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T H E F E D E R A L RESERVE
SYSTEM

ITS ORIGIN AND GROWTH

Reflections and Recollections
BY

PAUL M. WARBURG

In T w o Volumes
VOLUME ONE

NEW

YORK

THE MACMILLAN COMPANY
1930

V O L U M E

ONE

THE MACMILLAN
COMPANY
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SET U P AND ELECTROTYPED B Y THE LANCASTER PRESS, I N C .

•PRINTED IN THE UNITED STATES OF AMERICA-

TO THE GUARDIANS
OF THE

FEDERAL RESERVE

PAST, PRESENT, A N D

SYSTEM

FUTURE

T H I S B O O K IS D E D I C A T E D

PREFACE ix
The first draft of this book was prepared at Pasadena in
February and March of 1927. I had gone to California for a
three months' rest when the appearance of a series of articles
written by Senator Glass (subsequently published in book form
under the title " A n Adventure in Constructive Finance") impelled me to lay down in black and white my recollections of
certain events in the history of banking reform. As this
chronicle of the past gradually took form, these recollections
gave rise to reflections upon the Reserve System's present
state and its future. In this way the preliminary draft took
shape and in its essential parts and structure became the basis
of the present work. It was some time, however, before I
definitely resolved to publish the manuscript and, even after
coming to such a decision, I found myself, during the preparation of the final draft, under the strain of highly conflicting
emotions. The impulse to correct misinformation and not to
withhold material that possibly might prove of service to the
public interest clashed with a strong distaste for allowing my^
self to be drawn into a discussion of phases in our banking
history in which I had played an active part. Friends, however, whose unbiased counsel I sought and who were good
enough to read the manuscript, gave it as their considered
opinion that under prevailing circumstances it was my duty to
complete the work, no matter how trying the task. A year
went by in the futile attempt to finish the book in the midst of
the pressing duties of an active business life in New York. But
a second stay at Pasadena, in the spring of 1928, enabled me to
bring it to a close. My reluctance, however, to publishing it
still continued until, in the autumn of that year, I became

vii

viii

PREFACE

convinced that the Federal Reserve System had entered upon
a gravely critical period in its career, and that for the discussion
about to ensue it was highly important that certain vital facts
in the origin and growth of the System be adequately understood.
When I realized that it had become imperative for me to
write this book my first impulse was to seek the collaboration
of some of my former associates in the Federal Reserve organization. Regretfully, however, I reached the conclusion that I
might ill serve these friends, and the System itself, were I to
permit anyone officially connected with its administration to
become involved in a public discussion of its present structure
and functioning. In order to avoid exposing them to the
charge of being in sympathy with or responsible for any
statements contained in this book, I finally, and most reluctantly, went to the very extreme of foregoing to mention by
name even one-time fellows-at-arms to whom I longed to pay a
word of tribute for the splendid services they had rendered
the country and of personal gratitude for the friendship and
inspiration they had given me.
One of the best among these, Governor Benjamin Strong of
the Federal Reserve Bank of New York, has died since this
book was completed. I could not inscribe his name upon these
pages while he was living. Yet, now that he has gone, I may
safely confess that while writing these chapters, his picture often
stood before my eyes as the prototype of splendid men who,
with utter disregard of self, give their lives and souls to the task
of making our Federal Reserve System an efficiently and harmoniously functioning organization,—a heartbreaking undertaking under a law that, structurally, pits against one another
forces which should be united in a common effort towards a
common aim.
On the occasion of Governor Strong's death it was my privilege to present a resolution in which—inadequately indeed—I
attempted to express his fellow-citizens' appreciation of the

PREFACE

part he had played in aiding America to do justice to her
new opportunities and duties as a financial power. A reprint
of this resolution appears at the close of Volume Two.
Beside the name of Benjamin Strong I should like to place
that of David C. Wills, Federal Reserve Agent of Cleveland,
and for a brief period a member of the Federal Reserve Board.
Mr. Wills died in 1925 at the early age of 53 years. In both
cases, careers of extraordinary usefulness might have been
prolonged if a complete devotion to the service of the System
had not led these men to a ruthless neglect of their duties
towards themselves. The fact that it was my privilege to
persuade them both to become officers of the Federal Reserve
System at the time of its organization may justify my wish to
do homage to their memory in these opening pages.
Aside from the inclusion of the above-named resolution commemorating Governor Strong, the addition of a post-scriptum
dealing with the stock exchange panic of 1929, and a few footnotes here and there, the manuscript has been left substantially
unchanged as it stood in the spring of 1928.
It is hoped that the array of two heavy volumes will not
frighten the reader. M y story in itself is fairly brief, but it is
substantiated by the evidence of a collection of documents
which have been placed in the Appendix to Volume One.
Volume Two contains essays written by me since 1906. The
first part of that volume consists of articles composed before I
joined the Federal Reserve Board in 1914, while the second
part contains writings published since then. These documents
have been reassembled here, because most of them are either
out of print to-day or have become so scattered that they are
likely to be known only from haphazard quotations in the
books of other authors—quotations which are often entirely
misleading without the proper knowledge of their context.
No one who for a period of over twenty years has had the
temerity periodically to commit himself to print may hope that
a complete record of his writings will not demonstrate him as

PREFACE

having, at times, been gravely mistaken. For the historian,
however, it is just as important to ascertain what at given
periods human minds did not know as what they believed they
knew. Man's fight against his own ignorance and against that
of his neighbors constitutes one of the most instructive chapters
in the annals of human progress. From this standpoint—of
tracing the evolution of thinking in the realm of banking
reform—a fairly complete record of the author's efforts covering so wide a period may not be entirely uninteresting for a
coming generation of students.
I cannot adequately express the depth of my obligation to
those whom I found willing to read the manuscript. It ought
to be distinctly understood, however, that their generosity
in giving me the advantage of their counsel must not be
construed as an endorsement of any statements contained in
these pages. I may mention only my friends of Pasadena,
Robert S. Lovett, Professor William B. Munro, John Perrin,
and Henry M. Robinson, furthermore, Professor Edwin R.
A. Seligman and Victor Morawetz of New York, Professor
William T . Foster of Cambridge, Mass., Professor Harold
L. Reed of Cornell University, and, last but not least, my
most patient critic and friend, my wife. T o Professor Seligman, who from the days of my first literary endeavors has
always aided me by his willingness to give a critical reading
to my writings, I am particularly indebted for introducing
to me Mr. R. W. Robey of Columbia University who, together
with my indefatigable secretaries, Miss Margaret Habrich and
Miss Ingegerd Nissen, has given me invaluable assistance in
the final composition of the manuscript. For preparing the
index and seeing the volumes through the press I am obliged
to Mr. M. L. Jacobson, Statistician of the Federal Reserve
Board from 1914 to 1924.
I wish to extend my sincere thanks to The New York Times,
the Academy of Political Science, New York, the Columbia
University Press, the American Economic Association, the

PREFACE

Commercial and Financial Chronicle, New York, the North
American Review Publishing Co., New York, the Journal of
Commerce, New York, and the American Academy of Political and Social Science, Philadelphia, Pa., for their courteous
permission to reprint articles of mine previously published by
them.
PAUL M .
NEW

YORK,

January, 1930.

WARBURG

TABLE OF CONTENTS
P A R T

ONE

CHAPTER

PAGE

Introduction
1 First Attempts at Banking Reform (1903-1908)
2 Evolution of a Central Reserve Plan (1908-1910)
3 The United Reserve Bank Plan (1910)
4 The Aldrich Plan (1910-1912)
5 First Drafts of the Glass Bill (1913)
6 From Owen-Glass Bill to Federal Reserve Act
7 The Federal Reserve Act in Evolution (1914-1917)
8 The Aldrich Bill and the Federal Reserve Act: A Juxtaposition
of Texts
Share Capital, 180; Incorporation, Charter, and Powers, 184; Membership, 188; Organization, 198; Election
of Boards of Directors and Officers, 210; Constitution
of the Central Board, 224; Powers of the Central Board,
234; Filing of Certificate and Call for First Payment,
242; Stock Subscriptions and Increases and Decreases
of Holdings, 244; Tax Exemption, 252; Examinations,
254; Earnings, Contingent Funds, and Government's
Share in Excess Earnings, 256; Equal Advantages for
all Members and Right to Suspend Members from Use
of Privileges, 260; Fiscal Agency Relations, 262; Government and Members to be Sole Depositors, 264;
Interest on Reserve Balances, 266; Rediscount Powers,
268; Fixing of Discount Rates, 274; Power for National
Banks to Make " Acceptances," 276; Power to Purchase
(or Discount) Acceptances, 280; Investments in United
States Bonds and Other Securities, 282; Power to Deal
in Gold and Bullion, 284; Open-Market Purchases,
286; Foreign Correspondents or Agencies, 294; Clearing and Collection System, 296; Branches of Federal
Reserve Banks, 301; Reserves, 304; Loans on Real Estate, 316; Reserves Against Deposits and Notes, 318;
Weekly Report of Condition, 322; Reports and Examinations* 324; Partial Repeal of Section 5159, 328;
Retirement of National Bank Currency and Conversion
of two per cent Bonds, 330; Note Issue, 338; No Charge
for Transportation of National Reserve Association

xiii

3
11
31
49
56
81
105
137
178

CONTENTS

xiv
CHAPTER

10
11
12

Circulation, 350; Foreign Corporations, 352; Right to
Amend, 360; Effect on Existing Provisions of Law,
362; Local Associations proposed by the National Reserve Association Bill, 364; Federal Advisory Council
set up by the Federal Reserve Act, 367.
An Analytical Comparison of the Aldrich Bill and the Federal
Reserve Act Based on the Juxtaposition of Texts shown in
Chapter Eight
A. Organization, 369; B. Management, 374; C. Rediscounting, 383; D. Voluntary Purchases from Members or in the Open Market, 387; E. Investments in
Government Securities, 389; F. Gold Transactions,
390; G. Foreign Agencies, 391; H. Reserve Requirements, 392; I. Note Issues, 194; J. Retirement of
National Bank Notes and Refunding of Bonds, 396;
K. Clearing System, 398; L. Depositors, 399; M.
Fiscal Agency Relations, 400; N. Exemption From
Taxation, 400; O. Publication of Reports, 400; P.
Division of Earnings, 401; Q. Relations with Member
Banks, 402; R. Acceptances of National Banks, 404;
S. Real Estate Loans by National Banks, 404; T.
Foreign Trade Organizations, 405.
The Legatee of the Aldrich Bill
The Redistricting Intermezzo
Looking Forward

PAGE

369

407
424
456

ADDENDA
NUMBER

1
2
3
4

The Chicago Incident: A Postscriptum
The Stock Exchange Crisis of 1929
Suggested Change for Constitution of Federal Reserve Banks'
Directorates
Selected Sections of the Federal Reserve Act showing the
Alterations effected by Amendments during the Period
August 15, 1914 to April 5, 1918, inclusive

488
501
518

520

CONTENTS

xvii

P A R T TWO
APPENDICES
NUMBER

PAGE

1
2
3

Letter to Hon. Theodore E. Burton, April 30, 1908
Letter to Senator Aldrich, December 31, 1907
Statement before the Subcommittee of the Committee on
Banking and Currency of the House of Representatives
(Glass Committee), January 7, 1913
4 Report of Delegates from the New York State Chamber of
Commerce to the Monetary Conference in Washington,
January 18, 1911
5 Excerpts from Address of Hon. Nelson W. Aldrich, Chairman
of the National Monetary Commission, before the Annual
Convention of the American Bankers Association, at New
Orleans, November 21,1911
6 Editorial published in $he New York Times, March 4,1911. . .
7 Quotations from a pamphlet of The National Citizens' League
for the Promotion of a Sound Banking System—The Origin
of the League
8 Letter to Hon. Carter Glass from Mr. Victor Morawetz, April
9

11
12
13
14
15
16
17

5^9*7
;
Review of the Report of the National Monetary Commission
by the Committee on National Affairs of the Republican
Club of the City of New York, February 19, 1912
Dr. H. Parker Willis's Memorandum on Scope and Effect of
H. R.
To Reorganize the Present Banking and
Currency System, April 2, 1913
Letter to Colonel House analyzing Dr. H. Parker Willis's
Synopsis of the First Draft of the Glass Bill, April 22, 1913..
Extracts from Chapter X V I of An Adventure in Constructive
Finance by Hon. Carter Glass
Letter to Samuel Untermyer, written on the " Mauretania,"
May 24, 1913
Memorandum written on the "Mauretania" for Senator Owen
and Mr. Untermyer, May 24, 1913
Letter to Dr. A. Piatt Andrew, December 5, 1910
Memorandum on the Rediscounting and Open-Market Operations Clauses of the Owen-Glass Bill, October, 1913
Suggestions for Amending Sections 14 and 15 of the Federal
Reserve Bill

553
555

558

567

572
580

582
5^7
592

604
613
626
636
639
653
657
670

CONTENTS

XVI
NUMBER

18
19

PAGE

The Educational Campaign for Banking Reform, by A. D.
Welton
Miscellaneous Exhibits pertaining to pending Banking Legislation:
Letter from Irving T. Bush, August 7, 1913
Letter to Irving T. Bush, September 1,1913
Letter from Edmund D. Fisher, July 10, 1913
Excerpts from a letter of Professor J. Laurence
Laughlin, October 15, 1913
Letter from J. H. Tregoe, Secretary-Treasurer of the
National Association of Credit Men, January 7,
i9i3
Letter from J. H. Tregoe, Secretary-Treasurer of the
National Association of Credit Men, January 10,
1913
Excerpts from Report on Aldrich Bill by the Banking
and Currency Committee, National Association of
Credit Men, June, 1912
Excerpts from a Foreword on the Attitude of the National Association of Credit Men toward Banking
and Currency Reform, October, 1912
Facsimile of Leaflet No. 1 of the National Association
of Credit Men, January 10, 1913
Part of a Memorandum submitted to the Federal Reserve
Board at the Board Meeting of December 3,
1915

Letters and Editorials
Sections

21
22
23

Relating

of the Federal

to Amendments
Reserve Act.

of Note Issue
{Appendices

and

678
682
683
685

685

686

687

694
697

700

Reserve

21-26.)

Letter to Hon. Carter Glass, February 29, 1916
Quotation from The Chronicle of July 29,1916, Vol. 103, P. 348
Quotation from The Chronicle of September 30, 1916, Vol.
103, P. 1153
24 Letter to a Board Member, November 10, 1916
25 Press Statement issued by the Federal Reserve Board on
January 13, 1917
26 Letter to a Friend concerning Fiat Money, November 3,1913.

673

707
718
723
728
745
751

CONTENTS

xvii

NUMBER

PAGE

Quotations from an Address entitled "Banking Reform in
the United States," delivered by Nelson W. Aldrich (before
the Academy of Political Science, New York, October 15,

1913)
28
29
30

32
33
34

• ••

• •• 752

Testimony before the Reserve Bank Organization Committee,
January, 1914
.
Revised Report of the Federal Reserve Board Committee on
Redistricting, November 17, 1915
Opinion of T. W. Gregory, Attorney General, concerning the
Power of the Federal Reserve Board to abolish any of the
existing Federal Reserve Districts, November 22, 1915...
Opinion of T. W. Gregory, Attorney General, concerning the
right of the Federal Reserve Board to change the present
location of any Federal Reserve Bank, April 14, 1916
Letter to President Wilson, May 27, 1918
Letter from President Wilson, August 9, 1918
Memorandum to the Federal Reserve Board, warning against
forcing Federal Reserve Banks to invest, and urging the use
of Bankers' Acceptances to finance Trade between Foreign
Countries, March 30, 1915
Letter to Hon. James G. Strong, House of Representatives,
containing Report of Merchants' Association of New York,
May 24, 1927
Opinion of the Attorney General of the United States concerning the Powers of the Federal Reserve Board to regulate Discount Rates of the several Reserve Banks, December 9, 1919
Remarks of Author, as Chairman of International Acceptance
Bank, Inc., made in his Annual Report, March 7, 1929. . .
Index

759
767

781

792
802
805

806

817

820
823
827

LIST OF DIAGRAMS, FACSIMILES OF
LETTERS, ETC.
NUMBER

1
2
3
4
5
6

PAGES

Facsimile of Postcard showing List of Officers and Platform of the National Citizens' League
Letter to Author from Hon. Carter Glass, November 22,

72~73

116
i9 J 3
Letter to Author from J. H. Tregoe, January 7, 1913. .. 135
Letter to Author from President Wilson, April 30, 1914. 144
Diagrams showing Condition of Federal Reserve Banks
before and after Amendments of June 21, 1917
167-168
Diagrams showing Federal Reserve Holdings of Bills and
Securities, Movement of Open-Market and Bank Rates,
also Growth of Brokers' Loans and Stock Values, together with Changes in the Call Money Rate, 1926-

!929:

;

5°3~5°4

Facsimile of Leaflet No. 1 of the National Association of
Credit Men, January 10, 1913
697

xix

PART ONE

INTRODUCTION 23
Nisi utile est quodfacimus> stulta est gloria.
(PHAEDRUS)

In an article entitled " T h e Money Power in Politics," 1
Professor William B. Munro makes the following remarks on
the process of law making:
I am told that Congress and the State Legislatures make
the laws. . . . Instead of saying that legislators make the
laws, it would be far more correct to say that legislatures
merely put the finishing touches on the law. To say that they
"make the laws" is like saying that the books are made by
bookbinders, forgetting that there are authors, printers, and
proofreaders too.
The motive power in lawmaking is all supplied from somewhere outside the legislative halls. . . . Some intellect outside
the realm of active politics first conceives an idea. It spreads
to the minds of other individuals, slowly at first, but gradually
gaining momentum. Presently there is an organized movement in its favor; then comes the deluge of propaganda, until
the proposal becomes an issue and the politicians begin to take
note of it. A law is half made, and more than half made, when
a large body of aggressive support has been mobilized among
the voters; yet during this part of the process the legislative
bodies have nothing whatever to do with it.
No one conversant with the history of the Federal Reserve
Act is likely to read this passage without noticing how closely
it applies to the origin of that measure. The ideas so succinctly stated by Professor Munro seem not to have
occurred, however, to the principal commentators on
the origin of the Federal Reserve System.
As a rule,
these writers have treated the technical work of framing the
law, the debates in committees and on the floors of Congress,
and the incidents relating thereto, as the chief matters of his1

Atlantic Monthly, April, 1927, p. 447.

THE FEDERAL RESERVE SYSTEM

torical importance, indeed, as though they were the whole
drama. T o the period, on the other hand, during which the
basic ideas crystallized and during which public opinion
was mobilized in their support—the period which constituted
not only the prologue but also the first act of the drama—
they have given very scant and inadequate consideration.
Y e t the way a law looks when it is "half made, and more than
half made," deserves close study; for in this stage, if it is the
result of the labors of men uninfluenced by selfish motives, it
represents, as nearly as may be possible, the law in its ideal
form. It is the neutral model of a non-partisan proposal
untainted by political considerations. In order, however,
that a proposed bill may be placed upon the statute book,
it is its inevitable fate to become the subject of political and
often of partisan action. A parliamentary government cannot function effectually without a party system. Parties, in
turn, are bound by traditions, platforms, slogans, and, most
of all, by the fear of opposing factions. A model law, of
sufficient importance to be considered as coming within the
ominous circle of party politics, is bound, therefore, to lose its
neutral character and to be remodelled so as to harmonize
with the tenets of the party that undertakes to enact it.
Thus the labors of parliaments may result in deplorable perversions of the original non-partisan proposals by dint of concessions to the right side or the left, depending upon the particular party which happens to be in power. And the more
difficult it be to muster the necessary majority, the heavier
must be the toll of concessions to extreme wings whose votes
must be secured. Compromises thus are the frequent fruits
of parliamentary law making.
In spite of such handicaps, however, a law enacted in such
circumstances may denote great progress and, for a while at
least, confer benefits of the highest order. But as time progresses and as the economic structure based on such legal
groundwork grows in height and weight, the weakness of the

INTRODUCTION

very foundation will be revealed whenever so\ind principles
and convictions were compromised.
Fortunately, in a world of constant evolution, public opinion
advances and, as time loosens the stranglehold of prejudices
and party commitments, the "political necessities" of yesterday cease to exercise their sway. Ever-changing economic
and psychological conditions call for the adaptation of old laws
to new circumstances; and defects in a law which had to be
accepted as the price of its enactment may subsequently be
corrected with comparative ease. The law in a process of
gradual evolution may thus lose its partisan color and adopt
a form more closely approximating the original non-partisan
model.
A comprehensive scientific account of the origin and development of the Federal Reserve Act would have to record some
such evolution. The first part of such a history should
start with an analysis of the soil in which the early beginnings of the neutral law had its roots. It would then trace
that model through its first stages of development, describe
the gradual spread of the movement for its propagation,
and show how the propaganda gained momentum and assumed
an organized form.
The second part of the story—tne part devoted to parliamentary recognition of changed public opinion—would depict
Senator Aldrich's entrance upon the scene, his assumption of
the leadership in the banking reform movement by the presentation of the National Reserve Association Bill, a bill which
may be regarded as the Republican version of the neutral
model. The educational campaign carried on by the National
Citizens' League would fill an essential chapter of this part of
the story, which would end with the failure of the Aldrich
Plan. Thenceforth, this stage of the analysis would deal with
the ascendency of the Democratic party and with its crowning
accomplishment in banking reform, the enactment of the
Federal Reserve legislation.

THE FEDERAL RESERVE SYSTEM

The third part would reveal the law in operation. It would
show where practical experience led Congress to remove
some of the undesirable features forced into the law either bypolitical considerations or by faulty estimates of future needs,
and would indicate where errors still remain to be corrected if
the System's future is not to be impaired.
Ever since 1914 I had hoped for a comprehensive history of this kind. Unfortunately, however, while we have
several excellent books treating the operations of the Federal
Reserve System since its organization, 1 the most important
if not the only books dealing with the genesis of the Federal
Reserve Act are those of Senator Glass, Dr. H. Parker
Willis, and Senator Robert L. Owen, all of them the productions of pleaders in their own cause and not of unbiased
historians. These writers fail to give an adequate account
of the work done by individuals and associations in the
period extending from 1908 to 1914, and particularly of the
important contributions made by Senator Aldrich. Some of
them, indeed, have gone to the extreme of making determined
efforts to disprove any direct relationship between the Federal
Reserve Act and the Aldrich Bill.
Thus the true connection between the half-made law, as
Professor Munro puts it, and its outgrowth, the Federal Reserve Act, has yet to be fully described and justly appraised.
It is of the utmost importance that this connection should be
established, for without an adequate knowledge of the origin
and evolution of the Act we cannot understand the present
problems of the Federal Reserve System nor wisely determine
1 Harding, William P. G. Formative Period of the Federal Reserve System
(During the World Crisis), 1925, Houghton, Mifflin and Company; Kemmerer,
Edwin White, A B C of the Federal Reserve System, Princeton University
Press; Reed, Harold Lyle, Development of Federal Reserve Policy, 1922, Houghton, Mifflin and Company; Burgess, Warren Randolph, Reserve Banks and the
Money Market, 1927, Harper and Brothers; Goldenweiser, E . A.,
Federal
Reserve System in Operation, 1925, McGraw-Hill Book Company.

INTRODUCTION

what changes should be made in the law or in the methods
of its administration.
An equitable assessment and frank acknowledgement of
Senator Aldrich's work is further necessary for the special
reason that unless the System be considered the child and ward
of both parties its future is not secure. If, from time to time,
the needs of the Reserve System are to be dealt with by Congress in a spirit of disinterested sympathy, if Congress is to
place the Reserve System in a position of unassailable authority
and to safeguard it from political interference, the Reserve
System must have the undivided friendship and goodwill of
both political parties. It is imperative that it should be regarded not as the work of a single party, but as the product of
the combined efforts of all those who helped to bring it about
and as the property of all the people.
Moreover, it is dangerous to permit misinformation to remain for long unrefuted. Miss Clio, the Muse of History, is
a stubborn lady, entirely devoid of a sense of humor, and once
she has made up her mind, it is exasperatingly difficult to alter
her verdict. It is inadvisable, therefore, to delay too long the
correction of inaccuracies, particularly in cases where silence
might fairly be construed as assent.
Finally, the Reserve System does not stand still. Its problems are immediate, and legislative action may be invoked at
any time. When the hour for action by Congress does arrive,
it is of the utmost importance that the problem be taken up in
the fullest knowledge of the true facts and without partisan
bias.
Considerations such as these were uppermost in my mind
when I reached the conclusion that it was my duty to venture
upon the difficult and in many respects unwelcome task of writing this book. It ought to be understood, however, that I do
not present it as a chapter of banking history, or as a complete
story of the struggle of the non-political thought in banking
reform. It would have been impossible for me to attempt

THE FEDERAL RESERVE SYSTEM

to cover the many contemporaneous efforts made by others
striving for the same goal; I could give a description only of
the episodes of the play in which I personally took part either as
actor or as spectator. I could offer such a sketch only with the
very distinct and limited aim in mind of contributing building
material which some day might be useful to historians who,
in chronicling the genesis and evolution of the Federal Reserve
Act, would seek to fill in the gaps and throw new light upon
phases of the drama which have been incorrectly presented,
or have remained obscure.
In order to avoid any misunderstanding, may I be permitted
to state at the outset that I do not claim to have originated
any new banking principle. I was trained in the practices
of a banking system which under varying forms had worked
satisfactorily in almost every industrially advanced country,
except the United States. From the time of my arrival in
America I felt impelled to urge the adoption of the fundamental
principles upon which that established and proven system
was based, and by submitting several plans I tried to demonstrate the possibility of a practical adaptation of this system to
American conditions. It was owing to the interest I had
shown in banking reform that, when the Aldrich Banking and
Currency Committee was appointed, I was invited to assist it
in formulating a plan providing for the creation of a Central
Reserve Association with regional branches. I had opposed
plans envisaging systems of large numbers of divisional reserve banks entirely disconnected from one another, but I
favored plans providing for a moderate number of regional
banks intimately connected with one another so as to constitute a properly coordinated central banking system. Hence,
when subsequently a bill was introduced in Congress for the
creation of a system of regional reserve banks tied together
by a central board, instead of one reserve bank with regional
branches, I endeavored, just as I had done in the case of the
Aldrich Bill, by positive and negative recommendations, to

INTRODUCTION

keep the Act, a highly desirable project, from being jeopardized by dangerous concessions to extreme political demands.
When the Federal Reserve Act was passed, and I became a
member of the Federal Reserve Board, I continued, hand in
hand with others devoted to the same task, to work for the
successful development of the Federal Reserve System by
pressing for amendments as practical experience in operation
rendered them necessary and possible. In this work I was
at all times an opponent of the political view, championing
the non-political side, and it is in that spirit that as a final
effort I now present this book.
In the first part of the book the form of a personal narrative
has been adopted, because by this method it proved possible
to establish authentically the chronological record of events,
often in refutation of assertions made by others, without
tiring the reader by specifically mentioning in each instance
the statements to be disproved. Where it was important
to leave no doubt as to the nature of the case involved the
passages relating to these statements have been quoted.
While I do not deny that, having devoted the best part
of my life to the solution of our banking problem, I am anxious to keep the record of my work clear and undistorted, the
main object of this book does not lie in that direction. M y
narrative is but the background for the conclusions to be
drawn therefrom. "Recollections and Reflections" serve only
to show that the Federal Reserve Act—one of the greatest accomplishments ever recorded in the annals of Congress, an Act
conferring untold benefits not only upon the United States but
upon the entire world—is still weighed down with the burden
of political compromises which menace its future; that this danger could be removed without affecting any fundamental part
of the structure, but that the necessary remedial action may be
hoped for only if the problem can be dealt with in a thoroughly
non-partisan spirit.
The principal message of this book thus remains that the

THE FEDERAL RESERVE SYSTEM

Reserve System is the product of the labors of many minds,
that it is the common property and ward of all the people, and
that all must feel an equal degree of concern and responsibility for its welfare. In order to be accorded its proper place, the
Reserve System must be looked upon as a national monument,
like the old cathedrals of Europe, which were the work of many
generations and of many masters, and are treasured as symbols
of national achievement.
Because Bramante conceived,
Rafael Sanzio elaborated, and Michael Angelo carried out,
the Cathedral of St. Peter's at Rome, this monument of their
combined genius, is all the more cherished by the people of
Italy as one of their most sacred possessions.
If this narrative should help to awaken in the minds of its
readers a like attitude toward the Federal Reserve System,
the author's aim will have been accomplished.

CHAPTER

FIRST ATTEMPTS AT BANKING REFORM 31
(1903-1908)

WHEN

the full history of the Federal Reserve Act comes
to be written, it is to be hoped that in addition to a
complete description of the banking laws and conditions prevailing in the United States in the last decade of
the nineteenth century, it will contain a careful account of the
state of mind of the people of that time concerning the broad
problem of money and banking.
Without a clear comprehension of the attitude of the business
men, bankers, and economists of that period, coming generations will find it impossible to visualize the obstacles which
had to be overcome and to gauge the distance which had to be
covered, when the way was blasted for the gradual advance
and ultimate victory of banking reform.
Such a history, however, must be penned by others. I cannot do more here than attempt to sketch the rough outlines
of the picture of men and conditions as I saw them when,
after several visits to the United States, I moved from the
Old World to the New, and settled in New York as a banker
in the fall of 1902.
A t that time there were in existence some twenty thousand
national and state banks, stock savings banks, private banks,
and loan and trust companies, of which about one-half had a
capital of $25,000 or less. There were about five thousand
national banks, the largest of which had a capital of $25,000,000, a surplus of $8,900,000, and deposits of $138,000,000.
The largest state banking institution had a capital of $2,000,000, a surplus of $2,500,000, and deposits of $34,000,000.
There was no organic cohesion between these approximately
11

THE FEDERAL RESERVE SYSTEM

twenty thousand banks. Individualism in banking was the
gospel of the country. The view was generally held that
centralization of banking would inevitably result in one of two
alternatives: either complete governmental control, which
meant politics in banking, or control by " W a l l Street," which
meant banking in politics. Abhorrence of both extremes had
led to an almost fanatic conviction that the only hope of keeping the country's credit system independent was to be sought in
complete decentralization of banking. As a consequence,
there existed as many disconnected banking systems as there
were States, and even among the banks of a single State there
was no machinery for mutual protection except the "clearing-house associations." These organizations were to be
found, however, in only a comparatively small number of
localities and, even within their restricted areas, served—
rather ineffectively at that—to assist their bank members in
times of grave financial convulsions, rather than to prevent
the occurrence of such calamities.
The National Bank Act had been devised in order to create
a uniform though strictly decentralized credit system, with a
decentralized inelastic note issue secured by the deposit of collateral consisting of certain United States Government bonds.
Under this plan a system of obligatory individual "reserves"
was relied upon to limit the possible extent of credit and deposit
expansion. Taking account of the various types of banks, the
Act divided national banks into three classes, viz., central reserve city banks, reserve city banks, and country banks; and for
each classitstipulated a different " required reserve." Country
banks were to maintain against their demand deposits a reserve
of 15 per cent, of which not less than 6 per cent was to be held in
lawful money in their own vaults, and 9 per cent could be redeposited with other national banks acting as "reserve agents"
in reserve or central reserve cities. National banks in reserve
cities were to maintain a reserve of 25 per cent, of which not
less than half was to be kept in lawful money in their own

FIRST ATTEMPTS AT BANKING REFORM

vaults, while the other half might be redeposited with "reserve
agents" in central reserve cities. National banks in central
reserve cities, that is, in New York, Chicago, and St. Louis,
had to maintain a reserve of 25 per cent, all of which was
to be kept in lawful money in their own vaults. A number
of State laws had copied the National Bank Act in dividing
their state banks and trust companies into similar classes,
requiring them to maintain similar cash reserves against
deposits and granting them similar authority to redeposit
a portion of their required reserves with "reserve" and "central reserve agents." Indeed, certain States permitted their
institutions to include national bank notes in the cash reserve
to be kept in their vaults. Thus national and State legislatures had combined to create a system of pyramided reserves—
a system which was bound to produce an artificial and unhealthy concentration of funds in the reserve and central
reserve cities, and particularly in New York. Reserve funds
need not inevitably have accumulated in New York to any
larger extent than in Chicago and St. Louis, had not the callloan market of the New York Stock Exchange proved the only
reliable money reservoir in which reserve funds in vast amounts
could be easily placed, and from which—as long as things
remained normal—these funds could be withdrawn at the
pleasure and convenience of the lender. It should be remembered, in this connection, that in those days commercial
paper in the portfolios of the banks, instead of being a liquid
asset, constituted a lock-up of funds and that there was no
free supply of, or wide market in, United States Government
securities. The only government bonds normally available
were those that could be used as collateral for the issue of
national bank circulation, and these had been absorbed and
were firmly held by the national banks and commanded a
fancy price.
The settlement of balances between cities was entirely in
the hands of the commercial banks, which maintained elaborate

THE FEDERAL RESERVE SYSTEM

check collection departments. "Transfers," in so far as they
were not accomplished by shipments of actual currency,
were generally effected by buying or selling "exchange,"
and "collection and exchange charges" played a very important part in the banks' daily routine and — particularly
in the case of the smaller banks — furnished a substantial
portion of their revenues.
If industrial conditions had not undergone revolutionary
changes, this host of self-centered local banks might not have
proved so inadequate. But when the country outgrew its
provincialism; when our new industries started upon their
phenomenal careers; when a lively and intimate daily exchange
of goods and funds began to develop, not only between the
several sections of the country, but between ourselves and all
the rest of the world, the national banking, system, with the
state banking system superimposed upon it, was bound to
show the fatal consequences of its inadequate structure.
It became painfully manifest that extreme individualism in
banking had rendered the country incapable of coping with
its growing requirements and had made it hopelessly defenseless against dangers both from within and from without.
If gold was withdrawn for export, the bulk of it could only be
taken from the cash holdings of the bank which made the
shipment, or indirectly from some other institution. If the
bank losing gold strove to regain it by calling in some of its
demand loans—collecting in lawful money the balance thus
made available to it in the daily clearing-house settlement—
some other bank of necessity had to be the loser of a corresponding amount of reserve money. As long as all the banks
collectively commanded reserves well in excess of the legal
requirements, these adjustments could take place without
creating difficulties or alarm. But when heavy demands for
gold from abroad, or excessive domestic demands for circulation, or an abnormal increase of bank loans and bank deposits
had brought excess reserves down to or below the legal requirements, financial conditions became at once critical.

FIRST ATTEMPTS AT BANKING REFORM

Without a central organization, which by discounting
or buying commercial paper could furnish additional currency
or additional reserves, a heavy rise in deposits or a marked
increase in the volume of circulation were bound automatically
to tie up the banks. It is true that a certain elasticity was
provided by the willingness of European bankers to grant us
acceptance credits. These credits served to finance the movement of our crops and, in the form of finance bills, to provide
for the additional demands of industry and speculation. But
when these credits became exhausted, the mere knowledge that
the end of the tether had been reached created a situation of
such tenseness that even a slight shock could cause the
collapse of the insecure structure. When, in such circumstances, Europe would attempt to curtail credits, or draw
gold, or when the depositor would become alarmed and begin
to hoard it, when the vicious "gold premium" would put in its
dreaded appearance—pandemonium was inevitable. With no
central institution to provide relief, nobody could strengthen
his position save by attacking his neighbor. Thus natural
instincts of self-preservation, when called into play, unavoidably led to panics and wholesale destruction of values.
When the frantic attempt to sell securities at any price,
while nobody was in a position to buy, precipitated
a crash which at times forced the stock exchange to close
its doors, stock-exchange call loans "froze." That meant
that the liquid reserves of the banks in all parts of the country
had become immobilized and that a general suspension of
cash payments was inevitable. Within the confines of a
city banks might make efforts to settle at least the most
pressing transactions by accepting clearing-house certificates
in settlement with one another. Outside of this narrow circle,
however, payments between cities and sections entirely ceased,
as banks refused to ship currency and declined to accept payments in checks on other cities. It was one of the tragic
defects of the American banking system at that time that,

THE FEDERAL RESERVE SYSTEM

while disasters of this kind were the automatic consequences
of over-expansion, there was no possibility of averting them
by timely preventive collective action. There was no governmental or private authority that could assume leadership in
warning the country, or that had actual power to put on the
brakes if the car were moving too fast and heading for the
precipice.
Individualism in banking demanded that everybody should
be free to have his own individual fling, while the subsequent
disaster was the common property of all, engulfing the innocent
with the guilty. A t times, when excesses had not gone too
far, the unwillingness and inability of the banks to make
further loans—which might express itself in interest charges
of from 50 per cent to 100 per cent for call loans—would bring
about a contraction; at times, the very existence of such rates
would tend to broadcast the critical underlying conditions
and precipitate the panic that it was hoped such prohibitive
rates would forestall. Everybody will agree to-day that it
would be difficult to imagine a banking system more cruel
and more inefficient than that prevailing in the United States
at the beginning of the twentieth century—a system which,
instead of scientifically regulating the flow of credit and money
so as to secure the greatest possible stability, was designed automatically to produce instability; a system which permitted
expansion and contraction to go unhampered to their very
extremes; a system which knew no better way to turn the
ebbing tide of credit than to lay the country waste, making
its ruins an attractive shopping place for domestic and
foreign wreckers and bargain hunters.
It is very important, however, to realize how little the
people of that period understood the fundamental organic
defects of their banking system. American public opinion
was strongly inclined to dispose of the question by laying the
blame for these difficulties upon the "selfish and reckless
management of corporations," on "over-speculation/' the
"greed of banks," or the wily practices of "Wall Street,"

FIRST ATTEMPTS AT BANKING REFORM

T o a person trained under the central banking system of
European countries, such conditions seemed bewildering and
strange. To him American banking methods appeared to do
violence to almost every banking tenet held sacred in the Old
World. In Europe, reserves were centralized, note issues were
elastic, and commercial paper permitting of immediate sale
formed the quickest asset of the banks. In Europe, the "bill
market" formed the most important field in which banks sought
to employ their liquid funds, while a certain limited portion of
their secondary reserves was invested on the stock exchanges
in fortnightly or monthly loans under the term-settlement system generally prevailing on European stock exchanges, instead
of a daily-settlement system such as that in vogue with us. In
the United States, the note issue, based on government bonds,
was inelastic, gold reserves were decentralized, and investments in unsalable single-name commercial paper were locking up the funds of the banks, while call loans on the stock
exchange constituted their chief liquid asset.
The idea of a central banking system being anathema to all,
attempts to obtain relief generally centered in proposals for
the creation of more currency to be issued by thousands of
individual banks. What the general state of mind was with
regard to the banking problem may well be illustrated by a
conversation I had shortly after my arrival.
In order to clarify the problem as it had arisen in my mind,
I had ventured to set down, in a short memorandum, the
cardinal defects of our system as I saw them. I compared our
methods with those employed in Europe and pointed out the
direction in which, I believed, the remedy might be found.
I stressed the fact, however, that, aside from psychological
and political resistance, any attempt to establish in the
United States a banking system more nearly approaching the
European models would meet a serious and almost insuperable
obstacle in the fact that, while central banking systems in
Europe were largely built upon a foundation of modern

THE FEDERAL RESERVE SYSTEM

commercial paper and bankers' acceptances, these modern
forms of paper were then non-existent in the United States,
and that, therefore, progress could be achieved only by slow
degrees.
This memorandum was shown to Mr. Jacob H. SchifF, then
the senior partner of the banking firm of Kuhn, Loeb &
Company, of which I had lately become a member. Mr.
SchifF read the paper with interest and told me, what afterwards he often repeated, that, while theoretically he agreed
with most of the thoughts expressed, he believed that I was
misjudging the psychology of the American people, who would
never, he said, accept any system approaching a central
bank. But since he always appreciated earnest efforts on the
part of his juniors and never missed an opportunity of encouraging them, he suggested that I let him show the
paper confidentially to two of his friends. One of these was
Mr. James A. Stillman, President of the National City Bank
of New York. It was significant, however, of the atmosphere
in which we were then living that Mr. SchifF warned me to be
careful not to have the memorandum go any further, lest,
having just arrived from Europe, I might impair my standing
in the banking community by creating the impression that I
was urging a system which, in the final analysis, would have
to be built around a central banking organization. I gladly
accepted Mr. SchifF's suggestion, and a few days afterwards
I found Mr. Stillman standing over my desk. He looked at
me silently, as was his wont, through his half-closed, heavy
dark eyes.
" H o w is the great international financier?" he asked with
friendly sarcasm. He then added, "Warburg, don't you
think the City Bank has done pretty well?"
I replied, " Y e s , Mr. Stillman, extraordinarily well."
He then said, " W h y not leave things alone?"
It was not without hesitation that I replied, " Y o u r bank
is so big and so powerful, Mr. Stillman, that, when the next

FIRST ATTEMPTS AT BANKING REFORM

panic comes, you will wish your responsibilities were smaller."
A t this, Mr. Stillman told me that I was entirely wrong,
that I had the mistaken notion that Europe's banking methods
were the most advanced, while, as a matter of fact, American
methods represented an improvement upon, and an evolution
of, the European system, America having already discarded
its central bank. He had no doubt that progress would have
to be sought, not by copying European methods, but by
elaborating our own.
Four years later, in the midst of the panic, I found Mr.
Stillman once more standing over my desk; and when I looked
up, he asked, "Warburg, where is your paper?"
I said to him, " T o o late now, Mr. Stillman. What has to
be done cannot be done in a hurry. If reform is to be secured,
it will take years of educational work to bring it about."
This incident is related for the sole purpose of showing
the status of banking and business opinion in those far-off
days. What Mr. Stillman had said was typical of the general attitude then prevailing.
A t this juncture, the United States Senate was dominated by
the Republican "Old Guard," of which Senator Aldrich was the
all-powerful head. This group believed in bond-secured currency and, at a pinch, in still more bond-secured currency. In
times of emergency, further relief was to come from Treasury
deposits, as long as they were available (the government
borrowing as far as it had the power to do so). As a last
resort, when panic was imminent, or had actually set in,
clearing-house certificates were to be issued.
There were other groups in Congress which advocated socalled "asset-currency" plans. Representatives of this school
of thought were moving on sound lines, when proposing
to make commercial assets the basis of circulation. They
were preaching unsound doctrines, however, when they urged
that individual commercial banks should be authorized to issue
notes against their own assets, and that they should be per-

THE FEDERAL RESERVE SYSTEM

mitted to do so without providing a safe machinery for securing such notes and redeeming them in gold.
Under
such plans the weakest bank would have been allowed to
put its notes into circulation alongside the strongest, and
proposals for the guarantee of deposits were the logical
corollary of such schemes (Fowler Plan). It is an amazing
fact that commercial organizations and bankers' associations of that time favored such asset-currency plans in one
form or another.
To complete the picture, it ought to be added that
there was also at that time a powerful faction in Congress
which stood for the theory that " t h e issue of money is the
function of the government," and only a few years had
elapsed since the champions of free silver had alarmed the
world by their sixteen-to-one proposal.
After its first glimpse of daylight, my initial memorandum,
like a ground hog, went back into the still darkness of my
desk until, when banking conditions looked very critical, at
the close of 1906, I was invited to write an article for The
New York Times. I then elaborated the ideas I had expressed
in my memorandum and, in its revised form, the article was
published on January 6th, 1907, under the title "Defects and
Needs of our Banking System." 1 The article was primarily
an argument for the creation of modern American doublename paper, a discount market, a central note-issuing organization, and an appeal to bankers to cooperate, at least to the
extent of modernizing their conceptions with respect to accepting and endorsing. It also contained an argument urging the
consideration of term settlements on the New York Stock
Exchange, in order to discontinue the excessive use of the
country's surplus funds on the stock exchange's call-loan marDefects and Needs of Our Banking System, T h e New Y o r k Times Annual
Financial Review, January 6th, 1907; Essays on Banking Reform in the United
States, Proceedings of the Academy of Political Science in the C i t y of New
Y o r k , Vol. I V , No. 4. See also Volume T w o , p. 9.
1

FIRST ATTEMPTS AT BANKING REFORM

ket and to deflect a substantial portion of these funds into a
discount market.
In connection with a suggestion for the creation of a uniform
issue of bank notes against the deposit of legitimate commercial
paper, the following thought was expressed:
Certain committees would have to be appointed in every
reserve and central reserve city in order to scrutinize the
bills deposited as security by the banks. 5These committees
might be the predecessors of future local committees of a central
organization.
T o attempt to give an adequate description of the panic
which occurred in 1907 would lead us too far afield. October
of that year, with the weeks of slaughter and despair following
the failure of the Knickerbocker Trust Company and the run
on the Trust Company of America, will always remain vivid
in my mind. Banks and individuals with hundreds of millions
in call loans at their disposal could not save those that were
drowning. As already mentioned, without a central reserve
organization and without an elastic note issue, one bank
could only strengthen itself by weakening another, and
any attempt to call in funds from a debtor would only throw
him into desperate confusion and set in motion a chain of
further embarrassments and insolvencies.
In the midst of the panic, on November 12th, 1907, when
the gold premium was at its highest, and when all possibilities
of making settlements between cities had ceased, I published
a paper entitled " A Plan for a Modified Central Bank." 1
In this paper, it was proposed to create a bank at Washington, endowed with a capital of from $50,000,000 to
$100,000,000, partly paid up, and to be owned, one-half
by the government, and one-half by the national banks.
A Plan for a Modified Central Bank, Essays on Banking Reform in the
United States, Proceedings of the Academy of Political Science in the City of
New York, Vol. I V , No. 4. See also Volume Two, p. 29.
1

THE FEDERAL RESERVE SYSTEM

The management was to be in the hands of a salaried
president or presidents, to be appointed by the board of
directors; the board itself was to consist of delegates from the
various clearing houses, the Secretary of the Treasury, the
Comptroller of the Currency, both ex officio, and some additional directors to be appointed by the stockholders and by the
chambers of commerce and the Supreme Court (the latter
suggestion rather an evidence of my insufficient acquaintance,
at that time, with these American institutions). The object
in mind, however, is clearly shown in the following paragraph:
It is intended merely to show how it is possible to create
a board which would be independent of politics, which would
comprise men of business knowledge and experience, and
which, by its composition, would afford a reasonable guarantee
that it would not be swayed by selfish motives in its actions.
The proposed bank was to establish a general rate of interest,
to be modified from time to time, at which it would allow
advances of money against clearing-house certificates. There
were also provisions enabling the bank to buy three months'
paper, bearing at least three signatures, payable in dollars or
in certain foreign currencies. Authority for the government
bank to buy three months' paper, bearing at least three
signatures, including a bank's or a banker's endorsement
or acceptance, it was stated, was needed for the purpose
of encouraging the creation of such paper, the lack of which
was one of the main causes of the immobilization of the
resources of American banks.
The following is a quotation from this "Plan for a Modified
Central B a n k : "
The Government Bank would act as the clearing house for
the clearing houses.
It is not beyond the bounds of imagination that local boards
for branches of the Government Bank in the various cities
could be established, taking the clearing-house committee, or

FIRST ATTEMPTS AT BANKING REFORM

some members thereof, as a nucleus around which some other
independent members might be added. It is also possible that
these agencies would receive moneys in one city in order to pay
them out in the other. . . .
We need some centralized power to protect us against others
and to protect us from ourselves, some power able to provide
for the legitimate needs of the country and able at the same
time to apply the brakes when the car is moving too fast. . . .
We should aim to transform our commercial paper from a
non-liquid asset into the quickest asset of our banks. This
change, however, is so far-reaching that it would take years of
educational work to carry it out, while relief should come at
once. . . . Instead of giving vast and vaguely defined powers,
properly belonging to a central bank, to one or two political
officers (the Secretary of the Treasury and the Comptroller
of the Currency—Author) and instead of putting the burden
and responsibility on them alone, we should define the power
and responsibility clearly and should associate with our political officers in bearing it a large body of our best-trained business men. This would mean a democratic, a conservative,
and a modern way of self-government.
In the turmoil of their daily struggles for survival, it was
only natural that bankers did not find time to study this plan.
Indeed, in that time of panic, they could hardly have been
expected to do so. Looking backward to-day, however, it
seems that had it been possible to arouse Congress to quick
action along the lines proposed, prompt relief might have
been secured, and a great deal of trouble might have been
prevented.
But as far as the problem of devising remedial financial
legislation was concerned, the Senate and the House of
Representatives were, at that time, wide apart. The Senate
was wedded to Senator Aldrich's proposal for the issue of
additional notes against government bonds and other corporate
obligations, while the House was endorsing a proposal of the
Hon. Charles N. Fowler for an "asset currency"—a proposal

THE FEDERAL RESERVE SYSTEM

which involved the creation of "currency associations55 coupled
with a provision for the "guarantee of deposits."
It was inevitable that, after the panic, the general interest
in the question of banking reform should become very keen.
In January, 1908, under the leadership of Professor Edwin
R. A. Seligman, a series of lectures upon the banking problems
of the hour was arranged at Columbia University. I was
invited to join this forum and delivered an address entitled
"American and European Banking Methods and Bank Legislation Compared." 1
This address dealt with the problems covered in the earlier
articles referred to above; but for the first time, the "concentration of reserves" was urged. While one thousand millions
of dollars were lying idle in our banks and trust companies as
so-called reserves, that is, as the final resort in case of need,
this money, by virtue of the law, could scarcely be touched.
But what, my audience was asked, was the use of such reserves if they were not available in emergencies and times of
need and if, even in contravention of the law, they could not
be used by one bank without fear of being ruined, unless all
banks agreed to cooperate in using them freely? The inevitable conclusion was emphasized that the road to reform lay
in the direction of concentration of reserves, and in the cooperation of the banks under the leadership of one central
organization.
Although it is twenty years since this address was delivered
at Columbia University, certain passages contained in it may
have an interest not altogether outworn, as, for instance,
the following:
W e cannot have an effective modern central bank, because
there are no modern American bills of exchange, and we cannot
American and European Banking Methods and Bank Legislation
Compared.
The Currency Problem and the Present Financial Situation, Columbia UniversityPress, 1908; Essays on Banking Reform in the United States, Proceedings of the
Academy of Political Science in the City of New Y o r k , Vol. IV, No. 4. See also
Volume T w o , p. 39.
1

FIRST ATTEMPTS AT BANKING REFORM

create a sufficient amount of modern paper without a central
bank. W e cannot have stock-exchange settlements without
the abolition of the usury law; but even after its abolition we
must have a bill market before we can do away with daily
settlements and call loans, based on these daily transactions.
Nevertheless, every one of these changes will have to be
effected some day, and it is all-important that each successive
step in currency and banking reform be made with this end
in view.
From this standpoint it is evident why neither the Aldrich
Bill 1 nor the Fowler Bill can be deemed to be a step in the right
direction. E v e r y measure is bad (i) which accentuates
decentralization of note issue and of reserves; (2) which uses
exclusively bonds as a basis for additional circulation; (3)
which gives to commercial banks power to issue additional
notes against their general assets without restricting them in
turn in the scope of their general business, and without creating
some additional independent control, endorsement, or guarantee; (4) which gives arbitrary powers exclusively to political
officers, often untrained in business, and usually holding office
only for a short period.
A central clearing house, with power to issue against clearing-house certificates notes to be guaranteed by the United
States, would, in my judgment, form the best solution for the
time being. T h e creation of a central clearing house with a
capital of its own and with a limited dividend, the surplus
revenue going to the United States, would leave present conditions undisturbed, and, while offering immediate relief, would
at the same time form a sound basis for future developments.
I t is unnecessary to repeat in detail the a r g u m e n t s for the
organization o f the central clearing house and the enumeration
o f its powers w h i c h were given in this address. 2
This "Aldrich Bill" of 1908 must not be confused with the "Aldrich BUI" of
1912 proposing the National Reserve Association legislation.—Author.
2 1 thought it best to use the clearing-house organizations as the basis for the
first steps towards monetary reform, because the banks were familiar with their
operations; and, by choosing the form of a central clearing house, I hoped to avoid
the central-bank controversy, which would have involved interminable delays.
1

THE FEDERAL RESERVE SYSTEM

This Columbia University address became the subject of a
number of editorials and stimulated a good deal of interest
among bankers and business men in the problem of remedial
financial legislation.
An exchange of letters took place in the spring of 1908
between Mr. Herbert Parsons, Mr. Theodore E. Burton,
and myself. Both of these gentlemen were at that time
members of the House of Representatives. Some passages
from a letter I addressed to Mr. Burton throw light upon the
legislation then under discussion.
New York,
March 30th, 1908
T H E HON. THEODORE E .

BURTON,

H O U S E OF R E P R E S E N T A T I V E S ,
WASHINGTON, D .
DEAR MR.

BURTON:

According to your desire I have studied the question how to
amend the Aldrich Bill so as to embody in the same the
clearing-house certificates as a basis for issuing additional
circulating notes. . . .
My draft of the bill as it stands now is rather amusing,
because one cannot imagine two bills more opposed to each
other than the Aldrich and the Fowler Bills, and still by welding both together with comparatively few changes we get a bill
which takes away the radical features of both of them and
contains enough of both measures so as to make them appear
as a compromise to both contending parties. . . .
It would be carrying coals to Newcastle were I to try to tell
you why this bill, as suggested, would be superior to the
Aldrich Bill, and why it is more conservative than the Fowler
Bill, while it retains the good principles of the Fowler Bill of
"basing additional currency on commercial assets." What
I like about my bill is the fact that it will remain a voluntary
act for each bank to join the association and that each guarantee will be given after full examination, and that these guaran-

FIRST ATTEMPTS AT BANKING REFORM

tees will be well defined and limited, instead of a wholesale
guarantee for uncontrolled business.
While I think that a bill of this kind would be a big step in
advance, as against the bills proposed by Senator Aldrich and
Mr. Fowler, it is to my mind not the ideal bill as it maintains
the principle that commercial banks are, at the same time,
note-issuing banks, and as it increases this note-issuing power
which, once established, it will be difficult to take away again.
If the two Houses would take candidly to a scheme as outlined
in the enclosed bill, it may perhaps be possible, at the last
moment, to go one step further, and create a bank in Washington, the stock of which would, at the beginning, be entirely
owned by the government, and let this bank, which can be
governed partly by political officers, and partly by business
men, issue the notes against the certificates of guarantee,
instead of allowing the national banks to issue this ciruclation.
The difference, for the time being, is a very small one; but as a
stepping stone for the future the importance is immense. It
would establish a right principle, and besides such a scheme
could embrace not only national banks but state banks, possibly
also trust companies, which would become members of the district
associations, while both the Aldrich and the Fowler Bills, no
matter how amended, can only deal with national banks.
Yours very truly,
PAUL M .

WARBURG

The legislation under discussion finally took the form of the
bill which passed into law as the Aldrich-Vreeland Act. This
bill constituted a compromise somewhat on the order of the
one discussed in the letter above. It permitted the issuing
of emergency currency against the deposit of government—
and certain corporate—obligations and of commercial paper
guaranteed by certain currency associations to be organized
under the authority of the law. Unfortunately, however, Senator Aldrich succeeded in inserting a provision to the effect that
national banks, before being permitted to avail themselves of

THE FEDERAL RESERVE SYSTEM

the privilege of issuing notes against commercial paper, should
be required first to take out a certain amount of circulation
secured by bonds.
M y correspondence with Mr. Burton and with Mr. Parsons
finally led me to send Mr. Burton a draft of a bill, in the
formulation of which I had the advantage of the collaboration
of my late friend, Albert Strauss, who subsequently succeeded
me as member of the Federal Reserve Board. This bill was
sent to Mr. Burton in pamphlet form and was entitled " A Modified Central Bank of Issue: A Suggestion of a Bill." Accompanying the bill, I sent a letter to Mr. Burton under date of
April 30th, 1908 (see Appendix One), asking him to introduce
the bill in the House " b y courtesy," and he complied with
my request.
For convenience, the bill, as introduced by Mr. Burton,
has been reprinted in Volume Two. 1 It will be noted that the
bill contained the express provisions that balances of member
banks with the central bank of issue should be counted as
reserves of member banks, and that the notes of the central
institution should be counted as reserve money in the hands of
the member banks. T o the best of my knowledge, these two
suggestions were novel at that time.
The pamphlet in which this draft of a bill first appeared
contained a preface which gave a synopsis of the provisions
of the bill and which stated certain facts and fundamental
principles to be recognized in dealing with the question.
They were:
First, that the United States must finally develop some
kind of a central bank system, giving the country an elastic
currency payable in gold and based on modern commercial bills,
a system similar in principle, if not exactly alike in form, to
those of the important European central banks.
Second, that, while this must be the final aim, our political,
1A

Modified Central Bank of Issue: A Suggestion of a Bill, New York, 1908.

Volume Two, p. 71.

FIRST ATTEMPTS AT BANKING REFORM

legal, and economic conditions preclude the possibility of
creating an institution with powers and efficiency equal to
those of the European government banks.
Third, that, therefore, we shall have to be satisfied to
advance slowly, fully realizing that what we create now can
only be an initial step. But it must be a step in the right direction^ a measure which has clearly in view the final aim and which
does not neglect any of the fundamental principles on which modern central bank systems have been erected in other countries.
Two passages dealing with the legislative proposals then
under discussion may be of interest and are quoted in full:
No measure is acceptable:
(a) Which bases currency on long time obligations, like the
Aldrich Bill.
(b) Which would tend still further to decentralize the
power of issuing notes, and which would vest this power
in banks doing a general commercial business. The issuing of notes must be centralized into a few organs, ory if
feasible, into one organ—a plan, which will insure effective
expansion and contraction of currency and concentration of
reserves. Such a note-issuing bank, in order to be safe beyond
question and in order to provide safeguards against any abuse
of its vast power through favoritism or speculation, must be
carefully restricted in its scope of business. (That is why
we could not accept a bill like the Fowler Bill, which practically
would create thirty to forty thousand note-issuing national
banks, doing at the same time a general banking business,
while the smallest and most speculative bank, through the
proposed guarantee of deposits, would be as able to attract
large deposits as the largest and most conservative bank.
Such a measure, although the very antithesis of the Aldrich
Bill, would be quite as much in contravention of well-established economic principles.) A note-issuing bank in this
country should be exclusively a bank of the banks.

THE FEDERAL RESERVE SYSTEM

On the front page was printed President Lincoln's campaign
speech at New Salem—for which I was indebted to my friend,
the late General James H. Wilson of Wilmington, Delaware—
as follows:

Friends and Fellow-Citizens:
I am plain Abe Lincoln. I have consented to
become a candidate for the legislature. My
political principles are like the old woman's
dance—short and sweet. I believe in a United
States Bank; I believe in a protective tariff; I
believe in a system of internal improvements,
and I am against human slavery. If on that
platform you can give me your suffrages, I shall
be much obliged. If not, no harm done, and I
remain, respectfully yours,
Abe Lincoln.

CHAPTER

EVOLUTION OF A CENTRAL RESERVE PLAN
(1908-1910)'
T H E

most important paragraph in the Aldrich-Vreeland
Bill, enacted on May 30th, 1908, was that which
provided for the creation of the Monetary Commission. This Commission, organized under the chairmanship
of Senator Nelson W. Aldrich, had for its purpose the making
of a thorough investigation of banking methods in other countries and the submitting of a report and recommendations to
Congress. M y first meeting with Senator Aldrich had taken
place on December 26th, 1907. A t that time, he held a position of unparalleled power as the Republican party leader in
the Senate, which had been almost uninterruptedly under Republican control for over a generation. I had developed a
feeling of deep resentment towards him because, whenever the
question of banking reform was raised, one was told that so
long as Aldrich was in power there was no hope whatever of
weaning the country from the system of a bond-secured currency to which he had so strongly committed his party. I
met the Senator when he called at our office to secure information about certain practices of the German Reichsbank and
particularly about the issue of a certain type of German
currency. I availed myself of the opportunity to write to
Senator Aldrich on the following day, enclosing a copy of my
"Plan for a Modified Central Bank," 1 providing for the organization of a national clearing house.
This letter was followed up four days later by another in
which I took issue with him concerning a plan he must have
outlined in the course of our first talk, a scheme which con1

See Volume Two, p. 71.

THE FEDERAL RESERVE SYSTEM

templated granting national banks the power to issue notes
against certain clearing-house certificates. I urged the Senator to consider the possibility of organizing a central clearing
house which would issue a uniform circulation instead of permitting every individual bank to issue its own notes. The
full text of the second letter may be found in Appendix Two.
Whether or not Senator Aldrich ever gave serious consideration to the arguments of my letter or to my Columbia
University address, "American and European Banking Methods and Bank Legislation Compared/' 1 a copy of which was
sent to him in February, 1908, I have no way of knowing.
The proposals he made in connection with the framing of what
became the Aldrich-Vreeland Act, and the form in which it
was passed in May, 1908, offer convincing proof that I had
not succeeded in winning him over to my point of view. On
the other hand, we find the following passage in the speech
with which Mr. Aldrich introduced the bill in the Senate.2
Analyzing the several proposals under discussion, he said:
"There is one advocated by many thoughtful students of
economic history and teachings, who are led by the experience and practice of other commercial nations to favor some
plan for a central bank of issue which would be in effect a
central clearing house with very limited banking functions,
under government control. Personally, I believe that in time
this country is likely to adopt such a system, but I agree with
other members of the committee that its adoption at this
time, or in the near future, is out of the question."
Looking backward, one would be inclined to conclude from
the above that the seeds from which, later on, the "Aldrich
Plan" grew had begun to germinate and were struggling to
take root.
See Volume T w o , p. 39.
Speech of Senator Aldrich of Rhode Island on Senate Bill No. 3023 to amend
the National Banking Laws in the United States Senate, Monday, February 10th,
1908, p. 9.
1

EVOLUTION OF A CENTRAL RESERVE PLAN

In the summer of the same year, Senator Aldrich and certain members of the National Monetary Commission sailed
for Europe in order to interview the financial authorities of
the Old World.
In the meantime, I continued hammering my doctrines into
such victims as came my way.
After the panic of 1907, a great many commercial bodies
had organized special committees for the purpose of studying
the banking problem. In October, 1908, the Merchants' Association of New York invited me to become a member of
their Committee on Currency. This Association had, some
months earlier, endorsed the current Fowler Bill for an asset
currency, and I found the Committee a group of men thoroughly in favor of that scheme. The chairman of this Committee was Mr. Edward D. Page. Later on, he was succeeded
by Mr. Irving T . Bush. Professor Joseph French Johnson
served as the expert of the Committee. Altogether, the members constituted a very earnest and thoughtful group of merchants; and many an afternoon and night I sat with them,
struggling to win them over to the gospel of centralized
reserves and elastic note issue, and learning in turn from
them in what respects my ideas had to be modified.
On December 14th, 1908,1 received from Professor A. Piatt
Andrew, Special Assistant to the National Monetary Commission, an invitation to write an article on " T h e Discount System
in Europe," to be included in the series of essays to be published
by the Commission. It gave me particular pleasure to comply
with this request, because a true picture of the discount system
in Europe could not but prove a strong brief for centralized
banking. M y article was handed in on May 3rd, 1909.1
During the Christmas holidays of 1908, I read a paper
'The Discount System in Europe, Senate Doc. No. 402, 61st Cong., 2d sess.,
1910; Essays on Banking Reform in the United States, Proceedings of the
Academy of Political Science in the City of New York, Vol. I V , No. 4. See
also Volume T w o , p. 183.
1

THE FEDERAL RESERVE SYSTEM

before the American Economic Association entitled " A Central Bank System and the United States of America." 1
In this address, the field which had already been dealt with
in previous articles and speeches was covered once more; but
here, for the first time, I ventured to attack the problem of
the national bank currency. I proposed an "inverse conversion" to the effect that the 2 per cent government bonds with
the circulation privilege should be exchanged for 3 per cent's
without such privilege.
The suggestion was also made in this address that of the
net earnings of the central department only a limited portion
should be turned over to the stockholders, while the remainder
should be made over to the government with power in the
latter to use it for the purpose of gradually increasing the
gold cover behind the greenbacks or of retiring them.
The address shows a further evolution of the plan of a
central clearing house, as evidenced by the following paragraphs:
" T h e Central Department of Issue should have the right
to ask from time to time that the banks, through the associations, deposit with it a certain proportion of their cash reserves, and the law would have to be amended so as to allow
the banks to count as cash their deposits with the Central
Department of Issue. . . .
I have avoided calling the institution of the future a central bank, because, as proposed
here, it is not a central bank. If, instead of the independent
currency association, this Central Issue Department were endowed with active branch offices dependent upon the head
office, such a name would be correct. No doubt, a central
bank with active branch offices would be the more efficient,
so far as concerns the controlling of the country's gold, its
money rates, and its financial safety. But with our present
1A
Central Bank System and the United States of America, American
Economic Association Quarterly, 3d series, Vol. X , No. i ; Essays on Banking
Reform in the United States, Proceedings of the Academy of Political Science in
the City of New Y o r k , Vol. I V , No. 4. See also Volume T w o , p. 95.

EVOLUTION OF A CENTRAL RESERVE PLAN

political and financial conditions, it would probably be impossible, and in many respects unsafe, to vest such vast powers
and duties in one body."
A conference grew out of this meeting of economists when,
in the fall of 1909, a dinner was arranged at the suggestion of
Professor Davis R. Dewey, of the Massachusetts Institute of
Technology, then the President of the American Economic
Association, for a further discussion of the subject. Among
those present, I remember, were Professors T . N. Carver, of
Harvard University; E. R. A. Seligman, of Columbia University; H. R. Seager, of Columbia University, and J. H. Hollander, of Johns Hopkins University.
From then on, my correspondence with economists became
constantly wider; 1 and the "give and take" involved was most
helpful in bringing out the positive and negative needs of a
plan which was presently to be tested by being subjected to
the criticism of a deeply prejudiced public.
It was natural that the radical changes involved in the
proposals outlined in my articles should have encountered
determined opposition from many quarters. Of the scientific
writers, the two most gifted exponents of the anti-central
bank doctrine were Professor O. M. W. Sprague, of Harvard,
and Mr. Victor Morawetz, of New York. They both had published highly interesting articles in which they had not only
criticized the central bank doctrine but had presented important constructive proposals of their own. I undertook to
answer these two critics, for by so doing I hoped to meet the
entire range of the arguments of those opposed to the adoption of a central bank plan.
An analysis of Mr. Morawetz's and Professor Sprague's
arguments and proposals and my reply thereto may be found
in an address I delivered before the Finance Forum of the
1 Later on, the list of my correspondents included Professors F. W. Taussig,
of Harvard University; O. M. W. Sprague, of Harvard University; Irving
Fisher and Fred Rogers Fairchild of Y a l e Universitv, and clhers.

THE FEDERAL RESERVE SYSTEM

Young Men's Christian Association of New York, March 23rd,
1910, entitled " A United Reserve Bank of the United States." 1
Shortly after the publication of this address, Professor
Sprague changed his point of view, and from time to time
published studies very helpful to the further progress of currency reform. Mr. Morawetz also soon abandoned what was
then his main proposal, a plan to solve the whole problem
solely by regulating the note issue. This regulation was to
have been accomplished through the establishment of a central
board at Washington, which would have fixed the reserves to
be maintained against circulation.2
As an alternative suggestion, however, Mr. Morawetz had
mentioned, in passing, a system of "divisional banks." This
is, to the best of my knowledge, the first time that "regional
banks" were proposed. What, at that juncture, Mr. Morawetz had in mind was, however, a system of entirely disconnected divisional reserve banks. In our debate, I urged
him further to explore this scheme; but expressed the view
that such a system, in order to be successful, would have to
provide for a linking together of these separate reserve banks,
so as to insure their operating as a unit. This meant, of
course, that his system would, in effect, become a central
banking organization. In a later chapter, we shall revert to
Mr. Morawetz's contribution.
Arguments such as were used in the controversy with Professor Sprague and Mr. Morawetz, together with an elaboration in detail of a specific central banking plan presented in
connection therewith, finally won over my fellow-members of
the Merchants' Association. In the end, they gave me their
1A
United Reserve Bank of the United States.
Proceedings of the
Academy of Political Science in the City of New York, Vol. I, No. 2; Essays on
Banking Reform in the United States, Proceedings of the Academy of Political
Science in the City of New Y o r k , Vol. I V , No. 4. See also Volume T w o , p. 117.
2 Morawetz, Victor.
Address on the Banking and Currency Problem and
the Central Bank Plan at the Finance Forum of West Side Y. M. C. A.y N e w
Y o r k , 1909.

EVOLUTION OF A CENTRAL RESERVE PLAN

whole-hearted support; and, on April 27th, 1910, the Association decided to distribute 30,000 copies of my address, " A
United Reserve Bank of the United States," together with a
like number of copies of my article, " T h e Discount System
in Europe," which, as has been stated, was prepared for the
Monetary Commission. There was some delay, however, in
securing the copies of the pamphlet from Washington; and it
was not until July, 1910, that the copies were finally sent out.
The circular letter, which accompanied the pamphlets, read as
follows:
THE

MERCHANTS'

54-60

ASSOCIATION

(OLD NUMBER
NEW

66-72)

YORK

OF N E W

YORK

LAFAYETTE

ST.

CITY

July 27th, 1910
Dear Sir:
For three years a Special Currency Committee of The
Merchants' Association of New York has been studying the
currency problem of the United States.
The imperative need for improvement in our banking system requires no demonstration. The panic of 1907 furnished
an object lesson which brought conviction to every thoughtful business man and banker. The Aldrich-Vreeland Act of
1908 was passed avowedly as a temporary measure and is
only a makeshift, which will soon lapse by its own terms.
Our present system is universally admitted to be defective
in two respects: First, its bank-note circulation lacks elasticity, promptness in distribution, and celerity of redemption;
second, the banking reserve is so scattered as to be unavailable in times of emergency. All the various plans for amendment fall into two classes, which provide either for:
I. Power to be conferred upon the 7,000 national banks of
this country to supply themselves, at need, with full currency
requirements, basing their issues upon the maintenance of
individual reserves, the establishment of redemption or safety
funds, and upon bank assets, either generally liable, or specifically pledged, or

THE FEDERAL RESERVE SYSTEM
II. The creation of a central institution to concentrate into
one central reservoir a portion of the lawful money reserves
of all the banks, state and national; to devote itself specially
to the management of the currency and to the rapid solution
of currency problems; to be so devised that all solvent banking institutions shall be able to command immediately, by the
ordinary methods of banking procedure, whatever bank-note
currency they may deem necessary for the demands of their
depositors, and to retire the same without loss when no longer
needed.
For a time we shared the opinion of many advocates of a
more modern system of note issues that, while a central bank
was the logical solution of the problem, conditions peculiar
to the United States were unfavorable to its adoption.
The main objections against the establishment of a central
bank in the United States appeared to be:
First: Danger of political control,
Second: Danger of control by special interests,
5Third: Hurtful competition with existing banks.
Continued deliberation, however, together with the investigation of plans more recently offered, have led us to believe
that a currency system involving the use of a central bank
may be made feasible for this country.
In the hope that discussion of this important subject may
be stimulated, we send you herewith two pamphlets prepared
by Mr. Paul M. Warburg, a member of our Committee with
wide experience in banking. One of these pamphlets, entitled " A United Reserve Bank of the United States," offers
a sound solution for the defects of our present banking system. The other, a monograph prepared for the National
Monetary Commission on "The Discount System in Europe,"
shows the close inter-relation between the discount system
and the central bank system in Europe, contrasts European
conditions with our own, and explains why a bank that is
to perform in this country functions like those exercised by
the European central banks must be adapted strictly to our
own needs and conditions and must differ greatly from its
European prototypes.

EVOLUTION OF A CENTRAL RESERVE PLAN

It is our opinion that Mr. Warburg's plan would provide
no more than a legitimate extension of the banking facilities
of the United States. With such an institution in existence
as the United Reserve Bank he proposes, a currency famine
and money panic would become impossible, the monetary
reserve would be effectively utilized, the national Treasury
relieved of all responsibility for the money market, and international exchanges and movements of gold easily regulated
with immense benefit to all producers, distributors, and consumers alike, in every station of life.
Respectfully,
CURRENCY

COMMITTEE

ASSOCIATION

OF T H E

OF N E W

MERCHANTS'
YORK

By Irving T. Bush, Chairman
The articles published by me from 1908 to 1910 (reprinted
herein as Part One of Volume Two) constitute a series of
persistent efforts to arouse public opinion to a recognition of
the fact that banking reform in the United States, in order to
be successful, would necessitate the radical change from decentralized to centralized banking.
Reviewing these efforts in their chronological order, one can
readily perceive how, step by step, the central bank thought
advances, but how new trenches always remain to be taken.
With each new attempt, the method of attack had to be
changed and, at the same time, the proposals for the adaptation of the central bank thought to American business and
political conditions had to be further evolved and improved.
Thus the first articles simply endeavored to point out the
defects of the American system. They compared the methods
in force in America with the central bank practices characterizing the best European systems and indicated the general
direction which reform in the United States would have to
take. The main argument brought forward by those opposed
to these early proposals was that it would be impossible to
develop, along the lines indicated, a system which would be

THE FEDERAL RESERVE SYSTEM

bomb-proof against abuse either by politics or by business.1
Accordingly, the next plans proposed were so designed as to
meet and silence those objections. This explains the suggestion of reserve banks restricted in their rediscount operations
to the acquisition of commercial paper, guaranteed or endorsed
by cooperative banking associations to be formed for that
purpose. Safety, in other words, was sought by circumscribing the realm of activity of the central institution to such a
degree that no outside individual, firm, or bank could have
direct access to its resources. As a further safeguard, local
boards, in which control was divided between representatives
of banking, commerce, and the government, were designed to
supervise the activities, both at the branches and at the head
office.
After it had been shown by such suggestions that it was
possible to devise a system which would be absolutely safe,
a new and entirely valid objection had to be met. This was
the claim that such an iron-clad system would be too rigid
to be practicable and that, while it was safe enough as an
emergency institution, it would not, in the daily life of the
nation, function readily enough to play the important part
necessary for the success of any central banking organization.
Under the pressure of this new objection, it became necessary
to develop a plan affording the banks an easier, but, at the
same time, a politically unassailable, access to the central
system. Accordingly, I developed the thought that it might
be perfectly safe to permit the member banks to rediscount
short paper, having not more than twenty-eight days to run,
without the guarantee of the cooperative banking associations. A careful study of the European systems had elicited
the important fact that the bulk of their investments consisted
1 It is well to remember that the period during which these discussions
took place was the time of the struggle of the financial T i t a n s — t h e period of
big combinations, with bitter fights for control. All over the country there
was a deep feeling of fear and suspicion with regard to Wall Street's power and
ambitions.

EVOLUTION OF A CENTRAL RESERVE PLAN

of such short paper. Thus, when this simple device was added
to the powers of the central institution, together with the
provisions that it might discount paper with a maturity of
between twenty-eight and ninety days when guaranteed by
the banking associations, as well as buy in the open market
under certain safeguards bankers' acceptances and foreign
bills, and invest in government securities, a practical adaptation of the central bank thought to our political and business
requirements was presented, which seemed to meet the requirement of combining safety with elasticity.
This was the plan presented under the title " A United
Reserve Bank of the United States.55 Of course, it was not
the only plan that had been evolved on these or other lines.
The interest in the problem by this time had become very
general and many groups and individuals had made important
contributions. Among others, Mr. Maurice L. Muhlemann
published " A Plan for a Central Bank,551 which proceeded on
almost the identical lines followed by me, except that he chose
for his model the issuing department of the Bank of England,
while I was following the principles and methods of such
institutions as the Banque de France and the German Reichsbank.
On the whole, it may be said that the interest of business
men and economists during this period was keener and more
stimulating than that of the bankers. Mr. Frank A. Vanderlip, then a Vice President of the National City Bank of
New York, was a notable exception; he sensed at an early
date that the central reserve gospel opened a highly promising
vista and there are several letters in my files in which he
encouraged me to continue in my efforts. Mr. Charles A.
Conant was among the first apostles of central banking,
while Mr. A. Barton Hepburn at times commended our campaign, but on other occasions criticized our proposals as being
too radical. The American Bankers5 Association, at that
1

Banking Law Journal, November, 1909, to March, IQIO.

THE FEDERAL RESERVE SYSTEM

time, played a rather "lone hand," and was not so advanced
in its views as were the commercial bodies. M y contacts were
entirely with the latter and the plan outlined in " A United
Reserve Bank of the United States" may perhaps be taken
as an indication of the direction in which their thoughts were
moving; it was on the whole the product of the deliberations
of men who were representatives neither of the " b a n k s " nor
of "politics." The scheme evolved with them in this period
of inception, "when the law was half made" may, therefore,
be considered as an impartial model plan; for self-interest on
the part of the banks involved, and political party considerations, had not as yet begun the tug of war which later was to
pull it first to one side and then to the other. As the plan
contained a great deal, both in principles and in details, that
subsequently—as will be seen—found its way into the Aldrich
Bill and, through the Aldrich Bill, into the Federal Reserve
Act, a detailed description of it will be given in Chapter Three.
On November 12 th, 1910, shortly after the publication of
" A United Reserve Bank of the United States," I read a
paper before the Academy of Political Science entitled "Principles That Must Underlie Monetary Reform in the United
States." 1 A t this conference of the Academy, many members
of the Monetary Commission, including Senator Aldrich, were
present; and it was primarily to them that the paper was
addressed. It laid down the principles to be considered in
devising a system of "centralized reserves and decentralized
banking," which was to provide "fluidity of credit strongly
safeguarded."
This was the last address I wrote before the Aldrich Plan
was published. The thoughts we then fought for have become so generally accepted to-day that, to the student of this
1 Principles
that Must Underlie Monetary Reform, in the United States,
Proceedings of the Academy of Political Science in the City of New Y o r k , Vol. I,
No. 2; Essays on Banking Reform in the United States, Proceedings of the
Academy of Political Science in the City of New York, Vol. I V , No. 4.
See
also Volume T w o , p. 165.

EVOLUTION OF A CENTRAL RESERVE PLAN

generation, it may seem strange that so much effort had to
be wasted in order to prove a thing so obvious. From this
point of view, it may be useful to quote a single contemporaneous article illustrating how novel the suggestions seemed at
that time, even to those best informed and most advanced.
A leading article which appeared in The Financial and Commercial Chronicle has been singled out for that purpose, because the Chronicle is generally considered one of our foremost
financial journals, and because its discussion of my article was
particularly thorough. Incidentally, the reader is likely to be
impressed by the fact that, although the editorial was written
in November, 1910, it might just as well be applied, so far as
principles are concerned, to the Reserve System as it stands
to-day. The text of the article follows:
THE FINANCIAL SITUATION
In considering the admirable address delivered on Saturday
last by Paul M. Warburg of Kuhn, Loeb and Company, at
Columbia University, at the conference on the currency question held under the auspices of the Academy of Political
Science, one is led to think how easy it would be, theoretically, to construct a perfect banking and currency system for
the United States under Mr. Warburg's guidance, and yet
how beset with difficulties must be the task of putting such
a system into practical effect. It is evident from the carefully guarded utterances of Senator Aldrich at the aforesaid
conference that the Monetary Commission has as yet made
very little progress towards formulating its views on the
subject. But this is tantamount to saying that there are so
many practical obstacles to be overcome in devising a scheme
that shall be at once sound and workable that the members
of the National Monetary Commission have as yet been unable to solve the problem in a way satisfactory to themselves.
If it were possible to begin de novo in the construction of a
banking system, and if there were not preconceived notions
and ideas to overcome, the task would be by no means baffling

THE FEDERAL RESERVE SYSTEM
to the ingenuity of the trained mind. But to take the crude
system which we now have and to seek to adapt it to modern
requirements—which means practically to uproot it in some
of its most essential parts—makes the undertaking one of
Herculean proportions, from which the cautious investigator
shrinks more and more the deeper he gets in his study of
the subject.
Mr. Warburg furnishes the outlines of a scheme that seems
altogether sound, theoretically, and he works out his ideas in
a thoroughly logical fashion. And yet as he develops one
feature after another in his plan, leading the mind to marvel
at the masterful way in which it has been constructed, the
question which suggests itself with ever-increasing force is
whether its very merits, as an argumentative proposition,
would not be the strongest objection to it from the standpoint
of the legislator, by reason of the radical departure from
existing methods which it would involve. It is at all events
clear that the practical carrying out of the plan would at one
stage or another of the process encounter innumerable obstacles and drawbacks, founded on prejudice and long-established usage, which it would be almost impossible to overcome
and which would fail to command for the new scheme that
general assent necessary to make it a success.
Mr. Warburg lays down the doctrine that "a financial
system which scatters and decentralizes reserves, and makes
them unavailable and insufficient in case of need, is fundamentally wrong and defective." "In a modern system," he
argues, "constructed on credit, cash must be centralized as
far as possible into one big reservoir, from which everyone
legitimately entitled to it may withdraw it at will and into
which it must automatically return whenever it is not actually
used." But how is this desideratum to be obtained? He
tells us that "the central bank, having cash obligations, must
have the strongest reserve of cash and quick assets payable
within a short time. The general banks, having obligations
payable only in cash credit, need have reserves only in cash
credit and in quick assets convertible at all times into cash

EVOLUTION OF A CENTRAL RESERVE PLAN

credit." In another part of his address he says that "cash
balances with the central reservoir or its branches must be
considered and counted by the banks as cash in their own
vaults." More than that. "The central organ must have
power to request the banks to keep with it cash balances
proportionate to the amount of their deposits owned by banks."
In a footnote he tells us that by "banks" is always meant
national banks, state banks, and trust companies.
But would the large financial institutions in New York
and Chicago and other central reserve cities, a number of
which have attained dimensions putting them on an equality
with some of the great central banks of Europe, readily, or
ever, yield up their present right of holding their cash reserves
in their own vaults? Is it not certain that they would oppose, with all their might, the transfer of their own cash to
some central organ in exchange for the "cash credits" of
such central institution—no matter how powerful the central
organ might be, no matter how securely safeguarded, and no
matter how readily it might yield up its cash on demand?
As we interpret Mr. Warburg's plan, the central reservoir is
not to be an additional reservoir, but practically the sole
reservoir. It seems correct to say that cash should be centralized into one big reservoir and that a financial system
which "scatters and decentralizes reserves" is wrong and defective. But recent experience and recent education is to the
effect that it is not wise to burden the central institution
too much or to rely upon it exclusively. Late legislation in
this and other States compelling the trust companies to hold
extensive cash reserves in their own vaults is founded on
that idea. In like manner the English joint-stock banks,
after having been for years criticized for relying entirely upon
the Bank of England, have within the last twelve or eighteen
months in a number of cases been accumulating cash of their
own. Mr. Warburg thinks it is becoming recognized "that
central banks are not oligarchic but democratic institutions,
that central banks by creating safe conditions render the
small bank independent of the domination of the large insti-

66 THE FEDERAL RESERVE SYSTEM
tution, and that in Europe the central banks are the backbone of the independent banks in their fight against the evergrowing branch banking system." We fear Mr. Warburg is
a little too sanguine in this respect, and that it will be no
easy matter to get the average small bank to assent to the
proposition, while the larger banks, which are now a power
in themselves, will be sure to antagonize it. No objection
will be raised to his statement that "a system of centralized
reserves and decentralized banking power is clearly the system
that this country requires," but the further conclusion that
the country "will gladly accept it when once it has this
clearly presented to it in a definite form," may be doubted,
for it does not allow for the perversities of human nature or
the influence of prejudice and the inclination on the part of
the public to regard with suspicion the growth and centralization of power, especially where it takes the corporate form.
No development of modern times is more conspicuous than
the ever-present antipathy to the latter.
Mr. Warburg says that the United States Treasury should
cease to deal directly with the banks. "The central reservoir
should be the recipient of the government's surplus funds
and should attend to the government's disbursements. The
influence in business of the Treasury, a purely political body,
must cease." No truer words than these were ever spoken.
How to apply them, however, so as to find acceptance for
them is another matter. Mr. Warburg undertakes to meet
the objections that have been raised against the creation of
a central institution by saying that "the management of
the central reservoir must be absolutely free from the dangers
of control by politics and by private interests, singly or combined." He goes further and outlines a plan by which the
dangers of such control would be obviated. Under this arrangement the majority of the board of directors of the
central institution would be appointed by groups of banks
all over the country, leaving the government directors in a
minority. But would Congress ever consent to the Treasury's parting with its cash holdings to the central reservoir,

EVOLUTION OF A CENTRAL RESERVE PLAN

and the transfer to it even of its $150,000,000 gold reserve,
as is contemplated in a certain contingency which Mr. Warburg discusses—would it consent to the turning over of its
funds in this way to an institution not under the absolute
control of the government? And if the government had
such control, how could politics be kept out of it?
We agree entirely with Mr. Warburg in what he says concerning mercantile paper, and also in the preference he expresses for it as an investment for bank funds. There is
something very telling about his characterization of " the folly
of a system which makes the commercial paper purchased by
a bank immovable assets, locking up the capital of the purchaser, and which forces the banks to consider as their only
quick assets cash in their vaults, which they must not use,
and call loans on the Stock Exchange which during a panic
they cannot turn into cash." " Fluidity of credit," he says,
"must be our aim. A sound financial system must mobilize
its commercial paper and make it a quick asset instead of a
lock-up. Mobilized commercial paper must finally become
the most important basis of our financial structure, instead
of bonds and loans on stock exchange collateral."
He would have the central reservoir deal only with banks,
bankers, and trust companies, and he would have it purchase
commercial paper from banks and trust companies only. He
admits, however, that "the difficulty here is that we have
as yet no standard discount paper such as exists in England,
France, and Germany, and that, therefore, in order to avoid
abuse, some system must be invented which will act as an
effective control, and which will supply an additional and
safe guarantee." Thus we are up against another snag,
though in a previous paper Mr. Warburg made suggestions
intended to show how paper of this class could be provided
in accordance with a scheme "which, while strict enough to
prevent any abuse, could still be made broad enough to allow
of practical and effective operation."
The difficulties here outlined are not peculiar to Mr. Warburg's carefully thought-out plan. They are inherent in any

THE FEDERAL RESERVE SYSTEM
plan which attempts a reform of our banking and currency
system in a thorough-going way. We refer to them here at
length because they serve to indicate why progress thus far
in the work has been slow, and why every one in authority
seems reluctant to proceed in any but the most cautious way.
The principles that should apply are well understood, but
how to secure acceptance for them and put them into practical operation is the problem which taxes ingenuity.1

The foregoing article, which has been given practically in
its entirety, is well worth noting, for it shows very clearly
the ground which had to be covered before the conservative
element could be brought to favor any plan for adequate
banking reform.
1 The Financial
and Commercial Chronicle, New Y o r k , N o v . 19, 1910 (Vol.
L X X X X I , p. 1350).

CHAPTER

III

THE UNITED RESERVE BANK PLAN
(1910)
T H E
plan for a United Reserve Bank of the United
States was not presented in the form of a drafted bill,
but was offered in descriptive form. Only the powers
to be exercised by the proposed central institution were formulated in full detail in terms suitable for a prospective law.
In order to enable the reader to compare the draft of the
United Reserve Bank plan with the legislative proposals subsequently evolved, first by the Republican party leaders and
then by the Democratic party leaders, a full description of
the plan is presented in this chapter. The technical clauses,
some of which later found their way into the Aldrich Bill
and through it into the Federal Reserve Act, are reprinted in
full in their original language.1
The plan provided for the organization of a United Reserve
Bank, with a head office in Washington and some twenty
branches, with a share capital of $100,000,000, fully paid,
the stock to be divided among the banks of the country.
The eventuality was envisaged of selling the stock at a given
time to the public. Dividends were to be limited to, "let us
say, 4 per cent"; any profits in excess were to go to the government of the United States. (The possibility was discussed
of having the United States guarantee this minimum return.)
Following the Fowler Plan in that detail, it was proposed to
1 A juxtaposition of the text of the Aldrich Bill and that of the Federal
Reserve A c t will be found in Chapter Eight. See also Chapter Nine, An
Analytical Comparison of the Aldrich Bill and the Federal Reserve Act, and
Chapter Ten, The Legatee of the Aldrich Bill.
For the full text of the United
Reserve Bank Plan, see Volume Two, page 117.
49

THE FEDERAL RESERVE SYSTEM

divide the country into twenty zones. A local banking association was to be formed in each zone for the purpose of
guaranteeing paper offered by member banks—thus making it
eligible for rediscount with the United Reserve Bank. The
latter was to open a branch in each zone, the branch to be
administered by a board of directors to be appointed by the
local banking association. Provision was made for dividing
the zones into sub-divisions. Member banks were to have
the privilege of subscribing their pro rata of the stock; they
were to have the privilege of withdrawing from membership.
The provision in the plan prescribing the constitution of
the board of directors of the bank was as follows:
In order that the Board of Directors of the United Reserve
Bank in Washington may be thoroughly representative of
the various interests and districts of the country, that it
may be non-political, non-partisan, and non-sectional, a certain number of the directors, say three-fifths, should be appointed by the banking associations; a further number, perhaps one-fifth, should be elected by the stockholders; while
the Secretary of the Treasury, the Comptroller of the Currency,
the Treasurer of the United States, and others to be nominated
by them, should fill out the remainder of the Board. It might
be advisable to provide that no director, excepting the ex
officio members, should serve more than a certain number of
years in succession.
In order that commercial interests be adequately represented, provision might be made that the members appointed
by the stockholders should not be bank or trust company
presidents, and that these members should be elected preferably from the class of merchants and manufacturers. One
would then have a mixed board, of whom three-fifths would
be bankers, appointed by the banking associations, while onefifth would be chosen from the commercial classes by vote
of the stockholders, and one-fifth would be ex officio government members and the additional members appointed by
them.
This board should have the right to elect one or two gov-

THE

UNITED

RESERVE

BANK

PLAN

ernors of the United Reserve Bank, who would be salaried
officers appointed, like other bank presidents, for an indefinite
time, irrespective of political considerations, and remaining
in office as long as they render satisfactory service.
The main powers of the United Reserve Bank were outlined as follows:
1. To accept deposits from the government of the United
States and from members of the banking associations only.
No interest should be paid on such deposits, but they might
be counted as cash (and as part of the required reserve—
Author) by the banks and trust companies making them.
2. To buy from members of the banking associations, at a
discount rate to be published from time to time, commercial
paper having not more than twenty-eight days to run, and
issued at least thirty days before the date of rediscounting.
The aggregate amount which it might buy from each member should be restricted to a certain proportion of the unimpaired capital and surplus of such member, and the aggregate
amount issued by one issuer of commercial paper to a member
of the banking association and rediscounted with the United
Reserve Bank, should also be limited to a certain proportion
of such unimpaired capital and surplus.
3. To buy from member banks, at a discount rate to be
published from time to time, commercial paper having more
than twenty-eight days to run, but in any case less than
ninety days. The aggregate amount to be rediscounted by
the United Reserve Bank from each member and the aggregate amount admissible from individual makers of notes should
be restricted as under (2). Such paper, however, could be
discounted by the United Reserve Bank only with the endorsement or guarantee of the banking association to which
the member belonged.1
1 In consideration of such guarantee or endorsement, the banking association
would receive from the member handing in paper for rediscount a certain
remuneration, let us say % or y i of 1 per cent in the interest rate. T h e banking
associations would, of course, like the clearing houses, when clearing-house
certificates are issued, have the right to reject any paper which they did not
deem safe or proper to guarantee or endorse.

THE FEDERAL RESERVE SYSTEM
4. To buy, at a discount rate to be published from time
to time, paper having not more than ninety days to run
drawn by a commercial firm on, and accepted by a bank,
trust company, or banker, and endorsed by a bank, trust
company, or banker. One of these signatures should be that
of a member of the banking association. Limits as to amounts
of acceptances admissible from time to time for discount
with the United Reserve Bank should be fixed by the central
board.1
5. To buy bills on England, France, Germany (and such
other countries as may be decided upon), such bills to have
a maximum maturity of ninety days, to bear one commercial
signature, to be drawn on, and accepted by a well-known
foreign banking house, and endorsed by a member of a banking association or a banker in good standing. The United
Reserve Bank should have power to resell all bills that it
might buy and to do all things necessary for their collection.
6. To deal in bullion, and to contract for advances of
bullion, giving security therefor, and paying interest on such
advances.
7. To buy and sell bonds and Treasury notes of the United
States.
8. To issue circulating notes, payable on demand in gold;
such notes to be secured by bills, bought by the bank under
provisions (2) to (5), and by gold to the amount of at least
33XAP e r c e n t °f th e aggregate amount of outstanding notes.
9. To establish branches in places where there are head
offices of banking associations. Such branches under the
direction of the central board of the United Reserve Bank
might do the same business as the head office. Each branch
would have a local board, chosen by the board of managers
of the local banking association, to which board might be
added some members of the commercial classes appointed by
the head office in Washington. This local board would supervise the business of the branch bank, and elect its salaried

1 I t might be advisable to provide that in case of emergency the central
board, with the approval of the Secretary of the Treasury and the President of
the United States, might increase the limits fixed under 2, 3, and 4.

THE UNITED RESERVE BANK PLAN

president, subject to the approval of the central board in
Washington.
10. To request banks or trust companies desirous of making use of the services of the United Reserve Bank, to keep
with its branches a cash balance commensurate with the
amount of business done by them. The United Reserve Bank
should have the right to transfer sums of money from the
account of one member to that of another upon request.
11. To join the clearing-house association of the various
cities where the bank and its branches are located.
The powers of the central office were formulated as follows:
.

. . The central office would merely indicate the policy; the branches, which practically are under the supervision
of the local banking associations, would undertake certain
well-defined, safe transactions, into which no element of politics could enter, any more than it enters into our clearing
house.
The power to fix the discount rates was vested in the central
office. It was specifically stated that these discount rates
"need not necessarily be the same" in all branches.
The following quotations from " A United Reserve Bank of
the United States" further explain the proposal.
The cash reserves now scattered and useless will be concentrated into an effective central reserve. The general banks
will hold a sufficient amount of till money for their requirements, but as a reserve they must hold a cash balance with
the United Reserve Bank, commensurate as at present with
the aggregate amount of their deposits. . . .
The bank will act like a huge clearing house for the settlement of balances between various sections. Millions are now
constantly in transit, moving to and fro, crossing and recrossing one another in opposite directions. Hundreds of
millions are kept in scattered balances, which can be centralized under the new system. . . .

74 THE FEDERAL RESERVE SYSTEM
The new system makes commercial paper a quick asset
which can be converted into a cash credit or into actual
cash. Our present scandalous system of attempting to regulate the money market of the entire country by first pouring
money into the stock market and then withdrawing it, creating inflation and exorbitant security prices, followed in due
course by stringency and unnecessary price depression, will
give place to more orderly movements, as our discount markets develop. . . .
In order to secure an elastic currency and a safe basis for
a United Reserve Bank, we must reduce our outstanding
currency somewhere, so as to substitute the new elastic note
issue—an issue that will contract, so that it can expand with
safety. One way would be an inverse conversion; that is, a
gradual withdrawal of the existing note-issuing power with a
simultaneous conversion of our government bonds into obligations bearing a somewhat higher rate of interest, thereby
safeguarding the banks against a loss in the price of their
bonds. . . .
. . . As far as reserves are concerned, they will be united
and act as one. The surplus of one section will be available
for other sections and the interests of all together will bring
about the general policy of the United Reserve Bank.
The effectiveness of this plan would not be interfered with
by a provision that the discount rates of all the branches
need not necessarily be the same. Thus it might be possible
to meet undue expansion in one section of the country by
increasing the rate of that branch without increasing the rate
for other sections. . . .
It should be clearly understood that the United Reserve
Bank, by creating safe conditions, would make the small
banks independent, where they now have to rely, and are
dependent for help, on the good-will of their big sisters, or
the often doubtful ability to help of the Secretary of the
Treasury. A central reserve bank properly organized is not
an oligarchic but a democratic institution; it would mean
safety for all, hardship for none. . . .

THE

UNITED

RESERVE

BANK

PLAN

In the years covering the period between the publication
of this plan in 1910 and the enactment of the Federal Reserve
Act at the end of 1913, some of the thoughts expressed in the
United Reserve Bank Plan were further matured and modified.
For example, when I appeared before the House Committee
on January 7th, 1913,1 I expressed the view that in order to
bring about a well balanced control of the System it would
be advisable to empower the government to appoint a little
more than one-half of the members of the board of the central
office, in addition to the ex officio members, and to permit
the other members to be appointed by the banks. With reference to the boards of the branch banks, i.e., the Federal
reserve banks, the suggestion was made that the directors
appointed by the member banks should be slightly in the
majority.
It may be noted in passing that the theory thus outlined
in my testimony was followed in the first drafts of the Glass
Bill, until President Wilson—siding with the Owen-Bryan
faction—enforced his will by making the central board consist entirely of members appointed by the President. The
directorates of the reserve banks, on the other hand, are
constituted to-day along the lines above recommended. This
matter is more fully dealt with in subsequent chapters.
1

See Appendix Three.

CHAPTER

THE ALDRICH PLAN
(1910-1912)
H O R T L Y after the National Monetary Commission had
completed its investigations in Europe and had returned
to this country, I was invited to appear before it at a
hearing held in the Metropolitan Club of New York. A t that
hearing, there was no discussion of the broad problem of
banking reform; but a list of the authorities consulted by the
members of the Commission in Europe (from August 12th to
October 13th, 1908) was shown to me and my opinion was
asked concerning them. When the Commission adjourned,
Senator Aldrich detained me for a moment.
" M r . Warburg," he said quietly, " I like your ideas. I have
only one fault to find with them."
This intimation that the Senator had been won over to the
central reserve doctrine came like a thunderbolt from a clear
sky; but I asked, with as great composure as I could command,
what that fault was.
He answered, " Y o u are too timid about it."
This was an even more intense surprise to me than his first
statement, and I replied that, so far, it had appeared to me
that I was almost the only person in the banking reform
movement who had shown any courage about it.
He said, "Yes, but you say we cannot have a central bank,
and I say we can."
It is easy to imagine, but hard to describe, the mixed feelings
of joy and bewilderment into which this remark threw me,
for suddenly I found our roles reversed. Whereas before I had
doubted whether the Senator could ever be persuaded to
consider any central reserve plan, I now found it my part to

THE ALDRICH PLAN

dissuade him from going too far in that direction. Accordingly, I explained to the Senator why any attempt to establish
a full-fledged central bank, in the European sense, appeared
to me to be inadvisable. The main reasons given were, first,
that the operations of the European central banks were predicated upon a large bill market, in which modern bills of
exchange could readily be bought and sold, which was lacking
with us; and, second, that a central bank such as existed in
Europe, having wide powers to deal with individuals, was
not politically possible in the United States on account of
the dangers of abuse and the deep-seated prejudices and
suspicion which it would encounter. And, finally, it was
to be feared that such a central bank, if established, would
not live long, because it was likely to become almost at once
a target for bitter political attacks.
Although the Senator listened to these arguments, he did
not give any indication that he was hospitable to them. But,
needless to say, when I left the Metropolitan Club I was
elated, because what only a few hours before had appeared to
be an insurmountable obstacle in the way of progress was now
crumbling away and, for the first time, I felt confident that
genuine banking reform was within grasp of the United States.
M y next contact with the Senator came late in 1909, when
in view of the imminence of a new issue of government bonds,
I wrote to him, expressing the hope that he would oppose the
issue of any more bonds with the circulating privilege. I also
took this opportunity of bringing to his attention the fact that
the Banking Law Journal had sent out letters of inquiry to
state and national banks throughout the country, asking them,
" D o you favor a central bank, if not controlled by Wall
Street or any monopolistic interest?" and that, of the total
of 5,613 answers, about 60 per cent were in the affirmative,
33 per cent in the negative, and 7 per cent undecided. I
added, "When one takes into consideration that the main
reason given by those who answered in the negative was that

THE FEDERAL RESERVE SYSTEM

they did not believe it would be possible to create a central bank which would be free from Wall Street control, one
cannot help feeling very confident, for it will not be difficult
to disprove that argument."
While my correspondence with Senator Aldrich remained
rather halting and one-sided, the Senator hardly ever answering my letters, quite an extensive correspondence developed
between Professor A. Piatt Andrew, Special Assistant to the
National Monetary Commission, and myself, in the course of
which I furnished him with data for certain books which the
Commission intended to publish, together with the names of
competent translators, and other information of a similar
nature. Of course, I sent to both Senator Aldrich and
Professor Andrew copies of my articles and, at Professor
Andrew's request, I also mailed copies to certain members of
Congress.
In November, 1910, I was invited to join a small group of
men who, at Senator Aldrich's request, were to take part in a
several days' conference with him, to discuss the form that
the new banking bill should take. During this conference I
had my first opportunity of studying the Senator carefully,
and I was deeply impressed by the earnest devotion with
which he approached the subject and the untiring patience
with which he applied himself to it. I believe that there was
not a page of the thirty-five volumes collected and published
by the National Monetary Commission which he had not
read. The questions he asked indicated at once that he had
penetrated quite deeply, not only into the theory, but also
into the technique, of the banking problems involved. He
differed from Senators Owen and Glass, with both of whom it
later became my privilege to collaborate, in that he had
essentially a business mind. I was also impressed by the fact
that, although he was a very shrewd politician, he showed a
surprising disregard for party politics in dealing with our
particular problem. We were, after all, discussing a proposal

THE ALDRICH PLAN

which involved a revolutionary break with old Republican
banking traditions; but not once in all the deliberations was
that phase of it mentioned. On the contrary, he always
stressed the imperative necessity of dealing with the question
on a non-partisan basis. While I had approached Senator
Aldrich with a good deal of prejudice and suspicion, I soon
became convinced that the only object he had in mind was to
establish in the United States, as a final monument to his long
service in Congress, the best banking system that political and
economic circumstances would permit. In talking to him,
I often wondered what was the secret of his great political
power in Congress and, to judge from my own experience with
him, I should say that it must have been his indefatigable,
painstaking willingness to ascertain the facts down to their
very last details. With the same thoroughness and patience,
he seemed to analyze and approach the individuals destined
to play a part in the matter at issue.
When I joined the conference, I was quite at sea as to what
its outcome would be and frankly skeptical as to its prospects
of success. During the first days' sessions, Senator Aldrich
was much inclined to discuss the possibilities of a full-fledged
central bank on the European order—a model he seemed loath
to abandon. But when the conference closed, after a week of
earnest deliberation, the rough draft of what later became the
Aldrich Bill had been agreed upon, and a plan had been outlined which provided for a "National Reserve Association,"
meaning a central reserve organization with an elastic note
issue based on gold and commercial paper. This was not a
central bank in the European sense. It was strictly a bankers'
bank with branches under the control of separate directorates
having supervision over the rediscount operations with member
banks.
In its main principles and in many important details the
Aldrich Bill was closely akin to the plan proposed in the

THE FEDERAL RESERVE SYSTEM

"United Reserve Bank of the United States," 1 but there were
quite a number of differences, with some of which I was in
complete disagreement. For example, in regard to the
question of control, I thought that somewhat larger concessions should have been made to government influence and
representation. Neither was I in full accord with the provisions regarding taxation, note issue, the uniform discount
rate, the plan proposed for dealing with the 2 per cent government bonds, or the conditions attaching to the membership
of state banks and trust companies. Moreover, the Senator
had not yet agreed to a provision, which seemed to me of fundamental importance, that of giving the notes of the National
Reserve Association the status of lawful reserve money when
in the tills of member banks. The bill frankly followed the
Republican doctrine of "keeping the government out of business;" but, as a starter, it was encouraging beyond all expectation. Indeed, the highest hopes seemed warranted that a
most satisfactory piece of legislation could eventually be
developed from it.
The results of the conference were entirely confidential.
Even the fact that there had been a meeting was not permitted
to become public. 2
The period during which non-political thought held the
leadership in the banking reform movement may be considered as having ended with this conference. Senator
Aldrich had now adopted the general principles of the project;
he had evolved the Republican version of a central-bank plan
and had made himself its standard bearer. Where before, it
had been an educational campaign carried on by individuals
See Vol. II, p. 117. See also Chapters Eight and Nine of this volume for
comparisons of the Aldrich Bill and the Federal Reserve A c t .
2 Though eighteen years have since gone by, I do not feel free to give a
description of this most interesting conference concerning which Senator
Aldrich pledged all participants to secrecy. I understand, however, a history
of Senator Aldrich's life by Professor Nathaniel Wright Stephenson is shortly
to be published, and that this book will contain an authorized account of this
episode.
1

THE ALDRICH PLAN

and groups, the movement was now to assume a national
character. From then on until the final passage of the
Federal Reserve Act, the generalship was in the hands of
political leaders, while the role of banking reformers was to
aid the movement by educational campaigns and, at the same
time, to do their utmost to prevent fundamental parts of the
non-political plan from being disfigured by concessions born
of political expediency.
The next step was for the Senator to submit the synopsis
of the draft of the Aldrich Bill to his fellow-members of the
Monetary Commission in order to secure their approval and
backing.
Meanwhile, a number of public bodies studying the question
had extended invitations to me to address them or to assist
in carrying on their own investigations. Among these were
the Board of Trade of Philadelphia, the Produce Exchange of
New York, the National Association of Credit Men, and the
Chamber of Commerce of New York. Mr. A. Barton Hepburn, the President of the New York Chamber of Commerce,
appointed me a member of its Banking and Currency Committee in December, 1910.
The National Board of Trade had taken a very lively interest in banking and currency reform. Mr. Frank D. Lalanne
and Mr. William R. Tucker, who were members of the Philadelphia Boand of Trade, were particularly active in this
movement, and we frequently exchanged views.
The National Board of Trade now called a conference at Washington
and set aside January 18th, 1911, as "Monetary D a y . " Delegations were to be sent from chambers of commerce and boards
of trade in all parts of the country. Resolutions to be presented at the conference were under preparation by both the
Chamber of Commerce and the Merchants' Association of New
York. Each of the two bodies having appointed me a delegate
to the conference, and the Produce Exchange having been in
communication with me concerning the resolution it wished to

THE FEDERAL RESERVE SYSTEM

present, I was able to prevail upon all three associations to
have a joint meeting and to prepare a joint resolution.
The work of preparing this joint resolution created a
rather peculiar situation. I knew, of course, what proposals
the chairman of the Monetary Commission was about to
recommend but, having been pledged to secrecy, I could not
mention them to my colleagues. It was most important,
however, to have our resolution framed in general accordance
with the findings of the Monetary Commission. The task
would have been one of extreme embarrassment had it not
been for the fact that the main principles underlying the
Aldrich Bill were so much akin to the ones I had preached so
long and so often.
There had been delay after delay in the publication of the
Commission's Plan by Senator Aldrich. The uncertainties of
the Congressional situation, no doubt, baffled him greatly and
dictated a policy of extreme caution; his tendency to procrastinate was aggravated, moreover, by his physical condition which, at that time, began to alarm his collaborators.
It had repeatedly been urged that the plan be made public
before the conference of the National Board of Trade, which
seemed to offer a unique opportunity for securing an important
endorsement at the very moment of the launching of the bill.
The stage had been set, but when I left New York, on the day
before the conference, the Senator had not yet divulged his
plan. That very afternoon, however, as the New York
delegates to the Washington conference were passing through
Philadelphia, the evening papers brought before the public
for the first time an outline of the Aldrich Plan. There was,
of course, a general feeling of delight among the delegates
when they discovered how closely their resolution accorded
with what the Monetary Commission now recommended.
A very comprehensive account of the Monetary Conference
of the National Board of Trade was given by the delegates of
the Chamber of Commerce of the State of New York upon

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their return from Washington. Their report, dated January
30th, 1911, is well worth reading. It is reprinted in full
herein as Appendix Four. The following quotation from the
New York Journal of Commerce gives a brief resume of what
took place at Washington:
Washington, January iQth> 1911:—The National Board of
Trade to-day substantially endorsed the principles of the
Aldrich Plan of monetary reform by adopting the resolutions
offered by the Chamber of Commerce of the State of New York,
the Merchants' Association of New York, and the New York
Produce Exchange, recommending a "central banking organization." Tentative plans were drawn for a monetary league of
business men soon to be organized by the National Board. . . .
The preamble and resolutions as adopted are as follows:
Whereas, A modern financial system, which must rest upon
credit supported by adequate gold reserves, can be safe and
efficient only if so organized as to enable the concentration
of idle cash in one reservoir, and to render such cash always
speedily available for all legitimate needs, thus assuring
confidence; and
Whereas, Careful investigation and the experience of all
other great nations have demonstrated that a central bank
system is the most efficient instrumentality for this purpose,
providing the means for such concentration of cash and assuring the transformation into cash, whenever needed, of deposits,
commercial paper, and other proper forms of credit, conserving
the gold resources of the nation and maintaining the same
at a safe proportion to its cash obligations; and
Whereas, The banking system in use in the United States
has proved disastrously defective, because
It scatters reserves among more than 20,000 banks, each
striving in time of stress to strengthen itself at the expense
of the other;
It prevents the utilization of reserves and the mobilization
of the resources of banks which are invested in commercial
paper;

THE FEDERAL RESERVE SYSTEM
It substitutes stock-market loans for discounts of commercial paper, making the former the regulator of the daily
supply and demand for credit;
It provides for note issues absolutely irresponsive to business requirements, bringing about alternation of inflation and
stringency;
All of which defects tend to destroy confidence and generate
crises; and
Whereas, This convention is convinced that it is practicable
to create a central banking organization for the United
States, free from political or sectional control by means of
which these defects can be remedied; an instrument, not of
monopoly, but for strengthening and preserving the independence of the individual banks; an institution designed
primarily for public service and not for profit; not to compete
with existing banks, but to assist all of them to serve the
business communities more efficiently; now, therefore, be it
Resolved, That this convention unequivocally declares itself
in favor of the creation for the United States of a central
banking organization, based upon the following general principles :
1. That such central organization be a corporation endowed
with a large stock capital and not merely an association of
banks.
2. That its stock capital be owned by incorporated banking
institutions, including trust companies, whether under national or State charter, willing to assume equal duties as a
basis for equal privileges.
3. That its administration be divided between the government, the member banks, and the commercial classes, in a
manner which will safeguard against individual, sectional, or
political combination.
4. That its business be limited to transactions with the
government and with the incorporated banking institutions
which become stockholders, i. e. member banks, except as
provided in paragraph 9, clause B.
5. That dividends on its stock be limited to a fixed moderate
return, and profits in excess of such dividends, after providing

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for a reasonable surplus and emergency fund, be turned over
to the government.
6. That its business be conducted through branches to be
established in the banking districts into which the country
shall be divided, the member banks of the several districts
constituting joint associations and sharing in the administration of the branches.
7. That it shall, free of charge, receive and disburse all
moneys of the United States Government in places where it
shall have offices.
8. That it shall not allow interest on deposits.
9. That it shall have power:
(a) To issue circulating notes payable in gold, to be secured
by gold and negotiable paper, and, if necessary, eventually to
retire the present bond-secured bank notes, by a limited
amount of government bonds;
(b) For the regulation of its gold reserve to buy and sell
bullion, and to contract for loans of gold, and under proper
restriction to deal and invest in foreign bills of exchange;
(c) To require the member banks to keep with it a portion
of the reserve prescribed by law;
(d) To rediscount, only for member banks, commercial
paper under regulations prescribing the limit of amount for
each member bank, the maximum time to run, and determining the degree of guarantee to be provided by the joint associations of member banks of each district;
(e) Under careful and proper restrictions to discount
approved American acceptances;
(f) To transfer funds standing to the credit of a member
bank, to the credit of any member bank at any of its branches;
(g) To buy and sell the bonds and Treasury notes of the
United States.
10. That the central organization is ultimately to become
the sole note-issuing power.
Resolved, Furthermore, that copies of this resolution be sent
to the President of the United States, to the members of the
National Monetary Commission and to each Senator and
Representative in Congress.

THE FEDERAL RESERVE SYSTEM

It is interesting to see how much of the resolution passed by
the National Board of Trade conference might have been used
three years later in support of the subsequent Federal Reserve
legislation; or, putting it differently, how many of the recommendations here made were ultimately adopted by the writers
of the Federal Reserve Act.
The task of winning the leading bankers over to the Commission's Plan fell primarily on Senator Aldrich. With
infinite patience he saw them, one by one; and it was due
largely to the unique position he held with them, to his
thorough knowledge of the problem, and to the care with
which his bill had been prepared that the heads of the largest
financial institutions, men who in the nature of things are
usually temperamentally and traditionally averse to radical
changes, were, one after another, won over to the support of
his plan. 1
Presently a conference took place at Atlantic City, lasting
from February ioth to February 12th, 1911, at which about
twenty leading bankers from all parts of the country were
invited to discuss critically the details of the Aldrich Bill.
Senator Aldrich was not present at this meeting on account of
ill health which had rendered it imperative for him to seek a
few months of complete rest in the South. The Atlantic City
conference resulted in a full and frank discussion of a project
which many of those present approached in a spirit of openly
expressed antagonism. A t the end of the conference, however,
the champions of the bill felt greatly encouraged, because,
barring a few slight modifications, it had been fully endorsed
by the conference. Later in the year, Senator Aldrich went
on a speaking tour which took him over a large part of the
1 In this campaign Mr. Frank A . Vanderlip, then a Vice President of the
National City Bank of New Y o r k and the late Mr. Henry P. Davison, then a
Vice President of the First National Bank of New Y o r k , were of the greatest
aid to Senator Aldrich. Mr. Davison had accompanied the National Monetary
Commission on its trip to Europe, and he seemed to enjoy Senator Aldrich's
confidence and friendship in a very high degree.

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country, and which greatly stimulated the general discussion
and understanding of the bill. He spoke at Chicago on
November n t h , 1911, at Kansas City on November 14th
and 15th, 1911, and at New Orleans on November 21st, 1911.
An abstract of the New Orleans address is presented herein as
Appendix Five. It is interesting to note the similarity of the
arguments used by Senator Aldrich and those brought forward
later on by the proponents of the Federal Reserve Act. As
an illustration we quote the following passage from Senator
Aldrich's speech. Explaining his plan Senator Aldrich said:
. . . We propose to reconstruct the banking system of the
country so that individual banks will be able at all times to
protect not only their customers but the community they
represent. . . . We propose to concentrate the cash reserves of
the country so that they can be used to protect not only the
reserves of individual banks and communities and districts,
but those of the whole country, in the same way that the
great institutions of Europe protect and conserve the credit
of their respective countries. We propose to do that, not by an
organization like a central banky but by an organization that
affords a concentration and mobilization of cash reserves, and
at the same time secures a decentralization of control}
It is amusing to observe that in the debate upon the Aldrich
Plan the Democratic attacks were based on arguments very
similar to those the Republicans used when some years
later they were called upon to discuss the Federal Reserve
Bill. One almost believes oneself to be reading Senator Glass's
Adventure in Constructive Finance when one finds in Senator
Aldrich's Chicago speech a passage such as the following:
We have one class who are perfectly certain from their
understanding of the plan, that its adoption would result in
enormous inflation and dangerous expansion of credits. We
have another class who are quite as certain that the provisions
of the plan are not sufficiently expansive.
1

T h e italics are mine—Author.

THE FEDERAL RESERVE SYSTEM

On March 3rd, 1911, the New York Chamber of Commerce
endorsed the principles of the Aldrich Plan.
An editorial published in 5the New York Times of March
4th, 1911 (reprinted herein as Appendix Six) throws a
humorous light on the discussion preceding the vote in that
organization.
The resolution passed at Washington by the National
Board of Trade in favor of the organization of a league of
business men was not the first attempt that had been made to
organize a representative body of citizens in favor of monetary
reform. Some years earlier, the Merchants' Association of
New York had embarked upon a similar undertaking. The
first attempt failed because, at the time, the necessity of a
far-reaching reform and the lines such a reform should follow,
had not become sufficiently crystallized in the public mind.
When Senator Aldrich's Plan had taken a tangible and
highly promising form, it seemed that the psychological
moment had come to try once more to form such a league.
It was certain beyond doubt that, unless public opinion all
over the United States could be educated and mobilized, any
sound banking-reform plan was doomed to fail. The few
friends to whom these thoughts were explained were frankly
skeptical. They warmly approved of the idea of such a
campaign, but doubted the possibility of raising the very
substantial sums necessary to swing it successfully. Three
years of hard work and persistent progress in the field of
banking reform had demonstrated, however, that where
there's a will, there's a way; and now, having advanced so
unexpectedly near the coveted goal, it seemed imperative
to attempt the venture, no matter how impossible it might
appear. For obvious reasons, it would have been fatal to
launch such an enterprise from New Y o r k ; in order to succeed,
it would have to originate in the West. It was in accordance
with these thoughts that the Washington resolution for
the National Board of Trade conference had been formu-

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lated. As a result of that resolution, Mr. C. Stuart Patterson,
of Philadelphia, was charged with the appointment of a committee of seven to consummate the organization of a business
men's monetary reform league. Mr. Patterson was particularly well qualified for the task. His interest in banking reform
was well known and his name carried great weight because he
had served as chairman of the Committee on Metallic Currency
of the Indianapolis Monetary Commission of 1898.
The Committee as finally constituted consisted of the following men:
C. Stuart Patterson
Harry A. Wheeler
Frederick W. Upham
Irving T . Bush
James J. Storrow
George D. Markham
Paul M. Warburg, Chairman,

Philadelphia
Chicago
Chicago
New York
Boston
St. Louis
New York

Five members of this Committee met at Chicago on April 26th,
1911, and began to confer with some of the representative men
of the city. Owing largely to the personal efforts of Mr. Harry
A. Wheeler, a group of leading citizens of Chicago finally
agreed to undertake the task of organizing the league and
placing its affairs on a secure foundation. 1 By June 8th, 1911,
the National Citizens' League for the Promotion of a Sound
Banking System was completely organized. Its first set of
officers was as follows:
John V. Farwell
John Barton Payne
J. Laurence Laughlin
A. C. Bartlett
M. S. Wildman

President
Vice President
Chairman of the Executive
Committee
Treasurer
Secretary of Organization

1 T h e National Citizens' League published a pamphlet entitled The Origin
of the League which, in part, is reprinted herein as Appendix Seven.

THE FEDERAL RESERVE SYSTEM

These officers constituted a strong group of independent and
energetic men who assumed full responsibility for the League's
activities. They immediately embarked upon a very ambitious program. It provided for the organization of local
committees all over the country, 1 for the dissemination of
literature, and for the sending of speakers throughout the
United States in order to awaken interest in, and to promote
a general understanding of, the principles upon which a sound
monetary reform would have to be based.
The Committee was fortunate in being able to persuade
Professor J. Laurence Laughlin, of the University of Chicago,
to become the active head of the League. For two years he
devoted his entire time and energies to the successful management of this campaign. The services of other leading economists were also secured. The League was financed entirely
by voluntary contributions, some large and many very small.
Among the most liberal contributors were the banks, which
had swung into line and by this time had become warm
supporters of the campaign. During the life of the League, a
fund of approximately half a million dollars was raised for its
use.
Among the leaders of the League there were many prominent
Democrats. This was of great importance, as the complex
political situation in Washington, where President T a f t had
lost control of Congress, made it clear that monetary
reform could succeed only on a distinctly non-partisan platform. It was, therefore, only a dictate of wisdom for the
League, if it wished to win country-wide support, to limit itself
to principles and to abstain entirely from backing a specific
bill. In keeping with this, the League consistently refused
1 In N e w Y o r k , a sub-committee was established with Mr. John Claflin
as Chairman, and Mr. William Sloan as Treasurer. The Executive Committee
of this organization, under the able chairmanship of Mr. Irving T . Bush, vied
with the Chicago Committee in furthering the aims of the campaign.

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to commit itself to the Aldrich Plan. The first press statement of the League 1 emphasized this point by saying:
The object of the National Citizens' League to be established is to carry on an active campaign for monetary reform
on the general principles of the Aldrich Plan without endorsing
every detail of the National Reserve Association.
There were times when Senator Aldrich was not at all satisfied
with this policy, but the League stuck to it consistently to the
end.
A reproduction of a post card which was sent out by the
League in its campaign to win popular support may be found
on pp. 72 and 73.
The League published a periodical, Banking Reform, which
at first appeared weekly, and later twice a month. It had
a circulation of about 20,000 copies which, in the main, went
to newspaper editors all over the country, who soon began to
look upon it as their chief source of information with regard
to the problem of banking reform. In addition, the League
published pamphlets written for it by men whose names
commanded confidence in the business world.2
Soon after the organization had been perfected, it was
decided that a handbook should be published to serve as a
catechism for those who wished to study the problem. For the
preparation of this volume, which was to adhere closely to the
principles endorsed by the League, the services of Dr. H.
Parker Willis were secured. In becoming so intimately conversant with the principles for which the League stood, as
well as with the technical features under discussion, it is to
be presumed that he gained a familiarity with the subject
which, later on, proved valuable in the work he was invited
to undertake as the expert for the Glass Committee.
Chicago Herald, April 27 th, 1911.
Among the writers of pamphlets for the League were the following:
J. Laurence Laughlin, John V. Farwell, Franklin MacVeagh, John Perrin,
George E. Roberts, A. C. Bartlett.
1

THE FEDERAL RESERVE SYSTEM

The National Citizens' League
For the Promotion of a Sound
Banking System

A Non-Partisan
of Men of All

Association
Occupations

The panics of 1893 and 1907 showed every thoughtful business
man that something was wrong with our monetary system. We
now have sound banks, but an unsound system, in which banks
are isolated and do not co-operate in time of danger.
The League has no bill of its own; it is open to suggestions
from any source. But it presents the following objects to be
attained which it hopes to have incorporated into law:
1. Co-operation, not dominant centralization, of all banks by an
evolution out of our clearing-nouse experience.
2.. .Protection of the credit system of the country from the domination of any-group of financial or political interests.
3. Independence of the individual banks, national or state, and
uniform treatment in discounts and rates to all banks, large
or small.
4. Provision for making liquid the sound commercial paper oi
all the banks, either in the form of credits or bank notes
redeemable in gold or lawful money.
5. Elasticity of currency and credit in times of seasonal demands
and stringencies, with full protection against over-expansion.
6. Legalization of acceptances of time bills of exchange in order
to cr^at.e a discount market at home and abroad.
7. The organizaticm of better banking facilities with other countries, to aid in the extension of our foreign trade.
The passage of legislation incorporating the above objects
would directly affect the prosperity of all sections and classes
of people in our country. For this reason it should be the
dutj^ot every citizen to aid the League by contributions and
by influence among his neighbors. You may become a
member of the League upon payment of one dollar. The
proceeds of this membership fee will be devoted exclusively
toward defraying the expenses of the campaign. Send your
remittance to
THE TREASURER,
National Citizens' League,
223 W. Jackson Blvd.,
Chicago, 111.
A section of the League is formed, or will be formed, in each State.
If you prefer, send your remittance to the Treasurer of your State
Section.

THE ALDRICH PLAN 93

OFFICERS AND DIRECTORS
President
JOHN V. FARWELL
Vice-President
JOHN BARTON P A Y N E
Chairman of Executive Committee
J. LAURENCE LAUGHLIN
Treasurer
A. C. B A R T L E T T
Secretary of Organization
M. S. WILDMAN
B. E. S U N N Y
F. H. A R M S T R O N G
JULIUS R O S E N W A L D
F. A. D E L A N O
C Y R U S H. McCORMICK
GRAHAM TAYLOR
A. A . S P R A G U E
F. W. UPHAM
H A R R Y A. W H E E L E R
C . H. W A C K E R
CLYDE M CARR
MARVIN HUGHITT
JOHN G. S H E D D
JOSEPH B A S C H
Alabama-JOHN L. H A U L
Arizona—HUGO J. D O N A U
Arkansas—F. B. T . H O L L E N B E R G
Colorado—CHARLES MacA. WILLCOX
Georgia—J. K. O R R
Illinois—IT. G. O R E N D O R F F
Indiana—DAN W. SIMMS
Iowa—ROBERT J. F L E M I N G
Kansas—CHARLES M. H A R G E R
Kentucky—JOHN M. A T H E R T O N
Louisiana—CRAWFORD H. E L L I S
Maryland—GEORGE C A T O R
Massachusetts—WILLIAM L. D O U G L A S
Michigan—JOSEPH L. HUDSON
Minnesota—JOHN H. R I C H
Mississippi-C. H. WILLIAMS
Missouri—GEORGE A. M A H A N
Montana—NORMAN B. H O L T E R
Nebraska-A. E. C A D Y
NewJersey-FRANKLIN MURPHY
New Mexico—H. J. H A G E R M A N
New York—JOHN C L A F L I N
North Dakota—L. B. H A N N A
Ohio—JAMES A. G R E E N
Oklahoma—FRED S. G U M
Oregon—THOMAS D. H O N E Y M A N
Pennsylvania—C. S T U A R T P A T T E R S O N
Tennessee-WHITEFOORD R. C O L E
Texas—IKE T . P R Y O R
Washington-JAMES S. G O L D S M I T H
Wisconsin—W. H. H A T T O N
and others to be named.

THE FEDERAL RESERVE SYSTEM

In the Leagued handbook, Dr. Willis strongly opposed
counting the notes of any central organization, which might be
created, as legal reserves of member banks (a view shared by
Professor Laughlin). I was firmly of the opinion that it
should be lawful for member banks to count such notes as
reserves. When the handbook appeared, I was, of course,
much chagrined to find that an organization of which I was
one of the god-fathers and active members had, through its
official organ, expressed views to which I was so much opposed.
The difference of views between Dr. Willis and myself, however, concerned a subject on which we both had strong convictions, and I respected him for standing by his guns, as I
hoped he respected me for standing by mine.
During the year 1911, the campaign for monetary reform
made the most satisfactory progress. On November 21st,
the American Bankers' Association, at its meeting in New
Orleans, endorsed the Aldrich Plan. A t this conference,
Senator Aldrich delivered an excellent address which has
already been referred to on page 67. I followed him with
an address on "Circulating Credits and Bank Acceptances." 1
In this address I presented a long argument for permitting
national reserve notes in the tills of member banks to be
counted as lawful "reserve money." A t that time, Senator
Aldrich was still opposed to such a provision, and so likewise
was general opinion.2
5The Financial and Commercial Chronicle of November 25th,
1911, contains a brief report on the session of the American
Bankers' Association at New Orleans. 3 This report shows a
very just appreciation of the importance of the educational
work done by Senator Aldrich. A reprint follows:
See Circulating Credits and Bank Acceptances, T h e Commercial and Financial Chronicle, December 2, 1911; Essays on Banking Reform in the United
States, Proceedings of the Academy of Political Science in the City of N e w
Y o r k , Vol. I V , No. 4. See also Vol. T w o , p. 219.
2 See editorial columns, The New York Times, November 22, 1911.
3 The Financial
and Commercial Chronicle, November 25, 1911, Vol. 83, pp.
1420-1421.
1

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Our financial problems are likewise being put in the w a y of
a solution. T h e American Bankers' Association has been in
session this week at N e w Orleans, and its proceedings have
attracted almost as much attention here as if the convention
had been held at this point. T h e reason for the interest felt
in the gathering is that the deliberations of the convention
proper (as distinct from the several section meetings) were
given up almost entirely to the discussion and consideration
of ex-Senator Aldrich's Plan for the reform of the country's
banking and currency system. Senator Aldrich himself
addressed the convention, and there was a symposium of
papers and addresses treating of every phase and aspect of
the question. T h e criticisms in nearly every case were
favorable; even where exception was taken to particular
features of M r . Aldrich's proposal, there were highly flattering
remarks concerning the plan itself. W e shall print all the
papers and addresses delivered before the convention and
before the trust company section and the savings bank
section in a special supplement next week, making it possible
for the reader to study them and always to have them at
hand for reference.
Whether the Aldrich Plan shall ever find its w a y upon the
statute books or not, M r . Aldrich's achievement in having
been able to propose a scheme which has evoked such a universal chorus of praise will always rank high. . . . T h e
campaign which Mr. Aldrich, together with two or three
other men connected with the National Monetary Commission, has been carrying on since last January has been
educational in the highest degree. W e believe we are safe
in saying that in no equal period of time in the country's
history has so much progress been made in promoting sound
views regarding banking and currency. And the American
Bankers' Association, in giving such conspicuous prominence
to the subject has helped still further to vitalize the problem
and to advance the work of educating the public, the bankers
themselves, and the country's legislators and politicians.
Surely, out of all this much good for the public weal must
result in the end.

THE FEDERAL RESERVE SYSTEM

The National Citizens' League continued its work until
1914. There is no doubt that its campaign enjoyed a high
measure of success. Through its efforts, supporting those of
Senator Aldrich, the majority of the business and banking
communities, as well as a large portion of the press of the
country, were converted to the thought that the principles of
the Aldrich Plan should be embodied in legislation. However, the political situation made favorable action by Congress
impossible. Senator Aldrich, nevertheless, clung to the hope
that by submitting his recommendation to Congress with the
unanimous endorsement of the Monetary Commission, a bipartisan body, it would be possible to secure for it nonpartisan consideration. Unfortunately, the Senator's friends
were unable to prevail upon him to abstain from submitting
the bill in his own name. It was a matter of great doubt
whether the Democrats in Congress would be willing to give
to a Republican President the prestige which would come from
an accomplishment so monumental as the enactment of this
important piece of legislation. Certainly, it was not to be
expected that they would endorse a bill which carried the
name of the outstanding Republican leader.
As time went on, the chances for an unbiased consideration
of the bill by Congress grew more and more unfavorable.
The " M o n e y - T r u s t " investigation, under the whip of the
energetic Samuel Untermyer, kept the country stirred up, and
the rift between Roosevelt and T a f t became more and more
pronounced. A growing number of leaders of the Citizens'
League became convinced that, in these circumstances, the
Aldrich Bill could not pass, and some of them raised the
question whether the time had not come when either they,
individually, or the League itself should submit a substitute
plan which, while observing the principles upheld by the
League, would give the legislative proposal an outward form
so different that it would become acceptable to both parties.
It was decided, however, that the League should continue its

THE ALDRICH PLAN

policy of merely endorsing principles, and that neither the
League nor its leaders should endorse or propose any definite plan.
It was felt, furthermore, that, should the Democrats prevail
at the polls, the lead would have to be left to them for the
formulation of their own plans. All that we could aspire to
attempt at that juncture was to prevent the Republican, the
Progressive, and the Democratic parties from committing
themselves in their platforms to any statements which would
render banking reform on sound principles impossible. The
efforts of the League during the last period of its existence
were concentrated on this particular matter.
An amusing incident occurred in connection with an effort
to explain the Aldrich Plan to ex-President Roosevelt. In
January, 1912, the Outlook, with which he was then connected, sent out invitations for a luncheon at which the
pending banking and currency legislation was to be discussed.
Some twenty bankers and economists, as I recall it, were
assembled around the table; I was one of the guests and sat
next to Mr. Roosevelt. Two things impressed me immediately: (1) the lack of information with which Mr. Roosevelt
approached the subject, and (2) the amazing keenness and
rapidity with which he filled in the gaps in his knowledge of
the matter. It was fascinating to see him interrupt the
speakers and drive straight for the important points. After
a comparatively short, quick fire of searching questions, it
seemed that he had obtained a perfectly clear picture of the
problem involved. Among those present was Mr. Morawetz,
who expressed his views to the effect that a central-bank
scheme was, from the point of view of theory and practice,
the better scheme; but that it was politically undesirable, and
that its main weakness lay in the fact that it would be impossible for the United States to produce the management
required for such an undertaking—men who would be experienced and independent enough and, at the same time,
willing to sacrifice the opportunities offered by other careers

THE FEDERAL RESERVE SYSTEM

in order to accept a government position of the type involved.
Mr. Roosevelt said, laughingly, " W h y not give Mr. Warburg
the job? He would be the financial boss, and I would be the
political boss, and we could run the country together." A
general outburst of hilarity followed this remark.
As we disbanded, the consensus of opinion among those
whose impressions I could gather was that, so far as one could
draw conclusions from Mr. Roosevelt's final questions and
from the general trend of the discussion, he had been fairly
well won over to a favorable consideration of the Aldrich Plan,
or, at least, its broad underlying principles. All the keener
was our disappointment when we saw that the platform of the
Progressive party, as adopted in Chicago on August 7th, 1912,
contained the following section:
Improvement of the Currency
We believe there exists imperative need for prompt legislation for the improvement of our national currency system.
We believe the present method of issuing notes through private
agencies is harmful and unscientific. The issue of currency is
fundamentally a government function and the system should
have as basic principles soundness and elasticity. The control
should be lodged with the government and should be protected
from domination or manipulation by Wall Street or any
special interests.
We are opposed to the so-called Aldrich Currency Bill
because its provisions would place our currency and credit
system in private hands, not subject to effective public control.
The monetary reform plank of the T a f t wing was colorless
and non-committal; it abstained from endorsing the Aldrich
Plan. It is safe to assume that this was not due to any lack
of sympathy with the plan itself, but arose from a realization
of the fact that, if non-partisan consideration of banking
reform was to be secured, the worst that could happen would
be to make the plan a party measure.

THE ALDRICH PLAN

While the work of the Citizens' League had been successful
in some Democratic sections as, for instance, in Alabama,
where the Underwood wing had endorsed the principles of the
Aldrich Plan, the Democratic platform, as printed, proved
most disappointing. It contained the provision: " T h e Democratic party is opposed to the Aldrich Plan or a central
bank." A t the time, it was widely stated that the plank, as
adopted by the Democratic Convention, read " t h e Aldrich
Plan for a central bank," and that, when the document was
printed, either by inadvertence or by a Machiavellian trick,
it was made to read "the Aldrich Plan or a central bank."
Whatever the truth may be, the Chairman of the House
Committee on Banking and Currency, Mr. Glass, who, later
on, was charged with the formulation of a new plan, adopted
the second version as binding upon himself.
As the presidential campaign of 1912 advanced, Democratic
members of the Citizens' League, some of whom enjoyed
friendly relations with Woodrow Wilson, tried in vain to have
him express his views concerning the principles on which
monetary reform should be based. Mr. Wilson remained
silent and a puzzle to all. His views did not become publicly
known until the Glass Bill was fairly well advanced.
Early in 1910, Senator Aldrich had announced that, at the
expiration of his term, in November, 1912, he intended to
withdraw from active political life. His bill was introduced
in the Senate on January 9th, 1912, but, in view of the conditions which then prevailed, it was thought inadvisable to
push it any further.
While the Aldrich Bill thus failed to become law, it would
nevertheless be a great injustice to deny its author credit for
the invaluable service he rendered by boldly cutting loose
from the antiquated principles on which American banking
legislation had until then been resting and in proposing a plan
which was recognized as constituting so great an advance that
even its defeat made it inevitable that any substitute plan

THE FEDERAL RESERVE

SYSTEM

would have to adopt many of its principles and essential
features. When Senator Aldrich revised his original views on
the banking problem and in a radical way reversed the
policy of the great political party of which he was so prominent
a leader, he showed extraordinary courage and vision for
which the country owes him an everlasting debt of gratitude.

CHAPTER

FIRST DRAFTS OF THE GLASS BILL 101

AFTER

(i 913)

the success of the Democrats in the fall of 1912,
the country waited anxiously to see what would
be the course of banking reform. One wondered,
in particular, if Mr. Glass, the future Chairman of the House
Committee, would begin the work de novo (or rather ab ovo)>
or whether he and his Committee would proceed from the
point at which the National Monetary Commission had
stopped. For some time, however, Mr. Glass allowed little
or nothing to become public, and the President-elect maintained complete silence on the subject.
During the period between Governor Wilson's election and
his inauguration, when the banking reform plans of the Democratic party were still entirely undefined as far as the public
knew, a good many people came to me for information on the
subject. This was especially true of those who were likely,
in some way or other, to be appointed by the new Administration to positions of responsibility, such as Mr. McCombs,
Mr. McAdoo, and Mr. Henry Morgenthau. Some months
before the election, I had been invited to meet Colonel Edward
M. House and, in the course of the year, I met Senator Owen
and many members of both Houses of Congress. To all of
them I freely expressed my opinions, just as I did to Chairman
Glass when the Federal Reserve Bill began to assume tangible
form.
Among the first of the above mentioned gentlemen was
Mr. Morgenthau, who had played a very prominent and loyal
part in the Democratic election campaign. He asked me to
prepare for him a plan which, while observing the main princi-

THE FEDERAL RESERVE SYSTEM

pies of sound banking reform, would be compatible with the
tenets of the Democratic party as embraced in their platform.
A rough draft of such a plan was given to him by me on December 7th, 1912. It provided for a reserve bank which would
have its central office in Washington, with some twenty
branches in various parts of the country and with provision
for increasing the number of those branches, or for the creation
of sub-branches, as further developments might require. In
general, the powers to be enjoyed by such an institution were
about the same as those which had been given to the proposed
National Reserve Association in the Aldrich Bill. The plan
provided, however, for a measure of strong government control, with almost direct government ownership of the bank,
which would indirectly make the circulating notes issued by
the bank government obligations. The Democratic doctrine
would thus have been respected without a surrender to extreme demands.
This draft was prepared some three weeks before December
26th, 1912, the day when the President-elect was consulted
by Mr. Glass on the question of banking reform. None of us
knew what was running through Mr. Glass's mind or whether
any feature contained in the Aldrich Plan was to be taboo just
because it was so included. Lacking any indication regarding
the direction in which those now in control would move, all
suggestions concerning the external structure of the new
system were, of course, of very little value and were bound to
remain so until more definite information was made public
by the Democrats.
The first rumor that reached us was that Mr. Glass was
working on a system of regional banks. How far, at that time,
the Democrats planned to carry the regional idea was not, and
has not yet been, told, although it was stated that Mr.
Bryan wished to start with fifty regional institutions. 1
Dr. Willis states in his book The Federal Reserve System, p. 580: " I n the
first instance, the idea of an unlimited number of reserve banks had first been
1

FIRST DRAFTS OF THE GLASS BILL

It was, of course, more or less plain to all careful students that,
if a workable system was to be produced, the separate reserve
banks then under discussion would, in some way, have to be
connected. If the plan was to be acceptable this was inevitable, even though the independence of the regional banks was
to be the outstanding feature of the scheme and its main
divergence from the Aldrich proposal. Inasmuch as it was
out of the question to make one superman the financial dictator of the whole United States, and as the Democratic
platform made it impossible to provide for the regional banks
an organic connection, such as had been devised in the Aldrich
Plan, the creation of a Board was, in the end, the only possible
solution.
As Mr. Glass has since stated in his Adventure in Constructive Finance, he had originally planned that the only connecting
link between the various regional banks should be the Comptroller of the Currency. Those who know Mr. Glass's conservative temperament, however, will find it difficult to
believe that he intended to give to this one individual the
wide powers which, later on, were vested in the Federal
Reserve Board. Had he done so, he would have created an
autocrat with greater powers than the American people have
ever vested in a single person. The Comptroller of the Currency, a political appointee, would, under such conditions, have
been empowered to force one reserve bank to rediscount for
another, to review and determine the rediscount rates, to regulate the open-market transactions of the various banks, as well
as to exercise the rest of the one hundred and twenty-seven
"powers and duties" (as listed by Mr. Charles S. Hamlin of
the Reserve Board) with which the Board is endowed to-day
for the purpose of holding the System together. It must,
therefore, be assumed that Mr. Glass, at the outset, had in
broached, the thought being that eventually one would be established at every
point where local banking interests desired it and were able to furnish the
resources for a strong enough institution."

THE FEDERAL RESERVE SYSTEM

mind only that the Comptroller should exercise supervisory
powers. In other words, he must have started, as other financial reformers before him had done, with the idea of a large
number of independent and entirely disconnected central
banks. Inasmuch as he had not provided for a limitation of
the dividends payable to stockholders, these banks, had they
been called into existence, would have entered into keen competition with one another. 1
The regional idea, which has not infrequently been put
forth as a distinctive characteristic of the Federal Reserve
legislation, did not originate with Mr. Glass or Dr. Willis.
As has already been mentioned, a system of disconnected
sectional reserve banks had been suggested by Mr. Victor
Morawetz as early as the year 1909 and again in January, 1911.
(See footnote on page 36.) When Mr. Morawetz introduced
the regional plan, my attitude towards it was sympathetic,
provided the decentralization did not go too far and provided
also that it contained some means of joining the regional banks
together. During the next three years, I expressed my views
concerning regional banks repeatedly. Again, in January,
1913, before the sub-committee of the House Committee on
Banking and Currency, commonly known as the Glass Committee, I made public my views on the subject. (See Appendix
Three.) In this connection, the following quotation from
my article, " A United Reserve Bank of the United States,"
which was-published in 1909, may not be without interest:
1 Dr. Willis in The Federal Reserve System, p. 147, quotes a letter which
Mr. Glass addressed to him on December 29th, 1912, after the conference
between Mr. Glass and Mr. Wilson. This letter contains the following highly
significant passage:
" V e r y likely you will recall my remark that, speaking for myself, I would
cheerfully go with the President-elect for some body of central supervisory
control, if such a body can be constituted and divested of the practical attributes
of a Central Bank. In my judgment this is the point of danger. This is
where the bombardment will be directed. If we can devise a superstructure or,
to use Mr. Wilson's phrase, ' a capstone,' for the plan we have, as it shall be
revised, it would be well to be prepared for that emergency."

FIRST DRAFTS OF THE GLASS BILL

Mr. Morawetz's plan contains two suggestions: one, as we
have seen, being the regulation of reserves against note issue,
and the other being the creation of sectional reserve banks.
It is greatly to be regretted that Mr. Morawetz has emphasized the first scheme and touched only slightly upon the
second. It is sincerely to be hoped that he will work out in
detail this plan for sectional reserve banks, which he desires
to be at all times in a position to furnish reserve money to the
several banks in their sections by paying checks drawn against
the deposit accounts of the banks or by rediscounting paper
offered by them for that purpose.
I am confident that Mr. Morawetz will soon reach the conclusion that these sectional reserve banks must be endowed
with all the powers and charged with all the duties given under
our plan to the United Reserve Bank branches; otherwise
they will be nothing but safe-deposit vaults which will have
to hold for each bank the exact amount of cash received from
it for safekeeping. T h e y cannot go a single step further
without incurring the gravest danger unless they have some
Central bank to fall back upon, or unless they are themselves
central banks, that is to say, disconnected central-bank
branches. M r . Morawetz tries to cover the weakness of
decentralized reserves by providing that the several sectional
reserve banks be authorized to make arrangements with one
another in order to facilitate exchanges between different
sections of the country. B u t there must be more than this
authority to make arrangements with one another with a
view to facilitating these exchanges. These sectional reserve
banks must in the end act as a unit. Otherwise we shall have
a recurrence of our experiences of the end of 1907 when one
reserve center closed itself against the others, etc. . . .
Should a common foe attack Boston and N e w Y o r k , would
Illinois keep her soldiers at home, or would she differentiate
between Boston and New Y o r k ? The knowledge that all will
stand together gives a feeling of confidence and safety. It is
the same with our financial reserves; they must be held united
under one direction, to be thrown where they are needed, and

THE FEDERAL RESERVE SYSTEM
to be withdrawn from places where they are superfluous. . . .
There must be one big reserve, one note-issuing power, one
big bank, which will be neutral, administering impartially and
economically the funds of the Treasury of the United States,
and issuing notes that are good enough, not alone for the
people, but also for the banks to be counted as cash. Instead
of 20,000 institutions carrying an average of 8 per cent cash
against their deposits and notes, what we need is one big institution with a capital of $ 100,000,000, acting as reserve for all
and maintaining a normal reserve for its notes and deposits
alike of probably 80 per cent instead of 8 per cent. . .

B y 1912, regional plans were comparatively common.
Almost two years before the passage of the Federal Reserve
Act, I wrote the following letter to Mr. J. H. Cowperthwait,
New York, in response to an article he had published in
November, 1911, entitled "Separate Reserve Associations, A
Substitute for the Aldrich Plan."
New York, N. Y . January 12th, 1912
M R . J. H .

COWPERTHWAIT,

NEW YORK, N.

M Y D E A R M R . COWPERTHWAIT:

I am greatly indebted to you for sending me your pamphlet,
entitled "Separate Reserve Associations," and for the flattering dedication which you have written into it.
M r . M o r a w e t z abandoned his proposal for the creation of sectional reserve
banks, to be administered substantially as local central banks, and, in a paper
published in January, 1911 (Academy of Political Science in the C i t y of N e w
Y o r k , Vol. I, No. 2), he recommended a system of divisional banks linked
together b y a central association. In this article he stated that his plan was
merely an adaptation to conditions existing in the United States of the underlying principles of a central bank. T w o years later, on October 20th, 1913,
when M r . M o r a w e t z appeared before the Senate Committee, he recommended
t h a t no more than five or six reserve banks be organized. T h u s , starting with
views wide apart, we had both reached substantially the same conclusions.
A f t e r the publication of An Adventure in Constructive Finance, M r . M o r a w e t z ,
on April 5th, 1927, wrote a letter of protest to Senator Glass. Mr. Morawetz
sent me a copy of this letter, and with his permission it is published herein as
A p p e n d i x Eight.
1

FIRST DRAFTS OF THE GLASS BILL

While I do not agree with you, your point of view is certainly interesting, and the discussion of the problem from
the opposite side can only be helpful in crystallizing the views.
I am frank to say that you have not shaken my conviction,
which is that separate reserve associations will not prove
successful. The function of a reserve association, to protect a
country against gold withdrawals and other adverse effects,
cannot be carried on by separate associations, which would
not, as you point out yourself, have the same point of view, nor
be governed by the same conditions at the same time. The
accumulation of foreign exchange and its resale at a given
moment could not be carried on by scattered associations;
there must be one large and single point of view and cooperation by all, for the benefit of all, if the plan is to succeed.
If you unite your scattered associations under one head and
make them cooperative you will have to make this cooperation so strong as to again produce one single system, such
as the National Reserve Association; if you leave the cooperation between the scattered associations indefinite and
loose, you will have a scramble for reserves in times of need
and a gold premium between those various centers in case of
crises, and you will not have a united front in facing the
enemy at home and abroad.
Approximately a year before the hearings of the Glass
Committee began, my attitude toward a regional scheme was
publicly expressed in a report which, as chairman of a subcommittee on Banking Reform, I presented on February 19th,
1912, to the Republican Club of the City of New York. 1
In this report, the following statement was made:
It might, however, be opportune to emphasize this point
for the benefit of those critics who believe that the solution of
our monetary problem would best be found by creating
separate reserve associations, for which some plan of co1 T h e report is reprinted herein as Appendix Nine.
I t is interesting to
observe how much of it might just as well have been written as an endorsement
of the Reserve System.

THE FEDERAL RESERVE SYSTEM
operation has been very vaguely suggested. Your committee
believes that either a very rigid plan of cooperation will have
to be worked out, in which case it would result in a scheme
substantially the same as the National Reserve Association or
if these reserve associations were to remain fairly distinct
units, the most important advantage from the National
Reserve Association would be lost.

It is idle to conjecture whether or not Mr. Glass and Dr.
Willis, the Committee's expert, were familiar with these discussions. The facts are related here for the purpose of showing how obvious it was, long before the preparation of the first
draft of the Glass Bill was begun, that disconnected regional
reserves could not accomplish the desired end, and that, if
they were satisfactorily tied together, a central banking system
would result. Of course, as shown by the ultimate provisions
of the Federal Reserve Bill, Mr. Glass himself finally arrived
at this point of view.
Early in January, 1913, the Glass Committee began its
hearings and, together with Mr. A. Barton Hepburn, Mr.
Victor Morawetz, and some of my associates of the Citizens'
League, I was invited to appear before it. 1 Those testifying
at the hearings of the House Committee were, of course, anxious to find out from Mr. Glass just how far he felt the
Democratic platform precluded him from adopting the general
principles and some of the details embodied in the Aldrich
Plan. The trend of our examination left no doubt that a new
form of structure was considered a fundamental requirement.
Those of us who urged a plan involving the centralization of
reserves and note issue were confronted with the stereotyped
question whether or not we had read the Democratic platform,
and thus soon realized that the Democratic party was definitely
committed against " the Aldrich Plan or a central bank." The
A statement I presented to the Glass Committee in the course of my
testimony on January 7th, 1913, appears herein as Appendix Three.
1

FIRST DRAFTS OF THE GLASS BILL

matter was further clarified when, in the course of my testimony, the following statement was made by Mr. Glass:
I have not meant to imply that the Democratic party
intended to denounce anything that is good in the Aldrich
Plan or to restrict its representatives in Congress from adopting anything that is good in the Aldrich Plan; but if the
declaration of the party platform was not primarily against
the central reserve feature of the Aldrich Plan, I do not know
what is meant by denouncing the Aldrich Plan.
While, as a matter of loyalty to the work done in cooperation
with Senator Aldrich, I tried in my testimony to advocate a
central reserve system in a somewhat modified form, the
alternative of a regional plan had been freely discussed
among the leaders of the Citizens' League. A t the hearings
before the Glass Committee, Mr. John V. Farwell, the President of the League, and Professor J. Laurence Laughlin, its
chief executive, both offered regional plans. Mr. Farwell
proposed, in general terms, a regional plan with "five, or at
the most seven, district associations" with a "central cooperative board." Professor Laughlin, who had long been
anxious to submit a substitute for the Aldrich Plan, presented
a bill worked out in the fullest detail. It was a plan for six
regional associations with a "Central Treasury Board of
thirty members appointed by the regional associations and
. . . ex officio members to be appointed by the President."
After the House Committee hearings had established the
fact that no scheme would be considered seriously by Mr.
Glass and his colleagues unless it embraced the regional
reserve bank principle, I at once revised the plan which I had
outlined for Mr. Morgenthau a month earlier, suggesting that,
instead of having a single central institution, the United States
be divided into four zones with a bank in each.
These four regional reserve banks were to be mutually
responsible for each other and their profits and losses were to
be pooled in proportion to the capital they represented.

THE FEDERAL RESERVE SYSTEM

There was to be an issuing department at Washington,
which would issue notes under the joint responsibility of the
four regional banks. This issuing department could issue
notes only as long as the joint status of the four regional
reserve banks showed a cover of no less than 3 3 ^ per cent
in gold and the balance in commercial paper.
There was to be established at Washington a Board of
Regents, to consist of the governors of the four regional reserve
banks, four in number, the Secretary of the Treasury, the
governor and vice governor of the issuing department at
Washington, and four members, one from each region (not
being bank or trust company officers) to be appointed by the
President of the United States.
The Board of Regents was to have supervisory and veto
powers over the regional banks. It was to publish twice a
month the condensed statement of the four regional reserve
banks; it was, from time to time, to fix discount rates and to
establish a general policy concerning the investment or sale of
foreign exchange and the purchase or sale of United States
Government bonds and Treasury notes.
A system of free transfers of balances from one branch to
the other was to be worked out, regulating "exchanges between
cities." " T h i s will not be as easy," the memorandum
stated, " a s under the previous United Reserve Plan; the
operation will necessarily be more complicated, but it can
be done, if that is the price for securing otherwise perfectly
adequate legislation."
The memorandum embodying this revised plan was sent to
Mr. Morgenthau on January 10th, 1913; copies were sent
likewise to Colonel House and to Dr. Willis. I have Mr.
Morgenthau's assurance that he sent his copy of the memorandum to President Wilson. 1
Inasmuch as all these plans were submitted fully three months before the
Willis Digest of the first draft of the Federal Reserve Bill was written, it is
very difficult to understand exactly what Dr. Willis had in mind when, in
1

FIRST DRAFTS OF THE GLASS BILL

These details are related not in an effort to determine the
origin or authorship of the plan of regional banks with a controlling board. They are given here merely to show that in the
opinion of all those who were engaged upon the work of devising a bill in accordance with the Democratic platform there
was no course to pursue other than the one embracing regional
divisions with a central board of control. Mr. Glass has said
that, in his first interview on banking reform with Mr. Wilson,
on December 26th, 1912, when he and Dr. Willis spent two
hours outlining a divisional plan to Governor Wilson, the
President-elect towards the end announced that they were
"far on the right track" but "offered quite a few suggestions,
the most notable being one that resulted in the establishment
of an altruistic Federal Reserve Board at Washington to supervise the proposed system." 1 Some commentators have gone
so far as to call President Wilson the spiritual father of the
Federal Reserve Act on account of this suggestion. That is
overstressing his contribution. A controlling board was the
inevitable consequence of a regional scheme, and President
Wilson could not possibly have escaped a conclusion which so
many other students of the problem had been forced to reach.
The first definite suggestion of what Mr. Glass had in mind
in the way of a bill came to me during the latter part of April,
1913. Colonel House at that time sent me a Digest of the
proposed Glass Bill, which had been prepared by Dr. Willis
upon the President's demand and given to Colonel House
by the President. 2 I did not know at that time how the Digest
had passed into Colonel House's hands; he transmitted it to
me with the simple request that I analyze it for him as quickly
The Federal Reserve System, p. 523, he wrote that the Federal Reserve A c t
" was not derived from, or modelled after, or influenced even in the most remote
way by other bills or proposals currently put forward from private sources, but,
on the contrary, it was itself the pattern from which a host of imitators sought
copy."
1 Glass, An Adventure in Constructive Finance, p. 82.
2 See Glass's "Adventure
" p. 49.

THE FEDERAL RESERVE SYSTEM

as possible. I believe my reply had to be given within twentyfour hours. Such short notice did not permit me to make my
analysis as clear and concise as it should have been, but I
could not delay the answer, for I surmised, and subsequent
events have revealed my surmise as correct, that the analysis
was for the immediate information of the President. 1
It is to this analysis of mine of April 22nd, 1913, transmitted
to Mr. Glass by Secretary McAdoo on April 27th, 1913, that
Senator Glass refers in An Adventure in Constructive Finance,
page 49, when he speaks of a "hostile criticism . . . , calling
for radical alterations of the bill, which were not made, and
advocating certain things which were not done." An elaboration of this thought may be found in another passage on the
same page, reading as follows:
He simply was unalterably hostile to certain fundamental
provisions of the federal reserve bill and in plain terms persistently said so. This he had said at the committee hearings
in January, which made it quite futile to have him repeat it in
April. . . .
Inasmuch as my analysis of April 22nd, 1913, pertained to
the Willis Digest of the Glass Bill, a bill which was not in
existence when I testified before the Glass Committee on
January 7th, 1913, Senator Glass's statement that in January
I criticised the fundamental provisions of the Federal Reserve
Bill cannot be explained except upon the assumption that he
had not refreshed his memory when he wrote that statement.
This assumption would also explain his misconception and misstatement concerning the analysis itself. A study of my communication (See Appendix Eleven) will show that the critical analysis given therein, while frank, was written in a
1 T h e Digest, i.e. Dr. Willis's Memorandum on Scope and Effect of H. R.
y
— , and my analysis of it appear herein as Appendix Ten and Appendix Eleven
respectively. Both are recommended to the careful attention of the reader.

FIRST DRAFTS OF THE GLASS BILL

constructive, rather than a hostile, spirit, and that, instead of
"calling for radical alterations, which were not made, and
advocating certain things which were not done," the paper
contained no less than nine suggestions which appear, either
wholly or in part, in the Federal Reserve Act as passed by
Congress. The subject is perhaps of sufficient historical interest to justify citing the instances.
i. According to the Willis Digest of it, the draft of the Glass
Bill, as submitted at that time, provided for twenty Federal
reserve banks 1 "with -possible increase later, as provided."
In my analysis, I made the following statement:
" Y o u can readily see that if you had fifty independent
reserve centers, the plan, for many obvious reasons . . .
would be an impossible one. If you had three, four, or five, I
could see that you could develop a desirable plan. I mention
the large number of fifty, in order to show that this is not a
question of theory, but of practical application."
Further, in closing my argument for a reduction of the
number of reserve banks from twenty to four or five, I stated:
" A definite and national policy can be developed by so small a
number of units and it can be carried out . . . a proceeding
which is practically impossible with a larger number. If
this point of view be adopted, which I do not think is contrary
to the principle of the law as drawn at present, I think a very
creditable measure may be developed. It may even have
some advantages over the Aldrich Plan, because it is possible
that these three or four units, if need be, may have different
rates of discount, while in the Aldrich Plan the one rate for
the whole country may prove embarrassing at times."
The Act as passed by Congress provided for " n o t less than
eight nor more than twelve" regional banks. That Mr. Glass
1 In the Willis Digest, reserve banks are termed " N a t i o n a l Reserve B a n k s . "
In order to avoid confusion, we have changed this designation in quoting from
Dr. Willis* Digest, calling them by their later title, that is, Federal reserve
banks.

THE FEDERAL RESERVE SYSTEM

came to appreciate the advantages of a smaller number of banks
is shown by his statement that he had "hoped the Federal
Reserve Board Organization Committee would start the system with the minimum number 1 of regional banks." In any
case, a reduction from twenty or more to a final minimum of
eight and maximum of twelve evinced progress in the
direction advocated by me.
2. The Willis Digest stated: "Ownership (of the Federal
reserve banks) to be in the hands of the national banks;" . . .
and again "It has not been thought wise to permit state banks to
own stock in the Federal reserve banks"
In my analysis I pointed out that this would be a mistake,
and said:
" T h e basis of the Federal reserve banks ought to be as
broad and as strong as possible, and . . . national banks,
state banks, and trust companies should be admitted to the
privileges of the new organization on equal terms, provided
they submit to certain rulings as to their reserves and to
supervision, and on equal terms as to the holding of stock of
the Federal reserve banks."
The Federal Reserve Act as passed by Congress followed
these recommendations.
3. According to the Willis Digest, the first draft of the Glass
Bill provided that "Federal reserve banks would be allowed to
issue notes . . . to an amount equal to twice the par value of
their capital stock"
M y analysis stated: " I think any limit . . . is inadvisable
and dangerous, because whenever the limit is being approached
helplessness stares the country in the face, and a panic may
ensue."
The Act in its final form removed any such limitation.
4. On the other hand, in connection with the foregoing
provision of the tentative bill, I proposed that the notes be
1 See Glass's letter to Delano of November 13th, 1915.
Constructive Finance, p. 260. See also Appendix Twelve.

An Adventure

FIRST DRAFTS OF THE GLASS BILL

limited only by a prescribed gold reserve, and suggested 3 3 %
per cent.
The Federal Reserve Act as passed by Congress provides
that, in addition to the commercial paper against which notes
are issued: " E v e r y Federal reserve bank shall maintain reserves in gold . . . of not less than forty per centum against
its Federal reserve notes in actual circulation, and not offset
by gold or lawful money deposited with the Federal reserve
agent and thirty-five per centum against its deposit liabilities."
5. In connection with the disposition of the United States
bonds against which, under the National Bank Act, national
banks were allowed to issue their own notes, the Willis Digest
stated: "Banks now holding the bonds may offer these bonds for
redemption or conversion into three per cent bonds at a rate not to
exceed one-tenth of their holdings each year. . . . At the end of
ten years other holders of bonds would be allowed to convert them
into ?s."
In my analysis, I maintained that this was a weak plan for
several reasons. As a substitute, I suggested a plan which, in
principle, was followed by the Federal Reserve Act.
This is the one recommendation of mine which Senator Glass
admits to have been embodied in the Federal Reserve Act.
6. The Willis Digest stated that the proposed bill contained
a provision for the "transfer of reserves from existing national
banks in reserve and central reserve cities, to Federal reserve
banks."
M y analysis stressed the point that the proposal was
objectionable in so far as it provided that reserve balances with
reserve agents in reserve and central reserve cities were to be
converted into cash or into balances with the reserve banks.
That would have led to enormous credit contraction, unless the
member banks had at once recouped themselves by rediscounting with the reserve banks an aggregate approximately equalling the total amount of balances so withdrawn from reserve
agents. This was plainly undesirable, and if only cash in

THE FEDERAL RESERVE SYSTEM

vault and balances with reserve banks were to constitute the
future lawful reserve of member banks, then the alternative
was a corresponding reduction of the reserve requirements so
that, while balances in reserve and central reserve cities were to
be outlawed as legal reserves, the balances themselves would
not be violently disturbed.
In keeping with the thoughts here expressed, the first draft
of the Glass Bill was changed, and the Federal Reserve Act
ultimately provided for a reduction of the required reserves
from 15 per cent, 25 per cent, and 25 per cent—to 12 per cent,
15 per cent, and 18 per cent for country banks, reserve city
banks, and central reserve city banks respectively.
7. The Digest had it that the draft of the Glass Bill allowed
only fourteen months for completing the process of transferring
the reserves into the reserve banks.
In my analysis I said, "fourteen months is a very short
time to adjust conditions."
In the Federal Reserve Act, the period was lengthened to
thirty-six months.
8. The Willis Digest stated that the draft of the proposed
Glass Bill provided for the paying of interest on government
deposits.
In my analysis I said, " I doubt the wisdom of allowing
interest to the Treasury on its deposits."
The Federal Reserve Act did not provide for the payment
of such interest.
9. The Digest did not mention any limitation of the dividends which might be paid to stockholders.
In my analysis I stated that this limitation was "absolutely
necessary."
In the final draft of the Act dividends were limited to 6 per
cent, and excess earnings beyond 6 per cent, after the allowance
of a certain surplus to the reserve banks, were to go to the
United States Government as a franchise tax.
M y analysis of the Willis Digest was written on April 22nd,

FIRST DRAFTS OF THE GLASS BILL

1913. A month later, on May 21st, I sailed for Europe and,
quite unexpectedly, found Colonel House a passenger on the
same boat. I remember that I spoke to him about a conference
I had had with Mr. Untermyer and Senator Owen at the former's invitation, on May 18 th, three days before my sailing, at
which I had been interrogated at great length on questions of
monetary reform. Both Mr. Untermyer, who was carrying
on the " M o n e y T r u s t " investigation at that time, and Senator
Owen, who was the prospective Chairman of the Senate Committee on Banking and Currency, had shown a deep interest
in the subject. I informed Colonel House that Senator Owen
had indicated the rough outlines of a bill which he had drawn
up and which tended strongly in the direction of creating a
government agency for the issuing of currency, and that Senator Owen had tried to convince me of the superiority of his
scheme over the Aldrich Plan or over a plan such as he seemed
to believe to be under consideration by Mr. Glass. I also told
Colonel House that, at the end of our long discussion, I had
explained to Senator Owen that I could not endorse his advocacy of an absolute government control of the issue of
money, and that I believed a sound and practical regional plan
could be evolved, observing the main principles of the Aldrich
Plan, provided decentralization did not go too far.
Colonel House, in turn, showed me in confidence a plan
which had been given to him with the request that he express
an opinion concerning it. He asked me to study this anonymous bill, which I surmised had been prepared by either Mr.
McAdoo or Mr. John Skelton Williams, or both. As a matter 1
of fact, in his book The Federal Reserve System, Dr. Willis
mentions these two gentlemen as the authors of it. 1
During this voyage to Europe on the Mauretaniay I wrote a
memorandum in which I tried to disabuse the minds of Mr.
Untermyer and Senator Owen of the views they had expressed
in their talks with me, adding at the end an argument against
1

Willis, op. cit., ch. X I , p. 195.

THE FEDERAL RESERVE SYSTEM

the anonymous bill that had been shown to me in confidence
by Colonel House. This document I sent to Mr. Untermyer,
asking him to pass it on to Senator Owen. 1 Colonel House
received a copy of this Mauretania memorandum and seemed
in entire sympathy with it. I felt confident at the time that
he would send my adverse criticism of the anonymous bill
" b a c k home'' to headquarters. Evidence since published
shows that I was correct in this assumption. It is not impossible, therefore, that my Mauretania memorandum criticizing
the "anonymous bill" may have been helpful in breaking down
the efforts of Mr. Glass's opponents.
T o the best of my recollection, I saw the "Glass B i l l " for
the first time some weeks after its publication in June, 1913.
The first print of it reached me while I was in Europe. As
published, the bill showed certain improvements over the
Willis Digest which I had seen earlier. One of the encouraging
changes was the reduction of the number of reserve banks
from twenty to fifteen. Some of the major changes, however,
1 M y letter to Mr. Untermyer enclosing the Mauretania
memorandum for
Senator Owen will be found in Appendix Thirteen. For the memorandum
itself, see Appendix Fourteen. These documents have been reprinted here as
part of the evidence for close students of the subject; the ordinary reader may
safely pass them over.
Senator Owen, in his book, The Federal Reserve Act, pp. 81-83, (Century
Company, New Y o r k , 1919) refers to my talk with him as follows:
" I recall spending seven consecutive hours discussing with Mr. Paul Warburg the question of whether the Reserve notes should be the notes of the United
States Government or bank notes, he taking the position that they should be
notes of the Federal Reserve banks and not United States Treasury notes, he
contending that these notes would be the obligations of the United States and
would weaken the credit of the United States when the United States came
to borrow money from the banks or from the people. I took the position that
the currency of the country ought to have behind it the taxing power of the
nation, that the United States should control the currency, . . . and that the
Treasury notes would mobilize capital, so that it would be easier for the
Government to negotiate its loans with such notes operating as a medium for
transfer of credits conveniently through the banks which would be stabilized
by this system."

FIRST DRAFTS OF THE GLASS BILL

were deeply alarming and distressing. For example, the
published draft provided that Federal reserve notes would be
issued as "obligations of the United States," and, whereas
the Willis Digest had mentioned a provision for a Reserve
Board of which one-third of the membership would consist of
appointees of the reserve banks, the published draft provided
for a Board of seven members, all of whom were to be appointees of the President. Of these seven, three were to be the
Secretary of the Treasury, the Secretary of Agriculture, and
the Comptroller of the Currency—a hopelessly political
Board. Credit for these fatal changes has since been claimed
by Senator Owen, although Dr. Willis places the responsibility
on Mr. Bryan. One is inclined to assume that they shared
honors equally. Senator Owen, in his book, Hhe Federal
Reserve Act, gives the following account: 1
The Glass tentative draft avoided the establishment of a
central bank with branches, and provided twenty Federal
reserve district banks under control, however, of a Federal
Reserve Board, with forty out of forty-three members chosen
by the banks.
Section 10 of this draft provided for a Federal Reserve
Board, consisting of forty members chosen by the member
banks and their stockholders, and the Secretary of the Treasury, the Comptroller of the Currency, and the Attorney
General of the United States. Mr. Glass, however, proposed
to amend this draft to alter this provision so that the Federal
Reserve Board should be selected by the directors of the
National reserve banks, the directors of the Federal reserve
banks being selected by the member banks and their shareholders, either directly or indirectly.
I was strongly opposed to either provision because it would
not give to the United States control of the system. In effect
this control of the system I regarded as practically the same
as the Aldrich Bill, which would have put the management of
Owen, Robert Latham, Hhe Federal Reserve Act, pp. 72-79.
Company, New Y o r k , 1919.
1

T h e Century

120 THE FEDERAL RESERVE SYSTEM
the system in the hands of persons chosen to represent the
banks, and I insisted that the control of the system was a
governing function to be exercised alone by the Government
of the United States. . . .
Mr. Glass and myself discussed the matter very freely and
fully, but could not reach an agreement. As far as he felt it
safe to go was to have a Federal Reserve Board of seven,
four members of which were to be chosen by the Government
and three by the banks.
Upon this vital difference we determined to appeal to the
President. We had a hearing one night at the White House,
in the Cabinet Room, Mr. Glass urging his view and I pressing
the proposal that the Government should control the appointment of every member of this Board. After a discussion of
two hours, approximately, the President coincided with my
contention that the Government should control every member of the
Board on the ground that it was the function of the Government
to supervise this system and no individual, however respectable,
should be on this Board representing private interests.
Secretary McAdoo was present at this interview and agreed
with the view which I presented. . . .
The Glass draft, Section 21, followed the Monetary Commission Bill and provided that all moneys of the general fund
of the Treasury should, after six months, be deposited in the
National reserve banks and disbursed through such banks.
This I was unwilling to agree to, believing that the Government should retain complete control of its receipts and disbursements as a further check on the reserve banks by the
Government. . . .
Section 23 of the original proposal by Mr. Glass authorized
the National reserve banks to receive from the Federal Reserve
Board Federal reserve notes, but these notes were to be the
bank notes of the Federal reserve banks as in the Monetary
Commission Bill, and not the notes of the United States
Government.
I objected to this provision, insisting that the notes should
be United States Treasury notes and treated as such, for the

FIRST DRAFTS OF THE GLASS BILL

101

reason that in this way the United States Government would
be able to control these notes and the banks would not be able
to control them, and Senate Bill 2639, a n d House Bill 6454,
introduced June 26, 1913, by Mr. Glass and myself, made
such notes the obligations of the United States, to be issued
at the discretion of the Federal Reserve Board solely for the
purpose of making advances to Federal reserve banks (Section
17).
On this point I had the active assistance of Hon. W. J.
Bryan, Secretary of State.
In a letter to Mr. Samuel Untermyer, dated M a y 14th, 1927,
Senator Owen completes the story as follows: " I immediately
called on William J. Bryan at Calumet Place and obtained
his cooperation to correct this grave error on the currency of
the Willis draft. He assisted me and Joseph P. Tumulty,
then secretary to the President, cooperated and my views
prevailed. These fundamentals being reconciled, Mr. Glass
and myself, on June 26th, 1913, introduced identical bills as a
basis for discussion in Congress."
The bill, with its "fundamentals reconciled," now became
known as the Owen-Glass Bill.
Before Mr. Glass consented to these harmful changes, he
had presented a bill which, barring a dangerous tendency
towards excessive decentralization, was, in the main, sound
and highly commendable. It was the victory of the OwenBryan wing, and the insertion of sections repugnant to the
business and banking community, that caused alarm and
called forth determined opposition on the part of business men
and bankers.
M y own impressions concerning the Owen-Glass Bill, and
some constructive suggestions, were laid down in a sketch of an
article which, at the end of July, 1913, I enclosed in a letter to
Colonel House from Sils Maria, Switzerland, as follows:

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THE FEDERAL RESERVE SYSTEM
Sils Maria, July 30th, 1913
D E A R COLONEL HOUSE:

. . . While I am up here in the mountains I have been
fool enough, instead of playing, to write a short article concerning the Owen-Glass Bill and an argument for some
modifications. I am sending you the original herewith and
am forwarding a copy to my secretary by same mail so that
he may have some clean copies made. I do not know whether
I shall have the article published, because I am too much
out of touch with the controversy now going on, and if I knew
that there was no hurry and danger in delay, I would prefer
not to go into print before my return at the beginning of
September. But I have felt that I should write this argument
for President Wilson and Mr. McAdoo. They cannot possibly
believe that these Owen-Bryan heresies can be forced upon our
poor country without the worst consequences politically and
economically. I rather think that it would be welcome to
them if public opinion forced them to modify the bill, which
can be done, as I have tried to show, without destroying the
basic thoughts of the present bill. Moreover, I think I owe
it to myself to go on record with respect to this Owen-Glass
Bill. . . . I shall ask my secretary to send you a few copies of
my brief. I leave it to your own judgment whether I should
send copies to Messrs. Glass and Owen (or whether you would
conveniently do so) or possibly also to Senator Gore. Could
you send me a week-end cable giving your impressions concerning my paper and your free criticisms of the same, and
also telling me what I could do further in the matter. Many
sincere thanks in advance. . . .
Yours very sincerely,
PAUL M .

WARBURG

In answer to this communication Colonel House cabled me,
on August 12th, stating that the Glass Bill, in the interim,
had undergone important changes and advising against the
publication of my paper. By that time, indeed, the Glass
Bill, remodelled in several respects, had been endorsed by the
Democratic caucus.

FIRST DRAFTS OF THE GLASS BILL

103

I then revised the Sils Maria memorandum, entitling it
" T h e Owen-Glass Bill as Submitted to the Democratic Caucus," and from Europe I sent typewritten copies of it to Mr.
Irving T . Bush and Mr. Edmund D. Fisher, with both of whom
I was at that time closely associated as a member of the Citizens' League for the promotion of currency reform. Copies
were likewise sent to Colonel House. Through these friends,
copies of the article were forwarded to President Wilson,
Mr. McAdoo, Mr. Glass, Senator Owen, Dr. Willis, Mr.
Hepburn, and to the bankers—very few in number—who were
being consulted by Mr. Glass and who were familiar with
the status of the bill.
Colonel House's letter acknowledging receipt of the article
is, perhaps, not without interest:
October n t h , 1913 1
DEAR M R . WARBURG:

Thank you for sending me your criticisms and suggestions
with regard to the Owen-Glass bill. It comes this morning,
and I shall read it with a great deal of interest.
I have been consistently advising the reduction of reserve
banks, and I have also advised the reduction of the ex-officio
members from three to two, and an increase of the members
to be appointed by the central banks2 with a lengthening of
their terms from eight to ten years so that no President can
change the personnel during a single term of office. Just what
will happen finally lies in the lap of the gods; but I feel sure
that a currency measure of some sort will be enacted before
many moons.
I wish you were here so that we could have your valuable
advice.
With warmest regards and best wishes, I am,
Faithfully yours,
E . M . HOUSE
T h e date, October n t h , 1913, seems to have been an error on the part of
a clerk or secretary; it should probably have read September n t h , 1913.
2 i.e., Federal reserve banks—Author.
1

104

THE FEDERAL RESERVE

SYSTEM

In its revised form, my article on the Owen-Glass Bill 1
was published in the North American Review of October, 1913,
not, however, without my having first inquired of those in
charge of the legislation whether publication of my criticisms
and suggestions at that late date would "rock the boat" or
embarrass them. The only earlier publicity that my article
had received had been through an unauthorized publication of
parts of it by the Journal of Commerce, which, through channels
unrevealed to me, had secured one of the copies confidentially
distributed.
In this chapter a rather full account of my relation to the
Federal Reserve Bill in its earliest stages, and particularly of
my connection with Colonel House in regard to it, has been
given in order to refute certain statements which have been
made by Glass and Willis in their respective books—statements
which are misleading and which have done much to create
false impressions.
1 The
Owen-Glass Bill as Submitted to the Democratic Caucus, North
American Review, October, 1913; Essays on Banking Reform in the United
States, Proceedings of the Academy of Political Science in New Y o r k , Vol. I V ,
No. 4. See also Volume T w o , p. 237.

CHAPTER

FROM OWEN-GLASS BILL TO F E D E R A L
RESERVE ACT
U R I N G the summer and early fall of 1913 public discussion of the proposed Federal Reserve legislation
became very intense. The press had taken a deep
interest in it and many associations of business men and
bankers had sent delegations to Washington to present resolutions and to urge their views. After the bill had passed the
House, the main efforts of those most interested in the measure
were centered upon the members of the Senate Banking and
Currency Committee; upon Mr. Glass, who, it was hoped,
might still be persuaded to consent in the Conference Committee to a modification of some of the extreme features of the
House Bill; and, finally, upon the President and Mr. McAdoo,
who were expected to exercise an important influence in the
ultimate formulation of the law.
The bill, at every stage of its development, represented a
great triumph of the fundamental principles for which banking
reformers had striven, namely, concentration and mobilization
of reserves combined with an elastic note issue. Barring a few
dissenting voices, the regional reserve bank idea met with
approval, and the effort of the lawmakers to strengthen the
influence of the government in the administration of the proposed System was generally endorsed. There was strong and
fairly united opposition, however, to excessive decentralization
by the creation of too large a number of Federal reserve
banks, as well as to complete political control of the Board.
Moreover, the issue of the Federal reserve banks' circulation
as the obligation of the United States—a concession made to
the extreme Bryan wing—was particularly objectionable to
those representing independent business opinion.

105

106

THE FEDERAL RESERVE SYSTEM

While no doubt there were certain groups of bankers who,
in voicing their objections and in formulating specific recommendations, were influenced by selfish considerations, an
unbiased study of the record will demonstrate the fact that the
suggestions made by most critics were prompted by a sincere
desire to be helpful and constructive and to save a most
promising law from being maimed by concessions to extreme
political demands. An examination of the article mentioned
in the preceding chapter, " T h e Owen-Glass Bill as Submitted
to the Democratic Caucus," will show that this was the spirit
in which that criticism was written. I have no doubt that,
like many other contributions of the day, it would now be
taken as an expression of the non-political thought as opposed
to the political thought. Reprint of this article may be
found in Volume Two of the present work. A summary of
the article is presented in the following pages for those wishing
to judge for themselves where the non-political thought was
permitted to assert itself at the time of the enactment of the
law, or later, and where it was defeated and left to continue
knocking at the System's door, as it does to-day. 1
The article began as follows:
Now that we have before us the Owen-Glass Bill in the
definite form in which it has been submitted to the DemoSenator Glass has persistently used this article of mine as a justification for
describing me as a tenacious disciple of the central bank gospel, as represented
in Senator Aldrich's Plan, and as a "hostile critic" unalterably opposed to
certain fundamental provisions of the Federal Reserve Bill. A s early as 1915,
he recorded the statement, " Mr. Warburg did not draft a sentence of the l a w "
(Letter to The World, Willis, The Federal Reserve System, p. 542), In 1926,
after referring to me as a "hostile critic" who " b o m b a r d e d " the bill, he
stated that all but one of my recommendations to the Senate Committee were
"expunged from the bill in conference" by the House conferees. ( A n Adventure in Constructive Finance, p. 210.)
Dr. Willis likewise describes me as " a critic whose recommendations were
not a d o p t e d " (Willis, The Federal Reserve System, p. 530); indeed, he goes so
far as to say, " In fact, there were few portions of the bill which Mr. Warburg
considered at all satisfactory" (ibid., p. 432). In regard to these matters, the
present chapter will enable the reader to draw his own conclusions.
1

OWEN-GLASS BILL

107

cratic caucus, it may be interesting dispassionately to analyze
it and to establish wherein it differs from and wherein it agrees
in the main points with the bill of the Monetary Commission.
It is a source of great satisfaction to note that, as the
Republican party had to outgrow and to abandon its old
doctrine of "currency issued by national banks against
government bonds," so the Democratic party had to relinquish
its old heresies of the 16 to I silver standard and the guarantee
of deposits. Both parties are now agreed that reform must
provide for " a currency"—to use President Wilson's own
words— "not rigid as now, but readily, elastically responsive
to sound credit, the expanding and contracting credits of
everyday transactions, and the normal ebb and flow of
personal and corporate dealings."
There is a further and even more important progress. Both
parties have now recognized that it is not the "currency"
which is the exclusive or even the chief factor that needs
reform, but that, indissolubly interwoven with this question
is the problem of rendering available and efficient the now
immobilized reserves of the country, and of mobilizing and
modernizing the now illiquid American bills of exchange by
creating a "discount market" and "bank acceptances."
Both parties are thus in agreement as to the ends to be striven
for; more than that, they are agreed even as to the technical
means by which they must be attained. Accordingly, both
plans provide for concentration of reserves, for the creation
of an organization for the purpose of rediscounting commercial
bills, for the substitution of an elastic note for the present
national bank currency, and for a conversion of the 2 per cent
government bonds into 3 per cent bonds.
The country is to be congratulated upon seeing these theories and principles clearly established; it remains the nation's
duty conscientiously to watch that the aims now professed
by both parties be carried into effect in the best possible
way, and that they be not lost through ignorance, prejudice,
or considerations of party policy. Where there is agreement
as to the fundamentals, it should not be impossible to reach

108

THE FEDERAL RESERVE SYSTEM
an accord as to the means, provided they be honestly sought
for.

Far from blindly endorsing the National Reserve Association Plan, I frankly admitted in that article that, in my opinion, Senator Aldrich had gone too far in his efforts to maintain
the Republican doctrine of keeping the government out of
business. But, while I approved of the effort of the Democratic lawmakers to strengthen governmental influence, I
warned them against making the Federal Reserve Board a
politically controlled body, stating as follows: "There can be
no doubt but that, as drawn at present, with two Cabinet officers members of the Federal Reserve Board, and with the vast
powers vested in the latter, the Owen-Glass Bill would bring
about direct government management." It will be remembered that under the Owen-Glass Bill, as then drawn, two
Cabinet officers and the Comptroller of the Currency were to
constitute three of the proposed seven members of the Board,
but that, in its final form, the Federal Reserve Act provided
for only one Cabinet member on the Board.
In that article, I heartily endorsed a regional reserve bank
plan, but uttered a warning against over-decentralization,
expressing the belief that a maximum of six Federal reserve
banks might prove successful in creating independent centers
outside of New York in which discount markets might develop,
whereas, if there were twelve reserve banks, New York
would undoubtedly remain the sole money center. Moreover, I stated that a system of twelve autonomous reserve
banks would prove a very unwieldy instrument for the Board
to handle, and that it would offer great difficulties with regard
to open-market operations, gold policies, and foreign relations.
In subsequent chapters, we shall see how far these prophecies
have proved true.
The article criticized the plan proposed in the Owen-Glass
Bill for dealing with the national bank currency and set forth
the following suggestions:

OWEN-GLASS BILL

109

. . . The entire national bank currency ought to be converted into elastic currency from the beginning. What do we
gain by spreading this conversion of bonds and notes over
twenty years? There is every argument for a prompt
conversion.
The present proposition is unsatisfactory for both the
government and the banks. If we consider that within the
last twenty years English, French, and German government
bonds have gone down about 20 per cent, anybody would be
a bold man who would dare to foretell at what price United
States Government 3 per cent bonds will sell within the next
twenty years. If the United States should embark upon any
national enterprises entailing a material issue of bonds, the
price certainly would go down. Should United States 3 per
cent bonds sell below par, the national banks would, of course,
not convert. The national bank note issue, in that case,
would remain outstanding for twenty years, when the United
States would have to sell a 3 ^ per cent or possibly 4 per cent
issue to take the place of the old 2 per cent bonds.
History has entirely vindicated this criticism.
In addition, the following recommendation was made:
Let the four or six Federal reserve banks jointly assume
the national bank note issue and let them take over jointly, in
proportion to their respective capitals, the 2 per cent government bonds. Let the government convert half of the amount
so taken over into 3 per cent twenty-year bonds, the other half
into one-year 3 per cent Treasury notes of the United States.
As long as their charters last the Federal reserve banks would
jointly bind themselves, whenever these one-year notes
matured, to buy at par the same amount of new one-year 3
per cent Treasury notes.
This procedure was adopted, but, unfortunately, in a halfhearted way.
I protested vigorously against the plan of making Federal
reserve notes obligations of the United States instead of making them obligations of the Federal reserve banks guaranteed by the United States. I did not join the numerous critics

110

THE FEDERAL RESERVE SYSTEM

who charged that the note issue as proposed involved the
creation of "fiat money/' but I feared that the theory of the
issue of the currency by the government would strengthen the
clamor for government control of the System. This fear
was justified.
I approved of the principle followed in the Owen-Glass Bill
of fixing a definite percentage of the deposits of member banks,
as the measure of the reserve balances to be maintained by
them with their Federal reserve banks, but I protested against
the provision stipulating that a certain percentage of member-bank deposits should be immobilized in the vaults of
member banks.
With the end in view of strengthening the Federal reserve
banks and thereby strengthening the member banks themselves, the article stated:
. . . The balances with the Federal reserve banks, that is,
their cash holdings, ought to be increased as far as possible.
The banks ought to hold only as large or as small an amount of
actual cash as they actually need for their daily business, and
all unnecessary cash should be deposited with the Federal
reserve banks. Allowing for an ample supply of till money,
but leaving the determination as to its size to the free judgment
of the banks . . .
The very object of the law should be to reduce to the smallest
possible sum the amount of cash hoarded in the banks and to
increase to the largest possible size the concentrated reserves
in the Federal reserve banks. But it would be a mistake to
attempt at this time to do more than to free and to consolidate
the cash reserves, now wastefully impounded in the banks. It
would be inadvisable to add to these vast sums substantial
portions of the cash balances now kept with reserve agents as
part of the legal reserves. These balances are now actively
employed by the reserve city and central reserve city banks;
if withdrawn from these banks and replaced by actual cash in
vault, or by balances with the Federal reserve banks, the
accommodation heretofore granted to the community by the

OWEN-GLASS BILL

111

reserve city and central reserve city banks will have to be
provided by the Federal reserve banks . . .
If the new law eliminates these bank balances (with reserve
agents in central reserve and reserve cities—Author) as
reserves, it ought to provide for a corresponding reduction of
the reserve requirements . . .
The first part of this recommendation i. e., the plan to concentrate the largest possible amount of lawful money in
the Federal reserve banks, and to end the obligatory decentralization and immobilization of reserve money in the vaults
of the member banks, was not adopted at the time of the
passage of the Federal Reserve Act. The Senate had been
prevailed upon to embody in the bill a provision in keeping
with my proposal, but Mr. Glass was bitterly opposed to it
and the provision was expunged in conference. We shall see
in a subsequent chapter how the plan urged by me ultimately
had to be adopted. This all-important and hotly controverted question was covered in so many speeches delivered by
me both before and during my service on the Federal Reserve
Board that it is scarcely necessary to elaborate it here. The
reader may be interested, however, in an abstract of a letter,
dated December 5th, 1910, reprinted herein as Appendix
Fifteen, containing a long argument addressed to Senator
Aldrich, at a time when he, like Mr. Glass at a later date, was
still unwilling to include in his bill a provision permitting
member banks to count the notes of the National Reserve
Association as reserve money. In the end, it will be remembered, the Aldrich Bill, as introduced in Congress, contained
provisions allowing the notes to be freely exchanged for gold
and to be counted as reserves.
The second part of the recommendation, to the effect that
"required reserves" should be reduced if balances with reserve and central reserve agents were to be outlawed, was accepted by those in charge of the Federal Reserve Bill. A
similar suggestion had been embodied, in my analysis of the

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THE FEDERAL RESERVE SYSTEM

Willis Digest of the second draft of the Glass Bill, addressed
to Colonel House on April 22nd, 1913, wherein I coupled it
with the suggestion that it might be made obligatory upon
member banks to carry in the discount market a portion of the
balances customarily kept in reserve and central reserve cities.
Had some such plan of forcing reserve funds into the bill
market been adopted, we might have succeeded in lessening the
congestion of the country's liquid funds on the Stock Exchange
of New York, which congestion, contrary to the avowed intention of the framers of the Act, has assumed larger and larger
proportions.
A further article, 1 which was published simultaneously but
separately, dealt with the question whether or not Federal
reserve notes should be payable by the reserve banks " i n
gold" or "in gold or lawful money" when presented for payment at the Federal reserve banks. It is unnecessary here
to repeat the argument on this question, inasmuch as in this
respect I supported the plan as it was then proposed and as
it stands to-day.
As stated before, there were many other contemporaneous
essays and reports dealing with the proposed Federal Reserve
System in a similar spirit and on substantially the same lines
as my article. It is impossible for me to enumerate them or
to analyze them in detail; it may be sufficient to cite one interesting illustration. Professor E. W. Kemmerer, now of
Princeton University, as currency and banking expert to the
National Progressive Service Headquarters, wrote on August
25th, 1913, a report on the Owen-Glass Bill containing a long
list of proposed changes, among which we find the two following recommendations:
1. A reduction in the minimum number of regional banks
from twelve to five or six.
1 The Owen-Glass Bill: Gold or Lawful Money, Note Issue, Government Bonds
and Similar Questions, New Y o r k ; Essays on Banking Reform in the United
States, Proceedings of the Academy of Political Science in the City of N e w Y o r k ,
Vol. I V , No. 4; pp. 604-612. See also Volume T w o , p. 293.

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2. Elimination of the section providing for the advisory
council and insertion instead of authority for regional banks to
elect two members of the Federal Reserve Board. 1
It is worth noting that in the two suggestions cited above,
Professor Kemmerer's mind, which I have reason to believe
Mr. Glass regarded as that of a friend, and mine, which he
classed as that of a "hostile critic," traveled along exactly
the same lines. We were both, with others, exponents of the
non-political thought.
On my way home from Europe, towards the middle of October, 1913, I prepared a technical Memorandum dealing specifically with the rediscounting sections of the Owen-Glass Bill
and with the clauses concerning open-market operations,
which, on account of their technical nature, had not been dealt
with in my articles on that bill. (See Appendix Sixteen.)
One of the recommendations outlined in this memorandum
concerned Section Fourteen of the Glass Bill and may be taken
as an illustration of the kind of suggestions the memorandum
contained. Section Fourteen is now Section Thirteen of the
Federal Reserve Act. As passed by the House on September
18th, 1913, the first paragraph of that section read as follows:
Any Federal reserve bank may receive from any member
bank deposits of current funds—or checks and drafts upon
solvent banks payable upon presentation. . • . 2
The second paragraph read:
Upon the endorsement of any member bank any Federal
reserve bank may discount notes and bills of exchange
arising out of commercial transactions. . . . 2
For those who are familiar with the operations of the Reserve
System, it is hardly necessary to explain the grotesqueness of
these original provisions. These provisions would have permitted a member bank in Pensacola to deposit checks, or to
1
2

For my recommendation in this regard see page 258 of Vol. II.
T h e italics are mine—Author.

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THE FEDERAL RESERVE SYSTEM

rediscount paper, in the Reserve Bank of San Francisco, or in
any other of the " n o t less than twelve" reserve banks then
proposed. It is quite impossible to envisage how, in such
circumstances, it would have been practicable to organize a
safe and properly functioning check-clearing system, or to
exercise any supervisory control over the member banks of the
System, or even over the reserve banks themselves. In my
October memorandum, I urged that the first of these paragraphs be changed to read:
Any Federal reserve bank may receive from any of its
member banks and from the United States deposits of current
funds.1
and that the second be altered as follows:
Upon the endorsement of any of its member banks any
Federal reserve bank may discount notes, drafts, and bills of
exchange arising out of commercial transactions.1
Copies of this October memorandum were sent to Senator
Weeks on October 30th, 1913, to Senator Owen, and to
Secretary McAdoo on November 6th, 1913. Four days later,
on November 10th, 1913, Senator Owen informed me, when we
met on the train coming from Washington to New York, that
my recommendation concerning these paragraphs of Section
Fourteen, now Section Thirteen of the Federal Reserve Act,
had been followed in the Senate draft of the bill. Shortly
thereafter, a copy of the memorandum was received by Mr.
Glass.
The bill, as finally agreed upon in conference and as enacted
into law, accepted these changes as proposed by me. While
the alterations in question comprised only a few words, their
fundamental significance is evident. They restricted the
rediscount operations of every reserve bank to its own district, and they permitted a member bank to have access to the
clearing system solely through transactions with the reserve
1

T h e italics are mine—Author.

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115

bank of its own district—a procedure based upon a theory
which has become the fundamental principle of the Reserve
System as it stands to-day.
During the month of November, 1913, my personal relations
with Mr. Glass began to gain in intimacy. Of this, the
letter addressed to me by him on November 22nd, 1913, a
reproduction of which appears on the next page, may serve
as an illustration.
Two letters I wrote to Senator Glass in connection with the
October memorandum mentioned above are given here for the
light they may throw upon the problems in hand at that time.
New York, December 15 th, 1913
DEAR MR.

GLASS:

I send you herewith a copy of the memorandum which I
worked out on the steamer some six weeks ago, when I
returned to this country, and which I sent to Senator Owen.
A good many points have since been covered, but as you said
that you wanted to have this memorandum as soon as possible,
upon the very untrue statement that your mind works slowly,
I send it to you as it stands, not having the time to-day to
rewrite it. On and after page 9, you will find some remarks
about the collections. Will you please tell me, before I begin
to redraw the Rediscount Clause, as you have asked me to do,
what is your wish with respect to open-market operations.
Are foreign bills to be purchased from non-member banks or
not (provided bills bear three responsible signatures) ?
Are American promissory notes which bear the endorsement of a member bank to be purchased in the open market
by the Federal reserve bank from firms other than member
banks? In other words: If L. & Co. offer a bill for sale to the
Federal reserve bank, issued by Swift & Co. and endorsed by
the Fourth National Bank of New York, should the Federal
Reserve Bank of New York be permitted to buy such a bill
from L. & Co. ?
I take it that your understanding is that without the
endorsement of the member bank such bill would not be

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THE FEDERAL RESERVE SYSTEM

Sixtv-THIBO ConMm
CAHTCM (KASS.VA..CHAIRMAN.

:hael r.PHHAN.MAs*.

rRANKPwqoos.it

HOUSE OF REPRESENTATIVES,
COMMITTEE ON S A N K ! N O A N D C U R R E N C Y ;

WASHINGTON.

Vovember 22, 1913

Mr. Paul M . Warburg,
c/o Kuhn, Loeb & Co.,
Kew York City.
My dear Mr, Warburg:
I beg to acknowledge yours of November 21
with your letter to Senator Owen enclosed. I have
read your letter with Interest and will keep in mind
the view that you present as to gold notes,
I wish I might talk with you again before
very long on some of the details of the currency legislation, By the way, I have not yet received the
printed copy of the Senate amendments with your proposed alterations. Did you leave it with the Secretary of Treasury for me?
With cordial regards,
Sincerely yours,

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117

eligible as a rediscount for the Federal reserve bank, though
the wording of the bill is not clear in this respect at present.
As to bank acceptances, my conception is that acceptances
of member banks and of private banks may be purchased by
the Federal reserve bank if they bear at least the signature
of one member bank. In other words: If A. & Co. accepted a
bill drawn against a shipment of tea from China, and if that
bill were endorsed by the National City Bank, it would be
eligible; if the National City Bank would be the acceptor and
A. & Co. would be the endorser, should it be eligible?
Please give me your views in this respect, so as to be clear
what you wish me to convey in redrawing this particular
clause.
I enjoyed my interview with you very much indeed, and
appreciated your courtesy in permitting me to counsel with
you.
I am, with kindest regards,
Very sincerely yours,
PAUL M .

WARBURG

P.S. I enclose copy of a letter from the President of the
Comptoir National of Paris, a large French bank. You will
see that they all agree. I saw Sir George Paish to-day—the
London expert—he agrees absolutely that Federal reserve
notes should be counted as reserves of member banks.
New York, December 18 th, 1913
DEAR M R . GLASS:

I have not heard from you concerning the rediscount clause,
and suppose that you are kept so busy by conferences that it
is impossible for you to find the time to answer the questions
which I put to you, and I therefore send you the clause as far
as I could draw it without your reply.1
I have made a substantial change only in the first clause of
Section Fourteen. I think the whole Section would be very
much simplified if you would add, at the end of Section
Three: "The local business at each Federal reserve bank
point shall be organized and carried on in the same manner as
1

For the clause as drawn, see Appendix S e v e n t e e n — A u t h o r .

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THE FEDERAL RESERVE SYSTEM
that of the branches." This will permit you, in Section
Fourteen, to speak of branches only, as in a great many cases
including the Federal reserve bank, and you would thereby
simplify this clause very much.
I have explained in the memorandum which I sent you the
other day why it is necessary to strike out, at the end of Clause
Four, the words: "The amount of acceptances so discounted
shall at no time exceed one-half the capital stock and surplus
of the bank for which the rediscounts are made."
In the fifth clause of Section Fourteen, I would suggest that
after "or corporation" the words "rediscounted for any one
bank" be stricken out. I believe the meaning of the law is
that one single bank shall not grant any credit to any one
individual or firm in excess of 10 per cent of its own capital and
surplus. It is, however, conceivable that the Fourth National
Bank, having given accommodation up to 10 per cent of its
capital and surplus to Swift & Co. and having endorsed those
bills to the Federal reserve bank might want to rediscount
paper which it purchased from the First National Bank of
Chicago, the latter having given accommodation to Swift &
Co. and having endorsed the paper. The Fourth National
Bank could then not rediscount it, because the signature of
Swift & Co. would be on this paper, though it is guaranteed by
the First National Bank, which I think is not what the law
means. I think that the clause will read all right if the words
"rediscounted for any one bank" would be eliminated.
In Section Fifteen, I have added in Clause (b): "Notes and
obligations of States or Municipalities in Europe." This
is important, and these obligations should not be subject to
the clause "issued in anticipation of the collection of taxes,
etc.," because it would not be possible to ascertain in Europe
for what purposes these obligations would have been issued.
Altogether, I think this restriction is a little technical and
might be omitted.
For Clause (c), I have written a substitution, putting back
almost the original clause, as the House Bill contained it,
because I cannot understand why Senator Owen insists on
striking out "foreign." It ought to be clear that this clause

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119

deals exclusively with foreign exchange. It is necessary to
have three signatures and not only two on long bills. This
change I have also made in Clause (e). There should not be
any agencies in Europe, if that practically means foreign
branches of the Federal reserve banks, which would be
entirely uncustomary and dangerous, because the supervision
of those branches would be very difficult. Government banks,
as a rule, take correspondents to act as their agents.
Section Seventeen, Clause Fifteen, beginning "Every
Federal reserve bank shall receive on deposit from member
banks or from Federal reserve banks checks, etc.," ought to
be placed after Section Fourteen. I do not see what it has
to do with note issues. The first sentence ought to be
stricken out, because it is a repetition and not quite consistent.
I have not added a clause (because I do not know whether
you approve of it) stating, as suggested to you the other day,
that the Federal Reserve Board may promulgate from time to
time rules and regulations, fixing a limit in excess of which
member banks might be charged a higher than the published
rate.
I congratulate you on the changes which, apparently, if the
papers are correct, have been made in the bill, and am pleased
to see that the gold reserve fund has been created, and that the
tax for the gold reserve from 40 per cent downward has been
put in. It would have been better yet if it had been possible
to begin a little higher than 40 per cent.
I am now anxiously waiting for the next amendment, about
which I spoke to you so often. If nothing else should be
feasible, one might simply say that the Federal Reserve Board
shall have power to permit, or to cause the establishment of
four divisions—East, West, South, and North—within which
the regional banks should be permitted to pool their earnings
or to merge, but I sincerely hope you may be able to do better
than that.
The bill is shaping up now splendidly, and it would be a
great pity to miss that point.

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THE FEDERAL RESERVE SYSTEM
Apologizing for writing you at such length, when your time
is so valuable, I am,
Very sincerely yours,
PAUL M .

WARBURG

I enclose a telegram just received from George M. Reynolds
and letter from Credit Men's Association. How many more
do you want and from whom?
Hon. Carter Glass,
Chairman, Committee on Banking and Currency,
House of Representatives, Washington, D. C.
M y October memorandum and letters referring thereto will
illustrate, not only where recommendations of mine were
followed, but also where they were disregarded. Sometimes
the unwillingness to accept recommendations, which obviously
were logical and sound, caused harm which it subsequently took
years to undo. For instance, as stated in my letter to Mr.
Glass of December 18 th, 1913, the bill restricted the aggregate
of bankers' acceptances to be endorsed by member banks in the
open market to 50 per cent of their capital and surplus, while
there was no limitation with regard to the amount they could
endorse to reserve banks. The creation of a country-wide
discount market was avowedly one of the main objects of the
bill; here, then, was a provision which was bound to throttle
the desired development of an open discount market. But
those who were in charge of the bill persisted in leaving the
defective clause unchanged. Some years later, this error in the
original Act had to be remedied by amendment.
The meeting between Senator Owen and myself, to which
reference has been made as having occurred on November 10th,
1913, took place in the course of a journey from Washington to
New York. It afforded me an excellent opportunity personally
to present to him at length and at leisure my arguments against
some of the extreme doctrines he championed and to explain
some of the intricacies of the banking questions involved.
With regard to the latter, I found his mind most receptive, but

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121

concerning his pet theories it was closed, and my attempt to
win him away from those theories was a complete and absolute
failure—a failure plainly shown by certain parts of the Act, as
passed. After this meeting, however, Senator Owen kept in
close touch with me. Drafts of the bill, as it advanced or
retrogressed in the daily struggles of the Senate Banking and
Currency Committee, came from him frequently with requests
for advice and criticism.
Senator Owen, while adamant on the question of government note issue and on absolute government control of the
Reserve Board, was less obdurate than Mr. Glass on the
question of decentralization and was ready to sponsor a system
containing a smaller number of reserve banks. Furthermore,
he quickly grasped the importance of unimpeded gold concentration in the reserve banks and, as already stated, acceded
to the insertion of a clause permitting Federal reserve notes,
when in the vaults of member banks, to be counted as part of
the "required reserves."
The Senate Committee on Banking and Currency was at
that time widely divided within itself, and the number of
members of both political parties in contact with me grew from
day to day. I willingly served them to the best of my ability,
indeed, I remember that on one occasion I was called to
Washington in order to attempt—unfortunately without success—to bridge the differences existing between two of the
leading Democratic senators.
When the bill passed the Senate, it provided for "not less
than eight nor more than twelve" reserve banks. While
this was distinct progress over the "not less than twelve" of the
House of Representatives Bill, it did not go far enough to
satisfy me. Moreover, it was still to be feared that the House
Bill might prevail in this respect. In an excessive number
of reserve banks I foresaw the gravest danger and, at every
opportunity, I continued to argue for a smaller number, for,
obviously, the greater the decentralization, the greater had to

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THE FEDERAL RESERVE SYSTEM

be the powers vested in the connecting Board. T o me, it was
clear that, if there were twelve regional banks, no important
money centers would develop outside of New York, and the
excessive concentration of the country's free money on the
Stock Exchange of New York would continue.
T o all careful students it should have been clear that the
larger the number of reserve banks, the greater would be the
preponderance of New York, rather than the reverse. Even
if the territory of the New York bank were cut down to the
utmost, it would continue to overshadow the other districts,
unless they should embrace very large geographic areas. With
a large number of reserve banks, little or no personal and
financial leadership could be expected from the smaller districts and, in the end, the Federal Reserve Bank of New York
would become the pivot of the whole System. Such an outcome, while perhaps natural and from the point of view of
efficiency not undesirable, might ultimately make the Reserve
System an easy target for political attacks. The champions of
a large number of reserve banks, nevertheless, continued to
assume that the creation of large districts, few in number,
would mean the sacrifice of local self-government. They failed
to realize that, by a liberal and systematic development of
branches, an intensive decentralization of credit might be
accomplished and real local self-government brought about.
What I had in mind in all these discussions was a large
number of branches which would serve as a foundation for a
superimposed structure of reserve banks. Each of these
branch offices was to have a board locally elected, and the board
of the parent office of the larger district (the reserve bank)
was to be selected from the membership of the branch boards.
The directorates of these larger district banks would then
have constituted composite and well-blended boards fully
equipped to deal with broad questions of policy affecting the
whole country. Thus I strove for a system composed of a
small number of powerful units with diversified interests—

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units which would offer a greater chance for the development
of independent discount markets and, at the same time, leave
the Reserve Board free to deal more effectively with the major
problems of the System. In other words, I pleaded for a plan
which, while securing the maximum decentralization of credit,
would have enabled the Reserve Board, the general staff, to
deal with whole armies, instead of being charged with the
confusing and almost impossible task of directing from Washington a number of scattered regiments.
It still appears to me that my reasons for a small number of
reserve banks were sound. Obviously, it is easier to drive a
team of four horses than one of twelve. And if the twelve
should consist of fast trotters, heavy truck horses, and mules,
the task would require superhuman skill, particularly if there
were eight drivers on the box.
M y correspondence of those years shows to what extreme
pains I went in my attempt to prevent members of Congress
from committing what I then considered—and still consider
to-day—a grave blunder. M y files contain a large number of
letters from European authorities. Included among them are
opinions on regional decentralization from the heads of practically all the European central banks and from the presidents
of the large European financial institutions to whom I had
submitted the case. These letters, or abstracts of them, were
sent to those in charge of the Federal Reserve Bill. I thought
that, inasmuch as the point of view of a "Wall Street" man
might be construed in Washington as " tainted," the arguments
of these European bankers for a small number of banks might
possibly have some weight with the chairmen of the Banking
and Currency Committees of both Houses, and with other
influential persons taking a hand in the formulation of the law.
After it became evident that there was no hope of getting
the number of reserve banks reduced to less than eight, and
that there was even danger that the law might provide for no
less than twelve, I developed and submitted privately a plan

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THE FEDERAL RESERVE SYSTEM

contemplating the creation of super-Federal-reserve districts.
This plan provided for the coupling of some of the reserve
banks so that each two reserve districts would constitute a
super-Federal-reserve district. The Board would thus have
dealt with four, five, or six groups, instead of dealing with from
eight to twelve individual reserve banks. I hoped that this
would enable discount markets to develop at the larger
centers. This proposal, however, failed even though, as he
afterwards stated, Senator Glass was not unfavorably impressed with it. In a letter I addressed to Mr. McAdoo on
November 20th, 1913, I made an attempt to have the door
kept ajar for the possibility of coupling together some of the
districts at a later date. I urged him to have included in the
Act a clause allowing for the linking together of reserve
banks, two by two, upon their own initiative and request,
supported by the recommendation of the Reserve Board, and
upon the approval of the Secretary of the Treasury. Much to
my distress, even this proposal, which seemed safeguarded
beyond all hazards, proved unacceptable. 1
What I did not realize in those days was that I was trying, by
an appeal to reason, to prevail in an argument which had been
closed by "politics."
During the weeks preceding the passage of the Federal
Reserve Bill in the Senate, I was at various times invited by
Secretary McAdoo to confer either with himself alone or with
himself and others who were actively engaged in the preparation of the bill. Among the latter were Chairman Glass;
Mr. John Skelton Williams, then Assistant Secretary of the
Treasury; and Mr. Milton C. Elliot, later counsel of the
Organization Committee and of the Reserve Board. A t one
of these conferences, at which I had severely criticized the plan
of conversion of the 2 per cent government bonds, as proposed
1 A very incomplete account of the final and futile effort on my part to have
President Wilson's interest enlisted in this question is given in The Intimate
Papers of Colonel House, Vol. I, p. 165.

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125

in the draft of the bill, I was asked by Mr. McAdoo to submit
a redraft of that section. Hurriedly, I then and there dictated
and submitted to him the rough sketch of a plan to convert the
2 per cent bonds, one half into three per cent's, and the other
half into one-year Treasury notes, renewable from year to year.
The substance of this plan, which was closely akin to my
previous recommendations concerning the conversion of the
three per cent's, went into the Act, although weakened by
certain modifications of which I did not approve.
After one of these conferences, I was greatly surprised by a
question from Mr. Glass. The conference had been followed
by a long and friendly visit with him at his hotel, in the course
of which we had once more gone over some of the knotty
problems involved in the formulation of the law. Suddenly,
he asked me whether or not I would consider accepting an
appointment as a member of the prospective Reserve Board.
I took the question more or less as a joke or, at the most, as a
compliment, and told him that I did not think the President
would be at all likely to submit the name of a man associated
with one of the leading Wall Street firms. When Mr. Glass
urged the point, I finally answered that, while I still believed
he was asking me an entirely hypothetical question, nevertheless, if the President should decide to propose my name in
spite of all the opposition that might be offered to my appointment, it would be such an expression of the President's
confidence that it would be very difficult for me to refuse. Beyond this, I did not take the matter very seriously.
The question, however, gave me a great deal of satisfaction,
because the mere fact that, in spite of the frequent divergence
of our views, Mr. Glass should express the wish to see me on
the Board, seemed to indicate a genuine appreciation on his
part of my sincere interest in the cause of monetary reform.
During the last stages of the wrangle over the Federal Reserve Bill in the Senate, it often seemed as if stubborn resistance
and procrastination might destroy the possibility of its

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THE FEDERAL RESERVE SYSTEM

passage during the short session. But it was President
Wilson's great merit that he did not relent in his pressure for
action. Suddenly a slogan was invented to the effect that the
Federal Reserve Bill was to be placed on the President's
Christmas table as a gift from his devoted friends in the
Democratic party. This appeal to sentiment, and the lure of
the theatrical stage-effect involved, prevailed where stern
reason had failed. A few days before Christmas, on December
19th, 1913, the Senate Bill passed as Senator Owen's "substitute for the House Bill," and was immediately taken up in
conference.
In the course of the two months during which the Senate had
struggled with the bill, and during which associations of
business men and bankers had freely expressed themselves
concerning it, a number of important improvements had been
brought about. Weighing the advantages and disadvantages
contained in the Senate and House Bills respectively, one is
apt to reach the conclusion that, notwithstanding some of its
gravely objectionable features, the Glass Bill had been superior
to the Senate Bill as long as Mr. Glass had not surrendered to
Senator Owen's demand for a Reserve Board entirely appointed
by the President, and Federal reserve notes to be issued as
obligations of the government. After the acceptance of these
ominous provisions by the House, the Senate Bill, in its final,
improved form, was, on the whole, the better instrument of
the two. When, after the passage of the Senate Bill, committees from both Houses of Congress met in conference for the
purpose of harmonizing the differences between the Senate
and the House bills, it was generally hoped, therefore, that the
desirable features of the Senate Bill would meet with the
consent and approval of the House conferees, of whom Mr.
Glass was the leader.
The Conference Report, however, proved a great disappointment. It is true that in certain respects the bill, as agreed
upon in conference, showed some far-reaching improvements

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127

over the House Bill. For example, the number of reserve
banks was fixed in the Conference Report at "not less than
eight nor more than twelve" (as against "not less than twelve"
in the House Bill), and the number of ex officio members of the
Board provided in the House Bill was reduced from three to
two, and that of the appointive members increased from four
to five. The conference furthermore struck out from the
House Bill the following very objectionable clause:
Of the four persons thus appointed, (the Federal Reserve
Board members) one shall be designated by the President as
manager and one as vice manager of the Federal Reserve
Board. The manager of the Federal Reserve Board, subject to
the supervision of the Secretary of the Treasury and Federal
Reserve Board, shall be the active executive of the Federal
Reserve Board,1
and accepted the Senate version, to wit:
Of the . . . 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.1
While to those who had hoped that the Senate provision providing for only one ex officio member and for six appointive
members would prevail, the outcome was distressing. These
changes, nevertheless, demonstrated progress of great significance in that they gave the Reserve Board at least a fighting
chance for freedom from politics and governmental control.
The rediscount clause was also improved along the lines
previously indicated, and the autonomy of the reserve banks
was somewhat strengthened by changing subsection (d) of
Section Fifteen of the Glass Bill into the form adopted by the
Senate, to wit:
Every Federal reserve bank shall have power: . . . (d)
To establish from time to time, subject to review and deter1

T h e italics are mine—Author.

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THE FEDERAL RESERVE SYSTEM
mination of the Federal Reserve Board, rates of discount to be
charged by the Federal reserve bank for each class of paper.

In the Glass Bill, this section had read:
E v e r y Federal reserve bank shall have power . . . (d)
T o establish each week, or as much oftener as required, subject
to review and determination of the Federal Reserve Board, a
rate of discount to be charged by such Federal reserve bank for
each class of paper. 1

The earlier provision, in practical effect (as more fully explained in Addendum I), would have given the Board unchallengeable power to fix the rediscount rates.
On the other hand, the House conferees, fortunately, prevailed in eliminating the highly objectionable " insurance-ofdeposits" clause contained in the Senate Bill. It was, however, a matter of deep concern that they succeeded in removing
the clause in the Senate Bill permitting member banks to count
Federal reserve notes in their vaults as "reserve money."
The Senate sections providing for domestic acceptances were
also lost. A t the same time, Mr. McAdoo and Mr. Williams
injected some changes which were most regrettable. The
modifications they succeeded in incorporating had the effect of
strengthening the influence of the Secretary of the Treasury on
the Reserve Board. The Glass Bill, as passed by the House,
had provided that " t h e Comptroller of the Currency shall
perform his duties under the general direction of the Secretary
of the Treasury, acting as chairman of the Federal Reserve
Board''1
The last eight words were stricken out in conference.2
The Comptroller of the Currency was thus made entirely
independent of the Reserve Board, a change which, as subsequent events have amply shown, has gravely hampered the
The italics are mine—Author.
The Senate had provided for a Board of seven members, including the Secretary of the Treasury ex officio and six members appointed by the President.
The Comptroller, while placed " under the general directions of the Secretary
of the T r e a s u r y , " was not made a member of the Board.
1

OWEN-GLASS BILL

129

development of the Federal Reserve System and has aggravated the Board's difficulties and weakened its authority.
A further consequence of modifications made by the Conference Committee was that the Treasury retained the power of
depositing its free funds with banks and trust companies,
instead of being obliged to deposit such funds with the Reserve
System. This latter change particularly distressed Mr. Glass,
and he made a statement to that effect to the House when he
submitted the Conference Report, which he characterized—perhaps somewhat oversanguinely—as being " in all fundamental
respects the House currency bill." 1
The Conference Report passed the Senate on December
23rd, 1913, at 2.30 P.M. The President signed the bill the
same afternoon.
On the day the Federal Reserve Act was signed Secretary
David F. Houston, a member of the Cabinet throughout the
entire period of the Wilson Administration, made the following
entry in his diary:
The impossible has happened. To-day, Tuesday, December 23d, the currency measure became a law. The President
approved it a few minutes after six o'clock in the afternoon.
It was passed by a Congress dominated by the Democrats,
two thirds of whom had been unsound on currency questions
and a majority of whom can scarcely be said to have understood what the measure meant and would accomplish. The
majority of the Republicans had also had an unenviable
record on the currency. Bryan and several other members of
the Cabinet had supported free silver, as had Vice President
Marshall, the Speaker, Champ Clark, and many Democratic
Senators. The measure itself was the result of the labours of
many men, extending over a long period, but its passage at
this time in its present form was due to Woodrow Wilson,
ably supported by McAdoo, Glass, and a few others.2
Glass, op. cit., p. 336.
Houston, David F. Eight Years with Wilson's Cabinet, 1913
Doubleday, Page & Company, Garden City, 1926. Vol. I, p. 90.
1

to 1920.

130

THE FEDERAL RESERVE SYSTEM

This refreshingly unbiased account by a loyal Democrat
gives us a just description of the origin of the Federal Reserve
Act: it was, in truth, " t h e result of the labours of many men,
extending over a long period." Individuals and associations
in all parts of the country, business men, and economists,
stirred up by the disaster of 1907, had struggled with the problem and, step by step, had worked their way towards a better
understanding of the great principles that would have to underlie monetary reform. Had it not been for this pioneer work,
the Democrats, when they came into power, would never have
been able to bring about the banking legislation which some of
them now claim as the exclusive achievement of their party.
The question of how far the text and substance of the Aldrich
Bill benefited the "framers" of the Federal Reserve Act,
when they began to formulate the provisions of that measure,
will be more specifically dealt with in subsequent pages. 1
But in view of the deprecating tone in which in their historical accounts both Senator Glass and Dr. Willis speak of
the "labours of many men," referred to by Secretary Houston, this chapter ought not to close without the emphatic
statement, by one who saw them at work, that they are entitled
to the country's deepest and unreserved gratitude for the great
service they rendered. It was due to the untiring efforts of
these men that " t h e law was half made, and more than half
made"—in Professor Munro's words—when Congress finally
undertook its enactment. Our commonwealth is too dependent upon patriotic work done outside of Congress to permit so
outstanding a contribution to go down into history, not only
inadequately appraised, but actually misjudged and misconstrued. In earlier parts of this book reference has been
made to the activities of the National Citizens' League
during the Aldrich campaign. In order to complete the
1 See Chapter V I I I , " T h e Aldrich Bill and the Federal Reserve A c t : A
Juxtaposition of T e x t s " ; Chapter I X , " A n Analytical Comparison of the
Aldrich Bill and the Federal Reserve A c t based on the Juxtaposition of T e x t s
shown in Chapter V I I I " ; Chapter X , " T h e Legatee of the Aldrich Bill."

OWEN-GLASS BILL

131

record, without unduly lengthening this chapter, abstracts of
an article " T h e Educational Campaign for Banking Reform"
by Mr. A. D . Wei ton1 have been reprinted in Appendix
Eighteen. Mr. Welton was publicity director for the League
throughout the greater part of its existence and his account
may, therefore, be accepted as authentic. It is difficult, however, to reconcile it, and the facts presented in the course of
this narrative, with Senator Glass's and Dr. Willis's accounts,
of which the following from the pen of Mr. Glass may serve
as an illustration:
"An elastic currency," based on commercial assets, rather
than " a rigid currency," based on the bonded indebtedness of
the nation, was alleged to be the goal of the Indianapolis bill
and, years later, of the Walker bank bill, the Fowler bill, the
Williams bill, the Vreeland bill, the Aldrich bill, and the
composite Vreeland-Aldrich bill. The National Monetary
Commission, and the Citizens' League organized to finance
and otherwise promote the central bank plan projected by it,
crammed this idiom to the point of satiety.
The phrase became so trite as once to overtax the patience
of a profane colleague and provoke the expletive: "Oh, hell!
Everybody wants that; but nobody seems to contrive a way
to get i t ! " 2
It is easy to see in how many respects this reference to the
National Citizens' League is either incorrect or misleading.
The League, a thoroughly non-partisan body, had been organized for the purpose of promoting banking reform. It
consistently refused to endorse the Aldrich Plan or any other
plan, and it endorsed only principles. True enough, it endorsed most of the principles underlying the Aldrich Plan.
When it became apparent that the Aldrich Bill could not pass,
1 In special volume entitled The Federal Reserve System—Its
Purpose and
Work, Annals of the American Academy of Political and Social Science, Vol.
X C I X , No. 188, January, 1922.
2 Glass, op. citp.
18. T h e italics are mine—Author.

132

THE FEDERAL RESERVE SYSTEM

the forces behind the League split. Some of its principal
supporters, like the late Henry P. Davison, continued to favor
the Aldrich Bill; others, like Mr. Frank A. Vanderlip, who,
with Mr. Davison—as stated in an earlier chapter—had been
among the most active promoters of the Aldrich Plan,
came out with central bank plans of their own. The League
itself had no substitute plan. Some of its most important
members saw in the regional bank scheme a desirable variation of the Aldrich Plan, and one which, properly drawn up,
would not violate the outstanding principles the League had
endorsed, even though it might differ in many important details. In an attempt to be helpful in the working out of these
details, these members, as has been stated, made individual
suggestions for regional plans. A t no time could it have
been said that the League had a plan of its own or that, as a
body, it was either endorsing or opposing the Aldrich Bill or
the Federal Reserve Bill. Senator Glass, moreover, misses
the mark entirely when he says that the League crammed
to the point of satiety the idiom of " a n elastic currency"
based on commercial assets, rather than " a rigid currency"
based on the bonded indebtedness of the nation.
The most important of all the principles endorsed by the
League was the doctrine of the concentration and mobilization
of reserves. So far as I know, this idea was never urged in the
earlier campaigns and bills to which Senator Glass refers.1
The outburst of Mr. Glass's profane colleague must, therefore,
either have occurred before the campaign for banking reform
began, or else the gentleman quoted must have been negligent
in following the literature of the subject. To overcome the
doubts and skepticism of men of the type represented by this
1 It will be remembered, indeed, that the author of the Fowler Bill included
in the Senator's recital, in spite of his undeniable merits in furthering currencyassociation plans, has always been unrelenting in his bitter attacks upon both
the National Reserve Association Bill and the Federal Reserve A c t on account
of the very elasticity of note issue and the concentration and mobilization of
reserves embodied in both plans.

OWEN-GLASS BILL

133

colleague of Mr. Glass's and to win the country over to the
conviction that, indeed, it was possible " t o contrive a way to
get it," was the great merit and outstanding service of the
educational campaign carried on during the years from 1908
to 1913.
Anybody unfamiliar with the facts would gain the impression from passages in Senator Glass's and Dr. Willis's books
that bankers and business men presented a hostile and united
front in resistance to the framers of the Federal Reserve Act.
The opening paragraph of Chapter Fifteen of Mr. Glass's An
Adventure in Constructive Finance will serve to illustrate this:
While the federal reserve bill was pending, it was mercilessly condemned in detail by certain interests. Where there
was any praise in these quarters, it was faint enough to damn.
This hostile criticism reflected not alone the attitude of
bankers, as the class which imagined that it was chiefly
affected by the proposed readjustment; but it voiced the
disapprobation of those business groups which are most
readily impressed by banking thought. This was not surprising, since the phenomenon was and is of frequent recurrence. A very noteworthy exception was found among the
National Association of Credit Men, whose members thought
intelligently on the subject and understood the elements of the
problem. These credit men were not only tolerant, but
extremely helpful throughout the entire period of discussion.
In order to show how far such a picture fails to convey the
truth; in order to demonstrate how genuine was the desire of
business men to exert a helpful influence, some letters written
by persons active in the movement in those days have been
picked out from my files and reprinted as Appendix Nineteen.
These letters, to which many others might be added, will not
only enable the reader to understand the friendliness of the
atmosphere in which they were written, but they will also
show him that their writers, instead of being joint conspirators,
were not infrequently at variance with one another on the

134

THE FEDERAL RESERVE SYSTEM

subject involved. Particular attention is drawn to letters
written by Mr. J. H. Tregoe, Secretary-Treasurer of the
National Association of Credit Men, (see Appendix Nineteen)
whom Senator Glass in the paragraph just quoted describes
as the " v e r y noteworthy exception" and as not voicing " t h e
misapprobation of tffose business groups which are most
readily impressed by banking thought." Our readers will
be amused to note from these letters that the National Association of Credit Men was distributing a leaflet, of which a
copy was left with each member of the Glass Committee,
which I myself had assisted them to formulate, and which,
according to Mr. Tregoe, was "already creating thoughtful
attention." A reproduction of this letter is found on the
following page.
So far as my own experience went, I did not find the business groups, with which it became my good fortune to collaborate, greatly impressed by "banking thought," if by "banking
thought" we are to understand " t h e attitude of bankers,
as the class which imagined that it was chiefly affected by the
proposed readjustment." As I knew them, the business
groups were animated by the single purpose of securing the
enactment of a sound currency reform and, in this matter,
they were as free from "banking thought" as they were from
"political thought." 1
As to the bankers themselves, we have seen that there did
not exist any united, crystallized "banking thought"; bankers,
in groups and individually, held widely different views, both
Extracts from a Report of the Banking and Currency Committee of the
National Association of Credit Men (June 1912) and of the Committee's
special letter to the membership have been added to the collection of letters
assembled in Appendix Nineteen. These two documents have been included
because they throw a highly instructive light upon the attitude of the National
Association of Credit Men towards the plan of the Monetary Commission,
the National Citizens' League and, incidentally, towards the American
Bankers' Association. Perhaps I ought to add—in order to prevent any misunderstanding—that all these business men's associations, excepting, of course,
the National Citizens' League, came to me entirely of their own accord.
1

OWEN-GLASS BILL

135

NATIONAL ASSOCIATION OF CREDIT MEN
OFFICE OF THE SECKETAKV-TREASURER
41 P A R K

ROW

KEW^ORK

Jan. 7 , 1913.

Mr. Paul M. Warburg
Kuhn, Loeb & C o . ,
52 William S t . ,
Mew .York, N. Y .
Dear Mr. Warburg
Upon t h e s u g g e s t i o n o f Mr, D. G. Hhdy
of P h i l a d e l p h i a , Chairman of our N a t i o n a l Committee on
Banking and Currency, I am p l e a s e d t o hand you e n c l o s e d
f i v e c o p i e s of our "Banking and Currency L e a f l e t N o . 1 . "
T h i s i s t h e l e a f l e t which you so k i n d l y a s s i s t e d u s t o
d e f i n i t e l y f o r m u l a t e , and i t i s a l r e a d y c r e a t i n g t h o u g h t f u l attention.
We hope very soon t o have i t i n the hands of
t h e v e r y l a r g e s t number of our commercial men throughout
t h e c o u n t r y , and i f you can u s e a few a d d i t i o n a l c o p i e s t o
advantage I s h a l l be d e l i g h t e d to supply them.

136

THE FEDERAL RESERVE SYSTEM

as to objects and methods. The belief seems warranted that
some day the historian, comparing the evidence of facts with
the accounts given by the "framers of the A c t , " will reach the
conclusion that there was less hostility surrounding them than
they seem to have surmised and more friendly support than
they were able or willing to realize.

CHAPTER

VII

THE FEDERAL RESERVE ACT IN EVOLUTION
(1914-1917)
T H E

passage of the Federal Reserve Act was an achievement of the first order. The new law, in its essentials,
was sound and marked progress beyond any expectation, even though some grave "sins of omission and commission" in its enactment remained a source of deep disappointment to those who, for years, had so earnestly striven to secure
for the United States a banking system of the highest possible
order. What my own feelings were in the matter may be
gathered from a letter I wrote to Mr. Glass on December 23rd,
1913:
New York, N. Y., December 23rd, 1913
DEAR MR.

GLASS:

Permit me to congratulate you upon having successfully
brought to an end the very onerous task of perfecting the
currency law, and steering it through the many cliffs.
While my heart bleeds at many things that went into the
bill, and many things that were left out, I rejoice at the many
good features that, after all, the law will contain. There
cannot be any doubt but that the perfection of this legislation
means a new era in the history of banking in the United States.
The fundamental thoughts, for the victory of which some of us
have worked for so many years, have won out. That is to
say, from now on we shall witness the gradual elimination of
the bond-secured currency, of scattered reserves, of immobilized commercial paper, and of pyramiding of call loans on
the stock exchange. Where we differ it is in most cases a
question of degree. Whether concentration has gone far
enough with eight Federal reserve banks, whether reserves
will be sufficiently consolidated by lodging a portion in the

138

THE FEDERAL RESERVE SYSTEM
hands of the member banks, and by not permitting the notes
to be counted as reserves, whether $25,000,000 annually is a
large enough amount for reducing the inelastic national bank
currency, whether ninety or hundred and eighty days is the
right maturity for paper to be rediscounted, all these are
questions not of principle, but, as stated, of degree.
As long as this legislation was a question for discussion, it
was incumbent upon all of us to offer the freest criticism, and
to try to be helpful within the limits of our abilities. Now
that, for the time being at least, the discussion is closed, and
the law will go into effect, there remains only one thing for us
to do, and that is for each of us to do the best he can to give it
the fairest and fullest test. If, after a few years of actual
experience, it should be shown that the business community
was wrong in its suggestions and in its apprehensions, we shall
be satisfied; if it should be shown that we were right, I believe
that the country at large and its representatives at Washington
will then be perfectly willing to amend the law. By that time
a great many things which to-day are questions of theory will
have become hard facts, and everybody will be able to judge
from actual experience. In this, I am sure, we both feel alike,
because from the various talks that it was my privilege of
having with you, I am more than confident that, if you could
have had things entirely your own way, the law would look
different in many respects. It is only natural that, in a matter
where so many minds had to agree, concessions and compromises were necessary, and I suppose we shall have to be
satisfied with having been able to make so substantial a step
in advance. I sincerely hope, however, that a conservative
Federal Reserve Board will see to it that the instrument now
created will not be overtaxed. As it has been enacted, the
law will provide for an emergency organization, which will be
safe, if conservatively managed, and which will, very gradually
only, lead toward substantial fluidity of credit by the creation
of discount markets.
It is earnestly to be hoped that, if it should prove impossible
to reach this latter aim, in the immediate future, the future

FEDERAL RESERVE ACT IN EVOLUTION

139

board will not overheat the boilers up to a danger point by
trying to make this craft perform duties which now may be
beyond its power, but rather, after a fair and conservative
test, do the necessary work of perfecting the construction.
Meanwhile you are entitled to the thanks of the nation for
the hard, conscientious, and able work that you have done, and
personally I want to add my sincere appreciation for having
been permitted to counsel with you so frankly and frequently.
With assurances of highest esteem, and with best wishes, I
beg to remain,
Yours faithfully,
PAUL M .

WARBURG

Hon. Carter Glass,
Chairman, The Committee on Banking and Currency,
House of Representatives,
Washington, D. C.
Letters in similar vein were sent to Secretary McAdoo and
Colonel House. Their replies are given below:
THE SECRETARY OF THE

TREASURY,

WASHINGTON

December 29th, 1913
DEAR MR.

WARBURG:

Let me thank you heartily for your kind letter of the 23rd
of December and for the fine spirit it displays. I greatly
appreciated the intelligent interest and suggestions you made
concerning the new currency law, and I hope that the measure
as enacted may prove adequate for the purpose. Where there
exists, as in this case, such an immense variety of conflicting
opinion it would be expecting too much to believe that a
perfect measure would be possible at the outset. I am quite
sure that any needed changes which time and experience may
prove to be necessary, will be secured.
The task ahead of me and the Organization Committee is a
great one, but I shall tackle it with all the enthusiasm and
power that I possess and shall do my utmost, with the other
members of the committee, to organize the new system from

140

THE FEDERAL RESERVE SYSTEM
the highest standpoint of patriotism and good of our country.
Believe me with best wishes for the New Year,
Sincerely yours,
WM. G. MCADOO

HOUSE
COMMITTEE

REPRESENTATIVES
BANKING

AND

CURRENCY

Washington, December 24, 1913.
DEAR MR. WARBURG:

Permit me to acknowledge your kind letter of December
23rd and to express my very great appreciation of your congratulations. I desire also to thank you for the aid and
encouragement which, from time to time, you so cheerfully
extended the Banking and Currency Committee of the House
and, especially, to express my personal indebtedness for the
assistance you have given me. If the country could know the
true story of the struggle here it would realize that the public
interest has been as well served by expunging the things which
have been excluded from the Currency act as by those which
have been included.
Without meaning to convey the idea that I have any
knowledge of what may happen, I take leave to suggest that
you might well give serious consideration to the rather personal
question that I put to you in my room at the Raleigh when
you were last here.
With best wishes of the season, I am,
Sincerely yours,
CARTER GLASS

DEAR MR.

WARBURG:

Thank you for thinking of me and for saying such generous
things. It is you, I think, that just now deserves the gratitude

FEDERAL RESERVE ACT IN EVOLUTION

141

of your countrymen, and some day I shall tell them when and
how you served them.
Sincerely yours,
E. M.

HOUSE

N e w Year's D a y

1914.
These letters are of considerable interest, because they are
acknowledgements of a frank statement on my part that the
Federal Reserve Act as passed should not be considered as a
finality, and that actual experience in its operation would
prove the need of important modifications or amplifications.
Secretary McAdoo, in his letter, freely admits the possible
need of such amendments. Mr. Glass, notwithstanding the
notice thus served by me, invites me once more to "give serious
consideration to the rather personal question that I put to you
in my room at the Raleigh," meaning the possibility of my
appointment to membership on the Reserve Board. Mr.
Glass's reiteration of the suggestion perturbed me a good deal.
It faced me with the question whether, if such a call were to
come, it would be my duty to accept it in spite of my strong
conviction that, as written, the Federal Reserve Act, although
of great merit, was bound to prove inadequate. The more I
pondered, the clearer it became to me that success or failure
would depend entirely upon the sagacity and courage with
which the men first called to the helm should perform their
task.
Under the provisions of the Act, as passed, the Reserve System might have been administered on either of two general lines
of procedure. The first, and perhaps the more obvious,
would attempt to develop eight or twelve individual central banks, entirely independent of one another and kept
as far apart as possible so that the only connecting link between them would be the Reserve Board. The Board,
with the powers of a governmental body, would then administer the System by rigid bureaucratic rules and ordinances,

142

THE FEDERAL RESERVE SYSTEM

treating the Act as perfect and as a finality and striving to
force business to accommodate itself to it. Under such procedure, failure would be inevitable.
The other line of procedure would aim to bring about as much
cohesion between the reserve banks as the law permitted and attempt to increase the prestige of these banks as much as possible
so that, instead of merely being obedient tools of the Board, they
would assume positions of leadership in their own communities. This course would involve the exceedingly difficult task
of formulating rules and regulations which, while clearly defining and codifying the best existing banking practices, would
still be elastic enough to allow those in charge of the management of the reserve banks to use their discretion in meeting the varying needs of the East, the West, the North, and the
South, and, likewise, the widely differing requirements of the
large cities with their huge institutions and the small villages
with their miniature "banklets." A Board adopting this
procedure would, moreover, have to recognize that the Act, as
passed, was far from perfect and that one of the Board's foremost duties would be to recommend to Congress those changes
which a fair and sympathetic practical test would indicate as
essential for a sound development of the System. T o accept
the Act as perfect and as final would be to offer the highest
compliment to its authors and to the government; to administer it uncritically and in a bureaucratic spirit would, moreover, be the easiest and safest path for individual members of
the Board to pursue. It would mean, however, that the
Reserve System would remain dwarfed; that, in peace, the
country would be deprived of the full benefits of the System's
free and untrammeled growth; and that, in times of stress,
the System would show its inadequacies, with fatal consequences.
Would the new Board have vision and courage enough to
choose the thorny, second path leading to bitter struggles in the
beginning, but opening a route to unparalleled success in the

FEDERAL RESERVE ACT IN EVOLUTION

143

end? Some of the disasters which might occur if the Board
should administer the law uncritically were staggering. If, for
instance, the Board should consider it obligatory, instead of
merely permissive, to charge interest when "advancing" Federal reserve notes to the reserve banks, the free exchange of Federal reserve notes for gold—and with that the concentration of
the country's gold in the reserve banks—would be doomed. If,
giving way to political pressure, the Board should permit the
reserve banks to establish an immediate credit par check
clearing plan, without any charge for interest, the back of the
Reserve System might be broken right from the beginning,
while inflation on the grandest scale might ensue. There were
also the additional dangers that reserve banks might have
their strength dissipated by being forced prematurely into
earning dividends, and that an attempt would be made to
coerce state banks and trust companies to join the System,
instead of making it attractive enough for them to enter it of
their own free will.
Considerations such as these weighed heavily on my mind.
When finally, in the last week of April, Colonel House showed
me the list of the men the President had selected for membership on the first Federal Reserve Board and asked me whether
I would be willing to accept the appointment, I had become
convinced that no one with the interests of the country genuinely at heart would be justified in refusing to give the best
that was in him to the perfection of the great work about to
be undertaken. Colonel House told me that ex-Secretary of
State Richard Olney was to be invited to serve as the first
governor of the Board. I told Colonel House that the list of
my future colleagues (none of whom I knew) was perfectly
satisfactory to me, provided he could assure me that they
would all undertake their duties with open minds, untrammeled by preconceived notions or political obligations. If
that were the case, I would be prepared to undertake the
venture and I was convinced that, working as an ordinary

144

THE FEDERAL RESERVE SYSTEM

THE WHITE

HOUSE

WASHINGTON

A p r i l 30* 1914

My dear Mr. Warburg:
After several months of very careful
thought on the subject and a sincere attempt to
canvass the whole country for material of the
kind that the whole country would approve, I
.haY_e. come^to some very definite conclusions
with regard to the make-up of the Federal Reserve Board.

I am asking the Hon. Richard Olney

to take the governorship and (for fear he would
at his age decline a longer a ppointment) the twoyear tern on the Board, and I am writing to ask
i f you would not be willing to do the country the
great service of accepting the four-year appointment.

I f e e l that your counsel would be invaluable

to the Board and I sincerely hope that you may see
your way to making the saorifices necessary to accept.
Cordially and sincerely yours
Mr.. Paul M. Warburg,»9
New York City

FEDERAL RESERVE ACT IN EVOLUTION

145

member of the Board, I would be in the most advantageous
position for rendering the best service of which I was capable.
Colonel House stated that he could give me that assurance.
Soon after President Wilson wrote to me, asking me to become a member of the Federal Reserve Board, and I accepted
his invitation by return of mail and without any reservation. The President's letter, a reproduction of which appears
on the preceding page, and my reply follow.
THE WHITE

HOUSE

WASHINGTON

April 30, 1914
M Y DEAR MR.

WARBURG:

After several months of very careful thought on the subject
and a sincere attempt to canvass the whole country for material of the kind that the whole country would approve, I have
come to some very definite conclusions with regard to the
make-up of the Federal Reserve Board. I am asking the
Hon. Richard Olney to take the governorship and (for fear he
would at his age decline a longer appointment) the two-year
term on the Board, and I am writing to ask if you would not
be willing to do the country the great service of accepting the
four-year appointment. I feel that your counsel would be
invaluable to the Board and I sincerely hope that you may see
your way to making the sacrifices necessary to accept.
Cordially and sincerely yours,
WOODROW WILSON

May 1st, 1914
DEAR M R .

PRESIDENT:

Permit me to acknowledge receipt of your letter of April
30th, and to express to you my profound appreciation for the
great confidence that you have shown me by inviting me to
serve on The Federal Reserve Board for a term of four years.
Whether any personal sacrifices are involved, or not, it is a
rare privilege to be offered so great an opportunity for public

146

THE FEDERAL RESERVE SYSTEM
service, and I accept the high honor which you confer upon me,
with the sincere hope that my services may justify your
confidence in me.
I beg to remain, dear Mr. President, with assurances of
highest esteem,
Very faithfully yours,
PAUL M .

WARBURG

To the President,
The White House,
Washington, D. C.

THE

WHITE

HOUSE

WASHINGTON

May 4, 1914
M Y DEAR MR.

WARBURG:

Your letter of May first consenting that I should nominate
you to the Senate as one of the Board of Federal Reserve does
you great credit and affords me the deepest gratification. I
thank you for it mcst sincerely and shall look forward with
genuine pleasure to being associated with you here.
Cordially and sincerely yours,
WOODROW

WILSON

The membership of the first Board, as submitted to the
Senate for confirmation, differed from the first tentative list
of appointees drawn up by President Wilson. Mr. Olney
declined the position of governor on account of his advanced
age and Mr. Charles S. Hamlin, at that time Assistant Secretary of the Treasury under Mr. McAdoo, was finally chosen
by President Wilson in his stead. Mr. W. D. Simmons, of
St. Louis, and Mr. Harry A. Wheeler, of Chicago, having
declined to serve, the President named Mr. Thomas D. Jones,

FEDERAL RESERVE ACT IN EVOLUTION

147

a prominent lawyer of Chicago. The other members were
chosen from the President's original list.
If I were writing "memoirs," this would be the place in
which to record the incidents of the struggle that ensued in
regard to my confirmation by the Senate. I had informed the
President and Secretary McAdoo that I would not object to
appearing before the Senate Committee if all the prospective
members of the Board were called for examination. But
when, on July 2nd, 1914, Mr. Hamlin, Mr. Harding, and Mr.
Miller were favorably reported, while Mr. Thomas D. Jones
and myself were singled out for appearance before the Senate
Committee, I refused to respond to the Senate's invitation,
stating that I was not a "candidate for office" and that,
while the Senate had the right to refuse my confirmation, it
was my privilege to refuse to submit to what I considered a
humiliating procedure.
The deadlock continued for four weeks during which the
President urged me to give in, while I urged him to withdraw
my name. Much to my mortification, the controversy became
one of the main topics of the newspapers. In the main, the
press and public opinion strongly supported my stand. For
the purpose of this narrative, it is sufficient to relate that,
when the Great War broke out, I waived my own feelings and,
on August 1st and August 3rd, 1914, appeared before the
Committee. After having been grilled by Senator Bristow of
Kansas for a day and a half, I was promptly confirmed and
took office on August 10th, 1914. (For the hearings before
the Senate Committee on Banking and Currency see the confidential report printed by the Government Printing Office,
dated August 5th, 1914).
Upon its organization, the first Reserve Board was finally
constituted as follows:
William G. McAdoo, Secretary of the Treasury, Chairman ex officio

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THE FEDERAL RESERVE SYSTEM
John Skelton Williams, Comptroller of the Currency,
ex officio
Charles S. Hamlin, Governor
(2 years)
Frederic A. Delano, Vice Governor (6 years)
Paul M. Warburg
(4 years)
W. P. G. Harding
(8 years)
A. C. Miller
(10 years)

A t the first meetings of the Reserve Board, it became
clear that a majority of the members were bent on approaching
their problem with a strong inclination towards a bureaucratic
policy of administration which would freely employ the ruler
and, if necessary, use it as a "big stick." On the other hand,
the minority, to which I belonged, strongly advocated the
alternative policy. Fortunately, the minority point of view
gradually asserted itself and, by a narrow margin, eventually
won out. It finally became the prevailing policy of the Board,
even though there remained at all times a strong faction
which clung to bureaucratic doctrines and which, every now
and then, succeeded in having its own way.
The impelling needs of the situation soon forced the Board
to consider the advisability of suggesting amendments to the
Federal Reserve Act. Some of these took form at a fairly
early date, but others were debated for years before they were
ultimately submitted as recommendations to Congress. It
is not possible for me to write here a full history of the amendments which have been made down to the present time; I
shall merely indicate the important modifications effected in
the first four years, administratively or through changes in the
Act, which have proved to be of decisive moment in perfecting
the Reserve System, and giving it its present form and strength.
Senator Glass waxes quite eloquent when he claims credit
for the great achievements of the Reserve System and praises
the unequalled strength it finally developed. He writes:
If there was a trace of exaggeration in the estimate of that
seasoned English economist who declared the federal reserve

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149

system "worth to the commerce of America more than three
Panama Canals," nevertheless, it must be conceded that, in the
crucial test of a world war, it was bound to be more indispensable to civilization than three times three Panama Canals.
This merely means that I agree with the considered judgment of those eminent bankers of this and other lands who
have said that the World War could not have been financed but
for the Federal Reserve Act. And if not financed, of course, it
could not, except at infinitely greater sacrifice, have been won
by the United States and associated nations. Thus, in a final
analysis, the real value of this one achievement of Wilson's
administration might be fairly appraised by simply leaving to
the human contemplation what further slaughter and destruction would have ensued or what would be our situation to-day
had we lost the war with the Central European Powers! 1
It is necessary, however, to remember that, without the
amendments later enacted, the Federal Reserve System could
never have accumulated its present imposing gold strength
and reserve power. If, to-day, countries in all parts of the
world look to the Reserve System as the model to be copied;
if Australia contemplates it as such, and if British leaders
recommend it as embodying the principles desirable for "good
old England," these people have not in mind the dwarfed and
limping system originally sanctioned by Congress, but the
System as it stands to-day, freed from its original deadly straitjacket. Senator Glass cannot well be permitted, on the one
hand, to arrogate to himself the credit for the System in its
present form, and, on the other, to point with pride to the
fact that, at the time of the writing of the Act, he declined the
very proposals which Congress had to adopt later in order to
insure for the Reserve System the great success it subsequently
achieved.
Possibly the most impressive illustration of amendments
which had a decisive influence in remoulding and perfecting the
Reserve System is the metamorphosis of the reserve and note1

Glass, ibtd.> p. 2.

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THE FEDERAL RESERVE SYSTEM

issue provisions. It is due to the changes in these provisions
that reserve banks are able to-day freely to substitute their own
notes for the gold and gold certificates previously carried in the
pockets of the people or tied up in the tills of the member banks,
and it is to these changes that the Reserve System of to-day owes
its unparalleled gold strength. It took almost three years of
patient and unremitting effort to accomplish these drastic but
all-important changes. Powerful and determined resistance,
inside and outside the Board, had to be broken down inch by
inch, and the fight might have been lost had not the keen
realization of the dangerous insufficiency of the System
exercised its constant urge and stimulated the inventive genius
and determination of those struggling for the financial safety
of the country.
In the early stages, when there was no hope for remedial
action by Congress, relief was sought in a roundabout manner
by the creation of a reserve fund of gold which would be readily
available in case of need. This was accomplished by devising
a plan to pile up in the hands of the Federal reserve agents
some hundreds of millions of dollars of gold or gold notes,
which, however, as a technical compliance with the law, had
to be held as having redeemed outstanding Federal reserve
notes. Neither the gold so held nor the notes issued against it
were included as assets or liabilities of the Federal reserve
banks. The operation in substance amounted to the substitution of these notes for gold and gold certificates in circulation.
The plan, in brief, was to allow the issuance of notes backed by a
100 per cent gold cover instead of by 40 per cent gold and 100
per cent commercial paper. This enabled the reserve banks, in
case of heavy rediscount demands, to substitute discounted
paper and to use the 60 per cent gold so withdrawn as a reserve
for further note issues. It was a very cumbersome, indirect,
and unsatisfactory method, but it had to be followed in order
to bring the procedure within the formalities of the law.
Moreover, it subjected the Board to the unjustified but per-

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151

sistent charge that it was permitting or abetting a course of
conduct unauthorized by the Act.
After a prolonged period of patient experimentation, the
Board requested Congress to pass an amendment authorizing,
in plain words, the direct substitution of Federal reserve circulation for gold and gold certificates and providing for the frank
inclusion of such additional gold in the general assets of the
reserve banks (instead of carrying it in the banks' balance
sheets against "notes redeemed"). The Board, furthermore,
asked for the removal of the ridiculous provision which stipulated that, for every dollar of Federal reserve circulation, there
must be set aside one dollar in commercial paper and, in addition, no less than forty cents in gold. The type of work done
in those days in the direction of removing some of the harmful
shackles placed upon the System, and of strengthening its base,
is well illustrated by a section of a memorandum which I
submitted to the Board at its session on December 3rd, 1915,
reprinted as Appendix Twenty, and by a letter of mine to Mr.
Glass, dated February 29th, 1916, reprinted as Appendix
Twenty-One. A few quotations from addresses I was invited
to deliver in those years may likewise serve to throw further
light upon the efforts made at that time to overcome the resistance of those hesitating to follow, or offering determined opposition to our plans and views. 1 The following is a quotation
from my address to the bankers of Minneapolis and St. Paul:
It is to your interest to see the Federal reserve banks as
strong as they possibly can be. It staggers the imagination
to think what the future may have in store for the development
of American banking. With Europe's foremost financial
powers limited to their own field, with the United States
turned into a creditor nation of all the world, the boundaries
1 Cf. speeches made at Charlotte, North Carolina, on November 23rd, 1915;
St. Paul, Minnesota, on October 22nd, 1915; Atlantic City, on June 9th, 1916;
and Kansas C i t y , on September 29th* 1916; all of which may be found in
Volume T w a

152

THE FEDERAL RESERVE SYSTEM
of the field that lies open for us are determined only by our
own power of safe expansion. The scope of our banking
facilities will ultimately be limited by the amount of gold that
we can muster as the foundation of our banking and credit
structure. Gold that is carried in the pockets of the people,
gold that accumulates as excess reserves in the member banks'
vaults, does not afford the maximum service that the country
is entitled to expect. Excess balances and idle gold should
accumulate in the Federal reserve banks. They should not
control $300,000,000 of gold, as they do now, or $450,000,000
as they will after another year, but they should control a
billion or two of gold. The stronger the Federal reserve banks
become, the stronger will be the country and the greater its
chance to fulfill with safety and efficiency the functions of a
world banker. The basis of this development must be
confidence. Unless the member banks are profoundly convinced that their balances are as safe with the Federal reserve
banks as they are in their own vaults—besides being more
useful and efficient there—and unless they are convinced that
the Federal reserve banks will not abuse their vast resources
for inflation of credit or for the purpose of aggressively competing with the member banks, the full growth of the System and
with that the full growth of American banking, cannot be
attained.

In the same vein is a quotation from an address delivered
at Kansas City before the American Bankers' Association:
Does it not appear ridiculous that a country owning over
$2,500,000,000 of gold should not be able to mobilize a larger
free gold reserve than $200,000,000—or $300,000,000—
particularly when it is apparent that its future financial and
economic growth will depend upon the extent of the "preparedness" that it can provide in this respect?
If Mr. Glass felt obliged to combat the theories and
expressed in the speeches just quoted, he was not alone
opposition; he found strong support among prominent
omists and editorial writers. As an illustration,

views
in his
econsome

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153

"leaders" may be cited which appeared at that time in The
Commercial and Financial Chronicle. These are reprinted
herein as Appendix Twenty-Two and Appendix Twenty-Three,
respectively. Indeed, a member of the Board who shared
Mr. Glass's views took issue with me in public concerning the
opinions I had expressed upon the vexed problem of gold concentration in the above mentioned Kansas City address.
This clash between Board members was freely discussed by
the Press. Hence it seemed wiser not to prolong a public
controversy. An unpublished reply to this colleague of mine,
reprinted as Appendix Twenty-Four, may, however, prove of
interest, as it offers an impressive illustration of the earnestness
and persistence with which honest differences of opinion were
fought out between us. It is gratifying to record, however,
that bitter debates in the board room never affected the personal relations between members. A feeling of warm friendship developed in spite of, or possibly even by reason of, these
differences of opinion, and while delays were often caused by
these controversies, progress was all the more enduring when
it finally was secured.
The Board's proposed amendments made satisfactory progress in the Senate, but the House—under Mr. Glass's influence succeeded in emasculating the proposed modification of the
section covering the note issue. The Conference Report of
August 23rd, 1916, contained the following significant paragraph: 1
T h e Senate receded from its amendment of section 16 of the
Federal Reserve A c t which would have explicitly authorized
and encouraged Federal reserve banks to issue Federal reserve
notes based upon gold or gold certificates.

It is true that the amendment as passed on September 7th,
1916, provided, among other things, for the utilization of
acceptances and bills bought in the open market as collateral
1

Willis,

p. 1261.

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THE FEDERAL RESERVE SYSTEM

for Federal reserve notes, and that it gave power to the Board
to permit member banks " t o carry in the Federal reserve banks
any portion of their reserves now required to be held in their
own vaults." This denoted some progress at least in the right
direction.
As for myself, I continued, both inside the Board and out,
to stress the imperative need for the mobilization of the country's gold.
The following is a quotation from an address entitled
"Government and Business,"delivered by me in Chicago on
April 7th, 1917, after we had entered the War:
. . . About our power to take care of ourselves there can
be no doubt. But in view of the unparalleled demands that
may be made upon us both during the War and after the
conclusion of peace—demands which it may be our highest
national interest and duty to satisfy—we should not neglect to
perfect our financial machinery to such a degree as to give it
the greatest possible strength.
For this reason the Federal Reserve Board has again recommended to Congress amendments having for their object a
still further concentration in the Federal reserve banks of gold
now held in scattered bank reserves and a more liberal substitution of Federal reserve notes for our present rigid 100
per cent gold certificate circulation.
One billion dollars, one-third of the gold holdings of the
United States, is at present "unaccounted for;" you and I
carry it in our pockets, it is in the tills of the baker, the grocer,
and the dry goods store. We all would just as lief take
Federal reserve notes—our government's absolute obligations
secured at present by practically 100 per cent of gold and all
the assets of the Federal reserve banks. It is as apparent that
it would increase our strength enormously if we could add to
our organized reserves a substantial portion of this wasted
gold, as it is obvious that it would be nothing short of a crime
wilfully to withhold from our country at this time so vital an
addition to its power of offense and defense.

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155

Unfortunately, in the general tie-up of all legislative work
at the end of the preceding session, Congress was unable to
pass the desired legislation. It is most essential for the best
interests of the country that prompt action be taken by the
present Congress and it is most desirable that public opinion
assist the committees on banking and currency in securing
early and favorable consideration of these amendments, which
will enable us promptly to complete our financial mobilization.

These amendments relating to gold reserves and note issue
were prepared before the United States entered the World War.
By presenting them and urging their adoption, the Reserve
Board had only done its duty; it had looked ahead and had
endeavored to place the United States in a position of adequate
financial preparedness. Mr. Glass's resistance to the Board's
plans, however, could not be broken down. Even during the
critical months immediately preceding and following our
declaration of war, he stubbornly held to his views. Secretary
McAdoo, on the other hand, after the problem had been
explained to him, quickly understood the weakness of the
System and the dangerous conditions which might develop.
Wholeheartedly and with his usual energy, he placed himself
on the side of the amendments 1 ; in fact, he helped to consolidate
the Reserve Board's stand in the matter and urged Mr. Glass,
in consideration of the impelling needs of the situation, to
consent to the proposed changes. But Mr. Glass remained
adamant. The problem became so important that President
Wilson, upon the Board's insistence and at Mr. McAdoo's
request, entreated Mr. Glass to cooperate with us. Still the
latter persisted in his resistance, and the only concession he
reluctantly would make was, temporarily, to remove himself
from the Congressional field of battle. He agreed that, if,
during his absence, we should be able to secure the coveted
1 A record of these amendments may be found in the 1916 and 1917 numbers
of the Federal Reserve Bulletin.

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THE FEDERAL RESERVE SYSTEM

legislation, he would not obstruct it. A difficult task then
devolved upon me, leading to an intensely interesting situation.
In Mr. Glass's absence, Mr. Michael Phelan, of Boston,
became the acting Chairman of the House Banking and Currency Committee. I promptly made an appointment with
him and shortly afterwards we walked together to the Treasury
Building. On one side of the meeting-room of the Reserve
Board, a huge blackboard had been placed. This blackboard
extended from one end of the room to the other and showed in
colored lines the amount of our investments and our gold
holdings. With the aid of this diagram, it was easy to demonstrate how quickly added demands would wipe out our free
gold reserves. I had never met Mr. Phelan before; but, during
our long talk in front of this graph, I was impressed with his
earnestness and courage. It was no easy matter for him to
assume the responsibility of leadership in securing legislation
to which, it was well known, the chairman of the Banking and
Currency Committee, whose name carried so much authority,
was unalterably opposed. A t the end of our discussion, Mr.
Phelan said he wished to take a few days in which to think the
matter over. A little later he showed his mettle by stating
that he had become convinced of the fact that there was an
imperative need for the new legislation and that he was willing
to do his share in bringing it about.
Mr. Edmund D. Piatt, the present Vice Governor of the
Federal Reserve Board, was then the ranking Republican on
the Banking and Currency Committee. I invited him to walk
over to the Treasury with me so that I might explain the
situation to him by the aid of our chart, just as I had previously
explained it to Mr. Phelan. Like Mr. Phelan, he soon appreciated the grave dangers of the situation, and unhesitatingly
promised to give me his wholehearted support in averting
them.
In the Senate, few obstacles were encountered, because

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157

Senator Owen, in the early days before the Federal Reserve
A c t was passed, had accepted the doctrine which we were
seeking to have adopted by the law. In fact, it may be recalled
that the Federal Reserve Bill as sponsored by Senator Owen
in the Senate, and as passed by that Chamber, contained a
provision permitting Federal reserve notes to be counted as
reserves, which was, in effect, what we were now asking for,
although we were now seeking it in a form which was less
objectionable to those who had so strongly committed themselves against the earlier proposal.
It would be interesting to relate some of the dramatic
incidents which took place in connection with the task of
steering the amendment through Congress, but it must suffice
to say that in June, 1917 it passed both Houses. A statement
to the press made by the Board on January 13th, 1917, at a
time when our proposals had been submitted to Congress and
had received sympathetic consideration in the Senate, although
they had failed to make progress in the House, is given herein
as Appendix Twenty-Five.
T h e importance of this new legislation can scarcely be
overestimated, for it was the amendment relating to reserves
which enabled the Reserve System to corral and mobilize the
country's gold and thereby to finance, as well as it did, the
unparalleled demands of the War. It is this amendment
which gives the Reserve System the unequaled strength it
commands to-day.
T h e Federal Reserve Board in its Annual Report for the year
1917 (page 13) makes the following comment upon the effect
of the Amendment of June 21st, 1917:
The gain in actual cash by the Federal reserve banks,
following the amendments, may be best demonstrated by a
comparison of their condition on June 1st (three weeks before
the amendments were adopted) with their condition on
August 3rd.
On the earlier date the gold and lawful money held by

158

THE FEDERAL RESERVE SYSTEM
Federal reserve banks and by Federal reserve agents amounted
to $933,427,000, while on the latter date the total was $1,421,382,000, and for the same period the free gold—that is, the
surplus over required reserves—increased by $300,000,000.

This modification of the law produced a fundamental change
in the basic structure of the Reserve System and made it
follow the same line of thought as the "United Reserve B a n k "
and the "National Reserve Association" plans. Dr. Willis
has the following to say in connection with the amendment: 1
This modification . . . was a direct breach in the entire theory of the Reserve Act. In the original act provision had been
made for a threefold reserve. This included: (1) a deposit
with the reserve banks of a compulsory amount, (2) a holding
of vault cash also compulsory up to a minimum sum, and (3)
an intermediate amount which might be held in vault or
transferred to reserve banks. The theory of the act had been
that in times when reserve banks needed greater strength they
would so alter their policy and adjust their rates as to attract
this variable element of reserves to their own vaults, while at
times when credit could properly be relaxed they would repel
it and thus transfer to member banks the responsibility for
enlargements of the volume of credit in the market, enabling
them to proceed regardless of reserve bank policy. This plan
was substantially developed upon the experience of the Bank
of England and represented an adaptation of the "private"
and "public" rate policy and practice of that bank2 . . .
Willis, The Federal Reserve System, pp. 1179-80.
There are many reasons why the analogy of the Bank of England would not
apply. There are no " m e m b e r " banks in England; there are no compulsory
balances; and whereas only a few huge branch banking institutions cooperate
with the Bank of England, we have more than 27,000 banks in the United States.
Moreover, England has a highly developed discount market which serves as a
daily regulator of balances, while we have not. But, irrespective of these overwhelming differences, it is absolutely impossible to understand how any
Federal reserve discount policy could draw gold out of the tills of member
banks, or "repel i t , " so long as Federal reserve notes could not be counted as
reserve money and so long as the law stipulated the minimum to be maintained
in vault and reserve balance combined. N o interest being allowed on these
1

FEDERAL RESERVE ACT IN EVOLUTION

159

The new amendments abandoned the older theory and
substituted for it the notion of obtaining and holding as large
a proportion of reserve funds as possible, with a view to having
at all times on hand a vast credit-granting power. Those who
believed that reserve notes would figure largely in the reserves
of member banks also predicted that this change—which had
in effect although not in name been included in the amendments—would likewise greatly strengthen the credit inflating
or extending power of the system . . .
In passing, it may be noted that Dr. Willis is still regretting
the passage of these amendments and has not ceased urging
Congress to turn back the hands of the clock by canceling
what he erroneously calls the "war amendments," and to
return to his "scientific" plan which would cripple the reserve
power of the Reserve System. Actually, of course, it is not
true that the Amendments of June 21st, 1917, were proposed as
" w a r measures;" on the contrary, as we have seen, they had
been repeatedly considered and urged by the Reserve Board
before the War began.
In contrast to Dr. Willis, Senator Glass seems to be willing
to bow to the evidence furnished in this respect by the record
of the achievements of the Reserve System after the passage of
these amendments. In summing up the services rendered by
the Reserve System, he says: 1
reserve balances, discount rates could by no stretch of the imagination affect
the movement from tills to reserve bank balances or the reverse. I t is quite
impossible to give the doctrine propounded by Dr. Willis any practical meaning. I t is odd, moreover, to see Dr. Willis designate the Bank of England's
system as the only " s c i e n t i f i c " one, when England is moving rapidly to-day
toward a modification of her time-worn methods on lines following more nearly
the theory of the Bank of the Netherlands, the National Bank of Switzerland,
the Reichsbank, the Banque de France, the Swedish Riksbank, the Norwegian,
Danish, and Austrian central banks; in other words, toward the theory
guiding all other central banks and one which agrees entirely with the theory
adopted in these amendments to the Federal Reserve A c t .
1 Glass, ibid. pp. 305-306.
y

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THE FEDERAL RESERVE SYSTEM
The services of the reserve system in connection with what
is called the "gold problem" should be mentioned in this same
connection, especially as they have seldom been correctly
appraised. At the close of the war we had on hand a substantial national stock of gold, but the post-war years brought
immense transfers of the metal to our shores, as foreign
countries adopted this mode of settling their obligations and as
new production of gold found itself obliged to seek a market
where the price was not regulated. The outcome was an
increase in gold holdings up to an amount which is now
variously estimated as anywhere from $4,000,000,000 to
$4,500,000,000, or probably about one third of the visible
gold supply of the world. This large holding of gold has of
late years been held to the extent of almost two thirds in the
vaults of the reserve banks. As it has come into the United
States, it has been used by the member banks to which it was
consigned for the purpose of paying off their obligations to the
federal reserve banks of their respective districts. The
federal reserve banks have held it as the basis for their
outstanding credit. They have thus kept it from entering
immediately into circulation and so constituting the foundation for an extended inflation in prices and values as it might
have, had the system not been in existence. Whatever may
be thought of the discount policy of the reserve system there
can be no doubt that in one way or another the gold holdings
referred to have been protected from the direct drafts which
would otherwise have been brought to bear on them. Thus
an important service to the general object of price stabilization
has been rendered.

Whether or not one quite agrees with the economic theory
here propounded, no one could suspect Senator Glass, from
the expressions just quoted, of approving Dr. Willis's scheme
for again scattering, among the eight thousand seven hundred
member banks, a vast portion of the Reserve System's gold,
and of once more reducing the aggregate of Federal reserve
circulation outstanding to the amount of bills discounted by
the reserve banks.

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161

When the Federal Reserve Act was under consideration by
Congress, Mr. Glass's opponents argued that it was bound to
cause inflation. In reviewing this prediction, fourteen years
after it was made, Senator Glass says s1
None of the disasters prophesied by this distinguished
statesman have yet broken upon the country as a result of
the enactment of federal reserve legislation. The regional
banks have the greatest reserve of gold ever assembled outside
the bowels of the earth. Through their agencies was managed
the most inconceivable flotation of war loans in the history
of the universe; and to-day the prosperity of the nation seems
inseparably associated with the maintenance and wise administration of the system.
But while Senator Glass thus stresses the point that the
Reserve System did not cause inflation through the concentration of "the greatest reserve of gold ever assembled outside
the bowels of the earth," he amazes us by his inconsistency
when, in discussing in 1927 the proposals contained in the
Senate bill of 1913, he reiterates his time-worn and disproved
charges :2
. . . the Senate tremendously accentuated the alleged
"inflationary" features of the measure, if it did not make
inevitable the greatest imaginable amount of inflation. At
one stroke, in authorizing federal reserve notes to be counted
by member banks as a reserve, it made possible inflation to
the incredible amount of six billions of dollars, as computed
by competent actuaries. By authorizing bank acceptances
on domestic transactions, thus creating contingent liabilities
of great volume with not one dollar of gold cover, it not only
made certain credit expansion beyond approximation, but
would have introduced an untried and exceedingly dangerous
banking practice.
It is well known, of course, that ever since 1917 the much
denounced "domestic acceptances" have been authorized by
1
2

Glass, ibid.> p. 202.
Glass, ibid., p. 200.

162

THE FEDERAL RESERVE SYSTEM

an amendment to the Federal Reserve Act and, not only
have they not caused the predicted inflation, but they
have proved most beneficial to the agricultural sections of the
country and have been of great assistance in widening the
American discount market. The Amendments of 1917,
furthermore, permitted Federal reserve notes to take the place
of gold and lawful money in the tills of member banks. It is
difficult to follow Senator Glass's process of reasoning when
he defends the Reserve System against the charge of having
produced inflation and, at the same time, reiterates his contention that these two Senate proposals, i. e. the one relating
to domestic acceptances and the other permitting Federal
reserve notes to take the place of gold and lawful money
in the tills of member banks, which, in effect, have now been
in force since 1917, would not only have made "credit expansion certain beyond approximation, but would have introduced an untried and exceedingly dangerous banking practice/'
The history of the " G o l d Settlement F u n d " furnishes
another striking illustration of the inevitable advance of the
twelve separate reserve banks toward an organically united
System. The " G o l d Settlement F u n d " established to facilitate the settlement of balances between Federal reserve banks
has been one of the highest achievements of the Reserve
System. It enabled the reserve banks to adjust by means of
simple book entries the debit and credit balances resulting
from their huge daily operations and to avoid wasteful shipments of gold and currency. The telegraphic transfer system,
established as a corollary of the organization of the " G o l d
Settlement Fund," has also proved of the greatest economic
advantage, not only to the member banks, but to the entire country.
The development of the operations of the fund on its
present gigantic lines was due largely to the Amendment of
June, 1917, which gave the Federal Reserve Board clearly
defined authority to operate a Gold Clearing Fund, to the

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163

Treasury authority to act as custodian of the gold deposited
with it by the Federal reserve banks, and to the reserve banks
the right to treat gold deposited in this fund as part of their
required reserves. 1 The outstanding importance of this amendment, however, lay in the fact that, while until then there had
been no lawful organic cohesion between the reserve banks—
cooperation between them depending entirely upon the administrative measures of the Reserve Board—the law now created
frankly and unequivocally an organic link which united twelve
regional banks into a single coordinated system of strength
and efficiency.
The original Federal Reserve Act had provided that the
Reserve Board might " a c t as a clearing house.'' A similar
provision had already been embodied in the "United Reserve
B a n k " and the "National Reserve Association" plans; but
with the great difference that the proposals therein contained
dealt with corporate bodies, which could readily act as clearing
houses, while the Federal Reserve Act made it impossible for
the Reserve Board to exercise such a function, because the
Act had given the Board neither a corporate nor a financial
responsibility. Whether the writers of the Act avoided
incorporating the Board and neglected to endow it with an
adequate capital for fear it would thereby approach the
dreaded appearance of a central bank, or whether in taking
over the provision from the earlier proposals they had merely
failed to appreciate the needs of the problem, is an open
question. In any case, the Board, as such, until a change was
made in the Act, could not itself exercise a function which
Congress had evidently intended it to exercise.
In its quest for a remedy, the Board debated the possibility
of having the Richmond Federal Reserve Bank open a branch
at Washington for the purpose of using it as the "clearing
house" for the reserve banks, or of authorizing the Federal
Reserve Bank of Chicago, on account of its central location,
1

The amended sections will be found in Addendum I V herein.

164

THE FEDERAL RESERVE SYSTEM

to assume this function; but for obvious reasons both of these
plans had to be abandoned. A temporary plan was then
devised under which the reserve banks paid into the Treasury
or Subtreasuries gold certificates in large denominations,
while, once a week, the Treasury issued a corresponding
amount of new gold certificates in the names of those reserve
banks to which, in accordance with the certification of the
Reserve Board, a balance in the clearing between reserve
banks was due. This procedure, however, was clumsy and
circuitous, and enabled some critics to make the charge of
" extra-legality." Doubt was expressed by such critics as to
whether gold held in this fund could lawfully be counted by
reserve banks as part of their reserve. Hence the necessity
of an amendment which, as already stated, was obtained in
June, 1917. If the Reserve System, in its interdistrict
operations, functions as a unit to-day; if the Gold Settlement
Fund manages transactions involving billions of dollars a year;
and if the gigantic operations of the Treasury, in peace and in
war, have been carried on for a decade so as hardly ever to
cause a ripple in the money market, it is largely due to the
establishment and perfection of this machinery. But it is a
far cry from a plan of twenty entirely distinct and independent
regional banks to the present system of twelve reserve banks
united by the law into one interlocking organization.
It is tempting, but would lead too far afield, to trace in detail
the evolution of the Federal Reserve System's attitude regarding the membership of state banks and trust companies. A
review of the long list of drafts of regulations and amendments,
submitted from time to time to and by the Board, would
illustrate the slow and painful progress from a narrow conception of the Reserve System as a rediscounting machine,
designed primarily for the benefit of national banks (and state
institutions only insofar as they would restrict their own
functions substantially to those exercised by national banks),
to the adoption of the broader policy of liberalizing the powers

FEDERAL RESERVE ACT IN EVOLUTION

165

of national banks, so as to enable state institutions to enter the
System on a basis of parity without the loss of valuable powers
and privileges. It would be equally instructive to show by
the evidence of the drafts of regulations and amendments how,
step by step, the acceptance powers of member banks were
enlarged and how the Reserve System's attitude toward
acceptance operations, narrow and provincial in the beginning,
became more and more liberal, culminating in the creation of a
credit system extending over the entire world. In order to
enable the reader thoroughly to grasp the true scope and
meaning of the amendments here discussed, and in order to
place him in a position fully to understand their far-reaching
effect upon the ultimate development of the Reserve System,
the sections of the Federal Reserve Act bearing upon membership of state banks and trust companies, note issue and reserves, the Gold Settlement Fund, the powers of reserve banks,
and the powers of member banks to accept, are herein reprinted
in Addendum IV, which shows both the original text of the
respective clauses and the text as it stood after the passage of
the Amendments of June 21st, 1917. The effects of these
amendments may readily be seen from four charts presented
on the following pages. These charts tell their own story even
when due allowance is made for other factors, such as the direct
and indirect influence of the War, which aided and accelerated
the developments indicated by the graphs. 1
1 A study of these charts may prove instructive to the readers of Dr. Willis's
book on The Federal Reserve System in view of the many severe criticisms of the
first Board contained therein. He charges the first Board, not only with bias
and a lack of sympathy with regard to the Act, but also with neglect to
strengthen and prepare the System for the eventuality of the strain of the
impending war emergencies. It may suffice to cite here two of his statements
along these lines. T h e first may be found on page 836 as follows:
" T h e fact that the war was in progress and that eventually there was at least
a possibility of American participation, must from time to time have been present to the minds of every member of the group but was ignored by all in the
absorption of routine work and the process of playing the daily game of politics.
T h u s there was no distinct provision against the future, no building up of strong

166

THE FEDERAL RESERVE SYSTEM

There is still another development which should be mentioned
here as signifying gradual progress in the perfection of the
Reserve System. This was a development bitterly opposed
by both Mr. Glass and Dr. Willis, but as we see it to-day it
was a development which contributed very largely to the
present efficiency of the Reserve System.
T h e position of the Reserve Board, as designed by the Act,
was bound to prove exasperatingly difficult and trying. T h e
office was burdened with the handicap, commonly imposed
upon so many branches of administration in a democracy, of a
system of checks and counter-checks—a paralyzing system
which gives powers with one hand and takes them away with
the other. T o a certain extent, the consequences of the imposition of such a system have to be accepted as the price a
country must pay in order to safeguard its democracy. Success or failure in such cases generally depends on the wisdom
with which the balancing of the checks and counter-checks in a
legislative act is handled, and on the intelligence with which,
later on, the act is administered.
When the writers of the Federal Reserve Act began to deal
financial machinery which should be used in the event of the difficulty already
threatening and eventually unavoidable."
T h e second appears on page 619, and reads:
. . None of the members had played any part in the actual work of forwarding
the adoption of the Federal Reserve Act, while at least one had been directly
opposed to its enactment, and at least one other had had membership in an
organization which had been distinctly hostile throughout the whole formative
period of the new law. T h e Secretary of the Treasury, as has been seen, had,
moreover, sought to substitute another measure for the original bill or plan,
and the same was true of the Comptroller of the Currency, so that the new
choices represented in this respect nothing different from the early attitude of
important members of the administration.
Nevertheless, it was true that the Board as first constituted was predominantly doubtful of, or actually hostile to, the law which it had been set to
administer. . . . "
One is tempted to inquire whether a surgeon fighting a cancerous growth may
be fairly considered as " h o s t i l e " to the patient or to the disease.

FEDERAL RESERVE ACT IN EVOLUTION 187

STATE BANK AND TRUST COMPANY MEMBERS

188 THE FEDERAL RESERVE SYSTEM
FEDERAL RESERYE BANKS

NOTE I-Cash reserves include gold, legal tender notes, and silver.
"
i-Member bank reserve balances prior to igiy are shown net, i.e.
after deduction of amounts of items in process of collection.

FEDERAL RESERVE ACT IN EVOLUTION

169

with the link that was to connect the reserve banks, they
evidently first thought of it as no more than a supervisory
organ, Mr. Glass, as we have seen, proposed to charge the
Comptroller of the Currency with this function, while President
Wilson envisaged an "altruistic Board" as the capstone of the
System. When the President discussed with bankers their
plea that the Board should include members of the banking
profession delegated by the reserve banks, he asked them if
they knew of any important government board of control on
which private interests were represented.1
It is to be regretted that, in their reply, the bankers did not
raise the question whether the Federal reserve banks could
fairly be considered as "private interests." One would hardly
designate the Bank of England, the Banque de France, or the
Reichsbank as "private interests" and, as each Federal
reserve bank is practically a central bank in itself, the wish to
secure for these Federal reserve banks a modest minority
representation on the Board was entirely justified. The
recommendation seemed all the more warranted as it was
suggested that these Federal reserve bank representatives
might be chosen subject to the approval of, and final appointment by, the President. The bankers, furthermore, should
have stressed the point that the first thing to be agreed upon
was whether the Reserve Board was in reality going to be a
1 Glass, ibidp.
n 6 . Senator Glass indicates that this question convinced
the bankers of the weakness of their position, since no " c o n v i n c i n g r e p l y " was
possible. E v i d e n t l y Senator Glass brushes aside the fact that there are bankers
on the boards of directors of many of the European central banks. On the
board of the B a n k of England, there are to-day partners of the Morgans,
Barings, Lazards, and Schroeders. In London, however, these are termed
" m e r c h a n t b a n k e r s " — a fact which has led to the mistaken assumption over
here that bankers are excluded. Of the twenty-four directors of the B a n k of
England, outside the governor and the deputy governor, at least eight at present are bankers in our meaning of the word. T h e General Council of the
Reichsbank, as reorganized under the Dawes Plan, consists of fourteen members
(in addition to the president); of these—seven are representatives of foreign
countries and seven members represent Germany. All of the seven German
representatives are private bankers or bank officers.

170

THE FEDERAL RESERVE SYSTEM

purely supervisory board of control, or whether it was to be a
body endowed with important executive and administrative
powers. They might then have added that, if it was to be a
purely supervisory board, the Reserve System was doomed.
If the Reserve System was to retain the character of a regional
organization, with actual operations left in the hands of the
reserve banks, it was obvious that the System could not be
expected to function as a coordinated unit unless the Reserve
Board was vested, not only with the powers of supervision,
regulation, and approval, but also with powers, expressed or
implied, to influence and, if need be, to direct certain operations
of the twelve reserve banks so as to assure their harmonious
cooperation.
As the formulation of the law proceeded, many attempts
were made to find a satisfactory answer to the tantalizing
puzzle of how to safeguard the autonomy of the reserve banks
while giving, at the same time, adequate coordinating and
directing powers to the Reserve Board. This phase of the
problem will be more fully dealt with in subsequent portions
of the volume.
It was the desire to carry the theory of a divided control
into the directorates of the reserve banks that led the writers
of the Federal Reserve Act to devise the perfectly logical and
commendable plan of having six directors (Class " A " and
Class " B " ) elected by the member banks, and three directors
(Class " C " ) appointed by the Reserve Board. But they
pushed the principle of dual control to an extreme when they
begot that somewhat amphibious creature, the Federal reserve
agent, and compelled him to divide his mind and heart in two,
one half to function as the mouthpiece and organ of the Reserve
Board, and the other as a director of the reserve bank. He
was to be the Reserve Board's ambassador and official observer;
but, at the same time, in the capacity of a Class " C " director,
his responsibility to the stockholders was on a par with that of
the Class " A " and Class " B " directors.

FEDERAL RESERVE ACT IN EVOLUTION

171

Who was actually to manage the affairs of a reserve bank had
been left an open question in the Federal Reserve Act, which
provided merely that the three Class " C " directors, constituting in each bank only a minority of the board of directors, acting together with the six Class " A " and Class " B " directors,
were to appoint the managing officer of the bank. Obviously,
the Federal reserve agent, appointed by the Board, could not be
made the active manager of a reserve bank, because that
would have placed the Board in a position of responsibility for
the operations of the reserve bank, whereas such responsibility
plainly rested with the directors, a majority of whom were
elected by the member banks. The only possible solution was,
therefore, to make the Federal reserve agent the presiding
officer, ambassador, and observer, while the function of heading
the actual operations of the bank was vested in a president or
manager appointed by the combined action of the three classes
of directors of the reserve banks. In the minds of the framers
of the Federal Reserve Act, there seems to have prevailed some
vague idea that the Federal reserve agent should be the overtowering personality, with the manager as the subordinate.
But, as already stated, this, in effect, would have made the
Reserve Board responsible for the operations of the reserve
banks; it would have vitiated the theory of the autonomy of the
reserve banks; it would have been unacceptable to the member
banks; indeed, it would have created the very central bank with
branches which the writers of the Act had so passionately
denounced.
;

In these circumstances, if the reserve banks were to develop
as independent institutions; if, as such, they were to assume
positions of leadership in their communities; and if they were
to supply the Reserve Board with the instruments of influence
and power which were indispensable for the success of the
System, it followed that an effort would have to be made to
secure men of the highest possible type for the managerial
position. If this was the aim to be accomplished, the office of a

172

THE FEDERAL RESERVE SYSTEM

reserve bank manager would have to be endowed with all possible prestige so as to render it attractive to men of high standing
in the several communities. With this end in view, I urged
the Board to authorize the title of "governor" for the heads of
the reserve banks and, happily, the Board approved the
suggestion, although neither Senator Owen nor Mr. Glass were
in sympathy with it. There were also some members of the
Board who subsequently regretted this action. They feared
that the Board, by creating these positions of prestige, had
weakened its own standing. I never shared this view, for I
always believed, as I do to-day, that strong leadership on the
part of the reserve banks in their several districts is a prerequisite for the success of the entire System.
It was a very difficult task to find properly qualified men
willing to accept positions as Federal reserve agents and
governors, particularly when the salaries that a system without any proven earning power could offer were far below what
men of the necessary ability could earn in other positions. In
these circumstances, an appeal to men to join the staff of the
Reserve System, either as governors or Federal reserve agents,
could meet with favorable response only where the willingness
to render public service outweighed the natural desire for
material advancement. Beyond doubt, the country owes a
debt of deep gratitude to the leaders among the agents and
governors who, as pioneers, were willing to sacrifice their
private interests in order to accept these toilsome and unremunerative positions. Without them, the System could never
have attained the success of which the nation is so justly proud.
In most cases, the material sacrifice was smaller for the
governors than for the Federal reserve agents, because as
representatives of the Reserve Board they were regarded as
holding an "honorary" office, and it was thought that, like
Reserve Board members, they should be willing to accept the
smaller compensation customary for that type of position.
But Federal reserve agents were, as a consequence, entitled to

FEDERAL

RESERVE

ACT

EVOLUTION

173

believe that, in keeping with this theory, their office would be
one of particular dignity. They had a right to assume that, if
representing the Reserve Board on their respective directorates
was to be their outstanding duty, the Board would consider
them as a medium for whatever messages it wished to convey
to the reserve banks. After an initial attempt to adopt this
method, the Board, however, found it impossible to have a
common policy permeate the System, if it declined all contact
with the governors; and, as years went by, it became more and
more the Board's practice to communicate with the governors
directly concerning matters of operation, while it continued,
in theory, to hold that official messages and communications
concerning general policy and conditions should be addressed
to the Federal reserve agents. Fourteen years of practical
operation have shown that, even where the best spirit prevails
on all sides, the dualism in the administration of the reserve
banks has proved a source of perplexity, confusion, and, at
times, irritation and discouragement. A problem has been
created which, for all three parties concerned, the Board, the
Federal reserve agents, and the governors, has proved to be
practically impossible of a satisfactory solution.1
From the foregoing, it may be readily perceived how impossible it would have been for the Board to direct a system of
twelve reserve banks if a policy of keeping these banks wide
apart from one another, with the Board serving as the sole
center and instrument of communication, had been pursued.
It was obvious that in deciding questions of technical routine,
as well as in establishing a uniform understanding of the
Board's rules, regulations, and general policies, harmonious
1 The experience of past years seems to indicate that a great many difficulties would be avoided were the three Class " C " directors simply to serve as
chairman and vice chairmen of the board of directors, and if functions such
as the handling of the Federal reserve notes and the making of certain reports
were separated from the chairmanship and placed in the hands of the Federal
reserve agent, whose office would then be confined more or less to the activities
now exercised by the assistant Federal reserve agent.

174

THE FEDERAL RESERVE SYSTEM

cooperation could only be brought about by establishing contacts between the heads of the twelve reserve banks, both
governors and Federal reserve agents. These considerations led to the early conclusion that, if the System was to
operate as a coordinated whole, the governors of the reserve
banks and the Federal reserve agents would, from time to time,
have to be brought together in joint conferences with the
Reserve Board. During the period of the initial development
of the System, these meetings proved to be of the greatest
value, because they gave the Board a much needed opportunity
to preach its gospel and to instill in the hearts and minds of
the officers of the banks a wider conception of the aims and
duties of the System, as against the petty, sectional point of
view which tended to prevail in some districts.
The conferences were, however, of even greater and continuing importance with regard to the momentous questions
of the discount and open-market operations, for which a basis
for close cooperation between the Board, on the one hand, and
the reserve banks, on the other, had to be found as a prerequisite for a satisfactory functioning of the System.
With regard to the establishment of discount rates, the law,
after many changes of heart on the part of the framers of the
Act, had finally left the power of naming the rate with the
reserve banks, but the power to review such rates and to
determine them definitely was left with the Board. The
dangerous possibilities resulting from this wide-open compromise provision, which left all sides unprotected, are treated
more fully in Chapter X I I and Addendum I. Here, it suffices
to say that the two conflicting intentions of the Act—the one to
create autonomous banks and the other to create a supreme
Board—cannot be harmonized by either the banks or the Board
claiming or receiving from Congress an exclusive right; solution
of this problem can only be found in voluntary agreement and
intelligent cooperation on the part of all concerned. If the
Board is to avoid acts of coercion and if at the same time individ-

FEDERAL RESERVE ACT IN EVOLUTION

175

ual reserve banks are to be prevented from playing a lone and
selfish game, not in keeping with the broad policy which the
Board, after close study and consultation, has determined as
being in the best interests of the country as a whole, joint
meetings at which the System's problems are thoroughly
discussed, and at which a broad understanding of the general
situation is secured, are indispensable.
But the most fruitful field for these governors' conferences
was found in the unexplored question of open-market operations. The law confers upon each reserve bank the power,
individually and independently, to engage in open-market
operations. The hopeless confusion into which the System
found itself precipitated when each reserve bank, for itself,
began to engage in these transactions, could only be remedied
by devising a scheme for voluntary cooperation under a
common plan. Since the Reserve Board had authority only
to write rules and regulations for these operations, but had
no specific power to engage in, or to direct them, the ultimate
solution was found in having the reserve banks elect a Governors' Executive Committee which, to-day, under the auspices of
the Board, handles these open-market transactions for the
common account of all reserve banks desiring to participate
therein, and which, in a similar manner, acts as the medium
for uniting the reserve banks in their important transactions
with foreign central banks.
While the governors' conferences thus proved invaluable,
they nevertheless, from time to time, met with very strong and
determined opposition. In fact, for a while, they had to be
abandoned on account of the opposition raised against them.
It came from members of the Board, as well as from certain
individuals " o n the hill" who believed that the conferences
were an illegal or extra-legal attempt to create a central bank.
While, of course, there was nothing illegal or extra-legal about
the plan, it certainly is true that it brought the System one
step nearer to a coordinated central banking system, such as

176

THE FEDERAL RESERVE SYSTEM

had been envisaged by the United Reserve Bank Plan and the
Aldrich Plan.
The importance of a definite open-market policy, coordinated with the Reserve System's discount policy, is better
understood to-day than it was when the Federal Reserve Act
was written. With this phase of the problem we shall deal
more fully in later chapters; suffice it to say here, without fear
of contradiction, that, if in these operations each reserve bank
had been permitted to pursue a course of its own, the System
would have failed. In some form or other, a close cooperation
between the reserve banks had to be brought about. The law
having given the reserve banks a position of autonomy in the
matter of open-market transactions, it was nothing but an act
of wisdom on their part voluntarily to surrender it in order to
create a means of coordinating their individual operations.
In their own interests, and in order to avoid jealousies and
attacks, it was prudent for the reserve banks to seek the
coordinating influence of the Board in these joint operations,
even though the law had found it impossible and undesirable
to give the Board specific powers of direction in this respect.
Conversely, even though in the matter of fixing the rediscount
rates the law placed the ultimate power to enforce its will in
the hands of the Federal Reserve Board, the latter, having
regard for its own protection and the best interests of all concerned, would be ill-advised to resort to coercion instead of
making every effort to secure voluntary cooperation on the
part of the banks.
As was predicted long ago, the impelling need of a common
discount and open-market policy was bound to bring autonomous regional banks together if, to use the language of Dr.
Willis, the Federal Reserve System was " t o fulfill its entire
function as a genuine central banking system." 1
It is interesting to observe how those who had so passionately
condemned the Aldrich scheme as tainted with the charac1

Willis, The Federal Reserve System, Preface, page III.

FEDERAL RESERVE ACT IN EVOLUTION

177

teristics of a central bank were finally obliged to admit that
the Federal Reserve System could not be administered effectively unless it was frankly operated as a coherent central
banking system.
Upon a certain occasion, Senator Glass expressed his dissatisfaction with the Reserve Board, because the reserve banks
had shown themselves unwilling to do certain things which he
thought they should do. He suggested that the Board should
force the banks into submission.
" B u t , Mr. Glass," I said, with a smile, " t h e Board has no
power in the premises to force the banks and, moreover, would
not that make it a 'central bank' ?"
" O h , h — , " he answered, " i t is a central bank."
I have no doubt my colleagues will remember the incident,
because it was so intensely amusing that I promptly related it
to them.

CHAPTER

VIII

T H E ALDRICH BILL AND THE FEDERAL RESERVE
A C T : A JUXTAPOSITION OF T E X T S

E F O R E presenting our own conclusions with regard to
the similarities and dissimilarities between the National
Reserve Association Plan and the Federal Reserve Act,
conclusions which are embodied in Chapter X , it seemed
advisable to offer to the reader an opportunity of examining
for himself a comparison of these two bills, printed in parallel
columns. In order to make it as easy as possible to grasp
the essential points in such a juxtaposition, the paragraphs of
the Aldrich Bill have, in general, been printed in their original
sequence, while the Federal Reserve Act has been cut into
separate paragraphs, and these have been placed beside the
corresponding passages of the Aldrich Bill. A running commentary has been included at the foot of each section.
Serious students are earnestly requested to examine closely
this juxtaposition. Inasmuch, however, as many readers may
not find the time to dissect and compare carefully the legal
phraseology of the related sections of the two documents,
there has been prepared from this juxtaposition, and printed
immediately following it, as Chapter I X , An Analytical Comparison of the Aldrich Bill and the Federal Reserve Act Based
on the Juxtaposition of Texts Shown in Chapter Eighty which
in abstract form sets forth in parallel columns only the high
points of the two bills, so that their similarities and correspondences may easily be noted. 1
The author makes free, however, to suggest to his readers
1

This abstract is largely the work of Mr. R . W. Robey.

178

JUXTAPOSITION OF TEXTS

179

to cast at least a cursory glance upon the juxtaposition of
texts in Chapter V I I I and not to omit perusal of the running
commentary accompanying the comparison, as some of the
comments present essential elaborations.
Some duplication will be found in passages contained in the
commentary and in the text of the book. This is explained
by the fact that the original work began with the composition
of this comparison and its commentary, which served as working sheets for the book and which it was thought best therefore to leave undisturbed.

ABBREVIATIONS:

N. R. A.

National Reserve Association Bill

F. R. A.

Federal Reserve Act

U. R. B.

United Reserve Bank of the United States (Paul
M. Warburg scheme)
M . M . S. Where in the comparison of related sections the
substance has been found to be the same, making
due allowance for differences in language which are
of no particular importance or necessarily follow
from structural differences in the two bills, the
letters " M . M. S." will be used, meaning "Mutatis
Mutandis the
Same."
Matter printed in bold-faced type indicates similarities

180

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
{The Aldrich Bill)
SHARE

CAPITAL

Be it enacted by the Senate and House of Representatives of the
United States of America in Congress assembled, That the National
Reserve Association of the United States be, and it is hereby,
created and established for a term of fifty years from the date of
filing with the Comptroller of the Currency a certificate of paid-in
capital stock as hereinafter provided. It shall have an authorized
capital equal in amount to twenty per centum of the paid-in and
unimpaired capital of
all b a n k s eligible for m e m b e r s h i p

in said National Reserve Association. Before said association
shall be authorized to commence business two hundred million
dollars of the capital stock shall be subscribed and one hundred
million dollars of its capital shall be paid in cash.

(Continued on page 182)

JUXTAPOSITION OF TEXTS

181

Federal Reserve Act
SHARE

CAPITAL

SEC. 2. Under regulations to be prescribed by the organization
committee, every national banking association in the United States
is hereby required, and

every eligible b a n k

in the United States and every trust company within the District
of Columbia, is hereby authorized to signify in writing, within
sixty days after the passage of this Act, its acceptance of the
terms and provisions hereof. When the organization committee
shall have designated the cities in which Federal reserve banks
are to be organized, and fixed the geographical limits of the Federal
reserve districts, every national banking association within that
district shall be required within thirty days after notice from the
organization committee, to subscribe to the capital stock of such
Federal reserve bank in a sum equal to six per centum of the
paid-up capital stock and surplus of such bank, one-sixth of the
subscription to be payable on call of the organization committee
or of the Federal Reserve Board, one-sixth within three months
and one-sixth within six months thereafter, and the remainder of
the subscription, or any part thereof, shall be subject to call when
deemed necessary by the Federal Reserve Board, said payments
to be in gold or gold certificates.

(iContinued on page 183)

182

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
{The Aldrich Bill)

The capital stock of said association
shall be divided into shares of one hundred dollars each.
T h e outstanding capital stock m a y be increased from
t i m e to time as subscribing banks increase their capital
or as additional banks become subscribers or m a y be
decreased as subscribing banks reduce their capital or
leave the association by liquidation.

The head office of the National Reserve Association shall be located in Washington, in the District of Columbia.

COMMENT:

The principle is the same. A certain capital is to be subscribed by all member banks (national and state) and half
of the amount subscribed is to be paid in.
The differences are immaterial. The N. R. A. Bill stipulates
member bank subscriptions of 20 per cent of their paid-in
capital and a minimum of $200,000,000 total subscription for
the N. R. A. The F. R. A. stipulates member bank subscriptions of 6 per cent of capital and surplus and a minimum of
$4,000,000 total subscription for each Federal reserve bank. (At

JUXTAPOSITION OF T E X T S

183

Federal Reserve Act

SEC. 5.

The capital stock of each Federal reserve bank

shall be divided into shares of $100 each.

T h e outstand-

ing 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 m a y be
decreased as member banks reduce their capital stock or
surplus or cease to be members.

SEC. 2. No Federal reserve bank shall commence business with
a subscribed capital less than $4,000,000.

the close of 1928, the paid-in capital of the Federal reserve
banks was approximately $147,000,000 with a surplus of 254
millions.)
Shares of $100 and provisions for increase and decrease are
the same.

184

THE

FEDERAL

RESERVE

SYSTEM

National Reserve Association Bill
(The Aldrich Bill)
INCORPORATION,

SEC. 2.

CHARTER,

AND

POWERS

Upon duly making and filing with the C o m p -

troller of the Currency the certificate hereinafter required
the National Reserve Association of the United States
shall become a body corporate and as such and by t h a t
name shall have power—
First.

T o adopt and use a corporate seal.

Second.

T o have succession for a period

of fifty years from the date of said certificate.

Third.

T o make all contracts necessary

a n d p r o p e r t o c a r r y o u t t h e p u r p o s e s o f this A c t .
Fourth.

T o sue and be sued, complain and defend,

in any court of law or equity,
as f u l l y as n a t u r a l persons.

JUXTAPOSITION OF T E X T S

185

Federal Reserve Act
INCORPORATION,

CHARTER

AND

POWERS

SEC. 4. . . . Upon the filing of such certificate with the
Comptroller of the Currency as aforesaid, the said Federal
reserve bank shall become a body corporate and as such,
and in the n a m e designated in such organization certificate, shall have power—
First,

T o adopt and use a corporate seal.

Second.

T o 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.

Fourth.

T o make contracts.

T o sue and be sued, complain and defend,

in any court of law or equity.

186

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
{The Aldrich Bill)
Fifth.

T o elect or appoint directors and officers

in the manner hereinafter provided
and define their duties.
Sixth.

T o adopt by its board of directors by-laws n o t

inconsistent-with this Act, regulating the manner in
which

its property shall be transferred,
its general business conducted, and the privileges granted
to it by law exercised and enjoyed.

Seventh. To purchase, acquire, hold, and convey real estate as
hereinafter provided.
Eighth.

T o exercise by its board of directors or d u l y

authorized

committees,
officers, or agents,

subject to law,
all the powers

and privileges
conferred upon the National Reserve Association by this
Act.

COMMENT:

M.M.S.—except that the National Reserve Association Bill
provides for succession for fifty years, while the Federal Reserve Act has it for twenty years.

187

JUXTAPOSITION OF T E X T S

Federal Reserve Act

Fifth.

T o 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.

T o prescribe by its board of directors, by-laws

not inconsistent with law, regulating the manner in
which its general business m a y be conducted, and the
privileges granted to it by law m a y be exercised and enjoyed.

Seventh.
authorized

T o exercise by its board of directors, or duly
officers or agents,

all powers

specifically

granted by the provisions of this A c t

and such incidental powers as shall be necessary to carry on the
business of banking within the limitations prescribed by this Act.
. . . But no Federal reserve bank shall transact any business except
such as is incidental and necessarily preliminary to its organization until it has been authorized by the Comptroller of the Currency to commence business under the provisions of this Act.

188

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)
MEMBERSHIP

SEC, 3. All national banks,
and all banks or trust companies chartered by the laws
of any State of the United States

or of the District of Columbia, complying with the requirements
for membership in the said National Reserve Association, hereinafter set forth,
m a y subscribe to its capital

to an amount equal to twenty per centum of the paid-in and unimpaired capital of the subscribing bank, and not more nor less;
and
each of such subscribing banks shall become a member

of a local association as hereinafter provided. Fifty per centum
of the subscriptions to the capital stock of the National Reserve
Association shall be fully paid in; the remainder of the subscriptions or any part thereof shall become a liability of the subscribers,
subject to call and payment thereof whenever necessary to meet
the obligations of the National Reserve Association under such
terms and in accordance with such regulations as the board of
directors of the National Reserve Association may prescribe.
The subscriptions of a bank or trust company incorporated
under the laws of any State or of the District of Columbia to the

JUXTAPOSITION

TEXTS

189

Federal Reserve Act
MEMBERSHIP
SEC.

9.
Any bank

incorporated by special law of any State, or

organized under t h e general laws of a n y S t a t e or of t h e
United States, m a y m a k e application

to the reserve bank organization committee, pending organization,
and thereafter to the Federal Reserve Board

for t h e r i g h t to subscribe to t h e stock

of the Federal reserve bank organized or to be organized within
the Federal reserve district where the applicant is located. T h e
organization committee or the Federal Reserve Board, under such
rules and regulations as it may prescribe, subject to the provisions
of this section,
m a y p e r m i t t h e applying b a n k to become a stockholder

in the Federal reserve bank of the district in which the applying
bank is located. Whenever the organization committee or the
Federal Reserve Board shall permit the applying bank to become
a stockholder in the Federal reserve bank of the district, stock
shall be issued and paid for under the rules and regulations in
this A c t provided for national banks which become stockholders
in Federal reserve banks.

190

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
{The Aldrich Bill)

capital stock of the National Reserve Association shall be made
subject to the following conditions:
First, That (a) if a bank, it shall have a paid-in and unimpaired capital of not less than that required for a national bank
in the same locality; and that (J?) if a trust company, it shall have
an unimpaired surplus of not less than twenty per centum of its
capital, and if located in a place having a population of six thousand inhabitants or less shall have a paid-in and unimpaired
capital of not less than fifty thousand dollars; if located in a city
having a population of more than six thousand inhabitants and
not more than fifty thousand inhabitants, shall have a paid-in
and unimpaired capital of not less than one hundred thousand
dollars; if located in a city having a population of more than fifty
thousand inhabitants and not more than two hundred thousand
inhabitants shall have a paid-in and unimpaired capital of not
less than two hundred thousand dollars; if located in a city having
a population of more than two hundred thousand inhabitants
and not more than three hundred thousand inhabitants shall have
a paid-in and unimpaired capital of not less than three hundred
thousand dollars; if located in a city having a population of more
than three hundred thousand inhabitants and not more than four
hundred thousand inhabitants shall have a paid-in and unimpaired
capital of not less than four hundred thousand dollars, and if
located in a city having a population of more than four hundred
thousand inhabitants shall have a paid-in and unimpaired capital
of not less than five hundred thousand dollars.

JUXTAPOSITION OF T E X T S

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Federal Reserve Act

The organization committee or the Federal Reserve Board shall
establish by-laws for the general government of its conduct in
acting upon applications made by the State banks and banking
associations and trust companies for stock ownership in Federal
reserve banks. Such by-laws shall require applying banks not
organized under Federal law to comply with the

192

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
{The Aldrich Bill)
Second.

T h a t it shall have and agree to m a i n t a i n

against its demand deposits a reserve of like character
and proportion to t h a t required by law

of a national bank in the same locality: Provided, however, That
deposits which it may have with any subscribing national bank,
State bank, or trust company in a city designated in the national
banking laws as a reserve city or a central reserve city shall count
as reserve in like manner and to the same extent as similar deposits of a national bank with national banks in such cities.
Third.

That

it shall have and agree to

maintain

against other classes of deposits the percentages of reserve required by this Act.
Fourth.

T h a t it shall agree to submit to such exami-

nations and to make such reports as are required by
law and to comply with the requirements and conditions
imposed by this Act and regulations made in conformity
therewith.

JUXTAPOSITION OF TEXTS

193

Federal Reserve Act

reserve and capital requirements and to submit to the
examination and regulations

prescribed by the organization committee or by the Federal Reserve Board. No applying bank shall be admitted to membership
in a Federal reserve bank unless it possesses a paid-up unimpaired
capital sufficient to entitle it to become a national banking association in the place where it is situated, under the provisions of
the national banking Act.
Any bank becoming a member of a Federal reserve bank under
the provisions of this section shall, in addition to the regulations
and restrictions hereinbefore provided, be required to conform
to the provisions of law imposed on the national banks respecting
the limitation of liability which may be incurred by any person,
firm, or corporation to such banks, the prohibition against making
purchase of or loans on stock of such banks, and the withdrawal
or impairment of capital, or the payment of unearned dividends,
and to such rules and regulations as the Federal Reserve Board
may, in pursuance thereof, prescribe.
Such banks, and the officers, agents, and employees thereof,
shall also be subject to the provisions of and to the penalties
prescribed by sections fifty-one hundred and ninety-eight, fiftytwo hundred, fifty-two hundred and one, and fifty-two hundred
and eight, and fifty-two hundred and nine of the Revised Statutes.
The member banks shall also be required to make reports of the
conditions and of the payments of dividends to the comptroller,
as provided in sections fifty-two hundred and eleven and fifty-two
hundred and twelve of the Revised Statutes, and shall be subject

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
{The Aldrich Bill)

JUXTAPOSITION OF TEXTS

195

Federal Reserve Act
to the penalties prescribed by section fifty-two hundred and thirteen for the failure to make such report.
•

•

SEC. 19. If a State bank or trust company is required by the
law of its State to keep its reserves either in its own vaults or
with another State bank or trust company, such reserve deposits
so kept in such State bank or trust company shall be construed,
within the meaning of this section, as if they were reserve deposits
in a national bank in a reserve or central reserve city for a period
of three years after the Secretary of the Treasury shall have
officially announced the establishment of a Federal reserve bank
in the district in which such State bank or trust company is situate.
SEC. 2. . . . 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.
Any national bank failing to signify its acceptance of the terms
of this Act within the sixty days aforesaid, shall cease to act as
a reserve agent, upon thirty days' notice, to be given within the
discretion of the said organization committee or of the Federal
Reserve Board.
Should any national banking association in the United States
now organized fail within one year after the passage of this Act
to become a member bank or fail to comply with any of the provisions of this Act applicable thereto, all of the rights, privileges,
and franchises of such association granted to it under the nationalbank Act, or under the provisions of this Act, shall be thereby
forfeited. Any noncompliance with or violation of this Act shall,
however, be determined and adjudged by any court of the United
States of competent jurisdiction in a suit brought for that purpose
in the district or territory in which such bank is located, under

196

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(Xhe Aldrich Bill)

T h e words "subscribing b a n k s " when used hereafter
in this A c t shall be understood to refer to such national
banks, and banks or trust companies chartered by the
laws of any State of the United States or of the District
of Columbia, as shall comply with the requirements for
membership herein defined.

COMMENT:

The important difference here is that national banks may
become members under the National Reserve Association
Bill; while under the Federal Reserve Act they must become
members.
Under both plans, state banks and trust companies may

JUXTAPOSITION OF TEXTS

197

Federal Reserve Act
direction of the Federal Reserve Board, by the Comptroller of
the Currency in his own name before the association shall be declared dissolved. In cases of such noncompliance or violation,
other than the failure to become a member bank under the provisions of this Act, every director who participated in or assented
to the same shall be held liable in his personal or individual capacity
for all damages which said bank, its shareholders, or any other
person shall have sustained in consequence of such violation.
Such dissolution shall not take away or impair any remedy
against such corporation, its stockholders or officers, for any liability or penalty which shall have been previously incurred.
SEC. I.

Wherever the word " b a n k " is used in this Act,

the word shall be held to include State bank, banking
association, and trust company,

except where national banks or Federal reserve banks are specifically referred to.
The terms "national bank" and "national banking association"
used in this Act shall be held to be synonymous and interchangeable. •
T h e term " m e m b e r b a n k " shall be held to mean any
national bank, State bank, or bank or trust company
which has become a member

of one of the reserve banks created by this Act. The term "board"
shall be held to mean Federal Reserve Board; the term "district"
shall be held to mean Federal reserve district; the term "reserve
bank" shall be held to mean Federal reserve bank.
become members, provided they agree to conditions which
differ in details, but in both cases stipulate that the applying
banks are to submit to the same reserve requirements as
national banks, to requirements of examinations and reports, etc.

198

THE FEDERAL RESERVE

SYSTEM

National Reserve Association Bill
(The Aldrich Bill)
ORGANIZATION

SEC. 4.

T h e Secretary of the Treasury, the Secretary

of Agriculture,

the Secretary of Commerce and Labor,
and the Comptroller of the Currency

are hereby designated
a committee to effect the organization

of the National Reserve Association, and the necessary expenses
of said committee shall be payable out of the Treasury upon
vouchers approved by the members of said committee, and the
Treasury shall be reimbursed by the National Reserve Association
to the full amount paid out therefor.
Within sixty days after the passage of this Act said committee
shall provide for the opening of books for subscriptions to the
capital stock of said National Reserve Association in such places
as the said committee may designate. Before the subscription
of any bank to the capital stock of the National Reserve Asso-

JUXTAPOSITION OF T E X T S

199

Federal Reserve Act

ORGANIZATION

SEC. 2.

As soon as practicable,

the Secretary of the Treasury, the Secretary of Agriculture and the Comptroller of the Currency, acting as " t h e
Reserve Bank Organization Committee, 9 '

shall designate not less than eight nor more than twelve cities
to be known as Federal reserve cities, and shall divide the continental United States, excluding Alaska, into districts, each district
to contain only one of such Federal reserve cities. The determination of said organization committee shall not be subject to
review except by the Federal Reserve Board when organized:
Provided,

200

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
{The Aldrich Bill)

ciation shall be accepted, said bank shall file with the organization
committee or after organization with the National Reserve Association a certified copy of a resolution adopted by the board of
directors of said bank accepting all the provisions and liabilities
imposed by this Act and authorizing the president or cashier of
said bank to subscribe for said stock.
SEC. 5. When the subscriptions to the capital stock of the
National Reserve Association shall amount to the sum of two
hundred million dollars the organization committee hereinbefore
provided shall forthwith proceed to select fifteen cities in the
United States for the location of the branches of said National
Reserve Association: Provided, That one branch shall be located
in the New England States, including the States of Maine, New
Hampshire, Vermont, Massachusetts, Rhode Island, and Connecticut; two branches in the Eastern States, including the States
of New York, New Jersey, Pennsylvania, and Delaware; four
branches in the Southern States, including the States of Maryland,
Virginia, West Virginia, North Carolina, South Carolina, Georgia,
Florida, Alabama, Mississippi, Louisiana, Texas, Arkansas, Kentucky, Tennessee, and also the District of Columbia; four branches
in the Middle Western States, including the States of Ohio, Indiana, Illinois, Michigan, Wisconsin, Minnesota, Iowa, and Missouri;
four branches in the Western and Pacific States, including the
States of North Dakota, South Dakota, Nebraska, Kansas, Montana, Wyoming, Colorado, New Mexico, Oklahoma, Washington,
Oregon, California, Idaho, Utah, Nevada, and Arizona.
When the cities in which the branches are to be located have
been selected the organization committee shall forthwith divide

JUXTAPOSITION OF T E X T S

Federal Reserve Act

202

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)

the entire country into fifteen districts, with one branch of the
National Reserve Association in each district: Providedy
t h a t the districts shall be apportioned with due regard
to the convenient and customary course of business and
not necessarily along State lines.
T h e districts m a y be readjusted, and new districts and
new branches m a y from time to time be created by t h e
directors of the National Reserve Association

whenever, in their opinion, the business of the country requires.

JUXTAPOSITION OF T E X T S

203

Federal Reserve Act

t h a t 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.

T h e districts thus created m a y be readjusted

and new districts m a y from time to time be created by
the Federal Reserve Board, not to exceed twelve in all.

Such districts shall be known as Federal reserve districts and
may be designated by number. A majority of the organization
committee shall constitute a quorum with authority to act.
Said organization committee shall be authorized to employ
counsel and expert aid, to take testimony, to send for persons
and papers, to administer oaths, and to make such investigation
as may be deemed necessary by the said committee in determining
the reserve districts and in designating the cities within such
districts where such Federal reserve banks shall be severally located. The said committee shall supervise the organization in each
of the cities designated of a Federal reserve bank, which shall
include in its title the name of the city in which it is situated, as
"Federal Reserve Bank of Chicago." . . .
Should the subscriptions by banks to the stock of said Federal
reserve banks or any one or more of them be, in the judgment
of the organization committee, insufficient to provide the amount

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
('The Aldrich Bill)

JUXTAPOSITION OF TEXTS

205

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

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
{The Aldrich Bill)

JUXTAPOSITION OF TEXTS

207

Federal Reserve Act
. . . The organization of reserve districts and Federal reserve
cities shall not be construed as changing the present status of
reserve cities and central reserve cities, except in so far as this
Act changes the amount of reserves that may be carried with
approved reserve agents located therein. The organization committee shall have power to appoint such assistants and incur such
expenses in carrying out the provisions of this Act as it shall
deem necessary, and such expenses shall be payable by the Treasurer of the United States upon voucher approved by the Secretary
of the Treasury, and the sum of $100,000, or so much thereof as
may be necessary, is hereby appropriated, out of any moneys in
the Treasury not otherwise appropriated, for the payment of such
expenses.
SEC. 4. . . . When the minimum amount of capital stock prescribed by this Act for the organization of any Federal reserve
bank shall have been subscribed and allotted, the organization
committee shall designate any five banks of those whose applications have been received, to execute a certificate of organization,
and thereupon the banks so designated shall, under their seals,
make an organization certificate which shall specifically state the
name of such Federal reserve bank, the territorial extent of the
district over which the operations of such Federal reserve bank
are to be carried on, the city and State in which said bank is to
be located, the amount of capital stock and the number of shares
into which the same is divided, the name and place of doing business of each bank executing such certificate, and of all banks
which have subscribed to the capital stock of such Federal reserve
bank and the number of shares subscribed by each, and the fact

208

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)

COMMENT:

The Organization Committee is practically the same in both
the Aldrich Bill and the Act, except that the National Reserve
Association Bill provides for the designation of the Secretary
of the Treasury, the Secretary of Agriculture, the Secretary of
Commerce and Labor, and the Comptroller of the Currency,
whereas the Federal Reserve Act designates the Secretary of
the Treasury, the Secretary of Agriculture, and the Comptroller of the Currency.
The National Reserve Association Bill provides for fifteen
districts. The Federal Reserve Act provides for not less than
eight nor more than twelve districts.

JUXTAPOSITION OF TEXTS

209

Federal Reserve Act
that the certificate is made to enable those banks executing same,
and all banks which have subscribed or may thereafter subscribe
to the capital stock of such Federal reserve bank, to avail themselves of the advantages of this Act.
The said organization certificate shall be acknowledged before
a judge of some court of record or notary public; and shall be,
together with the acknowledgment thereof, authenticated by the
seal of such court, or notary, transmitted to the Comptroller of
the Currency, who shall file, record and carefully preserve the
same in his office.

In both cases, the "districts shall be apportioned with due
regard to the convenient and customary course of business
and not necessarily along State lines." In both cases, the
"districts may be readjusted and new districts and new
branches may from time to time be created."
The National Reserve Association Bill provides for the
organization of local associations (mention of which is omitted
here, but is made on pages 364 to 367).
The Federal Reserve Act provides for the Treasury to take
over shares in Federal reserve districts where the minimum of
$4,000,000 is not subscribed.

210

THE FEDERAL RESERVE

SYSTEM

National Reserve Association Bill
(The Aldrich Bill)
ELECTION

OF BOARDS

OF D I R E C T O R S AND O F F I C E R S

SEC. 8. Each of the branches of the National Reserve Association shall have a board of directors, the number, not less than
twelve in addition to the ex officio member, to be fixed by the
by-laws of the branch. These directors shall be elected in the
following manner:
The board of directors of each local association shall elect by
ballot a voting representative. One-half of the elected directors
of the branch shall be elected by the vote of such representatives,
each representative having one vote for each of the positions to
be filled, without reference to the number of shares which the
banks composing the association which he represents holds in the
National Reserve Association. One-third of the elected directors
shall be elected by the same voting representatives, but each
voting representative in this case shall have a number of votes
equal to the number of shares in the National Reserve Association
held by all the banks composing the local association which he
represents. The remaining one-sixth of the directors shall be
chosen by the directors already elected and
shall fairly represent the agricultural, commercial, industrial, and other interests of the district and shall
not be officers nor, while serving, directors of banks, trust
companies,

JUXTAPOSITION OF T E X T S

211

Federal Reserve Act
ELECTION

OF BOARDS

OF DIRECTORS AND O F F I C E R S

SEC. 4. . . . 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.
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.

212

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
{The Aldrich Bill)

insurance companies, or other financial institutions. The manager
of the branch shall be ex officio a member of the board of directors
of the branch and shall be chairman of the board.
Each director shall take an oath that he will, so far as the duty
devolves upon him, diligently and honestly administer the affairs
of such association and will not knowingly violate or willingly
permit to be violated any of the provisions of this Act.
All the members of the board of directors of the branch except
the ex officio member shall at the first meeting of the board be
divided into three classes. One-third of the directors shall hold
office until the first Tuesday in March immediately following the
election; one-third of the directors shall hold office for an additional period of one year after the first Tuesday in March immediately following the election; the remaining one-third of the directors
shall hold office for an additional period of two years after the
first Tuesday in March immediately following the election. All
elections shall be held on the first Tuesday in March of each year,
and after the first election all directors

JUXTAPOSITION OF TEXTS

213

Federal Reserve Act
Class C shall consist of three members who shall be designated
by the Federal Reserve Board. When the necessary subscriptions to the capital stock have been obtained for the organization
of any Federal reserve bank, the Federal Reserve Board shall
appoint the class C directors and shall designate one of such directors as chairman of the board to be selected. Pending the designation of such chairman, the organization committee shall exercise
the powers and duties appertaining to the office of chairman in
the organization of such Federal reserve bank.
No 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 chairman of the board of directors of the Federal reserve
bank of the district in which the bank is situated or, pending the
appointment of such chairman, the organization committee shall
classify the member banks of the district into three general groups
or divisions. Each group shall contain as nearly as may be onethird of the aggregate number of the member banks of the district
and shall consist, as nearly as may be, of banks of similar capitalization. The groups shall be designated by number by the
chairman.

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
{The Aldrich Bill)

JUXTAPOSITION OF TEXTS

215

Federal Reserve Act
At a regularly called meeting of the board of directors of each
member bank in the district it shall elect by ballot a district reserve elector and shall certify his name to the chairman of the
board of directors of the Federal reserve bank of the district.
The chairman shall make lists of the district reserve electors thus
named by banks in each of the aforesaid three groups and shall
transmit one list to each elector in each group.
Each member bank shall be permitted to nominate to the chairman 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 elector.
Every elector shall, within fifteen days after the receipt of the
said list, certify to the chairman his first, second, and other choices
of a director of class A and class B, respectively, upon a preferential
ballot, on a form furnished by the chairman of the board of directors of the Federal reserve bank of the district. Each elector
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.
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 FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)

JUXTAPOSITION OF TEXTS

217

Federal Reserve Act
the electors voting, by adding together the first and second choices,
he shall be declared elected. If no candidate have a majority of
electors voting when the first and second choices shall have been
added, then the votes cast in the third column for other choices
shall be added together in like manner, and the candidate then
having the highest number of votes shall be declared elected. An
immediate report of election shall be declared.
Class C directors shall be appointed by the Federal Reserve
Board. They shall have been for at least two years residents of
the district for which they are appointed, one of whom shall be
designated by said board as chairman of the board of directors
of the Federal reserve bank and as "Federal reserve agent." He
shall be a person of tested banking experience; and in addition to
his duties as chairman of the board of directors of the Federal
reserve bank he shall be required to maintain under regulations
to be established by the Federal Reserve Board a local office of
said board on the premises of the Federal reserve bank. He shall
make regular reports to the Federal Reserve Board, and shall act
as its official representative for the performance of the functions
conferred upon it by this Act. He shall receive an annual compensation to be fixed by the Federal Reserve Board and paid
monthly by the Federal reserve bank to which he is designated.
One of the directors of class C, who shall be a person of tested
banking experience, shall be appointed by the Federal Reserve
Board as deputy chairman and deputy Federal reserve agent to
exercise the powers of the chairman of the board and Federal
reserve agent in case of absence or disability of his principal.
Directors of Federal reserve banks shall receive, in addition to
any compensation otherwise provided, a reasonable allowance for

218

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)

shall be elected for a term of three years:

Provided, That the by-laws of the National Reserve Association
shall provide for the manner of filling any vacancies which may
occur in the board of directors of the branches.
The board of directors of the branch shall have authority to
make by-laws, not inconsistent with law, which shall be subject
to the approval of the National Reserve Association.

JUXTAPOSITION OF TEXTS

219

Federal Reserve Act
necessary expenses in attending meetings of their respective boards,
which amount shall be paid by the respective Federal reserve
banks. Any compensation that may be provided by boards of
directors of Federal reserve banks for directors, officers or employees shall be subject to the approval of the Federal Reserve
Board.
The Reserve Bank Organization Committee may, in organizing
Federal reserve banks, call such meetings of bank directors in the
several districts as may be necessary to carry out the purposes
of this Act, and may exercise the functions herein conferred upon
the chairman of the board of directors of each Federal reserve
bank pending the complete organization of such bank.
At the first meeting of the full board of directors of each Federal
reserve bank, it shall be the duty of the directors of classes A, B
and C, respectively, to designate one of the members of each class
whose term of office shall expire in one year from the first of January nearest to date of such meeting, one whose term of office
shall expire at the end of two years from said date, and one whose
term of office shall expire at the end of three years from said date.
Thereafter every director of a Federal reserve bank chosen as
hereinbefore provided shall hold office for a term of three years.
Vacancies that may occur in the several classes of directors of
Federal reserve banks may be filled in the manner provided for
the original selection of such directors, such appointees to hold
office for the unexpired terms of their predecessors.

220

THE FEDERAL RESERVE SYSTEM

National Reserve Association Bill
{The Aldrich Bill)
SEC* I 6 .
Each branch shall have a manager and a deputy
manager appointed from the district by the governor of the National Reserve Association with the approval of the executive
committee of said association and the board of directors of the
branch, and subject to removal at any time by the governor with
the approval of the executive committee of the National Reserve
Association. The powers and duties of the manager and deputy
manager and of the various committees of the branches shall be
prescribed by the by-laws of the National Reserve Association.

COMMENT:

In this comparison, the 15 branches and their directorates
and officers are being compared with the 12 Federal reserve
banks, their directorates, and officers.
Both systems of election recognize the difficulty that by
simply giving each member bank an equal vote the small banks
would secure entire control.
The Federal Reserve Act, therefore, divides the banks into
three groups "which shall consist as nearly as may be, of banks
of similar capitalization" and vests in each group the right to
elect two directors, that is a total of six, out of nine: these
six are the Class " A " and " B " directors. Three of these
are to be "actively engaged in commerce, agriculture or some
other industrial pursuit." The votes being cast through

JUXTAPOSITION OF T E X T S

111

Federal Reserve Act

"electors." Three additional directors, Class " C " directors,
are appointed by the Federal Reserve Board.
The National Reserve Association Bill permits half of the
board to be elected by numbers—each bank having one
vote—; one-third of the directors is to be elected by votes
equal to the number of shares held by banks in the National
Reserve Association, the votes in both cases being cast through
"voting representatives" of the local association; one-sixth is
to be elected by the directors elected, and this one-sixth is
to represent the agricultural, industrial, and other interests of
the district.

222

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)

In both cases, directors serve for three years, and are divided
into three classes.
In both cases, there are stipulations for certain directors
not being permitted to be officers, directors, or employees of
banks. The National Reserve Association Bill includes also
"insurance companies and financial institutions." On the
other hand, the Federal Reserve Act precludes Class " C "
directors from being "stockholders" of banks.
The main difference is that under the National Reserve
Association Bill the member banks, directly and indirectly,
elect the branch board; while the Federal Reserve Act provides
that one-third, of a board of nine, be appointed, as Class " C "
directors, by the Federal Reserve Board.
In the National Reserve Association Bill, the manager becomes an ex officio member of the board, and its chairman.
The Federal Reserve Act creates the office of the Federal
reserve agent, appointed by the Federal Reserve Board to act
as chairman; officers, including the bank manager (governor),

JUXTAPOSITION OF T E X T S

223

Federal Reserve Act

are to be appointed by the directors, Class "A,"- " B , " and
" C " directors acting together.
The National Reserve Association Bill leaves the appointment of the "Manager of the Branch" to the governor at the
head office of the National Reserve Association in Washington with approval of his executive committee and the board
of directors of the respective branch. (The governor and executive committee have the power of removal.)
The Federal Reserve Act seeks to accomplish the same end
by letting the board of directors of the Federal reserve bank
appoint the manager (governor) of the bank, the Board having
the power of removal and of approving his salary; but, instead
of joining in the selection of the manager (governor), the Board
appoints the chairman of the board, the Federal reserve agent;
in other words, instead of a joint selection of one responsible
head, there is a joint administration by a dual leadership
separately appointed by the central office and the local bank
(which in practical operation has proved very awkward).

224

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)
CONSTITUTION OF THE C E N T R A L

BOARD

SEC. 9. The National Reserve Association shall have a board
of directors, to be chosen in the following manner:
First. Fifteen directors shall be elected, one by the board of
directors of each branch of the National Reserve Association. In
case the number of districts shall be increased hereafter, each
additional district shall be entitled to elect an additional director
of this class.
Second. Fifteen additional directors shall be elected, one by
the board of directors of each branch of the National Reserve
Association, who shall fairly represent the
agricultural, commercial, industrial, and other interests

of the district, and who shall not be officers nor, while serving,
directors of banks, trust companies, insurance companies, or other
financial institutions. In case the number of districts shall be
increased hereafter, each additional district shall be entitled to
elect an additional director of this class.
Third. Nine additional directors shall be elected by voting
representatives chosen by the boards of directors of the various
branches, each of whom shall cast a number of votes equal to
the number of shares in the National Reserve Association held
by the banks in the branch which he represents. Not more than
one of the directors of this class shall be chosen from one district.

JUXTAPOSITION OF TEXTS

225

Federal Reserve Act
CONSTITUTION OF THE C E N T R A L

BOARD

SEC, IO. A Federal Reserve Board is hereby created which
shall consist of seven members, including the Secretary of the
Treasury and the Comptroller of the Currency, who shall be
members ex officio, and five members appointed by the President
of the United States, by and with the advice and consent of the
Senate. In selecting the five appointive members of the Federal
Reserve Board, not more than one of whom shall be selected from
any one Federal reserve district, the President shall have due
regard to a fair representation of the different

commercial, industrial and geographical divisions of the
country.

The five members of the Federal Reserve Board appointed by the
President and confirmed as aforesaid shall devote their entire time
to the business of the Federal Reserve Board and shall each receive
an annual salary of $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 members of said board, the Secretary of the Treasury, the
Assistant Secretaries of the Treasury, and the Comptroller of the
Currency shall be ineligible during the time they are in office and

226

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)

Directors of each of the three classes named above shall be residents of the district from which they are elected.
Fourth. There shall be seven ex officio members of the board
of directors, namely: The governor of the National Reserve Association, who shall be chairman of the board, two deputy governors
of the National Reserve Association, the Secretary of the Treasury,
the Secretary of Agriculture, the Secretary of Commerce and
Labor, and the Comptroller of the Currency.

No member of any national or State legislative body
shall be a director of the National Reserve Association,
nor of any of its branches, nor of any local association.

All the members of the board, except the ex officio members,
shall at the first meeting of the board be divided into three classes.
One-third of the directors shall hold office until the first Tuesday
in April immediately following the election; one-third of the
directors shall hold office for an additional period of one year
after the first Tuesday in April immediately following the election;

JUXTAPOSITION OF TEXTS

227

Federal Reserve Act
for two years thereafter to hold any office, position, or employment in any member bank. Of the five members thus appointed
by the President at least two shall be persons experienced in banking or finance. One shall be designated by the President to serve
for two, one for four, one for six, one for eight, and one for ten
years, and thereafter each member so appointed shall serve for a
term of ten years unless sooner removed for cause by the President.
Of the five persons thus appointed, one shall be designated by the
President as governor and one as vice governor of the Federal
Reserve Board. The governor of the Federal Reserve Board, subject to its supervision, shall be the active executive officer. The
Secretary of the Treasury may assign offices in the Department
of the Treasury for the use of the Federal Reserve Board. Each
member of the Federal Reserve Board shall within fifteen days
after notice of appointment make and subscribe to the oath of
office.
Sec. 4.

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.

SEC. IO. . . . 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.

228

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)

the remaining one-third of the directors shall hold office for an
additional period of two years after the first Tuesday in April
immediately following the election. All elections shall be held
on the first Tuesday in April of each year, and after the first
election of directors shall be elected for a term of three years:
Provided, That all directors provided for in sections seven, eight,
and nine of this Act shall serve until their successors have qualified: And provided further, That the by-laws of the National
Reserve Association shall provide for the manner of filling any
vacancies which may occur in the board of directors of the National Reserve Association.
Each director shall take an oath that he will, so far as the duty
devolves upon him, diligently and honestly administer the affairs
of such association and will not knowingly violate or willingly
permit to be violated any of the provisions of this Act.
The board of directors of the National Reserve Association
shall have authority to make by-laws, not inconsistent with law,
which shall prescribe the manner in which the business of said
association shall be conducted and the privileges granted to it by
law exercised and enjoyed.
SEC. IO. The executive officers of the National Reserve Association shall consist of a governor, two deputy governors, a secretary, and such subordinate officers as may be provided by the
by-laws. The governor of the National Reserve Association shall
be selected by the President of the United States from a list of
not less than three submitted to him by the board of directors of
said association. The person so selected shall thereupon be appointed by the said board as governor of the National Reserve

JUXTAPOSITION OF T E X T S

229

Federal Reserve Act
The first meeting of the Federal Reserve Board shall be held
in Washington, District of Columbia, as soon as may be after
the passage of this Act, at a date to be fixed by the Reserve Bank
Organization Committee. 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 five members of the Federal Reserve Board
appointed by the President, as above provided, a successor shall
be appointed by the President, with the advice and consent of
the Senate, to fill such vacancy, and when appointed he shall
hold office for the unexpired term of the member whose place he is
selected to fill.
The President shall have power to fill all vacancies that may
happen on the Federal Reserve Board during the recess of the
Senate, by granting commissions which shall expire thirty days
after the next session of the Senate convenes.
Nothing in this Act contained shall be construed as taking
away any powers heretofore vested by law in the Secretary of the
Treasury which relate to the supervision, management, and control
of the Treasury Department and bureaus under such department,
and wherever any power vested by this Act in the Federal Re-

230

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)

Association for a term of ten years, subject to removal for cause
by a two-thirds vote of the board. There shall be two deputy
governors, to be elected by the board, for a term of seven years,
subject to removal for cause by a majority vote of the board.
The two deputy governors first elected shall serve for terms of
four years and seven years, respectively. In case of any vacancy
in the office of deputy governor his successor shall be elected to
fill the unexpired term. In the absence of the governor or his
inability to act the deputy who is senior in point of service shall
act as governor. The board of directors shall have authority
to appoint such other officers as may be provided for by the
by-laws.
SEC. 14. The directors of the National Reserve Association
shall annually elect from their number an executive committee
and such other committees as the by-laws of the National Reserve
Association may provide. The executive committee shall consist
of nine members, of which the governor of the National Reserve
Association shall be ex officio chairman and the two deputy governors and the Comptroller of the Currency ex officio members,
but not more than one of the elected members shall be chosen
from any one district.
The executive committee shall have all the authority which is
vested in the board of directors, except the power of nomination,
appointment, and removal of the governor and deputy governors
and except such as may be specifically delegated by the board
to other committees or to the executive officers, or such as may
be specifically reserved or retained by the board.

JUXTAPOSITION OF T E X T S

231

Federal Reserve Act
serve 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.

232

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
{The Aldrich Bill)

COMMENT:

The principle of having a board representing all sections
of the country and representative of banking and of "agricultural, commercial, industrial, and other interests" and of
excluding members of National or State legislatures is substantially the same in both. (Strange to say, the Federal
Reserve Act originally left out "agricultural" representatives.
This has now been reversed, through amendment; the stipulation requiring two members experienced in banking or finance
has been stricken out and one obligatory agricultural member
has been added instead.)
The main difference is that in the National Reserve Association Bill the members elect a majority of the Central
Board.
In the Federal Reserve Act, the entire Board is appointed
by the President.
In the National Reserve Association Bill, the directors of
the National Reserve Association propose a list of three from
which the President elects the governor for ten years.
In the Federal Reserve Act, the President appoints the
governor and vice governor from among the five appointive
members; the governor and vice governor to serve at his
pleasure.
The National Reserve Association Bill provides for a board
of directors of 46 members; but it also provides for an executive committee which must be considered as the working body.

JUXTAPOSITION OF T E X T S

233

Federal Reserve Act

This executive committee offers the best point of comparison
with the Federal Reserve Board. Here we have:
NATIONAL

A.
B.
C.
D.

RESERVE

ASSOCIATION

EXECUTIVE

COMMITTEE

Nine Members
Governor, chairman
Two deputy governors
Comptroller of the Currency
Five directors, representatives of the member banks elected
by the directors of the National Reserve Association
(of whom not more than one may be chosen from any district)
FEDERAL

RESERVE

BOARD

Seven Members
A. Secretary of Treasury, chairman
B. Comptroller of the Currency
C. Five members (appointed by the President and to be confirmed by the Senate, not more than one to be selected from
any one Federal reserve district)
It is difficult to see how the executive committee of the National Reserve Association could be charged with being dangerously exposed to the preponderance of any one single influence
or control. A close examination of the constitution of the
boards of directors of the local associations, the branches,
and the National Reserve Association will convince the student how much exaggeration there has been in these charges.

234

THE FEDERAL RESERVE

SYSTEM

National Reserve Association Bill
(The Aldrich Bill)
POWERS

OF T H E

CENTRAL

BOARD

SEC, 29. The power of rediscount and discount granted to the
National Reserve Association by sections twenty-six, twenty-seven,
and twenty-eight of this Act shall in each case be exercised through
the branch in the district in which the bank making the application is located.

JUXTAPOSITION OF TEXTS

235

Federal Reserve Act
POWERS

OF THE

CENTRAL

BOARD

SEC. II. 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 requirement 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 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

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
{The Aldrich Bill)

JUXTAPOSITION OF TEXTS

237

Federal Reserve Act
annum upon such deficiency until the reserves fall to thirty-two
and one-half per centum, and when said reserve falls below thirtytwo 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 1 of this Act; or to reclassify existing reserve and
central reserve cities or to terminate their designation as such.
(f) To suspend or remove any officer or director of any Federal
reserve bank, the cause of such removal to be forthwith communicated in writing by the Federal Reserve Board to the removed
officer or director and to said bank.
(g) To require the writing off of doubtful or worthless assets
upon the books and balance sheets of Federal reserve banks.
1 This reference to Section T w e n t y is an error in the A c t .
should be to Section Nineteen.—Author.

T h e reference

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)

JUXTAPOSITION OF TEXTS

239

Federal Reserve Act
(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, or registrar of stocks
and bonds under such rules and regulations as the said board may
prescribe.
(1) To employ such attorneys, experts, assistants, clerks, or
other employees as may be deemed necessary to conduct the
business of the board. All salaries and fees shall be fixed in advance by said board and shall be paid in the same manner as the
salaries of the members of said board. All such attorneys, experts,
assistants, clerks, and other employees shall be appointed without
regard to the provisions of the Act of January sixteenth, eighteen

240

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)

COMMENT:

Section 29 of the National Reserve Association Bill has been
placed alongside of Section 11 of the Federal Reserve Act.
Section 11 of the Federal Reserve Act deals with the powers
of the Federal Reserve Board. (Governor Hamlin, in his
index, registers 127 powers and duties of the Federal Reserve
Board.) There is, of course, no similar provision in the National Reserve Association Bill; but a closer study develops
the far-reaching importance of Section 29 of the National
Reserve Association Bill in its bearing upon the question of
"similarity."
The problem in both cases is to vest supervision and a
certain amount of direction in the central office in Washington,
without, however, giving it the power to do the local discount
business which is placed in the hands of the local directorates
of the 15 branches and of the 12 Federal reserve banks respectively. For the exercise of the "power of discount and

JUXTAPOSITION OF TEXTS

241

Federal Reserve Act
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.

rediscount," these 15 or 12 directorates respectively are to
act as organizations with certain autonomous powers; but the
exercise of these powers is to be under the supervision of the
Central Board. In other words: the Central Board or the executive committee of the National Reserve Association fixes
the discount rate and the rules; the actual rediscount business
is done by the 15 branches. The analogy with the operations
and control of the Federal Reserve Board is clear, where the
Board "determines and reviews" the discount rates and the
12 Federal reserve banks do the actual business, the Federal
Reserve Board having the power to make one Federal reserve
bank rediscount for the other.
Open market operations are left in the hands of the central
office of the National Reserve Association, while the Federal
Reserve Act places the power to carry on these operations
with the Federal reserve banks, subject to the general supervision and regulation by the Board.

242

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)

FILING

OF C E R T I F I C A T E A N D

CALL

FOR F I R S T

PAYMENT

SEC. II. When the National Reserve Association is duly organized its board of directors shall call upon the subscribing banks
for a payment of fifty per centum on the amount of their subscriptions to the capital stock of said association. When one
hundred million dollars of capital have been paid in the board of
directors shall at once proceed to execute and file with the Secretary of State a certificate showing the payment of one hundred
million dollars on capital stock, and they shall further file with
the Comptroller of the Currency a certificate showing the title
and location of each bank which has subscribed to the capital
stock of the National Reserve Association, the number of shares
subscribed by each, and the amount paid thereon.

COMMENT:
M.M.S.

JUXTAPOSITION OF TEXTS

243

Federal Reserve Act
FILING

OF C E R T I F I C A T E AND C A L L

FOR F I R S T

PAYMENT

SEC. 4. When the organization committee shall have established Federal reserve districts as provided in section two of this
Act, a certificate shall be filed with the Comptroller of the Currency showing the geographical limits of such districts and the
Federal reserve city designated in each of such districts. The
Comptroller of the Currency shall thereupon cause to be forwarded
to each national bank located in each district, and to such other
banks declared to be eligible by the organization committee which
may apply therefor, an application blank in form to be approved
by the organization committee, which blank shall contain a resolution to be adopted by the board of directors of each bank executing such application, authorizing a subscription to the capital
stock of the Federal reserve bank organizing in that district in
accordance with the provisions of this Act.

244

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
{The Aldrich Bill)

STOCK

SUBSCRIPTIONS

AND

INCREASES

AND

DECREASES

HOLDINGS

SEC. 12. Shares of the capital stock of the National Reserve
Association
shall not be transferable, and under no circumstances
shall they be hypothecated

nor shall they be owned otherwise than by subscribing banks, nor
shall they be owned by any such bank other than in the proportion herein provided. In case

a subscribing bank increases its capital it shall thereupon subscribe for an additional a m o u n t of the capital

of the National Reserve Association equal to twenty per centum
of the bank's increase of capital, paying therefor its then book
value as shown by the last published statement of said association.

JUXTAPOSITION OF T E X T S

245

Federal Reserve Act
STOCK

SUBSCRIPTIONS

AND

INCREASES

AND

DECREASES

HOLDINGS

SEC. 5. . . . Shares of the capital stock of Federal reserve banks
owned by member banks
shall not be transferred or hypothecated.

When a m e m -

ber bank increases its capital stock or surplus, it shall
thereupon subscribe for an additional a m o u n t

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.

246

THE FEDERAL RESERVE

SYSTEM

National Reserve Association Bill
(The Aldrich Bill)
A bank applying for membership in the National Reserve
Association at any time after its formation m u s t subscribe for an a m o u n t of the capital of said association

equal to twenty per centum of the capital of said subscribing
bank, paying therefor its then book value as shown by the last
published statement of said association. When the capital of the
National Reserve Association has been increased either on account
of the increase of capital of the banks in said association or on
account of the increase in the membership of said association, the
board of directors shall make and execute a certificate

showing said increase in capital, the a m o u n t paid in and
by whom paid.

This certificate shall be filed in the office of the Comptroller of
the Currency.
In case a subscribing bank reduces its capital it shall
surrender a proportionate a m o u n t of its holdings in the
capital of said association, and if a bank goes into voluntary liquidation it shall surrender all of its holdings
of the capital of said association.

JUXTAPOSITION OF

TEXTS

247

Federal Reserve Act

A bank applying for stock in a Federal reserve bank at
any time after the organization thereof m u s t subscribe
for an a m o u n t 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 a m o u n t paid
in, and by w h o m 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.

248

THE FEDERAL RESERVE

SYSTEM

National Reserve Association Bill
(The Aldrich Bill)
In either case the shares surrendered shall be canceled
and the bank shall receive in payment therefor

a sum equal

to their then book value as shown by the last published statement
of said association.

If any member of the National Reserve Association
shall become insolvent and a receiver be appointed, the
stock held by it in said association shall be canceled and
the balance, after paying all debts due by such insolvent
bank to said association

(such debts being hereby declared to be a first lien upon the paid-in
capital stock),

JUXTAPOSITION OF T E X T S

249

Federal Reserve Act

in either case the shares surrendered shall be canceled
and the member bank shall receive in payment therefor,

under regulations to be prescribed by the Federal Reserve Board,
a sum equal

to its cash-paid subscriptions on the shares surrendered and onehalf of one per centum a month from the period of the last dividend, not to exceed the book value thereof, less any liability of
such member bank to the Federal reserve bank.
SEC. 6.

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,

250

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)
shall be paid to the receiver of the insolvent bank.
Whenever the capital stock of the National Reserve
Association is reduced, either on account of the reduction in capital of members of said association or the
liquidation or insolvency of any member, the board of
directors shall m a k e and execute a certificate showing
such reduction of capital stock and the a m o u n t repaid
t o each bank.

T h i s certificate shall be filed in the office

of the Comptroller of the Currency.

COMMENT:

M.M.S.—except that in case of surrender of stock or liquidation the National Reserve Association Bill provides for the

JUXTAPOSITION OF TEXTS

251

Federal Reserve Act

shall be first applied to all debts of the insolvent member
bank to t h e Federal reserve bank, and the balance, if
any, shall be paid to the receiver of the insolvent bank.
Whenever the capital stock of a Federal reserve bank is
reduced, either on account of a reduction in capital stock
of any member bank or of the liquidation or insolvency
of such bank, the board of directors shall cause to be
executed a certificate to the Comptroller of the Currency
showing such reduction of capital stock and the amount
repaid to such bank.

payment of a price equivalent to the book value, while the
Federal Reserve Act provides for the payment of par value
plus ]/2 per cent per month from last date of last dividend.

252

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
{The Aldrich Bill)
TAX
SEC.

13.

EXEMPTION

T h e National Reserve Association and

its

branches and the local associations shall be exempt f r o m
local and State taxation except in respect to taxes upon
real estate.

COMMENT:

Identical.

JUXTAPOSITION OF TEXTS
Federal Reserve Act
TAX

EXEMPTION

SEC. 7. . . . 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.

253

254

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
{The Aldrich Bill)
EXAMINATIONS

SEC. 15. There shall be a board of examination elected annually by the board of directors from among their number, excluding the members of the executive committee, of which the Secretary
of the Treasury shall be ex officio chairman.

It shall be the duty of this board to carefully examine
the condition and the business of the National Reserve
Association and of its branches

and to make a public statement of the result of such examination

a t least once a year.

COMMENT:

M.M.S.; except that results of examinations of the National
Reserve Association and its branches are to be given out in
a public statement; no such specific provision in the Federal
Reserve Act.

JUXTAPOSITION

TEXTS

255

Federal Reserve Act
EXAMINATIONS

and upon joint application of ten member banks the Federal
Reserve Board shall order a special examination and
report of

the condition of any Federal reserve bank.
SEC. IO. 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.

256

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)

E A R N I N G S , CONTINGENT F U N D S , AND G O V E R N M E N T ' S
IN E X C E S S

EARNINGS

SEC. 19. The earnings of the National Reserve Association
shall be disposed of in the following manner:
after the payment of all expenses

and the franchise and other taxes not provided for in this section

the shareholders shall be entitled to receive an annual
dividend

of four per centum
on the paid-in capital, which dividend shall be c u m u lative.

Further annual net earnings shall be disposed of as follows: First,
a contingent fund shall be created, which shall be maintained at
an amount equal to one per centum on the paid-in capital, and
shall not exceed in any event two million dollars and shall be
used to meet any possible losses. Such fund shall, upon the final
dissolution of the National Reserve Association, be paid to the
United States and shall not under any circumstances be included
in the book value of the stock or be paid to the shareholders.
Second, one-half of additional net earnings shall be paid into the

JUXTAPOSITION

TEXTS

257

Federal Reserve Act
E A R N I N G S , CONTINGENT F U N D S , AND G O V E R N M E N T ' S
IN E X C E S S

SEC. 7.

EARNINGS

A f t e r 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.

258

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)

surplus fund of the National Reserve Association until said fund
shall amount to twenty per centum of the paid-in capital, onefourth shall be paid to the United States
as a franchise tax,

and one-fourth shall be paid to the shareholders, until the shareholders' dividend shall amount to five per centum per annum on
the paid-in capital: Provided, That no such dividends, exclusive
of the cumulative dividends above provided for, shall at any
time be paid in excess of five per centum in any one year. Whenever and so long as the contingent fund has been provided for
and the five per centum dividend has been paid to shareholders
one-half of the additional earnings shall be added to the surplus
fund, and one-half shall be paid to the United States
as a franchise tax.

Whenever and so long as the surplus fund of the National Reserve
Association amounts to twenty per centum of the paid-in capital
and the shareholders shall have received dividends not exceeding
five per centum,
all excess earnings shall be paid to the United States as
a franchise tax.

COMMENT:

The principle in both is the same: limited earnings, creation
of contingent funds, and turning over of excess to the United
States Government.
The National Reserve Association Bill is more favorable
to the government in these stipulations; the division of the
earnings with the government begins sooner, and the divi-

JUXTAPOSITION

TEXTS

259

Federal Reserve Act
After the aforesaid dividend claims have been fully met,

all the net earnings shall be paid to the United States
as a franchise tax,

except that one-half of such net earnings shall be paid into a
surplus fund until it shall amount to forty per centum of the
paid-in capital stock of such bank.
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.

dends are limited to 5 per cent as against 6 per cent in the
Federal Reserve Act.
The Federal Reserve Act adds that the Secretary of the
Treasury may use such earnings from Federal reserve banks
to supplement the gold reserve behind greenbacks or to reduce
the outstanding bonded indebtedness. (This was also suggested in some of my earlier articles.)

260

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)

EQUAL ADVANTAGES
PEND

FOR A L L M E M B E R S

MEMBERS

FROM U S E

AND R I G H T TO

SUS-

PRIVILEGES

SEC. 22. All of the privileges and advantages of the National
Reserve Association shall be equitably extended to every bank of
any of the classes herein defined which shall subscribe to its proportion of the capital stock of the National Reserve Association
and shall otherwise conform to the requirements of this Act:
Provided, That the National Reserve Association may
s u s p e n d a b a n k f r o m t h e p r i v i l e g e s of m e m b e r s h i p

for refusal to comply with such requirements or for a failure for
thirty days to maintain its reserves, or to make the reports required by this Act, or for misrepresentation in any report or examination as to its condition or as to the character or extent of its
assets or liabilities.

COMMENT:
M.M.S.

JUXTAPOSITION OF TEXTS

261

Federal Reserve Act
EQUAL ADVANTAGES
PEND

FOR A L L M E M B E R S

MEMBERS

FROM U S E

AND R I G H T TO

SUS-

PRIVILEGES

SEC. 4. . . . 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. . . .
SEC. 9. 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, it shall be within the power of the said board, after hearing,
to require such bank to surrender its stock in the Federal reserve
bank; upon such surrender the Federal reserve bank shall pay
the cash-paid subscriptions to the said stock with interest at the
rate of one-half of one per centum per month, computed from the
last dividend, if earned, not to exceed the book value thereof,
less any liability to said Federal reserve bank, except the subscription liability not previously called, which shall be canceled,
and said Federal reserve bank shall, upon notice from the Federal
Reserve Board, be required
t o s u s p e n d s a i d b a n k f r o m f u r t h e r p r i v i l e g e s of m e m b e r ship,

and shall within thirty days of such notice cancel and retire its
stock and make payment therefor in the manner herein provided.
The Federal Reserve Board may restore membership upon due
proof of compliance with the conditions imposed by this section.

262

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
{The Aldrich Bill)
FISCAL

AGENCY

RELATIONS

SEC. 23. The National Reserve Association shall be the principal fiscal agent of the United States. The Government of the
United States shall upon the organization of the National Reserve
Association deposit its general funds with said association and its
branches, and thereafter all receipts of the Government, exclusive
of trust funds, shall be deposited with said Association and its
branches, and all disbursements by the Government shall be made
through said association and its branches.

COMMENT:

The National Reserve Association Bill makes it obligatory
upon the Treasury to use the National Reserve Association
as fiscal agent for all its free funds.

JUXTAPOSITION OF TEXTS

263

Federal Reserve Act
FISCAL

AGENCY

RELATIONS

SEC. 15. 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 Act makes it obligatory upon Federal
reserve banks to act as fiscal agents when required by the
Secretary of the Treasury, but retains for him the fullest
freedom to deposit government funds with banks and trust
companies outside the System.

264

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)

G O V E R N M E N T AND M E M B E R S TO BE SOLE

SEC. 24.

DEPOSITORS

T h e Government of the United States and

banks owning stock in the National Reserve Association
shall be the only depositors in said association.

All domestic transactions of the National Reserve Association
shall be confined to the Government and the subscribing banks,
with the exception of the purchase or sale of Government or State
securities or securities of foreign governments or of gold coin or
bullion.

(Owen Bill verbatim)

COMMENT:

The National Reserve Association Bill limits the domestic
so-called "open-market operations" to transactions with sub-

265

JUXTAPOSITION OF TEXTS
Federal Reserve Act
G O V E R N M E N T AND M E M B E R S TO BE SOLE

SEC. 13.

DEPOSITORS

Any Federal reserve bank

m a y 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 upon solvent member banks,
payable upon presentation; or, solely for exchange purposes, may
receive from other Federal reserve banks deposits of current funds
in lawful money, national-bank notes, or checks and drafts upon
solvent member or other Federal reserve banks, payable upon
presentation.

scribing banks, except transactions in government or State
bonds or foreign government securities or gold coin or bullion.
The Federal Reserve Act goes further in certain respects;
we shall revert to this under Sections 31-36.

266

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
{The Aldrich Bill)
INTEREST

RESERVE

BALANCES

SEC. 25. The National Reserve Association shall pay no interest on deposits.

(Owen Bill verbatim)

COMMENT:

In the Federal Reserve Act, there is neither any inhibition
to pay interest on balances, nor a mandatory provision that

JUXTAPOSITION OF TEXTS

267

Federal Reserve Act
INTEREST

ON R E S E R V E

BALANCES

interest shall be paid. As a matter of fact, interest has never
been paid nor—it is to be hoped—ever will be. T o pay interest on reserve money, the major part of which should
normally be kept idle, would destroy the safety of the System.

268

THE

FEDERAL

RESERVE

SYSTEM

National Reserve Association Bill
(The Aldrich Bill)
REDISCOUNT

POWERS

SEC. 26. The National Reserve Association may through a
branch rediscount for and
with the indorsement of any bank having a deposit w i t h
it, notes and bills of exchange arising out of commercial
transactions; t h a t is, notes and bills of exchange issued
or drawn for agricultural, industrial, or commercial purposes, and not including notes or bills issued or drawn
for the purpose of carrying stocks, bonds, or other investment securities.

JUXTAPOSITION OF TEXTS

269

Federal Reserve Act
REDISCOUNT

POWERS

POWERS OF FEDERAL RESERVE BANKS
SEC. 13. . . . Upon the indorsement of any of its m e m ber banks,

with a waiver of demand, notice and protest by such bank, any
Federal reserve bank may discount
notes, drafts, and bills of exchange arising out of

actual
commercial transactions; t h a t is, notes, drafts, and bills
of exchange issued or drawn for agricultural, industrial,
or commercial purposes,

or the proceeds of which have been used, or are to be used, for
such purposes, the Federal Reserve Board to have the right to
determine or define the character of the paper thus eligible for
discount, within the meaning of this Act. Nothing in this Act
contained shall be construed to prohibit such notes, drafts, and
bills of exchange, secured by staple agricultural products, or other
goods, wares, or merchandise from being eligible for such discount;
but such definition
shall not include notes, drafts, or bills covering merely
investments or issued or drawn for the purpose of carrying

or trading in
stocks, bonds, or other investment securities,

270

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
{The Aldrich Bill)

Such notes and bills must have a maturity of not more than
twenty-eight days, and must have been made at least thirty days
prior to the date of rediscount. The amount so rediscounted shall
at no time exceed the capital of the bank for which the rediscounts are made.

T h e aggregate of such notes and bills bearing the signature or indorsement of any one person,

company,

firm, or corporation, rediscounted for any one bank, shall
a t no time exceed ten per c e n t u m of the unimpaired
capital and surplus of said bank.

SEC. 27. The National Reserve Association may through a
branch also rediscount, for and with the indorsement of any bank
having a deposit with it, notes and bills of exchange arising out
of commercial transactions as hereinbefore defined, having more
than twenty-eight days, but not exceeding four months, to run,
but in such cases the paper must be guaranteed by the local association of which the bank asking for the rediscount is a member.
SEC. 28. Whenever, in the opinion of the governor of the
National Reserve Association, the public interests so require, such
opinion to be concurred in by the executive committee of the
National Reserve Association and to have the definite approval
of the Secretary of the Treasury, the National Reserve Associa-

271

JUXTAPOSITION OF TEXTS
Federal Reserve Act

except bonds and notes of the Government of the United States.
Notes, drafts, and bills admitted to discount under the terms of
this paragraph must have a maturity at the time of discount of
not more than ninety days: Provided, That notes, drafts, and bills
drawn or issued for agricultural purposes or based on live stock
and having a maturity not exceeding six months may be discounted in an amount to be limited to a percentage of the capital
of the Federal reserve bank, to be ascertained and fixed by the
Federal Reserve Board. . . .
T h e aggregate of such notes and bills bearing the signature or indorsement of any one 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.

272

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)

tion may through a branch discount the direct obligation of a
depositing bank, indorsed by its local association, provided that
the indorsement of the local association shall be fully secured by
the pledge and deposit with it of satisfactory securities, which
shall be held by the local association for account of the National
Reserve Association; but in no such case shall the amount loaned
by the National Reserve Association exceed three-fourths of the
actual value of the securities so pledged.

COMMENT:

The difference between the two sections consists in the precaution contained in the National Reserve Association Bill,
that paper with a maturity in excess ot 28 days must bear
the signature of the local association.
Eliminate this restriction, and the respective sections of the
two acts are practically identical.
It may be interesting to note that at the date of this writing
(February, 1927) the total "bills discounted" (Federal Reserve
Bulletin, February, 1927) amounted to $416,059,000; of these
$310,773,000 matured within 15 days and additional $27,613,000 matured within 16 to 30 days. Of the bills bought in
the open market—totaling $337,360,000—$218,171,000 were
maturing within 30 days.
A t the close of 1928 (December 26) of the total of $1,167,579,000 of discounted bills held by the Federal reserve banks
$1,012,581,000 matured within 15 days and additional $38,749,000 within 16 to 30 days.

JUXTAPOSITION OF T E X T S

Federal Reserve Act

Federal reserve bank holdings of bills bought in the open
market amounted at the close of 1928 to $489,270,000. Of
this total $259,346,000 were maturing within 30 days.
The Federal Reserve Act contains some exceptions in favor
of agricultural paper and in favor of bills drawn against
United States Government bonds.
The National Reserve Association provides for the discount
of bills drawn against government securities in Section 28,
which in addition contains broader (emergency) powers to discount paper "secured by securities." A similar section was
contained in the first drafts of the Federal Reserve Act, but
later on was stricken out.
The early drafts of the Federal Reserve A c t also contained
provisions favoring paper of short maturity. The rediscount
operations under Sections 26, 27, and 28 may only be carried
out through the branches of the National Reserve Association;
this corresponds to the rediscounting powers given to the
Federal reserve banks under the Federal Reserve Act.

274

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)
FIXING

DISCOUNT

RATES

SEC. 30. The National Reserve Association shall have authority
to fix its rates of discount from time to time, which when so fixed
shall be published, and shall be uniform throughout the United
States.

COMMENT:

The National Reserve Association Bill provides for uniform
discount rates throughout the United States.
The Federal Reserve Act provides for discount rates that
may differ between Federal reserve districts.
Discount rates that may differ between districts, no doubt,
are preferable. The United Reserve Bank Plan provided for
the possibility of varying rates; Senator Aldrich hoped that
the uniform rate would prove a strong factor in overcoming
resistance to the bill.
The National Reserve Association Bill stipulates that the
Board in Washington shall fix the rate of discount.
The Federal Reserve Act provides that the Federal reserve
banks shall establish the rates "subject to review and determination of the Federal Reserve Board."

JUXTAPOSITION OF TEXTS

275

Federal Reserve Act
FIXING

OF D I S C O U N T

RATES

SEC. 14. . . . Every Federal reserve bank shall have power: . . .
(d) 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; . . •

The provision in the Federal Reserve Act dividing the
authority of rate fixing has proved very difficult in operation.
While, in theory, the initiative rests with 12 autonomous Federal reserve banks, in practice the Board must assume a great
deal of leadership in order to bring about a national and coordinated policy.
The Executive Committee of the National Reserve Association, in spite of its power to fix the rate, would no doubt
have acted only after full consultation with the 15 branches,
and similarly the 12 Federal reserve banks converge at Washington, and the Board, while respecting to the utmost the
autonomy of the Federal reserve banks must, in the end, after
due consultation, determine the national policy. See Addendum I, Vol. I.

276

THE FEDERAL RESERVE

SYSTEM

National Reserve Association Bill
(The Aldrich Bill)
POWER

FOR

SEC. 31.

NATIONAL

BANKS

MAKE

"ACCEPTANCES"

National banks are

hereby authorized to accept drafts or bills of exchange
drawn upon them, having not more than

four
months to run,

properly secured, and arising out of commercial transactions as
hereinbefore defined.
T h e a m o u n t of such acceptances outstanding shall not
exceed one-half the capital and surplus of the accepting
bank,

and shall be subject to the restrictions of section fifty-two hundred
of the Revised Statutes.

JUXTAPOSITION OF TEXTS

277

Federal Reserve Act
POWER

FOR

NATIONAL

BANKS

MAKE

"ACCEPTANCES"

SEC. 13. . . . Any member bank
m a y accept drafts or bills of exchange drawn upon it

and growing out of transactions involving the importation or exportation of goods
having not more than

six
months sight to run;

but no bank shall

accept such bills to an a m o u n t equal at any time in the
aggregate to more than one-half its paid-up capital stock
and surplus.

Section fifty-two hundred and two of the Revised Statutes of
the United States is hereby amended so as to read as follows:
No national banking association shall at any time be indebted,
or in any way liable, to an amount exceeding the amount of its
capital stock at such time actually paid in and remaining undiminished by losses or otherwise, except on account of demands of
the nature following:
First. Notes of circulation.
Second. Moneys deposited with or collected by the association.
Third. Bills of exchange or drafts drawn against money actually on deposit to the credit of the association, or due thereto.

278

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
{The Aldrich Bill)

COMMENT:

The respective clauses are identical except that the National
Reserve Association Bill authorizes acceptances to be drawn
for "commercial transactions as heretofore defined/' while the
Federal Reserve Act restricts the power to accept to "transactions involving importations and exportations" (later widened
by amendment to include certain domestic transactions and
finance drafts); and that the National Reserve Association
stipulates that acceptances shall have not more than four
months to run and shall be "properly secured," while the

JUXTAPOSITION OF TEXTS

279

Federal Reserve Act
Fourth. Liabilities to the stockholders of the association for
dividends and reserve profits.
Fifth. Liabilities incurred under the provisions of the Federal
Reserve Act.
The rediscount by any Federal reserve bank of any bills receivable and of domestic and foreign bills of exchange, and of acceptances authorized by this Act, shall be subject to such restrictions,
limitations, and regulations as may be imposed by the Federal
Reserve Board.

Federal Reserve Act stipulates not more than six months sight
and does not provide for "properly secured."
Exception " Fifth " in the Federal Reserve Act is queer and
anomalous. Its effect is that if a member bank sells acceptances with its endorsement in the bill market, such endorsement must be treated as a liability; if it endorses the same
bills to the Federal reserve bank, it is not so to be counted.
In other words, this provision designedly places a handicap
on the development of an open discount market.

280

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)
P O W E R TO P U R C H A S E

(OR D I S C O U N T )

ACCEPTANCES

SEC. 32. The National Reserve Association may, whenever its
own condition and the general financial conditions warrant such
investment, purchase from a subscribing bank
acceptances

of banks or acceptors of unquestioned financial responsibility
arising out of commercial transactions as hereinbefore defined.
S u c h acceptances m u s t have not exceeding ninety days
to run,

and must be of a character generally known in the market as
prime bills.
Such acceptances shall bear the indorsement of the subscribing bank

selling the same, which indorsement must be other than that of
the acceptor.

COMMENT:

The respective clauses are very similar except for some
added limitations in the Federal Reserve Act.
The provision in the Federal Reserve Act definitely limiting
the amount of acceptances discounted for any one member
to one-half of the paid-up capital and surplus of that member
is entirely incomprehensible, if the framers of the Act honestly
desired to create a discount market to take the place of the call
loan market on the New York Stock Exchange. Instead of

JUXTAPOSITION

TEXTS

281

Federal Reserve Act
P O W E R TO P U R C H A S E

(OR D I S C O U N T )

ACCEPTANCES

SEC. 13. . . . Any Federal reserve bank may discount

acceptances

which are based on the importation or exportation of goods and
^vhich have a maturity at time of discount of not more
than three months, and indorsed by at least one m e m ber bank.

The amount of acceptances so discounted shall at no time exceed
one-half the paid-up capital stock and surplus of the bank for
which the rediscounts are made.
The aggregate of such notes and bills bearing the signature or
indorsement of any one 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.

encouraging members to buy acceptances in large amounts
and to treat them as their secondary reserves, this restriction
was bound to have the opposite effect. (This provision was
later on modified by amendment.) The tendency evidenced
in this clause is all the harder to explain when one considers
it in connection with the open market powers conferred in
Section 14 of the Federal Reserve Act to which we shall revert
in the chapter dealing with open-market purchases.

282

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)
INVESTMENTS IN UNITED STATES BONDS AND O T H E R
SECURITIES

SEC. 33.

The National Reserve Association may invest in

United States bonds; also in obligations, having not more
than one year to run, of the United States or its dependencies, or of any State,

or of foreign governments.

(Verbatim Owen Bill)

COMMENT:

M.M.S.—except that the National Reserve Association Bill
provides for power to invest also in short time obligations of

JUXTAPOSITION OF TEXTS

283

Federal Reserve Act
INVESTMENTS

UNITED

STATES

BONDS

AND

OTHER

SECURITIES

SEC. 14. . . . Every Federal reserve bank shall have power: . . .
(b) To buy and sell, at home or abroad, bonds and notes of the
U n i t e d S t a t e s , a n d 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;

foreign governments. On the other hand, the Federal Reserve
Act gives wider latitude with regard to the purchase of obligations issued by counties, municipalities, etc.

284

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)
POWER

SEC. 34.

DEAL

GOLD

AND

BULLION

T h e National Reserve Association shall have

power, both at home and abroad, to deal in gold coin or
bullion, to make loans thereon, and to contract for loans
of gold coin or bullion, giving therefor, when necessary,
acceptable security, including the hypothecation of any
of its holdings of United States bonds.

COMMENT:
M.M.S.

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285

Federal Reserve Act
POWER

DEAL

GOLD

AND

BULLION

SEC. 14. . . . Every Federal reserve bank shall have power:
(a) T o deal in gold coin and bullion at home or abroad,
to make loans thereon, exchange Federal reserve notes
for gold, gold coin, or gold certificates, and to contract
for loans of gold coin or bullion, giving therefor,when
necessary, acceptable security, including the hypothecation of United States bonds

or other securities which Federal reserve banks are authorized to
hold;

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THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)
OPEN-MARKET

PURCHASES

SEC, 35. T h e National Reserve Association shall have power
to purchase from its subscribing banks and to sell, with or without
its indorsement, checks or bills of exchange, arising out of commercial transactions as hereinbefore defined, payable in such foreign countries as the board of directors of the National Reserve
Association may determine. These bills of exchange must have
not exceeding ninety days to run, and must bear the signatures
of two or more responsible parties, of which the last one shall be
that of a subscribing bank.

COMMENT:

Sections 31 to 36 correspond to Sections 13 and 14 of the
Federal Reserve Act. The reader will readily see how much
of the National Reserve Association Bill has been carried over
in substance, often verbatim, into Sections 13 and 14 of the
Federal Reserve Act.
It will not do to say, as Glass and Willis claim, that these
sections of the National Reserve Association Bill simply contain a transcript of European central bank laws or practices,
and that, therefore, they were copied as matters of commonly
accepted banking technique. T h e transactions of European
central banks include principally the discount of, or loans on,

JUXTAPOSITION OF TEXTS

287

Federal Reserve Act
OPEN-MARKET

PURCHASES

SEC. 14. 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: . . .
(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;

bankers' acceptances or double-name trade bills. Such paper
did not exist here. The law had to provide, therefore, for
some new device enabling the central organization safely and
adequately to deal with our single-name paper; and it had to
set about and create the very bankers' acceptances and modern trade bills which, in turn, would constitute a safe and
readily available means of exchange between the new organization and the member and non-member banks. In devising
these means, the framers of the law had constantly to bear in
mind that, unless they could satisfy the country that the
system proposed would be safe from abuse—by "interests,"
large or small, East, South, or West, or from paper befriended
by the politicians—the prejudice against any kind of a central

288

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(2"he Aldrich Bill)

banking system could not, and should not, be overcome. In
other words: the doors to the Reserve System had to be opened
wide enough to render the System effective, and closed tight
enough to keep danger out. Sections 31-35 of the National
Reserve Association Bill represent the result of years of hard
struggle with this problem.
Moreover, a Reserve System that was to exercise a regulatory
influence, and not to be solely an emergency organization,
had to be constructed so as to be able to function, not only
as an anvil, but also as a hammer. 1
The National Reserve Association Bill and the United Reserve Bank Plan deal with this problem in a very clear way.
For the anvil operations, where the initiative rests with member banks desiring to rediscount single-name notes, only short
paper (with maturities not in excess of 28 days) is admitted;
where longer paper of this character is offered for rediscount,
the guarantee of local associations (that is the joint obligation
of the members of that district) is required. If the National
Reserve Association Bill had actually been enacted, this safety
appliance would probably have been eliminated after a few
years of actual operation. The Federal Reserve Act could
leave it out, because education had meanwhile further pro1

See my address, " H a m m e r or A n v i l / ' p. 819, Vol. II.

JUXTAPOSITION OF T E X T S

289

Federal Reserve Act

gressed, and it was no longer a psychological requirement,
particularly not in a system under so much stricter governmental control.
Barring the injection of the " local associations" for longer
paper, the " a n v i l " sections in both the National Reserve
Association Bill and the Federal Reserve Act are practically
the same. In both cases, the safeguarding of the character
of the paper is left to the Central Board, endorsement by
member banks is required, and the actual discount operations
are carried out, not by the Central Board, but by the 15
branches or 12 Federal reserve banks respectively.
Where "hammer" transactions were involved, i.e., transactions initiated by the Reserve System to be carried on as a
matter of larger national policy, be it for the strengthening
of the Reserve System, or in the exercise of a regulatory influence upon the country as a whole, the National Reserve
Association Bill placed the operations involved in the hands
of the Central Board; this included the purchase of bankers'
acceptances, U. S. Government and State securities, and foreign bills and foreign State securities (the latter where circumstances made it desirable that, in the interest of the country,
reserve funds should not be too actively employed at home).

290

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)

The Central Board was placed also in charge of gold and
bullion operations and the establishment of accounts in foreign
countries.
The Federal Reserve Act empowered every Federal reserve
bank individually to carry on these "hammer" transactions.
Obviously, the exercise of these functions by 12 Federal reserve banks, each acting individually, would have led to the
greatest confusion and would have rendered a national and
effective policy impossible. In practical operation, it was inevitable, therefore, that a plan of common action should be
developed. As a result, these transactions are carried on
to-day by a committee of Federal reserve bank governors,
who, under the auspices of the Board, attend to the openmarket investments for a common account of all Federal
reserve banks willing to join in these transactions.
Important negotiations and transactions with foreign central banks have generally been carried on by the New York
Federal Reserve Bank, under the auspices of the Federal
Reserve Board, leaving it open to the other Federal reserve
banks to join.
From the aforesaid, the reader may readily judge for himself
(1) how far the Federal Reserve Act took over from the Na-

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291

Act

tional Reserve Association Bill, in form and substance, the
sections constituting the heart of the System; and (2) how far
in practical operation, in spite of the outward organic difference in structure, the Federal Reserve Act, in these respects,
resembles the National Reserve Association Bill.
Section 14 of the Federal Reserve Act is a very unfortunate
hodgepodge. It is headed "Open-Market Operations," but
contains the clauses providing for the fixing of discount rates,
and other matter that has nothing whatever to do with the
"open market." The most peculiar feature is that it broadly
provides for the purchase of "bills of exchange" without the
endorsement of a member bank, or a banking endorsement.
Thus we find that, in Section 13, all kinds of restrictions and
limits are imposed upon Federal reserve banks in dealing
with members, while, in Section 14, the Board is given the
power to permit the Federal reserve banks to deal with anybody anywhere without any of these safeguards. Fortunately,
the Federal Reserve Board, notwithstanding pressure to the
contrary, has acted cautiously in this respect. It is the first
duty of a reserve system to keep itself safe and free from
commercial credit risks. In its open-market transactions in
foreign or domestic bills, Federal reserve banks must restrict

292

THE FEDERAL RESERVE SYSTEiM
National Reserve Association Bill
(The Aldrich Bill)

themselves to investments in which a credit risk is practically
excluded by the acceptance or endorsement of banks or banking firms of undoubted standing. One can readily see what
would happen to the Federal Reserve System if a bill drawn
by an oil producer on an oil distributor, or similar paper,
could enter the portfolios of Federal reserve banks without a
bank endorsement.1
It is now generally understood that it is not necessary for
Federal reserve banks to buy paper without the protection
of a bank endorsement in order to secure a proper strategic
position. Such a position may be secured and modified from
time to time by releasing reserve money to, or withdrawing
it from actual employment in, the money market, and both
the National Reserve Association Bill and the Federal Reserve
1 T h e United Reserve Bank Plan proposed for the transactions covered in
Section 32: Acceptances "drawn by a commercial firm on, and accepted by, a
bank, trust company, or banker, and endorsed by a bank, trust company, or
a banker. One of these signatures should be that of a member. , ,
For the transactions envisaged in Section 35, the United Reserve Bank
Plan proposed bills of a commercial character " t o be drawn on, and accepted
by, a well known foreign banking house and endorsed by a member or a banker
in good standing
T h e United Reserve Bank Plan thus gives greater latitude for open-market
operations than the National Reserve Association Bill, without going to the
extreme of Section 14 of the Federal Reserve Act.

JUXTAPOSITION OF T E X T S

293

Federal Reserve Act

Act provide ample opportunities for that in permitting, in
addition to the rediscount operations, investments in bankers'
acceptances, U. S. Government bonds, foreign exchange, and
other securities.
It is true that the National Reserve Association Bill, in
restricting purchases of bankers' acceptances to those endorsed by a member bank, went too far. The reason was a
political one; it was feared that the minority party, or others
opposed to the bill, would have raised the cry that the door
had been opened to "Wall Street," if any bills except those
endorsed by member banks had been admitted for purchase
by the National Reserve Association.

294

THE FEDERAL RESERVE SYSTEiM
National Reserve Association Bill
{The Aldrich Bill)
F O R E I G N CORRESPONDENTS OR A G E N C I E S

SEC. 36.

T h e National Reserve Association shall have

power to open and maintain banking accounts in foreign countries and to establish agencies in foreign countries for the purpose of purchasing, selling, and collecting
foreign bills of exchange, and it shall have authority to
b u y and sell, with or without its indorsement, through
such correspondents or agencies,

checks or prime foreign
bills of exchange arising out of commercial transactions,
which have not exceeding ninety days to run, and which
bear the signatures of two or more responsible parties.

(Verbatim Owen Bill)

COMMENT:

Verbatim the same, except that the language used in the
Federal Reserve Act is " to appoint correspondents and establish agencies," as against, in the National Reserve Association

JUXTAPOSITION OF TEXTS

295

Federal Reserve Act
FOREIGN

CORRESPONDENTS

AGENCIES

SEC. 14. • . . Every Federal reserve bank shall have power: . . .
(e) To establish accounts with other Federal reserve banks for
exchange purposes and, with the consent of the Federal Reserve
Board,
to open and maintain banking accounts in foreign countries,

appoint correspondents, and
establish agencies in such countries

wheresoever it may deem 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 arising out of actual commercial
transactions which have not more than ninety days to
run and which bear the signature of two or more responsible parties.

Bill, " t o establish agencies," and, farther on, "through such
correspondents or agencies."
For further comment, see page 300.

296

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
{The Aldrich Bill)
CLEARING

SEC. 3 7 .

AND

COLLECTION

SYSTEM

It shall be the duty of the National Reserve

Association or any of its branches, upon request, to transfer any part of the deposit balance of any bank having
an account with it to the credit of any other bank having
an account with the National Reserve Association.

If a deposit balance is transferred from the books of one branch
to the books of another branch, it may be done,
under regulations to be prescribed by the National R e serve Association,

by mail, telegraph, or otherwise, at rates to be fixed at the time
by the manager of the branch at which the transaction originates.
SEC. 21. Any local association may by a vote of three-fourths
of its members and with the approval of the National Reserve
Association,
assume and exercise such of the powers and functions
of a clearing house as are not inconsistent with the purposes of this Act.

T h e National Reserve Association m a y

require any local association to perform such services in
facilitating the domestic exchanges of the National Reserve Association

as the public interests may require.

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297

Federal Reserve Act
CLEARING

AND

COLLECTION

SYSTEM

SEC. I 6, . . . T h e 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 m a y a t 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 m a y also require each such bank to exercise the f u n c tions of a clearing house for its member banks.

. . . 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 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.

298

THE FEDERAL RESERVE SYSTEiM
National Reserve Association Bill
{The Aldrich Bill)

COMMENT:

The substance is very similar in spite of difference in verbiage.
Both acts provide for a system of transfers with charges,
but in the Federal Reserve Act there is the provision that
checks shall be "received from member banks on deposit at
par." This places the Federal Reserve System in the dilemma
of either giving immediate credit at par for every check so
received (thus conceivably paying cash to a member bank for
a check which may only be paid six days later) or of accepting
the checks on a "deferred credit basis," as done at present. If
the Federal reserve banks were permitted to make an interest
charge at a published bank rate for the days involved in the
trip of the check to its destination (without figuring for the

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299

Act

return trip of the remittance), the member banks, if they so
desired, would be given the immediate use of their money,
while the Federal reserve banks would receive some income
in return, to cover the high cost of operation of their collection
machinery. If the approximately $600,000,000 now carried
by the Federal reserve banks in uncollected checks were thus
turned into an earning asset of the Federal reserve banks,
the investments in government securities of Federal reserve
banks would automatically be reduced by a similar amount.
B y fixing the bank rate applicable to such collections high
enough, the Federal Reserve System could protect itself from
being forced to carry a larger amount than it desired. The
Federal Reserve System would thus remain in constant touch
with the market and gain an additional means of control.

300

THE FEDERAL RESERVE SYSTEiM
National Reserve Association Bill
(The Aldrich Bill)

COMMENT:

The National Reserve Association Bill does not provide
for what would be sub-branches of its branches. Section 5
(page 202) states only that " t h e districts may be readjusted
and new districts and new branches may from time to time
be organized by the directors of the National Reserve Association wherever in their opinion the business of the country
requires."
It may not be uninteresting to mention, at this point, that,
while the Federal Reserve Act does not provide in specific
terms for the establishment of foreign branches, pressure was

301

JUXTAPOSITION OF TEXTS
Federal Reserve Act
BRANCHES

OF F E D E R A L

RESERVE

BANKS

SEC. 3. Each Federal reserve bank shall establish branch banks
within the Federal reserve district in which it is located and maydo so in the district of any Federal reserve bank which may have
been suspended. Such branches shall be operated by a board of
directors under rules and regulations approved by the Federal
Reserve Board. Directors of branch banks shall possess the same
qualifications as directors of the Federal reserve banks. Four of
said directors shall be selected by the reserve bank and three by
the Federal Reserve Board, and they shall hold office during the
pleasure, respectively, of the parent bank and the Federal Reserve
Board. The reserve bank shall designate one of the directors as
manager.

brought to bear upon the Federal Reserve Board on several
occasions to permit or force Federal reserve banks to establish branches in foreign countries. Attempts were made to
give the language of Section 14 under " e " (see page 295) a
wider construction for that purpose. That paragraph reads
as follows:
. . to open and maintain banking accounts in foreign
countries, appoint correspondents, and establish agencies in
such countries . . . for the purpose of purchasing, selling, and
collecting bills of exchange."
This language has been taken over practically literally from
the National Reserve Association Bill {see page 294), which, in

302

THE FEDERAL RESERVE SYSTEiM

National Reserve Association Bill
(The Aldrich Bill)

turn, took it from the United Reserve Bank Plan (see pp. 81-82,
Vol.11).
It is certain that neither the United Reserve Bank
Plan nor the National Reserve Association Bill expected that
these agencies should be anything but foreign firms or institutions that would be appointed to act as agents in a manner similar to that provided for in the agency agreements which have
been concluded by the Federal reserve banks with quite a
number of foreign central banks. It stands to reason that
if it had been the original intention of the Federal Reserve
Act to permit the organization of foreign branches in foreign
countries, a law which is so careful in prescribing in detail how
domestic branches are to operate, would have been clear and
specific with regard to the organization, operation, and examinations, etc., of foreign branches. A t one time, Mr. McAdoo
fathered such a comprehensive plan for aggressive operations

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303

Act

by foreign branches of Federal reserve banks and President
Wilson publicly endorsed it. The Federal Reserve Board,
however, saw itself constrained to oppose it, and to decline
to carry it into effect. In recent years, the Federal Reserve
Board—against the advice of the Advisory Council—permitted
two Federal reserve banks to open each a branch in Havana
(Cuba), one of which has since been closed. It is a highly
dangerous precedent, all the more so as there is an aggressive
school of thought—of which Dr. Willis is the main exponent—
urging that Federal reserve banks should go into foreign countries, and engage there in pioneer work. It is unnecessary to
stress the reasons why it would run counter to every sound
theory of reserve banking to use reserve funds of a country for
such purposes.

304

THE FEDERAL RESERVE

SYSTEM

National Reserve Association Bill
('The Aldrich Bill)
RESERVES

SEC. 39. All subscribing banks must conform to the following
requirements as to reserves to be held against deposits of various
classes, but the deposit balance of any subscribing bank in the
National Reserve Association and any notes of the National Reserve Association which it holds may be counted as the whole
or any part of its required reserve:
First. On demand deposits: National banks in different localities shall maintain the same percentages of reserve against demand
deposits as is now required by law, and the same percentages of
reserve against demand deposits shall be required of all other
subscribing banks in the same localities.
Second. On time deposits: All time deposits and moneys held
in trust payable or maturing within thirty days shall be subject
to the same reserve requirements as demand deposits in the same
locality. All time deposits and moneys held in trust payable or
maturing more than thirty days from date shall be subject to the
same reserve requirements as demand deposits for the thirty days
preceding their maturity, but no reserves shall be required therefor
except for this period. Such time deposits and moneys held in
trust, payable only at a stated time not less than thirty days from
date of deposit, must be represented by certificates or instruments
in writing and must not be allowed to be withdrawn before the
time specified without thirty days' notice.

JUXTAPOSITION OF TEXTS

305

Federal Reserve Act
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, and all savings accounts and certificates of deposit which are subject to not
less than thirty days' notice before payment.
When the Secretary of the Treasury shall have officially announced, in such manner as he may elect, the establishment of a
Federal reserve bank in any district, every subscribing member
bank shall establish and maintain reserves as follows:
(a) A bank not in a reserve or central reserve city as now or
hereafter defined shall hold and maintain reserves equal to twelve
per centum of the aggregate amount of its demand deposits and
five per centum of its time deposits, as follows:
In its vaults for a period of thirty-six months after said date
five-twelfths thereof and permanently thereafter four-twelfths.
In the Federal reserve bank of its district, for a period of twelve
months after said date, two-twelfths, and for each succeeding six
months an additional one-twelfth, until five-twelfths have been so
deposited, which shall be the amount permanently required.
For a period of thirty-six months after said date the balance
of the reserves may be held in its own vaults, or in the Federal
reserve bank, or in national banks in reserve or central reserve
cities as now defined by law.

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
('The Aldrich Bill)

JUXTAPOSITION OF TEXTS

307

Federal Reserve Act
After said thirty-six months' period said reserves, other than
those hereinbefore required to be held in the vaults of the member
bank and in the Federal reserve bank, shall be held in the vaults
of the member bank or in the Federal reserve bank, or in both,
at the option of the member bank.
(b) A bank in a reserve city, as now or hereafter defined, shall
hold and maintain reserves equal to fifteen per centum of the
aggregate amount of its demand deposits and five per centum of
its time deposits, as follows:
In its vaults for a period of thirty-six months after said date
six-fifteenths thereof, and permanently thereafter five-fifteenths.
In the Federal reserve bank of its district for a period of twelve
months after the date aforesaid at least three-fifteenths, and for
each succeeding six months an additional one-fifteenth, until sixfifteenths have been so deposited, which shall be the amount permanently required.
For a period of thirty-six months after said date the balance
of the reserves may be held in its own vaults, or in the Federal
reserve bank, or in national banks in reserve or central reserve
cities as now defined by law.
After said thirty-six months' period all of said reserves, except
those hereinbefore required to be held permanently in the vaults
of the member bank and in the Federal reserve bank, shall be
held in its vaults or in the Federal reserve bank, or in both, at
the option of the member bank.
(c) A bank in a central reserve city, as now or hereafter defined,
shall hold and maintain a reserve equal to eighteen per centum
of the aggregate amount of its demand deposits and five per
centum of its time deposits, as follows:

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
{The Aldrich Bill)

JUXTAPOSITION OF TEXTS
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309

Act

In its vaults six-eighteenths thereof.
In the Federal reserve bank seven-eighteenths.
The balance of said reserves shall be held in its own vaults or
in the Federal reserve bank, at its option.
Any Federal reserve bank may receive from the member banks
as reserves, not exceeding one-half of each installment, eligible
paper as described in section fourteen properly indorsed and acceptable to the said reserve bank.
. . . Except as thus provided, no member bank shall keep on
deposit with any nonmember 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 reserve 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 reserve required by law is fully restored.
In estimating the reserves required by this Act, the net balance
of amounts due to and from other banks shall be taken as the
basis for ascertaining the deposits against which reserves shall be
determined. Balances in reserve banks due to member banks
shall, to the extent herein provided, be counted as reserves.
National banks located in Alaska or outside the continental
United States may remain nonmember banks, and shall in that
event maintain reserves and comply with all the conditions now
provided by law regulating them; or said banks, except in the
Philippine Islands, may, with the consent of the Reserve Board,

310

THE FEDERAL RESERVE SYSTEiM
National Reserve Association Bill
(The Aldrich Bill)

COMMENT:

When comparing the National Reserve Association Bill and
the Federal Reserve Act, it is necessary to deal with the sections containing the reserve provisions and those governing
the note issue at the same time. These sections and the
rediscount and investment clauses cover the most important
features of the two bills.
The characteristic idea of the United Reserve Bank Plan
was that it devised a scheme by which a substantial portion
of the idle gold reserves tied up in the vaults of thousands of
banks was to be transferred to a central reservoir and the
credit balances at the central reservoir thus created were to
be counted as part of the lawful reserves of these banks.
The scheme went further, however, in that it stipulated
that the cash which remained tied up in the member bank
vaults in percentages required by the old law, might consist
of the circulating notes of the United Reserve Bank. Thus
it was hoped that practically all the gold tied up in the banks
would flow into the central reservoir, while the balance with
the United Reserve Bank and its notes in the hands of the
member banks would constitute the reserves of the latter.
It was furthermore hoped to substitute the United Reserve
Bank notes for the gold circulation in the pockets and tills
of the people, thus making the United Reserve Bank a huge
gold reservoir, an organization of unparalleled strength.
If the old requirements of 25 per cent, 25 per cent, and 15
per cent, respectively, to be maintained against demand deposits, were to be left unchanged, then the balances with

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311

Act

become member banks of any one of the reserve districts, and shall,
in that event, take stock, maintain reserves, and be subject to
all the other provisions of this Act.
SEC. 20. So much of sections two and three of the Act of June
twentieth, eighteen hundred and seventy-four, entitled "An Act
fixing the amount of United States notes, providing for a redistribution of the national-bank currency, and for other purposes,"
as provides that the fund deposited by any national banking
association with the Treasurer of the United States for the redemption of its notes shall be counted as a part of its lawful reserve
as provided in the Act aforesaid, is hereby repealed. And from
and after the passage of this Act such fund of five per centum
shall in no case be counted by any national banking association
as a part of its lawful reserve.

so-called reserve and central reserve agents were to be continued to the extent that they were not kept as balance or
in vault.
If, in due course, these balances with reserve and central
reserve agents were to be abolished as part of the required
reserve—which was the sounder course—then logically the
total of reserves required was to be correspondingly reduced.
If the balance with the United Reserve Bank was to be considered the only reserve, and the till money of the member
banks was not to be counted as reserve, then a further reduction would be called for.

312

THE FEDERAL RESERVE SYSTEiM

National Reserve Association Bill
(The Aldrich Bill)

The National Reserve Association Bill adopted the principle of this plan. It is true that in its first draft it stopped
half way by not permitting the National Reserve Association
notes in the vaults of members to be counted as reserves.
This was modified, however, in the second and final edition
of the plan, and the National Reserve Association Bill provided, therefore, for complete gold concentration.
The National Reserve Association 'Bill did not provide,
however, for a definite percentage to be maintained as a
balance with the central organization, and it left it to the
discretion of the Executive Committee to determine the size
of these balances in each individual case. In this, it followed
the European plan where the central banks require their depositors to maintain balances commensurate with their scope
and standing, and with the business done with the central
institution. There do not exist any legal reserve requirements
in Europe. (It is to be assumed that, in actual operation, the
National Reserve Association would promptly have evolved
a definite rule, based on deposits of member banks, because
with thousands of members individual arbitrary arrangements
would at once have led to an impasse and trouble.)
The National Reserve Association Bill left unchanged the
old provisions of the law permitting balances maintained with
other banks, as reserve agents, or central reserve agents, to
be counted as part of the required reserve.1
In the United Reserve Bank Plan (March, 1910), I decided to remain
rather vague with regard to reserve requirements, for fear that if I were specific
the discussion would at once center on this detail. Antagonism would be
1

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Act

The Federal Reserve Act, on the other hand, clearly prohibited balances with other banks after a period of transition
to be counted as part of the required reserves and prescribed
definite percentages of demand and time deposits to be maintained either as a balance with the Federal reserve banks, or
as vault cash, while a certain amount was to be carried optionally either in vault or as a balance. It did not, however,
permit Federal reserve notes in the vaults of member banks
to be counted as reserve money.
The first drafts of the Federal Reserve Act provided for
the placing with the Federal reserve bank or in the member
banks' own vaults of the entire "reserve required" under the
old law. A large portion of these reserves not having been
held in actual cash, but having been actively employed by
the reserve and central reserve agents, this very drastic stipulation was likely to cause substantial contraction and to alarm
and antagonize the banks. On second thought, the bill was
modified and requirements were reduced from 15 per cent,
25 per cent, and 25 per cent to 12 per cent, 15 per cent, and
18 per cent respectively. (This was in keeping with my recaroused too early and a quiet discussion of the larger points involved would
become jeopardized. I confined myself to the following statement: " T h e
general banks will hold a sufficient amount of till money for their requirements,
but as a reserve they must hold a cash balance with the United Reserve Bank,
commensurate as at present with the aggregate amount of their deposits/'
It is fair to assume that Senator Aldrich avoided for the same reason being
more specific in submitting his bill. Senator Glass vividly describes the bitter
resistance that these clauses called forth on the part of the banks when the
Federal Reserve A c t boldly provided for specific reserve balances. It was a
matter of prudence to avoid that issue in the early stages of the discussion.

314

THE FEDERAL RESERVE SYSTEiM

National Reserve Association Bill
(The Aldrich Bill)

ommendation contained in the memorandum addressed to
Colonel House under date of April 22, 1913.)
Thus the Federal Reserve Act was superior to the National
Reserve Association Bill in venturing to deal more definitely
with the question of the character and size of reserves; it
was inferior in that it continued the obligatory requirement
of keeping a certain percentage in vault in lawful money and
in that it precluded Federal reserve notes from being counted
as reserve money, thereby preventing the free flow of gold
into the Federal reserve banks and placing a strong obstruction in the path of their growth. As long as Federal reserve
notes were made a second-class currency, obviously the member banks were likely to lock up in their vaults, in gold or
legal tender, not only the required portion of their reserves,
but also the optional portion.
In theory and practice, the provisions of the Federal Reserve Act thus were greatly inferior to those of the National
Reserve Association Bill.
It is impossible to repeat here all the arguments made in
this respect in earlier articles; suffice it to say that the great
strength enjoyed by the Federal Reserve System to-day could
not have been attained had not the original reserve sections
and the clauses regulating the note issue—with which we shall
deal presently—been thoroughly recast. The Federal Reserve
System would have remained dwarfed. Its gold holdings

JUXTAPOSITION OF TEXTS
Federal Reserve

315

Act

would have remained restricted to the obligatory balances of
the members, plus what little of the "optional" they might
have secured. They could not have drawn gold from circulation. On the other hand, being obliged to put up 100 per cent
collateral in bills discounted for all Federal reserve notes they
might issue, while they were to maintain in addition not less
than 40 per cent in gold, a total of 140 per cent, they would
have reached the end of their tether so much quicker.
After a thorough overhauling, the reserve provisions of the
Federal Reserve Act are very simple to-day. They provide
that member banks, against their demand liabilities, shall
maintain balances with their respective Federal reserve banks
as follows: country banks 7 per cent, reserve city banks 10
per cent, and central reserve city banks 13 per cent; they may
hold in their vaults whatever kind of money they like, and
as much or as little as they require; but their vault money
is no longer to be counted as reserve, nor are their balances
with banks other than the Federal reserve bank.
This is what the United Reserve Bank Plan proposed in
1910, and follows closely the principles of the National Reserve
Association Bill, with the exception that, as already stated,
the earlier plans left undefined the specific percentages of the
reserve requirements.

316

THE FEDERAL RESERVE SYSTEiM
National Reserve Association Bill
(The Aldrich Bill)
L O A N S ON R E A L

SEC. 40.

ESTATE

National banks may loan not more than
thirty per centum of their time deposits,

as herein defined,
upon improved and unencumbered real estate,
such loans

not to exceed fifty per c e n t u m of the actual value of the
property,

which property shall be situated in the vicinity or in the territory
directly tributary to the bank: Provided, That this privilege shall
not be extended to banks acting as reserve agents for banks or
trust companies.

COMMENT:

M.M.S.—except that the Federal Reserve Act restricts these
loans to farm lands, while the National Reserve Association
Bill restricts them to "improved real estate."

JUXTAPOSITION OF TEXTS

317

Federal Reserve Act
L O A N S ON F A R M L A N D S

SEC. 24. 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, but no such loan shall
be made for a longer time than five years, nor for an amount
exceeding fifty per centum of the actual value of the
property

offered as security. Any such bank may make such loans 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.

318

THE FEDERAL RESERVE SYSTEiM

National Reserve Association Bill
(The Aldrich Bill)
RESERVES

AGAINST

DEPOSITS

AND

NOTES

SEC. 41. All demand liabilities, including deposits and circulating notes, of the National Reserve Association shall be covered
to the extent of fifty per centum by a reserve of gold (including
foreign gold coin and gold bullion) or other money of the United
States which the national banks are now authorized to hold as a
part of their legal reserve: Provided, That whenever and so long
as such reserve shall fall and remain below fifty per centum the
National Reserve Association shall pay a special tax upon the
deficiency of reserve at a rate increasing in proportion to such
deficiency as follows: For each two and one-half per centum or
fraction thereof that the reserve falls below fifty per centum a
tax shall be levied at the rate of one and one-half per centum per
annum: Provided further, That no additional circulating notes
shall be issued whenever and so long as the amount of such reserve
falls below thirty-three and one-third per centum of its outstanding notes.
SEC. 42. In computing the demand liabilities of the National
Reserve Association a sum equal to one-half of the amount of
the United States bonds held by the association which have been
purchased from national banks, and which had previously been
deposited by such banks to secure their circulating notes, shall be
deducted from the amount of such liabilities.

COMMENT:

As minimum reserves, the National Reserve Association Bill
prescribes 50 per cent against notes and demand liabilities;
the Federal Reserve Act prescribes 40 per cent against notes
and 35 per cent against deposits.

JUXTAPOSITION OF TEXTS

319

Federal Reserve Act
RESERVES

AGAINST

DEPOSITS

AND

NOTES

SEC. 16. . . . 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,
and not offset by gold or lawful money deposited with the Federal
reserve agent. . . .
SEC. II. The Federal Reserve Board shall be authorized and
empowered:
. . . (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 requirement 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 against Federal reserve notes falls
below forty per centum, the Federal Reserve Board shall establish
a graduated tax of not more than one per centum per annum
upon such deficiency until the reserves fall to thirty-two and onehalf per centum, and when said reserve falls below thirty-two and
one-half per centum, a tax at the rate increasingly of not less than
one and one-half per centum per annum upon each two and onehalf 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.
As taxes on deficient reserves, the National Reserve Association Bill specifies i ^ per cent per annum, increasing in proportion, for each 2 ^ per cent deficiency below 50 per cent,
and if the reserve falls below 3 3 ^ per cent, no additional
circulation is to be issued; the Federal Reserve Act specifies

320

THE FEDERAL RESERVE SYSTEiM
National Reserve Association Bill
(The Aldrich Bill)

a graduated tax of i per cent per annum for deficiency if the
reserve against notes falls below 40 per cent to 32JH2 per cent
and a graduated tax of
per cent for each i } 4 per cent
deficiency below
per cent.

JUXTAPOSITION OF TEXTS
Federal Reserve

321

Act

The last part of Paragraph C of Section 11 of the Federal
Reserve Act, reading as follows: " T h e 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" has always been considered
by me as one of the most fascinating prize puzzles.

322

THE FEDERAL RESERVE SYSTEiM
National Reserve Association Bill
{The Aldrich Bill)
W E E K L Y R E P O R T OF

CONDITION

SEC. 43. The National Reserve Association shall make a report,
showing the principal items of its balance sheet, to the Comptroller of the Currency
once a week.

These reports shall be made public.

In addition, full reports shall be made to the Comptroller of the
Currency by said association coincident with the five reports called
for each year from the national banks.

COMMENT:

M.M.S.

JUXTAPOSITION OF TEXTS
Federal Reserve
W E E K L Y R E P O R T OF

323

Act
CONDITION

SEC. II. . . . 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.

324

THE FEDERAL RESERVE SYSTEiM
National Reserve Association Bill
(The Aldrich Bill)
R E P O R T S AND E X A M I N A T I O N S

SEC. 44. All subscribing banks shall, under regulations to be
prescribed by the National Reserve Association, make a report
monthly, or oftener if required, to said association showing the
principal items of their balance sheets.
SEC. 45. All reports of national-bank examiners in regard to
the condition of banks shall hereafter be made in duplicate, and
one copy shall be filed with the National Reserve Association for
the confidential use of its executive officers and branch managers.
SEC. 46. The National Reserve Association
m a y accept

copies of the reports of the national-bank examiners for subscribing national banks and also
copies of the reports of State-bank examiners for subscribing State banks and trust companies,

in States where the furnishing of such information is not contrary
to law: Provided, however, That the standard of such examinations,
both National and State, meets the requirements prescribed by
the National Reserve Association. The National Reserve Association
shall have the right at any time to examine or cause to
be examined by its own representatives any subscribing
bank.

The National Reserve Association may make such payments to
national and State examiners for such services required of them
as the directors may consider just and equitable.

JUXTAPOSITION OF TEXTS
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325

Act

R E P O R T S AND EXAMINATIONS

SEC. 21. Section fifty-two hundred 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,

T h a t the Federal Reserve Board m a y authorize examination by the State authorities to be accepted in the case
of State banks and trust companies

and may at any time direct the holding of

a special examination of State banks or trust companies

that are stockholders in any 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.

326

THE FEDERAL RESERVE SYSTEiM
National Reserve Association Bill
(The Aldrich Bill)

COMMENT:

M.M.S.

JUXTAPOSITION OF TEXTS

327

Federal Reserve Act
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.

328

THE FEDERAL RESERVE SYSTEiM
National Reserve Association Bill
(The Aldrich Bill)
P A R T I A L R E P E A L OF SECTION

SEC. 47.

5159

All provisions of law requiring national banks

to hold or to transfer and deliver to the Treasurer of
the United States bonds of the United States other t h a n
those required to secure outstanding circulating notes
and Government deposits are hereby repealed.

COMMENT:
M.M.S.

JUXTAPOSITION OF TEXTS

329

Federal Reserve Act
P A R T I A L R E P E A L OF SECTION
SEC. 1 7 .

5159

So m u c h of the provisions

of section fifty-one hundred and fifty-nine of the Revised Statutes
of the United States, and section four of the Act of June twentieth,
eighteen hundred and seventy-four, and section eight of the Act
of July twelfth, eighteen hundred and eighty-two, and of any
other provisions of existing statutes
as require t h a t before any national banking associations
shall be authorized to commence banking business it
shall transfer and deliver to the Treasurer of the United
States a stated a m o u n t of United States registered bonds
is hereby repealed.

330

THE FEDERAL RESERVE SYSTEiM
National Reserve Association Bill
(The Aldrich Bill)

R E T I R E M E N T OF N A T I O N A L B A N K C U R R E N C Y A N D C O N V E R S I O N
OF T w o

PER

CENT

BONDS

SEC. 48. There shall be no further issue of circulating notes by
any national bank beyond the amount now outstanding. National
banks may maintain their present note issue, but

JUXTAPOSITION OF TEXTS

331

Federal Reserve Act
R E T I R E M E N T OF N A T I O N A L B A N K C U R R E N C Y A N D C O N V E R S I O N
OF T w o

PER

CENT

BONDS

SEC. I8. 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.
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 pur-

332

THE FEDERAL RESERVE SYSTEiM
National Reserve Association Bill
(The Aldrich Bill)

whenever a bank retires the whole or any part of its
existing issue its right to reissue the notes so retired shall
thereupon cease.

SEC. 49. The National Reserve Association shall, for a period
of one year from the date of its organization, offer to purchase at
a price not less than par and accrued interest the two per centum
bonds held by subscribing national banks and deposited to secure
their circulating notes. The National Reserve Association shall
take over the bonds so purchased and assume responsibility for
the redemption upon presentation of outstanding notes secured
thereby.
T h e National Reserve Association shall issue, on

the

terms herein provided, its own notes as the outstanding
notes secured by such bonds

so held shall be presented for redemption and may issue further
notes from time to time to meet business requirements, it being
the policy of the United States to retire as rapidly as possible,
consistent with the public interests, bond-secured circulation and
to substitute therefor notes of the National Reserve Association
of a character and secured and redeemed in the manner provided
for in this Act.

JUXTAPOSITION OF TEXTS

333

Federal Reserve Act
chasing 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 a m o u n t 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

334

THE FEDERAL RESERVE SYSTEiM
National Reserve Association Bill
(The Aldrich Bill)

SEC. 55. Upon application of the National Reserve Association
the Secretary of the Treasury shall exchange the two per centum
bonds of the United States bearing the circulation privilege purchased from subscribing banks for three per centum bonds of the
United States without the circulation privilege, payable after fifty
years from the date of issue. The National Reserve Association
shall hold the three per centum bonds so issued during the period
of its corporate existence: Provided, That after five years from
the date of its organization the Secretary of the Treasury may at
his option permit the National Reserve Association to sell not
more than fifty million dollars of such bonds annually: And provided further, That the United States reserves the right at any
time to pay any of such bonds before maturity, or to purchase
any of them at par for the trustees of the postal savings, or otherwise.
SEC. 56. The National Reserve Association shall pay to the
Government a special franchise tax of one and one-half per centum
annually during the period of its charter upon an amount equal
to the par value of such United States bonds transferred to it by
the subscribing banks.

COMMENT:

The idea of a gradual withdrawal of national bank currency and of a gradual conversion of the 2 per cent U. S. bonds
bearing the circulation privilege into 3 per cent U. S. Government securities without the circulation privilege is taken over

JUXTAPOSITION OF TEXTS
Federal Reserve

335

Act

making such deposit in the manner provided by existing law, shall
be entitled to receive from the Comptroller of the Currency circulating notes in blank, registered and countersigned as provided
by law, equal in amount to the par value of the bonds so deposited.
Such 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 nationalbank 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 exceed one-half of the
two per centum bonds so tendered for exchange, and thirty-year
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 one-year
notes so purchased by such Federal reserve bank, to purchase

by the Federal Reserve Act from the National Reserve Association Bill with the following differences:
The National Reserve Association, for one year, is to offer
to take over at not less than par the 2 per cent bonds held

336

THE FEDERAL RESERVE SYSTEiM

National Reserve Association Bill
(The Aldrich Bill)

by subscribing banks and is to assume the circulation outstanding thereagainst.
The National Reserve Association may convert the 2 per
cent bonds into 3 per cent fifty-year bonds (without circulation
privilege).
After five years, with the approval of the Secretary of the
Treasury, it may sell not more than $50,000,000 a year.
The National Reserve Association is to pay a franchise tax
of
per cent per annum upon the par value of bonds transferred to it by member banks.
The Federal Reserve Act provides that after two years
from the passage of the Act, Federal reserve banks shall buy,
not in excess of $25,000,000, 2 per cent bonds at par if tendered by national banks.
Federal reserve banks may issue their own notes against
bonds so bought.
Federal reserve banks are to have the privilege of exchanging
2 per cent bonds, one-half into thirty-year 3 per cent bonds
and one-half into one-year notes of the United States, which
the Federal reserve banks obligate themselves to renew for
a period of thirty years.
The underlying ideas of this Federal Reserve Act conversion
plan are contained in the United Reserve Bank Plan. They
differ in some detail.
I t is not worth while analyzing these sections any further,

JUXTAPOSITION OF TEXTS

337

Federal Reserve Act
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.
For the purpose of making the exchange herein provided for,
the Secretary of the Treasury is authorized to issue at par Treasury notes in coupon or registered form as he may prescribe in
denominations of one hundred dollars, or any multiple thereof,
bearing interest at the rate of three per centum per annum, payable quarterly, such Treasury notes to be payable not more thanone 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.
inasmuch as, in consequence of the War and the issue of the
war loans, conditions have changed so radically that the conversion ideas as then proposed have become impracticable.
Meanwhile, the still outstanding 2 per cent bonds are beginning to near maturity, and the problem will then have to be
faced and solved for good and all.

338

THE FEDERAL RESERVE SYSTEiM
National Reserve Association Bill
(The Aldrich Bill)
NOTE

SEC, 52.
ciation

ISSUE

The circulating notes of the National Reserve Asso-

shall constitute a first lien upon all its assets and shall
be redeemable in lawful money on presentation at the
head office of said association or any of its branches.

It shall be the duty of the National Reserve Association to maintain at all times a parity of value of its circulating notes with the
standard established by the first section of the act of

March fourteenth, nineteen hundred, entitled

4 'An

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."

COMMENT:
M. M.

JUXTAPOSITION OF TEXTS

339

Federal Reserve Act
NOTE

ISSUE

SEC. 26. All provisions of law inconsistent with or superseded
b y any of the provisions of this A c t are to that extent and to that
extent only hereby repealed: Provided,
nothing in this A c t 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 m a i n tain 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 A c t 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. 16. . . . and the amount of
such Federal reserve notes so 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 A c t upon security of United States two per centum Government bonds,
become a first and paramount lien on all the assets of
such bank.

340

THE FEDERAL RESERVE

SYSTEM

National Reserve Association Bill
(The Aldrich Bill)
SEC. 53. The circulating notes of the National Reserve Association shall

be received a t par in payment of all taxes, excises, and
other dues

to the United States, and for all salaries and other debts and
demands owing by the United States to individuals, firms, corporations, or associations, except obligations of the Government
which are by their terms specifically payable in gold, and for all
debts due
from or by one bank or trust company to another, and
for all obligations due to any bank or trust company.

JUXTAPOSITION OF TEXTS
Federal Reserve

341

Act

SEC. I6. 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.
T h e 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

342

THE FEDERAL RESERVE SYSTEiM
National

Reserve Association
(The Aldrich
Bill)

Bill

SEC. 50. All note issues of the National Reserve Association
shall at all times be covered
by legal reserves to the extent required by section fortyone of this A c t and by notes or bills of exchange arising
out of commercial transactions as hereinbefore defined
or obligations of the United States.

SEC. 51. A n y notes of the National Reserve Association in
circulation at any time in excess of nine hundred million dollars
which are not covered by an equal amount of lawful money, gold
bullion, or foreign gold coin held by said association, shall pay a
special tax at the rate of one and one-half per centum per annum,
and any notes in excess of one billion two hundred million dollars
not so covered shall pay a special tax at the rate of five per centum
per annum: Providedy T h a t in computing said amounts of nine

JUXTAPOSITION OF TEXTS

343

Federal Reserve Act
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 and bills,

accepted for rediscount under the provisions of section thirteen
of this Act, and 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
c e n t u m against its deposits and reserves in gold of not
less than forty per c e n t u m against its Federal reserve
notes in actual circulation,

and not offset by gold or lawful money deposited with the Federal
reserve agent. 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. No Federal re-

344

THE FEDERAL RESERVE SYSTEiM
National Reserve Association Bill
{The Aldrich Bill)

hundred million dollars and one billion two hundred million dollars
the aggregate amount of any national-bank notes then outstanding shall be included.

JUXTAPOSITION OF TEXTS

345

Federal Reserve Act
serve 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 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,
and such Federal reserve bank shall, so long as any of its Federal
reserve notes remain outstanding, maintain with the Treasurer in
gold an amount sufficient in the judgment of the Secretary to
provide for all redemptions to be made by the Treasurer. Federal
reserve notes received by the Treasury, 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

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
{The Aldrich Bill)

JUXTAPOSITION OF TEXTS

347

Federal Reserve Act
to such bank, but in no event less than five per centum; 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 notes to
the bank so applying, and such bank shall be charged with the
amount of such notes and shall pay such rate of interest on said
amount as may be established by the Federal Reserve Board, and
the amount of such Federal reserve notes so 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

348

THE FEDERAL RESERVE SYSTEiM
National Reserve Association Bill
{The Aldrich Bill)

COMMENT:

The note-issue sections of the two acts are, of course,
radically different.
National Reserve Association notes are obligations of the
National Reserve Association.
Federal reserve notes are obligations of the United States
of America.
National Reserve Association notes are issued against notes,
bills of exchange, and gold.
Federal reserve notes are issued against 100 per cent notes
and bills accepted for rediscount1 deposited with the Federal
reserve agent; in addition, there must be a reserve of not less
than 40 per cent in gold.
Federal reserve banks shall pay such rate of interest on
notes as may be established by the Federal Reserve Board.
T h e Federal Reserve Board has never made any charge; if it
had, every exchange of Federal reserve notes for gold would
have involved a loss and the concentration of the country's
gold reserve could never have been accomplished.
The Federal Reserve Board may refuse to furnish notes.
The National Reserve Association Bill imposes a tax of
per cent plus 5 per cent respectively when the note issue
1 N o t e that acceptances purchased under open-market powers could not be
deposited as collateral against notes! (This was changed b y later amendment.)

JUXTAPOSITION OF TEXTS

349

Federal Reserve Act
reserve agent to transmit so much of said gold to the Treasury
of the United States as may be required for the exclusive purpose
of the redemption of such notes.
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 deposited with it and shall
at the same time substitute therefor other like collateral of equal
amount with the approval of the Federal reserve agent under
regulations to be prescribed by the Federal Reserve Board. . . .

exceeds $900,000,000—or $1,200,000,000—respectively of notes
"not covered by an equal amount of lawful money, gold, gold
bullion, or foreign gold.''
The free exchange of Federal reserve notes for gold was
not originally envisaged by the Federal Reserve Act. We have
dealt with some of the phases connected with these features
when discussing reserves {page 313 ff.).
In spite of these striking differences of theory and structure,
the Federal Reserve System's note issue in practical operation—and with the later amendments enabling the free exchange for gold—functions in just the same manner as the
National Reserve Association would have functioned. The
shell, as President Wilson said, is a government obligation;
the substance is a bank note. The red tape necessary in order
to satisfy these two requirements, while costly and bothersome, is in itself not an unbearable hardship. The gravest
consequence of the surrender to the Owen-Bryan theory was
that, by permitting Federal reserve notes to become the obligations of the United States, the fateful demand for a Federal
Reserve Board entirely appointed by the government became
irresistible.

350

THE FEDERAL RESERVE SYSTEiM
National Reserve Association Bill
(The Aldrich Bill)

CHARGE

FOR

TRANSPORTATION
ASSOCIATION

NATIONAL

RESERVE

CIRCULATION

SEC. 54. The National Reserve Association and its branches
shall at once, upon application and without charge for transportation, forward its circulating notes to any depositing bank against
its credit balance.

JUXTAPOSITION OF TEXTS
Federal Reserve

351

Act

COMMENT:

The Federal Reserve Act; contains no such provision, but
since October, 1918, all Federal reserve banks, by order of
the Board, have been absorbing the cost of note shipments to
and from member banks.

352

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)
FOREIGN

CORPORATIONS

SEC. 57. That banking corporations for carrying on the business of banking in foreign countries and in aid of the commerce
of the United States with foreign countries and to act when required as fiscal agents of the United States in such countries may
be formed by any number of persons, not less in any case than
five, who shall enter into articles of association which shall specify
in general terms the object for which the banking corporation is
formed and may contain any other provisions not inconsistent
with the provisions of this section which the banking corporation
may see fit to adopt for the regulation and conduct of its business
and affairs, which said regulations shall be signed, in duplicate,
by the persons uniting to form the banking corporation and one
copy thereof shall be forwarded to the Comptroller of the Currency and the other to the Secretary of State, to be filed and
preserved in their offices.
That the persons uniting to form such banking corporation shall
under their hands make an organization certificate which shall
specify, first, the name assumed by such banking corporation,
which name shall be subject to approval by the comptroller;
second, the foreign country or countries or the dependencies or
colonies of foreign countries or the dependencies of the United
States where its banking operations are to be carried on; third,
the place in the United States where its home office shall be
located; fourth, the amount of its capital stock and the number

353

JUXTAPOSITION OF TEXTS
Federal Reserve Act
FOREIGN

CORPORATIONS

AND

FOREIGN

BRANCHES

SEC, 25. Any national banking association possessing a capital
and surplus of $1,000,000 or more may file application with the
Federal Reserve Board, upon such conditions and under such
regulations as may be prescribed by the said board, for the purpose of securing authority to establish branches in foreign countries or dependencies 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. Such application
shall specify, in addition to the name and capital of the banking
association filing it, the place or places where the banking operations proposed are to be carried on, and the amount of capital
set aside for the conduct of its foreign business. The Federal
Reserve Board shall have power to approve or to reject such
application if, in its judgment, the amount of capital proposed
to be set aside for the conduct of foreign business is inadequate,
or if for other reasons the granting of such application is deemed
inexpedient.
Every national banking association which shall receive authority to establish foreign branches shall be required at all times to
furnish information concerning the condition of such branches to
the Comptroller of the Currency upon demand, and the Federal
Reserve Board may order special examinations of the said foreign
branches at such time or times as it may deem best. Every
such national banking association shall conduct the accounts of
each foreign branch independently of the accounts of other foreign
branches established by it and of its home office, and shall at
the end of each fiscal period transfer to its general ledger the
profit or loss accruing at each branch as a separate item.

354

THE FEDERAL RESERVE SYSTEiM
National Reserve Association Bill
{The Aldrich Bill)

of shares into which the same shall be divided; fifth, the names
and places of residence of the shareholders and the number of
shares held by each of them; and, sixth, a declaration that said
certificate is made to enable such persons to avail themselves of
the advantages of this section.
That no banking corporation shall be organized under the provisions of this section with a less capital than two million dollars,
which shall be fully paid in before the banking corporation shall
be authorized to commence business, and the fact of said payment
shall be certified by the Comptroller of the Currency and a copy
of his certificate to this effect shall be filed with the Secretary of
State: Provided, That the capital stock of any such bank may be
increased at any time by a vote of two-thirds of its shareholders
with the approval of the Comptroller of the Currency and that
the capital stock of any such bank which exceeds two million
dollars may be reduced at any time to the sum of two million
dollars by the vote of shareholders owning two-thirds of the
capital.
That every banking corporation formed pursuant to the provisions of this section shall for a period of twenty years from the
date of the execution of its organization certificate be a body
corporate, but shall not be authorized to receive deposits in the
United States nor transact any domestic business not necessarily
related to the business being done in foreign countries or in the
dependencies of the United States. Such banking corporations
shall have authority to make acceptances, buy and sell bills of
exchange, or other commercial paper relating to foreign business,
and to purchase and sell securities, including securities of the
United States or of any State in the Union. Each banking corporation organized under the provisions of this section shall have
power to establish and maintain for the transaction of its business

JUXTAPOSITION OF T E X T S

Federal Reserve Act

356

THE FEDERAL RESERVE SYSTEiM
National Reserve Association Bill
(The Aldrich Bill)

a branch or branches in foreign countries, their dependencies, or
the dependencies of the United States at such places and under
such regulations as its board of directors may deem expedient.
A majority of the shares of the capital stock of such banking
corporation shall be held and owned by citizens of the United
States or corporations chartered under the laws of the United
States or of any State of the Union, and a majority of the members
of the board of directors of such banking corporations shall be
citizens of the United States. Each director shall own in his own
right at least one hundred shares of the capital stock of the banking corporation of which he is a director.
Whenever the Comptroller shall become satisfied of the insolvency of any such banking corporation he may appoint a receiver
who shall proceed to close up such corporation in the same manner
in which he would close a national bank, the disposition of the
assets of the branches to be subject to any special provisions of
the laws of the country under whose jurisdiction such assets are
located.
The annual meeting of every such banking corporation shall be
held at its home office in the United States, and every such banking corporation shall keep at its home office books containing
the names of all stockholders of such banking corporation and
members of its board of directors, together with copies of the
reports furnished by it to the Comptroller of the Currency exhibiting in detail and under appropriate heads the resources and
liabilities of the banking corporation. Every such banking corporation shall make reports to the Comptroller of the Currency
at such times as he may require, and shall be subject to exami-

JUXTAPOSITION OF T E X T S

Federal Reserve Act

358

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)

nations when deemed necessary by the Comptroller of the Currency through examiners appointed by him; the compensation of
such examiners to be fixed by the Comptroller of the Currency.
Any such banking corporation may go into liquidation and be
closed by the vote of its shareholders owning two-thirds of its
stock.
Any bank doing business in the United States and being the
owner of stock in the National Reserve Association may subscribe
to the stock of any banking corporation organized under the provisions of this section, but the aggregate of such stock held by
any one bank shall not exceed ten per centum of the capital stock
of the subscribing bank.

COMMENT:

The National Reserve Association Bill provides for the organization of banking corporations to operate in foreign
countries, the stock of which may be owned by member banks.

JUXTAPOSITION OF T E X T S

359

Federal Reserve Act

The Federal Reserve Act grants power to member banks
to open branches in foreign countries.
By subsequent amendment, the power granted by Section 57
of the National Reserve Association Bill was also embodied
in the Federal Reserve Act.

360

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
(The Aldrich Bill)
RIGHT

AMEND

SEC. 58. Congress reserves the right to alter or amend the
provisions of this Act to take effect at the end of any decennial
period from and after the organization of the National Reserve
Association.

COMMENT:
M.M.S.

JUXTAPOSITION OF TEXTS

361

Federal Reserve Act
RIGHT

AMEND

SEC. 30. The right to amend, alter, or repeal this Act is hereby
expressly reserved.

362

THE FEDERAL RESERVE SYSTEM
National Reserve Association Bill
{The Aldrich Bill)
EFFECT

ON E X I S T I N G

PROVISIONS

LAW

SEC. 59. All acts or parts of acts inconsistent with the provisions of this act are hereby repealed.

COMMENT:
M.M.S.

JUXTAPOSITION OF TEXTS

363

Federal Reserve Act
EFFECT

ON E X I S T I N G

PROVISIONS

LAW

SEC. 26. All provisions of law inconsistent with or superseded
by any of the provisions of this Act are to that extent and to that
extent only hereby repealed.

364

THE FEDERAL RESERVE SYSTEM
APPENDIX

TO CHAPTER

VIII

Below are printed Sections 6, 7, 17, 20, and 38 of the
National Reserve Association Bill dealing primarily with the
organization and powers of the proposed local associations,
also Section 12 of the Federal Reserve Act dealing with the
Advisory Council. There are no comparable provisions
regarding these matters in the Federal Reserve Act and the
National Reserve Association Bill. These sections are reproduced here because they are deemed essential for a complete understanding of the two measures. A few sections of
the National Reserve Association Bill and the Federal Reserve
Act have been omitted from the above juxtaposition because
they deal with extraneous matter or matter not pertinent to
the present comparison.

National Reserve Association Bill
{The Aldrich Bill)
LOCAL

ASSOCIATIONS

SEC. 6. All subscribing banks within a district shall be grouped
by the organization committee or after organization, by the National Reserve Association, into local associations of not less than
ten banks, with an aggregate capital and surplus of at least five
million dollars, for the purposes hereinafter prescribed: Provided,
That the territory included in each association shall be contiguous
and that in apportioning the territory due regard shall be had for
the customary course of business and for the convenience of the
banks forming the association: Provided further> That in apportioning the territory to local associations comprising a district
every bank and all of the territory within said district shall be
located within the boundaries of some local association: And
provided further, That every subscribing bank shall become a
member only ot the local association of the territory in which it
is situated.

JUXTAPOSITION OF TEXTS

365

The banks uniting to form a local association shall, by their
presidents or vice presidents, under authority from the board of
directors, execute a certificate in triplicate setting forth the name
of the association, the names of the banks composing it, its principal place of business, its territorial limits, and the purposes for
which it is organized. One copy of this certificate shall be filed
with the Comptroller of the Currency, one copy shall be filed
with the National Reserve Association, and one copy shall be
filed with the branch of the National Reserve Association of the
district in which the local association is included. Upon the filing
of such certificates the local association therein named shall become a body corporate and by the name so designated may sue
and be sued and exercise the powers of a body corporate for the
purposes mentioned in this Act, and not otherwise.
The local associations in each district may be readjusted from
time to time and new associations may be authorized by the
directors of the National Reserve Association.
SEC. 7. Each local association shall have a board of directors,
the number to be determined by the by-laws of the local association. Three-fifths of that number shall be elected by ballot cast
by the representatives of the banks that are members of the local
association, each bank having one representative and each representative one vote for each of the positions to be filled without
reference to the number of shares which the bank holds in the
National Reserve Association. Two-fifths of the whole number
of directors of the local association shall be elected by the same
representatives of the several banks that are members of the
association, but in voting for these additional directors each representative shall be entitled to as many votes as the bank which
he represents holds shares in the National Reserve Association:
Provided, That in case forty per centum of the capital stock in
any subscribing bank is owned directly or indirectly by any other
subscribing bank, or in case forty per centum of the capital stock
in each of two or more subscribing banks, being members of the
same local association, is owned directly or indirectly by the same
person, persons, copartnership, voluntary association, trustee, or
corporation, then and in either of such cases, neither of such banks
shall be entitled to vote separately, as a unit, or upon its stock,

366

THE FEDERAL RESERVE SYSTEM

except that such banks acting together, as one unit, shall be entitled to one vote, for the election of the board of directors of
such local association. In no case shall voting by proxy be
allowed. The authorized representative of a bank, as herein provided, shall be its president, vice president, or cashier.
Each director shall take an oath that he will, so far as the duty
devolves upon him, diligently and honestly administer the affairs
of such association and will not knowingly violate or willingly
permit to be violated any of the provisions of this Act.
The directors originally elected shall hold office until the second
Tuesday in February immediately following their election, and
thereafter the directors shall be elected annually on that date
and shall hold office for the term of one year.
The board of directors of the local association shall have authority to make by-laws, not inconsistent with law, which shall be
subject to the approval of the National Reserve Association.
SEC. 17. The directors of each local association shall annually
elect from their number a president, a vice president, and an executive committee, whose powers and duties shall be determined
by the by-laws of the local association, subject, however, to the
approval of the National Reserve Association.
SEC. 20. Any member of a local association may apply to such
association for a guaranty of the commercial paper which it
desires to rediscount at the branch of the National Reserve Association in its district. Any such bank receiving a guaranty from
a local association shall pay a commission to the local association,
to be fixed in each case by its board of directors. Expenses and
losses in excess of commissions shall be met by an assessment of
the members of the local association in proportion to the ratio
which their capital and surplus bears to the aggregate capital
and surplus of the members of the local association, which assessment shall be made by its board of directors, and the commission
received for such guaranty, after the payment of expenses and
possible losses, shall be distributed among the several banks of
the local association in the same proportion. A local association
shall have authority to require security from any bank offering
paper for guaranty, or it may decline to grant the application.
The total amount of guaranties by a local association to the

JUXTAPOSITION OF TEXTS

367

National Reserve Association shall not at any time exceed the
aggregate capital and surplus of the banks forming the guaranteeing association.
SEC. 38. The National Reserve Association may purchase,
acquire, hold, and convey real estate for the following purposes
and for no other:
First. Such as shall be necessary for the immediate accommodation in the transaction of the business either of the head office
or of the branches.
Second. Such as shall be mortgaged to it in good faith by way
of security for debts previously contracted.
Third. Such as shall be conveyed to it in satisfaction of debts
previously contracted in the course of its dealings.
Fourth. Such as it shall purchase at sales under judgments,
decrees, or mortgages held by said association, or shall purchase
to secure debts due to it.
But the National Reserve Association shall not hold the possession of any real estate under mortgage or the title and possession of any real estate purchased to secure any debts due to it
for a longer period than five years.

Federal Reserve Act
FEDERAL ADVISORY

COUNCIL

SEC. 12. There is hereby created a Federal Advisory Council,
which shall consist of as many members as there are Federal
Reserve districts. Each Federal reserve bank by its board of
directors shall annually select from its own Federal reserve district one member of said council, who shall receive such compensation and allowances as may be fixed by his board of directors
subject to the approval of the Federal Reserve Board. The
meetings of said advisory council shall be held at Washington,
District of Columbia, at least four times each year, and oftener
if called by the Federal Reserve Board. The council may in
addition to the meetings above provided for hold such other
meetings in Washington, District of Columbia, or elsewhere, as

368

THE FEDERAL RESERVE SYSTEM

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, (i) 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.

CHAPTER
A N

A N A L Y T I C A L

BILL A N D
O N

T H E

C O M P A R I S O N

T H E

F E D E R A L

C H A P T E R

The Aldrich Bill
(As introduced in the Senate)
A.

COMPTROLLER

A L D R I C H

A C T

O F T E X T S

B A S E D

S H O W N

E I G H T

The Federal Reserve Act
(As signed by President Wilson)

COMMITTEE

TREASURY

AGRICULTURE
OF

T H E

ORGANIZATION

I. O R G A N I Z A T I O N
S E C R E T A R Y OF THE

O F

R E S E R V E

J U X T A P O S I T I O N
IN

SECRETARY

THE

CUR-

PERSONNEL

S E C R E T A R Y OF T H E
SECRETARY

COMPTROLLER

TREASURY

AGRICULTURE
OF

THE

CUR-

EIGHT

NOR

RENCY

RENCY
S E C R E T A R Y OF COMMERCE A N D
LABOR

DISTRICTS
NOT

FIFTEEN

LESS

THAN

MORE THAN
APPORTIONED
GARD
AND

WITH DUE

THE

CUSTOMARY

RE-

CONVENIENT
COURSE

BUSINESS"

APPORTIONED
GARD
AND

THE

WITH DUE

RE-

CONVENIENCE

CUSTOMARY

BUSINESS"
369

TWELVE"

COURSE

370

THE FEDERAL RESERVE SYSTEiM

NOT

NECESSARILY

STATE

LINES"

ALONG

SHALL

NOT

NECESSARILY

COTERMINOUS

WITH

ANY

S T A T E OR S T A T E S "
M A Y BE
'AND

NEW

MAY

M A Y BE

READJUSTED
DISTRICTS

. .

FROM TIME TO TIME

NEW

FROM

DISTRICTS

TIME

MAY

TIME

CREATED

CREATED
BY

'AND

READJUSTED

THE

DIRECTORS

NATIONAL RESERVE

THE

ASSOCIA-

THE

FEDERAL

RESERVE

BOARD,

TION
WHENEVER,
ION,

THE

COUNTRY

THEIR

BUSINESS

OPIN-

THE

REQUIRES"
NOT TO

EXCEED

TWELVE

ALL"

3. U
C O R P O R A T E ^ H E A D - O F F I C E " IN

WASHINGTON. INASMUCH, HOW-

A N D NO PROVISION AS TO

E V E R , AS A L L P O W E R S OF

DOMICILE OF T H E F E D E R A L R E -

DISCOUNT ARE
THE

DELEGATED

BRANCHES

MUST

PRIMARILY

TRATIVE, EXCEPT
TARY

THIS

OFFICE
ADMINIS-

FOR

INVESTMENT

RE-

CORPORATE

HEAD

OFFICE
THE

SERVE BOARD EXCEPT THAT IT
HOLD

ITS

FIRST

MEETING

WASHINGTON.

VOLUNOPERA-

TIONS.

O N E B R A N C H IN EACH DISTRICT.

ONE

FEDERAL

RESERVE

IN EACH DISTRICT.

BANK

38 7

ANALYTICAL COMPARISON
4.
ANY

ANY

EVERY

NATIONAL

TRUST

COM-

quired

TO BECOME A

COMPLIES

WITH

NATIONAL

STATE

BANK

PANY, WHICH
CERTAIN

MEMBERSHIP

REQUIREMENTS,

MAY

BANK

TT?-

MEMBER.

STATE B A N K S A N D T R U S T COMPANIES

may,

COMPLYING

WITH CERTAIN REQUIREMENTS,

BECOME A MEMBER.

BECOME MEMBERS.
STATE B A N K S A N D T R U S T COM-

STATE BANKS AND TRUST

PANIES

MEMBERSHIP

ELIGIBLE

MUST,

FOR
GEN-

MEMBERSHIP

ELIGIBLE

MUST,

COMFOR
GEN-

E R A L , COMPLY WITH THE SAME

REQUIREMENTS

NATIONAL

BANKS WITH REGARD TO CAPI-

TAL, RESERVES, AND

TAL, RESERVES, AND EXAMINA-

EXAMINA-

TIONS.

" T W E N T Y P E R C E N T U M OF T H E
PAID-IN

AND

capital"

UNIMPAIRED

OF M E M B E R

"SHALL

DIVIDED

DOLLARS

EACH"

"THE

ONE

MAY

INTO

HUNDRED

OUTSTANDING

STOCK

BANKS.

CAPITAL

INCREASED

SUBSCRIBING

CREASE THEIR

BANKS

CAPITAL

OF M E M B E R
"SHALL

BANKS.

DIVIDED

INTO

SHARES OF $ I O O E A C H .

"THE
STOCK

OUTSTANDING
SHALL

CAPITAL

INCREASED

FROM TIME TO TIME

FROM TIME TO TIME
"AS

SIX PER C E N T U M OF T H E PAID-

UP capital stock and surplus"

IN-

" A S MEMBER BANKS
THEIR

CAPITAL

SURPLUS

INCREASE

STOCK

AND

372
"OR

THE FEDERAL RESERVE SYSTEiM
AS

ADDITIONAL

BANKS

" O R AS ADDITIONAL BANKS BECOME MEMBERS,

BECOME

SUBSCRIBERS
" A N D M A Y BE

DECREASED

"AS

BANKS

" O R MAY BE DECREASED
"AS

SUBSCRIBING

BANKS

RE-

MEMBER

REDUCE

T H E I R C A P I T A L S T O C K OR S U R -

DUCE THEIR CAPITAL

PLUS
"OR
BY

LEAVE

THE

ASSOCIATION

" O R CEASE TO BE M E M B E R S . "

LIQUIDATION/'

"FIFTY

PER

CENTUM

SUBSCRIPTIONS TO THE
T A L STOCK OF T H E

THE
CAPI-

NATIONAL

RESERVE ASSOCIATION

SHALL

FIFTY

PER

THE

SUBSCRIPTIONS SHALL BE

PAID

IN, ONE-THIRD
THE

UPON

CALL

ORGANIZATION

MITTEE,

BE F U L L Y PAID I N "

CENTUM

THREE

COM-

ONE-THIRD
MONTHS,

WITHIN

AND

ONE-

THIRD WITHIN SIX MONTHS.
" T H E REMAINDER OF THE
SCRIPTIONS

ANY

SUBPART

BECOME

OF THE

SCRIPTION,

ANY

SUBPART

THEREOF,

THEREOF
"SHALL

" T H E R E M A I N D E R OF T H E

LIABILITY

SUBSCRIBERS,

"SUBJECT

CALL

AND

PAY-

" S H A L L BE SUBJECT TO CALL

MENT THEREOF
"WHENEVER
MEET
THE

THE

NECESSARY
OBLIGATIONS

NATIONAL

RESERVE

TO
OF
AS-

"WHEN
BY

DEEMED

THE

FEDERAL

NECESSARY
RESERVE

BOARD.

SOCIATION"
"BEFORE
SHALL

SAID
BE

ASSOCIATION

AUTHORIZED

"NO

FEDERAL

SHALL

RESERVE

COMMENCE

BANK

BUSINESS

38 7

ANALYTICAL COMPARISON
COMMENCE

BUSINESS

HUNDRED

MILLION

TWO

DOLLARS

WITH A SUBSCRIBED
LESS THAN

CAPITAL

$4,000,000."

OF THE C A P I T A L STOCK SHALL
BE

SUBSCRIBED

HUNDRED

AND

MILLION

ONE

DOLLARS

OF ITS C A P I T A L SHALL BE PAID
IN C A S H . "

INCORPORATION,

UPON DULY MAKING
ING

WITH

THE

AND

CHARTER,

FIL-

COMPTROLLER

AND

POWERS

UPON DULY MAKING AND
ING

WITH

THE

FIL-

COMPTROLLER

OF T H E C U R R E N C Y T H E PROPER

C E R T I F I C A T E the N A T I O N A L R E -

CERTIFICATE

SERVE ASSOCIATION SHALL BE-

SERVE B A N K SHALL BECOME A

each

FEDERAL RE-

COME A BODY CORPORATE AND

BODY C O R P O R A T E A N D AS SUCH

SHALL H A V E POWER TO ADOPT

SUCH

SHALL

HAVE

TO ADOPT AND USE A
ATE

SEAL,

SUE AND

MAKE

POWER
CORPOR-

CONTRACTS,

SUED,

ELECT

APPOINT OFFICERS, ADOPT

OR
BY-

AND

USE

SEAL,

SUED, APPOINT

OFFICERS

DIRECTORS

EMPLOYEES,

LAWS, ETC.

CORPORATE

MAKE CONTRACTS, SUE AND BE
ITS

ADOPT

BOARD
AND

BY-LAWS,

ETC.
"HAVE

SUCCESSION

PERIOD OF FIFTY

FOR

YEARS"

"HAVE

SUCCESSION

FOR

PERIOD OF T W E N T Y Y E A R S . . .
"UNLESS
SOLVED

BY AN

SOONER
ACT

G R E S S , OR U N L E S S ITS
CHISE

BECOMES

DISCONFRAN-

FORFEITED

B Y SOME V I O L A T I O N OF L A W "

374

THE FEDERAL RESERVE SYSTEiM
B.

BOARD

M A N A G E M E N T

DIRECTORS

N O T LESS T H A N T W E L V E IN A D DITION TO THE M A N A G E R
SHALL

OF O P E R A T I N G

OFFICES

NINE

WHO

MEMBER

OF-

VOTE

REPRE-

FICIO
ELECTED

ONE-THIRD (CLASS A)

ELECTED

S E N T A T I V E S OF T H E L O C A L A S -

BY EACH MEMBER BANK

SOCIATIONS :

ING

THREE-SIXTHS

ONE

VOTE

B Y V O T E OF EACH R E P R E S E N T A -

GARD

T I V E WITHOUT REGARD TO THE

SURPLUS.

C A P I T A L OF T H E B A N K S

"REPRESENTATIVE

ING

THE

TWO-SIXTHS
SAME

FORM-

ASSOCIATION

AND

ITS

CAPITAL

THESE

STOCK-HOLDING

REAND

SHALL

THE

BANKS"

B Y V O T E OF T H E

REPRESENTATIVES

PROPORTION

CAST-

WITHOUT

THE

BANKS*

CAPITAL
ONE-SIXTH
^DIRECTORS
ED,"

THESE

REPRESENT
TURAL,

ELECTED

THE

ONE-THIRD (CLASS B)

ALREADY

ELECT-

AS ABOVE

"SHALL

FAIRLY

TIME

SHALL

BE A C T I V E L Y

THE

AGRICUL-

COMMERCIAL,

T R I A L , AND OTHER
OF THE

DISTRICT,

INDUS-

INTERESTS
AND

SHALL

BUT

THEIR

ELECTED

"WHO

THEIR

DISTRICT

THE

ELECTION
ENGAGED
IN

COM-

M E R C E , A G R I C U L T U R E OR SOME
INDUSTRIAL

PURSUIT"

NOT BE OFFICERS, NOR, WHILE

AND WHO, WHILE A

DIRECTOR,

S E R V I N G , DIRECTORS OF B A N K S ,

SHALL

TRUST COMPANIES,
COMPANIES,
CIAL

INSURANCE

OR O T H E R

INSTITUTIONS"

FINAN-

OTHER

NOT

DIRECTOR,
ANY

BANK"

"BE
OR

OFFICER,

EMPLOYEE

38 7

ANALYTICAL COMPARISON

ONE-THIRD (CLASS C) A P P O I N T ED B Y T H E F E D E R A L
BOARD. WHILE

RESERVE

SERVING

NONE

OF T H E S E SHALL " B E A N OFFIC E R , D I R E C T O R , E M P L O Y E E , OR
STOCKHOLDER OF A N Y

" N O M E M B E R OF A N Y N A T I O N A L
OR S T A T E L E G I S L A T I V E
SHALL BE A

BANK."

" N O S E N A T O R OR R E P R E S E N T A TIVE IN CONGRESS

BODY

. . .

DIRECTOR"

SHALL

DI-

OFFICER

RECTOR."

AFTER
ALL

THE

FIRST

DIRECTORS

ELECTION
SHALL

AFTER
ALL

THE

FIRST

DIRECTORS

ELECTION
SHALL

E L E C T E D FOR A T E R M OF T H R E E

YEARS,

OF-

Y E A R S , T H E T E N U R E OF O F F I C E

EACH

OF O N E - T H I R D OF E A C H G R O U P

FICE

THE

TENURE

ONE-THIRD

OF
OF

GROUP EXPIRING EACH YEAR

EXPIRING EACH Y E A R .

T H E M A N A G E R OF T H E B R A N C H ,

ONE OF THE CLASS C DIRECTORS

APPOINTED BY THE

SHALL BE DESIGNATED BY THE

WITH

THE

GOVERNOR

APPROVAL

THE

E X E C U T I V E COMMITTEE OF THE
NATIONAL
TION

AND

RECTORS
SHALL
THE

RESERVE
THE
OF
THE

RESERVE

C H A I R M A N OF T H E

BOARD

BOARD.

ASSOCIA-

BOARD
THE

FEDERAL

DI-

BRANCH,

CHAIRMAN

BOARD.

CENTRAL

BOARD

In this part of the analysis, the Executive Committee of the
National Reserve Association is compared with the Federal
Reserve Board and the Board of Directors of the National

376

THE FEDERAL RESERVE SYSTEM

Reserve Association is compared with the Federal Advisory
Council. The reason for this is that the Executive Committee
was to be the actual operating body of the Association. The
full Board, consisting of forty-six members, could not, of course,
have functioned as the active managerial board. Rather it
is to be assumed that it, just as similar boards of European
central banks, would limit its activities—aside from electing
the Executive Committee—to the formal ratification of the
actions of the Executive Committee. The Federal Advisory
Council is placed alongside of the Board of Directors of the
Association, as representing the country at large versus the
central office, but attention is drawn to the very striking
difference between them, namely, that the Federal Advisory
Council is purely advisory with no power whatsoever to
enforce its opinions.
a.

EXECUTIVE

SHALL

COMMITTEE

CONSIST OF FIVE

BERS ELECTED

BY THE

MEMBOARD

OF D I R E C T O R S OF T H E N A T I O N -

FEDERAL

RESERVE

SHALL CONSIST
BERS,

OF FIVE

APPOINTED

PRESIDENT

BOARD
MEM-

THE

UNITED

A L R E S E R V E ASSOCIATION FROM

STATES BY AND WITH THE

AMONG

VICE

THEIR

AND THE

OWN

TWO

DEPUTY

THE

ASSOCIATION

COMPTROLLER
RENCY

MEMBERS

GOVERNOR AND

THE

GOVERNORS

AND
THE

MEMBERS

SENATE;

CONSENT

THE

ADTHE

SECRETARY

THE T R E A S U R Y AND THE COMP-

THE

T R O L L E R OF T H E C U R R E N C Y T O

CUR-

AND

OF-

SERVE

MEMBERS

OF-

THE

FIVE

AP-

POINTIVE MEMBERS

. . .

NOT

FICIO

FICIO.
" N O T MORE T H A N ONE OF T H E
ELECTED MEMBERS SHALL
CHOSEN
TRICT"

FROM A N Y

ONE

BE
DIS-

"IN

SELECTING

MORE THAN ONE

. . .

SHALL

BE SELECTED FROM A N Y
FEDERAL RESERVE

ONE

DISTRICT"

38 7

ANALYTICAL COMPARISON
(FIFTEEN

THE

BOARD MUST BE
TIVE

THE

ENTIRE

"THE

REPRESENTA-

DUE

AGRICULTURAL,

PRESIDENT

SHALL

REGARD

HAVE

FAIR

R E P R E S E N T A T I O N OF T H E DIF-

COMMERCIAL, INDUSTRIAL, AND

FERENT COMMERCIAL,

OTHER I N T E R E S T S OF T H E DIS-

TRIAL

TRICTS)

DIVISIONS OF T H E C O U N T R Y "

AND

INDUS-

GEOGRAPHICAL

" A T LEAST TWO SHALL BE
SONS
ING
" N O M E M B E R OF A N Y N A T I O N A L
OR S T A T E L E G I S L A T I V E
SHALL BE A
THE

DIRECTOR"

ABOVE

MEMBERS
FICERS

NAMED

"SHALL

NOR,

DIRECTORS

FIFTEEN

T I V E IN CONGRESS SHALL

MEMBERS "SHALL BE

OF-

BLE

DURING

ARE

IN OFFICE A N D

BANKS,

BANK-

" N O S E N A T O R OR R E P R E S E N T A -

SERVING,
TRUST

INSURANCE

OR O T H E R

FINANCE"

A MEMBER"

NOT BE

WHILE

COMPANIES,
PANIES,

BODY

EXPERIENCED
OR

PER-

COM-

FINANCIAL

INSTITUTIONS"

YEARS

THE

INELIGI-

TIME

THEREAFTER

THEY

FOR
TO

TWO
HOLD

A N Y O F F I C E , P O S I T I O N , OR E M PLOYMENT

ANY

MEMBER

BANK"

THE GOVERNOR " S H A L L BE

OFFICIO C H A I R M A N "

"THE

SECRETARY

TREASURY

SHALL

OF
BE

THE

OF-

FICIO C H A I R M A N "
THE

GOVERNOR

SELECTED

"SHALL

THE

PRESIDENT

OF T H E U N I T E D STATES FROM A

O N E OF T H E F I V E
MEMBERS
NATED

"SHALL

BY THE

LIST OF NOT LESS T H A N T H R E E

GOVERNOR

SUBMITTED

GOVERNOR"

HIM

THE

AND

APPOINTIVE
BE

DESIG-

PRESIDENT
ONE

VICE

BOARD OF D I R E C T O R S "
AFTER

THE

FIRST

APPOINT-

AFTER

THE

FIRST

APPOINT-

M E N T S T H E T E N U R E OF OFFICE

MENTS THE T E N U R E OF OFFICE

SHALL

SHALL BE TEN YEARS,

THREE

YEARS,

EX-

UNLESS

378

THE FEDERAL RESERVE SYSTEM

CEPT

FOR

THE

MEMBERS.
SHALL

THE

HOLD

OFFICIO

GOVERNOR

OFFICE

FOR

YEARS AND THE DEPUTY
E R N O R S FOR S E V E N

B. B O A R D

TEN

SOONER

REMOVED

PRESIDENT,

EXCEPT

THE

FOR

THE

E X OFFICIO MEMBERS.

GOV-

YEARS.

DIRECTORS

B. F E D E R A L

ADVISORY

COUNCIL
THE

BOARD

EACH
TWO

OF DIRECTORS

BRANCH

SHALL

DIRECTORS

ELECT

TO THE

CEN-

T R A L BOARD. ONE OF T H E S E IN
EACH INSTANCE SHALL
REPRESENT

THE

FAIRLY

AGRICULTUR-

AL, COMMERCIAL,

INDUSTRIAL,

A N D OTHER I N T E R E S T S OF T H E
DISTRICT,
WHILE
FICER

AND

SHALL

SERVING,
OR

DIRECTOR

NOT,

AN
OF

OFANY

OTHER FINANCIAL INSTITUTION.
FOR T H E E L E C T I O N OF
ADDITIONAL

NINE

MEMBERS

THE

BOARD OF DIRECTORS OF E A C H
BRANCH SHALL ELECT A
ING

"VOT-

REPRESENTATIVE"

SHALL

CAST

WHO

NUMBER

VOTES EQUAL TO THE

NUMBER

OF S H A R E S IN T H E A S S O C I A T I O N
HELD

BRANCH
SENTS.
OF

THE

BANKS

WHICH
NOT

THAN

DIRECTORS

THE

REPRE-

ONE
THIS

GROUP SHALL COME FROM A N Y
ONE DISTRICT.

THE

BOARD

OF DIRECTORS

EACH FEDERAL RESERVE

BANK

SHALL ELECT ONE MEMBER

38 7

ANALYTICAL COMPARISON
FINALLY,
SEVEN

THERE

SHALL

OFFICIO

MEMBERS,

NAMELY: THE

GOVERNOR

TWO

GOVERNORS

DEPUTY

THE ASSOCIATION, THE
TARIES

THE

AGRICULTURE,

AND
OF

SECRE-

TREASURY,

COMMERCE

AND

LABOR, AND THE COMPTROLLER
OF THE
"THE

CURRENCY.

EXECUTIVE

SHALL

HAVE

THORITY

COMMITTEE

ALL

WHICH

THE
IS

AU-

VESTED

"THE

FEDERAL

ADVISORY

COUNCIL SHALL H A V E POWER,
THROUGH

ITS

IN T H E BOARD OF DIRECTORS,

OFFICERS, ( i ) TO CONFER

ITSELF

DI-

E X C E P T T H E P O W E R OF NOM-

RECTLY

INATION, APPOINTMENT,

WITH

THE

FEDERAL

AND

R E S E R V E BOARD ON G E N E R A L

GOVERNOR

BUSINESS CONDITIONS; ( l ) TO

AND DEPUTY GOVERNORS AND

M A K E O R A L OR W R I T T E N R E P -

EXCEPT

RESENTATIONS

MATTERS WITHIN THE

REMOVAL

OF T H E

SUCH

MAY

SPECIFICALLY DELEGATED
THE

BOARD

MITTEES

OTHER

OR T O T H E

TIVE

OFFICERS,

MAY

COM-

EXECUSUCH

SPECIFICALLY

AS
RE-

DICTION
(3)

TION

SAID

CALL

AND

CONCERNING

FOR

MENDATIONS

INFORMA-

MAKE
IN

JURIS-

BOARD;"

RECOM-

REGARD

S E R V E D OR R E T A I N E D B Y T H E

DISCOUNT RATES, REDISCOUNT

BOARD."

(THAT

EXPECTED
BOARD

THAT

WOULD

IS,

WAS

BUSINESS,

WHILE

THE

SERVE

HAVE

THE

VARIOUS DISTRICTS, THE PUR-

NOTE

ISSUES,

CONDITIONS

RETHE

POWER TO E N F O R C E ITS JUDG-

CHASE

M E N T , IT W O U L D LIMIT ITSELF

UNDER ORDINARY CONDITIONS

BANKS, OPEN-MARKET OPERA-

CONFIRMATORY

ADVISORY

CAPACITY.)

AND

SALE

SECURITIES

TIONS
THE
THE

AND

SAID

GENERAL
RESERVE

TEM."

GOLD

RESERVE

BANKS,
AFFAIRS

BANKING

AND
OF
SYS-

380

THE FEDERAL RESERVE SYSTEM
3.

ADMINISTRATIVE

POWERS

In this section of the analysis, only a few of the more important powers of the Federal Reserve Board are compared with
the powers of the Board of Directors of the National Reserve
Association. Many of the powers and duties of the Federal
Reserve Board as listed in the Federal Reserve Act have no
counterpart in the Aldrich Bill because the difference in
corporate organization made their enumeration unnecessary.
Under the Federal Reserve Act, each Federal reserve bank is
a corporate body, while the Federal Reserve Board, or central
administrative unit, is an unincorporated group. The result
of this type of structure is that the Federal Reserve Board
does not automatically acquire those general powers of
supervision and administration over the Federal reserve
banks that it would have, were it the head office of a single
legal entity and the Federal reserve banks merely branches.
In other words, all the powers which are to be exercised by the
Federal Reserve Board must be expressly conferred and listed
in detail. In the Aldrich Bill, on the other hand, there is
only one corporate body, the National Reserve Association,
and the central board of directors may exercise complete and
absolute power over the branches, unless such power is specifically denied. The two most important denials of absolute
power are, first, that the right of rediscount must be exercised
through the branches, and, secondly, that there must not be
less than fifteen branches. The former is of great significance.
It leaves for the head office only the general administration of
the system and the exercise of those investment operations,
such as the so-called open-market purchases, which can be
performed satisfactorily only by having a uniform policy for
the whole system. In general, one might say, both bills
confer some specific and very similar powers and duties upon
their respective systems, and that the Aldrich Bill specifies
which of the normal corporate powers of a central board of

38 7

ANALYTICAL COMPARISON

directors it desires to restrict and transfer to the branches,
while, conversely, the Federal Reserve Act specifies which of
the normal corporate powers of the branches (Federal reserve
banks) it desires to restrict and transfer to the unincorporated
central board.

(AN IMPLICIT POWER OF A HEAD

"TO

EXERCISE

GENERAL

SUPERVISION

OFFICE)

OVER

FEDERAL RESERVE

"IT

SHALL

THIS

BOARD

TION)

THE

DUTY

(OF

EXAMINA-

CAREFULLY

EXAM-

"THE

FEDERAL

BUSINESS

RESERVE

BANK."

RESERVE
OF

ASSOCIATION

ITS

BRANCHES

LEAST ONCE A

(AN

IMPLICIT

RESERVE

EACH Y E A R , ORDER AN EXAM-

INE THE CONDITION AND THE
NATIONAL

BANKS"

BOARD SHALL, A T LEAST ONCE

INATION

OF T H E

SAID

EACH

FEDERAL

AND

. . .

YEAR."

POWER

"TO

REQUIRE

THE

WRITING-

O F F O F D O U B T F U L OR W O R T H -

HEAD OFFICE)

LESS ASSETS UPON THE BOOKS
A N D B A L A N C E S H E E T S OF F E D ERAL RESERVE
NO

POWER

REMOVAL

BANKS,"

" T O S U S P E N D OR R E M O V E

ANY

DIRECTORS OF B R A N C H E S ; MAN-

O F F I C E R OR D I R E C T O R O F A N Y

AGERS

FEDERAL RESERVE

REMOVED
WITH

THE

EXECUTIVE

BRANCHES
BY

THE

MAY

GOVERNOR

APPROVAL

COMMITTEE;

THE
POW-

ER TO REMOVE T H E OTHER OFFICERS IMPLICIT.

BANK,"

402 THE FEDERAL RESERVE SYSTEM

382
(IMPLICIT

"TO

DISCRETIONARY

P O W E R OF T H E

ASSOCIATION)

HAVE THE

TERMINE
CHARACTER
.

RIGHT TO

DEFINE

THE

. . ELIGIBLE

COUNT,"

RATE
THE

OF DISCOUNT
CENTRAL

FIXED

DIS-

WITHIN THE

MEAN-

FEDERAL

BANKS.

REVIEW

AND

DETERMINE

THE

RATE

DISCOUNT

ES-

ASSOCIATION

UNIFORMLY

FOR

TABLISHED

FEDERAL

RE-

THE

UNITED

STATES,

THE

BRANCHES.

(PROBLEM

BOARD

PAPER

FOR

ING OF T H E A C T , B Y
RESERVE

DETHE

COULD

NOT

ARISE

SINCE THE ASSOCIATION, AS
SINGLE

CORPORATION,

WOULD

O P E R A T E A S A U N I T I N SO F A R
AS

RESOURCES

ARE

CON-

SERVE

"TO

BANKS.

PERMIT,

AFFIRMATIVE

OR,

VOTE

THE
AT

LEAST FIVE MEMBERS OF T H E
RESERVE BOARD TO

REQUIRE

FEDERAL RESERVE BANKS

REDISCOUNT THE DISCOUNTED

CERNED.)

PAPER

OTHER

FEDERAL

RESERVE BANKS A T RATES OF
INTEREST
THE

FEDERAL

FIXED

RESERVE

BOARD,"
(IMPLICIT

TO PRESCRIBE THE RULES AND

DISCRETIONARY

P O W E R OF T H E ASSOCIATION)

REGULATIONS GOVERNING

THE

P U R C H A S E A N D SALE OF B A N K ERS'

ACCEPTANCES,

BILLS

E X C H A N G E , ETC., IN T H E O P E N
MARKET BY FEDERAL RESERVE
BANKS.
"THE

POWER

REDISCOUNT

AND

DISCOUNT

GRANTED

THE

NATIONAL

RESERVE

AS-

38 7

ANALYTICAL COMPARISON
SOCIATION

SECTIONS

TWENTY-SIX,

TWENTY-SEVEN

AND TWENTY-EIGHT

THIS

A C T SHALL IN E A C H C A S E
EXERCISED

THROUGH

THE

BRANCH IN T H E DISTRICT
WHICH
THE

THE

BANK

WILL

LO-

REFERRED

FOUND

UNDER

MAKING

APPLICATION

C A T E D " (SECTIONS
TO

REDISCOUNTING

E L I G I B I L I T Y R E Q U I R E M E N T S FOR N O T E S , D R A F T S , A N D B I L L S

INDORSEMENT

MEMBER

BANK

INDORSEMENT

MEMBER

BANK
WAIVER
AND

DEMAND,

NOTICE

PROTEST

ARISING OUT OF COMMERCIAL

ARISING OUT OF A C T U A L COM-

TRANSACTIONS;

MERCIAL TRANSACTIONS;

'THAT
DRAWN

IS, . . . ISSUED
FOR

I N D U S T R I A L , OR
PURPOSES"

AGRICULTURAL,
COMMERCIAL

'THAT
DRAWN

IS, . . . ISSUED
FOR

AGRICULTURAL,

I N D U S T R I A L , OR

COMMERCIAL

PURPOSES,
C OR

T H E PROCEEDS OF

WHICH

H A V E B E E N U S E D , OR A R E T O
BE

USED,

POSES."

FOR

SUCH

PUR-

384

THE FEDERAL RESERVE SYSTEM

"NOT

INCLUDING

NOTES

"SHALL

NOT

INCLUDE

NOTES,

B I L L S I S S U E D OR D R A W N FOR

D R A F T S , OR B I L L S

THE

M E R E L Y I N V E S T M E N T S OR I S -

PURPOSE

STOCKS,

BONDS,

INVESTMENT

CARRYING
OR

OTHER

SUED

DRAWN

PURPOSE

SECURITIES."

TRADING
OR

COVERING

OF
IN

OTHER

FOR

THE

CARRYING
STOCKS,

BONDS,

INVESTMENT

SE-

CURITIES, EXCEPT BONDS A N D
N O T E S OF T H E

GOVERNMENT

OF T H E UNITED S T A T E S . "

MUST HAVE A
NOT

MATURITY

THAN

EIGHT D A Y S "

TWENTY-

MUST
THE

HAVE
TIME

NOT

DAYS;
NOTES,

MATURITY

DISCOUNT

THAN

NINETY

PROVIDED,
DRAFTS,

THAT

AND

BILLS

D R A W N OR I S S U E D F O R A G R I CULTURAL

PURPOSES

MAY

HAVE A MATURITY "NOT

EX-

CEEDING SIX M O N T H S . "

MUST

HAVE

LEAST

BEEN

THIRTY

MADE

DAYS

B A S E D ON L I V E S T O C K "

PRIOR

T O T H E D A T E OF R E D I S C O U N T "
AMOUNT REDISCOUNTED MUST
AT

CAPITAL

TIME
OF

EXCEED

THE

REDISCOUNTING

BANK"
T h e " f i r s t d r a f t " of the Glass Bill provided that eligible paper should
have a maturity of only thirty days, unless the cash reserve of the Federal reserve
bank discounting the paper exceeded 50 per centum of its total outstanding
demand liabilities, in which case it could discount paper with a maturity of not
more than 120 days. (See Willis, The Federal Reserve System, p. 1542.)
1

38 7

ANALYTICAL COMPARISON
"THE

AGGREGATE

NOTES

AND

BILLS

SUCH

BEARING

"THE

AGGREGATE

NOTES

AND

BILLS

SUCH

BEARING

T H E S I G N A T U R E OR I N D O R S E -

MENT

ANY

ONE

PERSON,

OF A N Y

ONE

PERSON,

C O M P A N Y , F I R M , OR C O R P O R A -

C O M P A N Y , F I R M OR C O R P O R A -

T I O N , R E D I S C O U N T E D FOR A N Y

TION R E D I S C O U N T E D FOR A N Y

ONE

BANK,

SHALL

ONE B A N K SHALL A T NO TIME

CENT-

E X C E E D T E N PER C E N T U M OF

TIME EXCEED TEN PER

UM OF T H E U N I M P A I R E D C A P I -

THE

TAL

A N D SURPLUS OF SAID

BANK;

BUT THIS RESTRICTION

SHALL

AND

SURPLUS

SAID

B A N K " ( S E C . 2 6 N. R. A . )

UNIMPAIRED

NOT A P P L Y TO THE
OF

BILLS

DRAWN

NOTES

AND

CHANGE

BILLS

HAVING

EXTHAN

T W E N T Y - E I G H T DAYS, BUT NOT
EXCEEDING

FOUR MONTHS,

RUN, WHICH ARE GUARANTEED
BY

"LOCAL"

ASSOCIATION.

( S E C . 2 7 N . R. A . )
THE DIRECT OBLIGATIONS OF A
MEMBER

BANK,

BY THE "LOCAL
IF IT IS

INDORSED

ASSOCIATION,"

SECURED

"SATIS-

FACTORY SECURITIES," "WHENE V E R , IN T H E OPINION OF T H E
GOVERNOR
RESERVE

THE

NATIONAL

ASSOCIATION,

THE

P U B L I C I N T E R E S T S SO R E Q U I R E ,
SUCHOPINIONTO BECONCURRED
IN

THE

EXECUTIVE

COM-

DISCOUNT
EXCHANGE

GOOD

AGAINST ACTUALLY
VALUES."

CAPITAL

FAITH
EXISTING

386

THE FEDERAL RESERVE SYSTEiM

MITTEE
THE

. . . AND

DEFINITE

HAVE

APPROVAL

T H E S E C R E T A R Y OF T H E T R E A S U R Y . " IN NO CASE SHALL T H E
AMOUNT

LOANED

THREE-FOURTHS
VALUE
(SEC.

THE

EXCEED

THE

SECURITIES.

SEE NOTE

BELOW1

N. R. A . )

2. ELIGIBILITY

REQUIREMENTS

FOR

DISCOUNTING

ACCEPTANCES

" F R O M A SUBSCRIBING B A N K "

"OF

B A N K S OR A C C E P T O R S

UNQUESTIONED

FINANCIAL

RESPONSIBILITY"

" A R I S I N G O U T OF C O M M E R C I A L

"BASED

ON T H E

IMPORTATION

TRANSACTIONS AS HEREINBE-

OR E X P O R T A T I O N OF

FORE D E F I N E D "

(SEE

ALSO

THE

UNDER " O P E N

GOODS"

PROVISIONS

MARKET")

T h e " f i r s t d r a f t , " the " r e v i s e d d r a f t , " the " f i r s t print," and the " G l a s s
Bill as introduced in the H o u s e " all contained provisions for the rediscounting
of direct obligations of member banks secured by "satisfactory securities."
T h e following quotation is from the bill as introduced in the House (Willis,
p. 1604):
1

" W h e n e v e r in the opinion of the Federal Reserve Board the public interest
so requires, the Federal Reserve Board m a y authorize the reserve bank of the
district to discount the direct obligations of member banks, secured by the
pledge and deposit of satisfactory securities; but in no case shall the amount so
loaned by a Federal reserve bank exceed three-fourths of the actual value of the
securities so pledged or one-half of the paid-up and unimpaired capital of the
member b a n k . "

ANALYTICAL COMPARISON
"HAVE

NOT EXCEEDING

T Y DAYS TO

NINE-

RUN"

"HAVE
OF

38 7

MATURITY

DISCOUNT

TIME

NOT

THAN THREE MONTHS"
"BEAR

THE

INDORSEMENT

SUBSCRIBING

SELLING

THE

SAME,

INDORSEMENT
OTHER

THAN

"INDORSED
MEMBER

BY AT

LEAST

ONE

BANK"

WHICH

MUST
THAT

BANK

BE
THE

ACCEPTOR"
"THE

AMOUNT

ACCEPT-

A N C E S SO D I S C O U N T E D
AT

HALF

TIME

THE

EXCEED

PAID-UP

STOCK AND

SURPLUS

BANK

WHICH

FOR

DISCOUNTS A R E

V O L U N T A R Y

PURCHASE

PURCHASES

F R O M

OPEN

M A R K E T

ITS

SUB-

PURCHASE

FROM

WITH

ITS

IN-

CHANGE,

BILLS

ARISING

COMMERCIAL

EX-

OUT

TRANSACTIONS

AS HEREINBEFORE
'PAYABLE

SUCH

DEFINED,
FOREIGN

C O U N T R I E S A S T H E BOARD OF
DIRECTORS OF T H E
RESERVE

NATIONAL

ASSOCIATION

DETERMINE.

RE-

WITHOUT

MEMBER

ITS

IN-

DORSEMENT,

DORSEMENT,
CHECKS

THE

FROM

BANKS AND TO SELL,

WITHOUT

OF
THE

MADE"

SCRIBING B A N K S A N D TO SELL,
OR

ONE-

CAPITAL

M E M B E R S

T H E

SHALL

MAY

B I L L S OF E X C H A N G E
OUT OF COMMERCIAL
ACTIONS,
DEFINED."

ARISING
TRANS-

HEREINBEFORE

388

THE FEDERAL RESERVE SYSTEiM

THESE
MUST

BILLS
HAVE

EXCHANGE

NOT

EXCEEDING

N I N E T Y DAYS TO R U N .

AND MUST

BEAR THE

SIGNA-

T U R E S O F T W O OR M O R E
SPONSIBLE

PARTIES,

WHICH THE LAST ONE
BE

THAT

OF A

REOF

SHALL

SUBSCRIBING

BANK."

UNDER

RULES

TIONS

AND

FEDERAL RESERVE
PURCHASE
OPEN

REGULA-

PRESCRIBED

AND

MARKET,

THE

BOARD,

SELL

AT HOME

THE
OR

ABROAD,

EITHER
MESTIC

FROM
OR

FOREIGN

DO-

BANKS,

FIRMS, C O R P O R A T I O N S , OR I N DIVIDUALS,

See

"2.

MENTS
ABOVE

ELIGIBILITY
FOR

REQUIRE-

CABLE TRANSFERS AND BANK-

ACCEPTANCES,"

ERS' ACCEPTANCES AND BILLS
OF E X C H A N G E OF T H E

KINDS

A N D MATURITIES BY THIS ACT
MADE

ELIGIBLE

FOR

REDIS-

COUNT.

"WITH

WITHOUT

DORSEMENT
BANK."

THE

IN-

MEMBER

38 7

ANALYTICAL COMPARISON
E.

INVESTMENTS

G O V E R N M E N T
"BUY

" I N V E S T IN

SECURITIES

AND SELL, A T HOME

ABROAD,
" U N I T E D STATES

BONDS;

"BONDS

AND

NOTES

THE

UNITED STATES,
" A L S O IN OBLIGATIONS

"AND

BILLS, NOTES,

REVENUE

BONDS, AND W A R R A N T S ,

" H A V I N G NOT MORE THAN ONE
Y E A R TO RUN,

" W I T H A M A T U R I T Y FROM DATE
OF

PURCHASE

NOT

EX-

C E E D I N G SIX M O N T H S ,

"ISSUED

ANTICIPATION

T H E C O L L E C T I O N O F T A X E S OR
IN ANTICIPATION OF T H E
CEIPT OF A S S U R E D
" O F THE UNITED STATES

RE-

REVENUES

(SEE ABOVE)

" O R ITS D E P E N D E N C I E S ,

" O R OF A N Y S T A T E ,

" B Y ANY

STATE,

" C O U N T Y , DISTRICT,
SUBDIVISION,
ITY

UNITED

THE

RECLAMATION
OF

MENTS."

FOREIGN

GOVERN-

POLITICAL

MUNICIPAL-

CONTINENTAL

STATES,

IRRIGATION,

"OR

INCLUDING

DRAINAGE
DISTRICTS,

AND

390

THE FEDERAL RESERVE SYSTEiM
" S U C H PURCHASES TO BE MADE
IN A C C O R D A N C E WITH
AND REGULATIONS

RULES

PRESCRIB-

ED B Y THE F E D E R A L R E S E R V E
BOARD."

GOLD

TRANSACTIONS

BOTH A T HOME AND ABROAD,
TO

DEAL

GOLD

COIN

TO DEAL

GOLD

COIN

AND

B U L L I O N A T H O M E O R A B R O A Dy

BULLION

TO M A K E LOANS THEREON,

TO MAKE LOANS T H E R E O N ,

EXCHANGE FEDERAL RESERVE
N O T E S FOR GOLD, GOLD COIN,
OR GOLD C E R T I F I C A T E S ,

A N D T O C O N T R A C T FOR LOANS

O F G O L D C O I N OR B U L L I O N ,

OF GOLD COIN OR

"GIVING

THEREFOR,

WHEN

NECESSARY, ACCEPTABLE

SE-

CURITY,

"INCLUDING

"GIVING

THEREFOR,

WHEN

NECESSARY, ACCEPTABLE

SE-

CURITY,

THE

HYPOTHECA-

"INCLUDING
TION

OF UNITED STATES BONDS.

B O N D S OR O T H E R
WHICH
BANKS
HOLD."

THE

T I O N OF A N Y OF ITS HOLDINGS

BULLION,

HYPOTHECA-

UNITED

FEDERAL
ARE

STATES

SECURITIES
RESERVE

AUTHORIZED

38 7

ANALYTICAL COMPARISON
G.
"TO

OPEN

BANKING
EIGN

FOREIGN

AND

MAINTAIN

ACCOUNTS

FOR-

AGENCIES
"TO

OPEN

BANKING
EIGN

COUNTRIES

IN FOREIGN

AGENCIES

FOR-

CORRESPONDENTS,

" A N D ESTABLISH AGENCIES
SUCH

COUNTRIES

MAINTAIN

COUNTRIES,

"APPOINT

" A N D TO ESTABLISH

AND
ACCOUNTS

COUNTRIES

WHERESO-

E V E R IT M A Y D E E M B E S T

"FOR

THE

PURPOSE

PUR-

CHASING, SELLING, AND
LECTING

FOREIGN

COL-

BILLS

"FOR

THE

CHASING,

PURPOSE
SELLING

PUR-

AND

COL-

LECTING BILLS OF E X C H A N G E ,

EXCHANGE,

"AND

. . .

WITH

TO B U Y AND

WITHOUT

SELL,

ITS

IN-

" T H R O U G H SUCH CORRESPOND-

" B I L L S OF E X C H A N G E

ARISING

OF C O M M E R C I A L

TRANS-

" W H I C H HAVE NOT EXCEEDING
N I N E T Y D A Y S TO

WITH

INDORSE-

" T H R O U G H SUCH CORRESPOND-

" B I L L S OF E X C H A N G E
O U T OF A C T U A L

ARISING

COMMERCIAL

TWO

RESPONSIBLE

PARTIES."

" W H I C H H A V E NOT MORE THAN
NINETY DAYS TO RUN

RUN,

" A N D WHICH BEAR THE SIGNA-

ITS

TRANSACTIONS

ACTIONS,

WITHOUT

E N T S OR A G E N C I E S ,

TURES

MENT,

DORSEMENT,

OUT

" A N D TO BUY AND SELL

" A N D WHICH BEAR THE SIGNATURE

OF T W O

SPONSIBLE

OR M O R E

PARTIES."

RE-

392

THE FEDERAL RESERVE SYSTEM

FOR

RESERVE

MEMBER

"NATIONAL

REQUIREMENTS

BANKS

B A N K S IN

AGAINST

DIFFER-

DEMAND

BANKS

DEPOSITS

CENTRAL

ENT LOCALITIES SHALL MAIN-

CITIES,

TAIN THE SAME PERCENTAGES

RESERVE CITIES, 1 5 PER CENT-

RESERVE

MAND

REQUIRED
THE

DEPOSIT

ANY

NATIONAL

SOCIATION
THE

AND

DE-

NOW

LAW,"

" BUT

BALANCE

SUBSCRIBING

THE

AGAINST

DEPOSITS

BANK

RESERVE
ANY

NATIONAL

OF
IN
AS-

NOTES

RESERVE

ASSOCIATION WHICH IT HOLDS
MAY

WHOLE

OR A N Y

REQUIRED

FOR

NONE,
DAYS

COUNTED

P A R T OF

PER

RESERVE

UM; COUNTRY
CENTUM.
A

BANKS,
EACH

STIPULATED

PER

INSTANCE
PROPORTION

MUST BE K E P T IN T H E F E D E R A L
RESERVE

BANK

AND

V A U L T OF T H E M E M B E R
WHILE THE

BALANCE

THE
BANK,

MAY

K E P T IN EITHER P L A C E A T T H E
OPTION OF T H E M E M B E R

BANK.

THE
ITS

RESERVE"

MEMBER

EXCEPT
PRECEDING

FOR

BANKS

THIRTY

THEIR

MA-

AGAINST

TIME

DEPOSITS

FIVE PER CENTUM, TO BE HELD
BETWEEN

THE

BANK'S

T U R I T Y WHEN T H E Y SHALL " B E

VAULT AND THE

SUBJECT TO THE SAME RESERVE

SERVE

REQUIREMENTS AS DEMAND DE-

PROPORTION

POSITS"

DEPOSITS.

CENTUM;

BANK

PRECEDING

IN
AS

(FOR

OWN

FEDERAL
THE

FOR

SAME

DEMAND

THIRTY

THEIR

RE-

DAYS

MATURITY

THE REQUIREMENT WOULD
THE

SAME

DEPOSITS.)

FOR

DEMAND

38 7

ANALYTICAL COMPARISON

FOR

THE

CEN

" A L L DEMAND LIABILITIES, INCLUDING

DEPOSITS

AND

CULATING NOTES, . . .
BE COVERED TO THE
OF

PER

RESERVE

GOLD

BANK

SHALL

INSTITUTION

"EVERY

CIR-

FEDERAL
SHALL

RESERVE

MAINTAIN

S E R V E S I N G O L D OR

EXTENT

CENTUM

RAL

MONEY

NOT

THIRTY-FIVE

(INCLUD-

LAWFUL

LESS

PER

RE-

THAN

CENTUM

A G A I N S T ITS DEPOSITS A N D R E -

ING FOREIGN GOLD COIN A N D

SERVES

GOLD

LESS THAN FORTY P E R C E N T U M

BULLION)

MONEY

THE

OTHER
UNITED

AGAINST

GOLD

ITS

NOT

FEDERAL

STATES WHICH THE NATIONAL

SERVE

BANKS ARE NOW AUTHORIZED

CIRCULATION"

NOTES

RE-

ACTUAL

RESERVE

BOARD

TO HOLD AS A PART OF THEIR
LEGAL

RESERVE."
FEDERAL

A U T H O R I Z E D TO " S U S P E N D FOR
A

PERIOD

NOT

EXCEEDING

T H I R T Y D A Y S , AND FROM TIME
TO TIME TO R E N E W SUCH SUSPENSION FOR PERIODS NOT E X -

"WHENEVER
SUCH
AND

AND

RESERVE
REMAIN

CENTUM
SERVE

THE

SO L O N G
SHALL

BELOW

FALL

CEEDING

FIFTEEN

RESERVE

REQUIREMENT"

"WHEN

THE

DAYS,

GOLD

HELD AGAINST

ANY

RESERVE

FEDERAL

RE-

PER

SERVE

NATIONAL

RE-

FORTY PER CENTUM, THE FED-

ASSOCIATION

SHALL

NOTES

FALLS

ERAL RESERVE

BELOW

BOARD

SHALL

P A Y A SPECIAL T A X UPON THE

ESTABLISH A GRADUATED TAX

DEFICIENCY

. . .

LOWS:

EACH

FOR

ONE-HALF

PER

FOL-

OF NOT MORE T H A N ONE

TWO

AND

CENTUM

FRACTION THEREOF THAT THE

PER

ANNUM

SUCH D E F I C I E N C Y UNTIL
RESERVES

FALL

PER
UPON
THE

THIRTY-

394

THE FEDERAL RESERVE SYSTEM

RESERVE
PER
BE

FALLS

CENTUM

TAX

LEVIED AT THE

ONE

AND

CENTUM

vided

PER

RATE

RESERVE

PER CENTUM, A T A X A T

THE

RATE

INCREASINGLY

NOT

ISSUED

SUCH

AS
RE-

THIRTY-

ONE-THIRD

PER

LESS

THAN

HALF

PER

NUM

UPON

ONE

ONE-HALF

ALL NOTE ISSUES

LEGAL

. . .
BE

SHALL

COVERED

RESERVES TO

THE

E X T E N T " OF F I F T Y PER CENT-

FRACTION

COMMERCIAL

FINED

AND

ONE-HALF

ISSUES
SHALL

COVERED

NOT

LESS THAN FORTY PER C E N T U M
IN
PER

GOLD

PLUS

CENTUM

ONE
OF

ACCEPTED

HUNDRED

"NOTES
FOR

AND

REDIS-

OBLIGATIONS

DEOF

STATES"
BE

THE UNITED
CONSTITUTE

FIRST

LIEN UPON A L L ITS A S S E T S "

AND

CENTUM."

SHALL

TWO

CENTUM

TRANSAC-

TIONS AS HEREINBEFORE

THE UNITED

AN-

THAT

BILLS

ONE-

PER

BELOW

COUNT"

OUT

AND

THEREOF

U M " A N D B Y N O T E S OR B I L L S
ARISING

SUCH R E S E R V E F A L L S

EXCHANGE

ONE-HALF

EACH
PER

PER

I. N O T E

AND

CENTUM

NOTES."

TIMES

BELOW

THIRTY-TWO

ALL

SAID

FALLS

C E N T U M OF ITS OUTSTANDING

WHEN

Pro-

A N D SO L O N G

AND

PER

THAT

SERVE FALLS BELOW
THREE

CENTUM,

ONE-HALF

ANNUM;

CIRCULATING

AMOUNT

AND

THIRTY-TWO

SHALL

WHENEVER

TWO

PER

further,

NOTES

SHALL

ONE-HALF

ADDITIONAL

THE

BELOW

FIRST AND

OBLIGATIONS

STATES"
PARAMOUNT

LIEN

ON A L L T H E A S S E T S O F

SUCH

BANK"

38 7

ANALYTICAL COMPARISON
FEDERAL
SHALL

RESERVE

PAY

INTEREST

SUCH

BANKS
RATE

THE

NOTES

M A Y BE ESTABLISHED
FEDERAL RESERVE

OF
AS
THE

BOARD.

FEDERAL RESERVE BOARD M A Y
REFUSE TO FURNISH NOTES TO
A FEDERAL RESERVE
" A N Y NOTES

. . .

IN C I R C U L A -

TION . . .

IN E X C E S S OF N I N E

HUNDRED

MILLION

DOLLARS

WHICH A R E NOT COVERED
AN
FUL

EQUAL AMOUNT
MONEY,

BANK

GOLD

LAW-

BULLION,

OR F O R E I G N G O L D C O I N H E L D
B Y SAID A S S O C I A T I O N ,
PAY A

SPECIAL

TAX

R A T E OF ONE A N D
PER

CENTUM

SHALL

THE

ONE-HALF

PER

ANNUM,

A N D A N Y NOTES IN E X C E S S OF
ONE

BILLION

MILLION
COVERED
SPECIAL
OF

TWO

HUNDRED

DOLLARS
SHALL
TAX

FIVE

PER

COMPUTING

ANY

SHALL

AMOUNT
BANK

OUTSTANDING

INCLUDED"

CIRCULATING
NATIONAL

PER

AMOUNTS

NATIONAL

THEN

THE

RATE

THAT

SAID

NOTES

"THE

PAY

CENTUM

. . . THE AGGREGATE
OF

THE

Provided,

ANNUM:

NOT

NOTES

RESERVE

OF
AS-

FEDERAL

RESERVE

NOTES

" S H A L L BE R E C E I V A B L E BY ALL

396

THE FEDERAL RESERVE SYSTEM

SOCIATION
CEIVED

SHALL

PAR

RE-

PAYMENT

OF ALL TAXES, EXCISES,
OTHER DUES TO THE
STATES

. . . AND

OBLIGATIONS

SHALL

LAWFUL

ALL

ANY

REDEEMABLE

MONEY

AT THE

FICE

SAID

OR A N Y OF ITS

BANKS
BANKS,

A N D FOR A L L T A X E S ,
AND OTHER PUBLIC

CUSTOMS,
DUES."

COMPANY."

ENTATION
OF

FOR

DUE

B A N K OR T R U S T

AND

UNITED

NATIONAL AND MEMBER
AND FEDERAL RESERVE

SHALL BE REDEEMED IN GOLD

PRES-

HEAD

ON D E M A N D A T T H E T R E A S U R Y

OF-

D E P A R T M E N T OF T H E

ASSOCIATION

STATES,

BRANCHES."

THE

WASHINGTON,

. . .

UNITED

CITY

GOLD OR L A W F U L M O N E Y
ANY

FEDERAL

RESERVE

BANK."
T H E A C T OF M A R C H I4TH, I9OO,

T H E A C T O F M A R C H I 4 T H , I9OO,

IS R E A F F I R M E D

R E T I R E M E N T

NATIONAL

R E F U N D I N G
"THE

NATIONAL

RESERVE

AS-

SOCIATION SHALL, FOR A PERIOD OF ONE Y E A R
DATE

ITS

OFFER

PRICE

NOT

PURCHASE
LESS

AND ACCRUED
TWO

PER

HELD

TIONAL

FROM

PAR

INTEREST

THE

CENTUM

BONDS

SUBSCRIBING

BANKS AND

LATING NOTES.

THAN

NA-

DEPOSIT-

ED TO SECURE THEIR

THE

ORGANIZATION,

CIRCU-

. . . THE NA-

B A N K

NOTES

A N D

BONDS

AFTER

FROM

THE

PASSAGE OF T H E A C T A N D

FOR

TWO

PERIOD

YEARS

TWENTY

YEARS

THEREAFTER THE FEDERAL RESERVE

BANKS

QUIRED
BONDS

TO
USED

MAY

PURCHASE
TO

NATIONAL BANK

SECURE

RETHE
THE

CIRCULATION,

TO AN AMOUNT NOT EXCEEDING
$25,000,000 A
THESE

BONDS

RESERVE

YEAR.

AGAINST

THE

FEDERAL

BANKS

MAY

ISSUE

38 7

ANALYTICAL COMPARISON
TIONAL

RESERVE

TION

SHALL

ISSUE

OWN

NOTES

ASSOCIA-

THEIR

. . .

RESERVE BANK NOTES)1

THE

ITS

OWN NOTES.

(FEDERAL

OUT-

STANDING NOTES SECURED BY
S U C H B O N D S SO H E L D
B E P R E S E N T E D FOR
TION

. . .

POLICY

IT
OF

SHALL

REDEMP-

BEING
THE

THE
UNITED

STATES TO RETIRE AS R A P I D L Y
AS

POSSIBLE,

CONSISTENT

WITH THE PUBLIC INTERESTS,
BOND-SECURED
» 1

"UPON

CIRCULATION

APPLICATION

NATIONAL RESERVE

THE

ASSOCIA-

"UPON

APPLICATION

ANY

FEDERAL RESERVE BANK, AP-

T I O N T H E S E C R E T A R Y OF T H E

PROVED BY THE FEDERAL RE-

TREASURY

SERVE

SHALL

EXCHANGE

BOARD,

THE

SECRE-

THE T W O PER C E N T U M BONDS

T A R Y OF T H E T R E A S U R Y M A Y

ISSUE,

. . BEARING THE

TION
FROM
FOR

PRIVILEGE

CIRCULA-

PURCHASED

SUBSCRIBING
THREE

PER

BANKS
CENTUM

UNITED

STATES
GOLD

ING THE
ILEGE,

WITHOUT

THE

CIRCULATION

PAYABLE

AFTER

EXCHANGE

CENTUM

BONDS OF T H E U N I T E D S T A T E S
PRIVILEGE,

TWO

BONDS

CIRCULATION

BUT

AGAINST

CIRCULATION

STANDING,

FOR
PER
BEARPRIV-

WHICH

OUT-

ONE-YEAR

GOLD

FIFTY Y E A R S FROM T H E DATE

N O T E S OF T H E U N I T E D S T A T E S

OF I S S U E . "

WITHOUT

THE

PRIVILEGE,
NOT
OF

TO
THE

CIRCULATION
AN

EXCEED
TWO

PER

AMOUNT
ONE-HALF
CENTUM

BONDS SO T E N D E R E D FOR E X CHANGE,
THREE
1

See footnote on next page.

AND
PER

THIRTY-YEAR
CENTUM

GOLD

398

THE

FEDERAL

RESERVE

SYSTEM

BONDS WITHOUT T H E
LATION

PRIVILEGE

REMAINDER

K.
THE

NATIONAL

CLEARING

RESERVE

AS-

SOCIATION M A Y REQUIRE A N Y
LOCAL ASSOCIATION

PER-

F O R M S U C H S E R V I C E S IN
CILITATING

THE

FA-

DOMESTIC

FEDERAL

BOARD

. . . M A Y A T ITS DIS-

CRETION EXERCISE THE FUNCFOR . . . F E D E R A L
A

IN-

LOCAL

TIONS,

THREE-FOURTHS

QUIRE

ASSOCIATION

VOTE

ITS

THE

MEMBERS

APPROVAL

TIONAL

MAY

AND

THE

RESERVE

TION

"EXERCISE

THE

POWERS
ARE

NOT

NA-

ASSOCIASUCH

AND

T I O N S OF A C L E A R I N G
AS

WITH

MAY

FEDERAL

TERESTS MAY REQUIRE." A N Y
A

RESERVE

T I O N S OF A C L E A R I N G

CIATION

PUBLIC

. .

THE

BANKS,

THE

SYSTEM

E X C H A N G E S OF T H E . . . ASSOAS

CIRCU-

FOR

RESERVE

DESIGNATE

RESERVE

EXERCISE
AND

HOUSE

SUCH

MAY

EACH

BANK
FUNC-

ALSO
BANK

RETO

E X E R C I S E T H E F U N C T I O N S OF
A

CLEARING

MEMBER

HOUSE

FOR

ITS

BANKS"

FUNCHOUSE

INCONSISTENT

WITH T H E PURPOSES OF THIS
ACT
IT

SHALL

THE

NATIONAL

SOCIATION
BRANCHES,

THE

DUTY

RESERVE

AS-

BOARD SHALL M A K E A N D PRO-

ANY

ITS

M U L G A T E FROM TIME TO T I M E

UPON

REQUEST,

THE

FEDERAL

REGULATIONS

RESERVE

GOVERNING

There are several additional provisions in regard to the retirement of the
national bank notes and the refunding of the bonds bearing the circulation
privilege but they are not included here because conditions have become so
changed as to make retirement under existing provisions impracticable.
The
provisions are reprinted in full in the preceding chapter.
1

38 7

ANALYTICAL COMPARISON
TO

TRANSFER

THE

DEPOSIT

ANY

BANK

ANY

PART

BALANCE

HAYING

T H E T R A N S F E R OF FUNDS A N D

CHARGES

THEREFOR

AMONG

AC-

FEDERAL

RESERVE

BANKS

COUNT WITH IT TO THE CRED-

AND THEIR BRANCHES . . .

IT OF A N Y OTHER B A N K H A V ING

ACCOUNT

WITH

THE

NATIONAL RESERVE

ASSOCIA-

TION. IF A DEPOSIT

BALANCE

TRANSFERRED

BOOKS
THE

ONE

BOOKS

BRANCH,
UNDER

FROM
BRANCH

THE
TO

ANOTHER

MAY

DONE,

REGULATIONS

PRESCRIBED BY THE

NATION-

AL RESERVE ASSOCIATION,

M A I L , T E L E G R A P H , OR O T H E R WISE, AT RATES TO BE
AT

THE TIME

AGER

WHICH

THE
THE

FIXED

THE MAN-

BRANCH

TRANSACTION

ORIGINATES."

L.
"THE

GOVERNMENT

UNITED

STATES

OWNING

STOCK

AND
IN

DEPOSITORS
THE

BANKS

THE

NA-

" A N Y FEDERAL RESERVE
MAY

RECEIVE

ITS

MEMBER

BANKS,

FROM

SHALL

DEPOSITS OF C U R R E N T

POSITORS
TION,"

THE
IN

SAID

ONLY

DE-

ASSOCIA-

THE

FROM A N Y

TIONAL RESERVE ASSOCIATION
BE

BANK

UNITED

OF
AND

STATES,
FUNDS

IN L A W F U L M O N E Y , N A T I O N A L
BANK

NOTES,

SERVE
AND

NOTES,

DRAFTS

MEMBER
UPON

FEDERAL
OR

UPON

BANKS,

RE-

CHECKS
SOLVENT
PAYABLE

PRESENTATION;"

400
"THE

THE FEDERAL RESERVE SYSTEM
NATIONAL

RESERVE

AS-

SOCIATION SHALL P A Y NO INT E R E S T ON D E P O S I T S . "

M.
"THE

FISCAL

NATIONAL

SOCIATION

RESERVE

SHALL

PRINCIPAL

A G E N C Y

FISCAL AGENT

THE UNITED

ASTHE
OF

RELATIONS

FEDERAL
"WHEN

RESERVE
REQUIRED

FISCAL

OF THE UNITED
THE

GENERAL

FUNDS

GOVERNMENT
POSITED

MUST

WITH

THE

DE-

ASSOCIA-

DEPOSIT
FUNDS
WITH

TION

OF
OF

THE

BANKS

TION.

THE

S E C R E T A R Y OF T H E T R E A S U R Y ,
SHALL ACT AS

STATES."

BANKS

THE

GENERAL

GOVERNMENT

FEDERAL

LEFT
OF

AGENTS

STATES"

THE

RESERVE

THE

DISCRE-

SECRETARY

THE TREASURY.

N.
"THE

EXEMPTION

NATIONAL

RESERVE

FROM

AS-

T A X A T I O N

"FEDERAL RESERVE BANKS, IN-

SOCIATION A N D ITS B R A N C H E S

CLUDING THE CAPITAL

AND THE LOCAL ASSOCIATIONS

AND

SHALL

LO-

THE INCOME DERIVED T H E R E -

TAXATION

FROM SHALL BE E X E M P T FROM

CAL

BE EXEMPT

AND

STATE

FROM

STOCK

SURPLUS THEREIN,

AND

E X C E P T IN R E S P E C T T O T A X E S

FEDERAL, STATE, AND

LOCAL

UPON REAL

TAXATION,

TAXES

ESTATE"

UPON REAL

O.
"SHALL
SHOWING

MAKE
THE

PUBLICATION
A

REPORT,
PRINCIPAL

OF
THE
ONCE

EXCEPT
ESTATE."

REPORTS
"BOARD
EACH

SHALL
WEEK

PUBLISH
A

STATE-

38 7

ANALYTICAL COMPARISON
ITEMS OF ITS B A L A N C E SHEET,

MENT

TION

. . ONCE

REPORTS

WEEK.

SHALL

THESE

SHOWING
OF

SERVE

MADE

EACH
BANK

SOLIDATED

PUBLIC/'

ALL

THE

CONDI-

FEDERAL
AND

CON-

STATEMENT

FEDERAL

RE-

FOR

RESERVE

BANKS."

P.
STOCKHOLDERS
CEIVE

DIVISION
SHALL

ANNUAL

"RE-

DIVIDEND

EARNINGS

STOCKHOLDERS
CEIVE

PAID-IN CAPITAL, WHICH

PAID-IN CAPITAL STOCK, WHICH

DEND SHALL BE CUMULATIVE."

PER

"RE-

DIVIDEND

O F F O U R P E R C E N T U M ON T H E
DIVI-

SIX

SHALL

ANNUAL

DIVIDEND

CENTUM

SHALL

THE

CUMULA-

TIVE."
ADDITIONAL
SHALL

CREATE
EQUAL

EARNINGS

USED

FIRST,

CONTINGENT

OF T H E
IN

NET

ONE

PER

FUND

CENTUM

PAID-IN CAPITAL,
CASE

BUT
$2>

EXCEED

000,000, AND, AFTER THIS,

ADDITIONAL

STATES AS A

INTO A
IT

CAPITAL.

SURPLUS
PER

FUND,

CENTUM

STATES AS A

THE

UNITED

FRANCHISE

TWENTY-FIVE

TUM

THE

TWENTY-FIVE

AND

PROVIDED

INTO

PER

TAX,
CEN-

STOCKHOLDERS,

THAT

AFTER

THE

SURPLUS FUND SHALL AMOUNT
TO
THE
THE

TWENTY
PAID-IN

PER

CENTUM

CAPITAL

STOCKHOLDERS

HAVE

OF
AND
RE-

CENTUM

FUND

AMOUNT

TAX,

PER CEN-

SHALL

SURPLUS

SHALL

PER

PAID

FRANCHISE

EXCEPT THAT FIFTY
T U M OF T H E M

PER C E N T U M OF T H E N E T E A R N BE

EARNINGS

SHALL BE PAID TO T H E UNITED

INGS

SHALL

NET

OF T H E

PAID
UNTIL
FORTY

PAID-IN

402

THE FEDERAL RESERVE SYSTEM

CEIVED

FIVE

PER CENTUM

THE PAID-IN CAPITAL, ALL
CESS

SHALL

UNITED

PAID

STATES

TO
A

EXTHE

FRAN-

CHISE T A X .
THE NET EARNINGS

RECEIVED

BY THE UNITED STATES
BE

USED

EITHER

SHALL

SUPPLE-

M E N T THE GOLD R E S E R V E HELD
AGAINST UNITED STATES NOTES
(GREENBACKS)
APPLIED

THE

SHALL

REDUCTION

OF THE OUTSTANDING

BONDED

I N D E B T E D N E S S OF T H E

UNITED

STATES.

Q.
"ALL

RELATIONS

OF T H E PRIVILEGES

WI
AND

M E M B E R

BANKS

THE FEDERAL RESERVE

BANKS

A D V A N T A G E S OF THE NATION-

SHALL

" W I T H O U T DISCRIMINATION

RESERVE

SHALL

TENDED
BANK
THE

ASSOCIATION

EQUITABLY

EVERY

NATIONAL

BANK

MEMBER

Provided,

. . . .

SOCIATION

EX-

THAT

RESERVE

MAY

SUSPEND

FROM THE

COMPLY

"OR

FOR

THIRTY

DAYS

ITS

RESERVES,

THE

REPORTS

THE
THE

TO
OR

AGAINST

M E M B E R B A N K OR B A N K S

AND

SHALL,

PRO-

SUBJECT TO THE

ORDERS

OF T H E

FEDERAL

RE-

SERVE

BOARD,

EXTEND

RE-

FOR

LAW

AND

COUNTS,

ADVANCEMENTS

ACCOMMODATIONS
SAFELY

AND

MAY

THE CLAIMS AND DEMANDS

OTHER MEMBER

AND
BE

REASONABLY

MADE WITH DUE

MAKE

THE

EACH M E M B E R B A N K SUCH DIS-

MAINTAIN

REQUIRED

ANY

VISIONS

ACT,

FAILURE

PRIVILEGES

WITH"

QUIREMENTS

ADMINISTERED

AS-

OF M E M B E R S H I P FOR R E F U S A L
TO

FAVOR

REGARD

BANKS."

FOR
OF

38 7

ANALYTICAL COMPARISON
THIS A C T , OR FOR
SENTATION
OR

ANY

EXAMINATION

CONDITION

CHARACTER

ITS A S S E T S OR

IF AT A N Y TIME IT

MISREPREREPORT
TO

SERVE BOARD THAT A MEMBER

EXTENT

ITS
THE
OF

LIABILITIES."

TO THE

SHALL

APPEAR

FEDERAL

B A N K HAS FAILED TO

RE-

COMPLY

WITH THE PROVISIONS OF THIS
SECTION
TIONS

(9)

SERVE

OR T H E

THE

BOARD,

WITHIN

THE

REGULA-

FEDERAL
IT

SHALL

POWER

REBE
THE

BOARD, AFTER HEARING, TO REQUIRE SUCH B A N K TO S U R R E N DER

ITS

ERAL

STOCK

RESERVE

THE
BANK,

FED. .

A N D SUSPEND SAID B A N K FROM
F U R T H E R PRIVILEGES OF M E M -

ALL

SUBSCRIBING

SHALL

NATIONAL

AND

EXAMINERS

MAY

REPORT

OFTENER

R E Q U I R E D , TO SAID

BANKS

. . . MAKE A

MONTHLY,

BERSHIP . . .

ASSOCIA-

TION SHOWING THE PRINCIPAL
ITEMS

THEIR

BALANCE

SHEETS."
REPORTS
STATE

NATIONAL

AND

REPORTS

EXAMINERS

MAY

STATE

BANK

NATIONAL

SOCIATION

BANK

BE ACCEPTED.

BE ACCEPTED.
THE

RESERVE

SHALL

HAVE

ASTHE

EVERY
BANK

FEDERAL
MAY,

WITH

RESERVE
THE

RIGHT A T A N Y TIME TO EXAM-

PROVAL OF T H E F E D E R A L

INE

S E R V E A G E N T OR T H E

OR C A U S E T O

EXAM-

INED B Y ITS OWN R E P R E S E N T -

AL RESERVE BOARD,

ATIVES

FOR

BANK"

ANY

SUBSCRIBING

SPECIAL

MEMBER

ITS

DISTRICT.

APRE-

FEDERPROVIDE

EXAMINATION
BANKS

WITHIN

404

THE FEDERAL RESERVE SYSTEM
R.

ACCEPTANCES

"NATIONAL
BY

BANKS ARE

AUTHORIZED

DRAFTS

HEREACCEPT

BILLS

EX-

NATIONAL

BANKS

" A N Y MEMBER
CEPT

BANK MAY

DRAFTS

AC-

BILLS

EXCHANGE DRAWN UPON IT

CHANGE D R A W N UPON T H E M "
" A R I S I N G OUT OF C O M M E R C I A L
TRANSACTIONS AS
FORE

HEREINBE-

" A N D GROWING OUT OF T R A N S ACTIONS

OF
" H A Y I N G NOT MORE THAN FOUR
MONTHS TO
"PROPERLY
"THE

INVOLVING THE

PORTATION

DEFINED"

GOODS

" H A V I N G NOT MORE T H A N

SECURED"

AMOUNT

SUCH

AC-

OUTSTANDING

" B U T NO B A N K S H A L L
SUCH

BILLS

SHALL NOT E X C E E D ONE-HALF

EQUAL AT A N Y

OF T H E C A P I T A L A N D SURPLUS

AGGREGATE

OF THE ACCEPTING

ONE-HALF

BANK."

ITS

S. R E A L

ESTATE

IMPROVED

CUMBERED REAL
IN

AND

LOANS
UNEN-

VICINITY

OR I N T H E T E R R I T O R Y D I R E C T LY T R I B U T A R Y TO THE
"NOT

EXCEED

THE

THAN

PAID-UP

CAPI-

SURPLUS."

NATIONAL

UPON

AMOUNT

"IMPROVED

BANKS
AND

UNEN-

CUMBERED FARM L A N D "

ESTATE"

THE

B Y

TIME

TAL STOCK AND

"SITUATED

SIX

MONTHS SIGHT TO R U N ;

RUN"

CEPTANCES

"UPON

IM-

EXPORTATION

" S I T U A T E D WITHIN ITS
AL RESERVE

FEDER-

DISTRICT"

BANK"

FIFTY

PER

NOT

EXCEED

"FIFTY

PER

C E N T U M OF T H E A C T U A L V A L -

C E N T U M OF T H E A C T U A L V A L U E

U E OF T H E

OF THE

PROPERTY"

38 7

ANALYTICAL COMPARISON
"NO

SUCH

MADE

LOAN

FOR

THAN FIVE
AGGREGATE AMOUNT

SUCH

SHALL

LONGER

BE
TIME

YEARS"

AGGREGATE AMOUNT

SUCH

LOANS NOT TO E X C E E D T H I R T Y

LOANS M A Y EQUAL

PER CENTUM OF T H E TIME DE-

OF T H E TIME DEPOSITS OF T H E

POSITS OF T H E LENDING

BANK

LENDING

BANK

ONE-THIRD

TWENTY-

FIVE PER C E N T U M OF ITS CAPITAL AND
"THIS

PRIVILEGE

SHALL

NOT

BE EXTENDED TO BANKS ACTING AS R E S E R V E AGENTS

FOR

B A N K S OR T R U S T C O M P A N I E S "

THIS

SURPLUS.

PRIVILEGE

GIVEN

ONLY

TO N A T I O N A L B A N K S " N O T SITU A T E D IN A C E N T R A L R E S E R V E
C I T Y " AND THE " F E D E R A L
SERVE

BOARD

POWER

FROM

SHALL
TIME

RE-

HAVE

TIME

TO ADD TO THE LIST OF CITIES
IN

T.
"BANKING

T R A D E

CORPORATIONS

CARRYING
OF

FOREIGN

ON T H E

BANKING

COUNTRIES

AND

FOR

BUSINESS
FOREIGN

AID

WHICH

NATIONAL

SHALL

NOT

MAKE

LOANS

REAL

ESTATE"

BANKS

PERMITTED
SECURED

UPON

ORGANIZATIONS
( T H E O N L Y P R O V I S I O N FOR O R GANIZATIONS
FOREIGN

TRADE

FACILITATE
THE

FED-

ERAL RESERVE ACT WAS

THAT

THE

NATIONAL BANKS WITH A CAPI-

WITH

FOR-

T A L AND SURPLUS OF NOT LESS

EIGN COUNTRIES A N D TO ACT

THAN $ 1 , 0 0 0 , 0 0 0 MIGHT, UPON

WHEN

THE

COMMERCE

UNITED

AGENTS
STATES

STATES

REQUIRED
OF
IN

THE

SUCH

FISCAL
UNITED

COUNTRIES

APPROVAL

THE

ERAL RESERVE BOARD,
LISH

BRANCHES

FED-

ESTAB-

FOREIGN

406

THE FEDERAL RESERVE SYSTEM

MAY

ANY

COUNTRIES.

SUBSEQUENT

PERSONS,

NOT

MENDMENTS

HAVE

FORMED

NUMBER

LESS IN A N Y CASE T H A N F I V E "

A-

BROUGHT

IT INTO A G R E E M E N T WITH T H E
PROVISIONS

THE

ALDRICH

BILL QUOTED IN T H E P A R A L L E L
COLUMN.)
MUST

HAVE A

CAPITAL

LEAST $2,000,000 WHICH MUST
BE F U L L Y PAID-IN BEFORE T H E
CORPORATION

TO COMMENCE

BUSINESS.

"SHALL

AUTHORITY

HAVE

AUTHORIZED

MAKE ACCEPTANCES, BUY AND
S E L L B I L L S O F E X C H A N G E , OR
OTHER

COMMERCIAL

PAPER

RELATING TO FOREIGN

BUSI-

NESS, AND TO PURCHASE AND
SELL

SECURITIES"

"SHALL

HAVE

TABLISH
THE

POWER

AND MAINTAIN

TRANSACTION

BUSINESS

ESFOR

ITS

BRANCH

B R A N C H E S IN F O R E I G N C O U N TRIES, THEIR
OR

THE

THE UNITED

DEPENDENCIES,

DEPENDENCIES
STATES."

CHAPTER

THE LEGATEE OF THE ALDRICH BILL

S T U D Y of the juxtaposition and the abstracts of the
Aldrich Bill and the original Federal Reserve Act, as
presented in the previous chapters, is likely to prove a
surprise and a revelation to those of our readers who have been
told by Mr. Glass that: " Aside from the technique familiar to
all banking and currency schemes and excluding from the computation the nomenclature that inevitably applies to descriptions of commercial paper and discount operations of banks,
there are few features of resemblance in the two plans. They
differ in principle, in purpose, and in processes." 1 In other
places in his book the Senator repeats this charge in substantially similar language. Such passages relating to Mr. Aldrich's
work are in the main reprints of a speech delivered by Mr.
Glass in the House of Representatives on September 7th, 1916.
In this address he challenged his adversaries
to show one-fourth or any part of the Aldrich bill not common to nearly every comprehensive cooperative banking
scheme proposed in many years that has been transferred
bodily or otherwise to the Federal Reserve Act impliedly or in
text. Why do they not present their parallelisms? Why do
they not specifically cite the identical features which would
give a semblance of verity to their utterly unsubstantiated
assertions? It is because they know they cannot do it,
that they have never even attempted to justify their perversions by a presentation of the facts or by contrasting the
various provisions of the two measures. . . . They differ in
principle, in purpose, and in processes.2
Glass, ibid.> p. 241.
From Carter Glass's speech printed in the Congressional Record of September 7th, 1916.
1

408

THE FEDERAL RESERVE SYSTEM

A statement in a similar vein is found in Dr. Willis's Federal
Reserve System, page 523:
1. The Federal Reserve Act was not a copy or derivative
of any other single bill.
2. It had little or no relationship in principle to the so-called
Aldrich bill, although it in various places made use of the
Aldrich bill on matters relating to banking technique.
3. It was not derived from, or modeled after, or influenced
even in the most remote way by other bills or proposals currently put forward from private sources, but, on the contrary,
it was itself the pattern from which a host of imitators sought
to copy.
4. It was not an "original proposal" in the sense that it
embodied anything new in regard to banking principle, but
on the contrary, it was the digested product of elaborate and
careful study of European banking experience as adapted to
American necessities and requirements.1
We hope that Senator Glass's desire to see the two bills presented in parallel columns has been satisfied by the juxtapositions in Chapters VIII and I X . For our own part we believe
the evidence adduced from these comparisons will warrant the
conclusion that there is a very distinct relationship between the
two bills and that, instead of differing in "principle, purpose,
and processes," they are surprisingly akin.
It seems unnecessary to argue the case in greater detail; a
study of the evidence, however, suggests some interesting
thoughts. If, in 1913, instead of the Federal Reserve Bill, the
National Reserve Association Bill had been enacted, and if, on
the strength of the experience furnished by the test of actual
operation, it had been subjected to a process of gradual liberalization similar to that which the Federal Reserve Act has undergone, our investigation warrants the confident assertion that,
in its main aspects, the National Reserve Association's weekly
statement of assets and liabilities would probably resemble
It is difficult to reconcile this statement with the one we quote on page
415 and with many other contradictory passages in Willis's book.
1

THE LEGATEE OF THE ALDRICH BILL

409

very closely the weekly consolidated statement issued to-day
by the Federal Reserve System. The National Reserve Association's rediscount transactions would have been carried on
by the branches, while open-market operations for the System
would have been carried on by the central board, just as the
rediscount operations to-day are carried on by the reserve
banks, and just as to-day the open-market purchases and sales
are being effected by the Executive Committee of Governors
acting in cooperation with the Reserve Board for a combination
of reserve banks.1
Like the Reserve System, the National Reserve Association
would have provided a country-wide clearing system and an
elastic note issue based upon bills rediscounted or purchased.
While technically and legally the Federal reserve note is an
obligation of the United States Government, in reality it is an
obligation the sole actual responsibility for which rests on the
reserve banks. These notes are issued and redeemed in response to the rediscount and investment operations of the
reserve banks; they are, in practical effect, Federal reserve
circulation guaranteed by the United States. The government
could only be called upon to take them up after the reserve
banks had failed. While radically different in theory, and
while bound up with a mass of red tape in order to sustain the
outward appearance of that theory, the note issue, as functioning to-day under the amended Federal Reserve Act, operates
in the same manner as the note issue of the National Reserve
Association would have functioned; and the same assertion may
confidently be made with regard to reserves, as we have seen in
the preceding chapter.
I have never joined those critics of the Federal Reserve Bill
Except that the National Reserve Association, under the protection of a
reasonable interest charge and other safeguards, would have permitted the
absorption into its earning assets of a substantial portion of the checks in process
of collection, the so-called " float," and, by doing so, would have called for
correspondingly smaller amounts to be invested in government securities than
the Federal Reserve System (See Chapter V I I I , page 298, Comment).
1

410

THE FEDERAL RESERVE SYSTEM

who attacked the proposal of the issue of Federal reserve circulation by the United States Government as involving the issue
of fiat money. On the contrary, I found myself charged with
favoring the issue of fiat money when I advocated the issue of
Federal reserve notes as the obligation of reserve banks,
guaranteed by the United States. A letter written by me to a
friend, later on prominently connected with the administration
of the System, throws an amusing sidelight on the discussion
(See Appendix Twenty-Six). The collateral evils indirectly
following from the present form of the Federal reserve notes
are graver than the direct consequences resulting from the
adoption of the Bryan theory of the issue of bank currency
by the government.
The main charge directed against the proposed National
Reserve Association, as well as against my earlier United
Reserve Bank of the United States, was that both planned
the creation of "central banks"; in Mr. Glass's words, "central banks of the banks, by the banks and for the banks."
There is no doubt that as a campaign slogan this war cry, with
its open charge of "control by the interests," proved overwhelmingly successful in 1913. The Federal Reserve Act,
with its structure of eight or twelve apparently autonomous
regional banks, was politically by far the better, and in the long
run the safer, plan. But our investigation has shown that the
regional scheme, in order to become safe and effective, had to
be conceived and administered, in the end, as a coordinated
single central reserve system; while, conversely, the National
Reserve Association, starting with the structure of a single
central reserve system, in actual operation would have produced a regional system very nearly approaching that of the
Federal Reserve Act. That the division of the Reserve System into a number of separate corporate units is in many
respects more formal than actual may readily be conceived if
one considers what the situation would be if all reserve bank
stockholders were to exchange their stock in their local reserve

THE LEGATEE OF THE ALDRICH BILL

411

bank for that of one single reserve bank. The System, if such
exchange were effected, would go on exactly as it does to-day and
the stockholders, as a matter of fact, would not notice the.difference. Where dividends are limited, where one reserve bank
under the law may be forced to rediscount for another, there is,
from the standpoint of investment, no substantial difference between the several reserve bank stocks. Stockholding in a reserve bank is important only with respect to the voting, rediscounting, and clearing privileges it confers upon the holders;
and all of these privileges and protections could be conferred—
as provided in the National Reserve Association and in the
United Reserve Bank of the United States proposals—without
the creation of organically separate corporations.
No doubt the voters in 1913 were led to believe that the
Aldrich Plan envisaged a "central bank" in the European
sense, and it is fair to assume that this view is still held to-day
by many of the readers of Mr. Glass's broadsides against the
one-time advocates of the Aldrich Plan. Few only will have
observed the saving clause tucked away in a footnote of Mr.
Glass's Adventure in Constructive Finance that "wherever the
term 'central bank' occurs in this narrative it means a 'central
bank of banks' dealing only with member banks of a system,
and not a central bank in the European sense, transacting
business with the public. No American banker advocated a
central bank of the latter description."
It is amusing to note in this connection that when Mr.
Glass's collaborator, Senator Owen, introduced the Federal
Reserve Bill in the Senate, he used the following words in its
praise and defense: " A l l of these considerations urge that the
Federal reserve banks should be banks for banks, bankers'
banks, and not a public bank competing with the banks for
business." Here we have the admission of Mr. Glass's
co-sponsor of the Federal Reserve Act that it provided a system
" o f the banks, by the banks and for the banks," with this
main difference only: that the National Reserve Association

412

THE FEDERAL RESERVE SYSTEM

frankly provided for control by one central body, the banks of
the country having the preponderating voice in appointing a
central board on which the government had a minority representation, while the Federal Reserve Act provided for a division of powers and control between two separate groups, viz.,
the reserve banks, representing the member banks, and the
Reserve Board, representing the government.
Brushing aside, then, the external differences affecting the
"shells," we find the "kernels" of the two systems very closely
resembling, and related to, one another. The outstanding
and real difference between them is not so much one of form
and substance, as of control. The closer we study the facts,
the clearer it becomes that, behind the smoke screen of outward
differences, neither side concerned in the controversy was capable of perceiving that the real point at issue between them was
not the question of a central bank, because both parties in the
end were advocating a central banking system rather than a
central bank, but the problem of how it was to be controlled.
In their effort to solve this all-important question, both sides,
as we now are able to see, were sincere, but both sides went,
it seems, too far in opposite directions. Both sides, therefore,
failed. In our last chapter, we shall deal with this problem
in so far as it affects the Reserve System. It may be timely,
however, to dwell briefly, at this point, upon Senator Aldrich's
efforts to solve it.
Whoever was to undertake the writing of a new banking
law necessarily had to choose between the Scylla of preponderating business, or the Charybdis of preponderating government,
control. T o devise a practical scheme that would be ideally
balanced was plainly impossible. That Senator Aldrich saw
greater safety in a system in which the business element would
predominate, and that in this direction he went too far, is
frankly admitted. But Senator Aldrich sought to safeguard
his plan by closely circumscribing the National Reserve
Association's powers of dealing with individual member banks

THE LEGATEE OF THE ALDRICH BILL

413

and by broadly scattering the control all over the country. 1
Under his plan, no single interest could have predominated;
and the possibilities of abuse, or excessive use, by an individual
borrower were reduced to such a minimum, by the interposition
of the local banking associations, that every imaginary incentive for the acquisition of control of a branch of the National
Reserve Association was removed. In his speeches, the
Senator himself constantly reiterated his desire and determination to eliminate the possibility that control could be
acquired by any one interest or group. For instance, in a
speech he delivered at Kansas City, on November 14th, 1911,
he said:
No plan . . . should be adopted where there is the slightest
possibility that the organization or its business can be controlled by political influences or by any clique or combination
in New York or elsewhere.
And we find these same thoughts expressed in another passage
of that address as follows:
So it would seem to be absolutely impossible, physically,
that any organization could secure control of the National
Reserve Association. But I agree fully with Professor
Laughlin that the necessary steps, if any further are required,
to prevent any domination of this character, should be incorporated in the report of the National Monetary Commission.
Few people realize that the Aldrich Plan gave New York, which
at that time had 20 per cent of the banking capital of the
country and 26 per cent of the country's banking resources,
only four out of thirty-nine representatives on the central
board of the National Reserve Association, or less than 10 per
cent, while the Middle West, with 25 per cent of the banking
resources, was allotted 41 per cent of the directorate, and the
1

See Chapter V I I I , page 220, Comment.

414

THE FEDERAL RESERVE SYSTEM

South, with 14 per cent of banking resources, 31 per cent. It
has never been clear to the writer by what actual facts the
charge could be sustained that the National Reserve Association was an "imperialistic scheme to seize the banking business
of the United States."
As already stated, Senator Aldrich sought to buy freedom
for the central board from political control at the price of
imposing greater limitations upon the National Reserve
Association's powers. It is interesting to note that early
drafts of the Glass Bill, so long as they provided that the
reserve banks and the business elements should have a substantial representation on the Reserve Board, contained
similar provisions favoring the rediscounting of paper with
short maturities. As control of the Board came to be vested
in the government, these limitations were removed.
When comparing the Aldrich Bill and the Federal Reserve
Act, one must bear in mind that the former never received the
advantage of a full discussion in Congress, nor the benefit
of the modifications suggested by the teachings of practical
experience. It is safe to assume that the test of a Congressional debate would have strengthened the governmental influence
in the administration of the Aldrich scheme and that, concurrent therewith, actual operation would soon have eliminated
some of the cumbersome safeguards, such as the guarantee by
the local banking associations, which had been devised primarily for the purpose of breaking down the apprehensions
and prejudices which blocked the first pioneers' p a t h —
psychological obstructions which had to be overcome before
any headway could be made. 1
1 In the author's opinion, Senator Glass entirely misses the mark when (on
page 68 of his Adventure in Constructive Finance) he sums up the case of the
Aldrich Bill versus the Federal Reserve A c t by saying of the National Reserve
Association Plan that " i t s distinguishing feature was centralization as against
mobilization of the credits of the nation, the incentive and power of centralization being its normal state in contradistinction to mobilization. ,,
Mobilization
of credit would have been substantially the same under the United Reserve
B a n k Plan, the Aldrich Bill, and the Federal Reserve Act.

THE LEGATEE OF THE ALDRICH BILL

415

On the other hand, some of the serious shortcomings of the
Federal Reserve Act were not contained in the original Glass
Bill, and Congressional debate and political necessities forced
compromises and incongruities into the Federal Reserve Act
from which the Aldrich Bill could hardly have remained free
had it run the gamut of an acrimonious wrangle in both Houses.
The Republican party, it must be remembered, had its radical
elements no less than the Democrats, and nobody can tell
what sacrifices would have become necessary to secure the
cooperation of these radical elements had the Republican party
remained in power. Certain it is that, during the long years
of Republican domination, that party had not been capable
of uniting upon a sound plan of banking reform.
When comparing the characteristic features of the two
plans, I have often been reminded of two cathedrals, differing
in detail, but showing in their main lines the imprint of ideas
derived from the same school and period.1 It is true, of course,
that where the Republican architect designed fifteen chapels
united by a solid dome, the Democratic craftsman drew a
sketch for twelve chapels joined together by a cupola formed
by an open network of girders. It is also true that those who
later had to officiate under the open network dome found
themselves exposed to the inclemencies of the weather, and
that the hardships and discomforts of their position soon made
them seek permission to close up some of the open spaces, to
the extent that respect and reverence for the original architects
would permit. It is profoundly to be regretted, however, that
1 Dr. H. Parker Willis makes the following statement (page 428, The Federal
Reserve System):
. . . " T h e r e was no necessary opposition between the ideas of the Aldrich bill
in particular and the principles of a general nature which underlay the Federal
Reserve Act. Both aimed at somewhat the same general object and used
somewhat the same means for the attainment of that object. T h e Aldrich bill
was vitiated by special interest concessions, by inadequacy, and by shortsightedness, but there was no reason why one who believed in the principles underlying
the Aldrich measure should not have regarded the Federal Reserve A c t as a,
further development and broadening of those same principles,"

416

THE FEDERAL RESERVE SYSTEM

the draftsmen of the two plans show such scant consideration
for each other. It is much to be regretted that Senator
Aldrich's disappointment at his own failure, and his justified
dismay at some of the features of the Federal Reserve Bill,
made him a bitter, and possibly in parts an extreme, critic of
the new plan. One finds it easier, however, to sympathize
with Senator Aldrich, to whom the fruit of his labors was
denied, than with Mr. Glass who, having enjoyed twelve years
of practically unchallenged glory, saw fit to assail once more the
record of his defeated opponent gone to his rest a decade before.

What we have in mind may perhaps best be illustrated by
quoting some passages from Senator Glass's chapter " A
M y t h Destroyed." 1 The Senator writes as follows:
On October 15, 1913, before the Academy of Political
Science in New York City, Mr. Aldrich delivered an address
on "Banking Reform in the United States." It occupies
sixty-two printed pages in the record of proceedings, and was
devoted, almost in its entirety, to an examination of the
major provisions of the banking and currency bill passed by
the House and subsequently enacted into law as the Federal
Reserve Act. If anybody who is too simple to differentiate
for himself the inherent contrarieties of the Aldrich bill and the
Federal Reserve Act will read this address, he will quickly see
that Mr. Aldrich did not make the inscrutable blunder of
relating the one measure to the other. . . .
Mr. Aldrich in that New York address assailed every essential feature of the Federal Reserve Act. . . .
Summarizing his pronounced objections to the federal
reserve measure, Mr. Aldrich, since acclaimed by his confused
and beaten partizans as the real author of the bill he thus
condemned, concluded his philippic in these words:
"/ have tried to show that the bill has serious defects. It
appeals to the populists by adopting their plan of note issues;
to the socialists by seeking to place the management of the
most important private business of the country in the hands of
1

An Adventure in Constructive Finance, Chapter X V , pp. 242-248.

THE LEGATEE OF THE ALDRICH BILL

417

the government; it seeks the support of bankers in great centres
by its unexpected discrimination in their favour, but its dangerous doctrines and unwise methods do not appeal to the
judgment of the American people. Its objectional features
have neither the support of public opinion nor the approval
of the banking fraternity. They are contrary to the teaching
of economists and they are not supported by the judgment
of practical men. It threatens to upset business and to produce the evil results it was projected to cure."
Thus, it is seen, Mr. Aldrich claimed no share, whatsoever, in
the federal reserve bill. On the contrary, he ranged roughshod through every section of it. Not a fundamental provision was left untouched by his intemperate denunciation. And
it is a poor tribute to his discernment and his frankness to
suggest that he would have been foolish enough to excoriate
bitterly before an audience of political economists a piece of legislation which had been patterned after his own production.
The false claim, which Mr. Aldrich would have scorned, was
first set up at an exigent moment in the presidential campaign
of 1916 as a counterpoint to the boasts of an opposing party.
It was promptly and searchingly controverted on the floor of
the House of Representatives by the chairman of the Banking
and Currency Committee of that body in a speech which challenged contradiction in any particular. No answer in general
or in detail was made in that forum then; nor has any answer
been made anywhere since that had the slightest responsibility attached to it. While the bare assertion itself now and
then crops out, the remarkable address of Mr. Aldrich before
the Academy of Political Science stands as a permanent and
conclusive answer to the impudent claim. And it passes all
comprehension, in view of this authentic record, how any person
can expect to be believed when he asserts that the Federal
Reserve Act is, in either a practical or theoretical sense, an
imitation of the Aldrich currency scheme.1
The language above quoted from Senator Aldrich's speech
would be apt to strike the reader as rather severe and con1

T h e italics are mine —Author.

418

THE FEDERAL RESERVE SYSTEM

elusive—if, indeed, it applied to the Federal Reserve Act.
But the reader will be amazed to learn that it does not.
Senator Aldrich's speech of October 15th, 1913, dealt with
Mr. Glass's earlier bill, as it passed the House and before it
was drastically changed in becoming the Federal Reserve Act.
N o one conversant with the subject can read Senator Aldrich's
speech without observing at once that he was dealing with this
earlier draft of the Glass Bill. In order not to lengthen this
chapter unduly, some extracts from Senator Aldrich's address
are printed herein as Appendix Twenty-Seven. These extracts
are extraordinarily illuminating in many respects. Suffice it
to quote here two passages only, in which the Senator cites
sections of the bill then before him. He points out first that:
The Federal Reserve Board is given the power to determine
each week, or as much oftener as required, the rate of discount
to be charged by each reserve bank for each class of paper;
and, second, that:
It will be remembered that the Federal Reserve Board consists
of three members of the President's official family and four
others to be appointed by the President and confirmed by
the Senate.
The two sections just quoted clearly reveal the radical character of the earlier draft of the Glass Bill. It is easy to understand why Senator Aldrich, with these two sections before him,
warned his hearers against a banking law that would have
made the Reserve Board a hopelessly political body, with
powers, plainly expressed, of dictating the discount policy of
every reserve bank. The bill as then presented—with a
Federal Reserve Board consisting of three Cabinet officers and
four appointive members; with the "manager," as we have
seen, subject to the supervision of the Secretary of the Treasury, and with power vested in such a Board in effect to fix the
rediscount rates—embodied, indeed, a highly dangerous and
objectionable proposal. Inasmuch as some of Senator Al-

THE LEGATEE OF THE ALDRICH BILL

419

drich's severest criticisms were levelled at these very phases
of the Glass Bill, it is difficult to understand how Senator Glass
could have remained unaware of the fact, or that he should
have omitted to make it unmistakably clear to his readers,
that Senator Aldrich was dealing with the Glass Bill> as introduced in the House, and not the Federal Reserve Act. When
the Act had been passed, with important modifications of
the sections quoted above, as described in a preceding chapter,
Senator Aldrich wrote the following preface to the second
edition of his said speech before the Academy of Political
Science:
Note to Second Edition
Since the following address was read before the Academy of
Political Science, the "Federal Reserve A c t " has become a
law. The Senate and the Democratic caucus practically
remodeled the measure, eliminating many of the objectionable
features of the House Bill, and modifying provisions which
had been subjected to severe criticism. The Act as finally
adopted will, I believe, be accepted by the national banks with
a view of seeking in good faith to make its operation a practical
success and with the hope that defects may be cured by
subsequent legislation.
Whether the measure will meet the expectation of its friends
will depend largely upon the manner in which it is administered. Its success will depend, first of all, upon the character
and wisdom of the Federal Reserve Board, which is granted
extraordinary powers of control over vast interests and
intrusted with the decision of the intricate questions which are
involved in the various provisions of the Act. Very much
will also depend upon the conservative character of the
management of the several Federal reserve banks.
The Act adopts many of the principles of the bill reported
by the National Monetary Commission, as will be seen by a
comparison of the texts of the two measures} Its authors
concede that effective legislation for banking reform must
embody provisions for the concentration and mobilization of
1

The italics are mine—Author.

420

THE FEDERAL RESERVE SYSTEM
bank reserves through an organization of banks, and that
member banks must be able through such an organization to
maintain and replenish their reserves by a rediscount of commercial paper. Whether the organization provided by the
Act will secure these results in a satisfactory manner can be
ascertained only by experience.
If the loaning and note issuing power of the reserve banks
is used to the fullest extent in ordinary times as anticipated by
some of the authors of the Act, these institutions will be found
powerless in case of emergency for purposes of support or
protection. The adoption of this policy would naturally lead
to an expansion of credit inflation of the currency, producing
an appearance of prosperity and a boom in speculative prices,
but the ultimate result would be disastrous.
N. W. A.
W A R W I C K , January, 1 9 1 4

We must assume that Mr. Glass was not familiar with Senator Aldrich's " N o t e to the Second Edition"; it is impossible
otherwise to understand how he could, by the omission of this
note, have so entirely misrepresented Senator Aldrich's considered views concerning the Federal Reserve Act as finally
passed. The omission is all the more unfortunate, since in
reprinting Senator Aldrich's speech—we can only assume,
unintentionally—an alteration was made which could not fail
to increase the reader's confusion. A comparison of the text
of Senator Aldrich's speech (Appendix Twenty-Seven) with the
quotation given by Senator Glass will show that Senator
Aldrich said:
" I have tried to show that the House bill has serious defects
»i

while Mr. Glass's quotation makes this read:
I have tried to show that the bill has serious defects.1
1

Italics are mine—Author.

THE LEGATEE OF THE ALDRICH BILL

421

There is no intention to doubt Senator Glass's absolute sincerity when in his introduction 1 he solemnly declared that
" A t no point has there been attempt to twist the truth awry
to confirm a preconceived conclusion"; but the unfortunate
fact remains that his comment "Thus, it is seen, Mr. Aldrich
claimed no share, whatsoever, in the federal reserve bill"2
was bound to mislead the vast majority of his readers.
The passage of the Federal Reserve Act was a signal achievement and one for which the Democratic party could justly
claim great credit. It is to be regretted, however, that men
standing high in public estimation should have lessened their
prestige and impaired their record by attempting to magnify
their own accomplishments by belittling or denying altogether
the value of their opponents' contributions.
For President Wilson, it will always remain a feat of the
highest order to have succeeded in impressing his will upon a
Democratic party in which confusion had prevailed for so
many years and which included a powerful wing wedded to the
wildest monetary and banking doctrines. With keen pertinacity he perceived and took advantage of the great opportunity the situation offered. He saw a country impatiently
demanding banking reform, public opinion far advanced by a
campaign of many years, and Congress prepared by Senator
Aldrich's work for far-reaching action on scientific lines. It
was clear to the President that the Democratic party in these
circumstances could not afford to offer a substitute bill which
would fail to measure up to the standards of the bill the National Monetary Commission had proposed. On the other
hand, the Democratic banking reform bill, though in substance
it might, if necessary, be the same, must at all hazards be
different in appearance and, in form at least, must comply
with some of the ladical tenets of a powerful wing of the
Democratic party. It was here that he showed his great
1
2

An Adventure in Constructive Finance, Introduction, pp. 9-10.
Glass, ibid., p. 247; the italics are mine—Author.

422

THE FEDERAL RESERVE SYSTEM

genius as a political leader. He was quick enough to perceive
that a system of regional banks required more substantial
cohesion than the supervision of the Comptroller of the Currency, as proposed by Mr. Glass, and suggested, as the necessary link, an "altruistic" Board. As already stated, however,
this suggestion was no extraordinary or original contribution.
It was the logical sequel of a regional plan, and it was less
astonishing that President Wilson reached this inevitable
conclusion than that Messrs. Glass and Willis had managed
to escape it. He threw Glass into consternation when he
bought the support of the Bryan-Owen wing by permitting
Federal reserve notes to be issued as the obligation of the
United States; but, in doing so, in his own words, he "surrendered the shadow but saved the substance." He forced
Glass to abandon banking representation upon the Reserve
Board; and, having made it a purely governmental board, he
once more conceded the shadow but saved the substance
by inviting as many as three bankers among the five men
to constitute the membership of the first Reserve Board. 1
Finally, he whipped his party into line to pass a bill which
had taken, "lock, stock, and barrel," the technical clauses
and, in substance, the most important parts of the very bill
which his party platform had condemned, and which had
been roundly denounced as a vicious snare from which the
Federal Reserve Act was gloriously to save the country.
These compromises and stratagems secured a piece of legislation from which the country has derived blessings beyond
measure; the United States owes President Wilson a debt of
the deepest gratitude for the determination, courage, and
sagacity with which he dealt with Congress and his own party
leaders.
It was in the fight against the attacks by the wildest members
of his own party and in breaking down selfish obstruction or
demands from certain interests that Carter Glass proved a
1

Of these, only two accepted.

THE LEGATEE OF THE ALDRICH BILL

423

tower of strength. Temperamentally cautious, Mr. Glass
approached his problem with ideas more conservative than
those of the President. Glass had read the banking reform
literature published during the preceding years and evidently
recognized what was good and valuable in the Aldrich Plan.
The party platform, however, forbade a central bank plan,
and thus Glass was driven to seek the same ends through a
regional scheme. He started out with too generous a number
of regional banks operating as entirely separate units. Gradually, as he wrestled with his problem, he became aware of the
imperative necessity of linking these separate units together.
Consciously or subconsciously, he finally evolved a central
banking system; but for political reasons, and from habit, he
continued to denounce central bank plans. With touching
devotion and entire unselfishness, with grim tenacity and
unfailing courage, he carried on the fight, a brilliant debater,
witty and sarcastic, feared and respected. When Glass, after
the passage of the Act, wrote: " I f the country could know the
true story of the struggle here it would realize that the public
interest has been as well served by expunging the things which
have been excluded from the Currency act, as by those which
have been included," 1 he threw a true light upon his contribution; even though one might add that the Reserve System
would be stronger and safer to-day if, in this process of exclusion and inclusion, Mr. Glass in some respects had been more
consistent and in others less tenacious.
When the Democrats took up the fight for currency reform,
the idea had already triumphed; but their own party had to be
conquered. In this struggle and in the accomplishment of
having secured a great piece of financial legislation against
the ignorance, prejudice, vagaries, and conceit at work within
his own party ranks, Congressman Glass stood side by side
and shared honors with the President.
1

From letter to author, dated December 24th, 1913; see p. 140.

CHAPTER

THE REDISTRICTING INTERMEZZO

BEFORE

presenting the conclusions to be drawn and the
recommendations suggesting themselves from the historical and analytical account given in the preceding
pages, it is necessary to devote our attention to Chapter
Sixteen of Senator Glass's An Adventure in Constructive
Finance. In this chapter Mr. Glass discusses the so-called
"redisricting episode." This "episode," it will be remembered, occurred almost two years after the passage of the
Federal Reserve Act. It involves, therefore, an intermezzo
entirely unrelated to the matters which occasioned Senator
Glass's articles, viz., the statements contained in Professor
Seymour's Intimate Papers of Colonel House regarding Colonel
House's contribution to the enactment of the Federal Reserve
legislation and regarding the genesis of the Federal Reserve
Act.
The tale of this "redisricting episode" pointedly dragged in
and forming the closing word of the series of articles from the
pen of Mr. Glass, as first published by a selected group of
newspapers, constitutes a straight challenge to the members
of the Board who played a part in that episode. But a
refutation of Senator Glass's assertions is offered in this
chapter not so much for the sake of.establishing the true facts,
as to indicate the necessity for the recommendations which
are to follow.
The heading given by Senator Glass to Chapter Sixteen of
his work is highly suggestive: 1
1 A liberal abstract of the chapter is reprinted in Appendix T w e l v e ; readers
are earnestly requested to peruse it, so that they may have it clearly in their
minds when following our comments.

424

THE REDISTRICTING INTERMEZZO

425

OLD GUARD'S LAST STAND
System Imperilled by Consolidationists—The President Angered—
Reorganization Was Imminent—The Scheme Abandoned
Under this heading, four members of the first Board are
described as dark conspirators, banded together to destroy
the Reserve System with a view to paving the way for the
ultimate establishment of a central bank. A similar picture
of them may be found in Dr. Willis's book, The Federal Reserve
System, Chapter X X X I V .
For a complete understanding of the subject, it is necessary
to lead the reader back to the time when the Federal Reserve
Act had been passed and when the time had come for the
Organization Committee to enter upon its duties. It may be
recalled that, while the Federal Reserve Act was under discussion, the business and banking communities had insistently
urged that the number of reserve banks be reduced. The
reader will also remember that the Glass Bill, after having
started with twenty banks, finally provided for " n o t less than
twelve," and that, under the pressure of public opinion, in
"conference," the Senate provision of "not less than eight
nor more than twelve" was finally accepted. In these circumstances, the country generally expected that the Organization Committee would begin by dividing the country into
only eight districts, leaving to the Reserve Board the task of
creating further Federal reserve districts if experience should
prove additional districts to be necessary or desirable.
This expectation was all the more warranted as the evidence
secured by the Organization Committee in their country-wide
hearings was overwhelmingly in favor of the smaller number
of reserve banks, only nine out of eighty-four witnesses favoring the larger number. 1 Senator Glass states that he favored
the establishment of the System with only eight reserve banks
1 M y own testimony before the Organization Committee is given herein as
Appendix T w e n t y - E i g h t .

426

THE FEDERAL RESERVE SYSTEM

as a beginning, and Dr. Willis indicates that he favored nine.
It was a shocking surprise, therefore, for the country and
one of the worst blows the Reserve System could have received
to have the Organization Committee force upon the country
twelve reserve banks at the outset. There can be no doubt
that for the incoming Board, this action made the administration of the System immeasurably harder, while it was
certain to enhance the difficulty of securing men of outstanding character and ability for the administration of the
smaller reserve banks. It was obvious that the smaller the
bank, the less attractive would be an administrative position
in it. A large number of banks, moreover, would increase
the danger that they would exhibit a purely local and parochial
point of view and that, in consequence, so far from assisting
the Board in formulating a national policy, the small banks
would stress their local views and, by so doing, confuse and
resist the Board instead of aiding it.
The boundaries of the districts as drawn by the Organization Committee caused great dissatisfaction in a good many
instances. In some cases, without doubt, these protests
were fully justified, for the action of the Organization Committee had been extremely high-handed. For example,
Jersey City and Hoboken, just a stone's throw from New
York, had been allotted to the Philadelphia district, while
some of the cities in southern Connecticut which, in fact,
are suburbs of Greater New York, had been included in the
Boston district.
Requests were soon filed with the Board for hearings on the
applications of sections and localities desiring to be transferred from one district to another, while Pittsburgh and
Baltimore claimed that they should be made Federal reserve
cities instead of Cleveland and Richmond, respectively. The
Board, having been charged by the Act with the unpleasant
duty of reviewing the decisions of the Organization Committee, agreed that hearings should be held, but announced

THE REDISTRICTING INTERMEZZO

427

that it would delay action until it had had an opportunity to
observe the districts in actual operation for at least a year.
Any review of district boundaries, however, was certain to
prove most embarrassing. Two of the three members of the
Organization Committee—the Secretary of the Treasury and
the Comptroller of the Currency—were ex officio members of
the Board, and any readjustment undertaken by the Board
necessarily involved a criticism and undoing of what these two
colleagues had done. Moreover, the Governor of the Board,
Mr. Hamlin, had formerly been Assistant Secretary of the
Treasury, while Mr. John Skelton Williams, the Comptroller
of the Currency and as such an ex officio member of the Board,
had also been Assistant Secretary under Mr. McAdoo.
Naturally, both Mr. Hamlin and Mr. Williams had a feeling
of warm friendship for, and of loyal allegiance to, Mr. McAdoo,
then the Chairman of the Reserve Board. It was certain,
therefore, that three of the members of a Board of seven would
try to block any drastic readjustments. The remaining four,
however, had seen enough of the petty point of view resulting
from a twelve-headed system, and of the difficulties of its
administration, to convince them that, with regard to banking
standards and efficiency of service, it would clearly be for the
benefit of the country if the number of the reserve banks
could be reduced.
Whether or not such reductions would be politically feasible,
was another question. It should be stated, parenthetically,
that, while members of the Board struggled individually with
the task of how best to consolidate some of the districts, no
specific plan was ever formulated by any committee. It was
generally understood, however, that in the process of merging
one Federal reserve district with another, no plan should be
considered which—barring the small and unavoidable readjustments of the character mentioned above—might increase
the power of New York. Any accentuation of New York's
influence would be certain to lead to a misconstruction of

428

THE FEDERAL RESERVE SYSTEM

motives and would cause vicious attacks. A Committee
was appointed to study the question and present a report; it
consisted of F. A. Delano, Chairman, W. P. G. Harding, and
the author.
The main question this Committee had under consideration
was whether or not stronger and more satisfactory districts
would be produced by combining some of the existing districts as, for instance, Minneapolis and Chicago. Indications had been received that Minneapolis itself felt that it
would be served better as a branch organization of a larger
Chicago district, than as the seat of an independent reserve
bank. In a similar way, the questions of combining Dallas
possibly with Kansas City, and Atlanta with Richmond or St.
Louis, or of combining the three, and so forth, were discussed.
Plans along these lines were considered. But before they
were permitted to take any definite form, the Committee
sought positive instructions from the Board as to whether, in
dealing with these applications of sections for transfer from
one district to another, or with possible changes in connection
with Federal reserve cities within given districts, they were to
consider the existing twelve reserve banks as unalterable
fixtures, or whether they were to approach the problem on the
basis of a possible reduction of the number of Federal reserve
districts.
Such consolidations, it should be quite clearly understood,
would not have involved the dissolution of any of the twelve
reserve bank organizations. Each would have continued to
operate as before, except that those absorbed would have
become branches and would, in consequence, deal with a parent
office instead of adding to the complications of the Board by
charging the latter with the duty of managing what in size
and scope were, in fact, merely branches. The consolidation
1 Certainly this was the writer's attitude.
Governor W. P. G. Harding,
in his book, The Federal Reserve System, Chapter IV, page 35, states that he
favored a reduction of the number of the reserve banks from twelve to ten.

THE REDISTRICTING INTERMEZZO

429

would have been effected by the member banks of, say, the
Federal Reserve Bank of Minneapolis exchanging their stock
for shares in the Chicago Federal Reserve Bank, just as was
done where transfers of banks from one district to another
were made.
The new branches created by such consolidation would
each have had a board of directors of its own, such as that
which to-day exists in Los Angeles, a city of over 1,200,000
inhabitants, which is a branch of San Francisco; and in
Detroit, which is a branch of Chicago; and in Pittsburgh and
Cincinnati, which are branches of Cleveland; and so forth.
The service rendered by such branches is to all intents and
purposes as satisfactory as that provided by the reserve bank
proper. It is accordingly hard to understand why it should
have been denounced as an act of injustice or violence to
suggest that Dallas or Minneapolis should be served in a
manner which has since proved satisfactory to other cities of
much greater importance. The determined insistence upon
the creation and preservation of "one-crop districts," which
could not be expected to be self-sufficient, and which were
likely to be governed by "one-crop" considerations, could
hardly be justified, except on political grounds, in the face of
the excellent example of a "composite district" furnished by
the Federal reserve district of San Francisco, embracing all of
California, Oregon, Washington, Idaho, Nevada, Utah, most
of Arizona, and part of Montana.
Section 2 of the Federal Reserve Act reads as follows:
As soon as practicable, the Secretary of the Treasury, the
Secretary of Agriculture and the Comptroller of the Currency,
acting as "The Reserve Bank Organization Committee,"
shall designate not less than eight nor more than twelve cities
to be known as Federal reserve cities, and shall divide the
continental United States, excluding Alaska, into districts,
each district to contain only one of such Federal reserve cities.
The determination of said organization committee shall not

430

THE FEDERAL RESERVE SYSTEM

be subject to review except by the Federal Reserve Board
when organized. . . . 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. . . }
From this, I am sure the lay reader will gain the impression
that Congress here not only conferred upon the Reserve
Board a right, but also imposed upon it a clear duty, to consider the question of districts in its broadest aspects.
On November 12th, 1915, the Committee brought the subject up for a preliminary discussion by the Board. In the
absence of Mr. McAdoo, then ill at home, Governor Hamlin
and Comptroller Williams objected to a preliminary discussion
of the Committee's report and, in deference to their wishes,
the debate was postponed until the following Monday. A t
the meeting which took place on that day, discussion was once
more postponed for the reason that Mr. McAdoo was unable
to attend because of work on his report to Congress. On
Monday, November 22nd, when the Board reassembled and
the Committee expected the subject to be taken up, it found
itself confronted with a legal opinion of the Attorney General,
which Governor Hamlin, acting without authority from the
Board, in conjunction with, and at the instance of, Mr.
McAdoo, had requested the President to secure.
The Attorney General's opinion was to the effect that the
Reserve Board had no power to abolish any reserve bank.
Thus, while the Board had deferred the discussion out of
courtesy to Mr. McAdoo, the latter, together with the Board's
governor, and the President, had combined, without the knowledge of the four appointive members of the Board, to forestall
any debate by securing this opinion of the Attorney General.
About ten days later, on December 2nd, 1915, the Board's
Committee addressed a report to the Board. This report
was unanimous and was signed by Mr. Delano, as chairman,
1 T h e controversy centered around the italicized portion of the section, and
this has been copied verbatim from the Aldrich Bill (see Juxtaposition, pp.
202-203). The italics are mine—Author.

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431

Mr. Harding, and myself. In view of the purposes which
have been ascribed to this Committee, the report is of interest,
because it shows beyond question what was in the minds of
the Committee members. The report reads as follows:
December 2nd, 1915
To

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

BOARD.

Your Committee on Redistricting has received and noted
the copy of the opinion of the Attorney General addressed
to The President of the United States, under date of November 22nd, 1915, to the effect that the Federal Reserve Board
has not the power to abolish any one or more of the Federal
reserve districts, or any one or more of the Federal reserve
banks located in the cities designated by the Reserve Bank
Organization Committee.
Your Committee feels that there has been a serious misunderstanding, not only of the substance and purpose of its
preliminary report filed with the Board on November 13th,
1915, but also of the motives which prompted it. Therefore,
before making any further recommendations, your Committee is desirous of recounting briefly the facts which led to
its action and 011 which it based its recommendations, with the
hope that a better understanding of the facts as they appeared
to your Committee may promote a common point of view and
conduce to a continuation of the harmonious cooperation and
mutual good will that has in the past characterized the work
of the Board and stamped it with the approval of the public
at large.
On March 1st, 1915, Mr. Elliott 1 filed with the Board an
opinion dealing with the general powers of the Board to
review the determination of the Organization Committee,
to readjust the Federal reserve districts, to change the
designation of the Federal reserve cities, and to reduce the
number of districts formed by the Organization Committee.
It is to be noted, however, that, in this opinion, the question
of reduction was referred to very briefly, and Mr. Elliott
1

General Counsel of the Federal Reserve Board—Author.

432

THE FEDERAL RESERVE SYSTEM
later advised the Board that the consideration of this particular question was merely incidental to the main questions
discussed in that opinion and that, should the question of
reduction be specifically considered by the Board, he would
appreciate an opportunity of reconsidering his earlier opinion
on that particular point.
In view of the doubts raised by M r . Elliott, members of the
Board availed themselves of the opportunity of Senator Owen's
appearance before it in the hearing of the appeal of certain Oklahoma banks requesting a transfer from the Dallas
to the Kansas City District, to ask for his views concerning
the intent of Congress and the meaning of the Federal Reserve A c t relating to the powers of the Board on this whole
subject. T h e request for Senator Owen's views was not accidental, but intentionally contemplated to instruct and guide the
Board in disposing of pending appeals. His answer was that
Congress meant to " g i v e to the Board the power of the government itself in dealing with this system " and that he thought the
power of the Board 4 'would extend even to the power of reducing the number of the districts."
It is understood, of course, that this statement by Senator
Owen was merely his own personal opinion and that it was
made at a time when another, though closely related, subject
was under consideration, but it at least indicates that there was
no decided impression in Senator Owen's mind that this power
to reduce was not given to the Board.
T h e Board subsequently published in the June ist, 1915,
Bulletin a resolution, which was passed unanimously on M a y
4th, 1915, when both Governor Hamlin and Mr. Williams were
present, providing, among other things, as follows:
" T h a t action on other pending petitions be deferred until
further experience in the actual operation of the several
districts, especially in the light of the new clearing system
which is about to go into effect and of the extent to which
state banks take membership in the Federal Reserve System,
shall have provided the Board with the necessary data for a
conclusion, it being the opinion of the Board that action on
petitions relating to changes in cities designated as the location

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433

of Federal reserve banks should be deferred until the Board
shall have reached a conclusion from experience as to any
further readjustments in the boundaries of the several dis-

tricts, or in the number of districts, which may be desirable in the
operation and development of the Federal Reserve System."1
Y o u r Committee is positive that no objection was raised
at that time by any member of the Board or by any member of
Congress, indicating dissent from the proposition that the
Board had the right to reduce the number of districts. Indeed, such an argument was never raised in the briefs of counsel on the various appeals heard by the Board.
On October 19th, 1915, the following vote was passed, " t o
refer the question of redisricting1 to a special Committee consisting of Mr. Delano, Mr. Harding and Mr. Warburg."
Counsel for the Board were soon thereafter requested to
prepare opinions as to the legal right of the Board to reduce
the number of districts. Mr. Cotton filed his formal opinion
on November 22nd, 1915, stating unqualifiedly that the Federal Reserve Board is fully authorized by the A c t to reduce
the number of districts. Mr. Elliott, who, in accordance with
his own request, was reconsidering his earlier opinion of March
1st, 1915, filed his opinion with the governor on November
23rd, 1915, and on November 22nd, 1915, the Attorney
General delivered his opinion addressed to the President.
I t may be noted, therefore, that at the time of making its
preliminary report on November 13th, 1915, your Committee
did not believe either that members of Congress would take
the position that the Board was without power to reduce the
number of districts or that members of the Board would, in
view of the unanimous resolution above quoted, take that
view unless forced to adopt it by the conclusive opinion of
counsel.
Y o u r Committee began its work by elaborating a report
submitting definite alternative plans, but finally concluded
that it would be preferable to ask the Board first to pass upon
the question of policy and the principle involved. Y o u r
1

T h e italics are the Committee's.

454 THE FEDERAL RESERVE SYSTEM
Committee had, however, reached a conviction that the country would be better served by a reduction in the number of
districts to eight or nine. The reasons on which this conviction
was based seemed so convincing and conclusive to the Committee that it hoped the Board might adopt unanimously the
recommendation which it outlined. The Committee is desirous of emphasizing in the strongest terms its absolute
confidence, not only in the underlying principles of the Federal
Reserve Act, but also in the machinery provided for developing
such principles into a system which has already brought
immeasurable benefits to this country, and which, whether
with twelve banks or eight, will prove of inestimable value.
That the number of banks and districts originally created was
larger than is conducive, in the opinion of your Committee,
to the most efficient operation of the System and to the greatest
safety of the country is not the fault of the Act, but is due to
the fact that the Organization Committee, which, though
acting in the best of faith, could not, in the short time allotted
to it, acquire such knowledge and experience as is absolutely
necessary to a final determination of such an important
question.
The Attorney General has since denied the right of the
Board to reduce the number of districts determined by the
Organization Committee, and in view of that your Committee
is not desirous of making any further recommendations at this
time. It wishes, however, to emphasize the fact that at the
time of filing its preliminary report, no doubt existed in its
mind as to the wisdom of reducing the number of districts in
the near future, but also the right of the Board to make such
a reduction.
Your Committee is ready to submit an abstract of the
arguments that were prepared by it when it supposed that
the subject was to be discussed on its merits, and it is of the
opinion still that these arguments will assert themselves sooner
or later, and that the country will not rest satisfied until the
Federal Reserve System shall have been developed to render
its maximum possible efficiency. Furthermore, your Committee feels that, if the adjustment is not made at this time,

THE REDISTRICTING INTERMEZZO

435

it is more than likely to be made at some future time, but with
far greater difficulty and disturbance.
In reviewing the evidence before the Organization Committee it was noted that, of the eighty-four witnesses, only nine
recommended the formation of twelve districts; a large majority favoring not to exceed nine districts.
Your Committee concluded, as a result of its study of the
question, that the greatest protection from future disturbance
was the immediate establishment of a system enjoying its
maximum degree of usefulness and service. The country
would not permit any subsequent interference with a machinery once perfected, whereas weaknesses, such as those which
seemed to your Committee to exist now, offer a constant
target for critics. For these reasons, not to mention the
many practical advantages incident to carrying out, prior to
January ist, 1916, any changes that might have been decided
upon by the Board, your Committee was sincerely anxious
to secure prompt discussion and full consideration of its
recommendations.
As the chairman of the Committee repeatedly stated, the
desire for immediate consideration of the question was not
prompted by any intention on the part of your Committee to
force the Board to take any unconsidered action, and the
fact that the request of two members of the Board for another
preliminary report in writing as to the reasons for its recommendations was opposed by the Committee was, as explained
by the Committee, solely because it desired to have the report
discussed on its merits without delay and at that time lay
before the Board all the facts and figures it had collected.
Such a course was in consonance with our usual practice.
The Committee had postponed filing its report on account
of Secretary McAdoo's absence in the West, and later waited
until Mr. Harding had called on him at his house to apprise
him informally of the views of the Committee and secure
any suggestions which he might see fit to make. The Secretary, however, was unable, because of his own illness, and
later by illness in his family, to discuss the matter with Mr.
Harding, and the Committee then filed its report on Saturday,

436

THE FEDERAL RESERVE SYSTEM
November 13th, 1915, fixing the following Monday for discussion by the full Board, the Secretary of the Treasury having
stated to members that he would be engaged on his report to
Congress until the 15th, which the Committee assumed would
leave him free after that date. However, consideration of the
report was postponed until Monday, November 22nd, 1915,
because of the inability of the Secretary of the Treasury to be
present until that date.
A t the meeting of November 22nd, the opinion of the
Attorney General, already referred to, was presented; also,
the letters of two United States senators. Y o u r Committee
desires to repeat that at no time had there been a discussion
of the Committee's original report of November 13th, or of the
revised report of November 17th. The Committee therefore
regrets that> before it had the opportunity which it desired to
make an oral presentation of facts and arguments, and various
data in its possession the Attorney General's opinion was

sought without its knowledge.1
Y o u r Committee believes that it would have been fairer
to the President, to the Attorney General, and to the Federal
Reserve System, if the case had been submitted to the
Attorney General with a full presentation of arguments on
both sides of the question. If the Attorney General, for
example, had understood that no closing of banking offices
was contemplated but that in every city where a reserve bank
was abandoned a branch bank would be established, he would
not have been led to believe that the Committee's recommendation "would profoundly affect the currents of trade and alter
the whole face of business throughout vast sections of the
country," etc.
If your Committee was right in its conclusions as to the
advisability of a smaller number of districts, the permanency
which the Attorney General and every one of us desires for
the future of the system would have been best secured by
prompt and courageous action now.
Y o u r Committee, however, fully appreciates the authority
of the Attorney General's opinion and, submitting to the
1

T h e italics are mine—Author.

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437

conclusions reached therein recommends that the Board
abandon, at least for the present, any plan of redistricting
which involves the consolidation of any districts and that
the Board now address itself to the specific appeals pending
and to such readjustments as may be permissible and practicable under the Attorney General's opinion. . . .
How different this report of the Committee, presented
at the time, sounds from the extraordinary account of the
proceeding given by Senator Glass. He says: 1
There is one episode related to administration which occurred so soon after the system was set up and which was so
intimately concerned with the very integrity of original
federal reserve legislation itself as to make a reference
to it here seem altogether pertinent. The pertinacity of
those who held to the consolidationist view of bank credits
has already been made clear. As we have seen, they ardently
desired a central bank; and, denied that, exhausted every
resource of ingenuity to prevail with Congress to make the
number of regional banks as few as three, to be located in the
three great central reserve cities.
When, after months of consideration and discussion, this
was not done, it was supposed the fight was ended. But it
was not. The zeal of those advocating centralization was
unabated and their persistence unchecked by repeated
reverses. They carried the fight into the administration of
the system; and, in less than one year after the federal reserve
banks were organized for business, the Federal Reserve Board at
Washington entered upon a startling task of abolition which
might have contravened the purpose of Congress by reducing the
number of regional banks to any point at which the Board might
have pleased to desist! This extraordinary action was proposed and entered upon under an interpretation of the statute
which, if valid, could have completely subverted the intent
of the framers of the law. Indeed, the action proposed marked
a critical moment in the history of the federal reserve banking
1

Glass, op. cit.y pp. 255 ff.

438

THE FEDERAL RESERVE SYSTEM
system, for it not only involved an inevitable clash between
Congress and the Board, with its attendant bitterness, but
also would have precipitated a violent agitation in the districts sought to be abolished as well as in other districts which
might proceed in constant dread of a similar fate whenever it
should suit the notion of the Federal Reserve Board to put them
out of business. . . .
The crucial point was as to the legal right of the Board to
disestablish a single one of the twelve banks. Granted
authority, under the statute, to revoke the charter of one,
the right to consolidate the system into three central reserve city
banks, so desperately, but vainly, fought for in Congress, would
have been confirmed. Disestablishment might not have proceeded
that far; but it is by no means improbable that it would have
gone to exactly that extreme without prompt executive intervention.1

It should be recalled that Senator Glass is here referring to
the convictions of at least four out of the five appointive
members of the Reserve Board, convictions resulting from
exhaustive study and earnest deliberations. T o allude to
such views as the result of the machinations of the "advanced
consolidationists, intent on abolition of regional banks for
the mere sake of centralization" is a manifestation of insincerity or of morbid obsession. The proposed action was not
intended to destroy the System, as Senator Glass intimates;
but was, on the contrary, designed to make it the most efficient
organization possible under the provisions of the law. The
law clearly provided that there should be not less than eight
nor more than twelve Federal reserve banks. The Organization Committee had latitude to organize a system within these
limits. The Reserve Board's power of review could not conceivably go beyond these same limits.
T o claim that the abolition of one bank would confirm the
Board's right to consolidate the System into three or less
reserve banks is preposterous. That the Senator should
1

Italics are mine—Author.

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439

indulge in such fantasies, which, if justified, would constitute a
grave indictment of his own draftsmanship of the bill, is
scarcely believable. Yet, unfortunately, he is not alone, for
this very thought was expressed in the Attorney General's
opinion, to whom, " b y request," Senator Glass had submitted
a copy of his letter to Mr. Delano. The Attorney General
says:
The power of readjusting districts, and of creating new
districts, conferred by this provision upon the Federal Reserve
Board, is subject to two limitations only:
First, there must be due regard to the convenience and
customary course of business, and
Second, the number of districts cannot exceed twelve.
If, therefore, the power to readjust districts includes the
power to abolish districts, I see nothing to prevent the Board
from abolishing districts and banks until the number is reduced
not only to eight, but to six, four or even one if in the judgment
of the Board due regard to the convenience and customary
course of business dictates that policy.
One is almost ashamed to draw attention to the fact that the
Attorney General omitted to state that in this matter of
districts the Federal Reserve Act also provides a minimum
number of eight, which limit governed the Organization
Committee and thereby also the Federal Reserve Board's
power of review!
Dr. Willis joins the chorus when he credits Secretary
McAdoo with similar thoughts. He says: 1
In addition, he undoubtedly felt the seriousness of the step
which was proposed and recognized that if the number of
banks could be reduced in the way suggested, there would be
nothing to prevent its eventual further reduction and perhaps
the final consolidation of all the banks into one, thus attaining
the original purpose of the Aldrich Bill and of other proposed
measures.
1

Willis, op. cit., p. 733.

440

THE FEDERAL RESERVE SYSTEM

I feel certain that the thought that the number of reserve
banks could be reduced to less than eight never entered the
mind of any one of the four members of the Board. 1 Had
they ever given any indication of disregard for this clear and
unmistakable meaning of the Act, then, indeed, there would
have been full justification and ample opportunity for enjoining
them, or "for prompt executive intervention," or for the
"reorganization of the Board" to which Senator Glass alludes.
But what a sad revelation this incident is of the humiliations
to which men in high official positions are subjected! Although four men, who had accepted appointments at considerable sacrifice in order to serve their country, had carefully
studied the problem, they were not given an opportunity to
state their views. Instead, the President and the Attorney
General formed their judgment solely upon the evidence of
the Secretary of the Treasury, whose action was to be reviewed
and who had studiously avoided hearing the views of the
Committee, and upon the evidence of a governor devoted to
Mr. McAdoo and acting in accordance with his instructions.
When Senator Glass says: " T h e Board was arrayed in two
factions, the division being four to three, one side assuming to
be trustees for the banks and viewing the other as representing
the government," 2 he does not, to my mind, express the situation correctly. The four of us considered ourselves the
non-partisan trustees of the interests of the country at large;
the other three dealt with the question from the point of view
If any confirmation were necessary, a quotation from the Committee's revised report of November 17th, 1915, would furnish it:
1

" T h e ultimate judgment on this important question was to be that of the
Federal Reserve Board, and Congress did nothing to impede the free exercise
of the Board's judgment on this question other than laying down the requirements that the districts should not be more than twelve in number nor less
than eight, and by prescribing that due regard should be given to the 'convenience and customary course of business*."
T h e Committee's revised report is printed in full as Appendix Twenty-Nine.
It is a highly illuminating document.
2 Glass, op. ctt. p. 270.
y

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441

of the interests of their party. No stronger demonstration
could be given of a partisan view than Senator Glass's own
version and interpretation of this episode.
Even more astounding than Senator Glass's narrative,
however, is that of Dr. Willis, who gives us the following
account: 1
Unfortunately, Mr. McAdoo's interest in the situation had
become seriously aroused only after the propaganda for
reconstruction of the system had attained a very advanced
stage, but upon looking into the conditions in the Board it
seemed likely that he could not definitely be sure of more than
two votes in addition to his own, the reconstructionists
apparently having definite control of three votes with one
doubtful, and likely to go their way on most issues. The case,
therefore, was one which called for some finesse, since it obviously could not be met by direct ballot. Without waiting
longer for the hostile element to perfect its plans, the Secretary
in his capacity as Chairman called for a meeting at which the
subject of reconstruction should be taken under advisement,
and at this meeting strongly urged upon the Board the view that
the action proposed involved serious legal questions, the answer
to which ought not to be assumed or taken for granted, but on
which an opinion of the highest legal authority should be obtained.
Although various hesitant opinions of the Board's counsel
had been rendered as to different phases of the reconstruction
question, Mr. McAdoo urged that the whole subject be transferred
to the Department of Justice, there to be passed upon by the
Attorney General of the United States, both as to the question of
the Board's power to reduce the number of districts and also as
to its power to change the location of the reserve bank cities. It
was with the greatest difficulty that the Board was induced to
consent to this reference, but eventually the meeting ended in a
close ballot which necessitated a call upon the Attorney General
for his opinion.
The formulation of the letter transmitting the case then became
1

Willis, op. cit., pp. 734-735.

T h e italics are mine.—Author.

THE FEDERAL RESERVE SYSTEM

442

a matter of controversy In order that the language in which the
reference was made might not contain any element of bias or
suggestion. "The terms of the letter having been ultimately
agreed upon, it was sent to the Attorney General, and after the
usual delay, due to elaborate consideration of the questions involved, an opinion was rendered on November 22nd.
The inaccuracies in the foregoing account are too glaring to
require elaborate discussion. In passing, however, it may be
noted:
1. The Secretary never "called" a meeting of the Board.
2. The Secretary never urged, strongly or otherwise, that
the Board consider the legal aspects of the question.
3. The Board was never requested to submit, and never
submitted, the case to the Department of Justice.
4. The matter of reference was never considered by the
Board, and consequently there could not have been a close
ballot.
5. For the same reason there could not have been a controversy over the formulation of the letter to the Attorney
General.
6. Nor could there have been any controversy over the
transmittal of such a letter from the Board.
7. The opinion of the Attorney General was rendered within
about a week, which, far from being "after the usual delay,"
was an exceptionally short time for the delivery of such an
opinion by the department.
It will be noted that Dr. Willis writes that the Attorney
General's opinion was to be sought "both as to the question
of the Board's power to reduce the number of districts and
also as to its power to change the location of the reserve bank
cities," and that an opinion was rendered on November 22nd,
1915. This is another misstatement. The Attorney General's
opinion concerning the right of the Board to reduce the number
of districts was asked for without the Board's approval and

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443

delivered on November 22nd, 1915. The Attorney General's
opinion concerning the right of the Board to change the
location of the reserve bank cities was asked for by formal
Board action several months later, and to this official request
of the Board the Attorney General gave his reply under date
of April 14th, 1916. In a footnote to his statement, Willis
says: " T h e opinion of the Attorney General (that is, the one
of November 22nd) is reprinted as Appendix " B . " Looking
up "Appendix B " on page 758 of Willis's book, the student
finds an Attorney General's opinion addressed to the President,
and beginning as follows:
"Sir:
At the request of the Federal Reserve Board you have submitted
the following question for my opinion." 1
But this is the opinion dated April 14th, 1916, to which, by a
legerdemain, Dr. Willis added the opinion of November 22nd,
1915, omitting, however, the opening paragraphs of the latter.
The beginning of the earlier opinion, addressed to the President, which he suppresses, reads as follows:
SIR:

I have your letter transmitting a request from the governor
of the Federal Reserve Board for my opinion as to the power
of the Board to abolish any of the existing Federal reserve
districts or Federal reserve banks. T h e Secretary of the
Treasury, who is the ex officio chairman of the Board, united
with the governor in making this request, and you ask that I
comply with it. . . .

Thus a composite version of two opinions rendered by the
Attorney General upon two different occasions and upon two
different sets of facts is made to fit in with Dr. Willis's story
as told in the text above quoted. It is only by noticing the
discrepancy in the dates that one would have reason to question the accuracy of the events recorded and to compare Dr.
1

Italics are mine—Author.

444

THE FEDERAL RESERVE SYSTEM

Willis's reprint of the Attorney General's opinion with the
originals published in the Federal Reserve Board's annual
report for 1916 (p. 128) to which he refers. The two opinions
of the Attorney General are reprinted as Appendices Thirty
and Thirty-One. 1
In dealing with this episode, Senator Glass, instead of
attempting to correct Dr. Willis's story, follows along the
same lines. He says:
The action contemplated by the Board for Monday was
deferred for one week to get legal advice2 from the Attorney
General of the United States, who was furnished, by request,
with a copy of the foregoing letter.3
That Senator Glass's or Dr. Willis's memories should be at
fault regarding the actual circumstances of the case, is all the
more surprising because it had far-reaching consequences
which surely they will remember. The four appointive
members were deeply incensed at the action their colleague,
Mr. Hamlin, had taken without their knowledge. Dr. Willis
himself, as secretary of the Board, wrote the minutes of the
meeting of the Board of November 22nd, 1915, at which both
the Secretary of the Treasury and the Comptroller were
present. In those minutes, a telling account is given of the
very acrimonious debate that ensued and the earnest protests
placed on record against the unauthorized request for the
Dr. Willis's The Federal Reserve System abounds in statements which invite
contradiction. It is, however, not my task to dissect this book of 1,800 pages,
or to verify or identify the long list of documents, official and unofficial, signed
and unsigned, dated and undated, abridged and unabridged, which it contains.
In the above, I have analyzed a few pages of the book just where it became
necessary to open it in connection with our discussion of Senator Glass's statements. This analysis will suffice to give those who might be tempted to
consider Dr. Willis's work as authoritative an illustration of its methods and
of the validity of its conclusions.
2 T h e italics are mine—Author.
3 Glass, op. cit.y p. 269.
1

THE

REDISTRICTING

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445

Attorney General's opinion made by the Secretary of the
Treasury and the governor.1
Senator Glass is likely to remember this occurrence because
of the critical situation it engendered when Governor Hamlin's
term expired on August ioth, 1916. The four appointive
members personally had nothing but the friendliest feelings
for Mr. Hamlin; but they had made up their minds that, if
the prestige and independence of the Board were to be preserved, there would have to be at its head a governor whose
friendship for, and loyalty to, the Secretary of the Treasury
might not prove a menace to the independence and dignity of
the Board. Two members of the Board, Mr. Delano and Mr.
Harding, saw the President in order to impress upon him the
desirability of adopting a system of a two years' rotation in
the office of the governor; and, later on, on August 3rd, 1916,
I had a talk with Mr. McAdoo in which I frankly explained to
him that, while we respected and admired the feelings of
friendship and loyalty that tied Mr. Williams and Mr. Hamlin
to him, the independence and prestige of the Board made it
imperative that one of the other four appointive members
should be the next governor. At Mr. McAdoo's request, I
furnished him on the same day with a memorandum in which
I reiterated the arguments I had expressed in favor of the
adoption of a system of regular rotation in the offices of
governor and vice governor. Mr. Glass was fully advised of
this determination on the part of the members of the Board to
keep it independent. It was a struggle involving the future
of the Reserve System, and in it, I believe, the four appointive
members were not without his sympathy. This effort to
prevent the Reserve System from becoming, in effect, a
"Department of the Treasury" is described by Dr. Willis as
a " c a b a l " to secure my appointment as governor.
Temptation was great to ask the Board for permission to publish those
minutes here; it was felt, however, that such publication would constitute a
dangerous precedent which, in the interests of the Board, should be avoided.
1

446

THE FEDERAL RESERVE SYSTEM

Senator Glass, in Chapter X V of his Adventure, makes some
very glowing remarks about the great independence enjoyed
by the Board. As an illustration, he cites the case of a man
whom a President wished to appoint to a prominent position
in a reserve bank, and who was rejected by the Board. It is
to be assumed that he refers to President Harding's unfortunate promise of the position of Federal reserve agent to a
certain gentleman. Under the law, this office is filled, however, not by the President, but by the Reserve Board. Moreover, at the time, no vacancy existed. Senator Glass seems
to overlook, or perhaps he never knew, that a member of the
Reserve Board received a most sarcastic letter from the
President about this incident; and that when in August 1922
the time came to reappoint the governor whose painful duty
it had been not to follow the President's recommendation,
the President did not reappoint him.
It is dangerous for the public to be inveigled into the belief
that fearless members of the Reserve Board can rely on being
protected. That the reverse, unfortunately, is the fact is
shown by the case of the governor just cited. True enough,
there was opposition to the governor's reappointment on the
part of senators representing agricultural sections, whose
unreasonable demands the governor had found himself in
duty bound to oppose; and there was resentment on account
of the sufferings of the deflation period, for which responsibility, if any, rested on the Treasury rather than on the
Reserve Board. But the President did not make the fight for
the governor which, for the sake of the prestige of the Reserve
System, he should have made, and which he might have won. 1
1 As vice president of the Federal Reserve Board's Advisory Council, and as
a member of a special committee appointed for that purpose, as well as individually, I saw President Harding several times and tried in vain to impress upon
him the irreparable damage that might be done to the Reserve System if a
governor of the Board, who had performed his duties faithfully and courageously and who had served the country at great personal sacrifice, were driven
from office; if the Federal Reserve A c t were amended so as to eliminate the

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447

An account of the circumstances surrounding my own
withdrawal from the Federal Reserve Board may serve
further to illustrate how insecure is the position of members
of the Board who in the exercise of their sworn duty find it
necessary to antagonize persons of powerful political influence.
For reasons easily understood I prefer to abstain from elaborating the case. Suffice it to state that it was not—as is
generally assumed—my German birth that was the real
cause of my withdrawal. While we were at war that phase of
the question was only used as a blind by a senator opposed to
my reappointment. The real cause of the Senator's ire lay in
clause under which at least two members were to be "experienced in banking
or finance"; and if, instead, the Board's membership were increased from seven
to eight with a proviso that the additional member should represent the farming
interests. This was, however, exactly what occurred. A so-called " d i r t
f a r m e r " was appointed as an additional Board member while in the place of
Governor Harding, who was not reappointed, the President nominated and
appointed as governor Mr. Crissinger, whom previously he had appointed
Comptroller of the Currency. Mr. Crissinger was a lawyer by training; his
banking experience had been gained largely through his connection with a
banking institution in Marion, Ohio. He had had but little training in American commercial banking and none in international finance. There was no
objection to the appointment of a farmer to membership on the Board. On the
contrary, nothing could prove more efficacious in destroying misconceptions on
the part of the agricultural classes concerning the functioning and the powers
and duties of the System than the inclusion in the Board of a member of their
own profession. It was a matter of deep concern, however, that, while on President Wilson's first list of five appointive members there had been two and at one
time three bankers, there did not remain, under President Harding, a single
banking expert among the appointive members of the Board. This was all the
more deplorable because it came about at a juncture when America, now the
gold pivot of the world, was called upon to play a leading role in the restoration
of credit and exchange stability in all parts of the globe. In those years, pregnant with grave opportunities and grave responsibilities, the Board, like a
parliament with too many factions, was incapable of exercising a strong and adequate leadership. If the Reserve System rose to its task in a manner that fills
every American with pride, it was because the reserve banks themselves were
capable of producing gifted personalities and standard bearers around whom they
could rally. Happily, conditions have since been remedied by the appointment
of Governor R o y A . Young, ex-Governor of the Federal Reserve Bank of Minneapolis, to succeed Mr. Crissinger, after the latter's resignation.

448

THE FEDERAL RESERVE SYSTEM

the fact that the Board had found it necessary to antagonize
him in a fantastic scheme which, if enacted, would have seriously endangered the Federal Reserve System. It was for having opposed his plan and his "policies" that the Senator
effectively blocked my reappointment by threatening to raise
an issue which in the general interest I could not permit to
become the subject of a bitter public debate. 1
In his letter to Mr. Delano of November 13th, 1915, now
reprinted in full in Chapter Sixteen of his Adventure, Senator
Glass refers to a remark of mine to the effect that I would
have been ashamed if, at a certain period, the reserve banks
had earned their dividends. He also intimates that I stood
in the way of permitting reserve banks to engage in certain
open-market operations which might have enabled them to
earn their dividends. These charges were hardly fair at the
time, but a lack of understanding might have served as an
excuse for them. Moreover, a few days after Mr. Glass had
written this letter, he and I had a very long talk at my house,
in which I protested against some of his statements and gave
him full explanations concerning matters about which he
seemed to be misinformed or which he had misunderstood.
It seems strange, therefore, that the Senator should have
reprinted these charges at a time when the events of ten years
of operation had fully vindicated the policies followed by the
Board. It should be recalled that we were then in the period
immediately following the opening of the reserve banks. The
new reserve provision had brought about a very substantial
release of reserve money and, in addition, there had been heavy
imports of gold. The result was that an excessive state of
ease in the money market generally prevailed. In such
circumstances, it would have been a fatal, one might even say
1 Mr.
Glass was among those who tried to break down the Senator's
opposition to my reappointment.
For my letter of resignation to the President of M a y 27th, 1918, and his
reply of August 9th, 1918, see Appendix Thirty-Two and Appendix ThirtyThree respectively.

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449

a criminal, mistake to make money still easier by forcing
reserve funds into actual employment. T o have done so
would have stimulated inflation and frittered away our
reserve power before the real strain, which some of us foresaw,
had begun.
That this was my unmistakable meaning is plain if one does
not confine oneself to the reading of a single and disconnected
sentence quoted by Senator Glass from a speech delivered by
me in Minneapolis, on October 22nd, 1915, at a dinner following a governors' conference. The speech in question may
be found in Volume Two, page 307. It is not uninteresting,
because it also contains some remarks denouncing the "pyramiding of reserves," which Senator Glass has charged me with
having championed. M y remarks were directed primarily at
the governors themselves, because some of them had grown
discouraged and confused, as a result of the fact that some
members of the Board were pressing for earnings and the
Comptroller was pointing with particular pride to the fact
that in his home State the Federal Reserve Bank of Richmond
was earning a dividend. It was in order to keep these men in
line, and to prevent the System from embarking upon a policy
of inflation, that my remarks were made.
In several public speeches made in 1915 and 1916, which
may be found in Volume Two, I openly admonished the
reserve banks not to permit themselves to be stampeded into
a policy of inflation by surrendering to pressure from those
who, for political reasons, wished to see the efficiency of the
Reserve System demonstrated by premature declarations of
dividends. M y memorandum to the Board, reprinted as
Appendix Thirty-Four, dealt fully with the problem.
It is hard to explain how, in these circumstances, Mr. Glass
could write to Mr. Delano that, under my influence: "Federal
reserve banks have not tried* to earn expenses. Quite the
contrary, they have tried not to earn expenses; to my knowledge they have intrigued to this end"1
1

Italics are mine—Author.

450

THE FEDERAL RESERVE SYSTEM

It seems humorous for Senator Glass to depict me as an
opponent of open-market operations. Anyone familiar with
the inside history of the Reserve System knows that, for
many years, I was the outstanding champion of these operations, often in opposition to the majority of my colleagues on
the Board; indeed, I continued to preach the gospel of openmarket operations even after my membership on the Board
had ceased. If any evidence to this effect is required, it is
only necessary to refer to an address which I delivered at the
annual meeting of the American Acceptance Council on
January 19th, 1923. This address may be found in Volume
Two, page 819.
Senator Glass says: "Under Mr. Warburg's persistent leadership the Board had failed to put into operation mandatory
provisions of the Act which were intended to enable the
Federal reserve banks to earn expenses." This charge may
refer to my opposition to a plan of plunging the Reserve
System into the buying, in the open market, of bills, to be
purchased from corporations, firms, or individuals direct,
unguaranteed by a banking endorsement or acceptance, and
involving, therefore, a commercial risk and political dangers
which I believed the System must avoid at all hazards. As
to that, I have not changed my convictions and I am quite
confident that every conservative business man and banker
who has the future of the System at heart will agree with my
point of view. 1
1 Fourteen years of actual operation have brought convincing proof that,
Dr. Willis to the contrary notwithstanding, it is not necessary for the Reserve
System to deal directly with the public in order to secure earnings, if that be
the objective, or in order to establish itself as a dominant factor in the open
market.
A s to the charges made in Mr. Glass's letter of November 13th, 1915, it
may be interesting to quote the following passages from his speech, already
referred to, of September 7th, 1916. Answering the ridiculous assertions made
by some members of the Republican side that the Federal Reserve System had
cost the government more than one and a half million dollars, he said:

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451

It is significant, however, that at the time charges of this
character—i. e., that I was blocking the reserve banks for the
purpose of proving the failure of the Federal Reserve Plan
in order to clear the way for a central bank, or that I was
unwilling to permit the reserve banks to make investments,
because I was anxious to shield the big banks—were carried
not only into the halls of Congress, but also into the White
House, A member of President Wilson's intimate circle, who
had heard them discussed in the President's presence, asked
me about them. After I had explained the actual facts to
him, he urged me to seek an interview with the President
"Suppose it were true that all the banks are not earning dividends. Have
gentlemen such a radical misconception of the real purpose of the Federal
Reserve System as to imagine that its primary object was to earn dividends?
T h a t was not it at all. I t was established to conserve the banking facilities
of the United States; to constitute a great reserve force; to keep in poise the
banking and currency interest of the nation. T h e only Republican member of
the Federal Reserve Board, Mr. Paul M. Warburg, a banker of international
fame, speaking to this point in Minneapolis not long ago, said:
'Earning capacity must never be considered the test of the efficiency of
Federal reserve banks. Personally I should have felt heartily ashamed had
all our banks, considering the circumstances under which they began operations, earned their dividends in the past year. Such an earning, with all it
implied, would have been a proof that they had completely misunderstood
their proper functions and obligations/
(Applause on the Democratic side.)
" W o u l d gentlemen who criticize the Federal Reserve System on this score
have the reserve banks make a campaign for dividends when member banks,
in consequence of the reduction of reserves by the Federal Reserve Act, are
swollen with funds and credit? Would they have them do this merely to be
able to say they had earned dividends? I will tell you why the reserve banks
are not earning large dividends. It is because there are $2,076,000,000 of
reserves in national banks, which is #801,000,000 more than the legal requirements."
(Applause on the Democratic side.)
I t thus appears that while Mr. Glass at the time he wrote his letter to M r .
Delano did " n o t agree as to the economics" of my views, he did accept them
ten months later. It is all the more incomprehensible that he should have
seen fit to republish this letter with the charges and innuendos he had since
learned, and publicly acknowledged, to have been unwarranted.

452

THE FEDERAL RESERVE SYSTEM

because, as he said, the President had been worried by the
stories told about me. The President gave me the desired
appointment (June, 1916); and though I sensed that his mind
was gravely occupied with the momentous problems then
before him, he gave me his full attention during an interview
that must have extended over twenty minutes. His easy grasp
of the problem made a lasting impression upon me. We had
not proceeded very far before I felt satisfied that, whatever misconceptions might have existed, he now fully appreciated the
motives that were prompting the majority of the Reserve
Board in fashioning the policies of the Reserve System. He
permitted me also to avail myself of the opportunity to
present to him the views entertained by some of us concerning the desirability of simplifying the administrative
problems of the Reserve System by a moderate reduction in
the number of the reserve banks.
T o this proposal, however, the President would not agree.
Conceding that, from the point of view of efficiency, the
System might profit if simplified as suggested, he believed it of
greater importance that it should preserve a larger number of
points of contact. Needless to say, I tried to show that the
desired contacts could be secured with equal success by the
establishment of branches. The President held, however, to
the view that, in this regard, branches would not be so effective
as independent reserve banks and, within the limited time
that had been given me and which, under the existing conditions, was all that I had any right to claim, it was not
possible to pursue the argument any further.
I left the White House, however, with the confident feeling
that no doubt remained in the President's mind with regard
to the sincerity of my motives and the honesty of my convictions. It was natural that the President, in this question,
could not disregard the political considerations, while it was
my duty to approach the problem from a non-partisan and
non-political point of view, with the sole thought in mind of

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453

what the best interests of the Reserve System, that is, the
interests of the country, as a whole, required.
In view of Senator Glass's statement that the President
asked him whether it was not time for him " t o reorganize the
Board," it is interesting to chronicle that when, finally, the
President did "reorganize" it on August ioth, 1916, Mr.
Harding was made the governor, and I became the vice governor of the Board. We had been plain members until then.
While the appointive members, fighting for the independence
of the Board, were greatly cheered by the President's at least
partial recognition of their views, they were much distressed
to find that, in order to save appearances for the governor, the
vice governor, Mr. Delano, had been sacrificed. When I
expressed my unwillingness to take his place, Mr. Delano
showed his rare character and superb devotion by completely
disregarding his own position; he insisted that it was for the
best interests of the System gracefully to accept the White
House decision and not to incur the risk of irritating the
President by any attempt to persuade him to change his
selections. Mr. Delano and Mr. Hamlin went back to the
ranks like true soldiers; they took their seats as plain members
in a spirit of undiminished zest and unexcelled loyalty to the
Board's work. Force of circumstances, creating a dual
allegiance for some members of the Board, had placed them
in a perplexing and unenviable position which inevitably had
to lead to an open conflict if the Board's independence was to
be preserved. It is a pleasure to state, however, that these
differences of the initial years did not in the end affect the
personal relations between members. They learned to respect
their colleagues' opinions, even where they differed, and friendships were formed which grew warmer with every succeeding
year and which have endured.1
1 Mr. Delano withdrew from the Board in July, 1918, two years before the
expiration of his term, in order to join the A r m y . He went to France and
took a prominent part in the running of the sector of the French railway
system which was turned over to the United States.

454

THE FEDERAL RESERVE SYSTEM

I wrote to the President on August 14th, 1916, accepting the
appointment as vice governor and expressing my thanks for
his confidence in me as shown by the designation.
A t the same time, I expressed the hope that some day he
might see his way clear to adopt the principle of automatic,
instead of selective, rotation in dealing with the Board's
governorship and vice-governorship. I added that I would
deem it a great privilege if, at some time in the future, when
the heavy burdens then resting on his shoulders were removed,
I might be permitted to discuss this problem with him. The
President answered very graciously that he would be glad to
confer with me about the matter; but that, in the troublesome
conditions then prevailing, this seemed to him, for the time
being at least, a luxury which he would have to deny himself.
It need hardly be explained that the opportunity for a further
discussion of the subject never offered itself.
The war clouds threatening our sky grew darker and darker,
and soon they broke. Problems that had seemed all-important
now dwindled into insignificance. Differences were submerged
and forgotten. We shook hands and turned with a united
will to meet the great task that lay before us.
In this chapter it has been necessary to deal with ephemeral
personal questions to a much larger extent than is agreeable
to a writer who prefers to treat his subject from an impersonal
and detached point of view. After Dr. Willis in 1923 and
Senator Glass in 1926 had lifted, however, a corner of the veil
from events concerning which, in the interests of the Federal
Reserve System, the four members of the Board involved had
remained silent for thirteen years, it became imperative to
raise it further so that the real facts might be known and the
story freed from the half-truths and perversions by which it
had been clouded. Y e t it should be stated that for the mere
purpose of refuting false charges the unenviable task of relating
and elaborating these incidents would not have been undertaken. The facts recited in this chapter have been presented

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455

because they throw an instructive light upon the trying conditions in which Federal Reserve Board members serve their
country. Without a fair knowledge of these conditions neither
the grave dangers menacing the future of the Reserve System,
nor the nature of the remedies to be sought, can be adequately
understood.

CHAPTER

XII

LOOKING FORWARD
The recommendations contained in this chapter were formulated
in the spring of 1927, substantially in the form in which they are
here presented. Since then the Federal Reserve System passed
through two trying years, in which a wave of mad speculation in
stocks engulfed the entire country, ending in the fateful collapse
of brokers' loans and stock prices in the crash of October-November, 1929. When the catastrophe took place, this book had already
reached the page-proof stage, and it was deemed impracticable,
therefore, to attempt to recast it, and particularly this chapter,
so as to take account of recent occurrences. Moreover, the
recommendations made in this chapter deal largely with structural
problems of the Reserve System, and it appeared desirable not to
permit them to become clouded by the consideration of questions
of an essentially ephemeral character. It seemed profitable,
however, to review our suggestions in the light of the experiences
gained in these two years, and with this end in view, a postscriptum containing a brief discussion of this episode has been
added. It will be found as Addendum II (Volume One, pages 501
to 517), following Addendum I, which deals with the Chicago rate
controversy of the summer of 1927.

O T H friends and enemies of the Federal Reserve System
will agree that, speaking by and large, it has been functioning admirably and that, in some respects, it has surpassed all expectations. The surprising rapidity with which it
attained a position of unequalled strength and a key position
among all nations, the ease with which it handles its gigantic
daily transactions, and the confident assurance of safety
it gives the country, make it the marvel and envy of the

456

LOOKING FORWARD

457

rest of the world. But when all this is said, the fact remains
that the more precious our treasure, the more imperative it is
for us to safeguard it against deterioration and decay.
It is from this point of view that it is all-important that we
conscientiously inquire into the Reserve System's state of
health, that we face frankly and treat boldly any menacing
germs of disease that we may find, instead of ignoring them
or denying their existence.
We may forego dealing with the smaller defects to which
attention has been drawn; they are likely to find their own
cure in due time. Some major aspects, however, in which
the Reserve System has proved defective should be discussed
at length.
Turning our attention first to the technical side of the
problem, we must state as one of the System's most serious
shortcomings its failure to create important discount markets
outside of New York City and, as a corollary, its failure to
lessen the congestion of the country's unemployed funds on the
New York Stock Exchange.
The concentration of the country's money on the New York
Stock Exchange is more pronounced to-day than ever before.
As has been repeatedly stated on earlier occasions, the
excessive concentration of the country's fluid money in the
New York market could have been decreased by the adoption
of a term-settlement plan for at least some portion of New
York's stock exchange transactions. If such a system had
been developed, a substantial portion of the billions of dollars
now employed on the stock exchange would have been invested in fortnightly loans, instead of being put out " o n call;"
and "call money" thus might have been encouraged to seek
a more active employment in the discount markets. The
present condition is fraught with grave dangers for the banks,
as well as for the stock exchange itself. It is impossible to
believe that a country excelling in business acumen will
permanently submit to the hazards of a system that per-

458

THE FEDERAL RESERVE SYSTEM

petuates the wastes and risks involved in carrying a structure
of many billions of dollars of loans callable and renewable
from day to day. While the Reserve System is not directly
connected with, nor responsible for, the operations of the stock
exchange, it could not be unaffected by a tottering of this
Colossus that keeps on growing from year to year. For if
disaster should overcome the exchange, the banks would be
involved, and the banks are the wards of the Reserve System.
Moreover, stock-exchange operations absorb vast funds that
should properly flow into the bill market which, as the most
desirable meeting-ground for the lenders and borrowers of the
country's daily surplus funds, was designed to form the very
foundation of the Reserve System.
While, in view of the magnitude of the sums involved, a
remodelling of our present methods would needs have to be
undertaken with the greatest caution, and only very gradually,
as experience drawn from actual operation would permit, it is
highly desirable that carefully planned experiments in "termsettlement" trading should be undertaken at an early date
with a limited group of securities.
The reserve banks, the commercial banks of the country, the
stock exchange, and the people at large all have a very deep
interest in the ultimate establishment of a properly safeguarded
system of term settlements. An old sage said that " i t is difficult to legislate for prosperous people." It is small wonder,
therefore, that during these last years a majority of busy
stock-exchange members should have been adverse to any
far-reaching changes in their present customs. For those
looking farther ahead, however, it remains a matter of profound regret and concern, that a general apathy or lack
of leadership has permitted the problem to remain unsolved,
while the loan structure continued to mount, increasing
the magnitude of dangers and rendering it a more and more
difficult task to change existing methods. The Reserve System
cannot afford to stand still and permit the development of an

LOOKING FORWARD

459

adequate discount market to wait for the initiation by stockexchange authorities of needed corrective measures. Nor can
the System wait for voluntary remedial action on the part of
the banks, when experience has shown that, of their own free
will, they will not employ their funds in the bill market as
long as it is simpler, and at times more profitable, to invest
them in stock-exchange loans.
The country must have a wide and freely used bill market if
it is ever to enjoy as perfect a banking system as that to which
it is plainly entitled. If fourteen years of practical operation
under the Federal Reserve Act have not been able to evolve
such a market as an outgrowth of the banks' voluntary action,
for the reason that the hands of those willing to act in the
public interest are tied by those who take a narrower and more
selfish point of view, then, no matter how intensely one may
abhor "banking by law," a recommendation would seem
warranted to make it mandatory upon the banks to create a
bill market. This could be done by providing that any member bank investing its funds—directly or through correspondents—in call loans on a stock exchange should set aside an
amount equal to a given proportion of the funds so employed
and invest the amount so withheld in eligible acceptances or
loans thereon. In other words, against call loans on the stock
exchange, banks would carry a secondary reserve in the bill
market, a reserve, however, that would bear interest and could
be averaged over the year. 1 Similarly, member banks making
call loans on the stock exchange "for account of others' 5
would be required to withhold a given proportion of the funds
to be so loaned out, treating the amount so set aside as a
Permission " t o a v e r a g e " such a reserve over a year would enable the
member banks in times of increased demand, seasonal or otherwise, to sell a
portion of their bill holdings to the market or to the Federal reserve banks,
and to make good a shortage in their required reserve so incurred by carrying a
correspondingly larger amount of bills in periods when credit demand is usually
low.
1

460

THE FEDERAL RESERVE SYSTEM

balance to be invested by them in eligible acceptances or loans
thereon.1 In order to avoid any embarrassment that might
follow from the imposition of such a legal provision, the law
might stipulate only the maximum percentage that might be
required to be so invested, while the Reserve Board, in consultation with the reserve banks, might be given power to fix the
minimum at its own discretion. Thus, by the Board's setting
this minimum at a very modest percentage, a withdrawal of
funds from the stock exchange could be carried through quite
gradually without creating any commotion; and no greater
amounts would be withdrawn than the bill market in practical
operation would be capable of absorbing. Inasmuch as in
many parts of the country purchases of acceptances and loans
thereon could often be made in the districts where the banks
with the funds to be lent or invested are located, it may be
confidently assumed that some discount markets, larger or
smaller, as the case might be, would then develop outside of
New York. Money in larger volume might thus find employment in its home market, as the writers of the Federal Reserve
Act had in mind.
If this plan were carried into effect and if the Federal reserve
banks should continue normally to keep their buying rates for
short bankers' acceptances substantially lower than their
rates for the longer maturities, it would prove a profitable
practice for member banks to buy long bankers' acceptances
at the higher rate and sell them to the Federal reserve banks
at the lower rate, as these bills approached maturity and as the
member banks found it necessary to have recourse to the Federal Reserve System's credit facilities. A development along
these lines would materially increase the daily contact of the
Federal reserve banks with the member banks and the money
market.
1 This would involve the cooperation of the principal New Y o r k private
banking firms whose self-interest as well as public spirit, it is to be hoped, would
lead them to assist in carrying such a plan into effect.

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Members of Congress who are exercised, and justly so, over
the excessive accumulation of the country's fluid funds on the
New York Stock Exchange, might well ask themselves how
far they themselves are responsible for this condition. We
are not referring here again to the unfortunate results of the
Federal Reserve Act's effort to create too many independent
reserve centers, but wish only to point out that for over a
decade Congress has consistently sacrificed the bill market to
Treasury requirements. It is generally admitted that while
we were at war, and during the subsequent readjustment
period, this subordination of commercial to fiscal needs was
inevitable. But the point seems to have been reached long
since when the requirements of agriculture, commerce, and
business should exert the major influence in determining the
direction of the flow and the price of the country's money.
Banking funds that went into bills have, however, been subjected to the burden of the income tax, while bank money
going into short-term or long-term obligations of the United
States Government has been freed from that tax. As a consequence, government securities have preempted the place
which in the portfolios of the banks the commercial bill should
occupy, and instead of seeking to acquire large holdings of bills
eligible for rediscount with, or for sale to, the reserve banks,
member banks have come to rely primarily on their ability to
use for that purpose their own notes secured by government
securities.
Against expert advice Congress, several years ago, went to
the extreme of inserting a provision requiring foreign holders
of American bankers' acceptances to file an income tax return
for the income received from such bills. As was to be foreseen,
the United States Treasury has never been able, nor has it
ventured, so far as is known, to collect tangible sums under
this heading. But the unfortunate effect of the law has been
to prevent hundreds of millions of dollars of foreign money
from flowing into our bill market. In the spring session of

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THE FEDERAL RESERVE SYSTEM

1928, Congress amended the Revenue Act (Sec. 119) so as to
exempt at least the foreign central banks from this tax. It is
difficult to understand why the amendment was not drawn so
as to include all foreign holders. The government would not
have lost anything by giving up what it does not and cannot
collect, and if, instead of being deterred from doing so, foreign
banks had been encouraged to buy our dollar acceptances
liberally, our producers and consumers would have benefited
thereby. It is they who profit from lower open-market rates
for acceptances drawn to finance the shipment and exportation
of cotton, grains, oil, coffee, or manufactured articles, or for the
importation of coffee, tea, sugar, or rubber. Producers and
consumers would derive a still greater advantage, and our
entire banking structure would be greatly strengthened, if
acceptances, held not only by foreign but also by American
banks and corporations, were placed on an equal basis of tax
exemption with government securities.
If we contemplate the far-reaching effect that the granting
of the tax exemption here proposed would have in placing our
banking system on a sound basis, the amount that the Treasury
might thereby lose in tax receipts seems trivial. Figuring an
average interest rate on acceptances of 4 per cent and assuming
an average volume of acceptances outstanding of one and a
half billion dollars, the total tax involved would amount to
approximately six and a half million dollars per annum,
provided that all acceptances were held by American banks
and corporations. A t present, as is well known, about onehalf of the aggregate is held, however, by Federal reserve
banks and foreign central banks, neither of which pay the
income tax involved. It is safe to estimate, therefore, that
the risk of loss involved for the Treasury from the adoption
of this plan would at present not exceed three to four million
dollars a year. 1
1 If it had not been for the emergency created by the W a r , it is safe to
assume that, as in the beginning, borrowings against government securities

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463

The point has been raised that the supply of American
bills might not be large enough to furnish an adequate basis
for a wide call-money market. But we must remember that,
even in the very remote eventuality that a large majority
of all speculative stocks were placed on the term-settlement list,
there would always remain, as in Europe, a very important
"on call" market for money secured by non-speculative
investments for which cash dealings would continue. The
bulk of the money now employed on the stock exchange, or as
much as it should reasonably require, should, as we envisage
it, remain there in the form of bi-weekly and call loans as the
second line of secondary reserves. The bill market would
be the main medium for the investment of bank funds serving
as the first line of secondary reserves. From these funds the
debit and credit balances arising between banks would be
adjusted from day to day, and between settlement days free
bank funds would flow primarily into this reservoir instead of
into the stock market. On settlement days increased demands
of the stock exchange would cause heavier drafts on the bill
would still be subjected by the reserve banks to a rediscount rate one-half
per cent higher than the corresponding rediscount rate for commercial paper
(according to the practice of many European central banks). T h e time seems
to be near at hand when this practice might be readopted by our reserve
banks. It might lead our bigger insti tutions to hold larger portfolios of eligible
bills and to prefer to meet extraordinary demands by disposing of their bill
holdings at the lower rate rather than to borrow at the higher one.
Some writers have made the ill-advised suggestion that member banks'
notes secured by stock-exchange collateral should be made eligible for rediscount
by Federal reserve banks and they have cited, in support of their recommendation, the practice of some European central banks in granting so-called " L o m bard loans." It may be well to remind these writers that the aggregate of such
" L o m b a r d loans," in some cases restricted to the collateral of government
bonds of the respective country, would range within about $50,000,000 each
for the Reichsbank, the Nederlands Bank, the National Bank of Belgium, the
Swedish Riksbank, and some $100,000,000 in the case of the Bank of France.
Bills secured by United States Government securities rediscounted with Federal
reserve banks frequently aggregate in excess of $600,000,000.
One shudders to think what would happen to the Federal Reserve System if
its doors were opened for the carrying of stock-exchange collateral.

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THE FEDERAL RESERVE SYSTEM

market while, conversely, decreased demands would tend to
increase the drift of money into the bill market, particularly so
if the tax exemption above recommended were granted. For
these purposes our present volume of acceptances of over one
and a half billion dollars would offer a very substantial basis;
but it may safely be assumed that an increased demand for
bills, as it would follow from the adoption of the proposals
here outlined, would fairly quickly further enlarge their volume.
The part played by the reserve banks in the development of
the American bill market has been admirable. They have
always stood ready to buy sound eligible American bankers'
acceptances and have given to these bills an unexcelled
standing in the world markets, so that to-day, outside of
our own reserve banks, foreign central banks are the largest
buyers of dollar acceptances. As an international instrument
of exchange the dollar acceptance has fully vindicated itself;
it has gained the very position for itself that some of us foresaw
and hoped for over twenty years ago.
As far as our foreign relations are concerned, a very satisfactory open market has thus developed, with the Federal reserve banks on the one side and the foreign investors on the
other, a market in which foreign central banks buy acceptances
or, according to their own needs, collect them at or before
maturity.
With us, on the other hand, the bankers' acceptance does not
occupy a similar position as the principal connecting link
between the Reserve System and the commercial banks. It
is easy to see why this is most unfortunate. Domestic openmarket operations, in the final analysis, mean a release
of reserve funds to the market, or a withdrawal of reserve
funds from the market, through a voluntary increase or
decrease of the investment load carried by the Reserve
System. These transactions are of vital importance; they are
indispensable for the proper functioning of the Reserve System
and for the proper protection of the country. It is a pre-

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465

requisite for such transactions, however, that the market
generally own in liberal quantities, and be, therefore, able to
sell, the type of investments the reserve banks are permitted
to buy and, conversely, that the market be ready at all times
to purchase freely the assets the reserve banks may wish to
sell. Bankers' and trade acceptances—"discounts," as Europe calls them,—constitute the most desirable means of
exchange between central banks and the market. Since our
banks buy or sell "discounts" for their own account only in an
entirely inadequate volume, while they are liberal investors
and traders in government securities, it is clear why under
present conditions government securities play so important a
part in the transactions between the Federal Reserve System
and the banks and why, by the same token, the open-market
rate for bankers' acceptances has not been able to gain an
adequate influence over the money market.
This is not the place to elaborate the thesis that a country
is better served by a system built upon the bill market with its
facilities to direct unemployed funds into the marts of commerce and trade, than by one which steers these funds most
largely into the stock exchange. (Several of the articles
reprinted in Volume Two deal with this topic at length.)
Suffice it to say here that under our present system the most
natural contact between the Reserve System and the market
and the healthiest basis for the System's operations is lost.1
1 For a decade after the conclusion of the War we lived in an era in which
gold had lost its position as the dictator of the policies of central banks. In
the Old World most countries had cut the hawser that tied them to the yellow
metal, because they had lost the power to command or to hold it, while we,
in the United States, had accumulated so much more gold than we required
that it had ceased to exercise any restraining or regulative influence. With
the gold compass gone, the world began to look about for another instrument of
direction, and "price levels" became the new star by which to guide the policies of central banks. Leaders among European economists, as a consequence,
became converts to the gospel of " managed currencies," while here, where by
a combination of fortunate circumstances it had been possible to keep the index
of prices fairly level, extremists went so far as to seriously recommend an

466

THE FEDERAL RESERVE SYSTEM

The need of the reserve banks to buy or sell substantial
amounts of government securities for the sake of strengthening
or loosening the System's control over the money market, and
amendment to the Federal Reserve A c t which would make it mandatory for
the reserve banks to fashion their discount and open-market policies according
to the requirements of price stability. (For resolution of the Merchants'
Association of M a y 24th, 1927, opposing such amendment, see Appendix
Thirty-Five).
We are now entering another era of gold psychology. In one form or
another, leading countries in the Old World have once more adopted the gold
standard, and once more the tug of war for gold is taking place between central
banks just as during the period before the Great War. It will be a fortunate
development for the United States to be forced again to give more heed to the
effect of gold movements on our own reserve position. For the Reserve System
will be less subject to the charge of carrying on arbitrary policies and less
exposed to the demands and schemes of dreamers, theorists, and demagogues,
when once more it is clearly recognized all over the world that the first d u t y of a
central bank is to preserve its country's gold standard, and that discount
policies must first, and almost automatically, be directed towards that purpose,
with stability of price levels and kindred aims as ends to be achieved only
incidentally, in so far as the attainment of the first aim permits.
Because the Federal Reserve Act stipulates minimum gold reserves of 40 per
cent and 35 per cent against Federal reserve note issues and deposits respec^
tively, the man in the street is inclined to consider any reserves in excess of these
percentages as signs of strength. He overlooks, however, the fact that these percentages indicate not the norm, but the danger marks, and that reserves must find
their normal levels far above the minima stipulated by the Act. Moreover, in
writing these percentages into the law (against the determined opposition of
those objecting to any specified reserve percentages on the ground that it would
tend to " m a k e the people's money dearer to the masses") European pre-war
standards were generally followed. We must be mindful, however, of the fact
that in those days gold was carried in the pockets of the people. T h e tenshilling and pound sterling gold coins, the ten- and twenty-franc pieces, or the
ten- and twenty-mark pieces, etc. in actual circulation formed secondary gold
reserves of vast importance for central banks to fall back upon.
To-day
practically all the gold has been massed in the central banks. The secondary
reserves of circulating gold currencies no longer exist in the Old World,
while at the same time the financial structures resting on the central banks'
gold holdings have greatly increased in weight and size. Hence orthodox prewar theory concerning gold reserves ought to be revised and it should be realized
that under present conditions for countries able to do so, it would be safer to
place the minima on a substantially higher level. Furthermore, many central
banks are treating to-day their balances in England and in the United States,

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467

the obnoxious incentive to invest in these securities for the
sake of obtaining larger earnings, could be greatly lessened if,
at the proper time, the Federal Reserve Act could be amended
so as to permit the reserve banks to establish an immediate
credit check collection system, subject to an interest charge
covering the check's trip to its place of payment (without
charging for the time to be allowed for the return trip of the
funds to be remitted), the interest to be charged at a rate to be
published from time to time. In earlier chapters, we have
already dwelt upon the anomaly of the present " deferred
credit" system which, in spite of its excellent service, constitutes another serious defect of the Reserve System.
If the reserve banks operated a "deferred credit" as well as
an "immediate credit" check collection system, the official
rate of interest which would be charged for collections from
time to time would prove to be a very instructive gauge of the
money market, and an additional means of controlling it. If
the rate were too high, banks generally would be led to use the
deferred credit system; if it were too low, a moderate increase
in the rate would at once be felt all over the country. The
danger that the free use of an immediate credit system might
weaken the strength of the Reserve System and cause inflation could be safeguarded against by permitting the Board
in its discretion to increase correspondingly the member
banks' "required reserves" against time deposits. There is no
reason, however, to doubt that the reserve banks' aggregate
and their portfolios of prime bankers' bills payable in these countries, as part
of their gold reserve. These balances and bills may be converted into earmarked gold at any time, or gold may be actually demanded against them for
shipment. It is estimated that in excess of a billion and a half dollars of
foreign reserve money is thus invested in the United States. While we have
means to counteract or offset an embarrassing demand for gold made upon us
from abroad, yet it behooves us to remain conscious of the fact that to a very
large extent we are to-day a reserve bank for the entire world and that a psychological minimum of 60 per cent for our gold reserves would be more in keeping
with present circumstances than the 35 per cent or 40 per cent stipulated by the
Act.

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THE FEDERAL RESERVE SYSTEM

investments in checks for collection could be held within safe
bounds by an intelligent use of the rate of interest to be charged, and by the adoption of regulations imposing certain
limitations for the protection of the reserve banks against
abuse. The system as here proposed would establish a more
constant, a more direct and intimate contact with the banks
of the country, and the control to be exercised by the reserve
banks would, as a consequence, become a steadier and more
effective one than it is at present.1
But it is not only through their actual investment activities—
no matter whether they result from rediscounts, collections, or
open-market transactions—that well-organized and capably
administered central banks exercise their sway. The indirect
influence of their operations is of equal importance. In many
countries of Europe the effect of a change in a central bank's
discount rate is very materially increased by the practice of
the leading commercial banks of keeping the rates of interest
they allow and charge in a fixed relationship to the central
bank's official discount rate. As a consequence, a lowering or
raising of that rate immediately affects not only the borrowing
banks but the rate structure of the entire country. The
psychological effect of a central bank's change of policy
is thus greatly enhanced. It is obvious that the stronger this
psychological effect the more moderate the increase or
decrease of the official rate normally need be. Conversely, if
a central bank's discount rate, for one reason or another,
1 In order not to divert attention from the main proposals offered in this
chapter we refrain from dealing with another major defect of the Federal
Reserve System, viz. its failure to absorb the inelastic national bank circulation.
Our own thoughts and suggestions were expressed in the article " T h e OwenGlass B i l l " (see quotations on page 109, Chapter V I of this book, and the
argument in full in Volume T w o , pp. 260-264 and pp. 295-300); suffice it to
say here that if the Federal Reserve A c t had provided for a bolder plan for
the immediate conversion of the national bank notes into Federal Reserve
circulation, the question of earnings of reserve banks would have been solved
from the beginning and the strategic position of the reserve banks would have
been greatly strengthened.

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469

exercises only an unimportant influence, it must be advanced
or lowered much more drastically in order to make itself felt if,
indeed, in such circumstances it can adequately assert itself at
all.
It is to be regretted that after having adopted the commendable practice of tieing their rate structure to their Federal reserve bank's discount rate, 1 our commercial banks should have
decided once more to abandon this method and that, apparently, they were encouraged to do so by the Federal reserve banks
themselves. This unfortunate development can be explained
only by the assumption that the Federal reserve banks themselves had become apprehensive lest a closer interrelation of
commercial and official bank rates, which would tend to intensify the effect of a change in the official rates, might render
it still more difficult to secure a prompt agreement and fearless
action on the part of the many persons involved in passing
upon the question of rate changes. The commercial banks,
on the other hand, we may assume, were reluctant to bind their
own rate structure to the fluctuation of a discount rate which,
for political reasons, or from ignorance, or inability to agree
upon any action—conceivably at least—might be established
upon a level not in keeping with actually existing economic and
financial conditions.2
If the apprehensions here outlined were the guiding motives
of the Federal reserve and commercial banks respectively,
then these fears, unfortunately, were well founded. It
cannot be denied that, as the System is organized and as its
management is constituted to-day, it would hardly be safe to
clothe it with additional powers or burden its actions with
wider responsibilities.
1 Arrangements of this type are commonly made by a resolution passed by
the Clearing House binding its members to allow interest on deposits at a rate
of 2 to 2^" per cent below the " b a n k " rate and to charge interest for overdrafts
at a rate of i to i y i per cent above the " b a n k " rate.
2 The Federal Reserve System's record of the first semester of 1929 has since
convincingly illustrated the point.

470

THE FEDERAL RESERVE SYSTEM

Hence, an exasperating dilemma seems to face those ambitious to secure for the United States the highly perfected
banking system to which, as the largest financial power, the
country is clearly entitled. For our own safety, and that of
the whole world, it is imperative that in our Federal Reserve
System we should command an organization of the highest
efficiency and power—yet it cannot be denied that the difficulties of properly managing such an organization are
immense and that the more powerful it be, the graver the
consequences of mistakes made in its use.
There is no central bank in the world, however, the management of which is blunder-proof. But would occasional errors
lead any country of financial importance to wish to forego
the benefits derived every day in the year from the operations
of its central bank, or cause it wittingly to weaken the central
system's invaluable powers of protection? If there should be
overwhelming evidence of blunders committed in its operation,
should not the remedy be sought in improving the management
rather than in crippling the System?
It is probably true that, on the whole, our own central banking problem is more difficult than that of any other nation in
the world. The vast expanse of our country; the immensity
and diversity of its resources and interests; the complexities of
our political life and of a decentralized system of thousands
of individual banks; the existence of stock exchanges and industries of overtowering strength, standing outside the System's immediate control and brooking no interference, all
these combine to complicate the difficult task of developing
and administering the Federal Reserve System in a manner
that would enable it to render the fullest measure of service of which, within the limits of its proper functions, it is
capable.
That a central banking system in the United States cannot be
endowed with as full a measure of powers and functions as
is enjoyed by the central banks of Europe, and that our political

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471

and social conditions force us to accept a vastly more complicated system of administration than that governing similar
institutions in the Old World., must be accepted as an uncontrovertible fact. Hence we must resign ourselves to having a
system of more restricted powers and weaker organic structure
grappling with problems and responsibilities immeasurably
weightier than those of other central banks.
These difficulties have led some timorous minds to favor a
Federal Reserve System without a will; a system of gigantic
strength without initiative or power; an emergency system
that, instead of leading, would more or less automatically
follow the wishes and requirements of business and finance.
Such a system would inevitably lead either to Wall Street
domination or chaos, with complete political control as the
ultimate outcome in both eventualities. It would be better
for the country to have no Federal Reserve System at all than
such a system.
A Federal Reserve System that is fit to survive and worth
preserving must have a will of its own and power, within
its legal limitations, to assert it:. But this will must spring, not
from the urge to dictate or dominate, not from a desire to meet
political exigencies, or the wishes of any particular class, but
from a thorough and unbiased search of what the best interests
of the country as a whole require. This in itself is a task of
infinite difficulty requiring the best minds and bravest souls
the country can produce. Is the Federal Reserve System, as
at present designed, able to render service in its organization
attractive to such men? And furthermore, the duty of fashioning the Federal Reserve System's policy having been lodged
in many minds and many places, does the System, as at present
designed, possess a machinery that, assuming the highest
intelligence and motives in all parties concerned, can possibly
produce conclusions and actions as wise and as prompt as are
essential for the country's safety and welfare?
It is to these questions, which touch upon the most serious

472

THE FEDERAL RESERVE SYSTEM

defect of the Federal Reserve System, that we now propose to
address ourselves.
It ought to be distinctly understood, however, that the
adoption of most of the recommendations made in this first
part of the chapter, in so far as they involve the vesting of
additional powers in the Board, could not be hazarded except
as a part of a larger plan involving some such changes in the
organic structure of the System as are now to be discussed.1

One of the striking points of strength of the Reserve System
lies in its weakness. This paradox means that the strength
of a system of regional banks consists in engendering in the
minds of the people a comfortable feeling of protection against
the dangers of an autocratic central administration. In this
respect the Reserve System is to be preferred to that which
was provided by the National Reserve Association Plan and
my "United Reserve B a n k " proposal. There is no doubt
that both, if enacted, would have offered easier and more
tempting targets for political attacks. This political superiority of the Reserve System cannot be too highly appraised,
although it is, at the same time, the System's greatest weakness.
In making the Reserve Board the link that was to "join
together" what Congress had gone to such pains to " p u t
asunder," the law placed upon the Reserve Board a task the
difficulties of which, it seems, are not sufficiently appreciated.
Moreover, the Act, as finally agreed upon, constituted a
compromise between the widely opposing views prevailing
in the Senate and the House—views which resulted in the
adoption of a terminology sufficiently indefinite to enable both
sides to cherish the belief that, in the administration of the law,
E v e n if these changes were adopted, an "immediate c r e d i t " check collection plan should not be attempted until a record of several years has proved
the Board capable of dealing with the rediscount rate problem promptly,
efficiently, and solely on economic grounds.
1

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473

their conceptions would ultimately prevail. As a consequence,
the Reserve Board, when undertaking the responsibility for
the operation of the System, accepted a trusteeship exposing
it to attacks from both testators and co-legatees. Obviously the
guiding thought in the minds of some of the testators was to
confer far-reaching powers of control upon the "Reserve
Board, as the instrumentality of the government," while it
seems to have been the aim of other parties joining in the will
to stress the autonomy of the reserve banks and to give them
a large measure of independence. That in these circumstances
the legatees cannot always agree as to the proper interpretation
of so inconsistent a document was shown by the clash that
occurred in August, 1927, between the Reserve Board and the
Federal Reserve Bank of Chicago. The ambiguity of the law
was so glaringly illustrated by that controversy over the meaning of the provision in the Act relating to the establishment of
the discount rates of the reserve banks that it was thought
desirable to deal with the incident rather fully in a postscriptum
which appears as Addendum 1. Suffice it to state here that,
although the clause in the law relating to this fundamental
power leaves the question as to the authority of the Reserve
Board and the district banks unsettled and subject to amazingly divergent opinions on the part of the so-called "framers
of the A c t , " the best practicable course in the author's judgment is to leave the relevant clause of the Act just as it stands
to-day. Any attempt to place the power unequivocally
and exclusively in the hands of either the Reserve Board or the
reserve banks would only aggravate the difficulties of the
situation. Absolute power in the hands of the Board would
make the Reserve System a politically controlled central bank,
which would be unacceptable to the majority of the people and
abhorrent to the conservative elements of both political parties.
On the other hand, undisputed autonomy of the reserve banks
in the question of rate making would render a concerted dis-

474

THE FEDERAL RESERVE SYSTEM

count policy of the Reserve System an impossibility, and
reduce the Board to a position of impotence.
A regional system that is to operate successfully must
remain a balanced system. That is to say, the Reserve System must be under the leadership and direction of the Reserve
Board; but with a generalship on the part of the Board which
does not rest on the assertion and bureaucratic or dictatorial
exertion of its legal powers but on the reserve banks' full
confidence in the competence, fairness, and impartiality of the
Board, and on the clear recognition by the reserve banks of a
coordinating leadership by a Board seeking their harmonious
cooperation as indispensable to the successful and undisturbed
functioning of the System. For the enduring success of the
System, a Board enjoying the unreserved confidence of the
reserve banks is thus a fundamental prerequisite, a Board
whose leadership the reserve banks will accept voluntarily, as a
matter of self-interest, instead of submitting to it grudgingly,
or of openly resisting it in defense of their legal rights.
The essential question then, is: What can be done to preserve or strengthen the authority and competence of the
Board? Perhaps, in order to answer this question intelligently, one might also put it inversely by asking: What is there
that stands in the way of the development to the fullest possible extent of the Board's prestige and competence?
In all discussions preceding the passage of the Federal
Reserve Act it was stressed as one of the fundamental principles that, so far as possible, the System should be kept free
from political control. It was stated as one of the foremost
duties of the Board that, as a judicial body, it should perform
its functions independently of political considerations. In
view of the fact that the reserve banks were to be fiscal agents
of the government, and in keeping with the general sentiment
of the country that a body exercising functions of such national
importance should operate under a certain measure of government control, it was inevitable and proper that the Treasury,

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475

in some way, should be represented on the Reserve Board.
Yet, business men and economists are likely to agree that it
was a mistake to make the Secretary of the Treasury the
chairman of the Reserve Board.
The history of the last decade has furnished impressive
illustrations of the dangerous consequences following from the
subordination of the policies of central banks to the domination
of finance ministries. While it is fully conceded that, under
the stress of war, central banks cannot hope to preserve their
political independence, it remains true all the same that, in
times of peace, every effort should be made to keep central
banking and government finance separate. Secretaries of the
Treasury, like ministers of finance or secretaries of the
exchequer in other countries, are partisan members of an
administration in power. Dominant political parties have
always been known to pray and work for "good times" and
"prosperity" during the period in which they are in power.
The Reserve System, on the other hand, must be willing
to check a wave of unhealthy over-speculation threatening
to disturb the stability of prices and credit, and bound ultimately to inflict severe losses upon the country. In a timely grasp of dangerous conditions of this type and in a fearless
handling of situations as they arise lies the success or failure
of the Reserve System. It is impossible to hope that a party
administration would be found willing to undertake the painful
and ungrateful task of temporarily checking "prosperity"—
even though it were only sham prosperity—for the purpose of
preventing a grave disaster threatening to occur in the future.
Conditions such as prevailed in 1919 illustrate what we have
in mind, and such conditions are bound to recur from time to
time and lead to violent economic disturbances and the consequent threat of increased political interference and encroachment. 1 If the System is to steer an even course, one which
1 T h e stock-exchange panic of 1929 has further illustrated this point since
the above was written (see Addendum II).

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THE FEDERAL RESERVE SYSTEM

the reserve banks will unhesitatingly follow, the tiller ought to
be in the hands of a politically independent Reserve Board.
The fact that the Secretary of the Treasury is chairman of
the Reserve Board gives him, however, in addition to the
prestige to which his office entitles him, a dominant position
in discussions of the Reserve Board's affairs, and as the prestige
and importance of his office increase, that of the governor
loses in importance, not only in the estimation of the public,
but also in that of his colleagues and the officers and directors
of the reserve banks. Moreover, as we have seen in preceding
chapters, the President's power to reappoint or dismiss members of the Board, and to make or unmake its governors and
vice governors, is one in the exercise of which he is, naturally,
largely guided by his Secretary of the Treasury, and one which
at times has made it doubly difficult for Board members to
maintain the independence of the Board against the subtle
influences of party politics. Fourteen years of actual operation,
moreover, have demonstrated the incontestable fact that the
Secretary of the Treasury cannot possibly find the time to
attend regularly the Board's prolonged meetings. The head
of our Treasury is in a position to appear at such meetings only
at rare intervals, when matters of particular importance are to
be decided, or when critical situations arise; and on such occasions he is hastily posted and frequently forced to act without
the benefit of such detailed knowledge as would result from
closer contact with the Board's affairs. It ought to be stated
emphatically, however, that all of this does not imply the
slightest criticism of any of the Secretaries of the Treasury
who, since the organization of the Reserve Board, have acted
as chairmen of the Board. In general, they have conscientiously tried their very best to meet justly the embarrassing requirements of their dual position. A political chairman
of a non-partisan Board is an incongruity imposing upon the
incumbent a well-nigh impossible task.
The influence of the Secretary of the Treasury is further

LOOKING FORWARD

477

enhanced by the ex officio membership of the Comptroller of
the Currency, who administers his own department as an
appointee of the Treasury and under its control. The unfortunate fact that the Conference Committee permitted the
Comptroller's office to be represented on the Board as a bureau
of the Treasury, instead of placing it under the authority of
the Reserve Board, has led at times to a grave undermining
of the Board's position. As the law stands at present, the
Board, including the Comptroller, may pursue one policy
with regard to the affairs of member banks, while the office
of the Comptroller may pursue another. One single member
of the Board is in a position to block progress where common
policies are involved. The Treasury and the Comptroller's
office represent two independent powers within the Board with
definite purposes of their own, thus weakening the Board's
authority and aggravating its difficulties in developing and
enforcing its own policy. Highly exasperating conditions
have not infrequently resulted from this unfortunate feature
of the law.
Careful observers have also noticed a tendency on the part
of political leaders to consider the Reserve System as an
instrumentality of the government. From the beginning,
achievements of the Reserve System in operation have been
hailed as accomplishments of the party in power, or of a Secretary of the Treasury. Some "administrations" have even
gone so far as to claim credit for the lowering of discount
rates, and Secretaries of the Treasury have spoken for the
Reserve Board as if the policy of the Board were a concern
of the President's Cabinet.
The future of the Reserve System depends very largely upon
the country's ability to secure for service on the Board men
of the highest type willing to make the sacrifices involved
in accepting membership. The importance, therefore, of
making the office attractive to such men need not be stressed.
Under the conditions just described, however, it is obvious

478

THE FEDERAL RESERVE SYSTEM

that to a large number of prominent citizens, admirably
suited for service on the Board, membership has not proved
tempting. Yet, the factor which more than any other has
lessened the willingness of such men to serve has been the
realization that a fearless and conscientious discharge of their
duties might expose them to the ire and vengeance of senators,
whose wishes they might be forced to disregard. It was in
order to elucidate the seriousness of this latter point that
some of the incidents in the careers of earlier members of the
Reserve Board have reluctantly been touched upon.
With a view to securing for the Federal Reserve System a
management that may include the best available talent of the
country, a management organically so constituted that it may
be possible for it to grasp and master the trying task of uniting
the twelve autonomous Federal reserve banks in harmonious
and efficient cooperation under a common plan, the following
recommendations are presented:
One. That the Board itself appoint its governor and
vice governor and that the Board be left free to adopt a system
of rotation in the office of governor by having every appointive
member serve during the last four years of his term, first, two
years as vice governor, and second, two years as governor.
This change would necessitate the creation of the position of an
executive secretary of the Board to act as the "permanent
undersecretary.''
Two. That the governor of the Board be its chairman;
the vice governor its vice chairman.
Three. That the Undersecretary of the Treasury, instead
of the Secretary of the Treasury, serve as ex officio member of
the Reserve Board. This officer should be better able than
the Secretary to find time to attend the meetings of the Board,
and the Undersecretary could well serve without acting as
chairman of the Reserve Board.
Four. That the office of the Comptroller of the Currency, in so far as it deals with the affairs of the member

LOOKING FORWARD

479

banks, be administered under the supervision, direction, and
control of the Federal Reserve Board. (It is an open question
whether it would not be better to remove the Comptroller
entirely from the Board. As in the case of the Secretary of
the Treasury, experience has shown that the heavy responsibilities of his own office render it practically impossible for the
Comptroller to attend the Board's meetings regularly and to
keep fully in touch with its intricate problems.)
Five. That a member of the Reserve Board, who has been
confirmed by the Senate at the time of his first nomination,
may be reappointed by the President without the President's
obligation to resubmit his name for a renewed confirmation by
the Senate. (It is, of course, realized how desperately small
are the chances of the acceptance of this proposal by the United
States Senate. It is submitted, however, on the strength of
its merit, as the author is convinced that there is nothing that
would more effectively increase the independence of the
appointive members, and render the position of a Reserve
Board member less hazardous, than the adoption of this
suggestion.)
While the changes here proposed would tend greatly to
enhance the independence and prestige of members of the
Board, and thus render their position more attractive, they
alone would not completely solve our problem. If a smooth
and effective operation of the Reserve System is to be assured,
a further important modification seems to be urgently needed.
In order to command a free and willing acceptance of the
Reserve Board's leadership on the part of the reserve banks,
it is of paramount importance that the reserve banks be convinced of the Board's intimate knowledge and sympathetic
understanding of their affairs. If the country is to enjoy the
full benefit of the Reserve System, the Board must act as a
link connecting the reserve banks, and not as an instrument
designed to keep them asunder; not as an antagonistic, but as
a harmonizing body. Some students seem to think that the

480

THE FEDERAL RESERVE SYSTEM

future of the Reserve System would best be assured if there
were a Board of overshadowing importance at Washington,
with executives of small importance in the reserve banks.
Others seem to take the opposite view and envisage the Reserve
System of the future as governed by great leaders in the
reserve banks and a body of unimportant government
officials at Washington. The truth of the matter is that a
development along either of these extreme lines would be fatal.
Congress, in the long run, would not permit the Reserve System
to be dominated by the reserve banks, while the country would
not tolerate a central banking system under autocratic governmental control. If enduring peace and progress are to be assured, we must have the biggest possible leaders both at Washington and in the reserve banks and, instead of matching the
Board and the reserve banks against one another, we should
provide for a bridge that will unite them. The suggestion that
we have in mind, and which we should like to add to the five
already made, is to change the Federal Reserve Act so as to
provide:
Six. That the reserve banks be given the power, subject
to the approval of the President (who might reject the list
and ask for the submission of other names), to delegate four men
to the Reserve Board, each of these to be elected by the combined directorates of a group of three reserve banks. These
delegates would represent the three reserve banks electing them
in stated monthly meetings of the Reserve Board, and at these
monthly meetings they would have the privilege of voting.
A t these regular meetings (or at special meetings, if required),
the discount rates of the reserve banks would be submitted
" f o r review and determination," and the open-market policies
of the System would be dealt with.
The benefits which might be derived from this modification
are self-evident. If we accept twelve reserve banks as a
finality, it will always remain a well-nigh impossible task for
eight Board members individually to acquaint themselves with

LOOKING FORWARD

481

the conditions prevailing in twelve geographically remote
districts, and to exert the right type of influence upon the
operations of the twelve banks merely by communications with
the twelve governors and the twelve reserve agents at these
banks. If, sitting with the Board at its important meetings,
there were four men whose particular duty it would be to keep
themselves advised with regard to the affairs of the three
reserve banks whose representatives they would be, the Board
would find its problems greatly simplified, and it would be
easier for it to reach prompt and intelligent decisions concerning questions in the consideration of which knowledge of local
conditions plays an important part. From the adoption of the
modification here proposed, a further highly important
advantage would ensue, namely, that with these four representatives of their own associated with the Board, the reserve
banks would have a firmer assurance that their problems Were
fully understood. As a consequence, they would accept
the decisions of a Board so constituted willingly and without
hesitation. It may be stated with confidence that, had four
representatives of the reserve banks joined in the deliberations
of the Board when, in August, 1927, the clash between the
Board and the Federal Reserve Bank of Chicago occurred, the
trouble would have been avoided. In that situation, the Reserve Board, with full knowledge of prevailing conditions,
would either have abstained from imposing its will or, had it
reached the conclusion that a change of the Chicago discount
rate was imperative in the common interest, the Federal
Reserve Bank of Chicago would then have accepted the findings in a spirit of willing acquiescence in the Board's better
knowledge and judgment.
While in view of the political hazards and the personal
sacrifices involved, a desirable man might be unwilling to
accept office as an appointive member of the Board, it may
safely be assumed that he could hardly refuse to serve, if he
were called upon by the directorates of three reserve banks

482

THE FEDERAL RESERVE SYSTEM

to represent them at Washington. Such a choice would
be so impressive an evidence of the confidence reposed in
him by an important group of prominent members of the
banking and business fraternity, that a man thus delegated
would find it very difficult to decline. While these four men
would be chosen subject to the approval of the President, they
would otherwise be free from political hazards; and they would
receive an adequate salary, to be fixed and paid by the reserve
banks, in a manner similar to that which is now in force in connection with the salaries of reserve agents. Moreover, service
as a representative of reserve banks would not entail living in
Washington. On the contrary, it would be desirable for the
representative to remain a resident of the territory tributary
to the three banks he represents and, instead of living in
Washington, to go there from time to time to participate in
the deliberations of the Board. Such a representative of the
banks should be sought from among men not too much advanced in years who would be willing to stand the strain of
frequent journeys and be likely to serve for a long term.1
No matter how splendidly men may be equipped at the time
they assume membership on the Federal Reserve Board, tied
down to their desks by daily duties in Washington, they are
bound to lose touch with the ever-changing local conditions of
the country. A system providing a means of carrying the
country's problems to Washington through the medium of
expert "ambassadors" in constant touch with their home
territory would seem to offer advantages that do not require any
further elaboration.
The skeptics' obvious reply to this proposal is that, while it
may be highly desirable, it is "politically impossible." But
why should it be "politically impossible," if we bear in mind
that prominent leaders of both parties originally favored
1 Terms of service of ten years might be decreed with probability of reappointment upon expiration of the term in a manner analogous to conditions of
appointment of Federal Reserve Board members.

LOOKING FORWARD

483

like schemes? It will be remembered that, on the Democratic side, Mr. Glass, in his first drafts, made a very similar
proposal for the constitution of the Reserve Board, and that
Dr. Willis, in The Federal Reserve Systemmakes the following
observation:
Undoubtedly experience has demonstrated that the present
method of constituting the Federal Reserve Board is unsatisfactory. It has fallen constantly under the supervision of
politicians, and even when not under their influence has been
constantly fearful that it would be obliged to yield to them.
The fact that it has not yielded in the matter of appointments
is greatly to its credit, but represents a condition which
probably cannot be very long maintained. All this means
that the present position of the Federal Reserve Board is not one
which can be regarded as permanent if our banking system is to
function in safety. The question seriously raised is whether
something like the plan at first proposed in the federal reserve
act, whereby the bankers themselves would have been given a
partial representation on the Boards may not have to be introduced, or whether, if public opinion should continue adverse to
such an arrangement, it will be possible to obtain a composition
of the Board which shall be far less influenced by political considerations than at present.2
As to the Republican attitude, it will be recalled that the
Aldrich Bill went even further in the direction now proposed
by permitting the National Reserve Association's branches to
have, not only representation on the central board, but the
preponderating voice in its affairs.
In his message to Congress of December 21st, 1911, on " T h e
Financial Condition of the Treasury, Needed Banking and
Currency Reform and Departmental Questions," President
T a f t when commenting upon the proposal for the creation of
the National Reserve Association, made the following remarks:
1
2

Op. cit. pp. 1498-99.
Italics are mine—Author,

484

THE FEDERAL RESERVE SYSTEM
Exactly how the management of that association should be
organized is a question still open. It seems to be desirable
that the banks which would own the association should in the
main manage it. It will be an agency of the banks to act for
them and they can be trusted better than anybody else chiefly
to conduct it. It is mainly bankers' work. But there must
be some form of government supervision and ultimate control,
and I favor a reasonable representation of the government
in the management. I entertain no fear of the introduction
of politics or of any undesirable influences from a properly
measured government representation.

Here we have, then, the conservatives of both dominant
political parties of one mind with respect to the advisability of
having bank representation on the central board. As a
matter of party expediency, however, through the influence
of the Bryan faction, the Reserve System came to be branded
with the stamp of a purely governmental board. It may be
timely to remind the reader of what Mr. Bryan jubilantly
wrote after he and his friends had succeeded in winning
President Wilson over to their side:
The provision in regard to the Government issue of the notes
to be loaned to the banks is the first triumph of the people
in connection with currency legislation in a generation. It
is hard to over-estimate the value of this feature of the bill.
In the second place, the bill provides for Government control
of the issue of this money—that is, control through a board
composed of Government officials selected by the President
with the approval of the Senate. This is another distinct
triumph for the people, one without which the Government issue of the money would be largely a barren victory. 1
That the "triumph for the people" has had unfortunate consequences for the Reserve System is proved by the history of the
Board's record in the first fourteen years of the law's operation.
The Reserve System can live down the government note
issue concession if, from its acceptance, we do not draw
From letter to Carter Glass, dated August 22nd, 1913, reprinted in Willis,
op. citp.
303.
1

LOOKING FORWARD

485

the conclusion that the issue of the government's moneynecessitates, as a logical consequence, absolute governmental
control of the Board; it can live down its difficulties of overdecentralization and of unbalanced "balanced powers" if
the Reserve Board be given a greater political security and
the assurance of an uninterrupted admixture of experts fully
familiar with the detailed operations of the reserve banks.
In its present form, the Act is bound to lead to the gradual
deterioration of the Board, and finally of the System. On the
other hand, the remedy here proposed is entirely in keeping
with the theory upon which the Federal Reserve Act was built.
The Act provides to-day that, in the reserve banks, two-thirds
of the directors shall be elected by the member banks and
one-third by the Reserve Board. What is now proposed is
simply the application of this same theory to the composition
of the Reserve Board. Just as, in the operating section of the
System, the majority is elected by the banks, with a minority
representation of the central controlling section, so it is proposed that, in the central controlling section, the reserve banks,
as the operating section, shall have a minority representation.
Thus, of a total number of twelve, two-thirds would consist
of appointees of the President (six appointive members of the
Board, plus the two ex officio members, as the Act provides
to-day) while one-third would be composed of the four delegates appointed by the reserve banks, subject to the approval
of the President. 1
Some critics may insist that a Board of twelve members
would be too large. It may be confidently asserted, however,
that as long as it is necessary to have a body representative
of a cross-cut of all sections of the country, and since it is, therefore, impossible to have a very small executive body of possibly
three members, it is better to have a group large enough to be
forced to operate under parliamentary and business rules, than
Among the footnotes to the juxtaposition in Chapter V I I I , and in Addendum III, a suggestion will be found for the improvement of the system of electing the directorates of the reserve banks.
1

486

THE FEDERAL RESERVE SYSTEM

a Board of seven or eight in which more informal methods of
procedure and personal courtesies and considerations easily
may lead to procrastination and inaction.
The remedy here proposed would, it is true, necessitate
action by the Senate involving a certain lessening of its own
powers. Among the senators whom it has been my good
fortune to know there are, however, many who are keenly
alive to the injuries inflicted upon the country by the reckless
abuse of senatorial privileges on the part of some of their
egocentric colleagues. The proposal here made would, no
doubt, meet with determined resistance in the Senate, but if
the seriousness of the situation were fully realized by the
country, and if a demand for remedial action were carried
along by a strong wave of public opinion, there would be good
reason to expect effective support by those members of the
Senate, of whom I know Mr. Glass to be one, who are citizens
first and senators afterwards. No attempt to tinker with the
Federal Reserve Act should be hazarded, however, until a
strong administration, certain of adequate Congressional, if
possible bi-partisan, support, and with a full grasp of the
problem, will sponsor such a bill with a firm determination to
carry it through. The earlier the moment arrives when amendments of the Act as here suggested can safely be launched, the
better for the System.
The thrill of being given the unequalled opportunity of
taking part in laying the foundation of the giant structure of
the Reserve System, the patriotic impulse to serve the country
during the War, and the fascinating challenge to lend a hand
in the struggle with the titanic problems of the reconstruction
period, brought men of exceptional talent and rare unselfishness into the Reserve System and made them cling to their
tasks with unexcelled devotion through long, trying years.
Many men of that period and of that fibre are still on the
bridges of their crafts, in Washington and in the Federal
reserve districts, lending inspiration to their officers and crews,

LOOKING FORWARD

487

and still guided by the principles and standards born of the
spirit of those years. Yet, as we move away from the period
of the System's first beginning and early growth, the stimulating influences of those times begin to wane, and it is becoming
all the more important for us to do everything in our power
to make service on the Board and in the reserve banks as free
as possible from adverse influences.
The object in writing this book was to show whence we came,
whither we are drifting, and by what fairly simple means we
can avoid dangerous rocks now threatening our course. There
is no hope, however, that adequate remedies may be secured
unless both political parties realize that, in this matter, they
have not only equal claims of authorship, but also equal
responsibilities concerning the future fate of the System.
An account of the contributions made to the Act by particular persons is of negative rather than of positive importance,
because it is of enduring significance only in so far as it tends
to show that the Federal Reserve legislation was the result of
the efforts of many individuals rather than of any single mind
or party.
Through thousands of years, the old parable of King Solomon and the two mothers has not lost any of its strength and
beauty. True parenthood shows itself not in a selfish desire to
own the child, but in an unselfish desire to see the child live.
If both political parties can be counted on to vie with one
another in making their parenthood true in this sense, the
future of the Reserve System is secure.
Yet, in the final analysis, it is the people who are the guardians of the Reserve System. Congress merely reflects their
thoughts. The people themselves, like understanding parents,
must exercise a constant vigilance over the child's growth, and
stand determined to ward off any influence that tends to mar
its development, or to menace its life. The Reserve System
will be in danger whenever a coming generation relaxes in
the consciousness of that guardianship.

ADDENDUM

THE CHICAGO INCIDENT:
A POSTSCRIPTUM

N August, 1927, a controversy developed between the
Reserve Board and the Federal Reserve Bank of Chicago.
This controversy was occasioned by the Reserve Board's
surprising action in establishing a new discount rate for the
Chicago Bank before the Chicago directorate had submitted
its rate for "review and determination." While for a time the
disagreement had reached so critical a point that a judicial
determination of the question seemed to offer the only way
out, the opposing factions finally came to realize the unwisdom
of such a course. Sober second thought also came to perceive
that it would be most undesirable to request Congress to
make a clear-cut legislative distinction between the powers of
the Reserve Board on the one hand and the prerogatives of
the reserve banks on the other.
The resolve to leave the matter in statu quo was undoubtedly
well conceived, as a clear decision in favor of either side would
have been fatal.
T o deprive the Board of all power to fashion and, if need be,
to enforce the Reserve System's common discount policy
would have amounted to reducing the Board to a position of
insignificance and impotence; it would, moreover, have created
anarchy among the reserve banks unless the most important
of them should assume a dominant leadership. This, in turn,
would at once have led to jealousies and protests on the part
of the other Federal reserve banks and, in the end, would have
brought about Congressional interference. On the other
hand, to give to the Board a broad and clearly expressed power
to establish the reserve banks' discount rates would have
destroyed the theory of the autonomy of the twelve reserve

488

THE CHICAGO INCIDENT

489

banks. In effect, this would have been tantamount to the
creation of a politically controlled central bank, a development
abhorrent to the majority of both parties.
The whole incident merely reveals one of the structural
weaknesses of the Federal Reserve System—a weakness clearly
foreseen at the time of its genesis and of the formulation of its
functions, and one which cannot now be remedied by throwing
the balance of weight overwhelmingly on either side of the
scales. The "framers of the A c t , " as the record shows, were
thoroughly baffled by this problem, which required nothing
less than the finding of a formula providing at one and the
same time for the preservation and the destruction of the
autonomy of the reserve banks. A study of the relevant
sections in the several drafts of the Glass Bill and the Senate
Bill shows that the authors floundered about from one extreme
to the other until they finally adopted the language embodied
in the Federal Reserve Act which, in practical effect, left the
question of final authority wide open. Thus, if we examine
the drafts in their historical sequence, as published by Dr.
Willis, 1 we find that, in the first two drafts of his bill, Mr. Glass
provided that the "Federal Reserve Commission," later on
termed the Federal Reserve Board, should have absolute
power " t o establish each week, or as much oftener as required,
a rate of discount which shall be mandatory upon each Federal
reserve bank." It is true that, at that time, the bill provided
for a Federal Reserve Commission with three classes of
members, one group of which was " t o consist of Federal
reserve representatives chosen by Federal reserve banks." 2
1 I t is significant that, in the first draft, the Federal Reserve
consisted of three groups:

Commission

1. T h r e e ex officio members.
2. Three members to be appointed by the reserve banks.
3. T h r e e members to be appointed by the President; of these, one was
to be the president, one to be the vice president, and one to be the secretary
of the Commission.
T h e italics are mine—Author.
The Federal Reserve System, pages 1531 to 1594.

490

THE FEDERAL RESERVE SYSTEM

This provision made it safer for, and more acceptable to, the
reserve banks to have the power of establishing the discount
rate vested in the Reserve Board.
The third draft, the so-called First Print of the Glass Bill
still contained the same language for the fixing of the discount
rates, with this drastic change, however, that the power to
establish the rates was vested in a Reserve Board of seven,
of whom four were to be appointed by the President, while
three were to consist of two Cabinet members and the Comptroller of the Currency ex officio, the representatives of the
reserve banks being completely eliminated. Thus the power
to fix the discount rate was to go to a central body which was
bound to be under complete political control.
The next print, the Glass Bill as introduced in the House,
contained the same extreme provision for the composition of
the Reserve Board, but suddenly transferred the power to
establish rates from the Board to the reserve banks, which
were to have power " t o establish each week, or as much oftener
as required, subject to review and determination of the Federal
Reserve Boards a minimum rate of discount, etc."
The final draft contained the same provisions except that
the word " minimum " with regard to the rate of discount was
eliminated.
The Senate Bill provided for a Reserve Board of seven
members, of whom six were to be appoined by the President,
while the Secretary of the Treasury was to be the only ex officio
member; it contained a clause giving the reserve banks
power: " T o 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 banks for each class of
paper which shall be fixed with a view of accommodating
commerce and business." This Senate clause was accepted
by Mr. Glass in conference, and now forms part of the Federal
Reserve Act. The compromise agreed upon "in conference"
included, however, the highly regrettable provision to reduce

THE CHICAGO INCIDENT

491

the number of the appointive members of the Board from six
to five, and added the Comptroller of the Currency to the
Board as the second ex officio member.
From the foregoing, it will be seen that all of the Glass bills
gave control over rate making to the Board; for, even in the
bill as it passed the House, the fact that the reserve banks had
to submit their rates "for review and determination each
week or as much ojtener as required" 1 meant that, in effect,
the Board had the undisputed power to determine the rates.
The language of the Federal Reserve Act, as finally adopted,
restricted the Reserve Board's power to reviewing and determining the rates, as and when the reserve banks would submit
them "from time to time." This is a clear indication that the
law wished the reserve banks as far as practicable to exercise
the power to initiate the rates, while the Board was to determine them after the rates had been submitted for review.
There is nothing in the Act, however, that would prevent the
Reserve Board, when reviewing and determining a rate, from
establishing it as valid for a limited time and thus forcing
the reserve bank to resubmit it at the expiration of a given
period. By adopting this procedure, the Board would be in
a position to fix the rates if it should choose to do so because,
once submitted, the rates are not subject solely to "confirmation" but also to "determination" by the Board. 2
The Board can thus find sufficient authority in the Act to
dictate rates; and the authority to assume such powers in
time of need the Board must not surrender. But a wise
Board will use the utmost discretion in exercising this right.
A strong and competent Board (with this power in its
pocket) will find no difficulty in commanding a following on
the part of the reserve banks when, after consultation with
them or with the Advisory Council, it explains what the composite picture of all the districts combined indicates as the
1
2

Italics are mine—Author.
T h e Board openly followed this procedure for a time in the earlier years.

492

THE FEDERAL RESERVE SYSTEM

proper policy to be pursued for the benefit of the country as
a whole. 1
Here we touch the heart of the question, the problem dealt
with in Chapter X I I , that is, the question of the competence
of the Board. If the reserve banks are satisfied that the
Reserve Board's conclusions are sound, based upon a comprehensive study and grasp of all phases involved, and reached
with the country's best interests at heart, they will follow the
Board willingly and without any thought of challenging its
authority; but, if the Board's acts are high-handed or politically inspired, or if they exhibit a lack of adequate knowledge
of facts and conditions, clashes between the Board and the
reserve banks are inevitable.
The solution of the problem under discussion cannot be
found by giving the coveted power entirely to either one of
the two parties; any such step would leave one side disgruntled
and tend to increase the antagonism and widen the cleavage
between two forces which must cooperate with one another
if the System is to enjoy permanent safety and success.2
When the clash between the Board and the Reserve Bank
of Chicago occurred, Senator Glass, Senator Owen, and Dr.
Willis at once published statements containing their views with
regard to the controversy. Giving abstracts of their utterances, we find Senator Owen, whose wording of the section
in the Senate Bill had prevailed, summing up as follows:
. . . The present controversy turns on the point whether
the Federal Reserve Board shall exercise control of the fixing
of the rates. I am emphatically in favor of the exercise of this
power by the United States Government, and a fair interpretation
of the Federal Reserve Act will show that this was the intention•
. . . If there be any doubt, the doubt should be removed by an
amendment that would give this power to the Government. . . . 3
This does not necessarily mean uniform discount rates, but permits of
differentiation between the districts with a reasonable allowance for their
varying conditions and needs.
2 A s more fully explained in Chapter X I I .
3 T h e italics are mine—Author.
1

THE CHICAGO INCIDENT

493

Expressing views diametrically opposed to those just cited,
Senator Glass permitted himself to be quoted as follows:
It was the obvious spirit of the Act to confide to each Federal
Reserve Bank initial authority to establish rates because of the
banks' necessarily superior knowledge of regional conditions,
and neither the spirit nor the text of the Act sanction interference
by the central Board except in extraordinary circumstances. . . .
If the rediscount rate of the Chicago Reserve Bank is either
"dangerously low" or so unreasonably high, that the bank
fails in the requirement that it shall accommodate commerce
and business, then the Board at Washington may find justification in the law for its action. I am not sufficiently familiar
with conditions at Chicago to form any opinion on this point.
However, I am decidedly apprehensive that this action of the
Federal Reserve Board is, and was intended to be, a long stride
in the direction of making the Federal Reserve Board a central
bank, with the reserve banks as mere branches, which is as far
from the real intent of the law as anything could possibly be. . . .
I think Congress should promptly and peremptorily cure this
situation by legislation which nobody will misinterpret.1
Dr. Willis, in an article published by the New York Sun on
September ioth, 1927, gives his views as follows:
. . . The present effort to dictate rates of reserve banks
naturally fans this smoldering unrest into a flame. As a
matter of fact, it would be an immense change in the independence as well as in the actual working of the reserve system were there to be a central rate-making body at Washington.
The system was originally established with the intent to avoid such
a substitute for a central bank and with the definite belief that
rates would be locally established and under local control, the
centralizing function at Washington being merely that of harmonizing such rates. Local reserve banks cannot afford to give up
this autonomy. Were they to do so, they would become nothing
more than branches of the central organization, or at times they
might really be branches of other banks, which had succeeded in
1

The italics are mine—Author.

494

THE FEDERAL RESERVE SYSTEM
acquiring a dominating power in Washington. That is the
danger at the present time. . .
If a board of directors had no other recourse it should,
however, have the courage to resign office rather than to
assist in the violation of the fundamental principles on which
the reserve system is organized. There is a principle here
that is much more valuable and vital than any mere rate itself,
the principle of local and financial independence, originally
recognized in the reserve act, but requiring constant vigilance
as the price of its maintenance.

It is amusing to contrast the views laid down in this last
article with the thoughts expressed by Dr. Willis five years
ago in his book The Federal Reserve System, wherein we find
the following paragraphs: 2
Thus, since the Board could, at intervals of one week only,
approve or disapprove proposed discount rates, it was practically in the position of having a continuing veto upon rates,
since if a bank recommended the same rates it already had in
effect, the Board by vetoing them could compel the bank
either to suspend its discount business or else to file new rates.
Thus the Board practically took to itself a substantially larger
power than it had originally been granted by the framers of the
act, and yet in so doing the action of the Board was probably
not only wise but necessary. Unless there was to be communication and discussion among the reserve banks, it was only
through the exertion of a very decisive power by the Board
itself that such effort could be made to succeed. Hence it
seemed to be fully necessary for the Board to act constantly
as a clearing house for rates, data, and suggestions concerning
the fixing of discount levels, or else to assume practically the
junctions of a central bank in so jar as they related to the discount
rate. . . . The general question whether it was or was not
desirable for the Board to exercise the powers which it thus in
the circumstances usurped never came to an issue in any overt
1
2

T h e italics are mine—Author.
Op. cit., pp. 892-893.

THE CHICAGO INCIDENT

495

w a y , and this, as already stated, was probably because of the

recognition on the part of all concerned that such an extension

of the intent of the Reserve Act was almost unavoidable if the
work of the system was to proceed smoothly}
As quoted above, the utterances of the "framers of the A c t "
furnish an impressive illustration of the violence done to a
quiet and judicial discussion of questions affecting the Federal
Reserve problem by the ever-present injection of the argument
of " t h e spirit of the Act," a special and quasi-monopolistic
knowledge of this spirit being confidently claimed by each of
the "authors of the Act." But one is tempted to ask, what
is this "spirit of the Federal Reserve Act," and which of the
authors may justly arrogate to himself the right of interpretation ? Is it Senator Owen or the Glass-Willis combination, and at what moment in the chameleon's life did it show
its official color? In which of its many radically different
forms did it make its spirit known? With what reckless levity
the original " i n t e n t " of Congress or the "spirit of the A c t " is
conjured up is readily seen from the quotations just cited.
Both Glass and Willis seem to have completely forgotten that
their bills, in every form submitted, gave the Federal Reserve
Board the very rate-making power which they now
denounce as a step in the direction of a central bank, and as a
perversion of the original spirit. Willis more recently states
that the System was originally conceived "with the definite
belief that rates would be locally established and under local
control etc." There is no evidence whatever in the earlier
drafts just cited that would bear out this assertion. Indeed,
it is most amusing to find that, if Glass and Willis have any
foundation for their claims of reserve bank autonomy in the
question of rate-making, the only place from which they can
derive it is Owen's Senate Bill. And Owen says that the ratemaking power under his bill is vested in the Reserve Board!
T o cap the climax, Senator Glass, when Secretary of the
1

T h e italics are mine—Author.

496

THE FEDERAL RESERVE SYSTEM

Treasury, wishing to curb a reserve bank in what he now
terms a "desperate post-war emergency" in December, 1919,
invited the Attorney General to give him a legal opinion as to
the Board's powers in the premises; and this legal opinion
(see Appendix Thirty-Six) sums up the case as follows:
I am of the opinion that the Federal Reserve Board has the
right under the powers conferred by the Federal Reserve Act
to determine what rates of discount should be charged from
time to time by a Federal reserve bank, and under their powers
of review and supervision, to require such rates to be put into
effect by such bank.1
A detailed account of this strange record of confusion has
been given, because some important lessons may be drawn
from it. The story illustrates strikingly what may occur when
Congress finds it impossible to formulate in precise terms a
law which will express a compromise of conflicting views; and
when the law is to create a so-called "balanced position,"
involving an authority divided between two forces, neither of
1 Inasmuch as I left the Board in August, 1918, and the Attorney General's
opinion was not obtained by Secretary Glass until December 9th, 1919, I
have no personal knowledge of what were the causes of the " desperate postwar emergency." W e find some indications of these causes, however, in Governor Harding's Federal Reserve System, pp. 157 and 158. It appears that
after the conclusion of the War several reserve banks were anxious to increase
their rates. It was feared, however, that such action would interfere with the
placing of the Victory Loan and, as a consequence, no advance in rates was
made until November, 1919, after the Victory Loan of $4,500,000,000 had been
successfully placed in the month of June. T h e increase in discount rates, which
took place in November, involved an advance of only % per cent to y i per cent
through increase of the reserve banks'rates for 90-day war paper from 4^4
per cent to 4 y i per cent and 4 p e r cent. There was insistent pressure,
however, on the part of some of the reserve banks that rates should be further
increased so as to combat the mounting tide of inflation then under w a y .
T h e Treasury, having in mind an impending issue of certificates of indebtedness,
firmly opposed a further advance in rates, and no further increase took place
until after the sale of the Treasury certificates on December 15th, 1919. Subsequent events warrant the belief that the interests of the country would
have been better served had inflation been brought to an earlier halt, and that
the "desperate post-war emergency" resolved itself into the Treasury's determination to continue its cheap money policy.

THE CHICAGO INCIDENT

497

which is to be given complete control, the perplexities of the
case become still further aggravated. Where, as in the
Federal Reserve Act, a divided authority, inadequately determined, forms the most essential part of the fundamental structure of a law, satisfactory operation of that law must needs
depend upon the sagacity with which discretion is used by the
bodies set up to administer it.
This, in turn, indicates the necessity of securing for the administrative boards men of the highest character and competence, so that the discretion with which they are clothed may be
exercised without bias and with independence, courage, and
intelligence. It also means that Congress, after having left undefined what it found itself unable to define when writing the
law, should leave as undisturbed as possible the men in whose
hands the administration of the law is placed. It is imperative,
therefore, that individual members of Congress should refrain
from meddling in matters of policy, or appointments, or from
trying to impose their views in questions of interpretation of
the law on the plea that their thoughts are the ones Congress
desired to convey when, as a matter of fact, Congress went to
particular pains not to formulate them, because a majority
could not be found to agree on a common view which could be
precisely expressed. Nor should the Attorney General, a
member of the Cabinet, rashly be called upon to assume the
role of Congress in determining the intent of the law. Such
appeals to the Attorney General mean, in effect, that authority
to use discretion in the administration of the law comes to
be vested, not in the administrative body, but in the Attorney
General. Unless a Board itself sees a compelling necessity
for the guidance and protection to be obtained from an
Attorney General's opinion, the conduct of that Board should
not needlessly be interfered with by requests for the Attorney
General to intervene. If the law is to be tested, the proper
arena in which to settle the dispute would be a non-partisan
court of justice.

498

THE FEDERAL RESERVE SYSTEM

The fullest recognition should ungrudgingly be given to the
"framers of the A c t " for their positive as well as their negative
contributions. Yet, that must not blind us to the fact that
their record as regards both knowledge and performance
neither compels nor justifies others in places of responsibility to
concede to them a position of unchallenged superiority with regard to the interpretation of the Act or the direction of the Federal Reserve System's policies. Much rather does it follow
from the facts adduced herein that it is an imperative duty of
members of both parties and both Houses to inform themselves thoroughly with respect to the history of the Reserve
System, its present status, and the problems of its future.
This is all the more necessary, because under the auspices of
the "writers of the A c t " recommendations and schemes have
been launched in the past which, if adopted, would have
endangered or impaired the very safety of the Reserve System.
One need only recall that Senator Owen, during the Great
War, urged an elaborate plan to involve the Reserve System
in schemes to regulate and stabilize foreign exchanges; and
that- Dr. Willis, in the days when depreciation of foreign
currencies had only begun, registered his disapproval and regret
that the Reserve System did not boldly enter the field of foreign
exchange. Nor may the menace of unsound proposals from
such quarters be lightly considered as a thing of the past.
Only quite recently (February 25th, 1928) the Journal of
Commerce, of which Dr. Willis is the editor-in-chief, spoke as
follows:
There are many elements in the Federal Reserve Act as it
now stands on our statute books which either have been grossly
violated—knowingly in some cases—or have been ignored, or
have been held in abeyance.
. . . There is great need for reappraisement of what we have
done, what we have tried to do, and what we have failed to
accomplish in our central banking field.
What the author of this editorial may have had in mind, one

THE CHICAGO INCIDENT

499

can only surmise; but it may be well to remember that, in his
writings and teachings, Dr. Willis has consistently condemned
the modifications of the Act that enabled the Reserve System
to gain the great gold strength it enjoys to-day. It still
remains for him to assure us that he has given up the hope of
seeing this great gold strength once more disrupted, and the
law amended so as to force a return to his original plan of
scattered and immobilized gold reserves and a shackled
Federal reserve circulation. In addition, in spite of the
staggering losses sustained by the foreign branches of some of
our banks, he has continued to proclaim it to be the function
and duty of reserve banks to employ the reserve funds of the
member banks in pioneer work in foreign countries by having
the reserve banks open foreign branches of their own (for which
far-reaching departure the Act does not contain a clear and specific provision); and he further advocates that the reserve banks
—which banks were introduced by Senator Owen as " banks for
the banks, not expected to deal directly with the public" and of
which Glass says that nobody thought of them as "central
banks in the European sense transacting business with the publ i c " (see page 411 of this volume)—be thrown open to the
hazards of political loans and subjected to commercial risks by
being compelled to engage in direct dealings with the public. 1
One shudders to think of the consequences if any one of these
recommendations had been, or ever should be, followed in our
country.
There are large problems and grave times ahead of the
Reserve System. The larger these national and international
problems of the country grow, the greater will be the temptation to force upon the System the responsibility of coping with
tasks extraneous to its proper functions and plainly beyond its
capacity. Experiments of this character would sap the
System's strength, and expose it to the dissatisfaction and
attacks of persons disappointed by its failure to accomplish
1

Willis, The Federal Reserve System, p. 1037 and pages 1517-1518.

500

THE FEDERAL RESERVE SYSTEM

the impossible. Worst of all, the widening of the System's
radius of activity, or the mere belief in its power to do the
extraordinary things which visionaries or demagogues would
force it to attempt, would strengthen the tendency to tighten
the grip of political control over a System possessed of such
real or imaginary powers. True friends of the System will bend
their efforts towards keeping it as pure and simple as possible
and having it remain unencumbered with functions and
duties foreign to its essential purpose and likely to lead it upon
dangerous ground. When the time comes to revise the Federal
Reserve Act, those on whom the responsibility will rest
should be fully equipped for the serious task of safeguarding the broad, well-recognized principles underlying the
organization and operation of central banking systems, so
that our great banking law may be freed and kept free from
dangerous vagaries urged in the name of the "spirit of the
A c t , " or in the name of any other spirit.

ADDENDUM

THE STOCK EXCHANGE CRISIS OF 1929

REVIEWING

the Federal Reserve System's record from
the second half of 1927 to October-November of 1929,
the period of the phenomenal rise and the catastrophic
collapse of the structure of brokers' loans and prices of shares
on the New York Stock Exchange, future historians are likely
to point to two outstanding facts:
One, the impressive demonstration of the System's structural strength and,
Two, the inadequacy of its form of administration.
Unlike the panic of 1907, the convulsion of 1929 did not
shake the people's confidence in our banking and currency
system. Indeed, where in 1907 the stock exchanges were
closed and stock-exchange loans became frozen, where hoarding brought gold to a premium and bank payments were suspended, New York banks in October, 1929, boldly took over
some two billion dollars in loans made by out-of-town banks
and " o t h e r " lenders, domestic and foreign, who had persisted
in piling their funds upon the New York Stock Exchange and
now had become frightened. It was due to the courageous
action of a group of New York banks and of able leaders that
the stock-exchange panic was ultimately brought to a halt.
But the desperate fight to avert a further spread of the disaster
could never have been hazarded and won had it not been for
the country's unbounded confidence in the unequalled strength
of the Federal Reserve System and the availability of its
vast resources to the country's banks. In the face of a sudden
and unparalleled shrinkage of stock-exchange values, cutting
in half the brokers' loan structure of over eight billion dollars

501

502

THE FEDERAL RESERVE SYSTEM

within the short span of a few weeks, 1 bank credit remained
unshaken, because it rested on the rock foundation of the
Federal Reserve System. Y e t , while the fire fighters ultimately managed to check the conflagration, they did not
succeed in their efforts until appalling losses of property (and
lives) had been suffered throughout the country. Why was
it necessary, the historian will ask, for our financial authorities to stand by so long while unheard-of quantities of inflammable material were massed in an unsafe structure, and while
cool observers had been warning the public of the threatening,
indeed, inevitable catastrophe? That is the only phase of
the question which interests us and which we wish to explore
here, not with the object of praising or blaming individuals,
but for the purpose of ascertaining how far the present form
of administration of the Federal Reserve System and its
background may be held to have been responsible for its
inability to forestall so disastrous a disturbance.
It is important to examine the evidence before attempting
to judge the case, and in order to enable the reader to grasp
the picture, at least in its rough outlines, some graphs have
been prepared, which are here submitted for his examination.
It will be remembered that in the second half of 1927,
under a daring, but carefully devised, plan, the Federal Reserve System, by reducing its discount rates to
per cent
and by purchasing government securities on a large scale, had
embarked upon a policy of easing money in the United States
with a view to aiding European countries, particularly Great
Britain, in their efforts to establish or reestablish their gold
standards. This plan was entirely justified, not only as a
duty towards our neighbors, but as a matter of self-interest—
provided the System was prepared boldly to reverse this policy
1 According to calculations of the New York Stock Exchange the aggregate
value of securities listed on the Exchange declined between the end of September and the end of November from 87,074 to 63,589 million dollars, or
27 per cent, while the amount of brokers' loans declined during the same
period from 8,549 to 4,016 million dollars, or 53 per cent.

THE STOCK EXCHANGE CRISIS OF 1929

MILLIONS OP DOLLARS

MILLIONS OF DOLLARS

2000r

503

2000

Total Bilis and Securities/
1500

1500

1000

Discouiits for I
MemberBanks /

1000

iI 7

U.S.Securi'ties /
-yv
500

v ? /

500

Accepts
nces
1927

1926

1928

1929

1928

1929

PER

GENT
CommercialPaperRah
Reserve Bank Discount Rate
Acceptance Bate

[

rvvv»f"

r ^

•
1926

1927

504

THE FEDERAL RESERVE SYSTEM

as soon as it might become evident that excessive ease of
money was exercising an inflationary effect, or that it was
over-stimulating speculation. Unmistakable symptoms of
such adverse effects became evident at the end of 1927. A s a
PERCENT

PER cENT

280 I

( RELATIVE:s, 1926=100 )

(o^

280

260

240

/ A
Brokers Loans ra™ //
—> X
It
s
M 1/ Vi —
/—I

220

200
180

A
/ 4
A A/1

160

/AP

140

Stock Values L*.y

120

/ /

220

200
180

160

140

120

/ Call MoneyMe
1

100

( Renewal,
)

100

\ j T
80

consequence the Federal Reserve System did reverse its policy,
and in the first months of 1928 began to resell its holdings of
government bonds recently acquired. Unfortunately, however, this policy was not carried through with sufficient vigor
and persistency, largely because of the fear on the part of
representatives of industry and trade that further sales and
the resultant hardening of money rates might " h u r t business."

THE STOCK EXCHANGE CRISIS OF 1929

505

From then on, until the final collapse occurred, the charts
record with brief interruptions a continuous rise in the prices
of stocks and an unprecedented growth in stock-exchange
loans. 1
T h e Federal Reserve System's policy in the two years under
review m a y be characterized as the resultant of two contending
motives: on the one hand, the desire to see the orgy of speculation brought to a close, and on the other, the fear of coming
to close grips with it, lest "business be hurt," or the System
be charged with interfering with stock-exchange activities
which, it was claimed, did not by the terms of the Federal
Reserve A c t come under the direct supervision or control of
the Federal Reserve Board./ It is true that three increases of
discount rates (from ^ A P e r c e n t to 4 P e r cent,
per cent,
and 5 per cent) were successively granted in 1928.2 But these
increases came hesitatingly and by mild degrees and generally
post festum (see Chart " B " ) , and when they came, what little
psychological effect they otherwise might have had, was frequently weakened by statements, simultaneously given out
by men in high political positions, that stock-exchange loans
were not unduly high, or that money would remain easy, or
that business conditions were excellent and that there was no
cause for apprehension. It is small wonder that in these
circumstances increases in discount rates were practically without effect in dampening the exuberant spirit of unleashed
1 Graph " A , "
showing total investments of all Federal reserve banks,
demonstrates the inadequate liquidation of the System's holdings of United
States Government bonds in January and February, 1928. It will be seen
that, normally, the reserve banks hold the lowest aggregate of investments in
these months, and this lowest point offers the basis, as it were, for the year's
coming operations. The low point in 1928 will be found some #200,000,000
above the low point in 1927.
From chart " C " it will readily be seen how the lines indicating the rise in
stock-exchange loans and in stock prices find their starting point at the end
of 1927.
2 It will be remembered that the Bank of England as a rule advances its
rate by a full per cent.

506

THE FEDERAL RESERVE SYSTEM

speculation, which had gripped all classes in all parts of the
country.
A f t e r discount rates had been raised to 5 per cent in July,
1928, the Board until August 9th, 1929 refused to approve any
further increases requested by Federal reserve banks. I t
is true that on February 7th, 1929 the Board published a
strong statement in which it warned the people of the dangers
involved in the undue absorption of the country's credit supply
in speculative uses and in which it indicated its determination
to suppress any such excessive absorption of credit, a goal
which it thought it could attain without a further increase
in discount rates. This warning had only a temporary effect.
Stock-exchange prices soon continued their upward trend and
the brokers' loan structure went on rising from week to week.
T h e Federal Reserve System in this period showed the most
anomalous rate structure ever devised by any powerful central bank (see chart " B " ) . 1
O n April 2nd, 1929, the Board issued a second warning
which, like its first statement, had only a temporary effect
in arresting the upward movement of stock-exchange loans.
1 When prime commercial 90-day paper was selling at 6 per cent to 6*4
per cent; when the government borrowed for short periods at 5j/§ P e r cent taxfree (being the equivalent of about 5.85 per cent as compared with taxable commercial paper); when rates for call money varied from 7 to 25 per cent and
those for time money from
to 9 ^ per cent; and, finally, when bankers'
acceptances were selling at
per cent, a bank rate of 5 per cent was beyond
all understanding. It meant that the reserve banks were buying in the open
market the finest quality of paper at a rate of 5
per cent and above, while
paper of lower quality handed in by the same seller at the rediscount window
would have to be taken by the reserve banks at 5 per cent, indeed, in some
districts even at 4 y i per cent! I t was not surprising that in the face of the high
price which money commanded all over the country more than a billion dollars
of paper was rediscounted with the reserve banks at these tempting rates.
An examination of the chart showing the movements of the aggregate
investments of the Federal reserve banks indicates that the total rediscounts
hovered around the 500 million dollar line in 1925, 1926, and 1927, while from
the middle of 1928 until the collapse of October, 1929, they are found around
the one billion dollar line.

THE STOCK EXCHANGE CRISIS OF 1929

507

These loans, from the middle of 1927, had then risen by approximately 2 ^ billion dollars. O n M a y 21st, 1929, the Advisory
Council submitted to the Board a definite recommendation
to increase the prevailing discount rates to 6 per cent. T h e
Board published this resolution (quite against its custom), but
remained adamant in its opposition to the demand of Federal
reserve banks to move their discount rate above 5 per cent.
In M a y , 1929, several bad breaks occurred in the stock
market. On M a y 27th, particularly, the stock exchange suffered a severe sinking spell which, for a while, created grave
apprehension that frantic liquidation might degenerate into a
panicky stampede. This danger was arrested by the prompt
intercession of N e w Y o r k banks. This was wise in so far as
it was obviously desirable to keep the selling movement within
the bounds of orderly liquidation. If, however, this support
had been given less ostentatiously, and if, instead of giving new
courage to the " bulls," a concerted effort had then been made
to encourage a quiet but persistent liquidation, the country's
interests would have been far better served. As it was, the
market had shown unmistakable symptoms of its intrinsic
weakness; it had demonstrated to experienced observers that
stocks had advanced far beyond a price level at which they
might readily be absorbed by conservative investors, and that
any concerted attempt to unload some 10 billion dollars in
securities carried by brokers' and bank loans might precipitate
violent declines with catastrophic consequences. Nevertheless, on this shaky foundation the tottering brokers' loan
structure was permitted to rise by another billion dollars,
while numberless investment trusts—daring in plan and
scope and operating to produce a further pyramiding of prices
— w e r e floated almost from day to day and stock quotations
soared to new fantastic levels.
T h e Board, in these fateful months, sat still. Finally, on
August 9th, 1929—in the author's opinion at least half a year,
if not a year, too late—it permitted the N e w Y o r k Reserve

508

THE FEDERAL RESERVE SYSTEM

Bank to raise its rate to 6 per cent, which raise was accompanied, however, by a simultaneous decrease in the Federal
Reserve System's open market rates. Moreover, the 5 per
cent rate remained in force in all other districts. This belated
increase, which at best brought the N e w Y o r k rediscount rate
into a more reasonable relation to actually prevailing market
rates, exercised only temporarily a sobering effect upon the
frenzied minds of those wedded to the gospel of investing and
speculating in inflated stocks. Spokesmen for that school of
thought by that time had become openly defiant. Financial
leaders, prominent economists, and men in high political
positions had become convinced that a " n e w e r a " had arrived,
that hopes and expectations of future accomplishments were
to be accepted as the test in determining stock values, rather
than actual earnings and records of the past, and that those
who claimed that some twelve billion dollars in undigested
securities constituted an element of danger did not realize
that this gigantic amount represented only a safe and reasonable percentage of the new (inflated) value of our securities.
T h e disciples of the gospel of the " n e w e r a " were frankly
resentful of the "meddling of eight men at W a s h i n g t o n " and
saw in the Federal Reserve Board's power of interference a
danger which a change in the law, if necessary, should eliminate.
Views directly opposite were held by the conservatives
among bankers, business men, and government officials. T h e y
sided with the Board's views—bravely expressed in the beginning, but now strangely inarticulate—that the towering loan
pyramid on the stock exchange constituted an element of grave
danger; but they were disheartened and alarmed at the
Board's apparent unwillingness or inability to bring this
ominous run-away movement to a halt.
T h e Board thus found itself subjected to a cross fire from
two opposing camps, one blaming it for meddling too much,
the other for not meddling enough. T o cool observers it was

THE STOCK EXCHANGE CRISIS OF 1929

509

clear beyond doubt, first, that the Board's attempt to bring
about a loan contraction without adequately increasing rediscount rates had proved an impracticable and wasteful experiment, and second, that unless a more effective course were
pursued the country was headed for a most serious catastrophe.
W h a t m y own thoughts and apprehensions were in the
matter I laid down in a statement published March 7th,
1929, a reprint of which will be found as Appendix ThirtySeven. This statement is referred to, not for the doubtful satisfaction of seeing one's views vindicated, but in order to show
that it was entirely possible, indeed easy enough, at that time
to foresee what inevitably had to occur unless we promptly
mended our ways.
In the spring of 1929, it had become apparent that increases
in discount rates alone—unless undertaken with a vigor which
the Board, unfortunately, could not be expected to display—
would not prove strong enough weapons with which to conquer
an enemy, who by that time had lost all respect for the authority and power of the Board. Y e t , it was still possible to
bring the mad fling to a halt before the worst calamity had
occurred. W h a t after all was to be accomplished? T h e
Board (and its backers) desired to arrest a further growth of the
aggregate of "brokers' loans." T h e Board had attempted to
bring this about by discouraging member banks from borrowing from the Federal reserve banks for the purpose of investing the proceeds in stock-exchange loans. But the N e w Y o r k
banks were neither the heaviest borrowers of funds from the
Federal reserve banks, nor were they the heaviest lenders,
for their own account, of stock-exchange funds. T h e bulk,
as is well known, came from out-of-town banks (able to borrow from their Federal reserve banks at 5 per cent or even
4/^ per cent), from corporations, and from foreign lenders.
This made it well-nigh impossible—as long as the low rate
policy was continued—to attack the problem through the
lenders of whom so important a group was entirely beyond

510

THE

FEDERAL

RESERVE

SYSTEM

the reach of the Federal Reserve System. It would have
been possible, however, to control the situation if means could
have been found to secure the cooperation of the borrowers.
If the New York Clearing House Copimittee, acting under the
auspices of the Federal Reserve System, had sent for a Stock
Exchange Committee and, after explaining to them the
dangers and needs of the situation, had invited them to ask
every stock exchange firm within a given time to reduce its
borrowings—whatever they might be—by a given small percentage of their aggregate loans, the top of the market would
have been reached then and there, and liquidation would
gradually have set in (if needs be demands for further reductions might have been made at a later stage). Nobody could
have resisted the argument that unless the stock exchange
reduced its loans by its own volition, the pressure of increased
rediscount rates would ultimately have to be applied with
subsequent increases in the discount rates of leading central
banks in Europe. Higher money rates abroad, with distressing
consequences for industry and trade in the countries affected,
would result from such a course. Europe, it was clear, could
not much longer stand the cruel perversion of our banking
policy adopted in 1927 which, originally designed to encourage
a free flow of long and short-term credit from the United
States to foreign countries, was now draining the Old World
of its working capital and its gold. Such conditions finally
would have to lead to a slowing down of our business, which in
turn would bring about a fall in the prices of our shares on the
stock exchanges and, as a concomitant, a corresponding
shrinkage of stock-exchange loans. In other words, worldwide distress and a slowing down of our own business would
have to be conjured up in order to prevent our stock exchanges
from draining the credit reservoirs on both sides of the A t lantic. 1 It could have been made clear that a better process
1 How completely world money markets had fallen under the control of
our speculators is impressively shown by the fact that within six weeks after

THE STOCK EXCHANGE CRISIS OF 1929

511

would have been to avoid this circuitous and wasteful
road and to aim straight for a contraction of loans which
would carry with it an orderly liquidation on the stock exchanges without drastically affecting business in general either
here or abroad. If the Federal Reserve System and the
Clearing House banks had definitely agreed on the adoption
of such a plan, the stock exchanges would have been forced
to fall in line; for, no matter how large a volume of funds
stock-exchange firms were receiving from "others," they would
have realized that, in the final analysis, they were depending
upon the strength and good will of the New Y o r k banks. A
course as above described is not here discussed as an afterthought. A procedure along these lines was definitely urged
in the first days of April, 1929. B u t while everybody seemed
to agree on the desirability and practicability of such a plan,
it proved impossible to carry it into effect. T h e Reserve
System feared to expose itself to the charge of having gone
beyond its lawful field of activity by dealing, even indirectly,
with the stock exchanges, and the Clearing House banks, loath
in any case to undertake so unpopular a step, did not see
their way clear to hazard it at all as long as Federal reserve
discount rates were not increased to 6 per cent. So long as
the Federal reserve rates stood at 5 per cent, and below, they
feared, and justly so, that enforced reductions of loans in
brokers' offices would only result in driving the customers into
the October crash on the New York Stock Exchange fifteen reductions of
official discount rates were undertaken by eleven European central banks,
viz. Bank of England, from
to 6 per cent (October 31), to
per cent
(November 21), and to 5 per cent (December 12); Reichsbank, from 7 y i to 7
per cent (November 2); Bank of Netherlands, from
to 5 per cent (November
1) and to
per cent (November 15); Bank of Belgium, from 5 to
per cent
(November 13); Swedish Riksbank, from
to 5 per cent (December 13);
Norges Bank, from 6 to
per cent (November 21); Austrian National Bank,
from 8 to
per cent (December 9); Hungarian National Bank from 8 to
7 p e r cent (November 4); Bank of Danzig, from 7 to 6}4 per cent (November
2) and to 6 per cent (November 21); Bank of Poland from 9 to
per cent
(November 14); Bank of Rumania, from 9 ^ to 9 per cent (November 25).

512

THE FEDERAL RESERVE SYSTEM

the banks and thus create a highly embarrassing, indeed an
impossible, situation.
With the Board unwilling at that time to permit the increase, to which four months later it agreed, it is not surprising
that the proposal fell through. A glance at the graphs will
convincingly demonstrate that, while stock prices and the
pyramid of brokers' loans had already reached dizzy heights
in the first quarter of 1929, they still were much lower than in
the fall of that year. One may readily perceive how much
smaller the ultimate shrinkage and losses would have been if
liquidation had been brought about at that time.
This brief sketch of the conditions which led to the stockexchange panic of 1929 and of the Federal Reserve System's inability to forestall the final disaster or, at least, to prevent it from
assuming its overwhelming magnitude, has been prepared for
the sole purpose of illustrating once more the imperative need
for the adoption of some such measures as have been outlined
in Chapter X I I for the strengthening of the System's methods
of administration. There is no desire to fasten blame on any
individual who took part in fashioning the System's policies
in this trying period. N o doubt, everybody concerned acted
to the best of his knowledge and ability, and the keener his
realization of the gravity of his responsibilities, the greater,
of course, was the persistency with which he held to his own
views. T h e fact remains, however, that in the face of a most
critical situation—possibly the gravest with which the Federal
Reserve System has ever been confronted—we find a Federal
Reserve Board widely divided within itself and unable to agree
upon a definite and effective plan. W e find this Board, as
rumor has it, at variance with leading Federal reserve banks
and, against the advice of the Advisory Council, blocking
timely rate increases urged by the Federal reserve banks
most concerned. I t is easy to see how differently a composite
Board, as recommended in Chapter X I I , would have acted.
Instead of deadlocks, there would have been unity of action,

THE STOCK EXCHANGE CRISIS OF 1929

513

and whatever such action might have been it would have commanded confidence and respect. T h e writer is profoundly
convinced that with a different constitution of the Board, the
ominous stock-exchange debauch would have been arrested
long before it reached its colossal dimensions.
In fairness it must be admitted, however, that any Board
— n o matter what its constitution—would have found it a
Herculean, if not an impossible, task to perform its functions
wisely and efficiently in circumstances such as surround it at
present. In a country whose idol is prosperity, any attempt
to tamper with conditions in which easy profits are made
and people are happy,is strongly resented. I t is a desperately
unpopular undertaking to dare to sound a discordant note
of warning in an atmosphere of cheer, even though one might
be able to forecast with certainty that the ice, on which
the mad dance was going on, was bound to break. E v e n if one
succeeded in driving the frolicking crowd ashore before the
ice cracked, there would have been protests that the cover
was strong enough and that no disaster would have occurred
if only the situation had been left alone.
T h e Board, much to its credit, had the courage to warn
the country, but it stayed its hand when it should have driven
the people ashore before the ice broke. I t hesitated to sacrifice what appeared to the country to be actual prosperity
to what might have seemed to the people a problematical
disaster. Hence the Board's unwillingness to increase rates
beyond 5 per cent; its unwillingness " t o hurt business," even
though generally prevailing rates had long reached, or surpassed, the level of a 6 per cent bank rate, and even though
it was plainly to be foreseen that, if rates were not increased,
business in the end might have to suffer a severe setback,
while with quick and determined increases, incisive enough
to bring about liquidation, the period of high money rates
would probably be so brief that business might hardly be
affected by it. It was a trying position for the Board, one

514

THE FEDERAL RESERVE SYSTEM

which called for clear vision, cool heads, and a courageous
disregard of all personal and political considerations. But
while facing these difficulties the Board found itself harassed
by a cross fire from members of Congress. As in the Chicago
case, discussed in the preceding chapter, the views pressed
upon the Board by these men were diametrically opposed to
one another. Each side, however, threatened "legislation"
in case its views were disregarded.
T h e chairman of the House Banking and Currency Committee expressed himself as out of sympathy with the Board's
interference with stock-exchange loans, and seemed to advocate the admission to the Federal reserve bank portfolios
of paper liberally secured by stock-exchange collateral, while
ex-Senator Owen, one of the "framers of the Act," appeared
as counsel in a suit to restrain the Federal Reserve Bank of
New York from its allegedly "illegal conduct"—"in restricting the supply of credit available for investment purposes"
and "from arbitrarily and unreasonably raising the discount
r a t e " — " f o r the purpose and with the effect of raising interest
rates generally and call-money rates on the New York Stock
Exchange in particular." Senator Glass, on the other hand,
reproached the Board for not having acted energetically
enough in fighting the stock-exchange debauch, but, unfortunately, went to the extreme of branding as unlawful the
rediscount with Federal reserve banks of eligible paper where
the proceeds, after having become intermingled with the
funds of the borrowing member banks, were invested in
stock-exchange loans.1
1 In the latter contention it is impossible to follow Senator Glass.
The
Federal reserve banks must closely scrutinize the paper a member bank offers
for rediscount and must not accept any bills except such as have proved eligible.
Once it has rediscounted the bills, the member bank must be left free, however, to keep its proceeds as a balance with the Federal reserve bank, to send
them abroad, or to do anything with them that the member bank's charter
and the laws under which it operates, permit. If the New Y o r k banks, in
November, 1929, had not acted on this assumption they could never have

THE STOCK EXCHANGE CRISIS OF 1929

515

Is it to be wondered at that, thus exposed to attacks on both
flanks, the Federal Reserve System found safety in inaction
rather than in action? But, looking backward in the light
of recent experience, would not those who violently protested
against the exertion of any "paternalistic influence"—which
they perceived in the Federal Reserve Board's attempt to
restrain speculation—freely admit to-day that they were mistaken? President Hoover has received well-deserved commendation for the masterful strategy with which he united
industries and railroads, labor and agriculture, Federal, State,
and municipal governments in a common effort to counteract
the adverse consequences which the stock-exchange panic of
1929 might visit upon the country. Does it not seem absurd
that paternalistic guidance should be gratefully accepted
in the face of the actual occurrence of a grave calamity,
but that it should be resented when connected with an effort
to forestall it? Is it not childish that we should be willing
to fight an epidemic after it has spread and taken its heavy
toll, but should be unwilling to localize the disease before
it had gotten beyond our control? Does not the recent disaster teach us that, while the transactions which Federal
reserve banks are permitted to engage in must remain strictly
circumscribed as at present, it does not follow that the System's field of influence is restricted within the narrow circle
of these transactions? A petty Reserve System, that is to be
no more than a fire engine or an ambulance, cannot give the
country the service and protection, nor the prestige, to which
it is entitled. A Federal Reserve System worthy of its name,
while "accommodating commerce and business," must at the
same time seek its highest aim in preserving for the United
saved the situation by taking over the out-of-town-bank and other loans when
the crash came. If they had hesitated to do so, then, indeed, conditions
approaching those of 1907 might have arisen. This does not mean, however,
that a Federal reserve bank should not be free to act according to its own
discretion if a member bank were to use Federal reserve bank credit excessively,
or too continuously, or in a manner harmful to the country's interests.

516

THE FEDERAL RESERVE SYSTEM

States conditions of stability in which commerce and business
may thrive. This does not mean absolute price or business
stability. Fluctuations within fairly normal swings m a y be
necessary and healthy, and any attempt to compel the Federal
Reserve System uniformly to offset them would be dangerous
and Utopian. B u t whenever extreme economic or financial
developments threaten to unbalance the even course of banking or business, including agriculture—the Federal Reserve
System must be left free and untrammelled to exercise its
influence in forestalling such disturbances and to back its
efforts with the weapons with which the A c t has endowed it.
If this is the position that Congress desires the Federal Reserve
System to occupy, it m a y be worth while to consider the
advisability of amplifying the wording of the sub-title of the
Federal Reserve A c t 1 so that in future emergencies there m a y
be no doubt as to the meaning of the A c t with regard to this
larger conception of the Federal Reserve System's aims and
functions.
I t appeared opportune to add this brief analysis of the
history of the stock-exchange panic of 1929 on account of
the overwhelming proof it offers, first, of the need of giving
to the Federal Reserve System a form of administration that
will weld the Board and the reserve banks together instead of
splitting them apart and matching them against one another to
the point of deadlock and second, of the necessity of securing
from Congress a clear and definite interpretation with regard
to essential functions of the System so that a Board, composed
of government appointees and representatives of the Federal
reserve banks (as recommended in Chapter X I I ) , may devote
itself to its difficult task without being needlessly harassed
1

T h e sub-title of the Federal Reserve A c t reads as follows:

" 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."

THE

STOCK

EXCHANGE

CRISIS

1929

517

by the conflicting views and interpretations of members of
Congress, of business men and bankers, or members of the
learned professions. The history of the stock-exchange panic
of 1929 lends added emphasis to the conclusions presented in
previous chapters, viz: That we need an expert and independent administration uniting, instead of separating, the
Board and the reserve banks—a Board whose acts, prompt
and definite, would be accepted by all as the authoritative
conclusions of the common counsel of the best minds which
government and business can produce—and that, having
secured such a Board, we should see to it that it be exposed to
as little interference from politics and business as is humanly
possible.

ADDENDUM

III

SUGGESTED CHANGE FOR CONSTITUTION O F
FEDERAL RESERVE BANKS' DIRECTORATES

H E following plan is submitted with a view to improving
the methods of electing the directorates of reserve
banks and branches. The same plan was proposed by
me during the formulation of the Aldrich Bill and the suggestion was repeated while the Federal Reserve Act was being
written.
It is proposed that the election begin at the sub-districts
into which the Federal reserve districts containing one or
more branches are divided. What is envisaged in this proposal may best be shown by taking the Reserve Bank of San
Francisco as an example. Each of the sub-districts, including
in this case San Francisco, Los Angeles, Portland, Spokane,
Seattle, and Salt Lake City, would elect its own board of
directors, following the same methods as those which are
observed to-day in electing the directorates of the twelve
regional banks. Each sub-district, as well as the area served
by the head office, would thus elect three Class A directors and
three Class B directors, while the Federal Reserve Board would
appoint three Class C directors. Of the Class C directors,
one would be designated as chairman. Each sub-district
would then delegate two directors, one from Class A and one
from Class B, to serve as directors of the Federal Reserve Bank
of San Francisco. But in order to avoid making some of the
regional directorates too large, it might be provided in districts, where the number of sub-districts exceeds a given number, that the branch territory should select only one director
for the district board, with a second member delegated to act,
upon occasion, as his substitute. These delegates would thus

518

SUGGESTED CHANGE FOR F. R. DIRECTORATES

519

constitute two-thirds of the directors of the Federal Reserve
Bank of San Francisco, and the remaining one-third would be
appointed as Class C directors by the Federal Reserve Board.
In this manner, each branch would have a board competent
to administer its own local affairs, while for questions affecting
the district as a whole there would be a composite board truly
representative of the entire district. In the interim between
full board meetings, an executive committee would be in charge.
A t present, there is in some districts a directorate which is
almost entirely representative of the reserve bank city and
its immediate surroundings, a directorate on which, therefore,
the sub-districts are insufficiently represented. In other
Federal reserve districts, a contrary condition prevails and
we find reserve banks whose boards of directors represent
overwhelmingly the surrounding sub-districts, with the result
that, in dealing with its local affairs, the Federal reserve bank
suffers from a lack of directors representing its own immediate
locality.
If the plan here proposed were followed, each sub-district,
including the head office, would have a local board to oversee
the local business, while, as already stated, for questions
affecting the entire district there would be a board upon which
all branches and the head office would be represented. T h e
plan would have the additional advantage of precluding any
possibility of undue predominance on the part of any city or
section in the composition of the directorates of the Federal
reserve banks. I t may also be pointed out that if, under the
plan proposed in Chapter X I I , the twelve Federal reserve
banks were permitted to elect four delegates to the Federal
Reserve Board, each delegate so elected by the combined
action of the directorates of three reserve banks, could safely
be expected to be a man possessing the highest qualifications,
both as to character and knowledge.

A D D E N D U M

I V

S E L E C T E D SECTIONS O F T H E F E D E R A L R E S E R V E
A C T SHOWING T H E A L T E R A T I O N S E F F E C T E D
B Y AMENDMENTS DURING THE PERIOD
A U G U S T 15, 1914, T O A P R I L 5, 1918,
INCLUSIVE
Italics indicate new matter inserted by amendments and
canceled words indicate old matter stricken out. Dates
of the amendments are given in the margin.
State Banks as Members
SECTION

June 21,1917

NINE

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 reoerve bank organization committee5 pending organization^ and
thcroaftor to the Federal Reserve Board, under
such rules and regulations as it may prescribey
for the right to subscribe to the stock of the
Federal reserve bank organized or to be organised within the Federal reoerve district where
the applicant in which the applying bank is located. Such application shall be for the same
amount of stock that the applying bank would be
required to subscribe to as a national bank. The
organization committee or the Federal Reserve
Board, under subject to such ruleo and regulationo conditions as it may prescribe, oubjcct to
the provioiono of thio oectiony may permit the

AMENDMENTS TO FEDERAL RESERVE ACT

521

applying bank to become a stockholder in the
of such Federal reserve bank, of the district in
which the applying bank ia located/
June 21, 1917
In acting upon such applications the Federal
Reserve Board shall consider the financial condition of the applying bank> the general character of
its management, and whether or not the corporate
powers exercised are consistent with the purposes
of this Act.
June 21,1917
Whenever the organization committee or 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 issued and paid for under the rules
and regulations in this Act provided for national
banks which become stockholders in Federal reserve banks/payable on call of the Federal Reserve
Board, and stock issued to it shall be held subject
to the provisions of this Act.
June 2if 1917
Any bank becoming a member of a Federal
reserve bank All banks admitted to membership
under the provisions authority of this section
shall/ in addition to the regulations and restrictions hereinbefore provided/ be required to comply with the reserve and capital requirements of
this Act and to conform to -the- those provisions
of law imposed on
national banks respecting
the limitation of liability which may be incurred
by any person, firm, or corporation to such
bank3, the which prohibition against making such
banks from lending on or purchas^^g of or loans
en- their own stock, of such banks, and which
relate to the withdrawal or impairment of their
capital/ stock and which relate to
the payment
of unearned dividends/ and to such rules and

522

THE FEDERAL RESERVE SYSTEM

regulations as the Federal Rcoorvo Board may,
in pursuance thereof, prescribe. Such banks^
and the officers, agents, and employees thereof^
shall also be subject to the provisions of and
to the penalties prescribed by section$y fifty^onc
hundred and ninety-eight, fifty-two hundred,
fifty-two hundred and one, and fifty-two hui>
drcd and eight, and fifty-two hundred and nine
of the .Revised Statutes/ The member banks,
and shall -alse- be required to make reports of
condition and of the payments of dividends
to the Comptroller/ 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. ao provided in oectiona
fifty-two hundred and eleven and fifty-two hun>drcd and twelve of the Revised Statutes, and
ohall bo subject to the penalties prescribed by
section fifty-two hundred and thirteen for the
Failure to make such reports within ten days
after the date they are called for shall subject the
of ending 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.
June ai, 1917
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.
June 21,1917
Whenever the directors of the Federal reserve
bank shall approve the examinations made by the
State authorities, such examinations and the reforts thereof may be accepted in lieu of examina-

AMENDMENTS TO FEDERAL RESERVE ACT

523

tions made by examiners selected or approved by
the Federal Reserve Board: Provided, however,
5That 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.
June ai, 1917
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 Boardy
made pursuant thereto, it shall be within the
power of t h e b o a r d y after hearingy to require
such bank to surrender its stock in the Federal
reserve banky and to forfeit all rights and privileges of membership. upon such surrender (the
Federal reserve bank) 1 ohall pay the (cash paid
oubocriptiono) to the oaid stock (with interoot at
the rate of one-half of one per centum per month),
computed (from the laot dividend, if earned)> not
(to exceed the book value) thereof, lcoo any lia*
bility to oaid Federal reserve bank, except the
subscription liability not previously called, which
ohall bo canceled, and said Federal reserve bank
ohall, upon notice from the oaid Federal Reserve
Board, be required to ouopend oaid bank from
further privileges of membership and ohall within
thirty dayo of ouch notice cancel and retire ito
otock and make payment therefor in the manner
herein provided/ The Federal Reserve Board may
restore membership upon due proof of compliance
with the conditions imposed by this section.
June ai, 1917
Any State bank or trust company desiring to
1

Matter in parentheses forms part of new paragraphs.

524

June

THE FEDERAL RESERVE SYSTEM

withdraw from membership in a Federal reserve
bank may do soy 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; Provided, 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 lawy 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 onehalf 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 timey and shall likewise be entitled to repayment of deposits and of any other balance due
from the Federal reserve bank.
1917
The organization committee or the Federal
Reserve Board shall establish by-lawo for the
general government of ito conduct in acting upon
applications made by the State banks and bank*
ing aooociationo and truot companioo for stock
ownership in Federal reserve banks.—Such by*
lflwo shall require applying banko not organized

AMENDMENTS TO FEDERAL RESERVE ACT

525

under Federal law to comply with the reserve
and capital requirements and to submit to the
examination and regulations proscribed by the
organization committee or by the Federal Re"
gcrvc Board/ No applying bank shall be admitted to membership in a Federal reserve bank
unless it possesses a paid-up, unimpaired capital
sufficient to entitle it to become a national banking association in the place where it is situated
under the provisions of the national bank Act.
June 21,1917
Banks becoming members of the Federal Reserve
System under authority of this section shall be
subject to the provisions of this section and to those
of this Act which relate specifically to member
banks, but shall not be subject to examination under
the provisions of the first two paragraphs of section
fifty-two hundred and forty of the Revised Statutes
as amended by section twenty-one of this Act.
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 ten per centum
of the capital and surplus of such State bank or
trust company, but the discount of bills of exchange
drawn against actually existing value and the dis->

526

THE FEDERAL RESERVE SYSTEM

count of commercial or business paper actually
owned by the person negotiating the same shall not
be considered as borrowed money within the meaning of this section. The Federal reserve bank, as
a condition of the discount of notes, drafts, and
bills of exchange for such State bank or trust company, shall require a certificate or guaranty to the
effect that the borrower is not liable to such bank
in excess of the amount provided by this section,
and will not be permitted to become liable in excess
of this amount while such notes, drafts, or bills of
exchange are under discount with the Federal reserve bank.
June 21, 1917

It shall be unlawful for any officer, clerk, or
agent of any bank admitted to membership under
authority of this section to certify any check drawn
upon such bank unless the person or co?npany
drawing the check has on deposit therewith at the
time such check is certified an amount of money
equal to the amount specified in such check. Any
check so certified by duly authorized officers shall
be a good and valid obligation against such bank,
but the act of any such officer, clerk, or agent in
violation of this section may subject such bank to a
forfeiture of its membership in the Federal Reserve System upon hearing by the Federal Reserve
Board.
Powers of Federal Reserve Banks
SECTION

Sept, 7, 1916

THIRTEEN

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

AMENDMENTS TO FEDERAL RESERVE ACT
Canceled

Sept. 7, 1916

527

c h e c k s , and d r a f t s , u p o n s o l v e n t m e m b e r bankry

payable upon presentation/, and also, for collecHon, maturing
June ai, 1917
notes and
Sept. 7,1916
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 and drafts upon
solvent member OP other Federal reserve banks,
and checks and drafts, payable upon presentation within its district, and maturing
June
1917
notes and
Sept. 7, 1916
bills payable within its district;
June 21,1917 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
JO cents per $100 or fraction thereof, based on the
total of checks and drafts presented at any one
timey 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.

528

Sept. 7,1916

THE FEDERAL RESERVE SYSTEM

Upon the indorsement of any of its member
banks, with which shall be deemed a waiver of
demand, notice and protest by such banky as to
its own indorsement exclusivelyf 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, indus^
trial, or commercial purposes, or the proceeds
of which have been used, or are to be used, for
such purposes, the Federal Reserve Board to
have the right to determine or define the character of the paper thus eligible for discount,
within the meaning of-this Act. Nothing in this
Act contained shall be construed to prohibit such
notes, drafts, and bills of exchange, secured by
staple agricultural products, or other goods,
wares, or merchandise from being eligible for
such discount; but such definition shall not include notes, drafts, or bills covering merely
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 maturity
at the time of discount of not more than ninety
days/, exclusive of days of grace: Provided, That
notes, drafts, and bills drawn or issued for agrir
cultural purposes or based on live stock and
having a maturity not exceeding six months,
exclusive of days of gracey may be discounted in
an amount to be limited to a percentage of the
capital assets of the Federal reserve bank, to be ascertained and fixed by the Federal Reserve Board.

AMENDMENTS TO FEDERAL RESERVE ACT

Sept. 7,1916

Mar.

529

The aggregate of such notes, drafts, and bills
bearing the signature or indorsement of any one
borrower, whether a person, company, firm, of
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 which are baoed on the importation
or exportation of goodo and of the kinds hereinafter described, which have a maturity at the
time of discount of not more than three months/
months' sight, exclusive of days of grace, and which
are indorsed by at least one member bank.
amount of acceptances) so discounted ohall at no
time exceed one-half the paid up

3, 1915

Canceled

paired

Sept. 7, 1916

capital stock and surplus of the bank for
which the rediscounts are made// except by aw
thority of the Federal Reserve Board, under such
general regulations as said board may prescribe,
but not to exceed the• capital stock and surplus of

Sept. 7,

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

iqi6

530

THE FEDERAL RESERVE SYSTEM

Mar. 3,1915

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, firmy
or corporation to an amount equal at any time in
the aggregate to more than ten per cent 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 onehalf of its paid-up and unimpaired capital stock

Canceled

and surplus: except by authority

Sept. 7, 1916

of the

Federal

Reserve Board, under such general regulations >as
said board may prescribe, but not to exceed the
capital stock and surplus of such bank, and such
regulations shall apply to all banks alike regard•
less of the amount of capital stock and surplus.
June 21, 1917
PROVIDED,
HOWEVER,
That the Federal Reserve
Boardy 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.
Sept. 7,1916
Any Federal reserve bank may make advances
to its member banks on their promissory notes for

}

AMENDMENTS TO FEDERAL RESERVE ACT

Apr. 5, 1918
Sept. 7, 1916

531

a period not exceeding fifteen 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 notesy drafts, bills of exchange, or
bankers' acceptances as are eligible for rediscount
or for purchase by Federal reserve banks under
the provisions of this Acty or by the deposit or
pledge of bonds or notes of the United States.
Section fifty-two hundred and two of the Revised Statutes of the United States is hereby
amended so as to read as follows:
"Sec. 5202. No national banking association
shall at any time be indebted, or in any way
liable, to an amount exceeding the amount of
its capital stock at such time actually paid in
and remaining undiminished by losses or otherwise, except on account of demands of the nature
following:
First. Notes of circulation.
Second. Moneys deposited with or collected
by the association.
Third. Bills of exchange or drafts drawn
against money actually on deposit to the credit
of the association, or due thereto.
Fourth. Liabilities to the stockholders of the
association for dividends and reserve profits.
Fifth. Liabilities incurred under the provisions of the Federal Reserve Act.
Sixth. Liabilities incurred under the provisions
of the War Finance Corporation Act.
The discount and rediscount and the purchase
and sale by any Federal reserve bank of any
bills receivable and of domestic and foreign bills
of exchange, and of acceptances authorized by

532

THE FEDERAL RESERVE SYSTEM

this Act, shall be subject to such restrictions,
limitations, and regulations as may be imposed
by the Federal Reserve Board.
Sept. 7, 1916
That in addition to the powers now vested by
law in national banking associations organized
under the laws of the United States any such association located and doing business in any place
the population of which does not exceed Jive thousand inhabitants, as shown by the last preceding
decennial census, may, under such rules and regulations as may be prescribed by the Comptroller
of the Currency, act as the agent for any fire, life,
or other insurance company authorized by the authorities of the State in which said bank is located
to do business in said State, by soliciting and
selling insurance and collecting premiums on policies issued by such company; and may receive for
services so rendered such fees or commissions as
may be agreed upon between the said association
and the insurance company for which it may act
as agent; and may also act as the broker or agent
for others in making or procuring loans on real
estate located within one hundred miles of the place
in which said bank may be located, receiving
for such services a reasonable fee or commission:
PROVIDED,
HOWEVER, That no such bank shall in any
case guarantee either the principal or interest of
any such loans or assume or guarantee the payment of any premium on insurance policies issued
through its agency by its principal: And PROVIDED
FURTHER, That the bank shall not guarantee the truth
of any statement made by an assured in filing his
application for insurance.
Sept. 7, 1916

Any member bank may accept drafts or bills
of exchange drawn upon it having not more than

AMENDMENTS TO FEDERAL RESERVE ACT

533

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 regulationsy restrictionsy and limitations as may be prescribed by the
Federal Reserve Board: PRoviDEDy 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.
Y

Open Market Operations
SECTION

FOURTEEN

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

534

THE FEDERAL RESERVE SYSTEM

maturities by this Act made eligible for rediscount, with or without the indorsement of a
member bank.
Every Federal reserve bank shall have power:
(a) To deal in gold coin and bullion at home
or abroad, to make loans thereon, exchange Federal reserve notes for gold, gold coin, or gold
certificates, and to contract for loans of gold coin
or bullion, giving therefor, when necessary, acceptable security, including the hypothecation
of United States bonds or other securities which
Federal reserve banks are authorized to hold;
(b) To buy and sell, at home or abroad, bonds
and notes of the United States, and bills, notes,
revenue bonds, and warrants with a maturity
from date of purchase of not exceeding six
months, issued in anticipation of the collection
of taxes or in anticipation of the receipt of
assured revenues by any State, county, district,
political subdivision, or municipality in the continental United States, including irrigation, drainage and reclamation districts, such purchases to
be made in accordance with rules and regulations
prescribed by the Federal Reserve Board;
(c) To purchase from member banks and to
sell, with or without its indorsement, bills of
exchange arising out of commercial transactions,
as hereinbefore defined;
(d) To establish from time to time, 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;
(e) To establish accounts with other Federal

AMENDMENTS TO FEDERAL RESERVE ACT

535

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
Canceled
maintain
accounts in foreign countries,
Sept. 7, 1916 appoint correspondents, and establish agencies
in such countries wheresoever it mayJune 21,1917 be dttmed 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,
Sept. 7,1916 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.
June 21, 1917
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 Boardy
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.
June 21,1917

Note Issues
SECTION

SIXTEEN

Federal reserve notes, to be issued at the discretion of the Federal Reserve Board for the

536

THE FEDERAL RESERVE SYSTEM

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.
Sept. 7,1.916
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, and bills/ accepted
•fef* of exchange, or acceptances
June 21, 1917
rediocounted acquired under the proviSept. 7., 1916 sions of section 13 of this Act, and the 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/
June 21,1917
, or gold or gold certificates; but in no event
shall such collateral security, whether goldy 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

AMENDMENTS TO FEDERAL RESERVE ACT

537

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.
June at, 1917
Every Federal reserve bank shaii 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. and not offoet by gold
or lawful money deposited with the Federal re*oervo agent/ 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

538

THE FEDERAL RESERVE SYSTEM

so paid out. Notes presented for redemption
at the Treasury of the United States shall be
paid out of the redemption fund and returned
to the Federal reserve banks through which they
were originally issued, and thereupon such Federal reserve bank shall, upon demand of the
Secretary of the Treasury, reimburse such redemption fund in lawful money or, if such Federal reserve notes have been redeemed by the
Treasurer in gold or gold certificates, then such
funds shall be reimbursed to the extent deemed
necessary by the Secretary of the Treasury in
gold or gold certificates, and such Federal reserve bank shall, so long as any of its Federal
reserve notes remain outstanding, maintain with
the Treasurer in gold an amount sufficient in
the judgment of the Secretary to provide for
all redemptions to be made by the Treasurer.
Federal reserve notes received by the Treasurer
otherwise than for redemption may be exchanged
for gold out of the redemption fund hereinafter
provided and returned to the reserve bank
through which they were originally issued, or
they may be returned to such bank for the credit
of the United States. Federal reserve notes unfit for circulation shall be returned by the Federal reserve agents to the Comptroller of the
Currency for cancellation and destruction.
June ai, 1917
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

AMENDMENTS TO FEDERAL RESERVE ACT

539

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 ouch notes issued to it and shall pay such
rates of interest on oaid amount as may be established by the Federal Reserve Board/ -ft»4
•the 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 -so- 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.

540
June 21,1917

THE FEDERAL RESERVE SYSTEM

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 to the.
Treasury of the United Stateo held by him as
collateral security for Federal reserve notes as may
be required for the exclusive purpose of the
redemption of such Federal reserve notes/, but
such gold when deposited with the Treasurer shall
be counted and considered as if collateral security
on deposit with the Federal reserve agent.
June 21, 1917
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 dopooited with issued to
it and shall at the same time substitute therefor
other itfee- 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 providedfor against
Federal reserve notes which have been retired.
Federal reserve notes so deposited shall not be

AMENDMENTS TO FEDERAL RESERVE ACT

541

reissued except upon compliance with the conditions of an original issue.
June ai, 1917
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.
June 21, 1917

That 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

542

THE FEDERAL RESERVE SYSTEM
Board and shall be payable in gold coin or gold
certificates on the order of the Federal Reserve
Board to any Federal reserve bank or Federal reserve agent at the Treasury or at the Subtreasury
of the United States nearest the place of business
of such Federal reserve bank or such Federal reserve agent: PROVIDED, HOWEVER, That any expense
incurred in shipping gold to or from the Treasury
or subtreasuries in order to make such payments,
or as a result of making such payments, shall be
paid by the Federal Reserve Board and assessed
against the Federal reserve banks. The order used
by the Federal Reserve Board in making such payments shall be signed by the governor or vice governor, or such other officers or members as the
board may by regulation prescribe. The form of
such order shall be approved by the Secretary of
the Treasury.

June 2i, 1917

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.
June 21, 1917
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.
June 21,1917
Nothing in this section shall be construed as
amending section six of the act of March fourteenth, nineteen hundred, as amended by the acts

AMENDMENTS TO FEDERAL RESERVE ACT

543

of March fourth, nineteen hundred and seven,
March second, nineteen hundred and eleven, and
June twelfth, nineteen hundred and sixteen, nor
shall the provisions of this section be construed to
apply to the deposits made or to the receipts or
certificates issued under those acts.

Bank Reserves
SECTION

June 2i, 1917

NINETEEN

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.
June ai, 1917
When the Secretary of the Treasury shall have
officially announced, in such manner as he may
elect, the establishment of a Federal reserve
bank in any district, 0 Every subscribing mem
bank, banking association, or trust company
which is or which becomes a member of any Federal reserve bank shall establish and maintain
reserves balances with its Federal reserve bank as
follows:
June i ! I917
(a) A bank If not in a reserve or Central reserve city, as now or hereafter defined, it shall
hold and maintain reserves equal to twelve 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/.
as follows/
In ito vaults for a period of thirty six months

544

THE FEDERAL RESERVE SYSTEM

after oaid date five-twelftho thereof and permanently thereafter foui^twelftho.
In the Federal reoerve bank of ito diotrict^
for a period of twelve montho after oaid date,
two-twelftho, and for each ouccocding oix montho
an additional one-twelfth, until
five-twelfths
have been oo dcpooited, which ohall be the
•amount permanently required.
For a period of thirty-oix montho after said
date the balance of the reoerveo may be held in
its own vaulto, or in the Federal reoerve bank,
or in national banks in reoerve or central reoerve
citieo, ao now defined by law.
After said thirty-oix montho* period oaid reserves, other than those hereinbefore required
to be held in the vaults of the member bank
and in the Federal reserve bank, shall be held
in the vaults of the member bank or in the
Federal reserve bank, or in both, at the option
of the member bank.
(b) A bank If in a reserve city, as now or
hereafter defined, it shall hold and maintain
reoerveo with the Federal reserve bank of its district an actual net balance equal to not less than
fifteen ten per centum of the aggregate amount
of its demand deposits and five three per centum
of its time deposits/, as follows;
June 21, 1917
In ito vaulto for a period of thirty six months
after oaid date oix-fifteenths thereof, and permanently thereafter fivc-fiftccntho.
In the Federal reoerve bank of its district for
a period of twelve months after the date afore*
oaid at least three fifteenths^ and for each succeeding oix.rpontho an-additional one-fifteenth
until oix-fiftoontho have been 00 depooited, which
ohall be the arojount, permanently required.

AMENDMENTS TO FEDERAL RESERVE ACT

545

For a period of thirty-oix montho after said
•date the balance of the reserves may be held in
ito own vaulto, or in the Federal rcoorvo bank,
or in national banko in
rcoorvo or
Aug. 15,1914
ccnJune 21, 1917
tral reserve citieo ao now defined by law.
After oaid thirty-oix"months> period all of oaid
rcocrvco, except thooc hereinbefore required to
bo hold permanently in the vaults of the mem
bcr bank and in the Federal reserve bank, shall
be held in its vaults or in the Federal reserve
bank or in both, at the option of the member
JAAWLR
U U l l l V i

June 21, 1917

(c) A bank If in a central reserve city, as now
or hereafter defined, it shall hold and maintain
a reserve with the Federal reserve bank of its
district an actual net balance equal to not less
than eighteen thirteen per centum of the aggregate amount of its demand deposits and -frvethree per centum of its time deposits/, as follows;
In ito vaults six-eighteenths thereof.
In the Federal reserve bank, seven eighteenths^
The balance of oaid reserves shall be held in
ito own vaults or in the Federal reocrvc bank,

Any Federal reserve bank may receive from
the member banks ao reserves, not exceeding onehalf of each installment, eligible paper ao dethirteen properly
Aug. 15, 1914 scribed in section • fourteen
June 21,1917 indorsed and acceptable to the said reserve bank.
•If a State bank or trust company io required
Aug. 15, 1914
Canceled
or permitted by the law of ito State to keep ito
June 21, 1917 rcocrvco cither in ito own vaulto or with another
State bank or tru3t company, or- with a national

546

THE FEDERAL RESERVE SYSTEM

hanky ouch reoerve depooito GO kept in ouch Statebank, or truot company, or National bank ohall
be construed, within the meaning of thio section,
ao if they were reoerve depooito in a national
bank in a reoerve or central reoerve city for a
period of three years after the Secretary of the
Treasury shall have officiallj^nnounced the establishment of a Federal reoerve bank in the
diotrict in which ouch State bank or* truot company is oituate.—Except ao thuo provided, no
June 21,1917
No member bank shall keep on deposit with
any nonmember 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.
June 21,1917
The reserve 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
reserve balance required by law is fully restored.
June 21,1917
In estimating the reserves balances required
by this Act, the net balance difference of amounts
due to and from other banks shall be taken as
the basis for ascertaining the
Aug. 15, 1914
bank

AMENDMENTS TO FEDERAL RESERVE ACT

547

Canceled
deposits against which reserves required balances
June 21, 1917 with Federal reserve banks shall be determined.
Balances in reserve banks due to member banks
shall, to the extent heroin provided, be counted
as reserves.
June 21,1917
National banks, or banks organized under local
laws, located in Alaska or in a dependency or
insular possession or any part of the United States
outside the continental United States may remain nonmember banks, and shall in that event
maintain reserves and comply with all the conditions now provided by law regulating them; or
said banks/except in the Philippine Islands/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.
Foreign Branches
SECTION

Sept. 7,1916

TWENTY-FIVE

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, for the purpose of
securing authority to either or both of the following powers:
First. T0 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.

548

THE FEDERAL RESERVE SYSTEM

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.
Sept. 7,1916.
Such application shall specify^ in addition to
the name and capital of the banking association
filing it, the powers applied for, and the place or
places where the banking operations proposed
are to be carried ony and the amount of capital
oct aside for the conduct of its foreign business.
The Federal Reserve Board shall have power
to approve or to reject such application if, in
its judgment, the amount of capital proposed to
be oct aside for the conduct of foreign business
is inadequate, or in whole or in part if for other
any reasons the granting of such application is
deemed inexpedient/, and shall also have power
from time to time to increase or decrease the number
(of places where such banking operations may be
carried on.
Sept. 7,1-916
Every national banking association which ohall
receive authority to establish foreign branches
operating foreign branches shall be required at all
times to furnish information concerning the condition of such branches to the Comptroller of
the Currency upon demand, and every member
bank investing in the capital stock of banks or
corporations described under subparagraph two of

AMENDMENTS TO FEDERAL RESERVE ACT

Sept. 7,1916

Sept. 7, 1916

549

the first paragraph of this section shall be required
to furnish information concerning the condition
of such banks or corporations to the Federal Reserve Board upon demand, and the Federal Reserve Board may order special examinations of
the said foreign branches, banks, or corporations
at such time or times as it may deem best.
Before any national bank shall be permitted to
purchase stock in any such corporation the said
corporation shall enter into an agreement or undertaking with the Federal Reserve Board to restrict
its operations or conduct its business in such manner or under such limitations and restrictions as
the said board may prescribe for the place or places
wherein such business is to be conducted. If at
any time the Federal Reserve Board shall ascertain
that the regulations prescribed by it are not being
complied with, said board is hereby authorized and
empowered to institute an investigation of the matter and to send for persons and papers, subpoena
witnesses, and administer oaths in order to satisfy
itself as to the actual nature of the transactions
referred to. Should such investigation result in
establishing the failure of the corporation in questiony or of the national bank or banks which may
be stockholders therein, to comply with the regulations laid down by the said Federal Reserve
Board, such national banks may be required to
dispose of stock holdings in the said corporation
upon reasonable notice.
Every such national banking association shall
conduct the accounts of each foreign branch independently of the accounts of other foreign
branches established by it and of its home office,
and shall at the end of each fiscal period transfer

550

THE FEDERAL RESERVE

SYSTEM

to its general ledger the profit or loss accruiftg^/
at each branch as a separate item.
Sept. 7, 1916

Any director or other officer, agent, or employee
of any member bank may, with the approval of
the Federal Reserve Board, be a director or other
officer, agent, or employee of any such bank or
corporation above mentioned in the capital stock
of which such member bank shall have invested
as hereinbefore provided, without being subject to
the provisions of section eight of the Act approved
October fifteenth, nineteen hundred and fourteen,
entitled "An Act to supplement existing laws
against unlawful restraints and monopolies, and
for other purposes"

PART

TWO

APPENDICES

APPENDIX THREE
L E T T E R T O HON. T H E O D O R E E. B U R T O N
New York, N. Y .
April 30th, 1908
H O N . THEODORE E .

BURTON

H O U S E OF R E P R E S E N T A T I V E S
WASHINGTON, D .
DEAR MR.

BURTON:

I beg to acknowledge receipt of your yesterday's letter, which I
have read with much interest, and for which I thank you. I
assure you that it was the greatest pleasure for me to be of whatever little help I could be in this matter. Y o u certainly do not
owe me any thanks but we all have to thank you for the fight that
you are making for sound currency legislation, and it is more
than sad that the chances to pass a satisfactory bill are so poor.
I am trying to work out in a somewhat final shape my pet scheme
of a " M o d i f i e d Central B a n k . " Having been one of the first
champions of such an organization and having tried to put in a
fight for it during almost two years, I have been repeatedly requested to show in black and white what I would propose. T h e
little pamphlet that I have prepared embodies these ideas of mine,
which I have prefaced by a short statement of what I consider the
fundamental principles, which must be borne in mind in the framing of currency legislation.
As I hope to leave for Europe on M a y 7th, I did not want to
leave before having laid down these ideas of mine. It was my
intention to send a copy of this pamphlet to every national and
state bank, and also to every member of the legislature. I believe
that the question whether we shall finally be able to secure sound
currency legislation, will largely depend on a broad campaign of
education, and I would like to do my part in it.
I hope you will not consider this intention of mine as an evidence
of conceit, but it is the poor work done by others in this matter

553

554

THE

FEDERAL

RESERVE

SYSTEM

and the lack of knowledge shown by those who ought to know
better and must know better before anything can be achieved,
which makes me feel that I have a duty to perform. I must confess
that I would appreciate it very much if this bill of mine could be
introduced, so as to place it on record, and so as to secure for it
, some place in the consideration of the problem, which probably
will have to follow whatever may be decided upon now, be it a
commission or a temporary measure. I wonder whether it would
be improper for me to ask whether you or Mr. Parsons would be
willing to introduce this bill " b y request or by c o u r t e s y " which
would not commit the gentleman introducing this bill to champion
it as if it were his own, although, of course, I need not add how
much I would appreciate it if my " c h i l d " would find a strong
father. Please do not hesitate to write me with full frankness
about this matter, which I assure you I shall all the more appreciate.
W i t h assurances of highest respect, I beg to remain

Very truly yours,
PAUL M .

WARBURG

APPENDIX THREE
LETTER TO SENATOR ALDRICH
N e w Y o r k , December 31st, 1907
D E A R SENATOR ALDRICH:

Since I had the pleasure of seeing you, I have carefully considered
the interesting scheme which you outlined for creating an additional
currency, using as a basis clearing-house certificates. Y o u were
kind enough to say that you would be interested to receive any
further suggestions on this subject, and this encourages me to
write to you frankly what has occurred to me since on careful
consideration of the question.
I heartily agree with the object in view, and sincerely congratulate you upon the strong attitude you have taken against the assetcurrency plan. I believe, however, there might be some weighty
objections to the combination of the government bond-secured
national bank note and the national bank note secured by
clearing-house certificates. Does not the financial history of all
nations show the generally adopted tendency of divorcing the power
of issuing notes from the power of doing a general commercial
business, as done by the national banks? It strikes me that it
would be better to do away with some of the restrictions now
placed upon the national banks as, for instance, the limitation to
endorse paper, as to accepting and to certifying, etc., than to give
them additional note-issuing powers which logically should lead
to a further restriction of their privileges. While the government
bond-secured national bank note did splendid service to meet the
conditions of the past, would it not be well to create a new note to
be issued by a central clearing house, or whatever this institution
may be, and to let this new elastic note issue grow in extent and,
possibly, to stop any further issue of government-secured notes?
Did not the last panic show that we are suffering from too much
decentralization of our banking system and from the absolute
impossibility of securing any concerted action as to the free use of
555

556

THE FEDERAL RESERVE SYSTEM

our reserves, instead of competitive hoarding of currency by the
financial institutions? All these objectionable features might
be removed if the future issue of notes against clearing-house
certificates would not be left to the judgment of each clearing house
and as far as the physical issue is concerned, to each national bank.
But, if one independent organ would be created, to sit in final
judgment on the question whether the collateral is good and where
and whether the notes are to be issued, and to issue one kind of a
note, guaranteed by the United States—payable in gold, and
secured by an independent gold reserve—the situation would be
greatly improved, and not only expansion, but also effective
contraction would be secured.
I cannot help fearing that under your plan precarious situations
might arise. Suppose one particular clearing-house district, say,
for instance, Pittsburgh, would be heavily over-extended, and
desired to issue clearing-house certificates, while all the other
clearing-house districts of the country would not be in any extended
situation, and would feel that, instead of granting further accommodation, a wise restriction would be preferable. The members of
the clearing-house in Pittsburgh, having possibly all the same
interests, and being possibly all under the same influence o f —
perhaps—over-optimism, might misjudge the situation. In this
case, there is no authority, no central board of a national clearing house to pass on the question whether the notes ought to be
issued or not. Besides, if they are issued, possibly to pay for
indebtedness in other clearing-house districts, they might be
promptly presented for exchange into government notes, unless
they are clearly guaranteed by the United States. . . . For all
these considerations, I am rather inclined to believe that some kind
of a central clearing house should be created which would stand
between the government and the local clearing houses, which
would issue its own notes, guaranteed by the United States
Government, and which would be able, instead of issuing these
notes automatically at 6 per cent, to raise the rate of interest even
above this rate. In given instances, it would refuse altogether to
give advances, and it would give these advances for certain periods,
so that it can insure contraction of its outstanding notes.
I do not know whether you have found the time to read the

557

LETTER TO SENATOR ALDRICH

draft for the organization of a central clearing house, which I took
the liberty of sending you at your kind suggestion. However,
after having had the advantage of hearing your views, I am afraid
that you will feel that even those very limited powers that I had
planned to be given to the central clearing house, might prove
fatal to its ever being created. But you will readily see on glancing
through my paper that this plan is susceptible of many modifications; it would be perfectly feasible, if absolutely necessary, to
withhold from the central clearing house the power to discount
any paper, except through the clearing houses and, if unavoidable,
one might even take away the power to receive the government's
moneys. The latter privilege was inserted for the purpose of
securing for the central clearing house a regular income and for
increasing its gold reserve and, through that, its general power
of being of benefit. But even if stripped of these two very important privileges, a central clearing house would be a big step in
advance and, which is most important, a step in the right direction.
I most sincerely apologize for taking the liberty of writing to
you at such length, but I am so deeply interested in the question,
that I cannot withstand the temptation of submitting my views to
the man who will be all-important in working out this scheme. If,
at any time, I can be useful, please be assured that I shall be only
too glad to hold myself at your disposal.
With assurances of highest esteem, I beg to remain

Very truly yours,
PAUL M .

WARBURG

APPENDIX

THREE

STATEMENT BEFORE THE SUBCOMMITTEE OF
THE COMMITTEE ON BANKING A N D CURR E N C Y O F T H E HOUSE OF R E P R E S E N T A T I V E S , J A N U A R Y 7, 1913
The earnest study that has been devoted during these last years
to the question of monetary and banking reform has had this
tangible result that the roots of the evils of our present system
are now clearly understood. While a few years ago the opinion
generally prevailed that we were suffering primarily or even exclusively from the effects of an inelastic note issue, it is now clearly
recognized that this defect of our system is not the main question,
but that the more important and fundamental shortcomings of our
system are decentralized and therefore inefficient cash reserves and
the immobilization of the commercial paper held by our banks.
It may be safe to add that with the clear recognition of the
disease, common agreement has been reached as to the organs that
must be treated, and it is now generally conceded by the majority
of students of the question that a remedy for these three evils—
decentralized reserves, immobilized commercial paper, and inelastic
note issue—will have to be found by any legislation that is to
bring permanent and thorough relief. It is not so generally understood that of these three evils the decentralization of our cash
reserves is the most fundamental one, and that by creating a properly organized system of centralized reserves the remedy for all three
evils, and the defects that in turn follow them, can be and must be
found.
The point that, with your kind permission, I wish to emphasize
is that this work of reform cannot be done in a haphazard way by
treating each phase separately, but that centralization of reserves,
mobilization of credit, and elastic note issue go together—they
follow automatically a properly organized concentration and
cooperation of reserves.

558

STATEMENT BEFORE GLASS SUBCOMMITTEE

559

This interrelation becomes quite apparent to us when we stop to
consider that, in case of the organization of such a central reserve,
neither the banks nor the central reserve itself would be safe without the introduction of commercial or banking paper as a means of
exchange. The banks would not be safe, because they could not
permit a substantial portion of their cash reserves to be kept by
the central reserve, unless they could rely on two things: first, that
at all times they could obtain gold against their cash balances, if
actual cash were required from them, and second, that they would
at all times have the means wherewith to build up their cash
balances with the central reserve, in case increased demands for
cash would be made upon them. This means of exchange, the
key, if you please, to the vaults of the central reserve, is furnished
by commercial or banking paper. Without this key a central
reserve would be absolutely useless and therefore impracticable for
the banks.
On the other hand, a central reserve would not be safe, if it were
nothing but an automatic strong-box, receiving cash as it would be
paid in, and paying it out as it might be required. In order to be
safe, and in order to be able to protect the nation, the central
reserve must be in a position to increase at will its investments in
commercial paper and, vice versa, to reinforce its cash holdings
by collecting maturing paper, strengthening or loosening, whichever the case may be, its hold on the market, and protect its
own position, as against its aggregate on demand gold obligations
at home and as against other countries. Without this ability of
collecting or acquiring local or foreign paper, both at home and
abroad, the central reserve would not be safe.
It would be a great national achievement in itself to bring about
this mobilization of credit and the creation of an important worldwide discount market, which in turn would have, as a sequence,
the turning into a broad bill market of the many millions that now
flood and over-flood Wall Street. But, we must bear in mind
that it is an incidental, though necessary, development following
the creation of a central reserve as, inversely, the creation of an
effective central reserve is dependent upon the system of free exchange of commercial and banking paper. The two cannot be
separated.

560

THE FEDERAL RESERVE SYSTEM

A n elastic note issue is an additional and most effective weapon
of defense of a central reserve, without which it would be wellnigh impossible for the latter to perform its main functions of
maintaining, without exorbitant fluctuations in interest rates, a
proper proportion between all demand obligations and actual
gold reserves. A scientific and effective elastic note issue must be
covered by gold and commercial paper in a safe proportion, just
the same as the general deposit obligations of a central institution.
Bank notes are deposits in bearer form. They can be turned into
deposits at will as, inversely, deposits can be turned into notes at
the will of the owner. Both deposits and notes are payable in gold
and the centralized reserves cover indiscriminately the one and the
other. They, therefore, must be treated together and cannot be
dealt with by separate laws. Elastic note issue cannot be created
without a central reserve, nor without the existence of liquid commercial paper, nor can an efficient central reserve be established
without the power of elastic note issue. They all go hand in hand.
Inasmuch as it is generally recognized that the creation of a
discount market is most desirable and of the highest importance
for the nation, it has been frequently suggested that legislation
might start with the creation of such a market and leave the rest
to follow later.
T h e object of my argument was to show that such a course would
be impossible. American commercial paper will not be considered
a quick asset and will not take the place of the stock-exchange call
loan unless the purchasers—both local and foreign—know that
there will be a possibility of rediscounting a safe proportion of their
holdings, if need be, with a central institution. While as a matter
of fact the actual rediscounting by central institutions may be
unimportant in normal times, the existence of such central institutions creates the ultimate basis of confidence without which a discount market cannot be developed. No law can create a discount
market without a central reserve; without the latter our paper
would remain provincial and local and a "lock u p " as heretofore.
Others have advocated banking legislation creating a net of
local reserve centers all over the country, having in mind that a
general scheme of connecting these local reserve centers into one
central institution could be perfected at some future time. This,

STATEMENT BEFORE GLASS SUBCOMMITTEE

561

too, is not a practical plan. Unless a central reserve be endowed
with a large capital of its own and unless we bring about a free
return flow of all idle cash into one central reservoir, from where,
without the least possible friction it can be directed to wherever
it is legitimately wanted, there cannot be created that confidence
which is the basis of the entire structure. The banks would not
rely entirely upon the ultimate strength of their local reserve
centers and consequently they would hold back in their vaults
more cash than would be permissible for the safety of the local
reserve centers and the entire community. These local reserve
centers, each in turn, would try to accumulate the largest possible
amount of cash and, in times of stress, we would witness exactly
the same conditions which we saw during the panic of 1907. Instead of a free return flow of idle cash, we would have created a
large number of hoarding centers and we would experience again a
period of gold premium between one center and the other, and
local runs and havoc would follow. Moreover, in the majority
of the zones there would not exist a sufficiently important banking
power to organize local reserves of adequate size. The strongest
local reserve—no doubt that of the city of New York—would
therefore dominate, because it would be to that center that all
the country, in normal and abnormal times, would appeal for
help. A system of that kind would enormously increase the financial power of New York even beyond the measure enjoyed to-day.
Furthermore, the power that lies in union would be lost by such a
system of local reserve centers, which could neither accumulate a
large reserve of foreign exchange, as a weapon for warding off gold
exports, nor would they have any of the protective or preventive
powers which would benefit the nation under a strong scheme of
federated reserves.
It would appear then without much doubt that the solution for
our country must be sought on the lines of centralized reserves,
the same system, though in a form not so highly developed, as that
of the European central institutions, the effectiveness of which we
have admired again and again in these recent years. This system
has helped comparatively weak nations to stand phenomenal
strains without any such calamity as overcame this country under
much less trying conditions.

562

THE FEDERAL RESERVE SYSTEM

That part of the plan of the Monetary Commission which is
expressive of these principles has been generally recognized as
sound and as containing no more than a practicable adaptation of
methods which have been successfully tried by all other financial
powers of the globe.
The difference of opinion concerning the proper methods to be
applied in our country exists more regarding the shell than the kernel.
The two questions that remain to be solved to the satisfaction of the
nation are mainly those of form and control.
Less importance, I believe, is being attached to the first question.
It will not be difficult to reach an agreement as to whether this central
reserve shall be a simple federation of banks, under some kind of a
joint responsibility and without a capital of its own> or whether it
shall be a corporation endowed with a large capital and, if so, whether
the banks shall be its only stockholders, or whether the stock should
be kept indiscriminately and widely scattered. The harder problem, on the proper solution of which the fate of the entire measure
appears to depend, is that of finding the formula for constituting
control and management in a way that will create absolute confidence and, at the same time, satisfy the people.
There are those who claim that the institution should be managed like the Bank of England, by business men alone, without any
government interference (this is the scheme which evidently
appealed most to the framers of the National Monetary Commission's Plan); there are those again who claim that the issuing of
money with almost legal-tender powers is a semi-governmental
function and that, therefore, the government should have a larger
share in the running of the institution, a principle applied by our
sister republic in establishing the "Board of Regents" of the
Banque de France. There are even those who claim that the
government should issue these notes directly without the creation
of any special independent organ for this purpose.
It does not seem necessary to deal at length with this latter
contention. Once we have recognized clearly that commercial
paper must be the basis of a scientific note issue, we can see at a
glance where it would lead if the Treasury should become the organ
for the purchase and sale and the collection of such paper. It
would end in disaster.

STATEMENT BEFORE GLASS SUBCOMMITTEE

563

The same argument applies, though to a somewhat lesser degree,
to the question of the management of a central institution by
exclusive government administration; it, too, would be fatal.
It would without fail bring politics into business and business into
politics.
On the other hand, it is evident, that if the power of managing
this institution were to be placed exclusively in the hands of banks
and business men, it would create alarm and suspicion.
To my mind, a proper solution would be division of power between
these two factors. If the government, in addition to the ex officio
members, appointed a little more than half of the members of the
board of the central office, and the other half were appointed by
the banks from all parts of the country, and if the boards of the
branches were constituted in a similar way, possibly giving a slight
majority to the banking element on these branch boards, it seems
probable that both sides would protect each other against temptation, insinuation, and suspicion. In any case, there would be no
difficulty in finding some modus by which the government would
exercise effective supervision and control over a management,
the direction of which would have the advantage of the experience
and acumen of the business and banking community.
It is generally understood that such a central institution would
have to be restricted in its functions. It should deal only with
banks and trust companies and should be so constructed that it
would protect and strengthen the independence of the more than
20,000 banking units now in existence. It should be restricted
in its dealings to transactions in commercial and banking paper,
both domestic and foreign, and to investments in United States
Government securities and Treasury notes. It should, furthermore, be restricted as to the amounts that it might purchase from
each institution, and provision should be made which would
carefully safeguard the central institution, by a system of joint
guarantees or otherwise, in case such limits had to be surpassed.
This would protect the banks of the country and, incidentally, it
would bring about a network of bulwarks which would shield the
central institution from attacks both from within and from without.
It is evident why a central bank with all the wide powers enjoyed
by the European institutions, could not be conscientiously planned

564

THE FEDERAL RESERVE SYSTEM

for our country. It would interfere with the business and independence of the existing banks, and by the power of dealing with
individuals and individual firms the door would at once be opened
for dangerous abuses which must be avoided at all hazards. Control of such an institution, both at the head office and the branches,
would give such vast power that, no matter whether government
officials or business men were in charge, sooner or later it would
become the instrument of selfish ambition.
In framing this law we must clearly consider existing conditions.
The business man who wants to help in this work must forget his
own interests and must not try to belittle the possible dangers of
selfish motives and boundless ambition on the part of business men
or bankers, from which the future federation of reserves must be
protected with absolute certainty. The legislator, on the other
hand, must view the question with equal frankness and courage; he
cannot be blind to the dangers that would follow if the government
were to be dragged into business, and he dare not disregard the
fact that in order to serve the public interest best, this institution
must have the hearty and healthy cooperation of the best business
elements from all sections of the country.
This central reserve, or whatever name we may give it, must be
a sacred institution run for the public weal, without consideration
of personal gain by anyone connected with it.
If in order to secure this we have to forego the fullest satisfaction
of our pride and ambitions, by accepting the less perfect form of a
strongly restricted central reserve instead of a highly developed
central bank, we may still be satisfied with establishing a system
that will enable us to develop along modern lines and that will give
us safety and immunity from panics—without the institution
becoming a danger to our political and social life.

There is no difficulty in evolving such a plan. The country
demands with impatience that it should be done without any
further delay.
The statement gave rise to the following colloquy between the
writer and Mr. Glass:
The Chairman. Would you say that we should do nothing if we
cannot at this time get a central reserve association?
Mr. Warburg. That is a very hard question to answer, because

STATEMENT BEFORE GLASS SUBCOMMITTEE

565

it is a tremendous responsibility to say that. I feel very strongly
that, as I have tried to explain in what I have said to you, when
you will come to write a law of regional reserves on the lines that
Mr. Morawetz suggested, you would find very soon that either it
would not be protection, or that it would depend on New York and
Chicago, and would make those the centers, just the thing you want
to avoid; or that, if you wanted to make the system effective, you
would have to write so many conditions, how the various reserve
centers shall place their funds at the disposition of each other,
that it would be again a centralization of reserves.
I think that when you will be well under way in trying to work
this out, you will find that you will come toward a centralized
reserve system in some form. There are several forms. It need
not be done on the plan on which the Monetary Commission
proceeded, but I think that the kernel of it must tend toward an
effective centralization of reserves, or I do not think you will get
anywhere.
The Chairman. You do not agree with Mr. Hepburn, then, that
the cooperation of banks throughout the country in the regional
reserve associations would be infinitely better than the existing
system?
Mr. Warburg. It may amount to something. I am very skeptical of these general plans of saying a system of that kind should
be worked out. I have challenged Mr. Morawetz already in 1910
to produce a definite plan of that kind, and have told him then
that he would find that he would have to take one horn or the
other of the dilemma; that either he would produce an inefficient
and dangerous system, or that it would lead toward a strong
centralization of reserves in a very roundabout way, which would
not be as effective as a straight-forward central reserve.
The Chairman. That is what you are trying to arrive at, a
centralization of reserves?
Mr. Warburg. It is not that I am trying to arrive at it, Mr.
Chairman. It is to my mind—and I have studied this thing very,
very carefully for a great many years—the only way, the fundamental way, in which every other country in the world has been
treating this; and it is the only effective way in which it can be

566

THE FEDERAL RESERVE SYSTEM

treated, and it need not be a central bank. We have forgotten in
this country to make that clear.
The Chairman. Yes.
Mr. Warburg. It is not necessary to have that centralization of
reserves in a central bank. I am opposed to a central bank for the
United States.
The Chairman. Do you think the so-called Aldrich Plan is or is
not practically that of a central bank?
Mr. Warburg. I do not consider that a central bank for this
reason. Of course we have to be technical, and we have to define
it pretty clearly. A bank is an institution that does business
broadly. A central bank in this country would have the right to
deal with anybody else. It would have the right, as the European
banks have, to make loans on stocks and bonds. It would have
branches all over the country and would be the strongest competitor of the banks, as the European central banks are. The
Reichsbank and the Bank of France are active competitors, and
they claim that only through that can they hold that effective
grip upon the market that they need. That is their excuse for it.
Now, it is conceded that a central reserve would not be as
effective in its hold on the market as a central reserve bank would
be. But in Europe they have not got the large cash balances that
the banks have in this country, and if you could devise a scheme by
which those balances could be made cooperative it would fulfill all
requirements, and you would get safety from panics without a
central bank. You would not get safety from an occasional crisis;
crises you cannot prevent. But a collapse of your system can be
prevented under such a system. That I do not think can be
prevented under a system of regional reserves if you get a real
strain. Little things will not upset it; but if we should get into a
real serious entanglement as the European countries did just now
—and that may happen—a system of decentralized reserves would
not stand the strain for a moment.1
1 The remainder of the testimony containing largely colloquy with other
members of the Subcommittee has not been reprinted.

APPENDIX THREE
REPORT OF DELEGATES FROM THE NEW YORK
STATE CHAMBER OF COMMERCE TO THE
M O N E T A R Y C O N F E R E N C E IN W A S H I N G T O N ,
J A N U A R Y 18, 1911
T o T H E C H A M B E R OF C O M M E R C E :

The undersigned, who were appointed delegates of the Chamber
to the Monetary Conference of the National Board of Trade at
Washington on January 18th, 1911, beg leave to submit the
following report:
At the first meeting held by your delegates early in January
in New York, there was reached complete unanimity that the
solution of the problem of monetary reform in the United States
is to be sought on the lines of a central organization and on the
broad principles governing European central banks. These views
were thereupon briefly formulated.
From a report prepared by a Committee of the New York
Produce Exchange and from earlier statements issued by the Committee on Finance and Currency of the Merchants' Association,
both of which bodies had also accepted invitations to be present
at the said conference at Washington, it became evident that it
might be possible for the delegates of the three important commercial bodies of New York to agree upon one resolution, to be jointly
introduced at the convention.
Your delegates therefore brought about a conference with the
delegates of the Merchants' Association and the New York Produce
Exchange, at which preambles and resolutions were agreed upon
recommending the adoption of a central organization and setting
forth at length the general principles which should govern its
creation and operation.
On January 18th all of your delegates were in attendance at
Washington to participate at the conference which took place
under the able chairmanship of Mr. C. Stuart Patterson of
Philadelphia.

567

568

THE FEDERAL RESERVE SYSTEM

The joint resolution offered by the three New York commercial
bodies, of which printed copies were distributed among the members of the conference, was referred to a Committee on Resolutions
of eleven, of which Mr. Warburg of your delegation was made
chairman and Messrs. Ring and Sachs members. This committee
examined the various resolutions offered by commercial bodies
or their delegates, and it may be interesting to state that eight of
the twelve bodies which had expressed views were in favor of a
central banking organization.
In addition to the delegations of the Chamber of Commerce of
the State of New York, the Merchants' Association of New York,
and the New York Produce Exchange, the bodies offering resolutions in favor of a central banking organization, were the Board of
Trade of Philadelphia, the Baltimore Board of Trade, Baltimore,
Md., the Chamber of Commerce of Spokane, Wash., the Board of
Trade of Scranton, Pa., and the Board of Trade of Wilmington,
Del. It is a great satisfaction for your committee to report that
the resolutions offered by the delegates of the three New York
commercial bodies were adopted by the Committee on Resolutions
with only slight amendments and with only one dissenting voice,
and offered to the convention as the joint resolution of the conference. . . . (The preamble and resolutions are printed in full
on pages 63 to 65, Chapter IV.)
On the day preceding the meeting of the conference, Senator
Aldrich published his plan for banking and currency reform,
and copies thereof were in the hands of the members of the conference. The general provisions of the plan were explained in an
instructive address by Assistant Secretary of the Treasury, A.
Piatt Andrew.
Your delegates are greatly pleased to report that this plan,
barring a few comparatively unimportant details, complied fully
with the principles established in the foregoing resolution. The
subsequent resolutions endorsing the broad principles of the Aldrich
Plan without committing the conference to every detail of the
same, and advocating the creation of a Business Men's League
to assist in a campaign of propaganda and education, were unanimously adopted by the Committee on Resolutions.
These resolutions read as follows:

REPORT OF DELEGATES TO CONFERENCE

569

Resolved, That there be appointed by the Chairman of this
conference a committee of seven, to organize a Business Men's
Monetary Reform League which shall have its main office in
Chicago with branches in the various centers of the United
States where local committees shall constitute the management. The object of this League shall be to carry on an active
campaign of education and propaganda for monetary reform,
on the principles, without endorsing every detail, of a reserve
association with branches in the business centers of the country
as outlined in Senator Aldrich's plan.
Resolved, That the delegations here present be requested to
use their influence in the commercial bodies they represent to
gain the active cooperation of these bodies and of their
individual members in the work of the League as defined.
Resolved, That the Business Men's Monetary Reform League
be requested when organized to provide for a committee on
propaganda and education, and also for a committee on
legislation whose duty it shall be to further monetary legislation on the principles adopted by the League.
Resolved, Furthermore, that the committee on organization
be requested to bring about the cooperation, and if possible,
a consolidation between this League and the National Currency
League already organized about a year ago by the Merchants'
Association of New York.
All of these resolutions were offered to the conference at its
afternoon session, by the Chairman of the Committee on Resolutions, and after instructive debate they were carried by an overwhelming majority.
The conference was addressed at the afternoon session by the
Hon. Edward B. Vreeland, Vice Chairman of the National Monetary Commission, while at the banquet, following the conference,
there were addresses delivered by the Secretary of the Treasury,
the Hon. Franklin MacVeagh, and the Hon. John W. Weeks,
member of the National Monetary Commission.
All of these gentlemen made strong presentations of the weakness
of our present financial system and they all unequivocally endorsed,
in the strongest terms, the principles of the Aldrich Plan. They
all, furthermore, voiced the sentiment that if under present political conditions this most desirable reform was to be secured it

570

THE FEDERAL RESERVE SYSTEM

could only be achieved by a strong wave of public opinion, which
would force Congress to pass this legislation without consideration
of party lines. It was strongly expressed that this reform was not
a bankers' question, but a problem most vital to everyone, and
Secretary McVeagh, in particular, pointed out the hardships that
our present system inflicts upon the classes of medium and small
means and that these would derive the preponderant benefit and
protection from the establishment of a central organization, as
planned by Senator Aldrich.
While it was generally admitted that Senator Aldrich's scheme
was not complete in its present form and that many details might
be a matter of further discussion, there was unanimity that the
underlying principles of the plan were sound and that it contained
the basis for the long sought for remedy of the defects of our present
financial system.
The plan providing for the creation of a Business Men's Monetary Reform League met with emphatic approval on all sides.
It was generally expressed that the voice of the important
commercial bodies would carry the greatest weight throughout the
country and that by organizing and carrying on an active campaign
of education and propaganda these commercial bodies could be
more effectively instrumental in securing the success of the needed
legislation than any other organizations. Incidentally, the legislative committee to be formed by this League could render great
service in formulating the law, and the more important the League,
the stronger would become the influence of its legislative committee.
In organizing this Business Men's Monetary Reform League, it
was planned to divide the country into zones of operation and to
organize for each section of the country a special committee to do
the active work—a central committee, having its seat at Chicago,
to lead the general plan of campaign and of organization.
The Merchants' Association having already started a similar
organization about a year ago, and having united with itself a
large number of important commercial bodies, it was resolved
that steps should be taken to bring about a cooperation and, if
possible, a consolidation, so as to have all the important commercial
bodies of the country united in this effort.

REPORT OF DELEGATES TO CONFERENCE

571

Your delegates, in presenting this report, and in fulfilment of the
mission with which they have been charged by the conference, beg
to ask of this Chamber that it cooperate in the organization of this
Business Men's Monetary Reform League and that it give its
active support to this most important work to be done for the
benefit of the whole country.
Respectfully submitted,
Paul M. Warburg
Welding Ring
Algernon S. Frissell
Samuel Sachs
Maurice L. Muhlemann
New York, January 30th, 1911

Delegates to
-Monetary
Conference

APPENDIX THREE
E X C E R P T S F R O M A D D R E S S O F HON. N E L S O N W<
A L D R I C H , C H A I R M A N O F T H E N A T I O N A L MONET A R Y COMMISSION, B E F O R E T H E A N N U A L
CONVENTION OF THE AMERICAN BANKERS
ASSOCIATION, A T N E W O R L E A N S ,
N O V E M B E R 21, 1911
. . . The failures of our monetary system can be attributed in
part (1) to our inability to enforce that effective cooperation of
banks which is necessary to protect public and private interests
in times of stress or crises; (2) to the limitations and restrictions
imposed by antiquated laws with reference to the treatment
of reserves; and (3) to a defective, inelastic, and unscientific system
of note issue. . . .
. . . I ought to say, perhaps, in this connection that even following 1900, until we were suddenly awakened by the events of
1907, there was no clear idea on the part of bankers or business men
generally of the character of the real defects of our system. When
the Commission was appointed and we undertook this great work,
there was little reliable information available either as to the defects
of our own system or as to the methods and practices of other
countries. I could count upon the fingers of one hand the gentlemen, whose names are familiar to you, who had any accurate
knowledge of the real, practical methods and practices by which
the banking and monetary systems of Europe were carried on.
We were obliged to enter upon what was in effect a new field of
exploration, and I venture to say that it is only within the last two
or three years that our people have become thoroughly aroused to
the importance of this great question. Within that time we have
made great advances in a very gratifying way toward a consensus
of public opinion, not only as to the character of the evils from
which we have suffered, but as to the general character of the remedies which must be applied.

572

EXCERPTS FROM ADDRESS OF HON. N. W. ALDRICH

573

I shall discuss briefly some of the salient features of the plan to
remedy these defects through the organization of a National
Reserve Association. It is proposed to organize the banks of the
country into local associations, and these into district associations,
each with distinctive functions and each with local self-government,
and to organize all district associations into the National Reserve
Association.
The organization proposed is not a bank, but a cooperative union
of all the banks of the country for definite purposes and with very
limited and clearly defined functions. It is, in effect, an extension,
an evolution of the clearing-house plan modified to meet the needs and
requirements of an entire people. The plan or organization
includes positive provisions:
First, to maintain the integrity and independence of existing
banks, state and national. The new organization is outside of and
in addition to the existing system. As it is not a bank, it is not in
any sense a competitor for the business of existing banks. In
its ownership and domestic business it is confined strictly to banks
and the government.
Second, it provides clearly the equality of privileges and advantages for all banks, great and small, wherever located.
Third, it provides equality in rates of discount, or rediscount,
for all banks, and these rates are to be uniform throughout the
country. This, it is believed, will insure steadiness and reasonableness of rates everywhere. . . .
. . . Fourth, this organization is of a form and character that
will effectually prevent the control of its operations by political
influence, local or national. This organization is analogous to
that of clearing houses, and I have never known politics or differences of opinion growing out of the size of a bank or its location
to enter into the selection of the management of a clearing-house
association . . . no plan, however wise may be its provisions,
has any chance of adoption, and this great question can never be
successfully solved, unless it can be kept out of politics. . . .
. . . The fear is expressed in some quarters that this selection
of the governor by the President and the provisions making the
Secretary of the Treasury, the Secretary of Commerce and Labor,
and the Comptroller of the Currency ex officio members of the

574

THE FEDERAL RESERVE SYSTEM

board of directors of the Reserve Association, might lead to an
attempt to control the organization for political purposes. I
believe that the participation of these officials in the management
of the institution to the limited extent prescribed is necessary to
secure a proper recognition of the vital interest which the public
has in the management of the Association. . . .
. . . Fifth, to prevent beyond question the possibility of its
control by any corporation or combination of corporations, banks
or otherwise, by any individual or combination of individuals in
Wall Street or elsewhere, for selfish or sinister purposes, it is proposed to take every precaution and to adopt every safeguard. No
provision of a plan to reconstruct our monetary system is of more
vital importance than this. . . . we are now staking the safety
of all of our banking resources on the patriotic character and
business ability of bank managers in New York whose hands are
tied in emergencies by the restrictions of a defective system and
unwise legislation. The responsibilities of continuing this control
are too enormous, the risks of failure are too great, for this condition
to be tolerated long. In my judgment the only effective remedy
for this dangerous condition will be found in the organization by
the national government of an association of a character similar
to that suggested, with branches which will be relief centers at
various points throughout the country, each with local self government, but through which the cash resources of all the banks will
be available for the support of any in case of trouble. The
country banks now depend for assistance upon their correspondents
in reserve cities or central reserve cities. The reserve cities, the
reserve agents of the country banks, and individual banks generally
depend upon the banks of New York. This is naturally so, because New York, with her vast accumulations of capital, is the
most important financial center in the country. When any serious
financial disturbance occurs in New York—like the bank suspensions in 1907—and New York fails to respond to the drafts from
other sections, the country suspends. This dangerous condition
of dependence will continue until we have a thorough reorganization of our banking system. Every financial institution in the
United States is in peril whenever confidence is destroyed in the
strength of the New York banks or in the wisdom of their

EXCERPTS FROM ADDRESS OF HON. N. W. ALDRICH

575

Now the organization which we propose has for its first and its
prime purpose to place the banking business of the country,
through local associations, in such a condition that there can be
no general suspension of the banking institutions of the country
and no general suspension of their credit functions. . . .
. . . Sixth, the dominating principle is cooperation and not
centralization. We were satisfied that we could not adopt or
adapt to our use an organization like thje central banks of Europe
or the second Bank of the United States.
We cannot afford to overlook the prejudices of the past or the
present. One of the principal objections to the second Bank of
the United States was the charge of personal and political favoritism to individuals in its management. We must afford no
opportunity for a repetition of transactions of this character, and
the new organization must, therefore, do business with the banks
alone; it must be their agent, not generally, but for certain specific
and well defined purposes.
Among the provisions of the plan intended to remedy defects
and cure existing evils are the following:
1. To insure the maintenance of adequate reserves by the
association and its members, with such provisions for discounts
and note issues as shall enable the organization to respond promptly
at all times to normal or unusual demands for credit or currency
without danger of undue expansion or inflation.
2. To provide for concentration of the cash reserves of all the
banks to be used for the assistance and support of any, under
assured decentralization of control. Scattered reserves have been
found useless in times of pressure. Deposit balances in the Reserve Association are to be counted as legal reserves.
3. To authorize the Association to rediscount, through its district branches under local control, commercial paper of a definite
character for individual banks, to be used in replenishing their
reserves.
4. To give to individual banks the facilities for an increase of
their reserves and loaning power, which will enable them to adopt
the policy which has been universally effective in other countries
of allaying excitement, creating confidence, and preventing panics
by prompt payment of all demand obligations as presented, and

576

THE FEDERAL RESERVE SYSTEM

at the same time granting a liberal extension of credit to all
deserving customers in times of uncertainty and distrust. . . .
. . . In this country we have had but little serious discussion
with reference to the proper character and extent of bank reserves,
but all must agree that the manner of distribution makes them
useless when needed. When we consider that the cash reserves of
the banks are necessarily divided into 25,000 widely scattered
portions, it is not surprising that they should fail of their purpose
and prove useless in time of trouble. Instead of being concentrated, as they are in all other countries, for the effective protection
and benefit of any, they are rendered by this distribution ineffective
and useless to all. In other countries reserves are regulated, both
as to character and extent, by the judgment and custom of managers of banks and not by legislative provisions. . . .
. . . We propose to remedy the defects to which I have alluded
by providing that the balance of any bank with the Reserve Association shall be counted as a part of its legal reserve. The
Reserve Association may through its branches rediscount commercial paper for individual banks whenever it becomes necessary
to maintain their balances and to protect and replenish their
reserves. Commercial paper available for this purpose, as defined
by the plan, includes all notes and bills of exchange issued or drawn
for agricultural, industrial, or commercial purposes, but not for
carrying stocks, bonds, or other investment securities. . . .
. . . The plan provides not only for a concentration and mobilization of cash reserves, but for a decentralization of control by
means of the powers over distribution granted to local and district
associations. . . .
5. To grant the power for further note issues to this cooperative
association of all the banks, an authority which is now vested in
national banks scattered throughout the country. . . .
6. We provide for giving authority to the Reserve Association
to fix rates for rediscounts, which must be uniform throughout the
country.
7. We give to the Reserve Association power to protect its own
reserves, and thus enable it at all times to perform its most important function, that of sustaining the credit of communities and the
country. For this purpose the Association is required to keep its

EXCERPTS FROM ADDRESS OF HON. N. W. ALDRICH

577

assets always in liquid form, and all its rediscounts and investments
must be in short-time paper or securities. To enable the Association to strengthen its own reserves it may, first, attract gold from
other countries by an advance in the discount rate. In other
countries this method of attracting gold and of replenishing
the gold supplies of the country has been always found effective.
Second, it can purchase and borrow gold and give security for its
loans. Third, it is authorized to buy and sell, either in the United
States through its subscribing banks, or in foreign countries through
foreign banks or correspondents or its own agencies, bills of exchange payable in any of the great commercial countries. A
large portfolio of short-time foreign bills has been found elsewhere
the most effective means for increasing the gold supply of countries
and preventing its exportation in critical times. . . .
8. Believing that it is of great importance to establish a wider
discount market in this country, the plan prescribes a standard
of commercial paper, which is made available for rediscount at
the branches of the Reserve Association; second, it allows national
banks, to the extent of one-half their capital, to accept properly
secured drafts drawn upon them—drawn, perhaps, with documents attached, against cotton, wheat, or other products in
transit or in warehouse; third, it authorizes the National Reserve
Association, as I have already stated, to buy and sell in this country
and abroad bills of exchange drawn on foreign countries, based on
transactions in American products, or to pay for our purchases
abroad. It gives in this manner a national and international
currency, a newer and wider market, to notes, acceptances, and
bills of exchange based on the agricultural and other products of
the United States.
9. It requires the Association to facilitate domestic exchanges
by transfer of balances from one branch of the Association to
another upon application. . . . The great banks of Europe make
transfers of this nature to a very great extent. Great benefit will
accrue to us, especially in times of excitement and uncertainty, by
having one great institution, that by simply transferring a balance
upon its books, can transfer funds from one section of the country
to another without delay.
10. It is proposed to admit state banks and trust companies to

578

THE FEDERAL RESERVE SYSTEM

membership and equal privileges in the organization under provisions which coordinate the conditions of membership of all
banks in the same locality with reference to the character of their
reserves against demand and time deposits and with reference to
the character and number of examinations and the frequency and
character of reports of condition. The treatment of time deposits
is believed to be equitable to banks of all classes. . . .
11. We propose to give national banks increased privileges.
There has been a feeling that in the competition for business
throughout the country state banks and trust companies, especially in recent years, have had an advantage over national banks.
. . . I believe it is fair to both classes of institutions that so far as
we can do so by national legislation—and we are, of course, confined to very narrow limits in this respect—we ought to give
to national banks, state banks, and trust companies an equality
of privileges and advantages.
We propose also—and this is in answer to persistent demands
from various sections of the country, and especially from the
Northwest—to give to the national banks the right to establish
savings departments, and to loan money on real estate, under
proper regulations and control. . . .
12. The plan authorizes the organization of banks in foreign
countries to assist in the extension of our international trade. . . .
As an illustration of the helplessness of the banks under this
defective system, I will refer briefly to the manner in which our
banks are obliged to treat their surplus funds in the summer
months and at other times when there is no local demand. I
am not now discussing reserve moneys or the money deposited
with reserve agents. The surplus I have referred to was probably
sent to New York, perhaps through New Orleans or Kansas City
or Chicago, but it would reach New York in the end. What did
the New York bankers do with it? They probably were obliged
to loan it on call on stock-exchange collateral. There would be
nothing else that they could do with it. They loan it at the market
rate, inducing at times, as we all know, dangerous speculative
conditions. When the banks in the country need their money they
are liable to be told that conditions are such that they will have to
wait. In times like 1907 they could not get it at all by any process.

E X C E R P T S F R O M A D D R E S S OF HON. N. W. A L D R I C H

579

If the withdrawals are made, a reduction in reserves follows
and the necessary calling of loans is liable to affect rates for money
and create more or less disturbance in the market.
Banks do not dare now to buy bills drawn against foreign shipments of the character which I have described, first, because they
have no knowledge of the responsibility of the parties making the
drafts, and, second, because of the fear that at the time when they
might need the money there would be no demand or market for
paper of that class.
To cure the banks of a bad habit we propose a plan by which
instead of depositing their money at 2 per cent in Wall Street to
be used for speculative purposes they can safely invest it at, say,
3 to 4 per cent in standard notes or bills of exchange representing
the industries or the products of the United States. . . . and they
will have in their portfolios commercial paper created for legitimate
purposes, which they can take to the District Association and have
transformed into cash or a cash credit at any hour of any business
day of the year.
And what I say about foreign bills is largely true of domestic
bills of the character of the acceptances authorized by the plan. . . .
. . . I ask you if it is not worth while to take the banking institutions of the United States out of a condition of dependent helplessness and place them, where they belong, in a class with the best
and strongest banking institutions in the world? There is not a
particle of reason why prime sterling bills should forever remain
the highest form of credit. We ought to make New York and New
Orleans and Chicago financial centers of equal importance with
any in Europe. We ought to make a documentary bill drawn by
a producer here in Louisiana or anywhere in the United States,
drawn in dollars and cents, equal in currency and value to any
drawn in pounds, shillings, and pence.

APPENDIX THREE
E D I T O R I A L P U B L I S H E D IN THE NEW YORK
M A R C H 4, 1911

TIMES

Yesterday was the centennial of the end of the first experiment
of the United States in central banking, and Mr. J. Howard
Cowperthwait thought that was a suitable occasion to oppose the
motion of Mr. Paul Warburg that the Chamber of Commerce
should adopt the report of its delegates to the Washington conference in approval of the Central Reserve Association. Yet
Mr. Cowperthwait proceeded to say that there was nothing the
matter with the first Bank of the United States as a bank, nor yet
with the second Bank. Both became "political footballs," and
from that day to this "the spectre of Andrew Jackson has stood
at the portals of Congress to destroy any attempt to centralize
banking." Mr. Cowperthwait is afraid that this experience is
about to be repeated. He declared that he had reasons to believe
that the Monetary Commission is not well disposed toward the
suggestion of Senator Aldrich and, as he is a Republican, the
Democratic Congress will not approve his work even if the Commission should. Besides the country is not ready for the question,
and will not be until it has read the library which the Monetary
Commission has compiled. Mr. Cowperthwait's idea was that
Senator Aldrich's report was a question between himself and his
colleagues, and should be left so until the Commission has taken
some action formally.
The expediency of waiting until the country has digested the
Monetary Commission's collection of monographs is sufficiently
negatived by an incident which occurred during the Chamber's
debate. It was proposed to ask a show of hands as to how many
present had read the report of the Chamber's committee, not to
mention either Senator Aldrich's suggestion or the Commission's
library, and it was thought prudent not to risk the show. If the
Chamber of Commerce will not read the reports of its own members,

580

NEW

YORK

TIMES

EDITORIAL

581

written with distinguished ability and engaging style, what possible
hope is there that the country will read the general literature of
the subject? And if the country will not inform itself, with the
shame and miseries of 1907 so recent in memory, what should be
the alternative, indefinite delay or renewed vigor on the part of
those who have convictions on the subject.
It is agreeable to record that the Chamber decided against
delay, and adopted Mr. Warburg's report. He well said that there
are no Republican or Democratic depositors or borrowers, and that
the misfortunes which are still poignant in the memories of many
were distributed with entire impartiality. Senator Aldrich's
proposal is simply a statement of principles, with a rough draft of
one way of applying them to the necessities of our case. Its
strength lies largely in its impersonal character and in its adoption
of what is settled in finance rather than in any ingenious invention
of original character. The partisan who is capable of taking a
partisan view of such a matter is capable of demanding an American
arithmetic. It is a strictly American system of banking which we
wish to rid ourselves of and adopt instead essentials which are
approved among all commercial nations, even though the unessential and forms may differ. Mr. Muhlemann, Mr. Sachs,
and others made plain that Mr. Cowperthwait had taken the
best course to precipitate the evil which he feared, and they were
able to carry the Chamber with them. The result of the interesting proceedings is more encouraging than the disclosure of how
shallow an impression was made by the events of 1907 among
those who might have been assumed to have been in a state of
soothing indignation that the continuance of conditions so threatening to orderly business should be endured a moment longer than
is necessary.

APPENDIX THREE
Q U O T A T I O N S
T I O N A L

F R O M

CITIZENS'

M O T I O N

O F

P A M P H L E T
L E A G U E

S O U N D

F O R

O F

T H E

NA-

PRO-

B A N K I N G

S Y S T E M
T H E O R I G I N OF T H E

LEAGUE

As a result of the panic of 1907, the country became concerned
about the commercial safety of its future. This anxiety so pressed
upon Congress that the Aldrich-Vreeland Currency Bill of 1908
was passed. This bill was recognized purely as a temporary measure, and the National Monetary Commission was created to
investigate the problem of banking reform.
At the annual meeting of the National Board of Trade, held in
Washington on January 25th, 26th, and 27th, 1910, the following
resolutions were unanimously adopted:
Whereas, we assume that a plan for the revision of our
currency system will be formulated after the National Monetary Commission has made its final report: and
Whereas, a revision of our currency system upon a permanently sound and scientific basis is of vital importance to all
interests and should be accomplished as soon as practicable:
Resolved, That the National Board of Trade favors the
adoption of a currency system which will be based upon the
following fundamental principles and insure the following
results:
First—Be absolutely fair to all interests and to all localities:
Second—Insure at all times an adequate supply of properly
safeguarded currency:
Third—The volume of said currency to automatically
expand and contract in response to the normal demands of the
manufacturing, commercial, agricultural, and other legitimate
interests of the country:
Fourth—Said system to be absolutely free from domination
or control by political or any other favored interests:

582

NATIONAL CITIZENS' LEAGUE PAMPHLET

583

Resolved, That the National Board of Trade calls upon all
its constituent bodies to carefully study the fundamental
principles of banking and currency, in order to intelligently
aid the enactment of such legislation as will best conserve the
interests of the entire country.
The National Board of Trade decided to devote one day in
connection with its Annual Meeting in 1911 to a Business Men's
Monetary Conference. January 18th was set aside as "Monetary
Day." Two hundred selected commercial bodies were asked to
appoint special committees to make a careful study of the banking
question. Each organization was requested to submit its conclusions and recommendations to the National Board of Trade at
least one month before the meeting, and to send a representative
to the meeting, to be held in Washington beginning January 17th,
1911. The invitation met with a hearty response on the part of
the commercial organizations throughout the country, and a large
number of delegates participated in the Conference.
On January 17th—the day preceding the Conference—the
tentative plan of the National Monetary Commission for banking
reform was published and copies were already in the hands of the
delegates. Many of the details failed to find acceptance, but it
was recognized that it contained essential features which would
give us a constructive banking and credit system of the highest
value to the country.
The Business Men's Monetary Conference adopted resolutions
which ultimately led to the creation of the National Citizens'
League. By these resolutions, the chairman of the Conference was
authorized to appoint a committee of seven to organize a " Business
Men's Monetary Reform League," with headquarters in Chicago
and branches in the principal centers of the country, whose object
should be to conduct a comprehensive campaign of education in
behalf of some kind of a National Reserve Association. It was
agreed that the delegates to the Conference should endeavor to
enlist the active aid of the commercial bodies they represented.
Acting on the authority of these resolutions, a committee was
created which held a conference in Chicago, April 26th, 1911. It
was agreed by this committee that the responsibility of creating a
national organization should be left with the business men of

584

THE FEDERAL RESERVE SYSTEM

Chicago, who should conduct a nation-wide campaign from their
city. The problem was laid before a number of prominent and
representative Chicago business men who, after careful deliberation, agreed to accept as a duty and privilege the responsibility
of conducting the campaign from this center. Several meetings
followed and a general plan of campaign was mapped out.
The new movement was initiated by the Chicago Association
of Commerce. A joint meeting of the Board of Directors and the
Executive Committee of the Association was held on May 29th,
and took action by passing the following resolution:
Resolved, That the Chicago Association of Commerce,
recognizing the distressing effects of panics on trade, capital,
and labor, the consequent need of a sound banking system in
the interest of all the people in the country, and the suggestion
made for the creation of a National Reserve Association,
hereby requests John G. Shedd, Marvin Hughitt, Graham
Taylor, Harry A. Wheeler, B. E. Sunny, Cyrus H. McCormick,
Julius Rosenwald, Charles H. Wacker, Frederic A. Delano,
John Barton Payne, A. C. Bartlett, A. A. Sprague, J. Laurence Laughlin, John V. Farwell, Clyde M. Carr, Fred W.
Upham, F. H. Armstrong, and Joseph Basch to form a
National Citizens' League, the object of which shall be to
give organized expression to the growing public sentiment in
favor of, and to aid in, securing the legislation necessary to
insure an improved banking system for the United States of
America.
The Citizens' League is national in every respect: and the
Chicago Association of Commerce only accepted a responsibility
imposed upon it by the other commercial bodies of the nation to
take the initiative in the conduct of a campaign to which their
support had been pledged. The only part taken by the Chicago
Association, as such, was to launch the new League. This done,
it surrendered all control into the hands of the Board of Directors
of the League.
The organization was named "The National Citizens' League
for the Promotion of a Sound Banking System," and a certificate
of incorporation was granted by the Secretary of State under
date of June 6th, 1911. Article 2 of the certificate of incorporation
is as follows:

NATIONAL CITIZENS' LEAGUE PAMPHLET

585

The object for which it is formed is to give organized
expression to the growing public sentiment in favor of, and
to carry on a campaign of education for, an improved banking
system for the United States of America.
It remains for the National Monetary Commission to make its
final report in the form of a bill. It is understood that the National Citizens' League, business organizations, labor unions, and
all others wishing to express views on the National Reserve
Association Plan of banking and currency reform, will be given an
opportunity to present their case. Hearings will begin on October
15th, after which the Commission will prepare a final report to
Congress. Congress has demanded a report on January 8th and
set March 31st, as the limit of life allowed the Commission.
The National Citizens' League for the Promotion of a Sound
Banking System proposes to represent the people. The League
as yet has no legislative proposal of its own. It invites suggestions from any source. But it presents the following objects to
be attained, which it hopes to have incorporated into law:
1. Cooperation, not dominant centralization, of all banks by an
evolution out of our clearing-house experience.
2. Protection of the credit system of the country from the domination of any group of financial or political interests.
3. Independence of the individual banks, national or state, and
uniform treatment in discounts and rates to all banks, large or
small.
4. Provision for making liquid the sound commercial paper of
all the banks, either in the form of credits or bank notes redeemable
in gold or lawful money.
5. Elasticity of currency and credit in times of seasonal demands
and stringencies, with full protection against over-expansion.
6. Legalization of acceptances, or time bills of exchange, in
order to create a discount market at home and abroad.
7. The organization of better banking facilities with other countries, to aid in the extension of our foreign trade.
The League asks the nation to consider carefully and in an openminded way the platform outlined above, and invites the cooperation of all classes in the interests of much-needed banking

586

THE

FEDERAL

RESERVE

SYSTEM

reform. This cooperation can be effectively given by becoming
a member of the League.
The fee for membership in the League is one dollar. The
proceeds of this membership fee will be devoted exclusively
towards paying the expenses of the campaign. A section of the
League is formed, or will be formed, in each State. Your remittance may be made to the Treasurer of your State Section, or to

THE

TREASURER

National Citizens' League
223 West Jackson Boulevard
Chicago, 111.

APPENDIX THREE
L E T T E R T O HON. C A R T E R GLASS F R O M
MR. VICTOR MORAWETZ
April 5th, 1927
HON. CARTER GLASS,
LYNCHBURG, VIRGINIA
DEAR

SIR:

Because of your prominent public position, I wish to correct
a misapprehension on your part. Articles published by you in
the New York Evening Post indicate that you are of the impression
that I have claimed authorship of some part of the Federal Reserve
Bank Act. This is not the case. I have never asserted that I
took any part in the framing of the Act or in securing its passage
through Congress. So far as I can remember, I never saw a draft
of the bill until it had passed the House of Representatives.
However, it is a fact, established by contemporary publications,
that I publicly proposed the adoption of the principle of regional
reserve banks long before the regional reserve bank plan was
considered in Congress. When reform of our banking system had
become an issue of widespread public interest and the Aldrich
Committee was appointed, I discussed the subject with Senator
Aldrich and with leading bankers, and in 1909 I published a
small book on the Banking Problem. I consistently and strongly
opposed the plan of establishing a central bank and I suggested
that to secure the necessary concentration of bank reserves the
country should be divided into sections and that a properly constituted reserve bank should be created for each section, the
national banks in each section furnishing the capital and becoming
the shareholders of the reserve bank for their section. So far
as I am aware, this was the first suggestion of the creation of regional reserve banks instead of a single central bank.
I elaborated this plan in an article published in January, 1911,
in the Proceedings of the Academy of Political Science in the City

587

588

THE FEDERAL RESERVE SYSTEM

of New York. (Vol. I, No. 2, page 343.) I am sending you under
separate cover a reprint of this article. You will observe that it is
divided into three heads, namely, (1) A statement of the defects
of the then existing system, (2) A statement of the objections to
the central bank plan, and (3) A proposal to divide the country
into sections and to create a reserve bank in each section.
At this time I had become convinced that in my book on the
Banking Problem I had attached too much importance to the
issue of bank notes as a means of maintaining sound banking
conditions and that concentration of the bank reserves in properly
organized sectional reserve banks was far more important. My
recognition of this fact was due principally to discussions with that
exceptionally able, learned, and experienced banker, Mr. Paul
Warburg, who, however, at that time, was opposed to my proposal
to establish sectional reserve banks and insisted th^t the only
satisfactory way of obtaining the desired concentration of bank
reserves was by creating a single central bank with branches.
In the autumn of 1911 the article above referred to was reprinted
in pamphlet form with a few pages of additional matter and copies
were sent by me to the members of the Banking and Currency
Committees of the Senate and of the House of Representatives.
After President Wilson's election, but before his inauguration, a
copy of this pamphlet was placed in his hands, and I have letters
from Mr. Thomas D. Jones of Chicago, at whose house President
Wilson stopped, and from Professor J. Laurence Laughlin of
Chicago University stating that Mr. Wilson said to them that he
approved of the general plan which I outlined.
At this time nearly all the leading bankers in the country favored
the adoption of the central bank plan and my principal endeavor
was to convince the advocates of that plan that a regional reserve
bank plan was preferable. When I appeared before the Committee
of the House of Representatives in January, 1913, I had become
satisfied that the central bank plan was politically dead and my
principal endeavor was to point out that the main problem was
not a currency problem but a banking problem and that the prime
necessity was regional concentration of the bank reserves. When
I appeared before the Senate Committee on Banking and Currency
on October 20th and 21st, 1913, I stated that the bill embodied

MR. MORAWETZ'S LETTER TO SENATOR GLASS

589

the substance of the plan which I had advocated for years and my
discussion of the bill related to the provisions for carrying into
effect the principle of regional reserve banks. (Proceedings of
Senate Committee, pages 2615 to 2700.)
I have always recognized that unlimited credit is due to President
Wilson and his able lieutenants, including yourself, for framing
and securing the adoption of the Federal Reserve Bank Act. It
required extraordinary vision, courage, and political ability on the
part of the President to secure the adoption of that plan under the
then existing conditions. I regard the adoption of the Federal
Reserve Bank Plan as the greatest political accomplishment of
President Wilson's administration.
Until the publication of your articles in the Evening Post I
claimed no credit for proposing in my printed publications in 1909
and 1911 the establishment of regional reserve banks instead of a
single central bank. My proposal to establish regional reserve
banks was merely an adaptation to the conditions existing in the
United States of the principle of the central bank system which
for many years prevailed in every civilized country except the
United States. As pointed out in my article, the United States is
nearly as big as all of Europe and the creation of a single central
bank for the whole of the United States would have been equivalent
to the creation of a single central bank for the whole of Europe.
Each of the regional reserve banks performs in effect the functions
of a central bank for the region in which it is established. No
doubt this adaptation of the underlying principle of central banks
would have occurred to many of the able bankers who supported
the Aldrich Plan if they had not already been wedded to that plan.
However, when I heard that a controversy had arisen as to the
authorship of the Federal Reserve Bank Plan and that you were
about to publish in the Evening Post a series of articles controverting some of the statements in Professor Seymour's book, I
wrote to Colonel House on January 5th, calling his attention to
my publications in 1909 and 1911 and stating that my pamphlet
proposing divisional reserve banks instead of a single central
bank had been considered by President Wilson and approved
by him before his inauguration, as stated in the letter of Professor
Laughlin which I quoted. I also stated that the President had

590

THE FEDERAL RESERVE SYSTEM

remarked to a friend of mine when the Federal Reserve Bank Bill
was before the Committee of the House of Representatives that I
ought to be satisfied with the bill as it was my plan. My letter
to Colonel House was not written for publication, and by an oversight I referred to my appearance before the Committee of the
House of Representatives in January, 1913, instead of my appearance before the Senate Committee in October of that year,
though I sent with the letter a printed copy of my testimony
before the Senate Committee on October 20th and 21st. When
this letter was recently published, you made this oversight in
referring to my appearance before the Committee of the House of
Representatives instead of the Senate Committee the basis of an
attack in unmeasured terms upon my veracity in an article published in the New York Evening Post. I think this attack was
unjustifiable on your part as it was obvious that I did not intend
to refer to my appearance before the House Committee in January,
1913, when no bill had been drawn and Mr. Wilson was not
President, but that I intended to refer to my appearance for two
days before the Senate Committee in October.
In the publications above referred to I presented merely the
bare outline of a plan for the creation of regional reserve banks
instead of a single central bank. The details of my proposal
were not worked out, but I made a suggestion designed to secure
united action of the several regional banks when needed which
differed materially from the provisions of the Federal Reserve Act.
It was this: I proposed that the several regional reserve banks
should elect a central body authorized, in conjunction with the
Secretary of the Treasury, to deliver to each divisional reserve
bank, upon its application, circulating notes of this bank guaranteed by all the reserve banks upon deposit of a prescribed amount
in a reserve or note redemption fund, the percentage of which
would be subject to increase or reduction, from time to time, by
the Association with the approval of the Secretary of the Treasury.
Under the Federal Reserve Act the control of note issues and reserves is in effect vested in the Federal Reserve Board in Washington. In making this proposal I was influenced by the fear
that if full control of the entire system were placed in the hands of
political appointees the entire system might some day be wrecked

MR.

MORAWETZ'S

LETTER

SENATOR

GLASS

591

through politics. In his interview published in the New York
Times of January 9th, Professor Willis who at your request in
1912, prepared the first draft of the Federal Reserve Bank Bill,
used the following language: "Mr. Wilson wished even stronger
centralization than the draft of the bill provided. He adopted a
proposal of Bryan to make the Federal Reserve Board a government body rather than simply a group of bankers. This was in
order to win Bryan's support for the bill."
I am now satisfied that for political reasons the creation of the
Federal Reserve Board sitting in Washington was preferable to
the proposal made by me. Certainly the Federal Reserve System
has worked admirably up to the present day and I am sure that it
will continue to serve the country well so long as the members of
the Federal Reserve Board are appointed on their merits and not
for political reasons or to represent special interests.
Yours very truly,

VICTOR

MORAWETZ

APPENDIX THREE
REVIEW OF THE " R E P O R T OF THE NATIONAL
MONETARY COMMISSION" B Y THE COMMITTEE
O N N A T I O N A L AFFAIRS O F T H E R E P U B L I C A N
CLUB O F T H E C I T Y O F N E W Y O R K ,
F E B R U A R Y 19, 1912
The Monetary Commission has divided its work and its report
into two parts: First, a study and exposition of the defects of our
present system, and second, a recommendation of a remedy.
Both parts of the report are convincing documents, written with
the clear intention of submitting an argument which can be generally comprehended. This is all the more commendable since the
dissemination of facts is the only way of combating a prejudice
which always has played and still plays so important a part in
the discussion of this problem. Your Committee suggests that
every member of the Club read the full report of the Monetary
Commission and influence all those to do likewise who want to
form an unbiased judgment concerning the solution of this allimportant question.
The main defects of our present system are the decentralization
of our cash reserves, the immobilization of the commercial paper
held by our banks, and the inelastic bank-note issue, based on
government bonds instead of on gold and commercial paper.
At present reserves are scattered amongst more than 20,000
institutions and these accumulations of cash are called reserves
only by a misnomer. A power on which to fall back, for aid in
case of need, we are used to call a reserve; but the cash reserves of
our banks are helplessly tied up by law and to use them in critical
times by encroaching upon the legal minimum amounts to
an invitation to the depositors to begin a run. As actual reserves
these cash holdings are therefore useless and the mere fact that
they must be kept up is, under our present inelastic system, the
direct reason why our entire financial structure is resting on a mine

592

MONETARY COMMISSION REPORT REVIEWED

593

which may explode at any moment. For there are no means of
replenishing one bank's dwindling cash reserves except by drawing
upon the reserves of another and the very moment that there
springs into existence any interference with the free return flow
of cash into the banks, while withdrawals continue, panic and
suspension must follow under a system that in critical times does
not provide for any possibility of issuing additional currency or of
creating available bank credits by the rediscounting of commercial
paper.
Any modern banking system, with billions of demand obligations
against which there are available only millions of actual cash, must
periodically collapse unless it provides for the concentration of cash
reserve in one central reservoir whence cash will be freely forthcoming when required, and into which it will rapidly return just
because it is freely forthcoming. If we want to be safe, we must
either return to the old system of using actual cash for the daily
payment of any and all obligations, or if we wish to proceed on
modern lines of substituting credit tokens for the use of cash
and of developing to its highest possible form the system of paying
by clearing of credits, we must establish a system which insures
not only that cash credit will always be convertible into cash, but
also that cash credit to the bank and to the depositor will be more
valuable even than actual cash, because safer and cheaper to
handle.
A modern banking system must reduce the temptation of hoarding by the public well-nigh to a minimum, and must make hoarding
by banks an absolute impossibility, or the whole structure is unsafe.
A prerequisite for the concentration of all cash reserves, however,
is a confident reliance that the central organ will be at all times
strong enough to meet every legitimate demand for gold, and that
the banks, on the other hand, will at all times have the means with
which to obtain cash when it may be demanded from them by their
depositors.
The Monetary Commission's main problem as a banking proposition may then be divided into two parts: the one, the creation of a
central cash reserve, and the endowment of this association of
reserves with such powers as to render it safe beyond peradventure,
and the other, the creation of a system safe both for the association

594

THE FEDERAL RESERVE SYSTEM

and for the banks, by which the latter can rely on their ability to
create cash balances with the association against which they can
withdraw actual cash whenever necessary.
To these two phases of the problem there must be added a further
one, not distinctly a banking proposition, but closely connected
with it on account of its bearing upon the safety, and consequently,
the credit of the association, which is that of providing the strongest
possible protection for the association against political or financial
abuse and against the possibility of control by individuals or corporations singly or combined.
These three main requirements any plan for monetary reform
will have to fulfill, and in the opinion of your Committee, they
have been met successfully by the bill submitted by the Monetary
Commission.
A strong central reservoir is to be created, the paid-in capital of
which shall be no less than $100,000,000, but which will probably
be nearer $150,000,000, and which with an equal uncalled liability
of the stockholders will start the National Reserve Association
with a responsible capital of between $200,000,000 and $300,000,000, an amount sufficient to command the highest possible confidence at home and abroad.
This central reservoir will become the recipient of the United
States Treasury's free balance, estimated at about $100,000,000,
and of a substantial portion of the actual cash holdings of the
national banks, state banks, and trust companies, estimated at
between $400,000,000, and $600,000,000, so that the Reserve
Association will start out with such stupendous strength that
distrust as to its solvency, the germ of panic, may be considered as
banished forever.
But a mere dead mass of gold would not assure safety unless
there be coupled with it the power of using and in turn withdrawing
again a certain portion of the metal. In this power of expansion
and contraction, without giving any consideration to profit or loss,
lies the ability of the Reserve Association to protect the nation
from a dangerous plethora and consequent efflux of gold, on the
one hand, and from extreme stringencies bringing about catastrophes, on the other. It is with this object in view that the Monetary
Commission has endowed the National Reserve Association

MONETARY COMMISSION REPORT REVIEWED

595

with the power to buy commercial paper, both American and
foreign, haying no more than 90 days to run, and to invest in certain
short-time government securities. These investments of the
National Reserve Association would all be of such a character that
either by collection at maturity or by resale the National Reserve
Association would be in a position within a very short time to
liquidate its holdings at home or abroad and, by its greater or lesser
willingness to reinvest, to influence expansion or contraction to a
degree necessary for the protection of the nation.
In order to avoid any abuse by individuals or by individual
banks it has been provided that the National Reserve Association
shall have dealings only with such national banks, state banks,
and trust companies as shall become subscribers to the National
Reserve Association (every subscribing institution taking an
amount of stock equal to 20% of its capital), and the transactions
that these subscribing banks may carry on with the National
Reserve Association are carefully circumscribed. Subscribing
banks may rediscount with the National Reserve Association commercial paper having no more than 28 days to run; they may also
sell to the National Reserve Association certain foreign bills of
commercial origin and American commercial paper, having more
than 28 days and less than 90 days to run, but the latter only with
the joint guarantee of a local association of banks, to one of which
each subscribing bank must belong. The aggregate amount
which each bank may rediscount without the guarantee of its local
association, is limited to the capital of the rediscounting institution.
Through this machinery sufficient elasticity has been provided
to enable the National Reserve Association to assist the banks in
legitimately financing the seasonable requirements of the nation's
commerce and trade, while the restrictions placed upon the National Reserve Association protect it from being used for any
illegitimate purpose whatsoever.
On the other hand, these limitations of power protect the nation
from any abuse by the management of the National Reserve
Association. An additional safeguard has been provided by limiting to 5% the income to be derived from the stock of the National
Reserve Association, the balance, after the creation of certain
reserve funds, going to the government. This renders it so much

596

THE FEDERAL RESERVE SYSTEM

easier for the management of the National Reserve Association
to disregard, as it should, the question of profit to be derived from
its ordinary operations, and furthermore, it eliminates any inducement even indirectly to acquire control of such an association for
speculative or ambitious purposes. As an investment it would not
pay, as an instrument of power it would be useless, owing to the
restrictions placed upon its scope and its method of operation.
In addition, a very elaborate system of organization has been
worked out for the purpose of securing an administration by a
board consisting of representatives from all parts of the country
and from all walks of life. A Federal System is proposed, consisting
of fifteen districts, each containing a branch, each branch electing
two directors, and each bank having one vote without any consideration of the larger or smaller capital of a bank. In addition
to these thirty directors, nine further members are to be elected by
all the banks by a vote on a basis of capitalization; seven additional
places on the board of directors will be filled by ex officio members,
viz.: the Secretaries of the Treasury, of Agriculture, of Commerce
and Labor, and the Comptroller of the Currency, and furthermore
the governor and two deputy governors, making a total of forty-six
directors. Further safeguards have been provided for the purpose
of preventing accumulation of voting power by one bank acquiring a substantial stock interest in another subscribing institution,
but to go into a detailed description of the modus of election and
operation of the National Reserve Association would be to rewrite
the report of the Monetary Commission. Suffice it to say that in
the opinion of your Committee the plan provides for absolute
safety from the danger of the much dreaded "Wall Street" control
and from the danger of political abuse. If anything, the plan goes
to the other extreme of so democratizing the control that the
sections of lesser financial importance and the numerical majority
of the smaller banks predominate to a degree which is being considered unwise by some conservative critics.
Your Committee believes that too much importance has been
attached to this question of predominance on the board; it considers the present composition safe, in spite of the too liberal
representation of the weaker sections and smaller banks, and it
is confident that with a larger representation of the eastern States,

MONETARY COMMISSION REPORT REVIEWED

597

the administration would also be safe. Your Committee believes
that whoever will be honored by the choice of his community or
the entire district to act as its representative on the board of a
branch or on the main board, will feel the responsibility to such a
degree that no matter whether he come from Oklahoma or Oregon
or New England or New York, he will not be swayed by any other
consideration, but that he will do his best in conservatively administering this trust, on the safety of which will depend the
solvency of the whole nation and, in particular, that of the community which he represents. Office creates men, and in this case,
where it will not be the question of political, theoretical, or altruistic
work, as in so many other associations, but where the question is
one of the most vital and practical character, we may rely upon it
that the best men in each community will be available and will be
chosen. It is time that men of calm mind and judgment should
quietly consider this bogey of the danger of control by the " Money
Trust" of an association as planned by the Monetary Commission.
To fear that the banks of the whole country should either be lured
into such conspiracy or lulled into such dependency, is insulting the
manhood or intelligence of the entire nation. To believe, on the
other hand, that control could be gained by the brute power of
money, is folly. Those who apprehend such a course disregard
completely that almost a billion of dollars would have to be
invested in order to acquire the necessary majority in an association, the ownership of which would not carry any adequate advantage. Moreover, these critics overlook the fact that it may be
good business to buy control of an unwilling railroad or manufacturing concern which has tangible property or franchises which cannot
be duplicated. An unwilling bank acquired by force is nothing
but an empty shell. Its directors may go out, organize a new bank
and take with them the good will and every account of the old bank.
If one or two banks were controlled it might pass unnoticed, and
might be good business for the controlled banks; if 51 per cent
of the banks of 51 per cent of all localities were controlled, those
who would organize new uncontrolled banks would secure all the
business of the community. In a presidential year, with all its
hysteria, it is more necessary than ever carefully to dissect arguments, which are calculated to capture the public imagination.

598

THE FEDERAL RESERVE SYSTEM

A study of foreign conditions proves conclusively that central
banks are democratic institutions; they are the rock bottom on
which the smaller banks and banking firms base their existence in
their fight for independence from the gigantic oligarchy of the
large European branch bank institutions. Close scrutiny of the
plan of the Monetary Commission must convince every student
that far from increasing the power of any Money Trust—imaginary
or real—it would similarly strengthen the independence of the
smaller banks by destroying their present exclusive dependence on
the large banks, and by creating instead a new neutral institution
which would assure aid and protection to all legitimately entitled to
it under a system of local self-administration with a joint federative
supervision.
Some criticism has been levelled at the power given to the board
of increasing the number of branches, which provision leaves
room for the possibility of upsetting the now established balance
of power on the board. The Liberals fear an increase of branches
in eastern States, strengthening the eastern contingent on the
board, the Conservatives fear a rapid increase in the southern and
western States, which would strengthen the predominance of the
smaller banks and decrease the proportionate voting power of
the nine members now appointed by the stock vote. This objection might be met by adding a provision safeguarding the maintenance of the present proportion of the latter class of directors
to the number appointed by the branches or, in the opinion of your
Committee, the problem might be solved by providing that the
fifteen branches shall not be increased in number, but that they
may be sub-divided, whenever necessary, into sub-branches, acting
under similar management as the branches, but under the authority
and responsibility of the main branch. In this way, the future requirements of the country could be met without interfering with
the balance of voting power as now vested in the fifteen branches,
and this question on which the main discussion seems to center,
could be satisfactorily disposed of.
The plan of the Monetary Commission provides for the taking
over by the National Reserve Association of the i per cent United
States Government bonds, for the conversion of these bonds into
3 per cent bonds, for the assumption of the present national bank

MONETARY COMMISSION REPORT REVIEWED

599

note circulation by the National Reserve Association and for the
creation of a new elastic note issue to be covered by these government bonds, commercial paper, and legal tender, the latter to
amount to at least 30 per cent of the aggregate of all bank notes
outstanding at any time. The plan provides, furthermore, that
subscribing banks may count as cash their balances with the
National Reserve Association and its circulating notes.
The question has been raised whether such a system would not
bring about inflation. Your Committee, after careful consideration, has reached the conclusion that the possibility of inflation
must be inherent in any elastic system.
Too stringent a limit upon elasticity must destroy its main
benefit, which is the confident reliance that there will be no suspension of cash payments. If there be a point too easily reached,
even in the imagination of the people, at which cash payments
may stop, the mere approach of a stringency might precipitate a
run for cash and a period of hoarding which, as we have shown in
the beginning of this report, must prove fatal. The possibility of
inflation must be there or there would not be any safe elasticity.
But the guarantee against inflation lies in the constitution of the
management and, more than anything else, in the restrictions
placed upon the National Reserve Association as to its scope of
operation. No central bank in existence is so rigidly tied down
in this respect; the central banks of England, France, and Germany
may deal with individuals, loan on stocks and bonds, in short they
may do a general banking business, and if in spite of these much
wider functions no dangerous inflation has followed in these countries, we may confidently expect that, with the rigid conditions
imposed by the Monetary Commission, the National Reserve Association will be safe beyond doubt. In the opinion of your Committee the Monetary Commission has gone to the very extreme to
which it may safely go without endangering the whole structure.
Your Committee believes that in one respect the plan even now
goes too far. The National Reserve Association under the present
plan may not sell any of its government bonds for five years and
after that period only $50,000,000 per year, and then only with the
approval of the Secretary of the Treasury. In the opinion of
your Committee the National Reserve Association should be

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THE FEDERAL RESERVE SYSTEM

permitted, with the approval of the Secretary of the Treasury,
to sell more than $50,000,000, and to sell them before the expiration
of five years. As a matter of practice the National Reserve Association will probably not avail itself of this right, but as a matter
of principle and of foresight, the law should be so amended that
the National Reserve Association will be placed in a position where,
in view of the large commitment it undertakes by assuming the
national bank note issue, it may be able, in case of need, without
new legislation to strengthen its position by the sale of some of
its United States securities. Such mere power to act would
strengthen its position and thereby the general reliance in the power
of the National Reserve Association, which confidence is the
basis of the whole structure.
Your Committee regrets that, within the usual limits of the
reports of this Club, it is impossible to dwell on all the details of
the plan, such for instance as taxation of note circulation, and that
it can only touch in passing upon the far-reaching effect that may
be expected from a system of transferring by book entries cash
balances with the National Reserve Association from the account
of one subscribing bank to that of another, thus avoiding the wasteful shipment and tieing up of actual cash now constantly traveling
at cross-purposes all over the country.
The greatest importance is to be attached to those provisions
that will encourage and enable the banks to accept 90 days'
commercial bills drawn on them. The habit of accepting and of
rediscounting will bring about a gradual but phenomenal change
in our banking methods. The United States will at last be enabled
to finance its own foreign trade, instead of being dependent upon
and tributary to Europe in this respect, and the establishment of a
"discount market" in the United States will tend towards the
greater stabilization of rates of interest. At the same time it
will create a new avenue for foreign money, and a means of meeting
gold exports by a higher discount rate, as done in Europe. But
the most beneficial effect will be that, as the ultimate regulator and
holder of the funds subject to call of the entire nation, the bill
market will supplant the stock market; that the stock exchange
will be saved in the future alike from the senseless avalanches and
the disastrous, vehement withdrawals of the reserve moneys of

MONETARY COMMISSION REPORT REVIEWED

601

the entire country; that instead of having as quick assets call
loans (secured by bonds and stocks), which in case of stress cannot
be collected, and promissory notes, which must not be sold, the
banks in the future may consider their commercial paper as a
quick asset which can be sold in case of need, and that they may
be sure that their normal amount of call loans will not become
immobilized by general suspension.
In other words, the plan will assure the future solvency of our
banks with the same degree of certainty as our present system
guarantees their periodic insolvency. And it is this stability
which will compensate the Wall Street banks for the loss of autocratic powers that will follow the establishment of the National
Reserve Association. It is a misconception to think that banks
thrive most when interest rates are excessive; statistics show that
banks do best under conditions of stability. T h e new conditions
would enable the United States to become an effective world
power, financially and commercially, and new avenues will be
opened in exchange for those that will be closed.
T h e 100 per cent call rate and the 3 per cent gold premium will
sink into oblivion, as the mail coach disappeared before the railroad.
T h e power of the National Reserve Association to contract for
loans of gold and to deal in foreign exchange will enable the United
States in the future to aid other countries or to receive assistance
from other nations in a similar way as has been the practice between
the large central banks of Europe, particularly between the Bank
of England and the Banque de France. N o further elaboration
of the importance of these provisions is necessary for those amongst
us who still well remember the great sufferings that might have
been ended, or probably entirely avoided, if in 1907 there had
been in existence an American institution w

Full text of The Federal Reserve System, Its Origin and Growth : Reflections and Recollections : Volume 1

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