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1 ^ Copy of Hr. Benjamin Strong's speech £?'(/ delivered at “/illiamatovm, January, 1915. A I f*f You will recall l£r. Taft’* statement that the first Ideal for which a lawyer m a t atrive, Is thorough profesBional education. It you afeeoee t a k ing as an occupation, the important port of your ©dwoation will eemeaee tho day you ««ter the haaak, sod your riuteess will d«pead upon your Mastery, ty hard wort, and close application, of beth the detail of haaScing *aehimsryf «ad the principles governing its operation. It ia also laportant that you plat* a cor rect value opoB the results of the work that y&s are doing* though at the time they say appear to he of nail consequence. ^hile the neeuiiare of conraerdal accceaa la eowonly expressed in dol lars, any honest voeation ia which the material reward of ability and hai4 wocrt: la nfrl Tig money, can aleo he aa4» to eentzihorte toward the asking ef goad oar had citissena. if a life of hard work is oq&@1«A«& with the reward of aiapSy a huge estate, the worker Bay find that he has Mssed or overlooked the «msb> p H wifftHt of purpose* whioh would hare prodneed infinitely greater satisfaction than will the possession of property. le are bos witnessing the growth of ©oa- Tiotiona regarding standards of citisenship in badness affairs w M c h are luring a profound effect upon our laws and our business Hotbeds. But i p wirt sbuef frf haafcera aed hawking aiethods mast not h* sll**ed %e pr*J*Al8* yewr nor should it lead yoo to believe that hankers are wholly selfish, that tbslx* business is sordid, or that thair point of view ie a narrow 9 M . The technique and clerical detail of *bj husineas to he sore, is -amftlljr dry and uninteresting, but, with the stianlwB of a correet knowledge of its eeauoaic value, work in a bank will prove to he of absorbing interest. Basking is* in fact, the hinder of oownerce and brings the successful hariter into con tact with every aexmer of bteslaees enterprise. Should you naderttke that work it will bo better don© if you realise that it has a purpose of large signifi cance, and that you will assist in the discharge of obligations to the public and services to the Government Which bring satisfying rewards, while not Interferring in the least with the exercise of your talents to earn dividends for stockholders. Mr. Paul LI. V.arburg, in his pamphlet on "The Discount System in Burope", has forcefully stated the great problem of banking in the following language: "If banks were to keep, in cash, all the money deposited with them, business would cone to a standstill and a crisis would ensue. If banks were to leal to those who apply for loans all the money on deposit with them, a general panic and col lapse would follow a short period of overstimulation. Between these two extremes lies the middle course, the finding of which is the problem, and Its practice the art of banking.” The purpose of this paper is to illustrate, by a few staple examples, how the banking credit structure grows upon, and is supported by the gold reserves how these reservos, of necessity, are constantly shifting from one institution to another, from one section to another, and fixer, one country to another* and how important duties and responsibilities in the custody and control of these gold re serves extend with our comnerce throughout the world. The operations I shall mention occur in endless variety in the operation of the banking system with which you are already familiar. They will, therefore, be best suited to bring out the points that I have in mind, and incidentally, they will illustrate some of the defects of the old system and permit me to point out in conclusion the beneficial effect that our new system will have in this respect. -s- B X P A B D I S G T O T A L s C H A N G S S Loans Cash 1st JSatl. 2nd Satl. 3rd Hatl. 4th Hatl. Denosits Cash Loans Denosits 20,000 Cash 80,000 Loans — Deposits 80,000 -60,000 Cash 60,000 Loans — Deposits 60,000 -45,000 Cash 45,000 Loans Deposits 45,000 -33,750 Cash 35.750 Loans Deposits 33.750 -25,312.50 60,000 +60,000 80,000 15,000 45,000 +-45,000 60,000 11,250 33,750 + 33,750 45,000 8,437.,50 25,312.50 + 25,312,50 33,750 etc. etc. etc. 80,000 240,000 etc. etc. 320,000 A bank, (call it the First National), receives a deposit of $80,000 of gold, which the depositor brings to this country from Burope. Bear in mind that this gold does not come out of another American bank in payment of a check drawn by the d.epositor, but is new money imported from Europe. The bank then shows as an asset the $80,000 of gold, and as a liability the f8Q,000 owing to its depositor. keep, say 25 As it is only required to cash in its vault as a reserve against its deposit liability, (as until recently was the case with national banks in the cities of Hew York, Chicago and St. Louis), it loans ^60,600 to a borrower, for which it issues a check. The borrower de posits the check in the Second National Bank, which collects the proceeds froir. the First Sational Bank. This leaves the First National Bank with cash, |>20,000 (being 25 % of the deposit) and. $60,00$ of loans. The Second national Bank repeats the operation, lending 75 p of its cash, or $45,000, the check for which is deposited in the Third Hational Bank. This operation is constantly being repeated, so that possibly in a few days, a consolidated statenent mad© by all the banks in the coiraaunity which participate in the resulting transactions would show: #240,000$ Deposits, $320,000. Cash, $80,000} Loans, There has now been erected a pyramid of bank de posits resting upon the original #80,000 of gold, in the rate of 4 to 1. The ratio is, in fact, nearer 8 to 1 in actual practice throughout the whole system of Ameri can Banks. Should the original depositor draw a check on the $80,000 deposit, it M i l likely be deposited in another bant, and the same expansion will occur through the use of the money by similar successive operations in various banks. The same result arises if the check is used to pay an existing loan, the bonk which has the loan paid off thereby converts the amount of its loan into gold, that Is to aay, into reserve money, and may then make a new loan and start anew the same successive operations. Our checking system has, of course, facilitated this expansion, and the use of checks has become such a necessary convenience to the public that in cities containing a number of banka, the bankers have formed associations for clear ing, (that is for collecting and paying), the checks they receive on deposit which are drawn upon each other. Every morning- they take all these checks to the clear ing house, where each bank receives or payB in cash only the difference between the amount of the cheeks it has received from its depositors for collection and the amount of checks drawn on it which the other banks have received. By this means, gross daily payments between the banks of Hew York City, aggregating hundreds of millions, are settled by net payments of a few millions only. The saving in time, clerk hire and risk to effect this clearance of cheeks has been of vast benefit to the banks and to the public. You will observe that while the collection and payment of the claims of the banks due to and from each other by this moans necessitates only a mininmm dis turbance or shifting of reserves within the limits of one community, it is in fact, a coEsmmity method by which the batiks discharge their obligations to each other. This will be referred to later. - 5- Beturning to the original depositor, what happens if he draws a cheek for £4°*000 on his #80,000 deposit and sends it to some other part of the country? If he remits the check to the Sottth to pay for cotton purchased, the check will be deposited in a Southern bank and by that bank will be remitted to Hew York for collection. The Southern bank, possibly requiring cash to enable the manufacturers «.™i farmers in its commmity to pay laborers and fans hands will instruct its Hew YoriB correspondent to ship the gold South. The second chart will illustrate what results:- C O N T R A C T I N G BKDPCTIONS Cash 1st Natl.Cash Loans Deposits 20,000 2nd Sat1.Cash Loans Deposits 15.000 45.000 60.000 7,500 3rd Natl.Gash Loans Deposits 11,250 33.750 45.000 5,625 4th Natl.Cash Loans Deposits 8,437.50 25,312.50 33.750 4,218.75 Loans BALANCES Per)Q8lt8 Loams Deposits 10,000 10,000 60.000 80.000 Cash 30,000 30,000 40.000 40,000 7,500 22,500 22,500 30.000 30,000 5,625 16,875 16,875 22,500 22,500 4.218J5 12,656.25 12,656.25 16,875 etc. etc. etc. 16,875 etc. 40,000 etc. etc. 120,000 160,000 The withdrawal of the §40,000 of gold from the First National Bank then necessitates its calling for payment of a loan of $30,000, the proceeds of which, together with #10,000 of its reserves are shipped to the Southern hank. She borrow er draws a check for $30,000 on the Second National to pay the loan, which has been called, thus causing that bank to require payment of $22,500 of its loans, the pro ceeds of which, with £7,500 of its reserves, effects the payment to the First National -6Bank, and so, again* by successive operations, the pyramid of bank deposits and loans, erected as the result of the original deposit of §80,000 has been reduced one-half by the withdrawal of $40,000, leaving, in fact, ths consolidated state ment of the various banks participating in these transactions: Loans, #120,000 and Gold, #40,000; Deposits, $160,000. Our Hatione.1 and State banks cannot extend their business,,by a system of branches, throughout every section of the nation, as is done in other countries. So the check sent to the South must be collected, and distance prevents offsetting in the Banner possible through a city Clearing House, Merchants in the Sforth sell their goods in the South, farmers, in the South, sell their produce in the Horth. Ehe buyers and sellers send checks back and forth in payment, and settlement of the balances resulting from the ebb and flow of domeatic commerce requires the shipment of vast sums of money from on® part of the country to another, at great cost and some risk, and gives rise to sectional contraction and expansion as de scribed in the case of the individual bank:. Furthermore, an unusual volume of purchases by one section from another section may result in positive shortage of credit in the buying district which may necessitate the banks of that district borrowing from the banks of other sections. In a country where so large an area is devoted to agriculture, the requirements of the farmor causej^ a regular seasonal demand for currency and credit, between the sections. sirnple example. It may be illustrated by a The fanaer of the South feegina in the spring to prepare M s land for a crop of cotton. He buys fertilisers and seed, food for his family, laborers and stock, fanrt implements and other supplies. As his purchases and his payments to his laborers increase, he becomes indebted to a local merchant, frequently giv ing the merchant a mortgage on his cotton crop before it is picked or even grown. The merchant is likewise buying; these supplies from implement and dry froods houses, meat packers and other merchants in the Korth. He finances his requirements by borrowing frorr, tha local bank, which may have so many such borrowing clients, as to -7exh&ust Its own lending facilities, whereupon it borrows from a larger 'bank in a section where credit is available, say in Hew York. For the production of the cotton crop, the farmer has borrowed from the Southern merchant, the merchant from the Southern bank, the Southern bank from the Northern hank, and the Northern hank has shipped the borrowed gold or currency to the South. The chain of credit has grown with the ferowing crop, has extended to the Northern reserve reservoir and waved some part of the reserves into the section where the demand has arisen. Finally, in the fall and winter, the orop is harvested and partly sold to Northern spinners. In payment, the spinners rendt to the South checks drawn on New York banks, which the banks of the South, receiv ing on deposit from the sellers of cotton, send to their Northern bank correspond ents for collection and receive credit for the proceeds. Out of the proceeds of the cotton sales, the farmer pays his Indebted ness to the merchant, the merchant pays his indebtedness to the Southern bank and the Southern bank pays its loan to the Northern bank; the last of these payments being effected by cheeks drawn by the Southern bank on its credit with its Hew York correspondent. At the same time, farmers and laborers have paid their store bills owing the merchant with the currency or gold which had been shipped South earlier in the year and the merchants have deposited the currency in the bank or used it to pay bank loans. off. She entire chain of loans and credits has been paid The cash reserves of the Southern bank may then become excessive, and in order to employ its funds profitably, it ships its surplus reserve,(that is, gold or currency,) back to the North, where it is loaned possibly to the cotton spinner to enable him to manufacture the very cotton for the production of which the gold or currency was originally shipped to the South in the fall. Now take a case in which the cotton i9 sold to an English spinner. The Southern seller of the cotton tirasffs a draft or bill of exchange on the English buyer, say in London, payable at 60 or 90 days sight. The draft on London is ■ 8* sold to a Hew York "bank, thus producing the sane Hew York credit and revolting in the same liquidation of the chain of indebtedness created for the purpose of producing cotton.. The Sew York bank, however, aells this draft in London. The proceeds aro placed to the credit of the Hew York bank by its London correspondent, and from this transaction an International credit is created in faror of this country. Anerican. importers of merchandise from England purchase drafts drawn on the London, bank by the Sew York bank, in order to pay for goods purchased, so that, in this instance, the shipment and sale of the cotton to England, by means of these ch and drafts, has also effected payment for goods which our merchants hare purchased from that country* But, should the value of cur exports of cotton and other com- Btodlties far exceed the value of what we hare purchased from England, the Jew York bank may be unable to sell chocks on London at satisfactory rates of exchange and in sufficient quantity to ekhaast its balance there. It rasy be more profitable to loan these funds at home, whereupon it instructs its London bank correspondent to ship gold to this country. If we consider that the shipment of gold thus arranged is the identical gold first referred to as deposited with the First national Bank, it will be seen that the sszne gold starting from London, has paid London's debt to Hew York for cotton, has then been loaned to the Souths or has paid Hew York's debt to the South for cotton purchased, and in the South it has served as a reserve for loans created to produce cotton, or furnished currency for labor. Later in the season, when the cotton is sold, the Southern banks, as described, nay loan their surplus funds in the north and the gold will inove back again to Hew York. Possibly, the trade balance by that time, will have turned in favor of England, when the gold Mg h t again travel across the ocean. The gold has moved between the same points as has the merchandise, but in the orrooslte direction. Two other banking operations should be briefly referred to. Our Govern ment receives and pays out every year hundreds of millions of money to conduct the Government's business. Payments to the Government, of duties, taxes and other rev enues, are xsade in the same kind of money that serve as the cash reserves of banks. -9At times, the revenue a of the Government have ran far ahead of its expenditures, and at other times, unfortunately, the Governments revenueo are not sufficient to meet its expenditures. Our Government is distinguished from the governments of other nations in that it hs,s an independent treasury system; that is to say, ite revenues are paid directly in cash to government agents and sub-treasuries, and it has large ly paid its bills by warrant or check payable at th® sub-treasuries. In recent years, this aystea has been shown to involve decided dangers to our banking system, in that it sometimes forces withdrawale of large ssssqb of cash frora the reserves of the banks which are locked up in th© 'treasury causing contraction of cr-edit, &s be fore illustrated. And when the Govrmment’s revenues are insufficient and its working balance as a result is paid out, large sums are forced on the narkot, that is, are transferred from Sub-Treasury to Bank Seaerves, causing possibly an un healthy expansion. $he Government haa become ireonly alive to the fact that, in handling its revenues and disbursements, it is either under the necessity of al ternately withdrawing and returning 3mgo cams of roeorvo money from and to the banks, and possibly at moat inconvenient and dangerous tinnea, or it must conduct its money transactions in greater volume through banks. The Government has, there fore, adopted the policy of depositing its ftends in national banks throughout the country, in increasing volume although by a cumbersome nsthod. In this, as in other respects, experience shows the imperative necessity for a close working re lationship between the Government and the banks, in the handling of the Govern ments finances. The last banking transaction to be mentioned I most sketch only too briefly. £he conduct of business requires the use of two great instruments of ex change . On© is a deposit account or crcdit at & bank which may be need for pay ing debts, or for making purchases, by drssri^ checks upon the account, and which account may be created by borrowing from the bank. ^he other is currency with which to pay mill hands and farm laborers, for retail cash transactions, pocket and till http://fraser.stlouisfed.org/ money#_____ Federal Reserve Bank of St. Louis -10It i3 not igy purpose to discuss any of the many theories as to the best fora of this circulating1 sodium. Let us assume, in this illustration, that it is simply the note of the bank which is secured by some or all of its assets and the prongpt redemption of which is assured by an adequate reserve of gold and by the pledge of loans due the bank, the payment of which will result in its accumulating gold. The use of this currency will be illustrated if we assume that the original depositor with the First national Bank is a large employer of labor and that, once a week or once a month, he will withdraw a large payroll from the bank in gold or currency. If he withdraws $40,000 of gold for that purpose, the con traction first described results. But if the bank has the means of converting its deposit liability into a note liability, the customer^ need is served equally well by using the notes and the bank's gold is unaffected, provided, of course, no greater ratio of reserves is required for notes than for deposits. She notes, however, once delivered to the depositor and paid to the mill hands, are used by the M i l hands in payment for their purchases and remain in circulation a con siderable period of time, whereas a check drssra on the account will be presented for payment the same day or shortly thereafter, and if paid in gold or reserve money, will result in contraction as described. If, therefore, demand8 for curren cy with ^hich to make hand to hand payments can be supplied freely by an issue of the notes of the bank without materially disturbing its reserves, a useful pur pose will certainly be performed in that a circulating medium is provided which may be issued as business demands its use and redeemed and cancelled when the amount in circulation becomes redundant. An analysis of the transactions described discloses the following: Firsts She accumulation of gold in the banks results in the creation of an inverted pyramid of credit resting upon a comparatively narrow foundation of golds Second: The payment and collection of checks in connection with the seek- lag of loans and. the withdrawal of deposits growing out of the conduct of business in a given community necessitates the constant shifting of gold reserves between the banks of that eoa m m ity and results in expansion and contraction of loans and deposits by the Individual banks. Kbird: Commerce between the different sections of the country necessitates the shifting of this gold reserve between the different sections of the country, giving rise to expansion and contraction of credits in the different sections; Fourth: A similar shifting of the reserves of gold between the different nations is necessitated by the exchange of come roe between nations, also, giving rise to expansion and contraction of credits in the Fifth: countries affected: The Government becomes a factor in this process bf expansion M contraction when the collection of its revenues or payment of its expenses results in deposits or withdrawals of gold, the same as in the case of an individual de posit, only on a much larger scale; Sixth: The daily transactions performed by the use of cash or currency between individuals for which checks cannot be employed may be dondueted by the use of notes of the bank which can be substituted as a liability in place of its liabil ity to its depositor, and thereby conserve the bank’s gold reserve. Few successful bankers will claim nowadays that their responsibility for the conduct of the business- of the bank is completely fulfilled by the observance of the law and by naming their business to the satisfaction of their stockholder* and depositors. They recognise their duty to do their share, in good and bad tiros, to protect, not only their own, but their competitors* credit; for the conduct of the business of the world depends upon the confidence felt by the public in the ability of the bankers as a whole to maintain this structure of credit represented by the deposit and note liabilities of banks at all times and under all conditions. In the case of the local community, first mentioned, \shere the banks are associated in a Clearing House, their responsibility to one another is commonly recognized. In times of difficulty, some of the banks in a coaaranity may be called on to meet needs of their depositors to withdraw deposits or for loans in excess of their cash resources. In such cases, as in 1907, and again in August and September of last year, the Clearing House banks of Now York permitted those of their umbers «ho needed to do so to settle the not balances of exohanges, not in cash, but by borrowing from the other members. By the use of loan certificates they were enabled to borrow from all the other Clearing House banks for a tiiae instead of immediately paying checks drawn upon them in cash. tion of the principle of mutual obligations; Surely, this is a recogni And In recent times the banks which are associated in Clearing Houses, recognizing their obligations to each other, have frequently agreed among themselves upon a plan for examination by examiners employed by the Clearing House Association for the purpose of further protecting the cox&Bnmlty and one another. In the case of the different sections of the country, the plan recently arranged for providing a large credit for loans to Southern borrowers on the secur ity of cotton affords a striking illustration. By reason of the war, the value of cotton has been reduced this year to one-half of last year’s value. Southern farmers, merchants and. banters feared that it would be impossible to market a large part of the crop, and to the extent that it was marketed, that it might not pro duce sufficient value to enable them to pay their debts. An appeal to the bankers of the country resulted In the pledge of f100,000,000 by the banks of the Borth and West to be loaned upon the security of cotton in order to relieve the Southern lender of the necessity of forcing the sale of his collateral at a sacrifice. She obligations of bankers in one section to the bankers and business men of another section could not be better illustrated. The international brotherhood of mankind in matters of credit, forces its recognition upon the banker as soon as his gold is required to meet a foreign debt. Ee becomes the medium through whom the great international credit transactions growing out of cosmsrce are adjusted, sad upon hiss the country depends for the - 13- settlenient of the balances in gold. A situation arose, as a result of the war, in respect of our country'b indebtedness to Europe which brought home to the people of our country the extent of its dependence upon the basks and their managers in these matters. Hew York: had borrowed $80,000,000 abroad. The city of Merchants and bankers were also large ly indebted to merchants and bankers of Europe. The outbreak of the war necessi tated an unexpectedly prompt payment of a large part of this debt. Hourly 1,500 banka of the United States entered Into an agreement to furnish a total of $180,000,000 of gold for shipment to Europe, if required, in order that the city of Hew York and other American debtors might promptly iseat their engagements, The possible drain upon the reserves of the banka as a result of this engagement and of other demands growing out of the war justified the Secretary of the Treasury in depositing large sums of p-old held in the Treasury with various banks through out the country, and the gold resources of the government, as well as of the banka were brought to the relief of a situation which might have caused serious embar rassment to both the creditor and the debtor. The shock of the war likewise caused sane panicky feelJ up; throughout the country in the minds of the people who feared that they would net be able to get money (that is to say, gold or currency) from the banks with which to conduct their business. In 1907 similar fears becsone so exaggerated as to result in the hoard ing of large sums of money for which a premium of 3 or 4 % was paid, azsd a similar occurrence last year, coming at a time when our debts abroad had to be paid might have resulted in such huge withdrawals of reserve cash from the banks as to cause a most dangerous contraction. This denand was set, not by paying gold out of bank reserves to those who demanded currency, but by the issue of nearly §400,000,000 of bank notes which were secured by the pledge of a portion of the assets of the banks. Had the withdrawal been gold, the contraction of loans resulting there from might have brought disaster to our country’s business. In effect the banks - 14- substituted note liabilities for deposit liabilities and conserved their gold reserves. Dealings in credit as vast and complicated as are required for the con duct of industry and conmorce result in a constant increase and decrease in the deposit and loan accounts of the banks, and constant changes in the ratio of re serves to deposits and loans. But a safe ratio m a t always be maintained* and it is well to consider what causes may put the reserves in jeopardy and the situation beyond the bankers' control. A general or widespread loss of gold by the banks is frequently caused by increased activity in business which, for its conduct, requires the use of aa increased supply of currency for pay-rolls and hand to hand payments, or by a de mand for credit from one section of the country upon another section, which may draw reserves from one section to another; or by an adverse foreigfa trade balance resulting in shipments of gold to foreign countries; or by high rates of interest in foreign countries which induce loans to those countries, or by the looking up of gold in the Treasury through accumulation of the Government revenues, or by hoarding. A sound banking system, coupled with a recognition by bankers of their mutual dependence upon each other, generally provides the means of meeting with drawals of reserves arising from all of the causes mentioned, except from hoard ing. Ho danger causes the banker such a chill as that caused by the stupid, un controllable effort of foolish people to withdraw gold from the bank in times of distrust. Unfortunately, our banking system formerly contributed to the possibil ity of this danger arising. In such times, not only individuals, but the banks themselves, accumulate and lock 4p gold. With over £5,000 banks in the country, some of them will at times insist upon building up their reserves beyond what is regularly required. places of safety. Individuals also put gold in safe deposit boxes and other So remedy for this ever-present danger is so effective as that of meeting the demand. Fortunately, our new banking system has provided means for - 15- the issue, when such demand arises, of a note based tipon the assets of the new Federal reserve 'banks, which greatly minimizes the danger of this occurrence, usually brought about by the actions of selfish, unthinking people. It is not difficult to realise that the custody of the gold upon which credit rests, held as it is in this country by these 25,000 banks, and supporting, as it does, credits of nearly twenty thousand million dollars, places a responsi bility upon the banker, both to the Government and to the people, of wide signifi cance indeed. It cannot honestly he claimed that his responsibility is limited to compliance with the law, earning dividends for stockholders and meeting the de mands of his depositors. His larger obligations moat frequently be discharged for the benefit of or in co-operation with his own competitors. It extends throughout the country as well as to the people of his own immediate oomnsmity. And now, within the past five months, a great military conflict has started, one of the consequences of which is to impose upon our bankers increased burdens and responsibilities of International importance. We asst prepare ourselves, by a better understanding of our duties and of how they should be performed to help ameliorate the distress and hardship which is certain to result from tho war and to disturb the world of commerce and credit. Already the effect of the war has been to direct commerce through new channels, and, as banking credit is the hand-maiden of commerce, we must now prepare to undertake those banking obligations which are imposed by the enlargement of our commerce. We must not subject ourselves to the criticism which would Justly arise were we to seek to reap the profits without assuming our share of the responsibil ities growing out of our increased participation in the world's commerce. We eaa- not be camp-followers profiting from the plunder of the battle field and capitaliz ing the raisfortnnes of our sister nations. If we are to enlarge our usefulness by furnishing a larger supply of food and clothing to the rest of the world, we n u t likewise enlarge our usefulness by enabling our banks and merchants to extend credit facilities to our new customers. - 16- fhe occurrences of 1907 (a year of serious panic aad distress) empha sized the 'urgent need for insnediate study and revisi on of our banking laws. Onr note issues w«re inelastic, and their volume had no relation to the demands of the people for currency to effect hand to hand exchanges nor could they expand and contract with fluctuating demands. Ho cheok could be interposed to the exporta tion of gold resulting from adverse trade balances or higher rates of interest in foreign markets, and no machinery existed to enable the banks to readily convert their resources so as to satisfy enlarged demands by their customers for both credit and currency. Nor could the Governments revenues be deposited in banka with the freedom required. Congress has now created twelve institutions, (the Federal reserve banks) Into which have been paid over $260,000,000 of the reserves of the national basks and subsequent payments, by both the Government and the banks, it is hoped, will increase this accumulation of gold ife the one common reservoir to more than #500,000,000. The reserve banks are authorised to perform five principal functions that relate directly to the occurrences which I have described and for the control of which this country has heretofore been inadequately equipped. They furnish the means whereby the banks of the country may convert their assets into credits, Mid thereby increase their credits to their customers, with out the use of emergency measures, such as the clearing hcmce loan certificate first mentioned. They will in time furnish facilities for a more prompt and economical settlement of domestic exchanges, and the balances resulting ther®from, without the risk end expense of actual transfers of such large amounts of reserves, and with a minimum sectional expansion and contraction. Ehey provide for the prompt issue of currency as business demanda its use, and the liquid character of the assets of the banks, with their large gold reserves. Insure prompt redemption of this currency whan its use is no longer required. 2hey will serve as the depositaries of the revenues of the Government, -3.7thereby avoiding the contraction and expansion caused toy the independ ent operations of the Treasury. Of even greater importance in such times as during the past few months,they m a y become the instruments,through a judicious influence upon interest rates,and a wise use of credit, for exercising a certain measure of control over the importation and exportation of gold,. By that means they may protect our banking system as a whole against the dangers of too violent expansion or contraction,too suddenly imposed, as a result of an uncontrolled international movement of gold reserves. The conduct of business by competitive methods is an economic contest no less than is the war now raging in Europe a military contest. Credit (that is,the facilities of the banking system)has become the most necessary instrument in the successful conduct of business,. In a national sense,the machinery of credit,, in order to be safely and suc cessfully employed in the interest of the country's industry and commerce, must be mobilized under the leadership of a general staff and b y a com prehensive plan upon m u c h the same principles as tho3e upon which an army is mobilized. We are now putting into practical operation a better conception of the functions of banks based upon a recognition of the principle that a co-ordination of banking interests and a centralized control of banking reserves afford a greater protection to the banker and re sults in a better service to the public.
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