The Federal Reserve Act I 1

THE FEDERAL RESERVE ACT I 1. General banking organization. § 2. The Federal Reserve Board.

3. Federal Reserve banks. § 4. Federal Reserve notes. § 5. Reserves against Federal Reserve notes. § 6. Reserves against Federal Reserve bank deposits. § 7. Reserves in member banks. § 8. Rediscount by Federal Reserve banks. 6 9. Changes in national banks. § 10. Opera tion in the pre-war period. 1 11. Operation in the war period. § 12. Gold hoards and artificial interest rates. § 13. The post-war period. 11 14. Future of the Federal Reserve system.

§ 1. General banking organization.

President Wilson and the newly elected Congress with its Democratic majority made banking reform one of the main objects on the program for the special session beginning March 5, 1913. The result was the Glass-Owen bill, which became law as the Federal Reserve Act December 23 of that year. The bill was actively discussed within and without the halls of Congress, and many of its features were attacked by bankers, individually and acting through the bankers' associations, at various stages of its progress. As a result it underwent numerous amend ments in details, and, though it remained in most essentials as it was first proposed, it was at last accepted even by its critics as on the whole a beneficent act of legislation. Indeed, its strongest critics were the friends of the Aldrich plan, and the Federal Reserve Act embodies, in a greater degree than its authors were ready to admit, the main features of the Aldrich plan. In one important respect, however, it is different: it provides for more decentralization of control and of reserves than did the Aldrich plan. It created, not one central banking reserve, but, in the end, twelve regional, or 117 district, banks, each to keep the reserves of its district. The Jacksonian tradition of opposition to a central bank 1 in part helps to explain this; in part the contemporary congres sional investigation and discussion of the so-called "money trust" and the consequent desire to decrease the importance of "Wall Street" and of New York City banking power.

On the accompanying map (Fig. 1) are given the outlines of the districts as constituted and altered down to § 2. The Federal Reserve Board. At the head of the banking system stands the Federal Reserve Board of seven members, five of them appointed by the President and Senate of the United States for this purpose, and two serving ex, officio—the Secretary of the Treasury and the Comptroller of the Currency. One of the five shall be designated by the President as Governor and one as Vice-Governor of the Board. But the secretary of the Treasury is ex-officio chair man The term of the appointive members was fixed at ten years and the salary at $12,000 a year.

The powers of the Board are numerous and important. The Board is made the head of a real system of banking, the twelve parts of which can, in times of emergency, and at the Board's discretion, be compelled to combine their reserves by means of tending to each other (rediscounting), to the very limit of their resources, at rates fixed by the Board. By this means the reserves of the several district banks may be "piped together" and thus be practically made into one cen tral bank under the Board's control, although centralization was in outward form avoided by the bill. Alongside of the Reserve Board is placed a Federal Advisory Council, con 1 See ch. 8, f 1.

2 The law provided that an organization committee should designate not less than eight nor more than twelve cities as Federal Reserve cities, and should divide the continental United States, excluding Alaska, into districts each containing one such city. Twelve districts were designed. Whenever, therefore, the act speaks of "not less than eight nor more than twelve," or of "as many as there are Federal Reserve districts," we may now say twelve. See map, Figure 1, ch. 9.

sisting of one member from the board of directors of each of the twelve district banks. This council has only the power to confer with, make representations and recommendations to, and call for information from the Federal Reserve Board.