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work has not been done as well as it might have been, and that if it had been more carefully performed the operation of the new system would have been somewhat smoother and easier to manage.

138. THE FEDERAL RESERVE BOARD1

By E. E. AGGER

Co-ordinating and controlling the whole system is the "Federal Reserve Board." It is made up of seven members. The Secretary of the Treasury and the Comptroller of the Currency are members ex officio. Five members are appointed by the President by and with the advice and consent of the Senate. Not more than one member of the board can come from a single reserve district. At least two of the presidential appointees must have had banking or financial experience, but no member of the board may be an officer, director, or stockholder of any bank. Except for the ex-officio members, and for the first incumbents, whose terms will run respectively, two, four, six, eight, and ten years, the term of office will be ten years. But the President may remove members for cause. While the Secretary of the Treasury is the ex-officio chairman of the board, the President is empowered to name one of his five appointees as "governor." The governor and vice-governor are the chief executive officers of the whole system.

The Federal Reserve Board is an unusually powerful supervisory and regulating body. It may suspend or remove any officer or director of a federal reserve bank; it may require the writing off by such bank of its bad debts, and may suspend a federal reserve bank or take it over for purposes of reorganization or liquidation. It may also readjust or abolish altogether the classification of central reserve and reserve cities.

The member banks are represented in the central management by a "Federal Advisory Council," made up of one representative from each federal reserve district, chosen by the board of directors of the federal reserve bank. This council meets quarterly at Washington and at such other times and places as it may choose. While patterned after the stockholders' committee of the Reichsbank, it is even less powerful than the German prototype. It may merely call for information from, and advise with, the Federal Reserve Board.

Adapted from "The Federal Reserve System," Political Science Quarterly, XXIX (1914), 269-70.

2 Compare with selection No. 132.-EDITOR.

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139.

FUNCTIONS OF THE RESERVE BANKS1

The question naturally suggests itself and must be frankly faced: What is the proper place and function of the Federal Reserve Banks in our banking and credit system? On the one hand it is represented that they are merely emergency banks to be resorted to for assistance only in time of abnormal stress, while on the other it is claimed that they are in essence simply additional banks which should compete with the member banks, especially with those of the greatest power. The function of a reserve bank is not to be identified with either of these extremes, although occasions may arise when either of such courses may be imperative. Its duty plainly is not to await emergencies but, by anticipation, to do what it can to prevent them. So also if, at any time, commerce, industry, or agriculture is, in the opinion of the Federal Reserve Board, burdened unduly with excessive interest charges, it will be the clear and imperative duty of the Reserve Board, acting through the discount-rate and open-market powers, to secure a wider diffusion of credit facilities at reasonable rates. The Federal Reserve Banks are the holders of a large part of the banking reserves of the nation, the foundation of its banking structure. Nothing should be permitted in the operation of the Reserve Banks which would weaken this foundation. The resources of a Reserve Bank, to be useful for its peculiar purposes, should always be readily available. It follows, therefore, that they should be mainly invested in such short-term liquid investments as can be easily converted into cash as occasion may require. This conception of a Reserve Bank, moreover, implies that its investments should be marshaled in a steady succession of maturities, so that it may at all times as nearly as possible prove equal to the situation.

The ready availability of its resources is of supreme importance in the conduct of a Reserve Bank. Only then can it become a safe and at the same time flexible instrument of guidance and control, a regulator of interest rates and conditions. Only then will it constantly carry the promise of being able to protect business against the harmful stimulus and consequences of ill-advised expansions of credit on the one hand or against the menace of unnatural restrictions and unnecessary contractions on the other, with exorbitant rates of interest and artificial stringencies. It should at all times be a steadying influence, leading when and where leadership is requisite, but never 1 Quoted from First Annual Report of the Federal Reserve Board, December, 1914, pp. 17-18.

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allowing itself to become an instrument for the promotion of the selfish interest of any private or sectional group, be their aims and methods open or disguised. It should never be lost to sight that the Reserve Banks are invested with much of the quality of a public trust. They were created because of the existence of certain common needs and interests, and they should be administered for the common welfarefor the good of all.

The more complete adaptation of the credit mechanism and facilities of the country to the needs of industry, commerce, and agriculture with all their seasonal fluctuations and contingenciesshould be the constant aim of a Reserve Bank's management. To provide and maintain a fluid condition of credit, such as will make of the Reserve Banks at all times and under all conditions institutions of accommodation in the larger and public sense of the term, is the first responsibility of a Reserve Bank.

It should not, however, be assumed that because a bank is a Reserve Bank its resources should be kept idle for use only in times of difficulty, or, if used at all in ordinary times, used reluctantly and sparingly. Neither should it be assumed that because a Reserve Bank is a large and powerful bank all its resources should be in use all the time or that it should enter into keen competition with member banks, distributing accommodation with a free and lavish hand in undertaking to quicken unwisely the pace of industry. Such a policy would be sure, sooner or later, to invite disaster. Time and experience will show what the seasonal variations in the credit demands and facilities in each of the Reserve Banks of the several districts will be and when and to what extent a Reserve Bank may, without violating its special function as a guardian of banking reserves, engage in banking and credit operations. The Reserve Banks have expenses to meet, and while it would be a mistake to regard them merely as profit-making concerns and to apply to them the ordinary test of business success, there is no reason why they should not earn their expenses, and a fair profit besides, without failing to exercise their proper functions and exceeding the bounds of prudence in their management. Moreover, the Reserve Banks can never become the leading and important factors in the money market which they were designed to be unless a considerable portion of their resources is regularly and constantly employed.

There will be times when the great weight of their influence and resources should be exerted to secure a freer extension of credit and

an easing of rates in order that the borrowing community shall be able to obtain accommodation at the lowest rates warranted by existing conditions and be adequately protected against exorbitant rates of interest. There will just as certainly, however, be other times when prudence and a proper regard for the common good will require that an opposite course should be pursued and accommodations curtailed. Normally, therefore, a considerable proportion of its resources should always be kept invested by a Reserve Bank in order that the release or withdrawal from active employment of its banking funds may always exercise a beneficial influence. This is merely saying that to influence the market a Reserve Bank must always be in the market, and in this sense Reserve Banks will be active banking concerns when once they have found their true position under the new banking conditions.

It would be a mistake, therefore, and a serious limitation of their usefulness to regard the Reserve Banks simply as emergency banks. Regulation in ordinary times, as well as protection in extraordinary times, may be expected to become the chief service which these institutions will perform. The Federal Reserve Board is fully alive to its opportunities and responsibilities in this respect, but it must counsel patience in awaiting the fruition of the new system. It will take time for the new banks to develop the technique of control and skill and experience in its application. The ascertainment of the correct base from which comprehensive operations should begin, the establishment of a normal level from which expansions and contractions will freely take place, will have a most important bearing upon the future development and success of the system. Impatience to show results should not be permitted to tempt those in charge of the Reserve Banks into precipitate and unwise action.

The vast and complex structure of modern banking and credit systems is one of extreme delicacy of balance and adjustment, and it must never be overlooked that it is highly sensitive to all manner of disturbances, as recent events have painfully demonstrated. The banking systems of the larger nations are closely related to one another, and financial distress or collapse at one point quickly transmits shock to all others. Safety for us in critical times will depend on the confidence our system commands, the strength of its reserves, and its power to bring them into action promptly and effectively if needed. In dealing with new districts and entirely changed banking methods, time and experience alone can supply the data necessary for

charting the course to be pursued. This consideration, if nothing else, would suggest the greatest patience and prudence, even if the European horizon were less clouded than it is today. None the less, the Board realizes that where extraordinary conditions warrant extraordinary measures it is the foremost duty of the Board and the banks to act promptly and boldly.

140. THE DIRECTORS OF THE FEDERAL RESERVE BANKS1 BY MILTON C. ELLIOT

The duties and responsibilities of the directors of Federal Reserve Banks will be of the same general character, with an added degree of responsibility, as the duties and responsibilities of directors of national or member banks.

Section 4 of the Federal Reserve Act provides among other things that

Every Federal Reserve Bank shall be conducted under the supervision and control of a board of directors.

The board of directors shall perform the duties usually appertaining to the office of directors of banking associations and all such duties as are prescribed by law.

Said board shall administer the affairs of said bank fairly and impartially and without discrimination in favor of or against any member bank or banks and shall, subject to the provisions of law and the orders of the Federal Reserve Board, extend to each member bank such discounts, advancements, and accommodations as may be safely and reasonably made with due regard for the claims and demands of other member banks.

From this it will be observed that the Federal Reserve Banks are to exercise the functions of banks and are not merely an association of other banks.

When this section is read in connection with Section 13, relating to rediscounts and other powers of Federal Reserve Banks, and with Section 16, which provides in effect that the United States Government shall lend its credit through the issuance of Federal Reserve notes to these banks, it is apparent that the duties and obligations of the directors of Federal Reserve Banks are not honorary, but that those who undertake these important obligations are factors in a great co-ordinated system of banking.

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1 Adapted from an address before the American Bankers' Association, May, 1914. (Published in Monthly Letter of National City Bank, New York, June, 1914.)

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