position the federal reserve system occupies in the banking field. It would have involved, further, a discussion of the long felt necessity for a modification of the independent treasury system. These subjects, therefore, have properly not been enlarged upon.

It is a public service to undertake the difficult task of preparing an account of this great change in our fiscal system so as to combine accuracy with a comprehensive survey of the subject and, at the same time, to avoid technical details. All that is required to give the reader an understanding of the fundamentals of the new régime of American banking is contained in the following pages, which will be read with attention and interest by many who have been seeking this information during the past five years.

STANFOR

THE A B C OF THE FEDERAL

RESERVE SYSTEM

CHAPTER I

PURPOSE AND PLAN OF BOOK

This book is an attempt to set forth in nontechnical language the chief reasons why the federal reserve system was called into being, the main features of its organization, and how it works. Although the federal reserve act of 1913 is one of the most important pieces of financial legislation enacted in modern times, and although it has been in operation several years, comparatively few people are familiar with its elementary principles. It is looked upon by the majority of people as too technical and complicated a matter to be understood by persons other than bankers and economists. As a consequence there has been a surprising lack of public interest in the workings of the system and in the important legislative and administrative modifications which the system has undergone since its establishment. This unfamiliarity is not surprising when one considers the complex character of much of the

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FEDERAL, RESERVE SYSTEM

federal reserve machinery and the technical language in which this machinery is usually described. In a democracy, however, widespread ignorance, among the voters, of the country's financial system is fraught with danger.

America's leading manufacturing, transportation and commercial concerns years ago attained heights of economic efficiency which made them the envy of foreigners. None, however, envied us our banking system. None followed it except soon regretfully to turn back. This was true, despite the fact that our old American banking system had many substantial merits. It was reasonably safe, it yielded good profits, it was adaptable to the local needs of widely varying communities, and it developed the check and clearing system to a degree of perfection found in few if any other countries. Along with these meritorious features, however, it contained a number of very serious defects. The chief of these may be grouped conveniently under four heads: I. Decentralization. II. Inelasticity of credit. III. Cumbersome exchange and transfer system. IV. Defective organization as regards relationship with federal treasury. In the four succeeding chapters these four groups of defects will be considered, and in the following four chapters will be discussed the respective remedies provided by the federal reserve system.

CHAPTER II

DECENTRALIZATION OF AMERICAN BANKING PRIOR TO FEDERAL RESERVE SYSTEM

In 1912 the United States had many times more commercial banks than any other country in the world, and these banks averaged much smaller than those of any other important country. Official figures at that time placed the number of independent banking establishments of all kinds in the United States at approximately 30,000, and of this number something like 28,000 were banks whose business was wholly or partly of a commercial character. These commercial banks were owned for the most part by the residents of the communities in which they were placed, and the business of most of them was chiefly local in character. The great majority of national banks were national in nothing but name. Except for the rather loose association of the banks in the clearing houses of our principal cities and a growing community of interest, most of these banks were independent units, each working for itself. There was little team work. In