For a while it appeared that non-member banks might attempt to devise a scheme of nation-wide ex tent for overcoming this disadvantage. The Guar anty Trust Company of New York City offered to act as a clearing-house for non-member banks in New York State. Similar schemes were started in other states.
The situation was cleared up somewhat by the amendment of June 21, 1917, which provides that the reserve banks may accept items for collection and ex change from non-member state banks and trust com panies under certain conditions, the most important of which is that they maintain with the reserve banks a balance sufficient to offset the items in transit held for their account. This removes a rather galling re striction.
16. Federal Reserve Board regulation.—The coun try waited impatiently for the Reserve Board to an nounce its regulations regarding membership of state banks. Finally, after other pressing tasks of the Board had been accomplished, on June 7, 1915, the regulation was announced. The entire spirit of the regulation, as well as a statement issued to the press, indicates thatthe Board is anxious to cooperate with the state banks. It is frankly stated that only com mercial banks are desired for membership. This is as it should be. Investment banks would not derive much benefit from the system, nor would they con tribute much toward its success.
We shall mention here only some of the most im portant features of the newly published rulings. A member state bank "shall invest only in loans on real estate or mortgages of a character and to an extent which, considering the nature of its liabilities, will not impair its liquid condition." This ruling is to be interpreted by the Reserve Board. Undoubtedly, a great many state institutions are ineligible under this provision. Some of them say that they can set their houses in order if they are allowed sufficient time for the purpose. Others will probably never care to change the nature of their business so as to render them eligible. A bank may not have loans which are secured by its own stock.
Another condition is that, while a bank may make a loan to one person, firm or corporation aggregating more than ten per cent of its capital and surplus, it cannot rediscount the paper of such a borrower at the reserve bank.
The withdrawal provision seems to have been ar ranged satisfactorily. Of course, it is to be hoped that the state banks will never wish to withdraw, but they like to feel that they can get out of the system with out too great a sacrifice if it should ever be desirable for them to do so. At any rate, they can hold the threat of withdrawal as a club to enforce their rights. The matter of examination is left about where it was, except that the Reserve Board expresses its intention of cooperating with the state bank examiners, and thereby lessening the expense and inconvenience to member state banks.
17. State laws on membership.—Some of the states have adopted a rather hostile attitude toward the re serve system. In some cases there appears to be a certain amount of jealousy on the part of state bank officials. On the whole, the states have been quick to
change their laws whenever necessary in order to per mit state banks to invest in the stock of the reserve banks and take any other steps incident to entering the system.
Up to December 1, 1916, the following twenty-five states had passed laws expressly permitting state banks to become members: California Mississippi Ohio Idaho Missouri Oregon Iowa Montana South Carolina Kentucky Nebraska South Dakota Louisiana New Jersey Texas Maine New Mexico Utah Massachusetts New York Virginia Michigan North Dakota Washington Minnesota In the following fifteen states there had been no specific legislation, but the state authorities had ruled that state banks might enter.
Alabama Illinois Rhode Island Arizona Indiana Tennessee Arkansas Kansas Vermont Delaware Maryland West Virginia Georgia North Carolina Wisconsin In three states—Connecticut, Nevada and Wyo ming—the authorities had filed opinions to the effect that state banks could not enter under the law. The remaining five states were doubtful.
18. A satisfactory solution situ ation as it now stands is not all that could be desired, but it seems that the Reserve Board has shown good faith and that it intends to do all in its power to work out the solution of the problem in as satisfactory a way as possible. One or two influential state bankers have accused the Board of overstepping the bounds of its power under law, and of making its regulations more severe than was intended by Congress when the Act was passed. It has even been charged that at first the great national banks in the larger cities op posed the immediate entrance of state banks into the system, because of the shifting of reserves which would have been made necessary by their joining. This may or may not be true. The shifting of the reserves of national banks was a serious matter. The situation would have been much more serious, of course, if a great number of state banks had joined the system at the very beginning, and had begun to withdraw their deposits from reserve agents and to place them with the various Federal Reserve banks. It may be well that the state banks have delayed their entrance, but there can be no serious objection to their coming in gradually, now that the first shock has been withstood successfully.
State banks may wish to wait a little longer in order to see just how the system is going to work out and just how the state banks that have already joined the system are going to fare. Probably a little time will be needed for the Federal Reserve Board to convince state institutions that it is entirely friendly.
Up to January, 1918, the most successful argument for inducing them to enter was the plea that the coun try needed the close cooperation of all financial insti tutions in its efforts to win the war and, possibly, the fear that there might come a time of financial strin gency when they would like very much to obtain the full benefits of the system but might find the way of entrance barred.