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the bond-secured notes were a weak reed to rest upon in time of crisis.

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Inelasticity of Deposit Credit Our loan and deposit credit was likewise deficient in the quality of elasticity. Rigid legal minima for bank reserves set up an obstacle to loan and deposit expansion at times of increasing business activity. Banks which were “loaned up” and could not make further advances to regular customers of good standing were prevented from loaning their credit to these customers by accepting bills, which the customers might draw upon them, as is the common custom in Europe, because our courts had ruled that bank acceptances were illegal. The rediscount business among our banks was almost negligible, and most of that which existed was done on the quiet and under cover. Rediscounting was frowned upon by bankers and business men, and there was no central institution like the central banks of Europe, whose business it was to rediscount the

paper of other banks in times of need. Our American commercial paper was largely local we had comparatively little that could be sold in distant markets, either at home or abroad. In other words, rigidity rather than elasticity was a characteristic feature of our American deposit credit.

paper and

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FEDERAL RESERVE SYSTEM

Evil Results of Credit Inelasticity To this defect of credit elasticity coupled with that of decentralization were to be attributed largely the frequent and wide fluctuations in the interest rates on call and short-time loans, for which American money markets were notorious, the alternation of periods of excessive speculation stimulated by redundancy of currency and credit with periods of stringency and liquidation brought on by scarcity. For this rigidity of our credit system the business men and the farmers paid the price of higher interest rates; the farmer suffered through the necessity of selling his staple crops largely in the fall when a tight money market was depressing prices, and of buying his supplies largely in the early spring when easy money conditions tended to make prices abnormally high; the banker was compelled to keep large reserves and to tie up an excessive amount of his commercial deposits in capital investments, such as the purchase of bonds and the making of call loans on stock exchange collateral; while upon all classes in the community an uncertain and unstable money market, which was wont to collapse frequently in panics, imposed the burden of great financial anxiety.

CHAPTER IV

DEFECTIVE EXCHANGE AND TRANSFER SYSTEM

A third group of defects in our old banking system consisted in certain cumbersome features - unnecessary wheels and bolts as it were-in our domestic and foreign exchange mechanism. These features greatly interfered with the efficient operation of the machine and at the same time added to the expense. This subject is a large and complicated one and can only be touched upon here. It may be divided into two parts, that relating to domestic exchange, and that relating to foreign exchange.

Domestic Exchange Of the hundreds of billions of dollars in checks drawn every year, a very large proportion are for local payments, and, being settled promptly through local clearing houses or directly between the banks concerned, offer no difficulties. Our American clearing house machinery is a marvel of perfection for the settlement of local checks. In addition to the checks drawn for purely local

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ly and cheaply handling

payments, however, checks whose span of life is but one day and which are born, live and die within the narrow limits of one town or city, there are millions of checks drawn daily for out-oftown payments, checks whose span of life often covers many days and which in the range and speed of their movements excel the proverbial American tourist party in Europe. The supply of these checks that is continually in transit, recently estimated to amount at any one time to about $300 millions, is what is known among bankers as the "float.” The problem of efficientably apportioning the expense was for years a perplexing one. Some clearing houses, as for example that of New York, imposed certain definite charges for the collection of checks on points beyond a certain radius from New York City. Other clearing houses imposed no charges. The Boston clearing house developed a system for the parring of checks throughout New England, thereby eliminating all collection charges on items drawn on banks entering the system. Similar devices were adopted in a number of other sections of the country, notably in the middle west. Some cities, like Albany for example, became known as free cities and others were notorious for their high collection charges. Many banks

imposed exchange charges—some high and some low-for the collection of out-of-town checks received over their counters, and some made a charge for the collection of checks drawn

upon themselves when presented from out-of-town sources. These practices led among other evils to the practice of routing checks, which means that checks in the process of collection would often be sent by roundabout and devious routes in order to avoid or reduce collection charges. In this way the length of time in which checks were in transit was increased and the economic cost to the community for the collection of checks was made heavier.

One serious phase of the practice of routing checks was the manner in which it padded legal reserves. Competition among large-city banks for the accounts of country banks led the city banks to give an immediate credit to the country banks for out-of-town checks, checks which sometimes took the city bank a week or more to collect. The country bank counted as legal reserve out-of-town checks sent to the reserve city bank for collection as soon as they were mailed. The reserve city bank in turn would send some of these same checks to the central reserve city bank and count them as reserve money as soon as they were put in the mail. In this way one check in

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