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fore of very great importance to the United States as well as to the banks, that a large surplus should be created for the protection of outstanding liabilities. Federal Reserve notes issued through Federal Reserve Banks and for which they are ultimately liable are obligations of the United States.

The net earnings of the Federal Reserve Banks, which are paid to the Government under existing laws as a franchise tax, are used either to supplement the gold reserve held against outstanding United States notes, or to reduce the outstanding bonded indebtedness of the United States. The law provides that should a Federal Reserve Bank be dissolved or go into liquidation, any surplus remaining after the payment of all debts, dividend requirements, and the par value of the stock, shall be paid to and become the property of the United States. It is obvious, therefore, that if these earnings are carried into the surplus account of the Federal Reserve Banks they will accomplish substantially the purpose for which they are now used, since they will protect the credit of the United States.

AMENDMENT TO SECTION 10.

Section 10 now makes members of the Federal Reserve Board ineligible during the time that they are in office and for two years thereafter, to serve as officers or directors of member banks.

The proposed amendment is designed to make the members ineligible during the time they are in office and during the period for which they are appointed, but will not disqualify them after they have served their full term.

AMENDMENT TO SECTION 11.

Federal Reserve Banks are now prohibited from rediscounting for a member bank notes bearing the signature or indorsement of any one borrower in an amount in excess of 10 per cent of the capital and surplus of the member bank.

By recent amendment to the national bank act, national banks under regulations prescribed by the Comptroller of the Currency, with the approval of the Secretary of the Treasury, are permitted to lend to one person, an amount in excess of 10 per cent of their capital and surplus, provided such loans are secured by United States bonds or certificates of indebtedness issued after April 24, 1917.

In view of the limitations contained in sections 9 and 13 of the Federal Reserve Act, national banks and other member banks which. in the interest of the Government, have made loans to customers in excess of 10 per cent of their capital and surplus, upon the security of Liberty bonds, are now unable to rediscount the notes taken with

the Federal Reserve Banks. In justice to the member banks, therefore, it is important that this amendment to section 11 should be adopted, which will permit the Federal Reserve Board, when necessary, to suspend the limitations of the sections above referred to.

AMENDMENT TO SECTION 25.

The Board has, on previous occasions, recommended to Congress that the Federal Reserve Act be amended so as to permit national banks under certain conditions to establish branches. The proposed amendment to section 25 which has been incorporated in the House bill but not in the Senate bill, authorizes national banks located in a city of more than 100,000 inhabitants and having a capital and surplus of $1,000,000 or more, to establish branches not to exceed 10 in number within the corporate limits of the city or town in which it is located, provided the State laws extend a similar privilege to competing State corporations. As the law now stands national banks are at a serious disadvantage in meeting the competition of State banks with branches. In the opinion of the Board the proper development of the Federal Reserve System makes it necessary to coordinate as far as possible the powers of all member banks. Under existing laws, State banks and trust companies in many cases are permitted to operate branches even after conversion into national banks, with the result that some member banks, both national and State, are given advantage over other member banks.

The Board therefore renews its recommendation that this amendment be adopted, being confident that it will prove beneficial to the Federal Reserve System, as well as to the communities concerned.

AMENDMENT TO SECTION 5172, R. S.

A bill identical in form with this amendment has already passed the House and the Senate. In the Senate, however, it was passed as an independent bill, while in the House it was a part of a bill which dealt with other subjects. In these circumstances it has not become a law.

Under the present law, national bank notes must be delivered to member banks registered and countersigned in blank and are presumably signed by the officers of the issuing bank. The law makes such notes, however, subject to redemption by a national bank, whether issued and placed in circulation without signatures or with forged or fraudulent signatures. The actual signing of the note is therefore not a necessary incident to its validity. This amendment permits the signatures to be engraved on the notes before they are delivered to the banks. If adopted, considerable expense will be avoided and the distribution of the notes will be expedited.

FEDERAL ADVISORY COUNCIL.

The Federal Advisory Council during the year held four meetings at Washington, as required by section 12 of the Federal Reserve Act.

It is the practice of the Board, in advance of each meeting, to furnish the council with a list of topics suggested for discussion, and to hold a joint session with the council at the beginning and close of each meeting. At the opening session the Board's viewpoint is outlined and at the closing session the council submits a written report giving its opinions and conclusions regarding the questions brought to its attention by the Board, and makes, at the same time, such independent suggestions or recommendations as it may deem proper.

These meetings are of constantly increasing interest and value, for they give the Board the advantage of the views of leading bankers from all sections of the country, and at the same time enable the Board to make clear to these representative bankers its own attitude on various banking and financial problems.

The statute requires that these meetings be held not less than four times each year, and oftener if called by the Federal Reserve Board. The council is also empowered to hold additional meetings whenever it may deem it necessary, either in Washington or elsewhere. So far additional meetings have not been deemed necessary, but the Board will not hesitate to call the council together whenever, in the consideration of the problems incident to the readjustment period which the country is entering, such action should seem advisable.

The members of the Federal Advisory Council inform the Board at each meeting of financial, commercial, and agricultural conditions in their respective districts.

BOARD'S ORGANIZATION, STAFF, AND EXPENDITURES. The personnel of the Federal Reserve Board, which had remained intact for nearly four years, has undergone marked changes since July 22, 1918, when Mr. Frederic A. Delano, now a lieutenant colonel, Corps of Engineers, United States Army, resigned his membership in order to engage in military service overseas. The term of Mr. Paul M. Warburg, vice governor of the Board, expired on August 9, and the resignation of Hon. Wm. G. McAdoo, Secretary of the Treasury and ex officio chairman of the Board, became effective on December 16. Mr. Albert Strauss, of New York, was appointed by the President for the 10-year term to succeed Mr. Warburg, and taking the oath of office on October 20, was designated by the President as vice governor of the Board. Hon. Carter Glass, who became Secretary of the Treasury on December 16, is now by virtue of his office, chairman of the Board. No successor to Mr. Delano has yet

been named. Dr. H. Parker Willis, who had been the secretary of the Board since its organization, resigned on August 1, and the Board elected as his successor, Mr. Joseph A. Broderick, of New York, who had been from the outset the chief of its Division of Audit and Examination, and in addition to his duties as secretary, Mr. Broderick remains as the head of that division. On May 16, Mr. Louis C. Adelson was elected assistant secretary of the Board, and on September 1, Mr. Webb T. Chapman was elected as an additional assistant secretary. The marked growth of the activities of the Federal Reserve System has been accompanied by a heavy increase in the volume of the Board's work, necessitating considerable additions to the clerical force. The establishment of the Division of Foreign Exchange, with headquarters in New York, as well as the creation of the Division of Analysis and Research, have increased the number of persons employed by the Board from 76 on December 31, 1917, to 227 on December 31, 1918, of whom 91 are in the Division of Foreign Exchange, engaged in work which will end with the reestablishment

of peace.

The total cost of conducting the work of the Board during the year 1918, including salaries of members, expenses involved in printing the Bulletin, and the cost of operating the Division of Foreign Exchange, was $428,318.59. During the year 1918 two assessments were levied against the Federal Reserve Banks, aggregating $382,081, or approximately one-half of 1 per cent of the average paid-in capital and surplus of the Federal Reserve Banks for the year.

The annual reports of the Federal Reserve agents and further details relating to the operations of the Federal Reserve Board and of the Federal Reserve Banks appear in the appendix.

CONCLUSION.

Having submitted a report of operations in considerable detail, the Board deems it appropriate in closing to refer to certain facts and conditions which have had a bearing upon its policies and operations.

In meeting the emergencies occasioned by the war, Governments everywhere have been compelled to make unprecedented drafts upon their national incomes and resources. With the great nations engaged in a death grapple, preservation of national life has been the supreme object. Most difficult questions of financial expediency have been presented to finance ministers in deciding upon the most available and effective means of mobilizing national resources. The decision once made, it became the duty of all separate administrative agencies concerned with fiscal or banking functions to cooperate in giving effect to policies adopted, and it was in this spirit of cooperation that the Federal Reserve Board felt it to be its duty to assist in making effective the policies determined upon by the Secretary of the Treasury, however inconsistent some of the steps necessary to be taken might be with principles which usually govern in normal times. The demands of war are imperative and must be met without delay, and in financing the titanic struggle happily ended by the armistice last November first consideration could not always be given to what was theoretically desirable or convenient from the standpoint of banking practice.

The financial obligations of the Government are being met, the war has been won, hostilities have been ended, and representatives of the United States and the allied powers are now in conference regarding terms of peace. The country is confronted, it is true, with the problems incident to the demobilization of troops, the readjustment of prices, and the diversion of industry from war activities to the employments of peace. We are approaching an era of general readjustment and resumption of construction at home, and of reconstruction abroad, but the termination of the war at a time far in advance of popular expectation has minimized instead of magnified our national problems. We should have been confronted with them in any event whenever the war terminated, and the Government has not been required to withdraw from their ordinary employment the 2,000,000 or more of men it was preparing to withdraw in September last, nor is the country faced with the necessity of equipping them, and of maintaining overseas military and naval forces for a year or more of 4,000,000 to 5,000,000 men. The expenditures of $25,000,000,000 to $30,000,000,000 which had been anticipated for the year 1919 will be greatly reduced, and instead of sending new men to the front the Government is bringing back a large portion of the forces which it had been maintaining abroad.

Within a few months the country's war financing will have been completed, and the Board can then deal with the problems incident to bringing our credit structure and our banking operations back to a commercial basis. Our banking situation is strong and inherently sound, and is much stronger than would have been the case had the war continued for another year.

On December 31 the Federal Reserve Banks held a reserve of about 50 per cent against their combined liability for deposits and note issues, and if the reserve against deposits be computed on the basis of the legal requirement of 35 per cent, the reserve against Federal Reserve notes would be 60 per cent. The ability of the country to absorb investments has proved to be far greater than had been anticipated, and our credit structure, although expanded, is unshaken. We have no currency problems, and conditions are not comparable with those which existed at the close of the Civil War, and while the volume of circulation is larger than it has been at any period in our

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