CHAPTER XXII

THE FEDERAL RESERVE SYSTEM

183. Federal reserve banks.-In previous chapters reference has been made at different places to the terms and operations of various features of the Federal reserve system. We shall now try to summarize the new law as a whole, point out its most important features, and indicate the most important changes thus introduced into our currency and banking system.

The Federal Reserve Act provides for the division of the United States into from eight to twelve districts, each district to have one Federal reserve bank with a capital of not less than $4,000,000. Every national bank is required, and state banks and trust companies are permitted, to subscribe to the capital of the Federal reserve bank in their district to an amount equal to 6 per cent of their own capital and surplus, payable one-sixth at the call of the Organization Committee or the Federal Reserve Board, one-sixth within three months, and one-sixth within six months, the balance being subject to call. National banks failing to accept the terms of the Act within sixty days after notice lose the right to act as reserve agents and any bank which fails to become a member bank or to comply with the provisions of the Act within one year, forfeits its charter. If the stock subscriptions of banks in any district were insufficient to provide the minimum cap

ital required, stock was to be offered to the public, no single private subscription to exceed $25,000, and should the total subscriptions of banks and public be insufficient the balance needed was to be allotted to the United States, to be paid for out of treasury funds.1 The capital stock of each Federal reserve bank may be increased as member banks increase their capital or as additional banks become members, and may be decreased as member banks reduce their capital or surplus or cease to be members. The Act provides for the conversion of state banks into national banks if the state law permits such conversion. Membership is not confined to national banks; any state bank or trust company may become a member of a Federal reserve bank by meeting substantially the same requirements as apply to national banks. It may continue to exercise all corporate powers granted by the State, but must conform to the reserve and capital requirements of the Reserve Act and to those provisions of law imposed on national banks which prohibit them from lending on or purchasing their own stock, which relate to the withdrawal or impairment of their capital and to the payment of unearned dividends. It must make not less than three annual reports of condition and payment of dividends to the Federal reserve bank and be subject to examination by direction of the Reserve Board, though State examinations may be accepted by the Federal reserve bank. It is unlawful for any officer or agent of such a bank to over-certify a check. A state bank may withdraw from membership after six months' notice, but a Federal reserve bank may not, without authority of the Reserve Board, cancel in any one year more than 25 per cent of its capital in permitting voluntary withdrawals.

184. Management.-Each Federal reserve bank is conducted under the supervision and control of a board of nine directors holding office for three years and divided. into three classes, designated as classes A, B, and C. The 1 The required capital was fully subscribed by the banks.

three members of Class C are appointed by the Federal Reserve Board, and must have been for at least two years residents of the district in which the Federal reserve bank is located. None of them shall be an officer, director, employee, or stockholder of any bank. One member of this class, who must be "a person of tested banking experience, ," is named as chairman of the board of directors of his district reserve bank, and is known as "Federal reserve agent. He maintains a local office of the Federal Reserve Board and acts as its official representative in the district. The original Act provided that another member of Class C should also be an experienced banker and act as deputy chairman and deputy Federal reserve agent. It was found to be difficult to fill the office of deputy Federal reserve agent. That officer was required to have the same qualifications as the Agent, yet in most of the Reserve banks he received no salary but merely the fees paid to directors for attendance upon meetings. The Federal Reserve Board, therefore, recommended and Congress passed an amendment to Section 4, June, 1917, abolishing this title and office, and providing for the appointment by the Federal reserve agent, subject to the Board's approval, of one or more salaried assistants with tested banking experience, who shall have power to act in his stead. One of the Class C directors acts under appointment by the Board as deputy chairman.

Directors of Class A and Class B are chosen by member banks. Directors of Class A represent the member banks; directors of Class B must at the time of election "be actively engaged in their district in commerce, agriculture, or some other industrial pursuit.' They may not be offi

cers, directors, or employees of any bank, though they may be stockholders. No Senator or Representative in Congress may be an officer or director of a Federal reserve bank or a member of the Federal Reserve Board. It appears, then, that Class A consists of representatives of the banks or those who are intrusted with the funds of the business public; Class B consists of representatives of the

business interests of the district; and Class C consists of representatives of the Federal Reserve Board, one a person with banking experience, designated as Federal Reserve Agent.

The plan of electing the six directors of Classes A and B as provided by the amendment of September 26, 1918, is as follows: The Federal Reserve Board shall classify the member banks of the district into three groups, each consisting as nearly as may be of banks of similar capitalization. (The purpose of this amendment was to group the banks on a basis of capitalization so as to insure to large, medium-sized and small banks representation on the boards of directors of the Federal reserve banks.) Each member bank is permitted to nominate to the Chairman of the board of directors of the Federal reserve bank of the district one candidate for director of Class A and one for director of Class B. These candidates are listed by the Chairman and a copy of the list is sent within fifteen days of its completion to each member bank. The president, cashier, or some other duly authorized officer casts the vote of the member bank in the election. Within fifteen days this officer certifies to the Chairman the bank's first, second and other choices for director of Class A and Class B, respectively, upon a ballot furnished by the Chairman, but may not vote more than one choice for any one candidate. The law as amended further provides that an officer or director of a member bank shall not be eligible to serve as a Class A director unless elected by member banks which are members of the same group as the member bank of which he is an officer or director. Furthermore, an officer or director of more than one member bank is ineligible for a Class A director except when elected by banks in the same group as the bank having the largest aggregate resources of any of those of which he is an officer or director. A candidate having a majority of the total votes cast in the column of first choice is declared elected. If no candidate have a majority, votes cast for

second choice candidates are added to those of the first

choice, and if no candidate then have a majority the votes for third choice are to be added.

At the first meeting of the board of directors of each Federal reserve bank the directors of each of the three classes designate one member of each class whose term expires in one year, one in two years, and one in three years from the first of January nearest to the date of such meeting. Thereafter all directors are chosen for three years. Vacancies that may occur are to be filled in the same way as in the original selections and such appointees hold office for the unexpired term of their predecessors. Directors of Federal reserve banks may receive compensation for their services, subject to the approval of the Federal Reserve Board, and in addition a reasonable allowance for all necessary expenses in attending board meetings, such compensation and allowance to be paid by the respective Reserve banks. An exception to this rule is the Federal reserve agent, whose compensation is determined by the Federal Reserve Board but paid by the Reserve bank.

Acting upon the suggestion of the Federal Reserve Board, the board of directors of each Federal reserve bank has named one of its members as Governor, though this office or title is not provided for in the Act. He is the active operating officer of the bank, with administrative duties somewhat similar to those of a bank president. His duties do not conflict with those of the Federal reserve agent, who is chairman of the board of directors, and, as noted above, is appointed by the Reserve Board as its representative. In this latter capacity he transmits communications from the Reserve Board to the bank; receives and transfers to the bank Federal reserve notes in exchange for gold or commercial paper eligible for rediscount; makes periodic reports to the Reserve Board upon banking and business conditions in his district; and submits to the Reserve Board applications made by the board of directors of his bank for a change in the rate of discount on commercial paper. Each Federal reserve bank, may have,