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NATIONAL
MONETARY COMMISSION
LETTER FROM SECRETARY OF THE
NATIONAL MONETARY COMMISSION
TRANSMITTING, PURSUANT TO LAW,
THE REPORT OF THE COMMISSION

JANUARY 9. 1912
Referred to the Committee on Finance and ordered to be printed

WASHINGTON
GOVERNMENT PRINTING OFFICE
1912

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LETTER OF TRANSMITTAL.
WASHINGTON,

D. C , January #, if 12.

To the President of the Senate:
In compliance with the law, I am directed by the
National Monetary Commission to file with you its report.
Respectfully,
ARTHUR B. SHELTON,

Secretary.

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REPORT
OF TBS

NATIONAL MONETARY COMMISSION.
To the Congress.
The National Monetary Commission, created by sections
17,18, and 19 of "An act to amend the national banking
laws," approved May 30,1908, submits the following report:
Section 18 of the act gave authority and instructions
to the commission as follows:
It shall be the duty of this commission to inquire into and report to
Congress, at the earliest date practicable, what changes are necessary or desirable in the monetary system of the United States or in the laws relating
to banking and currency and for this purpose they are authorized to sit
during the sessions or recess of Congress, at such times and places as they
may deem desirable, to send for persons and papers, to »Hntirn^n oaths,
to summons and compel the attendance of witnesses. • • • Th e commission shall have the power, through subcommittee or otherwise, to examine witnesses and to make such investigations and examinations, in this or
other countries, of the subjects committed to their charge as they shall
deem necessary.

In accordance with these instructions we have undertaken in as thorough and scientific a manner as possible
to investigate banking and currency conditions in this and
other countries. These investigations have been pursued
through hearings and examinations in this country and
abroad by members and representatives of the commission,
and through the preparation of papers and monographs
by expert authorities. The commission has through the
Comptroller of the Currency collected statistical and other
information from National and State banks and trust
companies, national-bank examiners, and State bank
supervisors.

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In the summer of 1908 members of the commission
visited England, France, and Germany, the three countries
of Europe in which conditions most closely resemble
our own, examining their banking arrangements, methods,
and practices by personal interviews with the officers
of the leading institutions. Representatives of the commission have also visited the banks of Canada, Scotland,
Switzerland, Italy, and Sweden, conferring with their officers
and examining at first hand their methods of organization
and their arrangements for dealing with reserves, note issue,
commercial paper, and other banking factors. The questions and answers of the European and Canadian interviews
have been published in two volumes, which we believe
contain more accurate and concrete information in regard
to the actual practice of banking in these countries than
has ever been published before. The commission has conducted hearings and made inquiries in different parts of
this country for the purpose of obtaining opinions of
people, representing different localities and occupations, as
to desirable changes in our banking laws. Public hearings, after ample notice thereof, have been held in New
York, Chicago, St. Paul, Minneapolis, San Francisco,
Seattle, Portland, Los Angeles, Salt Lake City, Denver,
Kansas City, St. Louis, and Washington, while meetings such as that of the Western Economic Society at
Chicago and of the American Bankers Association and its
affiliated organizations at New Orleans, which have been
devoted exclusively to the discussion of monetary legislation, have been utilized by the commission as a means for
securing opinions of political economists and of bankers,
respectively.
In examining the printed literature of banking at the
beginning of our investigations we were struck by the
paucity, both in Europe and in America, of material
dealing with other phases of the subject than the history
of the circulation privilege. It was practically impossible

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to find, at least in English, any satisfactory account of
the operations of European banks other than note-issuing
banks, any penetrating examination of the great credit
institutions or of the organization of credit in other countries, while the literature of banking in the United States
was confined for the most part to accounts of the obsolete
State banking systems which existed before the Civil War
and to the history of national banking legislation. Until
our banking authorities had analyzed the processes and
functions of modern banking institutions and cut loose
from the traditional methods of banking of half a century or
more ago, it was not to be expected that the discussion
of banking reform would be m other terms than those
current in the earlier period. It is a singular fact that
most bankers, economists, and legislators who had
written upon banking had discussed banking questions
in much the same language and from much die same
point of view as English authorities who debated banking
reform in England during the decades before the act of
1844. The commission, therefore, at the inception of its
.labors enlisted the services of the world's best experts in
a fresh examination of banking in the leading countries
as it is conducted to-day. Leading financial editors,
bankers, Government officials, and university professors
in Europe and America and in the Orient, were employed
to prepare papers upon the actual operations of banks
and upon their separate functions and mutual relations.
The commission has thus collected and published monographs upon banking in England, France, Germany,
Canada, Switzerland, Italy, Sweden, Belgium, Mexico,
Russia, Austria-Hungary, Holland, and Japan, as well as
the United States, which, because of their scope and
authority, possess, we believe, enduring scientific value.
By means of special statistical inquiries framed upon a
uniform plan and directed to the leading banks of Great
Britain, France, and Germany, we have collected more

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complete statistical information with regard to the banks
of these countries than has ever been collected before,
while, by a series of special reports from all national and
State banks and trust companies in the United States, the
commission has been able for the first time to present
reports from all of the banks in the country upon a uniform basis.
The commission recognizes the value of the assistance
which it has received in the prosecution of its various inquiries and in compiling its data, as well as in the drafting of its proposals. It would be impossible to enumerate all at the bankers, economists, editors, Government
officials, business men, and banking and commercial organizations that have generously and patiently cooperated in the work, and it would seem invidious to attempt
any selection for special thanks. The list of contributors
to the publications of the commission speaks for itself,
but we are glad to express our obligations to many others
who have rendered equal service in other ways.
The act of May 30,1908, providing for the appointment
of the National Monetary Commission was a direct consequence of the panic of 1907. We shall not attempt to
recount the severe losses and misfortunes suffered by the
American people of all classes as the result of this and
similar crises. To seek for means to prevent the recurrence or to mitigate the severity of grave disasters of this
character was, however, one of the primary purposes of
its creation.
We have made a thorough study of the defects of our
banking system, which were largely responsible for these
disasters and have sought to provide effective remedies for
these and other defects, in the legislation we propose.
The principal defects in our banking system we believe
may be summarized as follows:
1. We have no provision for the concentration of the cash
reserves of the banks and for their mobilization and use

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wherever needed in times of trouble. Experience has
shown that the scattered cash reserves of our banks are
inadequate for purposes of assistance or defense at such
times.
2. Antiquated Federal and State laws restrict the use of
bank reserves and prohibit the lending power of banks at
times when, in the presence of unusual demands, reserves
should be freely used and credit liberally extended to all
deserving customers.
3. Our banks also lack adequate means available for use
at any time to replenish their reserves or increase their
loaning powers when necessary to meet normal or unusual
demands.
4. Of our various forms of currency the bank-note issue
is the only one which we might expect to respond to the
changing needs of business by automatic expansion and
contraction, but this issue is deprived of all such qualities
by the fact that its volume is largely dependent upon
the amount and price of United States bonds.
5. We lack means to insure such effective cooperation on
the part of banks as is necessary to protect their own
and the public interests in times of stress or crisis. There
is no cooperation of any kind among banks outside the
clearing-house cities. While clearing-house organizations
of banks have been able to render valuable services within
a limited sphere for local communities, the lack of means
to secure their cooperation or affiliation in broader fields
makes it impossible to use these or similar local agencies
to prevent panics or avert calamitous disturbances affecting the country at large. These organizations have, in
fact, never been able to prevent the suspension of cash
payments by financial institutions in their own localities
in cases of emergency.
6. We have no effective agency covering the entire country which affords necessary facilities for making domestic
exchanges between different localities and sections, or

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which can prevent disastrous disruption of all such
exchanges in times of serious trouble.
7. We have no instrumentality that can deal effectively
with the broad questions which, from an international
standpoint, affect the credit and status of the United
States as one of the great financial powers of the world.
In times of threatened trouble or of actual panic these
questions, which involve the course of foreign exchange
and the international movements of gold, are even more
important to us from a national than from an international standpoint.
8. The lack of commercial paper of an established
standard, issued for agricultural, industrial, and commercial purposes, available for investments by banks, leads
to an unhealthy congestion of loanable funds in great
centers and hinders the development of the productive
forces of the country.
9. The narrow character of our discount market, with its
limited range of safe and profitable investments for banks,
results in sending the surplus money of all sections, in
excess of reserves and local demands, to New York, where
it is usually loaned out on call on Stock Exchange securities, tending to promote dangerous speculation and inevitably leading to injurious disturbances in reserves. This
concentration of surplus money and available funds in
New York imposes upon the managers of the banks of that
dty the vast responsibilities which are inherent in the
control of a large proportion of the banking resources of
the country.
10. The absence of a broad discount market in our system, taken together with the restrictive treatment of reserves, creates at times when serious financial disturbances
are anticipated a condition of dependence on the part of
individual banks throughout the country, and at the same
time places the fanners and others engaged in productive
industries at a great disadvantage in securing the credit

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they require for the growth, retention, and distribution of
their products.
11. There is a marked lack of equality in credit facilities
between different sections of the country, reflected in less
favored communities, in retarded development, and great
disparity in rates of discount.
12. Our system lacks an agency whose influence can be
made effective in securing greater uniformity, steadiness,
and reasonableness of rates of discount in all parts of the
country.
13. We have no effective agency that can surely provide
adequate banking facilities for different regions promptly
and on reasonable terms to meet the ordinary or unusual
demands for credit or currency necessary for moving crops
or for other legitimate purposes.
14. We have no power to enforce the adoption of uniform
standards with regard to capital, reserves, examinations,
and the character and publicity of reports of all banks in
the different sections of the country.
15. We have no American banking institutions in foreign
countries. The organization of such banks is necessary
for the development of our foreign trade.
16. The provision that national banks shall not make
loans upon real estate restricts their power to serve
farmers and other borrowers in rural communities.
17. The provision of law under which the Government
acts as custodian of its own funds results in irregular
withdrawals of money from circulation and bank reserves
in periods of excessive Government revenues, and in the
return of these funds into circulation only in periods of
deficient revenues. Recent efforts to modify the Independent Treasury system by a partial distribution of the
public moneys among national banks have resulted, it
is charged, in discrimination and favoritism in the treatment of different banks.

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There is a general agreement among intelligent students
of the subject that to remedy these and other defects it
is necessary to provide a comprehensive reorganization of
credit and a thorough reconstruction of our banking systems and methods. We submit herewith our recommendation providing for such reorganization in the form of a
bill which, if enacted into law, will, we believe, accomplish
these results.
It is proposed to incorporate the National Reserve Association of the United States with an authorized capital
equal to 20 per cent of the capital of all subscribing banks,
of which one-half shall be paid in and the remainder shall
become a liability, subject to call under the provisions of
section 3 of the bill. It is also provided that before the
reserve association can commence business $100,000,000 of
capital must be paid in cash. All State banks and trust
companies conforming to the provisions of the bill with
reference to capitalization and reserves and all National
banks are entitled to subscribe for stock and to become
members of the association. Shares in the association are
not transferable and can not be owned otherwise than by
a subscribing bank or in any other than the proportion
named.
It is proposed to group into local associations all subscribing banks located in contiguous territory. The local
associations are to be organized into district associations,
in each of which shall be located a branch of the National
Reserve Association; and the district associations, which
shall be so arranged as to include all the territory of the
United States, are combined to form the National Reserve
Association of the United States.
These several associations are analogous in their
organization to our political divisions, into counties,
States, and the United States. Each has distinctive
functions quite unlike in their, character and each has
representative self-government. In the local association

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the individual bank is the voting unit. A majority of
banks, without reference to their size or their holdings of
stock in the reserve association, elect three-fifths of the
directors, and a majority in stock interest elect two-fifths.
This method of electing directors is, we believe, quite
novel in corporate government. It is more democratic
in form, with more liberal representation to minorities
than any method in general use.
One of the principal functions of the local associations
is to guarantee, upon application, the commercial paper
of individual banks which may be offered to the branches
for rediscount, as provided in section 27 of the bill. The
local association may, and in most cases would, require
from the bank making the application satisfactory
security for the guaranty, Local associations are authorized in serious emergencies to guarantee the direct obligations of subscribing banks with adequate security, in
accordance with the provisions of section 28 of the bilL
A local association may decline to give the guaranties
provided for under either of these sections. Local associations may also, by vote of three-fourths of their board of
directors and the approval of the National Reserve Association, assume and exercise the powers and functions of
clearing houses. They are required also to perform such
services in facilitating domestic exchanges as, in the
opinion of the National Reserve Association, the public
interests may require.
The boards of directors, not less than 12 in number, of
the district branches, are elected in the following manner:
First, one-half by the local associations, each association
acting as a unit without reference to its size or importance;
second, one-third by the local associations, each association in this case casting a number of votes equal to the
number of shares in the National Reserve Association held
by the banks composing such association; third, one-sixth
are chosen by the directors of the first and second class to
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represent other than banking interests. Thus a majority
of the local associations, without reference to the amount
of stock holdings which they represent, elect the larger
group of the directors of the district branch.
Each branch is to have a manager, who shall be a resident of the district, appointed by the governor of the
National Reserve Association, with the approval of the
executive committee of the reserve association and the
board of directors of the branch. The manager of the
branch is to be ex officio a member of its board of directors and its chairman.
The functions of branch organizations are important.
First, they hold the balances and a portion of the cash
reserves of the banks of the district; second, they exercise
the powers of rediscount and discount for banks located in
their districts; third, they are required to redeem upon
presentation in gold or lawful money the circulating notes
of the association and to distribute such notes to individual banks on application; fourth, they are required by
transfers of balances through branches or local associations
to facilitate domestic exchanges between different parts of
the country.
The board of directors of the National Reserve Association is to be elected in the following manner:
The bill provides that the entire country shall be
divided into 15 districts, with a branch in each district.
Of the 46 directors of the National Reserve Association,
2 of the first class, who shall be residents of the district,
are to be elected by the directors of each branch. One
of the directors thus elected by each branch must fairly
represent the agricultural, commercial, industrial, and
other interests of the district, and can not be an officer,
nor, while serving, a director of a bank, trust company,
insurance company, or otherfinancialinstitution. Second,
nine directors in addition to the thirty of the first class
are to be elected by the branch directors acting through

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votingrepresentatives, each representative to cast a number
of votes equal to the number of shares in the National
Reserve Association held by the banks in the branch he
represents. Not more than one director of this class may
be chosen from one district, and this director must be a
resident of the district from which he is elected. There
are to be seven ex officio members of the board of directors,
namely, the governor of the National Reserve Association,
who is to be chairman of the board, two deputy governors,
the Secretary of the Treasury, the Secretary of Agriculture, the Secretary of Commerce and Labor, and the Comptroller of the Currency.
The executive officers of the National Reserve Association are to consist of a governor, two deputy governors,
a secretary, and such subordinate officers as may be
authorized. The governor, who is to serve ten years, is
selected by the President of the United States from an
eligible list including not less than three names furnished
by the directors, and the deputy governors are elected by
the board of directors. The governor and the deputy
governors are removable for cause by the board of directors. The board is to choose from among its number
an executive committee, consisting of nine members, of
which the governor and the two deputy governors and
the Comptroller of the Currency shall be ex officio members. Not more than one of the elected members of this
committee can be chosen from one district. The board
is also to elect from among its number a board of examination, of which the Secretary of the Treasury shall be
ex officio chairman.
This distribution of power and control furnishes the
assurance that the general interests of the country and
of all communities will be conserved as well as the interests of the shareholders, as the National Reserve Association, through this form of organization, is brought into
close relations of responsibility to the Government and

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the people. The provision that one-half of the directors
elected by the branches shall fairly represent the agricultural, commercial, and other interests, and shall not
be connected with banks or other financial institutions,
insures the infusion of representative men into the governing board, who will have every motive to act in the
public interest.
Further restraint upon the administration of the association on narrow or selfish lines is imposed by the provision that four of the highest officials of the Government
are made ex officio members of the controlling board and*
by the requirement that the governor shall be selected by
the President of the United States.
The fear has been expressed that the selection of the
governor by the President and the provisions making
the Secretary of the Treasury, the Secretary of Agriculture, the Secretary of Commerce and Labor, and the
Comptroller of the Currency ex officio members of the
board of directors of the reserve association might lead to
an attempt to control the organization for political purposes. We 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. It is a corporation with private
stockholders, but it is proposed to make it the principal
fiscal agent of the United States and the depository of
its funds. The more important functions of the organization and its principal powers are of a public or semipublic character. It is not only the custodian of the
Treasury balances, but the principal reason for its existence is found in its ability at all times to sustain the
public credit.
As constituted under present proposals, however,
neither the President nor any of the officials named could,
from the inherent character of the organization, use any

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of its functions for personal or political purposes, but to
give to the President the power to appoint all the directors
of the reserve association, as has been suggested, would
result in making the association a political machine, and
appointments would be solicited and bestowed as a reward
for political services.
In providing for the creation for specific purposes of
this new representative organization it has been the aim
of the Monetary Commission to follow in its distribution
of powers and control our governmental structure, and to
coordinate independent local and district organizations
through an effective central agency for mutual cooperation. In this respect, as well as in its functions, the
National Reserve Association differs radically from the
First and Second Banks of the United States and from
European central banks. Its sources of authority are
democratic and not autocratic. Instead of overshadowing
banks, it is their representative; its controlling forces, acting in the public interests, impose policies upon and grant
powers to its managers.
In times of trouble it takes individual banks from a
condition of helpless isolation and dependence and places
them in a position where their integrity and independence
is assured, through an unfailing source of support. It is
outside of and supplemental to the existing system and
not a competitor in any sense with existing banks. It
provides for an equality of privileges and advantages to
all banks, great and small, wherever located. Its dominating principle is cooperation and not centralization.
Its organization is of a form and character that will
effectually prevent the control of its operations by political or other interests, local or national.
The National Reserve Association is-made the channel
through which local banking institutions exercise their
federated powers. It is in effect an evolution of the
clearing-house idea, extended to include an effective cen-

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tra) organization. It is not a bank but a cooperative
union of all the banks of the country, with very limited
and clearly denned functions. First, it holds a portion of
the cash reserves of the banks of the United States with
provision for their use only for specific purposes, second,
it is granted the power to issue circulating notes, under
strict governmental regulations, third, through the maintenance of its own reserves and the character and extent
of its resources it is required to sustain the credit of the
banks and of the country under all circumstances. All
of its operations are confined to, or incidental to, these
purposes, the only exception being the transaction of its
business as the fiscal agent of the Government of the
United States.
For obvious reasons the National Reserve Association
is required to keep its assets in liquid form and its rediscounts, discounts, and investments are confined to shorttime paper or Government securities.
The National Reserve Association is given ample power
to protect its own reserves, in order that it may be able
at all times to exercise its most important function—that
of sustaining the commercial and public credit of the
country. For the purpose of strengthening its own
reserves it may, first, attract gold from other countries
by an advance in its discount rate; second, purchase and
borrow gold and give security for its loans, including the
hypothecation of Government bonds, third, buy and sell
foreign bills of exchange. Short-time foreign bills have
been found elsewhere most effective as a means of replenishing a gold supply, and of preventing the exportation
of gold at critical times.
That our present system of bank-note issues based upon
Government bonds is defective and that a change in the
manner and character of issues must take place at an
early date is admitted on every hand. There are now
outstanding less than two hundred million dollars of
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United States bonds with the circulation privilege attached
not owned by the banks and held for circulation purposes.
These bonds are largely of a class which it would not usually be profitable for the banks to buy as a basis for
circulation. Congress has inaugurated the policy of
issuing bonds without the circulation privilege. It is
evident from these facts that if we are to provide for
any future demands of the country for currency the adoption of some other basis for note issues will be necessary.
Our bond-secured currency has all the qualities of ultimate safety, and its prompt redemption is guaranteed by
the United States, but it is not, as our experience has
amply shown, responsive, either in expansion or contraction, to the ever-changing conditions and demands of
business.
We propose that while the national banks shall have
the right to retain their existing circulation all new issues
shall be made by the National Reserve Association. We
propose that the authority now exercised by seven or
eight thousand national banks shall be vested in this
cooperative association of all the banks. We propose to
relieve the United States from the obligation to redeem
the outstanding national-bank notes based on the bonds
which are taken over by the reserve association. The
association is required to redeem in gold or its equivalent,
at any of its branches, upon presentation, such notes and
all notes of its own issue.
All circulating notes of the association are required by
section 41 of the bill, to be covered by gold reserves, or
by United States bonds, or by commercial paper which
must conform to the standards established in the bill.
The reserve association is required to maintain a reserve
of not less than 50 per cent against all of its demand
liabilities, including all new issues of notes, as well as
those issued in place of outstanding national-bank notes.
The notes constitute a first lien upon all the assets of the
•3306—19—3

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reserve association, including its holdings of Government
bonds.
We propose that the important privilege of note issue
shall be accorded to the principal financial agent of the
Government, to be exercised under Government control
and supervision, with restrictions and limitations of such
character as will, in our judgment, make undue inflation
impossible. All profits which may arise from note issues
will be paid into the Treasury of the United States.
While it may be contended that the issue of money of any
kind is a distinctive function of sovereign power, the exercise of this authority directly by Governments has, as
shown by the experience of the world, inevitably led to
disastrous results.
As safeguards against undue inflation of note issues it
is proposed: First, that no notes shall be issued whenever
and so long as the gold cover falls below 3 3 ^ per cent.
Second, that a graduated tax shall be paid on the amount
of deficiency whenever and so long as the reserve against
all liabilities falls below 50 per cent. For each 2]4 per
cent of such deficiency of reserve a tax of \% per cent is
levied. To illustrate, with the reserves at 40 per cent it
would require the payment of a tax of 6 per cent on
excess of note issues. Third, that whenever notes are
issued in excess of $900,000,000, and not in excess of
$1,200,000,000, and such excess issue is not fully covered
by gold or other lawful money, a tax of \yi per cent
shall be levied on the excess. Notes issued in excess of
$1,200,000,000, not fully covered by gold or lawful money,
are taxed 5 per cent. We have assumed in fixing the
terms of the limitation of $900,000,000 that the normal
amount of bank notes to meet business requirements is approximately the amount now outstanding—$700,000,000—
and we have allowed for the natural expansion of
$200,000,000 for seasonal or crop-moving demands. It

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will be seen that we propose three effective provisions to
prevent undue inflation of note issues.
We have imposed upon the National Reserve Association the duty of maintaining at all times a parity in value
of its notes with the gold standard established by the act
of March 14, 1900. The imposition of this duty, accompanied as it is by ample authority to protect its gold
reserves in the manner we have elsewhere explained, will,
in our opinion, effectively remove the possibility of a
suspension of gold payments by the association or by the
Treasury.
It has been insisted in some quarters that we should provide that all notes should be redeemed and all reserves
held in gold, and gold alone. We believe that no good
reason exists for the adoption of this suggestion. The
gold-standard act of 1900 settled finally the question of
the standard of value in this country. Prior to that time
we had made silver certificates available for the reserves
of national batiks. By the act of 1900 we made gold
certificates available as reserve money. Standard silver
dollars and United States notes are legal tender and can
properly be used in reserves. Every dollar of currency
which the United States has isssued, or for which it is
responsible, is to-day of equal value with the gold dollar.
We are certain that the American people will not consent
to any change in this respect. Practically all the silver
certificates are now in circulation in the form of notes of
small denominations and therefore not likely to be
held to any considerable extent either in the reserves of
banks or of the reserve association Gold certificates are
certainly equal to gold.
We have provided, by the system proposed, for the
ultimate security of the notes through a pledge of bonds
of the United States, gold, commercial paper, and the
other assets of the National Reserve Association, and

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have insured immediate convertibility into gold or its
equivalent upon presentation at any branch of the association. In fact, we have adopted every provision that the
experience of the world has shown to be necessary for the
security and convertibility of a paper currency. We have
provided that the reserve association, through its branches,
shall at once, upon application and without charge for
transportation, forward the circulating notes of the
association to any subscribing bank against its credit
balance. We assume that there will be but few banks in
the United States—certainly none in central communities—that will be more than 24 hours away from a positive
source of supply of notes for use for crop moving or other
purposes. This provision will remove all danger of a currency famine in any section of the country.
One of the most difficult problems with which the commission had to deal was the question of what provision
should be made for the outstanding 2 per cent bonds owned
by national banks held by the Treasury as a basis for their
circulating notes. The recent sales of the 3 per cent bonds
issued for Panama Canal construction and the market
prices of these securities establish the fact that the credit
of the United States, now approximately on a 3 per cent
basis, is above that of any of the other commercial nations. If the credit of the country is to be maintained at
this point, as it seems likely that it may be, 2 per cent
bonds, without the circulating privilege, would probably
have a market value approximating 70, and any legislation preventing their further use as a basis for bank circulation would entail enormous losses upon the banks.
When we consider that the refunding act providing for the
issue of these 2 per cent bonds practically compelled the
banks to purchase them, it would be manifestly unfair for
the United States to impose upon the banks the severe
losses which would follow their disuse for circulation
purposes.

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These equitable considerations will undoubtedly have
weight with the Congress, but it is equally bound to guard
against any loss of revenue or credit to the United States
that would be involved in refunding these bonds into threes.
We therefore propose that the National Reserve Association
shall purchase, at not less than par and interest, the 2 per
cent bonds held by national banks, and take over with
the purchase the right to issue notes to an amount equal
to the bank notes now outstanding, such new notes to
be issued and redeemed in the manner elsewhere provided.
It is proposed that the Secretary of the Treasury shall,
upon application of the reserve association, exchange the
2 per cent bonds purchased for 3 per cent bonds of the
United States payable after 50 years. The National
Reserve Association is required to hold such bonds during
the period of its corporate existence, subject, however, to
a right to sell at the option of the Government not more
than $50,000,000 in any one year after five years. The
reserve association is, however, required to pay an annual
franchise tax equal to 1 >£ per cent of the amount of the
bonds so purchased and exchanged.
The effect of these provisions, taken together, is that
the United States will be able to fund seven-ninths of
the national debt at a net interest charge of i}4 per cent,
and the national banks will be enabled to avoid the risks,
of being obliged to sell their bonds at a great sacrifice.
This plan seems to the commission to be equitable alike
to the Government and to the national banks, and placet
upon the National Reserve Association the obligation to
save both from the embarrassment and losses which
would arise from any other disposition of this mass of
Government securities.
Section 39 of the bill provides that 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 a part of its required

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reserves. In order to protect or replenish these reserves
and thus increase the loaning power of individual banks the
National Reserve Association is authorized, through its
branches, to rediscount commercial paper for subscribing banks. Commercial paper which can be used for this
purpose is denned in the bill as notes and bills of exchange
issued or drawn for agricultural, industrial, or commercial
purposes, and does not include notes or bills issued or
drawn for the purpose of carrying stocks, bonds, or other
investment securities. Commercial paper of this descriotion having not more than 28 days to run may be discounted for individual banks. If having more than 28
days and not exceeding 90 days to run, the rediscount may
be made for individual banks, with the guaranty of the local
association. The National Reserve Association may discount the direct obligations of individual banks, with the
guaranty of the local association, amply secured by a
pledge of collaterals of unquestioned value, whenever, in
the opinion of the governor and executive committee of
the reserve association, concurred in by the Secretary of
the Treasury, a serious emergency exists and the public
interests so require.
The bill provides that the National Reserve Association
shall fix its rates of discount from time to time, which,
when sofixed,shall be published, and shall be uniform
throughout the United States. In view of the great
disparity which now exists in discount rates on commercial
loans in different sections of the country, serious doubts
have been expressed as to whether this provision can be
made effective. It can not be expected that an equality of
commercial rates under all conditions and for all classes of
business can be secured at once by such legislation.
But with this provision adopted the tendency would be
toward a gradual equalization of rates at all points. It
is apparent to the commission that we must provide that
all the advantages and benefits which may accrue from

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the organization of the National Reserve Association,
including an absolute uniformity in its discount rates,
should be extended alike to every bank in every section.
The greater uniformity and steadiness of rates and better
opportunities of employment of capital which should
follow the adoption of the legislation we propose will
prove, we believe, an advantage to the banks of the
United States if we can judge by the experience of the
joint-stock banks of other countries. These banks in
France, England, and Germany, with bank rates much
lower than current commercial rates in this country and
an approximate equality of all other rates, are enabled,
largely on account of the steadiness and uniformity to
which we have referred, to pay dividends that are at least
equal to those paid by the banks of the United States. If
our bank managers could be assured of constant employment for their loanable funds at steady rates they would
willingly accept lower discount rates in many cases than
those which are now current. An approximate equalization of rates would be of great benefit to the people in
sections of the country where productive forces are only
partially developed. This process of equalization has
already commenced, and we are becoming a homogeneous
people in our industries and financial operations, and
we may look forward to the time when, with the adoption
of the provisions we have suggested, the farmer of the
South or the fanner or miner of our intermountain States
will be able, with the same class of credit or securities, to
obtain the money requisite for his purposes at as low a
rate as that current in other sections for similar loans.
Section 40 provides that national banks may loan not
more than 30 per, cent of their time deposits upon improved
and unencumbered real estate, such loans not to exceed
50 per cent of the actual value of the property, which
property shall be situated in the vicinity or in the territory directly tributary to the bank. This privilege is

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not extended to National banks which act as reserve
agents for other banks or trust companies.
We have provided as far as possible for a uniformity
of requirements with regard to capitalization, reserves,
examinations, and reports of all banks and trust companies who shall be members of the association. With
reference to reserves, the bill provides that the same percentage of reserves shall be required of all subscribing
banks in the same locality on demand deposits. Provision is made for a reserve on time deposits as denned
in section 39, and all National and State banks and
trust companies must keep the percentage of reserve on
time deposits therein required.
Sections 45, 46, and 47 of the proposed bill contain requirements for examinations and reports which are applicable alike to all subscribing institutions, whether operating under National or State charters. The reports of
National bank examiners for national banks and State bank
examiners for State banks and trust companies are made
available and acceptable whenever possible for the use of
the National Reserve Association, provided that the standard of such examinations shall in all cases meet the requirements prescribed by the association. The association is also
given the right, at any time, to examine or cause to be
examined by its own representatives any subscribing
bank. Through these provisions it will be possible to avoid
numerous and expensive duplications of examination,
which are not only troublesome but unnecessary. All
subscribing banks are required, under regulations to be
prescribed, to make reports of their condition monthly, or
oftener, showing the principal items of their balance sheets.
The publicity of conditions secured by the required examinations and reports will prove, as a basis of public
confidence, a great advantage to all well-managed institutions. We are living in an age when publicity, with
reference to the management and condition of public

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and quasi public institutions, is everywhere demanded.
Publicity with reference to the condition of financial
institutions has vital interest for the great mass of our
people.
While the shares in the National Reserve Association
are owned, and can only be owned, by the banks which
furnish all of its capital, the fact that important privileges
of a public character are granted to the association led the
commission to provide that its net earnings, after the payment of a dividend not exceeding 5 per cent to the shareholders and the accumulation of a surplus not exceeding
20 per cent of the paid-in capital, shall be paid to the
United States in the form of taxes upon its franchise.
The bill provides that the National Reserve Association
shall become the principal fiscal agent of the United States,
and as such shall serve through its branches as the custodian of the general funds of the Treasury, as the depositary of its receipts, and the instrumentality through
which its disbursements shall be effected. The system
of storing surplus revenues in independent vaults, and of
withdrawing the money from the channels of business
into useless inactivity, has not been followed in other countries for centuries, and is contrary to the methods followed
by our State and municipal governments, as well as by
private corporations and individuals. It has proved
peculiarly disturbing in this country on account of the
large fluctuations in the Treasury balance, which within
a single decade has fallen below $100,000,000 and
risen above $300,000,000, thus adding to or withdrawing from the country's circulating medium without any regard to the needs of trade. Of late the system has been largely modified by the transfer of a
considerable portion of the surplus funds to selected
national banks, but this policy inevitably involves unwarranted and unequal distinctions and privileges for the
banks so selected. The plan which we propose will do
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away with such discriminations, and will bring our Treasury policy into line with'the business methods of modern
times.
The adoption of these proposed changes in Treasury
methods will make possible a considerable reduction in
the expenses of the Treasury. Treasury officials estimate
that these reductions, growing out of the elimination of
the expenses connected with the Independent Treasury,
will amount approximately to $1,000,000 annually.
The Government will also effect large savings through
the transfer of the business of bank-note issue and redemption. During the present year the expenses of the
Treasury, for which it is not reimbursable by the banks,
in connection with the issue of bank notes, amounts to
$653,367, which could be saved in proportion as the
national banks transfer their bonds to the National
Reserve Association and retire their notes. The economies, therefore, resulting to the Treasury from the adoption
of the proposed plan will probably amount to more than
$1,500,000 annually. It is difficult to estimate the probable revenues which will accrue to the United States from
the taxes levied upon the reserve association and its
franchise. A competent authority has prepared an estimate that, after the accumulation of the surplus and the
contingent fund, and the payment of the maximum dividend of 5 per cent to the shareholders, the Government
will receive $5,500,000 annually. This estimate is based
upon the minimum amount of business which the National
Reserve Association will be likely to transact. The
franchise tax on the amount of Goverment bonds purchased, say $700,000,000, would amount to $10,500,000
annually.
Perhaps the most important defect in our monetary
system is to be found in its unscientific treatment of the
reserves of individual banks. We have described the
character of this defect, and we have provided by the
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terms of the proposed bill what we believe to be an effective and logical remedy. We propose that all or any portion of the cash reserves of the banks, including those
which are now required by law to be held in their vaults,
may be deposited with the reserve association, and when so
deposited shall be counted as a part of their legal reserve.
This will transform money which is now deprived of potency and defensive power into a condition of vitality and
effectiveness. It is proposed that the reserves thus concentrated may be used by the reserve association, through
its branches, for the assistance and support of any bank or
section when needed. The reserves of any subscribing
bank can be replenished at any time by the discount or
rediscount of commercial paper in the manner elsewhere
described. This involves the use of assets which otherwise
would not be available for this purpose to strengthen,
whenever necessary, the loaning power of the bank.
These provisions taken together will enable the banks
to adopt the policy of simultaneous strengthening of reserves and extension of credits which has been successful in
every instance for half a century in the prevention of
panics or serious financial disturbances in the commercial
nations of Europe. They do not suffer from widespread
bank suspensions or from a general paralysis of credit
operations. An advance in bank rates is used to curb
speculation and prevent overexpansion o f credit. The
plan we submit 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.
The commission believe that the various provisions of
the bill for establishing a broader discount market will
prove of great advantage to the people of the entire country.
The provisions upon which we rely to accomplish this purpose establish a standard of commercial paper issued for
agricultural and other purposes, which is made available
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for rediscount at the branches of the reserve association
The establishment of this standard will create a strong
tendency to make the usual instruments of commercial
credit conform to its requirements; second, it allows
national banks to the extent of one-half of their capital
to accept properly secured drafts drawn upon them,
drawn for instance with documents attached against cotton, wheat, or other products in transit or in warehouse,
third, it gives a new and wider market to domestic bills
of exchange drawn on foreign countries and based on
transactions in American products or to pay for our purchases abroad; fourth, it authorizes the National Reserve
Association to buy and sell in foreign countries prime
bills of exchange, many of which would be of American
origin.
These various provisions give a national and international
currency to notes, acceptances, and bills of exchange based
on the agricultural and other products of the United
States.
The methods by which our domestic and international
credit operations are now conducted are crude, expensive,
and unworthy an intelligent people. The annual value of
the products of our industries is estimated at thirty-five
thousand million dollars. If to this vast sum is added the
cost of transportation and distribution, we can realize that
the movements of these products through various stages
from the producer to the consumer requires the use of an
enormous amount of credit and cash. To form an accurate estimate of the magnitude of our credit structure, we
should add to this our accumulations of wealth and capital
and the sums used in connection with our foreign trade.
It is the function of a sound monetary system to take care
of these vast operations without friction and in such a
manner as will promote the prosperity of our people.
The unimportant part which our banks and bankers take
in thefinancingof our foreign trade is disgraceful to a pro38

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gressive nation. We export of domestic products about
two thousand million dollars annually, and our annual
imports amount approximately to fifteen hundred million
dollars. Very much the larger portion of this international trade is financed by and pays tribute to foreign
bankers. Take one illustration: Last year we exported
about six hundred and fifty million dollars in value of
cotton, it was largely financed by 60 or 90 day bills drawn
on Liverpool, London, Paris, or Berlin. This business
was practically all done by foreign banks or bankers.
The banks in the South and perhaps in New York
were enabled to collect a small commission on a part of
the business en route, but the lion's share of the profits
accruing from the transactions, millions of dollars in
amount, were paid to European merchants and bankers,
and this large sum was in the last analysis paid by the
cotton planter.
The disabilities from which our producers suffer in our
foreign trade also apply largely to domestic transactions.
The man who raises cotton in Mississippi or cattle in
Texas, or the farmer who raises wheat in the Northwest
can not readily find a market in Chicago, New York, or
London, for the obligations arising out of the transactions
connected with the growth and movement of his products, because the bankers of these cities have no knowledge of his character and responsibility. We propose
to remedy this condition in large part by the use of
the standardized commercial paper we have described,
and also by the use of acceptances of local banks of
drafts drawn by a farmer or planter whose responsibility is known to the bank and who may have deposited
with it security on his products.
Additional currency would be given to our commercial
paper in the markets of the world if official standards
could be adopted, first, for the different grades and qualities of the staple agricultural products of the country;
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second, for the methods used in preparing such products
for the market; third, for uniformity of bills of lading;
fourth, for the efficient and responsible management of
warehouses and elevators used for the storage and delivery
of agricultural products.
A wider domestic market for the commercial paper we
have described will be found in the changes which are likely
to ake place under the provisions of the bill submitted, in
the investment of the surplus funds of the banks, and by
surplus funds in this connection we do not refer to moneys
deposited with reserve agents, but to funds for which
there may be no legitimate local demand. The surplus
funds referred to are now deposited perhaps through
correspondents in New York at 2 per cent interest. The
New York banks are usually obliged to loan them on call
on stock exchange collaterals, inducing at times dangerous
speculative conditions, with the probability that when the
money is withdrawn the necessary calling of loans may
cause disturbances in reserves and in the market and sometimes lead to panics.
We propose by the provision of the bill submitted to
enable the banks to invest their surplus funds of the
character we have described in notes or bills of exchange
representing the industries or the products of the United
States. It may be that they will not be able in making
these loans to obtain the full rate current for discounts
of commercial paper, as they will have to compete with
foreign banks for a portion of the business, but they will
certainly receive more than 2 per cent for their money,
and they will have in their portfolio commercial paper
created for legitimate purposes which they can take to
the district branch and have transformed into cash or
a cash credit at any hour of any business day of the year.
We believe that these provisions for creating new classes
of investment obligations by establishing a standard of
commercial bills to be used in moving and caring for the

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agricultural and other products of the country, constitute
very important features in our plan of reorganization.
The creation of these new standards for foreign and domestic bills should have an important influence upon the
status of the United States in the financial world. It should
make a domestic documentary bill, drawn by a producer
anywhere in the United States, drawn in dollars and cents,
equal in currency and in value to the highest form of
credit in the markets of the world. We ought to make
New York and our other financial centers equal in importance with any in Europe. We ought to place our
financial institutions where they properly belong—in a
class with the best and strongest in the world.
Section 57 of the bill submitted provides for the incorporation of banks to do business in foreign countries. We
assume that it is not necessary to call attention to the
desirability of making every reasonable effort to promote
our foreign trade and to establish closer commercial and
financial relations with foreign countries. The impediments in the way of the development of our international
trade are numerous. Perhaps none of these is more important than the absence of American banking facilities in
other countries and the lack of knowledge abroad of our
financial resources and of the strength and character of
our banking institutions. The status of the United States
as one of the great powers in the political world is now
universally recognized, but we have yet to secure
recognition as an important factor in the financial
world. This condition of affairs is likely to remain unchanged as long as practically all our purchases and
sales abroad are financed by foreign bankers. We anticipate that the changes in the currents of trade which will
follow the opening of the Panama Canal will tend to the
enlargement of our international commerce. We shall, at
least, be brought into closer contact from a transportation
standpoint with many of the States of South America and

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the countries of the Orient. We shall certainly be disappointed as to the character and extent of the advantages
of this change unless we take some practical steps of a
positive character to secure for our merchants and bankers
advantages in the countries we have named equal to those
enjoyed by their commercial and industrial rivals. The
establishment of American banks is essential in countries where we have a right to expect an enlargement
of our trade.
In preparing the bill to establish the National Reserve
Association the commission has been impressed with the
necessity of inserting provisions that would 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 for
selfish or sinister purposes. No provision of the bill to
reconstruct our monetary system is of more vital importance than this. To-day the financial interests of the
whole country depend, in times of trouble, upon what is
popularly known as "Wall Street." Those who express
fears of the future domination of Wall Street seem to lose
sight of the fact that the domination of New York is an
accomplished fact; that 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 our judgment the only effective remedy
will be found in the national organization suggested, with
the power to maintain the independence of banks under
all circumstances and with branches which will be relief
centers at various points throughout the country, each with
local self-government. The reserve cities, the reservejagents
of the country banks, and individual banks generally de-

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pend 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 management.
In the provisions of the bill for the election of directors
of the National Reserve Association we provide for 39
directors, 2 to be elected by each of the 15 districts
defined in the bill, and 9 additional directors to be elected
by representatives of stock holdings in the association.
We propose to limit the representation of any one district to 3 out of the 39 directors elected, and under this
plan' every district will have 2 and none can have more
than 3 directors.
The New York district under these provisions, with 29
per cent of the banking resources of the country, would
have 8 per cent of the representation on the board; New
England, with 12 per cent of the resources, would have 8 per
cent of the representation; the Eastern States, as defined
in the bill, with 41 per cent of resources, would have 15 per
cent of representation; the Middle West, with 24 per cent
of resources, would have 31 per cent of representation;
the Southern States, with 11 per cent of resources, would
have 23 per cent of representation; and the Western and
Pacific States, with 12 per cent of resources, would have
23 per cent of representation. The New England, Eastern, and Middle West States, taken together, with 77 per
cent of the resources,'could elect only 21 out of the 46
directors in the Reserve Association, while the Southern,
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Western, and Pacific States, with 23 per cent of the
resources, might have 46 per cent of the representation.
These percentages of representation have been based upon
the theory that the New England, Eastern, and Middle
Western States, by reason of their preponderance of capital, would be entitled to elect the maximum number of
3 directors for each district.
In order to effect a combination to secure a majority of
the directors, the votes of eight districts would be necessary, and with New England having one, the Eastern
States two, and the Middle West four, one other district
would be necessary, showing that no combination of
Eastern and Middle West, with other interests could be
made which did not include more than 80 per cent of the
banking power of the country.
We think that this statement must of itself show conclusively that there can be no local domination—no
domination of selfish interests in this organization, and
that fear of possible Wall Street control can have no substantial foundation.
This equal representation of districts, unequal in size
and importance, in the election of a majority of directors
of the National Reserve Association, follows the democratic principle also deliberately adopted in the organization of local and district associations. For instance, in a
local association we give to a bank with $25,000,000 capital no greater voting power in the election of a majority
of the directors of the local association than a $25,000
bank. In our political institutions we have a similar
idea in the provision of the Federal Constitution, which
gives to every State, irrespective of its size an equal
representation in the Senate. This plan of organization, practically as now reported, was made public a
year ago and has received every manifestation of general
approval. It is based upon the theory that each section
of the country ought to be adequately represented on the
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board and that there exists such a solidarity in the interests of all sections of the country that no harm can
come to the interests of any district through this unequal
representation.
Suggestions have been made favoring a banking scheme
based on separate State or district organizations, each
with independent functions, partaking somewhat of the
character of existing clearing houses or of the branches
w.hich we propose to create in the bill. The fatal objection, in the opinion of the commission, to any plan of this
kind is found in the lack of affiliation or means to insure
cooperation between these different local organizations
in the public interest. The national association which
we propose to create can of course only exercise the
powers which are clearly delegated to it, but the grant
of the limited powers proposed in the bill is necessary for
the success of any plan which is to benefit the country at
large.
We propose to create an institution which can, among
other things, conserve the public credit; issue properly
secured circulating notes; control movements of gold and
foreign exchange; receive and disburse the Treasury
balances; insure the cooperation of all banks in the public
interest; equalize banking and credit facilities in different
sections of the country and insure adequate assistance
on reasonable terms to partially developed communities;
secure uniform rates of discount; prevent interruption of
domestic exchanges; provide means for replenishing cash
reserves and for their concentration for use in any direction
wherever needed, and establish standards of notes and bills
of exchange issued for agricultural or other purposes.
None of these results can be secured by the organization of
separate units in the manner suggested. There can be no
satisfactory reform of our monetary system, no remedy
for existing defects, which does not place upon the banks
of the entire country, acting together through some
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responsible agency, the serious duty of protecting public
and private interests at times when they are imperiled. This is amply demonstrated by our experience with clearing-house organizations. The results we
desire can not be secured through a headless aggregation
of independent organizations, which would be as helpless
as the members of a human organism without a brain to
coordinate, their functions or heart action to vitalize
their forces.
The proposal to create a National Reserve Association
has been criticized on the ground that its enactment
would lead to an undue expansion of credit and a dangerous inflation of currency. We have already stated our
reasons for believing that this contention as applied to
note issues has no foundation. It is true that we propose
to create new instrumentalities and provide new facilities
for an expansion of credit whenever this is necessary for
the welfare of our industries, or to prevent panics or
avert dangerous monetary disturbances. We believe that
credit properly organized and managed is one of the most
potent factors in the development of communities and
nations. The broad question we have to consider is
whether the facilities which we propose to create can be
or are likely to be used in such a manner as to produce
dangerous overexpansion.
In this connection the experience of other countries
where facilities exist similar to those which we propose
will afford valuable lessons. In none of the leading countries of Europe are there any statutory limitations upon
credit expansion. In fact there is no limitation whatever, either by law or custom. This is true not only of
the central banks but also of the joint-stock banks of
these countries. None of these banks is required by
law to hold reserves. Each bank acts for itself in this
respect. Of course, self-interest, custom, and public

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opinion lead the banks of the great commercial nations to
hold cash and liquid assets as reserves against their liabilities. Their cash reserves are kept almost entirely in
central institutions and not in their own vaults.
In this country we have no legal restriction upon credit
expansion except such as is involved in our statutory
provisions for fixed reserves. In ordinary times a bank
can, by increasing its balance with its reserve agent,
expand credit to the extent to which this is possible from
increased reserves, and to this expansion there is no legal
limit.
We believe that the bill we propose effectively guards
against the dangerous abuse of the facilities created. We
propose that a bank may, under certain conditions, replenish its reserves and increase its loaning powers through
rediscounts. The amount of paper that can be rediscounted for an individual bank is limited, first, by the
amount of 28-day paper which it has available for the
purpose; and second, by the provision that the aggregate
amount of such rediscounts shall not exceed the capital
of the bank. Discounts of long-time paper and of the
direct obligations of banks ^a" only be made with the
restrictions involved in the guaranty of the local association, and the guaranties of the local association to the
Reserve Association can not in any case exceed the capital
and surplus of the banks in the local association.
The power given the national banks to accept properly
secured drafts is limited in amount to one-half the capital
of the bank.
We give to the Reserve Association effective means to
check speculation and to prevent undue expansion through
the power to advance its discount rate. The provision that
the Reserve Association shall hold a reserve of not less than
50 per cent against all of its demand liabilities—a provision
which is unique in monetary legislation—and the provision
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that a progressive tax shall be imposed on any deficiency
of reserves will, we believe, effectually discourage undue
expansion of credit.
The use of a portion of the cash reserves of the banks by
the National Reserve Association will undoubtedly result in
a legitimate expansion of credit. This is inevitable. It is
necessary, in cases of unusual demands for credit in times
, of panic or anticipated trouble, that the banks should
' increase their reserves by rediscounts, in order that they
may extend assistance to those entitled to receive it.
This, of course, involves expansion. We can not prevent
a condition like that of 1907 without expansion on an
extensive scale. The prime purpose of the legislation
suggested is to provide the means for a proper expansion
of credit and the necessary enlargement of note issues in
times of trouble. Any unusual expansion of credit or
enlargement of note issues should, of course, be followed
by healthy and legitimate contraction, and we believe
that this has been secured in the provisions of the bill
submitted.
Our main reliance for preventing undue expansion
must, however, be found in the wise management of the
local and district associations and the reserve association.
We can not, of course, endow men with wisdom, intelligence, or conservatism by legislative enactment. The
efficiency of the institution will very largely partake of
the character and capacity of those who will be chosen
to manage it. In the management of financial institutions the personal equation is of the utmost importance.
In the last analysis the success of every banking institution in the United States and in every other country
depends upon the wisdom of its management. A century
of exceptionally sound and intelligent management has
given to the Bank of France the enviable position which
it now holds. The important place which the Bank of
England holds in the financial world is due to the wisdom
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of the men who have controlled its operations and not to
tiny legislative enactments.
We have taken every precaution to secure an honest,
intelligent, and able management for the local and district
associations and for the national association, and it is
incredible, with the ample powers conferred by the
terms of the act, that they will allow the public
interests to suffer from undue and destructive expansion.
There must be collusion or failure on the part of all
to make such a result possible. We can not suppose
that the directors of a local association would be likely to
indorse the paper of an individual bank to promote
speculation or when dangerous expansion would be likely
to follow. The officers and members of the local association would always be fully advised of the condition of an
applicant, and when asked to become responsible for its
obligations we can be sure that the guaranties would be
given cautiously, and would be fully secured, and that
they would be refused in cases of doubt as to the character
and purpose of the paper presented.
The acts of the directors of the branches and of the
reserve association will be open to public inspection and
will be subject to the closest scrutiny by the shareholders of the association and the public, and it is impossible to suppose that they would consent to the adoption
of a policy which would be ruinous to the vast material
interests which they directly represent and destructive of
public and private credit. We place in their hands ample
powers to prevent this disastrous result, and there can be
no reason to assume that they will not exercise it properly.
We believe that the very best men in every section of the
country will be selected as directors of the proposed institutions.
It can not be denied that there may be possibilities of
abuses, as there must be in every case of grants of power
where human agencies are employed, but this possibility
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should not lead us to refuse to create the facilities imperatively demanded for the progress and prosperity of the
American people, facilities which are enjoyed by the producers of every country competing with them for the
world's markets.
If we as a people should adopt the policy of discouraging
the use of every invention or of refusing to avail ourselves
of every discovery in the arts and sciences on account of
the possibility that abuses might grow out of their use
or that their acceptance might disarrange the established
order of things, we should unwisely place an insuperable
obstacle in the pathway of national progress.
The commission appreciates the magnitude of the duties
assigned to it of constructing a monetary system that will
provide for the present and future welfare of the American
people. The questions involved in this problem affect
the vital interests of the people of every class and
every section. We were required to devise a system
so comprehensive that its beneficial effects will be
felt equally by wage earners, farmers, manufacturers,
and all others engaged in productive industries, a plan
which will inspire hope and confidence in all those who are
responsible for the uninterrupted progress and prosperity
of a great people.
The far reaching consequences of fundamental changes
in a monetary system were graphically expressed by Sir
Robert Peel in his opening statement with reference to
the English bank act of 1844.
He said
"There is no contract, public or private, no engagement, national or individual, which is unaffected by it.
The enterprises of commerce, the profits of trade, the
arrangements made in all the domestic relations of society,
the wages of labor, pecuniary transactions of the highest
amount and of the lowest * * * the command which
the coin of the smallest denomination has over the neces40

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saries of life, are all affected by the decision to which we
may come on that great question which I am about to
submit to the consideration of the committee."
The adoption by the British Parliament of the minister's proposals established an important landmark in the
history of monetary legislation.
In the construction of an adequate monetary system
for the United States, the task of the commission was
rendered more difficult from the fact there were no precedents that we could follow, and no system in existence
that to any considerable extent could be made applicable
to existing or prospective conditions in the United States.
We were therefore obliged to originate a plan which
would answer the exacting requirements of American
conditions that would meet the needs of a progressive
nation, with its hundred millions of energetic and enterprising people, whose development has been impeded by
a defective and inefficient monetary system. The plan
we propose is essentially an American system, scientific
in its methods, and democratic in its control.

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A BILL
To incorporate the National Reserve Association of the
United States, and for other purposes.
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 banks eligible for membership 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. The capital stock of said association shall be divided
into shares of one hundred dollars each. The outstanding capital stock may be increased from time to time as
subscribing banks increase their capital or as additional
banks become subscribers or may 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.
SBC. 2. Upon duly making and filing with the Comptroller 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 that
name shall have power—
First. To adopt and use a corporate seal.
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Second. To have succession for a period of fifty years
from the date of said certificate.
Third. To make all contracts necessary and proper to
carry out the purposes of this act.
Fourth. To sue and be sued, complain and defend, in
any court of law or equity, as fully as natural persons.
Fifth. To elect or appoint directors and officers in the
manner hereinafter provided and define the r duties.
Sixth. To adopt by its board of directors by-laws
not 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. To exercise by its board of directors or duly
authorized committees, officers, or agent., subject to law,
all the powers and privileges conferred upon the National
Reserve Association by th act.
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, may 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 regu-

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lations 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 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 (b) 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 umimpaired capital of not less than five
hundred thousand dollars.

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Second. That it shall have and agree to maintain
against its demand deposits a reserve of like character
and proportion to that 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. That it shall agree to submit to such examinations 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.
The words "subscribing banks" when used hereafter
in this act 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 denned.
SEC. 4. The Secretary of the Treasury, the Secretary of
Agriculture, tlje 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.
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Before the subscription of any bank to the capital stock of
the National Reserve Association shall be accepted, said
bank shall file with the organization committee or aftei
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 the entire country into fifteen districts, with
one branch of the National Reserve Association in each
district: Provided, That the districts shall be apportioned
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with due regard to the convenient and customary course
of business and not necessarily along State lines.
The districts may be readjusted, and new districts and
new branches may from time to time be created by the
directors of the National Reserve Association whenever,
in their opinion, the business of the country requires.
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 of the local association of the territory in
which it is situated.
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

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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, 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.
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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. 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 agri
cultural, commercial, industrial, and other interests of

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the district and shall not be officers nor, while serving,
directors of banks, trust companies, 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 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.
,
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

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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.
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

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for an additiona1 period of one year after the first Tuesday
in April 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 April immediately following the election. All elections shall be held
on the first Tuesday in April of each year, and after the
first election all 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 Association
for a term of ten years, subject to removal for cause
by a two-thirds vote of the board. There shall be two
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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.
S s c i i . 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.
Ssc. 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 amount 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 asso54

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dation. A bank applying for membership in the
National Reserve Association at any time after its formation must subscribe for an amount 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 amount
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 amount 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. 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), 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
make and execute a certificate showing such reduction of
capital stock and the amount repaid to each bank. This
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certificate shall be filed in the office of the Comptroller of
the Currency.
Ssc. 13. The National Reserve Association and its
branches and the local associations shall be exempt from
local and State taxation except in respect to taxes upon
real estate.
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.
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 at least once a year.
SEC. 16. 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

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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.
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. 18. The National Reserve Association shall cause
to be kept at all times, at the head office of the association, a full and correct list of the names of the banks
owning stock in the association and the number of shares
held by each. Such list shall be subject to the inspection
of all the shareholders of the association, and a copy thereof
on the first Monday of July of each year shall be transmitted to the Comptroller of the Currency.
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 cumulative. 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
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shall be paid into the surplus fund of the National Reserve
Association until said fund shall amount to twenty per
centum of the paid-in capital, one-fourth 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 onehalf 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.
SBC. 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 befixedin
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

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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 National Reserve Association shall not
at any time exceed the aggregate capital and surplus of
the banks forming the guaranteeing association.
SEC. 21. Any local association may by a vote of threefourths 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. The National
Reserve Association may require any local association to
perform such services in facilitating the domestic exchanges of the National Reserve Association as the public
interests may require.
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 suspend a bank
from the privileges of membership 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.
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,
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shall be deposited with said Association and its branches,
and all disbursements by the Government shall be made
through said association and its branches.
SEC. 24. The 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.
SEC. 25. The National Reserve Association shall pay no
interest on deposits.
SEC. 26. The National Reserve Association may through
a branch rediscount for and with the indorsement of
any bank having a deposit with it, notes and bills of exchange arising out of commercial transactions; that 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.
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. 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.
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,
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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 Association 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.
SEC. 29. The power of rediscount and discount granted
to the National Reserve Association by sections twentysix, 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.
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.
SEC. 31. 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. The amount 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.

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SEC. 32. The National Reserve Association may, whenever its bwn 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. Such acceptances must
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.
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.
SEC. 34. The 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.
SEC. 35. The National Reserve Association shall have
power to purchase from its subscribing banks and to sell,
with or without ts 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.
SEC. 36. The 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 buy and

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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.
SEC. 37. 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 transfeired from the books of one branch
to the books of another branch, it may be done, under
regulations to be prescribed by the National Reserve 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. 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.
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
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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 de
posit, 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
SEC. 40. 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 centum 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.
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 bul64

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lion) 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.
SBC. 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.
SBC. 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.
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.
SBC. 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
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Reserve Association for the confidential use of its executive officers and branch managers.
Ssc. 46. The National Reserve Association may 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.
SEC. 47. 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 than those
required to secure outstanding circulating notes and Government deposits are hereby repealed.
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 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
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notes secured thereby. The 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, bondsecured 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.
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 forty-one of this act and
by notes or bills of exchange arising out of commercial
transactions as hereinbefore defined or obligations of the
United States.
SEC. 51. Any 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 offiveper
centum per annum: Provided, That in computing said
amounts of nine hundred million dollars and one billion
two hundred million dollars the aggregate amount of any
national-bank notes then outstanding shall be included.
SEC. 52. The circulating notes of the National Re
serve Association 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 estab67

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lished by the first section of the act of March fourteenth,
nineteen hundred, entitled "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."
SEC. 53. The circulating notes of the National Reserve
Association shall be received at 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.
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.
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.
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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.
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 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
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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 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.
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«

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 examinations 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 twothirds of its stock.
Any bank doing business in the United States and being
the owner of stock in the National Reserve Association

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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.
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.
SBC. 59. All acts or parts of acts inconsistent with the
provisions of this act are hereby repealed.
NBLSON W. ALDRICH,

Chairman.
EDWARD B. VREELAND,

Vice Chairman.
JULIUS C. BURROWS.
EUGENE HALS.
H. M. TELLER.
H. D. MONEY.
THEODORE E. BURTON.
JAS. P. TALIAFERRO.
BOIES PENROSB.
JOHN W. WEEKS.
ROBT. W. BONYNOB.
L. P. PADGETT.
GEO. P. BURGBSS.

A. P. Pujo.
GEO. W. PRINCE.
JAMES MCLACHLAN.
A. PIATT ANDREW,

Assistant to Commission.
ARTHUR B. SHELTON,

Secretary.
WASHINGTON,

January < , r?Z2,
P

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