should the reserve banks of such other districts be for any reason suspended.

Federal reserve banks are to be the banks of bankers. They must have a minimum capital of $4,000,000, which is to be subscribed in each district by the banks joining the system, although if the required capital cannot be obtained in that way, it is to be made up by public or governmental subscription. Membership is voluntary, and is open to state banks and trust companies as well as to national banks.

As the federal reserve banks are primarily public rather than profit-making agencies, their annual dividends are limited to six per cent. per annum. Any excess above six per cent. is to go, half to the surplus and half to the government, until the surplus reaches forty per cent., when the entire excess is to accrue to the government. The amount so accruing to the government is to be used at the discretion of the secretary of the treasury, to strengthen the gold reserve behind the "greenbacks" or to retire outstanding United States bonds. In case of liquidation, whatever is left of the surplus after deducting items justly chargeable against it goes to the government. The dividends to the shareholders of the reserve banks are, however, cumulative.

Co-ordinating and controlling the whole system is the "Federal Reserve Board." It is made up of seven members. The secretary of the treasury and the comptroller of the currency are members ex officio. Five members are appointed by the President, by and with the advice and consent of the Senate. Not more than one member of the board can come from a single federal reserve district. At least two of the Presidential appointees must have had banking or financial experience, but no member of the board may be an officer, director, or stockholder of any bank. Except for the ex officio members, and for the first incumbents, whose terms will run respectively two, four, six, eight and ten years, the term of office will be ten years. But the President may remove members for cause. While the secretary of the treasury is the ex officio chairman of the board, the President is empowered to name one of his

five appointees as "governor" and another as "vice-governor. The governor and vice-governor are the chief executive officers of the whole system.

The federal reserve board is an unusually powerful supervisory and regulating body. It may suspend or remove any officer or director of a federal reserve bank; it may require the writing off by such bank of its bad debts; and may suspend a federal reserve bank or take it over for purposes of reorganization or liquidation. It may also readjust or abolish altogether the classification of central and reserve cities.

The member banks are represented in the central manage ment by a "Federal Advisory Council," made up of one representative from each federal reserve district, chosen by the board of directors of the federal reserve bank. This council meets quarterly at Washington and at such other times and places as it may choose.

To effect the desired centralization of reserves the federal reserve banks are authorized to receive deposits from member banks, from the United States government, and, solely for exchange purposes, from each other. Deposits from private individuals may not be accepted. The secretary of the treasury is authorized to use his discretion in employing the federal reserve banks as depositories for government funds. In view of the evils disclosed by the independent treasury system in the past, it is hardly conceivable that he will fail so to employ them when once the system is well established. Member banks, on the other hand, are required to keep a considerable proportion of their lawful reserves on deposit in the federal reserve banks. The exact proportions vary slightly for the central reserve city, the reserve city, and for the so-called "country banks"; but at the end of three years these proportions are respectively seven-eighteenths, six-fifteenths and five-twelfths, while an additional five-eighteenths, four-fifteenths and three-twelfths, respectively, must be kept in the member bank's own vaults or in its federal reserve bank. While a minimum of one-third of the required reserves must be kept in the member bank's own vaults, from one-half to

two-thirds of the total reserves will ultimately be centralized in the federal reserve banks.

Let us now consider the provision made in the new law for insuring the "elasticity" of bank credit. This, as will be recalled, concerns the expansion and contraction of deposits and of notes in response to fluctuating demand.

The expansion of deposits has never given serious difficulty. The elastic notes in the new system are known as "federal reserve notes. These are the obligations of the United States government itself. They are issued at the discretion of the federal reserve board, through the federal reserve agents, to the federal reserve banks. The federal reserve banks pay the notes on demand to the member banks, from which they reach, in turn, the general public. The denominations of the notes are five, ten, twenty, fifty and one hundred dollars. All the notes must bear the distinctive letters and serial numbers which have been assigned by the federal reserve board to the reserve banks responsible for their issue. They are receivable at par by the reserve banks and by the member banks, and also by the United States government for all public dues. They are not legal tender in payments to individuals; but this will not seriously influence their general acceptability. They are redeemable in gold at the treasury at Washington, and in gold or lawful money at any of the reserve banks. Furthermore, they constitute a first lien against the assets of the reserve bank through which they are issued. Safer notes could hardly be imagined.

Prepared notes are kept on hand in sub-treasuries or mints. The only formalities to be observed by the federal reserve banks in obtaining them are to have on hand the required reserve and to turn over to the federal reserve agent an amount of collateral, made up of notes and bills accepted for rediscount, equal to the sum of notes desired. The federal reserve board may call for more collateral if that should be deemed necessary. The point is, however, that the major portion of the reserve banks' normal investments become thoroughly acceptable cover for note issue. The transformation of credit

from deposit form into note form ought not, therefore, to be a matter of difficulty.

To restrain note expansion within due bounds the federal reserve banks are required to hold a reserve in gold of forty per cent. against their federal reserve notes in actual circulation which are not already offset by gold or lawful money that has been turned over to the federal reserve agent for the purpose of retiring notes. A part of this gold reserve must be deposited with the United States treasurer. How large this part shall be is left to the determination of the secretary of the treasury, but it must in any case be not less than five per cent. But here, too, a more adjustable check is provided in the authority vested in the federal reserve board to grant in whole or in part, or to reject altogether, the application of a federal reserve bank for notes, and to fix the rate of interest on the amount that it does grant.

The law contains a series of provisions designed to insure contraction of notes when demand falls off. The notes may not be counted as lawful money for reserve purposes either by member banks or by reserve banks. It is, therefore, to the interest of a member bank to deposit in its reserve bank as speedily as possible any and all of the federal reserve notes that it receives as deposits. The reserve banks, in turn, are not only specifically required to return each other's notes for redemption, but the paying out by one reserve bank of the notes of another reserve bank involves a penalty of ten per cent. of the amount so paid out.

Consideration should now be given to the plan by which the new system makes the centralized reserves and the notes of the reserve banks available to the member banks.

This is made possible by provisions for re-discounting. With the indorsement of a member bank, the federal reserve bank may discount for such member bank notes, drafts, and bills of exchange arising out of actual commercial transactions. The federal reserve board determines in general the character of such paper. But the statute provides that paper secured by agricultural products or other goods and merchandise is not

to be considered ineligible for re-discounting. On the other hand, notes and bills covered by or put out for carrying stocks and investment securities, except notes and bonds of the United States government, are expressly declared ineligible. The obvious purpose of the discrimination against investment and similar paper is to discourage security speculation. This appears needlessly harsh. Bills acceptable for re-discount may not run longer than ninety days; but here, too, an exception is made in favor of the rural borrower, in that bills issued for agricultural purposes and those based on live stock may have a six months' maturity. The amount of these long-time bills, however, must be limited to such a percentage of the capital of the reserve bank accepting them as may be determined by the federal reserve board. In order to control the utilization of the advantages of the new system by banks which are unwilling to assume corresponding obligations, it is provided that, in applying for or receiving discounts, a member bank can act for a non-member only with the express permission of the federal reserve board. On the whole, therefore, it may be concluded that as long as a member bank keeps the required proportion of its reserves in lawful money in its own vaults, the question of obtaining hand-to-hand money or that of strengthening reserves is simply one of having on hand an adequate supply of bills acceptable for re-discounting.

Centralization of reserves involves also a well-organized system of domestic clearings. This was not overlooked in planning the new banking system. As clearing involves the balancing of credits against debits, in the absence of direct relations between debtors and creditors the process can be executed only through the mediation of an agency standing between them and acting for both. Hence, in the federal reserve system the federal reserve board may in first instance require each reserve bank to act as a clearing-house for its member banks, and it may also permit the reserve banks, for exchange purposes, to carry accounts with each other. The reserve banks must receive at par all remittances drawn on