From the beginnings of agitation for cur_Readings in Money and Banking Selected and Adapted

elasticity have recognized more or less clearly two kinds: (1) what we

may call _seasonal_ or ordinary elasticity, and (2) what we may call

_emergency_ elasticity. By the former was meant the power of a note

issue to adjust its volume to those moderate changes in the need for

money which show themselves in the course of an ordinary year. By

emergency elasticity was meant the power of a note issue to adjust its

volume to those extraordinary changes in need which connect themselves

with the typical banking panic. The evils which it was believed that

seasonal or ordinary elasticity would remedy were principally (1) the

summer shortage of currency for moving crops, together with the

temporary but more or less serious stringency in the New York money

market which accompanies that shortage, and (2) the plethora or excess

of currency which usually appears three or four months after the

crop-moving period has terminated. The evils which emergency elasticity

was expected to relieve were principally (1) the stringency which

precipitates the panic, (2) the money famine consequent on general bank

suspension after the panic has fully developed, and (3) the glut of

currency which attends the depression following a panic, often leading

to excessive exports of gold and thus endangering the whole credit

system of the country.

Let us, now, take up seasonal or ordinary elasticity, and ask ourselves

whether the new notes are likely to possess this characteristic. First,

how about the expansibility needed to supply adequate funds for

crop-moving? At this point, it must at once be admitted that the new

currency does not meet the demands of the case in quite the

thoroughgoing way which the earlier schemes thought to be necessary. The

ideal of the earlier plans was to provide an adequate and easily

utilized power of issue, located at the very place where the need for

expansion is felt, _i. e._, in the local bank. The new law gives up this

idea entirely. The local bank will not have power to issue the new

currency at all. In so far as its customers are to get any benefit from

that currency the benefit must come through two channels which the

country bank could use in getting the needed funds, even if the currency

had no expansibility, namely, (1) calling in its balances kept with

banks more centrally situated, and (2) borrowing from such central

banks. In other words, the new power of issue will help out in the

crop-moving period merely because it will put the reserve banks in a

better position to respond to the call of the country banks for the

return of their own balances and for advances on discounted paper.

Judged from this point of view only, the elasticity provided by the new

law is doubtless adequate. If the reserve banks have not kept themselves

in a position to meet the calls of their country members from money

already in possession, they will surely be able to put themselves into

such a position by expanding their issue of notes. In one sense, then,

the new issue has adequate expansibility for ordinary needs. There still

perhaps remains a doubt whether effective elasticity is after all

assured, for it is not clear that the country bank which needs money for

crop-moving purposes will have the wherewithal to get advances from the

reserve bank--that is, that it will have paper of the proper kind and in

sufficient amount for rediscount. However, it seems probable that the

act as finally passed has met this need by providing that agricultural

paper shall be admitted on rather more liberal terms than paper arising

out of ordinary commercial or manufacturing business. If this be so, it

would seem that the provisions of the new law for securing one phase of

seasonal elasticity--expansibility--are fairly adequate.

Passing, now, to the other side of elasticity--_i.e._,

contractility--can we say as much? Will the new issues promptly retire

when their special task is over? _Prima facie_, the verdict here is less

favorable than in the previous case. In general, there are two principal

processes by which a note circulation may be contracted: (1) _driving_

the notes out of circulation, and (2) _drawing_ them out. In so far as

the former process is depended upon, means are devised to make sure that

the notes shall persistently return to the issuer even against his

will--they shall have good homing power. By the second process, it is

made to the advantage of the issuer of the notes to hasten their

withdrawal himself.

As respects insuring contractility by the former of these processes, the

act certainly cannot claim to promise high efficiency. The driving-out

process requires roughly the fulfilment of two conditions: (1) keeping

the channels for the return of notes to the issuer fairly open, and (2)

supplying outsiders with a motive for sending the notes home. As regards

the former of these conditions, the new system probably is all right.

The return of the notes to the issuer seems not to be impeded by the

inconvenience or expensiveness of the process. All member banks and all

reserve banks must receive these notes; and the reserve banks will

probably have branches within easy reach of any part of the district.

Hence, any holder desiring to get notes back to the issuing bank will

find the process easy and the way open. But good homing power requires

more than this. It requires, namely, that adequate motives be supplied

to people generally, or, at least, to banks generally, for seeing that

the notes get back. It is not enough that the track be smooth; people

must desire to use it. Now, earlier plans for securing elasticity relied

on two principal motives for inducing holders to send notes back to the

issuer: (1) the desire of such holders to make room for their own notes,

and (2) their desire to exchange money which has various limitations

imposed upon it for money which is free from those limitations. It is

plain that the new system makes only a limited use of the former of

these methods of procedure. _Within_ the district for which any

particular reserve bank is the central bank, this particular force will

be practically inoperative; for the power to issue notes on the basis of

common assets is not given to any but the reserve banks, and the

profitableness of the power to issue the old type of note has always

proved too low to induce banks generally to take much trouble to get

their own notes into circulation. As between the reserve banks of the

different districts, however, this particular motive will, of course, be

more or less in evidence, since these reserve banks will all be

competitors for this opportunity. But even here the motive in question

will not play a large part, since more effective means for insuring the

return of the notes from outside reserve banks are provided in other

parts of the law.

As regards the second motive for returning idle notes--that is, the

desire to exchange a money subject to various limitations or

disabilities for one not subject to those limitations--the new act does

somewhat better than it does in respect to the first motive. It is,

indeed, true that, within their own district, no special disability,

like being forbidden to be paid out by other banks, is put on the new

notes. But they are always subject to the disability of not being legal

reserve money in the case of federal banks; and hence such banks will be

more or less disposed to return the notes issued by their own reserve

banks, in order to exchange them for reserve money. It may be doubted,

however, whether in ordinary times this will prove a very potent force,

since country banks will usually keep reserves considerably in excess of

legal requirements, and so will not need to discriminate nicely between

the two sorts of money. As between different districts, the case for the

homing power of the new notes is rather stronger, since reserve banks

are prohibited from paying out the notes of other reserve banks under

penalty of a 10 per cent. tax. Even here, however, the provisions are

none too adequate. While the notes of a particular reserve bank must not

be paid out by the reserve banks of other districts, there is no

prohibition against their being paid out by the member banks of other

districts; and it is doubtful whether there is sufficient motive to

induce said member banks of other districts to send in these notes to

their own reserve banks and so start them on their homeward journey. The

desire to exchange money which cannot be used as reserve for that which

can be would have some force; but, under many circumstances, it would

probably prove rather inadequate.

Another disability which contributes to the homing power of a bank note,

and which is actually used in the case of our old note, is not used with

this new note--I mean, the fact that they are not receivable for customs

dues. The decision to omit this provision was perhaps wise; but it

throws out a potent motive for sending notes home, and thus throws away

an opportunity to make better provision for their contractility.

On the whole, then, it must be acknowledged that, in so far as homing

power is dependent on giving to outsiders strong and persistent motives

for sending notes home, the new law is not altogether satisfactory.

We have seen that there is very little in the new system to secure that

the notes shall have good homing power--shall get home by what we have

called the _driving-in_ process. Is the system better off as respects

the _drawing-in_ process? Are matters so arranged that the issuing bank

will have the power and the desire to withdraw its notes--or at least

contract the currency proportionately--when the need for the notes has

fallen off? As respects the first part--making sure that the issuing

bank shall have the power to retire its notes, or at any rate to effect

a corresponding contraction of the currency--the new system is

practically perfect, as indeed was the old one. That is, any reserve

bank desiring to contract its note obligations may at its discretion

deposit with the federal reserve agent reserve notes, gold, or lawful

money. Obviously, this, if not strictly a contraction of its note

circulation, at least brings about the desired contraction of the

general circulation.

When, however, we consider the provisions of the new law for insuring

that reserve banks shall desire to contract their circulation when the

special need has passed, we find that the law does not promise quite so

well. The favorite device for accomplishing this result has been, of

course, a tax on issues, similar to the 5 per cent. tax of the German

system. Apparently, the new law provides for something equivalent to

this in the shape of an interest charge by the Federal Reserve Board,

the rate to be fixed by said board. How far this device will prove

effective in practice it is not safe to predict. In order that it should

induce the banks to contract their circulation, circumstances must have

arisen under which the issuing bank would be earning on its outstanding

notes a profit smaller than the tax itself. Now, it does not seem

certain that an excessive issue of notes would necessarily bring about

this condition. In the first place, in the absence of good homing power,

a volume of notes in excess of business needs would not necessarily

cause an accumulation of those notes in the vaults of the bank issuing

them. Secondly, so long as member banks are free to keep their balances

in banking institutions other than their reserve banks, an excess of

notes would not necessarily cause the general cash holdings of reserve

banks to be abnormally large. For, so long as the ordinary New York

banks are permitted to pay interest on bankers' balances, country banks

will to a considerable extent keep their balances with these outside New

York banks; and it seems not unlikely that the excessive monetary stock

thus accumulating in New York City would, instead of getting into the

hands of the New York reserve bank, largely remain in the hands of the

outside banking institutions and be employed more or less as it has been

in the past, that is, in financing doubtful enterprises and supporting

excessive speculation. But if the reserve banks do not feel the pressure

of excessive issues in the shape of accumulations of notes or some form

of money in their own vaults, they may conceivably be able to invest

advantageously all the funds in their possession, and, in that case, the

rate of interest charged by the Federal Reserve Board will not furnish

an adequate motive for the retirement of their issues. Doubtless,

however, this may in some degree be answered by saying that even an

excess which was felt only outside the reserve bank would, after all,

compel the reserve bank to contract its issues, since it would lower the

rate of discount so greatly that reserve banks could not profitably

invest their ordinary holdings, and consequently would wish to get rid

of the interest charge. Perhaps this is true; but it would by no means

insure the prompt and full contraction which most reformers have

considered desirable.

From the foregoing it would seem that one of the devices for inducing

the reserve banks to contract their issues after the need for them had

passed--that is, charging interest upon such issues--is not certain, at

any rate, to prove adequate; it will not surely eliminate the winter

plethora in New York City which is supposed to stimulate and support

excessive stock speculation. But the new law contains another provision

which may be viewed as a device for supplying the issuing banks with a

motive for contracting their issues, namely, the requirement that such

banks shall keep a gold reserve equal to 40 per cent. of their issues.

Is this likely to prove effective? Probably not. Whatever might be true

in panicky times, it seems certain that in an ordinary year the gold

holdings of a reserve bank will be much above 40 per cent. of its note

issue. If this be true, the maintenance of this 40 per cent. could

become difficult only when the excess of money was so great as to cause

a dangerous exportation of gold from the country, and this surely would

show a very inadequate degree of contractility. In short, the new law

does not insure that issuing banks shall be sufficiently disposed to

draw in their notes any more than it insures that outsiders will drive

them in. It would seem, then, that the new law does not promise to give

to the note issue the degree of contractility which has hitherto been

considered desirable. In other words, there is some point in the fear

expressed by many bankers that the new law will result in note

inflation--at least in so far as the avoiding of this danger is

dependent on the contractility of the note issue. Very likely, however,

the possibility of such inflation is sufficiently guarded against by

other provisions of the law.

We have discussed the adequacy of the new note issue in respect to

seasonal or ordinary elasticity. We pass on now to consider its adequacy

in respect to emergency elasticity--the elasticity which enables a

currency to adjust itself to those extraordinary fluctuations in need

which mark a banking panic and the depression that follows. Broadly

speaking, it is pretty certain that at this point the new law will get a

more favorable verdict than in the previous case. As pointed out in an

earlier connection, the banking panic, when fully developed, gives rise

to three difficulties and so to three needs: (1) funds to relieve the

antecedent stringency which threatens a complete collapse of the credit

structure; (2) a circulating medium for ordinary trade when a general

suspension of payment by the banks has brought on a money famine; and

(3) a prompt and thoroughgoing contraction of the circulation in the

depression which follows the panic. Now, there surely can be no doubt

that, under the new law, the availability of an issue sufficient in

volume instantly to relieve the antecedent stringency, and so to put a

stop to a panic before it had developed serious dimensions, is assured.

In fact, it is not at all improbable that, under the new system, the

reserve banks will be able to check the development of such a panic at

the very outset without increasing at all their note issues. But, if

this does not prove true--if it turns out that more currency is needed

for this purpose--there would seem to be no shadow of doubt that the new

system will insure the forthcoming of such currency both of a quality

and in a quantity which will be fully adequate to the task put upon it.

(1) The notes to be issued, being obligations of the Federal Treasury,

will be as acceptable as gold even on the eve of a panic. (2) There is

no limit to the absolute amount of these notes. (3) The practical limit

set by the requirement that discounted paper shall be furnished as a

basis for their issue is of no real significance, since such paper will

undoubtedly be vastly greater in volume than any need which could arise.

Accordingly, there can be no doubt that the new system provides all the

expansibility needed to abort, or reduce to comparative harmlessness,

any panic which might arise.

A word now with respect to the second need which an emergency

circulation is supposed to meet, that is, an ordinary circulating medium

for trade when banks have by common consent suspended payment. In the

first place, if we are right in supposing that the new law will surely

prevent any panic from reaching such a degree of intensity, it is

obvious that we shall not have occasion to meet the particular

difficulty here under consideration--that our note issue will not be

called on to display this particular sort of elasticity. If, however, it

be supposed that the foregoing prediction does not turn out to be

correct--if experience proves that panics can still go so far as to

cause banks generally to suspend payments, to hold on to every form of

reasonably solid money, and to try to satisfy the public with

substitutes--our verdict for the new currency would necessarily be less

favorable. We should have to admit that the new law does little or

nothing to relieve such a situation. Broadly speaking, the new money

will be altogether too good to meet this particular need. Banks that had

reached a stage of panic sufficiently intense to cause them to suspend

payment--to hoard the ordinary forms of money--would be sure to hoard

money as good as those notes are bound to be. That is, the new issue

would immediately pass into hoards, as did the greenbacks which the

Secretary of the Treasury reissued during the panic of 1873, and,

therefore, would bring little if any relief to the currency famine which

had developed. In fact, it is almost impossible to conceive any form of

note fitted for this particular task except one which was so bad that

there was no danger of its being hoarded. That is, the only proper way

to meet this particular need of a severe panic is to make sure that it

does not arise at all; and, in this respect, the new law promises well.

We come, finally, to the third need which emergency elasticity is

supposed to meet, that is, a prompt and great contraction of the

circulation when the panic has passed and the inevitable business

depression consequent upon such a panic has set in. Here, again, though

not in the same degree as in the last case, if the new law proves as

successful as many conservative students expect, the need in question

will be little, if at all, experienced. We shall usually escape the

extreme business inflation of the antepanic period; the panic itself

will be much abated, if not completely eliminated; and, in consequence,

the trade reaction which naturally follows a panic will be much

diminished in intensity. If this turns out to be true, the circulation

will never again show such an extraordinary glut as characterized the

winter of 1893-94. Nevertheless, it can hardly be doubted that, after

even an incipient panic, there will be some reaction, and consequently a

more or less plethoric condition of the currency will follow. Will the

new issue have sufficient contractility to meet this need? Earlier in

this paper we have seen that the conditions attached to the new issue

are in general not favorable to contractility, in that they do not

provide for either the prompt driving home or the prompt drawing home of

the notes when the necessity for their issue is past. Outsiders lack

adequate motives for sending the notes home; issuers lack adequate

motives for calling them home. The case for emergency contractility,

however, is somewhat better than the case for ordinary contractility.

First, it is probable that the homing power of the note will prove

greater at such a time than in an ordinary year, for, at such a time,

outside banks will not be able to find investments for their funds,

since speculative trading will disappear altogether and business

generally will be at a very low ebb. Again, it seems certain that the

issuing bank will, in this case, have more than the usual motive for

bringing about a contraction of the circulation. The chief reason why

such a bank may not be eager in ordinary times to hasten the retirement

of its notes is the fact that, provided the notes do not accumulate in

its own vaults, such a bank will gain more by using the funds in its

possession to make loans than it would by using them to retire notes,

assuming that the interest charge made by the Federal Reserve Board is

not placed excessively high. But it is practically certain that, in the

depression which follows a panic, no reserve bank will have

opportunities for keeping all of its funds busy; and since, in that

case, the interest charge, however small, will be a dead loss, the bank

will have adequate motive for effecting, as promptly as possible, an

adequate contraction of its note liabilities. This motive would be still

further strengthened should the glut prove sufficient to cause a decided

drain of gold, since, in that case, the reserve banks will find

difficulty in maintaining the required 40 per cent. reserve. On the

whole, then, we seem warranted in affirming that, as respects emergency

elasticity, the new notes will give no serious disappointment.

Finally, as respects elasticity in general, though the note issue,

viewed by itself, does not seem quite fitted to satisfy the tests which

an old-fashioned advocate of elasticity is inclined to impose upon it,

yet, when we take the new law as a whole, it seems not unreasonable to

affirm that it promises to accomplish, directly or indirectly, most of

the ends which we had hoped to attain through elasticity and hence

promises to give us a system which in essentials is truly and adequately

elastic.

NOTES PRINTED AND ISSUED

[300]During the year 1915 the circulation of Federal Reserve notes has

increased to $188,817,000 as of December 31, 1915. Believing that the

country should be prepared against any contingency, the Board had

authorized the printing of about $700,000,000 of these notes. Almost

one-quarter of the total supply printed has been placed in circulation.

On December 31, 1915, however, only $16,675,000 of notes secured by

commercial paper pledged with the Federal Reserve Agents was outstanding

as an obligation of the Federal Reserve Banks. The liability of the

Federal Reserve Banks as to the remainder has been discharged by the

deposit with the Federal Reserve Agents of a like amount of gold and

lawful money. This result has been achieved by the Federal Reserve Banks

in responding to requirements, for currency by issuing Federal Reserve

notes rather than by parting with gold. While the gold pledged with the

Federal Reserve Agents represents a very valuable protection in case of

a substantial demand for gold, it must be observed that the process is

expensive without, at the same time, giving to the Federal Reserve Banks

that additional strength and lending power which they would secure in

case the law were amended so that the Federal Reserve Banks would remain

liable for the outstanding notes, but, on the other hand, would retain

property title to the gold delivered to the federal reserve agents,

which, in that case, would not be paid in to extinguish the liability

upon the notes but would be deposited as collateral security against

them.

IMPOUNDING GOLD

[301]On November 16, 1914, the first shipment of Federal Reserve notes

was received by the Federal Reserve Agent [of the Federal Reserve Bank

of New York] from the Comptroller of the Currency. On November 19 the

bank pledged with the Federal Reserve Agent $500,000 of commercial paper

rediscounted by member banks and received from him a similar amount of

Federal Reserve Notes. These notes were not required by the banks

which made the rediscounts, as they had already withdrawn by checks

the credits so established. They were taken by this bank for its

general use. The issue of Federal Reserve notes gave the reserve

bank the opportunity of affording to its member banks complete

interchangeability between book and note credits. The bank therefore

established the policy of issuing Federal Reserve notes freely to

any member bank desiring them whether the credit thus withdrawn was

established by it through rediscounting, or the deposit of checks, or

the deposit of gold or lawful money. In practice, however, most credits

withdrawn by notes have been established by the deposit of checks which

have been collected by this bank in gold or lawful money through the

clearing house. Accordingly, the accumulation of cover in the hands of

the Federal Reserve Agent has been mainly gold, with but a small amount

of rediscounts. The processes provided by the act for the issue of

Federal Reserve notes to the reserve bank permit complete

interchangeability between gold and rediscounts held by the agent. Gold

may be substituted for rediscounts and rediscounts for gold, in

accordance with the requirements of the reserve bank. During the entire

period its requirements have been for notes with which it might exercise

its statutory right to "exchange federal reserve notes for gold, gold

coin, or gold certificates."

The policy of the Federal Reserve Bank has resulted in greatly

strengthening its gold position and its ability to assist its member

banks or other Federal Reserve Banks should they at any future time seek

credit in order to withdraw gold for domestic or foreign uses. Through

this policy also it has been able potentially, at least, to retard the

expansion of credit by impounding in the hands of the agent a large

volume of gold which might otherwise have found its way into bank

reserves already superabundant.

Furthermore, through this policy it has been able to take the first step

toward accomplishing one of the purposes of the act set forth in its

title, _e. g._, "to furnish an elastic currency." There are two forms of

elasticity, one of _quantity_ and the other of _quality_, both provided

for in the act.

From the point of view of cover, the gold certificate is completely

inelastic. It stands at one extreme of our currency, with a dollar of

gold set aside behind each dollar of paper. At the other extreme stands

the national-bank note, with only 5 cents of gold set aside behind each

dollar of paper. The assets of the issuing bank make it good, but its

elasticity is nullified by the requirement that it must be secured

dollar for dollar by government bonds.

Between these two extremes the Federal Reserve note, a new form of

currency, has been introduced. For each dollar of this paper there is

set aside from 40 cents to $1 of gold. As in the case of the

national-bank note, the obligation of the United States and the assets

of the issuing bank secure it.

The process in which this and other Federal Reserve Banks have been

engaged is the substitution, as a circulating medium, of a note which is

elastic in quality for the inelastic gold certificate. Gold is the most

uneconomical medium of hand-to-hand circulation since, when held in bank

reserves, it will support a volume of credit equal to four or five times

its own volume. What the reserve bank does in accumulating gold behind

its Federal Reserve notes is to establish with the holder of each note a

credit which may be availed of whenever the occasion requires. With this

credit established it can convert at will its gold-covered notes into

notes covered partly by gold and partly by commercial paper. In times

when credit is becoming strained and bank reserves need strengthening or

when gold must be exported, this conversion will take place, and after

the strain is over the gold cover will be restored through the repayment

of the rediscounts substituted for it. In this way elasticity of quality

in our currency is obtainable. But it should not be construed as in any

way a deterioration of the currency contemplated by the act. Quite the

reverse is true. The act provides for the issue of Federal Reserve notes

in unlimited amounts, with 40 cents of gold behind each dollar of paper.

This is elasticity of quantity and it becomes operative with the minimum

of gold cover. Elasticity of quality, on the other hand, operates with a

gold cover always above the 40 per cent. minimum and ranging as high as

100 per cent.

In order to be prepared for any currency demands which might be made

upon it, the Federal Reserve Bank of New York in the spring of 1915

adopted the policy of having printed and keeping constantly on hand a

supply of Federal Reserve notes substantially in excess of the amount of

emergency currency which, experience shows, this district might be

called upon to supply. The maintenance of this policy and of the policy

of issuing Federal Reserve notes freely has entailed a heavy cost upon

this bank. Unissued Federal Reserve notes are carried at cost on the

books of the bank, and at the end of each month the amount of notes

issued to the bank during the month is charged off at cost. The shipment

of notes unfit for circulation to the Comptroller of the Currency at

Washington for cancellation and destruction is a further item of expense

in connection with the maintenance of these policies. The directors and

officers of the bank, however, feel that the results accomplished amply

justify the expense incurred, and consider that the added strength

furnished the bank by the gold thus accumulated is perhaps the most

important result of the operations of the period.

Some reduction has already been made in the cost of printing Federal

Reserve notes, and it is to be hoped that further experience and study

will enable other substantial reductions to be made in the cost of

preparing for issue what has already become an important element of the

circulating medium of the country. The act provides that all expenses in

connection with the issue and redemption of Federal Reserve notes shall

be borne by the Federal Reserve Banks, and in view of the service the

banks are performing in accumulating gold through the medium of these

notes, the feeling is quite general among their officers that the notes

should be furnished to them at the lowest possible cost consistent with

the high quality of workmanship required.

The design of the notes is not altogether satisfactory for efficient

handling. In sorting notes it is necessary to be able readily to

distinguish between notes of this bank and notes of other reserve banks.

This would be greatly facilitated if the printing of the distinctive

number and letter of each bank were made more general on the face of the

note.

THE FINANCIAL POLICY OF THE FEDERAL RESERVE BANKS[302]

It seems clear that the cardinal principle in the management of the

Federal Reserve Banks will be to disregard the course which will lead to

maximum profits, following instead the path which will lead to the

greatest safety and which will permit these banks to be of the greatest

service to the nation. Large reserves should be maintained, and these

should consist chiefly of gold. The payment of interest upon bankers'

deposits and government deposits should be avoided, if possible, for the

reason that the payment of interest will force the keeping of smaller

reserves, if the cumulative dividend is to be earned. The banks should

be managed, not from the standpoint of profit, but from the standpoint

of safety.

Yet this is but one side of the policy of the Federal Reserve Banks.

Their power and influence can be made to extend much farther than would

result solely from the wise management of their own affairs. These banks

are the financial trustees of the nation. The country will look to them

to see that they exercise over the member banks a closer supervision and

discipline than has been possible in the past. Supplementing a negative

control by the bank examiners, who are powerless so long as the letter

of the law is observed, the federal reserve banks will be a great

positive force. The Federal Reserve Banks, with the approval of the

Federal Reserve Agent or the Federal Reserve Board, may conduct

examinations of a member bank, both for the purpose of ascertaining its

condition, and, what will be of equal importance, for the purpose of

determining the lines of credit which are being extended by it.

In the long run, the greatest work which the Federal Reserve Banks can

do for the business men of this country is to improve and standardize

the methods of commercial borrowing. I believe it is possible for these

banks, with the approval of the Federal Reserve Board, under the power

just quoted, to establish a comprehensive credit information clearing

service through which the aggregate loans of all large borrowers can be

known by any bank official and through which excessive borrowing or the

lending of money to concerns pursuing unwise financial policies can be

checked before disaster overtakes them. This is one of the greatest

needs of our banking system....

RELATIONS OF FEDERAL RESERVE BANKS WITH MEMBER BANKS[303]

The aim of this bank [Federal Reserve Bank of New York] at all times has

been to maintain frank and friendly relations with its member banks. At

every meeting of the New York or New Jersey Bankers' Associations, or of

their groups, to which invitations have been received, one or more of

the directors or officers have been present and discussed the

development of the various functions of the system.

When the establishment of an intradistrict collection system was under

consideration, the directors and officers invited representative member

bankers from all parts of the district to confer with them at the office

of the bank. The plan finally adopted was thoroughly discussed in all

its aspects and a consensus of opinion seemed to prevail that it was a

fair and reasonable plan.

When the conditions under which State banks should be admitted to the

reserve system were under consideration three conferences were held by

the directors and officers of the bank, one with national bankers, one

with State bankers, and one with trust company officers, from various

parts of the district, to ascertain their views upon the question at

issue. In every case the policy has been pursued of dealing frankly with

those present, in order that they might understand fully how the action

under consideration would affect them.

The officers have expressed themselves at all times as desirous of

establishing personal relations with officers of member banks and have

invited them to call at the bank when in New York City. Yet a year has

gone by and officers of probably not over 15 per cent. of the member

banks have done so. Many of them still have the feeling that the bank is

a branch of the Government. Their experience with the Government

consists principally of the statutory and supervisory relationship which

exists between them and the Comptroller's office. The conception of the

relation of this institution with them as co-operative makes headway

slowly. The fact that the national banks were practically compelled to

join the system naturally retards the development of the co-operative

idea. The change of attitude, upon which the success of the system will

ultimately depend, will probably come slowly, but there are already

signs, as we enter upon the second year of the system, that the banks

are getting more accustomed to it and appreciate the results it has

already accomplished. It is hoped that during the coming year, with

organization pressure somewhat lessened, more time can be devoted by the

officers to developing personal relations with the officers of member

banks.

The present attitude of the member banks toward the reserve bank may be

summarized as follows:

The New York City banks, upon which the strain of all crises first and

chiefly falls, fully understand the value and benefits of the system.

While regretting the loss of bank deposits which will probably be drawn

from them (estimated to be as high as $250,000,000), they are

nevertheless hearty supporters of the system, at all times co-operative

in their attitude.

Many of the banks in other large cities are unable to take full

advantage of the lowered reserve requirements, but in spite of the loss

of interest on their reserve balance, most of them understand what the

system in its larger aspects means for American banking and generally

give it their support.

While the same may be said of many of the country banks, yet it is among

the country banks as a class that most of the apathy and hostility to

the federal reserve system which still persists is found. Their

opportunities and earnings are relatively small, and in order to live

they must figure closely. They feel the loss of interest on reserve

deposits; the absence, as yet, of dividends on their capital

contribution; and the prospective loss or decrease of the exchange they

generally charge on remitting for checks drawn upon them. Many banks in

industrial centres are precluded by the activity of their business from

taking advantage of the reduction in the required reserve. They believe

that they will, in fact, be required to carry an even larger reserve

than heretofore in order to obtain collection service for notes, drafts,

and non-member bank checks and the various other services now rendered

by their reserve agents, but not yet undertaken, by the reserve banks.

It is very natural that they should view with reluctance the termination

or diminution of long-standing business associations with their reserve

agents. Few of them, as yet, conceive of the reserve bank as their

active reserve agent, performing all the services which go with the

relationship. The dormant accounts most of the banks maintain with the

reserve bank are, perhaps, indicative of their attitude toward it.

Relatively few banks of this district are borrowers; in good times and

bad they have been able when necessary to borrow from their city

correspondents on bonds or on the indorsement of their directors, two

avenues which are now to be closed to them. The rediscounting privilege

has been little availed of and the larger functions of the Federal

Reserve System, such as influencing domestic rates and international

gold movements through the development of a discount market and by

dealing in foreign bills, appear remote from their spheres of activity.

They feel that the system has few advantages to offer in return for the

cost it entails upon them.

All of these points will be felt with increasing acuteness by the

country banker as his reserve transfers approach completion and as

reduced balances result in reduced service from his city correspondent.

His point of view is outlined thus frankly in order that the

difficulties he sees may be clearly recognized and steps taken gradually

to remove them. The development of a more satisfied relationship

requires progress on the part of the reserve bank and a willingness to

co-operate on the part of the country banker.

The reserve bank should organize a complete collection system embracing

the handling of notes, drafts, and items on non-member banks, which

eventually will bring all the members into daily active relations with

the bank. It must be ready to act for member banks in the purchase,

sale, and custody of securities; to supply credit information on names

whose paper is offered by brokers; to give its members information

concerning methods of developing the new functions which the act

authorizes them to exercise; to perform the services now rendered by

their reserve agents; and generally to assist them in every reasonable

way.

The member banks should look upon the reserve bank not as an alien but

as their own institution. They own all its capital and most of its

resources, and they control its management through the directors they

elect, subject always to the supervision of the Reserve Board. At the

reserve bank they may borrow as a standing right and not as a favor

which may be cut off. They no longer have to buy or carry bonds to serve

as security for loans; the paper of their own customers, large or small,

will now serve as their security. While panics in the past may not have

affected them, they have been disastrous to the business interests of

the country, who are their customers; and their contributions to the

reserve bank should be recognized as a form of insurance not merely for

themselves but for their customers as well. If this insurance is

expensive and makes some changes in the nature of their business, the

act should be carefully studied with a view to making the most of the

new functions it provides. New avenues of activity should be looked for.

The banks which will get the most out of membership are those which are

the first to see and develop the opportunities it provides and to

educate their customers to the protection and facilities they will enjoy

through the system. The occasion is a favorable one also for the

correction of abuses. Customers will do things in the name of the

Federal Reserve System which they have never done before. The experience

of banks in using the forms provided by the reserve bank to get

statements from their borrowers is evidence of this. The occasion should

be seized also to increase the balances of depositors who carry

unprofitable accounts. To assist member banks in studying their accounts

this bank has had under preparation by chartered public accountants a

reasonably simple form for analyzing accounts which may be obtained by

banks desiring to use it.

It is the duty of the directors and officers to understand not only the

problems of the reserve bank but those of the member banks as well; and

it has been their endeavor during the past year to give special study to

those of the country bank. Several suggestions for the relief of the

country bank have come to their notice.

One of these, which the American Bankers' Association at its 1915

Seattle convention favored, was to permit the 3 per cent. of reserve

which the member bank may carry either in its vaults or in the reserve

bank, to be deposited with member banks not more than 300 miles distant

and count as reserve. This seems to be contrary to the spirit and intent

of the act, which is primarily to centralize reserves in Federal Reserve

Banks.

Another suggestion which seems more worthy of consideration is that the

percentage of reserve required for country banks should be somewhat

further reduced. When the reserve transfers are completed checks in

transit can no longer count as reserves. It is clear, therefore, that

the reserve reduction contemplated by the act will not be realized in

practice. A further reduction in the reserve requirements would, in the

case of many banks, result in a reserve less than the amount their

business actually required, and would enable them to carry the amount

thus freed wherever it would best serve their particular business, and,

if they so desired, to maintain some relations with present city

correspondents. It would lead away from the present rigidity of bank

reserves toward greater flexibility and a better understanding of their

meaning and purpose.

RELATIONS BETWEEN THE FEDERAL RESERVE BANK OF MINNEAPOLIS AND ITS

MEMBERS

[304]The Ninth Federal Reserve Bank has sought to make the Federal

Reserve Act fully operative within its district. During the spring of

1915 it had opportunity to demonstrate its effectiveness in meeting the

requirements of agriculture in the Northwest during the planting season,

and rediscounted liberally for member banks, in order to enable them to

better satisfy the requirements of farmers. It relieved local pressure

at a number of points where manufacturing enterprises and general

business were depressed because of war conditions, and had opportunity

to show that it can efficiently meet the demands of industry. Again, in

the fall of the year, when an adverse season had created large amounts

of immature corn, it was able to perform a very valuable service in

assisting member banks to meet the requirements of farmers who were

suddenly compelled to make provision for utilizing a valuable forage

crop. During the prevalence of the foot-and-mouth disease it was able to

come to the assistance of many banks in the western part of its

territory, which had applications for loans from numerous stockmen who

had cattle ready for market, but were unable to ship on account of

quarantine conditions. The service above indicated, while not perhaps of

notable consequence in any single case, consists in the aggregate of a

very valuable degree of assistance, which would not have been available

except for the Federal Reserve Bank, and without which, portions of the

district would have encountered considerable hardships.

RELATIONS BETWEEN THE FEDERAL RESERVE BANK OF BOSTON AND ITS MEMBER

BANKS

[305]Owing to the unusual conditions existing in the money market, and

to the fact that the reserve city banks offer facilities to the country

banks which this bank has not yet developed, more particularly in

connection with the collection of checks and other items, the latter

banks have carried only their minimum reserve requirements with this

bank and have used its facilities only to a limited extent. The

relations between country bank officials and the officials of this bank

have been most cordial. While many of the banks in this district are

borrowing, most of them find it much more convenient to go to their

correspondent bank and borrow, either in the form of a demand loan, with

or without collateral, or against a certificate of deposit.

The Comptroller's calls on the several dates show the total borrowings

of member banks in the district as compared with their rediscounts with

this bank, as follows:

_Total _Borrowed,

Borrowed._ F.R.B._

Dec. 31, 1914 $4,738,416 $105,000

Mar. 4, 1915 4,047,708 234,531

May 1, 1915 3,969,796 410,723

June 23, 1915 4,284,445 270,441

Sept. 2, 1915 3,398,856 190,849

Nov. 10, 1915 2,985,406 131,725

The officials of the city banks on the other hand are apparently

satisfied with the progress made in the development of this bank's

functions. While but few of the Boston banks have rediscounted with us,

almost all have intimated that should occasion arise they would do so.

Furthermore, several Boston banks have entered into the acceptance

business to a large extent, and the assistance that this bank has given

in the matter of rates and market for acceptances has done much to bring

it into favor with those banks. The Boston banks have also used this

bank to a large extent in exchange transactions, and the services

offered by the gold settlement fund have been used almost exclusively by

those banks.

Thus far Boston banks have received more benefits from this bank than

have the other banks in this district. A possible exception to this is

in Aroostook County, Me., where, owing to an unusual situation

surrounding the principal industry, the potato crop, banks have relied

on this bank to a considerable extent to carry them through a trying

period. The moral effect of having the Federal Reserve Bank of Boston

stand behind them was not only appreciated by those banks, but enabled

them to handle their business much more satisfactorily and to finance

themselves without having to call upon this bank to an undue extent for

rediscounts or without embarrassing their customers.

FEDERAL RESERVE BANKS AND THE ACCEPTANCE MARKET

[306]The right to accept drafts was conferred on New York State banking

institutions by the act of April 16, 1914. Shortly afterwards a few

acceptances were reported, principally against securities. It was not

until the derangement of international credit facilities at the opening

of the European war that American bankers' acceptances, especially those

relating to foreign commerce, came into existence in substantial volume.

At that time some of the trust companies with foreign connections

extended credits freely to their customers to replace credits formerly

granted by European banks which had been either withdrawn or reduced;

they also accepted drafts in large volume. On and after May 18, 1914,

member banks were authorized also to accept drafts drawn upon them

involving the importation or exportation of goods....

The monthly purchases of acceptances by this bank [the Federal Reserve

Bank of New York] in the New York market have been:

1915 _Number_ _Number_

_of pieces._ _Amount._ _of pieces._ _Amount._

_For itself._ _For other reserve banks._

February 41 1,659,740.21 86 1,263,871.25

March 140 3,343,143.17 250 3,799,809.42

April 86 1,272,694.36 84 1,700,396.57

May 46 867,420.18 48 1,305,873.80

June 132 3,083,261.75 34 602,558.89

July 106 2,496,865.67 147 2,348,050.89

August 103 1,597,630.63 89 1,910,417.47

September 89 1,769,880.50 172 1,948,243.05

October 68 2,199,679.95 163 2,028,098.36

November 115 1,899,606.56 246 2,594,951.04

December 310 5,648,708.78 313 2,809,823.59

Total 1,236 25,833,631.76 1,632 22,312,094.33

The policy pursued by this bank thus far has been to purchase good

acceptances whether or not the acceptor was a member bank....

The reserve bank and the market rate for the discount of such bills in

New York has been for nearly a year, and is now, lower than the rate for

similar bills in London. The relatively small volume of such credits

which American banks have succeeded in making operative even under the

unusually favorable opportunity which the war presents for their

extension, is evidence of the difficulty which will be encountered in

developing the acceptance business in the United States. Some of the

fundamental difficulties are:

(1) The disinclination to break old banking connections.

(2) The difficulty of educating handlers of bills in distant places as

to American credits.

(3) The lack of bill buyers in foreign countries who will quote as low

rates on dollar as on sterling bills.

(4) The natural prejudice of bill buyers in foreign countries in favor

of a bill of known currency and against a bill of as yet unknown

currency.

(5) The lack of men trained to exercise the judgment and financial

responsibility required of them as managers of branches or agencies

which American banks might establish in foreign countries.

(6) The inferior communications for both goods and mail between the

United States and foreign countries as compared with those between Great

Britain and foreign countries.

Only time, experience, and patient effort will remove these handicaps to

the elevation of dollar exchange to its proper position in international

finance. The business, however, is developing and will continue to grow

as our banking machinery and connections extend throughout the world.

The Act permits member banks to accept an amount of bills not exceeding

50 per cent. of their capital and surplus. By the amendment of March 3,

1915, under certain conditions they may be authorized by the Federal

Reserve Board to accept up to 100 per cent. of the capital and surplus.

The following banks in this district have received such authorization:

_Amount of

capital and

surplus._

Bank of New York, New York $6,000,000

Mechanics & Metals National Bank, New York 12,000,000

Atlantic National Bank, New York 1,600,000

American Exchange National Bank, New York 8,000,000

As this bank has probably been the largest single purchaser of bankers'

acceptances, it has been able, as it gained experience, to exert some

influence toward standardizing practice and form....

The amended regulation[307] issued September 7, 1915, considerably

broadened the field of acceptances eligible for purchase and encouraged

an increased volume of these instruments. The further amended regulation

issued December 4, 1915, covering the purchase of bankers' acceptances

arising out of domestic transactions relates to a class of bills which

national banks are not authorized to accept. When accepted by

institutions of high credit they have a ready market, though at a

fractionally higher rate than acceptances based on foreign transactions.

[308]New England imports a large volume of hides and wool from South

America and cotton and jute from the Orient and other sections of the

world. These shipments in the past have been financed through credits

drawn on European centers. Since the opening of the Federal Reserve

Banks these foreign trade transactions have been financed to a large

extent through dollar credits drawn on this country and the acceptances

arising there from have found a ready market in the Federal Reserve

Banks. Several of the member banks in this district have entered this

new field of finance and the Federal Reserve Bank of Boston has used

every effort to further and develop that business, not only by buying a

large amount of that class of paper, but also through furnishing

favorable forward discount rates to assist in protecting its member

banks. The following member banks have entered this field:

1. First National Bank, Boston, Mass.

2. Fourth-Atlantic National Bank, Boston, Mass.

3. Merchants National Bank, Boston, Mass.

4. National Shawmut Bank, Boston, Mass.

5. Old Colony Trust Co., Boston, Mass.

6. Second National Bank, Boston, Mass.

7. Merchants National Bank, Worcester, Mass.

Under special permission of the Federal Reserve Board the First National

Bank, of Boston, and the National Shawmut Bank, of Boston, have been

given authority to accept up to 100 per cent. of their capital and

surplus. It is of interest to note that the former bank has reported the

largest amount of acceptances of any member bank of the Federal Reserve

System.

CLEARINGS AND COLLECTIONS IN PRACTICE

[309]Section 16 of the Federal Reserve Act made general provision for

the establishment of a system of clearance of checks throughout the

United States, each Federal Reserve Bank being required to act as a

clearing house for its members if directed by the Federal Reserve Board,

while the Federal Reserve Board was authorized to clear for the reserve

banks themselves.

The Board had from the first recognized its duty to make this provision

of the law effective as fully and at as early a date as conditions would

permit; and in its first report spoke of this as "one of the most

important responsibilities with which it is charged under the Act." So,

regarding its duty in this particular, it undertook early in 1915 the

preparation of a general circular and regulations intended to provide

for the clearing of checks within the several Federal Reserve districts,

while it also took under advisement the establishment of a gold

settlement fund at Washington for the purpose of clearing obligations

between Federal Reserve Banks. The latter undertaking has been carried

to a successful conclusion and the gold settlement fund has been in full

and satisfactory operation since about the first of June. The Board,

however, had not advanced far with its work relating to the

intradistrict branch of the clearance system before technical and other

difficulties began to make their appearance. Many banks, both city and

country, throughout the system were opposed to the enforcement of the

provisions of the law because of the loss of exchange charges which

would thereby be entailed upon them. Legal questions were also raised,

it being argued that there is no power to compel a member bank not

located in a Federal Reserve city to pay or have charged to its account

at the Federal Reserve Bank of its district a check which it had not

seen and approved prior to the time of presentation at its own counter.

For the purpose of ascertaining the Board's powers in this connection

the opinion of the Attorney General has been requested.

While the Board was not inclined to attach undue importance to

objections based upon self-interest, it felt that it must take

cognizance of all legal objections, and it recognized that the clearing

question was essentially a reserve problem rather than a technical

question or a mere matter of administration. Inasmuch as the Federal

Reserve Act had granted a period of three years within which to effect

the final transfer of reserves to Federal Reserve Banks (balances with

correspondents counting as reserves in the meantime), there was a

certain ground for objection to the immediate introduction of complete

clearance at Federal Reserve Banks. As is well known, reserve balances

in some reserve cities have heretofore been used for the purpose of

providing for exchange and collection operations, and so long as this

function on the part of city correspondents continued there was some

argument in favor of deferring any compulsory application of par

clearance at the reserve banks. Study of the problem, moreover, shows

that, pending the time when state banks enter the system in larger

numbers, it may be necessary for some member banks to collect and clear

through their correspondents in reserve cities.

So complex was the situation and so serious the difficulty involved in

the compulsory application of any system, however carefully conceived,

that the Board felt it would be well if member banks could be brought to

recognize of their own free will the advantages of a general and

nation-wide clearing system--advantages which would inure not only to

the benefit of the public at large, but ultimately to the direct benefit

of the member banks themselves from the purely business standpoint. It

therefore took under favorable consideration the question of a voluntary

clearing system. Both the difficulties of a compulsory plan and the

probable merits of a voluntary system had been strongly represented to

the Board by the governors of the respective Federal Reserve Banks who

at various meetings had thoroughly canvassed the whole situation. Under

a plan, proposed by the governors, which in most districts became

effective during June, 1915, provision was made for the acceptance at

par by the Federal Reserve Bank of each district of checks drawn upon

any member bank of that district which had previously assented to the

provisions of the scheme. It was hoped that a very large number of

member banks would promptly affiliate themselves with the new system of

clearing and that the natural force of economic competition would

ultimately attract to it those who at first might hesitate.

This system, as already stated, became operative in most districts

during June, 1915. Prior to this whole discussion, however, two

districts had already undertaken the application of the clearing

provision of the law. Early in December, 1914, district No. 10 and

district No. 8 (Kansas City and St. Louis) had sought and obtained

permission to apply to their members a complete system of required

clearing. This system had been in full operation in both districts prior

to the general application of the voluntary system. Upon the

inauguration of the latter the directors of the Federal Reserve Bank of

St. Louis deemed it wise to offer to their member banks the option of

withdrawing from the clearance system if they so desired; but so

successful had been the working of the plan that comparatively few

retired, about 80 per cent. of all continuing their membership. The

Federal Reserve Bank of Kansas City continued its required system as

before for the benefit of all its member banks, numbering 950. As about

365 banks continued their membership in the St. Louis district, a total

of approximately 1,300 was included in the clearing system of the two

districts in question. Outside of these two districts about 1,100 member

banks voluntarily affiliated themselves with the clearing system within

a short time after its inauguration, and there was a subsequent net

inward movement of about 50 additional members, making approximately

1,150 banks which of their own free will have assented to the voluntary

clearing plan. This is considerably less than 25 per cent, of the

institutions eligible for membership, and the proportion has been so

small as to prove a severe disappointment to those who had confidently

expected that the foresight and enlightened self-interest of the member

banks would speedily accomplish the desired result. Some progress has

been made through the action of the banks, both member and non-member,

in improving exchange conditions and in providing for the clearance of

country checks at points where this practice has never before prevailed;

but in the main comparatively small advance has thus far been made in

rendering effective the provisions of the law requiring the

standardization of exchange and clearance practices. This slowness is

largely due to the failure of jobbers and merchants to appreciate the

advantages of the clearance system and to enlarge its membership by

insisting that their own banks join and co-operate in the plan. The

subject has recently been reopened at the conferences between the

governors of the Federal Reserve Banks, the Federal Reserve Agents, the

transit managers of the reserve banks, and the Board itself, with a view

to extending the present system not only in the several districts

themselves but as between the various districts. For many years it has

been lawful for banks to count as reserves deposits with other banks. It

was never the intention of the Federal Reserve Act that member banks

should continue the maintenance of these reserve accounts. On the

contrary, the full meaning of the act is manifestly opposed to such an

idea. It is the plain conception of the Act that the reserve banks

should, to a very large extent, if not entirely, perform the work that

is now being done by correspondent banks in this respect. This means

that the reserve balances to be carried in the future by the reserve

banks instead of by the correspondent banks should serve as the basis

for a system of clearing and collecting the exchanges of the country.

Whatever can be done to bring about the prompt and effective use of this

new system of bank settlement will be done.

BRANCHES AND AGENCIES

[310]The question of branches of federal reserve banks has received

careful attention during the past year. There has been intimation from

several quarters that the establishment of a branch at a given point

would be acceptable to the banks of that place. Only in one

instance--that of New Orleans--did the Board receive a definite request

from a Federal Reserve Bank to establish a branch. Believing that New

Orleans and the adjacent territory could make advantageous use of this

additional banking machinery, the Board authorized the establishment of

a branch of the Federal Reserve Bank of Atlanta to be located in New

Orleans, and this branch was opened for business on September 10.

Operations at the New Orleans branch have proceeded satisfactorily, and

the institution has been of considerable use to the local banks. The

branch is already more than self-supporting.

Investigation and experience have seemed to show that, at least for some

years to come, the organization of branches with completely equipped

offices, vaults, and the like, and with a full staff of salaried

officials, will be too heavy an expense for most of the reserve banks,

yet, that valuable service could be performed by local offices of the

several banks in not a few places. The Board has, therefore, had under

consideration the question whether establishing local agencies might not

meet the requirements of the case better than the more fully organized

branch office. Competent legal opinion is to the effect that the

creation of such local offices is permissible under the terms of the

law, and the Board believes that it may prove practicable to meet

banking necessities in many sections of the country by this means.

PROPOSED AMENDMENTS TO FEDERAL RESERVE ACT[311]

A year's experience in the operation of the Federal Reserve Act has

confirmed the Board in its profound conviction that the act has been one

of the most beneficial pieces of legislation ever adopted by Congress.

Not only have its fundamental principles been fully vindicated but in

most details the working of the measure has been successful. The act,

however, is a progressive piece of legislation and creates new

conditions as the result of its own operation. Modification in its terms

growing in part out of these new conditions will subsequently be

required from time to time.

For the present the Board presents the following suggestions for

amendments to the act:

(1) In addition to powers now possessed in this connection by Federal

Reserve Banks and national banks, the latter should be permitted to

subscribe for and hold stock in banks organized for the special purpose

of doing a banking business in foreign countries.

(2) With the approval of the Federal Reserve Board the issue of Federal

Reserve notes to Federal Reserve Banks should be permitted either

against the deposit of an equal amount, face value, of notes, drafts,

bills of exchange, and bankers' acceptances acquired by Federal Reserve

Banks under sections 13 and 14 of the Act, or of gold, or of both,

provided, however, that gold so deposited with a Federal Reserve Agent

shall count as part of the reserve required by the Act to be maintained

by the bank against such notes outstanding.

(3) The acceptance system, provision for which is made in foreign trade

operations by the Federal Reserve Act, should be extended to the

domestic trade in so far as relates to documentary acceptances secured

by shipping documents or warehouse receipts, covering readily marketable

commodities or against the pledge of goods actually sold.

There can be but little question of the safety of such acceptances, and

their use will tend to equalize interest rates the country over and help

to broaden the discount market.

(4) Permission should be granted to national banks to establish branch

offices within the city, or within the county, in which they are

located.

(5) In order to enable member banks to obtain prompt and economical

accommodations for periods not to exceed fifteen days, the Federal

Reserve Banks should be permitted to make advances to member banks

against their promissory notes secured by such notes, drafts, bills of

exchange, and bankers' acceptances as the law at present permits to be

rediscounted or purchased; or against the deposit or pledge of United

States Government bonds, the purchase of which is now permitted under

the law.

(6) The Board furthermore recommends that the power of national banks to

make loans on farm lands as provided in section 24 be extended so as to

permit any national bank not situated in a central reserve city to make

loans secured by improved and unencumbered farm land situated within its

Federal Reserve district, or within a radius of 100 miles from the place

in which such bank is located, irrespective of district lines. It also

recommends that the powers of national banks be further extended to

permit any such bank to make loans on any improved and unencumbered real

estate located within 100 miles of the place in which such bank is

located, irrespective of district lines; provided, however, that the

aggregate of farm land loans and other real estate loans made by any

national bank shall not exceed 25 per centum of its capital and surplus

or one-third of its time deposits; and provided further, that no such

real estate loan, as distinguished from a farm land loan, shall exceed a

period of one year nor exceed 50 per centum of the actual value of the

property offered as security.

It is believed that the enactment of these amendments will, besides

enlarging the usefulness of the national banks, result in greatly

strengthening the operation of the Federal Reserve Act, and more

completely realize the purposes of its framers. The text of the

amendments designed to carry out these recommendations will be submitted

by the Board at an early date. The Board has under consideration other

suggestions for amendments to the Federal Reserve Act concerning which

no conclusions have yet been reached, and regarding which the Board will

take occasion to submit its views to the Congress at an appropriate time

in the future.

STATEMENT OF CONDITION OF FEDERAL RESERVE BANKS.[312]

_Combined resources and liabilities of all Federal Reserve Banks as at

close of business on the last Friday of each month during 1915._

RESOURCES.

[In thousands of dollars.]

---------------------------+---------+---------+---------+---------+---------+

| Dec. | Jan. | Feb. | Mar. | Apr. |

| 31. | 29. | 26. | 26. | 30. |

| 1914. | | | | |

---------------------------+---------+---------+---------+---------+---------+

in vault | 228,641 | 235,417 | 248,256 | 241,344 | 237,278 |

Gold redemption fund | 428 | 488 | 653 | 824 | 950 |

+---------+---------+---------+---------+---------+

Total gold reserve | 229,069 | 235,905 | 248,909 | 242,168 | 238,228 |

etc. | 26,578 | 20,882 | 29,085 | 23,098 | 26,518 |

+---------+---------+---------+---------+---------+

Total reserve | 255,647 | 256,787 | 277,994 | 265,266 | 264,746 |

Commercial paper | 9,909 | 13,955 | 18,577 | 22,001 | 22,774 |

Bankers' acceptances | | | 1,892 | 9,682 | 13,812 |

United States Bonds | 205 | 2,015 | 5,406 | 6,639 | 6,813 |

Municipal warrants | 734 | 11,165 | 12,011 | 14,940 | 18,656 |

net assets | 5,418 | 3,179 | 3,215 | 6,091 | 6,909 |

Reserve Banks, net | 7,930 | 7,421 | 8,088 | 5,573 | 9,468 |

All other resources | 5,931 | 7,712 | 4,550 | 3,019 | 4,425 |

+---------+---------+---------+---------+---------+

Total resources | 285,774 | 302,234 | 331,733 | 333,211 | 347,603 |

---------------------------+---------+---------+---------+---------+---------+

LIABILITIES.

---------------------------+---------+---------+---------+---------+---------+

| Dec. | Jan. | Feb. | Mar. | Apr. |

| 31. | 29. | 26. | 26. | 30. |

| 1914. | | | | |

---------------------------+---------+---------+---------+---------+---------+

Capital paid in | 18,051 | 20,440 | 36,069 | 36,105 | 39,669 |

Reserve deposits, net | 263,948 | 279,516 | 290,336 | 288,217 | 294,832 |

net liability | 3,775 | 2,278 | 5,328 | 8,889 | 11,038 |

All other liabilities | | | | | 2,064 |

+---------+---------+---------+---------+---------+

Total liabilities | 285,774 | 302,234 | 331,733 | 333,211 | 347,603 |

---------------------------+---------+---------+---------+---------+---------+

RESOURCES. (continued)

[In thousands of dollars.]

---------------------------+---------+---------+---------+---------+---------+

| 28. | 25. | 30. | 27. | 24. |

| | | | | |

---------------------------+---------+---------+---------+---------+---------+

in vault | 219,187 | 222,746 | 212,988 | 211,145 | 229,972 |

Gold settlement fund | 23,426 | 31,360 | 52,140 | 55,930 | 59,050 |

Gold redemption fund | 1,027 | 1,081 | 1,064 | 1,104 | 1,202 |

|---------+---------+---------+---------+---------+

Total gold reserve | 243,640 | 255,187 | 266,192 | 268,179 | 290,224 |

etc. | 31,989 | 47,848 | 22,092 | 19,878 | 22,920 |

+---------+---------+---------+---------+---------+

Total reserve | 275,629 | 303,035 | 288,284 | 288,057 | 313,144 |

Commercial paper | 24,747 | 25,996 | 29,102 | 29,275 | 31,373 |

Bankers' acceptances | 9,204 | 10,379 | 11,625 | 13,564 | 13,058 |

United States Bonds | 6,947 | 7,601 | 7,923 | 8,836 | 9,328 |

Municipal warrants | 23,094 | 11,509 | 16,107 | 25,808 | 24,945 |

net assets | 7,765 | 9,124 | 11,029 | 12,491 | 14,866 |

Reserve Banks, net | 7,435 | 8,311 | 7,078 | 6,990 | 7,409 |

All other resources | 5,426 | 5,501 | 5,904 | 4,962 | 3,577 |

+---------+---------+---------+---------+---------+

Total resources | 360,247 | 381,456 | 377,052 | 389,983 | 417,700 |

---------------------------+---------+---------+---------+---------+---------+

LIABILITIES.

---------------------------+---------+---------+---------+---------+---------+

| 28. | 25. | 30. | 27. | 24. |

| | | | | |

---------------------------+---------+---------+---------+---------+---------+

Capital paid in | 54,158 | 54,200 | 54,181 | 54,689 | 54,748 |

Government deposits | | | | | 15,000 |

Reserve deposits, net | 292,050 | 311,349 | 306,183 | 316,989 | 329,941 |

net liability | 10,921 | 12,617 | 14,965 | 16,738 | 15,348 |

All other liabilities | 3,118 | 3,290 | 1,723 | 1,567 | 2,663 |

---------------------------+---------+---------+---------+---------+---------+

Total liabilities | 360,247 | 381,456 | 377,052 | 389,983 | 417,700 |

---------------------------+---------+---------+---------+---------+---------+

RESOURCES. (continued)

[In thousands of dollars.]

----------------------------+---------+---------+---------

| Oct. | Nov. | Dec.

| 29. | 26. | 30.

| | |

----------------------------+---------+---------+---------

Gold coins and certificates | | |

in vault | 218,224 | 245,986 | 266,546

Gold settlement fund | 61,960 | 73,830 | 77,293

Gold redemption fund | 1,222 | 1,252 | 1,124

+---------+---------+---------

Total gold reserve | 281,406 | 321,068 | 344,963

Legal tender notes, silver, | | |

etc. | 37,058 | 37,212 | 13,525

+---------+---------+---------

Total reserve | 318,464 | 358,280 | 358,488

Commercial paper | 30,448 | 32,794 | 32,368

Bankers' acceptances | 13,619 | 16,179 | 23,013

United States Bonds | 10,505 | 12,919 | 15,797

Municipal warrants | 25,014 | 27,308 | 12,220

Federal Reserve notes, | | |

net assets | 19,723 | 19,176 | 21,910

Due from other Federal | | |

Reserve Banks, net | 8,533 | 14,053 | 20,767

All other resources | 3,645 | 4,633 | 6,547

|---------+---------+---------

Total resources | 429,951 | 485,342 | 491,110

----------------------------+---------+---------+---------

LIABILITIES.

----------------------------+---------+---------+---------

| Oct. | Nov. | Dec.

| 29. | 26. | 30.

| | |

----------------------------+---------|---------+---------

Capital paid in | 54,838 | 54,846 | 54,915

Government deposits | 15,000 | 15,000 | 15,000

Reserve deposits, net | 343,554 | 397,952 | 400,012

Federal Reserve notes, | | |

net liability | 13,918 | 13,385 | 13,486

All other liabilities | 2,641 | 4,159 | 7,697

----------------------------+---------+---------+---------

Total liabilities | 429,951 | 485,342 | 491,110

----------------------------+---------+---------+---------

FOOTNOTES:

[287] O. M. W. Sprague, _The Federal Reserve Act of 1913_, _The

Quarterly Journal of Economics_, Vol. 28, No. 2, February, 1914, pp.

213-254.

[288] [The country has been divided into twelve districts in each of

which a Federal Reserve Bank began operations November 16, 1914.]

[289] After the Reserve Banks have been in operation long enough to be

running smoothly, not a few branches will doubtless be organized.

Branches are to have boards of directors, three of the members of which

are to be chosen by the Federal Reserve Board, and four by the directors

of the parent Reserve Bank. Branches are to be operated under rules and

regulations approved by the Federal Reserve Board.

[290] State banks and trust companies are eligible for membership, if

they have a sufficient capital to entitle them to become national banks

in the places where they are situated. On becoming member banks, they

must comply with the provisions of the national banking law regarding

reserves, examinations (the state examinations may be accepted), and

various other general provisions of the national banking law.

[291] In case subscriptions by the banks of a district are inadequate,

stock is to be offered to the general public; and if the response of the

public is inadequate, the stock is to be taken by the Government of the

United States. Neither privately owned nor government stock is entitled

to voting power. [In no district were subscriptions by the banks

"inadequate."]

[292] The inability of the Pujo money trust committee to secure desired

information from the banks evidently occasioned the following clause:

"No bank shall be subject to any visitatorial powers other than such as

are authorized by law, or vested in the courts of justice, or such as

shall be or shall have been exercised or directed by Congress, or by

either House thereof, or by any committee of Congress of either House

duly authorized."

[293] [Several of the more important regulations of the Federal Reserve

Board are contained in Appendix B.]

[294] The law regarding the examination of national banks is recast. The

only important changes are that hereafter all examiners are to be paid

salaries, and that the Federal Reserve Banks are empowered to conduct

special examinations of member banks.

[295] Adapted from Joseph French Johnson, _Fundamental Weakness of the

Glass-Owen Bill_, an address delivered before the Economic Club of New

York City, Monday evening, November 10, 1913.

[296] Although the address in part here reproduced was delivered as a

criticism of the Glass-Owen Bill, one of the measures that led up to

the passage of the Federal Reserve Act, that criticism, as a result

of a few slight changes made, applies with almost equal force to

the Federal Reserve Act itself. The preceding article by Professor

Sprague answers with striking directness Professor Johnson's trenchant

argument.--EDITOR.

[297] [It is commonly held that ample controlling power has been

conferred upon the Federal Reserve Board by the act as finally passed.

It is of interest that Senator Owen listened to the address of which an

adaptation is here given.]

[298] John Skelton Williams, Comptroller of the Currency, "Democracy in

Banking," an address delivered before the annual convention of the North

Carolina Bankers' Association in the House of Representatives at the

capitol at Raleigh, May 13, 1914. Printed in _Congressional Record_, 63d

Congress, 2d Session, Vol. 51, pp. 10150-53.

[299] F. M. Taylor, _The Elasticity of Note Issue under the New Currency

Law_. _The Journal of Political Economy_, Vol. 22, No. 5, May, 1914, pp.

453-463.

[300] _Second Annual Report of the Federal Reserve Board_, p. 16. 1916.

[301] _First Annual Report of the Federal Reserve Bank of New York_, pp.

19, 20. 1916.

[302] Thomas Conway, Jr., _The Financial Policy of the Federal Reserve

Banks_, _The Journal of Political Economy_, Vol. 22, No. 4, April, 1914,

pp. 319-331.

[303] _First Annual Report of the Federal Reserve Bank of New York_, pp.

34-36. 1916.

[304] Second Annual Report of the Federal Reserve Board, pp. 313, 314.

1916.

[305] _Ibid._, pp. 134-6.

[306] _Ibid._, pp. 23-25.

[307] [For regulations issued by the Federal Reserve Board see Appendix

B.]

[308] _Second Annual Report of the Federal Reserve Board_, pp. 134. 135,

1916.

[309] _Ibid._, pp. 14-17.

[310] _Ibid._, p. 18.

[311] _Ibid._, pp. 21, 22.

[312] _Ibid._, pp. 45, 46.

From the beginnings of agitation for currency reform the advocates of