UNITED STATES NOW

Evening Post, Volume CXVIII, Issue 92, 16 October 1934, Page 12

UNITED STATES NOW

CENTRAL. BANK PLAN

FEARS OF INFLATION

"Evening Post," October 16.

Large-scale inflation in the United States is generally feared by American bankers and conservative economists, and plans for a Government-controlled central bank to be brought before Congress are regarded as directed to that end. Such an institution, its advocates insist, shall be .brought under the control of the Government. It shall have full control over the operation of the individual banks and extend the principle of complete credit control to complete domination. The most ominous possibilities of the proposal in tie view of the trading banks appears to be that not only would Government control the business of banking but the nature of the banking process would be altered in such a way as to place the entire economic life of the United States under the regulation of public officials. Fesrs are expressed by banking opinion in New York that a central bank would be utilised as an instrument for inflation. The Guaranty Trust of Xew York, one of the largest banking institutions of the United States, directs attention to the fact that the American - Administration's programme of public loans and expenditures involves borrowing on a huge scale by the Government, mainly from the banks. This borrowing has already proceeded to a point where about one-third of total bank portfolios consist of Government bonds- and where member banks of the Federal Reserve system alone hold more than one-third of the total Public Debt. It is recognised that, if this borrowing continues, it will become increasingly difficult for the Government to float bonds at reasonable rates of interest. With the central bank completely under the control of the Government, this limit could be greatly extended; and, .if the central bank should be relieved of reserve requirements, there would be no limit at all. The central bank, under these circumstances, could simply issue notes in exchange for Government bonds. For all practical purposes, this would be equivalent to a direct issue of greenbacks by the Government. To the extent that Buch a policy was pursued, the central bank would be merely an instrumentality of roundabout inflation. The trust also observes: "But the problem of putting the funds to work would remain to be solved. DREAD OF DICTATION. '"The proposal to place the dictatorial authority over credit in the hands of the Governments brings in a new set of complications," states the Guaranty Trust. "Politically-appointed banking officials would be answerable to the Government that employed them, and it happens only too frequently that the principal objective of the Government is to get itself reelected. "Party membership would tend to become a matter of business policy rather than of honest political conviction. "Losses due to bad management would be recouped from the public treasury, and ultimately from the taxpayers. "That a Governmentally-coutrolled banking system could be administered with greater financial wisdom, greater fairness and impartiality, and greater courage to make unpopular decisions than a privately-controlled system is hardly conceivable. "It has happened more than once that a central bank has failed to .take steps towards credit restriction at a time when such a policy was urgently required, apparently because the banking authorities realised that restrictions might precipitate unpleasant developments and that they would be blamed for those developments. ... "It is reasonable to believe that public officials responsible to a political Administration would be far more susceptible to such influences." POLITICS IN BANKING. It appears to be the general opinion of American banking authorities that if the plan for a central bank for the United' States implied a combination of the twelve Federal Reserve Banks into a central institution with branches no great alarm would be occasioned. The regional scheme of reorganisation, however,, was adopted in the belief that it was better fitted to serve the needs of a large and highly-diversified country, and it is the considered opinion of banking authorities that that system should not be abandoned without very careful deliberation. What is feared by American bankers, however, is that the central bank plan will bring the undesirable elements ot politics into banking. "The consequences of such a policy," states the Guaranty Trust,' "would not be confined to the banking system itself. . "Banking is the nerve centre of bustness Government control of the supply of credit would sooner or later involve efforts at Government control of _ prices, production, and business policies in general. The entire industrial and commercial structure of the nation would be affected. The system of free enterprise under which the United States has developed would tend to disappear. Private property in productive goods would be placed' in jeopardy. "It is. doubtful whether the proponents of the plan realise how strongly it would tend to create a drift towards Socialism. Any changes to be made in the banking system of the United States should be "based on the principle of securing sound and conservative bank management, not on that of extending the powers of the Government into a highly technical field in -which it is not equipped to operate successfully."