ARGUMENTS IN THE NEGATIVE 
and automatically retired they are in effect gold certificates, or receipts for gold, the 
‘etirement of which may have no relation to the course of business. 
42 
Similarly, notes issued against paper purchased by reserve banks in the open 
market have no connection to the actual requirements of the business of the country 
out may depend only upon the reserve banks’ desire to increase their earnings by 
=mploying a portion of their assets which otherwise would be idle. 
The questions which may properly be raised about continuance of authority to 
issue currency notes against gold illustrate the problems which exist through con 
tinuation of the war-time amendments of the Federal Reserve Act into a period which 
may fairly be described as remote from war conditions. The amendment permitting 
the use of gold was made through the Act of June 21, 1917, and was recommended 
dy the Federal Reserve Board in the annual report presented to Congress in February 
1917. In making the recommendation the Reserve Board dwelt upon the desirability 
of “mobilizing” the gold supply. 
The nature of this amendment should be understood, in order that the propriety 
of reexamination now may be realized. Before the amendment was made, a reserve 
dank in order to get reserve notes had to turn over to the reserve agent 100% of 
:ommercial paper from its portfolio and as it issued the notes it obtained it had te 
srovide 40% additional in gold. Consequently, there was behind the notes in circula 
don 140% of direct security. The currency could be expanded, consequently, only as 
*he commercial paper owned by the reserve banks expanded. But in war financing 
bank deposits would grow without relation to commercial paper. Therefore, the 
Reserve Act was amended not only to allow issue of notes against paper secured by 
government obligations but against gold. This meant that, instead of having behind 
them 100% of commercial paper and 40% of gold, notes could have behind them 
10% of gold and 60% of paper secured by government obligations and/or commercial 
paper and/or gold. The result was to open the way to the war inflation, according to 
some critics, and according to well qualified experts to transfer anywhere from half tc 
‘hree-quarters of a billion in gold to the reserve banks. 
The open-market operations of the federal reserve system have as one of their 
purposes the building up in the United States of a market comparable with the markets 
in which central banks in Europe operate. The results raise some question about the 
desirability of continuation of the preferences which have been given to acceptances 
and some of the developments leave doubt about the propriety of the issue of currency 
against acceptances purchased in the open market by reserve banks. The considerations 
which are to be weighed may be suggested by quotations from a report made in 1922 
Jy a committee of national bank examiners, as follows: 
“The new regulations which have been issued by the Federal Reserve Board in 
connection with the use of bankers’ acceptances covering import and export trans- 
actions emphasize the necessity of more carefully considering the basis upon which 
acceptance credits are being granted by the various member banks. In spite of the 
comprehensive regulations issued by the Federal Reserve Board regarding this phase 
of banking practice, there have been numerous and flagrant violations upon the part 
of the large as well as the small banks. * * * Perhaps the most frequent abuse in 
connection with granting acceptance facilities against import and export transactions 
is found in the continued renewals given by some banks to their customers, * * * 
When the Federal Reserve Board announced its intention of showing greater leniency 
toward rediscounting by the federal reserve banks of renewals, in connection with 
transactions affected by the worldwide depression in business, many banks took advan- 
tage of this to too great and unintended an extent, and advances which were origi- 
nally made by acceptance credits, but which should long since have been either liquidated 
Continued on page 45) 
Votes Against Open- 
Market Purchases 
Reserve Board 
Security behind 
Notec 
Imendment of 1917 
Bank Acceptances 
dbuses 
Foreipn Trade