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Money Creation Profits Banks, Patman Says reserves ‘available’ to them.” In fact, Patman asks, where did the reserves come from in the first place? He quotes a report by the key Federal Reserve bank in the U.S., the one in New York, dated Nov., 1953: “Actually, the Federal Reserve banks have been the principal source from which the commercial banks have derived reserve funds since the founding of the Federal Reserve System in 1914.” “In plain words,” Patman says ; “since 1917 the Federal Reserve has given the private banks $46 billion of reserves. The banks have drawn out $28 billion in cash currencyand still have $18 billion left in reserves today; and it is what is left in reserves that really counts …. At the moment, the banks may create up to $8 for each $1 of reserves.” ‘What Is Who’? Patman delights in quoting an exchange which vividly illustrates that the Federal Reserve, when it “buys” government securities, creates money. Federal Reserve Board Chairman Marriner Eccles and a bewildered Rep. Dewey were talking during some 1942 hearings. Mr. Eccles. Whenever the Federal Reserve System buys government securities in the open market or buys them direct from the Treasury, either one, that is what it does Mr. Dewey. What are you going to use to buy them with? Mr. Eccles. What is who going to use? Mr. Dewey. The Federal Reserve Bank to make these purchases. Mr. Eccles. What do they always use? Mr. Dewey. You are going to create credit? Mr. Eccles. That is what we have ever done. That is the way the Federal Reserve System operates. The Federal Reserve System creates money. It is a bank of issue. It was obvious to Mr.. Eccles, but not to the congressman; and it is not obvious to the citizenry to this day, Mr. Patman maintains. The ordinary reader will not understand the next passage without a careful reading. The fact that few citizens have the patience to mull over such dry statements, Patman maintains, is the explanation of the possibility of “robbery in broad daylight.” Patman tried to relate the substance of the matter by saying, “By a sort of magic, the money is created.” But only the hard facts, as stated by Eccles in 1935, can explain how the banks are permitted to create money which they then can use for their own profit. Said Eccles: “In purchasing offerings of government bonds, the banking system as a whole creates new money, or bank deposits. When the banks buy a billiori dollars of government bonds as they are offered and you have to consider the banking system as a whole, as a unitthe banks credit the deposit account of the Treasury with a billion dollars. They debit their government-bond account a billion dollars, or they actually create, by a bookkeeping entry, a billion dollars.” Subscribe to The Texas Observer Patman objects that the banks then charge the government interest on the bonds they have bought simply by “a flick of the pen” on their books. He has approvingly quoted Thomas A. Edison, who had been asked, Patman said, whether the government should borrow $30 million to make repairs at Muscle . Shoals Dam. No, Edison had said. “Any government that can issue a dollar bond, interest bearing, that is good can issue a dollar bill, noninterest bearing, that is good; the only difference is the bill is easier to redeem because it does not draw interest.” In other words, Patman says, the government should not create debt bonds, give them to the banks, and then let the banks charge the government interest on them; the Federal Reserve should buy the bonds itself, in which case the interest payments are returned to the Treasury. ‘Creation of New Funds’ This phenomenon of “creating money” is discussed lucidly in an issue of Congressional Digest ures of the government argued whether Congress should raise the interest ceiling on long-term U.S. bonds. \(Arguing yes were Sec’y of the Treasury Robert Anderson, Federal Reserve Board chairman Wm. McChesney Martin, Jr., Sens. Prescott Bush and Hugh Scott, and Marriner Eccles. Arguing no were Sens. Paul Douglas and Reps. Patman, Henry S. Reuss, Byron L. Johnson, and Jahn D. The editors of Congressional Digest explained, in an associated article, “how the money ‘Supply is regulated.” Credit, the editors explained, comes from savings, \(simply a transfer of funds from people who save to people who banks. “When the credit is commercial bank credit, there is a creation of new funds that did not exist before.” Suppose you go to a bank for a loan of $1,000. The bank seldom pays out $1,000 in cash;, usually it credits your account with $1,000. You can write checks against the account. The bank simply, on the books, increases its loans by $1,000 “and deposits go up by $1,000.” Explained the editors: “In the process of making the loan, the commercial bank has created a deposit. As banks expand their loans and investments, they create more deposits. As they contract their loans and investments, they extinguish deposits.” Anyone can see how important this fact is for the state of business and the economic health of the country. The job of the Federal Reserve is to influence the flow of bank credit. As banks make more loans,, people get more money to spend, and business picks up tempo. As banks pull in on their loans, people have less to spend, and the economy slows down. The Federal Reserve influences what the banks do by the amount of reserves it creates or by changing how many dollars a bank can create for each dollar of reserves \(that is, by changing “the reserve Suppose the reserve requirement is 20 percent. For every $100 of deposits a bank has, it must keep in the Federal Reserve bank a reserve of $20. The Federal Reserve can either increase or decrease “the reserve requirements.” In this way, it can permit the banks to loan more money, or require them to contract their loans. This is the main mechanism by which the Federal Reserve tries to regulate hciw much money is being spent and invested. Suppose the whole banking system has to have a total of $20 billion in reserves. The banks have $100 billion of deposits. The Federal Reserve then decides to increase the total amount of bank reserves in existence by $1 billion. This means that the commercial banks, in the words of Congressional Digest’s editors, “can use these reserves, making loans and investments and expanding their deposits \(through the creaThe Same Effects, Except Once one understands that both the Federal Reserve and the private banks create new money, the issue becomesat last, Patman sighswhich shall create it? He explained the issue in his August 13, 1959, newsletter to his constituents. “The nation’s supply of money,” he said, “can be increased in either of two ways. “The Federal Reserve can acquire government .’bonds, or other government debt obligations, which cost the Federal Reserve nothing. The other method is for the Federal Reserve to amend its regulatio4 so as to make it possible for the private banks to acquire more government bonds. This costs the private banks nothing. Both methods increase deposits of the private banks, and the effects are the same, except for what happens to the interest payments on these bonds. “When the Federal Reserve acquires them, the interest payments come back into the Treasury and help meet the expenses of government. When the private banks acquire the bonds, the in terest payments go into bank profits. One of the big controversies now is over which method will ‘be used in the months and years ahead.” In short, Patman argues, the government should buy its own bonds and take the interest for income, which expands the nation’s credit without increasing the government’s interest load. If, however, the Federal Reserve reduces reserve requirements for the private banks, then the banks can use the created money to buy more government bonds, and then charge the government interest on them. He finds this senseless. The banks, of course, see it another way. In a 1957 report, the American Bankers’ Assn. economic policy commission, foreseeing that “the needs of the public for currency and bank deposits will increase with the growth of the American economy,” declared that the reserve base of the banking system would have to be expanded “either by creating reserves through open-market operations or by reducing reserve requirements.” The A.B.A. said the Federal Reserve, to follow the first, Patmanadvocated course, would have to further increase its investment portfolio, “which, it is widely agreed, is already excessively large.” \(Where, Patman demands, is this wide agreement? “Only among the bankers, we can be sure, who wish to have a slice of this portfolio transferred to A.B.A. said that to keep up with the economy through 1961, the Federal Reserve would have had to buy $7 billion in government securities on the open market. man, it would have flipped over the bridge railing and fallen forty feet to a concrete road below. Eli In Houston, the Selby mur der-for-hire case, which has occupied much space in the dailies, came to a head when a Negro confessed, then repudiated his confession as beaten out of him by Texas Rangers. In the confession he said he had been hired by another Negro for $1,500 to kill Mrs. Wilma Selby. The dead woman’s husband had admitted he paid out more than $4,000 to several Negro women to hire someone to kill her. The Week in Texas By a vote of 316 to 49, resi dents of San Benito’s school district in the Rio Grande Valley v ot e d to abolish segregated classes. A total of 750 had signed the petition required under state law asking for the election. There are 26 Negroes among the 5,800 children of school age in the district. Seven Negro high school students in San Benito have been going to high school in Harlingen agreement. OJudge Penn Jackson, chair man of the Insurance Board, expects a statement on the “safe driving insurance plan” to be issued by the board by Feb. 5. OAtty. Gen. Will Wilson ruled that San Antonio’s new medical school cannot be financed with University of Texas permanent fund income. OJ. Evetts Haley, chairman of “Texans for America,” confirmed that his group sent out 5,000 reprints of American Mercury’s article alleging leftism at Southern Methodist University. Patman emphasizes that these securities would be interest-free to the government \(that is, the interest would be used for the exBut A.B.A. added, “It would be far better to provide for this growth by lowering the reserve requirements of member banks . . . It is true that the government would lose a small amount of revenue, since about 90 percent of the Reserve banks’ annual earnings after dividends are now being voluntarily paid over to the Treasury. However, the Reserve banks were never intended to be a source of revenue to the government, and policy regarding the level of required reserves should certainly not be determined on the basis of the effect on Federal Reserve payments to the Treasury.” To which Patman angrily exclaims: “If our policy on this question of giving away government-owned securities to the private banks `should certainly not’ be determined by what this will cost the government, then may we ask on what basis should it be determined? . . . “Who would like to explain why the banks should be allowed to use the government’s creditfree of interest chargeto extend cred it to the government at an interest charge? Who would like to ex plain why, when the Federal Re Serve decides to allow more mon ey to be created to acquire inter est-bearing government obliga tions, it does not itself create the money and acquire’ the obliga tions? Who would like to explain why the interest charges should not go back into the Treasury in stead of into bank profits?”R.D. THE TEXAS OBSERVER Page 3 January 29, 1960 OA five-state meeting of the Southwest regional conference of the National Assn. for the Advancement of Colored People has been announced for Texarkana, Texas, February 13-14, by Clarence Laws, field secretary and coordinator for the region, headquartered in Dallas. Laws said that the conference will “review the achievements of the past year and adopt programs and goals in keeping with fundamental needs for 1960.” The conference closes Sunday afternoon, Feb. 14, with a public meeting featuring a top NAACP official, the release said. OThe presidents of the 19 state-supported colleges and universities in Texas have now formally opposed the state “trying to support any more colleges or universities,” favoring expansion of existing state facilities. The statement, issued by the Council of State College Presidents, seemed to be aimed against a campaign in Houston to have the state accept and maintain the University of Houston. OThe Texas Research League, the private research organization financed by 700 firms and individuals in business, has once again been designated to do staff research on state and local tax policy, R. S. Sines, Houston, chairman of the League, announced. The research will be given to the Texas state tax study commission, t h e legislature’s conservativedominated tax study group. OSen. Henry Gonzalez, San Antonio, evidently fell asleep at the wheel of his station wagon ten miles south of Waco at 4:15 a.m. one morning last week. His car hit the bridge at Bruceville and was demolished; Gonzalez esceped with a bruised knee. Had the car been slightly further to the left, said a highway patrol an Benito Integrates More were to be mailed. Dr. Willis Tate, S.M.U. president, said the article “is filled with obvious untruths and malicious deceit”; Bishop A. Frank Smith, president of S.M.U.’s trustees, said the piece contained “amazing insinuations”; Jerome Crossman, president of the Dallas Council of World Affairs, called it “scurrilous.” *An application from the “Texas Naturist Assn., Inc.,” for a charter to run nature parks and organize groups “for the practice of social nudism” was rejected by Secretary of State Zollie Steak