Expansion of Reserve Banks in the United States
Expansion of Reserve Banks until 1921
Before the entry of the United States into the war the operations of the Federal Reserve banks had been restricted, for reasons already explained, so that the personnel employed was necessarily limited. It had not been found necessary to expand the number of offices although the Federal Reserve Act had authorized the creation of branches both at home and abroad. Early in the history of the system a branch of the reserve bank at Atlanta had been established at New Orleans because of the importance of that city as a port of communication with South America. This, however, continued for a good while to be the only branch bank in the system.
The great expansion of operations resultant upon the fiscal transactions of the Treasury coincided with the upward swing of business which resulted from the complete establishment of the collection system. It was found that greater efficiency could be secured through the opening of new offices at strategic points, and before Jan. 1 1921 there had been created in all 22 branches. These branches varied to some extent in the scope and character of their functions, certain of them acting primarily as collection agencies while others added thereto very considerable powers in the rediscounting of paper and the holding of reserves. In some cases, as on the Pacific coast, creation of branches resulted from the fact that the district in which they were situated was so large that as a mere matter of convenience it was desirable to establish some local offices. In other cases the creation of branches grew out of peculiar local conditions or a need for recognition of the importance of some industrial centre outside the city in which the parent bank was situated. The local branch offices were usually given a comparatively simple organization and wherever possible the effort was made to have them practically dependent upon the bank of the district.
To facilitate this closeness of relationship and also to ensure prompt action in connexion with clearance and rediscounting operations a leased wire system, including both telegraph and telephone, was put into operation between the various banks in 1917, uniting the whole series of parent offices and branches with the board in Washington and rendering possible practically instantaneous communication upon matters of business policy. While it was never deemed expedient to establish actual branches in foreign countries, the system early in the war entered into agency relationships with the Bank of England whereby that institution was to hold funds in trust for the Federal Reserve banks jointly while they in turn were to undertake similar duties for the Bank of England. It was understood at the time that the agency relationship would not, until after the war at least, lead to the performance of functions involving the buying and selling of bills or operations in the discount market. Similar relationships were later concluded with the Bank of France, the Bank of Japan and various other international institutions, but in all cases the relationship was on a restricted basis and never resulted in the undertaking of international discount operations.
From the opening of the war onward, the personnel of the Federal Reserve banks expanded very rapidly, as was necessary in order to comply with the heavy demands that were made upon the banks for services. For the year 1920 the personnel of the banks probably averaged about 10,000 persons, while their combined earnings for that year were $181,000,000, and their total expenses of operation, $29,889,000, or about 16½ per cent. Earnings which had been small before the war, some banks barely making expenses and others paying a little less than the 6% dividend provided for in the Act, shot up rapidly, as the result of heavy Government loans and the large advance made by the reserve banks in connexion therewith. For the year 1920 the earnings of the entire system, after setting aside all reserves, providing for depreciation, etc., were well over 200% on the capital. This, of course, was an abnormal condition resulting from the financing of the war period and corresponding to similarly heavy earnings at the central banks of foreign countries. Under the terms of the original Federal Reserve Act all earnings above 6% on the capital stock were to be transferred to the Government in lieu of a franchise tax. The receipts of the Government in the form of profits from the Federal Reserve banks, therefore, from the beginning to the close of 1920 amounted to about $150,000,000.
See Also
- Federal Reserve System
- Federal Reserve System
- Supervision of Banking Organizations
- Federal Open Market Committee