ANTECEDENTS OF THE FEDERAL RESERVE SYSTEM Classification of the Financial Institutions The banking system of the United States is dual in the sense that some institutions are authorized by federal statute and charters and other institutions by state statute and charters, and the two classes have developed in competition with each other.
The financial institutions to which federal charters are granted or which operate under federal law include: i. Federal reserve banks.
2. National banks, some of which have local or foreign branches.
3. Federal land banks.
4. Federal joint-stock land banks.
5. National farm loan associations.
6. Postal savings depositories, including branch post-offices and stations.
7. "Edge" corporations.
8. The War Finance Corporation.
The state institutions are more varied in their nature, purpose, and operations. They embrace: i. Commercial chartered banks.
2. Private individual banks.
3. Trust companies.
4. Mutual or trustee savings banks.
5. Joint-stock and "special deposits" savings banks.
6. Bond houses and investment companies.
7. Co-operative savings associations and building and loan associations.
8. Morris-plan banks.
9. Personal loan companies.
xo. Personal loan brokers. Ir. Land banks.
12. Mortgage loan companies.
13. Credit unions.
14. Discount houses.
15. Acceptance houses.
16. Note brokerage houses.
17. Finance companies. i8. Cattle loan companies.
The emphasis of this book is on commercial banking and the development of the federal reserve system. It is the purpose of this chapter to present the historical background of this system. Non-commercial banks are treated less fully, the discussion of such institutions being limited to Chapters XXIII and XXIV.
The First Bank of the United States As part of a general scheme to support public credit in 1791, Alexander Hamilton prevailed upon Congress to institute the first Bank of the United States. His main arguments in support of the institution were: i. The demonstrated success and usefulness of national banks in the chief European countries.
2. The more effective utilization of capital by concentrating the savings of the community for business uses.
3. The possible services of such a bank to the government in advancing loans and facilitating the payment of taxes.
4. The desirability of a bank note currency.
The opposition to the scheme was led by Madison and came from the southern states.
The law provided for a Bank of the United State, located at Philadelphia, capitalized at $1o,000,000, with shares at $40o each, subscriptions payable one-fourth in specie and three-fourths in United States securities bearing 6 per cent interest and payable within two years. The United States government subscribed $2,000,000, which sum was loaned by the bank to the government, the loan to be repaid in ten annual instalments. Thus the pay ment of the government subscription was effected by what were virtually stock notes—a very faulty banking operation. The subscriptions in government securities were thought to give the bank a wider basis for note issue than would otherwise have been possible, as it would have been difficult to assemble $ro,000,000 in gold.
The bank was privately controlled by a board of directors of 25 members, one-fourth of whom at the end of each year became ineligible for re-election. Stockholders in foreign countries could not vote by proxy. The votes allowed per share decreased with the increase in the number of shares held by any, one stockholder, thus providing for decentralized control, and no subscription, save that of the government, was to exceed i,000 shares.
The bank was authorized to issue notes which were a legal tender in payment of all debts to the United States. The bank's debts were limited to the amount of the capital. This limitation could be exceeded only by authorization of Congress, and the directors were personally liable for the excess. The bank was forbidden to trade in merchandise, it was permitted to sell—but not to buy—United States securities, and its real estate invest ments were limited to its bank buildings and site. The bank was to make no loan to the United States in excess of $1oo,000, nor to any state in excess of $50,000, nor to any foreign country without the authorization of Congress. The maximum rate for loans and discounts was fixed at 6 per cent. The directors were empowered to establish branches within the United States. The bank was required to report its condition to the Secretary of the Treasury at his demand, but not oftener than once a week. The Secretary of the Treasury had the right to inspect the books of the bank. The charter ran for twenty years and meanwhile the government was to establish no other bank.