BANKS, FEDERAL RESERVE

‘These banks -were created by the | Federal Reserve Act of 1913, which displaced the Aldrich-Vreeland currency law. The latter was pa ed in 1908 as a stop-gap measure enacted after the suspension of specie payments by the banks in 1907, but its provisions for enabling emergency bank notes to be i ued in times of stre were not popular with the banks. The object of the Federal Reserve Act was to remedy the defects of the then existing banking system, which lacked proper provision for centralizing, holding and using cash reserves during a financial stringency. It also lacked an elastic bank note currency that could be expanded to meet increased demands for currency, either seasonal or abnormal, or contracted when the emergency pa ed. The purpose of the act, therefore, was to centralize bank reserves, making them always acce ible at the place needed; create an elastic bank credit and note i ue; organize an efficient and expeditious exchange and transfer system; and develop a banking system to aid the government's fiscal operations. To effect these aims the country was divided into twelve districts, in each of which a Federal Reserve bank was established. It created a system which each national bank was required to join as member banks and to subscribe to the capital stock of the Reserve Bank of its district. State chartered institutions could also enter the system by meeting the requirements. A Federal Reserve Board was also created, composed of seven members, to control the Reserve Banks and their note i ues. The President appoints five of the members, who hold office for ten years, the other members being the Secretary of the Treasury and the Comptroller of the Currency. The chief functions of the Reserve Banks embrace rediscounting commercial paper on which member banks have made advances to customers, i uing Federal Reserve notes to member banks, and_holding the legal reserves of member banks. The Reserve Banks must maintain a reserve of 40% in gold against the notes i ued, but can permit its reserve to fall below that percentage, subject to a graduated tax on the deficiency. The reserve notes are a bond-secured currency similar to that of the national banks and i ued in the same manner. These notes are designed to replace national bank notes as the latter are optionally retired.: The Reserve Banks function as government depositories and as fiscal agents of the treasury, marketing government securities and buying and selling foreign exchange. They seauiase the credit situation by raising or lowering their discount rates, and by a sys a 5 tematic apportionment of credit in defining the eligibility of commercial paper for rediscount.