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transit frequently counted as legal reserve for both a country bank and a reserve city bank. Occasionally such a check, after performing a yeoman service in being counted as legal reserve money by two banks for several days, would be returned as worthless marked "no funds."

Another defect of the domestic exchange system was the expense and trouble, for which it was largely responsible, of requiring heavy shipments of currency back and forth over the country. As previously noted, American money markets are subject to pronounced seasonal swings. At one season of the year the relative demand for bank funds is heaviest in the cotton belt of the south; at another time it is heaviest in the great cereal producing sections of the west and middle west; and at another season it is heaviest in the leading financial centers of the east. This heaviest demand often shifts from one section to another within a very brief period of time. Under our old banking system these shifts carried with them large shipments of currency

shipments amounting in the course of a year to hundreds of millions of dollars—and frequently a shipment would hardly be received and unpacked before a shift in the monetary demand would require it to be sent to another section or perhaps to be returned to the place whence it

came. All this involved expense, including packing, shipping, abrasion, insurance and interest items.

A second phase of the exchange difficulties under the old banking system was that relating to the foreign exchanges.

Foreign Exchange Difficulties Our foreign trade was financed largely through London, and those parts of the trade which were with the Orient and with South America were financed almost entirely through London. London is the world's financial center and it is but natural that we should utilize to a substantial extent her unrivalled facilities for financing oversea trade. The trouble was not that we utilized them, but that we utilized them too much and were unduly dependent upon them. This involved several difficulties, only two of which need be mentioned here. In the first place, payments through London gave rise to an additional foreign exchange operation, which normally added to both the expense and the risk of financing a shipment of goods. In the second place, the fact that invoices, bills of lading and other documents passed through the hands of foreign banks and of South American or oriental branches of foreign banks gave to our foreign competitors “in

FEDERAL RESERVE SYSTEM

side” information concerning our foreign business-information that was often used to their advantage in competition with our own citizens.

We now come to the fourth and last of the defects in our old banking system, which were outlined at the beginning of this book. That is a defect which is concerned with the relations of our banking system to the federal treasury.

CHAPTER V

DEFECTIVE BANKING MACHINERY FOR FEDERAL

GOVERNMENT

The general funds of the treasury were kept in part in the country's nine sub-treasuries, and in part in national banks, which qualified as depositories of government funds. There were 1,584 such national bank depositories at the close of the fiscal year 1914. The apportionment of the funds between the sub-treasuries and the banks on the one hand, and among the depository banks on the other hand, was entrusted to the Secretary of the Treasury. The treasury funds to be thus apportioned varied widely from year to year and from season to season.

In a number of respects this system worked badly. Briefly summarized, the defects were as follows: (1) It led to the continual hoarding in treasury vaults of large sums of money involving substantial administrative expenses and a heavy loss of interest. (2) At certain seasons of the year the Government's receipts greatly exceed its disbursements, as for example

at the times when tax payments are heaviest; while at other seasons, as for example when pension money or interest on the public debt is being paid, the disbursements exceed the receipts. In the former case the money market was disturbed by the Government's suddenly withdrawing large sums from circulation and thereby contracting the currency. In the latter case it was disturbed by the sudden pumping into circulation of large sums of money. These operations, when on any substantial scale, tended to affect the interest rates on call loans and the prices of speculative securities. The task imposed upon the Secretary of the Treasury, therefore, of apportioning these large government balances among the banks and the sub-treasuries was a difficult one and one which placed too great · power and responsibility over the money market in the hands of a government official. It also led to criticism and jealousy among depository banks. (3) The system caused depository banks to rely unduly upon the Secretary of the Treasury for aid in the form of increased government deposits in times of financial pressure, instead of depending upon themselves and keeping “their houses in order" so as to be ready for emergencies. “The grandfatherly attitude of the Secretary of the Treasury toward the banks"

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