REPORT OF THE COMPTROLLER OF THE CURRENCY. TREASURY DEPARTMENT, OFFICE OF THE COMPTROLLER OF THE CURRENCY, Washington, D. C., December 6, 1915. SIR: In accordance with the requirements of section 333 of the Revised Statutes of the United States I have the honor to submit herewith the fifty-third annual report of the operations of the Currency Bureau for the 12 months ending October 31, 1915. THE NATIONAL BANKING SYSTEM. Our National Banking System, established during the Civil War by authority of an act of Congress approved February 25, 1863, was a success and achieved the purposes for which it was primarily created. It furnished the market so much needed at that time for Government bonds which had to be sold to provide funds for the prosecution of the Civil War. It established a uniform currency, which circulated at its face value in every part of the country, and abolished the socalled "wildcat" currency issued by the State banks in the different States and which sold at nearly as many rates of discount as there were places in which it was circulated. Every bank of deposit, whether it pays interest on its deposits or whether it does not, must keep on hand, either in its vaults or in some place where it may be readily available, a certain proportion of its deposits to meet the checks which may be drawn upon it by its depositors. Prior to the inauguration of the Federal Reserve System banks in the three "central reserve" cities of New York, Chicago, and St. Louis were required to keep in their vaults 25 per cent of their deposits in cash. There were also 51 cities known as "reserve" cities, and the national banks in these cities were required to keep a reserve of 25 per cent of their deposits, of which one-half, or 12 per cent, was carried in their vaults and the other 12 per cent with their correspondent national banks in any one of the three central reserve cities. All of the other national banks throughout the United States, commonly designated as "country banks," although some of the cities in which these "country banks" were located were larger than some of the "reserve" cities, were required to maintain a reserve equal to 15 per cent of their deposits, of which two-fifths, or 6 per cent, had to be carried in their vaults and the remaining 9 per cent could be carried either in their vaults or could be held for their credit in national banks in either the reserve or central reserve cities. With the vast development and growth of our agriculture, industry, and commerce the old national banking system became inadequate to meet the needs of business. The demand for money was, in the nature of things, greater at one season of the year than at another, and each recurring autumn, when the crops were to be moved, there was nearly always the same uneasiness-active demand for and insufficiency of money. When unexpected crises arose, resulting in extraordinary calls for money, the unresponsiveness of our currency became more emphasized. Our bank-note currency, secured by the deposit with the national banks of Government bonds, was inelastic and could not be increased as necessity arose for more money to meet enlarged demands of business. BANKS COULD NOT ALWAYS RELY ON AVAILABILITY OF THEIR BALANCES WITH RESERVE AGENTS. Experience had shown that the system of accumulating and impounding reserves for the national banks of the reserve cities, as well as those of the country banks, in the three "central reserve" cities of New York, Chicago, and St. Louis worked badly. The funds of the banks throughout the country were stored up and concentrated in these three cities. The banks in these cities, especially in New York, had become accustomed to lending largely in Wall Street on demand, on bond and stock collateral, the reserve balances which these banks held for other banks, and upon which they usually paid the depositing banks 2 per cent per annum interest. Periodically, or in the cropmoving season, when the country banks had to withdraw their deposits from the centers, the national banks in the large cities would call in these loans on bonds and stocks, money rates would advance, and stocks decline. This process went on from year to year. When there was sudden strain and need, as in 1893 and 1907, the banks throughout the country having or anticipating a demand from their customers for money would seek to draw in their balances from New York and the other large cities. The New York banks, however, at these times unable to meet the demands upon them, would suspend currency shipments and resort to the usual remedy of issuing clearing-house certificates for protection until normal conditions should be resumed, and the banks in other large cities thereupon generally would be forced to follow the lead set by the New York banks, would hold onto the money of their correspondents, and issue clearing-house certificates, while currency was being bought and sold at a premium of 2 to 5 per cent. AIMS OF FEDERAL RESERVE SYSTEM. The Federal Reserve System has been designed to correct these and other evil and dangerous conditions and to furnish the banks and to the people of the country new and additional banking and financial facilities by providing: First. A currency or circulating medium which will not only pass without question at its face value in every part of the country, but which will expand when necessary to meet legitimate demands of increasing business, and which will also contract at the proper time when no longer required and when its continuance in circulation would threaten or promote inflation. Second. An improved system for the management and handling of the bank reserves, whereby these reserves become readily and easily available to meet demands for increased money and credit and where the proper utilization of that portion of the bank reserves not held in the vaults of the respective individual banks may be made available as a means of relief and to prevent the financial crises or mar ket panics from which the country has suffered so often when the country banks have tried to bring home their reserves to meet the wants of their customers. Third. A clearing or collection system by which the checks on national banks and other banks which are members of the Federal Reserve System, drawn on solvent banks by solvent drawers, may be cashed or collected at par in every part of the country, without the burden and expense of the exchange and collection charges which have been a material expense and a serious drawback to business operations. Fourth. The Federal reserve banks furnish through their capital, their large deposits, and their note-issuing power the facilities by which all members of the system, in any emergency, may rediscount their eligible paper and obtain funds to meet any sudden or unexpected demands. These reserve banks also provide their member banks in ordinary times with money and credit to enable them to meet the legitimate demands of customers for increased accommodations when the member banks themselves have not the needed funds. Fifth. The Federal Reserve System, by providing a source from which all well managed banks at all times may secure funds to meet any emergency, makes unnecessary the carrying by member banks of the reserves formerly required for national banks. By the reduction in reserve requirements provided by the act the loanable funds of the national banks upon the inauguration of the Federal Reserve System were increased immediately, through the release of reserves, by an amount figured at considerably more than $400,000,000. The other direct advantages provided by the Federal reserve act are (a) the opportunity given to national banks under certain conditions to lend money on improved, unincumbered farm propery; (b) the power conferred on national banks to establish branches in foreign countries; (c) the establishment and authorization of bank acceptances; (d) the provisions for open-market operations by Federal reserve banks; and, finally (e) the adoption of the new method for the compensation of bank examiners, which insures a more thorough and systematic examination of national banks than was possible under the antiquated fee system. FINANCIAL CRISIS OF 1914. The Federal Reserve Board was organized August 12, 1914, ten days after the outbreak of the European war, but the Federal reserve banks were not opened for business until November 16, 1914. The commerce, industry, and business of the entire world were disturbed as never before. Moratoria" had been declared in nearly all foreign countries. Outside sources of relief were shut off and the banking situation was greatly demoralized. As a result, however, of the instant and energetic action of the Secretary of the Treasury, August 2, 1914, authorizing and directing the issue of several hundred million dollars of "emergency currency" under the provisions of the emergency currency law of May 30, 1908, as amended by the Federal reserve act, the banks in all parts of this country-north, east, south, and west-were supplied promptly with all the currency they needed, which enabled them to maintain currency payments throughout the entire country, a record they were unable to make in 1893 and in 1907, and in previous crises infinitely less far-reaching than that which confronted us a year ago. EFFECTS OF THE NEW BANKING SYSTEM. The New York and other stock exchanges had been closed since July 30, 1914. The general business of the country was in an abnormal condition, for which there was no precedent by which thought and action could be guided. Some bankers and financiers had misgivings as to whether the new financial system ought to be launched under such critical and trying circumstances. Further delay in putting it into effect was being strongly urged. The Secretary of the Treasury, however, having taken all factors into consideration, determined that the sooner the Federal Reserve System could be placed in operation the better it would be for the country; and in accordance with the authority vested in him he announced on the 25th day of October, 1914, that the 12 Federal reserve banks would open for business on November 16, 1914. It was, therefore, under these stirring and world-shaking conditions that the system had its birth. Its progress from the very start has been steady and enormously beneficial to the banking and business interests of the country. REVIVAL OF CONFIDENCE AND BUSINESS. From November 16, 1914, to the present time confidence in the strength and soundness of business and financial conditions has grown almost uninterruptedly. All the $318,484,485 of emergency currency which was outstanding on November 16, 1914, when the new system started, had been retired by July 1, 1915, with the exception of $200,000 issued to a failed bank; and this small balance has been paid in full. The beneficent influences of the Federal reserve act have been exerted in every city, town, and village from one end of the country to the other; and these effects have been realized by business men of all classes, who have been enabled to secure the money needed for their legitimate requirements at rates of interest more favorable than ever known in our history. Many opponents of the Federal Reserve System, endeavoring to defeat or delay the passage of the act, freely predicted that, if the law should be passed, a commercial panic would ensue; that the withdrawal of the enormous bank reserves from New York, Chicago, and St. Louis would produce convulsions from which the whole country would suffer. Experience, however, has contradicted these prophecies squarely. The business and commerce of the United States have not contracted. They have expanded to dimensions never before reached. ENORMOUS GROWTH OF RESOURCES OF NATIONAL BANKS SINCE INAUGURATION OF FEDERAL RESERVE SYSTEM. The following comparative statement, based upon the report of condition of national banks as of October 31, 1914, two weeks before the Federal Reserve System went into effect, and the condition on November 10, 1915, after one year's operations under the new system, shows a development and growth during this one-year period never paralleled in the financial history of any country. |