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Posted on May 18, 2008 by Sammy Beanard | Posted under Politics
Bank Cash - A Rather Odd Subject
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Their so-called reserve, consisting of deposits with Federal Reserve banks or with large city correspondents, was by law required to be maintained at a certain fraction of their deposits it must remain intact. Under routine circumstances this system worked smoothly for cash came in as fast as it went out. But in an emergency that is, when the public was not following its usual routine, when it wanted more currency than usual, or when it was apprehensive not only that currency might prove a safer kind of money than a deposit, or that a deposit in a large city bank might be safer than one in a small town or country bank, other mechanisms came into play. Legislation provided the methods of making cash available to banks that needed it. Banks that needed cash could get it, one way or another, from banks that had cash. In the last analysis that meant that they could borrow from the Reserve banks, provided they had satisfactory collateral legally termed eligible paper; and the Reserve banks could issue currency, under the provisions of the law, up to the equivalent value of the eligible paper offered to them. This introduces still another question related to the problem of convertibility. In the twenties there were five kinds of paper currency in circulation, all interconvertible, although by the criteria of the time, two kinds were better than the other three. We also had two kinds of banks. While the problem of the convertibility of the bank deposit into currency was never too clearly recognized, the fact remained that we had one kind of bank which was more prepared to convert its deposits into currency, and another kind of bank which was less prepared. In other words, in the twenties we had five kinds of paper currency of varying degrees of "goodness," if we accept the criterion of convertibility of paper into gold coin; and we had two kinds of banks, one better than the other, if we accept the criterion of convertibility of deposits into currency. There are, of course, many criteria that may be applied to banking but here we are concerned with only one the criterion of the convertibility of deposits into cash, which is the monetary criterion of the bank deposit. No one would claim that in the twenties all banks that were members of the Federal Reserve System were good, or all those that were not, were bad; but by this fundamental criterion of the integrity of a dualistic money system, the member banks were better prepared than the non-member banks. The greatest defect of our monetary system of the twenties was its inadequate provision for the problem of insuring comprehensive, nation-wide convertibility of bank deposits. It was an unhappy thought that sugar-coated the crisis of 1933 with the euphemistic term "banking holiday." This phrase has obscured the thinking of the American public as to what happened in 1933, and partly shifted blame to the banker which properly should have been shared by the banker, the legislator, and the economist. It is easy to be wise after the event; but the record shows pretty clearly that neither the banker, nor the economist, nor the legislator had completely appraised the problem of convertibility that had been developing in the banking system during the twenties nor anticipated the implication of the phrase all so freely and uncomprehendingly used that the bank deposit had become the major element of our money system. About The Author: Sammy Beanard has researched and written about social security and other pressing issues. To see more of his writing, visit his article about social security index searches, as well as his opinions on social security number search. |
Tags: BANKING, BANKS, ECONOMICS, SOCIETY, MONEY, POLITICS
