Evening star., 1933-12-08
Money Minimized AS Price Factor
Dr. Sprague Says Commodity Slump Due Loan and Invest
Volume Reduction

financed exclusively on the basis Of
loans of high degree of liquidity.
Given confidence, efficient banks can
safely make very considerable volume
OF loans which are non-liquid In char
acter. The problem Is to. select; to
make loans which are good even though
they are slow and relatively lacking in
hquidity.
The establishment of the temporary
insurance of deposits at the beginning
of January should prove an effective
means Of strengthening confidence In
the banks, thus making it possible for
them to adopt a more enterprising
lending policy.
Safeguard Is Necessary.
Whether or no the insurance of de-
posits is desirable permanent feature
Of banking think 1t must be admitted
that some such safeguard Is necessary
1t the present time to restore confidence
in banks throughout the country.
Unhappily the preliminary arrange
ments incidental to the establishment
of the insurance system have been SO
handled as to intensity, for the time
being, the desire Of the banks to main
tain themselves in an exceptionally
liquid condition. 1t is most regrettable
that it was not found possible to es-
tablish the insurance system soon after
the passage of the Glass-Steagall act
last June.
Moreover, the conditions for entry
into the system have been made un-
necessarily severe by those responsible
for its establishment. Washington has
urged the banks to extend credit more
freely while examiners have been sub
Jectlng existing assets to valuations
based upon most pessimistic forecasts.
This has exerted a def1ationary influ-
ence unfavorable to the general pro-
gram of trade recovery.
It Is inconsistent with recovery plans
to allow any large number of banks
that were reopened last March to be
excluded from the insurance system.
Somehow or another virtually all Of
the banks that were opened then must
be brought under the guarantee scheme
on January /, however considerable the
burden this may impose upon the Gov
ernment.< Their failure would be GER
tain to weaken many other banks now
considered reasonably solvent.
Sees Aid Available.
feel confident, therefore, that at the
last moment whatever Government aid
Is required to enable banks to qualify
for the insurance system will be made
available Happily, the de6ationary In
f1uence incident to tie establishment Of
the insurance system = not to continue
for many more weeks.
The temporary insurance system
which goes into effect on January ! has
been limited to deposits not exceeding
S2,500. The permanent system that Is
to come into effect on July ! next goes
f,tn Sv1c
ance for deposits to $4,000. coverage of
rs per cent of further amount up to
$50.000, and SO per cent for deposits in
excess of that amount.
In my Judgment, it would be wiser to
limit the insurance in the permanent
scheme to the S2,500 or some other
moderate amount. 1t is difficult to dis
cover any public advantage from the
insurance of large deposits. The limited
number of individuals and corporations
who maintain large bank balances may
be supposed to be able to make an in
telligent choice of bank.
The mass of people, on the other
hand, are not often in position to
pick and choose. 1t is they who should
be protected by an insurance scheme.
Furthermore, if the permanent system
were to cover deposits of no more than
$4,000, or $4,000, it would lessen
enormously the risk imposed upon the
banks in contributing to the arrange
ment.
Liquidation Effect Bad.
Another def1ationary influence in the
banking situation has been the hquida-
ton of the assets of closed banks. The
pressure exerted by receivers of these
banks to collect from borrowers and dis
pose of investments has been very
great, tending to check business enter
prise and to depress values in those
sections of the country where bank
failures have been numerous.
There is now good prospect that the
assets of banks recently closed will be
taken over for slow liquidation by the
Government, some immediate distribu-
ton being made to the depositors in
these banks. This is probably the most
serviceable and persuasive of all the
various means of employing Govern
ment funds to assist in bringing about
trade recovery.
A considerable portion Of the loans
ordinarily made by banks is made in
the expectation that the borrower will
find it possible in the course of time
to reduce his bank loans by the issue
of bonds or of additional stock sold
to the general public. While there is
no reason to suppose that the volume
of new issues of securities would have
been. in any circumstances, very con-
siderable in recent months, it can
hardly be questioned that some of the
provisions of the securities act must
prove serious obstacle to the move
ment Of savings through normal in