The Logan Republican

SUMMARY OF CURRENCY BILL AS IT PASSED BOTH HOUSES

Most Far-Reaching Measure Relating to Finance.

Banks Given Sixty Days in Which to File Application for Membership in New System.

Washington.—The new bill affecting money, banking and finance of the United States which passed both houses of congress and received the signature of the president is one of the most far reaching measures legislating to finance that has been enacted in many years. The magnitude of the subject, the diversity of interests affected and the length of the debates in both branches of congress has made it difficult for the ordinary observer to follow the changes and grasp the essentials of this highly technical measure in its important bearings on money, finance, banking and the entire range of fiscal subjects, public and private which it affects. With a view, therefore, of presenting succinctly and in non-technical language, an epitome of the salient features of the measure as finally framed, the following summary is given of the bill as a whole and of its principal details.

First Steps To Be Taken

Generally speaking the first steps to be taken to bring into operation the nation's new financial system will be through an organization committee of the secretary of the treasury, secretary of agriculture and comptroller of the currency. Banks have 60 days within which to file their applications for membership in the new system and one year's time is allowed before the government will compel the dissolution of any national bank that refuses to join.

The new law will make little direct change in the operation of the present national banks, except to allow them to loan a certain amount of their funds upon farm mortgages. Its chief purpose is to add a new piece of machinery to the banking system that will take up the slack during the changing business conditions of each year, that will give the banks a place to quickly convert their assets into cash in time of need and that will bring out new federal currency when it is needed and retire it when money becomes cheap.

Elastic Circulation

Banks are now required to keep a certain percentage of their deposits as reserves, part in cash in their own vaults and part of which may be re-deposited in the banks of New York, Chicago, St. Louis and other designated cities. In times of sudden financial demands, when banks have loaned up to the full limit of their resources, these reserves furnish little relief, because if they are paid out to meet demands the banks are left in a precarious condition.

The basic principle of the new law is to get these reserve funds out into circulation when necessary without lessening the safety of any bank; and to provide a place to which local banks may rush in a crisis and get cash for the prime commercial paper they hold in their vaults.

Regional Reserve Banks

This is to be accomplished through a chain of regional reserve banks or reservoirs of reserves in which all banks shall deposit a stated part of the money they are required to hold as reserve. Under the new system when a financial flurry comes the banks can take commercial papers such as notes, drafts and bills of exchange to these reservoirs and secure the use of their own reserves, or if necessary even the reserve of other banks, by depositing this security.

The new regional banks will receive about one-half of the bank reserves of the country. They, in turn, will be permitted to loan back to the banks all but 35 per cent of these reserves, so that in case of emergency millions of cash can be brought out into circulation quickly. The banks will have to pay for these loans, however, as individuals have to pay for a loan from any stock bank; and this charge is expected to prevent the too free use of the reserves held by the regional banks.

New Paper Currency.

A new form of paper currency is also provided for to come out in case of emergency and which is expected to go back into the hands of the government when times are normal. These "treasury notes will be printed by the government and issued through each regional reserve bank and will bear the guarantee both of the regional bank and the government.

If the demand for currency in any section of the country exceeds the supply of circulating money, a regional bank can secure this new money from the government and put it into circulation; but a gold reserve of 40 per cent and commercial paper equal to the full value of the note must be held as a reserve behind each note so issued. This provision is expected to be the influence that will drive the new money back into retirement when it is no longer needed.

The following analysis presents the details of the new law without adhering closely to the technical division or language of the measure.

Federal Reserve Board.

At the head of the system will stand a federal reserve board at Washington appointed by the president and to consist of the secretary of the treasury, the comptroller of the currency and five other members. Two of these shall be expert bankers, but none shall have banking affiliations or own bank stock during their service. This board will exercise general control over the entire system.

The temporary "organization committee" for the federal reserve banks shall be located and will divide the entire country geographically with these cities as the centers of districts. All regional banks in a district will be required to subscribe for the stock of the regional reserve bank in that district and to keep a portion of their reserves there.

Member Banks.

Local banks will be known as "member banks," because they will own the stock of the regional reserve bank of their district. Each member bank will be required to take capital stock of the regional reserve bank equal to 6 per cent of the member banks' capital and surplus. The capital of the regional bank will increase or decrease so that it always represents 6 per cent of the combined capital and surplus of all the banks of the district that have joined the system.

National banks are compelled to join and state banks are permitted to if they bring their reserve requirements up to the standard set for national banks and submit to national examinations.

Public ownership of the stock of the regional reserve banks is permitted only in case enough banks do not join in any district to provide a capital stock of $4,000,000. In such event the public may purchase the stock in quantities limited to $10,000 for each individual; but the voting of this stock will be placed in the hands of government representatives on the board of directors of the regional reserve bank.

Restricted to Member Banks

The regional reserve banks may do business only with their member banks, not with the public, except that certain "open-market operations" such as the purchase and sale of gold, government or municipal bonds and certain forms of bills of exchange are permitted. These banks will make their earnings from the loans made to member banks and from the purchase and sale of bonds and foreign bills of exchange.

Member banks will be compelled to put up in cash only one-half of their subscription to the capital of the new banks; the remainder can be called for if needed by the regional bank. Dividends of 6 per cent will be paid on this stock to the member banks and the stock will be non-taxable. After these dividends are paid one-half of the surplus net earnings goes to create a regional surplus fund, and when this has reached 10 per cent of the regional bank's paid-in capital, these earnings are to go into the United States treasury. The balance of the net earnings are to be paid to the United States franchise tax.

Gradual Transfer.

With the machinery thus created for a new banking system that is supplementary to the commercial banks of the country, the law provides for a gradual transfer of part of the bank reserves to the new "reservoir" banks. In order not to disturb business conditions or to withdraw too suddenly the heavy deposits of country banks in the large cities, the law provides that three years may be consumed in shifting these balances and that if necessary part of the reserves transferred to the regional banks may consist of commercial paper.

The amount of reserve required from every bank under the new law and the place where it must be kept are as follows:

Country banks—Total reserve required, 12 per cent of demand deposits and 5 per cent of time deposits. Five-twelfths must be kept in the bank's vaults for two years and four-twelfths after that time. For the first year, two-twelfths must be kept in the regional bank, increasing one-twelfth each six months thereafter until it reaches five-twelfths of the total reserve. For three years the unallotted part of the reserve may be kept in the banks of reserve cities; after that time it must be kept either in the country banks' vaults or in the regional reserve bank.

Reserves Required.

Reserve city banks—Total reserve required, 15 per cent of demand and 5 per cent of time deposits. Six-fifteenths must be kept in the banks' vaults for the first two years and five-fifteenths after that time. Three-fifteenths must be kept in the regional reserve bank for the first year, increasing one-fifteenth every six months thereafter until it reaches six-fifteenths. For three years the unallotted portion of the reserve may be kept in other banks, in its own vaults or in the regional banks; after that time in one of the latter places.

Central reserve city banks (New York, Chicago and St. Louis)—Total reserve required, 18 per cent of demand and 5 per cent of time deposits. Six-eighteenths must be kept in the bank's own vaults, seven-eighteenths in the regional reserve bank and the remaining five-eighteenths in either place the bank may choose.

Board of Directors

These immense funds of reserves from "member banks," together with government moneys, will make up the deposits of the regional reserve banks. Each of these banks will be administered by a board of nine directors, six of whom will be elected by the banks and three appointed by the federal reserve board.

The regional banks may rediscount—that is, buy at a discount from its member banks—'prime commercial paper' when the member banks desire to convert these assets into money. The exact terms of this important provision as to the character of paper upon which the regional reserve banks may furnish cash are as follows:

"Upon the indorsement of any of its member banks with a waiver of demand, notice and protest by such bank, any federal (regional) reserve bank may discount notes, drafts and bills of exchange arising out of actual commercial transactions; that is, notes, drafts and bills of exchange issued or drawn for agricultural, industrial or commercial purposes or the proceeds of which have been used or are to be used for such purposes, the federal reserve board to have the right to determine or define the character of the paper thus eligible for discount within the meaning of this act."

Eligible for Discount

"Nothing in this act contained shall be construed to prohibit such notes, drafts or bills of exchange, secured by staple agricultural products, or other goods, wares or merchandise from being eligible for such discount; but such definition shall not include notes, drafts or bills covering merely investments or issued or drawn for the purpose of carrying or trading in stocks, bonds or other investment securities, except bonds and notes of the government of the United States."

"Notes, drafts and bills admitted to discount under the terms of this paragraph must have a maturity at the time of discount of not more than ninety days, provided that notes, drafts and bills drawn or issued for agricultural purposes or based on live stock and having a maturity not exceeding six months may be discounted in an amount to be limited to a percentage of the capital of the federal (regional) reserve bank, to be ascertained and fixed by the federal reserve board."

The regional banks may also discount acceptances based on the importation or exportation of goods.

Issuance of Treasury Notes.

The new treasury notes, which are to furnish the "elastic" element in the currency system and to add to the country's circulating element in time of need, will come into use in the following way:

The notes will be printed by the government with a distinctive style for each regional reserve bank. One of the three directors named by the federal reserve board for each regional bank will be known as the 'federal reserve agent' for that bank and a supply of the notes will be placed in his custody.

Should a regional bank desire to pay out more money than its cash resources will permit, the law provides that it may put some of its rediscounted commercial paper into the hands of the 'federal reserve agent' and receive in return the new treasury notes. For each note that it puts out into circulation the regional reserve bank must set aside in gold 40 per cent of the value of the note, as a guarantee for its redemption.

Protection of New Money.

This gold with the commercial paper held by the 'federal reserve agent' is the protection behind the new law. These notes will also be guaranteed by the government and must be redeemed in gold at the United States treasury.

Each regional bank, under the act, must keep a reserve of 5 per cent of the deposits it has received, besides the 40 per cent gold reserve behind the treasury notes it issues.

If the gold reserve behind the notes fell below 40 per cent, a heavy tax is imposed on the bank, which in turn adds the tax to the rate it charges member banks for discounts.

One regional bank cannot again pay out the notes of another except under a heavy tax. These notes are expected to return to the regional banks and be withdrawn from circulation when the need for their use passes.

None of the existing forms of currency except the national bank notes will be disturbed by the new law. The United States bonds now used to secure the issue of national bank notes are to be taken up at the rate of $25,000,000 a year by the regional reserve banks and new treasury notes or short-term 3 per cent bonds will take their place. National bank currency is expected gradually to be retired.

Final Control by Board.

The federal reserve board will exercise final control over the entire operation of the system. It can compel one regional bank to loan to another in time of need, can suspend all restrictions surrounding the reserve which regional banks must hold; and can remove directors of regional reserve banks whenever it is believed necessary.

While the banks retain control of the boards of the regional reserve banks, their connection with the federal reserve board is only through an advisory council made up of one representative from each federal reserve district.

An important change in national banking methods embraced in the new law will permit national banks except those in New York, Chicago and St. Louis to make direct loans on five-year farm mortgages up to 25 per cent of their capital and surplus, and up to one-third of their time deposits.