While the management of the Federal Reserve Banks will be relieved from many of the problems and difficulties of individual banks, and will deal primarily with certain definite depositors and customers the member banks, the responsibilities of their directors will be increased by reason of the fact that they have at stake, not only the investment of the depositors' funds, but the investment of the national credit.

In working out a system which will insure conservative business management of these banks Congress has undertaken to create a board of directors which is representative of the interests involved.

It is provided that the board of each Federal Reserve Bank shall consist of nine members; that one-third of this board, to be known as class "C" directors, shall be selected by the Federal Reserve Board, which is in effect the representative of the United States Government; that one-third shall be known as class "A" directors and shall consist of three members who shall be chosen by and be representative of the stockholding banks; and that the remaining one-third, to be known as class "B" directors, shall consist of three members who at the time of their election shall be actively engaged in their district in commerce, agriculture, or some other industrial pursuit. The make-up of this board of directors is therefore representative, first, of the United States Government, second, of the stockholding banks, and third, of the business representatives, who are in effect the creditors of that part of the public which deals with member banks.

In other words, it will be observed that class "A" consists of representatives of the banks or those who are intrusted with the funds of the business public for investment; class "B" consists of representatives of the public who are furnishing these funds, and class "C" consists of the representatives of the Government, which undertakes to supervise the proper and conservative investment of such funds.

It must be remembered, however, that while these three interests are representative, the Board when organized is a unit, and that this Board is charged with the management and control of the affairs of such bank. The grouping or classification relates only to the manner of election, and not to their status after election.

When by election by the member banks or by appointment by the Federal Reserve Board the candidates become members of the board of directors of the Federal Reserve Banks, the duties and obligations of each member are the same. It is true that the Chairman or Federal Reserve Agent and the Deputy Chairman or Deputy Federal

Reserve Agent who are members of the board occupy dual capacities, in that they are the local representatives of the Federal Reserve Board in addition to being members of the board of directors. As members, however, their duties are similar to those of class "A" and class "B" directors.

In order to insure a thoroughly representative board, Congress has provided that such boards shall not only consist of the three interests referred to, namely, the Government, the banks, and the business interests, but that in making this selection each district shall be divided into three general groups or divisions, each group to contain, as nearly as may be, one-third of the aggregate number of member banks of similar capitalization. Each one of these groups will nominate and elect one class "A" and one class "B" director, so that the directors will be selected by and be representative of not only the stockholding banks as a whole but of the several classes of banks included within each district. This does not mean that the board shall necessarily consist of officers or directors of the smallest banks as well as officers or directors of the largest, but that each class of banks shall have an opportunity to nominate and elect, together with banks of similar capitalization, either from their own or from any other group, the candidate best suited, in the opinion of such banks, to perform the important duties assigned to the directors of Federal Reserve Banks.

By the terms of the law: Group No. I will contain approximately one-third of the aggregate number of banks in a district and will be composed of banks of the largest capitalization. Group No. 2 will include approximately one-third of the aggregate number of banks in a district and will embrace the banks having the next largest capitalization. Group No. 3 will include approximately one-third of the aggregate number of banks in a district, being composed of those having the smallest capitalization.

B. The Practical Working of the System

141. DEFECTS TO BE REMEDIED BY THE ACT'

BY J. LAURENCE LAUGHLIN

The defects in our banking and currency system which were to be remedied by the new legislation may be very briefly summarized as follows: an inelastic bank-note circulation; an even more dan

Adapted from "The Banking and Currency Act of 1913," Journal of Political Economy, XXII (1914), 302.

gerously inelastic credit system; ineffective use of a large supply of gold; a scattering of reserves and lack of co-operative action by banks in times of stress; a rigid reserve system which induced panics; state banks and trust companies doing a commercial business but in different systems; an independent Treasury divorced from the money market which imperiled bank reserves in times of difficulty; the drift of idle funds to the call-loan market where they fed stock speculation, and the want of American banking facilities in other countries to aid our foreign trade.

142. THREE TYPES OF BANK NOTES IN THE FUTURE BY THOMAS CONWAY AND ERNEST M. PATTERSON

I. PARTIAL RETENTION OF PRESENT NOTES

The Federal Reserve Act does not compel the national banks to retire their circulation. They may increase it or decrease it under the old regulations and within the old limits if they see fit. Moreover, they are released by Section 17 of the act from the old requirement to purchase a stated amount of United States bonds before being authorized to commence the banking business.

Retiring the national bank notes.-The first important change is that, beginning two years after the passage of the act, that is to say, on December 23, 1915, member banks may retire their circulation in whole or in part, this privilege to remain open for a period of twenty years thereafter, or until December 23, 1935. Any member bank desiring to retire any or all of its circulating notes may file with the Treasurer of the United States an application to sell for its account, at par and accrued interest, its United States bonds, now held in trust at Washington against the circulation that is to be retired.

Disposition of the United States bonds.-The Treasurer shall notify the member banks of the amount of bonds sold for their account and these banks shall then assign and transfer the bonds to the reserve bank that has purchased them. The reserve bank shall then deposit lawful money with the Treasurer of the United States for the purchase of the bonds. The Treasurer shall deduct from this payment an amount sufficient to redeem the outstanding national bank notes that have in the past been secured by those bonds, and shall pay the balance, if any remains, to the member bank that formerly owned them.

I

Adapted from The Operation of the New Bank Act, pp. 132-48. (J. B. Lippincott Co., 1914.)

The reserve banks are not allowed to purchase more than $25,000,000 of these bonds in any one year, and even this amount may be reduced if they choose to purchase bonds under the authorization in Section 4. There were outstanding on December 26, 1913, $756,944,194 of national banks notes, against which were held $16,147,911 of lawful money, and $743,173,000 of United States bonds. If all the national banks make application regularly and the full $25,000,000 be taken over by the Federal reserve banks each year, the process will take nearly thirty years.

The act specifically limits the retirement process to a period of twenty years. Since, as we have seen, it would take nearly thirty years, at the rate of $25,000,000 a year, to retire all the outstanding notes, each bank would be left at the end of that long period with approximately one-third of its bonds still on hand. If we deduct the 3 per cent and 4 per cent United States bonds now held in trust and limit ourselves to the 2 per cent bonds, which amount to $685,996,700, the retirement of all of them would take over twenty-seven years, and at the end of twenty years the banks would be left with at least $185,996,700 unprovided for.

Whether bankers will wish to continue their issues of notes as of old is an uncertain matter. If United States bonds remain low in price their cheapness may be a temptation, as in the past. The banks may actually be encouraged to issue notes. If, however, they fear that the purchases by the new reserve banks will be insufficient to sustain the market, they may prefer to retire their issues as promptly as possible.

II. RESERVE BANK BOND-SECURED NOTES

Reserve bank notes are to be the obligation of the Federal reserve bank issuing them and "shall be in form prescribed by the Secretary of the Treasury, and to the same tenor and effect as national bank notes now provided by law. They shall be issued and redeemed under the same terms and conditions as national bank notes, except that they shall not be limited to the amount of the capital stock of the Federal reserve bank issuing them." In other words, each reserve bank may issue an amount of these notes that is limited only by the deposit of the prescribed security.

Issues of bond-secured currency of the Federal reserve banks may originate in two ways, although all of the notes will be alike in form 'See below.-EDITOR.

and in security. The first group will arise through the retirement of the national bank notes. The reserve banks purchasing these notes may deposit them in trust with the Treasurer of the United States, receiving from the Comptroller of the Currency an amount of circulating notes equal to the par value of the bonds so deposited. There will thus be no shrinkage in the volume of the currency, the amount of the new reserve notes being equal to the national bank notes that are retired. The net result will be to relieve the national banks of the ownership of the bonds and their liability for the notes, and to transfer both the bonds and the note liability to the reserve banks.

The second way in which the reserve bank notes may get into circulation is under the provisions of Section 4. The eighth of the powers conferred upon the reserve banks in that section stipulates that they may, "upon deposit with the Treasurer of the United States of any bonds of the United States in the manner provided by existing law relating to national banks," receive from the Comptroller of the Currency circulating notes equal in amount to the par value of the bonds so deposited. These notes are identical with the ones already described, the only difference being that in the first case the bonds are the ones that now secure the circulation of the national banks, while in the second the bonds may not have been securing national bank circulation at the time of purchase, and may have been bought from other owners than national banks.

The significance of this provision lies in the fact that it creates a market for United States bonds. This power of the reserve banks may be of value in maintaining the price of the bonds, not only to the advantage of the present holders of those bonds, but also to the advantage of the government. It is also important because, if this power is exercised, it will limit the amount of United States bonds that the reserve banks may purchase from the national banks to retire their circulation. The total amount they are permitted to purchase from both sources may not exceed $25,000,000 per annum. Most of our government bonds are in the hands of the national banks. The owners of the balance, who are the trust companies, insurance companies, and the general public, may, especially if the market declines, dispose of their holdings to the reserve banks, which will be tempted by the lower prices to make the purchases, since they may exchange them at the Treasury Department for new 3 per cent bonds. This may be done to such an extent as to lessen the rapidity with which those banks could purchase from the national banks.