BANKS: Hold The Line

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When a member bank sells U. S. bonds to the Federal Reserve, it can do three things with the proceeds: 1) take the cash to make loans; 2) reduce its debt to the Reserve; 3) let the money lie idle with the Reserve. Last week the Reserve Board reported that member bank loans to customers, instead of going up, had gone down by $125.000,000 (to $11,717,000,000). Likewise member banks had used about $370,000,000 of their bond-sale credits to reduce their own obligations at the Reserve banks. An increase of $281,000,000 (worth about three billions in new credits) in the member banks' reserve fund ($2,192.000,000) represented the approximate amount of cash they refused to withdraw and put to work.

Charged with economic cowardice, the banks defended themselves with the assertion that no good borrowers were now seeking loans, that only the most desperate and shabby credit-seekers lined up before their windows. Because of the confidential relationship between banker and borrower, the banks could not publish concrete examples of good and bad loans to refute their critics' complaints of noncooperation with the Reserve.

To Buy or Not? At last week's Washington meeting what Governor Meyer wanted to decide was: should the Federal Reserve continue to purchase Federal securities on a grand scale? All day long behind closed doors the district Governors argued the matter back & forth, pondered figures on paper and on wall charts. When at last the meeting broke up Governor Meyer announced tersely:

"It was decided to continue open market operations by the purchase of government securities, the extent and the amount to be determined from time to time as conditions justify."

Twelve Big Names. The Board's primary agent for executing this policy is the Federal Reserve Bank of New York, biggest in the system, of which George Leslie Harrison is Governor. The Board's decision meant that Governor Harrison would now try to buck his district's banks into line for credit expansion.

Back in his Manhattan office Governor Harrison summoned a dozen big bankers and industrialists for a heart-to-heart. Governor Meyer bustled over from Washington to attend. It was forcefully explained that some method had to be found to get the Reserve's credit through the banks and out to the country. The Government had moved. The next move was up to private enterprise and initiative.

Upshot of the Manhattan meeting was the creation of another special committee—twelve more Big Names to make Reserve credit "useful affirmatively in developing business" and "to secure more coordinated and so more effective action on the part of the banking and industrial interests."