The Freeman 1972 - The Ludwig von Mises Institute

246 THE FREEMAN Apriltion to the most esseJ,1tial creditneeds. It had done so during thecrises of 1873 and of 1890. And in1907 it had allayed alarm in Englandby merely increasing its discountrate.There ,also was the Reichsbankof Germany. It, too, conducted adiscount policy for the protectionof general banking liquidity. Butthe Reichsbank differed from theBank of England in one importantrespect, which had great appealfor the planners in the UnitedStates. This was the "elasticity"in its note circulation. So ourcentral banking institution wasfashioned, in general, after theReichsbank.While the Bank of England alwaysheld a full gold reserve forits notes issued, the Federal ReserveSystem was required tomaintain a, gold reserve of onlyforty per cent against its issuenotes; sixty per cent could be heldin trade and agricultural paperdiscounted by member banks. Andthe Reserve Banks had to keep onhand, in "lawful money," onlythirty-five per cent of all theirdeposits. In an emergency the fullreserve requirements could besuspended for thirty days, withrenewals of suspension for furtherperiods of fifteen days each - butat a penalty of a graduated tax onthe deficiency in reserves. Allthese features were to give thenew bank flexibility and elasticity.Economic control over the newSystem was given to seven governorswho are appointed by thePresident and approved by theU.S. Senate. Of course, ultimatecontrol lies in the hands of thePresident who makes the·appointments.In all important policymatters pertaining to Americanmoney and credit, his decisionprevails.In this age of radical interventionismand socialism, a sharpdistinction must always be madebetween economic control that isdecisive, and legal ownership thatis empty and meaningless. The1913 Congress that created theFederal Reserve System gave controlto the President actingthrough his seven governors, butrested the legal ownership withthe commercial banks that wereto join the System. The memberbanks thus could be made to financethe System through theforced sale to them of "stock"that lacked any right of control.After all, the new System was toafford support .and stability tocommercial banks. Why shouldn'tthey be made to finance such benefits?At least, this was the ra,­tionale of government in 1913.If the legal ownership of theSystem should ever be placed withthe Federal government - whichthe U.S. Congress, the creator of