America's Money Machine

The Great Investigation 55
At the same time, as a concession to advocates of a bond backed
currency, the Commission's proposals would authorize the issue ofnotes
against the pledge and deposit ofsatisfactory securities up to 75 per cent
of the value of such collateral. The character and quality of the "satisfactory
securities" was left open-a provision that tacitly allowed the use of
corporate bonds as note issue reserve. Notes could also be issued against
U. S. government bonds and also against notes of one year maturity or
less of states and even of foreign governments.
Ordinarily, circulating notes and demand liabilities of the proposed
central issuing authority (the National Reserve Association) were to be
secured by gold to the extent ofone-half, but a technical provision would
permit U. S. government bonds to be counted at par as reserve, and
provision was made for a tax upon the note issue when the reserve fell
below 50 per cent, with a minimum reserve in any case of33 1/3 per cent.
An additional limitation was that notes issued in excess of $900 million
should be covered 100 per cent by gold or be subject to a graduated tax.
On the question of the locus of authority, whether control of the
banking and monetary system should be centralized in one institution
with autocratic powers, or dispersed throughout the banking system, the
Commission again offered a compromise. Control over the quality ofthe
note issue, that is, of the reserves supporting the notes, would be vested
in a central authority called the National Reserve Association. This institution
alone would have the power to issue notes through the rediscount
process, and to assess the quality of the collateral offered. It would also
have the right and the duty to examine into the condition of member
banks-although, curiously, the draft bill gave no disciplinary authority
to the Association beyond publishing the reports.
, The quantity of the note issue was to be governed by the market
demand for money. That is, as member banks needed cash to meet calls
from depositors or to extend credit to customers, they would obtain the
means from the National Reserve Association by rediscounting their
commercial paper with the Association.* As demand for credit diminished,
and the discounted paper matured, the circulating notes would be
retired. The procedure represented an essential democracy in the money
system whereby the economy, working through the mass of individual
transactions, would make its will manifest in regard to the money supply.
*Rediscounting technically is the sale ofa promissory note at a discount representing the
amount ofinterest, with the guarantee of the offering bank-indicated by "endorsing" the
note-to payoff the note at maturity if the maker defaults.