of the national system of clearing and collection just described. At present there is a decided difference of opinion among bankers with respect to the maintenance of par collections on their present basis due to the effect on banking profits. The service of the Reserve system in this regard is unquestioned, however, and constitutes one of its outstanding achievements even if it should be eventually curtailed or even destroyed through opposition on the part of individual banks.

VII. AID TO FARMING COMMUNITIES.

There has been widespread controversy as to the service rendered by Reserve banks to the farming community, but a careful scrutiny of what it has done both during and since the war leaves no doubt on that score. The Agricultural Commission of Inquiry of 1921-1922 made a careful investigation into the work of the system and found that it had loaned freely to the farmer, although the Commission was inclined to blame it for withdrawing its aid too quickly or too extremely. According to the Commission's figures the member banks of the Reserve System, supported and sustained by the Reserve banks themselves, had at one time advanced about $4,000,000,000 in loans in agricultural and semi-agricultural counties. The Reserve System could not have done its work except for some method of interreserve bank rediscount. A plan was installed whereby the strong Reserve banks in the east and north took over the paper of the weaker Reserve banks in the south and west, thereby giving these Reserve banks resources which they were then able to lend to their customers. Thus very material aid was given to the latter, and they were sustained in their enterprises as long as there was any promise of success. The inter-reserve bank rediscounting did not become necessary until after the reaction of 1920 had set in, and it continued for three years more or less considerably, after which time it was discontinued due to a better condition of the banks in the outlying districts. The experience showed that the Reserve System was an engine of utmost effectiveness and power in the work of transferring resources from

one part of the country to the other and thereby providing for the seasonal financing of crops or for the steady financing of portions of the country which found themselves without immediate resources. It should be added that the experience of the Reserve System has shown that there is hazard in this kind of inter-district loan extension. Although, during the war and immediately after it, bank failures were almost unknown, the reaction which set in after 1920-1921 dragged down a good many banks particularly of the smaller capitalization and inflicted immense losses upon many of the larger banks. A climax developed in 1924 when a record high figure of over 750 bank failures was reached. This experience showed clearly that while the Reserve System could effectively sustain banks against sudden pressure due to panic or lack of confidence, there was nothing in its organization which could be expected to offset the effects of bad banking or hazardous loans. Although Reserve banks had been vested with large powers in examining their members, it may be questioned whether all of them have used these powers very effectively, while of course they have no authority of the kind over nonmembers.

VIII. GENERAL CONCLUSIONS.

The general conclusions to be drawn from the experience of the Federal Reserve System amply warrant the confidence expressed in it at the outset as a feasible and successful method of applying the idea of central or co-operative banking in the United States. It has improved the commercial paper of the country, ably financed a great war, vastly improved the methods of collection and remittance, economized the use of gold and reserve money in general, furnished an unquestionably sound currency and created a condition of unwavering confidence in the general solidity of our banking system. Its faults have been found in the acceptance of political dictation, a consequent inability to apply discount rate control of credit, a disposition to permit undue centralization to occur in some of the Reserve banks, a failure to furnish the right kind of leadership in

domestic credit and in foreign trade, and generally a lack of constructive ability, so far as the working out of the fundamental ideas involved in the application of central banking was concerned./Already the discussion of problems connected with the rechartering of the Reserve banks is on foot, and, from this time forward, no small part of the attention of the commercial and banking community must be given to the further development of our central banking mechanism.

CHAPTER XXIX

GOVERNMENT AND BANKING

I. RELATIONSHIPS BETWEEN GOVERNMENTS AND BANKS. IN almost all modern countries the business of banking has assumed a special relationship to the government; for there has been a tendency to exercise an increasing degree of surveillance over essential businesses of all types, especially over those which occupied a predominant influence. Banking would not in any case have been exempt from this kind of supervision, but the supervision of banking is probably older than that which is exercised over most other kinds of business. Historically it may be traced to the fact that in early modern times the state had definitely assumed the function of issuing money; while, when banking first began its modern development, the assumption that bank notes were money and that they were therefore to be controlled or regulated as a matter of state function or duty was likewise generally accepted. Within more recent times, however, specific business relationships between the government and banking institutions have come to be definitely accepted. Such relationships may be regarded as assuming the following principal forms:

1. In some countries the government is either whole or part owner of a central banking institution, or where it owns no stock it appoints the officers or directors of such a banking establishment. To such institutions is committed a sort of general oversight over the financial community at large. This may be informal in its scope, but nevertheless very thorough.

2. Elsewhere governments provide for the regular examination and inspection of banks, giving publicity to their reports, and through their officers requiring that banks conform to certain well-marked legal requirements.

3. In practically all countries governments have large revenues which they must receive and disburse through banking channels, and they thus become customers of banks on a large scale. In this capacity, their receipts and disbursements through the banks have a direct influence upon the position of the whole banking community and affect its soundness.

4. In some countries, too, the government has undertaken, either through direct lending or through guaranteeing the operations of private institutions, to furnish funds under specific conditions to individuals or corporations engaged in particular kinds of business which are supposed to be in need of such support or aid.

It is necessary to examine briefly these various types of relationship between governments and banks and to see how they affect the general organization of the banking system.

II. GOVERNMENT OWNERSHIP OF BANKS.

Cases in which there is complete or partial government ownership of banking institutions should probably be considered as distinct from those in which the government merely controls or directs banking through the appointment of officers or directors of such institutions, yet the general principle is the same in both cases. The latter kind of participation is considerably the more common, but the former is still a widespread type of government activity. Examples in American history may be found in the First and Second banks of the United States (see pp. 396-401), while in contemporary life perhaps the best illustration is afforded by the Riksbank, or state bank of Sweden-completely owned and operated by the government. In the First and Second banks of the United States the federal government was a minority stockholder, controlling twenty per cent of the shares; in the Riksbank, or state bank of Sweden, the government is sole owner, and the institution represents the government in its financial capacity and does a regular banking business in all branches. A somewhat similar instance is that of the Philippine National