The Indianapolis times. [volume] (Indianapolis [Ind.]) 1922-1965, 1935-09-20

be sold to the commercial banks IN
money. In this he is justified becal
reversing it at any time, through c
eral Reserve Banks.
Thus, the Federal Reserve Board
would ultimately buy back the bonds
by book entries at the Reserve
Banks. incidentally, and to the ex-
tent the bonds were retained, this
would relieve the tax payers OF the
burden of the debt as the Govern
ment is entitled to take back the
income received by the Federal Re-
serve Banks beyond the small 6
per cent on capital.
BY this method the Open Market
Committee would be welding the
sovereign power of Congress to
coin money and regulate the value
thereof for the long-term and ex-
panding needs of business.
Interest Charges Small
Interest on the government debt
is only 1.6 per cent of national in
come in the United States, con-
traSted with 5.4 per cent in Great
Britain. The British debt is about
48 billions, while the American debt
was only % billions last March, and
the net debt of all public bodies in
the United States was 81 billions.
The United States Indebtedness
would have to rise, therefore, to 81
billions to become as large in rela-
ton to our national income as the
British public debt is now,
Hence it seems rather absurd to
worry yet about our government
deficits, especially as these deficits,
largely, can be made up at any
time by the simple method of buy
ing, in the open market, an equiva-
lent amount of the debt with Re-
serve Bank book credits.
Process Not to Last
In the natural course of events
The present process of adding to
central government debt will not
last long. The healthy Sagging of
the government bond market,
which naturally sets in as recovery
progresses, has just been noted.
Monetary science now permits two
ways of cuShioning any untoward
effect of such sagging on holders of
government securities.
First, the Reserve Banks, as a
matter of custom, accept United
States bonds from the banks for
loans at par. The banks now hold
more than so per cent of Federal
government bonds. The custom of
accepting pledged of such bonds at
par may be confined by regulations
obliging this, and requiring the gov
eminent bank examiners to value
the bonds at par without regard to
market price, in determining a
banks capital and surplus posi-
ton.
This would amply assure solvency
to the banks. Meanwhile, there is
the added powerful safeguard, be-
coming. steadily available as bust
ness recovery progresses, in the
power of the Reserve Board and
open market committee, to support
the price of government bonds with
purchases.
Thus the banks would have dou-
BILE assurance against any loss from
the sale of their government bond
holdings in the event of liquidation.
Will Reverse Deficits
But open-market purchases mean
more than this. For they will be-
come the signal for a definite rever-
sal of the process of budget deficits
and the institution, on a larger and
larger scale, of Reserve Board seq
regation and virtual retirement of
government indebtedness by the
book-entry route.
This means that, hereafter, the
bulk of check-book money needed
in business will be less subject to
withdrawal from business, through
taxation to pay government debt.
Instead, business as it continually
expands will get its required added
supplies of check-book money for
permanent circulation, without dan
ger of it's being largely destroyed
by the calling and non-renewal of
commercial loans; for it will not
depend for its creation on such
loans.
When open-market extinguish-
ment of the debt of the United
States is in full swing, it will be-
come automatically easier to bal
ance the annual bugdet out of reve-
nues from the enlarged income OF
business and the people. Surplus
revenues may be expected to accrue,
even with progressive leSsening OF
tax rates, which would further help
in rapid and permanent retirement
of the national debt.
But responsible control Of this
all-important function of issuing
money in the public interest is i'm
peratively required in order to safe
guard needed monetary expansion
against imitation. The next, and
concluding, article in this series will
show how such control has been
affected by the passage of the
banking act of 1885.
Copyright 1885. Inoex Number 1nsti-
tute, Incl