the efficient way in which the problem was handled and for the speed with which the bill was enacted into law.

The Federal Reserve Act is a substantial improvement over the Aldrich plan. It should be chronicled here that the Federal Reserve Act is not a mere plagiarism of the Aldrich plan. In certain fundamental respects the new law is markedly different from and markedly superior to the Aldrich plan. A writer very intimately associated with the entire banking reform movement states these differences in the following language:

The Aldrich bill provided for a single central "reserve association" with scanty public oversight, with control vested practically wholly in the banks, and with the preponderance of power in the hands of the larger institutions which owned stock. It so arranged things as to keep this "reserve association" relatively inactive except upon special occasions of panic or disturbance. It made no direct provision for the shifting of reserves in part from existing banks to the proposed associations. . The new Act provides for twelve reserve banks, introduces the principle of local control, calls for strict government oversight, shifts reserves from present correspondent banks to new institutions, minimizes the influence of the larger banks in directorates, and generally diffuses control instead of centralizing it. It leaves banking as such to be practiced by bankers; it vests the control of banking in the hands of government officers. The theory and purpose of the new Act are widely different from those of the Aldrich bill.1

Subject to a great deal of hostile comment by the financial and business press during the period of its discussion before Congress, after passage the law very quickly became recognized at its true worth as the most constructive piece of legislation that had ever been placed upon the American statute books. For once, at least, a vitally important, though technical, question had been resolved into its fundamental issues through public discussion, and in this instance a measure emerging into law did represent the best constructive thinking of the nation.

'H. Parker Willis, The Federal Reserve, p. 68.

II. ADMINISTRATIVE FRAMEWORK OF

THE SYSTEM

The Federal Reserve Act divides the United States into twelve districts, chosen in the light of commercial rather than geographical factors. The map on page 573 shows the boundaries of the twelve districts and the cities in which are located the Federal Reserve banks which constitute the units of the system; while the data given below show the number of banks in each Reserve district and the paid-in capital and surplus of each Reserve bank.

The capital of the Federal Reserve banks was subscribed by the member banks of each district, each bank contributing a sum equal to 6 per cent of its paid-up capital stock and surplus. While capital contributions were compulsory for the national banks that joined the system, it was optional with each bank whether or not it should join. Only in one sense was there any compulsion; a national bank had to join the system if it remained a national bank; but it could surrender its charter as a national institution if it so desired and either take out a state charter or suspend operations. All of the

national banks, in fact, shortly joined the system; and, as we shall later see, a large number of state banks have since become members.

The Federal Reserve banks are managed by boards of directors, democratically chosen, and representing all classes of interest. To make certain that the Federal Reserve directors shall represent all classes of opinion and interest, the law provides that one-third of the board of nine members shall be known as class A, one-third as class B, and one-third as class C directors. The class A directors are chosen by and are representative of the stock-holding member banks. The class B directors must consist of individuals who at the time of their election are actively engaged in their district in some commercial, agricultural, or industrial pursuit. The class C directors are selected by the Federal Reserve Board, which is in effect the representative of the United States government, and hence of all the people. One of these directors is called the Federal Reserve Agent and is the personal representative of the Federal Reserve Board. Although the directors are thus chosen from among many different interests, as directors they must act as a unit and in the interests of the general financial welfare, as they see it.

Two of the members of the board belonging to class C, however, act in a dual capacity. The Federal Reserve Agent and deputy Federal Reserve Agent are also representatives of the Federal Reserve Board and have certain special duties to perform in this capacity.1

In still another way the Act has endeavored to secure a democratic organization and control. To insure against the domination of the board of directors by the larger and more powerful banks, the law provides that the banks shall be divided into three general groups, each group to contain roughly one-third of the aggregate number of member banks of similar capitalization. Thus group No. I would contain approximately one-third of the total number of banks in the district, consisting of banks of the largest capitalization; group No. 3 would

I See p. 580.

include the smallest banks of the district; and group No. 2 the banks in between. Each of these groups of banks nominates and elects one class A and one class B director. The directors thus represent not only the stockholding banks, but also the different classes of banks.

The Federal Reserve Board is the co-ordinating and controlling agency of the system as a whole. This board, which is organized as a part of the Treasury Department, is made up of seven members, of whom two are members ex officio-the Secretary of the Treasury and the Comptroller of the Currency. The other five members are appointed by the president by and with the advice and consent of the Senate. It is provided that not more than one member of the board may come from a single reserve district; and that at least two of the presidential appointees must have had banking or financial experience. No member of the board, however, may be an officer, director, or stockholder of any bank. The term of office is ten years; and the board is a perpetual body in that one of the five appointed members retires every two years. Thus during a given presidential administration not more than two of the five members could owe their appointment to the president then in office. The president is empowered to name one of the five members of the board as governor and another as vice-governor, and these are the chief executive officers of the entire system.

The Federal Reserve Board is assisted in its deliberations by a Federal Advisory Council which consists of one representative from each Federal Reserve district chosen by the board of directors of the Federal Reserve bank of the district. This council meets quarterly in Washington and at such other times and places as it may choose. Its function is purely consultative; it is designed to keep the Federal Reserve Board closely in touch with business and financial conditions in all parts of the country.

The powers and duties of the Federal Reserve Board in brief are as follows: It may suspend or remove any officer or director of a Federal Reserve bank; it may suspend a Federal