Evening star. [volume] (Washington, D.C.) 1854-1972, 1930-01-16

That the Federal Reserve Banklng
System is largely responsible for the
two periods of imitation and collapse ex.
perienced by this country IN 1920 and
1929 must be the considered verdict OF
history, says an editorial in the current
issue of the Bankers Magazine, which
advocates abolition of the Federal Re-
serve Board. This is true despite the
fact that each of these disasters was
worldwide in its origin, according u
the writer. for 1t should be the part OF
a properly managed central bank TO en-
visage world conditions, particularly as
to how they may affect our own situa-
ton, and to act accordingly.
No general indictment of the Federal
Reserve System is worth anything with
out bill of particulars.
In the first place, the linking up of
banking to the Government through the
Federal Reserve Board, appointed by
the President of the United States, es-
tabliShes a condition almost sure to be
infiationary, as has been experienced
more than once in our recent financial
history. The desire of the Government
to borrow at a low rate has on several
occasions conflicted with true bank
ing policy looking toward a higher rate
of discount. But this Is not all. In a
political campaign. when it is thought
running at high speed, although a
sound credit policy may dictate the APP
plication of the brakes, the views OF the
party in power are apt to prevail, as
they did in the campaign Of 1928.
Treasury Bill Sales.
Then there are the huge market
operations on Treasury bills and the
borrowings by banks on these obliga-
tons. 1t has been said that the banks
can take their Government paper, in
the form of Treasury certificates, to the
Federal Reserve banks. use this paper
as security for loans, receiving Govern
ment paper Federal Reserve notes. for
the proceeds, which in turn can be en-
ployed in stock speculation.
That this close connection between
the Government and the country's
banking system is vicious in principle
has been long recognized in theory
That it Is so in practice has been amply
demonstrated in 1920 and 1929.
The Federal Reserve Board, sitting al
Washington, should be abolished-not
for want of administrative capacity. but
because the principle upon which it,
creation 'and functions are based L
| wrong. 80 sis
with the board out of the way. the
Federal Reserve Banks would be still
subject to the existing law and to the
further will of Congress. They could
also be supervised in q general way by
the controller of the currency, as are
the national banks.
Substitute Urged.
If it is thought necessary to have q
central board or council OF some KIND
to formulate and enforce a degree Of
uniformity in banking policy, this body
should be chosen by the Federal Reserve
banks and should be composed OF rep
resentative bankers and business men
In this way the direct connection oi
the Government with the Federal Re-
serve system would be broken, but the
interests of the public would be safe
guarded by the law itself and by the
supervision of the controller.
But there is an even greater posi-
bility. of infation-a possibility which
has been actually manifest-in othel
features of the Federal Reserve act vel
to be mentioned.
The idea of consolidating a portion
of the country's banking reserves fol
use in expanding credit when neces-
sary and for protecting really solvent
banks from unmerited runs was en-
tirely sound in principle. But surely
experience has shown that the principle
has been greatly overworked. BY taking
over from the vaults of member ma
tional banks all of their legal reserves,
placing them with the various Federal
Reserve banks, the bridge was made
much broader than the flood, and re-
discounting and credit expansion fos-
tered to q dangerous extent.
That 1t is desirable to have an ample
supply of credit available to trade and
industry, at q reasonable rate. Is an
2WNt
this affords no warrant for an excessive
supply Of credit-far more than trade
and industry will absorb-that may be
used in boosting the prices of stocks to
the sky.
BY taking over all the legal bank
reserves, as above indicated, the Fed
eral Reserve banks were enabled to