When we ourselves became participants in the war, the Federal Government sold its own bonds to our citizens and lent the proceeds to foreign countries which used them in paying for our goods here, and thus a great foreign trade continued to be financed. This continued until several months after the armistice had been signed on November 11, 1918. It then became evident that the onesided trade which had developed and which had produced our immense export balance could not be indefinitely maintained but must be taken care of in some other way. Hence the growth of foreign branches, to which reference has already been made. These, however, were necessarily institutions lending upon short term. The need of a more permanent system of financing led to the adoption of a measure amendatory of the Federal Reserve Act and known as the "Edge Foreign Banking Act." This became effective in December, 1919, and authorized the creation of institutions allowed to invest in foreign countries and to sell their bonds to American investors who would thus become creditors of the banks, supplying them with funds wherewith to make foreign investments. All this had however, taken time, and the organization of new institutions under the Edge Act was slow partly because of the impractical provisions of the law and partly because of the increasing economic confusion in Europe. The Edge Act further made provision for acceptance business to be undertaken by Edge corporations organized for that purpose but there was little success in this direction.

Very few Edge banks were ever organized two in active operation at the close of 1921, but during the years 1919-1921 our foreign trade was largely financed by manufacturers and merchants who extended open book credits to their customers, financing themselves by direct borrowing at their own commercial banks. Through this means there was built up an enormous unfunded balance due the United States and estimated at the close of 1921 as something like $3,500,000,000. Reserve banks in the meantime had discounted foreign bills growing out of ordinary trade operations in considerable quantities, but only when stated in terms of dollars. With the shrinkage of prices after May, 1920, and the closing down of business which accompanied it, the volume of such paper fell off and the service rendered by reserve banks in the financing of foreign trade, which had always been more or less limited, became even less important. In its relation to foreign business the Federal

Reserve System has perhaps been less efficient and serviceable than in any other aspect.

A critical estimate of the service of the Federal Reserve System is necessarily very mixed in character. The gloomy forebodings expressed when it was first organized have been warranted in no essential respect. Loans have not been made on a "political" basis, and there has been but little difficulty in organizing and conducting the several banks in substantial harmony one with another; - in short, the administrative mechanism, while far from perfect, has been serviceable and efficient. On the other hand, the banking mechanisms of the system - its handling of reserves, its clearance and collection system, its plan of note issues, and other basic features, have been very satisfactory in their operation and, indeed, have worked more nearly perfectly perhaps than any similar systems now in operation. Moreover, the general service of the reserve banks has been far greater and more nationally essential than could have been hoped. No one could have foreseen the coming on of the European War or the fact that we should find ourselves obliged to furnish the means for carrying it through its later stages. Few would have believed that the Reserve System would prove adequate to the task of handling and conducting the finances of such a war. Yet it was in this very field that the system was found most efficient and satisfactory - it might be said most fundamentally essential to the maintenance of national solvency and financial success during the conflict.

The defects of the system have been found in unexpected directions but have been real and today present serious obstacles to its success. Starting with the idea of a small fundamental reserve contributed by commercial banks, the reserve resources of the system have been greatly expanded through gold importations, through deposits by members, and through changes in reserve requirements. Yet there has been no corresponding change in the methods of releasing these funds for market use, and in consequence the operations of the system, unless carefully handled, may tend somewhat toward constriction of credit at various times. A natural and available remedy is the free use of the funds in open market transactions, or their application to the financing of foreign transactions. Neither course, as already seen, has been followed, but the system has refrained from the open market type of transactions, while conditions have not been favorable for the undertaking of foreign operations. Whether a different situation will supervene at a later date it is difficult to say, but in the meantime the great accumulation of gold and the enormous unused lending power of the system have aroused the persistent hostility of many elements of the community.