The Press TUESDAY, MARCH 20. 1934. Mr Roosevelt and the Banks

Press, Volume LXX, Issue 21118, 20 March 1934, Page 8

The Press TUESDAY, MARCH 20. 1934. Mr Roosevelt and the Banks

President Roosevelt has proposed, and done many alarming things; since he came into office; but none; has been more alarming than his j scheme to turn the Reconstruction j : Finance Corporation into a state \ bank. The step is not, of course, j entirely unexpected, for since the; banking crisis of a vear ago neces-; sity has compelled the United States \ Government to interfere more and j more in the business of banking.! ■ The history cf the Reconstruction j Finance Corporation is a good indi-; - cation of this trend. Created by Mr i . Hoover to provide the capital for j i approved schemes of industrial I ; rationalisation, and strictly limited j | as to the amount it could lend, the j | Reconstruction Finance Corporation I ! under the Roosevelt administration ' I has enormously increased both its. 1 resources and its functions. The : | Agricultural Adjustment and Farm; ! Mortgage Act of May, 1933. em-j ] powered it to lend up to £ 10,000,000 I to public and semi-public authorities I | and increased the limit on its out- i ; standing loans to industrial concerns . ; to £60,000,000; and when, at the end [ of 1933, Mr Roosevelt began his j : attempt to depreciate the dollar by j ■ direct methods, it was the Reconi struction Finance Corporation which i ! was authorised to buy gold, first in-, | ternally and then abroad. Two other \ state departments nave encroached ; on what was once the preserve of: [ private banking. The powers of the : ! Federal Farm Commissioner to grant j loans have been extended at the ex- ; pense of the joint stock land banks; and the Treasury has acquired the j gold holdings of the Federal Re- j '■ serve Banks because, according to Mr Roosevelt, " the issuance and " control of the medium of excha j '• which we call money is a high; " prerogative of government." It, would be wrong to suppose that this j rapid and not very systematic in- j crease in the powers of the state to i control currency and credit is part | of a predetermined scheme to | nationalise the banks. Its rationale is to be found, first, in the defects in ; American banking structure which existed before the depression and. | second, in the collapse of parts of '■ the structure during the crisis at the ; beginning of 1933. The first struc-j tural effect was the lack of effective ; co-operation among the units of the j Federal Reserve system and the consequent difficulty of devising and enforcing a national monetary j policy. One of the main reasons' why" the Federal Reserve Board' failed in its efforts to check the. speculative boom of 1929 was that; it was unable to compel some of the ! reserve banks in the eastern states to follow its lead. The second structural defect was the incompleteness | of the Federal Reserve system i within its units. Membership of the - Federal Reserve system had never been made compulsory, so that a reserve bank exercised only a par- j tial control over the volume of credit I within its district. To make mat- , ters worse, the archaic banking | legislation in force in most of the' , states had left branch banking m a rudimentary stage of development. Over almost the whole of the farm : belt banking business was mainly in the hands of small independent , units. The effects of the crisis of. 1933 on the American banking sys-; tern, if it could be called a system. ■ 1 were a staggering revelation of its I ; weakness. For a week or more i ! every bank door in the country was | | shut; and when finally the panic] ; subsided and the position could be j I reviewed it became clear that many i : hundreds of independent banks ■ were ruined and that man?' hun-1 dreds more could only be rehabilit- ' ated by state action. When Mr' Roosevelt came into office his task in relation to banking was twofold. First, he had to deal with the immediate crisis by putting as many banks as possible back into busi- . . ness and to take steps to prevent a similar crisis in the future. Second.

in order to carry out the monetary policy which was the pivot of his programme lie had to find a means ' to control currency and credit on a national scale. The first part of the : task was entrusted to a Deposit. Liquidation Board, which proceeded to liquidate frozen deposits by lend- ■ ing to the banks on those assets | which could be regarded as sound. ■ Further, to prevent a recurrence of reckless lending in the farm belt it ' was enacted that no joint-stock land j bank should make any loans " exj " cept such as are necessary to the \ " refinancing of existing loans." i This provision threatened an imi mediate shortage of farm credit; and I it was in consequence necessary lo ' enlarge the lending powers of both ' the Reconstruction Finance Corpor- : at ion and the Farm Loan Commissioner. In his effort to create machinery to enforce a national monetary and credit policy the President had. in theory, two courses

open to him. He could reform the •' Federal Reserve system by increas- 1 ing the powers of the Federal Re- j serve Board over the regional re- j serve banks and by bringing all j banks into the system, or he could extend the control already exercised | over the banking system by state j organs such as the Treasury and the j Reconstruction Finance Corporation. [ In practice, he was not entirely free : :

; to chouse, since time was the es- ; sence of his problem. Reform of : the Federal Reserve system would i have been a long and difficult task. and there was in any case some i doubt whether the legislation emi powering him to carry out banking j reforms was constitutional. For the first few months at least it was necessary *o enforce his monetary policy through government agencies. There is reason to believe that at first government interference in banking was intended only as a temporary exDedient and that the President hoped ultimately to hand over the control of currency and credit to a reformed and purified banking system. But differences of opinion with the bankers have comj pelled the President to rely more ! and more on the Treasury and the ! Reconstruction Finance Corporation I and to think less and less about i reforming the banks. Moreover, the : recent banking scandals have enabled Mr Roosevelt to extend the . banking functions of the administra- ■ tion with the hearty approval of a ! great majority of the American i people. Yet it is impossible to | watch the process without misgiv- ! ings. The Macmillan Committee, in ■ one of the wisest passages in its ■ report, emphasises that the delicate i mechanism of finance can be coni trolled effectively only by those with. ; specialised training and experience. .In America at the moment the I mechanism is being controlled by I civil servants: and if Mr Roosevelt ! has learnt one thing from his cx- | periments in state control of mI dustry and commerce it is that the | American civil service, particularly ! in its higher grades, is not rcmarkI able either for independence or for ability.