The New Student's Reference Work/Currency Law
Currency Law. President Wilson, in signing the measure known as the Glass-Owen Currency Bill, Dec. 23, 1913, defined its purpose: “To furnish the machinery for free, elastic and uncontrolled credits.”
A “United States” of Banks. This law brings the banks of the United States into co-operation with the Government and with one another in a system corresponding to that of the Union itself—with its central and state governments and the sub-divisions of the latter.
Need for “A More Perfect Union.” Business transactions are mainly based, not upon money, but upon credit. Credit is based not alone upon money and other assets but upon confidence in “the business situation;” so that the mere existence of a banking federation to provide for financial needs and emergencies not only supplies those needs but has a strong tendency to prevent panics and depressions.
The law provides for broadening the basis of credits: (a) By permitting banks to re-discount at Federal Reserve Banks under Government control, the paper which they, themselves, have received as security for loans; (b) by including as lawful security paper issued for industrial and commercial purposes, and paper maturing in six months, secured by agricultural products. National banks, except those in the Central Reserve cities of New York, Chicago and St. Louis, may also make direct loans on five year farm mortgages; (c) by allowing member banks to accept bills of exchange at not more than six months sight drawn against imported or exported goods; (d) by permitting or compelling one Federal Bank to loan to another on discounted paper; (e) by providing for printing, by the Government when needed, of Treasury Notes to be issued by these Reserve Banks and secured by the re-discounted paper referred to under (b). The Reserve Bank is also required to hold in gold 40% of the value of these notes and they are guaranteed by the Government and redeemable in gold. In times of unusual demand for money, the Government may temporarily suspend the gold reserve provision.
The leading features of the law, as effecting the borrower and business conditions, may be summarized as follows:
The country is divided into districts in each of which the Government locates a Federal Reserve Bank. All national banks in each district must, and any state bank in the district may, under certain requirements, take stock in this bank equal to 6% of capital and surplus. Federal banks can loan only to their stockholders or “member banks.” Their sources of profit are interest on these loans and profits on dealings in designated securities. Dividends are restricted to 6%, earnings above 6% (and surplus fund requirements) going into the United States Treasury.
A very close control of this banking federation is vested in a Federal Reserve Board at Washington, consisting of seven members (one of whom must be Secretary, and another Comptroller of the Treasury) appointed by the President with consent of the Senate.
Powers: Of the nine directors of each Federal Bank, the Board appoints three, one of whom acts also as the “Federal Reserve Agent” through whom the Board and the Federal Banks communicate with each other; can remove directors of Federal Banks; in emergency, in its judgement, can suspend restrictions as to Federal Bank reserve; decides as to renewal of loans by Federal Banks and rate of interest to be charged from time to time on the Treasury notes and on loans.
To prevent the over-loaning or money for undue expansion and other dangerous and speculative ventures there are, in addition to the control provided by the close articulation of the Government and the banks, these checks upon inflation: (a) The fact that the Secretary of the Treasury can withdraw Government funds from a Federal Bank, thus reducing the basis of loans; (b) the fact that Member Banks must pay interest on borrowed money; (c) the fact that one Federal Bank cannot, under penalty of a heavy tax, re-issue the Treasury notes of another Federal Bank; (d) although the Board may suspend the gold reserve provisions in times of unusual demand for money, a heavy tax, the amount of which is in the discretion of the Board, maybe imposed on the Treasury notes when the Reserve falls below the 40% required under the law. (See Banks, Money, Mint.)