counts has been demonstrated. Such banks fully appreciate the effect of the system in securing them stable and reasonable rates of accommodation.

All this, however, has had to do merely with the rate of interest paid by one bank to another. What the public is prone to inquire is whether the new system has succeeded in reducing the rates to the customers of the banks. To this it may be answered that anything that results in reducing the rate of interest a bank has to pay, tends in due time to reduce the rate of interest it can charge. Further, the fact that individuals know that their bank is able to rediscount a given note at, say four per cent, necessarily makes them unwilling to pay an excessive advance over that rate. Business men who at present understand that their paper falls within the requirements of the Federal Reserve Act, are able to demand and do in practice exact a rate on such paper corresponding roughly to the rate fixed by the federal reserve bank plus a moderate commission. Some of them have been able to discount their paper below that rate because their own banks were holding high reserves and were eager to get business. Had the conditions been reversed, and had severe stringency been prevalent, they would have been able to demand accommodation from their banks. based upon the rate charged by the federal reserve bank of the district. The effects of the federal reserve system upon the large business man, or the business man irrespective of size, who knows how and is able to make his paper coincide with the requirements of the Federal Reserve Act, have been already perceptible and important. The effect of the Act upon other borrowers whose paper is not eligible to rediscount has probably been very much less. In time it is to be expected that every borrower will get the indirect benefits to which he is entitled under the law; but this is a matter involving banking competition, and requiring a relatively long period for its application.

The Federal Reserve Act, however, made provision for a system whereby the benefits of the law should be definitely conveyed to the public at large whenever circumstances would permit. This was found in the open market section (section 14) of the law. As originally drafted, section 14 provided that

federal reserve banks might buy in the open market notes, drafts and bills of exchange of the kind which had been made eligible for rediscount. The provision was subsequently emasculated so as to apply only to bills of exchange and cable transfers; but the bills-of-exchange provision alone would be sufficient to insure a very large circle of transactions between federal reserve banks and the people at large, based upon the actual sale of goods, and without the intervention of any member bank. This provision was necessary from a strict banking standpoint for the purpose of enabling the reserve banks to make their rates of discount effective-that is to say, to insure the extension of rates similar to those which they themselves were charging. The abnormally low rates of interest which have prevailed in the United States thus far since the organization of the new system have made it less necessary to apply this plan than would otherwise have been the case. The Board, at all events, has not issued any regulations governing open-market transactions; and though the reserve banks have lately been officially informed that they have the power to proceed with such transactions without waiting for the Board, they have not acted on the suggestion. The open market provision therefore (except as it relates to municipal warrants, acceptances and bonds) has remained inoperative, and what will be done with it in the future remains to be seen. It is undoubtedly one of the most important provisions in the Act and forms the means whereby the benefits of the federal reserve system may, if desired and permitted, be carried immediately beyond the limited circle of banking customers without waiting for the slow effect of indirect competition. One aspect of the question as to how far the so-called "small man" has obtained benefits from the reserve system, may be better understood from an analysis of the paper discounted by federal reserve banks, according to the size of the note. Such an analysis is presented in the table on page 602, and from this it is clear that loans of the smaller class have greatly predominated. A reason why this has been the case has been that up to date the business of federal reserve banks has been almost wholly with the smaller institutions among their members. In those districts where the rank and

371 15.8

58

101.9

85.6

321.3 15
69.8
10

305.8 175

file of the members were banks of small or moderate capitalization, the business of the reserve banks has been much more active than in those where the bulk of the capital was in the hands of a few very large banks. As is suggested by the table, the large banks have, to a considerable extent, stood aloof; partly, no doubt, because their reserves were high and they did not need to seek accommodation outside of their own vaults. It is, however, both an interesting and a regrettable fact in the present situation, that a certain number of the city banks have been inclined to regard the federal reserve banks as competitors of their own, likely to draw the country banking trade away from them, and consequently to be more or less quietly opposed in their operations. Coupled with this has been the fact that few well-managed city banks have been in position to require any assistance themselves. The consequence has been that the business of several of the reserve banks during the first year of their existence has been, to an extent that will probably never again be duplicated, confined to dealings with country banks in more or less difficult circumstances. There are exceptions to this statement. Some prosperous and able bankers, including a few who did not need any accommodation, have deemed it wise to become customers of federal reserve banks for the purpose of keeping the machinery in working order, or of showing good will, or of, incidentally, clearing a neat profit for themselves, as in the case of one large bank which retired its interest-bearing clearing-house certificates by discounting at a lower rate with a federal reserve bank. These cases, although more or less numerous, are, however, as already stated, the exception. The efforts of the federal reserve system in the aggregate have therefore thus far been devoted largely to the relief of the small country institutions. This has been in many ways a service of exceptional merit. During the period from November 16, 1914, to October 1, 1915, there have been remarkably few bank failures, as against the heavy crop of failures which has usually succeeded past periods of stringency and difficulty. Undoubtedly the federal reserve system has done well in preventing bank failures-how well would be only a matter of opinion even on the part of those intimately conversant with

the situation in each district. While recognizing this situation the student of banking will, however, naturally inquire whether in fact the federal reserve system in its future operations is likely to confine itself largely to dealing with hard-pressed members. In answering this question a great deal must depend upon the extent to which the banks enter the open-market field, and the extent to which individual business men consent to sell their paper in the form of bills of exchange available for purchase by reserve banks under the open-market section of the law. It will probably be some time before large city banks, heretofore in the habit of doing a substantial part of their business with country bank customers, consent to abandon this trade, even in part; and a still longer time before they will habitually resort to the federal reserve banks themselves. It will be a matter of education and also of development to induce them to do so. Meantime the federal reserve banks may look to open-market operations as a means of enlarging their business beyond the confines of mere assistance to members who find themselves obliged to seek aid.

However this may be, the tendency of the reserve banks, under existing conditions, to deal largely in paper of small face value, is illustrated by the comparison already furnished which shows that nearly one-third of all paper discounted was in notes varying from $2500 to $5000; and nearly one-fourth was in notes between $1000 and $2500; less than nine per cent of the notes (taking August as a representative month) were over $10,000 each, while a substantial percentage of all was under $500. The comparison, moreover, undoubtedly affords a conclusive reply to those who have alleged that the resources of federal reserve banks were being used simply for the promotion of the interests of city banks.

IV

One of the most loudly advertised elements of " banking reform" has been the necessity for an "elastic currency." During the panic of 1907, and again during the stringency of 1914, great quantities of emergency circulation-whether clearing-house certificates or what not-were issued. When the