Foreign Trade.

For many years these services could be secured by American exporters and importers from foreign banks with New York agencies only or from a small number of private banks. In recent years, however, large national banks and trust companies have opened foreign departments and have thus materially aided the expansion of our foreign trade.

It was necessary for these institutions to establish close relations with important money centers throughout the world. Such associations were secured in the past by employing the services of foreign banks as correspondents. This plan was followed by many American banks because of their own inexperience and lack of credit information. The necessary connections with foreign-exchange markets are also attained by establishing branches. As practically all the American banks interested in foreign trade have been located in New York, this state was the first to authorize the operation of branches abroad. Accordingly, several trust companies opened offices in London and on the Continent. This power was denied to national banks until 1916, when an amendment to the Federal Reserve Act permitted institutions with a capital and surplus of over $1,000,000 to establish foreign branches, but this privilege was exercised by only two banks.

Meantime, American banks tended to expand their international relations not through the opening of branches, but through the organization of overseas banks engaged exclusively in foreign trade. Under the laws of New York State, banking institutions were permitted to hold stock in corporations financing foreign trade, and accordingly a number of them have been founded. These international houses perform all banking operations, but have generally limited their activities to the Far East and to South America. In 1916 the Federal Reserve Act likewise empowered national banks with a combined capital and surplus of over $1,000,000 to invest 10 per cent in the stock of foreign banking corporations, whether organized under the laws of the state or those of the federal government. These provisions were further extended in 1919 by the McLean Act, which permitted any national bank, regardless of its size, to invest 5 per cent of its capital and surplus in the stock of a foreign banking corporation. But as a matter of fact Congress had never made provision for the organization of overseas banks under national law. The need of further legislation was accentuated by our unbalanced trade, which continued even after the armistice. During the war the movement of goods in international trade had been financed largely through the extension of government credit, and upon its withdrawal American banks found difficulty in furnishing credit sufficient in amount and in maturity to meet the needs of foreign buyers.

For these reasons, Congress in 1919 passed the Edge Act. This statute seeks primarily to provide long-term credit for foreign purchasers of American exports. To attain this end the statute authorizes the organization of corporations with capital stock of not less than $2,000,000 and under the supervision of the Federal Reserve Board.

In accordance with the regulations of the board, two types of Edge-law corporations have been organized. One form is a commercial bank empowered to create acceptances based on exports to foreign countries and to operate branches abroad. The second type is rather an investment bank. It is not permitted to make acceptances or conduct branches, but is given full power to issue and sell its own debentures. These obligations may be based on two classes of collateral held in trust: (1) commercial paper of a self-liquidating nature, (2) foreign securities.

The American Bankers' Association projected in 1921 a large Edge corporation and offered $100,000,000 of stock for the purpose of purchasing high-grade foreign securities and using them as collateral to protect its own debentures. The object was to sell the obligations of an American corporation to the investing public, which might be unwilling to absorb foreign securities directly.

In this way the unbalanced trade between the United States and the rest of the world, which can be corrected neither by the shipment of gold because of its insufficient amount, nor by the importation of merchandise because of its reaction on American industry, would be stabilized by the export of capital from the United States through foreign investments. The future of foreign trade financing is still uncertain.