CHAPTER VIII

HOW THE FEDERAL RESERVE PROVIDES PUBLIC
FUNDS TO THE PRIVATE BANKS

125. Do private banks enjoy a special relationship with the Federal Government?
Yes, a very special relationship. The business of banks is to lend money. The profit comes from the difference between the cost of creating money and the price they charge borrowers for that money. Now the cost of creating money is negligible. Congress has delegated the power to create money to the banking system without a charge. The banks do not pay a license fee or a payment charge for their reserves. Thus the raw materials the banks use cost them nothing. Also the Government subsidizes the private banks in other ways. The banks receive free services from the Federal Reserve. Check-clearing is one example. Further, the Federal Government provides private banks with protection from competition and the hazards of failure. New national banks are not chartered unless the Federal officer in charge of such matters thinks the new bank will succeed and will not “weaken” substantially any already existing bank. Then again, the FDIC has set rigid standards for a bank to receive insurance. No new bank whether National or State chartered can very well succeed unless it obtains insurance. A basis for this insurance is that time new bank will not face, or cause, “undue” competition.

120. Why is the Government interested in subsidizing the private commercial banks?
Because it furthers the public interest, up to a point. Our economy cannot function without a sound banking system and a well run, reliable money supply. The Government’s concern for the banking system is actually a concern for a flourishing economy. Bank profits are necessary for a good banking system. Sot he Government makes provisions through its regulations that bank profits are protected. Bank profits are only a means toward furthering the general public interest.

127. In recent years has the Federal Reserve exhibited an under regard for bank profits and an offhand regard for the public interest?
Yes. In recent years the Federal Reserve has, regrettably, followed a policy which has given away billions to the private banks. It has done this by increasing the money supply largely through lowering bank reserve requirements. The Federal Reserve could have provided part of the increase in the money supply itself by purchasing Government securities. But it did not choose to do so.

128. Is there an example of the Federal Reserve’s letting the private banks create all the money needed to increase the money supply?
Yes. In the early part of 1958, the Federal Reserve lowered reserve requirements in order to let private banks increase the money supply by a maximum of $10 billion. The purpose of reducing reserve requirements was to make more funds available for loans to business. The banks, instead, used the new “excess” reserves to acquire $10 billion of interest-bearing U.S. Government securities. This is an example of a giveaway”—Where the Federal Reserve should have purchased Government securities instead of letting private banks do it—to the advantage of their profits and to the disadvantage of the taxpayers.

129. What was the bond giveaway bill?
This was a bill sponsored by the American Bankers’ Association, introduced in Congress in 1059. Its purpose was to transfer $108 billion of Government securities from the Federal Reserve to private bankers. The goal was to reduce “enormous” Federal Reserve holdings of Government securities—and transfer them, and their interest income, to private firms. The mechanism was to permit banks to count vault cash as reserves, and use the “excess” reserves thereby created to buy bonds from the Federal Reserve. The bill was passed into law only after the House stated its firm opposition to the give that the new away sections of the bill, and expressed the hope “excess” reserves would be used to expand business loans.

130. Is there any reason to give private bankers more bonds?
Since they already receive almost $2 billion in interest from the Government, and have profited steadily from reserve requirement parings, it would be wrong. Bonds should be transferred to the Federal Reserve from the private banks, not the reverse.

131. Do private banks perform a service in buying Government bonds?
No, because they create money—an obligation of Government simply to buy bonds guaranteed by the Government. There is no risk involved, as there is in loans to businessmen and consumers. The banks’ traditional functions are to lend to private borrowers and assume the risks of creditors. Their reward for buying bonds with money they create is the “subsidized” profits they enjoy.

132. What Is the “burden” of U.S. Government bonds, held by the private banking system?
The burden is the heavy bond interest payments, borne by the taxpayers, that go to private bankers when the same amount of money could be created by an agency of Government . Then the taxpayers would not bear this tremendous cost on Government bonds purchased with reserves given to the private bankers.