The earliest work of the Federal Reserve system, like so much of its later opera tions, was of an unexpected nature. The system had not yet been organized when the breaking out of the European War brought unexpected demands to bear upon the country. There was a heavy drain of gold to Europe and Congress hastily revised the Ald rich-Vreeland Act in an effort to prevent panic. Many currency associations were organized and about $400,000,000 of notes were issued during the autumn. When the reserve banks came into formal existence in November they found themselves called upon to assist in the operation of retiring these notes—an import. ant function, but one that brought little actual profit to them.
Moreover, the abnormal movement of gold out of the country which had occurred during the first days of the European War was fol lowed by an equally abnormal movement of gold into this country. Very great sales of our raw materials and manufactured goods abroad were paid for largely. in gold and bank reserves were thus much raised. The change in reserve requirements made by the Federal Reserve Act had also set free a large balance of lending power. Due to those two factors, the demand for accommodation at Federal Reserve banlcs was not great It was only af ter the entry of the United States into the European War that they really became active in their rediscount operations. Earnings for the first two years, 1914-15, were only 2.7 per cent above expenses; for 1916 about 5 per cent; but in 1917 they reached about 18 per cent The law requires that the Federal Reserve banks, after paying all necessary expenses, to gether with 6 per cent cumulative dividends to their stockholders, shall carry one-half of ex cess profits remaining to their surplus fund until the surplus amounts to 40 per cent of the capital, and shall_ pay the other half of ex cess profits to the United States government as a franchise tax, the entire excess profits to be paid to the government after the surplus of a Federal Reserve bank reaches 40 per cent of its capital. The Federal Reserve banks of Boston, New York, Chicago, Atlanta, Rich mond and Minneapolis have paid their divi dends to stocicholders to 31 Dec. 1917 and at the same time paid into the treasury of the United States as a franchise tax the sum of $1,134,234.48, the amounts being paid by the banks as follows: Eloston $75,100 00 Atlanta $40,000 00 New armk 649,363 57 Richmond 116,471 73 Chicago 215,799 18 Minneapolis .. 37,500 00
These banks have also established on their books a surplus fund in amounts equal to the sums paid the government.
It is to be noted, however, that practically since their opening the banks have been sub ject to very abnormal conditions,— first, in consequence of lack of demand and later be cause of the existence of unusual and excep tional demand for accommodation based on a very special kind of paper— that secured by government obligations. The banlcs have not, therefore, had full opportunity to exert their influence upon the commercial paper of the country or to do more than take the prelim inary steps toward the creation of an open discount market It was with a view to the creation of this discount market that the act gave to the Fed eral Reserve Board power to regulate the conditions under which commercial paper should be made and discounted at reserve banks. Pursuant to the perrnission thus given, the Board early defined the chief types of commercial paper, including the bill of ex change accepted and unaccepted, the promis sory single-name note and the commodity note — with warehouse receipts as collateral. In all cases the paper was required to be the result of genuine commercial non-speculative trans actions and to have a specified short maturity. Acting further in accordance with the terms of the law, the Board authorized the Reserve banks to buy discountable paper in the °open market"— that is, without member bank en dorsement, should they desire.
This open market power was availed of by the Reserve banks dulling .their first two years of slack earnings. They bought widely of acceptances and also of government and municipal obligations and at one time had thus invested more than $200,000,000 as a means of earning needed revenue.
The first two years' development in com mercial paper was, however, notable for the introduction of the acceptance or accepted bill of exchange into American banking pmctice. Unusual stimulus to our foreign trade gave to the foreign bill or bankers' acceptance in such trade a degree of recognition it could not otherwise have attained. Although only a moderate amount of this paper was obtained by reserve banks, the fact that it had entered the market as a distinct type of paper for gen eral investment was rendered possible by the new system.