American banks upon which American exporters may draw, the bills being accepted by the American bank and sold in the American discount market.

Federal reserve banks have established agencies abroad, in England with the Bank of England; in France with the Bank of France; in the Philippines, with the National Bank of the Philippines; in Italy with the Bank of Italy; in Japan with the Bank of Japan; in Sweden with the National Bank of Sweden; and in Norway with the Bank of Norway. The foreign exchange division created by the federal reserve board in December, 1917, rendered valuable service during the war in stabilizing exchange both with our allies and with neutrals.

Under the provisions of the federal reserve act, national banks with a capital and surplus of a million dollars or over may be authorized under certain restrictions to establish branches abroad; and many such branches have already been established. National banks may furthermore invest to an amount not exceeding 10 per cent of their capital and surplus in the stock of banks chartered in the United States and principally engaged in international or foreign banking or banking in American dependencies, or engaged in such phases of international or foreign finan

cial operations as may be necessary to facilitate our foreign export trade. In this way a number of banks have been established which are owned either wholly or in part by groups of national banks.

In order to encourage American trade and the investment of American capital in foreign enterprises, there was added to the Federal Reserve Act on December 24, 1919, an important amendment popularly known as "the Edge Amendment."1 This amendment authorizes the organization of corporations "for the purpose of engaging in international or foreign banking or other international or foreign financial operations." The field of operation extends to insular possessions of the United States. Corporations organized under this amendment may conduct their business either directly or through the agency, ownership, or control of local institutions abroad. They may not carry on any part of their business in the United States except such as, in the judgment of the Federal Reserve Board, shall be incidental to their international or foreign business. The minimum capital of these corporations is $2,000,000. In addition to the right of receiving deposits outside of the

1 The amendment is given in full as Sec. 25 (a) of the Federal Reserve Act. Appendix, p. 161.

United States, they are specifically granted the right "to issue debentures, bonds, and promissory notes," but in no event may a corporation have liabilities outstanding in the form of such obligations exceeding ten times its capital stock and surplus.

There are two important respects in which corporations organized under this Edge Amendment will be affiliated with the Federal Reserve system, although these corporations cannot become regular member banks. In the first place, they operate under the supervision of the Federal Reserve Board which is given by the law large powers of examination and control. In the second place, any national bank may invest in the stock of these corporations, subject to the restriction that its total investment in the stock of these corporations and of other banks incorporated in the United States for foreign business shall not exceed ten per cent of the subscribing bank's capital and surplus.

This Edge Amendment has been on the statute books only a few months, and it is therefore too early to say anything definite as to how it will work. There is a widespread interest in the subject and the prospects appear to be good for a substantial development during the year 1920.

As a result of the war and of recent changes

in our banking system, we are now financing directly a large proportion of our foreign trade, and while this proportion may decline in the future, it will probably never go back to the old pre-war figures. As regards the financing at home of our foreign trade, the federal reserve system was established at the opportune time. It is proving to be a great influence in the internationalizing of American trade and American finance.

CHAPTER IX

THE FEDERAL RESERVE SYSTEM AND THE FEDERAL TREASURY

The fourth and last of the general defects of the old banking system, which were discussed in the early part of this book, was the defective organization of the old system from the standpoint of the federal treasury. How is the federal reserve system remedying this defect?

The provisions of the federal reserve act concerning the deposit of government funds are in section 15. They are: "The moneys held in the general fund of the treasury, except the five per centum fund for the redemption of outstanding national-bank notes, and the funds provided in this act for the redemption of federal reserve notes may, upon the direction of the Secretary of the Treasury, be deposited in federal reserve banks, which banks, when required by the Secretary of the Treasury, shall act as fiscal agents of the United States; and the revenues of the Government or any part thereof may be deposited in

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