Credit by Government

Whenever the question of parentage of that good Democratic institution the Federal Reserve Act is raised within hearing of Carter Glass, fireworks are sure to sputter. The choleric Senator from Virginia is the Federal Reserve's traditionally jealous father. But Oklahoma's aging Robert Latham Owen never lets him forget that he sat in the U. S. Senate in the days of the New Freedom* and owns one of the four gold pens with which President Wilson made the Act the law of the land. To that, the Senator snorts that every fundamental Owen contribution to the plan was erased before its passage. What is more, he fumes, judging from the number of people claiming to be the father of the Federal Reserve "its mother must have been a drunkard."

Like two cranky old Civil War generals fighting Gettysburg over again, Messrs. Glass & Owen, born scarcely a block apart in Lynchburg, Va., had at each other again last week when Mr. Owen, onetime Indian Agent for the Five Civilized Tribes, accused Senator Glass of "using an undeserved prestige as an expert in monetary science against the public interest."

Back shot the testy little Virginian, mentioning no names: "I may say that whatever prestige, if any, I may have was not gotten by using my position as a member of the Banking & Currency Committee of either house of Congress to gamble in foreign exchange with a prison-convict partner nor in any attempt to influence the action of the Federal Reserve authorities for my own pecuniary benefit!"

Old Mr. Owen, who now heads an inflationist group passing as the "Sound Money League," piously replied: "Of course, I would not charge Carter Glass with the undeserved prestige of 'gambling' with a 'prison-convict partner' or for that matter of compounding with the two thieves upon the Cross to sup with them in Paradise. I hope, however, that Paradise will be his destination. There may be left some shred of charity in his heart." No trifling cloakroom squabble was last week's dispute. This time it concerned not only the parentage of the Federal Reserve Act but the question of the very existence of the System it created. For last week President Roosevelt dispatched to his legislative leaders a 20,000-word bill which in one form or another is almost sure to be the Banking Act of 1935. Most significant banking measure since the Federal Reserve Act of 1913, the bill was so technical that no one except a banking expert could hope to understand it in detail. Nevertheless, its objective was crystal clear--unchallenged Federal control of the nation's currency and credit. It did not establish a central bank such as money-fanatics like Senator Elmer Thomas and Father Coughlin have been yammering for. But if the bill is enacted in anything like its present form, the U. S. banking system will be completely dominated by whatever President is in power. Said old Professor Irving Fisher, no hard-shelled Tory: "It comes nearer to making the President an economic dictator than all previous legislation put together."

The bill was divided into three parts. Part I was permanent continuance of Federal deposit insurance legislation, whereby all bank deposits up to $5,000 (including trust accounts) are guaranteed. The method of assessment of the cost of insurance was changed, decreasing the burden on small banks at the expense of big banks.

Part III contained technical amendments including one provision that was bad news for holders of National Bank stock: National Banks shall gradually increase surplus until it equals capital. For many a bank that would spell low dividends or none at all for years to come.

But it is Part II which, if passed, will make history. This section completes the slow transformation of the Federal Reserve from a group of twelve regional semi-autonomous institutions into a strongly-centralized system stemming straight from the President of the U. S. Oldsters like to deplore the decline & fall of the Federal Reserve but fact is. that, from the day its doors opened in the wild autumn of 1914, the System never functioned as it was originally intended. Within three years it was pressed into government service to finance the War. President Harding put it into politics in a big way, and it failed miserably to curb either the inflation of 1929 or the deflation that followed. And President Roosevelt did not hesitate to draft it for New Deal purposes, or to appoint a Governor who would do his bidding--Marriner Stoddard Eccles.

Hereafter, all semblance of independence is to be stripped away. The President will appoint, during his pleasure, the Governor of the Federal Reserve Board in Washington. This Board will have veto power over the election of the heads of the twelve regional Reserve Banks. And a committee of five--dominated by the White House-appointed Governor--is to dictate the credit policies of all the Reserve Banks.

Thus domination. But, further, the White House-ruled Federal Reserve will be given, in addition to its old tools of credit control, vast new powers to expand or contract the country's credit. The Board may alter at will the Reserve requirements of member banks, now fixed by law, as to time or demand deposits, in any or all classes of cities, in any or all Reserve districts. It may declare any sound bank asset eligible for rediscount irrespective of type, maturity or purpose. And flaunting every oldtime conception of commercial banking, the bill specifically adds long-term real estate mortgages to the list of legal National Bank assets. It not only lengthens the mortgage maturity limit from five to 20 years but also increases the permissible loan from 50% to 75% of real estate appraisals and ups the amount that a bank may own.

While the bill scraps all automatic checks & balances in favor of centralized managed credit, the new powers are double-edged. The banking bill is a recovery measure with a sharp inflationary twist but at the same time it provides the Administration with practically unlimited powers to deflate a boom, local or national. If inflation threatens to run away, it will be possible to clamp down tight. And having devised such a brake, the Administration will presumably feel freer to accelerate recovery through credit inflation.

This was the first major banking legislation in 25 years that Carter Glass did not have a hand in preparing. It was drafted in the Treasury under the eye of Governor Eccles. New Dealer though he is, Governor Eccles is a practical businessman and banker who has made and kept a fortune in his own right. But his theories of Government and Business were learned on the shores of Great Salt Lake and they are not the theories of Wall Street. An advanced student of the Spend-for-Prosperity school, he explained last week:

"Underlying the proposed changes in the banking law are fundamental economic and monetary considerations, the widespread influence of which has not been adequately understood. . . . Fluctuations in production and employment and in the national income are conditioned upon changes in the available supply of cash and deposit currency and upon the rate and character of monetary expenditures." But he emphasized that one of the "supremely important duties" of the remodeled Federal Reserve Board was "assuring that a recovery does not result in undesirable inflation."

It was the Washington consensus that the banking bill had been speeded to Congress to divert Senator Glass from his attack on the $4,000,000,000 Work Relief Bill. Certainly the banking bill was cleared by the White House so quickly that Governor Eccles did not have a chance to show it to the peppery little Virginia Senator in advance as he had promised. Senator Glass was hopping mad at what he considered a deliberate White House slight and took it out on Governor Eccles, accusing him of breaking his word. Governor Eccles hastily telephoned the Senator, explained that President Roosevelt had forwarded the bill sooner than expected.

For Governor Eccles that apology must have been acutely embarrassing. His recess appointment to the Federal Reserve has yet to be confirmed by the Senate. It lies in a Banking & Currency subcommittee on Federal Reserve legislation headed by Senator Glass himself. Administration leaders thoughtfully packed the Glass subcommittee, but the chairman has frankly expressed his doubts about Mr. Eccles' qualifications.

Before Senator Glass launches his expected attack on the new banking bill he will first have a scrap as to whether it will be considered by his subcommittee or the full Banking & Currency Committee, chairmanned by Florida's white-crested Senator Fletcher, 76, whom Mr. Glass, 77, always refers to as "that old man."

*Carter Glass Avas potent in the House.

This file is automatically generated by a robot program, so reader's discretion is required.