in the matter of government deposits was an expression frequently heard.

The four chief defects of our American banking system as it existed prior to the enactment of the federal reserve law have now been briefly described. They were decentralization, inelasticity of credit, cumbersome transfer system, and defective government depository system. To remedy these defects the federal reserve system was created by the law of December 23, 1913; and federal reserve banks opened their doors for business November 16, 1914. Since that date the system has developed rapidly under the management of administrative boards and under the influence of a number of important amendments to the organic law. It is not our task here to trace this interesting development, but rather to answer briefly the question: How is the federal reserve system as now developed remedying the defects of the old banking system? Let us consider the remedy in its relation to the four general defects in the order in which they have been discussed.

CHAPTER VI

HOW THE FEDERAL RESERVE SYSTEM IS REMEDYING THE OLD EVIL OF THE DECENTRAL

IZATION OF AMERICAN BANKING

The federal reserve act does not destroy our American system of small independent banks with its prestige of over a half century of growth and usefulness, and with its great merit of local adaptability to the needs of a country of magnificent distances and of widely varying economic activities. The federal reserve law continues these thousands of independent banks with all their essential functions, but federates them into a unified system which is democratic in its organization and nationwide in its field of operationa system dedicated to public service.

Federal Reserve Districts

There are twelve federal reserve banks, each of which operates in one of the federal reserve districts into which the country is divided. In determining the boundaries of these districts the authorities were required to have "regard to the

convenience and customary course of business," to make each district large enough to provide the minimum capital of $4,000,000 required by law, and to make none so large as to dominate the others thereby endangering the federal principle which the law sought to establish. A map showing the boundaries of the twelve federal reserve districts and the location in each district of the federal reserve city, namely, the city in which the main office of the federal reserve bank is located, is given below.1

The fact that the number of banks and the amount of banking capital in different sections of the country vary so widely explains the great differences in the geographic sizes of the federal reserve districts.

Plan of Organization

All national banks are required to be members of the system, and state banks and trust companies (which conform to certain standards as to size and character of business) are encouraged to join. Comparatively few state institutions joined during the first two years of the system, but the liberal policies of the federal reserve

1 The map is a reproduction of the one published in the Federal Reserve Bulletin of September, 1919.

authorities, together with later amendments to the law and a growing feeling that it is the patriotic duty of state institutions to join the system in these times of national emergency, these factors have all made the state institutions more favorably disposed toward the system and they have lately been joining in ever increasing numbers.

Member banks are required to subscribe to the capital stock of the federal reserve bank in their district to an amount equal to six per cent of the member bank's capital and surplus. Only onehalf of this subscription has so far been called, giving the federal reserve banks a paid-in capital of $85,140,000 on September 12, 1919, but the other half may be called at any time by the federal reserve authorities."

There are two noteworthy features of a federal reserve bank's plan of organization. They are first, its democracy, and second, its recognition of the quasi-public nature of the banking business through its grant to the public of participation in the bank's management.

The administrative control of a federal reserve bank is democratic. "One bank, one vote" is the rule. Furthermore, in order to prevent the large

2 Provisions for the establishment of federal reserve branch banks are contained in the federal reserve act (section 3). Up to September, 1919, twenty-one branch banks had been established.