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.

Consolidated Statement of the Federal Reserve Banks

Resources

Reserves

Millions

1. Gold Coin and Certificates............................

$ 168

2. Gold Settlement Fund, with the Federal Reserve Board. .

393

3. Gold with Foreign Agencies..........................

111

Total Gold Held by the Banks.....................

$ 674

4. Gold with the Federal Reserve Agents .................................................

1,152

5. Gold Redemption Fund Against the Federal Reserve

Notes..................................

144

Total Gold Reserves.........................

$1,971

6.Legal Tenders, Silver etc..........................

$ 2,119

Earning Assets

7. Bills Discounted: Secured by Government War Obligations...........................................

$1,255

8. All Other Bills Discounted...........................

1,234

9. Bills Bought in the Open Market.....................

356

Total Bills on Hand...............................

$2,846

10. United States Government Bonds and Certificates of Indebtedness.....................................

321

Total Earning Assets..............................

$3,167

Miscellaneous Items

11. Bank Premises.....................................

14

12. Uncollected Items and Other Deductions from Gross Deposits ............................................

890

13. Redemption Fund against Federal Reserve Bank Notes. ..

12

14. All Other Resources.................................

4

Total Resources..................................

$6,208

Liabilities

Capital

15. Capital Paid in.....................................

$ 94

16. Surplus ..........................................................................................

164

Total Capital Liabilities...........................

$ 259

Deposits

17. Government Deposits...............................

11

18. Due to Member Banks - Reserve Account................................

1,867

19. Deferred Availability Items..........................

647

20. Other Deposits Included for Government Credits.......

50

Total Gross Deposits.............................

$2,577

Notes

21. Federal Reserve Notes in Actual Circulation............

$3,135

22. Federal Reserve Bank Notes in Circulation, Net Liability

189

Total Note Liabilities..............................

$3,325

23. All Other Liabilities..................................

45

Total Liabilities..................................

$6,208

In the scrutiny of the above statement it will be noted that the reserves of the federal reserve banks are held in different places: the gold coin, gold certificates, legal tenders, silver, etc. (items 1 and 6), are the till money held in their own vaults; the gold settlement fund (item 2) is held in Washington, D. C; other gold (item 3) is held by agencies abroad, such as the Bank of England and others; other gold (item 4) is held by the federal reserve agents, as security against the federal reserve notes and for other purposes; and the redemption funds (items 5 and 13) are also held at Washington, the one against the federal reserve notes being lawful reserve, but not the one against the federal reserve bank notes. This allocation of parts of the reserve to different places and uses does not mean that it is any less a reserve, but rather that it is a more efficient reserve, for it is placed where payments are most conveniently and frequently made.

The earning assets of the reserve banks consist of short-term bills and long-term investments. The bills are of two types: those secured by government war obligations (item 7) and commonly called "war paper" and those of a direct commercial origin (items 8 and 9). The bills are discounted for the member banks and are called "rediscounts" (item 8), or else they are bought in the open market (item 9). The United States securities (item 10) are those bought by the banks for investment purposes, or purchased in the process of retiring the national bank notes or in the process of issuing federal reserve bank notes under the Pitt-man Act, or acquired in the process of collecting debts, etc. The methods and occasions of acquiring these various earning assets are described in later chapters.

The investments of a federal reserve bank are purchased from member banks or in the open market here and abroad. Practically all are voluntary purchases for the purpose of earnings. The bank, however, may be compelled by the Federal Reserve Board to purchase 2 per cent bonds, as well as commercial paper, from its member banks. The nature of these investments is strictly defined by law and regulated by the board. Their essential feature is that they be highly liquid.

The assets of the central bank in any system should be cash or highly liquid investments, its earning assets should constitute but a small fraction of its resources, and the rest of its assets should be in current funds held against emergencies. Such a bank is then able to absorb commercial paper in a redundant market, and to release it in an undersupplied market; or, in other terms, the bank can loan out funds in a tight money market and contract them in an easier market. By such open-market operations the reserve banks will, when the system is developed, control the money market.

Such operations by the federal reserve banks make the market rate conform to the rediscount rate set by themselves and the board. By becoming an active factor in the market, buying and selling at the established rates, the banks can make their rediscount rate effective; otherwise, whether it would be effective or not would depend wholly upon the extent to which members chose to rediscount. By this means the reserve banks are also able to maintain a reasonable and stable discount rate. A power of control, however, is possible only if the reserve banks have a substantial amount of loan funds at their disposal, if the open-market purchases are commercial paper, and if really a broad discount market exists. The Federal Reserve Act was so drawn as to eliminate from the transactions of the reserve banks call loans (see Chapter XXI) on stock exchange collateral, because experience had shown that in panics such loans could not be realized except by selling at a sacrifice the collateral on which they were based. For this reason during the war it was found necessary to supplement the control by the reserve banks with a voluntary "Money Committee " in New York, which so pooled the fund available for call loans as to control the call loan rate.

To continue the discussion of the items shown in the statement on pages 275 and 276 all the federal reserve banks are now provided with suitable building sites (item 11) and plans are under way for the erection of buildings. It is obviously desirable for these banks to have permanent and commodious quarters, alike for the efficiency of their service and for their prestige.

The federal reserve banks act as clearing houses for the banks of their respective districts, and, through the gold settlement fund, for the banks of the whole country. The operation of this fund as part of the federal par collection system will be described later. The reserve banks accept the items for collection and defer the availability of the proceeds until sufficient time has elapsed for collection to be made. At any one time, therefore, the uncollected items (item 12) on hand are a resource and the deferred availability (item 19) is a liability.