Evening star. [volume] (Washington, D.C.) 1854-1972, 1930-05-24
CHANGE INTENDING
POLICIES OPPOSED
Bankers Doubt Wisdom of
Relaxing Rules on Federal
Reserve Credit.
Special Dispatch to The Star.


nomic policy commission of the Ameri-
can Bankers Association in current pro-
posals aimed at making it easier for
members of the Federal Reserve Sys-
tenn to borrow from their Reserve banks.
These are offered as remedy, 1t says,
to overcome the difficulties many banks
suffer under because great shrinkages
have occurred in recent years in credit
instruments eligible for rediscounting
or borrowing under the present rules.
III a detailed study and report by the
commission. taking up specifically the
question of admitting installment finance
. company paper municipal issues and
railroad bonds to Federal Reserve credit
operations, it is declared that such ac-
ton might tend to make Reserve credit
: less liquid, throw its workings out OF
step with fundamental business changes,
and also increase the task of preventing
the Federal Reserve system from being
employed as a facility to initiation"
- The members of the commission are
r. S. Hecht, New Orleans, La, chair
man: George E. Roberts, New York City,
vice chairman; Nathan Adams, Dallas,
Tex. Leonard P. AyreS, Cleveland,
Ohio; Frank w. Blair. Detroit, Mich;
Walter w. Head, Chicago, ILL.,; w. d.
Longyear, Los Angeles, Calf; Walter
8. McLucas, Kansas City, Mo-; Max B.
Nahm, Bowling Green, KY; Melvin A.
New York City; o. Howard Wolfe, Phil
adelphia, and Gurden Edwards, New
York City, secretary.
Debt Retirement.
$. Sound Federal debt retirement poll
cies have resulted in contraction In
United States Government securities OF
S4,400, 100000 in five years, or almost 81
per cent" the report says, in discussing
the shrinkage in paper now eligible for
borrowing or rediscounting. open mar
; ket commercial paper showed last Sep
TENDER q contraction in five years OF
. $3.50, 000, 900 or more than II per cent.
Eligible paper in Federal Reserve bank
members in 1926 stood at about % per
cent of their loan portfolio; last De-
cember it amounted to only about 1877
per cent. There was drop OF half
billion dollars, or 10 per cent, in the
volume and more than five points, or
"a per cent, in the ratio
- These changes reflect, in part. the re-
mort comments, 1.-The driving out by
chain store and other direct merchan-
dising methods of large numbers OF
middlemen who formerly created con-
siderable volumes of commercial paper" !;
. also the rise of the practice of large
corporations to replace bank loans with
security issues. It continues:
Bankers acceptances have shown
an increase in five years OF nearly a
billion dollars. However, due to low
yield, this paper has not been expedient
for banks to carry in any great volume,
and therefore has not materially helped
the situation. There Is no question,
therefore, that there has been a very
serious contraction in available eligible
instruments.
~ Finance Company Paper.
ION the other hand, there has been
considerable expansion in non-eligible
instruments. It has been estimated that
the volume of finance company paper
arising from installment selling in the
banks is more than 81 900 900 900. An
: anual output of municipal issues has
been in excess of 100000, 900, with a
large increase in the hands OF banks.
Collateral loans by member banks since
1925 show an increase of $3,430, 000, 900.
or 81 per cent. These changes in bank
ing credit have led some to feel strongly
that a change in the eligibility rules
was called for"
Another aspect of the subject treated
by the report is the actual use of eligi-
bic paper for rediscounting and Dor
rowing by the member banks. 1t points
out that In December all member banks
held total of So, 429, 000, 900 in eligible
instruments, but only about S879, 000, 900,
or not much more than one-tenth. was
: being used at the Federal Reserve banks.
''It would appear that the banks as
q whole have no need for enlarged
sources Of eligible paper, since they are
using so small proportion OF what
they have at the Federal Reserve
banks" the report says. These gen.
eral figures, however, do not reveal the
important fact that these ample sup
plies are not evenly distributed. The
country State banks appear to be espe-
cially deficient in eligible paper.
Reports show that country State
bank members of the Federal Reserve
system held almost per cent of the
total loans of all member banks, but
less than per cent Of the eligible pa
per. and only about II per cent of their
loans were of this class. City State
bank members held about SO per cent
of the total loans Of member banks and
almost ~ per cent of the eligible paper,
while more than Is per cent Of their
loans were of this class. The national
banks held about So per cent of the
total loans and more than 81 per cent
of the eligible paper. The proportion
of national bank loans classed as eligi-
BILE was 1875 per cent.
This is a spotty condition that is
further accumulated in respect to many
particular localities and individual
banks. While the stronger banks have
an excess supply, many banks, espe-
cially In the country, but sometimes in
the cities as well, are in much weaker
position in this respect. The foregoing
facts indicate the source of the demand
for broadening the eligibility rules and
also present large measure of justifi-
cation. However, We question whether
the sound remedy is to be found in
easier eligibility.
Change Suggested.
"It has been suggested that the rules
be broadened to include finance CON-
pany paper arising from installment
selling, municipal securities and rail-
road bonds, so that banks will have
wider avenues of access to the Federal
Reserve banks. from which many OF
them are almost disfranchised by the
present restrictions.
1.-THE economic theory back of the
present rules is that paper of the DIES.
ignated character is fundamentally
sound, since 1t Is created by responsible
bank customers engaged in productive
enterprise, further reinforced by 6
banks Endorsement; tslat the volume
rises and falls with seasonal changes IL
business ana tIlS longer puSuleSS cycles
and that 1t is inherently liquid both il
respect to maturity and to the self
]iquidating character of the underlying
transactions, since these involve thu
production and distribution of goods tn,
proceeds of whose sales at each turn
over supply the funds to pay off tn
original notes. Eligible paper, there
fore, tends to keep expansion and con
traction of credit and currency in stel
with business.
y Neither railroad bonds, municipa
issues nor finance company installmen
paper quite qualify under this theory a