The system is divided into three classes: Central-reserve cities, where the total reserves are required to be 18 per cent. of demand liabilities and 5 per cent. of time deposits; reserve cities, where the reserves are required to be 15 per cent. and 5 per cent.; and other banking centers where they must be 12 per cent. and 5 per cent. For two years after the law was passed the latter class was required to hold five-twelfths of its re serve in its own vaults; thereafter four twelfths. The remainder of the reserves of the banks in the reserve cities were to be gradually withdrawn until five twelfths had been so redeposited, and by the end of the third year the entire re serve must be held either in the banks' vaults or by the Federal Reserve bank. The reserves of reserve, and Central-re serve cities must be similarly readjusted until, in the former case, five-fifteenths are held in the banks' vaults, and six fifteenths in the Federal Reserve bank— in the latter case, six-eighteenths and seven-eighteenths, respectively. At the end of a period of three years the un assigned reserve shall be either in the banks' own vaults or the Federal Reserve bank.
The Federal Reserve banks are not chartered primarily for profit. The cap ital of the Federal Reserve banks is owned by the member banks, subject to a cumulative dividend of 6 per cent. Profits in excess of this revert to the Government, with the provision that one half of these excess profits shall 'be diverted to the creation of a surplus fund for the Federal Reserve bank until the fund shall have reached 40 per cent. of
the capital of that bank. Primarily the duty of the Federal Reserve banks is to act as the custodian and guardian of the bank reserves of their member banks. Next is their duty to render a service to their member banks, and through them in turn to the general public in equaliz ing and stabilizing interest rates.
The Federal Reserve banks came into being in November, 1914, and notwith Standing that American bankers had gained through five years of discussion a better understanding of the deplorable defects in the American banking and cur rency system, the managers of the new Federal Reserve banks found that the welcome accorded them by the banks of the country at large was cool. This was because they did not really understand the new regime. The breaking out of the Great War was the immediate influence in their organization—requiring as it did the best banking talent and machinery in the country. The immense imports of gold from abroad following the outbreak of the war, and the general prosperity stimulated by war profits kept the sys tem at once from proving its great value For three years, from its formation up to our own entry into the struggle, in April, 1917, it was, however, gradually finding itself. When this great test came the Federal Reserve banks were pre pared for its great responsibilities. Dur ing the first year of war the system took a high place in the confidence and esteem of both bankers and business men.