1922 Encyclopædia Britannica/Federal Reserve Banking System

by Henry Parker Willis

FEDERAL RESERVE BANKING SYSTEM.—The Federal Reserve Banking System of the United States is the outgrowth of a movement for what was called “banking reform,” which had been in progress for about 20 years prior to the enactment of the Federal Reserve Act on Dec. 23 1913.

The National Banking System, which in 1913 contained a total of about 7,500 members, had been organized during the Civil War, the constituent Act being passed in 1863 and modified in the following year. It provided for the creation of independent institutions operating under the general requirements of the National Banking Law, but organized directly at the will of prospective stockholders. The fundamental basis of the law was “free banking,” as reflected in general authority to organize banks provided that the capitalization of each institution should not be less than a specified sum varying with the population of the place in which the proposed bank was to be situated. The minimum of capitalization was $50,000 (changed in 1900 to $25,000). Currency issued by the national banks was based upon and protected by Government bonds which each bank was required to purchase in a specified amount, not exceeding, however, a sum equal to the capital of the bank. Bond purchase provisions were later modified, but the essential principle remained. When these bonds had been purchased they were deposited with the Treasurer of the United States who thereupon issued circulating notes to the bank. Each bank was required to maintain a specified reserve which amounted to 25% in the case of banks located in three central reserve cities (New York, Chicago and St. Louis), while in reserve cities (eventually nearly 50 in number) the requirement was 12½% cash in vault and 12½% in the form of balances in banks in the central reserve cities. All other banks were required to keep 15% reserve, of which 6% had to be cash in vault and 9% might be in the form of balances in the banks of central reserve cities.

This system had proved inadequate because in time of stress or panic there was no recognized means for relieving hard-pressed banks; also the currency was inelastic, being limited by the amount of bonds available, and being slow in its issue and even slower in redemption. During and shortly after the panic of 1893, an agitation was started in favour of some plan for the issue of “emergency currency” as a means of preventing the development of acute panics; this ultimately grew into a demand for a currency not purely of emergency nature but elastic as required by business needs, and therefore including issues of ordinary bank-notes protected by the joint guarantee of the banks. The only practical outcome of this agitation was seen in certain sections of the Gold Standard Act of 1900. These provided for refunding the outstanding U.S. bonds at a rate (2%) which precluded the growth of a premium while it authorized banks of $25,000 capital in places with less than 3,000 people. Both provisions tended to make the issue of notes easier. Although numerous bills were urged, especially after 1907, the proposed plan for a really elastic note issue was never seriously considered by Congress because of the unwillingness of the larger banks to guarantee notes issued by a great many small institutions. After the panic of 1907 the so-called Aldrich-Vreeland Act was adopted (May 30 1908). This made provision for the organization of “national currency associations” which would have been allowed to issue notes based upon commercial paper or other securities deposited by constituent banks with the associations in question. At the time, however, the plan did not get into practical operation, partly because the difficulties attendant upon the panic of 1907 had been overcome before the Act was enacted. Contemporaneously with the Aldrich-Vreeland Act, provision was made for the creation of a body called the National Monetary Commission, which continued investigations for several years and eventually proposed a bill for general banking reform, ordinarily described as the Aldrich bill. This measure contemplated the creation of a central banking organization with branches. The plan still retained the fundamental concept of an emergency currency, but the proposed institution was not equipped with the ordinary powers, duties and responsibilities which had been found necessary in central banking experience abroad. It has been supposed that the Aldrich bill would have been adopted in its original or a modified form if the Republican party, under whose auspices it had been developed, had not been defeated in Nov. 1912. The Democratic party having come into office in the spring of 1913, the duty of enacting banking legislation was necessarily assumed by it and in June of that year a bill embodying what afterward became the Federal Reserve Act was introduced into congress. The measure had been under construction and preparation from about March 1912 onward, and a first draft of it had been presented to President-elect Wilson soon after the election of 1912. It was then approved by the President-elect, and the process of perfecting and improving it went on during the winter of 1912-3 under direction of a House of Representatives Committee. This bill when introduced had thus been under consideration at the hands of the special committee of the House Banking and Currency Committee for about 15 months prior to the date of its introduction, while preliminary studies had been undertaken even earlier. The bill consequently was quickly completed, went through Congress during the middle of 1913 and became law on Dec. 23 of that year.

Theory of Federal Reserve System.—The theory of the Federal Reserve Act was the separation of the central banking functions of the past from practical bank operation, the latter being carried on through distinct reserve banks under the general direction of a board vested with the banking functions of the past. To carry out this idea, the Federal Reserve Act provided for the creation of a number of central institutions whose membership was to consist of national banks, while institutions organized under state law (banks and trust companies) might at will also become members. Each such bank was obliged to contribute a sum equal to 3% of its capital and surplus and to become liable for an additional 3% which might be called in case of necessity. The central directing mechanism of the system was the Federal Reserve Board, which consisted of five members chosen by the President of the United States with the Secretary of the Treasury and the Comptroller of the Currency as members exofficio. No two of these five selected members were to be chosen from the same Federal Reserve district. An essential and fundamental requirement of the Act was the compulsory transfer of the reserves of member banks to the Federal Reserve banks, the reserve provisions requiring a minimum of vault cash and a minimum of balances on the books of the Federal Reserve bank, while a certain percentage of the required reserve might be either in vault or in the Federal Reserve bank. This was the so-called “divided reserve.” The maximum required reserve (in central reserve cities) was 18%, of which 5% was to be in vault, 6% with the Federal Reserve bank, and 7% either in vault or with the reserve bank at the discretion of the member. Each reserve bank was authorized to issue currency protected by notes and bills growing out of commercial, industrial or agricultural operations. These notes and bills were to have a maximum maturity of 90 days, except where they were the product of agricultural transactions, in which case the maturity was raised to 180 days. Deposits of these notes were to be made with an officer known as the Federal Reserve Agent, there being one such officer at every Federal Reserve bank. Each Federal Reserve bank was governed by a board of directors, six of whose members (three bankers and three business men) were chosen by constituent member banks voting in three separate groups according to size of capital, while three (including the Federal Reserve Agent who was also the chairman) were chosen by the Federal Reserve Board. The Federal Reserve Board was given the function of passing on and establishing rates of discount, such rates, however, being originally named by the boards of directors of the several Federal Reserve banks. The task of dividing the country into districts was placed in the hands of an organization committee with instructions to establish not less than eight nor more than twelve such districts. This committee eventually divided the country into 12 districts with a Federal Reserve bank in each, and the President of the United States named the Federal Reserve Board in accordance with the new law, the new organization taking office Aug. 12 1914. On coming into existence, the board proceeded to organize a Federal Reserve bank in each district; the member banks paid in their stock subscriptions Nov. 2, and the Federal Reserve banks opened for business Nov. 16 1914. As thus organized the initial paid-in capital of the system at opening was about $18,000,000, while the gross reserve balances were $256,000,000. These balances at the outset were obtained chiefly through actual transfers of specie and legal tender money ($205,000,000), although in some cases rediscount credits were granted to aid members in establishing the necessary legal balance. Each bank was at the outset equipped with a small staff of officers and employees and a uniform accounting system. The beginning of the year 1915 found the system in operation, but with its transactions upon a small scale. Its first duty was to aid in the retirement of the emergency currency which had been issued shortly after the opening of the World War under the terms of the Aldrich-Vreeland Act as modified by Congress just after the outbreak of the war in such a way as to render the working of its provisions rather more flexible than was possible under the original legislation. At the outset, however, the system was of considerable service in controlling the outflow of gold which had proved to be an embarrassing feature of the economic changes that immediately succeeded the opening of the war, while it also aided in other emergency measures. Various measures were adopted with this end in view the best known being the so-called hundred-million-dollar “gold pool” formed after the outbreak of the war to provide exchange and to check gold losses.

Operation of the System.—The operation of the Federal Reserve System may be divided into three distinct periods, the first from Nov. 2 1914 to the declaration of war by the United States April 6 1917; the second extending from the latter date to a period some time after the conclusion of the Armistice of Nov. 11 1918 (the date most aptly chosen for the close of this period probably being Nov. 4 1919); while the third period extended from the latter date to the close of the year 1920. During the first or pre-war period the functions of the system were concerned largely with the organization of its own constituent units and the modification of banking practice in the United States and with the establishment of methods suited to the initiation of the new plan. These functions naturally fell into two main groups: (1) in the internal organization of the Federal Reserve banks, and (2) in the establishment of satisfactory relationships between them and their members. In the latter category should be placed the work done in perfecting coöperation between the banks and the clearing houses of the different communities and in developing methods of collection, in working out plans for rediscounting with the least possible delay and friction, and other matters of equal importance. In the same group of functions must also be placed the work done by the Federal Reserve System in developing a new standard for commercial paper. The Federal Reserve Act had given to the Federal Reserve Board the duty of defining commercial paper. Consequently, one of the first undertakings of the board was the establishment of regulations designed to cover the different classes of commercial paper and the processes to be pursued by reserve banks in discounting such paper. These regulations did not have the force of law since they merely amounted to a statement of the standards with which commercial paper must comply in order to be “eligible,” that is to say, to be rediscountable at the Federable Reserve banks. Nevertheless, the growing power of the Federal Reserve banks was such that these standards of eligibility rapidly came to be recognized through the whole of the banking community. Progress was made in the matter of securing nearly identical methods of preparing financial statements to be used for the purpose of testing the credit position of firms who were presenting paper for discount. An outstanding element in the work of the Federal Reserve Board during this first period was the national and district clearance and collection system. The Federal Reserve Act had authorized the board to act as a clearing house for the several reserve banks, and early in 1915 the board took action by establishing the so-called Gold Settlement Fund at Washington. Each bank contributed originally a sum of $1,000,000 in gold, the entire amount being stored in the Treasury or the sub-treasuries. Claims accumulated by reserve banks upon one another were each week telegraphed as an aggregate to the board at Washington and offset against one another, the net debit or credit balances in the fund being registered in a set of books created for that purpose. The size of the fund grew rapidly and eventually reached a maximum of about $500,000,000. A second section of the fund was established to provide for clearances growing out of the accounts of Federal Reserve Agents as distinct from the bank to which they were accredited. The Gold Settlement Fund probably would not have been successful alone had it not been supported by some plan for the collection of items originating within the several districts. Such a plan was, however, worked out and put into effect in practically final form beginning about July 1 1916. This was the so-called “intradistrict” collection system. It provided for the depositing of cheques (at first only on member banks but finally on any other bank or any banker) by members or holders of clearing accounts with Federal Reserve banks. These cheques were sent to the banks upon which they were drawn, the latter being required to remit the proceeds in cash or acceptable exchange or to authorize the charging off of these remittances upon the books of the reserve banks. Member banks, of course, habitually followed the latter plan, while non-members who had no account with the reserve bank were obliged to furnish exchange or send coin. Although there was opposition from the banks which had previously made a profit out of this kind of exchange business, the opposition gradually lessened. Possibly the most vigorous form which it assumed was seen in the amendment to the Federal Reserve Act adopted in 1917, in which exchange charges made by member banks were recognized but which, on the other hand, practically neutralized such charges by providing that the Federal Reserve banks should not be permitted to pay exchange. The matter was promptly tested in the courts, and as a result of favourable decisions and of the evidently beneficial character of the system, the number of banks which agreed to clear at par was extended until in 1920 it included more than 29,000 institutions—practically all the banks of the United States. The total operations of the Federal Reserve intradistrict clearing system were at the rate of $13,124,000,000 per month during the year 1920.

War Finance.—Although the Federal Reserve System had practically established itself during the two and a half years of its existence prior to the entry of the United States into the war in April 1917, it was doubtful whether the resources of the system were sufficiently large to enable it to bear the strain which all recognized would be thrown upon it as soon as war demands began to make themselves felt. Accordingly Congress, upon recommendation of the Federal Reserve Board in June 1917, passed an amendatory Act which provided that nothing should be counted as reserve except balances on the books of Federal Reserve banks. The United States had declared war on April 6 1917, and almost immediately thereafter many of the larger State banks and trust companies, which had previously hesitated to become members, filed their applications, actuated partly by patriotic desire to strengthen the Government's accounts and partly by the fact that the severe financial stress of the war would be most easily met by the institutions which had joined the system. This movement into the Federal Reserve System was accelerated through the amendatory Act to which reference has already been made, so that in the course of the year 1917 the resources of the System were enormously increased, while its gold holdings were vastly added to through the gradual withdrawal of coin not only from the vaults of banks but also from circulation. Shortly after the declaration of war the Secretary of the Treasury had placed an issue of $50,000,000 of treasury certificates of indebtedness with the reserve banks, but it was promptly recognized that this plan of financing was unsound; and subsequent issues, both of long-term bonds and of Treasury certificates, were placed with member banks and so far as possible with the public through the reserve banks acting as intermediaries. It was seen from the outset, however, that in order to keep the rate of interest on Government bonds at a low figure and to insure wide distribution of the bonds, it would be necessary to guarantee their holders that they could borrow freely by using them as security at rates which would involve no expense. Consequently, from the date of the First Liberty Loan (June 1917) onward, banks all over the country undertook to loan to their customers on Liberty Bonds such amounts as the customers might need, running up to a total close to the face of the bonds, and at the same time reserve banks undertook to rediscount the notes collateraled with these bonds when received from the member banks. As the Government itself had entered, upon a wide scale, into business enterprises growing out of the war, a large and increasing volume of its payments for supplies, services and other needs was made out of the proceeds of bonds and certificates and this class of paper accordingly superseded in a corresponding degree paper which would otherwise have been made by business men for the purpose of financing their ordinary transactions. Both in order therefore to assist the rank and file of the public in absorbing Liberty Bonds and to facilitate the Government's own operations, there were large additions to the portfolios or holdings of reserve banks and the amount of the notes they issued and the deposits they entered on their books increased rapidly. At the end of 1917 there was outstanding in notes $1,247,000,000 while reserve de- posits were $1,446,773,000 and total resources were $3,089,945,000. These conditions were more and more accentuated as the war continued, particularly in view of the fact that the U.S. Government found it necessary to advance large sums to foreign countries, selling Liberty Bonds in order to provide the means for so doing. The consequence was an enormous increase of general prices brought about partly by the steady draft upon the consumable commodities in the country which were exported in great quantities (the total shipments during 1918 being $6,149,087,545 as against $2,484,018,292 in 1913), while they were partly due also to the great increase of bank-notes and bank deposits both on the books of members and of the reserve institutions themselves. It had been hoped that upon the declaration of the Armistice there would be a reaction to more conservative methods of financing, but the enormous commitments which had been made in sending about two million soldiers to France and in taking from the Allied Governments their obligations to a total eventually of about $9,600,000,000, constituted a situation which could not be immediately altered. In fact, war expenses continued to increase for several months after the Armistice, and the floating of a Fifth, or Victory, Loan, early in 1919, was essential in order to fund some part of the immense floating indebtedness of nearly $10,000,000,000 for advances to foreign countries, fully $2,500,000,000 of such advances being actually paid after the Armistice. The war finance period thus in effect extended to the middle of 1919 at least. By that time, however, the advance of prices was tremendous, and a very serious question arose as to whether the reserve banks ought to announce a material increase in their rates of discount. The objection to their doing so was strongly urged by the Treasury authorities, because such a policy would result in increasing the cost of money to the Government.

After the War.—The final conclusion of the operations attendant upon the Fifth, or Victory, Loan created a financial situation which was distinctly better from the standpoint of the Treasury than that which had existed before, and somewhat reduced the opposition of the department to a restoration of normal discount rates. Accordingly in Nov. 1919 a tentative advance in the rate of discount on all classes of commercial paper was made. This had but little effect upon the volume of credit outstanding, although it kept the rate of expansion below that which would otherwise have been unavoidable. Experience during the next six months showed that much more positive action would have to be taken, for speculation continued. It was not so intense in stocks and securities as during the month immediately after the Armistice, but prevailed very widely in staple materials as well as in many classes of finished products. In order to check this development of speculation, it was essential to limit the extension of credit to traders and manufacturers as well as to farm interests, which were seeking to obtain bank accommodation in order to carry large quantities of products which they withheld from the market. The rate of discount was eventually raised in May 1920 to a maximum of 7 per cent. Meanwhile a change in the personnel of the Treasury Department had occurred, and one of the features of the new régime was an alteration of policy with respect to methods of borrowing. The Treasury Department now advanced its offered rate of interest on certificates of indebtedness to a maximum of 6%, a figure more nearly corresponding to the prevailing rate in the open market. These advances took place practically simultaneously with corresponding action by the Bank of England and the British Government. The effect in both countries was beneficial in two ways it tended to place the Government's obligations more freely in the hands of investors and thus to take them out of the banks, while the advance in discount rates coupled with the initiation of an anti-speculative policy and the withholding of credit from those who desired to hoard and store products tended strongly to bring commodities directly upon the market. The consequence was the administration of a sharp check to the growth of credit, and during the latter part of the year 1920 there was a decided restriction of the total amount of new bank accommodation granted both by the reserve banks and by their members, while there was a very decided reduction in the degree of activity with which bank deposits were used. In addition to these changes in bank position was the fact that the extraordinarily high prices which had ensued upon the close of the war, reaching their peak in May 1920, declined rapidly from the middle of 1920 onward, eventually reaching, at the close of the year, an average level of about 190 as compared with 272 in May and 100 in 1913. This rapid decline tended to curtail the demands upon reserve banks and had the effect of eliminating the borrowing of many concerns which had been conducting operations on an unsound and semi-speculative basis. The close of the year 1920 found the reserve banks with $3,552,922,000 in notes outstanding, with total discounts amounting to $2,687,393,000 and total resources to $6,282,755,000.

Expansion of Reserve Banks.—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.

Influence of Reserve Banks on Banking and Business.—The influence of reserve banks upon business conditions in the United States is seen in the results of their effort to establish more uniform discount rates throughout the country, in their success in harmonizing commercial paper practices, in their relief of banks which would otherwise have been obliged to close on account of inability to rediscount paper, and in a variety of other less important ways. The question how far the reserve banks have succeeded in establishing a discount market or in providing a basis for financing foreign trade, both points which had been much under discussion prior to the passing of the Act, were in 1921 still matters of controversy. The provision of the Reserve Act which was intended to aid in the promotion of foreign trade authorized member banks to make bank acceptances and reserve banks to rediscount and buy such acceptances. It was natural that some time should elapse before much practical effect could be given to this provision, but it would probably have gone into operation as the result of a gradual and normal evolution had it not been for financial necessities caused by the war. In general the effect of the war was to disorganize all financial methods and systems previously in use, and this was as true in the field of commercial paper as in any other. Early in the war American foreign trade was placed upon a credit basis, and due to the difficulty of selling the obligations of belligerent Governments there was a strong temptation to obtain as much credit as possible upon a pure banking basis. The result was the lengthening of the maturity of the bankers' acceptance by every possible means and eventually the introduction of the so-called “renewal acceptance,” whereby groups of banks entered into agreements which involved the making of acceptances for financing American exports to belligerents and others, at the same time that other groups agreed to buy or discount these acceptances, the first groups in return undertaking to discount acceptances made by the second group and used to take up the first issue. This was, of course, a sheer perversion of the intent of the acceptance, and when after the close of the war there developed a widespread practice of inflation and “kiting,” followed eventually by an effort on the part of some accepting banks to repudiate acceptances because of the fact that heavy reductions in prices had occurred, the result was to impair confidence in American acceptances and to retard considerably the movement for their development. However, so far as gross volume is concerned, the new type of paper maintained a very substantial development until 1921 when the total amount in existence was estimated by the Federal Reserve Board as approximately six hundred million dollars, but during the first half of 1921 the value declined largely. Financing of foreign trade has been on so abnormal a basis and the trade itself has been so one-sided that it would be difficult to form a conclusive estimate of the effect of reserve banking in that connexion further than to say that without the general underlying strength which had been afforded by the system it would probably have been impossible for the United States to finance any such enormous volume of trade as it actually took care of. The effect of the Reserve System upon interest and discount rates has undoubtedly been to stabilize and harmonize them. Not only has there been a narrower variation of rates in different parts of the country than had been expected but the system has on the whole held the rates down. During the war this stability was partly due to wartime control. Subsequent to the close of the war there was a rebound to much higher rates of discount, but even these were probably by no means as high as they would have been, had it not been for the existence of the system.

Relations to Foreign Financing (The Edge Act).—While the original Federal Reserve Act had provided for the organization of foreign branches by qualified national banks, only a few banks showed real interest in the branch plan and only one or two took up the formation of branches on a considerable scale. Hence the adoption of an amendatory Act which authorized national banks to unite for the formation of banks which should engage in foreign trade financing. A few such banks were organized, but here also the interest of the different institutions was soon found to be limited. One reason assigned for the hesitation of banks in organizing the new corporations was the fact that they might be compelled to give to competitors an undue amount of knowledge of their own transactions. While, therefore, a few foreign trade institutions were organized, usually under the laws of New York state, with stockholders (banks) scattered throughout the country, it was evident within a year or so that this attempt to provide for the financing of foreign trade had been unsuccessful. Only in South America and the Far East (and there as a result of the provisions of the original Federal Reserve Act authorizing the creation of branches) did the banking system of the United States gain a distinct foreign development. The lack of foreign financing mechanism was obscured during the war years because of the necessity to which many foreigners were subjected of keeping their balances in New York and generally in dealing with American banks regardless of the conditions established by the law. Immediately after the close of the war modifications of this state of things began, and it became apparent that as soon as Government financing of American export trade ceased it would be impossible to maintain exportation long on anything like the basis which had existed during the war. A measure recognizing the need for an organization for export banking was taken under advisement in the winter of 1918-9 and was eventually made law in Oct. 1919. Meanwhile many American enterprises had fallen into the habit of financing their own foreign trade by extending long credits to buyers, while borrowing heavily from their own banks on domestic account in order to get the funds they needed to carry on trade elsewhere. In this way between the date of the Armistice and the close of 1920 there had been built up a foreign unfunded balance representing the difference between American exports and American imports reliably estimated as high as $4,000,000,000. One outcome of this great export balance was seen in continuous and violent disturbances of rates of foreign exchange, sterling (which had a normal par of $4.86) being depressed as low as $3.25, while other currencies suffered similarly and in some cases to a greater degree. This condition of affairs gave an impetus to the idea of establishing upon a national scale “Edge Act” corporations under the legislation already referred to, and during the winter of 1920-1 an effort was made to bring about the investment of capital in such undertakings, their purposes being to facilitate the movement of American goods to foreign countries on long-term credit.

Conclusion.—The Federal Reserve System between its organization at the end of 1914 and the close of the year 1921 passed through a remarkable development which not only vastly increased its resources as compared with any figures they would have been likely to reach had it not been for the war, but also necessitated active participation on the part of reserve banks in many types of financial transactions from which they might otherwise have abstained. The results of this activity were both good and bad—good in increasing the activity of the system and in affording an opportunity to be of direct and material usefulness; bad in bringing about a mushroom growth which prevented or curtailed the development of methods and practices upon a scientific basis. The system as a whole, especially those features which were at first thought to be of doubtful practicability, had definitely found its place and established its effectiveness. There had been improvement in methods of business financing, in the type of commercial papers, and in the use of modern instruments in connexion with the conduct of foreign trade. There had also been a large advance in economy, promptness and effectiveness, in domestic exchange, and in the collection of cheques. Priceless service was rendered to the U.S. Treasury during the war and through it to the world at large, since without the aid of the Federal Reserve System the financing of the war would probably have been impossible. On the other hand, the Federal Reserve System was the instrument through which an inflation of credit and prices occurred in the United States. The post-war attempt to curtail such inflation was not begun at a sufficiently early date, but was steadily working during 1921.

Authorities.—Reports of Secretary of the Treasury and of the Federal Reserve Board, 1914-20 inclusive; Federal Reserve Bulletins, 1915-20 inclusive. (H. P. W.)