ANALYSIS OF THE FEDERAL RESERVE ACT

The preceding summary shows that the Federal Reserve Act materially amends the National Bank Act. The following analysis demonstrates that the new law provides for the reformation of the currency system, the mobilizing of the banking reserve of the United States, the utilization of the discounted paper of the banks as a basis for loans and for the issuance of circulating notes. It abolishes the system of paying National bank examiners by fee. Section 21, amended section 5240 of the United States Revised Statutes to such an extent that opportunities for more thorough examinations obtain to a material degree and it is hoped that National bank failures will be almost wholly eliminated.

It creates a system of bank acceptances and an open market for commercial paper, which aids the bankers of the United States in facilitating to much greater degree than heretofore international trade. It likewise provides means whereby a bank may convert its assets readily into cash and the necessity for larger reserves which has heretofore obtained no longer exists.

Under the new statute, National banks may create branches in foreign countries. It is already manifest that such branch banks have materially helped in expanding our foreign commerce.

Section 24 of the new law enables National banks, under certain conditions, to make loans on improved and unencumbered farm land.

The statute mentioned creates a discount system whereby banks are given the opportunity to convert assets into currency by rediscounting commercial paper having not more than three months to run and which has been taken by the bank in the ordinary course of its business.

It removes, so far as borrowing money from a federal reserve bank is concerned, the limitation which prevented a National bank from borrowing a sum in excess of one hundred per cent. of its capital. It controls the indirect tax imposed by reason of collection charges on checks and inaugurates a new system whereby the old plan in accordance with which many millions of dollars were heretofore carried in the mails, will be eliminated.

The new law mobilizes the bank reserves in the twelve federal reserve districts hereinafter mentioned. In this way these funds are available for member banks of each district; the surplus moneys of one district may be available for the necessities of other districts.

It supplies a circulating medium absolutely safe to meet the periodical demands for additional currency. The commercial crises known as the panics of 1873, 1893, 1907 and the like would seem hereafter to be impossible.

Twelve cities, known as federal reserve cities, are established, and the continental United States is divided into twelve geographical districts, each district containing one such reserve city.

The largest district, in respect to number of member banks the seventh or Chicago district-has 984 member banks. The smallest district-the sixth or Atlanta district -has 372 member banks. The number of member banks may increase from the addition of State banks and trust companies as member banks.

Each member bank is required to subscribe to the stock of the federal reserve bank of its district in an amount equal to six per cent. of its paid-up capital stock and surplus. The federal reserve bank may be described as a bank of banks. It is made a depositary for a certain proportion of the reserve of all the member banks, and in addition may also be a depositary for Government funds. It possesses an exceptionally important power as a bank of issue and redemption of currency, because it may secure

from the Treasury Government notes known as federal reserve notes, which it is authorized to issue against commercial paper with a minimum gold reserve of forty per cent. These banks are granted certain powers in the matter of operations in the open market, such as the purchase of commercial paper and foreign exchange, as well as to act as clearing houses between their member banks, etc.

Each federal reserve bank has nine directors, three of whom represent the member banks, three represent industrial pursuits (these six being chosen by the member banks), together with three Government directors chosen by the Federal Reserve Board. These nine directors appoint all necessary officers, including the governor of the bank.

Under the statute the whole system is under the supervision of a central organization in Washington, known as the Federal Reserve Board. That board is composed of five members named by the President with the approval of the Senate, together with the Secretary of the Treasury and the Comptroller of the Currency, making a total of seven members. At the end of the term of office of the five members appointed by the President, all subsequent appointees will be named for ten-year terms, except those who may be selected to fill unexpired terms. December 23, 1913, the Federal Reserve Act came into existence and August 10, 1914, the board was inaugurated.

The sections of the Federal Reserve Act may be analysed as follows:

SECTION 1. TITLE AND DEFINITIONS

(a) Short title to be the "Federal Reserve Act.”

(b) Definitions of the words "bank," "national bank," "national banking association," "member bank," "board," "district" and "reserve bank."

SECTION 2. FEDERAL RESERVE DISTRICTS

(a) Organization committee formed of Secretary of

Treasury, Secretary of Agriculture and Comptroller of Currency.

(b) To designate not less than eight nor more than twelve federal reserve cities and to divide the continental United States, excluding Alaska, into districts, each district to contain only one of such cities.

(c) Districts not necessarily coterminous with a State and may be readjusted.

(d) Districts designated by number.

(e) Each district to have a federal reserve city designated by organization committee.

(f) Majority of the committee to be a quorum.

(g) Organization committee may employ counsel and expert aid.

(h) Regulations to be prescribed.

(i) All National banks required to become members and must signify in writing their acceptance of the act within sixty days.

(j) Otherwise they cease to act as reserve agent upon thirty days' notice; such notice to be given within the discretion of organization committee or of Federal Reserve Board.

(k) After thirty days' notice from organization committee, National banks required to subscribe to capital stock of federal reserve bank.

(1) Of such subscriptions one-sixth payable on call, one-sixth within three months, one-sixth within six months, the remainder may be called when deemed necessary by the Federal Reserve Board.

(m) Payments to be in gold or gold certificates.

(n) Shareholders individually responsible, equally and ratably, not one for another, in connection with all contracts.

(0) Franchise of National bank forfeited within one year, provided it fails to become a member bank.

(p) Violation of this act to be adjudged by United

States courts.

(q) No individual co-partnership or corporation permitted to subscribe for more than twenty-five thousand dollars par value of stock in any federal reserve bank.

(r) No one permitted to hold at any time more than this sum.

(s) Such stock is to be known as public stock.

(t) Organization committee may allot the United States stock, provided the total subscription is insufficient to provide for amount of capital required.

(u) A voting power not given to other than banks.

(v)

The reserve board to control transfer of stock. (w) Four million dollars capital to be subscribed before federal reserve bank can commence business.

SECTION 3. BRANCH OFFICES

(a) Branches may be established within the district by federal reserve bank in which it is located.

(b) Directors to have same qualifications as directors of federal reserve banks.

(c)

Four directors to be selected by the bank and three by the board.

(d) One director to be manager.

SECTION 4. FEDERAL RESERVE BANKS

(a) Five banks in a district may make application for a reserve bank.

(b) Organization certificate to be acknowledged. (c)

Such reserve bank has power to use a corporate seal and to have twenty years succession.

(d) Also has power to make contracts and to appoint officers.

(e) To have entity in any court.

(f) To deposit Government bonds and receive circulating notes for the same.

(g) To exercise other specific powers.

(h) Directors to consist of nine members, holding office for three years and divided into three classes, A, B and C.