South Bend news-times. (South Bend, Ind.) 1913-1938, 1915-01-27
RESERVE SYSTEM
BRINGS ORDER OUT
OF BANKING CHAOS
First Annual Report of Board
Says Recovery Followed
Quickly Upon Organization
of New Currency System.

! WASHINGTON, Jan. 27.-In its first
annual report issued here today. the
! federal reserve board takes a most
J optimistic view of the federal reserve
banks achievements in the few
months Of their existence, and of the
{ position they are TO hold in American
/ commercial life. 1t described the
/ quick recovery from the financial
chaos caused by the outbreak of the
war as due TO the new banking sys-
tenn.
In outlining the financial emer-
gency of the country when the men,
bers of the board took the oath OF
office Aug. 10 last, the report says the
situation demonstrated TO a striking
degree the dependence Of the Amer
lean banking system upon the call
! loan market because of the large pro-
portion Of the countrys banking re-
serves invested in calI-lOanS protect
ed by stock exchange colIaterals.
The opening OF the new banking
system was hurried on account of war
emergencies. the report states, but
events have since shown that the
opening Of the institutions was wisely
timed TO synchrOniZe with the restor-
alton of activity in our export trade.
( The federal reserve banks were able
TO begin business with substantially
the whole of their deposits in gold and
without pressure on the general busi-
ness or credit conditions.
Released Considerable Funds.
The change in reserve requirements
on the establishment of the new sys-
TEN released throughout the country,
the report notes a very considera bic
amount of funds which previously had
had TO be held idle by the banks.
( Precisely hoW much was released
probably cannot be told, says the
board but the release of actual cash
and the increase of lending power
were very large. Rates on CONNER
cial paper in New York city fell from
above six per cent to three and half
to four per cent. within two weeks af-
ter the new banks opened on Nov. 16.
The board believes however, that
the reduction in interest rates was
largely due TO the basic elements of
confidence inspired in addition to the
actual release Of reserves.
The report describes the operations
of the gold exchange fund and the
cotton loan fund. OF the latter II says
that its formation rendered material
service by restoring confidence, thus
stahiliZing values and establishing
basis for extension Of credit on cotton
as collateral.
Defines Position of Bank.
The board asks itself the question:
What is the proper place and function
of the federal reserve banks? and
answers as follows:
con the one hand. it is represented
that they are merely emergency banks
TO be resOrted to for assistance only
in time of abnormal stress; While on
the other. il is claimed that they are
in essence simply additional banks
which should compete with the men,
ber banks. especially with those of the
greatest power. The function of a
reserve bank is not 10 be identified
with either of these extremes, al
though occasions may arise when
either Of such course may be impera-
tive It's duty plainly is not TO await
emergencies but by anticipation, To do
what il can TO prevent them. So also,
if at any time. commerce, industry
or agriculture, are. in the opinion of
the federal reserve board burdened
unduly with excessive interest charges.
it Will be the clear and imperative
duty of the reserve board acting
through the discount rate and open
marke powers. to secure a wider diff
fusion of credit facilities at reasonable
rates. The federal reserve banks are
the holders of a large part Of the
banking reserves Of the nation, the
foundation of its banking structure.
Nothing should be permitted In the
operation of the reserve banks which
would weaken this foundation. The
resources of "a reserve bank, to be use
ful for its peculiar purposes, should
always be readily available. It fol-
lows. therefore that they should be
mainly invested in such shOrt-term
liquid investments as can be easily
converted into cash as occasion may
require This conception Of a reserve
bank. mOSeover. implies that its in
vestmentS should be marshaled in a
steady succession Of matUrities, so
that il may at all times IS nearly as
nnssihle nrnNe ennal 10 the situation.