"Reflation"

Plans for a third enormous national credit pump lay last week before the House Banking & Currency Committee. In January this committee helped design Reconstruction Finance Corp. to pump $2,000,000,000 of Federal funds through the nation's banks into Industry. In February, with the Glass-Steagall bill, it went to the rescue of the banks themselves by giving them a bigger & better pipe line into the Federal Reserve System. It was now proposed to pump Federal Reserve credit into the commodity markets-- wheat, corn, beef, cotton, coffee, sugar. The bill was introduced by Representative Thomas Alan Goldsborough, Maryland Democrat. It required the Federal Reserve "to take all available steps to raise the present deflated wholesale level of commodity prices as speedily as possible to the level existing before the present deflation, and afterward to use all available means to maintain such wholesale commodity level of prices." Just how the Federal Reserve was to accomplish this large order nobody was sure.

George Leslie Harrison, governor of the Federal Reserve Bank of New York and Eugene Meyer, governor of the Federal Reserve Board, appeared before the Committee. Both opposed the Goldsborough bill. Their objections were similar: the Federal Reserve was now doing all it could to support the commodity markets; by itself it could not execute such a legislative mandate. Declared plump Governor Meyer: "I would not want to be peremptorily ordered to run 100 yards in ten seconds flat." The Federal Reserve, according to its chief, was now "holding the line" and "if you can hold the line, you can turn it eventually."

To specify what the Government had already done Mr. Meyer revealed that R. F. C. has helped out of trouble 1,319 banks of which 76% were in towns of 10,000 population or less.* Likewise since Feb. 1, $250,000,000 in currency had been returned to circulation by hoarders./-

But it remained for pipe-smoking Governor Harrison to lay the biggest piece of fiscal news down before the House Committee--namely, that the Federal Reserve was in the market for U. S. securities as never before. Its purchases were part of the Government's new determination to pump credit into the country--a process its friends call "reflation" instead of inflation--under the provisions of the Glass-Steagall bill. Not until its statement was issued later in the week was the full extent of the Federal Reserve's pumpings evident to the country.

The Glass-Steagall bill permits Federal Reserve banks to use Treasury obligations for part of their currency coverage, thereby releasing gold above the 40% minimum requirement. Open market operations in the U. S. securities have always been part of the Federal Reserve's function. Last autumn the Federal Reserve began a credit-pressure move of the kind now undertaken. England's gold crisis halted that move, but since the Glass-Steagall bill's enactment (Feb. 27), the Reserve has been quietly purchasing in the open market Federal securities at the rate of $25,000,000 per week. Last week it was buying them at the rate of $100,000,000 per week. Total purchases: $245,000,000. The U. S. security market fairly boomed, imparting strength down the line to the rest of the bond market.

The result of this new Government credit policy was to increase the funds at the disposal of Reserve member banks for commercial loans in the following manner: Bank A receives from a customer $500,000 in Government securities to sell. It turns them into the Federal Reserve bank which credits Bank A with $500,000. Bank A credits its customer with a $500,000 deposit on which it must pay interest. But it gets no interest on its own $500,000 Reserve deposit. Until it draws its Reserve deposit and puts it to profitable work at the service of commerce or industry, it is losing money.

Last week, as a result of open-market purchases by the Reserve banks, the system's member bank balance increased $69,000,000 to $2,011,000,000. In effect the Federal Reserve was stacking this pile of $69,000,000 (worth approximately $690,000,000 in new credit) in its front window and inviting member banks to come and get it for "reflationary"' purposes rather than to call loans to raise money.

*Last week the Treasury gave R. F. C. the last $150,000,000 of its $500,000,000 allotment. Hereafter to raise money R. F. C. will have to sell its own securities.

/-Last week, after subscriptions of $30,000,000 the Treasury ceased selling "baby bonds" to absorb hoarded funds.

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