America's Money Machine

124 PART II / THE GREAT REVERSAL
The promotion of the banker's acceptance in a generally indifferent
market was the first majorstep in substituting finance in the abstract for
finance in the concrete. Backing for the note issue would no longer
consist ofphysical things, particularly goods in the course ofproduction
or trade, along with gold, but it would consist increasingly of evidences
of debt, of uncertain character and duration, and a declining amount of
gold. At first this debt was that of the commercial banker, in the form of
the banker's acceptance, whose assets did not consist of physical goods
(beyond the bank premises, and the small change in his cash till) but of
other evidences of debt. As we have noted, the original character of the
banker's acceptance as an instrument representing a further guarantee
upon an obligation derived from goods in trade, and having an early
maturity corresponding to the time required to deliver or dispose ofthe
goods in the market, had given way to that ofan instrument representing
an obligation secured by goods in warehouse and not actually in trade,
and having an indefinite, or a continually renewed maturity.
The next step was to substitute, for the banker's acceptance, the shortterm
obligations of the Federal government, which represented often the
unliquidated balance of past fiscal deficits, the cost of wars long fought
and forgotten, and other consumption activities of the state. This development
will be followed in more detail as our story proceeds.
The third major change in central bank theory which the customs of
commerce, the independence of trade, and the exigencies of politics
forced upon the Federal Reserve System, was in relation to the price level
-the notion that somehow the movement ofprices should be controlled
by the state.
The operations of the Federal Reserve System, as originally constituted,
were to be directed to a money and credit supplythat served "to
accommodate commerce and business."
It was in the 1923 Annual Report of the Board that official recognition
was first given to the theory that Federal Reserve policy should be directed
not to "accommodating commerce and business" but really to the
maintenance of a stable price structure. The Report stated: "Particular
prominence has been given in discussions of new proposals [for guides
to credit and currency administration] to the suggestion frequently made
that the credit issuing from the Federal Reserve banks should be regulated
with immediate reference to the price level, particularly in such
manner as to avoid fluctuations of general prices."6
Adolph C. Miller, the Board member whose opinions we have already