monthly, it is anticipated that the appropriation will be ample to meet the requirements to the close of the fiscal year.

In negotiating these loans the judgment of the Secretary has been determined very largely by what was represented to him as the actual necessities for the purchase of supplies and materials and other requirements in carrying on the war. After obtaining all light possible as to the reasons for such necessities, if it was determined that a loan should be made it was then submitted to the President, and, if he approved, a credit of the sum indicated was established and drawn against from time to time as the cash was needed to meet those requirements.

In conducting these financial relations with the allied Governments every possible effort has been made to obtain the maximum results from the credits established. In August, 1917, formal arrangements were entered into by the Secretary of the Treasury, with the approval of the President, on behalf of the United States, and by representatives of the allied Governments for the creation of a commission, with headquarters at Washington, through which all purchases made by those Governments in the United States shall proceed. The commission is composed of Bernard M. Baruch, Robert S. Lovett, and Robert S. Brookings. These gentlemen are also members of the War Industries Board of the Council of National Defense, and by reason of this relation are able to coordinate the purchases of the United States Government with the purchases of the allied

powers.

The obligations which have been purchased under the terms of the acts referred to are in the form of short-term or demand certificates of indebtedness signed by the duly authorized representatives of the respective Governments receiving advances of funds. These obligations under their terms shortly will be converted, at par, with an adjustment of accrued interest, into an equal par amount of gold bonds of the Governments concerned. Interest on these demand obligations was first placed at 3 per cent per annum, and shortly thereafter increased to 3 per cent per annum, these rates being established to conform to the rates paid by the Government of the United States on its short-term certificates of indebtedness issued under authority of the act of April 24, 1917, in anticipation of receipts from the sale of the bonds of the first Liberty loan. Subsequently, and coincident with the sale of these bonds, the rate was raised to 3 per cent per annum, thus conforming with the rate carried by the bonds. For obligations purchased since the approval of the act of September 24, 1917, the rate was placed at 41 per cent per annum.

By the terms of this act the normal rate of interest to be borne by the obligations of the United States issued thereunder could not exceed 4 per cent per annum. At the same time it rendered the

bonds thus issuable exempt from certain classifications of taxes, thereby substantially increasing the cost to the Government of the money received from the sale of its obligations by diminishing the amount which it might in turn take from its citizens in taxes. The rate of interest to be charged on the loans to foreign Governments under the terms of the act was not definitely fixed, but was left in the discretion of the Secretary, though a minimum was fixed. In the exercise of that discretion it was determined to fix the rate at 4 per cent per annum, the additional one-quarter per cent being added to compensate in part at least the loss to the Government due to the taxexemption features on its own obligations above referred to and the cost incurred by the United States of issuing its own bonds. This rate in turn will be further increased in case there should be higher rates of interest paid by the United States during the continuance of the war for the moneys that it may invest in the purchase of foreign obligations.

WAR-SAVINGS CERTIFICATES.

In order that every man, woman, and child in the country, however small their means, may be given an opportunity to assist the Government in the financing of the war, I have determined upon an extensive campaign for the sale of war-savings certificates. The issuance of these securities was authorized by the act approved September 24, 1917, in an amount not to exceed $2,000,000,000.

In addition to assisting the Government in the prosecution of the war it is confidently expected that these certificates will greatly encourage thrift and economy among the people of the country. Liberty bonds are offered in denominations of $50 and upward. They do not present a convenient form of investment to those who wish to accumulate savings in small amounts and put their funds in obligations of the Government. There are many mechanical and practical difficulties in the way of issuing bonds in large amounts of denominations below $50. The demand for such securities will be met by war-savings certificates.

The simplest possible plan has been evolved for the issuance of the certificates to the public. Under it any person may invest amounts as small as 25 cents at a time at post offices, banks, or trust companies, and at many places where accredited persons will act as selling agents. The campaign will be inaugurated on Monday, December 3, 1917. The certificates will be dated January 2, 1918, and will mature January 1, 1923—that is, five years after date.

These obligations of the United States will be evidenced by a warsavings stamp costing from $4.12 to $4.23, according to the month in which purchased and having a maturity value of $5, and thrift stamps costing 25 cents may be accumulated towards paying for a war-savings stamp.

During December, 1917, and January, 1918, war-savings certifi cate stamps will be sold at $1.12 each. At the beginning of each of the succeeding months of 1918, starting February 1, the cost of a stamp will increase 1 cent per month. The difference between the purchase price paid at any time during 1918 and $5 represents the interest the Government will pay the holder. This interest is at the rate of 4 per cent per annum, compounded quarterly on the average price of the stamps during 1918.

With the first war-savings stamp bought, the purchaser will obtain a war-savings certificate, containing blank spaces for 20 such stamps. If the 20 spaces are filled during December, 1917, or January, 1918, the cost to the purchaser will be $4.12 for each stamp or $82.40 for the filled certificate, and on January 1, 1923, the Government will redeem the certificate at $100, giving the holder $17.60 for the use of his money.

Thrift stamps, costing 25 cents each, are from time to time as purchased to be affixed to thrift cards, which will be supplied without cost. Thrift stamps will not bear interest, but a thrift card, when filled at a cost of $4, may be exchanged for a war-savings stamp bearing interest at 4 per cent, compounded quarterly, merely by turning the card into the post office, bank, or other sales agency and paying the difference between $4 and the current price of a war-savings stamp.

The privilege of surrendering a certificate to the Government and receiving the cost thereof, plus interest at the rate of about 3 per cent, has been provided for the convenience of those who may have bought certificates and, later find themselves in need of their money. Upon 10 days' written notice after January 2 next, postmasters will pay all certificates at their cost to purchasers, plus an increase of 1 cent a month on each war-savings stamp on the certificate surrendered.

The Treasury Department is receiving the cordial cooperation of the Post Office Department in the sale of these certificates. The Postmaster General, at the request of the Secretary of the Treasury, has prescribed regulations requiring employees of the Post Office Department and the Postal Service to give effective assistance and cooperation to carry out the plan.

The details of the offering of war-savings certificates are set forth in Treasury Department Circular No. 94 (Exhibit E).

THE FEDERAL RESERVE SYSTEM.

America's entrance into the war was accompanied by no shock or financial panic, nor was there the slightest flurry in financial circles when the decision was announced. Happily for America, the Federal Reserve System was established in 1914. It has been subjected to supreme tests, both preceding and following the declaration of

hostilities, and has measured up to every expectation and to every requirement. Without this system it would be impossible to finance our enormous domestic and foreign trade, to raise the tremendous credits required to assist the foreign governments making common cause with us against Germany, and to take care of the extraordinary expenditures entailed by our part in the war.

The Federal Reserve System during the past year has grown enormously, while widening materially the general scope of its activities and usefulness. The system was inaugurated on November 16, 1914. The total assets of the 12 Federal reserve banks on November 17, 1916, amounted to $943,419,000. On November 16, 1917, after the expiration of three years, the assets of these banks amounted to $3,012,406,000. The gold held by the Federal reserve banks and the Federal reserve agents, which a year ago amounted to $674,103,000, on November 16, 1917, had reached the enormous sum of $1,584,328,000.

During the past year the Federal reserve banks, through the Federal Reserve Bank of New York, arranged for the establishment of reciprocal accounts in various foreign countries; in England with the Bank of England; in France with the Bank of France; and in Italy with the Bank of Italy, though it is not expected that transactions between the reserve banks and the banks of belligerent countries will assume large proportions before the conclusion of the war. Arrangements have also been made for the opening of reciprocal accounts with the Philippine National Bank of Manila through the Federal Reserve Banks of San Francisco and New York.

The facilities and advantages of the system have been enlarged and increased during the year by the opening of branch banks at important centers in different Federal reserve districts, including Portland, Oreg., Seattle and Spokane, Wash., and Omaha, Nebr., and authority has also been given for the establishment of additional branches at Denver, Cincinnati, Louisville, Pittsburgh, and Balti

more.

The Federal reserve banks have assumed new and extremely important duties since the outbreak of the war in connection with Government finances. The Secretary of the Treasury on March 31, 1917, placed the first temporary Government loan through the Federal reserve banks by selling to the 12 reserve banks $50,000,000 of Treasury 90-day certificates of indebtedness, which were taken by the several banks at a 2 per cent interest rate. These certificates were issued before the war in anticipation of internal-revenue taxes payable in June. Since the outbreak of the war the Treasury has placed through the 12 reserve banks, which have in turn distributed them largely among their member banks and other cus

tomers, short-term Treasury certificates of indebtedness to the extent of $3,338,698,000 at rates varying from 3 to 4 per cent.

These certificates of indebtedness, as hereinbefore stated, are being issued from time to time, usually with maturities of 60 to 90 days, to provide temporarily for war-time requirements pending the receipt of income and other taxes and the proceeds of the sales of Liberty bonds, and are redeemed as these funds are paid into the Treasury.

When the first Liberty loan of $2,000,000,000 was subscribed for in June last the subscriptions, collections, and payments were also handled through the 12 reserve banks, and the settlements were made in such a way that no stringency in the money market was occasioned. The first Liberty loan was sold and paid for between June 15 and August 31, 1917, and it is interesting to note that the reports of the national banks show that between the calls of May 1, 1917, and September 11, 1917, embracing the period in which the first Liberty loan of $2,000,000,000 was taken up and paid for, the national banks of the country, instead of being drained of their resources through these vast collections by the Government, actually showed an increase of $154,000,000 in the sum total of their deposits for that period.

The payments for the second Liberty loan were made with the same ease that marked the settlements for the first loan.

The Federal Reserve System has been of incalculable value during this period of war financing on the most extensive scale ever undertaken by any nation in the history of the world. It would have been impossible to carry through these unprecedented financial operations under our old banking system. The effective machinery afforded by the Federal reserve banks has permitted the Government to execute its plans without a tremor of disturbance. Great credit is due the 12 Federal reserve banks for their broad grasp of the situation and their intelligent and comprehensive cooperation. The organizations which they perfected under the direction of the Treasury Department contributed greatly to the phenomenal success of the Liberty loans.

Amendments to the Federal reserve act.

As a result of the experience gained during the first two years of the operation of the system it was found desirable, during the past year, to amend certain sections of the Federal reserve act, and this was done by acts of Congress approved September 7, 1916, and June 21, 1917.

By these amendments the powers and authority of the Federal Reserve Board are strengthened and enlarged. The board is given power to authorize or require the establishment by the reserve banks of branches or agencies in this and in foreign countries. Provision is made for perfecting the collection of checks and drafts at par