Most of the foreign trade of the United States has heretofore been financed by foreign bankers. The new system permits the home institutions to enter this field of business.

Both member banks and federal reserve banks are benefited by the new provisions. As already noted, member banks are allowed within certain limits to accept on commission drafts and bills of exchange growing out of exports and imports, and these may be sold in the open market or be rediscounted at the federal reserve banks. Under the amendment adopted in August, 1916, a member bank is permitted to accept bills of exchange having not more than three months to run (exclusive of days of grace), drawn under regulations prescribed by the Reserve Board by banks or bankers abroad for the purpose of furnishing dollar exchange as required by the usages of trade in the respective countries. Such drafts or bills may also be acquired by the reserve banks. But no member bank may accept for such purposes for any one person more than 10% of its paid-up and unimpaired capital and surplus, unless the draft or bill of exchange is accompanied by documents securing title or by some other adequate security. In any case, the limit is one-half of the paid-up and unimpaired capital.

Interdistrict clearings

Financing foreign trade

But beyond these provisions, there are others permitting national banks to establish agencies in foreign countries or to acquire an interest in banks established there. National banks with a capital and surplus of $1,000,000 or more may, with the permission of the Reserve Board, estabtish branches in foreign countries or in the dependencies. The capital set aside for these branches must be specified, but besides conducting the foreign business of the home bank, the branches may also act as fiscal agents of the United States government. In the case of smaller national banks, an amendment adopted in August, 1915, permits them to subscribe up to 10% of their own capital and surplus to the stock of one or more banks or corporations chartered under United States national or state laws, and principally engaged in foreign banking, either directly or through control, ownership, or agency of local institutions in foreign countries. Full reports and information of all foreign agencies, etc., must be given to the comptroller. Moreover, the bank concerned must enter into an agreement with the Reserve Board to limit its foreign operations and to conduct its foreign business as the Reserve Board may prescribe. The accounts of the foreign branches, etc. must be independently kept. Any violation of the agree ment may result in an order to close out the foreign holdings.

Dollar exchange

Foreign agencies and connections

The reserve banks also are given significant privileged in the field of foreign operations. With the consent of the Federal Reserve Board they may, and under the direc tion and regulation of the Board they must, open account in foreign countries; they may appoint correspondent! or establish agencies for purchasing, selling, and collecting bills of exchange, and they may buy or sell through such connections bills of exchange growing out of commercial transactions with at least two names and with a maturity not exceeding 90 days exclusive of days of grace. A for eign account opened by one reserve bank may, with the Board's permission, be utilized by other reserve banks Moreover, the reserve banks may carry accounts here for their foreign correspondents.

The provisions bearing directly on the operations in the exchange market and on gold movements are of equal interest and importance. In addition to the dealings with their member banks, the reserve banks are permitted to purchase and sell in the open market, at home and abroad cable transfers of funds, bankers' acceptances and bills of exchange of the kind that are eligible for rediscount with or without the indorsement of a member bank. Fure thermore, they may deal in gold coin or bullion, at home and abroad, may make loans thereon, may exchange federal reserve notes for gold in bullion and in coin, or for gold certificates, and they may contract for loans of gold giving United States bonds and other authorized security as collateral. Finally, under rules prescribed by the Fed-eral Reserve Board, they may buy and sell, at home and abroad, United States bonds and notes, and also bills bonds, revenue warrants, etc., of states and of the minon political divisions when such bills, etc., have a maturity no1 to exceed six months and are issued in anticipation of taxes or assured revenue.

Reserve banks' foreign connections

Foreign exchange and gold movements

In the chapter dealing with the "Protection of the Reserves," the importance of effective control of domestic rates of discount was set forth. Hence in considering the provisions of the Reserve Act with reference to foreign operations, the power given to the Reserve Board finally to determine the rate of discount at the reserve banks must be recalled. Whether the rates fixed by the Board can be made effective or not is, of course, another question, the answering of which will depend upon the extent to which the market will have to rely on the reserve banks.

As a final guarantee to the world of the solidity of the whole system, the Federal Reserve Act reaffirms the gold standard, and authorizes the Secretary of the Treasury to purchase gold if necessary with one year 3% gold notes of the United States or to borrow it on the security of United States bonds.