fallen below this figure and has ruled around 3 per cent. The cost of converting sterling balances into balances in other countries where a higher interest rate might be obtained, added to the increased risks of such conversion due to the war, has operated to prevent transfers from the London market which otherwise might have been made.

At the beginning of the war in 1914 the creation of sterling bills of exchange in all parts of the world was stopped for the time being, and as a result there was a very large amount of unloanable funds in the London open-money market. The London joint-stock banks were obliged to lower the rate of interest which they paid upon balance to a point below the normal difference of 13 per cent off the bank rate. After the third moratorium proclamation, which reestablished the credit of British institutions all over the world, the drawing of time sterling bills was resumed on a large scale, and as a result London money rates went above 6 per cent. After the United States came into the war the creation of sterling bills fell off rapidly for reasons already stated, which resulted in bringing the British money market into the position outlined.

In New York, which at the present time is the only city in the United States which has anything like a broad acceptance market, the rate established by the Federal Reserve Bank is followed closely by the outside market, because there are not ordinarily sufficient funds available in the New York open market to absorb acceptances offered, and consequently there is no tendency for the outside rate to go below the Federal Reserve Bank rate. Should there be a period of very easy money, it is probable that the outside rate in New York would fall somewhat below the Federal Reserve Bank rate. This will transpire whenever bankers feel that they can hold bills until maturity without being obliged to transfer them to the Federal Reserve Bank during the life of the bills.

With the present restrictions upon foreign trade and without free shipments of gold between Great Britain and the United States, the New York and London money markets stand each upon its own bottom and are not subject to the ordinary leveling process usual in normal times. This being true, the Federal Reserve Board has felt justified in basing the rates of the Federal Reserve Banks upon our own money-market conditions instead of considering them in the light of market conditions abroad, as may become necessary upon the restoration of normal conditions. The problem of establishing discount rates for acceptances through the Federal Reserve Bank in New York since the United States entered the war has, consequently, been entirely free from any consideration of the English rate. It should be borne in mind also that our acceptance rate is applied to bills of exchange drawn upon banking institutions authorized by law to accept

time bills under certain restrictions. Our law provides for domestic acceptances only to a limited extent (50 per cent of the capital and surplus of the accepting bank) and was framed especially to promote our foreign trade.

During the war we were obliged to import on balance a very large volume from many countries, and it was necessary to afford every possible facility to aid in the financing of such imports. Too high an acceptance rate would naturally have caused more or less uneasiness in the countries called upon to make advances against their exports to us, as the impression might have prevailed that we were pressed for funds. Prevailing rates of from 4 to 4 per cent, therefore, have seemed to be entirely natural. When a normal basis of trade is again established between the principal countries of the world, the ability of this country to uphold the dollar in foreign markets will lie partly in the judgment displayed in adjusting our acceptance and bank rates. By that time, however, the English money market, as well as our own, will have resumed a more normal condition, so that the tendency in world currents of trade will be more clearly marked. The flow of money will be more noticeable and rates will have a greater tendency to establish themselves more automatically outside of the Federal Reserve System, thereby furnishing a surer basis for rate movement in the system.

In the development of the American acceptance market it is necessary to provide not only an outlet for acceptances but means of securing acceptances of bills in adequate volume, and in order to enable American banks and bankers to compete with British banking houses in financing the world's trade the combined power of American institutions whose acceptances can be made available in foreign markets to accept time bills must be large enough to meet all requirements, for otherwise should importers find that it is only occasionally that they can obtain dollar acceptance credits from American banks, due to the fact that these banks have reached the limit of acceptance liabilities provided by law, the importers will naturally return to the sterling acceptances which are available at all times in sufficient amounts to meet the demand.

On a recent date American banks whose acceptances, under the most liberal estimate, might be regarded as available in foreign markets were found to have acceptances outstanding to the amount of $477,500,000, and under existing limitations on this basis their acceptance liability can be increased by $630,000,000, provided every bank included in the list should be called upon to accept to the full extent of its ability. Many of these banks, however, are located in inland cities, and their acceptances are undoubtedly largely against domestic transactions. When they do accept on foreign transactions, it is usually in connection with some credit in which they have been invited to participate.

In the three cities of Boston, New York, and Philadelphia the acceptance line (on the basis of recent totals) still available for use by the accepting institutions is only a little over $275,000,000. The cities of Baltimore, Wilmington, and Charleston on the eastern seaboard can accept for about $15,000,000 more, making a total available for the promotion of the foreign trade of cities on the Atlantic slope of about $290,000,000, while the foreign trade naturally financed in these cities would require a much larger line if any considerable proportion were covered by dollar acceptances.

In order to provide additional facilities for engaging in foreign transactions, it has been suggested to the Board that it may become advisable to amend section 13 of the act so as to permit the Federal Reserve Board to authorize any member bank having a combined capital and surplus of not less than $1,000,000 to accept drafts or bills of exchange drawn upon it having not more than six months' sight to run, exclusive of days of grace, which grow out of transactions involving the importation or exportation of goods, to an amount not exceeding 200 per cent of its capital and surplus, provided that no bank shall be permitted to accept for domestic transactions in an amount greater than 50 per cent of its capital and surplus or more than 50 per cent of its capital and surplus for the purpose of furnishing dollar exchange, but that any part of the aggregate amount which a bank may be authorized to accept may be used in accepting drafts or bills of exchange growing out of transactions involving the importation or exportation of goods.

By limiting the authority to accept in the larger amount proposed, to foreign transactions, there would be no possibility of the added acceptance privilege being used for the expansion of domestic credits, and the aggregate amount of acceptances outstanding would be controlled by our foreign trade requirements.

MEMBERSHIP OF STATE INSTITUTIONS.

The amendments to section 9 of the Federal Reserve Act approved June 21, 1917, prescribe definite terms and conditions as to the admission and status of State banks as members of the Federal Reserve System, and provide also for their withdrawal upon six months' written notice. The Board had already adopted a liberal policy in dealing with State banks and trust companies, but the action of Congress has confirmed and strengthened what the Board sought to accomplish by regulation.

Section 9 of the Federal Reserve Act as amended provides that any bank becoming a member of the Federal Reserve System shall retain its full charter or statutory rights as a State bank or trust company, which has been interpreted by the Attorney General of the United States as going so far as to release them from the restrictions of

section 8 of the Clayton Act, which relate to joint directorships. Only 53 State banks and trust companies had become members of the system up to June 21, 1917, but the legislation to which reference has just been made removed the principal obstacles in the way of State bank membership, and this, together with the patriotic desire on the part of many of the banks to assist the Government in its war financing, has resulted in a rapid increase in the State bank membership. The movement of the State banks into the system still continues, for the fact is appreciated that the war is not yet over in a financial sense and the State bank members, almost without exception, as the result of their experience in the system, have come to appreciate the value of membership.

At the close of the calendar year 1917, 250 State institutions were members, with an aggregate capital and surplus of $520,765,000 and aggregate resources of about $5,000,000,000. On December 31, 1918, the total membership of State banks and trust companies had increased to 936, having an aggregate capital and surplus of $750,618,000 and aggregate résources of about $7,339,000,000. The total number of State banks and trust companies eligible for membership, including those now members, is estimated to be approximately 8,500 with total resources of about $13,500,000,000. The present State bank and trust company membership, therefore, represents about 54 per cent of the total banking assets of all State banking institutions eligible for membership in the Federal Reserve system.

Tables showing the titles, dates of admission, capital and surplus, and aggregate resources of State banks and trust companies appear in the appendix.

The Board wishes to express its appreciation of the cooperation which has been given it by nearly all of the State bank commissioners, and as an illustration of the influence which has been exerted by many of them the following is quoted from the annual report of the superintendent of banks of the State of Ohio for 1918:

The flotation of the different Liberty loans clearly demonstrates the value of the Federal Reserve System of the National Government in this great war crisis. Time will continue to prove the soundness of the system, and as the bankers come to a fuller realization of the benefits to be derived by membership, and what the system has accomplished for the protection of business, it is believed that more will seek membership therein.

The reserve of the Federal Reserve Bank is the basis of its loaning power, and every State bank joining the system will, through its deposit of reserve with the Federal Reserve Bank, increase the credit facilities thereof. It is manifestly of great importance therefore that all qualified State banks and trust companies identify themselves with the system in order that the demands of legitimate business and the requirements of the Government may have sufficient credit.

Large demands upon the banks appeared to be inevitable when this country became actively engaged in the great war. Calculating the amount of available

reserves held by State banks, it seemed to be insufficient to meet all the demands that would no doubt come upon these institutions. Consequently, I immediately used all the argument and influence at my command to induce eligible State banks to join the Federal Reserve System, so they could not only contribute their share to the mobilized reserves of the country, but have available direct to them, as a right, the rediscount facilities of the Federal Reserve System.

In my opinion the record of the State banks in Ohio in supporting the Federal Reserve System is a creditable one. The assets of those banks which are members at the date of this report aggregate $275,000,000. Pending applications when accepted by the Federal Reserve Board will increase the total aggregate thereof to $317,000,000, or 34 per cent of the entire State banking re

sources.

A word of appreciation is due also to the American Bankers' Association, which has continued its campaign committee on Federal Reserve membership. This committee is doing a great deal of effective work in calling the attention of State banks to the advantages to be derived from membership in the system.

The growth of State bank membership during the year 1918 is shown in the following tables:

TABLE 1.-Number and total resources of State banks and trust companies, members of Federal Reserve System, by districts.