6. Plans for Reform
On account of the defects in our system of banking, there has been long-continued agitation for reform, increasing in scope and intensity in recent years. After the crisis of 1907, which revealed these defects to many persons who had not observed them before, Congress appointed a commission to make investigations and to prepare a reform measure. In January, 1912, this committee submitted a report which embodied a bill for the incorporation of a National Reserve Association, to be made up of a federation of local associations of banks and trust companies. The purpose of this association was to supply a market for commercial paper, an elastic element in the currency, a place for the deposit of the bank reserves of the country and of the funds of the government, as well as proper machinery for the administration of this market and these funds.
For various reasons, the plan of the monetary commission did not meet with universal favor. It was condemned in particular by the Democratic party, which was victorious at the polls in the fall elections, and installed a new administration in Washington, March 4, 1913. A special session of the new Congress was called to consider the tariff question, and to it was submitted another plan for the reform of our banking system, which was enacted into law December 23, 1913.
This law provides for the incorporation of so-called "Federal Reserve Banks," the number to be not less than eight or more than twelve. The country is to be divided into as many districts as there are Federal Reserve Banks, and the national banks in each district must subscribe six per cent and pay in three per cent of their capital and surplus to the capital stock of the Federal Reserve Bank located in that district. State banks and trust companies may contribute on compliance with the same conditions as national institutions. If, in the judgment of the organization committee, the amount of stock thus subscribed is inadequate, the public may be asked to subscribe, and as a last resort stock sufficient to raise the total to an adequate figure may be sold to the Federal Government. Cooperation between these Federal Reserve Banks and a degree of unity in their administration are provided for through a Federal Reserve Board of seven members, two ex officio and five to be especially appointed by the President of the United States. For the administration of each Federal Reserve Bank, a board of directors of nine members is provided for, six to be appointed by the member banks and three by the Federal Reserve Board, one of those three to be designated as Federal Reserve Agent and to be the intermediary between the Federal Reserve Board and the bank of whose directorate he is a member.
The proposed Federal Reserve Banks are to hold a part of the reserves of member banks and to rediscount commercial paper, administer exchange accounts, and conduct clearings for them. They are also to serve as depositories for the United States government, and to issue treasury notes obtained from the Federal Reserve Board in exchange for rediscounted commercial bills, these notes to be redeemable on demand by them and to be a first lien on all their assets. Their retirement, when the need for them has passed, is provided for by the requirement that no Federal Reserve Bank shall pay out any notes except its own, all others being sent in to the issuing bank or to the treasury for redemption. Against outstanding note issues a reserve of at least 40 per cent in gold must be maintained, and against deposits one of at least 35 per cent in gold or lawful money.
This law provides remedies for the chief defects of our system; namely, a market for commercial paper which will enable a properly conducted bank at any time, through rediscounts, to secure notes, legal-tender money, or checking accounts in the amounts needed; a system of note issues which will fluctuate automatically with the needs of commerce for hand-to-hand money; a more economical administration of the reserve funds of the country, unattended by the dangers of the present system, and an administration of the funds of the federal government which is free from the evils of the independent treasury system.
CHAPTER V
Commercial Banking in Other Countries
In contrast with that of the United States, the characteristic features of the commercial banking systems of Europe are the central bank performing important functions for all other financial institutions and for the government; a relatively small number of large institutions with many branches mediating between the central bank and the people; and the use of commercial and bank bills instead of promissory notes as the chief instruments of loans and discounts.