drop below the required level. Although at individual reserve banks theoretical reductions of reserve had from time to time either taken place or been imminent, the Reserve Board has thought it better to maintain reserves there through compulsory inter-reserve bank rediscounting rather than through penalizing banks for permitting their reserves to decline.

A final point relates to the actual computation of the reserve percentage of the Federal reserve banks, either individually or as a whole. In spite of the variety and kinds of reserve permitted to be kept against deposits, gold bulks the largest by far. Yet the gold holdings of the banks may serve as legal reserve against either deposits or Federal reserve notes. Unless some arbitrary method of allocating the gold be adopted little can be done except to show a combined reserve. The Federal Reserve Board has been puzzled by this problem and has on different occasions given varying solutions. The present method, first adopted January 4, 1918, is to show merely a ratio of total reserves (not merely gold reserves) to deposit and Federal reserve note liabilities. combined.

State Changes in Reserve Requirements

Very early in the organization of the Federal Reserve System, it appeared that the several states recognized the necessity, certainly the desirability, of adjusting their legislation regarding local bank reserve requirements to that of the Federal Reserve Act. There were several reasons for such action, among them the fact that in the course of years state bank reserve requirements in many states had come to be modeled more or less closely upon the National Banking Act. It furnished a competitive advantage to the members of the Federal Reserve System that the Reserve Act had so greatly cut down the reserve requirements, thereby in many cases putting them into a position to deal much more economically with their customers and to make larger profits. Self-protection on the part of the state banks therefore called for legislation harmonizing their reserve requirements with those of the Federal Reserve System. Moreover, the action of the Federal Reserve Act in providing for a system of combined reserves and in opening the way to membership on the part of state banks had evidently greatly strengthened the entire banking situation, while holding out the advantage of this strength with a free hand to the prospective state members. It would have been a hardship upon these state members, unnecessary from the standpoint of banking strength or sound legislation, had the states continued to require of their own banks the same requirements, calling for larger amounts of reserve, that they had applied in the past. Moreover, another necessity for such action existed in the

fact that if state member banks were unable to substitute Federal reserve for state requirements, but had to keep dual reserves more or less different in nature, membership would be greatly discouraged. From a date soon after the adoption of the Federal Reserve Act, accordingly, there set in a decided trend toward the establishment of harmonious reserve requirements-in some cases, however, competitive to "undercut" Federal reserve requirements-which, however, was not uniform or successful throughout the country. A compilation was made public by the Federal Reserve Board early in 1924.31

1924 Bulletin, p. 154, amended for two states in 1925 Bulletin, pp. 486, 737. For an earlier compilation, see 1917 Bulletin, p. 768.

CHAPTER IV

THE FEDERAL RESERVE BOARD AND ITS AGENTS

THE central agency of the Federal Reserve System is the Federal Reserve Board. It supplies a unifying or coördinating as well as a supervisory element which is essential to the successful operation of the System. A number of problems exist with respect to its status and powers which will presently be sketched. The same is true of its relations with the Federal reserve banks especially as conducted through the Federal reserve agent who is its representative at each reserve bank. A means of focusing banking opinion with regard to Federal reserve questions or problems is afforded by the Federal Advisory Council, selected by the boards of directors of the various Federal reserve banks, and holding regular meetings to consider such problems.

THE BOARD AND ITS FUNCTIONS

Composition of the Board

The entire effort of the Federal Reserve Act, particularly in its original form, has been to obtain a "balanced" Board whose personnel would change only gradually. Membership is obtained through presidential appointment, subject to the confirmation of the Senate (section 10). It is provided that of the six members now appointed (formerly five), not more than one shall be selected from any one Federal reserve district, and that the President of the United States shall have due regard to a fair representation of the geographical divisions as well as of the financial, agricultural and commercial interests of the country in recommending appointees to the Board. Prior to 1922, it was required that at least two of the appointive members should be persons. experienced in banking or finance. Section 4 prohibits a member of Congress from being a member of the Board or an officer or director of a Federal reserve bank. Unfortunately, however, in the original selection of members made by President Wilson, prospective members were regarded as distinctly representative of the different sections of the country and of the community, in the thought that as each would be alert to protect the interest of his particular group, the net result would be a fusion of views which would benefit no one bank or class at the expense of the other, but would prove more or less satisfactory and

advantageous to all. Whether so narrow a conception of individual responsibility results in much more than mere division of opinion and can crystallize in the adoption of a steadfast policy may well be doubted in the light of the Board's actual experience. This view of Federal Reserve Board membership, while perhaps somewhat less certain as time went on, showed a decided revival and was accepted with but little question during the discussion preceding the adoption of the Agricultural Credits Act of 1923, which provided for a "dirt farmer" member specially to "look out" for the agricultural interests.

1

In order to retain the services of members for a considerable period of time, and avoid too rapid a turnover, the Act contained certain provisions directed to that end. While the salary of $12,000 for the full time of members was as large as that of Cabinet officers, it was not considered attractive from a commercial point of view, and the chief inducement lay in the prestige supposedly conferred by membership in this so-called "supreme court of finance." Moreover, not only are the ex officio members, the Secretary of the Treasury and the Comptroller of the Currency 1 ineligible to hold any office, position or employment in any member bank while in office and for two years thereafter, but the same is true of appointive members of the Board, except those who have served the full period for which appointed (amendment of March 3, 1919). At the same time, of course, this restriction tends to protect member banks against use for private purposes, and perhaps to their prejudice, of confidential data acquired while in office. Needless to state, no member of the Board may be an officer, director, or 'stockholder of any banking institution or trust company nor shall he hold any office in a Federal reserve bank during his term of service.

Another serious breach was made by the amendments of June 3, 1922. Membership may initially be obtained now either for a full ten-year period, or for a shorter time representing an "unexpired term" that is filled out by express nomination of an individual who is to occupy the place for the period in question.2 Originally, the Federal Reserve Act contemplated the appointment of five members in addition to the two ex officio members. These five members were so arranged, with varying lengths of term at the outset, that, it was supposed, one member would finish his term of office every two years. The intent of this provision was to give continuity to the Board by keeping the membership homogeneous and allowing for a change in the place of only one of the five

1

1As a member of the Board, the Comptroller has duties no different from those of any other member, though he may be somewhat more influenced by Treasury policy. His other duties with respect to note issue and bank supervision are discussed in later chapters.

The President may also make a recess appointment expiring at the next session of the Senate.

appointive members at each two-year period. It was, of course, conceivable, but not very likely, that both the Secretary of the Treasury and the Comptroller of the Currency should change simultaneously with the expiration of the term of an outgoing member among the appointive incumbents. Assuming a normal state of things, the Secretary of the Treasury and titular chairman would serve for four years, the Comptroller of the Currency, an ex officio member for a five-year term, lapping over from one national administration to the next, while the terms of appointive members were so calculated as to expire at a date entirely without reference to the probable assumption or surrender of office by the Secretary of the Treasury or the Comptroller. Still it was theoretically true that there might be a change of personnel affecting simultaneously or nearly simultaneously, two ex officio and one appointive out of a total of seven members. The Act of June 3, 1922, which provided for the appointment of a “dirt farmer" member, threw this arrangement out of gear by failing to provide for any adjustment between the terms of the new, or eighth, member, who now appeared as a sixth appointive member, it being specified that in addition to one member (of the original number) serving for two, one for four, one for six, and one for eight years, "the balance of the members" should serve for ten years. Thereafter, each of the six appointive members was to be appointed for a term of ten years. As a result, it is now possible for two to terminate their membership practically simultaneously, and for two others (ex officio) to go out of office at about the same time, a possible turnover of four members-in addition to the fact that, under unusual conditions, the appointments of members included in "the balance," might be so dated as to make the expiration of their terms coincide with still others. This has largely destroyed the idea of a balanced board whose membership changes only very gradually.

In spite of the provisions cited, part of which have been changed only during the past few years, there has to date been an exceedingly rapid turnover in board membership. This is shown in the table opposite.

Coupled with the evidence for a time of distinct political pressure upon the Board, and of effort to make appointments serve political ends, the situation is not reassuring to those who desire an impartial Board. A word must be said finally regarding the executive organization of the Board. The Secretary of the Treasury is chairman of the Board, but its active executive officer, subject to its supervision, is one of the appointive members who is designated by the President as governor. The President likewise designates a vice governor, both designations having been made as a matter of practice, annually. Relatively little tendency has been noted toward the making of changes in the