New-York tribune., 1918-06-30
conduct of the war will be aided, but
II poorly managed great harm may re-
suit.
Wilson Warns
Against Imitation


Wilson Warns
Against Imitation
The dangers of imitation have been
fully appreciated by our government
and reserve bank officials. On April 2,
1917, President Wilson said: at is
our duty, / most respectfully urge, to
protect our people, so far as we may,
against the very serious hardships and
evils which would be likely to arise
out of the imitation which would be
produced by vast loans"
This same idea was apparently in
the mind of Secretary McAdoo in
urging financial programme of half
taxation and half loan. The ideals of
the Federal Reserve Board as to the
assets of commercial banks have been
frequently expressed, but two quota
, tions will suffice. On November 10,
1914, they declared: Safety requires
not only the bills held by the Federal
f! RESERVE banks should be Of short and
we'll distributed maturities, but, in
addition, should be of such character
can be collected when they mature
They ought to be essentially self-
llqnidating," or, in other words, slould
represent in every case some distinct
step or stage in the productive or dis
tributlve process--the progression Of
goods from producer to consumer"
Again. in December, 1916, the board
in advising our banks against the ac-
QUESTION Of Treasury, bills of foreign
governments said: "If -. our banking
institutions have to intervene because
foreign securities are offered faster
than they can be absorbed by investors
an element would be introduced
INTO the situation which, if not kept
under control, would tend toward in
stability and ultimate injury to the
economic development Of this country"
NOW that we are definitely engaged
IN the war, increased production and
voluntary ", saving are proving difficult.
The Federal Reserve system is at hand.
snd through it, as fiscal agents, goy,
ernment bonds and certificates are
marketed There is grave danger that
this great financial machine which has
aiready performed such valuable s,r-
wee shall be utilized as an engine for
lnfatlon on a gigantic scale and with
disastrous results. The process has
already started and the pressure to
continue it is increasing. Several illus
tl&tlons will make this clear.
First is the increase in the amount
OF bonds held by the banks in the Re-
serve system. On June 80 1914, the
national banks held 1882, 900, 900 Of all
kinds of bonds, including United States
bonds. BY December 81, 1917, this had
increased to $3,495, 100000 (including
certincates Of indebtedness) an increase
OF 23,0O0,000. That all or most of
these bonds will be paid when due, and
are, IN the long run, a safe investment
is unquestionable, but that is not the
point here raised Instead of COM
mercial assets our banks have accumu-
lated large holdings of bonds which are
llquld only to the extent that they are
salable to the general public. To date
they are being acquired more rapidly
than they are being sold. Also, account
should be taken of the increase in col
loans must in the final analysis often
be interpreted in terms of the stocks
and bonds pledged as security.
Assets Needed That Are
Self-Liquidating
; Pressure has come from another
direction. 1t will be recalled that with
minor exceptions only short time COM
merclai q paper may be rediscounted at
Reserve banks and that investment
! paper is definitely excluded as not
iiquld;; In every case the determining
:. consideration is the nature of the
ftransaction behind the paper and not
the form of the paper itself. Short
time paper issued to finance q per
manent investment, the maker expect
ing to renew the notes from time to
time over period of years, is clearly
deDarred. Yet within the last year two
large, we'll known corporations, finding
1T difficult to borrow to advantage,
! made definite attempt to finance their
needs over a period Of several years
by issuing ninety-day notes to be re-
newed repeatedly, with the understands
ing that these notes should be accept
able for rediscount at the Reserve
banks. To this proposal emphatic OBJ
lection was made, and the plan was
dropped. 1t is mentioned here only
as another illustration of the pressure
! upon our system to acquire assets that
are not self-liquidating and that are
not readily salable elsewhere. Atten-
tion may also be called to the act re-
Gently passed authorizing the Secre-
/ tary of the Treasury to issue certifi-
Gates Of Indebtedness to the amount of
! $4,000, 100000 instead of the former
limit.
A final illustration Of the pressure
to utilize the Federal Reserve system
as market for securities and furnish
the banks with assets that are not self
Finance Corporation act. This War
Finance Corporation may advance
funds "for periods not exceeding five
years." either direct or through banks,
savings banks, trust companies and
building and loan associations, "to any
person, firm, corporation or association
conducting an established and going
business in the United States whose op-
erations shall be necessary or CON
tributory to the prosecution of the
war"
The s5oo,ooo, 900 capital stock of the
corporation will be subscribed by the
United States government, and it may
issue a maximum of 100000 Of
bonds. The bonds may be sold to the
general public, but Section 13, of the
! law, specifically authorizes the Fed
eral Reserve Banks "to discount the
direct obligations Of member banks Sc
cured by such bonds of the corpora
ton and to rediscount eligible paper
secured by such bonds and indorsed
by member bank.I There is little
reason to suppose that either the men,
Der banks or the Reserve banks can
easily refuse to accept such paper
Nevertheless it will be based on ad-
yances for periods up to five years, and
it will be strange indeed # many of
these loans are not of necessity re-
newed at maturity.
A few conclusions from .his analy-
sis may now be stated in less tech
| nical manner.
/. Our Federal Reserve system was
conceived primarily as a commercial