holding banks for protection in time of danger. The new act provides for 12 reserve banks, introduces the principle of local control, calls for strict government oversight, shifts reserves from present correspondent banks to the new institutions, minimizes the influence of the larger banks in directorates, and generally diffuses control instead of centralizing it. It leaves banking as such to be practiced by bankers; it vests the control of banking in the hands of government officers. The theory and purpose of the new act are widely different from those of the Aldrich bill. Where the Aldrich proposal veers widely away from the tendencies that have been developed during the preceding ten years of American banking discussion, the Federal Reserve Act closely follows them. Indeed, the act of 1913 is closer to any one of half a dozen bills of former years than to the Aldrich proposal.

From the standpoint of technique, as already noted, the case is quite different. With regard to stock issues, kinds of paper eligible for rediscounts, and not a few other particulars, the Federal Reserve Act follows lines laid down in the measure which bore the name of Senator Aldrich. In fact, the original House bill, for strategic purposes, retained wherever it could safely do so, the language of the Aldrich bill as regards banking technique, its framers recognizing that by so doing they enormously reduced the hold of the opposition and immensely contracted the field within which the familiar charges of "unsoundness" could find scope. The decision to follow this plan for strategic reasons was amply warranted, as the subsequent conflict with the banking interest showed that interest having repeatedly endorsed the Aldrich bill, and being, therefore, forced into constant conflict with itself in its criticism of the new measure. The fact that its leading representatives were so early reduced to vague charges of "socialism," "coercion," and "inflation," or "contraction" (according to the bias of the speaker of the moment) clearly demonstrated the difficulties to which they were subjected by the methods employed in preparing the draft of the Reserve Act. Moreover, the most desirable features of the Aldrich bill were found in its sections dealing with banking technique-upon which some of the country's best banking ability had been expended. The "theoretical" portions of the Aldrich bill were of no value whatever to any save a student of methods for producing monopoly. The Aldrich bill and its accompanying documents, in short, contained no revelation of financial wisdom. Nor was there anywhere in those limited portions of

the commission's work which proved of service, a thought not within reach in familiar European banking literature.

Perhaps the most notable and beneficial changes made by the Federal Reserve Act-the transfer of reserves from reserve to central reserve city banks and the provisions for par collection of checks whenever possible-were not mentioned either in the Aldrich bill or in those of its predecessors already referred to. They were not only new elements in the movement but were undoubtedly among the elements in the measure which proved hardest to enact into law. From the beginning, the most strenuous opposition was offered to them, notwithstanding that both features were admitted to be sound in principle. It was, therefore, only after a sharp contest that they succeeded in gaining a definite foothold, inasinuch as they constituted a new and distinctly distasteful element in the whole legislative proposal.

A review of the detailed provisions of the measure shows, therefore, that, while the conception of banking reform upon which it is founded is the same that has constituted the staple of the banking reform movement of recent years, and while the conception of a union of banks is directly borrowed, as in other bills of the past decade, from the actual practice of the banks themselves as developed under the stress of circumstances in the form of clearinghouse organizations; while, moreover, certain phases of the technique of the legislation itself followed the lines of the Aldrich or Monetary Commission bill, and while other portions of the act have been adapted from well-known legislative proposals that have figured within the past few years of banking discussion, the act as a whole is based upon a conception and plan entirely its own, applies in many fundamental respects methods of control and administration that have been given at least a new form, and includes several important innovations, not heretofore conspicuous in banking discussion although admittedly significant, not to say necessary to any thorough reorganization upon sound principles. That the act also contains some elements that may be regarded as reminiscences of the less desirable and more objectionable phases of banking agitation, is equally certain. These are seen in the underlying concept of the federal reserve notes, which are thought of as government currency loaned to banks, and are thus at least theoretically, although not practically, in line with so-called "government currency" schemes of past years.

Other defects of treatment inherited from the past agitation of

the subject are seen in section 18 dealing with the retirement of government bonds, in which is perpetuated the view that, if possible, bond-secured currency must be maintained at something like its present level in order to insure the existence of the "needed money" in the country independent of the "elastic currency" provided for by the terms of the enactment. It is probable also that in several of its provisions designed to prevent the participation of bankers, or those who are interested in banking institutions, in the management of the new system, the legislation will be regarded as open to criticism and as having drawn too heavily upon radical proposals of former years. One of these may be cited as an example. Under the guise of a clause revising the visitatorial powers of the government with respect to banking institutions (section 21), there is inserted in the measure an implied authority for the examination of banks by congressional committees a power which was proposed during the so-called Untermyer reform movement directed against the "Money Trust" in 1912, but which was then refused by Congress. It will be pretty generally conceded, even by "conservative" critics, that none of those particulars in which the new measure has been influenced by past legislative currents popularly regarded as unsound is very serious in its practical effect. The fact will remain that the influences have been present and that the bill bears the marks of the struggle through which it passed and of the varying views of widely different minds which had to be consulted or considered in connection with its making. All this is so unmistakably true that it must be recognized even by hasty students of the history and origin of the legislation of 1913. It has thus not owed its inspiration to any single source, notwithstanding that the underlying and guiding principles of its composition are those which have been long since recognized as being the necessary basis for genuine banking reform in the United States. It is a notable fact that many of those who have, after a cursory study, attributed a given origin to the measure, and have most positively asseverated its resemblance to given examples of legislation, have subsequently, upon closer acquaintance with its terms, seen good reason to alter their position and have wholly abandoned their earlier attitude of mind.

III

It is now necessary to devote some attention to the new legislation from the broad general standpoint and to note the signifi

cance of the measure as it finally became law. To the student of banking it need hardly be said that the striking aspects of the legislation are these three: (1) the creation of a general discount market for commercial paper; (2) the systematic pooling of reserves of existing banks; and (3) the provision of an elastic currency. In the multitude of details provided by the legislation, and in the various adjustments rendered necessary by it with respect to government deposits, bank reserves, examinations, and other more or less important matters, it is noticeable throughout that everything done has been for the purpose of promoting the objects already enumerated, and of insuring the transformation of American banking from its present basis of organization to its new proposed type of effort. If these chief objects shall be accomplished in actual practice, the legislation will have been amply warranted, and, it need hardly be said to a professional reader, will completely revolutionize the banking and credit situation, to the great profit not only of the banks themselves but of their customers. That the banks will greatly profit under the bill is susceptible of easy mathematical demonstration. That the business public will profit in a far higher degree than the banks is less obvious but is a fact which constitutes the chief basis for the legislation. Were it not true, the time and effort expended in securing the present result would scarcely have been warranted. In its real essence, the new law is in fact and in the best sense of the term a "business man's measure."

Heretofore, American banking has been too largely an agency in the service of speculation. This statement is borne out by the following considerations: (1) The rates controlling the flow of gold out of the United States have been those dictated by the call loan market, not those prevailing in the commercial discount market; (2) the funds which the banks desired to have ready to hand have been customarily invested in demand loans on stocks rather than in quick commercial paper or short-term foreign exchange; (3) in times of crisis or pressure, the banks have shortened loans in this country instead of, as in foreign countries, enlarging them to accommodate legitimate borrowers. If they have undergone sacrifice, it has been for the primary purpose of upholding and safeguarding the stock market.

The new act changes this condition in the following ways: (1) It transfers a small but necessary fraction of the ultimate reserve money of the country to government-inspected institutions, lo

cated in various parts of the country, where they will be quickly responsive to, and in sympathy with, business necessities, and prescribes by rigid rules that these funds shall be applied solely to commercial needs and to nothing else, since the loans that may be made by these new banks are narrowly restricted in term and in character; (2) it broadens the methods of doing business allowed to national banks, so far as relates to investments in legitimate commercial paper, and narrows them correspondingly, so far as relates to investments in stocks and bonds; (3) it increases the loaning power of the banks of a given community, and promises to such banks, when in need of assistance, the support which will be derived from the combined resources of their fellow banks in the same community or region. Its effort is thus to promote the growth of commercial credit and to protect that credit when brought into existence. It differs from the present law, in that it refuses longer to look upon the business man as one who "borrows money" at a bank, and regards him as one who manufactures a commodity-commercial credit and the paper representing itwhich he sells to banks, and which it is the function of the latter to insure and to keep liquid. It regards the duty of the bank as being, above all things else, that of maintaining specie payments and sustaining the solvency of the community; and it declines to consider the banker as one whose duty it is to promote enterprises, float issues of securities, or aid in stock speculation. That all these phases of financial effort have their place a desirable place when properly defined and recognized-the act fully concedes, but it holds in principle that that place is not found in connection with the work of commercial banks.

If the business community contents itself with simply continuing its present methods of operation, it will derive great advantage from the law. It will find: (1) that local banks will be able, by rediscounting the paper of local enterprises, to provide the funds needed by such enterprises in their operations; (2) that there will be no such wide fluctuations of interest rates either geographically or from season to season as now exist; (3) that there will be no necessity of emergency measures to safeguard the country from the possible results of financial panic or stringency. Credit will be more simply available, cheaper, and more equitably open to all. Not the least advantage to the business man will be found in the provisions with respect to bank examinations; since through these, it may be hoped, many operations which have been