§ 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.