Evening star. [volume] (Washington, D.C.) 1854-1972, 1929-01-24
for the legitimate requirements of Sc

for the legitimate requirements OF Sc
curltie; operations.
THE truth is that for long years
past the Federal Reserve system has
been wasting its resources and follow
ing unsound banking principles in sew
eral distinct directions. Due to the
practice of the United States Treasury
in putting the debt of the United States
SO largely into short-term form, and
endeavoring to have it carried by the
banks, the Federal Reserve system has
been under the necessity of supporting
the market for Government certificates
of Indebtedness. These certificates
when placed on the market at very low
rates of interest have at times threat
ened to depreciate in value.
THE reserve system was unfortu-
nately authorized during the war to
make loans to member banks on the
latter'S direct notes. and it has gone
on doing so, practically rediscounting
when and as requested upon member
bank paper with certificates as protec-
ton. In addition, it has fallen into
the habit of buying these certificates
from dealers with repurchase agree
ment whereby it undertakes to turn
them back to the dealers when the lat
ter may desire, so that, in the meantime,
1t has merely earned rate of interest
upon its certificate holdings. The result
has been that the reserve banks, in one
way or another, have found it necessary
to support the Governments short-term
market. There are now outstanding
about $4,000 100000 in Government
notes and short-term certificates and
the load upon the reserve banks has at
times been tremendous.
Furthermore, the reserve system.
quite early in its history, allowed itself
to undertake the development of an
acceptance market in the United States.
It was wise step to which the reserve
system found itself forced at about the
beginning of this year in its effort to
drive some of these acceptanceS out of
it's vaults and into those of the men,
Der banks which had previously been
holding only about SIS, 100000 of bank
ers' acceptances, but the effort came
too late.
Action by Bankers Urged.
ut may be possible to work out of
the present situation if the reserve sys-
tenn and the principal banking inter-
eSts OF the country can be induced to
operate in harmony with one another.
What are the chief things that should
be agreed upon? First of all, there
should be some temporary partial sus-
pension or moratorium with regard to
overisSues of new securities. If you tell
me that this Is out of the question. I
simply refer you to the experience of
the war and to the more recent eX-
perience of about two years ago, when
serious glut of bonds was noticed in
New York and was relieved by the OBJ
vious process of susperding the over
fots fvSNn y Al In1.n
ton in new issues time will be given
to work off old ones, a large part of
which remain still unsold and are
being carried by their sponsors whose
loans for that purpose are included un-
der the head of brokers' loans.
I'm the next place, the principal bank
ers must undertake quite definitely to
reduce their commitments on purely
speculative or trading account to some
figure taken as basic or normal This
expedient was tried during the war with
good results and has been sporadically
employed on a limited basis at times
since then. There has been partial
attempt at it in New York during the
past few months which has been de-
feated by the threat of large depositors
to move their accounts If they were de-
prived of speculative facilities.
I'm the third place, the Federal Re-
serve system must absolutely go out of
the business of furnishing bargain
counter credit, or of bootlegging its ac-
commodations to the stock market. A
reserve bank knows perfectly we'll what
member bank IS going to do with
funds when the latter borrows. It has
the right to land does) ask for state
ment OF condition, and this shows
practically what is going on. The re-
serve bank should insist that borrow
ing member refuse unlimited credit to
those who want to use 1t for the
furtherance of merely speculative mar
ket operations.
This does not mean that curtailment
should take place in such large measure
as to compel the calling of loans in
great quantities, and the throwing Of
securities on the market in amounts
that would involve danger. 1t merely
means that a halt should be called
until the country has had an opportu-
nifty to catch its breath. decide what it
wants to do, and let its savings keep
pace with its speculative commitments.
Partly under the influence of bad
banking management, partly as the re-
suit of great natural expansion in busi-
ness, and partly as the outcome of an
ill-judged and untimely effort to supply
foreign countries with gold under con-
ditions of doubtful wisdom, the United
States has largely scattered its surplus
lending and credit power The time
has thus come when a revision and re-
consideration of its various policies,
looking to a marked reduction in the
strain upon its banking and credit re-
sources, must take place. AS to his