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Rh nearly $10,000,000,000 for advances to foreign countries, fully $2,500,000,000 of such advances being actually paid after the Armistice. The war finance period thus in effect extended to the middle of 1919 at least. By that time, however, the advance of prices was tremendous, and a very serious question arose as to whether the reserve banks ought to announce a material increase in their rates of discount. The objection to their doing so was strongly urged by the Treasury authorities, because such a policy would result in increasing the cost of money to the Government.

After the War.—The final conclusion of the operations attendant upon the Fifth, or Victory, Loan created a financial situation which was distinctly better from the standpoint of the Treasury than that which had existed before, and somewhat reduced the opposition of the department to a restoration of normal discount rates. Accordingly in Nov. 1919 a tentative advance in the rate of discount on all classes of commercial paper was made. This had but little effect upon the volume of credit outstanding, although it kept the rate of expansion below that which would otherwise have been unavoidable. Experience during the next six months showed that much more positive action would have to be taken, for speculation continued. It was not so intense in stocks and securities as during the month immediately after the Armistice, but prevailed very widely in staple materials as well as in many classes of finished products. In order to check this development of speculation, it was essential to limit the extension of credit to traders and manufacturers as well as to farm interests, which were seeking to obtain bank accommodation in order to carry large quantities of products which they withheld from the market. The rate of discount was eventually raised in May 1920 to a maximum of 7 per cent. Meanwhile a change in the personnel of the Treasury Department had occurred, and one of the features of the new régime was an alteration of policy with respect to methods of borrowing. The Treasury Department now advanced its offered rate of interest on certificates of indebtedness to a maximum of 6%, a figure more nearly corresponding to the prevailing rate in the open market. These advances took place practically simultaneously with corresponding action by the Bank of England and the British Government. The effect in both countries was beneficial in two ways it tended to place the Government's obligations more freely in the hands of investors and thus to take them out of the banks, while the advance in discount rates coupled with the initiation of an anti-speculative policy and the withholding of credit from those who desired to hoard and store products tended strongly to bring commodities directly upon the market. The consequence was the administration of a sharp check to the growth of credit, and during the latter part of the year 1920 there was a decided restriction of the total amount of new bank accommodation granted both by the reserve banks and by their members, while there was a very decided reduction in the degree of activity with which bank deposits were used. In addition to these changes in bank position was the fact that the extraordinarily high prices which had ensued upon the close of the war, reaching their peak in May 1920, declined rapidly from the middle of 1920 onward, eventually reaching, at the close of the year, an average level of about 190 as compared with 272 in May and 100 in 1913. This rapid decline tended to curtail the demands upon reserve banks and had the effect of eliminating the borrowing of many concerns which had been conducting operations on an unsound and semi-speculative basis. The close of the year 1920 found the reserve banks with $3,552,922,000 in notes outstanding, with total discounts amounting to $2,687,393,000 and total resources to $6,282,755,000.

Expansion of Reserve Banks.—Before the entry of the United States into the war the operations of the Federal Reserve banks had been restricted, for reasons already explained, so that the personnel employed was necessarily limited. It had not been found necessary to expand the number of offices although the Federal Reserve Act had authorized the creation of branches both at home and abroad. Early in the history of the system a branch of the reserve bank at Atlanta had been established at New Orleans because of the importance of that city as a port of communication with South America. This, however, continued for a good while to be the only branch bank in the system. The great expansion of operations resultant upon the fiscal transactions of the Treasury coincided with the upward swing of business which resulted from the complete establishment of the collection system. It was found that greater efficiency could be secured through the opening of new offices at strategic points, and before Jan. 1 1921 there had been created in all 22 branches. These branches varied to some extent in the scope and character of their functions, certain of them acting primarily as collection agencies while others added thereto very considerable powers in the rediscounting of paper and the holding of reserves. In some cases, as on the Pacific coast, creation of branches resulted from the fact that the district in which they were situated was so large that as a mere matter of convenience it was desirable to establish some local offices. In other cases the creation of branches grew out of peculiar local conditions or a need for recognition of the importance of some industrial centre outside the city in which the parent bank was situated. The local branch offices were usually given a comparatively simple organization and wherever possible the effort was made to have them practically dependent upon the bank of the district. To facilitate this closeness of relationship and also to ensure prompt

action in connexion with clearance and rediscounting operations a leased wire system, including both telegraph and telephone, was put into operation between the various banks in 1917, uniting the whole series of parent offices and branches with the board in Washington and rendering possible practically instantaneous communication upon matters of business policy. While it was never deemed expedient to establish actual branches in foreign countries, the system early in the war entered into agency relationships with the Bank of England whereby that institution was to hold funds in trust for the Federal Reserve banks jointly while they in turn were to undertake similar duties for the Bank of England. It was understood at the time that the agency relationship would not, until after the war at least, lead to the performance of functions involving the buying and selling of bills or operations in the discount market. Similar relationships were later concluded with the Bank of France, the Bank of Japan and various other international institutions, but in all cases the relationship was on a restricted basis and never resulted in the undertaking of international discount operations. From the opening of the war onward, the personnel of the Federal Reserve banks expanded very rapidly, as was necessary in order to comply with the heavy demands that were made upon the banks for services. For the year 1920 the personnel of the banks probably averaged about 10,000 persons, while their combined earnings for that year were $181,000,000, and their total expenses of operation, $29,889,000, or about 16½ per cent. Earnings which had been small before the war, some banks barely making expenses and others paying a little less than the 6% dividend provided for in the Act, shot up rapidly, as the result of heavy Government loans and the large advance made by the reserve banks in connexion therewith. For the year 1920 the earnings of the entire system, after setting aside all reserves, providing for depreciation, etc., were well over 200% on the capital. This, of course, was an abnormal condition resulting from the financing of the war period and corresponding to similarly heavy earnings at the central banks of foreign countries. Under the terms of the original Federal Reserve Act all earnings above 6% on the capital stock were to be transferred to the Government in lieu of a franchise tax. The receipts of the Government in the form of profits from the Federal Reserve banks, therefore, from the beginning to the close of 1920 amounted to about $150,000,000.

Influence of Reserve Banks on Banking and Business.—The influence of reserve banks upon business conditions in the United States is seen in the results of their effort to establish more uniform discount rates throughout the country, in their success in harmonizing commercial paper practices, in their relief of banks which would otherwise have been obliged to close on account of inability to rediscount paper, and in a variety of other less important ways. The question how far the reserve banks have succeeded in establishing a discount market or in providing a basis for financing foreign trade, both points which had been much under discussion prior to the passing of the Act, were in 1921 still matters of controversy. The provision of the Reserve Act which was intended to aid in the promotion of foreign trade authorized member banks to make bank acceptances and reserve banks to rediscount and buy such acceptances. It was natural that some time should elapse before much practical effect could be given to this provision, but it would probably have gone into operation as the result of a gradual and normal evolution had it not been for financial necessities caused by the war. In general the effect of the war was to disorganize all financial methods and systems previously in use, and this was as true in the field of commercial paper as in any other. Early in the war American foreign trade was placed upon a credit basis, and due to the difficulty of selling the obligations of belligerent Governments there was a strong temptation to obtain as much credit as possible upon a pure banking basis. The result was the lengthening of the maturity of the bankers' acceptance by every possible means and eventually the introduction of the so-called “renewal acceptance,” whereby groups of banks entered into agreements which involved the making of acceptances for financing American exports to belligerents and others, at the same time that other groups agreed to buy or discount these acceptances, the first groups in return undertaking to discount acceptances made by the second group and used to take up the first issue. This was, of course, a sheer perversion of the intent of the acceptance, and when after the close of the war there developed a widespread practice of inflation and “kiting,” followed eventually by an effort on the part of some accepting banks to repudiate acceptances because of the fact that heavy reductions in prices had occurred, the result was to impair confidence in American acceptances and to retard considerably the movement for their development. However, so far as gross volume is concerned, the new type of paper maintained a very substantial development until 1921 when the total amount in existence was estimated by the Federal Reserve Board as approximately six hundred million dollars, but during the first half of 1921 the value declined largely. Financing of foreign trade has been on so abnormal a basis and the trade itself has been so one-sided that it would be difficult to form a conclusive estimate of the effect of reserve banking in that connexion further than to say that without the general underlying strength which had been afforded by the system it would probably have been impossible for the United States to finance any such enormous volume of trade as it actually took care of. The effect of the Reserve System