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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.

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