United States, they are specifically granted the right "to issue debentures, bonds, and promissory notes," but in no event may a corporation have liabilities outstanding in the form of such obligations exceeding ten times its capital stock and surplus.

There are two important respects in which corporations organized under this Edge Amendment will be affiliated with the Federal Reserve system, although these corporations cannot become regular member banks. In the first place, they operate under the supervision of the Federal Reserve Board which is given by the law large powers of examination and control. In the second place, any national bank may invest in the stock of these corporations, subject to the restriction that its total investment in the stock of these corporations and of other banks incorporated in the United States for foreign business shall not exceed ten per cent of the subscribing bank's capital and surplus.

This Edge Amendment has been on the statute books only a few months, and it is therefore too early to say anything definite as to how it will work. There is a widespread interest in the subject and the prospects appear to be good for a substantial development during the year 1920.

As a result of the war and of recent changes

in our banking system, we are now financing directly a large proportion of our foreign trade, and while this proportion may decline in the future, it will probably never go back to the old pre-war figures. As regards the financing at home of our foreign trade, the federal reserve system was established at the opportune time. It is proving to be a great influence in the internationalizing of American trade and American finance.

CHAPTER IX

THE FEDERAL RESERVE SYSTEM AND THE F ERAL TREASURY

The fourth and last of the general defects the old banking system, which were discussed the early part of this book, was the defective ganization of the old system from the standpo of the federal treasury. How is the federal serve system remedying this defect?

The provisions of the federal reserve act c cerning the deposit of government funds are section 15. They are The moneys held in general fund of the treasury, except the five centum fund for the redemption of outstand national-bank notes, and the funds provided this act for the redemption of federal rese notes may, upon the direction of the Secretary the Treasury, be deposited, in federal rese banks, which banks, when required by the Sec tary of the Treasury, shall act as fiscal agents the United States; and the revenues of the G ernment or any part thereof may be deposited

such banks, and the disbursements may be made by checks drawn against such deposits.

"No public funds of the Philippine Islands, or of the postal savings,1 or any government funds, shall be deposited in the continental United States in any bank not belonging to the system established by this act:,2 provided, however, that nothing in this act shall be construed to deny the right of the Secretary of the Treasury to use member banks as depositories."

Many of the advocates of the federal reserve system believed that this section did not go far enough. They believed that the practice of depositing government funds in thousands of banks scattered over the country was a vicious and expensive one, and wished the new law to make the federal reserve banks the depositories of practically all general funds, dispensing with the use of individual banks as depositories and ultimately with the independent treasury system. It was felt by many, however, that the immediate adoption of such a plan would be moving too rapidly and that it was undesirable to limit so narrowly the Secretary of the Treasury, who is

1 The law was later amended so as to authorize, under certain conditions, the deposit of postal savings funds in banks not members of the federal reserve system. See E. W. Kemmerer, Postal Savings, pages 112-116.

2 But see pages 86-87.

responsible for the safety of government funds. The extent to which the Secretary of the Treasury should keep general funds in the federal reserve banks, in member banks, and in the subtreasuries was, therefore, left to his discretion. There appears, however, to have been a widespread belief that the federal reserve banks would become to an increasing extent the depositories of federal funds, and that national banks and the sub-treasuries would, as time went on, receive an ever declining proportion of these funds. The Secretary of the Treasury is a member of the federal reserve board, and there is much to be said in favor of the proposition that banks desiring government funds should present their claims for advances to their federal reserve bank, and should receive such funds only by the ordinary method of rediscount. This would simplify the problem, remove from the Secretary of the Treasury the onerous task of apportioning funds among thousands of individual banks, and discourage the banks from depending upon the Secretary of the Treasury as a sort of grandfather for aid in time of need. The federal reserve bank, which is having continual dealings with all its member banks, would presumably be in a better position to judge the comparative needs of different banks than would the Secretary of the