Senate and been signed by the President, it might have disrupted the national banking system and caused the sudden retirement of $700,000,000 of national bank currency.

The country has never been informed of the quiet currents of expression that went on last autumn between leading banking interests. The sentiment of the national bankers crystallized in a quiet but unaccorded determination to make no acceptance of the House bill and to avoid the creation of any panic by simply sitting still and leaving it to the Administration, if it so elected, to enforce the act and put the national banks out of existence through receiverships. In other words, the banks would not themselves take the responsibility of a foreclosure upon the national banking system, with a contraction of $700,000,000 in the currency afloat, which meant the sudden retirement of 40 per cent of the money in the hands of the people.

This was the quiet sentiment of the national bank interests of the country as understood and privately, yet individually, formulated at the American Bankers' Association Convention in Boston in October.

While the bill was under discussion in the Senate it was changed so rapidly that the financial world, except for a few leading experts, lost personal interest in it, and refused to follow the matter in the news of the day. But now that financiers have had time to read the full text of the conference bill, as signed by the President, it is not saying too much to declare that they are astonished at its breadth and character, the evident sincerity of its purpose, and its freedom from bias, prejudice, or experimental notion.

Singular as it may appear, the force, breadth, and character of this bill are really due to the pressure put on Congress to produce a bill before the Christmas holidays. At the last moments of the session the several points in dispute were compromised by throwing them upon the new Federal Reserve Board, yet to be appointed, just where the power should be lodged.

In fact, the new banking bill puts in the hands of the Secretary of the Treasury and the Federal Reserve Board the construction, regulation, and government of a reserve banking system to be built out of the reserves of the national banks, gradually removed from the reserve and central reserve cities, and gradually mingled with the moneys of the United States Treasury. These moneys, with the capital subscribed by the national or "member" banks, constitute a basis for the rediscount of commercial paper from the member banks and the issuance in this connection of a new national currency supplementing

the present currency, yet protected by a 40 per cent gold reserve obtained from the banks and the Treasury; the whole system to be knit together at home and expanded abroad, with power in the Federal Board to expand or contract at will, to officer and manage and regulate and name the discount rates for the federal reserve banks with possibly more money in their pockets than may be then held by the banks now constituting the national banking system.

131. THE UNDERLYING PURPOSE OF THE ACT

BY C. W. BARRON

The "motif" underlying the Federal Reserve Act is not that "which is nominated in the bond." "An elastic currency" could have been had by an enactment of twenty lines. The "means of rediscounting commercial paper" are already at hand and such discounts exist to the extent of at least 100 millions in the national banking system. It is not "to establish a more effective supervision of banking in the United States," for that could be accomplished by increasing the appropriation and enlarging the salaries of the examiners, so that men with larger experience and breadth of vision would perform more effective supervision.

The purpose of the act most largely in its inception was "for other purposes," and these "purposes" can never be wisely or effectively carried out; if persisted in they spell disaster to the country.

The hidden purpose or "motif" which inaugurated this legislation, however in effect it may work out under wise administration, is to cheapen money.

The whole primary discussion of this bank act was to make money easier, to cheapen it to the farmer and producer and manufacturer and merchant. Senators and representatives both proclaimed within and without Washington that what they were seeking was a financial system that would give us an average rate approaching that of the Bank of France, where interest over a series of years averages between 3 and 4 per cent. They frankly said they hoped for something under the 4 per cent rate.

The charge was that the centralization of reserves in New York or Wall Street made money for bankers in that "den of iniquity," taxed the country with irregular and high rates of interest, and repressed commerce, investment, and prosperity.

'Adapted from The Federal Reserve Act, pp. 10-11, 38. (Boston News Bureau Co., 1914.)

Therefore the proposal in outline was that New York should be financially carved up; that the reserves of the national banks now centralized in New York should be taken away and between three and four hundred millions of the bank reserves which are now deposited in that center by the 7,500 national banks over the country should be removed to other centers of commerce and industry; and thereupon should be built an elastic banking and currency system, each center serving its own local community, but all interknit, each with the other, for mutual support.

The old system produced concentration of bank reserves in New York City, which Congress desired to decentralize. Wall Street was not responsible for this centralization of banking power; the banks of the country and the national bank act were responsible. The New York banks never originated, but, of course, made money out of it. It has been figured that they made one-third of 1 per cent per annum upon these deposits, but this was not their great profit. The profit came to the financial powers in New York who knew the ebb and flow of currency, spring and fall, and changed their investments as betwixt money, bonds, or stock according to the money currents. New York, as a recipient holder of fluctuating bank reserves, was the seat of financial power, and had control of rates and the distribution of credit according as money flowed in or out. When money flowed in after the country's planting or harvesting, New York bankers said who should have it, and upon what merchandise and what stocks and bonds it should be loaned.

The Federal Reserve Act is an act of decentralization. It seeks the establishment of other financial centers co-ordinated through a Federal Reserve Board at Washington. Finance and banks are for the people and human development. The people do not exist for the banks or for potential and highly centralized finance.

A new age is upon us. It is the universal age; it is the age of humanity; it is the age of decentralization of old powers that the individual unit of humanity may enter in.

132. A GENERAL VIEW OF THE FEDERAL RESERVE SYSTEM'

BY CHARLES S. HAMLIN

The Federal Reserve Act, in the first place, provides for a division of the United States into 12 districts, each district containing approximately from 500 to 700 national banks. The national banks in each

Adapted from Federal Reserve Bulletin, July, 1915, pp. 139–40.

district unite in forming a new bank called the Federal reserve bank, to which each national bank contributes 6 per cent of its paid-up capital stock and surplus to provide the necessary capital.

The individual capital of these 12 Federal reserve banks varies, respectively, from a little under 5 millions to a little over 20 millions of dollars. The total capital of the 12 banks (not counting State institutions which may ultimately become members) is a little over 100 millions of dollars.

In addition to the capital payments that must be made, each national member bank is obliged to pay to its Federal reserve bank a certain portion of its legal reserve, which portion, however, it still counts as part of its reserve. These payments of reserve are spread over a period of three years, and the total payments will amount to over one-third of the total reserves held by the national member banks.

In addition, the Secretary of the Treasury may deposit the géneral funds of the Treasury-excepting only certain trust funds-with the Federal reserve banks, and disbursements of the government may be made by checks drawn against such deposits..

The national banks in the 12 respective districts (and State banks which may join the system later) are the only stockholders of the Federal reserve banks, and their stock cannot be transferred or hypothecated. The stock is entitled to a 6 per cent annual cumulative dividend, and one-half the net earnings of the Federal reserve banks may be paid into a surplus fund until it amounts to 40 per cent of the paid-up capital stock.

All net earnings over and above this dividend and surplus are paid to the United States as a franchise tax.

Each Federal reserve bank is managed by a board of directors, consisting of nine members, of which three are appointed by the Federal Reserve Board and six are elected by the member banks, three of the six directors representing the banks and three consisting of members who at the time of their election were actively engaged in commerce, agriculture, or some other industrial pursuit.

These 12 Federal reserve banks are under the control and direction of the Federal Reserve Board, consisting of the Secretary of the Treasury and the Comptroller of the Currency, ex officio, and of five other members appointed by the President and confirmed by the Senate.

The Federal Reserve Board sits in Washington, D.C. It appoints, as I before said, three directors on the board of each Federal reserve

bank; it has general powers of supervision and examination of the Federal reserve banks and the member banks; it may suspend or remove, for cause, any director or officer of the Federal reserve banks; it may suspend the operation of any Federal reserve bank and liquidate or reorganize such bank; it defines the paper which may be rediscounted by Federal reserve banks; it has power to review and determine the rates of discount established from time to time by the Federal reserve banks for the discount of commercial paper offered by the member banks; it regulates the open-market powers of the Federal reserve banks; it has power to suspend every reserve requirement of the act if it deems such course necessary; and it has many other specific powers which I need not mention here.1

Each Federal reserve bank is independent of every other. They are empowered, however, with the permission of the Federal Reserve Board, and at rates fixed by the board, to rediscount the discounted paper of any of the other Federal reserve banks, and can be required to do so by the affirmative vote of at least five members of the Federal Reserve Board.

The act also creates a body known as the Federal Advisory Council, one member of which is elected by each Federal reserve bank. The duties of the council are to confer with the Federal Reserve Board and to advise it as to matters connected with discount rates, note issues, reserve conditions, open-market powers, and similar questions.

In connection with this selection reference is made to selections 101 and 102.-EDITOR.