The factor most largely responsible for the peculiar organization of the Federal Reserve System was need of centralization of reserves. Yet "centralization" had always had such an ominous ring in American ears that it was assumed to be necessary to avoid the semblance of complete centralization even though the benefits accruing from it were, if possible, to be assured.

The act provides for the establishment of new banks, to be known as Federal Reserve Banks, into which the reserves of the country are, so far as possible, to be gathered. The country is to be divided into from eight to twelve "federal reserve districts" in each of which is to be designated a "federal reserve city" in which in turn the new banks are to be established. The first districting of the country is to be by an "organization committee" made up of the Secretary of the Treasury and the Secretary of Agriculture and the Comptroller of the Currency. After the organization of the system a board known as the "Federal Reserve Board" is to have control of this matter.

A minimum capital of %4,000,000 is prescribed for each federal reserve bank. The capital is to be subscribed by "member banks" of the district, each bank entering the system subscribing an amount equal to 6% of its own capital and surplus. One-sixth of the amount subscribed is payable on call, one-sixth three months after the organization of the banks, one-sixth in six months, while the balance is to remain on call. If the bank subscriptions prove inadequate to supply the minimum capital, provision is made for popular subscriptions, although subscriptions by single individuals and corporations are limited to %25,000. So determined was Congress that the Federal Reserve System should get started that subscriptions by the United States government are pledged in every case where bank and popular subscription together do not suffice to supply the minimum capital. Above the minimum, the capital of the reserve banks may fluctuate as banks join or withdraw from the system. The shares are to be %100 each, payable in gold or in gold certificates. Those owned by banks are not to be transferred or hypothecated.

Absolute centralization feared

Federal reserve banks

Reserve districts

Capital of reserve banks

Ostensibly, membership in the Federal Reserve System was to be voluntary, and provision is made for the entrance into membership of state institutions as well as of national banks. By amendment adopted June 22, 1917, provision is also made for membership of banks organized under local laws in the territorial possessions. As a matter of fact, pressure was brought to bear on national banks to force them into the system, although at the same time inducements were extended to them as well.

National banks are required to signify within sixty days after the passage of the act as to their intention of joining the system. If they fail so to signify, they may on thirty days' notice from the Organization Committee be forbidden to act as reserve agents. Moreover, it is provided that government funds shall not be deposited with non-members of the system, and that a bank's charter shall be declared forfeited if it fail to enter the system within one year.

As an inducement to national banks to come into the system it is provided that, on application to and approval by the Federal Reserve Board, and if not in contravention of state law, national banks may be permitted to do a trust business, it is also provided that member banks not in central reserve cities may make restricted loans on improved, unencumbered farm lands, but in this connection power is given to the Federal Reserve Board to add cities to the list of those not permitted to make such loans. An inducement to the large city banks interested in the possibilities of foreign trade is found in the provision that national banks with a capital and surplus greater than %1,000,000, may with the authorization of the Reserve Board, establish foreign branches. But perhaps even more significant in this connection are the provisions enabling member banks to engage in the business of accepting on commission.

Membership

Pressure on national banks

Inducement to national banks

Amendments adopted in June, 1917, offer special inducements to the state banks to come into the system. While state banks must comply with the reserve and capital requirements of the act and with the provisions of law prohibiting the purchasing of or the lending on their own stock they are permitted to retain their state charter privileges. They are also exempted from the restriction in Revised Statutes 5200 relating to loans to individuals, although the restriction is practically made to apply in rediscounting operations by the bank itself at the federal reserve bank. Finally, provision is made for the withdrawal, on six months' notice, of a state member bank, although the law does not permit a reserve bank to cancel more than 25% of its capital in any one year for this purpose unless special authorization is obtained from the Federal Reserve Board.

Although branch-banking has not, on the whole, been favorably regarded in the United States, it was recognized that the peculiar function of the reserve banks would in time require the establishment of branches. It is therefore provided that the reserve banks may be permitted or required by the Reserve Board to establish branches in their several districts, and also in the other districts where the reserve banks of such districts have for any reason suspended operation. Provision is made for the operation of the branches by boards of directors of not more than seven members or less than three, under rules and regulations approved by the Reserve Board. The members of these boards are to have the same qualifications as directors of the reserve banks themselves. A majority of one of the branch directors is to be appointed by the reserve bank concerned, but the remainder are to be designated by the Federal Reserve Board. The bank is to select the branch manager.