AMERICAN CURRENCY SYSTEM.

Dominion, Volume 7, Issue 2011, 19 March 1914, Page 5

AMERICAN CURRENCY SYSTEM.

EXPECTED; CURE FOR BUSINESS PANICS' OBSOLETE BANKING RULES ABOLISHED. When President Wilson attached his signature to the Currency Law, or tho "Federal Reserve Act," as it is officially known, he did what it has fallen to the lot of few statesmen to do. By putting his name to the original copy of lie Bill he changed the whole fiscal system of the nation. It has been many vearso since any great country declared 'its banking methods obsolete and found it necessary to change them. The United States has been staggering undor an antiquated banking ami currency system for generations. That it was unscientific and antiquated everyone admitted, that it was absolutely necessary to amend it no one denied, but when it came to applying the' remedy there was Biich great divorgence of opinion that nothing was accomplished. Two obstacles had to be overcome. One was inertia and'suspicion, tho other was the 'deep-seated dislike of tho American to mako a change in fundamentals. Willing as the American is to take up with any noVelty that can bo thrown aside as easily as it can be tried, he is cautious about experimenting when a mistake may have serious consequences. Ho makes changes in tho tariff lightly, because the tariff is such an old story that it no longer has terrors for Km, but with the currency he had less familiarity, and,he' was afraid of making the situation worse. Thero was suspicion to be overthrown. When bankers or students talked reform of tho currency tho average American regarded them as the Greeks bearing gifts. It was a scheme not to help the people, but to enrich the bankers and strengthen the power of Wall Street'. The Republicans did several good things, and one of the best they did was to appoint a Commission to investigate the whole subject, but, unfortunately, the temper of the times was against them. At the head of this Commission was Senator Aldrich, a profound student of economics and a man of very extraordinary ability. It was Mr. Aldrich's misfortune that in tho public mind ho was one of the foremost of the high protectionists,' a millionaire affiliated with large business interests, and a member of tho Taft wing of. the, party ._ That was sufficient to discredit anything that he might advocate. . His Commission did a great deal of extremely valuable work in educating public opinion to. the necessity of currency reform, and the Bill he brought.in was so good tliat several of its; features were incorporated into tho present law. But a Bill bearing Mr. Aldrich's name was sufficient tn condemn it, and it-was part of. the ill-luck that so consistently followed him that Mr. .Taft wa's ilnable to claim the credit- for having signed a currency law. The Old Way. Without going too much into technical detail, it is sufficient to'say that the United States lias five kinds of bank notes in' circulation. These are greenbacks; Treasury notes, gold certificates, silver certificates, and' national bank notes. The greenbacks, strictly speakina. are the only notes pledged by the national credit. To enablo the Government to financo the Civil War they were made'legal tender in 1862, but the Government ■ now issues no more; green.ba'cks, and .tliercis no...way :.by-which tho volume of , currency flan be increas-' ed over the £60,000,000 to which tho issue is limited. Treasury, uctes are ■based'on a gold reserve. ..Gold certificates are issued b,v the Treasury on.the deposit of gold coin. Silver certificates were issued by the Government to. pay for tho silver bullion wlmn tlio Government was compelled by law to purchase four million ounces of ailvur every month, but as the law h?s bewi' re--■pealed, and the purchase of silver lias ceased, no additional certificates ' are issued. •.. . . .-.- -.■-,. ■ It is worth noting that there is no provision for an increase o'n the amount of currency in circulation when tho demands of trade require Additional circulating medium. The Government may not increaso the greenbacks; to issue gold certificates would require tbo withdrawal.of an •; equivalent amount of gold coin from 'circulation,' so that no help c≤ll he given in that way; fho j'liioahse of silver bullion automatically stopoed the issuance of silver certificates. The national banks, which are not nitiunal in tho sense that the Bank of England and the Bank of. France are, but■ nre substantially ; similar to the English icint stock banks, in addition'to performing the ordinary ■ functions of. a brink of discount and deposit' havo tho privilege of issuing notes.- These Jiotos r.re issued on the security of Gqv-ari'ment bonds deposited with.Treasury, and a bank can' increase its note issue by depositing additional security. Hut ihe process is a complicated and r-xnensivc one, so that unless money uomj;-amis a high rate there is no inducement to t:ie bank to take out additional c'ruulaticn. As a result, for a.great many years, at certain" there wns a. scarcity of jnqney, it commnded high ra:es, and business generally was .dislocated. It is to prevent that that the new law has been framed.

. ' And tho New. : Under the existing system, in times of stress a bank may have its vaults full of the- highest grade seturtics or the best-commercial paper in the market, but thoy aro no good when the public demands actual money. It is at such times that the banking system collapses. It cannot rediscount its paper, because every other bank is feeling the same pinch and doing its utmost to strengthen its' cash reserves. The scramble made by the banks for moiiey does more than anything else to cause it to be hoarded. The function of the Federal Reserve Bank will be to rediscount the paper of its constitueut banks so as to lr.ako the currency elastic. Certain kinds, of shortterm co'ininoroiil purer will bo accepted for rediscount and tho proceeds paid over to the bank in Federal Reserve notes, which are redeemable in gold on demand on presentation at tho Treasury, , ond are legally leceivablo for all taxes and other obligations. Theso notes aro secured by a deposit by tho Federal Reservo Baiik of 40 per cent, in gold and the collateral accepted for discount, and the further security of tho endorsement of tho bank offering the-paper for discount. Tho.Federal'Reserve notes are issued to tho Federal Reserve Dank on tho authority of the Federal Resorvo Board, after Having passed upon tho nature and sufficiency of tho collateral offered, and Uie Federal Bcßorve Board charges the Fodcal Reserve Dank interest so long as' thy notes are in circulation. In other words, tho Federal Reservo Board exercises the power of the Bank of England in fixing the discount rate, as the interest charged by the Federal Reserve Board on the nctes in cir 7 culation will bo tho discount, phi 3 its own charge, to be paid by tho constituent bank for obtaining funds from tho Federal Reserve Bank.

It lias lonf; been the complaint of business men and agriculturists of the South and West that one of tho reasons they were compelled to pay high rates for money was thnt .the interior banks sent their rcsorws! to New York and a few other large centres when; the money was lent for-.;peciilativo purposes, which put a premium on speculation and penalised legitimate enterprise. To discourage the banks as much as posr siblo from lending money on tho Stock Exchange, while- the law gives the Federal Reserve Board the right to determine the character of the paper eligible

for discount, it expressly prohibits the board from accepting paper issued or drawn for tho purpose of carrying . or trading in stocks, bonds, or other investment securities, except those of the Government of the United States; Lending Powers. Thero are two other important provisions of the new law to which referonce must be made. One is permission to national banks outside of the large cities to lend money on real property for a. term not to exceed five years, the other is tho authority granted to national banks to establish branches in foreign countries. At tho present time national banks do not lend money on real property, as a bank is supposed to keep its assets fluid; and a bank may have no branches, but must confine its business solely to its own banking establishment. The right to lend money on real property is in tho interest of the farmer, and the creation of the branches abroad is in the liope that it will increase the export trade of the United States, as most of tho banking of the American exporters is now done through foreign houses. At the time when tho Bill passed the House of Representatives the national bankers, almost without exception, violently opposed it and declared it a vicious, measure. Since then they have modified their opinion, and appearances indicate that a majority of the leading national banks will become members of the system. Experience will demonstrate whether the evils of Iho old system have been removed. Much will depend upon the character of the men composing the Federal Reserve Board, who are yet to bo appointed by the President: and the directors of the various Federal Reserve banks, who will bo responsible for the proper working of the law; but it is certain that a long step forward has been taken, and the dancer.of panics and currency famines in the United States ought to he lessened in the future.—A. Maurice Low, in the "Morning Post."