System.1

When the Federal Reserve Act was first projected it was not intended to include in the system banks or companies organized under non-national charters. Many state bankers and trust-company managers, however, promptly perceived the advantages to accrue from the new system, and there was an immediate and strong demand for membership provisions applicable to their companies. The Act as adopted, therefore, made provision for admitting to membership state banks and trust companies upon terms and conditions to be prescribed by the Federal Reserve Board. Not a few applications for membership were at once filed, but influential trust-company leaders feared that the provisions for getting out of the system were not sufficiently clear - that, while it might be easy enough to enter, it might be difficult to withdraw. To relieve this fear the Federal Reserve Board promptly adopted liberal regulations governing application for membership and withdrawal of state institutions. Yet both state banks and trust companies entered the system very slowly. Accordingly, Congress determined to amend the Act, and on June 21, 1917, an Act was passed whereby the regulations adopted by the board were incorporated into the statute and were thus given the force of law. The United States had become a belligerent on the side of the Allies in the war against Germany at about the same time that the amendment to the Reserve Act was taken under advisement. The impulse was therefore strong to enter the system out of considerations of patriotism and desire to present a united financial front to the enemy during the struggle. Coupled with patriotic considerations, the now highly favorable terms of membership and the natural wish to secure the protection of the Federal Reserve Bank organization brought many state banks and trust companies into the system. The total number of such state institutions on December 31, 1921, was 1,624, among which were some of the strongest and largest banks and trust companies in the country.

1 The following pages in this chapter are in large measure taken by permission of Messrs. Macmillan Co., publishers of The Modern Trust Company (Kirkbride, Sterrett, & Willis), from a chapter in that volume written by H. P. Willis.

The Federal Reserve Board under the provisions of the law has developed a detailed method of procedure in passing upon applications for admission to the system.

The only indispensable requirements laid down in the law as conditions of the membership of a state institution in the Federal Reserve system are that it shall be in sound condition and shall possess a paid-up unimpaired capital adequate to entitle it to become a national bank in the place where it does business. Specifically this latter requirement is as follows:

The requirement that the institution be in sound condition has been applied by the Federal Reserve Board in a clause of the regulations governing admissions which states that the board will consider in connection with each prospective member, its financial condition, the general character of its management, and whether or not the corporate powers exercised by it are consistent with the purposes of the Federal Reserve Act. It is not true, as supposed by many, that membership in the system implies the surrender of charter powers or the acceptance of new and rigid limitations upon business. Under the terms of the Act, state members are members in the full sense of the word, and hence are naturally subject to the regulations and restrictions which affect all members, as well as to the special regulations which may be laid down by the board. As a matter of fact, however, the board in admitting state members has seldom or never required any material changes in the scope of their business, although in various cases where very broad powers were being exercised it has required the applicant to undertake that it would not in the future seek to exercise any new or additional functions without first obtaining the permission of the Federal Reserve Board. It may be broadly stated that the only conditions directly operating to keep a bank from joining the system would be too limited a capital, poor financial condition, or incompetent or doubtful management. This, of course, does not mean that companies which fail to join may not have other and sound reasons for their decision. It does mean that, except where the company's capital is below $25,000, there is no necessity for remaining outside the system if the managers of an institution wish to enter it. The question of admitting the very small institutions has been considered, but thus far opinion has not been favorable. The state institution which has determined to enter the Federal Reserve system first signifies its intention through a resolution of its board of directors in somewhat the following form:

Whereas, it is the sense of this meeting that application should be made on behalf of this corporation for stock in the Federal Reserve bank of ................ in accordance with the provisions of the Federal Reserve Act and the regulations of the Federal Reserve Board made in pursuance thereof;

And whereas, six per cent of the paid-up capital and surplus of this corporation amounts to $................;

Now, therefore, be it resolved, That the president or vice-president and the cashier or secretary of this corporation be and they are hereby authorized, empowered, and directed to make application for and to subscribe to ............ shares, of a par value of $100 each, of the capital stock of the Federal Reserve bank of ...................., to pay for such stock in accordance with the provisions of the Federal Reserve Act, and to agree for and in behalf of this corporation to comply, upon receipt of the approval of this application by the Federal Reserve Board and its acceptance by this corporation, with all the requirements of the Federal Reserve Act and the regulations of the Federal Reserve Board made in pursuance thereof which are applicable to state banks and trust companies which become members of a Federal Reserve bank.