplus.1
It has been ruled by the Attorney-General of the United States
that such a procedure is permissible under the law, and it is
entirely consistent with Federal reserve policy. In serving the
business community the system, in years of heavy credit demand,
has made large earnings, a part of which has been set aside in a
reserve fund which now amounts to §220,000,000. Upon this
fund the system can legitimately draw at times when the demand
for reserve bank credit is not sufficient to result in adequate
earnings for the reserve banks. By pursuing this policy, the
system can continue to perform its functions in years of large
and of small demand for credit without departing from the
principle of conducting its operations solely with a view to
their effect on general credit conditions, and without reference
to their effect on the earnings of the reserve banks.
*In 1924 six of the reserve banks failed to have sufficient earnings to
meet their expenses and dividends and were given authority by the Federal Reserve Board to cover the deficiency, amounting to about §3,250,000,
out of surplus.

CHAPTER X I
MEMBERSHIP IN THE FEDERAL RESERVE SYSTEM 1
Membership in the Federal reserve system consists of all
national banks, which must join the system or give up their
national charters, and of such state banks and trust companies
as are eligible for membership and voluntarily avail themselves
of this eligibility. State banks may leave the system at any
time on 6 months' notice.
Growth of Membership.—A practically continuous increase
in the number of member banks has taken place since the organization of the system, so that at the present time approximately
33 per cent of all the banks, representing over 70 per cent of the
total banking resources of the country, are members of the
system. The annual growth of membership and its distribution
between national and non-national banks are shown in the
Member banks
End of year

1914
1915
1916
1917
1918
1919
1920
1921
1922
1923
1924 (June)

Total

National

Non-national

7,582
7,631
7,614
7,907
8,692
9,066
9,606
9,779
9,859
9,774
9,650

7,574
7,600
7,577
7,657
7,762
7,885
8,125
8,165
8,220
8,179
8,080

8
31
37
250
930
1,181
1,481
1,614
1,639
1,595
1,570

1 Based largely on "Review of the Month/' published in the Federal
Reserve Bulletin_for November, 1923.

124

MEMBERSHIP

IN THE FEDERAL

RESERVE

125

SYSTEM

table on preceding page. On June 30, 1924, of the total of 9,650
members, 8,080 were national banks and 1,570 state banks and
trust companies. The more rapid growth in non-national membership occurred during the years 1917 and 1918, state bank and
trust company members increasing from 37 at the end of 1916 to
930 at the end of 1918 and to 1,570 at the present time. During
the war, joining the Federal reserve system was considered a
patriotic act, and the President of the United States issued a
letter urging state banks to become members.
Membership in the Federal reserve system was largest in 1922,
and between the end of that year and the middle of 1924 there
was a decrease in membership of 209. This decrease was the
net result of 519 banks dropping out of the system in various
ways and of 310 other banks becoming members. In order to
show a clearer picture of the character of changes in membership
the following table gives an analysis of these changes for the
18-month period after the peak in membership was reached.
CHANGES IN MEMBERSHIP IN THE FEDERAL RESERVE

SYSTEM

(December 31, 1922-June 30, 1924)
Losses

Total losses to membership...
Voluntary liquidation.
Suspension of operation....
Insolvency—national banks,
non-national banks
Mergers between member
banks
Absorption by non-member
banks
Withdrawal

Number

519
50
34
150
21
138
82
44

Additions

Total additions to membership
Primary organization of
national banks
State institutions joining,
as such
Conversion of non-member state institutions
into national banks
Reopened after suspension
Other

Number

310
136
97

64
12
1

Of the 519 losses of members to the system during the period,
171 were caused by insolvencies, as 1923 and 1924 were years
during which an unusually large number of banks failed as the
result of unfavorable conditions in the agricultural districts.
There were also 138 mergers between member banks which

126

FEDERAL

RESERVE SYSTEM

OPERATION

resulted in a decrease in the number of members without changing the banking power of the system. During the entire period
only 44 state banks voluntarily withdrew from membership
and this loss was considerably more than made up by the addition of 97 other state banks and the conversion of 64 state banks
into national banks which automatically made them members
of the system.
Distribution of Membership.—A survey of the distribution
of membership by Federal reserve districts shows that the
largest number of member banks is in the four middle-western
districts, which have nearly half the member banks, while the
larger proportion of member bank resources, as is to be expected,
is in the eastern districts, nearly a third of the total resources
being in the New York district alone. The table following shows
the number and total resources of member banks, separating
national and non-national, by Federal reserve districts. An
important fact brought out by the figures is that non-national
banks, which constitute less than one-sixth of the number of
member banks, represent more than one-third of the resources.
This reflects the much larger average size of state bank and trust
company members than of national banks. In fact, the total
resources of the more than 8,000 national banks are about
MEMBER BANKS,

JUNE 3 0 ,

Number
Federal reserve bank

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago.....
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
Total

1924
Resources (millions of dollars)

Nonnational
banks

All
banks

National
banks

421
840
730
873
624
518
1,422
627
895
1,087
837
776

385
696
660
753
559
385
1,058
497
794
1,054
651
588

36
144
70
120
65
133
364
130
101
33
186
188

9,650

8,080

1,570

National
banks

Nonnational
banks

$ 2,570
11,227
2,524
3,499
1,517
1,245
5,210
1,471
1,089
1,464
1,000
2,960

$35,777

$22,556

All
banks

1,770
6,008
1,934
2,050
1,287
830
2,993
913
994
1,327
898
1,552

800
5,220
590
1,449
230
414
2,217
558
95
138
102
1,408

$13,221

MEMBERSHIP

IN THE FEDERAL

RESERVE

SYSTEM

127

$22,000,000,000, or an average of about $2,500,000, while the
total for the 1,600 state bank and trust company members is
about $13,000,000,000, or an average of about $7,500,000.
Banking Power Outside the Federal Reserve System—For
the country as a whole, two-thirds of all the banks, both eligible
and ineligible, are still outside the system, but the geographic
distribution of non-member banks is far from uniform. The
largest number of such banks is concentrated in the agricultural
districts, while in the eastern financial and industrial districts
the proportion of non-membership is relatively low. In the
New York district it is only 30 per cent, while in the St. Louis
district it is 81 per cent, and in nearly all of the middle-western
and southern districts it is more than 70 per cent. Following
are the percentages of non-member banks by districts:
Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta

PER

CENT

35
30
41
55
71
74

Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

75
81
73
73
55
54

When measured in terms of total banking resources, the proportion of banking power outside the system is much less than
is indicated by these percentages based on the number of nonmember banks. These banks are on the average much smaller
than member banks, so that non-member banks, which constitute
about two-thirds of the total number of banks, represent less
than one-third of the total banking resources. In resources,
however, as in the case of numbers, the proportions outside the
system are, in general, largest in the agricultural districts, and
particularly in the Middle Western States. Five States—North
and South Dakota, Kansas, Nebraska, and Iowa—in each of
which more than half of the banking resources are outside the
system, have 7 per cent of the total population and more than
20 per cent of all the banks in the country. This is the region
with a large number of small banks doing a business largely local
in character and serving chiefly rural communities. In some of
the southern states which have a large percentage of banks outside the system the proportion of resources held by non-member

128

FEDERAL

RESERVE

SYSTEM

OPERATION

banks is relatively low, as, for example, in Louisiana, where
non-members are 82 per cent of all banks but hold only 33 per
cent of the total banking resources. The percentage of total
bank resources held by non-member banks on June 30, 1923,
is shown by states in the following table, and is graphically
presented in the map (Fig. 14) on page 129.
PERCENTAGE OF TOTAL B A N K RESOURCES H E L D BY NON-MEMBER
JUNE 3 0 ,

Per
cent

Maine
New Hampshire.
Vermont
Massachusetts
Rhode Island
Connecticut
New York
New Jersey
Pennsylvania
Delaware
Maryland
District of Columbia
Virginia
West Virginia
North Carolina
South Carolina.....
Georgia
Florida
Alabama
Mississippi
Louisiana
Texas
Arkansas
Kentucky
Tennessee
Ohio

42.8
36.1
55.3

12.0
8.8
41.2

Indiana
Illinois
Michigan..
Wisconsin..
Minnesota.
Iowa
Missouri...

10.8
28.3
29.8
40.5
45.9
46.8

28.2
45.6
45.9

North Dakota.
South Dakota.
Nebraska
Kansas
Montana
Wyoming
Colorado
New Mexico...
Oklahoma

46.4
31.5
40.6
25.8
68.4
33.0
18.9
40.2

Washington.
Oregon
California...
Idaho
Utah
Nevada.
Arizona

34.1
39.1
26.4

BANKS,

1923

Total United States.

BANKING RESOURCES OUTSIDE OF FEDERAL RESERVE SYSTEM
JUNE 3 0 , 1 9 2 3

Vbtu^

Percentage of Bank Resources'
outside of Federal Reserve System
| UNDER 25 %
25 TO SO ¥o
• • SO AND OVER
Fio, 14.—On June 30, 1923, the proportion of banking resources outside the Federal reserve system varied from
9 per cent in Rhode Island and 11 per cent in New York to 68 per cent in Mississippi.

to
co

130

FEDERAL

RESERVE

SYSTEM

OPERATION

Relation of Non-member Banks to the Federal Reserve
System.—The relation of the smaller non-member banks in the
agricultural districts to the financial centers is through their
correspondents, with whom they carry balances and from whom
they secure accommodation, and most of these city correspondents are members of the system. In fact, member banks hold
over 90 per cent of the total bankers' balances of all banks. When
the resources of these non-member banks are not sufficient to
meet the needs of their customers, they turn for assistance to
their city correspondents who are members of the system, and
therefore the demand arising from non-member banks indirectly
reaches the Federal reserve banks. This procedure, however,
does not give the Federal reserve banks an immediate contact
with the sources of the demand for credit which they help to
supply, and provides only an indirect relationship between
the non-member bank and the Federal reserve system. Such
a relationship can hardly be regarded as a substitute for membership. Non-member banks have less assurance of accommodation
during periods of unusual demand for credit than they would have
if they joined the Federal reserve system, whose function it is
to furnish the additional credit required to meet the seasonal
and emergency needs of its members.
In commenting upon the indirect relation between non-member
banks and the Federal reserve banks, the Joint Committee of
Agricultural Inquiry in its report to Congress stated that:
. . . banks outside the Federal reserve system are without direct
access to the general reservoir of credit, consequently must rely for the
expansion necessary in times of stress or business expansion upon the
accommodation which it is possible to secure from their correspondents. These banks contribute little to the general reserves of the
country, as those reserves are now represented principally by deposits
in the Federal reserve banks. Consequently, if they are permitted to
borrow either directly or indirectly from the Federal reserve banks, in
times of stress or business expansion they must do so at the expense
of the reserves contributed by the banks which are members of the
Federal reserve system.
The attitude of Congress toward the desirability of direct
relationship between the rural banks and the Federal reserve

MEMBERSHIP

IN THE FEDERAL RESERVE SYSTEM

131

banks was apparently indicated by the provision in the agricultural credits act that the Federal reserve banks shall not discount for Federal intermediate credit banks paper bearing the
indorsement of such banks as are eligible but are not members of
the Federal reserve system. In June, 1923, the Federal Reserve
Board withdrew the general authority granted to member banks
during the war and post-war emergency period to discount with
Federal reserve banks paper acquired from non-members, so that
now this practice is permitted only upon specific approval by the
Federal Reserve Board.
Eligible Non-member Banks.—Under the present law most of
the banks outside the system are eligible for membership. While
in passing upon applications for membership the Federal Reserve
Board gives consideration to the financial condition of the applying bank, the general character of its management, and whether
or not the corporate powers exercised are consistent with the
purposes of the Federal Reserve Act, the most definite provision
with regard to eligibility is in connection with capital requirements. Until recently the capital required for admission was
the same for state banks and trust companies as was required
for the organization of national banks, but the agricultural
credits act of 1923 made eligible for membership state banks and
trust companies whose capital was 60 per cent of that required
for national banks, with the provision that the difference in
capital requirements shall be made up out of net earnings.
At the time of the amendment, of the 19,200 non-member banks
(exclusive of mutual savings and private banks) about half were
already eligible to membership, and as a result of the reduction
in capital requirements about 4,200 additional banks became
eligible, while about 5,300 banks remained ineligible. The
eligible banks outside the system are largely concentrated in the
agricultural states of the middle West and South. It is in these
sections that the largest additions to eligible banks were made by
the amendment, and where also there remains the largest number
of ineligible banks. So far only 7 applications for membership
have been received from banks made eligible by the amendment,
and it is clear that the provisions regarding capital requirements
have not been the decisive influence operating against the
increase of membership.

132

FEDERAL RESERVE SYSTEM

OPERATION

Reserve Requirements, Member and Non-member.—An
important factor affecting the status of member and non-member
banks and entering into the consideration of the advantages and
disadvantages of joining the system is the difference in reserve
requirements under Federal and state laws. The balances
carried with the reserve banks are the entire legally required
reserves of member banks, corresponding to the vault reserve
and the balances with reserve city banks formerly required by
the national bank act. In comparing the required balances
which bear no interest under the present law with cash in vault,
which constituted the non-interest-bearing portion of the reserves
under the old law, it may be pointed out that cash in vault
carried by member banks has been much reduced. In fact,
the total required balances with the Federal reserve banks,
plus the till money now carried by member banks, is considerably
less than the cash they formerly carried in vault. While combined demand and time deposits of national banks increased
by §8,500,000,000 between 1913 and 1923, the amount of cash in
vault declined by $650,000,000. This reduction in cash holdings
is not merely a result of the changes in the law, but also of the
fact that under the Federal reserve system currency to meet
the demands of depositors is at all times more readily and more
promptly available.
In deciding upon the advantages and disadvantages of joining
the reserve system from the standpoint of reserve requirements
the non-member banks compare their existing status under
state laws with the requirements under the Federal Reserve
Act. The lower reserve requirements prescribed in the Federal
Reserve Act were predicated upon membership in the system,
but subsequent to the passage of this act many of the states also
enacted legislation reducing reserve requirements, so that while
at the present time there is no uniformity in the state requirements, in general the reserves required of non-member banks
are lower than they were prior to the establishment of the
system. Thus the state banks have benefited by the establishment of the reserve system without joining it and the inducement
for joining has thereby become less apparent. A further phase
oi the legislative situation with regard to reserves is that 30
states have authorized state member banks to be governed

MEMBERSHIP

IN THE FEDERAL RESERVE SYSTEM

133

entirely by the requirements of the Federal Reserve Act, while
in 18 states, in the absence of such legislation, the state banks
which become members must conform to both the Federal and
the state law.
Interest on Reserve Balances.—As an explanation why a
larger number of the eligible banks have not joined the system,
the point is frequently raised that the Federal reserve banks do
not pay interest upon reserve balances carried with them by
member banks. In any consideration of the payment of interest
on these reserve balances it must be borne in mind that the
Federal reserve banks are the custodians of the ultimate banking
reserves of the country. In their capacity as reserve banks
they should be free to shape their policies with a view to the
proper administration of credit and their management should
not be influenced by the necessity of making profits sufficient to
pay interest on reserve balances. Furthermore, since these
balances may be maintained by borrowing from the reserve
banks, the payment of interest upon them would tend to interfere
with the effectiveness of discount policy. The experience with
reserve banking in other countries has shown the wisdom of
managing the central banking reserve and of determining discount policy without the necessity of considering interest payments. It is a pertinent fact that central banks of issue do not
pay interest on deposits in any country.
The payment of interest at the rate of 2 per cent on reserve
balances would amount to between §35,000,000 and $40,000,000
a year, and in ordinary times the Federal reserve banks
have not had sufficient earnings to make such payments. In
order to meet payments of such an amount the reserve banks
would have to make large additional investments in competition
with the member banks which would receive the interest. This
would more than offset the return to the member banks and
would also tend to bring pressure upon the reserve banks to
pursue an open-market policy with a view to making earnings
rather than to influencing the general credit situation. The
Federal Reserve Board has consequently placed itself on record
as opposed to the payment of interest on member bank balances
and has been supported in this position by the Federal Advisory
Council.

134

FEDERAL RESERVE SYSTEM

OPERATION

Among other plans for increased participation of member
banks in the earnings of Federal reserve banks is one that would
provide for payment, after the 6 per cent dividend to members,
of an equal amount to the government, and then of an additional 3 per cent to the members. Another plan would, after
meeting the 6 per cent dividend, pay to the government a 2 per
cent tax on Federal reserve note circulation not covered by gold,
and would distribute the balance of earnings among member
banks in proportion to their balances. Those advocating this
proposal base their argument on the principle that the reserve
banks, instead of paying to the government as a franchise tax
all their net earnings above 6 per cent on their capital, should
make their payments to the government in proportion to the
use they make of the privilege of fiduciary note issue. In the
writer's opinion, no plan of increased participation by member
banks in the earnings of the reserve banks is desirable because
any such plan would tend to increase the pressure on the
reserve banks to make earnings without regard to credit policy.
The farther the reserve banks become removed from the commercial, as against the public, point of view, the more likely
will they be to be guided in their policies solely by the credit
requirements of the country, regardless of the effect of their
policies upon their own earnings.
The Agricultural Credits Act of 1923 contained a clause creating a congressional committee for the purpose of investigating
the reasons why eligible banks remain outside of the Federal
reserve system and of recommending changes in the law or in
the regulations of the Federal Reserve Board which would induce
additional banks to join the system. The committee held hearings in Washington and outside and listened to testimony by
members of the Federal Reserve Board, and of the Federal
Advisory Council, by the Director of the War Finance Corporation, by members of the Farm Loan Board, and by representatives of banking and farm organizations. The committee's
report is not yet available. A questionnaire recently sent out by
a committee of the American Bankers' Association to all the
state banks brought out the fact that the principal objections to
joining the system on the part of these banks are the non-payment of interest on reserve balances, insufficient participation

MEMBERSHIP

THE FEDERAL

RESERVE

SYSTEM

135

of members in the earnings of the reserve banks, resentment of the
par collection system, and the opinion that the reserve banks are
of service only to city institutions and not to country banks.
The questionnaire contained also the following inquiry; " I f
your not being a member should contribute to the destruction
of the system, would you join?" Of those replying to this
question 80 per cent answered in the affirmative. These replies
indicate that, though many state banks feel that they can afford
to remain outside of the Federal reserve system so long as it is
in operation without their participation, an overwhelming
majority of the banks realize that they benefit by the existence
of the system and would do whatever was in their power to prevent its termination.1
Effect of Increased Membership on Federal Reserve System.—
While in certain respects it would be desirable to increase the
membership in the Federal reserve system, it would be distinctly
inadvisable to give consideration to any plan for this purpose that
is at variance with the principles and policies which experience
has demonstrated are sound bases for reserve banking. Larger
membership in the reserve system would undoubtedly increase
its usefulness by enabling it to reach more directly a greater
number of banks particularly in the rural communities. Since
the addition to membership of the smaller rural banks would
add little to the reserves of the system, while it would increase
its responsibilities, the desirability of their admission rests not
upon their contribution to the strength of the system but upon
the fact that through their admission the benefits of the reserve
system would be more widely distributed. The strength and
effectiveness of the Federal reserve banks are not dependent
upon increased membership, and the desirability of further
growth arises from the advantages of membership to the banks
that join and to the communities which they serve.
1

Sec Journal of the American Bankers1 Association, August, 1924, p. 79.

CHAPTER X I I
ORGANIZATION OF THE FEDERAL RESERVE BOARD
In the nature of its functions the Federal Reserve Board represents a compromise between the views of those who believed in
establishing a central bank and of those who favored autonomous
regional banks having control over the details of their own operations and of the relationship between themselves and their
member banks. The Federal Reserve Board has no authority
to interfere in these matters of internal management, but has
general supervision over the Federal reserve banks, in addition
to having three representatives on the Board of Directors of each
bank. Broadly speaking, the principal functions of the Board
are, in addition to general supervision of the operations of the
twelve regional banks, the definition of the eligibility of paper
for discount or purchase by the reserve banks, the approval or
determination of discount rates, the coordination of open-market
operations, and the general control over dealings between the
twelve reserve banks.
Composition of the Board.—The Board consists of eight members, two of whom are members ex-officio, namely, the Secretary
of the Treasury, who acts as chairman of the board, and the
Comptroller of the Currency. These two officials constitute
the link between the Treasury and the Federal Reserve Board.
It is fitting that the Secretary of the Treasury be represented on
the Board, as the reserve banks are fiscal agents of the government and as credit policies, particularly discount rates, are an
important influence in the money market where the Treasury is a large borrower. The Secretary of the Treasury,
though he acts as chairman of the Board, has no privileges not
possessed by other members, and has only one vote. The Board
is not a bureau of the Treasury. The Act provides, to be sure,
that the Secretary of the Treasury may assign quarters-to the
Board in the Treasury Building, and the members of the Board
and its Secretary with his staff are located in the Treasury

136

ORGANIZATION

OF THE FEDERAL RESERVE BOARD

137

Building, but several other divisions of the Board are located
elsewhere, and the connection with the Treasury is not organic
but merely one of convenience.
The other representative of the Treasury on the Board is the
Comptroller of the Currency, who has charge of all the national
banks, which apply to him for charters, and over whose operations
he exercises direct supervision. The Comptroller also issues
calls on certain dates on which all national banks report to
him upon their condition in accordance with prescribed schedules
of information. The state bank and trust company members
of the system report directly to the Board and are in certain
respects under its supervision. It will be remembered that all
national banks are by law obliged to be members of the Federal
reserve system, so that the Comptroller supervises the operations
of the great majority of the member banks of the Federal reserve
system, for out of the total membership of 9,650 banks, 8,080
are national banks and but 1,570 state banks and trust companies.
It may be said, therefore, that the Comptroller of the Currency
is a link between the Federal Reserve Board and the main body
of the member banks of the system.
The other six members of the Board are nominated by the
President and confirmed by the Senate. They hold office for
10 years and receive a compensation of $12,000 per annum, equal
to that of cabinet officers. The length of the term of office
emphasizes the strictly non-political character of the positions.
The section of the law regarding membership of the Board was
amended on June 3, 1922, and those portions of it relating to the
six appointive members now read as follows:
In selecting the six appointive members of the Federal Reserve Board,
not more than one of whom shall be selected from any one Federal
reserve district, the President shall have due regard to a fair representation of the financial, agricultural, industrial, and commercial
interests, and geographic divisions of the country. The six members
of the Federal Reserve Board appointed by the President and confirmed as aforesaid shall devote their entire time to the business of the
Federal Reserve Board. They are ineligible during the time they are
in office and for two years thereafter to hold any office, position, or
employment in any member bank, except that this restriction shall not
apply to a member who has served the full time for which he was
appointed.

138

FEDERAL

RESERVE SYSTEM

OPERATION

The Federal Reserve Board is thus intended to consist, in
addition to the two ex-officio members, of six men of the highest
rank in the official hierarchy and with long terms of office. The
salary, to be sure, is relatively small considering the caliber of
men it is intended to attract, but that is characteristic of all
high offices in Washington and does not generally operate as a
hindrance in the selection of members, since the prestige and
responsibility of the positions is such that able men are willing
to accept them regardless of the amount of compensation. It
was the intention of the Federal Reserve Act to have the membership of the Federal Reserve Board change slowly and gradually. The first five appointive members were designated by the
President to serve 2, 4, 6, 8, and 10 years, respectively, so that
the term of one member would terminate every 2 years. In
addition to these regular changes, however, there has been a
considerable number of changes in membership owing to death
and resignations so that the average term of office of Board
members during the first decade of the Board's existence has not
been so long as had been contemplated by the Act. A list of all
the members of the Board with their terms of office from 1914
to date is shown on page 283.
Leaving out of account the ex-officio members, wThose terms
of office are not prescribed by the Federal Reserve Act, the
membership of the Federal Reserve Board will normally change
very slowly, barring death and resignations, and furthermore
there is nothing in the law to prevent the reappointment of
members when their terms expire. As a matter of fact, in two
instances Board members have been reappointed at the termination of their original terms of office, and one member, under
two appointments, will have an official life, extending over the
entire twenty years of the original charter of the Federal reserve system. The law and precedent, therefore, combine so
far as membership on the Federal Reserve Board is concerned,
to preserve the continuity of reserve credit policy.
Functions of Governor and Other Members,—The active head
of the Federal Reserve Board is the Governor, who is designated
by the President from among the appointive members for a
period of one year subject to reappointment. As a matter of
fact, this position has been occupied in the history of the system
by only three persons. Charles S. Hamlin, who was the first

ORGANIZATION

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139

Governor and continued in office until 1916, W. P. G. Harding,
who was then designated and remained as Governor until his
term on the Board expired in August, 1922, and D. R. Crissinger,
the present incumbent, who took office on May 1, 1923.
Edmund Piatt, the Vice-governor, acted as Governor between the
time of Mr. Harding's retirement and Mr. Crissinger's inauguration. The Governor is the executive head of the Federal Reserve
Board. He presides over the Board meetings when the Secretary
of the Treasury is not in attendance; determines the general
plan of discussion; appoints committees and passes upon administrative matters. In his work he is assisted by the Secretary
who has a considerable staff to carry out the administrative
details of the work. The other appointive members are formed
into various standing and special committees of the Board, such
as the committee on economy and efficiency, the committee on
research and statistics, the committee on discount and openmarket policy, and in addition they generally act as links between
the Board and the districts from which they come, since the
business interests of a district from which a member comes
ordinarily turn to him for advice and assistance.
As a body the Board meets not less than 3 times a week and
sometimes as often as twice a day, the meetings lasting from 1
to 3 or 4 hours. Every important ruling of the Board and
every change in discount rates, and countless other matters, are
considered and passed upon by the Board as a whole. The
Board passes upon the appointment of officers of the reserve
banks and their salaries, upon the compensation of national bank
examiners, and upon a considerable number of applications of
member banks for authority to accept bills up to 100 per cent
of their capital and to act in a fiduciaiy capacity. In the case of
non-national members the Board passes on applications for permission to open branches or additional offices.
Federal Reserve Board's Relation to Problem of Branch
Banking.—In recent years the problem of branch banking has
become of considerable importance to the banking community of
the United States. The number of banks having branches has
rapidly increased and this has raised the question whether
banking in this country is to continue, as in the past, to be conducted largely by numerous independent banking units, or is

140

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OPERATION

gradually to be converted into a system of branch banking with
a relatively small number of banks having a vast system of
branches scattered over the continent, as is the case in most
foreign countries. The following table shows the extent of
branch banking in the United States and the states in which it
has reached the greatest development:
N U M B E R OF B A N K S WITH BRANCHES AND N U M B E R OF BRANCHES ON JUNE

30, 1924
Number of branches

State

Number
of banks
having
branches

State banks
Total

National
banks

j 2,233*

248

1,137

848

29
71
23
15
4
31

300
229
267
19
138
24
160

209
59
42
48
61
19
410

Member

Nonmember

i
Total United States

681

California
New York
Michigan
Pennsylvania
Ohio
Massachusetts
Other states

99 *
74
63
59
51
44
291

538
359
332
82
203
74
645;

In the summer of 1924 there were thus 681 banks in the
United States having branches, and the number of branches
was 2,233, or on the average about 3 branches for each parent
bank. The importance of these branch banking systems is
greater than their number would indicate since about 30 per
cent of the total banking resources of the country was held
by banks having branches. The table shows that only 248
branches belonged to national banks, while state bank members
had 1,137 branches and non-member banks had 848. The
branches of national banks wrere practically all in the same
city with the head office and constituted merely additional offices
or "teller windows," as they have been called, while of the
branches of state banks about one-third were outside of the home
city and were thus branch banks in a wider sense of the word.
California is the state where branch banking has had the greatest

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development, but there are many branch banks also in New
York, Michigan, Massachusetts, Ohio, and Pennsylvania and
in many sections of the South.
Among American bankers there exists a sharp difference of
opinion on the desirability of branch banking. The connection
of the Federal Reserve Board with the problem arises from the
fact that, while national banks are prohibited by law from
opening branches except (under certain restrictions) in the same
city where the head office is located, there is nothing in the
Federal Reserve Act to prevent member banks with state charters from engaging in branch banking. The law provides, in
fact, that state banks upon joining the Federal reserve system
retain all the powers and privileges granted them by their
states, unless these powers are in conflict with the terms of the
Federal Reserve Act. The question, whether a state bank
member is to be permitted to open a branch is, therefore, left
in each case to the determination of the Federal Reserve Board.
In view of the fact that the two classes of members of the Federal
reserve system, national banks and state banks, have a different
status in regard to branch banking, the problem of formulating
a policy in this matter has been particularly difficult. In dealing
with it the Federal Reserve Board has issued regulations by which
state member banks are governed in the matter of opening
branches. These regulations are reprinted on page 200. The
Board has also undertaken a comprehensive study of the extent
and legal status of branch banking in the United States and of
the experience with branch and unit banking in this country
and abroad.1
Other Functions of the Federal Reserve Board.—There are
many other matters which the law has left to the discretion of
the Federal Reserve Board, and upon which it must act currently.
An important function of the Board is the supervision of foreign
branches of non-national member banks and of corporations
organized to finance foreign trade, known as Edge law corporations from the name of the author of the amendment to the
reserve act authorizing their organization. The Board recently
1 A discussion of the branch banking problem, a summary of the Board's
policy in regard to branch banking and complete statistics of branch
banking appeared in the Federal Reserve Bulletin for Decmber, 1924, p. 925.

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FEDERAL

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OPERATION

passed on the question of granting authority to the reserve banks
of Boston and Atlanta to establish branches in Cuba, and worked
out regulations for the operation of these branches. The Board
is also entrusted with the administration of the Clayton Act
which limits interlocking directorates among member banks.
In addition the Board has deemed it an important function to
study the problems arising out of the operation of the system
and to recommend to Congress such amendments to the Federal
Reserve Act as appear from time to time to be desirable as the
result of experience. Most of the amendments enacted since
the original passage of the Act have, in fact, been adopted upon
the recommendation of the Federal Reserve Board.
The Board's Secretary attends the meetings of the Board,
keeps the minutes, acts as Secretary of the executive committee
and of other important committees, and prepares most of the
Board's correspondence on matters of policy. The Secretary
also has charge of the administrative work of the Board in its
relation both with the reserve banks and with its staff.
The Gold Settlement Fund.—Under the Secretary comes the
administration of the gold settlement fund and of the Federal
reserve agents' gold fund, the operations of which require some
description. The gold settlement fund is the keystone of the arch
of check collection, as through this fund are settled the daily
balances between the reserve banks arising from the clearing
and collection of checks. When a member bank receives from
a customer a batch of checks to be credited to his account, the
member bank forwards the checks to its reserve bank which
credits it with the face value of the checks to become available
as deposits after the expiration of a sufficient time to collect the
checks, in accordance with a definite time schedule. Immediate
credit is given for checks on banks in the Federal reserve bank
city, while for checks on out-of-town banks the length of time
before the amount becomes available varies with the distance that
the checks have to travel. For checks in the same city the reserve
banks act in the same way as do other clearing houses, while
checks on out-of-town banks in the same district are sorted and
sent for collection to the cities where the drawee banks are located,
the settlement between the member banks being made on the
books of the reserve bank. Checks on banks in another reserve

ORGANIZATION

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143

district are mailed to the Federal reserve bank of that district
for collection. Each day every Federal reserve bank and participating branch bank wires to the Federal Reserve Board the
amount it owes each other Federal reserve bank or branch on
account of checks received from such banks for collection, or for
wire transfers sold. The net debits or credits are calculated in
Washington and debited or credited to the bank's account in
the gold settlement fund and the reserve bank is informed by
wire of the net result. It is mainly for this purpose that the
reserve banks keep large balances with the Reserve Board in
the gold settlement fund, the amount on Aug. 27, 1924 being
$608,000,000. The reserve banks have a leased system of telegraph wires and the settlements are effected without delay, the
Board notifying each reserve bank every day what change has
been made in the amount of gold held to its credit. The reserve
banks in this connection also perform an additional service for
their member banks by permitting them to transfer money to
other member banks and through them to individuals in other
cities by wire without charge, the amount of the draft being
charged to the member's reserve account.
Through the gold settlement fund also are settled the accounts
of the reserve banks in connection with each other's Federal
reserve notes. If a traveler from Kansas City spends notes of
his home reserve bank during a stay in New York, these notes
find their way into the Federal Reserve Bank of New York,
which is not permitted by law to pay them out over the counter.
If the notes are in usable condition they are returned to the
issuing bank, if not, they are forwarded to the Treasury for
redemption and destruction. In either case the Federal Reserve
Bank of New York receives a credit against the Federal Reserve
Bank of Kansas City in the gold settlement fund. Thus Federal
reserve notes of other banks are handled by the reserve banks
in much the same way as checks and the balances are daily
settled through the gold settlement fund.
Another agency participating in the operations of the gold
settlement fund is the Treasury, which transfers its funds from
one reserve bank to another through the fund. These transfers
by the Treasury sometimes involve large amounts and have
an important influence on the gold holdings of the several reserve

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FEDERAL RESERVE SYSTEM

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banks. The volume of operations through the gold settlement
fund from 1920 to 1923 is shown below:
VOLUME

OF TRANSACTIONS THROUGH GOLD SETTLEMENT

FUND:

1920-1023
1920

$85,074,220,000

1921

04,934,801,000

1922

75,335,987,000

1923

S9,614,733,000

The Federal Reserve Agents' Gold Fund.—Operations through
the Federal reserve agents' gold fund cover transactions between
a reserve agent and the reserve bank of the same district. When
a reserve bank returns to the agent Federal reserve notes that
are unfit for use, the agent credits the bank with the face value
of the notes. On the other hand, when the agent issues notes
to a reserve bank and the bank wishes to use gold as collateral
it is likely to do so by transferring gold from its holdings in the
gold settlement fund to the credit of the agent in the agents'
gold fund. It is by charges against this fund, also, that the agent
keeps his redemption fund with the United States Treasurer at
the customary 5 per cent of the volume of gold-covered Federal
reserve notes outstanding. The volume of operations through
the agents' gold fund is shown below:
VOLUME OF TRANSACTIONS THROUGH AGENTS' GOLD F U N D ;
1920

$1,559,285,000

1921

2,176,872,000

1922

1,533,502,000

1923

1,320,704,000

1920-1923

The Counsel and the Chief Examiner.—As its legal adviser
the Board has a general counsel, with several assistants, who
prepare opinions upon the legal phases of the work under the
Board's consideration. In view of the fact that a great deal of
the Board's work is of a legal character, because the Board must
interpret the Federal Reserve Act and apply its provisions to
actual conditions as they arise, the functions of the Board's
counsel are of great importance. The opinions of counsel must
be approved by the Board's law committee and by the entire
Board, but the preparation of opinions and decisions devolves
upon the counsel's office.

ORGANIZATION

OF THE FEDERAL RESERVE BOARD

145

Another division of the Board has charge of bank examinations. The head of this division is the chief examiner who has a
number of assistants who examine the Federal reserve banks and
branches. This work of examination is an essential part of a
supervisory machinery, and though it is not much in the public
eye, it is an important part of the Board's organization.
Division of Bank Operations.—In addition to these administrative divisions the Board has a Division of Bank Operations,
which draws up the forms upon which the Federal reserve banks
make the weekly reports to the Federal Reserve Board required
by law, as well as daily and other regular and occasional reports
requested by the Board. State member banks make full condition reports to this division on call dates of which there are generally four every year. In addition to these function the division
obtains a large amount of information from member banks in order
to keep the Board informed of current banking developments.
About 800 member banks in selected cities report to the division
weekly through the Federal reserve banks upon their principal
resources and liabilities. In addition a large number of banks
report, also weekly, the total volume of debits to individual
accounts, which indicate the amount of payments by check or
otherwise charged by these banks against individual deposits.
The division also has general supervision over the records of
earnings and expenses and the accounting systems of the reserve
banks; it makes recommendations to the Board upon requests
for depreciation allowances, surplus and reserve funds, and other
matters of bank operation. It is in this division also that the
recently inaugurated work of the committee on economy and
efficiency is centered. This committee keeps records of the
volume and cost of work done by the different departments
of the twelve reserve banks in aggregates and per unit of product.
Every transaction of a reserve bank in discounting notes or in
purchasing acceptances and government securities is reported
to this division on sheets mailed daily by the banks, and these
items are tabulated to ascertain in detail the volume of each class
of operation, as well as the average discount rate charged and the
average maturity of paper discounted or purchased. Through
these channels the division keeps in close touch with the operations of the reserve banks, and the Federal Reserve Board depends

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FEDERAL RESERVE

SYSTEM

OPERATION

on this division for information about unusual developments
requiring attention. The intimate acquaintanceship of this division with the details of the operation of each reserve bank and
branch makes it possible for the Board to consider problems that
arise in any district with a background of detailed knowledge of the
conditions prevailing at the Federal reserve bank of that district.

CHAPTER X I I I
RULINGS AND REGULATIONS OF THE FEDERAL
RESERVE BOARD
Activities of the Federal Reserve Board in connection with the
determination of discount rates and the formulation of openmarket policies have been described in earlier chapters dealing
with the operations of the Federal reserve banks. In the present
chapter there is presented a brief discussion of the work of the
Federal Reserve Board in making rulings and issuing regulations
for the guidance of the Federal reserve banks.
Eligibility and Acceptability of Paper.—In accordance with
provisions of the Federal Reserve Act, the Federal Reserve
Board shall have the right "to determine or define the character
of the paper thus eligible for discount within the meaning of this
Act." In discussing this subject it is important to keep in mind
clearly the distinction between the eligibility of paper and its
acceptability, and between the definition of the character of
paper eligible for discount and the decision as to whether a given
piece of paper qualifies under the definition. The Federal
Reserve Board's function is confined to the definition of eligibility
in general terms, while the question of acceptability and the
application to individual offerings for discount or purchase of
the principles laid down by the Board is left to the reserve banks.
In order to be eligible for discount the paper must conform to the
conditions laid down in the Act as interpreted by the Board,
while in order to be acceptable the paper must be such as to
convince the loan committee of a reserve bank that it is a good
risk either on the strength of the names attached to it or of the
security back of it. Paper that is entirely eligible under the law
may nevertheless be unacceptable because the loan committee
may know that the parties who borrowed the money are not
financially dependable, but paper ineligible under the law, though
it may be perfectly good and would be acceptable to the loan

147

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SYSTEM

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committee, cannot be lawfully acquired by a reserve bank.
The Federal Reserve Board does not come in contact with the
borrowing member banks and does not pass upon the eligibility
of individual pieces of paper offered to the reserve banks for
discount or purchase.
Loans for Productive Purposes.—Section 13 of the Federal Act
provides that
. . . upon the endorsement of any of its member banks . . .
any Federal reserve bank may discount notes, drafts, and bills of
exchange arising out of actual commercial transactions; that is, notes,
drafts, and bills of exchange issued or drawn for agricultural, industrial,
or commercial purposes, or the proceeds of which have been used, or
are to be used for such purposes.

This defines in general the principle upon which rests the
eligibility of paper for discount. In accordance with the provision of the law just cited, in order to be eligible the paper
must arise out of a current business transaction directly related
to the production or distribution of commodities. The law
specifically prohibits loans, the proceeds of which are to be
used for investment purposes, or for the purpose of trading in or
carrying stocks or bonds or investment securities. The principle
upon which the Federal reserve banks must operate is thus to
supply only the short-term credit needs and not the capital
needs of industry. An exception to this rule is made in favor of
paper created for the purpose of carrying or trading in government securities. This exception was in the original law, but even
if it had not been, an amendment to that effect would have had
to be adopted during the war, because it was necessary to carry
out the war financing program of the government. It is this
exception that for a long time diverted the Federal reserve banks
from their function as commercial central banks to that of institutions helping to finance the government, and it was only after
the war was over that the banks gradually began to devote most
of their efforts to supplying credit to industry, commerce and
agriculture.
Another class of paper that the banks are not permitted to
discount, though this restriction is implied in the law rather than
stated directly, is paper arising out of speculative loans. The
Federal reserve banks are not permitted to engage in speculation

RULINGS AND

REGULATIONS

149

or to encourage speculative activity by discounting notes of
speculators. It should be borne in mind, however, that there is
an element of speculation in nearly all business activity, and
that consequently much of the eligible paper discounted by the
reserve banks contains an element of speculative risk. It is
against loans made for the purpose of gambling in commodities
or securities rather than against loans involving inevitable
business risks that the Federal reserve system raises a barrier.
Still another general class of paper that is excluded from discount by the reserve banks is paper the proceeds of which are to
be used for lending to other borrowers. That is, if a person
borrows money from a member bank in order to lend it to other
people, then the member bank is not permitted to rediscount
this paper with a reserve bank. This is for the purpose of keeping
the paper in the hands of the reserve banks in direct relation
to the production and distribution of goods. Money borrowed
for the purpose of lending may be ultimately used in a productive
way, but the process is indirect and the reserve banks are not
permitted to participate in the transaction. There are, however,
two exceptions made to this general rule: first, in the case of
factors who borrow money from the banks for the purpose of
lending it to producers of agricultural staples. Under the original
Act the Board ruled that such paper was not eligible for discount,
the technical term applied to it being "finance paper." But
the Agricultural Credits Act of 1923 specifically authorized the
discount of such paper by the reserve banks on the ground
that such authority would be of great assistance to agriculture.
Another exception to the rule, also in the interests of agriculture,
is made for the benefit of cooperative marketing associations.
Paper of such associations, the proceeds of which are to be used
to lend to the members of the association for their productive
agricultural operations, is made eligible for discount by the
reserve banks. This provision is also part of the Agricultural
Credits Act of 1923.
The Board's Regulations.—The Federal Reserve Board has
from time to time issued regulations defining the character of
eligible paper and explaining the application of the Act. The
latest set of regulations, series of 1924, is reprinted in Appendix
B. Much of the work of the Board has consisted in applying

150

FEDERAL RESERVE SYSTEM

OPERATION

the principles of the Act to the great variety of cases that
arise in actual practice. ThcBoard has held, for instance, that the
purchase or sale of foods is a comnicrcial transaction from the
point of view of the seller, and the note of a buyer given to the
seller in payment for articles purchased is a note which has been
issued for a commercial purpose, regardless of the use to which
the funds thus obtained are put. A note for the purchase of
articles intended for resale is also a note for a comnicrcial purpose,
even though the article be one that represents a permanent investment for the ultimate purchaser. When, however, an article is
purchased not for resale but for use, the eligibility of the note
given in payment depends on the character of the article. If
a farmer buys an article for permanent use, for instance, a pump
or an electric generator, his note is neither agricultural nor
commercial paper and is not eligible for discount, but if he buys
fertilizer, or twine, the paper is agricultural and eligible for
discount as such.
Water sold by an irrigation company to farmers, and delivered
through the company's ditches, may be classed as "goods sold,"
and a note for the water is eligible for discount. But a silo is a
permanent improvement and a note given for the purchase of a
silo is not eligible.
During the war it was held that a note given by a non-member
bank to a member bank, when secured by governme nt obligations
was eligible for rediscount with a reserve bank, when approved
by the Federal Reserve Board. This ruling, which was made as a
part of the Board's policy of helping the Treasury in every
possible way to float its war loans, was recently rescinded,
since it provided a method by which non-member banks, though
contributing in no way to the strength of the reserve system,
might nevertheless obtain reserve bank credit.
Maturity of Paper—Much of the work of definition has arisen
out of the Act's provisions in regard to the length of time for which
paper is eligible for discount. The law provides that commercial
and industrial paper is eligible for a period not exceeding 90 days,
exclusive of days of grace. Agricultural paper, on the other
hand, was made eligible by the original Act for 6 months and by
recent amendments for as long as 9 months. This distinction
in favor of agricultural paper was made because agricultural

RULINGS AND

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151

operations are, as a rule, slower than industrial operations;
and because the turnover in agriculture is much less rapid and
that, in order to serve agriculture, paper of longer maturity must
be discounted. This extension of maturity for agricultural
paper is not inconsistent with the principle that the reserve banks'
assets must be self-liquidating, since the fundamental requirement is that the period for which the paper is discounted do not
exceed the length of time required to complete the operation
for which the loan is made. If, therefore, the operation of feeding
livestock for market requires 9 months, the paper arising out of
that operation is essentially no less self-liquidating than 3 months'
paper of a retail store, and in principle, as well as in law, is no
less acceptable for discount at the reserve bank.
In defining agricultural, as distinct from commercial paper,
many fine points have had to be determined in practice. It has
been held, for instance, that the note of a packing company,
the proceeds of which are used for the purchase of livestock
for slaughter, is not livestock paper within the meaning of the
Act, and is eligible for discount only when its maturity do not
exceed 90 days. A note of a grain dealer given to a grower for
grain purchased for resale is commercial paper, even though the
grower subsequently discounts the note and uses the proceeds
for an agricultural purpose. This is on the principle that the
classification of paper depends upon the transaction out of which
it originally arises, irrespective of the nature of any further
transaction in which the paper may be subsequently negotiated.
A note given by a farmer in payment for a motor truck is agricultural paper, but notes of motor distributing companies given for
the purchase of motors are commercial paper eligible for discount
for a period not exceeding 90 days.1
A statement of the credit facilities offered to agricultural
interests by the Federal Reserve Act and its amendments, has
been issued by the Federal Reserve Board and printed in the
Federal Reserve Bulletin for August, 1923. This statement is
reprinted in Appendix E.
1 Many of the examples of interpretations here presented are taken from
a paper on "Eligibility for Discount" by CHARLES L. POWELL, Counsel
for the Federal Reserve Bank of Chicago, published in the Annals of the
American Academy of Political and Social Science for January, 1922, p. 105.

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FEDERAL

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While ordinarily paper eligible for discount under the law must
have a definite maturity in no case exceeding 9 months, the maximum permissible period being dependent upon the character of
the paper, there is a section of the law as amended in 1923
which provides for the discount or purchase of bills of exchange
payable at sight or on demand. This proviso was also made for
the benefit of agriculture and is limited to paper drawn for the
purpose of financing the domestic shipment of agricultural products secured by shipping documents conveying title to the
staples. The law provides that demand for repayment of such
paper must be made within a reasonable length of time after the
arrival of the staples at their destination and that the reserve
banks must not hold such paper for more than 90 days.
Rulings on Open-market Operations.—In addition to the
problems arising in connection with the discounting functions
of the Federal reserve banks, which have been by far the most
important from the point of view of the supply of credit, many
problems arise also in connection with the open-market functions
of the banks. By Sec. 14 of the Federal Reserve Act the reserve
banks are permitted to purchase from, or sell to, practically
anybody, cable transfers and bankers' acceptances and bills of
exchange of the kinds and maturities made eligible by the Act
for rediscount, with or without the endorsement of a member bank.
In general the Board's regulations provide that in order to be
eligible for discount or purchase an acceptance must arise from:
(1) the shipment of goods between the United States and a foreign
country, or between the United States and one of its dependencies, or between foreign countries, or between dependencies of
the United States and foreign countries; (2) the shipment of
goods within the United States; (3) the storage of readily marketable staples, provided the bill is secured by a warehouse receipt
conveying title to the staple. The Board also authorizes the
discount or purchase of acceptances drawn by banks outside of
the United States for the purpose of furnishing dollar exchange.
The Board has ruled that bankers' acceptances in order to be
eligible for purchase must have a maturity not exceeding 3 months,
except that acceptances arising out of foreign trade may have a
maturity up to 6 months. The Agricultural Credits Act of
1923 provides that acceptances arising out of agricultural

RULINGS AND

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153

transactions are eligible for purchase with a maturity up to 6
months.
The subject of acceptances has always received a great deal
of attention at the hands of the Federal Reserve Board, partly
because the existence of acceptances as a credit instrument
in the United States has been made possible by the Federal
Reserve Act, and partly because some of the members of the Board
have taken particular interest in the development of an acceptance market in this country in the belief that it will establish more
stable and flexible credit conditions. In the earlier days the
definitions of eligibility of acceptances for discount or purchase
were stated in much detail and it was generally considered that
the red tape involved was a handicap in the development of an
acceptance market. As the practice of acceptance credit developed, however, and as member banks became more familiar with
these instruments the Board gradually simplified the regulations
in connection with acceptance credit, so that at the present
time they are fairly simple and direct.
The Board's semi-judicial and semi-legislative function in
defining the conditions with which paper acquired by the reserve
banks must comply has had a direct relation to the formation
of the system's credit policies. By barring loans for capital or
speculative purposes from the portfolios of the reserve banks,
and by limiting the use of reserve bank credit to strictly productive purposes, the Board has not only embodied into reserve
bank practice the letter and the spirit of the Federal Reserve
Act, but has also laid the foundation of a policy of withholding
the support of the Federal reserve system from a growth of
credit not arising out of the requirements of productive business
activity.

CHAPTER

XIV

CONFERENCE AND RESEARCH WORK
In its capacity as the central supervising agency over the
credit institutions of the country, the Federal Reserve Board is
obliged to keep in close touch with developments in different
sections of the country and at the twelve Federal reserve banks.
The necessity for this was recognized by the Act in providing
for a Federal Advisory Council, which consists of one representative from each Federal reserve district.
The Federal Advisory Council.—The members of the council
are selected by the boards of directors of the twelve Federal
reserve banks and, as a rule, receive no compensation other than
their expenses in attending meetings in Washington. The law
provides that at least four meetings of the council shall be held
each year and additional meetings when called by the Federal
Reserve Board. As a matter of fact, the practice has been to
hold four quarterly meetings.
The Federal Advisory Council has power: (1) to confer directly
with the Federal Reserve Board on general business conditions;
(2) to make oral or written representations concerning matters
within the jurisdiction of the Board; and (3) to call for information and make recommendations in regard to discount rates,
rediscount business, note issues, reserve conditions in the various
districts, the purchase and sale of securities by reserve banks,
and the general affairs of the reserve banking system. The
Federal Advisory Council is a body of experienced men, generally
engaged in banking, who meet four times a year and canvass
the entire field of problems with which the reserve system has to
deal. They consult the Federal Reserve Board and at the
conclusion of their meetings submit their recommendations,
generally accompanied with a brief statement to the press of
their views upon the current situation. The Federal Advisory
Council has no authority over the Board, and its importance is
entirely dependent upon the prestige of the membership and the

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influence that its judgment may have with the Board. On
many occasions the advice and counsel of this body has been of
great service to the Federal Reserve Board. In 1920, for
instance, when the Federal reserve system was faced with a
number of extremely difficult problems the Federal Advisory
Council carefully considered these problems and submitted a
series of recommendations upon the policy to be pursued.1
Conferences with Governors and Federal Reserve Agents.—
In addition to the conferences with the Advisory Council the
Federal Reserve Board at least twice a year calls meetings of
the governors of the Federal reserve banks and once a year
also of the Federal reserve agents. Sometimes it calls in some of
the directors of the banks, on some occasions the banking directors (Class A), on other occasions the representatives of business
or agriculture in the different districts (Class B). At these
conferences the Board discusses in detail the problems that
confront the operating officials, as well as the more general
credit problems of the system. The governors and the agents
at these conferences meet by themselves, as well as with the
Board, talk over their own more important detailed problems,
and submit to the Board their general conclusions and
recommendations.
These conferences, in addition to keeping the Board in touch
with conditions in the several districts, serve the important purpose of bringing the operating officials together and making them
acquainted with each other and with the problems that confront
the different banks. It is a clearing house of Federal reserve
information and serves the purpose of developing a common
language and a common understanding of the matters that
concern the system. For instance, the question of the effect of
security purchases by a reserve bank in the interior on the credit
conditions in the New York district is one that would not, in the
ordinary course of affairs, be clear or present itself with much
force to the officials of the interior bank in question, and yet the
purchase of a security by the Dallas Bank, for instance, in the
New York district has the effect of bringing Federal reserve
funds into that district and is likely to result in a corresponding
reduction in the discounts of the New York reserve bank. And
1

See Annual Report of the Federal Reserve Boardj 1920, p. 597.

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conversely, the sale of securities by interior banks in the New
York market has the effect of creating a shortage of credit in the
New York market and consequently an increased use of reserve
bank credit in that district. It is such relationships as this
between the different districts that become more clearly understood through the conferences among the governors.
The Conference of May, 1920.—In this connection, one
particular conference between governors and members of the
Board should be mentioned. It is the conference held in May,
1920, the minutes of which were later printed as a Senate Document (310, Sixty-seventh Congress, Fourth Session). This
conference was held at a time when the reserves of the system
were at a low ebb, when the post-war booin had reached its peak,
and the banks of the country were greatly worried about the
inevitable liquidation that would follow the rapid expansion.
At this conference the Governor of the Board presented his
views of the situation, showing clearly that some check of credit
expansion was necessary, and yet that too drastic action would
do more harm than good by unduly alarming the business community. After a thorough discussion of the whole problem
at this meeting the governors of the reserve banks upon returning
to their homes recommended to their boards of directors the
raising of discount rates, and, as a matter of fact, the rates in
most of the districts were presently advanced. This conference
has become famous as the "deflation conference," which was
described by many critics of the system as a conspiracy among
the high officials of the system and the bankers of Wall Street
to deflate business, and especially the farmers. Ordinarily the
minutes of such conferences are not published, as they are chiefly
of interest to the participants and represent a free exchange of
opinion within the Federal reserve family. But in this case, in
view of the accusations, the minutes of the conference were published, and afford an interesting insight into the character of the
conferences between the Board members and the representatives
of the reserve banks. The substance of these minutes is such as
to convince all fair-minded students of the system that, at this
conference, responsible officials of the system discussed in a
temperate manner the difficulties confronting the banks of the
country and the best way of meeting these difficulties, and that

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there was no foundation for the charge that a policy of drastic
deflation was adopted.
In addition to the regular meetings with the governors held
twice a year, the Board is in frequent contact with many of the
governors and other officials, and there are standing committees
of governors which cooperate with the Board on certain subjects.
For instance, there is a committee on functional expenses, which
has been making a study of the cost of operation of the different
banks and has made efforts to increase the efficiency and reduce
the cost of many of the functions of the banks. There is also a
governors' committee on open-market sales and purchases which
differ from discounts in that they cannot be handled satisfactorily by the twelve reserve banks acting independently but must
be coordinated with reference to a policy adopted for the system
as a whole.
Division of Research and Statistics.—In a previous chapter
there was given a description of the work of the Board's Division
of Bank Operations and of the lines of statistics which it compiles
primarily from reports obtained from reserve banks and member
banks. This phase of the Board's statistical work is so closely
allied to the operation of the banks that it is handled by the
Division of Bank Operations. The results of these tabulations,
however, constitute the main source of information about credit
developments and, therefore, are the foundation of the work of
the Division of Research and Statistics which is a separate branch
of the Federal Reserve Board's organization. This Division on
the basis of all the available banking statistics studies the credit
problems confronting the system and the relationship of these
problems to general business developments. For this purpose
it collects information about the physical volume of production,
distribution, and employment, price movements, about discount
and interest rates in effect in different sections of the country
and abroad, and about foreign exchange rates in the New York
market. In addition, the division makes studies of international
gold movements and of foreign developments in the banking and
financial field in so far as they have a bearing upon the problems
with which the Federal reserve system must deal. Broadly speaking, the work of the Division may be grouped under three general
heads: (1) bank credit; (2) domestic business conditions; and

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(3) international business and financial conditions. The bank
credit work, in addition to a close scrutiny of the available banking figures, comprises a group of intensive studies intended to
furnish the Board with information about the credit and currency requirements of different districts and different industries
at different seasons of the year. These studies when completed
will make it possible for the Board to see more clearly what
movements in the demand for credit can be anticipated and to
what extent actual developments depart from these expectations.
These studies include an analysis of interest rates in different
markets and their relationship to one another and to reserve
bank discount rates. The Division is also making a study of
branch banking in this country and abroad. In its study of
business conditions in the United States the Division obtains
information from a large number of sources, including government
departments, individual business concerns and trade organizations. Much information for this purpose is supplied also by
Federal reserve agents of the several districts. The Board has
been a pioneer in undertaking this kind of work and continues
to collect much data of use not only to itself and the banks, but
to business men in general.
On the basis of this information the Division, in cooperation
with a committee of Federal reserve agents, prepares each month
a summary of business conditions in the United States, usually
under the general headings of production, trade, wholesale prices,
and bank credit. Before the summary is released to the press it
receives the approval of the Board and of the committee of reserve
agents; it is subsequently printed in the Federal Reserve Bulletin
and in the twelve monthly bulletins issued by the Federal reserve
banks. It constitutes, therefore, the joint judgment of the
banks and the Board upon current business conditions. The
statement avoids predictions and interpretations, but endeavors
to give a clear and unbiased presentation of the principal economic facts as they are reflected in available statistical and other
sources. This general summary is followed in the Federal
Reserve Bulletin by a more detailed discussion of developments in
different industries in the different districts.
In addition to publishing many of the price index numbers
collected in the various foreign countries, the Federal Reserve

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Board has constructed index numbers of its own for five of the
leading countries in order to make possible international price
comparisons on a substantially uniform basis. The Board's
index numbers are classified as to the stage of manufacture of the
product and as to the origin of the goods. These index numbers
make it possible to watch from month to month changes in price
levels in different countries from figures that are closely comparable and are classified into the same commodity groups.1
In the foreign field the Federal Reserve Board also collects
and publishes information about banking developments, foreign
exchange rates, and financial conditions in different countries.
A brief summary of the most important developments abroad
is published monthly in the Bulletin. Particular attention is
paid to central banking conditions abroad and to current monetary developments. Special problems in foreign countries having
a bearing either by analogy or by actual relationship upon domestic credit conditions are investigated and presented in special
memoranda to the Federal Reserve Board or in articles in the
Federal Reserve Bulletin.
Much of the work of the Division of Research and Statistics
is employed in the preparation of reports and memoranda for
the use of the Federal Reserve Board on problems which it has
under consideration. The Division also works closely with the
Board's committees on discount and open-market policies and on
agricultural credits. It is the Division's task in general to present to the Board all the available information on economic
developments that have a bearing upon reserve bank policy.
The Federal Reserve Bulletin.—The various groups of activities of the Division of Research and Statistics are reflected in
the Federal Reserve Bulletin, the official organ of the Federal
Reserve Board, which prints monthly figures on the condition and
operation of the Federal reserve and member banks, and statistics of business and credit conditions at home and abroad, as
well as the rulings of the Federal Reserve Board and an account
of the Treasury's current financial operations. The Division of
Research and Statistics prepares every month, in consultation
1 The Board's price indexes, together with other data 011 prices and
exchange rates, have been published in a separate bulletin entitled Prices
in the United States and Abroad: 1919-1923.

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with the Federal Reserve Board, a review of current credit and
economic conditions, which is published as the leading article in
the Federal Reserve Bulletin. This monthly review is frequently
the vehicle used by the Board for making a public statement of
policy, and for this reason it is closely watched by the financial
press. Three of the reviews of the month prepared in 1923 are
reprinted in the appendix.
Each of the twelve reserve banks also has a statistical organization which collects current data for the use of the Federal reserve
banks, the Federal Reserve Board, and the member banks. The
banks issue monthly reviews of economic conditions which have a
wide circulation in their respective districts.
The information collected by the Board and the Federal reserve
banks is thus published and put at the disposal of the business
community throughout the United States. It contributes to a
better understanding of business conditions both by the banks
and the general public and paves the way toward a closer
cooperation between business men, bankers, and the reserve
system in the continuous adjustment of the flow of credit to the
needs of productive industry.

CHAPTER X V
ELEMENTS OF RESERVE BANK CREDIT POLICY
In this brief study an attempt has been made to present a
simplified picture of the operation of the Federal reserve system
and to point out some of the problems with which the system
has been confronted in the past few years. It has been shown
what role in the system is played by the twelve Federal reserve
banks and by the Federal Reserve Board. The ultimate aims of
the banks and of the Board are the same, namely, to "accommodate commerce and business," that is, to work for the best
interests of those engaged in the production and distribution of
goods in the United States and through them to serve the nation
as a whole. Out of the plan of the system's structure, however,
there arise certain differences between the Federal Reserve Board
and the Federal reserve banks in their approach to the problems
of credit policy.
The Federal Reserve Board and the Federal Reserve Banks.—
These differences arise, in the main, from three causes: first,
the officials of each reserve bank are in daily contact with business
developments in their own districts and are, therefore, inclined
to view the financial situation from a local standpoint, while the
Federal Reserve Board endeavors to keep in touch with developments in all the twelve districts and in foreign countries, so that
it is in a position to consider current problems from a national
point of view, and with a perspective of economic trends throughout the world. Second, the operating officials of the reserve
banks, confronted as they are every day with the problem of
economical and efficient operation of their banks, are inevitably
somewhat influenced in their viewpoint by a desire to have sufficient earnings to meet expenses, while the Federal Reserve Board,
viewing the system as a whole, is much less interested in the
earnings of individual reserve banks, particularly when the earnings of one reserve bank are derived from operations which tend

161

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to reduce the income of another reserve bank, as is often the case
with open-market purchases. It is easier for the Reserve Board
to free itself from a consideration of reserve bank earnings and
to base its credit policy solely upon the credit requirements of
business. Third, the reserve banks are managed by their
boards of directors, two-thirds of whom arc selected by the
member banks and represent their viewpoint, while the members
of the Federal Reserve Board are appointed by the President of
the United States and represent the public at large. From these
differences arises a continuous adjustment within the Federal
reserve system between the local and the national, the commercial
and the non-commercial, the business and the public service
point of view.
This statement does not mean that reserve bank officials
lack appreciation of national problems, nor that they are indifferent to the welfare of reserve banks other than their own, or
unconcerned about the public aspects of their work. On the
contrary, these officials are fully aware of the broader phases of
the problem of administering the Federal reserve system. Nevertheless, the closeness of the banks' officials to their detailed
operating problems tends to magnify in their minds the weightiness of these problems and makes it helpful to them to have the
opportunity of consulting with the Federal Reserve Board, whose
attention is directed entirely to the national and the public
view upon credit conditions.
In the concluding section of the present study there is presented
a brief analysis of the main channels through which the Federal
reserve system exerts an influence upon the credit situation, and
of the allocation of functions between the banks and the Board,
or more accurately, the degree of responsibility attaching to
the reserve banks and the Federal Reserve Board in the performance of the different functions. Broadly speaking, there are
three principal ways through which the reserve system can
influence the character and volume of bank credit in use: (1)
the use of discretion in the granting of loans; (2) the determination of discount rates, and (3) open-market policy.
Discretion in the Granting of Loans.—In the exercise of discretion in the'granting of loans the responsibility rests largely
upon the reserve banks which are familiar with the operations

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of their member banks and are in close touch with local business
developments. In formulating their judgment upon credit
extension to their member banks, the reserve banks consider
themselves as holders of trust funds belonging to the entire membership, and consequently they discourage a disproportionate use
of reserve bank credit by one member bank or by a group of
member banks. In following developments in this respect the
reserve banks find it convenient to keep a record of the line of
credit to which each member bank is entitled on the basis of its
contribution to the lending power of the reserve banks, and to
compare the bank's actual borrowings with this so-called basic
line. No attempt is made to limit a member bank's borrowings
to this theoretical quota, since such a procedure would be both
impracticable and unreasonable, and would not be consistent
with the exercise of discretion. In passing upon a member
bank's application for a loan, a reserve bank does, however,
consider whether under prevailing credit conditions the member
is entitled to additional credit "when due regard is paid to the
claims of other member banks." In practice many member
banks constantly exceed their basic lines of credit, as under
ordinary conditions it is perfectly proper that they should, but
in times of a rapidly growing demand for credit these lines serve
as one of the useful guides upon which the reserve banks base
their credit judgment in regard to each individual borrowing
bank.
A more important basis for the exercise of discretion in all
cases would be the use to which a member bank puts the funds
obtained from a reserve bank. It is frequently difficult, however,
to ascertain the manner in which a member bank uses the
proceeds of its discounts, as the bank may borrow on its own
note or may rediscount customers' paper drawn for one purpose,
and use the funds obtained for an entirely different purpose.
Nevertheless, reserve bank officials, through their close personal
contact with officers of member banks, have a fairly accurate
knowledge of their policies, and can supplement this information
by referring to reports of examinations made of the condition of
the members. Even though a member bank's condition may be
perfectly sound and its operations in accordance with prudent
banking practice, a reserve bank may deem it wise to restrict

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the credit granted to a bank and even to request it to reduce its
outstanding indebtedness to the reserve bank, if there is reason
to believe that the member is using reserve bank funds as a means
of increasing its operating capital. Since the lending power of
reserve banks has its origin in the cooperation of member banks
it is intended for use in meeting exceptionally heavy seasonal or
other temporary requirements, and not to afford the opportunity to a member bank of increasing the regular volume of
its operations by drawing upon the common fund, held by the
reserve bank in trust for the entire membership. It may not
always be easy to discover such a course of action by a member
bank, but it is one of the circumstances which the reserve bank
considers in the exercise of its discretion.
It should be clearly understood that the lines of inquiry here
suggested are intended to be merely illustrative and are not in
any sense an exhaustive survey of the kinds of evidence upon
which the reserve banks base their credit judgment.
Determination of Discount Rates.—The determination of
discount rates is generally considered to be the most important
part of the credit policy of the reserve banks and the Reserve
Board. While there is much that is still unknown in the
relation of discount rates to the rate on loans to the public
and to the volume of bank credit in use, there is no doubt about
the importance of the reserve bank rate as a factor in the credit
situation, at a time when there is a demand for reserve bank
credit. At the financial centers, where the large commercial
banks keep in close touch with the market and use their funds to
the best advantage with almost mathematical precision, a change
in the rate which member banks must pay for reserve bank
funds is obviously an important consideration. The discount
rate also bears a definite relationship to open-market rates for
money and cannot be changed in ordinary times without affecting
these rates. As an important factor in the money market at
financial centers, the discount rate has a bearing upon the general
credit situation.
Experience points to the fact that conditions in the money
market in financial centers are an influence on financial conditions elsewhere. For it is in these centers that the surplus
funds of smaller banks throughout the country are held.

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Changes in the discount rate, by influencing the general level of
money rates affect the rate of earnings on funds invested by city
banks for country correspondents, and thus exert an influence
on the movement of funds from and to financial centers. The
balances kept by the country banks with their city correspondents
are the real operating banking reserves of the country, since the
lawful reserves kept with the reserve banks must be kept intact,
and in practice remain practically stable at the ratio to deposits
required by law. The use made of balances with correspondents,
which constitute the active secondary reserves of country banks,
depends on these banks, and they shift the funds to and from
their correspondents in accordance with money conditions at
the financial centers and with the volume of credit demand in
their own localities. Consequently, money rates at financial
centers, and hence reserve bank discount rates, which have a
definite relationship to these open-market rates, exert an influence upon the movement of funds between the financial centers
and the interior of the country. The level of discount rates,
furthermore, has an effect upon the use to which marginal
funds are put by country banks. When a bank has satisfied the
immediate needs of its regular customers and still has funds
available, its decision whether to invest these funds in securities, to
keep them on deposit in the city, or to lend them to a new customer
or to an old customer for a new purpose, is affected by prevailing
open-market money rates, and the discount rate is a factor
influencing these rates. Changes in the discount rate have,
therefore, a widespread influence on credit conditions throughout
the country, and the determination of these rates is one of the
principal responsibilities resting upon the Federal reserve system.
Since in making changes in discount rates the reserve banks are
required by law to obtain the approval of the Federal Reserve
Board, this responsibility devolves jointly upon the Federal
Reserve Board and the reserve banks.
Open-market Policy.—In giving the Federal reserve banks
authority to deal in the open market the Federal Reserve Act
enabled them to take the initiative in credit operations, so that
they have a means of adding to the total volume of credit in use
or of reducing this volume, depending upon the character of
prevailing credit conditions. Open-market purchases by the

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reserve banks, however, as has been pointed out, do not always
result in an equivalent increase in the volume of reserve bank
credit in use, since the additional funds not infrequently find
their way back, at least in part, to the reserve banks through
the repayment of discounts, as was the case, for instance, in the
first half of 1922, and again in 1924. Similarly, sales of securities
by reserve banks do not at all times result in a reduction of the
volume of credit in use, since the shortage created by the sales
is in many cases made up by additional borrowing by the member
banks, as was the case in the early part of 1923. These limitations upon the power of the reserve banks to influence the volume
of their credit in use through open-market purchases or sales
does not, however, diminish the importance of open-market
operations. The evidence for the view that in 1922 and 1923
discount operations tended to offset open-market purchases and
sales is that the total volume of reserve bank earning assets,
which measures the total volume of reserve bank credit in use,
remained fairly constant during the period, while the reserve
banks first purchased large amounts of government securities
and later reduced their holdings of these securities. The fact
that earning assets remained relatively stable, however, does not
necessarily mean that the reserve banks' operations in the openmarket had no effect upon the volume of credit in use. Credit
conditions are constantly changing in response to a large variety
of influences. The total credit in use is not like a reservoir of
water which is full to the brim and has only one ingoing and one
outgoing pipe. It is rather like a lake with numerous streams
entering and leaving it and with many hidden springs and outlets affecting the prevailing level. Adding credit to the total
in use or withdrawing credit from this total is like pouring water
into or pumping it out of a lake; the net effect in either case is
not the result of any single influence, but of a combination of
all the influences at work.
The experience of 1922 and 1923 indicates in a direct way only
that in 1922, when the reserve banks purchased securities, member banks continued to liquidate discounts; that in 1923 when
the reserve banks sold securities—discounts increased, and that
throughout the period total earning assets remained fairly,
though by no means entirely, constant. During a part of 1924

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security purchases were not so large as reductions in discounts, and total earning assets declined. There is nothing in
this experience to show what would have happened if the reserve
banks' open-market operations had been different. There is no
direct evidence to show that had the reserve banks not purchased
securities in 1922, the liquidation of discounts would have correspondingly slowed down, or that if they had not sold securities in
1923 discounts would not have increased. It is quite possible,
on the contrary, that the compensatory tendencies were only
partially effective and that the constancy of the volume of
reserve bank credit in 1922-1923 was maintained in part because
of, rather than in spite of, the open-market activities of the
reserve banks. It seems reasonable to believe that the stream
of reserve bank credit arising from security purchases in 1922
was only partly drained off by increased liquidation of discounts,
and that the balance was instrumental in hastening the turn in
credit conditions which occurred in mid-summer of that year.
It is also possible that security sales by the reserve banks in the
latter part of 1922 and the early part of 1923, while they led to
increased discounts, also exerted an influence toward tightening
the money market and contributing to the cautious attitude
of the business community in the spring of 1923.
It is too early, on the basis of the system's brief experience, to
generalize upon the consequences of its open-market operations.
The importance to the system, however, of a definite and consistent open-market policy is beyond dispute. In view of the
fact that such a policy must be national rather than local in
scope, it has been the function of the Federal Reserve Board,
and of representatives of several of the reserve banks, acting as a
body, to formulate the system's open-market policy and to
devise machinery for its execution.
Growth of American Banking Tradition.—Discount and openmarket policies of the Federal reserve banks, as has been seen,
directly affect the credit situation, but in addition they exert an
indirect influence through the effect they have upon the mental
attitude of the business community. A stricter scrutiny of
member bank credit lines, an advance in the discount rate, or a
considerable sale of securities by the reserve banks is notice to
the public that the Federal reserve system considers it necessary

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to exert a moderating influence on the growth of bank credit,
and the realization that the system takes this view tends in
itself to encourage a more cautious attitude on the part of the
banks and of business enterprises. At times when there is
little demand for reserve bank credit this psychological influence
is in fact the most important means possessed by the system for
maintaining its position as a factor in the credit situation.
Realizing the importance of this element of reserve bank credit
policy, the Federal Reserve Board has from the beginning
adopted the plan of publishing an official bulletin in which it
explains its views upon the credit situation and the policies which
it is pursuing. By giving publicity to its actions and to the reasons underlying credit policy the system has made its policies
more effective. In addition to statements of policy the system
assembles and publishes information on the business and credit
situation which helps the member banks and the business public
to understand the system's actions and to formulate their own
policies with reference to existing conditions. This work of the
Federal reserve system is important particularly because it
establishes a common basis of understanding and encourages
cooperation between business men, bankers, and the Federal
reserve system in the endeavor to moderate the swings of the
economic pendulum from depression to prosperity, and from
prosperity to depression. The development of such cooperation
is a step in the direction of establishing an American banking
tradition, based on conditions as they exist in this country and
on the accumulated experience of past years. A firmly established and rational banking tradition is in the long run the greatest safeguard against continuous or widespread practices leading
to unhealthy credit expansion.
Some progress in the development of such a tradition has been
made by the Federal reserve system during the past 3 years of
relatively normal business and credit conditions. In fostering
the growth of the American banking tradition the Federal reserve
system builds a strong public support for its policies and increases
its ability to be of service to the country.

APPENDIX A
PRINCIPAL PROVISIONS OF THE FEDERAL
ACT

RESERVE

(Approved Dec. 23, 1913)
In the following summary of the Federal Reserve Act the
wording of the law has been followed literally, but certain sections dealing with the organization period have been omitted
as no longer of importance, and in some cases minor details have
also been left out for the sake of brevity. An attempt has been
made to arrange the Act topically and to bring together all the
provisions bearing on the same subject. The references given
at the end of each provision are to sections of the Act and to the
pages on which these sections appear in the Act as published by
the Federal Reserve Board in 1923.
TITLE
An Act to provide for the establishment of Federal reserve
banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.
FEDERAL RESERVE DISTRICTS
The Reserve Bank Organization Committee shall designate not less than
eight nor more than twelve cities to be known as Federal reserve cities, and
shall divide the continental United States, excluding Alaska, into districts,
each district to contain only one of such Federal reserve cities. Provided,
That the districts shall be apportioned with due regard to the convenience
and customary course of business and shall not necessarily be coterminous
with any State or States. The districts thus created may be readjusted
and new districts may from time to time be created by the Federal Reserve
Board, not to exceed twelve in all. Such districts shall be known as Federal
reserve districts and may be designated by number (Sec. 2, page 1).
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CORPORATE POWERS OF FEDERAL RESERVE BANKS
Each Federal reserve bank shall have power:
First. To adopt and use a corporate seal. *
Second. To have succession for a period of twenty years from its organization unless it is sooner dissolved by an Act of Congress, or unless its
franchise becomes forfeited by some violation of law.
Third. To make contracts.
Fourth. To sue and be sued, complain and defend, in any court of law
or equity.
Fifth. To appoint by its board of directors such officers and employees
as are not otherwise provided for in this Act, to define their duties, require
bonds of them and fix the penalty thereof, and to dismiss at pleasure such
officers or employees.
Sixth. To prescribe by its board of directors, by-laws not inconsistent
with law, regulating the manner in which its general business may be
conducted, and the privileges granted to it by law may be exercised and
enjoyed.
Seventh. To exercise by its board of directors, or duly authorized
officers or agents, all powers specifically granted by the provisions of this
Act and such incidental powers as shall be necessary to carry on the business
of banking within the limitations prescribed by this Act {Sec. 4, page 6).

SHAREHOLDERS OF T H E FEDERAL RESERVE BANKS
National Banks.—Every national banking association shall be required
to subscribe to the capital stock of such Federal reserve bank in a sum equal
to six percentum of the paid-up capital stock and surplus of such bank, onesixth of the subscription to be payable on call of the organization committee, one-sixth within three months, and one-sixth within six months
thereafter, and the remainder of the subscription, or any part thereof, shall
be subject to call when deemed necessary by the Federal Reserve Board,
said payments to be in gold or gold certificates.
The shareholders of every Federal reserve bank shall be held individually
responsible, equally and ratably, and not one for another, for all contracts,
debts, and engagements of such bank to the extent of the amount of their
subscriptions to such stock at the par value thereof in addition to the
amount subscribed, whether such subscriptions have been paid up in whole
or in part, under the provisions of this Act (Sec. 2, page 2).
State Banks.—Any bank incorporated by special law of any State, or
organized under the general laws of any State or of the United States, desiring to become a member of the Federal Reserve System, may make application to the Federal Reserve Board, under such rules and regulations as it
may prescribe, for the right to subscribe to the stock of the Federal reserve
bank organized within the district in which the applying bank is located.

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Such application shall be for the same amount of stock that the applying
bank would be required to subscribe to as a national bank. The Federal
Reserve Board, subject to such conditions as it may prescribe, may permit
the applying bank to become a stockholder of such Federal reserve bank.
In acting upon such application the Federal Reserve Board shall consider
the financial condition of the applying bank, the general character of its
management, and whether or not the corporate powers exercised are consistent with the purposes of this act.
Whenever the Federal Reserve Board shall permit the applying bank to
become a stockholder in the Federal reserve bank of the district its stock
subscription shall be payable on call of the Federal Reserve Board, and
stock issued to it shall be held subject to the provisions of this act.
All banks admitted to membership under authority of this section shall
be required to comply with the reserve and capital requirements of this act
and to conform to those provisions of law imposed on national banks which
prohibit such banks from lending on or purchasing their own stock,
which relate to the withdrawal or impairment of their capital stock, and which
relates to the payment of unearned dividends. Such banks and the officers,
agents, and employees thereof shall also be subject to the provisions of and
to the penalties prescribed by section fifty-two hundred and nine of the
revised Statutes, and shall be required to make reports of condition and of
the payment of dividends to the Federal reserve bank of which they become
a member. Not less than three of such reports shall be made annually on
call of the Federal reserve bank on dates to be fixed by the Federal Reserve
Board. Failure to make such reports within ten days after the date they
are called for shall subject the offending bank to a penalty of $100 a day for
each day that it fails to transmit such report; such penalty to be collected
by the Federal reserve bank by suit or otherwise.
As a condition of membership such banks shall likewise be subject to
examinations made by direction of the Federal Reserve Board or of the Federal reserve bank by examiners selected or approved by the Federal Reserve
Board.
Whenever the directors of the Federal reserve bank shall approve the
examinations made by the State authorities, such examinations and the
reports thereof may be accepted in lieu of examinations made by examiners
selected or approved by the Federal Reserve Board: Provided, however,
That when it deems it necessary the board may order special examinations
by examiners of its own selection and shall in all cases approve the form of
the report. The expenses of all examinations, other than those made by
State authorities, shall be assessed against and paid by the banks examined.
If at any time it shall appear to the Federal Reserve Board that a member
bank has failed to comply with the provisions of this section or the regulations of the Federal Reserve Board made pursuant thereto, it shall be
within the power of the board after hearing to require such bank to surrender
its stock in the Federal reserve bank and to forfeit all rights and privileges
of membership. The Federal Reserve Board may restore membership upon
due proof of compliance with the conditions imposed by this section.

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Any State bank or trust company desiring to withdraw from membership
in a Federal reserve bank may do so, after six months' written notice shall
have been filed with the Federal Reserve Board, upon the surrender and
cancellation of all of its holdings of capital stock in the Federal reserve
bank: Providedj however, That no Federal reserve bank shall, except under
express authority of the Federal Reserve Board, cancel within the same
calendar year more than twenty-five per centum of its capital stock for the
purpose of effecting voluntary withdrawals during that year. All such
applications shall be dealt with in the order in which they are filed with the
board. Whenever a member bank shall surrender its stock holdings in a
Federal reserve bank, or shall be ordered to do so by the Federal Reserve
Board, under authority of law, all of its rights and privileges as a member
bank shall thereupon cease and determine, and after due provision has been
made for any indebtedness due or to become due to the Federal reserve bank
it shall be entitled to a refund of its cash paid subscription with interest at the
rate of one-half of one per centum per month from date of last dividend,
if earned, the amount refunded in no event to exceed the book value of the
stock at that time, and shall likewise be entitled to repayment of deposits
and of any other balance due from the Federal reserve bank.
No applying bank shall be admitted to membership in a Federal reserve
bank unless (a) it possesses a paid-up, unimpaired capital sufficient to entitle
it to become a national banking association in the place where it is situated
under the provisions of the National Bank Act, or (b) it posesses a paid-up,
unimpaired capital of at least 60 per centum of the amount sufficient to
entitle it to become a national banking association in the place where it is
situated under the provisions of the National Bank Act and, under penalty
of loss of membership complies with rules and regulations which the Federal
Reserve Board shall prescribe fixing the time within which and the method
by which the unimpaired capital of such bank shall be increased out of net
income to equal the capital which would have been required if such bank had
been admitted to membership under the provisions of clause (a) of this
paragraph: Provided, That every such rule or regulation shall require the
applying bank to set aside annually not less than 20 per centum of its net
income of the preceding year as a fund exclusively applicable to such
capital increase.
Subject to the provisions of this act and to the regulations of the board
made pursuant thereto, any bank becoming a member of the Federal
Reserve System shall retain its full charter and statutory rights as a State
bank or trust company, and may continue to exercise all corporate powers
granted it by the State in which it was created, and shall be entitled to all
privileges of member banks: Provided, however, That no Federal reserve
bank shall be permitted to discount for any State bank or trust company
notes, drafts, or bills of exchange of any one borrower who is liable for
borrowed money to such State bank or trust company in an amount greater
than that which could be borrowed lawfully from such State bank or trust
company were it a national banking association. The Federal reserve bank,
as a condition of the discount of notes, drafts, and bills of exchange for such

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State bank or trust company, shall require a certificate or guaranty to the
effect that the borrower is not liable to such bank in excess of the amount
provided by this section, and will not be permitted to become liable in excess
of this amount while such notes, drafts, or bills of exchange are under discount with the Federal reserve bank (Sec. 9, page 14).
CAPITAL STOCK OF THE FEDERAL RESERVE BANKS
The capital stock of each Federal reserve bank shall be divided into shares
of $100 each. The outstanding capital stock shall be increased from time to
time as member banks increase their capital stock and surplus or as additional banks become members, and may be decreased as member banks
reduce their capital stock or surplus or cease to be members. Shares of the
capital stock of Federal reserve banks owned by member banks shall not
be transferred or hypothecated. When a member bank increases its capital
stock or surplus, it shall thereupon subscribe for an additional amount
of capital stock of the Federal reserve bank of its district equal to six per
centum of the said increase, one-half of said subscription to be paid in the
manner hereinbefore provided for original subscription, and one-half subject
to call of the Federal Reserve Board. A bank applying for stock in a
Federal reserve bank at any time after the organization thereof must subscribe for an amount of the capital stock of the Federal reserve bank equal
to six per centum of the paid-up capital stock and surplus of said applicant
bank, paying therefor its par value plus one-half of one per centum a month
from the period of the last dividend. When the capital stock of any Federal
reserve bank shall have been increased either on account of the increase of
capital stock of member banks or on account of the increase in the number of
member banks, the board of directors shall cause to be executed a certificate
to the Comptroller of the Currency showing the increase in capital stock,
the amount paid in, and by whom paid. When a member bank reduces
its capital stock it shall surrender a proportionate amount of its holdings
in the capital of said Federal reserve bank, and when a member bank voluntarily liquidates it shall surrender all of its holdings of the capital stock of
said Federal reserve bank and be released from its stock subscription not
previously called. In either case the shares surrendered shall be canceled
and the member bank shall receive in payment therefor, under regulations
to be prescribed by the Federal Reserve Board, a sum equal to its cash-paid
subscriptions on the shares surrendered and one-half of one per centum a
month from the period of the last dividend, not to exceed the book value
thereof, less any liability of such member bank to the Federal reserve bank
(Sec. 5, page 11).
If any member bank shall be declared insolvent and a receiver appointed
therefor, the stock held by it in said Federal reserve bank shall be canceled,
without impairment of its liability, and all cash-paid subscriptions on said
stock, with one-half of one per centum per month from the period of last
dividend, not to exceed the book value thereof, shall be first applied to all
debts of the insolvent member bank to the Federal reserve bank, and the

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balance, if any, shall be paid to the receiver of the insolvent bank. Whenever the capital stock of a Federal reserve bank is reduced, either on account
of a reduction in capital stock of any member bank or of the liquidation or
insolvency of such bank, the board of directors shall cause to be executed a
certificate to the Comptroller of the Currency showing such reduction of
capital stock and the amount repaid to such bank (Sec. G, page 12).

BOARD OF DIRECTORS OF FEDERAL RESERVE BANKS
FEDERAL RESERVE AGENT

AND

Every Federal reserve bank shall be conducted under the supervision and
control of a board of directors.
The board of directors shall perform the duties usually appertaining to
the office of directors of banking associations and all such duties as are
prescribed by law.
Said board shall administer the affairs of said bank fairly and impartially
and without discrimination in favor of or against any member bank or banks
and shall, subject to the provisions of law and the orders of the Federal
Reserve Board, extend to each member bank such discounts, advancements
and accommodations as may be safely and reasonably made with due regard
for the claims and demands of other member banks.
Such board of directors shall be selected as hereinafter specified and shall
consist of nine members, holding office for three years, and divided into
three classes, designated as classes A, B, and C.
Class A shall consist of three members, who shall be chosen by and be
representative of the stock-holding banks.
Class B shall consist of three members, who at the time of their election
shall be actively engaged in their district in commerce, agriculture or some
other industrial pursuit.
Class C shall consist of three members who shall be designated by the
Federal Reserve Board. When the necessary subscriptions to the capital
stock have been obtained for the organization of any Federal reserve bank,
the Federal Reserve Board shall appoint the class C directors and shall
designate one of such directors as chairman of the board to be selected.
No Senator or Representative in Congress shall be a member of the
Federal Reserve Board or an officer or a director of a Federal reserve bank.
No director of class B shall be an officer, director, or employee of any
bank.
No director of class C shall be an officer, director, employee, or stockholder of any bank.
Directors of class A and class B shall be chosen in the following manner:
The Federal Reserve Board shall classify the member banks of the
district into three general groups or divisions, designating cjich group by
number. Each group shall consist as nearly as may be of banks of similar
capitalization. Each member bank shall be permitted to nominate to the
chairman of the board of directors of the Federal reserve bank of the district

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one candidate for director of class A and one candidate for director of class B.
The candidates so nominated shall be listed by the chairman, indicating by
whom nominated, and a copy of said list shall, within fifteen days after its
completion, be furnished by the chairman to each member bank. Each
member bank by a resolution of the board or by an amendment to its by-laws
shall authorize its president, cashier, or some other officer to cast the vote
of the member bank in the elections of class A and class B' directors.
Within fifteen days after receipt of the list of candidates the duly authorized officer of a member bank shall certify to the chairman his first, second,
and other choices for director of class A and class B, respectively, upon a
preferential ballot upon a form furnished by the chairman of the board of
directors of the Federal reserve bank of the district. Each such officer shall
make a cross opposite the name of the first, second, and other choices for a
director of class A and for a director of class B, but shall not vote more than
one choice for any one candidate. No officer or director of a member bank
shall be eligible to serve as a class A director unless nominated and elected
by banks which are members of the same group as the member bank of
which he is an officer or director.
Any person who is an officer or director of more than one member bank
shall not be eligible for nomination as a class A director except by banks in
the same group as the bank having the largest aggregate resources of any
of those of which such person is an officer or director.
Any candidate having a majority of all votes cast in the column of first
choice shall be declared elected. If no candidate have a majority of all the
votes in the first column, then there shall be added together the votes
cast by the electors for such candidates in the second column and the
votes cast for the several candidates in the first column. If any candidate
then have a majority of the electors voting, by adding together the first
and second choices, he shall be declared elected. If no candidate have a
majority of electors voting when the first and second choices shall have been
added, then the votes cast in the third column for other choices shall be
added together in like manner, and the candidate then having the highest
number of votes shall be declared elected. An immediate report of election
shall be declared.
Class C directors shall be appointed by the Federal Reserve Board.
They shall have been for at least two years residents of the district for which
they are appointed. One of the class C directors shall be designated by said
board as chairman of the board of directors of the Federal reserve bank and
as "Federal reserve agent." He shall be a person of tested banking experience, and in addition to his duties as chairman of the board of directors of the
Federal reserve bank he shall be required to maintain, under regulations
to be established by the Federal Reserve Board, a local office of said board
on the premises of the Federal reserve bank. He shall make regular reports
to the Federal Reserve Board and shall act as its official representative
for the performance of the functions conferred upon it by this act. He shall
receive an annual compensation to be fixed by the Federal Reserve Board
and paid monthly by the Federal reserve bank to which he is designated.

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One of the directors of class C shall be appointed by the Federal Reserve
Board as deputy chairman to exercise the powers of the chairman of the
board when necessary. In case of the absence of the chairman and deputy
ehairman, the third-class C director shall preside at meetings of the board.
Subject to the approval of the Federal Reserve Board the Federal reserve
agent shall appoint one or more assistants. Such assistants, who shall be
persons of tested banking experience, shall assist the Federal reserve agent
in the performance of his duties and shall also have power to act in his name
and stead during his absence or disability. The Federal Reserve Board
shall require such bonds of the assistant Federal reserve agents as it may
deem necessary for the protection of the United States. Assistants to the
Federal reserve agent shall receive an annual compensation, to be fixed and
paid in the same manner as that of the Federal reserve agent.
Directors of Federal reserve banks shall receive, in addition to any compensation otherwise provided, a reasonable allowance for necessary expenses
in attending meetings of their respective boards, which amount shall be
paid by the respective Federal reserve banks. Any compensation that
may be provided by boards of directors of Federal reserve banks for directors,
officers or employees shall be subject to the approval of the Federal Reserve
Board.
Every director of a Federal reserve bank chosen as hereinbefore provided
shall hold office for a term of three years. Vacancies that may occur in the
several classes of directors of Federal reserve banks may be filled in the
manner provided for the original selection of such directors, such appointees
to hold office for the unexpired terms of their predecessors (Sec. 4, page 7).
POWERS OF FEDERAL RESERVE BANKS
Discounts.—Upon the indorsement of any of its member banks, which
shall be deemed a waiver of demand, notice and protest by such bank as
to its own indorsement exclusively, any Federal reserve bank may discount
notes, drafts, and bills of exchange arising out of actual commercial transactions; that is, notes, drafts, and bills of exchange issued or drawn for
agricultural, industrial, or commercial purposes, or the proceeds of which
have been used, or are to be used, for such purposes, the Federal Reserve
Board to have the right to determine or define the character of the paper
thus eligible for discount, within the meaning of this Act. Nothing in this
Act contained shall be construed to prohibit such notes, drafts, and bills of
exchange, secured by staple agricultural products, or other goods, wares, or
merchandise from being eligible for such discount, and the notes, drafts,
and bills of exchange of factors issued as such making advances exclusively
to producers of staple agricultural products in their raw state shall be
eligible for such discount; but such definition shall not include notes, drafts,
or bills covering merely investments or issued or drawn for the purpose of
carrying or trading in stocks, bonds, or other investment securities, except
bonds and notes of the Government of the United States. Notes, drafts,
and bills admitted to discount under the terms of this paragraph must have a

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maturity at the time of discount of not more than 90 days, exclusive of grace.
Upon the indorsement of any of its member banks, which shall be deemed
a waiver of demand, notice, and protest by such bank as to its own indorsement exclusively, and subject to regulations and limitations to be prescribed
by the Federal Reserve Board, any Federal reserve bank may discount or
purchase bills of exchange payable at sight or on demand which are drawn
to finance the domestic shipment of nonperishable, readily marketable
staple agricultural products and are secured by bills of lading or other
shipping documents conveying or securing title to such staples: Provided,
That all such bills of exchange shall be forwarded promptly for collection,
and demand for payment shall be made with reasonable promptness after
the arrival of such staples at their destination: Provided further, That no
such bill shall in any event be held by or for the account of a Federal reserve
bank for a period in excess of 90 days. In discounting such bills Federal
reserve banks may compute the interest to be deducted on the basis of the
estimated life of each bill and adjust the discount after payment of such bills
to conform to the actual life thereof.
The aggregate of such notes, drafts, and bills bearing the signature or
indorsement of any one borrower, whether a person, company, firm, or corporation, rediscounted for any one bank shall at no time exceed ten per centum of the unimpaired capital and surplus of said bank; but this restriction
shall not apply to the discount of bills of exchange drawn in good faith
against actually existing values.
Any Federal reserve bank may discount acceptances of the kinds hereinafter described, which have a maturity at the time of discount of not more
than 90 days' sight, exclusive of days of grace, and which are indorsed by at
least one member bank: Provided, That such acceptances if drawn for an
agricultural purpose and secured at the time of acceptance by warehouse
receipts or other such documents conveying or securing title covering readily
marketable staples may be discounted with a maturity at the time of discount of not more than six months' sight exclusive of days of grace (Sec.
13, page 25).
Upon the indorsement of any of its member banks, which shall be deemed
a waiver of demand, notice, and protest by such bank as to its own indorsement exclusively, any Federal reserve bank may, subject to regulations
and limitations to be prescribed by the Federal Reserve Board, discount
notes, drafts, and bills of exchange issued or drawn for an agricultural purpose, or based upon live stock, and having a maturity, at the time of discount, exclusive of days of grace, not exceeding nine months, and such
notes, drafts, and bills of exchange may be offered as collateral security for
the issuance of Federal reserve notes under the provisions of section 16 of
this Act: Provided, That notes, drafts, and bills of exchange with maturities
in excess of six months shall not be eligible as a basis for the issuance of
Federal reserve notes unless secured by warehouse receipts or other such
negotiable documents conveying or securing title to readily marketable
staple agricultural products or by chattel mortgage upon live stock which is
being fattened for market.

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That any Federal reserve bank may, subject to regulations and limitations
to be prescribed by the Federal Reserve Board, rediscount such notes, drafts,
and bills for any Federal Intermediate Credit Bank, except that no Federal
reserve bank shall rediscount for a Federal Intermediate Credit Bank any
such note or obligation which bears the indorsement of a nonmember State
bank or trust company which is eligible for membership in the Federal
reserve system, in accordance with section 9 of this Act.
Notes, drafts, bills of exchange or acceptances issued or drawn by cooperative marketing associations composed of producers of agricultural products
shall be deemed to have been issued or drawn for an agricultural purpose,
within the meaning of this section, if the proceeds thereof have been or are
to be advanced by such association to any members thereof for an agricultural purpose, or have been or are to be used by such association in making
payments to any members thereof on account of agricultural products
delivered by such members to the association, or if such proceeds have been
or are to be used by such association to meet expenditures incurred or to be
incurred by the association in connection with the grading, processing,
packing, preparation for market, or marketing of any agricultural product
handled by such association for any of its members: Provided, That the
express enumeration in this paragraph of certain classes of paper of cooperative marketing associations as eligible for rediscount shall not be construed
as rendering ineligible any other class of paper of such associations which is
now eligible for rediscount (Sec, 13(a), page 30).
Establishment of Discount Rates.—Each Federal reserve bank shall have
the power to establish, from time to time, subject to review and determination of the Federal Reserve Board, rates of discount to be charged by the
Federal reserve bank for each class of paper, which shall be fixed with a view
of accommodating commerce and business (Sec. 14(d), page 32).
Advances to Member Banks.—Any Federal reserve bank may make
advances to its member banks on their promissory notes for a period not
exceeding 15 days at rates to be established by such Federal reserve banks,
subject to the review and determination of the Federal Reserve Board,
provided such promissory notes are secured by such notes, drafts, bills of
exchange, or bankers' acceptances as are eligible for rediscount or for purchase by Federal reserve banks under the provisions of this Act, or by the
deposit or pledge of bonds or notes of the United States (Sec. 13, page 28).
Open-market Operations.—Any Federal reserve bank may, under rules
and regulations prescribed by the Federal Reserve Board, purchase and sell
in the open market, at home or abroad, either from or to domestic or foreign
banks, firms, corporations, or individuals, cable transfers and bankers'
acceptances and bills of exchange of the kinds and maturities by this Act
made eligible for rediscount, with or without the indorsement of a member
bank.
Every Federal reserve bank shall have power:
(a) To deal in gold coin and bullion at home or abroad, to make loans
thereon, exchange Federal reserve notes for gold, gold coin, or gold certificates, and to contract for loans of gold coin or bullion, giving therefor, when

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necessary, acceptable security, including the hypothecation of United States
bonds or other securities which Federal reserve banks are authorized to hold;
(&) To buy and sell, at home or abroad, bonds and notes of the United
States, and bills, notes, revenue bonds, and warrants with a maturity from
date of purchase of not exceeding six months, issued in anticipation of the
collection of taxes or in anticipation of the receipt of assured revenues by
any State, county, district, political subdivision, or municipality in the
continental United States, including irrigation, drainage and reclamation
districts, such purchases to be made in accordance with rules and regulations
prescribed by the Federal Reserve Board;
(c) To purchase from member banks and to sell, with or without its
indorsement, bills of exchange arising out of commercial transactions, as
hereinbefore defined;
(e) To establish accounts with other Federal reserve banks for exchange
purposes and, with the consent or upon the order and direction of the Federal
Reserve Board and under regulations to be prescribed by said board, to
open and maintain accounts in foreign countries, appoint correspondents,
and establish agencies in such countries wheresoever it may be deemed best
for the purpose of purchasing, selling, and collecting bills of exchange, and
to buy and sell, with or without its indorsement, through such correspondents or agencies, bills of exchange (or acceptances) arising out of actual
commercial transactions which have not more than ninety days to run,
exclusive of days of grace, and which bear the signature of two or more
responsible parties, and, with the consent of the Federal Reserve Board,
to open and maintain banking accounts for such foreign correspondents or
agencies. Whenever any such account has been opened or agency or correspondent has been appointed by a Federal reserve bank, with the consent of
or under the order and direction of the Federal Reserve Board, any other
Federal reserve bank may, with the consent and approval of the Federal
Reserve Board, be permitted to carry on or conduct, through the Federal
reserve bank opening such account or appointing such agency or correspondent, any transaction authorized by this section under rules and
regulations to be prescribed by the board.
if) To purchase and sell in the open market, either from or to domestic
banks, firms, corporations, or individuals, acceptances of Federal Intermediate Credit Banks and of National Agricultural Credit Corporations,
whenever the Federal Reserve Board shall declare that the public interest
so requires (Sec, 14, page 32).
Any Federal reserve bank may also buy and sell debentures and other
such obligations issued by a Federal Intermediate Credit Bank or by a
National Agricultural Credit Corporation, but only to the same extent, and
subject to the same limitations, as those upon which it may buy and sell bonds
issued under Title I of the Federal Farm Loan Act (Sec, 13(a), page 31). 1
1 The provision of the Federal Farm Loan Act referred to is as follows: Section 27.
Any
Federal reserve bank may buy and sell farm loan bonds issued under this Act to the same
extent and subject to the same limitations placed upon the purchase and sale by said banks
of state, county, district, and municipal bonds under subsection (b) of section 14 of the
Federal Reserve Act approved Dec. 23, 1913,

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IN OPERA TION

Note Issues: Federal Reserve Notes.—Federal reserve notes, to be issued
at the discretion of the Federal Reserve Board for the purpose of making
advances to Federal reserve banks through the Federal reserve agents as
hereinafter set forth and for no other purpose, are hereby authorized. The
said notes shall be obligations of the United States and shall be receivable
by all national and member banks and Federal reserve banks and for all
taxes, customs, and other public dues. They shall be redeemed in gold on
demand at the Treasury Department of the United States, in the city of
Washington, District of Columbia, or in gold or lawful money at any
Federal reserve bank.
Any Federal reserve bank may make application to the local Federal
reserve agent for such amount of the Federal reserve notes hereinbefore
provided for as it may require. Such application shall be accompanied with
a tender to the local Federal reserve agent of collateral in amount equal to
the sum of the Federal reserve notes thus applied for and issued pursuant
to such application. The collateral security thus offered shall be notes,
drafts, bills of exchange, or acceptances acquired under the provisions of
section thirteen of this act, or bills of exchange indorsed by a member bank
of any Federal reserve district and purchased under the provisions of section
fourteen of this act, or bankers' acceptances purchased under the provisions
of said section fourteen, or gold or gold certificates; but in no event shall
such collateral security, whether gold, gold certificates, or eligible paper, be
less than the amount of Federal reserve notes applied for. The Federal
reserve agent shall each day notify the Federal Reserve Board of all issues
and withdrawals of Federal reserve notes to and by the Federal reserve bank
to which he is accredited. The said Federal Reserve Board may at any
time call upon a Federal reserve bank for additional security to protect the
Federal reserve notes issued to it.
Every Federal reserve bank shall maintain reserves in gold or lawful
money of not less than thirty-five per centum against its deposits and
reserves in gold of not less than forty per centum against its Federal reserve
notes in actual circulation: Provided, however, That when the Federal reserve
agent holds gold or gold certificates as collateral for Federal reserve notes
issued to the bank such gold or gold certificates shall be counted as part of
the gold reserve which such bank is required to maintain against its Federal
reserve notes in actual circulation. Notes so paid out shall bear upon their
faces a distinctive letter and serial number which shall be assigned by the
Federal Reserve Board to each Federal reserve bank. Whenever Federal
reserve notes issued through one Federal reserve bank shall be received by
another Federal reserve bank, they shall be promptly returned for credit
or redemption to the Federal reserve bank through which they were originally issued or, upon direction of such Federal reserve bank, they shall be
forwarded direct to the Treasurer of the United States to be retired. No
Federal reserve bank shall pay out notes issued through another under
penalty of a tax of ten per centum upon the face value of notes so paid out.
Notes presented for redemption at the Treasury of the United States shall
be paid out of the redemption fund and returned to the Federal reserve

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banks through which they were originally issued, and thereupon such Federal
reserve bank shall, upon demand of the Secretary of the Treasury, reimburse
such redemption fund in lawful money or, if such Federal reserve notes
have been redeemed by the Treasurer in gold or gold certificates, then such
funds shall be reimbursed to the extent deemed necessary by the Secretary
of the Treasury in gold or gold certificates. Federal reserve notes received
by the Treasurer otherwise than for redemption may be exchanged for gold
out of the redemption fund hereinafter provided and returned to the reserve
bank through which they were originally issued, or they may be returned to
such bank for the credit of the United States. Federal reserve notes unfit
for circulation shall be returned by the Federal reserve agents to the Comptroller of the Currency for cancellation and destruction.
The Federal Reserve Board shall require each Federal reserve bank to
maintain on deposit in the Treasury of the United States a sum in gold sufficient in the judgment of the Secretary of the Treasury for the redemption of
the Federal reserve notes issued to such bank, but in no event less than five
per centum of the total amount of notes issued less the amount of gold, or
gold certificates held by the Federal reserve agent as collateral security;
but such deposit of gold shall be counted and included as part of the forty
per centum reserve hereinbefore required. The board shall have the right,
acting through the Federal reserve agent, to grant in whole or in part, or
to reject entirely the application of any Federal reserve bank for Federal
reserve notes; but to the extent that such application may be granted the
Federal Reserve Board shall, through its local Federal reserve agent, supply
Federal reserve notes to the banks so applying, and such bank shall be
charged with the amount of notes issued to it and shall pay such rate of
interest as may be established by the Federal Reserve Board on only that
amount of such notes which equals the total amount of its outstanding Federal reserve notes less the amount of gold or gold certificates held by the
Federal reserve agent as collateral security. Federal reserve notes issued to
any such bank shall, upon delivery, together with such notes of such Federal
reserve bank as may be issued under section eighteen of this act upon security of United States two per centum Government bonds, become a first and
paramount lien on all the assets of such bank.
Any Federal reserve bank may at any time reduce its liability for outstanding Federal reserve notes by depositing with the Federal reserve agent its
Federal reserve notes, gold, gold certificates, or lawful money of the United
States. Federal reserve notes so deposited shall not be reissued, except
upon compliance with the conditions of an original issue.
The Federal reserve agent shall hold such gold, gold certificates, or lawful
money available exclusively for exchange for the outstanding Federal reserve
notes when offered by the reserve bank of which he is a director. Upon the
request of the Secretary of the Treasury the Federal Reserve Board shall
require the Federal reserve agent to transmit to the Treasurer of the United
States so much of the gold held by him as collateral security for Federal
reserve notes as may be required for the exclusive purpose of the redemption
of such Federal reserve notes, but such gold when deposited with the

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Treasurer shall be counted and considered as if collateral security on deposit
with the Federal reserve agent.
Any Federal reserve bank may at its discretion withdraw collateral
deposited with the local Federal reserve agent for the protection of its
Federal reserve notes issued to it and shall at the same time substitute
therefor other collateral of equal amount with the approval of the Federal
reserve agent under regulations to be prescribed by the Federal Reserve
Board. Any Federal reserve bank may retire any of its Federal reserve
notes by depositing them with the Federal reserve agent or with the Treasurer of the United States, and such Federal reserve bank shall thereupon be
entitled to receive back the collateral deposited with the Federal reserve
agent for the security of such notes. Federal reserve banks shall not be
required to maintain the reserve or the redemption fund heretofore provided
for against Federal reserve notes which have been retired. Federal reserve
notes so deposited shall not be reissued except upon compliance with the
conditions of an original issue.
All Federal reserve notes and all gold, gold certificates, and lawful money
issued to or deposited with any Federal reserve agent under the provisions
of the Federal reserve act shall hereafter be held for such agent, under
such rules and regulations as the Federal Reserve Board may prescribe, in
the joint custody of himself and the Federal reserve bank to which he is
accredited. Such agent and such Federal reserve bank shall be jointly
liable for the safe-keeping of such Federal reserve notes, gold, gold certificates, and lawful money. Nothing herein contained, however, shall be
construed to prohibit a Federal reserve agent from depositing gold or gold
certificates with the Federal Reserve Board, to be held by such board subject
to his order, or with the Treasurer of the United States for the purposes
authorized by law.
In order to furnish suitable notes for circulation as Federal reserve notes,
the Comptroller of the Currency shall, under the direction of the Secretary
of the Treasury, cause plates and dies to be engraved in the best manner
to guard against counterfeits and fraudulent alterations, and shall have
printed therefrom and numbered such quantities of such notes of the denominations of $5, $10, $20, $50, $100, $500, $1,000, $5,000, $10,000 as may be
required to supply the Federal reserve banks. Such notes shall be in form
and tenor as directed by the Secretary of the Treasury under the provisions
of this Act and shall bear the distinctive numbers of the several Federal
reserve banks through which they are issued.
When such notes have been prepared, they shall be deposited in
Treasury, or in the subtreasury or mint of the United States nearest
place of business of each Federal reserve bank and shall be held for the
of such bank subject to the order of the Comptroller of the Currency
their delivery, as provided by this Act.

the
the
use
for

The plates and dies to be procured by the Comptroller of the Currency
for the printing of such circulating notes shall remain under his control
and direction, and the expenses necessarily incurred in executing the laws
relating to the procuring of such notes, and all other expenses incidental to

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183

their issue and retirement, shall be paid by the Federal reserve banks, and
the Federal Reserve Board shall include in its estimate of expenses levied
against the Federal reserve banks a sufficient amount to cover the expenses
herein provided for.
Any appropriation heretofore made out of the general funds of the
Treasury for engraving plates and dies, the purchase of distinctive paper,
or to cover any other expense in connection with the printing of nationalbank notes or notes provided for by the Act of May thirtieth, nineteen
hundred and eight, and any distinctive paper that may be on hand at the
time of the passage of this Act may be used in the discretion of the Secretary
for the purposes of this Act, and should the appropriations heretofore made
be insufficient to meet the requirements of this Act in addition to circulating
notes provided for by existing law, the Secretary is hereby authorized to use
so much of any funds in the Treasury not otherwise appropriated for the
purpose of furnishing the notes aforesaid: Provided, however, That nothing
in this section contained shall be construed as exempting national banks or
Federal reserve banks from their liability to reimburse the United States
for any expenses incurred in printing and issuing circulating notes (Sec.
16, page 34).
Federal Reserve Bank Notes.—Upon deposit with the Treasurer of the
United States of any bonds of the United States in the manner provided by
existing law relating to national banks, the Federal reserve banks shall have
authority to receive from the Comptroller of the Currency circulating notes
in blank, registered and countersigned as provided by law, equal in amount
to the par value of the bonds so deposited* such notes to be issued under the
same conditions and provisions of law as relate to the issue of circulating
notes of national banks secured by bonds of the United States bearing the
circulating privilege, except that the issue of such notes shall not be limited
to the capital stock of such Federal reserve bank {Sec. 4, page 7).
After two years from the passage of this Act, and at any time during a
period of twenty years thereafter, any member bank desiring to retire the
whole or any part of its circulating notes, may file with the Treasurer of the
United States an application to sell for its account, at par and accrued
interest, United States bonds securing circulation to be retired.
The Treasurer shall, at the end of each quarterly period, furnish the Federal Reserve Board with a list of such applications, and the Federal Reserve
Board may, in its discretion, require the Federal reserve banks to purchase
such bonds from the banks whose applications have been filed with the
Treasurer at least ten days before the end of any quarterly period at which
the Federal Reserve Board may direct the purchase to be made: Provided,
That Federal reserve banks shall not be permitted to purchase an amount
to exceed $25,000,000 of such bonds in any one year, and which amount shall
include bonds acquired under section four of this Act by the Federal
reserve bank.
Provided further, That the Federal Reserve Board shall allot to each
Federal reserve bank such proportion of such bonds as the capital and surplus
of such bank shall bear to the aggregate capital and surplus of all the
Federal reserve banks.

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Upon notice from the Treasurer of the amount of bonds so sold for its
account, each member bank shall duly assign and transfer, in writing, such
bonds to the Federal reserve bank purchasing the same, and such Federal
reserve bank shall, thereupon, deposit lawful money with the Treasurer
of the United States for the purchase price of such bonds, and the Treasurer
shall pay to the member bank selling such bonds any balance due after
deducting a sufficient sum to redeem its outstanding notes secured by
such bonds, which notes shall be canceled and permanently retired when
redeemed.
The Federal reserve banks purchasing such bonds shall be permitted to
take out an amount of circulating notes equal to the par value of such
bonds.
Upon the deposit with the Treasurer of the United States of bonds so
purchased, or any bonds with the circulating privilege acquired under section four of this Act, any Federal reserve bank making such deposit in the
manner provided by existing law, shall be entitled to receive from the
Comptroller of the Currency circulating notes in blank, registered and
countersigned as provided by law, equal in amount to the par value of the
bonds so deposited.1 Such notes shall be the obligations of the Federal
reserve bank procuring the same, and shall be in form prescribed by the
secretary of the Treasury, and to the same tenor and effect as national-bank
notes now provided by law. They shall be issued and redeemed under
the same terms and conditions as national-bank notes except that they shall
not be limited to the amount of the capital stock of the Federal reserve bank
issuing them.
Upon application of any Federal reserve bank, approved by the Federal
Reserve board, the Secretary of the Treasury may issue, in exchange for
United States two per centum gold bonds bearing the circulation privilege,
but against which no circulation is outstanding, one-year gold notes of the
United States without the circulation privilege, to an amount not to excecd
one-half of the two per centum bonds so tendered for exchange, and thirtyyear three per centum gold bonds without the circulation privilege for the
remainder of the two per centum bonds so tendered: Provided, That at the
time of such exchange the Federal reserve bank obtaining such one-year
gold notes shall enter into an obligation with the Secretary of the Treasury
binding itself to purchase from the United States for gold at the maturity
of such one-year notes, an amount equal to those delivered in exchange for
such bonds, if so requested by the Secretary, and at each maturity of oneyear notes so purchased by such Federal reserve bank, to purchase from the
United States such an amount of one-year notes as the Secretary may tender
to such bank, not to exceed the amount issued to such bank in the first
instance, in exchange for the two per centum United States gold bonds; said
obligation to purchase at maturity such notes shall continue in force for a
period not to exceed thirty years.
t Under act of Apr. 23, 1018, Federal reserve banks may issue Federal reserve bank
notes in any denomination, including $1 and $2, against the security of United States
certificates of indebtedness to the extent permitted by that act.

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185

For the purpose of making the exchange herein provided for, the Secietary
of the Treasury is authorized to issue at par Treasury notes in coupon or
registered form as he may prescribe in denominations of one hundred dollars,
or any multiple thereof, bearing interest at the rate of three per centum per
annum, payable quarterly, such Treasury notes to be payable not more than
one year from the date of their issue in gold coin of the present standard
value, and to be exempt as to principal and interest from the payment of all
taxes and duties of the United States except as provided by this Act, as well
as from taxes in any form by or under State, municipal, or local authorities.
And for the same purpose, the Secretary is authorized and empowered to
issue United States gold bonds at par, bearing three per centum interest
payable thirty years from date of issue, such bonds to be of the same general
tenor and effect and to be issued under the same general terms and conditions as the United States three per centum bonds without the circulation
privilege now issued and outstanding.
Upon application of any Federal reserve bank, approved by the Federal
Reserve Board, the Secretary may issue at par such three per centum bonds
in exchange for the one-year gold notes herein provided for (Sec. 18, page 41).
Check Clearing.—Any Federal reserve bank may receive from any of its
member banks, and from the United States, deposits of current funds in
lawful money, national-bank notes, Federal reserve notes, or checks, and
drafts, payable upon presentation, and also, for collection, maturing notes
and bills; or, solely for purposes of exchange or of collection, may receive
from other Federal reserve banks deposits of current funds in lawful money,
national-bank notes, or checks upon other Federal reserve banks, and checks
and drafts, payable upon presentation within its district, and maturing
notes and bills payable within its district; or, solely for the purposes of
exchange or of collection, may receive from any nonmember bank or trust
company deposits of current funds in lawful money, national-bank notes,
Federal reserve notes, checks and drafts payable upon presentation, or
maturing notes and bills: Provided, Such nonmember bank or trust company
maintains with the Federal reserve bank of its district a balance sufficient
to offset the items in transit held for its account by the Federal reserve
bank: Provided, further, That nothing in this or any other section of this act
shall be construed as prohibiting a member or nonmember bank from making
reasonable charges, to be determined and regulated by the Federal Reserve
Board, but in no case to exceed 10 cents per $100 or fraction thereof, based
on the total of checks and drafts presented at any one time, for collection or
payment of checks and drafts and remission therefor by exchange or otherwise; but no such charges shall be made against the Federal reserve banks
(Sec. 13, page 25).
Every Federal reserve bank shall receive on deposit at par from member
banks or from Federal reserve banks checks and drafts drawn upon any of
its depositors, and when remitted by a Federal reserve bank, checks and
drafts drawn by any depositor in any other Federal reserve bank or member
bank upon funds to the credit of said depositor in said reserve bank or
member bank. Nothing herein contained shall be construed as prohibiting

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a member bank from charging its actual expense incurred in collecting and
remitting funds, or for exchange sold to its patrons. The Federal Reserve
Board shall, by rule, fix the charges to be collected by the member banks
from its patrons whose checks are cleared through the Federal reserve bank
and the charge which may be imposed for the service of clearing or collection
rendered by the Federal reserve bank.
The Federal Reserve Board shall make and promulgate from time to time
regulations governing the transfer of funds and charges therefor among
Federal reserve banks and their branches, and may at its discretion exercise
the functions of a clearing house for such Federal reserve banks, or may
designate a Federal reserve bank to exercise such functions, and may also
require each such bank to exercise the functions of a clearing house for its
member banks (Sec. 16, page 39).
Government Deposits.—The moneys held in the general fund of the Treasury, except the five per centum fund for the redemption of outstanding
national-bank notes and the funds provided in this Act for the redemption of
Federal reserve notes may, upon the direction of the Secretary of the
Treasury, be deposited in Federal reserve banks, which banks, when required
by the Secretary of the Treasury, shall act as fiscal agents of the United
States, and the revenues of the Government or any part thereof may be
deposited in such banks, and disbursements may be made by checks drawn
against such deposits.
No public funds of the Philippine Islands, or of the postal savings, or any
Government funds, shall be deposited in the continental United States in
any bank not belonging to the system established by this Act: Provided,
however, That nothing in this Act shall be construed to deny the right of the
Secretary of the Treasury to use member banks as depositories.
The Federal reserve banks are hereby authorized to act as depositories
for and fiscal agents of any National Agricultural Credit Corporation or
Federal Intermediate Credit Bank (Sec. 15, page 33).
RESERVES OF T H E F E D E R A L RESERVE B A N K S
Every Federal reserve bank shall maintain reserves in gold or lawful
money of not less than thirty-five per centum against its deposits and
reserves in gold of not less than forty per centum against its Federal reserve
notes in actual circulation (Sec. 16, page 35).
The Federal Reserve Board shall have authority to suspend for a period
not exceeding thirty days, and from time to time to renew such suspension
for periods not exceeding fifteen days, any reserve requirements specified
in this Act (Sec. 11, page 20, see also page 191).
RESERVES OF M E M B E R B A N K S
Demand deposits within the meaning of this Act shall comprise all
deposits payable within thirty days, and time deposits shall comprise all
deposits payable after thirty days, all savings accounts and certificates of

APPENDIX

187

deposit which are subject to not less than thirty days' notice before payment, and all postal savings deposits.
Every bank, banking association, or trust company which is or which
becomes a member of any Federal reserve bank shall establish and maintain
reserve balances with its Federal reserve bank as follows:
(a) If not in a reserve or central reserve city, as now or hereafter defined,
it shall hold and maintain with the Federal reserve bank of its district an
actual net balance equal to not less than seven per centum of the aggregate
amount of its demand deposits and three per centum of its time deposits.
(b) If in a reserve city, as now or hereafter defined, it shall hold and
maintain with the Federal reserve bank of its district an actual net balance
equal to not less than ten per centum of the aggregate amount of its demand
deposits and three per centum of its time deposits: Provided, however,
That if located in the outlying districts of a reserve city or in territory added
to such a city by the extension of its corporate charter, it may, upon the
affirmative vote of five members of the Federal Reserve Board, hold and
maintain the reserve balances specified in paragraph (a) hereof.
(c) If in a central reserve city, as now or hereafter defined, it shall hold
and maintain with the Federal reserve bank of its district an actual net balance equal to not less than thirteen per centum of the aggregate amount of
its demand deposits and three per centum of its time deposits: Provided,
however, That if located in the outlying districts of a central reserve city or
in territory added to such city by the extension of its corporate charter, it
may, upon the affirmative vote of five members of the Federal Reserve
Board, hold and maintain the reserve balances specified in paragraphs (a)
or (b) thereof.
No member bank shall keep on deposit with any State bank or trust
company which is not a member bank a sum in excess of ten per centum of
its own paid-up capital and surplus. No member bank shall act as the
medium or agent of a nonmember bank in applying for or receiving discounts
from a Federal reserve bank under the provisions of this Act, except by
permission of the Federal Reserve Board.
The required balance carried by a member bank with a Federal reserve
bank may, under the regulations and subject to such penalties as may be
prescribed by the Federal Reserve Board, be checked against and withdrawn by such member bank for the purpose of meeting existing liabilities:
Provided, however, That no bank shall at any time make new loans or shall
pay any dividends unless and until the total balance required by law is fully
restored.
In estimating the balances required by this Act, the net difference of
amounts due to and from other banks shall be taken as the basis for ascertaining the deposits against which required balances with Federal reserve
banks shall be determined.
National banks, or banks organized under local laws, located in Alaska
or in a dependency or insular possession or any part of the United States
outside the continental United States may remain nonmember banks, and
shall in that event maintain reserves and comply with all the conditions

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now provided by law regulating them; or said banks may, with the consent
of the Reserve Board, become member banks of any one of the reserve
districts, and shall in that event take stock, maintain reserves, and be subject
to all the other provisions of this Act (Sec. 10, page 43).
BANK

EXAMINATIONS

Section fifty-two hundered and forty, United States Revised Statutes, is
amended to read as follows:
The Comptroller of the Currency, with the approval of the Secretary of
the Treasury, shall appoint examiners who shall examine every member
bank at least twice in each calendar year and oftener if considered necessary:
Provided, however, That the Federal Reserve Board may authorize examination by the State authorities to be accepted in the case of State banks and
trust companies and may at any time direct the holding of a special examination of State banks or trust companies that arc stockholders in any Federal
reserve bank. The examiner making the examination of any national bank,
or of any other member bank, shall have power to make a thorough examination of all the affairs of the bank, and in doing so he shall have power to
administer oaths and to examine any of the officers and agents thereof
under oath and shall make a full and detailed report of the condition of said
bank to the Comptroller of the Currency.
The Federal Reserve Board, upon the recommendation of the Comptroller
of the Currency, shall fix the salaries of all bank examiners and make report
thereof to Congress. The expense of the examinations herein provided
for shall be assessed by the Comptroller of the Currency upon the banks
examined in proportion to assets or resources held by the banks upon the
dates of examination of the various banks.
In addition to the examinations made and conducted by the Comptroller
of the Currency, every Federal reserve bank may, with the approval of the
Federal reserve agent or the Federal Reserve Board, provide for special
examination of member banks within its district. The expense of such
examinations shall be borne by the bank examined. Such examinations
shall be so conducted as to inform the Federal reserve bank of the condition
of its member banks and of the lines of credit which are being extended by
them. Every Federal reserve bank shall at all times furnish to the Federal
Reserve Board such information as may be demanded concerning the condition of any member bank within the district of the said Federal reserve bank.
No bank shall be subject to any visitatorial powers other than such as are
authorized by law, or vested in the courts of justice or such as shall be or
shall have been exercised or directed by Congress, or by either House thereof
or by any committee of Congress or of either House duly authorized.
The Federal Reserve Board shall, at least once each year, order an examination of each Federal reserve bank, and upon joint application of ten member banks the Federal Reserve Board shall order a special examination and
report of the condition of any Federal reserve bank (&ec~-21, page 45).

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189

DIVISION OF E A R N I N G S
After all necessary expenses of a Federal reserve bank have been paid or
provided for, the stockholders shall be entitled to receive an annual dividend
of six per centum on the paid-in capital stock, which dividend shall be
cumulative. After the aforesaid dividend claims have been fully met, the
net earnings shall be paid to the United States as a franchise tax except
that the whole of such net earnings shall be paid into a surplus fund until it
shall amount to one hundred per centum of the subscribed capital stock of
such bank, and that thereafter ten per centum of such net earnings shall be
paid into the surplus.
The net earnings derived by the United States from Federal reserve banks
shall, in the discretion of the Secretary, be used to supplement the gold reserve
held against outstanding United States notes, or shall be applied to the
reduction of the outstanding bonded indebtedness of the United States under
regulations to be prescribed by the Secretary of the Treasury. Should a
Federal reserve bank be dissolved or go into liquidation, any surplus remaining, after the payment of all debts, dividend requirements as hereinbefore
provided, and the par value of the stock, shall be paid to and become the
property of the United States and shall be similarly applied.
Federal reserve banks, including the capital stock and surplus therein,
and the income derived therefrom shall be exempt from Federal, State, and
local taxation, except taxes upon real estate (Sec. 7, page 12).
FEDERAL RESERVE B O A R D
A Federal Reserve Board is hereby created which shall consist of eight
members, including the Secretary of the Treasury and the Comptroller of
the Currency, who shall be members ex officio, and six members appointed
by the President of the United States, by and with the advice and consent
of the Senate. In selecting the six appointive members of the Federal
Reserve Board, not more than one of whom shall be selected from any one
Federal reserve district, the President shall have due regard to a fair representation of the financial, agricultural, industrial and commercial interests,
and geographical divisions of the country. The six members of the Federal
Reserve Board appointed by the President and confirmed as aforesaid
shall devote their entire time to the business of the Federal Reserve Board
and shall each receive an annual salary of §12,000, payable monthly, together
with actual necessary traveling expenses, and the Comptroller of the Currency, as ex officio member of the Federal Reserve Board, shall, in addition
to the salary now paid him as Comptroller of the Currency, receive the sum
of $7,000 annually for his services as a member of said board.
The Secretary of the Treasury and the Comptroller of the Currency shall
be ineligible during the time they are in office, and for two years thereafter
to hold any office, position, or employment in any member bank. The
appointive members of the Federal Reserve Board shall be ineligible during

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the time they are in office and for two years thereafter to hold any office,
position, or employment in any member bank, except that this restriction
shall not apply to a member who has served the full term for which he was
appointed. Of the six members thus appointed by the President one shall
be designated by the President to serve for two, one for four, one for six,
one for eight and the balance of the members for ten years, and thereafter
each member so appointed shall serve for a term of ten years, unless sooner
removed for cause by the President. Of the six persons thus appointed,
one shall be designated by the President as governor and one as vice governor
of the Federal Reserve Board. The governor of the Federal Reserve Board,
subject to its supervision, shall be the active executive officer. The Secretary of the Treasury may assign offices in the Department of the Treasury
for the use of the Federal Reserve Board. Each member of the Federal
Reserve Board shall within fifteen days after notice of appointment make
and subscribe to the oath of office.
The Federal Reserve Board shall have power to levy semiannually upon
the Federal reserve banks, in proportion to their capital stock and surplus
an assessment sufficient to pay its estimated expenses and the salaries
of its members and employees for the half year succeeding the levying of
such assessment, together with any deficit carried forward from the preceding
half year.
The Secretary of the Treasury shall be ex officio chairman of the Federal
Reserve Board. No member of the Federal Reserve Board shall be an officer
or director of any bank, banking institution, trust company, or Federal
reserve bank nor hold stock in any bank, banking institution, or trust
company; and before entering upon his duties as a member of the Federal
Reserve Board he shall certify under oath to the Secretary of the Treasury
that he has complied with this requirement. Whenever a vacancy shall
occur, other than by expiration of term, among the six members of the
Federal Reserve Board appointed by the President, as above provided, a
successor shall be appointed by the President, with the advice and consent
of the Senate, to fill such vacancy, and when appointed he shall hold office
for the unexpired term of the member whose place he is selected to fill.
The President shall have power to fill all vacancies that may happen
on the Federal Reserve Board during the recess of the Senate by granting
commissions which shall expire with the next session of the Senate.
Nothing in this Act contained shall be construed as taking away any
powers heretofore vested by law in the Secretary of the Treasury which
relate to the supervision, management, and control of the Treasury Department and bureaus under such department, and wherever any power vested
by this Act in the Federal Reserve Board or the Federal reserve agent
appears to conflict with the powers of the Secretary of the Treasury, such
powers shall be exercised subject to the supervision and control of the
Secretary.
The Federal Reserve Board shall annually make a full report of its operations to the Speaker of the House of Representatives, who shall cause the
same to be printed for the information of the Congress (Sec. 10, page 17).

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191

POWERS OF THE FEDERAL RESERVE BOARD
The Federal Reserve Board shall be authorized and empowered:
(a) To examine at its discretion the accounts, books and affairs of each
Federal reserve bank and of each member bank and to require such statements and reports as it may deem necessary. The said board shall publish
once each week a statement showing the condition of each Federal reserve
bank and a consolidated statement for all Federal reserve banks. Such
statements shall show in detail the assets and liabilities of the Federal reserve
banks, single and combined, and shall furnish full information regarding
the character of the money held as reserve and the amount, nature and
maturities of the paper and other investments owned or held by Federal
reserve banks.
(b) To permit, or, on the affirmative vote of at least five members of the
Reserve Board to require Federal reserve banks to rediscount the discounted
paper of other Federal reserve banks at rates of interest to be fixed by the
Federal Reserve Board.
(c) To suspend for a period not exceeding thirty days, and from time to
time to renew such suspension for periods not exceeding fifteen days, any
reserve requirements specified in this Act: Providedj That it shall establish a
graduated tax upon the amounts by which the reserve requirements of this
Act may be permitted to fall below the level hereinafter specified: And
provided further, That when the gold reserve held against Federal reserve
notes falls below forty per centum, the Federal Reserve Board shall establish
a graduated tax of not more than one per centum per annum upon such
deficiency until the reserves fall to thirty-two and one-half per centum, and
when said reserve falls below thirty-two and one-half per centum, a tax at
the rate increasingly of not less than one and one-half per centum per annum
upon each two and one-half per centum or fraction thereof that such reserve
falls below thirty-two and one-half per centum. The tax shall be paid by
the reserve bank, but the reserve bank shall add an amount equal to said
tax to the rates of interest and discount fixed by the Federal Reserve Board.
(d) To supervise' and regulate through the bureau under the charge of
the Comptroller of the Currency the issue and retirement of Federal reserve
notes, and to prescribe rules and regulations under which such notes may be
delivered by the Comptroller to the Federal reserve agents applying therefor.
(e) To add to the number of cities classified as reserve and central reserve
cities under existing law in which national banking associations are subject
to the reserve requirements set forth in section twenty of this Act; or to
reclassify existing reserve and central reserve cities or to terminate their
designation as such.
(J) To suspend or remove any officer or director of any Federal reserve
bank, the cause of such removal to be forthwith communicated in writing by
the Federal Reserve Board to the removed officer or director and to said
bank.
(g) To require the writing off of doubtful or worthless assets upon the
books and balance sheets of Federal reserve banks.

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(h) To suspend, for the violation of any of the provisions of this Act,
the operations of any Federal reserve bank, to take possession thereof,
administer the same during the period of suspension, and, when deemed
advisable, to liquidate or reorganize such bank.
(i) To require bonds of Federal reserve agents, to make regulations
for the safeguarding of all collateral, bonds, Federal reserve notes,
money or property of any kind deposited in the hands of such agents, and
said board shall perform the duties, functions, or services specified in this
Act, and make all rules and regulations necessary to enable said board
effectively to perform the same.
(j) To exercise general supervision over said Federal reserve banks.
(k) To grant by special permit to national banks applying therefor, when
not in contravention of State or local law, the right to act as trustee, executor, administrator, registrar of stocks and bonds, guardian of estates,
assignee, receiver, committee of estates of lunatics, or in any other fiduciary
capacity in which State banks, trust companies, or other corporations which
come into competition with national banks are permitted to act under the
laws of the State in which the national bank is located.
(I) To employ such attorneys, experts, assistants, clerks, or other employees as may be deemed necessary to conduct the business of the board.
All salaries and fees shall be fixed in advance by said board and shall be
paid in the same manner as the salaries of the members of said board. All
such attorneys, experts, assistants, clerks, and other employees shall be
appointed without regard to the provisions of the Act of January sixteenth,
eighteen hundred and eighty-three (volume twenty-two, United States
Statutes at Large, page four hundred and three), and amendments thereto,
or any rule or regulation made in pursuance thereof: Provided, That nothing
herein shall prevent the President from placing said employees in the classified service.
(m) Upon the affirmative vote of not less than five of its members, the
Federal Reserve Board shall have power to permit Federal reserve banks to
discount for any member banks notes, drafts, or bills of exchange bearing
the signature or endorsement of any one borrower in excess of the amount
permitted by section 9 and section 13 of this Act, but in no case to exceed 20
per centum of the member bank's capital and surplus: Provided, however,
That all such notes, drafts, or bills of exchange discounted for any member
bank in excess of the amount permitted under such sections shall be secured
by not less than a like face amount of bonds or notes of the United States
issued since April 24, 1917, for which the borrower shall in good faith prior
to January 1, 1921, have paid or agreed to pay not less than the full face
amount thereof, or certificates of indebtedness of the United States: Provided further, That the provisions of this subsection (m) shall not be operative
after October 31, 1921 (Sec. 11, -page, 20).
The discount and rediscount and the purchase and sale by any Federal
reserve bank of any bills receivable and of domestic and foreign bills of
exchange, and of acceptances authorized by this Act, shall be subject to s\ich

APPENDIX

193

restrictions, limitations, and regulations as may be imposed by the Federal
Reserve Board (See. 13, page 29).
The Federal Reserve Board may, by regulation, limit to a percentage
of the assets of the Federal reserve bank the amount of notes, drafts, acceptances, or bills having a maturity in excess of three months, but not exceeding
six months, exclusive of days of grace, which may be discounted by such
banks, and the amount of notes, drafts, bills, or acceptances having a maturity
in excess of six months, but not exceeding nine months, which may be rediscounted by such bank (Sec. 13(a), page 31).
The Federal Reserve Board may permit or require any Federal reserve
bank to establish branch banks within the Federal reserve district in which
it is located or within the district of any Federal reserve bank which may
have been suspended. Such branches, subject to such rules and regulations
as the Federal Reserve Board may prescribe, shall be operated under the
supervision of a board of directors to consist of not more than seven nor less
than three directors, of whom a majority of one shall be appointed by the
Federal reserve bank of the district, and the remaining directors by the
Federal Reserve Board. Directors of branch banks shall hold office during
the pleasure of the Federal Reserve Board (Sec. 3, page 5).
The discount rates established from time to time by the Federal reserve
banks for each class of paper shall be subject to review and determination
of the Federal Reserve Board (Sec. 14, page 32).
The Board shall have the right, acting through the Federal reserve agent,
to grant in whole or in part, or to reject entirely the application of any
Federal reserve bank for Federal reserve notes (Sec. 16, page 36),
GOLD DEPOSITS W I T H U N I T E D STATES

TREASURY

The Secretary of the Treasury is hereby authorized and directed to
receive deposits of gold coin or of gold certificates with the Treasurer or any
assistant treasurer of the United States when tendered by any Federal
reserve bank or Federal reserve agent for credit to its or his account with
the Federal Reserve Board. The Secretary shall prescribe by regulation the
form of receipt to be issued by the Treasurer or Assistant Treasurer to the
Federal reserve bank or Federal reserve agent making the deposit, and a
duplicate of such receipt shall be delivered to the Federal Reserve Board by
the Treasurer at Washington upon proper advices from any assistant treasurer that such deposit has been made. Deposits so made shall be held subject to the orders of the Federal Reserve Board and shall be payable in gold
coin or gold certificates on the order of the Federal Reserve Board to any
Federal reserve bank or Federal reserve agent at the Treasury or at the
Subtreasuiy of the United States nearest the place of business of such Federal reserve bank or such Federal reserve agent: Provided, however, That any
expense incurred in shipping gold to or from the Treasury or subtreasuries
in order to make such payments, or as a result of making such payments,
shall be paid by the Federal Reserve Board and assessed against the Federal
reserve banks. The order used by the Federal. Reserve Board in making

194

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such payments shall be signed by the governor or vice governor, or such other
officers or members as the board may by regulation prescribe. The form of
such order shall be approved by the Secretary of the Treasury.
The expenses necessarily incurred in carrying out these provisions, including the cost of the certificates or receipts issued for deposits received, and
all expenses incident to the handling of such deposits shall be paid by the
Federal Reserve Board and included in its assessments against the several
Federal reserve banks.
Gold deposits standing to the credit of any Federal reserve bank with the
Federal Reserve Board shall, at the option of said bank, be counted as part
of the lawful reserve which it is required to maintain against outstanding
Federal reserve notes, or as a part of the reserve it is required to maintain
against deposits (Sec. 16, page 39).
FEDERAL ADVISORY

COUNCIL

There is hereby created a Federal Advisory Council, which shall consist of
as many members as there are Federal reserve districts. Each Federal
reserve bank by its board of directors shall annually select from its own
Federal reserve district one member of said council, who shall receive such
compensation and allowances as may be fixed by his board of directors
subject to the approval of the Federal Reserve Board. The meetings of
said advisory council shall be held at Washington, District of Columbia, at
least four times each year, and oftener if called by the Federal Reserve
Board. The council may in addition to the meetings above provided for
hold such other meetings in Washington, District of Columbia, or elsewhere,
as it may deem necessary, may select its own officers and adopt its own
methods of procedure, and a majority of its members shall constitute a
quorum for the transaction of business. Vacancies in the council shall
be filled by the respective reserve banks, and members selected to fill vacancies shall serve for the unexpired term.
The Federal Advisory Council shall have power, by itself or through its
officers, (1) to confer directly with the Federal Reserve Board on general
business conditions; (2) to make oral or written representations concerning
matters within the jurisdiction of said board; (3) to call for information and
to make recommendations in regard to discount rates, rediscount business,
note issues, reserve conditions in the various districts, the purchase and sale
of gold or securities by reserve banks, open-market operations by said banks,
and the general affairs of the reserve banking system (Sec. 12, page 24).
P O W E R OF M E M B E R B A N K S T O

Any member bank may accept drafts or bills of exchange drawn upon it
having not more than six months' sight to run, exclusive of days of grace,
which grow out of transactions involving the importation or exportation of
goods; or which grow out of transactions involving the domestic shipment
of goods provided shipping documents conveying or securing title are

APPENDIX

195

attached at the time of acceptance; or which are secured at the time of
acceptance by a warehouse receipt or other such document conveying or
securing title covering readily marketable staples. No member bank shall
accept, whether in a foreign or domestic transaction, for any one person,
company, firm, or corporation to an amount equal at any time in the
aggregate to more than ten per centum of its paid-up and unimpaired capital
stock and surplus, unless the bank is secured either by attached documents
or by some other actual security growing out of the same transaction as
the acceptance; and no bank shall accept such bills to an amount equal
at any time in the aggregate to more than one-half of its paid-up and unimpaired capital stock and surplus: Provided, however, That the Federal
Reserve Board, under such general regulations as it may prescribe, which
shall apply to all banks alike regardless of the amount of capital stock and
surplus, may authorize any member bank to accept such bills to an amount
not exceeding at any time in the aggregate one hundred per centum of
its paid-up and unimpaired capital stock and surplus: Provided further,
That the aggregate of acceptances growing out of domestic transactions shall
in no event exceed fifty per centum of such capital stock and surplus (Sec.
13, page 27).
Any member bank may accept drafts or bills of exchange drawn upon it
having not more than three months' sight to run, exclusive of days of grace,
drawn under regulations to be prescribed by the Federal Reserve Board by
banks or bankers in foreign countries or dependencies or insular possessions
of the United States for the purpose of furnishing dollar exchange as required
by the usages of trade in the respective countries, dependencies, or insular
possessions. Such drafts or bills may be acquired by Federal reserve banks
in such amounts and subject to such regulations, restrictions, and limitations
as may be prescribed by the Federal Reserve Board: Provided, however, That
no member bank shall accept such drafts or bills of exchange referred to
in this paragraph for any one bank to an amount exceeding in the aggregate
ten per centum of the paid-up and unimpaired capital and surplus of the
accepting bank unless the draft or bill of exchange is accompanied by
documents conveying or securing title or by some other adequate security:
Provided further, That no member bank shall accept such drafts or bills in
an amount exceeding at any time the aggregate of one-half of its paid-up
and unimpaired capital and surplus (Sec. 13, -page 29).
R I G H T OF N A T I O N A L BANKS TO G R A N T LOANS ON F A R M L A N D
TO ESTABLISH BRANCHES ABROAD, A N D TO I N V E S T
I N FOREIGN B A N K I N G CORPORATIONS
Any national banking association not situated in a central reserve city
may make loans secured by improved and unencumbered farm land situated
within its Federal reserve district or within a radius of one hundred miles of
the place in which such bank is located, irrespective of district lines, and may
also make loans secured by improved and unencumbered real estate located
within one hundred miles of the place in which such bank is located, irre-

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spcctive of district lines; but no loan made upon the security of such farm
land shall be made for a longer time than five years, and no loan made
upon the security of such real estate as distinguished from farm land shall
be made for a longer time than one year nor shall the amount of any such
loan, whether upon such farm land or upon such real estate, exceed fifty
per centum of the actual value of the property offered as security. Any such
bank may make such loans, whether secured by such farm land or such real
estate, in an aggregate sum equal to twenty-five per centum of its capital
and surplus or to one-third of its time deposits and such banks may continue
hereafter as heretofore to receive time deposits and to pay interest on the
same.
The Federal Reserve Board shall have power from time to time to add to
the list of cities in which national banks shall not be permitted to make
loans secured upon real estate in the manner described in this section
(Sec. 24, page 49).
FOREIGN BRANCHES OF N A T I O N A L B A N K S
Any national banking association possessing a capital and surplus of
§1,000,000 or more may file application with the Federal Reserve Board
for permission to exercise, upon such conditions and under such regulations
as may be prescribed by the said board, either or both of the following
powers:
First. To establish branches in foreign countries or dependencies or
insular possessions of the United States for the furtherance of the foreign
commerce of the United States, and to act if required to do so as fiscal agents
of the United States.
Second. To invest an amount not exceeding in the aggregate ten per
centum of its paid-in capital stock and surplus in the stock of one or more
banks or corporations chartered or incorporated under the laws of the United
States or of any State thereof, and principally engaged in international or
foreign banking, or banking in a dependency or insular possession of the
United States either directly or through the agency, ownership, or control
of local institutions in foreign countries, or in such dependencies or insular
possessions (Sec* 25, page 50).
BANKING

CORPORATIONS TO D O
BUSINESS

FOREIGN

BANKING

Corporations to be organized for the purpose of engaging in international
or foreign banking or other international or foreign financial operations, or
in banking or other financial operations in a dependency or insular possession
of the United States, either directly or through the agency, ownership, or
control of local institutions in foreign countries, or in such dependencies
or insular possessions as provided by this section, and to act when required
by the Secretary of the Treasury as fiscal agents of the United States, may
be formed by any number of natural persons, not less in any case than
five (Sec. 25(a), page 52 el &cq.% known as the Edge Act).

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197

S E C R E T A R Y OF TIIE TREASURY TO M A I N T A I N P A R I T Y OF
ALL FORMS OF M O N E Y ISSUED OR C O I N E D B Y T H E
U N I T E D STATES
All provisions of law inconsistent with or superseded by any of the
provisions of this Act are to that extent and to that extent only hereby repealed : Provided, Nothing in this Act contained shall be construed to repeal
the parity provision or provisions contained in an Act approved March
fourteenth, nineteen hundred, entitled " A n Act to define and fix the standard
of value, to maintain the parity of all forms of money issued or coined by
the United States, to refund the public debt, and for other purposes,"
and the Secretary of the Treasury may, for the purpose of maintaining such
parity and to strengthen the gold reserve, borrow gold on the security of
United States bonds authorized by section two of the Act last referred to or
for one-year gold notes bearing interest at a rate of not to exceed three per
centum per annum, or sell the same if necessary to obtain gold. When the
funds of the Treasury on hand justify, he may purchase and retire such
outstanding bonds and notes (Sec. 26, page 62).
INTERLOCKING BANK

DIRECTORATES

Clayton Antitrust Act, approved October 15,1914, as amended
by the Kern amendment, approved May 15, 1916, as amended
by the Act approved May 26, 1920.1
SEC. 8. That from and after two years from the date of the approval of
this Act no person shall at the same time be a director or other officer or
employee of more than one bank, banking association, or trust company
organized or operating under the laws of the United States, either of which
has deposits, capital, surplus, and undivided profits aggregating more than
$5,000,000; and no private banker or person who is a director in any bank
or trust company organized and operating under the laws of a State, having
deposits, capital, surplus, and undivided profits aggregating more than
$5,000,000, shall be eligible to be a director in any bank or banking association organized or operating under the laws of the United States. The
eligibility of a director, officer, or employee under the foregoing provisions
shall be determined by the average amount of deposits, capital, surplus,
and undivided profits as shown in the official statements of such bank,
banking association, or trust company filed as provided by law during the
fiscal year next preceding the date set for the annual election of directors,
and when a director, officer, or employee has been elected or selected in
accordance with the provisions of this Act it shall be lawful for him to continue as such for one year thereafter under said election or employment.
1 Amended by Sec. 25 of Federal Reserve Act, as amended Sept. 7, 1916; and amended
by Act approved Dec. 24, 1919, amending the Federal Reserve Act, as to corporations
engaged in foreign banking and financial operations.

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No bank, banking association, or trust company organized or operating
under the laws of the United States, in any city or incorporated town or
village of more than two hundred thousand inhabitants, as shown by the
last preceding decennial census of the United States, shall have as a director
or other officer or employee any private banker or any director or other officer
or employee of any other bank, banking association, or trust company
located in the same place: Provided, That nothing in this section shall apply
to mutual savings banks not having a capital stock represented by shares:
Provided further, That a director or other officer or employee of such bank,
banking association, or trust company may be a director or other officer
or employee of not more than one other bank or trust company organized
under the laws of the United States or any State where the entire capital
stock is owned by stockholders in the other: And provided further, That
nothing contained in this section shall forbid a director of class A of a Federal
reserve bank, as defined in the Federal Reserve Act, from being an officer
or director, or both an officer and director, in one member bank: And
provided further, That nothing in this Act shall prohibit any private banker or
any officer, director, or employee of any member bank or class A director of
a Federal reserve bank, who shall first procure the consent of the Federal
Reserve Board, which board is hereby authorized, at its discretion, to grant,
withhold, or revoke such consent, from being an officer, director, or employee
of not more than two other banks, banking associations, or trust companies,
whether organized under the laws of the United States or any State, if such
other bank, banking association, or trust company is not in substantial
competition with such banker or member bank.
The consent of the Federal Reserve Board may be procured before the
person applying therefor has been elected as a class A director of a Federal
reserve bank or as a director of any member bank.
When any person elected or chosen as a director or officer or selected as an
employee of any bank or other corporation subject to the provisions of this
Act is eligible at the time of his election or selection to act for such bank or
other corporation in such capacity his eligibility to act in such capacity
shall not be affected and shall not become or be deemed amenable to any
of the provisions hereof by reason of any change in the affairs of such bank
or other corporation from whatsoever cause, whether specifically excepted
by any of the provisions hereof or not, until the expiration of one year
from the date of his election or employment.

ABOLITION

SUBTREASURIES

APPROPRIATION A C T , APPROVED M A Y

29,

1920

Section 3595 of the Revised Statutes of the United States, as a m e n d e d ,
providing for the appointment of an Assistant Treasurer of the United States
at Boston, New York, Philadelphia, Baltimore, New Orleans, Saint Louis,
San Francisco, Cincinnati, and Chicago, and all laws or parts of laws so
far as they authorize the establishment or maintenance of offices of such

APPENDIX

199

Assistant Treasurers or of Subtreasuries of the United States are hereby
repealed from and after July 1, 1921; and the Secretary of the Treasury is
authorized and directed to discontinue from and after such date or at such
earlier date or dates as he may deem advisable, such subtreasuries and the
exercise of all duties and functions by such assistant treasurers or their
offices. The office of each assistant treasurer specified above and the
services of any officers or other employees assigned to duty at his office
shall terminate upon the discontinuance of the functions of that office by
the Secretary of the Treasury.
The Secretary of the Treasury is hereby authorized, in his discretion, to
transfer any or all of the duties and functions performed or authorized to
to be performed by the assistant treasurers above enumerated, or their
offices, to the Treasurer of the United States or the mints or assay offices of
the United States, under such rules and regulations as he may prescribe, or
to utilize any of the Federal reserve banks acting as depositaries or fiscal
agents of the United States, for the purpose of performing any or all of such
duties and functions, notwithstanding the limitations of section 15 of the
Federal Reserve Act, as amended, or any other provisions of law: Provided,
That if any moneys or bullion, constituting part of the trust funds or other
special funds heretofore required by law to be kept in Treasury offices, shall
be deposited with any Federal reserve bank, then such moneys or bullion
shall by such bank be kept separate and distinct from the assets, funds, and
securities of the Federal reserve bank and to be held in the joint custody of
the Federal reserve agent and the Federal reserve bank: Provided further,
That nothing in this section shall be construed to deny the right of the
Secretary of the Treasury to use member banks as depositaries as heretofore
authorized by law.
The Secretary of the Treasury is hereby authorized to assign any or all
the rooms, vaults, equipment, and safes or space in the buildings used by the
subtreasuries to any Federal reserve bank acting as fiscal agent of the
United States.

APPENDIX B
REGULATIONS

OF THE FEDERAL

RESERVE

BOARD

REGULATION A, SERIES OF 1924
(Superseding Regulation A of 1923)

DISCOUNTS U N D E R SECTIONS 13 A N D 13a
ARTICLE A
NOTES, DRAFTS, AND BILLS OF E X C H A N G E
SECTION I. GENERAL STATUTORY

PROVISIONS

Any Federal reserve bank may discount for any of its member banks any
note, draft, or bill of exchange: Provided—
(а) It has a definite maturity at the time of discount of not more than
90 days, exclusive of days of grace; except that (1) if drawn or issued for a A
agricultural purpose or based on livestock, it may have a maturity at the
time of discount of not more than nine months, exclusive of days of grace,
and (2) certain bills of exchange payable at sight or on demand are eligible
though they have no definite maturity (see Section VII, below);
(б) It has been issued or drawn for an agricultural, industrial, or commercial purpose, or the proceeds have been used or are to be used for such a
purpose, or it is a note, draft, or bill of exchange of a factor issued as such
making advances exclusively to producers of staple agricultural products m
their raw state;
(c) It was not issued for carrying or trading in stocks, bonds, or other
investment securities, except bonds and notes of the Government of the
United States or unless it is secured by bonds or notes of the War Finance
Corporation;
(d) The aggregate of notes, drafts, and bills bearing the signature or
indorsement of any one borrower, whether a person, company, firm, or corporation, discounted for any one member bank, whether State or National,
shall at no time exceed 10 per cent of the unimpaired capital and surplus
of such bank; but this restriction shall not apply to the discount of bills
of exchange drawn in good faith against actually existing values;
(e) It is indorsed by a member bank; and
(/) It conforms to all applicable provisions of this regulation.
No Federal reserve bank may discount for any member State bank or
trust company any of the notes, drafts, or bills of exchange of any one

200

APPENDIX

201

borrower who is liable for borrowed money to such State bank or trust company in an amount greater than that which could be borrowed lawfully from
such State bank or trust company under the terms of section 5200 of the
United States Revised Statutes, as amended, were it a national banking
association.
Any Federal reserve bank may make advances to its member banks on
their promissory notes for a period not exceeding 15 days, provided that
they are secured by notes, drafts, bills of exchange, or bankers' acceptances
which are eligible for discount or for purchase by Federal reserve banks, or
by the deposit or pledge of bonds or notes of the United States, or bonds or
notes of the War Finance Corporation.
SECTION II. GENERAL CHARACTER OF NOTES, DRAFTS, AND BILLS OF EXCHANGE
ELIGIBLE

The Federal Reserve Board, exercising its statutory right to define the
character of a note, draft, or bill of exchange eligible for discount at a
Federal reserve bank has determined that—
(а) It must be a negotiable note, draft, or bill of exchange which has been
issued or drawn, or the proceeds of which have been used or are to be used
in the first instance, in producing, purchasing, carrying, or marketing goods1
in one or more of the steps of the process of production, manufacture, or
distribution, or for the purpose of carrying or trading in bonds or notes of
the United States or of the War Finance Corporation, and the name of a
party to such transaction must appear upon it as maker, drawer, acceptor,
or indorser: Provided, however, That if the purpose is the carrying or trading
in bonds or notes of the War Finance Corporation, such note, draft, or bill
of exchange must be secured by same.
(б) It must not be a note, draft, or bill of exchange the proceeds of which
have been or are to be advanced or loaned to some other borrower, except
as to paper described below under Sections VI (6) and VIII.
(c) It must not be a note, draft, or bill of exchange the proceeds of which
have been used or are to be used for permanent or fixed investments of any
kind, such as land, buildings, or machinery, or for any other capital purpose.
(d) It must not be a note, draft, or bill of exchange the proceeds of which
have been used or are to be used for investments of a purely speculative
character.
(e) It may be secured by the pledge of goods or collateral of any nature,
including paper which is ineligible for discount, provided it (the note, draft,
or bill of exchange) is otherwise eligible.
SECTION III. APPLICATIONS FOR DISCOUNT

Every application for the discount of notes, drafts, or bills of exchange
must contain a certificate of the member bank, in form to be prescribed by
the Federal reserve bank, that, to the best of its knowledge and belief, such
1

When used in this regulation the word " g o o d s " shall be construed to include goods, wares,

merchandise, or agricultural products, including livestock.

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notes, drafts, or bills of exchange have been issued or drawn, or the proceeds
thereof have been or are to be used, for such a purpose as to render them eligible for discount under the terms of this regulation, and, in the case of a
member State bank or trust company, every application must contain a
certificate or guaranty to the effect that the borrower is not liable, and will
not be permitted to become liable during the time his paper is held by the
Federal reserve bank, to such bank or trust company for borrowed money
in an amount greater than that which could be borrowed lawfully from such
State bank or trust company under the terms of section 5200 of the United
States Revised Statutes, as amended, were it a national banking association.
SECTION IV. PROMISSORY

NOTES

(а) Definition.—A promissory note, within the meaning of this regulation, is defined as an unconditional promise, in writing, signed by the maker,
to pay, in the United States, at a fixed or determinable future time, a sum
certain in dollars to order or to bearer.
(б) Evidence of Eligibility and Requirement of Statement.—A Federal
reserve bank must be satisfied by reference to the note or otherwise that it is
eligible for discount. The member bank shall certify in its application
whether the note offered for discount has been discounted for a depositor
other than a bank or for a nondepositor and, if discounted for a bank,
whether for a member or a nonmember bank. The member bank must
also certify whether a financial statement of the borrower is on file with it.
A recent financial statement of the borrower must be on file with the
member bank in all cases, unless the note was discounted by a member
bank for a depositor (other than a bank) or for another member bank, and—
(1) It is secured by a warehouse, terminal, or other similar receipt covering
goods in storage, by a valid prior lien on livestock which is being marketed
or fattened for market, or by bonds or notes of the United States; or
(2) The aggregate of obligations of the borrower discounted and offered
for discount at the Federal reserve bank by the member bank is less than
a sum equal to 10 per cent of the paid-in capital of the member bank and is
less than $5,000.
Whenever the borrower has closely affiliated or subsidiary corporations
or firms, the borrower's financial statement shall be accompanied by separate
financial statements of such affiliated or subsidiary corporations or firms,
unless the statement of the borrower clearly indicates that such note is both
eligible from a legal standpoint and acceptable from a credit standpoint:
Prodded, however, That the Federal reserve bank to which such note is
offered for rediscount may waive this requirement until May 1, 1925, in
any case where such borrower and the affiliated or subsidiary corporations
or firms have not issued separate financial statements prior thereto.
A Federal reserve bank shall use its discretion in taking the steps necessary
to satisfy itself as to eligibility. Compliance of a note with Section II (c)
may be evidenced by a statement of the borrower showing a reasonable
excess of quick assets over current liabilities. A Federal reserve bank may,
in all cases, require the financial statement of the borrower to be filed with it.

APPENDIX

203

SECTION V. DRAFTS, BILLS OP EXCHANGE, AND TRADE ACCEPTANCES

(«) Definition.—A draft or bill of exchange, within the meaning of this
regulation, is defined as an unconditional order in writing, addressed by
one person to another, signed by the person giving it, requiring the person
to whom it is addressed to pay in the United States, at a fixed or determinable future time, a sum certain in dollars to the order of a specified person;
and a trade acceptance is defined as a draft or bill of exchange, drawn by the
seller on the purchaser of goods sold,1 and accepted by such purchaser.
(6) Evidence of Eligibility and Requirement of Statements.—A Federal
reserve bank shall take such steps as it deems necessary to satisfy itself
as to the eligibility of the draft, bill, or trade acceptance offered for discount
and may require a recent financial statement of one or more parties to the
instrument. The draft, bill, or trade acceptance should be drawn so as to
evidence the character of the underlying transaction, but if it is not so drawn
evidence of eligibility may consist of a stamp or certificate affixed by the
acceptor or drawer in a form satisfactory to the Federal reserve bank.
SECTION VI. AGRICULTURAL PAPER

(а) Definition.—Agricultural paper, within the meaning of this regulation, is defined as a negotiable note, draft, or bill of exchange issued or
drawn, or the proceeds of which have been or are to be used, for agricultural
purposes, including the production of agricultural products, the marketing
of agricultural products by the growers thereof, or the carrying of agricultural products by the growers thereof pending orderly marketing, and the
breeding, raising, fattening, or marketing of livestock, and which has a
maturity at the time of discount of not more than nine months, exclusive of
days of grace.
(б) Paper of Cooperative Marketing Associations.—Under the express
terms of section 13a, notes, drafts, bills of exchange, or acceptances issued
or drawn by cooperative marketing associations composed of producers of
agricultural products are deemed to have been issued or drawn for an
agricultural purpose, if the proceeds thereof have been or are to b e —
(1) Advanced by such association to any members thereof for an agricultural purpose, or
(2) Used by such association in making payments to any members
thereof on account of agricultural products delivered by such members to
the association, or
(3) Used by such association to meet expenditures incurred or to be
incurred by the association in connection with the grading, processing,
packing, preparation for market, or marketing of any agricultural product
handled by such association for any of its members.
These are not the only classes of paper of such associations which are
eligible for discount, however, and any other paper of such associations
1 A consignment of goods or a conditional sale of goods can not be considered "goods sold"
within the meaning of this clause. The purchase price of goods plus the cost of labor in
effecting their installation may be included in the amount for which the trade acceptance is
drawn.

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OPERA T I O N

which complies with the applicable requirements of this regulation may be
discounted on the same terms and conditions as the paper of any other
person or corporation.
Paper of cooperative marketing associations the proceeds of which have
been or are to be used (1) to defray the expenses of organizing such associations, or (2) for the acquisition of warehouses, for the purchase or improvement of real estate, or for any other permanent or fixed investment of
any kind, are not eligible for discount, even though such warehouses or other
property are to be used exclusively in connection with the ordinary operations of the association.
(c) Eligibility.—To be eligible for discount, agricultural paper, whether a
note, draft, bill of exchange, or trade acceptance, must comply with the
respective sections of this regulation which would apply to it if its maturity
were 90 days or less.
(d) Discounts for Federal Intermediate Credit Banks.—Any Federal
reserve bank may discount agricultural paper for any Federal intermediate
credit bank; but no Federal reserve bank shall discount for any Federal
intermediate credit bank any such paper which bears the indorsement of
any nonmember State bank or trust company which is eligible for membership in the Federal reserve system under the terms of section 9 of the Federal
reserve act as amended. In discounting such paper each Federal reserve
bank shall give preference to the demands of its own member banks and
shall have due regard to the probable future needs of its own member banks;
and no Federal reserve bank shall discount paper for any Federal intermediate credit bank when its own reserves amount to less than 50 per cent
of its own aggregate liabilities for deposits and Federal reserve notes in
actual circulation. The aggregate amount of paper discounted by all Federal
reserve banks for any*one Federal intermediate credit bank shall at no time
exceed an amount equal to the paid-up and unimpaired capital and surplus
of such Federal intermediate credit bank.
(e) Limitations.—The Federal Reserve Board prcscribcs no limitation on
the aggregate amount of notes, drafts, bills of exchange, and acceptances
with maturities in excess of three months but not exceeding six months,
exclusive of days of grace, which may be discounted by any Federal reserve
bank; but the aggregate amount of notes, drafts, bills of exchange, and
acceptances with maturities in excess of six months, but not exceeding nine
months, which may be discounted by any Federal reserve bank shall not
exceed 10 per cent of its total assets.
SECTION VII. SIGHT DRAFTS SECURED BY BILLS OF LADING

A Federal reserve bank may discount for any of its member banks bills
of exchange payable at sight or on demand which—
(o) Are drawn to finance the domestic shipment of nonperishable, readily
marketable, staple agricultural products, and
(6) Are secured by bills of lading or other shipping documents conveying
or securing title to such staples.

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205

All such bills of exchange shall be forwarded promptly for collection, and
demand for payment shall be made promptly, unless the drawer instructs
that they be held until arrival of car, in which event they must be presented
for payment within a reasonable time after notice of arrival of such staples
at their destination has been received. In no event shall any such bill be
held by or for the account of a Federal reserve bank for a period in excess
of 90 days.
In discounting such bills Federal reserve banks may compute the interest
to be deducted on the basis of the estimated life of each bill and adjust the
amount thus deducted after payment of such bills to conform to the actual
life thereof.
SECTION VIII. FACTORS'

PAPER

Notes, drafts, and bills of exchange of factors issued as such for the
purpose of making advances exclusively to producers of staple agricultural
products in their raw state are eligible for discount with maturities not in
excess of 90 days, exclusive of days of grace, irrespective of the requirements
of Sections II (a) and II (b).

ARTICLE B
BANKERS'

ACCEPTANCES 1

SECTION IX.

DEFINITION

A banker's acceptance within the meaning of this regulation is defined
as a draft or bill of exchange, whether payable in the United States or abroad
and whether payable in dollars or some other money, of which the acceptor
is a bank or trust company, or a firm, person, company, or corporation
engaged generally in the business of granting bankers' acceptance credits.
SECTION X .

ELIGIBILITY

A Federal reserve bank may discount any such bill bearing the indorsement
of a member bank and having a maturity at the time of discount not greater
than that prescribed by Section X I (o), which has been drawn under a credit
opened for the purpose of conducting or settling accounts resulting from a
transaction or transactions involving any one of the following:
(1) The shipment of goods between the United States and any foreign
country, or between the United States and any of its dependencies or insular
possessions, or between foreign countries, or between dependencies or
insular possessions and foreign countries;
(2) The shipment of goods within the United States, provided shipping
documents conveying security title arc attached at the time of acceptance;
or
1

For regulations governing the acceptance by member banks of drafts and bills of exchange

drawn on them, see llegulation C, p. 208.

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(3) The storage of readily marketable staples,1 provided that the bill is
secured at the time of acceptance by a warehouse, terminal, or other similar
receipt, conveying security title to such staples, issued by a party independent of the customer, and provided further that the acceptor remains secured
throughout the life of the acceptance. In the event that the goods must
be withdrawn from storage prior to the maturity of the acceptance or the
retirement of the credit, a trust receipt or other similar document covering
the goods may be substituted in lieu of the original document, provided that
such substitution is conditioned upon a reasonably prompt liquidation of
the credit. In order to insure compliance with this condition it should be
required, when the original document is released, either (a) that the proceeds
of the goods will be applied within a specified time toward a liquidation of
the acceptance credit or (b) that a new document, similar to the original
one, will be resubstituted within a specified time.
Provided, that acceptances for any one customer in excess of 10 per cent of
the capital and surplus of the accepting bank must remain actually secured
throughout the life of the acceptance, and in the case of the acceptanccs of
member banks this security must consist of shipping documents, warehouse
receipts or other such documents, or some other actual security growing
out of the same transactions as the acceptance, such as documentary drafts,
trade acceptances, terminal receipts, or trust receipts which have been issued
under such circumstances, and which cover goods of such a character, as
to insure at all times a continuance of an effective and lawful lien in favor
of the accepting bank, other trust receipts not being considered such actual
security if they permit the customer to have access to or control over the
goods.
A Federal reserve bank may also discount any bill drawn by a bank or
banker in a foreign country or dependency or insular possession of the
United States for the purpose of furnishing dollar exchange as provided in
Regulation C, provided that it has a maturity at the time of discount of
not more than three months, exclusive of days of grace.
SECTION X I .

MATURITIES

(а) Legal Requirements.—No such acceptance is eligible for discount
which has a maturity at the time of discount in excess of 90 days1 sight,
exclusive of days of grace, except that acceptances drawn for agricultural
purposes and secured at the time of acceptance by warehouse receipts or
other such documents conveying or securing title covering readily marketable staples may be discounted with maturities at the time of discount of
not more than six months' sight, exclusive of days of grace.
(б) General Conditions as to Maturity of Domestic Acceptances.—
Although a Federal reserve bank may legally discount an acceptance having
1 A readily marketable staple within the meaning of these regulations may be defined as
an article of commerce, agriculture, or industry of such uses as to make it the Bubject of
constant dealings in ready markets with BUch frequent quotations of price as to make (a)
the price easily and definitely ascertainable and (b) the staple itself easy to realize upon by
sale at any time.

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207

a maturity at the time of discount not greater than that prescribed under
(a), it may decline to discount any acceptance the maturity of which is in
excess of the usual or customary period of credit required to finance the
underlying transaction or which is in excess of that period reasonably
necessary to finance such transaction. Since the purpose of permitting the
acceptance of drafts secured by warehouse receipts or other such documents
is to permit of the temporary holding of readily marketable staples in storage
pending a reasonably prompt sale, shipment, or distribution, no such
acceptance should have a maturity in excess of the time ordinarily necessary
to effect a reasonably prompt sale, shipment, or distribution into the process
of manufacture or consumption.
SECTION XII. EVIDENCE OF ELIGIBILITY

A Federal reserve bank must be satisfied, either by reference to the
acceptance itself or otherwise, that the acceptance is eligible for discount
under the terms of the law and the provisions of this regulation. The
bill itself should be drawn so as to evidence the character of the underlying
transaction, but if it is not so drawn evidence of eligibility may consist of a
stamp or certificate affixed by the acceptor in form satisfactory to the
Federal reserve bank.
REGULATION B, SERIES OF 1924
(Superseding Regulation B of 1923)

OPEN M A R K E T PURCHASES OF BILLS OF EXCHANGE,
T R A D E ACCEPTANCES, AND BANKERS' ACCEPTANCES UNDER SECTION 14
SECTION I. GENERAL STATUTORY PROVISIONS

Section 14 of the Federal reserve act provides that, under rules and
regulations to be prescribed by the Federal Reserve Board, Federal reserve
banks may purchase and sell in the open market, at home or abroad, from
or to domestic or foreign banks, firms, corporations, or individuals, bills of
exchange of the kinds and maturities made eligible by the act for discount
and bankers' acceptances, with or without the indorsement of a member
bank.
SECTION

II.

GENERAL

CHARACTER

OF BILLS AND

ACCEPTANCES

ELIGIBLE

The Federal Reserve Board, exercising its statutory right to regulate the
purchase of bills of exchange and acceptances, prescribes that—
(a) Any banker's acceptance or bill of exchange which is eligible for
discount under the terms of Regulation A is eligible for purchase by Federal
reserve banks in the open market, with or without the indorsement of a
member bank, i f —
(1) It has been accepted by the drawee prior to purchase; or

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(2) It is accompanied or secured by shipping documents or by warehouse, terminal, or other similar receipts conveying security title; or
(3) It bears a satisfactory bank indorsement;
(6) A banker's acceptance growing out of a transaction involving the
importation or exportation of goods may be purchased if it has a maturity
not in excess of six months, exclusive of days of grace, provided that it
conforms in other respects to the applicable requirements of Regulation A ;
and
(c) A banker's acceptance growing out of a transaction involving the
storage within the United States of goods actually under contract for sale
and not yet delivered or paid for may be purchased, provided that the
acceptor is secured by the pledge of such goods, and provided further, that
the acceptance conforms in other respects to the applicable requirements of
Regulation A.
SECTION I I I .

STATEMENTS

A bill of exchange, unless indorsed by a member bank, is not eligible
for purchase until a satisfactory statement has been furnished of the financial
condition of one or more of the parties thereto.
A banker's acceptance, unless accepted or indorsed by a member bank,
is not eligible for purchase until the acceptor has furnished a satisfactory
statement of its financial condition in form to be approved by the Federal
reserve bank and has agreed in writing with a Federal reserve bank to inform
it upon request concerning the transaction underlying the acceptance.

REGULATION C, SERIES OF 1924
(Superseding Regulation C of 1923)

A C C E P T A N C E B Y M E M B E R B A N K S OF D R A F T S
BILLS OF E X C H A N G E 1

AND

ARTICLE A
ACCEPTANCE OF D R A F T S OR B I L L S OF E X C H A N G E D R A W N AGAINST D O M E S T I C
OR F O R E I G N SHIPMENTS OF GOODS OR S E C U R E D B Y
RECEIPTS

COVERING

READILY

MARKETABLE

SECTION I . BTATUTORY

WAREHOUSE

STAPLES

PROVISIONS

Under the provisions of the sixth paragraph of section 13 of the Federal
reserve act, as amended, any member bank may accept drafts or bills of
exchange drawn upon it, having not more than six months' sight to run,
exclusive of days of grace, which grow out of transactions involving the
1 For regulations governing the rediscount of bunkers' acccptanccs by Federal reserve
banks, see Regulation A , page 200.

APPENDIX

209

importation or exportation of goods; or which grow out of transactions
involving the domestic shipment of goods, provided shipping documents
conveying or securing title are attached at the time of acceptance; or which
are secured at the time of acceptance by a warehouse receipt or other such
document conveying or securing title covering readily marketable staples.1
This paragraph limits the amount which any bank shall accept for any one
person, company, firm, or corporation, whether in a foreign or domestic
transaction, to an amount not exceeding at any time, in the aggregate, more
than 10 per cent of its paid-up and unimpaired capital stock and surplus.
This limit, however, does not apply in any case where the accepting bank
remains secured either by attached documents or by some other actual
security growing out of the same transaction as the acceptance. A trust
receipt which permits the customer to have access to or control over the
goods will not be considered by Federal reserve banks to be "actual security"
within the meaning of section 13. A bill of lading draft, however, is "actual
security" even after the documents have been released, provided that the
draft is accepted by the drawee upon or before the surrender of the documents. The law also provides that any bank may accept such bills up to
an amount not exceeding at any time, in the aggregate, more than one-half
of its paid-up and unimpaired capital stock and surplus; or, with the approval of the Federal Reserve Board, up to an amount not exceeding at
any time, in the aggregate, more than 100 per cent of its paid-up and
unimpaired capital stock and surplus. In no event, however, shall the
aggregate amount of acceptances growing out of domestic transactions
exceed 50 per cent of such capital stock and surplus.
SECTION II* REGULATIONS

(1) Under the provisions of the law referred to above the Federal Reserve
Board has determined that any member bank, having an unimpaired surplus
equal to at least 20 per cent of its paid-up capital, which desires to accept
drafts or bills of exchange drawn for the purposes described above, up to
an amount not exceeding at any time, in the aggregate, 100 per cent of its
paid-up and unimpaired capital stock and surplus, may file an application
for that purpose with the Federal Reserve Board. Such application must
be forwarded through the Federal reserve bank of the district in which the
applying bank is located.
(2) The Federal reserve bank shall report to the Federal Reserve Board
upon the standing of the applying bank, stating whether the business and
banking conditions prevailing in its district warrant the granting of such
application.
(3) The approval of any such application may be rescinded upon 90 days'
notice to the bank affected.
JA readily marketable staple within the meaning of these regulations may be defined as an
article of commerce, agriculture, or industry of such uses as to make it the subject of constant dealings in ready markets with such frequent quotations of price as to make (a) the
price easily and definitely ascertainable, and (b) the staple itself easy to realize upon by sale
at any time.

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RESERVE

SYSTEM

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ARTICLE B
ACCEPTANCE OF DRAFTS OR BILLS OF EXCHANGE D R A W N FOR THE PURPOSE
OF CREATING DOLLAR
SECTION III. STATUTORY

EXCHANGE
PROVISIONS

Section 13 of the Federal reserve act also provides that any member bank
may accept drafts or bills of exchange drawn upon it having not more than
three months' sight to run, exclusive of days of grace, drawn, under regulations to be prescribed by the Federal Reserve Board, by banks or bankers in
foreign countries or dependencies or insular possessions of the United States
for the purpose of furnishing dollar exchange as required by the usages of
trade in the respective countries, dependencies, or insular possessions.
No member bank shall accept such drafts or bills of exchange for any
one bank to an amount exceeding in the aggregate 10 per cent of the paid-up
and unimpaired capital and surplus of the accepting bank unless the draft
or bill of exchange is accompanied by documents conveying or securing title
or by some other adequate security. No member bank shall accept such
drafts or bills in an amount exceeding at any time in the aggregate one-half
of its paid-up and unimpaired capital and surplus. This 50 per cent limit
is separate and distinct from and not included in the limits placed upon the
acceptance of drafts and bills of exchange as described under Article A of
this regulation.
SECTION IV.

REGULATIONS

Any member bank desiring to accept drafts drawn by banks or bankers
in foreign countries or dependencies or insular possessions of the United
States for the purpose of furnishing dollar exchange shall first make an application to the Federal Reserve Board setting forth the usages of trade in the
respective countries, dependencies, or insular possessions in which such
banks or bankers are located.
If the Federal Reserve Board should determine that the usages of trade
in such countries, dependencies, or possessions require the granting of the
acceptance facilities applied for, it will notify the applying bank of its
approval and will also publish in the Federal Reserve Bulletin the name or
names of those countries, dependencies, or possessions in which banks or
bankers are authorized to draw on member banks whose applications have
been approved for the purpose of furnishing dollar exchange.
The Federal Reserve Board reserves the right to modify or on 90 days'
notice to revoke its approval either as to any particular member bank or as
to any foreign country or dependency or insular possession of the United
States in which it has authorized banks or bankers to draw on member banks
for the purpose of furnishing dollar exchange.

APPENDIX

211

REGULATION D, SERIES OF 1924
(Superseding Regulation D of 1923)

RESERVES OF MEMBER BANKS
SECTION I. STATUTORY PROVISIONS

Section 19 of the Federal reserve act provides, in part, as follows:
BANK RESERVES

SEC. 19. Demand deposits within the meaning of this act shall comprise
all deposits payable within thirty days, and time deposits shall comprise all
deposits payable after thirty days, all savings accounts and certificates of
deposit which are subject to not less than thirty days' notice before payment,
and all postal savings deposits.
Every bank, banking association, or trust company which is or which
becomes a member of any Federal reserve bank shall establish and maintain
reserve balances with its Federal reserve bank as follows:
(a) If not in a reserve or central reserve city, as now or hereafter defined, it
shall hold and maintain with the Federal reserve bank of its district an actual
net balance equal to not less than seven per centum of the aggregate amount
of its demand deposits and three per centum of its time deposits.
(b) If in a reserve city, as now or hereafter defined, it shall hold and maintain with the Federal reserve bank of its district an actual net balance equal
to not less than ten per centum of the aggregate amount of its demand deposits
and three per centum of its time deposits: Provided, however, That if located
in the outlying districts of a reserve city or in territory added to such a city
by the extension of its corporate charter, it may, upon the affirmative vote of
five members of the Federal Reserve Board, hold and maintain the reserve
balances specified in paragraph (a) hereof.
(c) If in a central reserve city, as now or hereafter defined, it shall hold
and maintain with the Federal reserve bank of its district an actual net
balance equal to not less than thirteen per centum of the aggregate amount of
its demand deposits and three per centum of its time deposits: Provided,
however, That if located in the outlying districts of a central reserve city or in
territory added to such city by the extension of its corporate charter, it may,
upon the affirmative vote of five members of the Federal Reserve Board,
hold and maintain the reserve balances specified in paragraphs, (a) or (6)
thereof.

The required balance carried by a member bank with a Federal reserve
bank may, under the regulations and subject to such penalties as may be
prescribed by the Federal Reserve Board, be checked against and withdrawn
by such member bank for the purpose of meeting existing liabilities: Providedt

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RESERVE

SYSTEM

OPERA

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however, That no bank shall at any time make new loans or shall pay any
dividends unless and until the total balance required by law is fully restored.
In estimating the balances required by this act, the net difference of
amounts due to and from other banks shall be taken as the basis for ascertaining the deposits against which required balances with Federal reserve
banks shall be determined.
The various Liberty bond acts (act of April 24, 1917, sec. 7; act of September 24, 1917, sec. 8; act of April 4, 1918, sec. 8) provide, in part, as
follows:
That the provisions . . . with reference to the reserves required to be
kept by national banking associations and other member banks of the
Federal Reserve System, shall not apply to deposits of public moneys by the
United States in designated depositaries.
SECTION II. DEFINITIONS

(а) Demand Deposits.—The term "demand deposits" shall include all
deposits which are payable within 30 days except "savings accounts,"
" t i m e certificates of deposit," and "postal savings deposits," as defined
below.
(б) Time Deposits.—The term " t i m e deposits" shall include all " t i m e
deposits, open accounts," all "savings accounts," all " t i m e certificates of
deposit," and all "postal savings deposits," as defined below.
(c) Time Deposits, Open Accounts.—The term " t i m e deposits, open
accounts" shall mean deposits not evidenced by certificates of deposit or
savings pass books, in respect to which a written contract is entered into
with the depositor at the time the deposit is made that neither the whole
nor any part of such deposit may be withdrawn, by check or otherwise,
except on a given date, not less than 30 days after the date of the deposit,
or on written notice which must be given by the depositor a certain specified
number of days in advance, in no case less than 30 days.
(id) Savings Accounts.—The term "saving accounts" shall mean those
deposits in respect to which—
(1) The pass book, certificate, or other similar form of receipt must
be presented to the bank whenever a withdrawal is made,
(2) The depositor may at any time be required by the bank to give
notice of an intended withdrawal not less than 30 days before a withdrawal is made, and
(3) The bank's printed regulations, accepted by the depositor at the
time the account is opened, include the above requirements.
(e) Time Certificates of Deposit.—A " t i m e certificate of deposit" is
defined as an instrument evidencing the deposit with a bank, either with or
without interest, of a certain sum specified on the face of the certificate
payable in whole or in part to the depositor or on his order—
(1) On a certain date, specified on the certificate, not less than 30 days
after the date of the deposit, or
(2) After the lapse of a certain specified time subsequent to the date of
the certificate, in no case less than 30 days, or

APPENDIX

213

(3) Upon written notice, which the bank may at its option require to
be given a certain specified number of days, not less than 30 days, before
the date of repayment, and
(4) In all cases only upon presentation of the certificate at each withdrawal for proper indorsement or surrender.
CO Postal Savings Deposits.—The term "postal savings deposits" shall
mean deposits of postal savings funds in banks under the terms of the postal
savings act, approved June 25, 1910, as amended.
(p) Government Deposits.—The term "Government deposits" shall
mean deposits of public moneys by the United States in designated
depositaries.1
SECTION III. COMPUTATION OF RESERVES

(a) Amounts of Reserves to Be Maintained.—Every member bank of the
Federal reserve system is required by law to maintain on deposit with the
Federal reserve bank of its district an actual net balance equal to 3 per cent
of its time deposits plus—
Seven per cent of its demand deposits if not in a reserve or central reserve
city.
Ten per cent of its demand deposits if in a reserve city, except that if
located in an outlying district of a reserve city or in territory added to such
city by the extension of the city's corporate limits such bank may, upon the
affirmative vote of five members of the Federal Reserve Board, be permitted
to maintain 7 per cent reserves against its demand deposits.
Thirteen per cent of its demand deposits if located in a central reserve city,
except that if located in an outlying district of a central reserve city or in
territory added to such city by the extension of the city's corporate limits,
such bank may, upon the affirmative vote of five members of the Federal
Reserve Board, be permitted to maintain 7 per cent or 10 per cent reserves
against its demand deposits.
No reserves are required to be maintained against Government deposits
as defined above.
(b) Deductions Allowed in Computing Reserves.—Member banks in
determining the amount against which reserves must be carried may deduct:
(1) From gross demand deposits, all Government deposits as defined
above.
1 Deposits made by United States postmasters of Government funds, other than postal
savings deposits, received by them in their official capacity, constitute "Government
deposits" within the meaning of this regulation and, when made in designated depositaries,
are exempt from the reserve requirements of section 19. The following classes of deposits,
however, are not "Government deposits" within such meaning and are not exempt from
reserve requirements:
(1) Deposits of Philippine funds made by the Philippine Government and carried under
the title, "Treasurer of the Philippine Islands currency reserve fund account."
(2) Deposits of Porto Rican funds made by the Porto Rican Government.
(3) Deposits of Indian funds under the control of the Department of the Interior.
(4) Deposits of States, counties, or municipalities.
(5) Deposits of the United States Shipping Board and the Emergency Fleet Corporation.

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(2) From the amount of balances due to other banks, the amount of
balances due from other banks (except Federal reserve banks and foreign
banks), including in the amount due from banks, out of town items placed in
the mail and charged to the account of correspondent banks, items with a
Federal reserve bank in process of collection, checks drawn on banks located
in the same city, and exchanges for clearing houses.
(c) Availability of Checks as Reserve.—Checks forwarded to a Federal
reserve bank for collection or credit can not be counted as part of the
minimum reserve balance to be carried by a member bank with its Federal
reserve bank until such time as may be specified in the appropriate time
schedule referred to in Section IV of Regulation J. If a member bank draw
against checks before such time, the draft will be charged against its reserve
balance if such balance be sufficient in amount to pay it; but any resulting
impairment of reserve balances will be subject to all the penalties provided
by the act.
SECTION IV. PENALITIES

FOR DEFICIENCIES IN

RESERVES

(a) Basic Penalty.—Inasmuch as it is essential that the law in respect to
the maintenance by member banks of the required minimum reserve balance
shall be strictly complied with, the Federal Reserve Board, under authority
vested in it by section 19 of the Federal reserve act, hereby prescribes a basic
penalty for deficiencies in reserves according to the following rules:
(1) Deficiencies in reserve balances of member banks in central reserve
and reserve cities will be computed on the basis of average daily net deposit
balances covering a weekly period of seven days. Deficiencies in reserve
balances of other member banks will be computed on the basis of average
daily net deposit balances covering a semimonthly period.
(2) Penalties for deficiencies in reserves will be assessed monthly on the
basis of average daily deficiencies during each of the reserve computation
periods ending in the preceding month.
(3) A basic rate of 2 per cent per annum above the Federal reserve bank
discount rate on 90-day commercial paper w ill be assessed as a penalty on
deficiencies in reserves of member banks.
(b) Progressive Penalty.—The Federal Reserve Board will also prescribe
for any Federal reserve district, upon the application of the Federal reserve
bank of that district, an additional progressive penalty for continued deficiencies in reserves, in accordance with the following rules:
(1) When a member bank in a central reserve or reserve city has had an
average deficiency in reserves for six consecutive weekly periods, a progressive penalty, increasing at the rate of one-fourth of 1 per cent for each
week thereafter during which the average reserve balance is deficient, will be
assessed on weekly deficiencies until the required reserve has been restored
and maintained for four consecutive weekly periods, provided that the
maximum penalty charged will not exceed 10 per cent.
(2) When a member bank outside of a central reserve or reserve city has
had an average deficiency in reserves for three consecutive semimonthly
periods, a progressive penalty, increasing at the rate of one-half of 1 per

APPENDIX

215

cent for each half month thereafter during which the average reserve balance
is deficient, will be assessed on semimonthly deficiencies until the required
reserve has been restored and maintained for two consecutive semimonthly
periods, provided that the maximum penalty charged will not exceed 10
per cent.
SECTION V . LOANS AND DIVIDENDS WHILE RESERVES ARE DEFICIENT

It is unlawful for any member bank the reserves of which are at any time
deficient to make any new loans or pay any dividends unless and until the
total reserves required by law are fully restored, and the payment of
penalties for deficiencies in reserves does not exempt member banks from
this prohibition of law. As provided above, penalties for deficiencies in
reserves are computed on the basis of the average reserve balances for weekly
or semimonthly periods; but this prohibition of law applies whenever the
reserves are deficient for one day or more, regardless of whether or not the
average reserve balances for the weekly or semimonthly period are deficient.

REGULATION E, SERIES OF 1924
(Superseding Regulation E of 1923)

PURCHASE OF WARRANTS
SECTION I. STATUTORY

REQUIREMENTS

Section 14 of the Federal reserve act reads in part as follows:
Every Federal reserve bank shall have power—
(b) To buy and sell, at home or abroad, bonds and notes of the United
States, and bills, notes, revenue bonds, and warrants with a maturity from
date of purchase of not exceeding six months, issued in anticipation of the
collection of taxes or in anticipation of the receipt of assured revenues by any
State, county, district, political subdivision, or municipality in the continental United States, including irrigation, drainage and reclamation districts, such purchases to be made in accordance with rules and regulations
prescribed by the Federal Reserve Board.
SECTION II.

DEFINITIONS

Within the meaning of this regulation—
The term "warrant" shall be construed to mean "bills, notes, revenue
bonds, and warrants with a maturity from date of purchase of not exceeding
six months."
The term "municipality" shall be construed to mean "State, county,
district, political subdivision, or municipality in the continental United
States, including irrigation, drainage, and reclamation districts."
The term "net funded indebtedness" shall be construed to mean the legal
gross indebtedness of the municipality (including the amount of any school
district or other bonds which depend for their redemption upon taxes levied

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SYSTEM

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upon property within the municipality) less the aggregate of the following
items:
(1) The amount of outstanding bonds or other debt obligations made
payable from current revenues;
(2) The amount of outstanding bonds issued for the purpose of providing
the inhabitants of a municipality with public utilities, such as waterworks,
docks, electric plants, transportation facilities, etc.: Provided, That evidence
is submitted showing that the income from such utilities is sufficient for
maintenance, for payment of interest on such bonds, and for the accumulation of a sinking fund sufficient for their redemption at maturity;
(3) The amount of outstanding improvement bonds, issued under laws
which provide for the levying of special assessments against abutting property in amounts sufficient to insure the payment of interest on the bonds
and the redemption thereof at maturity: Provided, That such bonds are
direct obligations of the municipality and included in the gross indebtedness
of the municipality; and
(4) The total of all sinking funds accumulated for the redemption of the
gross indebtedness of the municipality, except sinking funds applicable to
bonds described in (1), (2), and (3) above.
SECTION III. CLASS OF WARRANTS ELIGIBLE FOR

PURCHASE

Any Federal reserve bank may purchase warrants issued by a municipality
in anticipation of the collection of taxes or in anticipation of the receipt of
assured revenues, provided—
(a) They are the general obligations of the entire municipality; it being
intended to exclude as ineligible for purchase all such obligations as are
payable from "local benefit" and "special assessment" taxes when the
municipality at large is not directly or ultimately liable;
(b) They are issued in anticipation of taxes or revenues which are due
and payable on or before the date of maturity of such warrants; but the
Federal Reserve Board may waive this condition in specific cases. For the
purposes of this regulation, taxes shall be considered as due and payable on
the last day on which they may be paid without penalty;
(c) They are issued by a municipality—
(1) Which has been in existence for a period of 10 years;
(2) Which for a period of 10 years previous to the purchase has not
defaulted for longer than 15 days in the payment of any part of either
principal or interest of any funded debt authorized to be contracted by it;
(3) Whose net funded indebtedness does not exceed 10 per centum of
the valuation of its taxable property, to be ascertained by the last preceding valuation of property for the assessment of taxes.
SECTION IV.

"EXISTENCE"

AND

"NONDEFAULT"

Warrants will be construed to comply with that part of Section III (c)
relative to term of existence and nondefault, under the following conditions:
(1) Warrants issued by or in behalf of any municipality which was, subsequent to the issuance of such warrants, consolidated with or merged into an

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existing political division which meets the requirements of these regulations,
will be deemed to be the warrants of such political division: Provided, That
such warrants were assumed by such political division under statutes and
appropriate proceedings the effect of which is to make such warrants general
obligations of such assuming political division and payable, either directly
or ultimately, without limitation to a special fund from the proceeds of taxes
levied upon all the taxable real and personal property within its territorial
limits.
(2) Warrants issued by or in behalf of any municipality which was, subsequent to the issuance of such warrants, wholly succeeded by a newly organized political division whose term of existence, added to that of such original
political division or of any other political division so succeeded, is equal to
a period of 10 years will be deemed to be warrants of such succeeding political division: Provided, That during such period none of such political divisions shall have defaulted for a period exceeding 15 days in the payment of
any part of either principal or interest of any funded debt authorized to be
contracted by it: And provided further. That such warrants were assumed
by such new political division under statutes and appropriate proceedings
the effect of which is to make such warrants general obligations of such
assuming political division and payable, either directly or ultimately, without limitation to a special fund from the proceeds of taxes levied upon all
the taxable real and personal property within its territorial limits.
(3) Warrants issued by or in behalf of any municipality which, prior to
such issuance, became the successor of one or more, or was formed by the
consolidation or merger of two or more, preexisting political divisions, the
term of existence of one or more of which, added to that of such succeeding
or consolidated political division, is equal to a period of 10 years, will be
deemed to be warrants of a political division which has been in existence for
a period of 10 years. Provided, That during such period none of such
original, succeeding, or consolidated political divisions shall have defaulted
for a period exceeding 15 days in the payment of any part of either principal or interest of any funded debt authorized to be contracted by it.
SECTION v .

LIMITATIONS

(а) Except with the approval of the Federal Reserve Board, no Federal
reserve bank shall purchase and hold an amount in excess of 25 per cent of
the total amount of warrants outstanding at any time and issued in conformity with provisions of section 14(6), above quoted, and actually sold by a
municipality.
(б) Except with the approval of the Federal Reserve Board, the aggregate amount invested by any Federal reserve bank in warrants of
all kinds shall not exceed at the time of purchase a sum equal to 10 per
cent of the deposits kept by its member banks with such Federal reserve
bank.
(c) Except with the approval of the Federal Reserve Board, the maximum amount which may be invested at the time of purchase by any Federal
reserve bank in warrants of any single municipality shall be limited to the

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following percentages of the deposits kept in such Federal reserve bank by
its member banks:
Five per cent of such deposits in warrants of a municipality of 50,000
population or over;
Three per cent of such deposits in warrants of a municipality of over
30,000 population, but less than 50,000;
One per cent of such deposits in warrants of a municipality of over
10,000 population, but less than 30,000.
(d) Any Federal reserve bank may purchase from any of its member banks
warrants of any municipality, indorsed by such member bank, with waiver
of demand, notice, and protest if such warrants comply with Sections HI
and V (6) of these regulations, except that where a period of 10 years is
mentioned in III (c) hereof a period of 5 years shall be substituted for the
purposes of this clause.
SECTION VI. WARRANTS OF SMALL

MUNICIPALITIES

Warrants of a municipality of 10,000 population or less shall be purchased only with the special approval of the Federal Reserve Board.
The population of a municipality shall be determined by the last Federal
or State census. Where it can not be exactly determined the Federal
Reserve Board will make special rulings.
SECTION VII. OPINION OF COUNSEL

Opinion of recognized counsel on municipal issues or of the regularly
appointed counsel of the municipality as to the legality of the issue shall be
secured and approved in each case by counsel for the Federal reserve bank.

R E G U L A T I O N F, S E R I E S OF 1924
(Superseding Regulation F of 1923)

TRUST POWERS OF NATIONAL BANKS
SECTION I. STATUTORY

PROVISIONS

The Federal reserve act as amended by the act of September 20, 1918.
provides in part:
SEC. 11. The Federal Reserve Board shall be authorized and empowered:
tk) To grant by special permit to national banks applying therefor, when
not in contravention of State or local law, the right to act as trustee, executor, administrator, registrar of stocks and bonds, guardian of estates,
assignee, receiver, committee of estates of lunatics, or in any other fiduciary
capacity in which State banks, trust companies, or other corporations which
come into competition with national banks are permitted to act under the
laws of the State in which the national bank is located.

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219

Whenever the laws of such State authorize or permit the exercise of any
or all of the foregoing powers by State banks, trust companies, or other
corporations which compete with national banks, the granting to and the
exercise of such powers by national banks shall not be deemed to be in
contravention of State or local law within the meaning of this act.
National banks exercising any or all of the powers enumerated in this
subsection shall segregate all assets held in any fiduciary capacity from the
general assets of the bank and shall keep a separate set of books and records
showing in proper detail all transactions engaged in under authority of this
subsection. Such books and records shall be open to inspection by the State
authorities to the same extent as the books and records of corporations
organized under State law which exercise fiduciary powers, but nothing in
this act shall be construed as authorizing the State authorities to examine
the books, records, and assets of the national bank which are not held in
trust under authority of this subsection.
No national bank shall receive in its trust department deposits of current
funds subject to check or the deposit of checks, drafts, bills of exchange, or
other items for collection or exchange purposes. Funds deposited or held
in trust by the bank awaiting investment shall be carried in a separate
account and shall not be used by the bank in the conduct of its business
unless it shall first set aside in the trust department United States bonds or
other securities approved by the Federal Reserve Board.
In the event of the failure of such bank the owners of the funds held in
trust for investment shall have a lien on the bonds or other securities so set
apart in addition to their claim against the estate of the bank.
Whenever the laws of a State require corporations acting in a fiduciary
capacity, to deposit securities with the State authorities for the protection
of private or court trusts, national banks so acting shall be required to
make similar deposits and securities so deposited shall be held for the
protection of private or court trusts, as provided by the State law.
National banks in such cases shall not be required to execute the bond
usually required of individuals if State corporations under similar circumstances are exempt from this requirement.
National banks shall have power to execute such bond when so required
by the laws of the State.
In any case in which the laws of a State require that a corporation acting
as trustee, executor, administrator, or in any capacity specified in this
section, shall take an oath or make an affidavit, the president, vice president,
cashier, or trust officer of such national bank may take the necessary oath
or execute the necessary affidavit.
It shall be unlawful for any national banking association to lend any
officer, director, or employee any funds held in trust under the powers conferred by this section. Any officer, director, or employee making such loan,
or to whom such loan is made, may be fined not more than $5,000, or imprisoned not more than five years, or may be both fined and imprisoned, in the
discretion of the court.

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In passing upon applications for permission to exercise the powers enumerated in this subsection, the Federal Reserve Board may take into consideration the amount of capital and surplus of the applying bank, whether or
not such capital and surplus is sufficient under the circumstances of the case,
the needs of the community to be served, and any other facts and circumstances that seem to it proper, and may grant or refuse the application
accordingly: Provided, That no permit shall be issued to any national banking association having a capital and surplus less than the capital and surplus
required by State law of State banks, trust companies, and corporations
exercising such powers.
SECTION* II.

APPLICATIONS

A national bank desiring to exercise any or all of the powers authorized
by section 11 (k) of the Federal reserve act, as amended by the act of
September 26, 1918, shall make application to the Federal Reserve Board,
on a form approved by said board, for a special permit authorizing it to
exercise such powers. In the case of an original application—that is, where
the applying bank has never been granted the right to exercise any of the
powers authorized by section 11 (k)—the application should be made on
F. R. B. Form 61. In the case of a supplemental application—that is, where
the applying bank has already been granted the right to exercise one or more
of the powers authorized by section 11 (k)—the application should be made
on F. R. B. Form 61-6. Both forms are made a part of this regulation and
may be obtained from the Federal Reserve Board or any Federal reserve
bank.
SECTION III. SEPARATE

DEPARTMENTS

Every national bank permitted to act under this section shall establish
a separate trust department, and shall place such department under the
management of an officer or officers, whose duties shall be prescribed by the
board of directors of the bank.
SECTION IV. CUSTODY OF TRUST SECURITIES AND

INVESTMENTS

The securities and investments held in each trust shall be kept separate
and distinct from the securities owned by the bank and separate and distinct one from another. Trust securities and investments shall be placed
in the joint custody of two or more officers or other employees designated by
the board of directors of the bank and all such officers and employees shall
be bonded.
SECTION V . DEPOSIT OF FUNDS A W A I T I N G INVESTMENT OR DISTRIBUTION

Funds received or held in the trust department of a national bank awaiting investment or distribution may be deposited in the commercial department of the bank to the credit of the trust department, provided that the
bank first delivers to the trust department, as collateral security, United
States bonds, or other readily marketable securities owned by the bank,

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221

which collateral security shall at all times be at least equal in market value
to the amount of the funds so deposited.1
SECTION VI. INVESTMENT OP TRUST FUNDS

(а) Private Trusts.—Funds held in trust must be invested in strict
accordance with the terms of the will, deed, or other instrument creating the
trust. Where the instrument creating the trust contains provisions authorizing the bank, its officers, or its directors to exercise their discretion in
the matter of investments, funds held in trust may be invested only in
those classes of securities which are approved by the directors of the bank.
Where the instrument creating the trust does not specify the character or
class of investments to be made and does not expressly vest in the bank, its
officers, or its directors a discretion in the matter of investments, funds held
in trust shall be invested in any securities in which corporate or individual
fiduciaries in the State in which the bank is located may lawfully invest.
(б) Court Trusts.—Except as hereinafter provided, a national bank acting
as executor, administrator, or in any other fiduciary capacity, under appointment by a court of competent jurisdiction, shall make all investments under
an order of that court, and copies of all such orders shall be filed and preserved with the records of the trust department of the bank. If the court
by general order vests a discretion in the national bank to invest funds held
in trust, or if under the laws of the State in which the bank is located corporate fiduciaries appointed by the court are permitted to exercise such discretion, the national bank so appointed may invest such funds in any securities
in which corporate or individual fiduciaries in the State in which the bank is
located may lawfully invest.
SECTION VII. BOOKS AND ACCOUNTS

All books and records of the trust department shall be kept separate and
distinct from other books and records of the bank. All accounts opened
shall be so kept as to enable the national bank at any time to furnish information or reports required by the Federal or State authorities, and such
books and records shall be open to the inspection of such authorities.
SECTION VIII.

EXAMINATIONS

Examiners appointed by the Comptroller of the Currency or designated by
the Federal Reserve Board will be instructed to make thorough and complete audits of the cash, securities, accounts, and investments of the trust
department of the bank at the same time that examination is made of the
banking department.
1 The act requires that the bank shall set aside in the trust department "United States
bonds or other securities approved by the Federal Reserve Board." This provision of the
regulations is intended as a general approval by the Federal Reserve Board of all securities
which comply with the requirements thereof and specific approval by the Federal Reserve
Board is unnecessary as to such securities. The Board will not approve any securities which
do not comply with these requirements.

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SECTION I X .

SYSTEM

OPERA

TION

CONFORMITY W I T H STATE L A W S

Nothing in these regulations shall be construed to give a national bank
exercising the powers permitted under the provisions of section 11 (k) of the
Federal reserve act, as amended, any rights or privileges in contravention of
the laws of the State in which the bank is located within the meaning of that
act.
SECTION X . REVOCATION OF PERMITS

The Federal Reserve Board reserves the right to revoke permits granted
under the provisions of section 11 (fc), as amended, in any case where in the
opinion of the board a bank has willfully violated the provisions of the
Federal reserve act or of these regulations or the laws of any State relating
to the operations of such bank when acting in any of .the capacities permitted
under the provisions of section ll(fc), as amended.
SECTION X I .

CHANGES IN

REGULATIONS

These regulations are subject to change by the Federal Reserve Board;
provided, however, that no such change shall prejudice any obligation undertaken in good faith under regulations in effect at the time the obligation was
assumed.

R E G U L A T I O N G, S E R I E S OF 1924
(Superseding Regulation G of 1923)

LOANS ON FARM LAND AND OTHER REAL ESTATE
Section 24 of the Federal reserve act provides in part t h a t —
Any national banking association not situated in a central reserve city may
make loans secured by improved and unencumbered farm land situated
within its Federal reserve district or within a radius of one hundred miles of
the place in which such bank is located, irrespective of district lines, and
may also make loans secured by improved and unencumbered real estate
located within one hundred miles of the place in which such bank is located,
irrespective of district lines; but no loan made upon the security of such farm
land shall be made for a longer time than five years, and no loan made upon
the security of such real estate as distinguished from farm land shall be made
for a longer time than one year nor shall the amount of any such loan,
whether upon such farm land or upon such real estate, exceed fifty P c r
centum of the actual value of the property offered as security. Any such
bank may make such loans, whether secured by such farm land or such real
estate, in an aggregate sum equal to twenty-five per centum of its capital
and surplus or to one-third of its time deposits and such banks may continue
hereafter as heretofore to receive time deposits and to pay interest on the
same.

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223

National banks not located in central reserve cities may, therefore, legally
make loans secured by improved and unencumbered farm land or other real
estate as provided by this section.
Certain conditions and restrictions must, however, be observed—
(а) There must be no prior lien on the land; that is, the lending bank must
hold an absolute first mortgage or deed of trust.
(б) The amount of the loan must not exceed 50 per cent of the actual value
of the land by which it is secured.
(c) The maximum amount of loans which a national bank may make on
real estate, whether on farm land or on other real estate as distinguished
from farm land, is limited under the terms of the act to an amount not in
excess of one-third of its time deposits at the time of the making of the loan,
and not in excess of one-third of its average time deposits during the preceding calendar year: Provided, however, That if one-third of such time deposits
as of the date of making the loan or one-third of the average time deposits
for the preceding calendar year is less than one-fourth of the capital and
surplus of the bank as of the date of making the loan, the bank in such event
shall have authority to make loans upon real estate under the terms of the
act to the extent of one-fourth of the bank's capital and surplus as of that
date.
(eZ) Farm land to be eligible as security for a loan by a national bank must
be situated within the Federal reserve district in which such bank is located
or within a radius of 100 miles of such bank irrespective of district lines.
(e) Real estate as distinguished from farm land to be eligible as security for
a loan by a national bank must be located within a radius of 100 miles of
such bank irrespective of district lines.
(/) The right of a national bank to "make loans" under section 24 includes
the right to purchase or discount loans already made as well as the right to
make such loans in the first instance: Provided, however, That no loan secured
by farm land shall have a maturity of more than five years from the date on
which it was purchased or made by the national bank and that no loan
secured by other real estate shall have a maturity of more than one year from
such date.
(g) Though no national bank is authorized under the provisions of section
24 to make a loan on the security of real estate, other than farm land, for a
period exceeding one year, nevertheless, at the end of the year, the maturing
note may be renewed or extended for another year, and in order to obviate
the necessity of making a new mortgage or deed of trust for each renewal
the original mortgage or deed of trust may be so drawn in the first instance
as to cover possible future renewals of the original note. Under no circumstances, however, must the bank obligate itself in advance to make such a
renewal.
It must in all cases preserve the right to require payment at the
end of the year and to foreclose the mortgage should that action become
necessary. The same principles apply to loans of longer maturities secured
by farm lands.
Qi) In order that real estate loans held by a bank may be readily classified,
a statement signed by the officers making a loan and having knowledge of the

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facta upon which it is based must be attached to each note secured by a
first mortgage on the land by which the loan is secured, certifying in detail
as of the date of the loan that all of the requirements of law have been duly
observed.
REGULATION H, SERIES OF 1924
(Superseding Regulation H of 1923)

MEMBERSHIP OF STATE BANKS A N D TRUST
COMPANIES
SECTION I. BANKS ELIGIBLE FOR MEMBERSHIP

1. Incorporation.—In order to be eligible for membership in a Federal
reserve bank, a State bank or trust company must have been incorporated
under a special or general law of the State or district in which it is located.
2. Capital Stock.—Under the terms of section 9 of the Federal reserve
act as amended, no applying bank can be admitted to membership in a
Federal reserve bank unless—
(а) It possesses a paid-up, unimpaired capital sufficient to entitle it to
become a national banking association in the place where it is situated,
under the provisions of the national bank act, or
(б) It possesses a paid-up, unimpaired capital of at least 60 per cent of such
amount, and, under penalty of loss of membership, complies with the rules
and regulations herein prescribed by the Federal Reserve Board fixing the
time within which and the method by which the unimpaired capital of such
bank shall be increased out of net income to equal the capital required
under (a).
In order to become a member of the Federal reserve system, therefore,
any State bank or trust company must have a minimum paid-up capital
stock at the time it becomes a member, as follows:

If located in a city or town with a population o f —

Not exceeding 3,000 inhabitants
Exceeding 3,000 but not exceeding 6,000 inhabitants
Exceeding 6,000 but not exceeding 50,000 inhabitants
Exceeding 50,000 inhabitants

...

Minimum
capital if
admitted
under
clause (a)

Minimum
capital if
admitted

$ 25,000
50,000
100,000
200,000

under
clause (6)

15,000
30,000
60,000
120,000

Any bank admitted to membership under clause (b) must also, as a
condition of membership, the violation of which will subject it to expulsion
from the Federal reserve system, increase its paid-up and unimpaired capital
within five years after the approval of its application by the Federal Reserve

APPENDIX

225

Board to the amount required under (a). For the purpose of providing for
such increase, every such bank shall set aside each year in a fund exclusively
applicable to such capital increase not less than 50 per cent of its net earnings
for the preceding year prior to the payment of dividends, and if such net
earnings exceed 12 per cent of the paid-up capital of such bank, then all
net earnings in excess of 6 per cent of the paid-up capital shall be carried to
such fund, until such fund is large enough to provide for the necessary
increase in capital. Whenever such fund shall be large enough to provide
for the necessary increase in capital, or at such other time as the Federal
Reserve Board may require, such fund or as much thereof as may be necessary shall be converted into capital by a stock dividend or used in any other
manner permitted by State law to increase the capital of such bank to the
amount required under (a): Provided, however, That such bank may be
excused in whole or in part from compliance with the terms of this paragraph
if it increases its capital through the sale of additional stock: Provided,
further, That nothing herein contained shall be construed as requiring any
such bank to violate any provision of State law, and in any case in which
the requirements of this paragraph are inconsistent with the requirements
of State law the requirements of this paragraph may be waived and the
subject covered by a special condition of membership to be prescribed by the
Federal Reserve Board.
SECTION II. APPLICATION FOR MEMBERSHIP

Any eligible State bank or trust company may make application on
F. R. B. Form 83a, made a part of this regulation, to the Federal Reserve
Board for an amount of capital stock in the Federal reserve bank of its
district equal to 6 per cent of the paid-up capital stock and surplus of such
State bank or trust company. This application must be forwarded direct
to the Federal reserve agent of the district in which the applying bank or
trust company is located and must be accompanied by Exhibits I, II, and III,
referred to on page 1 of the application blank.
SECTION III. APPROVAL OF APPLICATION

In passing upon an application the Federal Reserve Boad will consider
especially—
(1) The financial condition of the applying bank or trust company and
the general character of its management;
(2) Whether the corporate powers exercised by the applying bank or
trust company are consistent with the purposes of the Federal reserve act;
and
(3) Whether the laws of the State or district in which the applying bank
or trust company is located contain provisions likely to prevent proper
compliance with the provisions of the Federal reserve act and the regulations
of the Federal Reserve Board made in conformity therewith.
If, in the judgment of the Federal Reserve Board, an applying bank or
trust company conforms to all the requirements of the Federal reserve act
and these regulations, and is otherwise qualified for membership, the board

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will issue a certificate of approval subject to such conditions as it may deem
necessary- When the conditions imposed by the board have broil accepted
by the applying bank or trust company the board will issue a certificate of
approval, whereupon the applying bank or trust company shall make a
payment to the Federal reserve bank of its district of one-half of the amount
of its subscription, t.c., 3 per cent of the amount of its paid-up capital and
surplus, and upon receipt of this payment the appropriate certificate of stock
will be issued by the Federal reserve bank. The remaining half of its subscription shall be subject to call when deemed neccssary by the Federal
Reserve Board.
SECTION IV. CONDITIONS OF MEMBERSHIP

Pursuant to the authority contained in the first paragraph of section 9
of the Federal reserve act, which provides that the Federal Reserve Board
may permit applying banks to become members of the Federal reserve
system "subject to such conditions as it may prescribe" the Federal Reserve
Board will prescribe the following conditions of membership for each
bank or trust company hereafter applying for admission to the Federal
reserve system, in addition to such other conditions as the board may consider necessary or advisable in the particular case—
(1) Except with the permission of the Federal Reserve Board, such bank
or trust company shall not cause or permit any change to be made in the
general character of its assets or in the scope of the functions exercised by
it at the time of admission to membership, such as will tend to affect materially the standard maintained at the time of its admission to the Federal
reserve system and required as a condition of membership.
(2) Such bank or trust company shall at all times conduct its business
and exercise its powers with due regard to the safety of its customers.
(3) Such bank or trust company shall not reduce its capital stock except
with the permission of the Federal Reserve Board.
(4) Such bank or trust company shall not, except after applying for and
receiving the permission of the Federal Reserve Board, establish any branch,
agency, or additional office.
(5) Such bank or trust company, except after applying for and receiving
the permission of the Federal Reserve Board, shall not consolidate with or
absorb or purchase the assets of any other bank or branch bank for the purpose of operating such bank or branch bank as a branch of the applying bank;
nor directly or indirectly, through affiliated corporations or otherwise,
acquire an interest in another bank in excess of 20 per cent of the capital
stock of such other bank; nor directly or indirectly promote the establishment of any new bank for the purpose of acquiring such an interest in it;
nor make any arrangement to acquire such an interest.
(6) Such bank or trust company shall reduce to, and maintain within,
the limits prescribed by the laws of the State in which it is located, any
loan which may be in excess of such limits.
(7) Such bank or trust company shall reduce to an amount equal to 10
per cent of its capital and surplus all balances in excess thereof, if any*

APPENDIX

227

which are carried with banks or trust companies which are not members of
the Federal reserve system, and shall at all times maintain such balances
within such limits.
(8) Such bank or trust company may accept drafts and bills of exchange
drawn upon it of any character permitted by the laws of the State of its incorporation; but the aggregate amount of all acceptances outstanding at any
one time shall not exceed the limitations imposed by section 13 of the Federal
reserve act, that is, the aggregate amount of acceptances outstanding at
any one time which are drawn for the purpose of furnishing dollar exchange
in countries specified by the Federal Reserve Board shall not exceed 50 per
cent of its capital and surplus, and the aggregate amount of all other acceptances, whether domestic or foreign, outstanding at any one time shall not
exceed 50 per cent of its capital and surplus, except that the Federal Reserve
Board, upon the application of such bank or trust company, may increase
this limit from 50 per cent to 100 per cent of its capital and surplus: Provided,
however, That in no event shall the aggregate amount of domestic acceptances
outstanding at any one time exceed 50 per cent of the capital and surplus
of such bank or trust company.
(9) The board of directors of said bank or trust company shall adopt a
resolution authorizing the interchange of reports and information between
the Federal reserve bank of the district in which such bank or trust company
is located and the banking authorities of the State in which such bank is
located.
Each bank or trust company applying for membership hereafter will be
required to agree to the above conditions and any other conditions which the
board may prescribe, prior to the admission of such bank or trust company
to the Federal reserve system.
SECTION V . PERMISSION NECESSARY PRIOR TO MAKING CHANGES IN ASSETS
OR SCOPE OF FUNCTIONS

Each bank or trust company hereafter admitted to the Federal reserve
system and each bank or trust company which has heretofore been admitted
subject to condition No. 1 of Section IV or subject to any similar condition
shall, through the Federal reserve agent, request the permission of the
Federal Reserve Board prior to taking any action which may result in a
change in the general character of its assets or in the scope of the functions
exercised by it at the time of admission to membership, such as will tend to
affect materially the standard maintained at the time of its admission to the
Federal reserve system and required as a condition of membership.
The board considers that among the actions which may result in changes
of the kind referred to in this section are the establishment of branches,
agencies or additional offices and consolidations or mergers with, or purchases
of the assets of other banks or branch banks.
SECTION VI. PRINCIPLES GOVERNING ESTABLISHMENT OF BRANCHES

In passing upon applications by State banks and trust companies for
permission to establish branches, agencies or additional offices, under condi-

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tion No. 4 of Section IV, or under any similar condition which may have
been prescribed by the Federal Reserve Board and agreed to by any bank or
trust company heretofore admitted to the Federal reserve system, the
Federal Reserve Board will observe the following principles—
(1) The Federal Reserve Board will as a general principle restrict the
establishment of branches, agencies or additional officcs by such banks or
trust companies to the city of location of the parent bank and the territorial
area within the State contiguous thereto, as said territory has been defined
in the board's resolution of November 7, 1923, 1 excepting in instances where
the State banking authorities have certified and the board finds that public
necessity and advantage render a departure from the principle ncccssary
or desirable.
(2) The Federal Reserve Board as a general principle will not consider
an application by such bank or trust company for a permit to establish a
branch, agency or additional office, unless the authorities of the State in
which such bank is located regularly make simultaneous examinations of
the head office and all branches, agencies or additional officcs of such bank,
nor unless the examinations made by the State authorities are, in the judgment of the Federal Reserve Board, of such character in every respect as
to furnish the Federal Reserve Board with sufficient information as to the
condition of such bank and the character of its management to enable the
Federal Reserve Board fully to protect the interests of the public.
(3) The Federal Reserve Board as a general principle will require each
bank or trust company which establishes or maintains branches, agencies
or additional offices to maintain for itself and such branches, agencics or
additional offices an adequate ratio of capital to total liabilities and an adequate percentage of its total investments in the form of paper or securities
eligible for discount or purchase by Federal reserve banks.
(4) The Federal Reserve Board will not consider any application to establish a branch, agency or additional officc until the State banking authorities
have approved the establishment of such branch, agency or additional office,
and the directors or executive committee and the Federal reserve agent of
the Federal reserve bank of the district in which such bank or trust company
is located have made a report upon the financial condition of the applying
bank or trust company, the general character of its management, what effect
the establishment of such branch, agency or additional office would have
upon other banks or branches in the locality in which it is to be established,
and whether, in their opinion, it would be in the interest of the public in such
locality, together with their recommendation as to whether or not the application should be granted.
(5) When permission is granted for the establishment of such branch
agency or additional office same shall be established and opened for business
within six months after such permission is granted. If such branch, agcncj
» T h e term "contiguous territory" is defined in the board's resolution of N o v . 7, 1923, t<
mean: " T h e territory of a city or town whose corporate limits at some point coincide wit*
the corporate limits of the city or town in which the parent bank is l o c a t e d . "

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229

or additional office is not established within such time the permit shall
become void, unless the time is extended by the board for good cause.
(6) The Federal Reserve Board reserves the right to cancel any permit
which it may grant hereafter to establish any branch, agency or additional
office whenever it shall appear, after hearing, that such branch, agency or
additional office is being operated in a manner contrary to the interest of the
public in the locality in which it is established.
SECTION VII. POWERS AND RESTRICTIONS

Every State bank or trust company while a member of the Federal reserve
system—
(1) Shall retain its full charter and statutory rights as a State bank or
trust company, subject to the provisions of the Federal reserve act, to the
regulations of the Federal Reserve Board, and to the conditions prescribed
by the Federal Reserve Board and agreed to by such State bank or trust
company prior to its admission:
(2) Shall maintain such improvements and changes in its banking practice as may have been specifically required of it by the Federal Reserve Board
as a condition of its admission and shall not lower the standard of banking
then required of it;
(3) Shall enjoy all the privileges and observe all those requirements of the
Federal reserve act and of the regulations of the Federal Reserve Board made
in conformity therewith which are applicable to State banks and trust companies which have become member banks; and
(4) Shall comply at all times with any and all conditions of membership
prescribed by the Federal Reserve Board at the time of the admission of
such member bank to the Federal reserve system.
SECTION VIII. EXAMINATIONS AND REPORTS

Every State bank or trust company, while a member of the Federal
reserve system, shall be subject to examinations made by direction of the
Federal Reserve Board or of the Federal reserve bank by examiners selected
or approved by the Federal Reserve Board.
In order to avoid duplication, examinations of State banks and trust
companies made by State authorities will be accepted in lieu of examinations
by examiners selected or approved by the board wherever these are satisfactory to the directors of the Federal reserve bank, and examiners from
the staff of the board or of the Federal reserve banks will, whenever desirable,
be designated by the board to act with the examination staff of the State in
order that uniformity in the standard of examination may be assured.
Every State bank or trust company, while a member of the Federal
reserve system, shall be required to make in each year not less than three
reports of condition on F. R. B. Form 105. Such reports shall be made to
the Federal reserve bank of its district on call of such bank, on dates to be
fixed by the Federal Reserve Board. They shall also make semiannual
reports of earnings and dividends on F. R. B. Form 107. As dividends may
be declared from time to time, each State bank or trust company member

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shall also furnish to the Federal reserve bank of its district a special notification of dividend declared on F. R . B. Form 107a.

II. F. B. Forms 105,107

and 107a are made a part of this regulation.

R E G U L A T I O N I, S E R I E S OF 1024
(Superseding Regulation I of 1923)

INCREASE OR DECREASE OF CAPITAL STOCK OF
FEDERAL RESERVE BANKS A N D CANCELLATION OF OLD AND ISSUE OF NEW STOCK
CERTIFICATES
SECTION I. INCREASE OF CAPITAL STOCK

(a) New National Banks.—Each new national bank, while in process of
organization (including each nonmember State bank converting into a
national bank, 1 while in process of such conversion) shall file with the Federal
reserve bank of its district on application to the Federal Reserve Board on
F. R. B. Form 30 (or as to a nonmember State bank converting into a
national bank, on F. R. B. Form 30a), made a part of this regulation, for
an amount of capital stock of the Federal reserve bank of its district equal
to 6 per cent of the paid-up capital stock and surplus of such new national
bank. Such application shall be forwarded promptly to the Federal
Reserve Board, and if it is found to be in proper form the Federal Reserve
Board will grant its approval effective if and when the Comptroller of the
Currency issues to such bank his certificate of authority to commence
business. If its application is approved, the applying bank shall thereupon
make a payment to the Federal reserve bank of its district of one-half ot the
amount of its subscription, i.e., 3 per cent of the amount of its paid-up
capital and surplus; and upon receipt of this payment the Federal reserve
bank will issue a receipt therefor, place the amount in a suspense account,
and notify the Federal Reserve Board that it has been received. When
the Comptroller of the Currency issues to such applying bank his certificate
of authority to commence business the Federal reserve bank shall issue a
stock certificate to the applying bank, and the capital stock of the Federal
reserve bank represented by such certificate shall be considered as issued as
of the date upon which the Comptroller of the Currency issues his certificate
1 Whenever any State member bank is converted into a national bank under Sec. 5154 of
the Revised Statutes, as amended by Sec. 8 of the Federal reserve act, it may continue to
hold as a national bank its shares of Federal reserve bank stock previously held as a State
bank, and need not file any application for Federal reserve bank stock, unless the aggregate
amount of its capital and surplus is increased, in which event it should file an application
for additional stock, as provided in Section I («). The certificate of stock issued in the old
name of the member bank, however, should be surrendered and canceled, and a new certificate should be issued in lieu thereof, in the new name of the member bank, as provided in
Section III.

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231

of authority to commcnce business. The remaining half of the subscription of
the applying bank shall be subject to call when deemed necessary by the
Federal Reserve Board.
(£>) State Banks Becoming Members.—Any State bank or trust company desiring to become a member of the Federal reserve system shall
make application as provided in Regulation H, and when such application
has been approved by the Federal Reserve Board and all requirements
of Regulation H have been complied with the Federal reserve bank shall
issue an appropriate certificate of stock as provided in Regulation H.
(c) Increase of Capital or Surplus by Member Banks.—Whenever any
member bank shall increase the aggregate amount of its paid-up capital
stock and surplus, it shall file with the Federal reserve bank of which it is a
member an application on F. R. B. Form 56, made a part of this regulation,
for an additional amount of the capital stock of the Federal reserve bank of
its district equal to 6 per cent of such increase. After such application has
been approved by the Federal reserve agent and by the Federal Reserve
Board, the applying member bank shall pay to the Federal reserve bank of its
district one-half of the amount of its additional subscription, and when this
amount has been paid the appropriate certificate of stock shall be issued by
the Federal reserve bank. The remaining half of such additional subscription shall be subject to call when deemed necessary by the Federal Reserve
Board.
(d) Consolidation of Member Banks.—Whenever two or more member banks consolidate and such consolidation results in the consolidated bank
acquiring by operation of law1 the Federal reserve bank stock owned by the
other consolidating bank or banks, and which also results in the consolidated
bank having an aggregate capital and surplus in excess of the aggregate
capital and surplus of the consolidating member banks, such consolidated bank shall file an application for additional stock, as provided in
Section I (c).
(e) Certifying Increases of Federal Reserve Bank Stock.—Whenever
the capital stock of any Federal reserve bank shall be increased the board of
directors of such Federal reserve bank shall certify such increase to the Comp1 Section 5 of the Federal reserve act provides that "Shares of the capital stock of Federal
reserve banks owned by member banks shall not be transferred or hypothecated." This
provision prevents a transfer of Federal reserve bank stock by purchase, but does not prevent a transfer by operation of law. When there is a merger of member banks involving the
liquidation of one of such banks and the purchasing of the assets of the liquidating bank by
the bank continuing in existence, it is necessary for the liquidating bank to surrender its
Federal reserve bank stock and for the purchasing bank to apply for new stock. On the
other hand, if member banks consolidate, under a statute which does not require the liquidation of any of the consolidating banks, and the assets and obligations of the consolidated
banks are transferred to the consolidated bank by operation of law, the consolidated bank
becomes the owner of the Federal reserve bank stock of the consolidating banks as soon as
the consolidation takes effect and such stock technically need not be surrendered. The
certificates of stock issued in the names of the consolidating banks, however, should be
surrendered and canceled, and a new certificate should be issued in lieu thereof in the new
name of the consolidated bank, as provided in Section III. A consolidation of national
banks under the act of Congress entitled " A n Act to provide for the consolidation of national
banking associations," approved November 7, 1918, meets all of these conditions.

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trailer of the Currency on F. It. B. Form 5S, which is made a part of tins
regulation. Such certifications shall be made quarterly as of the last days
of December, March, June, and September of cach year. A duplicate copy
of each certificate shall be forwarded to the Federal Reserve Board.
SECTION II. DECREASE OF CAPITAL STOCK

(a) Reduction of Capital by Member Bank.—Whenever a member bank
reduces the amount of its paid-up capital stock and, in the case of reduction
of the paid-up capital of a national bank, such reduction has been approved
by the Comptroller of the Currency and by the Federal Reserve Board in
accordance with the provisions of section 28 of the Federal reserve act, it
shall file with the Federal reserve bank of which it is a member an application for the surrender and cancellation of stock on F. R . B. Form 60, which
is made a part of this regulation. When this application has been approved
by the Federal reserve agent and the Federal Reserve Board, the Federal
reserve bank shall accept and cancel the stock which the applying bank is
entitled to surrender and shall refund to the member bank the proportionate
amount due such bank on account of the stock canceled.
(b) Insolvency of Member Bank.—Whenever a member bank shall be
declared insolvent and a receiver appointed by the proper authorities; such
receiver shall, within six months from the date of his appointment, file
with the Federal reserve bank of which the insolvent bank is a member an
application on F. R. B. Form 87, which is made a part of this regulation, for
the surrender and cancellation of the stock held by such insolvent member
bank, and for the refund of all balances due to it. If the receiver shall fail
to make such application within the time specified, the Federal reserve agent
shall report the facts to the Federal Reserve Board with a recommendation
as to .the action to be taken, whereupon the Federal Reserve Board will
either issue an order to cancel such stock or, if the circumstances warrant
it, grant the receiver additional time in which to file such an application.
Upon approval of such an application by the Federal reserve agent and the
Federal Reserve Board, or upon the issuance of such an order by the Federal
Reserve Board, the Federal reserve bank shall cancel such stock and shall
adjust accounts between the member bank and the Federal reserve bank b y
applying to any indebtedness of the insolvent member bank to such Federal
reserve bank all cash-paid subscriptions made by it on the stock canceled
with one-half of 1 per cent per month from the period of last dividend, if
earned, not to exceed the book value thereof, and the balance, if any, shall
be paid to the duly authorized receiver of such insolvent member bank.
(c) Voluntary Liquidation of Member Bank.—Whenever a member bank
goes into voluntary liquidation and a liquidating agent is appointed, sucb
agent shall, within six months from the date of his appointment, file with the
Federal reserve bank of which the liquidating bank is a member an application on F. R. B. Form 86, if a national bank, and on F. R . B. Form 143, if a
State bank, which forms are made a part of this regulation, for the surrender
and cancellation of the stock held by it and for the refund of all balances due
to such liquidating member bank. If the liquidating agent shall fail to

APPENDIX

233

make such application within the time specified, the Federal reserve agent
shall report the facts to the Federal Reserve Board with a recommendation
as to the action to be taken, whereupon the Federal Reserve Board will either
issue an order to cancel such stock, or, if the circumstances warrant it, grant
the liquidating agent additional time in which to file such an application.
Upon approval of such an application by the Federal reserve agent and the
Federal Reserve Board, or upon the issuance of such an order by the Federal
Reserve Board, the Federal reserve bank shall cancel such stock and shall
adjust accounts between the liquidating member bank and the Federal
reserve bank by applying to the indebtedness of the liquidating member bank
to such Federal reserve bank all cash-paid subscriptions made by it on the
stock canceled with one-half of 1 per cent per month from the period of last
dividend, if earned, not to exceed the book value thereof, and the balance,
if any, shall be paid to the duly authorized liquidating agent of such liquidating member bank.
(d) Consolidation of Member Banks.—Whenever there is a consolidation
of two or more member banks which results in the consolidated bank acquiring by Operation of law (see note 11 on p. 231) the Federal reserve bank stock
owned by the other consolidating banks, and which also results in the consolidated bank having a paid-up capital less than the aggregate paid-up
capital of the consolidating member banks, the consolidated bank shall file
with the Federal reserve bank of which it is a member an application for the
surrender and cancellation of stock on F. R. B. Form 60a, which is made a
part of this regulation. Upon the approval of this application by the Federal reserve agent and the Federal Reserve Board, the Federal reserve bank
shall accept and cancel the stock which the applying bank is entitled to
surrender, and shall refund to the applying bank the proportionate amount
due such bank on account of the stock canceled.
(e) Certifying Reductions of Federal Reserve Bank Stock.—All reductions
of the capital stock of a Federal reserve bank shall, in accordance with the
provisions of section 6 of the Federal reserve act, be certified to the Comptroller of the Currency by the board of directors of such Federal reserve
bank on F. R. B. Form 59, which is made a part of this regulation. Such
certifications shall be made quarterly as of the last days of December, March,
June, and September of each year. A duplicate copy of each certificate
shall be forwarded to the Federal Reserve Board.
SECTION III. CANCELLATION OF OLD AND ISSUE OF N E W STOCK CERTIFICATES

Whenever a member bank changes its name or, by consolidation with
another member bank, acquires by operation of law (see note 11 on p. 231)
the Federal reserve bank stock previously held by such other member bank,
it shall surrender to the Federal reserve bank the certificate of Federal
reserve bank stock which was issued to it under its old name, or which was
issued to such other member bank. The certificate so surrendered shall be
indorsed by the member bank surrendering it or by the. member bank to
which it was originally issued and shall be accompanied by proper proof of
the change of name or consolidation. Upon receipt of such certificate of

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stock so indorsed, together with such proof, the Federal reserve bank shall
cancel the certificate so surrendered and shall issue in lieu thereof to and in
the name of the member bank surrendering it a new certificate for the
number of shares represented by the certificate so surrendered, or if the
member bank is entitled to surrender some of the stock which is represented
by the surrendered certificate, and an application for the surrender and
cancellation of such stock is at the same time made in accordance with this
regulation, the new certificate shall be for the number of shares represented
by the surrendered certificate less the number of shares canceled pursuant
to such application. All cases where certificates of stock are surrendered
and new certificates issued in lieu thereof and in a different name shall be
reported to the Federal Reserve Board by the Federal reserve agent.

R E G U L A T I O N J, S E R I E S OF 1924
(Superseding Regulation J of 1920)

CHECK CLEARING AND COLLECTION
SECTION I. STATUTORY

PROVISIONS

Section 16 of the Federal reserve act authorizes the Federal Reserve
Board to require each Federal reserve bank to exercise the function of a
clearing house for its member banks, and section 13 of the Federal reserve
act, as amended by the act approved June 21, 1917, authorizes each Federal
reserve bank to receive from any nonmember bank or trust company, solely
for the purposes of exchange or of collection, deposits of current funds in
lawful money, national-bank notes, Federal reserve notes, checks and
drafts payable upon presentation, or maturing notes and bills, provided
such nonmember bank or trust company maintains with its Federal reserve
bank a balance sufficient to offset the items in transit held for its account
by the Federal reserve bank.
SECTION II. GENERAL

REQUIREMENTS

In pursuance of the authority vested in it under these provisions of law,
the Federal Reserve Board, desiring to afford both to the public and to the
various banks of the country a direct, expeditious, and economical system
of check collection and settlement of balances, has arranged to have each
Federal reserve bank exercise the functions of a clearing house and collect
checks for such of its member banks as desire to avail themselves of its
privileges and for such nonmember State banks and trust companies as may
maintain with the Federal reserve bank balances sufficient to qualify them
under the provisions of section 13 to send items to Federal reserve banks for
purposes of exchange or of collection. Such nonmember State banks and
trust companies will hereinafter be referred to as nonmember clearing banks.

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235

Each Federal reserve bank shall exercise the functions of a clearing
house and collect checks under the general terms and conditions hereinafter
set forth.
SECTION' III. CHECKS RECEIVED FOR COLLECTION

(1) Each Federal reserve bank will receive at par from its member banks
and from nonmember clearing banks in its district, checks1 drawn on all
member and nonmember clearing banks, and checks drawn on all other
nonmember banks which are collectable at par in funds acceptable to the
Federal reserve bank of the district in which such nonmember banks are
located.
(2) Each Federal reserve bank will receive at par from other Federal
reserve banks, and from all member and nonmember clearing banks in other
Federal reserve districts which are authorized to route direct for the credit of
their respective Federal reserve banks, checks drawn on all member and
nonmember clearing banks of its district, and checks drawn on all other
nonmember banks of its district which are collectable at par in funds acceptable to the collecting Federal reserve bank.
(3) No Federal reserve bank shall receive on deposit or for collection any
check drawn on any nonmember bank which cannot be collected at par in
funds acceptable to the Federal reserve bank of the district in which such
nonmember bank is located.
SECTION IV. TIME SCHEDULE AND AVAILABILITY OF CREDITS

(1) Each Federal reserve bank will publish a time schedule showing the
time at which any item sent to it will be counted as reserve and become
available for withdrawal or other use by the sending bank. For all checks
received, the sending bank will be given immediate credit, or deferred
credit, in accordance with such time schedule, and as provided below.
(2) For all such checks as are received for immediate credit in accordance
with such time schedule, immediate credit, subject to final payment, will
be given upon the books of the Federal reserve bank at full face value in the
reserve account or clearing account upon day of receipt, and the proceeds
will at once be counted as reserve and become available for withdrawal or
other use by the sending bank.
(3) For all such checks as are received for deferred credit in accordance
with such time schedule, deferred credit, subject to final payment, will be
entered upon the banks of the Federal reserve bank at full face value, but
the proceeds will not be counted as reserve nor become available for withdrawal or other use by the sending bank until such time as may be specified
in such time schedule,2 at which time credit will be transferred from the
1 A check is generally defined as a draft or order upon a bank or banking house, purporting
to be drawn upon a deposit of funds, for the payment at all events of a certain sum of money
to the order of a certain person therein named, or to him or his order, or to bearer, and
Payable on demand.
1 For rules for computation of reserves and penalties for deficiencies in reserves, see
Regulation D, Sections III and IV, pp. 213 and 214.

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deferred account to the reserve account or clearing account subject to final
payment and will then be counted as reserve and become available for
withdrawal or other use by the sending bank.
SECTION V. TERMS OF COLLECTION

The Federal Reserve Board hereby authorizes the Federal reserve banks
to handle such checks subject to the following terms and conditions; and
each member and nonmember clearing bank which sends checks to any
Federal reserve bank for deposit or collection shall by such action be deemed
(a) to authorize the Federal reserve banks to handle such checks subject to
the following terms and conditions, (b) to warrant its own authority to give
the Federal reserve banks such authority, and (c) to agree to indemnify any
Federal reserve bank for any loss resulting from the failure of such sending
bank to have such authority.
(1) A Federal reserve bank will act only as agent of the bank from which it
receives such checks and will assume no liability except for its own negligence and its guaranty of prior indorsements.
(2) A Federal reserve bank may present such checks for payment or send
such checks for collection direct to the bank on which they are drawn or at
which they are payable, or in its discretion may forward them to another
agent with authority to present them for payment or send them for collection direct to the bank on which they are drawn or at which they are payable.
(3) A Federal reserve bank may in its discretion and at its option, either
directly or through an agent, accept either cash or bank drafts in payment of
or in remittance for such checks and shall not be held liable for any loss
resulting from the acceptance of bank drafts in lieu of cash, nor for the failure
of the drawee bank or any agent to remit for such checks, nor for the nonpayment of any bank draft accepted in payment or as a remittance from the
drawee bank or any agent.
(4) Checks received by a Federal reserve bank on its member or nonmember clearing banks will ordinarily be forwarded or presented direct
to such banks, and such banks will be required to remit or pay therefor at par
in cash or bank draft acceptable to the collecting Federal reserve bank, or at
the option of such Federal reserve bank to authorize such Federal reserve
bank to charge their reserve accounts or clearing accounts; provided,
however, that any Federal reserve bank may reserve the right in its check
collection circular to charge such items to the reserve account or clearing
account of any such bank at any time when in any particular case the
Federal reserve bank deems it necessary to do so.
(5) Checks received by a Federal reserve bank payable in other districts
will be forwarded for collection upon the terms and conditions herein provided to the Federal reserve bank of the district in which such checks are
payable.
(6) The amount of any check for which payment in actually and finally
collected funds is not received shall be charged back to the forwarding
bank, regardless of whether or not the check itself can be returned.

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237

SECTION' VI. OTHER RULES AND REGULATIONS

Each Federal reserve bank shall also promulgate rules and regulations
not inconsistent with the terms of the law or of this regulation, governing
the details of its check clearing and collection operations. Such rules and
regulations shall be set forth by the Federal reserve banks in their letters of
instruction to their member and nonmember clearing banks and shall be
binding upon any member or nonmember clearing bank which sends any
check to such Federal reserve bank for collection or to any other Federal
reserve bank for the account of such Federal reserve bank for collection.
R E G U L A T I O N K, SERIES OF 1924
(Superseding Regulation K of 1923)

BANKING CORPORATIONS AUTHORIZED TO DO FOREIGN BANKING BUSINESS UNDER T H E TERMS OF
SECTION 25(a) OF THE FEDERAL RESERVE
ACT
SECTION I. ORGANIZATION

Any number of natural persons, not less in any case than five, may form
a Corporation1 under the provisions of section 25(a) for the purpose of engaging in international or foreign banking or other international or foreign
financial operations or in banking or other financial operations in a dependency or insular possession of the United States either directly or through
the agency, ownership, or control of local institutions in foreign countries
or in such dependencies or insular possessions.
SECTION II. ARTICLES OP ASSOCIATION

Any persons desiring to organize a corporation for any of the purposes
defined in section 25(a) shall enter into articles of association (see F. R. B.
Form 151 which is suggested as a satisfactory form of articles of association)
which shall specify in general terms the objects for which the Corporation
is formed, and may contain any other provisions not inconsistent with law
which the Corporation may see fit to adopt for the regulation of its business
and the conduct of its affairs. The articles of association shall be signed by
each person intending to participate in the organization of the Corporation
and when signed shall be forwarded to the Federal Reserve Board in whose
office they shall be filed.
SECTION III. ORGANIZATION

CERTIFICATE

All of the persons signing the articles of association shall under their hands
make an organization certificate on F. R. B. Form 152, which is made a part
of this regulation, and which shall state specifically:
1 Whenever these regulations refer to a corporation spelled with a capital C, they relate to
a corporation organized under section 25(a) of the Federal reserve act.

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First. The name assumed by the Corporation.
Second. The place or places where its operations are to be carried on.
Third. The place in the United States where its home office is to be
located.
Fourth.

The amount of its capital stock and the number of shares into

which it shall be divided.
Fifth. The names and places of business or residences of persons executing the organization certificate and the number of shares to which each has
subscribed.
Sixth. The fact that the certificate is made to enable the persons subscribing the same and all other persons, firms, companies, and corporations
who or which may thereafter subscribe to or purchase shares of the capital
stock of such Corporation to avail themselves of the advantages of this
section.
The persons signing the organization certificate shall acknowledge the
execution thereof before a judge of some court of record or notary public
who shall certify thereto under the seal of such court or notary. Thereafter
the certificate shall be forwarded to the Federal Reserve Board to be filed
in its office.
SECTION IV. TITLE

Inasmuch as the name of the Corporation is subject to the approval
of the Federal Reserve Board, a preliminary application for that approval
should be filed with the Federal Reserve Board on F. R. B. Form 150,
which is made a part of this regulation. This application should state
merely that the organization of a Corporation under the proposed name
is contemplated and may request the approval of that name and its reservation for a period of 30 days. No corporation which issues its own bonds,
debentures, or other such obligations will be permitted to have the word
" b a n k " as a part of its title. No Corporation which has the word " F e d eral" in its title will be permitted also to have the word " b a n k " as a part
of its title. So far as possible the title of the Corporation should indicate
the nature or reason of the business contemplated and should in no case
resemble the name of any other corporation to the extent that it might result
in misleading or deceiving the public as to its identity, purpose, connections,
or affiliations.
SECTION V. AUTHORITY TO COMMENCE BUSINESS

After the articles of association and organization certificate have been
made and filed with the Federal Reserve Board, and after they have been
approved by the Federal Reserve Board and a preliminary permit to begin
business has been issued by the Federal Reserve Board, the association shall
become and be a body corporate, but none of its powers except such as are
incidental and preliminary to its organization shall be exercised until it has
been formally authorized by the Federal Reserve Board by a final permit
generally to commence business.
Before the Federal Reserve Board will issue its final permit to commence
business, the president or cashier, together with at least three of the direc-

APPENDIX

239

tors, must certify (a) that each director elected is a citizen of the United
States; (6) that a majority of the shares of stock is owned by citizens of the
United States, by corporations the controlling interest in which is owned by
citizens of the United States, chartered under the laws of the United States,
or by firms or companies the controlling interest in which is owned by citizens
of the United States; and (c) that of the authorized capital stock specified
in the articles of association at least 25 per cent has been paid in in cash and
that each shareholder has individually paid in in cash at least 25 per cent of
his stock subscription. Thereafter the cashier shall certify to the payment
of the remaining installments as and when each is paid in, in accordance with
law.
SECTION VI. CAPITAL STOCK

No corporation may be organized under the terms of section 25(a) with
a capital stock of less than $2,000,000. The par value of each share of stock
shall be specified in the articles of association, and no Corporation will be
permitted to issue stock of no par value. If there is more than one class of
stock, the name and amount of each class and the obligations, rights, and
privileges attaching thereto shall be set forth fully in the articles of association. Each class of stock shall be so named as to indicate to the investor
as nearly as possible what is its character and to put him on notice of any
unusual attributes.
SECTION VII. TRANSFERS OF STOCK

Section 25(a) provides in part that—
A majority of the shares of the capital stock of any such corporation shall
at all times be held and owned by the citizens of the United States, by corporations the controlling interest in which is owned by citizens of the United
States, chartered under the laws of the United States or of a State of the
United States, or by firms or companies the controlling interest in which is
owned by citizens of the United States.
In order to insure compliance at all times with the requirements of this
provision after the organization of the Corporation, shares of stock shall be
issuable and transferable only on the books of the Corporation. Every
application for the issue or transfer of stock shall be accompanied by an
affidavit of the party to w hom it is desired to issue or transfer stock, or by
his or its duly authorized agent, stating—
In the Case of an Individual.—(a) Whether he is or is not a citizen of the
United States and, if a citizen of the United States, whether he is a naturalborn citizen or a citizen by naturalization, and if naturalized, whether he
remains for any purpose in the allegiance of any foreign sovereign or State;
(*>) whether there is or is not any arrangement under which he is to hold the
shares or any of the shares which he desires to have issued or transferred to
him, in trust for or in any way under the control of any foreign State or any
foreigner, foreign corporation, or any corporation under foreign control; and
if so, the nature thereof.
In the Case of a Corporation.—(a) Whether such corporation is or is not
chartered under the laws of the United States or of a State of the United

240

FEDERAL

RESERVE

SYSTEM

IN OPERA TION

States. If it is not, no further declaration is necessary, but if it is, it must
also be stated (b) whether the controlling interest in such corporation is
or is not owned by citizens of the United States, and (c) whether there is or
is not any arrangement under which such corporation will hold the shares
or any of the shares if issued or transferred to such corporation in trust
for or in any way under the control of any foreign State or any foreigner
or foreign corporation or any corporation under foreign control; and if so,
the nature thereof.
In the Case of a Firm or Company.—(a) Whether the controlling interest
in such firm or company is or is not owned by citizens of the United States;
and, if so, (6) whether there is or is not any arrangement under which such
firm or company will hold the shares or any of the shares if issued or transferred to such firm or company in trust for or in any way under the control
of any foreign State or any foreigner or foreign corporation or any corporation under foreign control; and if so, the nature thereof.
The Board of directors of the Corporation, whether acting directly or
through an agent, may, before making any issue or transfer of stock, require
such further evidence as in their discretion they may think necessary in
order to determine whether or not the issue or transfer of the stock would
result in a violation of the law. No issue or transfer of stock which would
cause 50 per cent or more of the total amount of stock issued or outstanding
to be held contrary to the provisions of the law or these regulations shall
be made upon the books of the Corporation. The decision of the board
of directors in each case shall be final and conclusive and not subject to any
question by any person, firm, or corporation on any ground whatsoever.
If at any time by reason of the fact that the holder of any shares of the
Corporation ceases to be a citizen of the United States, or, in the opinion of
the board of directors, becomes subject to the control of any foreign State or
foreigner or foreign corporation or corporation under foreign control, 50
per cent or more of the total amount of capital stock issued or outstanding is
held contrary to the provisions of the law or these regulations, the board of
directors may, when apprised of that fact, forthwith serve on the holder of
the shares in question a notice in writing requiring such holder within two
months to transfer such shares to a citizen of the United States, or to a firm,
company, or corporation approved by the board of directors as an eligible
stockholder. When such notice has been given by the board of directors
the shares of stock so held shall cease to confer any vote until they have been
transferred as required above and if on the expiration of two months after
such notice the shares shall not have been so transferred, the shares shall
be forfeited to the Corporation.
The board of directors shall prescribe in the by-laws of the Corporation
appropriate regulations for the registration of the shares of stock in accordance with the terms of the law and these regulations. The by-laws must also
provide that the certificates of stock issued by the Corporation shall contain
provisions sufficient to put the holder on notice of the terms of the law
and the regulations of the Federal Reserve Board defining the limitations
upon the rights of transfer.

APPENDIX

241

SECTION VIII. OPERATION'S IN THE UNITED STATES

No Corporation shall carry on any part of its business in the United States
except such as shall be incidental to its international or foreign business.
Agencies may be established in the United States with the approval of the
Federal Reserve Board for specific purposes, but not generally to carry on
the business of the Corporation.
SECTION IX. INVESTMENTS IN THE STOCK OF OTHER CORPORATIONS

It is contemplated by the law that a Corporation shall conduct its business
abroad either directly or indirectly through the ownership or control of
corporations, and it is accordingly provided that with the consent of the
Federal Reserve Board a Corporation may invest in the stock, or other
certificates of ownership, of any other corporation organized—
(a) Under the provisions of section 25(a) of the Federal reserve Act;
(b) Under the laws of any foreign country or a colony or dependency
thereof;
(c) Under the laws of any State, dependency, or insular possession of
the United States;
provided, first, that such other corporation is not engaged in the general
business of buying or selling goods, wares, merchandise, or commodities in
the United States; and second, that it is not transacting any business in
the United States except such as is incidental to its international or foreign
business.
Except with the approval of the Federal Reserve Board, no Corporation
shall invest an amount in excess of 15 per cent of its capital and surplus
in the stock of any corporation engaged in the business of banking, or an
amount in excess of 10 per cent of its capital and surplus in the stock of any
other kind of corporation.
No Corporation shall purchase any stock in any other corporation organized under the terms of section 25(a) or under the laws of any State, which is
in substantial competition therewith, or which holds stock or certificates of
ownership in corporations which are in substantial competition with the
purchasing Corporation. This restriction, however, does not apply to corporations organized under foreign laws,
SECTION X. BRANCHES

No Corporation shall establish any branches except with the approval of
the Federal Reserve Board, and in no case shall any branch be established in
the United States.
SECTION X I . ISSUE OF DEBENTURES, BONDS, AND PROMISSORY NOTES

Approval of the Federal Reserve Board.—No Corporation shall make
any public or private issue of its debentures, bonds, notes, or other such
obligations without the approval of the Federal Reserve Board, but this
restriction shall not apply to notes issued by the Corporation in borrowing
from banks or bankers for temporary purposes not to exceed one year. The
approval of the Federal Reserve Board will be based solely upon the right
°f the Corporation to make the issue under the terms of this regulation

242

FEDERAL

RESERVE

SYSTEM

OPERA

TION

and shall not be understood in any way to imply that the Federal Reserve
Board has approved or passed upon the merits of such obligations as an
investment. The Federal Reserve Board will consider the general character
and scope of the business of the Corporation in determining the amount of
debentures, bonds, notes, or other such obligations of the Corporation which
may be issued by it.
Application.—Every application for the approval of any such issue
by a Corporation shall be accompanied by (1) a statement of the condition
of the Corporation in such form and as of such date as the Federal Reserve
Board may require; (2) a detailed list of the securities by which it is proposed
to secure such issue, stating their maturities, indorsements, guaranties, or
collateral, if any, and in general terms the nature of the transaction or transactions upon which they were based; and (3) such other data as the Federal
Reserve Board may from time to time require.
Advertisements.—No circular letter, or other document advertising the
issue of the obligations of a Corporation shall state or contain any reference
to the fact that the Federal Reserve Board has granted its approval of the
issue to which the advertisement relates. This requirement will be enforced
strictly in order that there may be no possibility of the public's misconstruing such a reference to be an approval by the Federal Reserve Board of the
merits or desirability of the obligations as an investment.
SECTION X I I . SALE OF FOREIGN

SECURITIES

Approval of the Federal Reserve Board.—No Corporation shall offer
for sale any foreign securities with its indorsement or guaranty, except with
the approval of the Federal Reserve Board, but such approval will be based
solely upon the right of the Corporation to make such a sale under the terms
of this regulation and shall not be understood in any way to imply that the
Federal Reserve Board has approved or passed upon the merits of such securities as an investment.
Application.—Every application for the approval of such sale shall be
accompanied by a statement of the character and amount of the securities
proposed to be sold, their indorsements, guaranties, or collateral, if any, and
such other data as the Federal Reserve Board may from time to time require.
Advertisements.—No circular, letter, or other document advertising
the sale of foreign securities by a Corporation with its indorsement or
guaranty shall state or contain any reference to the fact that the Federal
Reserve Board has granted its approval of the sale of the securities to which
the advertisement relates.
SECTION XIII.

ACCEPTANCES

Kinds.—Any Corporation may accept (1) drafts and bills of exchange
drawn upon it which grow out of transactions involving the importation
or exportation of goods, and (2) drafts and bills of exchange which are
drawn by banks or bankers located in foreign countries or dependencies
or insular possessions of the United States for the purpose of furnishing
dollar exchange as required by the usages of trade in such countries, dependencies, and possessions, provided, however, that, except with the approval of
the Federal Reserve Board and subject to such limitations as it may pre-

APPENDIX

243

scribe, no Corporation shall exercise its power to accept drafts or bills of
exchange if at the time such drafts or bills are presented for acceptance it
has outstanding any debentures, bonds, notes, or other such obligations
issued by it.
Maturity.—Except with the approval of the Federal Reserve Board, no
Corporation shall accept any draft or bill of exchange which grows out of a
transaction involving the importation or exportation of goods with a maturity
in excess of six months, or shall accept any draft or bill of exchange drawn
for the purpose of furnishing dollar exchange with a maturity in excess of
three months.
Limitations.—(1) Individual drawers: No acceptances shall be made for
the account of any one drawer in an amount aggregating at any time in
excess of 10 per cent of the subscribed capital and surplus of the Corporation,
unless the transaction be fully secured or represents an exportation or
importation of commodities and is guaranteed by a bank or banker of
undoubted solvency. (2) Aggregates: Whenever the aggregate of acceptances outstanding at any time (a) exceeds the amount of the subscribed
capital and surplus, 50 per cent of all the acceptances in excess of the amount
shall be fully secured; or (6) exceeds twice the amount of the subscribed
capital and surplus, all the acceptances outstanding in excess of such amount
shall be fully secured. (The Corporation shall elect whichever requirement
(a) or (b) calls for the smaller amount of secured acceptances.) In no event
shall any Corporation have outstanding at any one time acceptances drawn
for the purpose of furnishing dollar exchange in an amount aggregating
more than 50 per cent of its subscribed capital and surplus.
Reserves.—Against all acceptances outstanding which mature in 30
days or less a reserve of at least 15 per cent shall be maintained, and against
all acceptances outstanding which mature in more than 30 days a reserve of
at least 3 per cent shall be maintained. Reserves against acceptances
must be in liquid assets of any or all of the following kinds: (1) Cash; (2)
balances with other banks; (3) bankers' acceptances; and (4) such securities
as the Federal Reserve Board may from time to time permit.
SECTION* XIV. DEPOSITS

In the United States.—No Corporation shall receive in the United States
any deposits except such as are incidental to or for the purpose of carrying
out transactions in foreign countries or dependencies of the United States
where the Corporation has established agencies, branches, correspondents,
or where it operates through the ownership or control of subsidiary corporations. Deposits of this character may be made by individuals, firms, banks,
or other corporations, whether foreign or domestic, and may be time deposits
or on demand.
Outside the United States.—Outside the United States a Corporation
receive deposits of any kind from individuals, firms, banks, or other
corporations, provided, however, that if such corporation has any of its
bonds, debentures, or other such obligations outstanding it may receive
abroad only such deposits as are incidental to the conduct of its exchange,
discount, or loan operations.
m ay

244

FEDERAL

RESERVE

SYSTEM

OPERATION

Reserves.—Against all deposits received in the United States a reserve of
not less than 13 per cent must be maintained. This reserve may consist
of cash in vault, a balance with the Federal reserve bank of the district in
which the head office of the Corporation is located, or a balance with any
member bank. Against all deposits received abroad the Corporation shall
maintain such reserves as may be required by local laws and by the dictates
of sound business judgment and banking principles.
SECTION X V . GENERAL LIMITATIONS AND

RESTRICTIONS

Liabilities of One Borrower.—The total liabilities to a Corporation of
any person, company, firm, or corporation for money borrowed, including
in the liabilities of a company or firm the liabilities of the several members
thereof, shall at no time exceed 10 per cent of the amount of its subscribed
capital and surplus, except with the approval of the Federal Reserve Board:
Provided, however, That the discount of bills of exchange drawn in good
faith against actually existing values and the discount of commercial or
business paper actually owned by the person negotiating the same shall not
be considered as money borrowed within the meaning of this paragraph.
The liability of a customer on account of an acceptance made by the
Corporation for his account is not a liability for money borrowed within the
meaning of this paragraph unless and until he fails to place the Corporation
in funds to cover the payment of the acceptance at maturity or unless the
Corporation itself holds the acceptance.
Aggregate Liabilities of the Corporation.—The aggregate of the Corporation's liabilities outstanding on account of acceptances, average domestic
and foreign deposits, debentures, bonds, notes, guaranties, indorsements,
and other such obligations shall not exceed at any one time ten times
the amount of the Corporation's subscribed capital and surplus except with
the approval of the Federal Reserve Board. In determining the amount
of the liabilities within the meaning of this paragraph, indorsements of bills
of exchange having not more than six months to run, drawn and accepted
by others than the Corporation, shall not be included.
Operations Abroad.—Except as otherwise provided in the law and these
regulations, a Corporation may exercise abroad not only the powers specifically set forth in the law but also such incidental powers as may be usual in
the determination of the Federal Reserve Board in connection with the
transaction of the business of banking or other financial operations in the
countries in which it shall transact business. In the exercise of any of these
powers abroad a Corporation must be guided by the laws of the country in
which it is operating and by sound business judgment and banking principles.
SECTION X V I .

MANAGEMENT

The directors, officers, or employees of a Corporation shall exercise
their rights and perform their duties as directors, officers, or employees,
with due regard to both the letter and the spirit of the law and these regulations. For the purpose of these regulations the Corporation shall, of course,
be responsible for all acts of omission or commission of any of its directors,

officers* employees! or representatives m the conduct of their official duties.

APPENDIX

245

The character of the management of a Corporation and its general attitude
toward the purpose and spirit of the law and these regulations will be
considered by the Federal Ileserve Board in acting upon any application
made under the terms of these regulations.
SECTION X V I I . REPORTS AND EXAMINATIONS

Reports.—Each Corporation shall make at least two reports annually
to the Federal Reserve Board at such times and in such form as it may
require.
Examinations.—Each Corporation shall be examined at least once a year
by examiners appointed by the Federal Reserve Board. The cost of
examinations shall be paid by the Corporation examined.
SECTION X V I I I .

AMENDMENTS TO REGULATIONS

These regulations are subject to amendment by the Federal Reserve
Board from time to time, provided, however, that no such amendment
shall prejudice obligations undertaken in good faith under regulations in
efTcct at the time they were assumed.
R E G U L A T I O N L, SERIES OF 1924
(Superseding Regulation L of 1923)

INTERLOCKING B A N K DIRECTORATES UNDER T H E
CLAYTON A C T
SECTION I.

DEFINITIONS

Within the meaning of this regulation—
The term "member bank" shall apply to any national bank and any State
bank or trust company which is a member of the Federal reserve system.
The term "national bank" shall be construed to apply not only to national
banking associations but also to banks, banking associations, and trust
companies organized or operating under the laws of the United States,
including all banks and trust companies doing business in the District of
Columbia, regardless of the sources of their charters.
The term "resources" shall be construed to mean an amount equal
to the sum of the deposits, capital, surplus, and undivided profits.
The term "State bank" shall include any bank, banking association, or
trust company incorporated under State law.
The term "private banker" shall apply to any unincorporated individual
engaging in one or more phases of the banking business as that term is
generally understood and to any member of an unincorporated firm engaging
m such business.
The term " E d g e A c t " shall mean section 25(a) of the Federal reserve
act, as amended December 24, 1919.
The term " E d g e corporation" shall mean any corporation organized under
the provisions of the Edge Act.
The term "city of over 200,000 inhabitants" includes any city, incorporated town, or village of more than 200,000 inhabitants, as shown by the

246

FEDERAL

RESERVE

SYSTEM

IN OPERA

TION

last preceding decennial census of the United States. Any bank loeated
anywhere within the corporate limits of such city is located in a city of over
200,000 inhabitants within the meaning of the Clayton Act, even though it
is located in a suburb of an outlying district at some distance from the
principal part of the city.
SECTION II. PROHIBITIONS OF CLAYTON

ACT

Under section 8 of the Clayton Antitrust A c t —
(1) No person who is a director or other officer or employee of a national
bank having resources aggregating more than §5,000,000 can legally serve
at the same time as director, officer, or employee of any other national
bank, regardless of its location.
(2) No person who is a director in a State bank or trust company having
resources aggregating more than $5,000,000 or who is a private banker
having resources aggregating more than §5,000,000 can legally serve at the
same time as director of any national bank, regardless of its location.
(3) No person can legally be a director, officer, or employee of a national
bank located in a city of more than 200,000 inhabitants who is at the same
time a private banker in the same city or a director, officer, or employee of
any other bank (State or national) located in the same city, regardless of
the size of such bank.
The eligibility of a director, officer, or employee under the foregoing
provisions is determined by the average amount of deposits, capital, surplus,
and undivided profits as shown in the official statements of such bank,
banking association, or trust company filed as provided by law during the
fiscal year next preceding the date set for the annual election of directors,
and when a director, officer, or employee has been elected or selected in
accordance with the provisions of the Clayton Act it is lawful for him to
continue as such for one year thereafter under said election or employment.
When any person elected or chosen as a director, officer, or employee of
any bank is eligible at the time of his election or selection to act for such bank
in such capacity his eligibility to act in such capacity is not affected by reason
of any change in the affairs of such bank from whatsoever cause until the
expiration of one year from the date of his election or employment.
SECTION III.

EXCEPTIONS

The provisions of section 8 of the Clayton A c t —
(1) Do not apply to mutual savings banks not having a capital stock
represented by shares.
(2) Do not prohibit a person from being at the same time a director, officer,
or employee of a national bank and not more than one other national bank,
State bank, or trust company, where the entire capital stock of one is owned
by the stockholders of the other.
(3) Do not prohibit a person from being at the same time a class A director
of a Federal reserve bank and also an officer or director, or both an officer and
a director, in one member bank.
(4) D o not prohibit a person who is serving as director, officer, or employee
of a national bank, even though it has resources aggregating over $ 5 , 0 0 0 , 0 0 0
from serving at the same time as director, officer, or employee of any number

APPENDIX

247

of State banks and trust companies, provided such State institutions are
not located in the same city of over 200,000 inhabitants as the national
bank and do not have resources aggregating in the case of any one bank
more than $5,000,000.
(5) Do not prohibit a person from serving at the same time as director,
officer, or employee of any number of national banks, provided no two of
them are located in the same city of over 200,000 inhabitants and no one of
them has resources aggregating over $5,000,000.
(6) Do not prohibit a person who is not a director, officer, or employee of
any national bank from serving at the same time as officer, director, or
employee of any number of State banks or trust companies, regardless of
their locations and resources.
(7) Do not prohibit a person who is an officer or employee but not a director of a State bank from serving as director, officer, or employee of a national
bank, even though either or both of such banks have resources aggregating
over $5,000,000, provided both banks are not located in the same city of
over 200,000 inhabitants.
(8) Do not prohibit a person who is an officer or employee but not a director of a national bank from serving at the same time as director, officer, or
employee of a State bank, even though either or both of such banks have
resources aggregating over $5,000,000, provided both banks are not located
in the same city of over 200,000 inhabitants.
(9) Do not apply to persons who have obtained the consent or approval
of the Federal Reserve Board under the provisions of the Kern amendment,
section 25 of the Federal reserve act, or the Edge Act, as hereinafter
provided.
Exceptions Cumulative.—The above exceptions are cumulative.
SECTION

IV.

PERMISSION

OP THE

FEDERAL

RESERVE BOARD

UNDER

KERN

AMENDMENT

By the Kern amendment, approved May 15, 1916, as amended May 26,
1920, the Clayton Act was amended so as to authorize the Federal Reserve
Board to permit any private banker or any officer, director, or employee of
any member bank or class A director of a Federal reserve bank to serve as
director, officer, or employee of not more than two other banks, banking
associations, or trust companies coming within the prohibitions of the
Clayton Act, provided such other banks are not in substantial competition
with such private banker or member bank.
Substantial Competition.—If the institutions involved are not in substantial competition, the board is authorized, in its discretion, to grant, withhold, or revoke such consent; but if they are in substantial competition,
the board has no discretion in the matter and must refuse such consent.
The board has adopted the following statement of general principles for its
guidance in determining whether banks are in substantial competition within
the meaning of the Kern amendment to the Clayton Act:
" I n general, two banks will be deemed to be in substantial competition
if they actually compete for a considerable amount of business, i.e., if a
considerable portion of the business of each is of the same character and in

248

FEDERAL

RESERVE

SYSTEM

IN OPERA TION

doing or seeking such business they actually compete for the same customers
or prospective customers, regardless of whether or not it is probable or
possible that an interlocking directorate between them would result in
injury to the public by making credit less available. If the statements of
two banks show that each has a considerable amount of the same class of
deposits or loans and it appears from the evidence submitted that they are so
located as to be in a position to serve the same customers conveniently,
the board will presume, in the absence of evidence to the contrary, that they
are in substantial competition. This presumption may be rebutted, however, by any evidence showing that they are not actually competing for
such business, e.g., that they actually serve different classes of customers,
that the business in question is not actually sought by one bank but is
merely incidental to its other business, or that competition has already been
eliminated through common stock ownership. The existence of substantial
competition, however, may be shown by evidence other than that described
above."
This is not intended as a precise definition of the term "substantial
competition," but merely as a broad statement of the general principles
which will be observed by the Federal Reserve Board in determining whether
banks are in substantial competition. Whether or not substantial competition exists in any particular case is a question of fact which must be determined in the light of all the facts and circumstances involved in such case.
Burden of Proof.—Inasmuch as the Federal Reserve Board has no power
to permit a person to serve two or more banks coming within the prohibitions
of the Clayton Act unless the institutions involved are not in substantial
competition, the applicant for such permission has the burden of proving to
the board that such institutions are not in substantial competition.
When Obtained.—Inasmuch as the Kern amendment excepts from the
prohibitions of the Clayton Act only those "who shall first procure the consent of the Federal Reserve Board," it is a violation of the law to serve two
or more institutions in the prohibited classes before such consent has been
obtained. Such consent should be obtained, therefore, before becoming an
officer, director, or employee of more than one bank in the prohibited classes.
Such consent may be procured before the person applying therefor has been
elected as a class A director of a Federal reserve bank or as a director of any
member bank.
Applications for Permission.—A person wishing to obtain the permission
of the Federal Reserve Board to serve banks coming within the prohibitions
of the Clayton Act should:
(1) Make formal application on F. R. B. Form 94, or, if a private banker,
F. R. B. Form 94d. Each of these forms is made a part of this regulation.
(2) Obtain from each of the banks involved a statement on F. R. B. Form
94a, which is made a part of this regulation, showing the character of its
business, together with a copy of its last published statement of condition,
and, if a private banker, make a statement on F. R. B. Form 94e showing the
character of his or his firm's business.
(3) Forward all these papers to the Federal reserve agent of his district,
who will attach his recommendation on F. R. B. Form 94b, which is made

APPENDIX

249

a part of this regulation, and forward them in due course to the Federal
Reserve Board.
Approval or Disapproval.—As soon as an application is acted upon by the
board, the applicant will be advised of the action taken.
If the board approves the application, a formal certificate of permission
to serve on the banks involved will be issued to the applicant.
Rehearing.—If the board decides that the banks are in substantial
competition and that it can not approve the application, it will, upon
petition of the applicant, reconsider its decision and afford him every
opportunity to present any additional facts or arguments bearing on the
subject.
Effect of Permits.—Permission once granted is continuing until revoked,
and need not be renewed.
Revocation.—All permits, however, are subject to revocation at any
time in the discretion of the Federal Reserve Board. The issuance of a
permit to any person shall have the effect of revoking any or all permits
which may have been issued previously to that person.
SECTION v .

PERMITS UNDER SECTION 2 5 OF THE FEDERAL
RESERVE ACT

With the approval of the Federal Reserve Board, any director, officer,
or employee of a member bank which has invested in the stock of any
corporation principally engaged in international or foreign banking or
financial operations or banking in a dependency or insular possession of the
United States, under the provisions of section 25 of the Federal reserve act,
may serve as director, officer, or employee of any such foreign bank or
financial corporation.
Applications for Approval.—The approval of the Federal Reserve Board
for such interlocking directorates may be obtained through an informal
application in the form of a letter addressed to the Federal Reserve Board
either by the officer, director, or employee involved, or in his behalf by one
of the banks which he is serving. Such application should be sent directly
to the Federal Reserve Board.
SECTION VI. PERMITS TO SERVE EDGE

CORPORATIONS

With the approval of the Federal Reserve Board—
(1) Any officer, director, or employee of any member bank may serve at
the same time as director, officer, or employee of any Edge corporation in
whose capital stock the member bank shall have invested.
(2) Any officer, director, or employee of any Edge corporation may serve
at the same time as officer, director, or employee of any other corporation
in whose capital stock such Edge corporation shall have invested under the
provisions of the Edge Act.
Applications for Approval.—Such approval may be obtained through an
informal application in the form of a letter addressed to the Federal Reserve
Board either by the director, officer, or employee involved, or in his behalf
by one of the banks or corporations involved. Such applications should be
sent directly to the Federal Reserve Board,

APPENDIX C
FEDERAL RESERVE BANK DEVELOPMENTS: 1914-1924
1 . — E A R N I N G ASSETS OF FEDERAL RESERVE BANKS,

1914-1924

(In thousands of dollars)
Bills discounted

Secured by
U. S. government obligations1

Date
W
Cxi
o

1914:
Nov. 27
Deo. 3 1 .

1015:
Jan. 29
Feb. 26
Mar. 26
Apr. 30
May 28
June 25
July 30
Aug. 27

Other

.
.

Total

Bills bought
in open market

Total bills
on hand

7,383
. 9,909

13,955
20,469
31.G83
36,586

13.955
20,469
31,683
36,586

S 13,180
17,417
21,579
25,469

33,951
25,996
29,102
29,275

33,951
36,375
40,727
42,839

7,383
9,909

13,055
20,469
31,683
36.5S6

33,951
25,996
29,102
29,275

$
10,379
11,625
13,504

7,383
9,909

United States
securities

205

0,947
7,001
7,923
8,836

Municipal
warrants4

Total earning
assets

7,383
10,848

27,135
37,886
53,262
62,055

63,992
55,485
64,757
77,485

734

$23,094
11,509
16,107
25,SOS

Sept. 24.
Oct.
29..
Nov. 2 0 . .
Dec. 3 0 . .

31,373 | $
30,448
32,794
32,368

31,373
30,448
32,794
32,368

$ 13,058
13,019
16,179
23,013

44,431
44,007
48,973
55,381

0,328
10,505
12,919
15,797

$24,945
25,014
27,308
12,220

78,704
79,586
89,200
83,398

1916:
Jan.
Feb.
Mar.
Apr.

28..
25..
31.
28..

20,901
22,827
21,207
21,448

26,901
22,827
21,267
21,448

$ 20,314
29,054
40,408
47,585

53,215
51.881
61,075
69,033

$ 21,372
29,032
40,275
49,081

$20,602
25,403
33,015
36,933

95,189
100,910
134,965
155,647

May
June
July
Aug.

20..
30..
28..
25..

20,365
21t188
27,594
27,032

20,305
27,594
27,032

$ 52.70S
71,095
83,454
82,146

73,073
92,283
111,048
109,178

$ 55,782
57,129
50,581
55,001

$44,940
22,671
27,220
27,863

173,801
172,0S3
194,849
192,012

Sept. 29.
Oct. 2 7 . .
Nov. 24.
Deo. 2 9 . ,

25,953
21,131
20,501
30,196

25,953
21,131
20,501
30,190

$ 80,625
86,085
102,092
127,497

100,578
107,210
122,593
157,093

$ 53,471
51,904
50,594
55,414

$24,028
29,890
22,100
8,975

184,077
189,010
195,353
222,082

15,711
20,200

35,043

15,711
20,266
20,100
35,043

$ 97,697
123,900
84,473
71,400

113,408
144,232
104,579
100,443

$ 55,7G9
48,118
47,700
117,818

$12,249
17,124
15,715
14,999

181,426
209,474
107,994
239,260

45,687
193,546'
125,789
135,448

47,587
219,092
138,459
147,315

$107,377
202,270
195,097
154,591

154,904
421,362
333,556
301,900

$117,058
70,728
76,953
77,927

$14,675
2,440
1,469
1,230

287,297
494,536
411,978
381,063

1017:
Jan. 2 0 . .
Feb. 2 3 . .
Mar. 30.
Apr. 2 7 . ,
May
June
July
Aug.

25.
29.
27.
31.

20,106

1,900
25,546
12,670
11,867

21,188

1 Figures to Nov. 30, 1917, inclusive, represent only member banks' collateral notes sccured by Government war obligations and are exclusive
of customers* paper similarly secured, the amount ol which, however, was small.
s Includes loans on gold coin and bullion—$21,850,000.
» Includes bill of lading drafts as follows: Jan. 25, $2,705,000; Feb. 21, $2,824,000; Mar. 29, $2,994,000; Apr. 26, $2,108,000; May 31, $235,000;
June 28, $12,000; July 20. $37,000; Sept. 27, $31,000.
•All other earning assets beginning with Feb., 1924.

1 . — E A R N I N G ASSETS o r FEDERAL RESERVE BANKS,

to
cn
to

1914-1924—Continued.

(In thousands of dollars)

stos

Bills discounted

Date

1917:
Sept. 2 8 . . .
Oct. 2 6 . . . .
Nov. 3 0 . . .
Dcc. 2 8 . . .

Secured by
U. S. government obligations1

Other

Total

Bills bought
in open market

tq
&

Total bills
on hand

United States
securities

Municipal
warrants4

Total earning
assets

PS
^
Gq
tea

901,574
805,704
887,293
1,204,587

$123,194
222,657
310,769
78.853

$ 4,902 s
3,436 s
3,523*
2,722s

$1,029,670
1,031,797
1,201,5S5
1,286,162

$256,373
216,848
205,274
232,603

$1,153,730
1,080,023
1,507,425
1,G60.798

$140,924
259,066
57,012
56,122

736*
23s
103*
07

$1,301,390
1,345,112
1,564,540
1,7IG,9S7

$288,391
398,623
375,341
303,673

$2,001,821
1,944,787
2,190,536
2.006,611

$ 78,643
350,311
121,790
311,546

102*
24
27
13

$2,0S0,5Gfi
2,295,122
2,312,359
2,318,170

627,602
509,534
583,228
901,743

$273,912
290,170
304,005
302,844

897,357
869,175
1,302,151
1,428,195

$1,713,430
1,546,164
1,815,195
1,702,938

Jan. 25
Feb. 2 1 . . . .
Mar. 2 8 - 2 9
Apr. 20. . . .

312,520
263,905
'301,451
642,429

315,142
245,629
281,777
259,314

May 3 1 . . . .
June 28
July 20
Aug. 30

5G2.993
434,509
073,231
896,228

334,364
434,G66
628,920
531,967

Sept. 2 7 . . . .
Oct. 2 5 . . . .
Nov. 2 9 . . .
Dee. 2 7 . . . .

$1,221,533
It092,417
1,412,511
1,400,371

491,897
453,747
402,684
302,507

504,937
084,959
1,052,377
1,064,310

$ 95,005
110,042
89,090
107,233

$176,169
177,590
205,454
275,366

167,016
187,864
350,790
397,285

409,708
574,684
961,852
956,072

233,539
397,094
750,398
680,706

65,023
200,230
405,608
283,421

224
233
1,429
1,005

1018:

GQ
^

o
fcg
S3

1910:
Jan. 31.
Feb. 28.
Mar. 28.
Apr. 25..

$1,357,571
1,667,965
1,691,010
1,760,672

243,557
211,855
195,230
189,740

$1,601,128
1,879,820
1,886,240
1,950,412

$281,293
276,919
248,107
185,822

$1,882,421
2,156,739
2,134,347
2,136,231

$294,784
182,782
200,935
218,636

May 29..
June 27.
July 25,.
Aug. 29..

$1,802,893
1,573,483
1,616,210
1,609,296

186,499
244,557
251,392
205,83S

$1,989,392
1,818,040
1,867,602
1,815,134

$183,650
301,558
375,556
363,138

$2,173,042
2,122,598
2,243,158
2,178,272

$229,011
231,509
239,400
270,705

$2,402,056
2,354,107
2,482,55S
2,448,977

Sept. 26.
Oct. 31..
Nov. 28.
Dec. 20..

$1,572,503
1,681,082
1,736,033
1,510,304

309,779
447,465
478,176
684,514

$1,882,282
2,128,547
2,214,209
2,194,878

$342,491
394,355
495,595
585,212

$2,224,773
2,522,902
2,709,801
2,780,090

$278,315
301,254
314,937
300,405

$2,503,088
2,824,156
3,024,741
3,080,495

1920:
Jan. 30..
Feb. 27.
Mar. 20.
Apr. 30.

$1,457,892
1,572.980
1,441,015
1,465,320

716,465
880,531
1,008,215
1,069,751

$2,174,357
2,453,511
2,449,230
2,535,071

$561,313
531,367
451,879
407,247

$2,735,670
2,984,878
2,901,109
2,942,318

$303,521
294,354
289,922
293,514

$3,039,191
3,279,232
3,191,031
3,235,832

May 28.
June 25.
July 30.
Aug. 27.

$1,447,962
1,277,980
1,241,017
1,314,830

$1,071,469
1,153,814
1,250,013
1,352,297

$2,519,431
2,431,794
2,491,030
2,667,127

$•118,600
399,185
345,305
321,965

$2,938,031
2,830,979
2,836,935
2,989,092

$306,394
352,296
325,380
300,580

$3,244,425
3,183,275
3,162,315
3,289,072

Sept. 24
Oct. 29.
Nov. 26
Dec. 30.

$1,220,423
1,203,005
1,192,425
1,141,036

$1,484,041
1,597,392
1,542,975
1,578,098

$2,70-1,464
2,801,297
2,735,400
2,719,134

$307,024
298,375
247,703
255,702

$3,012,088
3,099,672
2,983,103
2,974,836

$297,500
296,371
320,614
288,191

$3,309,588
3,396,043
3,303,717
3,263,027

4
4
3

$2,177,209
2.339,525*
2,335,285
2,354,870

I§

to
Ox
CO

I . — E A R N I N G ASSETS OP FEDERAL RESERVE BANKS,

to
o*

1914-1924.—Continued.

(In thousands of dollars)
Bills discounted
Date

1921:
Jan. 31
Feb. 28
Mar. 31
Apr. 30

$2,007,907
2,841,733
2,629,378
2,453,420

$1,907,913
1,751,350
1,641,612
1,491,935

$ 75,457
40,223
17,977
35,320

$1,983,370
1,791,573
1,659,589
1,527,255

$266,481
259,184
244,365
230,233

$2,240,851
2,050,737
1,903,054
1,757,488

910,169
850,591
705,941
659,113

$1,413,013
1,313,027
1,182,301
1,144,346

$ 45,012
86,110
72,954
145,203

$1,458,055
1,399,137
1,255,255
1,289,609

$227,830
192,521
204,544
233,528

475,299
427,963
419,686
324,361

838,885
712,577
680,467
510,104

$ 74,935
93,458
105,270
90,677

913,820
806,035
785,737
600,781

$293,085
407,889
455,506
587,080

300,384
294,177
273,788
271,335

471,490
461,418
406,178
397,448

$118,182
161,112
140,111
180,176

589,672
622,530
546,289
577,624

$603,419
555,465
536,669
507,131

$2,457,117
2,389,510
2,233,106
2,076,508

787,244
037,590
577,774
545,176

$1,120,009
1,113,760
1,003,838
940,759

496,844
462,436
476 t 360
485,233

363,586
284,614
260,781
185,743

171,106
167,241
132,390
126,113

$
1

2,352,446
2,180,331

$287,150
282,807
270,932
207,095

$1,416,750
1,391,545
1,262,000
1,138,910

May 31
June 30
July 31
Aug. 31

$2,620,817

$1,040,367
997.905
971,100
937,652

Sept. 30
Oct. 31
Nov. 3 0 . . .
Dec. 31
1922:
Jan. 31
Feb. 28
Mar. 31
Apr. 29

$163,700
169,421
119,340
109,763

Total

Municipal
warrants4

United States
securities

Other

May 31
June 30
July 31
Aug. 31

Bills bought
in open market

Total bills
on hand

Secured by
U. S. government obligations1

2,558,931

10
67
379
206
242
102

3
21

Total earning
assets

$1,685,885
1,591,668
1.459,866
1,523,516
$1,207,111
1,214,100
1,241,345
1,187,861
$1,193,091
1,177,995.
1,082,961
1,084,776

§§
to
Eu
tr*
fej
fcq
so

IS
05

5
ba

1
c

1022:
Sept. 30.
Oct. 31
Nov. 29
Dec. 30

$ 162,780

269,042
315,280
331,790

300,916
307,393
334,816
285,990

$ 463,696

$ 597,251

$244,375
258,165
259,226
272,122

708,071
834.600
909,322
889,902

$-182,676
362,639
304,461
436,155

$188,566
207,678
263,358
271,573

785,817
803,438
962,272
996,566

$353,735
363,074
250,360
185,305

$258,680
205,600
183,096
171,607

$1,029,414
1,042,549
1,009,032
1,036,169

$191,964
101,503
98.083
101,995

55
65
10
20

$1,221,433
1,144,117
1,107,125
1,138,184

883,800
803,354
723,068

$173,258
204,608
300,207
354,637

$1,056,811
1,088,498
1,103,561
1,077,705

$ 96,285
91,837
104,169
133,566

317
317
154
51

$1,153,413
1»180.652
1,207,884
1,211,322

576,435
650,096
617,780

15
24
24
39

$1,190,762
1,197,263
1,213,807
1,326,096

1923:
Jan. 31
Feb. 2 8 . . . .
Mar. 31
Apr. 30

377,482
356,039
372,70S
386,079

$ 219,769
239,721
326,146
338,914

595,760
698,914
724,993

May 31
June 30
Juiy 31
Aug. 31

$ 406,824

$ 363,910

$ 770,734

Sept. 30..
Oct. 31
Nov. 30
Dec. 31

$ 401,186

$ 482,367

$ 883,553

$ 267,978

$ 264,282

532,260
528,963
517,885
447,185

$286,041
267,880
228,247
124,485

818,301
796,843
746,132
571,670

$126,371
165,463
262,867
301,660

10
100
51
51

944,682
962,406
1,009,050
873,381

441,366
333,954
293,047
274,668

$ 79,549
36,524
23,469
58,103

520,915
370,478
316,516
332,771

$352,857
431,085
522,897
542,211

551
1,301
1,250
1,750

874,323
802,864
840,663
876,732

$ 276,199

$131,576
200,114
313,572
387,100

407,775
464,255
555,596
701,288

$576,108
584,205
683,738
540,160

$ 1,995
3,557
2,550
8,050

985,878
1,052,017
1,141,884
1,249,438

1924:
Jan. 31
Feb. 2 9 ;
Mar. 31
Apr. 30

407,356
391,937
412,318
425,630
400,533
353,685

257,215
228,949
161,164

May 31
June 30
July 31
Aug. 30

Sept. 30.
Oct. 3 1 . .
Nov. 29.
Dec. 31.

429,593
433,999
452,214

458,150
396,821
369,383

836,949
825,936
864,562

271,748
288,936
286,021

164,149
115,580
89,424
83,480

$ 277,217

111,591
118,592
112,694
186,840

218,374
203,623
191,188
164,608
145,549
129,330
127,288

264,141
242,024
314,128

$1,139,552
1,166,512
1,212,673
1,181,871

2.-

to
-RESERVES, DEPOSITS, AND N O T E CIRCULATION OP FEDERAL RESERVE BANKS,
(Amounts in thousands of dollars)
Reserves

Deposits

Date

1014:
Nov. 27.
Dec. 31..

Government

Members'
reserve1

F. R .
notes in
circulation

Required
reserve

Excess
reserve

Reserve
percentage

Gold

Total

227,840
241,321

2G2.470
267,809

249,2G8
256,018

2,700
10,608

251,968
260,626

88,324
93,850

174,146
174,049

104.2
100.5

251,306
209,753
273,137
2S0.543

272,188
298,838
296,235
307,061

272,095
282,248
282,644
285,364

14,500
22,957
33,767
46,444

286,595
305,205
316,411
331,808

101,033
107,970
112,433
118,455

171,155
190,808
183,802
188,606

95.0
97.9
93.6
92.5

284,615
303,038
299,105
309,999

57,847
72,489
85,127
95,233

342,462
375,527
384,232
405,232

122,754
135,059
138,738
140,593

207,566
236,972
230,737
232,450

90.5
99.1
96.2
93.5

Net*

29..
20..
2G.
30..

May
Juno
July
Aug.

28.,
25..
30..
27..

208,331
324,183
347,383
359,165

330,320
372,031
369,475
379,043

Sept. 24.
Oct. 2 9 . .
Nov. 26.
Dec. 30..

405,404
433,236
492,163
542,413

428,324
470,294
529,375
555,938

15,000
15,000
15,000
15,000

337,532
350,021
398,899
394,245

115,662
146.025
165,30-1
189.026

453,194
496,016
564,203
583,271

164,401
180,917
205,736
213,596

263,923
289,377
323,639
342,342

94.5
94.8
93.8
95.3

1916:
Jan. 2 8 . .
Feb. 25..
Mar. 31.
Apr. 28..

555,241
526,213
514,521
487,029

570,737 $
543,891
524,459
499 ,040

27,760
32,501
38,469
40,660

441,663
435,793
445,328
439,0131

179,224
171,368
163,066
163,094

620,887
607,161
60S,394
602,107

226 272
221,075
221,091
218,892

344,465
322,810
303,368
280,148

91.9
89.6
80.2
82.9

F. R.
bank note
circulation
—net
liability

to
g
SO
£
C0
t?3

1915:
Jan.
Feb.
Mar.
Apr.

1914-1924

S
S

o
tq
S3
^
O

964
1,609

May 26.
June 30.
July 28.
Aug. 25.

515,255 $ 537,227 $ 44,131
542,744
570,192 101,152
527,530
544,125
56,542
530,221
548,486
50,099

504,299 $
538,241
535,548
530,860

Sept. 29.
Oct. 27.,
Nov. 24.
Dec. 29,,

584,767
617,481
701,501
736,236

592,578 $ 38,985
627,457
29,982
26,319
719,475
28,837
753,774

529,300 S 196,538 $
518,703
214,622
240,44S
620,128
650,665
275,353

1917:
Jan. 26..
Feb. 23.
Mar. 30.
Apr, 27.

791,245
803,324
938.046
945,141

808,824 $ 25,607
818,573
13,407
947,328
20,567
975,481
99,689

687,841
629,475
711,117
719,785

688,508 $
677,036
706,905
743,532

259,768 $ 918,276 $
303,171
980,207
357,610 1,064,515
420,509 1,164,041

977,371 $1,014,263 S 76,114
1,294,512 1,334,352 300,966
1,362,263 1,414,052 143,032
1,353,498 1,406,108 154,358

813,326
1,033,460
1,135,456
1,069,804

721,171 $
,261,800
,232,200
,133,926

454,402
508,753
534,015
587,915

$1,175,573 $
1,770,553
1,766,215
1,721,841

May 25
June 29
July 27
Aug. 3 1 . . . . . .
Sept. 28
Oct. 26.
Nov. 30.
Dec. 28.

159,389 $ 663,688 $ 240,260 $
690,485
152,244
249.282
152,590
688.13S
248,478
156,315
687,211
248,341
725,898 $
703,325
800,576
926,018

296,9G7
320,910
295,647
300,145

80.9
82.6
79.1
79.8

1,732
1,721
1,692
1,690

263,891 $ 328,687
277,894
319,563
.406,251
313,224
337,874
415,900

81.6
82.2
83.6
81.4

3,033
1,031
1,02S

344,885 $
358,231
390,461
428,441

463,939
460,342
556,867
547,040

85.3
83.5
89.0
83.8

434,170 $
645,131
644,876
632,040

580,093
689,221
769,176
774,068

86.3
75.4
80.1
81.7
77.0
71.7
63.2
63.6

8,000
8,000
8,000

65.4
66.0
62.7
61.3

8,000

$1,408,470 $1,457,559 S 71,289 $1,136,930
1,503,436 1.552,942 132,221 1,264,323
1,621,725 1,676,211 220,962 1,489,370
1,671,133 1,720,768 108,213 1,453,166

,193,886 $ 700,212 $1,894,098 $ 697,945
847,506 2,166,304
800,581
,318,798
981,222
,595,512 1,056,983 2,652,495
.,457,994 1,246,488 2,704,482 1,008,893

$ 759,614

1918:
Jan. 25
$1,726,507 $1,782,759 $135,691 $1,480,743
Feb. 21
1,772,395 1,832,524
56,165 1,459,720
Mar. 28-29.. 1,815,704 1,874,063 104,086 1,499,400
Apr. 26..
1,827,000 1,890,945 130,668 1,497,416

L, 492,878 $1,234,934 $2,727,812 $1,016,481
L,462,627 1,314,581 2,777,208 1,037,751
L,535,367 1,452,838 2,988,205 1,118,513
[,556,303 ; 1,526,232 3,082,535 1,155,199

$ 766,278

752,361
694,989
711,875

794,773
755,550
735,746

934
2,459
6,023

1
b
o

8,000

7,999
7,978
7,895

Figures not reported separately until Jan., 1917.
Figures shown in this column represent net deposits up to and including Feb. 28, 1921, and total deposits thereafter.
NOTE.—Figures of cash reserves, Federal reserve note circulation, excess reserves, and reserve percentages for dates prior to June, 1917, have
been calculated on a basis comparable with figures published subsequent to the passage of the June 21, 1917, amendment to the Federal reserve
act, which provides that gold with Federal reserve agents may be counted as part of the bank's required reserves.
1

^
-<I

2 . — R E S E R V E S , DEPOSITS, AND N O T E CIRCULATIONS OF FEDERAL RESERVE BANKS,

1914-1924—Continued.

(Amounts in thousands of dollars)
Reserves

Deposits
F. II.
notes in
circulation

Date
Gold

Total

Government

Members*
reserve1

Net 1

May 31.,
Juno 28..
July 2 0 . .
Aug. 30..

$1,917,820
1,949,021
1,974,200
2,013,794

Sept. 27.
Oct. 2 5 . .
Nov. 29.
Dec. 27..

$2,020,813 $2,072,170 $191,023 $1,535,490 $1,007,109 $2,349,326
2 , 0 4 5 , 1 3 2 2 , 0 9 8 , 1 0 9 278,218 1,083,499 1,723,902 2 , 5 0 7 , 9 1 2
2 , 0 0 5 , 2 1 3 2 , 1 2 0 , 3 7 1 207,157 1,488,893 1,668,283 2,568,67G
2,090,274 2,146,219
63,3G7 1,587,318 1,552,892 2 , 0 8 5 , 2 4 4

1939:
Jan.
Feb.
Mar.
Apr.
May
June
July
Aug.

Total
deposit
and
F. R.
note
liability

Required
reserve

$1,975,709 $100,191 $1,440,413 $1,580,608 $1,000,968 $3,187,570 $1,195,700
2,006,109
84,535 1,557,587 1,529,819 1,722,210 3 , 2 5 2 , 0 3 5 1,224,323
2 , 0 2 9 , 3 2 9 233,040 1,435,196 1,622,870 1,870,835 3 , 4 9 3 , 7 0 5 1,316,339
2 , 0 6 6 , 9 6 2 104,729 1,478,639 1,572,898 2 , 0 9 2 , 7 0 8 3 , 0 6 5 , 0 0 0 1,387,597

Excess
reserve

Reserve
percentage

F. K.
bank note
circulation
—net
liability

780,009
781,876
712,990
679,305

62.0
61.7
58.1
50.4

8,324
10,390
11,084
20,087

$4,016,435 $1,523,218
4.231,814 1 , 6 0 6 , 5 3 !
4 , 2 3 0 , 9 5 9 1,011,309
4 , 2 3 8 , 1 3 6 1,617,010

548,058
491,038
509,002
528,009

51.0
49.0
50.0
50.0

S 35,819
58,859
8G,003
117,122

31..
28..
28..
25..

$ 2 , 1 1 2 , 1 0 0 $2,179,646 $ 64.92S
2 , 1 2 2 , 9 9 8 2 , 1 8 8 , 7 2 3 210,547
2 , 1 4 2 , 3 0 5 2 , 2 1 0 , 5 2 4 168,147
2,169,210 2,240,152
91,720

$1,693,132 $1,059,457 $2,450,729 $4,110,186 $1,501,102
1 , 6 2 0 . 9 7 2 1,790,739 2 , 4 7 2 , 3 0 7 4 , 2 0 9 , 0 4 6 1,617,781
1,631,107 1,741,425 2 , 5 2 1 , 7 7 0 4 , 2 0 3 , 2 0 1 1,618,209
1 , 6 6 4 , 3 2 0 1,752,094 2 , 5 4 9 , 5 5 2 4,301,G46 1,633,054

618,544
570,942
592,315
007,098

53.0
51.3
51.9
52.1

$129,445
131.042
145,510
158.848

29..
27..
25..
29..

$2,187,743 $2,255,106 $141,479 $1,650,118 $ 1 , 8 3 0 , 9 2 0 $2,519,292 $4,350,212 $1,648,539
2,147,784 2 , 2 1 6 , 2 5 6
73,614 1 , 7 1 3 , 0 3 0 1,750,694 2 , 4 9 9 , 1 8 0 4,249,874 1,612,415
2 , 0 9 5 , 1 5 1 2 , 1 6 1 , 0 2 3 116,038 1 , 7 1 8 , 3 9 0 1,796,561 2 , 5 0 4 , 4 9 7 4 , 3 0 1 . 0 5 8 1 , 6 3 0 , 5 9 5
2,066,788 2,135,970
54,494 1 , 7 2 9 , 9 5 0 1,629,797 2 , 5 8 0 , 6 2 9 4 , 2 1 0 , 4 2 6 1 , 6 0 2 , 6 8 1

600,507
603,841
530,42S
533,295

51.8
52.1
50.2
50.7

$108,427
177,185
193.849
219,815

$2,177,854 $ 2 , 1 8 7 , 5 0 5 $ 61,270 $1,731,413 $1,634,074 $2,655,354 $4,289,428 $1,634,068
2 , 1 3 8 , 0 0 0 2 , 2 0 5 , 5 9 2 100,405 1,833,481 1,850,518 2 , 7 5 2 , 8 7 6 4,003,394 1,748,831
2,093,041 2,159,000
98,157 1,844,434 1,889,399 2 , 8 5 2 , 2 7 7 4 , 7 4 1 , 6 7 6 1.802,200
2,078,432 2,135,530
72.357 1,7816.874 1,704,470 3 , 0 5 7 , 0 4 6 4 , 7 6 2 , 1 1 6 1,819,623

553,437
456,761
357,460
315,913

51.0
47.9
45.5
44.8

$239,451
254,933
256.793
261,039

Sept. 2 6 . .
Oct. 3 1 . .
Nov. 28.,
Dec. 26..

1920:
Jan.
Feb.
Mar.
Apr.

30..
27..
26..
30..

$2,012,656
$ 2 , 0 7 3 , 9 3 3 $ 72,974 $ 1 , 8 5 0 , 7 1 2
1 , 9 6 6 , 8 3 6 2 , 0 8 3 , 2 1 5 133,913 1,871,961
1,934,755 2,057,155
27,711 1,867,125
1,036,720 2,070,765
37,592 1,859,844

May
June
July
Aug.

28..
25...
30...
27...

SI,953,103 $2,092,496 $ 36,433
1,969,375 2,108,605
14,189
1,977,704 2,12S,640
12,167
1,971,825 2,127,827
43,510

$1,806,496 $2,850,944 $ 4 , 6 5 7 , 4 4 0 $ 1 , 7 7 2 , 6 5 0
1 , 8 8 4 , 5 7 6 3 , 0 1 9 , 9 8 4 4 , 9 0 4 , 5 6 0 1,867,594
1,772,904 3 , 0 4 8 , 0 3 9 4 , 8 2 0 , 9 4 3 1,839,731
1,812,732 3,074,555 4,887,2S7 1,804,278

301,283
215,621
217,424
200,487

44.5
42.5
42.7
42.4

$250,530
237,131
201,392
177,SSI

$ 1 , 8 5 2 , 9 1 6 $ 1 , 7 9 4 , 4 4 0 $ 3 , 1 0 7 , 0 2 1 $4,901,461 $ 1 , 8 7 0 , 8 6 2
1 , 8 3 1 , 9 1 6 1,722,223 3 , 1 1 6 , 7 1 8 4 , 8 3 S , 9 4 1 1 , 8 4 9 , 4 6 5
1 , 8 0 8 , 1 5 6 1 , 0 9 7 , 2 4 5 3 , 1 2 0 , 1 3 8 4 , 8 1 7 , 3 8 3 1,842,091
1 , 8 I S , 5 0 2 1,717,867 3 , 2 0 3 , 6 3 7 1,921,504 1 , 8 8 2 , 7 0 8

221,034
259,140
286,549
245,119

42.7
43.6
44.2
43.2

$179,1S5
185,601
192,168
200,793

4 6 , 4 9 3 $ 1 , 8 0 0 , 6 7 7 $1,658,46-1 $ 3 , 2 7 9 , 9 9 6 $ 4 , 9 3 8 , 4 6 0 $ 1 , 8 9 2 , 4 6 0
18,754 1,805,661 1,674,553 3 , 3 5 1 , 3 0 3 5 , 0 2 5 , 8 5 6 1 , 9 2 6 , 6 1 5
15,909 1 , 7 1 1 , 7 7 4 1,023,011 3 , 3 2 5 , 5 3 8 4 , 9 4 9 , 1 7 9 1,80S,489
27,639 1 , 7 4 8 , 0 7 9 1,60-1,190 3 , 3 4 4 , 0 S 6 4 , 9 1 8 , 8 7 6 1,899,311

259,134
241,423
296.821
319.822

43.0
43.1
44.4
45.4

$211,180
214,961
214,610
216,9G0

$ 2 , 1 0 3 , 6 6 0 $ 2 , 3 1 9 , 7 5 5 $ 2 8 , 6 2 7 $1,721,89/5 $ 1 , 6 5 0 , 6 0 3 $ 3 , 0 8 3 , 1 5 5 $ 4 , 7 3 3 , 8 1 8 $1,810,001 & £0S,761
2 , 1 4 8 , 0 8 5 2,3G3,475
559,550
50,828 1 , 7 0 5 , 2 5 3 1 , 6 7 0 , 0 1 0 3 , 0 4 8 , 5 5 4 4 , 7 1 8 , 5 6 4 1,803,92,
2,221,5G9 2 , 4 3 6 , 7 4 1
650,224
9 1 , 6 1 7 1 , 6 5 8 , 6 2 5 1,784,394 2 , 9 0 4 , 9 4 8 4 , 6 8 9 , 3 4 2 1 , 7 8 0 , 5 1 7
4
,
5
7
6
,
2
2
5
761,733
2,322,683 2,505,012
1,743,879
31,664 1,GGO,509 1 , 7 3 2 , 2 1 4 2 , 8 4 4 , 0 1 1

19.0
50.1
52.0
54.8'

$200,159
187,633
169,885
154,944

31...
30..
31..
31..

$ 2 , 4 0 8 , 0 5 8 $ 2 , 5 7 1 , 5 7 9 $ 3 9 , 0 8 0 $1,001,034 $1,670,624 $2,751,809 $ 4 , 4 2 2 , 4 9 3 $ 1 , 0 8 5 , 4 6 6 E 8 8 6 , 1 1 3
981,934
2,467,659 2,627,494
4 3 , 4 4 6 1 , 6 0 3 , 8 4 5 1,075,217 2 , 6 4 8 , 0 8 0 4 , 3 2 3 , 3 0 3 1 , 6 4 5 , 5 6 0
2,543,039 2,697,032
3 2 , 6 8 0 1 , 6 2 5 , 1 2 3 1,683,018 2 , 5 4 9 , 0 2 6 4 , 2 3 2 , 0 7 4 1,608,917 1 , 0 8 8 , 1 1 5
2 , 6 4 1 , 0 6 1 2 , 7 8 7 , 9 2 0 - 4 6 , 8 0 9 1,018,901 1,690,754 2 , 4 8 1 , 4 6 6 4 , 1 7 2 , 2 2 0 1 , 5 8 4 , 3 4 8 1 , 2 0 3 , 5 7 2

58.1
60.8
03.7

00.8

$ 143,706
132,568
125,046
109,864

Sept. 3 0 .
Oct. 3 1 . .
Nov. 30.
Dec. 31..

$ 2 , 7 2 8 , 3 7 2 $ 2 , 8 7 9 , 3 3 1 $ 9 8 , 5 4 0 $ 1 , 5 8 1 , 0 3 2 $1,704,807 $2,482,427 $4,187,234 $ 1 , 5 8 9 , 0 5 3 $ 1 , 2 8 9 , 6 7 8
4 3 , 0 8 0 1 , 6 5 8 , 6 2 7 1,732,898 2 , 4 2 1 , 4 2 6 4 , 1 5 4 , 3 2 4 1 , 5 7 5 , 0 8 5 1 , 3 5 9 , 8 7 5
2,791,272 2,934,960
45,913 1,670,362 1,742,830 2,360,006 4,108,836 1,556,392 1,432,750
2,840,447 2,989,142
95,951 1 , 7 5 3 , 2 1 7 1,876,082 2 , 4 0 9 , 3 9 2 4 , 2 8 5 , 4 7 4 1 , 6 2 0 , 3 8 5 1 , 3 8 9 , 8 6 7
2,874,995 3,010,252

68.8
70.6
72.7
70.2

$100,378
85,515
75,862
83,690

$ 82,810 $ 1 , 6 7 7 , 8 3 7 $ 1 , 7 9 0 , 6 8 5 $ 2 , 1 7 0 , 0 5 2 $3,960,737 $1,498,361 $1,564,344

77.2
77.1
77.1
77.8

$ 82,811
80,717
80,575
77,135

Sept. 2 4 . .
Oct. 2 9 . . .
Nov. 2 6 . .
Dec. 3 0 . . .
1921:
Jan. 3 1 . . .
Feb. 2 8 . .
Mar. 3 1 . .
Apr. 3 0 . .
May
June
July
Aug.

1922:
Jan. 3 1 . .
Feb. 2 8 . .
Mar. 31.
Apr. 2 9 . .

$1,989,835 $2,151,591
2,003,320 2,168,038
2,023,946 2,195,310
2,059,333 2,249,163

$2,908,958 $3,002,705
2,946,739 3,079,784
2,074,784 3,105,039
2,996,425 3,128,306

53,759
87,588
51,981

1,710,249
1,708,761
1,754,844

1,799,401
1,834,811
1,849,442

2,196,058
2,194,743
2,109,420

3,005,450
4,020,554
4,018,862

1,508,214
1,520,081
1,515,073

1,571,570
1,584,958
1,613,233

t*3
to

OI
CO

2 . — R E S E R V E S , DEPOSITS, AND N O T E CIRCULATION OF FEDERAL RESERVE BANKS,

Reserves

Deposits

Date
Gold

Total

Government

Members'
reserve1

Net®

F. It.
notes in
circulation

Total
deposit
and
F. 11.
note
liability

Required
reserve

to
o
o

1914-1924—Continued.

Excess
reserve

F. R.
Reserve ' bank note
percent- circulation
—net
age
liability

May 31
June 30
July 31
Aug. 31

S3,007,621 $3,130,497 $ 54,295 $1,782,004 $1,870,153 $2,141,184 $4,011,337 $1,511,027 $1,619,470
33,093 1,820,377 1,883,329 2,152,962 4,036,291 1,520,350 1,624,192
3,021,767 3 , 1 4 4 , 5 4 2
3,017,949 3,178,652
58,583 1,760,824 1,846,582 2 , 1 3 2 , 1 4 5 3,978,727 1,499,162 1,679,490
3 , 0 6 1 , 0 4 9 3,195,558
48,446 1,803,622 1,874,688 2 , 1 5 5 , 5 1 5 4,030,203 1,518,347 1,677,211

78.0
77.9
79.9
79.3

$ 70,553
67,351
61,052
53,636

Sept. 30
Oct. 31
Nov. 29
Deo. 30

$3,077,210 $3,207,494 $ 14,511 $1,857,200 $1,897,182 $2,268,652 $4,165,834 $1,571,475 $1,636,019
3,079,966 3,217,882
34,355 1,812,570 1,875,436 2.301,777 4 , 1 7 7 , 2 1 3 1,577,113 1,640,769
3,072,858 3,202,810
33,449 1,807,631 1,860,223 2,329,814 4,190,037 1,583,004 1,619,806
3,047,393 3,176,872
10,756 1,933,888 1,973,532 2 , 3 9 5 , 7 8 9 4,369,321 1,049,052 1,527,820

77.0
77.0
76.4
72.7

$ 44,005
34,961
2 ,868
2,770

S3,075,810
3,072,813
3,059,592
3,082,282

1923:
Jan. 31
Feb. 28
Mar. 31
Apr. 30

$3,227,132 $ 46,014
43,401
3,201,600
3,167,446
79,354
3,179,666
40,290

$1,913,465 $1,991,062 $2,203,701 $-1,194,763 $1,578,354 $1,6-18,778
1,887,552 1,952,317 2 , 2 4 6 , 9 4 3 4 , 1 9 9 , 2 6 0 1,582,086 1,619,514
1,862,676 1,961,651 2,247,257 4 , 2 0 8 , 9 0 8 1,585,480 1,581,966
1,864,756 1,926,109 2 , 2 3 5 , 4 3 5 4,161,544 1,568,311 1,611,355

76.9
76.2
75.3
76.4

3,105
2,645
2,431
2,286

M a y 31
June 30
July 31
Aug. 31

$3,112,106 $3,201,333 $ 28,130
33,544
3 , 0 9 5 , 2 1 7 3,194,G65
35,811
3,100,814 3 , 1 9 0 , 9 3 2
3,105,903 3,188,541
46,551

$1,899,810 $1,964,128 $2,245,829 $4,209,957 $1,585,775 $1,615,558
1,851,938 1,914,043 2 , 2 5 3 , 0 3 3 4 , 1 6 7 , 0 7 6 1,571,128 1,623,537
1,878,367 1,936,938 2 , 1 7 7 , 7 4 3 4,114,681 1,549,026 1,641,906
1,844,718 1,911,730 2,226,90S 4 , 1 3 8 , 7 2 8 1,559,905 1,628,636

76.0
76.7
77.0
77.0

1,724
1,425
1,570
520

Sept. 30
Oct. 31
Nov. 30
Dec. 31

$3,112,717 $3,189,598 $ 50,304 $1,839,142 $1,912,460 $2,267,620 $4,180,080 $1,576,409 $1,613,189
3,111,078 3,191,145
40,334 1 , 8 9 5 , 2 6 5 1 , 9 5 8 , 6 6 0 2 , 2 2 4 , 8 6 5 4 , 1 8 3 , 5 2 5 1,575,475 1,615,670
32,501 1,864,794 1,919,214 2 , 2 5 2 , 4 9 2 4 , 1 7 1 , 7 0 6 1,572,722 1,612,555
3,101,158 3,185,277
3,080,032 3,168,934
38,074 1,898,315 1,959,579 2,246,673 4 , 2 0 6 , 2 5 2 i 1,584,522 , 1,584,412

76.3
76.3
76.4
75.3

t*J
§

485
523
498
471

t-n

S
&a

S
S
55

I
^
^
o

1924:
Jan. 31
Feb. 29
Mar. 31
Apr. 30

$3,142,575
3,119,652
3,094,OSS
3,120,389

$3,261,161
3,220,804
3,193,887
3,222,609

$ 37,582 $1,950,702 $2,010,322 $2,026,469 $4,036,791 $1,514,201 $1,746,960

May 31
June 30
July 31
Aug. 30

$3,112,029
3,128,176
3,143,065
3,089,127

$3,205,513
3,238,803
3,247,113
3,16S,536

$ 47,477 $1,906,093 $1,974,807 $1,911,440 $3,886,247 $1,455,759 $1,749,754

Sept
Oct.
Nov.
Dec.

30
31
29
31

43,095
99,581
32,503

43,251
45,464
36,135

435
402
383
343

82.5
83.7
82.6
81.4

319

1,790,823
1,782,693
1,718,195

$2,197,101 $1,745,395 $3,942,490 $1,467,142 $1,666,008
2,194,827 1,799,104 3,993,931 1,487,833 1,629,992
2,208,728 1,874,833 4,083,561 1,522,988 1,587,021
2,310,668 1,862,002 4,172,730 1,553,557 1,493,497

79.5
78.1
76.2
73.0

1,944,095 2,010,317
2,090,821 2,168,124
2,059,517 2,128,220

$3,046,723 $3,133,210 $ 56,254 $2,110,949
26,976 2,138,452
3,036,705 3,117,825
3,025,316 3,110,009
36,693 2,142,820
2,936,533 3,047,054
51,197 2 t 220,436

80.8
80.4
79.7
82.0

1,900,149 1,964,451
1,885,237 2,006,372
1,944,952 2,005,381

2,042,665 4,007,110
2,002,785 4,009,157
1,926,013 3,931,394

1,860,923 3,871,240
1,763,947 3,932,071
1,763,659 3,891,879

1,504,624
1,503,344
1,472,289

1,447,980
1,464,420
1,450,341

1,716,180
1,690,543
1,750,320

APPENDIX D
WEEKLY CONDITION STATEMENT OF FEDERAL
RESERVE BANKS
RESOURCES AND LIABILITIES OF THE T W E L V E FEDERAL

RESERVE

BANKS COMBINED
(In thousands of dollars)
Sept. 24, 1924;Sept. 17, 1924jSept. 26, 1023
Resources
Gold with Federal reserve agents
Gold redemption fund with U. S. Treasury
Gold held exclusively against Federal
reserve notes
Gold settlement fund with Federal Reserve
Board
Gold and gold certificates held by banks
Total gold reserves
Reserves other than gold
Total reserves
Non-reserve cash
Bills discounted:
Sec. by U. S. government obligations
Other bills discounted
Total bills discounted
Bills bought in open market
U. S. government securities:
Bonds
Treasury notes
Certificates of indebtedness
Total U. S. government securities
All other earning assets
Total earning assets
5 per cent Redemption fund—Federal reserve
bank notes
Uncollected items
Bank premises
All other resources
Total resources
Liabilities
Federal reserve notes in actual circulation
Federal Reserve bank notes in circulation—net
Deposits:
Member bank—Reserve account..
Government
Other deposits
Total deposits
Deferred availability items
Capital paid in
Surplus
All other liabilities
Total liabilities
Ratio of total reserves to deposit and Federal
reserve note liabilities combined, percent.
Contingent liability on bills purchased for foreign correspondents

262

$2,031,406
34,686
$2,066,092

$2,038,632
36,638
$2,075,270

$2,061,965
53,328
$2,115,293

603,448
399,623
$3,069,163
$
86,852
$3,156,015
$
43,191

$
$

89,515
170,348
259,863
91,901

5
S
$

37,061
397,753
139,782
574,596
1,995
928,355

611,304
394,919
$3,081,493
$
83,919
$3,165,412
$
44,543

$
$

83,601
174,366
257,067
99,212

$
$
$

35,951
397,863
184,915
618,729
6,950
982,858

641,647
359,664
$3,116,604
$
76,094
$3,192,698
$
74,248

$
$

402,141
459,867
862,008
172,124
21,462
66,275
4,148

$
91.885
$
317
$1,126,334
$

28
616,211
55,023
13,717
$5,078,259

598,345
60,026
26,211
$4,812,143

775,917
59,672
26,464
$5,054,866

$1,729,859

$1,734,666

$2,247,830
492

2,120,331
46,926
28,625
CO i n : ceo

2,261,255
6,339
29,583
$2,297,177
$ 678,050
112,032
220,915
12,026
t ; A* . Ortfl
93,054,ooo

1,851,790
56,279
22,004

540,929
111,976
220,915
12,582
k
t•i1 l BIO
O l i , Iut *oj

80.4
$

19,692

91,MoutVio
$
550,527
109,657
218,369
21,311
ft) j U / O t * " "
76.4

78.5
$

20,959

33,794

RESOURCES AND LIABILITIES OF THE FEDERAL RESERVE B A N K S AT CLOSE OF BUSINESS, SEPTEMBER 2 4 ,

1024

(In thousands of dollars)
Federal Reserve Bank of

Boston

Retouree*

New York

Philadelphia

Cleveland

Richmond

Attanta Chicago

St.
Louis

Minneapolis

Kansas
City

Dallas

San
Francisco

Total

Gold with Federal reserve a#cnta
569,854 $183,267 $216,939 $ 51,473 $128,861 $226,345 $ 54,308 $ 56.09S $ 61,595 $ 43,303 $227,932 $2,031,406
1211,431
2,234
1,967
6,054
5,904
2,793
3,647
781
3,769
Gold redemption fund with U. S. Treaa.
34,656
2,704
1,309
1,810
1,624
Gold held eiclusively against
$213,665 $ 575,908 $189,261 $218,906 $ 53,283 $131,651 $229,992 $ 58,077 $ 56,879 $ 64,299 $ 44,927 $229,241 $2,066,092
Federal reserve notes
Gold settlement fund with Federal
156,782 f 31,220 $ 72,862 $ 33,603 $ 18,065 $129,386 $ 16,617 $ 13,532 $ 32,711 $ 10,392 $ 36,174 $ 603,448
$ 52,104
Reserve Board
177,740 27,126
17,930 13,348
Gold and gold certificates held by banks. 21,665
399,623
8,124
9,780
3,613
6,952 33,657
7,563 72,125
$287,434 $ 910,430 $247,607 $309,698 $100,234 $157,282 $431,503 $ 84,474 $ 78,535 $100,623 $ 62,271 $299,072 $3,069,163
Total gold reserves
2,724
8,129
17,518
4,785 $ 4,274
8,885 $ 10,120 $ 14,939 $ 1,261 $ 2,470 $ 8,480 $ 3,267 $
Reserves other than gold
86,852
$295,563
927,948 $250,331 $314,483 $104,508 $166,167 $441,623 $ 99,413 $ 70,796 $103,093 $ 70,751 $302,339 $3,156,015
Total reserves
' 3,999
13,709 ' 1,246 * 2,595 ~ 2,261 " 3,550 $ 5,111 $ 2,774 $
Non-reserve cash.
43,191
605 $ 2,543 $ 1,679 $ 3,029 $
Bills discounted:
89,515
9,475
17,821 11,227 21,995
5,385
2,602
5,778
Sec. by U. S. government obligations.
625
4,311
1,336
303
8,657
28,939 22,994 20,240 18,932 10,851
17,401
170,348
6,297
4,751
Other bills discounted
8,990 11,451 12.814
35,222 $ 17,524 $ 28,6 $ 38,414 $ 25,596 $ 28,897 $ 23,243 $ 11,154 $ 9,615 $ 12,787 $ 18,199 $ 259,863
$ 10,529 $
Total bills discounted.....
Bills bought in open market
91,901
3,693 $ 1,674 $ 3,626 $ 3,862 $ 9,291 $
40,084 $ 1,801 $ 8,301
$ 2,304
$ 8,376 $
U. 8. Government securities:
1,625
1,119
37,061
1,191
9,645
1,834
5,115
996
749
Bonds..,.
4,902
8,246
600
1,039
397,753
2,812
1,375 53,143 12,715 15,033 24,305 19,469 42,056
Treasury notes
136,394 25,426 38,229
26,796
139,782
990
6,492 17,163
515 17,769
Certificates of indebtedness....
5,277 17,398
46,020
5,268
8,407
3.454
11,029
Total U. S. government securities $ 38,864 $ 187,316 $ 31,452 $ 60,742 $ 4,993 $ 2,886 $ 80,557 $ 16,7 $ 28,547 $ 34,337 $ 27,795 $ 60,338 $ 574,596
1,995
245 $ 1,750
All other earning assets
Total earning assets
$ 57,769 $ 262,867 $ 52,527 $ 97,726 $ 43,407 $ 30,786 $118,343 $ 43,705 $ 41,375 $ 47,578 $ 44,444 $ 87,8 $ 928,355
Uncollected items
$ 50,676 $ 133,330 $ 55,259 $ 54,865 $ 54,9 $ 26,787 $ 75,129 $ 30,122 $ 14,781 $ 36,922 $ 27,420 $ 38,089 $ 598,345
[,528
2,993
4,595
1,912
60,026
2,524
3,067
8,264
9,130
2,875
1,112
Bank premises
4,312
16,714
188
5,129
1,050
156
3,511
26,211
219
1,878
4,665
146
8,325
246
All other resources
$144,679
$195,781
$178,694
$207,857
$232,043
$649,168
$149,717
$439,017
$4,812,143
$360,721
$479,018
$412,465
$l,362,tt83
Total Resources

RESOURCES AND LIABILITIES OF THE FEDERAL RESERVE BANKS AT CLOSE OF BUSINESS, SEPTEMBER 2 4 , 1 9 2 4 — C o n t i n u e d .
(In thousands of dollars)
Federal Reserve Bank of

Boston

New York

Philadelphia

Cleveland

Richmond

Liabilities
Federal reserve notes in actual circulation$198,035 $ 302,733 1150,984 $210,792 $ 71,434 $133,955 $216,692
Deposits:
$138,458 $ 827,403 $125,818 $176,819 S 03,077 $ 59,496 $313,005
Member bank—Reserve accouut
3,106
3,045
2,172
3,826
3,397
10,816
Government
5,118
1,365
374
249
1,538
186
18,132
Other deposits
100
$140,879 % 856,411 $129,237 $181,290 $ 66,660 $ 64,714 $318,369
Total deposits
$ 48,898 $ 111,992 $ 49,795 $ 49,578 $ 51,261 S 18,457 $ 67,072
Deferred availability items
5,883
4,579 15,197
30,201 10,392 12,705
8,005
Capital paid in
8,950 30,426
11,072
59,929 19,927 23,691
10,390
Surplus
962
386
1,388
1,717
258
1,412
947
All other liabilities
$412,405
$479,018
$1,302,983
$232,043
$360,721
$649,168
$207,857
Total Liabilities
Ratio of total reserves to deposit and
Federal reserve note liabilities combined, per cent
Contingent liability on bills purchased
for foreign correspondents

87.2

80.1
$

5,181 $

89.3
1,9S5 «

80.2
2,394 $

St.
Louis

Atlanta Chicago

75.7

83.6

1,167 $

tfOl $

Minneapolis

Kansas
City

San
Francisco

Dallas

Total

f 55,960 $ 65,097 $ 64,782 $ 51,199 $208,196 $1,729,859
$ 72,728 $ 50,130 $ 80,923 $ 51,973 $160,441
4,324
2,243
3,673
2,950
2,256
4,474
818
327
778
284
$ 76,496 $ 52,713 $ 83,944 $ 55,930 $169,239
$ 30,517 $ 14,074 t 32,575 $ 29,053 $ 37,057
8,064
4,147
5,118
3,324
4,361
7,577 15,301
10,072
7,484
9,406
1,160
1,811
G23
531
1,387
$178,694 $144,679 $195,781 $149,717 $439,017

82.5
3,050 1

75.1

67.7

1,003 $

737 S

CO. 3
941 $

$2,120,331
46,U2G
28,625
$2,195,882
$ 540,929
111,976
220,915
12,582
$4,812,143

S0.1

66.0
778 $

80.4

1,555 $

19,692

Federal reserve notes outstanding and in actual circulation
$220,06S t 610,35S $198,714 $231,232 $ 78,711 $150,820 $231,278 $ 63,96S $ 68,022 $ 72,118 $ 57,734 $247,396 $2,236,419
Federal reserve notes outstanding
506,560
8,008
6,535 39,200
2,925
7,330
22,033
7,277 16,865 14.5S6
313,625 47,730 20,440
Federal reserve notes held by banks—
Federal reserve notes in actual circulation$198,035 $ 302,733 $150,9S4 $210,792 $ 71,434 $133,955 $216,692 $ 55,960 $ 05,097 % 04,782 $ 51,199 $208,196 $1,729,859
Distribution of bills and U. S. certificates of indebtedness by maturities

Bills discounted
Bills bought in open market.
Certificates of indebtedness..

Within 15 days

16 to 30 days

31 to 60 days

61 to 90 days

$143,331
20,064

$30,569
13,593

$48,859
24,270
3

$28,417
27,910
76,282

From 91 days to
6 months
$ 8,266
6,004
19,980

Over 6 months
$

421

43,517

Total
S 259,863
91,901
139,782

to
OS

APPENDIX E
AGRICULTURAL CREDIT FACILITIES UNDER THE
FEDERAL RESERVE ACT
(Statement Issued by the Federal Reserve Board in August, 1923)
In view of the interest attaching to the added facilities for extending
credit to farmers, established by the agricultural credits act of 1923 with the
amendments to the Federal reserve act which it contained, there has been
prepared the following summary in nontechnical language of the ways in
which credit may be extended for agricultural purposes under the provisions
of the amended Federal reserve act and the regulations issued by the Federal
Reserve Board.
How Credits Are Extended.—The operations of Federal reserve banks in
extending credit to agricultural interests are regulated by the Federal
reserve act with its various amendments. Neither farmers nor other individuals can obtain credit directly from the Federal reserve banks, but must
apply for loans to their own local banks, which, if they are members of the
Federal reserve system, may in turn rediscount with the Federal reserve
bank the notes, drafts, or bills of exchange required from customers. The
Federal reserve act places certain limitations on the character of paper
that the reserve banks may discount and places upon the Federal Reserve
Board the duty of issuing regulations putting into effect the provisions of
the law. Following is a brief summary of the provisions of the act and of
the board's regulations with special reference to the credit facilities offered
to agricultural interests.
General Character of Eligible Paper.—The character of the paper which
Federal reserve banks may discount is generally defined in section 13 of the
Federal reserve act. This provision of law authorizes Federal reserve banks
to discount notes, drafts, and bills of exchange issued or drawn for agricultural, industrial, or commercial purposes, or the proceeds of which have
been used or are to be used for such purposes. The law does not permit the
reserve banks to discount paper the proceeds of which are (1) to be loaned
to some other borrower, or (2) to be used for permanent investment, or (3)
for speculation. Exceptions to (1) in favor of certain kinds of agricultural
loans are discussed later.

Agricultural Paper in General.—Agricultural paper is given by the act an
important advantage over commercial paper, since the latter can be discounted only for a period not exceeding 90 days, while paper which is issued
or drawn for an agricultural purpose, or is based on live stock, may now be

265

266

FEDERAL

RESERVE

SYSTEM

IN OPERA TION

discounted by Federal reserve banks even though it has nine months to
run from the date of discount. The Federal Reserve Board has made
appropriate provision for this in its new regulations in which the definition
of agricultural paper has been clarified and broadened so as to incorporate
the latest and most liberal principles adopted by the board in determining
what constitutes agricultural paper. Nine months' paper will thus be eligible for discount if the proceeds have been or are to be used by a farmer in any
one or more of the steps of planting, cultivating, harvesting, or marketing
a crop, or of breeding, fattening, or marketing live stock, and the Federal
Reserve Board has held that the marketing of crops or live stock includes
carrying them for a reasonable time in order to market them in an orderly
manner, instead of dumping large quantities on the market at one time in
order to get money with which to meet current expenses. Under this provision of the law, member banks which have loaned money for nine months
to wheat growers and other farmers for the purpose of raising, carrying, and
marketing their crops, will be able to rediscount the farmers' notes with the
Federal reserve banks.
Paper of Cooperative Marketing Associations.—In recent years cooperative marketing associations have been coming more and more into prominence as agencies that enable the farmer to market his crops to better
advantage. The service which such associations can render to agriculture is
clearly recognized and the Federal reserve act makes special provisions for
the extension of credit to such associations. Under the act, as amended by
the agricultural credits act of March 4,1923, cooperative marketing associations can issue paper which is eligible for discount with maturities up to 9
months, if the proceeds of the paper are advanced to members of the association for an agricultural purpose, or are used to pay members for agricultural
products delivered to the association, or finance the association in packing,
preparing for market, or marketing products grown by its members. Paper
of cooperative marketing associations by which money is borrowed to be in
turn loaned to individual members of the association would ordinarily be
ineligible for discount, but it was felt that the ability to issue such paper and
have it available for discount would be of such assistance in the cooperative
marketing movement that a special exception to the general rule is made
in the law. The law also specifically defines as agricultural certain classes
of paper of cooperative marketing associations which otherwise would be
construed as commercial paper. This provision makes the paper in question
eligible for discount with Federal reserve banks for a maximum period of 9
months, instead of 90 days.
Sight and Demand Drafts.—Another feature of the law which should prove
of great assistance to the agricultural interests is the new provision making
sight and demand drafts eligible for discount under certain circumstances.
Under the original act such paper would be ineligible for discount because
it has no definite maturity. It appears, however, that it is the custom of
many member banks during crop-moving periods to discount large volumes
of sight drafts secured by bills of lading covering the shipment of wheat,
cotton, or other agricultural products. These drafts, although having no

APPENDIX

267

definite maturity, arc usually paid with great promptness, and actually
constitute a liquid and desirable form of paper. At the suggestion of the
Federal Reserve Board an amendment was made to the Federal reserve
act by the agricultural credits act of March 4, 1923, permitting Federal
reserve banks to discount sight or demand drafts drawn to finance the domestic shipment of nonperishable, readily marketable staples and secured by
bills of lading or similar shipping documents conveying or securing title to
such staples. In order to assure the liquidity of the Federal reserve banks'
assets it is provided that such paper must be presented for payment with
reasonable promptness and in no event may a Federal reserve bank hold
such paper longer than 90 days.
Factors1 Paper.—The law as recently amended also provides that notes,
drafts, and bills of exchange of factors for the purpose of making advances to
producers of staple agricultural products in their raw state shall be eligible
for discount. Under normal circumstances, paper the proceeds of which
are loaned to some other borrower would be ineligible for discount, but this
kind of factors' paper may now be discounted with maturities up to 90 days.
This facility should prove of much assistance in financing agricultural production, because in addition to borrowing from their banks, farmers can also
borrow from their factors who will be the more ready to lend on account of
the privilege given them of making notes and drafts which may be discounted
by Federal reserve banks.
Bankers' Acceptances.—In addition to the ordinary classes of credit
instruments—that is, notes, drafts, and bills of exchange—a type of paper
known as bankers' acceptances has recentlj^ been coming into more common
use as a means of financing agricultural operations, both by individual
farmers and more particularly by cooperative marketing associations.
Bankers' acceptances are drafts or bills of exchange drawn on and accepted
hy a bank or trust company or other banking institution, and the law authorizes Federal reserve banks to discount bankers' acceptances under certain
conditions. For this purpose such acceptances must be indorsed by a
member bank and must be drawn to finance the importation or exportation
of goods, or the storage of readily marketable staples. Acceptances which
are drawn to finance the domestic shipment of goods or the storage of readily
marketable staples must also be secured by shipping documents or warehouse
receipts conveying or securing title to the goods or staples in question.
With regard to bankers' acceptances, the law also discriminates in favor of
those drawn to finance agricultural operations by making them eligible
for discount with maturities up to six months, provided they are secured by
warehouse receipts conveying title to readily marketable staples, while
bankers' acceptances drawn for other purposes may be discounted by
Federal reserve banks with maturities up to 90 days only. Thus individual
farmers and cooperative marketing associations can obtain funds to finance
their operations by drawing on their banks and discounting the accepted
drafts with other banks. This additional means of getting credit is a very
valuable one, because bankers' acceptances are normally the best type of
credit instrument and carry the lowest rate of interest.

268

FEDERAL

RESERVE

SYSTEM

IN OPERA TION

Admission of Small Banks to Membership.—With a view to increasing
the availability of credit through the Federal reserve banks, the agricultural
credits act of March 4, 1923, contained a provision designed to enable many
smaller banks, which formerly had insufficient capital to become member
banks, to join the Federal reserve system. Under this provision banks
having 60 per cent of the capital normally required as a qualification for
membership may join the system under certain conditions relating to the
increase of their capital within a reasonable time, and it is hoped that many
of the small country banks will take advantage of this provision and thereby
put themselves in a position to offer their customers the benefits of membership and the increased credit facilities afforded by the rediscount privilege.
Open Market Purchases of Paper.—In addition to the discount of agricultural paper for member banks, Federal reserve banks are also enabled
to extend credit facilities to the agricultural interests by means of purchasing
such paper in the open market. Under section 14 of the Federal reserve act
the power is given to Federal reserve banks to purchase in the open market
bankers' acceptances and bills of exchange of the kinds and maturities made
eligible for discount. By virtue of this provision Federal reserve banks may
purchase, as well as discount, bills of exchange drawn for agricultural
purposes and having maturities up to nine months, and secured bankers'
acceptances drawn to finance agricultural operations with maturities up to
six months.
Five-year Loans on Farm Land.—The Federal reserve act also makes
provision for long-time borrowing on real-estate security. Section 24 of the
act authorizes national banks to make loans for periods up to five years when
secured by improved and unencumbered farm land, and for periods up to
one year when secured by improved and unencumbered real estate. Naturally, land thus used as security for loans must be located within reasonable
proximity to the lending bank—the exact limits are prescribed in the law—
and it is further provided, as a matter of sound banking, that these loans
may not exceed 50 per cent of the actual value of the property offered as
security. The law also places a reasonable limitation on the aggregate
amount of farm land and real estate loans which national banks may have
outstanding, for otherwise they might tie up too much of their funds in
long-time nonliquid loans and not be able to meet the current requirements
of their other borrowers. Thus, farmers who need long-time loans can
borrow for five years from national banks in their locality on the security of
their farm lands, and the Federal Reserve Board has provided in its regulations that at maturity such loans may be renewed for other five-year periods,
although a national bank must not obligate itself in advance to make a
renewal.
Other Credit Facilities.—The above gives a brief description of the more
important provisions of the Federal reserve act which provide for the
extension of credit facilities to the agricultural interests. There are also
certain other provisions dealing with the relations between the Federal
reserve banks and the new intermediate credit institutions which were set
up by the agricultural credits act of 1923, and by virtue of which Federal

APPENDIX

269

reserve banks, through discounting and open-market purchases, are enabled
to extend certain additional credits to agriculture.
Agricultural Loans by National Banks.—Attention should also be called to
the provisions of section 5200 of the Revised Statutes. This is not part of
the Federal reserve act and applies only to national banks, but it has an
important bearing on the amount of credit which farmers and cooperative
marketing associations may obtain from national banks. Section 5200 of
the Revised Statutes contains the limitation on the amount of money which
a national bank may lend to any one person. This is, in general, 10 per
cent of the lending bank's capital and surplus, with certain classes of paper
excluded as not being considered loans of money. An exception is made,
however, with respect to loans on readily marketable nonperishable staples,
including live stock. Such loans may be made to any one person up to 25
per cent of the lending banks' capital and surplus, provided the loans over
and above 10 per cent are represented by notes, secured by shipping documents or warehouse receipts covering staples or live stock. National banks
may also discount in unlimited amounts certain kinds of paper classified
broadly as " bills of exchange drawn in good faith against actually existing
values." Section 5200 of the Revised Statutes includes in this broad classification drafts secured by shipping documents conveying or securing title
to goods shipped, demand obligations when secured by documents covering
commodities in process of shipment, and bankers' acceptances of the kinds
described in section 13 of the Federal reserve act, so that national banks may
extend credit on these classes of paper without limitation. These provisions,
which were inserted on the recommendation of the Federal Reserve Board,
give broad powers to national banks to extend accommodation on the
security of farm products and live stock and have proven of great value to
farmers and cattlemen in their financing problems.
The Federal Reserve Board's Part.—A discussion of the provisions of
the law in this connection would not be complete without reference to the
functions of the Federal Reserve Board, in construing and administering the
law. There is not space here for a critical study of the board's rulings and
regulations with respect to agricultural credits, but it can be stated with
emphasis that the board has so construed and administered the law as to
improve in the highest possible degree the credit standing and economic
position of the agricultural interests, placing at their disposal, through its
discounts for member banks and its open-market operations, the vast
resources of the Federal reserve system to the fullest extent permitted by the
law and by the principles of sound banking.

APPENDIX F
RICHMOND

CASE

DECISION OF SUPREME COURT OF T H E
STATES, JUNE 11, 1923

UNITED

FARMERS AND MERCHANTS BANK OF MONROE, N . C . , ET AL., PETITIONERS,
v. FEDERAL RESERVE B A N K OF RICHMOND,

VA.

[On writ of certiorari to the Supreme Court of the State of North Carolina!
Mr. Justice BRANDEIS delivered the opinion of the court.
The Legislature of North Carolina provided by section 2 of chapter 20,
Public Laws of 1921, entitled " A n act to promote the solvency of State
banks;'*
" T h a t in order to prevent accumulation of unnecessary amounts of currency in the vaults of the banks and trust companies chartered by this State,
all checks drawn on said banks and trust companies shall, unless specified
on the face thereof to the contrary by the maker or makers thereof, be payable at the option of the drawee bank, in exchange drawn on the reserve
deposits of said drawee bank when any such check is presented by or through
any Federal reserve bank, postoffice, or express company, or any respective
agents thereof."
Section 1 authorizes banking institutions chartered by the State to charge
a fee not in excess of one-eighth of one per cent on remittances covering
checks, the minimum fee on any remittance therefor to be ten cents. Section 4 exempts from the operation of Sections 1 and 2 all checks drawn in
payment of obligations to the Federal or the State government. Whether
this statute conflicts with section 13 of the Federal reserve act (December
23, 1913, c. 6, 38 Stat. 251) 263; as amended September 7, 1916, c. 461,
39 Stat.752; June 21, 1917, c. 32, section 4, 40 Stat. 232, 234) or otherwise
with the Federal Constitution is the question for decision.
The legislation arose out of the effort of the Federal Reserve Board to
introduce in the United States universal par clearance and collection of
checks through Federal reserve banks. See American Bank & Trust Co.
v. Federal Reserve Bank of Atlanta, 25G U. S. 350. The Federal Reserve
Bank of Richmond serves the fifth Federal Reserve District which includes
North Carolina. Upon the enactment of this statute the bank gave noticc

270

APPENDIX

271

that it considered the legislation void under the Federal Constitution; that,
when presenting checks to North Carolina State banks for payment over the
counter, it would refuse to accept exchange drafts on reserve deposits as
required by section 2; and that it would return as dishonored checks for
which only exchange drafts had been tendered in payment. Some checks
were returned thus dishonored; and to enjoin such action, this suit was
brought in a court of the State by the Farmers and Merchants Bank of
Monroe and eleven other State banks. Two hundred and seventy-one more
joined later as plaintiffs. So far as appears, none of them was a member of
the Federal reserve system or was affiliated with it. The trial court granted
a perpetual injunction. The Supreme Court of the State reversed the
decree, 183 N. C. 546; and the case is here on writ of certiorari, 261 U. S.—.
Defendant admits that, if the North Carolina statute is constitutional,
plaintiffs are entitled to an injunction.
To understand the occasion for the statute, its operation and its effect, the
applicable banking practice must be considered.1 Par clearance does not
mean that the payee of a check who deposits it with his bank for collection
will be credited in his account with the face of the check if it is collected.
His bank may, despite par clearance, make a charge to him for its service
in collecting the check from the drawee bank. It may make such a charge
although both it and the drawee bank are members of the Federal reserve
system; and some third bank which aids in the process of collection may
likewise make a charge for the service it renders. Such a collection charge
may be made not only to member banks by member banks, National or
State, but it may be made to member banks also by the Federal reserve
banks for the services which the latter render. The collection charge is
expressly provided for in section 16 of the Federal reserve act (38 Stat.
268) which declared that:
" T h e Federal Reserve Board shall, by rule, fix the charges to be collected
by the member banks from its patrons whose checks are cleared through the
Federal reserve bank and the charge which may be imposed for the service
of clearing or collection rendered by the Federal reserve bank."
Par clearance refers to a wholly different matter. It deals not with
charges for collection, but with charges incident to paying. It deals with
exchange. Formerly, checks, except where paid at the banking house over
the counter, were customarily paid either through a clearing house or by
remitting, to the bank in which they had been deposited for collection, a
draft on the drawee's deposit in some reserve city. For the service rendered
by the drawee bank in so remitting funds available for use at the place of
the deposit of the check, it was formerly a common practice to make a
small charge, called exchange, and to deduct the amount from the remittance.
1 See Annual Reports of the Federal Reserve Board, 1914, pp. 19, 20,174; 1915, pp. 14-17;
1916, pp. 9—12; Regulation I, Series of 1916, p. 169; 1917, pp. 23, 24; Regulation J, genes of
1917, 181-183; 1918, pp. 74-77; 204-206; 810, 811, 817, 821; 1919, pp. 40-44; 222-228; 1920,
PP. 63-09; 1921, 68-73; 228-230; Letter from the Governor of the Federal Reserve Board of
January 20, 1920f Senate Document No. 184, 66th Congress, 2d session; also "Par Clearance
of Checks," by C. T. Murchison, 1 No. Car. Law Review 133.

272

FEDERAL

RESERVE

SYSTEM

OPERA

TION

This charge of the drawee bank the Federal Reserve Board planned to eliminate and, in so doing, to concentrate in the twelve Federal reserve banks the
clearance of checks and the accumulation of the reserve balances used for
that purpose. The board began by efforts to induce the banks to adopt
par clearance voluntarily. 1 The attempt was not successful. The board
then concluded to apply compulsion. Every national bank is necessarily
a member of the Federal reserve system; and every State bank with the
requisite qualifications may become such. Over members the board has
large powers, as well as influence. The first step in the campaign of compulsion was taken in the summer of 1916, when the board issued a regulation
requiring every drawee bank, which is a member of the Federal reserve
system to pay without deduction, all checks upon it presented through the
mail by the Federal reserve bank of the district. The operation of this
requirement was at first limited in scope by the fact that the original act
(section 13) authorized the reserve banks to collect only those checks which
were drawn on member banks and which were deposited by a member bank
or another reserve bank or the United States. Few of the many State
banks had then elected to become members. In September, 1916, section
13 was amended so as to authorize a reserve bank to receive for collection
from any member (including other reserve banks) also checks drawn upon
nonmember banks within its district. Thereby, the Federal Reserve
Board was enabled to extend par clearance to a large proportion of all checks
issued in the United States. But the regulation (J) then issued expressly
provided that the Federal reserve banks would receive from member banks,
at par, only checks on those of the nonmember banks whose checks could
be collected by the Federal reserve bank at par. It was recognized that
nonmembers were left free to refuse assent to par clearance. By December
15, 1916, only 37 of the State banks w ithin the United States, numbering
about 20,000, had become members of the system; and only 8,065 of the
State banks had assented to par clearance.
Reserve banks could not, under the then law, make collections for nonmembers. It was believed that if Congress would grant Federal reserve
banks permission to make collection also for nonmembers, the board could
offer to all banks inducements adequate to secure their consent to par
clearance. A further amendment to section 13 was thereupon secured by
act of June 21, 1917, c. 32, section 4, which provided, among other things,
that Federal reserve banks:
"Solely for the purposes of exchange of or collection, may receive from
any nonmember bank . . . deposits of checks . . . payable upon presentation: P r o v e d , Such nonmember bank . . . maintains with the Federal reserve bank of its district a balance sufficient to offset the items in
transit held for its account by the Federal reserve bank."
T o this provision, which embodied the legislation proposed by the Federal
Reserve Board, there was added, while in the Senate, another proviso, relating to the exchange charge, now known in a modified form as the Hardwick
amendment, which declares:
iSee Report, Federal Reserve Board, 1915, pp. 14-17; ibid, 1916, pp. 9-11.

APPENDIX

273

" T h a t nothing in this or any other section of this act shall be construed as
prohibiting a member or nonmember bank from making reasonable charges,
to be determined and regulated by the Federal Reserve Board, but in no case
to exceed 10 cents per $100 or fraction thereof, based on the total of checks
and drafts presented at any one time, for collection or payment of checks and
drafts and remission therefor by exchange or otherwise; but no such charges
shall be made against the Federal reserve banks."
Thus a Federal reserve bank was authorized to receive for collection checks
from nonmembers who maintained with it the prescribed balance; and
strenuous efforts were then made to induce all State banks to so arrange.
But the law did not compel State banks to do this. Many refused; and they
continued to insist on making exchange charges. On March 21, 1918, the
Attorney General, 31 Ops. Atty. Gen. 245, 251, advised the President:
" T h e Federal reserve act, however, does not command or compel these
State banks to forego any right they may have under the State laws to make
charges in connection with the payment of checks drawn upon them. The
act merely offers the clearing and collection facilities of the Federal reserve
banks upon specified conditions. If the State banks refuse to comply with
the conditions by insisting upon making charges against the Federal reserve
banks, the result will simply be, so far as the Federal reserve act is concerned,
that since the Federal reserve banks cannot pay these charges they cannot
clear or collect checks on banks demanding such payment from them."
The Federal Reserve Board and the Federal reserve banks were thus
advised that they were prohibited from paying an exchange charge to any
bank. But they believed that it was their duty to accept for collection any
check on any bank; and that Congress had imposed upon them the duty of
making par clearance and collection of checks universal in the United
States. So they undertook to bring about acquiescence of the remaining
State banks to the system of par clearance.1 Some of the nonassenting
State banks made stubborn resistance.2 To overcome it the reserve banks
held themselves out as prepared to collect at par also checks on the State
banks which did not assent to par clearance. This they did by publishing
a list of all banks from whom they undertook to collect at par, regardless
of whether such banks had agreed to remit at par or not. This resulted
in drawing to the Federal reserve banks for collection the large volume of
checks which theretofore had come to the drawee bank by mail from many
sources and which had been paid by remittances drawn on the bank's balance
in some reserve city. If a State bank persisted in refusal to remit at par,
the reserve banks caused these checks to be presented, at the drawee bank,
1 North Carolina was placed on the par list on November 15, 1920.
There were on January 1, 1921, in the United States, 30,523 banks, State and national. Of these, 1,755 State
banks had refused to enter the par list. About 250 of the banks so refusing were in North
Carolina. During the year 1921 the number which refused to consent to par clearance
increased to 2,353. Annual Report of Federal Reserve Board, 1921, p. 71.
a See American Bank <fe Trust Co. v. Federal Reserve Bank of Atlanta, supra; Brookings
State Bank v. Federal Reserve Bank of San Francisco, 277 Fed. 430; 281 Fed. 222; Farmers
& Merchants Bank of Catlettsburg, Ky., v. Federal Reserve Bank of Cleveland, 286 Fed.

610.

274

FEDERAL

RESERVE

SYSTEM

IN OPERA TION

for payment in cash over the counter. The practice adopted by the reserve
banks would, if pursued, necessarily subject country banks to serious loss of
income. It would deprive them of their income from exchange charges; and
it would reduce their income-producing assets by compelling them to keep in
their vaults in cash a much larger part of their resources than theretofore.
That such loss must result was admitted. That it might render the banks
insolvent was clear. But the Federal reserve banks insisted that no alternative was left open to them, since they had to collect the checks and were
forbidden to pay exchange charges. The State banks denied that the
Federal reserve banks were obliged to accept these checks for collection;
and insisted that Federal reserve banks should refrain from accepting for
collection checks on banks which did not assent to par clearance.
It was to protect its State banks from this threatened loss, which might
disable them, that the legislature of North Carolina enacted the statute
here in question.1 It made no attempt to compel the Federal reserve bank
to pay an exchange charge. It made no attempt to compel a depositor to
accept something other than cash in payment of a check drawn by him.
It merely provided that, unless the drawer indicated by a notation on the
face of the check that he required payment in cash, the drawee bank was at
liberty to pay the check by exchange drawn on its reserve deposits. Thus
the statute merely sought to remove (when the drawer acquiesced) the
absolute requirement of the common law that a check presented at the
bank's counter must be paid in cash. It gave the drawee bank the option
to pay by exchange only in certain cases; namely, when the check was
"presented by or through any Federal reserve bank, post office or express
company, or any respective agents thereof." The option was so limited,
because the only purpose of the statute was to relieve State banks from the
pressure which, by reason of the common-law requirement, Federal reserve
banks were in a position to exert and thus compel submission to par clearance. It was expected that depositors would cooperate with their banks
and refrain from making the prescribed notation; and that when the reserve
banks were no longer in a position to exert pressure by demanding payment
in cash, they would cease to solicit, or to receive, for collection checks on
nonassenting State banks. Thus, these would be enabled to earn exchange
charges as theretofore. Such was the occasion for the statute and its purpose. Whether this legislative modification of the common-law rule which
requires payment in cash violates the Federal Constitution is the question
for decision. That it does is asserted on five grounds.
First.—It is contended that in authorizing payment of checks by draft on
reserve deposits section 2 violates the provision of Article I, section 10, clause
1 of the Federal Constitution, which prohibits a State from making anything
except gold and silver coin a tender in payment of debts. This claim is
1 Statutes similar in purpose were enacted in Alabama, Florida, Georgia, Louisiana,
Mississippi, South Dakota, and Tennessee. See Annual Report of Federal Reserve Board,
1921, p. 70; Alabama, Gen. <fc Loc. Acts, 1920, No. 35; Florida, Laws, 1921, c. 8532; Georgia,
Laws, 1920, p. 107; Louisiana, Acts, 1920, No. 23; Mississippi, Laws, 1920, c. 183; South
Dakota, Laws, 1921, c. 31; Tennessee, Pub. Acta, 1921, c. 37.

APPENDIX

275

clearly unfounded. The debt of the bank is solely to the depositor. The
statute does not authorize the bank to discharge its obligation to its depositor
by an exchange draft. It merely provides that, unless the depositor in
drawing the check specifies on its face to the contrary, he shall be deemed
to have assented to payment by such a draft. There is nothing in the Federal
Constitution which prohibits a depositor from consenting, when he draws
a check, that payment may be made by a draft. And, as the statute is
prospective in its operation, Denny v. Bennett, 128 U. S. 489; Abilene
National Bank r. Dollev, 228 U. S. 1, 5, there is no constitutional obstacle
to a State's providing that, in the absence of dissent, consent shall be
presumed. Laws which subsist at the time and place of the making of a
contract, and where it is to be performed, enter into and form a part of it, as
fully as if they had been expressly referred to or incorporated in its terms.
This principle embraces alike those laws which affect its construction and
those which affect its enforcement or discharge. See Odgen v. Saunders, 12
Wheat. 213, 231; Von Hoffman v. Quincv, 4 Wall. 535, 550. If, therefore,
the provision of section 2 authorizing payment by exchange draft is otherwise
valid, it is binding upon the drawer of the check. Since it binds the drawer,
it binds the payee and every subsequent holder, whether he be a citizen of
North Carolina or of some other State, and wherever the transfer of the
check was made. Brabston v. Gibson, 9 How. 263. For the holder of a
check has, in the absence of acceptance by the drawee bank, no independent
right to require payment under the general law. Bank of the Republic v.
Millard, 10 Wall. 152. He takes it subject to the construction and with
rights conferred by the laws of North Carolina, the place of the bank's
contract and of performance. Pierce v. Indseth, 106 U. S. 546. Compare
Rouquette v. Overmann, L. R. 10 Q. B. 525.
Second.—It is contended that section 2 violates the due process clause.
The argument is that defendant is a Federal corporation authorized to
engage in the business of collecting checks payable upon presentation within
the district, a business common to all banking institutions; that the right
to engage in this branch of the business is a valuable property right; that
while defendant has, in the past, not made any charge for such collections,
it has the right to do so, and could make this branch of its business an important source of revenue; that to compel defendant to accept in payment of
checks exchange drafts on reserve deposits, whether good or bad, deprives
it of liberty of contract, and in effect of an important branch of its business,
since that of collecting checks can not be conducted under such limitations.
To this argument the answer is clear. The purpose of the statute, as its
title declares, was to promote the solvency of State banks. We should, in
the absence of controlling decision of the highest court of the State to the
contrary, construe the statute not as authorizing payment in a " b a d "
draft, but as authorizing payment in such exchange drafts only as had customarily been used in remitting for checks. So construed the statute is
merely an exercise of the police power, by which the banking business is
regulated for the purpose of protecting the public and promoting the general
welfare. Noble State Bank v. Haskell, 219 U. S. 104, 575. The regulation

276

FEDERAL

RESERVE

SYSTEM

IN OPERA TION

here attempted is not so extreme as inherently to deny rights protected
by the due process clause. Compare Chicago, Burlington & Quincy R. R.
Co. v. McGuire, 219 U. S. 549, 567, 568; Central Lumber Co. r. South Dakota
226 TJ. S. 157, 162. If the regulation exceeds the State's power to protect
the public, it must be because some other provision of the Federal Constitution is violated by the means adopted or by the manner in which they are
applied.
Third.—It is contended that the statute is obnoxious to the equal protection clause. The argument is that the Federal Reserve Bank of Richmond is
obliged to accept payment in exchange drafts, whereas other banks with
whom it might conceivably compete may demand cash, except in those
cases where they present the check through an express company or the post
office. It is well settled that the legislature of a State may (in the absence of
other controlling provisions) direct its police regulations against what it
deemed an existing evil, without covering the whole field of possible abuses.
Lindsley r. National Carbonic Gas Co., 220 U. S. 61, 81; Missouri Pacific
Ry. Co. v. Mackey, 127 U. S. 205. If the legislature finds that a particular
instrument of trade war is being used against a policy which it deems wise to
adopt, it may direct its legislation specifically and solely against that instrument. Central Lumber Co. v. South Dakota, supra, p. 160. If it finds that
the instrument is used only under certain conditions, or by a particular class
of concerns, it may limit its prohibition to the conditions and the concerns
which it concludes alone menace what it deems the public welfare. The
facts recited above disclose ample ground for the classification made by the
legislature. Hence, there was no denial of equal protection of the law.
There remains to consider whether section 2 exceeds the State's power,
because Congress has imposed specifically upon Federal reserve banks duties,
the performance of which section 2 obstructs; and that in this way it conflicts with the Federal reserve act. This is the ground on which the invalidity of the North Carolina act has been most strongly assailed.
Fourth.—One contention is that section 2 conflicts with the Federal
reserve act because it prevents the Federal reserve banks from collecting
checks of such State banks as do not acquiesce in the plan for par clearance.
The argument rests on the assumption that the Federal Reserve Bank of
Richmond is obliged to receive for collection any check upon any North
Carolina State bank, if such check is payable upon presentation; and is
obliged to collect the same at par without allowing deductions for exchange
or other charge. But neither section 13, nor any other provision of the
Federal reserve act, imposes upon reserve banks any obligation to receive
checks for collection. The act merely confers authority to do so. The class
of cases to which such authority applies was enlarged from time to time
by Congress. But in each amendment, as in section 13, the words used
were " m a y receive"—words of authorization merely. It is true that in
statutes the word ' " m a y " is sometimes construed as "shall." But that is
where the context, or the subject matter, compels such construction. Supervisors v. United States, 4 Wall. 435. Here it does not. This statute appears
to have been drawn with great care. Throughout the act the distinction is

APPENDIX

277

clearly made between what the board and the reserve banks "shall" do
and what they " m a y " do. 1
Moreover, even if it could be held that the reserve banks are ordinarily
obliged to collect checks for authorized depositors, it is clear that they are not
required to do so where the drawee lias refused to remit except upon allowance of exchange charges which reserve banks are not permitted to pay.
There is surely nothing in the act to indicate that reserve banks must undertake the collection of checks in cases where it is impossible to obtain payment
except by incurring serious expense; as, in presenting checks by special
messenger at a distant point. Furthermore, the checks which the act declares
reserve banks may receive for collection are limited to those "payable on
presentation." The expression would seem to imply that the checks must be
payable either in cash or in such funds as are deemed by the reserve bank
to be an equivalent. A check payable at the option of the drawree by a draft
on distant reserves would seem not to be w ithin the limited class of checks
referred to in the act. The argument of the Federal reserve bank is not
helped by reference to the incidental power conferred by section 4. It is
only "such incidental powers as shall be necessary to carry on the business
of banking w ithin the limitations prescribed by this [the Federal reserve]
act" which are granted. No duty or right of the Federal reserve bank to
collect checks is obstructed by the North Carolina statute which merely
gives to the drawee bank the right to pay in the customary exchange draft,
where this depositor has, by the form used in drawing the check, consented
that this be done.
Fifth.—The further contention is made that section 2 conflicts with the
Federal reserve act because it interferes with the duty of the Federal Reserve
Board to establish in the United States a universal system of par clearance
and collection of checks. Congress did not in terms confer upon the Federal
Reserve Board or the Federal reserve banks a duty to establish universal par
clearance and collection of checks; and there is nothing in the original act or
in any amendment from which such duty to compel its adoption may be
inferred. The only sections which in any way deal either with clearance or
collection are 13 and 1G. In neither section is there any suggestion that the
Reserve Board and the reserve banks shall become an agency for universal
clearance. On the contrary section 16 strictly limits the scope of their
clearance functions. It provides that the Federal Reserve Board:
1 In the original Federal reserve act (38 Stat. 251) " m a y " is used in sections 2, 3, 4, 5, 8, 9,
10, 11, 12, 13, 14, 15,16, 18, 19, 21, 22, 24, 25, 26, 28. "Shall" is used in those sections and
also in sections 1, 6, 7, 20, 23, 27, 29. Thus: Sec. 2: "The Secretary . . . shall designate
• . . cities to be known as Federal reserve cities, and shall divide the Continental United
States into districts. . . . The districts . . . may be readjusted. . . . Such districts
shall be known as Federal reserve districts and may be designated by number"; Sec. 3:
"Each Federal Reserve bank shall establish branch banks within the Federal reserve district
in which it is located and may do so in the district of any Federal reserve bank which may
have been suspended"; Sec. 5: "outstanding capital stock shall be increased . . . as
member banks increase their capital stock . . . and may be decreased as member banks
reduce their capital stock . . .
Sec. 13; " . . . may receive . . . deposits . . .
may discount . . . shall at no time exceed"; Sec. 16: "Every Federal reserve bank shall
maintain reserves . . .
"Every Federal reserve bank shall receive on deposit."

278

FEDERAL

RESERVE

SYSTEM

OPERA

TION

" m a y at its discretion exercise the functions of a clearing house for such
Federal reserve banks . . . and may also require each such bank to
exercise the functions of a clearing house for its member banks."
There is no reference whatever to " p a r " in section 13, either as originally
enacted or as amended from time to time. There is a reference to " p a r " in
section 16; and it is so clear and explicit as to preclude a contention that it has
any application to nonmember banks; or to the ordinary process of check
collection here involved. Section 16 (38 Stat. p. 268) declares:
" E v e r y Federal reserve bank shall receive on deposit at par from member
banks or from Federal reserve banks checks and drafts drawn upon any of its
depositors, and when remitted by a Federal reserve bank, checks and drafts
drawn by any depositor in any other Federal reserve bank or member bank
upon funds to the credit of said depositor in said reserve bank or member
bank. Nothing herein contained shall be construed as prohibiting a member
bank from charging its actual expense incurred in collecting or remitting
funds, or for exchange sold to its patrons."
The depositors in a Federal reserve bank are the United States, other
Federal reserve banks, and member banks. It is checks on these depositors
which are to be received by the Federal reserve banks. These checks from
these depositors the Federal reerve banks must receive. And when received
they must be taken at par. There is no mention of nonmember banks in
this section. When, in 1916, section 13 was amended to permit Federal
reserve banks to receive from member banks solely for collection other checks
payable upon presentation within the district—and when, in 1917, section 13
was again amended to permit such receipt solely for collection also from
certain nonmember banks—section 16 was left in this respect unchanged.
In other respects section 16 was amended both by the act of 1916 and by the
act of 1917. The natural explanation of the omission to amend the provision in section 16 concerning clearance is that the section has no application
to nonmember banks—even if affiliated.
Moreover, the contention that Congress has imposed upon the board the
duty of establishing universal par clearance and collection of checks through
the Federal reserve banks is irreconcilable with the specific provision of the
Hardwick amendment which declares that even a member or an affiliated
nonmember may make a limited charge (except to Federal reserve banks)
for "payment of checks and . . . remission therefor by exchange or otherwise." The right to make a charge for payment of checks, thus regained by
member and preserved to affiliated nonmember banks, shows that it was not
intended, or expected, that the Federal reserve banks would become
the universal agency for clearance of checks. For, since against these the
final clause prohibited the making of any charge, then if the reserve banks
were to become the universal agency for clearance, there would be no
opportunity for any bank to make as against any bank a charge for the
"payment of checks." The purpose of Congress in amending section 13
by the act of 1917 was to enable the board to offer to nonmember banks the
use of its facilities, which it was hoped would prove a sufficient inducement
to them to forego exchange charges; but to preserve in nonmember banks the

APPENDIX

279

right to reject such offer, and to protect the interests of member and
affiliated lion member banks (in competition with the nonaffiliated State
banks) by allowing also those connected with the Federal system to make a
reasonable exchange charge to others than the reserve banks. The power of
the Federal Reserve Board to establish par clearance was, thus, limited by
the unrestricted right of unaffiliated nonmember banks to make a charge for
exchange and the restricted right of members and affiliate nonmembers to
make the charge therefor fixed as reasonable by the Federal Reserve Board.
No bank could make such a charge against the Federal reserve banks,
because these are prohibited from paying any such charge. Member and
nonmember affiliated banks, because they were such, performed the service
for the Federal reserve banks without charge. Unaffiliated nonmember
banks were under no obligation to do so. Thus construed, full effect may
be given to all clauses in the Hardwick amendment as enacted. It in no
way interferes with the right of a depositor in a nonaffiliated State bank to
agree with his bank that the checks which he might drawr should (unless
otherwise indicated on their face) be payable, at the option of the drawee,
in exchange in certain cases.
The North Carolina statute here in question does not obstruct the performance of any duty imposed upon the Federal Reserve Board and the
Federal reserve banks. Nor does it interfere with the exercise of any
power conferred upon either. It is therefore consistent with the Federal
reserve act and with the Federal Constitution.
Reversed.
Mr. Justice VAN DEVANTER and Mr. Justice SUTHERLAND dissent.

APPENDIX G
CLASSIFICATION OF EXPENSES OF OPERATION OF
FEDERAL RESERVE BANK OF NEW Y O R K : 1923
The expenses of carrying on the work of the bank, divided as nearly as
possible according to functions, with the miscellaneous items of overhead
similarly apportioned among the various functions, were as follows:
1. Maintaining the accounts of the bank.
This work included making about 9,026,000 entries a year in the accounts maintained with member and other banks,
and the current determination of reserve
balances, which are required by law
2. Supplying currency and coin.
Paying out, receiving, and redeeming currency, involving the count of about 775,000,000 individual notes during the year. $
Paying out and receiving coin. This service was formerly performed largely by
the Subtreasury, and is now entirely in
the hands of the Federal Reserve Bank.
Receipts and issues amounted to $228,798,000 for the year
Currency and coin shipments to and from
out-of-town banks. There were 234,621
such shipments in and out during the
year
Cost of printing new Federal reserve currency to replace worn notes in circulation
and to maintain supplies unissued and on
hand, including cost of transportation....
Supplying currency and coin
3. Making loans.
Making discounts and advances to member banks. The number of items handled
during the year was 72,177, aggregating
$17,952,000,000
$

280

211,363

896,934

172,025

429,038

421,229
$1,919,226

275,110

APPENDIX

281

Purchasing acceptances and government
obligations for the account of this bank
and other Federal reserve banks. The
items purchased during the year aggregated $3,528,000,000
142,907
Making loans
4. Collecting checks, drafts, notes, and coupons.
Collection of cash items, mostly checks.
The average number collected was 425,151 a day, or 128,400,000 for the year,
aggregating $65,518,000,000
$1,705,245
Collection of non-cash items, including
drafts, notes, and coupons. The number
of items handled during the year
was about 2,177,000, aggregating $1,921,000,000
501,816
Collecting checks, etc
5. Supplementary services.
Custody of securities. This service involved holding in safekeeping on the average about $700,000,000 of securities for
the United States government, $50,000,000 for the War Finance Corporation and
$260,000,000 from other sources
$ 186,129
Purchase and sale of bankers acceptances
and other securities for member banks
and foreign banks amounting for the
year to $237,712,000, and receiving and
delivering securities for the account of
member banks, amounting for the year
to about $500,000,000. In addition the
bank has acted for the Treasury Department in the purchase and sale of government securities
145,638
Telegraphic transfer of funds. This service is performed over the telegraph wires
of the Federal Reserve System, and is
used by the Treasury Department and
member banks. It involves making an
average of 939 transfers of funds to all
parts of the country each day, amounting
to about $92,820,000 and aggregating for
the year $28,031,500,000
Supplementary services
6. Services in connection with government loans.
This work included during 1923 the receipt
or delivery of 1,345,000 individual govern-

418,017

$2,207,061

115,400
*

282

FEDERAL

RESERVE

SYSTEM

IN OPERA TION

ment bonds, notes, and certificates,
amounting to $2,622,000,000, which were
exchanged or converted or handled in
connection with registration; and the payment of 17,683,617 individual coupons on
government bonds, notes, and certificates.
It also involved the sale and issue of
124,846 pieces amounting to §851,583,000,
and the redemption of 788,758 pieces
amounting to §807,929,000 of government
bonds, notes, and certificates. Aside
from amounts received from the Treasury
in partial reimbursement, the cost of such
operations to the bank was
(In addition to these operations for the
Treasury, the bank performed other work
for the government connected with the
currency, the collection of checks, the
custody, purchase, and sale of securities,
the transfer of funds, etc., which have
been referred to under their respective
headings.)
7. General or Supervisory expenses, not apportioned among the functions specified
above.
Executive salaries (Chairman, governor,
four deputy governors, and secretary of
the bank, and manager and cashier of the
Buffalo branch)
$
Work of the Federal reserve agent, including note issues, examination of member
banks, visits to member banks, statistical
and information services, such as the
preparation of weekly bank statements
and the publication of the monthly review.
Maintaining the General Audit
Directors' Fees and Traveling Expenses
This bank's share of the expenses of the
Federal Reserve Board
General or supervisory expenses
Total

048,310

203,640

352,575
260,226
21,664
190,847
$1,028,952
$6,880,136

APPENDIX H
MEMBERSHIP

OF THE FEDERAL RESERVE
1914-1924

BOARD:

CHAIRMAN (cx-officio)
William G. McAdoo:
(New York)
Carter Glass:
(Virginia)
David F. Houston:
(Missouri)
Andrew W . Mellon:
(Pennsylvania)

Aug. 10, 1914—resigned Dec. 15, 191S
Dec. 16, 1918—resigned Feb. 1, 1920
Feb. 2, 1920-Mar. 3, 1921
Mar. 4, 1920-

COMPTROLLER OF THE CURRENCY

•John Skelton Williams:
(Virginia)
Daniel R. Crissingcr:
(Ohio)
Henry M. Dawes:
(Illinois)
J. W . Mcintosh:
(Illinois)

Aug. 10, 1914-Mar. 3, 1921
Mar. 17, 1921—resigned April 30, 1923
May 1, 1923—resigned Dec. 15, 1924
Dec. 15, 1924GOVERNOR

Charles S. Hamlin:
(Massachusetts)
W. P. G. Harding:
(Alabama)
Edmund Piatt (acting):
(New York)
Daniel R. Crissingcr:
(Ohio)

Aug. 10, 1914-Aug. 9, 1916
Aug. 10, 1916-Aug. 9, 1922
Aug. 10, 1922-April 30, 1923
May 1, 1923VLCE-GOVERNOR

Frederick A. Delano:
(Illinois)
Paul M. Warburg:
(New York)
Albert Strauss:
(New York)
Edmund Piatt:
(New York)

Aug. 10, 1914-Aug. 9, 1916
Aug. 10, 1916-Aug. 9, 1918
Aug. 10, 1918-Mar. 15, 1920
June 16, 19202S3

284

FEDERAL

RESERVE

SYSTEM

IN OPERA TION

MEMBERS OF THE BOARD

Charles S. Hamlin:
(Massachusetts)
Paul M. Warburg:
(New York)
Frederic A. Delano:
(Illinois)
W . P. G. Harding:
(Alabama)
Adolph C. Miller:
(California)
Albert Strauss:
(New York)
H. A. Moehlenpah:
(Wisconsin)
Edmund Piatt:
(New York)
D. C. Wills:
(Ohio)
Daniel R. Crissinger:
(Ohio)
John R. Mitchell:
(Minnesota)
Milo D. Campbell:
(Michigan)
E. II. Cunningham:
(Iowa)
George R. James:
(Tennessee)

Appointed Aug. 10, 1914 for 2 years. Reappointed Aug. 10, 191G. Term expires August
9, 1926.
Appointed Aug. 10, 1914 for 4 years. Term
expired Aug. 9, 1918.
Appointed Aug. 10, 1914 for 6 years. Resigned
July 21, 1918
Appointed Aug. 10, 1914 for 8 years. Term
expired Aug. 9, 1922
Appointed Aug. 10, 1914 for 10 years. Reappointed Aug. 10, 1924. Term expires Aug. 9,
1934
Appointed Nov. 26, 1918. Resigned Mar. 15,
1920
Appointed Nov. 10, 1919 to complete unexpired
term of Mr. Delano. Term expired Aug. 9,
1920
Appointed June 8, 1920 to complete the unexpired term of Mr. Strauss. Term expires
Oct. 26, 1928
Appointed ad interim Sept. 29, 1920—resigned
Mar. 3, 1921
Appointed May 1, 1923—term expires Aug. 9,
1932
Appointed May 12, 1921—resigned May 12,
1923
Appointed Mar. 14, 1923. Died Mar. 22, 1923
Appointed May 14, 1923 to complete the unexpired term of Mr. Campbell. Term expires
Mar. 2, 1933
Appointed May 14, 1923 to complete the unexpired term of Mr. Mitchell. Term expires
May 11, 1931.
MEMBERSHIP IN D e c . ,

1924

Andrew W . Mellon, Secretary of the Treasury, ex-officio
J. W . Mcintosh, Comptroller of the Currency, ex-officio
Daniel R. Crissinger, Governor
Edmund Piatt, Vice-governor
Adolph C. Miller
Charles S. Hamlin
George R. James
E. H. Cunningham

APPENDIX

EXTRACTS F R O M ARTICLE ON DISCOUNT POLICY OF FEDERAL
RESERVE BANKS
B y O. M .

W . SPRAGUE OF HARVARD U N I V E R S I T Y 1

At the outset, it is necessary to reach some conclusion as to the responsibility that rests upon the Reserve Board and the management of the reserve
banks for the credit expansion of the last five years. For by far the greater
part of that expansion responsibility clearly rests elsewhere. The volume of
credit has been subject to conditions and influenced by policies which the
management of the reserve system could not control. This is obviously
the case as regards the large additional supply of credit which became available as a result of the gold imported before we entered the war. Up to
that time, the loans of the reserve banks were of quite insignificant
proportions.
After we entered the war, the loans of the reserve banks increased by
leaps and bounds; but for the policy of war finance which occasioned these
loans and the manifold greater loans of the commercial banks, the Reserve
Board was not responsible. That it is possible to finance without inflation
expenditures as great even as those incurred by the Uniied States government during the recent war, I am firmly convinced. That we could not
finance that war without credit inflation, I am equally certain. The primrose path of inflation had the backing of public opinion; the administrative
machinery and perhaps the constitutional power for adequate taxation were
lacking. A little less waste in expenditure, slightly heavier taxation and
slightly higher interest rates on government bonds might have characterize
our war finance program,with the desirable result that there would have been
somewhat less of credit inflation. But I must not allow myself to digress
further on this tempting subject. The important point in the present
connection is that whatever the financial policy adopted by a government
in time of war may be, it is the imperative duty of the management of
a central bank to cooperate loj-ally in executing that policy. The Reserve
Board and the officials of the reserve banks could offer advice and criticism;
they could not decline to do their part in executing the policy of the
Treasury.
Presumably there would have been no less use of credit in financing the
war if the reserve system had not been established. In that event, the
government would doubtless have met requirements for additional money
for use outside the banks by issues of paper money which would surely
1 Reprinted from the AMERICAN ECONOMIC REVIEW, Vol. X I , N o . 2, March, 1921.

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have become inconvertible. The economy of gold under the reserve system
permitted credit expansion on an unexampled scale without suspension of
specie payments. It was none the less inflation.
One of the results of the extensive use of credit in financing the war was to
place the banks of the country in a position of extreme dependence on the
reserve banks. At the time of the armistice the reserve banks were lending
member banks nearly $1,800,000,000 and in addition held nearly $400,000,000 of bills bought in the open market. As general liquidation of loans at
the reserve banks, unless due to the receipt of new gold, involves much
greater contraction of loans by member banks, it is probable that they
must continue to rediscount heavily there for many years to come if not
indefinitely. No progress whatever in reducing these obligations has been
made during the two years since the armistice. On the contrary, borrowing
at the reserve banks has increased by nearly 50 per cent, loans standing at
33,126,000,000 on November 5,1920.
It is only for this after-the-war increase in the loans of the reserve banks
and the more considerable increase in the loans of the other banks thus made
possible that the management of the reserve banks can be held to be in
some measure, but by no means primarily, responsible. Government
financial policies were the controlling factor in the situation for at least a
year after the armistice. The policy of borrowing at abnormally low rates
was insistently maintained by the Treasury. It does not fall within the
scope of this paper to discuss in detail the wisdom of this policy. Much
can be said on both sides of the question. I content myself with observing
that it was my opinion at the time, and the subsequent course of events has
not altered the conclusion, that a distinctly higher range of rates on government certificates in thesummer and autumn of 1919 would have been a wiser
policy. But even if the Federal Reserve Board had been convinced that the
after-the-war financial policy of the Treasury was unwise, as to which
there is no evidence one way or the other, I do not think the board could
have refused to cooperate in executing that policy, taking an independent
course and making a sharp advance in discount rates. It is, however,
reasonable to surmise that the policy of the Treasury after the armistice
would have been subjected to more searching scrutiny if the Reserve Board
were less heavily weighted with Treasury officials. When account is taken
of the future frequent borrowing requirement of the government, the retention of two Treasury officials as ex-officio members of the Reserve Board
seems most inexpedient. Borrowers on a large scale are not the most
desirable of persons to be selected as directors of any bank. The Treasury
as a borrower in times of peace should not be in position to exert a considerable, much less a controlling, direct influence on the discount policy of the
reserve banks. Merely as a matter of simplification of administrative
machinery, also, the functions of the Comptroller of the Currency should be
transferred to the Reserve Board and the reserve banks. So much of diminution of direct Treasury influence as is involved in this proposal seems
certainly desirable. Whether the Secretary of the Treasury should cease
to be a member of the board is a question as to which a definite answer is

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less easily given. Upon the whole, I am inclined to think that the presence
of the Secretary is desirable. The intimate understanding of the financial
situation that a Secretary may gain as a member of the Reserve Board can
hardly fail to be of advantage to him in the conduct of his office. The
Secretary of the Treasury, as a member of the Board can also do much to
defend the reserve system from unreasonable demands on the part of the
public and above all from political onslaughts.
Returning once more to the course of credit under the reserve system, there
remains for consideration the experience of the last twelve months, during
which the reserve banks have been in position to exert complete control
over the supply of credit and have also been able to take independent action.
At the end of August, 1010, the gross debt of the government reached its
maximum and though the Treasury continued to enter the market as a
chronic borrower, its strongest ground for insisting upon the policy of liberal
loans at low rates could be urged no longer. With evident reluctance
Treasury control of the discount policy of the reserve banks was relaxed
and seems to have been entirely relinquished with the last issue of 4 % per
cent certificates in January, 1920.
Full responsibility for the credit situation was regained in circumstances
which imposed a severe test upon the reserve system and upon its management. After nearly five years of unexampled business activity, accompanied by unprecedented credit expansion and advances in prices, the
activity of trade was unabated, the demand for credit was if anything more
intense and prices were still moving rapidly upward. Beneath the surface,
there were indications that even though large supplies of additional credit
were still to be had, a period of readjustment could not be long postponed.
Liberal credit was no longer, as at the beginning of a period of activity,
serving to stimulate production and direct industry into promising channels.
It was rather tending to disorganize industry, subjecting it to an increasing
extent to speculative influences, to wage disputes and numberless other
strains. The average quality of the loans of the banks was becoming less
satisfactory because of these conditions in industry as well as on account of
extensive sales of goods in foreign markets on long credit terms. In short
the situation at the end of 1919 was one which by no possibility could be
corrected by the application of additional supplies of credit. A check on
further credit expansion followed by some contraction was the one sure
remedy and that remedy would have been quite as much needed even though
an abundant supply of additional credit had been still available. It is,
however, by no means certain that the Reserve Board would have taken
measures to restrain credit during the course of the winter and spring of
this year if the power of the reserve banks to extend credit within the limits
of legal reserve requirements had not been nearly exhausted. The successive
advances in discount rates made during the first half of the year were not
then entirely the expression of a voluntary policy. It was a policy which in
Wgo measure was enforced by the reserve position of the banks. It was
necessary to check further credit expansion. Otherwise, the reserve banks
in the course of a few months would have held no reserve above legal require-

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merits as a basis for credit to be used in meeting an emergency. To go on
expanding credit until the last available dollar was employed was indeed our
former practice, and the initial stages of the transition to a period of readjustment were always marked by crisis and panic. It is one of the inestimable
advantages of the reserve system that the brakes were applied before the
supply of credit was entirely exhausted and before trade activity had culminated in a crisis. W e are still in the midst of a period of necessary readjustment and liquidation, but the immense superiority of the reserve system as
compared with our former means of meeting similar situations is already
conspicuously evident.
Although the process of readjustment is not completed, experience alreade
furnishes a basis for fairly definite conclusions regarding some important
aspects of the policy of the reserve banks in handling the situation. The
discount rate of the reserve banks is clearly an effective means of checking
credit expansion, but it is also evident that advancing rates influence the
situation rather slowly. Credit continued to expand for some months
after rates were finally advanced in May to the present high level. When
credit is expanding rapidly, there is at any moment a considerable supply
of unused credit scattered among the thousands of banks of the country the
use of which is not subject to control by the reserve banks. The continued
increase in the amount of federal reserve notes for some months after credit
expansion was checked is in accord with what was to have been anticipated.
Increased requirements for currency accompany, but with some lag, the
increase in credit in the form of deposits subject to check.
These conditions and tendencies prompt the suggestion that when rates
are advanced in order to check credit expansion the practice of the Bank of
England of advancing rates by increments of one per cent should be adopted.
In making for the first time a test of the effects of advancing discount rates,
it was perhaps natural and proper to move slowly. Experience during the
last year indicates that advances of fractions of per cent are ineffective.
It may be added that in this particular instance, it would have been of much
advantage if somewhat greater progress in the process of readjustment had
been made before the beginning of the crop moving season, a result which
would have followed a less hesitant discount policy.
The process of gradual contraction and orderly industrial readjustment
seems at first sight in every respect superior to the short and severe crisis
and panic followed by depression with which we have had frequent experience in the past. I do not doubt that the balance of advantage is heavily
in favor of the slower process. At the same time it should be recognized
that the slower process is attended by its own peculiar difficulties. While
the aggregate loss is doubtless reduced, the burden of loss is apparently
distributed in a somewhat different but by no means certainly in a more
equitable fashion among the various groups of producers. The slow process
of liquidation does not succeed in bringing about a slow and uniform general
decline in prices. In fact, price changes seem to be more irregular, or at
least the irregularities are more prolonged than when periods of trade
activity culminated in catastrophic disturbances. In this connection the

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query suggests itself whether farmers might not have incurred less loss if
there had been a crisis in the early autumn that might have forced a more
immediate reduction in prices of the goods they must buy.
The irregular distribution of the burdens of liquidation in some measure
explains even though it does not give sufficient ground for complying with
the widespread demands for assistance now being made by various classes of
producers. Much of the occasion for special consideration will disappear
when in the near future, as now seems probable, the decline in prices has
completed the circle.
There is grave danger that the quack remedy of inflation through enforced
accommodation from the reserve banks may be attempted. Such a remedy
would be similar in all essentials to the grant of aid by the issue of paper
money by the government, a form of assistance that was urged but successfully resisted after the Civil War. It is not too much to say that it is now
to be determined whether the people of the United States possess sufficient
intelligence and endurance to permit the successful operation of anything
better than a straight-jacket credit s}Tstem. We have established a system
which is designed to prevent collapse and complete disorganization. This
presupposes that reserve banks will regularly hold in reserve large potential
credit power. If we insist upon using such power as a means of temporary
relief and stimulation, ultimate disaster is the certain consequence. Past
experience shows that it is dangerous for governments to issue paper money.
There is a constant temptation to overissue when confronted by real or
imaginary emergencies. The same danger arises in the case of the reserve
system—that public opinion and perhaps legislative action will compel the
employment of its resources in a vain endeavor to cure evils which are
mainly due to credit already granted in excess.
The process of industrial readjustment at best is painful and its burdens
are most unevenly distributed. It seems pertinent therefore to inquire
whether something more cannot be accomplished through the reserve system
than the mere modification and amelioration of conditions at the culmination
of periods of business activity. Would it be possible so to operate the
reserve system that conditions which compel widespread liquidation would
not be developed, or at least would not be developed to so serious degree
as in the past. This inquiry is rendered more significant by the serious
danger that conditions which render subsequent liquidation unavoidable
will develop more luxuriantly under the reserve system than was possible
under the national banking system. Let us examine this point.
The liquidation now under way will doubtless lead to a considerable
reduction in the loans of the banks to the public and in rediscounts at
the reserve banks. It is not unlikely that a reserve ratio as high as 70 per
cent will be seen before the beginning of the next period of active business
and intense demand for credit. Moderate if not low discount rates will
doubtless prevail at the beginning of the period. A large supply of credit
will be available; much more, as we have seen, than could be furnished if
the reserve banks like the Bank of England could not issue credit notes.
I mention this familiar fact once more because the pre-war discount policy

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of the Bank of England, with its changes in rates as the reserve increased or
decreased, seems to give the sanction of successful experience to a policy
for central banks that would allow credit to be extended freely at low rates
whenever reserves* are ample. Bank of England practice, however, loses
significance and is positively misleading when it is applied to a banking
system which loses no gold for purposes of domestic circulation as deposit
credit expands. Again in pre-war times, comparatively slight influences,
whether at home or abroad, were sufficient to subject the reserve of the Bank
of England to depletion from gold exports. For these two reasons credit
expansion in England could seldom be carried far without bringing the
reserve of the bank down to a point at which an advance in the discount
rate would become necessary. In this country, whatever may be the situation in the distant future, gold exports for many years to come are not likely
to be the almost automatic consequence of moderate credit expansion.
This restraint on excessive credit expansion in any single country was
effective when all important commercial countries were on the gold standard.
It is not now effective because most of the world is on an inconvertible basis.
Consequently the volume of credit which may be created in the United
States will be determined for many years to come almost wholly by domestic
influences. In these circumstances, while the reserve system may be
expected to prevent the outbreak of panic, its expansive power is so great
that with the reserve ratio the determinant of discount policy it can be confidently predicted that far wider price fluctuations will mark the successive
stages of the business cycle than were experienced under the national
banking system.
It should also be noted that the discount rate of the reserve banks is
a somewhat less immediately effective instrument of credit control than
that of the Bank of England in pre-war days. A considerable portion of the
loans of the British banks were of an international character which could
readily be shifted to the money markets of other countries when London
rates became relatively high. Owing to the present disordered financial
situation of most countries, loans arising out of foreign trade and other
international transactions no longer possess this quality so valuable from a
banking standpoint. International loans have become no more transferable
than domestic loans and, it may be added, with respect to payment at
maturity without delay or renewals have become decidedly inferior to
domestic loans.
The absence of branch banking in the United States also weakens the
validity of comparisons between the discount rate of the Bank of England
and those of the reserve banks. Credit is less fluid under our system of some
thirty thousand banks. There are much wider variations in the lending
rates of the various commercial banks; there is no such general market rate
of discount as in England. Consequently, the Bank of England practice of
a discount rate slightly above the market rate cannot have so pervasive an
influence. Moreover, until the banks cease to be constant heavy borrowers
at the reserve banks, a condition largely due as we have seen to the war, it
will not be feasible as a regular policy to establish discount rates above the

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291

lending rates of member banks even of those in the large cities. When,
however, it is the definite purpose of the management of the reserve banks
to check credit expansion, it will probably be found necessary to establish
discount rates which arc considerably above the minimum rates at which
some member banks are making some of their loans.
As a guide to discount policy, it must be admitted the reserve ratio has
certain conspicuous advantages. It is definite and obvious. Public opinion
may be expected to support the always unwelcome policy of credit restraint
when that policy is enforced by a depleted reserve. It is unhappily very
doubtful whether the public would have been reconciled to the advance in
rates made last spring if the reserve banks had had, let us say, a reserve
ratio of 55 per cent, and yet, all other things being the same, an advance
in rates would have been no less desirable.
By parity of reasoning, it follows that reductions in discount rates need not
wait upon the acquisition of a high reserve ratio. The present situation
furnishes a convenient illustration. Credit expansion has already been
definitely checked; there is no present danger that lower discount rates
would stimulate a widespread demand for credit that would permit prices to
move rapidly upward once more. The demand for credit is now largely for
the purpose of holding goods for which purchasers cannot be found. It is no
longer a sellers' market. In these circumstances, it is at least possible that a
slight reduction in discount rates, by encouraging many to resume normal
business dealings, might facilitate the process of liquidation, and so make
possible a more speedy reduction in the total volume of loans than will be
secured through the maintenance of the present schedule of rates.
There is no substitute for the reserve ratio which possesses its peculiar
virtues of simplicity and definiteness. To an enlightened business public,
however, it should be evident that so delicate and at the same time potent
an instrument as credit cannot be wisely administered in a mechanical
fashion in accord with simple definite rules.
Whether at any time it is desirable to impose restraint upon credit depends
upon the uses to which credits arc being put and upon the effects of these uses.
Hie most definite indication that we possess of excessive credit is found
m the decided upward movements of prices extending over a number of
years. There is practically universal agreement that prices cannot be held
at an absolutely fixed level. Most would agree that advancing prices at
the beginning of a period of activity stimulate production in some measure.
I'cw, however, would question that at some stage in every period of business
activity rising prices facilitate ill-judged undertakings and fail to increase
industrial output. X o doubt there would be wide differences of opinion as
to just when this stage is reached in any particular business cycle. Even so,
*t is submitted that the expert judgment of a responsible body like the
1 ederal Reserve Board, enjoying the benefit of general public criticism,
provides a far more satisfactory basis for a discount policy than the variations of a reserve ratio.
The proposal to base the discount rate largely on the observed effects of
credit expansion is not designed to secure the stabilization of prices. Such a

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policy would not be concerned with permanent changes in prices associated
with variations in the world's supply of gold. It would aim merely at
lessening price fluctuations within particular business cycles, checking somewhat the upward movement, and thereby lessening the subsequent decline.
Nearly every economic and social question is complicated, and many
are rendered insoluble by the alternations between activity and depression of the business cycle. To mention but a single instance, consider
the extent to which efforts to enlist an interest in efficient production
on the part of wage earners have been frustrated for many years to comc
by the present widespread unemployment, an inevitable sequel of the orgy
or inflation of the last five years.
This proposal to administer the reserve system in such a way as to moderate the fluctuations of the business cycle, will of course be met with the
objection that it is politically hazardous. It will be urged that any attempt
to influence prices will be resented by large and influential classes who would
believe, whether rightly or wrongly, that they were being subjected to
needless loss or deprived of well earned gains. This difficulty, while unquestionably very serious, is less than would appear at first sight. W e should not
gauge the antagonism to restraint on credit exercised at an early stage in a
period of expansion by the outcry which is heard when enforced contraction
occurs after years of excessive credit, rising prices, and feverish trade act ivity.
Restraint in the use of credit if imposed at an earlier stage in the cycle will not
be accompanied by widespread liquidation, followed by years of depression.
Here as elsewhere it is the wiser course to endeavor to remove causes, working with the confident expectation that that discount policy for the reserve
banks which will yield the greatest permanent advantage will finally secure
general public approval.
In the event that no control of credit based on the observed effects of
credit expansion at different stages in the business cycle is attempted by
the Federal Reserve Board, or, if attempted, is given up because of lack of
public support, another, but in my judgment less satisfactory, method of
lessening the danger of excessive credit should be adopted. At some
favorable moment, when the public is in a conservative mood, the legal
reserve requirements against federal reserve notes, or against both notes and
deposits should be raised. A reserve ratio of 50 per cent or even 60 per cent
would permit much more additional credit expansion than was possible
under the national banking system, and quite as much as could be advantageously employed. The economic development of the country might
have been somewhat more rapid at times in the past had more capital been
available, but credit is not capital; it is simply an agency for transferring
capital. I venture to assert that at no time in the past has the economic
development of the country been retarded because of an insufficient supply of
credit, while very frequently development has been retarded as a consequence
of credit furnished in excess.
The experience of six years has disclosed no serious defects in the structure
or management of the federal reserve system, while the expansive credit
power of the system, enormously greater than that under the national

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293

banking system, presents no serious danger for the future if suitable policies
arc adopted. Much more is clearly necessary than the adjustment of discount rates to variations in the reserve position of the reserve banks. A
discount policy should be adopted which is designed to check the rapid expansion of credit in periods of trade activity. Such a policy is entirely practicable but it cannot be adopted in the absence of general confidence in the
wisdom of the policies of the management of the reserve banks, and it
requires readiness on the part of the public to support these policies even
when the immediate consequences are painful. Satisfactory results from
the working of the reserve system seem assured if the management is given
the support of an intelligent public opinion.

APPENDIX J
EXTRACTS F R O M ARTICLE ON FEDERAL RESERVE
BY A. C.

POLICY1

MILLER

Member of Federal Reserve Board
The acute distress and the economic hardship resulting from the business
and price recession movements of the past eight months, which have been
experienced in all sections of the country, have drawn attention to the
federal reserve system to a degree not hitherto experienced and have made
the operations and methods of the federal reserve banks a matter of widespread public interest. The growing appreciation of the fact in the past
few months, even in sections of the country where a strong disposition was
manifested last autumn to charge the federal reserve system with responsibility for the collapse of prices, that the recent liquidation movement has,
in the main, proceeded from world-wide economic causes and is incident to
the general economic readjustment made necessary by the profound economic disturbances worked by the war, has done much to clarify the atmosphere and to make the moment favorable for a review and discussion of federal
reserve policy and practice. While there is every reason to believe that the
first and worst stage of the post-war economic readjustment is near its close,
there is enough likelihood of further periods of economic difficulty and
strain in the process of completing the general readjustment to make it a
matter of great public concern to consider how the federal reserve system
may best function in assisting the industry, trade, and business of the country
through such further periods of uncertainty and pressure as inay occur.
It is but little more than six years since the federal reserve system was
organized and began operations on a modest scale. In that brief period
of time it has had to meet a greater variety of conditions and problems than
have ever confronted any system of reserve banking. Since the armistice
it has had to cope with economic and financial problems of unprecedented
magnitude and great complexity. It has rendered continuously the greatest
assistance to the Treasury in making short-term borrowings. It has provided the credit basis for financing our enormous exports on credit to Europe.
It is primarily to its steadying and moderating influence that the drop in
prices during the past eight months did not eventuate in a complete and
disastrous collapse. All of these things have been accomplished without ever
for a moment putting the maintenance of the gold standard, or the solidity
and integrity of our credit system, in jeopardy. These things augur
well for the future of reserve banking in the United States. The federal
1

Reprinted from the AMERICAN* ECONOMIC REVIEW, Vol. X I , No. 2, June, 1021.

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reserve system has met its first searching tests on the whole with remarkable
success. The fact, moreover, that in the heat of a presidential campaign,
in which the attitude and methods of the federal reserve system were frequently the subject of bitter attack in sections of the country which felt in
a peculiarly high degree the impact of the price recession movement, it did
not yield to sectional or political pressure of any character, has done much to
set at rest the doubt, often expressed at the inception of the system, as to
whether any system of reserve banking under governmental supervision
could be fully successful in the United States because of ''politics."
A great banking system is not, however, to be regarded as a ready-made
contrivance. The legislator can frequently foresee much, and the law can do
much, to make provision for future contingencies and establish safeguards
against future temptations, but when all is done that can wisely be done by
legislative prescription and legislative safeguards, it still remains true that
a great banking system must be largely the result of growth and development
in the course of shaping its policies, devising methods, promoting practices,
and adapting its operations to the exigencies of differing situations as they
arise. Such is peculiarly the case at the present time. The federal reserve
system must learn its ways and get its gait in a world more profoundly
disturbed financially, economically, socially, and politically than ever
before. Severe, therefore, as are the tests which the system has already
had to meet, the developmental stage may not yet be said to be over.
Traditional methods of reserve banking, developed in the experience of
Europe, cannot be mechanically adopted in the administration of the federal
reserve system.
Much pioneer work in blazing new paths must therefore
needs be done by those who are guiding its development, and they will need
all the help they can get from enlightened discussion and large-minded
consideration of their problems. Recalling Bagehot's penetrating observation that " t h e abstract thinking of the world is never to be expected from
persons in high places," 1 and recalling also how much the development of the
English banking system in the nineteenth century owed to scientific economic discussion, it is much to be desired that American economists who are
interested in problems of credit and banking, or in the bearing of credit
administration upon economic conditions, should give close thought to
Federal reserve problems. It is for this reason that Dr. 0 . M . W . Sprague's
notable examination of the discount policy of the Federal reserve banks4 is
particularly welcome. His paper serves well as a point of departure for (1)
1 Reference: Lombard
Street, by Walter Bagchot, p. 179. The whole passage with reference to the early management of the reserve of the Bank of England is worth quoting:
• . . the directors of the Bank of England were neither acquainted with right principles, nor were they protected by a judicious routine. They could not be expected themselves to discover such principles. The abstract thinking of the world is never to be expected
from persona in high places; the administration of first-rate current transactions is a most
^grossing business, and those charged with them are usually but little inclined to think on
Points of theory, even when such thinking most nearly concerns those transactions.
No
doubt when men's own fortunes are at stake, the instinct of the trader does somehow anticipate the conclusions of the closct. But & board has no instincts when it is not getting an
income for its members, and when it is only discharging a duty of office."
3 In the American Economic Review for March, 1921, p. 16.

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a review of federal reserve policy in the past and (2) a consideration of
factors and difficulties that will have to be reckoned with in adjusting the
methods and operations of the Federal reserve banks in the future to new
conditions and altered circumstances.
3. Credit Policy.—Credit policy was only of theoretical moment in the
first years of the federal reserve system. Easy credit conditions in the
United States, because of the reduction of member bank reserve requirements and the great influx of gold, made reserve bank credit policy and discount rates of little actual consequence until the late autumn of 1916.
Then, for the first time, did a credit situation develop which gave to the rates
of some of the federal reserve banks a degree of effectiveness. The increasing pressure for credit funds, which would have developed in the year 1917
even if the United States had not entered the war, would undoubtedly have
led to the development of an effective discount policy by the federal reserve
system—a policy in which main reliance would have been put upon rates,
and under which reserve bank rates would have been adjusted to market
conditions so as to keep them, in the larger financial centers at least, at or
above the ordinary commercial rate; all of this in accordance with well
recognized principles of reserve bank practice. With the entry of the
United States into the war the outlook was changed, and the federal reserve
system was confronted with large and difficult problems of credit growing
out of the loan policy and loan operations of the Treasury. From that time
forth to the beginning of the year 1920, the discount policy of the federal
reserve system was shaped not in accordance with money market conditions
—not with the idea of using reserve bank rates as an instrument of effective
control of the money market—but with the primary purpose of assisting the
Treasury in the flotation of its great bond issues and its short-term certificate
issues. In brief, the discount policy of the federal reserve system ^*as
treated as an element of the Treasury's loan policy, the federal reserve
system virtually ceasing to exercise, for the time being, its normal function
of regulating credit. The position of the Federal Reserve Board with
respect to the bearing of Treasury policy upon the federal reserve system
has been explained in its several annual reports,1 and recently was succinctly
stated by the governor of the Federal Reserve Board at the joint hearings
held before the Senate and House committees on agriculture on December
3, 1920: 2
" T h e Federal Reserve Board adopted a policy in order to assist in the war
financing which was economically unsound. I say this frankly. Congress
authorized certain loans. It authorized the Secretary of the Treasury to
determine the rates at which the loans should be issued. The Secretary of
the Treasury asked the advice of experts and then fixed the rates of interest,
to be borne by the several issues of bonds, notes, and certificates. During
the time we were actually at war, something like SI8,000,000,000 of bonds
were sold to the people, an amount certainly in excess of the normal investSec Report for 1920, pp. 11-15; for 1919, pp. 67-73; and for 1918, pp. 1 - 5 and 85-87.
Pages 62 and 63 of the hearings entitled "Reviving the Activities of the War Finance
Corporation."
1

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297

merit power of the American people in such a short time, and the only way
in which those loans could be financed was through the instrumentality of the
banks. The only way the banks could undertake to do it was to get some
assistance from the Federal Reserve Banks and at a low rate. The low rate
of interest borne by these bonds was fixed with a view of holding down the
expenses of the Government as far as possible. Anyway, that is something
the Federal Reserve Board has no responsibility for. In order to make
possible the floating of these bonds we fixed a rate less than their coupon
rate. Some member banks announced that for a period of six months there
would be a rate of 4 ) i per cent on notes secured by Government obligations.
The result was there was no loss to subscribing banks pending the distribution of the bonds to the public. There were successive bond issues. The
principal reason why discount rates were not increased earlier than they were
in 1919 was on account of Treasury financing."
This may be taken as the official statement of the Federal.Reserve
Board with respect to the discount policy followed by the federal reserve
banks to the end of the year 1919.
It is clear that the point at which the loan policy of the Treasury affected
the federal reserve banks was the money rate. Discount rates were maintained at artificially low levels from shortly after the beginning of the war
in 1917 until the end of the year 1919. The particular device which was
employed in aid of the Treasury's loan policy, as is well known, was the
establishment and maintenance of (1) preferential rates on bond and
certificate secured paper, as compared with commercial paper, and (2) a
differential in favor of the rate on such bond and certificate secured paper
as compared with the interest rate borne by the bonds and certificates.
The immense credit resources of the federal reserve system were thus availed
of by the Treasury during this period to make and maintain an artificial
money market. In effect, the power of the Federal Reserve Board as the
ultimate regulator of the discount policy of the federal reserve banks was
put in commission, and rates were fixed, not "with a view of accommodating
commerce and business," 1 in accordance with normal principles, but with a
view to accommodating the financial program of the Treasury in accordance
with emergency principles.
Whether the Treasury's loan policy and methods of short-term borrowing
were well conceived is not here in question. Indeed, the time has not yet
come for passing judgment upon the policies of the Treasury in connection
with the financial conduct of the war. It is, however, possible to speak of
that feature of Treasury policy which most vitally affected the federal
reserve banks. The wisdom and the necessity of the device of an artificial
money rate, carried to the point that it was by the maintenance of a differential rate upon so-called war loan paper, may be questioned. In the light
of subsequent developments, it may be questioned whether it was not a
costly device to the country. While the bad economic consequences of
artificially low discount rates were minimized during the war by the many
various controls over the economic activities of the people that were then
1

The language of tho Federal Reserve act, section 14, paragraph D.

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set up, a precedent was established which it was found difficult to set aside
after the war.
The controls which were set up during the war on production, trade, and
consumption—such as the War Industries Board, War Trade Board, Food
Administration, Fuel Administration, Railway Administration, Shipping
Board, Capital Issues Committee, New York Money Committee, had very
important financial consequences. Their bearing upon the credit situation
and upon the credit problem of the federal reserve banks was especially
important. They acted in effect, though that was not their intended purpose, as a control of credit expansion at the source by limiting the occasion
for the use of credit and by confining its use to such purposes as were
deemed essential to the prosecution of the war.1
But with the close of the war—that is, with the cessation of hostilities
following the armistice—these various controls were soon lifted: " T h e
moment we knew the armistice to have been signed we took the harness o f f . " 4
It was very generally expected that business and industry, if freed from
restraint, would soon effect their return to a normal condition. Early in the
year 1919, however, industrial stagnation and unemployment were in evidence, and a fresh survey and diagnosis of the economic situation was made
by the Industrial Board3 set up under the auspices of the Department of
Commerce for assisting the readjustment of industry and trade to a more
stable basis. Its main effort was directed to bring about revision of prices
and stabilization of the expected fall of prices. Events soon showed that the
policy of "price stabilization" was based on a faulty economic diagnosis. It
was not many months after the close of the war that prices began to rise.
The main impulse came from the release of buying power which had been in
restraint during the war. A seller's market began to develop in the spring of
1919. The consumer demanded goods; price was a secondary consideration.
Dealers, both wholesale and retail, were bidding against one another for such
supplies as there were, and manufacturers were bidding against one
another for raw materials and labor. The rapid rise of prices induced buying for speculation, and speculation in its turn accelerated the rise of prices.
Inflation was becoming cumulative and systemic in its effects, and pervading
the whole body economic. This is the explanation of a phenomenon which
has puzzled so many people. During the war, expansion of credit was
restrained from working its full economic effects in the form of price inflation
and speculation. After the war it was let loose when the various controls
above enumerated were lifted and the huge volume of credit created during
the war was permitted to diffuse itself.
The credit and business situation which developed in the United States
in 1919 was one that needed restraint. A seller's market usually needs
1 Federal Resene Bulletin, October, 1918, pp. 922-924. If these various controls which
were in effective operation in the last months of the war had been made equally effective
early in the war, it is probable that a better financial and credit situation would have been
maintained throughout the war; in brief, that there would have been less inflation of credit
and prices than in fact developed.
2 From President Wilson's address to Congress, delivered December 2, 1918.
3
Federal Reserve Bulletin, Mar., 1919, p. 246.

APPENDIX

299

credit restraint before it passes the limit of safety, just as a buyer's market
usually needs the help of credit support. It would have been of the greatest
advantage to the country if such restraint1 had been exercised by the federal
reserve system in the year 1919, and the development of the runaway and
speculative markets, which developed in the second half of the year, been
measurably prevented. The federal reserve system was the one important
agency of control left to the country after the various war controls had
disappeared. All the more important was it, therefore, that it should be in a
position to function as effectively as possible. Its burden and responsibility, even under the most favorable view of the situation, were
undeniably large, and would have imposed a severe test upon the
system. In the light of what transpired in the year 1920, as is
now a matter of universal knowledge, there is every reason to believe
that if the federal reserve svstem had functioned as effectively in
1919 in regulating credit as it did in 1920 in retarding and eventually arresting expansion, it would have rendered an inestimable service to
the country and would have prevented many of the unhealthful developments in business and credit from gaining the headway which made action
of so drastic a character as that which was taken in 1920 necessary. How
much of the business distress and economic hardship experienced by the
country during the past year would have been avoided, had the federal
reserve system been in a position to pursue a discount policy in the second
half of the year 1919 such as the trend of developments clearly indicated to
be necessary, cannot of course be determined. Much of the hardship
suffered by the country in 1920 might, however, have been avoided by the
adoption in 1919 of an effective precautionary policy of credit control. That
such a precautionary discount policy would have been adopted by the federal
reserve system, had it felt free to act, will not be doubted by any one
acquainted with the attitude of the Federal Reserve Board and the federal
reserve banks at this time. As early as June, 1919, after the close of the
Victory Liberty Loan campaign, which, it will be remembered, was announced to be the last of the war loans, the Federal Reserve Board expressed
its concern over the unhealthful tendencies which were in process. Counsel
1 The month of September was the time to have gotten control.
The public debt reached
its maximum at the end of August, and a great reduction of the floating debt occurred in
September. Total war loan paper for the twelve federal reserve banks dropped from
SI,635,233,000 on September 5, 1919, to $1,383,896,000 on September 19, following the
redemption of certificates on September 15 of $431,910,000. The rise was then rapid, reaching
<1,771,028,000 on November 7. The movement of total bills discounted paralleled the
variations in war loan paper closely. On September 5, total bills discounted for member
banks were $1,847,418,000.
They fell to $1,645,881,000 on September 19, and rose to
$2,189,489,000 on November 7. The expansion of the loan account of the federal reserve
banks during the seven weeks from September 19 to November 7 amounted to over

1500,000,000.
For the Federal Reserve Bank of New York, total war loan paper dropped from $672,070,° 0 0 on September 5, 1919, to $483,053,000 on September 19. It then rose to $795,212,000
on November 7. On September 5, total bills discounted amounted to $724,861,000, falling
to $528,592,000 on September 19, and rising to $904,351,000 on November 7. The expansion in total bills discounted in the seven weeks from September 19 to November 7 amounted
l o approximately $375,000,000.

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and warnings of similar purport were subsequently repeated. The necessity
of restraint upon the borrowings of member banks for speculative purposes
by other means than advances in discount rates1 was pointed out, and such
restraint was urged. Here and there, for a while, there were some slight
evidences that the situation was being controlled, but no large results were
achieved, and speculative tendencies of a dangerous character and large
dimensions, involving speculation in land and commodities as well as m
securities, gained increasing momentum through the autumn of 1919.
" Direct action," so-called, as a method of credit control was not succeeding.2
The expansion of credit and the rise of prices went on apace. Speculation
flourished. It could no longer be doubted that the federal reserve system
must undertake the regulation of credit by means of discount rates. A
beginning was made by the slight advance in discount rates on war loan
paper on December 11, 1919, with every expectation and intention on the
part of the federal reserve system of assuming full control of its discount
policy with the advent of the year 1920.
AH this is said dispassionately and objectively, by way of explanation of
a critical period in the history of federal reserve policy. The Treasury, as
well as the federal reserve system, had its difficulties. While the war, in a
fighting sense, was over with the advent of the year 1919, it was not over in
a financial sense. The Treasury was still confronted with vast financial
obligations. The financial precedent established during the war carried
over into the year 1919. Reserve bank policy continued to be subordinated
to Treasury policy, and discount rates throughout the year 1919 were maintained at artificially low levels. The device of an artificial discount rate
provided too comfortable an expedient alike to the Treasury and to the banks
of the country, which were still burdened with commitments made under the
"borrow and b u y " Liberty Loan slogan, to be easily relinquished. Thus
was the federal reserve system controlled in the matter of its discount policy
at the very time when the interest of the country at large required that it
should be free of control in order that it itself might control.
With the year 1920 3 the federal reserve banks entered upon the exercise
of their function of regulating credit in accordance with business and
economic indications, and, under circumstances of extraordinary difficulty
and for the first time since the outbreak of the war, undertook to develop
a policy of credit control by means of discount rates. About the same time
the Treasury adopted the policy of adjusting the interest rate on its short1 "The Federal Reserve Board is concerned over the existing tendency towards excessive
speculation, and while ordinarily this could be corrected by an advance in discount rates at
the Federal Reserve Banks, it is not practicable to apply this check at this time because of
Government financing." (From a letter sent by the Federal Reserve Board to the chairmen of the federal reserve banks, June 10, 1919.)
1 "These warnings, however, were only a transitory expedient and were given only momentary attention by many banks. The Board was prepared, as soon as Treasury exigencies
permitted, to resort to the well-known method of advancing the rate of discount." Annual

Report for 1920, p. 12.

* "Fortunately the condition of the Treasury is such that the Board can now feel free to
inaugurate discount policies adjusted to peace-time conditions and needs." Annual Report
for 1919, p. 69.

APPENDIX

301

term borrowings to the state of the money market. It is not for the Federal
Reserve Board to estimate the wisdom of the credit policy pursued by it
m the year 1920. It may, however, with propriety speak of the attitude
which led to that policy. There was nothing " h e s i t a n t " 1 in the policy
adopted by the board at this time. Rates were advanced as follows in January, 1920: commercial paper rate, from 0£ per cent at ten banks and 5
per cent at two banks to 6 per cent at all banks; certificate of indebtedness
rate, from 4 H per cent to 4}£ per cent according to the rate borne by the
certificate to 4?£ per cent on all classes of certificates; liberty bond rate, from
4 % per cent at ten banks and 5 per cent at two banks to
per cent at all
banks. Such marked advances of rate do not betray "hesitation"; they
evidence conviction. 2 This first advance in rates not proving effective,
further advances were made in the early summer—the commercial rate at
the largest Federal reserve banks being advanced from 6 percent to 7 per
cent, rates on certificates from 4 % per cent to
per cent at seven banks,
and from 5 per cent to 6 per cent at five banks, according to the rate borne by
the certificate, and rates on liberty bonds from 5Yi per cent to 6 per cent at
six banks, and 5?£ per cent at one bank, the rate being left unchanged at the
remaining five banks.
The reserve ratio for the federal reserve system as a whole on January 2,
1920, was 43.7 per cent as compared with 50.8 per cent on July 3, 1919.
It declined to 42.8 per cent on July 2, 1920. The board's action in raising
rates was therefore clearly supported by the reserve position of the banks.
But there is nothing in the action taken then or at any time later in the year
to justify the statement that the board's discount policy in 1920 was not
" t h e expression of a voluntary policy." 3 The board's attitude is clearly
indicated in its annual report for 1919: " T h e expansion of credit set in
motion by the war must be checked. Credit must be brought under effective
control and its flow be once more regulated and governed with careful regard
to the economic welfare of the country and the needs of its producing industries." 4 The action taken by the federal reserve banks in 1920 was taken not
primarily to protect their reserves but to control the rate of expansion of
credit. It should be distinctly noted in reviewing the situation of the
reserve banks during the years 1919 and 1920 that the reserve ratio of the
federal reserve system was declining, not because reserves were being
depleted through loss of gold, but primarily because the credit facilities of
the system were being too freely drawn upon by the banks of the country
The terra used by Mr. Spraguc in the article already cited, page 24.
" I t was the Board's conviction, however, at the close of the year (1919) that a substantial advance in all discount rates was necessary and that it should not be long delayed."
1

Annual Report for 1919, p. 4.
* " I t is, however, by no means certain that the Reserve Board would have taken measures to restrain credit during the course of the winter and spring of this year [19201 if the
power of the reserve banks to extend credit within the limits of legal reserve requirements
had not been nearly exhausted. The successive advances in discount rates made during the
first half of the year were not then entirely the expression of a voluntary policy. It was a
policy which in large measure was enforced by the reserve position of the banks." (Sprague,
article cited, p. 23.)
1

Annual Report for 1919, p. 71.

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and the liabilities of the reserve banks in the form of deposits and notes
mounting at a steady and startling rate. The decline of the reserve ratio
reflected quite accurately the credit expansion which was in process.1 The
solicitude of the board arose not because of loss of gold—for the total gold
holdings of the reserve system showed little variation (amounting on
January 3, 1919, to $2,091,194,000; on July 3, 1919 to S2,128,946,000; on
January 2, 1920, to §2,062,615,000; on July 2, 1920, to §1,971,696,000; and
on December 31, 1920, to §2,059,333,000), but because of the unhealthful
credit situation which had been developing since the summer of 1919, and
which threatened to culminate in disaster unless subjected to control. While
this condition was reflected in the decline of the reserve ratio, the board's
discount policy was directed toward improving the reserve position of the
federal reserve banks not by increasing their reserves but by checking the
constant expansion of their liabilities and by setting in operation forces
which would make for a healthier credit situation. It raised rates to protect
the reserve banks against abuse of their credit facilities, and to protect
the community and the general business and economic situation against the
consequences of such abuse.
Whether the federal reserve system would have had the support of public
opinion to the extent it had during the past year, had the bad situation which
the Federal Reserve Board was undertaking to improve not been unmistakably reflected in the reserve position of the banks, may well be doubted:
" A s a guide to discount policy, it must be admitted the reserve ratio has
certain conspicuous advantages. It is definite and obvious. Public opinion
may be expected to support the always unwelcome policy of credit restraint
when that policy is enforced by a depleted reserve. It is unhappily very
doubtful whether the public would have been reconciled to the advance in
rates made last spring if the reserve banks had had, let us say, a reserve
ratio of 55 per cent, and yet, all other things being the same, an advance in
rates would have been no less desirable." 2
It is this consideration, thus well stated, which has given to the bank
reserve ratio in the past its authoritative position as a credit and banking
indicator. It is this same consideration which will assure it a position of
almost equal importance in the future. Tradition, it must never be forgotten, has much to do with matters of banking and credit practice. The
popular tradition that the reserve ratio is the index of changes in the credit
situation will therefore be slow to disappear. Particularly will this be true
in the United States, where long adherence to the principle of legislatively
* Studies made by the Statistical Division of the Federal Reserve Board indicate that for
the larger part of the year 1920 the reserve ratio hasfluctuatedin close accord with changes
in note and deposit liabilities. As between notes and deposits, the indications are that for
shorter periods of time changes in the ratio followfluctuationsin deposits, while for longer
periods of time the decisive influence on the ratio is exercised by changes in the volume of
notes. An effort has been made to devise an "index of divergence," or formula for estimating the relative effects of changes in liabilities and of changes in reserves on the movement of
the reserve ratio. Sec paper by E. A. Goldcnweiser, "Index of Divergence," in the forthcoming September number of the American Statistical
Review.
• Spraguc, article cited, p. 27.

APPENDIX

303

prescribed minimum banking reserves has much of the sanctity of a first
principle. The proposals often made in recent months to abandon the
reserve ratio as an indicator of discount policy and to base discount policy
hereafter on the observed effects of credit on prices,1 have, therefore, the
character of academic proposals, even in present circumstances, which, it
must candidly be admitted, are less favorable than was ordinarily true in the
past to quick responsiveness on the part of the reserve ratio to changing
business, credit, and price conditions. As an abstract proposition, the
proposal to substitute a price indicator for the reserve ratio as a guide to
discount policy has much economic merit. The rigors of the recent price
readjustment process through which the United States, in common with the
rest of the commercial world, has been passing, have emphasized the value
of price stability. Price disturbances not originating from inevitable natural
causes are bad and costly alike to producer and consumer. It is not surprising, therefore, in view of the trying experiences of recent years, that
effort should be made, in reviewing the working of present-day credit and
banking machinery, to find some guide to credit policy that will give to the
community greater protection against unsettling changes in the price level.
Recent American experience, it may also be admitted, has demonstrated that
good banking administration in times of economic disorder, at least, presents
more than a problem of merely maintaining the reserve ratio, in a conventional or perfunctory sense.
Without entering upon the discussion of controverted questions of economic theory touching the relation of changes in prices to changes in the volume of credit, it may be assumed that the retardation of the flow of credit
in times of expansion, and the acceleration of the flow of credit in times of
business recovery following a period of depression, have an appreciable
bearing on price movements. As a theoretical proposition, therefore, it is
entirely conceivable that the discount policy of the federal reserve system
might be governed by indications of impending price changes, with a view
°f mitigating their cyclical fluctuations. While such an undertaking would
raise some new and difficult problems of credit administration, no doubt in
time the technique of a plan of credit regulation based on price indices could
be worked out and made administratively praticable if public sentiment
demanded. But there is now no warrant in the statute under which the
federal reserve banks are organized for undertaking to regulate their credit
operations on any such basis. The economic logic of the Federal Reserve
act is clearly predicated upon the theory that the federal reserve banks shall
be operated with regard to reserve ratios, and "rates be fixed with a view of
accommodating commerce and business." It would imply a very latitudinarian construction of the term "accommodating commerce and business"
for the Federal Reserve Board and the federal reserve banks to adopt the
"observed effects of credit on prices" as their rule of action in the future.
There is not, however, the slightest reason for supposing that such a procedure on the part of the federal reserve banks would be viewed with public
approval. Quite the contrary. Public sentiment in the United States is,
1
Ibid., p. 28.

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and always has been, highly sensitive in matters of credit control, and
precisely, among other reasons, because of the bearing that such control
has, or is believed to have upon the movement of prices.
The popular dread of "contraction," based, as it is, upon the popular
assumption of a close, immediate, causal connection between contraction
and falling prices, has seldom, if ever, been appealed to in vain in the United
States in times of economic pressure. There is not the slightest warrant
in either the remote or recent economic history of the United States for
supposing that the American public would sanction or tolerate a discount
policy on the part of the federal reserve system avowedly based upon price
indexes, even if it were clear that such a practice were otherwise advisable.
It would be regarded as tantamount to the setting up of a credit and price
despotism. This fear of contraction and its consequences is one of the
most persistent phases of American popular economics; practically viewed,
it has the force of an instinct and is the explanation of many, if not most, of
the otherwise puzzling vagaries of American financial history. One of its
earliest and most energetic manifestations, it is well to recall, was the bitter
hostility aroused against the Second Bank of the United States because of the
financial pressure experienced in 1833-1834, alleged to have been due to the
sinister purposes and Czarist methods of the great banking institution
against which Andrew Jackson was successfully arraying the forces of public
sentiment in many sections of the country. Later manifestations of the
same feeling abound in the decades following the Civil War, when the nation
was confronted with the problem of correcting currency disorders resulting
from the Civil War. Recent events, in the autumn of 1920, have given
evidence of the persistence of a similar strain of sentiment.
The problem of credit and currency regulation in a country as vast as the
United States, and as complicated in its economic organization with different
sections of the country in different stages of economic development and
maturity, presents a very difficult problem even under normal conditions.1
This, among other things, is the explanation and justification of the use of
the regional principle in determining the structure of our system of reserve
banking, as against the principle of a single central institution, nation-wide
in the scope of its operation and control—the regional principle permitting of
a closer adaptation of credit policy to regional or local conditions. The
discount or credit policy of a reserve bank, whether organized on the regional
or the central principle, must always be the expression of a judgment as to
when a situation has arisen in business, industry, or credit which indicates
the desirability of action on the part of reserve holding and credit and
currency regulating institutions. That judgment must be a live judgment,
not a mechanical judgment. A great variety of factors enter into the
determination of appropriate discount policy. Among these may be
mentioned the state of business, industry, and trade (both domestic and
foreign), the state of money markets (both domestic and foreign), interna1 See Sprague, article cited, pp. 2G-27:
"There is no such general market rate of discount as in England. Consequently, the Bank of England practice of a discount rate
slightly above the market rate cannot have so pervasive an influence/'

APPENDIX

305

tional gold movements, seasonal conditions and needs, accidental economic
disturbances, sometimes political conditions and the international situation,
the stage of the business cycle, price movements,1 and the state of banking
reserves. No one of these by itself can be conclusive of action to be taken.
Each has its own value and significance; and competent judgment on the
part of reserve institutions depends in great measure upon the skill and
capacity developed to give to each of these several factors its due weight in
any given set of circumstances in determining the matter of credit policy.
But when all this is said, it may yet be added that ordinarily there is no one
indicator which is more suggestive of the occasion of considering action on
the part of a reserve bank than a change in its reserve ratio.2
1 " W h i l e the Federal Reserve Board will always be mindful of the interdependence of
credit and industry and of the influence exerted on prices by the general volume of credit,
the Board nevertheless can not assume to be an arbiter of industry or prices."
Annual

Report for 1919, p. 73.
"Sprague, article citcd, p. 27: "There is no substitute for the reserve ratio which
possesses its peculiar virtues of simplicity and definitcness."

APPENDIX K
R E V I E W S OF T H E

MONTH

(From Federal Reserve Bulletin)
I . MARCH, 1 9 2 3

Business and Credit.—Since the opening of the year there has been continued growth in the volume of production, further increases in the prices
of basic materials, and a larger demand for credit. Though the general
credit trend has been somewhat obscured by seasonal influences, the differences between the developments this year and at the beginning of 1922
indicate an increase in the credit requirements of business. The reduction
in loans at member banks during January was only half as large in 1923
as in 1922, and the decrease in reserve bank discounts was much smaller
than a year ago. Also, the return flow of Federal reserve note currency was
not so pronounced this year as last, and came to an end a week or two earlier.
Borrowing for commercial purposes, which has increased steadily since
mid-summer of 1922, showed no seasonal decline, but continued to increase
during January and February. The effect of this larger credit demand was
felt early in February in a higher level of money rates in the financial centers.
In considering the present condition of industry and trade and the prospective demand for credit, it is important to give attention not merely to
the financial situation, but to influences affecting the current volume of
production and trade. Credit changes tend to lag behind changes in productive output, and consequently the immediate financial developments do
not adequately reflect the extent of present industrial activity. The factors
of primary importance in estimating the present outlook arc the volume
and character of goods being produced and marketed, and the sources of
demand for these goods.
Recent Increases in Production.—It is well known that the trend of production has been upward since the middle of 1921, and that the current
output is large, but the extent of recovery and the magnitude of the present
volume of production compared to earlier periods of business activity are
not so fully realized. During the last quarter of 1922 production was greater
than at any similar period during the past five years. The Federal Reserve
Board's index of production in basic industries, which measures the changes
in the output of 22 commodities, shows that in September, 1922, production
was equal to the monthly average for 1919, and that since that month there
has been an almost continuous advance. During so short a period as the
last five months there has been a 20 per cent increase in output, and m
January the level of production rose above the peak of 1920. During this

30G

APPENDIX

307

period industrial disturbances have been few, mining has proceeded on a
larger scale, and traffic conditions have improved. The relatively mild
winter and the continued demand for housing facilities have led to a continuance of building operations. Greater efficiency, both of labor and of factory equipment, has made larger output possible, and the sustained demand
for basic materials at advancing prices has made production profitable.
The chief factor in the larger production during January was the increased
output of iron and steel. This output during the first month of 1923 was
double that of the same month last year; the output of steel ingots was, in
fact, the largest on record for any January and with the exception of March,
1920, the largest for any month since 1918. Recent estimates of the consumption of steel by important lines of industry indicate the character of
present demand. Railroads used approximately 25 per cent of last year's
steel production; transportation and storage of oil, gas, and water consumed
15 per cent; buildings and bridges approximately 12 per cent; the automobile
industry 9 per cent, and the export demand about 8 per cent. Larger steel
production during January has been accompanied by a growth in the volume
of unfilled orders and by an increase in the price of steel.
A somewhat similar situation exists in the building industry and in the
industries producing building materials. Since the latter part of 1922 the
volume of orders plaecd for lumber has exceeded production, some weeks
running as high as 50 per cent in excess; in December and January shipments
of lumber exceeded production by about 20 per cent. Production of lumber,
cement, and face brick during January, 1923, average about 45 per cent
greater than a year earlier, and prices of building materials advanced 19 per
cent during the same period. The advance in prices of these materials durmg the past year has been greater than for any other group represented in
the index number of the Bureau of Labor Statistics, but the increase in
their production has been still greater. The demand for basic materials
and for house furnishings resulting from the present building activity has
played a large part both directly and indirectly in creating the current
volume of production and trade. The construction industry and, in fact,
the production of equipment goods in general are fluctuating in character,
and the influence of the additional demands arising from such industries
upon the volume of employment, and hence on the buying power of workers,
greatest during periods of changing business activity.
While the production of consumers' goods ordinarily fluctuates less than
that of basic materials, yet their output has also responded to the recent
increase in business activity and to the larger purchasing power resulting
from fuller employment. At the beginning of 1922 the production of textiles, shoes, and food declined, but during the latter part of the year the
output of these goods again increased. For the year as a whole, cotton
consumption at textile mills was the largest since 1918; woolen mills were
particularly active during the last quarter of the year and maintained their
Production during January. The output of food products was greater during 1922 than in cither of* the two preceding years, although in general less
than during 1919. It is estimated that during last year more meat was con-

308

FEDERAL

RESERVE

SYSTEM

IN OPERA TION

sumed in the United States than during any previous year. The domestic
demand for consumers* goods is the largest market for American products,
and the increase in the money income of the Nation during the past year has
been reflected in that market.
Production and Stocks.—In order to determine the economic significance
of the large volume of current production, it is important to know whether
the output is being marketed as it is produced or is accumulating in large quantities. A comparison of the stocks of basic materials in January, 1923, with
those for the corresponding month a year ago indicates, as far as information
is available, that they are not accumulating. As this conclusion bears an
important relation to the current business and credit situation, the evidence
is presented in some detail. The following table shows the stocks of basic
commodities on hand January 1, 1923, and the percentage of increase or
decrease compared with a year ago.
STOCKS OF BASIC

MATERIALS, JANUARY 1.

Bituminous coal,1 tons
Anthracite coal,1 tons
Crude petroleum, barrels
Gasoline,1 gallons
Kerosene,® gallons
Pine lumber,* M feet
Cement, barrels
Brick, face, number
Wood pulp, tons
Newsprint,* tons
Cattle hides, number
Calfskins, number
Goat and kid skins, number
Sheep and lambskins, number
Sole leather7
Cotton,8 bales
Flour,' barrels
Beef,10 pounds
Pork products,10 pounds
Lamb, 10 pounds

1922,

AND JANUARY

1923

Jan. 1. 1922

Jan. 1, 1923

Per cent
increase
or decrease ( —1

48,000,000
1,230,000
185,623,000
439,031,000
170,315,000
2,178,000
11,938,000
160,961,000
169,923
227,235
5,819,000
2,965,000
10,380,000
12,661,000
11,303,000
6,945.000
7,776,000
84,808,000
462,637,000
6,444,000

30,000,000
364,000
264,578,000
4 567,101,000
4 234,436,000
2,216,000
9,134,000
118,626,000
113,301
238,707
6,346,000
3,298,000
8,730,000
9,151,000
9,764,000
5,996,000
7,700,000
116,222,000
567,312,000
4,528,000

-25.0
-70.4
42.5
20.2
37.6
1.7
-23.5
-26.3
-33.3
5.0
9.1
1.2
-15.9
-27.7
-13.6
-13.7
- 1.0
37.0
22.6
-35.2

1 Total commercial stocks; estimate based on 5,000 reports.
Stocks of 516 identical retail dealers.
Refiners' stocks.
< Figures for Dec. 1, 1922, the latest available.
* Reports of Southern Pine Association and Western Pine Association.
• Stocks of mills, jobbers, and publishers and stocks in transit.
7 Backs, bends, and sides.
* At mills and warehouses.
• Estimates of Russell's Commercial News,
" Cold-storage holdings, Bureau of Agricultural Economics.
2

APPENDIX

309

The fact that stocks of many basic materials at the beginning of the year
were less than a year ago indicates that the goods produced have moved
steadily into the channels of trade. A further indication that no large
physical volume of goods has been accumulated by industrial corporations
is furnished by the recently published annual statements of a considerable
number of concerns engaged in the production of raw materials and of
finished goods. These statements show that inventories at the close of
1922 averaged somewhat less than in 1921, notwithstanding the fact that
prices are higher than a year ago. Information concerning stocks in the
hands of retailers is less comprehensive, the only available data being the
reports received by Federal reserve banks from 500 department stores in
over 100 cities. The merchandise stocks held by these stores at the end of
the year were relatively low and during January declined slightly.
The relation between production and stocks is ordinarily regarded as of
great value in throwing light upon business and credit conditions and
tendencies. In a period of business revival, when prices are advancing,
there coines a time when the expectation of further increases in prices
furnishes a powerful incentive to manufacturers and merchants to enlarge
the volume of their purchases of materials and merchandise, and so to accumulate stocks. Such practice, if generally pursued, may for a time be itself
the cause for bringing about the expected price increase. The policy of
purchasing far in anticipation of demand because of expected price advances,
and of ordering materials in excess of requirements because of fear of shortages, introduces an element of unhealthy speculation into production and
trade. Such policies, furthermore, ordinarily lead to increased borrowing to
finance the larger inventories, and borrowing for this purpose accounts in
part for the enlarged demand for credit which accompanies a rise in prices.
How large a volume of credit at any given time is required to maintain a
healthy condition of productive industry is not always easy to determine,
particularly in a country of such varied and complex economic activity as
the United States. But it is well to emphasize that the economic use of
credit is to facilitate the production and orderly marketing of goods, and
not to finance the speculative holding of excessive stocks of materials and
merchandise. So far as the available indications go, the increased demand
for credit during recent months appears to have arisen from the larger financial requirements of current production and trade and not from speculation
in inventories.
Further evidence as to the movement and marketing of goods is furnished
by the car loading of merchandise and the volume of wholesale and retail
sales. Railroad loadings of merchandise in the last quarter of 1922 were
about 10 per cent larger than those of the last quarter of 1921. During
January there was a further increase of merchandise loadings, and the total
for the month was 23 per cent larger than the corresponding month of last
year. The volume of wholesale and retail merchandising increased in the
last quarter of 1922, but the increase of wholesale trade was not unusually
large for the season of the year. For 1922 as a whole, however, the volume
°f wholesale trade was substantially greater than in 1921. In retail trade

310

FEDERAL

RESERVE

SYSTEM

OPERA TION

the sales, both of department stores and mail-order houses, were considerably larger in the fall of 1922 than in 1921. During the last quarter of the
year department stores increased their sales over the corresponding period
of the previous year by approximately 6 per cent, while, comparing the
same periods, mail-order houses reported sales 31 per ccnt larger. Mailorder sales, however, which reflect the merchandise demand in rural districts
and which declined heavily during 1920 and 1921, were still smaller in dollar
value than they were in 1919, whereas department-store sales, representing
city trade, were much larger. December sales of reporting department
stores reached the largest monthly figure of the last four years, and in
January were 12 per cent larger than in January, 1922.
The increased buying which made possible this larger marketing of
goods came chiefly from fuller employment and the larger pay rolls and
from some increase in the net proceeds to the farmer from the sale of his
products.
Increased Buying Power.—Restoration of buying power resulting from
reemployment after the industrial inactivity of 1921 is one of the causes for
the sustained demand that has supported the increase in that activity.
During the past year the pay rolls at industrial establishments increased
approximately 25 per cent. Moreover, this increased money income was
not offset by corresponding increases in the cost of living. Retail prices rose
very little during the year, so that the advance in wholesale prices has not
yet been fully reflected in the prices of goods bought by the ultimate consumer. These conditions have enabled wage earners to make savings, as is
evidenced by the growth of savings deposits throughout the country- The
increase during the year in savings deposits for about 880 reporting banks
distributed through the 12 Federal reserve districts and holding approximately one-third of the total time and savings deposits of the country was
S445,000,000. About 60 per cent of this increase took place during the last
three months. The accumulation of these savings represents partly the
deposit of funds arising from the redemption of Victory notes and war
savings certificates, but it indicates more particularly that current money
income has not only been sufficient to purchase a large volume of consumers
goods, but also to contribute to the funds now being invested in houses and
other capital goods. It is generally true that in years when production is
large both consumption and saving are also greatest.
Foreign Markets as a Factor.™The curtailed buying power of European
purchasers under present conditions raises the questions as to the extent
of dependency of various lines of industry upon foreign buyers and the
relative importance of domestic and foreign markets. In the following table
are shown, for selected years for certain basic materials, the proportion of
domestic production in terms of quantity which has been sold in foreign
markets. No account is here taken of the lag of several months that must
ordinarily take place between the time goods are produced and the time they
are exported.

APPENDIX

311

PERCENTAGE OF DOMESTIC PRODUCTION EXPORTED IN SPECIFIED CALENDAR
YEARS
Commodity

Wheat
Wheat flour
Cotton
Tobacco
Beef
Pork and lard
Bituminous coal
Copper
Gasoline
Kerosene
Gas and fuel oil

1013

1920

13.0
10.5
1.9
60.8
46.6
.9
15.9
3.8
66.8
9.8
57.8
9.6

24.7
18.1
.6
45.8
29.6
2.3
24.3
6.0
45.6
8.1
37.5
9.3

1921
Dl .A
Oi
4
13.9

A f>

81.4
48.2
.8
24.9
5.0
117.91
10.3
38.5
8.7

1922

19.2
12.0
5.7
61.4
32.5
.6
20.6
2 7
66.5
9.3
38.8
6.5

1 Exports greater than production, due to marketing of stocks carried over from previous year.

The figures show the very wide differences in the relative amounts of
various products which were shipped to foreign markets, and the relatively
large proportion of certain farm products marketed abroad indicates the
connection between the condition, of world markets and the prosperity of the
American farmer. The relation between the total foreign trade and total
domestic production is difficult to estimate with accuracy, but both on the
basis of physical units and of dollar value it is clear that no large proportion
of the country's production during 1922 was marketed abroad. It should
not be assumed, however, that the foreign trade of the United States is unimportant because, however measured, it is only a small part of our combined
domestic and foreign trade. The cotton growers of the South and the
farmers of the Middle West depend to a considerable extent upon foreign
demand to insure marketing their crops at profitable prices. Moreover,
even for manufacturers, the existence of a foreign market ready to absorb
surplus products is an important price stabilizing factor, even though the
actual volume of certain kinds of goods solfl abroad may not be large.
The physical volume of exports in 1922, according to the foreign trade
index of the Federal Reserve Board and other available data, was slightly
less than in 1921, but the movement of goods was in general well maintained
and was highest in the last three months of the year. The rise in those
months was due entirely to increased exports of raw materials, chief among
which was raw cotton. The quantities of foodstuffs and manufactures, on
the other hand, showed a tendency to decline in the latter part of 1922,
following large movements of those classes of goods earlier in the year.
The lower priced cereals, such as corn, rye, and oats, were exported in larger
quantities than in the previous year, but wheat exports fell sharply on
account of strong competition from Canada, which tended to discourage
foreign buying. In December, however, wheat exports showed a decided
recovery from the level of November and preceding months.

312

FEDERAL

RESERVE

SYSTEM

IN OPERA TION

Manufactured goods were shipped abroad in about the same quantity
during 1922 as in the preceding year, exports having increased steadily in
volume from the summer of 1921 until about the middle of last year. Since
then the gain in that direction has not been sustained. Export trade in
textile manufactures was larger in 1922 than a year earlier, but shipments
of iron and steel manufactures and machinery were smaller. The downward
trend of manufactured exports during the latter half of 1922, at the same
time that production in this country was expanding, indicates that American
manufactures have not depended upon foreign markets to any large extent
as an outlet for the recent increase in output.
Prices and Production.—While production and prices have both been
increasing during the past year, for many commodities the rate of increase
in production has been greater than the rate of advance in price. Wholesale prices, as measured by the index of the Bureau of Labor Statistics, have
advanced 13 per cent in the course of the past year, while the volume of
production in basic industries has increased 40 per cent. Prices of raw
materials taken as a group have advanced 20 per cent during this period,
while the prices of consumers' goods have risen only a little more than G per
cent. During the three months ended January, 1923, the diverse price movement among different groups of commodities balanced one another, so that
the combined index has showed no net change. In January it remained
unchanged at 156 per cent of the 1913 average. Prices of many basic
commodities, however, advanced during January and February to new high
levels for the current movement, in some cases reaching the highest points
since 1920. During the past year price advances have been effective in
calling forth larger output, and the expansion of production has been
supported by the larger use of credit. Wrhen, however, production reaches
the limits imposed by the available supplies of labor, plant capacity, and
transportation facilities—in fact, whenever the productive energies and
resources of the country are employed at full capacity—output can not be
enlarged by an increased use of credit and by further increases in prices.
With production at its present volume, prices of many basic materials
advancing, and the buying power of the public apparently considerably
strengthened, the question arises, what will be the trend in the demand for
credit and how soon will increased loan activity at banks result in a larger
demand for accommodation at the Federal reserve banks?
Credit Conditions.—As was stated in the beginning, the credit developments during the early part of this year differ in some significant particulars
from those during the corresponding period a year ago. The extent of
seasonal liquidation was less this year than last, and the movements in
various classes of loans indicate the difference in the character of present
borrowing compared with that of a year ago. Last year liquidation was
chiefly of commercial loans, while this year it was for the most part confined
to loans secured by stocks and bonds, commercial loans continuing to
increase. At reporting member banks between the close of the year and the
middle of February, loans secured by corporate obligations declined about
§47,000,000, while other loans, largely commercial in character, increased

APPENDIX

313

by about $243,000,000. The larger part of these commercial loans were
made by banks in the industrial and financial East, where the increased
demand for credit has been reflected in higher money rates.
The extent to which this increased demand for credit may be met by other
means than borrowing at reserve banks is limited. Although during the
period between the beginning of 1921 and midsummer of 1922 member banks
in leading cities used funds arising from loan liquidation in the purchase of
securities to the extent of over $1,000,000,000, it is doubtful how far they
will be able to meet the increased financial requirements of business by the
sale of these securities. While a portion of these securities might be
absorbed by ultimate investors out of current savings, a large volume of sales
within a short period is not likely to result in any considerable increase in
the total volume of funds available for current operations. The fact is
that member banks have made use of all their available funds either for
loans or investments, that a reduction in investments will result in increased
demand for loans, and that the growing demand for commercial credit
will lead member banks to apply for additional accommodation at Federal
reserve banks.
The increased demand for credit for commercial purposes is beginning to
reflect itself in increased borrowing from certain of the reserve banks, particularly those in the larger centers where borrowings reflect most sensitively the
greater industrial demands. The outstanding fact in reserve bank developments during the first eight weeks of 1923, taking the system as a whole,
is that seasonal liquidation of discounts this year was negligible compared
with last year, the net aggregate reduction this year being only about $2,000,000. Member banks reduced their borrowings at eight of the reserve banks,
but these reductions were offset by increases at the Philadelphia, Dallas,
San Francisco, and New York reserve banks. The largest increase in discounts for the period was at the Federal Reserve Bank of New York, where
member banks increased their borrowings by $96,000,000. To better adjust
its relation to the altered condition of the money market thus evidenced,
the New York reserve bank has raised its discount rate from 4 to
per
cent. Action which was also taken at the Boston and San Francisco reserve
per cent
hanks brought the rates of these banks to the uniform level of
now obtaining at all Federal reserve banks.
Expansion in the volume of reserve bank credit at a time when physical
production is approaching maximum, particularly if the growth of business
extends to all districts, will bring the reserve banks into a closer relationship
through their rediscount operations to the movement of production, trade,
and prices than they have sustained for more than a year.
I I . APRIL,

1923

Gold and Credit.—During recent months the reserves of the Federal
reserve banks, in consequence of continued gold imports, have reached the
highest figure since the establishment of the system. Member bank reserves
at the Federal reserve banks are also the highest on record. Reserve

314

FEDERAL

RESERVE

SYSTEM

IN OPERA

TION

banks and member banks, however, have utilized these reserves during the
past year in altogether different degrees. Measured by total loans and
investments the volume of reserve-bank credit is smaller than a year ago,
while member-bank credit has increased more than $2,000,000,000. In
fact, the aggregate amount of member-bank credit now in use is approximately as large as at the peak of credit expansion in 1920. Member banks
have extended this credit without obtaining from the reserve banks an
amount of accommodation even approaching the volume of their borrowings
in 1920. This large volume of member-bank credit is the result of increased
credit demands which began early in 1922 and became more marked during
the second half of that year. This expansion in member-bank credit without a corresponding growth in Federal reserve bank accommodation has
been made possible by a continued flow of gold from abroad. This gold
was deposited by member banks with the reserve banks and was thus
the basis of additional credit extended to borrowers. The inflow of gold of
over $200,000,000 during 1922 corresponds roughly to the increase in the
reserves of the reserve banks and also in the reserve balances of member
banks. During this period the total of demand and time deposits of members increased $2,800,000,000. It is impossible to determine the extent to
which the influx of gold has stimulated the extension of credit by member
banks. From the point of view of the Federal reserve banks, however, it is
not so important to know whether bank credit would have expanded to the
same extent had there been no gold imports, as it is to realize clearly that,
if member banks had not received a steady stream of gold from abroad,
they could not have extended the additional credit granted by them during
1922 without applying for a larger amount of accommodation at the Federal
reserve banks.
The growth of deposit liabilities of member banks at a rate approximately
tenfold the increase in their reserve balances is in accordance with experience which shows that their actual reserves never greatly exceed the legally
required minimum. This is in striking contrast to the Federal reserve
banks which for more than a year have maintained a reserve ratio of over
75 per cent to deposit and note liabilities combined. Thus the inflow
of gold in 1922 has maintained the ratio of reserve bank reserves to their
increasing liabilities at a relatively constant and high level, and the utilization of the reserve balances arising out of this gold has enabled member banks
to extend their loans and to maintain their reserve requirements without
additional borrowing from the reserve banks.
Figures which have recently become available showing the condition
of all member banks of the reserve system at the end of December, 1922,
show that total loans and investments of these banks at the end of 1922 were
$25,700,000,000, indicating but little reduction from the total of $26,100,000,000, shown at the peak of expansion in November, 1920. During the
same period, total earning assets of the reserve banks, which measure the
total volume of reserve-bank credit in use, declined from $3,400,000,000 to
$1,300,000,000, and constituted at the end of 1922, 5 per cent of memberbank credit, compared with 13 per cent in 1920. This change in the propor-

APPENDIX

315

tion of reserve-bank credit to the total volume of bank credit reflects the
effect of the billion dollars of gold imported since the autumn of 1920.
Gold Imports and the Credit Situation.—The use made by member banks
of gold received from abroad has depended upon the character of the business
and credit situation in the United States at the time. Thus the effect upon
credit of the present gold movement which began in September, 1920, may be
marked off into two distinct periods. During the first period, which con-

tinued until the close of 1921, gold was chiefly used to liquidate borrowing
by member banks at Federal reserve banks, while in the second period, with
the revival of business activity and the increased demand for credit, gold
was used as a basis of additional lending by member banks, ihe bare
on the chart show imports and exports of gold since the beginning of I J U
and the line indicates changes in the reserves of Federal reserve banks.
During the 15 months preceding the present gold inflow the United States
lost over $400,000,000 in gold to South American and oriental countries

316

FEDERAL

RESERVE

SYSTEM

OPERA

TION

which had accumulated balances during the war and withdrew them after
the removal of the embargo. This outflow is reflected in the decline of
the reserves. The chart clearly brings out the fact that the heavy gold
imports, which began in the last quarter of 1920 and continued through
1921, raised the reserves of the reserve banks to a high level. The gold
reaching this country from abroad was taken to the reserve banks and there
liquidated a corresponding amount of member-bank indebtedness. During
1922, however, when member banks were receiving little accommodation
from the reserve banks, gold imports, which continued, though in reduced
volume, were used largely as a basis for the extension of new credit.
During the first period of the present gold movement, when the gold
inflow amounted to 3845,000,000, liquidation of credit in the United States
was under way, the demand for credit was relatively small, prices were declining, business activity was at low ebb, and the member banks utilized the
gold obtained from abroad to reduce their indebtedness at the reserve banks
and thus to strengthen their own position. This use of the foreign gold
representing the liquidation of debts owed to America by foreigners accelerated the reduction of bank loans which was proceeding independently as
the result of domestic conditions. The reduction in Federal reserve bank
assets from their peak in October, 1920, to their lowest point in the summer
of 1922, was due approximately to the same extent to the liquidation of
domestic and of foreign loans. The former is roughly measured by the
reduction in Federal reserve note circulation and the latter by the net
imports of gold.
The second period in the gold movement, during which net imports
totaled $269,000,000, began about the opening of 1922, but particularly
after the first quarter of that year. A large number of member banks,
especially in the financial East, had paid off their entire indebtedness to the
reserve banks and the gold imported during this period, when deposited
with the reserve banks, constituted a basis for extension of credit by the
member banks. Thus, gold imports during the first period facilitated
liquidation of credit while during the second period they were used as
reserves against new credit. Furthermore, during liquidation the imported
gold canceled a corresponding amount of indebtedness, dollar for dollar,
while during the more recent inflow it supported an approximately tenfold
increase in the deposit liabilities of member banks. This increase was in
response to the domestic credit demand, but in the absence of gold imports
member banks would necessarily have borrowed from the reserve banks to
meet their larger reserve requirements.
Reserve Balances and Growth of Credit.—The consequences of any addition to reserve balances, whether they arise from gold imports or from reservebank accommodation, are important because of the relation they bear to the
lending power of member banks and the growth of credit. The volume of
member-bank reserve deposits at Federal reserve b a n k s r e m a i n s fairly steady,
but small changes in these reserves are significant because of their relation
to member-bank deposit liabilities. Indeed, over longer periods of time
the level of reserve deposits at reserve banks changes less than that of any

APPENDIX

317

other big item in the statement. Federal reserve notes, for instance,
dropped from a peak of §3,400,000,000 at the end of 1920 to a low point of
§2,100,000,000 in the middle of 1922. During the same period the deposits
of Federal reserve banks rose from §1,800,000,000 to §1,900,000,000. The
difference in the range of fluctuations between the reserve deposits of member banks and Federal reserve note circulation is a reflection of the difference
between member-bank and Federal reserve bank credit. Member-bank
credit represents a large part of the Nation's volume of credit, and a relatively
small percentage of change in that volume may reflect the difference between
a period of industrial inactivity and of industrial revival. Reserve-bank
credit, on the other hand, is resorted to at times when the ordinary credit
facilities are inadequate. When increased credit demands can be met only
by recourse to the Federal reserve banks, the volume of reserve-bank lending
is a sensitive indicator of credit conditions. But when, as has been the case
during the last year, the growing demand for credit has been supported
by gold imports, the volume of reserve-bank credit is not an adequate indicator of credit trends. This is evident from the fact that at the present
time the volume of reserve-bank credit is at about the same level as a
year ago, wThile the loans and investments of member banks have expanded
over $2,000,000,000.
Federal Reserve Notes and Business Activity.—The increase in the volume
of member-bank loans and investments has furnished the business community with the credit needed to finance the recent increase in production
and trade. Increases in the volume of credit, however, are invariably
followed by a larger demand for currency. During the past 12 months a
part of this added demand was met by the direct use of gold, as indicated
by the fact that the volume of gold in circulation increased by §130,000,000.
But this growth of gold circulation was not sufficient to meet enlarged currency requirements and additional supplies of currency could be secured by
member banks only through borrowing at Federal reserve banks. It is in
this way that the increased demand for credit has led to a demand for
additional accommodation at reserve banks, even though the reserves
against additional credit have been supplied by the receipt of gold from
abroad. It is noteworthy that the increase in the earning assets of the
Federal reserve banks since the end of July, 1922, when the demand for bank
credit became more pronounced, is closely paralleled by the increase
in Federal reserve note circulation. The increased demand for hand-to-hand
currency which goes with increased employment, production, and credit
caused the banks to borrow from the reserve banks in order to secure Federal
reserve notes. Furthermore, when the borrowing is for the purpose of meeting reserve requirements the volume of accommodation needed is on the
average only one-tenth as large as the increased deposit liabilities of member
banks, but when the borrowing is for the purpose of obtaining currency it
equals the amount of currency needed, dollar for dollar. At the present
time the relation between the growth of credit and the demand for currency
is such that even if gold imports continue at a considerable rate the need for
additional currency will keep the reserve banks closely in touch with the
credit situation.

318

FEDERAL

RESERVE

SYSTEM

OPERA

TION

Absence of International Gold Standard—Business and credit developments in the United States at a time when other leading commercial countries are not on a gold basis are not subject to the regulating influences that
would be operative under an effective international gold standard. Under
existing world conditions of depreciated currencies and gold embargoes,
differences in the levels of money rates and prices prevail in various countries
without giving rise to corrective gold movements. In pre-war times an
unusual degree of loan activity, accompanied by a rise in prices more rapid
in this country than abroad, resulted in unfavorable exchange rates and a
consequent outflow of gold. Such an outflow tended to check the increase
in the volume of bank credit and to bring international price levels and money
rates into line. While the United States now has larger gold holdings than
ever in its history and its currency is freely convertible into gold for export,
this does not constitute an effective gold standard in a regulatory sense.
Such a standard presupposes not merely that domestic currency is on a
parity with gold but that gold can and does move freely into and out of the
country in response to business and credit conditions here and abroad.
But present world financial conditions act as an effective check upon our
gold exports. The volume of our international balance of payments,
Government control of gold movements in most foreign countries, and the
depreciation of foreign currencies prevent the outflow of gold.
Since the
beginning of 1921 there have been almost no gold exports from the United
States. The largest exports for any month during the period occurred
during October, 1922, when the Canadian dollar was at a slight premium
and Canadian banks withdrew balances from New York. A relatively small
gold movement corrected the exchange rate and the outflow ceased.
More
recently gold exports on a small scale have been made to British India, which
has had favorable trade conditions during the past year and has also purchased gold in the London market. While moderate outward movements of
gold, possibly on a somewhat larger scale, may occur during the present
year, net imports will probably continue. Under such conditions there is
little immediate prospect of international gold movements exercising a
corrective influence on our domestic credit developments.
Reserve Ratio as Credit Indicator.—Large gold reserves, the result of an
unprecedented inflow of gold due chiefly to conditions abroad, have increased
the lending power of Federal reserve banks far beyond the present domestic
credit needs. Consequently the relation of these reserves to the deposit
and note liabilities of the reserve banks as expressed in the reserve ratio
is not now a satisfactory indicator of changes in credit conditions. In fact,
since the beginning of 1922 the reserve ratio has remained relatively constant
around 75 per cent, largely as the result of offsetting changes in gold reserves
and in reserve balances of member banks. Gold reserves are now approximately $200,000,000 above what they were 15 months ago, and during this
same period the deposits of reserve banks have increased also by about
$200,000,000. Consequently since the opening of 1922 the effect on the
reserve ratio of the growth in liabilities has been largely offset by the increase
in gold holdings. Thus the gold received from abroad in liquidation of

APPENDIX

319

foreign indebtedness has balanced in the reserve ratio the enlarged volume
of deposits which have increased in response to the domestic business situation. Under these circumstances, changes in the reserve ratio, since they
are the result of diverse and unrelated influences, do not reflect the developments in the domestic credit and business situation.
III. MAY, 1923
Business Expansion and the Reserve Banks.—Credit developments during the past month have further emphasized the fact that current business
expansion is being financed independently of reserve bank credit. In these
circumstances, the weekly statement of the reserve banks is not indicative
of changes in credit conditions. Changes in reserves, in earning assets, and
in Federal reserve note circulation have been relatively slight since last
summer and have not reflected the considerable growth in bank credit. The
reserve ratio, as was pointed out last month in a discussion of the effect of
gold imports on our credit situation, has at present little value as an indicator
of credit movements. It was these gold imports that enabled member banks
to meet the increased credit and currency demands of their customers
without obtaining a corresponding amount of accommodation at the reserve
hanks. Thus, under immediately prevailing conditions, it is the changes
in member bank loans and investments rather than any item in the reserve
bank statement that roughly measure the rate of increase in the use of bank
credit. This rate of growth for bank credit, compared with the rate of
expansion for production and trade, affords, in the absence of such a test
as the reserve ratio which is dependent upon free gold movement, an important indicator of changes in credit conditions. The fact that the recent
growth of credit has been accompanied by a further increase in the physical
volume of production is favorable evidence of the economic effectiveness of
the credit in use.
Comparative stability in the volume of reserve bank credit while member
bank credit increased has characterized credit developments during the past
15 months. Since the middle of 1922, when renewed demand for credit was
first reflected in larger commercial loans, total loans and investments of
member banks in leading cities have increased by $1,300,000,000, while
earning assets of the reserve banks have increased by less than $100,000,000.
At the present time the total of member bank credit is nearly as large as in
1920 and the volume of goods being produced and marketed exceeds the peak
reached in that year, yet the volume of reserve bank credit is $2,200,000,000
less.
Present Currency Requirements—During the past two months Federal
reserve note circulation has declined slightly and the growing demand for
currency has been met by an increase in other forms of money in circulation.
In fact, the total money in circulation is now $242,000,000 larger than a
year ago, while Federal reserve notes during this period have increased by
o&ly $52,000,000 and Federal reserve bank notes have declined by $58,000,000. Gold and gold certificates in circulation have increased by $127,000,000, silver and silver certificates by $100,000,000, national-bank notes by

320

FEDERAL

RESERVE

SYSTEM

OPERA

TION

SI 1,000,000, and United States notes by $10,000,000.
More than threefifths of the year's increase in circulation occurred between February 1 and
April 1 of this year. A part of this additional currency has been supplied
out of the cash reserves of the reserve banks, which declined slightly during
the past two months. But, like the additional demand for credit, the recent
demand for additional currency has been met without substantial increase
in the use of reserve bank credit.
While increases in other forms of money in circulation have largely supplied the recent demand for more currency, the fact is that the present volume of currency is much less than in 1920, even though production, trade,
employment, and member-bank credit are now at or near 1920 levels. On
April 1, 1923, the total volume of money in circulation was nearly S 1,000,000,000 less than at its peak in November, 1920, and over $000,000,000 less
than on the corresponding date of 1920. Changes in the demand for handto-hand currency arise chiefly, from the pocket-money and till-money
requirements of retail trade, from pay-roll needs, and from the habit of
accumulating and holding currency as savings. The volume of retail trade,
taking the country as a whole, is approximately the same now as at this season in 1920, though retail prices are lower. In certain agricultural sections,
however, where hand-to-hand currency is largely used and where business
recovery has been slow and incomplete, the volume of business is still much

below the 1920 level, and it is probable that in those sections there is a
smaller demand for currency. There is also at present a much reduced
amount of currency held as savings. The extent of such holdings depends
less upon the current volume of employment than upon the duration of
the period of full employment; in 1920 such holdings were doubtless at a
record figure, since full-time employment and high wages had continued for
several years. During the subsequent period of slack employment much
of the currency held as savings was spent, and the present period of fuller
employment has not yet continued long enough to result in similar
accumulation.
Of the various fluctuating demands for currency the pay-roll requirement
is probably the most important because it includes the seasonal demand at
harvest time and because it influences other currency demands arising

APPENDIX

321

from retail trade and from savings. The accompanying chart shows for
recent years the relation between the total pay roll of reporting industrial
establishments in the State of New York, which may be taken as fairly
representative of changes in factory pay rolls for the entire country, and the
volume of Federal reserve notes in circulation. The range of fluctuation in
pay roll and in currency has been similar, though the changes in the volume
of currency have lagged behind the changes in pay roll. The chart shows
that while the pay roll increased since the beginning of 1922, it is still much
lower than at the peak in 1920. This, taken together with the lower level
of retail prices, is probably the most important single fact in accounting
for the smaller volume of currency now in circulation. This lesser demand
for currency, together with the gold imports which have supplied member
banks with a basis for loans without additional borrowings from the reserve
banks, accounts for the present reduced volume of reserve bank credit compared with 1920.
If the relation between pay roll and Federal reserve notes which held
during previous years continues, the rapid increase in the pay roll since the
middle of 1922 will soon result in a substantial increase in demand for
currency, and in order to secure the additional currency member banks will
seek accommodation at the reserve banks.
Production and Credit.—The increased use of credit, which is reflected
in the larger loans and investments of member banks, but not in the earning
assets of Federal reserve banks, has been primarily in response to the
increased volume of production. Thus far business expansion has been
characterized by a rapid increase in the output of basic commodities. In
fact, the growth in the physical volume of production since the middle of
1921 indicates a rate or industrial recovery almost without parallel in
American business. Within a year and a half after recovery began the
monthly output of 21 basic commodities, as measured by the Federal
Reserve Board's index of production, increased over 67 per cent. The
volume of goods produced and consumed during the first quarter of 1923
probably exceeds that of any similar period in the history of the country.
Fuller employment of equipment and of labor has produced the additional
income from which profits and wages were realized. In fact, profits
in many lines of industry have been dependent upon quantity production, the lower production cost per unit more than offsetting the increased
cost of materials. It is partly in consequence of larger output that the
prices of manufactured goods have not more fully reflected the increases in
prices of raw materials. Larger pay rolls also until quite recently have
resulted chiefly from increased employment rather than from advances in
wage rates. These increases in production and employment have thus far
economically justified the increases in the total volume of bank credit. For
credit extension docs not result in overexpansion so long as the additional
credit yields proportionate results in the larger production and marketing
of goods.
Credit Conditions, 1923 and 1920.—The current volume of wholesale and
retail trade indicates that the goods now being produced are moving satis-

322

FEDERAL

RESERVE

SYSTEM

OPERA

TION

factorily into the channels of distribution. About 700 firms engaged in
various lines of wholesale trade and representing practically all sections of
the country are now reporting their monthly sales to the Federal reserve
banks. Since the opening of the year the total volume of sales by these
concerns has been about 18 per cent larger than during the corresponding
period a year ago. In retail trade the sales of 306 department stores located
in 100 cities throughout the country have also exceeded the sales of last year
b y 15 per cent. In March, 1923, sales of these stores w ere above the level
of March, 1920, in spite of the lower retail prices now prevailing.
Department-store sales are at present relatively higher in the industrial districts
of the East than in the agricultural sections of the South and West. The
volume of merchandise buying in rural districts is further indicated by the
sales of mail-order houses, which during recent months have been approximately 37 per cent above the sales of a year ago, though the present dollar
volume of their buying is still much below the level of 1920.
The extent to which various sections of the country have shared in the
current growth of business and credit may be shown in a general way by the
changes in the volume of check payments and of member bank credit.
For this purpose a comparison is made of the total volume of bank debits
during the first quarter of 1923 with the corresponding period in 1920,
and a comparison of the total loans and investments of member banks at
the end of the year 1922 with similar figures for November, 1920. This
comparison in the form of percentages, with 1920 figures taken as 100, is
shown below, by Federal reserve districts.

Federal reserve district

Boston
New York..
Philadelphia
Cleveland...
Richmond..
Atlanta
Chicago

Check Member
paybank
ments,
credit,
per cent per cent

105.5
99.6
100.6
97.8
85.6
80.9
94.6

105.0
99.2
101.4
105.4
96.4
90.7
95.9

Federal reserve district

St. Louis
Minneapolis
Kansas City
Dallas
San Francisco
System

Cheek
payments,
per cent

06.0
88.2
81.6
$7.8
101.0
07.5

Both in volume of business and in bank credit the more recent figures,
taking the country as a whole, show but a slight reduction compared with
1920. When considered by reserve districts there is a close correspondence
in the changes since 1920 in credit and in business volume. With but few
exceptions, business activity in the industrial East and on the Pacific coast
either approximates or exceeds that of 1920 and has been accompanied by
corresponding increases in credit. In marked contrast are conditions in
the South and Middle West, where both business volume and bank credit
are considerably below the 1920 level.

APPENDIX

323

This regional comparison emphasizes the fact that, while the total volume
of business and bank credit is nearly as large as in 1920, there are important
differences between the situation at that time and now. In 1920 credit
expansion was more pronounced in agricultural than in industrial communities, while at the present time it is in the large cities that the volume of credit
is relatively larger. Thus the reserve banks in the South and West in meeting the demands of their member banks in 1920 were obliged to rediscount
large amounts with the bank in the industrial sections, while at present there
are no interbank rediscounts and no Federal reserve bank approaches the
limit of its lending capacity.
The lesser dependence of the member banks upon the reserve banks is
reflected in the much smaller total volume of reserve bank earning assets
and in the smaller proportion which paper discounted for member banks
constitutes of that total. On October 15, 1920, of the total earning assets
held by reserve banks, discounts for member banks constituted 81 per cent,

MILLIONS OF DOLLARS

EARNING AS SETS

1200

600

MILLIONS OF DOLLARS

A/"

1200

U.S. SECURITIES

600

y V j
N

DISCOUNTR^ - ^

ACCEPTANCES^

1922

1923

while on April IS, 1923, the percentage was 58, and in the middle of 1922,
when discounts were at low ebb, the percentage was as low as 35 per cent.
Open-market Policy.—Total earning assets of the 12 Federal reserve
banks combined measure the volume of reserve bank credit in actual use
and are continuously in process of adjustment to the demand for such
credit. It is this total rather than any single class of assets which indicates
at a given time the extent to which reserve bank credit is being utilized as a
basis of member bank credit and as a source of currency. The relationship
between the open-market operations of the Federal reserve banks and the
demand for discount accommodation on the part of the members has been
brought out clearly by the experience of 1922 and the first quarter of 1923.
The chart shows for each week in 1922 and in 1923 to date the volume of
discounts, open-market purchases, and total earning assets.

324

FEDERAL

RESERVE

SYSTEM

OPERA

TION

Since the middle of January, 1923, the increase in discounts at reserve
banks has been accompanied by a decline in holdings of open-market purchases, with a consequent stability in the total volume of earning assets.
This is in contrast to the situation in the early part of 1922, when member
banks were rapidly liquidating their indebtedness at the reserve banks. At
that time, also, the volume of earning assets remained relatively constant,
because the decline in discounts was accompanied b y a corresponding
increase in the holdings of Government securities. Thus, for a period of
more than a year the total of reserve bank credit has fluctuated around
§1,200,000,000 and has remained within a range of $1,000,000,000 to
§1,350,000,000. During that period discounts have fluctuated between
§1,000,000,000 and less than $400,000,000, and Government security holdings between $600,000,000 and $225,000,000. Acceptances have shown an
upward trend beginning with June, 1922, and recently have exceeded the
Government security holdings. Thus, during the period covered by the
chart, fluctuations in the volume of discounts and in the holdings of
open-market purchases have offset each other and consequently have not
resulted in corresponding changes in the total volume of reserve bank
credit in use.
The relation between open-market purchases and discounts has not held
true for reserve banks considered individually. There have been large
purchases of Government securities by reserve banks in the interior without
a corresponding decline in the discounts for their member banks. But the
fact that for the 12 banks combined earning assets have remained comparatively constant indicates that a corresponding liquidation has taken place
at other reserve banks.
A recognition of the desirability of coordinating more closely the openmarket operations of the several reserve banks led to a discussion of openmarket policy at the recent conference of the Federal Reserve Board with
the governors of the reserve banks. The Federal Reserve Board's position
in the matter is indicated by the adoption of the following principle with
respect to open-market investment operations of the Federal reserve banks;
" t h a t the time, manner, character, and volume of open-market investments
purchased by Federal reserve banks be governed with primary regard to
the accommodation of commerce and business and to the effect of such
purchases or sales on the general credit situation."
B y providing that open-market investment operations are to be governed
" w i t h primary regard to the accommodation of commerce and business/'
the principle rests upon the same general considerations as those provided
in the Federal reserve act for the determination of discount rates. Since
in open-market operations the initiative can be taken b y the reserve banks
rather than b y member banks, these operations may be used as a gauge of
the degree of adjustment between the requirements for reserve-bank
credit and the volume of it in actual use. The sale of an investment by a
reserve bank is a means of testing the demand for credit b y placing the
initiative for and the cost of such credit directly upon borrowing member
banks.

APPENDIX

325

Administration of Credit.—To what extent the member banks will be
able to finance a further growth of business without additional accommodation from the reserve banks depends mainly upon the size of gold imports
in the immediate future and the further possibilities of shifting from investments and loans on securities to loans for commercial and industrial purposes. Gold imports have recently been small, the net imports for February
being §7,000,000 and for March, $5,500,000, compared with a monthly
average of $20,000,000 for 1922 and of $55,000,000 in 1921. If the gold
movement continues at the present reduced scale, the imported gold will not
be sufficient to form a basis for any considerable increase in credit extension
by member banks and also to meet a growth in the demand for currency.
Furthermore, while member banks since the opening of the year have been
able in part to increase their loans for commercial purposes by the use of
funds withdrawn from investments and from loans on securities, the extent
of such transfer is limited since the sale of securities in excess of current
savings indirectly leads to a demand for bank credit. Since the opening of
the year the monthly rate of growth in commercial loans at member banks
in leading cities has been nearly 2 per cent. A continuance of this credit
trend must soon result in increased borrowings by member banks at the
reserve banks.
The relation between the expansion of bank credit and the expansion
of business, as well as the responsibility of the banking community for the
economic use of credit, is clearly set forth in a recent report of a committee
on unemployment and business cycles, appointed by Secretary Herbert
Hoover, as chairman of the President's Conference on Unemployment,
held in September, 1921. The report states: "Expansion of bank credit is
a necessary condition of expansion of business operations. . . . But an
overexpansion of credit may so increase the purchasing power of business
men that it will merely result in enabling them to bid against one another
for limited supplies of goods and materials so as to force prices above what
consumers are willing and able to pay. Bank credit often expands so
rapidly that it lifts the buying or investment power of business men out of
line with the general buying power of the community. Because of their
strategic position the banks have an unusual duty and an exceptional
opportunity to give sound information and counsel to business men. . . .
While the relationship between the volume of credit and the volume of business and the movement of prices is not always simple to interpret, it appears
to be sufficiently close to make it a matter of first importance that the volume and the flow of credit should at all times be tested by the contribution
which additions to the volume of credit make to the total of economic production. Additions to credit which can not be economically validated by a
commensurate effect in actual production are speculative, and as such should
be subjected to control, so that business and industry can be maintained in
a healthy state."
The present lending capacity of the country's banking system, in view of
the great growth of the reserves at the reserve banks, is now far in excess
of the credit needs of the country's productive capacity. In such a situation

326

FEDERAL

RESERVE

SYSTEM

IN OPERA TION

it is the available supplies of labor and equipment and not the potential
supply of credit that in the end must fix the limit which may be attained by
aggregate national production. As these limits are approached credit
policy must be increasingly influenced by careful consideration of the continued effectiveness of further additions to the total volume of credit in
contributing to increased productivity.

APPENDIX

EXTRACT FROM ANNUAL REPORT OF THE FEDERAL
RESERVE BOARD FOR 1923
FEDERAL RESERVE DISCOUNT POLICY

These banking and business developments constituted the circumstances
in which the Federal reserve system functioned during 1923 and with
reference to w hich Federal reserve credit policy was formulated. In carrying out this policy the system has not relied upon changes in discount rates
as the only means of influencing the general credit situation. The openmarket transactions of Federal reserve banks during 1923, which are later
considered in some detail, as well as their discount policy, have reflected
Federal reserve credit policy. Furthermore, the experience of several
of the reserve banks is demonstrating that changes in discount rates need
not be in all circumstances the main reliance or in any situation the exclusive
reliance in making the credit policy of the reserve banks effective. By
maintaining constant, close, and direct contact with the loan policies and
operations of its member banks, through examination or otherwise, a reserve
bank can do much by other means than changes in discount rates to establish
an effective supervision and control of the credit released by it to its member
banks.
Discount Policy in 1923.—Discount rates in 1923 underwent fewer changes
than in any other year in the history of the system. The only changes in
discount rates were at the Federal reserve banks of Boston, New York, and
San Francisco, where near the end of February rates were advanced from
4 per cent to
per cent, bringing the rates at these banks to the level
prevailing at all other reserve banks.
These advances gained significance from the fact that they were the first
rate advances in more than two years. At the time there had been a
considerable increase on a national scale in the demand for credit and the
existing inequality between discount rates in various districts tended to
attract an undue proportion of borrowing to the centers with low rates.
The effect of the rate advances of the three banks was to bring about a
better regional distribution of credit and to test the character and soundness
of the credit demand by having the obligations of borrowers passed upon by
banks in their own locality.
The attitude of the Federal reserve system, as expressed in these rate
changes, was not immediately reflected in any change of the volume of bank
credit in use. This, however, is not to be taken as indicating that the
advances of rates, slight as they appeared, were without consequence.

327

328

FEDERAL

RESERVE

SYSTEM

OPERA

TION

The influence of the change of discount rates by the reserve banks can not be
measured by any immediate effect that they might be expected to have on the
total volume of borrowing at member banks. The credit process which
finally gives rise to a granting of credit by a member bank has its beginning
in the business plans and decisions of the bank's customers. The movement
in the volume of credit at any given time, and particularly in times of business expansion, has a momentum which can not be immediately checked,
and while the expansion is actively going on the movement tends to gain
momentum at an increasing rate. The volume of banking credit in use and
outstanding, as recorded in the statements of the banks, is the outcome
of commercial plans and commitments which may antedate by many months
the extension of credit by the banks. Business transactions which are
already under way will ordinarily be carried through to completion, quite
irrespective of changes that have supervened in credit conditions and money
rates. The rise in discount rates is not intended to interrupt or interfere
with antecedent commitments that are in process of completion but rather
to induce a more prudent attitude on the part of borrowers with regard to
new commitments. It requires, therefore, some time for a rate change to
show its effects in the altered lending operations of the banks.
In the months immediately following the rate advances made in February,
1923, the volume of credit, especially the borrowings for commercial and
industrial purposes, continued to increase at a rapid rate. Prices, particularly of those commodities which had been advancing rapidly for about a
year, ceased their rise in May, chiefly because the increased volume of
production which the rise in prices had stimulated was reaching the market
and taking effect in supplies of goods available for consumption.
While
consumers' demand was maintained and the volume of trade continued large
throughout the year, there was some recession in industrial activity in the
second half of the year and a decline in the price level from the peak reached
in M a y to approximately the level of the corresponding months of the
previous year.
The rise of prices during the early months of 1923, which in comparison
with the price movements experienced under more settled business conditions
of the years before the war was proceeding at a relatively rapid rate, led to
expressions of concern that the country might once more be entering upon a
period of credit expansion and gave rise in certain quarters to a demand
for further discount rate advances. The judgment of the Board, however,
was that the increasing volume of credit was justifying itself in the continued
increase in the volume of production and consumption; the fact that there
was little indication of speculative activity was regarded aa sufficient evidence that credit was not being put to uneconomic uses.
In commenting on the business and credit situation at the time, the Board
said in its Review of the Month for March that " t h e economic use of credit
is to facilitate the production and orderly marketing of goods and not to
finance the speculative holding of excessive stocks of materials and merchandise. So far as the available indications go, the increased demand for credit
during recent months appears to have arisen from the larger financial

APPENDIX

329

requirements of current production and trade and not from speculation in
inventories. When production reaches the limits imposed by the available
supplies of labor, plant capacity, and transportation facilities—in fact,
whenever the productive energies and resources of the country are employed
at full capacity—output can not be enlarged by an increased use of credit
and by further increases in prices." The view of the Board at the time
that the upward movement of prices was not due to an unwarranted expansion of credit, as tested by the volume of trade and industry, was confirmed
by the subsequent course of economic events.
During the closing months of 1923 prices became more stable, the reduced
volume of production became better adjusted to the current demand, and
th,e volume of commercial and agricultural borrowing, after reaching a
peak during the crop-moving period, declined slightly. All of these
developments indicated that the year 1923 by comparison with previous
years attained a considerable degree of economic stability. The outcome
for the year shows that the banks of the country through the extension of
credit supported the industrial and trade recovery that was under way and
that the Federal reserve banks through their discount policy performed
the function laid down in the act of "accommodating commerce and
business."
Relation of Discount Rates to Market Rates.—The experience of the last year
throws light upon the important and much discussed but as yet little understood problem of the basis of Federal reserve discount policy and
rates.
Discussions have usually addressed themselves to the question of relationship that should exist and be maintained between Federal reserve bank rates
and the rates in the open market and between Federal reserve bank rates and
prevailing rates charged by member banks to their customers for current
commercial accommodation. The view most widely held in financial and
banking circles is that the Federal reserve bank rate should move in sympathy with general money rates, rising as they rise and falling as they decline.
A further development of this theory, based upon the leadership which it is
felt the Federal reserve banks should assume in the money market, asserts
that when money conditions are tightening the Federal reserve bank rates
should lead the rise of money rates. A still further and more extreme
view holds that Federal reserve bank rates normally should be above the
level of member bank rates. A comparison of money rates in the New York
market during the year 1923 with the discount rate maintained by
the Federal Reserve Bank of New York is presented in the following
table:

330

FEDERAL

RESERVE

SYSTEM

Federal
reserve
discount
rate

1923:
January
February
March
April

4.00
4.00
4.50
4.50
4.50
4.50
4.50
4.50
4.50
4.50
4.50
4.50

June
July
August
September
October
November
December

IN OPERA TION

Prime
bankers'
acceptances, 90
days

4.00
4.00
4.00
4.125
4.125
4.125
4.125
4.125
4.125
4.125
4.125
4.125

Treasury
certificates

3.66
3.65
4.12
4.13
3.95
3.84
3.91
3.86
4.01
4.22
3.94
3.88

Prime
commercial
paper, 60
to 90 days

4.63
4.63
4.98
5.13
5.10
4.91
4.94
5.02
5.125
5.125
5.10
4.88

It appears that the Federal reserve bank discount rate of 4 lA per cent was in
excess of the rate on bankers' acceptances and Treasury certificates of short
maturity throughout the year and below the commercial paper rate.
. The relation in 1923 between Federal reserve bank rates and rates charged
by member banks in the different districts to their customers is indicated
by a comparison of the practically uniform rate throughout the year at all
the Federal reserve banks and the rates paid by customers to member banks
on paper rediscounted with the Federal reserve banks. This comparison
is presented in the following table:

Federal
reserve
bank
rate

Boston
New York
Philadelphia
Cleveland
Richmond
Atlanta
Chicago
St. Louis
Minneapolis
Kansas City
Dallas
San Francisco

;

Average for all districts

4.42
4.42

5.07
5.22

4.50
4.50
4.50
4.50
4.50
4.50
4.50
4.50
4.50
4.44

5.31
5.58
6.09
6.25
5.62
5.59
7.93
7.15
8.41
5.84

4.47

5.48

APPENDIX

331

The table brings out the fact that the margin between the Federal reserve
bank rate and member bank rates varies considerably from district to
district, and that in general the spread is narrowest in those districts where
the financial centers are located. The differences in the margin reflect in
part the differences in the costs and risks of member bank lending in various
sections of the country. These differences between districts also represent
the wider margin between the Federal reserve bank rate and member bank
rates in smaller cities as compared with the larger centers. With the
Federal reserve bank rate at
per cent, the rates charged to customers in
December, 1923, were 5.44 per cent for cities of 100,000 population and over,
0.34 per cent for cities from 15,000 to 100,000, and 7.54 per cent for cities of
less than 15,000. The diversity in member bank rates, whether considered
by Federal reserve districts or by size of cities is, therefore, apparent. It
follows that the Federal Reserve Board, in approving the maintenance by all
Federal reserve banks of rates at a uniform level practically throughout the
year, was guided by no mechanical rule as to the necessity of maintaining a
fixed and invariable relationship between reserve bank rates and member
bank customer rates. Indeed, the observations of the Federal Reserve
Board and the experience of the Federal reserve banks make it certain
that the Federal reserve banks and the Federal Reserve Board can not
adequately discharge their function of "fixing rates with a view of accommodating commerce and business" by the simple expedient of any fixed rule or
mechanical principle.
GUIDES TO CREDIT POLICY

It is to the reserve ratio that the public in most countries looks to get an
indication of changes in the banking position and in .the credit situation.
This habit of looking at the reserve ratio as an indicator is particularly
prevalent in the United States, because the United States is more than any
other the country of legally regulated reserves. However theoretically
imperfect any reserve ratio may be as a credit and banking index even in
normal circumstances, and however defective reserve ratios may have
become as a result of the suspension of the gold standard in many countries,
the reserve ratio is nevertheless the one banking index that has uninterruptedly enjoyed the prestige of tradition and there is little or no indication of
the displacement of this tradition in the near future. The reserve ratio
must, therefore, be reckoned with as a fact in banking administration.
In thus recognizing the importance generally attached by the business
public to changes in the reserve ratio as an index of the banking position,
the board is not oblivious of, nor indifferent to, the fact that central bank
practices associated with an effective international gold standard are now
inoperative and that this seriously affects the serviceability of reserve ratios
as working guides in credit and currency administration.
The reserve ratio can not be expected to regain its former position of
authority until the extraordinary international gold movements which, in
part, have occasioned and in part have resulted from the breakdown of the
gold standard, have ceased and the flow of gold from country to country is

332

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again governed by those forces which in more normal and stable conditions
determine the balance of international payments. The gold standard as a
regulatory influence can not be effective for one country alone, no matter
how impregnable its gold position. Gold movements in the years before the
war were in response to changes in the trade and financial position of countries operating on the gold standard, and the changes in the reserve ratios
of the central banks, which reflected these movements, were therefore indicative of trade movements and current banking and credit developments.
A decline in the reserve ratio reflected either a growth in the liabilities arising
chiefly from domestic business or a loss of reserves owing to an unfavorable
balance of international payments. Under an effective international gold
standard the movements of gold among the money markets of the world
exercised a corrective influence on exchange rates, tended to equalize money
rates in various countries, and to keep domestic price levels in line with the
world price level. In these circumstances, changes in the reserve ratios of
the various central banks served as valuable indicators of the changes in the
credit and trade relations of the countries and were consequently important
guides in the shaping of discount policies. Under the present conditions
with gold embargoes in force in most foreign countries and the United
States practically the only free gold market of the world, the movement of
gold to this country does not reflect the relative position of the money markets
nor does the movement give rise to corrective influences, working through
exchanges, money rates, and price levels, which tend to reverse the flow.
The significance which movements in the reserve ratios formerly possessed
rested upon the fact that they were the visible indicators of the operation
of the nicely adjusted mechanism of international finance. With this
mechanism now inoperative, the ratios have lost much of their value as administrative guides. It has therefore been necessary for banking administration
even in those countries that have been most successful in maintaining a
connection wTith the gold standard to develop or devise other working bases.
This has been as true in the United States where the gold standard has been
consistently maintained as in other countries where that standard is for
the time being inoperative.
The anomalous situation thus confronting central banking administration
in all countries had led to much discussion in the United States and elsewhere
as to workable substitutes for reserve ratios as guides to credit and currency
administration. Particular prominence has been given in discussions of
new proposals to the suggestion frequently made that the credit issuing
from the Federal reserve banks should be regulated with immediate reference
to the price level, particularly in such manner as to avoid fluctuations of
general prices. Entirely apart from the difficult administrative problems
that would arise in connection with the adoption of the price index as a
guide and entirely apart from the serious political difficulties which would
attend a system of credit administration based on prices, there is no reason
for believing that the results attained would be as satisfactory as can be
reached by other means economically valid and administratively practicable.
In saying this the board is not unmindful of the abundant evidence recent

APPENDIX

333

years have given of the economic and business disturbances occasioned by
violent fluctuations of prices. But it must not be overlooked that price
fluctuations proceed from a great variety of causes, most of which lie outside
the range of influence of the credit system. No credit system could undertake to perform the function of regulating credit by reference to prices
without failing in the endeavor.
The price situation and the credit situation are no doubt frequently
involved in one another, but the interrelationship of prices and credit
is too complex to admit of any simple statement, still less of a formula of
invariable application. An oversimplified statement of complex problems
contributes nothing toward the development of an effective administrative
procedure. It is the view of the Federal Reserve Board that the price
situation and the credit situation, while sometimes closely related, are
nevertheless not related to one another as simple cause and effect; they are
rather both to be regarded as the outcome of common causes that work in
the economic and business situation. The same conditions which predispose
to a rise of prices also predispose to an increased demand for credit. The
demand for credit is conditioned upon the business outlook. Credit is
created in increasing volume only as the community wishes to use more
credit—when the opportunity for the employment of credit appears more
profitable. Sometimes borrowers want to borrow more and sometimes
they are content with less. Sometimes lenders are ready to lend more and
at other times less. Why this should be so depends on all those multifarious
conditions and circumstances that affect the temper of the business community. For the most part these conditions lie beyond the radius of action of
the Federal reserve banks. When the business outlook is inviting business
men are apt to adventure and new business commitments are made in
increasing volume. But only later will these commitments be reflected in
the possible rise of prices and an increase in the volume of credit provided
by the commercial banks of the country. The Federal reserve banks will
not to any considerable extent feel the impact of the increased demand
for credit until the whole train of antecedent circumstances which has
occasioned it is well advanced on its course; that is, until a forward movement of business, no matter from what impulse it is proceeding, has gained
momentum.
Credit administration must be cognizant of what is under way or in
process in the movement of business before it is registered in the price index.
The price index records an accomplished fact. Good credit administration
in times of active business expansion should not encourage or assist the
excessive accumulation of forward commitments in business and banking
which only later on will definitely reflect the rate at which they have been
taking place in resulting changes of credit volume and changes of price
levels; and in times of business reaction should discourage enforced liquidation of past commitments which also will only later on reflect the rate at
which it has been taking place in altered credit volume and price levels.
The problem of efficient credit administration is, therefore, largely a question
of timeliness of action.

334

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TION

No statistical mechanism alone, however carefully contrived, can furnish
an adequate guide to credit administration. Credit is an intensely human
institution and as such reflects the moods and impulses of the community
—its hopes, its fears, its expectations. The business and credit situation of
any particular time is weighted and charged with these invisible factors.
They are elusive and can not be fitted into any mechanical formula, but the
fact that they are refractory to methods of the statistical laboratory makes
them neither nonexistent nor nonimportant. They are factors which
must always patiently and skillfully be evaluated as best they may and
dealt with in any banking administration that is animated by a desire to
secure to the community the results of an efficient credit system. In its
ultimate analysis credit administration is not a matter of mechanical rules,
but is and must be a matter of judgment—of judgment concerning each
specific credit situation at the particular moment of time when it has arisen
or is developing.
There are among these factors a sufficient number which are determinable
in their character, and also measurable, to relieve the problem of credit
administration of much of its indefiniteness, and therefore give to it a
substantial foundation of ascertainable fact. In large part these factors
are recognized in the Federal reserve act. The act, therefore, itself goes
far toward indicating standards by which the adequacy or inadequacy of the
amount of credit provided by the Federal reserve banks may be tested.
The Federal reserve act has laid down as the broad principle for the guidance of the Federal reserve banks and of the Federal Reserve Board in the
discharge of their functions with respect to the administration of the credit
facilities of the Federal reserve banks the principle of "accommodating
commerce and business."
(Sec. 14 of the Federal reserve act, par. (d).)
The act goes further. It gives a further indication of the meaning of the
broad principle of accommodating commerce and business. These further
guides are to be found in section 13 of the Federal reserve act, where the
purposes for which Federal reserve credit may be provided are described as
"agricultural, industrial, or commercial purposes." It is clear that the
accommodation of commerce and business contemplated as providing the
proper occasion for the use of the credit facilities of the Federal reserve banks
means the accommodation of agriculture, industry, and trade. The extension of credit for purposes "covering merely investments or issued or drawn
for the purpose of carrying or trading in stocks, bonds, or other investment
securities, except bonds and notes of the Government of the United States,"
is not permitted by the Federal reserve act. The Federal reserve system is
a system of productive credit. It is not a system of credit for cither investment or speculative purposes. Credit in the service of agriculture, industry,
and trade may be described comprehensively as credit for productive use.
The exclusion of the use of Federal reserve credit for speculative and investment purposes and its limitation to agricultural, industrial, or commercial
purposes thus clearly indicates the nature of the tests which are appropriate
as guides in the extension of Federal reserve credit. They clearly describe
the nature or character of the purposes for which such credit and currency

APPENDIX

335

may be extended. The qualitative tests appropriate in Federal reserve
bank credit administration laid down by the act are, therefore, definite
and ample.
But the problem of credit and currency administration implies the use
not only of qualitative tests but also of quantitative tests. By what means
may it be known whether the volume of credit provided by the Federal
reserve banks is in any given set of circumstances adequate, excessive, or
deficient? The problem in good administration under the Federal reserve
system is not only that of limiting the field of uses of Federal reserve credit
to productive purposes, but also of limiting the volume of credit within the
field of its appropriate uses to such amount as may be economically justified
—that is, justified by a commensurate increase in the Nation's aggregate
productivity. The Board is fully aware of the fact that the problem of
credit extension involves the question of amount or volume as well as the
question of kind or character; otherwise stated, involves a quantitative as
well as a qualitative determination. But it is the view of the Board that it
is not necessary to go outside of the Federal reserve act to find suitable
methods of estimating the adjustment of the volume of credit provided by
the Federal reserve banks to the volume of credit needs. The Federal
reserve act itself suggests the nature of the tests, guides, or indicators—
whatever they may be called—to be used in gauging the need for and the
adequacy of Federal reserve credit. The provisions of the act already
quoted indicate that the needs for credit which arc recognized by the act
as appropriate are those derived from agriculture, industry, and trade.
It is the belief of the Board that there will be little danger that the credit
created and contributed by the Federal reserve banks will be in excessive
volume if restricted to- productive uses.
A characteristic of the good functioning of the economic system is to be
found in the smooth unobstructed movement of goods from the producer
through the channels of distribution to their several ultimate uses. The
characteristic of the good functioning of the credit system is to be found in
the promptness and in the degree with which the flow of credit adapts itself
to the orderly flow of goods in industry and trade. So long as this flow is
not interrupted by speculative interference there is little likelihood of the
abuse of credit supplied by the Federal reserve banks and consequently little
danger of the undue creation of new credit. The volume of credit will
seldom be at variance with the volume of credit needs as they are reflected
in the demands of productive industry as long as (1) the volume of trade,
production, and employment, and (2) the volume of consumption are in
equilibrium. Credit for short-term operations in agriculture, industry, and
trade, when these operations are genuinely productive and nonspeculative
in character, that is to say, credit provided for the purpose of financing the
movement of goods through any one of the successive stages of production
and distribution into consumption, is a productive use of credit. But when
the effect of the credit used is to impede or delay the forward movement of
goods from producer to consumer, unless such delay is made necessary by
some unavoidable cause, e.g., the interruption of transportation facilities,

336

FEDERAL

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SYSTEM

IN OPERA TION

credit is not productively used. The withholding of goods from sale when
there is a market or the accumulation of goods for an anticipated rise of price
is not a productive use. It is the nonproductive use of credit that breeds
unwarranted increase in the volume of credit; it also gives rise to unnecessary
maladjustment between the volume of production and the volume of consumption, and is followed by price and other economic disturbances.
Administratively, therefore, the solution of the economic problem of keeping
the volume of credit issuing from the Federal reserve banks from becoming
either excessive or deficient is found in maintaining it in due relation to the
volume of credit needs as these needs are derived from the operating requirements of agriculture, industry, and trade, and the prevention of the uses
of Federal reserve credit for purposes not warranted by the terms or spirit
of the Federal reserve act.
There are no automatic devices or detectors for determining, when
credit is granted by a Federal reserve bank in response to a rediscount
demand, whether the occasion of the rediscount was an extension of credit
by the member bank for nonproductive use. Paper offered by a member
bank when it rediscounts with a Federal reserve bank may disclose the
purpose for which the loan evidenced by that paper was made, but it does
not disclose what use is to be made of the proceeds of the rediscount. A
farmer's note may be offered for rediscount by a member bank when in
fact the need for rediscounting has arisen because of extensions of credit
by the member bank for speculative use. Similarly, the note of a member
bank collateraled by United States Government securities may be offered
for discount to a Federal reserve bank when in fact the proceeds are to be
used in supporting the extension of credit for "agricultural, industrial, or
commercial purposes." Protection of their credit against speculative uses
requires that the Federal reserve banks should be acquainted with the
loan policies and credit extensions of their member banks—such acquaintance as can be obtained by examination of their member banks or by other
forms of contact with them. In brief, the technical administrative problem
presented to each reserve bank is that of finding the ways and means best
suited to the circumstances in which it operates of informing itself of when
and to what extent the extension of credit for speculative uses is the real
occasion of member bank rediscounting.
The administrative problems presented to the Federal Reserve Board are
of different character and require a different technique. Unlike the Federal
reserve banks, the Federal Reserve Board makes no loans. It is not an
operating body, but a supervising body. As a supervising body it is not
primarily concerned with the detail of the transactions of the Federal
reserve banks. Its concern lies rather with the total volume and the aggregate effects of the credit transactions of the Federal reserve banks. In
the discharge of the responsibility placed upon it by the act for the "review
and determination" of the discount policy and discount rates of the Federal
reserve banks "with a view of accommodating commerce and business,"
the Federal Reserve Board must look for guidance primarily to information
concerning the state of industry and trade and the state of credit. Changes

APPENDIX

337

in the volume of bank credit in use are the outcome of changes in the volume
of business. A proper and effective credit policy, considered in its broader
aspects must, therefore, be based on that wide variety of economic facts
which, when brought together, throw light on the changes taking place in
the business situation and their relation to current banking and credit trends.
While statistical information concerning production and distribution,
covering the whole range of business activity from producer to consumer, is
not complete, it is sufficient to indicate currently the rate at which goods are
being produced and marketed. Information of this character, as a result of
the growing recognition of its value and of the activities in collecting such
information both by governmental and private agencies, is now available
more currently and in more lines of industry and trade than ever before.
The changes from month-to-month recorded in these figures, when brought
together and interpreted, indicate the nature and rate of readjustments
which are constantly taking place in the industrial and business situation.
The activity of business, as measured by these current statistics, is the
outcome of the decisions and actions of a large number of individual business
men. They arc, to be sure, in form and in substance an account of the
immediate past, but they also give indications of the conditions affecting the
course of business in the future. While this information does not make it
possible to measure or estimate in advance the probable aggregate volume
of credit needs or to combine into any single formula the elements of judgment applicable to varying credit situations as they arise, it provides basic
data needed in banking administration. No statistical analysis can ever be
a substitute for judgment in matters of credit administration, but such
analyses of economic conditions are indispensable as furnishing the factual
basis for credit judgment and for the development of credit policy.
In view of the importance of this information in the determination of
credit policy the Board and the Federal reserve banks collect through their
statistical organizations, in addition to current reports on banking and credit
conditions, basic economic data bearing on changes in the volume of production, trade, and employment, and the movement of prices both in the United
States and abroad. The volume of production in physical units indicates
the extent of industrial activity and measures the output of goods which will
subsequently come into the market. Monthly data are available for basic
industries, and while fluctuations in the volume of production in these
industries are wider than those in the total for all industries, the data are
sufficiently representative to indicate at any given time the direction and
trend of industrial activity. Changes in the volume of employment at
industrial establishments, figures for which are available for a larger number
of industries, not only reflect the degree of current productive activity and
thus supplement thefigureson production, but because of their bearing on the
earnings of workers, also indicate changes in the purchasing power of a
large body of consumers. It is the buying power of consumers which primarily determines the demand for goods and the rate at which current
production can be maintained. The movement of goods into the hands of
final purchasers is measured by the volume of retail buying, which for

338

FEDERAL

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SYSTEM

OPERA

TION

many lines of trade throughout the country is reported monthly. The rate
at which goods are moving through the intermediate channels of distribution
is reflected in the volume of wholesale trade and of the shipments of merchandise. A smooth distribution of goods requires that stocks of raw
materials and merchandise shall be held at different points in the marketing
process, and the extent to which the marketing is orderly—that is, without
undue accumulation or exhaustion of stocks—is shown in the changes in the
volume of stocks held by producers and distributors. While information
concerning stocks is not yet as complete or as current as information on
production and trade, it is now available for many commodities and is
steadily becoming more satisfactory.
Since the purpose of the Board and of the Federal reserve banks in collecting and compiling this current economic information is to measure changes
in the volume of production and trade in relation to changes in the volume of
credit, the various lines of information are put into the form of index numbers
for purposes of comparison. The use of index numbers, by placing the wide
variety of information on a common basis, makes possible comparisons of the
direction and rate of change in the basic industrial and commercial activities
in their relation to credit trends.
In the current surveys of business conditions published by the Board
and the Federal reserve banks, the economic data which they collect are
made available to the business community. These publications and the
activities of other Government and private agencies in the gathering and
interpretation of information with reference to current economic conditions
are contributing to a better understanding of the factors at work in the
business situation and a better appreciation of the relation between business
movements and the volume of credit. The business community from which
the demand for credit arises is in a position, on the basis of the more adequate
information now available, to shape its policies with reference to the use of
credit in accordance with fundamental factors and thus to cooperate with
banking authorities in the maintenance of sound credit conditions.
The circumstances which have unavoidably led central banking administrations in all countries to exercise a more direct judgment concerning credit
conditions and needs than was necessary in periods when the gold standard
functioned as an effective regulator of international trade and, financial
movements have been discussed earlier in this report. Under the conditions
that formerly obtained, action of a central bank was largely determined by
forces that were registered in changes in its reserve position. N o test so
simple, so definite, so easily understood, and so practicable has been found,
nor is likely to be found, as the old reserve ratio. The banking and business
community in prewar days, looking at the position of the central b a n k that is, the state of its reserve and the position of its reserve ratio—could
see for itself what the state of credit was and what course of action was
indicated. The business community could, therefore, closely approximate
both the kind of action and the time of action to be taken by central banking
authorities. In circumstances which made necessary the protection of their
gold reserves, little scope was left for the exercise of large discretion. Under

APPENDIX

339

present conditions, however, and until the restoration in some form of the
international gold standard, discretion must inevitably play a larger r61e
in central banking administration than in prewar days when more reliance
could be placed on changes in the reserve ratio. There is much evidence
that this altered situation in which the banking community finds itself is
being more fully understood by the general business and borrowing public,
and that a more intelligent comprehension of present day credit problems
is resulting.
The more fully the public understands what the function of the Federal
reserve system is and on what grounds and on what indications its policies
and actions are based, the simpler and easier will be the problems of credit
administration in the United States. For this reason it has been the policy
of the Board to inform the public, either through its official monthly
publication or by statements to the press, on matters in which the public
has an interest and to which its attention should be drawn. By this means
the Board presents to the public a statement of the problems confronting
the system and of the attitude of the Board toward current banking and
credit developments. The public is a partner in the Federal reserve system.
The cooperation of the public based upon an understanding of the broad
outlines of Federal reserve credit policy is of the greatest advantage to a
good functioning of the system. The difficulties and disturbances wThich
have confronted business men, both in this country and abroad, during the
period of postwar readjustments, have obliged them to take cognizance of
the fundamental factors which influence the movement of trade and industry
and of the relation between these factors and the volume of credit. In the
United States more than in any other country business men in recent years
have shown a disposition to use current statistical data measuring the rate
and movement of basic factors in the economic situation and to adjust the
policies of their individual business enterprises to the underlying economic
forces. The Federal reserve system in developing its policies is also in a
position to use as guides these indicators of changes in the state of industry
and trade, and with the increasing public appreciation of the value and
meaning of these guides will to a larger degree have the cooperation of an
informed public opinion in the carrying out of its policies. It is the belief
of the Board that out of the experience of the United States and other countries that are now endeavoring to adapt their banking systems to the changing conditions and needs of industry during this period of unprecedented
disturbance, there may result a larger conception of the function of these
banking systems and the development of a new and more competent basis
of credit administration.

INDEX
A

Acceptances, definition of, 55
earnings of Federal reserve banks
from, 1920-1924, 114
eligibility for purchase, 152
holdings by Federal reserve banks,
3, 55, 116
market for, 55, 57
in England, 57
purpose of introduction in the

Bank of England, discount rate of,
compared with Federal reserve bank rate, 46
Bankers' acceptances, eligibility of,
for purchase, 152
Banking resources outside of Federal
reserve system, 127
chart showing, 129
Banking tradition, American, growth
of, 167
Bills of exchange, discount of, 22,
148
(See also Discount and openmarket operations.)
Borrowings between Federal reserve
banks, amount of, 36
Federal Reserve Board's control
over, 16
Branch banking in the United
States, Federal Reserve Board's
relation to, 139
Branches of Federal reserve banks,
13
Bulletin, Federal Reserve, 159
Business conditions in the United
States, statements about, prepared by Division of Research
and Statistics, 158

United States, 55
rate of earnings on, 1920-1924,

116
Advisory Council, Federal, 17, 154
meetings of, 17, 41, 154
powers of, 154
Agencies of Federal reserve banks,
13
establishment of, in Cuba, 13,
142
Agricultural cooperative associations, acceptances of, 56
Agricultural credit facilities under
the Federal Reserve Act (Appendix E), 265
Agricultural districts, 32, 35, 83
borrowings of reserve banks in,
from other reserve banks, 35,
83
Agricultural paper, 151
eligibility for discount, 22
maturity of, 22, 150
American banking tradition, growth
of, 167
Annual report of Federal Reserve
Board for 1923, extracts from
(Appendix L), 327
Atlanta par clearance case, 105

C
Canada, gold shipments to, 99
Capital required of banks for membership in system, 7
Central reserve cities, 78
Check clearing and collection, 15,
101-109

342

INDEX

Check clearing and collection,
Atlanta par clearance case, 105
campaign for universal par collection, 105
charges authorized, 104
checks handled and amounts collected, 1920-1923, 108
expenses of operation, 119
gold settlement fund, 16, 142
growth of the system, 103
North Carolina par clearance case,

106
number of banks on par list, 109
principals underlying the clearing
of checks, 101
Richmond par clearance case, 106
U. S. Supreme Court decision,
text of (Appendix F), 270
United States Supreme Court
decision, 106
City correspondents, relation between country banks and, 10,
130
Clayton Act administration, 142
Clearing houses, Federal reserve
banks as, 103
Collateral notes of member banks,
discount of, 23
Collateral required against Federal
reserve notes, 10, 73
Commercial paper, definition of, 150
discount rates on, 53
Comptroller of the Currency exofficio member of Federal Reserve Board, 15, 136
Condition of Federal reserve banks,
before and after the war, 2, 3
Board's function in obtaining
statements of, 17
statement of, on September 24,
1924 (Appendix D), 262
Conferences with Federal Reserve
Board, Federal Advisory Council, 17, 41, 154
Federal Reserve Agents, 17, 155
governors of Federal reserve
banks, 17, 41, 61, 155

Conferences with Federal Reserve
Board, governors of Federal
reserve banks, May 20, 1920,
printed as Senate document, 156
governors and advisory council on
credit situation, 41
Congressional committee to investigate reasons why eligible banks
remain outside of Federal reserve system, 134
Cooperative marketing associations,
acceptances of, 56
Cost accounting in Federal reserve
banks, 18, 121
Counsel of Federal Reserve Board,
144
Country banks, discount rates compared with Federal reserve bank
rate, 45
relation between city correspondents and, 10, 130
reserves required for banks in, 78,
79
Credit conditions, conference of
governors, advisory council, and
Federal Reserve Board to discuss, 41, 156
gold imports, effect on, 6, 96
reserve ratio as indicator of, 5,
98, 99
Cuban agency of Federal reserve
banks, 13, 142
Currency, effect of demand for on
reserves of reserve banks, 84
effect of gold imports on, 68, 71
table showing, 69
{See also Federal reserve notes;
Gold; Money in circulation.)
D
Deficiencies in reserves, of Federal
reserve banks, legal provisions
about, 88
of member banks, penalties for,
80, 114
"Deflation conference," 156

INDEX
Deposits, demand and time, 79
reserves against, 78, 79
Deposits of Federal reserve banks,
before and after the war, 3
chart showing, 29
reserves against, 12, 87
table showing, 1920-1922, 32
(See also Reserves.)
Directors of Federal reserve banks, 8
Discount and open-market operations of Federal reserve banks,
19-38, 54-62
acceptances, definition of, 55
holdings by Federal reserve
banks, 55, 56, 116
market for, 55, 57
purchase of, by Federal reserve
banks, annual rates of earnings, 116
earnings from, 1920-192-1,
114, 116
bills discounted, annual rates of
earnings, 116
before and after the war, 3
earnings from, 1920-1924, 114
holdings of, 1920-1924, 116
character of paper discounted by
Federal reserve banks, 22, 148
character of paper eligible for
purchase, 54, 148
chart showing discounts, 28
collateral notes of member banks,
23
discount rate as related to, 49
effect of open-market purchases on
earning assets, 58
history of discounts, 34
lending power of Federal reserve
banks, 19
maturity of paper eligible for discount, 22, 150
notes, drafts, and bills of exchange, discount of, 22, 148
open-market policy of Federal
reserve banks, 60, 61, 165
conference of governors to discuss, 61, 156

343

Discount and open-market operations of Federal reserve banks,
rulings on discounts, 149
on open market operations, 152
United States securities, paper
secured by, discount of, 4, 24
purchase of, 57, 166
annual rate of earnings on, 116
earnings from, 114, 116
Discount rates, 39-53
advances in, 40, 62
Bank of England rate compared
with Federal reserve bank
rate, 46
chart showing rate at New York
Federal Reserve Bank, 45,49
commercial, agricultural, and livestock, paper, discount rates
on, table showing, 53
comparison between city and
country bank rates, 45
comparison between Federal reserve bank rate and member
bank rate, 44
comparison between rates on
paper secured by Government obligations and rates on
commercial paper, 26
determination of, 164
history of, 39-50
member bank earnings, relation
of, to discount rates, 48
open-market rates as related to
discount rates, 51
policy of Federal reserve banks,
164
prior to autumn of 1919, 39
progressive rates, 42, 50
in effect on certain dates, 53
repeal of act authorizing, 42, 51
reduction in, since 1920, 43
reserve ratio, relation of, to, 50, 98
summary of experience with, 50
Districts, Federal reserve, 13, 14
Dividends paid by Federal reserve
banks, 113
Drafts, discount of, 22, 148

344

INDEX
E

Earning assets of Federal reserve
banks, amounts held, 19201924, 114, 116
chart showing, 28, 59
effect of open-market purchases
of Government securities on,
58
Earnings and expenses of Federal
reserve banks, 112
check clearing and collection,
expenses of, 119
control of, 115
distribution of earnings of Federal
reserve banks, 1914^1924,113
expenses of Federal Reserve Bank
of New York, year 1923,
classification of, 119
statement in detail (Appendix
G), 280
increase in expenses, 1919-1924,

118
Economy and efficiency in Federal
reserve banks, 18, 120
Eligibility of paper discounted by
Federal reserve banks, 9, 147
Federal Reserve Board's function
to define, 16, 147
Examination of Federal reserve
banks, 17, 144
Examination of member banks, 17
Expenses of Federal Reserve Board,
16
F
Federal Advisory Council, 17, 154
conference of, 17, 41, 154
powers of, 154
Federal Reserve Act, amendment
authorizing collateral loans, 23
amendment relating to reserve
requirements, 2, 79
full title, 19
passage of, 1
provisions of (Appendix A), 169

Federal reserve agents, conferences
of, 17, 155
custodians of Federal reserve
notes, 73
duties of, 9
Federal reserve agents' gold fund,
75, 144
Federal reserve bank agencies, 13,
142
Federal reserve bank notes, 77
circulation, table showing, 69
Federal reserve banks, assistance
rendered to Government during the war, 2
branches of, 13, 142
capital supplied by member banks,
7
check clearing and collection, 15,
101-109
committee for passing on loans, 8
condition of, before and after
the war, 2, 3
directors of, 8
dividends paid, 113
earnings and expenses, 112-123
1914-1923, 113
economy and efficiency, 18, 120
eligibility of paper for discount,
9, 16, 22, 147
examination of, 17, 144
Federal reserve bank developments, 1914-1924 (Appendix
C), 250
fiscal agency operations, 15, 109
functions of, 9
inter-rescrve bank borrowing, 35,
36
chart showing, 37
lending power, 19
location of, 13
management of, 8
opening of, 1
open-market operations. (See Discount and open-market operations.)
ownership of, 7
rediscounting between, 36

345

INDEX
Federal reserve banks, rediscounting
between,
Federal
Reserve
Board's control over, 10
reserves. (Sec Reserves.)
sources of earnings, 114
surplus account, 20, 113, 123
payment of expenses out of, 123
tax, franchise, paid to United
States Government, 113
Federal Reserve Board, Clayton Act
administration, 142
conference on credit situation, 41,
156
conference with Federal Advisory
Council, 17, 41, 154
conference with Federal Reserve
Agents, 17, 155
conference with Governors of
Federal reserve banks, 17, 41,
61, 155, 156
counsel, 144
credit policy, 161
discount rate policy, 164
division of bank examination, 144
division of bank operations, 145
division of research and statistics,
157
functions of, 15-17, 136
gold settlement fund, administration of, 142
governor, functions of, 13S
meetings of, 139
membership of, 136
since organization (Appendix
H), 283
organization, 15-17, 136
regulations, 16, 147
relation of, to the issue of Federal
reserve notes, 76
rulings, 147
salaries of members, 137
secretary, duties of, 142
term of office of members, 137
views on open-market purchases,
61

Federal reserve districts, map showing outline of, 14

Federal reserve notes, borrowings at
reserve banks influenced by
demand for currency, 66
circulation, before and after the
war, 3
chart showing, 28, 29
decline in, 81
during Christmas holidays, 64
elasticity of, 63
gold imports, effect on, 67
relation of, to changes in volume
of business, 64
table showing, 32, 69
collateral required for issue of, 10,
73
denominations of, 72
Federal reserve agents' accounts,
table showing, 74
Federal reserve agents' duties in
handling, 9
Federal Reserve Board's duties in
issuing, 76
issue and redemption of, 73
legal status, 72
not legal tender, 72
printing of, 73
redeemable in gold, 72
reserve required against, 21, 72
Finance paper, 148
Fiscal agency operations of Federal
reserve banks, 15, 109
Foreign agencies of Federal reserve
banks, 13, 142
Franchise tax paid to Government
by Federal reserve banks, 113
Free gold, S9
G
German Reichsbank, gold from, 95
Gold, circulation, table showing, 69
Federal reserve notes redeemable
in, 72
free, 89
imports to United States, 31, 43,
99
chart showing, 91

346

INDEX

Gold,

imports to United States,
effect on crcdit situation, G, 9G
effect on demand for reserve
bank credit, 71
effect on Federal reserve note
circulation. 68
effect on reserve ratio, 97
effect on reserves, 95
mobilization of, at Federal reserve
banks, 68
paying out, into circulation, 69, 93
reserves of Federal reserve banks,
87
increase in, 96
stock in United States, increase in, 6
used by member banks for liquidation of discounts at reserve
banks and as basis for new
credit, 96
Gold fund of Federal reserve agents,
75, 144
Gold redemption fund, 75
Gold settlement fund, 16, 142
administration of, 142
volume of transactions, 19201923, 144
Government, assistance rendered to,
by Federal reserve banks during
the war, 2
Federal reserve banks as fiscal
agents of, 109
Government securities. (See United
State Government securities.)
Governor of Federal Keserve Board,
16, 138
Governors of Federal reserve banks,
conferences of, 17, 41, 61, 155,
156
on open-market operations, 61
on credit situation, 41, 156
Graduated tax for deficiencies in
reserves, 88
I

India, gold shipments to, 100
Interest rates, on Liberty bonds and
Victory notes, 26

Interest rates, on reserve balances
of member banks, 133
(See also Discount rates.)
Inter-reserve bank borrowing, chart
showing, 37
during crop-moving period, 35, 36
Federal Reserve Board's control
over, 16
J
Japanese silk market, collapse of, 30
Joint Committee of Agricultural
Inquiry, comments on relation
of non-member banks to Federal
reserve banks, 130
L
Lending power of Federal reserve
banks, 19
Liberty loans, flotation of, 25
Liquidation of loans, 31, 33
in agricultural and industrial
districts, 32
Livestock paper, maturity of, 22
Loan committee of Federal reserve
banks, 8
Loans, discretion in granting, 163
liquidation of, 31, 33
London joint-stock banks, do not
rediscount paper, 46
M

Management of Federal reserve
banks, 8
Maturity of paper eligible for discount, 22, 150
Member banks, capital required for
membership in system, 7
changes in membership, 125
discount rates charged customers,
compared with Federal reserve bank rate, 44
earnings of, in relation to discount
rates of reserve banks, 48

347

INDEX
Member banks, growth in membership, 1011-1924, 124
increase in loans of, in 11)19, 40
member bank credit ami reserve
bank credit (chart), 34
relation to Federal reserve banks,

reserves of. (See Reserves.)
Resources, by districts, 12G
Miller, A. C\, extract from article by
(Appendix J), 294
Money in circulation, chart showing,
70
table showing, GO
(See also Currency, Federal reserve notes; Gold.)
Money rates, chart showing, 45
structure of in the United States,
44
N

National Bank Act, reserves required under, 78
National bank notes in circulation,
69
National banks, examination of, 17
number in Federal reserve system,
124
required to be members of Federal
reserve system, 7
Non-meinber banks, eligible for
membership in system, 131
per cent of bank resources held by,
chart, 129
per cent of banks out of Federal
reserve system, 127
table, 128
relation of, to Federal reserve
system, 10, 130
reserve requirements, 132
resources of, 128
North Carolina par clearance case,
106
Supreme Court Decision (Appendix F), 270
Notes, drafts, and bills of exchange,
discount of, 22, 148

Open-market operations of Federal
reserve banks. (See Discount
and open-market operations.)
Ownership of Federal reserve banks,
7
P
Par clearance case, Atlanta, 105
Richmond, 106
Supreme Court decision (Appendix F), 270
Par clearance controversy, 104
Phillips, C. A., on bank credit, 84
Pittman certificates, 57, 77
Prices, volume of credit in relation
to, 52
decline in, 43
indexes of, published and compiled by Federal Reserve
Board, 158
Progressive discount rates, 42, 50
repeal of act authorizing, 42, 51
R
Rediscounting between Federal reserve banks, 36
chart showing, 37
Federal Reserve Board's control
over, 16
Regulations of the Federal Reserve
Board, 16, 147
text of (Appendix B), 200
Reserve cities, reserves required of
banks in, prior to passage of
Federal Reserve Act, 78
under Federal Reserve Act, 79
Reserve ratio of Federal reserve
banks, actual and adjusted, 93
as indicator of credit situation, 5,
98
changes in, causes of, 92
chart showing, 94
discount rates as related to, 50

348

INDEX

Reserve ratio of Federal reserve
banks, discount rates raised
when ratio was low in 1920, 98
gold imports, effect on, 97
less significant at present, 99
table showing, 1920-1922, 32
Reserves, constancy of reserve balances, 81
currency demand, effect of, on, 84
deficiencies, penalties for, 88
Federal reserve banks, against
deposits, 12, 87
against Federal reserve notes,
87
availability for use in any section of the country, 82
chart showing, 28, 29
economy of, under Federal
Reserve Act, 20
elasticity of requirements, 88
gold reserves, increase in, 4, 90
legal provisions, 87
suspension of reserve requirements, provisions for, 88
table showing, 32
free goldj chart showing, 90
gold imports, effect of, on, 95
graduated tax for deficiencies in,

88
increase in, through gold imports,
96
interest on reserve balances, 133
member bank, 78-8G
deposit with Federal reserve
banks, 12, 20
amendment to Federal Reserve Act, 2, 79
amount required, 21
reduction in, 79
replenishing of, when depleted,

80
required prior to passage of
Federal Reserve Act, 78
required under Federal Reserve
Act, 79
volume of, 79

Reserves, required against Federal
reserve notes, 72
requirements, member and nonmember banks, 132
Resources of banks outside of
Federal reserve system, 127, 129
Resources of member banks, 126
Reviews of the month, from Federal
Reserve Bulletin (Appendix K),
30G
Rulings of the Federal Reserve
Board, 147
Russian State Bank, gold from, 95
S
Salaries of Federal Reserve Board
Members, 10, 137
Secretary of the Treasury cx-ollicio
member of the Federal Reserve
Board, 15, 13G
Silver in circulation, table showing,
69
Silver dollars, melting of, under
Pittman act, 77
Speculation, 30, 33, 40, 62
paper for speculative purposes not
eligible for discount, 22, 146
Sprague, O. M . \V., extracts from
article by (Appendix 1), 285
Surplus account of Federal reserve
banks, 20, 113, 123
payment of expenses out of, 123
T
Tax, franchise, paid by Federal reserve banks to Government,
112, 113
Tax, graduated, for deficiencies in
reserves, 89
Treasury certificates, purchase of,
by Federal reserve banks, 58
U
United States bonds, interest rates
on Liberty bonds and Victory
notes, 26

349

INDEX
United States Government securities, chart showing purchases
by Federal reserve banks, 28
discount of paper secured by,
decline in amount, 4
table showing, 24
effect on earning assets of Federal
reserve banks of purchase of,
r>8
purchase of, by Federal reserve
banks, 57
earnings from, 1920-1924, 114,
116

United States notes, circulation of,
69, 88
security for, 88
United States Supreme Court decision in par clearance case, 106
text of (Appendix F), 270
V
Victory loan, flotation of, 4, 25
W

World war, operation of system before, during, and after, 2, 24

Full text of Federal Reserve System in Operation

FRASER