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The Federal Reserve Act I 1

THE FEDERAL RESERVE ACT I 1. General banking organization. § 2. The Federal Reserve Board.

3. Federal Reserve banks. § 4. Federal Reserve notes. § 5. Reserves against Federal Reserve notes. § 6. Reserves against Federal Reserve bank deposits. § 7. Reserves in member banks. § 8. Rediscount by Federal Reserve banks. 6 9. Changes in national banks. § 10. Opera tion in the pre-war period. 1 11. Operation in the war period. § 12. Gold hoards and artificial interest rates. § 13. The post-war period. 11 14. Future of the Federal Reserve system.

§ 1. General banking organization.

President Wilson and the newly elected Congress with its Democratic majority made banking reform one of the main objects on the program for the special session beginning March 5, 1913. The result was the Glass-Owen bill, which became law as the Federal Reserve Act December 23 of that year. The bill was actively discussed within and without the halls of Congress, and many of its features were attacked by bankers, individually and acting through the bankers' associations, at various stages of its progress. As a result it underwent numerous amend ments in details, and, though it remained in most essentials as it was first proposed, it was at last accepted even by its critics as on the whole a beneficent act of legislation. Indeed, its strongest critics were the friends of the Aldrich plan, and the Federal Reserve Act embodies, in a greater degree than its authors were ready to admit, the main features of the Aldrich plan. In one important respect, however, it is different: it provides for more decentralization of control and of reserves than did the Aldrich plan. It created, not one central banking reserve, but, in the end, twelve regional, or district, banks, each to keep the reserves of its district. The Jacksonian tradition of opposition to a central bank 1 in part helps to explain this; in part the contemporary congres sional investigation and discussion of the so-called "money trust" and the consequent desire to decrease the importance of "Wall Street" and of New York City banking power.

On the accompanying map (Fig. 1) are given the outlines of the districts as constituted and altered down to § 2. The Federal Reserve Board. At the head of the banking system stands the Federal Reserve Board of seven members, five of them appointed by the President and Senate of the United States for this purpose, and two serving ex, officio—the Secretary of the Treasury and the Comptroller of the Currency. One of the five shall be designated by the President as Governor and one as Vice-Governor of the Board. But the secretary of the Treasury is ex-officio chair man The term of the appointive members was fixed at ten years and the salary at $12,000 a year.

The powers of the Board are numerous and important. The Board is made the head of a real system of banking, the twelve parts of which can, in times of emergency, and at the Board's discretion, be compelled to combine their reserves by means of tending to each other (rediscounting), to the very limit of their resources, at rates fixed by the Board. By this means the reserves of the several district banks may be "piped together" and thus be practically made into one cen tral bank under the Board's control, although centralization was in outward form avoided by the bill. Alongside of the Reserve Board is placed a Federal Advisory Council, con 1 See ch. 8, f 1.

2 The law provided that an organization committee should designate not less than eight nor more than twelve cities as Federal Reserve cities, and should divide the continental United States, excluding Alaska, into districts each containing one such city. Twelve districts were designed. Whenever, therefore, the act speaks of "not less than eight nor more than twelve," or of "as many as there are Federal Reserve districts," we may now say twelve. See map, Figure 1, ch. 9.

sisting of one member from the board of directors of each of the twelve district banks. This council has only the power to confer with, make representations and recommendations to, and call for information from the Federal Reserve Board.

§ 3. Federal Reserve banks. The twelve Federal Reserve banks, which opened for business November 16, 1914, are institutions of a type new in our financial history. They are "banks for banks," that is, for the "member banks" in their respective districts. Every national bank must, and any state bank or trust company may (on agreeing to comply with reserve and capital requirements for national banks and to submit to federal examination), subscribe for stock to the amount of 6 per cent of its capital and surplus, and thus be come a "member bank." The capital of each Federal Re serve bank was to be at least $4,000,000; in fact, only two of those organized (Atlanta and Minneapolis) had at their open ing less than $5,000,000 capital ; the largest (New York) had $21,000,000 ; and the average was $9,000,000. The member banks receive dividends of 6 per cent, cumulative, on their paid-in shares of capital, and (beginning 1921, by amend ment) all remaining net earnings are added to surplus until it amounts to 100 per cent of the subscribed capital ; after that 10 per cent shall be added to surplus and the rest goes to the government as a franchise tax. By the end of 1920 the total surplus of the system exceeded the subscribed cap ital, and only two of the banks (Cleveland and Dallas) had less than 100 per cent surplus.

Each reserve bank has nine directors, consisting of three classes of three men each. Classes A and B are elected by the member banks by a system of group and preferential voting designed to prevent the large banks from outvoting the smaller ones. Directors of class A are chosen by the banks to repre sent them, and are expected to be bankers; those of class B, though chosen by the banks and though they may be stock holders, shall not be officers of any bank, and shall at the time of their election be actively engaged within the district in commerce, agriculture, or some other industrial pursuit. Directors in class C are appointed by the Federal Reserve Board, one of them being designated as chairman of the board of directors and as Federal Reserve agent. They rep resent the public particularly, and may not be stockholders of any bank.

Any Federal Reserve bank may: a. Receive deposits from member banks and from the United States.

b. Discount upon the endorsement of any of its member banks negotiable papers, with maturity not more than ninety days, that have arisen out of actual business transactions, but not drawn for the purpose of trading in stock and other investment securities.

c. Purchase in the open market anywhere various kinds of negotiable paper.

d. Deal anywhere in gold coin and bullion.

e. Buy and sell anywhere bills, notes, revenue bonds, and warrants of the states and subdivisions in the continental United States.

f. Fix the rate of discount it shall charge on each class of paper (subject to review by the Federal Reserve Board).

g. Establish accounts with other Federal Reserve banks and with banks in foreign countries or establish foreign branches.

h. Apply to the Federal Reserve Board for Federal Reserve notes to be issued in the manner below indicated.

§ 4.

Federal Reserve notes. In 1914 there were outstand ing about $750,000,000 of what we may now call the old-style bank-notes (bond-secured). These were not retired by the new act ; but the law was shaped with the purpose of retir ing them at the rate of about $25,000,000 a year, so that they would all disappear from circulation in thirty s These notes were all secured by the deposit of bonds of the United States, a large share of them bearing interest at the artificially low rate of 2 per cent. Two per cent. was less than the market rate for Whenever the banks having old-style bank-notes outstanding desire to retire any of their circulating notes, the Federal Reserve banks may be required by the Federal Reserve Board to purchase the bonds in due quota (not to exceed $25,000,000 in any one year). On the deposit of these bonds with the Treasurer of the United States, the Federal Reserve banks may receive other circulating notes (essentially of the old style) called Federal Reserve bank-notes, or may receive 3 per cent bonds not bearing the circulating privilege.

The new kind of notes provided by the act are called Fed eral Reserve notes. They are not secured by the deposit of government bonds, but they are secured beyond all question in other ways. First, they are obligations of the United states receivable for all taxes, customs, and other public dues, and redeemable by the latter in gold or in lawful money (which includes greenbacks, Treasury notes, gold certificates, and silver dollars). Thirdly, their credit and prompt re demption is insured by certain elastic rules as to re serves in gold which must be kept for the redemp tion of outstanding notes. Fourthly, they are secured by collateral, consisting of notes and bills accepted for re discount from member banks, which must be deposited by a Federal Reserve bank with the Federal Reserve agent of its district, dollar for dollar for every note it receives. Fifthly, the notes become "a first and paramount lien on all the assets of the bank." This is what gives the notes their character of asset currency. It is apparent that the notes unite in a manner without example the characteristics of asset bank notes with those of political paper money' government loans, for 3 per cent bonds without this privilege sold above par. Therefore these 2 per cent bonds were held almost exclu sively by banks, and would have lost a good share of their value had the note-deposit privilege been withdrawn.

4 The Act does not explicitly say by whom the notes are issued: it says that they are "to be issued at the discretion of the Federal Re serve Board"; that "the said notes shall be obligations of the United States." Further on the notes are spoken of as "issued to" a Federal Notes, it will be observed, are issued only on request of a Federal Reserve bank, and not by or on request of the mem ber lianks. After the notes have been issued, the bank may re circulation by months until the latter part of 1920, a level for several months as credits began to be curtailed, and a fall beginning the first of 1921.

duce its liability any day by depositing lawful money with the Federal Reserve agent, who is right there in the bank. The Federal Reserve banks and the United States Treasury Reserve bank, and again as "issued through" a Federal Reserve bank, but not by it. But the phrase occurs (sec. 16), "its [i. e., the Federal Reserve bank's] Federal Reserve notes." The notes thus are technically issued by the United States, but not as ordinary political (fiat) money, for they are not given a forced circulation by the government in pay ing its indebtedness. But the banks "shall pay such rate of interest on" the amounts of notes outstanding as may be established by the Federal Reserve Board (i. e., to the government of the United States). Practically the notes (as respects choice of time of issue, amounts, profits from them, commercial assets to secure them and to redeem them) are asset currency issued by the several Federal Reserve banks, must promptly return to the banks through which they were issued all notes as fast as they are received, and "no Federal Reserve bank shall pay out notes issued through another on penalty of a tax of ten per centum." This regulation does not apply to the member banks, but its effect must be to keep notes from circulating long in any district except that for which they were issued.

§ 5. Reserves against Federal Reserve notes. The rule applying in normal times to reserves against note issues is that each bank must provide a reserve in gold equal to 40 per cent "against the Federal Reserve notes in actual circulation, and not offset by gold or lawful money deposited with the Federal Reserve agent." At least 5 per cent is to be on de posit in the Treasury of the United States. The proportion of reserves to the liability for note issues by any bank, how ever, may be allowed to fall below 40 per cent, on condition that the Federal Reserve Board shall establish a graduated tax of not more than 1 per cent per annum (it evidently might be made less if the Board chose) upon such deficiency, until the reserves fall to per cent and thereafter a graduated tax of not less than per cent on each additional per cent, deficiency or fraction thereof!' This tax must be paid 1,y the Reserve bank, hut it must add an amount equal to the tax to the rates of interest and dis h This may be shown in the following table: count charged to member banks. The effect of these rules is to give a power of note issue in time of emergency without compelling the Reserve banks to lock up their reserves held against notes. Suppose, for example, that the circulating notes were in normal times $1,000,000,000, and the reserves, therefore, were $400,000,000, and the rate of discount 5 per cent. Then the circulation might be doubled with the same reserves, the proportion thus falling to not less than 20 per cent of outstanding notes, and the rate of discout to cus tomers rising to 13.5 per cent (5 plus 8.5). Or, to take a most extreme supposition, suppose that the withdrawal of gold had been so great as to reduce the reserves against notes to $50,000,000; yet outstanding notes might still be doubled, becoming $2,000,000,000, the proportion of reserves falling to 2.5 per cent, the rate of discount rising to 24 (5 plus 19).

the twelve Federal Reserve banks, combined, in the first seven years. It was above 80 until 1917, and about 90 in April just as we entered the war. It fell to about 55 in the war period, where it remained until the latter part of 1919, and fell to 40 the first half of 1920, the period of greatest speculation and highest prices. The reserve of some of the banks fell several points below 40. (The average reserve re quirement against notes and deposits together was about 38.) Recall this chart when considering if 11-13 below.

§ 6. Reserves against Federal Reserve bank deposits. Every Federal Reserve bank shall, under normal conditions, maintain reserves in lawful money of not less than 35 per cent against its deposits. But the Federal Reserve Board may suspend any reserve requirement in the Act for a period not exceeding thirty days and from time to time renew the sus pension for periods not exceeding fifteen days; but in that case it must establish a graduated tax upon the amounts by which the reserve requirements may be permitted to fall be low the levels specified as to note issues. Although the amount of the tax on the deficiency of reserves against de posits is not indicated in the act, it is plainly the thought that the Board will follow somewhat the same rule as in re spect to excess note issues. The great discretionary power as to reserve requirements thus lodged in the hands of the Board makes possible at times of emergency the use of the reserves both of the Reserve banks and of the member banks, down to the last dollar, if need be, without violation of law. This gives practically unlimited opportunity to expand credit both by the issue of bank-notes and by discount and deposit in periods of financial crises.

§ 7. Reserves in member banks. Important changes were made in the rules as to the reserves against deposits that had been in force under the old national banking system. A new distinction was made between time and demand de posits. Time deposits are defined as those payable after thirty days or subject to not less than thirty days' notice ; and demand deposits as those payable within thirty days. In every case the reserve requirement against time deposits is now only 3 per cent (first 5 per cent, but later amended). This gives encouragement to banks to maintain savings de partments and to make agricultural loans. The Federal Re serve banks take the place of the banks in reserve and cen tral reserve cities as the depositories of funds that were' The complete application of the new• rule was deferred for a period of three years from the passage of the act.

counted as a part of the reserves of member banks. The legal minimum reserves for country banks (as fixed by amend ment June, 1917) is 7 per cent; for banks in reserve cities 10 per cent; for banks in the three central reserve cities 13 per cent, all of which must be kept in the Federal Reserve bank, till-money not being counted as part of the reserve.? These legal requirements as to proportion of reserves, as compared with those of national banks under the old law, are smaller by 53 per cent, 60 per cent, and 48 per cent, re spectively (though practically less reduced because till-money is no longer counted). The large increase in lending power thus given to the member banks explains in part the large expansion of banking credit between 1915 and 1920, the en couragement of speculation in 1918-1920, and the large earn ings of most member § 8. Rediscounts by Federal Reserve banks. More im portant than any other single feature of the act is that by which each Federal Reserve bank is to rediscount notes, drafts, and bills of exchange arising out of actual com mercial transactions, when endorsed and presented by any of its member banks. This, quite apart from the note issues,

gives a power to the banks collectively, under the general supervision and control of the board, to expand credits in definitely at any time for real business purposes. This en ables any business man who can offer commercial paper of sound quality to borrow on it at some rate of discount, even in the most stringent times. And, in turn, every member bank should be able at such times to rediscount such paper 7 By amendment, September, 1918, banks in outlying districts of central reserve cities, or of reserve cities, may, by affirmative vote of five members of the Federal Reserve Board, be permitted to hold reserves less than the usual 13 and 10 per cent, respectively.

8 The original act reduced the legal minimum of reserves required of each of the three classes of banks to 12. 15, and IS respectively, and laid down an over-ingenious rule for the proportion that must be left in the member bank's own vaults and in the Federal Reserve Bank, respectively, or that might be in either place.

and thus secure credit toward its reserve requirement on the books of its Federal Reserve bank. Suppose, for example, that a member bank (in a central reserve city) saw its re serve in the Federal bank fall below 13 per cent of its de mand deposits. It could by rediscounting $13,000 worth of notes increase by $100,000 the amount to which it might legally extend credit to its customers. The deposits of the Federal Reserve bank would then be increased $13,000, against which it must have a reserve of 35 per cent or culation of the Federal Reserve banks during the war period, and their continued expansion after the end of the war. This caused the "free gold" (the margin of gold above the legal minimum requirements) to decrease until the middle of 1920. This was getting nearer and nearer to the point where discount rates must legally be raised (in some dis tricts the point was passed), and finally compelled a contraction of credit, which then came quickly and violently.

$4550. If the reserves of any Federal Reserve bank fall too low, it can in turn rediscount its paper with the other Federal Reserve If the time comes when no one of the twelve banks can longer maintain a 35 per cent reserve 9 See on "piping" provision, 2, above.

the Board may reduce or suspend the requirement, levying a tax graduated according to the deficiency. The provision here for elasticity of credit, combined with union and solid arity of all the central banking reserves of the country to meet unusual demands in emergencies, exceeds any needs that can be expected to arise.

§ 9. Changes in national banks. There was thus created a national system of reserves, but it will be observed that membership in the new system of the Federal Reserve banks was not limited to national banks, but was opened on equal terms to banks organized under state laws. While in most respects the general banking law remained as it was, cer tain changes of importance were made. The percentage of reserves required of all member banks (as above indicated) is a substantial reduction of the former requirement for na tional banks. In some other respects the powers of national banks were enlarged. One with a capital and surplus of $1,000,000 may with the approval of the Board establish foreign branches, and one not situated in a central reserve city may lend on farm-lands for a term not longer than five years, but not to exceed one third of its time deposits or 25 per cent of its capital and surplus. National banks may now be granted permission by the Board to act as trustee, executor, administrator, or registrar of stocks and bonds, thus having the rights that have proved in many cases to be of advantage to trust companies organized under state laws.

§ 10. Operation in the pre-war period. Nearly a year was spent preparing for the opening of the Federal Reserve banks. The organization committee, after holding meetings in many cities, divided the country into twelve districts. Officers and a staff of employees had to be selected for each of the twelve banks, part of the capital had to be paid in, bank buildings and equipment had to be secured, and many details arranged.

It was fortunate that the district banks were nearly ready to begin operations when, August 1, 1914, the great European war broke out. The able appointees to the Federal Reserve Board commanded the confidence of the bankers and of the public. The knowledge that the system would early begin to function was reassuring in the grave financial stress of the next three months, and the opening of the district banks November 16, 1914, at once made possible the release for commercial uses of cash reserves and credits to meet the needs of reviving business 10 The history of the Federal Reserve system for the first seven years of its operation may be divided into (1) the pre-war period, from the opening of the banks till our entrance into the war on April 6, 1917; (2) The war time period, till the armistice, November 11, 1918; (3) the post-war period of expansion to May 1920 ; the period of falling prices and contraction thereafter (not yet ended at this writing).

Two years and nearly five months elapsed from the open ing of the banks until the United States entered the war. This period was filled with work of organization, redistricting, preparation of rules and regulations, development of plans for the clearing of checks between Federal Reserve banks and between member banks, and the admission of state banks (a few of which entered the system). Growth was steady but slow up to April, 1917. A general idea of the development of the system can be gained from a study of the charts show ing some of the more important statistical data. Federal Reserve notes were issued to the amount of $36,000,000 and net deposits were $707,000,000, making $113,000,000 total liabilities against which reserves must be held; whereas the reserves held equaled 89 per cent of liabilities. For several months before our entrance into the war the system increased the reserve percentages, absorbing some of the gold that was flowing into the country and, consequently, reducing some what its "earning assets," which fell to $168,000,000. Little use had as yet been made by member banks of the re 10 See § 7 above.

discount privilege, because, as the new legislation had re duced their own reserve requirements, they had "plenty of slack" lending power, which only gradually had begun to be taken up. Nevertheless, all of the Federal Reserve banks, before the end of 1916, had earnings in excess of expenses, and one after the other begin to declare dividends and to increase their surpluses, to the surprise of many who had pre dicted that this would not be possible.

§ 11. Operation in the war period. With our entrance into the war the Federal Reserve system, and our banking institutions altogether, entered upon a growth that has been characterized by the Federal Reserve Board as "in many ways the most remarkable in the financial history of the World." At the beginning of the period the volume of busi ness at the Federal Reserve banks was too limited, while the available resources of member banks were too large to enable the Federal Reserve institutions to exert more than an in cidental influence upon credit uses. The period of belliger ency changed these conditions, and at its close the Federal Reserve banks stood as the holders of nearly the entire re serves of the country, the directors of the one unexhausted reservoir of banking credit in the The Federal Reserve system began at once to act as the fiscal agency of the government, and continued throughout the war period and the post-war period, including the fifth (or Victory) loan, to fill the central role in fiscal operations. During this period the net deposits of the system increased 21/2-fold, the notes in circulation increased 7-fold, and earning assets in creased 14-fold. Paper admissible under the rules for re discount, especially that based on governmental securities, which were given preferential treatment and rates, increased greatly in amount. Member banks made use extensively of 11 Paraphrased from editorial statement in the "Federal Reserve Bul letin," Dec. 1, 1918, p. 1164.

Federal Reserve bank during the war period, from barely more than a tenth of a billion dollars to over two billions at the date of the armi stice. Observe that after the war, as the member banks availed them selves freely of the rediscount privilege, the total rediscounts rose ra pidly by more than another billion, despite the decrease of war paper. The "other discounts," which meant commercial loans, must be looked upon as in large part the cause of the commercial speculation, "profit eering," and inflated prices, which marked the period from the middle of 1919 to the middle of 1920.

the rediscount privilege, and took the proceeds, either in notes or in credit, to their reserves, this being a source of large earnings for the Federal Reserve banks. The accompanying table shows the net earnings by years: § 12. Gold hoards and artificial interest rates. The war time influence and activities of the Federal Reserve Board, and of those controlling the various district banks in general, merit high praise. They steadily urged the sound economic policy of industry, thrift, and self-denial on the part of the people. They fostered no illusions that the magic of bank ing credit or of. paper money could take the place of real production of the goods needed, and of real abstaining from the goods not needed, for the prosecution of the war. Al though the banks (district and member) found it necessary to take and hold for a time an increasing proportion of the successive loans ("war paper"), and the local banks to lend heavily at low rates of interest to customers on the security of war paper, great efforts were made to get the public to pay in full and to relieve the banks of this burden.

In two particulars the policy of the Board is more open to question. The Board showed a mercantilist bias in favor of an artificial heaping up of gold in this country, as shown in its fathering and defense of the gold embargo. It de fended this on the ground, first, that it was desirable to con serve the available gold supply on the assumption that this would make the country stronger economically. But this could but have the effect, in the end, of artificially inflating our prices at home, of increasing the amount of Liberty bonds to be issued, and of causing the value of the American dol lar to depreciate in the countries from which at the time we were buying in excess of our sales. The Board thus con tradicted its own sounder doctrine that goods, not artificial inflation of credit and prices, was what was needed to win the war. The Board further attached undue importance to maintaining low interest rates artificially at a time when the natural trend of rates was upward. This could but en courage the increased use of credit by the public, and thus neutralized the Board's own sound policy of keeping down the use of credit for purposes less urgent or of a speculative nature. Throughout the war period (and for a full year thereafter) our banking practice was in violation of the basic principle of central rediscount, "well established in the tradition of Europe, that the official rate of rediscount should be above the market rate." Fig. 6. Chapter 9. The increasing wholesale prices appear to be even more nearly parallel with the rapidly expending bank deposits than with the monetary circulation.

§ 13. The post-war period. At the sudden termination of military operations, the Federal Reserve Board at once gave expression to wise warnings against the inflation and specula tion that usually have occurred at such a time. It declared the immediate problem to be that of "preventing credit from expanding too far, and so far as practicable of reducing any excess that already exists." It again counseled thrift and the acceptance of falling prices by the people, and limitation of credits by the banks. If this policy could have been made effective, the price index of armistice month (which was 206) might have been the peak, and prices might have moved slowly downward to lower levels. As it was, prices wavered, fell as low as 197 in February, 1919, rose again, then with a bound went up in July, 1919, to 219, and still upward to the peak of 272 in May, 1920, then to plunge steeply down ward to 151 in May, 1921. Enormous evils of speculation and undeserved profits to some, unjust burdens of rising prices to many others, great waste of productive effort, and finally much unemployment and suffering in the period of crisis, would have been avoided if the price readjustment downward had progressed evenly from the date of the armis tice.

To fix the blame precisely is not easy, or indeed possible; but a large part of it must be traced back to the policy of the United States Treasury in fixing the rate of interest on all its issues of loans artificially below the market rate. rAs a result the bonds had to be marketed more by appeals to patriotic motives, enforced by many measures of popular coercion to induce and compel the public to subscribe to the loans, and still further supported by preferentially low in terest rates by member banks to enable customers to carry bonds on bank loans, and preferentially low rediscount rates on such paper presented for rediscount at the Federal Re serve banks. At one time the total of war paper held by all banks (including the Federal Reserve), exceeded $6,000, 000,000, and the very preference given to it for rediscount was a premium to active business not to pay off the loans but rather to use funds for other purposes in a period of rapidly rising prices. The Treasury and the Federal Re serve banks, in this policy of artificially low interest rates, had "caught a Tartar," and did not know how to let go without causing a slump in the price of Liberty bonds, which nevertheless was sure to occur. The per cents (which composed the larger part of those outstanding) fell some what below par early in 1919, fell to 92 in December, 1919, as discount rates and rediscount rates were raised, and as low as 82 in May, 1920. Large quantities of the bonds appear to have been thrown upon the market by holders who had been carrying them on credit. The whole policy above dis cussed must be looked upon as a case of price-fixing by which the rate of interest on government loans was kept artificially lower through an unsound use of government con trol over banking policy. The results were speculation, infla tion of prices, and eventual disillusionment and loss to in vestors and to large numbers of other citizens.

§ 14. Future of the Federal Reserve system.

The Fed eral Reserve system rendered valuable service during the war, and was a stabilizing influence in the period of industrial de pression that began midway in 1920. While there has been enormous shrinkage in prices, in valuations of goods in stock, in securities, and in "paper profits," and inevitable loss to many investors and business men, the "retreat" has been more orderly than in previous financial crises, and at no time has the banking system as a whole been anywhere near danger of collapse, as in former crises. The Federal Reserve banks have become an indispensable part of our banking system. Probably valuable lessons have been learned from the war time experience. It is probable that the use of the rediscount privilege will, in normal times, not be extended to the limit, as in 1919 and 1920, but will be kept in large part in reserve for emergencies. This would result in smaller earning assets and earnings for the Federal Reserve banks, and would make the recent figures in these respects appear abnormal, and not to be expected regularly. Altogether, as a piece of financial machinery, the Federal Reserve system has been a demonstrated success, and doubtless is capable of beneficial development. However, the possibility of political inter ference with banking policy is apparent, and might become a grave danger to the whole financial situation.

REFERENCES.References.

Federal Reserve Board, The Federal Reserve Bulletin. Monthly. Kemmerer, E. W., The A B C of the federal reserve system. Prince ton. Pp. 192. Princeton University Press. 3d ed. 1919.

Phillips, C. A., Readings in money and banking. Ch. XXXI. N. Y. Macmillan. 1916.

White, Horace, Money and banking illustrated by American History. Bost. Ginn. 1914. Bk. III. Cli. XXII and appendices D and E.

banks, notes, bank, board and cent