Newark evening star and Newark advertiser. [volume] (Newark, N.J.) 1909-1916, 1913-12-30
BY j. L. LAuoHLIN
(Hesd Of Department OF Political EcOI
Omy 81 Chicago University and Al

(Hesd of Department OF Political Econ
0my ~ Chicago University and Au-
thor OF principles of Money!
Copyright, 1913. by the Newspaper En-
terprlse Assoeiation.)
This measure stands out as the
most important legislation on banking
obvious purpose II to make both our
currency and credit system more
elastic, and to remove the possibility
OF frequent paroxysms Of credit. Be-
fore this we have mad a highly In
dividual.stic system of over $4,000
banks. each acting for itself. The new
law 10 intended TO introduce co-opera-
ton for the common good. In our
principal cities the banks. without any
legislation. have Through clearing
house associations established local
cooperation, which has helped to
minimize the effects of stringency and
panic. This act aims to extend sOnie-
thing like equivalent action over all
parts of the country.
Unconsciously to many, our busi-
ness fabric has been developing In
such way as to enable an exchange
OF goods to take place mainly by
checks drawn on bank deposits Only
In purely rural districts are money
and notes absolutely necessary to buy
with. Yet the Idea Is widespread,
coming down to US from times when
our money economy was generally
rural" that our great need In time
of crisis is more money" although
any hard pressed borrower who can
get loan at bank can meet his
maturing debt by O check on that
bank. In fact. the more we look into
the facts-as In the panic of 19o7-we
find the centre of the difficulty In the
lending power of the hanks. When
panic-stricken persons draw down the
reserves of the banks they lessen the
power OF the banks to lend. There
fore. a measure which will. In time OF
danger. help out the reserves and the
lending power of the banks Is OF chief
!mportance-of far more Importance
than increasing the money In the
hands OF the public which serves as n
means OF exchanging goods; because
we have a highly-developed medium
in checks Ia deposit currency. This
ganization of credit should be the
central point in great currency
measure.
The Organization Of Credit.
How has this purpose been carried
out In the new act? Instead OF one
central bank. we shall have at least
eight regional banks in as many dis
tricts into which the country Is to be
divided (probably In Boston New
York, Chicago. st. Louis. San Fran
cisco, New Or cans. etc. etc.). The
banks In each district subscribe the
capital to their own federal reserve
bank, which can lend to any member
bank. but not TO the public. In time
of stress. when a member bank Is
hard pressed by borrowers. that bank
can take it's picked short-time COM
mercial paper tthese are the notes
given by borrowers and held bv the
bank in Its assets) to Its federal re-
serve bank and, with this as security.
get a loan called a rediscount). The
proceeds of this loan can be counted
by the member bank as a part OF its
reserve as long as they are left on de-
post with the federal reserve bank.
What Is the result? The member
bank has now Its lending power
touched. and as long as Its customers
can present short time (ninety days,
etc.) commercial paper. based on q
sale OF goods. that bank can lend to
| legitimate business in buying and
selling goods need ever In the future
go into bankruptcy for lack OF q loan.
This feature Is the core OF the new
act.
Control by Reserve Board.
Obviously, IL there are several Fed
eral reserve banks. they must be uni
fed by some supervisory control
This IL the function of the Federal
reserve board OF seven to be- appoint
ed by the President. This board may
examine accounts of the banks under
it.; supervise pote-issues; locate re-
serve cities: suspend officials. II neces-
sary, In reserve banks: suspend re-
serve requirements for period OF
thirty days, and, In an emergency
require one Federal reserve bank t.
lend to another. Objection has beer
made that a board appointed by the
President places our credit system
under political control. That might
be true If banking operations were
conducted by this board. AS a fact
the work of this board, while i'm.
portant. Is chiefly administrative and
supervisory; but the lending on com.
mercial paper Is carried on only BY
the Federal reserve banks twhost
customers are the member banks ir
each respective district). This is 9
pivotal matter.
Elasticity of Notes.
The elasticity of credit to be game,
by the provisions just mentioned 1
of first Importance: but the elasticit.
of the bank-note Issues although sec