One of the requisites of banking reform outlined in the previous chapter was solidarity - and unity - of the whole banking system. Since there are at present nearly three times as many banks operating under state charters as national banks it can be seen that this desideratum cannot be attained unless a large proportion of the state banks enter the new system. By the terms of the Act all national banks are required to enter the system prior to December 23, 1915, or forfeit their charters; state banks are not required to enter, but are permitted to do so at any time. Practically all the national banks have made application for membership, but only a very small number of state banks have applied. As no time limit is set for their entrance they seem disposed to watch the operation of the new system until its success is assured.

A comparison of the relative advantages and disadvantages of membership in the new reserve system may serve to indicate the probable attitude of state banks and trust companies toward it. In the first place it should be noted that in several states it is illegal for state banks to own stock in other banking institutions. Until this prohibition is removed the state banks concerned cannot become members of the Federal reserve system. Many small state banks will be kept out by the requirement that the capital of banks that enter must not be less than the minimum required for national banks in towns of the same population. The smallest capital permitted to national banks is $25,000, but in some states banks may be organized with $10,000 capital. Again, the Federal Reserve Act follows the national bank act in limiting the amount that may be loaned by a member bank to any one borrower to an amount not to exceed 10 per cent of its capital and surplus, while in some states banks may lend 25 or even 50 per cent. Another objection may be found in the strict Federal examinations and reports. Still another objection is found in the higher reserve requirements under the new system than under the state laws, though in a number of the states there is practically no difference in this respect. In the case of time deposits, against which member banks are required to keep a reserve of only 5 per cent, the advantage generally is in favor of the new system. Quite generally city banks and reserve agents have paid interest on the reserve deposits of their country bank correspondents. As the Federal reserve banks will probably not pay interest on deposits, banks entering the system may suffer some loss of income from this source. Most of these objections are invalid when viewed in the light of sound banking experience. In most instances it would be to the advantage of state banks to have higher reserve requirements, stricter examinations, and closer limitations upon their loans.

Among the advantages to state banks of entering the Federal system the most important are: first, the right to rediscount their commercial paper and secure Federal reserve notes in time of need; and, second, the privilege of depositing at par with reserve banks all checks and drafts on other member banks in the district and to have similar items drawn on themselves pass at par within the district. This clearing and collection arrangement when fully worked out will effect an immense saving to both banks and depositors, and may prove to be the crowning attraction of the new system to state institutions. If the order goes forth that items deposited for collection by member banks only will be received at par by the Federal reserve banks, non-member state banks and trust companies will find their business as collection agents for other banks and their usefulness to their own customers greatly curtailed. To what extent the privilege of rediscounting commercial paper will be advantageous to state banks will depend upon the development of the rediscount practice among banks in general. It provides a means of relief, however, to all member banks when in need of additional ready funds. Non-member banks may, possibly, get help from the reserve banks by securing rediscounts through a member bank, subject to the permission of the Reserve Board, but such permission is not likely to be granted except in the most serious situations.

In this connection it is to be noted that while the reserve requirements of member banks may be higher in some cases than the requirements under state law, they are lower in others, and quite generally lower as regards time deposits. Moreover, non-member banks will probably lose some of their bankers' balances under the provision that "no member bank shall keep on deposit with any non-member bank a sum in excess of ten per centum of its own paid-up capital and surplus." A temporary exception is made to this provision whereby the reserves of state banks that under the law of the state may be kept with another stale bank may be counted as reserves within the meaning of the Act for three years after the establishment of a reserve hank in the district. State institutions now acting as depositaries for other banks, unless they enter, will have to give up all but ten per cent of the deposits so held, thus losing a very profitable source of income. By joining the reserve system, banks outside of the central reserve cities, which hitherto have received interest on their redepesited reserves, will be deprived of this income, assuming that the Federal reserve banks will not pay interest on the reserves kept with them. This may be offset in part, however, by the 6 per cent return that member banks may expect on their stock subscriptions to the reserve banks. Moreover, the loss of interest on reserves will be a small premium to pay for the insurance the Federal reserve system provides against disastrous financial panics, or by the assurance that any solvent bank can get immediate aid in an emergency by rediscounting some of its prime commercial paper. Finally, when the Federal reserve system is thoroughly established, all banks will find that membership in such a powerful, nation-wide banking system under strict Federal supervision and control will enhance their prestige and attract business.

It would be idle to attempt a forecast of the future of the Federal reserve system. It is not perfect by any means, but experience will develop its weaknesses and indicate the lines along which it must be strengthened. Many new and intricate problems will confront the directors of the reserve banks and the Federal Reserve Board. If they adopt a wise and conservative policy, working together in harmonious cooperation, and if the business men of the country adapt their practices to conform to the changes contemplated by the Act, the new system will work well, and in time will be regarded as the greatest achievement in financial legislation in the history of the country.