The sun. [volume] (New York [N.Y.]) 1833-1916, 1916-04-01
THE FEDERAL RESERVE ACT.
Is II Unsound and Un.Amerlcani-
Is II Based Upon Principle and
the Logic Of American Exnerience2

that othe matters of vital Importance
to the country's prosperity and welfare
have been overlooked. But there are
thoughtful observers who realize that in
the near future IA never before we shall
need an economic system SO wisely con-
structed in every part as to stand the
strain OF the tremendous struggle for
commercial supremacy sure to follow
on the conclusion Of the European con
fiict.
We need an American tariff system,
designed to sustain American industry
and labor.
We need an American merchant
marine that will save us the enormous
sums we are now paying to foreign
ship owners and which will aid i'm en-
tending our trade to the four quarters
OF the world and provide an auxiliary
to our navy that will UNNECESSARILY i'm
crease the country's defensive power.
we need an American banking sys-
tenn. based upon established principles.
In harmony with American traditions
n derived from our own experience.
II Is with the latter requirement alone
that I propose to deal.
Taking up first the principles Of bank
ing. let us see what these are:
l. Gold. and gold only. is At to he
used as bank reserves.
2. Bank book credits. whether en-
ployed In the shape OF checks issued by
the depositor or in the shape of notes
issued by the bank. are in substance
IDENTICAL, n whether the Issue should
bc made in the one form or In the other
is a matter for the determination Of the
man who obtains the credit and accord
ing to his convenience. Both the note
credits and the deposit credits, each
being really n different form Of the
same thing. should he based upon an
adequate reserve OF gold coin. and both
subject 70 the actual daily test OF re-
demption In that metal.
J. The organization Of our banking
system should conform to. democratic
principles. a union of the banks being
formed for purposes requiring coopera-
ton. but the identity Of the banking
units should he preserved and the indie
pendence and autonomy OF the banking
system maintained.
Recurring to the first OF these prin-
cii1's, there Is n valid reason why moth
ing but gold should he used as bank re-
serves.
In the FIRST place. II anything less
valuable than gold Is so employed
Gresham's law will be set In operation
and the inferior forih Of money will
drive gold out Of circulation and cxpel
It from the country.
Resides. 20 the extent that other
forms OF money In use as reserves rep
resent a margin not covered by gold,
To that extent one credi. Is being built
uron another. a process capable OF end
less repetition and sure to lead to dan.
ccrous imitation.
This indispensahlv sound principle of
banking Is violated by the Federal Re.
serve act. which indeed does not per.
NIT tho use of the Fedetal Reserve notes
as reserves for the $500 national banks
but these notes may he used as reserves
10y the vastly greater number Of Stat.
banks. The notes In question may n.
issued against n reserve of ~ per cent.
mus aNording an uncovered margin q,
D" per cent. of credit upon which a still
larger credit structure may he built.
The most vicious element OF these
notes is that they are obligations Of tn,
United States Government. thus giving
them a fictitious Importance and en-.
c~ouraeinC their use as bank reserves.
As TO tho second principle laid dowr
above, | cannot do better than {, quot,
from Alexander Hamilton
EV.rv loan which a bank make. is. ~
ns first shape. n credit given to the bor
rover on It, books, the amount OF whic,
" stands ready 20 pay. either In Its owl
notes or in gold or silver n, his option.
The right OF the man who has oh
tanned a loan. the buyer of credit. I,
TAX" "A banks notes or coin as his con
, NcnienCc might suggest was clearly pcr
'elNed by Hamilton. and the principl,
ne thus simply stated IL one ~ funda
mental Importance in banking \ bani
INVESTIGATES the character and the SO
curity OF an applicant Tor a loan. i
makes the loan, setting aside ;
proper reserve against the credit.
II is then for the man who obtain,
the credit to say in what share IA,
wants L. use the credit, whether i'm th,
banks notes or in coin.
The Federal Reserve act denies hi,
right 1" make this choice. forbids tn,
bank To issue its notes, the Government
absolutely usuiping this function.
In III" cities tn. use OF checks is mucl
create than IN the country. ~ that tn,
Federal Reserve act substantially favor,
IN" cities inasmuch az il denies the RICH
of IN" banks 10 issue their notes. which
would Ice convenient for us" by farm
erS, wage oaruers and retail dealers
but provides all the facilities needed f.
the wealthy stock operators and dealer
- IN" cities. Who Use checks more tina
currency.
But this is not all. To obtain tn,
currency needed To- supply the wants %
the people in its community hanl
which IL a member Of the Federal Re
serve system must ship its commercial
paper 10 a Federal Reserve bank, pa,
express or mail charges both WAYS, ua,
a rediscount charge and also cnntrbut
toward keeping IN the elaborate an,
costly Federal Reserve machinery, foI
the purpos" Of issuing currency which tn,
local member bank might just as WEI
have issued, thus saving the cNpcus
which Is ultimately met by the h,,sines
men Of its community. In other word,
II commercial paper shipped hv a luci,
bank Is good enough eccuri,y to plcds
with "A Federal Reserve bank for cur
rency, it is good enough for the locs,
bank To hold a"tinst the ourrenC
issued hy Itself. the security being pre-
ciscly Identical II the member bank
could issue the currency direct. the
would save all the costs above mentioned
which are n wholly unnecessary tn.
upon business and labor Local bank
are trusted in the granting of scvcra
billions OF credit. in the form of ban
book credits, and is II not fair to infc
that they are capable of safely iSsuin
n few hundred millions OF notes" The
grant the credit anyway and, as Ham
ilton iorccful!y declared, tn. option ~
the form in which the credit shalt y
employed should lie with the borrower.
This method of issuing notes make
u purely a matter of the borrower
convenience, without the intervention -.
n politically constituted board at Wash
ington or elsewhere. The notes, h.in
issued against a proper reserve. =,
deemed through tho clearinss a. check
are, made a first lien on assets AN
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