New-York tribune., 1918-06-30
National Budgetimg Would Obviate
Many Pitfalls in Financing War
Declaring Productions the Thing Warns Against Regarding
Financial Machinery ItseReserve Banks May
paired Ever Increasing Proportion Of quidang Assets

or issued or drawn for the purpose OF
carrying or trading in stocks, bonds or
other investment securities, except
bonds and notes Of the government of
the United States"
The Federal Reserve BOARD, which
was required by law to indicate more
precisely the kind Of paper eligible
for rediscount. held as follows,
(a) That it must be bill the pro-
ceeds of which have been used or are to
be used in producing, purchasing, car
rying or marketing goods in one or
! more of the steps of the process of pro-
duction, manufacture or distribution;
(b) That no bill is eligible" the pro-
ceeds of which have been used or are
to be used:
{. Cd For permanent or fixed invest
ments of any kind, such as land, build
ings, machinery.
CD For Investments Of merely
speculative character, whether made in
goods or otherwise.
The general intent of the law and Of
the rulings is evident. The Reserve
banks assets are to be kept liquid in
order that these banks may be of the
highest possible service as commercial
banks. To that end only commerce. al
paper is to be acceptable for redis-
counting. Speculative paper and even
! investment paper are ruled out, with
the single exception of bonds and notes
OF the government of the United States.
Only few concessions of a minor nature
or of a temporary character are to be
found in various sections of the act.
Since the passage Of the law in 1918
three particularly significant changes
have occurred. The first is the con-
centration Of large part Of the gold
supply of the country in the possession
of the Reserve banks. Scattered bark
reserves mean a lack Of mobility, while
of adjustment in financing business
transactions. Our former system Of
decentralized reserves was too rigid,
and their concentration in the Federal
Reserve banks was a distinct improve
ment. Greater elasticity of crciit
transactions has been made possible; {;
funds can now be shifted more readily
from one place to another; relief can
quickly be granted to sections of the
country where it may be needed, and
the gold thus concentrated is placed
definitely under the direction of GEN.
trail body, which may control gold ex-
ports.
The law as originally passed pro-
vided for a gradual shifting of re-
serves and along with this change q
reduction in the reserve requirements
OF the memDer banks, but soon the
European war brought US so large a
food Of gold that it was thought wise
to hasten the concentration, and three
steps were taken. G) Reserve re-
quirements for member banks were
still further reduced, and are now 7,
10 and 13 per cent respectively for the
: different classes of banks. These per-
, eentages may be contrasted with the Is
and 25 per cent requirements Of a few
/ years ago. (2) These required reserves
must ali be kept with the reserve banks,
and member banks are distinctively
urged to turn over to the Reserve banks
all of their cash holdings with the ex-
ception of such amounts as they think
| 1T wise or necessary to hold for daily
needs. This, too, is in marked contrast
with our former banking practice, un-
der which our national banks were
required to hold from 40 to 100 per
cent of their legal reserve as cash in
their own vaults. 60 At first the law
! did not permit the Federal Re-
t serve banks to count as part of
the 40 per cent reserve which they
are required to hold against their
| issues of Federal Reserve notes the
gold. and gold certificates in the pos
session of the Federal Reserve agents.
Since June, 1917, this accumulation of
gold and gold certificates is to be
counted, a change which permits a
/ great expansion in note issues