Chapter II
Quotations From The Booklet
The Federal Reserve System — Its Purposes and Functions
Before we go into the discussion of the banking problem, I want to give you many quotations from the booklet issued May 1, 1939, by the Board of Governors of the Federal Reserve System, during the chairmanship of Marriner S. Eccles.
Page 18: “The Federal Reserve Open Market Committee comprises the seven members of the Board of Governors, and five representatives of the Federal Reserve Banks. The Committee directs the open market operations of the Federal Reserve Banks; that is, the purchases and sales of United States Government securities and other obligations in the open market.”
Page 18: “Member banks include all national banks in the continental United States, and such State banks and Trust companies as apply for membership, meet the requirements, and are admitted. On December 31, 1938, the membership comprised 5,224 National banks and 1,114 State banks. There were over 8,000 other State banks and trust companies that did not belong to the system. . . .”
Pages 19 & 20: “. . . Currency is actually used for only a small part of the country’s total volume of payments, the greater part being effected by the use of bank: cheques. . . . it is possible for them to borrow additional funds from their Federal Reserve Bank, and possible for the Federal Reserve authorities on their own initiative to supply additional funds through open market purchases.”
Page 22: “The Federal Reserve Act. . . empowered the Reserve authorities to discount paper for member banks, to engage in open market operations, and to issue Federal Reserve notes. . . . The member banks. . . may deposit in their reserve accounts in Reserve Banks the cheques on other banks (after first giving deposit credits to customers on the bank’s book-double deposits) and surplus currency received from their customers, and on the other hand, they may draw on their reserve accounts for various purposes, especially to procure currency and to pay the cheques drawn on them by their customers and deposited in other banks.”
Page 23: “Since the Federal Reserve authorities have the power to increase or decrease the supply of reserve funds and within limits to increase or decrease reserve requirements, they are able to exercise considerable influence over the amount of credit, in the aggregate, that banks may extend.”
Pages 23-24: “The duties of the Reserve authorities . . . . are principally the following: hold member bank reserve balances; furnish currency for circulation; facilitate the clearance and collection of cheque; supervise member banks and obtaining reports from them; and act as fiscal agents, custodians, and depositories for the United States Government.”
Page 26: “Federal Reserve notes are liabilities of the Federal Reserve Banks that issue them. . . . They are also obligations of the United States Government.” Which makes the Government the guarantor of private notes.
Page 26: “Treasury currency, comprising silver certificates, silver dollars, subsidiary silver, minor coin and United States notes, is issued by the Treasury itself, but it is placed in circulation . . . through the Reserve Banks.”
Page 27: “All United States paper currency is printed at the Bureau of Engraving and Printing in Washington, D.C., and all United States coins are made at the Philadelphia Denver and San Francisco mints . . . operated by the United States Treasury. Federal Reserve Notes are printed by the Bureau at the expense (30 cents a $1,000) of the Federal Reserve Banks.”
Page 27: “There are two principal ways by which any individual gets paper money and coin. Either he draws it out of his bank and has it charged to his account; or, he is paid for his labour, his services, or his merchandise with money that has been drawn out of a bank by someone else.”
Page 28: “Banks provide themselves with the amounts and kinds of cash that the people want. Member banks depend upon the Federal Reserve Banks for replenishment of their supply, ordering what they require and having it charged to their reserve accounts. Non-member banks generally get their supply from member banks.”
Pages 30-31: “The use of cheques is facilitated by the services of the Federal Reserve Banks in clearing and collecting them through the reserve accounts of member banks. For example, suppose a Hartford, Connecticut, manufacturer sells $1,000 worth of electrical supplies to a dealer in Sacramento California and receives a cheque on a bank in Sacramento. . . . The Hartford manufacturer . . . deposits the cheque in his Hartford bank. The Hartford bank does not require cash for the cheque; it wants credit in its reserve account at the Federal Reserve Bank of Boston. Accordingly, it sends the cheque to the Federal Reserve Bank of Boston (which credits Hartford banks reserve account $1,000). The Federal Reserve Bank of Boston sends it to the Federal Reserve Bank of San Francisco. The Federal Reserve Bank of San Francisco debits the Sacramento bank’s reserve account $1,000 and sends it to the Sacramento bank. The bank in Sacramento charges the cheque account of the depositor (the electrical dealer) who wrote it, and either remits the amount to the Federal Reserve Bank of San Francisco or authorizes the San Francisco Reserve Bank to charge the amount to its reserve account. The Federal Reserve Bank in San Francisco thereupon credits the Federal Reserve Bank of Boston. The Federal Reserve Bank of Boston in turn credits the account of the Hartford bank. Thus the cheque effects the transfer through the Federal Reserve Banks of $1,000 of deposit credit from the chequeing account of the dealer in Sacramento to the chequeing account of the manufacturer in Hartford and transfers $1,000 In Reserve from San Francisco Reserve bank to Boston Reserve Bank to credit of Sacramento bank.”
Page 32: “Cheques which are collected and cleared through Federal Reserve Banks must be paid in full by the banks on which they are drawn, without deductions of a fee or charge.”
Page 35: “The twelve Federal Reserve Banks carry the principal chequeing accounts of the United States Treasury, handle much of the work entailed in issuing and redeeming Government Obligations, and perform numerous other fiscal duties of the United States Government.”
Page 39: “The aggregate deposits in the banking system as a whole represent mainly funds lent by banks or paid by banks for securities, mortgages, and other forms of investment obligations. It may seem that it should be the other way around that bank loans and investments would be derived from bank deposits (to the credit of customers) instead of bank deposits being derived from loans and investments; and it is true that deposits would not grow out of loans if currency were to be used by the public for monetary payments to the exclusion of bank deposits transferable by cheque. But as it is, the public in general prefers to have its monetary funds — including what it borrows — on deposit in banks rather than in the form of currency in its own possession. The result of this preference is that the proceeds of loans go on deposit to be disbursed by cheques, and aggregate deposits are increased.
“Suppose for example, that a man borrowed $1,000 from a bank and took his loan in currency. The bank would have $1,000 less currency than before and in its place a promissory note for $1,000. Its deposits would remain unchanged. (But when others returned the cash for deposit new deposits would be created.) But suppose that the borrower, preferring not to take the currency, asked for $1,000 deposit credit instead, it (the bank) would have $1,000 more deposits (also the note) in its books. The loan instead of decreasing the bank’s cash balance would have increased its deposits.
“Or suppose that the bank purchases a $1,000 Government bond from one of its customers. The customer does not want payment in currency — he wants payment in deposit credit. Accordingly, the bank acquires a $1,000 bond and its deposits increased by $1,000. The bank’s currency is not involved in the transaction and remains what it was.
“. . . when banks give deposit credits to their customers, they assume an obligation to pay the customers’ cheques. Consequently, they must have funds on hand for the purpose; though ordinarily the amount need not be more than a (small) fraction of the total deposit liability.”
Foot Note, page 40: “As this and the preceding paragraphs indicate, a bank’s purchases of investments, i.e., notes, bonds, mortgages, etc., is an extension of credit just as loans are; and bank investments increase bank deposits just as loans do. For the sake of simplicity, the terms ‘lending and extension of credit’ are often used where the purchase of the investments by banks as well as lending by banks is meant.”
Page 42: “. . . member banks are required to maintain reserves of a certain volume with the Federal Reserve Banks, and at the same time the Federal Reserve Banks are given the power to advance additional reserve funds to them either by lending to them directly or by purchasing securities and other forms of (investment) obligations in the open market.”
Page 44: “While maintaining his average reserve balance at or above the minimum requirement, a banker may make constant and active use of his reserve account. From day to day he may have credits to his account for cheques on other banks received from his depositors; and from day to day he may have charged to the account for cheques that have been drawn on him and deposited in other banks. He may also from time to time withdraw currency and have it charged to the account, and when he has more currency than he needs, he may deposit it at the Reserve bank to be credited to his account. . . .
Suppose, for example, that a given bank has $2,000,000 of deposits, is required to have reserves of 10 percent, (of the $2 million) and has exactly that amount, namely $200,000. If a customer deposits an additional $100,000, either in cash or in the form of a cheque on another bank, the first bank not only has its deposits increased by that amount, but also is put in position to increase its reserves equally by depositing the currency or cheque in the Federal Reserve Bank.”
Page 45: “In brief, when borrowed funds are chequed out, the (page 46) result is a decrease in reserves; and when they remain on deposit, the result is an increase in deposits without an increase in reserves. In either event, lending has an immediate reaction upon the ratio of reserves to deposits. And, as a corollary, the amount of reserves held in relation to legal requirements is a controlling factor in the lending policy of a bank.”
Page 48: “The loans which individual member banks may obtain from the Federal Reserve Banks are of two classes: (1) the discount of so-called eligible paper; and (2) advances. Eligible paper consists principally of notes, drafts, and bills of exchange used to finance payments for agricultural and industrial products. Advances may be made by a Federal Reserve Bank to a member bank on the latter’s promissory note secured by collateral. (Page 49) Under the two foregoing provisions a Federal Reserve Bank may supply a member bank with any amount of additional reserves the member bank needs, the only limitation being the amount of good assets the member bank can offer the Federal Reserve Bank as security.”
Page 50: “In recent years, however, banks have had a large volume of excess reserves, there has been little occasion for them to borrow from Federal Reserve Banks.” (Note: Sure: The $250 billion U.S. Bonds gave banks $1,250 billion Reserves.)
Page 50: “The second method of supplying banks with additional reserve funds is through open market purchases (Page 51) of government securities and other obligations. These purchases are undertaken at the initiative of the Federal Reserve authorities and not of individual member banks. They do not have particular banks in view, but the aggregate reserves of the banking system as a whole.
“Securities purchased by the Federal Reserve authorities in the open market come out of the portfolios either of banks themselves or of investors and corporations that are customers of banks. If they come out of the portfolios of investors and corporations, the cheques given in payment by the Federal Reserve authorities (Page 52) are deposited by the investor and the corporation in their respective banks” and as a result bank deposits are increased. The banks in turn deposit the Reserve authorities’ cheque in their reserve accounts at the Federal Reserve Bank, so that reserves also are increased (dollar for dollar) purchases of securities by the Federal Reserve authorities always increase the reserves of banks, therefore open market purchases increase bank reserves relative to bank deposits, they tend to furnish member banks a larger basis for credit expansion. . . . Thus if $100,000,000 of securities purchased by the Reserve authorities came from the portfolios of investors, the result would be that bank deposits as well as reserves would be increased by that amount.”
Page 55: “Loans and purchases of securities by the Federal Reserve authorities are one of the important sources of member bank reserves; member bank reserves in turn are the basis of member bank credit-that is, of the loans and investment: of member banks. And member bank credit is a source of bank deposits transferable by cheque wherewith business men and other persons make the bulk of their monetary payments. ...
“In other words, member bank credit is used chiefly in the form of member bank deposits subject to cheque; Federal Reserve Bank credit is used chiefly in the form of member bank reserves held on deposit with the Reserve Banks; and the volume of member bank reserves — deriving in greater or less degree from Federal Reserve Bank Credit (which is the Nation’s credit subrogated to them by Congress, gratis. — The author) determines the ability of member (Page 56) banks to meet the demands of their borrowers for member bank credit.
“It is important to note, however, that Federal Reserve Bank credit and member bank credit are not the equivalent of each other, dollar for dollar. Member bank reserves do not have to be increased by $500 million of Federal Reserve bank credit in order to make possible an increase of $500 million in member bank credit. The additional Federal Reserve Bank credit needed will be only a fraction (1/5 on an average) of the additional member bank credit to be extended. . . .
“Suppose that banks were required to maintain reserves of 20 percent and that they had just that 20 percent and no more. Then if the deposits were to be increased by $500 million, they would have to increase their reserves by but $100,000,000. Accordingly, the $100 million of Federal Reserve Bank credit obtained by borrowing or by the sale of securities to the Federal Reserve Banks would increase their reserves sufficiently to enable them to expand their own credit by $500 million.”
Page 68: “Bank deposits result chiefly from loans and other extension of credit by banks.”
Page 69: “Suppose there were only one bank instead of several thousand, and that this one bank did all of the commercial banking business of the country. Suppose further that this bank were required by law to have reserves equal to at least 20 percent of its deposits. Thus if it had deposits of $5 billion, its reserve balance with the Reserve Bank would have to be at least $1 billion.”
Page 70: “Suppose, however; that the Reserve authorities were of the opinion that more loans might advantageously be made and that the bank should be provided with additional reserves so that it could make them. Suppose, therefore, they purchase $20 million of securities (corporation stock) in the open market. The seller of the securities would deposit in the commercial bank the money he received in payment (the Reserve authorities’ cheque). The commercial bank in turn would deposit it in its reserve account at the Reserve Bank. Having these additional reserves of $20 million, the commercial bank, by making loans, could increase its deposits to five times as much, or $100 million — $20 million being the 20 percent reserves required against deposits of $100 million.”
Page 71: “The same principle that would hold if there were only one bank holds true of all banks taken together.” (All banks must be ONE. — the author.) . . . “By the normal and active process of clearing the enormous number of cheques that are constantly being drawn on one bank and deposited in another — thereby entailing the transfer of funds from one reserve balance of one bank to the reserve balance of another.”
Page 75: “The practical consequence of this is that the Federal Reserve authorities, by supplying a relatively small volume of additional reserve funds, make it possible for the banking system as a whole to supply the public with a far greater additional volume of credit.”
Note bottom Page 75: “The reserves required are not 20 percent at present (1938), but about 15 percent is the average. The figure 20 percent has been used for greater simplicity in illustration.”
Page 84: “(The Nature of Federal Reserve Bank Credit.) Credit in general is a matter of monetary agreement, the essence of it being an acceptable promise to pay. Bank credit is a special form of credit, peculiar in that it involves a promise or assumption of liability by a bank, given in exchange for a promise made to the bank. Thus the bank accepts a promissory note of a customer and in exchange promises to pay the customer a corresponding amount, which, pending his order, is carried on its books as a deposit in his favour.
“Bank credit plays a vitally important part in modern economic life. As a source of bank deposits transferable by cheque, it provides the funds with which the bulk of monetary payments is effected. It is always interchangeable with legal tender money, but for the most part it is not derived from legal tender money, nor does the volume of bank credit bear any . . . relationship to the volume of legal tender money. If the volume of loans that banks could make and of deposits they could accept were limited to the volume of currency in existence, bank credit would not have the utility (inexhaustibleness) in our economic system.” (Bank would be stymied.)
Page 85: “Reserve Bank credit resembles member bank credit in general, but under the law it has a limited and special use — as a source of member bank reserve funds. It is itself a form of money authorized for special purposes, convertible into other forms of money convertible therefrom, and readily controllable as to amount. (This is the genesis of created money-bank deposits.)
“Federal Reserve Bank credit, therefore, as already stated, does not consist of funds that the Reserve authorities ‘GET’ somewhere in order to lend, but constitutes funds that they are empowered to create. (By writing a cheque against no funds. — the author.) The process of creation is one of giving the promise of the Federal Reserve Bank — in the form of Federal Reserve notes and reserve deposits — in exchange for the promise made by others to the Federal Reserve Banks, the reason for the exchange being that the Federal Reserve Banks’ promises are recognized by law as having a particular monetary utility not possessed by the promises of individuals and institutions. That is, Federal Reserve Bank promises — or ‘liabilities,’ as they are commonly called — serve in the form of Federal Reserve notes as the principal element of the circulating medium. . .”
Page 94: “ A striking feature is the abrupt increase in the gold stock in 1934. This reflects revaluation of the dollar by which the price of gold was raised from $20.67 to $35 an ounce.”
Page 106: “. . . the surplus of the Federal Reserve banks is now (1938) about $149,000,000. This, with their capital of about $135 million gives them capital and surplus combined about $248 million.” (It’s about $350 billion now.)
That comprises the definite statements of the Reserve Board in 1939, which specifically asserts that when bankers make loans and buy investment obligations they just give the borrowers, and sellers of investment obligations, deposit credits on their books, and the aggregate deposits are increased.
As you read what follows, if a doubt arises in your mind that “what I say can’t be true,” reread these quotations, for they give you a complete picture of banking under the Federal Reserve System, and you will be convinced that the banking business as a whole is a crime, and should be abolished.
Don’t reject what I shall say, unless, after testing what I say by the above quotations, you find I do not I have proof that what I say is true.