Evening star., 1937-08-23
RESERVE ACTION
AIDS j. s. BONDS
Dilemma of Easy Money
With Imitation Curb
Faces Officials.
By GEORGE r. HUGHES,
)pecial Dispa ten 70 The Star.

By GEORGE r. HUGHES,
Special Dispatch 70 The Star.
NEW YORK, August 23.-It is taken
for granted that the controlling con-
sideration In the action OF the Federal
Reserve governors with regard to
cutting the discount rate was to check
liquidation OF Government obligations
In the open market.
In its formal statement Of approval
Of the reduction at Atlanta and
Chicago, the board states that it
desired to make reserve credit avail
able to member banks without en-
oourasing them ito borrow outside
OF their districts or TO liquidate their
portfolios in order to be In a position
to meet the needs Of present or pros
pective borrowers"
1t may have been . coincidence that
the announcement followed so closely
a period OF relative weakness In the
Government bond market. However,
that was the fact. and the day after
the news came out. Governments
rallied substa ntially
1t Is = question which only the event
can answer whether. II indeed the
status Of the market was the point
in mind. the end desired will have
been attained. Simply a matter Of
good business, it would seem prefer
able for banks to avail themselves
OF the discount privilege rather than
liquidate earning assets II the cost OF
discounting was less than the sacrifice
Of income
On the other hand. it has been
dinned into bankers ears so long that
for them to hold 50 large q proportion
OF the evidences OF the national debt
was potentially dangerous that they
may we'll prefer to continue decreas
ing their commitments in this quarter.
On theoretical grounds, 1T is al
together desirable that . wider dis
tribution OF Government bonds be
obtained The present situation is
abnormal. During the depression, it
was impossible to do anything else but
to finance the deficit through the
banks, but all agree that this ought
not to continue indefinitely.
One obstacle. and perhaps the prin-
cipal one, to obtaining such wider
distribution Is the unattra ctive return
that investment tn Governments gives
the purchaser. AS it stands. institu-
tlonal investors other than banks. to
say nothing Of private individuals.
stand aside from the Government
market because they cannot obtain
what seems to them an ADEQUATE
yield.
That situation will not be remedied
BY cutting the discount rate. 1t Is
reasonable to believe that, if 4 Gov
eminent obligation of medium term
could be had on per cent basis
or perhaps = little more, the banks
would have some one to take bonds
on their hands.
The dilemma that confronts our
monetary authorities Is q very real
one. They want easy money in the
interest OF the Treasury and because
they believe that it Is in the interest
also OF industry and agriculture. They
do not want such an abundance OF
available credit Is will lead to infia-
tion 50 they increase reserve require
ments to the limit allowa BILE by law
When. however. the banks find them
selves hampered by these new reserve
requirements and begin to dispose OF
their Government bonds, the board
takes action which tends to nullify
the effect OF its former policy. It all
seems to show the dificulty OF mone.
tary management.
tCopyright. 1887. By the North American
Newspaper Alliance, Inc)