CHAPTER XXII

THE FEDERAL RESERVE SYSTEM

183. Federal reserve banks.-In previous chapters reference has been made at different places to the terms and operations of various features of the Federal reserve system. We shall now try to summarize the new law as a whole, point out its most salient features, and indicate the most important changes thus introduced into our currency and banking system.

The Federal Reserve Act provides for the division of the United States into from eight to twelve districts by the Organization Committee, composed of the Secretary of the Treasury, the Secretary of Agriculture and the Comptroller of the Currency, each district to have one Federal reserve bank, to be located by the said committee. Each reserve bank is to have a capital of not less than $4,000,000. Every national bank must, and state banks and trust companies may, subscribe to the capital of the Federal reserve bank in their district to an amount equal to 6 per cent of their own capital and surplus, payable one-sixth at the call of the organization committee or the Federal Reserve Board, one-sixth within three months, and one-sixth within six months, the balance being subject to call. National banks failing to accept the terms of the Act within sixty days after notice lost the right to act as reserve agents and any bank which failed to become a member bank or to comply with the provisions of the Act within one year forfeited its charter. If the stock subscriptions of banks in

any district were insufficient to provide the minimum capital required, stock was to be offered to the public, no single private subscription to exceed $25,000, and should the total subscriptions of banks and public be insufficient the balance needed was to be allotted to the United States, to be paid for out of treasury funds.1 The capital stock of each Federal reserve bank may be increased as member banks increase their capital or as additional banks become members, and may be decreased as member banks reduce their capital or surplus or cease to be members. The Act provides for the conversion of state banks into national banks if the state law permits such conversion. Membership is not confined to national banks; any state bank or trust company may become a member of a Federal reserve bank by meeting substantially the same requirements as apply to national banks. It may continue to exercise all corporate powers granted by the State, but must conform to the reserve and capital requirements of the Reserve Act and to those provisions of law imposed on national banks which prohibit them from lending on or purchasing their own stock, which relate to the withdrawal or impairment of their capital and to the payment of unearned dividends. It must make not less than three annual reports of condition and payment of dividends to the Federal reserve bank and be subject to examination by direction of the Reserve Board, though State examinations may be accepted by the Federal reserve bank. It is unlawful for any officer or agent of such a bank to over-certify a check. A state bank may withdraw from membership after six months' notice, but a Federal reserve bank may not, without authority of the Reserve Board, cancel in any one year more than 25 per cent of its capital in permitting voluntary withdrawals.

184. Management.-Each Federal reserve bank is conducted under the supervision and control of a board of nine directors holding office for three years and divided into three classes, designated as classes A, B, and C. The three members of Class C are appointed by the Federal 1 The required capital was fully subscribed by the banks.

Reserve Board, and must have been for at least two years residents of the district in which the Federal reserve bank is located. None of them shall be an officer, director, employee, or stockholder of any bank. One member of this class, who must be "a person of tested banking experience, ," is named as chairman of the board of directors of his district reserve bank, and is known as "Federal reserve agent." He maintains a local office of the Federal Reserve Board and acts as its official representative in the district. The original Act provided that another member of Class C should also be an experienced banker and act as deputy chairman and deputy Federal reserve agent. It was found to be difficult to fill the office of Deputy Federal Reserve Agent. That officer was required to have the same qualifications as the Agent, yet in most of the reserve banks he received no salary but merely the fees paid to directors for attendance upon meetings. The Federal Reserve Board, therefore, recommended and Congress enacted an amendment to Section 4 abolishing this title and office, and providing for the appointment by the Federal reserve agent, subject to the Board's approval, of one or more salaried assistants with tested banking experience, who shall have power to act in his stead. One of the Class C directors acts under appointment by the Board as deputy chairman.

Directors of Class A and Class B are chosen by member banks. Directors of Class A represent the member banks; directors of Class B must at the time of election "be actively engaged in their district in commerce, agriculture, or some other industrial pursuit.' They may not be officers, directors, or employees of any bank, though they may be stockholders. No Senator or Representative in Congress may be an officer or director of a Federal reserve bank or a member of the Federal Reserve Board. It appears, then, that "Class A consists of representatives of the banks or those who are intrusted with the funds of the business public for investment; Class B consists of representatives of the public who are furnishing the funds; and Class C consists of the representatives of the Government,

which undertakes to supervise the proper and conservative investment of such funds."'1

The plan of electing the six directors of Classes A and B is as follows: In each district the chairman of the board of directors of the Federal reserve bank, or, pending his appointment, the organization committee, shall classify all the member banks of the district into three groups, each group containing as nearly as possible one-third of the total number and consisting of banks of similar capitalization. Then the board of directors of each member bank chooses a district reserve elector and certifies his name to the Federal reserve agent of the district. The agent makes lists of the electors thus chosen by all the banks in the three groups of the district and sends a list to each elector in each group. Each member bank may nominate a candidate for director of Class A and another for Class B, and a list of these nominees is furnished by the reserve agent to each elector. On a ballot form furnished by the agent each elector certifies his first, second and third choice for three directors of Class A and three of Class B. A candidate having a majority of the total votes cast in the column of first choice is declared elected. If no candidate have a majority, votes cast for second choice candidates are added to those of the first choice, and if no candidate then have a majority the votes for third choice are to be added.

At the first meeting of the board of directors of each Federal reserve bank the directors of each of the three classes designate one member of each class whose term expires in one year, one in two years, and one in three years from the first of January nearest to the date of such meeting. Thereafter all directors are chosen for three years. Vacancies that may occur are to be filled in the same way as in the original selections and such appointees hold office for the unexpired term of their predecessors. Directors of Federal reserve banks may receive compensa

1 Address of Mr. Milton C. Elliott, Secretary of the Organization Committee, at the convention of member banks of the Fifth Regional District, held at Richmond, May 18, 1914.

tion for their services, subject to the approval of the Federal Reserve Board, and in addition a reasonable allowance for all necessary expenses in attending board meetings, such compensation and allowance to be paid by the respective reserve banks. An exception to this rule is the Federal reserve agent, whose compensation is determined by the Federal Reserve Board but paid by the reserve bank. Acting upon the suggestion of the Federal Reserve Board, the Board of Directors of each Federal reserve bank has named one of its members as Governor, though this office or title is not provided for in the Act. He is the active operating officer of the bank, with administrative duties somewhat similar to those of a bank president. His duties do not conflict with those of the Federal Reserve Agent, who is chairman of the board of directors, and, as noted above, is appointed by the Reserve Board as its representative. In this latter capacity he transmits communications from the Board to the bank; receives and transfers to the bank Federal reserve notes in exchange for commercial paper eligible for rediscount or for gold; makes periodic reports to the Board upon banking and business conditions in his district; and submits to the Board applications made by the board of directors of his bank for a change in the rate of discount on commercial paper. Each Federal reserve bank may have, also, a deputy governor to act for the governor in his absence or to assist him in the discharge of his duties.

The Federal Reserve Board may permit or require any Federal reserve bank to establish branch banks within the district in which it is located, or the district of any Federal reserve bank which may have been suspended. Such branches, subject to rules and regulations prescribed by the Reserve Board, are operated by a board of not more than seven nor less than three directors, of whom a majority of one are appointed by the Federal reserve bank of the district, and the remaining directors by the Federal Reserve Board. All hold office during the pleasure of the Reserve Board,