the government in various treasury operations. This will make it possible for the government to use modern and economical methods in caring for its receipts and making its payments, and should also prove of advantage in its borrowing.

The federal reserve banks are also empowered to buy, sell, and borrow gold coin and bullion, the securities of the federal government, and the warrants and other short-time obligations of states and municipalities. They may also buy and sell bills of exchange arising out of either foreign or domestic trade. This last power enables them, in case of need, to come to the relief of banks not members of the system. Buying bills of exchange from other banks differs from "rediscounting" only in that in the latter process the bills to be rediscounted are normally and usually exchanged for deposit credits or bank notes. Under the law, federal reserve notes cannot be issued upon the security of "purchased" paper, but only upon paper "rediscounted" for member banks, nor can federal reserve banks give deposit credit to banks not in the system. This means that since "purchases" will usually involve a direct drain upon the reserves of the federal banks, their power of "purchase" is much more restricted than their power of "rediscount."

But there is a yet more important aspect of these authorized "open-market operations" in commercial paper. Only through the use of this power can the federal reserve banks hope to make their discount rates "effective" in the money market. Only in this way can they expect to "put on the brakes " when they think that bank credit is being expanded with dangerous rapidity or encourage free lending on the part of the banks when conditions are such as to make that policy seem desirable. Only in this way, moreover, can they protect their gold reserves by the use of devices similar to those which the Bank of England and other European banks have found effective. The existence of an "open market " for commercial paper means merely that commercial paper, instead of being held till maturity by the bank first discounting it, may be bought and sold freely, and may move from one city to another and even from one country to another, according to differences in prevailing discount rates.

In the United States open market operations of this kind are not yet of sufficient magnitude to give the federal reserve banks any large opportunity for exerting their influence. They are consequently endeavoring to stimulate the growth of open-market operations.

The federal reserve system has been very carefully devised for the purpose of getting rid of the principal evils inherent in the national banking system as it was. If given a thorough and fair test, it should accomplish that purpose. There is some danger that the new system may make possible a too easy and too rapid expansion of bank credit in periods of business prosperity, ending perhaps in reaction and crisis. But this danger is inseparable from any really elastic system of bank credit. With a wise exercise of the powers which the Federal Reserve Board has over discount rates and reserves, the alternations of periods of business prosperity and periods of business depression should be less frequent and less violent than in the past.

The most formidable obstacle to the success of the federal reserve system now apparent is the possible lack of cordial coöperation on the part of the banks-especially the smaller banks-of the country. Very few state banks and trust companies have become member banks, while a few member banks have given up their national bank charters and have withdrawn from the system. Despite the fact that the Federal Reserve Act modified the national banking law by permitting national banks to engage in various kinds of banking operations which had previously been prohibited, some of the bankers feel that membership in the system decreases their banking profits. Member banks no longer get interest on their reserve deposits (although this is compensated for, at least in part, by the reduction in the size of the required reserves) and, if they utilize the federal reserve banks as clearing and collection agencies for checks drawn upon other banks in the system, they lose some of the profits from certain charges that had previously been made for collections and exchange. The advantages of the system to individual banks will appear most clearly at time of crisis. But lessons of periods like that of 1907 are soon forgotten. The greatest advantages of the system, however, are its effects upon the commercial interests of the country as a whole. A particular banker may feel that he can share in many of the general advantages of the system without membership in it. It is to be hoped that this absence of a sense of individual responsibility for the general banking situation may not develop so far as to prevent the federal reserve system from attaining its maximum usefulness.

The

The Present Position of State and Private Banks. figures in Table V give only a partial idea of the present position of banking in the United States, for while they are complete as to national banks, there were, in 1915, over 3000 other banks which failed to make reports to the Comptroller of the Currency.

"State banks," in the narrow sense, include only corporations chartered by the individual states to conduct a general commercial banking business. In a broader sense savings banks and trust companies incorporated under state law may be said to be state banks.

1 Compiled from statements in Federal Reserve Bulletin, Vol. ii, pp. 426, 427.

2 Federal reserve notes to the amount of $175,219,000 were outstanding at this date but a large porportion of these were covered by gold set aside for the purpose (and not included in the statement of resources) and others remained in the hands of issuing banks. The amount in circulation was $154,038,000.

TABLE V

NUMBER OF BANKS AND AMOUNT OF DEPOSITS IN SPECIFIED KINDS OF

Savings banks do not usually do a commercial banking business; that is, they are not engaged in the sale of bank credit in a form that can be used in making payments. Their deposit accounts are not usually transferable by means of checks. They receive deposits of small savings and invest them in long time securities, such as real estate mortgages and bonds of various sorts. They perform an important social service by stimulating saving and by increasing the financial power of small investors through concentrating and combining their resources. Savings banks are organized either as corporations or as mutual societies managed by a board of trustees acting for the depositors. The latter type is especially common in the eastern states.

Trust companies were at first organized to take charge of trust funds and to act as executors and administrators of estates. They have, however, developed the functions of both savings banks and commercial banks, and have even entered such specialized_banking fields as foreign exchange and the underwriting of corporation securities. They have thus the character of free lances in the banking field. Their banking functions have developed so rapidly that in many states they have been put under no such rigid control as is exercised over state and savings banks.

Private banks are of two very distinct types. Some are small unincorporated banks in country towns. Others are great concerns in the financial centers which deal in investment securities, buy and sell foreign exchange, finance great corporate undertakings, and, in some cases, act as brokers in the stock market.

It is impossible, in fact, to draw a definite line between "banking" and 1 Compiled from Report of Comptroller of the Currency, Finance Report, 1915,

pp. 533, 595.

2 Exclusive of inter-bank deposits and postal-savings deposits.

other financial undertakings. Building and loan associations, private money lenders, note brokers, dealers in investment securities, life insurance companies, etc., frequently perform functions which are very much like some kinds of "banking." But banking as the institution which converts personal credit into bank credit in the form of deposit accounts and bank notes is a clearly defined thing, and has a distinct economic significance of its own.

QUESTIONS

1. Explain the various items in the published "statement" of a national bank.

2. Because a national bank can buy interest-bearing government bonds and use them as security for its own issues of paper money, advocates of government paper money issues have alleged that it gets "double interest on its money." Is this true?

3. How should one compare the profitableness of issuing notes with the profitableness of extending deposit credit?

4. What restrictions does your state impose on state banking corporations?

5. Report on the note-issue systems of the Bank of England, the Bank of France, the Imperial Bank of Germany, and the Canadian banks.

6. Report upon the relative advantages of the promissory note and the bill of exchange as instruments of commercial credit.

7. Compare the provisions of the Aldrich plan with those of the federal reserve system.

8. Does the supply of bank credit involve the sacrifice of “waiting" on the part of anyone? Who are the real or ultimate lenders?

9. What are bank acceptances? trade acceptances? commodity paper? 10. Are bank notes more closely analogous to government paper money or to bank deposits?

II. What points of superiority have bank notes over government paper money?

REFERENCES

(See also references for Chapter XIV.)

Comptroller of the Currency. Annual Reports.

CONANT, C. A. History of Modern Banks of Issue.

CONWAY, THOMAS, and PATTERSON, E. M. The Operation of the New Bank

Act.

DUNBAR, C. F. Chapters on the Theory and History of Banking.

Federal Reserve Board. Annual Reports; Federal Reserve Bulletin (monthly). HOLDSWORTH, J. T. Money and Banking.

KNOX, J. J. History of Banking in the United States.

LAUGHLIN, J. L. (editor). Banking Reform.