Federal Reserve Act, McFadden Act, Banking Act of Banking Act of Bank Holding Company Act, COMMITTEE ON BANKING AND . Act shall be the "Federal Reserve Act." Wherever the word "bank" is used in this Act, the word shall be held to include State bank, banking association and trust. HARVARD COLLEGE LIBRARY THE FEDERAL RESERVE ACT "That one Measure won the War" — John Skbkton WruaiAMs Comptroller qf the Currency The.
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1 A number of sections of the Federal Reserve Act are long or note above and below at the bottom of each page of the pdf version and. gress and ultimately in the Federal Reserve Act of. A study of monetary conditions was author ized by a Republican administration, and remedial. H E Federal Reserve Act has now so completely demonstrated its value, and is so widely approved by the business men of America and of the world, that I have .
The currency of checks and drafts with which men met their ordinary obligations was dimin- ished fifty per cent in the United States, thus diminishing this ephem- eral currency which at that time probably averaged a thousand mill- ion dollars. Secured by Govt, war obligations ll,3S8,,ooo Bills discounted: Usage guidelines Google is proud to partner with libraries to digitize public domain materials and make them widely accessible. Appearances Before and Reports to the Congress Section 3. National banks failing to signify their acceptance within sixty days were forbidden to act as Reserve agents, and those failing within a year to become members were required to surrender their charters.
From one of these ar- guments, dated September 26, , I take the following p. The Bank of England has a great advantage in having all the reserve concentrated in the hand of one concern charged with the duty by the force of public opinion of maintaining this reserve above the danger-point.
This tends to check gold exports, to cause gold im- ports, and usually brings idle gold from the Continent. If, in ordinary times, gold is not attracted it is usually because there is loanable money on Lombard Street content with a lower rate. In this event the Bank of England sells consols for cash and buys them back on time, which has the effect of absorbing the loanable money on the street and thus making the rate effective in at- tracting gold.
For example: This was done in , in , and in , with the result that the panic in each case was con- trolled instantly. The state gets all the benefit over and above a low rate of interest to the stockholders. The bank is controlled and dominated by the uniform rate of interest. It has substantially a monopoly in the issue of paper money.
It may issue even in excess of these limitations hy paying a tax to the German Empire of five per cent per annum on sveh over-issue. First, By raising the rate. Second, By favorable assay to foreign gold, by giving six to eight interest days to shippers, and other little devices favoring the shipment of gold to Berlin.
First,, in case of an exchange unfavorable to France, the Bank of France pays out small gold coins which by use are slightly under weight and therefore not suitable for export.
In case of strong demand money brokers buy up fuU-weight napoleons, atid sell them for export, and ultimately the bank feels the withdrawal, but it costs something to take gold from France in this manner, and the method opposes a mechanical obstruction to the withdrawal of gold. Third, in case of need the Bank of France can protect its gold hoard by paying out five-franc silver pieces as legal tender under the law, and this provision of course abundantly protects the gold held by the bank against direct withdrawal.
The French people by long custom still maintain and do nearly all their business in cash, and checks are comparatively little used in commercial life.
The notes must be redeemed at any part of the Dominion. No reserve is actu- ally required by law, but the cash reserve for redemption has actually averaged in gold and legal tenders for some years ten per cent about. Under the law, forty per cent of the reserves must be in Dominion legal tenders, which, of course, take care of such paper to that extent. There is a double liability of stockholders, a special liability of directors, elaborate regulations, frequent printed reports, etc.
The German method, to which I called attention at that time , consisted in issuing currency against securities under a penalty of a tax of five per cent on the issue to the ex- tent it exceeded its fixed gold secur- ity, and lending these bank notes at interest, and I recommended at that time the following remedy: In this way such deposits would become a source of strength instead of weakness. Rec, February 25, ; p. Since this recommendation was made the principles I then proposed have been adopted by the United States: Act of Jime 25, , 36 Stats.
United States bonds may be used now as a basis of issuing Federal Re- serve Notes, under an interest charge fixed by the authorities of the United States. I advised the country at that time "That the currency could be quickly and safely expanded by issuing Treasury notes against standard securities put up as col- lateral with the Treasury of the United States. In this manner the sudden with- drawal of deposits and the shrinkage of the narrow margin of currency available to the banks could be supplemented as above stated without forcing into liquidation, at such an unfortunate time, any borrower.
At that time I made the following comiment Ibid. They are easy to prevent. The remedy is per- fectly simple.
Provide a means for quickly expanding the currency when financial fear threatens the country. Provide a means by which the timid depositor who rushes on the banker and demands his money shall not frighten that banker out of his wits.
Provide a means by which that banker can, upon the strength of adequate security, obtain a tem- porary accommodation of money with which to meet his frightened depositors. In a time of panic a man cannot borrow money if he puts up gold dollars as collateral, for the manifest reason that it is not security, but currency, which is then required.
It is the duty of the United States to protect the commercial Ufe of its citizens against this senseless, unreasoning, destruc- tive fear that seizes the depositor when he has been sufficiently hypnotized by the metropoUtan press with its indiscreet sug- gestions. Jones offered an amend- ment to the then pending Aldrich Bill, contemplating the amendment to the National Bank Act, which I drew as follows: Any citizen of the United States shall have the right to deposit United States bonds under rules and regulations to be prescribed by the Secretary of the Treas- ury, and to receive from such fund ninety per cent of the face value of such bonds in United States Treasury notes, and shall have the right at any time within twelve months to redeem such bonds by repaying in United States Treasury notes the amount so received by him on account of such bonds, with interest at the rate of six per cent per annum on such amount.
Failure to redeem such bonds within the limit of twelve months shall operate as a forfeiture of such bonds to the United States, and such bonds shall be sold to the highest bidder in the open market, and the balance, after the payment of the principal of the amount advanced, the in- terest on the same, and the expenses, shall be paid to the former owner of such bonds.
Gov- ernment notes b against adequate security, c loaned by the Govern- ment at interest high enough to pre- vent inflation. Senator Aldrich, then in charge of the Bill, declined to accept this amendment or to improve upon it Jones and James K. Jones, Jr. Telephone Main "Washington, D. C, February 11, Robert L. Owen, United States Senate, City.
I think you will find the debate on that bill at that time quite interesting. Record, Feb. This bill provided for the establishment of National Cur- rency Associations, and it was ap- proved May 30, 35th Stats. These National Currency Associa- tions, to be composed of not less than ten national banks in number, and each association having a capital and surplus of at least five millions of dollars, were to be authorized as cor- porate bodies. They were authorized to expand the circulation by the ap- proval of the Comptroller of the Cur- rency to an amount m t exceeding seventy-five per cent of the cash value of the securities or commercial paper deposited under the direction and control of the Secretary of the Treasury.
For instance: Such notes should not exceed ninety per cent market value of qualified bonds, and ''The total amount of circulating notes outstanding of any national banking asso- ciation, including notes secured by United States bonds, as provided by law, and notes secured otherwise than by deposit of such bonds, shall not at any time exceed the amount of its unimpaired capital and sur- plus.
It was further provided that the notes should be distributed as equi- tably as practicable between the various sections of the country. A very impractical provision in time of panic. Furthermore, the national banking associations issuing such circulating notes, proposed by the Act, were re- quired to pay for the first month a tax of five per cent per annum upon such notes in circulation, with one per cent per amium for each month thereafter until a tax of ten per cent per annum was reached.
No bank in sound condition and free from the fear of a panic would take the trouble to call a meeting of the directors of a national currency association and make the appeal necessary to obtain these circu- lating notes and put up their securities on a charge of five per cent up to ten per cent for the use of such notes, unless a panic had already taken place. Jones and which was rejected by Mr.
Aldrieh, and that his refusal of this proposal had left the country impro- tected against the panic of After I had made this indictment of the neglect of Senator Aldrich to adopt these principles in , 1 said Cong. That the committee bill limited the issue to five hxmdred million dol- lars of emergency notes, which had been demonstrated by the Chainoan himself to be insuflEicient in volume, and imposed restrictions which would prevent any but a fractional part of that issue, and in addition closed every door to relief until after the Secretary of the Treasury should have declared an emergency, which I insisted should be left to the bank makmg application and not to the Treasury, because a bank may be put in a panic within twenty-four hours, and nobody can know this as well as the bank oflEicers.
I objected that the national banks were not permitted to take advantage of the Bill unless they came within certain rigidly described classes, thus limiting the efficiency of the proposed remedy and preventing its full and free exercise. For exam- ple: No national bank which has less circulating notes outstanding than forty per cent of its capital was per- mitted to have the benefit of the Act. No national bank with a siuplus of less than twenty per cent was per- mitted to have relief.
No national bank in any event was to have any relief in emergency notes exceeding a gross amount of its outstanding notes in excess of the capital and surplus of such bank. Moreover, no state bank, no trust company, no savings-bank, was permitted to have the benefit of this remedy against panic, although these institutions at that time held two- thirds of the banking capital of the United States, and had less than four per cent currency reserve, and were therefore to that extent dangerous to our financial stability.
All these objections, made in , were remedied in the Federal Re- serve Act in This has been accomplished. I demanded that these notes should not be national bank notes, but should be Treasury notes based upon the securities and the credit of the banks, but in addition being Treasury notes supported by the taxing power of the people of the United States.
This was accomplished in the Fed- eral Reserve Act. I advocated at that time the retire- ment of the bond-secured national bank notes and the issuance in lieu thereof of Treasury notes payable in gold page The Federal Reserve Act provided the gradual retirement of the bonds and national bank notes by substi- tuting Federal Reserve bank notes.
This has been accom- plished, imder the Federal Reserve Act. Federal Reserve notes are now issued in lieu of gold, and such gold to the extent of many hundreds of millions of dollars has passed into the hands of the Federal Reserve banks in the custody of Federal Reserve agents and made available for this very purpose page The Committee Aldrich Bill permitted railroad bonds to be used as a basis of the emergency cir- culative notes, and did not provide that privilege for United States bonds.
Against this I vigorously pro- tested page I further insisted in upon a readjustment of the cash reserves of the banks so that they would be real reserves and actually available, as they were not under the then existing statute page This was cor- rected in the Federal Reserve Act. I stated at that time the principles which should govern the statutes on banking, as follows: On adequate security; On an interest charge to prevent inflation.
On July 31, , when the Euro- pean war broke out, I offered an amendment to the Aldrich-Vreeland Act which was adopted that day by unanimous consent, as follows: This amendment was in accord- ance with the recommendations which I had made on February 25, , and which were not accepted at that time.
The House added a further provi- sion authorizing the Secretary of the Treasury to extend the benefits of the Act to all qualified state banks and trust companies which have joined the Federal Reserve System or which may contract to join within fif- teen days after the passage of the Act.
I had taken this matter up with the Treasury Department on Friday morning, July 31, , agreed upon the form of amendment with the Treasury Department, and called the Banking and Currency Conmiit- tee together and obtained a imani- mous report in favor of the amend- ment, and the bill passed unani- mously through both Houses with the amendments above indicated.
The amendments in the House were brought about by numerous conferences between the Committees of the Senate and the House of Rep- resentatives, and all these amend- ments were actively urged by such distinguished bankers as Frank A.
Glover, president Riggs National Bank, Washington, and others. It had the usual cor- porate powers. Yet the bankers who approved this bill in- sisted afterwards that national banks should rvat be required to subscribe to the Government-controlled Federal Eeserve Banks.
The bill provided an orpnization committee composed of the Secretary of the Treasury, the Secretary of Commerce and Labor, and the Comptroller of the Currency. The Association was to have fifteen branches in as many dis- tricts.
The National Reserve Associa- tion was to be under the control of a board of directors, consisting of fif- teen directors to be elected, one by the board of directors of each branch of the National Reserve Association; 2. Nine additional directors were to be elected by a voting representa- tive chosen by the board of directors of the various branches, each of whom should cast a number of votes equal to the number of shares in the National Reserve Association held in the branch which he represented.
There were to be seven ex- officio members of the board of direc- tors, namely: The effect of this "plan was to place absolutely in the hands of the banks the control of the reserve system.
And to fix this stupendous power in the hands of five men in New York City representing a Board of forty-six per- sons, forty-two of whom were to be chosen by the banks and four of whom were to represent the Gov- ernment of the United States. The Bill proposed to exempt the Reserve Association and the local associations from local and state taxations ex- cept as to real estate. The local asso- ciations were authorized, for a com- mission, to guarantee comimercial paper for rediscount at the branches of the National Reserve Association.
It was provided that any Igcal as- sociation might function as a clear-' ing-house by a vote of three-fourths of its members with the approval of the National Reserve Association. Some day this will be corrected and the Act administered more advantageously for business men and depositors.
It was proposed that the National Reserve Association should he the principal fiscal agent of the United States, and that the Government should thereupon deposit all its gen- eral funds with said Association and its branches, and thereafter all re- ceipts of the Government, exclusive of trust funds, should be deposited with said Association and its branches, and all disbursements by the Government should be made through said Association and its branches.
Section 25 provided tibiat the Asso- ciation should pay no interest on deposits. Section 26 authorized the Associa- tion to rediscount for its member banks commercial bills, but not on bills based on investment securities. Discoimted bills should not have a maturity of more than twenty-eight days, nor exceed the capital of the bank for which rediscoimts were made, nor exceed ten per cent of the unimpaired capital of the mem- ber bank. Bills up to four months were approved for discoimt with the guarantee of the local association.
Section 30 provided that the Asso- ciation should have the authority to fix its rate of discoimt throughout the United States. Section 36 authorized the Reserve Association to open and maintain banking accounts in foreign countries and establish agencies in foreign countries for the purpose of handling foreign bills and checks. The mem- ber banks were authorized to count their deposits with the Reserve Asso- ciation as legal reserves.
Section 41 provided that the Na- tional Reserve Association should cover all demand liabilities, including deposits and circulating notes to the extent of fifty per cent in gold or lawful money, with a proviso that whenever and so long as such reserve should fall and remain below fifty per cent the Reserve Association should pay a special tax upon the deficiency of reserve at a rate increas- ing in proportion to such deficiency, as follows: Yet the Bank of England has been compelled by war to drop to eighteen per cent reserve against outstanding Bank of England notes and a lower per cent against deposits.
In computing the demand liabili- ties of the National Reserve Associa- tion a sum equal to one-half of the amount of United States bonds held by the Association which have been purchased from national banks, and which have previously been deposited by such banks to secure their circu- lating notes, should be deducted from the amount of such liabilities. The National Reserve Association was thereupon author- ized to issue, — "Its own notes as the outstanding notes secured by such bonds," and "May issue further notes from time to time to meet business requirements, being the policy of the United States to retire as rapidly as possible, consistent with the pub- lic interests, bond-secured circulation, and to substitute therefor notes of the National Reserve Association of a character and se- cured and redeemed in the manner provided for in this Act.
Section 51 provided that any notes of the National Reserve Association in circulation at any time in excess of nine hundred million dollars which are not covered by an equal amount of lawful money, gold bullion, or for- eign gold coin held by said Associa- tion, shall pay a special tax at the rate of one and one-half per cent per annum, and any notes in excess of one billion two hundred million dol- lars, not so covered, shall pay a spe- cial tax at the rate of five per cent per annum, provided that in com- puting said amounts the aggregate amount of any national bank notes then outstanding shall be included.
The notes were to be received at par in payment of all taxes, exer- cises, and otiher dues to tihe United States, and for all salaries and other debts and demands owing by the United States to individuals, firms, corporations, or associations, except obligations of the Government spe- cifically payable in gold, and for all debts due from or by one bank or trust company to another, and for all obligations due to any bank or trust company; in other words, le- gal TENDER, except for specific gold contracts of the United States.
Section 55 directed the Secretary of the Treasury to exchange the two- per-cent bonds of the United States bearing a circulation privilege for three-per-cent bonds without the  THE FEDERAL RESERVE ACT circulation privilege, payable fifty years from date, and the National Reserve Association was required to hold the three-per-cent bonds during the period of its corporate existence, with the right to sell at the option of the Treasury, after five years, not more than fifty million dollars of such bonds annually, the United States reserving the right to pay off such bonds at any time.
Section 56 required the National Reserve Association to pay the Gov- ernment a special franchise tax of one and a half per cent annually during the period of its charter upon an amount equal to the par value of such United States bonds transferred to it by the subscribing bank.
When this Act was presented to the Congress of the United States an active propaganda ensued through- out the United States to obtain for it the public approval; meetings were held in various cities of the United States under the patronage of the American Bankers' Association.
The most serious ob- jections to the Aldrich Bill were these: The entire banking powers of the United States were to be concen- trated in the executive oflScers pri- vate persons , who would be located in New York City, and this power would be sufficient to coerce every member bank and large business in America. It was desirable, on the contrary, that the control of the system should be in the hands of the Government of the United States, and, second, that the reserve centers should be distributed and not concentrated in one city where a small clique could control the system.
So long as the Reserve Associa- tion issued its own bank notes it fol- lowed as a corollary that the Associa- tion would control its own notes as it saw fit, and thereby could control the currency of the country and thereby control the credits of the coxintry regardless of the will of the American people, since the Govern- ment under the proposed would not have been in control.
The measure, however, did have some valuable features; it did provide for the gradual retirement of the national bank notes. It did provide for acceptances, do- mestic and foreign. It did provide for a currency which was elastic and would accommodate itself to the demands of commerce always provided the gentlemen in control permitted it.
Woodrow Wilson was elected President of the United States upon a platform oppos- ing a central bank, favoring the tak- ing of the banking business out of the control of the so-called "money- trust" or "credit trust" whose ex- istence had been demonstrated by the Pujo investigation, and declaring the doctrine ''Banks exist for the accommodation of the public and not for the control of business.
The Senate was reorganized ac- cordingly; there was formed a Com- mittee on Committees, of which I became a member, the Conomittee on Finance was divided, the Com- mittee on Banking and Currency established, I was made Chairman of this Committee, and immediately organized a sub-Committee to study this question in co-operation with the Committee of the House, which was giving attention to this question at the same time. During the preceding winter , Hon.
I was advised that this draft had met with the tentative approval of the President. Glass gave me a copy of his draft and his notes thereon which I have preserved.
I, too, made a draft incorporating the principles I had advanced in , and these two proposals became the basis of discussion in framing the Federal Reserve Bill which finally became the Federal Reserve Act. Glass, however, proposed to amend this draft to alter this provision so that the Federal Reserve Board should be selected by the directors of the Na- tional Reserve banks, the directors of the Federal Reserve banks being selected by the member banks and their shareholders, either directly or indirectly.
I was strongly opposed to either provision because it would not give to the United States control of the system. Their representations with regard to this had made a serious impression on Mr.
Glass and on others in au- thority. Glass and myself discussed the matter very freely and fully, but could not reach an agreement. Upon this vital difference we de- termined to appeal to the President. Glass urging his view and I pressing the proposal that the Gov- ernment should control the appoint- ment of every member of this Board.
R- Federal Reserve Banks Section 5. Insolvency of member banks Section 7. Division of Earnings Section 8. Conversion of state banks into national banks Section 9. State Banks as Members Section 9A. Participation in lotteries prohibited Section 9B. Resolution of Clearing Banks Section Pricing of Services Section 11B. Federal Advisory Council Section 12A. Federal Open Market Committee Section Open-Market Operations Section Government Deposits Section Note Issues Section Deposit of bonds by national banks Section Refunding Bonds Section Bank Reserves Section National bank notes redemption fund as reserve Section Bank Examinations Section Offenses of examiners, member banks, officers, and directors Section Relations with affiliates Section 23B.
Restrictions on Transactions with Affiliates Section Real Estate Loans Section 24A.