Perth Amboy evening news., 1923-05-24
FUNCTIONS OF RESERVE
BANK
Daily Letter by Frederic j. Haskin

WASHINGTON. May 21.-D. K.
CCissinger of Marion, Ohio, has just
taken office as Governor of the Fed
| eral Reserve Board, the body which
stands at the head of the American
monetary and banking system. Dur
ing his administration of that office
he hopes to settle the most funda-
mental question which now con-
fronts the system, that is, whether
| the twelve Federal Reserve Banks
actually shall be banks or reserve
or active. operating banks.
The original theory of the Federal
Reserve Act was that these twelve
banks should occupy a position IN
relation to the credit of the country
comparable TO the position a fire en-
CINE occupies to the buildings of a
community. 1t was the plan that
the banks should come to the aid
OF the financial community in times
of stress, and that, in the intervals,
they should remain practically dor
mant.
This history of the Federal Re-
serve System has been an exciting
one. The twelve banks opened in
tho autumn of 1914, not Ions after
AliC GuA OPEdh on lAdu bAbhEsA puAs
The opening of the banks was in the
midst of unparalleled disorder and
excitement in the financial world.
The New York Stock Exchange bad
been compelled to close because of
the panic conditions and all over the
world bankers and business men
were in doubt as to what would
happen.
n~l,. ,Jr.1,& 81 4ta I"cIopaI nIEGpArn
Banks at such a time steadied Amer
lean business and doubtless went far
toward preventing even more serious
consequences than were apparent.
The opening of the banks in such an
emergency was a godsend 10 the
country, but was unfortunate FOR the
banks. The whole idea OF Federal
Reserve Banks was new in this
country. 1t would have been bet
ter for them had they had an OPP
p~ortunity to open in peaceful, nor
NAL times so they could have time
to gain experience and equilibrium.
Instead they We're plunged instantly
in the midst of the most extreme and
| abnormal conditions the country had
ever seen.
Busy Institutions At Once
Immediately the banks had to be-
| gin functioning at full speed. The
| demand OF the member banks upon
them caused them to begin their re-
discounting operations at once. They
! became busy institutions overnight.
4 newly organized fire company
should have an opportunity for rsac-
/ tice drills and a chance to test its
new equipment, but here was n case
Of one long fire that lasted seven
years.
Right through the war years and
| then in the period of business boom
with subsequent depression, these
new banks had to operate at top
speed. AS fiscal agents of the Gov
| eminent, they had to zeal the brunt
OF the Liberty Bond distribution and
perform all ann of services for
the banks. They had no respite un-
til about a year or eighteen moaths
ago when American business finally
settled back to something like nor
NAL conditions, at least so far as
/ banking and currency are concern
ed.
Here is where the rub came. In
the first years of intense activity tht
new banks got into the habit of OPP
Grating. They had no previous eH'
perience TO guide them. These alb
normal operations were the only bas'
is they knew. Necessarily, they buil
up large staffs. The Federal Reserve
Bank of New York alone has 3,OOl
employees. The large volume o
emergency business they had becl
doing these years brought IN bii
earnings-many millions every wear
This combination Of circum stance
led the officers of these banks 20 eX
pect constant activity and big re
turns. No individual, of course
makes any profit out of a Eederi
Reserve Bank. The excess Gaming
all go directly to the Government
but in times of big earnings, operat
ing expenses mount up. When Tn
end of the period came, the attitud
Of mind could not instantly chang
nor could the big staffs be cut dow
rapidly, nor the big, expensive build
ings be disposed of.
How The Earnings Slumped
An example of just how this work
ed out is shown by two years of IN
operations of the Federal Reserv
Bank of New York, In 1921 thi
bank had net earnings of $26 900 90
with expenses of $4,000, 900. In 1872
earnings had dropped to SO, 10000
but expenses were 100000. Hes