America's Money Machine

When to Reef Sail 1 17
You have the power under the Reserve Act to suspend the reserve requirements.
Without suspending the reserve requirements as to the reserve note you
could issue additional reserve notes equal to the amount outstanding without
violating the statute. In other words, you could increase the credits of the
Reserve banks and the member banks three billions immediately, not only
without harm, but with the beneficent effect of immediately restoring the
confidence of the country which has been impaired by the terrible policy of
so-called deflation.
Out of the 1920 debacle and the controversy that it generated began
to emerge the issue of the central function of monetary policy, and the
direction ofpublic policy. The issue was fairly stated in an editorial in the
Times commenting upon the debate between Owen and Harding and
their respective parties:
The first duty ofbanks is to keep themselves liquid. In excess ofpatriotism
the banks financed the Treasury rather than trade, and thus got into the
frozen condition from which they are retrieving themselves in the interest of
all concerned. It is the duty ofbusiness to finance the banks as well as of the
banks to finance business. The reciprocal discharge of all obligations is the
duty of all.
It is not the duty of the banks to sustain the price of anything. During the
war there grew up the idea that banks should limit their loans to essential
credits. That meant that war industries should be supported for the same
reason that the banks financed the Treasury. Senator Owen now thinks that
the banks should extend themselves in the interest of "legitimate production"
and "legitimate distribution." But who shall decide what is legitimate?
Governor Harding long ago declared, with general approval, that it was not
the duty of Washington bankers to decide that for the country. Senator
Owen's appeal should be to the member banks. But how shall they decide
upon the degrees of legitimacy of the loans which they make? Solvent customers
should be enabled to meet their obligations and required to do so.
The customers owe to one another what they owe to the bank-liquidation
ofobligations at maturity in whatever kind ofproduction or distribution they
may be engaged. Banking gets into deep water when it attempts anything
more than receipt of deposits and making of loans. In that aspect it is one
of the simplest of businesses, but Senator Owen would have it assume the
function of a financial Providence. Governor Harding's way is less sympathetic,
but sounder. 7