of the collection system was met with determined opposition from a great variety of sources, and that the disposition on the part of the Federal Reserve Board to leave the question to the various banks to be worked out as a matter of practical experience and adjustment was not a success. As the time for the final transfer of reserves has drawn near (November 16, 1917), it has, however, been appreciated more and more strongly by wise bankers that an effective clearing and collection system ought to be introduced and made actually operative before the time of eventual transfer when the reserve balances with city banks would no longer count as reserves should arrive. Hence, the action of the Federal Reserve Board in adopting in the early summer of 1916 a compulsory system of clearings and collection. Inasmuch as the items were drawn, in the nature of things, not only upon other members but also upon non-members it was early perceived that the success of the plan would depend upon obtaining the consent of non-members to its application. That enough non-members have accepted the plan to make the total number of assenting banks about 15,000 (as against some 7,625 regular members of the system) shows that the plan has thus far met with very distinct success. In effect, it amounts to nothing more than the undertaking of check collection at par, with deferred book credit, a moderate charge for handling the several items being made to the banks that deposit them.

The operation of this plan of clearing and collection has materially reduced exchange charges in many parts of the United States. Various large business houses testify that they have made savings of 50 per cent of their annual exchange charges. This saving has been effected without the sacrifice of legitimate business by any bank. There is no truth in the constant statements that banks are compelled under the plan to make their checks good at a great distance from home. The ruling of the board has merely been that checks drawn upon a member bank must be paid for by acceptable exchange remitted by the member bank to the federal reserve bank, but that in the absence of such exchange the reserve bank will pay the cost of transmitting currency. At one time recalcitrant banks were informed that non-adherence to the system would mean that checks would be directly presented to them and collected in currency at their counters through the Post Office Department, but this has not been found necessary thus far. About all that can be said, then, is that the collection system of the

Federal Reserve Board by enlisting, in some cases, the services of the express companies, as check collecting agencies has up to date prevented banks from enforcing a discount upon their own checks and has compelled them to meet these obligations over their counter at par or to adopt a policy which was equivalent thereto.

This is a long stride toward the establishment of better, fairer, and more businesslike conditions of check settlement in the United States than have ever in the past existed. It is the first time that any scientific, unifying effort has been made in the direction referred to. One result of the work done is to bring about a greater approach toward uniformity in clearing house rules and in many other ways the indirect consequences of the attempt have been as beneficial as its direct results. Very distinct credit should be given to the federal reserve system as a whole for what it has accomplished in this particular, even while the admission is made that it has not yet gone the full length that some had expected, or attained as yet the results that may reasonably be expected at a later date.

In this connection it is appropriate to note that the progress in transferring reserves from city banks to federal reserve banks has been steady and has occurred without the slightest shock to business or banking operations. One reason for the extension of the time required for this transfer over what was practically a three-year period was found in the constant predictions that the transfer would cause severe stringency. Whether as a result of the large importation of gold into the United States or for other reasons, such stringency has at all events not materialized, and the final transfers, if ordered, could be made without the necessity of shifting any actual cash from the large city banks to the federal reserve banks. The development of a satisfactory check collection system has undoubtedly gone far toward reconciling the wiser bankers of the country to the transfer of reserves, while the admission is now very general that the new system without an adequate reserve requirement could not possibly have succeeded.

V

In one phase the operation of the federal reserve system thus far must be considered decidedly incomplete. Most of the bills which preceded the Federal Reserve act had made a more or less elaborate provision for foreign banking, authorizing the establish

ment of branches abroad and in other ways contemplating the upbuilding of American business elsewhere. This need was an obvious necessity, for American banking has nowhere been so inadequate as in its cultivation of the foreign field. As will be remembered, the Federal Reserve act, following the lines laid down by the discussion of the past fifteen years, had likewise made provision for foreign branches of American banks, subsequently supplemented by an amended provision which authorized the creation of foreign banks whose stocks should be held by groups of member banks, while it also made provision for the acceptance system already discussed. We have seen that the acceptance system has been artificially implanted in the United States and has attained a certain growth, but that its future must eventually be determined in no small degree by the action of American bankers in entering the foreign field. It must be admitted with regret that thus far very little progress in this direction has been made. American bankers have taken the foreign business that was automatically transferred to them or which came to them by reason of the lower rates of our domestic market, but they have shown comparatively little active interest in foreign banking as such.

We must conclude, therefore, that the banks of the country have not gone actively into the task of preparing themselves for the struggle to retain our foreign trade after the change of conditions which all admit must come when European conditions. materially alter, and when competition is restored to something like its former intensity. The federal reserve system has made a beginning by undertaking preliminary arrangements looking to the designation of foreign agencies intended to assist in fulfilling the purposes of the system in so far as these relate to foreign operations. We need not, however, insist upon the fact that the federal reserve system has a purpose which is essentially different from that of ordinary commercial banks, and that whatever it may do in promoting our relations with foreign countries and in aiding in the general plan to promote the welfare of the American discount market, it cannot perform the task which only strong commercially organized institutions can fulfill-that of exploiting and developing the foreign market in the interest of our own business community.

It is to be feared that some of our bankers look at this question as if it were a question of immediate profit solely. They are inclined to inquire into the possible profits to be gained by the estab

lishment of branches and connections abroad, as if it affected only them and the welfare of their institutions. The question is, however, a good deal broader than this, since it involves the whole matter of retaining our trade and developing it in markets other than our own domestic fields. The business man will not be able under existing conditions in trade and industry, to carry on the campaign alone. He must have that powerful assistance which only the banker can afford, and this cannot be rendered without special organization and coöperation for foreign trade. There are two methods by which such effective coöperation can be accomplished: one, the actual establishment of bank branches abroad; the other, the establishment of connections with some insti- ! tution which will faithfully and earnestly represent the interests of our own bankers and business men in those foreign countries.

We have long known that England's powerful hold upon the trade of South America and the Far East was not due to any innate fondness on the part of the people of those regions for Great Britain or her citizens, but was due to the fact that British banking institutions stood ready to facilitate the movement of goods to those countries, while they also stood ready within reasonable limits to assist in the development of the resources of those countries, and in the exportation of their products to Great Britain. The progress which has been made in recent years by German bankers and business men in competing with Great Britain and her representatives, has been due to Germany's recognition of the essential basis for British trade, and her adoption of similar modes of getting and controlling business. The real question in the whole matter is: Do we want to continue our present control of foreign trade, or are we content to return to the foreign trade situation which existed before the European war? If we do in fact believe that benefit comes to the country from the maintenance of a strong and well-diversified foreign trade, it will be necessary for us as a nation to adopt those measures and methods which experience has shown to be requisite.

In order to deal with foreign countries successfully we must not only sell but buy. We must do more than this. We must hold out the help necessary to enable our own business men to place their goods on foreign markets with success and at reason→ able cost, and we must enable shippers in this country to export without unreasonable sacrifice. Moreover, we must, if we wish to

create a permanent and growing foreign trade, aid producers and shippers abroad by every legitimate means in our power, to increase their output, and to market it under favorable conditions. The idea that this cannot be done, or that some special difficulties stand in the way, or that the problem is being prematurely presented, or that for some reason we can escape immediate action upon it, has been dispelled by the events of the past two years. It must be evident to all that the present moment is one which calls for the exercise of constructive business ability and the display of enterprise and initiative by our people along every line that experience shows to be required in facilitating the growth of business.

The fact that there has been so little genuine pioneer work in the direction of foreign trade is not a reflection upon the federal reserve system, but is merely an indication that American bankers and business men have not as yet aroused themselves to the real facts regarding our foreign trade situation. Yet it is evident that they must so arouse themselves and that their interest must become active and vigorous if the system itself is really to succeed. One of its great functions, as we have already seen, is that of establishing a discount market. Yet no such market can be successful unless it is given an international scope. The action of the Federal Reserve Board in establishing certain agencies or connections with foreign banking institutions is helpful as far as it goes, but cannot, of course, attain its full object unless genuine participation in foreign finance is undertaken by American institutions.

VI

Brief reference has been made at various points in the foregoing discussion to the earnings of federal reserve banks. To the close of the year 1915 these earnings were about 3 per cent on capital above expenses, while for the year 1916 they were about 5 per cent. The returns thus obtained have been secured through the employment of only a small portion of the resources of the banks, and experience has made it evident that there will ordinarily be no trouble whatever in paying expenses and an excess above the 6 per cent which the banks may under the law retain for themselves. The question of earnings, however, is of very much broader significance than has ordinarily been conceded. As the federal reserve system grows older it becomes more and more evident that the