In these circumstances, as will readily appear, there was offered an unusual opportunity to the member banks of the reserve system to finance not only the trade of the United States but that of the world as well. This, however, was availed of only in a partial and hesitating way, and eventually the banks, during the year 1921, largely withdrew from any substantial part in such foreign trade operations. Precisely why this unique opportunity was thus neglected or misused can be better understood from a survey of the relation of the Act to the foreign trade situation.

From the very beginning the relation of Federal Reserve banks to foreign countries and their banking systems constituted a serious problem. This would have been true in any case because the American banking system had occupied so isolated a position and had been able to do so little in the direction of financing American foreign trade. It became of exceptional importance during the war because of the fact that most foreign currencies had become so largely depreciated while military danger to London and Paris led many banks and individuals throughout the world to transfer their balances to New York. In addition to this, however, American foreign trade assumed a far greater importance during the war than it had ever had before.

The Federal Reserve Act provided three means for bringing the American banking system into closer relations with those of foreign countries. It authorized the national banks under specified conditions to establish foreign branches, and to create bankers' acceptances in the financing of foreign trade; it provided in an amendatory act of 1916 for the establishment of institutions, to engage in foreign banking exclusively, whose stock might be owned by national banks; and it provided for the establishment of branches and increased the amount of such acceptances to 100 per cent. of capital and surplus, while of this amount one half might be acceptances drawn against domestic transactions pure and simple.

Unfortunately the acceptance even in foreign trade was often drawn for the purpose of promoting speculative operations designed to assist in the holding and storing of commodities or to anticipate their movement. The latter evil was aggravated by a further amendment to the Federal Reserve Act (1916) which authorized the drawing of acceptances to create what was called "dollar exchange" in favor of countries which might be approved by the Federal Reserve Board. Partly as the result of generally unfavorable commercial conditions affecting the whole world during the reaction which set in after the spring of 1920, partly as the result of poor management of foreign branches, and partly owing to the abuse of the acceptance, the spring of 1921 found many foreign branches losing money rapidly and not a few American banks faced with the necessity of renewing their outstanding acceptances or of taking a heavy loss on them. The result was the closing, during 1921, of a good many of the foreign branches which had been previously established while the total volume of acceptances which had been afloat in the market was cut from a total of possibly $1,000,000,000 including both member and non-member paper to about $400,000,000. At the same time several foreign credit institutions were either liquidated or curtailed operations. In the meantime Federal Reserve banks had been hesitant in taking any direct part in the financing of foreign trade. The Federal Reserve Board had at the outset defined the paper which they could discount in such a way as to require it to be drawn in terms of dollars. They purchased and discounted large quantities of member and non-member acceptances, but only when drawn in dollars, the reason assigned being that a like prac-tice of dealing only in bills drawn in sterling had long been prevalent at the Bank of England, while on the other hand, it was asserted that the danger of loss due to fluctuation of currency as the war progressed was too great to be incurred by reserve banks. For similar reasons there had been refusal to establish agencies abroad. Soon after the United States entered the war, pressure from the government led Reserve banks to establish agency relations with the Bank of England, subject, however, to a private agreement which specified that during war there should be no actual operation by either the reserve system or the Bank of England in the market of the other. The arrangement was largely one for the fiscal convenience of the governments concerned and for the holding of coin without danger of transoceanic shipment. In these aspects it was well worth while, but it had little significance as a commercial banking relationship. Similar relations were subsequently established with various foreign banks but upon an equally limited basis. The Federal Reserve System never acquired a portfolio of foreign bills nor did it ever undertake to support the operations of American banks in the markets where branches were established. Neither did it ever undertake to supply exchange or remittances to foreign countries save in a limited way for the Government of the United States, and during the latter part of the war for business uses through arrangements with certain South American states.

While there had been much sporadic discussion of the financing of foreign trade before the Federal Reserve System was established, and while there had been well-grounded criticism of the conditions in our legislation which necessitated applications to English banks for the opening of acceptance credits, the lack of foreign trade financing had never been so important in its effect as to constitute an evil of first proportions. Contrary to the condition in such a country as Great Britain, the United States depends only in a secondary degree upon its foreign trade, although such trade is unquestionably essential as a regulator and supplement to domestic commerce. A new situation came into existence soon after the war opened, due to the fact that European countries found it necessary to rely very largely upon the United States as a source of supply for munitions and food. In order to pay for these necessaries various means were found. Large quantities of foreignheld American securities were shipped to the United States and sold in this market. Great sums in gold as already noted, followed them. Finally European bonds were placed in considerable quantities with American banks and individuals. Distrusting the financial position of foreign countries, American bankers and business men hesitated to extend credit and in most cases depended upon payments made prior to shipment of goods.