tutions in the country that can take on at least a limited amount of such business which is sound, safe, and secure, but not as quickly liquid as the preferred classes mentioned in the reserve bank act.

Fifth, customers of country banks know very little about making statements, and it would be very difficult for a country bank to meet the "red-tape" requirements of the federal reserve banks when discounts are needed. A statement must be filed for the maker of each note offered for rediscount, certain application blanks must be filled out and filed, and a great deal of necessary routine gone through before a loan can be secured or paper rediscounted. I believe the small member banks and non-member banks must rely, as heretofore, largely upon their correspondents in the larger centers to supply them with funds as needed for emergencies. Fortunately, such banks do not need accommodations very often.

Sixth, it would be very dangerous to place the entire banking business of the country under the control of a federal board at Washington. No other free country that I know of has ever succeeded in forcing all banking institutions to come under absolute governmental control.

Is it not unwise to take on the risks and the obligations entailed by becoming members of the reserve system when it is not necessary to do so? While there are benefits and advantages to those banks that are members of the system, these are more or less counterbalanced at this time by the risks, curtailment of privileges, limitation of functions, added expenses, and other disadvantages offered by the system.

State banks and trust companies are in a very fortunate position, both for themselves and for their patrons, in being able to stand aside during the formative period-we might say the experimental stage-of the new national banking system and steady the financial ship while the national banks trim their sails and adjust their craft to suit the current of the new stream. These twenty thousand or more state banks and trust companies, remaining serene and undisturbed, are able to take care of their business in the usual way, co-operating at all times in a most friendly and patriotic spirit in bringing the new national system to its highest efficiency and most perfect state of usefulness.

164. THE ATTITUDE OF THE FEDERAL RESERVE BOARD'

BY CHARLES S. HAMLIN

We are anxious that the state banks generally shall come into the system-some of them seem to be holding aloof and waiting. The Federal Reserve Board has done everything in its power to liberalize the regulations for the admission of state banks. I want to say frankly that this system has succeeded, and will succeed, whether the state banks come in or not, but the bigger the base the stronger the edifice, and I believe it highly desirable that all state banks join the system. About thirty of the large, strong banks have joined, and there is quite a waiting list now of those who desire to come in, but I want to make the prediction that if the state banks do not come into the federal reserve system, sooner or later they will have to establish a system of their own, and if they go to their state legislatures and ask authority, the first question will be: "Why have you not entered the federal reserve system ?" Such a system would require special legislation in several states, and would require years to put through. I earnestly hope in the near future to see the state banks coming into the federal reserve system, and I want to hold out this thought to them, that if they come in now they will come in easily, because their assets are liquid; but the time may come when the state bank wants to come in quickly, and the bank may find its assets are not in a liquid condition and it will take time and trouble to get in.

Our regulations have been very moderate. We have interfered very little with the powers of the state banks. The state banks which come into the system can still loan on real estate when national banks have never been permitted to do that except to a limited extent under the Federal Reserve act. They can come in with all their branches and do business side by side with national banks that are not authorized directly to have branches. We even accept the examination of the state authorities where we find that those examinations are sound and good; that, certainly, is a great privilege for the state banks. We even have gone so far that we say to the state bank that, once in, you can withdraw on a year's notice; I think that is a privilege the state banks must appreciate. But we do not believe that one of them would look back to see whether the door was open or closed after it had once entered the system.

1Adapted from an (unpublished) address before the Western Economic Society, November, 1915.

Sometimes a bank president may say, "Why should a state bank come in, if it is true that the system is a great success and we can never have any more panics?" Now I think it is true that we will never have any more panics, but that does not mean that individual state banks will not have trouble in the future as they have had trouble in the past. And when they do come-for I believe there will be a long line of state banks at the first touch of stringencythen they must take the last place in the line to be examined, and it will take longer. But if you still ask, What use it is, because we can never have a general conflagration again? a man might just as well get up when there is a motion to put in a system of hydrants in a city, and say he read the other day the report that the hydrant systems over the United States are so efficient that the whole United States could now never be burnt up. I think that would be almost as sensible an answer as the one we occasionally receive. Now, when times of stringency and tight money come, banks will not be able to get the assistance outside of the system that they have previously secured, even from the national banks.

I believe, however, that this question will be largely settled by the customers of the bank. If a man were going into a small town to start an elaborate business, requiring much capital and credit, and he were to find two state banks there, one belonging to the federal reserve system and one not belonging to it, would it take that man, if he were prudent, long to decide where to put his deposits? I believe that the people of the United States in the long run will see to it that the banks they deal with sooner or later become members of the federal reserve system.

165. NEW YORK'S NEW STATE BANKING LAW1

BY THEO. H. PRICE

In April, 1914, the state of New York passed a new bank act, designed for the most part to enable the state institutions to compete with the banks in the Federal Reserve system.

The most important of these changes in the law have to do with reserves and acceptances.

I

Adapted from an article on "Commerce and Finance" in the Outlook, CVI (1914), 813-15.

In the matter of reserves the proposed changes follow closely the provisions of the Federal Reserve Bill. Under the new law the reserves required will be:

At least one-half the reserves on hand shall consist of gold bullion, gold coin, gold certificates, or United States notes, and the remainder shall consist of lawful money of the United States or any other form of currency authorized by the United States. State banks and trust companies that become members of the Federal Reserve system may keep the reserves permitted to be on deposit with the Federal Reserve Bank.

Other reserve depositaries shall be designated by the Superintendent of Banking.

The reduction in the reserves for which the new law provides will undoubtedly work a great enlargement in the credit which the State institutions will be able to extend. In the provision which is made for acceptances the greatest possibility of credit expansion is to be found. In brief, this portion of the law permits State banks and trust companies to accept drafts on them and payable within one year.

The liability of institutions in the Borough of Manhattan on account of such acceptances for account of any one individual, firm, or corporation is limited to 25 per cent of their capital and surplus. Banks and trust companies elsewhere may accept the drafts of any

one individual, firm, or corporation up to 40 per cent of their capital and surplus. The drafts so accepted must be drawn in good faith against actually existing values, or, where they exceed 10 per cent of the bank's capital and surplus, may be, to the extent of the excess so authorized, secured by collateral having an ascertained market value that is 15 per cent more than the obligation against which it is hypothecated.

Under the new law State institutions may accept bills to the extent of 25 per cent to 40 per cent of their aggregate capital and surplus, "multiplied by the number of individuals, firms, and corporations who desire and can arrange for this form of credit."

The bill contains many other interesting provisions. One of these permits the formation of land banks with authority to issue debenture bonds against guaranteed real estate mortgages. Another imposes some rather drastic restrictions upon private and unincorporated bankers.

It is unnecessary, however, to discuss these provisions; they are chiefly of local interest.

The changes that are nation-wide in their importance are those that relate to reserves and acceptances. There is reason to believe that the other States of the Union have been awaiting New York's action in regard to its banking system and will speedily follow suit in changing their laws so that the State institutions throughout the country may compete with the increased facilities which the National banks will be able to offer under the Federal Reserve system.

The liberalization of the right to accept, for which the New York law provides, will enable the State institution to grant far greater facilities in this respect than the National banks can offer. On the other hand, the State institutions that do not become members of the Federal Reserve system will be unable to avail themselves of the provisions of the Federal Reserve bill in the matter of rediscounts and Federal Reserve notes.

It seems probable, therefore, that the competition in the extension of credits which is almost certain to come when the two systems are fully organized will be one of rediscounts versus acceptances. The extent to which either or both of these means of credit extension shall be popularized and availed of will depend largely upon the education of the public as to their respective merits.

This advantage has now been largely overcome by granting to Federal Reserve Banks the right of accepting domestic bills of exchange.-EDITOR.