12. FEDERAL RESERVE SYSTEM, The. The Federal Reserve Act, passed 23 Dec. 1913, is the underlying measure upon which the Federal Reserve system depends. The system itself consists of (a) the 12 Federal Reserve banks and their branches, situated in districts defined as in the accompanying map; (b) the national banks which, by the terms of the law, are required to be stockholders in the Federal Reserve banks; and (c) such State chartered banking institutions as may comply with the requirements for membership and may apply for and be granted such membership.
The banking system of the United States at the time of the adoption of the Federal Reserve Act included three distinct elements (a) the national banks created under charters granted by the Federal government and num bering some 7,600; (b) the State banks, exist ing under special or general charters granted by the States and rather more numerous than the national banks; and (c) the trust com panies and savings banks also created by the States but doing a broader business than the State banks so-called. Only loose restrictions as to capitalization controlled any of these banks, while their reserves might be kept at home in their own vaults, or partly there and of quiet it was unable to exert any control over the development of credit or to regulate the country's gold supply, in relation to that of other nations.
Although there had been much discussion of the banking question, no definite legislation designed to improve conditions had been adopted since the Civil War, except only the so-called Aldrich-Vreeland Act of 1908. The "Gold Standard Act of 1900D had dealt almost entirely with the monetary, and only inci dentally with the banking, problem. In the Aldrich-Vreeland Act, provision was made for informal unions or associations of banks to be known as "national currency associations° whose function it was to issue notes secured by specified collateral on request of their mem bers. Practically no such associations had, however, been organized under the law until after the adoption of the Federal Reserve Act, so that when the latter measure became law partly with other banks. Under the National Bank Act, three classes of banks had been created—country, reserve city, and central re serve city; their reserves varying from 15 to 25 per cent. Only central reserve city banks were required to keep all of their reserves in their own vaults. Particular complaint had
long been made of the bank currency furnished by National institutions. The banks bought government bonds, deposited them in trust with the Treasurer of the United States, and received from the Comptroller of the Cur rency notes for circulation. These notes were "inelastic*— i.e., could not be expanded or contracted at will in response .to business re quirements, because they depended upon the volume and price of bonds as determining fac tors governing their own amount. Due to lack of elastic currency and to wide diffusion of reserves the banking system was liable to dis order in times of financial pressure. In times the nation was still on the old basis of bank ing.
The Federal Reserve Act, however, sought not only to provide the improved and respon sive currency which had been called for in the older measures of banking reform, but went much deeper. It recognized that the essential difficulty in American banking lay in its undue decentralization and consequent dissipation of strength. Fundamentally, therefore, it sought to give relief by changing the organization of banking so as to provide for combination of reserves and for joint control of and oversight over banking. To this end it provided for dis trict organizations, which were essentially to be bankers' banks, dealing chiefly with their own members—the commercial banks of the district.
The number of such districts to be created was the subject of much difference of opinion, but ultimately Congress set the number at not less than eight nor more than 12, it placed in the hands of an organization com mittee, consisting of the Secretary of the Treasury, the Secretary of Agriculture and the Comptroller of the Currency the duty of de termining how many should first be estab lished and of drawing their outlines. This organization committee was, under the act, to establish in each district a Federal Reserve bank to whose capital national banks must become subscribers in an amount in each case not less than 6 per cent of their own capital (3 per cent to be paid in and 3 per cent to be subject to call). Every such Federal Reserve bank was to have a minimum capitalization of. $4,000,000 of which one-half was to be paid up.