PART I.

COMMENTS ON THE FEDERAL RESERVE ACT.

A NEW AND BROAD CREATION.

Next to the Declaration of Independence and the Constitution of the United States the Federal Reserve Act, signed by President Wilson Dec. 23d, 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 20 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 pretence 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, as the upper millstone, should the act give evidence of being for them dangerous.

Yet the bill in its broad principles is the result of currency expert 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 undiscussable. Had not the financial papers refrained from criticism, a panic might easily have ensued. Had the House bill passed the 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 unrecorded 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 receivership. 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% 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.

Our readers will, therefore, now better understand why the financial newspapers have so little discussed the currency measure while it was pending.

The bankers were a unit in their declaration against political control of the credits of the country. They saw the dangers of absolutely free check collections, giving rise to check-kiting from one end of the country to the other; the impossibility of calling up the reserves from the banking interests of the country, as proposed in the House bill, without disaster, and sundry other features of this bill that made it beyond the probability of any volume of money in the country to inaugurate, to say nothing of the amount of credit. required to sustain it, the disaster of contraction to inaugurate it and if inaugurated the wild check-kiting and inflation that must follow.

Now, miracle of miracles, with responsibility to nobody, and yet with credit to everybody, the millstones of banking sentiment and political legislation have ground out a bill that may prove, with wise administration, as much of a marvel as the Declaration of Independence or the Constitution of the United States.

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 upon 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 re-discount 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% 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 pocketbooks than may be then held by the banks now constituting the national banking system.

In discussing the new bank act the text thereof will be followed and the subjects taken up as in the order of the act, which is in thirty sections, and as printed by the government covers twentysix and a half ordinary pages.

II

THE UNDERLYING MOTIVE.

The new United States banking law is named the "Federal Reserve Act." According as the Federal Reserve Board thereunder acts it will be a reserve act or an expansion act, the result of which no man can foresee. It is not rhetoric to say that all the nations of the earth are watching that reservoir of one-fifth of the world's gold money which is in the United States and which may readily be tapped off if the federal reserve act becomes a federal inflation act.

The output of gold is not increasing and unless the cost of labor is lowered, or men are turned from the factories and cities, it may not increase for many years. In the past few years interior India has taken 400 million dollars in gold from the civilized world, and not oftener than once in 100 years does either gold, silver or copper flow back from India. In the opening up of the Orient, China may also become a consumer of gold. Even Egypt has pulled upon the world's gold supply. The Balkan war scare in 1913 locked up at least 300 millions of gold in European strong boxes and stockings.

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 20 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 farmer and producer and manufacturer and merchant. Senators and representatives both proclaimed,