managing." The growing disposition on the part of the Administration to force national banks into system membership also disturbed the Currency Commission. On December 9, two weeks after the bill had been brought to the Senate floor, John Perrin wrote Senator Owen:

Two alternatives must be faced: Either the possibility must be considered of the Government promoting the establishment of an entirely new banking system with a view to driving out of existence in considerable measure the existing banks, or, on the other hand, present banks generally must be influenced either by compulsion or inducement into participation.5

A compromise proposal would have extended the transition period by six years to 1920. But two days later the Glass-Owen bill was amended so that refusal to accept the terms of the Act within 60 days would bring punitive action. Perrin again tried to change the attitude of the bill from threatened punishment to promised rewards, arguing that special advantages should be offered to those banks subscribing early. Forgan continued to insist that there should be no compulsion requiring the national banks to comply or be dissolved. Despite the unremitting efforts of banking's leadership, coercion remained a feature of the Act. It would be mandatory for all national banks to become members of the new Federal Reserve System.

National-bank officers, alarmed over these and other provisions, began talk of withdrawing from the national banking system. "After a careful reading of the Bill," wrote one irate president, "will have to say, most emphatically, I do not see a single thing to recommend it from the standpoint of our little Bank." Another small-town banker wrote from Texas that a large majority of the country banks would surrender their national charters. John Hamilton warned, "This measure would certainly drive 60 per cent of the national banking institutions out of business and cause them to re-organize under state charters.” In July a Boston banker wrote: "I am considering the policy of endeavoring to get the banks here to join in a statement to the powers at Washington that they might withdraw from the national system if the bill went through in its present form." Even Forgan threatened to withdraw his powerful and financially important First National Bank of Chicago. Removing himself from the emotional impact of the law upon the national bankers, he assessed the effect of the new legislation:

The fact that a large number of national banks are likely to withdraw from the system, or to put it in another way, the fact that the bill will not be sufficiently attractive to induce the national banks generally to go into it and will certainly have no attractions for State banks appears to me to be the most alarming thing in connection with the bill, and it is most desirable that the attention of the powers at Washington should be drawn to it. If the bill is not sufficiently attractive to draw the national banks generally into the system and

5 James B. Forgan Papers, The First National Bank of Chicago. 6 Ibid.

to attract the larger State banks through the country the result will be a complete fiasco . . . as it would mean the complete destruction of our present national banking system because all the national banks refusing to go into it must either continue under State charters or be dissolved. . .7

Forgan was in a sense correct, for events would soon prove that membership in the new system had few attractions for banks having an option. Nevertheless, confronted with the choice of giving up their national charters or staying in the new organization, most national bankers decided to remain, realizing as they did that their remonstrance had helped to forge a statute that would be tolerable.

On December 23, 1913, President Wilson signed the bill establishing the Federal Reserve System. Some 80 years after they let the previous central bank die, Americans reluctantly accepted once again the idea of a central bank. In an illusory attempt to decentralize authority, a Federal Reserve Bank was organized in each of 12 districts, each district enclosing an area of similar economic activity and containing enough banking resources to support a strong Reserve Bank. The system was to be headed by a Federal Reserve Board of seven members, including ex officio the Secretary of the Treasury and the Comptroller of the Currency and five others to be appointed by the President. Membership in the System would be compulsory for national banks; state banks, upon compliance with certain requirements, might become members. Upon joining the System, a commercial bank was required to purchase shares of the capital stock of the Federal Reserve Bank of its district up to the amount of 3 percent of its combined capital and surplus (another 3 percent might be required). Thus, member banks nominally owned the Federal Reserve Banks, with a limitation on the annual return to their stock of a 6 percent cumulative dividend. But three of the nine directors of each Bank were to be appointed by the Board in Washington, one of them to be designated Chairman of the District Bank and Federal Reserve Agent. The Act originally provided that member banks might retain a part of their reserves as cash in vault, but in 1917 the rule was changed to require all the legal reserves of member banks to be in the form of deposits with the Federal Reserve Bank of its district.9 The framers of the Federal Reserve Act did not intend that the new central bank should execute a monetary policy directed toward stabilizing the economy. In fact, the Federal Reserve did not seriously undertake such responsibility for nearly four decades after its founding. Nevertheless, the

8

7 James B. Forgan to Thomas P. Beal, July 29, 1913, James B. Forgan Papers, The First National Bank of Chicago.

8 There is little question that the framers of the Federal Reserve Act intended Federal Reserve Agents to be the chief executive officers of the several Banks. But the district boards, six of their members elected by the member banks of the district, designated a "Governor" as chief operating officer, and the Agent gradually assumed only an advisory and ministerial role.

9 Beginning November 24, 1960, all currency and coin held by a member bank could once again be counted as reserves.

Just inside the entrance to the Federal Reserve Building is this modest statement of the hopes of a great President for financial stability.

basic idea of the new central banking scheme was to correct deficiencies in the monetary system. There is little in the legislative history of the Act, or in the statements of those most closely involved in its passage, to suggest that the Federal Reserve would have more than minimal supervisory responsibility. Yet, as we shall see presently, the very notion of a central bank implied a linkage with other supervisory authorities.

Retrogression of the National Banking System

Between 1900 and 1914, the year in which the Federal Reserve began operations, the number of commercial banks in the United States increased from about 9,000 to just over 25,000; as of June 30, 1914, there were 17,498 state-chartered banks and 7,518 national banks. During World War I statechartered banks increased much more rapidly than national banks.

In 1921 the number of commercial banks in this country stood at the incredible level of more than 29,000, approximately 21,000 of them state banks and about 8,000 of them national banks.10 The year 1921 marked the high point of commercial bank numbers, though in the early 1920s two successive Comptrollers of the Currency followed reasonably liberal chartering policies because of their anxiety to maintain the number of national banks and so the strength of the Federal Reserve System. "It is desirable, indeed necessary," wrote Comptroller Daniel R. Crissinger, "to bring into the Federal reserve system the largest possible proportion of the banking power of the country. National banks are required to be members of the Federal reserve system, and they must inevitably constitute the real foundation of that structure." 11 Even so, Crissinger observed in his 1921 Annual Report that "95 applications, with capital of $4,530,000, were rejected" and that the principal causes of rejection were “lack of demand for additional banking facilities in the various communities or the reported unsatisfactory financial standing or character of the applicants." From 1924 on, chartering policy became progressively more restrictive, the rejection rate for the years 1926-1930 approximating one-half of the applications received. In his 1927 Annual Report, Comptroller Joseph McIntosh wrote:

This bureau is subject at all times to the demand for charters for new national banking associations. One of its most difficult problems is to avoid conflict between the interests of the applicants and the needs of the community for additional banking facilities. . . . An analysis of the applications which this office has received for the establishment of new banks shows that there is too often a desire to organize banks in localities where the communities are amply served and which would not support new institutions with a likelihood of any fair measure of success.

10 Some series show slightly more than 30,000, doubtless because the enumerators included certain private banks that are not represented in the smaller figure.

11 Comptroller of the Currency, Annual Report, 1922, p. 2.

Extreme care should be exercised in granting charters, both for National and State banks. This has been my policy with respect to national bank charters. During the current year only 44 per cent of the number of applications received for the establishment of new national banks was approved, as compared with 52 per cent the previous like period and an average of 72.8 per cent over the eight prior years, with a high of 82.7 per cent just subsequent to the World War. In other words, despite the fact that the number of applications received remains about the same, the number approved by this office is constantly becoming fewer and in the current year a less number of applications was approved than has been approved any year during the past 10-year period.12

In 1928, Comptroller John W. Pole reported that the Office was exercising a "policy of extreme care in granting charters for national banks" and that less than 40 percent of applications received were approved.

12 Comptroller of the Currency, Annual Report, 1927, pp. 13-14.