Evening star. [volume] (Washington, D.C.) 1854-1972, 1931-10-23

5, total Federal Reserve credit stood at
only $940, 900, 900. The increase in Fed
eral Reserve notes in circulation is justi-
fled, in the opinion Of Mr.. Diefenbach,
in order to counterbalance the effect of
boarded money in this country. It will
make for a stabilized recovery in secu-
rity prices when this money starts ocm-
ing out of the strong boxes, as the Fed
eral Reserve banks will then be in a
position to decrease the amount Of Fed
eral Reserve notes through a decrease
of items in its portfolio against which
Federal Reserve notes have been issued.
Suggested Changes.
Important changes are not necessary
in the Federal Reserve act, but they are
very decidedly necessary In our present
banking laws, which have brought about
the real trouble In the banking situa-
ton. Some suggested steps which would
do much to protect the interests of de-
positors are that % banking laws
should be changed so that much larger
more liquid form; (2) banks should
be required by law to publish in their
report a list of securities In, their in
vestment portfolios; 90 1 charter
should not be granted to bank which
was unable to qualify under the provi-
SionS Of the local clearing house, as this
membership has proven to be greater
protection than State banking depart
ment supervision. The clearing house
example of this. Bankers are primarily
cuStodians Of the money intrusted to
their keeping, and they must use the
resources Of their institutions, which are
essentially fiduciary in character, in
the spirit of service to their customers
and to the community. 1t is argued
that the average small bank cannot af-
ford the luxury of a portfolio heavily
weighted with low-yield Government Sc
curities. If these banks would pay lower
interest rates on deposits they would
have at least a partial solution to this
problem.
At present the only effective control
of our money is lodged with the Fed
eral Reserve authorities. From 1924 to
1928 they regarded an increase in Fed
eral Reserve credit and a cheap money
policy as desirable. However, following
the expansion which took place at that
time, the Feaeral Reserve banks port
folio of rediscounts, bankers accept
anceS and United States Government
securities was too slowly and not Suffi
GENTLY liquidated prior to 1929. An
other contributing factor was that the
rediSccunt rate and the buying rate for
acceptanceS were raised too slowly and
too late In 1881, in order to bring
about the same results as in 1924 and
1925, the rediscount rate and the buying
rate for acceptances were lowered to
extreme levels. This low rate failed
entirely to accomplish the object in
mind, which was to bring about re-
vival in business by encouraging COM
mercial houses and industries to borrow
at low rates for legitimate needs and
induce investment in securities and pre-
vent further sfrinkage in the market
value of securities. 1t failed because
virtually all strong member banks have
been striving to attain even greater
liquidity of assets and because of hoard
ing on the part of bank depoSitors In
many communities Strong and LIQUID
BANKS have been bidding comparatively
for commercial paper and short-term
Federal obligations, but have been re-
luctant to buy or hold corporate bonds
or to make loans except on highly mar
ketable collateral, no matter how sound
the ultimate security might be. This
policy OF seeking maximum hQuidity is
one that is good banking for individual
institutions, but bad banking for the
country as a whole Its influence has
continued to bring about lower security
prices.
Urges New Corporation.
In addition to the creation Of the
National Credit Corporation, which
should renew confidence and drive
boarded money back to the banks, Mr..
Diefenbach concluded, the present de-
fnora1ized stakM NJ the secllritV market