The Federal Reserve Act I 1

To fix the blame precisely is not easy, or indeed possible; but a large part of it must be traced back to the policy of the United States Treasury in fixing the rate of interest on all its issues of loans artificially below the market rate. rAs a result the bonds had to be marketed more by appeals to patriotic motives, enforced by many measures of popular coercion to induce and compel the public to subscribe to the loans, and still further supported by preferentially low in terest rates by member banks to enable customers to carry bonds on bank loans, and preferentially low rediscount rates on such paper presented for rediscount at the Federal Re serve banks. At one time the total of war paper held by all banks (including the Federal Reserve), exceeded $6,000, 000,000, and the very preference given to it for rediscount was a premium to active business not to pay off the loans but rather to use funds for other purposes in a period of rapidly rising prices. The Treasury and the Federal Re serve banks, in this policy of artificially low interest rates, had "caught a Tartar," and did not know how to let go without causing a slump in the price of Liberty bonds, which nevertheless was sure to occur. The per cents (which composed the larger part of those outstanding) fell some what below par early in 1919, fell to 92 in December, 1919, as discount rates and rediscount rates were raised, and as low as 82 in May, 1920. Large quantities of the bonds appear to have been thrown upon the market by holders who had been carrying them on credit. The whole policy above dis cussed must be looked upon as a case of price-fixing by which the rate of interest on government loans was kept artificially lower through an unsound use of government con trol over banking policy. The results were speculation, infla

tion of prices, and eventual disillusionment and loss to in vestors and to large numbers of other citizens.

§ 14. Future of the Federal Reserve system.

The Fed eral Reserve system rendered valuable service during the war, and was a stabilizing influence in the period of industrial de pression that began midway in 1920. While there has been enormous shrinkage in prices, in valuations of goods in stock, in securities, and in "paper profits," and inevitable loss to many investors and business men, the "retreat" has been more orderly than in previous financial crises, and at no time has the banking system as a whole been anywhere near danger of collapse, as in former crises. The Federal Reserve banks have become an indispensable part of our banking system. Probably valuable lessons have been learned from the war time experience. It is probable that the use of the rediscount privilege will, in normal times, not be extended to the limit, as in 1919 and 1920, but will be kept in large part in reserve for emergencies. This would result in smaller earning assets and earnings for the Federal Reserve banks, and would make the recent figures in these respects appear abnormal, and not to be expected regularly. Altogether, as a piece of financial machinery, the Federal Reserve system has been a demonstrated success, and doubtless is capable of beneficial development. However, the possibility of political inter ference with banking policy is apparent, and might become a grave danger to the whole financial situation.