The Federal Reserve Act passed in 1914, gave the power to member banks of the system to accept drafts drawn upon them up to fifty per cent, of their capital and surplus, provided they were drawn in conformity with certain specified restrictions and limitations. A few of the larger banks throughout the country readily took advantage of this opportunity and began issuing dollar credits on account of the advantages and economies which the dollar credit offered in comparison with credits issued in foreign currencies. The importer and exporter in this country readily favored this means of financing their foreign trade through the dollar credit, as it afforded them a cheaper rate of commission, and economies in time and expense by dealing direct and only with the American bank.

In the issuance of foreign credits, a merchant was not sure of the cost of his goods until he had transacted for the purchase of enough exchange to cover the draft for each particular transaction, and furthermore was compelled to make payment at least ten days or more before maturity of the foreign draft in order to enable his bank to have funds in the hands of its foreign correspondent at the date of maturity. Another way in which he could place funds in the hands of the bank in the country where the credit was issued was by means of "cabling" the sum at his own expense, say two days or so before maturity.

By using the dollar credit, the American merchant is always assured of the prices of his goods as there is no question of fluctuating exchanges, for the merchant pays only in dollars. The dollar credit also saves the importer interest, and he pays the issuing bank the day before maturity of the draft.

During the war, on account of high interest rates in European centers, bank acceptances became more favorable and the value of dollar credits issued rapidly increased. Dealings in bank acceptances progressed to such a point that the few banks who were issuing them soon found that the demands of their customers could not be met under the restrictions imposed by the Federal Reserve Board. An amendment was, therefore, passed to the Act permitting member banks under certain conditions prescribed by the Federal Reserve Board, to accept up to one hundred per cent of their capital and surplus instead of fifty par cent, which was the original limit. Even these increased facilities, favoring the acceptance powers of the member banks were soon found to be inadequate and the demand for American dollar credits soon exceeded the supply. The Board at Washington quickly realized that if the banks of this country were going to finance the importation and exportation of merchandise to and from the United States, some substantial enlargement of their facilities would have to be granted.