self-government, together with the operation of technical banking by those who supplied the capital, under general direction. This final adjustment which secured safe and efficient methods, as contrasted with the chaotic proposals which might have been adopted, will be a cause of permanent congratulation.

It is to be observed, moreover, that the solution adapted to our conditions, in which a widely scattered system of individual banks had to be retained, must be original with us. In no other country were the conditions the same. The relation of a Central Bank in European states to other banks was not one based on the existence of a system of individualistic and numerous banks carrying on independent operations. Therefore, while retaining self-management of privately owned banks, co-operation was obtained by Reserve Banks in local districts under management by bankers, while country-wide and uniform action was gained by governmental direction through a Federal Reserve Board.

The difficulty of sectional differences of interest working against each other would, nevertheless, have to be met in the practical workings of any plan. If there had been one central institution, pressure would have been brought upon the central management to help out one section of the country at the expense of another. Under a system of regional banks each section gets the support of its own resources first of all, an arrangement by which sectional antagonism is reduced to the minimum. In addition, when one section is in trouble beyond its own powers of recovery, then by aid of the Reserve Board one Reserve Bank may come to the aid of another. Such a practice, it is to be noted, has been going on in an extra-legal way in previous years whenever banks of a large center have sought assistance from New York. Such a practice was natural and inevitable. In the new law such practice is openly recognized and legalized.

136. REASONS FOR CHOICE OF DISTRICTS1

The Organization Committee has issued the following statement as a summary of its operations and conclusions:

The Federal Reserve Act directs the Reserve Bank Organization Committee to "designate not less than eight nor more than twelve cities to be known as Federal Reserve cities," to "divide the continental United States, excluding Alaska, into districts, each district to contain only one of such

Issued April 2, 1914. Taken from Monthly Letter of National City Bank, New York, April, 1914.

Federal Reserve cities," and to apportion the districts "with due regard to the convenience and customary course of business." The Act provides that the districts may not necessarily be coterminus with any State or States.

In determining the Reserve districts and in designating the cities within such districts where Federal Reserve Banks shall be severally located, the Organization Committee has given full consideration to the important factors bearing upon the subject. The Committee held public hearings in eighteen of the leading cities from the Atlantic to the Pacific and from the Great Lakes to the Gulf, and was materially assisted thereby in determining the districts and the reserve cities.

Every reasonable opportunity has been afforded applicant cities to furnish evidence to support their claims as locations for Federal Reserve Banks.

More than 200 cities, through their Clearing-House Associations, Chambers of Commerce, and other representatives, were heard. Of these, 37 cities asked to be designated as the headquarters of a Federal Reserve Bank.

The majority of the Organization Committee, including its Chairman and the Secretary of Agriculture, were present at all hearings, and stenographic reports of the proceedings were made for more deliberate consideration. Independent investigations were, in addition, made through the Treasury Department, and the preference of each bank as to the location of the Federal Reserve Bank with which it desired to be connected was ascertained by an independent card ballot addressed to each of the 7,475 National Banks throughout the country which had formally assented to the provisions of the Federal Reserve Act.

Among the many factors which governed the Committee in determining the respective districts and the selection of the cities which have been chosen

were:

First. The ability of the member banks within the district to provide the minimum capital of $4,000,000 required for the Federal Reserve Bank, on the basis of 6 per cent of the capital stock and surplus of member banks within the district.

Second. The mercantile, industrial, and financial connections existing in each district and the relations between the various portions of the district and the city selected for the location of the Federal Reserve Bank.

Third. The probable ability of the Federal Reserve Bank in each district, after organization and after the provisions of the Federal Reserve Act shall have gone into effect, to meet the legitimate demands of business, whether normal or abnormal, in accordance with the spriit and provisions of the Federal Reserve Act.

Fourth. The fair and equitable division of the available capital for the Federal Reserve Banks among the districts created.

Fifth. The general geographical situation of the district; transportation lines and the facilities for speedy communication between the Federal Reserve Bank and all portions of the district.

Sixth. The population, area, and prevalent business activities of the district, whether agricultural, manufacturing, mining, or commercial, its record of growth and development in the past, and its prospects for the future.

In determining the several districts, the Committee has endeavored to follow state lines as closely as practicable, and wherever it has been found necessary to deviate, the division has been along lines which are believed to be most convenient and advantageous for the district affected.

137. CRITICISM OF THE DISTRICTS CHOSEN1

The plan of division indicated by the committee has already received very severe criticism, this criticism being particularly addressed to the following points:

1. The establishment of the maximum number of 12 districts, notwithstanding that the advice of a large number of bankers and business men had been in favor of the limitation of the number to the minimum required by law.

2. The failure to create a single large overshadowing bank with a capital of not less than $25,000,000 to $30,000,000, such a bank having been strongly recommended on the ground that an institution of such a size was necessary to control foreign exchange operations and to direct the course of trade and monetary operations between the United States and foreign countries.

3. The placing of too many districts on the Atlantic Coast while the West was left relatively unsupplied with districts and banks.

4. The faulty division of the country between the several districts in certain particulars. Among these particulars are expressly mentioned (a) the selection of boundary lines that would include larger and richer centers as tributary to smaller and weaker points at which reserve banks were situated, (b) the artificial separation of certain portions naturally tributary to a given city and their inclusion in a region. assigned to another city, (c) the erroneous assignment of certain regions to cities with which they have comparatively poor or slow transportation connections.

1

Adapted from "Washington Notes" in Journal of Political Economy, XXII (1914), 484-87.

These objections, as thus classified, practically summarize the whole case against the plan of districting, but there is a distinct difference in the weight to be given to the various criticisms. As to whether the maximum or minimum number of districts should have been created, decided difference of opinion undoubtedly exists in responsible circles, not a few persons taking the view that if possible the 12 districts should have been mapped out, assuming, of course, that each could be assigned a capital adequate to the creation of a reasonably strong bank in the district under consideration. This point may be regarded therefore as essentially a question of difference in theory or of attitude toward the banking organization question in general.

In the same way the failure or refusal to create a single bank of predominant capital is not considered as affording ground for the pessimistic criticisms that are voiced in some quarters. The New York reserve bank actually provided for will have a much larger capital than any other institution in the system, and, while its capital is materially smaller than the combined capital and surplus of several of the other institutions located in the city of New York, this fact is not regarded as necessarily indicating anything very definite with reference to the effectiveness of the proposed plan. As a matter of fact, the Bank of England is considerably below several other institutions in London, so far as relates to aggregate resources. This does not prevent the Bank of England from exercising a predominant control over the prevailing rate of discount. A similar condition exists in some of the Continental countries. It is believed, therefore, that the size allowed to the New York institution is amply sufficient to permit the establishment of an effective bank. Moreover, too little weight appears to have been allowed in current discussion to the fact that the Federal Reserve Board will exercise a powerful central control over the whole system and will undoubtedly succeed in uniting the different institutions in a single and well-considered national policy.

A different point of view is evidently entertained by careful thinkers with respect to the actual districting. The third point, already mentioned above, that too many districts have been placed on the Atlantic Coast while the West is left relatively unsupplied is regarded as having very considerable force. As things stand, the Atlantic Coast districts are represented by the cities of Boston, New York, Philadelphia, Richmond, and Atlanta. This is considered clearly one too many, the unnecessary city and district being Rich

mond. By leaving out the Richmond district a much-needed district which could have been used elsewhere would have been saved with positive benefit to the other districts on the Atlantic Coast, which are now too thickly packed together to admit of a healthy growth. The belief prevailing in sound quarters is that the Atlanta district with its very limited capital would have been better off had not the states of North and South Carolina, which properly belong to it, been pared away in order to provide a southern extension for the Richmond district. In the same way, the northward extension of the Richmond district tended to force the northern boundary of the Philadelphia district to the shores of New York harbor, thereby depriving New York City of a portion of its natural territory, the northern rim of New Jersey, while in like manner the rearrangement of boundaries necessitated by the insertion of the Richmond district tended to prevent the inclusion of western Connecticut with New York, and to force other adjustments generally believed to be out of harmony with the "convenience and customary course of business."

In a somewhat similar fashion the fourth criticism already mentioned is finding support among informed students of banking. This criticism closely follows that which has been last considered. By making Baltimore, for example, tributary to Richmond, and New Orleans to Atlanta, an injury was done not only to local pride but also to the convenient and customary development of trade relations. The work done in this regard seems to make it unavoidable that there should be a considerable reversal of the current of business in a number of districts, the clearing of checks and the obtaining of rediscounts being carried on at points where under other conditions they would never have been placed. Undoubtedly this kind of change will cause some friction, but there seems to be little doubt that the amount of it has been considerably exaggerated. Those who are disposed to place too much stress upon the effect of the districting overlook the fact that the new system is simply superadded to existing banking arrangements and that it in no way interferes with them. Even the redistribution of reserves does not affect them, since the gross amount of required reserve is so reduced under the new banking act that banks which have been in the habit of keeping reserve balances with the old reserve cities could continue to do so without serious hardship under the new law, even if these balances were not counted as reserves. They would be as well off as they were before. The criticism of the districting really amounts in the last analysis to a statement that the