given a year within which to settle for themselves whether they will enter the system or not. It is thus entirely possible, although we think not probable, that the organization of some of the reserve banks might be deferred until several months after the adoption of the act. If this should be the case the call for new reserves would be even slower and it is fair to assume that the movement of banks into the system will practically be distributed throughout the year so that the draft on reserve funds will not fall suddenly as has been assumed in the computations made above, but will be diffused over a very considerable period. This would give ample opportunity for the acquiring of reserve money through any one of the channels through which it is ordinarily obtained-importation, production of gold, the gathering in of cash in circulation, or as a substitute the gradual extension of rediscounts by Federal reserve banks which count for reserve purposes the same as actual cash, up to the specified limit permitted by the act. There need therefore be no anxiety whatever with reference to a sudden stringency due to an excessive demand for currency consequent upon a rush of banks into the new system immediately after the enactment of the proposed legislation. On the contrary, the reasonable expectation would point in the opposite directiontoward a somewhat extensive relaxation of cash requirements due to the fact that banks will see a profit in getting rediscounts from the Federal reserve banks instead of fulfilling their reserve requirements by transferring actual reserve money to such banks. This is quite opposed, we are aware, to the current view on this subject, but it is far more in harmony with the facts of the case.

SECTION 21.

In this section provision is made for the repeal of portions of existing law which require that the 5 per cent fund deposited with the Treasurer of the United States by national banking associations for the purpose of note redemption shall be counted as part of the lawful reserve. There is no good reason for treating the 5 per cent fund in this way and there never has been any. The existing requirements of legislation practically withdraw the amount kept with the Treasury for the purpose of current redemption of national bank notes from the actual uses of the bank and put them out of reach. It is believed that if the national banks are to continue to issue notes, and so long as they do, they should be required to provide for the redemption of their notes on an independent basis, and that the fiction of counting as reserve something which is not reserve and never can serve that purpose ought not to be maintained. As the national-bank notes are retired, through the presentation of 2 per cent bonds for conversion into threes, the amount of the fund kept on deposit with the Treasury for the current redemption of national-bank notes will be of less and less importance, so that such burden as is thrown upon the banks by the provisions of section 21 will disappear as the banks at their own option convert their bonds. The section is therefore a further working out of the ideas carried by section 20, which are in substance that reserve should be either actual cash at home or a balance with a cooperative institution which is organized for the purpose of maintaining and safeguarding the solvency of the country and which can be relied upon to hold its balances subject to call in case of necessity.

SECTION 22.

Section 22 establishes a reserve of 333 per cent of the outstanding demand liabilities of each Federal reserve bank, such reserve to be held in gold or lawful money. In a general way the committee believes that requirement of a fixed reserve is not a wise or desirable thing as viewed in the light of scientific banking principle. It believes, however, that in a country accustomed to fixed reserve requirements the prescription of a minimum reserve may have a beneficial effect, and it therefore has determined upon 33 per cent. This it regards as a minimum requirement and it firmly believes that the reserve banks will of their own accord keep as a usual practice considerably more than the amount required. It will be remembered that in an earlier section (sec. 12) the Federal reserve board was given power to suspend reserve requirements for 30 days if it saw fit. And in the present section, with that in mind, it is provided that if, upon notice of 30 days after being directed by the Federal reserve board to make good its required reserve so as to bring it up to 33 per cent, any Federal reserve bank fails to comply with directions, the Federal reserve board shall have power to close the bank and appoint a receiver therefor.

SECTION 23.

In section 23 it is sought to improve upon and strengthen existing bank examination requirements, in the belief that the latter are not now sufficiently effective and that existing authorities have not the power to carry through such examinations either with the thoroughness or the frequency that the circumstances demand. Section 23 therefore provides for a change in the method of compensating bank examiners and alters in various details the methods now employed in carrying out the examinations.

In view of the close and intimate relationships which are to be maintained between Federal reserve banks and their member banks, and in view of the fact that the Federal reserve banks are authorized to act as clearing houses for such member banks, the power is bestowed upon the Federal reserve banks subject to the oversight of the Federal reserve board to carry on examinations of member banks as it may deem best. These examinations would be similar to those now conducted by clearing-house associations.

Paragraph 3 of the section authorizes the Federal reserve board to make an examination not less frequently than four times a year of national banks in reserve cities. This is in view of the fact that the reserve cities, if they continue to be such, will have the power of holding bank funds and of conducting all of the functions they now perform. It has been found in the past that the condition of city banks changed much more rapidly than did that of country banks, and it is therefore thought to be desirable that specially close oversight should be maintained with regard to this class of banks.

It has been complained that under this section national banks in reserve cities would be under examination nearly all the time. No charge of the sort can be sustained. The Federal reserve board's examinations of banks in reserve cities, which are to be made four

times a year, are not additional to the two examinations of every national banking association described in the first paragraph, but include them. In other words, banks ranked as country banks are to be examined at least twice and all others at least four times a year by the Federal reserve board, while, if desired, the reserve bank of each district may have a system of its own for keeping advised of the affairs of member banks-a plan employed by clearing-house associations to-day. The specifications with reference to the items to be shown in the reports of examination of national banks in reserve cities cover items that have been, it is thought, neglected under past legislation.

In general the purpose of this section is to convey all reasonable and necessary power of bank examination, to place it where it can be most effectively used, and to assume that the power is to be used for the purpose of strengthening, protecting, but certainly not of annoying or crippling the banks to which it is applied.

SECTION 24.

In this section it is sought to correct a bad practice, all too prevalent, of paying fees to bank examiners in order that they may make a favorable report upon the condition of a bank; and further to end the illegitimate practice whereby officers of national banks have heretofore profited at the expense of borrowers by charging a commission or brokerage for the obtaining of loans. The extent of these practices can not be stated, but that they prevail is certain; and it is equally clear that they are opposed to public welfare and to sound banking, besides being wholly at variance with fundamental principles of honorable personal conduct.

SECTION 25.

In this section it is endeavored to overcome the practice which has sprung up on the part of dishonest or cowardly national bank stockholders of evading the double liability provision when they have been informed of the failure of a bank in which they hold shares, by transferring such shares to some "dummy" who is immune from recovery under the double-liability provision. It is believed that by making stockholders who have transferred their shares 60 days before a bank failure equally as liable as if they had not made such transfer, the needs of the situation will be met. Some have alleged that the requirements should be that stockholders be liable whenever and so long as it could be proven that they had knowledge of the impending bank failure, but that they should not be liable if in good faith they transferred their shares within 60 days before a failure. This sounds plausible but is at variance with the facts of experience. The process of proving that a stockholder had knowledge is difficult and expensive, if not impossible in many cases, and it is believed that the 60-day provision is entirely equitable and far more workable.

SECTION 26.

Loans on improved farm lands are provided for in this section under strict limitations as to the value of the security and the amount of the loan as compared with the face of the bank's capital. The loans

are limited to a period of twelve months, and are permitted only in the case of country banks. This provision has not been made, as seems to be supposed in some quarters, for the purpose of furnishing a means of supplying farmers with working capital. It has been made upon the advice of practical bankers, in recognition of the fact that in many parts of the country the principal or almost the sole business of national banks is found in making loans to farmers, and that while these loans are in every sense commercial in that they are to be paid back out of the proceeds of a business process then going on-the raising and marketing of a crop-the only actual security the farmer can offer is a lien upon his land and its products. To allow the bank to take this lien enables it to do frankly and truthfully, with due protection to itself, business that it will probably do in some way, even if not thus authorized, inasmuch as the well-being of the community and the transaction of its business calls for the extension of loans to farmers who are engaged in the process of growing and marketing consumable articles and who need working capital in order to facilitate their operations. The total amount of such loans which could be made under the provisions of this section might run as high as $150,000,000, but is not likely to approximate that sum.

SECTION 27.

Permission to national banks to open departments specifically designed for the reception of savings deposits and conducted with a view to the separate investment and protection of such savings deposits is granted in section 27. For a long time national banks have found their business encroached upon by the growth of savings banks and trust companies, and in several hundred instances they are now found evading the law by the organization of allied concerns which are carried on as trust companies or savings banks under technically separate organization, but really under an identical control. The committee, while strongly believing in the principle of a corps of commercial closely restricted banks as the basic element in the country's credit system, believes that with the added strength afforded by the new Federal reserve banks, Congress may reasonably relax some of the restrictions now surrounding the business of national banks and allow to national institutions the savings bank and limited trustee functions recognized in this section without unduly straining the essential structure of the national banking system, provided that savings departments if organized shall be conducted upon an entirely separate basis from the commercial departments of the national banks creating them, with segregated reserves and strictly segregated assets. Some further restrictions have been laid down in the section which are largely self-explanatory.

SECTION 28.

There has long been a demand for an extension of the powers of national banks which would permit them to facilitate foreign trade and do business abroad. The plan upon which the committee has determined after much consideration and comparison of various competing propositions calls for permission to national banks having

a capital of $1,000,000 or over to establish branch banks in foreign countries whenever they may deem best, subject to regulations to be prescribed by the Federal reserve board. It is, however, required that due application shall be made to the reserve board for permission to establish such branches and that in establishing them the bank in question shall set aside a specified amount of its capital for use at the said branches and shall submit to suitable examination of the affairs of the branches. A separate accounting system is ordered to be maintained at each branch in order that it may be known exactly how successfully each such independent institution is being carried on, and in order to prevent unsuccessful operations engaged in at one point from being covered up in the affairs of the institution as a whole. Inasmuch as the requirements concerning the creation of these branches are necessarily general in terms, section 28 naturally specifies that a power of further regulation from the administrative standpoint shall be lodged with the Federal reserve board in order that the said board may exercise a suitable control over the doings of the banks which apply for such permission, and of their branches.

SECTION 29.

Section 29 is merely the usual provision for repeal of inconsistent statutory requirements, whatever they may be, that might conflict with the terms of the legislation now proposed for adoption.

SECTION 30.

Section 30 specifies that Congress retains the right to amend, alter, or repeal the act a power reserved, no doubt, in any event, but which it has been deemed best to express in specific language.