BANKS, FEDERAL RESERVE, the Federal Reserve system is primarily a result of the currency disturbances of 1907-1908 which were promptly fol lowed by the passage of the Aldrich act providing for an emergency circulation not to exceed $500,000,000. The condi tions of this bill were so strict, however— having been framed just after an ex treme crisis and suitable only for such an emergency—that no issue was ever undertaken under its provisions. It had stirred up legislative agitation of the subject, however, and in 1910 a commis sion under Senator Nelson A. Aldrich of Rhode Island, its original promulgator, set seriously to work on the whole ques tion of banking reform.
This National Monetary Commission spent three years in expert investiga tion of banking conditions here and in Europe.
Senator Aldrich meanwhile offered in 1911 a reorganization plan the chief fea ture of which was a National Reserve Association, consisting of a central bank—whose stock should be distributed to other banks through the country— which should have the control through the election of a majority of the directors. Associate or local systems were to be formed, also controlled by the local banks which were members.
This measure assigned to the National Reserve Bank—which should hold a re serve from all the banks, and rediscount the paper of the local associations— the function of controlling the credit of the whole system and thus limiting local panics. It also has the power to issue notes on general assets to promote elasticity of the currency. It can also take up the bonds of the local banks which the government will gradually re fund in 3 per cent. bonds that will find buyers in the general market. The Na tional Monetary Commission offered a bill the year following which was essen tially the same.
The measure was taken up by the Special Session of Congress in 1913, and discussed in all its bearings till it was finally passed with some change on Dec. 23, 1913.
Under this enactment the United States is divided for facilitating the banking inter-relations of the country into twelve districts whose headquarters are in twelve principal cities of the country under the control of a Central Reserve Board. This board is composed
of the Secretary of the Treasury (ex officio), the Comptroller of the Currency (ex-officio), and five bankers appointed for terms of ten years by the President.
A Federal Advisory Council is also provided for, consisting of twelve mem bers, one elected by each of the twelve district Reserve banks, to confer when necessary with the Board.
Each district bank is governed by a directorate, three of whose members are the appointees of the Federal Reserve Board; the others appointed by the bank itself. Every National bank is required, and every State bank is permitted, under certain conditions, to subscribe to the stock of the Federal Reserve bank in its district to the extent of 6 per cent, of its own capital and surplus. In this way the paid-in capital of the twelve Federal Reserve banks at the date of our enter ing the war with Germany was about 56 millions; the largest bank, New York, having very close to twelve millions; the smallest, Atlanta, $2,414,000. The dis trict banks have the power to create branches for dealing in Government and other securities, and to rediscount com mercial paper for their associate mem bers. They may also be called on by the Federal Reserve Board to rediscount paper for other Federal Reserve banks.
The district banks are empowered to purchase from members Government bonds held for circulation, and take out circulation on them. As an alternative these bonds may be changed to 3 per cent. bonds without circulation. This pro vision is for the purpose of gradually re tiring the note circulation secured by bond. Treasury notes made by the Gov ernment are offered as a new circulatory element. The Federal Reserve bank re quiring these must place rediscounted commercial paper in the hands of a director who is designated as a Federal Reserve Agent. The circulation of these notes is guaranteed by the bank of a reserve in gold of 40 per cent. of their face value.