The Birmingham age-herald., 1920-10-23

LaHNS III tHelf ItldllOn 10 cFeull- " Hat
 shall say will be in defense of the
 system and the administration of it
 ln this particular phase of it's opera
 tions not because l think it needs de-
 Tense. but because there is seemingly
 so much that is misun1e 1erstood con
 cerning it's purposes as the apply both
 10 the expansion and the control oi
 banking credit.
 The vagaries of human nature are
 no better exempliied than in the differ
 ence in the attitude of the puonc towards
 the opera tions of the federal reserve act,
 during the period when expansion was
 the essential function and the time when
 it became necessary to restrict the us4
 0f the expansive power of the federal reserve system. Profligacy and extrav-
 agance are easily acquired habits, while
 thrift and accumulation are the results
 of self denial and some hardships Only
 a few months ago we heard nothing but
 praise of the new banking system. It
 was 8 matter of pride that we had ac-
 conlplished the unparalleled task of not
 only financing the war by furnishing the
 funds required for the direct expenditure
 of the treasury, but that we had taken
 care of the credit needs of commerce
 and industry to an extent greatly beyond
 our widest dreams of volume, and we
 had given the. credit to the functions of
 the federal reserve banks. There was no
 doubt in our minds but that the old
 system of an inelastic currency and in-
 dependent reserves would have suffered
 a collapse even without the added strain of war. When the federal reserve board
 and the federal reserve banks undertook
 q policy of a readjustment of credits
 by appealing to member banks to exer-
 else a somewhat keener discretion in the granting of loans for non-essential pur-
 poses and the liquidation Tn a gradual
 and orderly manner of existing loans Of like character, we began to hear of the
 injustice done to many quarters and the
 system as directed by those in charge of
 it's affairs was held responsible for all
 Of the ills of a tight money market.
 CREDITS
 Credit is the keynote of banking. It is more so today than ever before. It is the inspiration, the source of revenue
 and at last the justification of the usual
 transaction particularly in commercial banks Most every other function of the bank bears either a direct or collateral relationship to the question of credit It
 was the development of banking in it's ca pacity of supplying credit which led to the conditions requiring a more adequate system of banking laws in this country. We required greater elasticity in the currency supply because of the seasonal demands upon us for that medium during the crop moving period particularly, but i the abnormal demand for currency mean an expanded credit situation, for the two went together. We argued for the mob- ilization of reserves. but we would not have had any use for changing the To- cation of our reserve funds except that by gathering them into common reser voir they might be used to take care of an, abnormal demand for credit. by form ing the basis of the note issuing power of the federal banking institutions which is the expansive power of the system so far as credit is concerned. Thus we have an elastic currency and a channel for a greater volume of rediscounting The federal reserve act not only pro- vides the quantitative means of credit but through the definition of the eig- i ibility of rediscounts it emphasizes the value of it's qualitative feature.
 CREDIT EXPANSION From the very beginning the federal reserve system has been engaged in ex- ercising it's function of expanding credit. l It's operations opened with the need of lit with which to retire the emergency currency called out because of the de- rangement of the export market with the outbreak of the war in Europe. There was but little or no contraction of it before the business demands stimulated by the activity of war re- quirements called the need forth again and then, of course, when our own country became 8 participant expan- sion was the established order of the day. The theory of the note issuing power of the Federal Reserve bank is l that so long as the notes are sustained ! by self-liqliidating commercial paper that the contraction will be automatic, and the normal balance of credit will be restored without harm or fear. But p1nr ctan 1at 1av- ths gency of war, when much of the expan- sion had been occasioned by the needed stimulation of government financing. that the note issuing function was being tpartially supported by the notes given for the purchase of government bonds and hence less liquid.
 Under any condition a system which undertakes to provide an expansion of credit must have the means to control it l or else it is robbed of the essential qual- ] ity of elasticity, but the curtailment need arrives much earlier if it has all ready assumed obligations more or less fixed in character, as was the case with the federal reserve banks when they be- gan to admit bond-secured loans on 8 parity with those ordinarily termed self-liquid It is upon this point of un- dertaking to control credit in which the l federal reserve board and the federal re- iserve banks reluctantly engaged, that tthe system has received the greatest cen Isure The advocates of continuously low rates and further expansion seem to hold to the opinion that to restrict the growth of credit so long as it may be maintained by the issuance of federal re- serve notes constitutes a greater menace | to the prosperity of producers, the 1 growth of our municipalities and in- dustries, than the lowering of gold re- serves. In their fine zeal for the arti- | ficial ease of the moment, they fail to Itake into account the day of reckoning which must surely follow the contraction of debts, not securely supported by an adequate yield of production, sufficient both as to volume and time of maturity. To my mind, any argument to the eff | feet that credit control should be ig- lnored until the full lending power of tfe l federal reserve banks has been ex- | hausted, irrespective of a gold reserve, even for the purpose of sustaining an | increased production, which or course ls a thing altogether to be desired. is like saving that we can create wealth by writing statutes upon the federal law books It is analogous to that arsu' ment against liquidness in lines of credis | at banks. with which you are all fa- mliar. Who among you has not been sked why a debt should be paid So 1 long as the maker can present a solvent condition and you are in the business oi l lerding money? Liquidation in banking lis as essential as solvency and credit control in federal reserve banking IS sound concomitant to credit expansion CRITICISM
 .sThe criticism of the federal re- 1 serve system or it may be more ac- curate to say the administration of