were any financial wise ones-said, "Why charge the people, it is their own money?"

66

These facts are just noted in passing to indicate that the motif" underlying the bill will be found to be the great danger in its execution-the demand for cheap money.

While the bank bill may be socialistic the labor union seems to have had no part in its enactment. The Federal reserve banks are set up for 20 years unless sooner dissolved by act of Congress, or a franchise become forfeited by violation of law; and the bank "may dismiss at pleasure" its officers or employees. Evidently the legislators recognize the desirability of discipline and safety by giving the bank power to "dismiss at pleasure," although such power is denied to the transportation interests of the country.

It is still apparent that the custody of money must be safeguarded beyond the safety required in travel.

VI

THE FEDERAL AGENT AND HIS RESERVES.

It is presumed that there will be presidents* of Federal Reserve Banks, although that official is not directly mentioned.

In Section 4 it is provided that the bank by its board of directors shall appoint "Such officers and employees as are not otherwise provided for in this Act, define their duties, require bonds of them, etc."

Many bankers have assumed from the reading of the Act and from the fact that the Federal Reserve Agent is under the Act made chairman of the board that that valuable old fogy, otherwise known as the conservative bank president, who arrives late and goes early, and looks wise, is dispensed with in this most progressive new banking act.

Such, however, cannot be the case. The nine directors, only three of whom are nominated by the Government, must run the bank as ordinary banks are run in the national banking system.

A bank here, as elsewhere, must be represented by its president. He is more than ever under this bank act the representative of the board and the bank, for the Federal Reserve Agent is distinctly the representative of the Government and reporting thereto.

The directors must give their orders through the president. The agent, who is chairman of the board, must get his from the Government. The functions at times may conflict. The Reserve Agent, until the Federal Reserve Board at Washington otherwise rules, has nothing more to do with the bank than any other director except to preside over the board as one of the nine directors.

The business of the bank may be conducted for months, if not for years, with little reference to the Federal Reserve Agent.

The moment, however, the bank desires the new currency it takes off its hat to the Federal Reserve Agent and says: "Please," and he answers, "Hand over your collateral to my custody, give me the evidence that it is distinctly re-discounted paper, based upon transactions of commerce."

He must then be provided with a safe or a compartment in the

*They have been designated "governors."

vault and becomes the sole keeper of the commercial notes and custodian of the new government money, passing it in and out so long as the United States Government is in the business of issuing paper through that bank.

When the bank has no notes of the United States Government his function ceases except as chairman, director and a reporter to the Government.

The interesting question may arise in the litigation of the future as to the divided responsibilities of the bank and the reserve agent of the Government as custodian of collateral-commercial notesand of government paper.

Section 7 relates to division of earnings, and the question has been raised as to whether the shares can earn the 6% cumulative dividends.

This will depend in the first instance upon the amount of paper the banks elect to pass in for re-discount when making their payments on deposit account. The capital must be paid in by gold, but one-half of the deposits may be paid in with commercial paper. If 200 million paper is paid in or re-discounted at a 6% or 5% rate, the banks in the aggregate would have no difficulty in earning 6% on a 100 million capital. But if the re-discount rate should in time be lowered to 4%, it would take 300 millions of re-discounted paper to make 6% dividends and expenses, surplus, etc., estimated at a like amount.

If the system should start with the world's discount rates as in 1913, it ought not to have a lower discount than 6%. When money is easy at 2% and 3% in the markets of the world, the rediscount rate of the reserve banks may safely be lowered, at least in the East, to 4%. But when discount rates throughout the world become still easier, the regional banks, for safety, should still maintain their 4% rate, go out of the home discount market and accumulate reserves to meet the ultimate effect of rising prices and expanded industry which is always stimulated by abnormally low rates either at home or abroad.

The foreign discount market will be as important as the home market, and at times more so.

And the Federal reserve system of this country, if properly administered-administered so as to maintain its credits and gold reserves in equilibrium-will be the balance wheel for the whole world. Its reserves will be accumulated in time of low money rates, and its profits will be made and accumulated in discounting at high money rates when there is universal demand over the world for

Its safety will then lie not only in the expansion of its note

issue, but in the removal of restraints from the reserves.

When money rates are low it should not expect to make the 6% upon its share capital. When money rates are high, or above 5%, it should steadily expand credit at a rising rate of interest and, with that alone as governor, support the wings of reserve, and of power over reserves, of the regional reserve banks and the member banks. To do this effectively the Federal Board must always conserve gold when money rates are low and let that and its new currency and all credit fly freely to the ends of the earth on high and advancing discount rates.

One of the first reductions in reserves that might be made in due time should arise from the reclassification of the banks. At the end of three years all bank reserves are removed from reserve city banks and central reserve city banks. There is no reason for requiring an 18% reserve in the three central reserve cities and 15% in reserve city banks.

Under section 11, paragraph E, power is given the Federal Reserve Board "to reclassify existing reserve and central reserve cities, or to terminate their designation as such." Under this clause the central reserve cities might at first be reclassified as reserve cities, thus reducing their reserve from 18% to 15%, and later the reserve city designation might be abolished, thus reducing all bank reserve requirements to 12%.

Under our new reserve law, city bank reserves are not actually reduced from 25% to 18% and 15%, as would appear by the reading of the bill. Before determining the net deposit against which 25% reserves must be kept, the "due from banks" may be deducted from the "due to banks." Therefore, New York need not hold 25% against all the deposits placed with it by banks; and, on the whole, its 25% reserve requirement means only about 21% against gross deposits. By the new law the redepositing of bank reserves as now practised is in three years abolished, and bank deposits in other "member" banks become individual deposits. Many city banks will find that their reserve requirements are actually increased.

In the last days preceding the passage of the banking bill a leading banker, representing the St. Louis banks, arrived in Washington and cried, “Hold up! You are not reducing our reserve requirements. You are increasing them. St. Louis banks now hold only 17.2% of their gross deposits under the 25% requirements. You are now forcing us up to 18%!" He proposed amendment to the law. But he was too late. The bill was rushed through on the false theory that the country needed immediately the new money that might be created under it, and also with the understanding that it might be soon amended, where amendment was found necessary.

It was pointed out that the national bank act itself has been amended by "57 varieties."

If the 7100 country banks, most of which are well distant from reserve banks, need only a 12% reserve, of which only one-half need be kept in their own vaults, certainly the central reserve city banks, with a re-discount privilege at their Federal reserve bank in the same city, need keep no more in cash. When they need money they have only to step across the way and re-discount their bills or commercial paper and receive credit to bring up their reserve, which have been checked out at the Federal reserve bank, or get Federal reserve currency, if that is needed to meet the payrolls of their cus

tomers.