National Affairs: Reserve Review

Widespread among financiers is the conviction that U. S. banking is undergoing the most important and fundamental change in its history. Certain it is that historians will look back upon the 1920-1940 era as one of sensational disturbances, major tragedies and new developments in U. S. and world finance.

During the past month an attempt has been made in Congress to get above the immediate crosscurrents of U. S. finance and take a long view backward and forward. Planting itself at the halfway point of the Era of Change, a subcommittee of the Senate Banking & Currency Committee has been seriously taking stock of the Federal Reserve system and its implications. No spectacular hit-&-run investigation flashing large in press headlines and proving nothing, the committee's survey will require a year to complete.

In 1913 no man had a larger hand in creating the Federal Reserve Board with its twelve district banks than little, sharp-beaked Congressman Carter Glass of Virginia. Today Senator Carter Glass heads the sub-committee conducting this broad inquiry. Rarely is it thus given to a member of Congress to review his legislative handiwork after 17 years.

The ten-year trial of the Federal Reserve system since post-War disturbances cleared away closely parallels the decade of experiment with Federal Prohibition. Just as Prohibition is now undergoing scrutiny and overhauling, so also is the Federal banking system.

To test the strength and flexibility of the Federal Reserve system there were three major inflations during the decade: 1) the boom in western farm land values followed by the long collapse of Agriculture; 2) the rise and fall in Florida land; 3) the boom of "Coolidge prosperity" followed by the stock crash and Depression. It was the last that brought the Glass committee into action.

Some of the questions to which Chairman Glass sought answers: 1) Why did 6,000 banks out of 30,000 fail in the U. S. in ten years? 2) What did the Federal Reserve do to check 1929 stock speculation? 3) What effect has branch banking on U. S. finance? 4) What new laws might stop excessive stock speculation? 5) What new powers does the Federal Reserve system need? 6) How can banks' security subsidiaries be controlled and regulated? 7) How can competition for bank charters between States and the Federal Government be reduced?

Most of the subcommittee's hearings so far have been a post-mortem of the stock crash and the part the Federal Reserve played—or failed to play—to avert catastrophe. From the financiers who passed before his committee Senator Glass, arch enemy of stock speculation, got little support for his bills to penalize speculators with a new tax and to restrict the Federal Reserve's loan policy.

General was the agreement of witnesses that the Federal Reserve Board in Washington had followed a mistaken course of public warnings in trying to check the 1929 stock inflation instead of adopting the recommendation of the New York Federal Reserve Bank for tipping the rediscount rate. When this rate was belatedly advanced from 5% to 6% it was admittedly insufficient to turn the tide. Though witnesses were not rude enough to say so, they implied that the fault lay largely with the foggy-headed uncertainties of Roy A. Young, the Governor of the Board.