The Big Sandy news. [volume] (Louisa, Ky.) 1885-1929, 1922-02-03

loans the rediscount rates OF the Fed
eral Reserve Banks were also held be-
low the market Throughout the war
almost any bank anywhere would lend
money on a Liberty Bond at a rate OF
interest no higher than that borne by
the bond. Almost anybody could SUBJ
scribe for a Liberty Bond. make a
small initial payment and have the
local bank carry the bond indefinitely
The transaction cost him nothing, for
the bank charged only the same rate
or interest that the bond drew. II cost
the bank nothing either, for II could
Immediately hand over the subscribe
er's note, with the bond attached. "a
the nearest Federal Reserve Bank
which would discount the note at 4
per cent. II amounted 70 this: Write
your name to a bond subscription and
make a small initial payment. Your
bank will then carry the subscription
Reserve Bank will carry II for your
bank free OF cost"
The Imitation OF 1919.
AS a war measure, no doubt, that
was justified. The Government wish
ed a big popular subscription to the
bonds not only because IL needed the
money but also for the moral effect OF
showing d united people. The armis-
tice left the Government with some
billions of unfounded debt. The Vic
tory Liberty Loan OF $500, 000, 900 was
soon offered for subscription. and at
Ter that the Treasury was out
ehorfar- fip,a ana octn0 NJ, n :, t.....,n.. -.
scale. A low Federal Reserve redis-
count rate had been OF incalculable
value in floating the war loans, and the
Treasury wanted the rodiscoun; rates
kept low while II was doing its post
war financing. In fact. the rediscount
rate was kept well below the mark
throughout 1919,
The obvious result was to make bor-
rowing from a Federal Reserve Bank
very profitable to the member banks.
A member bank could readily lend
money AT 6 orr per cent and then re-
discount the note AT n Federal Reserve
Bank at or-5 per cent. Bankers be-
ing only human, have no doubt that
this helped on the reckless imitation OF
1919. And II was quite contrary 10
the theory of reserve or central bank
ing. The theory Is that banks other
than the reserve bank win have suf-
ficient funds 10 take care OF the ordi-
nary average demands OF business. In
an emergency, or under unsual condi-
tons they can turn to the reserve
bank and keep themselves In cash by
rediscounting paper. But they should
not make profit out OF resorting 10
the reserve bank; for that bank is sup
posed 10 be the custodian. not of the
main army but only OF the reserve.
and the reserve should not be drawn
into action unless there is real un-
ayoidable need. Thus reserve banks
such as the Bank OF England and the
Bank OF France normally hold their
rediscount rates slightly above the
market. In short, banks should not be
paid handsome premium for drawing
on the reserve; but in 1919, generally
speaking, we were paying them
handsome premium, because The Treas
ury Department wished TO hold the re-
rate low In order 10 facIli-
tate It's own financing.
When the Federal Reserve Banks
raised rediscount rates--flnaiiy to Z
per- cent in some districts, including
New York. and to per cent In 9th
ers-there was a good deal OF COM
plant from member banks because
thai cut down, or cut on. .heir profits
The object OF the reserve system.how-
ever. was not to make banking more
profitable but TO make II safe.
There was complaint also, OF a pro-
discount rate which some OF
the reserve banks adopted. Each mem
Der bank was allowed a normal or ha-
sic line OF credit proportioned to its
II could rediscount at It's
Federal Reserve Bank up 10 that nor
NAL line at the regular rediscount
rate; but II 1t went rs per cent above
the normal line It must pay per cent
premium. and so on. The object. OF
was 10 check expansion of
credit in those spots where II had gone
1t should be understood that
al through the pinch many member
banks were rediscounting less than
their normal line. many others only
up to their normal line. while few
vent much above the normal line. AS
he president OF Federal Reserve
Bank put 1t, I'VE have high pressure /
banks and low pressure banks and 4
pressure banks" The object 4
II the progressive rate was TO put /
,rakes on the high pressure banks. OF
course the object OF raising the redis-