CHAPTER XIII THE PRINCIPLES OF THE FEDERAL RESERVE SYSTEM I. CENTRALIZATION OF RESERVES centralization The factor most largely responsible for the peculiar Absolute organization of the Federal Reserve System was need of centralization of reserves. Yet "centralization" had al- feared ways had such an ominous ring in American ears that it was assumed to be necessary to avoid the semblance of complete centralization even though the benefits accruing from it were, if possible, to be assured. reserve banks The act provides for the establishment of new banks, to Federal be known as Federal Reserve Banks, into which the reserves of the country are, so far as possible, to be gathered. The country is to be divided into from eight to twelve "federal reserve districts" in each of which is to be designated a "federal reserve city" in which in turn the new banks are to be established. The first dis- Reserve districts tricting of the country is to be by an "organization committee" made up of the Secretary of the Treasury and the Secretary of Agriculture and the Comptroller of the Currency. After the organization of the system a board known as the "Federal Reserve Board" is to have control of this matter. reserve banks A minimum capital of $4,000,000 is prescribed for each Capital of federal reserve bank. The capital is to be subscribed by "member banks" of the district, each bank entering the system subscribing an amount equal to 6% of its own capital and surplus. One-sixth of the amount subscribed is payable on call, one-sixth three months after the organ Membership Pressure on national banks Inducement to national banks ization of the banks, one-sixth in six months, while the balance is to remain on call. If the bank subscriptions prove inadequate to supply the minimum capital, provision is made for popular subscriptions, although subscriptions by single individuals and corporations are limited to $25,000. So determined was Congress that the Federal Reserve System should get started that subscriptions by the United States government are pledged in every case where bank and popular subscription together do not suffice to supply the minimum capital. Above the minimum, the capital of the reserve banks may fluctuate as banks join or withdraw from the system. The shares are to be $100 each, payable in gold or in gold certificates. Those owned by banks are not to be transferred or hypothecated. Ostensibly, membership in the Federal Reserve System was to be voluntary, and provision is made for the entrance into membership of state institutions as well as of national banks. By amendment adopted June 22, 1917, provision is also made for membership of banks organized under local laws in the territorial possessions. As a matter of fact, pressure was brought to bear on national banks to force them into the system, although at the same time inducements were extended to them as well. National banks are required to signify within sixty days after the passage of the act as to their intention of joining the system. If they fail so to signify, they may on thirty days' notice from the Organization Committee be forbidden to act as reserve agents. Moreover, it is provided that government funds shall not be deposited with nonmembers of the system, and that a bank's charter shall be declared forfeited if it fail to enter the system within one year. As an inducement to national banks to come into the system it is provided that, on application to and approval by the Federal Reserve Board, and if not in contravention of state law, national banks may be permitted to do a trust business. It is also provided that member banks not in central reserve cities may make restricted loans on improved, unencumbered farm lands, but in this connection power is given to the Federal Reserve Board to add cities to the list of those not permitted to make such loans. An inducement to the large city banks interested in the possibilities of foreign trade is found in the provision that national banks with a capital and surplus greater than $1,000,000, may with the authorization of the Reserve Board, establish foreign branches. But perhaps even more significant in this connection are the provisions enabling member banks to engage in the business of accepting on commission. Amendments adopted in June, 1917, offer special inducements to the state banks to come into the system. While state banks must comply with the reserve and capital requirements of the act and with the provisions of law prohibiting the purchasing of or the lending on their own stock they are permitted to retain their state charter privileges. They are also exempted from the restriction in Revised Statutes 5200 relating to loans to individuals, although the restriction is practically made to apply in rediscounting operations by the bank itself at the federal reserve bank. Finally, provision is made for the withdrawal, on six months' notice, of a state member bank, although the law does not permit a reserve bank to cancel more than 25% of its capital in any one year for this purpose unless special authorization is obtained from the Federal Reserve Board. Although branch-banking has not, on the whole, been Branches favorably regarded in the United States, it was recognized that the peculiar function of the reserve banks would in time require the establishment of branches. It is therefore provided that the reserve banks may be permitted or required by the Reserve Board to establish branches in their several districts, and also in the other districts where the reserve banks of such districts have for any reason sus Management of the reserve banks Directors Federal Reserve Agent Election of directors pended operation. Provision is made for the operation of the branches by boards of directors of not more than seven members or less than three, under rules and regulations approved by the Reserve Board. The members of these boards are to have the same qualifications as directors of the reserve banks themselves. A majority of one of the branch directors is to be appointed by the reserve bank concerned, but the remainder are to be designated by the Federal Reserve Board. The bank is to select the branch manager. The act vests the government of the reserve banks in a board of nine directors. These are divided into three classes, A, B, and C, each containing three members. Class A directors are to represent and are to be elected by the member banks. Class B men also are to be elected by the member banks, but are to represent the broader business and commercial interests of the district. Class C directors are to represent the general public interest and are to be designated by the Reserve Board. One of the Class C directors is to be designated as chairman by the Reserve Board, and by virtue of such designation he becomes also the "Federal Reserve Agent." Another Class C director is to become in like manner vice-chairman. It was originally provided that the vice-chairman should also be deputy federal reserve agent, but by amendment adopted in June, 1917, the office of deputy agent was abolished, and authority was given to the federal reserve agent to appoint one or more assistants who have power to act in his name or stead during his absence. The law provides that the reserve agent is to be a person of tested banking experience. The method of electing the directors is carefully prescribed, and at the same time the essential qualifications of the directors are specified. It is hardly necessary to go into these matters in detail, although it may be said that the aim is to give the small banks equal voice with the large. The law provides also that no senator or representative in Congress shall be a director or officer of a reserve bank, and that no director in Class B shall be an officer, director, or employee of any bank, while directors in Class C shall not even be stockholders of banks. The term of office for the directors is fixed at three years. to U. S. As the federal reserve banks are to be public rather Dividends than profit-making agencies, their dividends are limited to 6% per annum. The dividends are, however, cumulative. It is provided that one-half of the net earnings after the dividends have been declared shall go into a surplus fund, Surplus until a surplus of 40% of the capital is accumulated. The remaining net earnings are to go to the United States Excess government. It is interesting in this connection to notice earnings that the amounts paid to the government are to be used, at the discretion of the Secretary of the Treasury, to supplement the gold reserve against United States notes or to reduce the government's bonded indebtedness. The surplus is of only secondary interest to the stockholders, however, because it is provided that, should a reserve bank go into liquidation, anything remaining in the surplus after proper deductions for debts, for dividends, and for the par value of the stock, shall accrue to the United States. The federal reserve banks are, by the law, made exempt Taxes from all taxes except those on real estate. In view of the limitation of dividends this would appear to be the only consistent course to pursue. Special taxes are provided in connection with the control of credit expansion as subsequently set forth, but these special taxes, contingent upon certain eventualities, are not for revenue purposes. The expenses of the Federal Reserve Board, of note issue, of the preparation of printing plates, etc., are to be assessed on the federal reserve banks by the Reserve Board. The franchise of the reserve banks runs twenty years Franchise unless sooner dissolved by Congress, or unless forfeited by particular banks through violation of law, etc. To coördinate and to control the whole system, provision |