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MAT 11 1914) Woli öll fund


American Economic Review


MARCH, 1914

No. 1


The Federal Reserve Act, signed by President Woodrow Wilson on December 23, 1913, has already aroused much criticism, many different expressions of opinion, and elaborate discussion of details. Great political prejudice has been engendered. Throughout the past year the discussion has been almost continuous, at first in a limited number of publications and in technical circles, then in the secular press, on the platform, and generally throughout the country. Taking the debate on the so-called money trust question as the precursor of that which dealt with banking legislation, in the proper sense of the term, the controversy in Congress has also been well nigh continuous for the past year. As a result of this twelve months effort, roundly speaking, and of the preliminary work which had gone before, the country has today on the statute books, a law much more inclusive and incisive than any that has been adopted since the passage of the national bank act in 1863-1864. Indeed, the new measure is more far-reaching than the national banking act itself, since the latter was primarily a change in the method of issuing currency, while the Federal Reserve Act is not only that, but is also a radical transformation of the methods employed in the creation of bank credits. It is not likely that the Federal Reserve Act will become fully effective save after a considerable period of further criticism and analysis. What the act means, how it has come into existence, its relation to banking proposals past and present, and the methods by which its adoption has been secured, as well as the opposition from which it has suffered heretofore and will suffer in the future, are, therefore, of fundamental interest not only as a matter of history and current politics but as an element in the further development of American banking legislation. The present study can afford only a general sketch of these varying phases of the measure, but it will endeavor to set forth some of the more salient elements in the situation.

No current economic issue has received more attention of a

certain sort than currency and banking, during the past few years of American politics. Beginning with the struggle for "sound money" in 1896 and 1900, the debate gradually shifted to the field of banking reform; and during the decade just past consideration of the question at bankers' conventions, at meetings of business men, and elsewhere, has been almost constant. While the issue has not taken, in recent years at least, a strong hold upon the popular interest or imagination, it has been the topic of unremitting study and controversy among the more intelligent classes in the community as well as among the business and banking interests of higher grades and, as every student of theory knows, among professional economists. To dispassionate observers, indeed, it has sometimes seemed that the banking question had become, or was in danger of becoming, a largely academic mattera subject of forensic disputation; as to which, debate was bitter and controversial, but with reference to which, few seriously expected any definite action within a reasonable future, while none looked for immediate legislation designed to close the issue once and for all. At least one result of the prolonged controversy has been witnessed during the past three years in the expenditure of probably about $1,000,000 in actual direct outlay for the purpose of securing legislation. This vast sum, expended partly for governmental investigations, partly for organized agitation, and partly in the promotion of meetings, conventions, and other oc casions for debate, must be regarded as having had its pri uy result in the creation of a helpful public opinion and underst ind ing of the fundamentals of banking.

Yet those who believed that, in consequence of this extended discussion of the subject, there would be a smoothing of the path for legislative action have found themselves profoundly mistaken. Neither from the banking community as such, from organizations of business men, from the press, or from the professional econo mists of the country taken as a body has aid been received by thes who were engaged in the task of framing and enacting the proposed currency and banking legislation. Honorable and dis ir guished exceptions in each of the classes or groups just enumera'd spring at once to mind, but in the main the remark will hold true. The currency and banking law of 1913 had to be pressed forward to a passage over the all but united opposition of those who had been engaged in the popularizing of "sound" ideas o currency and banking and in the voicing of a demand for action,

notwithstanding that it embodies, and at every stage of its progress has embodied, the essential ideas regarded as fundamental by thoughtful students of the problem with which it deals. Selfish interests entwined about an obsolete and injurious system of banking have striven their utmost to discredit the legislation and to place obstacles in the path of its advocates; supposed experts have lent their services to the defense of the worse elements in the existing situation; and the press has too often done what it could both to misrepresent the facts and to discredit the motives of those who were honestly laboring for the fundamentals of reform. That under these conditions and in spite of them the Federal Reserve Act has been passed, some of the older conditions remedied, and a way opened to the very great improvement of American banking, both from the technical and from the broader point of view, is primarily due to the honesty and sincerity of the House leaders entrusted with the duty of presenting a reform measure, to the constant and courageous coöperation of the Treasury and its chief, and above all to the unwavering determination and keen insight of the Executive. Secondarily, the result shows the capacity of the dominant party for discipline and leadership and its power to shake off false traditions and past mistakes.


A brief outline sketch of the legislative history of the Federal Reserve Act may first be presented.1 Without at present entering into the early history of the process by which the measure itself was framed, between April, 1912, and June, 1913, it may be generally said that during the period referred to a preliminary draft of what later became the Federal Reserve Act was shaped under the auspices, first of a sub-committee of the House Banking and Currency Committee as organized in the Sixty-second Congress, Hon. Carter Glass of Virginia being chairman of the sub-committee in question, and then under the auspices of Mr. Glass himself as the ranking Democratic member and prospective chairman of the banking and currency committee to be organized in the House of Representatives of the Sixty-third Congress.

Upon the basis of careful investigation, conducted under di'Much of this history, in its greatest significance, is not a matter of record, since the events which formed the principal parts of it occurred behind closed doors in the party caucus, or during consultations of legislative leaders. No complete review of these events and phases in the history of the bill will be undertaken within the scope of this paper.

rection and supervision of the committee, partly at public hearings during the winter of 1912-1913, partly by private investigations, it had been determined what features should and what points should not be embodied in the proposed measure. The bill thus drafted had been submitted to and had received the approval of President Woodrow Wilson, and was thus, when introduced in the House of Representatives on June 18, an administration bill in the sense that it had received the approval of those charged with administrative responsibility, while it had been developed by the authorized legislative agencies of Congress. As thus drafted for presentation, the banking bill covered certain main points, which were subjected to no serious change and which have been succinctly reviewed in a report, submitted to the House on September 9, 1913, by Chairman Glass on behalf of the Banking and Currency Committee, as follows:2

After looking over the whole ground, and after examining the various suggestions for legislation, some of which have just been outlined, the Committee on Banking and Currency is firmly of the opinion that any effective legislation on banking must include the following fundamental elements, which it considers indispensable in any measure likely to prove satisfactory to the country:

1. Creation of a joint mechanism for the extension of credit to banks which possess sound assets and which desire to liquidate them for the purpose of meeting legitimate commercial, agricultural, and industrial demands on the part of their clientele.

2. Ultimate retirement of the present bond-secured currency, with suitable provision for the fulfillment of Government obligations to bondholders, coupled with the creation of a satisfactory flexible. currency to take its place.

3. Provision for better extension of American banking facilities in foreign countries to the end that our trade abroad may be enlarged and that American business men in foreign countries may obtain the accommodations they require in the conduct of their operations.

Beyond these cardinal and simple propositions the committee has not deemed it wise at this time to make any recommendations, save that in a few particulars it has suggested the amendment of existing provisions in the national-bank act, with a view to strengthening that measure at points where experience has shown the necessity of alteration.

In order to meet the requirements thus sketched, the committee proposes a plan for the organization of reserve or rediscount institutions to which it assigns the name "Federal reserve banks." It recommends that these be established in suitable places throughout the country to the number of 12 as a beginning, and that they be assigned the function of bankers' banks. Under the committee's plan these

'H. Rept., 63 Cong., 1 Sess., pp. 16 et seq.

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