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Banking Principles And Practice | by Ray B. Westerfield



The aim of this book is to give a comprehensive exposition of the theory and practice of commercial banking in the United States

TitleBanking Principles And Practice
AuthorRay B. Westerfield
PublisherThe Ronald Press Company
Year1921
Copyright1921, by The Ronald Press Company
AmazonBanking principles and practice

Banking Principles And Practice

By Ray B. Westerfield, Ph.D.

Assistant Professor of Political Economy, Yale University; Secretary-Treasurer, American Economic Association

In Five Volumes. Volume I. Elements Of Money, Credit, And Banking

Volume II. The Banking System Of The United States

New York The Ronald Press Company

New York The Ronald Press Company

Copyright, 1921, by The Ronald Press Company

All Rights Reserved

To My Mother and Father

-Preface
The aim of this book is to give a comprehensive exposition of the theory and practice of commercial banking in the United States. In its preparation the author has been guided by the following princip...
-Forms And Illustrations
Forms And Illustrations Vol I Figure Page 4. The Federal Reserve Districts........... 242 5. Proposed Type Of Organization For The Federal Reserve Banks, 1918 266 6. Official Organization ...
-Chapter I. Metallic Money. Relation of Money and Banking Principles
A bank is an institution for the custody, loan, exchange, or issue of money and credit, and for facilitating the transmission of funds by bills of exchange. Banks deal in money and in credit, which is...
-The First Exchanges
Inasmuch as the principles of money and banking are closely related, it seems logical in a study of banking to inquire first into the history of exchange and the functions of money. The first exchange...
-Primary Functions of Money
The burden of the method of barter is reduced where some commodity is quite generally in demand in a society. The possessor of surplus commodities is willing to accept this article of general demand, ...
-Minor Functions of Money
In addition to these three fundamental functions of money there are many minor functions. One of the latter, important in banking, is the storing of value against emergencies. As will be explained lat...
-Characteristics of Commodities Used as Money
The commodities which have been used as money have been many and various, and have possessed in varying degrees the qualities which enabled them to perform all or some of the functions of money more o...
-Metals as Money
Historically considered, the evolution of money as a commodity is characterized by the tendency of metals to supersede all other forms of money in the more advanced communities, and by the tendency to...
-Coinage
Metallic money may circulate by weight or by count. In its earliest form it circulated by weight, but the practice was very inconvenient. So long as money circulated by weight, there was no misapprehe...
-Legal Tender
One of the necessary functions of government is the adjudication and final settlement of contested rights and contracts; another is the levy and collection of revenue and the quittance of the revenue ...
-Brassage and Seigniorage
The coinage laws of a state also determine the charges for coinage and the freedom with which the state will coin for an individual any bullion he may have and wish coined. Since coins are manufacture...
-Bimetallism versus Monometallism
Up to and well into the last century the coinage systems of progressive nations were bimetallic. That is, there were: (1) free and unlimited coinage of both gold and silver at a fixed legal ratio of w...
-Operation of Bimetallism Illustrated
To illustrate the compensatory theory, suppose we had had bimetallism in the United States during the past generation. The pure content of the gold dollar is 23.22 grains Troy, and of the silver dolla...
-Effect of Two Legal Tenders
The displacement of one metal by the other, resulting in the establishment of equilibrium between market and mint prices, operates more exactly if both metals are full legal tenders at the mint ratio....
-The Limping Standard
The United States adopted bimetallism in 1792 and continued it with more or less success until 1873 when the free coinage of silver was given up; after a few years (1876) a limited coinage on governme...
-Relation of Seigniorage to Value of Coins
Given free coinage, a seigniorage charge increases the value of the coined metal by the amount of the seigniorage. The state either keeps a part of the bullion, which it does not coin, or it holds bac...
-Means of Maintaining Public Confidence
One means by which the government can maintain public confidence is to limit the number of coins issued; the number of any particular coin issued bears a somewhat steady relation to the volume of tran...
-Chapter II. History Of The National Coinage. First Coinage Act
The first Coinage Act of the United States was prepared by Alexander Hamilton in 1792. It provided for the establishment of a mint and a bimetallic system of gold and silver at a 15:1 ratio; it named ...
-Changes in the Mint Ratio
The 15:1 ratio as ascertained by Hamilton was soon found to be too low. The French had a higher ratio, 15.5: 1, and gold flowed to France where its coinage value was higher. Silver only was coined, an...
-Coinage of the Silver Dollar
Between 1861 and 1879 greenbacks took the place of metals; the silver dollar had not been coined since 1834, and when, in 1873, the coinage laws were reconstructed, the silver dollar was omitted from ...
-Gold Standard Act
The silver movement came to a crisis in the election of 1896, and in 1900 was finally settled by what has come to be known as the Gold Standard Act. This act fixed the gold dollar, weighing 25.8 grain...
-The Pittman Act
In 1918 the adverse balance of trade between the United States and India, in the face of the necessity of conserving and fortifying our gold reserves during the war, led to the passage of the Pittman ...
-Other Coinage Laws
The Act of 1906 provided for the redemption of copper and nickel coins in lawful money, when presented in sums of not less than $20. When they are presented for redemption in such quantity as to indic...
-Bullion Bars
Gold bars are carried by the banks for the convenience of their customers in the city or elsewhere, and are shipped upon request. Gold bullion as held in banks bears the official stamp of the United S...
-Foreign Shipments Of Gold
When obtainable, bullion is preferred for shipment abroad, but as a rule the supply of large bars is more or less limited. When shipments are heavy, gold coins of the denomination of 10's and 20's are...
-Gold Coins In Circulation
The United States4 gold coins in circulation now are the double eagle, the eagle, half-eagle, and quarter-eagle, containing, respectively, $20, $10, $5, and $2 1/2. The gold dollar, though no longer c...
-Silver Coins In Circulation
The silver coins of the United States now current are dollars, half - dollars, quarters, and dimes. Silver dollars were first coined in 1794 under the Act of 1792, and weighed 416 grains .089 fine, or...
-Other Issues Of Silver Coin
Various other silver coins have been issued. The trade dollar, issued by the Act of 1873, weighed 420 grains, or 7.5 grains more than the standard dollar. Though intended only for circulation in the O...
-Nickel And Copper Coins
The nickel 5 - cent pieces of the present were first coined under the Act of 1866. They are composed of 75 per cent copper and 25 per cent nickel, and weigh 77.16 grams. The cent dates from 1792, the ...
-Statistical Statement Of The Coinage
The present United States coinage is as follows:5 Weights And Fineness Of Coins Double eagle ... Gold $20.00 464.400 grains pure 516.00 grains...
-Legal Tender Of Coins
Certain moneys of the United States are lawful money. This term is used to denote the legal-tender quality of money, and dates from 1862.6 Legal tender is a quality given a circulating medium by act...
-United States Mints And Assay Offices
The place of coinage is called the mint. There are eleven mint service institutions in the United States, situated as follows: coinage mints at Philadelphia, San Francisco, and Denver; mints at New ...
-Other Functions Of The Mints
Besides coinage, the mint institutions perform other functions: 1. The reduction, until recently, of silver dollars to bullion for shipment under the Pittman Act. 2. The reduction and recoinage ...
-Chapter III. Credit. Confidence And Time Element
The discussion of money has so far dealt only with the metallic forms. Transactions in which immediate payment of standard metallic money is made are primarily barter transactions - as when one hat is...
-The Contract Element
Indeed, Brown may desire the shoes but he may not have gold or another commodity acceptable to Jones, but Jones, having confidence in Brown's future ability and willingness to provide acceptable commo...
-Credit A Substitute For Money
Credit serves the convenience of Brown and Jones in another way. So long as metallic money was passed at the time of exchange, every exchange necessitated the handling and testing of two commodities -...
-The Personal Element In Credit
It is important to conceive the exact nature of a credit. If Brown promises to pay to Jones at some later date, he creates a property right; Jones thereafter has a claim on Brown and Brown's wealth; t...
-Secured Credit
The personal element can be reduced by attaching to the credit a concrete article of wealth or property right which, having assured and easily determined value, can be readily sold and converted into ...
-Credit Indorsement And Substitution
The personal element can be reinforced by getting, in the words of the customary expression, someone to go your security, that is, getting more names on the paper to evidence the credit; the purpo...
-Commercial And Financial Credits
Credit is deferred payment; there is a period of trust, and it may be long or short. The longer the period the more the contingencies against which the creditor must provide. Commercial credits have...
-Definition Of Commercial Credit
Exact agreement does not exist among financial men and writers as to the definition of commercial credits. In the United States the term commercial paper is widely used in a very technical sense, an...
-Effect Of Time Element On Credit Values
The time element in a credit ordinarily gives rise to discount when the credit is exchanged against money. If a promissory note does not mature till 30 days hence, the holder cannot hope to find in th...
-Other Kinds Of Credit
Another form of credit is commonly called personal, or consumptive, credit, on the theory that such credits spend themselves in the consumption or annihilation of necessities and articles of luxu...
-Relation Of Credits To Wealth
The credit instruments are many and, to facilitate their various uses, are highly specialized. Book credits, promissory notes, bills of exchange, drafts, acceptances, certificates of indebtedness, che...
-Fundamental Basis Of Credit
A credit rests upon the person or wealth of the debtor; even when apparently based upon credits the ultimate basis is concrete wealth. For instance, a mortgage company may pledge mortgages and mortgag...
-Relation Of Credits To Interest
It is human nature to prefer present economic goods or services to future economic goods or services, the degree of preference varying with the person - with his personal characteristics and the natur...
-Credits As Circulating Media
In its function of facilitating exchange, credit may become the actual medium. An earnest of this was seen in the treatment of subsidiary, fiduciary, or token, coins. A credit medium is more economica...
-Chapter IV. Government Paper Or Credit Money. Wide Acceptability Of Government Credit
From the creditor's point of view, credit represents the trust he has in the debtor; from the debtor's point of view, credit is borrowing power, the power he has to induce the creditor to put economic...
-Classification Of Government Credit Money
Government paper money is of three sorts, the classification being based on the proportionate reserve of standard money which the Treasury keeps on hand to redeem credit money, and to instil into the ...
-Value Of Inconvertible Money
To give acceptability to inconvertible paper, the government usually makes special provisions. One is to declare it legal tender in payment of private and public dues. Unless the people unite to boyco...
-Danger Of Overissue Of Government Paper Money
The danger or likelihood of overissue is the greatest objection to government paper money. Overissue brings about inflation, rising prices, bigger profits, business boom, and a demand for more and mor...
-Advantages And Disadvantages Of Paper Money
The advantages of the issue of government paper money are: 1. It is economical, since it substitutes a less expensive material than metal for money and conserves the metal for the arts. 2. It is ea...
-Government Paper Money Issued By The United States
The issues of paper money of the United States government now current for which the government is direct debtor embrace the United States notes, the treasury notes of 1890, the gold and silver certifi...
-Greenbacks
The greenback issues were started in 1861 and continued throughout the war. The government suspended specie payments in 1862 and the greenbacks depreciated until, in 1864, they brought less than 40 ce...
-Treasury Notes Of 1890
The treasury notes of 1890 are similar to the greenbacks in quality. They were issued under the Sherman Silver Law of that year to pay for the silver bought by the government. They created an addition...
-Gold And Silver Certificates
The United States has two forms of representative paper money, the gold certificate (or note) and the silver certificate. In 1863 Congress authorized the issue of gold notes against deposits of gold c...
-Gold Order Certificates
One other form of government certificate is the gold order certificate, issued at the discretion of the Treasurer of the United States, against deposits of gold coin or gold bearer notes, of ten-thous...
-Method Of Issuance
The United States Treasury has Divisions of Issue and Redemption, to which are assigned respectively the accounts relating to the issue and redemption of United States notes, gold certificates, silver...
-Method Of Redemption
United States notes and gold certificates are redeemable by the Treasurer in gold coin, treasury notes of 1890 in gold coin or silver dollars, and silver certificates in silver dollars. National bank ...
-Money Circulating In The United States
The total money in circulation in the United States on June 30 in recent years is shown in the following table: Money In Circulation In The United States, June 30 (In Millions) ...
-Chapter V. Nature Of Bank Credit. Specialization In Credit Issue
The credits issued by the government are incidental to its major functions of making, executing, and interpreting the law. The credits issued by the business man are incidental to the conduct of his c...
-Forms Of Bank Credit
The liabilities of a bank to creditors take four chief forms: 1. Deposits 2. Bank Notes 3. Acceptances And Letters Of Credit 4. Bills Payable Deposits are rights to draw on the bank for...
-Nature Of Cash Deposits
Suppose a person, Mr. White, from motives of hire, public interest, or business efficiency, undertakes to accept moneys from a certain number of persons, Messrs. Black, Brown, Green, and Blue, who hav...
-Motives In Depositing Cash Funds
Customers have various motives in making deposits of cash funds. One motive is the desire for safety. The depositor gives up his right to any particular cash when he makes a deposit; he cannot properl...
-Nature Of Loans
The last paragraph introduces the subject of loans and discounts. The person or bank, here termed White, soon observes that, although payments of checks are being continually made, cash is as contin...
-Nature Of Discounts
It may be supposed that the loans placed by White in this way do not exhaust the sum that may be loaned by him without endangering his ability to meet all demands made upon him, and that some of his c...
-Effect Of Loans And Discounts On Deposits
Under the circumstances just mentioned, White's ability to loan and discount further is decreasing; the ratio of his cash to his demand liabilities has decreased from 55:100 (or 100:145) to 66:145 (or...
-Rationale Of Exchange Of Credits
The rationale of this exchange of credits is that the seller (or borrower) gives less widely known credit for the more widely known credit of the bank. The bank essentially guarantees the private cred...
-Limitation On Creation Of Deposits Of Bank In System
In an earlier paragraph it is stated that the creation of deposits by White was limited by the declining ratio of White's cash to his deposits. So far the hypothesis has been that White was the only b...
-Illustration Of Need Of Common Ratio
The necessity of this common ratio as among the banks of a system may be illustrated numerically. Assume the following data: Bank A has $100,000 cash reserve, and likewise all the other banks, B, C, D...
-Ratio Of Loans To Deposits
Because a very large proportion of deposit liabilities are created by the method of loans and discounts, and because receipts of cash deposits ease the bank's position and incline it to extend loans t...
-Bank Notes
White's last two statements (see page 73 above) of assets and liabilities showed the alternative effects of his paying for discounts with cash or deposits; the two previous statements showed the simil...
-Summary. The Three Functions Of Commercial Banking
The three fundamental functions of commercial banking are, then, discount, deposits, and note issue; discount (and loan) is, in practice, but one method of creating deposits and note issue; and the th...
-Capital
In the discussion in the previous sections, White has been doing business entirely on his customers' money and his own credit. No mention has been made of any direct contribution of funds by himself; ...
-Surplus And Undivided Profits
The company may, voluntarily or by force of law, over a period of years add to the original capital contributions by withholding part of its earnings, not declaring them in dividends and converting th...
-Chapter VI. Bank Operations And Functions. Fundamental And Other Functions
The activities described in the preceding chapter as discount, deposit, and note issue are traditionally called the fundamental functions of commercial banks. Function here means the course of actio...
-Banks As Credit Markets
Banking operations facilitate the production and distribution of goods. They do this by organizing the market for credit, by negotiating between lender and borrower, by rendering an ever larger volume...
-Extensions Of Investment Credit
To the degree that banks invest in stocks and bonds of corporations, they contribute fixed capital to enterprises. The purchase of securities is the practical equivalent of loaning funds; loans to pur...
-Loan Ratios As Business Barometers
The sum of a bank's investments in securities and of its loans and discounts represents its contributions of capital to business. A part of these funds was originally deposited as cash in the bank; th...
-Effect Of Other Operations On The Bank Statement
So far as developed in the preceding sections, the operations of White, the bank, might result in a capital statement such as the following: Assets Loans and Discounts.......... $304,395 Cash...
-Typical Bank Statement
The combined effect of these and other transactions is to render the statement into that of a typical commercial bank. There is, however, no uniformity of style or titles in the published statement...
-Clearings And Collections
In the process of executing the functions of loan, discount, deposit, and note issue, and of the incidental business of the bank, there come into its possession numerous forms of credit items which mu...
-Methods Of Presentment
The method of presentment of an item for payment is determined by its cost and by legal requirements. The costs include the clerical work, messenger service, loss of interest on idle funds, risks of c...
-The Clearing House
The clearing house is an association which provides a common meeting place and facilities for collection messengers to exchange their reciprocal claims on each other and settle the net balances only. ...
-Out-Of-Town Collections
To collect out-of-town items, one system is to effect arrangements whereby the correspondent acts as agent, collecting items on banks in its city through the clearing house and on banks in its vicinit...
-Chapter VII. Protection Of Bank Note Holders. Nature Of Bank Notes
In case the seller of discount items (the borrower) or his business clientele does not understand the deposit-check-paying system, he will probably ask that the proceeds be paid to him in cash. The ba...
-Bank Notes And Deposits - Similarity
Bank notes and bank deposits are essentially alike. Both are liabilities of the bank, deposits being payable to the depositor or his order as evidenced by the check, notes being payable to the holder,...
-Bank Notes And Deposits - Differences
Although bank notes and deposits are thus much alike in nature and effects, they have, nevertheless, fundamental differences. Deposits are circulated by checks or drafts - that is, orders to pay, w...
-Reasons For Special Protection Of Noteholder
The proper protection of noteholder and depositor is an important matter. Obviously since the noteholder is the more likely to suffer, owing to his ignorance of the nature and course of the bank note,...
-Currency Principle Versus Banking Principle
The matter of protection of bank credit has been the bone of contention between two schools of banking thought - those who believe in the currency principle and those who adhere to the banking pri...
-Safeguards Against Bank Insolvency
The protection of bank credit resolves itself into two general lines: (1) the establishment of safeguards against the bank's insolvency, and (2) special protection of its creditors against the suspens...
-Objects Of Protecting Bank Notes
When bank notes are given special protection, three objects are kept in view: 1. To Keep The Bank Notes Of A Going Or Suspended Bank At Par. 2. To provide that the noteholder shall be secured ag...
-2. Providing Payment At Par
The second object in protecting bank note holders, namely, to provide ultimate payment at par if immediate conversion proves impossible, is attained in several ways in the different existing banking s...
-3. Elasticity Of Note Issues
The great danger in any system of protection of note issues is that the restrictions may be so rigid as to destroy or unduly circumscribe elasticity of issue. A note issue should be capable of expandi...
-Methods Of Attaining Elasticity
One method for bringing about the desired correlation between the expansion or contraction of the volume of bank notes and the increased or lessened demand of the business world is to allocate the iss...
-Existing Systems Of Protecting Bank Notes
Differences of historical, political, and economic nature in the leading commercial countries of the world have resulted in various adaptations of the methods of protecting bank notes, as given in the...
-Bank Notes In France
The Bank of France has a monopoly of the note issue privilege. The notes are a legal tender for all debts. They are secured by the general assets of the bank, but they are not given a prior lien on th...
-Bank Notes In England
The Bank of England, to which the note issue privilege surrendered by other banks accrued under the Bank Act of 1844, the Peel Act, has a practical monopoly of the bank note issue in England. The En...
-Bank Notes In Germany
The monopoly of note issue in Germany is conferred by law upon the Reichsbank and four other joint-stock banks; in case of the surrender of the note-issuing power by any of the four the privilege accr...
-Bank Notes Of Canada
The Canadian banking system consists of 19 banking corporations, with 4,000 branch offices, including 124 branches outside of Canada. These 19 banks are empowered to issue notes at their main offices ...
-Bank Notes In The United States
These include national bank notes, federal reserve bank notes, and federal reserve notes, and will be described in Volume II, Chapter XIX. ...
-Chapter VIII. Protection Of Depositors. Special Protection In The United States
For reasons presented in the preceding chapter, the state has not been as solicitous for the protection of depositors as it has for the protection of noteholders. Indeed, much of the protection to not...
-Provision For Protection
Two methods of protection are provided in the United States. Both the federal and state laws require minimum percentage reserves to be held against deposits. Since the state and national banks are com...
-Methods Of Guaranteeing Deposits
In periods of depression and panic in the Middle West, high losses by bank depositors have occasioned legislative movements for their protection. Out of the panic of 1907 arose various plans for the g...
-Safety Fund Plan
The first application of the safety fund plan to protect deposits was in the form of a bank law in New York State in 1829, though the apparent intention of the legislature was to guarantee notes only....
-The Oklahoma System
By the Act of December 17, depositors of defaulting Oklahoma banks were to be paid at once; and to provide a fund in advance to meet such contingent payments, assessments were levied against all state...
-Unfavorable Conditions In Oklahoma
For certain reasons, conditions have not been favorable for experimentation with deposit guaranty in Oklahoma. For one thing, despite the fact that the banks of Indian Territory, which became part of ...
-Popularity Of The System
The Oklahoma system was from the first very popular. Until 1911, the state banks increased fast in number and deposits, while the national banks declined in number and increased their deposits but sli...
-The Kansas System
Owing to the general popularity of deposit guaranty, and particularly to the pressure brought by banks of Kansas near the Oklahoma line, which felt a migration of deposits to the guaranteed Okl...
-Strength Of Kansas System
The Kansas law has many elements of strength not found in the original Oklahoma law. The chief advantages are the following: 1. Undue expansion of deposits is checked by limiting them t...
-Arguments For Guaranty Of Deposits
Argument in favor of guaranteeing deposits has been on political, moral, social, and economic grounds. The political (largely partizan) arguments may be waived, except to remark that if deposit guaran...
-Effect Of Guaranty On Panics
The degree of stability that can be achieved by deposit guaranty applies to runs on banks rather than to financial crises. Crises depend upon more comprehensive causes than the confidence of depositor...
-Guaranty Of Savings Deposits And Commercial Deposits
Many of the arguments for deposit guaranty start from the point of guaranteeing deposits that originate through the deposit of actual cash or cash items, that is, primarily savings deposits, and pass ...
-Effect Of Guaranty On Banks
The sponsors of deposit guaranty maintain that banks ultimately pay dearly for all losses to depositors, because failure causes such discredit and suspicion and consequent falling off in business, tha...
-Guaranty As Assessment Insurance
Guaranty of deposits is also objected to on the ground that it is a form of assessment insurance, is not actuarial, does not select risks, and suffers from a high concentration of risks. It is true th...
-Chapter IX. Reserves For Protection Of Bank Credit. Considerations Governing Size Of Cash Reserve
In Chapter VI it was stated that one of the three essential objectives in protecting bank notes is to provide for their instant convertibility upon demand by the holder and thus maintain their parity....
-Desirability Of Minimum Reserve
It is very questionable whether it is desirable to establish a minimum reserve by law, though it does exert a restraining influence on a few reckless bankers who might otherwise injure the whole finan...
-Methods Of Increasing Reserves
The cash reserve of a bank fluctuates in size according to the business transacted, varying with the hour, day, season, year, and cycle of years. It is desirable that it should fluctuate, for rigidity...
-Importance Of Regulating Cash Reserve
So long as a bank's officers realize their responsibility for meeting liabilities upon demand, and so long as the government authorities enforce the law and regulations to this end, probably the most ...
-Essentials Of Secondary Reserve
The banker likes to have all his assets earning profits. Loans and Discounts earn interest and discount; the Securities Owned yield interest or dividends and may increase in value with changes in the ...
-Convertible Forms Of Earning Assets
Though the market for stocks and bonds is the highly organized stock exchange, the term of such securities is usually very long and they do not rest upon commercial transactions which liquidate them. ...
-Liquidity For Banking System As A Whole
While in ordinary times an individual bank may find commercial paper, call and time loans, and stocks and bonds readily convertible forms of earning assets, it is usually true that this seeming liquid...
-Effect Of War On Liquidity Of Assets
The recent war has had the effect of reducing the liquidity of bank assets the world over. Forced by the government or by popular pressure to facilitate the financing of the war, the banks bought larg...
-Protection Of Acceptances And Letters Of Credit
The methods of protecting bank notes and deposits have been treated at length in preceding chapters. Bank acceptances are a third form of bank credit requiring protection. This form of liability is in...
-Limitation Of Acceptance Credit
In addition to the interests of the drawer, drawee, acceptor, purchaser, and the party to whom the letter of credit is issued and his guarantor, the general public has an interest in the actual and co...
-Difference Between Accepting And Lending
A common misconception exists as to the difference between the processes of accepting and lending. The misconception, as commonly stated, is that in accepting, the bank does not part with money as it ...
-Protection Of Bills Payable
A fourth form of bank credit liability that requires protection is Bills Payable. When a bank needs funds and does not find it expedient or possible to discount paper in its portfolio, it may borrow f...
-Chapter X. Relation Of Bank Credit To Prices. Marginal Utility And Price
Trade is fundamentally barter; the money economy and the credit economy sprang from the barter economy. Under the money economy one commodity possessing the quality of general acceptability was exchan...
-Basis Of Price Level
It is apparent that the market price of any commodity will be high if that commodity has high utility or if the commodity is relatively scarce, or, on the other hand, if money is plentiful and therefo...
-Effect Of Money And Deposits On Price Level
The purchasing capacity of an individual at any time (his power to command goods in the market) is increased by his bank deposits subject to transfer by check - instead of paying by money he pays by c...
-Remoter Influences On Prices
The five factors, M, M', V, V, and T, are the only factors that can affect P directly. Any other influences on prices must act through one or more of these five factors and there are hundreds of such ...
-Index Numbers
The price level is calculated and estimated in terms of an index number, which is some form of average of prices of representative commodities. When the price level rises or falls the prices of all co...
-Inflation And Its Effects
According to the quantity theory of money, most exactly stated in Professor Fisher's equation of exchange, an increase in money and bank credit beyond the needs of trade at a given price level tend...
-Inequalities Of Inflation
Increases of money and bank credit, if used, tend to price inflation, but they do not inflate all prices equally because there is not an equal demand for all kinds of things or services. The inflation...
-Interest Rate And Inflation
Nor does the interest rate rise in proportion to the inflation. The loaning class is less shrewd and apt in sensing conditions and is usually content for a time to loan at, say, 3 per cent to borrower...
-Schemes Of Price Adjustment
Obviously this system is unjust. It encourages debt and discourages thrift. It burdens the creditor, the wage-earner, and the salaried class. It lets the shrewd enterpriser class batten on the poor, t...
-Financial Panics And Industrial Crises
Earlier in the chapter it was shown that a period of rising prices is a period of business boom, inasmuch as profits of the enterpriser are then unusually large. Interest on the manufacturer's growing...
-Overproduction And Underproduction
But sometimes the commercial and industrial basis is also decidedly unsound. The cycle of prosperity has brought an overextension in many lines, and the necessary adjustments must be more fundamental....
-Effect Of Investment On Production
Overproduction in a certain line is often largely explained by overinvestment therein. If a field of investment gives promise of permanent high earnings, capital, and thereby labor, are diverted to it...
-Psychological Factors
One trade is bound to another by the fact that they are each other's customers. High profits in one line increase the demand for the products of another line, and therefore its prices and wages. In ad...
-Periodicity Of Panics
Business depression is characterized by low production, dull trade, hesitant investment, hoarding, low prices, liquidation, low interest rates, and unemployment. How long the depression lasts depends ...
-Chapter XI. Classification And Functions Of Banks. Specialization Of Bank Functions
Banking institutions are specialized dealers in and guarantors of credits. The evolution of our system of credit has been characterized by the same division of labor which dominates our social and eco...
-Classification By Functions
The most common classification of American banks based on bank functions makes three divisions, namely: 1. Commercial banks. 2. Investment institutions, including savings banks and bond houses or i...
-Functions Of Commercial Banks
The major functions of commercial banks have been described in Chapter IV as the testing and guaranty of credit, and the extension of credit by means of notes, deposits, and acceptances. Commercial ba...
-Specialization Of Commercial Banks
Commercial banks specialize in loans, adapting their services to their locality or to a special clientele. Some carry specialization to such degree as to relinquish many of their banking functions. Fo...
-Savings Banks
1. Mutual or Trustee Savings Banks. The savings bank started as a mutual savings association and is commonly regarded as a benevolent institution. A mutual savings bank is a financial establishment wh...
-Functions Of Savings Banks
The essential economic and social functions of savings banks are three in number, as follows: 1. They assemble the capital of the community, conserve the idle wealth, and having aggregated it into ...
-Functions Of The Bond House And Investment Bank
Whereas savings banks aim to assemble funds for the purchase of investments, and whereas the bond houses or investment banks are concerned with the sale and distribution of securities, both promote in...
-1. Purchasing Securities
The houses which buy first hand the largest blocks of securities are relatively few in number and strong financially, with central offices in New York, Philadelphia, Boston, or Chicago. There are, of ...
-2. Underwriting
A bond house which has bought a big block of securities endangers itself by the high concentration of risk; this risk is usually distributed by having the issue underwritten by a group of banks throug...
-3. Distributing Securities
Bond and brokerage houses prefer to sell large issues at small commissions rather than small issues at larger commissions. The expense of investigating a small issue is nearly as heavy as a large issu...
-Banking And Other Operations Of Bond Houses
The intimate relations between a bond house and its customers are furthered by certain of its banking operations. A special department is established for the safe deposit of funds which, together with...
-General Functions Of Trust Companies
A trust is something committed to another person's care for use or management and for which an account must be rendered. The original and essential function of a trust company was to accept and handle...
-Advantages Of Corporate Over Individual Trustee
A trust company can perform the various functions of trustee better than an individual. As a corporation its existence is not limited, so that it can carry through to the end any trusts committed to i...
-Trust Functions For Individuals
Trusts undertaken for individuals are of various kinds and arise for numerous reasons. Persons who feel themselves incompetent to care for their estates, travelers, absentee property-owners, endowed c...
-Trust Functions For Corporations
A trust company commonly acts as trustee under the trust deed or mortgage securing an issue of bonds. It certifies to the regularity of the issue and to the genuineness of the document, but does not g...
-Insurance And Safe-Deposit Functions
Some few states permit trust companies to do a fidelity insurance and title insurance business similar to that done by regular bond or surety companies. Fidelity insurance is devoted chiefly to acting...
-Chapter XII. Antecedents Of The Federal Reserve System. Classification Of The Financial Institutions
The banking system of the United States is dual in the sense that some institutions are authorized by federal statute and charters and other institutions by state statute and charters, and the two cla...
-The First Bank Of The United States
As part of a general scheme to support public credit in 1791, Alexander Hamilton prevailed upon Congress to institute the first Bank of the United States. His main arguments in support of the institut...
-4. The Desirability Of A Bank Note Currency.
The opposition to the scheme was led by Madison and came from the southern states. The law provided for a Bank of the United States, located at Philadelphia, capitalized at $10,000,000, with shares...
-Services Of First Bank To Government
The government enjoyed many advantages from the bank, such as the $2,000,000 loan for its stock subscription, which bore only 6 per cent interest, whereas the dividend rate on the stock was 8 per cent...
-Dissolution Of First Bank
Because the bank was regarded as a Federalist institution, Jefferson and the Democrats were opposed to it, yet the institution was managed capably and with a view to profits and kept aloof from politi...
-The Second Bank Of The United States
After the dissolution of the first Bank of the United States and during the war against Great Britain, the money market became badly disorganized, specie payments were suspended except in New England,...
-History Of Second Bank
Professor Dewey summarizes the history of the bank somewhat as follows. The bank was chartered on April 10, 1816, and on April 30 Congress ordered the resumption of specie payments to go into effect o...
-Weaknesses In Operation Of Second Bank
A number of weaknesses developed in the operations of the second bank during its earlier years. The subscription to its stock by means of stock notes was a mistake in that the method of payment amount...
-Defects Of Note Redemption System
Though the original system of bank note redemption aided in effecting resumption by forcing the state banks to improve the standing of their notes and created a good national currency accepted everywh...
-Services Of Second Bank To Commerce
The second Bank of the United States operated in domestic exchange, the sale of drafts to the public constituting no small part of its business. The public and the Treasury argued that the bank ought ...
-Causes Of Dissolution Of Second Bank
The opposition which brought the bank to an untimely end was largely inspired by political intrigue and by selfish jealousy on the part of the state banks. The charges of Jackson and other critics wer...
-State Banks Before The Civil War
Banking in the United States really dates from 1781, when Robert Morris, Superintendent of Finance of the Revolution, founded the Bank of North America at Philadelphia to promote the financing of Wash...
-Causes Of Panic Of 1837
In 1836 the Treasury issued the specie circular, an order to its public land agents to receive for the sale of public lands only specie, and to refuse the notes issued by the banks. The order aimed ...
-The Independent Treasury System
After the crisis of 1837 many projects were advanced to substitute for the banks some other form of financial institution as public depositories. Two national banks had failed for political reasons, a...
-Bases Of Note Issue Before The Civil War
The period between 1790 and 1861 was one of experimental banking in a new country rich in natural resources and settled with an energetic, inventive, and independent people who worked things out for t...
-Evils Of Early Bank Note Issues
Prior to the year 1860 the state bank notes consisted of a heterogeneous currency, lacking all uniformity, under diverse systems of issue, with varying degrees of protection and of limitations on issu...
-Proposed Advantages Of National Bank Note Issue
In his finance report of 1861, Secretary Chase first stated the advantages to be derived from the preparation and delivery to institutions and associations of notes prepared for circulation under nat...
-The National Banking Act
The National Banking Act became a law on February 25, 1863. On October 1 the Secretary reported the organization of but 66 national banks, and these were small institutions with the foundation of whic...
-The Growth Of The National Banking System
The nationalization of those state banks which desired to continue to issue bank notes was rapidly consummated during the years 1865 and 1866. Since that time the number of banks has increased eightfo...
-Movement To Reform National Banking System
Certain defects in the national banking system appeared early, particularly in the geographical distribution of the banks and in the reduction of national bank note circulation as the national bonds w...
-Chapter XIII. Federal Reserve Districts And Membership. The Federal Reserve Districts
The Federal Reserve Act provides for the division of the country into not less than eight nor more than twelve Federal reserve districts, each with its own reserve bank, individually controlled and h...
-Boundaries Of Federal Reserve Districts
To put the federal reserve system into operation the Reserve Bank Organization Committee was constituted, consisting of the Secretary of the Treasury, the Secretary of Agriculture, and the Comptroller...
-Domestic Branches Of Federal Reserve Banks
The Federal Reserve Act, as amended June 21, 1917, provides that the board may permit or compel a federal reserve bank to establish branches within its district or within the district of any reserve b...
-Foreign Branches Of Federal Reserve Banks
The Federal Reserve Act authorizes any reserve bank, with the consent of the Federal Reserve Board, to establish banking accounts, appoint correspondents, and set up agencies in such foreign countries...
-Membership In Federal Reserve System
The sponsors of the federal reserve system hoped to have it include all national banks and all state banks and trust companies of size and importance. The act required each national bank to signify to...
-Legal Requirements Of Membership
State banks becoming members of the federal reserve must conform to the laws imposed upon national banks, which prohibit them from lending on or purchasing their own stock, and which relate to the wit...
-Procedure In Applying For Membership
The procedure for acquiring membership in the federal reserve system is as follows: 1. A resolution by the board of directors, upon a form furnished by the federal reserve agent, applying for stock...
-Growth In State Bank Membership
After the passage of the Federal Reserve Act the state banks and trust companies did not seek admission to the federal reserve system as quickly as was expected. Many banks objected outright to the sy...
-Growth Of Federal Reserve System
Date National State Total 1914 December 31............. 7,584 8 7,592 1915 June 30................. 7,607 17 ...
-Objections To Membership
The board has tried to induce the state banks to join by meeting their objections and removing the obstacles. For instance, the expense and bother of examinations by both state and national examiners ...
-Reasons For Membership
The following are some of the reasons prompting state institutions to join the system: 1. The state institution retains all its charter and statutory powers and in addition enjoys the advantages of...
-New Powers Of National Banks
The Federal Reserve Act and amendments also broadened the powers of national banks, so as to put them more nearly on the same plane of competition with the state banks. Some of these acquired powers a...
-Chapter XIV. Federal Reserve Banks. Capitalization Of Federal Reserve Banks
The Federal Reserve Act prescribes a minimum capitalization of $4,000,000, divided into $100 shares for each of the twelve federal reserve banks. The outstanding capital stock increases or decreases f...
-Surplus
The act provides for an annual 6 per cent cumulative dividend on the paid-in capital stock of the reserve bank. Any excess of net earnings above the 6 per cent accrues to the United States as a franch...
-Earnings And Operating Costs
During their first years of operation not many of the reserve banks were able to earn the 6 per cent. The amortization of organization expenses, the small volume of business, and the low earnings on t...
-The Board Of Directors
Each reserve bank is supervised and controlled by a board of directors of nine members, holding office three years and divided into classes A, B, and C, of three members each. The directors owe their ...
-Election Of Directors
Directors of class A and class B are chosen as follows: The banks of the district are classified by the chairman of the board of directors into three groups, each containing about one-third of the ban...
-The Federal Reserve Agent
The federal reserve agent must be a man of tested banking experience. As indicated by his other title mentioned above, he acts as chairman of the board of directors of the reserve bank and maintains t...
-Internal Organization
In 1915 and again in 1918, the Federal Reserve Board suggested a scheme of internal organization for the federal reserve banks. The 1918 scheme is shown in Figure 5. ...
-Reorganization Of Federal Reserve Bank Of New York 1919
The heavy demands made by the war upon the services of the federal reserve banks led to a disproportionate growth of certain functions and departments, while the general growth of these banks since 19...
-The Governor
The two chief men in a federal reserve bank are the federal reserve agent, whose duties have been stated in a preceding section, and the governor. The governor is the active operating officer of the b...
-Powers Of The Reserve Banks
The federal reserve banks are primarily bankers' banks, for their customers and owners are the member banks. But they are clothed with powers enabling them also to perform certain services for non-mem...
-Typical Bank Departments
These and other functions are distributed among the departments of the Federal Reserve Bank of New York (using this bank for illustration) as follows: ...
-The Cash Department
1. The Authorities Division handles signatures, stop-payments, examination of checks, discount resolutions, and extracts from bylaws and resolutions of customers. 2. The Paying Division (Paying Tel...
-The Custody Department
1. The Custody Division has the custody of the collateral for all departments, including the investments of the federal reserve bank itself, the collateral on discounts and advances, collateral for go...
-The Check Department
1. The Incoming Mail Division handles the general distribution of the mail, prepares the morning exchanges for the clearing house, receives and credits remittances, advising immediate credits and prov...
-The Collections Department
1. The Government Check Division receives the Government checks out of the exchanges from the clearing houses, sorts and schedules them, and attends to the accounting for them. 2. The City Collecti...
-The Loan Department
1. The Credit Division receives applications for advances and discounts, handles the commercial statements of borrowers, and makes credit investigations. 2. The Loans and Discounts Division handles...
-The Foreign Department
The Foreign Department handles the accounts of foreign governments and banks, the allotments and purchases of foreign exchange for other federal reserve banks, and all government regulations of foreig...
-The Certificate Of Indebtedness Department
The Certificate of Indebtedness Department handles the subscriptions, the deliveries, and the redemptions of the certificates of indebtedness of the United States Treasury, and also the account of the...
-The Government Deposit Department
The Government Deposit Department handles the applications of the banks for government deposits, the receipt and delivery of securities for collateral, the calculation and receipt of interest on the d...
-The Government Bond Department
1. The Bond Division handles the incoming and outgoing mails that pertain to government bonds, the loans records, and records of individual subscriptions; the conversion, registration, exchange, trans...
-The Government Securities Sales Department
The Government Securities Sales Department includes a number of divisions, the name of each indicating its function in the sale of securities: 1. Certificates Of Indebtedness Sales 2. War Saving...
-The Bill Department
The Bill Department performs the open-market operations concerned with bills of exchange, keeps records of bills purchased for the reserve bank itself and for others, makes allotments to and purchases...
-The Securities Department
The Securities Department handles the open-market transactions in United States securities and municipal warrants, makes and keeps the purchase and sale contracts, keeps records of the securities owne...
-Resources And Liabilities Of The Federal Reserve Banks
In the following statement, as of July 17, 1920, the resources and liabilities of the twelve federal reserve banks are grouped and numbered for convenience in describing them. Consolidate...
-Liabilities Of The Federal Reserve Banks
The paid-in capital of the reserve banks (item 15) amounts to 3 per cent of the capital and surplus of the member banks. The surplus of the reserve banks (item 16) now exceeds their capital and this i...
-Fiscal Agents Of The United States
The Federal Reserve Act provides that moneys held in the general fund of the United States Treasury, except the 5 per cent redemption funds against national bank notes and federal reserve notes, may, ...
-The Treasury And Reserve Banks
The number of depositories was greatly increased during the war, and many special depositories will continue to be used until the war financing definitely ends. Meanwhile the Treasury, despite polit...
-Duties Of Former Sub-Treasuries
The functions of the sub-treasuries were in part as follows: 1. Issue Of Gold Order Certificates On Gold Deposits. 2. Acceptance Of Gold Coins And Silver Dollars For Exchange. 3. Acceptance o...
-Chapter XV. The Federal Reserve Board. Membership Of The Board
Our previous experience with a central national bank, in 1791-1811 and again in 1816-1836, had shown that such an institution, despite its financial success, was likely to fall a victim of politics, a...
-Criticism Of Constitution Of The Board
The chief criticisms that have been brought against the constitution of the board are: that appointment thereto is owing to government officials rather than to banks, and therefore the board is too op...
-Powers And Responsibilities
The board is responsible for the success of the system and is clothed with great powers, the chief of which are as follows: 1. To examine the federal reserve banks and member banks, and to require ...
-Administrative Duties
The business of the Federal Reserve Board is handled through committees of the members, who prepare the matters to be acted upon and report them to the full board for determination. The board appoints...
-The Federal Advisory Council
The Federal Reserve Act provides for an advisory council consisting of as many members as there are districts. The board of directors of each federal reserve bank elects one member and determines his ...
-The Comptroller Of The Currency - Powers And Duties
The National Banking Act of 1864 provided for the establishment of a separate bureau of the Treasury, under the Comptroller of the Currency, charged with the execution of that and subsequent laws resp...
-The Comptroller's Examiners
The Comptroller's examiners, on October 31, 1919, consisted of a field force of 128 national bank examiners and as many assistants, who were under the immediate supervision of twelve chief examiners l...
-National Bank Reports
The Act of 1869, still in force, requires national banks to make each year not less than five reports to the Comptroller. At the call of the Comptroller a report of conditions on the specified past da...
-Chapter XVI. Domestic And Foreign Branch Banking. Branch Banking Within The United States
Branch banking in the United States has always aroused much opposition, especially among the smaller banks, on the theory that it results in monopoly and is contrary to our democratic ideals, the big...
-State And National Branch Bank
In certain states, state banks and trust companies are empowered to establish branches in their home cities, elsewhere in the state or abroad, but even in those states the system has not spread as far...
-Development Of Branch Banking
Altogether it would seem that branch banking is an inevitable future development in the United States and that the state and national bank laws will be liberalized in this respect. It is a perversion ...
-Need For Foreign Branches Of American Banks
American banks have been slow to establish foreign branches. The National Banking Act gave the national banks no such right and in this respect most of the state banking laws followed the national law...
-Foreign Branch Banks Established
As a result of this provision of the Federal Reserve Act two national banks have opened foreign branches. The National City Bank of New York in 1920 operated a chain of 55 branches, located in Hispani...
-Ownership And Management Of Foreign Branches
A committee of government experts in foreign trade recently considered the question of the character of the agencies most desirable for banks to maintain in foreign countries - whether they should be ...
-Growth And Functions Of Foreign Branches
The growth of foreign branch banking has been promoted by the war and the consequent increase of our foreign trade, and, on the other hand, it has been a leading factor in developing that trade. Branc...
-Federal Foreign Banking Associations
In 1919, after the peg was removed from sterling, franc, and lire exchange, rates declined to hitherto unknown levels and speculation in exchange became excessive. American exporters suffered, and a...
-Provisions Of The Edge Act
The Edge Act became law in December, 1919. It allows federal incorporation of two kinds of banking institutions, which, however, are not clearly distinguished - one doing principally commercial bankin...
-Powers Of The Edge Corporations
The Edge corporations enjoy general banking powers; to handle all forms of commercial instruments; to deal in securities, including those of the United States and of any state; to accept bills drawn u...
-Edge Corporations Established
It is thus seen that the Federal Reserve Board is clothed with broad powers for the regulation and control of the Edge corporations, and upon this regulation their success and avoidance of danger larg...
-Chapter XVII. Legislation Governing National Bank Note Issue. Bond Deposit Requirement From 1864 To 1900
The National Banking Act of 1864 required, as a preliminary to the issue of national bank notes, a deposit of United States registered bonds to an amount not less than one-third of the paid-in capital...
-The Aldrich-Vreeland Act - Emergency Circulation Of Associations
On May 30, 1908, the Aldrich-Vreeland Act was passed in order to provide emergency circulation, the need for which had been severely felt during the panic the previous year. By this act ten or more na...
-Emergency Circulation Of National Banks
The Aldrich-Vreeland Act also provided that national banks having bank notes outstanding secured by the deposit of United States bonds to an amount less than 40 per cent of its capital, and having a s...
-Character Of The Emergency Notes
The additional circulating notes issued under the Aldrich-Vreeland Act were of the same nature, tenor, and use as the circulating notes of national banks previously issued and secured by the deposit o...
-Effect Of War On Emergency Circulation
On August 4, 1914, at the opening of the Great War and the consequent disturbance of financial conditions, the Federal Reserve Act and the Aldrich-Vreeland Act were further amended. By these amendment...
-Conversion And Refunding Of Bonds Under The Federal Reserve Act
The Federal Reserve Act repealed the provisions of Section 5159 of the Revised Statutes of the United States and of the Acts of 1874 and 1882, and any other provisions of existing statutes that requir...
-Retirement Of National Bank Notes
One of the fundamental purposes of the federal reserve system was to eliminate the bond-secured note circulation and substitute the federal reserve note based on commercial paper and gold. The sudden ...
-The Pittman Act Of 1918
The occasion of the Pittman Act was explained in Volume I, Chapter I, as the sudden and pressing need for a great quantity of specie to pay the adverse trade balance with India during the war, and the...
-The Deposited Bonds
National banks wishing to issue bank notes are required to deposit with the Treasurer of the United States registered bonds of the United States. The Treasury stands ready to exchange for this purpose...
-Chapter XVIII. National Bank Notes. Preparation Of National Bank Notes
After the bonds have been deposited, the bank is entitled to receive from the Comptroller of the Currency circulating notes in blank, registered, and countersigned, equal to the par value of the bonds...
-Denominations And Character
The Act of June 3, 1864, provided for $1, $2, $5, $10, $20, $50, $100, $500, and $1,000 notes, but not more than one-sixth part of the notes furnished to any bank was to be of smaller denomination tha...
-The Redemption Fund
Immediately after a bank receives its first circulation from the Comptroller it is required to deposit with the Treasurer of the United States, as a redemption fund, a sum of lawful money equal to 5 p...
-Method Of Note Redemption
The notes must be presented to the Treasurer in sums of $1,000 or any multiple thereof. Upon receipt they are sent to the National Bank Redemption Agency of the Treasurer's office, and are there sorte...
-Withdrawal Of Circulation
Should a bank reduce its circulation, either by depositing lawful money or by permitting notes to be redeemed by the Treasurer and destroyed and asking for no new notes to take their place, the amount...
-Effect Of Liquidation
Within six months from the date of the vote to go into liquidation, the bank must deposit with the Treasurer of the United States lawful money sufficient to redeem all outstanding notes. This deposit ...
-Effect Of Failure To Redeem Upon Demand
Whenever a national bank fails to redeem in lawful money any of its circulating notes, upon demand of payment duly made at its place of business during the usual business hours, the holder may cause t...
-The Tax On National Bank Notes
National banks taking out circulation are subject to a tax on the average amount outstanding. This tax is payable semiannually, and is at the rate of 1/2 per cent per annum on such notes as are secure...
-Public Advantages Of National Bank Notes
By means of national bank notes several advantages are acquired by the public. The national bank system was formed to provide a uniform bank note currency, and this purpose has been thoroughly real...
-Banking Advantages Of The National Bank Notes
The establishment of a safe and uniform bank note system has undoubtedly proved a direct benefit to banking by creating confidence in banking institutions. The National Banking Act stemmed the rising ...
-Assuming Maturity 1925.
It thus appears that the profit is lowest when the premium is highest; that at any market price it is higher when the market rate of interest is lowest; that the profits on the 2's may be as great as ...
-Disadvantages Of National Bank Notes. National Bank Notes Have Several Disadvantages.
For one thing, the profits to the national banks from the bank note privilege are so small and the operations of issue, withdrawal, and redemption so troublesome, that many national banks make no use ...
-Inelasticity
The chief criticism of national bank notes, however, is their inelasticity - the quantity of notes does not bear a direct ratio to the volume of business done. Bank notes should expand and contract in...
-Other Disadvantages
Besides the disadvantages mentioned above, the national bank note system has this objection - that it failed to provide for an emergency circulation. This defect was seriously realized in the panic of...
-Chapter XIX. Federal Reserve Notes. Issue Of Federal Reserve Notes
One of the chief objects of the Federal Reserve Act was to replace the unsatisfactory national bank notes with a bank note currency that should be controllable and elastic. The provisions of the act f...
-Methods Of Redemption And Retirement
Any federal reserve bank may at any time reduce its liability for outstanding federal reserve notes by depositing with the federal reserve agent its federal reserve notes themselves, gold, gold certif...
-Effect Of Gold Reserve Concentration
Several important results flowed from this operation under the original provisions of the Act: 1. The federal reserve notes became themselves practically gold certificates, the federal reserve agen...
-Direct Issue Of Notes For Gold
On June 21, 1917, the Federal Reserve Act was amended to permit the direct issue, by the federal reserve agent to the federal reserve bank, of federal reserve notes for gold and gold certificates. By ...
-Amendment Providing For Direct Issue
The effects of the amendment of June 21, 1917, and the use made of the privileges conferred by it are indicated in the following statistical statement covering the month before and the month after tha...
-Reserves Of Federal Reserve Banks
Before June 21,1917, there was, after the manner of the Bank of England, a severe separation of the gold held against notes (100 per cent or nearly that amount being carried with the federal reserve a...
-Tax On Deficiency Of Reserves
To provide against extreme emergencies, provision is made for the increase of federal reserve notes. The Federal Reserve Board may suspend, for a period not exceeding 30 days (though it may from time ...
-Other Devices For Obviating Deficiencies Of Reserves
The paragraph of the Federal Reserve Act prescribing the conditions when the reserve requirement may be suspended, and the penalties for violation, is very loosely drawn. It provides a graduated tax f...
-Movement Of Reserve Ratio
The movement of the reserve ratio of a banking system does not necessarily serve in all cases as a true index of strength. The ratio may increase as the result of an increase in cash reserve even thou...
-Characteristics Of Federal Reserve Notes
The federal reserve notes are direct obligations of the United States, and are not, therefore, in the strict sense bank notes. They are receivable by all member banks and federal reserve banks, and fo...
-Provisions For Controlling Excessive Issues
The original provisions against excessive issues of notes seemed ample to prevent inflation. A 40 per cent gold reserve was required, and this requirement could only be obviated by the payment of a pr...
-Responsibility For Stemming Inflation
It is obvious that the ultimate control of note issue rests with the Federal Reserve Board, and, therefore, upon the personnel and policies of the board the possibility of inflation depends. If its me...
-Safety Of Federal Reserve Notes
The federal reserve notes also seem as safe as they can be made. They are direct obligations of the United States government, which retains a first lien on all the assets of the federal reserve bank, ...
-Elasticity Of Federal Reserve Notes
The intention of the system was to provide an elastic currency, which would provide not only for emergencies but also for the seasonal variations in the demand for money. The system seems altogether c...
-Reserve Note Circulation
The system of issue and redemption of federal reserve notes which has been adopted has had a marked and beneficent effect on our monetary media. The Treasury, federal reserve banks, and the member ban...
-Chapter XX. Discount Operations Of The Federal Reserve Banks. Paper Eligible For Rediscount
The discount operations of the federal reserve banks are of three classes: 1. For Member Banks. 2. Open-Market Purchases And Sales. 3. For Other Federal Reserve Banks. Paper that is eligib...
-1. Rediscounting For Member Banks
Before 1914 one of the serious defects in the American banking system was the want of a discount market - a dependable source of funds for the banks at all times, on the basis of commercial paper. The...
-Effect Of War On Discount Of Commercial Paper
The most important cause of change in attitude towards rediscounting was the necessities of war finance, with its huge spasmodic receipts and payments handled through the banks. The war made it necess...
-Statistical Statement Of Rediscounts
War finance operations have so disturbed discount operations that it is impossible to show the normal seasonal variations in the discount holdings of the reserve banks. Undoubtedly as soon as the Trea...
-2. Open-Market Operations
The discount market is enlarged also by the open-market operations of both the member banks and the federal reserve banks. Member banks buy, as do the federal reserve banks, from discount companies, n...
-3. Rediscount Operations Between Federal Reserve Banks
All rediscount operations between the federal reserve banks are arranged by the Federal Reserve Board, under authority of Section 11 of the Federal Reserve Act, which provides that a federal reserve b...
-Discount Rates Of Federal Reserve Banks
Section 14 of the Federal Reserve Act clothes any federal reserve bank with the power to establish from time to time, subject to review and determination by the Federal Reserve Board, rates of discoun...
-Factors Influencing Discount Policy Of Federal Reserve Board
In the determination of its discount policy the Federal Reserve Board has been influenced by a number of factors. In the first place, throughout the period of our participation in the war it was th...
-Control By Lines Of Credit
The urgent need of restraining bank expansion in 1920 led to an amendment of the Federal Reserve Act to the effect that the discount rates of the federal reserve banks, fixed subject to the approval,...
-Chapter XXI. Reserves Against Deposits Under National Banking Act. Legal Requirements
The Act of 1864 required that national banks located in the seventeen principal cities named carry reserves consisting of lawful money, equal to 25 per cent of the aggregate amount of their circulatio...
-System Of Redeposited Reserves
Under the laws of 1864, 1887, and 1903, a complicated system of redeposited reserves against deposits developed which may be presented by the chart on page 389. ...
-Bank Correspondents
Under the National Bank Act no bank was required by law to carry any reserve with banks in reserve or central reserve cities, but it was permitted to do so if it found it advantageous. No bank, howeve...
-Effect Of System On Concentration Of Money
The result of the system was a high degree of concentration of money in the three central reserve cities and in relatively few banks even there. According to the returns of the last Comptroller's call...
-Competition For Deposit Balances
Although these bank balances were not very profitable to the reserve banks, the correspondents were useful in giving access to business lines and houses in every part of the United States. Accordingly...
-Effect Of Redeposited Reserves On Securities And Money Markets
The payment of interest on deposits, undertaken in addition to the other multiplex services of the reserve city banks and brought about by the force of competition among the reserve city banks for the...
-Effect On Cash Carried, Exchange, And Accommodation
The interest on the balances drew the funds to the reserve cities and then forced the reserve city banks to loan and invest them. The result was that the national banks as a whole kept on hand very sm...
-Reserves And Stock Exchange Loans
The fault here was in the system, not in any particular banks, nor in a special desire of the banks to facilitate stock exchange speculations. The banks were institutions for profit; they were competi...
-Fictitious Reserves
Another evil of the system of redeposited reserves arose from the fact that the actual available reserve was much less than the minimum reserve required by the banking laws, not only because of the in...
-Evils Of Legal Minimum Reserve
Again, objection might be raised against the system on the ground that the fixation by law of a minimum per cent reserve against deposits is very questionable policy. The other governments of the worl...
-Decentralization Of Reserves
One of the most objectionable features of the former reserve system was the decentralization and parceling of the reserves among the 7,500 national banks and the 21,000 state institutions. The system ...
-Chapter XXII. Reserves Against Deposits Under The Federal Reserve Act. Legal Requirements
The Federal Reserve Act of 1913 distinguished between time deposits and demand deposits. The reserves required against time deposits in all banks were put at 5 per cent, those against demand deposits ...
-Amendments To Reserve Requirements
On September 7, 1916, the Act of 1913 was amended so as to permit member banks to carry with the federal reserve bank any part of the reserves which by the Act of 1913 they were required to carry in t...
-Amounts And Distribution Of Reserves
The amounts and distribution of reserves under the Acts of 1887, 1913, 1917, and 1918, are shown in the table on page 403. Effects Of Federal Reserve System On Reserves The chief effects of the ...
-2. Concentration Of Reserves
The reserves of a member bank now consist wholly of balances with the federal reserve bank. The board has made a steady campaign in the case of both notes and deposits, to concentrate the gold holding...
-3. Decentralization of Bank Balances in Central Reserve Cities
The regional system has the effect of reducing the balances carried in central reserve city and reserve city banks, and of lodging them in the twelve federal reserve banks or of investing them locally...
-4. Cessation Of Interest Payments On Reserves
The federal reserve banks, conforming to the practices of the central reserve banks of Europe, do not pay interest on reserve balances. To do so would force the central reserve bank to invest an undue...
-Calculation Of Reserves Of Member Banks Against Deposits
For purposes of reserve calculations the Federal Reserve Act defines demand deposits as comprising all deposits payable within 30 days. It defines time deposits as comprising all deposits payable ...
-Definition Of Reserve Cities
The Federal Reserve Act conferred authority upon the Federal Reserve Board either to add to the number of cities classified as reserve and central reserve cities, or to terminate their designation as ...
-Reserves Of The Federal Reserve Banks Against Deposits
The Federal Reserve Act requires every federal reserve bank to maintain reserves, in gold or lawful money, of not less than 35 per cent against its deposits. It does not state, except by implication, ...
-Nature Of The Gold Settlement Fund
One of the objects of the Federal Reserve Act was to provide a universal system of domestic exchange at par. The establishment of such a system has been fraught with great difficulty, both from the co...
-Operation Of Gold Settlement Fund
The facilities of the gold settlement fund have been extended to all branches of federal reserve banks which carry deposit accounts of member banks, thus simplifying the accounting between the head of...
-Functions And Transactions Of Gold Settlement Fund
The function of the gold settlement fund is to obviate the necessity of shipping gold - the gold need not be shipped unless the federal reserve bank has exhausted its balance with the fund, and even t...
-Telegraphic Transfer Of Funds
The leased wire system, connecting all federal reserve banks and their branches with each other and with the Federal Reserve Board and the Treasury Department, is used to provide telegraphic transfers...
-Members' Drafts On Federal Reserve Banks
The gold settlement fund is part of the federal reserve scheme whereby federal reserve banks are to acquire, at least in part, the exchange facilities which have been heretofore provided by city banks...
-Three Kinds Of Drafts May Be Drawn On The Federal Reserve Banks By Members.
1. Ordinary Drafts. In making remittances within its own district (that is, in cases in which exchange on another district is not demanded) the member should draw ordinary drafts. Such drafts are not ...
-The Par Collection System
The second power conferred on the board by Section 16 of the Federal Reserve Act was to require each federal reserve bank to exercise the functions of a clearing house for its member banks. In a circu...
-Progress Of Par Collection System
The federal par collection system has been introduced against the continued opposition of the country banks, particularly of the South. The growing use of the system during 1919 and 1920 would seem to...
-Statistical Statement Of Deposits In The United States
On June 30, 1919, the total deposits of the state, savings, and private banks and loan and trust companies in the United States were as follows: Due to banks.................................
-Chapter XXIII. Institutions Other Than National And Federal Reserve Banks. Composition Of The Banking System Of The United States
In Chapter XII were listed, under several classifications, the financial institutions that compose the banking system of the United States. The intervening chapters have described the national and fed...
-State Banks - Growth
State banks, which include commercial banks incorporated under state charters, amounted in 1860 to 1,562. By 1868 this number had decreased to 247 owing to national bank legislation, particularly the ...
-Requirements As To Capital
Most states have requirements as to the minimum capital of their banks. In some states the amount required is the same throughout the state; in others the amount is either graded according to the popu...
-Limitations As To Loans
Since most of the banks in the United States are small, the loans to any one customer are likely to involve excessive concentration of risk. This danger is increased by the fact that a controlling int...
-Requirements As To Reserves, Branches, And Supervision
Regulations as to minimum reserves against deposits were, even in those states where such reserves are now required, very tardily made, Connecticut leading the way in 1872. The requirement is not yet ...
-Trust Companies - Legal Requirements
As stated in Chapter XII, trust companies perform numerous functions. Their powers vary with the state laws, and to the general power of administering trusts incidental or even unrelated powers have b...
-Growth Of Trust Companies
The early companies, of which the first was founded in 1822, were also interested in the insurance business. In 1853 the first company was chartered to do exclusively trust business. Immediately after...
-Causes Of Recent Growth
The trust companies owe their recent rapid growth to several factors. Probably the greatest is the tremendous increase in private and corporate wealth in the last generation. The need for some institu...
-Supervision And Regulation
The examination and regulation of trust companies developed later than the examination and regulation of banks. This was due to the late standardization of trust companies and was brought on by the in...
-Private Bankers
The term private banker has come to represent two categories in the United States. In Wall Street it technically refers to a small group of great banking houses, such as J. P. Morgan and Company, J....
-Mutual And Joint-Stock Savings Banks
The earliest savings banks were founded in Philadelphia in 1816, in Boston in 1816, in Baltimore in 1818, and in New York in 1819. These were of the mutual type. The growth of mutual and joint-stoc...
-Statistical Statement Of The Banking System Of The United States
In order to summarize the figures for the six chief classes of banks in the United States, and therefore to give a comprehensive view of our financial power, the following statistical statements are g...
-Chapter XXIV. Institutions Other Than National And Federal Reserve Banks (Continued). Postal Savings Banks
The postal savings banks were inaugurated in 1910 as a device to give greater security to small depositors and attract deposits from hoarding, particularly by the foreign and other elements of our pop...
-School Savings Banks
The school savings bank plan was originated in 1876. In 1915 the American Bankers' Association began an active campaign to put savings banks into the public schools and inculcate the habit of economy ...
-Building And Loan Associations - Nature And Organization
Building and loan associations include associations variously called mutual loan associations, homestead aid associations, savings fund and loan associations, co-operative savings and loan association...
-Operations And Functions
The associations are capitalized, the members paying a certain sum weekly or monthly until the aggregate amount paid plus accrued interest equals the maturing value of the share, usually $200. Thus th...
-Statistical Summary
The first building and loan association was founded in Philadelphia in 1831. Pennsylvania has always led in the movement, and its associations of this kind have defeated the rise of mutual savings ban...
-Savings In The United States
In the United States are provided many instrumentalities for saving, which, while they are not fundamentally savings bank institutions, are nevertheless powerful means to thrift. Of these, war savings...
-The Loan Shark
Where banks fail to serve a community, an opening is afforded for private persons to perform some of their functions. Certain pathological conditions in society may also occasion and maintain the acti...
-Remedial Loan Systems
Against the evils of the loan shark business three correctives have been used: 1. Campaigns Of Publicity Through The Newspapers. 2. Legislation on the one hand so penalizing usurious lending and...
-Morris-Plan Banks
In 1910 Arthur J. Morris, a lawyer of Norfolk, Va., after a study of the co-operative industrial banks of Europe with a view to adapting their principles to American conditions, established an industr...
-Advantages Of Morris Loan Plan
The advantages of the Morris plan are many: 1. It promotes thrift. The loan and partial payment plan trains the borrower to weekly savings, and after the loan is repaid he will likely continue to save...
-Cattle Loan Companies
Some years ago cattle-raisers depended upon the small state banks, the national banks, and certain livestock commission houses at the central markets to finance their industry. Because of the inadequa...
-Nature And Terms Of Cattle Loans
An applicant for a loan prepares a financial statement, describing the stock he has to offer as collateral and the facilities for taking care of it, the amount of real estate he owns or has leased, an...
-Rediscounting Cattle Paper
The loan company procures its funds largely from the money centers by the process of rediscounting the cattle paper, though some of the loans are rediscounted locally. The company forwards to the bank...
-Security And Liquidity Of Cattle Paper
The security of the paper is enhanced by the fact that the company's loans are scattered among many cattlemen, the simultaneous failure of whom is quite unlikely. Hence the buyer of paper from such a ...
-The Federal Farm Loan System
The federal farm loan system was instituted to organize the market for real estate mortgages and facilitate long-term loans to farmers. As will be shown later, the national banks fail to provide rural...
-Federal Land Banks
The federal land banks are central mortgage bond institutions. The country is divided into twelve districts, with boundaries conforming to state lines because the federal land banks have to conform to...
-Federal Farm Loan Bonds
Besides the subscriptions to their capital stock and the surplus and reserves accumulated out of earnings, the federal land banks are permitted to issue bonds, known as federal farm loan bonds, whic...
-National Farm Loan Associations
The national farm loan associations are co-operative credit associations, modeled upon the credit unions prevalent in Europe. They consist of ten or more natural persons who are owners, or who are abo...
-Joint-Stock Land Banks
The joint-stock land banks are private mortgage bond companies, composed of ten or more natural persons, organized for profit, chartered under federal law by the Federal Farm Loan Board, an...
-Federal Farm Loan Board
The whole system is supervised and controlled by the Federal Farm Loan Board, composed of the Secretary of the Treasury and four other members appointed by the President and confirmed by the Senate. I...
-Chapter XXV. Bank Organization And Conversion. Introductory
The purpose of this and the following chapter is to set forth in a general way the necessary procedure to be followed when a new bank is organized, a state bank converted to a national bank, two banks...
-Requirements For Formal Application
The formal application for reservation of title and authority to organize a national bank - made on a blank furnished by the Comptroller - must be signed by at least five persons who are prospective s...
-Examination Of Application
The application blank should be accompanied by a draft for $100, payable to the order of the Comptroller, to cover the expense of investigation. Owing to the number of banks organized by professional ...
-Articles Of Association And Organization Certificate
The incorporators first draw up and execute in duplicate the articles of association and the organization certificate, and then forward one copy of each of these to the Comptroller. The articles of as...
-Election Of Directors And Officers
The next step in the organization procedure is the stockholders' meeting for election of the directors. In case the directors are specifically named in the articles of association this first election ...
-Requirements As To Capital Stock Subscriptions
After the election of officers, the board should call in the subscriptions to the capital stock. The law requires that 50 per cent of the capital stock of a national bank shall be paid in cash and per...
-Requirements As To Circulation
Prior to the passage of the Federal Reserve Act, an applicant bank before being permitted to do business was required to deposit with the Treasurer of the United States what were known as charter bon...
-Reorganization Of A Bank Into A National Bank
Occasionally it is deemed advisable by the directors and other shareholders of a state or private bank to enter the national banking system by reorganization rather than conversion. The controlling mo...
-Conversion Of A State Bank Into A National Bank
A bank incorporated in a state under a special charter or general statute may be converted into a national bank unless such conversion is forbidden by the laws of the state. A trust company organized ...
-Organization Of A State Bank - Preliminary Requirements
In 1914 the state of New York revised its banking laws in conformity with the recommendations of the Van Tuyl-Hepburn Banking Commission. As these are therefore comparatively modern, and as the New Yo...
-Authorization Certificate
The corporate existence of the bank dates from the approval of the organization certificate. But the bank is not permitted to transact business until all its capital stock has been fully paid, in cash...
-Qualifications Of Directors
The qualifications for the directors of a New York state bank are the same as for the directors of a national bank, that is, the directors must be citizens of the United States and in the case of thre...
-Organization Of A Trust Company
A trust company, like a state bank, is organized under state law. In New York it may be formed by seven or more natural persons filing and publishing a notice of intention and filing an organization c...
-Conversion Of A State Bank Into A Trust Company
In New York a state bank desiring to become a trust company must call a meeting of its stockholders, giving them due notice twenty days in advance. If holders of two-thirds of the capital stock agree ...
-Conversion Of A Trust Company
The procedure to be followed in converting a trust company in New York is the same as in converting a state bank, except with regard to funds held by a trust company as executor, trustee, or administr...
-Organization Of A Mutual Savings Bank
In New York a savings bank may be formed by filing with the Superintendent of Banks a notice of intention to organize, signed by not less than nine nor more than thirty persons. The procedure as to pu...
-Chapter XXVI. Charter Changes, Consolidation., And. Liquidation. Increasing Capitalization Of A National Bank
A national bank may, with the consent of the Comptroller of the Currency and by vote of the stockholders owning two-thirds of the shares, increase its capital stock to any sum approved by the Comptrol...
-Reducing Capitalization Of A National Bank
A national bank may, with the consent of the Comptroller of the Currency and of the Federal Reserve Board, and on the favorable vote of shareholders owning not less than two-thirds of the shares, redu...
-Extension Of Charter
The law authorizes the extension of the charter of a national bank whose term is about to expire. For such extension the written consent of shareholders owning at least two-thirds of the capital stock...
-Change Of Name Or Location
A national bank may, with the consent of the Comptroller of the Currency and by vote of shareholders owning two-thirds of the shares, change its name or its location to any other locality in the same ...
-Requirements In Amending Charter
The law provides that no change shall be made in the charter of a national bank by which the rights, remedies, or security of the existing creditors of the bank will be impaired. This, by implication,...
-Reasons For Consolidation Of Banks
There are many motives for the consolidation of banks. One no doubt is to allay competition. Another is to be able to offer a more varied service, as the combination of trust companies and national ba...
-The Agreement Of Consolidation
National banks proposing to consolidate should advise with the Comptroller of the Currency and apply for his approval. If the consolidation seems advisable and the terms of it are not objectionable, t...
-Approval Of Consolidation
The bonds held by either bank in excess of the amount of the capital of the consolidated bank must be withdrawn prior to approval of the consolidation by the Comptroller. These are released upon depos...
-Methods Of Consolidation
Consolidation may be effected by placing one or both of the banks in liquidation, to which end three methods are in use: 1. Without an increase of the capital the directors of the absorbing bank ma...
-Liquidation Of National Banks
National banks may be liquidated voluntarily during the term of their charter or at the expiration of it, or the liquidation may be compulsory because of dissolution for violation of the National Bank...
-Conversion Of A National Bank Into A State Bank
If a national bank has authority to dissolve it may incorporate under state law. The dissolution is carried out under the national law. Consent in writing of the holders of two-thirds of the capital s...









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