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American Economic Review
WHAT THE FEDERAL RESERVE SYSTEM HAS DONE Two and a half years of experience in the operation of federal reserve banks is not a period of sufficient length to enable the careful student of banking institutions to form a final judgment concerning them. The banks, although technically in existence for about thirty months, have been fully organized and in operation for a much shorter period. They may perhaps be said to have had a real operating life of from eighteen months to two years. But even that length of time has not afforded the test that would have been furnished at almost any other period in American financial history. The unexpected and drastic changes in financial and commercial relationships due to the European war have altered underlying conditions, have produced developments in foreign trade and in banking that could not have been predicted, and, coupled with the unusual and extreme financial expedients adopted by foreign governments, have subjected the American market to highly artificial conditions. For all these reasons, a judgment of the success of the federal reserve system and a prediction based thereon, if furnished at this time, must be accepted only subject to very grave qualifications. Some of these will appear later in the present discussion; others no doubt will suggest themselves to the reader without being pointed out. The conclusion arrived at must in any event be regarded as tentative and as being stated entirely in terms of existing conditionsthat is, as indicating a comparative judgment regarding the value of the federal reserve banking system in contrast to the conditions which would have existed had it not been organized.
Certain obvious elements in the federal reserve system may first be enumerated and disposed of, more as a matter of record than as contributing much to the discussion. First of all, the federal reserve system has proved its practicability and has shown that it can be a successful "going concern." This statement, now so widely if not universally conceded, was, as will be remembered, sharply combated at the time of the passage of the Federal Re