The sun. [volume] (New York [N.Y.]) 1833-1916, 1916-03-26
RESERVE CHANGES
CALLED UNSOUND
Danger in Owen Amendments
to Bank Act Seen by "Fi-
nancial Chronicle"
FINDS NOTE PLAN FLAW

Danger in amendments TO the Federal
reserve act as proposed in the bill intro
duccd in the United States Senate on
March Is by Senator Owen is seen by
the Commercial and Financial Chronicle.
In a leading editorial the Chronicle
points particularly to the amendment re-
lating to the issuance of Federal re-
serve notes. II explains that the pro-
posed changes In the note Issuing pro-
visions are: First, to remove altogether
tho limitations upon tho classes and
kinds Of mercantile paper that now serve
as a basis for the issuance Of paper.
Second. to allow the issuanc OF notes
against deposits Of gold. no mercantile
paper being required to call them into
being. Third. that the reserve banks
shall be permitted TO count gold thus
deposited with the Federal reserve agent
as II 1t were part Of their own gold hold
ings I'm computing the 40 per cent. gold
reserve which the law requires must be
held against the reserve notes outstand-
ing.
THE law now provides" says the
Chronicle. that the collateral to be
deposited as security for the reserve
notes shall be notes and bills accepted
for rediscount under the provisions of
section l3 OF this act That is positively
the only kind of paper that will serve as
collateral. namely. notes and bills ac-
cepted for rediscount under the pro-
visions ot Section 49, In other words.
nothing but red!scounts will answer.
Prevents Undue Expansion.
'in this form undue expansion IL pre-
Guided. and AS indicating how conserva-
lively the provision has worked We may
note that even At its maximum the aS-
yregate OF note issues which the twelve
banks combined have had outstanding.
secured by rediscounts. has never quite
reached sci 900. 900, the rest of the notes
out being a'ioat on deposits OF gold. But
under the amendments proposed instead
of the collateral being merely notes and
bills accepted for rcdiscount II would
consist Of notes. drafts AID bills of ,N-
! change and bankers acccptances rcdis-
counted or purchased under he pro-
visions uf section - or IL"
The Chronicle points out that In the
first place the classes OF rediscounted
paper to he available are enlarged and
that the paper need not be rediscoun,ed
a. all. but may consist also of "pur
chased notes. drafts and bills of cN-
change or bankers acceptances. This
paper may have been acquired under
section II of the act which deals with
the open market operations OF the re-
serve banks. Continuing the editorial
says;
conceive what would happen II the
reserve banks were allowed To buy paper
In the open market and issue reserve
notes against the same There would bt
absolutely nothing to prevent the re-
serve banks from repeating the operation
over and over again. With the right to
issue notes confined to rediscounted
paper the volume of notes IL made &c
conform accurately to trade require
ments. which then constitute the sole
measure OF the note issuing function; III,
~yolition of the managers Of the reserve
banks in that event plays no part In III.
movement.
Unlimited Note Issuing.
THAT, is 10 say, II the member bank
4, bring no paper to lie r~cdlscountcd nc
, notes can be issued. But with the bank
:. permitted to go In the open market ant
acquire paper, and then use such papeI
as the basis for note issues. the note'
can he put out to an indefinite extent.
IF the reserve banks choose 10 do a
> they need not u.s. the notes issue
! against purchased paper To acquire NOR
pap,1'. They can purchase ''oNernnlen
bonds to the extent of s2j,O0O,ooo
year and against such bonds ISSUE
} Federal reserve bank notes. Against sucl
n reserve bank notes, which are a dis
a tine. class OF notes. the reserve bank
o are not required 10 hold any gold reserv'
at all, their position IN that respect benz
the same az that of the national banks
| II any one thinks ii an improbable con
= tingency that such reserve bank note
would BE- issued IN "A period OF none.
=. plethora like the present We Viii inform
him that some are now actually OUT
u standing, S6Sl, 900 having been put il
n circulation the last two weeks. and IN
reserve banks having made large ~
y.stnreuts in Government bonds in /.
y cent periods with the evident idea =
. using them In that way since the mrs
4 ~ the year their holdings OF Government
bonds have risen from s15,'9',"oo 7
s39gl3,0Oo.' In closing tn. cdit"fi1
= says:
1.-THE whole effect Of this an"ndn"t
is to put the note issuing function on
dubious and questionable basis, whe'
+ now it is Oh "A sound and cons"rrativ
A.