The Birmingham age-herald., 1922-04-25

SIX months. A FedSral NeSerNe pauh ] IS forbidden by law to discount paper | covering merely investments or | drawn for the purpose of carrying | or trading in stocks, bonds or other | securities, except those of the United | States.
 ''The reserve banks are the sole | custodian of the legal reserves of it's 1 member banks, and the necessity or throwing safeguards and limitations around their loan transactions is evil | dent. It is necessary that these loans | be liquid, that they be of short ma turity and easily collectable. The 1 strength of the entire banking system of the United States depends on this. l If the Federal Reserve banks should allow Themselves to get weak and dis abled, it would affect seriously all the banks in the United States. The federal reserve board Is not authoriz- ed to pass on paper or lend single dollar. This is B function which must be exercised by the directors of the banks or their officers
 Provide for Possibilities
 The law does not fix a limit as to the amount of loans to any member bank, but it does require that due re- gard must be given to the possible demands and needs of banks that are not borrowing In other words, we cannot lend all our money to a few banks but must be ready to supply possible borrowers.
 The president of very large bank which never borrowed cent from the Federal Reserve bank. told me the other day that he did not expect to borrow but that he wanted us to have the funds ready for him at any time he was in need. This is what the law contemplates but 1t could not be car ried out if the reserve banks were in a weak or extended condition. The reserve banks are what the name inn plies-reserves for emergency and they must be kept in a sound and liquid condition.
 Another function of the federal reserve system is the issuing of fed eral reserve notes, or what we call an elastic currency. Under the old system, the currency was inelastic. It was rigid and did not conform to the needs of the country. Nearly all of us can remember the time when we could not go to our local banks and obtain as much as S25 in cur rency. The old system was a panic breeder, for 1t did not provide for the natural expansion and contrac- tion of the business of the country. It was either feast or famine.
 Helps Business
 Under the new system as busi- ness expands, when there Is need for more currency for pay rolls, hand ling of crops, etc, the local banker discounts his paper with his reserve bank and receives for it the best cur rency on earth-less a fair rate of interest.
 "The federal reserve notes are se- cured by an equal amount of liquid commercial paper. but the law re- quires the reserve bank to maintain a reserve of 40 per cent in gold against it's notes in actual circula- required and is cancelled when not needed
 "Under the new system, there
 fore, & currency panic-such as
 we have had several times Is the
 last 40 years, is practically im-
 possible.
 There no excuse for any sound bank at present refusing to pay out currency. The currency system under the reserve act is simply the old law of supply and demand applied in sound and conservative way. As long as member bank is sound and solvent, it can obtain the neces- sary loans and currency.
 SHHAAOA sAOP 9RNNAIdOOh
 "The new system, however does not prevent bank failures or business bankruptcy. As long as men specu- late and as long as the greed of human nature exists, there will be failures. The reserve system cannot help those who are incapable of talk ing care of themselves.
 Much has been said about the large earnings of the Federal Reserve banks. When the system was started in 1914. the earnings the first year were not sufficient to pay the divi- l dend to it's member banks, which is limited by law to 6 per cent. Com- | plaints were made that the banks l were not earning any money. At that 1 time, there was little demand for i loans although the discount rate was only about per cent. The war came on, business increased, money was in demand and the earnings increased accordingly. Then the critics said the banks were earning too much, were profiteering, although by law all earnings over the per cent divi- dend to stockholders after certain allowances, go to the government.
 If the stockholders of the Fed eral Reserve banks are reaping such a bountiful harvest of dividends and profits, some one should explain why fV per cent OI the entire DanklnR re- sources in the United States are not ih the system although all the out side banks have been repeatedly in- vited to join.
 .It is hoped that Congress will
 amend the law so as to make 1t more profitable to the owners of
 the reserve banks so that the en-
 tire banking resources of the
 country will eventually come into
 the system
 The Federal Reserve banks paid to the government for the year 1921. nearly $60,o0o,000 as franchise tax. The same critics who complained about the large earnings said that the banks were not loaning enough and that they should increase their loans. The only way to decrease earnings is to call in the loans, so you see it is hard to please every body.
 T have been with the Atlanta re- serve bank for over seven years and so far as I know, no eligible commer- cial or agricultural demands of sound nature have ever been refused.
 T have thus given you a, brief out line of the work being done by the Federal Reserve banks. To explain the whole system would require much more time and would only weary you with figures and statistics. The Hon. Carter Glass in speech in the Sem ate consumed two days in explaining this wonderful system of finance ana a and O htc Q hIa ~naao,