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F e d e r a l R e s e r v e B a n k o f S t . L o u is

March, 1936


Architect's Drawing of New Building of the Board of Governors
of the Federal Reserve System, Washington, D. C.

This booklet was prepared under the auspices
of the Federal Reserve Agents’ Conference primar­
ily to give the essential facts regarding the System
itself, and to furnish banks with a general outline
of the requirements for membership.

Foreword ................................................................................................. 3
The Federal Reserve System T oday............................................... 6
Board of Governors of the Federal Reserve S y ste m .... 6
Federal Open Market Committee........................................... 8
The Federal Reserve Banks..................................................... 10
The Member Banks..................................................................... 14
Federal Advisory Council.......................................................... 14
The W ork of the Federal Reserve Banks.................................... 15
Holding Reserves of Member Banks.................................... 15
Extension of Credit by Federal Reserve Banks................. 19
Credit Facilities for Member Banks............................ 22
Credit Facilities for O thers............................................. 23
Open-Market Investments................................................. 24
Currency .......................................................................................... 24
Interdistrict Settlement F u n d .................................................. 30
Check Collection............................................................................ 31
Collection of Notes, Drafts, Bonds, Coupons, etc............. 33
W ire Transfers of Funds............................................................ 33
Fiscal Agency................................................................................. 33
Informational Services of the Federal Reserve System.. 34
General Information Regarding Membership in the Federal
Reserve System..................................................................................
Capital Required............................................................................
Stock Subscription........................................................................
Reserve Requirements.................................................................
Voluntary W ithdraw al................................................................
Examinations and Reports.........................................................
Branches of State Member Banks...........................................
Limitation on Interest Paid on Deposits..............................
Miscellaneous Provisions............................................................
Conditions of Membership........................................................





F ed er a l R eser v e S y st e m T o d a y

The Federal Reserve System was created by the Federal
Reserve Act, approved December 23, 1913. The twelve Re­
serve banks opened their doors for business on November 16,
Coming into existence within a few months after the out­
break of the World War, the System has been faced throughout
its history with problems of operation and of policy arising from
abnormal economic and financial conditions throughout the
world. In surmounting resultant difficulties and notably in
helping the Government to finance its participation in the World
War, the System met successive tests of its strength and sound­
ness. Both in the period of rapid expansion during the war and
in the subsequent contraction during the post-war depression
of 1920 and 1921, the System’s adaptability to changing condi­
tions and its capacity for meeting demands upon its resources
were put to a severe test.
In the succeeding eight years, the System was confronted
with changed but no less difficult conditions. A steady flow of
gold from abroad furnished a basis for a vast expansion of credit
which was sufficient not only to meet all legitimate needs of
trade, but also to finance speculative activity in the securities
markets, in real estate, and in other fields. The collapse of this
speculative boom was followed by a period of world-wide busi­
ness and industrial stagnation of unprecedented severity, cul­
minating in the almost complete paralysis of this country’s
banking machinery. During the depression, the System cush­
ioned the decline by an easy money policy and, upon the re­
opening of the banks after the proclamation of the national
banking holiday, the System actively cooperated in the rehabili­
tation of the banking structure and in the restoration of eco­
nomic and financial confidence.
Experience gained during two decades of the System’s opera­
tions afforded a valuable basis for further adapting its functions

[ 5]

and administration to serve the public interest. W ith the pass­
age of the Banking Act of 1935, the System’s responsibilities
were broadened and more clearly defined and allocated. The act
embodied numerous changes, some of which were fundamental
in character, reflecting a broader conception of the System’s
place in the nation’s economic life than existed when it was
established. Machinery for the formulation and execution of
open-market policies was simplified and responsibility for openmarket operations, as well as for discount rates and reserve re­
quirements, was clearly fixed with a view to enlarging the
System’s ability to maintain sound credit conditions and to
serve the needs of trade and industry.
T h e F ed era l* R eserv e S ystem T o d a y

The Federal Reserve System comprises several parts, in­
1. The Board of Governors of the Federal Reserve
2. The Federal Open Market Committee.
3. Twelve Federal Reserve banks with 25 branches.
4. Member banks, numbering about 6,500.
5. Federal Advisory Council.
Board of Governors of the Federal Reserve System—Broad
supervisory powers are vested in the Board of Governors of
the Federal Reserve System which has its offices in W ashing­
ton. The Board of Governors is composed of seven members
appointed by the President with the advice and consent of the
Senate. In selecting these seven members, the President is re­
quired to have due regard to a fair representation of the finan­
cial, agricultural, industrial, and commercial interests, and
geographical divisions of the country. No two members may
be from the same Federal Reserve district.
Among the many responsibilities of the Board of Governors,
those concerning the credit policies of the System are the most
important. The discount rates charged by the Reserve banks,
which are established by the boards of directors of these banks,
are subject to the review and determination of the Board of
Governors. The Board may, within certain limitations and in
order to prevent injurious credit expansion or contraction,


change the requirements as to reserves to be maintained by
member banks against deposits. After March 1, 1936, each
member of the Board of Governors will also be a member of
the Federal Open Market Committee, which is charged with
the responsibility of determining policy in connection with
purchases and sales of bills and securities in the open market—
an operation which is discussed more fully in a later paragraph.
Actions along these lines must be taken with a view to accom­
modating commerce and business and with regard to their bear­
ing upon the general credit situation of the country.
For the purpose of preventing the excessive use of credit
for the purchase or carrying of securities, the Board of Gov­
ernors is authorized to regulate the amount of credit that may
be initially extended and subsequently maintained by brokers,
banks, and others on any security (with certain exceptions)
registered on a national securities exchange. Certain other
powers have been conferred upon the Board which are likewise
designed to enable it to prevent an undue diversion of funds
into speculative operations.
In connection with its supervision of Federal Reserve banks,
the Board of Governors is also authorized to make examinations
of such banks; to require statements and reports from them ; to
require the establishment or discontinuance of their branches;
to supervise the issue and retirement of Federal Reserve notes;
and to appoint some of the directors of each Reserve bank and
to approve the appointment of the chief executive officers, as
described in later paragraphs.
In connection with its supervision of member banks, the
Board is authorized among other things (1) to pass on the
admission of State banks and trust companies to membership
in the Federal Reserve System and on the termination of mem­
bership of such banks; (2) to examine member banks and re­
ceive condition reports from State member banks and their
affiliates; (3) to limit by regulation the rate of interest which
may be paid by member banks on time and savings deposits •
(4) to issue voting permits to holding company affiliates of
member banks entitling them to vote the stock of such banks
at any or all meetings of shareholders of the member banks;
(5) to regulate interlocking relationships between member
banks and organizations dealing in securities or, under the
Clayton Antitrust Act, between member banks and other banks;
(6) to remove officers and directors of a member bank for con­


tinued violations of law or unsafe or unsound practices in con­
ducting the business of such b a n k ; (7) to suspend member banks
from the use of the credit facilities of the Federal Reserve Sys­
tem for making- undue use of bank credit for speculative pur­
poses or for any other purpose inconsistent with the maintenance
of sound credit conditions; (8) to pass on applications of State
member banks to establish out-of-town branches; (9) to pass
on applications of national banks for authority to exercise
trust powers or to act in fiduciary capacities; (10) to grant
authority to national banks to establish branches in foreign
countries or dependencies or insular possessions of the United
States, or to invest in the stock of banks or corporations en­
gaged in international or foreign banking; (11) to supervise the
organization and activities of corporations organized under
Federal law to engage in international or foreign banking. In
exercising its supervisory functions over the Federal Reserve
banks and member banks, the Board of Governors promulgates
regulations governing certain of the activities of Federal Re­
serve banks and member banks.
To meet its expenses and to pay the salaries of its members
and its employees, the Board makes semi-annual assessments
upon the Federal Reserve banks in proportion to their capital
stock and surplus.
The Board of Governors is required under the Banking Act
of 1935 to keep a complete record of its actions on all questions
of policy together with the votes taken and the reasons under­
lying such actions, and to include this record in its annual re­
port to Congress.
Federal Open Market Committee—Federal Reserve banks
are authorized to buy and sell in the open market bonds and
short-term obligations of the United States, bankers’ accept­
ances, and other assets listed in a later paragraph. Such pur­
chases and sales may only be made in accordance with the di­
rection and regulation of the Federal Open Market Committee
Effective March 1,1936, the Federal Open Market Committee
consists of the seven members of the Board of Governors of
the Federal Reserve System and five representatives of the
Federal Reserve banks who are to be elected annually. One
member is elected by the boards of directors of the Federal


Reserve Banks of Boston and New York, one by the Federal
Reserve Banks of Philadelphia and Cleveland, one by the Fed­
eral Reserve Banks of Chicago and St. Louis, one by the Federal
Reserve Banks of Richmond, Atlanta, and Dallas, and one by
the Federal Reserve Banks of Minneapolis, Kansas City, and
San Francisco.
Decisions in regard to open-market purchases and sales are
made with reference to general credit conditions. When there
is evidence of undue use of bank credit, or indications of heavy
speculative demands for credit that are tending to create un­
sound conditions, the Reserve banks, under the direction of and
regulations adopted by the Federal Open Market Committee,
may sell securities in the open market, payment for which re­
sults in a reduction in the reserve deposits of member banks
in their Federal Reserve bank. In order to prevent injurious
credit expansion, the Board of Governors may also, with certain
limitations, increase reserve requirements. The sale of securi­
ties in the open market or the increase of reserve requirements
would normally have the effect of requiring member banks
either to curtail their own operations or borrow from the Re­
serve banks. The Federal Reserve banks may exert further
pressure on borrowing banks by raising discount rates, with the
approval of the Board of Governors, making it more expensive
for member banks to borrow.
On the other hand, when business is receding and credit
demand is low, the Reserve banks, under the direction and regu­
lations of the Open Market Committee, may buy securities in
the open market and thereby increase the reserve deposits of
member banks, thus enabling them to make additional loans or
investments without having to borrow from the Reserve banks.
Open-market operations, therefore, exert an important influence
on the volume of credit available to business and investors and
on interest rates, that is, on the cost of this credit.
Under the Banking Act of 1935, a complete record is kept
of the actions taken by the Federal Open Market Committee
upon questions of policy, together with the votes taken and the
reasons underlying the Committee’s actions. This record will
be published in the Annual Report of the Board of Governors
of the Federal Reserve System.


The Federal Reserve Banks — The country is divided into
twelve Federal Reserve districts, in each of which there is a
Federal Reserve bank bearing the name of the city of its loca­
tion. There are also in operation 25 branches of Federal Re­
serve banks and 2 agencies, as listed below:
District Number





Location of Federal
Reserve Bank

Location of Branch

Buffalo, New York
Cincinnati, Ohio
Pittsburgh, Penna.
Baltimore, Maryland
Charlotte, N. C.
Birmingham, Alabama
Jacksonville, Florida
Nashville, Tennessee
New Orleans, Louisiana
Detroit, Michigan
Little Rock, Arkansas
Louisville, Kentucky
Memphis, Tennessee
Helena, Montana
Denver, Colorado
Oklahoma City, Okla.
Omaha, Nebraska
El Paso, Texas
Houston, Texas
San Antonio, Texas
Los Angeles, California
Portland, Oregon
Salt Lake City, Utah
Seattle, Washington
Spokane, Washington

5 ...............................
10 .
12 .

* In addition to the branches named, the Federal Reserve Bank of Atlanta has an
agency at Savannah, Georgia, and operates another agency for the System at Havana,

The Federal Reserve banks are under the general supervision
of the Board of Governors of the Federal Reserve System. The
capital of the Federal Reserve banks is supplied by the member
banks, each of which is required to subscribe to the capital
stock of its respective Reserve bank in an amount related to its
own paid-up capital and surplus.

[ 10 ]

[ 11 ]

Each Federal Reserve bank has a board of nine directors
whose members are residents of the respective district and are
required to administer the affairs of the Federal Reserve bank
fairly and impartially. The terms of office of all directors are
three years, so arranged that the term of one director of each
class expires each year. Six of the nine directors are elected
by the member banks of the district. These six include: three
Class A directors, who must be representative of the member
banks and who are usually active officers of member banks;
and three Class B directors, who may not be officers, directors,
or employees of any bank, but who must be actively engaged
in their district in commerce, agriculture, or industry. For the
election of directors, member banks are divided into three groups
according to size of capital and surplus—small banks, mediumsize banks, and large banks. Each group of member banks
elects one Class A director and one Class B director.
The remaining three directors, who are called Class C
directors, are appointed by the Board of Governors of the
Federal Reserve System and may not be either officers, direct­
ors, employees, or stockholders of any bank. One of the Class
C directors is designated by the Board of Governors of the
Federal Reserve System as chairman of the board of directors
and Federal Reserve agent. As Federal Reserve agent, he is
the official representative of the Board of Governors and is
required to maintain a local office of that body on the premises
of the Federal Reserve bank. He administers such parts of
banking law as are delegated to him, maintains a stock of Fed­
eral Reserve notes, and holds the collateral for such notes when
issued. Examiners appointed with the approval of the Board
of Governors of the Federal Reserve System examine State
member banks. The Federal Reserve Agent keeps himself fully
informed of the condition of all member banks.
Looking at the make-up of a Reserve bank board of direc­
tors in another way, Class A directors represent lenders of funds,
Class B directors represent borrowers, and Class C directors
represent the interests of the general public.
The chief executive officer of a Federal Reserve bank, effec­
tive March 1, 1936, is the president who, together with the
first vice-president, is appointed for a term of 5 years by the
board of directors with the approval of the Board of Governors
of the Federal Reserve System. Other officers may be appointed
by the board of directors of the Federal Reserve bank.

[ 12]


The Federal Reserve banks derive their funds for advances
to member banks and for open-market purchases principally
from the power conferred upon them by Congress to receive de­
posits and also to issue Federal Reserve notes. The principal
sources of deposits of the Reserve banks are the member banks,
which are required to keep with the Reserve banks reserve bal­
ances bearing a specified percentage relationship to the member
banks’ own deposit liabilities, and the United States Govern­
The Reserve banks must hold a 40 per cent reserve in gold
certificates against Federal Reserve notes in circulation and a
35 per cent reserve in gold certificates or other lawful money
against deposits. When deposits with the Reserve banks are
made in the form of gold certificates or lawful money, they add
to the reserves of the Reserve banks and consequently increase
their lending power by approximately two and one-half times
the amount of the deposit. Deposits at the Reserve banks, how­
ever, may also be obtained by member banks through borrow­
ing from the Reserve banks, or as a result of open-market pur­
chases by these banks. Deposits obtained in these ways do not
add to the reserves of the Reserve bank, or to their lending
power, but, on the contrary, utilize some of the reserves and con­
sequently absorb some of their lending power.
Federal Reserve banks are not operated for the purpose of
making profits. It was the intention of Congress in enacting the
Federal Reserve Act that the activities of the Federal Reserve
banks be directed toward influencing credit conditions for the
best interests of industry, agriculture, and commerce. Conse­
quently, these banks in ordinary times have a large volume of
cash assets and unused lending power. Since the Reserve banks
hold the ultimate reserves of the banking system, it is impor­
tant that the lending power of these banks be at all times ade­
quate to meet not only the seasonal demands of trade and in­
dustry but also unusual requirements that may arise in excep­
tional circumstances.
After all necessary expenses of a Federal Reserve bank have
been provided for, its stockholding member banks are entitled
to receive a cumulative annual dividend of six per cent on the
paid-in capital stock. On December 31, 1935, the paid-in stock
of the Reserve banks held by the member banks totaled
$130,512,000, and dividends paid on this stock in 1935 were
$8,504,974. After dividend claims have been fully met, the net
earnings are paid into the surplus fund of the Federal Reserve

[ 13 ]

bank, which strengthens the position of the bank and increases
its ability to serve the public. More than one-fourth of the
aggregate net earnings of the Reserve banks since their organi­
zation was paid to the Government as a franchise tax, approxi­
mately one-fourth was paid in dividends to member banks,
nearly one-fourth, under act of Congress, was contributed to
the capital of the Federal Deposit Insurance Corporation, and
a fourth remains in the surplus accounts of the Reserve banks.
In case of liquidation or dissolution of a Federal Reserve
bank, any surplus remaining after payment of all debts, divi­
dends, and the par value of its capital stock is to be paid to the
United States Government.
The Member Banks—All national banks in the continental
United States are required by law to be members of the Federal
Reserve System, and eligible banks and trust companies operat­
ing under State charters may, with the approval of the Board
of Governors of the Federal Reserve System, become members.
Pertinent information with respect to membership in the Fed­
eral Reserve System is given in a later section.
About 40 per cent of the commercial banks in the United
States were members of the System on December 31, 1935, and
these member banks had resources amounting to about fourfifths of the total banking resources of all commercial banks in
the country. There were 6,387 member banks on December 31,
1935, of which 5,386 were national banks and 1,001 were State
banks. The State bank members ranged in size from banks
with $25,000 capital to some of the largest banks in the United
The relation of a member bank to the Federal Reserve bank
of its district is similar in many respects to the relation of an
individual to his bank. It is chiefly from member banks that
Reserve banks receive deposits and to member banks that they
make loans and supply currency.
Federal Advisory Council—The Federal Advisory Council is
composed of twelve members, one from each Federal Reserve
district, selected annually by the board of directors of the Fed­
eral Reserve bank of the district. The Council is required to
meet in Washington at least four times each year, or oftener if
called by the Board of Governors of the Federal Reserve Sys­
tem, and may hold such other meetings in Washington or else­
where as the Council may deem necessary. The Council acts
in an advisory capacity, conferring directly with the Board of
Governors of the Federal Reserve System on general business

[ 14 ]

and financial conditions and making recommendations concern­
ing matters within the Board’s jurisdiction and the general
affairs of the System.
T h e W ork of t h e F ed era l R eserv e B a n k s

Among the principal functions of the Federal Reserve banks
are holding the basic reserves of the banking system, issuing
Federal Reserve notes, making discounts for or advances to
member banks, purchasing and selling investments of the kinds
permitted under the law, making direct loans to business and
industry under certain conditions, clearing and collecting checks
for member banks, safekeeping of securities for member banks
outside of Reserve bank and branch cities, and acting as fiscal
agents for the United States Treasury.
Holding Reserves of Member Banks—Every member bank
is required by law to keep on deposit with its Federal Reserve
bank a sum which bears a specified relation to its deposits. This
is known as the member bank’s reserve and, among other things,
is responsible for the name, “Reserve” banks. Reserves required
on time deposits are $3 per $100 in all classes of banks, while
reserves required on demand deposits at the time this pamphlet
was prepared were 13 per cent in central reserve city banks, 10
per cent in reserve city banks, and 7 per cent- in other banks,
known as “country banks.”*
Changes in the volume of reserve balances carried by mem­
ber banks with the Reserve banks are one of the most important
indicators of credit conditions. Since member banks are required
to hold a prescribed minimum proportion of reserves in rela­
tion to their deposit liabilities, and since in ordinary times banks
do not carry a large amount of idle funds, changes in the
volume of reserve balances ordinarily correspond to pro­
portionate changes in deposits held by member banks. When
member bank reserves increase because of gold imports or
through purchases by the Reserve banks in the open market,
the banks tend to increase their loans and investments, and con­
sequently their deposits, until their volume is as large as the
new reserve balances are permitted to support. On the other
hand, if reserve balances are diminished through gold exports,
sales of securities by the Reserve banks in the open market, or
through a domestic demand for currency, member banks must
* Reserve requirements were progressively raised beginning with August 16, 1936, and
by May 1, 1937, stood at double those given above. On April 16, 1938, however, the reserve
requiiement on net demand deposits was lowered to 22J4 per cent for central reserve city
banks, 17Yi per cent for reserve city banks, and 12 per cent for country banks; that on time'
deposits was reduced to S per cent for all member banks.

[ 15 ]

either liquidate some of their loans and investments or borrow
from the Reserve banks in order to bring- their reserves up to
the minimum required by law.
Since the reserves constitute only a fraction of the deposits
that they are permitted to support, changes in reserves tend to
be accompanied by changes in member bank deposits of several
times the amount of the change. It is for this reason that re­
serve balances are sometimes referred to as “high power
The lower portion of the accompanying chart shows the
course of member bank reserve balances from 1918 to 1935.
Prior to 1932 these balances rarely exceeded the reserves re­
quired by law. Periods when reserve balances increased were
periods when member banks were increasing their own loans
and investments and deposits. Periods when member bank re­
serves diminished were periods when bank credit, as measured
either by loans and investments or by deposits, declined. In­
creases in reserves, therefore, were indicative of periods of credit
expansion, and decreases in reserves of periods of credit liquida­
tion or contraction.
Not only changes in the volume of reserves of member banks
are significant, but also the means that bring about these
changes. If increases in reserves are caused by gold imports or
open-market operations by the Reserve banks, they come to the
member banks without causing them to borrow money, and
consequently they result in a tendency on the part of the banks
to find outlets for the new funds. In these circumstances credit
conditions are easy and interest rates tend to decline. If, how­
ever, the member banks, in order to have the required amount
of reserves, must borrow from the Reserve banks, then they are
likely to make efforts to get out of debt, and may sell invest­
ments or call loans. Credit conditions become tight and interest
rates advance.
For these reasons, the Reserve banks can exert an important
influence on credit conditions by increasing or decreasing the
volume of member bank reserves by buying or selling securities
in the open market.
Since 1932 the demand for bank credit by business has been
inactive, while reserves of member banks have been greatly in­
creased, first, through open-market operations by the Reserve
banks, and later through large imports of gold from abroad.
As a consequence, member bank reserve balances with the Fed­
eral Reserve banks have been much larger than the minimum

[ 16 ]














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g o ld "
















DEPOSI rs wi rH f . R . BA IKS





1919 1920 1921 19Z2 1923 1924 1925 192E 1927 1928 1929 1930 1931 1932 1933 19341935









RES :r v e



D scow




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x g




1918 1919 1920 1921 1922 1923 1924 1925 192B 19Z7 1928 1929 1930 1931 1932 1933 1934 1935














# EX C E 55







1918 1919 1920 1921 I92Z 1923 1924 1925 192G 1927 1928 1929 1950 1931 1932 1933 1934.1935

[ 17 ]

required by law. These reserves above legal requirements are
known as excess reserves. The continued expansion of these
excess reserves was in accordance with the Federal Reserve
System’s policy of easy money pursued for the purpose of lower­
ing prevailing money rates and encouraging the recovery of
Some of the principal factors, changes in which influence the
volume of member bank reserve balances, are also shown on the
chart.* Gold stock and Reserve bank credit may be considered
as primary sources of reserve funds. If other factors do not
change, additions to the country’s gold stock increase bank
reserves and ease conditions in the money market, while reduc­
tions in gold stock have the opposite effect. Like effects follow
increases or decreases of Reserve bank credit. The principal
components of Reserve bank credit are shown in the middle
section of the chart and comprise bills discounted for member
banks, bills bought in the open market by the Reserve banks,
and holdings of United States Government securities by the
Reserve banks. As already indicated, it makes a difference
whether changes in reserves are caused by open-market pur­
chases by the Reserve banks, or reflect borrowing by member
banks from the Reserve banks.
“Money in circulation” and “Treasury cash and deposits with
Federal Reserve banks,” which are also shown on the chart, are
sometimes spoken of as factors making use of reserve funds.
Increases and decreases in these work in the opposite direction
from changes in gold and Reserve bank credit. A member bank
needing currency to meet customers’ demands may get it from
a Reserve bank and have the amount charged to its reserve
account. On the other hand, a member bank with surplus cur­
rency on hand may deposit it, receiving credit in its reserve
account. Additions to funds withdrawn by the Treasury from
the banks and held on deposit with the Federal Reserve banks
or as cash in the Treasury vaults result in a decrease in reserve
balances of member banks or an increase in their borrowings,
while disbursements of such funds by the Treasury have the
opposite effect.
The Federal Reserve banks may be thought of as a system
of twelve reservoirs, each holding the reserve deposits of mem­
ber banks and prepared to make loans to meet the credit needs
* A full discussion of the derivation of this chart and the significance of its constituent items may be found in the Federal Reserve Bulletin, July 1935, and in “Money
Rates and Money Markets in the United States,” by Winfield W. Riefler. Harpe*- &
Brothers, Publishers, 1930.

[ 18 ]



of its respective district. Facilities for borrowing on sound
assets at its Reserve bank are an assurance to a well-managed
bank of its capacity to render better service to its industrial,
commercial, and agricultural customers.
In actual practice, a member bank’s reserve account at the
Reserve bank may be increased by depositing currency or checks,
by transfers from a correspondent bank, by borrowing at the
Reserve bank, or by the sale to the Reserve bank of bankers’
acceptances, or under certain circumstances, by the sale to the
Reserve bank of Government securities or other assets which the
Reserve banks may purchase. The reserve balance may be
checked against by the member bank, but any deficiency in the
required balance must be restored.
No interest is paid on member bank reserve deposits. If
interest were paid on such deposits, Reserve banks would need
to be so operated as to earn the interest and would have to keep
their funds more fully invested, thus competing directly with
commercial banks for loans and investments. Since the public
interest requires that the operations of the Reserve banks be
conducted with reference to the general condition of credit and
business rather than to the need for earnings, the Reserve banks
are not permitted to pay interest on deposits.
Extension of Credit by Federal Reserve Banks—The power
of the Reserve banks to extend credit is of great importance to
the business public. Let us take as an example a grocer in
Austin, Texas, who wishes to buy a carload of flour. At the
moment his bank account is not sufficient to cover such a pur­
chase, and so he applies to his local bank for a loan. The bank,
satisfied with the grocer’s credit rating, makes him a 90-day loan
on his note, and the grocer then buys the flour. As he sells it
and his customers pay their bills, the grocer accumulates funds
to retire his note.
In ordinary circumstances, a bank’s resources are sufficient
to meet its customers’ requirements, but the grocer’s application
for a loan may reach his bank at a time when many other cus­
tomers need business loans. If the bank expands its loans at
this time, it may in turn be forced to borrow. Before the estab­
lishment of the Federal Reserve System the Austin bank would
have applied for a loan from some other bank with which it had
an account. Usually, correspondent banks can meet requirements
of this character coming from their bank customers. However,
the correspondent bank similarly might not be in a position to
expand its loans.

[ 19 ]








Since the passage of the Federal Reserve Act, the Austin
bank, if a member of the Federal Reserve System, is in a much
more secure position, since it can always turn to the Reserve
Bank of Dallas. It may offer to the Reserve bank the grocer’s
note. The Reserve bank then examines the note as to its
eligibility under the law and as to its soundness, and, if satisfied
with the loan, resdiscounts it and places the proceeds in the
reserve account of the Austin bank.
Later, when the grocer’s note matures and is paid, it is re­
turned to him and thus the circle is completed. Meanwhile,
the grocer has been able to carry on his business. The Austin
member bank, with the funds it borrowed from the Reserve
bank, has been better able to serve its customers than would
have been the case if the reserve reservoir had not been avail­
able to draw upon.
The rate of interest charged the member bank by the Reserve
bank is called the “discount rate.” The discount rate for each
class of paper is required to be established every fourteen days
by each Reserve bank, or oftener if deemed necessary by the
Board of Governors of the Federal Reserve System, and is sub­
ject to review and determination by the Board of Governors.
Such rate is applied uniformly to all member banks in the dis­
trict on paper of like character and is usually lower than the
rate charged its customers by a member bank.
The member bank’s lending rate at any particular moment
is determined, subject to State law, largely by custom and busi­
ness conditions. On the other hand, the discount rate at a
Reserve bank is determined largely with reference to credit
conditions. Discount rates are advanced when there is evidence
of excessive growth of credit or the development of speculative
activity and reduced when business is inactive and the demand
for credit is low.
Federal Reserve banks may borrow from each other by re­
discounting loans which they have made.
Important types of credit extension in which the Federal
Reserve banks may engage are described below in summary
form :
Credit Facilities for Member Banks— Reserve banks are
authorized to discount for their member banks eligible paper
which consists of notes, drafts, bills of exchange, and bankers’
acceptances of short maturities arising out of commercial, indus­
trial, and agricultural transactions, and short-term paper secured

[ 22 ]

by obligations of the United States. They are authorized to
make advances to their member banks upon the promissory
notes of the latter for periods not exceeding ninety days upon
the security of paper eligible for discount or purchase and for
periods not exceeding fifteen days upon the security of obliga­
tions of the United States and certain other securities.
Federal Reserve banks may also make advances to member
banks on other kinds of security, namely, upon any assets of the
member bank whether otherwise eligible or not, which will
secure the loan to the satisfaction of the lending Reserve bank.
Such loans may have a maturity of not more than four months
and bear interest at a rate of not less than ^ of 1 per cent per
annum higher than the highest discount rate at the time in
effect at such Reserve bank. Under certain prescribed conditions,
advances may also be made to groups of member banks upon
collateral other than eligible paper.
Credit Facilities for Others — Federal Reserve banks may
make working capital loans direct to established industrial or
commercial businesses which are unable to secure needed credit
from their usual sources. These loans may be for periods
not exceeding five years. Federal Reserve banks may also par­
ticipate with member banks or other financial institutions in
making such loans. A third form of this Federal Reserve bank
assistance to industry is for a member or nonmember bank to
make the loan, first protecting itself by securing a commitment
from the Federal Reserve bank. The commitment binds the
Federal Reserve bank to take over the loan at the request of
the lending bank and to assume an agreed proportion of any
loss, in no case exceeding 80 per cent of the loan.
Federal Reserve banks may also make advances to individ­
uals, partnerships, or corporations upon their notes secured by
direct obligations of the United States for periods not exceeding
ninety days. In unusual and exigent circumstances, the Board
of Governors of the Federal Reserve System may authorize a
Federal Reserve bank under certain conditions to discount for
individuals, partnerships, or corporations notes, drafts, and bills
of exchange of the kinds and maturities made eligible for dis­
count for member banks. Federal Reserve banks may discount
short-term agricultural paper for Federal Intermediate Credit

[ 23 ]

Open-Market Investments—Federal Reserve banks, in accord­
ance with the direction and regulations of the Federal Open
Market Committee, may purchase and sell in the open market
bankers’ acceptances, cable transfers, and bills of exchange of
the kinds and maturities eligible for discount, and direct obli­
gations of the United States or obligations which are fully
guaranteed by the United States as to principal and interest, as
well as certain short-term obligations of Federal Intermediate
Credit banks, of National Agricultural Credit Corporations, and
of States in the continental United States and political subdi­
visions thereof. These operations are an important phase of
the System’s credit-extension activities.
Currency—Currency in this country has become the “small
change” of business. The greater part of the country’s trans­
actions is settled by check, and except when banking disturb­
ances have resulted in hoarding of currency by the public, the
amount of currency in circulation has varied chiefly with the
need for cash in making retail purchases and in paying wages.
The Federal Reserve banks are the principal currency reser­
voirs of the United States, and their own note issues afford the
elastic element in the American currency supply. Member banks
obtain the currency that they pay out from the Federal Reserve
bank of their district. Nonmember banks usually obtain their
currency from their correspondent banks, which are members
of the Federal Reserve System and order the currency in turn
from the Federal Reserve bank.
Currency transactions between a member bank and a Federal
Reserve bank are much the same as those between an ordinary
bank and its depositors. When an individual needs currency, he
draws a check on his bank and cashes it. If he does not have a
sufficient balance in the bank to obtain funds in this manner,
he may be forced to borrow. Similarly, when a member bank
requires currency to pay out to its customers, it in effect draws
and cashes a check on its Federal Reserve bank. The member
bank may find it necessary to borrow at the Federal Reserve
bank for this purpose.
On the other hand, when an individual has more currency
than he needs, he deposits it at his bank, perhaps paying off a
loan. Likewise, if a member bank decides that it has more
currency than it needs, it will return the surplus currency to the
Reserve bank for credit to its account. Thus, the increase or
decrease in the volume of currency in circulation does not depend

[ 24 ]

upon the initiative of the Federal Reserve banks but upon the
needs of the member banks. Their needs, in turn, are determined
by the needs of their customers.
The entire cost of shipping currency to and from member
banks is paid by the Federal Reserve banks.
In order to be able to supply all calls for currency without
delay, the Federal Reserve banks keep on hand large stocks of
all denominations of currency and coin. Additional stocks of
paper currency are also maintained at the Bureau of Engraving
and Printing in Washington, D. C.
As banks of issue, the Federal Reserve banks have had out­
standing both Federal Reserve notes and Federal Reserve bank
notes. Federal Reserve notes constitute the major portion of
the currency used in the United States today, about $3,700,000,000
being in circulation during December 1935. Federal Reserve
bank notes, however, have been issued only under special condi­
tions. The amount outstanding at any time has been relatively
small and those issued during the 1933 banking emergency are
rapidly disappearing from circulation.

A cardboard carton of currency being strapped for shipment by a
Reserve bank to a member bank. Steel bands are placed around each
package while it is compressed between the jaws of the machine.

[ 25 ]

Federal Reserve notes are obligations of the United States
and are a first and paramount lien on all the assets of the issuing
Federal Reserve bank. They are legal tender for all public and
private debts.
Any Federal Reserve bank may make application to its
Federal Reserve agent for Federal Reserve notes. They are
issued by the Federal Reserve agent against the security of gold
certificates and of commercial and agricultural paper discounted
or purchased by Federal Reserve banks, and, until March 3, 1937,*
may also be secured by direct obligations of the United States
when authorized by the Board of Governors of the Federal Re-

Tlie 'packages shown in the above illustration are new and used Federal
Reserve notes being issued by the Federal Reserve agent to the Federal
Reserve bank.

serve System. Every Federal Reserve bank is required to main­
tain reserves in gold certificates of not less than 40 per cent
against its Federal Reserve notes in circulation. A small fund in
gold certificates is maintained with the Treasurer of the United
States for the redemption of its Federal Reserve notes, but this
may be counted as part of the 40 per cent reserve.
* Extended to June 30, 1939.

[ 26 ]



The collateral pledged with the agent by the Reserve bank
for Federal Reserve notes must not be less than the amount of
notes applied for. The Board of Governors of the Federal Re­
serve System may at any time call upon the Federal Reserve
bank for additional security to protect Federal Reserve notes
issued to it.
Every Reserve bank is required to redeem in lawful money
its own Federal Reserve notes and the notes issued by other
Reserve banks, but it may not place the notes of other Federal
Reserve banks in circulation again under a penalty of a tax of
10 per cent upon the face value of the notes so paid out. It is
required to return promptly to every other Reserve bank the
notes of such other Reserve bank, or, upon direction of that
bank, to forward them to the Treasurer of the United States for
retirement. Badly worn and mutilated notes are canceled and
returned by the Federal Reserve bank receiving them to W ash­
ington. Notes which are still fit for use may be returned by a
Reserve bank to the custody of its Federal Reserve agent, and
the former is then entitled to the return of an equivalent amount

Currency returned to the Reserve banks is sorted by machines of the type
shown in this illustration.

[ 28 ]

of collateral. Returned notes may again be obtained from the
agent on the presentation of collateral as required for the issue
of new notes. The costs of engraving, printing, issuing, and
retiring Federal Reserve notes, together with insurance and ship­
ping costs, are paid by the Reserve banks.

Currency which returns to the Reserve banks unfit for fu rth er use, is cut
in two by this machine and the two halves sent in separate shipments to

The facilities provided by the Federal Reserve System for
borrowing 011 sound assets to obtain currency represent one of
the most important improvements made in the American finan­
cial system by the Federal Reserve Act. Previously, when there
was a sudden increase in the demand for currency, a large supply
was difficult to obtain: First, because facilities for issuing suf­
ficient currency to meet emergency demands did not exist; and
second, because there was no central pool from which banks
could borrow, while in times of banking difficulty large-scale
sales of investments or borrowing from other banks was im­
possible. The impossibility of increasing the supply of currency
was one of the principal causes of the panics of 1873, 1893, and
1907, when many banks suspended payments to depositors, not­
withstanding the fact that they owned sound assets of the types

[ 29 ]

on which the Federal Reserve banks now extend credit. The
Federal Reserve System established an elastic currency system,
which made it possible to meet the unprecedented withdrawals
of cash in the years 1930-1933.
The demand for currency is one of the principal sources of
the seasonal demand for Reserve bank credit. This is shown
by the chart on page 17, on which one line represents the total
of credit extended by Reserve banks from January 1918 through
December 1935, and a second line, volume of money in circula­
tion. The close relationship of the seasonal fluctuations in Re­
serve bank credit and in currency is at once evident.

A coin-counting machine in a Reserve bank. In 198Jt nearly $300,000,000
of coin was received and counted at the twelve Reserve banks.

Interdistrict Settlement Fund—Each Federal Reserve bank
has a deposit of gold certificates with the Board of Governors
at Washington. The sum of the twelve deposits is called the
Interdistrict Settlement Fund, which was created to assist Fed­
eral Reserve banks in settling their transactions with each other.
Private or leased wires connect all Federal Reserve banks and
branches, and at the close of each day the Reserve banks wire

[ 30 ]

to Washington the total of the amounts that they owe the other
Reserve banks. The Interdistrict Settlement Fund combines
these figures and transfers sums from one bank’s account in the
fund to another’s account to pay the net amount of these inter­
bank transactions. In this way check collections, transfers of
funds for member banks and the Treasury, Federal Reserve bank
investments, and an enormous mass of other interdistrict busi­
ness are transacted merely by bookkeeping entries and without
physical shipments of currency. In 1935, business totaling
$91,000,000,000 was handled through the Interdistrict Settlement
Check Collection—Under regulations prescribed by the Board
of Governors of the Federal Reserve System, the twelve Federal
Reserve banks act as a nation-wide clearing house for their
member banks and for such nonmember banks as maintain ap­
propriate balances with the Reserve banks. For these banks the
Federal Reserve banks will collect checks drawn on all banks
in the United States which do not deduct an “exchange charge”
for paying checks on themselves received through the mail. Outof-town checks drawn on banks in the same Federal Reserve

Bundles of incoming checks being opened in the mail department of a
Reserve bank.

[ 31 ]

district deposited with a Reserve bank are usually sent directly
to the banks on which drawn. Checks drawn on banks in an­
other Federal Reserve district, however, are ordinarily sent to
the Reserve bank of that district for presentation. This payment
between Federal Reserve banks for the proceeds of check col­
lections is made by telegraph through the Interdistrict Settle­
ment Fund. Direct forwarding of checks and settlement of
interdistrict items through the Interdistrict Settlement Fund have
reduced materially the average time formerly required to col­
lect out-of-town checks under the old indirect routing practice.
Since upwards of 90 per cent of all commercial transactions are
settled by checks, the more prompt availability of the proceeds
of checks represents an important saving to business and bank­
ing in this country. Moreover, checks are collected by the
Federal Reserve banks without payment of the old “exchange
charge” and this represents a large saving to commerce.

Sorting U. S. Treasury checks in a Reserve hank. Each pile of checks is
drawn for a different purpose and by a different disbursing officer of the

[ 32 ]

Collection of Notes, Drafts, Bonds, Coupons, etc.—The Fed­
eral Reserve banks also collect miscellaneous items such as
notes, drafts, bonds, coupons, etc., collection being made through
direct routing and the use of the Interdistrict Settlement Fund
in much the same manner as checks.
Wire Transfers of Funds—Member banks wishing to create
balances or pay funds in another part of the country may do
so by means of wire transfers through their Reserve banks with­
out loss of time and, if transfers are for multiples of $100, at no
cost to member banks except where made for the benefit of a
designated customer, when a charge is made for the cost of the
telegram. These transfers are accomplished by means of wire
advices from the sending to the receiving Federal Reserve bank,
and payment is made through the medium of the Interdistrict
Settlement Fund.

A clerk in a Federal Reserve bank counting coupons from various U. 8.
Treasury securities after redemption by the Reserve bank as Fiscal Agent
fo r the Government.

Fiscal Agency—The Reserve banks act as fiscal agents of
the Government in the issue, transfer, exchange, conversion, and
redemption of United States Government securities, and in the
administration of special deposit accounts of the Government in

[ 33 ]

member and nonmember banks. Functions formerly performed
by the Sub-Treasuries of the United States in connection with
the exchange and redemption of money for the public are han­
dled now by the Reserve banks. They are also called upon to
serve as fiscal agents for various agencies and corporations
established by the Government, as for example, the Reconstruc­
tion Finance Corporation. The Fiscal Agency Department of
a Federal Reserve bank is a convenience to banks and the public
having occasion to deal with the Government in these matters.
Informational Services of the Federal Reserve System—Im­
portant work is carried on by the Board of Governors of the
Federal Reserve System as well as at the Reserve banks in the
collection and analysis of financial and business data of local,
national, and international scope. Accurate and current infor­
mation of this character is essential to the officials of the System
who are responsible for national credit policies. The material
thus assembled is made public as far as possible for the benefit
of member banks and business in general.
The official publication of the Board of Governors of the
Federal Reserve System, the Federal Reserve Bulletin, is issued
monthly and is supplied free of charge to all member banks, and
at a subscription rate of $2.00 per year to cover printing costs,
to the general public. It is a source for statistical material deal­
ing with general business conditions, the operations of the Fed­
eral Reserve banks and member banks, money market develop­
ments in this country, and foreign banking data, including
exchange rates, gold holdings of central banks and governments,
reports of central banks, and similar material.
A monthly review of business conditions in its district is
issued by each Federal Reserve bank. These reviews are based
in part on reports received from banks and from firms represent­
ing the major lines of industry, and are designed to include the
type of information currently useful to bankers in their lending
activities. In addition to the monthly reviews of business con­
ditions, a large amount of statistical matter for the use of officers
and directors is prepared at each Federal Reserve bank. Several
of the Reserve banks maintain libraries which are open to the
public, affording access to collections of well-selected books,
pamphlets, and current periodicals on economic and financial

[ 34 ]

G e n e r a l I n f o r m a t io n R e g a r d in g M e m b e r s h ip
in t h e F e d e r a l R e s e r v e S y s t e m

Among- the privileges which a bank enjoys as a member of
the Federal Reserve System are the following:
1. Facilities for rediscounting eligible paper and obtain­
ing advances on promissory notes.
2. Obtaining currency and coin promptly when needed.
3. Direct use of Federal Reserve check collection facilities.
4. Direct use of Federal Reserve non-cash collection
5. Transferring funds by telegraph.
6. Drawing drafts on Federal Reserve bank.
7. Safekeeping of securities by the Federal Reserve bank
for member banks located outside of Federal Reserve
bank and branch cities.
8. Use of the emblem
9. Member bank deposits are automatically insured by
the Federal Deposit Insurance Corporation up to
$5,000 for any one depositor.
As stated above, all national banks in the continental United
States are required to become members of the Federal Reserve
System. In the case of State banking institutions interested in
becoming members, applications should be addressed to the
Federal Reserve agent at the Reserve bank in the district in
which the applicant is located. The Federal Reserve agent
investigates the condition of the bank and makes recommenda­
tions to the Board of Governors of the Federal Reserve System,
which must pass on each application for membership.
In acting upon the application of a State institution for
membership, the Board gives special consideration t o :
(1) The financial history and condition of the applying
bank and the general character of its m anagem ent;
(2) The adequacy of its capital structure and its
future earnings prospects;

[ 35 ]

(3) The convenience and needs of the community to be
served by the bank; and
(4) W hether its corporate powers are consistent with the
purposes of the Federal Reserve Act.
Some of the important statutory provisions regarding mem­
bership are outlined below.
Capital required—To be eligible for admission to member­
ship in the Federal Reserve System, a State bank or trust com­
pany, including Morris Plan banks and other incorporated bank­
ing institutions engaged in similar business but excepting mutual
savings banks having no capital stock, must have a paid-up,
unimpaired capital sufficient to entitle it to become a national
bank in the place where it is situated, except that this require­
ment does not apply to certain State banks and trust companies
having a capital of not less than $25,000.
After the year 1941 the above requirement may be waived
by the Board of Governors of the Federal Reserve System with
respect to the State banks and trust companies having average
deposits of $1,000,000 or more, which after that year are required
to be members of the Federal Reserve System, in order to have
the benefits of deposit insurance.*
A mutual savings bank having no capital stock must, to be
eligible, have surplus and undivided profits of not less than the
amount of capital required to organize a national bank in the
same place.
The minimum capital requirements with respect to new
national banks are as follows:
In cities having population of:
In an outlying district of a city with a population exceeding 50,000
inhabitants; provided State law permits organization of State banks

Capital Required
$ 50,000

Stock Subscription—An applying bank is required to sub­
scribe for stock in the Federal Reserve bank of the district in an
amount equal to 6 per cent of its paid-up capital and surplus
(including capital notes and debentures sold to the Reconstruc­
tion Finance Corporation), except that a mutual savings bank
Savings banks, mutual savings banks, Morris Plan banks and other incorporated
banking institutions engaged only in business similar to that transacted by Morris Plan
banks, State trust companies doing no commercial banking business, and banks located
in Hawaii, Alaska, Puerto Rico, or the Virgin Islands, are not required to become
members of the Federal Reserve System in order to have deposit insurance.

[ 36 ]

must subscribe for an amount of stock equal to six-tenths of one
per cent of its total deposits. Only one-half of the par value of
the stock is paid, the other half remaining- subject to call by
the Board of Governors of the Federal Reserve System. Upon
the amount paid in, the Reserve bank pays cumulative dividends
at the rate of 6 per cent per annum.
Reserve Requirements—A member bank must maintain with
its Federal Reserve bank as a reserve balance a certain propor­
tion of its deposits. This proportion varies according to the
class of the deposit and the location of the bank, as follows:
Net Demand
Member Banks:
Deposit s*t Depositsf
(a) In central reserve cities.........................................................................
(b) In reserve cities.......................................................................................
10 %
* Gross demand deposits less balances due from other banks and cash items in
process of collection payable immediately upon presentation in the United States,
t See page 15 for subsequent changes in these requirements.

If located in an outlying district of a reserve city, however,
a member bank may, upon approval of the Board of Governors
of the Federal Reserve System, have its reserve requirements
reduced to those specified in (c), and, if located in an outlying
district of a central reserve city, may, with the approval of the
Board of Governors of the Federal Reserve System, have its
reserve requirements reduced to those specified in (b) or (c).
The Board of Governors of the Federal Reserve System may,
in order to prevent injurious credit contraction or expansion,
change the requirements for reserves of member banks located
in reserve and central reserve cities or of those located elsewhere
or of all member banks, but such reserves shall not be less than
the percentages of deposits shown in the above schedule nor
more than twice such percentages.
The law provides that no new loans may be made nor any
dividends paid by a member bank if its reserve is deficient.
Penalties which are prescribed by the Board of Governors of
the Federal Reserve System are assessed for deficiencies in a
bank’s reserves. Deficiencies are computed 011 the basis of the
average daily net deposit balances for semi-weekly, weekly, or
semi-monthly periods for banks located in Federal Reserve and
branch cities, reserve cities, and elsewhere, respectively.
Voluntary Withdrawal—Any State member bank or trust
company may withdraw from membership after six months’
written notice has been given to the Board of Governors of the

[ 37 ]

Federal Reserve System, upon the surrender and cancellation
of all of its holdings of Federal Reserve bank stock, but, in
exceptional circumstances, such six months’ notice may be
waived by the Board in individual cases. The law provides,
however, that no Federal Reserve bank shall, except upon ex­
press authority of the Board, cancel within the same calendar
year more than 25 per cent of its capital stock on account of
such voluntary withdrawals during that year.
Examinations and Reports—National banks and their affil­
iates are examined by the Comptroller of the Currency and
copies of the reports are furnished the Reserve bank. State
member banks and their affiliates are examined by examiners
appointed with the approval of the Board of Governors of the
Federal Reserve System ; and, whenever the directors of a
Federal Reserve bank approve examinations made by the State
authorities, such examinations and the reports thereof may be
accepted in lieu of examinations made by examiners so ap­
pointed and approved. The Board of Governors of the Federal
Reserve System deems it desirable to have at least one regular
examination of each State member bank, including its trust de­
partment, made during each calendar year by a Federal Reserve
bank’s examiners either independently or jointly with State
banking authorities. The laws of some States authorize the
acceptance of the reports of examiners for the Federal Reserve
banks in lieu of examinations by State examiners.
A State member bank is required to furnish its Federal Re­
serve bank semi-annual reports of earnings and dividends and
not less than three reports of condition each year, including
reports of its affiliates (with certain exceptions), and to publish
such reports of condition. A national bank sends to its Federal
Reserve bank copies of similar reports which it submits to the
Comptroller of the Currency. A member bank must also furnish
its Reserve bank with periodical reports of daily net deposit
balances for reserve computation purposes.
Branches of State Member Banks—State member banks may
establish and operate branches on the same conditions and sub­
ject to the same limitations as those applicable to national banks,
subject to the provisions of the laws of the State in which they
are located, and subject also to the approval of the Board of
Governors of the Federal Reserve System with respect to the

[ 38 ]

establishment of out-of-town branches. The Board’s approval is
not required for branches within the city, town, or village in
which the parent bank is situated.
Limitation on Interest Paid on Deposits— No member bank
of the Federal Reserve System may pay interest on any deposit
which is payable on demand, with certain specified exceptions;
and the Board of Governors of the Federal Reserve System is
required by law to limit by regulation the rate of interest which
may be paid by member banks on time and savings deposits.
Miscellaneous Provisions—There are a number of other pro­
visions of Federal law relating to different aspects of operations
of national banks as well as State banks which become members
of the Federal Reserve System. Each member bank must have
not less than 5 nor more than 25 directors. There are provisions
regulating loans to a bank’s own executive officers; providing
for the removal of any director or officer for violation of law
or for continued unsafe or unsound banking practices; limiting
the degree to which directors, officers, or employes of member
banks may serve other banks or securities organizations; and
imposing penalties with respect to embezzlements, false entries,
and similar matters.
Other important provisions prohibit member banks from
lending on or purchasing their own stock; prohibit payment of
unearned dividends; limit activities with respect to purchasing,
selling, underwriting, and holding investment securities and
stock; regulate the relation of a member bank to holding com­
pany affiliates; prohibit affiliation with any organization engaged
principally in the issue, underwriting, or distribution of securi­
ties; limit loans on stock or bond collateral; limit loans to or
investments in stock of affiliates; and limit the investment in
bank premises.
Conditions of Membership—The Board of Governors of the
Federal Reserve System prescribes for each State institution
applying for membership conditions to which the institution
must agree before it is admitted to the System. These conditions
are designed to maintain high standards in member banks and
to insure that powers exercised after their admission will be
consistent with the provisions of the Federal Reserve Act.
The Federal Reserve agent in each district is prepared to
furnish on request full information as to the procedure to be
followed and forms to be used in applying for membership.

[ 39 ]

In its more than twenty years of operation and development,
the Federal Reserve System has become an integral part of
American business and finance. Through the Interdistrict Set­
tlement Fund it has made possible the more efficient, less costly,
and speedier handling by member banks of check collections and
transfers of funds. It has provided an elastic and adequate
supply of currency, a concentration of bank reserves for greater
usefulness, and an efficient fiscal agency for the Treasury. The
ability of member banks to borrow on business paper which
provides a ready market for the loans of customers, large and
small, has tended to equalize the credit supply in all parts of
the country, to eliminate seasonal credit strain, and give greater
assurance that member banks can supply the credit requirements
of their communities. Machinery has been set up to provide a
national credit policy administered in the public interest and to
insure unified action by the banking system in carrying out this

[ 40 ]