our present state of affluence, stimulated by "war orders" and high prices. When the Federal Reserve Act was being formulated, the politicians at Washington assured us that it would extract the poison in our credit and economic systems which make for periods of excessive prosperity and depression. In other words, the word "panic" was to be relegated to the lexicons of the past. New York and Wall street were to be deprived of their super-power in finance and banking by the creation of twelve reserve centers. The evils of bond-secured national bank circulation were to be cured by Federal Reserve notes based on liquid commercial assets.

The fact is, however, that our trained men of business and banking have not yet become reconciled to the optimistic faith that the muchdesired equilibrium has been achieved. The influence of the Federal Reserve banks on discount rates is practically nil; their activities in emitting reserve notes on deposits of gold and encouraging rediscounts are criticised as tending toward "inflation" of credits. We find by reference to trade indexes that prices of commodities and manufactured products have never before been so high in this country. On the present basis of production the annual yield to the steel industry alone is $6,500,000,000 over that of 1914. Dun's index number, representing

more than one hundred commodities, touched the record figure of 137,146 on January 1st. In addition, the cost of raw material in manufactures has increased from 50 to 100 per cent. But for the tribute paid to labor, especially by manufacturers of war munitions, the cry of "high cost of living" would be heard throughout the land. That such prices and wages cannot endure permanently is obvious to every sane-minded man. Happily, the manipulators of “war stocks" on the New York Stock Exchange seem also to have seen the light, as may be judged from the fact that the average range of 50 active stocks on January 15th had declined to 90.13, as compared with the high of 94.13 last October. Transactions on the stock exchange during December declined over 25 per cent. in volume as compared with November. Indeed, the responsible banking and trust company interests of New York have earned grateful recognition because of the wholesome influence which they have exerted through margin requirements in putting an end to the excesses of "war stock speculation."

WORDS OF CAUTION BY GARY,

VANDERLIP, et al.

That there are dangers ahead, that our remarkable recovery in industry and business generally is not based on entirely normal factors and that a tight check should be observed in regard to credit expansion, are some of the observations of men like Judge Gary and Frank A. Vanderlip who know whereof they speak. It cannot be doubted that much of our present prosperity is related directly or indirectly to the war. At the same time there are some erroneous ideas as to the extent of readjustments which must take place when peace is restored. There is a disposition to exaggerate the effect of our foreign trade upon home business. In truth the total value of our 1915 exports and imports, valued at $5,350,000,000, is dwarfed into insignificance when compared with our domestic trade which is estimated by the analyst to aggregate $507,000,000,000. Taking the volume of bank clearings alone for the year past, we find an aggregate of $186,079,731,746, with an average increase for the whole country of 20.8 percent. It is significant that interior trade reports an increasing amount of business due to purely domestic consumption. The danger of "dumping" of cheap foreign made goods upon poverishment of warring nations, the heavy war our markets after the war also ignores the imtaxes upon production and the need of rehabilitation of their own industries.

Inflationary influences are doubtless at work in the financial and credit situation. But they are essentially different from the kind of overextension which precipitated previous panics. According to the figures of the U. S. Treasury, the total money supply of the United States, including Federal Reserve notes, national bank notes, gold, silver coin and certificates aggregated on January 1st the sum of $4,401,988,000 against $3,972,373,000 a year ago. Here is an increase of $429,000,000 as compared with an increase of $496,000,000 in gold due to foreign shipments of gold to this country and domestic production. On the other hand the total of bank note issues of all kinds was reduced by $66,500,000 during the same period. Of the total of $214,125,000 Federal reserve notes issued by the twelve Federal Reserve banks by January 1st, only $16,675,000 represent commercial paper rediscounts, and the remainder represents the deposit of gold or lawful money, dollar for dollar. Whatever may be said to the contrary,

the huge imports of gold from Europe, in part payment for the $1,747,390,381 excess of exports over imports during 1915, constitute a powerful leverage in dealing with the problems of readjustment. The fundamental strength of our financial position is further reflected by the fact that bond prices are advancing in the face of nearly $1,500,000,000 absorption of American securities returned from abroad.

SOME ASTONISHING RECORDS OF 1915 TRADE AND FINANCE One year ago British Treasury representatives were in this country to obtain assurance that we would meet our indebtedness of interest and other obligations abroad. There were fears of "liquidation" of American securities and instability of our gold supply. So remarkably was the situation reversed that in September the British Commissioners came here to find a way to stem the tide of gold to this country and to borrow a billion of dollars to provide payment for their purchases. Our investors and bankers were prepared to absorb only half that amount. Despite the total of approximately $1,000,000,000 in loans and credits extended to Europe, the absorption of nearly $1,500,000,000 of American securities held abroad and the imports of $450,000,000 of gold the exchanges are still in our favor, with demand sterling declining to a record low of 4.50 last September and under the impulse of the British "mobilization" of American securities rising to 4.78 on January 6th, 1916, the highest since the break, as against the par of 4.8665. Before the war we were third among the nations in rank of foreign trade. Now we are first. For some time "Dollar" exchange has been at a premium in foreign markets and is rapidly displacing, temporarily at least, the sterling bill. We have financed upward of $200,000,000 Canadian securities besides making direct loans to a number of neutral and South American countries. Bank clearings for 1915 aggregated $186,079,731,746 as compared with the previous high record of $172,847,178,745 in 1912. Gross railway earnings have increased for the past year 3.3 percent, and there has been a remarkable activity in the building of new American ships. The value of all agricultural crops increased 8 percent to $5,538,370,000, and despite a short yield, the value of the last cotton crop exceeded substantially that of the previous year. Steel making is proceeding at the rate of

40,000,000 tons of ingots annually and pig iron at the rate of 30,000,000 tons. The January dividend and interest disbursements were $21,000,000 larger than for the same month last year. Notwithstanding all the marvelous activity, money rates continued abnormally low. With all the fluidity of capital here the warring powers in Europe have piled up a war debt burden of nearly thirty billions.

THE REMARKABLE INCREASE IN BANKING WEALTH

Perhaps the most remarkable development of the past year is the great increase in the banking wealth of this country. The resources of all national and state banks and trust companies, including those of the Federal Reserve banks, aggregated last June, according to the annual report of the Comptroller of Currency, $28,185,585,000. For the year ending November, 1915, the net resources of national banks alone increased $1,743,878,648, deposits increased $2,081,530,164, loans and discounts increased $917,450,502 with excess cash reserves of $891,000,000. The aggregate resources of trust companies of the United States at the close of the year approximate $7,000,000,000.

If the Federal Reserve Act was designed to impair the banking prestige of New York City, the experiences of the past year defeated all such expectations on the part of Washington politicians. From January 2, 1915, to January 15, 1916, the net deposits of New York Clearing House institutions increased from $2,091,985,000 to $3,502,752,000; their loans increased from $2,182,875,000 to $3,271,057,000, while aggregate reserve increased from $461,752,000 to $737,091,000, leaving on the latter date an excess of $160,236,000 over legal requirements. Trust companies show an increase in deposists during the same period from $1,241,368,000 to $1,932,427,500; increase in loans from $1,139,110,000 to $1,560,524,000 with increase in cash from $100,382,000 to $170,353,000. Particularly significant is the increase in bank balances carried by New York institutions for interior banks. In reviewing the Wall street situation we must come to the conclusion that there is nothing in American economic history to match the splendid leadership, resourcefulness and conservatism characterized in the management of the banks and trust companies of this city.

EXERCISE OF TRUST POWERS BY NATIONAL BANKS DECREED

UNCONSTITUTIONAL

Important recent developments in the State courts will hasten a final determination of the validity of Section 11, paragraph k of the Federal Reserve Act which authorizes the Federal Reserve Board to grant national banks the right to exercise trust powers. In the first place the Illinois Supreme Court has rendered a decision that the exercise of such powers by National banks is unconstitutional, and that it would be in direct contravention of the laws of that State. The second development is the filing of briefs by the Attorney General of Michigan in behalf of the trust companies and the presentation of a brief by the Federal Reserve Board as amicus curiae in the proceedings pending in Michigan, contesting the right of the First National Bank of Bay City, as respondent, to perform trust functions. A third suit, involving the constitutionality of this provision of the Federal Reserve Act, has been brought in the Supreme Court of Massachusetts by the State Department of Justice at the instance of William D. T. Trefry, Commissionar of Corporations, against the National Shawmut Bank of Boston, to restrain the latter from exercising its franchise of acting as trustee, executor, administrator and registrar of stocks and bonds. As a result of the decision in Illinois, the banking departments of a number of states have announced that action will be brought against national banks in the respective commonwealths which attempt to avail themselves of the fiduciary privileges granted by the Federal Reserve Board.

The decision delivered by Chief Justice Farmer of the Illinois Supreme Court sustains the principal objections set forth in the argument of Attorney General Patrick J. Lucey. The proceeding is based on the advice given by the Attorney General to the State Auditor of Public Accounts to decline the issue of a certificate of qualification to the First National Bank of Joliet which had obtained permission to act in trust capacities from the Federal Reserve Board. Upon refusal to grant the certificate, the First National Bank of Joliet filed a petition in the Illinois Supreme Court for a writ of mandamus to compel the State Auditor to honor its application. The court in its decision, published in another part of this number of TRUST COMPANIES, held that the grant by Congress to national banks of the power to act as

trustee, executor, administrator, or registrar of stocks and bonds, is unconstitutional and void, for want of power in Congress to grant such a franchise to a national corporation. The court also maintains that to permit national banks to act in such capacities would be in contravention of the laws of Illinois. Upon the minor contention of the Attorney General that said Section 11, paragraph k, is a delegation of legislative power by Congress to the Federal Reserve Board in violation of the Constitution of the United States and therefore void, the decision holds that the powers delegated are not legislative but purely administrative. This does not alter the vital determination that the section in question is unconstitutional, and as such is a distinct victory for State sovereignty as well as for the integrity of trust company functions as subject to purely State control. The First National Bank of Joliet, it is announced, will ap peal the case to the United States Supreme Court.

FEDERAL RESERVE BOARD CLAIMS STATE COURTS WITHOUT JURISDICTION SUBSTANCE

OF BRIEF

It is a logical conclusion that if the United States Supreme Court should sustain the argv ments presented by Counsel M. C. Elliott f the Federal Reserve Board in the Michigan qu warranto proceedings contesting the right of the First National Bank of Bay City to act as trustee, etc., we shall have "New Nationalism" with a vengeance and the structure of "state rights" will suffer complete collapse. All other issues in this case, which promises to be one of the most celebrated in the history of American jurisprudence, are subordinated to the conten

tion of the Federal Reserve Board that

"The courts of a State are without jurisdiction to oust a corporation organized under the laws of the United States or to enjoin such corporation from exercising any or all of its franchises within the borders of the State."

The courts are clogged with controversies regarding the question of Federal and State jurisdiction but probably no such radical doctrine has ever been advanced as contained in this argument and the further assumption that The power to create carries with it the power to preserve. Congress may vest Na

tional banks with any powers it deems necessary to preserve the National banking system or the corporate entity of individual banks." Trust companies are primarily interested in securing a decision as to the validity of the grant of fiduciary powers to National banks and the question of whether State Courts have jurisdiction to pass upon the constitutional right of a national corporation to exercise such functions will not be germain to the vital issue at stake. There can be no doubt that judicial control of a Federal agency is within the exclusive jurisdiction of the Federal government providing that such agency does not exercise powers which the Federal government has no constitutional right to confer.

In regard to the constitutionality of Section 11 (k), counsel for the Federal Reserve Board maintains that "every contendment is in support of the constitutionality of the act and that the courts invariably hold that an act of Congress is unconstitutional unless its repugnancy to the Constitution is clearly apparent." It is also held to be well settled that Congress has the power to incorporate banking associations to be used as instrumentalities of the Government in the conduct of its fiscal affairs and that such powers may be either public or private in nature. It is further assumed:

"These powers, though private in nature, need not be even incidental to the conduct of the Government's fiscal affairs. It is sufficient if they are necessary to the successful operation of the bank. The character of the powers and the degree of their necessity are matters of legislative discretion."

The argument that National banks are necessary to the Government in the performance of its fiscal duties is materially weakened by the fact that the Federal Reserve Act has deprived National banks of the two prime functions which prompted the passage of the National Bank Act, namely as depositories of the Government and in creating a market for government bonds through the issue of bond-secured National bank notes. Only recently the Federal Reserve Board required the transfer of Government deposits from National banks to Federal Reserve banks. The prime object of the Federal Reserve Act is to retire National bank currency based on Government bonds and substitute therefore Federal Reserve notes secured by eligible commercial paper. The operation of trust companies with both commercial banking and fiduciary powers is referred to in the brief

to show that there is no inconstancy in combining the two functions. The contention that the relation of trustee and cestue que trust differs from that of debtor and creditor is dismissed by the argument:

"Inasmuch, therefore, as Congress has constitutional authority to organize a National bank and to vest in it the power to trade with individuals, and to deal in property within the borders of a State, the fact that its operations may affect the citizens of a State, or their property, cannot be said to constitute an unconstitutional invasion of the rights of the State. The Federal law is supreme within its sphere...."”

Counsel Elliott also takes exceptions to the finding of the Illinois Supreme Court upon various premises and in presuming that Congress did not deem it necessary on any ground that National banks possess these powers by the mere fact that the act provides that only those banks which make application therefore shall be granted permission to exercise the powers in question. In the main the brief presented by the Attorney General of Michigan in behalf of the trust companies (see page 29 of this issue of TRUST COMPANIES) embodies the points sustained in the Illinois suit.

MISLEADING THE PUBLIC AS TO TRUST COMPANY MANAGEMENT

Officers of a number of trust companies have written to the editor of TRUST COMPANIES calling attention to unwarranted and misleading reflections upon trust company administration contained in a story by Maximilian Foster, entitled "The Dub," which appeared in recent issues of "The Saturday Evening Post." Although the author refers to a fictitious trust company and that the alleged practices were indulged in some twenty-five years ago in the purlieus of Wall street he leaves the impression that such methods prevail at the present time. It is evident that Mr. Foster did not consider the injurious effect of his entirely unwarranted allegations upon the public mind, especially through a publication so widely read as "The Saturday Evening Post." It is inconceivable that the responsible editorial management of that paper would knowingly countenance such

an attack, especially when it concerns the delicate question of the sacred relationships between trust companies as custodians of the property of widows, minors and incompetents. It is unfair and unjust to charge that any trust company juggles with the accounts of such clients for selfish profit and indulges in illegal subterfuges, even if the trust .company is a fictitious one. An examination of the public or judicial records will fail to disclose anything to justify such statements, Mr. Foster's intimation to the contrary notwithstanding. The trust companies are spending millions to educate the people as to the economy and safety of trust company management of estates and trusts. They are justified by their record of able and faithful administration in emphasizing such advantages. The story in the "Saturday Evening Post" therefore calls for retraction and an editorial explanation in order to disabuse the minds of such of its readers as may not be familiar with the facts.

99

COMPTROLLER AGAIN PLAYS TO THE " GALLERIES The recent annual report of the Comptroller of Currency again emphasizes the need of abolishing that office for personal, technical and political reasons. "Usury" has evidently become a mental obsession to Mr. John Skelton Williams. He dreams of it and lives in the clouds of his own fancies. He pleads for greater autocratic power to bring "usurious bankers" to justice. He woefully magnifies the transgressions of a few bankers. The fact that forty-three bank officers were convicted during the year for criminal violations seems to appeal to this white-plumed knight of the Treasury Department as an excellent text, especially since there is need of providing material for Democratic campaign books upon the eve of another Presidential election.

The Comptroller lends himself eagerly to the politicians in Congress who put political considerations above general welfare of the country. He re-iterated his now familiar charges as to the practice of usury by a number of national banks before the House Rules Committee. In order to justify his allegations, the Comptroller avails himself of mathematical deductions and isolated instances of exorbitant interest rates. Indeed, bankers generally do not quarrel with his denunciation of usury. What they object to and righteously resent is his manner of casting reflections upon the entire banking fraternity and the obvious hostility of his attitude

toward the profession of banking. Their patience has been exhausted by inquisitorial methods and requirements which affect neither the solvency or welfare of the National banks. A great deal of absolutely useless and silly data is called for in published statements which necessitate extra clerk hire and cause undue annoyance without serving any apparent purpose. In fact, the Comptroller is today the most dangerous foe of the Federal Reserve system. A considerable number of National banks, especially in smaller communities have already relinquished their national charters in favor of state organization. The number promises to increase unless the executive authorities at Washington take cognizance of the situation. His harsh rulings and pettifogging do more to discourage State banks and trust companies from becoming members of the Federal Reserve system than any other objection.

CONGRESS AND THE FEDERAL

RESERVE ACT

Thus far Congress has displayed no special zeal to take up the numerous suggestions for correcting the faults in the Federal Reserve system which have been exposed after one year of actual operation. The usefulness and practicability of the Federal Reserve banks are still to be demonstrated. That the problems will be satisfactorily worked out we have no doubt. On January 1st, the Federal Reserve banks entered actively into their function as Government fiscal agents by the transfer of Government funds from National bank depositaries and payment of checks drawn by the Treasurer of the United States. On the first of the year the provisions likewise became effective for the gradual retirement of National bank circulation and refunding of U. S. Government 2's. Important new rulings have also been announced in regard to "open market" operations, eligibility to rediscount of bills drawn for purchase of agricultural machinery and relating to other phases. The fact that the Federal Reserve Board has not encountered "fair sailing" in connection with the establishment of its intradistrict check collection system is indicated by the request for an opinion from the Attorney General as to the power of the Board to make the plan compulsory upon all member banks. On the other hand the clearing houses of the country are experiencing marked success in expanding their facilities for collection of out-oftown checks.