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and the Federal Reserve Banks now collect without charge all checks on members and other banks on the par list.

During the month of October, as has already been stated, additional facilities were given member banks and their customers through the absorption by the Federal Reserve Banks of all cost of postage, expressage, insurance, etc., incident to shipments of currency to and from member banks (not including silver and subsidiary coin), also of the cost of telegrams between the Federal Reserve Banks and member banks in connection with currency, exchange transfers, and deposit transactions. Under a similar arrangement for nonmember banks maintaining clearing accounts, the Federal Reserve Banks absorbed the cost of postage, insurance, and expressage in connection with shipments of currency in settlement of clearing balances, and a further saving of expense to nonmember banks on the par list is provided by inclosing stamped envelopes with collection letters for return remittances. All expenses incident to shipments of currency made in payment of items sent for collection are borne by the Federal Reserve Banks.

Since the installation of the leased-wire system connecting all Federal Reserve Banks, delays in the transmission of telegraphic transfers from one section of the country to another have been reduced to a minimum, and the number of such transactions which are consummated daily indicates the member banks' appreciation of the facilities afforded.

In some districts there has been an increase in the number of banks taking advantage of the exchange facilities, provided through the medium of Federal Reserve exchange and Federal Reserve transfer drafts. Any member bank may obtain through its Federal Reserve Bank as complete facilities as it could secure by maintaining accounts in each of the 12 Federal Reserve cities, as these drafts are payable on presentation at any designated Federal Reserve Bank without deduction for time involved in collection, the settlements between the Federal Reserve Banks concerned being made through telegraphic transfers.

ISSUES OF FEDERAL RESERVE BANK NOTES.

The act approved April 23, 1918, known as the Pittman Act, the short title of which is “An act to conserve the gold supply of the United States; to permit the settlement in silver of trade balances adverse to the United States; to provide silver for subsidiary coinage and for commercial use; to assist foreign Governments at war with the enemies of the United States; and for the above purposes to stabilize the price and encourage the production of silver,” authorizes the Secretary of the Treasury to melt or break up and sell as bullion not more than 350,000,000 of standard silver dollars, and provides that any silver certificates which may be outstanding against such standard silver dollars so melted or broken up shall be retired at the rate of $1 of such certificates for each standard silver dollar melted or broken up, and that sales of bullion shall be made at such price-not less than $1 per ounce of silver 1,000 fine—and upon such terms as shall be prescribed from time to time by the Secretary of the Treasury.

The act further provides that the sales of silver bullion may be made for the purpose of conserving the existing stock of gold in the United States, of facilitating settlement in silver of trade balances adverse to the United States, of providing silver for subsidiary coinage and for commercial use, and of assisting foreign Governments at war with the enemies of the United States. In order to prevent contraction of the currency, the Federal Reserve Board is authorized to permit or require the Federal Reserve Banks to issue Federal Reserve bank notes in any denominations, including denominations of $1 and $2, in an aggregate amount not exceeding the amount of standard silver dollars melted or broken up and sold as bullion, upon deposit with the Treasurer of the United States, as security for the bank notes issued, of United States certificates of indebtedness, or of United States one-year gold notes. The Federal Reserve bank notes are taxable at a rate to make the net return on the certificates of indebtedness or the one-year gold notes equal to the net return on United States 2 per cent bonds used to secure Federal Reserve bank notes. The effect of the Pittman Act has been most satisfactory; it has caused no expansion of currency, as the Federal Reserve bank notes which have been issued have merely taken the place of a corresponding amount of silver dollars or silver certificates which had been in circulation and the bullion which has been made available by the melting of the silver dollars has been most effective in relieving an acute financial situation with which the British Government was confronted in India, and has also relieved, without the shipment of gold, an adverse exchange situation, which threatened to restrict our importations from the Orient.

In the allocation of silver, preference has been given to the requirements of our own Government and the governments associated with us in the war, although as the supply of silver has become more ample, shipments have been permitted to some extent for commercial purposes. Up to the close of the year, $119,162,760 of Federal Reserve bank notes were issued and put into circulation mainly in denominations of $1 and $2, and exports of silver were authorized by the Board since April 23, amounting to $258,209,000.

These issues of Federal Reserve bank notes are of a temporary character and will be retired automatically as the Treasury redeems the certificates of indebtedness or notes securing them, as required

by section 6 of the Pittman Act, which provides that “as and when standard silver dollars shall be coined out of bullion purchased under authority of this act, the Federal Reserve Banks shall be required by the Federal Reserve Board to retire Federal Reserve bank notes issued under authority of section 5 of this act, if then outstanding, in an amount equal to the amount of standard silver dollars so coined, and the Secretary of the Treasury shall pay off and cancel any United States certificates of indebtedness deposited as security for Federal Reserve bank notes so retired."

AMENDMENTS TO THE FEDERAL RESERVE ACT.

The ability of the Federal Reserve System to meet the abnormal conditions incident to the war has been due in a large measure to the liberal attitude and prompt action of Congress in enacting legislation necessary to make the Federal Reserve Act responsive to these conditions.

The acts which have become law since the last annual report of the Board, and which amend the provisions of the Federal Reserve Act, or affect the operations of the Federal Reserve Banks or member banks, may be summarized briefly as follows:

(1) Section 8 of the act approved April 4, 1918, known as the third Liberty bond act, authorized the Secretary of the Treasury to leave on deposit with banks which subscribed for themselves or for their customers to the third Liberty loan the proceeds of such subscriptions under certain safeguards and restrictions. This was obviously necessary to prevent complications which might have resulted from heavy withdrawals of deposits from banks throughout the United States and the concentration of these funds in the Treasury.

(2) Section 13 of the act approved April 5, 1918, known as the war finance act, authorized the Federal Reserve Banks to discount direct obligations of member banks secured by bonds of the War Finance Corporation and to use notes so secured, if it becomes necessary, as a basis for Federal Reserve notes. While the War Finance Corporation did not find it necessary to issue bonds or to obtain credit through the Federal Reserve Banks, this precautionary legislation unquestionably had a very beneficial effect in stabilizing

credits.

Section 15 authorized the Federal Reserve Banks to act as fiscal agents and depositaries of the War Finance Corporation, thus placing at the disposal of that corporation the facilities of the Federal

Reserve System.

Section 20 of this act amended section 5202, Revised Statutes, so as to exempt from the liabilities which may be incurred by a national bank those incurred under the provisions of the war finance corpora

tion act.

Section 301 repealed the stamp tax in so far as it applied to promissory notes secured by bonds or obligations of the United States. This provision of the war finance corporation act aided materially in marketing Liberty bonds.

(3) The act approved April 23, 1918, known as the Pittman Act, amended the Federal Reserve Act by authorizing Federal Reserve Banks to issue Federal Reserve bank notes in any denomination including denominations of $1 and $2 against the security of United States certificates of indebtedness or of one-year United States gold notes. This act has been discussed elsewhere in this report.

(4) The act of September 24, 1918, entitled “A supplement to the third Liberty bond act,” amended section 5200, Revised Statutes. This section limits the amount that may be loaned by any national bank to any one person to 10 per cent of the capital and surplus of the lending bank. Under this amendment loans secured by Liberty bonds were made exempt under certain conditions from this limitation, thus facilitating to a very great extent the marketing of Liberty bonds.

(5) The trading-with-the-enemy act, as amended by the act approved September 24, 1918, authorized the President to use any agencies that he might select to control foreign-exchange transactions. Under authority of this act the Federal Reserve Board was designated to perform these functions as the agency of the Secretary of the Treasury.

(6) The act of September 26, 1918, amended sections 4, 11, 16, 19, and 22 of the Federal Reserve Act, and sections 5208 and 5209, Revised Statutes:

(a) The amendment to section 4 of the Federal Reserve Act simplified the procedure to be followed in the election of directors of Federal Reserve Banks.

(6) The amendment to section 11, subsection (k), of the Federal Reserve Act, broadened to some extent the trust or fiduciary powers that may be exercised by national banks; made such operations subject to appropriate safeguards and restrictions, and will make it possible for national banks to exercise these powers on a basis of substantial equality with competing State corporations.

(c) The amendment to section 16 of the Federal Reserve Act authorized the issuance of Federal Reserve notes in larger denominations than was possible under preexisting laws.

(d) The amendment to section 19 of the Federal Reserve Act vested in the Board the power to classify banks in outlying districts of reserve and central reserve cities as banks in reserve or nonreserve cities, thus removing what might have proven an injustice to the smaller banks in the outlying districts of the larger cities or in newly annexed territory of such cities.

(e) The amendment to section 22 of the Federal Reserve Act, which relates to transactions between member banks and their officers or directors, has cleared up the many ambiguities of that section and has removed what was regarded by many State banks as an obstacle to membership.

(f) The amendment to sections 5208 and 5209, Revised Statutes, which prescribe penalties for false statements made with intent to defraud by officers or directors of national banks, and certain penalties for embezzlement, abstraction, or willful misapplication of funds on the part of such officers or directors, makes subject to these penalties officers and directors of Federal Reserve Banks and receivers of national banks.

PENDING AMENDMENTS TO THE FEDERAL RESERVE ACT.

There is now pending in the House a bill to amend sections 7, 10, 11, and 25 of the Federal Reserve Act, and section 5172 of the Revised Statutes. A bill has already been passed in the Senate, the provisions of which are substantially similar to those of the House bill, except that it does not include any amendment to sections 10 and 25 of the Federal Reserve Act.

The purpose of the proposed amendments included in these bills may be summarized briefly as follows:

AMENDMENT TO SECTION 7.

Section 7 of the Federal Reserve Act now provides that the net earnings of the Federal Reserve Banks, after paying expenses and cumulative dividends, shall be paid to the United States as a franchise tax, except that one-half of such net earnings shall be paid into a surplus fund until that fund amounts to 40 per cent of the paid-in capital.

The amendment to section 7 provides that all net earnings shall be paid into a surplus fund until that fund amounts to 100 per cent of the subscribed capital of the Federal Reserve Bank and that thereafter 10 per cent of said net earnings shall be paid into this fund.

The Federal Reserve Banks are not subject to the same restrictions as are imposed upon national banks regarding liabilities that may be incurred. National banks are not permitted to become liable for borrowed money (except to Federal Reserve Banks and to the War Finance Corporation) in an amount greater than their capital stock, nor can they issue and put in circulation national bank notes in excess of this amount.

In order to give greater elasticity to their operations, Federal Reserve Banks were not made subject to these restrictions. It is there

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