Evening star., 1935-04-02

the existing practice each Federal
Reserve Bank fixes the rate of in
terest which it charges its member
banks upon moneys borrowed from
it, but under the law the rate of in
terest to be charged member banks
upon their borrowings from the Fed
eral Reserve bank may be fixed by
the Federal Reserve Board in Wash
ington. The Federal Reserve Board
may thus make borrowing by individ-
ual members attractive by low rate
or prohibitive by high rate.
The present statute fixes the char
acter of security that may be ac-
cepted by the Federal Reserve Bank
from the local bank to secure its bor-
rowings The original limitations
upon these securities which are COM
monty designated as eligible paper"
were quite narrow Paper eligible to
discount was restricted to certain
specified types and among those types
to that having early maturitieS. These
restrictions proved to be unduly mar
row for times of emergency and
among the emergency legislation of
the depression have been statutes
widening the definition of eligible
paper However. those statutes either
have or are about to expire. 1t is
estimated that the total amount of
eligible paper in the hands of member
banks in 1929 did not exceed S4,500.-
100000, while the eligible paper at
the height of the depression did not
exceed S200O,000 00O AS the depres-
sion deepened, the amount of paper
held by the member banks which was
eligible to discount with the Federal
Reserve Banks under the statute de-
clined until many banks throughout
the country had no eligible paper. In
many communities, especially the
smaller communities. banking prac-
| ticeS were such that none of the paper
held by the banks met the require
ments of the Federal Reserve statute.
The result was that as deposits de-
clined the banks were compelled. in
order to pay depositors and to MAIN
tain their cash reserves, to sell bonds.
As deposits we're declining through
out the country, bonds were
thrown upon the market in great
quantities with the inevitable con-
sequence that bond prices declined
| greatly and banks suffered losses
of hundreds of millions of dollars
through the forced sale of their bonds
at prices far below their fair values.
The losses so suffered brought in
solvency to many banks and tremen.
dous losses to their depositors.
Can Fix Securities.
1t has been quite generally recog-
nized that the definition of paper
eligible for discount at Federal Re-
serve Banks should be broadened. The
new bill, in the place of widening and
expanding the statutory classification
OF paper available as security for bank
borrowings at the Federal Reserve
banks, propose to repeal practically
all statutory definitions and limita-
tlons and to give to the Federal Re-
serve Board at Washington full and
unrestricted power to designate the
kinds and classes of securities that
may be accepted for discount by Fed
eral Reserve Banks.
The new bill provides that Subject
to such regulations as to maturities
and other matters as the Federal Re-
serve Board may prescribe, any Fed
eral Reserve bank may discount any
commercial. agricultural or indus
trial paper and may make advances to
any such member bank on its PROM
issory notes secured by any sound as
sets of such member bank"
Gov. Eccles of the Federal Reserve
Board in Washington says in refer
ences to this provision What is pro-
posed is that the problem of liquidity
shall cease to a large extent to be
concern of the individual bank and
shall become the collective concern
of the banking system" 1t is proposed
tc make 1t possible for banks without
abandoning prudence or care to meet
local needs for short-time and long
time funds and to be assured that in
case of need they can resort to the
Federal Reserve Banks on the basis
of all their sound assets regardless
of the form or nature of the collat-
eral"
This provision constitutes funda-
mental departure from the theory
heretofore prevailing as to the char
acter of securities acceptable by Fed
eral Reserve banks. Had this or a
similar provision been in effect, and
liberal use made of it, during the first