1 Later deposits were to be made when required through depletion of balances.

2 The facts as to the use of the settlement fund may be briefly reviewed as follows:

Daily Average Number and Amount of Items Handled By the Federal Reserve Collection System

The next step was the introduction of a clearing service within the districts themselves. To this the strong opposition of member banks was encountered from the beginning especially from two sources - city banks which believed that the assumption of such a duty would lessen their country bank deposits, and country banks which believed that such action on the part of reserve banks would impair their income from high exchange charges. The necessity of doing something, however, became so evident that representatives of the reserve banks devised a plan of voluntary clearance permitting members to deposit items for collection if they chose to do so. Only about a year was required to prove this plan a failure, and on July 1, 1916, there was introduced a plan of involuntary or compulsory collection. Under this, if Bank A deposited with a Federal Reserve bank a check drawn upon another bank whether a

Note. - Items drawn on Treasurer of the United States are included. Items handled by more than one Federal Reserve bank or branch have been counted only once, except in the figures for the first three months of the period ending June 15, 1917, when separate figures covering such items were not reported.

member of the system or not), the Federal Reserve bank would take the necessary measures to collect the check, if the check was drawn on another member bank, the Reserve Bank would give the depositing member credit for it as soon as sufficient time had been allowed to have the check reach the bank on which it was drawn. The Reserve Bank, thereupon, charged the amount against the reserve account of the latter institution. Where a bank was not a member it was invited to join the collection system by undertaking to remit at par, and, in the event that it did not care to do so, arrangements were made to collect in cash. The system worked fairly well and had the effect of maintaining reserves, eliminating a large part of the "float" uncollected checks in the mails which were routed by roundabout methods in order to enlarge the amount of "deposits" on the books of various banks, and considerably reducing extravagant collection charges. In 1920 suit was brought by some Southern banks to secure the complete discontinuance of this method of collecting non-member checks, but up to the close of 1921 no final decision had been reached. Due to hostile action in the legislatures of a number of Southern States, the collection system, which at one time had been almost countrywide, has been somewhat limited in area. It is still of first importance as a factor in the operation of the reserve system.

The effect of the European War upon banking institutions both in England and on the Continent was, of course, wholly disastrous. The principal outstanding results of the war from the standpoint of banking pure and simple may be summarized as: (1) a very great increase in government obliga-tions discounted with banks, and hence a tendency to render their portfolios very unliquid; (2) an enormous expansion in the volume of paper cur-rency and a complete retirement of specie from the field of circulation; and (3) in many countries the substitution of a government irredeemable note as the standard of value, superseding gold and constituting the basis for "redemption" of bank notes. The closing of the war found banks in nearly all countries in an extremely feeble condition. Gold reserves had been in some of them practically exhausted; in others they had become inadequate to the maintenance of specie redemption. In practically all, the movement of gold into and out of the country had been prohibited. Exchange relations between the United States and European countries, as well as among some of the latter themselves, had been subjected to stringent government regulation, the administrations of the several countries undertaking to convert the local currency of one into that of another at a fixed rate. Thus during the latter part of the war and for some months after the close of the struggle the British government succeeded in maintaining a fixed exchange rate of $4.76 per pound sterling, both supplying exchange on Great Britain and redeeming all exchange that was offered to it in New York at that rate.

Due to these and other abnormal conditions there had been a complete redistribution of gold on an artificial basis and at the close of the war the United States had become the possessor of a very large share of the free gold of the world. This share was somewhat diminished after the end of the war by reason of the fact that when the United States removed her own gold embargo July 1, 1919 some minor exportations occurred. The outflow was not very long continued, however, and comparatively soon there was a backward movement both of gold and securities which hardly offset the enormous excess of merchandise which the United States continued to export to foreign countries. By the close of the year 1921 the stock of gold in Federal Reserve banks was nearly $3,000,000,000. European countries had in corresponding measure lost their gold, and exchange had, with some ups and downs, quite steadily deteriorated throughout the whole period. Altogether the Federal Reserve System had been subjected to a new and peculiar condition, sometimes described as "gold inflation." This would in ordinary circumstances have led to a fresh rise in prices, but the price level, after its tremendous drop from about 270 in May, 1920, to about 140 in July, 1921, remained practically stable. Competition with European countries was gradually restored, particularly in South American and

Eastern markets, but instead of a great inrush of foreign goods into the United States, such as had been predicted, both our exports and our imports fell off very greatly, - our imports, however, more seriously than did exports - down to the close of 1921.