Evening star., 1926-11-24
MEN AND MONEY
BY NJ. S. Rukeyser.
(Copyright. 1921

name would Smeu as sweet the cA'
pert in the psychology of selling has
seen practical advantage in calling a
spade a carefully wrought instrument
for digging.
AS a people we are impressed with
titles and badges. Call a man vice
president of bank and he is satisfied
to work for a relatively moderate
salary. With a less sounding
title he might be actively discontented.
The reverse psychology is true.
Sometimes our pet antipathy fades
away If the name Is changed.
For example, since Andrew Jack
sons time significant element in the
American public has loathed the idea
Of central bank. During the admin
istration of former President Taft, the
Aldrich committee in the Senate.
which studied the question of reform
ing the unscientific American banking
system. leaned toward the idea OF a
central bank. However. when in the
first year of the Wilson administra-
tion the actual drawing up of the Fed
eral reserve act was accomplished, the
old public prejudice against a central
bank was respected. AS sop to those
who feared the alleged dangers of con-
centrated financial power, the system
provided for not one central bank but
l. scattered throughout the country.
The dozen. however, were to be CO.
ordinated through the Federal Reserve
Board.
Equivalent to Central.
In practice, particularly in the eX-
preston of its recent policies, the
Federal reserve system has drifted in
the direction of becoming the moral
equivalent of central bank. The
development has taken place suhtly,
without appreciation by the general
public.
At least three independent factors
in the operation of the Federal reserve
system suggest central banking.
First. the IL banks are guided in
their purchase of Government securi-
ties by the so-called open market COM
mittee, consisting of the governors of
five banks, headed by Benjamin
Strong. governor Of the Federal Re-
serve Bank of New York and the dom
inant personality in the Federal re-
serve system. In the hands Of this
committee lies the power of the sys-
tenn to exert it's greatest immediate
influence, under present conditions on
the money market, on speculation and
on business. This committee. which
acts with the sanction of the Federal
Reserve Board. has perhaps greater
power than any other financial group
in the country. There is no question
that the committee seeks to operate
constructively in the public interest.
That it has always acted wisely has
been questioned by outside banking
experts. For example, when the open
market policy was new in 1924 the
committee induced the reserve system
to ease the money market to a far
greater extent than some critics con-
slider wise or eXpedient. The full eff
feet of that extraordinary monetary
ca sement, which encouraged specula-
ton in securities and real estate. can
not be measured until the present
business cycle has been completed.
Compelling RediscOunts.
Secondly. the Federal Reserve Board
has the power to compel any one of
the II banks to rediscount eligible
paper for any other reserve bank. The
net effect of this is to pool the finan-
cial resources of the II banks and
make them in reality a single reser-
voir of reserve credit. With the pres
ent superabundan gold holdings and
the high ratios Of reserves of the
banks, there is no need of forcing
these interhank operations, although
in 1920, when the reserve banks We're
down near their legal reserve mini
mum, such operations actually took
place.
Thirdly, shortly after the war the
Federal Reserve Board asked the At
torney General whether under the law
it had the power to initiate changes in
discount rates instead of merely hav-
ing the right to approve changes sug-
gested by the banks themselves. The
Attorney General ruled that the board
had the rights to initiate rates. This
right has never been contested, al
though the board as matter of policy
has voluntarily left the initiative to
the banks.
In popular discussion of the reserve
system the discussion Of boosting or
lowering the discount rate inevitably
comes to the fore.
There is lack of public understand
ing as to the considerations which de-
termine a change in rates. Specula-
tors watch such changes with an eagle
eye as an authoritative clue to the
economic outlook. The recent none
tary easement led to rumors of pos
sible further reduction in the dis
count rate.