THE FEDERAL RESERVE SYSTEM 1. Federal Reserve Act.—When the Democratic Party came into power in 1912, it considered itself bound by pre-election pledges to bring about some sort of banking and currency reform, but it felt com mitted against any scheme which would involve the establishment of a central bank. The party leaders in Congress immediately began to cast about for some plan which would correct the recognized defects of the national banking system without including the central bank idea, which twice had been found suc cessful in this country during the lives of the First and Second Banks of the United States, and which had been the bulwark of credit in all the great coun tries of Europe for so many years. An alternative to a central bank system was the Canadian plan, a system composed of a few large banks with a great number of branches thruout the country. This was not considered seriously, for the country seemed defi nitely committed against the branch bank idea. The system finally adopted includes neither a central bank nor a branch banking organization. It is in many ways a new experiment in the field of banking.
The Federal Reserve Act, which became law De cember 23, 1913, provides for a regional system of twelve coordinate banks, each working independ eatly in its own distinctive territory, but all bound together in certain respects by the Federal Reserve Board at Washington. We shall proceed first to de scribe the organization of the Federal Reserve system, and then explain the most important functions which it performs.
2. Federal Reserve United States is divided into twelve Federal Reserve districts, which are designated by numbers from one to twelve. In each district a city is chosen to be a Federal Reserve city, and in that city a Federal Reserve bank is estab lished. Each Federal Reserve bank bears a number corresponding to that of its district and takes its name from the city in which it is located. The Fed eral Reserve Bank of Boston is Number 1. The other reserve cities are: (2) New York, (3) Phila delphia, (4) Cleveland, (5) Richmond, (6) Atlanta, (7) Chicago, (8) St. Louis, (9) Minneapolis, (10)
Kansas City, (11) Dallas, (12) San Francisco. Figure 3, page 282, shows how the United States was divided into districts on December 1, 1916.
Alf national banks in each district are compelled to subscribe to the capital stock of their reserve bank an amount equal to 6 per cent of their paid-up capi tal and surplus. State banks, which are permitted to join the system under certain conditions without becoming national banks, must also subscribe 6 per cent of their capital and surplus if they enter. One sixth of the capital subscription was paid in gold and gold certificates before the reserve banks opened for business on November 16, 1914, one-sixth was paid three months later, and another sixth was paid by May 2, 1915, making in all three-sixths which had been paid by that date. The remaining three-sixths is subject to call by the Federal Reserve Board. As new banks enter the system, or as member banks in crease their capital and surplus, the capital of the reserve banks is increased. On the other hand, the reserve bank capital is decreased when member banks drop out of the system or lower their capital and surplus. The combined paid-up capital of the twelve reserve banks on November 23, 1917, was $67,136,000. National banks in Alaska and in the in sular possessions, except in the Philippine Islands, may become members, but they are not required to do so.
Earnings of the reserve banks are to be distributed in the following manner : (1) after payment of all expenses the stockholders are to receive a 6 per cent cumulative dividend; (2) one-half of the re mainder is to go to a surplus fund until it shall amount to 40 per cent of the paid-up capital stock of the bank ; (3) all earnings above these go to the United States as a franchise tax, and they may be added to the gold reserve against United States notes or be applied toward liquidating the bonded debt.