PREFACE 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 ix 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 other, skilled clerks were engaged and trained, and accounting methods were perfected, so that when the test came as a result of our entry into the war, in April, 1917, the Federal Reserve banks were in large measure prepared for the grave tasks and responsibilities at once to be assumed. During the first twelve months of our country's participation in the war the reserve system became established upon a basis of confidence and respect, even in fact of admiration, among both bankers and business men; and its future therefore seems assured so long as good management deserves the support now enjoyed. During these four years, however, the work of organization, and during the last year and a half the work assumed by the Federal Reserve banks as fiscal agents of the Government, have so occupied the time of all connected with the system that it has been difficult to overcome, in a comprehensive way, much of the ignorance and misunderstanding of the functions of the system. It is widely accepted as successful and necessary, but, with some exceptions, it is still hardly possible to say that it is understood. It has come as an enlargement of the scope of a great banking machine which had become complicated by the dual development of two classes of banks, national and state; and, in the case of state banks, a development which covered a vast field of business activity not confined to commercial banking. Under the influence of the new system of twelve closely allied banks of reserve and of discount, the tendency will be toward unification and simplicity which will be brought about by the state institutions, in increasing numbers, becoming stockholders and depositors in the reserve banks. Until, however, through evolution in methods and many changes in both state and national laws, we have a truly unified system, banking in this country will be a puzzle and a mystery to the casual observer, to the business man, and to bankers abroad, unless its various features are presented in a concise and comprehensive form, stripped of the technicalities of economic discussion. It is much more difficult to present a complex problem in concise form than in extended detail. This task, however, Professor Kemmerer has undertaken with distinct success. An account of the functions assumed by the federal reserve banks as fiscal agents of the United States Government, and of the handling of war bonds, certificates of indebtedness and government funds would have complicated, and, possibly, rendered less clear the description of the |