Evening star., 1931-12-07
BANK RED|SCOUNT
CHANGE SUGGESTED
More Elastic Method Is Urged
in Operation of Federal
Reserve.
Special Dispatch to The Star.

Special Dispatch to The Star
NEW YORK, December Ito make
the Reserve System more serviceable to
American business, careful considera-
ton must be given to the changed
credit requirements of modern industry
and trade and new ways in which they
must be met, says the Business Week
IN its current issue. The system was
established in response to an imperative
demand for more elastic currency and
commercial credit accommodation to
meet changing seasonal and diverse
geographical needs of business than was
available under the earlier banking
system, which depended upon individual
and localized bank reserves. This was
accomplished by pooling these reserves
IN the regional Reserve banks and pro-
viding means of rediscount for certain
assets-chiefly, commercial paper-of
the individual banks.
Demands on System.
This was great improvement; 1t
served its purpose fairly well: prevented
serious local and seasonal credit or
currency stringencies so long as suf-
nclent redlScountable assets were avail
able and widely distributed among the
member banks. But the war came along
before 1t got a fair trial. The Reserve
system was first drawn into financing
the war needs of the Government, then
found itself unwillingly financing the
prolonged speculative security market
Doom OF the postwar period.
In the meantime the whole basis of
business financing and therefore the
character OF member bank assets has
changed The commodity panic of
1871, which found business with enor
nous inventories carried by the banks
on commercial credit, created in most
concerns a deadly fear of bank in
deptedness and determination to
keep out of the banks" thereafter.
fortunately the bull market of 1929
enabled them to declare their independ-
public.
The net result is that the BIGGER
businesses are no longer In debt to the
oanKS to anything like the extent that
they used to be, and probably will never
oe again. The principal bank debtors
dre now the smaller concerns who had
no security market the public that
oougnt the securities by which busi-
ness hnancsd itself, and the Federal.
state and local governments The
relative proportion of commercial paper
III total pank assets has declined, and
city banks.
The fundamental effect of this situ-
alton is to render the whole Reserve
system less elastic and less LIQUID II
IS useless TO expect that it will curl it,
sen oy business revertlng to wider use
OF commercial paper of kinds now redis-
cpuntable. This depression has only
accentuated the business mans phobia
ABOUT short-term bank loans. 1t has
not CT, cured the public of security buying
IL VIII greatly increase the amount Of
oank credit involved in Government
financing. Corporations will maintain
larger cash reserves; time deposits and
! long-term bank loans and Investments
VIII tend to increase, and business itself
Will use more intermediate or long
term credit, both for financing con-
sumner sales by installment paper, which
mas come to stay, and for financing
more rapid obsolescence of equipment
Rediscounting Functions.
The rediscounting functions of the
Reserve banks as we'll as the member
bank reserve requirements must sooner
or later be adapted to these conditions
If the credit needs of modern business
are to be met. How, precisely, this is
to be done is a difficult technical prob
lem to which we do not presume to
dictate the answer. We are confident
that conscientious. open minded con-
sideration by Congress can find the an
swer Nothing should be done which
demonstrably endangers the stability or
safety of the system or complicates its
activities with function for which it is
not fitted, but it is equally important
that nothing be left undone which
might increase the service which the
Reserve System is intended to render
American business by providing more
elastic credit resources for the country