"Diffusive Inflation"

Fighting fire with fire, the Senate Banking & Currency Committee last week produced a currency-inflation substitute for the Goldsborough bill as passed by the House. Author of the substitute was Virginia's Carter Glass, who made public haste to belittle his own measure, deny its necessity and usefulness.

Under the Goldsborough bill the Federal Reserve would be required to inflate commodity prices by a deflation of the value of the dollar. Presumably this would be accomplished by an intensive form of U. S. security purchases such as the Reserve Was been using to pump credit into the country (see p. 43). In theory a Federal Reserve member bank would sell a "government" to the Reserve, withdraw the proceeds in paper money, which in turn would be lent out to commercial customers seeking cash. As the quantity of currency in circulation increased its value would decline and the prices of commodities would climb until they reached the 1926 level. Then the Reserve would stop buying Federal securities, the fall of the dollar would halt, prices would stabilize and everybody would be happy.

Senator Glass summarily rejected this scheme for what its sponsors call "controlled inflation" on the ground that it put autocratic powers in the hands of a small Washington group, the Federal Reserve Board. If there was to be currency inflation, the peppery little Virginian wanted it diffused throughout the land. If "governments" were to be turned into more currency, he wanted to short-circuit the Federal Reserve and hook the 7,600 national banks up directly with the Treasury and its Bureau of Engraving & Printing.

At present national banks can issue their own currency on $740,000,000 worth of pre-War 2% U. S. bonds. For every $1,000 bond and $50 in gold deposited they can get from the Treasury $950 in their own bank notes. The Glass bill simply authorized national banks to obtain paper money on all U. S. bonds for five years. The only limit was the individual capitalization of the banks. National banks as a whole are capitalized at about $1,600,000,000. National bank notes already in . circulation total slightly more than $600,000,000. Therefore under the Glass bill the national banks could, by putting up any U. S. bonds in their portfolios, inflate the currency by approximately $1,000,000,000. Theoretically this would have the same result as though the Federal Reserve bought $1,000,000,000 worth of Federal securities and forced the cash out through the banks.

"I dissent from the view that there is any need of artificial inflation of the credits or currency of the country," declared Senator Glass when his bill was reported out by committee, "but if there, is to be any more inflation it should be brought about by a simple method which everybody may understand and not by the roundabout process which is being vainly tried by the Federal Reserve authorities. I think there should be 'diffusive' inflation rather than so-called 'controlled' inflation. ... I distinctly disavow the belief that any of these legislative devices is necessary at this time. I simply offered the bill as a substitute for the Goldsborough bill which I regard with the utmost aversion."

Two facts which seemed to refute the political clamor for more currency: 1) national banks today could issue an additional $114,000,000 in bond-backed bank notes before reaching the legal maximum; 2) member banks had not yet come forward to utilize in full the proceeds from their security sales stacked up at the Federal Reserve.

This file is automatically generated by a robot program, so reader's discretion is required.