Federal Reserve Banks
( Originally Published 1918 )
While the country was recovering from the panic of 1907-8, President Wilson, on June 24, 1913, sent to the Congress a currency message in which he said: "We must have a currency, not rigid as now, but readily, elastically responsive to sound credit, the expanding and contracting credits of every-day transactions, the normal ebb and flow of personal and corporate dealings. Our banking laws must mobilize reserves; must not permit the contraction anywhere in a few hands of the monetary resources of the country or their use for speculation purposes in such volume as to hinder or impede or stand in the way of other more legitimate, more fruitful uses. And the control of the system of banking and of issue which our new laws are to set up must be public, not private, must be vested in the Government itself, so that the banks may be the instruments, not the masters, of business and of industrial enterprise and initiative."
Accordingly, on December 23, 1913, Congress passed "An act to provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective super vision of banking in the United States, and for other purposes."
Main Features of the Act
Federal Reserve Districts. The act provides that the Reserve Board organization committee shall designate not less than eight nor more than twelve reserve cities, and divide the country into districts, each district to contain only one of the Federal reserve cities. The following twelve cities were designated by the committee : Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. The reserve banks were formally opened Nov. 16, 1914.
National Banks Must Subscribe to Capital Stock. When the organization committee shall have designated the cities in which Federal reserve banks are to be organized, and fixed the geographical limits of Federal reserve districts, every national banking association within that district shall be required within thirty days after notice from the organization committee to subscribe to the capital stock of such Federal reserve bank in a sum equal to six per centum of the paid up capital stock and surplus of such bank.
Capital Required. No Federal reserve bank shall commence business with a subscribed capital less than $4,000,000.
Branch Offices. Each Federal reserve bank shall establish branch banks within the Federal reserve district in which it is located and may do so in the district of any Federal reserve bank which may have been suspended. Such branches shall be operated by a board of directors under rules and regulations approved by the Federal Reserve Board. Directors of branch banks shall possess the same qualifications as the directors of the Federal reserve banks. Four of said directors shall be selected by the reserve bank and three by the Federal Reserve Board. The reserve bank shall designate one of the directors as manager.
Stock Issues. The capital stock of each Federal reserve bank shall be divided into shares of $100 each. The outstanding capital stock shall be increased from time to time as member banks increase their capital stock and surplus or as additional banks become members, and may be de-creased as member banks reduce their capital stock or surplus or cease to be members. When a member bank increases its capital stock or surplus it shall thereupon subscribe for an additional amount of capital stock of the Federal reserve bank of its district equal to six per centum of the said increase.
State Banks as Members. Any bank incorporated by special law of any state, or organized under the general laws of any state or the United States, may make application to the reserve bank organization committee, pending organization, and thereafter to the Federal Reserve Board for the right to subscribe to the stock of the Federal reserve bank organized or to be organized within the Federal reserve district where the applicant is located. The organization committee of the Federal Reserve Board may permit the applying bank to become a stockholder in the Federal reserve bank of the district in which the applying bank is located.
Advantage to State Banks. By becoming "member banks" the state banks become part of the general banking and currency scheme provided by the act, thus being placed in a better position to meet the demands of their patrons and the people of their locality for more adequate banking facilities.
A Federal Reserve Board is created by the act, consisting of seven members, including the Secretary of the Treasury and the Comptroller of the Currency, and five members appointed by the President of the United States, which board is to exercise general supervision over the Federal reserve banks.
Federal Advisory Council.-The act provides, for a Federal advisory council, consisting of as many members as there are Federal reserve districts. The council shall have power, by itself or through its officers, (1) to confer directly with the Federal Reserve Board on general business conditions; (2) to make oral or written representations concerning matters within the jurisdiction of the board; (3) to call for information and to make recommendations in regard to discount rates, rediscount business, note issues, reserve conditions in the various districts, the pur-chase and sale of gold or securities by reserve banks, open-market operations by said banks, and the general affairs of the reserve banking system.
Powers of Federal Reserve Banks
To Receive Deposits. Any Federal reserve bank may receive from any of. its member banks, and from the United States, deposits of current funds in lawful money, national bank notes, Federal reserve notes or checks and drafts upon solvent member banks, payable upon presentation; or, solely for exchange purposes, may receive from other Federal reserve banks deposits of current funds in lawful money, national bank notes, or check and drafts upon solvent member or other Federal reserve banks, payable upon presentation.
To Discount Notes, Drafts and Bills of Exchange.--Upon the indorsement of any of its member banks, with a waiver of demand, notice and protest by such bank, any Federal reserve bank may discount notes, drafts and bills of exchange arising out of actual commercial transactions; that is, notes, drafts and bills of exchange issued or drawn for agricultural, industrial, or commercial purposes, or the proceeds of which have been used, or are to be used, for such purposes, the Federal Reserve Board to have the right to determine or define the character of the paper thus eligible for discount within the meaning of this act. Nothing in this act contained shall be construed to prohibit such notes, drafts, and bills of exchange, secured by staple agricultural products, or other goods, wares, or merchandise, from being eligible for such discount; but such definition shall not include notes, drafts, or bills covering merely investments or issued or drawn for the purpose of carrying or trading in stocks, bonds, or other investment securities, except bonds and notes of the Government of the United States.
Notes, Drafts and Bills admitted to discount under the terms of this paragraph must have a maturity at the time of discount of not more than ninety days : Provided, That notes, drafts and bills drawn or issued for agricultural purposes or based on live stock and having a maturity not exceeding six months, may be discounted in an amount to be limited to a percentage of the capital of the Federal reserve bank, to be ascertained and fixed by the Federal Reserve Board.
To Discount Acceptances. Any Federal reserve bank may discount acceptances which are based on the importation or exportation of goods, and which have a maturity at discount of not more than three months, and indorsed by at least one member bank. (See "Acceptances.")
Open Market Operations. Any Federal reserve bank may, under rules and regulations pre-scribed by the Federal Reserve Board, purchase and sell in the open market, at home or abroad, either from or to domestic or foreign banks, firms, corporations, or individuals, cable transfers and bankers' acceptances and bills of exchange of the kinds and maturities by this act made eligible for rediscount, with or without the indorsement of a member bank.
Every Federal reserve bank shall have power:
(a) To deal in gold coin and bullion at home or abroad, to make loans thereon, exchange Federal reserve notes for gold, gold coin or gold certificates, and to contract for loans of gold coin or bullion, giving therefor, when necessary, acceptable security, including the hypothecation of United States bonds or other securities which Federal reserve banks are authorized to hold;
(b) To buy and sell, at home or abroad, bonds and notes of the United States, and bills, notes, revenue bonds, and warrants with a maturity from date of purchase of not exceeding six months, issued in anticipation of the receipt of assured revenues by any state, county, district, political subdivision or municipality in the continental United States, including irrigation, drain-age and reclamation districts, such purchases to be made in accordance with rules and regulations prescribed by the Federal Reserve Board;
(c) To purchase from member banks and to sell, with or without its indorsement, bills of exchange arising out of commercial transactions, as hereinbefore defined;
(d) To establish from time to time, subject to review and determination of the Federal Reserve Board, rates of discount to be charged by the Federal reserve bank for each class of paper, which shall be fixed with a view of accommodating commerce and business;
(e) To establish accounts with other Federal reserve banks for exchange purposes, and, with the consent of the Federal Reserve Board, to open and maintain banking accounts in foreign countries, appoint correspondents and establish agencies in such countries wheresoever it may deem best for the purpose of purchasing, selling and collecting bills of exchange, and to buy and sell, with or without its indorsement, through such correspondents or agencies, bills of exchange arising out of actual commercial transactions which have not more than ninety days to run and which bear the signature of two or more responsible parties.
Government Deposits. The moneys held in the general fund of the Treasury, except the five per centum fund for the redemption of outstanding national bank notes and the funds provided in this act for the redemption of Federal reserve notes, may, upon the direction of the Secretary of the Treasury, be deposited in Federal reserve banks, which banks, when required by the Secretary of the Treasury, shall act as fiscal agents of the United States; and the revenues of the Government or any part thereof may be deposited in such banks, and disbursements may be made by checks drawn against such deposits.
Note Issues. Federal reserve notes, to be issued at the discretion of the Federal Reserve Board for the purpose of making advances to Federal reserve banks through the Federal reserve agents as set forth in the act and for no other purpose, are hereby authorized. The said notes shall be obligations of the United States and shall be receivable by all national and member banks and Federal reserve banks, and for all taxes, customs, and other public dues. They shall be re-deemed in gold on demand at the Treasury Department of the United States, in the City of Washington, District of Columbia, or in gold or lawful money at any Federal reserve bank. Any Federal reserve bank may make application to the local Federal reserve agent for such amount of the Federal reserve notes hereinbefore provided for as it may require. Such application shall be accompanied with a tender to the local Federal reserve agent of collateral in amount equal to the sum of the Federal reserve notes thus applied for and issued pursuant to such application.
Collateral Security. The collateral security thus offered shall be notes and bills, accepted for rediscount under the provisions of section thirteen of this act, and the Federal reserve agent shall each day notify the Federal Reserve Board of all issues and withdrawals of Federal reserve notes to and by the Federal reserve bank to which he is accredited. The said Federal Reserve Board may at any time call upon a Federal reserve bank for additional security to protect the Federal re-serve notes issued to it.
Gold Reserves. Every Federal reserve bank shall maintain reserves in gold or lawful money of not less than thirty five per centum against its deposits and reserves in gold of not less than forty per centum against its Federal reserve notes in actual circulation, and not offset by gold or lawful money deposited with the Federal reserve agent.
Refunding Bonds. After two years from the passage of this act, and at any time during a period of twenty years thereafter, any member bank desiring to retire the whole or any part of its circulating notes, may file with the Treasurer of the United States an application to sell for its account, at par and accrued interest, United States bonds securing circulation to be retired.
Loans on Farm Lands. Any national banking association not situated in a central reserve city may make loans secured by improved and unincumbered farm land, situated within its Federal reserve district, but no such loan shall be made for a longer time than five years, nor for an amount exceeding fifty per centum of the actual value of the property offered as security. Any such bank may make such loans in an aggregate sum equal to twenty-five per centum of its capital and surplus to one-third of its time deposits, and such banks may continue hereafter as heretofore to receive time deposits and to pay interest on the same.
The Federal Reserve Board shall have power from time to time to add to the list of cities in which national banks shall not be permitted to make loans secured upon real estate in the manner described in this section.
Bank Examinations. The Comptroller of the Currency, with the approval of the Secretary of the Treasury, shall appoint examiners who shall examine every member bank at least twice in each calendar year and oftener if considered necessary. Provided, however, That the Federal Reserve Board may authorize examination by the state authorities to be accepted in the case of state banks and trust companies, and may at any time direct the holding of a special examination of state banks or trust companies that are stockholders in any Federal reserve bank. The Federal Reserve Board shall, at least once each year, order an examination of each Federal reserve bank, and upon joint application of ten member banks the Federal Reserve Board shall order a special examination and report of the condition of any Federal reserve bank.
Prohibitions and Penalties. No member bank or any officer, director or employee thereof shall hereafter make any loan or grant any gratuity to any bank examiner. Any bank officer, director or employee violating this provision shall be deemed guilty of a misdemeanor and shall be imprisoned not exceeding one year or fined not more than $5,000, or both; and may be fined a further sum equal to the money so loaned or gratuity given. Any examiner accepting a loan or gratuity from any bank examined by him, or from an officer, director or employee thereof, shall be deemed guilty of a misdemeanor and shall be imprisoned not exceeding one year or fined not more than $5,000, or both; and may be fined a further sum equal to the money so loaned or gratuity given; and shall forever thereafter be disqualified from holding office as a national bank examiner. No national bank examiner shall perform any other service for compensation while holding such office for any bank or officer, director or employee thereof.
Gratuities Forbidden. Other than the usual salary or director's fee paid to any officer, director or employee of a member bank and other than a reasonable fee paid by said bank to such officer, director or employee for services rendered to such bank, no officer, director, employee or attorney of a member bank shall be a beneficiary of or receive, directly or indirectly, any fee, commission, gift, or other consideration for or in connection with any transaction or business of the bank.
Bank Examiner Pledged to Secrecy. No examiner, public or private, shall disclose the names of borrowers or the collateral for loans of a member bank to other than the proper officers of such bank without first having obtained the express permission in writing from the Comptroller of the Currency or from the board of directors of such bank, except when ordered to do so by a court of competent jurisdiction, or by direction of the Congress of the United States, or of either House thereof, or any committee of Congress or of either House duly authorized. Any person violating this section shall be punished by a fine not exceeding $5,000 or by imprisonment not exceeding one year, or both.
Stockholders Liable for Debts. The stockholders of every national banking association shall be held individually responsible for all contracts, debts, and engagements of such association, each to the amount of his stock therein, at the par value thereof, in addition to the amount invested in such stock. The stockholders in any national banking association who shall have transferred their shares or registered the transfer thereof within sixty days next before the date of the fail ure of such association to meet its obligations, or with knowledge of such impending failure, shall be liable to the same extent as if they had made no such transfer, to the extent that the subsequent transferee fails to meet such liability; but this provision shall not be construed to affect in any way any recourse which such shareholders might otherwise have against those in whose names such shares are registered at the time of such failure.
Foreign Branches. Any national banking association possessing a capital and surplus of $1,000,000 or more may file application with the Federal Reserve Board, upon such conditions and under such regulations as may be prescribed by the said board, for the purpose of securing authority to establish branches in foreign countries or dependencies of the United States for the furtherance of the foreign commerce of the United States, and to act, if required to do so, as fiscal agents of the United States. Such application shall specify, in addition to the name and capital of the banking association filing it, the place or places where the banking operations proposed are to be carried on, and the amount of capital set aside for the conduct of its foreign business. The Federal Reserve Board shall have power to approve or reject such application if, in its judgment, the amount of capital proposed to be set aside for the conduct of foreign business is in-adequate, or if for other reasons the granting of such application is deemed inexpedient.
Interlocking Bank Directorates Prohibited
The Clayton Antitrust Act, approved October 15, 1914, provides in section 8: "That from and after two years from the date of the approval of this Act no person shall at the same time be a director or other officer or employee of more than one bank, banking association or trust company, organized or operating under the laws of the United States, either of which has deposits, capital, surplus, and undivided profits aggregating more than $5,000,000; and no private banker or person who is a director in any bank or trust company, organized and operating under the laws of a state, having deposits, capital, surplus, and undivided profits aggregating more than $5,000,000, shall be eligible to be a director in any bank or banking association organized or operating under the laws of the United States. The eligibility of a director, officer, or employee under the fore going provisions shall be determined by the average amount of deposits, capital, surplus, and undivided profits as shown in the official statements of such bank, banking association, or trust company filed as provided by law during the fiscal year next preceding the date set for the annual election of directors, and when a director, officer, or employee has been elected or selected in accordance with the provisions of this Act, it shall be lawful for him to continue as such for one year thereafter under said election or employment.
"No Bank, Banking Association, or trust company, organized or operating under the laws of the United States, in any city or incorporated town or village of more than two hundred thou-sand inhabitants, as shown by the last preceding decennial census of the United States, shall have as a director or other officer or employee any private banker or any director or other officer or employee of any other bank, banking association, or trust company located in the same place : Provided, That nothing in this section shall apply to mutual savings banks not having a capital stock represented by shares : Provided further, That a director or other officer or employee of such bank, banking association, or trust company may be a director or other officer or employee of not more than one other bank or trust company organized under the laws of the United States or any state where the entire capital stock of one is owned by stockholders in the other: And provided further, That nothing contained in this section shall forbid a director of class A of a Federal reserve bank, as defined in the Federal Reserve Act, from being an officer or director or both an officer and director in one member bank.
"When any person elected or chosen as a di-rector or officer or selected as an employee of any bank or other corporation subject to the pro-visions of this Act is eligible at the time of his election or selection to act for such bank or other corporation in such capacity, his eligibility to act in such capacity shall not be affected and he shall not become or be deemed amenable to any of the provisions hereof by reason of any change in the affairs of such bank or other corporation from whatsoever cause, whether specifically excepted by any of the provisions hereof or not, until the expiration of one year from the date of his election or employment.