New-York tribune. [volume] (New York [N.Y.]) 1866-1924, 1917-11-19
By Eugene E. Agger
Associate Professor of Economics

/ From az article in the Journd4 OF inc
! American Bankers Associdtion.)
The greatly-to- be-desired mobillza-
ton of the country's bank reserves, as
a step in raising the banking system
to the highest level of efficiency, may
now be said to be in fair way tow
ard actual attainment, because the I'D
eralization of the Federal Reserve act
and a recognition of the obvious de-
mands of war time have stimulated the
state banks and trust companies. in
considerable numbers, to enroll as
members of the Reserve system.
The hopeful progress discernibie IN
reserve mobilization serves greatly to
| emphasize the necessity of taking the
i steps that follow next in order. Mob
| ilized reserves are useful only when
they are accessible. The end to be
achieved in modifying reserves is full
mobility and elasticity Of the credit
/ that may be made to rest upon them.
/ The demand for credit, both in the
form of deposits and in that of notes,
| is subject to constant variation, and
the banking system, if it is to function
efficiently, must be attuned with sufti-
Gent delicacy TO meet whatever varia-
tons in demand may arise. But draw
| ing on the reserves modified in the
Federal Reserve banks, either for the
purpose Of strengthening reserve bal
ances or for that of securing additional
circulating notes, assumes that the
member banks concerned can supply
the kind of assets which, according to
the Reserve act and to sound banking
practice, is acceptable for the purpose.
indispensable to Mobility
There is a consensus of competent
opinion to the effect that indispensable
to the attainment Of real mobility and
elasticity of bank credit over the coun-
try as a whole is the development Of
sound practice in the creation of COM
mercial paper and of an open discount
market.
Loans based upon Stock Exchange
collateral have played dispropor-
tionately conspicuous part in American
banking. With Stock Exchanges open
and with the heavy volume OF trading
through them it may be true that so
far as the individual bank is concerned
collateral loan on Stock Exchange
securities may seem liquid enough.
But for purposes Of rapid transfer the
collateral loan cannot be made adapta-
BILE. The collateral represents prop
erty held in trust, and may not be
touched by the bank until the super
imposed loan natures. Hence the loan
must normally be held until its ex-
piration, and offers before that time
to the bank originally responsible little
possibility for transfer or conversion.
Commercial paper. however, normally
represents property owned outright,
which can be retained or transferred
by the owner as his own interest die
tates. Commercial paper OF the right
sort can be redscounted at a reserve
bank or can be disposed Of in an open
market.
The Immediate Problem
The immediate problem. therefore, is
that of developing a sound practice
that will produce sound types OF pa
per. In this connection 1t is conceded
that, as far as the necessary legal
basis is concerned. the Federal Reserve
act makes ample provision. The next
step must be taken by business men
and bankers working in cooperation.
The question then arises: what are
sound practices? The answering OF
this question is important alike TO bust
ness man and to banker, and not only
to them, but also to the general public.
But in view of the part that bank credit
plays in our modern economic life. the
chief responsibility in safeguarding
credit and in insisting upon sound
practice devolvcs upon the banker.
Bank credit circulating by means of
checks or of banknotes must be kept
"as good as gold" While on the one
hand an adequate cash reserve must
be maintained to guarantee immediate
redeemability, on the other hand the
remaining assets on which bank credit
rests must be of character to assure
absolute security. The banker must,
therefore. be very circumspect in lend
ing his influence to the development of
any particular type Of CONNIE rcial pa
per. He must seek pretty constantly
to get back TO sound principles. apply
ing those principles to different posi-
bilities of practice and insisting that
any proposed form meet fully the tests
that sound principles suggest.
What Is Credit!
What, after all, is credit 1t is legal
ly defined as "the ability to borrow
money or obtain goods by virtue of the
opinion conceived by the lender or
sender that the party will repay" As
a simple medium of exchange, il is a
promise to pay money at some future
time. II is promise that is ordinarily
given in exchange for valuable eco
nomic goods or services. 1t is, there
fore, often spoken of as a medium Of
exchange which supplements or acts as
a substitute for money. To-day, how
ever, its role is tremendous. Few ex-
changes involve actual money itself. |
In most of them credit is some form or