ANNUAL REPORT OF THE FEDERAL RESERVE BOARD.

FEDERAL RESERVE BOARD, Washington, January 31, 1919.

SIR: In compliance with the requirements of section 10 of the Federal Reserve Act, the Federal Reserve Board submits herewith its fifth annual report covering operations for the calendar year ended December 31, 1918.

FISCAL AGENCY OPERATIONS.

War financing has been the dominant feature of the year. Government requirements have been larger than ever, and the vast operations of the Treasury have been reflected in the work and activities of the Federal Reserve Banks. These banks have handled all details connected with the sales and allotments of Treasury certificates of indebtedness among member and nonmember banks of their respective districts, have received subscriptions to Liberty bond issues, collected all bond and certificate payments and redeposited the funds with depositary banks, withdrawing them as required by the Treasury, and have made deliveries of Government bonds and Treasury certificates to subscribers. They have also attended to the exchange and conversion of bonds for member and nonmember banks and for the public.

The Secretary of the Treasury has continued the policy of using the Federal Reserve Banks as agencies for negotiating all Government loans, and the work of the banks in performing this function has been even heavier than before. Under the general direction of the Secretary of the Treasury the work of the Liberty loan committees in the selling campaigns throughout the various districts has been supervised by the governors and other officers of the Federal Reserve Banks.

By means of interdistrict settlements through the gold settlement fund, maintained at Washington by the Federal Reserve Board for the banks, it has been possible for the Treasury to leave funds with designated depositary banks throughout the country until actually required, transfers being made by telegraph to Federal Reserve Banks in cities where the Government's disbursements are made. These vast operations have been conducted without any strain upon or disturbance of the money market.

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A total of $11,117,936,400 of bonds of the third and fourth Liberty loans, and $10,660,743,000 of Treasury certificates of indebtedness issued in anticipation of these loans, of the forthcoming fifth loan, and of 1918 and 1919 tax receipts have been subscribed, allotted and collected through the 12 Federal Reserve Banks. A detailed statement of these operations is given in the subjoined table:

Allotments of Liberty bonds and Treasury certificates from Jan. 1 to Dec. 31, 1918.

1 Exclusive of $250,000 of the Nov. 30, 1917, issue allotted on Jan. 28, 1918. ? Includes 76 millions 4 per cent certificates of the Aug. 23 issue received in payment for the 41 per cent issue of Nov. 7.

NOTE.-Above figures are exclusive of $104,707,000 of 2 per cent 1-year certificates sold to Federal Re serve Banks to secure bank-note circulation, and of special temporary certificates sold to Federal Reserve Banks. none of which are now outstanding.

Including operations in 1917, certificates of indebtedness and Liberty bonds subscribed for and collected through the Federal Reserve Banks have amounted to $31,457,310,400 composed of $14,530,708,000 of certificates and $16,926,602,400 of Liberty bonds.

The Treasury balances carried with the Federal Reserve Banks and the member banks in the various districts have been subject to wide fluctuations, owing mainly to the constantly changing requirements of the Treasury, and partly to the seasonal character of col

lections of internal-revenue taxes made for the Treasury's account. The average of the Friday night balances standing to the credit of the Treasury on the books of the 12 Federal Reserve Banks for the year were as follows:

REDISCOUNT OPERATIONS AND SALES BETWEEN FEDERAL RESERVE BANKS.

Section 11 of the Federal reserve act provides that the Federal Reserve Board may permit or, on the affirmative vote of at least five members of the Federal Reserve Board, require Federal Reserve Banks to rediscount the discounted paper of other Federal Reserve Banks at rates of interest to be fixed by the Federal Reserve Board.

Transactions of this character between the Federal Reserve Banks have been unusually heavy during the past year, due to three causes named in the order of their importance: First, transfers of Government funds; second, joint purchases of bankers' acceptances; and third, seasonal requirements incident to crop moving.

The Board's policy has been to equalize, in an approximate degree, the reserves of the 12 Federal Reserve Banks with the purpose of avoiding undue variations in their reserve position. Discount transactions between the banks have not, as a rule, been negotiated by the banks themselves, but through the medium of the Federal Reserve Board, instructions being given by telegraph, and transfers incident to the operations were effected in the same way.

Open-market purchases of bankers' acceptances have shown a very substantial growth. Investments in paper of this class reached a maximum of $388,383,000 on October 25. The principal market for acceptances is New York, although an open market for them has been established in Boston under the auspices of the Federal Reserve Bank there. The Federal Reserve Banks of other districts have found it more convenient to participate in the purchases of acceptances made by the Federal Reserve Bank of New York, and some of the banks have undertaken to take care of the acceptances originating in their own districts which are sold in the New York market. Voluntary transactions between the banks in acceptances

have been permitted without the indorsement of the Federal Reserve Bank selling them, but in all cases where the Board has required rediscount operations the indorsement of the bank disposing of the paper has been given.

Rediscounting because of seasonal or crop-moving requirements has been confined to five banks-the Federal Reserve Banks of Kansas City, Minneapolis, Dallas, Atlanta, and Richmond-but it is probable that none of these banks would have had occasion to rediscount except for the fact that they were discounting heavily for member banks paper secured by Government obligations. Transactions in paper of this class have been so heavy and transfers of balances from one district to another so constant that the process of rediscounting between banks has been continuous through the greater part of the year.

All of the banks have disposed of paper except the Federal Reserve Banks of Cleveland and San Francisco. Rediscount operations between the Federal Reserve Banks, including voluntary purchases of bankers' acceptances, during the year, have aggregated $660,638,000, as shown in detail in the following table:

Interdistrict movement of bills discounted or purchased by Federal Reserve Banks during the period from Jan. 1 to Dec. 31, 1918.

The discount policy of the Board has necessarily been coordinated throughout the year with Treasury requirements and policies, which in turn have been governed by demands made upon the Treasury for war purposes. All lines of business activity have been subordinated to war necessities; more than two million men have been under arms

in France, another million at stations and training camps in this country, half a million more were in the Navy, making more than three and a half million men actually under arms; and it is estimated that the labor of fifteen million more has been devoted to the production, manufacture, and distribution of commodities and material required in the conduct of the war. The Government has been the principal purchaser and consumer of goods, as well as the chief employer of labor, and the financing of the Government therefore has been of paramount importance from a commercial as well as a patriotic point of view.

The rates of interest borne by the Treasury certificates of indebtedness and by the Liberty loan bonds have been determined by the Secretary of the Treasury within the limits fixed by Congress, and the Board has felt it to be its duty to adjust its discount rates in such manner as to assist the distribution of the various Treasury issues.

The Board has therefore continued the policy, as explained in the last annual report, of giving a preferential rate of discount to notes made or offered by member banks secured by the Government's war obligations, and has continued to permit the Federal Reserve Banks to discount for nonmember banks, upon the indorsement of a member bank, notes secured in this manner.

The coupon rate of the Liberty loan bonds of the third and fourth issues is 41 per cent, against 3 per cent for the first loan and 4 per cent for the second, and the interest rate on certificates of indebtedness was advanced during the year to 4 per cent, against rates of 3 to 4 per cent during 1917.

The Board thereupon approved an appreciable increase in discount rates at all Federal Reserve Banks, the principal changes having beer made on April 8, shortly before subscriptions closed to the third Liberty loan. While a preferential has been maintained in favor of paper secured by Government obligations, corresponding changes have been made in the rates for commercial paper of various maturities, all of which are shown in the following tables:

Changes in rates of discount for 15-day commercial paper, including collateral

Federal Reserve

Bank.

notes.

Effective

Jan. 1, Apr. 3, Apr. 8, May 20, Aug. 29, Sept. 3, Sept. 5, Sept. 10, Dec. 30,

1918.

1918.

1918.

1918.

1918.

1918.

1918.

1918.

1918.

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