banks selling them to such investors or the latter subscribing for them direct. In such cases, the important thing has been to fix a rate which corresponded generally to the rate at the reserve bank, the private holders finding it easy to dispose of their certificates without loss so long as the possible bank buyer could borrow from reserve banks with the certificates as collateral. The same motive which induced the bank to subscribe directly has also induced the individual to purchase in the confidence that banking necessities would establish a stable open market demand for the paper.

It does not follow, however, that there is in any given case a necessary correspondence between the discount rate at a reserve bank and the rate fixed by the Treasury Department upon an issue of certificates. For example, on June 9, 1924, the Treasury Department announced an offering of certificates of indebtedness bearing 234 per cent at a time when the reserve bank rate was 4 per cent. This rate of 234 per cent was the lowest that had been established practically since the beginning of the war and represented in substance a return to the old borrowing conditions which had prevailed prior to the struggle. The Treasury found itself amply able to obtain in the open market sufficient supplies of money furnished by individual bidders, owing to the fact that a great accumulation of gold in the United States, accompanied by comparative slackening of business, had rendered the available amount of fluid funds considerably greater than the demand for such funds that prevailed in the current market. Due to those conditions, the general situation was such as to enable the Department to borrow direct without special inducement based on the treatment of such loans at reserve banks. This situation will frequently exist under present market conditions, indeed is likely to exist whenever money is overabundant and satisfactory investments of high grade are not available in adequate volume.

Present Conditions

Fiscal functions exercised by Federal reserve banks have thus practically superseded the older deposit system of the United States as well as the older sub-Treasury system. Due to the persistence of issues of Government currency such as gold certificates, United States notes (greenbacks), and others, due also to the peculiarly close relationship which has always existed between the national banking system and the Treasury (the latter institution holding and applying Government bonds deposited with it for the purpose of protecting circulation, as well as the 5 per cent redemption fund which is habitually used for redeeming outstanding notes), the Federal reserve banks are in position to perform an unusual range and variety of duties under the

head of this fiscal group of functions. The question bow far these duties or functions will develop in the future is still to oe ascertained. For the present, they provide the reserve banks with a very large amount of routine work, and at the same time impose upon them a correspondingly heavy burden of expense which should be reckoned as representing the payment made (in one aspect at least) to the Government for the charter privileges enjoyed by reserve banks. Exactly what the service is worth it would be difficult to say, but at one time it was reckoned by a Secretary of the Treasury as equivalent to a saving of the interest on a sum of $25,000,000. At 4 per cent, this would amount to approximately $1,000,000, a figure worth considering in connection with the net return realized by the Government for the privileges accorded to the reserve banks. Should the Federal Government continue, as it seems likely to do, as the recipient of very large tax revenues, and of course the disburser thereof, it might be reasonable to expect that practically all relationships between the banks and the Government involving the receipt, use, disbursement or depositing of public funds will pass into the hands of the reserve banks. From this standpoint, then, if from no other, the reserve banks will undoubtedly continue to be a factor of considerable significance to the banking community as well as to the Government through the exercise of this important branch of their duty.

Informing in this connection is the Board's summary, in its annual report for 1924, of the fiscal agency operations, from which the following extracts are taken:

Fiscal agency operations of the Federal reserve banks during 1924 included the sale and delivery of newly issued bonds and notes, the redemption of securities called for payment or matured, denominational exchanges, interchanges of coupon and registered bonds, exchanges of temporary for permanent bonds, conversions, transfers of ownership, purchases of securities in open market for Government account, maintenance of Government deposit accounts with designated depositaries, and the custody of Government securities. . . .

In addition to the purely fiscal agency operations, the Federal reserve banks, acting as depositaries for the Treasury, pay Government checks, warrants, and coupons, collect checks and noncash items for the account of the Treasury, withdraw Government deposits from depositary banks, transfer funds by telegraph, and carry on the former subtreasury operations, comprising principally the replacement, exchange and redemption of United States paper currency and coin. . . . While some of this coin would no doubt have been handled by the Federal reserve banks even if the subtreasuries had not been discontinued, a large part of this work prior to 1921 was performed by the subtreasuries. December 31, 1924, the Federal reserve banks held $414,500,000 of securities pledged by depositary institutions as collateral for Government deposits, which on that date amounted to $228,000,000, and in addition $2,269,000,000 of securities were held in safekeeping for the account of the Treasury.

On

During the war and until June 30, 1921, the Federal reserve banks were

reimbursed by the Treasury for practically all expenses incurred in the discharge of their fiscal agency functions, but at present they receive reimbursement for only those expenses incurred directly in connection with the issue of new securities, all other operations being conducted at the expense of the Federal reserve banks. Reimbursable fiscal agency expenses of the Federal reserve banks during 1924 were $444,000 and the amount of expenses absorbed was approximately $868,000. These figures do not, however, include the cost of handling Government coupons, checks, and warrants and other depositary operations, or the cost of handling coin.

CHAPTER XXII

TIME AND GOVERNMENT DEPOSITS

It was noted in chapter II that the Federal Reserve Act in its final form provided for admission of state banks and trust companies to membership. This was inserted at the specific request of these institutions. It naturally raised the question of the relative powers of national and state member banks. The Act undertook, in time at least, to deprive the national banks of certain privileges they had possessed, notably that of issuing national bank notes and receiving Government deposits. To compensate for these losses, as well, as to place them in a more favorable competitive situation, it accordingly broadened the powers of the national banks in a number of ways, through:

1. Permission to loan on real estate, if the bank was not located in a central reserve city.1

2. Permission to receive time deposits against which a smaller reserve might be kept.

3. Permission to act in specified fiduciary capacities.

National versus State Charters

At the time that the Act was passed, much discussion ensued as to its intent concerning the future composition of the banking system. Many held that, instead of attempting merely to equalize the powers of national and state banks, it sought to give the national banks such a preponderating advantage as ultimately to drive the state-chartered institutions out of existence, and leave only national banks. Time has shown this view to be erroneous and, in fact, the pendulum has now swung to the other extreme. The future of the national banks is often discussed and the apprehension felt by some has been increased by the fact that recent consolidations in some of the larger centers have elected to relinquish the national and substitute a state charter, as well as by the relatively more rapid increase in number of state banks. This increase is shown in the following table, prepared from the annual reports of the Comptroller of the Currency.2

In large part, however, this provision was inserted to obtain support for the Federal Reserve Act in Congress.

Figures for 1909 from Barnett, "State Banks and Trust Companies," in vol. VII of the publications of the National Monetary Commission.

X

NOTE: Stock savings banks included with state banks, but private banks excluded, in figures taken from the Comptroller's reports.

The national banking system has been showing marked progress only in three states. In Texas and Oklahoma the system of deposit guaranty is credited with having rendered a state charter less attractive, while in Massachusetts the failure of some of the younger trust companies during the last few years has tended to bring all into bad repute with the public.

In actual practice the matter is complicated by the fact of membership in the Federal Reserve System. Banks may be either national members, state members or state nonmembers. But more important is the distinction between what may be roughly termed "large" and "small" banks. Large city banks generally find it desirable to be members, though they have the option of a national or a state charter. For them, the relative advantages of a state charter may be summarized as follows:3

1. Better situation for taking and administering trust business. National banks, it has been stated, have a questionable right to accept trusts which in time run beyond their charter life, while it is not possible to name them in a succession of trustees. National banks had a 20-year charter before 1922 (provided by acts in 1862, 1882, and 1902), and subsequently one for 99 years. In 1921, 21 states had absolutely no limitation of life for state-chartered institutions, 25 had one or more classes of limitation, from 20 to 100 years, one had no limitation in terms but required an annual license, and one had the duration governed by the special charter of the individual institution.

2. Usually empowered to maintain branches, while national banks are not, except in limited instances.

3. Usually permitted to declare a stock dividend, which is not permitted under the National Bank Act.

4. Usually have somewhat broader powers in the matter of loans, savings accounts, and safe deposits. In particular, state-chartered institutions may hold the shares of other companies, including safe-deposit companies.

5. Less difficulty in matters of taxation. The situation of national banks has been rather uncertain, section 5219 of the National Bank Act being interJ. R. Kraus, Vice President, Union Trust Co. of Cleveland, in Bankers' Monthly, July, 1921.