Developments in the organization and functions of American banks since the establishment of the Federal Reserve System

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1 University of Iowa Iowa Research Online Theses and Dissertations 1921 Developments in the organization and functions of American banks since the establishment of the Federal Reserve System Mary Ellen Donovan State University of Iowa This work has been identified with a Creative Commons Public Domain Mark 1.0. Material in the public domain. No restrictions on use. This thesis is available at Iowa Research Online: Recommended Citation Donovan, Mary Ellen. "Developments in the organization and functions of American banks since the establishment of the Federal Reserve System." MA (Master of Arts) thesis, State University of Iowa, Follow this and additional works at:

2 DEVELOPMENTS IN THE ORGANIZATION AND FUNCTIONS OF AMERICAN BANKS SINCE THE ESTABLISHMENT OF THE FEDERAL RESERVE SYSTEM A Thesis subm itted to the F a c u lty of the Graduate College of the S ta te U n iv ersity of Iowa in p a r t i a l f u lf illm e n t of the requirem ents for the degree of Master of Arts b y Mary E lle n Donovan Iowa C i t y, Iowa June, 1921

3 TABLE OF CONTENTS Chap ter Page 1. INTRODUCTION THE NATURE 0 / COMMERCIAL BANKING... 5 Banking O perations and A ccounts... 5 Bank C r e d it L iq u id ity of Bank A s s e ts NEW BUSINESS ACTIVITIES OF AMERICAN BANKS.. 23 Commercial D epartm ent Auditing of Books fo r B usiness Es tabl i shm ent s C o n stru ctio n Loans Banking by M a il Income Tax S e rv ic e Calf Clubs C lerking of Stock S a le s Returns on Stock Shipm ents Savings Department Honoring Checks on Savings A c c o u n ts T h rift Talks to C h ild re n Home Economics B ureaus Services to F o re ig n e rs T rust D epartm ent A f f ilia te d I n s t i tu t io n a l D e p a rtm e n t The Community T r u s t Safety D eposit S e rv ic e Adver t is i n g IV. NEW POWERS CONFERRED BY THE FEDERAL RESERVE ACT UPON NATIONAL BANKS T rust Powers of N ational B a n k s Savings D e p o s i t s Loans on Farm Land and Other Real E state 57 Foreign Branches of N ational Banks A c c e p ta n c e s Broker, Insurance Agent, E t c V. CLEARING AND COLLECTION OF CHECKS Gold S e ttla n e n t Fund

4 DEVELOPMENTS IN THE ORGANIZATION AND FUNCTIONS OF AMERICAN BANKS SINCE THE ESTABLISHMENT OF THE FEDERAL RESERVE SYSTEM INTRODUCTION The Nature. of Commercial B anting The f i r s t chapter of t h i s study attem pts to mate clear the nature of c omm ff c i al b a n tin g. The balance sheet of an in d iv id u a l bant is used as an aid in e x p o s itio n. Among the item s appearing on the balance sh e et, Surplus e s p e c ia lly seems to stand in need of e x p lan atio n. A surplus is commonly thought of as a sum of money, a fund set aside by the b a n t. I t i s im portant that i t be made clear that a surplus i s d o lla rs worth, not d o l la r s, th at i t simply in d ic a te s th a t the sh a re h o ld ers have an equity in each of th e resource item s. Bant C redit The c u rre n t theory of b ant c re d it, namely, th at manifold loans are extended by a given b a n t on the b a s is of a d ep o sited a c c r e tio n to i t s re se rv e s i s erroneous, and it w ill be shown th a t t h i s theory i s the r e s u l t of f a ilu r e to d is tin g u is h between the loans of in d iv id u a l

5 2 banks and those of the banking system. Is Banking P a r a s itic? The statem ent is sometimes made th a t banking is p a r a s i t i c. This a s s e r tio n is based upon the fac t t h a t a bank is able to make loans equal to several tim es i t s re serves, but the point is overlooked th at while i t is true that to the e x te n t th a t bankers make m anifold loans and d ep o sits on the b a s is of a given amount of cash, p ric e s tend to go up, th e re s u lt is th a t the pu rch asin g power of the d o lla r is reduced, and while the banker re c e iv e s more i n te r e s t, h i s purchasing power is n o t in c re a se d. In r e a l i t y, his real income is reduced through the operations of the b anking system. L iq u id ity of Bank Assets Our c o n sid e ratio n of the l iq u i d it y - or non-1 iquidi t y - of bank assets must be confined to the p e rio d b e fo re the establishm ent of the F ederal Reserve System for a t the present time the liq u id ity of the a s s e ts of any in d iv id u a l bank is, in the main, a m atter of e l i g i b i l i t y fo r r e d i s count. While in normal times bank a sse ts possess a high degree of l iq u i d it y due to the f a c t that they c a n be

6 3 s h if te d from one hank to another, experience has shown th at in times of s tr e s s, none of them are liq u id in the sense that they can he quickly converted in to cash. The E ffe c ts of the New Powers C onferred Upon N ational Banks by the Federal Reserve Act The developments in commercial banking have been going on s i l e n t l y, and the in d ic a tio n s are t h a t we are today approaching a p o in t of development where the departm ent store is very d i s t i n c t l y suggested. The Federal Reserve Act by g ra n tin g to N ational banks a u th o rity to ex ercise tru s t company powers, to accept savings d e p o sits and to lend on farm land and other r e a l e sta te has placed N ational banks in a p o s itio n to a c tiv e ly compete with S tate banks and t r u s t companies in sundry lin e s of b u s in e s s which have always ranked as the most p r o fita b le c a rr ie d on by S tate i n s t i t u t i o n s. The tendency today i s fo r each bank to o ffer a complete banking s e rv ic e. Our banking system pi-ior to the passage of th e Federal Reserve Act may be compared to th a t which p re v a ils in England in d iv is io n of work and s p e c ia liz a tio n. The system in vogue today is s im ila r to th at of Germany where th e c r e d i t banks com-

7 4 bine a l l kinds of f in a n c ia l busi n ess ( gener al ly with the sole exception of mortgage c r e d i t tra n s a c tio n s) so th a t every customer can s e tt le a ll h is f in a n c ia l a f f a ir s in one spot on com paratively the ch eap est terms p o s s ib le. Bank Service The idea of bank service is growing by leaps and bounds, and th e p ro g ressiv e banks of today have o ffic ers whose chief duty i t is to fin d out how the bank may offer a d d itio n a l serv ice. The Federal Reserve Check C o lle c tio n System The banking system of the United S ta te s has been g re a tly strengthened by -the estab lish m en t of the Federal Reserve Check C o lle c tio n System. This system has served as a so lu tio n of the exchange problem, as a remedy for the c i r cu itous rou ting of checks which had r e s u l te d in the pyramading of rese rv es,a n d as a means of c o rre c tin g the g e n e ra lly u n s a tis fa c to r y c o n d itio n s which had p re v a ile d for many years in th is branch of banking. The op eratio n to the check c o lle c tio n system at the present time comes from a com paratively small number of banks seeking to p ro te c t th e ir owh p r o f i ts and is la rg e ly the r e s u l t of f a ilu r e to comprehend the advantages to be gained from a u n iv e rs a l c o lle c tio n system.

8 5 THE NATURE OF COMMERCIAL BANKING Banking Operations and Accounts The operations of a commercial hank may be b e s t understood by a c o n sid e ra tio n of the balance sh eet, tracin g the various items e n te rin g into such a rep o rt from the beginning of business through the operations of banking. We may suppose that a bank opens w ith a c a p ita l of $100,000, a l l -of whi ch has been paid in cash, and a surplus of $10,000, also c o n trib u te d by sh areh o ld ers, and th a t is has in v ested in a banking house $20,000, The i n i t i a l statem ent at the opening of b u sin e ss would be as follow s: As se t s L i a b i l i t i es Cash $90,000 Capi tal $100,000 Banking House $110,000 Surplus 1 0,ooo $110,000 The bank now begins i ts d ealin g s with the public, and we w ill suppose that shareholders and other d e p o sito rs immediately leave with the bank $90,000 in cash. The s ta te - nent w ill then stand: Cash $180,000 Banking House 2 0, 00 0 Capi tal $100,000 Surplus 10,000 Depos i ts $200,000 #200,000

9 6 The hank receives and approves a p p lic a tio n s for loans amounting to #65,000, $15, 0 00 of which is taken in cash and th e balance in deposit c r e d i t. The statem ent w ill then read: Loans & D iscounts $65,000 Banking House 20,000 C ash # 250,000 Gap i t al $100,000 Surplus 10,000 Deposi ts $250,000 The bank decides to e s ta b lis h connections w ith two banks in fin a n c ia l c e n te rs and places with these banks $40,000 on d e p o s it. This tra n s a c tio n w ill make the fo llo w ing change in the statem ent: Loans & Discounts $65,000 Due from Banks 40,000 Banking House 20,000 C api t al $100,000 Surplus 10,000 Depos i ts 140,000 Cash $250,000 $250,000 An a p p lic a tio n fo r a mortgage loan of $10,000 is approved, the e n ti r e amount of which is taken in cash, The statem ent w ill then read:

10 7 Loans & Discounts $75,000 Due from B ank s 40*, 000 Banking House 2 0, ap i t al $100,000 Sur pi us 10,000 Depo s its 140,000 C ash $250,000 $250,000 The d ire c to r s decide that the amount of cash on hand is too larg e and decide to invest $40,000 in United States bonds. The statem ent w ill then stand: Loans & Discounts $75,000 Du e f r om B ank s 40,0 00 Banking House 20,000 Ca p ita l $100,000 Surplus 10,000 Deposits 140,000 B onds 40,000 Cas h $250,000 $250,000 A customer req u e sts a c e r t i f i c a t e of d e p o sit fo r $9500, b e a rin g 4% i n t e r e s t, in re tu rn fo r a lik e amount of checks on other banks. Without rep ro d u cin g the bank statem ent, we w ill in d ic a te th e changes made by t h i s tra n s actio n. Due from banks is in c re a se d $9500 and a new item, c e r t i f i c a t e s of d e p o s it appears among th e l i a b i l i t i e s. The bank d ecid es to issue $40,000 of n o tes and forwards to the Uni ted S tates Treasury a lik e amount of

11 8 bonds as s e c u r ity. In accordance w ith the N ational Bank Act, i t must also m aintain a 5% redem ption fund. We may suppose that the n o tes are paid out to borrow ers. Loans and discounts are in creased $40,000, cash is decreased $2000, a new item, redem ption fund, appears among the a s s e ts, and n new item, c ir c u la t in g n o te s, among the l i a b i l i t i e s. A customer draws a check in favor of a d e p o s ito r of the bank for $75, overdrawing his account th at amount. A new item, o v e rd ra fts, w ill appear among the a s s e t s, and deposits w ill be in creased $75. The bank receives a d d itio n a l d e p o s its of $125,000, $50,000 in cash and $75,000 in checks on other banks. Cash is in creased $50,000, due from banks is in creased $75,000, and d e p o sits are in creased $125, 000. The bank discounts for a customer $26,000 of commercial paper, m aturing in 60 days at 6%. The proceeds, $25,740, is l e f t on d e p o sit. Loans and d isc o u n ts w ill be in creased $26,000, d ep o sits are in creased $25,740, and a new item, undivided p r o f i t s, in the amount of $260, appears among the l i a b i l i t i e s. Local merchants are g ran ted loans to ta llin g $70,000 on the d e p o s it of s u ita b le c o l l a t e r a l and the amount is l e f t on d e p o sit. Loans and discounts are in-

12 9 creased $70,000 and d e p o s its are in creased $70,000. The bank buys in the open market $60,000 of comm ercial paper; the time is four months; the ra te 1%; the discount $1400, and pays for same by a New York d ra ft fo r $58, 600. Loans and discounts are in creased $60,000, due from banks is decreased $58, 600, and undivided p r o f its is increased $ Through the lapse of tim e, the bank accum ulates p r o f i ts in the amount of $100,000 which are c u r r e n tly i n vested in the re g u la r a sse ts of the b u s in e s s. This amount the d ire c to rs desig n ate as s u rp lu s. Although the ear nings are invested c u rr e n tly, w ithout being accumulated as a fund p rio r to their investm ent, we may conveniently suppose for the sake of ex p o sitio n or analysis that this amount is accumulated as a cash balance and set asid e as ear-marked funds. The c o n d itio n of the bank would now be as f o Hows : Loans & Discounts $271,000 Over dr af t s 75 Due from Banks 65,900 Banking House 20,000 B onds 40,000 Redemption Fund $621,975 Capi tal $100,000 Sur p 1 us 110,000 Undi v. Pr of it s 1,660 Dep osi t s 260,815 CDs 9,500 C irc u la tin g Not e s $621,975

13 10 In the above statem ent, "Loans and Discoxints" and "Dep o s it s are d is p r o p o r tio n a te ly small for a going banking concern, and in order to become a ttu n e d to the system of which i t is a p a rt and to make a p r o f ita b le record, i t w ill be im pelled to lend u n til i t e s ta b lis h e s a normal r a t i o of cash or reserv e to d e p o s its, the r a t i o being norm ally in the neighborhood of 10%, more or l e s s. Two items have appeared in our balance sheet which re quire fu rth er ex p la n a tio n, Undivided P r o fits and Surplus. Undivided P r o f its may be thought of as accum ulating earnings; t h i s account f lu c tu a te s with every tra n s a c tio n of th e bank. From t h is account is deducted c u rre n t expenses, dividends to sto ck h o ld ers and a l l lo ss e s. Like Surplus, Undivided P ro fits simply in d ic a te s th a t th e sh a re h o ld ers have an eq u ity in each of the items on the a s s e ts side of the-balance sh eet. Surplus is u su a lly b u i l t up out of Undivided P r o f i t s. When the management of a bank sees f i t, it in s tr u c ts i ts bookkeeper to tra n s fe r a c e rta in amount from Undivided P r o fits account to Surplus account. Surplus re p re s e n ts the ac cumulated earnings of a bank. It g e n e ra lly stands as a c le a n, round sum and r e mains fix ed over a period of tim e. There seems to be a g en eral idea that Surplus is a s o rt of e x tr a re se rv e fund. It is not a cash reserv e; i t is excess a s se t value due to

14 11 shareh o ld ers, n o t dollars,"but d o lla r s worth. N either is i t a fund so in v ested th a t th e hank p o ssessin g i t i s in a p o s itio n to secure on short n o tic e an ad d itio n to i t s cash reso u rces. There is no p ro v is io n in the law for in v estin g re so u rc e s which a rise from the c re a tio n of a surplus in e x c e p tio n a lly l ic u i d a s s e ts, and, in p ra c tic e such a s s e ts cannot he d is tin g u is h e d from any other a s s e ts. It is clear, th en, tha t Surplus is im portant, not in connection w ith the im m ediate,but with the u ltim a te solvency of a bank. In this co n n ectio n i t i s of great importance; the accum ulation of a surplus in creases a b ank's assets,an d th e c r e d ito r s have a la rg e r m argin of sa fe ty in the event of liq u id a tio n. A large surplus is an evidence of the growth of a bank and a lso of i t s stre n g th and saf e ty. Bank Credit The statem en t of a r e p r e s e n ta tiv e commercial bank w ithin a given c re d it a rea shows loans equal to several times the cash holdings of the bank, and the same s itu a tio n is found in banks taken in the aggregate. Theorists observing th is have o ffe red the ex p lan atio n that if an in d iv id u a l bank thoroughly a s sim ila te d to the system has loans equal to t e n times its r e s e r v e s, the

15 12 a c q u is itio n of an a d d itio n a l prim ary d e p o s it would enable it to make new loans eoual to te n times the amount of such 1 d e p o sit. The c o n te n tio n th a t an in d iv id u a l bank in a fy system can make loans equal to ten times the amount of a d d itio n a l cash newly a c q u ire d i s based on the assum ption th at the lending bankwould lose no cash as the re s u lt of i t s loan o p e ra tio n s, because checks drawn by borrow ers against th e ir loans would be o f fs e t by the checks of the customers of other banks which were also expanding th e ir loans, and t h i s assum ption is the r e s u l t of confusing the operations of an in d iv id u a l bank, which c o n s ti tu t e s only one u n it in the system, with the operations of the bank- 2 ing system as a whole. If a re p r e s e n ta tiv e American bank w ith an approximate rq tio of 1 to 10 between cash and deposi ts were to attem pt upon the securing of a new prim ary d e p o sit o f, s ay $10,000 to add $100,000 to i t s loans, the r e s u l t would be a lo ss of cash through unfavorable c le a rin g house b alan ces. Money is borrowed to be used, and the borrow ers 1 A prim ary d eposit is a d e p o sit of cash or i t s e q u iv a le n t which has no d ir e c t connection w ith a loan. A d e riv a tiv e d ep o sit is one which owes i t s e x iste n c e to a loan or which is b u i lt up in a n tic ip a tio n of th e repayment of a loan. 2 A.Phil lip s, B ank C redit.the MacMillan Company, 1920,p p.53,-34. York,

16 13 of t h i s hank v/ould at once send checks to t h e i r c re d ito r s, many of them in d is ta n t c i t i e s. A com paratively small amount of the checks issued.perhaps $10,000, would he in favor of d e p o sito rs of th is hank. The ty p ic a l r a t i o of d e riv a tiv e d e p o sits to loans for American banks is,ro u g h ly, about 20%, so our bank would r e t a in perhaps $10,000 rep resen ted by checks in fav o r of i t s d e p o sito rs, plus 20% which borrow ers would leave on d e p o sit, or $ 2 0,0 0 0,and the rem ainder, $70,000, would be lo s t to banks s c a tte re d throughout the system. Such a tra n s a c tio n would obviously reduce the cash of our bank to the danger lin e. The co n ten tio n th at claims and c o u n ter-claim s would s t i l l balance is c le a r ly untrue because the a d d itio n to a b a n k s reserv es o rd in a rily comes from other banks in the system, in which case the loans of those banks would c o n tra c t rath er than expand, or from imported or newly mined gold, which would o r d in a r ily be re c e iv e d by a com paratively small number of the banks, and i t is evident that the oth er banks would not increase t h e ir loans simply to p re- " 1 vent a lo ss of cash by the bank receiving the re s e rv e. How much, then, can our bank, which has a cash- dep o sits r a tio of 10% and a d e r iv a tiv e d e p o s it-lo a n 1 Op.c i t., p p.75,75

17 14 r a tio of 20%, add to i t s loans on the b a s is of a new prim ary d ep osit of $10,000? I t would be a b le to add to its loans to the amount of about $11,000 and would r e ta in about $1220 in cash as a reserve a g a in s t the $12,200 d e p o s its, $10,000 prim ary d e p o sits and $2220 der iv a tiv e d eposits which would be owned by the bank a fte r the borrowers had checked a g a in st the proceeds of th e ir loans. I t is e v id e n t, then, that although the reserve re ta in e d, or the r e s id u a l cash, forms the b asis of loans and deposits many times g r e a te r than i t s e l f, the re s id u a l cash is only a small f r a c ti o n of the newly acquired cash on the b a s is of which the banker expands his loans?' It is only through the operations by which a bank receiv es a d o lla r, lends a d o lla r and keeps ten cents that i t f i n a l l y has loans equal to t e n times the amount of i t s c ash ho Id ings. If we think now of one bank doing the e n tir e banking b u sin ess of the co u n try, i t is clear th a t the a c q u is itio n of a new prim ary d eposit of $10,000 would enable the bank to make loans equal to several times the amount of the new d e p o s it. The loan expansion would be 1 Op. c i t., p.67

18 15 lim ite d only by the n e c e s s ity of m aintaining the normal c ash-dep o si t s r a t i o. If the cash deposits r a t i o is 1 to 10, the bank could lend $9000. This would be p o ssib le b e cause the lending bank would lose no cash. All checks drawn by borrow ers would be in favor of d e p o sito rs of the 1 b ank. I t is e v id e n t that the erroneous theory that a re p re s e n ta tiv e individual bank in a system can make a manifold increase in i ts loans on the b a s is of a given a d d itio n to its r e s e r v e s is the r e s u lt of f a i l u r e to d i s tin g u ish sharply between the loans of in d iv id u al banks and those of the banking system. We have seen th a t a bank is able to make loans equal to several times i t s r e s e r v e s, and th e in fe ren c e from this f a c t has sometimes been that banking is p a r a s i t i c. The co n tentio n is th a t the banker rec e iv es a r e tu r n of 6% on his cash holdings; th a t he has c re a te d m anifold loans r e s u ltin g in d e p o sits which mean increased p u r chasing power and higher p r ic e s. I t is tru e that to the extend th at bankers make m anifold loans and de- 1 Op. a i t., pp. 38,39.

19 16 p o sits on the b a s is of a given amount of cash p ric e s tend to go up, but th e re s u lt is th a t the purchasing power of the d o lla r i s reduced, and w hile the banker re c e iv e s more d o lla rs in i n te r e s t, his purchasing power is n o t i n creased. In r e a l i t y, th e real income of the banker is reduced through the operations of the ban k in g system. Furthermore, the i n te r e s t ra te r i s e s very slow ly so that i t does not o ffse t the decline in the purchasing power of the p rin c ip a l caused by the. r i s e in p ric e s. During periods of high p r ic e s, the borrow ers make much g r e a te r p r o f its than the lenders, and as a re s u lt of th eir d e sire to sieze their opportunity loans are ra p id ly expanded. As loans are expanded, p ric e s continue to ris e, and th is goes on u n til the slow but p ro g re ssiv e advance in the i n t e r e s t r a te overtakes th e r a te of r is e in p r ic e s. When th is occurs, th e c o n d itio n s which p r e c i p it a te a panic are u su ally p r e s e n t. L iq u id ity of Bank A ssets. We may now turn to a c o n s id e r a tio n of the l i q u i d i t y - or non-1 iquidi ty -o f bank a s se ts, and in doing so i t w i l l be necessary to confine the d is c u s s io n to the period before the estab lish m en t of the Federal Reserve

20 17 System, for at the presen t time the l iq u id ity of the assets of any in d iv id u al hank is, in the main, a m atter of e l i g i b i l i t y for re d is c o u n t. Before the passage of the F ederal Reserve Act, th e theory was q u ite u n iv e rs a lly held th a t commercial paper is a u to m atically s e lf - l i q u id a t in g i* ' and th at investm ent paper is in h e re n tly u n liq u id, and we must examine th is theory as i t worked out in actual p ra c tic e before commercial paper was given l iq u i d it y through the p riv ile g e s extended to it by the F ederal Reserve Banks. In p r a c tic e, we fin d th a t the commercial loans made by a bank to its custom ers are n o t always liq u id a te d prom ptly at m atu rity. Frequent renewals are g ra n te d by country banks, a loan o ften being e x te n d e d f o r y e a rs. These r e newals do n o t n e c e s s a rily in d ic a te th a t the loans are used f o r investment purposes, or t h a t the paper is not good. They may in d ic a te merely a continuous need fo r working c a p it a l. There is no doubt, however, that in the country many loans are used fo r n on-c omm er c i al p urposes. In th e c ommer c i al c e n te rs, the keen com petition between banks and the need fo r continuous working c a p ita l in some lin e s, such as m anufacturing, w holesaling and

21 18 r e t a i l i n g in sta p le lin e s, make the renewal of loans very common, if no t the ru le. It may he said th at commercial banks fu rn is h permanent working c a p i t a l for concerns in staple l i n e s. Very f re q u e n tly these concerns never com pletely liq u id a te at any time with th eir b an k e r. The e x te n t to which bank c re d it serves fo r perm anently fin an cin g in d u stry has been u n d e rra te d. The bulk of our banking c re d it is financing our in d u stry ra th e r than our commerce. The s t a t i s t i c s of a ll commercial banks show that something lik e 50% of a ll loans is devoted to in v e s t ment uses and th a t in the neighborhood of tw o -th ird s of a ll c re d it extended by commercial banks goes for fix e d rath er than working c a p it a l. Although many commercial notes are paid at m atu rity, a n a ly s is shows th a t the comm ercial paper of a b an k s own custom ers Is among the le a s t r e l i a b l e of a l l i t s a sse ts as a means of re p le n is h in g d ep leted r e s e r v e s. A banker never knows, as long as he adheres to the policy of renewing loans at the pleas-are of his custom ers ju s t what percentage of the m a tu ritie s at any given date w ill be paid. C o lla te ra l loans are more r e l i a b l e as bank assets than commercial loans to custom ers. If a

22 19 c o l l a t e r a l loan is not paid at m aturity, the hanker may dispose of the c o l l a t e r a l, although he may h e s ita te to do so through fea r of lo sin g a custom er. I t was estim ated in 1909 that c o l l a t e r a l loans c o n s titu te d over 22% of t o t a l hank reso u rc es in the U nited S ta te s. Loans made through commercial paper houses are extrem ely se rv ic a b le as hank a sse ts, due to the f a c t that renewals are never g ra n te d. The loans g e n e ra lly run for six months. In 1918, four b i l l i o n d o lla r s worth of th is paper was held by commercial banks in the United S t at e s. Bonds which are high-grade as to both s e c u rity and m a rk e ta b ility are v ery r e l i a b l e bank a s s e ts and, in the main the bonds purchased by banks are of th is c h a ra c te r. For an in d iv id u a l bank they are h ig h ly liq u id because in normal times they are e a s i l y s h ifte d from one bank to a n o th e r. The item "Due from Other Banks" is a highly im portant fa c to r making for l iq u i d it y as long as f a i r weather co n tin u es. In the f in a n c ia l and sp e c u la tiv e c e n te rs to which these balances are sent there i s a t a l l

23 20 times an in d e f in ite ly large demand for loans, and a very considerable p a rt of the funds r e c e iv e d by banks in the money centers is loaned on stock exchange c o l l a t e r a l, and so to a great ex ten t supply the l i q u i d i t y for hank assets and make possible l o c a l loans on n o n - liq u id paper. I f we now tu rn frcrm the in d iv id u a l bank to the banking system, we find th a t i t un q u estio n ab ly fu rn is h e s most lin e s of b u s in e s s w ith permanent working c a p it a l. Often a customer w ill lio u id a te w ith h is own hank by s e l l ing h is paper through b ro k e rs, so that there is no reduction in the t o t a l amount of c re d it extended by banks; it has simply been s h if t e d from one bank to another. So far, we have considered the l iq u i d it y of bank a s se ts in normal times and found th a t so long as f a i r weather continues l i q u i d i t y is a synonym for sh if t a h i l i t y. But when tro u b le se ts in, we fin d that alm ost none of them are liq u i d in the sense that they can be quickly converted into cash; they w ill n o t stand the te st of ready n e g o tia b ility. I t is a b s o lu te ly im possible for banks to c o lle c t any considerable p a rt of loans made to custom ers. One a u th o r ity s ta te s that it is to b e questioned whether banks could find among th e ir Loans &

24 2 1 Discounts item one -fourth of the total which they could refuse to renew. Furthermore, at such times there is a l ways a greatly increased demand for accommodation. Paper bought through not e-br ok er s could be counted on in time of c ris is only under the impossible con- V dition that the banks holding it knew when the crisis would occur and could arrange m aturities accordingly. Collateral loans are not especially liquid in emergencies due to -the fact that the market at such times is flooded with securities which renders it practically s tagnant. Bonds are p ractically anal ago us to c o lla te ra l. The more people there are who want to sell bonds and the fewer who want to buy them, the lower their price w ill be and the less easy it w ill be to sell them at a ll. Prom the standpoint of the system as a whole, the re lie f that s. can be furnished by bonds is p ractically negligible. Balances with other hanks, which are considered as reserve have been found to be largely unavailable in times of strain. Each bank, acting singly, tries to strengthen its position by withdrawing its b a l ances, thus shifting to the central money market

25 22 v i r t u a l l y the e n tir e r e s p o n s i b il it y of meeting the s itu a tio n, which is c e r t a in to involve the banks in a gene ra l suspension of payments, as in the c r i s i s of 1857,unle s s some maasure of common a c tio n is adopted by the banks, as was th e case in subsequent c r i s e s. The unhappy consquences of the i n a b i l it y of banks to cope s u c c e s s fu lly with emergencies have been elim inated by the operations of the F ederal Reserve Banks, which, through the ample Reserves at th e ir d isp o s a l, are now able to cope w ith any emergency which may a r is e.

26 23 NEW BUSINESS ACTIVITIES OF AMERICAN BANKS The ty p ic a l American hank of today may p ro p erly he c a lle d a fin a n c ia l service s t a t i o n. Service may he d e fined as the point of human c o n ta c t between the bank and i ts d e p o sito rs, or as anything which a bank does fo r or in behalf of its customers or the community. I t is e s p e c ia lly a p p lic a b le to those th in g s which a bank is not le g a lly bound to do, but which i t does to show its ap p re c iatio n of i t s r e l a tio n s h ip and r e s p o n s i b il it y to i t s customers and to the community in which i t is located. There was a time when bankers thought th at th e ir chief duty was to their sto ck h o ld ers and not to th e ir customers; they did not r e a liz e as they do today that the i n te r e s t of the sto ck h olders are not s a c r if ic e d but advanced by g iv in g the d e p o sito rs c h ie f c o n s id e ra tio n. The a ttitu d e of the old-tim e bankers toward the public was too much that of frozen d ig n ity. P r a c tic a lly the only adv e rtisin g they thought i t wise to do was to in s e r t in small space th e ir statem en ts as r e q u ire d by law. Many of the older banks secluded th eir o f fic e r s ; the policy today i s to keep them in view where they are a v a ila b le

27 24 to custom ers. We have re a so n to b e lie v e th a t the days of c o ld -sto ra g e banking are p a s t, and the day of kindly human in te r e s t in the custom er is dawning. Mr.Edward H.K itridge, Manager of the p u b lic ity department of the Old Colony Trust Company of Boston, a speaker a t the r e c e n t convention of the F in an cial Advertis e r s A sso ciation, s a id - " The banker of today surrounds himself1 with the atmosphere of c o r d i a li t y. He makes a decided e f f o r t to meet h i s custom ers f r e e ly and sym p ath etically, and t r i e s to make them feel th a t they are as im portant to the bank as the bank i s to them. In mother words, he humanizes h is i n s t i t u t i o n and t r i e s in every way to e s ta b lis h a perso n al c o n ta c t w ith his c li e n te l e, and r e a liz e s that b u sin e ss is not the t e s t, b u t "service,whereby he and h is I n s t i t u t i o n are m easured". A member of the s t a f f of the N ational City Bank of New York who has much to do with the various phases of the bank's serv ice to c lie n ts and frie n d s makes the fo llo w ing statem ent: "The term "Service" i s very much overworked and is so in ta n g ib le th a t a d e f i n i t i o n is d i f f i c u l t. Our idea of service to our c lie n ts is to place at th e ir d i s -

28 25 posal every modern banking f a c i l i t y, and, in a d d itio n, to look a fte r th e ir in te r e s t s here in the same manner we would lik e them to attend to our b u sin e ss if our p o sitio n s * were rev ersed. D aily we re c e iv e req u e sts fo r i n f o r mation of -all kinds, many of them fo re ig n to th e banking b usiness, and we are c a ll e d upon to perform many services which are not in any sense banking fu n c tio n s, and we make every e f f o r t to handle these req u e sts in a manner which w ill be s a tis f a c to r y to our c l i e n t s. We have bought books, checked tru n k s, r e f e rr e d b u sin e ss p ro p o sitio n s to rep u ta b le in d iv id u a ls in the c it y, and our re p re s e n ta tiv e s have appeared b e fo re v arious d e p a r t ments in Washington in the i n te r e s t s of our c l i e n t s. Yesterday,we met a Greek fam ily on an incoming sh ip, took them to a r a i l r o a d s t a t i o n and arranged f o r th e ir t r a n s p o rta tio n to an inland c it y. These i l l u s t r a t i o n s are in d ic a tiv e of the wide scope of our se rv ic e. In a d d itio n to these, a very im portant f e a tu r e a t t h i s time is our fo reign trad e se rv ic e, by means of which we compile i n f o r mation from a l l parts of the world regardi ng m a rk e ts, p rices and tra d e c o n d itio n s, and d i s t r i b u t e i t to customers in the country who are i n te r e s t e d in im porting

29 26 and exporting m erchandise. We a lso m aintain an In d u s tr ia l Service Department by means of which we provide those of our o lie n ts who d e s ire i t with ex p ert i n d u s t r i a l en g in eering advice and su g g e stio n s". In t h i s g re a t hank and many of our la rg e s t banks new phases of service a re disco v ered alm ost every day. Many of them have o f f i c e r s whose c h ie f duty i t is to find out how the bank may offer a d d itio n a l service. The g reat m ajority of bankers, however, do n o t yet r e a liz e a ll the v ario u s forms of service which t h e i r banks are capable of re n d e rin g. If they d id, many of th eir advertisin g problems would be so lv e d f o r they could then make th is the b a s is upon which to lay the g r e a te s t s t r e s s in adver ti si ng. There are three im portant r e q u is ite s in the p re p a ra tio n for e f f i c i e n t s e rv ic e. F i r s t, the bank must be managed by men of c h a ra c te r, a b i l i t y and judgment. Second, in h irin g employees who are to meet the public they must be c a re f u l to select men of a b i l i t y and i n te g r ity. Third, the general groundwork must be la id among the employees for a knowledge of just what good service is and i t must be made of v ita l i n t e r e s t to them

30 27 to study it and to render i t whenever c a l l e d upon to do so. Mr.George C.VanTuyl, P re sid e n t of the M etropolitan T rust Company of New York C ity, has an a r t i c l e in the Bankers Magazine for Deceimb er, 19 17, e n t i t l e d "Making Good on S ervice", in whi ch he shows that he has gone to the bottom of the m atter and t h a t he is convinced of the n e c e ssity of beginning w ith in the hank i t s e l f by re n d e r ing th e study of service of i n t e r e s t to the employees and making i t p r o f ita b le for them to pursue i t. Recognizing the need for a s p i r i t of good fello w sh ip among the employees, his bank e sta b lish e d an em ployees' club, of which p r a c t ic a l ly a l l of the employees were members,and which became so su ccessfu l that the hank b u i l t a club house in c lo s e proxim ity to the c i t y, provided w ith a ll the f a c i l i t i e s for f r ie n d ly enjoyment and h e a lth fu l comp e titio n. The bank a lso issu e d a monthly paper which contained items of in te r e s t to employees, m atters connected with the growth of the i n s t i t u t i o n, and which gave prominence to c lip p in g s from various sources showing the b e s t in stan ces of good se rv ic e p r a c tic e d by other i n s t i t u t i o n s, both i n d u s t r i a l and banking. Mr.VanTuyl

31 28 said, "The s p ir i t of the paper i s se rv ic e, the s p i r i t behind i t is service, the s p i r i t that has promoted the club is s e rv ic e. Almost every bank has some means of in c re a sin g the e ffic ie n c y of its employees in order to render the b e s t possible serv ice to the public,and no bank can afford not to do i t, for only a fte r i t has solved th is problem is it in a p o s itio n to talk about good service to the p u b l ic. The modern bank endeavors to offer a complete banking se rv ic e, and th e large banks have i n s t a l l e d a n in c re a sin g ly large number of departm ents, each f u r n i s h ing a sp e c ia liz e d s e r v ic e. Many p ro g re ssiv e banks,howe v e r, m ain tain commercial, savings and t r u s t departments, and we may now consider some of the services which these departm ents o f f e r. Commercial Department The commercial departm ent of a hank serv es th e b u sin ess man, who, in order to c a rry on his b u sin ess needs c u rre n t funds or c r e d i t. T herefore, th e oommarci al departm ent is c o n s ta n tly s tr i v in g to

32 29 increase i t s d e p o sits, th ereb y enlarging the b a n k s loaning c a p ac ity. While service i s becoming in c re a sin g ly necessary f o r the l i f e and growth of all departm ents, it is of e sp ecial importance to the commercial departm ent b e cause i ts success depends on i t s a b ility to secure th e accounts v* of b u sin ess men, to a s s is t them in th e ir ac ti vi tie s, and to aid th e community by en ab lin g the various in d u s tr ie s to employ th e ir d e p o sits to the g r e a t e s t p o s s ib le advantage. The commercial d e p o s ito r is, as a rule, f ami 1 i ar with the b a n k 's o rd in a ry s e rv ic e s. To gain his special in te r e s t and a tte n ti o n, i t is often necessary to offer him sp ecial s e rv ic e s. Auditing of Books fo r B usiness E stablishm ents Progressive commercial departm ents have recognized that m erchants are demanding more a c c u ra te co st fin d in g and offer f i r s t - c l a s s a s s is ta n c e to business men in au d itin g t h e i r bocks. Many of them make a p ra c tic e of sending t h e i r a u d ito rs to business e stab lish m en ts, upon re q u e s t, to make a complete audit of the books, for which they charge only a nominal fee. Many of these departm ents engage le c tu re r s to give

33 30 se rie s of talk s to busines men on th e importance of b e tt e r b u sin ess methods. There is no attempt made by the le c tu re r to appeal d i r e c tl y f o r new b usin ess f o r th e bank bearing the expense of the campaign, but the departm ents rep o rt that s a ti s f a c to r y r e s u l t s have been o b tain ed. C o n stru ctio n Loans Since the F ederal Heserva Act c o n fe rre d upon N ational banks the a u th o rity to lend on re a l e s ta te, comm ercial departments of our hanks have done much toward solving the se rio u s housing problems in t h i s country. They have encouraged the b u ild in g of new homes and aided in the economical financing of th e ir cons true tio n, th e r e by discharging a c iv ic r e s p o n s ib ility r e s tin g upon our banks, and at the same time promoting t h e i r ovm i n t e r e s ts. A prominent M assachusetts bank has s e t aside a sum in excess of i t s c a p i t a l and su rp lu s, and, of course, many times what i t c o u ld loan d i r e c t on r e a l e s ta te, for making c o n s tr u c tio n loans, u s in g the cre d it of re s p o n s ih ile b u ild e rs fo r the medium of such loans. The home-owner must have b een a d e p o sito r and known

34 31 to the officers as responsible. When the house is ocmpleted, the N ational hank a s s i s t s in securing a savings hank mortgage of long d u ra tio n, and w i l l then carry for the bu ild er the balance which is reduced by th e amount put up by the owner and which i s a lso secured hy second mortgage. The l a t t e r is reduced monthly and is a d e sira b le bank investm ent in every way. This i s an e x cellen t plan as i t b rin g s th e bank d i r e c t l y in touch with the home-owner, and is most s a t i s f a c t o r y to a l l concerned. The lo a n a s s o c ia tio n s, home-huil ding co rp o ratio n s and mortgage i n s t i t u t i o n s, as wel las the b u ild e r s and contra c to rs of New York S ta te are a ll given s u b s ta n tia l loans, at low i n t e r e s t r a te s, for the purpose of stim ulating b u ild in g. The banks of a prominent town in New Jersey loan well managed b u ild in g and loan a s so c ia tio n s up to fiv e months of th e ir r e c e i p ts for dues. The amount so loaned is g re a tly in excess of what could be le g a l ly loaned on 1 re a l e s ta te d ir e c t. 1 Edmund S. Wolfe, Natl onal Bank Funds for Hou s i ng. J ourn al of the American Bankers A ssociation, F ebruary, 19 21, Vol. X lll. No. 8, p. 564.

35 32 Banking by Mail Since people have c ome to re a liz e the convenience of banking by m ail, th is o ffe rs an opportunity to the comm ercial departm ent to extend to i ts custom ers a service which goes far toward holding old accounts and securing new ones. Commercial departm ents having a large number of farmer customers have an ex c ep tio n al o p p o rtu n ity to make good on th is p o in t, but i t is by no means a l l o t t e d to the out-of-tow n custom ers along, as many w ith in th e c ity find it a g re a t convenience. D epositors may send checks fo r c re d it, and i f the pass book is inelosed, it i s returned to them prom ptly, to g eth er wi th envelopes and d eposit tic k e ts for fu rth e r use; otherw ise, a d u p lic a te d e p o sit tic k e t is forw arded. I f c u sto m e rs notes are due, and they wish to renew them, the bank forw ards renew als, and on r e ceipt of renew al notes and check fo r i n t e r e s t, cancels and-mails th e old n o tes. On request, the bank w ill issue its C a s h ie r s checks in payment of b i l l s. Any in o u irie s which custom ers make in regard to -their b u sin e ss m a tte rs are promptly and courteously answered. Income Tax Service A serv ice which at the p rese n t time is e s p e c ia lly

36 33 appreciated by bank patrons is advice on the Income Tax Law. Firms or in d iv id u a ls a f f e c te d by the Income Tax Law may obtain from progressive banks th e forms which they are re q u ire d to use and a s s is ta n c e in making the r e tu r n. Calf Clubs As a re s u lt of a d e s ire on the p a r t of the banks to get farm ers in te r e s te d in p u re-b red c a t t l e, c a lf clubs have become quite popular with them during the l a s t few y e a rs. In this S tate, the work has u s u a lly been done under the d i r e c t i o n of an expert from the A g ric u ltu ra l College a t Ames, who in many in sta n c e s, is asked by the bank to select and buy the c a lv e s, which are then sold to the c h ild re n of farm ers at a reasonable p ric e, the bank taking the note of the purchaser for one year, same being indorsed by the f a t h e r or g u ard ian of the c h ild. Clerking of Stock Sales The c le rk in g of stock sales by employees of commercial departm ents i s a service which has done much toward stren g th en in g the r e l a ti o n s between th e b ank and the farm er. The man c le rk in g the s a l e makes a re p o rt

37 34 to the fanner and then attends to the account of each purchaser u n t il i t is s a t i s f a c t o r i l y a d ju ste d. The hank assumes the r e s p o n s i b il it y of securing c r e d i t re p o rts on buyers who desire to give notes, th ere b y enabling the man se llin g to pass on them. Returns on Stock Shipments Another service which appeals to the farmer is in co n n ection w ith re tu rn s on s to c k shipm ents. Many farmers arrange to have these retu rn s sen t to the bank. They are c r e d ite d to the customer upon r e c e ip t and a d u p lic a te deposit tic k e t mailed, or, in some c a se s, the p arty d ir e c ts the bank to h o ld th e funds and c a l l s p e r sonally fo r them. The farm er feels th a t he re c e iv e s b e tte r service by dealing through the bank than by d e a l ing d ir e c t with the comm ission houses. Since bankers have begun to re a liz e th a t from 50% to 60% of a ll new b u sin e ss is th e d i r e c t r e s u l t of e f f i c i e n t se rv ic e, one might recound alm ost e n d le ssly devices used by commercial departm ents of modern banks to improve th e ir s e rv ic e.

38 35 Savings Departm ents The savings departm ent of a bank e x is ts p rim arily for the saver, the man of small means, but much can be done to make savings accounts v d ep o sito r and to the bank. immensely p r o fita b le both to the Honoring Checks on Savings Acoounts A serv ice which many savings departm ents o ffe r and which is much a p p re c ia te d by the public is th e ir w i l l i n g ness, i n case of n e c e s s ity, to honor checks on savings accounts. Many people who do n o t o r d in a r ily need a checking account sometimes have ocoasion to issu e a check, on th eir savings account, and i t is an accommodation to have i t honored by the bank. T h rift Talks to C hildren Savings departm ents are also coming to re a liz e the importance of reaching c h ild r e n by talking to them in the sch o o ls, asking th e teach ers to talk to them and issuing t h r i f t b o o k le ts. Various methods are

39 36 devised, f o r h an d lin g th e accounts. Sometimes the tea c h e r c o lle c ts the money and account of i t is kept on a card which is issu e d to the c h ild u n t il i t reaches One d o lla r, when the bank issues a reg u lar savings pass book. Although these accounts are often handled a t a lo ss in the beginning,' co n stan t e f f o r t and p u b lic ity u s u a lly r e s u l t in p ro fita b le r e tu r n s. Home Economics Bureaus A number of savings departm ents make stro n g appeals for women s accounts by i n s t a l l i n g home economics bureaus. The major work of the bureau c o n s is ts of i n t e r views in the bank. Customers are in v ite d to come as often as they d esire for help in making adjustm ents in th eir spending and for general in fo rm atio n on household management. When desired, blanks for a "Household Budget" or "P ersonal Expense Account" are giv en. The Bureau of Home Economics, S ociety for Sav ings, C elveland, Ohio, re p o rts th a t the budget l e a f l e t s, together with signs in the bank, newsp ap er a d v e rtis in g and p u b lic ity are th e ways in which people f i r s t learned about the bureau, but at th e p resent tim e about o n e -h a lf of the

40 37 people who oome are sent by frien d s whome the b u rea u has benefi ted. Another im portant p a rt of the work in connection with the Home Economics Bureau in a bank i s the giving of talks to various groups, such as college s tu d e n ts, lib r a r ia n s, fa c to ry employees, Y. W. 0. A.clubs and women's c lu b s. An e f f o r t is made to s u it th e talk to the p a rtic u la r audience. The r e s u l ts accom plished by these bureaus are im portant. In the f i r s t place, they a s s i s t people to save who have never saved b e fo r e. They teach th e ir custom ers to increase th e ir savings, in some cases to double them, although th e ir incomes are not in c re a se d. They a s s i s t others to adjust th e ir spending so that they obta in a b e t t e r balanced liv in g. Services to F oreigners The p rogressive savings depar tin <31 ts, esp ec ia lly those of the la rg e banks, are making s p e c ia l e f f o r ts to secure the accounts of f o re ig n e rs. Many f o re ig n e rs avoid th e b ank s managed by American o ffic e rs because

41 38 they do not understand t h e i r method of doing b usiness, and, as a consequence, hide t h e i r money in s e c r e t p laces. To overcome the p red ju d ice s and fe a rs of these people, the banks are sending out s o l i c i t o r s to work among them, to t e l l them of the b a n k s stre n g th and and s a fe ty. T e lle rs are employed who speak the 1 anguage of the dom inating c la sse s of f o re ig n e rs in the c ity, so th a t when the s o lic ito r b rin g s in a p ro sp e c t, he can be introduced to a t e l l e r who speaks his own language. F a c to rie s and s to re s are s o li c it e d, l i t e r a t u r e is d is tr ib u te d, and the point is emphasized that the bank employs an i n t e r p r e t e r who w ill be glad to explain th e b a n k s service to them. Much valuable b u sin e ss i s secured in this way. While there is not so great an opportunity for this kind of service in the small towns, th e u n derlying p r in c ip le may be applied. There are some fo re ig n e rs in every community, and, like every one e ls e, they are pleased when th e ir b u s in e s s is appreciated and when h elp fu l servioe i s extended to them. During th e war, the banks did much good work among fo re ig n e rs. These people were o fte n s o l i c i t e d to s e ll th eir bonds a t a discount Or exchange them for u n d e s ira b le stocks or fo re ig n cu rren cy, thus undermining th e work of

42 39 the t h r i f t campaigns th at flo a te d the four lo a n s. Many hanks recognized t h e ir opportunity and a d v e rtis e d th a t since g re a t numbers of people who held L iberty Bonds had no safe place to keep them, they had decided to store the bonds in th e ir v a u lts f r e e of charge. They also s ta te d that they would o oil ect the coupons w ithout expense to the owner and would d e p o s it them to h is c r e d it in a savings account which would i t s e l f draw i n t e r e s t. They made i t clear that no money had to be deposited, th a t they merely c re d ite d the coupons to a savings account which would he open fo r the bond-bolder when th e f i r s t coupon came due. This o f fe r drew to th e bank many peo p le who would never otherwise enter its doors and paved the way fo r fu tu re accounts. Tr us t Dep ar tment Beside th e ir f i d u c i a r y c a p ac ity, modern p ro gressive t r u s t departm ents are p u ttin g in to o p eratio n plans for in creasin g t h e ir se rv ic e s and thus c r e a tin g new business and in creasin g t h e i r e arn in g s.

43 40 A f f ilia te d I n s t i t u t i o n a l Department Several large t r u s t departm ents are rendering r e a l service and s e c u rin g p r o f i ta b l e b u sin e ss through the c re a tio n of an a f f i l i a t e d i n s t i t u t i o n a l departm ent. time of th'i s department is given to managing the The a f f a ir s of clubs, i no ludi ng, such o rg an iz a tio n s as w e lfa re leagues, p a tr i o ti c a s s o c ia tio n s, the hoy scouts, country clu b s, and so f o rth, th e departm ent a c tin g as s e c r e ta r y, tre a su re r, or agent and u s u a lly assuming the e n ti r e f in a n c ia l management of the o rg an izatio n ; i t also acts in an advisory cap acity to the s o c ie ty. This service has a personal appeal to b u sin ess men who form erly refu sed high p o sitio n s in these o rg an iz a tio n s because of the office drudgery that went with them. The i n s t i t u t i o n a l department is ready to do the work for these men, under th e ir d ire c tio n ; \ it has on i t s s t a f f a u th o r itie s on system, expert accountants, bookkeepers, and so f o r t h. Every community has f ra te r n a l and s o c ia l o rg an iz a tio n s which need guidance and a s s is ta n c e, and the i n s t i t u t i o n a l departm ent performs a re a l public s e rv ic e. The Community Trust An opportunity which has been taken advantage

44 41 of by the tr u s t departm ents of some of the larg e banks is the o reato n of a "Community T ru st", which is a public t r u s t e s ta b lis h e d by persons who c o n trib u te to a fund, the income from which is to be used in a id in g c h a r ita b le and ed u cational i n s t i t u t i o n s which are n o t operated fo r p r o f i t. This fund is of g re a t service to the community; it aids the sick and aged, improves liv in g cond itio n s ani provides re o r e a tio n. Small c h a r i t i e s and educational i n s t i t u t i o n a l are u s u a lly i n s u f f ic i e n t l y endowed; the Community Trust p lan aids them whenever p ra c tic a b le. Through th is plan people of moderate means are enabled to help in a g re a t work. The t r u s t is fle x ib le and e l a s t i c and capable of being apportioned to meet the needs of the tim e s. This service i l l u s t r a t e s the human side of the tru s t b u s in e s s. Safety D eposit Service S afety deposi t serv ice is an outstanding f e a tu re of almost every tru s t departm ent, and much is being accomplished toward doing away with the old id e a held by the v ast m ajority of people th a t a sa fe ty d e p o sit

45 42 v a u lt is a place fo r wealthy people to keep stocks and bonds. Most banks f i n d th a t the b e st way of reaching safety deposit p ro sp e c ts is by d i r e c t a d v erti si ng, and to be su ccessful in an a d v e rti sin g c ampaign the bank must have some s p e c ia l f e a tu re, something worth whi le, s pec ia l equipment, se rv ic e, or whatever i t may be, and then the advertisem ent must drive i t home. Some banks give th ree or four months f r e e r e n t a l on the f i r s t y e a r s r e n ta l of a safety de po si t box. The rent of a box which w ill mee th e requirem ents of the average person is ah out one cen t a day, a t which c o s t no one can a ffo rd to r is k the lo ss of th e ir valuable papers, even i f they have only insurance p o l ic i e s. These cam paigns, in a d d itio n to securing new business f o r the hank, are of service to the community because they educate people to the importance of having adequate p r o te c tio n f o r valuable p ro p erty. Adv er t isi ng An in c re a sin g ly large number of banks extend t h e i r a c t i v i t i e s through the use of pamphlets and s im ila r m a te ria l, and i t may be in place to give a b r i e f account of the natu re of ty p ical p ieces of a d v e r tis in g

46 43 m a te ria l of th is p a r t i c u l a r c h a ra c te r. One o lass of pamphlets looks inward to the hank and its service and s e ts f o r t h th e s tr e n g th, serv ice or s ta n d ing of the t ank. A pamphl et e n t i t l e d Shawmut Se rv ic e, issued by The N ational Shawmut Bank of Boston i l l u s t r a t e s th is type. It was prepared w ith the o b ject of a c q u a in t ing d ep ositors and others w ith some of the v a rie d and highly h e lp fu l se rv ic es which a modern, h ig h ly organized and progressive hank places at t h e i r d isp o s a l. The booklet extends an i n v it a ti o n to d e p o sito rs and others to make f u l l use of "Shawmut S ervice", and then proceeds to describe th e s e rv ic e s ren d e re d by th e various d e p a r t ments of th e b ank,namely, the commercial hanking, c r e d it, c o lle c tio n, coupon, safe-keeping, safe-depo s i t, tra n s fe r and tru s t departm ents. The b o o k let fu rth e r s ta te s that custom ers may a v a il them selves of the advantages of in tro d u c tio n to the b a n k s corresp o n d en ts in the c i t i e s for the purpose of e sta b lis h in g new c onn ec ti on s, ob ta in- ing accurate lo c a l in fo rm atio n on c re d it m a tte rs, or with reg ard to trade or other lo c a l c o n d itio n s. A tten tio n is also c a ll e d to the services o ffe re d by the tax c o n su lta n t of the bank. The pam phlet also extends an

47 44 in v ita tio n to custom ers to make use of the data compiled for th e ir use co n cern in g the operation of im portant laws d e a lin g wi th c ommarce and finan ce and the b e n e f it and oonveni aioe of b a n k e rs' acceptances in the fin an cin g of imports and e x p o rts. Ana-th er c la s s of pam phlets issued by banks looks at the g r e a t world of commerce outside and co n tain s i n form ation of i n te r e s t to custom ers reg a rd in g production and the development of th e resources of the community. A pamphlet issu ed by The Denver N ational Bank, enti t l ed A g r ic u ltu ra l. I n d u s tr ia l and M i ni na Pond itio n s. is re p re s e n ta tiv e of th is type of a d v e r t is i n g m a te ria l. While some of the services which we have considered b elong w ith in the province of the city hank and others p e rta in e s s e n t i a l l y to the f i e l d of country banking, the broad underlying p r in c ip le s are the same, and the im portant point is -that every hanker shall study the needs of his own community and s h a ll f e e l th a t he has a d e f in ite duty to that community which can be performed only b y giving th e b e s t service of whi ch his h ank is capabl e.

48 45 NEW POWERS CONFERRED BY THE FEDERAL RESERVE ACT UPON NATIONAL BANKS Prior to the passage of the F ederal Reserve Act, Cong ress had not in any sense kept pace w ith S tate L e g is la tio n in extending corporate hanking powers, and the discrepancy between St-ate banking and N ational banking had become a source of serious concern to those banks operating under N ational c h a r t e r s. 'When s e c tio n 9 was in co rp o rate d in the Federal Reserve Act, giving to S tate banks and t r u s t companies a ll of the b e n e fits of the Federal Reserve plan of c o o p eratio n, th is discrepancy became even more serious since it took from N ational banks c e r ta in advantages which up to th a t time had served to o f fs e t in some measure the broader powers given to S tate banks and tr u s t companies. S tate banks joining the F ederal Reserve System may under s e c tio n 9 of the Act obtain F ederal Reserve notes and may r e d i s count commercial paper. They may also he designated as Government d e p o s ito rie s by the S e c re ta ry of the Treasury and obtain p r a c t ic a l ly a l l of the advantages of the System, except the p riv ile g e of issuing c ir c u la tin g notes based upon Government bonds, and th is is la rg e ly o f fs e t by the p riv ile g e of obtaining Federal Reserve n o te s. With these advantages added to those already

49 46 enjoyed by reason of th e b ro a d e r c o rp o ra te powers of S tate banks and t r u s t companies, i t became im perative for Congress, in order to preserve the i n t e g r i t y of the N ational banking system and of the banks composing the system, to render the fu n ctio n s of N ational banks sim ila r in a very high degree to those of State banks and t r u s t com panies. A ccordingly, new powers were conferred upon N ational banks, based upon the p rin c ip le th a t u n if ic a tio n of the e n tire banking system was d e sira b le and th at such u n i f i c a t i o n could be accom plished only by p la c in g N ational banks in a p o s itio n to compete with State hanks and t r u s t companies on more nearly eoual terms. Under p resent c o n d itio n s, National banks more n early approach the s ta tu s of departm en tal banks, which the Federal Reserve Act a p p aren tly contem plated. T rust Powers of N ational Banks S ection 11 (k ) of the o rig in a l Federal Reserve Act provided th a t, s u b je c t to the p ro v isio n s of the Board,and when not in c o n tra v e n tio n of State laws, N ational banks might act as tr u s t e e, a d m in is tra to r, and r e g i s t r a r of stocks and bonds, under such ru le s and re g u la tio n s as the Board prov ided. Almost im m ediately a fte r the adoption of the Federal Reserve Act, there was an urgent demand from

50 47 National banks for the establishm ent of re g u la tio n s under which they could exercise tr u s t company powers, b u t the Board did not deem it wise to act on this su b je c t fo r some months a fte r i t s o rg a n iz a tio n. However, in J u l y,1915, i t adopted the policy of a u th o riz in g N ational banks, o th e r wise q u a lifie d, to exercise the powers co n fe rre d by sectio n l l ( k ), u n less there was an express p ro v is io n of the S tate law, e ith e r d i r e c t l y,o r by necessary im p lic a tio n, p ro h ib itin g a N ational bank from e x e rc isin g such powers. The Board was d istu rb e d by the o p p o sitio n which i t s advocacy of an ex ten sio n to N ational banks of some of the p riv ile g e s enjoyed by S ta te i n s t i t u t i o n s a ro u s e d,p a r t i c u l a r l y in New York and gave out the follow ing s t a t e ment : "From recent a r t i c l e s and statem en ts, i t appears that the im pression has teen received in many o u a rte rs th a t when a N ational bank is perm itted by the Federal Reserve Board to act as tru s te e, executor, or adm in is tra to r, the ex ercise of these powers w ill r e s u lt in serious c o n f l i c t of j u r i s d i c t i o n as between the S tate c o u rts and a u th o r itie s and the Federal Government. "It is somewhat d i f f i c u l t to understand upon what the ordinary assum ption is b ased. I t is assumed, both as a m atter of law and as a m atter of p o lic y, th a t

51 48 N ational banks e x e rc isin g the powers r e f e r r e d to w ill be su b je c t to the S ta te laws r e l a tin g to the a d m in istra tio n of t r u s t e s ta te s, ju s t as any other c o rp o ratio n which is p e r m itted by State a u th o r ity to ex ercise these powers. "When such e s ta te s are adm inistered under the ju r i s d ic t io n of C ourts, the N ational hank appointed by the Court, or named in the instrum ent c re a tin g the tr u s t, w ill, of course, be su b je c t to the orders and r u le s of such C ourts, and there should not be any c o n f lic t of j u r i s d ic tio n in so far as the a d m in istra tio n of such e s ta t e s is c ancerned. " I t is u n fo rtu n a te th a t a mistaken im pression of the purpose and e f f e c t of t h i s p ro v isio n of the Federal Reserve Act should r e s u lt in c r e a tin g a seeming issue for which no re a l b a sis e x i s t s. " The Board fu rth e r s ta t e s in its 1915 re p o rt: " It is with reg re t th a t the Board r e p o r ts th at i t s a c tio n in g ran tin g fid u c ia ry powers a u th o rize d by the Federal Reserve Act to N ational banks has been the subject of much c r i t ic i s m and o p p o s itio n on the p a rt of a number of tr u s t companies who are engaged in th e b u s in e s s of comm ercial banking in d ire c t co m p etitio n with N ational hanks. Suits have been i n s t i t u t e d in two or more S ta te s to test the c o n s t i t u t i o n a l i t y of s e c tio n ll( k ) and to prevent by in ju n c tio n or otherwise the e x e rc ise of the power of

52 49 tru s te e, executor, a d m in istra to r and r e g i s t r a r of stocks and bonds by N ational banks on the ground that the e x e rc ise of these powers is in c o n tra v e n tio n of the law of the State in which such N ational banks are lo ca te d. Advices have been receiv ed th a t sim ilar s u its w ill he s ta r te d in other S ta te s. The Board has authorized i ts Counsel to intervene in th ese cases, to f i l e b r ie f s in support of the cons t i t u t i o n a l i t y of the Act, and to appear and argue the questions involved when th is course i s deemed n ec essa ry or ad v isab le. Every e ffo rt w ill be made to o b tain an early adjustm ent of th is im portant question by the Supreme Court of the United S ta te s." On April 18,1915, tr u s t companies under the hanking laws of New York p resen ted a p r o te s t to the Federal Reserve Board, s ta tin g th a t the Federal Government had no power under the C o n stitu tio n to permit a c o rp o ra tio n to p e r form such f u n c tio n s. The Board d eclin ed to act upon the p r o te s t, except by r e s o lv in g to c o n tin u e the g ra n tin g of perm its to N ational banks under the a u th o r ity of the Federal Reserve Act. F in a lly, a su it was f i l e d by th e tr u s t companies of Michigan to te s t the c o n s t i t u t i o n a l i t y of the grant of tr u s te e functions to N ational banks. On November 4,1916, the Supreme Court of M ichigan declared th a t Congress had exceeded i t s c o n s ti tu t i o n a l powers in granting such

53 50 fu n ctio n s. An appeal was taken to the Supreme Court of the U nited S ta te s, and on June 11,1917, th a t Court handed down i t s d e c isio n. The lower Court was rev ersed, and the Court sustain ed the c o n s t i t u t i o n a l i t y of se ctio n l l ( k ) of the Federal Reserve Act. The d e c is io n in t h i s case is of fa r-re a c h in g and v ita l importance to the F ederal Reserve System in that i t not only su sta in s th e r ig h t of Congress to v e st in N ational hanks the powers enum erated in se ctio n l l ( k ), b u t f u l l y recognizes the rig h t of Congress to g rant to such banks any and a ll powers th a t are n e c essa ry to en able them to meet th e comp e titio n of banks and tru s t companies o p eratin g under State c h a rte rs. During the year 1916, 125 a p p lic a tio n s for p e r m ission to exercise fid u c ia ry powers under the terms of the Federal Reserve Act p rese n ted to the Board were gr ant ed, ac ti on on 84 of which c a r r ie d approval of f u l l f id n o ta ry powers, while in the case of 41 only lim ite d powers were g ra n te d. Under the law as amended September 16,1918, the fid u c ia ry powers which may be g ra n te d to N ational banks were enlarg ed so as to include a u th o rity to act as guardian of e s ta te s, assignee, re c e iv e r, committee of e s ta te s of lu n a tic s, or in any other f id u c ia r y c a p a c ity in which S tate banks, t r u s t companies or other corporations which compete

54 51 with N ational hanks are p erm itted to act under the laws of the State in which the N ational hank is lo c a te d. The Board is au th o rized to grant perm its to N ational banks to exercise f id u c ia ry powers in any case in which competing S ta te co rp o ra tio n s are p e rm itte d to e x e rc ise such powers, even though the laws of the S tate d i r e c t l y, or by necessary im p lic a tio n, p r o h ib it the e x e rc ise of suoh power s by N ational ban k s. The Federal Reserve Act goes no f u rth e r than to permit to N ational banks the r i g h t to exercise f id u c ia r y powers. The terms of t h e i r e x e rc ise and the re g u la tio n s and r e s t r i c t i o n s re g a rd in g th e ir e x e rc ise are m atters of State l e g i s l a t i o n and a d m in is tra tio n. A rtic le IX of the R egulations of the Board s ta te s th at-"n othing in these re g u la tio n s s h a ll be construed to give a N ational bank exe rc isin g the powers p erm itted under the p ro v isio n s of sectio n ll( k ) of the Federal Reserve Act, as amended, any r ig h ts or p riv ile g e s in c o n tra v e n tio n of the lav/s of the State in which the bank is lo c a te d w ith in the meaning of th a t Act". The Board rese rv es the rig h t to revoke a perm it if i t is convinced th at a hank has w i l l f u l l y v io la te d e ith e r S tate or National laws p e rta in in g to the ex ercise of f id u c ia ry powers. I t is p la in th a t the in te n t of the Act is to place State i n s t i t u t i o n s and N ational banks in th e same

55 52 S tate upon an eoual footing in the e x e rc ise of such powers. The f i r s t ste p in the procedure for o b tain in g fid u c ia ry powers by a N ational hank is to w r ite to the Federal Reserve Board or any Federal Reserve Bank for a copy of a p p lic a tio n, form No. 61. The form makes a form al a p p l i catio n fo r the exact powers d e s ire d, based upon a re s o lu tio n of the Board of D irecto rs and duly signed by the o f fic e r s. In th is form must be in s e r te d the name and lo c a tio n of the applying bank, the p o p u latio n of the city or town in which i t is lo cated, a statem ent of a s s e ts and l i a b i l i t i e s, and a c e r t i f i e d copy of the r e s o lu tio n of the Board of D ire c to rs. The a p p lic a tio n, p ro p e rly executed, Chairman of the Board of D irec to rs is to be m ailed to the of the Federal Reserve Bank of the D i s t r i c t in which the applying hank is lo ca te d, and is to be sent by him to the Federal Reserve Board. The Federal Reserve Agent, before tra n s m ittin g the a p p lic a tio n, adds c e rta in inform ation in regard to th e re g u la tio n s as to fin a n c ia l i n s t i t u t i o n s e x e rc isin g f id u c i a r y powers under the laws of the S tate in which the applying bank is lo c a te d and such other inform ation r e l a t i v e to the applying bank and i t s o f fic e r s as he ca n g iv e, to g eth e r w ith h is recommendations as to th e g ran tin g or r e j e c t i o n of the a p p lic a tio n. When the a p p lic a tio n i s rec e iv ed by the Federal Reserve Board, i t is f i r s t r e f e r r e d to the Counsel for

56 53 leg a l opinions and recom m endations. I t is then sent to a sub-com mittee which adds inform ation which' is based on r e p o rts of the N ational hank examiner, together with i t s recommendations. The a p p lic a tio n,w ith a l l of this i n form ation, is then sent to the Committee, from which i t 1. goes to the Board for f in a l a c tio n. The Agent of the Federal Reserve Bank of New York in h is re p o rt to the Federal Reserve Board for 1919 makes the follow ing statem ent in regard to the development of tr u s t b u sin e ss by N ational banks: "A number of the banks, e s p e c ia lly those in the larg er c i t i e s, are a c tiv e ly developing f id u c ia ry b u sin e ss, but in the sm aller places many of the banks have gone no fu rth e r than to o b tain the B oard s perm ission to tra n s a c t 2. i t. The to ta l number of N ational banks h o ld in g p e r mits on December 31, 1920, was Savings D eposits Another im portant innovation of the Federal Reserve Act v/as the p ro v isio n for the acceptance by 1. Clay Herr ick. Trus t Denar tme n ts i n Nati onal B anks. The Bankers Magazine, Vol. C ll, Jan u ary, 19 21, p *6th Annual Report of F ed eral Reserve Board, p. 322.

57 54 N ational banks of tim e d ep o sits on which they may pay i n te r e s t. Under the N ational Bank Act, N ational banks were not s p e c if ic a lly au th o rize d to organize savings d e partm ents, b u t the com petition fo r d ep o sits and the payment by S tate banks and t r u s t companies of higher ra te s of in te r e s t on savings accounts r e s u l te d in N ational hanks e s ta b lis h in g savings departm ents, or paying i n t e r e s t on savings accounts. As the law did n o t d is tin g u is h b e tween savings accounts and demand d e p o s its, N ational banks were com pelled to carry the same re se rv e a g a in s t one as a g a in st the other, and there was no c e rta in ty that the Savings department r u le s could be en fo rced. However, nearly h a lf of the N ational banks in the United S tates prio r to the passage of the Federal Reserve Act, had e s ta b lis h e d savings departm ents and held more than E ight hundred m illio n d o lla r s of savings d e p o s its. Under the lib e r a l i n te r p r e ta tio n of the law by the Oomptr o ile r of the Currency th is was perm itted because i t was not s p e c if ic a lly fo rb id d e n. 1. The r ig h t to accept in t er e sts-b e ar i ng time dep o s its is expressly co n fe rre d on N ational banks by sectio n 24 of the Federal Reserve Act, which provides th a t- "Such banks may continue h e re a fte r as h ereto- 1 *0.A.Phi 11 ins.re adi ngs in Money and B anking. The JAacMillan Company, New York, 1920, p.

58 55 fo re,to receive time d e p o sits and to pay i n t e r e s t on the same." Section 19 provides in p a rt th a t- "Demand d e p o sits w ith in the meaning of th is Act sh a ll comprise a l l deposits payable w ith in th ir ty days and time d e p o sits sh all comprise a l l deposits payable a fte r th ir ty d-ays and which are s u b je c t 'to not le s s than th ir ty days' n o tice, and a ll p o sta l savings d e p o s its." In the o rig in a l House b i l l, p ro v is io n was made for the c re a tio n of savings departm ents, but th is p ro v isio n was e lim in a te d by the Senate and agreed to by the conferees. In i t s stead, p ro v isio n was m ade,authorizing the hank to pay i n te r e s t on d e p o sits and in cluding savings accounts in the in te r e s t- b e a r in g d e p o s its. In re g a rd to the savings accounts of N ational banks, the Board says in i t s 1915 re p o rt: "Under re g u la tio n s c a re f u lly developed by the Board, it has sought to lim it the number of accounts against which reserve of 5% (later reduced to 5%) has been p erm itted to those which are beyond question what they p ro fe ss to be, the red u ctio n, th e re fo re, involving no element of danger to th e liq u id c o n d itio n of the banks. D espite this c a re, some State o f f i c i a l s have considered it th e ir duty to attem pt to r e s t r i c t the development

59 56 of the savings d e p o sit fu n c tio n o f National banks, and in C a lifo rn ia this a ttitu d e has been c a r r ie d so fa r that the Board has recommended to the Federal Reserve Bank the i n stitution of in ju n c tio n proceedings, designed to p ro te c t the rig h ts of me nb er banks." The re d u c tio n of cash the b u s in e s s of a N ational bank reserv es a g a in s t such of as re p re s e n te d by d e p o s its which are s u b je c t to not le s s than t h i r t y days' notice from the old requirem ent of from f if te e n to tw e n ty -fiv e per c e n t to the new b a s is of th ree per c e n t makes a vast d iffe re n c e in the amount which our N ational hanks must dep o sit w ith re se rv e a g e n ts. Savings accounts are much more stab le than checking accounts and the w ithdraw als,as shovn by experience, are very r e g u l a r. As a r e s u l t, the bank can with p e rfe c t s a fe ty keep the lower re se rv e p ro vided for by the F ederal Reserve Act and can invest the balance in le s s liq u id a s s e ts than the n e c e s s i ti e s of the o rdinary checking b u sin ess would demand. The in v e s t ments of savings banks are in some S ta te s s t r i c t l y lim ited, and under the p rov isions of the Federal Reserve Act N ational banks have a d i s t i n c t advantage in being le s s narrowly r e s t r i c t e d in the employment of savings 1. depo si ts. 1. Conway and P a tte r son. The Oner at ion o f t he New Bank A ct. J.B, L ip p in co tt C ompa ny, Ph i 1 ade lphi a and L ondon, 1914, p. 225.

60 57 Loans on Farm Land and Other Real E s ta te Of a l l the r e s t r i c t i o n s in the N atio nal Bank Act, those upon loans were by f a r the most serious handicap to country hanks in competing with S tate i n s t i t u t i o n s. P rio r to the passage of the Federal Reserve Act, ru ra l "banks had, in f a c t, taken land into account in making loans and in various ways made i t the s e c u r ity fo r many of th e ir loans. While the Federal Reserve Act was under c o n s id e ra tio n in Congress a stro n g demand came from hanking i n s t i t u t i o n s in the West and South th a t N atio n al hanks he given the p riv ile g e of making farm loans, but i t was adm itted by p r a c tic a lly every advocate of the-extens ion of t h i s power to N ational banks th a t i t should be lim ite d to a c e rta in p ro p o rtio n of the b a n k 's c a p ita l, or with refe re n c e to some 1 fixed percentage of i ts time d e p o sits. The Federal Reserve Act as o r ig in a lly passed by Congress authorized any N ational hank, except those l o cated in Central Reserve C itie s, to make loans up to 25% of i t s c a p it a l and surplus or 33 l / 3 % of i t s tim e dep o sits on improved and unencumbered farm land,under c e r ta in sp e c ifie d c o n d itio n s. In an Act approved September 7,1916, t h i s s e c tio n of the Federal Reserve Act was 1 J. T.Ho Ids wo rth.money and B acking.second E d itio n, D. Appleton and Company, New York and London,1919,p. 265

61 58 amended so as to empower any N ational bank, except those lo cated in C entral Reserve C itie s, to lend 25% of i t s c a p ita l and surplus or 33 l/3% of i t s tim e d e p o sits on any improved and unencumbered r e a l e s ta te, as d is tin g u is h e d from farm land, provided such real e s ta te is lo c a te d w ith in 100 m iles of the place in which the lending bank is lo ca te d, up to 50% of the value of the p ro p e rty. Farm loans are lim ite d to f iv e y ears and other re a l e s ta te loans to one y e a r. The F ederal Reserve Board has power to add from time to time to the l i s t of c i t i e s in which National banks are n o t p erm itte d to make such lo a n s. The purpose of t h i s p ro v isio n is to enable banks to make loans to farmers who have l i t t l e beside land to offer as se cu rity, and who req u ire funds f or a consid e ra b le period to carry on th e ir o p e ra tio n s. I t has never been claimed th a t s e c tio n 24 of the F ederal Reserve Act would meet a l l of the requirem ents fo r long time loans, but adequate p ro v is io n has been made under the Federal Farm Loan Act whereby the Farm Loan Board has e s ta b lis h e d a system of farm loan banks in the United S ta te s, which banks are auth o rized to make loans over long periods of time. The power to lend on farm land and other re a l estate is a d i s t i n c t advantage to N ational b a n k s. I t gives them more of the most p r o f ita b le kind of lo ca l b u siness on which the re tu rn s are g re a te r than they could

62 59 secure by lending th e ir funds in the money c e n te rs or using them in the purchase of paper from n o te-b r ok er s. The a b i l i t y to lend on farm land and other re a l e s ta te b rin g s d e s ira b le customers to the bank who would otherw ise e s ta b lis h hanking connections elsew here. Furtherm ore, by a s s i s t i n g in the growth of w ealth in i ts o omiauni t y, the bank advances i ts own i n te r e s t s and lays a so lid foundation for i ts fu tu re expansion. Foreign Branches of N ational Banks Of the powers granted to N ational banks by the Federal Reserve Act, none, perhaps, is more s ig n i f ic a n t or frau g h t w ith g r e a te r p o s s i b i l i t i e s than those c o n fe rre d for the purpose of financing our fo re ig n t r a d e. I t had long been re a liz e d th a t the fo re ig n tra d e of the United States was very inadequately fin a n c e d and th at in many cases Americans engaged in fo re ig n b u sin ess were unable to get the accommodations trhich they r e q u ire d. Under sectio n 27 of the Federal Reserve Act, any N ational hank having a c a p ita l and surplus of n o t le s s than $1,000,000 may e s ta b lis h fo re ig n branches under re g u la tio n s of the Federal Reserve Board. So f a r, only two N ational hanks have ap p lie d for th is power, The N ational Oity Bank of

63 60 New York and The F i r s t N ational Bank of Boston. The former has undertaken the task upon a large s c a le. Section 25 of the F ed eral Reserve Act, as amended by the Acts of September 7,1916 and September 17,1919, authorized a N atio n al bank having a c a p ita l and surplus of $1,000,000 or more to in v e s t, under c e r t a i n circum stances, in the stock of c o rp o ra tio n s c h a rte re d or inco rp o rated under the laws of the United S ta te s, or of any State th ere o f,a n d p r in c ip a lly engaged in in te r n a tio n a l or fo re ig n banking, and authorized any N ational bank, u n til January 1,1921, w ithout reg ard to the amount of i ts c a p ita l and su rp lu s, to in v e st, under c e r ta in conditions in the stock of one or more co rp o ra tio n s in c o rp o ra te d under th e laws of the United S ta te s, or of any S ta te th e re o f, and p r in c ip a lly engaged in such phases of in te r n a t ional or fo re ig n f in a n c ia l o p erations as might be necessary to f a c i l i t a t e exports from the United S tates or any of i t s dependencies. At that time, however, Congress had n o t provided any means for the Federal in c o rp o ra tio n of f o re ig n hanking c o rp o ra tio n s or other fo re ig n f in a n c ia l co rporations in whose sto c k N ational banks were authorized to in v e s t. In the enactment of s e c tio n 25(a) of the Federal Reserve Act, approved December 24,1919, Congress provided a means fo r the in c o rp o ra tio n of i n s t i t u t i o n s under Federal law for the

64 61 purpose of engaging in in te r n a tio n or fo re ig n banking or other in te r n a tio n a l or fo re ig n f in a n c ia l operations in whose stock N ational bank^ as well as in d iv id u a ls, firm s and 1. other corp o rations may in v e st. The provisions of the s o -c a lle d Edge Act which c o n s titu te s s e c tio n 25(a) perm it a N ational bank, reg a rd le ss of the amount of its capi tal stock to in v est up to 10% of i t s c a p ita l and surplus in the stock of c o rp o ra tio n s organized under the p ro v is io n s of th a t s e c tio n and engaged e ith e r in fo re ig n banking operations or in th e fo re ig n in vestment business, but the aggregate of a l l investm ents made by a N ational bank under the provisions of s e c tio n 25 and 25(a) must n o t exceed 10% of i t s c a p ita l and s u rp lu s. The primary purpose of the Edge Act was to provide fo r the establishm ent of a Federal system of i n t e r n a tio n a l banking or f in a n c ia l c o rp o ra tio n s o p e ra tin g under Federal su p e rv isio n w ith powers s u f f i c i e n t l y broad to enable them e ff e c tiv e ly to compete with s im ila r fo re ig n c o r p o ratio n s and to affo rd to the American exporter and imp o rter at a l l tim es a p o ssib le means of fo re ig n b u sin e ss. 2. fin a n c in g his The immediate e f f e c t of the o p eratio n of c o r- 1. 7th Annual Report of Federal Reserve Baard, 1920, p th Annual Report of F ederal Reserve Board, 19 20, p.24.

65 62 po rations under t h i s Act, however, has been to g r e a tly aid in extending long-term c r e d its to Europe. The overwhelming balance of our exports over our im ports th a t f i r s t developed d u rin g the war has co n tin u ed, due to the fac t that since the Arm istice Europe has needed raw m a te ria ls in great q u a n titie s in order to r e e s t a b l i s h her in d u s tr ie s, to gether with an immense a resum ption of normal amount of imported f oods tuf f s, whi le production has been prevented by p o l i t i c a l and economic d istu rb a n c e s. Since the passage of the Edge Act, two i n t e r n a tio n a l f in a n c ia l c o rp o ratio n s have been organized under the terms of that Act, one with a c a p i t a l stock of $2, 100,000 and the other w ith a c a p ita l stock of $7,000,0 00. Last October, a committee of the American Bankers A sso ciatio n presented a re p o rt at the Washington convention which in cluded a proposal for the form ation of another c o rp o ra tio n with a c a p ita l stock of $100, 00, 000. Arrangements are now being made fo r the completion of the o rg a n iz a tio n. Acceptances The Federal Reserve Act, however, made prov isio n not only f o r the mechanism for conducting fo re ig n trade, b u t also f o r the estab lish m en t of p r a c t i c a l business methods by le g a liz in g the use of acceptances m aturing

66 63 w ith in six months, a r i s i n g from the fo re ig n trade of the United S ta te s and other c o u n tr ie s. An amending act of September 7,1916, au th o rize d th e acceptance of domestic h i l l s, accompanied by shipping documents or secured by warehouse r e c e ip ts for r e a d ily m arketable s ta p l e s. Under the amendment of September 7,1916, prov is io n was a lso made f o r the acceptance by N ational banks of b i l l s of exchange having n o t more than three months to run (exc lu si ve of days of grace) for the purpose of f u r n is h ing d o lla r exchange as req u ired by the usages of trade in fo re ig n c o u n trie s or dependencies, or in su la r p o ssessio n s of the United S ta te s. Bankers acceptances have been rendered e li g ib le fo r red isco u nt a t the Federal Reserve Banks and th is has given them a h ig h er degree of l iq u i d it y th an would o th e r wise have c h a ra c te r iz e d them. The F ed eral Reserve Act had d efin ed a bank acceptance as "a d r a f t or b i l l of exchange of which the acceptor i s a bank or t r u s t company, or a firm, person, company or c o rp o ra tio n engaged in the b u sin e ss of g ran tin g b an k ers' acceptance c r e d i t s ". The c h a ra c te r of the instrum ent may be fu rth e r explained by an i l l u s t r a t i o n. A, a merchant in London, ships goods to B in America. A d e s ire s a c r e d i t which w ill enable him to liq u id a te promptly, and B agrees th a t A's d r a f t f o r the goods sh a ll

67 64 be accepted by a New York bank. B may have p ro te c te d his bank in some sp ecial manner, i f the i n s t i t u t i o n so r e quired, o r he may simply have made a s a ti s f a c to r y statem ent on the s tre n g th of which the bank had agreed to accept A s d ra ft for a commission, with the u n d erstanding, of c o u rse, th at B w ill place in the b ank s hand funds w ith w hich to meet the d r a f t several days before i t m atures. One banker has defined the hank acceptance as follow s: "From a banking standpoint in American, a bank acceptance is nothing but the c e r t i f i c a t i o n of a time d r a f t by the bank on which it is issu e d. The c e r t i f i c a t i o n of a check, which is the only one mentioned in some of our banking law s,binds the bank to pay the check on p r e s e n ta tio n, whereas the acceptance of the d r a f t hinds th e a c ce p tin g b ank to pay the same at m a tu rity ". Prior to the passage of the Federal Reserve Act our N ational banks were not p e rm itte d to make acceptances, and w h ile there was nothing to prevent S tate banking laws from le g a liz in g th e ir use, such laws, which were u su a lly modeled upon the N ational Bank Act, e ith e r ignored or p ro h ib ite d th e ir use. A trade acceptance d if f e r s from a bank acceptance in th a t the trade acceptance is drawn by the se lle r of m erchandise upon the buyer, fo r the amount of the

68 65 invoice, and bears upon i ts face th e sig n a tu re of the buyer, together with the date and place of payment. It i s simply a neg o tiab le promise to do e x a c tly as the buyer agreed to do when the goods were ordered. The advantages to the banker of the trade acceptance introduced under the operation of the Federal Reserve Act are of im portance. T his two-name paper cons t i t u t e s a secondary re s e rv e, as i t can be e a s ily r e d i s counted at th e F ederal Reserve Banks at p r e f e r e n t ia l r a t e s. The trade acceptance re p re s e n ts a commercial tra n s a c tio n, which is not always true of single-nam e p a p e r. Furtherm ore, a customer who s e t t l e s his accounts by trade acceptances is n ot lik e ly to s e ll his book aceounts, borrow through brokers or apply a t other banks for c r e d i t, because he knows th a t h is bank, if a member of the Federal Reserve System, can take care of h is n eed s. F in a lly, the trade acceptance system is an im portant fa c to r in keeping the c r e d i t system s o und. Trade acceptances are now used throughout the United S tates in p r a c t i c a l l y every lin e of b u s in e s s, are in- eluded in th e terms of sale of thousands of b u sin e ss concerns and are d isc o u n te d f re e ly by p rogressive bankers of the country. However, the trade acceptance has n o t made the headway th a t i t m erits la rg e ly because of the a tt i tu d e

69 66 of the banker. There are a large number of bankers in every sec ti on wh os e study of c r e d it c on d itio n s has not gone f ar enough to enable them to r e a l iz e th e g rea t advantages of th is c r e d i t instrum ent to themselves and th e ir c l i e n t s as an a id to b e tte r morals 1 i ng c on di ti ons. in business and b e tt e r c r e d it and b ank- Of a l l the p ro v is io n s made by the Federal Reserve Act, none i s of g reater importance than th a t re la tin g to b an k ers' acceptances. From the stan d p o in t of fin an cin g our fo re ig n tra d e, i t is of the utmost s ig n if ic a n c e. Under the old system, our fo reig n trad e had to be fin a n c e d in London and on the C ontinent, and the expression "d o llar exchange" which is now heard so f re q u e n tly was m erely an ideal fa r removed from p r a c tic a l r e a l i z a t i o n. Under the p ro v isio n s of the Federal Reserve Act, our im porters are no longer re q u ire d to pay London an annual t r i b u t e in the way of acceptance comm issions. Our e x p o rte rs, a lso, are freed from dependence upon London and can now b i l l th e ir shipments in d o lla r s. Our domestic trade has also b e n e fitte d by the le g a liz a tio n of bankers' accep tan ces. Under our banking system prior to the c o rre c tiv e l e g i s la t io n of 1913, our merchants and m anufacturers were fo rced to pay 1 Robert H. B e an. Ac c e nt anc e Needs E x p lan atio n Rather The N orthwestern Bank er, V ol. 39 8, Oc t ob er, 19 20, p. 21. Than D efense.

70 67 current lo cal r a t e s for money because of our lack of a true discount m arket. Under the present system, every merchant whose local c r e d i t is good can count on being able to s e l l l h i s paper throughout the Reserve D i s t r i c t in which he is located, and also, in a l e s s e r degree, throughout the country, and w ill get the b e s t r a te of commercial c r e d i t p re v a ilin g anywhere w ithin his l o c a l i t y. Furtherm ore, borrowers now have the advantage of fo re ig n com petition f o r th eir paper from which form erly they were excluded, with the ex cep tio n of the la r g e s t and s tr o n g e s t, due to the f a c t th at the acceptance is s a la b le wherever the acce p tin g bank is known. The advantages of the acceptance to the hanks themselves are im p o rtan t. B ank s in money c e n te rs which were form erly deprived of th is type of se c u rity in which to i n vest th e ir moneyt and which as a r e s u lt in v e ste d th e ir funds p rin c ip a lly in trad e paper and stock exchange loans, may now purchase b i l l s of exchange which cover genuine comm ercial tra n s a c tio n s and which bear the acceptance of a prime bank. The f i e l d for the investm ent of the d e p o sits of c i t y hanks has been g re a tly broadened, b o th to the ad- I vantage of the hanks themselves and of trade in general. Country banks under the lim ita tio n s of the N ational Bank Act e ith e r d e p o site d th e ir surplus funds with

71 68 reserve agents at a very low ra te of i n t e r e s t, in v e ste d in bonds, which always carry the danger of s p e c u la tio n, or employed them in the purchase of paper from h o te-b r ok er s. The latter method brought a g re a te r i n t e r e s t r e tu r n, and was f re e from sp e c u la tio n, but i t me ant the ty in g up of the b an k s funds for a c o n s id e ra b le tim e, and, furtherm ore, banks buying such paper were fo rc e d to depend upon the opinion of n ote-b ro k ers or correspondent banks in re g a rd to the fin a n c ia l r e s p o n s i b i l i t y of the makers of the n o te s. These banks may now in v e st in paper which has back of it the c re d it of some great hank whose standing is unquestioned. Bank acceptances are regarded as the b e st quick asset for a b a n k s p o r tf o lio, and they alm ost cons t i t u t e a supplem entary cash reserv e due to the f a c t th a t they may be e a s ily and q u ick ly converted into cash in case of emergency. Broker, Insurance Agent, Etc. In ad d itio n to the powers above r e f e rr e d to, an amendment to the Federal Reserve Act, approved September 19,1916, perm its N ational banks operating in places having a po p u latio n of not over 5000, under re g u la tio n s p re s c rib e d by the Com ptroller of the

72 69 Currency, to act as Agent for f i r e, l i f e or other in surance companies a u th o rize d to do business in the S ta te. An a d d itio n al p ro v isio n perm its N ational banks in the same c e n te rs to a c t as broker or agent for others in making or p ro cu rin g loans on real esta te lo ca te d w ith in 100 m iles of the h an k s home. The bank is allowed to charge commissions for s e rv ic e s so ren d e re d or accept fees for i t s work. P rio r to the g ra n tin g of this power, bank o ffic e rs in such l o c a l i t i e s very often combined th e ir d u tie s afe o ffic e rs with insurance and other sim ilar b u s in e s s, but in the l a t t e r c a p a c itie s they acted, not for the i n s t i t u t i o n, but as in d iv id u a ls. Under the present law, when a bank takes over th e b u sin e ss which was p rev io u sly conducted by the o f fic e r s in th eir in dividual c a p a c ity, such o f f ic e r s are deprived of an outside income. No hank i s allowed to guarantee the p r i n c ip al or i n t e r e s t of any loan, the payment of insurance premiums, or the tru th of any statem ent made by an a p p li cant f o r in su ra n c e. B usiness a f f i l i a t i o n s in small towns are often c lo s e and some banks have h e s ita te d about entering into com petition w ith th e ir own custom ers who are already in the insurance b u s in e s s. Shortly b e fo re the passage of th is amend-

73 70 ment, a conference of Canadian b ankers and the d e a le rs in the Western p r a ir ie provinces of Winnipeg was held at which the d e a le rs charged th a t branch hanks were taking up agencies fo r the p lacing of insurance. They objected to of this assum ption of an outside en terpr is e, and the heads several c h a rte re d banks promised them th a t the p ra c tic e» would be stopped. Thus, w hile the heads of leading hanks of one country, a f te r some years of experience, had decided that the hanks must go out of the insurance b u sin e ss, our own, country passed a law p e rm ittin g N ational banks, as i n s t i t u t i o n s, in moderate sized towns, to take over t h i s b u s in e s s. Without attem pting to summarize the fa c ts of th is chapter, i t is in place to s t a t e th a t the Federal Reserve Act has accom plished two purposes in a very conspicuous manner. I t has u n if ie d our banking system by enabling N ational banks to enter into active comp e t i t i o n with State banks and t r u s t companies in sundry lin e s of business which have always ranked as the most p r o f ita b le c a r r ie d on by State i n s t i t u t i o n s. The banks re ta in the advantages of com petition and yet they are so grouped and assembled as to make i t p o s s ib le to use reserve resources j o i n t l y and e f f e c ti v e ly fo r the

74 71 b e n e fit of a l l and the p ro te c tio n of the p u b lic. F u rth e r more, it has p laced our banks in a p o s itio n to make American f in a n c ia l influence abroad f e l t more f u l l y than ev er b ef o re.

75 72 CLEARING AND COLLECTION OF CHECKS In a d isc u ssio n of a piece of hanking machinery so e s s e n tia lly modern and American as the F ederal Reserve Check C o llec tio n System, it i s n ecessary to review the d i f f i c u l t i e s and ev ils attending the u n s a tis fa c to r y and unsound methods of handling country checks which exis te d fo r many years prio r to the estab lish m en t of the Federal Reserve Banks. I t is only in th is way th a t an a p p re c ia tio n of the m erits of the system now in force in the sev eral Federal Reserve d i s t r i c t s can be gained. Among the very numerous c r itic is m s of our banking system made by the N ational Monetary Commission which submitted i ts rep o rt to Congress in January, 1912, app ear e d the following: "We have no e ffe c tiv e agency covering the e n tir e country which affords necessary f a c i l i t i e s for making domestic exchanges between d if f e r e n t l o c a l i t i e s and s e c tio n s, or which can prevent d is a s tro u s d is ru p tio n of a l l such exchanges in times of se rio u s tr o u b l e." Prominent among the d e fe c ts of the o ld system were excessive exchange charges, e s p e c ia lly by banks in the West and South, caused by the w astefu ln ess of the

76 73 independent system of c o ll e c ti o n s. In order to reduce or avoid exchange charges, p ra c tic e s were r e s o r te d to which increased the delay and waste in the system. In the f i r s t place, ro u tes in order checks were sent by roundabout and devious to fin d a p o s s ib le route open w ithout exchange ch arges. This method was made p o s s ib le by agreements between correspondent banks to pay checks f o r one another at par. In the second p lace, banks found it necessary to m aintain exchange balances with banks in d i s ta n t c i t i e s which, in re tu rn, rendered f re e c o lle c tio n se rv ic e. This meant the tying up of larg e sums in s c a tte r e d deposits w ith correspondent banks at low r a te s of i n t e r e s t. These exchange balances were regarded as p art of the 1 awful re s e rv e s. One serio u s phase of the p ra c tic e of r o u t ing checks was the manner in which it padded le g a l re s e rv e s. Reserve -holding banks, under s t r e s s of comp e ti t io n for the accounts of out-of town banks, were accustomed to give immediate c r e d it for item s sent to them by co untry banks which sometimes re q u ire d a week to c o lle c t. To i l l u s t r a t e : A bank In Ohicago would give immediate c re d it to a bank in Iowa fo r such checks drawn

77 74 on M inneapolis, Denver and S alt Lake Oity as the Iowa hank might send to its Chioago co rre spondent, thereby undertaking to c o ll e c t checks on M inneapolis, Denver and Salt Lake C ity, and, in the me anti me, pay i ng the Iowa bank the face v alu e of the checks upon r e c e i p t. Moreover, when the re se rv e c ity bank received checks from i ts c o rre s pondents, it would send some of them to the c e n tr a l re serve c it y hank and count them as reserv e as soon as they were placed in the m ail. F requently, a cheek \vhich had been counted as reserve by the various hanks was r e turned f o r want of funds. The exchange balances were reg ard ed by the barks holding them as e s s e n t i a l l y the same as other dep o sits and no s p e c ia l reserves were kept ag ain st them. But in times of tro u b le, the in d iv id u a l hanks, in an attem pt to strengthen th e ir own po si t ion, wo ul d draw a g a in st these balances and often i n s i s t upon shipments of currency. Consequently, the re s e rv e -h o ld in g banks were weakened, and the usual r e s u l t in times of panic 1 was a complete breakdown of th e dom estic exchanges. 1 Conway and P a tte rso n, op. c i t., p.207.

78 75 Another serious d i f f i c u l t y for which the old system was larg ely re sp o n sib le was the need of heavy shipments of currency back and fo rth over the co u n try to meet the seasonal demands. These shipments amounted in a year to hundreds of m illio n s of d o lla r s and involved the expense of packing, shipping, abrasion and in te r e s t item s. R eferring ag ain to excessive exchange c h a rg e s, the f i r s t noted among the d e fe c ts of the old sys tem, Ame ric an commerce su ffered severely from the i n f l i c t i o n of high c o lle c tio n charges upon b u s in e s s for check c o lle c tio n, and th is practice, was c a rrie d so far that in the h e a rin g s which preceded the enactment of the new bank a c t,c o u n try bankers t e s t i f i e d th at in many in sta n c e s such charges c o n s titu te d f u ll y on e-h alf of th eir earnings and they could 1 not get along without them. Banks m aintained exh o rb ita n t r a te s by agreem ents among them selves and d e veloped a code of s o -c a lle d "banking e th ic s ", which prevented them from c u ttin g the excessive charges, even had they been disp o sed to do so. A check was regarded as something out of which as much p r o f it as p o s s ib le was 1 J. T. Ho ldswor th, op.c it., p

79 76 to be made, and no p a rtic u la r bank or group of banks ca n be singled out as the prime offender in th is ; a l l alike were g u i lt y to a greater or less deg ree. However, New York, although the fin a n c ia l c e n te r of the co u n try, made no attempt to b e tte r i ts t r a n s i t methods, and the need for reform in that s e c tio n was so g la r in g ly obvious that in 1912 the ac cu sa tio n was made th at the New York banks were making excessive p r o f i ts in c o lle c tio n s. In the hearings before the Pujo Committee which was in v e s tig a tin g the "Money T ru st", i t was charged th a t the New York banks r e a l iz e d about $50,000,000 a year from th is source. According to the New York banks themse lv e s, th e gross income to the members of the C learin g House A sso ciatio n from c o l l e c t i o n exchange during the year 1911 was $2,042,551. From th is must be deducted, as exchange c o s t, postage, r e n t, s ta tio n e r y, s a la r ie s and loss of i n t e r e s t, t o ta l li n g $2,042,083.78, 1 leaving a net income of $97, Without attem p tin g to draw conclu sion s in regard to the m atter, i t i s, never the le s s, evident from the ru le s of th e 1 Conway and P a tte rso n, op. c it., p. 325.

80 77 New York C learing House t h a t New York hanks attem pted to s h if t to th e ir c u sto m e rs shoulders the expense of check c o lle c tio n. The co u n try was div id ed in to three groups, the charges upon a l l c i t i e s w ith in each group being u n i form. The f i r s t group c o n siste d of those c i t i e s near New York known as d is c re tio n a ry p o in ts. each h a n k w a s p erm itted to ex ercise i t s On these p o in ts own d i s c r e tio n as to charges and in p ra c tic e none were made. The r e mainder of the country was divided roughly hy the M ississip p i R iver. A uniform r a t e of l/lo of 1% was charged on a l l points e a s t of th a t lin e and l/4 of 1% on a ll p o in ts west of i t. Unlike country banks, however, the banks of New York City did not deduct from the face of t h e i r own checks. In P h ila d e lp h is another device was used which accom plished p r a c t i c a l l y the same purpose as the plan of the New York hanks. The large hanks paid i n t e r est on the d e p o s its of country hanks, b u t i n t e r e s t began immediately only on items on d i s c r e tio n a r y p o in ts. The remainder of the country was divided into three d i s t r i c t s. In te re s t began on checks drawn on hanks in the f i r s t d i s t r i c t only a f te r three days, on those drawn on banks

81 78 in the second d i s t r i c t a f t e r f iv e days and on checks drawn on banks in the rem ainder of the country only a f te r seven days. Many attempts were made by C learing House A sso ciatio n s to reform the methods used in check c o lle c tio n, but they u su a lly were un su ccessfu l owing to lack of c o o peration by t h e banks in the v arious c o ll e c ti o n c e n te rs. Progress was made, however, in some sections of the country, n o ta b ly Boston and Kansas City were country c le a rin g house systems were put in to o p e ra tio n. I t was in New England that the f i r s t attem pt was made to am eliorate the u n s a tis f a c to r y co n ditions which a tten d ed the c o lle c tio n by Boston banks of checks on neighboring S ta te s. The plan f i n a l l y adopted in 1900 was th at of a c le a rin g house fo re ig n departm ent- a country c le a rin g house- for the purpose of c le a r in g such checks. Each bank, instead of sending in d iv id u al l e t t e r s each day to i ts country co rresp o n d en ts, "lump ed" i ts co u n try checks and forwarded them to the c le a r in g house where they were re -s o rte d and sent by the c le a r in g house to th e banks on which they were drawn. Settlem ent was made through th e regular c le a rin g house in two days, which was the

82 79 time r e o u ire d for c o lle c tio n. If th is system had been g en eral, it would have been unnecessary fo r th e fram ers of the Federal Reserve Act to include the c le a rin g fu n c tio n among th e powers of the F ederal Reserve Banks. This plan was so l a t e r when Kansas City and su c c e ssfu l that fiv e years i t s surrounding d i s t r i c t found i t s e l f in the same predicam ent, another c le a rin g house was e s ta b lis h e d. The Country C learing House Department of the Kansas City C learing House A sso ciatio n covered the S tates of M issouri, Kansas, Nebraska, Colorado, New Mexico, Oklahoma and Texas and included more than fiv e thousand banks. The Kansas City Country C learing House did not i n te r f e r e with the arrangem ents of the in d iv id u al b a n k s-it merely o ffe red i t s members the a d d itio n a l f a c i l i t i e s which i t a ffo rd e d. I t e ffe c te d a sav in g of over 50% in the gross expense of handling t r a n s i t items in i ts t e r r i t o r y and reduced the time re o u ire d fo r o o lle c tio n about 25%. Devices sim ilar to the country check c l e a r ing house systems r e f e r r e d to above were developed in sev eral o th er se c tio n s of th e co u n try, n o tab ly the middle w est. Some c i t i e s became known as f r e e c i t i e s.

83 80 0 th er s, ho wever, were n o to rio u s fo r th e ir high c o ll e c ti o n charges. Many hanks made c o lle c tio n ch arg es- some excessive and some re a so n a b le - fo r the c o l l e c t i o n of o u t-o f- town items p resen ted a t th e ir own c o u n te rs. Numerous e f f o r ts made to combat the e v ils just r e f e r r e d to met w ith l i t t l e success. At a meeting of the Reserve City Bankers A sso c ia tio n held in St. Louis inapri 1, 1913, eight months before the F ederal Reserve Act was passed, the fo llo w in g r e s o l u ti o n was adopted! "R es ol ve d, Th at the A sso ciatio n of Reserve C ity Bankers does hereby endorse the recommendations subm itted by the Committee for the c o n s id e ra tio n of C learing House Arrangements in Reserve City Banks fo r the handling of country item s, and that i t be the sense of th is A ssociation that a copy of these recommendations as subm itted be p rin ted and mailed to e v e ry bank p re s id e n t and to the p re sid e n t of every C learing House and members of th is A sso ciation in the f i f t y re s e rv e c i t i e s of the country, and th at there be embodied th erew ith a statem ent, not to exceed 600 words, by a r e p r e s e n ta tiv e of the four C learing Houses in Boston, Kansas C ity, N ash v ille, and A tlan ta, where country c le a rin g houses are now

84 81 e s ta b lis h e d, showing b r i e f l y the plan adopted and th e r e s u lts o b tain ed." Copies of the recommendation were sent to 50 reserve c i t i e s, but with p r a c t ic a l ly no r e s u l t s. Although many hankers in the re se rv e c i t i e s stro n g ly advocated the country c le a r in g plan, i t was not p o ssib le to persuade a l l members to agree to i ts adoption. Even had they done so, i t would have taken a long tim e to com pletely cover the 1 country with country c le a rin g house departm ents. From th is review of the slow, w asteful a n t i quated system of check c o l l e c t i o n in vogue in the United S tates at th e tim e the Federal Reserve Act was passed, we are in a p o s itio n to a p p re c ia te the d i f f i c u l t and com plicated problems confronting the F ederal Reserve a u th o r itie s in the e a r ly days of the new system. T echnical problems arose out of the u n w illin g n e ss of bankers to lose the p r o fits growing out of exchange ch a rg e s. It was also argued that n e ith e r the Federal Reserve Board or the Federal Reserve Banks had power to perm it items drawn 1 C.R.McKay, Deputy Governor, The Federal Reserve Bank of Ch i cag o. "Ch eck Gollec t l o nsystem o f the Fed er al Reserve Banks, an address d e liv e re d before O f f ic ia ls of Bankers A ssociation of th e C entral S tates at Chic ago, March 10, 1920.

85 82 on them to be charged a g a in s t t h e i r accounts hy the Federal Reserve Banks immediately upon r e c e ip t. While the Board was l i t t l e d istu rb ed by the o p p o sitio n a r is in g from s e l f - i n te r e s t, i t f e l t that i t must take cognizance of a l l legal objections and re q u e ste d the opinion of th e Attorney General in reg ard to i ts power in this c o n n e ctio n. The Board c le a r ly recognized that the c le a rin g question was e s s e n tia lly a re s e rv e problem, and as the F ederal Reserve Act gave the m mb er banks three years in which to make the f i n a l tra n sfe r of rese rv es to F ederal Reserve Banks, and as b alances with city correspondents counted as r e s e rv e in the meantime, it f e l t that the banks were p a r tly j u s t i f i e d in o b jectin g to the immediate in tro d u c tio n of a complete c l e a r ance at th e F ederal Reserve Banks. The Board a lso recognized th a t u n til a larg e number of S tate banks en tered the system, i t might he necessary for some member banks to use th e c o ll e c ti o n f a c i l i t i e s of th eir correspondents in reserv e c i t i e s. The d i f f i c u l t i e s of a compulsory plan and th e possible m erits of a v o lu n tary system were p resen ted to the Board by the Governors of the r e s p e c tiv e F ederal Reserve Banks who had thoroughly in v e s tig a te d the s i t u a t i o n, with the r e s u l t th a t the Board took under fav o rab le c o n sid e ra tio n the q u e stio n of a voluntary c le a r in g

86 83 1 s y s t em. Before the Board prom ulgated i t s voluntary plan, however, the Federal R e serve-banks of Kansas City and S t. Louis, with the approval of the Federal Reserve Board, in augurated a complete system of i n t r a - d i s t r i c t c le a r in g, embracing the handling of checks on a l l member banks in th e ir re sp e c tiv e d i s t r i c t s. Under th is plan, checks were received from member banks, drawn on any other member banks of the d i s t r i c t, without charge fo r c o lle c tio n, and immediate c r e d i t was g iv e n fo r such checks. Likewise, immediate charge was made to the account of each member bank covering a ll checks drawn on such bank. The Federal Reserve Board announced on March 4, 1915, that i t had determ ined to d ire c t the in tro d u c tio n of a voluntary r e c ip r o c a l p lan for immediate c le a ran c e at a ll Federal Reserve Banks where a c le a rin g plan was not already in o p eratio n. Federal Reserve Agents were i n stru c te d to take the m atter up with th eir boards of d ire c to r s at once. The Board did not attem pt to p re scrib e d e ta ils but l e f t that m atter under the c o n tro l of 2 the hank o f fic e r s. The plan was s im ila r to that in 1 Second Annual Report of The Federal Reserve B o ar d, 1915, p Federal Reserve B u lle tin, May,1915,p. 6

87 84 force in the Kansas City and St.Louis d i s t r i c t s, except that i t applied only to checks drawn on such hanks as expressed th e ir w illin g n e ss to have checks on them cle a red through th e ir Federal Reserve Bank. Each hank jo in in g the system agreed to provide the funds above the rese rv es r e - quired to meet c le a rin g demands. Banks were per mi t te d to withdraw from the c le a r in g system on t h i r t y d a y s n o tic e. This system became e ff e c tiv e in most d i s t r i c t s during Ju n e, In the Kansas City d i s t r i c t, the o rig in a l plan was continued for the b e n e fit of the 950 member banks, but the Federal Reserve Bank of St. Louis o ffered i t s members the option to withdraw from the c l e a r ing system and about 20% took advantage of the oppo rtu n ity, leav in g about 365 banks in the system. The banks did not take e n th u s i a s t i c a l ly to the plan, and the disappointm ent of the Board is expressed in its r epo r t : "Outside of these two di s. tr ic ts (Kansas City and St.Louis) about 1,100 member banks v o lu n ta r ily a f f i l i a t e d them selves with the c le a rin g system within a short tim e a f te r i t s in au g u ra tio n, and there was a subsequent net inward movement of about 50 a d d itio n a l

88 85 members, making approxim ately 1,150 banks which of their own f re e w ill have assented to the voluntary c le a r in g plan. This i s c onsi derably le s s than 25 per cent of the in s t i t u t i o n s e lig ib le f o r membership, and the p ro p o rtio n has been so small as to prove a severe disappointm ent to those who had c o n fid e n tly expected th a t the f o re s ig h t and enlig h ten ed s e l f - i n t e r e s t of the member banks would sp e ed ily accom plish the d e sire d r e s u l t...this slowness < la rg e ly due to the f a i l u r e of jobbers and m erchants to is e a p p re c iate the advantages of the clearan ce system and to enlarge its membership by i n s i s t i n g t h a t t h e i r own hanks jo in and cooperate in the p la n." On December 31,1915, the to ta l number of items c le a red through the F ederal Reserve Banks was 9-J- m illio n s, amounting to n e a rly 5%- b i l l i o n d o l l a r s. Serious d i f f i c u l t y re s u lte d from charging checks to the accounts of member banks immediately upon r e c e ip t by the Federal Reserve Banks. This method, which had seemed h ighly d e s ira b le in theory because i t made checks immediately available as rese rv e for member banks, in p r a c tic e caused large o v e rd ra fts in the accounts of hanks on which the checks were drawn, th e t o t a l o v e rd ra fts sometimes amounting to se v e ra l m illio n d o l la r s. It became in c re a sin g ly ev ident th at the

89 86 v o lu n ta ry system of clearan ce and c o lle c tio n s was not lik e ly to reach such a p la in of e ff ic ie n c y as to make i t a s u b s ta n tia l fa c to r in the clearance and c o lle c tio n system of the co u n try. In A p ril, 1916, the Board decided to e s ta b l is h a more uniform and comprehensive system of c l e a r ance and c o lle c tio n s, and on May 1,1916, issued a c ir c u la r e n ti t le d "Check C learing and C o lle c tio n ", announcing i t s country-w ide c le a r in g plan. The p ro v isio n s of this c irc u la r can b e st be s e t fo rth by quoting from the p ress statem ent given out by the Board and which also appeared in the May, 1916, Fe der al Reserve B u l l e t i n : (l) The Federal Reserve Banks w i l l accept ad; par a l l checks from member banks, whether drawn a g a in st member banks, nonmember banks, or p riv a te banks. An exc e p tio n is made at the o u tse t in the case of checks drawn a g a in st nonmemher hanks which cannot he c o ll e c te d at p a r. (2) All checks thus receiv ed from member hanks w ill be given immediate c r e d i t e n try, although amounts thus c re d ite d w ill n o t b e counted as re s e rv e s nor become a v a il - % able u n til c o lle c te d. (3) In order to enable member banks to know how

90 87 soon checks s e n t in for c o ll e c tio n w ill be a v a ila b le eith er as re s e rv e s or f o r the payment of checks drawn a g a in st them, time sc h ed u le s, giving the minimum time for c o lle c tio n, w ill be fu rn is h e d by each F ed eral Reserve Bank to i t s member banks. (4) The a c tu a l c o s t, w ith o u t p r o f i t, of the c le a r in g and. c o lle c tio n of checks w ill be p a id by the F ederal Reserve Banks and asse sse d a g a in s t the member banks in p ro p o rtio n to t h e i r sen d in g s. (5) The whole plan is based on g e n e ra lly accepted p rin c ip le s under which c le a rin g and c o lle c tio n plans have long been operated. A Federal Reserve Bank w ill not debit a member b an k s rese rv e account with items f o r warded to i t for c o lle c tio n u n t i l the rem ittan ce of the member bank in payment of such items sh all have had time to reach the Federal Reserve Bank, The time schedule was worked out on the basis of the mail tim e re q u ire d for items to r e a c h the paying bank, plus the mail time req u ired for the paying bank to rem it to the Federal Reserve Bank of i t s d i s t r i c t. To i l l u s t r a t e : Rules of the New York hank give immediate c re d it fo r checks on p r a c t i c a l l y a l l of the New York

91 88 banks. One day is required for checks on Boston, P h ila d e lp h ia, and other nearby p o in ts. Most points in the East req u ire two days, and the maximum time for p o in ts 1 in the extreme West is e ig h t days..the system was not compulsory for any bank,hut every bank must keep the re q u ire d rese rv e on d e p o s it w ith the Federal Reserve Bank of i t s d i s t r i c t and must pay w ith out c o ll e c ti o n charges checks drawn upon i t s e l f and presented a t i t s own counters fo r payment, and rem itta n ce s by the Federal Reserve Bank through the mail is regarded as such p re s e n ta tio n. In case member hanks are unable to send in o f fs e ttin g checks on other banks, they may rem it lav/ful money or Federal Reserve notes a t the expense of the Federal Reserve Banks. On December 15,1916, par c o lle c tio n s were being made on over 15, 000 banks. A c o lle c tio n charge averaging about l- - cents per item was assessed upon the member hanks in p ro p o rtio n to the extent 2 to which they used the c o ll e c ti o n f a c i l i t i e s. Immediarely upon taking over the Boston Country C learin g House, the Federal Reserve Bank of Boston was 1 2 E. H.P resto n.reserve Banks Sys tern of Par C learan ce. Jo urnal of P o l it i c a l Economy, V ol.28,1920, p Third Annual Report of The Federal Reserve B oard,1916, p. 10.

92 89 able to c o ll e c t checks drawn upon any bank, both member and nonmember, lo c a te d in New England. While the F ederal Reserve Bank took over the country c o ll e c tio n s, the c le a r ing house a s s o c ia tio n was perm itted to preserve i t s s ta tu s as a voluntary a s s o c ia tio n, m aintaining su p e rv isio n over its own members, conducting its daily c le a rin g s, and so f o r th. The equipment is fu rn ish e d by the rese rv e hank, and th e o ffic e rs and c le r k s are employees of th e reserv e bank. But when the cle a rin g balances are once e s ta b lis h e d, a ll settlem ents are made through the reserve hank. At the time of the in au g u ra tio n of the new system, Federal Reserve Banks were ex p ressly re q u ir e d hy section 16 to "receive on deposit at par from member banks or from Federal Reserve Banks checks and d r a f ts drawn upon any of i ts d e p o s ito rs. In th e case of re c e iv in g checks on nonmember banks fo r c o lle c tio n, the Board was advised by i t s counsel th a t th is c o n s ti tu t e d one of its im plied power s co n ferred by th a t p a rt of s e c tio n 4 which s ta t e s that F ederal Reserve Banks may exerc i s e " such in c id e n ta l powers as sh a ll he necessary to carry on the b u s in e s s of banking w ith in the lim ita tio n s p re sc rib e d by t h i s Act". The r ig h t to receive d e p o sits and act as a c le a rin g house 1 E. E. Agger, Organiz ed Banki n g. Henry Holt & Company, New Y ork,1918, p. 294.

93 90 im plies the rig h t to receive checks fo r c o lle c tio n and c r e d i t. But in order th a t there m ight he no doubt about th is im plied power, Congress on September 7,19 16, amended s e c tio n 15 by an act which, among other th in g s, p e r m itted,but did not re q u ire Federal Reserve Banks to r e ceive d e p o sits of a l l "checks and d r a f ts payable upon p r e s e n ta tio n ". This removed a l l doubt as to the r ig h t of a reserve hank to exercise i t s own d i s c r e tio n in accepting for c o ll e c ti o n checks drawn on nonmenber as 1 well as upon member banks. With a view to making th e c le a r in g and c o lle c tio n system more complete and c omprehens ive, Congress on June 21,1917, amended se c tio n 13 so as to allow F ederal Reserve Banks to receive a t par from any nonmember hank or tru s t company, f o r the purpose of exchange or c o lle c tio n, d e p o sits of "checks and d r a f ts payable upon p re s e n ta tio n, or m aturing notes and b i l l s " wheh. such nonmember banks and tr u s t companies agree to rem it a t par checks drawn upon them selves and to m ain tain a compensating balance with the Federal Reserve Bank, the amount to he determ ined by the Federal Reserve Bank. 1 Senate Document # 184,pp. 2,3.

94 91 This amendment was intended p rim a rily fo r those nonmember hanks th a t were i n e l i g i b l e for memb e rsh ip, ei ther because of a lack of s u f f i c i e n t c a p i t a l or o th erw ise. It was, second, to permit both member and nonmember banks- "To make reasonable charges, to he determ ined and re g u la te d by the Board,but in no case to exceed 10 cents per $100 or f r a c t i o n th ere o f, based on the t o ta l of checks and d r a f ts presented at any one time, fo r c o lle c tio n and payment of checks and d r a f ts and r e m ission therefor by exchange or o th erw ise." But i t was e x p re ssly s tip u la te d th a t- "No such charges sh a ll be made a g a in s t the re - serve b ariks. " This amendment, known as the Hardwick amendment, i s the l a s t change in the law r e l a t i n g to the c o lle c tio n of checks. The exchange-charging hanks, e x p e cia lly those in the South and West, fought this measure v ig o ro u sly, hut were unable to d e fe a t i t. All banks were req u ired to rem it at par. The Board req u ested an i n t e r p r e t a t i o n of the p ro v isio n s and i t

95 92 was construed by the Attorney General and re c e n tly h e ld by the United S tates C irc u it Court of Appeals, F ifth C irc u it, as p ro h ib itin g Federal Reserve Banks from pay- 1 i ng exchange charges to menber or nonmember banks. At the c lo s e of the year 1917, th e costs of c o lle c tio n, averaging about l/lo of 1% to 1 l/2 cents per item were a ssessed upon member banks in p ro p o rtio n to the e x ten t to which they used the c o l l e c t i o n f a c i l i t i e s. On July 1,1918, a ll serv ice charges were ab o 1 i shed, and the F ederal Reserve Banks a ls o assumed the c o sts of postage, telegram s, insurance and other expenses in connection w ith check c o lle c tio n, currency shipments, exchange tr a n s f e r s and d e p o sit tra n s a c tio n s between the member banks and the Federal Reserve Banks. P r a c tic a lly the same f a c i l i t i e s were extended to c l e a r ing member banks. A fu rth e r s e rv ic e to nonmember banks on the par l i s t is provided by in c lo sin g stamped envelopes with c o ll e c ti o n l e t t e r s for r e tu r n r e m itta n c e s. The arguments p resen ted by country banks for re fu sin g to rem it a t par were thereby e f f e c tiv e ly 1 Sixth Annual Report o f the Federal Reserve Bo ar d, 19 19, p. 64.

96 93 me t. The number of par banks grew slowly u n t i l at the end of 1918 out of 29,000 banks in the United S ta te s, 18,977 rem itted at par. On December 7,1918, at a conference of Federal Reserve Agents held in Washington, the conclusion was reached that an active campaign should he s ta r te d to extend the par l i s t and e s ta b lis h a country-w ide par system. It was rec o g n iz ed that th e number of hanks which re fu s e d to re m it at par was s u f f i c i e n t l y large to cause many banks to h e s i t a t e to make use of the F ederal Reserve c o ll e c ti o n system because of the number of items which could not be handled by the 1 Federal Reserve Banks. t^s r e s u l t of c o rr e s pondence and personal s o l i c i t a t i o n, n e a rly 10,000 more banks were added to the c le a rin g system by the end of It is c h ie f ly in connection with the ex ten sio n of th e p ar l i s t to include nonmember banks that th e p resen t co n troversey has a ris e n. If the Federal Reserve Banks in th e ir c a p a c itie s as c le a r in g houses are to render e f f i c i e n t serv ice to th e ir 1 F ifth Annual Report of The F ed eral Reserve B o ard, 19 18, p.7 5.

97 94 member banks, they must he able to c le a r checks drawn on a l l hanks, member hanks, nonmenber hanks ox p r iv a te hanks, whether or not they agree in advance to remit at p a r. The Board is thoroughly convinced of the advantages of a u n iv e rs a l system f o r the par c o lle c tio n of checks, and the F ederal Reserve Banks have had its u n q u a lifie d approval, not only in their e f f o r ts to p ersuade nonmenber banks to remit a t p a r, b u t a lso in th eir p ra c tic e of p re s e n tin g over th e counter checks drawn on nonmember banks which refu se to remit a t par. In the second co urse, the Federal Reserve Banks have employed s u ita b le agents for the purpose. These agents may he a menber bank lo c a te d in the same c ity as the drawee hank, a nonmember bank, an express company, or any s u ita b le person or c o rp o ra tio n able to make c o lle c tio n over the counter of the drawee 1 b ank. O pposition on the. p a rt of the hanks against par c o lle c tio n has taken various c o n crete forms. For in stan ce, some hanks, in clu d in g some member hanks,have r e s o r te d to the device of stamping n o ta tio n s on th e ir 1 Sixth Annual Report of the Federal Reserve B o ard,1919, p. 64.

98 95 "blank checks to the e f f e c t th a t th e check is not v a lid if presented through th e Federal Reserve Banks. Employees and agents of the Federal Reserve Banks in making p re s e n ta tio n of checks have sometimes been offered s ilv e r d o lla rs in payment, and in some cases have been refused payment, the drawee bank re ly in g on the i n a b i l i t y of the agent to f in d a notary public w illin g to make p r o t e s t. The Board rep o rts th a t one agent announced a few days afte r h is appointment th at he would no longer a c t as agent through fe a r of in ju ry to h is b u s in e s s. 1 The s t i f f e s t f i g h t a g a in st par c o ll e c ti o n appears to have taken place in P ierce, Nebraska. It was a lleg ed th a t the Federal Reserve Bank of Kansas City had in te n tio n a lly h e ld up items for th e purpose of p re senting them in bulk and demanding payment in cash so as 2 to embarrass the drawee bank and enforce par rem itta n ce. The a lle g a tio n s became so serious in re gard to the methods used b y the employees of the Omaha branch of th e Federal Reserve Bank of Kansas City that 1 Senate Document # 184, p p.4,5. 2 H.H.P re s to n,o p.c it.,p.5 7 4

99 96 a special meeting of S tate hankers of Nebraska was held at Omaha on January 14,19 20, to consider the m atter of par c o lle c tio n s. The p r a c tic e s of the Federal Reserve Banks were severely c r i t i c i z e d and re s o lu tio n s were passed asking re p re s e n ta tiv e s in Congress to demand an in v e s tig a tio n of the methods employed by the Federal Reserve Board. Senator N orris of Nebraska presented the m atter to the Senate on January 19,1920, and a re s o lu tio n was passed "requesting the Federal Reserve Board to inform th e Senate whether the Board or any Federal Reserve Bank, under i n s t r tc tions or with the consent or knowledge of said Board,had re s o r te d to any method of coercion to c ompel State banks to jo in the Federal Reserve System, or by th re a ts or other coercive means has attem pted to require such S ta te hanks to submit to any ru les or reg u la tio n s made by the Federal Reserve Board or any Federal Reserve Bank". In answer to the Senate r eso lu ti on, Go ver nor W. F.G.Harding subm itted a l e t t e r to the P re sid e n t of the Senate, containing a b r ie f review of th e development of the check c le a rin g and c o lle c tio n system now

100 97 in force in th e various Federal Reserve d i s t r i c t s, to gether with a summary of the p ro v isio n s of th e law and amendments there o under which the system has heen organized and o p erated. The l e t t e r also contained a complete statem ent of the p o s itio n of the Board. The rep o rt as a whole is an excellent defense of the system. The l e t t e r was p rin ted as Senate Document 1 # 184. The opposition to par c o lle c tio n s has also been very vigorous in the so u th e a ste rn S ta te s. The le g is la tu r e s of Mississippi, L ouisiana, Georgia and Alabama have passed laws re q u irin g all hanks w ith in the State, in c lu d in g R ational banks, member banks and nonmember banks to ma'm charges " for c o lle c tin g and r e m itting " cash items which " are presented to the payer bank for payment through or by any bank, banker, t r u s t company, Federal Reserve Bank, post o ffic e, express company, or any c o lle c tio n agency, or by any other agency w hatsoever". The law of the S tate of Missis s ip p i which became e ffe c tiv e March 8, 1920, is 1 H. H.Preston, op. c it.,p

101 98 mandatory, but those of the other four S tates simply p u r port to authorize a l l banks w ith in the State to make c o lle c tio n ch arg es. The laws of these four States p ro h ib it o ffic e rs from p ro te s tin g any check when nonpayment is s o le ly on account of re fu s a l to pay th e exchange. The le g is la tu r e of South Dakota has also passed sim ila r law s. The Federal Reserve Board has taken the p o s itio n th a t these laws are u n c o n s titu tio n a l inasmuch as they purport to req u ire National hanks and S tate hanks which have joined the Federal Reserve system to make exchange charges ag ain st Federal Reserve 1 Banks. The lawmakers of M ississip p i ev id en tly had some serious doubts as to the c o n s t i t u t i o n a l i t y of the law for they provided that in case th e Courts held that National hanks are not re q u ire d to charge exchange, " th is Act s h a ll s t i l l remain in f u l l force and e f f e c t as to a l l other hanks in the S ta te ". Pending Supreme Court, the d e c is io n of the United S ta te s the Federal Reserve Board has refused 1 Sixth Annual Report of the Federal Reserve B o ard,1919, p p.63,64,

102 99 to handle checks on M ississip p i hanks which were form erly on the par l i s t. Support has been secured for the cause of the State hanks from th e S tate Bank Section of th e American Bankers A ssociation, which at i t s convention in St.Louis? September 30-0ctober 2,1919, condemned the methods used 1 in order to secure par c o lle c tio n. Although th e q u estio n of method is s t i l l under d isc u ssio n, it has la te ly become subo rdinate to the p rin c ip al of par c o lle c tio n as such. A National A sso ciatio n of bankers was formed in New Orleans on February 6, 1920, c a lle d th e N ational and State Bankers P ro te c tiv e A ssociation. A number of National banks were re p re se n te d at th e m eeting. A r e s o lu tio n was adopted to req u est Congress to amend the Federal Reserve Act to p ro h ib it the handling by Federal Reserve Banks, eith er for d e p o s it or c o lle c tio n, of any checks drawn on nonmember hanks.u n le s s such banks are c l e a r ing members. On February 28,19 20, a r e s o lu tio n introduced by R epresentative King of I l l i n o i s, in 1 Journal of th e American Bankers A ssociation X ll, p No.9,

103 100 compliance with the demands of the N ational and State Bankers P ro tectiv e A ssociation, was re fe rre d to the Committee on R u le s. As yet, no action has been taken th ere on. 1 -While the opposition ap p a re n tly comes from a com paratively small number of banks, seeking to p ro te c t th e ir own p r o f i ts, i t is strong and w ell organized. There is no doubt that w ithout p o litic a l in te rfe re n c e the opp o sitio n would he met and overcome because of the sound p rin c ip le s u nderlying the check c o lle c tio n system. However, support for the system i s no t lack in g among the b u sin e ss in te r e s t s of the co u n try. The appeal now b e fo re Congress is to pass an amendment to the Federal Reserve Act, re c o g n iz in g the rig h t of banks to charge exchange when paying checks drawn by t h e i r own depositors and to repeal th a t p a rt o f th e Hardwick amendment which s p e c ifie s t h a t no such charges s h a ll be made a g a in st the Federal Reserve Banks, and i t i s for Congress to decide whether the par c o lle c tio n system sh a ll be ab o lish ed or whether i t sh a ll become u n iv e rsa l. 1 H. H.Preston, op. c it.,p

104 101 When we consider th e m erits of the system, there can be l i t t l e doubt as to the outcome. I t was the idea of service and the d e sire to develop the fu n c tio n s of the Federal Reserve Banks to th e ir utmost useful lness that led to the e &t ah lishmen t and development of th e check c o lle c tio n system. It has served as a so lu tio n of the exchange problem, as a remedy for the c irc u ito u s ro u tin g of checks which had r e s u l te d in the pyram iding of re serves, and as a means of c o rre c tin g the g e n e ra lly uns a tis f a c to r y conditions which had p rev ailed for many jrears in th is branch of banking. The "best evidence of the value to the banks of th e country of the Federal Reserve C o llec tio n System is the volume of b u sin e ss handled through i t. A clear idea of the growth of the system since i t s establishm ent may he obtained by a glance at the development of the Gold S ettlem ent Fund. On January 1,1921, checks on a l l hut 1755 of the 30,523 hanks in the United S tates c o u ld he c o lle c te d a t par through the Federal Reserve Banks. These 1755 hanks are all lo cated in the follow ing seven S tates: Tennessee, South C arolina, L ouisiana, M iss

105 102 i s s ip p i, Alabama, Georgia and F lo rid a. Consequently, every bank in nine of the twelve Federal Reserve d i s t r i c t s is on the par l i s t s, the three d i s t r i c t s in which there aee now any nonpar hanks being those of Richmond, 1 A tlanta and S t.l ouis. There is every rea so n to b eliev e th a t the Federal Reserve check c o lle c tio n system w ill be able to stand upon its own m erits, and th at Congress w ill uphold the d e c isio n of the Uni ted S tates C ircu it Court of Appeals. The system, which is the r e s u lt of years of study based upon experience, and to which more tim e and thought have been devoted than to a l l the other functions of the Federal Reserve Banks, seems to stand in need of e x p la n a tio n rather than defense. I t is not unreasonable to hope that as nonmemher banks learn more of i t s o p e ra tio n s, they wall perceive i ts b e n e fits, and that the v ast and as yet undeveloped p o s s i b i l i t i e s of the system may be r e a liz e d fo r the bene f i t of the member banks and through them f o r th a t of the nonmember banks and the p u b lic. 1 Sixth Annual Report of the Feder alreserve Board, 1919, p. 63.

106 103 Gold Settlem ent Fund It may have suggested i t s e l f to the mind of the reader th at th e i ntr a-di s tr i et plan would probably not work w ell u n less some system- were devised f o r the clearance and c o lle c tio n of checks between d i s t r i c t s. In the Federal Reserve Act, i t was sp e c ifie d th at the Federal Reserve Board misfit act as a c le a rin g house for the Federal Reserve Banks, or might d esignate one of the Federal Reserve Banks thus to act. In pursuance of th is a u th o rity, th e Board at an early date took up the q u e stio n of e s ta b lis h in g a c e n tra l clearin g fund in the hands of the Board i t s e l f. A special committee of in v e s tig a to rs appointed by the o rg an izatio n committee framed the plans fo r such a fund, and th is p lan as se t f o r th In th e ir rep o rt was subsequently adopted as the e s s e n t ia l b a sis of the B oard s plan of c le a ra n c e. A committee composed of the governors of reserve banks a s s is te d in arranging the d e ta ils of the plan, hut no im portant change was made 1 in the general idea. 1 H.Parker W illis, The Federal R e serve. Poub 1 edav. Page & Company, New Y ork,1915, p. 233.

107 104 On May 8,1915, the Board issued a c ir c u la r and re g u la tio n providing f o r the e sta b lish m en t of the Gold Settlem ent Fund. By May 24th, each hank was req u ired to forward to the United States Treasury or to a subtreasu ry $1,000,000 in gold or gold c e r t i f i c a t e s, plus its t o t a l n et indebtedness to a l l other Federal Reserve Bank. The Treasury Department agreed to cooperate with the Federal Reserve Board in operating th e fund and, under the arrangements thus concluded, the several a s s is ta n t tre a s u re rs forwarded tele g ra p h ic advice of deposits to the Treasurer o f the United S tates at Washington, who, in turn, issued gold order c e r t i f i c a t e s of th e $10,000 denomination, payable to the Federal Reserve Board, and these c e r t i f i c a t e s in the hands of the 1 Board made up the Gold Settlem ent Fund. Under the Act as amended, a d d itio n a l s a fe guards have been thrown around the. fund by p erm ittin g the Treasurer of the United States to carry a sp ecial account upon his books to the c re d it of the Federal Reserve Board, as agent for th e re sp e c tiv e Federal Reserve Banks and Federal Reserve Agents. Payments 1 Second Annual Report of the Federal Reserve Bo ard, 1915,p.79

108 105 are now made by checks signed by o f f i c i a l s of the Board. The p rac tic e of issuing gold order c e r t i f i c a t e s in denominations of $10,000, re p re sen tin g gold deposited w ith the Treasurer by Federal Reserve Banks has been discon- 1 t i nu e d. On May 20,1915, a prelim inary se ttle m e n t or c l e a r ing v/as made to a s c e r ta in the amount which & ach bank should deposit. The amount required, approximat ely $18,000,000, was d ep osited the fo llo w in g week. In providing for c le a rin g s between the Federal Reserve Banks, the Federal Reserve Board agreed that the cost of operation of the Gold Settlem ent Fund and such shipments of currency as were necessary should be p ro portioned by semiannual accounting among th e twelve 2 Federal Reserve Banks. On Thursday, May 27,1915, the f i r s t reg u lar weekly settlem ent was made. On th e preceding Wednesday evening each Federal Reserve Bank forwarded to the Federal Reserve Board advice of th e amount due the 1 2 Fourth Annual Report of the Federal Reserve B o ar d, 1917,p. 24. The Federal Reserve Bui 1 eti ng, De cemb er, 19 15, p,401

109 106 several other Federal Reserve Banks. When the settlem ent was completed, te le g ra p h ic advice of the several c r e d its, as w ell as the n e t d e h it or c r e d it b ah - anee was sent to the hanks. Upon re c e ip t of th is advice, each reserve hank charged th e accounts of other reserve banks with th e amounts i t had re p o rte d due to them and c re d ite d th e ir accounts with the amounts which they had rep o rted due to i t, and the d iffe re n c e between them eq ualled the net d e b it or c re d it to the Gold 1 S ettlem en t Fund, ad advised in the telegram. During the year 1916, the scope of the Gold Settlem ent Fund was enlarged by providing a s im ila r fund fo rf ed eral Reserve Agents. Through the opera tio n of these two funds, tra n sfe rs may now be made between a ll of the Federal Reserce Banks, between any Federal Reserve Bank and any Federal Reserve Agent and between any Federal Reserve Bank or any Federal Reserve Agent and the tre a su ry or sub tre a s u ry of the 1 Second Annual Report of the Federal ReserveBoard, 1915, p.79.

110 107 United S tates. 1 During the year 1917, there was a marked increase in the volume of b u s in e s s tra n s a c te d through the fund, caused p a rtly hy a larg e r use of the c o lle c tio n and c l e a r ing f a c i l i t i e s of th e system, p a r t i c u l a r l y in the m atter of wire tra n s fe r s from one Federal Reserve Bank to another and p a rtly hy the f i s c a l operations of the Treasury in connection with the tra n s fe r of funds r e ceived from the sale of -C ertificates of Indebtedness and Liberty Bonds. Consequently, th e Board deemed i t expedient to i n s t a l l a system of d a ily settlem en ts b e tween the Federal Reserve Banks in place of th e weekly c le a rin g s which had been in o p e ra tio n since the establishm ent of the fund in On July 1,1918, the f i r s t c le a rin g under the d a ily settlem ent plan was made. In order to fu rth er f a c i l i t a t e the d a ily s e t t l e ments and to render the c o l l e c t i o n and c le a rin g service more e ffe c tiv e,a leased tele g ra p h wire system connecting a l l of the Federal Reserve Banks and branches 1 Second Annual Report of the Federal Reserve B o ard,1915, p. 79.

111 108 with the office of the Federal Reserve Board was in s t a l l e d July 1,1918. Under th is plan, at 10:00 A. M., E astern time, each hank w ired the s e t t l i n g agent of the Federal Reserve Banks, who has charge of the books of the fund-, the amount which i t had c re d ite d to other Federal Reserve Banks the previous day, and the t r a n s fer of funds from the c re d it of one bank to that of another was made by means of book e n tr ie s : During the year 19 19, th e f a c i l i t i e s of the Gold Settlem ent Fund were extended to a l l branches of the Federal Reserve Banks which carry accounts of member banks. A dditional f a c i l i t i e s were provided in the office of the Federal Reserve Board so that the settlem ents are now e ffe c te d more quickly for the twelve Federal Reserve Banks and twenty-two branches than when the settlem en ts were made between the twelve Federal 2 Reserve Banks. On March 1,1920, an arrangement was made 1 F ifth Annual Report of the Federal Reserve B o ar d, 19 18, pp. 32, Sixth Annu&l Report of th e Federal Reserve B o ar d, 19 19, p. 44

112 109 e ffe c tiv e whereby each Federal Reserve Bank and d ire c t s e ttlin g branch began tele g ra p h in g th e Board the gross amount c o lle c te d f o r the account of each other Federal Reserve Bank and dir ect s e tt li n g branch before the f in a l closing of th e hooks f o r the day. Under th is plan, settlem en t is now e ffe c te d by the Board the sarre day and telegraphic advices are sent to each hank and d ire c t s e t t l i n g branch to reach them b e fo re the opening fo r b u sin ess the fo llo w in g morning, when the necessary e n tr ie s are made and th e ir hooks f in a lly closed for the preceding day. Under the o rig in a l plan, settlem ents were made each morning of the c r e d i ts telegraphed th e Board th e preceding day. This plan has elim inated the i nt er - Feder al Reserve Bank " flo a t", which had previously been c a rrie d by some Federal Reserve Banks f o r oilier Federal Reserve Banks because of payments received by the correspondent F ed eral Reserve Bank one day in advance of payment through 1 Settlem ent Fund. the Gold 1 Seventh Annual Report 19 20,p.70. of th e Federal Reserve Board,

113 110 A comparison of the y early combined c le a rin g s and tra n s fe rs through the fund w ill give a c le a r idea of the growth in the volume of tra n s a c tio n s $1,052,649, ,757,836, ,962,946, ,242,592, ,984,252, ,625,805,000 Through the o p eration of the Gold Settlem ent Fund, it is possible to c re a te, w ithout c o s t, any amount of exchange that may he needed at any p o in t where a Federal Reserve Bank or bran ch is lo ca te d, as well as to obtain w ithout cost immediate s e ttle m e n t fo r any amount of exchange th a t may accum ulate. The most noteworthy f e a tu re in the o p e ra tio n of the fund is th e c o rre c tin g of one of the serious defec ts of the old c o lle c tio n system which we have noted, namely, the n e c essity fo r heavy shipments of currency from one s e c tio n of the country to another to

114 111 meet the seasonal demands fo r money. T ransfers are fre q u e n tly made from one d i s t r i c t to another through the Gold Settlem ent Fund by simple bookkeeping e n tr ie s. The June, ,Federal Reserve B u lle tin s ta t e s that heavy gold imports u ltim a te ly d estin ed fo r the in d u s tr ia l and a g r ic u ltu r a l c e n te rs, from which had gone the exports of commodities, were t r a n s f e r r e d from New York through the Gold Settlem ent Fund. The Federal Reserve Bank of New York d e p o site d gold w ith the sub- treasu ry for c re d it in the Gold S ettlem ent Fund, and tra n s fe r re d the c r e d it thus acquired to e th e r Federal Reserve Banks. The tra n s fe rrin g of these enormous amounts of gold c r e d its almost in sta n ta n e o u sly by means of the leased telegraph wire system, without the physical movement of a d o lla r, has been of in c a lc u la b le value to the Governmait, the banks and the pu b lic.

115 112 REGULATION C, SERIES OF 1920 (Superseding R egulation C of 1917) ACCEPTANCE BY MEMBER BANKS OF DRAFTS AND BILLS OF EXCHANGE A. ACCEPTANCE OF DRAFTS OR BILLS OF EXCHANGE DRAWN AGAINST DOMESTIC OR FOREIGN SHIPMENTS OF GOODS OR SECURED BY WAREHOUSE RECEIPTS CO''TEEING READILY MARKETABLE STAPLES. 1. S ta tu to ry p ro v isio n s. Under the pro v isio n s of the f i f t h paragraph of section 13 of the Federal Reserve Act, as amended by the acts of September 7,1916, and June 21,19 17, any member bank may accept d r a f ts or b i l l s of exchange drawn upon I t, having not more than six months' s ig h t to run, exclusive of days of grace, which grow out of tra n sa ctio n s involving the imp o rta tio n or e x p o rta tio n of goods; or which grow out of tra n sa ctio n s in v olving the domestic shipment of goods, provided shipping documents conveying or securing t i t l e are attach ed at the tim e of acceptance; or which are secured at the time of acceptance by a warehouse r e c e i p t or other such document conveying or securing t i t l e covering re a d ily marketable s ta p le s. This paragraph lim its the amount which any hank shall accept f o r any one person, company, firm or c o rp o ratio n, whether in a fo re ig n or domestic tra n s a c tio n to an amount not exceeding at any time, in the aggregate, more than 10 per centum of i t s paid-up amd unimpaired c a p ita l stock and s u rp lu s. This limi t, however, does not apply in any case where the accepting hank r e mains secured e ith e r by attached documents or by some other a c tu a l se cu rity growing out of the same tra n sa c tio n as the acceptance. A tru st r e c e ip t which perm its the customer to have access to or c o n tro l over the goods w ill n o t be considered by Federal Reserve Banks to be "ac tu a l s e c u r ity " w ithin the meaning of s e c tio n 13. A b i l l of lading d ra ft, however, Is "actual se cu rity ", even a fte r the documents have been rele a se d, provided th at the d ra ft is accepted by the drawee upon or b e fo re the surrender o f the documents. The law; also provides that any hank may accept such b i l l s up t o an amount not exceeding at any time, in the aggregate, more than hne-hal f of i t s paid-up and unimpaired c a p ita l stock and surplus, or, with the approval of the Federal Reserve Board, up to an amount not ex-

116 113 cee&ing a t any time, in the aggregate, more than 100 per centum of its paid-up and unimpaired c a p i t a l stock and surplus. In no event, however, sh a ll the aggregate amount of acceptances growing out of domestic tra n sa ctio n s exceed 50 per centum of such c a p ita l stock and s u rp lu s. 11.R egula ti o ns 1. Under the provisions of the law r e f e r r e d to above the Federal Reserve Board has determ ined t h a t any member hank, having an unim paired surplus equal to at lea st 20 per centum of its paid-up c a p it a l, which desires to accept d ra fts or h i l l s of exchange drawn for the purposes described above, up to an amount not exceeding at any time, in th e aggregate 100 per centum of its paid-up and unimpaired capital stock and surplus, may file an a p p lic a tio n for th a t purpose with the Federal Reserve Board. Such a p p lic a tio n must be forwarded through the Federal Reserve Bank of the d i s t r i c t in which the applying hank i s lo c a te d. 2. The Federal Reserve Bank s h a ll re p o rt to the Federal Reserve Board upon the standing of the applying h a n k,s ta t ing whether the business and banking c o n d itio n s p re v a ilin g in its d i s t r i c t w arrant the g ran tin g of such a p p lic a tio n s. 3. The approval of any such a p p lic a tio n may he r e scinded upon 9 0 days' n o tice to tlx e hank a ffe c te d. B. ACCEPTANCE OF DRAFTS OR BILLS OF EXCHANGE DRAWN FOR THE PURPOSE OF CREATING DOLLAR EXCHANGE. 1 S ta tu to ry p ro v isio n s. Section 13 of the Federal Reserve Act also provides that any member bank may accept d r a f ts or b i l l s of exchange drawn upon i t having not more than three months' sig h t to run, exclusive of days of grace, drawn, under re g u la tio n s to be p re s c rib e d by the Federal Reserve Board, by banks or bankers in fo re ig n c o u n trie s or dependenaies or in su la r possessions of the United S ta te s f o r the purpose of fu rn is h in g d o lla r exchange as re q u ire d by the usages of trade in the re s p e c tiv e c o u n trie s, dependencies, or in su la r p o ssessio n s. No member bank s h a ll accept such d r a f ts or b i l l s of exchange fo r any one bank to an amount exceeding in the aggregate 10 per centum of the paid-upi and unimpaired

117 114 c a p i t a l and. s u rp lu s. This 50 per cen t lim it is se p a ra te and d i s t i n c t from and not included in the lim its placed upon the acceptance of d r a f t s and b i l l s of exchange as described under sectio n A of t h i s re g u la tio n. ll.r e g u la tio n s. A'ny me iiher bank d e s ir in g to accept d r a f ts drawn by banks or bankers in fo re ig n c o u n trie s or dependencies or insular possessions of the United S tates for the purpose of furnishing d o lla r exchange s h a ll f i r s t make an a p p lic a tio n to the Federal Reserve Board s e ttin g fo rth the usages of trade in the resp e c tiv e c o u n trie s, dependencies, or in sular possessions in which such banks or bankers are lo c ated. If th e Federal Reserve Board should determ ine that the usages of trade in such c o u n trie s, dependencies, or possessions req u ire the g ra n tin g of the acceptance f a c i l i t i e s ap p lied fo r, i t w ill n o tify the applying hank of i t s approval and w ill also p u b lish in the Federal Reserve B u lle tin th e name or names of those c ountr i e s, dependenc i es or possessions in which banks or bankers are authorized to draw on msnber banks whose a p p lic a tio n s have been approved for the purpose of fu rn ish in g d o lla r exchange. The Federal Reserve Board reserves the r ig h t to modify or on 90 d a y s n otice to revoke i t s approval e ith e r as to any p a rtic u la r member bank or as to any foreign country or dependency or in su lar p o ssessio n of th e United S tates in which i t has authorized hanks or bankers to draw on member banks f o r th e purpose of fu rn is h in g d o lla r exchange.

118 115 REGULATION D,SERIES OF (Superseding Regulation D of 1917 ) TIME DEPOSITS AND SAVINGS ACCOUNTS Section 19 of the Federal Reserve Act provides, in part,as follows: Demand' deposits, within the meaning of th is act, shall comprise a ll deposits payable within 30 days,and time deposits shall comprise all deposits payable after 30 days, and a ll savings accounts and c e rtific a te s of deposit which are subject to not less than 30 days notice before payment, and a l l postal savings deposits. Time deposits, open accounts. The term "time deposits, open accounts" shall be held to include all accounts, not evidenced by c e r t i f icates of deposit or savings pass books, in respect to which a written contract is entered into with the d e positor at the time the deposit is made that neither the whole ror any part of such deposit may be wi th- drawn by check or otherwise, except on a given date or on w ritten notice which must be given by the depositor a c ertain specified number of days in advance, in no case less than 30 d ays. Savings accounts. The term "savings accounts" shall be held to in clude those accounts of the bank in respect to which, by its printed regulations, accepted by the depositor at the time the account is opened- (a) The pass book, c e r tific a te, or other sim ilar form of receipt must be presented to the hank whenever a deposit or withdrawal is made, and (b) The deposi tor may at any time he required by the bank to give notice of an intended withdrawal not less than 30 days before a withdrawal is made. Time c e rtific a te s of deposit. A "time c e rtific a te of deposit" is defined as

119 116 an instrum ent evidencing the d e p o s it with a bank, e ith e r w ith or without i n t e r e s t, of a c e r t a in sum s p e c ifie d on the face of the c e r t i f i c a t e payable in whole or in p a r t to the d e p o sito r or on h i s order- (a) On a c e rta in date, sp e c ifie d on the c e r t i f i c a t e, not le ss than 30- days a fte r the date of the d e p o sit, or (b ) After the lapse of a c e r ta in s p e c ifie d time subsequent to the date of the c e r t i f i c a t e, in no case less than 30 days, or (c) Upon w ritten n o tic e, which the b arik may at i t s option require to be given a c e r ta in sp e c ifie d number of days, not less th a n 30 days, before the date of r e pay rn ent, and (d) In a l l cases only upon p r e s e n ta tio n of the c e r t i f i c a t e at each withdrawal for proper indorsement or surrender. REGULATION F, SERIES OF (Superseding R egulation F of 1919) TRUST POWERS OF NATIONAL BANKS 1 S ta tu to ry p ro v is io n s. The Federal Reserve Act as amended hy the act of September 26,1918, provides in part: Sec. 11. The Federal Reserve Board sh a ll be a u th o r ized and empowered: (k) To grant by special permit to n a tio n a l banks applying therefor,whennot in c o n tra v e n tio n of State or local law, the r ig h t to act as trus te e, execu tor, admini s t r a t o r, r e g is tr a * of stocks and bonds, guardian of e s ta te s, assignee, r e c e iv e r, committee of e s ta te s of lu n a tic s, or in any other f id u c ia r y cap ac ity in which State banks, tr u s t companies or o th. er oarpor a tio n s which

120 117 come into com petition with n a tio n a l hanks are p erm itted to act under the laws of the S ta te in which the national hank is lo cated. Whenever the laws of such State authorize or perm it the ex ercise of any or a l l of the foregoing powers hy State hanks, tru s t companies, or other c o rp o ra tio n s which compete with n ational "banks, the g ran tin g to and the exe rc ise of such powers hy national hanks shall not he deemed to he in co n tra v e n tio n of State or local law w ithin the me anting of this a c t. N ational hanks e x e rc is in g any or a l l of the powers enumerated in t h i s su b se c tio n sh a ll segregate a l l a s se ts held in any fid u c ia ry capacity from the general assets of the hank and sh a ll keep a sep arate s e t of hooks and rec o rd s showing in proper d e ta il a ll tra n sa ctio n s engaged in under au th o rity of t h i s subsection. Shch books and records s h a ll he open to in sp e c tio n hy the S tate a u th o r itie s to the same extent as the books and records of corporations organized under S tate law which e x e rc ise fid u c ia ry powers, hut nothing in t h is act s h a ll he construed as au th o r izing the S tate a u th o r itie s to examine th e ho ok s, r ec ords and a s s e ts of the n a tio n a l hank which are n o t held in tr u s t under a u th o rity of t h i s su b se c tio n. No N ational hank s h a ll receive in i ts tru s t d e p a rtment deposits of c u rre n t funds su b ject to check or the deposit of checks, d ra fts, b i ll s of exchange, or other items fo r c o lle c tio n or exchange purposes. Funds dep o site d or held in tru s t hy the bank aw aiting investment sh all be c a rr ie d in a se p ara te account and s h a ll not he used by the bank in the conduct of i ts b u sin ess unless it sh a ll f i r s t set aside in the tru s t department United S tates bonds or other s e c u r itie s approved by the Federal Reserve Board. In the event of the f a ilu r e of such bank, the owners of the funds held in t r u s t for investm ent s h a ll have a lien on the bonds or other s e c u r itie s so set app.rt in a d d itio n to t h e i r claim a g a in s t the e s ta te of th e bank. Whenever the laws of a State r e q u ir e co rp o ratio n s acting in a fid u c ia ry c a p a c ity to deposit s e c u r i t i e s with the State a u th o r itie s fo r the p ro te c tio n of p riv a te or court, tr u s ts, n atio n al hanks so a c tin g s h a ll be required to make sim ila r deposits and s e c u r itie s so deposited s h a ll he held for the p ro te c tio n of p riv a te or court tr u s ts as provided by the State law. N ational banks in such cases sh a ll not be req u ired to execute the bond u su a lly re q u ire d of in d iv id u a ls if State c o rp o ra tio n s under s i, i l a r circum stances are ex-

121 118 empt from th is requirem ent. N ational hanks sh a ll have power to execute such bond whgn so ren u ired by the laws of the S tate. In any case in which the laws of a State req u ire that a co rp o ra tio n acting as tru s te e, executor, a d m in istra to r or in any capacity sp e c ifie d in t h i s s e c tio n, s h a ll take an oath or make an a f f i d a v i t, th e pr e s id e n t, vie e pre s id e n t, c ah s i er or tru s t o ffic e r may take the necessary oath or execute the necessary a f f id a v it. I t sh a ll be unlawful for any n ational banking a s so c ia tio n to lend any o f f ic e r, d i r e c to r, or employee any funds herd in t r u s t under the powers con ferred by th is sectio n. Any o ffic e r, d ire c to r, or employee making such loan, or to whom such loan is made, may be fined not more than $5,000, or imprisoned not more than fiv e years, or may be both fin e d and imprisoned, in the d is c r e ti o n of the c o u r t. In passing upon a p p lic a tio n s for perm ission to e x e rc ise the powers enumerated in t h i s sub sec ti on, the Federal Reserve Board may take into c o n s id e ra tio n the amount of c a p ita l and surplus of the applying bank whether or not such c a p ita l and surplus is s u ff ic ie n t under the circum stances of the case, the needs of the community to be served, any and other f a c ts and circum stances that seem to i t pr op&r and may grant or refu se the a p p lic a tio n a c c o rd in g ly : Frovided, That no permit s h a ll be issued to any national banking a s s o c ia tio n having a c a p ita l and surplus less than the c a p ita l and surplus req u ired by State law of S tate banks, t r u s t companies and co rp o ratio n s e x e rc is in g such powersi 11. -Applications A n a tio n a l bank d e sirin g to exercise any or a ll of the powers authorized by sectio n ll( k ) of th e Federal Reserve Act, as amended by the act of September 26,1918, sh a ll make a p p lic a tio n to the Federal Reserve Board, on a form approved by s a id Board, for a s p e c ia l permit au th o rizin g it to e x ercise such powers. In the case of an o rig in a l applic ati on-that is, where the applying bank hasnever been gran ted the r ig h t to exercise any of the powers authorized by se ctio n ll(lp)-the a p p lic a tio n should be made on F.R.B.Form 61. In the case of a supplemental appl i cati o n-that is, where the applying bank has already been granted the rig h t to e x e rc ise one or more of the powers authorized by s e c tio n l l ( k ) - t h e a p p lic a tio n should be made on F.R.B.Form 61-b. Both forms are made a part of til i s re g u la tio n and may be obtained from the Federal

122 119 Reserve Board or any Federal Reserve Bank. I I I. Separate depsr tment s Every n atio n al bank perm itted to act under t h i s se c tio n s h a ll e s ta b lis h a se p a ra te tr u s t de par tm ent, an d s h a ll place such department under the management of an o fficer or o f fic e r s, whose d u tie s sh a ll be p re s c rib e d by the board of d ire c to ry of the bank. IV. Custody of tru s t s e c u r i t i e s and investm ents. The s e c u r itie s and investm ents held in each t r u s t sh a ll be kept separate and d i s t i n c t from th e s e c u ritie s owned hy the hank and sep arate and d i s t i n c t one from another. T rust s e c u ritie s and investm ents s h a ll be placed in the joint custody of two or more o ffic e rs or other employees designated hy the board of d ir e c to r s of the bank and a l l auch o ffic e rs and employees sh a ll be bonded. V.Deposit of funds aw aiting investment or d is t r ib u t io n. Funds receiv ed or held in the t r u s t department of a national bank aw aiting investment or d i s t r ib u t io n may be d e po sited in the commercial department of the bank to the c re d it of the tru s t departm ent, provided that the bank f i r s t d e liv e rs to the t r u s t departm ent, as c o l l a t e r a l s e c u rity, United S tates bonds or other r e a d ily m arketable s e c u r itie s owned hy the bank, which c o l l a t e r a l security shall a t a l l times be equal in market value to the amount of the funds so de po si ted. V I. Inve stm an t of t r u s t fu n d s. (a) P riv a te t r us ts «.-Funds held in tru s t must be invested in s t r i c t accordance with the terms of the w ill, deed, or other instrum ent c re a tin g the tr u s t. Wbare the instrum ent creating the t r u s t contains provisions a u th o r izing the bank, its o f f ic e r s, or its d ire c to r s to e x ercise their d i s c r e tio n in the matter of investm ents, funds held in t r u s t may be invested only in those c la s s e s of s e c u r itie s which are approved by the d i r e c to r s of the bank. lie re the instrum ent c re a tin g the t r u s t does not specify the c h a ra c te r or c la s s of investm ents to be made,

123 120 and does not expressly vest in the hank, i t s o f fic e r s, or d ire c to rs a d is c re tio n in the m atter of i nve stmen ts, funds held in tru s t s h a ll he invested in any s e c u ritie s in which corporate or in d iv id u al f id u c ia r ie s in the S tate in which the hank is lo cated may in v e s t. (h) Court tru sts. -Except as h e re in a fte r pro v id ed,a national hank a c tin g as executor, ad m in istrato r, or in any other fid u c iary c a p ac ity, under appointment hy a court of competent j u r is d ic tio n, s h a ll make a l l investm ents under an order _,of that court, and copies of a l l such orders s h a ll he f ile d and preserv ed w ith the records of the t r u s t d e p a rtment of the hank. If the court hy general order v e s ts a d is c re tio n in the ^ t i onal "bank to invest funds held in tr u s t, or if^tne laws of the State in which the hank is l o cated corporate f id u c i a r i e s appointed hy the 8ourt are perm itted to exercise such d is c r e tio n, the n a tio n a l hank so appointed may in v est such funds in any s e c u r i t i e s in which corporate or in d iv id u a l f id u c i a r i e s in the State in which the hank is located may law fully in v e s t. VI1. Books and accounts. All hooks and reco rd s of the' tru s t departm ent sh a ll he kept separate and d i s t i n c t from other hooks and records of the hank. All accounts opened sh a ll he so kept as to enable the n ational bank at any time to f u r n i s h inform ation or re p o rts required by the Federal or S ta te a u th o r itie s,and such books and records s h a ll be open to the in sp ectio n of such a u th o r i ti e s. VII I. Exam inations. Examiners appointed hy the Com ptroller of the Currency or designated by th e Federal Reserve Board w ill be in stru c te d to make thorough and complete a u d its of the cash, s e c u r itie s, accounts,and investm ents of the t r u s t d e p a rtment of th e bank at th e same tim e th at exam ination is made of the banking department. IX. Conformity wi th S tate laws. Nothing in these re g u la tio n s sh a ll be construed ^0 give a n a tio n a l bank ex ercising the powers p erm itted under the provisions of s e c tio n 11 (k ) of the Federal Reserve Act, as amended, any r ig h t s or p riv ile g e s in c o n trav en tio n

124 121 of the laws of the S-fcate in which the bank is lo ca te d w ith in the meaning of that a c t. X.Revocation of perm its. The Federal Reserve Board rese rv es the rig h t to revoke perm its g ran te d under the provisions of section l l ( k ), as amended, in any case where in the opinion of th e Board a t ank has jv ilfu lly v io la te d the p ro v isio n s of the Federal Reserve Act or of these r e g u la tio n s or th e laws of any State r e l a t i n g to the operations of such bank when a c t ing in any of th e c a p a c itie s p erm itte d under the p ro visions of section ll(k ^ as amended. XI.Changes in r e g u la tio n s. These re g u la tio n s are su b je c t to change by the Federal Reserve B oar d; pr ovided, how/ever, that no such change shall preju d ice any o b lig a tio n undertaken in g o o d.faith under re g u la tio n s in e ffe c t at the time the o b lig a tio n was as sume d. REGULATION G, SERIES CF (Superseding R egulation G of 1917) LOANS ON FARM LAND AND OTHER REAL ESTATE Section 24 of the Federal Reserve Act p ro v id e s,in p a r t, that - Any national banking a s s o c ia tio n n o t s itu a te d in a c e n tra l reserve c ity may make loans secured by improved and unencumbered farm land S itu a te d w ithin its Federal r e serve d i s t r i c t or wi thin a rad iu s of one hundred m iles of the place in which such bank i s lo cated, irr e s p e c tiv e of d i s t r i c t l i i t s, and mqy also make loans secured by improved and unencumbered r e a l e s ta te located w ithin one hundred miles of the place in which such bank is loc ated, irrespec tive of d i s t r i c t lin e s ; but no loan made upon the s e c u irty of

125 122 such farm land s h a ll be made for a longer time than five years, and no lo an made-up on the s e c u r ity of such r e a l e s ta te as d istin g u ish e d from farm land sh a ll he made f o r a longer time than one year, nor s h a ll the amount of any such loan, whether upon such farm land or upon such rea l e s ta te, exceed f i f t y per centum of the a c tu a l value of th e property offered as secu rity. Any such hank may make such loans, whether secured hy such farm land or such re a l e s ta te, in an aggregate sum equal to tw en ty -fiv e per centum of its c a p ita l and surplus or to n e -th ird of i t s time d e p o s its and such banks may continue h e re a fte r as h e re to fo re to receiv e time d e p o s its and to pay in te r e s t on the same. N ational banks not located in c e n tr a l reserv e c i t i e s may, th er e f or e, le g a lly make loans secured by improved and unencumbered farm land or other re a l estate as provided by this s e c tio n. C ertain conditions and r e s t r i c ti ons.must, however,be ob served- (a) There must be no p rio r lien on the land; that is, the lending bank must ho ld an ab so lu te f i r s t mortgage or deed of tr us t. {b ) The amount of the loan must not exceed 50 per cent of the a c tu a l value of the land by which i t is secured. (c) The maximum amount of loans which a n a tio n a l ban s may make on rea l e s ta te, whether on farm land or on other r e a l e s ta te as d is tin g u is h e d from farm land, is lim ited under the terms of the act to an amount not in excess of o n e -th ird of its average time d ep o sits during the preceding calendar y e a r: Pr ov ided, however, That i f oneth ird of such time deposits as of the date of making the loan or o n e-th ird of the average tim e d e p o s its for the preceding calendar year is le s s than one-fourth of the c a p i t a l and surplus of the bank as of the date of making the loan, th e bank in such e v e n t sh a ll have a u th o r ity to make loans upon real e s ta te under the terms of the a c t to the extent of one-fourth of the h a n k s c a p i t a l and surplus as of that date. (d) Farm land to be e lig ib le as s e c u r ity far a laaa by a n a tio n a l bank must be s itu a te d w ith in the Federal reserve d i s t r i c t in which such hank is located or w ithin a ra d iu s of 100 m iles of such hank ir r e s p e c tiv e of di s tr ic t 1 in& s. (e) Real e s ta te a.s d istin g u is h e d from farm land to be e lig ib le as s e c u rity for a loan by a n a tio n a l bank must be located w ithin a radius of 100 miles of such hank irre s p e c tiv e of d i s t r i c t lin e s.

126 123 (f) The rig h t of a n atio n a l bank to "make loans" under s e c tio n 24 includes the r i g h t to purchase or d isc o u n t loans already made, as well as th e rig h t to make such loans in the f i r s t in s ta n c e : P rovided, however, That no loan secured hy farm land s h a ll have a m aturity of more than fiv e years from the date on which i t was purchased or made by the n atio n al hank and that no loan secured by other rea l e sta te sh a ll have a m aturity of more than one year from such date. (g) Though no n a tio n a l bank is authorized under the provisiqns of s e c tio n 24 to make a loan on the se c u rity of re a l e s ta te,o th e r than farm land, for a period exceeding one year, n e v e rth e le ss, at the end of the year, i t may p roperly mate a new loan upon the same se c u rity for a period not exceeding one year. The m aturing note must he c a n ce lle d, and a new note taken in i t s place, but in order.to obviate the n e c essity of making a new mortgage or deed of t r u s t fo r each renewal, th e o rig in a l mortgage or deed of t r u s t may be so drawn in the f i r s t instance as to cover p o ssib le fu tu re renewals of the o rig in a l note. Under no circum stances, however, must the bank obligate i t s e l f in advance to make such a renewal. I t must, in a l l cases, preserve the r ig h t to re q u ire payment, at the end of the year and to fo re c lo s e the mortgage should that a c tio n become necessary. The same p r i n c ip le s apply to loans of longer m a tu ritie s secured hy farm land s. (h) In order that real a s ta te loans h e ld by a bank may be r e a d ily c l a s s i f i e d, a statem ent signed by the o ffic e rs making a loan and having knowledge of the facts upon which it is based must be attached to each note secured by a f i r s t mortgage on trie land by which th e loan is s e c u re d,c e r tify in g in d e ta i l as of the date of th e loan th a t a ll of the requirem ents of the law have been duly observed. R egulation J, Series of (Superseding R eg u latio n J of 1917) CHECK CLEARING AND COLLECTION Section 16 of the Federal Reserve Act a u th o rizes the Federal Reserve Board to req u ire each Federal Reserve Bank to exercise the functions of a c le a r in g house for i ts me lib er banks,and se ctio n 13 of the Federal Reserve Act, as amended by the act approved June 21, 19 17, authnri z e s

127 124 each Federal Reserve Bank to re c e iv e from any non-memh er bank or t r u s t company for the purposes of exchange or c o lle c tio n, deposits of c u rre n t funds, in lawful money, n a tio n a l -bank notes, Federal Reserve notes, checks and d r a f ts payable on p re s e n ta tio n, or m aturing notes and b i l l s, provided such nonmember bank, or t r u s t company m aintains with its Federal Reserve Bank a balance s u f f ic ie n t to o f fs e t the items in t r a n s it held for i ts account by th e Federal Reserve Bank.. In pursuance of the a u th o rity vested in i t under these provisions of the law, the Federal Reserve Board, d e s ir in g to afford both to the public and to the various banks of the country a d i r e c t, expeditious and economical system of check c o lle c tio n and settlem ent of b alances, has arranged to have each Federal Reserve Bank exercise the functions of a c le a rin g house for such of i ts member banks to avail themselves of i ts p riv ile g e s and for such nonmember S tate banks and tnust companies as may m ain tain with the Federal Reserve Bank b a l ances s u ff ic ie n t to q u a lify them under the pro v isio n s of se ctio n 13 to send items to Federal Reserve Banks for purposes of exchange or of c o lle c tio n. Such nonmember S tate banks and t r u s t companies w ill h e re in a fte r be re fe rre d to in th is re g u la tio n as nonmenfoer c le a rin g banks. Each Federal Reserve Bank s h a ll e x e rc ise th e fu n ctio n s of a c le a rin g house under the fo llo w in g general terms and c ondi t i ons: (1) Each Federal Reserve Bank w ill re c e iv e a t par from i ts member banks and from nonmember c le a rin g banks in i t s d i s t r i c t, checks drawn on a l l member and nonmember c le a rin g banks and on a ll nonmember banks which agree to rem it at par through the Federal Reserve Bank of th e ir d i d t f i c t. (2) Each Federal Reserve Bank w ill receive a t par from other Federal Reserve Banks, and from a ll member and nonmember clearing banks, re g a rd le ss of th e ir lo c a tio n, f o r the cred it of their accounts with th e ir re s p e c tiv e Federal Reserve Banks, checks drawn upon a ll member and nonmember c le a rin g banks of its d i s t r i c t and upon a l l other nonmember banks of i t s d i s t r i c t whose checks are c o lle c te d a t par by the Federal Reserve B an k. (3) Immediate cred it entry upon r e c e ip t su b je c t to f in a l payment w ill be made for a ll such items upon the books of the Federal Reserve Bank at f u ll face value, but the proceeds w ill not be counted as p a rt of the minimum reserve nor become available to meet checks drawn u n til such time as may be sp e cifie d in the appropriate time schedule re f e rr e d to in subdivisi on 7. (4) Checks receiv ed by a Federal Reserve Bank on its member or nonmember c le a rin g banks w ill be forwarded d ir e c t to such banks and w ill n o t be charged to th e ir accounts u n til s u ff ic ie n t time has elapsed w ith in which to re c e iv e advice of payment, as shown by the ap p ro p riate time schedule re fe rre d to in subdivision 7.

128 125 (5) Under th is plan each Federal Reserve Bank w ill receive a t par from i ts member and nonmember clearin g banks checks on a l l member and ncnmember c le a rin g banks and on a l l nonmember banks whose checks can be c o lle c te d a t par by any Fede ra l Reserve Bank. Member and nonmember c le a rin g banks w ill be req u ired by the Federal Reserve Board to provide funds to cover at. par a ll checks receiv ed from or fo r the account of th e ir Federal Reserve Banka: Pro vi ded, however, That a menber or nonmember c le a rin g bank may ship currency or specie from i ts own v a u lts at th e expense of i ts Federal Reserve Bank to cover ari^r deficiency which may h rise because of and only in the case of i n a b i l it y to provide items to o ffs e t checks r e ceived from or for the account of i t s Federal Reserve Bank. (6) Section 19 of the Federal Reserve Act provides th at- The re q u ire d balance c a r r ie d by a menber bank with a Federal Reserve Bank may, under the re g u la tio n s and su b je c t to such p e n a ltie s as may he p resc rib e d hy the Federal Reserve Board, be checked a g a in s t and withdrawn by such member bank fo r the purpose of meeting e x is tin g 1 i abi 1 i t i es : Pro vid ed, ho w- ever,t hat no bank shall at any tim e make new leans or s h a ll pay any dividends unless and u n t il the to ta l b alan ce r e quired hy law is f u lly re s to re d. Items can not be counted as p art of the minimum reserve balance to be c a rrie d by a member bank wi th. i t s Federal Reserve Bank u n t il such time as may be s p e c ifie d in the a p p ro p riate time schedule r e f e r r e d to in subdivision 7. T herefo re, should a member bank draw a g a in st items before such time, th e d raft would he charged a g a in st i t s reserv e balance, if such balance were s u f f ic ie n t in amount to pay i t ; hut any r e s u l ti n g impairment of reserve balances would he su b je c t to a ll the p e n a ltie s provided hy the act. Inasmuch as i t i s e s s e n tia l that the law in respect to the maintenance by member banks of th e re q u ire d minimum reserve balance sh all be s t r i c t l y complied w ith, the Federal Reserve Board, under a u th o r ity vested in i t by s e c tio n 19 of th e a c t, has prescribed as th e b a sic p en alty for any d eficien cy in r e serve a sum eqmi valent to an in te r e s t on the amount of the deficiency of 2 per cent per annum above ninety-day discount ra te of th e Federal Reserve Bank of the di s t r i c t in which the menber bank is located, and has announced that i t w ill p re scribe for any Federal Reserve d i s t r i c t, upon the a p p lic a tio n of the Federal Reserve Bank of that' d i s t r i c t, as an a d d itio n al p ro g ressiv e p en a lty fo r any subsequent deficiency by the same menber bank during th e same calendar year a sum equivalent to an i n t e r e s t charge on the amount of the subsequent d e fic ie n c y a t a r a t e in c re a sin g o ne-half of 1 per c e n t fo r each subsequent d e fic ie n c y. (7) Each Federal Reserve Bank w ill determ ine hy analysis

129 126 the amounts appearing on i t s hooks to the c re d it of each member bank. Such analysis w ill show th e true s ta tu s of th e reserve held hy the Federal Reserve Bank f o r each member bank and v/ill enable it to apply the p en alty for impairment of reserv e. Each Federal Reserve Bank w ill publish time schedules showing th e time at which any item sent to it m i l he counted as reserve and become a v a ila b le to meet any checks drawn. (8) In handling items for member and nonmember "clearing banks, a Federal ReserveBank w ill act as agent only. The Board w ill require that each member, and nonmember c le a rin g bank authorize i t s Federal Reserve Bank to send checks for c o lle c tio n to banks on which checks are drawn, and, except fo r negligence, such Federal Reserve Bank w ill assume no l i a b i l i t y. Any fu rth e r requirem ents that the Board may deem n ecessary w ill be set fo rth by the Federal Reserve Banks in th e ir l e t t e r s of in s tr u c tio n to t h e ir member and nonmenber c le a r in g banks. Each Federal Reserve Bank w ill also promulgate ru le s and re g u la tio n s governing th e d e ta ils of i ts operations as a c le a r in g house,such ru le s and r e g u la tio n s to be bin d in g upon al Imemb er and c le a rin g member banks which are c le a r in g through th e Federal Reserve Bank. REGULATION K,SERIES OF (Superseding R eg u latio n K of 1920, issued in March, ) BANKING CORPORATIONS AUTHORIZED TO DO FOREIGN BANKING BUSINESS UNDER THE TERMS OF SECTION 25(a) OF THE FEDERAL RESERVE ACT. I. O rganization Any number of n a tu ra l per sons, not le s s in any case than fiv e, may form a C orporation under the p ro v isio n s of section 25(a) for th e purpose of engaging in in te r n a tio n a l or fo re ig n banking or other in te r n a tio n a l or fo re ig n f in a n c ia l operations or in banking or other fin a n c ia l operations in a dependency or in su lar p o ssessio n of th e United Stat es, ei th er d ire c tly or through the agency, ownership, or c o n tro l of local i n s titu tio n s in fo re ig n c o u n trie s or in such dependencies or in su la r possessions. I I. A rtic le s of a s s o c ia tio n. Any persons d e sirin g to organize a c o rp o ra tio n for any of th e purposes defined in section 25(a) sh a ll enter into

130 127 a r t i c l e s of as s oci at ion ( se e F.R.B.Form 151 which is suggested as a s a tis f a c to r y form of a r tic le s of a sso c ia tio n ) which sh a ll specify in general terms th e objects for which the C orporation is formed, and may c o n ta in any other p ro v isio n s not incons is te n t with law which the C orporation may see f i t to adopt for the r e g u la tio n of i ts b u sin ess and the conduct of i ts a f f a i r s. The a r t i c l e s of a s so c ia tio n s h a ll be signed by each person i n tending to p a r tic ip a te in the o rg an iz a tio n of the Corporation and when signed s h a ll be forwarded to the Federal Reserve Board in whose o ffice they shall be f i l e d O rganization c e r t i f i c a t e. All of the persons s ig n in g the a r t i c l e s of a s s o c ia tio n sh all under th e ir hands make an o rg an izatio n c e r t i f i c a t e on F.R.B.Form 152,which is made a p a rt of t h i s r egulafci on, and which shall s ta te s p e c if ic a lly : F i r s t. The name assumed by th e C orporation Second. The place or places where i t s operations are to be c a rrie d on. Third. The place in the United States where its home office is to be lo ca te d. Fourth. The amount of i t s c a p i t a l stock an d t he number of shares into which i t shall be d iv id e d. F ifth. The names and places of bu sin ess or residence of persons executing the o rg an iz a tio n c e r t i f i c a t e and the number of shares to which each has su b scrib ed. Sixth. The fac t th a t th e c e r t i f i c a t e is made to enable the persons subscribing th e same and a l l other persons, firm s, companies and c o rp o ra tio n s who or which may th e re a fte r s ub - scribe to or purchase shares of the c a p ita l stock of such Corporation to a v a il them selves of the advantages of th is section. The persons signing the o rg an iz a tio n c e r t i f i c a t e sh a ll acknowledge the execution th ere o f before a judge of some court of reco rd or notary public who s h a ll c e r t i f y th e re to under the seal of such court or notary. T hereafter the c e r t i f i c a t e sh a ll be forwarded to the Federal Reserve Board to be f i l e d in i t s o f f i c e. IV. T itle. Inasmuch as the name of the C orporation is su b je c t to the approval of the Federal Reserve Board, a p relim in ary a p p lic a tio n for th a t approval should be f i l e d w ith the Federal Reserve Board on F.R.B.Form 150, which is made a p a rt of th is re g u la tio n. This a p p lic a tio n should s ta te merely that the organiz atio n of a C orporation under the proposed name i s contem plated and may request the approval of th a t name and i ts

131 128 re s e rv a tio n for a period c 30 days. No Corporation which issues i ts own h o nd s, debentures, or o th er such o b lig a tio n s w ill he p erm itte d to have the word "bank" as a part o f i ts t i t l e. No C orporation which has the w ord"f ederal" in i t s t i t l e w ill be perm itted also to have th e word" hank" as p a rt of i t s t i t l e. So far as p o ssib le, the t i t l e of the Corporation should in d ic a te the nature or reason of the b u sin e ss contem plated and sjhould in no case resemble the name of any other co rp o ratio n to the ex ten t that i t might r e s u l t In m isleading or deceiving the public as to its id e n tity, purpose, c o n n ectio n s, or af f i 1i at i ons. V. A uthority to commence b u sin e ss. A fter the a r t i c l e s of a s s o c ia tio n and o rg an iz a tio n c e r t i f ic a te have been made and f i l e d w i t h the Federal Reserve Board, and a fte r they have been approved by the Federal Reserve Beard gnd a prelim inary permit to begin b u sin ess has been issued hy the Federal Reserve Board, the a s s o c ia tio n sh a ll become and he a body co rporate, but none of i ts powers except such as are in cidental and p relim in ary to i t s o rg an iz a tio n s h a ll be exercised u n til it has been fo rm ally authorized hy the. Federal Reserve Board hy a f in a l permit g e n e ra lly to commence b u s in e s s. Before th e Federal Reserve Board w ill Issue i ts fin a l perm it to commence b u sin e ss, the p resid e n t or c a s h ie r, together with at le a s t three of the d i r e c to r s, must c e r t i f y (a) that each d ire c to r e le c ted is a c itiz e n of the United States;(b) that a m ajo rity of th e shares of stock Is owned by c itiz e n s of the United S ta te s, hy corporations the c o n tro llin g in te r e s t in whicbn is ovned by c itiz e n s of the United S ta te s, ch artered under the laws of the United S tates, or hy firms or companies, the contro llin g i n t e r e s t in which is owned by c itiz e n s of the United S tates; and (c ) that of the a u th o riz e d c a p ita l stock sp e cifie d in the a r t i c l e s of a s s o c ia tio n at le a s t 25 per cent has been paid in in cash and th at each shareholder has in d iv id u a lly paid paid in in cash at le a s t 25 per cent of his stock su b s c rip tio n. T hereafter the cashier s h a ll c e r t i f y to the payment of the rem aining in sta llm e n ts as an when each is paid in In accordance wi th lav;. VI. C apital stock. No Corporation may he organized under the terms of sectio n 25(a) with a c a p i t a l stock of le s s than $2,000,000. The par value of each share of stock sh a ll he s p e c if ie d In the a r t i c l e s of as s oc ia t i on, and no C orporation w ill he p erm itted to issue stock of no par value. If there i s more than one c la s s of stock, the

132 129 name and amount of each c la s s and the o b lig a tio n s, r ig h t s and p riv ile g e s attaching th e re to s h a ll be set fo rth fu lly in the a r t i c l e s of a sso c ia tio n. Each c la s s of stock s h a ll he so named as to in d ic a te to the in v esto r as n early as p o ssib le what is i ts ch a ra c te r and to put him on n o tice of any unusual a t t r i but e s. VI1. T ransfers of stock. Section 25(a) provides in p art th a t- The m ajority of th e sh ares of the c a p it a l stock of any sxic h co rp o ratio n sh a ll at a ll times be hold and owned by the c itiz e n s of the United S ta te s,b y co rp o ratio n s the c o n tr o llin g in te re s t in which is owned by c itiz e n s of a State of the United S tates, cr hy firms or companies the c o n tr o l li n g in te r e s t in which is owned by c itiz e n s of the United S ta te s. In order to insuira compliance a t a l l times w ith the r e quirements of th is pro v isio n a fte r the o rg an iz a tio n of the 0 or - p oration, shares of stock s h a ll he Issuable and tra n s fe r a b le only on the books of the C orporation. Every a p p lic a tio n for the issue or tra n sfe r of stock sh a ll be accompanied by an a ffid a v it of the party to whom i t is desired to issue or tra n s fe r stock, or by his or. i t s duly appointed agent, s ta t in g - In the case of an indiv id ual. - (a ) Wh eth er he is or is not a c itiz e n s of the United S ta te s, and if a c it i z e n of the United S ta te s, whether he i s a n a tu ra l born c i t i z e n or a c itiz e n by n a tu r a liz a tio n, and i f n a tu ra liz e d, whether there is or is not any arrangement under which he is to hold the shares or any of the shares which he d e s ire s to have issued or tra n s fe rre d to him, in tr u s t for or in any way under the c o n tro l of any foreign s ta te or any fo re ig n e r, fo re ig n corp o ratio n, or any co rp o ratio n under fo re ig n c o n tro l, and i f so, the nature th e re o f. In the case of a c o rp o r a tio n.- (a ) Whether such corporatio n is or is n o t c h a rte re d under the laws of the United States or of a State of the United S ta te s. If i t is not, no fu rth e r d e c la r a tio n is n ecessary, but i f i t is, it must also be s ta te d (b ) whether the c o n tr o llin g in te r e s t in such c o rp o r a tio n is or is not owned by c itiz e n s of the United S tates and (c) whether there i s fir is not any arrangem ent under which such corporation w ill h o ld th e shares or any of th e shares if issued or tra n s fe r re d to such c o rp o ra tio n, in tr u s t for or in any way under the c o n tro l of any fo re ig n sta te or any fo re ig n e r, or fo reig n corporation, or any c o rp o ra tio n under fo re ig n contro l, and if, so, the nature th ere o f. In the case of a firm or company.-(a) Wh th er the cont r o l li n g in te r e s t in such firm or company is or is not owned

133 130 by c itiz e n s of the United States and if so, (hf whether there i s o r i s no t any arrangement under which such firm or company w ill h o ld th e s liares or an;' of the shares if issued or tra n s fe r re d to such firm or company for or in any way under the c o n tro l of any fo reig h s ta te or any fo reig n er, or fo reig n co rp o ratio n, or any corporation under fo re ig n c o n tro l, and if so, the n a tu re th e r e o f. The board of d ire c to rs of the Corporation, whether acting d i r e c tl y or through an agent, may, before making any issue or1 tra n s fe r of stock, r e q u ir e such further evidence as in th e ir d isc re tio n they may think n ecessary in order to determine whether or not the issue or tra n sfe r of the stock would r e s u l t in a v io la tio n of the law. No issue or tra n sfe r of stock which would, cause 50 per cent or more of the total amount of sto c k issu ed or outstanding t o be held c o n tra ry to the provisions of th e law or th se regtilations sh all be made upon th e b o oks of the C orporation. The d e c is io n of the Board of D irectors in each case s h a ll be fin a l and conclusive and n o t su b je c t to any question by any person, firm or corp.-' o ration on any ground w hatsoever. If a t any time by reason of the f a c t that the holder of any shares of the C orporation ceases to be a c i t i z e n of the. United S tates, or, in the opinion of the board of d i r e c t o r s, b e comes s u b je c t to th e co ntrol of any fo re ig n s ta te or fo re ig n er or fo reig n c o rp o ra tio n or c o rp o ra tio n under fo re ig n c o n tro l, 50 per cent or more of the to ta l amount of c a p ita l stock issued or oil ts tern di ng Is held c o n tra ry to th. e p ro v isio n s of the lav/ or these re g u la rio n s, the hoard of d ire c to rs may, when apprised of that fa c t, f o rth w ith serve on the holder of th e shares in question a notice in w ritin g r e q u i r in g such holder w ith in two months to tra n sfe r such shares to a c itiz e n of the United S ta te s, or to a firm, company or c o rp o ra tio n a improved by the board of d ire c to rs as an e l i g i b l e sto ck h o ld er. When such notice had been given by the board of d ire c to r s, the shares of stock so held s h a ll cease to confer any vote u n til they have been tra n s fe rre d as req u ired above, and i f on the e x p ira tio n of two months after such notice the shares hhall not have been so t r a n s ferred, the shares shall be f o r f e i t e d to the Corporation. The hoard of d ire c to rs sh a ll p rescrib e in the by-laws of th e C orporation ap p ropriate re g u la tio n s f o r the r e g is tr a tio n of the shares of stock i n accordance with Hie terms of the law' and these r e g u la tio n s. The by-laws must also provide th at the c e r t i f i c a t e s of took issued by th e C orporation shall contain provisions s u f f i c i e n t to put the holder on n otice of the terms of the lav/ and the re g u la tio n os the Federal Reserve Board defining the lim ita tio n s upon the r ig h ts of t r a n s f e r.

134 131 f i l l.o perations in the United. S tates. No C orporation sh a ll c a rry on any p art of i t s business in the United S tates, except such as s h a ll be in c id e n ta l to i ts in te rn a tio n or fo re ig n b u s in e s s. Agencies may be e s ta b lis h e d in the United States with the approval of the Fed- 4ral Reserve Board for- s p e c ific ppr poses, but not g e n e ra lly to carry on the b u s in e s s of the C orporation. IX. Inve stments in the sto c k o f other C orporations. I t is contem plated by the law th at a C orporation s h a ll conduct i t s business abroad e ith e r d ire c tly or in d ir e c tly through the ownership or c o n tro l of c o rp o ra tio n s, and i t is accordingly provided that a C orporation may invest in the stock of other c eirti f i cate s of ownership,of any c o rp o ra tio n organized-* (a) Under the p ro v isio n s of se c tio n 25(a) of the Federal Re serve Act ; (b) Under th e laws of any fo re ig n country or a colony or dependency thereof; (c) Under th e laws of any S ta te, dependency, or in su la r possession of the United S tates; provided, f i r s t, that such other corp o ratio n is not engaged in the general b u sin e ss of buying or s e l l i n g goods, wares, merchandise, cr commodities in the United States; and, second, that i t is not tra n sa c tin g any business in the U nited S ta te s, dxcept such as i s i nc ideatta,l to i ts in te r n a tio n a l or foreign bus i n ess. Except with the approval of the Federal Reserve Board, no Corporation s h a ll invest an amount, in excess of 15 per cent of its c a p ita l and surplus in the s to c k of any c o rp o ra tio n engaged in the b u s in e s s of banking, or an amount in excess of 10 per cent of i t s c a p ita l and surplus in the stock of any other kind of c o rp o ra tio n. No co rp o ratio n sh a ll purchase any stock in any other c o r p o ratio n organized under th e terms of section 2 5 (a) or under the laws of any S tate, which is in s u b s ta n tia l co m petition therew ith, or which holds stock or c e r t i f i c a t e s of ownership in co rp o ratio n s which are in s u b s ta n t ia l com petition with the purdhasing Co rporat ion. Thi s r e s t r i c t i o n, however, does n o t apply to corporations organized under fo re ig n laws. X. Branches. No Sorpor a tio n s h a ll e s ta b lis h any branches except with

135 132 the approval of the Federal Reserve Board, and in no case shall any branch be e s ta b lis h e d in the U nited S ta te s. XI. Issue of debentures, bonds and promissory n o tes. Approval of the Federal Reserve Board.-No Corporation sh all make any public or p r iv a t e issue of i t s debenture bonds, notes or other such o b lig a tio n s w ithout the ajjproval of the Federal Reserve Board, b u t th is r e s t r i c t i o n sh a ll not apply to notes issu ed by the C orporation in borrowing from banks or bankers fo r temporary purposes not to exceed one year. The approval of the Federal Reserve Board w ill he based s o le ly upon the r ig h t of the Corporation to mate the issue under the terms of th is r e g u la tio n and s h a ll n o t be understood in any way to i#ply that the Federal Reserve Board has approved or passed upon th e m erits of such o b lig a tio n s as an investm ent. The Federal Reserve Board w ill c on sid er the general c h a ra c re r and scope of the b u sin e ss of the C orporation in determ ining the amount of debentures, bonds, notes, or other such o b lig atio n s of the C orporation which may be issued by i t. A p p lica tio n.- Every-applic ati on for the approval of any such issue hy a C orporation sh a ll be ac comp a n ie d b y (l) a statem ent of the c o n d itio n of the C orporation in such form and as of such date as the Federal Reserve Board may require; (2) a d e ta il ed l i s t of the s e c u r i ti e s by whi ch i t is proposed to secure such issue, sta tin g th e ir m a tu ritie s, in d o rsements, g u aran ties or c o l l a t e r a l, if any, and in general terms the n a tu re of the tra n s a c tio n or tra n s a c tio n s upon which they were based; and (5) such other date as the Federal Reserve Board may from tim e to time re q u ire. A dvertisem ents.- No circ ular, le t ter, or other document a d v e rtis in g the issue of the o b lig a tio n s of a Co rp o ra tio n s hal 1 s ta te or co n tain any reference to the fa c t that the Federal Reserve Board has g ranted i t s approvd.1 of the issue to which the advertisem ent r e l a t e s. This requirem ent w ill be enforced s t r i c t l y in order th a t th eree may be no p o s s i b i l i t y of the p u b lic s m isconstruing such a refe re n c e to be an approval of the Federal Reserve Board of the m erits or d e s ir a b il it y of the ob lig atio n s as an investm ent. X ll. Sale of fo re ig n s e c u r i t i e s. Approval of the Federal Reserve Board.-No Corporation

136 133 sh a ll offer for sale any fo re ig n s e c u r i ti e s w ith i ts i n dorsement or guaranty, except with the approval of the Federal Reserve Board, b u t such approval w ill be based s o le ly upon the r ig h t o f the Co rp orati on to make such a sale under the terms of t h i s re g u la tio n, and sh a ll no t b e understood in any way to imply that the Federal Reserve Board has approved or passed upon the m erits of such s e c u r itie s as an investm ent. Ap pi ic; at ion. -Every a p p lic a tio n f o r the ap p ro v a l of such sale sh a ll be accompanied by a statem ent of the c h a ra c te r and amount of th e s e c u r i t i e s proposed to be sold, their Indorsements, giiar ant i es, or c o lla ter al, if any, and such other d ate as the Federal Reserve Board may from tim e to time r e q u ir e. A dvertisem ents.- No c irc u la r, l e t t e r, or o th er document a d v e rtis in g the sale of fo re ig n s e c u r i ti e s by a C orporation with i ts indorsement or guaranty s h a ll s ta te or co n tain any reference to the f a c t th a t th e Federal Reserve Board has g ran te d its approval of the sa le of the s e c u ritie s to which the advertisement r e l a t e s. X l l l. Acceptances. K inds,- Any C orporation may accept (l) d r a f ts and b i l l s of exchange drawn upon I t which grow out of tra n sa c tio n s in v o l ving the im portation or e x p o rta tio n of goods, and (2) d r a f ts and b i l l s of exchange which are drawn by banks or bankers located in foreign countries or dependencie s or in su la r possessions of the United S tates f o r the purpose of fu rn is h in g d o lla r exchange as required by the usages of trade in such c o u n trie s, dependencies, and possessions, provided, however, that, except with the a p p ro v al of the Federal Reserve Board and su b je c t to such lim ita tio n s as i t may p re s c rib e, nocorpora tion shall exe rc is e Its power to accept d r a f ts or b i l l s of exchange if at the time such d ra fts or b i l l s are p resen ted f o r acceptance it has outstanding any debentures, bonds, notes, or other such o b ligati on s issued by i t. M a tu rity.- Except with th e approval of th e Federal Reserve Board, no C orporation s h a ll accept any draft or b i l l of exchange which grows out of a tra n a a c tio n in v o lv in g the im portation or e x p o rtatio n of goods w ith a m a tu rity in excess of six months, oe s h a ll accept any draft or b i l l of exchange drawn f o r the purpose of'f urni sh i ng d o lla r exchange with a m atu rity in excess of three months. Limi t at ions. - (1 ) Individual drawers: No acceptances sh a ll be made fo r the account of any one drawer i n an amount aggregating at any time in excess of 10 per cent of the s u b scribed c a p ita l and surplus of the Corporation, u n le ss the tra n sa c tio n be f u l l y secured or re p re se n ts an e x p o rta tio n or

137 134 im portation of c ommodities and is guaranteed by a bank o r banker of undoubted solvency. (*2) Aggregates: Whenever the aggregate of acceptances outstanding at any ti me (a ) exceeds the amount of the subscribed c a p i t a l and su rp lu s, 50 per cent of all th e acceptances in excess of the amount s h a ll he f u lly secured; or (b ) exceeds twice the amount of th e subscribed c a p ita l and su rp lu s, a ll the acceptances outstanding in excess of such amount shall be f u lly secured. (The Corpora tio n shall e le c t whichever requirem ent (a) or (b) c a l l s for the sm aller amount of secured acceptances.) In no event s h a ll any C orporation have o u tstanding at any time acceptances drawn for the' purpose of fu rn ish in g d ollar exchange i n an amount aggregating more than 50 per cent of its subscribed c a p i t a l and s u rp lu s. R e se rv e s.- Against a ll acceptances outstanding which mature in 30 days or l e s s a reserve o f at le a s t 15 per cent shall he maintained, and a g a in s t a ll acceptances outstanding which mature in more than 30 days a reserve of at lea st 3 per c e n t sh a ll be m aintained. Reserves a g a in s t acceptances must le in liq u id a s se ts of any or a ll of the following kinds: (l) cash; (2) b ala n c e s with other banks; (.3) hanker s acceptances; and (4 ) such s e c u ritie s as the Federal Reserve Board ma y from time to tim e p er mi t. XIV. Deposi ts. In the United S ta te s.- No C orporation s h a ll receive in th e United States any deposits except as are in c id e n ta l to or for the purpose of c a rry in g out tra n s a c tio n s in fo re ig n countries or de pende no i e s of the United S tates whene the Corporation has e s ta b lis h e d agencies, branches, correspondents, or where i t operates through tie ownership or c o n tro l of subsidiary c o rp o ratio n s. D eposits of t h i s ch a ra c te r may be made by in d iv id u a ls, firm s, banks, or other c o rp o ratio n s, whether fo reig n or dom estic, and-may be time d ep o sits or on deman d. Outside of the United S tat es.-0 ut si de the United S tates a C orporation may receive d e p o sits of any kind from in d iv id u a ls, firm s, hanks or other c or po ra t ion s : Pr ov i de d, ho w- ev er, Th at i f s uc h C o rp o ra t i o n has any of i t s bonds, debentures, or other such ob lig atio n s outstanding it may receiv e abroad only subh deposits as are in c id e n ta l to the conduct o f i ts exchange, discount, or loan o p erations. R eserv es.- A gainst a l l deposits re c e iv e d in the United States rese rv e of n o t l e s s than 13 per cent must be mai ntai n ed. Thi s r e s e r v e may consist of cash i n v aul t, a b a l ance with th e Federal Reserve Bank of the d i s t r i c t in which.

138 135 the head office of the C orporation is lo cated, or a balance with any member hank. Against a ll deposi ts rec e iv ed abroad the C orporation sh all m aintain such reserv es as may be required hy lo cal laws and hy die dictates of sound business judgment and banking p r in c ip le s. TV. General im ita tio n s and r e s t r i c t i o n s. L i a b i l i t i e s of o n e b o rr o war.- The t o t a l l i a b i l i t i e s to a Corporation of any person, company, firm or corporation far money borrowed, in c lu d in g in the l i a b i l i t i e s of a company or firm the l i a b i l i t i e s of the several members th e re o f, s h a ll at no time exceed 10 per cent of the amount of i t s su b scrib ed c a p ita l and su rp lu s, except with, the approval of the Federal Reserve Board: Provided, however, That the discount o f b i l l s of exchange drawn in good f a i t h against a c tu a lly e x is tin g values and the discount of commercial or b usiness paper a c tu a lly owned by the p erso n n e g o tia tin g the same sball-not be considered as money borrowed w ithin the meaning of th is paragraph. The l i a b i l i t y of a customer on account of a n acceptance made by the C orporation for his account is not a l i a b i l i t y for money borrowed w ith in the meaning of th is paragraph u n less and u n t i l he f a i l s to place the Corporation in funds to cover the payment of th e acceptances at m aturity or u n less th e C orporation it-self holds the acce p ta n ce. Aggregate l i a b i l i t e s of the C o rporation.- The aggregate of the C o rp o ratio n s l i a b i l i t i e s outstanding on account of acceptances, average dome stice and fo re ig n d ep o sits, debentures, bonds, notes, g u a ra n tie s, indorsem ents, and other subh o b ligations shall not exceed at any one time ten times the amount of the C o rp o ratio n s subscribed c a p i t a l and su rp lu s except with the a p p ro v al of the Federal Reserve Board. In determ ining the amount of the l i a b i l i t i e s w ith in the meaning of th is paragraph, indorsements of b i l l s of exchange hav in g n o t more than s ix months to run, drawn, and ac ce p te d hy others than the, C o rp o ratio n,sh a ll n o t be included. Operations abroad.- Except as otherwise provided in the law and these r e g u la tio n s, a C orporation may ex ercise abroad no tonly the powers s p e c if ic a lly s e t fo rth in the law, h u t a lso such in cid e n ta l powers as may be used in the d e te rm in a tio n of the Federal Reserve Board in connection with the tra n s a c tio n of the business of hanking or o th or f in a n c ia l operations in the c o u n tries in which i t s h a ll tra n s a c t b u sin e ss. In the e x e r cise of any of these powers abroad a C orporation must be guided by the laws of the country i n whi ch it i s operating and by sound b u sin ess judgment and banking p r i n c i p l e s.

139 136 XVI. Management. The d ire c to r s, o ffic e rs or employees of a C orporation sh a ll exercise th e ir r ig h ts and perform th e ir d u tie s as d i r e c to r s, o ffic e rs, o r employees, w ith due regard to both the l e t t e r and s p ir i t of the law and these r e g u la tio n s. For the purpose of these regulations the C orporation sh all, of course, be responsible for a l l acts of om ission or commission of any of i t s d ire c to rs, o ffic e rs, employees, or r e p r e s e n ta tiv e s in the c onduct o f 't h e i r o f f i c ia l d u tie s. The c h a ra c te r of the management of a Corporation and i ts general a ttitu d e toward th e pur po se and s p ir i t of the law and these re g u la tio n s w ill he considered by the Federal Reserve Board in acting upon any a p p lic a tio n made under the terms of these r e g u la tio n s. XVII. Reports and exam inations. R e p o rts.- Each C orporation s h a ll make a t l e a s t two r e ports annually to the Federal Reserve Board a t such times and in such form as i t may r e q u i r e. E xam inations.- Each C orporation s h a ll be examined at le a s t once- a year by examiners appointed by the Federal Reserve Board. The cost of examinations aha 11 be paid by the Corporation examined. XVIII. Amendments t o r e gula ti o ns. These re g u la tio n s are s u b je c t to amendment by the Federal Reserve Board from tine to time: Provided, however, That no svtch amendment s h a ll p reju d ice o b lig a tio n s undertaken in good f a ith under re g u la tio n s in effect at the time they were ass urn a d. Regulations under which n a tio n a l banks may act as in surance agents and as brokers or agents in making or procuring loans on re a l e s ta te under the amendment covering such a c tio n passed by congress in 1916 as issued from the o ffic e of the Com ptroller of the Currency: Where a National Bank Acts as Insurance Agent. (at The bank must be lo c a te d in a place the p o p u latio n

140 137 of which does not exceed 5,000 as shown by the l a s t preceding decennial census. (b ) The insurance company for which the bank acts as agent must have been authorized by the a u th o r i ti e s of the State in which the bank is lo cated to do b u sin ess in that St ate. (c) The a c tiv itie s of the hank as such agent must be r e s t r i c te d to the s o l i c i t i n g and s e llin g of insurance and the c o lle c tio n of premiums on p o lic ie s issued by the in surance co mpa ny. (d) The bank may receive fo r se rv ic es so rendered such lawful fees or commissions as may he agreed upon between the hank and the insurance company for which i t may a c t as agen t. (e) The hank i s p ro h ib ite d from assuming or guaranteeing the payment of any premium on insurance p o lic ie s issued, through i t s agency, by i ts p r in c ip a l. (f ) The hank i s p r o h ib ite d from guaranteeing the tru th of any statem ent nade hy an assured in f i l i n g h i s a p p lication for i nsturanse. (g) The power s c onfer re d are to be exercised under such re g u la tio n s as may be p resc rib e d by the C om ptroller of the Cur r ency. In pursuance of the fo reg o in g amendment the follow ing reg u la tio n s are hereby p re sc rib e d fo r n atio n a l banks which may undertake to act as agents for insurance companies. 1.Each c o n tra c t of agency must be form ally accepted by the board of d ire c to r s of th e agent bank by a r e s o lu tio n spread upon the minutes in th e follow ing form. "Be i t re s o lv e d th a t the c o n tr a c t of agency entered in to on 191 betw een the insurance company and the natio n al_bank of by pre sid ent ( or vice p re s ident) and c a sh ie r, a copy of which is on f i l e in th is bank, is hereby r a t i f i e d ab d approved." 2. A c e r t i f i e d c opy of suoh re s o lu tio n, a t t e s t e d by the p resid en t or vice p re sid e n t and by the c a s h ie r and by a m ajority of th e d ire c to rs o f t he bank, must be forwarded to t h i s office on fo m s to he fu rn ish e d by t h is o f fio e. 3. There should he on f i l e in the bank, availab le for in sp e c tio n by the gxaminer, the fo llo w in g documents: (a) An a u th o ra tiv e statem ent showing th ep o p u la tio n of the town according to the last preceding decennial census. (b ) A proper c e r t i f i c a t e from the a u th o r itie s of the S tate in which the hank is loc ate d showing as to e ach i n surance company f o r which the hank is acting as agent th a t such company has re c e iv e d a u th o rity from the said State to tra n s a c t b u sin ess in that S ta te. (o) A proper c e r t i f i c a t e or other w ritin g of each in-

141 138 surance company fo r -which the hank acts au th o rizin g the bank to act as its ag en t, se ttin g f o!rth th a t the hank does not guarantee the payment of any premium on insurance p o lic ie s issib d through i t s agency by i t s p rin c ip a l, and s ta tin g th a t the bank is not to be held resp o n sib le fo r the tru th of any statem ent made by an assured in f i l i n g his a p p lic a tio n for insurance. (d) Copies of a l l rep o rts made by the agent bank to each insurance company which i t re p re s e n ts. 4. The bank w ill be reo u ired to keep a record as to each company for which it acts as agent, showing:for f ir e insurance: The amount of each p o lic y, the r a te and premium, date of commencement, term and d ate of e x p ira tio n, as well as a d e scrip tio n of p ro p erty insured, with name of assured and to whom lo ss is payable. As to l i f e insurance: Amount and date of po licy, w ith premium, and a statem ent as to under what form the insurance is w ritte n, giving also name of assured and b e n e f ic ia r y. As to any and a ll other forms of insurance: The f u l l e s t possible p a r tic u la r s as to amounts, dates, r a t e s, premiums, and what is in su red by the policy, and of c o lle c tio n of all premiums c o lle c te d for account of the company, refunds made, the p ro p o rtio n of premium c re d ite d to the p r o f i ts of the bank under i t s agreement with the company, the p ro p o rtio n dhe the company, the amounts and dates of a l l rem ittan ces made to the insurance company on account of premiums c o lle c te d, and the b a la n c e, if any, due from the bank to t h e insurance company. 5. T h e b a n k w i l l b e req u ired t o c a r r y on i t s general ledger an account which w ill, at a ll tim es, show the amount due to insurance c ompanies fo r which i t is a c tin g as agent, on account of premiums c ol le c t ed,but not rem itte d,an d the l i a b i l i t y must be shown in re p o rts of c o n d itio n and in the published statem ents of th e bank under the heading"other l i a b i l i t i e s - on account of insurance premiums c o lle c te d and not re m itte d," u n less s p e c i f i c a l l y provided for in the r e port. 6. T h eb an k should a l s o k e e p sue h records as ma y be r e q u ired by each insurance company in the manner and under the forms p rescrib ed by the various companies; all of which should be a v a ila b le fo r in s p e c tio n by the examiner on re - q ue st. 7. The agent bank must not assume any r e s p o n s ib ility or l i a b i l i t y f o r e ith e r the adjustm ent, settlem ent, or payment of losses under any policy issu ed by or through i t s agency. 8. The records of a l l p ro fi ts derived from the insurance agency should be c a r r ie d in a sep arate account on the books of the bank, and th e rec o rd s should be so kept as to enable

142 139 the examiner r e a d ily to tra c e to the source all-items of p ro fit d e riv e d in t h is c o n n e ctio n. Where a National Bank Acts as Broker or Agent in Making or Procuring Loans on Real E state In order to a v a il i t s e l f of t h i s p riv ile g e : (a) The hank must he lo c a te d in a place th e population of which does not exceed 5, 000 as shown hy the la s t p receding decennial cen su s. (b ) The rea l estate hy which the loans n e g o tia te d are secured must he located w iih in 100 miles of the place in which the n e g o tia tin g hank is lo cated. (c) The hank may receive fo r such se rv ic e s a reasonable fee or c omrni ssion. (d) The bank s h a ll in no case guarantee e ith e r the p r i n c ip al or i n t e r e s t of any such lo an s. (e) The powers conferred are to be e x ercised under. such re g u la tio n s as may be p rescrib ed by the Com ptroller of the Currency. The follow ing reg u la tio n s are p rescrib ed for n a tio n a l banks which may undertake to act as agents or brokers in making or procuring loans on real e s ta te. 1. A bank intending to a v a il i t s e l f of this p ro v isio n of the law must adopt by its board of directors a r e s o lu tio n in the follow ing form: "Be it re s ol ve d, That the o ffic e rs of the N ational Bank of are hereby author! zed and empowered on behalf of this bank, as broker or agent, to accept from customers of th is bank deposits of funds to be in v ested for account of said customers, in loans secured by real e s ta te, and to procure, as broker or a g e n t,fo r customers of th is bank loans which s h a ll be secured by real estate, under the p ro v isio n s of the act approved September 7,19 16 : Pr ovided,, That the investment of su ch funds as sta te d, and a l l such procuring of loans or lending of funds fo r c lie n ts s h a ll be undertaken only under w ritten in s tr u c tio n s from the customer for whom the hank, through i t s o f fic e r s, may act as broker or agent, such w r itte n in s tru c tio n s in each case to be f i r s t d e liv e re d to an o f fic e r of th is bank. Such in s tru c tio n s sh all, in a l l c a s e s, s ta te c le a r ly th a t the bank in actin g as broker or agent in no way guarantees payment of e ith e r the p rin c ip al or i n te r e s t of any loan so nego tia te d." 2. A c e r t i f i e d c opy of such r e s o lu tio n, a tt e s te d by the p resid en t or vice p re s id e n t and c a s h ie r, and by a

143 140 m ajority of the (directors of the hank, must he f orwarded to th is o ffic e,o n forms to he fu rn ish e d hy t h is o ffic e. 3. No hank shall charge more than one commission or brokerage on the making of any loan; that i s to say, if i t shall charge a brokerage or commission to the p arty borrowing the money, it s h a ll not charge a brokerage or commission to the p a rty fo r whom the money is loaned,and vice versa. 4. Each bank a c tin g under th is provision of law w ill be re q u ire d to keep a record showing as to aach loan nego-tiated by the barik_ (a) The name and ad d ress of the p rin c ip a l for whom the bank is ac ti ng, (b ) Date of w ritte n in s tr u c tio n s from the p r in c ip a l, (c) Name and a d d re ss of maker of note, (d) Date of note, (e) Date of m atu rity of note, (f) B rief d e s c rip tio n of property securing note,show ing lo c a tio n and distance from place in which hank is lo cated, (g) Character or improvements, e t c., (h) Name and ad d ress of party to whom note was transfe rre d or d e liv e re d by the bank, (i) Date of such tra n sfe r or d e liv e ry, (j) Amount of prin cip al of note, ( k ) R at e or i n te re s t or d i sc un t, (l) Rate of commission or brokerage charged by bank for acting as broker or agent, and m) Amount of such commission or brokerage, and whether sa id commission ms pai d by borrower of the money or by the party f o r whom it was loaned. 5. A book should be kept Showing the date on which each mortgage or deed or t r u s t n e g o tia te djby th e bank has been adm itted to rec ard, the co u rt in which the same is r e corded, and the re c o rd a tio n fees p a id in each case. 6. The records of a l l p ro fits d eriv ed from acting as broker or agent in n e g o tia tin g loans on r e a l e s ta te should be c a rrie d in a se p ara te account on the books of the hank, and th e records should he so kept as to enable the examiner re a d ily to trace to the source a ll items of p ro fit d eriv ed in th is connection. 7. Deposits of money re c e iv e d by th e bank as broker or agent to be in v ested in loans secured by real efeate as p re scribed by law, must be t r e a t e d as tr u s t funds and kept sep arate and apart from thejother a sse ts of the hank. Such funds must in no case be p erm itted to p ass from the possession of th e h ank u n til the loan fo r which they are to be paid

144 141 out i s form ally accepted, by or in behalf of the p arty f o r whose account n e g o tia te d. 8. No bank sh a ll advance or use i t s own funds in conn e c tio n w ith real estate loans n e g o tia te d as broker or agent. 9. No loans secured by r e a l e s ta te, v/hich the bank has n e g o tia te d as broker or agent, should become a p art of the a sse ts of the bank even tem porarily, u n less such loans conform to the p rovisions of section 24 of the Federal Reserve Act, as amended. 10. There should he a v a ila b le in the bank for in sp ectio n by -the n a tio n a l -bark -examiner- (a) An a u th o r ita tiv e statem ent s ho va nt the p o p u latio n of the town according to the la s t preceding decennial census. (b ) All records p e rta in in g to the n e g o tia tio n of r e a l e s ta te loans as brflter or ag en t. National banks a c tin g as broker f o r the placing of loans should prenare blank forms of a p p lic a tio n to be executed by a p p lic a n ts for loans. These a p p lic a tio n s should show_ (a) L ocation of pro p erty. (b ) Ac r e ag e. c ) Assessed v a lu a tio n. (d) E stim ated present value. (e) B rief descrip tio n s of b u ild in g s thereon and estim ated value of them. (f) Whether b u ild in g s are insured, and if so, for what amounts and in what com panies. (g) Whether property is a lre a d y encumbered and, if s o,fo r what amount. (h) If property is f ar m pr op er t y, a p p lic a n t should s ta te whether or not th e dw elling is provided w ith sa n ita ry arrangements approved by the local board of h e a lth, and,if not, what sa n ita ry arrangements there are. At the foot of t h i s a p p lic a tio n should be p rin te d below the sig n a tu re of the a p p lic a n t a statem ent to th e effect th at "The statem en ts in the foregoing a p p lic a tio n have been subm itted to thi s b ank by the ap p lican t for the loan,but the bank does not undertake to guarantee the c o rre c tn e ss of any of the statem ents made by the a p p lic a n t." If any a p p lic a tio n fo r a loan makes statem ents in h is a p p lic a tio n which any o ffic e rs of th e b a n k before whom the a p p lic a tio n may come may have reason to th in k are not c o rre c t, the a tt e n ti o n of the ap p lican t should he c a lle d to the p o s s ib le discrepancy.

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146 Magaz ine Ar t i c 1 e s The Journal of P o l i t i c a l Economy Harold G.Moulton: The Surplus in G ommerc i al B anking. V o l.25,1917, p p ~...~ Harold G.Moulton: C ommerc i al Banking and Car i tal Formati on. V ol.2 6, ,A rtic le 111, p p H. H. Preston: Th e Feder al Reserve Banks1 Sy s tern of Par C o lle c tio n s. Vol.2 8, ,p p The Q uarterly Journal of Economics O.W. M. Sprague: Th e Feder al Re serve B anking System. Vol. 30,1916, p p Sys tern * W. P. G.Harding: Why We Cannot Have a Panio. December, 19 20, pp Journal of the American Bankers A ssociation 0. Howard Wolfe: 01 eari ng Func tlons in The or v and in Pr ac tic e. Vol nn The Bankers Magazine H. B.Grimm: The New Busines s Den ar tm ent.february, 1921,p p

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