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FILE COPY ,." item .'A\ e> • T H E F E D E R A L AS ) 1 N N A T I O N A L A AND R E S E R V E N E W S Y S T E M F A C T O R I N T E R N A T I O N A L Address by W. P . G. Harding, Governor,, Federal Reserve Board. '• 4 To the Boston City Club, \ Eoston, M a s s . , on Thursday evening, December lU, 1916 For release to morning papers of Friday, December 15th. F I N A N C E Daniel Webster, in his Reply to Hayne, began with these words: "When the mariner has been tossed for many days, thick weather, in and on an unknown sea, he naturally avails him- self of the first pause in the storm, the. earliest glance of the sun, to take his latitude, and ascertain how far the elements have driven him from his true courje. Let us imitate this prudence, and before we float further on the waves of this debate, refer to the point from which we departed, that we may at least be able to conjecture where we now are. the reading of the r e s o l u t i o n . " I ask for Sixty years later the same idea was epitomized, not elegantly, but tersely, by an Alabama Congressman, who, having been interrupted in the course of debate, resumed his remarks with the question, "Mr. Speaker, where was I at? 11 It seems proper, in these momentous times, with half the world in the throes of a death struggle, vtfien the breaking of precedents, business, the establishment of new records in all lines of and the appearance of new problems - industrial and financial - are matters of daily occurrence, that American business men and bankers whoso function it is to think and to act for others as well as for themselves, and constant reckonings, should make careful in order to determine where we now are, 35G7 and how far the storm on the other hemisphere is driving us out of our normal course. Few, if any, w i l l contend that general business con- ditions in the Unit3d States today are normal. Our export trade for example, has increased from one and one-quarter to one and one-half "billions per annum in ordinary times, to between five •and six b i l l i o n s . We have received since January first 1S15 im- portations of gold into this country in settlement of trade balances amounting to more than one b i l l i o n dollars, and within that time we have sent to other countries about a quarter of a b i l l i o n in gold, so that the net increase in our gold stock in about two years' time has been around seven hundred and f i f t y millions of dollars. We have witnessed a marked rise in prices of all com- modities, - meat3, farm products, metals, and manufactured goods, and have seen repeated advances in wage scales, so that costs oi production have been greatly increased and the ciost of living has reached a point hitherto unknown in times of domestic peace. Just a3 surely as night follows day, so is action succeeded by reaction, and thoughtful men are turning their eyes to the future and are seeking means for building up a permanent trade in those articles of commerce for which there is normally a steady demand, and with those countries which may reasonably be depended upon to become permanent customers. Frankly, we know that much of our present prosperity has come to us as a result of calamities to others, and that - 3 - radical changes must necessarily occur when swords are "beaten into plow-shares and peace resumes its sway. No man whose heart-beats respond to the instincts of humanity would wish to see a prolongation of war for the sake of personal gain or national aggrandizement, but it is only natural that we should wish that the changes which must occur with the return of peace be followed by gradual ana moderate reactions rather than by a perpendicular slump in business and by general financial disturbance. I must confine my remarks tonight to a brief dis- cussion of the relation of the banks of this country to the present situation and to the changing conditions which are to come. While there are serious responsibilities which must be borne by a l l the banks, I feel that our new banking systemj composed of the twelve Federal Reserve Banks, is charged partic- ularly with the obligation of leadership and of providing means of assisting our financial Institutions to meet successfully any situation which may arisei History shows that after every great war there is an aftermath, - a period of reconstruction which requires not only financial leadership of the highest order, but intelligent cooperation and concentration of capital. For several years after the close of the Revolutionary War financial conditions in this country were chaotic; Continental currency was without value, such- currency as we had was local and even personal in its character, and we were entirely dependent upon 915- 4 - foreign countries for the limited amount of coin that was in circulation or that was held in strong boxes. Closely following the establishment of the Federal government, and mainly through the instrumentality of Alexander Hamilton, the first bank of the United States, a central bank modeled somewhat along the lines of government banks in Europe, was chartered in the year 1791, period of twenty years. for a Through its aid the finances of our young republic were placed upon a firm foundation and a stable and uniform currency system was established. " But even in those early days there was a strong prejudice against a central bank as being contrary to the genius of our American institutions; and when the charter of the bank expired in 1811 it was not renewed by Congress. Then followed the War of 1812 and upon it conclusion it was found that the resources of the independent banks which had come into existence could not be coordinated in such a way as to meet the situation successfully, and so in 1816 Congress chartered the second Bank of the United States, another central bank. The antagonism however, to the central bank idea had never died out, and the latent sparks of opposition finally burst into flame, so that in I836 the Bank of the United States ceased to exist as a national bank and was forced a few years later to wind up its affairs. From the days of Andrew Jackson there has never baon a time when a majority of the people of the United States have been in favor of one central banking institution. While certain - 5 - advantages growing out of such a bank have been recognized, they have been more than offset in the public mind by the inherent evils and possible dangers of such a system. In the midst of the Civil Was in 186}, the National Banking Act was passed by the Congress of the United States, and provided a system of banking in this country that was dominant for f i f t y years and which is the corner stone of our present Federal Reserve system. The first and perhaps paramount purpose of the National Banking Act was to provide a uniform national system of currency, without the creation of a great central institution like the old bank of the United States* The national banks were subjected to uniform laws, and to government supervision, but they were disjointed units, and no means were provided by law for any concentration of their resources in times of need. voluntary, Any effective cooperation between them was through clearing house associations, and the measures adopted by them to meet various crises, while necessary and commendable, were of questionable legality. The status of the national banks prior to the advent of '. the Federal Reserve system may be likened to that of the thirteen original states of the American Union during the years that intervened between the recognition of their independence and the adoption of the Constitution. December 2 3 , The Federal Reserve Act of 1913, which has provided a bond of union between the banks is entitled "An Act to provide for the establishment of Federal Reserve Eanks, to furnish an elastic currency, to aiford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes." Section 18 of the Federal Reserve Act provides means, at the option of national banks, for retiring the whole or any part of their circulating notes by authorizing the Federal Reserve Board to require the Federal Reserve Banks to purchase bonds from the national banks in an amount not exceeding $ 2 5 , 0 0 0 , 0 0 0 in any one year, which bonds may be exchanged, under the conditions stated in the Act, for United States 30-year bonds and 3$ o n e - year gold notes, without the circulation privilege* The intention of the framers of the Federal Reserve Act was undoubtedly to provide, through the gradual retirement of national bank notes, a vacuum to be f i l l e d by issues of Federal Reserve notes, But I am getting ahead too rapidly and this phase of our currency question w i l l be considered later on in my remarks. When the b i l l to este.blish national banks was introduced in Congress in I863, less than thirty years had elapsed since the withdrawal of the Treasury deposits from the bank of the United States. The opposition at tha- time to a central bank, or to any- institution carrying with it a centralized control, was deepseated and widespread., and the sponsor; of the various plans which took final shape in the National Banking Act were carefull;"to point out that the objections to a central bank considered and had been avoided by them. had been duly It was first suggested that State banks and bankers be permitted to issue circulating notes secured by United States bonds, and it was urged that 913 - 7 - none of the objections against a central bank could be offered against such a plan, to bestow favors, ends. and as the Government would have no power such a system could not be used for political In a speech advocating this plan Samuel Hooper, a member of the House from Massachusetts,, States Bank is concerned, said: "As far as the United it was affirmed that, by its favors, the Government erabled that bank to monopolise the business of the country; and it was affirmed that frequently great inconven- ience and sometimes terrible disaster resulted to the trade and commerce of different localities by the mother bank of the United States arbitrarily interfering with the management of the branches by reducing suddenly their loans and sometimes withdrawing large amounts of their specie, for political e f f e c t . Here each bank transacts its own business upon its own c a p i t a l , and is subject to no demands except those of its own customers and its own business. It w i l l be as if the Bank of the United States had been divided into many parts, and each part endowed with the l i f e , motion, and similitude of the- whole, revolving in its own orbit, managed by its own board of directors, business interests of its own locality; attending to the and yet to the b i l l s of each w i j l be given as wide a circulation and as fixed a value as were -given to those of the Bank of the United States palmiest days." in its In the second annual report of Honorable Hugh McCulloch, Comptroller of the Currency, made in November 1864, ing system is discussed at length, said: eratum', first the new bank- and regarding it the " I t promises to give to the people that the Comptroller long-existing'desid- a national currency, without a national bank, a bank note circulation of uniform value without the creation of a moneyed power in a few hands over the p o l i t i c s and business of the country. The banks established under the National Banking Act are, and were designed to be local institutions, other, but under national control and independent of supervision. Nation- a l i z a t i o n without centralization is the keynote of tional Banking Act, under which, as enacted, national State, bank was required county and city, to originally designate town or the branch offices being permitted; May 1 , 1 8 8 6 , tion, Na- village, as the of business, the place carried no branches or and, while by the amendment of a national bank is authorized to change its it must be to a each specifically where its operations of discount and deposit were to be on, and was allowed only one place each place not more than thirty loca- miles distant and the new location must be in the same State as the old. The local character that was intended a national bank is further emphasized by that the rate of to the given requirement interest which a bank may charge must not ex- ceed the rate allowed by the laws of the State, district be in which it is located; territory or nor are national banks permit- 915 -9- ted to acquire stock in other banks or to retain such stock when taken to secure a debt previously contracted, except for a reasonable time pending its sale; but under the Federal Reserve Act a national bank is expressly required to be a continuing stockholder in the Federal Reserve Bank of its district. Notwithstanding the purpose to localize each national bank a3 far as its situs is concerned, no geographical limitation is placed by the law upon the deposits that may be received by a bank or upon the loans which it may make, although the bank is expressly prohibited from transacting its business in more than one office and is without power to establish a branch even in its own town; but on the contrary every national bank has the right to s o l i c i t and to receive deposits from, and to rrake loans to, individuals and corpora- tions in all part3 of the United States and of the world. Further than t h i s , the National Banking Act originally provided that national banks in eighteen cities might be used by national banks in a l l other cities as custodians of their required reserves and the banks a in part of seventeen of these reserve cities were authorized by the Act to carry onehalf of their required reserves with banks in New York City, an inconsistency typical of the composite character of much of our legislation; for while the National Banking Act made possible any number of individual it not only permitted but banking compelled the units concentra- tion of a considerable part of the banking reserves of the country - 10 - with the banks of a single c i t y . more consistent. The Federal Reserve Act is While it recognizes the advantages of a concentration of reserves, it does not create a central or dominant institution, but provides instead for the establishment of twelve banks, each to act as a central bank for the reserves of its own d i s t r i c t , the stock of each to be owned by, and its deposits to come from, banks in its own district and from none other. In this manner the reserves of the different sections of the country are designed to be kept at home, and undue concentration in a single city or in a small group of cities is avoided. A large national bank in Eoston or in New York can so extend its business as to solicit and receive deposits and to make loans without any restriction as to locality, ing among its customers corporations, count- firms, and individuals in all parts of the United States and in foreign countries; but the Federal Reserve Bank of Boston or the Federal Reserve Bank of New York can deal only with banks in its own Federal Reserve district. Any Federal Reserve Bank can engage in open market operations resulting from transactions which may have originatsd in other d i s t r i c t s , and may rediscount for ether Federal Re- serve Banks, but no Federal Reserve Bank has the same wide field of operation throughout the country as a whole that is open to the national banks. TThile the I'eders.l Reserve Banks are legally autonomous units there is no power given to the r to act with other Federal Reserve Banks by virtue of agreements made by their directors or executive officers so as to constitute themselves a system with centralized powers, "but the control of the Federal Reserve Banks in this respect is vested in the Federal Reserve Board, through which body alone the coordinated and centralized powers of the Federal Reserve system are exercised; and even in the creation of the Federal Reserve Board the danger of localized centralization is recognized and guarded against, for the Federal Reserve Act provides that in the designation of the five appointive members of the Board the President shall select not more than one from any one Federal Reserve district ana that he shall have "due regard to a fair representation of the different commercial, industrial and geographical divisions of the country." the While .main purpose of the National Banking Act was to provide a national currency without the intervention of a central bank, its development andc«.veration made possible a greater concentration of banking power in the hands of a few individuals than the country had ever known before; but the Federal Reserve Act has provided for the concentration of reserves in a carefully controlled central institution in each of twelve geographical divisions of the United States, and when necessary, for the mobilization of the resources of these institutions as one great bank, thus avoiding the dangers that would come from a single centralized institution while affording all the safeguards and benefits to be derived from concentration and cooperation. Some of you may perhaps have seen a statement that was recently given to the press by the Federal Reserve Board, in which - 12 - the suggestion was made that in view of abnormal conditions throughout the world, ' it would be best that the banks of this country should keep themselves i n a liquid condition and proceed along indicated lines of prudence and conservatism. } h The suggestion was made also that as the United States is fast becoming banker of foreign countries in a l l parts of the world, the investors should receive full and authoritative data, particularly in the case of unsecured loans. I know that there has been criticism of the Board's action in making this statement, which has been given a significance neither j u s t i f i e d nor intended. It was not the T)urr)ose of the Board to make an attack, either open or covert, upon the credit of any Vvernment, nor did it seek in its statement to reflect upon any particular obligations. In my opinion, what the Board had in mind when it made its brief reference to in- vestors, was simply t h i s . American investors have for many years been accustomed to buying industrial securities - railroad obliga^ tions to a great extent. In dealing with these securities certain well established rules have been developed. acquired the habit of requiring specific gross earnings, The investor has information regarding fixed charges, net earnings, sinking funds, etc., and he insists upon knowing definitely whether he is offered a first mortgage bond, income bond, preferred stock, stock. or common It is the practice of every issuing house when offer- ing securities to atate all necessary details its own signature or that of the head either over of the borrowing cor- - 13 - poration. Nowhere is the importance of authentic and complete information more fully understood and appreciated than in Europe, both in England and on the Continent, and prospectuses for foreign loans contain all the important facts relating thereto, in a statement signed by an authorized representative of the foreign government or by the issuing house, or in some cases by both. The Board sought merely to c a l l attention to the fact that as this country has become an important market for foreign securit i e s , the same businesslike habits which are well established regarding domestic loans, of foreign should be developed in the marketing flotations. It happened that a few days after the Board's statement had been made public, certain momentous events took place which had no connection whatever with any domestic incidents* Last week there was a notable stiffening in rates for call loans in the New York market , which advanced to 15$, a higher level than they had reached since the establishment of the Federal Reserve Banks. One of the leading financial journals, this incident, in an editorial discussing has this to say: "The pinch in money at this centre th^present week, under which rates for call money on Monday touched 15fo and reached maximum figures of 1C$ on Tuesday and on Wednesday (normal conditions not being restored until Thursday), demonstrates anew that the Federal Reserve system., upon which the whole country has been placing so much dependence, has not solved our monetary problems. I f , prior to the experience of this week, any one had ventured to suggest that such high rates were possible with the Federal Reserve system in full operation and at a time when the country is literally flooded with currency in one. form or another, he would have been deemed lacking in perfect : - 14 - faith and denominated a hopeless skeptic. These high rates, too, have come at a time when the gold stream to these shores from foreign countries has been flowing with such strength and volume that many good people have been holding up their hands and say ing that we are getting too much of the metal and that the movement ought to be stopped. As it happens, the easing of the monetary tension here which came towards the end of the week was due entirely to the resumption of gold imports on a large scale, and it is evident that whatever may be the situation elsewhere in the United States, New York has been badly in need of extra supplies of g o l d . " It may seem paradoxical and certainly is anomalous that while the country is literally swimming in gold as the result of the enormous importations of the metal which nave occurred sincd the beginning of 1916, the New York Clearing House banks and trust companies should be steadily drained of their supplies of the metal, and of their money holdings generally, yet the fact itself can not be gainsaid. And it is a striking commentary upon the working Of the Federal Reserve system that this should be so. Secretary of the Treasury McAdoo in his annual report the present month is loud in his praises of the Federal Reserve system and of the benefits it has conferred upon the community, but in view of this week's happenings his flattering tribute would appear Somewhat premature. The Secretary avers that the country's present "great propperity could not exist without it (the Federal Reserve system)." This is perhaps pardonable exaggeration, but has no basis in the facts. Nor is there warrant for the contention that "the usefulness of the system has been broadened recently by the amendatory Act of September 7 , 1916." On the contrary, through these amendments and the methods pursued in the administration of the law, nearly all of which have tended to promote the inflation possibilities of the law, there has been a distinct departure from the conservatism that marked the statute as originally drafted and the law has lost some of its most potent elements for good. Certainly the Reserve Act must be held responsible for the depleted state of the Clearing House institutions at this centre. For it is the reduction in the money holdings and surplus reserves of these Clearing House institutions that accounts for the twist in money; and the possibility of such a flurry ir: money rates as has now occurred would have been sooner 915 -15- recognized except for the implicit faith felt in the efficacy of the Reserve system, which has made the ordinary man inclined to neglect his customary study of monetary currents, It has been argued that business activity, together with high prices and Stock Exchange speculations, necessarily create an active demand for loan accommodation, That of course is in considerable measure true, but the predicament in which the Clearing House banks found themselves this week was not due to loan expansion but followed directly from a severe loss in money holdings. The existence of Die Federal Reserve Bank at this centre has not served to relieve the situation and there is no telling what might have happened except for the opportune arrival of some more gold from abroad. It is noteworthy that the large credit balances of the Federal Reserve Bank of NewYork did not serve to swell the Reserve Bank's own money holdings, showing that the money must have been transferred to other points by the Reserve Bank through the Reserve clearing house system. As a matter of fact, the New York Reserve Bank's money holdings, after beinghe"Javily enlarged in the week ending November 17, (when the total of gold and legal tender mounted from $ 1 7 0 , 6 6 0 , 7 5 7 to $ 1 9 2 , 8 5 2 , 2 9 7 ) , were in the succeeding two weeks reduced to $ 1 5 6 , 4 0 8 , 7 4 1 , at which figure the total was the smallest of any week since June 2 l a s t . In other words, the Federal Reserve Bank of New York drew enormous amounts out of the Clearing House institutions and could not retain the money, but transferred i t , as already stated, to other points. " It 3oems that this high authority is an unwilling witness to the soundness of the position taken by the Board in its statement, although it takes occasion to rap the Fed- eral Reserve system. But it is d i f f i c u l t to see how the New York Federal Reserve Bank can be held responsible pletion of reserves of its member institutions, for the de- or in what respect it3 operation has been unfair to the banks of its home c i t y . Besides being our chief York is our greatest port of entry. financial center, New Through its custom house passes a vast volume of goods which do not remain in New York City but which are distributed throughout every State to every town and hamlet in the land. In the same way most of our imports of gold come first to New York, and through the financial institutions there find their way to other sections of this country and to South American nations. The Federal Reserve Bank does not cause this diversion of gold; it merely aids its member banks in effecting the distribution called for by our coumercial transactions. is rather amusing to find in the same journal to which 1 haVe referred, It issue of the financial -*> which in its editorial states that the existence of the Federal Reserve Bank in New York ,.has not served to relieve the situation, and there is no telling what might have happened except for the opportune arrival of some more gold from abroad, - this statement in its reading columns: NEW YORK CITY BANKS AVAIL OF REDISCOUNT OF RESERVE BANK. PRIVILEGES "The use of the rediscount privileges of the Federal Reserve Bank was availed of for the first time this week by several of the local banks. While the practice is new to the banks of this city, the up-State banks are said to have made use of the rediscount f a c i l i t i e s of the Reserve System ever since the opening of the Reserve Bank. So far as the New York institutions are concerned, the New York Federal Reserve Bank is said to have taken the initiative in suggesting that they adopt the practice of rediscounting through i t . It is explained that their action in resorting to the Reserve discounting privileges was not the re- 915 -17sult of any apparent strain of the money market, but to inaugurate this feature of the system and demonstrate its workability.H It is a note-worthy fact that except for a slight advance in the hitherto abnormally low rate for acceptances, there has been no advance in rates for commercial paper of a character eligible for rediscount with Federal Reserve Banks, and the so-called "flurry" was confined secured by stock exchange collateral. entirely to loans While the Federal Re- serve Act does not permit Federal Reserve Banks to rediscount paper secured by investment securities such as stocks and bonds, national banks which carry such loans can at any time strengthen their position by rediscounting eligible commercial paper with the Federal Reserve Bank, and it seems that the important banks in New York and Boston which had rediscount transactions a few days ago with their Reserve banks, desired to impress this fact upon banking institutions throughout the country. Hitherto large banks have as a rule not been inclined to show any rediscount l i a b i l i t y upon their statements, and an aversion to rediscounts has been felt by many of the smaller institutions throughout the country. The Federal Reserve Act, however, while imposing strict limitations upon the character of' the paper that can be discounted by Federal Reserve Banks, distinctly encourages rediscount operations by member banks, and before the amendment uf September 7, 1916, permit- 915 -18- ting Federal Reserve notes to be issued upon the security of bills purchased in the open market, except it was impossible to issue Federal Reserve notejyupon paper red is counted by a member bank. It is highly important, ment of the Federal Reserve system, in the proper develop- that banks should over- come their old-time prejudice against r©discounting and that they should learn to avail themselves freely of the f a c i l i t i e s afforded by the Federal Reserve Banks. In the statement to which I have already referred, tho Federal Reserve Board announced that it does not share the view frequently expressed of late, that further importations of large amounts o^ gold must of necessity prove a source of danger or disturbance to this That danger, country. in the opinion of the Board, w i l l arise only in case the inflowing gold should remain uncontrolled and be permitted to become the basis of undesirable loan expansions and of inflation. The Board suggested that there are means of Controlling accessions of gold by proper and voluntary cooperation of the banks, lative enactment. or, if need be, by legis It suggested that an important step in this direction would be the anticipation of tho final transfer of reserves required by th3 Federal Reserve Act to be made on November 16, 1917. A b i l l has been introduced in Congress providing that this transfer be made effective with 915 -19- in sixty days from the date of its enactment. There are now approximately $600,, 0 0 0 . 0 0 0 of sd-'Called reserves held by national bank reserve agents which,, if the amendment becomes a law, and in any event., in November 1917,. w5.ll no longer be counted as such., but w i l l have in bank. the status simply of balances The actual reserve requirements in gold w i l l be increased by about $200,,000,,000, and if we do not regard profit as a first consideration, there are other moans by » which the continued inflow of gold into this country can be used to its lasting benefit. For many years this country has been handicapped because of the inelastic quality of a very large part of its circulating medium. I refer particularly to the legal tender notes or greenbacks, and to national bank notes. The framers of the Federal Reserve Act had in mind the ultimate retirement, over a period of twenty years, of the bond-secured national bank notes, and the conversion of the United States which they are based' but in the permissive form in which this section of the Act was finally passed, there is no certain- ty that the national bank notes will be retired so far as to say that the bonds upon nor w i l l I go retirement of all national bank notes is desirable or necessary in our present situation. I have heard the suggestion made that it might be well to consider the adviasbility of preparing for the retirement of say, 000 of national bank notes within tfce mext throe years, $200,000, qir5 ... 20 - provided this can be done without injury to the national "banks and without permanently contracting our circulating medium, in case it should ever be desirable to keep it at its present volume An Act of Congress would of course be necessary to Carry into effect any plan for the compulsory retirement of national bank notes, and I have mac'e this reference merely to show that our circulating medium need not necessarily become redundant by further injections of gold into i t . legal tender qualifications, of $ 3 ^ 8 , 7 2 1 , 9 2 5 , of which greenbacks and $ 2 , 0 ^ 0 , 9 0 9 Treasury notes possessing are outstanding to the extent $ 3 4 6 , 6 8 1 , 0 1 6 are the old war time are Treasury notes of 1^90 which were issued on account of silver purchases but which are payable in coin. The suggestion has been made frequently that advantage should be taken of the present plethora of gold to retire permanently these notes* ppposition which manifested itself No doubt some of the in the late sixties and the early seventies against the retirement of legal tender notes may spring up again, should their retirement be seriously considered. But if our currency is redundant, -would it not be wise to strengthen it by retaining gold, at the same time retiring the notes that have caused so much controversy and disturbance i n times past? The principal objection w i l l prob- able come from those who may fear that the retirement of the legal tender notes w i l l lead to permanent contraction, but if they could be convinced that this is not the case and that the 915 - 21 - vacuum created could be f i l l e d at any time when necessary by Federal Reserve notes of a truly elastic character, their opposition would have l i t t l e to rest upon. If Congress should ever decide upon the retirement of the greenbacks, the Federal Reserve Banks could be u t i l i z e d as a means of effecting the operation, without the slightest disturbance to interest or to credit rates facilities. So far any influence the Federal Reserve Banks have exerted in the field of international finance apart from their importance as the holders of domestic reserves, and their position when considered collectively, as a dominant factor in Amer- ican banking, has come from their ability to purchase or discount acceptances arising out of transactions involving the or exportation of goods. importation Later on, in a l l probability, the Federal Reserve Banks w i l l avail themselves of the powers given them by law, with the consent of the Federal Reserve Board, to open and maintain banking accounts with foreign Countries and to establish correspondents and agencies abroad, but so far they havo done nothing in the foreign field except to encourage the development of the acceptance business, which is already playing a very important part in financing our commercial abroad. transactions The Federal Reserve Act authorizes national banks to establish branches in foreign countries, and the amendment of last September permits them to become stockholders in corporations organized for the purpose of carrying on a banking business other countries. established Already branches in two the American West banks Indies and in have in South 915 -2.2America, and it is thought that their example m i l by other banks in the course of time. be followed Two years have elapsed since the establishment of the Federal Reserve Banks. While they have not been operated with an eye to p r o f i t , they have earned their expenses and a part at least of their dividend requirements- The prejudices which existed in the beginning against the Federal Reserve system have to a great extent disappeared. The Reserve banks had not been established in the summer of 1914 v?hen the country was brought face to face with a great crisis because of the outbreak of tho European war, and since their organization they have had no opportunity to give a practical of their efficiency as emergency institutions, demonstration and because of the remarkable ease in money which ha3 existed almost continuously during the past two years i they have not had the oppor- tunity of exercising to any great extent all of the functions for which they were designed. steadily in tho confidenbo of They have nevertheless gained the public, and the fact of thoir existence has enabled tho country to withstand, without the slightest financial disturbance, many shocks and sensations which would probably under old conditions have been followed by unpleasant results. I think it may be said in all fairness that the Federal Reserve system is no longer looked upon as an ephemeral experiment. The country recognizes that 23 - it has been established upon a ifirm and enduring foundation, that it has not beon and can not be conducted 'for the sole benefit of any group or interests, but that the policies governing its operation are, and must continue to be, broad enough to serve the banks and the patrons of banks, without discrimination throughout the entire country. be perfect, The Federal Reserve law as it stands may not but we have every reason to believe that the country feels that it is correct in principle and that any changes which may be made in the law from time to time w i l l be along lines which enable the Federal Reserve Board and the Federal Reserve Banks better and more adequately to provide for all contingencies, and to measure up more fully to the duties and responsibilities which have devolved upon them.
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