always to have access to an open discount market where it can sell acceptances, etc.? 41. What is the relation of the bank acceptance to the development of a discount market? 42. What is the purpose of the acceptance banks of Europe? Are such institutions indispensable to the development of a discount market? 43. Why is it believed that the growth of discount corporations or brokers is necessary to the efficient operation of a discount market? IV. CLEARINGS AND COLLECTIONS 44. What parts of the clearing and collection system have been affected by the Federal Reserve System? 45. What was the objection to the "float" that characterized the former collection system? 46. A bank in Grand Rapids, Michigan, receives a check from one of its customers drawn against a bank in Milwaukee, Wisconsin. Show how it would be collected under the Federal Reserve clearing system. How would it probably have been collected under the old system? 47. A bank in Springfield, Massachusetts, receives a check drawn on a bank in St. Louis, Missouri. Show how it would be collected under the Federal Reserve System. How would it probably have been collected under the old system? 48. What is the purpose of the gold settlement fund? In what respect is it analogous to the system of settling clearing-house balances by means of clearing-house certificates? In what respects does it differ? 49. Have the state banks not a right to oppose their attempted coercion into the Federal Reserve clearing system? 50. Do you think that in the end all of the banks will find it to their advantage to use the system of par collections? Why, or why not? V. THE TREASURY AND THE FEDERAL RESERVE SYSTEM 51. Why did not the Federal Reserve System eliminate the system of depositing government funds with individual depositary banks? 52. Would you favor the abolition of the system of depositing government funds in individual banks? Why, or why not? 53. How does the Federal Reserve System make possible the elimination of the sub-treasury system? 54. Would you favor severing the relation of the Federal Reserve banks with the Treasury Department, including the elimination of the Secretary of the Treasury as a member of the Federal Reserve Board? 55. As a member of the Federal Reserve Board in time of war, would you take the stand that Federal Reserve policy should be formulated without regard to the fiscal problems of the Treasury Department? VI. ANALYSIS OF FEDERAL RESERVE BANK STATEMENTS 56. What are the most significant changes in the combined financial statements of the Federal Reserve banks in 1916 and in 1920, as given on pages 616-18? 57. Under what designation do "rediscounts" appear in the balance sheet on page 617? Collateral loans to member banks? 58. What is the meaning of the item on the resources side, "Gold redemption fund”? 59. What is the meaning of "Uncollected items and other deductions from gross deposits"? 60. Does the large surplus fund of the Federal Reserve banks indicate that these institutions have been profiteering? 61. What is the meaning of the entry "Deferred availability items" on the liability side? 62. What is the ratio of reserves to Federal Reserve note and deposit liabilities combined on each of the Federal Reserve statements given in the text? Consult the financial press and ascertain the present reserve ratio. REFERENCES FOR FURTHER STUDY Agger, Eugene E.: Organized Banking, chaps. xiii and xiv. Dunbar, Charles F.: Chapters in the History and Theory of Banking, third edition, revised and enlarged by O. M. W. Sprague, chap. xii. Holdsworth, John Thom: Money and Banking, chap. xxii. Kemmerer, Edwin W.: The Operation of the Federal Reserve Act. Laughlin, J. Laurence: Banking Progress, chaps. iv, vii, and x. Moulton, Harold G.: Principles of Money and Banking, Part II, chap. vii. Phillips, Chester A.: Readings in Money and Banking, chap. xxxi, -: American Banking, chaps. xvi-xix. CHAPTER XXVI THE WAR AND THE FEDERAL RESERVE SYSTEM Wars have always been disruptive of financial systems, and none more so than the Great War which began in 1914. The Napoleonic struggle a hundred years earlier, for example, reduced European currency systems to chaos, and a generation of currency agitation and discussion followed; while the financial exigencies of our Civil War led to the issue of irredeemable paper money and the abandonment of specie payments for a period of seventeen years. But after the gold standard was definitely established by the leading countries of the world and nearly two generations had elapsed since any great western commercial nation had been subjected to the disrupting influence of a great war, it was commonly felt that society had learned important financial lessons and that the requirements of war would henceforth be met with much less serious dislocation of the financial and business fabric than had been the case in the past. The present condition of the financial systems of the world, however, unfortunately affords conclusive evidence of the error of this conviction. It may be recalled that the war in Europe commenced just prior to the inauguration of our Federal Reserve System. After the temporary financial shock incident to the outbreak of hostilities was passed, the first noteworthy financial effect upon the United States of the struggle in Europe was manifested in the shipment to this country of great quantities of gold in payment for war supplies, as already indicated in the chart on page 271 above. These funds went, immediately speaking, into the reserves of American banking institutions. This augmentation of specie holdings, together with the decrease in reserve requirements for member banks that the Federal Reserve Act provided, resulted in a very great increase in the lending power of the individual banks. Meanwhile the volume of reserve money in the Federal Reserve banks was also very large. It will be recalled that the cash resources of the Federal Reserve institutions were originally derived in part from the capital contributions of the stock-holding member banks and in part from deposits, both of member banks and of the federal government. These sources yielded large funds to the Federal Reserve banks at the very commencement of their operations. Later, the amendment to the Federal Reserve law which made it necessary for each member bank to keep all, rather than merely a portion, of its required reserve in the Federal Reserve bank of its district, the concentration of gold reserves through exchanging Federal Reserves notes for gold, as described above, and finally, the accession of the larger state banks as members of the Federal Reserve System, very greatly increased the volume of reserve money in the central reservoirs. In 1916 the ratio of cash to notes and deposits combined in the twelve Federal Reserve banks was about 87 per cent; and although for more than a year we had one foot in the conflict, the net reserve was about 77 per cent at the time we formally entered the war in 1917. Our financial structure was, therefore, in an extraordinarily strong position for meeting the financial strain of a great war. As everyone is aware, the period from 1914 to 1920 has been marked by a revolution in prices. The chart on page 626 indicates the extent of the price advance in each of the leading allied countries. Russia and the one-time Central Powers haye witnessed even greater price changes. The causes of this price revolution have been variously assigned (in the United States) to the resort to borrowing rather than to taxation as a means of raising the funds required by the government, to the loose extension of credit in the form of bank loans, to the activities of labor unions in forcing wages to higher levels, to the thriftlessness and extravagance of people generally, to the law of demand and supply, to changed costs of 600 500 400 300 200 100 production, to the Democratic party, etc. To attempt an adequate discussion of the moot question of the causes that produced the price revolution would require a volume in itself. a base of 100. 1916 1917 1918 1919 1920 'Wholesale prices in five leading countries. Prices for 1913 taken as Taken from Report on Business Conditions (Second Federal Reserve District), August, 1920. |