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New era near, say bankers of Federal Reserve (1914)

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Money from 1914

New era near, say bankers praising Federal Reserve

United States may become creditor nation, not borrower, if hopes of leaders in finance are fulfilled in wise management of bank

Business to expand; panics no longer feared

A new era in the business and banking of the country begins today, in the opinion of the greatest bankers and business men of New York, with the opening of the Federal reserve banks.

The most striking summary of the probable effect of the reserve system that has yet been heard in Wall Street is a quotation from the director of the Bank of France made during one of the financial crises in this country.

“If you gathered your reserves and concentrated your banking resources,” he said, “your country would not have to seek money from us. That would not be the only result: your country would in fact be lending money to us.”

In time and not in the very distant future, said men whose words carry unusual weight in all banking matters, the country has the chance through the concentration of its enormous gold supply in the reserve system of becoming a creditor nation, lending not only in Europe but in the great undeveloped, commercial fields of South America and the Orient.

A central bank of the United States, though made up of twelve apparently individual units, has at last been created, in the opinion of the banking community of New York. The fact that the Federal reserve system, starting today with the transfer of reserves from the member banks, is a single central bank has been established to the full satisfaction of the leading bankers of this city, despite the effort of the Democratic party to avoid it. This has been achieved in practice. New York is convinced, because the control of the bank is under one head, the Federal Reserve Board, and the resources of the system are piped together in one reservoir.

Confidence in its heads

The result will be, as stated by one of the bankers in New York whose opinion has a nationwide significance, that within three years, if the management of the bank is as wise as the present governing body promises to make it, the business and banking communities of the country will not be able to explain how the country got along for so many years without it.

The first immediate reason for the enthusiastic support that New York is giving the Federal reserve system is its strong confidence in the character and ability of the men at the head of the system in the reserve board and of those in charge of each bank. The wisdom of the reserve board’s rulings and declarations of intention on commercial paper, a fundamental of the system, received the high praise of bankers generally in New York.

Another factor of importance that has won New York’s hearty support of the system is that the Administration is closely in accord with the reserve board. It is still recognized as a dangerous weakness that the system might become the prey of a party in other hands than those at the head of the present Administration and the present reserve board. Amendments to secure stronger banking control are still regarded as necessary. Nevertheless it is recognized as a fortunate feature of the system that a series of checks and balances has been provided by which through the watchfulness of one reserve bank on another the influence of politics may be mitigated.

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An excellent start

Samuel McRoberts, vice-president of the National City Bank, spoke with approval of the work accomplished by the Federal Reserve Board.

“The Federal reserve system has been given an excellent start,” he said, “in the ruling the board has made regarding commercial paper eligible for the banks’ rediscount.”

Alexander J. Hemphill, president of the Guaranty Trust Company, said:

“I thoroughly approve of the Federal reserve act. I believe it will be of great benefit to the country. I do not see how, under wise direction, we can now be subject to panics, unless all the reserve banks should lose their heads. We shall be no longer dependent in such marked degree on Europe. I feel certain that the trust companies will cooperate with the various regional reserve banks to make the whole system a complete success, and in this way serve the best interests of the people.”

William A Read, head of the banking and investment house of William A Read & Co, said:

“I approve heartily of the Federal reserve bank. Its ultimate effect, I believe, will be to benefit greatly the country and the people. I do not think that money rates at the present time should be reduced more than moderately, and I believe that this will be the action of the Federal Reserve Board. The effect of the system should be to render money available when needed and to stabilize rates.”

Victor Morawetz, who had an active part in the discussion of the bill during its formulation, when interviewed as to its effect, said:

“Whether the Federal reserve bank system will prove a success or a failure will depend upon the control and management of the Federal reserve banks and upon the action of the several national and State banks throughout the country. No banking system can of itself produce prosperity. The Federal reserve bank system is merely the machinery designed to place banking in the United States upon a sound basis.

“If used wisely this machinery may accomplish great good, but if used unwisely it may produce incalculable harm. A sound banking system under well informed and prudent management is the greatest possible aid to prosperity and is necessary as a safeguard against financial troubles, but the best banking system without well informed and prudent management is unsafe.

“The Federal reserve banks will become the foundation of our financial system. Under wise management they will accomplish an immense amount of good, but if through unwise management they should break down a national catastrophe would result. Conservatism and foresight, therefore, should be the keynote of the management of the Federal reserve bank system.

“If bankers should proceed on the assumption that the Federal reserve bank system will relieve them of the necessity of exercising conservatism and care in extending credits the result will be disastrous. If the managers of the reserve banks should be lacking in conservatism and foresight or if they should proceed on the assumption that they can manufacture prosperity by expanding credits the result likewise will be disastrous.

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Improper influences

“Again, if the Federal Reserve Board in Washington should undertake to manage the banking business of the country, if it should allow itself to be affected by political influences or sectional bias, or if it should undertake, except in times of extraordinary emergency, to exercise certain of its powers, such as the power to shift the reserves of the reserve banks or to suspend reserve requirements, the system will prove a failure and will do more harm than good.

“On the other hand, if bankers throughout the country and the directors of the reserve banks exercise conservatism and foresight, if the Federal Reserve Board rigidly adheres to a national policy free from sectional bias and political influences and if it confines its activity in normal times to the supervision of the reserve banks so as to keep them always in a sound condition, with ample reserves enabling them to supply additional credit and currency in times of exceptional stringency in the money market, the Federal reserve bank system will prove of incalculable benefit to the entire country.”

Max May, vice-president of the Guaranty Trust Company and one of the leading men in the country in foreign exchange said:

“The Federal reserve banks can have but one effect. Operated under wise direction, as they are now, they can be only a benefit to business, to banking and to the people of the country. There should no longer be the wide fluctuations in rates and values that have endangered American business and finance in the past.”

Effect on state banks

George C Van Tuyl, Jr, former superintendent of the State Banking Department, and now president of the Metropolitan Trust Company, who guided the movement which resulted in the new State banking act, which bears his name, said:

“One of the main objects in the passage of the new State banking act, in addition to the original purpose of correlating and modernizing the old laws on the statute books, was to bring the State banking institutions into harmony with the national system. Through reduction of reserves to meet the Federal requirements, through the granting of privileges of discounts and acceptances, through amending of the law regarding stock holdings enabling State institutions to join the national system if they desire, the new law has put State institutions on an equal footing with the national banks, and in fact granted privileges which it will require amendments to the Federal reserve act to secure for the financial institutions.

“One of the first advantages that have accrued to the State institutions is the reduction of reserves. Though the law permitting the reduction went into effect on April 16 of this year, the full advantage of this has not been enjoyed until now. On Monday, those State institutions which are members of the Clearing House will have reduced their reserves to the lower figures permitted by the law. Though I consider the estimate of $77,000,000 of released reserves in the State institutions of New York City as possibly too high, the usefulness of the great amount of new banking resources released for business purposes cannot be overemphasized.”

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