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 or 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.