The lion's share of the cash resources of the Federal Reserve Banks will come from the reserves and working balances deposited with them by member banks. Under the terms of the act, part of the required reserves of member banks _must_ be placed with Federal Reserve Banks. This is a novelty in central banking legislation, but is based upon sound principle, and is especially to be commended for this country where, on account of the absence of branch banking, the number of banks to be served by the regional banks will be very great. It makes certain some increase in the resources of the Federal Reserve Banks, along with the expansion of the credit liabilities of the member banks. It also lessens somewhat the danger of unnecessary withdrawals of funds from the reserve banks in emergencies.

Reserve requirements of the national banking law are radically changed.

In addition to the requirement that a part of the reserve of the banks be kept with the Federal Reserve Banks, the reserve ratio is reduced for all cla.s.ses of banks: the practice of keeping a part of the reserve of country and reserve city banks with reserve agents is to be discontinued; and a distinction for reserve purposes is made between time and demand deposits. Some of these changes become effective as soon as the new system is established; others are to be made in a succession of steps and completed three years after the pa.s.sage of the act.

Time deposits are to comprise deposits payable after thirty days, and are to include certificates of deposit and savings accounts subject to thirty days' notice. A reserve of 5 per cent. is required against these deposits, and no distinction is made between country and city banks.

This low reserve requirement will certainly lead the banks to encourage the conversion of demand obligations into time obligations. A relatively large part of the deposits of banks in most European countries is payable at notice. It is obviously an arrangement which shields the banks somewhat from the effects of sudden waves of distrust.

Against demand deposits the ratio of reserves is also to be reduced at once; but the existing cla.s.sification of banks is to be retained. The required ratio for country banks is reduced from 15 to 12 per cent., for reserve city banks, from 25 to 15 per cent., and for central reserve city banks from 25 to 18 per cent. A provision in the bill excluding from reserves the 5 per cent. fund held in Washington against outstanding circulation is a slight offset to this reduction in reserve ratios.

As regards the banks in central reserve cities, the initial arrangement regarding the disposition to be made of their reserve is also the _final_ arrangement. They must hold 6/18 of their reserve in vault, 7/18 in their Federal Reserve Bank, and the remaining 5/18 either in vault or with their federal reserve bank. Other banks are allowed a period of transition. Reserve city banks for three years must hold 6/15 of their reserve in vault, thereafter 5/15; for twelve months they must keep with their Federal Reserve Bank 3/15, adding an additional 1/15 every six months; so that at the end of two years they will have a deposit of 6/15. During the three year period the remainder of the reserve may be deposited with reserve agent banks in a central reserve city, or by what would seem to be an inadvertent extension of existing practice with those in reserve cities; but thereafter it must be either in vault or with a Federal Reserve Bank. Country banks must hold in vault 5/12 of their reserve for three years, thereafter 4/12; for twelve months must deposit with their Federal Reserve Bank 2/12, and an additional 1/12 every six months until 5/12 are deposited at the end of two years. The remainder of the reserve may be kept for three years with reserve agent banks, but at the end of that period must be either in vault or in a Federal Reserve Bank.

Whether these changes in reserves, together with payments by the banks of subscriptions to the capital stock of the reserve banks, will make necessary any considerable amount of loan contraction, cannot be precisely determined. If numbers of state banking inst.i.tutions enter the system at the beginning, some strain may be occasioned, since, although these requirements are less than those to which the national banks have been subject, they exceed those imposed upon banks by the law of many of the states. In order to enable the banks to avoid contraction, the act contains a provision under which one-half of each instalment of reserve to be placed in reserve banks may be received in the form of the kinds of commercial bills of exchange which the reserve banks may purchase in the open market. It is, however, most unlikely that the banks will be able to make much use of this arrangement, because of the scanty amount of such paper available.

FEDERAL RESERVE NOTES AND NATIONAL BANK NOTES

The power to issue notes is a useful but not indispensable resource for inst.i.tutions having the responsibilities which are placed upon the Federal Reserve Banks. The issue of notes by a central bank enables it to supply domestic requirements for currency without reducing its holdings of reserve money. In the absence of the right of issue, it would only be necessary to acc.u.mulate in ordinary times a somewhat greater amount of reserve money, to provide for seasonal and emergency needs. General public confidence in the Federal Reserve Banks would, however, be far less secure if they were not empowered to issue notes.

This is because of the exaggerated importance almost universally attached to the right of note issue, even in countries in which the check has become a universal medium of payment.

The particular provisions in the act regarding the issue of notes are extremely complicated, and are in some respects quite without precedent.

The notes for which provision was made in the bill of the Monetary Commission were to be bank notes pure and simple, subject to a variety of restrictions designed to keep the total amount issued within safe limits. The notes which are to be issued under the provisions of the act are certainly quite as well safeguarded in this respect. In addition, the notes are made obligations of the Government of the United States, which also undertakes to redeem them at Washington. The obligation of the Government is in addition to and does not take the place of any banking safeguard. It is designed to meet the desires of the very large number of people throughout the country who believe that the issue of money is a government function. To many bankers and others familiar with our past financial history, this provision in the bill was most distasteful. Their opposition, though natural, was, however, neither very practical nor reasonable. It was based very largely upon the fear that the government obligation on the notes would prove an entering wedge for an issue of fiat money at some future time. But paper money cannot be issued under the terms of the act for the purpose of meeting government expenditures. Additional legislation would be necessary, and the possibility of such legislation is not appreciably increased by making the notes which are to be issued by the reserve banks an obligation of the Government. On the other hand, this provision won many friends for this important piece of banking legislation; it allayed opposition which would always have been a serious menace to the permanence of the new system.

The quant.i.ty of the new notes which may be issued is wholly within the control of the Federal Reserve Board; but the initiative in taking out circulation rests entirely with the boards of directors of the reserve banks. Applications for notes may be made at any time by a reserve bank to its district reserve agent, the member of its board of directors who is the medium of communication between the bank and the Board.

Rediscounted commercial loans equal in amount to the notes applied for must be deposited with the agent, and a reserve in gold of 40 per cent.

must be maintained. (A reserve of 35 per cent. in gold or lawful money is required against deposits.) The Board may grant in whole or in part, or reject entirely, applications for notes, and may also impose such interest charge upon the notes as it may deem advisable. The notes are to be a prior lien on the a.s.sets of the issuing banks, and there is, therefore, no possibility of loss to note holders, nor any to the Government on account of the obligation which it a.s.sumes.

Such part of the 40 per cent. gold reserve against the notes as may be deemed advisable by the Secretary of the Treasury, but in no case less than 5 per cent., must be deposited in the Treasury of the United States for the redemption of the notes in Washington. Each Reserve Bank is required to redeem not only its own notes but also those of the other Reserve Banks either in gold or in lawful money; redemption in Washington is in gold alone. In practice it is certain that Reserve Banks will redeem the notes in gold over the counter; and it is also certain that slight use will be made of the redemption machinery at Washington. Member banks will certainly deposit the notes with their own reserve banks, which are required to accept the notes of other banks at par. The reserve banks, in turn, are required under the law to return for redemption the notes issued by other reserve banks. Redemption at Washington has apparently been provided because national bank notes are redeemed there in large volume every year; a result of the circ.u.mstance that the present number of issuing banks is so large as to make counter redemption much more costly.

Various provisions in the act are evidently designed to keep the issue of notes within safe limits; but not much reliance should be placed upon them. Reserve Banks may not, under penalty of a prohibitive tax of 10 per cent., pay out the notes of other Reserve Banks. If these banks, like the Scotch banks, were working in the same territory, regular redemption would check over-issue on the part of any one of them. But under a system of regional banks, each with its own territory, there will be only a very irregular relation between the amount of notes put out by any one and the amount which will be received by the others.

Moreover, it should be borne in mind that regular redemption is no check whatever upon general expansion, either in the form of notes or of deposits, when all banks are expanding credit at the same time.

Not much effect also in checking over-issue is to be looked for from those provisions in the act which require a 40 per cent. reserve in gold and impose a graduated tax upon reserve deficiencies. A considerable part of the total reserves of the Reserve Banks is certain to be in gold; and deposit liabilities are certain to be vastly greater than those for notes in circulation. The circ.u.mstances are hardly conceivable in which a Reserve Bank would not have an amount of gold in its entire reserve ample to provide a gold reserve for such notes as it might issue. The special tax on note reserve deficiency can therefore be readily evaded by shifting the deficiency to the reserve against deposits. Deficient reserves are only allowed when reserve requirements are suspended by the Federal Reserve Board. The Board is to impose a graduated tax on all deficiencies except in the note reserve. On note reserve deficiencies, the tax imposed in the law is to be added to the rate of discount of the reserve banks. The arrangement would seem to be a most unworkable one, since there is no means of knowing to what extent a borrowing bank will have occasion to use the proceeds of its loan in the form of notes. Fortunately this provision of the act is never likely to become operative.

After all, for proper use of the right of issue under the act the main reliance must and should be on wise and experienced management for the reserve banks, and above all on a conservative Federal Reserve Board.

Restrictions which would make over-issue impossible would also deprive the right of issue of all usefulness as a means of extending credit.

Moreover, the danger of the over-expansion of credit in the form of deposits is vastly greater than it is in the form of bank notes in any country in which deposit credits have become the more important credit medium.

One of the most perplexing questions that presented itself in framing the act was the disposition to be made of the national bank notes and the 2 per cent. government bonds which secure very nearly all of them.

When the measure reached the Senate, it contained provisions which contemplated the gradual subst.i.tution of Federal Reserve notes for the national bank notes. But when it was pointed out that this would require the Reserve Banks regularly to rediscount at least seven hundred million dollars of commercial paper, in order to support the existing volume of currency, it was felt that some other arrangement must be made. A plan to unify all the varieties of paper money now in circulation, with the exception of the silver certificate, by the issue of an equal amount of United States notes, backed by an ample gold reserve, found influential support; but it was wisely decided to present this in a separate measure. The particular provisions regarding the national bank notes and the bonds contained in the act should be regarded, therefore, as a temporary arrangement pending future legislation.

In order to avoid the contraction of the currency which would follow the refusal of many national banks to enter the system, each Reserve Bank is authorized to purchase bonds and take out circulation similar in all respects to the notes issued by the national banks. After the end of a period of two years, additional bonds may be purchased, but only from member banks, and at the discretion of the Federal Reserve Board. Member banks desiring to retire circulation and dispose of their bonds, may make application to the Board, which may require the Reserve Banks to purchase them. No more than twenty-five million dollars of bonds may be purchased in any one year, and the amount purchased is to be distributed among the various Reserve Banks in proportion to their capital stock.

Bonds thus purchased may be used as a basis for additional national bank notes by the reserve banks, or they may be converted into 3 per cent.

government obligations--one-half into thirty-year 3 per cent. bonds, and one-half into one-year 3 per cent. notes, both issues without the circulation privilege. In taking the one-year notes, a Reserve Bank enters into an obligation to purchase an equal amount at each successive maturity for thirty years. The purpose of the notes is to provide the Reserve Banks with a readily marketable a.s.set, the sale of which abroad may prove serviceable in periods of strain, and the domestic sale of which will enable the Reserve Banks to make their discount rates effective in the money market. Government short-term obligations are used for these purposes by many of the European central banks.

The existing volume of national bank notes will not be reduced under the terms of the act, except in so far as the Reserve Banks convert 2 per cent. bonds into 3 per cent. bonds or notes. There may even be some slight increase in the total of national bank notes in circulation, since banks may use for this purpose the small quant.i.ty of bonds not already absorbed in this way. Little concern, however, need be felt because the national bank notes are not to be retired. Present requirements for money to be used outside the banks are sufficient to absorb all the notes at present; and with the growth in population a somewhat greater quant.i.ty could be absorbed in future.

LENDING OPERATIONS OF THE FEDERAL RESERVE BANKS

The normal lending operations of the Federal Reserve banks are limited to the rediscounting for member banks of commercial loans maturing within ninety days. Commercial loans are generally defined in the act as "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 is authorized to define more precisely the nature and character of eligible paper. To make a.s.surance doubly sure, the rediscount of loans secured by stocks and bonds is specifically prohibited. The act also provides that six months' maturities of paper drawn and used for agricultural purposes or based on live stock may be rediscounted.

In confining rediscounts to commercial loans, the act is more stringent than that governing the operations of central banks in Europe. In practice, however, the bulk of the loans of these inst.i.tutions are in connection with commercial transactions. While this restriction may in some particular emergency hamper the Reserve Banks in giving a.s.sistance to some threatened bank, it is upon the whole amply justifiable. Under our banking system in the past the collateral loan has enjoyed a prestige which it is hoped will be transferred to commercial loans.

Exclusion of collateral loans from rediscount will certainly contribute much to bring this about. The restriction also gives the public greater confidence that the resources of the Reserve Banks will be generally available throughout the entire country.

One of the reasons which has been advanced for confining rediscounts to commercial loans is based upon certain misconceptions of the true nature of commercial paper--misconceptions which, if adopted by the management of the Reserve Banks in formulating their policy, may have disastrous consequences. It has been contended on all sides during the last few years that commercial paper was from its very nature liquid; and further, that credit could therefore safely be granted to an extent limited only by the amount of such paper. Both of these contentions are hopelessly fallacious. In an emergency, no kind of loan is liquid to any considerable extent. Business cannot suddenly be deprived of the amount of credit to which it has become adjusted. It is, indeed, often said that loans based upon any commodity entering into general consumption can be quickly liquidated. This can be done as regards any particular loan; but supplies for the immediate and distant future must be in process of production and they will require a new batch of loans. The view that credit can be safely granted to the full extent of merchandise in process of distribution and even in process of manufacture is equally fallacious. Credit affects price. Liberal discounts may cause speculative advances in commodity prices, stimulating excessive prices by wholesalers, jobbers, and retailers, as well as by speculative holders pure and simple. There is no mechanical or statistical test for the amount of credit which may be safely granted, whether the loans be commercial or collateral. Over-expansion is possible by both operations.

Commercial loans will become the most liquid a.s.set that member banks can hold, simply because they can be rediscounted with the Reserve Banks. A smaller amount of Bank funds will be employed in the call loan market.

But whatever amount remains available for that use will be subject to far less seasonal fluctuation both in volume and in rates. The retention of fixed reserve ratios, even though they may be suspended by the Federal Reserve Board, will probably lead many city banks to use the call loan market to a moderate extent, since it will enable them to avoid the necessity of resorting to the reserve banks for rediscounts whenever reserves momentarily drop below legal requirements. A somewhat larger proportion of time loans will doubtless be used in connection with stock exchange dealings; but the available supply of call money will presumably be sufficient to permit the continuance of the present American practice of daily delivery of securities.

At the outset, on account of the widespread prejudice among bankers against rediscounting, the demand for accommodation from the Reserve Banks may not be large; but this prejudice will surely die away in time, and most if not all of the Reserve Banks will suffer from no lack of regular business, except in periods of business depression. Member banks in those parts of the country in which the supply of credit is inadequate for local requirements will lend more closely, while banks which regularly have more funds than can be thus employed will purchase more commercial paper from note brokers and perhaps rediscount for banks in those parts of the country in which rates are normally high.

Aside from the government account, member banks are to provide the funds for the reserve banking system. Compet.i.tion with member banks would therefore and justly occasion serious dissatisfaction. Managed by boards of directors a majority of the membership of which is to be selected by the member banks, there would seem to be little danger of serious compet.i.tion from the Reserve Banks. Nevertheless the act places such restrictions upon dealings by the Reserve Banks with the general public that little or no compet.i.tion will be possible.

The Reserve Banks are permitted to engage in three kinds of open market operations: (1) dealings in government securities, and also in obligations of the states and local bodies, maturing within six months and issued in antic.i.p.ation of taxes; (2) dealings in foreign exchange; and (3) dealings in domestic bills of exchange.

The purchase and sale of government bonds and notes and state and local short-term obligations require no detailed consideration. In periods of inactive demand for rediscounts, investments of this kind will doubtless be made by the Reserve Banks in order to employ surplus funds.

The right to engage in foreign exchange dealings will also be similarly useful, surplus funds being invested in foreign bills. Moreover, if any of the Reserve Banks find that their resources are regularly in excess of domestic requirements, they may be used to facilitate the financing of the foreign trade of the country with domestic capital. It is also very generally believed that the power to engage in foreign exchange operations may be so used that it will be possible to rely upon securing abundant foreign funds in periods of financial strain. This is most unlikely. It is entirely possible for a small country to rely upon holdings of foreign bills as a means of influencing the foreign exchanges, and even for such supplies of gold as may be needed on occasions when confidence is threatened. But the banks of a large country must rely mainly upon domestic resources, since the amount of cash and credit needed in an emergency is too great to be secured from foreign money markets. It should be the policy of the Reserve Banks to maintain themselves in a condition of such abundant strength as to be wholly independent of foreign a.s.sistance. Moreover, if they maintain strong reserves in ordinary times, they will not be disturbed on account of gold exports. Gold exports amounting to fifty, or even a hundred million dollars should not be made the occasion for obstructive measures such as are adopted by many of the European central banks. Measures of this kind are generally an indication that the credit structure rests upon an inadequate foundation. New York has been a free gold market in the past, and even under our imperfect banking system, there has always been a sufficient amount of gold for every banking purpose. Moreover, restrictions placed upon gold movements can have but temporary effects; in the long run the distribution of gold among the various commercial countries is determined by fundamental influences which override all such artificial barriers.

The act permits only one kind of banking business between Reserve Banks and the general public. They are allowed to buy and sell to or from individuals, firms, and corporations, as well as domestic and foreign banks, bills of exchange of the kinds which are made eligible for rediscount. The purpose of this provision in the act is to enable the Reserve Banks to secure some employment for their funds when the demand for rediscounts slackens, and to develop a broad discount market. A broad discount market may be developed under the new banking arrangements; but the prediction is ventured that this provision in the act will not contribute to its development and that in general it will be barren of results. It should be observed that the promissory note, the usual borrowing instrument in this country, although it may be used for rediscounting purposes, cannot be bought and sold in the open market by the reserve banks. Aside from foreign trade, the mercantile bill of exchange, payable at a future date, has largely fallen into disuse in most advanced commercial countries. More and more cash payments are either insisted upon, or are favored by the offer of trade discounts for cash considerably greater than bank discounts. When a purchaser pays cash, obviously a mercantile time bill of exchange cannot come into existence. In European countries, many purchasers who pay at once often draw a bill of exchange on their own bank and, after it has been accepted, discount it in the open market. In this country banks are to be allowed under the act to accept only bills drawn in connection with merchandise exports and imports. Material will, therefore, be lacking for a broad discount market, if its development is dependent upon open market operations by the Reserve Banks.

Fortunately the development of a broad discount market does not require open market operations on their part. A broad discount market is one to which many borrowers resort with full a.s.surance that they will find many lenders. Even under past banking arrangements, many borrowers and lenders have been brought together through note brokers; but owing to the lack of an available supply of cash and credit with which to meet emergencies, this market has been subject to violent perturbations, and at times dealings have been almost entirely discontinued. In the future a solvent borrower will feel more certain that his paper can always be marketed by his note broker; and banks will purchase more largely, since they will prefer to use such paper for rediscounting purposes rather than that of their own regular customers.

ADDITIONAL POWERS OF NATIONAL BANKS

Nearly half of the national banks have established savings departments and now hold more than eight hundred millions of savings deposits. This has been a recent development, and one for which there was no specific authority in the national banking law; but under the liberal interpretation of that law by the Comptroller of the Currency in recent years, it has been permitted because it was not forbidden. Many have doubted, however, whether the banks could enforce the thirty and sixty days' notice of the withdrawal of deposits which, following the practice of regular savings banks, appeared on the pa.s.sbooks issued to depositors. This uncertainty has been removed by implication by the new act, which includes in its definition of time deposits, savings accounts subject to at least thirty days' notice. It is of course a great advantage to the national banks, that in the employment of these deposits they are subject to much less restriction than is imposed upon savings banks in many of the states.

Subject to the permission of the Federal Reserve Board, and when not in contravention of state laws, national banks may act as trustees, executors, administrators, and registrars of stocks and bonds. Many banks will find this a useful extension of their powers. If trust companies may properly engage in banking, there can be no good reason why banks should not undertake trust functions. The department store principle in banking has made rapid headway in most countries in recent years. Under proper supervision every kind of reasonable and safe financial business can be handled by a single inst.i.tution safely and in a way which is convenient for the business community. In some states legislation may be necessary to permit national banks to undertake trust functions. In Ma.s.sachusetts, it seems to be the opinion among lawyers that no legislation is required.

Inability to lend on mortgage security has been the most serious disadvantage experienced by country national banks in compet.i.tion with state inst.i.tutions. Land has been by far the best local security available over large parts of the country. Rural bankers have, in fact, taken it into account in making loans and by various devices have succeeded in making it the security for many of the loans which they have granted. Under the Federal Reserve Act all banks, except those in central reserve cities, may lend for periods not exceeding five years 25 per cent. of their capital and surplus, or one-third of their time deposits, on the security of unenc.u.mbered and improved farm land to 50 per cent. of its market value.

Two changes are made in the law for the purpose of facilitating financial business with foreign countries. National banks having a capital of at least one million dollars may establish foreign branches, subject to the approval of the Federal Reserve Board, and to such regulations as it may formulate for conducting this business. Banks may also accept bills of exchange maturing within six months drawn in connection with exports and imports of merchandise. These are desirable changes in the law. It is not, however, probable that many foreign branches will be established in the near future, and it is most unlikely that the American acceptance will make rapid headway in foreign markets.

The scope of the following provision in the act is uncertain. "Other than the usual salary or director's fee paid to any officer, director, or employee of a member bank, and other than a reasonable fee paid by said bank to such officer, director, or employee for services rendered to such bank, no officer, director, employee, or attorney of a member bank shall be a beneficiary of, or receive, directly or indirectly, any fee, commission, gift, or other consideration for or in connection with any transaction or business of the bank." This prohibition obviously covers payments to bank directors and officers in return for aid in securing accommodation from the banks. It may be held that all purchases by a bank of commercial paper from a firm of note brokers, or of securities from a banking house, are forbidden if any of the partners of such firms are on its board of directors. In this event, a few banks would lose valuable directors; but the question of the wisdom of such exclusion is too complex to be given consideration in this paper.[292]

SUPERVISORY FUNCTIONS OF THE FEDERAL RESERVE BOARD

A variety of functions of a supervisory or administrative nature are to be exercised by the Federal Reserve Board. It is to formulate detailed regulations regarding various matters concerning which only general provisions are contained in the act. Among important matters regarding which the Board is to formulate regulations may be mentioned: rules for conducting branch offices; the regulation of state banks which become member banks; rules defining precisely commercial loans eligible for rediscount; and the regulations for the operation of foreign branches.[293] The Board is to exercise many supervisory functions over the reserve banks which are similar to those which have long been exercised by the Comptroller of the Currency over the national banks.

Examination of the Reserve Banks is under its direction. There must be one examination each year, and additional examinations must be ordered upon the application of ten member banks.[294] The Board is also to publish once each week, a statement showing the condition of each Reserve Bank, and a consolidated statement for all these inst.i.tutions.

It is also given a number of important powers to be exercised at its discretion. It may suspend reserve requirements for a period of thirty days, and renew such suspension for successive fifteen day periods. For violations of law, it may suspend the operation of a reserve bank, and administer or liquidate it. The Board may also recla.s.sify cities as reserve or central reserve cities, or terminate their designation as such.

The method of banking reform which has now been adopted, necessarily involves placing somewhere enormous power to expand credit. This power cannot be surrounded by sufficient safeguards to prevent all possibility of its misuse, because in so doing, its wise use would be quite as seriously interfered with. Competent management is therefore absolutely essential if satisfactory results are to follow the pa.s.sage of the Federal Reserve Act. In the operation of the new system, the boards of directors of the reserve banks may prove the most important part of the organization; or that place may be occupied by the Federal Reserve Board. The boards of directors will exercise all the ordinary powers of such boards, except in so far as they are subject to control by the Board. All the loans of the Reserve Banks are to be made by the boards of those banks. In this matter, the Board has no power whatever, except that it may require, on the affirmative vote of five members, one Reserve Bank to rediscount paper for others. Here is a power that seems to be designed merely to prevent any working at cross purposes among the Reserve Banks. Few or no occasions for its use will present themselves if all the Reserve Banks are well managed by their own boards. All rates of discount are to be fixed in the first instance by the boards, subject to review and determination by the Federal Board. Here again the decision of the Reserve Bank boards is altogether unlikely to be overruled if these banks are skilfully managed.

[Ill.u.s.tration: THE FEDERAL RESERVE DISTRICTS]

The power of the Federal Reserve Board to restrain the Reserve Banks is vastly greater than its power to force them to take positive action which might lead to the inflation of credit. This was clearly the purpose in view in giving the Board the more important of its many powers. It may, for example, reject applications of Reserve Banks for notes, but this will not endanger a.s.sets, it will simply lessen power to expand operations. Its power over the discount rates of Reserve Banks will obviously be more effective when used to advance rates which it deems too low than it will be if used to enforce a rate lower than the management approves. The directors of the Reserve Bank would still determine the amount of accommodation which it might safely grant to member banks at the enforced low rate. Officers and directors of Reserve Banks may be removed at any time by the Federal Board, which is merely required to communicate its reasons for removal in writing; but the right of member banks to choose successors will still remain.