The material changes in the items comprising resources and liabilities of the Federal Reserve Banks from March 30, 1917 (which date was prior to the declaration of war and also before the act was amended on June 21, 1917, which changed reserve requirements by providing that all reserves of member banks be carried with the Federal Reserve Banks), to December 27, 1918, have been as follows:

In connection with the loans and discounts, it should be noted that the increase of Government secured paper held by the banks has been about $1,400,000,000 as against an increase of commercial discounts. and purchases of acceptances combined of $502,000,000.

The increase in Federal Reserve notes outstanding since March 30, 1917, has been $2,328,000,000, from which it will be seen that after making allowances for the notes which have been exchanged for gold the net expansion in note issues has been due largely to the discount by the banks of paper secured by war obligations of the Government. About two-thirds of the profits made by the banks during the year 1918 have been due to the expansion of this class of loans.

The increase in capital of $25,000,000 has been due in part to the increase in capital and surplus of member banks, but principally to payments to capital account by State banks and trust companies which have become members of the system.

The increase in Government deposits noted for part of the year has been due to the larger activities of the Treasury in connection with war financing.

The increase in member bank deposits is accounted for by changes in reserve requirements made by the act of June 21, 1917, the growth of deposits of national banks, and by the reserves carried by the State bank and trust company members, most of which have joined the system since June 21, 1917.

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The increase in Federal Reserve bank notes of $117,000,000 does not represent any material addition to the circulating medium, as most of these notes have been issued in substitution for silver certificates by virtue of the act of April 23, 1918, which authorizes the issue of $1 and $2 Federal Reserve bank notes, upon the retirement of silver certificates in equal amounts, to be secured by Treasury certificates of indebtedness deposited with the Treasurer of the United States. A more extended discussion of these bank notes appears further on in this report.

ACCEPTANCES.

The acceptance is a comparatively new development in American finance. A few of the States, just prior to the passage of the Federal Reserve Act, authorized banks and trust companies operating under State charters to accept bills of exchange drawn upon them, and the Federal Reserve Act authorized such transactions on the part of member banks where the drafts or bills have not more than six months to run and where they grow out of transactions involving the importation or exportation of goods, the total volume of such acceptances outstanding at any one time not to exceed in the aggregate one-half of the paid-up capital and surplus of the accepting bank. The act of March 3, 1915, authorized the Federal Reserve Board to permit member banks to accept and Federal Reserve Banks to discount acceptances in a total amount not exceeding the capital and surplus of the accepting bank, and the act of September 7, 1916, authorized member banks to accept drafts and bills growing out of transactions involving domestic shipments of goods, provided shipping documents conveying or securing title are attached at the time of acceptance, or which are secured at time of acceptance by warehouse receipts or other similar documents conveying or securing title, covering readily marketable staples. The total amount of domestic bills which may be accepted by a member bank may not exceed at any one time in the aggregate one-half of its paid-up and unimpaired capital stock and surplus.

The Board had on December 31, 1918, authorized 161 member banks to accept up to 100 per cent of their capital and surplus. Purchases of acceptances constituted the greater part of the open-market transactions of the Federal Reserve Banks. Acceptances bought are mainly bankers' acceptances, although trade acceptances, which are drafts drawn by the seller upon the purchaser of goods and which may be either foreign or domestic in their character, are now being acquired in increasing volume, in some districts the aggregate of trade acceptances being 5 per cent or more of the total acceptance holdings, the total for the system being slightly more than 3 per cent.

Trade acceptances are discounted more freely upon the indorsement of member banks, and a differential of one-fourth of 1 per cent is usually given in favor of these acceptances as against promissory notes.

The following tabular statement of acceptances bought in the open market by the Federal Reserve Banks during the past four years shows the large increase in the volume of the acceptance business: Acceptances bought in open market by Federal Reserve Banks. [In thousands of dollars; i. e., 000 omitted.]

Bankers' acceptances are regarded as the most liquid of all investments, and it has always been the policy of the Board to permit a substantial differential in their favor. The rates on acceptances are subject to fluctuations, reflecting accurately the varying conditions of the money market, and consequently the Board has never fixed a definite rate for them but has prescribed maximum and minimum rates within the limitations of which the Federal Reserve Banks are permitted to purchase bills.

In 1915 Federal Reserve Bank acceptance rates ranged between 2 and 3 per cent, and at the present time the minimum rate is 4 per cent. The private rate in London has for the past nine months been about 3 per cent against average current rates in New York of 41 per cent. While this difference may have diverted some business to the English banks, the Board has not as yet deemed it advisable for the Federal Reserve Banks to meet the British rate, because of the large financial operations of the Treasury, and for other reasons which are stated below. It was thought that a lower rate for any class of paper than that borne by member banks' 15-day collateral notes secured by Government obligations might have an unfavorable effect upon the Treasury's operations.

The British rate of 34 per cent, however, has been maintained for nearly a year, despite the fact that London banks have been paying

3 per cent interest on domestic balances and 4 per cent interest on foreign balances, while the British Government is paying 5 per cent on loans made to it by the United States Government. The report of the British Committee on Currency and Foreign Exchanges, dated August 18, 1918, however, indicates the possibility of an advance in the British discount rate on acceptances. As no reduction in the rate for paper secured by Government obligations is contemplated by the Board, a lower acceptance rate at Federal Reserve Banks would have a tendency to reduce the proportion of bondsecured paper held by them, and to bring about a corresponding increase in their proportion of commercial paper holdings.

In considering rates of discount for bankers' acceptances in the United States, certain fundamental differences between the London and the New York money markets must be kept in mind. In London there is an official rate fixed by the Bank of England, known as the bank rate, and there is also an open-market or private rate. The bank rate is the rate at which the Bank of England will buy approved bills of exchange in the London market. The bank will not buy the acceptances of foreign banks domiciled in London nor of foreign agencies established in London.

The London market can avail itself of the rate established by the Bank of England, which is prepared at all times to absorb bills at its prevailing discount rate. The bank itself, whenever it seems desirable, operates in the market, absorbing funds when it wishes to maintain or advance the rate, and whenever it wishes to ease the market the bank takes an active instead of a passive part in the purchase of bills of exchange. The Bank of England rate is usually higher than the private rate, which is governed by the demand for and supply of bills of exchange. The supply is represented largely by bills drawn for the purpose of carrying on international commerce in the form of 60 and 90 days' sight acceptances drawn upon English banks and acceptance houses. The demand in the open market comes mainly from the joint-stock banks, private banks, and discount companies, and represents accumulated funds whose use in other channels is not expected to develop for some time-say, 30, 60, or 90 days and sometimes for longer periods. Bills of exchange available for discount with the Bank of England are purchased by these institutions with the knowledge that they can always be disposed of at the bank rate on the day of sale, and this knowledge gives such elasticity to investments in bills of exchange that purchases are made freely from moneys temporarily idle, and a large portion of the resources of the purchasing institutions is carried in the shape of bills purchased at the open-market rate which are discountable at the Bank of England. Should a feeling arise in the course of market operations that the Bank of Eng

land is likely to raise its rate, which is usually done in gradations of one-half of 1 per cent to 1 per cent, the open-market rate, or private rate, will rise in anticipation of the change, above the official bank rate. During a period when the bank rate seems to have been established at a definite figure and when no changes are anticipated, the tendency of the private rate is to drop below the bank rate and to continue there. Bankers and discount houses purchasing bills of exchange at the private rate know that in any event they can sell their bills at the bank rate, and if this rate holds fairly steady they have an opportunity to earn the full interest obtainable on bills. purchased for such time as they may be held. Furthermore, purchasers know that if the bills are carried for a considerable portion of the time they have to run and then must be sold at the bank rate, there will be a profit on the investment for the time the bills are carried even though sold at the higher bank rate.

The accumulation of funds in London from all parts of the world has been invested to a large extent in bills of exchange for many years. Experience, demonstrating the safety of these investments, has given great elasticity to the operations and has made the open discount market in London for bills of exchange so broad that large transactions are carried on without noticeable effect upon the money market. It is therefore natural that during periods of steady money rates the private rate should rule below the bank rate.

Before the war, time bills of exchange were drawn upon London covering exports and imports between England and other countries and between foreign countries, all of which created a vast turnover, which the English money market was able to absorb because of the accumulation of funds in London available for such investments. During the war, owing to several causes, sterling bills of exchange were not created in nearly so large a volume. One reason for this is that the United States Government was making loans in dollars to Great Britain, France, and Italy to provide for purchases by these nations in the United States, and another is that purchases made by these nations in the United States include raw materials. which have been imported into the United States to be used in the manufacture of goods for the allied powers which otherwise might have been imported direct by those nations. This applies particularly to food, clothing, and munitions. As a result, the British money market is, or has been until recently, rather bare of bills of exchange. Funds available in London for use in the open market are probably greater now than in normal times, as there has been an accumulation due to the fact that foreign exchanges have generally ruled against Great Britain, which has made the withdrawal of sterling balances by foreign nations difficult and expensive. Even though the bank rate has been maintained at 5 per cent, the private rate has naturally