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About The Sunday Oregonian. (Portland, Ore.) 1881-current | View Entire Issue (Oct. 24, 1915)
1 AFTER & year of building:, the Fed eral reserve system constitutes, in the words of Benjamin Strong:, Jr., Governor of the Federal Reserve Bank of New York, a new and stable foundation upon which the credit and currency of the United States rest. - Frederick A. Delano, vice-grovernor of the Federal Reserve Board, calls the new system a "shock absorber." It capably "absorbed' the shock of the European war and safely retired $385. 000,000 of emergency currency that had been Issued under the Aldrich-Vreeland act without causing; a ripple in the fi nancial sky. Leading; bankers say the operation of the system has caused confidence in all lines of business activity, as it grives the manufacturer and merchant the as surance that no situation will inter vene to deprive them of the credit and funds necessary to finance their busi ness requirements. It has lessened to the least degree the danger of financial panics. It is a safety valve for the vast machinery by which the business of the Nation is performed. The Federal reserve system will have been in operation for a year on Novem ber 16. Although all the features of this great innovation in banking will not become effective for two years more, leading financiers are agreed that the system can be called a suc cess. It has revolutionized methods of banking in the United States; finances have been mobilized and centralized, and the danger of frequent commer cial disturbances which existed under the old system of banking has been re moved. Bankers are contributing their energy, experience and cordial co-operation to make the system realize the blessings and advantages for which the Nation had so long striven. The war necessities of other coun tries has given the United States its opportunity to become a creditor Na tion. Evidence of this is furnished by the huge balance of trade that has piled up in our favor in the last 12 months, and the new banking system provides the improved facilities for ex tending credit to exporters and im porters, which makes it possible for them to expand the country's foreign trade. The Federal reserve system is the outstanding triumph of the Wilson Ad ministration the one reform which really has been tried. The war in Europe, cutting off as It has the im ports of other countries, thus far has not allowed the tariff law to be tried to its full extent. But not so with the Federal reserve act. which when but an infant weathered the storm of fi nancial chaos resulting from the out break of the war. the closing of the stock exchanges, the disruption of the cotton market and the wrecking of long-established lines of trade. "Within the last year the United Ptates. by, means of the institution of the Federal reserve system, has ob tained An elastic currency. A means of rediscounting commer cial paper. A more effective supervision of banking in the United States. The opening of the Federal reserve system sent to the country a tremen dous wealth of reserves held in the National banks of the country, in ac cordance with the antiquated banking act, but regarded by expert bankers as wholly unnecessary. This release of reserves was accomplished by cutting down the percentage necessary to be held by National banks to meet their obligations. Amounts in Reserve Vnknomi. Just what was the total of the re serves thus released Treasury officials do not know. They say that the in tricate Bystem of the old banking law. with its intertwined deposits, never will permit of a correct estimate. Guesses as to the amount vary from 1500,000.000 to fl. 000,000.000. One thing is certain, however, within the last year the wealth released by the National banks has made loans much easier and has tended to keep Interest rates at a minimum. In view of the unsettled conditions of the last year, this alone is regarded as a great achievement for the Federal reserve system. When asked what the reserve sys tem has accomplished in the last year, Mr. Pelano, vice-governor of the Fed eral Reserve Board, said: "As thus far developed the benefits of the reserve act are seen more clearly by the indirect results than by the actual transactions of the banks them selves. The great fund of reserves re leased on November 16, when the sys tem went into operation, went to meet the demands of business. There Imme diately followed a general reduction of Interest rates. "Soon after the war in Europe broke out. before the reserve system went into operation, it became necessary for the Treasury to issue $385,000,000 of emergency currency, under the Aldrich Vreeland act." The Federal Reserve Board worried somewhat about the re tirement of this vast sum, for no one knew what the effect would be. We proceeded cautiously, and succeeded in retiring the whole amount. And it never caused a ripple in the financial sky. "It seems to me the first big result of the Federal reserve system has been to bind together all the National banks of the country into 12 strong regiments. These 12 banks the Federal reserve banks represent in each district from 385 to 982 member banks, with a nom inal capital ranging from $4,808,000 to $21,624,000. only half of which is paid in. The 12 banks were not created to do business directly with the public, but as reserve banks, as their namo Implies, for the purpose of holding the reserve deposits for the member banks. "One of the important services which they may give to their member banks is the right to discount their paper and issue bank notes against it. By dis counting good commercial paper and in turn selling it (I. e., rediscounting it) to the Reserve banks the member banks have a way to earn money for them selves, as well as making credit much easier. They do not have to carry the load themselves. "It has been a great work to bind to gether the National banks of the coun try. There are approximately 7600 of them. Who is there who will doubt that this alone is a great advantage, even if the act accomplished nothing else? "Imagine a police force composed of 7600 officers, all reporting to one chief. Could there be any effective work done by such a farce? Any experienced man who might be asked to put the force on a better basis of efficiency would immediately divide the force into divisions, with suitable headquar ters, putting subordinate officers in cnarge oi eacn. 10 iuuj way me cniei would be in touch with the subordinate officers, who in turn would be close to the men. The reason that better results could be obtained is apparent. "Under the old system, which was in effect for 50 years, the banks all oper ated independently. It is true, of course, that there developed a method of depositing the reserves of smaller banks in larger banks, but it developed much that was bad, and from the view point of a banker, unsafe. "Not only serious duplication of re serves developed, but, because of active competition for deposits, there resulted many vicious practices, such as paying high rates of interest and granting special privileges. Altogether it was a scheme of "you tickle me and I'll tickle you." They got along on paper. "We have taken the public into our confidence in working out the system, and if we have been successful I be lieve that that is part of the reason. The public has been aware of every step we have taken. We have not gone so rapidly as we might have gone, but we have gone carefully, as was manl-' festly our duty as trustees of an lm- mense reserve fund- - "Of course there atill ' remain two THE SUNDAY OREGOXTAN, PORTLATTD, years before all of the features of the act will go into effect. There are some important features yet to be worked out. The biggest single job yet to be undertaken, I think, is a system for the clearance of the checks of member banks, but it will not be long before this can he accomplished. Self-Adjusting System. "I have on various occasions referred to the Federal Reserve system as a. 'shock absorber.' I mean by that that the system is capable of adjusting itself to meet all conditions which might arise, lessening to the least degree the danger of financial panics. "This new law. designed to make each district self-sustaining, makes it possible for a district with plenty of money to help a district which is short of funds and is in need of assistance. In order to accomplish this one Reserve bank is permitted to rediscount the commercial paper for another bank. In case of need the Federal Reserve Board is empowered to compel this redis counting. "Stated in a different way. there is provided a basis of management where each Reserve bank may operate as an independent unit, but where in time of need the resources of several banks can be called upon to some extent to re lieve the strain. "In addition the Federal Reserve banks are empowered to act as Govern ment depositories and as fiscal agents. Sub-Treasuries are not abolished, but there are many advantages for the use of the banks in this capacity: "First If the money of the people the taxpayers is retained in the Re serve banks it is there for the promo tion of trade and commerce. "Second It is safe, because back of the Federal Reserve banks is the guar antee of the member banks, which own them. "Third The function or fiscal or dis bursing agent for all Government drafts or checks, aggregating approxi mately mnrn than tl.AAA Ann a Aav fan . bo perf0rmed by the banks effectively and with a great saving to the Govern- ment." " Opens Ports to Foreign Trade. Another achievement of the new sys- tern has been the institution of an ar- rangement whereby foreign shipments may be financed by means of bankers' acceptances. Under an amendment to the Federal reserve act passed at the last session of Congress any Federal reserve bank may discount acceptances which are based on the importation or exportation of goods and which have a maturity at the time of discount of not more than 30 days and are indorsed by at least one member bank. The board, in a recent ruling, provided that these acceptances may be renewed for 90-day periods. . The effect of this arrangement is from the banks in the Southern States that exporters need not have their that there possibly would be a shortage funds tied up in goods which are in of funds for the financing of the cot transit. The reserve banks shoulder ton crop. The surplus funds in the the credit. Indorsed by the member other banks of the country indicated -n tnn x exporter or importer the benefit of his money, whereas, if he had to wait until the merchant to whom the goods were consigned got ready to pay. he would ot be able in soma case to continue operations. . i. w- j m m - -w x . This step, officials believe, will give American merchants a great opportu- nity to capture large portions of the foreign trade, allowing them . to ex- tend to reliable merchants in other undertaken on very short notice and countries reasonable credit. In this withont time for adequate prepara way they are able to compete with the tion. systems of other foreign countries, "The offices we now occupy were which have been giving long credits rented and arranged to suit our needs, for years. ' . a staff of employes, largely temporary The Federal Reserve Board's system was selected and the necessary ma of collecting data, about business con- chines, stationery and supplies were dltions of the country is more com- obtained within a space of three weeks, plete than any operated before by a. immediately prior to November 16, 1914. Government agency. The reports are On November 16 $100,000,000 of reserve sent in monthly from -Federal reserve deposits was received, and by about No- agents of the 12 districts and cover crop conditions, manufacturing, the business of railroads, the effect of the weather on trade and agriculture. shipping, the - volume of loans, retail trade and the outlook for the future, All this detailed Information is pub- lished by the board each month in a publication of the board printed at the Government printing office in Wash ington entitled the Federal Reserve Board Bulletin. The data are arranged according to the districts, which are: No. 1. Boston; No. 2, New Yorkf No. 3, Philadelphia; No. 4, Cleveland: No. 6, -Richmond; No. 6, Atlanta; No. 7, Chicago: No. S I.St. Louis; No. 9, Mlnne- spoils; No. 10 Kansas City: No. 11, Dallas; No. 12. San Francisco. In August it became clear to the Federal Reserve Board from reports u tnere tT"i to finance the .other crops, even though they appeared to be unusually large. As a result. William G. McAdoo, Sec- retary of the Treasury, soon afterward announced that, he - would deposit is OCTOBER 4, 1915. the Federal reserve banks of the cot- ton states, Richmond, Atlanta and Dal- bank now a hanl supply of on short notice and affords the banks las, $30,000,000 of Treasury gold to be $250,000,000 of notes of various denomt- additional facilities for extending credit used for loans on cotton. The effect nations- by making it possible to rediscount of this, according to reports received "Through the courtesy of the Federal commercial paper In large amounts, by the board, was extremely beneficial Rse"ve Board the officers of the re- It is the duty of a bank to go the to the South. serve banks have been afforded an op- limit in financing commercial require Mr. McAdoo, to remove any criticism Portunity to discuss and assist In the ments. The merchant or manufacturer of partiality, offered to deposit similar Preparation of the various regulations who counts on using $500,000 in his bust funds in the banks in Minneapolis, governing the transactions of the re- ness during the year must have as- Kansas City and St. Louis. These banks replied that they had sufficent money to move the crops. Within the last month a branch of a Federal reserve bank, the first of Its kind, has been opened. It Is at New Orleans, which tried hard for one of the 12 main banks; but failed. This branch bank is operated as part of the bank at 'Atlanta. Another innovation of the system is the power of the Federal Reserve Board to allow National banks to act .niit as executors, trustees, and registers of stocks and bonds. Many of these banks, where state laws permit, have obtained permission from the board to perform these functions ordinarily vested in trust companies. Organization of Federal Reserve Banks. "The actual work of organization that is, securing banking offices, as sembling a staff of competent men and providing the mechanical means for conducting the business is now about completed," said Mr. Strong, governor of the New York Federal Reserve Bank, "notwithstanding that the work was vember 20 a total of about $113,000,000 in capital stock payments and reserve aeposits naa Deen iransierrea to tne bank, and thereafter it was performing a limited number of Its varous func tions. For some months after Novem- ber 16 much time was devoted to In vestigating and employing the perma nent organization and directing the men in the work of preparing a safe and economical Byetem of accounting and office management. "Practically all of the work of the bank is new and differs materially from that of a National or state bank. and consequently forms and methods of accounting required special study and preparation. It was. of course. equally important that reasonable unl- formity should prevail in all the re- serve banks as to methods of conduct ing the business, keeping records and Interchange of business and informa tion. This has been accomplished through frequent meetings with the Reserve Board and by a series of con ferences held by the governors of the 12 bank, and similar conferences of the Federal reBerve agents and accountants and audltora drawn from the 12 banks. as well as the experts in charge of the colection departments. sisetings - of -these, four, classes .t- the bank's officers are held at fairly regular intervals, the discussion at the meetings generally resulting in agree ments as to uniform methods, which ars reported and considered by the Federal Reserve Board. The banks have taken the first steps In the develop ment of a plan for handling checks for the member banks, the plan vary ing somewhat in the different banks to meet the varying needs of the dlf- ferent districts. The natural sequence of this step has been the establishment of a fund of gold administered by the Federal Reserve Board In Washington for the purpose of settling balances arising out of exchange transactions between the reserve banks. Much Work Accomplished. - " "A superficial view of what has been accomplished by the management of the reserve banks gives but a slight indication of the vast amount of work involved. This is illustrated by the problem which confronted us in or dering supplies of Federal reserve notes. When this bank undertook some months ago to order about $300,000,000 of notes it required some weeks of pre liminary study of the whole subject of currency circulation in order to ar rive at a fair estimate of the denomi nations that should be ordered. The serve oanKs. 1 nese regulations apply to practically all departments of the bank's activities and have almost the same force in governing the transac tions of the bank as does the statute Itself. Great care is. therefore re- quired in their preparation, and these regulations have been the subject of constant study and investigation, in co-operation with the Reserve Board. "Since this bank was organized its membership has been increased by the transfer from the Philadelphia district ot the National banks located in the 12 normern counties or New Jersey, so that the New York Reserve Bank now has 610 members. "It also has been necessary to develop a policy in respect of investing the funds of the bank. Up to the present time its investments at interest have consisted in a very small part of dis counted paper sent In by the member banks, by far the greater part of the money Invested consisting of the ob ligations of various municipalities, is sued in anticipation of the collection of taxes and of drafts accepted by respon sible banks and bankers. The principal market for paper of this character is New York City, and it has, therefore, been necessary for this bank to execute orders for a large volume of such in vestments in behalf of the other re serve banks. "In order that we may be in a posi tion to meet the requirements of the member banks for discount of their commercial paper, as contemplated by the statute, it also has been necessary to assemble files of information in re gard to the business, management and condltlon of an the member banks of this district, and work of that charac ter is continuous. "Suggestions of forms for statements to be made by borrowing customers of member banks have been furnished to all the banks of this district, as well as other necessary forms to enable them to conduct their transactions with this bank. "Reviewing the work of last year. I think it is safe to say that few enter prises ever have been undertaken in this country which presented more novel problems to be solved and re- QUired a greater degree of care in their outlon- A indicatlng the extent of ,, f,r.f,r. of -ov- ernora of tne reserve banks discussed a programme containing no less than js at hand. The banker merely has to 76 topics. take his paper out of the portfolio and "Notwithstanding the inactivity of have it rediscounted at the Federal Re our business at the present time, there Berve Bank. This makes for a sltua- is a constant and steady growth or depotlts and note issues that is rather impressive as to the future possibilities of tho eystem. ..Qn December 1 of last year the bank . on v ece . .1 , i .me had $3,822,000 of paid-in capital. $105.- 00,000-deposits -and 170.000 X notes outstanding. At the present time the bank has a paid-in capital of $10,897. 700; gross deposits, $174,325,000. and $61,620.0)0 of notes outstanding. "Including the gold held by the Fed-' eral reserve agent as security for notes, it holds $218,700,000 cash, of which $202,000,000 consists of gold. It also holds about $15,000,000 of Investments at Interest. "The work of the organization is now completed. This bank, and I believe the other 11 reserve banks as well, are now prepared to perform their legal functions, and In their present position. with cash resources exceeding $400,- 000,000. they afford a new and stable foundation upon which our credit sys tem rests." How Prominent Bankers Regard the Federal Reserve System BT LOUIS Q. KAUFMAN. President Chatham and Phoenix National Bank of New York. IT IS a recognized fact that money panics never can occur again under this system. It gives us recourse to a tremendous amount of new cur- rency which can be put into circulation surance that the funds will be forth coming when he wants them: other wise he lacks confidence to carry on and expand his enterprises. The operation of the Federal Reserve system gives him that confidence. He now knows that no situation will in- tervene to deprive him of the credit and funds necessary to finance his business requirements. Fear causes panics, and this eystera has removed the cause for fear. We never expect to see an unusual situation develop in the future which cannot be met with the aid or the tea- oral Reserve Banks,' unless it should be some great calamity, the nature o which cannot now be foreseen. It wil take generations to outgrow the sit uation which has been developed through the operation of the Federal Reserve system. It is a safety valve. BY ALBERT H. WIGQIK. President of the Chase National Bank and Chairman of the New York Clesx-ing-House Committee. We believe that the records of one year of operation have demonstrated that the Federal Reserve system will be a benefit to the mercantile and banklnir interests of the country, and that the purpose of its framers to pre - vent extremely high rates in the money . market will be effective. BY ROLLIX P. GRANT. President of the Irving; National Bank of New York. It was needed the Federal Reserve system and it is ehaplng itself to meet the needs for which it was de signed. Its operation has generated confi dence and caused a greater feeling of security among business men and bank ers on all sides. If it is not perfect, experience will help to make it perfect. BY THOMAS COCHRAN. President of the IJberty National Bank of New York. One of the great things about the Federal Reserve system is the insur ance it affords. It provides a safe re treat in time of storm. Its psycholog- lcai effect is makee you una enormous because it afraid. v.. ... ,a the banker know that if a storm does blow relief tion that Is at all times uquia. Eventually, I presume, there will be found many useful service, which the svstem can perform In normal times, Dut at present its greatest good lies -. .t. it Vfforda In a. case in the protection it afford, la case of emergency. , . . t