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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 Idefect 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

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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"

in the matter of government deposits was an expression frequently heard.

The four chief defects of our American banking system as it existed prior to the enactment of the federal reserve law have now been briefly described. They were decentralization, inelasticity of credit, cumbersome transfer system, and defective government depository system. To remedy these defects the federal reserve system was created by the law of December 23, 1913; and federal reserve banks opened their doors for business November 16, 1914. Since that date the system has developed rapidly under the management of administrative boards and under the influence of a number of important amendments to the organic law. It is not our task here to trace this interesting development, but rather to answer briefly the question: How is the federal reserve system as now developed remedying the defects of the old banking system? Let us consider the remedy in its relation to the four general defects in the order in which they have been discussed.

CHAPTER VI

HOW THE FEDERAL RESERVE SYSTEM IS REMEDYING THE OLD EVIL OF THE DECENTRAL

IZATION OF AMERICAN BANKING

The federal reserve act does not destroy our American system of small independent banks with its prestige of over a half century of growth and usefulness, and with its great merit of local adaptability to the needs of a country of magnificent distances and of widely varying economic activities. The federal reserve law continues these thousands of independent banks with all their essential functions, but federates them into a unified system which is democratic in its organization and nationwide in its field of operationa system dedicated to public service.

Federal Reserve Districts

There are twelve federal reserve banks, each of which operates in one of the federal reserve districts into which the country is divided. In determining the boundaries of these districts the authorities were required to have "regard to the

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