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serve act and for a good while afterward. The doubt it implies probably lingered in the minds of many who were hopeful of the success of the system, and may even have troubled some of those who firmly believed in its possibilities. The cruder fears then expressed that the reserve banks would be controlled by political or unbusinesslike considerations both as to personnel and as to their operations-were promptly proved without foundation, and even those who have been most anxious to find traces of corruption, gross nepotism or genuine inefficiency in the banks, have been unsuccessful. The present writer has on a former occasion pointed out that at the beginning some of the banks were probably over-staffed as a result of the inability to forecast the exact scope of the business to be undertaken. The terms of the law itself make unavoidable a heavy overhead expense, and it may be conceded to those who seek to find a basis for criticisms that probably all of the banks if commercially operated could be conducted on a somewhat lower level of expense than they now are. This does not mean that there has been extravagance or carelessness in management but merely that the conditions under which the banks have been organized, the terms of the law creating them, the necessary safeguards involved in their handling of funds, and other considerations which necessitate the maintenance of elaborate records and complete control of every operation, have made them expensive institutions. That they have been too expensive for the service they have rendered, few contend; and the fact that during the year 1916 the banks, besides covering all expenses, earned 5 per cent net upon their capital, while maintaining themselves in exceptionally strong condition, should effectually terminate the discussion as to whether they can be made to "pay" or not. The management of the Federal Reserve Board at Washington has been successful in moulding the system into a uniform shape, and relationships between the board and the banks have produced so little friction that even a rather severe critic thoroughly familiar with the inner workings of the administrative organization of the system would probably concede success in this branch of its activities. The expenses of the board, including all salaries, have aggregated less than $220,000 a year, and mark it as one of the least costly government enterprises of the sort now in existence.

Again, it is to be noted that the currency supplied by the system has been readily available, satisfactory to the public and to

the banks, and abundant in amount, so that the "emergency currency" aspect of the so-called "banking reform problem" appears to have been fully dealt with. This brief sketch of the more obvious facts regarding the working of the system may be summarized in the statement that "success" in the superficial sense of the term has unquestionably attended the enterprise, and the statements made are so little open to controversy that they may almost be regarded as axiomatic.


As there was never any reasonable room for doubt regarding the success of the federal reserve system in the sense already described, granting honesty and fair ability in putting it into operation, so there need be no assumption of exceptional credit and no claim to more than ordinary achievement growing out of what has been done in this regard. It is rather with the subtler workings of the system and with its effects upon banking in the scientific sense of the term that the student is concerned. He will look for an answer to the questions whether the system has in reality improved and strengthened the banking condition of the United States in the way that was expected and hoped by careful analysts of banking problems, and he will inquire whether those matters in which the federal reserve system constituted a new and original departure from the ordinary principles laid down in what was previously included under the head of "banking reform” have been justified. To these questions we may now address our attention.

Perhaps the most fundamental problem affecting the whole system is that which grows out of the so-called "regional" type of organization. The Federal Reserve act while in its early stages was bitterly assailed not only by those who have continued to complain of its regional character but also by many who are now members of the system created by it. It was then asserted that the central or coöperative banking principle could not be successfully worked out upon a district plan; that no national discount market could be brought into existence under such a plan; that the policies of the several federal reserve banks could not be harmonized or adapted to one another sufficiently to bring about the necessary community of action, and that the existence of the several districts would render the various banks so weak, dependent and inefficient as to deprive them of real strength. These opin

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ions were never accepted by the less partisan of those who shared in banking discussion prior to the year 1914, and would not be conceded now, even without experience in operation. Conclusions drawn from the two and a half years of experience with the system must, as already suggested, be modified by the fact that conditions have been very unusual. Nevertheless, we may put forward with assurance certain definite ideas upon each of these points. The reserve banks have beyond any question been operated as a unit. Their discount rates have been substantially similar, bearing in mind differences in local conditions, and there has been little or no difficulty on their part in meeting the local conditions that called for remedial action. The Southern reserve banks, while not equal in capitalization and resources to the others, have been able to render marked assistance to the banks of their own communities, and through them to the borrower, while their influence has been in the direction of moderating and harmonizing interest and discount rates to such a degree as to bring decided and generous recognition of their work not only from technical men but from the public at large. If a section of this public is at times inclined to praise the reserve banks because of a belief that to the work of these institutions may be attributed increases in the prices of cotton or other staples, it yet remains true that much of the recognition accorded to their efforts has been more -discriminating. The Southern agricultural communities have found that the stringency of the "crop moving period" has been greatly diminished, and that an appreciable part of this benefit is attributable to the working of the reserve system. While it has never been necessary thus far for one reserve bank to draw upon another for aid through rediscounts, the machinery for extending such aid is always available, and there is probably no informed person who doubts that had such aid been required it could and would have been promptly rendered. It is, therefore, fair to conclude that the country has derived from the federal reserve banks organized upon the regional or district plan all of those benefits in the way of accommodation, adjustment of rates, and equalization of banking capital that they could have had from a central bank with branches. The statement that a central bank with branches would have done the same work very much more cheaply is scarcely borne out by the limited experience of the reserve system thus far in the matter of branches, and is still less supported by the evident logic of the facts in the case. Ex

perience has daily demonstrated that the various communities desire local institutions and that a central bank would have had to establish branches nearly as costly in their operation as the individual federal reserve banks is a conclusion that can hardly be escaped. Some saving in overhead expenses could probably have been made by such an institution and a slight saving in the cost of note issue could probably also have been secured, but beyond this it is difficult to see any advantage in the one plan over the other as relating to economy of administration.

On the other hand there seems to be no reason to doubt that the regional or district plan has operated as effectively in the direction of a discount market as a central bank would have done. It was a commonplace among those who opposed the new system to say that the discount market could not be secured save through a bank organized upon highly centralized principles. Just how far this "discount market" may be said to have been brought into existence we shall inquire more fully at a later point. The question here at issue is whether or not the district type of organization has been in any way different in its effect upon the discount market from that of the central bank. The answer would seem to be decidedly in the negative. Several considerations may be cited in support of this view. In the first place, there has been close coöperation between the federal reserve banks in most matters. In other ways, moreover, close coördination of work has been obtained. Reference has already been made to the adjustment of discount rates to one another upon a close working basis, but this is only one of several examples of coöperation. If it be said that this coöperation and coördination is merely another way of approximating to a central bank plan of organization and that it differs from the latter only in being less efficient and more clumsy, the reply must nevertheless be ruled out of account. The question is not whether the federal reserve system can or could successfully substitute something new for the methods of central banking but whether it can make use of those methods. If it has done so, those who were disposed to contend that it could not succeed for lack of them must own themselves in the wrong.

The issue, however, is far more important than that of proving whether this or that contending group was or was not right; it is a question whether the methods of the federal reserve system looking to the establishment of a definite discount market have been efficient and satisfactory, and to this the reply must

be on the whole in the affirmative. Interest rates have undoubtedly been stabilized and rendered more uniform than in the past, while the banks have been able to act as a unit in their purchases of paper and investments. Indeed, some might consider that more criticism should be visited upon the closeness of this coöperation, than upon the alleged clumsiness of the expedients employed. There is general agreement that the district plan of organization has resulted in bringing the reserve banks of the several districts considerably closer to the communities in which they are located than could have been true had these banks been mere branches of a central organization. This is not a partisan or one-sided assertion, but is a generalization from authoritative expressions made by many persons including not a few of those who formerly entertained the opposite view. While there has been criticism of the method of electing the directorates of the several banks, and while it has been and is frequently stated that these directorates are not satisfactorily representative of the banking and business communities in which they are located, owing to the preponderating power given to the smaller banks through the equality of voting strength ("one bank, one vote") provided in the act, combined with the singular circumstance that many country banks do not care to exercise their franchise, it yet remains an admitted fact that the banks are regarded by their several communities as being in a very direct sense their own institutions, controlled by them, responsive to their needs, and far more truly representative of local requirements, as already stated, than the branches of a central bank could have been.


It was apparent from the initiation of the federal reserve system that its essential success would depend very largely upon its being able to reform the commercial paper of the country. It is not now necessary to consider the lines along which this reform was called for, since recent banking discussion has made the whole subject familiar to all students. As is well known, the banking paper of the United States has developed in a predominating degree upon the "single-name" basis, as opposed to the "acceptance" or "two-name" basis adopted in foreign countries. While there have been voices, some of them influential, that protested against the attempt to substitute two-name paper for single-name, the general drift of discussion in recent years has been toward two-name paper,

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