This Act established the Federal Reserve System in the United States, which is the central banking system of the country. The Federal Reserve System was created to address various issues in the banking and financial system, including the establishment of a more elastic currency, better means of rediscounting commercial paper, and improved banking supervision.
The Act outlines several key provisions and concepts:
- Federal Reserve Districts: The Act provides for the establishment of Federal Reserve districts and cities. The country is divided into districts, each containing a designated Federal Reserve city. The organization committee is responsible for designating these districts and cities.
- Membership and Capital Requirements: National banks, State banks, and trust companies are eligible to become member banks of the Federal Reserve System. Member banks are required to subscribe to the capital stock of a Federal Reserve bank, with certain payments due at specific intervals. Shareholders of Federal Reserve banks are held responsible for the bank’s obligations.
- Acceptance of Terms: Banks are required to signify their acceptance of the terms of the Act within a specified period. Failure to do so may result in consequences such as ceasing to act as a reserve agent or forfeiture of certain rights and privileges.
- Branch Offices: Each Federal Reserve bank is allowed to establish branch banks within its district. These branches are operated by boards of directors under the approval of the Federal Reserve Board.
- Powers and Functions: Federal Reserve banks are granted various powers, such as the power to adopt a corporate seal, make contracts, sue and be sued, appoint officers and employees, and issue notes backed by U.S. government bonds.
- Issuance of Currency: Federal Reserve banks can issue Federal Reserve notes backed by U.S. government bonds deposited with the Treasury. These notes serve as a form of currency.
- Regulations and Supervision: The Federal Reserve Board is granted authority to adopt rules and regulations governing the operations and transactions of member banks and Federal Reserve banks. The Act aims to establish more effective supervision of banking in the United States.
- Establishment of Federal Reserve Banks: The act provided for the creation of Federal reserve banks to serve as the central banking institutions of the United States. These banks were tasked with various responsibilities related to monetary policy, currency issuance, and banking supervision.
- Membership and Structure: The act defined the various types of banks that would be included under the term “bank” as used in the act, including State banks, banking associations, and trust companies. It also defined terms such as “national bank,” “national banking association,” “member bank,” “board,” “district,” and “reserve bank.”
- Federal Reserve Districts and Cities: The act designated a specific number of cities as Federal reserve cities and divided the continental United States into districts, each containing one Federal reserve city. The determination of these districts was to be overseen by the Reserve Bank Organization Committee.
- Organization and Governance: The act detailed the process of organizing Federal reserve banks, including the selection of directors from different classes (A, B, and C). It described the roles and responsibilities of these directors, their terms of office, and the requirements for their qualifications.
- Capital Stock and Stock Issues: The act discussed the capital stock of Federal reserve banks, its division into shares, and the process for issuing and transferring these shares. It also addressed the circumstances under which capital stock could be increased or decreased.
- Earnings and Dividends: The act established that after necessary expenses were paid, the stockholders of Federal reserve banks would be entitled to receive a cumulative annual dividend of six percent on the paid-in capital stock. Any remaining net earnings would be paid to the United States as a franchise tax, with a portion directed to a surplus fund.
- Taxation and Dissolution: The act granted certain tax exemptions to Federal reserve banks, including their capital stock and surplus, with exceptions for real estate taxes. It also detailed the procedures and outcomes in the event of dissolution or liquidation of a Federal reserve bank.
Source:https://fraser.stlouisfed.org/title/federal-reserve-act-975
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