the disgrace of American banking in the past will be early detected and corrected before they have had time to eat out the heart of institutions which might otherwise have continued sound and solvent. This is equivalent to saying that, under the new law, credit, even if there be no change in business methods, will be cheaper and more evenly diffused, as well as more steady and more certainly to be counted upon by those who do business by acceptable methods. But the community will not gain the greatest advantage from the measure if it adheres merely to established types of operation. The new act provides for the creation of a true discount market, such as has existed for many years in every European country. This means that every merchant of established local credit may in the future count upon a free sale for his paper throughout the reserve district in which he is situated, and to a somewhat lesser degree generally throughout the country. The rediscount principle, when fully worked out, taken in connection with the use of the acceptance system, will enable the sound, even though small, manufacturer or trader to get the advantage of the best rates of commercial credit that prevail anywhere within his region of the country. If there is capital to spare unemployed and seeking occupation-he may expect that, through the general sale of bills under the new system, such capital will be available for the purchase of his paper and will be so employed. By the judicious use of the acceptance, the local bank will be enabled to facilitate the movement of goods into and out of the country, and will at once make the utmost of its own capital and at the same time enable its clients to gain the widest employment for their own resources. The net result of these various influences should be: (1) considerable reduction in average rates of interest on commercial paper throughout the United States, (2) very great reductions in the rates in certain sections remote from commercial centers; (3) stability and certainty in distribution of credit; (4) creation of new and more convenient types of paper.

Not the least important of the provisions of the new measure is that which assures to the business man the cheaper collection and transmission of his funds. The act provides for the deposit of many classes of checks and drafts at par with federal reserve banks, and it thereby aims to establish a parity of exchange among banks within every federal reserve district and then between the federal reserve banks themselves. It permits charges to

be made by member banks that correspond to the actual cost to them of collecting funds for their clients, but it places these charges under federal control and specifically authorizes the Federal Reserve Board to restrict them by rule. This is as it should be. In years past American commerce has suffered severely from the infliction of high, not to say, excessive, charges for check collection upon business men throughout the country. So far has this type of extortion been carried that it was testified by country banks during the past summer that in many instances fully one half of their earnings were due to such charges, and that they could not get along without them. Such exorbitant rates were maintained by agreements among banks and the development of a code of what is called "banking ethics," whereby banks were prevented from cutting the excessive charges had they been so minded. Much of this evil may be expected now to disappear. The banks will be restricted, when the system is fully in operation, to moderate rates; and thereby a great burden will be lifted from the backs of the commercial community. In the opinion of some, this burden will in part be removed by the process of clearing checks instead of collecting them, which is to be inaugurated under the new system. But whether it does so disappear or not, the merchants of the country will be relieved of the excess charges made by the banks in the way already indicated. In many instances this will save thousands of dollars annually to individual firms.

A less direct, although most important, aspect of the new law in its relation to business is seen in the economy of gold that will be effected under it. The original bill provided for maintaining reserves at about their present height, in the belief that ultimately the governing board would let them all down to the level prescribed for country banks. The final act makes a very great reduction in reserve requirements and will release a great volume of money after all new needs for the reserves of the federal reserve banks have been complied with. That this will produce some danger of inflation during the transition period—a danger that will need to be carefully guarded against by the best sense of the banking community-is evident. After that period has been passed, the reduction in the amount of gold that must be carried constantly in bank vaults will really be far-reaching. The United States has for many years been obliged by its antiquated banking methods to use much larger gold reserves than any other country

in the world in proportion to business done. This was as much a waste as any other unnecessary employment of capital. It meant that the actual cost of operating a bank, which had to be recovered from borrowers in interest charges, was greater in proportion to the enlarged expense of carrying an unnecessarily high reserve. This cost in turn was heightened in times of panic by. the very great expense that had to be incurred for the sake of getting more gold with which to build up the reserves when the latter had been depleted. By lessening this important item of cost in banking and by reducing the exceptional and sporadic elements of cost growing out of panic conditions from time to time, reductions of interest rates will be rendered feasible and will ultimately transfer their effect to the commercial world. In this same connection it deserves to be noted that the new system will also render the control of the country's gold supply much easier and simpler. It will provide the machinery for dictating, upon occasion, changes in rediscount rates intended to prevent exportation, and upon other changes intended to aid importation. The mechanism will be automatic and effective and will replace the antiquated, costly, and not very effective methods that have had to be followed in the past. This will directly aid the man engaged in foreign trade and will immensely assist in the management of foreign exchange operations. Exchange will be furnished at much less cost to the community and our rates of exchange will be much more closely harmonious with those of the rest of the world.

In times past, there has been constant and well-founded complaint that American business men engaged in foreign trade or operating branches of their houses abroad were obliged to depend upon foreign banks for their accommodation or else finance themselves practically unaided. Where, as in the South American trade, it has been necessary for the American business man to resort to branches of European banks established in the various countries, it has been asserted that such banks, working as they did in close harmony with merchants of their own nationality, were often unfaithful to their American clientele, allowing competitors to know their business operations, and, when disposed to do so, cutting off their credit in favor of such rivals. These charges have had more or less foundation, and it has certainly been true that the banking accommodation of Americans engaged in foreign operations has been poor even at the best. Under the

new law, banks of moderate capitalization may, under the supervision of the Reserve Board, establish branches in foreign countries, and operate them subject to very broad and liberal terms of business management. This should end the constant complaint about lack of banking accommodations and should place Americans in the foreign trade upon a footing of equality with foreign competitors. It is true that, as has recently been noted, the United States lacks a supply of well-trained bank managers acquainted with foreign practice and ready to expatriate themselves for the time necessary to carry on a branch office elsewhere. Such shortage of trained men will, however, be overcome as soon as opportunity of a real sort is offered, just as the lack of wellprepared consuls has already been overcome in a very large degree, since the consular service was placed, at least partially, upon a footing of efficiency, and promotions made in a measure according to merit. It may be confidently expected that American foreign trade will within a short time be afforded all the assistance that it can reasonably call for under the very liberal provisions now made for foreign branch banking.

The general management of the new system has wisely been taken, in part, out of the hands of bankers; and has been placed, in a measure, in those of men representing commerce, industry, and agriculture. This is not because of distrust of bankers or because of a feeling that special discrimination should be shown in favor of given classes in the community. It is due to a feeling, everywhere recognized, that the industrial portion of the community should be given a voice in the management of the commercial credit of the nation, and that banking is, in its highest and best sense, a semi-public function, carried on, not merely as a means of profit, but for the sake of providing for social wants in the creation of credit and the maintenance of redemption. The business man, in the best sense of the word, is expected to take a living and direct part in the work of carrying on the new system, no matter whether he owns stock in any bank or not-and perhaps the more freely if he does not own such stock. He will thus be drafted into service because of the significance of banking to every class and section of the country, and because of the perception that it, like transportation, is no longer to be considered solely a private money-making industry.

To get the full advantage of the system, the business man needs to arouse himself to a new conception of his functions and duties.

He needs to bring his methods of borrowing and his view of commercial paper into harmony with European practice, to accustom himself to prompt payment of notes and bills without extended renewals and to the putting of his business upon a short-term cash basis. He needs further to familiarize himself with the idea of banking in the larger sense as distinct from a mere note-shaving and stock-manipulating occupation, and to prepare to share actively in the management of the new reserve banks and their branches, in which important places have been reserved for him. When he has fully developed himself along these lines, he will find the new legislation perhaps the most important step in the progressive development of business, in the broader sense of the word, that has for many years been taken by the federal government. It has the distinction, almost unique among recent acts of legislation, of being not a restrictive or hampering but a constructive measure in its purposes and methods. Much of its success will depend upon the business man and his attitude toward it.

IV

Little has been said, in the foregoing discussion, of the technical aspect of the new banking measure, its effect upon the types of commercial paper employed by the community, its probable alteration of the distribution of reserves throughout the country, or its influence upon competition between banks. In each of these fields the act will produce a very great and far-reaching transformation. To indicate the limits of this transformation, to show exactly how the new machinery must be put into operation and the points at which difficulty will be encountered, would involve a more extended treatment than can be afforded within the limits of this paper. Each one of the topics indicated, as well as several others that might be suggested, calls for elaborate and detailed study, and cannot be dealt with without danger of error-at least, until some further experience has been obtained under the law as an actual working factor. The time will come in the near future when precise statements can be made regarding the exact nature and extent of the changes necessarily to be expected under this statute. First among the events which will greatly contribute to clarification will be the action taken by the reserve bank organization committee, now at work, in the division of the country into banking districts.

HENRY PARKER WILLIS.