The sun., 1916-01-10
BANKERS DENOUNCE
RESERVE SYSTEM
Iournal Of American Associa-
ton Says Elastic Currency
Failed to Result.
SHOWS INITIATION PERIL

IN an article on the Federal reserve
hnk system the January issue OF the
yo,rnai Of the american Bankers Asso-
eloiton will say in part:
rt has been often stated in these
columns that the intention OF those who
s,ye time and study to a new banking
system was to establish a going central
,,.,l,ution or several Of them. BY this
I. meant Institutions which would have
daily transactions with their members
and be component parts OF the banking
scheme OF the country. They were not
10 be institutions which were to lead an
rnocuous banking existence until there
came an emergency which would call
into operation all of their reserve
strength.
The Aldrich-vreeiand act was an
emergency measure, and us such II
worked satisfactorily under the one test
to which 1t was put. 1t was inexpensive
and efficient so far as supplying cur
vncy was concerned. Expert opinion
vas 10 the effect that the country needed
something moro than this. and in some
measure and to some extent expert
opinion was needed in the formation
Of the reserve act. Where II was not
needed difficulties have arisen.
"No one could have fore.een what the
capital requirements Of reserve bank
system would Re. Experience seems to
have shown under the peaceful opera
tons OF the act that the mere liability
o, the banks for the required capital
would have been as effective as its paw
men;
Liability From Paid In Capital.
paid in capital creates a dividend
liability. Dividends necessitate banking
operations and the accumulation Of
earnings. Under present circur tances
the necessity for earnings seems synony-
nous with competition between the re-
serve banks and their stockholders. 80
far as the stockholdng banks have been
able to prevent this competition they
seem 10 have done Il.
On the other hand. the necessity for
dividends has driven the reserve banks
and the Federal Reserve Board to de-
Tsing means whereby the earnings Of
he banks could be Increased The
only Held for the enlargement of the
operations OF the reserve banks is the
open market and operations therein as
outlined In section fourteen OF the act
SO FAR these operations have not been
particular extensive. and unless there
IL some revision OF the law this prob
ably will not be.
l.
10 say that the reserve banks have done
little business becausA OF hostility TO
he new system. Tha system has de-
fee;s, and not the least are defects OF
early administration and administrative
features OF the act. II was plainly an
error TO bring into existence at one
stroke twelve reserve hanks
There has apparently been about
enough business for two or three. Two
Or three. or one, could have done all
ne business there has been to do and
an the business there will be to do for
an Indefinite time to come. The organi-
faton committee tortured the language
Of section two into new meaning.
The Eject Of Politics.
The banking system. which is the
p7!de OF the administration that created
H. would have been further along the
road TO success IL the political view
mad been less warped by partisanship
and sentimental hostility 10 ancient fic-
IONS abou, central bank II the banks
are emergency institutions, there has
been erected a system most cumbersome
and expensive
Another defect is that an act whose
hrst purpose was to furnish an elastic
currency has failed to do So In some
measure this failure il due To conditions
which could not have been foreseen. viz.
me upheaval In Europe. which has
turnHd Hood OF gold In the direction
o. 'he United states
AS result of excessive gold i'm
ports which the repurchase Of Ameri-
csh securities held abroad could not hold
COW. there has been currency ex-
pshslon OF approximately $500, 900. 900.
me Federal reserve system. designed
70 meet any possible spasm OF contrac-
Won was unfortunately not designed to
cope with the question Of expansion.
ne country is afflicted with a cur
'n'E nhatlon and is menaced with the
hangers that accompany it."