it could put the present company out of business) and hence that company can purchase it at its own price-to be utilized or forgotten as may be most profitable. The position of the National Cash Register Company, and the General Electric Company in certain fields, is similar. That is, in these fields, new inventions are not today encouraged by a natural process. They might be fostered artificially by a generous government stipend quite as successfully. Moreover, laws could be made penalizing the non-use of inventions. The interplay of the forces of industry is extremely complex and cannot be successfully solved by the blanket application of simple principles.

Our laws do not correspond to the facts of industry. They bow before the fetish of competition apparently as an end in itself. Suggestions of a modification of this attitude in the latest decisions of the Supreme Court were, in part, nullified in the recently enacted Clayton Act. If the argument presented in this paper is sound, then no single law can be framed which meets the problem presented by the complex of industry in a socially beneficial manner, and we must look to the further discrimination of the courts and the trade commission to adopt a policy which shall recognize conditions as they exist, and determine the proper differentiation which alone can bring order out of the present chaos.

PRINCETON UNIVERSITY.

OSWALD W. KNAUTH.

7

THE FIRST YEAR OF THE NEW BANKING SYSTEM

M

EMBERS of the Federal Reserve Board took the oath

of office on August 10, 1914. On November 2 the first instalment of capital stock in the new federal reserve banks was made payable. The banks themselves were formally opened on November 16. A year, roughly speaking, has thus elapsed since the actual inauguration of the new system in practice. This year has not, however, been a year of complete operation. Owing to the international financial problems which pressed for attention at the time the Board was appointed, it was necessary to spend many weeks in emergency work before thought could be directly given to the task of organizing the banking system. Even then the decision to open the banks without further loss of time in order to meet existing needs and to relieve the reserve situation meant that their engaging in business on the sixteenth of November must be nominal only, and that subsequent to that date a considerable period must elapse before even the most fundamental regulations governing their conduct could be established on a uniform footing. While, therefore, there has technically been about a year of experience with the new system as such, there has been considerably less than a year of actual operation of the banks. Some functions assigned to them by law have not yet been undertaken at all. The time, however, has been sufficient to indicate many things that may be expected of the new system, to show where certain of its principal problems will lie, and to suggest the nature of its further development in sundry directions both in law and in business practice.

I

Both logically and chronologically, a review of experience in opening the federal reserve system deals first with organization. First of all, predictions made by opponents of the federal reserve system with reference to the probable character of the personnel of the new institutions have been without foun

dation. The Federal Reserve Board itself has never been governed by partisan considerations in its choice of employees. The personnel of the several banks, so far as its selection lay within the power of the Board, has also been chosen upon its merits. In the business transactions of the banks there has been no opportunity for the exhibition of party preference; and, so far as can now be seen, no such opportunity is likely to be afforded. The banks themselves deal primarily with their stockholding corporations, which are traditionally "soulless" and traditionally free from party preference. The only question which has actuated them in the granting of loans is the soundness of the paper presented; and he would indeed be an acute critic who could find at any of the federal reserve banks a sound basis for complaint of any favoritism or nepotism beyond that which exists in any humanly organized institution.

The question how satisfactorily the new type of banking organization has operated is more difficult. It is not enough to be clean or free of partisanship; a business organization must be efficient as well. In essence, the Federal Reserve Act seeks to eliminate red-tape administration by placing within the hands of the several banks the actual work of practical banking, leaving to the Federal Reserve Board itself only those general duties and that exercise of supervisory authority which can be maintained with a small staff of trustworthy employees. The Federal Reserve Board from the beginning of its existence perceived the possibilities of this arrangement, and has from the outset sedulously striven to abstain from interference with routine business at the several banks, with the selection of personnel, or with any matter which could properly be placed in the hands of the banks themselves. This policy has resulted in the choice by the several banks of their own staffs, wholly free of interference on the part of the Federal Reserve Board, although the Board has, in the case of the higher officers, freely given its advice when requested. The Board has not only, as already noted, chosen its own staff without reference to political considerations, but has made the choice under a system of selection as rigid and careful as that employed by the Civil Service Commission. A number of employees who had been

chosen by the Reserve Bank Organization Committee were transferred automatically to the staff of the Reserve Board; but in this transfer the Board merely accepted what it found. Its own selections have been made in the way already indicated. The Board, moreover, has largely reduced the size of the staff employed by the Organization Committee, and, as compared with other government bodies, its expenses, as will later be set forth, would unquestionably be considered very moderate. At the several banks efforts have in most cases been made to keep expenses to a reasonable level and not to employ supernumera

ries.

From the larger standpoint, also, the general working of the organization has, in the main, been effective. Shortly after the banks were opened there was a period during which action upon the numerous questions presented to the Federal Reserve Board was not immediate, owing to the fact that many factors still had to be ascertained and much information collected concerning conditions in the several districts. Without due investigation, any ruling that might have been issued would have lacked uniformity and would probably have been subject to extensive change at a later date. The delays which then occurred, therefore, may be regarded as unavoidable, and they have for the most part been eliminated during recent months. In fact it is the testimony of many who are directly affected by the Board's work that it has succeeded in obtaining unexpectedly prompt action, and has avoided delay to a degree that has enabled the banks to act with at least reasonable speed upon the applications of their customers. As for the banks themselves, there was at first in the minds of many of their members the thought that they like the Board-would be red-tape institutions, operated under such conditions that business men could hardly hope to get accommodation from them save in times of necessity and under conditions that would not make it worth while for them to attempt the maintenance of regular relations. This prediction, wherever it was made, has failed of verification. Not a few of the federal reserve banks have done exceptional educative work in explaining to their members what they must do to secure prompt and effective attention in their applications

for rediscounts. All this has taken time; but it is today admitted that in many instances the service rendered by the reserve banks is as prompt and satisfactory as that rendered by the larger correspondent banks of the cities, and that there is no reason why a member bank possessed of discountable paper should not confidently count upon the accommodation that it desires, without undue delay and at a minimum of expense.

In the relations between the several banks and the Federal Reserve Board there has been at times, no doubt, some difference of opinion upon points involving current operations. These divergences have been of minor importance except as to the question to what extent the weekly discount rates may be considered under the direct control of the Federal Reserve Board. Whatever doubt has properly been entertained on this point has, however, been dissipated by the definite position assumed by the Board to the effect that discount rates can not become effective without its approval, and that the scope and purpose of the Act, as such, undoubtedly give it the right to make suggestions as to the general discount policy of the several banks. To get a more conclusive ruling than this it would be necessary to take the matter to the courts for the purpose of making a test case. Pending, therefore, the development of some larger issue of controversy than has exhibited itself in the past few months, it may be fairly said that the different members of the federal reserve system have worked together smoothly and without more than an occasional hitch. It may be added that this smoothness of operation may be expected to increase as time goes on, and the regulations laid down by the Federal Reserve Board are better understood and complied with.

II

Students of banking in its theoretical aspects, however, will be only secondarily concerned with the practical mechanics of the reserve system. They will naturally ask what has been done by the Federal Reserve Board toward the standardization of commercial paper and the improvement of lending conditions in the United States. This was one of the first problems to be