was to withdraw this 5% fund from the reserve when the reserve requirements should be reduced so sharply on the inauguration of the system. The banks did not realize this provision of the Act until after the turn of the year, and the beginning of the inflow of money to the banks. In effect it was an added export of gold, but taken universally over the whole country, and brings our money "experts" for 1913 to above $100,000,000. The only other error in phraseology thus far discovered is that which permits the reserve city banks for three years after inauguration of the Act to keep their optional reserves with each other.* This clause which permits country banks to keep their optional reserves for 36 months in their own vaults, or in the Federal Reserve bank, also contains the alternative, "or in national banks in reserve or central reserve cities as now defined by law." This is eminently proper, as country banks are now permitted to keep reserves in both reserve and central reserve cities, but the same phraseology is repeated in regard to banks in reserve cities, obviously an oversight unless it was designed as a further attack upon New York City and intended to give, for illustration, cities like Albany an opportunity to bid against New York for reserve deposits from Philadelphia and Boston, or vice versa. Banks of the Boston and Philadelphia class have, disregarding this, three options when their reserve requirements on the inauguration of the system are reduced from 25% to 15%. Six of this 15% must be kept in cash, instead of 12 of the 25% as at present; 3% must be placed with the Federal Reserve bank; and 6% is optional. It may be held in cash; with the Federal Reserve bank, or in central reserve city banks. It is not, however, likely that there will be any great shifting of reserves, for at the end of the first year the Federal Reserve bank takes up 1%, in six months thereafter another 1%, and a third 1% at the end of two years. A year later, or at the end of 36 months after the inauguration of the system, the cash requirement is reduced from 6% to 5%, and the amount of optional reserve is increased from 3% to 4%. Thereafter no reserve can be counted except its cash in the bank vaults or with the Federal Reserve bank. *Note. This was corrected by amendment Aug. 15, 1914. XII CAN STATE BANKS QUIT THE NATIONAL SYSTEM? There seems to be a general impression that a state bank or trust company which enters the Federal Reserve System can withdraw at will. The act makes no explicit provision for the termination of the membership of any member bank except by liquidation or insolvency. It is true that it is a matter of option with a state bank or trust company whether or not it comes into the system, whereas with a national bank it is a matter of compulsion. But if a state bank or trust company voluntarily comes in, so far as its membership is concerned, it stands on the same basis as a national bank and is subject to the same duties and liabilities. It is suggested that if a state bank gets tired of its membership in the system, all it is necessary for it to do is to check out its reserve on deposit in the Federal Reserve Bank and turn in its stock for cancellation. There is no authority in the law for cancelling the stock under these circumstances, and if the bank checks out its whole reserve, it then becomes subject to the following provision: "No bank shall at any time make new loans or shall pay any dividends unless and until the total reserve required by law is fully restored." As respects state banks they would appear to have the right to come into the system in two ways: Under section 8 by a vote of 51% of their capital stock and with the approval of the Comptroller of the Currency they may "be converted into a national banking association, with any name approved by the Comptroller of the Currency." But section 9 permits them to become stockholders in a Federal Reserve Bank and the Federal Reserve Board shall establish by-laws to deal with state banks becoming members and "such bylaws shall require applying banks not organized under Federal law to comply with the reserve and capital requirements and to submit to the examination and regulations prescribed by the organization committee or by the Federal Reserve Board." However, provision is made to insure that state banks joining the system are subject in some other respects to similar rules as the national banks, so that unfair competition between them may be prevented. The Federal Reserve Bank upon notice from the Federal Reserve Board may suspend a state bank "from further privileges of membership" and it "may restore membership." It would also seem to be within the power of the Federal Reserve Board in establishing bylaws to make regulations under which the state banks may retire from the system. Until then any state bank attempting to leave the system by withdrawing its reserves from the Federal Bank might be interested in the end of the sixth paragraph of Section 2, which provides that for violation of the Federal Reserve Act, "Every director who participated in or assented to the same shall be held liable in his personal or individual capacity for all damages which said bank, its shareholders, or any other person shall have sustained in consequence of such violation." XIII THE OLD AND THE NEW RESERVES. Having shown in Article 9 the possibility of two billion credit expansion in our banking system, beginning in 1914, by the two hundred and sixty million reduction in the reserve requirements, two interesting problems immediately arise: First, as to how soon such an expansion may begin actively, and then through what class of banks the distribution of credit will take place. The third question as to who will get the benefit of the credit expansion, agriculture, industry or transportation, and how far the results will be divided between capital and labor, may be considered later, for that is the ultimate and not the primary problem. Bankers who have their nose to the grindstone say, "Why! we cannot start a bank without a year of preparation. It takes study to locate a bank and then it takes a year to build a bank vault, although meanwhile the clerical organization and internal system may be all arranged for." In reply it may be said that the regional reserve banks require no ground floors and until they have taken up the clearing house function they require no new buildings and no large spaces. The business can be done on the second floor and the government already has the machinery to quickly provide the clerical organization. The question of the bank vault may be readily solved by the use of the United States Treasury and its sub-treasury sysThere are sub-treasuries in this country in the following cities, besides the Treasury at Washington: tem. Boston, New York, Baltimore, Philadelphia, San Francisco, Chicago, These have the vault accommodations needed at first. Should Denver or Seattle be selected, their names can be found in this list of United States mints and assay offices: Section 19 of the Federal Reserve Act covering the subject of reserves is the most important section. The question for bankers and financial people to immediately consider is when the second paragraph of Section 19 becomes effective. It reads: 66 'When the Secretary of the Treasury shall have officially announced, in such manner as he may elect, the establishment of a Federal reserve bank in any district, every subscribing member bank shall establish and maintain reserves as follows": Immediately follows the reduction of the required bank reserves, and the transfer of part of the reserves to the regional reserve banks. The tremendous changes that take place we show in this little table, which every banker should put in his pocketbook: We have printed in full-faced figures the abracadabra acrostic, as these are the important figures all financiers may have occasion to remember for many years. To assist the memory one need only recall that beginning with the country banks which have a final optional reserve of 3% (to be kept either in cash, or with the Federal |