New Britain herald., 1929-01-07

miss principle.

miss principle.
 Just what occurred during this period of deflation has been . mat ter of some doubt. and one feels like congratulating Senator Reed smoot for adding the inside story of this affair to his article on disciplined money in the Saturday Evening Post. To our knowledge it is the first time that all the facts underlying this economic upheavaI have been print cd.
 The Utah senator points out that . recession was bound to take place after the war boom was over. With this thesis all can agree. although there were many smart citizens At the time who thought the boom would last for at least decade.
 Passing over the facility with which the Federal Reserve banks performed the function of being fis- cal agents for the government during the war in floating the huge bond issues, the senator reaches the de- flation period.
 The law provided that government bonds should be eligible collateral for the issue of Federal Reserve notes. It must be remembered that this was made part of the law in 1914. when only a billion of such bonds existed. When during the war billions more were issued. wholly different credit structure took form. Senator Carter Glass. secretary of the treasury when the Federal Re- serve law was passed, says that had he dreamed that such an avalanche of government bonds would be issued hs would never have consented to their being classified as eligible col lateral.
 The Federal Reserve Act makse the secretary of the treasury ex- officio chairman of the Federal Re- serve Board. Thus William G. Me- Adoo functioned. not only as secre- tary of the treasury during the war. but also a member of the reserve board. His paramount duty was to see that the liberty bonds were sold. Now We will quote Senator Shoot:
 How interests although inviting to spectators. were conducive to wider bond sales. W. H. G. Harding, wartime governor of the board. saw clearly enough that easy credit and low discount rates were bringing about unwholesomely high prices. He sought to have Federal Reserve Bank rates raised--in A word. start to apply the brakes to imitation. Secretary McAdoo took issue with such course. To raise the rate would make it more difficult to sell bonds. The board was effectually prevented from applying the law scientifically and raising the rate by Mr. McAdoo's threat that if such a step were taken he would induce President Wilson to transfer the Federal Reserve Board bodily to his supreme direction. making it merely bureau of the treasury department. The board subsided under this threat until after the Armistice. (Such power was given the President un. der the wartime Overman Act.)"
 The result is history. Imitation was tremendous; prices were at "fairy- tale height" wages and profits were fantastic. An economic saturnalia had set in. Many people believed the inflated good times'' would con- tinue indefinitely. But sound bank CTS knew the soap bubble would have to burst" remarks the senator. and. remembering the old panic days. feared disastrous experiences"
 Finally. on behalf of the Federal Reserve Board, Governor Harding in December. 1919. announced the board would approve increased dis count rates by member banks. This was sort of declaration of inde- pendence: the war was over and the board was no longer controlled by the treasury department of the gov- ernment. That winter more than a billion dollars were driven out of Wall street, and the discount rate was pushed up to seven per cent. Deflation had set in.
 Instead of a panic, as many bank CTS had feared, the Federal Reserve functioned perfectly, and only de- pression cnsued. The difference be. tween a panic and a depression is that the former knocks everyone cold while the latter merely passes over as a short era of slow business.