CHAPTER VI

PAGES

HOW THE FEDERAL RESERVE SYSTEM IS REMEDYING THE OLD

EVIL OF THE DECENTRALIZATION OF AMERICAN BANKING.. 28-49

Division of country into twelve federal reserve dis-

tricts, 28-29.-Membership in federal reserve system,

29-31.-Democracy of federal reserve banks' plan of or-

ganization, 31-33.- Coordination of twelve federal reserve

banks and centralization of their control provided for by

means of federal reserve board, advisory council, and class

C directors of federal reserve banks, 33-35.-District cen-

tralization of bank reserves, 35-38.-Mobilization of re-

serves, 38-39.-Inter-district mobility of reserves, 39.-

Rediscounting by one federal reserve bank for another,

39-42.-Open-market operations, 42-44.-Creation of a

broader discount market for commercial paper, 44-45.—

Increasing use of the trade acceptance, and advantages of

trade acceptance over open-book account credit, 45-46.—

The bank acceptance, 46-48.-Inter-district mobility of

reserves promoted by increasing use of trade acceptances

and bank acceptances, 47-48.-Intra-district mobility of

reserves increased by federal reserve system, 48-49.

CHAPTER VII

CREDIT ELASTICITY UNDER THE FEDERAL RESERVE SYSTEM.... 50-65

Provisions of federal reserve act for bond-secured

national bank notes, 50-51.-The federal reserve bank

note, 51.-Federal reserve notes, 51-52.-Their elasticity,

52-57.-Elasticity of deposit currency obtained in a num-

ber of ways: Removal of old rigid legal reserve require-

ments, 58. New legal reserve requirements less rigid

and may be suspended in times of emergency, 58-61.

Privilege of rediscounting at federal reserve banks, 61-

62. Privilege of borrowing on collateral notes with short

maturities, 63.-Contractility of circulating credit un-

der federal reserve system, 64-65.

CHAPTER VIII

DOMESTIC AND FOREIGN EXCHANGE UNDER THE FEDERAL RE-

SERVE SYSTEM

Provisions of federal reserve law concerning domestic

exchange, 66-69.-Early experiments of the federal reserve

authorities as regards the clearing and collection of

checks, 69.-Present clearing and collection system,

70-75.-The gold settlement fund, 75-78.-Foreign ex-

change, foreign agencies and branches of American banks

organized for foreign business under the new banking

system, 79-83.

66-83

CHAPTER IX

PAGES

THE FEDERAL RESERVE SYSTEM AND THE FEDERAL TREASURY.. 84-92

Federal reserve banks authorized by law to be deposi-

taries of government funds, 82-83.-Extensively used as

depositaries by Secretary of the Treasury, 83-87.-Fed-

eral reserve banks as fiscal agents of Government render

invaluable services in the financing of the war, 88.-

President Wilson's appeal to non-member banks to join
federal reserve system as a matter of patriotic duty

88-90.

APPENDIX A

COMBINED BALANCE SHEET OF TWELVE FEDERAL RESERVE

BANKS AS OF MARCH 28, 1918, AND BRIEF EXPLANATIONS

OF THE VARIOUS ITEMS..

APPENDIX B

FEDERAL RESERVE ACT AS AMENDED TO MAY 1, 1918, WITH A

MARGINAL INDEX AND WITH CITATIONS OF AMENDATORY

ACTS

93-97

...98-180

APPENDIX C

PROVISIONS OF THE FARM LOAN ACT, APPROVED JULY 17, 1916,

WHICH AFFECT FEDERAL RESERVE BANKS AND MEMBER

BANKS OF THE FEDERAL RESERVE SYSTEM...

APPENDIX D

.181-183

SECTION 7 OF "AN ACT TO AUTHORIZE AN ISSUE OF BONDS TO

MEET EXPENDITURES FOR THE NATIONAL SECURITY AND

DEFENCE,
APPROVED APRIL 24, 1917, WHICH AF-

FECTS FEDERAL RESERVE BANKS AND MEMBER BANKS OF THE

FEDERAL RESERVE SYSTEM"

.184-185

APPENDIX E

THE "PITTMAN ACT" OF APRIL 23, 1918, WHICH PROVIDES FOR

THE SUBSTITUTION OF FEDERAL RESERVE BANK NOTES FOR

SILVER CERTIFICATES

INDEX TO FEDERAL RESERVE ACT AND ITS AMENDMENTS.

INDEX TO TEXT OF BOOK

.186-196

.191-203

.204-208

PREFACE
By

BENJAMIN STRONG, LL.D.

Governor of the Federal Reserve Bank of New York

The federal reserve banks came into being in the month of November, 1914. The passage of the legislation by which they were created had been preceded by five years of discussion, following the financial upheaval of the fall of 1907, such as might have been expected to prepare the way for the considerable changes in banking methods contemplated by the new law.

Notwithstanding, however, that American bankers had gained a better understanding of the deplorable defects in the American banking and currency system, the managers of the new federal reserve banks soon found that the welcome accorded to them by the banks of the country was, to say the least, cool. Business men generally welcomed the change for the better, recognizing the protection which the reserve system afforded them; but nevertheless both bankers and

business men were regrettably ignorant of what it all meant.

It was the influence of the war which demanded that the federal reserve banks be organized as promptly as possible. The best banking machinery and the best banking talent in the country seemed to be required to protect the interests of both bankers and business men. Much was expected from the new system, once it was started. Very shortly, however, immense imports of gold from abroad, general business prosperity stimulated by war profits, and reasonably comfortable conditions in credit and banking, appeared to put the federal reserve banks for the first two and one-half years of their existence into the class of expensive luxuries; in fact, they were regarded as examples of governmental interference with business which were tolerated but, nevertheless, were not appreciated by many bankers.

During this interval, November, 1914, to April, 1917, the system, by slow stages of progress, found itself. The machinery for conducting actual operations was designed and developed far beyond the requirements of the moment. The terms of the Act were perfected where need was discovered, the men engaged in the work became better acquainted with their duties and with each