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Federal Reserve Bank of Richmond
Questions and Answers
on the
Federal Reserve System
Federal Reserve Bank o f Richmond
Richmond, Virginia
July, 1920
Contents
QUESTIONS
F o r e w o r d ..................
PAGES
v, vi
I. I n t r o d u c t io n ..............................
i to
6
i
II. O r g a n iz a t io n ................................
7 to
25
7
Federal Reserve B oard ............
8 to
9
7
10
8
9
Federal A d viso ry Coun cil........
III. M
Federal Reserve B a n k s ............
11 to
25
e m b e r s h ip ..................................
26 to
32
17
26
17
27 to
28
17
29 to
32
18
B a n k s ..........................................
33 to
64
21
M obilization o f R eserves.........
34 to
35
21
E lastic C u rren cy........................
36 to
40
22
Rediscounting............................
41 to
63
27
64
42
E lig ib ility....................................
Stock Subscriptions..................
D iv id e n d s
and
D iv is io n o f
Earnings..................................
IV . F u n c t io n s
of
F ed er al R e ser ve
Bankers’ A cceptances...............
V. R e s e r v e s
65 to
78
43
Reserves R eq u ired ....................
65 to
66
43
D eposits.......................................
67 to
71
43
Deficiencies in R ese rve .............
72 to
78
45
C u r r e n c y S h ip m e n t s ..............
79 to 101
48
Collection S y ste m .....................
80 to
48
of
M
ember
V I. C o l l e c t io n s , T
B an ks. . .
ransfers,
and
90
A dvan tages o f Collection S ys
tem ............................................
91 to
93
53
Transfers o f F u n d s....................
94 to
96
55
Currency Shipm en ts.................
97 to
98
56
Im m ediate C red it S ym b ol.......
99 to 101
57
[in ]
VII.
S t a t e B a n k a n d T r ust C om - q u e s t i o n s
pa n y M e m b e r sh ip ................... 102 to 138
pages
60
Eligibility — Tests — Charter
Rights.................................... 102 to 105 60
Procedure...................................106 to 109 62
Reports—Examinations—With
drawals................................... 110 to 115 65
State Reserve Requirements ..
116 68
Objections Raised to Member
ship ....................................... 117 to 125 69
Advantages of Membership. . . 126 to 138 75
VIII. S u n d r y P r o v isio n s ..................... 139 to 146 83
Clayton Anti-Trust Act........... 139 to 140 83
Fiduciary Powers......................141 to 142
84
Postal Savings Deposits..........
143 85
Federal Reserve Bulletin..........
144
86
Regulations of Federal Reserve
Board.....................................
145 87
Regulations of Federal Reserve
Bank of Richmond.............
146 87
A pp e n d ix
Form showing Method of Com
puting Reserve to be Carried
with the Federal Reserve
Bank by Member Banks....
I n d e x ........................................................
Civ]
Insert
89
Foreword
VIONG the most important duties of the officers
of a Federal reserve bank is that of acquainting
member banks, and banks that may wish to become
members, with the various functions of a Federal re
serve bank, with the possible benefits of membership in
the Federal Reserve System if it be properly taken ad
vantage of, and with the best ways in which to deal
with a Federal reserve bank in order to secure the great
est amount of good from the association.
This duty is discharged in various ways: by circulars
issued from time to time, by correspondence directly
with the officers of member and non-member banks,
and by personal interviews at their offices and at the
offices of the Federal reserve bank. In the course of such
correspondence and interviews, many questions are
asked and answered'.
In this little book we have endeavored to arrange in
logical order many of the questions we have answered
from time to time. We have added to these a number of
other questions that naturally suggest themselves. By
putting a table of contents at the beginning and a com
prehensive index at the end, and by printing and bind
ing it in the present form, we have sought to make the
book of further value as a ready reference, available at
all times.
C v]
We are greatly indebted to the Federal Reserve Banks
of San Francisco, Minneapolis, and New York for per
mission granted by them to make use of similar books
which have been prepared by them, on the same general
plan, and from which we have drawn frequently and
freely in the preparation of this book.
F ederal R eserve B a nk
[vi]
of
R ic h m o n d .
I. Introduction
1. What Is the Federal Reserve System?
It is a system o f banking, established and operated
under the provisions o f an A ct passed by Congress and
approved December 23, 1913, known as the Federal
Reserve A ct, the long title o f which is,
“ A n A ct to provide for the establishment of Federal
Reserve Banks , to furnish an elastic currency>to
afford means of rediscounting commercial paper, to
establish a more effective supervision of banking in
the United States, and for other purposes”
2. Why Was the Federal Reserve System Established?
T o rem edy the defects o f the banking system o f the
U nited States.
For tw enty years or more before the passage o f the
Federal Reserve A ct, reforms in the banking laws o f the
United States had been continually discussed. T he
N ational Banking System , which was established in
1864, was adm ittedly imperfect in m any respects.
Panics occurred with com parative frequency and regu
larity; and, whenever a panic occurred, the defects o f
the N ational Banking System , aggravated by the imper
fections o f the various state banking systems in exist
ence, became increasingly apparent. Students o f finance,
economists, and the more thoughtful bankers generally
were convinced that m any, if not all, panics were avoid
able, especially those arising from scarcity o f currency,
and that the United States had reached a point where
co
agriculture, commerce, and industry demanded banking
facilities of the highest efficiency.
On M a y 30, 1908 (largely because o f the panic of
1907), Congress established a N ational M onetary Com
mission consisting o f sixteen members to inquire into,
and report to Congress, what changes were necessary or
desirable in the m onetary system o f the United States.
T his Commission rendered its report, comprised in fif
teen or tw enty volumes, January 9, 1912. Organized
efforts to revise the banking laws followed im m ediately,
and these efforts culminated in the adoption o f the
Federal Reserve A ct, which embodies the chief recom
mendations o f the N ational M onetary Commission.
3 . What Were the Chief Objections to the Old National
Banking System?
T he chief objections to the old N ational Banking
System are concisely stated in the report of the N ational
M onetary Commission, which listed seventeen defects,
o f which the most im portant were as follows:
(1 ) T h e r e was no provision j or the mobilization
and use of the scattered reserves of the banks of the
country.
(2) A n t iq u a t e d Federal and State law restricted
the use of bank reserves and curtailed the lending
power of banks during periods of stress when reserves
should be freely used and credit liberally extended to
all deserving customers.
(3) B a n k s lacked the ability to replenish their
reserves or increase their lending power to meet un
usual demands.
(4) T h e c o u n t r y was hampered by an inelastic
currency made up chiefly of bank note issues the
volume of which was usually dependent upon the
amount of United States bonds held by the issuing
banks and the price of bonds.
(5) B a n k s were without means of co-operation
and deprived of the possibility of joint action in times
of stress.
(6) L a c k of an established market for agricultural,
industrial and commercial paper led to an unhealthy
congestion of loanable funds in great centers, tending
to encourage speculatioit and injurious disturbances
to reserves. The United States lacked a broad dis
count market.
(7) T h e r e was a marked lack of equality in
credit facilities between different sections of the
country.
4. Has
the Establishment and Operation of the Federal
Reserve System Remedied These Conditions?
The establishment and operation of the Federal re
serve banks, under the Federal Reserve Act and the
various amendments thereto, have completely remedied
many of the defects incident to the inefficiency and
inadequacy of the National Banking System as it ex
isted before the establishment of the Federal reserve
banks. Other conditions have been greatly modified,
and it is confidently believed that, as the Federal Re
serve System is expanded and developed, many if not
all of these remaining defects will be corrected. The
reserves of member banks have been concentrated in
the Federal reserve banks. Additional funds have been
acquired through the subscriptions of member banks to
[3]
the capital stock of the Federal reserve banks and
through deposits from the United States Government.
A thoroughly elastic currency has been provided, and,
at the same time, the credit power of bank reserves
concentrated in the Federal reserve banks has been
enormously increased by the issue of Federal reserve
notes. Member banks have been enabled to take care
of practically all legitimate demands from their agri
cultural, industrial, and commercial customers by redis
counting with the Federal reserve banks the notes*
drafts, and bills of exchange arising from current trans
actions. Virtual equality in credit facilities in all parts
of the country has been created and discount rates made
more uniform than they have ever been in the history
of the country.
Moreover, the Federal Reserve System has carried
the country through the strain of war financing with
astonishing success. It is difficult, if not impossible, to
see how the banks could have carried the burden of war
finance and accommodated their customers but for the
existence and efficient operation of the System. Know
ing that the Federal Reserve System was behind the
banks of the country, the depositing public (because of
its entire confidence in the System) has been content to
leave on deposit in banks in every part of the country
funds which, under other conditions, according to pre
vious experience, would undoubtedly have been with
drawn for the purpose of hoarding. In this respect,
every bank in the United States has benefited, whether
it was a member of the System or not; and the cumula
tive effect of this widespread confidence has been, perU3
haps, the largest factor in making our huge war financ
ing operations possible.
5. Did the Establishment of the Federal Reserve
System
Involve the Incorporation in the American Banking System
of New and Untried Banking Principles?
It did not. Before the Federal Reserve Act was
framed, there was a thorough study of banking condi
tions and banking methods in this country, and the
successful banking systems of many other countries also
were exhaustively studied and analyzed. The Federal
Reserve Act is the adaptation to American conditions
of those banking principles in the banking systems
of England, France, Germany, and other industrial and
commercial countries which long experience has proved
to be the best.
6. Is There Any Provision by Which the Operations of Fed
eral Reserve Banks May Be Changed to Meet Changing
Conditions?
The provisions of the Act looking to this end are of
two kinds: first, the requirements of the law are stated
as broadly as possible, and the duty of making definite
application through regulations issued from time to
time is imposed upon the Federal Reserve Board;
second, it is the duty of the Board to keep in touch
with conditions, to keep itself constantly informed
with reference to the effects of the operation of the
various provisions of the Act, and to suggest to Con
gress from time to time such amendments to the Act
as, in the opinion of the Board, may be necessary or
advisable.
[ 5]
As experience has been gained in the operation of the
Federal reserve banks, regulations have been modified
from time to time and amendments to the Act have
been passed by Congress. The advantage of having the
operations of the System continually observed and
studied by a body of experts whose duty it is to
keep the System fully up to current requirements at
all times is probably greater than the majority of
bankers and business men have realized.
II. Organization
7. Of What Elements Does the Federal Reserve System
Consist?
The Federal Reserve System consists of:
(1) T
F
Reserve Board.
he
ederal
(2) T h e F e d e r a l
(3) T h e F e d e r a l
Advisory Council.
Reserve Banks.
FEDERAL RESERVE BOARD.
8. What Is the Federal Reserve Board and How Is It Con
stituted?
The Federal Reserve Board is the governing body of
the Federal Reserve System and consists of seven mem
bers, five of whom are appointed by the President of
the United States, by and with the advice and consent of
the Senate. The other two members of the Board are
the Secretary of the Treasury and the Comptroller of
the Currency, who are members ex-officio. Of the five
appointed members, two must be experienced in bank
ing or finance, and not more than one can be selected
from any one Federal reserve district. In making the
selections, the President is required to have due regard
to a fair representation of the different commercial,
industrial, and geographical divisions of the country.
Each of the five appointive members holds office for a
period of ten years, but the terms of the first appointees
were designated as two, four, six, eight, and ten years,
respectively, so that a new appointment or a reappoint
ment occurs once in every two years. The President
[
7]
designates one of the five as Governor, and another as
Vice-Governor of the Federal Reserve Board.
9. What Are the Powers and Duties of the Federal Reserve
Board?
The Federal Reserve Board has general supervision
over the twelve Federal reserve banks. Its function is
to determine uniform policies for the twelve Federal
reserve banks and to co-ordinate their activities. Its
powers are set forth in detail in Sections 10 and 11 of
the Federal Reserve Act.
FEDERAL ADVISORY COUNCIL.
10. What Is the Federal Advisory Council?
The Federal Advisory Council is composed of twelve
members, one from each Federal reserve district, chosen
annually by the board of directors of the Federal reserve
bank of the district. The purpose of the Council is to
give the Federal Reserve Board the benefit of the coun
sel and advice of men outside the active operations of
the System.
The regular meetings of the Council are held at Wash
ington, District of Columbia, at least four times each
year, and oftener if called by the Federal Reserve Board.
It may meet, however, on its own initiative, and may
hold special meetings at Washington or elsewhere, as
it may deem necessary.
The Council has power (i) to confer directly with the
Federal Reserve Board on general business conditions;
(2) to make oral or written representations concerning
matters within the jurisdiction of the Board; (3) to call
[8]
for information and to make recommendations in regard
to discount rates, rediscount business, note issues, re
serve conditions in the various districts, the purchase
and sale of gold or securities by the reserve banks, open
market operations by the reserve banks, and the general
affairs of the Federal Reserve System.
FEDERAL RESERVE BANES.
11 . Are the Federal Reserve Banks Government Institu
tions?
Since all the stock in the Federal reserve banks is
owned by member banks, and since the majority of the
board of directors of each Federal reserve bank are
elected by member banks, Federal reserve banks are
not under the control of the Government. They are
required, however, to perform certain services for the
Government, generally known as Fiscal Agency Opera
tions (see Question No. 25). A minority of the board of
each Federal reserve bank are appointed by the Federal
Reserve Board (see Question No. 1 4 ) , and a certain
portion of the excess profits of each Federal reserve
bank is required to be paid to the Government as a
franchise tax (see Question No. 30).
12. How Many Federal Reserve Banks Are There?
Twelve. The continental United States is divided into
twelve Federal reserve districts, each district containing
a Federal reserve city (that is, a city in which a Federal
reserve bank is located); the districts are apportioned
“with due regard to the convenience and customary
course of business” and are not necessarily coterminous
[9]
with state lines. The districts thus created may be read
justed from time to time by the Federal Reserve Board,
but not more than twelve Federal reserve districts in all
may be created. There is a Federal reserve bank in each
one of these districts, located, of course, in the desig
nated Federal reserve city of the district. Each Federal
reserve bank is an autonomous or self-governing insti
tution, under a board of nine directors, of whom six are
elected by the member banks of the district and three
are appointed by the Federal Reserve Board.
13. In What District Is the Federal Reserve Bank of Rich
mond?
The Federal Reserve Bank of Richmond is in the Fifth
Federal Reserve District, which embraces the District
of Columbia, the states of Maryland, Virginia, North
Carolina, South Carolina, and West Virginia (except
six counties in the extreme northwestern part of the
state). The banking power of the Fifth Federal Reserve
District is shown by the following table:
(These figures are as of February 28,1920.)
oco omitted
No.
Capital
National Bank Members
State Bank Members. ..
Eligible Non-Members. .
Ineligible Non-Members.
544
48
665
798
#77,662
>
67,507
•7,767
2.745
T O T A L S ..................... 2,055 #175,681
Surplus
#54,982
8,507
38,784
9,290
Deposits
Resources
#928,625 #1,242,803
163,298
720,776
J
105,149
555,945
253,730 30 ,774
*•••,563 11.843,449 #2,428,651
14. How Is a Federal Reserve Bank Managed?
Each Federal reserve bank is managed by a board of
nine directors, six being elected for terms of three years
[ 10]
each by the member banks and three appointed for sim
ilar terms by the Federal Reserve Board. The first
elected and appointed directors, however, were allotted
terms of one, two, and three years, respectively, so that
two directors are elected each year by the member
banks and one is appointed each year by the Federal
Reserve Board. The nine directors are designated as
Class A, Class B, and Class C directors, respectively.
Directors of Class A (three in number) are chosen by,
and intended to be representatives of, the stock-holding
banks. They may be officers and stockholders in mem
ber banks. Class B directors (three in number) are also
elected by member banks, but must be men who are
actively engaged in commerce, agriculture, or some
other industrial pursuit. No Class B director can be
an officer, director, or employee of a bank, though
Class B directors may be stockholders of banks. Direc
tors of Class C (three in number) are appointed by the
Federal Reserve Board. No director of Class C can be
an officer, director, employee, or stockholder of any
bank. One of the Class C directors is designated by the
Federal Reserve Board as Federal Reserve Agent and
Chairman of the Board of Directors of the Federal
reserve bank to which he is appointed. Another Class
C director is designated by the Federal Reserve Board
as Deputy Chairman.
15. How Are Class A and Class B Directors Elected?
The member banks in each Federal reserve district are
divided by the Federal Reserve Board into three gen
eral groups or divisions, which are designated as Group
i, Group a, and Group 3, respectively. Each group con-
CiO
sists, as nearly as possible, of banks of similar capitaliza
tion. In the Fifth Federal Reserve District, Group i is
composed of member banks each one of which has a
combined capital and surplus in excess of $599,000.
Group 2 consists of member banks each one of which
has a combined capital and surplus of not less than
1150,000 and not more than $599,000. The remaining
member banks in the District, the combined capital and
surplus of each one of which is less than $150,000, are
classified in Group 3. Each group nominates and elects
one Class A and one Class B director in the manner
prescribed by Section 4 of the Federal Reserve Act.
No officer or director of a member bank is eligible to
serve as a Class A director unless nominated and elected
by banks which are members of the same group as the
member bank of which he is an officer or director; and,
in case he is an officer or director of more than one
member bank, he can be nominated and elected only by
the group which embraces the largest bank of which he
is an officer or director.
16. What Are the Qualifications and Duties of the
of the Board and Federal Reserve Agent?
Chairman
He must be “a person of tested banking experience.”
In addition to his duties as Chairman of the Board, he
is required to maintain a local office of the Federal
Reserve Board on the premises of the bank. He is the
official representative of the Federal Reserve Board.
One of his important duties is to issue Federal reserve
notes to the Federal reserve bank and to hold the securi
ties against which the notes are issued.
17. How Are the Other Officers of the Federal Reserve Bank
Chosen?
By the Board of Directors, which has power to create
all offices other than those of Director, Chairman of the
Board, Federal Reserve Agent, Assistant Federal Re
serve Agent, and Deputy Chairman of the Board; to
appoint the officers and employees, and to prescribe
their duties. The head of the executive department of
the bank bears the title of Governor, and under him are
usually one or more Deputy Governors, a Cashier, and
one or more Assistant Cashiers.
18. How Large Is the Staff of the Federal Reserve Bank of
Richmond?
On January i, 1920, the Federal Reserve Bank of
Richmond had 399 officers and employees, including 101
at the Baltimore Branch and 23 at the War Loan
Organization; on July 1, 1920, the total was 555, in
cluding 142 at the Baltimore Branch and 23 at the
War Loan Organization.
19. How Are the Salaries of Officers and Employees of a
Federal Reserve Bank Fixed?
The salary of the Chairman of the Board and Federal
Reserve Agent is fixed by the Federal Reserve Board.
The other directors are paid attendance fees, which are
fixed by resolution of the board of each Federal reserve
bank as approved by the Federal Reserve Board. The
salaries of all other officers of a Federal reserve bank are
fixed by the board of directors of the bank, and the
salaries of other employees are fixed by the same board
or by the executive committee with the approval of the
£13]
board. All salaries, however, are subject to the approval
of the Federal Reserve Board, and each bank is required
to make full reports to the Federal Reserve Board with
reference to salary adjustments.
20. Are Branch Offices of a Federal Reserve Bank Permitted?
Yes. The Federal Reserve Board may permit or re
quire any Federal reserve bank to establish branch
banks.
21. How Are the Branches Operated?
They are operated under the supervision of a board of
directors, to consist of not more than seven nor less
than three directors, of whom a majority of one shall be
appointed by the Federal reserve bank of the district,
and the remaining directors by the Federal Reserve
Board. The directors of branch banks are appointed for
a term of one year and hold office during the pleasure
of the Federal Reserve Board. The active head of the
branch is called the Manager and is appointed by the
directors of the Federal reserve bank of the district,
from among the directors appointed by it. The activi
ties of the branch are determined by by-laws framed by
the board of the Federal reserve bank as approved by
the Federal Reserve Board.
22. Do the Branch Banks Serve Particular Parts of the Dis
trict?
Yes. Each branch is usually assigned a certain terri
tory embracing the banks which normally transact bus
iness with the city in which the branch is located.
[14]
23. What Are the Chief Governing Factors Which Determine
the Establishment of a Branch?
First, whether that part of a Federal reserve district
for which a branch is proposed can be more efficiently
served by a branch than by the Federal reserve bank
of the district; in this question, railroad facilities and
mail schedules play an important part. Second, whether
the improved facilities afforded by the branch to the
members located in the territory to be assigned to it
will warrant the increased expenditure involved by the
creation of the branch, and whether the establishment
of the branch will be a distinct economic gain to the
banking and commercial business of the district.
24. How Many Branches Has the Federal Reserve Bank of
Richmond?
The Federal Reserve Bank of Richmond has one
branch, located at Baltimore, Maryland. The territory
assigned to the Baltimore Branch is the entire State
of Maryland and that part of West Virginia, approxi
mately one-half, the railroad facilities of which make it
more convenient for the banks located therein to deal
with the Branch.
25. Do the Federal Reserve Banks Perform Any Services
for the Federal Government?
Yes. They are required by the Federal Reserve Act to
serve as Fiscal Agents of the Federal Government. Dur
ing all the Liberty Loan campaigns, they acted in this
capacity, received subscriptions for bonds, notes, and
certificates of indebtedness, made collections on these
subscriptions, and delivered securities to subscribers
upon completion of payment. In connection with these
[I5l
subscriptions, numerous and large transactions in the
nature of redeposits with qualified depositors were con
ducted; collateral for such deposits, as required by law,
was received and held by the Federal reserve banks.
In each district an active War Loan Organization, of
which the Governor of the Federal reserve bank was
the responsible head, conducted the practical operations
of the campaigns. Thrift stamps, war savings stamps,
and Treasury savings certificates were sold and dis
tributed, and are still being so handled.
The Federal reserve banks have, in their capacity as
Fiscal Agents, performed for the Government services of
the highest value. The extent of the work of the Federal
Reserve Bank of Richmond as Fiscal Agent is indicated
by the fact that the Liberty Loan Department, includ
ing the War Loan Organization, had at one time approx
imately 150 employees. Liberty bonds and Victory
notes were sold in the Fifth District to an amount ex
ceeding one billion dollars. In addition to this, a large
volume of war savings stamps, Treasury savings certifi
cates, and certificates of indebtedness of various issues
was successfully placed.
In the near future, the various sub-treasuries of the
United States, now in existence, will be discontinued,
and Federal reserve banks and their branches will be
called upon to exercise many of the sub-treasury func
tions for the Government. They are already rendering
an important service to the Government and to the
public in connection with the receipt of deposits from
collectors of revenue, and the payment of Government
checks and the coupons from bonds of the various loans.
[16]
III. Membership
ELIGIBILITY.
26. What Banks May Be Members of the Federal Reserve
System?
All national banks are required to be members, and
eligible state banks and trust companies may become
members with the approval of the Federal Reserve
Board.
See Chapter VII., “State Bank and Trust Company
Membership” (pages 60-82 of this book), in which the
subject of State Bank Membership is fully covered.
STOCK SUBSCRIPTIONS.
27. For How Much Stock Must a Member Bank Subscribe?
For an amount equal to six per cent, of its paid-up
capital and surplus. If a member bank increases or de
creases its capital or surplus, it must increase or de
crease accordingly its stock in the Federal reserve bank.
Stock adjustments are usually made shortly after the
first days of January and July of each year, when it is
customary for banks to carry part of their eartiings to
their surplus. Increases or decreases of capital or surplus
at other times, if considerable in amount, should be
followed by a corresponding adjustment of stock hold
ings in the Federal reserve bank.
28. When Is the Subscription to the Capital Stock to Be Paid?
One-half of the subscription must be paid at the time
the applicant bank becomes a member, or when the
i ni
capital stock or surplus of the member bank is increased,
and the other half paid upon call of the Federal Reserve
Board. Up to this time, the Federal Reserve Board has
not called for any part of the second half of the stock
subscription of member banks. Each member bank,
therefore, holds stock of a paid-in value equal to three
per cent, of its paid-in capital stock and surplus.
DIVIDENDS AND DIVISION OF EARNINGS.
29.Are Dividends
Paid on the Stock of Federal Reserve
Banks?
Yes. The Federal Reserve Act provides for the pay
ment of an annual dividend of six per cent, on the paidin value of the stock. Moreover, this dividend is cumu
lative. That is to say, if the earnings of a Federal reserve
bank do not justify the dividend in any particular year,
and the accumulated surplus is not sufficient to provide
for the dividend, it is paid only in part, but the re
mainder is payable in the following year, in addition to
the current dividend for that year, provided the profits
are sufficient to make the payment. All twelve of the
Federal reserve banks have paid the full six per cent,
dividends from the date of organization to the last
dividend period, and each Federal reserve bank has a
surplus fund sufficiently large to insure the payment
of the six per cent, dividends regularly in the future.
30. What Becomes of the Earnings of a Federal Reserve
Bank Above Dividend Requirements?
Under the Federal Reserve Act as originally passed,
Federal reserve banks were required to pay all surplus
[ i *3
earnings to the Government as a franchise tax, except
that they were allowed to retain one-half of such surplus
earnings until a surplus fund of forty per cent, of paidin capital had been accumulated. Later, however, the
law was amended, and now Federal reserve banks are
allowed to retain all surplus earnings until a surplus
fund equal to one hundred per cent, of the subscribed
capital is accumulated (this is two hundred per cent, of
the present paid-in capital); and, after the establish
ment of such a surplus, ten per cent, of the surplus
earnings (after the payment of the current dividend)
is to be retained by the bank and the remainder paid
to the Government as a franchise tax.
31. Why Was the Law Changed and What Are Some of the
Effects of the Change?
Owing to the participation of the Federal reserve
banks in Government financing during the war, their
earnings were enormously greater than any one had
anticipated, and it is difficult, if not impossible, to be
lieve that they can continue in anything like the same
degree. It was thought wise, therefore, that these ex
traordinary profits should be retained, at least in part,
for the benefit of member banks through the increased
power of service on the part of the Federal reserve
banks. The accumulation by each Federal reserve bank
of a surplus equal to its total subscribed capital (twice
its present paid-in capital) will insure not only the regu
lar payment of dividends in future years, whether the
profits of each year warrant the payment of the current
dividend or not, but also the continuance and enlarge-
[ i 9]
ment of many services which the Federal reserve banks
are performing for their members without charge.
32. What Is the Amount of the Capital Stock and Surplus of
the Federal Reserve Bank of Richmond?
On June 30, 1920, the paid-in capital was $4,824,650;
the surplus was $8,067,365.
IV. Functions of Federal
Reserve Banks
33. What Are the Principal Functions of Federal Reserve
Banks?
The principal functions of Federal reserve banks are:
(1) To
the concentration or mobilization
effect
of the reserves of their members.
(2) To
an elastic currency by the issue
of Federal reserve notes.
(3) To
means of rediscounting indus
trial, commercial, and agricultural paper.
provide
afford
MOBILIZATION OF RESERVES.
34. How Do Federal Reserve Banks Effect the Mobilization
of Reserves?
Each member bank is required to carry its reserve
with the Federal reserve bank of its district. Each Fed
eral reserve bank is, therefore, a reserve center for its
district, and the reserves of all twelve Federal reserve
banks are effectively centralized through the provision
of the Act that the Federal Reserve Board may permit
or require Federal reserve banks to rediscount for each
other. If, therefore, the demand for accommodation is
heavy in one section of the country and light in another,
the district in which the demand is light may be called
upon to aid the district in which the demand is heavy.
Rediscount transactions between Federal reserve banks
[21]
are conducted by wire through the leased wire system
connecting all Federal reserve banks and branches.
By this method, relief is obtainable as soon as it is
needed.
35. Has This Privilege of Rediscounting Between Federal
Reserve Banks Been Availed of by Any of Them?
Yes. All the Federal reserve banks have rediscounted
with or for each other during the past two years. At one
time the Federal Reserve Bank of Richmond had redis
counts with other Federal reserve banks amounting to
fifty-five millions of dollars, a sum greater than all the
available reserve deposits of its member banks at the
time. At other times the Federal Reserve Bank of Rich
mond has rediscounted for other Federal reserve banks.
During the year 1919 rediscount facilities in greater or
less volume were in constant use.
ELASTIC CURRENCY.
36. How Do Federal Reserve Banks Furnish an Elastic
Currency?
By the provisions of the Federal Reserve Act, a Fed
eral reserve bank is allowed to issue Federal reserve
notes. These notes are a direct obligation of the United
States. The holders, however, have a first lien upon the
assets of the Federal reserve bank by which they are
issued. All the notes issued by a Federal reserve bank
bear the number and letter of the issuing bank. Federal
reserve notes have been issued in the following denom
inations: $5, $10, $20, $50, $100, $500, $1,000, $5,000,
and $10,000.
[22]
The process of issuing Federal reserve notes may be
briefly described as follows:
Unissued notes in sufficient volume and of the various
denominations are lodged with the Federal Reserve
Agent and kept by him in special compartments in the
vault of the Federal reserve bank in joint custody with
an officer of the bank. Upon requisition of the bank,
notes are turned over to the bank by the Federal Re
serve Agent, who must, however, take collateral for the
notes, which collateral he must continue to hold as long
as the notes remain outstanding. The collateral may
consist of gold, or of industrial, commercial, or agricul
tural paper, eligible for rediscount, or partly of one and
partly of the other. The Agent must hold collateral to
the full amount of outstanding Federal reserve notes.
If he holds forty per cent, gold and sixty per cent, eligi
ble paper, the bank is not required to hold a gold re
serve against the notes. If, however, he holds less than
forty per cent, of gold, the bank is required to hold a
sufficient amount of gold to make up forty per cent.,
notwithstanding the fact that it may have more than
sixty per cent, of paper lodged with the Agent as col
lateral. The Agent is required to deposit with the Treas
urer of the United States as a redemption fund five per
cent, of the gold held by him as collateral for Federal
reserve notes, and the bank is required to deposit an
additional amount sufficient to make the redemption
fund in the hands of the Treasurer of the United States
equal to five per cent, of the total amount of outstanding
Federal reserve notes.
Federal reserve notes are redeemable in gold at the
[23]
Treasury Department at Washington and in gold or
lawful money at any Federal reserve bank. Every Fed
eral reserve bank is required to redeem the notes issued
by another Federal reserve bank if presented to it for
redemption, but no Federal reserve bank is allowed to
pay out the notes issued by another Federal reserve
bank. When the paper held by the Federal Reserve
Agent as collateral for outstanding Federal reserve notes
matures, it is surrendered to the Federal reserve bank
only in exchange for other eligible paper, Federal reserve
notes, or gold. It is manifest, therefore, that when the
paper upon the discount of which Federal reserve notes
were issued matures and is paid, gold must be placed in
the hands of the Federal Reserve Agent to meet any
outstanding Federal reserve notes originally issued
against the paper. As Federal reserve notes can be pre
sented for redemption to the Treasury Department or
to any of the Federal reserve banks (and as a matter
of fact to any branch of a Federal reserve bank), it is
clearly apparent that, regardless of the conditions under
which they were originally issued, no greater volume of
Federal reserve notes can remain in circulation at any
one time than the public has need for and is willing to
hold. On the other hand, at each Federal reserve bank
the Federal Reserve Agent has at all times an ample
supply of unissued Federal reserve notes in various de
nominations which can be instantly procured by a Fed
eral reserve bank in exchange for gold or eligible paper
and put into circulation in response to a demand for
currency. We have, therefore, a perfectly elastic cur
rency, which will automatically expand and contract as
conditions require.
{>4 }
37. What Is the Limit upon the Note-Issuing Power of a
Federal Reserve Bank?
Thfe law requires that a Federal reserve bank must
maintain reserves in gold of not less than forty per cent,
against its Federal reserve notes in circulation. The to
tal volume of gold held by a Federal reserve bank is,
therefore, a very important element of the question.
The Federal Reserve Board is authorized to limit the
amount of Federal reserve notes which any Federal
reserve bank may issue and have outstanding at any
one time; and it is also authorized, under certain condi
tions laid down in the Act, to modify the reserve re
quirements with respect to Federal reserve notes.
38. What Amount of Federal Reserve Notes of the Federal
Reserve Bank of Richmond Are Now Outstanding?
On December 31, 1919, the Federal Reserve Bank of
Richmond had in actual circulation Federal reserve
notes amounting to $145,765,320; on June 30,1920, the
actual circulation was $124,487,275.
39. What Are Federal Reserve Bank Notes and Why Are
They Issued?
When the Federal Reserve Act was passed, that pro
vision of the National Bank Act which required a na
tional bank to invest a part of its paid-up capital in
United States bonds against which national bank notes
could be issued was repealed, so that while national
banks are still allowed to issue notes, it is no longer
necessary for them to do so. At the same time, provision
was made in the Act for the gradual retirement of na
tional bank circulation and the purchase by Federal
reserve banks of the two per cent. United States bonds
[ 25]
bearing the circulation privilege. Several such purchases
were made by direction of the Federal Reserve Board,
but purchases were suspended when the Government
began its issues of Liberty bonds.
Federal reserve banks were authorized by the Act to
exchange the two per cent, bonds so purchased for three
per cent, thirty-year bonds and three per cent, one-year
renewable notes, neither of which, however, bore the
circulation privilege, but they had the right to retain
the two per cent, bonds purchased from national banks
and to issue against such bonds Federal reserve bank
notes upon the same terms and under the same condi
tions that national banks are allowed to issue national
bank notes. The lowest denomination in which such
Federal reserve bank notes could be issued was origi
nally $5, and only a few of the Federal reserve banks
exercised the privilege of issuing such notes. But by a
later amendment to the Federal Reserve Act, Federal
reserve banks were authorized to exchange the one-year
renewable three per cent, notes for special one-year two
per cent, certificates of indebtedness; to purchase such
certificates of indebtedness for cash, and to issue against
such certificates Federal reserve bank notes in denom
inations of $i and $2. The total amount of such issues,
however, was limited to the amount of silver certificates
withdrawn from circulation. All the Federal reserve
banks have issued $i and $2 Federal reserve bank notes
in accordance with the provisions of the Act, and have
thereby added greatly to the facilities of commerce and
industry by the circulation of these notes, large numbers
of which are needed at certain seasons, particularly dur
ing crop-moving periods.
40. To What Extent Have One and Two Dollar Bank Notes
Been Issued by the Federal Reserve Bank of Richmond?
The total amount of such notes outstanding on De
cember 31,1919, was $12,057,950; the total amount on
June 30,1920, was #9,614,741.
REDISCOUNTING.
41. What Determines the Lending Power of a Federal
Reserve Bank?
The lending power of a Federal reserve bank is de
termined by two elements: first, by the amount of its
paid-in capital, earned surplus, reserve deposits of mem
ber banks, and Government deposits; second, by its
power to issue and keep outstanding Federal reserve
notes. As will be seen by the following explanation, this
second factor greatly supplements the first.
A Federal reserve bank is, of course, not required to
hold any reserve against its paid-in capital or earned
surplus. It is, however, required to maintain a reserve
in gold or lawful money of thirty-five per cent, against
the reserve deposits of its member banks and against
Government deposits. Therefore, a Federal reserve bank
can lend back to its member banks the total amount of
its paid-in capital and earned surplus plus sixty-five per
cent, of its member banks’ reserve and other deposits.
This, in any case, would amount to a sum sufficient to
accommodate a considerable number of banks, and is a
great improvement on the old National Banking Sys
tem, because the pooling of reserve deposits in a Federal
reserve bank makes it possible to take advantage of the
fact that the season for expansion in one part of the dis-
[273
trict frequently coincides with the season for contrac
tion in another part. The power of one Federal reserve
bank to rediscount with or for another Federal reserve
bank enables the System as a whole to take advantage
of the varying time of seasons in different parts of the
country. The lending power of a Federal reserve bank,
however, does not end here.
It is further increased by the power which is given to
Federal reserve banks by the Act to issue Federal re
serve notes. Against Federal reserve notes issued and
outstanding, the Federal reserve bank is required to
maintain a gold reserve of forty per cent., and for the
remaining sixty per cent, of the collateral required to be
lodged with the Federal Reserve Agent of its district,
it may use eligible paper discounted or rediscounted by
it for its member banks.
It will be seen, therefore, that if the loans of a Federal
reserve bank to its member banks are paid by the Fed
eral reserve bank in gold or lawful money, the limit of
its lending power would be reached after it had dis
counted an amount of paper equal to its paid-in capital,
earned surplus, and sixty-five per cent, of its deposits.
If, however, it can pay for the loans to member banks
in Federal reserve notes, its lending power is two and a
half times the amount which it could lend, if payment
had to be made in gold or lawful money.
Because of the changes which have been made in the
reserve requirements of national banks, which changes
were made possible by the establishment of the Federal
Reserve System, together with the confidence of the
public in the Federal Reserve System, an enormous
[ 18 ]
amount of gold has been accumulated in the Federal
reserve banks, and the banks of the country generally
and the public at large are entirely willing to receive
and hold Federal reserve notes for daily commercial
needs.
Because the total amount of Federal reserve notes
already issued and outstanding is larger than the total
amount of loans to member banks, the Federal reserve
banks have a lending power equal to two and a half
times the free gold held by them (the amount of their
capital, surplus, and sixty-five per cent, of their deposits),
so that it is not necessary for the member bank discount
ing paper with the Federal reserve bank to take and use
actual Federal reserve notes, for the reason that there
is already a sufficient volume of Federal reserve notes
in circulation to include the amount of the transaction.
As a practical demonstration of the truth of the above
statement, the Federal Reserve Bank of Richmond held
on January i, 1920, reserve deposits of its member banks
amounting to $62,712,000. It was able to lend to its
member banks $121,407,000, and to maintain its own
reserve at a point substantially higher than the mini
mum fixed by law. The power to do these things was
due to the fact that it had Federal reserve notes issued
and outstanding at the time (needed and used in circu
lation for daily business needs) amounting to $145,755,000.
It will be seen from this explanation that, by pooling
their reserves in a Federal reserve bank, member banks
have obtained not only the enormous advantage de
rived from the use of combined reserves at different
[29]
seasons in different parts of the country, but this power
is actually multiplied by the note-issuing power of the
institution in which the reserves are pooled.
42. Has Every Member Bank the Right to Rediscount with
Its Federal Reserve Bank?
Yes; provided the member bank has eligible paper to
offer for rediscount, that is to say, paper which meets the
requirements of the law, as laid down in the Federal
Reserve Act, and of the regulations of the Federal Re
serve Board, made in pursuance of the duties imposed
and powers conferred on the Board by the Federal
Reserve Act.
43. What Paper Is Eligible for Rediscount with a Federal
Reserve Bank?
Notes, drafts, and bills of exchange, arising out of
actual commercial transactions, or seasonal agricul
tural requirements, i.e., that are issued or drawn for
agricultural, industrial, or commercial purposes, or the
proceeds of which have been or are to be used in pro
ducing, purchasing, carrying, or marketing goods in
one or more of the steps of the process of production,
manufacture, or distribution. Such notes, drafts, and
bills of exchange issued or drawn for industrial or com
mercial purposes must have a maturity at the time of
discount of not more than ninety days, exclusive of
days of grace. Notes, drafts, and bills of exchange
drawn or issued for agricultural purposes or based on
live-stock must have a maturity at the time of discount
of not exceeding six months, exclusive of days of grace.
Any such paper may have been drawn for a longer time
[30]
when discounted or purchased by the member bank,
but the maturities must be not longer than ninety days
for commercial and industrial paper and six months for
agricultural or live-stock paper when offered for redis
count with a Federal reserve bank.
44. Is There Any Other Class of Paper Eligible for Redis
count?
Yes. Paper secured by United States bonds, Treasury
certificates, or United States notes is eligible for redis
count provided its maturity is not beyond ninety days,
exclusive of days of grace, at the time it is offered for
rediscount.
45. What Paper Is Not Eligible for Rediscount?
Notes, drafts, or bills of exchange, the proceeds of
which have been used or are to be used for permanent or
fixed investments of any kind or for investments of a
purely speculative character, are not eligible for redis
count.
46. Is a Note Otherwise Eligible Made Ineligible Because
It Is Secured by Pledge of Collateral?
No. It may be secured by the pledge of goods or
collateral and still be eligible for discount by a Federal
reserve bank.
47. Is This Distinction Made for the Purpose of Discouraging
Speculation or Speculative Investments?
No. But as the deposits of Federal reserve banks are
mainly the reserve funds of member banks, their invest
ments should be not only of short maturity but liquid
beyond question. Therefore, it is the object of the regu
L3i]
lations to define eligible paper as paper growing out of
current commercial or agricultural transactions under
conditions which will insure the liquidation of the paper
at maturity. Moreover, since the paper rediscounted by
Federal reserve banks is used as collateral for Federal
reserve notes, it should be practically self-liquidating,
so that any sudden contraction in the volume of out
standing Federal reserve notes can be met out of the
proceeds of maturing paper.
48. Why Does a Federal Reserve Bank Rediscount Only
Short-Time Paper?
Because the commercial banking experience of the
world points conclusively to the wisdom of maintaining
a highly liquid condition. The rediscounting of shorttime, self-liquidating paper guarantees that a reserve
bank will never be caught in such a position that it
cannot supply currency and credit to any reasonable
extent instantly and on demand. The central banks of
the chief foreign countries follow the same practice of
rediscounting only short-time and highly liquid paper.
So well is this principle recognized that, since the found
ing of the reserve banks in the United States, the trend
has been toward an increase of short-time paper.
This is an advantage both to the reserve banks and their
members. The shorter the paper, the more liquid are the
reserve banks; and the shorter the paper, the more op
portunities are afforded to the member banks to require
curtailment or payment when necessary or practicable.
For this reason, no Federal reserve bank is allowed to
rediscount industrial or commercial paper with a ma
turity longer than ninety days. As a matter of fact, the
[32]
average maturity of the paper held by all Federal re
serve banks is within thirty days. Agricultural paper,
however, having not more than six months to run, is
eligible for rediscount. This exception is made because
of the well-known fact that crops cannot be planted,
matured, and marketed within a shorter time. Notwith
standing this fact, many farmers have adopted the prac
tice of giving short-time notes, even with the certainty
of having to renew in many cases before the completion
of the operations financed by them. This is a result of
the growing certainty on the part of the farmer of ob
taining adequate help throughout the entire season,
and this certainty is a result of the proper functioning
of the Federal reserve banks.
49. Is All Eligible Paper Acceptable?
Paper which is technically eligible under the regula
tions is not necessarily acceptable, since the officers and
directors of Federal reserve banks are clothed with full
authority to determine whether or not paper offered for
rediscount is satisfactory. In addition, the regulations
provide that, in case a borrower's statement is necessary,
the paper of the borrower is eligible only in the event
that the statement shows a reasonable excess of quick
assets over current liabilities. What constitutes a reason
able excess will depend upon the nature of the business,
the time of the year in which the statement is made,
and other circumstances disclosed by the statement. The
officers of a Federal reserve bank have, of course, the
right to require such additional information with refer
ence to paper offered as may seem necessary to them.
[33]
50. How Does a Federal Reserve Bank Determine Whether
or Not Paper Offered to It for Rediscount Is Eligible?
The member bank offering paper for rediscount is
required to list it on a regular offering sheet furnished
by the Federal reserve bank. On this sheet are various
columns in which certain information with reference to
each note is required to be given. Directions printed on
the sheet show plainly and clearly what information is
required and how the sheet is to be filled out. Further
more, in signing the application for the rediscounts on
the sheet, a duly authorized officer of the applying mem
ber bank certifies that, to the best of his knowledge and
belief, the paper is eligible under the law and the regula
tions of the Federal Reserve Board.
51. Is It a Difficult or Complicated Matter to Secure and
Furnish the Information Required by a Federal Reserve
Bank in Connection with Paper Offered for Rediscount?
No information with reference to paper offered for
rediscount is required by a Federal reserve bank except
such as a prudent officer of the offering bank should
have in his possession before discounting or purchasing
the paper for his bank, and any officer having this in
formation at his command should have no difficulty in
properly filling out the rediscount application sheet.
52. When and in What Form Are Borrowers’ Statements
Required in Connection with Paper Offered for Redis
count?
When the member bank is lending to any one bor
rower as much as $5,000 (or, in the case of a bank with
a capital of less than $50,000, an amount equal to ten
per cent, of its own capital stock), the bank should have
[
34 ]
in its files a signed statement of the assets and liabilities
of the borrower. Moreover, these statements should be
renewed at least once a year. When any paper of such a
borrower is offered for rediscount, the member bank
should send with the offering a copy of the borrower’s
statement, certified to by some officer of the bank as be
ing a true copy of a signed statement in the files of the
bank. Having once filed a certified copy of a borrower’s
statement with a Federal reserve bank, it is, of course,
unnecessary to furnish another copy until the first is a
year old, or until a new statement is requested by the
Federal reserve bank. This requirement of borrowers’
statements in connection with paper offered for redis
count has enabled member banks to secure many state
ments from borrowers heretofore unobtainable. We have
had evidences of many cases in which member banks
have saved themselves from serious losses by examina
tion of statements so obtained.
53. Are Statements Required in Any Other Cases?
Statements are sometimes required even where the
total amount loaned to the borrower by the member
bank is less than $5,000, or ten per cent, of the capital
of the member bank, where such capital is less than
$50,000. The officers and directors of a Federal reserve
bank are supposed to be careful and prudent in the re
discounting of paper, and the law and the regulations
give them the right to ask for such information with
respect to each loan as they may deem it prudent to
require. At the same time it is not the policy of the
Federal Reserve Bank of Richmond to be in any way
[35)
unreasonable, or to insist upon the production of a state
ment unless the circumstances connected with the par
ticular transaction are such as to make it seem neces
sary.
54. When a Member Bank Files with Its Federal Reserve
Bank a Statement of One of Its Customers, Is the Infor
mation Regarded as Confidential?
Not only statements, but all other forms of credit
information furnished to a Federal reserve bank by a
member bank are looked upon as confidential by the
Federal reserve bank. While its officers, of course, feel
entirely free to use. the information furnished by one
bank for the purpose of passing upon paper offered by
another bank, no information given by one bank is
communicated to another bank without the express per
mission of the bank from which the information is re
ceived. All statements and other credit information are
kept in a special credit file, under the charge of the man
ager of the credit department, and only the officers
and employees directly engaged in credit work are at
liberty to examine the file.
55. Is There Any Limit upon the Amount That a Member
Bank May Rediscount with Its Federal Reserve Bank?
While the law sets no limit, it is within the power of
the officers of a Federal reserve bank to decide each case
separately and to determine to what extent credit should
be extended to the applying member. In such determina
tion, they are expected to be impartially guided by
sound banking principles, the conditions surrounding
the applying bank, and the purpose for which the pro
ceeds are to be used.
[
36}
56. What Additional Reason Is There for Limiting the Amount
That Any Member Bank May Rediscount with Its Fed
eral Reserve Bank?
Section Four of the Federal Reserve Act provides
that:
“S
[of directors\ shall administer the
affairs of said bank fairly and impartially and with
out discrimination in favor of or against any mem
ber bank or banks and shall, subject to the provisions
of law and the orders of the Federal Reserve Board,
extend to each member bank such discounts, advance
mentsy and accommodations as may be safely and
reasonably made with due regard for the claims and
demands of other member banks.”
aid
board
Therefore, if any member bank is borrowing from its
Federal reserve bank an amount considerably greater
than it would be able to obtain if all member banks
were asking for their share of available credit at the
same time, it is in a position where curtailment might
have to be required, in case requests for loans or redis
counts were simultaneously made by a considerable
number of other member banks and a generally ex
panded condition thus produced.
57. Under What Circumstances and to What Extent Does
the Federal Reserve Bank of Richmond Require Mar
ginal Collateral?
Section 5,202 of the National Bank Act provides that
no national bank shall borrow an amount exceeding the
amount of its paid-in capital stock. Certain exceptions
are made, however, and one of these exceptions is, “Lia
bilities incurred under the provisions of the Federal
Reserve Act.”
[37]
Therefore, a member bank is allowed to exceed the
limit, if necessary, with respect to loans from or redis
counts with its Federal reserve bank. At the same time,
the exception was not made in abnegation of the prin
ciple but in order that a Federal reserve bank might be
in a position to extend to a member bank in an emergency
any degree of assistance which it might require and
which the officers of the Federal reserve bank might
consider necessary and safe. The Federal Reserve Bank
of Richmond has adopted the policy of requiring mar
ginal collateral from any member bank whose total
borrowings (exclusive of notes secured by Government
paper), including loans from other banks as well as the
Federal reserve bank, exceed the amount of the member
bank’s capital. In case the member bank has a large sur
plus in proportion to its capital, the request is not al
ways made as soon as the total reaches the amount of
the capital. The amount of marginal collateral depends
upon circumstances. It is customary to ask for twentyfive per cent, (of the total amount borrowed from the
Federal reserve bank) when the amount of capital is
exceeded, and to increase the percentage if the amount
of capital is considerably exceeded. This rule is applied
uniformly and impartially to all member banks.
58. Is It Sound Practice for a Member Bank to Borrow from
Its Federal Reserve Bank for the Purpose of Relending
at a Profit?
Such a practice is extremely unsound. Generally
speaking, a bank should limit the amount of its loans to
its own resources and reserve its borrowing power with
its Federal reserve bank to meet emergencies, such as
[ 38]
an unexpected shrinkage of deposits, or to meet the
increased demands of its regular customers during the
season or seasons when their legitimate requirements
exceed the resources of the bank. In other words, every
bank should “clean up” all its obligations for bills pay
able or rediscounted paper at least once or twice in each
year. By so doing it will materially increase its capacity
to expand its loans during the season or seasons when
the demands of its customers are normally heaviest.
59. May a Member Bank Borrow from Its Federal Reserve
Bank on Its Own Note?
Yes. The Federal Reserve Act provides that any
Federal reserve bank may make advances to its member
banks on their promissory notes for a period not exceed
ing fifteen days, provided such promissory notes are
secured by such notes, drafts, bills of exchange, or bank
ers’ acceptances as are eligible for rediscount or for pur
chase by Federal reserve banks under the provisions of
the Act and the regulations of the Federal Reserve
Board, or by the deposit or pledge of bonds or notes of
the United States.
60. Are Such Notes Subject to Renewal?
The privilege of borrowing in this way was granted
to member banks to enable them to secure short-time
advances even when they did not happen to have
paper eligible for rediscount maturing within the re
quired time. The privilege was not given for the purpose
of substituting this form of obligation for rediscounted
paper. Therefore, such notes are not supposed to be
renewed, though the paper securing them may be redis
[39 ]
counted, if necessary, at the maturity of the note.
However, during the period in which banks were called
upon to assist in Government financing, it was necessary
for them to rediscount very freely with their Federal
reserve banks, and fifteen-day notes secured by Govern
ment obligations have been freely renewed. This practice
will doubtless be continued as long as it may be neces
sary.
61. How Does the Federal Reserve Bank Collect Notes Re
discounted with It?
When notes are rediscounted with the Federal reserve
bank, the discount is calculated up to the day of matur
ity. Approximately ten days before that date, the notes
are sent for collection to the member bank for which
they were discounted and on the maturity date the face
value of the notes is charged to the reserve account of
the member bank. Wherever the member bank wishes
the Federal reserve bank to collect the notes, they are
turned over to the collection department ten days
before maturity, and at maturity they are charged to
the reserve account of the member bank; but when re
turns are received on the notes entered for collection,
credit is, of course, given in the reserve account of the
member bank. By this method, it is unnecessary to
approximate and include, at the time the notes are
rediscounted, the time necessary for collection, or to
include a special charge covering any possible exchange
which may be made by the collecting bank. As a matter
of fact, the practice of returning notes to the member
banks for collection has proved entirely satisfactory, as
[40]
it enables the bank to make its own arrangements for
collection and returns.
62. How Are the Discount Rates of a Federal Reserve Bank
Determined?
The law provides that the discount rates for each
Federal reserve bank shall be fixed by the board of
directors of the bank, subject to review and determina
tion by the Federal Reserve Board. As a matter of prac
tice, discount rates vary slightly with different classes of
paper and sometimes for different maturities. Whenever
a change is made in one or more rates by a Federal re
serve bank, the change is submitted to the Federal Re
serve Board for approval, and, after such approval has
been obtained, all member banks are advised not only
of the new rate but of all rates existing at the time.
These rates are applicable impartially to all member
banks whether large or small.
By an amendment to the Federal Reserve Act, ap
proved April 13, 1920, Federal reserve banks are per
mitted to establish graduated or progressive discount
rates, that is to say, rates which may be graduated or
progressed on the basis of the amount of the advances
and discount accommodations extended by the Federal
reserve bank to the borrowing bank. If and when grad
uated or progressive discount rates are established by a
Federal reserve bank, a basic amount is determined for
each member bank, taking into consideration the aver
age reserve deposit of the member bank for a given past
period and the amount paid in by the member bank on
its subscription to the capital stock of the Federal
reserve bank. The regular published discount rate is
[4 1]
charged on loans and rediscounts up to the basic amount
and, on additional amounts borrowed, a progressively
higher rate is charged in accordance with the terms fixed
by the Federal reserve bank and approved by the Fed
eral Reserve Board in establishing the progressive rates.
63. Will the Federal Reserve Bank Hold Securities in Cus
tody for Its Members?
Yes. The Federal reserve bank is prepared to hold
Liberty bonds, Victory notes, Treasury certificates of
indebtedness, or other Government securities in cus
tody for member banks without charge. Moreover, it
will remove coupons as they mature, collect, and credit
them to the reserve account of the member bank, in
every case advising the amount credited.
BANKERS’ ACCEPTANCES.
64. What Are Bankers' Acceptances and upon What Condi
tions Are Member Banks Authorized by Law to Accept?
This subject is a very intricate one, and it is further
complicated by the fact that, until the passage of the
Federal Reserve Act, national banks were not allowed
to accept. Moreover, the law prescribing the conditions
under which acceptances can be discounted or purchased
by Federal reserve banks is subject to modification by
regulations and rulings of the Federal Reserve Board.
This subject will be covered in a special booklet on
Bankers’ Acceptances to be issued by the Federal Re
serve Bank of Richmond.
[ 4-1
V. Reserves of Member Banks
RESERVES REQUIRED.
65. What Are the Reserves Required to Be Carried by Mem
ber Banks with a Federal Reserve Bank?
Every member bank is required to establish and main
tain a reserve balance with its Federal reserve bank as
follows:
(1) I f i t is not located in a reserve or central
reserve city, an actual net balance equal to seven per
cent, of its net demand deposits (as defined in Question
No. 67) and three per cent, of time deposits (as defined
in Question No. 68).
(2) If in a reserve city , ten per cent, of net demand
deposits and three per cent, of time deposits.
(3) If in a central reserve city, thirteen per cent,
of net demand deposits and three per cent, of time
deposits.
66. What Are the Reserve Cities in the Fifth Federal Reserve
District?
Richmond, Virginia; Baltimore, Maryland; Washing
ton, District of Columbia; and Charleston, South Caro
lina. There is no central reserve city in the Fifth Federal
Reserve District.
DEPOSITS.
67. What Are Demand Deposits?
Demand deposits comprise all deposits payable with
in thirty days.
U3]
68. What Are Time Deposits?
Time deposits comprise all deposits payable after
thirty days, savings accounts subject to not less than
thirty days’ notice, time certificates of deposit until
within thirty days of their maturity, and all postal
savings deposits.
69. Must Reserves Be Carried Against All Deposits?
Reserves must be carried against all deposits, includ
ing state, county, municipal, and postal savings depos
its, except secured deposits of the United States, other
than postal savings deposits.
70. How Is the Reserve of a Member Bank Calculated?
A form showing the method of computing the reserve
to be carried by a member bank will be found in the
Appendix hereto.
71. Can a Member Bank Check on Its Reserve Account with
Its Federal Reserve Bank?
Member banks are not only allowed but encouraged
to check on their accounts with their Federal reserve
bank, provided the realized reserve balance is not re
duced below the point required by law. If the balance
is reduced below that which the member bank is re
quired by law to maintain, the Federal reserve bank is
required by law and the regulations of the Federal Re
serve Board to assess a penalty against the member bank
for deficiency in its reserve. The law provides further
that no bank whose reserve is deficient shall make new
loans or pay any dividends until the total balance re
quired by law is fully restored.
[44]
DEFICIENCIES IN RESERVE.
72. What Is the Penalty for a Deficient Reserve?
At present the penalty prescribed by the Federal
Reserve Board is an amount equal to an interest charge
at a rate two per cent, above the current discount rate
for ninety-day commercial paper. The regulations of
the Board provide further that an additional penalty
may be imposed in case a member bank is repeatedly
deficient in its reserve.
73. How Is the Penalty Assessed?
Member banks located in reserve or central reserve
cities are required to make weekly reports to their Fed
eral reserve bank. These reports show net demand de
posits, time deposits, and required reserve. Banks not
located in a reserve or central reserve city are required to
make such reports semi-monthly, covering, respectively,
the first and second half of each month. The Federal re
serve bank maintains a record showing the daily balance
on the available reserve account of each member bank.
The average required reserve for the calendar week and
the average actual reserve for the same period are com
pared for banks located in reserve cities, and the aver
age deficiency for the week is thus determined. In the
case of a bank not located in a reserve or central reserve
city, the averages are taken for semi-monthly periods.
Penalties are assessed upon the basis of these compari
sons, and itemized bills are sent monthly to member
banks whose reserve accounts have become deficient.
For further particulars see our Circular No. 89, Revised.
[ 45 ]
74. What Is the Purpose of the Penalty for Deficient Re
serves?
Penalties for deficiencies in reserves are assessed for
the purpose of discouraging banks from depleting their
reserve accounts when called upon to meet unexpected
demands which can be provided for by rediscounting
paper with the Federal reserve bank. From the answers
to several of the preceding questions, it will be perfectly
evident that the lending power of a Federal reserve bank
is affected far more by checking against a reserve ac
count than by rediscounting paper to the same amount.
To be exact, $1,000 withdrawn from a reserve account
affects the lending power of a Federal reserve bank to
the extent of $1,625.
75. How May the Reserve Account of a Member Bank Be
Opened?
The reserve account may be opened in any of the
following ways:
( 1) By
gold, lawful money, or Federal
depositing
reserve notes with the Federal reserve bank.
(2) By
checks drawn on correspon
dents on the Federal reserve bank's par list or by a
deposit by a correspondent with any Federal reserve
bank or branch for the credit of the applying bank
with its Federal reserve bank.
(3) By
with the Federal reserve
bank.
depo siting
red isco un ting
76. For What Items Is Immediate Credit Given?
Immediate credit will be given for gold, gold certifi
cates, silver certificates, United States notes, Federal
[46]
reserve notes, Federal reserve bank notes, the proceeds
of paper rediscounted, checks drawn on the Treasurer
of the United States, and, in Richmond, for checks drawn
on banks in Richmond, Virginia, or, in Baltimore, for
checks drawn on banks in that city. Immediate credit
is not given for checks on out-of-town banks (except
those bearing the Immediate Credit Symbol, see Ques
tions Nos. 99 to 101) because the Federal reserve bank
cannot count as reserve items in transit, but only col
lected funds.
77. How May a Member Bank Keep Track of the Balance
to Its Credit on the Books of the Federal Reserve Bank?
By charging the items sent to the Federal reserve
bank in a special account on its general ledger, and
transferring such charges to its reserve account upon
the exact dates on which credit will be given by the
Federal reserve bank. These dates will be indicated in
acknowledgments of receipt sent out by the Federal
reserve bank. Of course, credits to reserve account
should be made in the same way. Further suggestions
with reference to, and proper maintenance of, a reserve
account will be found in our Circular No. 45-b.
78. Are There Any Limitations upon the Deposits Which a
Member Bank May Keep with Other Banks?
No member bank may keep on deposit with any state
bank or trust company, which is not a member bank, a
sum in excess of ten per cent, of its own paid-up capital
and surplus.
[47}
VI. Collections, Transfers, and
Currency Shipments
79. Does the Federal Reserve Bank of Richmond Maintain
a Collection Department?
Yes. Through this department, checks and drafts
drawn upon national banks, all state bank members,
and all non-members, whose names appear on the par
list, can be collected and credited without expense to
or deduction from the accounts of member banks.
Through another department, bills, notes, drafts, and
other time items can be collected and the proceeds
credited upon receipt.
COLLECTION SYSTEM.
80. What Checks or Drafts Will Be Received by the Federal
Reserve Bank of Richmond for Collection?
Checks and drafts on Federal reserve banks and their
branches, on all member banks in the United States,
whether national or state banks, and on all non-mem
ber banks in the United States, upon which checks can
be collected at par, will be received for collection by the
Federal Reserve Bank of Richmond. Checks on non
member banks whose names are not on the par list are
not received for collection.
81. What Is the Par List?
In addition to all national banks and state bank mem
bers, a very large proportion of the state banks (not
members of the Federal Reserve System) have agreed
[48}
to remit at par for checks drawn upon them. The names
of the state banks on the par list are published twice a
year by the Federal Reserve Board, and changes are
noted each month in a supplement issued in connection
with the Federal Reserve Bulletin published by the Fed
eral Reserve Board. Copies of the par list and supple
ments (bringing the par list down to date) will be fur
nished to any bank on application.
82. What Proportion of Banks in the United State? Is on the
Par List?
More than ninety per cent.
83. What Proportion of Banks in the Fifth Federal Reserve
District Is on the Par List?
Sixty-four per cent. There are 2,143 banks in the
District, of which 1,367 are on the par list. These fig
ures are as of June 30, 1920.
84. How Should Checks Be Sent to the Federal Reserve
Bank for Collection?
Checks should be sent to the Federal reserve bank for
collection in regular cash letters, and, where the number
of checks sent at any one time is considerable, a separate
letter should be made up for each maturity (see time
schedule), and only checks available on the same ma
turity date should be included in one letter. That is to
say, items acceptable for immediate credit should be
included in one letter; items available one day after
receipt (see time schedule),in another letter; items avail
able two days after receipt, in another letter; and so on.
Where the items sent are few in number, a single letter
form may be used; but on this form the items should
[49]
be grouped as to maturities, with one total for im
mediate credit items, another for items available one
day after receipt, another for items available two days
after receipt, and so on. The Federal reserve bank will
acknowledge receipt of all such sendings, and the
acknowledgment slip will indicate the day upon which
each amount is to be credited in the reserve account of
the member bank. As stated under Question No. 85,
there is no difficulty whatever in the operation of this
plan.
85. When Is Credit Given for Checks on Banks on the Par
List Which Are Sent to the Federal Reserve Bank by
a Member Bank?
The Federal reserve bank issues a time schedule
which embraces all points upon which collection can be
made. This schedule is divided into various sections,
designated as “immediate credit,” “one day,” “two
day,” “three day” points, etc. All items in the “im
mediate credit” section are credited immediately to the
reserve account of the member bank. Other items are
credited to the deferred credit account of the member
bank and transferred to the reserve account after the
lapse of time indicated in the time schedule. This plan
is entirely simple in operation.
86. Why Is Not Immediate Credit Given for All Items as
Soon as They Are Received?
Because items in transit are not money and cannot be
counted as reserve by a Federal reserve bank until
they are converted into money. Some of these items
require one day, some two days, some three days, and
[ 50]
so on. The volume of items in transit is what is techni
cally known as “float.” One of the most serious defects
of the old National Banking System was that items in
transit could be counted as reserve, with the result
that, whenever circumstances required reserves to be
drawn on, the system broke down because such a large
part of the reserve had no real existence. In eliminating
the practice of counting float as reserve, the Federal
Reserve System has merely squared theory with facts
and made impossible a condition which was always pro
ductive of disaster in time of trouble.
87. Are Any Charges Made for Collecting Checks?
No.
88. Are Any Charges Made for Collecting Bills, Notes, Cou
pons and Other Items?
No charge is made by the Federal reserve bank to
member banks for making time collections payable in
any city in which there is a Federal reserve bank or
branch. Time collection items payable in other cities are
subject to the exchange charge made by the collecting
bank at the point of payment. The Federal reserve
banks, however, make a charge of fifteen cents per item
for all drafts, notes, etc., returned unpaid. The purpose
of this charge is to prevent the use of the Federal reserve
bank for transmitting dunning drafts, and not to make
money or cover expenses.
89. When Are Checks That Are Drawn on Member Banks
and Sent to Them by Federal Reserve Banks Charged to
Their Reserve Account?
All checks drawn on a member bank and sent for
collection to or through a Federal reserve bank are dis-
[50
patched by the Federal reserve bank direct to the mem
ber bank on the day of receipt. When these letters are
dispatched they are charged by the Federal reserve
bank to a deferred debit account, and the charge is
transferred to the reserve account of the member bank
(on which the checks are drawn) on the first day upon
which returns could be received from the member bank,
provided they are made promptly upon receipt of the
items by the member bank. Proper allowance for delays
in the mails is always made upon receipt of advice of
such delays from the member bank. For further particu
lars see our Circular No. 89—Revised.
90. What Is Meant by the Direct Routing of Checks?
It frequently happens that a member bank is so
situated that it can dispatch items payable in another
Federal reserve district direct to the Federal reserve
bank (or branch) of that district, and save considerable
time thereby. Where the member bank has items of
considerable size, or a considerable number of items
which can be handled in this way, direct routing is
encouraged. No member bank, however, should under
take the practice of routing items direct to another Fed
eral reserve bank (or branch) without first communi
cating with its own Federal reserve bank and obtaining
permission to do so. At the time this permission is
granted full directions will be given and sample forms
furnished. It is absolutely necessary that these direc
tions be followed and that proper forms be used in
order to insure the prompt receipt of credit by the
member bank in its reserve account with its own Fed
eral reserve bank.
[SO
ADVANTAGES OF COLLECTION SYSTEM.
91. What Are the Advantages of Collecting Checks Through
the Federal Reserve Bank?
First, greater economy in collecting these items and
avoidance of the necessity of maintaining balances with
correspondents in various cities in order to obtain check
collection facilities.
Second, most direct routing of items possible, with a
corresponding reduction in the length of time items are
outstanding. This results in the elimination or reduc
tion of float and enables member banks and their cus
tomers to learn at the earliest possible moment whether
items have been paid or dishonored, and to have the
funds represented by the items available for use more
quickly.
92. How Has the Collection System of the Federal Reserve
Banks Benefited Industry and Commerce?
First, by shortening the time necessary to make col
lections. Under the old system it was necessary for an
item to reach its destination and the returns to come
back; and, as these returns were usually in the shape of
a bank draft on some other point, an additional period
of one or more days was necessary to complete the trans
action. By the establishment of the twelve Federal
reserve banks and their branches, and by the inaugu
ration of settlements by wire through the leased wire
system (which connects all the reserve banks and their
branches), payment is obtained in most cases in onehalf of the original time.
Second, by concentration of an enormous volume of
[53]
items in one system, the volume travelling in one direc
tion is largely offset by the volume going in the other
direction. A still further economy in this respect is
gained by the fact that all Federal reserve banks and
branches are included in one daily settlement made by
means of wire advices. The effect of this system is to
reduce to a minimum the necessity for the transfer of
actual money in the settlement of exchanges.
Third, the necessity for the transfer of money to
make settlement is still further reduced and practically
eliminated by the establishment of the Gold Settlement
Fund in Washington, which is participated in by all
Federal reserve banks and, either directly or indirectly,
by their branches. This enormous saving to the business
interests of the country in time and in the expense cov
ering the cost and risk of the transportation of money
is due to the collection system of the Federal reserve
banks.
93. To What Extent Are the Banks of the Fifth District
Making Use of the Collection System?
In 1918 the total number of checks handled by the
transit department of the Federal Reserve Bank of Rich
mond (including that of the Baltimore Branch) was
12,020,068, amounting to more than seven billions of
dollars. The total number of checks handled in 1919
was 20,934,355, amounting to more than nine billions of
dollars. The daily average in 1918 was 39,540 checks,
amounting to $23,399,000, while the daily average in
1919 was 69,319 checks, amounting to $30,808,000. In
addition to this enormous volume of clearing operations
during 1919, there were handled 79,627 direct routing
[ 54 }
letters containing items aggregating more than $1,500,-
000,000.
TRANSFERS OF FUNDS.
94. How May Member Banks Use the Federal Reserve Bank
for the Transfer of Funds?
In two ways: by wire transfers, and by Federal reserve
exchange drafts.
95. How May Wire Transfers Be Made?
A member bank may make wire transfers without
cost through its Federal reserve bank to any other Fed
eral reserve bank or branch for its credit with any
member bank. Telegrams addressed to the Federal re
serve bank for this purpose may be sent “collect.” Or
the member bank may request its correspondent in
another district to make a transfer to its own Federal
reserve bank for its own use of funds which it has to its
credit with its correspondent. The correspondent, if a
member of the Federal Reserve System, can effect the
transfer immediately and without cost to itself. All
Federal reserve banks and branches are connected by
leased wires which enable them to make these transfers
promptly and without charge.
96. What Are Federal Reserve Exchange Drafts?
Any member bank may make arrangements with its
Federal reserve bank to draw drafts upon it, using a
special form provided for this purpose by the Federal
reserve bank. Such drafts are known as“Federal Reserve
Exchange Drafts,” and will be accepted for immediate
credit, but subject to final payment by any other Fed[ 55 ]
eral reserve bank or branch. The member bank issuing
such drafts agrees to notify its Federal reserve bank of
all drafts so issued, using a special advice form for the
purpose, which form is mailed upon the day upon which
the drafts are issued. Upon receipt of this form, the
Federal reserve bank charges the drafts to the account
of the member bank and holds the funds to meet the
drafts when presented for payment. Any Federal reserve
bank or branch paying such a draft can immediately
reimburse itself through the Gold Settlement Fund,
through which settlements are made daily, and the ac
tual drafts are forwarded by mail to the Federal reserve
bank or branch upon which they are drawn. Up to this
time, Federal reserve exchange drafts cannot be drawn
for amounts greater than $5,000 each. For further in
formation with reference to this subject, see our Circular
No. 81.
CURRENCY SHIPMENTS.
97. What Facilities in Shipping Currency Does the Federal
Reserve Bank of Richmond Afford?
Shipments of gold coin and gold certificates may be
made to the Federal Reserve Bank of Richmond by
either member or non-member banks and the transpor
tation cost will be borne by the Federal reserve bank,
provided the regulations for making such shipments are
observed by the shipping bank. Mutilated gold coin
will be accepted at bullion value, but, until further
notice, the cost of abrasion from ordinary use will be
absorbed by the Federal reserve bank. Transportation
charges on shipments of currrency to and from member
[56]
banks only will be borne by the Federal Reserve Bank
of Richmond, provided the regulations with respect to
sealing and shipment are duly observed. And, until
further notice, the cost of necessary telegrams relating
to such shipments will also be paid by the Federal Re
serve Bank of Richmond. National bank notes should
not be sent to the Federal reserve bank for exchange or
redemption; such shipments should be made to Wash
ington as heretofore. For further information on this
subject, see our Circular No. 84.
98. Are Member Banks Located in a City in Which There Is
a Federal Reserve Baiik or Branch in a Position to Offer
Special Advantages to Country Banks Maintaining Ac
counts with Them?
This is naturally the case. If the country bank is a
member of the Federal Reserve System its check on its
correspondent located in a Federal reserve city (or
branch city) is acceptable for immediate credit by the
Federal reserve bank (or branch) located in the same
city. Country banks that are not members of the Sys
tem, but that are on the Federal reserve par list, can
use checks on these city correspondents in remitting for
items forwarded to them by the Federal reserve bank
of the district.
IMMEDIATE CREDIT SYMBOL.
99. What Facility, if Any, Has the Federal Reserve Bank of
Richmond Provided by Which Member Banks Located
in Other Cities Can Overcome This Inequality?
The Federal Reserve Bank of Richmond has offered
to its member banks, and particularly to those carrying
[57}
the accounts of other banks, the use of the Immediate
Credit Symbol. Checks bearing this symbol are accept
able for immediate credit by the Federal Reserve Bank
of Richmond and, therefore, can be used by country
banks to promptly replenish their reserves, or to cover
checks drawn upon them and sent to them by the
Federal Reserve Bank of Richmond. By this means
banks located in cities other than a Federal reserve or
branch city can offer the same advantages to their bank
customers that can be offered by the bank located in
the Federal reserve or branch city.
100. Explain the Nature and Use of the Immediate Credit
Symbol.
The Immediate Credit Symbol, of which an illus
tration is given in the accompanying cut, is a
copyrighted symbol, the use of which is con
trolled by the Federal Reserve Board and the
Federal reserve bank. A member bank desiring to obtain
the privilege of granting to its customers the right to use
this symbol upon checks drawn upon it must apply to its
Federal reserve bank for permission to do so.The member
bank is then required tosign a contract agreeing to certain
conditions which are necessary to insure the proper use
of the symbol. One of these conditions is that the right
to use the symbol can be granted to one of its customers
only upon the customer’s signing a contract with the
member bank. This contract is designed also to insure
the proper use of the symbol. The customer, usually a
country bank, to whom the right to use the symbol has
been granted, can then affix it to any or all of the checks
[58]
drawn by him on the member bank through which the
right to use the symbol is granted.
These checks are accepted for immediate credit by
the Federal reserve bank or branch indicated in the
symbol, and, under an arrangement covered in the con
tract with the member bank on which they are drawn,
they are charged immediately to the reserve account of
that bank. Other checks not bearing the immediate
credit symbol are, of course, sent in the usual way, and
charged only after the expiration of the proper transit
time. For further particulars see our Circular No. 93.
101. Can the Immediate Credit Symbol Be Used on Checks
Which Are to Be Sent Out of the District?
It can be so used, but wherever the amount invoived
is considerable we would strongly advise that the cus
tomer bank communicate with its member bank corre
spondent direct and ask that the payment be made in
the other district by a wire transfer, and when the
amount is very large a transfer by wire should always
be made. This can be accomplished promptly and with
little or no expense, and the member bank on which the
draft is made will have the opportunity to protect its
own reserve account more promptly and more effect
ually. Moreover, until the banks in other districts be
come more familiar with the use of the symbol and learn
that they can obtain credit for a check bearing the sym
bol in the same time that credit can be obtained for a
check drawn on a bank in the Federal reserve city indi
cated in the symbol, there is danger that the person
remitting by this means may not obtain the full advan
tage which should accrue to the use of the symbol.
[59]
VII. State Bank and Trust Com
pany Membership
In this section of this book we endeavor to group the
questions and answers relating specifically to state bank
and trust company membership in the Federal Reserve
System. State banks and trust companies contemplating
membership and those that are already members will
find many matters of interest in the preceding sections
of the book, which deal with the relations between a
Federal reserve bank and its member banks. It is
manifestly unnecessary to repeat or duplicate that in
formation in the following section.
ELIGIBILITY— TESTS— CHARTER RIGHTS.
102. What State Banks and Trust Companies Are Eligible
for Membership?
Any bank or trust company incorporated by a special
law of any state, or organized under the general laws of
any state, and having a paid-up, unimpaired capital
stock at least equal in amount to that which would be
required of a national bank in the same place, is eligible
for membership. The capital requirements of national
banks (and state banks applying for membership) are as
follows:
In cities or towns not exceeding 3,000
inhabitants...............................................$2 5,000.
In cities or towns exceeding 3,000 but not
exceeding 6,000 inhabitants................... 50,000.
[60]
In cities or towns exceeding 6,000 but not
exceeding 50,000 inhabitants.................$100,000
In cities exceeding 50,000 inhabitants........200,000
103. What Tests Are Applied in Considering the Application
of a State Bank or Trust Company for Membership?
First, the financial condition and the character of the
management of the applying institution.
Second, whether the powers authorized in its charter
and exercised by it are consistent with the Federal Re
serve Act.
Third, whether the laws of the state in which the
applying bank or trust company is located contain pro
visions likely to prevent its proper compliance with the
provisions of the Federal Reserve Act. The present laws
of the states embraced in the Fifth Federal Reserve
District contain no such provisions.
104. If, When a State Bank Applies for Membership, It
Appears That There Are Provisions in Its Charter, or
Conditions Existing in the Bank Which Are Inconsistent
with Membership in the Federal Reserve System, Is
the Application Refused?
Not necessarily. In such case, unless the objection is
radical, the application is accepted on condition that the
officers and directors of the applying bank agree to cer
tain conditions laid down by the Federal Reserve
Board for the purpose of overcoming the objection. In
every case the applying bank is given ample time and
opportunity to consider these conditions.
105. Does a State Bank or Trust Company Retain Its Charter
Rights When It Becomes a Member?
Yes. It retains its full charter and statutory rights as
[6,}
a state bank or trust company. It is subject to the pro
visions of the Federal Reserve Act, which relate specifi
cally to member banks, and to the regulations of the
Federal Reserve Board, and must conform to those
provisions of law imposed on national banks which
prohibit such banks from lending on or purchasing
their own stock, which relate to the withdrawal or im
pairment of their capital stock, and which relate to
the payment of unearned dividends; but otherwise a
state bank member is permitted to exercise any charter
rights not in conflict with the Federal Reserve Act or
regulations of the Federal Reserve Board.
PROCEDURE.
106. What Is the Procedure for Becoming a Member of the
Federal Reserve System?
First, the adoption by the board of directors of a
resolution making application for stock in the Federal
reserve bank (F. R. B.—Form 83-a).
Second, formal application for the requisite number
of shares with agreement to pay for them and to comply
with the requirements of the Federal Reserve Act, etc.
(F. R. B.—Form 83-a).
Third, the three following exhibits are to be attached
to the application:
E x h ib it O n e : A statement of condition as of a given
date, signed by three directors and duly
certified by the cashier or secretary.
E x h ib it Two: A certified copy of charter or articles of
incorporation of the corporationt with
amendments.
[62]
E x h ib it T h r e e : A statement containing certain supple
mentary information (Supplement to
F. R. B.—Form 83-0).
All necessary forms will be furnished on request.
Whenever it is possible to do so, duplicate copies of
the report of the last examination of the applying bank
or trust company made by the state banking depart
ment, together with copies of all correspondence relat
ing thereto, should accompany the application. When
ever it is practicable to do so, a representative of the
Federal Reserve Bank of Richmond will be sent without
expense to the applying bank to assist in preparing the
papers necessary in connection with the application for
membership.
On completion of the application, all the necessary
papers and documents are examined by the executive
committee of the Federal Reserve Bank of Richmond
and forwarded to the Federal Reserve Board in Wash
ington, with the formal recommendation of the com
mittee. The decision of the Federal Reserve Board is
transmitted in the form of an official letter through
the Federal Reserve Agent to the applying bank,
which usually forwards its acknowledgment and ac
ceptance by wire.
The Federal Reserve Board then instructs the Federal
Reserve Bank of Richmond to proceed with the com
pletion of the membership, and the Federal Reserve
Bank of Richmond communicates with the applying
bank with reference to the deposit of its required re
serve and payments upon its application for capital
stock. The officers and executive committee of the Fed[ 63]
eral Reserve Bank of Richmond endeavor to handle all
applications as promptly as possible, and, should any
matters arise necessitating correspondence, the applying
bank is notified at once.
107. How May the Reserve Account of a Member Bank Be
Opened?
For answer to this question, see Question No. 75 on
page 46.
108. For How Much Stock Must a Member Bank Subscribe?
For an amount equal to six per cent, of its paid-up
capital and surplus. One half of the subscription must
be paid in at once; the other half is subject to the call of
the Federal Reserve Board. No call has yet been issued
for any part of the second half of any member bank’s
subscription. If a member bank increases or decreases
its capital stock or surplus, it must increase or decrease
accordingly its stock in its Federal reserve bank.
109. If a State Bank Is Permitted by the Law of Its State to
Lend to Any One Person an Amount Greater Than
Ten Per Cent, of Its Capital Stock, Does It Give Up This
Right by Becoming a Member?
No. The loan limit under the state law is not inter
fered with, but a state bank member may not redis
count with the Federal reserve bank any of the paper of
a borrower who is liable to it in an amount in excess of
ten per cent, of its unimpaired capital and surplus un
less all of such borrower’s paper offered for rediscount
is secured by not less than a like face amount of bonds
or notes of the United States, issued since April 24,
1917, or certificates of indebtedness of the United States,
[64]
but in no event more than twenty per cent. This pro
vision as to paper secured by Government obligations
will become inoperative on December 31, 1920. A state
bank member may, however, rediscount eligible notes
of other borrowers.
REPORTS— EXAMINATIONS— WITHDRAWALS.
110. Does a State Bank or Trust Company Which Is a Mem
ber of the Federal Reserve System Make Reports to the
Comptroller of the Currency, or Is It Subject to Exami
nation by the Comptroller of the Currency?
No. State banks and trust companies which are mem
bers of the System are not in any way under the juris
diction of the Comptroller of the Currency. They are
required to make in each year not less than three re
ports of condition to the Federal reserve bank of which
they are members, on dates to be fixed by the Federal
Reserve Board, and semi-annual reports of earnings
and dividends. No publication of these reports is re
quired. In order to prevent duplication of work, they
are usually called for as of dates upon which state
ments are called for by the state banking departments.
All member banks are required to make semi-monthly
reports of reserve condition upon forms provided by the
Federal reserve banks. This is necessary in order to
enable the Federal reserve banks to determine whether
proper reserve balances are being maintained. These
reports are very simple, and the labor involved is slight.
Member banks in reserve and central reserve cities are
required to make these reports weekly, instead of semi
monthly.
111. To What Examinations Would a State Bank'or Trust
Company Member Be Subject?
State bank members are subject to examinations
made by direction of the Federal Reserve Board or the
Federal reserve bank by examiners selected or approved
by the Federal Reserve Board. But, in order to avoid
duplication, examinations made by state authorities
are accepted by the Federal reserve bank, so that, ex
cept as noted in the next succeeding answer (see Ques
tion No. 112), no special examinations are made, and
member banks are not subject to additional expense for
examinations.
The Federal Reserve Bank of Richmond has made a
practice of co-operating with the state bank examiners
in the Fifth District and frequently furnishes one or
more examiners to assist in the examination made by
the state banking department. The state bank member
in such case is subject to no additional expense for the
examination.
112. Then
Membership Would Not Involve Extra Exami
nation?
Not necessarily; but the Federal reserve bank may,
of course, at any time make a special examination,,
should the necessity arise. These cases, however, are
rare, and whenever such special examinations are made
they are of marked benefit to the member bank, and are
so appreciated.
113. May a State Bank Withdraw from Membership in a
Federal Reserve Bank?
Yes, upon giving six months’ written notice to the
Federal Reserve Board. The only other restriction upon
[66]
withdrawal of a state bank is the provision of the
Federal Reserve Act, which does not permit any Federal
reserve bank, except upon express authority of the
Federal Reserve Board, to cancel within the same
calendar year more than twenty-five per cent, of its
capital stock for the purpose of effecting voluntary with
drawals during that year. Applications for withdrawal
must be dealt with in the order in which they are filed
with the Board.
114. What Becomes of the Stock In a Federal Reserve Bank
Held by a State Bank That Ceases to Be a Member?
The stock is surrendered and cancelled and the mem
ber bank receives a sum equal to the amount paid in on
its subscription and one-half of one per cent, per month
from the date of the last dividend, but not to exceed
the book value of the stock (in case the earnings of the
Federal reserve bank are not sufficient to pay the onehalf of one per cent, per month), less any liability of the
bank to the Federal reserve bank.
115. May a Bank Forfeit Its Membership?
Yes. The Federal reserve bank may require a bank
which fails to comply with the provisions of the law or
the regulations of the Federal Reserve Board to sur
render its stock in the Federal reserve bank and forfeit
all rights and privileges of membership; but member
ship may be restored upon proof of compliance with the
conditions imposed.
[67}
STATE RESERVE REQUIREMENTS.
116. What Are the State Reserve Requirements for State
Banks in This District?
District of Columbia: No specific law with reference to
reserves.
Maryland: Banks of discount and deposit must keep
on hand a reserve of five per cent, of their demand
deposits in cash and an additional reserve of ten per
cent, of such deposits in cash or bank balances. Trust
companies must keep on hand a reserve of ten per
cent, of their demand deposits (not including deposits
of the City of Baltimore, secured by Baltimore City
stock) in cash or in bank balances, and a further re
serve of five per cent, of such deposits in bank balances
or in United States, Maryland, or Maryland munici
pal securities.
North Carolina: Every bank and trust company must
keep on hand a reserve of available funds (cash or
balances due from solvent banks) equal to fifteen per
cent, of all demand deposits and deposits payable within
thirty days, and five per cent, on all postal savings
deposits and deposits subject to withdrawal after not
less than thirty days’ notice. No reserve is required
against deposits secured by North Carolina or United
States bonds. State bank members are required to
maintain only such reserves as are required by the
Federal Reserve Act.
South Carolina: No reserve is required of state banks.
Virginia: Every bank and trust company must main
tain a reserve of ten per cent, of its demand deposits
and three per cent, of its time deposits.
[68]
West Virginia: All banking institutions are required
to keep on hand a reserve of at least six per cent, of
their demand deposits in lawful money, and an addi
tional reserve of nine per cent, in lawful money or bank
balances. State bank members are required to maintain
only such reserves as are required by the Federal Re
serve Act.
As a matter of course, a state bank becoming a mem
ber of the Federal Reserve System would be required,
as a member bank, to carry the reserves specified in the
Federal Reserve Act, whether the law of the state in
which it was located required a reserve or not.
OBJECTIONS RAISED TO MEMBERSHIP.
117. What Are the Principal Objections Raised to Member
ship?
The principal objections raised to state bank mem
bership are:
(1) T h e l o ss of interest on the reserve balance
carried with the Federal reserve bank.
(2) The
of exchange, or rather the jact that
non-member banks are able, in some cases, to charge
exchange, while member banks are not.
(3) T h e
that a great deal of “red
tape” is involved in doing business with the Federal
reserve bank.
(4) T h e f a c t that statements of customers are
required in connection with paper offered for redis
count.
(5) A
expense and trouble due to ex
planations and reports.
[69]
loss
im pressio n
d ditional
118. Why Is Interest Not Paid on the Reserve Balance
Carried with the Federal Reserve Bank?
Because it is wrong in principle, and would defeat one
of the most important objects for which the Federal
Reserve System was established; namely, “to afford
means of rediscounting commercial paper.” If a Federal
reserve bank were compelled to use at all times a large
percentage of its resources to purchase paper in the open
market for the purpose of earning interest to be paid to
member banks on their reserve deposits, it is manifest
that this would absorb its funds to such a degree as to
leave itself without adequate resources to meet the needs
of its member banks in case of sudden emergency or for
heavy seasonal requirements.
Moreover, even if this were not the case, member
banks would probably lose far more than they would
gain if Federal reserve banks should pay them interest
on their reserve deposits. The reserve deposits held by
all Federal reserve banks amount to, approximately,
$1,800,000,000. Interest at two per cent, on this amount
would require the Federal reserve banks to keep invested
at all times at least $900,000,000 at four per cent., and
the competition which the necessary investment of this
enormous sum would make inevitable would tend so to
reduce the interest rates in the open market, under
ordinary conditions, that the loss to member banks on
all their loans would doubtless far exceed the income
they would derive from the two per cent, interest on
reserve deposits.
The Federal reserve banks are not intended to be
money-making institutions, and anything that would
C?o}
force them to become money-making institutions would
inevitably result in placing them in direct competition
with their own member banks, not only in the matter
of loans but also as competitors for bank balances. It is
no more logical for a Federal reserve bank to pay inter
est on the reserve balance of a member bank than it
would be for the member bank to pay itself interest
on the cash in its own vaults.
119. Is It True That Banks Lose Money by Joining the
Federal Reserve System Through Loss of Interest
on the Idle Balance Carried with the Federal Reserve
Bank?
The failure to collect such interest apparently results
in a direct loss. This is much more than offset, however,
by the fact that, having the benefit of a substantial and
reliable reserve, which can be availed of in case of need,
the member bank can afford to lend up its funds much
more closely than would otherwise be practicable.
Moreover, it can make contracts for certain lines of
credit extending over a whole season with entire cer
tainty of its ability to keep its contract, and, in the
presence of an efficient reserve system, it can operate
with less reserve than would be otherwise possible. It
will be remembered that when the Federal reserve banks
were first organized one of the earliest steps taken was
to reduce materially the required reserves of all three
classes of national banks.
120. How May a Member Bank Offset the Loss of Interest
on Its Balance with the Federal Reserve Bank?
By studying the Federal Reserve System, acquainting
itself with its possibilities, and availing itself of the
[ 7i]
services offered by the System. It is entirely possible
for any bank, without serious inconvenience, so to re
adjust its methods of doing business that its connection
with the Federal Reserve System will result in a sub
stantial profit. This is not a theory, because the reports
of the Comptroller of the Currency show that the profits
of all national banks during the period in which the
Federal Reserve System has existed have far exceeded
the profits made during any previous period of similar
length. This is in part due to growth, of course, but
the growth under the Federal Reserve System has far
exceeded the growth in any other period of banking
history. Moreover, many state bank members have
testified that their connection with the System has not
only offset all apparent “losses,” but has resulted in
positive profit.
121. What Is Being Done with Reference to the Objection
That Non-Member Banks May in Many Cases Continue
to Charge Exchange on Checks Drawn on Themselves,
While Member Banks Are Not Allowed to Make Such a
Charge?
The par list of the Federal Reserve System is being
gradually extended, and on June 30, 1920, it embraced
27,996 of the 30,153 banks in the United States. That
the list will be further extended and will eventually em
brace all solvent banks in the United States, is a foregonecondusion. For a further discussion of the par collec
tion system of the Federal reserve banks see pages 48-55.
122. What Can Be Said in Reply to the Objection That “Red
Tape” Is Involved in Dealing with the Federal Reserve
Banks?
It is manifest that, since a Federal reserve bank acts
[7*]
under the law and the regulations of the Federal Re
serve Board, it is necessary that member banks in
dealing with it should be required to observe certain
reasonable forms and to transact their business with a
reasonable amount of regularity. These requirements
are only irksome in the beginning, if at all; a very little
practice makes every one of them a matter of course,
and in a very short time the member bank becomes ac
customed to transacting business in a uniform and reg
ular manner and sees the great advantage of doing so,
and is itself benefited thereby. It is only by observing
a reasonable degree of uniformity that continual mis
takes and misunderstandings can be avoided.
123. What Objection Is Oftenest Raised?
The objection oftenest raised by the new member
bank is with respect to the information required in
connection with paper offered for rediscount. In no case
does the Federal reserve bank ever require information
which the prudent banker would not, or should not,
seek to have before making the loan to his customer,
and in very many cases member banks have avoided
serious losses by obtaining in advance of making loans
the information which the Federal reserve bank would
require of them if and when such notes are offered for
rediscount
124. It Has Been Said That Rediscounting Is a Complicated
and Time-Consuming Transaction. Is This True?
On the contrary, it is very simple. The member bank
selects the paper from its portfolio, lists it upon a re
[73]
discount application sheet furnished by the Federal
reserve bank, and sends the sheet and the paper, ac
companied, when necessary, by copies of the statements
of borrowers on file with the bank. Upon receipt and
acceptance of the offering, the Federal reserve bank
gives credit for the proceeds upon the same day with
advice to the member bank. On the back of the redis
count application sheet are printed simple but complete
directions for the selection of paper eligible for redis
count, and the sheet itself clearly indicates how the
paper is to be listed and what information is to be given
with respect to each note.
125. Are the Objections Raised on the Ground of Additional
Expense and Trouble Due to Examinations and Re
ports Well Founded?
It is believed that they are not. It is the testimony
of state bank members that, while some slight trouble
and expense are incurred in making reports, particularly
where the accounting system of the member bank is
incomplete or imperfect, the advantage to the member
bank itself of compiling in succinct form the information
asked for in the report far outweighs the trouble and
expense of securing it. State bank members have the
peculiar advantage of enjoying the benefits of the Fed
eral Reserve System while retaining all the privileges
granted to them by their charters or the laws of their
states, except such privileges as may be in direct con
flict with the express terms of the Federal Reserve Act.
[ 74 ]
ADVANTAGES OF MEMBERSHIP.
126. What Advantages Are Afforded a State Bank by Mem
bership in the Federal Reserve System?
The advantages offered are of two kinds.
The first are general in nature, and arise from being
a part of a strong banking system, which strengthens
the whole financial, industrial, and commercial situation
of the country. The member bank is greatly strength
ened by the support of the System, and the public is
quick to appreciate the added security. Since such a
system can reach its highest efficiency only when it
embraces all commercial banking institutions, the addi
tion of any institution to its membership necessarily
gives it additional strength.
The second are the special benefits that accrue from
membership, among which are:
security.
(2) G
ability of a member bank to grant
accommodation to its customers.
(3) I
ability to obtain rediscounts.
(4) E asy transfer offunds by draft or telegraph.
(5) S
of currency without cost.
(6) P
in the free check collection
service of the Federal Reserve System.
(1) I n c r e a s e d
reater
ncreased
h ipm ents
articipatio n
127. How Is Increased Security Afforded by Membership?
Through its own large reserves and through the power
to discount with all other Federal reserve banks, com
bined with the power of issuing Federal reserve notes,
[ 75 ]
a Federal reserve bank can come to the assistance of
every well-managed member bank in time of need.
This additional security reaches (a) to the borrow
ers of the member bank, because they can count with
certainty on reasonable lines of credit for agricultural,
industrial, and commercial needs; (b) to the depositors,
because they can count upon the repayment to them of
their deposits by the member bank, through the greater
ability of the member bank to rediscount eligible paper
with the Federal reserve bank; and (c) to the stock
holders, because it strengthens the bank and insures the
ability to maintain its business relations with depositors
and borrowers without the many checks and interrup
tions incident to the operation of the old National
Banking System. Viewed solely as insurance, member
ship in the Federal Reserve System affords protection
and the means of growth which could not be purchased
by any reasonable annual premium, and we are con
vinced that, in time, no non-member will be able to com
pete for and solicit the business of the public on equal
terms with member banks.
12S. How Is the Banking and Financial System Strengthened
by the Admission of State Banks?
Through the concentration of reserves, which may be
likened to a wire cable each strand of which, taken alone,
is weak, but in combination can sustain an enormous
strain. The reserve of each bank is in itself relatively
weak, but, in combination with the reserves of other
members of the Federal reserve bank, can resist the
shock of financial panic.
[76]
129. How Does the Reserve Principle of the Federal Reserve
Banks Differ from That of the Old National Banking
System and the State Bank Systems?
Under the old national banking law, national banks’
reserves were carried as “cash in vault” and “deposits
with banks in reserve or central reserve cities.” Such
deposited reserves were loaned in large part, and, in time
of panics such as those that occurred in 1893,1902, and
1907, these reserve agents were in no position to pay
the reserves deposited with them without calling their
loans to such an extent as to add materially to the
difficulties of the situation. This redepositing and
pyramiding of reserves was one of the recognized evils
which the Federal Reserve Act has obviated in so far as
member banks in the Federal Reserve System are con
cerned. Through the mobilization of the reserves of its
members and its power of note issue, the Federal reserve
bank is able to convert eligible paper of members into
currency or credit, either of which is available to the
member bank on demand.
130. How Does the Principle of Central Reserves Give
Greater Safety to Member Banks?
By the principle of concentrating the reserves of all
the member banks of a district in one Federal reserve
bank, and of further centralizing the reserves of the
whole country by a system of rediscounting between
Federal reserve banks, the surplus reserve in one part
of the country is available for use in another part.
Since the seasonal demands vary as to time in different
localities, it is always possible to obtain needed funds
[77]
in one locality by drawing upon temporarily idle re
serves in another locality.
131. Is It Necessary for a Country Member Bank to Carrj a
Secondary Reserve in the Shape of Bank Balances?
No. If it has in its possession a sufficient amount of
paper eligible for rediscount, this in itself constitutes
a secondary reserve; and every well-managed bank al
ways has, or normally has, enough of such paper to en
able it to meet all sudden demands by rediscounting it
with its Federal reserve bank. The interest or discount
on such eligible paper is always larger than the interest
received on balances maintained with other banks.
132. How Does Membership Enable a Bank to Extend Ad
ditional Accommodation to Its Customers?
The ability to replenish reserves through rediscount
is a guarantee of ability to meet the requirements of cus
tomers. Well-managed member banks, therefore, even
when loaned up as to their own resources, will still be
able to count upon obtaining funds by rediscount to
meet further unexpected and urgent demands. The
rediscount provisions of the Federal Reserve Act were
established to afford guarantees that member banks
will be able at all times to care for the reasonable and
legitimate necessities of their customers. As long, there
fore, as a member bank does not undertake to transact a
business out of proportion to its working capital and
does not tie up its resources in speculative transactions
or capital loans, it can be certain of being able to take
care of the seasonal requirements of its customers.
C?8 ]
133. Is It True That the Smaller Banks Have Little, if Any,
Paper Eligible for Rediscount?
Many bank officers are under the impression that
their banks have no paper eligible for rediscount with a
Federal reserve bank, when such is by no means the
case. Any paper made by a solvent person, firm, or cor
poration, the proceeds of which have been used, or are
to be used, for a current industrial, commercial, or
agricultural operation, is eligible for rediscount. As a
matter of course, the amount which can be loaned to
any one borrower will depend upon his ability to repay,
as is indicated by a comparison between what he owns
and what he owes. This information, however, is no
more than any prudent banker should require in any
case.
134. Are Notes for Small Amounts Eligible?
Yes. The amount of a note does not affect its eligi
bility. As a matter of fact many of the small country
banks frequently discount notes for $25 or less. It is
manifest, however, that in offering paper to a Federal
reserve bank, a member bank will naturally select notes
of reasonable size in order to save itself the trouble
of listing a large number of items on its application
sheet. The Federal Reserve Bank of Richmond, how
ever, has never, on account of its smallness, rejected any
note offered to it for rediscount.
135. Of What Advantage to Member Banks Are the Transfer
and Collection Services of Their Federal Reserve Banks?
The Federal reserve banks have placed at the disposal
of member banks facilities never before approached
[79]
in this country. By the transfer service, funds can be
made immediately available in any part of the country.
Transfers in any amount are made by wire for the
credit of the member bank with any member bank in
any other Federal reserve district. This service is with
out cost to the member bank.
By a more direct routing and check collection than
was possible under the old system, the saving in time
is very considerable, and the aggregate float, the col
lecting cost of which has always been borne in one way
or another by the banks of the country, has been prac
tically cut in half.
136. Are the Country Banks at a Disadvantage as Compared
to the Banks in Cities Where the Federal Reserve Bank
or a Branch Is Located?
To a certain extent a bank located in a Federal
reserve or branch city enjoys some advantages. It is
able to operate with less vault cash. It can start its
collection items through the channels of the Federal
Reserve System more promptly and it can act more
promptly in restoring its reserve by immediately lodging
paper for rediscount with the Federal reserve bank or
branch. On the other hand, it must pay checks drawn
upon itself one or two days sooner than banks located in
other places. The Federal Reserve Bank of Richmond
has attempted to minimize the disadvantages borne by
the banks in other cities by bearing the cost of tele
graphic messages directing transfers to other Federal
reserve districts and ordering the shipment of currency
to member banks. It also bears the cost on currency to
and from the member bank, provided the member bank
[ 80]
observes the regulations covering such shipments (see
our Circular No. 84).
137. Do Not the Banks Located in Reserve and Branch Cities
Enjoy Exceptional Advantages Arising from Their Abil
ity to Secure the Accounts of Other Banks Who Are
Members of the Federal Reserve System, or Who
Have Occasion to Remit to the Federal Reserve Bank
or Branch of the District in Which They Are Located?
Banks located in Federal reserve and branch cities
formerly had a decided advantage with respect to such
accounts, and must always of necessity continue to
possess some advantages. All banks in the Fifth Federal
Reserve District, however, have been placed, as far as
possible, on an equality in this respect by the intro
duction and development of the Immediate Credit
Symbol system. For further particulars with respect
to the use of the Immediate Credit Symbol see our
Circular No. 93 and Questions Nos. 99-101 on pages
57- 59-
138. Is There Any Advertising Value in Membership in the
Federal Reserve System?
There is unquestionably a very substantial adver
tising value in membership in the Federal Reserve
System. Member banks have found that membership
increases their prestige and attracts business. The con
fidence of the public at large in the Federal Reserve
System is well-nigh boundless. It may be confidently
stated as a fact that the state banks (and banks gener
ally, of course) have received more advantage from the
Federal Reserve System, arising out of the following
single circumstance, than they have received from all
other sources combined. During the trying period
[8 0
through which this country passed, it was the supreme
confidence of the people in the ability of the Federal
Reserve Banking System to function properly that
induced millions of depositors to leave their money in
the banks of the country (non-member as well as mem
ber) instead of checking it out for hoarding purposes,
as was so frequently done in time of trouble or an
ticipation of trouble on former occasions. The Fed
eral Reserve System has justified this confidence, and
money flowed into the banks instead of out of them,
and their deposits increased as never before. But the
time is before us, in which the demands of depositors
(who are also borrowers) on their institutions will be
specific, rather than general. They are already asking
whether the institutions with which they are banking
are members of the Federal Reserve System or not, and
they will ask this question more and more.
VIII. Sundry Provisions
CLAYTON ANTI-TRUST ACT.
139.
What Is the Clayton Anti-Trust Act?
The Clayton Anti-Trust Act, approved October 15,
1914, provides:
(1) T h a t no ■person shall at the same time be a
director or other officer or employee of more than one
bank, banking association, or trust company organ
ized or operating under the laws of the United States
either of which has deposits, capital, surplus, and un
divided profits aggregating more than $5,000,000.
(2) T h a t no private banker or person who is a
director in any bank or trust company organized and
operating under the laws of a state having deposits,
capital, surplus, and undivided profits aggregating
more than $5,000,000, shall be eligible to be a director
in any bank or banking association organized or
operating under the laws of the United States.
(3) T h a t no bank, banking association, or trust
company organized or operating under the laws of the
United States, in any place having more than 200,000
inhabitants, shall have as a director or other officer or
employee any private banker or any director or other
officer or employee of any other bank, banking associa
tion, or trust company located in the same place.
The above provisions do not apply to mutual savings
banks not having a capital stock represented by shares,
and do not prohibit a person from being at the same
time a Class A director of a Federal reserve bank and
also an officer or director, or both, in one member bank;
[ 83 ]
or from being an officer, director, or employee of one
member bank and one other bank, where the entire
capital stock of the second is owned by the stockholders
of the first.
On May 15, 1916, Congress amended Section 8 of
the Clayton Act, and provided that nothing in the
Act shall prohibit any officer, director, or employee of
any member bank, or Class A director of a Federal
reserve bank, from being an officer, director, or em
ployee of not more than two other banks, if the per
mission of the Federal Reserve Board is first applied for
and if such other banks are not in substantial competi
tion with the member bank.
140. Does the Clayton Anti-Trust Act Affect State Bank
Members in the Federal Reserve System?
In an opinion dated September 10,1917, the Attorney
General of the United States held that the application
of the provisions of the Clayton Act to a state bank was
not affected by the fact that such bank was a member of
the Federal Reserve System.
FIDUCIARY POWERS.
141. What Are Fiduciary Powers?
Under Section 11(k) of the Federal Reserve Act, the
Federal Reserve Board is authorized and empowered
“To grant by special permit to national banks applying
therefor, when not in contravention of state or local
law, the right to act as trustee, executor, administrator,
registrar of stocks and bonds, guardian of estates,
assignee, receiver, committee of estates of lunatics, or
in any other fiduciary capacity in which state banks,
[84]
trust companies, or other corporations which come into
competition with national banks are permitted to act
under the laws of the state in which the national bank
is located.”
These powers are granted after application upon a
form provided by the Federal Reserve Agent, which
application is forwarded to the Federal Reserve Board
with his recommendation. Applications are granted by
the Federal Reserve Board and official notice is for
warded to the applying bank.
142. Are State Bank Members Authorized to Exercise
Fiduciary Powers?
No. The Federal Reserve Act makes no mention of
state bank members in authorizing the Federal Reserve
Board to grant these powers. The Board is permitted
to grant them only to national banks. State banks are
under the control of the laws of the state under which
they are chartered, but member state banks may exer
cise such powers if authorized by their charters or by
the law of the state to do so (see Question No. 105).
POSTAL SAVINGS DEPOSITS.
143. What Is the Effect of Membership in the Federal
Reserve System upon a Bank’s Right to Obtain Postal
Savings Deposits?
The law now provides that new or additional postal
savings shall be deposited with member banks only, and
state bank and trust company members are entitled
to receive postal savings deposits on a par with national
banks, according to the plan of distribution of such
deposits.
[85]
FEDERAL RESERVE BULLETIN.
144. What Is the Federal Reserve Bulletin?
The Federal Reserve Board publishes on the first of
each month the Federal Reserve Bulletin, which is its
official digest of financial topics of interest to member
banks, and which contains complete data and informa
tion in regard to current affairs ot the Federal Reserve
System, together with the rulings of the legal depart
ment of the Federal Reserve Board from time to time,
and the regulations and informal rulings of the Board.
The Federal Reserve Bulletin is the Board’s medium
ot communication with member banks of the Federal
Reserve System and is the only official organ or peri
odical publication of the Board. It is printed in two
editions, of which the first contains the regular official
announcements, the national review of business condi
tions, and other general matter, and is distributed with
out charge to the member banks of the Federal Reserve
System. The second edition contains detailed analyses
of business conditions, special articles, review of foreign
banking, and complete statistics showing the condition
of Federal reserve banks. For this second edition the
Board has fixed a subscription price of $4 per annum
to cover the cost of paper and printing. Single copies
will be sold at 40 cents. Foreign postage should be
added when it will be required. Remittances should be
made to the Federal Reserve Board.
Member banks desiring to have the Bulletin supplied
to their officers and directors may have it sent to not
less than 10 names at a subscription price of $2 per
annum.
[8 6 ]
No complete sets of the Bulletin for 1915, 1916, or
1917 are available.
REGULATIONS OF FEDERAL RESERVE BOARD.
145. How Are the Regulations of the Federal Reserve Board
Issued?
In pamphlet form. The general and special regulations
are obtainable on application to any Federal reserve
bank.
REGULATIONS OF THE FEDERAL RESERVE BANK OF
RICHMOND.
146. How Are the Regulations of the Federal Reserve Bank
of Richmond Issued?
In circular form. These regulations and circulars
embody all information and data a member bank should
have. Complete sets of current regulations are furnished
to state banks as soon as they become members.
[ 87 ]
Appendix
FORM SHOWING METHOD OF COMPUTING RESERVE TO BE CARRIED WITH
THE FEDERAL RESERVE BANK BY MEMBER BANKS
DEMAND DEPOSITS
1. Deposits, other than United States Government deposits, payable within thirty
days__________________________________________________.....................
.
*3 2
Balances due to banks, other than Federal Reserve Banks................. ......... .......$
4<
Cashier’s Checks on own Bank outstanding.......................................
Deferred Credits due Federal Reserve Bank...............__.............................. ....... ... $
5 Certified Checks outstanding.................. ............................................................... $
T O T A L D U E T O B A N K S (Items 2, j , 4 and 5 )____________________ ~
Less:
6. Balance due from banks, other than Federal Reserve Bank ..,
*7. Items with Federal Reserve Bank in process of collection........
8. Checks on other banks in same place .......__ _________ ..._......
9. Exchanges for clearing house............___.................... .............. ....
...$
... $
T O T A L D E D U C T IO N S (Items 6 ,7, 8 and 9)_________
10. N et Balance due to banks**___________ ...____ ___
11. T O T A L D E M A N D D E P O S IT S (Items I and 10)________
TIME DEPOSITS
12. Savings accounts (subject to not less than thirty days* notice before payment)
13. Certificates of deposit (subject to not less than thirty days' notice before
payment)--------------------------------------- -------- ---------------------------------------------
14.
Other deposits payable only after thirty days.......__ ___ .............___ _
15. Postal Savings deposits.._......................_...._...____....................... ...........
16. TOTAL TIME DEPOSITS (Items 12, 13,14 and 15)__________________
I
*
*
RESERVE REQUIRED
Banks in Reserve Cities, 10 per cent.; elsewhere, 7 per cent, of Demand deposi ts (I tem n ) ................................................ ..............................................
Three per cent, of Time deposits (Item 16) ..................._.....__.................._..............
Total reserve to be maintained with Federal Reserve Bank .....................
*If only one Deferred Account is carried with the Federal Reserve Bank, the credit balance must be shown
under Item No. 3 or the debit balance under Item No. 7.
**Should the aggregate “due from banks” (Items 6, 7, 8 and 9) exceed the aggregate “due to banks”
(Items 2, 3, 4 and 5), both items must be omitted from the calculation.
Index
(Figures refer to the numbered questions the answers to which treat
the topics indicated
.)
Act, Clayton Anti-Trust (see “Clayton Anti-Trust Act”).
Federal Reserve (see “Federal Reserve Act”).
National Bank (see “National Bank Act”).
Advantages of Membership in Federal Reserve System . 126-138
Advisory Council, Federal (see “Federal Advisory Council”).
Agent, Federal Reserve (see “Federal Reserve Agent”).
Assistant Federal Reserve A gen t...............................................17
Attendance fees, paid to directors...............................................19
Baltimore Branch of Federal Reserve Bank of Richmond . . 24
Bank Balances:
With non-member banks, limitations upon....................... 78
Not necessary as secondary reserves...................................131
Bank Notes:
Federal reserve (see “Federal Reserve Bank Notes”).
National (see “National Bank Notes”).
Bankers’ acceptances..................................................................64
Banks, Federal reserve (see “Federal Reserve Banks”).
Banks, Member (see “Member Banks”).
Board, Federal Reserve (see “Federal Reserve Board”).
Board of directors (see “Directors of Federal Reserve Banks”).
Branch Banks:
May be established.............................................................. 20
Operation and management o f ...........................................21
Each serves designated territory.......................................22
Chief factors determining establishment o f ....................... 23
Baltimore Branch of Federal Reserve Bank of Richmond. 24
Cashier of a Federal Reserve B a n k .......................................17,19
Chairman of the Board:
Appointment o f ........................................................................ 14
Qualifications and duties o f ...............................................16
Salary o f .............................................................................. *9
Checks, collection of (see “Collection System”).
[s9 ]
INDEX —Continued
Clayton Anti-Trust Act:
Provisions..............................................................................139
Does not apply to mutual savings banks........................... 139
Regarding Class A directors and non-competing member
banks..................................................................................139
Application of, to state banks not affected by their being
members of Federal Reserve S y s te m ........................... 140
Collection Department:
Collects rediscounted n o t e s ...............................................61
Of Federal Reserve Bank of Richm ond........................... 79
Collection System:
Checks and drafts accepted for collection, defined . . . . 80
Par l i s t ......................................................................81-83,121
How to send checks for collection.......................................84
When credit is given, time schedule...................................85
Immediate credit, not given for all it e m s ....................... 86
No charge for collecting checks...........................................87
Charge on notes, drafts, etc., returned u n p aid ................88
Deferred debit accou n t.......................................................89
Direct routing of checks...................................................... 90
Advantages of, to member banks................................... 9 J>93
Benefits of, to industry and commerce...............................92
Extent used in Fifth District...............................................93
Immediate Credit Sym bol...........................................99-101
Credit Facilities:
Marked inequality between different sections of country
under old National Banking System............................... 3
Equalized for all sections through Federal Reserve System 4
Currency Shipments:
Facilities for and expense of . . . . ....................... 97 ,136
Deferred debit account with member b a n k s........................... 89
Deficiencies in reserve (see “Reserves”).
Demand deposits, defined.......................................................... 67
Deposits:
Demand, defined.................................................................. 67
Time, d efin ed ......................................................................68
Reserve against, required . .
. .......................34,65
(See “Reserves.”)
[90]
INDEX —Continued
Postal Savings, new or additional (with member banks
only) ..................................................................................143
Deputy Chairman of B o ard ...................................................14,17
Deputy Governor of a Federal reserve b a n k ....................... 17,19
Direct routing of checks.............................................................. 90
Directors of Federal Reserve Banks:
Choose Federal Advisory Council....................................... 10
Classified..............................................................................14
Class A, election o f .............................................................. 15
Class B, election o f .............................................................. 15
Class C, appointment o f ...................................................... 14
Appoint officers and employees........................................... 17
Fix salaries of officers and employees...................................19
Attendance fees paid t o ...................................................... 19
Appoint manager and majority (of one) of directors of
branch banks...................................................................... 21
Frame by-laws of branch banks........................................... 21
Class A, Clayton Anti-Trust Act relates to ........................139
Discount Market:
Restricted under old National Banking System................ 3
Broad, provided by Federal Reserve System ................... 4,33
(See “Rediscounting.”)
Discount Rates:
Made more uniform.............................................................. 4
How determined.................................................................. 62
Progressive..........................................................................62
District of Columbia:
In Fifth Federal Reserve District....................................... 13
Reserve requirements i n ...................................................... 116
Districts, Federal reserve (see “Federal Reserve Districts”).
Dividends to member banks.......................................................29
Drafts, notes, etc., collection of (see “Collection System”).
Earnings of Federal Reserve Banks:
Dividend requirements...................................................... 29
Surplus earnings retained............................................... 3° > 3 l
Franchise t a x ......................................................................3°
Elastic Currency:
Not afforded by old National Banking System ...............
3
[9O
INDEX—Continued
Provided under Federal Reserve System....................... 4,36
To provide, a primary function of Federal reserve banks . 33
Eligibility....................................................................................26, 102
(See “Membership in the Federal Reserve System.”)
Examination of member banks................................... 110-112,125
Exchange charges on checks................................................117,121
(See “Par List.”)
Exchange Drafts, Federal R eserve...........................................96
Federal Advisory Council:
One of the three elements of which the Federal Reserve
System consists.................................................................. 7
Election, purpose, pow ers.................................................. 10
Federal Reserve Act:
Established Federal Reserve S y s te m ...............................
1
Approved December 23, 1 9 1 3 ........................................... 1
Long title o f .......................................................................... 1
Passed after 20 years of agitation for banking reform . . 2
Adapts best of European systems to American conditions. 5
May be amended.................................................................. 6
Liabilities of national banks incurred under, excepted . . 57
Authorizes Federal Reserve Board to grant fiduciary
powers to national b a n k s ...............................................141
Allows state bank members to exercise same, if their
charters and state laws perm it.......................................142
Federal Reserve Agent:
Appointment o f ..................................................................14
Qualifications and duties o f ............................................... 16
Assistant Federal Reserve A g en t.......................................17
Salary o f ..............................................................................19
Functions in the issue of Federal reserve n o tes............... 36
Passes upon applications of national banks to Federal
Reserve Board for permission to exercise fiduciary powers 141
Federal Reserve Banks:
One of the three elements of which the Federal Reserve
System consists.................................................................. 7
Under general supervision and direction of Federal Reserve
Board.................................................................................. 9
Stock of, all owned by member banks...............................11
M
IN DEX—Continued
Not under Government control...........................................11
Act as Fiscal Agents for Government........................... 11,25
Pay franchise tax to Government...................................11,30
Twelve in n u m b er.............................................................. 12
How managed:
Board of directors (see “Directors of Federal Reserve
Banks”).
Chairman of Board (see “Chairman of the Board”).
Federal Reserve Agent (see “Federal Reserve Agent”).
Deputy Chairman of B o ard ....................................... 14
Governor and other officers.......................................17
Salaries of officers and employees, how fixed ................... 19
Branches of (see “Branch Banks”).
Earnings of (see “Earnings of Federal Reserve Banks”).
Functions o f ..........................................................................33
Reserves mobilized b y ...................................................... 34,35
Reserves required of member banks............................... 34,65
(See “Reserves.”)
Elastic currency provided b y ...............................................36
(See “Elastic Currency.”)
Power to issue Federal reserve notes, limit o f. . . . 36,37
(See “Federal Reserve Notes.”)
Power to issue Federal reserve bank n otes....................... 39
Lending power of, how determined...................................41
(See “Rediscounting.”)
Must maintain reserve of 35 per cent, of deposits. . . . 41
Collection system of (see “Collection System”).
Federal Reserve Bank Notes:
How and why issu ed .......................................................... 39
Denominations......................................................................39
Outstanding (Richm ond).................................................. 40
Federal Reserve Bank of Richmond:
District of, defined..............................................................13
Banking power o f.................................................................. 13
Size of staff o f ...................................................................... 18
Salaries of officers and employees, how fixed ................... 19
Baltimore Branch o f ..........................................................24
Paid-in capital and surplus o f ...........................................32
Rediscount operations of, with other Federal reserve banks 35
INDEX —Continued
Federal reserve notes of, outstanding...............................38
Federal reserve bank notes of, outstanding....................... 40
Marginal collateral.............................................................. 57
Rediscounted notes, how collected b y ............................... 61
Holds securities in custody for member b a n k s................63
Collections b y .................................................................. 79,80
(See *‘Collection System.”)
Currency shipments...............................................................97
Immediate Credit Symbol o f .......................................99-101
Regulations issued in circular fo r m ...................................146
Federal Reserve Board:
One of the three elements of which the Federal Reserve
System c o n sists.............................................................. 7
Appointment and general d u tie s.......................................8,9
May readjust Federal reserve districts............................... 12
Appoints the three Class C directors and Chairman of the
Board and Federal Reserve Agent of each Federal
reserve bank...................................................................... 14
Fixes salary of Chairman and approves salaries of all other
officers and employees....................................................... 19
May permit or require establishment of branch banks . . 20
Appoints minority of directors of branch banks................21
Approves applications of member banks........................... 106
Approves applications of national banks for permission to
exercise fiduciary powers...................................................141
Publishes Federal Reserve B u lle t in .......................................144
Regulations of, issued in pamphlet form ........................... 145
Federal Reserve B u l l e t i n .............................................................. 144
Federal reserve c ity ...................................................................... ia
Federal Reserve Districts:
May be readjusted by Federal Reserve B o a rd ................12
Richmond, defined.............................................................. 13
Federal Reserve Exchange Drafts...............................................96
Federal Reserve Notes:
Direct obligations of the United S ta te s ........................... 36
Denominations......................................................................36
Bear number and letter of issuing bank, can be paid out
only by same...................................................................... 36
How is s u e d ..........................................................................16
[ 94]
INDEX —Continued
Redemption o f ......................................................................36
Limit of power to is s u e .......................................................37
Outstanding (R ichm ond)...................................................38
Power to issue increases lending power of Federal reserve
banks..................................................................................41
Federal Reserve System:
Operated under provisions of Federal Reserve Act . . . 1
Why established.................................................................. 2
Has remedied defects in old National Banking System
4
Made it possible to finance war needs without panic . . 4
Adapts best principles of European systems to American
conditions.......................................................................... 5
May be changed to meet changing conditions................ 6
Consists of Federal Reserve Board, Federal Advisory
Council, and Federal Reserve B a n k s ........................... 7
National banks must be, state banks and trust companies
may be, members o f ...............................................26,102
(See “Membership in the Federal Reserve System.”)
Fiduciary Powers:
Maybe granted to national banks by Federal Reserve Board 141
State bank members may exercise, if their charters and
state laws permit.............................................................. 142
Fiscal Agents, Federal reserve banks as, for Government . 11,25
Float:
Defined..................................................................................86
Reduced by Federal reserve collection system . . . 99,135
Franchise tax paid by Federal reserve banks to Government 11,30
Gold:
Required as reserve against Federal reserve notes . . * 3 6
Federal reserve notes redeemable in ...................................36
Accumulations of, in Federal reserve b a n k s ....................41
Settlement F u n d .............................................................. 92,96
Governor of a Federal Reserve Bank:
Appointed by board of directors.......................................17
Salary o f ..............................................................................19
Head of War Loan Organization.......................................25
Governor of Federal Reserve Board:
Appointed by the President............................................... 8
[ 95]
INDEX —Continued
Immediate Credit:
For what items g iv en .......................................................76,98
Why not given for all ite m s ...............................................86
Symbol:
Purpose.................................................................. 99,137
Nature and use.............................................................. 100
Use outside Fifth D istrict...........................................101
Interest on Reserve Balances:
Not paid by Federal reserve banks, reasons therefor . 117,118
Apparent loss may be overcom e............................... 119,120
Lending Power:
Of banks curtailed by antiquated Federal and state laws . 3
Of banks increased under Federal Reserve System . . . 4
Of Federal reserve banks, how determined........................41
(See “Rediscounting.”)
Marginal collateral...................................................................... 57
Maryland:
In Fifth Federal Reserve District.......................................13
Reserve requirements o f .......................................................116
Member Banks:
Number of, in Fifth District............................................... 13
Elect Class A and Class B directors............................... 14,15
The three groups o f .............................................................. 15
National banks must,state institutions may,be members 26,102
(See “Membership in the Federal Reserve System.")
Stock subscriptions o f .......................................................27,28
(See “Stock Subscriptions of Member Banks.”)
Dividends t o .......................................................................... 29
(See “Earnings of Federal Reserve Banks.”)
Reserves of, required to be carried with Federal reserve
b a n k .............................................................................. 34,65
(See “Reserves.”)
Rediscounting privileges of (see “Rediscounting”).
Securities of, will be held in custody by Federal Reserve
Bank of Richmond on request.......................................63
Reports required o f ...................................................73,110,125
Collection service to (see “Collection System”).
C 96]
INDEX —Continued
May not keep over 10 per cent, of their paid-up capital and
surplus on deposit with any non-member bank . . . . 78
Deferred debit accounts with...............................................89
Examinations o f ...................................................110-112,125
Withdrawal and forfeiture of membership................113-115
Clayton Anti-Trust Act, regarding non-competing . . . 139
Postal savings deposits, new or additional, placed only with 143
Membership in the Federal Reserve System:
In General (see Chapter III.):
National banks must, state institutions may, be
m em bers..............................................................26,102
Stock subscriptions.................................................. 27,28
(See “Stock Subscriptions of Member Banks.”)
Dividends to member banks.......................................29
Surplus earnings of Federal reserve banks . . . . 30,31
(See “Earnings of Federal Reserve Banks.”)
Of State Banks and Trust Companies (see Chapter VII.):
Reserve account, how o p e n e d ...............................
75
(See “Reserves.”)
Eligibility......................................................................102
T e s ts ..............................................................................103
Charter rig h ts...................................................... 104,105
Procedure in becoming a member...............................106
Stock subscriptions...................................................... 108
(See “Stock Subscriptions of Member Banks.”)
Loan limit o f.................................................................. 109
Reports to, examinations by, Comptroller of the
Currency.................................................................. 110
Reports to,examinations by, Federal reserve banks 110-112
Withdrawal and forfeiture of membership . . . 113-115
State reserve requirements...........................................1x6
Objections raised to membership....................... 117-125
Advantages of m em bership...............................126-138
Mutual Savings Banks:
Clayton Anti-Trust Act does not apply t o ....................... 139
National Banks:
Required to be members of Federal Reserve System . . 26
Liabilities of, incurred under Federal Reserve Act, excepted 57
[9 7 ]
INDEX —Continued
May be granted fiduciary powers by Federal Reserve Board 141
National Bank Act:
Excepts liabilities of national banks incurred under Federal
Reserve A c t ......................................................................57
National Bank Notes:
Chief form of currency under old National Banking System 3
Provisions for gradual retirement o f ............................... 39
National Banking System:
Defects of, generally adm itted........................................... 2
Defects of, listed by National Monetary Commission . . 3
Remedied by Federal Reserve System............................... 4
National Monetary Commission:
Report on National Banking S y ste m ............................... 2
Defects therein, listed........................................................... 3
North Carolina:
In Fifth Federal Reserve District ................................... 13
Reserve requirements o f .......................................................116
Notes:
Federal Reserve (see “Federal Reserve Notes”).
Federal Reserve Bank (see “Federal Reserve Bank Notes”).
National Bank (see “National Bank Notes”).
Rediscounting of (see “Rediscounting”).
Objections raised to membership in Federal Reserve System 117-125
Officers of a Federal Reserve Bank:
Chairman of the B oard ................................................... 14,16
Federal Reserve Agent (see “Federal Reserve Agent”).
Governor and other officers...............................................17
Panics:
Frequent under old National Banking System, avoidable. 2
Because of Federal Reserve System, war financing involved
no panic..............................................................
4
Par List:
D efined..................................................................................81
Extent of, in United S t a t e s ...........................................82,121
Extent of, in Fifth D is tr ic t...............................................83
Penalty for deficiencies in reserve (see “Reserves”).
[98]
INDEX —Continued
Postal Savings Deposits, new or additional, placed only with
member banks.......................................................................... 143
“Red Tape” charged against Federal reserve banks . . . 117,122
Rediscounting:
Lack of a broad discount market, one of defects of old
National Banking S ystem ............................................... 3
To provide a broad discount market, one of primary func
tions of Federal reserve b a n k s....................................... 33
Between Federal reserve banks........................... 34>35>4i> 130
Lending power of a Federal reserve bank, how determined 41
Every member bank has right o f ...................................42,133
Paper eligible for rediscount, how determined . 43,44,50,134
Paper not eligible for rediscount.......................................45
Note otherwise eligible not made ineligible because secured
by pledge of collateral...................................................... 46
Short-time paper.............................................................. 47,48
“Eligible’' and “Acceptable” paper distinguished . . . . 49
A simple process.............................................................. 51,124
Statements of borrowers, when and in what form required,
regarded as confidential...............................................52”54
(See also 117, 123.)
Limit of member bank's borrowings............................... 55—57
Marginal collateral.............................................................. 57
National banks’ liabilities incurred under Federal Reserve
Act, excep ted .................................................................. 57
For purpose of relending at profit, unsound....................58
Member banks may borrow on own n o te s....................59,60
Rediscounted notes, how collected ................................... 61
Discount rates, how determined, progressive rates . . . 62
Rediscounts, member banks enjoy greater ability to obtain,
than under old National Banking S ystem ....................126,132
Reports required of member b an k s............................... 73,110,125
Reserve cities in Fifth D istrict...................................................66
Reserve notes (see “Federal Reserve Notes”).
Reserves:
Not mobilized under old National Banking System, use
too much restricted.......................................................... 3
Concentrated under Federal Reserve System ................... 4
[99]
INDEX —Continued
To concentrate, a primary function of Federal reserve banks 33
How mobilized.................................................................. 34, 35
Required to be carried by member banks with Federal
reserve bank.................................................................. 34,65
Basic to lending power of Federal reserve banks . . . . 41
Required against all deposits...............................................69
How calcu lated .................................................................. 70
(See also form in Appendix.)
May be checked against...................................................... 71
Penalty assessed for deficiency i n .......................................72
Semi-monthly reports on, required...................................73
How penalty is assessed . . ...........................................73
Why penalty is assessed.......................................................74
Reserve account, how opened, kept track o f ................75,77
State reserve requirements...................................................116
Interest on, discussed.................................................. 117-120
How reserve principle of Federal reserve banks differs from
that of old National and State Banking systems . 129,130
Bank balances as secondary reserves, unnecessary . . . 131
Richmond, Federal Reserve Bank of (see “Federal Reserve
Bank of Richmond”).
Salaries of officers and employees, how fix ed ........................... 19
Security, increased, to member banks by Federal Reserve
S y stem ...................................................................... 126,127,130
South Carolina:
In Fifth Federal Reserve District....................................... 13
Reserve requirements o f .......................................................116
State Banks and Trust Companies:
Number of, members in Fifth District............................... 13
May join Federal Reserve System................................... 26,102
(See “Membership in the Federal Reserve System.”)
May exercise fiduciary powers if their charters and state
laws p erm it...................................................................... 142
State banking departments, co-operation w it h ....................... 106
Statements of Borrowers:
When and in what form required, regarded as confidential 52-54
Objected t o .................................................................. 117,123
(See “Rediscounting.”)
[ 10 0 }
INDEX —Continued
Stock Subscriptions of Member Banks:
Amount required..................................................................27
When to be p a id ..................................................................28
Dividends..............................................................................29
Disposal of stock when bank ceases to be a member . . . 114
Sub-treasuries:
To be discontinued..............................................................25
Functions of, to be discharged by Federal reserve banks . 25
Surplus earnings of Federal reserve banks retained . . . 30,31
(See “Earnings of Federal Reserve Banks.”)
System, Federal Reserve (see “Federal Reserve System”).
National Banking (see “National Banking System”).
Time deposits, defined .............................................................. 68
Time schedule..............................................................................85
Transfers of Funds:
Necessity for, reduced by collection system o f Federal
reserve b a n k s .................................................................. 92
Wire transfers.................................................................. 94,95
Federal Reserve Exchange Drafts.......................................96
Currency shipments...................................................97,135,136
Advantages..........................................................................135
Vice-Governor of Federal Reserve Board:
Designated by President....................................................... 8
Virginia:
In Fifth Federal Reserve District....................................... 13
Reserve requirements o f .......................................................116
West Virginia:
In Fifth Federal Reserve District.......................................13
Reserve requirements of ...................................................116
Wire transfers.......................................................................... 94 ,95
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