BANKS: Hold The Line

(See front cover)

Eleven of the twelve Governors of the twelve Federal Reserve Banks met extraordinarily in Washington last week to un-kink another bad knot in the credit rope with which they are trying to pull the country out of its economic ditch. From Boston New York and Philadelphia, from Richmond, Atlanta and Dallas, from Cleveland, Chicago and St. Louis, from Minneapolis and San Francisco, they answered the call for consultation from Eugene Meyer, Governor of the Federal Reserve Board, overlord of the nations credit and currency. Only George Henry Hamilton Governor of the Kansas City Reserve Bank, failed to appear. His deputy went instead.

The Governors assembled in the long narrow board room opening upon the grimy interior court of the Treasury building. Around its brownish-yellow walls hung many a chart, their graphs ending in dismal downward dips. (Zigzags were all in black & white because color-blind Governor Meyer has trouble with reds and greens.) After handshakes all around, the Board and its visiting officials settled down in black leather swivel chairs around a long mahogany table for an all-day session.

Six weeks prior the Governors had gathered in this same austere room to launch a Federal Reserve policy to expand credit. Now they were back again to decide its future.

Bonds for Paper. The Federal Reserve's program for abating deflation was a direct outgrowth of the Glass-Steagall bill passed in February. That law permitted the Reserve to substitute U. S. bonds and other Federal securities for commercial paper as part of its currency coverage. Its glut of gold behind paper money was thus ready to be mobilized for more useful purposes.

Cash for Bonds. The twelve Reserve banks thereupon went into the open market and began to buy Federal securities, first at the rate of $25,000,000, later at $100,000,000 per week. At last week's meeting Governor Meyer informed his conferees that the system now owned the heaviest portfolio of "governments" ($1,466,000,000) in its history. Since late February it had bought $725,000,000 worth. Fortnight ago it first used its privilege of putting Government securities —$97,000,000 worth—behind its paper money. Last week this new form of currency coverage rose to $148,000,000.

Federal Reserve Banks were not buying U. S. securities because they liked their engraving. Their purpose was to build up a mass of new credit which member banks would take and pass along to deflated Business. But member banks were not carrying out their end of this credit-expansion scheme. They let the Reserve's funds stack up unused at the Reserve banks instead of piping it out to customers.