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premises now owned and occupied to a fair selling price, such price to be submitted to the Federal Reserve Board for approval before depreciation allowance is determined.

6. Apparent depreciation of Government securities.–Full provision to be made for apparent depreciation (based on market value) in Government securities before any sum is transferred to surplus account, and provision made for Government franchise tax.

No change should be made in book value of securities but depreciation allowance should be charged to profit and loss account and credited to account “ Reserve for depreciation." Depreciation should be figured on the following basis: 2 per cent bonds 1930–1938.

98 4 per cent bonds 1925_

106 3 per cent conversion 1946–47

85 3 per cent one-year notes_

100 31 per cent Liberty loan 1947...

98 4 per cent Liberty loan 1942–1947.

93 41 per cent Liberty loan 1928–1947.

96 7. Surplus and franchise tax.–After dividends and all allowable charge-offs have been made, one-half the remainder, up to 40 per cent of capital paid in, to be credited to surplus account and the balance credited to an account to be opened under the title “ Reserve for franchise tax," to remain in such account until demand therefor is made by the Government, of which due notice will be given you by the Federal Reserve Board.

GOLD SETTLEMENT FUND.

The general plan of operation of this fund has been described in previous reports and it is therefore unnecessary to make any further explanation of it. Owing to the great increase in the volume of business between the Federal Reserve Banks, caused partly by Government war financing (including large transfers of funds received from the sale of certificates of indebtedness and Liberty bonds and subsequent redistribution of these funds among various centers in payment for munitions and supplies for the account of the United States and the allied Governments) and partly by larger use of the collection and clearing facilities of the system, particularly in the matter of wire transfers from one Federal Reserve Bank to another, it was deemed expedient to install a system of daily settlements between the Federal Reserve Banks in place of the weekly clearings which had been in operation since the establishment of the fund in May, 1915. The first clearing under the daily settlement plan was made July 1, 1918. The new system has worked with facility, rapidity, and smoothness, and has eliminated much clerical work at the Federal Reserve Banks. In order to expedite the daily settlements and to improve the collection and clearing service, a leased telegraph wire system, connecting all the Federal Reserve Banks and branches with the Board's office at Washington, was installed July 1, 1918. Under the daily settlement plan each Federal Reserve Bank telegraphs the

Board by 10 a. m., eastern time, the respective amounts credited to other Federal Reserve Banks on the previous day. Upon receipt of the telegrams by the Board, clearing is made by book entries, and within one hour each Federal Reserve Bank is advised of the amount of credits for its account from the other Federal Reserve Banks and also of the net debit or credit to its gold settlement account on the books of the Board.

In order to eliminate unnecessary work between the San Francisco bank, its branches, and other Federal Reserve Banks, and delays in reconciling di fferences due to the distances between the parent bank and branches, beginning with December 2 the four branches of the San Francisco bank, located at Seattle, Spokane, Portland, and Salt Lake City, were authorized to make settlements through the fund in the same manner as the Federal Reserve Banks, except that the net debit or credit balance in the settlement of each branch is adjusted through the gold settlement fund account of the head office, as the branches do not maintain accounts with the fund.

Since the installation of the leased-wire system, practically all transfers between the Federal Reserve Banks for account of the Treasury are made directly through the fund. Settlements on account of rediscount operations between the Federal Reserve Banks are also made by direct transfer through the fund, and on account of the instant contact afforded by the leased-wire system, transactions are completed within 20 minutes to 2 hours, the major portion of the time being consumed in the arrangement of details between the respective banks. Transfers through the gold settlement fund are of great value in these operations.

The transactions through the fund have a very important bearing upon the reserve position of the banks, and as all entries affecting the fund are made on the books of the Board and at the banks simultaneously, the Board is at once informed as to the effect of the day's transactions upon the reserves of each bank.

Combined clearings and transfers through the fund during the year 1918 aggregated $50,242,592,000, as compared with $27,154,704,000 in 1917, $5,533,966,000 in 1916, and $1,052,649,000 in 1915, making a grand total of $83,983,911,000 since the operation of the fund was begun May 20, 1915. A comparison of the amounts of the average weekly settlements shows clearly the growth of the volume of transactions. Average weekly volume of clearings and transfers: 918, July 1 to Dec. 31.

$1,064, 596, 000 1918, Jan, 1 to June 30.

966, 203, 000 1917

522, 206, 000 1916

106, 422, 000 1915

31, 898, 000 100823°-19

3

Analysis of the principal transactions growing out of the Government's financial program, and of the transactions through the gold settlement fund since the declaration of war, April 6, 1917, shows the important part the fund has played in fiscal agency operations, for through it the Treasury has been enabled to transfer, without the actual handling of cash, vast sums from districts where they had accumulated to other districts where funds were needed to meet disbursements, the time consumed in transfers being measured in minutes instead of days.

The settlement of April 12, 1917, for the week following the declaration of war showed totals liquidated of $293,506,000, while transfers between Federal Reserve Banks during the week amounted to only $1,622,000, making a combined total of $295,128,000. Total clearings of the settlement of May 17, 1917, amounted to $412,103,000, and constituted the largest settlement up to that date. This volume was occasioned by large transfers on account of the sale of certificates of indebtedness by the Treasury issued in anticipation of the first Liberty loan. Transfers, during the same week, between Federal Reserve Banks, largely to New York, of Government funds for account of the Treasurer of the United States amounted to $108,740,000, making a record total of combined clearings and transfers of $520,843,000. The volume of clearings and transfers through the fund increased steadily after this time, mainly on account of the movement of funds in connection with the Treasury's large fiscal operations. A new record total of $1,092,920,000 for combined clearings and transfers was made in the week ended November 22, which immediately followed the first payment of 18 per cent on the second Liberty loan November 15, 1917.

There was a large increase in the volume of business during May and June, 1918, on account of the movement of funds accruing from payments on subscriptions of the third Liberty loan. Combined clearings and transfers for the week ended June 20 aggregated $1,140,250,000, and were the heaviest since the establishment of the fund. During the past four months the volume of combined clearings and transfers has averaged well over a billion dollars a week as the result of increased business due to movements of funds in connection with the fourth Liberty loan.

During the past year the Federal Reserve Banks and the Federal Reserve agents have found it desirable to make payments for credit to their gold redemption funds against Federal Reserve notes, and to the banks' redemption funds against Federal Reserve bank notes, by transfers from their balances with the Federal Reserve Board to the Treasurer of the United States. Several of the Federal Reserve Banks also make payments to the Treasurer of the United States

for the credit of national banks in the 5 per cent redemption fund against national bank currency by transfers from their balances in gold settlement fund account.

Total balances to the credit of the Federal Reserve Banks and agents amounted to $1,330,423,000 on December 31, 1918, divided as follows: Federal Reserve Banks $401,926,000 and Federal Reserve agents $928,497,000. Total increase in the combined funds during 1918 amounted to $522,176,000, as compared with $535,927,000 during 1917.

PROPOSED INTERNATIONAL GOLD FUND.

The successful operation of the gold settlement fund has suggested the possibility of avoiding shipments of gold from one country to another in settlement of balances arising out of ordinary commercial transactions, and the Board is ready, if authorized to do so, to undertake negotiations looking to the establishment of an international gold exchange fund, or to assist in any way in its power in negotiations which may be begun by a Government department looking to that end. The Board realizes that the successful operation of a plan of this kind is dependent upon the stability of the governments concerned, and believes that definite plans can not perhaps be worked out until a stable peace has been assured. The Board would point out the importance of excluding all transactions arising from the adjustment of war obligations and of limiting the work of the fund to current commercial and exchange transactions. The gold deposited in a government bank or banks should be in the nature of a special or trust fund, and all nations participating should deposit their proper proportions of gold. Assuming that the leading nations of the world will be at peace for a long period of years, there seems to be no reason why an international arrangement of this kind should not operate as efficiently as our own gold settlement fund, which has cleared enormous transactions between distant sections of a country of vast area. The saving of loss and expense incident to abrasion and transportation charges and interest on gold transferred will be enormous, and the advantage to the commerce of the world will be incalculable. It will probably be necessary in the beginning to limit participation in the fund to the United States and the entente allies, and to a few of the leading neutral nations, but it is conceivable that all civilized countries may eventually be participants.

EXPORT OF GOLD COIN, BULLION, AND CURRENCY.

As the country's activities in connection with the war gained momentum and Government financing assumed large proportions, resulting in constantly expanding issues of Federal Reserve notes, it became apparent that in the national interest every effort should be directed toward the conservation of our gold supply. Under the power delegated to the Board by the Secretary of the Treasury under the Executive orders of September 7, 1917, October 12, 1917, and January 26, 1918, a committee of the Board meets daily to consider and pass upon all applications for permission to export coin, bullion, and currency; and the closest scrutiny has been given to all applications, each being treated upon its own merits. Until the signing of the armistice, first consideration was compatibility with the national interest, due regard being given to proposed exports of coin, bullion, and currency necessary to obtain certain essential commodities—such as nitrate for use in powder making; copper, lead, antimony, tungsten, and platinum for use in the manufacture of munitions; petroleum for shipping, motor trucks, aeroplanes, and other motor-driven apparatus; hides for the manufacture of leather, and other miscellaneous commodities.

During the month of May some minor modifications were deemed necessary in the regulations which had been issued by the Board governing the exportation of coin, bullion, and currency, particularly in that section relating to funds carried by travelers leaving the country. Under the original regulations issued travelers leaving the country were permitted to carry on their persons or in their baggage United States notes, national bank notes, and Federal Reserve notes to the amount of $5,000; American silver dollars, subsidiary silver coins, and silver certificates to the amount of $200; and gold coin or gold certificates to the amount of $200. This rule was modified so that travelers were permitted to take with them United States paper currency, other than gold or silver certificates, to the extent of $1,000 for each adult, with the further provision that subsidiary silver coins not to exceed $100 for each adult might be taken in lieu of a like amount of notes. With few exceptions travelers do not carry large sums of money for personal expenses, as their needs are better served by the use of foreign drafts or travelers' checks; nor was the permission to carry gold certificates of more than slight value to the traveler. While the amount was small in individual cases, in the aggregate it was considerable and meant the loss of so much gold. Another and far more important reason for the modification of the regulations was the belief that United States currency taken into foreign countries by travelers was being absorbed by enemy agents for propaganda purposes. To further curtail the activities of enemy propagandists it also became necessary, in granting permission for the exportation of foreign paper currencies, to restrict such exportations to the country of origin.

In order that persons, firms, or corporations located near the Canadian border, who in the usual course of business receive Canadian

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