price. By reference to this table it will be noted that money is assumed to be worth 6 per cent. From the gross receipts, that is, interest on the bonds, and the interest on $100,000 circulation loaned, at 6 per cent, deductions are made for the tax on circulation, expenses incident to redemptions, shipments of currency, etc., and the sinking fund, to show the net receipts. The actuary then computes the interest on the cost of the bonds at 6 per cent, the difference between this amount and the net receipts being the net profit to the bank. Two per cent consols of 1930 were at the highest average net price in March last, and as a result the profit on circulation was at the lowest point, namely, 1.296 per cent. These bonds were at the lowest point in July, namely, 100.250, when the profit on circulation is shown to have been 1.412. The highest-priced Government issues are the 4 per cent bonds of 1925, and were held at 116.86 in January last, when the profit on circulation was 0.986 per cent. At the market price of 114.134, in August last, the profit on circulation was at its maximum, namely, 1.226 per cent. The Panama Canal bonds of 1916 sold, on an average, in August last, at 100.303, when the profit on circulation was 1.410 per cent. The highest average price during the year for these bonds was 101.250, in April last, and the percentage of profit on circulation 1.325. VII THE FEDERAL RESERVE SYSTEM Introduction The Federal Reserve System in which our national banks are now organized was inaugurated by the Federal Reserve Act of December 23, 1913. For fifty years our banks had been operating under the national banking law that had been passed during the Civil War. This act gave us a safe and uniform bank-note currency, and in other ways it constituted so substantial an improvement over the conditions that had existed prior to the war that we were long loath to tamper with it seriously. While defects were early revealed, they appeared in the main to be of such a nature as required amendment merely, rather than thoroughgoing revision. But the panic of 1893 revealed serious shortcomings in the national banking system. It was found that the great dearth of money that developed could not be relieved by an increase in that element of our currency system to which we must look for elasticity, namely, the bank notes, and it became necessary for the clearinghouse associations, and even private businesses, to issue a wide variety of substitutes for cash. The same phenomenon had of course been manifested in 1873, but the nature of the difficulty was not so generally understood at that time. It also became apparent in 1893 that in consequence of inadequate and rapidly dissipating reserves our banks were unable to expand their loans to meet the needs of a crisis. The result of the experience of 1893 was the advancement of the Baltimore plan of currency reform, which was modeled after the Canadian system of issuing currency protected by a joint guaranty fund to which all the banks contribute. Nothing came of the plan, however, the silver issue of the time forcing all other financial matters into the background. Again, in 1898 the Indianapolis Monetary Commission, after a thorough survey of the banking and currency problem, suggested some substantial amendments to existing currency legislation, among which was the issue of bank notes based upon commercial paper, or asset currency. However, the SpanishAmerican War diverted our attention to problems of international policy, while the long period of prosperity which followed caused us in the main to forget the question of banking reform. However, the act of 1900, in providing that national banks might thereafter issue notes up to the par value1 of bonds deposited as security, gave us a rapid expansion of bank-note currency; but it did nothing to provide the necessary elasticity. The disastrous panic of 1907 thoroughly aroused the country to the imperative need of banking reform. It was observed that whereas other countries were equally subject to periodic fluctuations of commerce and trade the United States appeared to be the only nation in which the banking machinery was incapable of alleviating the conditions that developed in time of crisis. Strong pressure, partly political, was brought on Congress to pass some emergency legislation. After a very brief study of the problem Congress passed the Aldrich-Vreeland Act of 1908, which provided for the issue of emergency notes in time of stress through groups of banks in various communities organized into national currency associations. This currency could be based in part on commercial paper, and thus for the first time we secured legal permission for an asset currency. Moreover, good service was rendered by this act at the outbreak of the European war, just prior to the inauguration of the Federal Reserve System. The Aldrich-Vreeland law, however, was confessedly a temporary measure, its final clause authorizing the appointment of the National Monetary Commission and making appropriation for a thoroughgoing study of the entire banking problem. The movement for banking reform then rapidly developed. The National Monetary Commission in its investigation drew upon the experience of the entire world, and a vast literature on the subject was collected and published-nearly fifty volumes in all. Meanwhile numerous independent students were analyzing the problem, with the result that the various weaknesses of the national banking system, as indicated in our previous chapter, were clearly revealed. A large number of comprehensive plans of reform were also put forward, many of them as bills in Congress, and others in the form of monographs by commercial associations and independent students of the question. 'To market value, only, when market value is less than par. It remained, however, for the Aldrich bill, growing out of the work of, and indorsed by, the National Monetary Commission, to bring us to close quarters with the problem. The Aldrich plan, which was presented to Congress early in 1911, was discussed the country over perhaps more thoroughly than any other measure ever before Congress. The bill is generally conceded to have had many excellent provisions; many of them, indeed, subsequently became embodied in the Federal Reserve Act. But the prevalent distrust of Mr. Aldrich in consequence of his unsavory reputation on tariff matters, together with the fact that his proposal was undoubtedly a very strongly centralizing measure, made its enactment into law a political impossibility, especially after the coming of the Democrats to power in 1912. The Federal Reserve Act is an outgrowth of the Aldrich plan, though modified in numerous details and in some very important respects. Passed with unusual expedition by a newly organized and inexperienced Congress, the measure was very generally distrusted by the financial interests of the country while it was pending. It was held by many, indeed, that it would wreck the national banking system, if not the country itself. After the passage of the act, however, as soon as time had permitted a study of the provisions of the law, it became apparent that an extraordinary piece of legislation had been enacted; and practically all parties promptly rallied to its support. The act now appears to be one of the wonders of American legislation; it seems almost inconceivable that a measure containing so much of solid achievement and so little of weakness could have come out of Washington. It is important to reflect, however, that the fundamental principles underlying the new system were developed out of the innumerable discussions of the subject that had been taking place for years. It nevertheless remains a remarkable coincidence that the principles thus scientifically developed should have been in so admirable a manner incorporated into law. The new system has now been in operation for nearly two years, and it appears to have justified the confidence that has been reposed in it. It will of course require many years to test the measure fully; but already the business of the country is being adjusted to the changed conditions. Whether the act permanently accomplishes all that its supporters hope, it is already clear that we shall never go back to the old order, and that the inauguration of the Federal Reserve System marked the beginning of a new era in American banking. A. General Description of the System 130. THE CREATION OF THE FEDERAL RESERVE SYSTEM1 By C. W. BARRON Next to the Declaration of Independence and the Constitution of the United States the Federal Reserve Act, signed by President Wilson December 23, 1913, may be the most important measure ever placed before the people of these United States. Upon its wise administration depends the good or ill of a hundred million people, and as a nation we shall probably live under it, not only for the twenty years named in the act, but, with amendments found necessary from time to time, for possibly many generations. The miraculous thing about its creation is that it sprang forth in a few hours before the Christmas holidays from a new Congress that understood little of currency and less of banking and an Executive and a Cabinet that never made any pretense to a clear understanding of financial principles. Yet a Congress of financial experts, with an Administration and a Cabinet composed of the leading bankers of the country, probably could not have produced so good a bill. Bankers are not generally progressive or even open-minded. The line of safety must be their rule of procedure, and all changes they naturally regard with suspicion. Congress, having no fixed principles, was subject to no prejudices, and the bankers, who could never be induced to formulate a bill, unconsciously made one by their negations. This bill is the re-formation of an absolutely unworkable and chaotic measure passed by the House. It was forced into shape by pressure from the Administration to do something promptly, as the nether millstone, and the determination of the banking interests to quit the national banking system, should the act give evidence of being for them dangerous as the upper millstone. Yet the bill in its broad principles is the result of expert currency and banking agitation that has been going on for well-nigh a generation, even before the necessity for currency legislation was emphasized by the 1907 panic. The bill as it passed the House was so highly dangerous as to be undesirable. Had not the financial papers refrained from criticism a panic might easily have ensued. Had the House bill passed the 'Adapted from The Federal Reserve Act, pp. 7–9. (Boston News Bureau Co., انا |