Before proceeding, however, to a brief review of the history of the operations by which the system gradually advanced to the position thus indicated, it is necessary to sketch certain essential aspects of its organization whose understanding is necessary to comprehension of the position reached at the present time.

In thinking of this new system as one of the world's great central banking organizations it is desirable to bear in mind certain very fundamental differences between it and other central banking systems. First of all, it should be noted that in most foreign countries the central bank or reserve bank is the nucleus of a banking structure which has later grown up around the institution. The central bank itself is in most cases older than the majority of the banking institutions about it. It has been established because of the weakness or defect of previously existing banking systems and because of the fact that it was desired to provide a means for the attainment of some very definite object; usually the development of a government plan of fiscal reform. The Federal Reserve System, on the other hand, was superimposed upon an

Resources and Liabilities of the Federal Reserve Banks, 1921 [In thousands of dollars.]

already active and widely diffused banking system whose service was entirely satisfactory to the community in all ordinary particulars, although there was need for the aid which could be rendered by a centralizing and coordinating institution. For this reason the Federal Reserve System differs in sundry very essential particulars from any other central bank. It is worth while to enumerate the chief of these points of individuality.

(a) The Federal Reserve System deals only with banks and with the Government and not in any particular with individuals so far as redis-counting is concerned.

(b) The Federal Reserve System is owned by banks and neither the Government nor individuals own any stock in it.

(c) The directors of the Federal Reserve Bank are to the extent of two thirds elected by banks, the one third who represent the Government being the holders of an indirect power of control in certain circumstances.

From these considerations it will appear that the Federal Reserve Banks are in a very real and genuine sense what has been termed by some as a matter of analogy "bankers' banks," or a means of extending aid and support on behalf of the entire banking community to banks who need such accommodation from time to time, thus indirectly redistributing the supply of credit between different regions and individuals.

As already remarked, the reasons why the Federal Reserve System has been given this unique position and why its functions even in the Act as ultimately passed were so greatly limited in their scope, are obvious, being traceable to the circumstance, already mentioned, that the system was grafted upon an already existing banking stem instead of being developed from the root as with European banking systems. Whatever may be the reasons for the situation, however, the effect of it, as already noted, is one which necessarily arouses question and doubt as to the future.

Its first problem clearly lay, after organization had been effected, in securing the participation of a number of banks sufficient to make it really representative of the commercial banking of the country. The Act had required all national banks to accept membership and all except less than a score of obscure institutions did so. There remained the problem of securing the membership of state institutions. This involved several issues of competition and banking cooperation not altogether obvious on the surface. The state banks and trust companies had at the outset been very insistent that they should be accorded the privilege of joining the system, and such privilege had eventually been included in the Act. When the Federal Reserve Board was formed it found a long list of applicants for membership. During the few months following the organization of the Board a decided change in the attitude of the trust companies and State banks took place, and by the time that the regulations covering their admission had been formulated in May, 1915, few, if any, were desirous of entering. The reason assigned was that while they believed the conditions laid down by the Board for entrance were fair, they did not think that the Act had made satisfactory provision for permitting their withdrawal, and they doubted whether the Board could assure them the power to retire at will. Such provision was accordingly incorporated in the Federal Reserve Act as a part of the law by an amendment which was adopted in 1916. The effect was greatly to encourage the movement of banks into the system and this movement was materially aided by the final entrance of the United States into the European War and the feeling on the part of State institutions that it was both a wise and patriotic step for them to affiliate themselves with the reserve system. Thus the Federal Reserve Banks came to include by the close of 1921 about 10,000 members of which 1631 were organized under State charters, and to represent about 80 per cent. of the commercial bank assets of the country.

Closely connected with this question of membership was another problem which involved the functions of national banks. Practically throughout the world the tendency for many years past had been in the direction of banking specialization. In the European countries a sharp line was early drawn between the investment bank and the commercial institution, while the latter in its turn was subdivided into many special groups. The United States had been an exception to this general trend of development. So-called trust companies authorized to act as guardian, executor, trustee, registrar, and the like, had been developed in many States and had found it profitable to combine with their fiduciary functions a general banking business. Some of them had gone so far as to develop their commercial banking, much beyond their fiduciary, duties. When the Federal Reserve Act was first taken under advisement, there was an effort to confine membership in the proposed system strictly to national banks, it being believed that such banks were much more narrowly limited in the scope of their business and hence more desirable members of a commercial banking system. Political pressure while the Act was under consideration led to the modification of this view. State banks and trust companies were admitted to membership and from this the conclusion was naturally drawn that logic required the granting of fiduciary powers to national banks. Such an extension was accordingly made, and although the actual exercise of the powers was resisted by State institutions, a test case in the Supreme Court brought a favorable verdict.1 Congress materially enlarged the scope of the powers which could be granted and by the close of 1921 some 1200 national banks had applied for and had received authority to exercise fiduciary functions. In reaching conclusions regarding the effectiveness and success of the Act as it stands, or with reference to its probable future, experience is a far better guide than theory. Yet the years which have passed since the adoption of the law have been singularly unfruitful in settling disputed issues. This is because of the unusual character of the banking problems that have been presented during that time.