The Indianapolis times. [volume] (Indianapolis [Ind.]) 1922-1965, 1935-09-19

restore the supply Of money Gin its
This consists Of the government sell
return for newly created check-book
against which credit the gOvernmel
new money into circulation.
But this is not the best way to
restore the money supply. There is
another way, open market opera
tons" under which the buyers Of
the bonds are not the thousands Of
commercial banks but the y Federal
Reserve Banks.
What, more specifically, are open
market operations?
They are the buying and selling
by Federal Reserve Banks of gov
eminent obligations in the open
market. The dealings may be with
individuals, but usually they are
with commercial banks which are
members of the Federal Reserve
System.
When a Federal Reserve Bank
buys government bonds it creates
new money by a book entry, just as
does any other bank.
But the point to which attention
is called here is not the increase in
money but the rather startling fact
that, when it is the Federal Reserve
Banks which buy the bonds, the
government debt is, in effect, re-
duced. This is because, under the
new law, the Federal Reserve Banks
are practically an arm of the United
States government.
In general, when $1,000 100000 of
United States bonds are issued, the
cost to the government is the inter-
est which, at per cent, is S3O,OO0,OOO
a year. The billion of bonds is the
equivalent of a perpetual annuity of
80 millions per annum, to be met by
taxes. But when the Federal Re-
serve Banks acquire the bonds and
receive the 80 million, they will have
to pay most of the 80 million back
into the United States Treasury
from which it came.
Dividends Are Limited
This is because the stockholders
of the Federal Reserve Banks are
limited to dividends of 6 per cent on
about $146,O00,0OO of capital stock.
All beyond that 6 per cent must,
under the law, revert to the United
States Treasury. The government
does not really own the Federal Re
serve Banks but, in effect, it owns
all the equity above little 6 per
cent preferred stock.
In other words, while the govern
ment sells its bonds to the thousands
of commercial banks and individ-
uals, it will later practically buy
many of them back through its (vir-
tuaD subsidiaries, the Federal Re-
serve Banks.
Both methods create new check
book money to be paid by the gov
eminent for goods and services into
the deposit accounts of business
men. But there is a great difference:
between the two methods. The
first method unbalances the budget
and increases the government debt,
as the commercial banks buy the
government bonds. The second
method, on the other hand, consists
of buying back the bonds, virtually
on government account, through the
fundamentally of the Federal Re-
serve Banks, and this virtually re-
tires the debt. In short, one method
increases and the other decreases,
the public debt!
1t is not yet generally realized
that any such method as the sec
ond embarrassing the govern
ment debts available It's exist
ence should serve, to some extent.
to quiet the fears which some people
have of an uncomfortable govern
ment debt.
Behind this simple solution, or
partial solution, Of the public-debt
question lies the whole philosophy
of sovereignty over monetary issues.
The government has hitherto, un-
consciously, assumed that the right
of primary money issue inhered in
the private banking groups. At any
rate the government assumed that
it needed to apply to these private
groups for the money.
Reasserting Its Right
There was, and is, however, only
a vague realization that the nation
has been letting these private bank
ing groups create the nations
money, although it is common
knowledge that the entire capital
and surplus of these banking groups
is but a small fraction of the sums
they have lent to the government.
Now, by buying back the bonds, via
its creature the Federal Reserve, the
government is reasserting its sover-
eign and constitutional right to is
sue money itself.
The restoration of this right is of
fundamental Importance. Equally
important is a safeguard against
over issue. If the reserves of the
member banks we're greatly in
creased by exchanging their hold
ings of bonds for newly created
government ii. e. Federal Reserve)
credits, they might use these swol-