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Rh 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 re-discounting. 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