Branches

The act vests the government of the reserve banks in a board of nine directors. These are divided into three classes, A, B, and C, each containing three members. Class A directors are to represent and are to be elected by the member banks. Class B men also are to be elected by the member banks, but are to represent the broader business and commercial interests of the district. Class C directors are to represent the general public interest and are to be designated by the Reserve Board. One of the Class C directors is to be designated as chairman by the Reserve Board, and by virtue of such designation he becomes also the "Federal Reserve Agent." Another Class C director is to become in like manner vice-chairman. It was originally provided that the vice-chairman should also be deputy federal reserve agent, but by amendment adopted in June, 1917, the office of deputy agent was abolished, and authority was given to the federal reserve agent to appoint one or more assistants who have power to act in his name or stead during his absence. The law provides that the reserve agent is to be a person of tested banking experience.

The method of electing the directors is carefully prescribed, and at the same time the essential qualifications of the directors are specified. It is hardly necessary to go into these matters in detail, although it may be said that the aim is to give the small banks equal voice with the large. The law provides also that no senator or representative in Congress shall be a director or officer of a reserve bank, and that no director in Class B shall be an officer, director, or employee of any bank, while directors in Class C shall not even be stockholders of banks. The term of office for the directors is fixed at three years.

Management of the reserve banks

Directors

Federal Reserve Agent

Election of directors

As the federal reserve banks are to be public rather than profit-making agencies, their dividends are limited to 6% per annum. The dividends are, however, cumulative. It is provided that one-half of the net earnings after the dividends have been declared shall go into a surplus fund, until a surplus of 40% of the capital is accumulated. The remaining net earnings are to go to the United States government. It is interesting in this connection to notice that the amounts paid to the government are to be used, at the discretion of the Secretary of the Treasury, to supplement the gold reserve against United States notes or to reduce the government's bonded indebtedness. The surplus is of only secondary interest to the stockholders, however, because it is provided that, should a reserve bank go into liquidation, anything remaining in the surplus after proper deductions for debts, for dividends, and for the par value of the stock, shall accrue to the United States.

The federal reserve banks are, by the law, made exempt from all taxes except those on real estate. In view of the limitation of dividends this would appear to be the only consistent course to pursue. Special taxes are provided in connection with the control of credit expansion as subsequently set forth, but these special taxes, contingent upon certain eventualities, are not for revenue purposes. The expenses of the Federal Reserve Board, of note issue, of the preparation of printing plates, etc., are to be assessed on the federal reserve banks by the Reserve Board.

The franchise of the reserve banks runs twenty years unless sooner dissolved by Congress, or unless forfeited by particular banks through violation of law, etc.

To coordinate and to control the whole system, provision is made for the creation of an agency called the Federal Reserve Board.

Dividends

Surplus

Excess earnings to U. S.

Taxes

Franchise

This Board is to be made up of seven members. Two of the seven, namely, the Secretary of the Treasury and the Comptroller of the Currency, are made members ex officio. The remaining five are to be appointed by the President with the advice and consent of the Senate. Vacancies are to be filled in the manner provided for original appointments, except that when vacancies occur during the Senate recess, the law provides that the President shall grant a commission expiring thirty days after the date of the opening of the next session. The term of office of the appointed members is fixed at ten years, except in the case of the first incumbents, who are to serve two, four, six, eight, and ten years respectively. Provision is made for removal for cause by the President.

In defining the qualifications of members of the Reserve Board the law provides that not more than one member can come from a single reserve district. While two of the five appointed members must have had banking or financial experience, no member of the Board is permitted to be an officer, director, or stockholder of a bank. Then, too, senators and representatives are made ineligible.

The law makes the Secretary of the Treasury the ex-officio chairman of the Board, but it provides that the Board itself shall choose from the five appointed members one to act as governor and another as vice-governor. Provision is made for the appointment by the Board of a secretary, of counsel, and of other necessary aids.

The Federal Reserve Board is one of the most powerful administrative boards in the world. Its powers in detail can be more intelligently set forth in connection with the related subjects, but here it may be said that the Board exercises general supervision over the whole system. A few of the general powers may be enumerated as follows:

It may suspend or remove any officer or director of a federal reserve bank.

The Federal

Reserve

Board

Membership

Qualifications

Organization

Powers

It may add to, or reclassify, central reserve and reserve cities.

It may require reserve banks to write off doubtful debts.

It may suspend a reserve bank, take it over, or liquidate it.

The law provides for a Federal Advisory Council, made up of one member from each reserve district. The members are chosen by the boards of directors of the reserve banks. The Council is to meet quarterly at Washington, and oftener, if called by the Federal Reserve Board. Provision is also made for special meetings at Washington or elsewhere.

As is hinted in the name, the powers of the Federal Advisory Council are advisory only. The Council is authorized to confer directly with the Reserve Board on general business conditions; to make oral or written representations concerning matters within the jurisdiction of the Board; to call for information and to make recommendations in regard to discount rates, rediscount business, note issue, reserve conditions in the various districts, the purchase and sale of gold or securities by the reserve banks, open market operations by the reserve banks, and the general affairs of the reserve banking system.

Omitting from consideration here the capital stock, the sources of the funds to be mobilized in the federal reserve banks were originally two: deposits of member banks and deposits of the United States government. Since June, 1917, deposits of non-member banks for exchange purposes have been permitted. In this connection mention should also be made of accounts carried for foreign correspondents. Provision is made for deposits by one federal reserve bank in another, but these, also, are solely for exchange purposes, and represent no net addition to the reserve system as a whole.

The depositing of government funds in the reserve banks is not mandatory. The law provides that the Secretary of the Treasury "may" direct that treasury money in the general fund, except the 5% redemption fund behind the national bank notes and the redemption fund held against federal reserve notes, be deposited in federal reserve banks. The reserve banks are to act as the fiscal agents of the government when required. Revenue as it is collected may be deposited in the reserve banks and disbursements may be made by drawing checks against the government's account.

Federal

Advisory

Council

Powers

Reserve mobilization

Sources

Government deposits

The law originally provided that member banks were to keep in their several reserve banks a prescribed proportion of their legally required reserves. The reserves prescribed for central reserve city, for reserve city, and for country banks were respectively 18%, 15%, and 12%. In each case the law required the depositing in the reserve banks of a little more than one-third of these reserves, namely, 7/18, 6/15, and 5/12 respectively. Furthermore, while making special provision for a transition period of three years, the law provided that at the end of three years, 5/18, 4/15, and 3/12 respectively of the prescribed reserves of central reserve city, reserve city and country banks were to be in the member bank's own vaults or on deposit with its reserve bank. The remaining one-third of the required reserves was to be in cash in the member bank's own vaults. In order further to stimulate reserve centralization these provisions were amended in August, 1916, so that by a vote of at least five members and covering all the districts, the Reserve Board might by general ruling permit member banks to deposit in the reserve banks any portion of their reserves previously required to be carried in their own vaults. But owing to the desire further to strengthen the reserve system in the face of the Great War the whole reserve requirement was changed in June, 1917. There is now no legal provision for vault reserves, but all member banks must keep prescribed balances with their reserve banks. These balances are 3% of time deposits in all cases, and 13%, 10%, and 7% of demand deposits for banks respectively in central reserve cities, in reserve cities, and in other places. In other words, all required reserves of member banks must now be deposited in the reserve banks. Member banks are also forbidden to deposit with non-member state banks or trust companies in excess of 10% of their own capital and surplus.

Bank deposits