Evening star., 1939-03-27
Federal Reserve Notes
Called Free Service
Bankers Do Not Profit From
Interest on Their Use,
OfficiuIs Soy
To the Editor OF The Star:

St''S'oIS Suy
To the Editor OF The Star:
With reference to correspondence
which you have published dealing with
the supposed advantage of silver certifi-
Gates over Federal Reserve notes, I am
quoting below an interesting memoran-
dunn from the Federal Reserve Bank of
New York which points out that those
who hold Federal Reserve notes to be
burden on business have mot been cor
rectly informed as to the character of
Federal Reserve note circulation"
Not only do Federal Reserve notes yield
no interest; they constitute "one of the
free services which Federal Reserve
banks render the public"
ut may be WELL in discussing this mat
ter, first to give specific answers to the
questions in Senator ToWnsend's letter,
and then to provide background for
these answers by proceeding to gen.
eral description OF the way in which cur
rency goes into circulation.
Replies to the first and second ques-
tions may be combined as follows: ordi-
narily no interest cost to the public land
corresponding benefit to the banking
SYSTEM is involved in the issuance of
currency Of any kind In cases where
borrowing from the banks is related to
an increased demand for currency, as for
instance, in the case of temporary busi-
ness borrowing to meet seasonal increases
In pay rolls, 1t makes no difference what
ever whether Federal Reserve notes or
silver certificates are issued; the inter-
est cost to the borrowers is the same in
either case
The answer to the third question,
which is corollary to the preceding
statement, is that the issuance of silver
currency does not increase or decrease
the earning capacity of the banking sys-
tenn from what it would be if Federal
Reserve notes were issued instead.
"All increases in the amount of cur
rency in circulation have as their start
ing point an increased demand for cur
rency by business organizations or indi-
vlduals. When manufacturer, for in
stance, wants currency to meet a pay
roll, he sends to his bank for the desired
currency, giving the bank his check for
the amount, which is debited to his de-
post balance: in other words. he ex-
changes part of his deposits for currency.
No borrowing is involved unless the man
ufacturer has not sufficient deposits to
cover the currency withdrawal, or unless
he does not wish to reduce his deposit
balance. Whether he receives Federal
Reserve notes or silver certificates has.
OF course, no bearing upon the question
OF "nether or ! IS necessary or de-
sirable for him to ,btain loan from his
bank. He cannot draw silver certificates
against an insufficient deposit balance
any more than he can draw Federal Re-
serve notes; he obtains either form of
currency in precisely the same way. If
the bank needs additional currency to
supply his requirements, it withdraws
the money from the Federal Reserve
bank and lnstructs the latter to charge
the amount to its reserve balance in the
Federal Reserve bank Federal Reserve
notes and silver certificates are obtained
in exactly the same way
There is no necessary relationship be-
tween the amount of currency in circu-
latlon and the volume of bank loans. In
the past nine years, for example. the
total amount of currency in circulation
has increased by more than so per cent,
and the amount of Federal Reserve
notes In circulation has considerably
more than doubled while the total VOL
ume of member bank loans has been re-
duced by more than so per cent.
1T would appear, therefore, that
Representative White has not been cor
rectly Informed as to the character of
Federal Reserve note circulation. He
refers to Federal Reserve notes as Federal
Reserve interest-y yielding notes. whereas
the fact is that they yield no interest
either to member banks or to Federal
Reserve banks. For member banks the
supplying of Federal Reserve notes or
any other type of currency, such as
silver certlflcates, to their customers in
wolves, in general, simply a conversion
OF depoSltors' balances into currency
and, incidentally, reduction in the
banks cash reserves. For Federal Re-
serve banks the issuance of Federal Re-
serve notes is considerable item of
expense because of the cost of printing
and shipping the notes. That is one of
the free services which the Federal Re-
serve banks render to the public Substi-
tuition OF Federal Reserve notes for silver
certificates would in no way increase
the earnings either of member banks
or OF Federal Reserve banks, but would,
In fact, reduce the net earnings of the
Federal Reserve banks by increasing the
cost to them of printing the notes."
1t is worth noting that any public
advantage" offered by silver certificate
imitation would be equally applicable
IN arguing for "greenback" imitation,
while the latter would avoid one dis
advantage which the silver program en-
tails. namely, the subsidization by the
rest of the country of the sellers of an
unneeded commodity.
March %. j. G. TOWNSEND.
"oNNfc