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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, or any government funds, shall be deposited in the continental United States in any bank not belonging to the system established by this act:,' 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. Keromerer, Postal Savings, pages 112-116.

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

Treasury. Moreover, how could a federal reserve bank place adequate pressure on member banks to conserve their strength in time of need, to advance discount rates, to contract loans, etc., if the member banks could “go around” the federal reserve bank and the federal reserve board and get funds directly from the Secretary of the Treasury?

For these and other reasons it was expected that the Secretary of the Treasury, in the exercise of the discretion granted him by the law, would deposit his funds in a large and increasing degree in federal reserve banks. Events pointed clearly in this direction prior to our entrance into the war. Governor Strong of the New York Federal Reserve Bank writes me: “The first deposit of government funds made by the treasury with the federal reserve banks was on September 4, 1915, when certain special deposits were made in a number of banks. Later, arrangements were made to have the collectors of customs and collectors of internal revenues in the twelve federal reserve bank cities deposit all of their funds in the federal reserve banks and as a matter of fact, for a long period prior to the passage of the bond act of April 24, 1917, which altered the status of public deposits, the federal reserve banks had been receiving the principal

revenues of the Government outside of postal funds and had been paying a very large proportion of government checks and warrants. The limitation of this fiscal agency service in the collection of revenues and payment of checks to the twelve federal reserve bank cities was, of course, due to the inconvenience of extending these operations to places where federal reserve banks had not yet established branches. The plan therefore of actively employing the federal reserve banks as fiscal agents had been put into operation some time before the first bond bill was passed and was an important and very active part of the work of the reserve banks almost immediately after the arrangement was established.”

The abnormal conditions, however, created by the European War set up obstacles in the way of the Government's discontinuing the use of individual banks as depositaries of government funds. During the early days of the war the heavy demands for funds in America to meet obligations due abroad and the frenzied condition of the money markets throughout the world naturally prevented the inauguration of a policy of withdrawing government funds from individual banks and depositing them in the federal reserve banks. Later the heavy buying in this country by European belligerents discouraged such a

policy. Such was not a time for withdrawing large sums from individual banks. Finally our own entrance into the war and the floating of our huge Liberty loans rendered a transfer of this kind out of the question. In the interest of causing a minimum of disturbance to the money market in the floating of these loans, the Government wisely adopted the policy of keeping the funds widely scattered and to as large an extent as practicable in the banks of the communities where they were received. The result is that in recent times there have been more government funds in individual banks than at any previous period in our history. The deposit of government funds, moreover, is no longer limited to banks that are members of the federal reserve system, since the law under which all government bonds and certificates of indebtedness have been issued since we entered the war provides for the deposit of their proceeds in qualified national banks and state banks and trust companies against certain approved collateral. Numerous nonmember banks therefore have qualified as depositories in connection with our Liberty loans.

What will be the Government's policy in this matter after the abnormal conditions resulting from the war have passed, of course, it is impossible to say at this time.

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