retailer. It should be noted that the $5,000 limit mentioned in paragraph 2 above does not necessarily contemplate that statements shall be offered where the borrower has sold paper to an amount exceeding $5,000, but that the limit of $5,000 covers the paper offered for rediscount. In other words, the borrower might have discounted $25,000 worth of paper, but so long as the bank chooses to hold $20,000 or more of this paper, rediscounting $5,000 or less, the statement is not required. The third exemption covers, in substance, commercial paper secured by cotton, grain or other warehouse receipts. In this case the value of the collateral is presumed to be sufficient to warrant the waiving of the requirement of a borrower's statement.

The Federal Reserve Board has recommended that these requirements be imposed at once in the purchase of paper from note brokers. The regulation, however, does not become effective until July 15 of this year, thus giving the banks time to adjust their affairs to meet the requirements of the Board.

The Board recommends that every member bank maintain a credit file which "shall contain original signed statements of the financial condition of borrowers, or true copies thereof, certified by a member bank or by a notary public, designating where the original statement is on file. Statements shall contain all the information essential to a clear and correct knowledge of the borrower's credit and of his method of borrowing."

The Board specifies in a general way the character of information which should be in the credit files of member banks. Such files should contain information concerning the nature of the business or occupation of the borrower, the extent of his indebtedness and his financial responsibility. Where the borrower is a firm or corporation, a balance sheet showing quick assets, slow assets, permanent or fixed assets, current liabilities and accounts, shortterm loans, long-term loans and capital and surplus should be at hand. Furthermore, the contingent liabilities, such as endorsements, guaranties, etc., should be set forth in detail, and information should be given respecting any mortgage debt and as to whether there is any lien on current assets.

It is too early to accurately estimate the effect of these requirements. The Board declares that in making the changes in its regulations, it "has not modified its views upon the general principles"

expressed in its regulations of 1914 "as being of fundamental importance in the best development of the new system."

The new requirements of the Board were prompted by a desire to slowly educate their customers in giving statements. The board in its 1915 regulations enjoins the member banks "to do their utmost to accustom their borrowers in furnishing such statements," even where the furnishing of statements is not required under the three classes of exemptions noted above. It is very clear to anyone who has carefully perused the regulations of the Federal Reserve Board that a progressive development in scope and detail of the regulations is contemplated, with a view to improving the general quality of commercial paper offered for discount, both through the exclusion of undesirable paper given by overextended borrowers and more particularly with a view to requiring the payment of paper when due, rather than its renewal, as has too often been the practice in the past. This work will occupy a period of years and if done carefully and without violent and arbitrary changes will be of the greatest assistance to the business men of this country. It will raise commercial paper to the proud position of being the best class of banking asset-a position held by such paper every country in Europe. This will mean lower rates of interest to the business man and greater security in his dealings with the bank. With the paper of weak or reckless borrowers eliminated, the losses sustained by banks through the purchase of this class of investment will be materially reduced, thus leading to the investment of a larger amount of money in this manner.

in

The greatest incentive to increased investments in commercial paper by member banks will be the fact that commercial paper, meeting the requirements of the board, can be converted into cash whenever an emergency arises through the rediscount of it with the Federal reserve banks. This is the only class of banking asset which a bank may certainly count as being always liquid. Commercial paper will largely supersede the call loan as the secondary reserve of our member banks, thus diverting a large amount of money, which has heretofore, of necessity, been used in more or less speculative transactions, into commercial channels to the great profit of our country and the welfare of our banks.

THE FREE PORT AN AGENCY FOR THE DEVELOPMENT

OF AMERICAN COMMERCE

BY FREDERIC C. HOWE,

Commissioner of Immigration at the Port of New York.

AN OVERLOOKED ELEMENT IN INTERNATIONAL TRADE

In the discussion and legislation now going forward for the reëstablishment of the American merchant marine and the development of our carrying trade a very important, possibly the most important, of all elements has been neglected. And that is the necessity of cargoes, not only for incoming ships but for outgoing ones as well. In order to re-create our merchant marine and enter the field for the carrying trade of the world in competition with England and Germany, it is necessary that ships should be able to speedily and surely find cargoes. And neither the modification of the registration acts nor the acquisition of ships by the government will achieve the desired result unless provision is made for this primary condition as well. Incoming as well as outgoing cargoes are a sine qua non to the development of American trade and shipping.

The Opportunity. Several things coöperate at the present time for re-creation of our carrying trade. They are the European war, the opening of the Panama Canal, the amendments to the registry act and the new currency measure. Added to these is the substantial extension of the free list in the recently enacted tariff bill. The European war has closed the ports of Germany and Russia. It has dislocated the carrying trade of England, Belgium and the Mediterranean countries. The Panama Canal brings South America close to North America and also opens up the trade of the Orient to us. We now have the financial machinery for the transaction of a world business through the establishment of subsidiary banking branches, while our attitude of friendly neutrality to all of the nations involved in the present war lends a strong moral influence to the development of American trade.

The Present Carrying Trade of the World. It is the countries that have substantially free trade that do the carrying trade of the world. They are England, Germany (through her free ports),

Belgium, Holland and Denmark. The great bulk of the carrying trade is done by Great Britain, because she is a free trade country, and a reference to the rise of British shipping in the years which followed the repeal of the corn laws shows a tremendous and immediate increase in her oversea trade following the establishment of free trade. For fifty years she has been mistress of the seas for the very simple reason that ships could come to her ports from all over the world; they could there discharge their cargoes and find other cargoes awaiting them without delay. Here there were no obstacles, obstructions or tariff barriers to interfere with traffic. All history is unanimous in its demonstration that carrying trade will go hundreds of miles to escape tariff barriers. Protective tariffs killed the Spanish trade; they destroyed the rich and prosperous cities of the Netherlands. They killed our own foreign shipping; for commerce hates tariff barriers. In recent years

Germany has begun to compete with Great Britain for the carrying trade of the world. She has been able to do this through her free ports, which have existed in Hamburg, Bremen and Lübeck, ever since the Franco-Prussian war. These concessions were insisted on by these old free cities when they entered the Empire. And by Imperial law there exists in the harbor of these cities a large free harbor, into which ships can come and go without the payment of customs duties upon their cargoes. By this means a free counter is provided, across which goods can be exchanged and trans-shipped to other destinations. Or they can be placed in great storage warehouses, where they can remain for an indefinite period until cargoes have accumulated for other ports. If desired they can be shipped at any time into the Empire on the payment of the customs duties. These ports have grown with great rapidity. Here cargoes can be broken and new ones made up. To these ports ships can come from any place in the globe with the assurance that they will quickly find outgoing cargoes to some other destination. The free port has contributed greatly to the upbuilding of German shipping.

THE PROPOSAL

America cannot hope to establish herself as a clearing house of the world until cargoes exist with which to fill ships' bottoms. For ships must be filled not only going but coming;

they must be able to change their destination and do a tramp trade. As it is now, we have cargoes of raw materials to European countries and some outgoing and incoming cargoes to South America and the Orient. But our protective tariff prevents the importation of European wares and compels a large part of the transAtlantic shipping to go empty one way.

How can this obstacle be overcome? Aside from a policy of free trade the only other alternative is the development of the free port idea along the lines of German experience. And the suggestion is that Congress should provide for a half dozen free ports as an experiment; three of which should be on the Atlantic seaboard, one on the Gulf, one at Panama, and one or two upon the Pacific Coast.

Quite obviously these free ports should recognize existing transportation and industrial conditions; they should be linked up with rail transportation. The leading Atlantic ports are New York, Boston, and Philadelphia. And New York and Boston have admirable natural advantages and harbor facilities for the planning of such ports. New Orleans is a natural port upon the Gulf of Mexico and may become a port of great prominence in connection with the Panama Canal traffic. Upon the Pacific coast San Francisco, Los Angeles and Seattle are all ports of importance, all of which either own or plan to own a comprehensive system of municipal docks. These would seem to be the natural harbors for the making of preliminary experiments. In addition, all of these cities are rail terminals and have a substantial industrial life which would be quickened by contact with the free port idea.

These ports might be opened in coöperation with various cities. Or it might be provided that any city with a certain amount of customs receipts that offered dockage for a free port would be entitled to enjoy this privilege. This would be an encouragement to cities to acquire and develop their own docks and harbors, which for the most part are in the control of private interests.

Into these ports ships could come from all over the world, from Europe, Africa, Asia, and South America. Here their cargoes could be placed in warehouses without the payment of customs. dues; or cargoes could be broken and re-made. Goods which remained in the warehouses would be placed in bond, as is now done for importers.