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FEDERAL RESERVE SYSTEM.

The

Federal Reserve System

w as

es tab l i shed pursuant

t o

au tho r i t y

conta ined i n t h e Ac t o f December 2 3 , 1 9 1 3 , known a s t h e Federal Reserve A c t ,

t h e

purposes

of

which,

a s

s t a t e d

i n t h e

preamble,

a r e T o

provide

f o r t h e

es tab l i shment

of

Federal reserve banks,

t o

f u r n i s h

a n

e l a s t i c c u r r en c y,

t o

afford means of rediscounting commercial paper, t o e s t a b l i s h a more effec-

t i ve supe rv i s ion

o f

banking

i n t h e

Uni ted S ta tes ,

a nd f o r

other purposes .

t r

The System comprises t h e Fed eral Reserve Board, which ex er ci se s su per vis ory

f u n c t i o n s , t h e Federal Advisory Council, which acts i n a n advisory capaci ty

t o t h e Federal Reserve Board, t h e twelve Federal reserve banks s i tuated i n

d i f f e r e n t s e c t i o n s o f t h e Uni ted S ta tes , t h e F ed er al Open Market Committ ee,

a n d t h e member banks, which include a l l nat ional banks an d such State banks

and trust companies a s have vo lu nt a r i l y appl ied t o t h e Federal Reserve Board

f o r membership a n d have been admitted t o t h e System.

The Federal reserve banks a r e l o c a t e d i n Boston, New York, Phi la-

delphia, Cleveland, Richmond, Atlanta, Chicago,

S t .

Louis, Minneapolis,

Kansas City, Dallas and San Fra nci sco . There a r e a l so i n opera t ion twenty-

f ive branches

and two

agencies

of t he

Federal reserve banks,

a l l o f

which

a r e loca t ed i n o t h e r c i t i e s o f t h e United St at es , except one agency i n

Havana, Cuba.

The cap i t a l s t ock o f t h e Federal reserve banks i s entirely owned

b y t h e

member banks

and may not be

t r a n s f e r r e d

o r

hyp oth eca ted . Every

nat ional bank i n e x i s t e n c e a t t h e time o f t h e es tab l i shment o f t h e Federal

Reserve System w as r equ i r ed t o subscr ibe t o t h e cap i t a l s t ock o f t h e Federal

reserve bank o f i t s d i s t r i c t i n a n amount equal t o s i x p e r cent of t he

subscr ib ing bank*s cap i ta l

and

su rp lus .

A

l i k e amount

of

Federal reserve

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X-7631 3 3 1

— 2 —

bank stock must be subscribed f o r by every national bank organized since that

time and by every State bank or trus t company except mutual savings banks)

upon becoming a member of the Federal Reserve System; and when a member bank

increases i t s capital or surplus, i t i s required t o subscribe f o r additional

stock

i n the

same proportion.

One

half

of

each subscription must

b e

fully paid

and the

remainder

i s

subject

t o

cal l

by the

Federal Reserve Board;

but

ca l l

f o r

payment

o f the

remainder

has not

been made.

A

mutual savings bank which

i s a d -

mitted

t o

membership

i n the

Federal Reserve System must subscribe

f o r

Federal

reserve bank stock in an amount equal t o six-tenths of one pe r centum o f i t s

tota l depos i t l iab i l i t i e s ; and thereafter such subscription must be adjusted

semi-annually on the same percentage basis.

After a l l necessary expenses of a Federal reserve bank have been paid

or provided f o r i t s stockholding member banks are ent i t led to receive an annual

dividend o f s i x per cent on the paid-in capital stock, which dividend i s cumu-

l a t i v e . After these dividend claims have been f u l l y m et the ne t earnings are

paid into th e surplus fund of the Federal res erve bank. Federal reserve banks,

including th e capital stock and surplus therein and the income derived there-

from,

are

exempt from Federal, State

and

lo ca l tax ation, except taxe s upon real

estate.

The board o f directors of each Federal reserve bank i s composed of

nine members, equally divided into three classes, designated Class A Class B

and Class C. Directors o f Class A are representative of the stockholding member

banks. Directors of Class B must be actively engaged i n the ir d is t r ic t in com-

merce, agriculture or some other industrial pursuit, and may no t b e of f icers ,

directors or employees of any bank. Class

C

directors may n ot oe off icers*

directors, employees, or stockholders of any bank. S i x o f the nine directors>

those o f Class A and Class

B,

are e lected by the stockholding member banks,

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while t h e Federal Reserve Board appoints t h e three Class C d i r e c t o r s . The term

of o f f i c e of each d i rec to r i s th ree y ea r s , so arranged that t h e term o f on e d i r -

e c t o r

of

each cl as s exp ir es each ye ar .

One of the

Class

C

d i re c t o r s appoin ted

by th e

Board

i s

d es ig n a ted

a s

chairman

o f t h e

board

of

d i r e c t o r s

o f t h e

Fed era l re se rv e bank

a n d a s

Federal

reserve agen t ,

a n d i n t h e

l a t t e r c a pa c i ty

h e i s

req u i red

t o

main ta in

a

local

o f f i c e o f t h e Federal Reserve Board o n t h e premises o f t h e Fed er al re se rv e bank.

Another Class C d i r e c t o r i s appointed by th e Federal Reserve Board a s deputy

chairman.

Fed er al re se rv e banks a r e au tho ri ze d, among oth er thi ng s, t o discount

f o r t he ir member banks not es , d r a f t s , b i l l s of exchange an d bankers

1

acceptances

o f sh o rt ma t u r i t i e s a r i s in g ou t o f commercia l , indust r ia l an d a g r i c u l t u r a l t r a n -

s a c t i o n s , an d sho rt term paper sec ured b y o b l i g a t i o n s o f t h e Uni ted S ta tes ; t o

make advances t o t h e i r member banks upon t h e i r prom iss ory note s f o r p er io d s no t

exceeding ninety days upon t h e s e c u r i t y of p ap er e l ig ib le f o r d iscount o r p u r -

chase

a n d f o r

p er io d s

n o t

exceeding f if teen days upon

t h e

s e c u r i t y

of

o b l i g a -

t i o n s

o f t h e

United States

and

c e r t a i n o t he r s e c u r i t i e s

i n

ce r t a in ex cep t io n a l

c i rcumstances

and

under cer ta in p rescr ibed condi t ions ,

t o

make advances upon

other k inds of s e c u r i t y t o groups of member banks a n d , until March 3 , 1 9 3 4 ,

o r f o r such addit ional period n o t exceeding one year a s t h e P r e s i d e n t may

p r e s c r i b e , t o in di vi du al member banks; t o make loans, until t h e Pres iden t

shal l o therwise declare and in no event after March 2 4 , 1 9 3 4 , t o nonmember

banks o r t ru s t companies under cer ta in pre sc ri bed condi t ion s upon se cu ri ty

which may or may not be e l i g i b l e f o r red i sco u n t ; i n unusual a n d exigent circum-

stances when authori ty h a s been granted b y a t least five members o f t h e Federal

Reserve Board, t o discount f o r i n d i v i d u a l s , p a r t n e r s h i p s o r corporat ions, under

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X-7631

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ce r t a i n p resc r ib ed co n d i t io n s , n o tes , d r a f t s and b i l l s of exchange o f t h e kinds

an d matu r i t i e s mad e e l ig ib le f o r discount f o r member banks; t o make advances t o

i n d i v i d u a l s , p a r t n e r s h i p s o r corporations upon their promissory notes secured

b y d i r e c t o b l i g a t i o n s o f t h e Uni ted S ta tes f o r p er io d s n o t exceeding ninety

days;

t o

purchase

and

s e l l

i n t h e

open market ban ker s' acce ptan ces

an d

b i l l s

o f

exchange

o f t h e

kinds

and

m a t u r i t i e s e l i g i b l e

f o r

d i sco u n t ,

a n d

o b l ig a t io n s

o f t h e

Uni ted S ta tes ;

t o

deal

i n

gold coin

and

b u l l i o n ;

t o

r e c e i v e

a n d

hold

on

deposi t

t h e

reserve balances

o f

member banks;

t o

issue Federal reserve notes

an d Federal reserve bank notes; t o a c t a s clear ing houses and a s c o l l e c t i n g

agen ts f o r their member banks, an d under ce r t a i n cond i t ions f o r nonmember banks

i n t h e c o l l e c t i o n of checks an d o ther ins t ruments ; t o a c t a s d e p o s i t a r i e s and

f i s c a l a g e n t s o f t h e Uni ted S ta tes ; and to exercise other banking functions

s p e c i f i e d i n t h e Federal Reserve Ac t .

Federal reserve notes a r e a f i r s t and paramount lien o n a l l t h e a s -

s e t s o f t h e Federal reserve banks through which they a r e i s su ed a n d a r e also

o b l i g a t i o n s

o f t h e

United St a te s . They

a r e

issued agains t

t h e

s e c u r i t y

o f

gold

and of

commercial

an d

agr icu l tu ra l paper d iscounted

o r

purchased

b y F e d -

era l reserve banks ,

a n d ,

until March

3 , 1 9 3 4 ,

when authorized

b y t h e

Federal

Reserve Board,

may

a l s o

b e

secured

b y

d i r e c t o b l i g a t i o n s

o f t h e

Uni ted S ta tes .

Every Federal reserve bank i s req u i red t o main ta in r ese rv es i n gold o f n o t less

th an 4 0 p e r cent against i t s Federal reserve notes i n a c t u a l c i r c u l a t i o n a n d i s

also requ i red t o main ta in r ese rv es i n gold o r lawful money o f n o t less th an 35

p e r cent against i t s d ep o s i t s .

Federal reserve bank notes a r e t h e o b l i g a t i o n s o f t h e Federal reserve

bank procuring them a n d a r e redeemable i n lawful money of t h e Uni ted S ta tes on

p r e s e n t a t i o n a t t h e United States Treasury o r a t t h e bank o f i ss ue . They a r e

i ssued agains t t h e s e c u r i t y of d i rec t o b l ig a t io n s o f t h e Uni ted S ta tes i n a n

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amount equal t o t h e face value of such obligat ions a n d a g a i n s t t h e secu r i ty

of n o t e s , d r a f t s , b i l l s of exchange an d bankers

1

acceptances i n a n amount

equal t o n o t more than ninety p e r cent o f t h e es t imated value thereof .

Each Federal reserve bank maintains on d ep o s i t i n t h e Treasury o f t h e United

S ta tes i n lawful money a redemption fund equal t o f i v e p e r cen t of i t s l i -

a b i l i t y

o n

Federal reserve bank notes

i n

a c t u a l c i r c u l a t i o n ,

o r

such other

amount

as may be

req u i red

b y t h e

Treasurer

o f t h e

United St at es with

t h e

approval

o f t h e

Secre ta ry

o f t h e

Treasury,

a n d i s

req u i red

t o p a y a t a x o f

o n e- fo u r th

of one per

cent each half year upon

t h e

average amount

of i t s

Feder al res er ve bank note s i n c i r c u l a t i o n # No such Fed era l r es er ve bank

notes may be i s s u e d a f t e r t h e President shal l have declared b y proclamation

t h a t t h e emergency recognized b y h i m i n h i s proclamation of March 6, 1933 ,

h a s term inat ed, unl ess such notes a r e secured b y t h e d ep o s i t of bonds of t he

United States of cer ta in c lasses which a r e e l i g i b l e a s s e c u r i t y f o r nat ional

bank notes.

Broad supervisory powers a r e ves ted i n t h e Federal Reserve Board,

which

ha s i t s

o f f i c e s

i n

Washington.

The la w

d es ig n a tes

t h e

Secre ta ry

of

t h e

Treasury

a n d t h e

Comptroller

o f t h e

Currency

a s

ex-officio members,

and

provides f o r t h e appointment o f s i x members b y t h e Pres iden t wi th t h e advice

and consent o f t h e Sen a te . I n se lec t in g th ese s i x members, t h e Pres iden t

i s req u i red t o have a due regard t o a f a i r r e pr e s e n t a t i o n o f t h e f i n a n c i a l ,

a g r i c u l t u r a l , i n d u s t r i a l a n d commercia l in teres ts , an d geograph ical d iv is ions

o f t h e co u n t ry . No tw o appointive members may be from t h e same Federal r e -

s e r v e d i s t r i c t .

Among t h e more important duties o f t h e Federal Reserve Board a r e

t h e rev iew and d e te rmin a t io n of discount rates charged b y t h e Federal

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reserve banks on th ei r d iscounts a n d advances an d superv is ion over t h e open

market operat ions o f t h e Fede ra l re se rv e bank s. Such open market op er at io ns

a r e conducted under re gu la ti on s adopted b y t h e Fed era l Reserve Board wi th a

view t o accommodating commerce a n d business and with regard t o thei r bear ing

upon t h e g e n e ra l c r e d i t s i t u a t i o n o f t h e country . The Federal Open Market

Committee, which makes recommendations with regard t o open market ope ra ti ons ,

was c r e a t e d b y t h e l a w a n d c o n s i s t s of twelve members, o n e member being s e -

lec ted annual ly

b y t h e

board

of

d i r e c t o r s

of

each Federal reserve bank.

The

meetings

o f t h e

Committee

a r e

held

i n

Washington

a t

least four t imes each

year upon

t h e

c a l l

o f t h e

Governor

o f t h e

Federal Reserve Board

o r a t t h e

r eq u es t

of any

three members

of t h e

Committee.

I n connection with i t s su p erv i s io n of Federal reserve banks t h e

Federal Reserve Board i s also au thor ized t o make examinations of such banks;

t o requ i re s ta tements and re po rt s from such banks; t o r e q u i r e t h e e s t a b l i s h -

ment or d iscon t inuance of branches of such banks; t o superv ise t h e issue and

r e t i r e m e n t of Federa l reserve no tes ; a n d t o exerc ise specia l superv is ion over

a l l r e l a t i o n s h i p s and t r a n s a c t i o n s o f t h e Federa l res erv e banks with for ei gn

banks

o r

bankers .

Th e

Federal Reserve Board also passes

o n t h e

admission

of

State

banks

and

trust companies

t o

membership

i n t h e

Federal Reserve System

and on

t h e

te rmin a t io n

of

membership

of

such banks;

i t h a s t h e

power

t o

examine

member banks a n d t h e a f f i l i a t e s of State member banks; i t receives cond i t ion

r e po r t s fr om S t a t e member banks and t h e i r a f f i l i a t e s ; i t l i m i t s b y r e g u l a -

t i o n t h e r a t e o f in te res t wh ich may be paid by member banks on t ime and

sav ings deposi t s ; i t i s au th o r i zed , i n i t s ' d i s c r e t i o n , t o i s su e v o t in g p e r -

mits t o ho ld ing company a f f i l i a t e s o f .member banks entitling them t o vote

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- 7 - X-7631

t h e stock of such banks a t e l e c t i o n s of d i r e c t o r s a n d i n deciding quest ions

a t

meetings

of

shareholders

and t o

i ssue permi ts cover ing cer ta in re la t ions

between member banks

an d

organiza t ions dea l ing

i n

s e c u r i t i e s ;

i t h a s t h e

power t o remove off icers an d d i r e c t o r s of member banks, f o r cont inued v io la -

t i o n s of law or unsafe o r unsound practices i n conduct ing t h e bus iness of

such bank;

i t m a y, i n i t s

d i s c r e t i o n , suspend member banks fr om

t h e u s e o f

t h e c r e d i t f a c i l i t i e s o f t h e Federal Reserve System, f o r making undue use

of bank c red i t f o r speculat ive purposes o r f o r a n y other purpose in co ns is te nt

with t h e maintenance of sound credi t condi t ions; i t passes on app l i ca t i ons

of

nat ional banks

f o r

a u t h o r i t y

t o

exercise t rust powers

o r t o a c t i n

f i d u c i -

a r y c a p a c i t i e s ; i t may g ran t au tho r i t y t o nat ional banks t o es tab l i sh branches

i n fo re ign coun t r i e s o r dependencies o r in su l a r pos se s s ions o f t h e United

S t a t e s , o r t o i n v e s t i n t h e s tock of banks or corporat ions engaged i n i n t e r -

n a t i o n a l o r fo re ig n banking; i t superv ises t h e o rgan iza t i on and a c t i v i t i e s

of

corporations organized under Federal

l a w t o

engage

i n

i n t e r n a t i o n a l

o r

fore ign banking; a n d i t issues permits under t h e au tho r i t y g r an t ed b y t h e

provis ions o f t h e Clayton Ant i t ru s t A ct r e l a t i n g t o i n t e r l o c k i n g d i r e c t o r a t e s .

Another funct ion o f t h e Board i s t h e opera t ion o f t h e gold set t lement fund,

b y which balances due t o and from t h e various Federal reserve banks arising

out o f t h e i r own t r a n s a c t i o n s or those of their member banks a r e s e t t l e d i n

Washington with out ph ys ic al shipments of gold.

I n exo rc i s ing i t s supervisory funct ions over t h e Federal reserve

banks and member banks, t h e Federal Reserve Board promulgates regulations,

pursuant t o au tho r i t y g r an t ed b y t h e Federal Reserve A c t , governing cer ta in

o f t h e

above-ment ioned ac t iv i t i es

of

Federal reserve banks

an d

member banks.

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X-7631

To meet i t s expenses a n d t o p a y t h e s a l a r i e s o f i t s members a n d i t s employees,

t h e

Board makes semi-annual assessments upon

t h e

Federal reserve banks

i n

propor t i on t o the i r c ap i t a l s t ock an d su rp lu s . Annual re po rt s o f the opera-

t i o n s

o f the

Board

a r e

made

t o t h e

Speaker

o f t h e

House

of

Representa t ives

f o r t h e

in fo rma t ion

of

Congress

a s

requi red

b y l a w .

The Federal Advisory Council acts i n a n advisory capac i ty , confer -

r ing with

t h e

Federal Reserve Board

on

general business condi t ions

and

making

recommendations concerning matters within t h e B o a r d ' s j u r i s d i c t i o n and the

g e n e r a l a f f a i r s

o f t h e

Federal Reserve System#

The

Council

i s

composed

of

twelve members, one from each Federal reserv e d i s t r i c t being sel ect ed annual-

l y b y t h e

board

of

d i r e c t o r s

o f t h e

Federal reserve bank

o f t h e

d i s t r i c t .

The

Council

i s

r equ i r ed

t o

meet

i n

Washington

a t

l e a s t fou r times each year

and o f t e n e r i f c a l l e d b y t h e Federal Reserve Board.

October 1 , 1933 .