BUSINESS & INVESTMENTS

One Way to Fight Depression

F. B. HOUSSER April 1 1932
BUSINESS & INVESTMENTS

One Way to Fight Depression

F. B. HOUSSER April 1 1932

One Way to Fight Depression

BUSINESS & INVESTMENTS

F. B. HOUSSER

Hundreds ol thousands of dollars are lost annually In Canada through careless investment. Fraudulent and worthless securities are being constantly poured on to the market to trap the unwary. A general observance of this simple maxim will assist in the reduction and elimination ot this economic waste— ■BEFORE YOU I NV EST— IN VESTI G ATE”

AN important and far-reach-

ing move was

recently made by the President of the United States to relieve the effects of the much advertised depression on the

American people, who lost hundreds of millions of dollars in savings deposits through the epidemic of American bank failures last year. The incorporation in February of a two-billion-dollar Recon-

struction Finance Corporation, of which Mr. Hoover himself was the chief promoter, ranks as one of the most determined gestures j so far made to restore confidence, not only jin the United States but abroad. Outside j countries as well as American citizens were beginning to lose confidence in the soundness of American financial institutions, and this feeling was being nursed and fostered by commercial enemies of the United States. It is too early yet to say whether the ¡experiment will have the results desired.

> but the plan itself is something about which all Canadians should be informed.

Federal Reserve System

IN ORDER to understand what has been taking place, it is necessary to learn a 'little about the Federal Reserve Banking ; System. In 1913 Congress, on the insistence of President Wilson, passed the Federal Reserve Act. Twelve Federal Reserve banks were created, armed with powers and charged with responsibility to act in certain assigned areas as a branch of one central organization. The system is under the control of a board of directors including the Secretary of the Treasury, the Comptroller j of Currency and five others named by the President. Every national bank is required to join the system and to subscribe for stock but there are thousands of local banks not members. The Federal Reserve is supposedly prepared to supply member banks with money as needed. It is a bankers’ bank, and until the last two years has been i functioning satisfactorily.

! As explained by President Hoover in a statement last October, when the Federal ; Reserve Act was passed, banking institu! tions were different then from what they ! are now. Then, when a corporation needed money it borrowed from its bank and* deposited securities which were acceptable by law as collateral. Now, however, many ! corporations needing money issue their own ! securities in the form of bonds and stocks. These securities do not, or rather did not. ¡come within the Federal Reserve Law as i paj)er which is eligible for Reserve Bank discount.

The October Crisis

GREAT BRITAIN went ofr the gold standard in September. Immediately following this there was something approaching an international money panic, of which, it is claimed. France took advantage to undermine confidence in the j American dollar by a raid on the gold in the ! vaults of the Federal Reserve Bank. The withdrawal of foreign money from New ! York in the form of gold scared the American

bankers and the American public. On j Mr. Hoover’s own1 statement, $360,-, 000,000 of American j securities were dumped on the New York market by foreigners within ten days, and as much or more by Americans themselves, j

To make things worse, there were runs on independent banks in all sections of the United States. These banks could not raise enough cash to meet the demands of their depositors and were forced to dump their securities on the market on top of those of j everyone else. There were more securities • being offered for sale than buyers to take them, and both the stock and bond markets slumped.

The National Credit Corporation

CAN THE night of October 6 Mr. Hoover held a conference of Treasury heads! and Senators and Congressmen, and submitted a programme to deal with “the wholly abnormal situation and bring about an early restoration of confidence,” as he described it. The plan was to form a $500.000,000 company called the National Credit Corporation whose chief function would lie to liberate frozen assets, or in other words convert into cash high-grade securities in the possession of banks which were unsaleable because there was no one to buy them.

The idea was that the banks, in time of need, could procure credit in cash by pledging stocks and bonds not legally eligible for rediscount at the Federal Reserve Banks. This was virtually a proposal to j change the Federal Reserve Bank Act, and ! was fiercely opposed by certain financial ; editors and politicians. The chief objection to it was based on the seemingly sensible argument that in accepting frozen assets as security for loans, the trouble was only being transferred from one place to another. If these stocks and bonds were frozen before j they were pledged, they would be just as I frozen, only the Federal Reserve would have I them instead of the independent banks. In j answer, it was pointed out that they were ' only frozen “pro tern” and the Federal, Reserve could afford to hold them until they thawed.

The New Corporation

ALTHOUGH $500.000.000 looked like a lot of money, it soon became apparent that this would not be enough to meet all the demands likely to be made upon the ! National Credit Corporation. The railways had to be looked after. They were frozen, too. The Chairman of the Interstate Commerce Commission testified before a committee that the roads would need between $85.(XX),000 and $156,000,(XX) above cash on hand to meet obligations maturing before May 1, 1932, and that on October 31, 1932., they have obligations to meet totalling $224,000.000. In the meantime, gross operating revenues of the carriers had dropped two billion dollars since 1928. Something had to be done for the railroads.

The deeper the crisis was investigated the

more alarming it grew. Eminent bankers began to say that the Credit Corporation was a magnificent gesture and of some value psychologically, but was not likely to be of any great use otherwise; not. at any rate, adequate to meet the emergency. Mr. Hoover in his annual message to Congress came forward with a recommendation for the creation of an organization similar in nature to the War Finance Corporation, and. to make a long story short, there came into being the Reconstruction Finance Corporation, which is authorized to lend two billion dollars for the aid of banking and industry “and specifically aimed at checking deflation.”

The president of this huge organization is former ambassador Charles G. Dawes. The board includes the governor of the Federal Reserve Board and other prominent bankers. The United States Government has undertaken to subscribe up to $500,000,000 of the capital stock, and the corporation is authorized to issue up to $1,500,000,000 of bonds or notes. The railroads have been given the right to make a ten per cent reduction in wages, which is expected to save them around $200,000,000 ¡:>er annum. This reduction, however, is only authorized until February 1. 1933. A slight increase in the rates on selected freight has also been allowed.

Hope of the Republicans

THF most optimistic predictions as to the effect of this legislation have been made by leading financial journals in the United States. It is important to note, however, that a director of the new corporation does not hope to see it reach the peak of its activity for at least five months. It has already had some effect in restoring confidence, but, should it fail to function to advantage after being launched with such a chorus of promise, the reaction on public sentiment in the States and elsewhere may be unpleasant. It has become the hope of the Republican party in the election next November.

Foreign financial critics, while admitting the magnificence of the gesture, are taking the attitude of the man from Missouri who wanted to be shown. It is seen as a possible solution in part of certain local problems of the United States itself, but not of the main fundamental problems which confront the world, such as the corner in gold, prohibitive international tariffs which have paralyzed trade, and the war debts and reparations.