What is the situation of a national bank if it does not avail itself of the privilege of note issue? If it wishes to buy United States bonds it can buy those which have a higher yield than those available as a basis for circulation. When the demand for loans requires more funds, it can borrow on these bonds from the Federal reserve bank and lend the proceeds. Or the bank may rediscount notes on which it has made loans and obtain additional funds to lend. In either case it has obtained a second margin of profit, which, according to circumstances, may be greater or less than if notes had been issued; in the latter case the return should always be greater. In either method the expense of note issue is avoided and the bank has entire freedom to buy bonds or sell them according to the condition of the market. Many banks no longer issue notes.

CHAPTER XX

THE BULWARK OF AMERICAN BANKING –

THE FEDERAL RESERVE BANKS

237. The organization of the Federal reserve banks. In each of the twelve districts into which the United States is divided there is a Federal reserve bank. They are located in the cities of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. The capital stock of each bank is owned by national and state banks (see 238) which are called member banks. Every national bank is required to subscribe to the stock of the bank of its district to an amount equal to 6% of its own. capital and surplus. Only one half of this stock has been paid in. State banks may become members if they desire. Upon its paid-in stock each member bank is entitled to receive each year cumulative dividends to the amount of 6%.

Each Federal reserve bank has a board of nine directors who serve terms of three years each. Six of these directors are elected by the member banks, three called class A directors to represent the stockholding banks, three called class B directors to be "actively engaged in their district in commerce, agriculture, or some other industrial pursuits." In order to elect directors, each of the banks is divided into three groups of as nearly equal capitalization as possible, and one director of class A and one of class B are elected by a majority vote of the banks of each of the three groups. The three class C directors are appointed by the Federal Reserve Board. No senator or congressman can

be a member of the Federal Reserve Board, or an officer or a director of a Federal reserve bank. No director of class B shall be an officer, director, or employee of any bank, no director of class C shall be an officer, director or employee of any bank." Class C directors must have resided in the district for which appointed at least two years. One of the class C directors is designated by the Federal Reserve Board as chairman of the board of directors " and as "Federal reserve agent." The Federal reserve agent must be a man of tested banking experience. He is the resident agent of the Federal Reserve Board and conducts the local office of the Board in the bank.

With the approval of the board the Federal reserve agent appoints one or more assistants. The Federal reserve agent and his assistants have their salaries fixed by the Federal Reserve Board but they are paid by the Federal reserve bank. Each Federal reserve bank is under the supervision and control of the board of directors who are empowered to perform the duties usually falling to directors. They elect the other officers of the bank. The chief executive of each bank is the governor, who is assisted by deputy governors, cashiers, managers, heads of divisions, and tellers.

Each Federal reserve bank is subject to the regulation of the Federal Reserve Board consisting of eight members including the Secretary of the Treasury and the Comptroller of the Currency. These two are members ex officio. The other six members are appointed by the President of the United States. The President must choose not more than one member from each Federal reserve district and he must give due regard to a fair representation of the different judicial, agricultural, commercial, and industrial interests, and geographical divisions of the country. Each serves ten years and receives a salary of $12,000 per annum. One member of the Board

is designated as governor and another as vice-governor of the board. The Governor is the active executive officer of the Board. No member of the Board can be an officer, or director of any banking institution in the country or hold stock in any of them.

The Federal reserve bank of each district may have one or more branches. All but Boston and Philadelphia already have branches. The Atlanta bank in addition to four branches has one agency located at Savannah. The Federal Reserve Board has granted permission to the banks at Boston and Atlanta to establish agencies, which will coöperate with each other, at Havana, Cuba. Each branch is controlled by a board of three to seven directors who hold office at the pleasure of the Federal Reserve Board. A majority of one of these directors is chosen by the Federal reserve bank, the others are appointed by the Federal Reserve Board.

The salaries and expenses of the Federal Reserve Board are paid from a fund levied by assessment on the Federal reserve banks in proportion to their capital and surplus.

There is also an advisory council composed of twelve members, one member elected by the board of directors of each bank. This council meets four times a year in Washington unless called oftener by the Federal Reserve Board. It confers with the Board on general business conditions and has the power to call for information and to make recommendations concerning the operations and affairs of the reserve banking system.

Each Federal reserve bank after paying dividends carries all of its earnings to surplus until there has been reserved from profits an amount equal to 100% of its subscribed capital. After this surplus has been created 10% of earnings are to be added each year and the remainder paid to the U. S. Government as a tax. At the close of the year 1922 the Federal Reserve Bank of Dallas