duced to the minimum number, principally officers of the bank, whose acts could be suggested and passed upon from time to time by the stockholders' committee. Such a solution of the problem, however, would not be regarded favorably by the more important banking institutions. The managements of the latter declare they have no intention of evading the law, but they would like to know whether the foregoing interpretation of the statute is correct.

MEMBERSHIP OF STATE BANKS

June 7, 1915, the Federal Reserve Board made an exceptionally important decision. It is to the effect that it will allow State institutions to enter the Federal Reserve System with the right to withdraw and surrender membership if they so desire. State bankers have stated that an objection to entering was that when once members, they must surrender their charter or liquidate to get out.

The board states in the following circular (No. 14) that only one American credit system can exist. Men of affairs will not be satisfied if it leaves out any very considerable part of the nation's strength. Trust companies and State banks have their distinctive places and must be respected in coördinating them in the federal system.

Apparently the board used its discretionary power to bring about this coördination. Evidently the board sought to establish only regulations recognized as necessary to protect the system against admission of an institution which would not be a source of strength, and to prescribe such rules as would insure conformity of such an institution to the necessary essentials.

Access afforded by membership to the resources of the system will add to the prestige of the strongest State institutions. There will then be two principal classes of banks, those which do and those which do not belong to the system. These may be termed "Member Banks" and "Non-member Banks."

The board also states that membership will carry with it obligations as well as privileges. The statute imposes conditions as to the membership of State banks in the system and banks organized under State laws must comply with the capital and reserve requirements of the National banks. They must obey the statutory provisions imposed upon National banks respecting the limitations of liability which may be incurred by any natural or artificial person to such banks and the prohibition against purchases of or loans upon stock of such banks, the withdrawal or impairment of capital, and the payment of dividends which have not been earned. They must likewise obey other provisions, such as restrictions on the amount of acceptances by banks of this character, as well as those relating to transactions between such banks and their directors. They must, of course, observe the rules that the Federal Reserve Board may prescribe from time to time.

As to loans on real estate, the board apparently would not impose restrictions which may embarrass banks. The board provides limitations, however, so that loans or investments of this character may not be so excessive as to impair their liquid conditions.

It may be added that it is evident that the Federal Reserve Board has gone to the limit of its discretion in making it possible for State institutions to become members of the system. It will be noticed that State institutions having passed the necessary examinations, have the privilege of withdrawing from the system by giving twelve months' notice, but the re-payment of the amount of capital stock it holds in the reserve bank will not be made immediately, but by instalments should the board so elect.

It is asserted that a present member bank which has no means of leaving the system except by liquidation, might proceed to liquidate, re-organize under State law and then come into the system again with the added privilege of being able to leave the system after a year's notice. The

Reserve Board, however, would undoubtedly inquire into the motive of such action and might perhaps withhold permission for renewed membership.

The circular (No. 14) may meet objections which have prevented State institutions from becoming members of the system.

The fact must not be forgotten that this interpretation of the law by the Federal Reserve Board, permitting withdrawals by State institutions is not a part of the statute. The best solution is an enactment by the Federal Legislature amendatory of the statute.

ISSUE OF TWO HUNDRED MILLION DOLLARS IN NOTES BY FEDERAL RESERVE BANKS

The federal reserve banks have issued 235 million dollars in notes. This circulating currency is secured by approximately one hundred and eighty million dollars in gold, and twenty million dollars in discounted commercial paper. The motive of the federal reserve banks in issuing these notes is the accumulation of a large gold reserve as a future financial bulwark. In spite of this substantial note issue, it is to be observed that in this particular operation, the currency of the country has only been expanded to the extent of the discounted paper held as collateral. However, in case of financial stress, one hundred million dollars of gold may be withdrawn from this account and a like amount of approved discounts substituted for it, thereby reducing the underlying gold security from ninety per cent. to forty per cent. of the par value of the notes outstanding, and coincidently increasing the paper collateral from ten per cent. to sixty per cent.

In addition to these notes, the federal reserve banks have also issued about ten millions in bank notes which are identical in structure with National bank notes and are secured by ten million dollars of Government bonds deposited with the Comptroller of the Currency. Inasmuch as the federal

banks are taking advantage of the profit derived from this ten-million-dollar circulation on exactly the same basis as a National bank, and at a time when the country is over-supplied with currency, a National bank may similarly expand its circulation account to the extent of its capital in order to take advantage of the maximum circulation profit. If it is desirable for a federal bank to avail itself of this privilege and profit, a National bank may do likewise.

ERROR IN AMENDING THE FEDERAL RESERVE ACT

Section 13 (paragraph 5) provides that no member bank shall accept bills of exchange at any time to aggregate more than one-half its capital and surplus.

Member banks of the reserve system desiring to accept draft or bills of exchange beyond fifty per cent. of their capital and surplus are handicapped by Congress, owing to a mistake made in amending the Federal Reserve Act. In the proposed amendment, as originally framed, member banks were permitted to accept bills of exchange beyond the fifty per cent. limitation with the permission of the Federal Reserve Board. During the rush preceding adjournment, the clause authorizing the reserve board to permit banks to exceed the limitation was carelessly stricken from the bill, although it was not a point of difference between the two houses and not properly a subject for the consideration of the conference committee.

In the conference committee the following language was dropped in the confusion of the moment: "Except by authority of the Federal Reserve Board, under such general regulations as said board may prescribe, but not to exceed the capital stock and surplus of such bank, and such regulations shall apply to all banks alike, regardless of the amount of capital stock and surplus." Instead, therefore, of being able to accept bills up to one hundred per cent. of the capital and surplus, banks cannot go beyond the fifty per cent. limitation. The number of banks, however, desiring to exceed the limitation is comparatively small.

THE RESERVE OF GOLD

At the last session of Congress the Federal Reserve Board made an effort to obtain authority to give their notes directly in exchange for gold. The proposed amendment was defeated in the lower House although the Senate approved it. The great central banks of Europe pursue this course and it is the direct method by which they replenish their gold stocks. It was a defect in the Federal Reserve System not to provide originally for such exchanges and the failure to pass this amendment is an error. The reserve banks should have all sources of supply under their control for strengthening their reserves of gold.

The Federal Reserve System was created to centralize reserves and to place the banking system under central authority. Large powers must be conferred upon this authority in order that it may perform the service that is expected of it. The power to issue currency is admittedly one which must be guarded and for this reason it is placed under the supervision of one responsible official body. The effectiveness of the system depends upon the command given to this authority over the reserve resources of the country. The gold stock of the country should not be dispersed through all the member banks. We have established reserve banks without the most important reserves. An agency to protect the country against financial crises should be given full

resources.

No other country exists where all the banking institutions are required to carry specified reserves. In practically every other important country the notes of the central bank are used as the reserve cash of the other banks. The eminent German and French banks hold little cash, but carry the notes of the Reichsbank and the Bank of France.

THE TERM "PRIVATE BANKER" DEFINED

October 14, 1916, the Federal Reserve Board interpreted the term "private banker" to include partnerships or individ