allowing itself to become an instrument for the promotion of the selfish interest of any private or sectional group, be their aims and methods open or disguised. It should never be lost to sight that the Reserve Banks are invested with much of the quality of a public trust. They were created because of the existence of certain common needs and interests, and they should be administered for the common welfarefor the good of all.

The more complete adaptation of the credit mechanism and facilities of the country to the needs of industry, commerce, and agriculture with all their seasonal fluctuations and contingenciesshould be the constant aim of a Reserve Bank's management. To provide and maintain a fluid condition of credit, such as will make of the Reserve Banks at all times and under all conditions institutions of accommodation in the larger and public sense of the term, is the first responsibility of a Reserve Bank.

It should not, however, be assumed that because a bank is a Reserve Bank its resources should be kept idle for use only in times of difficulty, or, if used at all in ordinary times, used reluctantly and sparingly. Neither should it be assumed that because a Reserve Bank is a large and powerful bank all its resources should be in use all the time or that it should enter into keen competition with member banks, distributing accommodation with a free and lavish hand in undertaking to quicken unwisely the pace of industry. Such a policy would be sure, sooner or later, to invite disaster. Time and experience will show what the seasonal variations in the credit demands and facilities in each of the Reserve Banks of the several districts will be and when and to what extent a Reserve Bank may, without violating its special function as a guardian of banking reserves, engage in banking and credit operations. The Reserve Banks have expenses to meet, and while it would be a mistake to regard them merely as profit-making concerns and to apply to them the ordinary test of business success, there is no reason why they should not earn their expenses, and a fair profit besides, without failing to exercise their proper functions and exceeding the bounds of prudence in their management. Moreover, the Reserve Banks can never become the leading and important factors in the money market which they were designed to be unless a considerable portion of their resources is regularly and constantly employed.

There will be times when the great weight of their influence and resources should be exerted to secure a freer extension of credit and

an easing of rates in order that the borrowing community shall be able to obtain accommodation at the lowest rates warranted by existing conditions and be adequately protected against exorbitant rates of interest. There will just as certainly, however, be other times when prudence and a proper regard for the common good will require that an opposite course should be pursued and accommodations curtailed. Normally, therefore, a considerable proportion of its resources should always be kept invested by a Reserve Bank in order that the release or withdrawal from active employment of its banking funds may always exercise a beneficial influence. This is merely saying that to influence the market a Reserve Bank must always be in the market, and in this sense Reserve Banks will be active banking concerns when once they have found their true position under the new banking conditions.

It would be a mistake, therefore, and a serious limitation of their usefulness to regard the Reserve Banks simply as emergency banks. Regulation in ordinary times, as well as protection in extraordinary times, may be expected to become the chief service which these institutions will perform. The Federal Reserve Board is fully alive to its opportunities and responsibilities in this respect, but it must counsel patience in awaiting the fruition of the new system. It will take time for the new banks to develop the technique of control and skill and experience in its application. The ascertainment of the correct base from which comprehensive operations should begin, the establishment of a normal level from which expansions and contractions will freely take place, will have a most important bearing upon the future development and success of the system. Impatience to show results should not be permitted to tempt those in charge of the Reserve Banks into precipitate and unwise action.

The vast and complex structure of modern banking and credit systems is one of extreme delicacy of balance and adjustment, and it must never be overlooked that it is highly sensitive to all manner of disturbances, as recent events have painfully demonstrated. The banking systems of the larger nations are closely related to one another, and financial distress or collapse at one point quickly transmits shock to all others. Safety for us in critical times will depend on the confidence our system commands, the strength of its reserves, and its power to bring them into action promptly and effectively if needed. In dealing with new districts and entirely changed banking methods, time and experience alone can supply the data necessary for

charting the course to be pursued. This consideration, if nothing else, would suggest the greatest patience and prudence, even if the European horizon were less clouded than it is today. None the less, the Board realizes that where extraordinary conditions warrant extraordinary measures it is the foremost duty of the Board and the banks to act promptly and boldly.

140. THE DIRECTORS OF THE FEDERAL RESERVE BANKS1 BY MILTON C. ELLIOT

The duties and responsibilities of the directors of Federal Reserve Banks will be of the same general character, with an added degree of responsibility, as the duties and responsibilities of directors of national or member banks.

Section 4 of the Federal Reserve Act provides among other things that

Every Federal Reserve Bank shall be conducted under the supervision and control of a board of directors.

The board of directors shall perform the duties usually appertaining to the office of directors of banking associations and all such duties as are prescribed by law.

Said board shall administer the affairs of said bank fairly and impartially and without discrimination in favor of or against any member 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, advancements, and accommodations as may be safely and reasonably made with due regard for the claims and demands of other member banks.

From this it will be observed that the Federal Reserve Banks are to exercise the functions of banks and are not merely an association of other banks.

When this section is read in connection with Section 13, relating to rediscounts and other powers of Federal Reserve Banks, and with Section 16, which provides in effect that the United States Government shall lend its credit through the issuance of Federal Reserve notes to these banks, it is apparent that the duties and obligations of the directors of Federal Reserve Banks are not honorary, but that those who undertake these important obligations are factors in a great co-ordinated system of banking.

Adapted from an address before the American Bankers' Association, May, 1914. (Published in Monthly Letter of National City Bank, New York, June, 1914.)

While the management of the Federal Reserve Banks will be relieved from many of the problems and difficulties of individual banks, and will deal primarily with certain definite depositors and customers-the member banks, the responsibilities of their directors will be increased by reason of the fact that they have at stake, not only the investment of the depositors' funds, but the investment of the national credit.

In working out a system which will insure conservative business management of these banks Congress has undertaken to create a board of directors which is representative of the interests involved.

It is provided that the board of each Federal Reserve Bank shall consist of nine members; that one-third of this board, to be known as class "C" directors, shall be selected by the Federal Reserve Board, which is in effect the representative of the United States Government; that one-third shall be known as class "A" directors and shall consist of three members who shall be chosen by and be representative of the stockholding banks; and that the remaining one-third, to be known as class "B" directors, shall consist of three members who at the time of their election shall be actively engaged in their district in commerce, agriculture, or some other industrial pursuit. The make-up of this board of directors is therefore representative, first, of the United States Government, second, of the stockholding banks, and third, of the business representatives, who are in effect the creditors of that part of the public which deals with member banks.

In other words, it will be observed 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 these funds, and class "C" consists of the representatives of the Government, which undertakes to supervise the proper and conservative investment of such funds.

It must be remembered, however, that while these three interests are representative, the Board when organized is a unit, and that this Board is charged with the management and control of the affairs of such bank. The grouping or classification relates only to the manner of election, and not to their status after election.

When by election by the member banks or by appointment by the Federal Reserve Board the candidates become members of the board of directors of the Federal Reserve Banks, the duties and obligations of each member are the same. It is true that the Chairman or Federal Reserve Agent and the Deputy Chairman or Deputy Federal

Reserve Agent who are members of the board occupy dual capacities, in that they are the local representatives of the Federal Reserve Board in addition to being members of the board of directors. As members, however, their duties are similar to those of class "A" and class "B" directors.

In order to insure a thoroughly representative board, Congress has provided that such boards shall not only consist of the three interests referred to, namely, the Government, the banks, and the business interests, but that in making this selection each district shall be divided into three general groups or divisions, each group to contain, as nearly as may be, one-third of the aggregate number of member banks of similar capitalization. Each one of these groups will nominate and elect one class "A" and one class "B" director, so that the directors will be selected by and be representative of not only the stockholding banks as a whole but of the several classes of banks included within each district. This does not mean that the board shall necessarily consist of officers or directors of the smallest banks as well as officers or directors of the largest, but that each class of banks shall have an opportunity to nominate and elect, together with banks of similar capitalization, either from their own or from any other group, the candidate best suited, in the opinion of such banks, to perform the important duties assigned to the directors of Federal Reserve Banks.

By the terms of the law: Group No. 1 will contain approximately one-third of the aggregate number of banks in a district and will be composed of banks of the largest capitalization. Group No. 2 will include approximately one-third of the aggregate number of banks in a district and will embrace the banks having the next largest capitalization. Group No. 3 will include approximately one-third of the aggregate number of banks in a district, being composed of those having the smallest capitalization.

B. The Practical Working of the System

141. DEFECTS TO BE REMEDIED BY THE ACT1

BY J. LAURENCE LAUGHLIN

The defects in our banking and currency system which were to be remedied by the new legislation may be very briefly summarized as follows: an inelastic bank-note circulation; an even more dan

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Adapted from "The Banking and Currency Act of 1913," Journal of Political Economy, XXII (1914), 302.