lacking the British Empire is in central banks, it certainly does not II. UNITED STATES. Subsequently to the panic of 1907 and the recovery which followed, the banking system of the United States entered upon a period of prosperity and success which continued practically unbroken to the opening of the World War. The sudden outbreak of that war, 1914, caused a temporary shock not only to banking but to general business. This uncertainty, however, lasted but a few months, and was succeeded by a restoration of confidence which continued with expanding business and activity in all branches of banking down to the autumn of the year 1920. In the autumn of 1920 the development of post-war reaction in business and a violent shrinkage of prices brought severe pressure to bear upon all the elements of the banking system of the United States, but this was not sufficient to cause any dangerous shock. The period in question was one of unusual importance in American banking, not only because of the organization of the Federal Reserve system in which all national banks were compelled by law to assume membership, but also because of the fact that the strongest state banks and trust companies voluntarily entered the system during the first three years after its formation, with correspondingly broad effects upon financial organization, while the effects of the war and the expansion of American industry which accompanied the struggle greatly enlarged the activity of American banking and added to its profits. Pre-War Period.-The years 1908-13 were characterized by During the years in question the National Monetary Coma steady and consistent growth of business. In the following mission, appointed in accordance with the provisions of the table, which shows the advance in the number of organized Aldrich-Vreeland law, was prosecuting its investigations into banks as well as their chief assets and liabilities, the increase existing conditions, but these investigations were academic up of operations may be noted during the five years in question, to 1912, while even in the latter year the bill for banking reorand may be compared with the advance during the war period:-ganization proposed by the National Monetary Commission PRINCIPAL ITEMS OF RESOURCES AND LIABILITIES OF NATIONAL, STATE, SAVINGS, PRIVATE BANKS, LOAN AND TRUST COMPANIES FROM 1900 TO 1920. Compiled from reports obtained by the Comptroller of the Currency. 994 1,016 18,147 1,113 19,645 1,690 1,305 1.368 19,583 1,757 1,401 359 1,452 21,005 1,800 1,326 508 1,423 22,450 1,879 1,547 404 1,554 23,631 1,952 1,512 1,572 24,986 2,010 1,585 1,560 25,712 1,639 26,971 2,132 1,714 2,705 18,517 1,457 27,804 2,162 1.732 639 2,783 19,135 1,486 32,271 2,195 1,849 564 3,463 22,834 1917 27.923 20,594 1,502 37,126 2,274 1,945 674 3.913 26,289 28,880 22,514 896 40,726 2,351 2,034 684 3,595 27,808 1919 29,123 25,301 12,229 5,865 47,615 2.437 2.182 825 3.890 33,065 1920 30,139 31,256 11,387 5,833 1,076 53,079 2,702 2,410 976 3,708 37,683 175101 68891 In order to show the relative position occupied by the national | banks, the following tabular comparison, relating to national institutions only, is presented. It will be understood that while the state banks and trust companies included in their number the bulk of the investment institutions of the nation, the commercial banking assets were predominantly held by the national banks. The period 1908-13 was not, however, notable for any far-reaching changes in method or organization; provisions which had been enacted in the Aldrich-Vreeland law of May 30 1908 for the formation of national currency associations (see FEDERAL RESERVE BANKING SYSTEM) remaining prac (the "Aldrich Bill") had small chance of success so that at no time prior to 1913 was there a serious prospect of fundamental change in legislation. The adoption of the Federal Reserve Act in the latter year greatly altered the conditions under which the national banking system, and indeed the whole banking system of the United States, was operating, but it did not produce any direct or immediate effect upon the methods or position of the banks themselves until a much later date. Indeed, the Federal Reserve Act itself did not come into practical operation until nearly a year subsequently to its passage, the reserve banks being organized in Nov. 1914. During the prewar years, however, the problems of the national banking system 48,433,103 14,462,220 985,512 1919 29,660,850 24,864,635 4,796,215 1920 29,000,000 2 In the assembling of data in relation to savings banks the classification of banks as made by the State banking departments is closely followed, in consequence of which a number of so-called State savings banks, formerly treated by the Comptroller's office as savings banks, are now regarded as commercial banks, and the returns therefrom are combined with the latter, which accounts for the relatively small amount of deposits reported for stock savings banks since 1915. 3 Dividends unpaid not included. The number of trust companies and information with reference to the principal items of assets and liabilities on or about June 30 of each year since 1914 are shown in the following table: $735,612,324 3,062,695 $732,549,629 1Notes redeemed but not assorted by denominations. The figures show a practically stationary condition of the circulation. They cannot, however, throw light upon the increasing volume of demand for currency, which during those years was growing at a rapid rate. Only through an enlarged use of cheques and other credit substitutes or through additions to the basic monetary circulation itself was it possible for the United States to add to its circulating medium. Another factor which had assumed very great importance during the preliminary period referred to, was the growth of trust companies, involving as it did sharp competition with national banks. Subsequently to the year 1890 there had been a rapid development of trust companies in many parts of the United States as well as extension and improvement of legislation affecting them. In some states the trust companies, either through local restriction or as the result of custom, still confined themselves to fiduciary business, but under the laws of most commonwealths they had taken on banking functions, and in some they had developed the latter with so much success as to make their preliminary or nominal purposes largely secondary. Due to the fact that trust company laws were usually much less restrictive than those which controlled the operation either of national banks or of state banks, both of the latter classes of institutions were feeling the competition of the trust companies with considerable severity. The table on the next page shows the relative positions of different classes of banks in 1920 and the increase in the number of trust companies and savings banks during recent years. Savings banks' development during this period is shown in the following figures: While commercial banks, both national and state, had from time to time considered the question of seeking permission to exercise fiduciary functions, the problem had never assumed any considerable importance until the Federal Reserve Act was brought up for consideration. Their policy had been directed towards enforcing a limitation or restriction of the banking functions of trust companies, both in the states where local legislation had not made much direct concession to trust company activity, and in those where a beginning had already been made in extending to them banking powers, rather than to competing with them. One demand which had been made with entire justice by the national banks had been that in so far as they exercised actual banking functions and became liable for demand deposits, the trust companies should be required to keep a proportion of reserve equal to that required of the banks with which they were competing. Something had been done in the direction of applying such a requirement, but state laws were still in an unsatisfactory condition. The Opening of the World War.-The year 1914 had opened prosperously for the banks of the country, business being prac tically normal and employment at least up to the average, while agricultural conditions were satisfactory. The sudden advent of war in Europe at the end of July, however, necessarily subjected the banks to a very severe shock. Due to the seasonal character of American exportations of agricultural products RESOURCES AND LIABILITIES OF 22,109 STATE, SAVINGS, AND PRIVATE BANKS AND LOAN & TRUST COMPANIES, JUNE 30, 1920 and of many of the importations of manufactures, it had become customary in past years for English banks to hold claims upon American institutions which gradually accumulated each year up to the opening of the autumn season, when the movement of crops to foreign countries provided funds which were used for the cancellation of these balances. At the opening of the war it was supposed that in trade with England such balances against American banks amounted to something like $500,000,000. One phase of Great Britain's economic policy upon the outbreak of war was to call in the balances due to her in foreign countries and generally to cut off trade relations that might subject her credit structure to fresh demands. At the same time the presence of German war-vessels in the Atlantic made it uncertain how long a time must elapse before the movement of goods to and from Europe would be resumed upon a normal basis. The export trade of the United States was thus seriously checked at the same time that extensions of credit by British banks were practically suspended. One immediate effect of this situation was to cause a large exportation of gold from the United States, while the shipment of goods was first reduced, and at last temporarily suspended. These two factors caused serious disturbances in the eastern part of the country and produced a general lack of confidence, while at the same time they tended to depress the prices of American staples. Cotton was affected with particular seriousness, its price declining during the autumn to a point as low as five cents per pound as against a figure, then regarded as normal or satisfactory, of 12 or 13 cents in the early part of the year. In consequence of this stagnation of export trade, there was a somewhat corresponding shock to domestic business, a resulting difficulty in making collections, and eventually a withdrawal of funds from banks not only for export of specie, but also for the purpose of domestic hoarding. Congress, which was then in session, hastened to amend the Aldrich-Vreeland Act of 1908, the measure thus adopted taking effect on Aug. 4 1914. Under the terms of this amendatory measure the issue of emergency currency was permitted under more liberal conditions than before. It would have been much better if the Federal Reserve Act, which was passed during the preceding Dec., had been brought into operation, but as a matter of fact reserve banks did not get under way until Nov. 1914. The action of Congress in passing the emergency currency law was, therefore, necessary in order to provide an immediate means of furnishing funds for the payment of depositors. The currency thus provided for under the new law was accordingly issued and eventually rose to a peak point of about $430,000,000. This served to the total gold exports during 1914 amounting to approximately $223,000,000. Meanwhile the Federal Reserve Board had been organized in accordance with the terms of the Federal Reserve Act on Aug. 10 1914, and was immediately confronted by the great losses of gold which were being incurred by the banks in order to satisfy the demands of British creditors. In the belief that much of this withdrawal of gold was due to a lack of combined action on the part of the American banks, the board supervised the formation of what became known as the "international exchange fund," or "gold pool," which was in effect an agreement among American banks to provide a total of $100,000,000 of gold for export (or gold exchange), permitting any bank that might be drawn upon to supply itself from the common stock by depositing therein satisfactory funds in other forms. This measure was effective in restoring confidence while at the same time the first fear and uncertainty that had resulted from war conditions began rapidly to disappear; German vessels were soon driven from the North Atlantic and the movement of products from the United States to Europe was resumed upon a limited scale. The urgency of demands for cash declined and the banks (which had begun the issue of clearing-house certificates on Aug. 3) were able to retire their obligations on Dec. 1, although the Stock Exchange (which had been closed on July 31) was not reopened until later. Thus the banks of the country passed through the dangerous early stages of the war partly by exercising their own latent power and partly in consequence of the aid which had been extended to them through Congressional enactment and through coöperative effort under the leadership of the Federal Reserve Board. The Banks and the Federal Reserve System. The projected text of the Federal Reserve Act had been made public in June 1913, and had served as a basis for discussion from that date up to the passage of the Act on Dec. 23 of the same year. It may fairly be said that practically all of the banks of the country were opposed to it-the national banks primarily because it made membership in the system compulsory; the other banks because they feared that great changes and innovations in business would result from the new system. After the adoption of the Federal Reserve Act the question whether or not to enter the system became acute with national banks since the law had provided that a failure of any national bank to enter the system would mean the necessity of surrendering its charter and transferring itself to a state banking system, through reincorporation. Accordingly during the early part of the year 1914 there was constant discussion of the wisdom or the un practically unanimous determination to take stock in the new Federal Reserve banks. The principal points at which the new Act immediately touched the national banks were in connexion with the contribution of capital and the transfer of their reserves. In the course of the discussion of the Federal Reserve Act there had been an effort on the part of the national banks (especially after membership in the system had been made compulsory) to reduce the required amount of contribution to the capital stock of the Federal Reserve banks to as low a level as possible. It was eventually fixed at 3% of the capital and surplus of each national bank, so that when the banks eventually entered the system (as all except some eight or ten finally did) they were obliged to pay in only about $50,000,000. In the same way they had endeavoured to avoid the necessity of transferring any part of their reserves to the Federal Reserve banks, except as they might elect, but had not entirely succeeded, although a three-year period was finally provided during which the transfers might be made in instalments, and only part of the reserves was even eventually to be transferred. At the outset the banks paid over to the Federal Reserve banks only about $18,000,000 of capital and $227,000,000 of reserve deposits. These payments were made during the month of Nov. 1914 and, as just shown, were only about $245,000,000 in all, so that the burden of establishing the reserve system was not a particularly heavy one. Indeed, with the reduction in reserve requirements which had been made in the Federal Reserve Act (central reserve city banks being cut from 25% of reserve deposits to 18%, reserve city banks from 25% to 15% and country banks from 15% to 12%), the banks were in much better condition to take care of the needs of their customers than they were before the organization of the reserve system, even without any recourse to rediscounting. In view of the fact that European demands for American goods were considerably reduced during the first months of the war, so that industry was temporarily checked and domestic prices were lowered, bank resources were more than adequate to the needs of customers. Later as the requirements of European countries became heavier and export shipments from the United States were increased, the banks entered upon a period of unusual prosperity, and the difficulty in earning dividends which they had experienced during 1915 disappeared. Credit in fact became comparatively safe, not only on account of the rapidly rising prices which greatly reduced the danger of business failure, but also because of the fact that many of the large purchases of goods in the United States made for European account were practically guaranteed by foreign Governments which at that time were in a relatively strong financial condition. The number of banks accordingly increased steadily and the capital and surplus even more markedly, as may be seen from the tables already given. What has been said in this section is intended to apply directly to the case of the national banks but holds equally true of state institutions (both banks and trust companies). All went through a somewhat parallel course of development, while the high wages and steady employment which were due to very large European purchases of goods provided a strong basis for the growth of savings. Savings deposits accordingly advanced decidedly in amount. For the same reason which enabled national banks to refrain from re-discounting, state banks and trust companies were relieved of any urgent necessity to enter the Federal Reserve system. The system accordingly extended but little credit to its members up to the end of 1916, while it enlarged its membership very little outside of the national banks themselves. The War Period.-An entirely different situation came into existence immediately upon the entry of the United States into the World War in April 1917. There had already been some growth of re-discounting during the earlier months of that year, and Congress after the opening of the war, June 1917, amended the Federal Reserve Act. By the terms of this new law all reserves of national banks were to be carried in Federal Reserve banks and nothing held in vault was to be counted as reserves, it being felt that such action was practically essential in order to concentrate the banking power of the country, to enlarge the lending power of the reserve banks and to relieve the members of the necessity of carrying coin in vault. At the same time effort was made to discourage the payment of coin or legal-tender money to depositors, so that the banks soon passed to what was really a paper basis. The continued importations of gold strengthened the reserve bank holdings, so that there was at all times far more gold in the country than before the war. The net increase in gold holdings was fully $1,000,000,000, but gold coin had practically disappeared from common use. Congress had also provided, in the Act already referred to, for membership of state banks in the Federal system under conditions which permitted them to withdraw whenever so disposed by giving six months' notice. Partly because of this assurance of ability to retire and partly because of a feeling that the advent of war would naturally subject all banks to severe stress, while at the same time it was regarded as a matter of patriotism to render such aid to the Government as they could, a large number of institutions entered the system. These accretions to membership continued rapidly during the years 1917-8 and resulted eventually in the admission of about 1,200 state institutions. The movement into the system had a rather important effect upon the banks and trust companies that joined. They were compelled as a condition of membership to maintain reserves equal to those of the member banks already in the system, so that a process of standardizing reserves was effectively carried forward. During the years 1915-8 there had been extensive changes in state banking legislation. These changes had provided more nearly uniform reserve requirements, besides authorizing the local state banks to become members of the reserve institutions if they felt so disposed. In consequence even those banks which did not become members were in some measure adjusted to the banking situation by being subjected to more uniform requirements. A somewhat similar process was also going on in the matter of types of bank paper, the new legislation both of Congress and of the states being intended to standardize these types. Thus the United States emerged from the war with a much more harmonious and uniform system of banking legislation than it had ever before possessed. Change in Holdings.-The effect of the war was, however, of a very far-reaching character in its relation to the portfolios or paper holdings of the banks of the country. The method of financing the war which was chiefly resorted to by the Treasury involved heavy taxation, but it was some time before the new taxes could yield any returns and the Federal Government never obtained from that source more than about one-third of its total outlay. The other two-thirds were obtained from the banks and the public by borrowing. The public was encouraged to save and to use its savings in the purchase of Liberty Bonds, but a very large proportion of the bonds sold to the public had to be carried in part at least by means of loans obtained at banks upon paper collateralled by Government obligations. This was true of all classes of banks, both national and state, as well as of the trust companies, while the latter and the savings banks were also urged to purchase and hold as many Liberty Bonds as they could. In these ways the investments of the banks and their commercial portfolios came to consist very largely of paper collateralled by Government obligations. This was true not only of the paper which represented subscriptions to bonds, but also of paper which took the place of ordinary commercial borrowings. Due to the fact that many business men preferred to borrow on their own notes collateralled by Government bonds in order to get the lower rates of interest made by the banks on such notes, paper of this kind rapidly displaced ordinary evidences of indebtedness. This state of things continued until some time after the close of the war, a modification occurring in the autumn of 1919 and continuing to grow more pronounced thereafter. New Functions of National Banks.-Prior to the adoption of the Federal Reserve Act national banks had not been allowed to perform so-called fiduciary functions, including those of acting as guardian or trustee, registrar, fiscal agent, administrator and others. These functions had been exclusively performed by trust companies, most states following the example of the National Bank Act and drawing a sharp line of distinction between their own state banks and their trust companies. The Federal Reserve Act authorized the assumption of fiduciary powers by national banks upon permission of the Federal Reserve Board. Such permission when granted by the Board was promptly questioned in the courts, but was upheld by the Supreme Court of the United States. This decision led to an extension of the scope of the fiduciary functions so that national banks were shortly placed upon a basis of competitive equality with trust companies. The situation led various states to modify their laws in such a way as to permit state banks to take on fiduciary functions likewise. Thus the distinction which had previously existed between national banks, commercial state banks, and trust companies was gradually wiped out. By the end of 1920 about 1,200 national banks had been granted permission to exercise trust functions. The time has not yet been sufficiently long to permit an accurate judgment of the effect of these changes upon the general banking situation, the full exercise of fiduciary functions being usually a process of comparatively slow development. The result was which the U.S. Treasury furnished the means. Organizing for Foreign Trade.-One of the principal defects of the old national banking system was that it did not function well in connexion with foreign trade. Neither national nor state banks had been in the habit of using bankers' acceptances, which had become the standard basis of foreign business in Great Britain. This defect was remedied in the Federal Reserve Act, which authorized the making of acceptances by national banks up to an amount equal to 100% of the capital and surplus of the accepting bank (50% in the original Act confined to foreign trade, but later amended to 100% of which not to exceed 50% might be domestic acceptances). Several of the states in which banking had assumed the greatest development made a similar change in their legislation at about the same time, so that at the opening of the World War, with its great impetus to American foreign trade, the banking system, both national and state, was in position to finance business on the acceptance plan. It was seen, however, in the formulation of the Federal Reserve Act that in order to develop foreign banking successfully the use of the branch system would be necessary. Branch banking had never been permitted in the United States under the National Bank Act, and although it sporadically existed under various state laws such systems were only local and not particularly successful. It may broadly be said, therefore, that there had been no development of the branch bank principle prior to 1913. Although at one time it was proposed to insert in the Federal Reserve Act permission to establish domestic branches of national banks, and although the Act gave to Federal Reserve banks power to establish branches within their own districts and at their own discretion, it withheld from national banks power to create domestic branches. It, however, did vest them under certain conditions with the power to establish branches abroad. This power was used by only one or two of the larger national banks, and early in 1915 the demand for action which would allow national banks to subscribe to the stock of foreign trade banks to be jointly owned by them became very strong. Accordingly Congress in 1915 modified the Federal Reserve Act to the extent of permitting the organization of foreign trade banks. The plan, however, did not meet with much favour and few such banks were organized. Those which were brought into existence did a fairly successful business, but not enough were established to give the plan a commanding place in American financial life. The subject, however, of financing foreign trade was unavoidably thrown into the background by the advent of the war and the conditions grow-greatest development there. Under the cash discount system, ing out of it. Foreign countries financed their purchases of American goods upon what was practically a cash basis prior to the time that the United States itself entered the war and after that date practically the whole export trade of the United States was financed upon the basis of Government credits for Growth of a Discount Market.-The use of the acceptance function to which reference has already been made progressed comparatively slowly during the early years of the Federal Reserve system, being retarded by the various disturbing conditions attendant upon the war. The expansion of the acceptance proceeded most rapidly and reliably in connexion with foreign trade, where this type of paper speedily assumed a position of some importance. Its growth was, however, greatly restricted as a result of the lack of branch banks maintained by American institutions in foreign countries. At the close of 1920 it was estimated by the Federal Reserve Board that the total amount of acceptances made by member banks of the system and then outstanding was probably a little under $650,000,000. The bulk of these acceptances had been made by a comparatively small number of acceptance-issuing institutions located for the most part at points whose interest carried them in considerable measure into the export trade. Some interior banks had attempted to develop the domestic acceptance, but with no great success, while the commercial, or trade, acceptance, or “domestic bill" as known in other countries, had shown but slight signs of assuming importance. This was partly due to the existence of the well-known system of offering cash discounts which, if it did not originate in the United States had attained by far its while invoice prices were strictly maintained, a second or reduced invoice price was offered to those who were able to make an immediate or "cash payment within a specified number of days from the date of the invoice, while to those who preferred to enjoy the full period of credit the full face value of the |