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No. 31 "Political Banking" Speech of Dr. Walter E. Spahr, Professor of Economics, New York University, April 26, 1935. American Liberty League. 400dpi TIFF G4 page images Digital Library Services, University of Kentucky Libraries Lexington, Kentucky Am_Lib_Leag_31 These pages may freely searched and displayed. Permission must be received for subsequent distribution in print or electronically. No. 31 "Political Banking" Speech of Dr. Walter E. Spahr, Professor of Economics, New York University, April 26, 1935. American Liberty League. American Liberty League. Washington, D.C. 1935. This electronic text file was created by Optical Character Recognition (OCR). No corrections have been made to the OCR-ed text and no editing has been done to the content of the original document. Encoding has been done through an automated process using the recommendations for Level 1 of the TEI in Libraries Guidelines. Digital page images are linked to the text file. ment of a National Commission on Money and Banking. Titles I and III of the Bill are safe enough, and need not cause you concern; they merely include technical amendments of minor consequence. But if Title II should be passed, then only the most providential good fortune can save this country from the evil consequences which are almost certain to flow from a politically-controlled banking system. Let us all do our part in an attempt to prevent the passage of this measure. Political Banking â˜… â˜… â˜… Speech of DR. WALTER E. SPAHR, Professor of Economics, New York University, and Member of the National Advisory Council of the American Liberty League, over the Blue Network of the National Broadcasting Company, April 26,1935 AMERICAN LIBERTY LEAGUE! National Headquarters NATIONAL PRESS BUILDING WASHINGTON, D. C. Document No. 31 Political Banking â˜… TlIE question of "Political Banking" is not one of mere academic interest; on the contrary, the issues involved have a most important bearing upon the welfare of everyone of us. As you may know, the American Liberty League does not attempt to utilize valuable time upon the air, such as that allotted this evening by the National Broadcasting Company, except to discuss problems which are extremely pressing and vital to the people of this country. At the moment there is a serious issue facing our people in the tendency to convert our various banking systems into politically-controlled institutions. The general public does not appear to appreciate just how far this movement has already gone. I have just made a list of twenty-one of our most important banking and financial systems which are owned wholly or in part by the Federal government. This list includes, for example, such important institutions as the Reconstruction Finance Corporation, the Federal Intermediate Credit System, the Federal Home Loan Banking System, the Home Owners' Loan Corporation, and the Central Bank and the twelve Regional Banks for Cooperatives, and sixteen other systems and corporations. Of this list of twenty-one, seventeen are completely, and four are partially, owned by our central government. Although Federal ownership of some of these institutions is to be defended, my purpose is to give you some idea of the extent to which socialization in the field of banking and finance has already taken place. Most of this has been accomplished since March, 1933. Now steps are being taken which will make it possible to convert our Federal Reserve System into a politically-controlled institution. This System supervises and provides banking facilities for the member commercial banks; and it is the commercial banks which touch the lives of all of us in our daily transactions. Title II of the Banking Bill of 1935, now before Congress, opens the way by which the Federal Re- serve Board can be made a political agent of the party in power; the Board will be able to control the boards of directors of the Federal reserve banks; and these banks, in turn, control the member commercial banks. When such powers fall into the hands of a political party, it is a simple thing to control business and the principal activities of people as they attempt to make their living. Give a political party control of the commercial banking system of a country and it can control its citizens to any extent it desires. The freedom of the people can disappear over night. Despite the general denials of such intent on the part of those who advocate the passage of Title II of the Banking Bill, and despite what may appear to be plausible arguments advanced in behalf of some of its features, a wise and prudent people will not permit such powers to fall into the hands of any political party. The movement to make a politically-controlled agency out of our Federal Reserve System cannot be fully appreciated without examining the fundamental notions which obviously surround the plan and provide its principal setting. Those who advocate that Causes of the Federal Reserve Sys- Depression tem be brought under Misunderstood the direct control of the party in power are, in general, the ones who have failed to understand the fundamental causes and cures of this depression. Though the depression was caused by the World War and the attendant maladjustments, these advocates have contended that onr money and banking systems were fundamentally responsible for it. Though the depression, like the World War, was almost world wide, the advocates of political banking nevertheless hold that our money and banking systems were chiefly responsible for our depression. Though the greatest inflation and the greatest aftermath of suffering were experienced by those warring countries in which the central commercial banks were brought under direct political control, advocates of political banking would have 3 us adopt such a system as a means of fostering a business recovery. The advocates of political banking, in general, believe that money and credit can be forced into circulation by artificial means and a sound recovery generated. To accomplish this they believe that they must have control of our Federal Reserve System. They do not understand that, when a price level rises in a sound manner, the currency supply is a result rather than a casual factor. They do not understand that the only certain way a currency can be made to cause a rise in prices is to inflate it and that this leads to subsequent disasters. In short, they do not understand that there is a sound rise in prices which accompanies a sound recovery and an unsound rise in prices caused by currency inflation. They do not understand that the causal factors in each case are different, that the reactions of people to the two types of rising prices are different, and that the economic consequences are different. It should be clearly understood that a sound rise in the price level is caused by the increased activities of producers, particularly those in the heavy goods industries, whose inventories and costs are reduced sufficiently to enable them to resume operations at profit, and that the supply and velocity of currency in circulation increase as a consequence. The unsound rise in prices is caused by currency inflation. The sound rise generates widespread confidence; the unsound generates widespread fears. The sound rise brings economic equilibrium and general prosperity to all classes of people. The unsound rise, caused by currency inflation, can end only in a business collapse, or in repudiation of the currency, or in its devaluation all of which involve serious losses for a people. The advocates of politi-Special cal banking also propose Favors for to grant the Federal gov- Government ernment special favors, as against other borrowers, in seeking loans. They are planning to provide the government with an isolated market in the banks at low interest rates, rather than i force the government to go into the open market for its funds as do other borrowers. It is not the function of any banking system to give the credit of any borrower a higher rating than it deserves; and yet this is precisely what the political bankers propose shall be done with the credit of the government. This, of course, means credit inflation. These advocates who, in the main, are the same ones who believe a nation can spend its way into recovery, are afraid to force the government to go into the open market for its funds; they are afraid that investors would not purchase the government's securities except at lower prices and that this would tend to restrict the government's borrowing and spending programs. The advocates of political banking are also providing the means by which all sorts of long-term illiquid assets can be dumped into the Federal Reserve banks and thereby converted into deposit currency or legal-tender Federal Reserve notes. This, too, involves currency inflation. In short, Title II of the Dangerous Banking Bill of 1935 will Possibilities give the party in power Involved. an opportunity to insti- tute all these inflationary and other measures which are known by monetary authorities to be economically fallacious and dangerous for a nation. It is not too much to say that under this Title II almost anything can be done by the party in power through its politically-controlled Federal Reserve Board. It can inflate the currency without let or hindrance; it can convert the government's deficits and other illiquid paper into legal-tender paper money; it can change the member banks' reserve requirements at will. The biU opens the way for doing the very things that the important lessons of central banking teach us should not be done. It does not provide for better central and commercial banking but for more political banking. There is nothing about the program which can contribute to a sound business recovery; there is nothing in the nature of a sound recovery program which requires such 5 a political banking scheme; and there is nothing which a central banking system can appropriately do to aid recovery which cannot be accomplished now by our Federal Reserve System. Another most damaging indictment against this movement to make a political agency out of our Federal Reserve System is found in the fact that there is no emergency calling for the passage of such fundamental banking legislation. Therefore the purposes of its advocates either rest upon fallacious notions as to the powers which a central banking system can appropriately use to aid a sound business recovery, or they are part of the program of those who wish to bring as many of our vital institutions as possible under political control in order to insure the perpetuation of the party in power. Of course there are others who support such a program because it is a step toward a thorough socialization of our major economic institutions. In any event, it is not the part of prudence for our people, if they do not desire political control of our most vital economic institutions or if they do not wish to see socialism advanced in this country, to permit the party in power to take possession of our Federal Reserve System. The lessons of central banking unmistakably teach us that the farther removed the central banking system is from political control the better it is for the general welfare. Recognizing that there Careful are no circumstances Study which justify the passage Urged of such a bill at the pres- ent time, in so far as the necessities of a sound recovery are concerned, and being apprehensive regarding the dangers in the situation, various outstanding organizations have urged that such legislation be postponed and that instead a National Commission be appointed to study the problems of money and banking reform before any further fundamental legislation is undertaken. Not long ago sixty-six members of the Economists' National Committee on Monetary Policy issued a public statement condemning Title II of this Banking Bill. This Committee is composed of the leading monetary economists of this country. A short time thereafter sixty-two members of this Committee issued another statement urging the appointment of a National Commission on Money and Banking. The American Liberty League did likewise. Various other national bodies and outstanding individuals have urged delay so that further study can be made of our money and banking problems. The United States Chamber of Commerce has urged such delay and further study; the President of the New York Chamber of Commerce has, for several weeks, been publishing the names of prominent people who have urged postponement of further legislation and the appointment of a National Commission; and a similar proposal was made by a Special Committee of the American Bankers Association. To provide for such a Commission is but the part of prudence; and at the present time such a procedure is especially wise considering that the advocates of Title II are composed largely of political planners, inflationists, fiat money advocates, and believers in a program of free spending by the government. The fact that these people oppose the appointment of a scientific Commission to conduct a study of our currency and banking problems provides an additional good reason for insisting upon the creation of such a Commission. Their anxiety to bring the Federal Reserve System under their control as speedily as possible speaks for itself. Even though you may not be a close student of the problems of money and banking, you must be impressed with the wisdom of not permitting any political party to obtain the power to manipulate our commercial banking system as it sees fit. You must appreciate the appropriateness of having money and banking reforms studied and proper laws drafted by a non-political scientific body interested in giving our people the best money and banking systems attainable. Therefore, write your Congressman, Senators, and newspapers in protest against the passage of this Title II, and urge the appoint-