Work Done

The Senate:

> Debated the La Follette-Costigan bill for $375,000,000 in direct Federal aid for unemployment; added to it another $375,000,000 for State road building.

> Confirmed Ogden Livingston Mills to be Secretary of the Treasury, Arthur Atwood Ballantine to be Undersecretary of the Treasury and Robert Lincoln O'Brien to be chairman of the Federal Tariff Commission.

> Went into secret session to hear anonymous charges against Ira M. Ornburn, nominated to be a member of the Tariff Commission; confirmed (70-to-9).

> Received from Wisconsin's Elaine a bill prohibiting the use of butter substitutes in the Army & Navy.

Committees of the Senate:

> Rejected a bill by Idaho's Borah to reduce Congressional salaries.

> Heard Secretary of War Hurley testify against Philippine independence (see p. 12).

The House:

> Passed 38 private claims in four hours.

> Debated a constitutional amendment to do away with "lame duck" sessions of Congress (see p. 14).

> Received from its Merchant Marine Committee a bill prohibiting foreign ships to cruise from U. S. ports "to nowhere," following testimony by U. S. Shipping Board officials that liquor was the chief attractions on such cruises.

Committees of the House:

> Rejected a Senate resolution for the free distribution of 40,000,000 bu. of Farm Board wheat among the needy.

> Commenced the drafting of a tax-up-ping bill (see p. 14).

Dictator Money

One day last week New York Stock Exchange values jumped $3,000,000,000 in five trading hours. The next market day they surged up another $4,000,000,000 in two hours. The rise was the sharpest and strongest in months. Simultaneously cotton moved up $1 per bale. Wheat spurted 1-c- and 2-c- per bu. Commodities bulged hopefully. The cause: A bill (House of Representatives No. 9203) "to improve the facilities of the Federal Reserve System for the service of commerce, industry and agriculture, to provide means for meeting the needs of member banks in exceptional circumstances and for other purposes."

H. R. 9203 was introduced by Congressman Henry Bascom Steagall of Alabama, chairman of the House Banking & Currency Committee. In the Senate an identical measure was sponsored by Virginia's old, peppery Phi-Beta-Kappa-Dangling Carter Glass. Senator Glass never lets the world forget that he acted as "patron and floor manager" (his own words for the original Federal Reserve Act when it passed the House 19 years ago), that he still considers it very much his own legislative child. The Glass-Steagall bill was born at the White House. Behind it loomed the shadowy outline of a printing press whirling off millions, perhaps billions, of dollars of crisp new paper money.

The Glass-Steagall bill's purpose was fivefold: 1) to open the Federal Reserve's doors to easier borrowing by hard-pressed banks; 2) to attract hoarded money back into bank deposits; 3) to print new paper money; 4) to help the Federal Reserve finance the Treasury's deficit; 5) to free gold to meet foreign demands.

Today a bank in the Federal Reserve System can go to the Reserve bank in its district and borrow money only on the bonds or other direct obligations of the U. S. Government, on businessmen's promissory notes covering actual commercial transactions and, a minor point, on credits advanced to agricultural agencies. No other kind of security is eligible for the Reserve's rediscount privilege./- Not one nickel will the Reserve lend on the best industrial bonds, on prime stocks or on A-1 real estate mortgages. In its effort to keep liquid to meet depositors' demands, a bank which has exhausted all its assets eligible for Reserve borrowing must dump its other securities on the market to raise more cash. This dumping deflates values all the more, scares the public, increases the popular demand for ready cash. Bank after bank has failed only for examiners to discover that while it was short of cash and rediscountable paper it had plenty of other security assets.**

Tomorrow. To make these other security assets legal collateral for loans from the Federal Reserve is one major aim of the Glass-Steagall bill. By widening rediscount eligibility, its sponsors hope that banks on the brink of failure can fly into the arms of the Federal Reserve instead of into the arms of Federal receivers. The bill provides that five or more independent banks may take their assets, whatever they may be, to their district Reserve bank and ask for a joint cash loan on them. Whether they get it or not will be up to a three-quarter majority of the Federal Reserve Board in Washington which is empowered to pass on the worth of the collateral offered. Presumably the Board, if it sees fit, can authorize loans on stocks, bonds, mortgages. The only limitation imposed by the bill is that no foreign securities can be accepted by the Reserve. The banks thus accommodated, however, must pay an interest rate at least 1% more than that charged for now eligible paper.*

New Money. But the Federal Reserve is not a bottomless cash box from which countless millions of dollars can be paid out to member banks. Whence, therefore, will come all the money needed to make all the new loans? To this question there is a combination of interrelated answers. The broadest concept of the Glass-Steagall bill is that it will materially enlarge the Federal Reserve's power to stop member bank failures. As failures decline, hoarders of currency would be encouraged to redeposit their cash. Such redeposits. in turn, would strengthen banks and reduce their demands for more loans from the Federal Reserve. Hoarded currency would again start flowing back toward the Federal Reserve whose supply of loan funds would thus be replenished to meet what would then become the disappearing problem of bank failures.

This ideal operation of the Glass-Steagall bill is squarely based on an old and familiar imponderable--public confidence. The measure's sponsors, however, have concluded that it takes something more real and concrete to restore public confidence than words and promises. Therefore they have armed the Federal Reserve with a new club so enormous as to batter down the worst popular fears. This club consists of an authorization to issue a potential $2.500,000,000 in new currency. Possibly the club may never be taken from the shelf for actual swinging; possibly banks can be stabilized without a new currency issue. If not, the Federal Reserve would be in a position to use its new power to whatever degree was necessary.

According to last week's best judgment, the currency club would start swinging just enough to produce the necessary psychological momentum. Hoarders would redeposit their cash; banks would breathe easier; the demand for Federal Reserve loans would diminish; the machinery of normal banking would pick up speed by itself; the currency club, having served its initial purpose, would go back on the shelf.

An elastic currency was one of the Federal Reserve's original purposes. Each of the twelve district banks was authorized to print its own paper money which became the joint obligation of the Federal Reserve bank and of the U. S. Treasury to pay gold on demand. Each bank of issue must hold in actual gold or gold certificates at least 40% of the amount of its outstanding currency. Likewise behind each dollar of Reserve currency must be 100-c- of commercial paper or of gold or of gold certificates. U. S. Government bonds and other Treasury obligations (although eligible for rediscount at Federal Reserve banks) cannot be used to cover the Reserve's paper money.

Last week the scarcity of commercial paper produced the following result: The Federal Reserve had $2,662,000,000 outstanding in paper money which was covered by $2,129,000,000 in gold or almost twice as much as was required by the 40% provision of the law. It was to this excess gold used for currency coverage that the Glass-Steagall bill went to create the Federal Reserve's currency club. The measure proposed that the Federal Reserve use U. S. bonds and other direct obligations as backing, along with gold, for its currency. Thus by using $600 of bonds and $400 of gold as backing for $1.000 of money, it works out that the Federal Reserve could issue about $2,500,000,000 in new money.

But it is scarcely conceivable that the Federal Reserve would use all the gold, thus freed from currency collateral, as coverage for more money. Always kept in mind is the possibility of foreign demands on the U. S. gold supply--"raids on the dollar." The Glass-Steagall bill intentionally or otherwise will materially strengthen the Federal Reserve's position to withstand gold exports without violent shocks and strains to the U. S. money market.

As guards against any inflationary flood of paper money, the bill also provided that: i) Reserve banks could issue money on direct obligations of the U. S. only when a majority of the Reserve Board "deem it desirable in the public interest"; 2) such bond-backed currency could be issued only within one year from the law's enactment.

Whipping. Such, in short, were the enormous potentialities of the proposal brought into being around the White House breakfast table. President Hoover summoned Messrs. Glass and Steagall. Governor Meyer of the Federal Reserve, Secretary of the Treasury Mills, President Dawes of Reconstruction Finance Corp. were called in. President Hoover explained the desperate plight of the nation's banks and the psychological failure of other relief plans to arrest the downward plunge of deflation. Heavy Federal financing to meet the Deficit (see col. 3) was ahead. Drastic action must be taken. Messrs. Meyer, Mills and Dawes nodded their heads in agreement. Gradually Senator Glass's opposition to opening the Federal Reserve to larger bank borrowings was beaten down by facts and figures. He and Congressman Steagall returned to the Capitol where they whipped their bill into shape.

Summary committee hearings followed. Mr. Dawes considered things so bad that he insisted on testifying in secret session. Presumably he explained that his R. F. > was stalled at the very outset for lack of relief cash and the inability of the public market to absorb R. F. > obligations. He undoubtedly endorsed the Glass-Steagall bill as a means of pumping new money into the market to buy R. F. > securities. Secretary Mills estimated that the substitution of bonds for commercial paper would release about $750,000,000 in gold from currency coverage. He denied that the purpose of freeing this gold was to create a reserve to resist foreign raids on the dollar though such a result was ap- parent. The measures were promptly reported to the House and Senate. The House passed (350-10-15) its bill after a three-hour debate.

The Senate bill carried, however, two amendments which threatened dispute. One was that groups of five or more banks could not apply for new Reserve loans until they had used up all their commercial paper now eligible for rediscount. Senator Glass put in that provision because he claimed large banks were now hoarding $8,500,000,000 in such assets, which should be rediscounted before other securities were offered as collateral. The other amendment provided that only single banks with capital of $500,000 or less could apply for special loans under the "exceptional and exigent" clause of the bill. Senator Glass was more interested in saving the small bank than the large one from failure.

Effects. As to its possible effects, the Glass-Steagall bill became all things to all men. President Hoover viewed it as one more expansion of bank credit, another move to quiet public alarm, restore confidence in banks and bring hoarded money out of hiding. Secretary Mills thought it would stop all further bank failures. Wall Street, as indicated by the stock rise, looked upon it as currency inflation which might turn the tide. Most anxious bankers hailed it as the "most constructive step" yet taken in the Depression. Conservative Republican Senators, shying away from its inflationary aspect, played down the printing press idea for political reasons, guessed that the Reserve Board might after all have no occasion actually to expand the currency.

On two points, however, there seemed to be general agreement: 1) the Glass-Steagall bill directly interposed the public credit of the U. S. Government for the private credit of U. S. finance and industry; 2) the Federal Reserve Board--Governor Meyer, Adolph > Miller, Charles S. Hamlin, George R. James, and Wayland W. Magee, together with Secretary Mills and Comptroller of the Currency Pole-- was made a virtual dictator of U. S. currency and hence U. S. economics for one full year.

* Shaking hands with Mrs. Woodrow Wilson last month. He did not rise, because, though a gallant Virginian, he is 72 and Mrs. Wilson reached rapidly.--ED.

/- Rediscount: the process whereby a bank re-borrows from its Federal Reserve bank on U. S. securities or short-term commercial notes to reimburse itself for loans it has already made.

* 0n Feb. 9, for the first time since early in 1930, not a single bank in the land failed. In 1930 there were 1,345 failures, in 1931, 2,302. So far in 1932 there have been 376, or an average of ten per business day.

* "In exceptional and exigent circumstances," according to the bill, a single bank without "eligible or acceptable assets" for ordinary rediscounting may apply to the Federal Reserve to save it from failure. Here again the Board in Washington will say yes-or-no.

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