Speech

Tine Federal Reserve Act And The Place It Is To Occupy In American Finance IIY FHUDKRtC 01? LA NO . Member o! tiie Federal Ke»erve Hoard) WASHINGTON. D. C. March 16th 1915 I IE title of the Federal Reserve Act, passed December 23, 1913, states its purposes as follows: "An Act to provide for the estab- lishment of Federal Reserve Banks, to furnish an clastic currency, to afford means for rcciscounting com- mercial paper, to establish a more effective supervision of banking in the United States, and for ovher pur- address iocs delivered lo an Association h poses." of Business Men by MR. FREDERIC A. DELANO, of Chicago. In order to understand the place which the Federal Reserve Bank Sys- one of ih. >hree members of the tem is destined to occupy in the life of DERAL RESERVE BOARD the nation, one must review the provi- selected 'oy '"'res^e/.: V/ilson as represcnla- sions of the system under which the National banks have operated for fifty uj p>vJessie; end business experience, years and appreciate ziic fact that, in •--'CI :s -o. c.hzd in non-technical language the new Act, Congress ht to cor- ^hicL • -lieVc mparIs lo the suhjret rect and supplement an exit. . g system, c:. • <due at the present time. with which nearly two gei ations of our people have become fan : ar, rsthcr - -'...a j/oa care for additional copies we than to supplant it with an c .irely new ,ed lo furnish tbcm as long as system, built upon a new ;oundaxion._ °Ur edition lasts. Furthermore, it is import, v. to bear WU CREEK COAL CO.. in mind that two-thirds of tvx banking of the country is done by banks and Mauch Chunk. Ptnn if trust companies chartered by the vari- ous states, under laws differing widely, and in some cases under charters much less strict than the Federal ..w. T\is feature becomes of great import .-c . D; when it is considered that the ulti- mate banking reserves of tli„ cou... y are the reserves of the National banks. State banks permit National Bank Notes to be counted as reserves; there- fore, unless these were fully secured, the whole fabric would break down. 3 3 26 S RESERVE REQUIREMENTS. Under the Banking Lav/ of £853, reserves varying from 15% to 25% is an elementary but important were stipulated, but unfortunately that fret that the whole theory of banking law, (bccausc it permitted Reserve ls based on the principle of averages CiJy banks to deposit half their re- ^erivcd from the results of experience. set ves in Central Reserve City banks &ar£lts represent, roughly, two clasr.cs and Non-reserve City banks, three- customer.;—depositors and borrow- fifths of their reserves in Reserve ers> Ir a bank had to keep in its City banks) allowed a great duplica- vaults cash subject to instant demand tion of reserves without any elasticity. by all its depositors, no bank could A demand ior currency attending a * exceot by borrowing from it3 panic or loss of confidence on the part neighbor of the public invariably found the banks, and if the demand V/Cre simultaneous the entire banking banks carrying the minimum reserves system v/ould break down, bccausc authorized under the lav/, and it would at once develop that these so-called there is rot sufficient currency to meet reserves were not, in fact, available; the demand. Banking, therefore, de- they might more truly be called mini- pends Upon hypothesis that a large mum requirements of normal times, Proportion v, . the J.nds of depositors V/1U not be called upon simultaneously; not reserves to be drawn upon in case that somewhere between 10% and 25% of need. rnUst be kept on hand and on thjc Premise.-, .. ,;d thac the remainder can ^ act. , ; , employed at interest—that ls> earning something; otherwise a kank could not earn its rent, salaries, and cost of operation, to say nothing a return on the capital invested by lts promotors.* Gross deposits of individuals (*) It is oroper to explain that while a and corporations in Na- °ank be oins doing business by lending its tional banks, State banks and CaPital and a share of its deposits, each loan Trust companies SIS,517,732,3713 at is made goes to swell the deposits be- CaUse the loan when made is not usually Gross loans and discounts by Paid out in cash, but is put as a deposit cred- National banks, State banks Uc<i to the borrower and subject, like any and Trust companies 015,238,357,231 othcr deposit, to checl: by the borrower Total U. S. currency out- V/ho has thereby become a depositor. The standing same date $3,402,015,427 felationship of depos.;;; to loans and to Cufr n y i .-ell illustrated by the aggre- C C s v (This report includes all National banks and gate figures i~kcn from the statement of the ^0tnptrollcr ot the Currency for June 30th, <)5% or more of the State banks and trust 1as follows:— companies.) 16 5 6 AN ELASTIC CURRENCY. complain that this form of currency A* is apparent that this nubject of was not safe. reserves iz of immense importance to thc country's development. For twenty Thc complaint came only from thc economists and students of the prob- years bankers, business men and econ- lem, that it was incapable of expan- omists have interested themselves in thc Problem of working out a solution, sion and contraction with the de- mands of business. If the amount ^he fact that other countries were able were increased to take care of maxi- adjust their banking and currency mum requirements, there was no Methods to the ebb and How of busi- ness, or even to survive considerable ready means, in periods of slack busi- recessions without complete stagna- ness, of contracting the amount of cur- tion or panic, was constantly referred rency in circulation except by the t°- After much discussion it bccamc clumsy method of returning the cur- apparent that this question of reserves rency, redeeming the deposited bonds closely associated witli that of a and converting these into cash again, suitable currency; that one of the a manifest impossibility on any large Phenomena attending every panic or scale, because United States bonds business disturbance was a demand for have long since reached a market price, currency which, if not satisfied, invari- by reason of their circulation privilege, led to the hoarding of metallic far above their investment value. Our money. It was pointed out that in own experience in this country before this respect the currency system of thc thc Civil V/ar, as well as that of Europ- United States, under thc National ean nations, pointed out a remedy in banking Act of 1363, was peculiarly basing thc currency, not upon long ngid and inelastic—far more so than it time securities such as Government had been under earlier banking acts or bonds, but on short time loans of mer- Under the central bank systems com- chants, manufactuers, and agricultural mon in Europe. producers, loans based upon and rep- resenting actual purchase and sale of ^he currency provision of the law of raw material, produce or commodities, !863 was based on the idea of com- or of manufactured or partly manufac- pelling National banks to purchase tured products. The great advantage united St ates Government bonds and of such loans as a basis for currency, Uoing those bonds as collateral security lay in the fact that they were self-liq- 0r National bank currency. As a plan uidating, constantly turning over, that create a market for Government they represented largely food or other puds, of which there were some three products classcd as the necessities of "Hons outstanding at thc close of thc life, that the currency based on these ivil War (three times as many as loans of short maturity naturally in- now), the Act was a great success. creases or decreases in volume directly nder its provisions bonds which sold with thc enlargement or diminution of °n a basis of more than 7% reached trade requirements, population, etc. a basis of less than 2%. Nobody could Thc Act fully provides for the redemp- 7 tion of the Notes as well ar, for their These new Federal Reserve Notes, issuance, an important but not always issued in five denominations, ($5, $10, appreciated necessity. $20, $50, $100), represent the elastic However, in order to leave undis- currency of the country. In other turbed the existing currency, with words, the previously issued currency Which every one was familiar, Con- already mentioned, amounting in total gress provided what the present bond- on February 1, 1915, to $3,463,599,450, secured currency should remain in- will easily take care of average require- tsct for the present, subject to partial ments of business, while the new cur- ^placement and cancellation through rency provides an elastic, supplemen- a period of twenty years with a tary currency. Thus the plan devised new bond-secured currcncy of the and finally adopted by Congress, not federal Reserve Banks. This means only meets the requirements of an that the notes cf twelve Federal Re- elastic currcncy, but meets most ingen- serve Bank • will gradually displace the iously the difTculty in respect to re- notes of 76,000 National banks, and at ceives to which I have already referred. the same '::rne diminish in volume at Depending somewhat on the diversity c mode,- .-ate per year. Xn addition of business or the dependence of a com- munity upon a single crop, there is to to this bank note currency; plus the some extent a seasonal ebb and flow Sold and gold certificates; silver and in the demands of every community, silver certificates and greenbacks, al- exhibiting itself in an increased or di- ready in existence, (enumerated in minished demand for currency and Table A) there was created by the Fed- banking credit. eral Reserve Act a new form of cur- rency, known as Federal Reserve The new Act makes a substantial re- Notes. duction in the reserve requirements, (see Table B) yet accomplishes this without weakening, but actually TABLE "A". strengthening those reserves by mak- In Circulation, February 1, 1915. ing them more effective and available. This claim may sound so paradoxical Coin (including bullion) $023,050,364 and astounding that it is proper to con- «old Certificates 958,443,039 standard Silver Dollars 67,621,922 sider carefully how it is accomplished: «lver Certificates 452,613,274 (1) The new law does away with Subsidiary Sliver 160,334,776 treasury Notes of 1390 2,321,963 duplication, (See Table B) so that United States Notes 319,711,226 the reserves are in a form where National Bank Notts 379,497,331 their amount and availability are be- Total $3,463,599,450 yond question. (2) Instead of being in part very widely scattered, (e. g., two-fifths of N. B. This- table dees not include any Sold which is back ox gold certificates, or all country bank reserves in bank's silver back of silver certificates. In other own vault) and the remainder large- ^'ords, thero is no duplication in this state- ment. ly concentrated in three Central Reserve cities, at the end oi the three years, under the now plan, these re- These reserve deposits must be kept serves v/ill be largely marshalled in very largely in the Reserve banks, thus the twelve Federal Reserve Banks. the three groups of banks, Central Re- serve City banks, Reserve City banks (3) The reserves deposited in the and Non-Reserve City or country Reserve Banks arc more than simply banks, must severally keep in the Fed- so much ca::h, for it becomes avail- eral Reserve Bank of their District 7% able in an expansive way and, as of their 18% reserves, 6% of their 15% need develops, each dollar of reserves reserves and 5% of their 12% reserves is capable of expansion, through its and these percentages may be increased note .;suing power, into two dollars at their own option co 12%, 10% and and half. 8% respectively. (N. —Hew -.his is accomplished At first blush this might seem an in- xv*ll b , lore . u.iy explained.) discreet use to make ox reserves; it might indeed strike one as a wild pro- ject of pyramiding on assets, but a study of the Act will satisfy the stu- dent that, if the Federal Reserve Board does its full duty, these reserves can 'i^ji.iii "ir be used expansively as suggested, yet be absolutely safe. At this v/riting, with only two installments or the capital --crccnta^'o Percentage Percentile stock paid in and with only one-third c. deposits of active of time de- required as or demand posits or sav- of the total reserves (except as to Cent- i-jiserves deposits ings deposits ral Reserve City banks) in the hands u:;Jcr ihc required as under the new old lav/. :reserves law. of the twelve District Reserve Banks, under new the total cash deposits in their hands I law at end oi' three aggregate $281,373,000. The lav/ re- ' years. quires, as cash reserve in Fedc.v.1 Re- serve Bank vaults against deposits of Three Central member banks, 35% of the said de- Reserve • 25% is*; 5% posits—or, at present, $93,480,550. The Citica remaining 65% of reserve deposits can be used as a basis for the issue of -5% of which currency in the form of Federal Re- one-hal: could 1-j serve Notes; in respect to which powers kept in a 15' 5% the law requires, first, that: each Central Rc- uerve City. of the twelve Reserve Banks, (except for supervision by the Federal Reserve Country 115% ofwfci Board) shall be an autonomous, self- sank- hrcc-fifths contained an independent unit; and, -ouM be ::ept in a 12Tc 5 It second, that it may issue currency . .c^ex-vo Ci against approved "commercial paper" or (*) "acceptances" when indorsed by 10 II Member .,3, dollar for dollar, pro- MOW THE FEDERAL RESERVE vided it she:!] deposit as additional pro- BANKS ARE FORMED; THEIR tection a.\a reserve against such Notes CAPITAL AND RESOURCES. n°t less the:;. 40% of gold. From this it wil1 be s -hat, after deducting $98.- Before we proceed too rapidly with the functions of the Central Banks 480,550 the abrogate cash re- created under the Federal Reserve Act, sources g. j Federal Reserve Banks, as a reserve against the deposits of its something should be said of their formation, capital, resources, etc. The Member brinks, there remains $182,- capital stock of the twelve Federal ^92,450, wHch is capable of sustaining a total r: 0 currency of $457,231,125; Reserve Banks is contributed by the and, obviously this v/ill increase very National banks of the District of which it is the banking center by an assess- ^rgely wuc-a all the reserves shall have ecn paid la, and be still further in- ment upon each of those banks equal to 3% of their capital and surplus. Sub- creased Government deposits are scription to the capital stock of the "Fed- made i th: federal Reserve Banks, or lf> ^s it :s hoped, State banks in large eral Reserve Banks must be paid in ^mbera caLer the system. » gold and is obligatory on all National banks, but optional on State banks which arc permitted to join the system '"^cccptanccs" arc meant "draftn" if they desire to do so... The required ch « • 0I' c«chan^c" drawn upon a pur- minimum capital stock of the twelve raser Zoods to be delivered, growing out 0 b or import, and acccptcd by the Reserve Banks, which must be paid in a or "•/ ^ banker or accepting houue, gold within six months, now aggregates Un£T C-- . .'half of the buyer. about fifty-five million dollars, an amount which will, of course, increase an the number of banks increase, or as they increase their capital and surplus, or, as State banks enter the system. The capital stock of a Federal Re- serve Bank is expected to pay its own- ers (the member banks) 6% dividends, \ and these dividends are made cumula- tive. After this dividend has been paid any remaining profits go to the United States as a franchise tax, provided that one-half this amount must be used to build up a surplus fund until such fund shall have amounted to 40% of the paid-in capital of each Federal Reserve Bank. The remaining net profits may be used, at the discretion of the Secre- tary of the Treasury, to supplement the 13 gold reaer OPERATIONS OF THE RESERVE .Id „gainst the United ^ates not greenbacks"). Inciden- BANKS IN ORDINARY TIMES. taHy these ce .ierai Reserve Banks arc It might be assumed from what has exempted :rorn all taxes, except on rc^l estate been said that these twelve Federal Re- In addi. ion. to their capital resources serve Banks exist solely to take care of the Fe v ... Reserve Banks arc cxj>Iicit- unusual, spasmodic, or seasonal de- ly made depositaries, as already ex- mauds of business or else those ex- Plained, oi' . large share of the reserves cessive demands which periodically of their n icni.>er banks, and, in addi- come upon us at greater intervals of time. That alone might well be called tion to t; - .^erve deposits, member a worthy object to attain, but it would banks arc- aittcd to keep excess rc- have to be admitted that a ponderous serves wit a v. - Federal Reserve Bank, and costly machine had been created to Federal < c crve Banks are not pcrmit- serve an occasional demand; and it ipt deposits from individuals, might be doubted whether a machine corporations, but arc permit- thus kept in comparative idleness acc apt Government deposits and through two-thirds of the year would to act as iiwCal agents of the Govcrn- operate smoothly and successfully ^exit. when the steam was turned on. But the framers of the Act had no such idea. They meant that these Reserve Banks should be active undertakings and, among other requirements, imposed upon them the duty of earning for their stockholders (the member banks, ag- gregating to begin with 7,600) not only operating expenses and all costs by the Government for engraving and print- ing of notes, the salaries and expenses of the Federal Reserve Board and its staff of employees, but, in addition, 6% on the capital invested by the banks. In order to enable the twelve Reserve Banks to employ their funds profitably in the dull seasons (the seasons of liqui- dation) and recognizing that in such seasons the member banks v/ould not bring commercial paper to the Reserve Banks for rediscount and the issuance of currency, for the obviout, reason that in those seasons the member banks themselves would have ample loanable funds, Congress provided for the pur- 15 14 chase and sale of ccrtain readily mar- on, say "half load," yet capable of tak- ketable investments; for example, Gov- ing on a "full load" at any time or, ernment bonds, tax warrants of States, for short periods, even a considerable Municipalities, etc., acceptances, e. g., "overload." drafts or bills of exchange, the pay- In much that has been said and writ- ment of which has been guaranteed or ten, however, it is evident that in some Promised at maturity, and other particulars the true functions of the similar documents. Investments of Federal Reserve Banks have been mis- this kind, which must be made under understood. These great District restrictions of Federal Reserve Board, Banks, each representing a large and ai'e, with the exception of Govern- important territory, important though ment bonds, all short time paper, they be as the Central Banks of their the idea being that they shall ma- Districts, arc not in any sense whole- ture in advance of the active re- salers of money to their member banks quirement of funds for crop moving, who, in turn, dispense or retail it at a etc. It is impossible to foretell just profit to their customers. These Cen- what experience will develop, but it is tral Banks, with whom the public is Probable that the rcdiscounting of com- riot directly permitted to deal, are, in mercial paper and the issue of Federal a sense, "banks of banks" as lias fceen Reserve Notes therefor will reach, nor- frequently said; but their gross assets mally, a minimum in the months of Jan- really bear only a small ratio to that uary to March, inclusive; that thcre- of the aggregate of the stockholding a*ter it will gradually rise to a maxi- banks, and, while their powers and in- mum requirement in the Autumn, and fluence arc very great, their actual cur- from that maximum recede again to the rency issuing power 'will represent, low point after Christmas. However, after all the reserves have been paid lt is to be expected that the demands in in,—at most some 12 per cent, to 15 the various districts, with a diversity of per cent, of total loanable funds of harvesting seasons, will develop a con- banks in the country. National and dition where there may be a scarcity of State. funds in one region and a surplus in another. With this possibility in view, the Act provides that the Reserve Bank NOTE: Stated in round figures, after de- one District may rediscount for that ducting: the reserves required against de- of another District. h p a o n si d ts , , w t h h i e c r h e w re i m ll a s i u n s s t a $ i 1 n 3 3 a .,( n "> i 0 s 0 s ,0 u 0 a 0 n o c f e g o o f ld f o o u n r hundred lifty-four millions of Federal Re- serve Notes. This will be increased in £rom the foregoing it may be seen three years to, say 700 millions, which is that, while the Federal Reserve Act 4 V* per cent, of the total loans and discounts of the State and National banks of the Provides a valuable "shock absorber," country on June 30th, 1914. This will be is far more than an inert piece of increased, as already explained, as State machinery which comes into action in bank» enter the system and as Government deposits are added. an emergency. It might more truly be hkened to an extra "unit" in a large power station, revolving at all times 16 17 WHAT THE RESERVE BANKS ^CREASED POWERS GRANTED TO NATIONAL BANKS HAVE ACCOMPLISHED }n or(^er to give National banks a The benefits of the Reserve Act as j^der scope of operation and a bigger thus far developed are evidenced more of usefulness, a number of added by the indirect benefits derived than Powers were given to them simulta- by the actual transactions of the Re- neously ith the creation of the Re- serve Banks themselves. For example, W serve Banks. Thus they were allowed, there was released on the 16th of No- under regulations of the Reserve Board, vember, when the banks were declared start branch banks in foreign coun- opened by the Secretary of the Treas- 1Cs, to act as trustees, to retain ury, something like 450 millions of v/ered reserves against time and sav- dollars (the exact amount has not been ^gs deposits, etc. These added powers determined on account of the difficulty ould go a long way to enable National of computation by reason or the dupli- s to do an increased business, to cations In previous methods of calcu- ^nter the field of foreign commerce and lation). This large fund was released adjust th -mselves to the growing to meet the demands of business; its n(*d of our people. immediate effect was a reduction in all s interest rates in every district. The ^°wever, the new Banking Act not emergency currency issued to meet the °nIy increase the powers of the Na- panic conditions brought on by the banko in dealing with foreign European war was rapidly retired so Commerce by allowing them to estab- that, from a maximum issue of $385,- s 1 branches in foreign countries, but 2 J 6,655, this emergency currency out- cpens the dcor to investment of a large standing has been reduced (at the close Part of the resources of the banks in of business on the 15th day of March) .Ccepted kills of exchange in conncc- to $23,879,232 and this is in spite of a with the import and export of the fact that a large area of our country oods, and permits the discount or pur- has suffered from a most serious set- ase of these bills of exchange or back, due to the unexpected and sud- Acceptances," as they are usually den reduction in the demand for its by the Federal Reserve Banks. chief staple product—cotton. aIso permits Federal Reserve Banks t establish agencies in foreign coun- As a precautionary measure, and on lcs for the purpose of dealing in the advice of bankers generally, three ( * reign exchange. While these new years are provided by the Act in which °Wers remain to be developed, it is to develop the Reserve Banks to their lc*ent that it is destined to play a full power. Whether or not this was Verv • nn unnecessary length of time is a de- ^ y miportant part in the commercial batable subject; but one thing is ^rowth of this country. already evident, and that is that the country is impatient for more rapid progress. 16 18 This therefore provides a basis of DECENTRALIZATION OF RE- management, where each Central bank SERVES AND CO-OPERATION may operate as an independent unit, OF SERVICE. but where in time of stress the re- siourccs of several can be to some ex- The Federal Reserve Act sought to tent merged or at least used coopera- overcome v/hat had developed into a tively. serious cvii under the old banking sys- tem; namely, (1) the excessive central- OTHER IMPORTANT nation of reserves in one city.—New York—, ..nd (2) the use of that money FUNCTIONS OF almost who'ly in fostering stock mar- THE BANK ket operations, because "call-loans" on Before closing this paper it is proper stock market collateral were the most to discuss briefly some of the other readily available form of investment functions of these Reserve Banks. for fund-i subject to call. This was These lie chiefly in two directions; accomplished in several ways, to wit: first, as Government depositaries and (r Tc dve Federal Reserve Banks v/eie v w.ed; each standing on its fiscal agents; second, as clearing' houses for checks drawn within their Districts own feet; each autonomous and self or, upon such a plan as the Reserve contained; each the Central bank of Board may approve, between Districts. its own District. The Act docs not abolish the Sub- (2 t New forms of bank loans were treasuries, but authorizes the Secre- substituted in preference to call loans „ tary of the Treasury to deposit and on stock exchange collateral, e.g., the Reserve Banks to receive, Gov- short time commercial paper based ernment monies and to act as fiscal on manufactured or partly manufac- agents of the Government. It is tured goods, produce, etc., or ac- for this reason chiefly that the Sec- cepted bills of exchange on exports retary of the Treasury is made an ex- ' and imports, cable transfers, etc. ofTicio member of the Federal Reserve These are all short time self liqui- Board and its Chairman, while the dating instruments, once much used Comptroller of the Currency is also in this country and always used made an cx-ofTicio member; thus giv- abroad as a basis for note issue or ^ ing the Government a minimum repre- credit extension. sentation on the Board of two out of The act, while aiming to make each seven members. The framers of the district self-sustaining, made it pos- Act argued the propriety of this repre- sible for a District with plenty of rentation, in spite of the fact that the money to help a District desiring fur- capital investment was made solely by ther funds or actually needing help, the subscribing banks, noc in order to. ^kis v/as accomplished by permitting give the Federal Reserve Board a politi- °ne Reserve Bank to rediscount com- cal (i.e. partisan) complexion, but on mercial paper for another and, in case the ground that as the Government need, authorizing the Federal Re- was expected to become a large deposit serve Board to compel it. 21 for collections on out-of-town checks, tor, it was entitled to have an influential and, in times of panic, such as 1907, voice in the supervision. and 1914, the rediscount of paper and The argument in favor of the Gov- securities of ics members, issuing ernment thus using the Federal Re- against these, clearing house certifi- serve Banks is strong; first, the general cates, which have been used not only in reason that the money of the people transactions between banks but in (the tax payers) is retained where it some eases even in public transaction a. will 'be most effective in promoting There is little doubt that this de- trade and commerce; second, that it is velopment of the clearing houses, ad- safe, because the integrity of the justing themselves as they have, twelve Reserve Banks is assured by the through many years of experience, to guarantee, individual and collcctivc, of tire demands of business, provided a all the member banks; lastly, that the valuable and effective suggestion to function of fiscal or disbursing agent the framers of the Federal Reserve law. -or all Government drafts or checks, So it is not to be wondered at that aggregating, in round numbers, more the Federal Reserve Act, in adopting than ; million dollars per day, can be the emergency function of the clearing performed effectively by these Banks, houses in the rediscount of member and doubtless at a saving to the Treas- banks' paper, saw the desirability of ury 'oven after allowing for the in- adopting, at the same time, the chief terest paid by National banks on Gov- feature of these clearing houses; ernment deposits) compared with the namely, the check clearing idea. And costly and necessarily cumbersome so, in fact, the Act did embody a V ' . method of remitting from the Treasury or Sub-treasuries to pay checks drawn scheme for the clearing of checks with- on the Treasurer of the United States. in and finally between the Districts, Tiie second important function of the subject to the rules to be framed by Reserve Bank outside of the chief the Reserve Board, and, at the same functions for which it was created is time, authorized the Reserve Board, in that of its place as a collccting agency, co-operation with the Comptroller of or clearing house, for checks of its re- the Currency, to raise the standard of spective District. All important cities tiie examination system co-ordinatc of the country have had their clearing with the examination by the Federal houses for checks of National and State Reserve Banks and by the Federal Re- banks in the community. These clear- serve Board. ing houses, formed for mutual con- venience by voluntary action of their component banks, have developed im- portant functions quite outside of those originally contemplated. Among these may be mentioned a system of sclf-cx- amiration more rigid and thorough than that previously maintained by the Government; agreed rules for charges 23 22 Government Directors the leading one FEDERAL RESERVE BOARD, is designated as Chairman of the FEDERAL RESERVE BANK Board and Federal Reserve Agent, DIRECTORATE, FEDERAL acting, with his two colleagues, as ADVISORY COUNCIL official representative of the Federal A description of vhe new hanking Reserve Board. With the exception of system would not be complete with- °ut some reference to the Federal Re- the Federal Reserve Agent and the Deputy Federal Reserve Agent, the DI- serve Board, the make-up of the bank directorships and the Advisory Coun- rectors rcccive no salary, but each cil. receives a Director's fee for the meet- ings he attends, plus actual expenses ^-s is generally known, the Federal in going to and from meetings. It is Reserve Board consists of seven mem- not expected that the fee shall fully bers, the Secretary of the Treasury compensate these men for the service the Comptroller of the Currency performed, but that the position shall officio" members, the other five, be regarded as one of honor and dig- dominated by the President and con- nity, and that it will be readily pos- firmed by the Senate, two of whom sible to get men of high character to snail be men "experienced in banking and finance," and the other three being render the service. o- general professional or busi- There is another feature of the Fed- ness experience. Of the appointive eral Reserve Act which is important: Members, no two may be selected from The Directors of each Federal Reserve one District and the terms of scrv- Bank elect someone, either from within lce expire one each two years. After or without their number, as a member the terms of those now in office have of the Federal Advisory Council. This expired, their successors will be ap- Advisory Council of twelve is given pointed for ten year terms. The sal- broad authority under the law to ad- ary vise with the Federal Reserve Board, of each member of the Federal to interrogate the Board and to make Reserve Board is $12,000 per year, paid suggestions to it. As the Advisory ky the Federal Reserve Banks. Council may be counted upon to repre- £ach Federal Reserve Bank is gov- sent a fine type of banking experience erned by nine Directors, three repre- in the country, it should be of great senting bankers, three representing value in the administration of the law business men and three representing and in keeping the Federal Reserve the Government. In respect to the Board in touch with the experienced first two groups, each is divided so as banking sentiment. While it is admit- to represent, first, the larger banks of tedly a move in the direction of con- tr*e District; sccon^, the medium sized servatism, it must also be recognized banks and, th-'d, the smaller banks, that the influence of this Council, term of office of one of each group because it is simply advisory, will Directors expires each year, and depend almost wholly on the character Vvhen the terms of those now in office of its personnel and its methods of empire, their successors will be elected approach. three-year terms. Of the three 25 CONCLUSION. The President has drawn the apt parallel of the relations of the various Thus briefly I have endeavored to Reserve Banks to the central authority state in simple phraseology the salient (The Federal Reserve Board) and the features of the Federal Reserve Act relation of the various states to the and the place it is likely to have in the Federal Government. financial structure of our country and As a servant of the public, one of of our business life. those employed to administer the law, The reason the Federal Bank System it is to be expected that I should be is grea is that it has been evolved by enthusiastic as to its possibilities. At the pa: ent study and adaptation of our the same time, not having been a owa banking experience, the ex- banker, my views as to what this Act perience of Europe, the clearing house really docs mean to the public may be Ccr.-iHeaie plan, all ingeniously en- questioned. I v/il'i, therefore, close my graved upon an existing National remarks by quoting from the recent Banki. and Currency System with paper of Vice-President Herbert R. which the country was familiar. The Kldridge, of the National City Bank of New York, so that may know result is a system far better suited to American needs and American methods what a practical banker of large and and prejudices than a Central Bank or varied experience has to say: a Branch Bank system. "The Federal Reserve Act marks the greatest step forward this country has have been created under this ^ ever made in its financial advancement, Ac. -A-clve Central Banks, cach as While it leaves much to be desired, and nearly ,s possible autonomous units, will undoubtedly be subjected to sev- bu each under centralized supervision w eral revisions, it remains the greatest of the Federal Reserve Board on mat- constructive measure Congress has ters of Joint and common interest. If given us in many, many years." the plan works out in practice as well The wonder is not that there are as it should; if the Federal Reserve some imperfections in the Act, but that Board does its full duty; if petty or from the great melting pot of conflict- partisan politics arc laid aside, we shall ing opinions a problem so difficult and have reached one ideal of scientific i so technical should have been success- management — "local self-government fully worked out. and centralized supervision"; we shall have accomplished the object of all good organization—local incentive and enthusiasm with only enough central- ized supervision to compare results; to measure men, methods and costs; and to insure the necessary co-operation on all matters where joint co-operation is necessary, either for the good of the country or of the banks themselves. 26

Frederic A. Delano (1915, March 15). Speech. Speeches, Federal Reserve. https://whenthefedspeaks.com/doc/speech_19150316_delano

@misc{wtfs_speech_19150316_delano,
  author = {Frederic A. Delano},
  title = {Speech},
  year = {1915},
  month = {Mar},
  howpublished = {Speeches, Federal Reserve},
  url = {https://whenthefedspeaks.com/doc/speech_19150316_delano},
  note = {Retrieved via When the Fed Speaks corpus}
}