Frank Albert Fetter.

Source book in economics, selected and ed. for the use of college classes online

. (page 26 of 30)
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3. Our banks also lack adequate means available for use
at any time to replenish their reserves or increase their loan-
ing powers when necessary to meet normal or unusual de-

4. Of our various forms of currency the bank-note issue is
the only one which we might expect to respond to the chang-
ing needs of business by automatic expansion and contraction,
but this issue is deprived of such qualities by the fact that its
volume is largely dependent upon the amount and price of
LTnited States bonds.

5. We lack means to insure such effective cooperation on



the part of banks as is iieeessaiy to protect their own and the
public interests in times of stress or crisis. There is no
cooperation of any kind among banks outside the clearing-
house cities. AVhile clearing-house organizations of banks
liave been able to render valuable services within a limited
sphere for local connnunities, the lack of means to secure their
cooperation or affiliation in broader fields makes it impossible
to use these or similar local agencies to prevent panics or
avert calamitous disturbances affecting the country at large.
These organizations have, in fact, never been able to prevent
the suspension of cash payments by financial institutions in
their own localities in cases of emergency.

G. We have no effective agency covering the entire coun-
try which affords necessary facilities for making domestic
exchanges between ditt'erent localities and sections, or which
can prevent disastrous disruption of all such exchanges in
times of serious trouble.

7. We have no instrumentality that can deal effectively
with the broad questions which, from an international stand-
point, affect the credit and status of the United States as
one of the great financial powers of the world. In times of
threatened trouble or of actual panic these questions, which
involve the course of foreign exchange and the international
movements of gold, are even more important to us from a
national than from an international staudi)oint.

8. The lack of commercial paper of an established standard,
•issued for agricultural, industrial, and commercial purposes,

available for investments by banks, leads to an unhealthy con-
gestion of loanable funds in great centers and hinders the
development of the productive forces of the country.

9. The narrow character of our discount market, with its
limited range of safe and profitable investments for banks,
results in sending tlie surplus money of all sections, in excess
of reserves and local demands, to New York, where it is usu-
ally loaned out on call on Stock Exchange securities, tending
1o promote dangerous speculation and inovital)ly leading to


injurious disturbances in reserves. This concentration of
surplus money and available funds in New York imposes upon
the managers of the banks of that city the vast responsibilities
which are inherent in the control of a large proportion of the
banking resources of the country.

10. The absence of a broad discount market in our sys-
tem, taken together with the restrictive treatment of reserves,
creates at times when serious financial disturbances are an-
ticipated a condition of dependence on the part of individual
banks throughout the country, and at the same time places
the farmers and others engaged in productive industries at
a great disadvantage in securing the credit they require for
the growth, retention, and the distribution of their products.

11. There is a marked lack of equality in credit facilities
between different sections of the country, reflected in less
favored communities, in retarded development, and great dis-
parity in rates of discount.

12. Our system lacks an agency whose influence can be
made effective in securing greater uniformity, steadiness, and
reasonableness of rates of discount in all parts of the country.

13. We have no effective agency that can surely provide
adequate banking facilities for different regions promptly and
on reasonable terms to meet the ordinary or unusual demands
for credit or currency necessary for moving crops or for other
legitimate purposes.

14. We have no power to enforce the adoption of uniform
standards with regard to capital, reserves, examinations, and
the character and publicity of reports of all banks in the
different sections of the country.

15. We have no American banking institutions in foreign
countries. The organization of such banks is necessary for
the development of our foreign trade.

16. The provision that national banks shall not make loans
upon real estate restricts their power to serve farmers and
other borrowers in rural communities.

17. The provision of law under which the Government acts


as custodian of its own funds results in irregular withdrawals
of money from circulation and bank reserves in periods of
excessive CJovernnient revenues, and in the return of these
funds into circulation only in periods of deficient revenues.
Recent etl'orts to modify the Independent Treasury system
by a partial distribution of the public moneys among national
banks have resulted, it is charged, in discrimination and favor-
itism in the treatment of dift'ereut banks,

[To remedy these defects the Commission drafted a bill for a "Na-
tional Reserve Association," a bank for banks, wliich in its main
features bears some likeness to the earlier First and (second Hanks of
the United States, and to the great central banks of Europe. The
proposal is popularly known as the Aldrich Plan, because Senator
Aldrich was chairman of the Commission, The essential financial
features of the bill are here taken from Senate Document 243, afore-
said, pp. 43-72, many details of the organization and control, and less
important expressions, being omitted.]

§ 1, Charter, capital, location. The National Reserve
Association of the United States ... is created and estab-
lished for a term of fifty years [with] an authorized capital
equal in amount to 20 per cent, of the paid-in and unimpaired
capital of all banks eligible for membership, . . . $200,000,-
000 of the capital stock shall be subscribed and $100,000,000
of its capital shall be paid in cash. . . . The head office shall
be located in Washington, D. C.

§ 2. [Corporate powers set forth.]

§ 3. Membership of banks. All national banks, and all
banks or trust companies chartered by the laws of any State
of the United States or of the District of Columbia, complying
with the requirements for membership in the said National
Reserve Association . . . may subscribe to its capital to an
amount equal to 20 per cent, of the paid-in and unimpaired
capital of the subscribing banks and not more nor less; . . .
Fifty per cent, of the subscriptions . . . shall be fully paid in ;
the remainder . . . shall become a liability of the subscribers,
subject to call. . . .


[The subscriptions of State banks or trust companies are made sub-
ject to their complying with conditions substantially the same as to
amount of capital and surplus, percentage of reserves, etc., and sub-
mission to examinations, as those imposed upon the national banks.]

§§4-18 [These sections designate in all needed detail the plans of
organization and administration. A committee of three Cabinet officers
is designated (§4) to effect the first organization. There are to be
fifteen (or more) districts with a branch and a local association of
subscribing banks in each district (§5, §6). Each local association
(§7) and each branch (§8) and the whole association (§9) is to have
a board of directors, chosen by a somewhat complex method of plural
voting, and representing the banks and agricultural, commercial and
industrial interests. The board of the National Association is to have
as ex officio members the Secretaries of the Treasury, of Agriculture,
and of Commerce and Labor, and the Comptroller of the Currency.
The "governor" of the Association sliall be selected by the President
of the United States from a list (§10). Duties of directors in organ-
izing the Association are indicated (§11). Shares of capital stock
in the Association are to be o^vned not otherwise than by subscrib-
ing banks (§12). Exemption from local and State taxation except
upon real estate (§13). An executive committee (§14) and a board
of examination (§15) are to be elected by the Board. Managers of
branches (§16). Organization of local associations (§17). List of
banks and of shares of stock in the Association to be kept (§18).
Several of these features (especially §§7-10) have called forth much
discussion because of the fear of centralization of control over the
great financial institutions.]

§ 19. Earnings and dividends. The earnings of the Na-
tional Eeserve Association shall be disposed of in the follow-
ing manner: After the payment of all expenses and the
franchise and other taxes not provided for in this section, the
shareholders shall be entitled to receive an annual dividend
of 4 per cent, on the paid-in capital, which dividend shall be
cumulative. Further annual net earnings shall be disposed
of as follows: First, a contingent fund shall be created,
which shall be maintained at an amount equal to 1 per cent,
on the paid-in capital, and shall not exceed in any event
$2,000,000, and shall be used to meet any possible losses.
Such fund shall, upon the final dissolution of the National
Reserve Association, be paid to the United States and shall


not under any circumstances be included in the book value of
the stock or be paid to the shareholders. Second, one-hall'
of additional net earnings shall be paid into the surplus fund
of the National Reserve Association until said fund shall
amount to 20 per cent, of the paid-in capital, one-fourth shall
be paid to the United States as a franchise tax, and one-fourth
shall be paid to tlie shareholders, until the shareholders' divi-
dend shall amount to 5 per cent, per annum on the paid-in
capital : Provided, That no such dividends, exclusive of the
cumulative dividends above provided for, shall at any time be
paid in excess of 5 per cent, in any one year. "Whenever and
so long as the contingent fund has been provided for and
the five per cent, dividend has been paid to shareholders, one-
half of the additional earnings shall be paid to the United
States as a franchise tax. Whenever and so long as the sur-
plus fund of the National Eeserve Association amounts to
20 per cent, of the paid-in capital and the shareholders shall
have received dividends not exceeding 5 per cent., all excess
earnings shall be paid to the United States as a franchise tax.
§ 20. Local associations to guarantee commercial paper.
Any member of a local association may apply to such asso-
ciation for a guaranty of the commercial paper which it de-
sires to rediscount at the branch of the National Reserve Asso-
ciation in its district. Any such bank receiving a guaranty
from a local association shall pay a commission to the local
association, to be fixed in each case by its board of directors.
Expenses and losses in excess of commissions shall be met by
an assessment of the members of the local association in pro-
portion to the ratio which their capital and surplus bears
to the aggregate capital and surplus of the members of the
local association, which assessment shall be made by its board
of directors, and the commission received for such guaranty,
after the payment of expenses and possible losses, shall be
distributed among the several banks of the local association
in the same proportion. A local association shall have au-
thority to require security from any bank offering paper for


guaranty, or it may decline to grant the application. The
total amount of guaranties by a local association to the Na-
tional Reserve Association shall not at any time exceed the
aggregate capital and surplus of the banks forming the guar-
anteeing association,

§ 21. Local associations and clearing houses. Any local
association may by a vote of three-fourths of its members and
with the approval of the National Reserve Association, as-
sume and exercise such of the powers and functions of a
clearing house as are not inconsistent with the purposes of
this act. The National Reserve Association may require any
local association to perform such services in facilitating the
domestic exchanges of the National Reserve Association as
the public interests may require.

§ 22. Functions of the National Reserve Association.
All of its privileges and advantages . . . shall be equitably
extended to every bank of any of the classes herein defined
which shall subscribe to its proportion of the capital stock
and shall otherwise conform to the requirements of this act.
[Proviso, power of suspending a bank.]

§ 23. It shall be the principal fiscal agent of the United
States. The government of the United States shall . . . de-
posit its general funds, and ... all receipts of the Govern-
ment, exclusive of trust funds, and make all disbursements
through said association and its branches.

§ 24. Its sole depositors shall be the government of the
United States and banks owning its stock. . . . All its domes-
tic transactions . . . shall be confined to the Government and
the subscribing banks, with the exception of the purchase or
sale of Government or State securities or securities of foreign
governments or of gold coin or bullion.

§ 25. It shall pay no interest on deposits.

§ 26. It may through a branch rediscount for and with
the indorsement of any bank having a deposit with it, notes
and bills of exchange arising out of commercial transactions
. . . and not . . . drawn for the purpose of carrying stocks,


l)omls, 01- otluT iiivestniout securities. . . . [Details as to ma-
turity ami auiouut aud kinds of notes rediscounted, §§ 27-20.]

§ 30. It shall have authority to fix its rates of discount
from time to time, which when so fixed shall be published,
and shall be uniform throughout the United States.

§ 31. National banks are authorized to accept drafts or
l)ills of exchange drawn upon them, having not more than
four months to run, properly secured, and arising out of com-
mercial transactions. Tiie amount of such acceptances out-
standing shall not exceed one-half of the capital and surplus?.

§ 32. The National Eeserve Association may purchase
from a subscribing bank acceptances of banks or acceptors of
unquestioned financial responsibility arising out of commer-
cial transactions. Such acceptances must have not exceeding
ninety days to run, and must be of a character generally
known in the market as prime bills.

§ 33. It may invest in United States bonds; also in obli-
gations, having not more than one year to run, of the United
States or its dependencies, or of any State, or of foreign gov-

§ 34. It shall have jDOwer, both at home and abroad, to
deal in gold coin or bullion, to make loans thereon, and to
contract for loans of gold coin or bullion, giving therefor,
when necessary, acceptable security, including the hypotheca-
tion of any of its holdings of United States bonds.

§ 35. It shall have power to purchase from its subscrib-
ing banks and to sell, with or without its indorsement, cheeks
or bills of exchange, arising out of commercial transactions as
hereinbefore defined, payable in such foreign countries as its
board of directors . . . may determine. These bills of ex-
change must have not exceeding ninety days to run, and must
])ear the signatures of two or more responsible parties, of
which the lasit one shall be that of a subscribing bank.

§ 36. It shall have power to open and maintain banking
accounts in foreign countries and to establish agencies in for-
eign countries for the purpose of ]uirehasing, selling, and


collecting foreign bills of exchange, and it shall have author-
ity to buy and sell, with or without its indorsement, through
such correspondents or agencies, checks or prime foreign bills
of exchange arising out of commercial transactions, which
have not exceeding ninety days to run, and which bear the
signatures of two or more responsible parties,

§ 37. [Duty to transfer credit balances, by mail, tele-
graph, or otherwise.]

§ 38. It may purchase, acquire, hold, and convey real
estate for the following purposes and for no other: [Condi-
tions specified].

§ 39. Reserves of subscribing banks. All subscribing
banks must conform to the following requirements as to re-
serves to be held against deposits of various classes, but the
deposit balance of any subscribing bank in the National Re-
serve Association and any notes of the National Reserve Asso-
ciation which it holds may be counted as the whole or any part
of its required reserve:

First. On demand deposits: National banks in different
localities shall maintain the same percentages of reserve
against demand deposits as is now required by law, and the
same percentages of reserve against demand deposits shall be
required of all other subscribing banks in the same localities.

Second. On time deposits : All time deposits and moneys
held in trust payable or maturing within thirty days shall be
subject to the same reserve requirements as demand deposits
in the same locality. All time deposits and moneys held in
trust payable or maturing more than thirty days from date
shall be subject to the same reserve requirements as demand
deposits for the thirty days preceding their maturity, but no
reserves shall be required therefor except for this period.
Such time deposits and moneys held in trust, payable only at
a stated time not less than thirty days from date of deposit,
must be represented by certificates or instruments in writing
and must not be allowed to be withdrawn before the time
specified without thirty days' notice.


§ 40. National banks may loan not more than 30 per cent,
of their time deposits, as herein delinetl, upon improved and
unencumbered real estate, such loans not to exceed 50 per
cent, of the actual value of the property, which property shall
be situated in the vicinity or in the territory directly tribu-
tary to the bank: Provided, That this privilege shall not
be extended to banks acting as reserve agents for banks or
trust companies.

§ 41. All demand liabilities, including deposits and cir-
culating notes, of the National Reserve Association shall be
covered to the extent of 50 per cent, by a reserve of gold
(including foreign gold coin and gold bullion) or other money
of the United States which the national banks are now au-
thorized to hold as a part of their legal reserve: Provided,
That whenever and so long as such reserve shall fall and re-
main below 50 per cent, the National Reserve Association
shall pay a special tax upon the deficiency of reserve at a rate
increasing in proportion to such deficiency as follows: For
each 2V2 per cent, or fraction thereof that the reserve falls
below 50 per cent, a tax shall be levied at the rate of IV2 per
cent, per annum; Provided further, That no additional cir-
culating notes shall be issued whenever and so long as the
amount of such reserve falls below 33/^ per cent, of its out-
standing notes.

§ 42. In computing the demand liabilities of the National
Reserve Association, a sum equal to one-half of the amount
of the United States bonds held by the association which
have been purchased from national banks, and which had
previously been deposited by such banks to secure their
circulating notes, shall be deducted from the amount of such

§§ 43-46. [Details as to reports of the National Reserve
Association and of the subscribing banks.]

§ 47. Bank-note issues. All provisions of law requiring
national banks to hold or to transfer and deliver to the Treas-
urer of the United States bonds of the United States other


than those required to secure outstanding circulating notes
and Government deposits as hereby repealed.

§ 48. There shall be no further issue of circulating notes
by any national bank beyond the amount now outstanding.
National banks may maintain their present note issue, but
whenever a bank retires the whole or any part of its existing
issue its right to reissue the notes so retired shall thereupon

§ 49. The National Keserve Association shall, for a period
of one year from the date of its organization, offer to purchase
at a price not less than par and accrued interest the 2 per
cent, bonds held by subscribing national banks and deposited
to secure their circulating notes. It shall take over the bonds
so purchased and assume responsibility for the redemption
upon presentation of outstanding notes secured thereby. It
shall issue, on terms herein provided, its own notes as the
outstanding notes secured by such bonds so held shall be pre-
sented for redemption and may issue further notes from time
to time to meet business requirements, it being the policy of
the United States to retire as rapidly as possible, consistent
with the public interests, bond-secured circulation and to sub-
stitute therefor notes ... of a character and secured and
redeemed in the manner provided for in this act.

§ 50. All note issues of the National Eeserve Association
shall at all times be covered by legal reserves to the extent re-
quired by section 41 of this act and by notes or bills of ex-
change arising out of commercial transactions as hereinbefore
defined or obligations of the United States.

§ 51. Any notes of the National Reserve Association in
circulation at any time in excess of $900,000,000 which are
not covered by an equal amount of lawful money, gold bullion,
or foreign gold coin held by said association, shall pay a spe-
cial tax at the rate of ll^ per cent, per annum, and any notes
in excess of $1,200,000,000 not so covered shall pay a special
tax at the rate of 5 per cent, per annum: Provided, That


in foinputiiiu- said aiiiouiifs . . . tlie aggregate amount <)(.' any
national-bank notes then outstanding shall be ineluded.

§ 52. The circulating notes of the National Reserve Asso-
ciation shall constitute a first lien upon all its assets and shall
be redeemable in lawful money on presentation at the head
office of said association or any of its branches. It shall be
its duty to maintain a parity of value of its circulating notes
Avith the standard established by the first section of the act of
IMarch 14, 1900, entitled "An act to define and fix the stand-
ard of value, to maintain the parity of all forms of money
issued or coined by the United States, to refund the public
debt, and for other purposes."

§ 53. The circulating notes of the National Reserve Asso-
ciation shall be received at par in payment of all taxes, excises,
and other dues to the United States, and for all salaries and
other debts and demands owing by the United States to indi-
viduals, firms, corporations, or associations, except obligations
of the Government which are by their terms specifically pay-
able 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.

§ 54. The National Reserve Association and its branches
shall at once, upon application and without charge for trans-
portation, forward its circulating notes to any depositing bank
against its credit balance.

§ 55. United States bonds. Upon application of the
National Reserve Association the Secretary of the Treasury
shall exchange the 2 per cent, bonds of the United States bear-
ing the circulation privilege purchased from subscribing banks
for 3 per cent, bonds of the United States without the cir-
culation privilege, payable after fifty years from the date of
issue. The National Reserve Association shall hold the 3 per
cent, bonds so issued during the period of its corporate exist-
ence: Provided, That after five years from the date of its
organization the Secretary of the Treasury may at his option


permit it to sell not more than $50,000,000 of such bonds an-
nually: And provided further, That the United States re-
serves the right at any time to pay any of such bonds before
maturity, or to purchase any of them at par for the trustees
of the postal savings, or otherwise.

Online LibraryFrank Albert FetterSource book in economics, selected and ed. for the use of college classes → online text (page 26 of 30)