On August 29, 1913, a bill was introduced in the House of Representatives by Hon. Carter Glass of Virginia, Chairman of the Banking and Currency Committee, to provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means for rediscounting commercial paper, to more effectively supervise banking in the United States, and for other purposes.
The title of this proposed measure was The Federal Reserve Act. It created a Federal Reserve Board composed of five members to be appointed by the President of the United States and confirmed by the Senate, and two ex-officio members - the Secretary of the Treasury and the Comptroller of the Currency.
A Reserve Bank Organization Committee was provided for, to be composed of the Secretary of the Treasury, the Secretary of Agriculture and the Comptroller of the Currency, which was authorized to designate not more than twelve nor less than eight cities in the United States to be known as Federal Reserve cities, and to divide the continental United States into districts, each district to embrace one of the Federal Reserve cities. These districts were required to be apportioned with due regard to the convenience and customary course of business.
The bill required every national banking association to signify in writing to the Reserve Bank Organization Committee, within sixty days after the passage of this act, its acceptance of the provisions and terms of the act, and any national bank failing to do so should cease to act as reserve agent for other banks upon thirty days' notice to be given by the Organization Committee or the Federal Reserve Board.
Any national bank failing to become a member of this system within one year after the passage of the act forfeited all rights, privileges and franchises under the national banking laws.
The privilege of becoming a member was also extended to State banks and trust companies.
The long recommended change in the method of compensating bank examiners from a fee to a salary and expense basis was provided for by this bill.
A Federal Advisory Council was authorized to consist of as many members as there were Federal Reserve Districts, each Federal Reserve Bank by its board of directors to select annually a representative to serve on the council.
Important changes were made in the laws governing reserve requirements and the method of maintaining reserve.
Loans by member banks on farm lands within well-defined limitations were authorized, as well as the establishment of foreign branches by banks having a capital and surplus of $1,000,000.
The bill was favorably reported to the House of Representatives by the Banking and Currency Committee on September 9, 1913, and passed the House September 18, 1913, by a vote of 287 ayes to 85 nays.
The bill was reported to the Senate on the same day that it passed the House of Representatives and was immediately referred to the Committee on Banking and Currency, of which Senator Robert L. Owen was chairman, where it remained until December 19, 1913. On this date it was reported favorably to the Senate, passed by that body on the same date, and was referred to a Conference Committee of the two Houses on the disagreeing amendments. It was again reported to the respective Houses by the Conference Committee on December 22, 1913, and finally passed the House of Representatives on that date by a vote of 298 ayes to 60 nays. It was approved by the President on the same date in the presence of a number of Senators, Representatives, department officials, newspaper correspondents and others.
This bill as it originally passed the House of Representatives was by no means a well considered measure. It contained many glaring defects and numerous objectionable features. It was hurried through the House under restricted debate without sufficient time for the consideration and digestion of its important provisions, and bore every evidence of hasty legislation. It was under consideration in committee less than ten days and passed the House in nine days after being reported from the committee.
The opposition to many of the provisions in the bill as it passed the House was so strong that the Senate committee very wisely accorded public hearings on the measure to a number of prominent bankers and practically redrafted the entire bill.
The bill was intended, as the report of the Committee stated, "to bring about necessary changes in the banking and currency system of the United States and to correct long-standing evils that had a slow and deep-rooted growth".
It aimed to rectify defects complained of in the national banking system, although, the report stated, "it did not seek to make all the innovations that might, from an ideal standpoint, be deemed desirable".
In comparing this measure with the bill reported and recommended by the National Monetary Commission on January 8, 1912, known as the Aldrich bill, the committee stated that the Aldrich bill was often referred to "as a poisonous theoretical novelty," and at other times as an "ingenious scheme to create a central bank which would absorb all banking functions to itself".
It was claimed for the Federal Reserve Act that such panics and commercial crises as have occurred in the past would be made mathematically impossible in the future by supplying a method for the banks to readily obtain a circulation medium sufficiently elastic to meet all the demands of industrial or commercial activities, by providing for the mobilization of reserves in the several reserve districts and their availability not only for the business needs of the respective districts but for the legitimate demands of any other district, and by furnishing a discount system which would enable every well-managed bank to quickly convert its assets into cash to meet unexpected contingencies or runs.
The framers of this act while condemning the central bank plan apparently recognized the principle of a central authority with limited branches as the correct theory of a banking system, but objected to a central bank because of the power and influence it was feared such an institution would wield in the political and financial affairs of this country.
This act, however, created a central authority in the Federal Reserve Board with far more power than was ever contemplated conferring upon a central bank by any of the plans proposed for such an institution. The ultimate success or failure of the Federal Reserve Bank System will depend upon the conservatism, judiciousness and absolute impartiality with which this power is exercised by the central authority.
JOHN SKELTON WILLIAMS Comptroller of the Currency, 1914-1921.