Fifth. The general geographical situation of the district; transportation lines and the facilities for speedy communication between the Federal Reserve Bank and all portions of the district.

Sixth. The population, area, and prevalent business activities of the district, whether agricultural, manufacturing, mining, or commercial, its record of growth and development in the past, and its prospects for the future.

In determining the several districts, the Committee has endeavored to follow state lines as closely as practicable, and wherever it has been found necessary to deviate, the division has been along lines which are believed to be most convenient and advantageous for the district affected.

137. CRITICISM OF THE DISTRICTS CHOSEN1

The plan of division indicated by the committee has already received very severe criticism, this criticism being particularly addressed to the following points:

1. The establishment of the maximum number of 12 districts, notwithstanding that the advice of a large number of bankers and business men had been in favor of the limitation of the number to the minimum required by law.

2. The failure to create a single large overshadowing bank with a capital of not less than $25,000,000 to $30,000,000, such a bank having been strongly recommended on the ground that an institution of such a size was necessary to control foreign exchange operations and to direct the course of trade and monetary operations between the United States and foreign countries.

3. The placing of too many districts on the Atlantic Coast while the West was left relatively unsupplied with districts and banks.

4. The faulty division of the country between the several districts in certain particulars. Among these particulars are expressly mentioned (a) the selection of boundary lines that would include larger and richer centers as tributary to smaller and weaker points at which reserve banks were situated, (b) the artificial separation of certain portions naturally tributary to a given city and their inclusion in a region assigned to another city, (c) the erroneous assignment of certain regions to cities with which they have comparatively poor or slow transportation connections.

'Adapted from "Washington Notes" in Journal of Political Economy, XXII (1914), 484-87.

These objections, as thus classified, practically summarize the whole case against the plan of districting, but there is a distinct difference in the weight to be given to the various criticisms. As to whether the maximum or minimum number of districts should have been. created, decided difference of opinion undoubtedly exists in responsible circles, not a few persons taking the view that if possible the 12 districts should have been mapped out, assuming, of course, that each could be assigned a capital adequate to the creation of a reasonably strong bank in the district under consideration. This point may be regarded therefore as essentially a question of difference in theory or of attitude toward the banking organization question in general.

In the same way the failure or refusal to create a single bank of predominant capital is not considered as affording ground for the pessimistic criticisms that are voiced in some quarters. The New York reserve bank actually provided for will have a much larger capital than any other institution in the system, and, while its capital is materially smaller than the combined capital and surplus of several of the other institutions located in the city of New York, this fact is not regarded as necessarily indicating anything very definite with reference to the effectiveness of the proposed plan. As a matter of fact, the Bank of England is considerably below several other institutions in London, so far as relates to aggregate resources. This does not prevent the Bank of England from exercising a predominant control over the prevailing rate of discount. A similar condition exists in some of the Continental countries. It is believed, therefore, that the size allowed to the New York institution is amply sufficient to permit the establishment of an effective bank. Moreover, too little weight appears to have been allowed in current discussion to the fact that the Federal Reserve Board will exercise a powerful central control over the whole system and will undoubtedly succeed in uniting the different institutions in a single and well-considered national policy.

A different point of view is evidently entertained by careful thinkers with respect to the actual districting. The third point, already mentioned above, that too many districts have been placed on the Atlantic Coast while the West is left relatively unsupplied is regarded as having very considerable force. As things stand, the Atlantic Coast districts are represented by the cities of Boston, New York, Philadelphia, Richmond, and Atlanta. This is considered clearly one too many, the unnecessary city and district being Rich

mond. By leaving out the Richmond district a much-needed district which could have been used elsewhere would have been saved with positive benefit to the other districts on the Atlantic Coast, which are now too thickly packed together to admit of a healthy growth. The belief prevailing in sound quarters is that the Atlanta district with its very limited capital would have been better off had not the states of North and South Carolina, which properly belong to it, been pared away in order to provide a southern extension for the Richmond district. In the same way, the northward extension of the Richmond district tended to force the northern boundary of the Philadelphia district to the shores of New York harbor, thereby depriving New York City of a portion of its natural territory, the northern rim of New Jersey, while in like manner the rearrangement of boundaries necessitated by the insertion of the Richmond district tended to prevent the inclusion of western Connecticut with New York, and to force other adjustments generally believed to be out of harmony with the "convenience and customary course of business."

In a somewhat similar fashion the fourth criticism already mentioned is finding support among informed students of banking. This criticism closely follows that which has been last considered. By making Baltimore, for example, tributary to Richmond, and New Orleans to Atlanta, an injury was done not only to local pride but also to the convenient and customary development of trade relations. The work done in this regard seems to make it unavoidable that there should be a considerable reversal of the current of business in a number of districts, the clearing of checks and the obtaining of rediscounts being carried on at points where under other conditions they would never have been placed. Undoubtedly this kind of change will cause some friction, but there seems to be little doubt that the amount of it has been considerably exaggerated. Those who are disposed to place too much stress upon the effect of the districting overlook the fact that the new system is simply superadded to existing banking arrangements and that it in no way interferes with them. Even the redistribution of reserves does not affect them, since the gross amount of required reserve is so reduced under the new banking act that banks which have been in the habit of keeping reserve balances with the old reserve cities could continue to do so without serious hardship under the new law, even if these balances were not counted as reserves. They would be as well off as they were before. The criticism of the districting really amounts in the last analysis to a statement that the

work has not been done as well as it might have been, and that if it had been more carefully performed the operation of the new system would have been somewhat smoother and easier to manage.

138. THE FEDERAL RESERVE BOARD'

By E. E. AGGER

Co-ordinating and controlling the whole system is the "Federal Reserve Board." It is made up of seven members. The Secretary of the Treasury and the Comptroller of the Currency are members ex officio. Five members are appointed by the President by and with the advice and consent of the Senate. Not more than one member of the board can come from a single reserve district. At least two of the presidential appointees must have had banking or financial experience, but no member of the board may be an officer, director, or stockholder of any bank. Except for the ex-officio members, and for the first incumbents, whose terms will run respectively, two, four, six, eight, and ten years, the term of office will be ten years. But the President may remove members for cause. While the Secretary of the Treasury is the ex-officio chairman of the board, the President is empowered to name one of his five appointees as "governor." The governor and vice-governor are the chief executive officers of the whole system.

The Federal Reserve Board is an unusually powerful supervisory and regulating body. It may suspend or remove any officer or director of a federal reserve bank; it may require the writing off by such bank of its bad debts, and may suspend a federal reserve bank or take it over for purposes of reorganization or liquidation. It may also readjust or abolish altogether the classification of central reserve and reserve cities.

The member banks are represented in the central management by a "Federal Advisory Council," made up of one representative from each federal reserve district, chosen by the board of directors of the federal reserve bank. This council meets quarterly at Washington and at such other times and places as it may choose. While patterned after the stockholders' committee of the Reichsbank, it is even less powerful than the German prototype. It may merely call for information from, and advise with, the Federal Reserve Board."

Adapted from "The Federal Reserve System," Political Science Quarterly, XXIX (1914), 269–70.

139.

FUNCTIONS OF THE RESERVE BANKS'

The question naturally suggests itself and must be frankly faced: What is the proper place and function of the Federal Reserve Banks in our banking and credit system? On the one hand it is represented that they are merely emergency banks to be resorted to for assistance only in time of abnormal stress, while on the other it is claimed that they are in essence simply additional banks which should compete with the member banks, especially with those of the greatest power. The function of a reserve bank is not to be identified with either of these extremes, although occasions may arise when either of such courses may be imperative. Its duty plainly is not to await emergencies but, by anticipation, to do what it can to prevent them. So also if, at any time, commerce, industry, or agriculture is, in the opinion of the Federal Reserve Board, burdened unduly with excessive interest charges, it will be the clear and imperative duty of the Reserve Board, acting through the discount-rate and open-market powers, to secure a wider diffusion of credit facilities at reasonable rates. Federal Reserve Banks are the holders of a large part of the banking reserves of the nation, the foundation of its banking structure. Nothing should be permitted in the operation of the Reserve Banks which would weaken this foundation. The resources of a Reserve Bank, to be useful for its peculiar purposes, should always be readily available. It follows, therefore, that they should be mainly invested in such short-term liquid investments as can be easily converted into cash as occasion may require. This conception of a Reserve Bank, moreover, implies that its investments should be marshaled in a steady succession of maturities, so that it may at all times as nearly as possible prove equal to the situation.

The

The ready availability of its resources is of supreme importance in the conduct of a Reserve Bank. Only then can it become a safe and at the same time flexible instrument of guidance and control, a regulator of interest rates and conditions. Only then will it constantly carry the promise of being able to protect business against the harmful stimulus and consequences of ill-advised expansions of credit on the one hand or against the menace of unnatural restrictions and unnecessary contractions on the other, with exorbitant rates of interest and artificial stringencies. It should at all times be a steadying influence, leading when and where leadership is requisite, but never Quoted from First Annual Report of the Federal Reserve Board, December, 1914, pp. 17-18.