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