It remained, however, for the Aldrich bill, growing out of the work of, and indorsed by, the National Monetary Commission, to bring us to close quarters with the problem. The Aldrich plan, which was presented to Congress early in 1911, was discussed the country over perhaps more thoroughly than any other measure ever before Congress. The bill is generally conceded to have had many excellent provisions; many of them, indeed, subsequently became embodied in the Federal Reserve Act. But the prevalent distrust of Mr. Aldrich in consequence of his unsavory reputation on tariff matters, together with the fact that his proposal was undoubtedly a very strongly centralizing measure, made its enactment into law a political impossibility, especially after the coming of the Democrats to power in 1912. The Federal Reserve Act is an outgrowth of the Aldrich plan, though modified in numerous details and in some very important respects. Passed with unusual expedition by a newly organized and inexperienced Congress, the measure was very generally distrusted by the financial interests of the country while it was pending. It was held by many, indeed, that it would wreck the national banking system, if not the country itself. After the passage of the act, however, as soon as time had permitted a study of the provisions of the law, it became apparent that an extraordinary piece of legislation had been enacted; and practically all parties promptly rallied to its support. The act now appears to be one of the wonders of American legislation; it seems almost inconceivable that a measure containing so much of solid achievement and so little of weakness could have come out of Washington. It is important to reflect, however, that the fundamental principles underlying the new system were developed out of the innumerable discussions of the subject that had been taking place for years. It nevertheless remains a remarkable coincidence that the principles thus scientifically developed should have been in so admirable a manner incorporated into law. The new system has now been in operation for nearly two years, and it appears to have justified the confidence that has been reposed in it. It will of course require many years to test the measure fully; but already the business of the country is being adjusted to the changed conditions. Whether the act permanently accomplishes all that its supporters hope, it is already clear that we shall never go back to the old order, and that the inauguration of the Federal Reserve System marked the beginning of a new era in American banking. A.. General Description of the System 130. THE CREATION OF THE FEDERAL RESERVE SYSTEM1 By C. W. BARRON Next to the Declaration of Independence and the Constitution of the United States the Federal Reserve Act, signed by President Wilson December 23, 1913, may be the most important measure ever placed before the people of these United States. Upon its wise administration depends the good or ill of a hundred million people, and as a nation we shall probably live under it, not only for the twenty years named in the act, but, with amendments found necessary from time to time, for possibly many generations. The miraculous thing about its creation is that it sprang forth in a few hours before the Christmas holidays from a new Congress that understood little of currency and less of banking and an Executive and a Cabinet that never made any pretense to a clear understanding of financial principles. Yet a Congress of financial experts, with an Administration and a Cabinet composed of the leading bankers of the country, probably could not have produced so good a bill. Bankers are not generally progressive or even open-minded. The line of safety must be their rule of procedure, and all changes they naturally regard with suspicion. Congress, having no fixed principles, was subject to no prejudices, and the bankers, who could never be induced to formulate a bill, unconsciously made one by their negations. This bill is the re-formation of an absolutely unworkable and chaotic measure passed by the House. It was forced into shape by pressure from the Administration to do something promptly, as the nether millstone, and the determination of the banking interests to quit the national banking system, should the act give evidence of being for them dangerous as the upper millstone. Yet the bill in its broad principles is the result of expert currency and banking agitation that has been going on for well-nigh a generation, even before the necessity for currency legislation was emphasized by the 1907 panic. The bill as it passed the House was so highly dangerous as to be undesirable. Had not the financial papers refrained from criticism a panic might easily have ensued. Had the House bill passed the Adapted from The Federal Reserve Act, pp. 7-9. (Boston News Bureau Co., Senate and been signed by the President, it might have disrupted the national banking system and caused the sudden retirement of $700,000,000 of national bank currency. The country has never been informed of the quiet currents of expression that went on last autumn between leading banking interests. The sentiment of the national bankers crystallized in a quiet but unaccorded determination to make no acceptance of the House bill and to avoid the creation of any panic by simply sitting still and leaving it to the Administration, if it so elected, to enforce the act and put the national banks out of existence through receiverships. In other words, the banks would not themselves take the responsibility of a foreclosure upon the national banking system, with a contraction of $700,000,000 in the currency afloat, which meant the sudden retirement of 40 per cent of the money in the hands of the people. This was the quiet sentiment of the national bank interests of the country as understood and privately, yet individually, formulated at the American Bankers' Association Convention in Boston in October. While the bill was under discussion in the Senate it was changed so rapidly that the financial world, except for a few leading experts, lost personal interest in it, and refused to follow the matter in the news of the day. But now that financiers have had time to read the full text of the conference bill, as signed by the President, it is not saying too much to declare that they are astonished at its breadth and character, the evident sincerity of its purpose, and its freedom from bias, prejudice, or experimental notion. Singular as it may appear, the force, breadth, and character of this bill are really due to the pressure put on Congress to produce a bill. before the Christmas holidays. At the last moments of the session the several points in dispute were compromised by throwing them upon the new Federal Reserve Board, yet to be appointed, just where the power should be lodged. In fact, the new banking bill puts in the hands of the Secretary of the Treasury and the Federal Reserve Board the construction, regulation, and government of a reserve banking system to be built out of the reserves of the national banks, gradually removed from the reserve and central reserve cities, and gradually mingled with the moneys of the United States Treasury. These moneys, with the capital subscribed by the national or "member" banks, constitute a basis. for the rediscount of commercial paper from the member banks and the issuance in this connection of a new national currency supplementing the present currency, yet protected by a 40 per cent gold reserve obtained from the banks and the Treasury; the whole system to be knit together at home and expanded abroad, with power in the Federal Board to expand or contract at will, to officer and manage and regulate and name the discount rates for the federal reserve banks with possibly more money in their pockets than may be then held by the banks now constituting the national banking system. 131. THE UNDERLYING PURPOSE OF THE ACT By C. W. BARRON The "motif" underlying the Federal Reserve Act is not that "which is nominated in the bond." "An elastic currency" could have been had by an enactment of twenty lines. The "means of rediscounting commercial paper" are already at hand and such discounts exist to the extent of at least 100 millions in the national banking system. It is not "to establish a more effective supervision of banking in the United States," for that could be accomplished by increasing the appropriation and enlarging the salaries of the examiners, so that men with larger experience and breadth of vision would perform more effective supervision. The purpose of the act most largely in its inception was "for other purposes," and these "purposes" can never be wisely or effectively carried out; if persisted in they spell disaster to the country. The hidden purpose or "motif" which inaugurated this legislation, however in effect it may work out under wise administration, is to cheapen money. The whole primary discussion of this bank act was to make money easier, to cheapen it to the farmer and producer and manufacturer and merchant. Senators and representatives both proclaimed within and without Washington that what they were seeking was a financial system that would give us an average rate approaching that of the Bank of France, where interest over a series of years averages between 3 and 4 per cent. They frankly said they hoped for something under the 4 per cent rate. The charge was that the centralization of reserves in New York or Wall Street made money for bankers in that "den of iniquity," taxed the country with irregular and high rates of interest, and repressed commerce, investment, and prosperity. I 1 Adapted from The Federal Reserve Act, pp. 10–11, 38. (Boston News Bureau Co., 1914.) Therefore the proposal in outline was that New York should be financially carved up; that the reserves of the national banks now centralized in New York should be taken away and between three and four hundred millions of the bank reserves which are now deposited in that center by the 7,500 national banks over the country should be removed to other centers of commerce and industry; and thereupon should be built an elastic banking and currency system, each center serving its own local community, but all interknit, each with the other, for mutual support. The old system produced concentration of bank reserves in New York City, which Congress desired to decentralize. Wall Street was not responsible for this centralization of banking power; the banks of the country and the national bank act were responsible. The New York banks never originated, but, of course, made money out of it. It has been figured that they made one-third of 1 per cent per annum upon these deposits, but this was not their great profit. The profit came to the financial powers in New York who knew the ebb and flow of currency, spring and fall, and changed their investments as betwixt money, bonds, or stock according to the money currents. New York, as a recipient holder of fluctuating bank reserves, was the seat of financial power, and had control of rates and the distribution of credit according as money flowed in or out. When money flowed in after the country's planting or harvesting, New York bankers said who should have it, and upon what merchandise and what stocks and bonds it should be loaned. The Federal Reserve Act is an act of decentralization. It seeks the establishment of other financial centers co-ordinated through a Federal Reserve Board at Washington. Finance and banks are for the people and human development. The people do not exist for the banks or for potential and highly centralized finance. A new age is upon us. It is the universal age; it is the age of humanity; it is the age of decentralization of old powers that the individual unit of humanity may enter in. 132. A GENERAL VIEW OF THE FEDERAL RESERVE SYSTEM' BY CHARLES S. HAMLIN The Federal Reserve Act, in the first place, provides for a division of the United States into 12 districts, each district containing approximately from 500 to 700 national banks. The national banks in each I Adapted from Federal Reserve Bulletin, July, 1915, pp. 139-40. |