Evening star. [volume] (Washington, D.C.) 1854-1972, 1931-10-07
Importance Far Reaching.


When it is considered that the total
resources of the banks that have closed
their doors since the depression will not
exceed 81 100000, 900 and that most of
them would not have failed had such a
pool been in existence as Is now pro-
posed, the far-reaching Importance of
the new program as constructive
measure OF banking defense against I'M
warranted Withdrawals by ignorant de-
posltors may be truly understood
What = being Gone today is not I'M
precedented. The machinery of the
new banking pool resembles very closely
Inc organization set up under the AID
rlch-Vreeland act of 1908 just after the
1907 panic. Use was made of the same
law in 1914. when the European war
broke out and the Federal Reserve bank
ing system had been Created, but was
not yet functioning.
The plan calls for action by clear
ing house associations throughout the
country. Such associations will pledge
per cent of deposits. This is by no
means guarantee of other banks
losses. or means of imitation but
the use of a flexible piece of banking
machinery for rediscount purposes and
Tor a temporary period.
Thus the President expects to ask
Congress to set up a corporation. like
the War Finance Corporation which
was revived in 1921 for an objective
somewhat similar to that of the pres
ent day. except that 1t mainly con-
cerned agriculture.
Half Billion Fund Used.
A revolving fund OF a half billion
dollars was granted then by Congress
and 1t was used to lend money. not
n fVNf n RI a1e I~.NN - laNrA Of IL
Citations and banking institutions hold
ing agricultural paper.
1t took .5everal years - liquidata the
corporation, but it turned in a profit to
the Treasury. Its loans were all made
good by the borrowers with the eXcep-
ton CT about S50,000,000 in crop loans.
which item was more than Offset BY the
appre ciation in the bonds held by the
corporation. Eugene Meyer. now gov
ernor of the Federal Reserve Board. was
head of the War Finance Corporation.
That operation demonstrated that local
committees can be formed to judge eff
fectively the quality of the loans and
the security back Of them. But the War
Finance Corporation really c-nverted
many short-;erm credits into long term
obligations and thus enabled the banks
to stay liquid and the borrowers to get
the necessary financial accomm dation
till the depression of 1921 was over.
Translated into present-day condi-
tions, the new plan means a national
corporation privately set up by the
banks but ultimately to be merged with
Government corporation outside the
Federal Reserve System If it should be-
come necessary to enlarge its scope
The national institution" as the Presi-
dent called it, will be decentralized to
correspond to the II Federal Reserve
dist.ics While not an official body as
yet the IL organizations will have on
their boards the governors of the diff
ferent Federal Reserve districts. Thu
clearing house association will, of
course, be the corner stone of the whole
plan.
Small Bank Position.
In effect. a small bank with SIS 900
OF slow assets. for example. feeling that
the community was losing confidence in
the bank, would 60 to the Clearing
House Committee or regional organi-
cation and that institution would eX-
anime the loans.
In nine cases out of ten. the loans are
sound, but a small bank cannot borrow
at a correspondent bank because the
latter itself has to stay liquid. The re-
suit is that the small bank shops around
for help in its immediate vicinity. goes
tc other regions a1d finally is COM
PEELED to close its doors. The regional
organization now to be set up can take
such loans over and give the small bank
$4,000 in cash to add to its strength
ard the crisis thus can be averted.
While the amount involved may be
small it causes a breakdown in conf
dence multiplied in terms of damage by
hundreds of times the amounts involved
if bank closes its doors and individual
cepositors are subjected to hardShips.
The regional organizations under the
present plan become unofficial redis-
count bodies. Much of the experience
of the Federal Reserve system came out
of the informal working of the clearing
house associations when the Aldrich-
Vreeland act machinery was In opera
ton. At that time, however, the Gov
eminent issued currency against the
eligible paper. 1t is not necessary for
any currency to be issued today, as the
banks have plenty of it and can borrow
on their own resources at the Federal
Reserve banks If they need 1t.
What today's situation has demanded
is a diffusion of banking resources to
take care OF slow loans. Some of them
are slow in the sense that they may
take a year to be repair. and these notes
are not rediscountable anywhere at
present. Also many OF the notes are
based on real estate mortgages. which
are difficult to convert into cash because
of the lack of a market.
Defects in Reserve Act.
The inroads made on American banks
by the drop in stock market securities
and by runs on small institutions have
brought out the defects in the Federal
Reserve act. President Hoover has an
nounced that he will recommend
changes in the rediscount provisions OF
the law, and he refers to the fact that
the Senate Banking and Currency Com
mittee has been studying those changes.
The truth is the Federal Reserve act
has never had a test like the present
depression, and it would not have been
possible to get congressional approval
in 1918 for some of the things which
experience now teaches the bankers Is
wholly sound.
Many bankers have wondered why
the rediscount provisions were not long
ago broadened. Thus bonds issued by
cities and States which have a sound
fiscal system, for instance, cannot be
used as a basis of borrowing by banks
at the Federal Reserve, though Federal
Government bonds can be so utilized.
Certainly the future OF New York City