**.'":l,'>>'*.J - 
 
BOUGHT WITH THE INCOME 
 FROM THE 
 
 SAGE ENDOWMENT FUND 
 
 THE GIFT OF 
 
 Hentg W. Sage 
 
 1891 
 
 AA3^.\L^o "1i\i.li^l^,t>.5: 
 
 3081 
 
Cornell University Library 
 HG1813.U5 C63 
 
 The bank and the Treasury, 
 
 olin 
 
 3 1924 030 181 972 
 

 Cornell University 
 Library 
 
 The original of tiiis book is in 
 tine Cornell University Library. 
 
 There are no known copyright restrictions in 
 the United States on the use of the text. 
 
 http://www.archive.org/details/cu31924030181972 
 
THE BANK AND THE TREASURY 
 
"... About twenty-five years ago, Lord Revelstoke, at the head of 
 the great firm [Baring Brothers], was visiting a German watering-place, 
 where he met one of our leading American bankers. Naturally, their 
 conversation drifted into a discussion of the financial situation, and in 
 the course of the talk, Lord Revelstoke remarked that he intended during 
 the next ten or fifteen years to enter extensively into modem financial 
 banking. From that time the character of the business of the Barings 
 began to change, and from being the greatest merchants in commercial 
 credits, they put their resources more and more into fixed forms of 
 investment, into speculative ventures in securities and into the promotion 
 of financial enterprises. What was the result? In 1890 the . . . world 
 was startled by rumors reflecting upon the credit of this house, hitherto 
 considered invincible, and its failure was only averted by the most stren- 
 uous efforts of the Bank of England, with the aid of the strongest bankers 
 of London. . . . 
 
 "We refer to this striking chapter in financial history simply because 
 it illustrates one of the peculiar dangers of our own times. Unques- 
 tionably, the special temptation to which our banks are now subjected 
 is the temptation to turn from commercial to financial banking; to 
 change from the buying and selling of commercial credit into investments 
 in securities and loans extended to promote financial enterprises; in 
 short to change their business from that of commercial banks to that of 
 finance companies. 
 
 "The process of concentration in banking which is going on would 
 possess little danger were it not accompanied in so large a degree by this 
 change. The house of the Barings was a striking example of concen- 
 tration in banking. Its business encircled the globe; its wealth was 
 enormous, and so great were its transactions that even at the time of its 
 trouble in 1890 its holdings of paper amounted to $100,000,000. But 
 when it began to divert its interest, formerly directed almost exclusively 
 to commercial credits, and began to throw the weight of its prestige and 
 resources into the field of investment, speculation and promotion, then 
 the power of its concentration of capital became a menace to the world. 
 In the same way concentration in banking, which is going on at such 
 rapid rate in New York, would not be open to much or any criticism if 
 such concentration . . . was employed for the purpose of facilitating 
 the commerce of the country instead of being used in purely financial 
 undertakings." — The Wall Street Journal, New York, Oct. 29, 
 1904. 
 
THE BANK 
 
 AND 
 
 THE TREASURY 
 
 FREDERICK A. CLEVELAND, Ph.D. 
 
 PROFESS 0,R OF FINANCE IN THE SCHOOL OF 
 
 COMMERCE, ACCOUNTS, AND FINANCE, 
 
 NEW YORK UNIVERSITY 
 
 LONGMANS, GREEN, AND CO. 
 
 91 AND 93 FIFTH AVENUE, NEW YORK 
 
 LONDON AND BOMBAY 
 
 1905 
 
Copyright 1905 
 By Longmans, Green, and Co. 
 
 All rights reserved 
 
 The FHmpion Press Norwood Mass. 
 
PREFACE 
 
 This is not a general treatise on money and bank- 
 ing. The intention is, rather, to contribute some- 
 thing to a single subject of national interest — the 
 problem of providing a more "sound " and "elastic" 
 system of current credit-funds. In recent discus- 
 sion of currency and banking, it has seemed that 
 a too narrow view has been taken : By one class the 
 assumption is made that "issues" of Government 
 are capable of affording the "elasticity" desired; 
 another has attempted to demonstrate that in an 
 "assets-bank-currency" is to be found the nostrum 
 for financial ills. Both classes have failed to see that 
 our financial superstructure rests on two distinct and 
 widely separated pillars — the Independent Treas- 
 ury, and the Commercial Bank; that each has its 
 own burden and responsibilities; that the one is an 
 institution of public-money-issue, the other an insti- 
 tution of private-credit; that the one supports a large 
 issue of credit-money upon a "gold reserve" for its 
 foundation, the other a still larger issue of bank- 
 credit upon a "lawful money reserve." Upon these 
 two pillars is rested a superstructure of private-credit 
 incalculable in amount — a magnificent pile, to the 
 
vi PREFACE 
 
 building of which nearly every business transaction 
 of the immediate past has contributed and which in 
 its long-time credit obligations projects itself into the 
 future, involving to a greater or less extent the pro- 
 spective business of the next fifty years. It is this 
 towering superstructure of credit, sensitive to the 
 last degree, and the contemplation of the perils of 
 a shock to so delicate and comprehensive an organi- 
 zation, that makes a matter of currency or banking 
 reform a dangerous undertaking — one that should 
 be carefully considered and not entered upon lightly 
 from motives of political expediency. 
 
 During the last two decades currency and banking 
 questions have been prominent in the councils of the 
 nation, and many radical changes have been pro- 
 posed. Every sudden institutional or social change 
 must of necessity be accompanied by disturbances 
 due to breaking bonds of custom and to the introduc- 
 tion of certain elements of the unknown as premises 
 for judgments concerning the future. This fact, to- 
 gether with the known sensitiveness of the credit 
 structure, suggests that whatever the financial re- 
 forms to be undertaken, we break with the present no 
 further than is necessary to accommodate imme- 
 diate needs. Sweeping changes would amount to 
 financial revolution, and proposals of this kind 
 should be peremptorily dismissed. 
 
 The suggestion that we should at once abolish one 
 of the pillars upon which the national-credit super- 
 
PREFACE VII 
 
 structure rests (the United States Sub-Treasury) 
 brings with it nothing but a picture of national dis- 
 tress. No change of this kind could safely be under- 
 taken till the present burden of credit-money had 
 been removed from the capital; there must first 
 have been a complete revision of the monetary sys- 
 tem — a system that we have labored a century to 
 bring to its present state of "soundness" and which 
 in its architectural plan is yet scarcely completed. 
 The proposition to throw the whole financial burden 
 on the commercial bank, and to strengthen this by a 
 scheme of centralization, carries with it the same 
 certainty of disaster, unless the change be gradual, 
 and unless also every shift of stress be made after a 
 careful calculation of probable results. 
 
 And this calculation should be something more 
 than philosophical conjecture. It should be based 
 on experience. In the preparation of this work it 
 has been the constant endeavor to measure carefully 
 every salient point of the present financial structure, 
 to take into account the monetary and banking ex- 
 perience of the past, and, having in view this expe- 
 rience, to suggest certain results that may be attained 
 in the direction of increased soundness and elasticity 
 by slight changes in the organic relations of the sys- 
 tem with which we are now working and which in 
 all its details we may understand. In making these 
 suggestions it has been the underlying belief that 
 experience is the only safe guide to judgment — that 
 
viii PREFACE 
 
 evolution and not revolution should be the principle 
 of financial reform. 
 
 Any attempt to analyze national banking condi- 
 tions and the results of banking and currency opera- 
 tions must necessarily be based on published reports. 
 For the purpose of a better understanding of financial 
 relations the concrete statistical data thus found have 
 been collected, and co-ordinated, and reduced to 
 charts. It is a matter of regret that more of this 
 history and experience cannot be graphically dis- 
 played in a publication of this kind. Much of val- 
 uable suggestion has been obtained from letters of 
 transmission, reports and published documents of 
 the Treasury Department and of the standing com- 
 mittees of the House and Senate. The public utter- 
 ances and views of public men and of leading bank- 
 ers, of editorial and monograph writers, have lent 
 much color to thought in the formulation of working 
 hypotheses for the consideration of available material. 
 A proper appreciation of the problem of increased 
 "soundness" and of "elasticity" in credit funds, 
 however, rests largely upon the analytical methods 
 and conclusions of public accountancy. The ques- 
 tion even turns on relations of current assets to cur- 
 rent liabilities of institutions issuing credit — on re- 
 sources "available" for pa5mient of credit obligations 
 outstanding. Without in any way ascribing to others 
 opinions here expressed or conclusions reached, it is 
 due to say that in getting at a proper basis for the 
 
PREFACE ix 
 
 consideration of this problem, my indebtedness is 
 chiefly to my associates, Mr. Elijah W. Sells, Mr. 
 Charles S. Ludlam, Mr. Deroy S. Fero, and Mr. 
 Homer A. Dunn, whose long professional experience 
 in the analysis of financial data has made them in- 
 valuable critics. In this relation, I also wish to ex- 
 press gratitude to Mr. Edward P. Moxey, for the 
 liberality with which he has given his time, and 
 who in his views has reflected the experience of 
 years of service as Government expert and as pro- 
 fessional bank accountant; also to Mr. Herbert G. 
 Stockwell, who has ever been kind and generous in 
 suggestion and criticism concerning matters falling 
 within his acquaintance. Further, I wish to express 
 gratitude to Mr. Charles G. Dawes, whose experi- 
 ence as Comptroller of the Currency, and more 
 recently as President of the Central Trust Com- 
 pany of Illinois, has given to the author much 
 encouragement when reflected through words of 
 approval and generous interest in results. 
 
 A considerable part of the matter contained in 
 some of the chapters following has appeared in 
 periodicals and in the published proceedings of the 
 Pennsylvania Bankers' Association. For permission 
 to use such portions as have been brought out 
 periodically, I am under obligation to the pubHshers 
 of The North American Review, the Annals of The 
 American Academy of Political and Social Science, 
 The Financier, The Capitalist, The Railway World, 
 
X PREFACE 
 
 and The (New York) Mail and Express. The 
 collection and classification of data and the 
 compilation of many statistical tables and summaries, 
 not here shown but on which reasoning is based and 
 from which conclusions are drawn, are the contribu- 
 tion of my wife; except for her active interest and 
 intelligent devotion to the subject this published 
 result would not have been possible without sacrifice 
 of other interests demanding attention. To her I 
 am further indebted for assuming responsibility for 
 the most trying of all details — manuscript correc- 
 tion and proof-reading. F. A. C. 
 
 October 15, 1904. 
 
 30 Broad Street, New York. 
 
CONTENTS 
 
 CHAPTER tACB 
 
 I. Commercial Bakking and Speculation — A 
 
 Financial Retrospect i 
 
 II. The Use of Commercial Bank-Credit in 
 
 Lieu of Industrial Capitalization . . 13 
 
 III. The American System of Currency and 
 
 Banking .... . . 29 
 
 IV. National Credit-Money and the National 
 
 Bank . . . . 41 
 
 V. The Demand for a " Sound " and " Elastic " 
 
 System of Bank-Credit . ... 54 
 
 VI. The Relation of Bank Capitalization to 
 
 THE Problem of Elasticity 67 
 
 VII. The Public Control of Commercial Banks 77 
 
 VIII. A Point of Control Not Adequately Cov- 
 ered BY THE National Bank Act . . 99 
 
 IX. Character of A sets to be Held by Banks 
 
 as " Invested-Reserves " 113 
 
 X. Public Dangers in the Present Equipment 
 
 of National Banks 127 
 
 xi 
 
xii CONTENTS 
 
 CHAPTER PAGE 
 
 XI. Why the "Unencumbered Securities" of 
 National Banks are not Readily Con- 
 vertible INTO Cash . 146 
 
 XII. Dangerous Assumptions Made by the Gov- 
 ernment WITH Respect to Currency and 
 Banking ... . ... 157 
 
 XIII. Advantages of National Banks under the 
 
 Present Practice over State and Private 
 Banks . 171 
 
 XIV. The Amount of Elasticity for which Pro- 
 
 vision IS TO BE Made . . .... 180 
 
 XV. Possibilities of Elasticity under Our 
 
 Present National Banking System . . 193 
 
 XVI. Possibilities of Increasing Elasticity by 
 
 Simple Modifications of the Present Law 208 
 
 XVII. Superiority of the American Funding Sys- 
 tem OVER those of Other Countries . 237 
 
 XVIII. Recent Efforts Made to Further Adapt 
 Our Funding System to the Nation's 
 Business Needs ... .... 259 
 
 Appendix of Documents: 
 
 "The Baltimore Plan" of Currency Reform, 1896 . 291 
 
 "The Carlisle Plan," 1896 293 
 
 Fowler Bill of March 15, 1897 .... 296 
 Indianapolis Monetary Commission Bill, January 6, 
 
 1898 303 
 
CONTENTS 
 Appendix — Continued : 
 
 McCleary Bill, May ii, 1898 . . 
 Aldrich Bill, December 19, 1899 
 
 Secretary Gage's Bill 
 
 Gold Standard Act, March 14, 1900 
 Fowler Bill, April 4, 1902 
 Payne Bill, February 26, 1903 
 Fowler Bill, February 26, 1903 . 
 
 PAGE 
 306 
 
 3" 
 312 
 316 
 319 
 323 
 32s 
 
 FACING 
 PAGE 
 
 List of Charts: 
 
 I. Showing fluctuations in credit compared with 
 capitalization .... .... 
 
 n. Showing commercial assets compared with cap- 
 italization 
 
 III. Showing periods of increased and decreased 
 
 business activity .... ... 
 
 IV. Showing correspondence of credit fluctuations 
 
 with business activity 
 
 V. Showing fluctuations in money-demand . 
 VI. Showing effect of national money-demand in 
 New York . . . ... 
 
 VII. Showing how money-demands reach New York 
 
 through the reserve system 134 
 
 vin. Showing amount of money borrowed by New 
 York banks for use as reserves 
 IX. Showing how bank-credit is affected by specula- 
 tion 
 
 X. Showing how fluctuating demands are met in 
 Cotton states ... .... 
 
 XI. Showing varying conditions of credit in different 
 
 sections of the country 184 
 
 24 
 60 
 
 70 
 
 152 
 
 160 
 
 176 
 
XIV CONTENTS 
 
 List of Charts ^Continued: "^page" 
 
 xn. Credit conditions in Corn states compared with 
 
 Cotton states . ... 202 
 
 XIII. Showing money-reserve, securities held, credit 
 accounts and commercial assets of National 
 Banks . . . 244 
 
 Tabular Inserts: 
 
 I. Consolidated statement of Capital Accounts of 
 
 all National Banks in the State of Iowa . 94 
 n. Classified and consolidated balance sheet of all 
 
 National Banks in the United States . . . 130 
 
THE BANK AND THE TREASURY 
 
 Chapter I 
 
 COMMERCIAL BANKING AND SPECULATION — A 
 FINANCIAL RETROSPECT 
 
 December, 1890, Baring Brothers announced to the 
 world that the credit institutions of Europe had called 
 a halt. A period of promotion and speculation in 
 
 new industrials, in railways, and in the 
 luduatim'^'^ securities of South America, Australia, 
 
 and South Africa was suddenly ended. 
 The movement preceding the failure had been one of 
 expansion — a struggle for increasing profits; the 
 movement following the failure was marked by credit 
 retraction and trade depression — by efforts to recoup 
 and prevent further loss. Although for two years 
 after 1890 we had tremendous forces working in 
 our favor (with unprecedented yields of grain and 
 higher prices of food stufifs, due to crop failure 
 abroad), the detracting influences of foreign de- 
 pression and foreign financial reorganization brought 
 home to the United States the fact of over-specula- 
 tion; in 1893 our credit institutions collapsed and 
 we followed the wake of Europe through a period 
 of depression. Our experience of 1893, following 
 1890, was similar to our financial collapse in 1884, 
 
2 THE BANK AND THE TREASURY 
 
 following foreign failures in 1881. September, 1902, 
 brought us again to face the possibility of another 
 credit reaction. 
 
 About two years before, another period of specu- 
 lation abroad had come to an abrupt end; since 
 that time Germany and England had been passing 
 through financial readjustment and reorganization. 
 Here in the United States, as in the two years fol- 
 lowing 1890, we had forces at work to keep the wheels 
 of industry moving at an increasing 
 
 ^JhZT^' ''' '"^t^' ^^^ t'"^^^ journals looked upon 
 this growing activity as evidence of 
 national thrift — an era of unprecedented prosperity 
 based on safe business methods. Those represent- 
 ing manufacture, merchandising, and transportation 
 enterprise saw ahead nothing but increasing activity. 
 But the experience of the last four months of 1902 
 caused men in financial circles to regard the situation 
 with feelings of apprehension. Months of strain on 
 our commercial credit institutions, months of adverse 
 trade balances, months of increased speculation had 
 put those in control of financial interests on their 
 
 guard. 
 
 Causes 0} Credit FluctiMtions 
 
 After September, 1902, the financial situation was 
 the general topic of discussion among bankers, and 
 these deliberations found strong expression in ap- 
 peals to the National Government for measures of 
 relief. Among those who early sounded notes of 
 
BANKING AND SPECULATION 3 
 
 warning was the vice-president of the National City 
 Bank of New York. Commenting on the financial 
 outlook in November, 1902, Mr. 
 expansion Vanderlip showed that from 1896 to 
 
 1902 the increase in business activity 
 of every kind had been accompanied by a like increase 
 in the credit-accounts (so-called deposits) sold by 
 banks to their customers; and that along with so- 
 called prosperity had been purchases of commercial 
 paper by the banks by means of these increased 
 book-credits or "deposits." He called attention to 
 the fact that the expansion in the credit-accounts 
 (deposits) of the National banks alone, since 1890, 
 had amounted to $1,300,000,000, while other in- 
 stitutions of deposit had increased their credit- 
 accounts (credit-funds offered to the public for 
 current use) $2,300,000,000 — a total increase of 
 $3,600,000,000; within six years there had been an 
 increase of credit-funds in the form of bank accounts, 
 amounting to almost double the entire money stock 
 of the country both in circulation and in the Treasury. 
 But what had been the increase in banking equip- 
 ment ? What provision had been made by the banks 
 for maintaining these increased burdens on the 
 credit structure? After showing that during the 
 three years following 1899 the credit accommoda- 
 tions of National banks alone had increased $1,300,- 
 000,000, Mr. Vanderlip further commented as 
 follows: "With that increase in liabilities of Na- 
 
4 THE BANK AND THE TREASURY 
 
 tional banks in mind, let us look at the assets 
 representing the reserve basis. The 
 Credit weakness ^^j ^j j^ ^^^ legal-tenders held 
 due to tnflaHon ^ ° p 
 
 by National banks last month [Octo- 
 ber, 1902] was $508,000,000. The total at the begin- 
 ning of 1899 was $509,000,000. Here we have an 
 expansion of $1,300,000,000 in deposits [demand 
 obligations of the banks used in the community as 
 funds], while the basis of gold and legal-tenders 
 upon which that inverted pyramid stands is actually 
 slightly smaller than it was at the beginning of the 
 period. Now, in that same time, the deposits of 
 the other banks — State banks, trust companies, 
 savings banks, and private banks — have probably 
 increased not far from three billion dollars, and 
 there is little likelihood that their gold and legal- 
 tender reserve is materially larger than — if it is as 
 large as — at the beginning of 1899. We have had, 
 then, in less than four years, an increase in the bank 
 deposits [bank credit-accounts] of the country of 
 over four billion dollars accompanied by no increase 
 in the specie or legal-tender holdings of these banks." 
 
 Causes of Credit Contraction 
 
 The data relied on for this conclusion were taken 
 from the report of the Comptroller, an official 
 compilation made from the returns of the banks 
 themselves. The evidence presented in the report 
 of the Comptroller, however, went further; it showed 
 
o 8 8 8 
 
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 1800 
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 8 
 
 3900 
 3600 
 3300 
 3000 
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 (n\ Mcx n..-r=T«MrMK,^,,T...K,r.«r., ,^.-.,«.,n . r' 1 NDIVIOUAL DEPOSITS , DEPOSITS OF UNITED STATES DISBURSJNG Of FICES, AND AMOUNTS DUE TO BAr 
 CC) NET OUTSTANCINGOEMANDOBLIGATIONS-I.E, LESS AMOUNTS DUE FROM BANKS, AND CURRENT EXCHANGES. 
 
 (BJ TOTAL CAPITALIZATION — SHARE CAFITAL, SURPLUS AND UNDIVIDED PROFITS. 
 
 (A) TOTAL SHARE CAPITAL. _ 
 
 
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 'i ^ ^. SCALE 
 3 O fH "^ MILLIONS 
 5 O O CF DOLLARS 
 
BANKING AND SPECULATION 5 
 
 that, during the period under discussion by Mr. 
 
 Vanderhp, the capital of these institutions had not 
 
 been proportionately increased. We may take a still 
 
 longer period: May, 4, 1893 (before the depression 
 
 began), the capital, surplus, and undivided profits of 
 
 National banks amounted to $1,041,- 
 Lack of capital n ^^ o <-• > i 
 support 807,066.87; September 15, 1902, at 
 
 the time of the last report before the 
 more recent tenseness of the financial situation began 
 to be felt, the total of capital, surplus, and undivided 
 profits was only $1,201,145,882.69, a decrease of 
 nearly $11,000 per bank doing business. There had 
 been an increase of $1,561,335,896.44 in obligations 
 to depositors, while the gross increase in capitaliza- 
 tion available to support this increase in demand 
 liabilities was only $159,338,815.82, about ten per 
 cent. The average net increase in deposit liabilities 
 was $282,418 ; the net decrease of capital was $10,951 
 per bank doing business. 
 
 The banking equipment of 1893 had proved too 
 weak to support outstanding credit obligations. In 
 September, 1902, the current credit-accounts out- 
 standing were vastly larger than in 1893. Without, 
 therefore, materially increasing the capital employed 
 
 in the business, in fact actually de- 
 ^S^/a^Tgoi creasing the average capital per bank 
 
 doing business, the banks had been 
 offering to the public, and actually selling, an increase 
 in accounts-payable over those outstanding in 1893 
 
6 THE BANK AND THE TREASURY 
 
 amounting to $1,567,000,000; in 1902 they had 
 sold an amount of demand-credit for use in the busi- 
 ness community as funds equal to about double the 
 amount of deposit liabilities outstanding in 1893. 
 The experience of 1902 was a repetition of the ex- 
 perience of 1893, and this in turn was a repetition of 
 1884 and 1873. In each of the previous cases disas- 
 ter had followed close on the heels of an inflation of 
 credit-accounts. 
 
 Methods Employed for Expanding Commercial 
 Credit 
 
 But in his address of warning Mr. Vanderlip did 
 not stop with showing the weakness of the reserve 
 basis. He proceeded to a second conclusion: 
 "What," he asks, "has brought about this remark- 
 able development of bank-credit?" The answer 
 must at once come to the mind of any observer of 
 finance that the principal reason for the expansion 
 
 of deposits (bank credit-accounts) 
 The flotation 0} , ,-, . . r 
 
 new companies ^nd the accompanymg expansion of 
 
 loans (commercial paper held by 
 banks) is to be found in the great movement which 
 has been the significant feature in financial affairs of 
 the last half dozen years — the movement to aggre- 
 gate industrial establishments into single great cor- 
 porate units and to convert the evidence of ownership 
 into corporate securities which have entered actively 
 into the stream of financial operations. Vast amounts 
 
BANKING AND SPECULATION 7 
 
 of new securities have been created in these half- 
 dozen years, based in a large measure upon proper- 
 ties which were before held as fixed investments by 
 individuals, or, if standing in the form of corporate 
 property, the securities of these corporations were 
 more closely held, and in but small measure entered 
 into the financial operations of the day. This move- 
 The use of new ment — tending to convert the evi- 
 issiies as col- dences of ownership of a great amount 
 "■^^"■^ of fixed property into a form which 
 
 has been considered a bank collateral, and which has 
 been made the basis of loans and of corresponding 
 increases or deposits — is undoubtedly the most im- 
 portant single cause for the increase of more than 
 four billion dollars in bank deposits [bank accounts] 
 and bank loans [commercial paper] of the country 
 in the space of three or four years. 
 
 A False Notion 0} "National Prosperity" 
 
 We would not shut our eyes to industrial progress 
 — to the fact of augmented capital and increasing 
 production. We would not deny the benefit of 
 thrift, nor the prosperity which comes from mating 
 industry with economy. But such are not the phe- 
 nomena which have stirred national pride, carried 
 The imaginative it beyond the rule of reason, and un- 
 quality in busi- settled the judgment of our industrial 
 *^^^^ leaders. Periodically we become psy- 
 
 chologically drunk. That which has inebriated has 
 
8 THE BANK AND THE TREASURY 
 
 not been the wine at the feast, but a distorted imagi- 
 nation that Hves in dream-pictures of opulence. Not 
 the actual increase in wealth, but an increase in the 
 estimates of value given to our possessions swells us 
 with a vanity of hope which marks us for destruction. 
 
 The basis for criticism for every "note of caution" 
 addressed to the public during such a crucial period 
 is found in the exuberant feeling then current, ex- 
 pressed in the oft-repeated phrase "national pros- 
 perity." If we accept the reasoning of Mr. Vander- 
 lip and others, the ancestral lineage of this wonderful 
 prosperity is not hard to trace. At- 
 iSo^-iSoe''^ ' tention may be called to the fact that 
 the depression from 1893 to 1896 was, 
 as were other similar periods, one of financial reor- 
 ganization — one of new economies introduced into 
 our industrial establishment. During this period of 
 depression the water had been gradually squeezed 
 out of previously inflated capitalizations; again the 
 nation had come to rely, for its "cash" as well as for 
 its income, on profits from legitimate business. With 
 such an equipment we were able to sell pig iron at a 
 profit of $10 to $12 per ton; steel rails were sold with, 
 a liberal return to capital at $17.50 per ton; and bar 
 iron entered a profitable market at 95 cents per 
 hundred. 
 
 After business had been reorganized on a lower 
 base of capital liabilities, thousands of commodities 
 were produced with profit at prices such that they 
 

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BANKING AND SPECULATION 9 
 
 began to find their way into foreign marts and, in 
 
 competition with foreign made goods, undersold 
 
 them. Europe was startled at our commercial 
 
 strength developed. Our appearance with shiploads 
 
 of products that others could not 
 The business re- ^ , . .... 
 
 vival of 1807 manufacture at competitive rates 
 
 made the world realize that in the 
 Western continent were resources and an industrial 
 development that in free competition might bid de- 
 fiance to all Europe. Under such circumstances bUls 
 of exchange drawn against the sale of these goods 
 formed a true basis for commercial bank loans, and 
 bank-credits were supported by capital-resources ade- 
 quate to protect them — a banking equipment that 
 included a thirty-three per cent money-reserve for 
 the redemption of demand obligations. And as our 
 foreign trade increased, instead of allowing this 
 banking equipment to become impaired, we at that 
 time imported gold for new banking reserves, to 
 support new credits, and new current funds were 
 again at hand for the support of still larger commer- 
 cial accommodations in the purchase of bills and 
 commercial paper based on actual sales of produce. 
 What was the result, however, when the commer- 
 cial bank extended its support to the capitalization of 
 new promotions and became the chief factor in the 
 "industrial speculation" that grew out of this sudden 
 national awakening? Instead of limiting the com- 
 mercial banking business to the service of a com- 
 
10 THE BANK AND THE TREASURY 
 
 mercial constituency, instead of devoting the energies 
 and the funds of commercial banks to the accommo- 
 So-called pos- Nation of producers and merchants, 
 perity and specu- a system of underwriting new flota- 
 laiive excesses ^^^^^ ^^^^ inaugurated. This was 
 
 not a novel experience. Similar practice is recalled 
 by the ex-Assistant Secretary of the Treasury, by 
 reference to the "real-estate" restriction in the Na- 
 tional Bank Act. Back of the law forbidding banks 
 to loan on real-estate securities may be seen the long 
 periods of industrial depression and financial reor- 
 ganization following the panics of 1825, 1837, and 1847. 
 Each period of prosperity immediately preceding 
 these crises had been one of capitalization of new 
 promotions. At that time, however, speculation was 
 based on the possibilities of increasing profits to be 
 derived from the development of agricultural re- 
 sources. Westward migration had appropriated for 
 use large areas — a new empire — of grain lands for 
 
 which new transportation develop- 
 False attitude of , ^ ^ ■, , , . .1 
 
 the banks ment had opened a market to the 
 
 seaboard. New cotton, tobacco, and 
 hemp lands enlarged this area to such an extent that 
 the territory appropriated but still undeveloped was 
 larger than the old Atlantic slope to which capital 
 had before confined its investments. In these new 
 areas all other demands gave way to the clamor for 
 new capital, and the commercial banks attempted 
 to supply this demand. 
 
BANKING AND SPECULATION 11 
 
 The failure of some eight or nine hundred com- 
 mercial bankmg institutions during 1837 and 1838 
 was the result of this kind of bank-credit employ- 
 ment; the failure of nearly fifteen hundred banks 
 during the next three decades of State banking on 
 investment securities brought to the mind of prac- 
 tical bankers the character and purpose of the com- 
 mercial bank. In 1903 and 1904, while Europe 
 was going through the throes of financial reorgan- 
 ization, our farmers were blessed with large crops 
 and high prices; a kind and bountiful Providence 
 Need for re- filled the granaries and the storehouses 
 medial legisla- of the great West and South, per- 
 **"* mitting us to levy tribute on a dis- 
 
 tressed world. Temporarily judgment on our 
 financial folly has been suspended, but the instru- 
 ments of self-destruction are stni in the hands of 
 an unthinking public. Organized and capitalized 
 for the purpose of rendering service to a business 
 community in furnishing "current funds," or "cash" 
 for current use, the equipment of the commercial 
 bank is necessarily ill-adapted to the work of "per- 
 manent capitalization." To employ the funds of a 
 commercial bank for long-time real-estate investment 
 has ever been found unsafe, and following 1837 legis- 
 lation was invoked to protect the public against loss. 
 The same need for restrictive and protective legisla- 
 tion is now upon us. And such legislation should 
 be as welcome to the conservative banker as to the 
 
12 THE BANK AND THE TREAStTRY 
 
 community. The public requires protection against 
 ruinous disturbances to commercial credit; the con- 
 servative banker would be protected against the 
 competition of short-sighted speculators who, posing 
 as bankers, are responsible for these disturbances. 
 
Chapter II 
 
 THE USE OP COMMERCIAL BANK-CREDIT IN LIEU OF 
 INDUSTRIAL CAPITALIZATION 
 
 In business, there are two distinct classes of obli- 
 gations for the future payment of money which are 
 made subjects of investment. These two classes are 
 commonly known as (i) capital liabilities, and (2) 
 current credit liabilities, or floating debt. The capi- 
 tal liabilities are those obligations (shares or bonds) 
 incurred by a concern which are sold to obtain funds 
 or properties for permanent equipment or for con- 
 tinuous use in the business. The current credit 
 liabilities are those obligations which are sold to 
 obtain funds for some temporary or current need. 
 
 These differing purposes give char- 
 Methods of capi- . i. ^.v i ^ c i. i. 
 
 talization ^cter to the two classes of contracts 
 
 as investments. The need for capital 
 being a continuing one, the contracts representing 
 capital liabilities are long-time contracts. Share 
 contracts are those on which the invested principal 
 is not due or payable during the life of the concern 
 without a proprietary resolution reducing the amount 
 of capital employed. Even the current income pay- 
 ments on share contracts are made contingent on 
 
 [13] 
 
14 THE BANK AND THE TREASURY 
 
 profits and the declaration of dividends; there is no 
 obHgation for payment of money which will in any 
 way embarrass the concern or threaten its capital. 
 The "credit" capital liabilities are those contracts 
 for the future delivery of money, such as bonds and 
 mortgages, the principal of which is made payable 
 after such a time that the company may make ample 
 provision by payment out of profits or by occasional 
 refunding. A company which has not been ade- 
 quately capitalized may, however, procure equip- 
 ment and properties for continuous use with funds 
 obtained by temporary loans or on floating debt. 
 This bespeaks a condition of under capitalization, 
 is unusual, and is dangerous to the last degree. 
 
 The capitalization of a business by means of long- 
 time obligations should be large enough to cover all 
 of the continuous financial needs. That is, the cap- 
 ital thus contributed must be large enough to provide 
 the properties and equipment permanently or con- 
 tinuously used. To provide, by the sale of long-time 
 obligations, more funds than are needed to carry the 
 stock and to obtain the property and equipment 
 continuously needed, would be to encumber the busi- 
 ness with an unnecessary capital burden. To pro- 
 
 . vide, by sale of long-time contracts. 
 Capital require- r j i • ■, ■. 
 
 ments lunds less m amount than the per- 
 
 manent or continuous needs, would 
 be to handicap the management by putting it under 
 the necessity of constantly refunding capital needs 
 
BANK-CREDIT IN LIEU OF CAPITALIZATION 15 
 
 and to prejudice success by carrying a floating debt, 
 at an increased current cost, for the payment of 
 which there are no assets available other than those 
 which, if taken for liquidation, would impair the 
 equipment in use. 
 
 The distinction between capital liabilities and cur- 
 rent liabilities for the present purpose is this, that the 
 former should be, and usually are, the subject of 
 direct capital investment, while the second usually 
 are the subject of commercial bank-credit invest- 
 ment. The commercial bank is not organized for 
 Capitalization of direct capital investment. It is cap- 
 permanent finan- italized for the purpose of supporting 
 cial needs j^^ ^^^ ^^^^^^ obligations; and these 
 
 credit obligations in turn are used as a means of 
 purchasing the current liabilities of other business 
 concerns. This is the business of banking. One wish- 
 ing capital-funds ordinarily must apply to some one 
 having funds for long-time investment. Capitaliza- 
 tion depends on the long-time investment powers of 
 a community. The permanent equipment of com- 
 merce and industry can safely increase only so fast 
 as investment capital increases. Investment capital 
 is increased by importation as a result of foreign 
 investment, or by net income in the form of returns 
 on prior investments. The demand-credits (or de- 
 posits) of banks are neither of these, and therefore 
 are not proper funds for use in purchasing permanent 
 equipment. 
 
16 THE BANK AND THE TREAStJRY 
 
 In the recent period of inflation, as in other periods 
 of speculation, it was not found necessary to await 
 the tardy development of capital-funds for purchases 
 of this kind; promoters did not find it necessary to 
 appeal to such an investing constituency. They 
 Funding perma- found that by incorporating industrial 
 nent needs by means enterprises and consolidating corpo- 
 of bank-credit ^^^^ ^^^^^^.^1 j^^^ g^j^j ^^^^^^ corporate 
 
 syndicates, these new securities or "industrials" so 
 created could be listed on the market and could be 
 made the subject of general quotation. This step 
 taken, the speculation induced by the sudden realiza- 
 tion of our commercial greatness as a world power 
 was converted into an agency for marketing the new 
 securities to banks. An active buying having been 
 "stimulated," it was not necessary to wait for the 
 investing public to absorb the flotation ; the margin 
 speculator was utilized to obtain capital-funds from 
 our commercial credit institutions, using the securi- 
 ties so created as "collaterals." One syndicated 
 issue having been introduced into the speculative 
 pool and floated on margins (the promoters having 
 realized) a new consolidation was undertaken and 
 in like manner funds were again procured from the 
 commercial banks. The infection spread from in- 
 dustrials to railroads, to mines, and to every form of 
 undertaking. 
 
 It was on this character of banking resources — 
 loans, secured by newly created collaterals — that 
 
BANK-CREDIT IN LIEU OF CAPITALIZATION 17 
 
 a large part of the increase in our credit-funds (the 
 deposits of commercial banks) was based. It is to 
 credit obligations of this kind — those used by banks 
 as a means of purchasing collateral notes of brokers 
 and promoters secured by new flotations — that 
 many of the disturbances to commercial credit are 
 The character of attributable. Investments of bank- 
 bank-credit so credit are not capital investments. 
 So to use them is, by sudden credit 
 expansion and then by a subsequent credit con- 
 traction, to threaten industry with loss of equipment, 
 or, by inability to contract, to threaten the bank with 
 insolvency. Before such insolvency wiU be admitted, 
 however, the increased credit burden will be shifted 
 on the commercial constituency of the bank. The 
 bank — the provider of current funds for current 
 use — is forced to sacrifice the ends of its creation ; 
 being allured into this kind of investment by a pros- 
 pect of large gains from speculation, it is converted 
 into an instrument of business uncertainty and of 
 wholesale financial debauchery. 
 
 Expansion of Bank-Credit and False Estimates of 
 Future Earning Power 
 
 That a temporary increase in industrial activity 
 results from these practices cannot be denied. Such 
 has ever been the result of speculative promotions 
 and credit inflations. The cause of this increased 
 activity, however, is quite apparent. In each so- 
 
18 THE BANK AND THE TREASURY 
 
 called "period of prosperity" the immense amount 
 of new funds made available for the 
 ^nitpZs purchase of properties and equipment 
 through the flotation of securities and 
 the expansion of bank-credit has increased the de- 
 mand for every kind of material — of construction, 
 of maintenance, and of subsistence. From 1898 to 
 1903 manufacturers of pig iron could not fill do- 
 mestic orders, and prices advanced from "$12 per 
 ton in October, 1898, to $25 at the beginning of 1900; 
 steel rails doubled in the same period, the price going 
 from $17.50 to $35; bar iron scored even a greater 
 percentage of gain within a shorter time, the price 
 advancing from 95 cents a hundred in July, 1897, to 
 $2.60 in October, 1899. The quotations of clear pine 
 boards advanced from $45 to $73 a thousand; for 
 brick, from $4. 50 to $6; rope, from 5^ cents to 13 cents, 
 and salt, from 21 cents to $1." Prices were advanced 
 all along the line, in cases doubled and quadrupled. 
 An increase from four to six billions in the credit- 
 funds within five years — billions, not millions — 
 made available to the country as a means of pur- 
 chasing new materials and new services, by a simple 
 process of "flotation," operated to put the conduct 
 
 of enterprise into the hands of pro- 
 False estimates of , r. r. r. j i-.,i tx. 1.1. 
 
 valuation ^^oters who have had little thought 
 
 for the future. Of what interest was 
 
 it to the promoter that he was offering prices for 
 
 materials twice or three times their cost when the funds 
 
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BANK-CREDIT IN LIEU OF CAPITALIZATION 19 
 
 with which to pay for them were so easily obtained ? 
 Why should he be concerned with cost of production 
 when his profits were to come from promotion and 
 equipment instead of coming from operations or 
 permanent income on investment ? Of what interest 
 is it to merchants and manufacturers that prices are 
 higher when they might sell at advances which would 
 yield increased net profits? These new trade de- 
 mands and the consequent higher prices of products, 
 based on credit-funds obtained from speculative flo- 
 tations, temporarily increased the profits of produc- 
 tive enterprise, and these new margins of profit 
 carried speculation in capital shares to a still higher 
 mark; again new market quotations made a new 
 basis for estimates of value of the securities offered 
 as collaterals; these in turn increased the amount of 
 bank-credit made available for higher spendthrift 
 prices; and again there came larger returns in the 
 form of immediate net earnings to plants set in 
 motion at a higher speed with larger equipment for 
 supplying customers' demands. As has been re- 
 peatedly demonstrated, this is not prosperity, but 
 the result of a debauched popular judgment recording 
 new increments of wealth by a process of increasing 
 valuation of goods. 
 
 No other explanation is needed for the reverse of 
 the foreign trade balance. When American prices are 
 high, instead of having a trade balance to be settled 
 in Europe, exportation becomes so far reduced and 
 
20 THE BANK AND THE TREASURY 
 
 importation so far increased that for months at a 
 time we are forced to borrow from abroad on "finance 
 bills" — or other devices — some form of floating 
 debt incurred by our bankers as a means of meeting 
 
 the demands of a commercial con- 
 fZlgntiade stituency. After 1898, instead of im- 
 
 porting gold, "there has, in spite of 
 the theoretical trade balance, been no significant 
 shipment of gold in our direction," except when 
 forced by temporary loans. More than this, our 
 financial institutions have not had the strength to 
 keep gold on this side. Before the end of 1902 we 
 had begun to lose our gold. At that time conserva- 
 tive bankers pertinently asked: "What of the fu- 
 ture?" "If a hundred million dollars' importation 
 of gold can serve as a basis for an expansion of so 
 many millions of dollars of deposits and loans, what 
 will an exportation of $100,000,000 mean?" It 
 might have been added, that in all probability the 
 adverse balances against our financial centres would 
 have resulted in a complete overthrow of our inflated 
 credit system had not the United States Treasury 
 come to the relief of commercial banking institutions 
 with deposits (loans of the Government to the banks) 
 amounting to over $100,000,000; and within four 
 months Government aid to the banks was increased 
 to more than $160,000,000. 
 
BANK-CREDIT IN LIEU OF CAPITALIZATION 21 
 
 Banking Crises Due to Credit Inflation 
 
 But even with the support given by the Treasury, 
 
 as events subsequently proved, the credit problem 
 
 was not solved. The question of the ability of the 
 
 commercial banks of the country to 
 The crisis of ,, . ... .., 
 
 serve their constituency with current 
 
 funds (the problem of adjusting the 
 speculative situation and forcing liquidation of spec- 
 ulative loans to such an extent as not to compel them 
 to restrict accommodations to commercial enter- 
 prise) kept the New York banker in a quandary by 
 day and, for two years, hung over him like a spectre 
 by night. 
 
 With all effort bent toward the common cause; 
 with united action on the part of the commercial 
 banking fraternity acting on the best counsel and 
 combining their united resources with those fur- 
 The cooperation wished to the banks by the Treasury, 
 of banks for pro- they managed to maintain their finan- 
 teckon ^^^ integrity, although this was ac- 
 
 companied by a long line of forced liquidations. To 
 a large extent the "capitalization" of these new pro- 
 motions fell on the banks and trust companies and 
 weakened their equipment for the support of com- 
 mercial credit accommodations. 
 
 During the first weeks of January, 1903, with the 
 customary New Year's commercial settlements and 
 payments, there was a relaxation of nervous tension 
 
22 THE BANK AND THE TREASURY 
 
 induced by what had come to be speculative neces- 
 sity. But the far-seeing read the handwriting on the 
 wall. Summer demands must be provided for; the 
 "finance bills" were coming due and 
 
 Forced liquida- ^ contributed to an adverse inter- 
 Hon 
 
 national balance which set up expor- 
 tation of gold; the character of securities held by 
 American banking houses was not attractive to for- 
 eign investors and sales of these could not be utilized 
 as a set-oflf against foreign balances; moreover, spec- 
 ulative syndicates found it necessary to "buy in" 
 securities offered on the other side below the market 
 here. 
 
 It is much to the credit of our leading banking 
 institutions that in 1902 a campaign of liquidation 
 was inaugurated in time to allow them gradually to 
 "convert" speculative loans, in anticipation of de- 
 mands — to make available those forms of holdings 
 Circumstances which in time of financial strain are 
 favoring the absolutely unavailable, but which may 
 "'^ ^ be realized on without loss to the 
 
 banks if pressure is brought on the borrower in such 
 moderation as not to induce panic. By making this 
 pressure a gradual one, all the resources of the spec- 
 ulative public in the market were utilized. 
 
 But the effect was deadly. First the margins and 
 accounts of the small speculators were wiped out; 
 then the more resourceful "outsider" was driven to 
 the limit of his means and was forced to suspend 
 
BANK-CREDIT IN LIEU OF CAPITALIZATION 23 
 
 operations; later the contest was carried on between 
 "insiders" and "professionals," the stronger utiliz- 
 ing profits gained from those less able to manipulate 
 the market ; but in the end all contributed (through 
 
 demands to maintain margins on a 
 iim ^^ '^' falling market by sale of stock and by 
 
 reduction of loans) to keep up the 
 reserves of the banks and protect the credit of New 
 York institutions against exportation demands and 
 against "calls" on reserve loans from the interior. 
 For two years this liquidation continued. Those 
 banks which had confined their operations to a com- 
 mercial banking business were able to protect them- 
 selves and their customers against serious losses. By 
 fortuitous circumstances, by aid of the Government, 
 and by cooperative action, through their ability to 
 utilize the profits and resources massed by specula- 
 tors during the five years preceding, those into whose 
 fostering care the national funding system has been 
 given were not driven to measures which seriously 
 interfered with commerce. These resources, how- 
 ever, are incidental, and speculative profits are not 
 limitless; in fact a number of the large operators so 
 far felt the results of parallel reductions in prices and 
 of the confiscation of margins that they can be of no 
 further utility to the banks. It was the bounteous 
 return of a wide expanse of fertile soil and a partial 
 failure of supplies abroad with corresponding profit- 
 able returns to the farmer of the South and the 
 
24 THE BANK AND THE TREASURY 
 
 West that saved the day for American financial in- 
 stitutions in 1904. 
 
 Falling Prices and Industrial Depression 
 
 That the financial situation is still a dangerous one 
 is apparent. And the danger lies not so much in a 
 present or in an approaching crisis as in the continued 
 use of a dangerous instrument of commerce. This 
 danger is always present and will be so long as 
 present practices continue. The recurring necessity 
 for adjustments of credit to a lower 
 SLXS' "^ level has been the chief source of 
 financial disturbances in the past. 
 This has been brought about by the repetition of 
 speculative expansion and subsequent forced credit 
 liquidation. Forced credit liquidations have re- 
 sulted in declining valuation of assets and a lessening 
 ability to meet credit obligations outstanding. 
 
 The basis of credit judgment is estimated ability 
 to pay. This estimate is arrived at by the use of that 
 financial device known as a "balance-sheet," on one 
 side of which are placed "liabilities" and on the 
 other "estimated valuation of assets." The liabili- 
 ties of a business concern are the "weights" used in 
 adjusting the balances; they are fixed in amount. 
 In arriving at financial condition, 
 j^gmZr '' "liabilities" are placed on the right- 
 hand side of the scales. Then on the 
 other side of the accounting balance is placed "ap- 
 

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BANK-CREDIT IN LIEU OF CAPITALIZATION 25 
 
 praisement" or "the valuation of assets." If the 
 amount of the "valuation" exceeds the amount of the 
 "liabilities," then there is recorded a "surplus." If 
 the scales swing in the other direction there is re- 
 corded a "deficit." This "surplus" (or "deficit") 
 of value of assets over liabilities is the basis for judg- 
 ment as to the value of securities and as to ultimate 
 ability to liquidate credit. The basis for judgment 
 of short-time demand-credit, however, is estimated 
 value of "available" or readily "convertible assets;" 
 these are weighed against "current liabilities." 
 
 The depreciation or reduction in estimates of value 
 placed on "industrials" alone during the first year 
 after September, 1902, has been calculated to exceed 
 three thousand ftiillion dollars. If other securities 
 are included, the most conservative estimate of the 
 amount of depreciation is beyond comprehension, 
 unless we reduce the estimated value of assets to a 
 Contraction of mathematical comparison with fixed 
 credit- funds to level liabilities. With this continuous scal- 
 0} capital support ^^ ^j estimates of "value of assets," 
 some business concerns have not been able to make 
 the necessary adjustment. Seven of the so-called 
 "trusts" have become insolvent, and ten or twelve 
 others have admitted the speculative character of 
 judgments on which their "prospectus" profits and 
 prospective dividends were based by passing divi- 
 dends. And, as in former periods of readjustments, 
 depreciation (i.e., the scaling of estimates of value) 
 
26 THE BANK AND THE TREASURY 
 
 of securities must continue until the earning capacity 
 of the joint stock institutions has been demonstrated 
 to be adequate to justify investment at a level of 
 valuation which may be maintained. 
 
 The greatest public danger to be feared from this 
 sort of credit expansion and contraction is that spec- 
 ulative gains may not be adequate or available to 
 meet demands for credit liquidation when readjust- 
 ment of the credit load becomes necessary. When 
 the financial balance cannot longer be kept in ad- 
 justment by exchange of "securities" owned against 
 liabilities (i.e., by process of cancellation of liabilities 
 of one concern against the liabilities of another), and 
 
 the weight of liquidation falls on pro- 
 The danger to be , , r • j i. • j.i i 
 
 feared ducts of mdustry, m other words, 
 
 when liquidation is forced into the 
 market where "goods" are disposed of, then it may 
 become necessary to readjust the whole industrial 
 machinery to such a level of capitalization that net 
 profits may give ample return on the capital liabilities 
 represented in the balance-sheet. If this readjust- 
 ment falls on a period of low productive returns (poor 
 crops and low prices), as in 1893-96, then the reaction 
 and reorganization becomes far-reaching. A period 
 of financial readjustments is what we know as an era 
 of commercial and industrial depression. It was 
 such a condition that we had to face in 1893, after the 
 speculative collapse of December, 1890, and the re- 
 organization continued until 1897. Similar to this 
 
BANK-CREDIT IN LIEU OF CAPITALIZATION 27 
 
 was the period of readjustment from 1884 to 1886, 
 after the excesses of 1879 to 1883; and stUl further 
 back may be found the long depression of 1873 to 
 1878, after the speculative activities following the 
 close of the War. And although every favoring cir- 
 cumstance has been with us to support the inflated 
 capitalization of the speculation price of 1902, we 
 cannot.say that we are yet on a safe and sure financial 
 foundation. 
 
 Demands }or Greater Elasticity 
 
 It is during such periods of credit contraction, and 
 industrial depression that demands for "elasticity" 
 may be found written on the editorial pages of news- 
 papers and financial periodicals. At such time, 
 "elasticity" is the term most often heard in public 
 
 councils and in private financial dis- 
 dSdluy'' cussion. Though frequently used it 
 
 is a term accepted without definition, 
 and understood by each to mean something that will 
 afford him financial relief. Each person puts into 
 the word a different content: to the man in commer- 
 cial pursuit "elasticity" means ability to obtain funds 
 for current use in the form of bank accommodation; 
 to the banker it signifies ability to expand and con- 
 tract his supply of money according to his own needs 
 for payment; others take it to mean the ability of 
 the Government to increase or decrease the general 
 circulation. It is this failure to agree on the meaning 
 
28 THE BANK AND THE TREASURY 
 
 of the first premise of their reasoning that makes 
 agreement on a conclusion so difficult to reach. 
 
 A proper understanding of the problem of elasticity 
 must take into account both forms of current funds, 
 viz.: bank credit-accounts (the form of funds used 
 by the business man), and money (the form of current 
 funds necessary to the payment of balances by the 
 banker). To the individual business man or to the 
 individual banker, the problem resolves itself into 
 one of the relation of "available assets" (i.e., assets 
 What is neces- readily convertible into cash) to "cur- 
 sary to a proper rent liabilities," current demands for 
 consideration payment of cash. The exercise of 
 sound discretion, with reference to proposed meas- 
 ures of reform looking toward elasticity, however, 
 requires that we know, not only the character of the 
 demand, but also the financial machinery with which 
 we are at present working and in which the readjust- 
 ment is to be made. 
 
Chapter III 
 
 THE AMERICAN SYSTEM OF CURRENCY AND 
 BANKING 
 
 For years the National Bank Act has been a sub- 
 ject of general condemnation. The system of com- 
 mercial banking operating under it has been pointed 
 to as a patchwork — as an impotent device that has 
 outgrown its original usefulness; it has been referred 
 to as a financial crutch that from force of habit 
 the country has been leaning on after convalescence. 
 These critics have observed that our system differs 
 
 from banking systems of Europe and, 
 Critics of the ■, , ,. , . . , , 
 
 System "y ^J^^logJ) the conclusion is reached 
 
 that our financial calamities are due 
 to these differences. The champions of the National 
 banking system, however, contend that in the same 
 sense every institution is a "patchwork"; that the 
 Bank of England is founded on and constructed of 
 "patches" of legislation and administration, having 
 grown out of the exigencies of war quite as truly as our 
 own; that the Bank of France has been "patched" 
 till little or none of the original fabric is left; that the 
 Bank of Russia, and, in fact, if cause for criticism 
 be found in this, the financial systems of all coun- 
 tries are to be brought under the same condemnation. 
 
 [29] 
 
30 THE BANK AND THE TREASURY 
 
 What the critics of the system have failed to see, 
 and that which is most important, is that each of the 
 great financial systems has been evolved from con- 
 ditions quite different from our own; that it is from 
 these differences of environment (if a biological figure 
 may be used) that variety has been produced in 
 financial concerns as well as in other forms of busi- 
 ness life. Arising out of conditions peculiar to our- 
 An evolution selves we have a distinctly American 
 from American institution — an institution that has 
 conditions ^^^^ gradually adjusted to our busi- 
 
 ness needs. We have a banking system as distinctly 
 our own as is our factory system, our railroad system, 
 our school system, our Government. In so far as 
 there is demand for change, it is in the nature of a 
 further development of the institution — a further 
 adaptation to meet the growing needs of a fast de- 
 veloping and rapidly shifting business organization. 
 With this statement of diflfering point of view in 
 mind, it may be well to trace the distinctive fea- 
 tures of the American system, then from the van- 
 tage ground of the institution and its environment 
 again to take up the thread of discussion as to the 
 new adaptations proposed or that may be thought 
 necessary. 
 
 The Development of American Banking Ideals 
 
 At the time that the American colonies became 
 embroiled in revolution with the mother country they 
 
THE AMERICAN CURRENT FUNDING SYSTEM SI 
 
 had no commercial banks; they had no agencies of 
 government adequate to financing the necessities of 
 war, and none to meet the demands of a fast growing 
 commerce. As a means of meeting the exigencies 
 of military operations, resort was had to issues of 
 colonial and continental public scrip and to foreign 
 loans. When public credit failed, funds were raised 
 by lottery and by temporary funding devices. Com- 
 mercial and industrial paralysis left no occasion for 
 organization in aid of private business till after the 
 close of the struggle for independence. 
 
 The country emerged from the revolutionary con- 
 flict politically independent, but without money or 
 credit at home or abroad. The people were without 
 a currency other than that imported in the form of 
 foreign coin; their paper currency had depreciated 
 to a point that forbade other than speculative trading 
 or barter; they were practically without adequate 
 funds for public or private use. The welfare of the 
 commercial classes on the seaboard 
 SffSSSw^de'^anded the establishment of agen- 
 cies of commercial credit ; the country 
 at large demanded a money that would pass current 
 throughout the bounds of the nation. These two 
 demands were met by the organization of a great 
 central commercial bank — the first Bank of the 
 United States. The circumstances of the time' re- 
 quired (i) an agency of such financial vigor and 
 strength as would serve the Government in refunding 
 
32 THE BANK AND THE TREASURY 
 
 its debt; (2) an institution of national scope such as 
 would give to the people a sound currency; (3) a bank 
 with powers of discount equal to the volume of com- 
 mercial credit used. 
 
 With the expiration of the Charter of the first Bank 
 of the United States, however, both of these situa- 
 tions had changed. In the first place, the National 
 debt had been refunded and the Government had 
 been placed beyond necessity other than that which 
 Why the First might be met by its current revenues. 
 Bank was not re- In the second place, the controlling 
 chartered interests of the people had shifted; 
 
 from foreign trade to domestic commerce, from 
 support of shipping to the development of land 
 transportation, from merchandising raw materials 
 and foreign products to the capitalization of home 
 industry, from town building on the coast to the 
 development of the resources of the interior the 
 commanding interests of the nation were turned. 
 The mint was supplying a uniform coinage for bank 
 reserves; local banks were supporting local interior 
 development. The first Bank fell with the party 
 with which it was identified — the party of foreign 
 trade, the party that drew its principal support from 
 the seaboard commercial interests. 
 
 The War of 18 12 was a war directed against the 
 New England coast towns. It was a war of the in- 
 terior against the East. As against England, it was 
 a failure; as against the East, the interior won a de- 
 
THE AMERICAN CURRENT FUNDING SYSTEM 33 
 
 cisive victory; the enormous foreign trade interests 
 of the North Atlantic seaboard were ruined. The 
 The Second Bank National financial system was reor- 
 oj the United ganized with the party of internal im- 
 "'^^ provements and home markets in 
 
 power. As a means of permanently turning away 
 from shipping interests and encouraging the up- 
 building of home industry, the tariff of 1816 was 
 passed. War had served either to destroy or had 
 proved a temporary barrier to foreign commerce. 
 The tariff of 1816 was enacted as a permanent barrier 
 to investment in international trade — a barrier that 
 was raised higher and higher through several suc- 
 cessive enactments. Party measures were pushed 
 for the opening of interior transportation routes, and 
 as a means of further strengthening the hands of the 
 administration, the second Bank of the United States 
 was established. The only banks that had remained 
 on a specie-paying basis during the War of 181 2 were 
 the banks of New England. The commercial rela- 
 tions of the interior were in a chaotic condition ; the 
 Central Government was struggling under a new 
 load of debt; the currency was disorganized and un- 
 satisfactory; Treasury bills were at a discount. A 
 National financial agency was again created, with a 
 capital of thirty-five million dollars, to perform the 
 double function of refunding the National debt and 
 providing a sound commercial currency for the 
 interior. 
 
34 THE BANK AND THE TREASURY 
 
 As the Charter of the second Bank neared its 
 close the scene again shifted. Before the Federal 
 Government was in a position to lend adequate aid 
 to the enormous demands from the interior for trans- 
 portation and internal improvement New York had 
 successfully financed the Erie Canal. With this 
 event begins a new chapter in our financial history. 
 Reasons jorwind- ^0 longer did local communities look 
 ing up the Second to the National Government as the 
 '^^ only agency adequate to carry on the 
 
 internal improvements demanded. Besides, with 
 the development of the resources of the interior, a 
 new alignment took place which detracted still fur- 
 ther from support of National as opposed to State 
 enterprise. The industrial systems of the North and 
 South worked to cross purposes. As soon as the 
 uplands were utilized and cotton was made king the 
 constituency of the cotton and tobacco belt was 
 thrown against the tariff, while the industrial organi- 
 zation of the North and West demanded its con- 
 tinuance. 
 
 The tariff contest finally resulted in compromise. 
 Both sections, however, weakened in their support 
 of "National" as opposed to "State" institutions 
 and "State" activities. Internal improvements in 
 each section were promoted from a State or local 
 financial base ; the support of a National agency was 
 not needed. The South demanded "States-Rights" 
 a a measure of protection to its industrial and social 
 
THE AMERICAN CURRENT FUNDING SYSTEM 35 
 
 system ; the North and West likewise organized their 
 internal politics around State functioning, State im- 
 Internal improve- provements, State banking, but held 
 wewfa and State to tariff legislation for protection of 
 «» »»g home-industry as against foreign 
 
 competition and as a means of inducing invest- 
 ment of capital in the development of interior re- 
 sources. In all but tariff issues, therefore, ideals of 
 local self-government carried the day as against the 
 party representing National activities. Jackson rode 
 to power in 1828 as the popular representative of the 
 compromised "local" ideal, while Adams and Clay, 
 representing centralized National functions, failed 
 to retain political support. As a logical sequence, 
 the second Bank — the instrument created to support 
 centralized National activities, the federal institution 
 — perished, and the whole financial system went over 
 to a State basis. 
 
 But evil days were ahead. The panic of 1837 and 
 the depression following carried down local enter- 
 prises. State banks and State flotation schemes of 
 all kinds were brushed away like the paper issues 
 
 which had preceded them. From 
 M^SSt the ruins of their own fortunes the 
 
 people looked out on bankrupt cities, 
 bankrupt towns, bankrupt counties, bankrupt States. 
 Over eight hundred State banks were complete fail- 
 ures, while all commercial credit institutions that 
 survived within the area of the new development 
 
36 THE BANK AND THE TREASURY 
 
 went over to a non-specie-paying basis; their issues 
 passed for what they would bring. 
 
 At the same time, the National party (the Whigs), 
 by fusion with malcontents and with the "Ultra- 
 States-Righters" — the "nullifiers" of the South — 
 again gained control of the Central Government. 
 Attempt to incor- Another measure was proposed by 
 porate a third leaders for a third Bank to bring 
 Federal hank ^^^^^ ^^ National finance, to cur- 
 rency and to commerce. But Harrison's death threw 
 the administration into the hands of the "Ultra- 
 States-Righters," the extreme advocates of localism; 
 Congress, representing National functions, was 
 powerless; the way was blocked till again local in- 
 terests had readjusted themselves, till strong local 
 institutional life reasserted itself in the election of 
 President Pierce. 
 
 It was in the midst of this chaos, following the 
 panic of 1837, that the Independent Treasury was 
 established as an institution designed to protect the 
 finances of the Government against becoming in- 
 volved in transactions and institutions of private- 
 credit. It was out of this same chaos that our new 
 "independent" institutions of private-credit arose. 
 From the working of these two independent systems 
 side by side, from experiment, and from adaptations 
 made to current necessity and to business need, 
 American banking ideals were developed. Before 
 the Civil War had again thrown us into the turmoils 
 
THE AMERICAN CURRENT FUNDING SYSTEM 37 
 
 of military contest we had passed through two more 
 
 financial crises; two industrial depressions brought 
 
 American banking ideals to the test, 
 
 The local institu- , ., ^ . .• ,-, ■, 
 
 Hon retained ^"^^ ^^^ adaptations then made, as a 
 result, were again along distinctively 
 American lines. With no purpose of reverting to a 
 system of National commercial credit — with ideals 
 of "local" internal improvement and "local" need 
 for capital uppermost, with "local" interests, as op- 
 posed to "National" necessity, the force present to 
 give shape to enterprise and form to legislation — 
 "local," "independent" banking in the various States 
 was gradually reduced to a basis of safety and 
 economy. 
 
 The Suffolk system of New England had proved 
 itself adequate to keep bank issues on a specie-pay- 
 Measures to i^g basis during times of severest 
 strengthen capi- strain — had sustained commercial 
 talization credits when in all other sections they 
 
 had failed. This was a system devised to protect 
 "local" institutions when the forces of the country 
 and of the Central Government were arrayed against 
 them. From the Suffolk system was adopted the 
 salutary principle of prompt redemption of current 
 demand-credit obligations. The Free-Bank system 
 of New York was distinctly the product of "local" 
 and State as opposed to "National" financial in- 
 terests; this was the result of the adaptation of "in- 
 dependent" commercial credit institutions to the 
 
38 THE BANK AND THE TREASURY 
 
 demands for internal improvement and for the de- 
 velopment of the latent resources of a politically 
 organized "locahty." 
 
 By experience, and the application of the test of 
 business necessity and convenience to each new de- 
 vice, the States came to distinguish between the 
 forms of credit used as "money" (forms which were 
 Credit-money dis- to P^ss from hand to hand without 
 Hnguished jrom question) and "bank credits-of-ac- 
 credit-accounts ^^^^^„ (credit-funds provided for 
 
 private use, created by direct contract with the bank). 
 The "independent" Free-Bank system was adopted 
 by nearly all the States. The safety-fund, and the 
 idea of collaterally secured circulation, was directed 
 toward the correction of the "unsoundness" of the 
 "money" system under a practice of "independent" 
 commercial bank issues; collateral security for notes 
 was introduced to serve the double purpose of giving 
 a market to "local- improvement" stocks and bonds, 
 and at the same time of avoiding the necessity for 
 holding coin reserves against notes outstanding; the 
 safety-fund came to be a marginal coin reserve to 
 insure pajmient in full in case of failure and on 
 forced sale of securities. 
 The business importance of the distinction between 
 
 "money issues" and bank "credit- 
 Importance of the . ,, , ^ , - , 
 
 distinction accounts used as funds found expres- 
 
 sion in the distinctly different provision 
 for the payment of each of the two forms of demand 
 
THE AMERICAN CUllRENT FUNDING SYSTEM 39 
 
 obligations of the banks. The "safety-fvind" and 
 "collateral security" were devoted entirely to the 
 support of "credit-money," or notes of the banks; 
 a first lien on general assets was also added for 
 further security of bank "money issues." But such 
 provision for the security of the "money-funds" 
 left the bank free to provide or not to provide for the 
 redemption of its "credits-of-account." As a means 
 of protection to book-credits, a "money-reserve" re- 
 quirement was introduced and a system of inspection 
 was established to protect the people against financial 
 impotence and fraud. The necessity for capital (the 
 necessity for invested funds as equipment for a busi- 
 ness institution offering credit-funds to a community) 
 came to be recognized and laws were passed to pre- 
 vent banking without capital-resources, or what was 
 known as "wild-cat" banking. In all of these adap- 
 tations, however, in all of the legislation and provis- 
 ions for administrative control the leading idea was 
 one of local need, local service, local development, as 
 opposed to "National" necessity or "paternalistic" 
 enterprise. 
 
 The Separation of the Institution of Money 
 Issue from that of Credit-Account 
 
 Fortunate it was for our financial system that the 
 Civil War occurred at a time when banking ideals 
 had come to be so well crystallized and when the 
 necessity for a common currency had come to be so 
 
40 THE BANK AND THE TREASURY 
 
 generally felt. We were quite ready to have a uniform 
 practice, a common law, a central administration along 
 Establishment of lines of previously proved experience 
 a strictly Ameri- — a system that would preserve all 
 can system ^f ^-^e salutary principles worked out 
 
 under American business conditions, and one which, 
 by uniformity, was adapted to a wider commercial 
 activity. The complete taking over of the money 
 functions by the Treasury, under necessities of war, 
 and the reorganization of our independent com- 
 mercial-banking institutions under the National Bank 
 Act, were the last steps in the final establishment of 
 the American system of currency and banking. 
 
Chapter IV 
 
 NATIONAL CREDIT-MONEY AND THE 
 NATIONAL BANK 
 
 Again attention is called to the fact that banking 
 ideals in America had developed from strictly Amer- 
 ican conditions; that as a result we had worked out 
 a system unique ; also that intelligent banking opinion 
 was fairly well settled at the time the nation found 
 itself in the throes of civil strife. We were still 
 suffering from the results of the panic of 1857, and 
 there was engraved on the memories of older bankers 
 the record of failures in 1837 and 1847. The nation 
 also realized, as a matter of experience, that these 
 years of financial failure each had been followed by 
 an era of industrial depression and financial reor- 
 ganization. It was commonly believed that lack of 
 uniformity in laws, conflicts of systems, and rival 
 advantages offered to incorporators by one State 
 bidding against another, under conditions favoring 
 loose banking practice, had contributed to this con- 
 fusion. Before the greenback came to take a prom- 
 inent part in our circulation, the credit-money of the 
 nation, in the form of " notes-of-hand " (issues of 
 State banks), were in such condition that one doing 
 
 [41] 
 
42 THE BANK AND THE TREASURY 
 
 business was required to keep constantly before him 
 a current list of quotations as to prices of "bills," 
 and then he ran the risk of loss in exchange. Still, 
 Conlmion in the advantages found in the local in- 
 credit-moneyathe-dLt^tTX^tni institution for fostering 
 ginning of War ui^^^^,, interests were so great that 
 
 all this confusion and loss could be suffered with 
 scarcely a suggestion of return to central banking — 
 to a central "Federal" institution with its large capi- 
 tal, its branches, and its uniform currency. Even 
 during the War, when Federal ideals were strong, 
 there was no large business interest ready to advocate 
 or even listen to proposals for a central Federal bank. 
 In fact, it was the fear that such might be the out- 
 come of a Federal law which stood for a long time in 
 the way of establishing a uniform National system 
 in conformity with existing ideals. 
 
 Conversion of the Treasury into an Exclusive 
 Agency of Credit-Money-Issue 
 
 When the Government found itself confronted by 
 the necessity of supporting armies in the field, when 
 it became necessary to maintain an armament with 
 a fighting force of half a million, when its expendi- 
 Issues of Govern- tures amounted to millions per day, 
 meni credit for it found itself equipped for such an 
 currency undertaking with an independent (but 
 
 empty) Treasury, and with a commercial-credit sys- 
 tem entirely divorced from the Federal State; the 
 
NATIONAL CREDIT-MONEY AND THE BANK 43 
 
 finances of the country were organized on independ- 
 ent commercial lines rather than on those intended 
 for Government service. The conversion of this 
 empty independent Treasury into an active financial 
 agency to provide current funds for the Government 
 became a matter of necessity, and as the easiest and 
 most expeditious way of providing such funds the 
 Treasury assumed issue functions. 
 
 The notes (demand-credit obligations) of the 
 Treasury entered into circulation in competition with 
 the mixed and inefficient system of bank-note cur- 
 rency. At first (as demand obligations for the pay- 
 Government credit ^ent of gold and silver) they passed 
 becomes money at par. Later, being valued at less 
 ^^" ^^ than specie-paying bank-notes, they 
 
 were made legal-tender to give them currency. As 
 an incident to this, the whole commercial-credit sys- 
 tem passed over to a Government "paper standard." 
 The banks, failing to provide a "coin-reserve" for the 
 redemption of their demand obligations, immediately 
 accepted the situation. They provided themselves 
 with a cheaper form of legal-tender money for re- 
 serves and sold their coin, using instead issues of the 
 Treasury for the redemption of notes.* 
 
 At first, from National necessity, Treasury-notes 
 
 ♦This practice became general with banks in every section except the 
 Pacific coast. The practice was systematized in the East by action of the 
 principal Clearing-House Associations; Boston was the last of the large 
 cities to adopt the United States note as a standard for payment. August 
 27, 1861, that Association voted that any bank which might conform to 
 the agreement entered into by the banks in New York and Philadelphia, 
 
44 THE BANK AND THE TREASURY 
 
 were issued in settlement of demands against the 
 Government; after the issues of the Treasury had 
 been accepted by the banks as a standard for pay- 
 ment of their own credit-accounts the notes of the 
 Displacement o) Government were found preferable to 
 the State bank- the diversified issues of banks. Gov- 
 ^°^^ ernment issues at least provided a 
 
 uniform, and therefore more acceptable form of 
 credit-money. This preferment on the part of the 
 banks, this decision to accept United States notes as 
 reserves, this better service rendered by the Treasury 
 as an agent of money-issue, paved the way to the tax 
 which eliminated the credit-issues of banks from our 
 money circulation.* From that time to the present 
 all our "credit-money" has been issued by the Cen- 
 tral Government, the banks confining their credit 
 activities entirely to commercial functions, using the 
 credit-money-issues of the Government for their re- 
 serves. From that day to this the American money 
 question has been an entirely separate and distinct 
 
 with reference to the National loan, could deposit with the Clearing- 
 House Committee "Treasury-notes" of that loan and receive in exchange 
 certificates of the "loan committee" to an amount not exceeding ninety 
 per cent of the par value of such Treasury-notes. These certificates were 
 to be received at the Clearing-House in settlement of balances. The 
 notes were later adopted as a basis for payment in Ueu of "coin." 
 
 *True, the ten per cent tax imposed on State bank-notes was the im- 
 mediate cause of the retirement of State bank-notes. But if the green- 
 back and the National banking system had not been considered more 
 advantageous, the banks would not have withdrawn their opposition to 
 their use and adoption, and, furthermore, would not have voluntarily 
 accepted the change. There can be no doubt that the uniform system 
 of greenbacks and "Government" bank-notes was in every way more 
 acceptable and more serviceable to the people than the complicated, 
 hazardous, and uncertain system of independent bank issues. 
 
NATIONAL CREDIT-MONEY AND THE BANK 45 
 
 one from the American commercial banking problem, 
 and every attempt to treat the two questions without 
 distinction has led to confusion of thought. 
 
 The Creation of a Uniform System of 
 Commercial-Credit 
 
 In the reduction of our "commercial-credit" to a 
 uniform system the same National necessity was the 
 immediate cause. It was the need of the Govern- 
 ment for current funds that reduced credit-money- 
 issues of the country to a uniform basis in the Treas- 
 ury-notes; it was the continuing public need for 
 A national bank- current funds that finally gave us 
 ing system from uniform institutions of commercial- 
 puhlic necessity ^^^^^^ Secretary Chase saw in the 
 
 commercial bank the possibility of an enlarged mar- 
 ket for bonds. The practice among the States under 
 the Free-Bank system suggested a practical method 
 for utilizing this market. 
 
 Before this could be done, however, it was neces- 
 sary to incorporate the many "local" banking sys- 
 tems under National law. But to make such a 
 National system a success would require voluntary 
 consent on the part of both banks and bank patrons. 
 Incorporated the General respect^ and voluntary con- 
 Serf American sent must be gained through devising 
 experience ^ National law that would serve the 
 
 commercial purpose better than had the mixed and 
 uncertain State-bank systems. The inducement to 
 
46 THE BANK AND THE TREASURY 
 
 voluntary consent which Secretary Chase and his 
 advisors offered was a National Banking Law, into 
 which were incorporated all of the most wholesome 
 measures — the best banking ideals that had been 
 evolved during nearly half a century of independent 
 commercial banking experience. These ideals were 
 brought together and welded into a consistent plan 
 — one that commended itself both to bankers and 
 to established business interests. 
 
 The manner in which this law represented and 
 still represents the "local" ideal is caught from the 
 language of ex-Comptroller Dawes, in a recent speech 
 before the Kansas Bankers' Association: "It has 
 been built up, not from some central institution com- 
 bined with numerous branches which discourage the 
 banks in small towns, but has been built up from 
 Organized fifteen thousand differentiated banking 
 
 around local, units, until in banking, as in other 
 hanking needs ^^^^ industries of these United States 
 of ours, is coming a day of commercial domination 
 of the world. It is the little men whom we have 
 protected in this Government." The National bank- 
 ing system is a part of that National policy evolved 
 "to let the little men get on in the country, in order 
 to let the little bank get into operation, in order to 
 let the little manufacturer get into operation, and to 
 not cut off from their credit those people who, start- 
 ing from small beginnings, have brought us into this 
 great prosperity which we all enjoy and which is so 
 
NATIONAL CREDIT-MONEY AND THE BANK 47 
 
 widely and evenly distributed throughout this great 
 country of ours." 
 
 The American System 0} Sound Money 
 
 The American credit-money-system, in its final evo- 
 lution, is essentially a system of Government obliga- 
 tions for the payment of gold on demand. In the 
 effort of the American people through the last cen- 
 tury to obtain a "uniform" currency, the Independ- 
 ent Treasury has been maintained, and has finally 
 become the only institution of credit-money-issue. 
 Uniformity of valuation of all our money-issues is 
 secured through this central institution by a process 
 of immediate redemption. In the interest of " sound 
 money," and as a provision directed toward meeting 
 the demands for gold payment arising out of these 
 credit-money-issues, a gold-reserve is set aside in a 
 special department of the Treasury known as the 
 Department of Issue and Redemption. Here is kept 
 the $150,000,000 gold-reserve; here all demands for 
 gold obligations arising out of credit-money-issues 
 may be presented and honored ; here, in fact, and in 
 practice, all forms of money are made interchange- 
 Credit-moneys able. If the holder of silver wishes 
 rift^l^ATa- greenbacks he may exchange silver 
 tional Treasury for notes; if he has gold, and for con- 
 venience wishes silver certificates, these may be had ; 
 if he has any form of money other than gold, and 
 wishes standard money, he may obtain this in ex- 
 
48 THE BANK AND THE TREASURY 
 
 change, at par, without discrimination. Thus every 
 form of money is issued by the Treasury, and 
 all forms other than gold are made demand obliga- 
 tions for gold payment. Furthermore, the means of 
 meeting these obligations are at hand: first, in the 
 form of a "reserve" large enough to meet current 
 demands, and, second, by making the credit-money- 
 issues redeemed a first lien on the general resources 
 and revenue powers of the Government. These 
 credit-money-issues of the Treasury are made legal- 
 tender for the payment of commercial-credits. 
 
 The American System of Banking 
 
 The American banking system, on the other hand, 
 is essentially an independent institution of commer- 
 cial-credit. It has for forty years been entirely di- 
 vorced from money-issue functions, except as an 
 agent of the Government for the conversion of bonds 
 An independent i^^to demand notes. The service that 
 system of com- it renders is one of furnishing com- 
 mercial-credit ^^^^^j^j credit-funds to its business 
 constituency in the form of book-credit accounts. 
 
 The legal- tender "credit-money-issues" of the 
 Government are contracts to pay gold coin; the 
 Comparison of " commercial-credit-accounts " offered 
 money and hank- to the public by the banks are con- 
 ing systems ^^^^^^ ^^ ^^^ legal-tender money. The 
 
 Independent Treasury protects the "credit-money" 
 system by maintaining a "reserve" of gold. As 
 
NATIONAL CREDIT-MONEY AND THE BANK 49 
 
 all the reserves and the revenue power of the 
 Treasury are organized for and directed toward the 
 maintenance of a convenient form of legal-tender 
 money in its integrity, so it is intended that the com- 
 mercial bank shall protect its "demand-credit-ac- 
 counts" by keeping a money-reserve adequate to 
 meet current demands, fortified by all the capital- 
 resources of the bank. It has come to be recognized 
 that the bank's service to the country is not one of 
 " money-issue." When money is needed, a customer 
 cares not whether it is in bank-notes, greenbacks, 
 gold certificates, or notes of 1890, so long as it is 
 "sound;" i.e., so long as he knows that he may 
 obtain gold or something as valuable on demand. 
 He may obtain "money" as cheaply from a Treasury 
 ofl&ce as from a bank. 
 
 The chief service of the bank is one of purchasing 
 good, sound, commercial paper offered for sale in the 
 community as a means of obtaining funds to meet 
 the current needs of enterprise, and (as the most 
 convenient form of funds) to be able to give "good, 
 sound, commercial bank-credit" in return. Under 
 
 a system which permits the banks to 
 vkeffebank i^sue notes-of-hand, the reason that 
 
 the bank gives to its customers funds 
 in this form is that it is to the bank's advantage to 
 do so, and not because the customer prefers the 
 bank-note to Government issues. But the American 
 business public has found that, in over ninety per 
 
50 THE BANK AND THE TREASURY 
 
 cent of its business, funds in the form of a "bank- 
 account" are more convenient to the customer, and 
 they have seen fit to take away from the bank the 
 power of money-issue in the interest of public safety. 
 Under our system, the commercial bank, being de- 
 prived of credit-money-issue privileges, renders two 
 services: (i) It furnishes a market for commercial 
 paper; (2) it furnishes a form of credit-funds more 
 convenient for use than money itself. 
 
 But the public is quite as much interested in know- 
 ing that the credit-accounts of banks will remain 
 "sound" — i.e., will be paid on demand in "sound" 
 legal-tender money of the Government — as it is 
 that the Government shall furnish "sound" legal- 
 tender money, for under the law of greater economy, 
 over nine-tenths of the business is done on this form 
 of obligation when protection is given against "un- 
 sound" banking. The method employed under this 
 Need for sound- Unique American system of independ- 
 nessin bank- ent commercial banking is to require 
 '^'^^ * banks to maintain their capital-re- 
 
 sources unimpaired, and to keep a "reserve" of 
 legal-tender currency sufiicient to protect the accounts 
 which they have sold to the public for business use. 
 When thus protected we have a system of credit 
 thrice compounded: (i) a system of Government 
 "legal- tender credit-money-issues" based upon the 
 gold standard; (2) a system of "commercial bank- 
 credit-funds" (book-accounts) based on legal- tender 
 
NATIONAL CREDIT-MONEY AND THE BANK 51 
 
 money; (3) a system of "business-credit" looking to 
 the bank-account for means of payment. It is the 
 current opinion that under the American system, 
 through the Independent Treasury, we have already 
 secured to ourselves a "sound money"; the problem 
 now before us is one of securing for ourselves "sound 
 commercial bank-credit." 
 
 The So-called "Issues" 0} National Banks 
 
 To this conclusion and summary one objection 
 will be urged, viz., that the banks called National 
 banks have retained issue functions. This conten- 
 tion will not be admitted, and in this lies one of the 
 minor financial fallacies of the time. As an institu- 
 tion of commercial-credit, our National bank is not a 
 bank of issue. It would be as logical to call banks, 
 which deposit gold and receive in return gold- 
 Clearing-House-certificates, banks of issue ; it would 
 be as justifiable to so regard a State bank or private 
 bank that has deposited gold, silver, or currency in 
 the Treasury and received certificates to represent 
 them. Bank-notes, it is true, are at present a form 
 of money, but, for the issue of these, the bank occu- 
 pies a position of agency of the Government for the 
 Banks an agency of conversion of bonds into notes. The 
 the Government for note-issue power was not intended 
 bond conversion ^^ ^ ^^^^^ ^f meeting a commercial 
 
 demand; it was given purely as an accommoda- 
 tion to the Government for its own ends. As a 
 
52 THE BANK AND THE TREASURY 
 
 means of creating a bond-market when the Treasury 
 was in need of coin the bank was allowed to buy 
 coin bonds, i.e., to exchange gold, or gold market 
 equivalents, for bonds; then (on depositing the bond 
 thus purchased with the Government as security to 
 a promise to deliver a definite amount of money to 
 the Treasury) the bank obtained a form of paper 
 money, called "National currency" or bank-notes, 
 for use in its business, receiving the interest on the 
 bond as an inducement for the exchange. 
 
 The Government issues the bank-note in the same 
 sense that the Clearing-House issues Clearing-House 
 loan-certificates. These notes are not bank-credits 
 issued in the course of a commercial banking busi- 
 ness. The value of the note does not rest on the 
 credit-contract of the bank, but on a contract with 
 the Government which in turn rests on the collateral 
 securities deposited with the Treasurer, i.e., on Gov- 
 ernment credit. The notes were not "issued" by 
 the bank, but were purchased or borrowed from the 
 Government, and as a form of money the immediate 
 Government ^^^^ ^o the bank is more than that of 
 issues notes to any other form of money obtainable. 
 the banks j^ jg therefore thoroughly misleading 
 
 and tends to involve the subject of currency and 
 banking in mystery to speak of this form of currency 
 as bank-money. It is quite as misleading to attempt 
 to align this practice with any experience under other 
 systems of banking in discussion of "elastic bank- 
 
NATIONAL CREDIT-MONEY AND THE BANK 53 
 
 issues." Under the American system the National 
 "bank-note" is a form of money issued by the Gov- 
 ernment to and through the bank as a corporate 
 agent of the Government. 
 
Chapter V 
 
 THE DEMAND FOR A " SOUND" AND "ELASTIC" 
 SYSTEM OF BANK-CREDIT 
 
 The solution which we have given to the problem 
 of "sound money" has been by taking our money- 
 issues entirely out of the hands of private concerns 
 and putting them under a department of Govern- 
 ment. By so doing, however, we have left our 
 Opinion as to " commercial-credit " entirely in the 
 need for greater hands of private individuals and cor- 
 elasticity porations. That greater elasticity is 
 
 needed and that some change should be made in the 
 National Bank Act to this end, all are agreed. Opinion 
 differs only as to what the character of this change 
 should be. And this difference grows out of a differ- 
 ence of view as to the method by which elasticity in 
 credit obligations may be attained without restricting 
 business accommodations. 
 
 Two Schools of Banking Opinion as to Method of 
 Obtaining Elasticity and Sound Banking 
 
 Proceeding from the assumption that greater elas- 
 ticity is needed as a common point of departure, 
 argument has gone out on two distinct lines; bankers 
 
 [54] 
 
"sound" and "elastic" banking 55 
 
 have divided into two schools of opinion diametri- 
 cally opposed. The one has reached the conclusion 
 
 that "branch-banking" and "cur- 
 Points of differ- i j • i , ,, 
 
 g„^g rency based on commercial assets ' 
 
 will secure the desired end ; the other 
 has as zealously urged "independent banking" and 
 "credit-accounts" (deposits) based on independent 
 and adequate capitalization. On examination of 
 the arguments used by these two schools there ap- 
 pears not only the fundamental difference in their 
 appreciation of the relation of the problem of "elas- 
 ticity" to financial "soundness," but the reasons for 
 this divergence in conclusions as to the remedies to 
 be applied are also apparent. Taking premises for 
 argument there has been a wide difference in their 
 conception of the "system" to be modified, and also 
 a lack of agreement as to the form of "bank-credit" 
 to which elasticity is to be given. 
 
 The "Commercial Assets" Banking School 
 
 Mr. Eckels, representing the ideas of the "branch- 
 bank", "commercial assets banking" constituency, 
 has refused absolutely to take into account the fact 
 that we have in America a system that has grown out 
 of American conditions, and therefore one that must 
 be considered from the standpoint of further adap- 
 tation to American financial and industrial interests. 
 He and his followers show that branch-banking has 
 produced good results in other fields, and conclude 
 
56 THE BANK AND THE TREASURY 
 
 that it would also produce equally good results if 
 
 grafted upon our own industrial plant. They show 
 
 that the bank-note circulation of Eng- 
 Character of their i j o ii j t i j /-^ 
 claims ^^^°' Scotland, Ireland, Germany, 
 
 Canada, etc., has adjusted itself to in- 
 creased and decreased business demands for current 
 funds; it is therefore assumed that the English or the 
 Scotch or the German branch-bank would work here 
 better than our own system of decentralized, inde- 
 pendently capitalized banks. 
 
 This reasoning from analogy might have been put 
 with convincing force if they had first shown that the 
 American business demand and the American bank- 
 ing system were the same sort of demand and a 
 system similar to those from which their analogies 
 are taken. Their fundamental error lies in failure 
 
 to appreciate that there are no par- 
 Fallacy of reason- n i • .., x ^i j^ i i .i 
 
 ing fromanalogy ^^^^Is m either. In the first place, the 
 
 discussion is not with reference to an 
 English system of banking, a Scotch system or a 
 German system; what we have to do with is an 
 American system. In the second place, the form of 
 "bank-credit" demanded by the American business 
 man is not a bank-note, but a "credit-account" for 
 the use of the customer of the bank. To show by 
 direct quotation Mr. Eckels' line of departure: " Com- 
 merce wants (i) a note-issue which is sound, and (2) 
 one which from day to day in its volume meets, not 
 only in the cities of great commercial undertaking. 
 
57 
 
 but upon the frontier and in sparsely populated 
 places, the needs of the people in their transactions, 
 . . . in their transferring of property from one to 
 another." This is the first premise in the reasoning 
 of the "commercial assets banking" school. 
 
 All admit, and our whole past history supports the 
 conclusion, that the American people wish a " sound " 
 credit-money when they wish credit-money at all; 
 but it is affirmed by Mr. Eckels' opponents that his 
 assumption is wrong when he further says that the 
 American people wish a "note-issue upon the part 
 of the bank." This, it is urged, is what the Ameri- 
 can people have been drifting away from since 1837, 
 Note-issues for ^'^^ ^haX they completely abandoned 
 the use of the forty years ago. The American peo- 
 ^"''^^^ pie have not seen an "issue" of a 
 
 bank — using the word in the same sense that Mr. 
 Eckels uses it in his analogies drawn from Canadian 
 and European practice — since the Civil War. The 
 school which he represents fail to appreciate the 
 fact that the American people have completely di- 
 vorced their system of "credit-money-issue" from 
 their system of "commercial-bank-credit." 
 
 The "Capital Assets" Banking School 
 
 The other school is ably represented by Mr. 
 Dawes. While in a measure this school has failed 
 to appreciate the full import of the institutional dis- 
 tinction between the American and other systems. 
 
58 THE BANK AND THE TREASXIRY 
 
 in their reasoning about "elasticity" they have pro- 
 ceeded from a proper appreciation of the form of 
 Bank-accounts circulating medium demanded. Quot- 
 used by business ing from Mr. Dawes for a statement 
 community ^f ^j^jg ^j^^. u^j^^^ jg ^^le most im- 
 
 portant function of a bank? It is not the note- 
 issuing function . . . the most important function 
 which banks exercise in any community is that of 
 producing purchasing power [credit-accounts of cus- 
 tomers] in that community. ... By that method 
 through those simple operations of banking [the 
 purchasing of commercial paper and giving to the 
 customers, in exchange, accounts on the books of 
 the bank], there has been built up in this country 
 to-day a purchasing power of something over nine 
 billion dollars, whereas the total amount of Govern- 
 ment money in circulation — gold, silver, and paper 
 — is about $2,250,000,000. It is the check and 
 draft circulation against that tremendous credit 
 balance which furnishes the currency [current funds] 
 with which over ninety per centum of our total trans- 
 actions are done. . . . We have in this country the 
 most elastic currency which the world has ever 
 
 known, in this check and draft cur- 
 Elasticity in t-,, . , ^^ • ^ ^ 
 
 credit-accounts ^ency. ... Did you ever thmk how 
 
 elastic the check and draft currency 
 of the United States is? Why in the year 1900 the 
 clearances of the city of New York alone were thirty- 
 one billions of dollars — not millions — thirty-one 
 
"sound" and "elastic" banking 59 
 
 billions of dollars greater than they were in 1897, 
 and they were five billions of dollars less in 1900 than 
 they were in 1899. Just think of the elasticity of 
 that magnificent currency which has been built up 
 in this country by this system of differentiating bank- 
 ing among the fifteen thousand banks scattered over 
 these United States." 
 
 Recognizing that the chief service rendered by the 
 commercial bank is one of providing its customers 
 with credit-accounts (deposits) for business use, this 
 second school of banking opinion have strongly im- 
 pressed on their faith, that there is at present no 
 limit to the elasticity of the form of funds in current 
 use except that imposed by the bank itself; elasticity 
 is limited only by the amount of capital support 
 given to accounts outstanding. They strongly advo- 
 Limit to elasticity cate increased financial "soundness" 
 imposed by banks as a remedy for inelasticity, and as a 
 themselves ^^^^^ ^^ ^j^jg ^^^ ^j^^y f^^j^^^ ^^^p. 
 
 cate the principle of banking on the "capital re- 
 sources" of the bank instead of doing business with 
 "issues" based on "commercial assets." 
 
 Since the exchange of credit-accounts for com- 
 mercial paper is the chief business of the bank, and 
 The limitation since these credit-accounts (deposits) 
 one of " sound- are the chief form of funds used in 
 "^"" the community, the underlying pre- 
 
 mise of their belief is that the first duty of the bank is 
 to make these credit-accounts "sound." Soundness 
 
60 THE BANK AND THE TREASURY 
 
 is here used in the same sense that it was understood 
 to mean in the recent money controversy. The bank- 
 account is sold to the customer (or exchanged for his 
 note) to be used as current cash in his business. 
 What the customer wants to know is that it is as 
 good as gold. And what the bank must do to insure 
 this result is to be able to redeem its credit-contract 
 on demand. 
 
 The "Soundness" of a Bank's Credit 
 
 There are two ways in which credit-contracts may 
 be met; viz., by "payment" and by "settlement." 
 Payment is the satisfaction of a credit obligation by 
 delivery of the amount of money contracted for. 
 Two methods of Settlement is the satisfaction of a con- 
 satisfying a credit tract for future delivery by a new 
 tga ton contract or acceptance, in lieu of de- 
 
 livery or payment. Ability to pay depends on the 
 ownership or possession of money, or something 
 which can be converted into cash, for delivery when 
 the credit-contract is due and demand is made; 
 ability to settle depends on the power of the one 
 obligated to offer something which will be acceptable 
 to the creditor in lieu of legal-tender money. 
 
 In campaigns for currency and banking reform, 
 these two methods of satisfaction of credit-demands 
 have been the first premises of the two opposing 
 schools of financial thinking. Recurring periods of 
 relapse from speculative excess, cycles of decreasing 
 
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61 
 
 assets and proportionately increasing liabilities, have 
 caused issue to be joined between them. The school 
 The dividing line in which have pleaded for reform based 
 campaigns }or finan- on ability to pay, have styled their ar- 
 cial soundness ^^^^^ ^ ^^^^ j^^ financial "sound- 
 
 ness." The school which have urged measures for 
 settlement, without being required to fulfil their con- 
 tracts for future delivery of money, have been char- 
 acterized by their opponents as "inflationists." But, 
 whatever may be chosen as terms properly to repre- 
 sent these two financial creeds, it must be recognized 
 that each is an attempt to solve the problem of liqui- 
 dation — the one, by the introduction of methods 
 which will insure a larger proportion of assets to 
 credit issued, the other, by a provision for new issues 
 of credit liabilities to meet those already outstanding. 
 It may be further observed that, in all of these con- 
 tests, the one school have stood for the strict fulfil- 
 ment of existing contracts, and have sought to protect 
 business against the evil of future excesses of credit- 
 issue, while the other school have sought to obtain re- 
 lief from a present emergency, arising out of demands 
 for the delivery of money on existing contracts of 
 credit. 
 
 In 1893-96, attempt was made to solve the prob- 
 lem of liquidation by establishing 371.5 grains of 
 silver as the standard of payment of existing liabili- 
 ties and for the valuation of assets. With the price 
 of silver as it then stood, this device would at once 
 
62 THE BANK AND THE TREASURY 
 
 have doubled the proportion of assets to credit Habili- 
 
 ties, and would have made liquidation easy. Two 
 
 successive political campaigns re- 
 The sound money i i • . r .i u ^ j j 
 
 controversy corded Victory for the gold standard; 
 
 and all future doubt as to the ability of 
 the Government to liquidate its credit-money obliga- 
 tions, by payment according to the standard, was set 
 at rest by increasing the assets of the Government 
 available to meet gold demands. These questions 
 are now considered settled, but a new period of liqui- 
 dation brings with it a similar controversy with re- 
 spect to the credit-accounts of commercial banks. 
 On questions of public policy, opinion is again di- 
 vided between the same schools, representing the 
 same ideals that have contested for supremacy 
 throughout the last two centuries. 
 
 The Demands of the Two Schools of Banking Reform 
 
 A re-statement of their respective demands may 
 lend clearness to the presentation of contending 
 faiths. To give greater facihty to the liquidation of 
 bank-credit liabilities, the one school argue: (i) for 
 authority to issue new promissory notes in settlement 
 Demands of the °^ credit-accounts outstanding ; (2) for 
 " commercial as- a first lien on the general assets of the 
 
 sets " banking ]t)ank to secure the ultimate payment of 
 school . , ^ e , , , 
 
 these notes; (3) for the abolition of the 
 
 Sub-Treasury; (4) for the "deposit" of all revenues 
 
 of the Government in the commercial banks, without 
 
"sound" and "elastic" banking 63 
 
 collateral security; (5) for the right of banks to es- 
 tablish branches, without requiring a proportionate 
 increase of capital-resources to liabilities. 
 
 The arguments offered in support of these several 
 demands are in brief as follows: (i) That authority 
 to issue notes will relieve the banks from the necessity 
 of obtaining legal-tender money for delivery in time 
 Arguments sup- of unusual demand for liquidation of 
 porting these de- bank-credit, and will thus relieve ex- 
 ^^^ ^ traordinary pressure on the money 
 
 market; (2) that a first lien on the general assets of 
 the bank, to secure the ultimate payment of notes 
 issued in settlement of outstanding credit-accounts, 
 will keep the bank-note as "sound" as the issues of 
 the Government, and will protect it as well as if 
 secured by a deposit of Government bonds; (3) that 
 the abolition of the Sub-Treasury system will prevent 
 money being abstracted from the regular channels of 
 trade when there is a surplus of Government revenue 
 over expenditure; (4) that by "depositing" the reve- 
 nues of the Government with the commercial banks, 
 these "deposits" may be used to support stUl larger 
 volumes of credit-accounts, and increase the available 
 funds of the community; (5) that by a system of 
 branch-banking, capital wUl be given greater "fluid- 
 ity," — i.e., the money of the bank may flow from 
 one part of the country to another as it may be 
 needed. 
 
 Answering these contentions, the other school of 
 
64 THE BANK AND THE TREASURY 
 
 banking opinion urge that all this is a plea directed 
 towards weakening the capital-resources of the banks 
 on the one hand, and for permission to avoid payment 
 of credit-accounts outstanding on the other. Further 
 enlarging on these views, they argue that authoriza- 
 tion to issue new notes in settlement of demands for 
 Arguments for delivery of money made on-account 
 "capital assets" is a means of avoiding payment, and 
 anktng ^ j^^ effect not only prevents such a 
 
 readjustment of assets to liabilities as is necessary to 
 "sound banking," but tends toward a still larger 
 inflation of credit, at the very time when assets are 
 being scaled by the exercise of more conservative 
 judgments of valuation — i.e., when ability to con- 
 vert assets into cash for delivery on credit-demands 
 is being reduced. It is also pointed out that the 
 security offered for note-issues, in the form of a lien 
 on the general assets, not only decreases the need of 
 capital-resources, but at the same time tends to 
 weaken still further the support to bank-credit-ac- 
 counts — the kind of funds in most general use — 
 and to weaken public confidence in the whole bank- 
 ing system; the immediate effect of this weakened 
 confidence is to lessen the opportunities of the bank 
 to render a service in the community out of which it 
 obtains its revenue. They urge that the Sub-Treas- 
 ury, instead of being an element of weakness, is an 
 element of strength in two ways : first, by segregating 
 the public funds, the necessity for larger bank capi- 
 
BANKING 65 
 
 talization is increased ; and, second, by storing up an 
 independent reserve in time of low money-demand, 
 an independent money-reserve is at hand which may 
 be made available to the banks in time of monetary 
 strain. In support of this last contention, they point 
 to the wholesome influence of the Sub-Treasury in 
 the recent disturbances, such as the Baltimore and 
 St. Louis panics, at which times the bank situation 
 might have proved disastrous to the business of the 
 whole country, had it not been for the aid of the 
 Government. 
 
 As to the so-called "deposits" of Government- 
 moneys in the banks, they show that these are noth- 
 ing more or less than loans to the banks without 
 interest. In this relation, it is further urged that the 
 only reason why the Government or anyone else 
 should purchase a bank-account is to obtain funds 
 for current use in a form more convenient than 
 money; that the only need of the Government for 
 such funds is represented in the accounts of disburs- 
 ing officers — about $6,000,000. They hold, there- 
 fore, that the ever-increasing loans of the Govern- 
 ment to the banks (in the early part of 1904 amount- 
 ing to about $170,000,000) put a premium on their 
 Increased "elas- relying on the paternal support of the 
 SLf/aTi Treasury, instead of depending on 
 strength their own capital-resources for the 
 
 cash needed in the liquidation of their own accounts 
 — i.e., for money-reserves. Again, it is urged that 
 
66 THE BANK AND THE TREASURY 
 
 the demand for branch-banking is inspired by this 
 same motive — the desire for still further lessening 
 the capital cost of doing business, which, if accom- 
 plished, would result in again weakening the need 
 for capital contributions by the stockholding pro- 
 prietors of banking corporations. 
 
 This second school would secure elasticity in quite 
 another way. Their underlying principle is ex- 
 pressed by Mr. James G. Cannon: "Bankers some- 
 times plead for more elastic currency, but what is 
 needed is more elasticity of the assets of the bank; 
 what is wanted are assets that are readily convertible 
 into cash in time of panic, which will pay depositors, 
 and at the same time permit new loans." This 
 Adequate capital- Statement sets out in strong relief the 
 resources the so- irreconcilable premises of the two 
 ^^"^ classes of thinkers; the one urging a 
 
 right to increase liabilities still further when their 
 assets are already inadequate to support outstanding 
 demand-credit ; the other urging an increase in capi- 
 tal-assets — those assets readily convertible into cash 
 without curtailing loans. 
 
Chapter VI 
 
 THE RELATION OF BANK CAPITALIZATION TO 
 THE PROBLEM OF ELASTICITY 
 
 Although the relation of capitalization to the 
 
 problem of elasticity is an indirect one, its importance 
 
 has been overlooked by those who have had remedies 
 
 to propose. As before observed, "elasticity of 
 
 credit-accounts" and of banking accommodations is 
 
 Distinction he- the desideratum; and elasticity of 
 tween"' wild-cat" j., j. j j j 
 
 and "sound" credit-accounts depends on an ade- 
 
 hanking quate equipment of the bank with 
 
 "available" or "convertible" capital-resources. The 
 assets, which are available without "forcing" or 
 curtailing loans, are those that are obtained by capi- 
 tal expenditure ; in fact it may be said that this is the 
 chief end for which the capital of a banking institu- 
 tion is obtained. The provision of "capital-assets" 
 instead of "commercial-assets" as a basis for bank- 
 credit (whether in the form of notes-of-hand or bank- 
 credit-accounts) is the essential distinction between 
 the "wild-cat banking" of the past and "sound 
 banking." 
 
 This is another way of stating the controversy be- 
 tween the two schools of banking opinion represented 
 
 [67] 
 
68 THE BANK AND THE TREASURY 
 
 by Mr. Eckels and Mr. Dawes. While it may not 
 be said that Mr. Eckels favors "wild-cat" banking 
 (i.e., banking without capital), the conclusion reached 
 by his critics seems warranted that all of his proposals 
 are in the direction of weakening the capital support 
 given to asset liabilities outstanding. An application 
 of his proposals, therefore, would be in the direction 
 of wild-cat banking. Mr. Eckels argues for bank- 
 ing on "commercial-assets," i.e., making the current 
 credit obligations of the bank depend on the converti- 
 bility of loans and discounts, which in turn would 
 depend on the convertible assets of customers. The 
 Banking on the school represented by Mr. Dawes 
 capital of the contend that the current money-de- 
 °'^ mands arising out of the credit-ac- 
 
 counts used by the bank to purchase commercial 
 paper should be met by the bank itself out of its own 
 capital; i.e., the second school referred to argue for 
 banking on the capital-resources of the bank instead 
 of banking on the convertible assets of the community, 
 to which the bank has sold its credit to be used as 
 current funds. 
 
 Principles of Banking with Respect to 
 Capitalization 
 
 The reasoning of this second school is based on the 
 assumption that the purpose of bank capitalization, 
 as in all business enterprise, is to provide funds with 
 which to procure permanent equipment. This 
 
BANK CAPITALIZATION AND ELASTICITY 69 
 
 assumption cannot be denied; it must be accepted as 
 axiomatic . The financial process called capitalization 
 Capitalization of is the creation of a permanent fund 
 permanent needs for a permanent use. The reason for 
 oj banks Ui. • • j- i r 
 
 obtammg funds for permanent equip- 
 ment by capitalization is to avoid the necessity of 
 constantly refunding— a need which is a continuing 
 one. This being generally accepted, the only ques- 
 tion that remains is: What are the permanent needs 
 — what is the equipment necessary to safe banking? 
 Their second premise is that the business of bank- 
 ing is one of furnishing "current funds" to its cus- 
 tomers in the form of non-interest-bearing credit. 
 This must also be accepted. The customer obtains 
 these credit-funds by selling to the bank his own 
 interest-bearing note, or some other form of bankable 
 asset. The earnings of a bank are derived from 
 exchanging these non-interest-bearing credit obliga- 
 tions, which are used in the community as current 
 Needs determined funds, for good commercial paper 
 hy nature oj purchased at a discount or with in- 
 terest accruements.* The amount 
 of earnings depends in large measure on the amount 
 of good commercial paper the bank is able to buy 
 with its credit-accounts — i.e., profits depend on the 
 amount of credit-accounts (so-called deposits) pur- 
 
 *This form of statement is not entirely in accord with the more recent 
 practice whereby the banks are paying interest on their own accounts 
 (deposits). But in such event, tlie rate must necessarily be lower than 
 that paid by the customers for loans. In any event the result is the same. 
 
70 THE BANK AND THE TREASURY 
 
 chased by customers by means of their own interest- 
 bearing obligations and bankable assets. 
 
 The permanent need of a commercial banking 
 institution is a need for money and for assets readily 
 convertible into money; this equipment is necessary 
 as a means of supporting outstanding credit-accounts 
 sold to customers. And if a bank has in mind the 
 principle of elasticity in providing accommodation to 
 the community which it attempts to serve, the amount 
 The amount of ^f capitalization of a bank should be 
 capital needed by sufficient to support and protect its 
 "' credit-purchases of all good commer- 
 
 cial paper offered by those who wish to use credit- 
 accounts. The bank holding itself ready at all times 
 to purchase all good paper offered by those who carry 
 so-called "deposits" should have "capital-resources" 
 large enough to meet all demands for money on the 
 credit-accounts created and issued to customers in 
 exchange for commercial paper, without calling or 
 re-discounting its loans. Or, to state the conclusion 
 of the second school categorically: Capitalization 
 should be sufficient to meet every money-demand on 
 the amount of banking (credit-account) business done. 
 
 If there were no variations in the amount of credit 
 
 used, then a money equipment large 
 Fluctuations in , , . , , 
 
 credit-demand enough to meet money-demands on 
 
 this constant volume of credit-issues, 
 
 pending voluntary liquidation, would be the only 
 
 equipment needed. But the fluctuations of de- 
 

 
 
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BANK CAPITALIZATION AND ELASTICITY 71 
 
 mands for current bank-credit are continuous; the pro- 
 portion of money-demands to credit outstanding is 
 also variable. These fluctuations come from the 
 shifting prosperity of customers; they come also from 
 the fluctuating demands of a business community 
 from season to season. 
 
 It is found by experience, however, that the de- 
 mand for current funds {i.e., the amount of good 
 commercial paper and other bankable assets offered 
 to the bank in exchange for accounts) varies with 
 considerable regularity. The money-demand may 
 likewise be closely approximated. In highly mer- 
 cantile communities the experience of a bank may 
 show a recurring ebb and flow of credit four times a 
 year — the largest demands coming semi-annually; 
 in certain agricultural communities there is a rise 
 Ability to capital- and fall twice per year; in others, the 
 ize flmtnating loans and accounts cumulate and are 
 eman s reduced by voluntary liquidation only 
 
 once in twelve months. The amount of capital 
 needed under such circumstances, unless the bank 
 intends regularly to shift the burden by re-discount, 
 is an amount that will provide a safe money-reserve 
 for the support of the largest volume of credit-ac- 
 counts (so-called deposits) carried during the year. 
 
 No greater fallacy existed in banking circles than 
 the one so often stated — that a certain percentage 
 of "cash" to deposits is the only equipment necessary 
 to sound banking. This form of reasoning has led 
 
72 THE BANK AND THE TREASURY 
 
 to strange results. In time of minimum demand, 
 the money-reserves are allowed to run low in propor- 
 Equipment tion. By assuming that this is the 
 
 needed to meet only form of equipment needed, the 
 ■fluctuations |^g^j^]^ ^12,5 no resources from which more 
 
 money may be realized, when demands are larger, 
 without calling loans or restricting credit accommo- 
 dations. Again, in attempting to determine the 
 amount of money-reserve needed, it may be found 
 that in one institution less than ten per cent is actually 
 used. The bank having such an experience recog- 
 nizes that it is not good business to carry a money- 
 reserve of twenty or thirty per cent. This would be 
 as foolish as for a coke company to build twice or 
 three times as many ovens as it may ever hope to use. 
 The clause of the National Bank Act which allows 
 the banks to "deposit" their surplus money-reserve 
 is a contradiction in itself and a recognition of this 
 folly. But those who are responsible for this law 
 engaged in two other fallacies, viz.: (i) that the so- 
 called "deposit" is not a sale of money; and (2) that 
 the asset obtained on sale of surplus money is a 
 readily convertible "invested-reserve." 
 
 The wide variations of demands for money from 
 "Money-reserve" time to time on the accounts of cus- 
 and "invested- tomers make two forms of equipment 
 reserve advantageous, viz. : (i) a legal- tender 
 
 "cash-reserve" of such amount as will protect the 
 bank against all current demands, including de- 
 
BANK CAPITALIZATION AND ELASTICITY 73 
 
 mands of customers for money and demands of 
 banks on exchanges; (2) an "invested capital-re- 
 serve" which will produce an investment income 
 when money-demands are small, but which may 
 readily be converted into "cash"* in time of need, 
 without forcing the bank to sell its commercial paper 
 or call in its loans. 
 
 The Kind of Capital Equipment Necessary to 
 Elasticity 
 
 As a basis for further discussion of the relation of 
 capitalization to the problem of elasticity, the follow- 
 ing illustration is given. A bank with a share-capi- 
 tal of $100,000 and a surplus of $25,000 may provide 
 equipment for itself, as follows: 
 
 Capital-Resources 
 
 Banking house $S,ooo 
 
 Redemption equipment: 
 
 1. Cash-reserves: 
 
 (a) Exchange balance $10,000 
 
 (b) Money-reserve 60,000 
 
 2. Invested-reserve 50,000 120,000 
 
 Total equipment $125,000 
 
 Capital Liabilities 
 
 Capital stock $100,000 
 
 Surplus 25,000 
 
 Total capitaUzation $125,000 
 
 *"Cash" is here used to mean legal-tender "money" and "accounts" 
 with banks for purposes of redeeming exchanges, but not to include 
 "loans" to banks at interest even when these loans are in the form of 
 open accounts not used for the redemption of credit obligations. See 
 subsequent treatment of "loans to reserve agents," etc. 
 
74 THE BANK AND THE TREASURY 
 
 With these capital-resources and with this redemp- 
 tion equipment of $120,000 the bank may purchase 
 commercial paper and other bankable assets with its 
 own credit-accounts as follows: 
 
 Commercial Assets 
 Loans and discounts, etc.* $466,666.66 
 
 Commercial Liabilities 
 Accounts of customers {i.e., deposits) $466,666.66 
 
 From the above it will be seen that the bank in 
 question has used all its capital in the purchase of 
 equipment, that is to say: (i) $5,000 was used to 
 provide a banking-house, furnishings, etc.; (2) a 
 redemption equipment made up of a "cash-reserve" 
 of $70,000 and an " in vested-reserve " of $50,000 — 
 i.e., capital-resources amounting to $120,000 were set 
 aside for the protection of the credit transactions of 
 the bank with its customers. In the above showing, 
 $466,666.66 of "demand-accounts" are represented 
 as outstanding; these have been used to purchase 
 $466,666.66 of commercial paper.* It thus appears 
 that there is a "cash-reserve" amounting to fifteen 
 per cent of the outstanding customers' accounts 
 
 *It is not to be presumed that all accounts are created by the purchase 
 of commercial paper. Much of the accounts are created by "deposits" 
 (sales) of money, checks, and drafts, etc., but generally speaking the 
 money, checks, and drafts deposited with (sold to) a bank will be used as 
 set-offs against withdrawals, and the customers' accounts (deposits) will 
 very nearly equal commercial paper held — i.e., loans and discounts. 
 If the capital funds are kept separate and apart and the investments to 
 be used as capital-equipment clearly distinguished and unimpaired, the 
 "commercial assets" account and the "commercial liabilities" account 
 will be very nearly equal. 
 
BANK CAPITALIZATION AND ELASTICITY 75 
 
 (so-called "deposits") and that there is an added 
 " invested-reserve " of ten and seven-tenths per cent. 
 Let us assume that this bank is located in a Western 
 cattle country, and that the demands of customers 
 for current funds fluctuate from $300,000 to $700,000 
 during a year — also that a fifteen per cent money- 
 reserve (a much larger money-reserve than is usually 
 necessary) is found adequate at all times to satisfy 
 
 current demands for money. During 
 Capital adjust- ., i^i i • • ,i 1 
 
 ments to demands ^^e cattle shippmg season the loans 
 would, by voluntary liquidation, be 
 reduced to $300,000; at such times only $45,000 in 
 "cash-reserve" would be needed for safety. With 
 the capitalization above represented, therefore, $65,- 
 000 of the redemption equipment of the bank might 
 be invested in some kind of readily convertible asset 
 that would produce an income. Gradually, as the 
 season progressed, the ranchers would bring in new 
 cattle-notes to exchange with the bank for accounts. 
 Safety would then demand an increase in the "cash- 
 reserve"; this (the cash-reserve) might then be re- 
 couped out of the "invested-reserve" — i.e., out of 
 the unencumbered capital-resources. When the 
 commercial-paper-assets and current-accounts-pay- 
 able rise to $700,000 the "money-reserve" (by sale 
 or by hypothecation of "in vested-reserves") would 
 be increased to ^105,000 (fifteen per cent of out- 
 standing accounts-payable) and still leave a ten per 
 cent margin of " invested-reserve." That is, $45,000 
 
76 THE BANK AND THE TREASURY 
 
 of the capital-resources in the form of "in vested- 
 reserves" might be hypothecated with a ten per cent 
 margin in collaterals without sale of the invested 
 capital-reserves (or they might be sold) in any market 
 Elasticity a result where money might be had on favor- 
 of capital adjust- able terms, and the amount of the 
 ments money so purchased might be trans- 
 
 ferred as an exchange balance to the Western bank. 
 With such an equipment, the bank, doing business 
 under the conditions assumed, would enjoy an elas- 
 ticity in cash-reserves equal to the full capitalization, 
 less amount invested in banking-house and fixtures; 
 it would also enjoy an elasticity in customers' ac- 
 counts equal to more than five and one-half times its 
 total capital. This elasticity might be attained and 
 at the same time the bank might keep invested at 
 interest all of its capital which is not actually needed 
 as a "cash-reserve" to meet current demands on 
 credit obligations outstanding. 
 
Chapter VII 
 
 THE PUBLIC CONTROL OF COMMERCIAL BANKS 
 
 One of the principal functions of government, so 
 far as it undertakes to control banks, is to protect 
 the customer against an impairment of banking 
 capital; to this end periodical reports are required. 
 Question is raised as to the efficiency of present 
 methods of control and as to the degree of pro- 
 tection given to purchasers of credit-accounts of 
 banks. Preliminary to this inquiry three questions 
 must be answered before any proper appreciation 
 may be had of the possibilities of public control as 
 a means of protecting the public against an "un- 
 sound" and "inelastic" circulating medium, viz., 
 (i) what are the powers of control given by the Na- 
 tional Bank Act ? (2) Under the Act, what are the 
 purposes for which control is to be exercised? and 
 (3) in the exercise of powers granted, what devices or 
 means may be employed by the Comptroller to reach 
 these ends ? These preliminary questions having been 
 disposed of we then will be fairly abreast of our topic. 
 
 Powers of Control Given by the National Bank Act 
 
 The first of these inquiries may be answered by 
 direct appeal to the language of the Act. Section 
 
 [77] 
 
78 THE BANK AND THE TREASURY 
 
 No. 87 of the National Banking Law (Section 52 11, 
 R. S.) contains this specific mandatory declaration: 
 "Every association [i.e., National bank] shall make 
 to the Comptroller of the Currency not less than five 
 reports during the year, according to the form which 
 may be prescribed by him." This general provision 
 is supplemented by grants of specific power to the 
 Comptroller, which enable him to call for other re- 
 ports as often as he may desire, and to obtain such 
 information as he "in his own judgment" thinks 
 necessary "to a full and complete knowledge" of 
 financial condition; a bank failing or refusing to 
 comply with such request is liable to a penalty of 
 $100 per day (Section 5213, R. S.). It would appear, 
 therefore, that the Comptroller is not lacking in 
 authority to obtain any and all information which 
 may be necessary to administrative supervision. A 
 further reading of the National Bank Act quite as 
 concisely forces the conclusion that the Comptroller 
 has all the power necessary to a complete control over 
 National banks and their operations, as to all subjects 
 which are properly within the range of official dis- 
 cretion ; this power extends even to the taking posses- 
 sion of the bank itself and winding up its affairs for 
 failure to comply with his demands. 
 
 The Purposes for which Control is to be Exercised 
 
 This brings us to consider the second question 
 raised, viz. : the subjects of official discretion under 
 
PUBLIC CONTROL OF COMMERCIAL BANKS 79 
 
 the Act, or the purposes for which official control is to 
 be exercised. It has repeatedly been affirmed that 
 the prime purpose of the National Bank Act was to 
 create a better market for Government bonds when 
 the National credit needed support. In the midst of 
 civil strife when the financial resources of the nation 
 were strained almost to the point of bankruptcy, it 
 was conceived that a very large part of the capital 
 employed in commercial banking enterprise in the 
 United States might be utilized to support the Gov- 
 ernment. The plan proposed was an old one — one 
 in which the banks (being induced to use their capital 
 to purchase Government bonds receiving the high 
 rate of interest then paid on National loans) would 
 be permitted to use "notes" with which to carry on 
 their banking business. By this device it was 
 thought that the financial strength of the banks 
 might be brought to the support of the Government, 
 i.e., that the State banks might be induced to bring 
 over their capital into a new National system where 
 it might be utilized in the manner indicated. 
 
 To make such a scheme acceptable, however, two 
 conditions must be met: The first result of such a 
 plan of support to the bond market would be a large 
 Conditions neces- increase in the money circulation of 
 sary to the adop- the country and this note would not 
 tton of the Bank -^^ received unless it be made as sound 
 (i.e., as valuable) as the money then in current use 
 — the greenback. But this is not the only condition 
 
80 THE BANK AND THE TREASURY 
 
 that the Government must reckon with. In the 
 experience of the past, business had suffered quite as 
 much from unsound bank-credit in the form of 
 customers' accounts (or deposits) as it had from an 
 unsound currency. National reaction against "wild- 
 cat" banking had but recently forced the several 
 State systems over to a basis of capitalization and 
 official inspection to protect the people against 
 wholesale fraud and bankruptcy. If these State 
 institutions were to be brought into a National bank- 
 ing system — if the Government was to utUize their 
 capital-resources to fund its own necessities — the 
 new National system must carry with it all the pro- 
 visions for safety and for the protection of the public 
 against the speculative devices of the unscrupulous 
 that three decades of the legislative reaction had 
 evolved. Wild-cat banking was banking on "com- 
 mercial assets" without adequate capitalization. 
 From 1837 to the time of the Civil War the whole 
 trend in banking ideals and in banking legislation 
 was toward the strengthening of banking equipment. 
 It had been found from bitter experience that a bank 
 which was not properly capitalized (and which, 
 therefore, did not have capital-resources sufficient 
 to support its credit transactions) was as dangerous 
 to those coming into business contact with it as was 
 a mine or a factory whose construction was faulty 
 and whose machinery was overcrowded. To the 
 public, the poorly equipped bank was much more 
 
PUBLIC CONTROL OF COMMERCIAL BANKS 81 
 
 dangerous than the mine or factory by reason of the 
 
 fact that, in case of collapse, a much larger number 
 
 of people were constantly within the danger line. 
 
 After two years of agitation and amendment and* 
 
 compromise an acceptable law was enacted. 
 
 Under the Act the note was to be secured by a*! 
 
 collateral deposit of the bonds purchased; and those 
 
 Guarantees for holding the credit-accounts of the 
 
 '^ sound currency" i , , , i. ^ i i_ 
 
 and "sound ^ank were to be protected by pro- 
 
 banking" visions which required what was 
 
 thought to be adequate capitalization before busi- 
 ness should be begun, and the exercise of official \, 
 supervision to prevent "impairment of capital" 
 during the period that business should continue. 
 It was for the purpose of enforcing these two pro- 
 visions of safety and security that the Bureau of the 
 Currency was created and a Comptroller was ap- 
 pointed. 
 
 Means by Which Control May Be Exercised and the 
 Ends of the Act Reached 
 
 The functions of the Comptroller have a direct 
 relation to the conditions above described. The 
 first, or, as it was then viewed, the prime purpose for 
 which public control was to be ex- 
 Ij'clZoT^'''' ercised was to guarantee the sound- 
 ness of the new National currency. 
 This is clearly expressed in the first clause of the 
 Bank Act which recites: "There shall be in the 
 
82 THE BANK AND THE TREASURY 
 
 Department of the Treasury a bureau charged with 
 the execution of all the laws passed by Congress 
 relating to the issue and regulation of a National cur- 
 rency secured by United States bonds; the chief 
 officer of which bureau shall be called the Comp- 
 troller of the Currency. ..." The second purpose 
 of the appointment of a Comptroller is set out in 
 various subsequent portions of the Bank Act, viz.: 
 to insure adequate capitalization — (i) adequate 
 capitalization as a condition precedent to commenc- 
 ing business, and (2) adequate capitalization at all 
 times to secure customers against loss through 
 "impairment." 
 
 That the "National Currency" which was to be 
 issued through the agency of the banks might be as 
 sound as the standard money (i.e., that all forms of 
 money-issues might have a common valuation) pro- 
 vision was made that the bonds purchased by the 
 banks might be hypothecated with the Treasurer as 
 collateral security for final pa)mient and redemption 
 of notes outstanding. According to the provisions of 
 the Act the Government was made a trustee for the 
 
 benefit of note-holders. For each 
 Control to insure ^ i j. ^ 1 .,111 
 
 sound currency h°° of notes turned over to the bank 
 
 by the Government for issue, the 
 Treasurer was to hold a non-interest-bearing account 
 with the bank secured by a $1,000 bond. The obli- 
 gation of the bank to the Government was for the 
 repayment of $900 in bank-notes or legal-tender 
 
PUBLIC CONTROL OF COMMERCIAL BANKS 83 
 
 money at its own option. The Government as trus- 
 tee was the legal owner of the bond. The benefi- 
 ciaries were (i) the note-holders to the amount of 
 notes held, and (2) the bank for the amount of the 
 current income on the bond and for its equity of 
 redemption. This plan of National currency having 
 been adopted, when a bank issued a note the cus- 
 tomer took it, as before observed, not on the credit of 
 the bank, but as a beneficiary in the trust-security 
 held by the Government. The note-holder never 
 inquired as to the credit of the bank through which 
 the note was issued, but relied entirely on his claim 
 against the security held in trust by the Treasurer. 
 Since both bond and greenback were Government 
 credit the National currency secured by Government 
 bonds was taken by the public to be as good as a 
 greenback. Later, when both greenbacks and bonds 
 were redeemed in gold, this National currency came 
 to be considered as good as gold. 
 
 As a means of control (to secure the soundness of 
 the circulation or National currency so issued), 
 therefore, the function of the newly created bureau 
 
 was to see that the trust account of 
 S4tr "^ the bank with the Treasurer was kept 
 
 amply secured, and that the bonds 
 held as collateral security were sufficient for this 
 purpose. But all the data was at hand for deter- 
 mining this fact, and the bonds themselves being in 
 custody, the services of the Comptroller in his capac- 
 
84 THE BANK AND THE TREASURY 
 
 ity as guardian of the currency became merely nomi- 
 nal and perfunctory. Moreover, for this service no 
 1^ report was necessary to control. 
 f Not so with the second function exercised by the 
 bureau — the protection of those who held open 
 accounts (or deposits) of the bank; its importance 
 was correspondingly increased, but not in its bearing 
 Importance of ^n original capitalization. As at the 
 control to protect beginning, the method of ascertaining 
 depositors whether the bank had the requisite 
 
 capital-resources to commence banking operations 
 has remained one of inspection and not one of finan- 
 cial report. The Comptroller must know that at 
 least fifty per cent of the amount of the authorized 
 capital-stock is actually in hand in money, and that 
 the balance of the stock subscription is good, so that 
 it may be realized in ten per cent monthly instal- 
 ments. 
 
 The most difficult duty which the Comptroller has 
 to perform, and the one of increasing importance to 
 the financial world, is that which pertains to the 
 security of the public against the "impairment of 
 Capital as a sup- capital-resources " during the period 
 port to "de- that the bank continues in operation. 
 posits" Knowledge as to this feature of the 
 
 work must come largely from the reports made by 
 the banks themselves, as the number of examiners 
 is grossly inadequate to report more than a check on 
 some of the main items of account. It is from 
 
PUBLIC CONTROL OF COMMERCIAL BANKS 85 
 
 this duty that the present inquiry takes its chief j 
 bearing. 
 
 Protection of the Public Against Impairment of 
 Capital 
 
 To state more specifically some of the questions 
 that the Comptroller must have in mind in asking 
 for reports with respect to capitalization: Section 
 5202, R. S., provides that "No association at any time 
 shall be indebted, or in any way liable, to an amount 
 exceeding the amount of its capital-stock [capital- 
 resources] at such time actually paid in, and remain- 
 ing undiminished by loss or otherwise, except on 
 accounts of the nature following: (i) Notes of circu- 
 lation; (2) Moneys deposited with or collected by the 
 association; (3) Bills of exchange or drafts drawn 
 against money actually on deposit to the credit of 
 the association, or due thereto; (4) Liabilities to the 
 stockholders of the association for dividends and 
 reserve profits." Section 5203, R. S., specifies that 
 Specific assign- "No association shall, either directly 
 ments of duty to or indirectly, pledge or hypothecate 
 Comptroller ^^^ ^j j^^ ^^^^^ ^^ circulation for the 
 
 purpose of procuring money to be paid in on its 
 capital-stock, or to be used in its banking operations 
 or otherwise; nor shall any association use its circu- 
 lation notes or any part thereof in any manner or 
 form to create or increase its capital-stock [capital- 
 resources]." Section No. 5204 recites that "No 
 
86 THE BANK AND THE TREASURY 
 
 association or any member thereof shall, during the 
 period it shall continue its banking operation, with- 
 draw or permit to be withdrawn, either in the form 
 of dividends or otherwise, any portion of its capital 
 [capital-resources]." Again, in Section No. 5205, 
 R. S., the law requires that "Every association which 
 shall have failed to pay up its capital-stock, as re- 
 quired by law, and every association whose capital- 
 stock [capital-resources] shall have become impaired 
 by loss or otherwise, shall, within three months after 
 receiving notice thereof from the Comptroller of the 
 Currency, pay the deficiency in capital-stock [capital- 
 resources] by assessment upon the stockholders pro 
 rata for the amount of capital-stock [capital-liability] 
 held by each." 
 
 All of these, and other assignments of duty with 
 respect to the protection of customers against im- 
 pairment of capital, make necessary official inquiry 
 into the relation of capital-resources to capital-lia- 
 bilities — they require a special in- 
 Need for an ■ ^ ^.i. -i. i 
 
 analytical report ^^i^y as to the capital-resources at 
 
 hand. For the purpose of determin- 
 ing whether or not the capital equipment of the bank 
 has become impaired through "loss" on account of 
 banking operations or "otherwise," a keenly ana- 
 lytical report is necessary. To properly execute this 
 function of control it is necessary to distinguish the 
 capital-resources and liabilities from the other assets 
 and obligations of business. 
 
PUBLIC CONTROL OF COMMERCIAL BANKS 87 
 
 The Present Value of the Report to the Comptroller 
 as a Means of Control 
 
 In taking up the "form" of report made by the 
 banks to the Comptroller, attention will be confined 
 to the question of determining whether or not the 
 No attempt made capital-resources have become im- 
 to distinguish paired. An examination of financial 
 capital-resources statements, as at present made, will 
 disclose the fact that no attempt is made to distin- 
 guish "capital "-resources and liabilities from the 
 assets and obligations "current" to the business. 
 
 An Analysis of Banking Resources 
 
 For the purpose of determining the financial con- 
 dition of a going concern, it has become an established 
 principle of analysis that capital-resources are all 
 those properties and assets which are intended for 
 permanent or continuous use in the business. Two 
 Equipment to be principles of administration are well 
 provided by capi- settled: (i) to prosecute an enter- 
 tal investment p^.^^^ successfully it is necessary to 
 provide the management with equipment adapted to 
 its purposes; and (2) whatever property, equipment 
 and stock or working assets are permanently or con- 
 stantly needed, should be provided out of capital 
 investment. As before suggested, this is the purpose 
 for which capital is needed. The proper equipment 
 
88 THE BANK AND THE TREASURY 
 
 of a business is necessary to success. As a matter 
 both of financial advantage and of financial safety, 
 this equipment should be provided out of capital. 
 To attempt to provide permanent equipment out of 
 temporary loans, or floating debt, is to hold the enter- 
 prise in constant jeopardy. This is as true of a bank 
 as it is of a railroad or of a mine, and this is the under- 
 lying thought of the law. 
 
 Again, to restate a currently accepted definition, 
 the current assets of an enterprise are those which are 
 acquired, not for equipment or continuous use in the 
 business, but those which are acquired in its current 
 transactions — i.e., in the course of current operation 
 for profit. The purpose of current assets is realiza- 
 tion, or conversion. Current liabilities are those in- 
 curred in current transactions. It is to fund the 
 temporary needs — to meet the current expenses — 
 to provide funds to carry these current assets and 
 current transactions — that a floating debt is con- 
 The" commercial tracted. If the principles of financial 
 assets" obtained analysis commonly employed in ac- 
 oncurrentaccount counting are applied to the assets and 
 liabilities of National banks, conclusion may be 
 reached as to whether or not the capital-resources 
 have been impaired; also, whether or not the 
 permanent equipment is adequate to support its 
 operations with safety to those who may be in 
 business contact with the institutions under ex- 
 amination. 
 
PUBLIC CONTROL OF COMMERCIAL BANKS 89 
 
 What Are the Capital-Resources of National Banks 
 
 The reports, as at present made to the Comptroller, 
 are not based on such a system of analysis, and, 
 therefore, any attempt at rearrangement to this end 
 must in a measure be unreliable. But taking the 
 various items of resource exhibited as a basis for 
 present discussion, a fair approximation may be 
 reached: (i) "Banking-house and fixtures" are un- 
 questionably capital-resources. (2) "Real-estate," 
 in contemplation of law and from every point of 
 business reasoning, should be charged against capital. 
 
 (3) The bank invests its capital in 
 Analysis of capi- ■, ■, . . , ^. , 
 
 tal outlay bonds to secure circulation, and re- 
 
 ceives on the collaterals deposited 
 notes vsrhich may be used in the business — the "mar- 
 gin" of capital invested in these collaterals should 
 be considered a capital charge; the same is true of 
 the "margins" invested in the collaterals deposited 
 to secure Government deposits. (4) The "money- 
 reserve" is essentially a capital-reserve; it is the 
 principal redemption equipment necessary to support 
 the current credit-accounts (deposits) outstanding — 
 the resource necessary to meet the floating debt of a 
 business, whose chief transactions are the purchase 
 of current assets by use of its own current credit- 
 accounts. There can be no doubt that the "money- 
 reserve" held by a bank should be a direct charge 
 against capitalization, and is made so by legal enact- 
 
90 THE BANK AND THE TREASURY 
 
 merit — the only question with reference to this class 
 of items pertains to the interpretation to be given as 
 to what properly constitutes "money-reserves." 
 (5) The accounts which it is necessary for a bank to 
 maintain to provide for its out-of-town "exchanges" 
 are likewise assets permanently needed and in con- 
 tinuous use; it should therefore be counted as a part 
 of the necessary redemption equipment. (6) Finally, 
 the unencumbered securities and other direct invest- 
 ments of capital owned and held by a bank as a 
 means of strengthening its cash-reserve should be 
 regarded a part of its redemption equipment and 
 a charge against capital-resource. These must be 
 so considered for the reason that the direct applica- 
 tion of capital to the purchase of "securities," or for 
 that matter even to the purchase of commercial paper, 
 is not banking. There can be one purpose only for 
 making such purchases, viz.: to keep the capital 
 which is needed to support credit transactions in- 
 vested in income-producing assets when not needed 
 in the form of "cash." "Securities" must be con- 
 sidered either as redemption equipment held in 
 reserve or as an investment which is a charge on 
 capital and therefore a deduction from capitalization 
 for banking. The same is true of all other direct 
 investments of capital. A bank which engages in 
 buying and selling "securities," in "underwriting 
 flotation," or in other business not in the nature of 
 banking, needs to have a larger capital than an insti- 
 
PUBLIC CONTROL OF COMMERCLAL BANKS 91 
 
 tution which does not so engage itself. Whether the 
 capital investment be in banking equipment, or in 
 other assets and business ventures, the amount of 
 funds thus engaged by the banks should be set up as 
 capital-resources or charges against the capital pro- 
 vided for doing business, the protection of which is 
 the chief end of control. 
 
 These several classes of assets being in the nature 
 of charges against capital, the duty of the Comptroller 
 (under the National Bank Act) requires : (i) that an 
 examination of the assets be made to ascertain what 
 may fairly be counted as capital outlay for banking 
 Examination to equipment, and that this be compared 
 ascertain capital with the amount of capital provided 
 impairment ^^^ ^^^ ^£ ^.j^^ institution under exam- 
 ination; and (2) that an examination of current assets 
 be made to ascertain whether there have been any 
 losses suffered in the prosecution of the business, since 
 all "bad loans," etc., must be charged against capital. 
 
 The accounts exhibiting capital put into the busi- 
 ness are found on the liability side of the balance- 
 Accounts exhibit- sheet. The capital provided for use 
 ing capital pro- in the business is represented in three 
 "^'^^'^ controlling accounts, viz.: "Capital- 
 
 stock," "surplus," and "undivided profits." Of 
 these, the first two items are to be a permanent 
 reserve or liability in the business, and the third 
 must remain in it so long as there is any question as 
 to the impairment of capital-resources. 
 
92 THE BANK AND THE TREASURY 
 
 Before any comparison may be made for the pur- 
 pose of determining what character of investments 
 have been made of capital put into the business, the 
 statement of assets reported by the banks must be 
 Provisions made assumed to be based on a proper 
 for appraisement valuation, or a critical examination 
 ol assets ^^^^ -^^ j^^^j p^^. ^j^j^ purpose the 
 
 Comptroller may supplement the report made by the 
 bank itself with the report of his examiners in whose 
 field the bank lies, or may detail a special examiner 
 if the case seems to warrant such an assignment. In 
 any case, however, a distinction must be made be- 
 tween the current-accounts and the capital-accounts. 
 
 Classification of Balance-Sheet to Show 
 Financial Condition 
 
 Intelligent judgment as to the character of equip- 
 ment provided by a bank by capital investment 
 requires a classification of resources. The exercise 
 of official discretion with reference to the integrity of 
 capital-resources, which proceeds from the examina- 
 tion of financial reports, makes a classified balance- 
 Consolidated sheet a necessity. To the end of 
 statement for establishing a basis for the further dis- 
 tate of owa cussion of "the financial report as a 
 means of control," and at the same time of showing 
 some of the difficulties which stand in the way of the 
 exercise of effective control under the present form 
 of report, an analysis of the consolidated statement 
 
PUBLIC CONTROL OF COMMERCIAL BANKS 93 
 
 of all the National banks of the State of Iowa for 
 September 9, 1903, is here exhibited. The classifi- 
 cation submitted is not offered as a model in the 
 arrangement of items. Neither is the assignment of 
 inadequacy of the present set form intended to reflect 
 on Comptrollers past or present. The form now 
 used is, in effect, that which has been employed by 
 officers of banks for a century; it has been engaged 
 by comptroUing officers of Government since public 
 examination first began. To suggest that a change 
 might be made to advantage is not therefore to be 
 considered as offered in the spirit of reflection on 
 official conduct, more than a proposed amendment 
 of law would imply legislative incapacity. 
 
 Not engaging any spirit of personal criticism, and 
 holding in mind the difficulty of doing more than to 
 suggest that a classified balance-sheet is essential to a 
 consideration of the topic assigned, the statement 
 of capital-accounts opposite page 94 is modestly 
 offered as a tentative arrangement. 
 
 Attempting to show the amount of capital put into 
 the business, and to account for its investment, in the 
 exhibit below it is assumed that the valuation of 
 assets represented in the reports of the Comptroller 
 is conservatively made, and that there are no "bad 
 loans" to be written off. But even with this assump- 
 tion, and for this purpose, the form of report made 
 by the banks to the Comptroller renders many of the 
 items doubtful: (i) In the statement of "premium on 
 
94 THE BANK AND THE TREASURY 
 
 bonds" as one element in the computation of the 
 amount of capital locked up in "margins" there is 
 Douhtjul items no way of distinguishing this from 
 duetojormoj premium on "bonds on hand"; (2) 
 statement -^ ^j^^ ,, ^^^^ j^^^^,, j^ jg ^^ frequent 
 
 occurrence for banks to include expense vouchers 
 which are to be held till the end of the month; in 
 so far as these were included, the statement of the 
 amount of "cash-reserve" is too large. (3) The 
 amount stated as "balance kept with banks for ex- 
 change" must be roughly approximated, as no spe- 
 cific inquiry is made in the present form submitted 
 by the Comptroller to determine this fact. The 
 amount of Clearing-House exchanges held are $141,- 
 000; assuming that the amount of exchanges out- 
 standing against the banks under consideration aver- 
 ages$i 75,000, and further that the average exchanges 
 against "outside" banks are not greater than those 
 against clearing-house banks, and this would seem 
 conservative; assuming further that on an average 
 it requires three days for outside exchanges to be 
 presented and paid, the average balance needed to 
 be kept for the redemption of exchanges would be 
 $525,000. Again assuming that the "outside" 
 money demands for exchange were not more than 
 one-tenth of the local demands for money, and taking 
 this as a basis for estimate, the exchange account 
 necessary would be $548,799; this is taken as the 
 amount of the account with "reserve agents" which 
 
Missing Page 
 
PUBLIC CONTROL OF COMMERCIAL BANKS 95 
 
 is carried for redemption of outside exchanges. The 
 remainder of the "reserve agent" account is con- 
 sidered as "loans" to other banks at interest and is 
 included in the "in vested-reserve." These amounts 
 are arbitrarily set up, but as they are both in the 
 nature of capital charges the arbitrary division is not 
 important. (4) Under the head of "encumbrances" 
 on "securities owned" it is assumed that the "bills 
 payable" and "other liabilities" stand as encum- 
 brances on stocks, bonds, etc. This is true to the 
 extent only that these liabilities are based on stocks 
 and bonds hypothecated as collaterals, and in so far 
 as this is not true the account would be varied by 
 an exact return such as might be obtained from the 
 bank. (5) The amount exhibited as "loans to re- 
 serve agents" is stated on the assumption that the 
 purpose of such investment is to have a quickly 
 convertible asset by means of which cash may be 
 obtained when the money-reserve runs low — a bank 
 making a statement to the Comptroller under a form 
 calling for these specific items of capital-resource 
 might set up some other form of asset as a "direct 
 capital investment." In each and all of the items 
 above mentioned there are elements of doubt — 
 elements which require questions to be raised, but 
 each of which might be made certain by a different 
 form of inquiry submitted to the banks by the Comp- 
 troller in seeking for a classified statement of capital 
 investments. 
 
96 THE BANK AND THE TREASURY 
 
 But assuming for the purposes of present discus- 
 sion that the above analysis of capital investment 
 were true to the facts, let us see what use might be 
 made of such form of report. In the first place we 
 may seek to eliminate those investments which are 
 not in the nature of redemption or banking equip- 
 ment. The building in which the bank is housed 
 need not be owned by the bank itself. The banking 
 business is a credit business; primarily it consists of 
 the exchange of bank-credit for commercial-credit 
 at a profit. Investment in a building does not 
 strengthen the concern in its current-credit relations. 
 Many of the largest banking institutions do not own 
 a building. The prime purpose of capitalization 
 being to provide equipment with which to supply 
 
 funds to the community in the form 
 Unnecessary j. , j j-^ r -j. i 
 
 capital outlays ^^ demand-credit, any use of capital 
 
 to purchase a building must be con- 
 sidered as an extraneous investment not available 
 for the support of the credit of a going concern. 
 "Real-estate" belongs to the same class of invest- 
 ments. This has been so often said that it has be- 
 come axiomatic in commercial banking circles. The 
 "margin" invested in the securities hypothecated 
 with the Government are also not available to the 
 business as a going concern. All of the above 
 classes of assets are important as assets for final 
 liquidation on "winding up," but to a "going con- 
 cern" they are purely voluntary and ornamental and 
 
PUBLIC CONTROL OF COMMERCIAL BANKS 97 
 
 bear much the same relation to the business of bank- 
 ing that the gilded dome on the Congressional Li- 
 brary does to the value of its literary stores within. 
 Whether or not in contemplation of law this amounts 
 to an impairment of capital, the fact remains that 
 $3,297,053 of capital invested in this way has weak- 
 ened the banks of Iowa as "going concerns" to that 
 extent. 
 
 Another class of considerations attaches to the 
 remaining classes of capital investments — those re- 
 sources used to support the banking transactions 
 themselves by redemption of credit obligations on 
 demand. Assuming that the banks had made re- 
 turn of redemption equipment as above exhibited, 
 the Comptroller as an agent of the Government 
 Outlays for re- should know whether this equipment 
 demption equip- is adapted to the use for which it is 
 ''**'*' intended. The unencumbered secu- 
 
 rities, for example, being intended for an invested- 
 reserve to strengthen the cash-reserve held to support 
 demand-accounts (deposits outstanding), the ques- 
 tion pertinent to this use is: Are these securities im- 
 mediately convertible by sale or hypothecation with- 
 out loss of principal ? If, again, any of these are held 
 as the result of underwriting, this fact would suggest 
 that a portion of the bank's capital was being em- 
 ployed in business other than banking and there 
 would be an impairment in use if not in valuation. 
 Such part of the bank's capital as is used for under- 
 
98 THE BANK AND THE TREASURY 
 
 writing should be placed among the unavailable 
 assets. Further than the specific inquiries made as 
 to the character of redemption equipment, compari- 
 son may be made of total capital outlay with capital 
 liabilities, to ascertain whether the equipment had 
 been provided by means of capital or on floating 
 debt. By some such classification increased facility 
 would be given to many other official inquiries 
 directed toward the protection of the people against 
 the impairment of the capital-resources needed by 
 a going banking concern. 
 
Chapter VIII 
 
 A POINT OF CONTROL NOT ADEQUATELY COVERED 
 BY THE NATIONAL BANK ACT 
 
 While the National Bank Act is very specific as 
 to powers of control directed against the "impair- 
 ment of capital" there is another element of banking 
 strength or weakness quite as important that has 
 been neglected; viz., the protection of the customer 
 against overburdening the equipment used. Judg- 
 ment as to safety must be made not alone with re- 
 spect to the absolute strength of material used in 
 construction and equipment, but this having been 
 Need for deter- determined it then must be compared 
 mining the with the weight or strain that it is to 
 
 credit load support. To be more concrete, every! 
 
 facility is given to such inquiry as the Comptroller 
 may desire to make to protect the capital put into 
 the business against deterioration, but almost no 
 provision is made for official inquiry as to whether 
 the credit burden imposed by the bank officers on 
 this equipment in the prosecution of the business is 
 greater than it can safely bear. '^^• 
 
 [99] 
 
100 THE BANK AND THE TREASURY 
 
 There is no provision made for correlation of capi- 
 tal equipment with the credit liabilities incurred in 
 the course of its business. These must be met on 
 demand, and safety requires that they should be met 
 by capitalization. This is an essential to sound 
 banking as contemplated in the National Bank Act. 
 Banking activities are represented in its current 
 assets acquired and the current liabilities incurred 
 in banking operation. To concretely exhibit this 
 class of financial results, reference will again be 
 made to the summary for the State of Iowa above 
 used in the statement of capital accounts. 
 
 Current Assets (Less $000,00) — Acquired in the Course of 
 Banking Operations 
 
 I. — Due from Banks and Bankers: 
 
 (i) Due from National Banks $2,698,877 
 
 (2) Due from State Banks... 1,058,726 
 
 (3) Clearing-House exchanges 141,352 
 
 $3,898,955 
 
 II. — Commercial assets : 
 
 (i) Loans and discount $62,159,426 
 
 (2) Overdrafts 1,121,025 
 
 Total $63,280,451 
 
 Less notes rediscounted . . 105,267 
 
 Net commercial assets 63,175,184 
 
 III. — Miscellaneous: 
 
 (i) Revenue stamps 1,020 
 
 Total current assets $67,075,159 
 
A POINT NOT COVERED BY THE BANK ACT 101 
 
 Accounts Representing Banking Operations 
 
 Current Liabilities {Less $000,00) — Incurred in Banking 
 
 Operations 
 I. — Due to Banks and Bankers : 
 
 (i) Due to National Banks.. $2,362,481 
 
 (2) Due to State Banks 4,257,426 
 
 (3) Due to Trust Companies, 
 
 etc 3.258,966 
 
 $9,878,873 
 Less amount incurred for 
 
 equipment purposes.. 1,465,537 
 
 8,413,336 
 
 II. — Commercial Credit Accounts: 
 
 (i) Individual deposits $58,606,777 
 
 (2) Deposits of U. S. disburs- 
 ing officers 42,586 
 
 58,649,363 
 
 III. — Miscellaneous : 
 
 (i) Dividends unpaid 12,460 
 
 Total current liabilities $67,075,159 
 
 From the two summaries exhibited, — the one of 
 "capital accounts" (p. 94), and the other of "banking 
 transactions" (above), — it appears that by means of a 
 capital investment of $20,501,114 a banking business 
 of $67,075,159 was carried on. With these results in 
 mind let us determine, in so far as we may, what 
 Means of deter- Strain was brought on capital equip- 
 mining equip- ment. In the first place, on what 
 ment strength ^^^^ ^j ^^^ equipment does the bank- 
 ing strain come? As before observed, it is at once 
 apparent that no part of the credit strain falls 
 on the first three classes of equipment enumer- 
 
102 THE BANK AND THE TREASURY 
 
 ated, viz.: (i) "Banking-house and fixtures." (2) 
 "Real-estate" and (3) "Margins." From the point 
 of view of the demands of commercial banking these 
 are purely a gratuitous use of capital. Ownership 
 of a house and furnishing is unnecessary — this para- 
 phernalia may be leased and the rent charged to 
 current expenses, and when a building is owned it is 
 in the nature of a real-estate investment; "real- 
 estate" owned is an encumbrance on banking capital 
 and not banking equipment; the "margins" invested 
 in bonds used as collaterals for notes and deposits are 
 incidental to the system devised by the Government 
 to strengthen its own credit, and as such are not 
 banking equipment — they are a further encum- 
 brance on banking capital. 
 
 The equipment necessary to banking transactions 
 is the "cash-reserves" or "such invested capital- 
 reserves as may readily be converted into cash" and 
 which may be used to meet demands on outstanding 
 credit-accounts without curtailing commercial ac- 
 commodation. As a means of carrying on a business 
 which consists in the exchange of bank "credit-ac- 
 counts" for "income-producing assets in the nature 
 of commercial-credit," the bank must establish and 
 Three classes 0} maintain a reputation for meeting its 
 
 redemption credit-accounts on demand. The 
 
 equipment ^^^^ ^^^ ^^^^ ^^^^ ^^^ ^^ ^^^^ ^.^^^ 
 
 safety to its customers is by having capital-resources 
 in the form of "cash" when demands are made. 
 
A POINT NOT COVERED BY THE BANK ACT 103 
 
 The real test of banking strength, therefore, is to be 
 found in the redemption equipment: (i) in the 
 "cash-reserve" — cash in hand and exchange-bal- 
 ances — and in ' ' invested-reserve " — " unencum- 
 bered securities" and "other capital investments" 
 readily convertible into cash. Again assuming the 
 valuation of these capital-assets to be conservative, 
 the strength of banking equipment of the State of 
 Iowa by this method 'of analysis, at the time stated, 
 was $17,104,061. 
 
 But a comparison of strength of equipment with 
 the credit strain upon it must be arrived at by bring- 
 ing the two results together. The total demand 
 obligations for the payment of money were in round 
 numbers $68,500,000. That is, the redemption 
 equipment (after deducting reserve loans uncapital- 
 ized) being $17,100,000, and the total amount of 
 demand-credit to be supported $68,500,000, the 
 
 inverted pyramid would be $68,500,- 
 The test 0} credit ^ -n 4. • j.^- 
 
 tension 000 — $17,100,000. But m gettmg 
 
 at the amount of the strain that will 
 
 fall on the capital-resources this gross amount must 
 
 be reduced. Eliminating by set-off the current 
 
 institutional assets and liabilities, the relation of 
 
 credit outstanding to capital-assets would be $62,- 
 
 500,000 — $17,100,000. In other words, $17,100,- 
 
 000 invested in banking or redemption equipment 
 
 has permitted the banks of Iowa to purchase about 
 
 $62,500,000 of interest-bearing commercial assets by 
 
104 THE BANK AND THE TREASURY 
 
 means of about $62,500,000 of their own credit- 
 accounts supported by this equipment. Through 
 banking operation, the corporations have a gross 
 income about four times as large as they would have 
 by direct investment of their capital in commercial 
 paper, and have furnished to the community credit- 
 funds which do the work of money of equal amount. 
 
 The purpose of control is to make such a business 
 safe, and the differential of safety must be drawn 
 from experience, leaving an adequate margin of pro- 
 tection to the public against contraction of the circu- 
 Need jor control luting medium as well as to protect 
 as a means of customers against immediate loss from 
 ^*'* ^ non-payment. The need for a better 
 
 correlation of capitalization with equipment and 
 banking operations carried on may appear the more 
 vividly by comparison of the several classes of banks 
 reported. {See next page.) 
 
 Assuming that for the purpose of accounting for 
 capital investment in redemption equipment the 
 cash on hand is to be a first charge against capital 
 (this not being an income-producing asset and of 
 first importance in the support of credit), in so far as 
 may be determined from published bank returns, 
 the foregoing summary shows the disposition of cap- 
 ital invested in the banking business in the various 
 classes of banks represented. From this it would 
 appear that while in a single agricultural State like 
 Iowa the banks by their own capitalization have 
 
A POINT NOT COVERED BY THE BANK ACT 105 
 
 Exhibit of Capital Investments by Classes of National Banks, 
 
 September 9, 1903 
 
 (Stated in Millions of Dollars.) 
 
 Classes of Iteus 
 
 All 
 
 National 
 
 Banks 
 
 20 
 
 in Sj 
 
 out; 
 
 
 Unavailable Capital : 
 
 Investments (Banking-Houses, real- 
 estate and margins) 
 
 Redemption Equipment: 
 Cash-Reserve: 
 
 (i) Money 
 
 (2) Exchange account 
 
 Invested Reserve: 
 
 (i) Securities 
 
 (2) Other reserve investments. 
 
 $186 
 
 60s 
 61 
 
 446 
 12 
 
 $101 
 
 183 
 18 
 
 237 
 IS9 
 
 147 
 14 
 
 116 
 
 $43 
 
 248 
 
 177 
 
 Total Capitalization* . 
 
 $1,310 
 
 $215 
 
 * The amount stated as capitalization includes capital stock, surplus, and undivided 
 profits. 
 
 provided the funds to procure a large part of the 
 resources used as redemption equipment to support 
 their outstanding credit, taking all of the banks of the 
 Inadequacy 0} United States this is not true; they 
 capital invest- have provided capital enough for 
 ^^^''^ "cash-reserves" and for "securities" 
 
 actually held, but they have provided almost no 
 capital for direct investment in "loans to reserve 
 agents." The banks in reserve cities (of the 
 second class) are in about the same relative con- 
 dition as those of the country at large, in so far as 
 
106 THE BANK AND THE TREASURY 
 
 these items are concerned ; absolutely they are in a 
 much weaker position on account of the importance 
 of their "reserve loans" not capitalized. The banks 
 of the central reserve cities (the "cities of the first 
 class"), however, have not sufficient capital to pro- 
 vide themselves with the current "cash-reserves" 
 used in the business, and which are required of them 
 by statute, to say nothing of securities owned; the 
 amount of "cash" which such banks are able to 
 provide through capitalization is only 24.2 per cent of 
 their net banking liabilities. Assuming that all 
 of their capital were retained in the form of cash, 
 there would not be enough to provide the amount 
 actually on hand by $27,000,000 — this part of the 
 redemption equipment, together with the funds neces- 
 sary to provide all other forms of equipment carried, 
 had been borrowed. Assuming that the equipment 
 actually carried is needed, then the banks of reserve 
 cities have obtained $292,000,000 of their equipment 
 on floating debt. 
 
 If we take the judgment of bankers as to what 
 equipment is necessary to the safe conduct of their 
 business, an interesting result will be obtained. For 
 this purpose it may be assumed that a banker will 
 keep no more "cash" on hand than safety to his 
 business requires; if he does he is violating good busi- 
 ness judgment. The same may be said of "exchange 
 accounts" and of investments made in low income- 
 producing assets from which "cash" may be realized 
 
A POINT NOT COVERED BY THE BANK ACT 107 
 
 by quick returns to support credit-accounts. Assum- 
 ing further that the principle is a sound one, that such 
 Capital weakness ^ssets as are permanently employed, 
 admitted by or such as are continuously needed 
 '^^ ^" in the business, should be procured 
 
 by direct investment of capital (i.e., that a busi- 
 ness concern, especially a bank, should not obtain 
 its equipment on a "floating debt"), then the in- 
 adequacy of capital increases as we proceed from 
 periphery of the National banking system towards 
 this centre. To exhibit this in tabular form, the 
 result of failure of the Law to require such control 
 as will prevent the overtaxing of capital-resources, 
 and such as will insure that our commercial banks 
 do business on their own capital, would appear 
 something as follows: (See next page.) 
 
 In this question is raised as to several classes of 
 items. Without specific inquiry as to the amount 
 a bank carries for "exchange account" this must be 
 approximated. The approximation here given, how- 
 ever, is a deduction from "loans to reserve agents" 
 (another account which is carried as an invested- 
 reserve for the purpose of supporting the cash-re- 
 serve) and therefore one which should be capitalized. 
 As to the securities held, in so far as they are not held 
 as reserve equipment, they are not a banking re- 
 source, and like "real-estate" are in the nature of an 
 encumbrance on banking capital. Such assets must 
 be either for support to bank-credit or for direct 
 
108 
 
 THE BANK AND THE TREASURY 
 
 Statement of Equipment Actually Used by the Several Classes Compared 
 with Capital Provided 
 
 (Stated in Millions of Dollars) 
 
 Classes of Capital Iteus 
 
 Unavailable Capital Outlays : 
 " Banking-house," " real-estate," 
 and " margins " 
 
 Redemption Equipment Used : 
 
 Cash-reserves 
 
 Exchange account 
 
 Securities 
 
 Loans to reserve agents 
 
 Total equipment carried 
 
 Actual capitalization provided 
 
 Equipment carried on floating debt. . 
 Percentage of floating debt 
 
 $3-4 
 
 S-5 
 •5 
 
 2.4 
 lO.I 
 
 $21.9 
 
 $20.5 
 1.4 
 7% 
 
 
 $101 
 
 183 
 18 
 
 237 
 221 
 
 $760 
 
 $698 
 
 62 
 
 9% 
 
 •a 
 
 t3 
 
 $186 
 
 606 
 
 61 
 
 446 
 
 36s 
 
 $1 ,664 
 
 $i>3io 
 
 354 
 
 27% 
 
 SJS 
 
 $42 
 
 147 
 
 IS 
 
 116 
 
 I4S 
 
 $465 
 
 144 
 44% 
 
 -as 
 
 S ^ i2 
 
 (J S3to 
 
 $43 
 
 27s 
 27 
 
 94 
 
 $439 
 
 I291 
 148 
 
 51% 
 
 $38 
 
 208 
 
 79 
 
 $346 
 
 $215 
 
 131 
 
 60% 
 
 investment. In either case the bank should not buy 
 bonds on credit. Taking the charges against capital 
 Amount of in- ^^ they stand and the redemption 
 crease in capital equipment actually used, we find that 
 needed j^^. ^^^ United States, in the judgment 
 
 of bankers themselves as reflected in practice, the 
 banks should have provided $354,000,000 more of 
 capital to support their business. That is, to prop- 
 erly support $4,363,000,000 of credit used in the 
 course of bank operations to purchase $4,363,000,000 
 of income-producing assets, the equipment which 
 was actually used should have been provided by the 
 
A POINT NOT COVERED BY THE BANK ACT 109 
 
 proprietors of the business. Such a provision would 
 require an increase of twenty-seven per cent in total 
 bank capitaUzation. But further inquiry would 
 show that all but about five per cent of this gross 
 amount of capital to make up the shortage would be 
 required from the reserve city banks, and that nearly 
 one-half of the entire increase is needed in the City 
 of New York. Such would be the inevitable con- 
 clusion if we accept the business judgment of bankers 
 themselves as to the needs for banking equipment. 
 
 The Inadequacy of the Bank Act 
 
 Again the position before taken is affirmed, — that 
 this is not proposed as a true method of analysis to 
 get at the relation of intensity of credit strain to 
 equipment used. Attention is directed only to the 
 fact that such an element should be taken into ac- 
 count in reports, the purpose of which is to furnish 
 the data for official control as a means of protecting 
 the country against "unsound" banking and an 
 "inelastic" currency. Further, it is suggested that 
 no provision is made in the present form of report 
 for ascertaining these data; and only one provision 
 of law is made to protect the public against any 
 The only protec- overtaxing of capital equipment. This 
 Hon against in- one provision referred to is the clause 
 pahon which imposes a minimum limit in 
 
 money-reserve to be kept. This limitation imposed 
 does, in fact, operate to prevent some of the least 
 
110 THE BANK AND THE TREASURY 
 
 provident bankers from bringing their house down 
 on the heads of customers, and precipitating a panic 
 in the business community. Nevertheless, the pro- 
 vision is entirely inadequate to prevent an overtaxing 
 of equipment. To illustrate one of the methods 
 used for complying with the law, and at the same 
 time for carrying a load that keeps the institution on 
 the verge of credit collapse: — From the published 
 reports it appears that a number of banks have indi- 
 vidual deposits outstanding amounting to from ten 
 to twelve times their capitalization. Some of these 
 banks continuously carry a cash fund larger than 
 their capital-stock, surplus and undivided profits. 
 They also carry large holdings of stocks, bonds, and 
 other securities. Where did they obtain this money ? 
 Undoubtedly they borrowed it. Where did they get 
 their other redemption equipment? Undoubtedly 
 by means of a floating debt. In several instances, 
 only about one-third of the redemption equipment 
 constantly used by these banks is provided by means 
 of capitalization; the balance is obtained on demand 
 loans. Imagine another enterprise being financed 
 in this manner. With methods of capitalization ad- 
 mittedly unsafe if applied to another business, is it 
 to be presumed that our system of commercial credit 
 will be "sound" and capable of rendering the highest 
 service to the business community so long as these 
 methods are permitted? 
 This is not to be considered as imputing fault to a 
 
A POINT NOT COVERED BY THE BANK ACT 111 
 
 banker for doing business in this way. If a banker 
 finds that he may obtain capital from others with 
 which to do business, and that, when a sudden de- 
 The individual i^^nd comes for payment, he can force 
 banker primarily his commercial customers to find the 
 a )au means necessary to replace the tempo- 
 
 rary foundations withdrawn, if by such methods the 
 banker may be able to keep his own house from falling 
 on the heads of managers and stockholders, he maybe 
 exonerated on the principle that he has availed him- 
 self of a business advantage which has brought a large 
 return in profits. The method may be excused in the 
 case of the individual bank. But what is the result 
 of this character of banking to the commercial com- 
 munity? And what of a general law and adminis- 
 tration which permits such an individual practice? 
 As a National system this is another form of "wild- 
 cat" banking, and it is in this very practice that we 
 find much of the trouble that heretofore has been 
 ascribed to inelasticity of the currency. The prime 
 fault is in a law which permits bank capitaUzation 
 inadequate to maintain the volume of bank-credit 
 offered by banks to the community as a circulating 
 medium with which to do business and of which 
 customers have availed themselves. This form of 
 bank-credit being suddenly withdrawn to protect the 
 bank from its own weakness, the community and the 
 individual customers of the bank are left in a crippled 
 condition, to struggle against financial loss. 
 
112 THE BANK AND THE TREASURY 
 
 One of the purposes of control should be to secure 
 a better coordination between the volume of credit- 
 Additional ele- accounts sold and capital equipment 
 ments oj control provided as a means of support; to 
 needed ^.j^j^ ^^^ ^j^^ National Bank Act needs 
 
 revision. But having been revised so as to give the 
 Comptroller power to exercise supervision, to prevent 
 the overstraining, as well as the "impairment" of 
 capital, the present power to compel reports is suffi- 
 cient to make the supervision effective. One of the 
 principal purposes of the Bank Act is to guard integ- 
 rity of our financial system and to protect the public 
 against loss on account of inadequate bank capital- 
 ization. To effect the full purpose of the Act, to 
 vouchsafe a system of control which will secure 
 "sound banking" as well as "sound currency," there 
 should be added to the present powers which are 
 intended to protect against an impairment of capital, 
 inquisitory powers directed against an overloading 
 of equipment. As a means of executing this author- 
 ity, classified schedules should be devised which will 
 furnish the information necessary to intelligent offi- 
 cial discretion, and classified financial statements of 
 results should be published, that the public may the 
 more intelligently deal with the banks. 
 
Chapter IX 
 
 CHARACTER OF ASSETS TO BE HELD BY BANKS AS 
 ' ' INVESTED-RESERVES ' ' 
 
 To restate conclusions: If we define capital-re- 
 sources as those assets which represent capital outlay 
 (assets purchased by means of capital-funds or which 
 are to be charged against capital-account), then it is 
 in financial statements of capital-resources that the 
 capital outlays of a business are to be accounted for. 
 In a banking business, there are two general classes 
 of capital-assets, viz., (i) those in the nature of physi- 
 cal equipment, and investments not 
 A restatement of -i v i ^ ^ i_ i • 
 
 conclusions available to support banking trans- 
 
 actions, and (2) the banking or re- 
 demption equipment — resources which have been 
 provided or which are being held to support current 
 banking operations. Investments in assets of the 
 first class referred to (not being a necessary part of 
 the business) may be treated simply as an encum- 
 brance on capital; outlays for assets of the second 
 class (or what we may term "redemption equip- 
 ment") are essential to the business of banking. 
 Again, under present business conditions the "re- 
 demption equipment" of a bank is necessarily made 
 
 [113] 
 
114 THE BANK AND THE TREASURY 
 
 up of two general classes of resources, viz., (i) the 
 "cash," which is made up of the "money-reserve" 
 on hand retained as a means of protecting the bank 
 against default on current or ordinary local money- 
 demands on credit-accounts, and exchange-balances 
 kept with correspondents to meet foreign demands 
 for money on credit-accounts, and (2) those assets 
 which are held as an "in vested-reserve" as a means 
 of obtaining "cash" to meet extraordinary demands 
 on credit-accounts outstanding. The purpose of a 
 legal requirement for adequate capital equipment 
 is to insure the "soundness" of credit-accounts of 
 banks sold to customers for use as funds, without 
 forcing a sudden contraction of the circulating me- 
 dium and a consequent credit collapse. The reason 
 for carrying a part of the equipment as "invested- 
 reserves" is to decrease the capital cost to the bank. 
 From such a view of the capital-resources of commer- 
 cial banks, and such a statement of the uses of the 
 two kinds of redemption equipment (viz., "cash" 
 and "in vested-reserves" or capital investments read- 
 ily convertible into cash), inquiry may be made as to 
 the character of assets which a bank may hold as an 
 "in vested-reserve." What character of "invested 
 capital reserves" will contribute best to the purposes 
 (public and private) for which they are held? 
 
 Generally speaking, there are three kinds of in- 
 vestments in which a bank may employ capital-re- 
 sources not needed in the form of "cash," but which 
 
ASSETS TO BE HELD AS "RESERVES" 115 
 
 are necessary to the equipment of the bank for the 
 support of outstanding accounts. These may be 
 described as follows: (i) Loans to other commercial 
 institutions; (2) stocks, bonds, and other securities; 
 Classes 0} re- and (3) the commercial paper pur- 
 serve capital in- chased from those who are not de- 
 vestments positors. That is to say, the "loans 
 
 to other commercial institutions," the "stocks, bonds, 
 and other securities," and the "commercial paper" 
 which are to be considered as "reserve capital-in- 
 vestments" are assets which have not been purchased 
 by means of credit-accounts of the bank. And in 
 making financial statements of "capital-resources" 
 and "capital-liabilities" the bank should clearly 
 indicate what paper or assets are to be considered as 
 chargeable to capital-account. These three classes 
 of investments will be separately considered. 
 
 Demand Loans to Other Banks as Reserve- 
 Capital Investments 
 
 It is the common practice among banks to loan a 
 portion of their capital-resources to other banks. 
 The reason for this is not a public one, but to de- 
 crease the capital cost to the bank. Such loans are 
 set up in published summaries under two heads; viz., 
 (i) amounts "due from reserve agents," and (2) 
 amounts "due from other banks." Regarding the 
 practice from the point of view of public interest, 
 these loan accounts have been considered as assets 
 
116 THE BANK AND THE TREASURY 
 
 immediately available for procuring cash to meet 
 money-demands. So general and so plausible is 
 Loans called" de- this assumption, that it was made a 
 posits with re- part of the National Bank Act, under 
 serve agents" ^j^j^j^ ^^^j^ ^^^^^^ ^j -^^^^5 ^^^ ^^. 
 
 counted as cash. The general acceptance of this 
 conclusion rests on fallacy. The conclusion has been 
 supported by reasoning from analogy. In mercan- 
 tile business a bank-account is properly considered 
 "cash"; the primary purpose of a merchant's bank- 
 account is to provide the means necessary for meeting 
 current commercial demands. 
 
 While, how^ever, this is true of the merchant, it 
 does not necessarily follow as to the banker. It may 
 not be assumed that a credit-account of one bank 
 against another bank should be considered as cash- 
 capital equipment. For the purposes of the bank, 
 this assumption goes afield at four points: (i) Since 
 the business of the bank is one of purchasing "com- 
 Accountsvnth mercial assets" by exchanging its 
 
 other banks as credit-accounts for the use of its cus- 
 equiptnent ^^^^^^ ^^ ..^^^j^ „ ^j^^ ^^^y. ^^ ^ ^ 
 
 different funding relation than the merchant accom- 
 modated; while the merchant may settle his credit 
 obligations by bank credit, the bank must make pro- 
 vision for the settlement of credit balances in money. 
 (2) The checking out or transfer of the accounts of 
 one bank to customers of other banks outside of the 
 immediate locality must be settled through the estab- 
 
ASSETS TO BE HELD AS "RESERVES" 117 
 
 lishment of an exchange base in other cities; whether 
 this exchange base is in the form of money or of 
 rights to "draw," a considerable portion of the fund 
 cannot be made available for the payment of local 
 demands and for the settlement of local exchanges. 
 The exchange account is capital tied up for the sup- 
 port of exchange transactions and cannot be con- 
 verted into money without crippling the bank's 
 operations. (3) To permit one bank to sell its 
 "money-reserves" to another bank for a credit or 
 "reserve-account," and then to permit the selling 
 bank to treat the "account" as cash to any greater 
 extent than it may be necessary for the second bank 
 to retain the money in its vaults to meet the exchange 
 demands of the first bank, is to permit both banks 
 to extend their credit-accounts on the same capital 
 support and thus to weaken the equipment of both, 
 since a demand of one bank on another bank for 
 settlement is a demand for money. (4) By account- 
 ing "amounts due from other banks" as "cash," 
 without distinction as to the exchange purpose of 
 their creation, and through the regular practice of 
 loaning money-surplus to reserve agents, the reserve 
 city banks have been encouraged to give support to 
 underwriting syndicates and to margin speculation 
 at the same time that the "depositing" bank is ex- 
 tending its credit-accounts with customers. A very 
 large portion of accounts (deposits) held by customers 
 against reserve city banks are credit-contracts created 
 
118 THE BANK AND THE TREASURY 
 
 in exchange for call-loans, which, under ordinary 
 circumstances, may be quickly realized on by the 
 reserve bank; these, however, are not immediately 
 convertible in time of panic without undermining the 
 whole credit structure ; at such times a general process 
 of forcing liquidation constricts the circulating me- 
 dium to an extent that proves ruinous to business. 
 Whenever an unusual demand for payment of loans 
 is made by country banks on reserve agents, such 
 demands force the reserve banks to restrict their own 
 accommodations, and thus contract the circulating 
 medium. 
 
 The underlying fallacy of the reasoning which is 
 back of that part of the Bank Act, and back of the 
 theories which give sanction to the practice itself, 
 may be seen when we analyze the character of the 
 investment. In so far as bank A does not need the 
 reserve fund or account kept with the reserve city 
 The fallacy en- bank B, as an exchange base {i.e., for 
 gaged by the a current purpose) it is investing its 
 '^^ '' capital in the same kind of a credit 
 
 obligation as is the call-loan customer of bank B. 
 Bank A is degrading its investment judgment to the 
 same level as an ordinary speculator, and receiving 
 therefore a rate of interest little if any higher than 
 might be received on U. S. Government bonds. 
 Bank A's investment (account with B) is one de- 
 signed to be held as "available" for the purpose of 
 obtaining cash to meet an extraordinary demand. 
 
ASSETS TO BE HELD AS "RESERVES" 119 
 
 But extraordinary demand is usually associated with 
 market conditions which make "call-loans" the most 
 delicate of all commercial assets. Yet for this pur- 
 pose bank A holds an open account of bank B, which 
 in turn has treated the money borrowed from bank 
 A as a "cash-reserve" to support accounts of specu- 
 lators and to meet demands made on its own ac- 
 counts. This is the common practice in New York 
 City. By reference to Chart VIII, opposite page 
 152, it may be seen that the "deposits" of country 
 banks furnish nearly all the money held by New 
 York City banks as a means of supporting about 
 $1,000,000,000 of demand accounts of customers. 
 
 It is not a new experience in the financial world for 
 reserve city banks to temporarily suspend money 
 payment to protect themselves against the banker's 
 demand for money on payment of drafts and ex- 
 change-balances. The vicious tendency of such a 
 practice of borrowing a money-reserve from other 
 banks and of lending the credit of borrowing banks to 
 speculative enterprise has been a subject of com- 
 ment by every Comptroller from the foundation of the 
 National banking system down to and including Mr. 
 Unavailability oj Knox; and the undesirability of in- 
 reserve accounts vesting capital of commercial banks in 
 in time 0} strain ^^^^^ ^^ " reserve-agents " was again 
 
 pointed out by Mr. Dawes in 1898. While under 
 ordinary circumstances they may be convertible, 
 "loans to other banks" cannot be considered the 
 
120 THE BANK AND THE TREASURY 
 
 best kind of reserve-capital investment. There may 
 be many reasons w^hy the banks of reserve cities 
 would be in favor of such a practice, but from the 
 point of view of elasticity and general welfare the 
 practice should be publicly and legally condemned. 
 
 "Securities" as Reserve-Capital Investments 
 
 As to State banks, private banks and trust com- 
 panies, it is shown that a large proportion of the 
 securities owned are in forms not easily marketable 
 when occasion requires. The National banks have 
 no published statistics of the proportion of the several 
 classes of stocks, securities, etc., held, but the reports 
 About one-half of do show that about one-half of their 
 bank capital so capital and surplus is invested in 
 invested stocks, bonds, and other securities; it 
 
 is also shown that these assets yielded little support to 
 the credit-accounts in time of emergency or extraor- 
 dinary money-demand. Such a showing and such 
 experiences, however, do not warrant the conclusion 
 that stocks, bonds, and other securities which may at 
 once be converted into cash to meet money-demands 
 on accounts outstanding may not be effectively used 
 as "reserve-capital investments." 
 
 It may be stated as a demonstrable conclusion 
 that such investments are not always convertible 
 into money by sale without loss to the bank. But 
 while a favorable market may not always be found 
 in which even stocks and bonds which are considered 
 
ASSETS TO BE HELD AS RESERVES 121 
 
 as "gilt edge" may be realized on without loss to 
 
 invested principal, in time of monetary disturbance, 
 
 securities of this class may usually be 
 Convertibility by ,. j j_ , ^, 
 
 j^j^g -^ realized on by sale as soon as the 
 
 emergency is passed ; in time of finan- 
 cial depression it very often happens that investments 
 of the first rank rise to a higher point than during a 
 period of credit inflation for the reason that "gilt- 
 edge" securities are then relatively scarce and are 
 the only ones to which investment capital is attracted. 
 Elasticity, however, depends on immediate con- 
 vertibility. Although, in an emergency, "gilt -edge" 
 securities may not be converted by sale without in- 
 vestment loss, money may always be obtained on 
 them by a process of hypothecation. The large finan- 
 cial companies, such as savings banks, trust com- 
 panies, insurance companies, etc., which have few 
 demand obligations to meet and which at the same 
 
 time have large funds available for 
 hypoiSiZ ^^ investment, may come to the rescue 
 
 of the commercial banks through 
 loans, in case the banks do not care to realize on their 
 securities by sale at an unfavorable market rate. In 
 obtaining cash by loans or sales of their own col- 
 laterally secured credit obligations the banks are able 
 to realize on reserve-capital investments of this kind, 
 by hypothecating their securities with investment 
 institutions. In such event the only part of the in- 
 vested capital not available for present needs is the 
 
122 THE BANK AND THE TREASURY 
 
 amount represented in the "margins." It is by this 
 process that the Government assists national banks 
 to obtain money on such investments without loss. 
 
 Special facility is given for such a disposition under 
 our present Law. Two methods are provided where- 
 by the United States Treasury may permit the imme- 
 diate conversion of "gilt-edge" securities. In the 
 first place, "United States bonds" may be hypothe- 
 cated for "issues"; in the second place (under the 
 special jacilities more recent ruling of the Secretary), 
 jor hypothe- when the Government has a Treasury 
 '-'^^"^ surplus, "gilt-edge" securities may 
 
 be hypothecated for gold, i.e., "Government de- 
 posits," which immediately give to the banks receiv- 
 ing them an exchange-balance against the Treasury. 
 In order to avail themselves of these aids, however, 
 the Government requires that the banks have unen- 
 cumbered "gilt-edge" securities to hypothecate, and 
 this is what the banks in many instances have failed 
 to do. 
 
 Again, "gilt-edge" securities which are unencum- 
 bered may at any time be hypothecated in the general 
 loan market. For the purpose of procuring tempo- 
 rary loans, the loan capital of the 
 Support 0} the ,. . , . , , 
 
 loan market ^"tire commercial world may be 
 
 availed of. There are no institutional 
 or National limits to a good investment security. It 
 is to assist in the process of international investment 
 as a means of relieving National financial distress 
 
ASSETS TO BE HELD AS "RESERVES" 123 
 
 that the "rate" is so often raised by the Bank of 
 England. The loan market is not local or National. 
 In the past, the inability of banks, which have in- 
 vested capital in securities, to obtain money by sale 
 has been due to one of two practices: Either the bank 
 has departed from the banking business and has be- 
 come a dealer in securities for the purpose of making 
 its profits on buying and selling instead of looking 
 primarily to interest pa)Tnents on commercial accom- 
 modation, or its officers have been guilty of adminis- 
 trative indiscretion in the purchase of securities 
 which are intended to give support to their own credit- 
 accounts. Their inability to obtain funds by hypoth- 
 ecation has been due either to the weakness of the 
 Practices which security itself (as frequently happens 
 have prevented when the bank engages in underwrit- 
 conversion j^^g ^^^ ^^j^^j. speculative ventures), 
 
 or to the fact that they have already hypothecated 
 their "gilt-edge" holdings. An instance of failure 
 from the first cause — i.e., on account of the char- 
 acter of the weakness of its investments — is found 
 in a recent collapse of a large institution which had 
 sought without success to obtain a million dollar loan 
 on the security of eight million dollars of securities 
 held. Instances of inability of banks to obtain 
 money for pressing need on account of "gilt-edge" 
 securities having already been hypothecated are 
 many; and, under the present Law and practice, the 
 Government holds out a permanent inducement for 
 
124 THE BANK AND THE TREAStlRY 
 
 banks to weaken their equipment through the hy- 
 pothecation of their best investment assets. The in- 
 ducement referred to is the offer on the part of the 
 Government to exchange "notes" and "deposits" 
 for secured accounts of the bank, without interest. 
 The result is, that the banks, as a means of increasing 
 their profits during times of ordinary money-demand, 
 or so-called periods of prosperity, encumber their 
 best invested assets by hypothecation, and in time of 
 money stringency and extraordinary demand they 
 are unable to support their credit-accounts (deposits) 
 without forcing "loans." 
 
 Commercial Paper as Reserve-Capital Investments 
 
 Commercial paper held as "reserve-capital" in- 
 vestments must be clearly distinguished from com- 
 mercial paper purchased by means of credit-accounts, 
 i.e., by exchange for deposits. Commercial paper 
 which is obtained for direct investment of a bank's 
 How capital is capital is usually obtained through its 
 invested in com- own loan brokers, or through a com- 
 mercia paper mercial paper house or note-broker. 
 Their own loan brokers are represented in the "loan 
 crowd" who are seeking to invest the money surplus 
 for the bank. The note-broker would obtain a mar- 
 ket for the paper of his customers. The business of 
 the note-broker is to find banking houses or other 
 loaners of capital who are looking for this kind of 
 investment. 
 
ASSETS TO BE HELD AS "RESERVES" 125 
 
 Ordinarily a bank will not buy paper of one who 
 is not a customer if it has enough paper offered by 
 its customers to fully employ its capital. The reason 
 for this is that a customer's note may be purchased 
 in exchange for a credit-account of the bank (a de- 
 posit). The bank with its own capital used as a 
 
 "redemption reserve," therefore, may 
 A "reserve" cap- , i i- ^i ^ r 
 
 ital investment Purchase several times the amount of 
 
 commercial paper from its customers 
 that it can by direct investment of capital in the notes 
 of those who are not customers ; as a result a propor- 
 tionately larger return in profit will be received from 
 the exchange with customers. The bank will loan 
 through its broker, or will offer to purchase paper 
 through a note-broker, only as a means of investing 
 a "capital" surplus, and this may be used as an 
 " invested-reserve " without contracting or forcing 
 loans to customers. 
 
 Demands for pajmient made on these notes do not 
 reflect on the bank itself through forcing the customer 
 {i.e., the holder of its own accounts) to convert. 
 Neither do payments at maturity so seriously disturb 
 the commercial world as do sudden demands on 
 "call" or short-time paper. The paper purchased 
 
 through note-brokers usually runs for 
 S^i^'XSS si-ty or ninety days, the definite period 
 
 for which funds are needed by the one 
 selling his paper), and payment will be made by vol- 
 untary liquidation. Such demands, however, may 
 
126 THE BANK AND THE TREASURY 
 
 quite as seriously interfere with the principle of 
 elasticity of the bank-account as a circulating me- 
 dium, since a narrowing market for these loans, or 
 the refusal to renew when renewals are asked, may 
 require liquidation of the accounts where they are 
 kept, and this liquidation may result in violent con- 
 traction. 
 
 Under such circumstances, commercial paper must 
 be regarded as a very high class of investment for 
 surplus "capital" so far as the interests of the indi- 
 vidual bank are concerned. Such investments are 
 also in the line of true banking for profits from interest 
 accrued in commercial accommodations. But never- 
 theless investments of capital-funds in commercial 
 paper to be held as a "surplus-reserve" may be con- 
 sidered of doubtful character for the community at 
 
 large. Commercial paper is used by 
 Doubtful charac- .11. ^ t ^ • 
 
 ter of practice *-"^ busmess man to obtam current 
 
 funds. Capital-investment in com- 
 mercial paper may at any time put the bank in the 
 position of forcing the customers of other banks to 
 liquidate, and thereby may cut off banking accom- 
 modation when accommodation is most needed. 
 Besides, such a practice tends to relieve the banks of 
 a locality from responsibility for capitalizing to meet 
 the funding needs of its local constituency. 
 
Chapter X 
 
 PUBLIC DANGERS IN THE PRESENT EQUIPMENT 
 OF NATIONAL BANKS 
 
 Although the total liabilities of failing banks 
 approaches $300,000,000, the direct losses to custom- 
 ers has been less than $50,000,000. This, reduced 
 to a percentage of loss on total liabilities of all Na- 
 tional banks per year, would amount to about one- 
 twentieth of one per cent, or to about one-fifth of 
 one per cent on capital employed in the business. 
 The average direct loss, however, is not the primary 
 consideration, more than is the average direct loss on 
 the circulation of counterfeit coins, or the average 
 
 direct loss on depreciated currency. 
 Losses from bank rr^ .1 • j- -j i ,1 i • • ^i. 
 failure -'-^ *-^^ mdividual the loss is m the 
 
 sudden disappearance of his entire 
 account so far as its use as current funds is concerned. 
 Without notice or opportunity to protect himself, he 
 is deprived of his "cash." To him the immediate 
 loss is as great as if he were the victim of a robbery; 
 his indirect loss is greater, owing to the difficulty of 
 again providing himself with current funds at a time 
 when the credit of the whole community is strained 
 
 [127] 
 
128 THE BANK AND THE TREASURY 
 
 by the sudden shock and the concurrent cutting off 
 of funds from all the customers of the failing institu- 
 tion. This suggests, also, an incidental loss to the 
 whole trading community, the extent of which cannot 
 be measured or estimated. 
 
 The suggestion here made is not intended as an 
 arraignment of the National banking system so far 
 as the solvency of its banks is concerned. The fact 
 is that the individual bank has managed to protect 
 itself against insolvency and that the direct losses to 
 "depositors" have not been proportionately larger 
 than to those of any other of the great banking sys- 
 tems of the world. It is not to this aspect of the situa- 
 tion that pleas for increased "elasticity" are directed. 
 
 Arguments for elasticity have refer- 
 Direct financial . .r t_i- .• ^i • 
 
 loss not the issue ^^ce to the public question — the m - 
 
 direct losses due to inability of the 
 banks of the system to adjust their credit accommo- 
 dations to current demands. The plea is not for 
 increased security to the stockholders of the bank as 
 a means of protecting them against insolvency, nor 
 for the guarantee of the accounts of banks. In so far 
 as such proposals are made they are purely incidental. 
 The whole question of elasticity is a public one, 
 having to do with the protection of the circulating 
 medium against sudden contraction as a means of 
 preventing loss to the individual bank and to the 
 individual customer. It is to this end that a correla- 
 tion is advocated between the capital support pro- 
 
DANGERS IN PRESENT EQUIPMENT 129 
 
 vided for credit-accounts and the amount of credit- 
 accounts to be supported. 
 
 Capital Equipment and Credit Strain on the System 
 
 That the National banking system may be under- 
 stood with respect to capitahzation, the resources and 
 habiUties of all the National banks of the United 
 States are exhibited in classified balance sheet form 
 opposite page 130. In this an attempt is made to 
 re-arrange the various items reported by the banks to 
 the Comptroller in such a way as to show (i) the 
 character of properties purchased by capital outlay 
 which are unavailable for the support of banking 
 transactions; (2) the classes of resources which are 
 to be considered in the nature of redemption equip- 
 ment, setting opposite these two classes of items 
 the capital provided by the stock sales, surplus, and 
 The character oj undivided profits, plus the amount 
 equipment illus- obtained by floating debt; and, (3) 
 '^^ ^ the accounts representing banking 
 
 operations and the relation of the redemption equip- 
 ment to current demand liabilities. Owing to the 
 indefiniteness and uncertainty of the data contained 
 in the Comptroller's report for this purpose, these 
 statements must be taken subject to the same quali- 
 fications and questions raised on pages 94 and 95. 
 But until a form of report is prescribed for the banks 
 which will require specific declarations in classified 
 form, the data given must remain the best obtainable. 
 
130 THE BANK AND THE TREASURY 
 
 Assuming this to represent the National banking 
 situation on September 9, 1903 (and it cannot be far 
 afield, for the reason that the items with respect to 
 which question may be raised would not materially 
 alter conclusions as to the results by classes), and 
 assuming further, as does the National Bank Act 
 itself, that an amount due from a reserve agent is to 
 be considered a part of the "in vested-reserve" and 
 therefore a capital charge, it would appear: (i) that 
 $186,904,932.68 of the capital of banks was invested 
 in properties and rights that were not available 
 for current credit-redemptions (viz., in "banking- 
 houses," "real-estate" and "margins"), and that the 
 banks could have done just as much business as 
 going banking concerns if they had not had these 
 resources; these (though available for final liqui- 
 dation) were unavailable investments and operated 
 as a reduction of banking capital. (2) That of the 
 two kinds of redemption equipment (assuming, as in 
 Chapter VIII, that the foreign exchanges were only 
 one-tenth of the local exchanges, and that $60,583,- 
 675.38 would be adequate provision for these) 
 $669,157,468.20 was in the form of "cash-reserves," 
 and $811,543,333.22 was in the form of "invested- 
 reserves" — the total redemption equipment being 
 equal to $1,480,700,801.42. (3) That the total capi- 
 tal provided by the proprietors, including stock, sur- 
 plus, and undivided profits, after deducting outlays 
 for the unavailable investments, was only $1,123,189,- 
 
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DANGERS IN PRESENT EQXnPMENT 131 
 
 175.24, there being a difference between the redemp- 
 tion equipment carried and the capital provided 
 amounting to $357,511,626.18; this amount was bor- 
 Redemption rowed from other institutions and 
 equipment— how amounted to a demand-credit capital 
 liability or floating debt incurred in 
 the purchase of redemption equipment. To reach 
 such conclusions, it is to be observed, no assumption 
 has been employed that is not based on the plain 
 provisions of the Bank Act itself — viz., that the 
 "amounts due from reserve agents" is to be con- 
 sidered a part of the "reserve-funds" and therefore 
 a capital charge. The amount of this demand-credit 
 hability (or floating debt) must be subtracted from 
 the available redemption equipment before the net 
 amount of capital support to banking operations may 
 be obtained. This net redemption equipment, 
 therefore, amounted to ;?i, 123,189,175. 24. 
 
 To measure the credit tension, or the strain which 
 is brought on the equipment provided, the current 
 credit-liabilities must be brought into comparison 
 with the net redemption equipment. This relation 
 
 would be represented by the fraction ^'-^ ^' — li559: — 
 
 1,123,189,174.24 
 
 or if reduced to percentage the capital support would 
 appear as 25.7 per cent of the banking operations 
 supported. Still another result would be obtained 
 by setting off the institutional assets against institu- 
 tional liabilities. Assuming that this might be done 
 
132 THE BANK AND THE TREASURY 
 
 without impairing the banking power, the net bank- 
 ing operation would amount to$3,493,363, 570.62, and 
 Credit strain on the relation of equipment would be 
 redemption equip- raised to 27.9 per cent. This would 
 ^*^^^ be the measure of strain on the as- 
 
 sumption that all parts of the redemption equip- 
 ment were equally available for the support of credit. 
 Of this equipment, however, $811,543,333.22, or 
 72.2 per cent, is in the form of investments, and 27.8 
 per cent in money-reserves. Without a special ex- 
 amination of these investments no measure may be 
 taken of their strength. Experience shows that the 
 amount of invested-reserves actually available as 
 equipment to meet the credit strain in time of need 
 falls far below the amount and proportion above 
 indicated. With this statement in view as to the 
 method of arriving at the conclusion here reached 
 some more general observations may be made. 
 
 A Historical View 
 
 From 1869 to 1893 the "money-reserves" in Na- 
 tional banks were equal to about 50 per cent of the 
 share capital. During the same period the com- 
 bined amounts of money-reserves plus the unencum- 
 bered securities ("United States bonds," "stocks, 
 securities, etc.") were equal to about 50 per cent of 
 the share capital plus the surplus. Investments in 
 the nature of loans to other banks made up a large 
 part of the balance of capital-resources; under ordi- 
 
DANGERS IN PRESENT EQUIPMENT 133 
 
 nary circumstances these last mentioned investments 
 
 (loans to other banks) are available resources for the 
 
 support of credit-accounts, but as a 
 Banking eqmp- , j. • . . i i i 
 
 ment before 1893 ^^^m of equipment they have always 
 
 shown weakness at the very time when 
 strength is required. In many instances, however, 
 the loans to other banks have not accounted for the 
 entire balance ; at such times as this discrepancy has 
 appeared, it is evident that the banks have used a 
 portion of their capital for direct purchase of "com- 
 mercial assets" instead of procuring them by ex- 
 change of credit-accounts. From inquiry as to prac- 
 tice of individual banks it is found that many of 
 them have been guilty of investing a portion of their 
 capital in loans to customers, relying specifically on 
 their "commercial assets" to support their "credit- 
 accounts." Such a practice is prima facie evidence 
 of an extension of credit which may at any time cause 
 the banks suddenly to reduce the credit-funds in the 
 community to protect themselves from loss. To the 
 public the result is the same as if no capital whatever 
 had been invested in the banking business. 
 
 Since 1893 the showing has been quite a different 
 one; increasing proportions of capital-funds have 
 been used to purchase securities. Had these invest- 
 ments been readily convertible into cash when money 
 was needed, the banks would have been in a much 
 stronger position to-day than they were in before 
 1893. The fact is, however, as hereinafter shown. 
 
134 THE BANK AND THE TREASURY 
 
 that owing to the large interest of the banks in "call 
 loans" secured by collaterals, these investments, 
 Characterof cap- shocks, securities, etc., owned have 
 ital investments not been immediately convertible by 
 since 1893 sale; many of them are not even con- 
 
 vertible by hypothecation in time of extraordinary 
 money-demand. Among these may be placed secu- 
 rities which have been underwritten, for the reason 
 that if they were marketable they would not be "on 
 hand." The effect of investment of capital-funds 
 in "stocks, securities, etc.," in many instances has 
 been that such investment has come to be an added 
 burden on banking equipment, instead of being an 
 increased support to commercial credit-demands, 
 and a primary cause for increasing credit disturbance 
 by increasing the expansion and contraction of credit- 
 funds. Since 1893 credit disturbances and inability 
 of bank-credit to meet demands have increased, until 
 "inelasticity" has become the most important prob- 
 lem in American finance. 
 
 Banking Equipment Purchased on Credit 
 
 Within the last ten years there has been a gradual 
 increase in the proportion of "money-reserves" to 
 Inadequacy of capital. The "money-reserves" have 
 proprietary grown until for some time they have 
 
 capita ^ggj^ jj^ amount about equal to the 
 
 "share-capital" (not including "surplus "and "undi- 
 vided profits") employed by National banks; and the 
 

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DANGERS IN PRESENT EQUIPMENT 135 
 
 amount of "money-reserves" plus "unencumbered 
 securities" has come to be larger than the combined 
 total of ' ' share-capital ' ' and ' ' surplus. " This situa- 
 tion, however, has not been associated with an in- 
 crease in "money-reserves" proportionate to credit- 
 liabilities, but with a decrease in capitalization. If 
 we consider the loans to reserve agents as a part of 
 redemption equipment, then the equipment of Na- 
 tional banks for the support of credit-accounts far 
 exceeds the proprietary capital provision made for 
 its purchase — an anomalous position ; a situation to 
 be explained only by the assumption that a part of 
 the banking equipment had been purchased on credit. 
 From a point of view of the proportion of banking 
 equipment represented as being available, the banks 
 are in a much stronger position than they were before 
 1893, but this representation is without consideration 
 of the adaptability of equipment to the purpose for 
 which it is provided and used. As a matter of public 
 concern, equipment is for the purpose of supporting 
 the credit-accounts without contracting loans, and it is 
 with reference to these that its strength must be 
 measured . Capitalization must be considered simply 
 as the means by which the equipment is to be pro- 
 cured. Judged from this standard, the capital is 
 inadequate to provide equipment used; and equip- 
 ment used being procured on credit and weakened 
 by this character of charge is inadequate to support 
 banking demands. 
 
136 THE BANK AND THE TREASURY 
 
 As before shown, the operation of the legal reserve 
 clause of the National Bank Act has been to prevent 
 a decrease in the amount of money held below a 
 point necessary to meet ordinary current needs; but 
 at the same time the credit load which the banks have 
 attempted to carry has been multiplied until within 
 the last ten years the proportion of total capital-re- 
 sources to demand obligations has been materially 
 lessened. Proportionate to the credit load to be 
 supported, therefore, banking equipment has been 
 weakened not only with reference to its quantity but 
 also with reference to its quality. The increase in 
 
 Increase in money-reserves has been due to an in- 
 
 money-reserves ■ , ,. , r i i i 
 
 due to increased ^^^^^^ ^^ relative weakness of total 
 
 credit weakness banking equipment through an in- 
 crease of credit-accounts outstanding. The equip- 
 ment now used to support outstanding demand- 
 credits is not only relatively weaker, but a large part 
 of it, instead of being provided by means of capitali- 
 zation, has been purchased or provided by means of 
 the very current-accounts (the demand-credit) which 
 the equipment so purchased was intended to support. 
 
 Methods Employed to Increase Equipment without 
 Increasing Capitalization 
 
 Under a banking law which allows banks to pay 
 interest on "deposits" of (loans from) other banks, 
 — a law which permits the depositing (loaning) bank 
 to count the loan a part of its cash — a premium is 
 
DANGERS IN PRESENT EQUIPMENT 137 
 
 placed on an inferior kind of redemption equipment, 
 and a practice has grown up which in many instances 
 has destroyed the equipment character of the loan. 
 On September 9, 1903, there were approximately 
 $395,000,000 of these loans. Several points of weak- 
 ness of the "loan to reserve agents "have already been 
 The" loading" 0}'^^^^'^^^ to. A practice which com- 
 " accounts with pletely thwarts the purpose of the Act 
 reserve agents" ^^^ renders the "reserve-account" 
 wholly unavailable is known as "loading" balances 
 or "mutual balances." Bank A deposits with (loans 
 to) bank B (its reserve agent) $100,000. Bank B 
 loans to bank C $100,000. Bank C loans to bank A 
 $100,000. Under our present system of reporting, 
 by such a series of transactions bank A having 
 $100,000 in cash may count it as $200,000. If, how- 
 ever, bank A were required to send in a report on 
 some such classified form as that hereinbefore sug- 
 gested, every transaction of this kind would appear 
 on the balance-sheet as well as in the private instruc- 
 tions to the Comptroller. 
 
 The method of purchase of commercial assets de- 
 scribed by Mr. Vanderlip has also been employed for 
 procuring the capital equipment used to support com- 
 mercial credit-funds. A corporation 
 ^haselffecSities wishing to float an issue, obtains an 
 underwriting; or by some method it 
 may get a quotation on the Street or on the Exchange. 
 These issues, if underwritten by the bank, to the 
 
138 THE BANK AND THE TREASURY 
 
 extent that advances are made on this account, are 
 considered as "stocks, securities, etc." 
 
 If not underwritten by the bank they may be used 
 by the broker as collaterals for procuring increased 
 loans; if the broker cannot obtain a loan on this sort 
 of collateral at reasonable margins and interest, other 
 securities may be substituted, and the broker may 
 carry the new flotation against his own capital until 
 the new issues are disposed of to the public. For the 
 purpose of buying these increased loans to which the 
 The credit pur- securities stand as collateral, the bank 
 chase of "money- uses its own increased credit-accounts, 
 reserves which in turn are used by customers 
 
 as cash to buy other securities. As the public grad- 
 ually absorbs the securities offered, the banks are 
 able to absorb larger volumes of money through 
 voluntary payments made on loans, without increas- 
 ing capital. 
 
 This process of "loading" and of credit acquisition 
 of equipment reserves may continue so long as credit 
 inflation continues and the money supply of the 
 country is increased by a favorable balance of foreign 
 exchange on sales of goods; or the same result may 
 be accomplished by decreased demand for legal- 
 tender money to be used as "current cash" in the 
 community. 
 
 At last the tables turn. There is an increase in the 
 demand for money in outstanding accounts. The 
 balance of foreign exchange, on account of goods, 
 
DANGERS IN PRESENT EQUIPMENT 139 
 
 grows less; with the increase of business activity the 
 demand for money, for "till cash" and "change" 
 increases; and again, the demand for money may be 
 still further increased by the decreased use of bank- 
 credit-accounts, due to doubt as to the ability of the 
 The inherent banks to meet their customers' ac- 
 weakness in such counts outstanding. At the same time 
 prac tees there is a corresponding decrease in the 
 
 demand for securities. The public no longer con- 
 tinues to absorb stock and bond flotations offered by 
 speculators and promoters, and the brokers are forced 
 to carry increasing quantities of undigestible securities 
 against their own capital . With falling prices of secur- 
 ities, the banks inaugurate a process of liquidation of 
 the loans, which in turn, not only wipes out margins, 
 but also, on occasion, when the shrinkage in prices 
 and in available assets of speculative customers has 
 been too rapid, forces the bank to take securities in 
 satisfaction of loans. These securities so taken are 
 also added to their holdings of "stocks, securities, etc." 
 The upshot of such practice is this: (i) That while 
 money-reserves may be temporarily maintained to 
 meet the provisions of law without curtailing com- 
 mercial accommodation, market con- 
 cerned *'^ '^°^' ditions which call a halt to speculation 
 place the banks in a position which 
 forces liquidation of loans to maintain these 
 "money-reserves"; (2) the current-accounts expand 
 beyond a safe proportion to total resources purchased 
 
140 THE BANK AND THE TREASURY 
 
 by means of invested capital; (3) the capital-invest- 
 ments themselves become impaired in quality and 
 are not readily convertible; (4) a part of the capital 
 of the banks which should be used in the business is 
 diverted to underwriting and speculative ventures; 
 and (5) in time of credit contraction (the burden of 
 procuring money as a means of meeting demands in 
 the credit-accounts used by the banks to purchase 
 income-bearing assets being forced on the commercial 
 and industrial community) all profitable business 
 suffers for lack of current funds. 
 
 From the practice of National banks during the 
 last ten years, some other interesting conclusions may 
 be drawn. In the first place, it is evident that elas- 
 ticity requires some sort of protection against the 
 expansion of bank-credit beyond the margin of safety 
 to available capital equipment provided by the bank 
 for its support. In the second place, the conclusion 
 before drawn seems beyond question, viz., that if 
 banks are to give support to underwriting and to 
 margin speculation, such capital equipment as is 
 used to this end should be clearly distinguished from 
 the equipment used in the commercial banking busi- 
 ness. In the third place, the conclusion would seem 
 
 beyond controversy, that when a bank 
 Inherent dan- ... . . , , . 
 
 g^^ m its various capacities overloads its 
 
 capital support, or permits itself to 
 
 extend its credit beyond a point of safety, the only 
 
 way the credit relations of a community may be 
 
DANGERS IN PRESENT EQUIPMENT 141 
 
 maintained and brought within Hnes of safety with- 
 out contracting commercial accommodation, and 
 forcing a reduction in current credit-funds, is by 
 enlisting the support of new and increased capital — 
 a banking capital large enough not only to support 
 its regular commercial business with safety, but also 
 to provide the funds necessary to carry on the various 
 underwriting and speculative enterprises through 
 which the banks are forced into a position of contrib- 
 uting capital for the permanent equipment of new 
 promotions. 
 
 The Increasing Weakness of Banks in Periods of 
 
 Credit Expansion or So-Called Periods of 
 
 Prosperity 
 
 To illustrate the need for a correlation of both 
 "money-reserve" and "reserve-capital investments" 
 (or total redemption equipment) to credit-accounts 
 outstanding, the exhibit on Chart XIII is referred 
 to. Taking the record of the last forty years it 
 would be shown that periods of credit strain have 
 been periods of relatively low capitalization and over- 
 taxed equipment. These also have been periods in 
 which demands for greater elasticity have been 
 Failure in the heard. It is also quite as apparent 
 past to coordinate ^-^^^^ ^-^^^^ ^^^ ^^^^ ^^ g^gj. increasing 
 credit support . ,. , ,. ^- . v i 
 
 with credit strain ratio of credit obligations to capital 
 
 equipment. Assuming the most favorable hypoth- 
 esis possible— that the whole capital of the banks 
 
142 THE BANK AND THE TREASURY 
 
 has been properly invested in resources which may be 
 used to support accounts outstanding — no other evi- 
 dence is needed of over-issue of credit-accounts or over- 
 sale of "deposit" obligations on the part of the banks. 
 Periods of speculation have carried credit-accounts 
 out of all safe proportion to capital invested as a 
 means of providing equipment for the business. As 
 a result, when money-demands on exchange-balances 
 have increased, the banks have been forced to curtail 
 loans to customers to procure the money necessary 
 to make payments to other banks. Periods of de- 
 pression and of financial reorganization have followed 
 so-called periods of prosperity and credit expansion; 
 so-called periods of depression have been seasons of 
 readjustment of current credit to capitalization. If 
 we reduce this experience during the last period of 
 prosperity to a base of percentages, a tabulation of 
 results would be as follows: 
 
 Per cent of Per cent of 
 
 vpa- Capitalization vp^r Capitalization 
 
 ■^ to Customers- ^^^ to Customers- 
 
 Accounts Sold Accounts Sold 
 
 i8g6 56 igoo 35 
 
 1897 49 1901 31 
 
 1898 42 1902 32 
 
 1899 33 1903 36 
 
 Again engaging the most favorable assumption 
 (that, during this period, all of the capitalization of 
 the National banks was invested in the best of bank- 
 ing equipment, and that during all this period there 
 was no weakness in the character of capital-resources 
 held), the showing is an interesting one. From the 
 
DANGERS IN PRESENT EQUIPMENT 143 
 
 foregoing it will appear that in 1896 the capitalization 
 (share capital and surplus) was fifty-six per cent of 
 Increasing weak- the amount of credit-accounts (de- 
 ness in periods of posits) sold to customers. From 1896 
 prospen y ^^ 1901, or the period of credit expan- 
 sion, the banks had so far increased the proportion of 
 the demand-credit obligations sold to customers that 
 they had reduced their capital equipment to thirty- 
 one per cent. Since that time they have been forcing 
 an adjustment by process of gradual liquidation, and 
 in 1903 they had increased the ratio of capitalization 
 to thirty-six per cent, as a means of protecting them- 
 selves against the folly of oversale of credit-accounts 
 to customers. 
 
 The disturbance which was caused to business was 
 well-nigh equal to that caused by the issue of green- 
 backs during the Civil War; during the two years of 
 liquidation the loss sustained to securities (by parties 
 The credit dis- on which these documentary proper- 
 turhance equal to ^j^^ j^^^ ^^^^ unloaded in times of 
 that of the green- 
 hack inflation so-called prosperity) was quite as 
 
 great as the cost of carrying on the greatest military 
 campaign in history. And it is not certain that the 
 lesson has yet been learned; for we find that imme- 
 diately following a long period of forced liquidation 
 at the opening of the year 1 904, when money and credit- 
 demands had suddenly grown less, the New York 
 banks alone, in three weeks, again increased their 
 sales of credit-accounts (deposits) over $42,000,000. 
 
14-4 THE BANK AND THE TREASURY 
 
 This operated on business in the same manner as 
 if there had been a sudden increase in the money 
 circulation of like amount. The press again con- 
 gratulated the public on a business revival. Little 
 thought was given to a possible day of reckoning. 
 
 The experience of the last forty years of National 
 banking (and the same experience might be shown 
 in State and private banks) suggests that some limit 
 should be placed on bank-credit issues (deposits) 
 other than that found in the "legal money- reserve"; 
 
 that ' ' reserve-capital investments ' ' 
 A limit of safety i u r -j j n 
 
 needed should be considered as well as 
 
 money-reserves; that, while the Comp- 
 troller may properly interest himself in the money 
 equipment of a bank as a safeguard to credit, he 
 should also have the power to call a halt on increasing 
 credit-issue beyond a safe proportion to total un- 
 impaired redemption equipment — i.e., the total cash 
 and assets readily convertible into cash without calling 
 in commercial loans. 
 
 Federal authorities should be given such powers 
 that they might force the stockholders of a bank to 
 increase its capitalization when it attempts to handle 
 a volume of business disproportionate to its capital- 
 Should be regu- i^ed equipment —i.e., to force the 
 lated by federal banks to discontinue the practice of 
 aut onty issuing credit beyond the point of 
 
 safety. Such legislative and administrative control 
 over our credit institutions is just as imperative as 
 
DANGERS IN PRESENT EQUIPMENT 145 
 
 that directed toward the limitation of credit-money 
 strain on the gold-reserve of the Treasury, the limi- 
 tation of strain on the structure of bridges or the 
 equipment of mines, or the enactment of legislation 
 for safety of buildings devoted to manufacturing, etc. 
 It should be recognized that the credit equipment, 
 when overstrained, is hazardous, not alone to those 
 immediately involved, but also to the business in- 
 terests of the entire nation. 
 
Chapter XI 
 
 WHY THE "unencumbered SECURITIES" OF 
 
 NATIONAL BAISraCS ARE NOT READILY 
 
 CONVERTIBLE INTO CASH 
 
 It has been assumed that, under our present bank- 
 ing system, "unencumbered securities" are the most 
 available of the capital assets or redemption equip- 
 ment to meet money-demands in time of strain 
 without curtailing commercial accommodations. At 
 the risk of tedium, the reasons for this conclusion 
 will be retold: (i) That commercial paper, whether 
 purchased by means of capital or on credit-account 
 may not be converted into cash, except in so far as 
 it may be voluntarily paid, without impairing the 
 elasticity of credit accommodations, for the purpose 
 of obtaining money to meet demands on credit-ac- 
 Points of superi- counts without contraction ; therefore, 
 ority of unen- -[qq^^^ must be considered as "contin- 
 
 cumbered secur- 
 ities" gent." (2) The effect of forcing pay- 
 ment of loans to (amounts due from) reserve agents, 
 at times, is to curtail banking accommodations of the 
 reserve banks and therefore to impair the elasticity 
 of "customers-accounts " in the reserve cities — i.e., 
 to cause contraction instead of allowing expansion of 
 
 [146] 
 
WHY SECIIRITIES ARE NOT CONVERTIBLE 147 
 
 this form of current funds. (3) The securities de- 
 posited "for circulation" and "for deposits" of Gov- 
 ernment cannot be utilized. When the cash-reserves 
 are threatened, the only class of assets of considerable 
 amount remaining that is readily available, and which 
 will make possible the expansion of credit-accounts 
 when expansion is demanded, is "unencumbered 
 securities." 
 
 The Use of Banking Capital for Outlays in 
 Unavailable Assets 
 
 With the exercise of good banking judgment, "un- 
 encumbered securities" might be utihzed to obtain 
 new supplies of cash to support the "money-reserve." 
 Assuming that the assets of this class held by banks 
 are "available," our commercial-credit institutions 
 are in a stronger position to-day and may give greater 
 elasticity to their credit-accounts than ever before. 
 This delectable conclusion might be admitted, were 
 it not for two trite facts: (i) that during the two years 
 following September, 1902, the banks were hard 
 pressed for money and the business community 
 suffered enormous liquidation on account of "inelas- 
 Investmentin ticity" of bank-credit; (2) that the 
 unavailable se- banks during this time did not to any 
 cunhes ^esX extent, indeed, throughout a 
 
 long banking experience, they have not taken any 
 considerable portion of securities to market and sold 
 them for cash to relieve sudden pressure. The un- 
 
148 THE BANK AND THE TREASURY 
 
 encumbered securities held have been constantly 
 increasing; the amount held by the National banks 
 has during the last thirty years increased from a 
 small holding to about $500,000,000. The increase has 
 been gradual, almost without a break in the line (see 
 opposite page 244), yet the banks have not to similar 
 extent utilized securities to meet money-demands or 
 to support money-reserves; they have not by sale 
 converted them into cash. On the contrary, they 
 have, on numerous occasions, in time of financial 
 peril, increased their holdings of securities, and 
 thereby increased the weight of liquidation which 
 has been thrown on assets acquired by means of their 
 own demand liabilities. 
 
 Now the question may fairly be raised — Why is it 
 that so large a part of the capital-assets of banks 
 has not been used to obtain money to protect de- 
 mands for money made on their credit-accounts; why 
 has the principle of elasticity of accounts been sacri- 
 ficed, when unencumbered assets were at hand to 
 The principle 0} support the credit of institutions 
 elasticity sacri- whose business it is to purchase com- 
 ^'^^ mercial paper "on account" and to 
 
 provide current funds to the community when 
 needed? By referring to the chart (page 244), it 
 will be seen that "commercial assets" and not "se- 
 curities" have responded to money-demands. The 
 fact stands out boldly that the customer has been 
 sacrificed and that business accommodations have 
 
WHY SECURITIES ARE NOT CONVERTIBLE 149 
 
 been neglected; good commercial paper has been 
 turned away and good loans have been called or 
 reduced to protect capital-investments in the form 
 of securities owned. It is in this fact and in this 
 situation that we must look for much of the practice 
 that has stood in the way of "elasticity." 
 
 If we ask a banker why he does not sell his stocks 
 and other unencumbered securities for cash with 
 which to protect his customers-accounts without 
 curtailing loans, he will say that under the existing 
 system and practice he cannot do so without loss to 
 Why the banker ^^e capital-resources of his institution. 
 does not sell The practical business problem is, 
 securities therefore: Shall the bank suffer a 
 
 capital loss in its efforts to obtain money with which 
 to make good its accounts, or shall the public suffer 
 from inelasticity of bank-credit? In such an emer- 
 gency, there is only one way that a faithful bank 
 officer can answer such a question: The burden of 
 loss must be shifted, if possible, and forced liquida- 
 tion is the result. A better solution would have been 
 not to have allowed the bank to get into such a 
 situation. But for this the banker is not entirely at 
 fault; this has not come from any disposition on his 
 part to curtail accommodations nor to deprive his 
 customer of needed funds. The trouble has been 
 in the kind of competition that he has been forced to 
 meet and in the system which he is employed to 
 operate. 
 
150 THE BANK AND THE TREASURY 
 
 An explanation which has been offered to account 
 for the relatively unvarying amount of securities re- 
 ported by banks is, that these securities are used as 
 collateral security for "bills payable" and "other 
 liabilities" such as temporary loans from other finan- 
 cial institutions. While there is considerable of 
 fluctuation in "biUs payable" and "other liabilities," 
 and these fluctuations respond in a measure to periods 
 The claim that of extraordinary money-demand, they 
 they are used jor do not account for more than a small 
 collateral ^^^^ ^j ^^^ evident "inconvertibility." 
 
 A better reason why "unencumbered securities" 
 have not been "convertible into cash in time of 
 panic," as a means of support to "money-reserves," 
 seems to be in an interpretation of the statistical 
 exhibits of the annual reports of the Comptroller. 
 The increase in "Stocks and Other Securities" 
 owned by National banks during the five years 1898- 
 1902, inclusive, is given as follows: 1898, $255,000,- 
 coo; 1899, $320,400,000; 1900, $367,300,000; 1901, 
 $448,600,000; 1902, $493,100,000. 
 
 The Character 0} Securities Held by Banks 
 
 The securities owned have been an increasing "un- 
 encumbered asset." The power of one to convert 
 property into money depends on a market; the gain 
 or loss depends on the price obtained as compared 
 with cost; the price obtainable depends on the pur- 
 chasing demand at the time the offer is made. This 
 
WHY SECTJRITIES ARE NOT CONVERTIBLE 151 
 
 takes us into a more general banking situation. The 
 National bank is only one of four classes of institu- 
 tions pressed for money at the same time and having 
 the same kind of securities for sale. It must enter a 
 market in which State banks, private banks, and the 
 trust companies, — besides, on occasion, in a smaller 
 way, the savings banks, — are also buying and selling. 
 If we take into account the holdings of similar unen- 
 cumbered securities by these institutions for five 
 years they appear as follows: 
 
 Railroad Securities 
 
 (Amounts in Millions) 
 
 1898 1899 1900 ipoi 1902 
 
 State banks $.6 $.2 S .3 $2.4 $3.3 
 
 Private banks .7 .3 .5 1 .3 .7 
 
 Trust companies 14.6 12.5 10.4 22.0 18.0 
 
 Totals $15.9 $13.0 $11.2 $25.7 $22.0 
 
 Banks, Stocks, etc. 
 
 (Amounts in Millions) 
 
 1898 1899 1900 1901 1902 
 
 State banks $2.6 $2.2 $.4 $.1 $ .^ 
 
 Private banks .3 .3 .4 .4 .4 
 
 Trust companies .9 1.2 .2 3.2 2.6 
 
 Totals $3.8 $3.7 $1.0 $3.7 $3.2 
 
 Industrial and other Securities — not including United States and 
 Municipal Bonds 
 
 (Amounts in Millions) 
 
 1898 1899 1900 1901 1902 
 
 State banks $121.5 $160.7 $179.6 $228.5 $267.1 
 
 Private banks 2.1 2.0 2.4 4.1 3.2 
 
 Trust companies 137.8 216.4 30S-9 3S8-S 412-8 
 
 Totals $261.4 $379.1 $487.9 $591.1 $683.1 
 
152 THE BANK AND THE TREASURY 
 
 Total Securities Owned by State Banks, Private Banks and Trust 
 Companies 
 (Amounts in Millions) 
 
 1898 1899 1900 1901 1902 
 
 Railroad securities $15.9 $13-° ^n-^ $25-7 $22-° 
 
 Bank securities 3.8 3.7 i.o 3.7 3.2 
 
 Industrials, etc 261.4 379-i 487-9 59i-i 683.1 
 
 Totals $281.1 $395-8 $500.1 $620.5 $708.3 
 
 Total Stocks and other Securities Owned by Commercial Banks 
 (Amounts in Millions) 
 
 1898 1899 1900 190T 1902 
 
 National banks $255.2 $320.4 $367.3 $448.6 $493-i 
 
 Other commercial banks, etc. 281.1 395-8 500.1 620.5 7°S-3 
 
 Totals $536.3 $716.2 $867.4 $1069.1 $1201.4 
 
 The foregoing exhibits show that in State banks, 
 in private banks, and in trust companies, there has 
 been a remarkable increase in securities held, and 
 that nearly the whole amount has been in stocks 
 and bonds other than "Railroads," "Banks," or 
 "Municipals" (for municipals are not represented 
 here). The increase has been largely in those secu- 
 rities known as "Industrials, etc." We also know 
 that many of these institutions have been active in 
 underwriting industrial and other current issues; in 
 
 so far as these are represented they 
 dustrMsZtc.^ '""'^^^ still in the form of "undigested 
 
 securities." We have no sufficient 
 data for the closer classification of "stocks and other 
 securities" owned by National banks, but it may 
 fairly be assumed that they have been somewhat 
 similarly involved in the practice that has been so 
 
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WHY SECURITIES AB.E NOT CONVERTIBLE 153 
 
 prevalent with private banks, State banks, and trust 
 companies. In this practice, which ties up the capi- 
 tal of banks in securities which are not readily ac- 
 ceptable as collateral, and in the efforts of the banks 
 to prevent investment loss in forced sales, may be 
 found sufficient reason for the present "inconvert- 
 ibility of securities." 
 
 The Effect of Call-Loans on the Use of Unencumbered 
 Securities as Redemption Equipment 
 
 The uncomfortable financial gastritis caused by 
 "undigested" industrials, however, will not explain 
 the persistence of similar conditions of inconverti- 
 bility extending back thirty or forty years. For 
 explanation of this another market situation may be 
 appealed to. From the report of the Comptroller it 
 appears that at the time of greatest liquidations, 
 September, 1902, these various banks were holding 
 collaterally secured loans to the amount of $2,146,- 
 6oo,ooo,to which, if we add a twenty per cent margin 
 as a basis for estimate of the stocks held in trust, 
 would make an aggregate of $2,575,900,000 of secu- 
 rities, to the sale of which they look for the payment 
 of loans. In this situation may be found a contin- 
 uing or persistent force — a reason in self-preserva- 
 tion—for the inconvertibility of securities owned. 
 To attempt to sell their own holdings of $1,201,400,- 
 000 in time of financial strain would threaten the 
 market for more than twice that amount of collateral 
 
154 THE BANK AND THE TREASURY 
 
 security, on the sale of which loans depend for pay- 
 ment. The loss from sudden conversion of "stocks" 
 owned, therefore, would be a double one. It would 
 depreciate the properties owned by the bank and at 
 the same time would threaten loss on collateral loans. 
 In these circumstances the only solution, without loss 
 to the bank, is such a careful handling as will allow 
 the bank to obtain money desired without any sud- 
 den shock to the stock market. 
 
 The Need for Separate Capitalization for 
 "Speculation" and "Underwriting" 
 
 The present and continuing practice of under- 
 writing and of loaning on collaterals to speculators 
 gives the key to the inability of the banks to use this 
 class of capital assets to support their credit — to the 
 inconvertibility of "unencumbered securities." In- 
 stead of looking to stocks and bonds for investment 
 of "surplus capital-resources" and holding these as 
 a means of protecting the money-reserve from deple- 
 tion, instead of looking to these investments as a part 
 of the equipment provided out of capital to support 
 the current-accounts of customers (the stock in trade 
 of the bank) there has ever been a temptation for 
 The different banks to turn a part of their capital- 
 f^^iesebZ- resources away from the commercial 
 nesses banking business. In the early part 
 
 of the past century real-estate was the attraction; 
 investment and speculation in this came to be so 
 
WHY SECURITIES ARE NOT CONVERTIBLE 155 
 
 dangerous a practice as to bring forth universal con- 
 demnation, which resulted in the enactment of stat- 
 utes prohibiting real-estate purchases. Later, stocks 
 and bond issues of corporations attracted the funds 
 of the banker. The more recent practice has been 
 defended on the ground that securities are more 
 readily convertible into cash. As a matter of prac- 
 tice, however, under our present system of "reserves" 
 and "call-loans," they are not and never have been 
 quickly convertible assets when an invested capital 
 reserve is really needed to support customers-ac- 
 counts. They have proved not quite so dangerous to 
 our credit institutions as real-estate investments, but 
 nevertheless dangerous; and the institution so owning 
 "securities," when sorely pressed, have done the only 
 thing possible to do, viz., turned to commercial paper 
 assets, forced loans, and shifted the burden as far as 
 possible on the community, rather than themselves 
 suffer an investment loss on forced sales of securities. 
 The principle that the commercial bank should 
 furnish funds for speculation without special capi- 
 talization for that purpose is a wrong 
 ^7Sr "' one; it results in destroying, in part 
 at least, its usefulness as a com- 
 mercial banking institution.* If marginal speculation 
 is to remain a prominent feature in financial circles, 
 
 *To show the disturbing influence of speculation the chart on page i6o 
 has been prepared. From this it will be seen that during the period from 
 1S93 to 1897 the individual accounts (deposits) and the "loans and dis- 
 counts" of New York banks followed along parallel lines. This was a 
 
156 THE BANK AND THE TREASURY 
 
 institutions intended primarily to serve such a con- 
 stituency should stand on their own basis of capitali- 
 zation, and should have a financial equipment in the 
 form of resources especially adapted to success in 
 the rendering of such service. The commercial bank 
 which builds up a "call-loan" constituency encour- 
 ages a practice and a use of banking capital which in 
 time of strain not only precludes the possibility of 
 converting unencumbered securities owned, but also 
 loads the market with collateral loans and shuts the 
 door of opportunity for obtaining money, by sale or by 
 hypothecation of capital-resources held in reserve. 
 
 period during which New York banks were supporting a relatively small 
 volume of speculation. From 1897 to 1902 the speculative activity of 
 the metropolis was the most conspicuous feature. The disturbance of 
 commercial-credit relations is traced in the erratic movement of the lines. 
 At times the loans and discounts nearly equal current obligations. Again, 
 within a few months there will be a disparity amounting to several hun- 
 dred millions of dollars. This speculative result cannot be considered a 
 wholesome one for a commercial bank. 
 
Chapter XII 
 
 DANGEROUS ASSUMPTIONS MADE BY THE GOVERN- 
 MENT WITH RESPECT TO CURRENCY AND 
 BANKING 
 
 The failure on the part of legislators and admin- 
 istrative officers to appreciate the distinction between 
 the functions of the Treasury as the sole agency of 
 money-issue, and the functions of the commercial 
 bank as the sole agency for the issue and redemption 
 of commercial-credit used as current funds under the 
 American financial system, has led to legal provisions 
 and to practices which are in large measure respon- 
 sible for the undesirable condition of our circulating 
 Failure to appe- medium as well as for the present 
 ciate character of inadequacy of bank capitalization and 
 Treasury issues redemption equipment. It was not 
 until the last decade that a proper appreciation was 
 had of the provisions to be made for the support of 
 the credit-moneys issued by the Treasury. This 
 having been brought to the attention of the country 
 in 1893, the same motives which moved the people 
 to demand security for State bank issues after the 
 fall of the first and second banks of the United States, 
 the same motive that sanctioned the establishment 
 
 [157] 
 
158 THE BANK AND THE TREASTIRY 
 
 of an independent Treasury, that made the issues of 
 the National Treasury more acceptable in business 
 than the mixed and uncertain State bank circulation, 
 and that brought popular support to the National 
 banking system, called forth an expression favorable 
 to "sound money" on every occasion that the issue 
 has been raised. 
 
 The controversy of the recent money campaigns 
 was not one as to whether the Treasury should so 
 fortify itself that its issues or money promises should 
 be immediately redeemable ; this point was conceded 
 by both factions. The question was as to the stand- 
 ard to be adopted as a basis for issue and redemption. 
 The silver party urged that gold was becoming rela- 
 tively scarce, as evidenced by an almost continuous 
 fall in prices since 1873, and that the adoption of a 
 gold standard of money and credit would perpetuate 
 conditions unfavorable to commerce and industry; 
 
 the gold party held that the adminis- 
 Contention in the , ,. .... ■, r ^i 1 ^ ^ i 
 
 money campaign trative attitude for the last twenty 
 
 years had been to make all contracts 
 for money payment gold obligations, and that a 
 change of standard such as the silver party urged 
 would cause financial disturbances that would be 
 ruinous. The refusal of the silver party to make a 
 declaration that all past contracts should be con- 
 sidered as gold contracts lent color to accusations of 
 intention to dishonor. But whatever may be said 
 of the standard controversy^ it must be admitted that 
 
ASSUMPTIONS MADE BY THE GOVERNMENT 159 
 
 the sentiment for "sound money* — a money every 
 dollar of which would be redeemed on demand at par 
 in the standard adopted — was practically unani- 
 mous. In the elections which followed the people 
 chose gold for the money standard, and the subse- 
 quent increase in gold production has reacted in 
 price ratios in such manner as to make this choice 
 acceptable to both parties and to eliminate the 
 "standard" controversy from politics. The effect 
 of the last few years has been to so fortify the Treas- 
 ury as to enable it to redeem its money obligations in 
 gold — in other words, to make a gold standard 
 credit-money a sound one. 
 
 The recurrence of a period of credit contraction 
 and financial depression has brought the other arm 
 of our financial system under popular as well as 
 official scrutiny. As never before the public is be- 
 ginning to realize that there is something wrong with 
 institutions of commercial-credit. Animated by the 
 same motive as in the past — a desire for soundness 
 Failuretoappre- i^ the financial system — but con- 
 ciate the character vinced also of the need for a sort of 
 of bank-credit adjustment that will make the system 
 capable of adapting itself to the fluctuating demands 
 for commercial accommodation, the thought of the 
 people is again turned toward financial reform. 
 
 The "soundness" required of banks as public 
 agencies of commercial-credit is not only one of 
 ability to pay, but ability to pay without disturbing 
 
160 THE BANK AND THE TREASURY 
 
 the credit relations of the country. With respect to 
 the banks, as well as the Treasury, it is recognized 
 A campaign for that in the past the Government failed 
 elasticity in to appreciate its responsibilities. It 
 ^ has also failed to grasp the problem 
 
 before it; it has assumed an attitude that has proved 
 harmful — has engaged assumptions which must be 
 abandoned before a better adjustment can be made 
 to American business conditions. 
 
 The Assumption 0} the Government that the "Cash-" 
 
 Reserve is the Only Reserve Needed for 
 
 Credit-Accounts 
 
 The dangers inherent in the reserve practice have 
 
 been discussed in another relation. It may also be 
 
 considered with respect to the attitude of the Federal 
 
 Government. The first effect of the assumption that 
 
 the "cash "-reserve is the only guarantee needed for 
 
 credit-accounts was the incorporation of this fallacy 
 
 in the National Bank Act. It has already been 
 
 pointed out that such a legal requirement may be 
 
 complied with without the use of a bank's capital by 
 
 borrowing money from customers or from other 
 
 banks; it has been further shown that 
 Gives no key to .,_ . . . 1 , 1 -■-, 1 
 
 capital strength *e permission given under the Bank 
 
 Act for a bank to count its loans to 
 other banks as "cash" allows the banks to inflate 
 their legal reserves by process of maintaining "mu- 
 tual balances." The lack of legal provision requir- 
 

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ASSUMPTIONS MADE BY THE GOVERNMENT 161 
 
 ing a coordination of equipment provided by means 
 of capitalization with total "deposits" or credit- 
 accounts outstanding leaves no protection to the 
 customer and no adequate guarantee of such a char- 
 acter of soundness for commercial-credit-funds as 
 will protect the public. 
 
 Aside from the capital weakness induced by prac- 
 tices thus encouraged, another effect of the provisions 
 of the Bank Act, based on this assumption, is to 
 leave the system without possibilities of credit ex- 
 pansion when there is a coincident increased demand 
 on the banks for money — i.e., without power to 
 adapt itself to the expanding and contracting de- 
 mands for commercial accommodation without vio- 
 lation of the " legal preserve " requirement. Under 
 such a provision of law, the money-reserve itself is 
 Government con- ^^^ available to meet demands on 
 trol of this kind credit obligations. And there is no 
 forces inelasticity provision made for obtaining more 
 money to support new credit-accounts. As a result, 
 when demands increase, accommodations must be 
 restricted in order to preserve the integrity of the 
 legal money-reserve kept by the bank to meet money- 
 demands. The Government, through its Depart- 
 ment of Comptrol, therefore, having first set up a 
 fund to guarantee the financial integrity of the insti- 
 tutions issuing credit, places itself in the way of the 
 bank using this fund for the very purpose for which 
 it was created. By this attitude the Government 
 
162 THE BANK AND THE TREASURY 
 
 often forces a bank to fall back on its constituency 
 and force a reduction in accommodations. Thus, 
 under the operation of the assumption made, the 
 legal system of control becomes an element of pri- 
 mary disturbance, and the bank, even when finan- 
 cially sound, may fall into the hands of a receiver, 
 thus adding still further to the credit-constrictions 
 and credit-contractions against which complaint is 
 entered. 
 
 Another result of the Law requiring a minimum 
 reserve to be kept, and looking to this only for pro- 
 tection of accounts, is to limit the exercise of functions 
 
 of comptrol and prevent inquiries 
 Limits intellieent !• i i.- i i. i i j r 
 
 control which are essential to a knowledge of 
 
 financial condition. Before reform in 
 
 legislation can take place there must be a complete 
 
 abandonment of the "reserve" principle which now 
 
 stands as a fundamental feature of the Bank Act. 
 
 An Assumption that the "Note-Issue" is not a Loan 
 to the Bank without Interest 
 
 A second assumption that has led astray legisla- 
 tors and bankers is, that the "note-issue" is not a 
 Government loan to the bank without interest. It 
 
 has before been pointed out that the 
 Weakens capital , • ■•, • jUii_-u i i.- 
 support ^'^^^ ^^ obtamed by the bank entermg 
 
 into a contract with the Government 
 
 for the delivery of an amount of money equal to 
 
 the amount of issues received, the contract for pay- 
 
ASSUMPTIONS MADE BY THE GOVERNMENT 163 
 
 ment being secured by United States bonds. It 
 has also been observed that this amounts to an ex- 
 change of obligations by which the Government 
 (through the bond market thus created) receives 
 money for its purposes and the banks obtain "issues" 
 with which to do business, a device which ties up the 
 capital of the bank and places on it the duty of first 
 redemption of the note. But the weakening of the 
 capital support to the banking business — that sup- 
 port available for redemption of current credit-obli- 
 gations — is not the only public danger which lies in 
 the assumption. 
 
 Viewing the bank-note as a money-issue, the policy 
 of the Government favoring the expansion of this 
 part of the currency is directly opposed to its policy 
 restricting issues of Treasury-notes. Since the close 
 of the Civil War there has been a growing sentiment 
 favoring the payment of the outstanding National 
 floating debt in the form of "greenbacks." Cam- 
 paigns for "sound money" have been waged to re- 
 duce demand-credit-obligations and to secure the 
 foundations of gold-standard currency-issues. One 
 Induces currency of the most threatening features of 
 disturbances our whole financial system has been 
 
 throughnote-issues ^^^ j-giatively large amount of credit- 
 money obligations proportionate to the reserve kept 
 to enable the Treasury to redeem. The operation 
 of the "endless chain" through the Treasury in 1893, 
 the shock to credit, private and public, following the 
 
164 THE BANK AND THE TREASURY 
 
 threatened disappearance of the gold-reserve, the 
 pledges of 1896, the currency act of 1900 increasing 
 the reserve to $150,000,000, making the reserve a 
 trust fund and securing it against impairment by 
 giving to the Bureau of Issues and Redemption a 
 first lien on the current assets of the General Treas- 
 ury, the loan power placed in the hands of the Treas- 
 urer as a means of giving force to the instruction to 
 maintain the gold standard of credit-money redemp- 
 tion, the increasing demands for the retirement of 
 Treasury-notes and proposed legislation for making 
 silver subsidiary, — all these acts and tendencies are 
 directly antagonized by an increase in bank-note 
 issues. By the inflation of the currency with paper 
 issues in the form of collateral notes that may be 
 arbitrarily injected into the circulation as a matter 
 of high finance, gold and gold-bearing obligations of 
 the Treasury may be supplanted and the money 
 system itself may become unsettled. 
 
 Another dangerous feature of the practice of note 
 inflation is in the possibility of increasing obligations 
 for gold payment (for the note is ultimately reduced 
 to this) without making any additional provision for 
 gold redemption-reserves in the banks or in the 
 
 Treasury. By law the banks must 
 Lessens gold re- , , , -j- ^ j t v 
 
 serves P^y ^"^^ notes if presented. In its 
 
 original form the Law contained pro- 
 visions for a redemption-reserve. This, however, has 
 been repealed to further stimulate the investment of 
 
ASSUMPTIONS MADE BY THE GOVERNMENT 165 
 
 bank capital in Government bonds. Having in it 
 possibilities of increasing issues to such a point as to 
 drive gold out of circulation it lays bare our credit- 
 money system at its most vulnerable point. The 
 danger is increased at two particulars: (i) The gold 
 supply may by exportation become too small to 
 support the credit-issues of the Treasury, without 
 provision made for Government loans to stimulate 
 gold importation; and (2) the paper-issues may be- 
 come so far expanded that the present stock of gold 
 may be found inadequate even though no exportation 
 takes place. 
 
 That such a result is not beyond reason may ap- 
 pear in the experience of the last three or four years. 
 Since the bond refunding acts and the Law of 1900, 
 amending the Bank Act, this inflation of the currency 
 has been marked. February 4, 1898, only $184,106,- 
 000 of National bank-notes were outstanding; Feb- 
 ruary, 1900, the amount had risen to $204,916,000. 
 One year later they had increased over $104,654,000. 
 September 9, 1903, the amount of notes outstanding 
 are reported as $375,037,000, and in July, 1904, the 
 Treasury reported over $449,000,000 of bank-notes 
 in the hands of banks and in circulation. And the 
 increase still continues. The effect of 
 
 Ji'lLllTLt'.. the increase in bank-notes on the 
 crease m issues 
 
 money circulation is identically the 
 same as an increase of like amount in greenbacks 
 would have been. The greenbacks and silver obli- 
 
166 THE BANK AND THE TREASURY 
 
 gations remaining about the same, the bank-note has 
 supplanted that much of gold, has made unprofitable 
 gold importation, and at times has made profitable 
 the exportation of the standard metal when otherwise 
 exportation would have been unprofitable. For ten 
 years we have been devising ways and means to 
 retain a larger amount of gold as a foundation for 
 money and credit. Since 1897 we have almost 
 doubled our credit and increased our money cir- 
 culation nearly $900,000,000. At the same time we 
 have, by encouraging an increase in bank-notes, effec- 
 tively barred the way to gold importation until the 
 note expansion shall have reached a point to produce 
 a shock in credit relations. Many editorials have 
 been written in financial periodicals attempting to 
 account for the gold movement, but, strangely enough, 
 the influence of the bank-note inflation has been over- 
 looked. The great public danger which lies in the 
 assumption that a note-issue is not a loan to the bank 
 without interest is to be found in the fact that such 
 an assumption permits the bank-note to be made a 
 part of the permanent money stock instead of forcing 
 upon it an emergency character which will allow of 
 its issue with profit only when the money-demand is 
 increased, and will compel retirement when money- 
 demands fall off. 
 
ASSUMPTIONS MADE BY THE GOVERNMENT 167 
 
 The Assumption that "Deposits" by the Govern- 
 ment are not Loans without Interest 
 
 The third dangerous assumption is, that so-called 
 "deposits" of money by the Government are not 
 loans to the banks without interest. Mr. Eckels 
 pleads for treating the Government deposits in the 
 same manner as customers' deposits. He holds that 
 the attitude of the Government requires security for 
 deposits is one which tends to discredit the bank. 
 This conclusion may be conceded to 
 for deposits ^^^ extent that the Government is in 
 
 •need of active credit-accounts in the 
 transaction of its business. The fact is, however, 
 that at the time Mr. Eckels' comment was offered, 
 the Government had on deposit with banks about 
 $170,000,000, whereas its current needs, or its use for 
 credit-accounts of banks, amounted to only from 
 $5,000,000 to $10,000,000 as represented in the de- 
 posits of disbursing officers. The balance, some- 
 thing over $160,000,000, was an inactive account, and 
 was in the nature of a loan to the banks without 
 interest. 
 
 A business man who has from ten to twenty times 
 as large a cash fund as is needed for current use, cer- 
 tainly would not be expected to keep this on deposit 
 in a commercial bank, unless the commercial bank 
 made an arrangement with him to pay him a liberal 
 rate of interest on his deposit. Such an arrangement 
 
168 THE BANK AND THE TREASURY 
 
 would amount to a loan from the customer to the 
 
 bank. When such deposits are made they are usually 
 
 represented by certificates-of-deposit, 
 The "deposit" a j i. *. i. 
 
 loan ^^ ^^^ under such agreements as to 
 
 distinguish them clearly from the ac- 
 tive accounts of customers. To argue that a deposit 
 of aU the revenues of the Government should be made 
 with the banks, and that these should be considered 
 as an ordinary customer's account, does not comport 
 with the practice of banks nor with the business rea- 
 soning of those very men who are now using the 
 argument for the purpose of bringing public opinion 
 to support such a conclusion. 
 
 If the contention were that the Government should 
 make such deposits, but that the bank was to pay a 
 reasonable interest for the same, then there might be 
 some ground of support to the argument. But in 
 
 How " deposits '' i\ye^ same process of reasoning by 
 
 without interest i • i •, • i i j , i , ^^i /~> 
 
 weaken capital ^^ich it IS held that the^ Government 
 
 support should be considered in the same 
 
 light as other depositors, the advocates of this doc- 
 trine also affirm that the bank "cannot afford to pay 
 interest on such deposits." The result of such a 
 transfer of money from the United States Treasury 
 to the banks has been to encourage the banks in time 
 of minimum money-demand to rely on the funds of 
 the Government for the support of their own credit- 
 accounts, instead of relying on their own capitaliza- 
 tion. 
 
ASSUMPTIONS MADE BY THE GOVERNMENT 169 
 
 The weakening of capital support to bank-credit- 
 accounts is not the only cause for public anxiety. 
 The "deposit" of general funds of the Treasury 
 leaves nothing to support the gold-reserve but bank- 
 credit. Under such a financial plan we would have 
 a credit-money that in time of special financial stress 
 would find its foundation in the credit of the very 
 institutions on which the greatest pressure is brought 
 Makes the Gov- ^^ money payment. Gold redemp- 
 ernment a disturb- tions and the maintenance of the 
 mg jac or Treasury reserve when redemptions 
 
 are made in emergency must fall on the bank. But 
 the monetary disturbance does not end here; a "de- 
 posit" of gold by the Government causes the bank 
 to dispose of gold previously held. This dislodge- 
 ment of gold from the reserves also leaves the bank 
 in a less advantageous position for redeeming its 
 note-issues when demands may be made on these. 
 The whole effect is the same as a credit-money in- 
 flation; it tends to increase gold exportation ia time 
 of minimum money-demand, and to accentuate or 
 increase gold importation in time of maximum 
 money-demand. 
 
 In appeals to the confidence of the public it is 
 common practice for banks to advertise themselves 
 as "Government Depository." The implication is 
 that such a relation should commend them to the 
 public. In the light of the present financial relations 
 question might be raised as to whether borrowings 
 
170 THE BANK AND THE TREASURY 
 
 of this kind should not be used as a reason why the 
 pubUc should seek another institution for current 
 credit accommodations. The conclusions just an- 
 nounced do not mean that the practices on the part 
 of the Government of loaning to the banks by "is- 
 sues" and by "deposits" may not be used to great 
 advantage, and that this advantage 
 
 Possibilities in , , i. i o i. li. • 
 
 these practices may not be mutual. Such a result is 
 possible, provided the practice is sub- 
 ject to regulation which will prevent the loan from 
 weakening the institution of commercial-credit. To 
 accomplish such results and to secure the advantage 
 referred to, however, the Treasury-deposit to the 
 bank must be properly considered as a loan from the 
 Government to the bank, which is made under such 
 conditions only as to provide a market in which the 
 banks may obtain money by hypothecation of capi- 
 tal-resources at a fair market rate, when otherwise 
 in the open market they might be forced to pay rates 
 which would force a curtailment of commercial ac- 
 commodations. 
 
Chapter XIII 
 
 ADVANTAGES OF NATIONAL BANKS UNDER THE 
 
 PRESENT PRACTICE OVER STATE AND 
 
 PRIVATE BANKS 
 
 Other conditions being equal there are two ways 
 only, under the present practice, by which a National 
 bank may enjoy an advantage over private and State 
 banks: The first advantage lies in the possible in- 
 creased income to be obtained from 
 Two advantages r j j i_ • r << • n 
 
 enjoyed bonds used as a basis for issues , 
 
 the second advantage lies in the pos- 
 sible increased income to be derived from "Govern- 
 ment deposits." At the ruling market prices and 
 the present rate of interest receivable, the possibility 
 of obtaining an increased return on investments in 
 Government-bonds without the issue-privilege is 
 small, if not wholly lacking. A statement of the net 
 investment-return on bonds as computed by the 
 Government Actuary is as follows: 
 
 Investment-Return stated in Dollars per Hundred based on January 
 Prices, 1895-1902 
 
 5s of 1904 4S of 1907 4S of 1925 3S of 19x8 3S of 1930 
 
 1895 $3.01 $2.76 _ _ _ 
 
 1896 3.29 3.01 $3.21 
 
 1897 2.88 2.71 2.91 - - 
 
 1898 2.55 2.33 2.55 - - 
 
 1899 2.4s 2.32 2.48 $2.54 
 
 1900 1.81 1.91 2.25 1.7s $i.8j 
 
 1901 1. 18 1.69 2.04 1.58 1.75 
 
 1902 1.67 1.72 1.90 I. 1.6529 
 
 [171] 
 
172 THE BANK AND THE TREASURY 
 
 Assuming that all of the Government-bonds held 
 by a National bank are hypothecated for issues, and 
 that "par value" be received in notes, these notes 
 ''Issues" com- ^ay then be used by the bank as 
 pared with legal- money. They may not, however, be 
 tender reserves counted legally as a part of the re- 
 serve. If the notes are used to purchase "commer- 
 cial paper" then the bank may not purchase more 
 "paper" than it has notes, whereas an equal amount 
 of legal-tender money held in reserve to support 
 credit-accounts (deposits) would permit the bank to 
 buy from two to four times as much of the commer- 
 cial paper oflfered by customers (depositors). Such 
 a use of the notes would therefore cause the bank to 
 do busiaess at a loss. 
 
 The bank, however, may make the notes available 
 for the highest banking return by paying them out in 
 response to money-demands (as for example in set- 
 tlement of balances due to distant banks) and hold 
 
 the legal-tender money received as 
 Elements of gain ^ ,, ri-,, . j • v tu 
 
 and loss reserves. This device permits the 
 
 National banks to avoid the disability 
 attaching to the "notes," which prevents the "notes" 
 from being held as reserves, but for the same reason 
 forces the bank-note into general circulation to sup- 
 plant the legal-tender holdings. Assuming that the 
 bank in question succeeds in thus exchanging its 
 entire "issue" for legal- tenders, then the only dis- 
 ability which it suffers is the tying up of the amount 
 
ADVANTAGES OF NATIONAL OVER STATE BANKS 173 
 
 of its capital represented by the "margins," i.e., by 
 the "premiums," the "five per cent fund with the 
 Treasury," etc. With these two factors alone to be 
 considered, then, if the investment return on the 
 bonds were two per cent, and the "margin," including 
 the "premiums" and the "five per cent fund," were 
 ten dollars per hundred (and if again it be assumed 
 that one dollar in reserve will support four dollars of 
 credit-accounts, and that the rate of interest in com- 
 mercial loans were five per cent), then the margin of 
 income lost to the business on account of capital 
 invested in "margins" would equal two per cent or 
 exactly the same amount as the income realized on 
 the bonds. Under such circumstances the advantage 
 to the National bank would be nil. 
 
 The same conclusion may be drawn from the 
 computations of the Government Actuary found on 
 page 33 of the Comptroller's Report, 1902. In this 
 it is assumed that the notes may be invested at the 
 rate of six per cent, and on this assumption the result 
 exhibited is as follows: 
 
 2S of 1930 $6.62 per $100 
 
 3s of 1903 6.16 per 100 
 
 4s of 1907 6.19 per 100 
 
 4S of 1925 5.94 per 100 
 
 Ss of 1904 5.96 per 100 
 
 Such a result does not show any considerable ad- 
 Advantage small vantage from "bond investment and 
 under present issue " as it would not be logical to 
 practice assume that the "note" may be in- 
 
 vested at any higher rate than could the " legal- tender 
 
174 THE BANK AND THE TREASIHRY 
 
 money" used to purchase the bond. Assuming that 
 the note may be used with equal advantage, however, 
 in the above showing, there would be a fraction of 
 one per cent of profit on three classes of bond invest- 
 ments, and a fraction of one per cent of net loss on two 
 others represented. 
 
 In this result, however, the assumption is that the 
 "note" is as useful to the banker as are gold certifi- 
 cates or other forms of money. If this be an over- 
 statement, then there may be, in truth, a loss to the 
 bank on every class of bonds which is here made the 
 basis for actuarial calculation. To say the least, the 
 margin of net profit in "issue" is, in the judgment 
 
 of bankers, so small that few have 
 Possibilities of a m i ^i i j- ^i 
 
 Ig^^ ever availed themselves of the maxi- 
 
 mum issue privilege. Quoting from 
 Mr. Ridgely, in an address delivered on the evening 
 of December i8, 1903, at a banquet given by the 
 New York State Bankers' Association: "In the Re- 
 port of the Comptroller of the Currency just made 
 there is given a table showing the percentage of the 
 issues outstanding to permissible circulation, from 
 1863 to 1902. The maximum of 81.6 per cent was 
 reached in 1882, and the minimum of 44.1 per cent 
 in 1892, and since the Act of 1900 it has been a little 
 over 50 per cent, now being 53.32 per cent. It is 
 hard to figure now whether there is any profit at all, 
 as it depends upon the amount of notes which can 
 be outstanding and the prices of bonds. On circu- 
 
ADVANTAGES OF NATIONAL OVER STATE BANKS 175 
 
 lation based on some classes of bonds there is a 
 positive loss." 
 
 In the foregoing discussion the assumption has 
 been that the banks which receive "issues" from the 
 Government have desired to keep them outstanding, 
 and the present practice conforms to the assumption 
 made. When this is done, however, the question of 
 advantage or disadvantage of "issue "-privilege must 
 be considered as pertaining to a use of "issues" in 
 lieu of "credit-accounts," for the purchase of legal 
 "cash "-reserves. In the first case, there would be a 
 "Notes" com- positive loss in that the capital of the 
 pared with "de- bank could not be used for bankmg 
 ^"^^^^ purposes; in the second case, the in- 
 
 creased income from bonds would not more than 
 compensate for the margin of capital which is made 
 unavailable — being invested in "margins." The 
 point here made is, that viewed in the light of present 
 practices (i.e., looking upon the issues as a form of 
 funds to be currently used as a part of the permanent 
 money stock) the issue-privilege is of little or no 
 advantage to the National bank, and in certain cir- 
 cumstances may stand in the way of obtaining the 
 best business results. 
 
 Advantages in the "Government Deposit" Privilege 
 
 The second special privilege accorded to the Na- 
 tional bank by the Government (viz., the privilege of 
 hypothecating invested capital-resources, or "gilt- 
 
176 THE BANK AND THE TREASURY 
 
 edge" securities, for Government loans) presents a 
 
 somewhat more alluring prospect. By such an 
 
 arrangement, under present practice, the money 
 
 surplus of the Treasury is looked upon as a prize to 
 
 be taken for the use of banks as "reserves" without 
 
 the payment of interest, in exchange for demand 
 
 obligations against which no "reserve" need be kept. 
 
 The advantage in this is two-fold: (i) The money 
 
 received from the Government does 
 Elements oj ad- , „ ., , i j- i-i-. i j 
 
 vantage ^°^ suffer the legal disability placed 
 
 on "issues." It is in the form of gold 
 or demand obligations of the Government (credit- 
 money) payable in gold. (2) It is procured at a less 
 expense than "issues," not being subject to a tax, 
 and being relieved from the cost of plates, from 
 maintenance of a redemption fund, etc. Assuming 
 that the amount invested in bonds is a part of the 
 capital which would be permanently needed for 
 "cash-reserves," and that the bonds were hypothe- 
 cated, then the money obtained from the Govern- 
 ment could be used to the same advantage as if it 
 had not been invested in the bonds. The bank, 
 however, would be required to use more capital to 
 obtain the amount necessary for current redemptions. 
 The only elements to be considered in estimating 
 profit or loss in the practice could be found in the 
 capital-return on the bonds and the amount of bank- 
 ing capital tied up in "margins." In this there 
 might be a small advantage over the "issue." But 
 
ADVANTAGES OF NATIONAL OVER STATE BANKS 177 
 
 assuming that the amount so invested in bonds were 
 a part of the "in vested-reserve" {i.e., the capital 
 surplus over and above the permanent cash require- 
 ments), then the money obtained from the Govern- 
 ment might again be re-invested to the same advan- 
 tage as if no bonds had been purchased. Assuming 
 that the margin were ten per cent and that the net 
 return on the bonds were two per cent, the bank 
 would obtain twenty per cent on the amount invested 
 in the margin. 
 
 Reasons why the "Deposit-Loan" Privilege is more 
 Advantageous than the "Issue-Loan''^ Privilege 
 
 It is not in this character of items, however, that 
 the large advantage lies. The practice of the Gov- 
 ernment being to make "deposit- 
 ^^ Deposit-loans" ^ ■<■, ^ ^ ■ • 
 
 in emergency ^o^ns" only when emergencies arise, 
 
 the National bank has a Government 
 fund at hand to which it may apply for cash in time 
 of greatest need. This practice is sustained by the 
 history of nearly every financial stringency since the 
 establishment of the National banking system, when 
 the Government was in a financial condition to lend 
 aid. During the period of forced liquidation from 
 1 90 1 to 1903 the aid lent by the Government to the 
 National banks was the most striking single feature 
 in giving support to the money market. An addition 
 of over $100,000,000 to the money-reserves of Na- 
 tional banks by transfer from the Treasury within 
 
178 THE BANK AND THE TREASURY 
 
 a few months went far toward preventing a wholesale 
 collapse in the overstrained credit of commercial 
 banks, while they were slowly applying pressure to 
 those who had obtained credit-accounts in exchange 
 for collateral loans. 
 
 A private bank or a State bank in time of financial 
 stress must look to the market for funds. To obtain 
 money with which to maintain its credit-accounts, 
 without curtailing loans to customers, it must convert 
 some of its capital-assets. This may be done either 
 by sale or by hypothecation. If by sale, then the 
 bank must take the market price for securities, and 
 on an unfavorable market must suffer an investment 
 loss. If by hypothecation, then the bank must pay 
 the market rate for money. The National bank, on 
 Advantage of the Other hand, if it has "gilt-edge" 
 "emergency" loans securities "reserved," may obtain 
 without interest ^^^^^ ^^^^ ^^^ Government by hy- 
 
 pothecation free of charge — i.e., without payment 
 of any interest at all. To illustrate this advantage : 
 Let us suppose that the market for securities is five 
 per cent below the price paid by the bank. To sell 
 capital-resources under such conditions would entail 
 a direct investment loss of five dollars per hundred. 
 Again let us suppose that the market rate for money 
 has risen to ten per cent in the market, then this 
 extraordinary rate must be paid on hypothecation. 
 Either circumstance would put the State bank or 
 private bank at a disadvantage in competition with 
 
ADVANTAGES OF NATIONAL OVER STATE BANKS 179 
 
 the National bank, which may obtain "issues" or 
 "deposits" from the Government on hypothecation 
 of its investments. 
 
 The "issue-privilege" might be used with the 
 same advantage as the "deposit-privilege" if the 
 banks chose so to do. The difference lies in the 
 practice of the Government rather than in the nature 
 of the right. The "deposit-loan" privilege has been 
 "Issues not ^'^ opportunity extended for the con- 
 loaned in enter- version of "invested-reserves" or re- 
 ^^"'''^ serve capital-resources in time of 
 
 emergency, thus seeming to increase the banking 
 power; the "issue "-privilege is an opportunity to use 
 "money-reserves" for direct investment, which seems 
 to permanently increase the money stock without 
 adding anything to the banking power. This con- 
 clusion is drawn from present practice under the 
 National Bank Act, and does not reflect on the pos- 
 sibilities of using both privileges to a much better 
 result. 
 
Chapter XIV 
 
 THE AMOUNT OF ELASTICITY FOR WHICH PROVISION 
 
 IS TO BE MADE 
 
 An essay on elasticity and sound banking would 
 be without bearing if it failed to consider the amount 
 of fluctuations and demands for current funds. And 
 such a consideration, to be of value, must have 
 reference to commercial and financial experience, 
 rather than to arbitrary conjecture. The current 
 funds for which demands are made in business are 
 of two kinds, viz., money and credit. Each of these 
 has its own peculiar history and importance. Of 
 fluctuations in total money-demands the statistics 
 published by the Department of the Treasury are 
 the best record. 
 
 Fluctuations in Total Money Supply and 
 Demands of the Country 
 
 The general money supply is increased or de- 
 Variations in creased by coinage and redemption, 
 total national by importation and exportation. Aside 
 money-demands ^^^^ ^^^^^^ ^^^ j^^^^^^ ^^ variation 
 
 are comparatively insignificant. From the Treasury 
 statistics it is found that the greatest variation 
 
 [180] 
 
AMOUNT OF ELASTICITY REQUIRED 181 
 
 within a period of a single year since 1890, allowing 
 for the average rate of increase, is about $244,000,- 
 000, or about ten per cent of the National money 
 supply. It would seem that the fluctuation in total 
 money supply of the country is not a serious matter 
 — that the increasing and decreasing need of the 
 future, as in the past, may readily be met through 
 present agencies of coinage, issue, and importation 
 without seriously disturbing the world's markets. 
 
 But the fluctuations in total National money-de- 
 mand with respect to total money supply are not as 
 significant as are the variations of supply and demand 
 with respect to the several financial groups and insti- 
 tutions of which the National system is composed. 
 This is true for the reason that within the National 
 group specific variations of much larger proportions 
 Greater impr- ^^7 be completely lost sight of. For 
 tance of variations example : Within a period of a year the 
 inspecific demand treasury may show a monetary loss 
 of $250,000,000, while the bank-reserves may show 
 a gain of equal amount. These fluctuations would 
 not in any manner affect the total money supply of 
 the country. Again, the' banks might lose $250,000,- 
 000 from their reserves and the money in circulation 
 among the people might increase in like amount. 
 Such fluctuations would be lost sight of in an exhibit 
 of National money supply and demand. Each year 
 just such fluctuations as these rise like a spectre be- 
 fore thoughtful bankers. 
 
182 THE BANK AND THE TREASURY 
 
 As between the several financial groups there are 
 three separate inquiries: (i) What are the fluctuations 
 in the money-demands made by the Federal Govern- 
 ment and by the several State treasuries; (2) what 
 are the fluctuations in money-demands made by 
 banks for money-reserves with which to support their 
 credit-accounts; and (3) what are the fluctuations in 
 
 the demands among the people for 
 Jpedfif demands "tiU-cash" and "pocket-change," etc. 
 
 As to these several classes of fluctua- 
 tions in demand we may never have complete data. 
 Fortunately, however, we have reports and statistics 
 from which a safe approximation may be reached. 
 The Bureau of Statistics of the Department of Com- 
 merce and Labor furnishes monthly statements of 
 changes in the money supply in the Treasury and in 
 circulation. Five times per year the Comptroller of 
 the Currency makes public the changes in National 
 bank-reserves; several inquiries have also been made 
 with reference to the daily averages of deposits and 
 withdrawals of National banks by months; the State 
 banking and fiscal reports furnish supplementary 
 evidence for different sections. 
 
 Fluctuations in Demands on the Treasury 
 
 Giving consideration first to the demands of the 
 Treasury, the widest variation from the average in- 
 crease in fiscal needs during the last fifteen years has 
 been about $160,000,000. This amount is well 
 
AMOUNT OF ELASTICITY REQUIRED 183 
 
 within the customary money balance carried. But 
 assuming, as now happens, that money-demands on 
 the Treasury may increase, at a time when the reve- 
 nues are decreasing, this customary balance may be 
 threatened with extinction. Nevertheless, the prob- 
 lem of adjustment of Treasury resources to Treasury 
 needs is not in itself a factor disturbing to business. 
 Through the ample loan-power of the Treasurer, 
 money may be obtained by importation at any time 
 that a money surplus in the vaults of the banks is not 
 available to the Government. It is only when the 
 American money rate is low, when the money stock 
 of private institutions is so large that they can afford 
 to sell at rates far below the usual commercial rate, 
 that the fiscal needs of the Treasury will be supplied 
 from the banks. In other words, when the Govern- 
 ment is forced on the world's market to obtain funds 
 for its own needs, importation will serve to strengthen 
 the National money situation. When loans are 
 Fiscal iransac- taken by our own people, such invest- 
 tionshavelMe ^^^^^ ^^^ ^^ ^^^^^ speculative ex- 
 bearmg on elas- ^ 
 
 ticity cesses coincident with a large private 
 
 surplus. The monetary disturbances that in the 
 past have arisen from Treasury needs have been 
 due to threatened attack on the financial integ- 
 rity of credit-money-issues of the Government or 
 to the calling in of loans previously made by the 
 Treasury to the banks. The purely fiscal trans- 
 actions of the Government have served to strengthen, 
 
184 THE BANK AND THE TREASURY 
 
 rather than to weaken, our institutions of private- 
 credit. 
 
 The popular notion that the money in the vaults 
 of the Government is abstracted from the money 
 stock of the country is erroneous. Assuming that 
 $150,000,000 were the average reserve carried in the 
 general fund of the Federal Treasury, and that 
 $100,000,000 were the average money-reserve carried 
 in the vaults of State and local treasuries, this aver- 
 age reserve amounting to $250,000,000 would be 
 taken, not out of the money stock available for busi- 
 ness use in the United States, but out of the money 
 stock of the world. If originally the Treasury re- 
 serves had suddenly been abstracted from the money 
 Notion that Treas- circulation of the United States, it 
 ury jundsreducena-vfould, by business necessity, soon 
 tion's stock in trade ^^^^^^ equalized by importation; 
 
 and after an equilibrium had thus been established 
 this reserve would no longer be a factor in the money 
 market. Only the fluctuations or variations in this 
 Treasury reserve would ever reach the exchanges. 
 An increase in Treasury reserves without importation 
 would operate to decrease the supply for other pur- 
 poses. Conversely, a decrease in fiscal money sup- 
 plies without exportation would operate to increase 
 the money supply of the country which is outside of 
 the Treasury. The effect of this increase or de- 
 crease, it is true, would first be felt by persons or 
 institutions of first contact, but should the amount 
 
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AMOUNT or ELASTICITY REQUIRED 185 
 
 of increase or decrease affect the funding needs of 
 these persons or institutions of first contact, the de- 
 mand or supply would at once be passed on through 
 the market, and the equilibrium again restored. 
 
 Fluctuations in the Money-Demands 0} the Banks 
 and of the People 
 
 From the point of view of elasticity the only money- 
 demands that are serious, and therefore the principal 
 ones to be considered, are those made by the banks 
 as a means of supporting their own credit-accounts, 
 and those made by the people for "till-cash" and for 
 "change," etc. These two demands may be treated 
 as practically the same, since the method by which 
 money is obtained by the people is directly or indi- 
 rectly to draw on the banks. The purpose of selling 
 commercial paper or other bankable assets to a bank 
 The chief fluctua- is to obtain a current fund for use in 
 iions in money- business. Under ordinary circum- 
 demands of hanks ^^^^^^^ ^ customer prefers these funds 
 in the form of a bank-account. But when occasion 
 requires the bank may be asked by the customer to 
 pay its account, and thus money is withdrawn from 
 the bank-reserve. The banks stand in the position 
 of a money market to the people. The banking 
 business is one of selling money "short" and then 
 making delivery "on demand." It is through the 
 process of making deliveries on "short sales" of 
 money by the banks that the reserves are depleted. 
 
186 THE BANK AND THE TREASURY 
 
 The largest fluctuation from the average increase 
 or decrease of money-reserves of National banks 
 recorded during the last fifteen years is about $155,- 
 000,000. This was under circumstances of extreme 
 monetary disturbance, and a general condition of 
 doubt, which in many localities amounted to actual 
 Amount oj das- panic. Assuming that this amount 
 blnkmomy-Z ^^"^^Y represents the maximum fluc- 
 serves tuations in money-demands on other 
 
 banking institutions proportionate to their capitali- 
 zation (and the assumption would seem a conserva- 
 tive one since the National banks are depositories for 
 private banks. State banks, and trust companies), the 
 extreme fluctuation in money-demands made by all 
 banking institutions would not exceed $375,000,000. 
 This may be taken as the degree of elasticity needed 
 in the money circulation to meet the money-demands 
 of banks, and, through the banks, to meet the 
 money-demands of the public* 
 
 Fluctuations in Demands for Credit-Funds 
 
 Turning to the question of elasticity for which 
 provision is to be made in the other form of current 
 funds used by the business community (viz., bank- 
 accounts), the same process of reasoning may be 
 followed. Taking the statistics of National banks 
 five times per year as a basis for calculation, the 
 largest variation in average decrease or increase 
 within fifteen years has been about $875,000,000, or 
 
AMOUNT or ELASTICITY REQtTTRED 187 
 
 about fifteen per cent of the average amount of active 
 bank-credit at the time outstanding. 
 
 Using another basis for calculation of the extreme 
 possibilities of fluctuations in demands for credit- 
 accommodations which may be sought by the busi- 
 ness community, the statistics of daily averages of 
 deposits and withdrawals may be invoked. From 
 the investigation made in 1903, it would appear that 
 the average daily demand on National banks is about 
 $226,000,000, and that this average daily demand 
 fluctuated by months from $258,000,000 to $200,- 
 000,000. In other words, from the month of Jan- 
 Computation uary to the month of August there was 
 jrom daily a fluctuation in daily averages of about 
 
 averages $6o,ooo,ooo. It also appears that the 
 
 total amount of funds provided in the form of bank- 
 accounts changed hands on the average about once 
 in fifteen days — that is, that the average length of 
 time for which the business man provides current 
 funds needful to his business is about half a month. 
 Assuming that $60,000,000 is a maximum fluctuation 
 in daily demands on National banks for credit-ac- 
 commodation, and, further, that the active accounts 
 of all commercial banking institutions is about 
 $6,000,000,000; assuming again that the credit fluc- 
 tuations in other institutions are in like proportion to 
 those of National banks, and that the average period 
 for which credit-accommodation is asked is fifteen 
 days; assuming further that this gross fluctuation in 
 
188 THE BANK AND THE TREASURY 
 
 demand fell within the period of average loans, in- 
 stead of within a period of a year, then the maximum 
 fluctuation in demands for credit-accommodations 
 would rise to $1,800,000,000, or about thirty per cent 
 of the active accounts outstanding. This would 
 seem an extreme estimate as to the elasticity required 
 under conditions most favorable to credit expansion. 
 Using the foregoing conclusions as a basis for 
 determining the amount of elasticity actually needed 
 to date, it would seem that the preparation to be 
 made for response to fluctuating demands for money 
 by banks amounts to about $400,000,000 — i.e., 
 that provision for an emergency currency of about 
 thirty per cent of the National bank capitalization 
 would be adequate to meet every fiuc- 
 
 Total elasticity . . • 1 1 -^1 ^ • 
 
 required tuatmg money-demand without im- 
 
 portation or high market rates. By 
 the same criterion it would seem that the banks 
 should provide for an increasing and decreasing 
 credit fluctuation of from $1,000,000,000 to $1,800,- 
 000,000, or from sixteen to thirty per cent of the 
 average volume of credit-accounts used as current 
 funds. 
 
 How Fluctuating Demands Affect the Present 
 System 
 
 Before reaching conclusions as to the manner in 
 which this fluctuating demand for money and credit 
 may be met, it may also be well to trace the effect of 
 
AMOUNT or ELASTICITY REQUIRED 189 
 
 demands on our system as at present operated. This 
 can best be done by means of charts, which at a 
 glance will give the results of many years of ex- 
 perience. Under our present practice the loan to 
 reserve agents, or the "reserve deposit," is the form 
 Money-demands '^^ which the surplus money of banks 
 of the country fall is invested in time of low demand. 
 on reserve hanks j^ j^ ^^ ^^^ ^^^^^^^ ^^ "calling" these 
 
 reserve loans that the investing bank expects to re- 
 store to itself the funds loaned in time of money need. 
 On Chart V is represented the money-demands made 
 on all National banks of the United States by their 
 customers, and also the demands made by investing 
 banks on reserve agents. From this it conclusively 
 appears that the demand for money made by cus- 
 tomers on all of the many banks of the United States 
 finally falls on the reserve agents — that is, through 
 our peculiar system of investment of capital surplus 
 all of the fluctuations in money-demands of the 
 people fall on a few banks. 
 
 Another fact quite as conclusively appears from 
 Chart VI, opposite page 70, viz., that the demands 
 made on reserve agents finally fall on the banks 
 The demands on of the city of New York. Trac- 
 ZZ^hhiron ™g ^^^ fluctuations on this chart it 
 New York will appear that every variation in 
 
 money-reserves held by banks of the country at large 
 finds a similar variation in New York City banks. 
 That this may the more surely be traced to the 
 
190 THE BANK AND THE TREASURY 
 
 "reserve" system, another chart is prepared (page 
 134), which shows the "amount due from all reserve 
 agents" and the "amount due from New York City 
 banks." The experience here recorded leaves no 
 question but that the avenue through which money- 
 demands reach New York is the "reserve bank." 
 
 Another clue to the situation is found in Chart 
 VIII, opposite page 152. From this it seems that the 
 amount due from New York banks to other banks, 
 in every fluctuating detail, is almost exactly the 
 amount of "money-reserves" kept by the banks of 
 New York to support their own credit-accounts. 
 The borrowed That monetary disturbance would 
 money-reserves of occur under such circumstances is a 
 New York banks conclusion which might be reached 
 by conjecture; that monetary disturbances have 
 actually occurred is a matter of history and expe- 
 rience. The record of the past and the evidences 
 here presented can leave no doubt of the fact that 
 under the present practice of investing capital-re- 
 serves in loans of other banks, every monetary de- 
 mand falls directly on the banking centre and tends 
 to throw the whole commercial-credit system into a 
 condition of unrest — a condition which at times 
 deprives outside banks of the support of central 
 banks, and, again, forces New York banks to resort 
 to Clearing-House certificates for settlement of 
 money-balances among themselves, — a condition of 
 financial paralysis to commercial enterprise. The 
 
AMOUNT OF ELASTICITY REQUIRED 191 
 
 present method of supplying money-demands, a 
 method which simply shifts the demand from one 
 bank to another, is one of the features to be consid- 
 ered in devising ways and means to overcome present 
 defects, and to give greater elasticity to the money 
 medium and greater safety to banking institutions, 
 without forcing the banks again to shift the fluctu- 
 ating demand back to the constituency where it 
 arises, thus standing in the way of extension of 
 commercial accommodation when accommodation 
 is needed. 
 
 Certain other features in credit-demands may be 
 developed with reference to fluctuations and methods 
 of providing credit-supply. From the charts of credit- 
 fluctuations (pages 184, 202) it will appear that 
 quite a different practice prevails in different sections 
 of the country. In the cotton and tobacco States 
 fluctuations in credit-demands are as regular as the 
 seasons. In manufacturing Pennsylvania the varia- 
 tion by seasons is scarcely noticeable. To meet these 
 local conditions quite a different method of capital 
 equipment would seem to be necessary. That a 
 Conditionsindi}- practice prevails in the cotton States 
 jerent sections to peculiar to themselves when com- 
 he considered pared with other sections would ap- 
 pear from Chart X, opposite page 176. In the 
 cotton and tobacco section a large portion of the 
 current credit given is procured from other sections 
 by means of "bills payable" and "notes re-dis- 
 
192 THE BANK AND THE TREASXJRY 
 
 counted." The fluctuations in these two items of 
 account follow the seasons of crop removal with all 
 of the precision that do the credit-accounts of cus- 
 tomers. In a section of variegated industry such as 
 that represented for comparison, this practice does 
 not prevail. On the other hand, it appears that the 
 necessity for meeting periods of extraordinary fluc- 
 tuation, due to industrial depression and speculative 
 reaction, is very much greater, and should be brought 
 into the calculation of credit strain on redemption 
 equipment. 
 
Chapter XV 
 
 POSSIBILITIES OF ELASTICITY UNDER OUR 
 PRESENT NATIONAL BANKING SYSTEM 
 
 Many writers have argued to the conclusion that 
 under our present practice the bank-note has in 
 itself no possible use as an emergency currency. 
 To enlarge more fully on this position three reasons 
 are urged why National bank "circulation" may not 
 be increased to relieve a monetary strain, viz.: (i) 
 That in time of ordinary money-demand the com- 
 Reasons assigned mercial constituency do not wish 
 for inelasticity in bank-notes for use in their business 
 issues ^^ g^j^y gj.ga^^g]- extent than they al- 
 
 ready use them; if they did wish more notes it is 
 affirmed they would call for them at the bank in 
 exchange for commercial paper or other bankable 
 assets sold, instead of opening bank-accounts. In 
 so far as note-issues are increased, therefore, the in- 
 crease is in the nature of a substitution for other 
 forms of money circulation. (2) That in time of 
 extraordinary money-demand under the present prac- 
 tice, the bank has no power to extend either its money 
 or its credit-accounts to meet the enlarged business 
 need for current funds; the bank must literally buy 
 
 [193] 
 
194 THE BANK AND THE TREASURY 
 
 its "notes" from the Government before issuing 
 them; moreover, the "notes" must be purchased by 
 use of the bank's credit, collaterally secured by 
 United States bonds on hand and other collaterals, 
 and these collaterals will cost them more than the 
 amount, in "notes," realized; the bank which is in 
 straits for legal-tender money, therefore, has no 
 power to obtain "notes" from the Government. 
 (3) That when so obtained, the notes may not be as 
 eflfectively used as other forms of money, viz., legal- 
 tender issues of the Government. 
 
 Elasticity as an Individual Banking Problem 
 
 The problem of elasticity to the individual bank is 
 one which pertains to its own credit-accounts. Un- 
 der a highly localized banking system a single insti- 
 tution cannot control the money supply of the nation; 
 it cannot adapt general money supply to general 
 money-demand. If a bank possess powers of credit- 
 note-issue to meet the demands of its own customers 
 Problem one ^or money, it would to this extent be 
 
 which pertains to able to relieve its own necessities and 
 credU-accounts ^^ ^^.^ ^^^^^^ ^^ ^^^ ^^ ^^^ ^^^^^ 
 
 market. But the principal money-demand made on 
 a bank does not come from its customers; it comes 
 from other banks. Under such a system as that sug- 
 gested by the "commercial assets" school, there is 
 no reason to suppose that other banks would accept 
 these notes so issued in settlement of balances. Or, 
 
ELASTICITY POSSIBLE IN PRESENT SYSTEM 195 
 
 if they were accepted, banking experience further 
 suggests that the system itself would prove dangerous. 
 Commercial-assets money-issues are safe only when 
 provision is made for other banks to send issues 
 "home" for payment as fast as they are received. 
 When notes of other banks are promptly redeemed 
 they operate in the same manner as do checks and 
 drafts. 
 
 Credit-money-issues by banks, if properly safe- 
 guarded, cannot materially affect the fluctuations in 
 bankers' demands, and this is the chief fluctuation in 
 money-demands to be provided for. Such issues 
 may have the effect of supplanting the stable and 
 " Issues " cannot constant money supply issued by the 
 supply chief Government which is now used for 
 money-demand u^yi ^^^^„ ^^^ "pocket change." 
 
 That is to say, bank-issues might operate to drive 
 gold, silver, and Government-notes out of circulation, 
 but could not supply the demand made by one bank 
 against another. As near as may be estimated from 
 statistics at hand, the constant money-demand for 
 "till cash" and for personal uses is at present about 
 $1,600,000,000, or 70 per cent of the money out- 
 side of the Treasury. This stable or permanent 
 circulation might be supplied by the credit-note- 
 issues of the bank, but to make such a circula- 
 tion sound it would be necessary for the banks to 
 increase their capitahzation to carry the credit- 
 money-load which is now on the Treasury — a charge 
 
196 THE BANK AND THE TREASURY 
 
 on capital equal to about fifty per cent of the present 
 redemption equipment of National banks. 
 
 The possibility of the individual bank solving its 
 own problem of elasticity in credit-accounts under 
 the present Law, however, is not wanting. This 
 may be done through adequate capitalization and 
 adequate redemption equipment. As before indi- 
 cated, the only limitation to the amount of credit- 
 Individual bank accounts that a bank may carry is to 
 may provide elas-^^ found in its unimpaired capital; 
 hctty m credit- ^ .ii 
 
 accounts the only limitation to the possible 
 
 elasticity in the credit-accounts of such an institution 
 is to be found in the amount of redemption equip- 
 ment which it provides for itself. If the minimum 
 of credit-accounts demanded by its customers is 
 $500,000 (assuming that twenty-five per cent is an 
 adequate cash-reserve to meet all demands on its 
 current obligations), then the minimum capital sup- 
 port required would be $125,000. If the maxi- 
 mum demand from customers for credit-accounts is 
 $1,000,000, then, under the same assumption, the 
 maximum capital requirement would be $250,000. 
 But in order to make possible this $500,000 expansion 
 of credit-accommodations the bank should be capi- 
 talized to meet the maximum redemption require- 
 ment. 
 
 Assuming again that all the redemption equipment 
 were invested, except such portion as is necessary to 
 be carried in cash as a twenty-five per cent money- 
 
ELASTICITY POSSIBLE IN PRESENT SYSTEM 197 
 
 reserve to support credit-accounts outstanding, then 
 when the demand for customers' accounts is at a 
 Power oj expand- minimum the bank, if capitaHzed at 
 ing credit in its $250,000, would have $125,000 of its 
 own an s capital invested and temporarily held 
 
 as an income-producing asset awaiting an increase in 
 money and credit-demands. The only question in 
 determining ability to expand accounts to meet in- 
 creased wants of customers would be in the character 
 of these capital reserve-investments held — that is, 
 a question as to their immediate convertibility into 
 cash. Should it at any time appear that a bank were 
 unable to meet demands for current credit-accounts 
 or for cash, this inability would arise from one of two 
 occasions: (i) a too small capitalization, or (2) an 
 unwise investment of surplus capital for purposes of 
 redemption reserves. 
 
 Possibilities 0} Elasticity in the National Banking Sys- 
 tem as a Whole, without Change in the Present Law 
 
 The possibility for elasticity in the National bank- 
 ing system as a whole under the present Law differs 
 from that of the individual bank in this, — that a 
 system of banking such as the National banking 
 May give elas- System, including within it over 5,000 
 ticity to money different banking institutions, makes 
 circulation possible a degree of elasticity in the 
 
 money circulation adequate to meet the fluctuating 
 money-demands of the nation, as well as a degree of 
 
198 THE BANK AND THE TREASURY 
 
 elasticity in the credit-accounts of individual banks 
 sufl&cient to meet demands of customers. While one 
 bank, with its comparatively insignificant capitaliza- 
 tion, can do little to affect the money market, 5,000 
 banks can do much. Under the present Lav? the 
 possibility for money expansion and contraction to 
 meet commercial demands lies (i) in the "issue- 
 privilege" and (2) in the provision made for Govern- 
 ment "deposits." The National banks alone enjoy 
 these privileges. The "issue" powers not only give 
 to National banks increased facility for the conver- 
 sion of their invested redemption equipment into 
 cash by hj^othecation, but also furnish a method 
 under the present Law whereby an increase in the 
 money circulation of the country may be effected 
 without importation and without disturbance of the 
 money-funds of the National Treasury. 
 
 But such a result may be attained only by cooper- 
 ration on the part of the many banks of the system 
 by which the various individual institutions making 
 up the system would refrain from hypothecating 
 their bonds in time of minimum money and credit- 
 demands, and would hold them as an unencumbered 
 capital-investment ready for hypothecation when 
 Amount of das- money-demands might increase. The 
 ticity which may amount of fluctuation in the money- 
 e given demands made on National banks 
 
 has never exceeded $100,000,000. The total amount 
 of bonds owned by National banks, July, 1904, 
 
ELASTICITY POSSIBLE IN PRESENT SYSTEM 199 
 
 was over $450,000,000. The total fluctuating 
 money-demands of the entire country has never ex- 
 ceeded $150,000,000. If the capital invested in 
 bonds by National banks alone were used for the 
 purpose of supporting the fluctuating banking and 
 business demand for money, instead of being em- 
 ployed as a means of supporting the bond market 
 and for increasing the permanent money supply of the 
 country, this capital investment would be adequate to 
 meet every need for elasticity in the money medium. 
 The elasticity thus given to the money circulation 
 would be in response to money-demands made 
 through the banks. In other words, the elasticity 
 would be provided through those institutions upon 
 which demands were made. Such a practice would 
 supply the fluctuating banker's needs for money as a 
 means for payment on credit-accounts, as well as the 
 fluctuating popular demand for "change" and for 
 other personal payments, which give rise to drafts on 
 the bank. This adaptation of money-supply to 
 May give das- money-demand would be^ in direct 
 tkity to credit- support of expanding credit-accounts 
 funds q£ ^anks, and this use of capital in- 
 
 vestments in bonds owned by banks would admit of 
 a sudden increase or decrease in credit transactions 
 during a period of fluctuating demand of at least 
 $1,600,000,000, while the greatest fluctuation in the 
 accounts of National banks during the last fifteen 
 years has been only $350,000,000. 
 
200 THE BANK AND THE TREASURY 
 
 How the Credit- Accounts of National Banks may he 
 
 made Elastic under the Present Law without the 
 
 Use of the Issue-Privilege 
 
 The possibility for elasticity through issues is 
 quite equalled by the possibility for elasticity with- 
 out issues. The difference is this, that the issue- 
 privilege makes possible elasticity of the money cir- 
 culation as well as credit accommodations without 
 importation and without disturbance of the resources 
 Elasticitywithout of the Treasury, while the elasticity 
 issues limited to provided for under the Law without 
 credit-accounts ^^^^^ ordinarily would involve a 
 drawing down of Treasury resources and possibly 
 an importation of gold. The second possibility of 
 increasing elasticity lies in the privilege before dis- 
 cussed — the privilege granted to the National banks 
 to receive "deposits" from the Government upon 
 the hypothecation of securities acceptable to the 
 Treasurer. The deposit- (loan)-privilege is accorded 
 to National banks as a means of making the Treasury 
 surplus available to them for money-reserves in time 
 of need. It is a happy supplement of the issue- 
 (loan) -privilege. 
 
 This provision of law under the recent decision of 
 the Treasurer allows the banks to hypothecate not 
 only United States bonds on hand, but also other 
 "gilt-edge" securities, discretion as to the advances 
 to be made being left with the Secretary. By a 
 
ELASTICITY POSSIBLE IN PRESENT SYSTEM 201 
 
 proper use of this privilege elasticity may be given to 
 the credit-accounts of banks and much rehef may be 
 afforded to the community seeking accommodation. 
 Such a use of the deposit- (loan) -privilege has in it 
 Attainable with- the possibility under favorable con- 
 out disturbing the ditions of making practically all the 
 money mar e gurpiug capital-resources of banks 
 (that may have been conservatively invested) im- 
 mediately convertible into cash, by hypothecation, 
 when cash is needed to keep up the lawful money- 
 reserve of banks, which in turn may be used to in- 
 crease credit-accommodations. By such a practice 
 the entire money surplus of the United States Treas- 
 ury might be used as a subsidiary money-reserve to 
 the money-reserves of commercial banks. This 
 added facility for immediate conversion of invest- 
 ments into cash has its chief significance in the fact 
 that, while money may be withdrawn from the 
 Treasury (at such times as the Treasury may have 
 a surplus available) the credit-accounts of banks may 
 be expanded and adequate support may be given 
 to them in money-reserves without appeal to the 
 money market and without disturbance of money 
 rates. 
 
 There may be, however, few conditions favorable 
 to the use of the Government deposit (loan). The 
 hypothecation of investments with the Government 
 as security for these loans (sales of money by the 
 Government to the banks) depends upon the coinci- 
 
202 THE BANK AND THE TREASURY 
 
 dence of a disposable Treasury surplus with a bank- 
 er's pressing need. It has happened that during 
 the years 1898 to 1902, with foreign importations 
 increasing faster than Government expenditures, the 
 Government had a surplus of money in its vaults 
 which was available to the banks without serious 
 Conditions under inconvenience to the Treasury; 1903 
 which this would and 1904 find other conditions preva- 
 not obtain ^^^^ ^^ ^^^ National capitol. The 
 
 same has been true of every period of trade reaction 
 and financial retraction. 
 
 When tariffs have been lowered or the American 
 commodity market has been less favorable to impor- 
 tation, the Government has not had a large loanable 
 money surplus. In fact, it has usually happened 
 that during such periods of depression the Govern- 
 ment has not been in a condition to lend a helping 
 hand to private institutions. The situation has oft- 
 Conditions under times been reversed. Deposits or 
 ances would he ^^ans previously made to the banks 
 increased must be recalled as a means of meet- 
 
 ing the deficit created by the excess of expenditures 
 over receipts. Owing to this fact, under the present 
 practice the loan-deposit has proved a somewhat 
 dangerous device. Under any circumstances, the 
 possibility of gaining support from the Government 
 is highly contingent and not to be permanently re- 
 lied on as a safeguard against inelasticity. At 
 best it must be treated as an auxiliary support, but 
 

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ELASTICITY POSSIBLE IN PRESENT SYSTEM 203 
 
 nevertheless, at such times as it may be used, it 
 may be one of the most efficient supports to credit 
 conceivable. 
 
 Possibility under the Present Law oj Increasing 
 
 Elasticity of both the Money Circulation and 
 
 of Credit-Accounts through the Loan Market 
 
 There is under the present system a third possi- 
 bility of making capital assets in the form of redemp- 
 tion equipment immediately convertible into cash 
 without forcing a contraction of commercial accom- 
 modations. This possibility lies in the practice of 
 so using the invested-reserve as to make it an instru- 
 ment of immediate conversion in the loan market 
 itself. The general Ipan market is the third resort 
 for a National bank, but it is available to all banks 
 and persons doing a banking business. A bank 
 virhich finds its money-reserves running low may 
 obtain relief from other banks in the community by 
 hypothecation or by sale, unless these other banks 
 Elasticity through are under similar constraint, in which 
 convertible invest- case banking relief must come from 
 ^^^^^ outside. The condition precedent to 
 
 such a use of the money market, with its powers of 
 money importation, is an adequate unencumbered 
 invested-reserve. If a bank has an adequate amount 
 of "gilt-edge" capital assets it may at all times 
 obtain money to support an expansion in its credit- 
 accounts, whether or not it has Government "issue" 
 
204 THE BANK AND THE TREASURY 
 
 and "deposit" privileges. For such an institution 
 the problem of elasticity is solved. 
 
 This elasticity may come through the employment 
 of idle funds already in the community or by a 
 process of money importation from the outside 
 world. In a large banking community there are 
 always to be found many customers of banks and 
 other persons having accounts or claims against 
 other financial institutions in the immediate locality 
 who are willing to exchange these accounts or claims 
 Possibilities ^^^ g^od investments. The induce- 
 
 without appeal to ment which brings out these funds 
 e mar e ^^^ makes them available for cur- 
 
 rent use is the offer of increased investment return. A 
 bank which needs $50,000 in money, by offer of an 
 increased rate of interest may find among its own 
 customers (depositors) those who are willing to pur- 
 chase $200,000 of the bank's "bills payable" or 
 time-notes secured by stocks, bonds, or other avail- 
 able assets, the effect of which would be not to in- 
 crease its money-reserves but to reduce its outstand- 
 ing credit-accounts (deposits) of customers. Such 
 an adjustment would relieve the strain on its money- 
 reserves without restricting its commercial-accom- 
 modations. Again, through bankers or otherwise, 
 the bank might find customers (depositors) of other 
 institutions who were willing to purchase $50,000 of 
 its "bills payable," secured by the hypothecation 
 of reserve capital-investments. Such a disposition 
 
ELASTICITY POSSIBLE IN PRESENT SYSTEM 205 
 
 would have the effect of giving to the bank hypoth- 
 ecating its securities credit-claims against other 
 
 institutions amounting to $50,000, 
 How the market , . , , ■ ^ . ^ ^ . 
 
 is reached which amount might at once be trans- 
 
 ferred to its own vaults. This would 
 put the bank in a position to support outstanding 
 commercial-accommodations without calling loans. 
 The great investment companies, old line insurance, 
 savings banks, etc., have large current means that 
 may be made available by secured loans. By similar 
 process, when the domestic loan market may not 
 furnish the desired money-reserve, foreign negotia- 
 tions might set up a gold balance by importation. 
 But any method of safely meeting money-demands 
 requires an adequate unencumbered capital reserve; 
 adequate support to commercial banks by the loan 
 market and investment companies would require the 
 discontinuance of paying interest on deposits by 
 which commercial banks in ordinary time borrow all 
 available funds of these institutions. 
 
 One Obstacle in the way of Elasticity without Legal 
 Enactment 
 
 As has been suggested, the elasticity to be given to 
 the circulating medium of the country, whether in the 
 form of money or in the form of credit-accounts, must 
 come by cooperation of the many banks of the 
 National system. It is in this that the improbabihty 
 of securing such a result as that outlined obtains. 
 
206 THE BANK AND THE TREASURY 
 
 In the first place, the banks do not do business that 
 way. In view of this fact, even if a majority of 
 bankers were of the opinion that such a change 
 might be advantageous, they would not be willing to 
 alter their methods unless general cooperation were 
 assured. Against a change which would have such 
 a degree of uniformity as would insure the elasticity 
 Voluntary co- desired is set all of the force and 
 operation to this inertia of custom — a factor which 
 end imfrobable requires the strong arm of law and 
 the closest supervision of Government to overcome. 
 In the second place, a very large majority of bankers 
 have not this view of the case. In fact, judging from 
 expressions made, many influential bankers would 
 favor changes in method which would still further 
 lower the percentage of capitalization required to 
 business transacted. In the third place, to effect 
 such cooperation in the interest of the greater elas- 
 ticity needed, certain practices and collateral em- 
 ployments of banking capital would have to be 
 abandoned. There has been a growing tendency 
 toward underwriting. The class of securities com- 
 monly underwritten is not such an investment of 
 capital as contributes to elasticity. There has been 
 a growing tendency toward banking consolidation, 
 by which the surplus capital of controlled banks is 
 loaned to (deposited with) the controlling bank, 
 without any increase in capital strength being 
 effected through the consolidation. Investments in 
 
ELASTICITY POSSIBLE IN PRESENT SYSTEM 207 
 
 the accounts of "central" banks may lend them- 
 selves to the purposes of an individual bank or 
 group under ordinary circumstances, but conversion 
 of these investments into money to support local de- 
 mands weakens the credit-support at the centre. 
 Such a disposition of capital does not contribute to 
 elasticity in the banking system as a whole. In fact, 
 it has two effects directly opposed to elasticity and 
 soundness: (i) it weakens the capitalization of "cen- 
 tral" banks, and (2) it ties up the capital of the 
 "depositing" bank in such a way as to render it 
 difficult to bring money into the system from without 
 as a means of meeting increasing demands. 
 
Chapter XVI 
 
 POSSIBILITIES OF INCREASING ELASTICITY BY SIMPLE 
 MODIFICATIONS OF THE PRESENT LAW 
 
 Elasticity is the need — the problem is to supply 
 it. To re-state a conclusion reached in the preceding 
 chapter, the present system will admit of an adequate 
 measure of elasticity if bankers were brought into 
 cooperation to this end. The impelling force in the 
 present practice — a practice which stands in the 
 way of cooperative results — is the constant desire to 
 lower capital-cost of banking operation. This mo- 
 tive must be reckoned with. It is ever-present in all 
 The need for forms of business. It is the desire to 
 legislation to se- obtain the largest income possible at 
 cure cooperation ^ ^^^^^ capital-cost and current-ex- 
 pense that gives point to the administrative devices 
 of every institution conducted for gain. It has been 
 the effort to lower cost and to increase profits (at 
 times ill-directed) that has made necessary legisla- 
 tion for the inspection of mines and factories, and for 
 the introduction of safety appliances to the physical 
 equipment of enterprise. 
 
 The same necessity lies back of the present need 
 for legislation requiring greater business safety or 
 
 [208] 
 
MODIFICATIONS TO INCREASE ELASTICITY 209 
 
 "soundness" in the redemption equipment of com- 
 mercial banks as a means of securing increased elas- 
 ticity and better banking service. It is through 
 compulsory legislation that a uniform practice may 
 be introduced. Under circumstances of competi- 
 To benefit the tion, reforms which require an in- 
 
 bank as well as crease in capital-cost can be attained 
 the public jj^ ^^ ^^j^gj. ^^y r^^^ ^^^^ ^j ^^g 
 
 banking legislation of the past has been toward the 
 imposition of requirements that will bring to the 
 public protection against insolvency of individual 
 banks. The demand of to-day is protection against 
 the operation of the system as a whole — the con- 
 traction of credit-accommodation as a means of 
 protecting the banks. And as past legislation must 
 be recognized as of advantage to the banker as well 
 as to the public, the same result may be predicated 
 of a further evolution of our system of commercial 
 credit to adapt it to the increased needs for a more 
 sound and a more elastic medium of exchange. 
 
 Changes in the Law to Increase the Soundness of 
 Credit- A ccounts 
 
 In the many plans proposed for increasing the 
 elasticity of bank-issues and bank-credit, the element 
 of the business safety of the latter has been ignored. 
 An underlying fallacy has been entertained, viz., 
 that the problem of elasticity may be solved without 
 increasing the financial strength of those institutions 
 
210 THE BANK AND THE TREASURY 
 
 offering current credit-accounts for sale. But in- 
 creased financial strength must come at a cost. 
 Greater soundness of credit can be had only through 
 reinforced redemption equipment for meeting the 
 demands for money payment, and redemption equip- 
 ment must be procured by capital investment. 
 Larger and better facilities for rendering banking 
 service are made possible only by means of stronger 
 and improved machinery for credit support. In 
 banking, as in other undertakings, experience has 
 taught the lesson that without adequate capital-re- 
 sources both the institution and the public may 
 suffer many times more than the price of safety. 
 Initial capital cost of equipment, however, must be 
 met, and met by those who undertake the banking 
 business. 
 
 An Amendment of the "Money-Reserve" Section of 
 the Bank Act 
 
 The first change in the Law looking toward in- 
 creased elasticity is one which would require in- 
 creased capitalization and at the same time would 
 take away the inducement to invest the capital surplus 
 of the bank in a comparatively weak and dangerous 
 form of redemption equipment. The oft-repeated 
 recommendation of Comptrollers and of financial 
 writers for the repeal of those sections of the Bank 
 Act which permit one bank to loan a portion of its 
 capital to another at interest is here invoked — a 
 
MODIFICATIONS TO INCREASE ELASTICITY 211 
 
 repeal of the clauses pertaining to "reserve deposits." 
 It is unnecessary to re-state the dangerous character 
 Re-statement of of this device, — that a "deposit" is 
 defects in "re- a loan; that a loan is a sale of money 
 serve " law j ^j. ^^.^^-^ . ^^^^ ^^^ , ^ reserve deposit ' ' 
 
 at best cannot be more than a capital investment, but 
 too often is obtained by exchange of credit; that in 
 times of money strain it shifts the burden from one 
 bank to another; that such a device does not permit 
 of the use of capital to effect an increase in the 
 money-reserves of banks or an expansion of credit 
 with safety; that it hampers the operations of the use 
 of bank capital in such a manner as to make elasticity 
 in money circulation and in current credit-funds of 
 the nation impossible. 
 
 A deposit with another bank for the purpose of meet- 
 ing exchange balances may be properly considered a 
 part of the "cash" requirement, but for obvious 
 reasons it may not with public safety be considered 
 Effect of prohibit- as a part of the " invested-reserve." In 
 ing interest on so far as a deposit with another bank 
 ^^"^^ ^ is considered as cash, the use of capi- 
 
 tal for the purpose of obtaining such accounts should 
 be restricted to the need for redemption of exchanges; 
 this restriction may be effected through the Act by a 
 prohibition restraining one bank from paying interest 
 on the "deposits" (loans) of another. As has been 
 before pointed out by financial writers, such a pro- 
 hibition would take away the inducement to this 
 
212 THE BANK AND THE TREASURY 
 
 form of investment of capital surplus. Without an 
 income inducement, a bank would carry no larger 
 deposits with other banks than would actually be 
 needed for an exchange base. Besides, in case a 
 commercial bank were not permitted to pay interest 
 on deposits, there would be no inducement for trust 
 companies, savings banks, and insurance companies 
 to carry large credits with them. Or, to put the 
 same relation in another form, the commercial banks 
 would not become borrowers of money from these 
 institutions as a means of supplying themselves with 
 "money-reserves" to meet ordinary demands of cus- 
 tomers on. credit-account. Such a complete segre- 
 gation of the funds of institutions of current account, 
 from investment institutions, would do much to give 
 stability to general financial conditions. The in- 
 vestment institutions would carry a line of short- 
 time papers, to be sure, and among these short-time 
 investments might be secured bills payable and re- 
 discounts of commercial banks. But such a practice 
 would make the current revenue of investment insti- 
 tutions an auxiliary support to the commercial banks 
 when support were needed, instead of making the 
 commercial banks the money market as well as the 
 credit market, a plan which would make the various 
 investment institutions and the Treasury of the 
 United States independent and prominent factors in 
 the money markets, and do much to place the banks 
 in a position to gain support for the credit market. 
 
MODIFICATIONS TO INCREASE ELASTICITY 213 
 
 The "reserve" Law as it stands has proceeded 
 from a popular misconception that a bank "deposit" 
 is an amount of money owned by the depositor. 
 Misconception as This fallacy is made use of by banks 
 to meaning of themselves in their dealings with cus- 
 
 epost tomers, and by customers in thinking 
 
 about banks. A familiar instance of such use is seen 
 in advertisements of the financial condition of banks 
 as a means of soliciting public confidence in their 
 paying ability. In almost any banking journal such 
 a display as this may be found: 
 
 THE FIRST NATIONAL BANK OF ECONOMY FALLS 
 
 Capital $100,000 
 
 Surplus 100,000 
 
 Total Capital and Surplus $200,000 
 
 Deposits $1,500,000 
 
 The above is assumed to be a statement of financial 
 strength. If the advertisement were written to 
 speak the truth it would be something as follows: 
 
 Capital and Surplus $ 200,000 
 
 Call Loan Indebtedness 1,500,000 
 
 Excess of Demand Indebtedness over Capital — 1,300,000 
 
 A credit-account to a customer is a contract for the 
 future delivery of money — a deal in "futures." 
 The bank sells to its customers (so-called depositors) 
 its contracts for the future delivery of money. These 
 contracts are due on "call." They have not even 
 the time usual on boards of trade and stock ex- 
 changes where "puts" and "calls" are dealt in. In 
 
214 THE BANK AND THE TREASURY 
 
 stock transactions a "future" is usually entitled to 
 at least one day's notice before delivery is to be made. 
 "Deposit" an Institutions of commercial-credit do 
 investment in not reserve this privilege, and if they 
 futures ^j^ make such reservation the utility 
 
 of their credit to customers as current funds would 
 be destroyed ; they would stand in the same position 
 as savings institutions. The commercial bank must 
 deliver at once, without notice, or admit its insol- 
 vency, and with such admission sacrifice all claims 
 to public confidence as a basis for future credit sales. 
 After several decades of experience we established 
 a law requiring banks to keep a certain minimum pro- 
 portion of money-reserves to demand-credit outstand- 
 ing. A prescribed ratio of "cash" to credit-accounts 
 outstanding should be established — "cash" to in- 
 clude both money-reserves and exchange-balances. 
 It should be permitted, however, that these may be 
 used for the satisfaction of immediate demands. 
 Should require But the law should also require that 
 cash-reserve pro- this "cash "-reserve, including money 
 videdoutofcapital ^^^ exchange-balances, should be 
 provided out of capital. It should further require 
 that every subsequent increase in credit-obligations 
 should be supported by "cash" provided by capital 
 investment. Such an amendment would prevent an 
 expansion of credit beyond ability to support it, and 
 would be equivalent to saying that a bank should 
 capitalize its maximum instead of its minimum 
 
MODIFICATIONS TO INCREASE ELASTICITY 215 
 
 credit-redemption requirements. As a result of such 
 an amendment the bank itself, to increase its own 
 income, would see to it that such portion of its re- 
 demption equipment as was not immediately needed, 
 when credit-demands were not at a maximum, was 
 invested in assets immediately convertible into cash. 
 An amendment of this one feature of the Bank Act 
 by repeal and by substitution of a provision author- 
 izing the banks to invest their surplus capital-re- 
 sources in first-class marketable securities only, to 
 be accounted as an "in vested-reserve" and to be 
 considered as a part of the redemption equipment 
 held as a basis for credit support, would at once add 
 over $400,000,000 to the assets of National banks 
 Increase in das- available to procure money by sale 
 ticity oj money-re- or by hypothecation without disturb- 
 servesasaresuU -^^ ^^^ ^^^^j^ relations of other insti- 
 tutions. Such a change would greatly increase the 
 possibilities of credit expansion in time of need. 
 This increased strength of equipment can come from 
 the superiority of investments of present capital em- 
 ployed as banking equipment. In every other rela- 
 tion the Law has recognized the investment of one 
 bank in the liabilities of another as a policy not to be 
 supported. Commercial banking institutions have 
 failed, and until such a change is made they always 
 will fail, to support an extraordinary strain which is 
 general enough to reach the central bank. The 
 present reserve provisions always have operated and, 
 
216 THE BANK AND THE TREASURY 
 
 under similar conditions, must operate to force a 
 reduction of loans with increased money-demand. 
 
 Moreover, such an amendment of this feature of 
 the Bank Act would take out of the National banking 
 system at the reserve centres over $400,000,000 of 
 money that is now held there as an invested-reserve, 
 but which is used by these central banks for the 
 support of a much larger volume of credit represented 
 Increased inde- ^ call-loans and other speculative 
 pendence of indi- assets — a kind of security that is of 
 vidual hanks ^j^^j^ ^^^ ^^ ^^^ j^j^^ ^j business that 
 
 should be supported by commercial banking capital. 
 The "call-loans" of National banks, as well as the 
 call-loans of other institutions which depend on the 
 money-reserves of National banks, are speculative 
 loans. These loans are usually incurred as a means 
 of carrying on margin speculation. This is about 
 the only kind of business to which a call-loan is 
 adapted. Under the present practice the National 
 bank has become the mainstay to the speculator. In 
 an emergency the National bank finds itself at times 
 tied hand and foot with the man whose only interests 
 lie in market fluctuations instead of in producing 
 goods and marketing them. When gradual liquida- 
 tion may be effected the banker may protect his 
 commercial constituents against the speculative 
 judgments of professional traders. On the other 
 hand, when the strain is sudden and danger is immi- 
 nent these call-loans may not be made available to 
 
MODIFICATIONS TO INCREASE ELASTICITY 217 
 
 protect commercial-credits. But even if by forcing 
 liquidation the banker is able to preserve his own 
 institution intact, the result is a shock to the commu- 
 nity and it reacts unfavorably on commercial and 
 industrial enterprise. 
 
 Repeal of the provisions referred to would not only 
 increase the elasticity of commercial-credit-accounts 
 but would also purge the commercial bank of its 
 most dangerous constituency. It would compel the 
 speculator to seek call-loan accommodation with 
 institutions and agents specially capitalized and 
 equipped for such service. Such a change in the 
 Would purge sys- Law would also require the conserva- 
 tem of dangerous tive banker to seek other investments 
 cons ttuency ^^^ j^jg surplus money-reserves, and by 
 this means would leave intact the capital-resources 
 of commercial banks for commercial-credit support. 
 It would tend to break down the practice of comming- 
 ling capital assets of banks, would place each indi- 
 vidual institution on a more independent footing, and 
 would sever the bonds which have so frequently 
 dragged all down into a common pool through the 
 weakening or breaking of some central support. 
 The individual banker would be banking on money- 
 reserves and "gilt-edge" investments instead of 
 basing his own credit on the credit of other banking 
 institutions which in turn look to speculative or 
 other customers for support in emergency — a system 
 which brings the results of bank-credit over-expan- 
 
218 THE BANK AND THE TREASURY 
 
 sion down on the heads of those engaged in commerce 
 and industry. 
 
 Amendment Requiring a Minimum Proportion 0} 
 Redemption Equipment to Maximum 0} Credit- 
 Obligations Outstanding 
 
 An amendment directed toward adequacy in capi- 
 talization would not be complete without a clause 
 requiring a prescribed proportion of "redemption 
 equipment" to the maximum credit-funds disposed 
 of for the accommodation of customers. As a mat- 
 ter of public safety a bank should not be permitted 
 to incur credit-obligations in excess of a prescribed 
 ratio to unimpaired capital. That is, instead of the 
 money-reserve being a criterion by which to gauge the 
 soundness of credit-accounts, the law should adopt the 
 measure of unimpaired capital available for redemp- 
 tion purposes. Such an amendment would have the 
 Controlling controlling efifect: (i) Of imposing on 
 
 effect of such an the Comptroller of the Currency the 
 amendment inquiry as toiwhat part of a bank's 
 
 capital is tied up in "banking-house and fixtures," 
 in "real-estate," in "mortgages," and in "other in- 
 vestments" not available for the support of credit- 
 accounts, such as "underwriting," etc. ; (2) of making 
 it the duty of the Comptroller of the Currency and of 
 examiners to inquire into the amount of capitaliza- 
 tion remaining after procuring "redemption equip- 
 ment"; (3) of requiring a specific accounting for the 
 
MODIFICATIONS TO INCREASE ELASTICITY 219 
 
 character of "redemption equipment" held — what 
 portion in cash, what portion in investments — and 
 as to cash, what portion is held in the form of money- 
 reserves, and what portion in the form of exchange 
 accounts; (4) of compelling a report in such form 
 that this total redemption equipment may be com- 
 pared with the maximum of credit-obligations to be 
 redeemed. At present no question is raised so long 
 as the money-reserve bears the prescribed proportion 
 to "deposits." This money-reserve may have been 
 borrowed; it may be swelled by padded or "mutual" 
 balances. 
 
 The bank's capitalization may be inadequate to 
 support even the minimum of credit-accounts. No 
 inquiry is made as to the character of redemption 
 equipment other than cash. In fact, a Comptroller 
 of the Currency has been known to say that so long 
 as the loans of a bank are good there is little need for 
 investigating further. A prominent banker also an- 
 nounces as his belief that if the cash-reserve is kept 
 intact it is of less importance to know that the " stock, 
 bonds, and other securities" held are properly repre- 
 sented in financial statements than that the "com- 
 mercial assets" are not to be written down. These 
 Need for a change opinions have in them much of truth, 
 in the principle but not for the reasons assigned. It 
 0} control jg necessary that loans be good, for the 
 
 reason that any loss on this or on any other account 
 is a capital loss. There can be no other kind of loss in 
 
220 THE BANK AND THE TREASURY 
 
 a going business; only an insolvent can saddle losses 
 on creditors. Assuming that all the "commercial 
 assets" are good, a bank having capital-assets which 
 are unavailable and of questionable character (while 
 it may be able to liquidate on "winding up") will not 
 as a "going concern" make an efficient banking 
 institution. In case the money-reserves are not pro- 
 vided for out of the capital, the bank is a constant 
 menace to the community. As a going concern 
 every extraordinary demand will be forced on cus- 
 tomers, and the community will experience a peri- 
 odical restriction in funds available for current use 
 such as will make commercial judgments uncertain 
 and enterprise extra-hazardous. It is to remedy just 
 this defect in our present banking system that the 
 present agitation for elasticity is being carried on. 
 The Law must have regard for public welfare rather 
 than the solvency or insolvency of an individual bank. 
 
 An Amendment of the Bank Act to Enjoin the Pay- 
 ment of Interest on "Issues" to Banks 
 
 A third change in the Law in the interest of elas- 
 ticity has been suggested. Writers and publicists 
 have called attention to the fact that underneath the 
 present Law a small, almost nominal tax is imposed 
 on issues. Throughout the course of banking legis- 
 lation, and in most of the recent proposals directed 
 toward reform, an assumption has run that both the 
 bank and the Government may use the same capital 
 
MODIFICATIONS TO INCREASE ELASTICITY 221 
 
 at the same time, without weakening the resources of 
 either. The Government is in need of gold. It 
 offers its bonds for sale, and as a means of availing 
 itself of a better market holds out to the bank an 
 inducement to buy. The inducement offered the 
 bank to part with its gold is this: That the bank may 
 continue to receive the interest on the bond and at 
 the same time have its face value in notes to use as 
 money. In this transaction the presumption is that 
 the notes will not serve as an elastic medium; the 
 presumption is rather that the amount of notes issued 
 will, at once, be added to the permanent stock of 
 money in circulation. The present nominal tax is 
 based on the same theory as the plan of issue — a 
 high tax on notes would reduce the inducement to 
 purchase bonds and in like degree would depress the 
 bond market. The ten per cent prohibitive tax on 
 State bank issues proceeds from the same conclusion. 
 The bond market is no longer a matter of public 
 concern. On the other hand, an elastic currency is 
 an end desired. If, in the framing of a banking law, 
 all question of Government-credit were abandoned, 
 and a tax were laid on issues (or interest were charged 
 on the Government loan of "issues") for the purpose 
 A use oj the in- of regulating their use to meet the 
 terest rate to regu- extraordinary money-demand — if, in 
 late circulation ^^^^^ words, an elastic currency in- 
 stead of a bond market were made the object of legis- 
 lation — it is contended that elasticity may be at- 
 
THE BANK AND THE TREASURY 
 
 tained without abandoning the principle of safety 
 found in a secured note circulation. For purposes of 
 illustration, let us assume that the varying needs for 
 money during the year did not fluctuate more than 
 $300,000,000. Then the use of the $449,000,000 of 
 bank-notes already outstanding might be regulated 
 by interest charges as follows: Issues (loans) to the 
 extent of five per cent of the capital of National banks 
 or an amount ample to cover the active accounts of 
 disbursing officers might be at the rate of one per 
 cent as compensation for the use of the banks as 
 disbursing agents of the Government. Such a low 
 interest rate on a small portion of the "issues" would 
 also have the effect of keeping a small amount of 
 "issues" in circulation to guarantee the ready ac- 
 ceptance of the bank-note by customary use. The 
 balance (something over $400,000,000) might be 
 charged for at a rate which would make this amount 
 of authorized issues an emergency money-reserve. 
 To follow this principle of regulation a little further, 
 a portion of the $400,000,000 reserve medium (let us 
 say two-thirds) might be taxed at a rate slightly 
 above the usiial commercial paper rate, and the re- 
 mainder at a still higher rate to preclude its use 
 except when the emergency became extreme. 
 
 The proposition is not a new. one. The principle 
 has been several times proposed under the name of a 
 "tax," but has met with little support. The banks 
 have not favored it for obvious reasons; the public 
 
MODIFICATIONS TO INCREASE ELASTICITY 223 
 
 has not seen the need for such a restriction on the 
 issue of notes by banks as will take them out 
 Why proposition of the permanent money stock and at 
 has not received the same time force the banks to 
 suppor strengthen their capital-resources {i.e., 
 
 to require them to do business on their own capital, 
 under extraordinary as well as ordinary conditions) ; 
 they have not considered the necessity of compelling 
 the less provident of commercial banking institutions 
 to furnish out of their own capital-funds a redemption 
 equipment strong enough to make secure their credit- 
 accounts (so-called deposits). 
 
 The Strength and the Weakness of Secretary Shaw's 
 Proposal 
 
 Financial disturbances between 1902 and 1904 
 lend force to the reasoning which lies back of such a 
 demand. Secretary Shaw in an address before the 
 National Association of Merchants and Travelers at 
 Chicago has become an open advocate of the prin- 
 ciple. "If I were given authority to formulate a 
 measure that would provide the requisite elasticity 
 Elastic medium to our present currency system," says 
 eqtialto 50 per cent Mr. Shaw, "1 think I would add 
 oj collateral issues ^^ amendment permitting National 
 
 banks, with the consent of the Comptroller of the 
 Currency, to issue a volume of circulating notes equal 
 to fifty per cent of the bond-secured circulation, at a 
 tax of six per cent, the same to be retired at will (by 
 
224 THE BANK AND THE TREASURY 
 
 the banks) or by direction of the Comptroller, by the 
 deposit of an equal amount of lawful money, with 
 any Sub-Treasury." 
 
 Predicting the result of such a measure in elas- 
 ticity. Secretary Shaw continues: "Three things I 
 know : First, this additional circulation would spring 
 Government in- ™to existence almost instantly when- 
 surance to elastic ever and wherever interest rates ad- 
 medium yanced to the point of profit. Second, 
 
 it would as promptly retire whenever interest rates 
 became normal. Third, it would be absolutely safe, 
 — as good as the present National bank-issue, and 
 with a slight change, identical in form and appear- 
 ance, — for the Government, amply protected by the 
 six per cent tax, would underwrite it." 
 
 In this we have stated the principle of a current 
 charge on "issues" for regulation of that part of the 
 money medium which we would have respond to the 
 fluctuating needs that could be met by ordinary 
 dealings in the market. The charge, however, is to 
 be in the nature of a premium paid for insurance. 
 In this we have a partial abandonment of the prin- 
 StiU clings to old ciple of "banking on the capital-re- 
 idea 0} support to sources of the bank." The coUater- 
 hond market ally-secured note is still to serve as a 
 part of the permanent money-supply, and the elastic 
 medium is to gain its "soundness" from Govern- 
 ment underwriting. In other words. Secretary Shaw, 
 while announcing the principle of elasticity, still 
 
MODIFICATIONS TO INCREASE ELASTICITY 225 
 
 clings to the idea of bank-note issues for the support 
 of the bond market, instead of limiting "issues" 
 through banks to the fluctuating money needs of the 
 country. 
 
 An Amendment of the Bank Act to Encourage 
 
 Investment 0} Surplus Capital in "Gilt-Edge" 
 
 Securities 
 
 To the above principles of emergency currency 
 
 may be urged the objection that, from motives of 
 
 business profit, the banks would very largely reduce 
 
 their circulation, and reduce the holdings of United 
 
 States bonds as a basis for issue. Thus, it may be 
 
 said, such a change as that suggested for regulating 
 
 issues, by interest requirement, or by means of any 
 
 other current change adequate to compel retirement 
 
 of issues, would defeat its own ends. To make 
 
 effective a collaterally-secured emer- 
 The inducement • , 
 
 to investment §^^^^7 currency, some mducement 
 
 must be offered to investment in the 
 kind of capital-resources which will be received by 
 the Government as a basis for issue. Such an in- 
 ducement must be found in the rate of return which 
 the bank may get on the kind of investments of sur- 
 plus money or other capital-resources that may be 
 reserved for hypothecation or sale to obtain money 
 when needed. 
 
 Under the present Law investments of this kind 
 are limited to (i) United States bonds, as a basis for 
 
THE BANK AND THE TREASXIRY 
 
 issue; (2) loans to (deposits with) reserve agents; and 
 (3) more recently, to "gilt-edge" securities acceptable 
 as a basis for Government loans. As to the first class 
 of investment the banks get a return below two per 
 cent. As to the second class, the rate of return is 
 from two to three and one-half per cent; on the 
 Investments un- average they are somewhat above two 
 der the present per cent per annum. The most prof- 
 '"' itable return on "in vested-reserves" 
 
 is from those securities other than Government bonds 
 and reserve deposits — "gUt-edge" securities such as 
 have recently been received by the Secretary of the 
 Treasury as collateral to "deposit" loans. 
 
 The business advantage of investment of surplus 
 capital-resources in this class of securities, and the 
 unquestioned soundness of the collateral, suggest the 
 application of provisions similar to those advocated 
 by Mr. Aldrich and Mr. Payne for the security of 
 Government loans to the banks (Government de- 
 posits). In a bill introduced in the House of Rep- 
 resentatives by Mr. Payne, February 26, 1903, it is 
 proposed that the Secretary of the Treasury accept 
 as collaterals the following securities: "Bonds of the 
 United States, bonds or other interest-bearing obli- 
 gations of any State of the United States, or any 
 legally authorized bonds issued for municipal pur- 
 poses by any city in the United States which has been 
 in existence as a city for a period of twenty-five years, 
 and which for a period of ten years previous to such 
 
MODIFICATIONS TO INCREASE ELASTICITY 227 
 
 deposit has not defaulted in the payment of any part 
 of either principal or interest of any debt authorized 
 Amendment pro- to be contracted by it, and which has 
 SII/m/' -t such date more than fifty thou- 
 Payne sand inhabitants as established by the 
 
 last census, and whose net indebtedness does not 
 exceed ten per centum of the valuation of the taxable 
 property therein, to be ascertained by the last pre- 
 ceding valuation of property for the assessment of 
 taxes; or the first-mortgage bonds, not including 
 street railway bonds, of any railroad company which 
 has paid dividends of not less than four per centum 
 per annum regularly and continuously on its entire 
 capital stock for a period of not less than ten years 
 previous to the deposit of the bonds." 
 
 With the utmost safety the Treasurer as trustee for 
 the note-holder and as guardian of the principle of 
 "sound money" and "sound credit," might receive 
 any of these investments as a basis for issues, thus 
 giving to the banks a better return than they now 
 receive on loans of surplus capital to reserve-agents. 
 This would furnish the inducement to the banks to 
 carry an "in vested-reserve" that might be made 
 immediately convertible. With such oppportunity 
 given for investment of surplus money-reserves, and 
 with the imposition of a tax which would insure that 
 issues would not be put into circulation except when 
 the money pressure was above the ordinary, both the 
 inducement to invest and the convertibility of the 
 
228 THE BANK AND THE TREASURY 
 
 investment by sale or by hypothecation and issue 
 would be secured. 
 
 Amendment oj the Bank Act to Require Payment 0} 
 Interest on Government "Deposit" Loans to Banks 
 
 The same reasoning as is urged in support of a 
 charge on "issues" would suggest the imposition of 
 an interest requirement on the banks for loans (de- 
 posits) from the United States Treasury. What has 
 been so carefully called "a deposit" of the Govern- 
 ment with a bank is not a deposit in any sense of the 
 word. It is nothing more nor less than a loan without 
 interest. It is a sale of money to the bank in return 
 The profitable ^r which the Government gets a de- 
 character of these mand credit-claim against the bank 
 ""^^^ secured by such collaterals as the 
 
 Treasurer may -require. These so-called deposits 
 may be made immensely profitable to the bank; by 
 using the money so purchased on credit and without 
 interest, as a "money-reserve" the bank may pur- 
 chase at least four times as much commercial paper 
 "on-account" (i.e., in exchange for deposits). For 
 this reason, it is that only when pressure is brought 
 to bear on the bank by the Government that the 
 money is turned back into the Treasury, where it 
 belongs. 
 
 Instead of the bank having an inducement to re- 
 lieve its hypothecated investment from encumbrance 
 as soon as the extraordinary demand for money is 
 
MODIFICATIONS TO INCREASE ELASTICITY 229 
 
 past, there is a continuing inducement for the bank 
 to stretch its credit to the limit at times when money- 
 An inducement to demands are small, and then again to 
 encumber redemp- appeal to the Government for aid in 
 tion equipment ^^^^ ^j ^^^^ Another danger lies in 
 
 the fact that the Government is not in touch with the 
 commercial world except when appeals are made for 
 assistance. It, therefore, knows not when to bring 
 pressure for payment; the Government has only its 
 surplus loaned and has no need to bring pressure at 
 all until current public expenditures begin to run 
 ahead of current revenues. 
 
 For these several reasons, an interest charge, 
 enough above the usual commercial rate, should be 
 made, to compel the bank to do business on its 
 own capital and to retain an unencumbered capital- 
 surplus convertible by hypothecation with the Gov- 
 ernment when commercial-demands might make 
 hypothecation profitable. This would make the 
 Government surplus an emergency fund that would 
 be sought for by the banks only in time of financial 
 
 pressure — a fund which would re- 
 fe!S clar^ge"" turn to the Government immediately 
 
 after the emergency had passed. This 
 would, to the extent of Government surplus available, 
 avoid the necessity of importing gold when there is 
 an adequate supply in the country to meet all mone- 
 tary needs, and at the same time would give to the 
 banks the advantage of being able to obtain money 
 
230 THE BANK AND THE TREASURY 
 
 on favorable terms when they have good capital- 
 resources to hypothecate. 
 
 The Proposed Amendment for a Guarantee Fund to 
 Secure Credit-Accounts 
 
 It has been stated, and, since the days of wild-cat 
 
 banking, the statement has gone without challenge, 
 
 that a commercial bank should not be allowed to 
 
 commence, not to say continue, business until it had 
 
 provided itself with property equipment sufficient to 
 
 make both its "deposits" (credit-ac- 
 Capital support ^ \ j -^ ^ • a 
 
 to credit-accounts ^o\mis) and its note-issues secure. A 
 
 proper regard for the principle of 
 elasticity requires a re-statement after the manner 
 suggested by Mr. Cannon. A bank should have a 
 capital equipment large enough to protect its credit, 
 and to meet all commercial demands of its customers 
 for money without calling in its loans. 
 
 If we accept this as a proper statement of the 
 principle of capitalization and equipment, it follows 
 that any security given to a bank's credit-accounts, 
 or to its note-issues, should be provided out of the 
 Contrasted wUh resources of the bank. The recent 
 Government suggestion of Secretary Shaw, in the 
 underwriting ^^^^^^^ ^y^^^ xtitutd to, is to the 
 
 effect that the amount received from the tax on issues 
 (premiums for insurance of issues) should be utilized 
 to guarantee the Government against loss from un- 
 derwriting the emergency notes of the banks. In 
 
MODIFICATIONS TO INCREASE ELASTICITY 231 
 
 this the Secretary of the Treasury has not abandoned 
 the idea of secured issues, but he would have the 
 direct security come from the Government. Those 
 who have declared themselves for secured issues 
 would have bank-notes secured by the hypothecation 
 of the capital-resources of the bank, while others, 
 still more conservative, notable among them Mr. 
 Dawes, would have the principle of security extended 
 to the "deposits" of the banks as well as to the 
 "issues." 
 
 The theory on which "security" or "insurance" 
 of deposits rests, is this: that the credit-accounts 
 (deposits) of the bank are the form of current funds 
 most used in business; that the business of the com- 
 munity depends quite as much on the "soundness" 
 of bank-credit as on the "soundness" of Government 
 credit-money; that the profits of the bank are derived 
 from buying income-producing commercial paper in 
 exchange for bank-credit; the bank, therefore, should 
 protect those who have taken its credit in exchange, 
 so long as it remains outstanding for current use. In 
 other words, the public is quite as much interested in 
 "sound bank-credit" as it is in "sound money," and 
 since the bank is permitted to issue "current credit- 
 accounts" for its own profit it should be required to 
 protect these with its own capital-resources. The 
 theory is eminently sound in principle, and in practice 
 would add much to the integrity of commercial 
 bank-credit. 
 
232 THE BANK AND THE TREASURY 
 
 If we require the banks to deal on their own 
 capital, the note-issues should be secured by bank 
 assets. Again, if we are to have a true system oj 
 assets hanking, then in so far as the security for 
 current accounts of banks is not provided by original 
 capitalization it should be derived from their capital- 
 ized current-income. An enforced contribution from 
 income, in the form of interest payments on Govern- 
 ment loans ("issues" and "deposits") 
 A trust fund tose- . • j i , i ■ i , 
 
 cure "deposits" ^^ penods when the commercial rate 
 
 is high, would not only operate to 
 make elastic that part of our money system repre- 
 sented by note-issues and credit-accounts, but might 
 also be used to build up a "fund" which would be 
 held by the Government for the benefit of the bank's 
 creditors. The security of "note-issues" and of 
 "deposits," it is argued, would give to all forms of 
 credit used as current funds in the community that 
 element of security the lack of which has so often 
 precipitated wholesale panic and individual disaster. 
 Such an insurance fund for "deposits," however, 
 could not be built up and maintained on any other 
 principle than that of "banking on capital-resources." 
 The suggestion for an adequate guarantee fund for 
 deposits is premised on an interest charge on secured 
 issues, and on an interest charge on secured deposit- 
 loans, so made and regulated as to make the capital- 
 resources of the bank more readily convertible. The 
 secured-note may enter into circulation without ques- 
 
MODIFICATIONS TO INCREASE ELASTICITY 233 
 
 tion as to the soundness of our credit-money system; 
 the guaranteed credit-account might be used in busi- 
 ness to give the same impUcit faith as to the sound- 
 ness of our commercial-bank-credit. With such a 
 The benefiis of modification in the Law, it is said, if 
 secured credit- the Law were properly administered, 
 accounts ^^^ ^^^^ ^^^^^ ^^ compelled to do 
 
 a safe business. The banks would be required to do 
 business at an increased capital cost, it is true, but 
 this would not necessarily mean an increased rate of 
 interest to customers, nor decreased profits for the 
 banks. As a result of increased capital strength and 
 enlarged redemption equipment their credit would 
 be more readily salable, and the banks might do a 
 larger business than under a system which compels 
 them to refrain from credit expansion when accom- 
 modation is most in demand. This would bring 
 about that much desired condition so zealously ad- 
 vocated by Mr. Eckels, in which the Government 
 would be entirely divorced from the banking busi- 
 ness. All commercial-credit business would still be 
 done by the banks; the banks would be operating 
 on their own resources; and the Government when 
 acting at all would serve in an auxiliary capacity 
 only — that of trustee for all parties in interest and 
 administrative guardian of the welfare of the nation. 
 Similar suggestion has come from several sources. 
 The Fowler bill of 1897 contained a provision for a 
 guarantee fund. The proposition has been argued 
 
234 THE BANK AND THE TREASURY 
 
 in financial journals. The opposition developed has 
 come largely from the older and stronger banks. To 
 them there is an advantage in the unsecured system 
 Character of op- ^^ that their solvency is not questioned ; 
 position to seem- and by virtue of their reputed ability 
 ing" deposits" ^^ ^^^^ current obligations they are 
 able to make large sales of credit compared with 
 capital employed. To establish a common fund for 
 the security of all credit-accounts sold by all the banks 
 in the system would give to the small bank the same 
 reputation for soundness as is enjoyed by the largest 
 institutions. This argument would be valid under 
 our present system of banking, wherein there is no 
 check on credit sales other than a "money-reserve." 
 If, however, an amendment were made which re- 
 quired a minimum cash-reserve to be provided out of 
 capital, and the powers of the Comptroller were ex- 
 tended to prevent the extension of credit beyond a 
 certain proportion of that capital available in the 
 form of redemption equipment, neither the large nor 
 the small bank could extend its credit beyond the 
 prescribed limit. Each bank would be restricted in 
 its maximum business to a safe proportion to capital 
 invested. Under such a provision, the large bank 
 could not be deprived of business by a small bank 
 unless the small bank increased its capital, in which 
 case the small bank would be entitled to do a larger 
 business. It may be questioned whether any pro- 
 vision made for increased safety to business would 
 
MODIFICATIONS TO INCREASE ELASTICITY 235 
 
 reflect on the worthy institution. On the other hand, 
 much may be gained by all parties concerned through 
 the enlarged opportunities offered to banks for doing 
 business. And through a system of mutual respon- 
 sibility pressure would be brought by the banks 
 themselves for an enforcement of the Law. 
 
 Whatever may be conceived as a proper applica- 
 tion, in concrete provisions of the Law, the principles 
 governing increased availability of capital-assets of 
 National banks and increased elasticity by simple 
 changes in the existing system may be summarized 
 as follows: 
 
 (i) An amendment of the "money-reserve" pro- 
 visions of the Bank Act, requiring a minimum " cash "- 
 reserve to be provided out of capital, would operate to 
 give increased financial strength to the banks; it 
 would make possible increased elasticity of credit- 
 accounts and credit-accommodations. 
 
 (2) A change in the Bank Act fixing a minimum 
 of "redemption equipment" to be provided out of 
 capital, making this proportionate to the maximum 
 of credit-obligations outstanding, would operate to 
 increase the capitalization of banks. 
 
 (3) An amendment requiring interest payments on 
 "issues" (loaned by the Government to the banks) 
 would operate to make the note-circulation an 
 elastic currency. 
 
 (4) An amendment of the Bank Act permitting 
 the hypothecation of "gilt-edge" securities for Gov- 
 
236 THE BANK AND THE TREASURY 
 
 ernment "deposits" would encourage capital invest- 
 ment in more highly convertible assets. 
 
 (5) An amendment requiring the payment of in- 
 terest on "deposit" loans would make the Treasury 
 surplus an important support to the banks for the 
 support of increased credit-accommodation. 
 
 (6) The proposed amendment to constitute the 
 Government income from interest on loans, taxation, 
 etc., a contingent sinking fund has in it possibilities 
 for increasing the soundness of bank-credit and for 
 increasing elasticity in so far as elasticity depends on 
 public confidence in the banking system. 
 
 (7) A provision requiring that all capital used 
 for the purchase of " banking house," "real estate," 
 for underwriting, etc., be considered banking capi- 
 tal impairment, would have a wholesome effect and 
 would serve as a protection to the public. 
 
 (8) A clause requiring that all special and prefer- 
 ential deposits be stated in all published reports, 
 would do much to correct present evils in banking 
 practice. 
 
 Every measure taken to enable banks to meet 
 demands for accommodation by use of capital 
 equipment would tend to minimize fluctuation in 
 demand, and to decrease the amount of capital 
 which must be held in reserve in low income-pro- 
 ducing investments and thus be to the advantage 
 of the banks as well as of the business community. 
 
Chapter XVII 
 
 THE SUPERIORITY OF THE AMERICAN FUNDING 
 SYSTEM OVER THOSE OF OTHER COUNTRIES 
 
 A CENTURY of adaptation to new and ever-changing 
 conditions has given to America some remarkable 
 institutions. In none is the strenuous character of 
 the people more strongly marked than in our financial 
 system. In none have we developed greater possi- 
 bilities for solidity and working efficiency than in our 
 concerns organized to supply the increasing demand 
 for current funds. Living amid great natural re- 
 Optimism and sources, hampered for lack of capital 
 conservatism as and industrial equipment, working in 
 jactorsinbusiness circumstances which require intensity 
 of effort and strictest economy, the balance of 
 National prosperity has been swung by two contend- 
 ing forces — the one conservative, the other promo- 
 tive. Our conservatism has consisted in measures 
 to protect property already acquired. Our promo- 
 tions have been efforts to apply all our own resources, 
 as well as those which might be acquired from others 
 through contracts of current credit and of capitaliza- 
 tion. An inventive people, we have exercised our 
 best talent in devising ways and means for doing 
 
 [237] 
 
238 THE BANK AND THE TREASURY 
 
 business, and to this end both capital and current 
 funds have been obtained in exchange for contracts 
 made for the future delivery of money. The re- 
 sult at times has been to carry investment judgment 
 beyond all reasonable certainty of return. 
 
 Nor has the situation been an unnatural one. 
 With teeming riches on every hand, awaiting only the 
 intelligent application of capital for their recovery, 
 when markets have been high the inducement to 
 promotion and credit investment has been great. 
 When failure has come, it has more often been due 
 to changes in general market conditions than to dis- 
 Failure to meet appointment in productive results. 
 contracts for fu- Prospective money returns have not 
 ure eivery always been realized within the term 
 of a loan. Failure in judgment as to the amount of 
 money obtainable in the future has resulted in inability 
 to make money delivery — in inability to meet credit- 
 obligations. Even when the rewards of nature have 
 surpassed all calculation, money payments required 
 by contracts of capitalization and current credit have 
 not been met. 
 
 As before suggested, the money returns required 
 by contracts of credit have depended quite as much 
 on the market price obtainable of the thing produced 
 as on the amount of the physical product. The mar- 
 ket has been subject to world conditions and to fluc- 
 tuations which the parties to the contract could not 
 foresee; so violently have these fluctuations in world 
 
SUPERIORITY OF THE AMERICAN SYSTEM 239 
 
 conditions reacted on our credit relations that period- 
 ically commerce and industry have become paralyzed 
 Failures due to ^y forced liquidations and the with- 
 world market drawal of working funds. In each 
 con ttwns period of increased world activity and 
 
 increasing financial return, capital has been more 
 easily obtained from abroad; with each period of 
 decreasing world demand and consequent lower 
 prices for products, capital has become more conserv- 
 ative, forcing retrenchment and financial readjust- 
 ment. Out of such a situation — alternately moved 
 by the forces of conservatism (or protection to wealth 
 acquired) and by forces of promotion and credit ex- 
 pansion (or endeavor for increasing gains) — our 
 funding institutions have arisen. 
 
 In the organization and control of institutions of 
 current credit, the guiding principle of the American 
 people has ever been and to-day is to give to capital 
 the highest utility compatible with safety. Pro- 
 ceeding from this principle, alternating in control 
 between the forces of conservatism and those of 
 credit expansion, we have developed a National 
 system that is unique — a system in which both our 
 money and our commercial funds are on a credit 
 basis. In the interest of National economy and 
 business safety, our money (largely credit-money) is 
 issued by an agency of Federal Government — the 
 United States Treasury. For purposes of utility, our 
 commercial-credit is issued and controlled by private 
 
240 THE BANK AND THE TREASURY 
 
 locally-independent institutions — our commercial 
 
 banks. The more vividly to portray our National 
 
 funding system, it has been described as a mammoth 
 
 structure of delicate balance and adjustment resting 
 
 on two independent and widely separated columns 
 
 The principles of or pillars: the one is a column of 
 
 'nlTi^nt 7.1 $1,500,000,000 of credit-money, which 
 omy tn our pnan- ^ ' j ' ' j ^ 
 
 cial system has for its foundation the gold Treas- 
 
 ury-reserves; the other is a column or pillar of about 
 $10,000,000,000 of bank-credit, which has for its 
 foundation the reserves of the commercial bank. On 
 these two columns or pillars is superimposed from 
 $30,000,000,000 to $60,000,000,000 of business-credit 
 that looks to the resources of the two independent and 
 widely separated institutions above referred to — the 
 Treasury and the bank — for support. The great 
 problem of the century past has been to make this 
 structure a safe one in which to do business. The 
 problem of to-day is to so lay the foundations that the 
 columns may be able to support the constantly 
 shifting strain that is placed upon them. 
 
 In planning for the present as well as for the future 
 we must plan for the business of a continent. Our 
 The abandonment business demands are larger and more 
 of the European varied than those of any other coun- 
 system ^^^ q^^. pj^j^g^ therefore, must be 
 
 continental. We cannot confine our view to one 
 State, as does France, or Spain, or Austria. We 
 already have developed a banking power comparable 
 
SUPERIORITY OF THE AMERICAN SYSTEM 241 
 
 with that of all Europe. From considerations of 
 local autonomy and National development we have 
 long since abandoned the European system, the cen- 
 tral feature of which is a State bank under Govern- 
 ment direction and control. 
 
 That the Treasury, under such a system as we 
 have, cannot supply the people with current funds 
 goes without saying. Even the money-demands of 
 commerce and industry cannot be supplied except 
 through loans, and the Government has permanently 
 retired from the loan business. Loaning is the only 
 method by which the fluctuating demand for funds 
 may be met under any system of finance. In Ger- 
 Therelationofthe many, in Russia, and in France — in 
 Treasury to the fact wherever the general government 
 money market j^ ^jg^ ^ ^^^^^^ _ ^^^^^ ^^^^^ ^^^ ^^ 
 
 made to the people direct. But under a system such 
 as ours, in which the Government has no institution 
 of commercial-credit, the only manner in which the 
 Government can bring its large financial resources to 
 the support of the market is through independently 
 organized commercial banks. 
 
 How under Our System the Treasury and the 
 
 Commercial Bank may Work together to Provide 
 
 the Elasticity Required 
 
 Since both money-demands and credit-demands 
 fall immediately on the commercial bank it is to this 
 that we must look for the means necessary to supply 
 
242 THE BANK AND THE TREASURY 
 
 these demands. Our inquiry is, therefore, Under 
 such a system as that with which we are working, 
 how may the banks the better supply the fluctuating 
 money and credit-demands, and how may the Treas- 
 ury best lend support to the banks without weakening 
 Proposed method its support to the credit-money-issues 
 oj Treasury of the Government ? Answer to this 
 support inquiry has come from some of our 
 
 leading bankers in the following form: "That the 
 Treasury be required to deposit all its current funds 
 over and above its currency requirements in the 
 banks." The reason urged in support of this propo- 
 sition is that such a requirement would "prevent the 
 money of the country being locked up in the public 
 vaults, thus depriving business of its proper use." 
 
 In opposition it is said that the reasoning by which 
 the above conclusion is reached proceeds from two 
 fallacies: first, that the money held by 
 Objections raised the Treasury is abstracted from the 
 money stock of the country, and, 
 therefore, operates to cripple business, and, second, 
 that greater elasticity would be given to bank-credit 
 by having the resources of the Government deposited 
 in commercial banks. 
 
 The popular notion that money in the vaults of the 
 Government is abstracted from the money stock "of 
 the country" has already been discussed. There 
 can be no reasonable conclusion other than that the 
 supply of money for business purposes finds its level 
 
SUPERIORITY OF THE AMERICAN SYSTEM 243 
 
 through the market, and that whatever is regularly 
 
 held in reserve by any particular government is not 
 
 abstracted from the money-supply of a particular 
 
 Treasury stock country, but goes rather to reduce the 
 not withdrawn •^ ^ ^ , , r .^ i i 
 
 jrom national available money stock of the world, 
 
 money supply which may be made available for 
 private business ends. If, therefore, the Treasury 
 surplus of the United States may be made available 
 for private business uses in time of extraordinary 
 business demand, such Treasury-reserve instead of 
 decreasing the money stock of the country will in- 
 crease it to the full extent of the amount thus made 
 available. Furthermore, it may be said that the 
 money in the vaults of the Treasury is not idle. On 
 the contrary, in so far as it is needed to support the 
 credit-issues of the Government, it gives to the 
 country from eight to ten times the amount of money 
 which is held in reserve for the support of these 
 credit-issues. The Treasury-reserves, therefore, 
 enable the Government to supply to the people from 
 eight to ten times as much money as it could do at 
 the same cost if these reserves were not so held. 
 
 Again, in so far as the general fund of the Treasury 
 is not necessary to the support of credit-issues of 
 Government they must be looked to as current cash 
 for the carrying on of a public institution. To say 
 that public business is not a part of the business of 
 the country would certainly be erroneous. The 
 actual need of the Government for current funds 
 
THE BANK AND THE TREASURY 
 
 with which to carry on its business has been variously 
 estimated at from $100,000,0,00 to $200,000,000. To 
 Treasury-reserves the extent that the amount held in the 
 SsZlmy """' Treasury is not to supply an actual 
 supply funding need this surplus should be 
 
 reduced — but not by loaning it to private parties. 
 The Government has obligations of its own to meet, 
 and may at any time apply a surplus to their reduc- 
 tion. If at any time there may be said to be any 
 idle money in the Treasury this is not a fault of the 
 system, but rather a fault of those who are operating 
 it. But the mere fact of the segregation of public 
 funds from private funds leaves the Government at 
 all times in a position to lend temporary aid to private 
 funding institutions, which it could not do if the 
 public funds had been commingled with those of 
 private agencies. 
 
 The second fallacy is quite as apparent. To make 
 the commercial bank the regular recipient or deposi- 
 tory of Government funds as they are received, when 
 the Government itself is out of the banking business, 
 cannnot add to the elasticity of bank-credit. If Gov- 
 
 Government de- emment-deposits with the banks were 
 posits in hanks do - r, 1 . , -i- . , . 
 
 not increase elas- ^o be kept at a uniform amount, this 
 
 ticity amount would soon become absorbed 
 
 in business, and the bank-reserves would be reduced 
 
 to the usual safe working proportion. Whenever an 
 
 extraordinary demand for money or for current funds 
 
 might arise the bank would be in no better position 
 
OOS qS^oSo SSoSoS HoSo'f^ MILLIONS 
 OOOO OOOOOOOOOOOO OOOOO'' COLLARS 
 
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SUPERIORITY OF THE AMERICAN SYSTEM 245 
 
 than before to meet this demand. This is an assump- 
 tion most favorable to such a reciprocal arrangement. 
 The revenues and expenditures of Government are 
 not uniform. Were the revenue receipts and current 
 expense payments to be made through the banks this 
 would be added cause of monetary and credit dis- 
 turbance, since it often happens that the banks are 
 hardest pressed and are required to keep the largest 
 May increase reserves for their own protection at a 
 monetary disturb- time when the expenses of the Gov- 
 "^""^^^ ernment are in excess of revenues and 
 
 the Treasury surplus is running low. If, for exam- 
 ple, the banks had been the fiscal agents of the Gov- 
 ernment within the year 1903-4, it would have been 
 necessary for them not only to have paid for the 
 Panama canal purchase and to have arranged for the 
 other extraordinary fiscal payments, but they would 
 also have been required to meet a revenue deficit of 
 $41,700,000. That is, all of these causes would 
 have operated to reduce the Government surplus, 
 and the Treasury must have drawn heavily on the 
 banks as a means of protecting its own credit-obliga- 
 tions. Had these drafts been postponed, the Gov- 
 ernment, with a large surplus, would have been forced 
 to borrow money to fund its current needs. To 
 place the Government in a position of this kind would 
 hamper public business without adding anything to 
 the strength of the banks. Such an alliance between 
 the Government and the banks would reduce their 
 
246 THE BANK AND THE TREASURY 
 
 ability to extend commercial accommodation and 
 would stand in the way of, rather than permit, in- 
 creased elasticity in the system. 
 
 The Independent Treasury Increases the National 
 Money Supply 
 
 So long as the Government remains out of the 
 banking business (and with us this seems to be an 
 established policy), the greatest elasticity obtainable 
 must come through the collateral support which an 
 Independent Treasury is able to give to independent 
 commercial banks. The fact that the National 
 Treasury carries in its vaults from $100,000,000 to 
 $250,000,000 in money over and above its currency 
 requirements, and that this may be kept free for 
 collateral support to the banks, suggests the basis on 
 which the Government may aid the banks to meet 
 increased money-demands and at the same time 
 permit the banks to increase their credit-accounts to 
 customers. It usually happens that the Treasury 
 surplus becomes largest in periods of low money- 
 demand — at times when the banks are giving an 
 inordinate expansion to their credit. For example, 
 from June 30, 1899, to June 30, 1902, the ordinary 
 Causes money to receipts of the Treasury exceeded the 
 J:HS/tr «^dinary disbursements by $345,000,- 
 demand 000. During the same period the 
 
 bank-credit of the country expanded about $2,000,- 
 000,000. From June 30, 1902, to June 30, 1904, the 
 
SUPERIORITY OF THE AMERICAN SYSTEM 247 
 
 ordinary receipts of the Treasury exceeded the ordi- 
 nary expenditures only $12,000,000, and during the 
 latter fiscal year there was an actual deficit of $41,- 
 700,000. This falling off of Government revenues 
 was coincident with great financial pressure on the 
 banks, and a consequent reduction in credit-accom- 
 modations to the public. 
 
 The net results of the Independent Treasury sys- 
 tem during the years referred to have been to bring 
 into the United States in time of greatest prosperity, 
 and to keep here during a period of credit expansion, 
 at least $200,000,000 in gold, which if placed in the 
 vaults of banks would doubtless have caused still 
 greater credit expansion on the one hand, and at the 
 Treasury-reserves same time would have set up an ex- 
 released in high portation of gold. Even if no finan- 
 money-demand ^-^j ^j^ j^^^ ^^^^ ^^^^ ^^ ^^^ ^^^^^ 
 
 by the Treasury, the result of the independent fiscal 
 system would have been beneficial. During the 
 period of low money-demand the Treasury was 
 gradually absorbing an increasing surplus, thus pre- 
 venting exportation of gold, while during the period 
 of extraordinary money-demand the Government 
 was gradually disbursing the surplus to meet its own 
 revenue deficit. The same effect may be traced 
 through the recurring periods of credit expansion and 
 credit retraction since the Independent Treasury was 
 established. 
 
248 THE BANK AND THE TREASURY 
 
 Collateral Aid of the Treasury to Prevent Credit 
 Contraction 
 
 But the history of the last three years (1902, 1903, 
 and 1904) teaches another lesson, which by the banks 
 should never be forgotten. When the effects of 
 speculative loans had brought about credit reaction, 
 and business conservatives began to demand settle- 
 ment on contracts iot money delivery, and when in- 
 creased pressure was brought on the banks for money 
 payment, the rapidly disappearing reserves would 
 doubtless have proved ruinous, not only to the banks 
 but also to the commercial and industrial interests of 
 the whole nation through the collapse of the bank- 
 credit column supporting them, had not the National 
 Treasury responded to pleas for aid from commercial- 
 credit institutions. A volume of credit had been 
 May support piled up which was too great for the 
 the banks in time banks to support on their own re- 
 0/ i ress sources. The crumbling foundation 
 
 of bankers' reserves would doubtless have gone from 
 under and given way to the financial stress which 
 business interests were bringing to bear on them had 
 not the Government transferred over $100,000,000 to 
 their support. Had the prescription above referred 
 to as a remedy for inelasticity and for financial weak- 
 ness been followed, had the Government previously 
 deposited its surplus in the banks during these years 
 of so-called prosperity, instead of giving to the great 
 
SUPERIORITY OF THE AMERICAN SYSTEM 249 
 
 National credit structure the solidity and the power 
 of endurance which is bespoken for it, it would have 
 had the effect of adding nothing to the capital 
 strength of our commercial-credit institutions; it 
 would have made the superstructure still more top- 
 heavy — would have placed our funding system in 
 the same position as were those of Germany, Russia, 
 England, and France. That our business suffered 
 less than the commerce and industry of Europe 
 during the same period was largely due to the very 
 subsidiary reserves of which certain individuals are 
 heard to complain. 
 
 The Independent Treasury gives to the American 
 system a strength that is not attainable under any of 
 the much lauded foreign financial devices. The fact 
 is that we have not used the Independent Treasury 
 to its highest advantage. The deposits made by the 
 Government with banks are loans without interest. 
 So long as the Government does not call these loans 
 there is no inducement for the banks to pay them. 
 On three different occasions from 1899 to 1903 the 
 Treasury has helped the banks to support their 
 financial burdens. In each case the strain upon 
 them was due to an over-issue of their own credit 
 and to inability to make the money 
 ^pTkn7e7"^ ^''' payments demanded without a vio- 
 lent contraction in credit-accommo- 
 dation. The Government has stepped in to prevent 
 this contraction. But when the stress was past, what 
 
250 THE BANK AND THE TREASURY 
 
 then ? Did the Government again gradually repos- 
 sess itself of the moneys gratuitously loaned? Has 
 it again reclaimed the means by which assistance was 
 rendered ? No ; following just such reasoning as has 
 been quoted, the loans remained with the banks still 
 without interest. The Treasury was able again and 
 again to come to the relief of the banks by reason only 
 of its constantly increasing surplus. 
 
 The weakness in the situation lies in the failure 
 of the banks to reduce their temporary loans from 
 the Government when the emergency is past, and in 
 the Treasury's failing to call in its demand loans 
 when the reserves of the banks become adequate to 
 support their credit. In July and August the bank 
 reserves piled up till they were becoming a source of 
 possible weakness. When the Panama canal pur- 
 chase was to be settled for, when the 
 Weakness in ^ . , . <• n 
 
 present practices Government revenues began to fall 
 
 off, instead of demanding a return of 
 loans to the banks and thus reducing the large sur- 
 plus-reserves which the banks had accumulated, the 
 Government preferred to still further reduce the 
 reserves in its vaults, calling on the banks for only 
 such an amount as seemed necessary. During the 
 month of September there was a gradual withdrawal 
 of bank reserves to supply the business need. Under 
 circumstances of weakening bank reserves and of 
 gradually decreasing revenue of Government, with 
 the consequent disappearing of the Treasury surplus, 
 
SUPERIORITY or THE AMERICAN SYSTEM 251 
 
 the banks may not only be deprived of collateral aid 
 in time of financial stress, but may be required even 
 to still further weaken their money-reserves by 
 making payments to the Government. Under such 
 circumstances, the banks would be left to their own 
 resources, with the Government money-demand as 
 well as the public money-demand to supply. The 
 result would be that in their own protection the banks 
 would be forced to contract business accommodation 
 in such a way as to make the present practice posi- 
 tively dangerous. 
 
 How the Treasury Surplus may be kept as a Reserve 
 for Collateral Support to Credit 
 
 At no time in the history of banking were the time 
 and circumstances more opportune for Treasury sup- 
 port to banks than in 1902 and 1903. At no time in 
 our history might the Secretary more wisely have 
 withdrawn the Government deposits than in July 
 and August, 1904, when the money-reserves were 
 piled up in the vaults of the banks. The effect of 
 failure to do this was twofold: (i) The cheapness of 
 Inurest charges money caused an exportation of gold; 
 to insure prompt (2) the low rate of call-loans encour- 
 payment of loans ^^^^ speculation. In September we 
 
 had the result made apparent of a concurrent flow of 
 money to the interior and abroad, and at the same 
 time an increase in speculative activity which went 
 on unabated till about December first. Thus again 
 
252 THE BANK AND THE TREASURY 
 
 we had a brief period of increasing credit expansion 
 and decreasing bank-reserves. These movements 
 did not prove threatening, it is true, but there seems 
 at least a possibility that the banks may again call to 
 the Treasury for collateral aid, and under conditions 
 which would require the Treasury to turn a deaf ear. 
 Following a practice by which the Government loans 
 its surplus to the banks without interest or below the 
 ordinary market rate, the continuous aid of the Treas- 
 ury to the banks may depend on the exercise of dis- 
 cretion by the Secretary. If, however, the Govern- 
 ment were to charge the bank, not an exorbitant rate, 
 as would a money-lender in time of stress, but the 
 usual commercial rate, the bank would promptly 
 return the loan when money falls below the usual 
 price. In either case, whether by exercise of oflScial 
 discretion or by charging a rate which would make 
 the restoration of reserves autonomous, the Treasury 
 support to the system would not be weakened. 
 
 Elastic Possibilities in the Bank-Note 
 
 It has been pointed out that even if the Treasury 
 never had a surplus to loan to the banks in periods 
 of emergency, under the American system we have 
 possibilities for increasing circulation for current 
 needs that are not inherent in foreign systems. This 
 is in the so-called issues of banks. If the bank has 
 unencumbered resources (mind you, Mwencumbered 
 resources) necessary to obtain a Government "de- 
 
SUPERIORITY OF THE AMERICAN SYSTEM 253 
 
 posit " (loan), these same resources may be pledged 
 for issue — a loan from the Government in the 
 Equal to fluctu- form of "bank-notes." July i, 1904, 
 aiing money- the Treasury reported that there were 
 "^'^ ^ '"'••",000,000 of bank-notes in the 
 
 hands of the banks or in circulation. These issues 
 alone were more than ample to meet all fluctuations 
 in money-demands of the country. The only trouble 
 is (as in the case of a permanent policy of depositing 
 Government surplus with the banks) that when the 
 banks are in trouble these notes are not available. 
 Like the Government deposits, they have already 
 been absorbed in current circulation, have all been 
 used to support the ordinary banking operations 
 during periods of low money-demand, and in time of 
 strain the banks have their best securities tied up for 
 funds with which to do business when there is no 
 strain to be met. In time of extraordinary demand 
 they are left helpless. 
 
 Why should this be so? Why might not these 
 notes be used in such a way as to permit an increase 
 of at least $400,000,000 in money circulation and a 
 simultaneous increase of at least $1,600,000,000 of 
 May be made to bank-credit-accounts at any time that 
 respond to de- an extraordinary demand for funds 
 mands ^^jgj^^ ^^ ^^^^^ M&nj bankers have 
 
 suggested as a way out of the difficulty that a tax 
 be placed on issues. Secretary Shaw in his Chi- 
 cago address of a year ago pointed to this. Re- 
 
254 THE BANK AND THE TREASURY 
 
 quire the banks to pay a tax equal to the commercial 
 rate of interest (let us say five or six per cent) on all 
 issues over and above a determined minimum — or 
 call it interest on the "issue loan" of the Government 
 to the banks — and the banks would not encumber 
 their assets except when money-demands were above 
 that rate. These suggestions are made with much 
 force. The result may also be predicated on ex- 
 perience. As the trustee of collaterals and as the 
 department of issue and control of the bank-note, 
 the Treasury might thus lend as much support for 
 the expansion of money circulation and current credit 
 accommodation as the system itself would require. 
 
 Aside from making the bank-note circulation in 
 large part an emergency currency, aside from giving 
 elasticity to our National money and credit system, 
 the effect of such a Law would be twofold. By 
 taking a large part of the present issue of bank-notes 
 out of circulation, except when an extraordinary de- 
 mand arose, the ordinary demand must be supplied 
 Theeffectsofalawhy other forms of money — the 
 ^on^^leposits"^^ amount taken out of ordinary circu- 
 and" issues" lation must come from some other 
 source. This would necessitate an increase in gold 
 certificates or other forms of money-issue. The 
 ordinary money requirement would be met, but it 
 would not be met by bank-notes. The necessary 
 money-funds would come either from an increase in 
 issues of Government or from importation of gold. 
 
SUPERIORITY OF THE AMERICAN SYSTEM 255 
 
 The second result that would obtain has a bearing 
 on the financial strength of the banks themselves. 
 If the banks were not encouraged to encumber their 
 best resources in time of low money-demand; if, it 
 may be said, they were required to retain their 
 capital in such form as to make it available for sup- 
 port of their credit and were permitted to deposit 
 "gilt-edge" securities of such kind and quality as 
 might be prescribed by the Treasurer for bank-notes 
 in time of strain, the support which is now given to 
 the credit of Government in the form of increased 
 strength to the bond market would then be given to 
 the banking business. In other words, the net result 
 would be an increase of banking-capital for banking 
 purposes and an increase in standard money in the 
 country — a result which in itself would be desirable 
 as a means of supporting greater elasticity in credit- 
 accommodation. 
 
 Support which the Treasury may give to the Money 
 
 Market 
 
 Another conservative principle is contained in the 
 American system that is not afforded by that of any 
 other country: As the one institution permitted to 
 issue credit-money the Treasury gives to the people 
 a form of currency more convenient in use than gold, 
 and less expensive to itself. The silver dollar, the 
 greenback, the silver certificate, etc., cost the people 
 who use them just as much as gold coin or gold 
 
256 THE BANK AND THE TREASURY 
 
 certificates, but the cost to the Government of these 
 credit-moneys is less. By means of their issue the 
 Financial advan- Government is able to carry on its 
 tage of credit- own business and to decrease its inter- 
 money-issues gst-bearing debt about $600,000,000. 
 What the Treasury stands pledged to do and what it 
 is necessary for it to do under our system is to pro- 
 tect these credit-issues, i.e., to make payment in gold 
 when gold is demanded. So long as no doubt arises 
 as to this there can be no financial disturbance on 
 that account. But there may be a distinct advantage 
 to the money and credit system. If at any time our 
 foreign balances demanding settlement become so 
 great as to cause a drain on bankers' gold reserves 
 (the foundation for some $10,000,000,000 of bank- 
 credit), it may become necessary to stay the tide of 
 exportation as a means of protecting the National 
 credit structure. This result will be effected through 
 the demands made by the banks on the United States 
 Treasury for payment of Government credit-issues. 
 That is, through their own reserves the banks may 
 reach the gold reserves of the Treasury and bring them 
 to their own support. Under such circumstances and 
 at such time the Government will be brought into 
 the gold market as a means of meeting its own de- 
 mand debt, and gold may be had for the support of 
 the credit of American Funding Institutions at a rate 
 more favorable than it could be had by any indi- 
 vidual, private banking corporation, or foreign nation. 
 
SUPERIORITY OF THE AMERICAN SYSTEM 257 
 
 No greater fallacy was ever put forth than that 
 which concludes that a Government which is not in 
 the banking or loan business can supply money 
 capital direct for private business. If all the gold 
 coin of the world were stamped and issued from the 
 United States mint, so long as the business habits of 
 our people remained the same, no greater amount 
 of gold would find its way into American channels of 
 trade. On the other hand, if the Government did 
 not issue or coin a dollar the people would have the 
 same amount of money which they now have with 
 which to do business. Our circulation would not 
 increase or decrease in either case. Instead of buying 
 gold and taking it to the mint we might buy foreign 
 coins; instead of retaining the currency issued by the 
 Government or that put out in payment of its own 
 obligations we might have some other form of cur- 
 rency. But the usual amount of currency would be 
 supplied from one source or another by coinage, by 
 issue or by importation, in exchange for products of 
 our mines, our manufactures, etc. What the Gov- 
 ernment can do and does do is to make the moneys 
 ordinarily needed and currently used conform to a 
 National standard, and to protect these in their 
 Superiority of financial and physical integrity against 
 
 American system impairment. More than this, the 
 
 in elastic posst- ^ 
 
 hilities Government may provide a means by 
 
 which extraordinary demands for money may be met 
 
 without resort to importation. It may make pro- 
 
258 THE BANK AND THE TREASURY 
 
 vision for meeting this fluctuating demand through 
 the banks, and it may make this extraordinary 
 money-supply more readily obtainable than might 
 be if our traders and manufacturers were required to 
 go abroad for it. This may be done either by direct 
 money loans to the banks from the Treasury reserves, 
 or by temporary credit-issues to the banks. Instead 
 of the banks pledging securities abroad, the way 
 should be opened to pledge them with the Treasury 
 and thereby obtain any amount of money for such 
 extraordinary circulation that is needed without dis- 
 turbing domestic and foreign trade. And for this 
 purpose no system is so well adapted as the American 
 system, having for its main support the two independ- 
 ent financial institutions — the independent com- 
 mercial bank and the Independent Treasury, the one 
 representing the financial resources of fifteen thou- 
 sand independent banking institutions, the other 
 representing the combined resources of the nation. 
 
CHAPTER XVIII 
 
 RECENT EFEORTS MADE TO FURTHER ADAPT OUR 
 
 FUNDING SYSTEM TO THE NATION'S 
 
 BUSINESS NEEDS 
 
 Among the results already accomplished in the 
 effort to adapt our funding system to the nation's 
 business needs, prominently stand out the following : 
 (i) The abandonment of the European funding system. 
 This was effected through the refusal of the Federal 
 Congress to incorporate the third bank of the United 
 States, and by the contemporaneous withdrawal of 
 the several States from commercial banking enter- 
 prises. (2) The establishment of independently capi- 
 talized commercial banks in each locality whose private 
 funding needs and resources were sufficient to induce 
 capital to interest itself in this form of undertaking. 
 (3) The establishment of an Independent Federal 
 Treasury — a department of Government which pro- 
 vides the means necessary for meeting public fiscal 
 obligations without drawing on private capital and 
 Adaptations al- without disturbance to local business. 
 ?2r.tt (4) The Legal Tender Acts, and the 
 ditions several Currency Acts, and National 
 
 Bank Act — which not only completely segregated 
 the functions of money coinage and money-issue 
 
 [259] 
 
260 THE BANK AND THE TREASURY 
 
 from those of banking, but also collected into a 
 national system the best experience of a quarter of a 
 century of independent banking. (5) The gold 
 standard currency Act of 1900 — which made certain 
 all question as to the standard of money valuation 
 and of credit-money payment — which enjoined the 
 Treasurer to maintain all the money-issues of the 
 Government at a valuation equal to the prescribed 
 standard — and which adequately capitalized the 
 ability of the Division of Issue and Redemption of 
 the Treasury to redeem all credit-money obligations 
 (i) through placing in the hands of the Treasurer an 
 adequate gold fund to be protected as a "reserve," 
 (2) by giving to this fund a first lien on the "general 
 fund" of the revenue department of the Treasury, 
 and (3) by arming the Secretary with the full loan 
 power of the national Government, as a means of 
 ultimate redemption of credit-money-issues. 
 
 These results are accomplished facts. The credit- 
 money-issues of the Treasury are "sound." They 
 pass without question in any part of the world at par 
 with gold coin of the United States. American 
 National banks, as independent institutions likevfise, 
 are as "sound" as those of any other country. 
 The need which Neither has our banking system as a 
 has not been sue- whole, and our business, suffered more 
 cessjullymet ^^^^ "inelasticity" of current-funds 
 than have the older nations of Europe. Still, our 
 funding system is admittedly far from being satisfac- 
 
EFFORTS TO MAKE FURTHER ADAPTATIONS 261 
 
 tory; there yet remains a condition present which we 
 cannot fail to recognize as a subject of serious con- 
 cern — viz., that our own funding system (as well as 
 theirs) has not satisfactorily met the shifting and 
 fluctuating demands of trade, and that business has 
 suffered much on this account. This is the subject 
 of present solicitation and of many prospective meas- 
 ures of reform, a critical review of which is presented. 
 Before, undertaking a critical review, however, 
 some definite standard of analytical and critical 
 judgment must be found. This standard is taken 
 from two fundamental conclusions which would seem 
 to be well estabUshed in American thought: (i) That 
 an institution, public or private, which is authorized 
 Standards ojjudg- to issue credit-money should be capi- 
 metu of measures talized sufficiently to enable it to 
 proposed maintain adequate reserves with 
 
 which to redeem these credit-issues in the standard 
 money of the realm, at par, on demand. (2) That 
 a commercial bank which is not supported by the 
 Government should be required to do business on 
 its own capital. That is to say, that an institution 
 which is authorized by charter to circulate its own 
 credit-accounts in the community for current funds 
 should have a capital sufficient to make it a safe 
 institution with which to do business; and that the 
 capital should be guarded as a special fund to main- 
 tain "reserves" with which to meet current demands 
 for payment on these credit-obligations without 
 
262 THE BANK AND THE TREASURY 
 
 forcing commercial credit contraction by liquidation 
 and without endangering public welfare. 
 
 Accepting these general conclusions as principles 
 fundamental to "sound currency" and "sound bank- 
 ing," several other conclusions would seem war- 
 ranted: 
 
 I. That so long as we retain the gold standard of 
 valuation and of credit redemption, all issues of the 
 Treasury (including silver coins and silver certifi- 
 cates, as well as currency obligations) should be 
 interchangeable and should be recognized as prom- 
 ises of the Government to pay gold on demand. It 
 being made the duty of the Treasurer to maintain all 
 issues at par, the "gold reserve" in the Division of 
 Issue and Redemption, the lien on the "general 
 fund" of the Treasury given to this division, and the 
 loan power in the hands of the Treasurer for reim- 
 bursement of the gold reserve thus created, should 
 be placed behind the silver coins and silver certifi- 
 cates of the United States as well as behind the green- 
 backs and the Treasury notes of 1890. The duty of 
 the Treasurer with respect to the prompt redemption 
 of these issues should not be left subject to doubt 
 through failure to make specific mention of them for 
 a guide to official conduct. 
 
 II. In passing judgment on measures proposed to 
 increase the "soundness" of commercial credit-funds 
 issued by banks (bank accounts) the following prin- 
 ciples of capitalization should be recognized: (i) 
 
EFFORTS TO MAKE FURTHER ADAPTATIONS 263 
 
 That no resources of a commercial bank should be 
 
 regarded as "unimpaired capital" which are not 
 
 proper capital investments and which may not be 
 
 available as a fund to supply the bank with "cash" 
 
 to redeem its outstanding credit. (2) That the 
 
 amount of capital which is to be con- 
 Sound banking • j j -i i-i / • • j\ 
 
 conclusions ^idered as available (or unimpaired) 
 
 for the support of credit-accounts 
 should be specifically "reserved" for that purpose 
 and protected as a "reserve fund," and should not be 
 allowed to become encumbered or to be so used as 
 not to be at all times accessible for the redemption 
 of demand credit-obligations. (3) That all funds 
 which are to be considered as "reserves" for redemp- 
 tion of current credit-obligations should be capital 
 funds, and the accounts kept and reports published 
 of "reserve funds" should not include money or 
 other assets borrowed from customers — i.e., ob- 
 tained in exchange for credit liabilities. (4) That 
 banks should never be permitted to extend credit 
 (sell an amount of credit-accounts to customers) 
 which is not adequately protected by such capital 
 reservations ; i.e., a limit of safety should be placed 
 on the amount of credit-obligations which a bank 
 may issue proportionate to "unimpaired capital." 
 (5) That when any portion of the capital of a bank 
 shall be lost, or encumbered, or in any manner 
 rendered unavailable (as in the purchase of real- 
 estate or in underwriting), that the limit of credit 
 
264 THE BANK AND THE TREASURY 
 
 issue permissible to such bank should be reduced in 
 proportion to the amount so rendered unavailable 
 for current redemption purposes. (6) That if branch- 
 banking be authorized, the amount or proportion of 
 unencumbered capital "reserves" should be the same 
 as those required of individual banks. 
 
 III. Government issued currency, and privately 
 issued commercial-credit funds, having been ren- 
 dered "sound" by the Treasury and the bank each 
 adequately capitalizing its redemption needs, "elas- 
 ticity" in such a funding system as ours would re- 
 quire: (i) That, since the Treasury cannot supply 
 directly to the people the funds required in business 
 to meet the fluctuations in money-demand as well as 
 in commercial credit-demands, these funds must be 
 supplied by commercial banks. (2) That, since the 
 banks are organized and capitalized to supply current 
 Conclusions with credit-accounts to the public at a 
 respect to elas- profit, and the chief fluctuations in 
 *^*-^ money-demands are bankers' de- 
 
 mands to keep up the money-reserves drawn against 
 by those holding current accounts, the unimpaired 
 capital of banks should be sufficient to procure this 
 extraordinary money-supply when needed. (3) That 
 the surplus capital reserves of banks, kept for the 
 purpose of expanding the money-supply, either as a 
 means of supporting credit-accounts or of expanding 
 credit-accommodations, should be invested in such 
 securities or other assets as are readily convertible 
 
EFFORTS TO MAKE FURTHER ADAPTATIONS 265 
 
 and such as will be received by the Treasury as 
 collateral for money loans to the banks. (4) That 
 these Treasury loans, whether in the form of gold 
 ("deposits") or credit-money ("issues") should bear 
 a rate of interest which will cause the banks to retire 
 from circulation the extraordinary money-supply 
 when not needed — i.e., when customers reduce the 
 extraordinary amount of credit-accommodations ex- 
 tended to them by the banks. 
 
 With the foregoing canons of critical judgment 
 before us, the following proposed measures will be 
 discussed in the order set out: (i) The Baltimore 
 Plan; (2) the Carlisle Plan; (3) the Fowler Bill of 
 1897; (4) the plan of the Monetary Commission of 
 the Indianapolis Convention, 1898; 
 Measures dts- ^^^ ^^^ McCleary Bill of 1898 ; (6) the 
 
 Gage Bill of 1900; (7) the Currency 
 Act of 1900; (8) the Fowler Bills of 1902 and 1903; 
 and (9) the Payne Bill of 1903. In taking them up 
 for detailed discussion, it should be held in mind that 
 at the time the Baltimore Plan was proposed, con- 
 flicting legislation had brought the Treasury into 
 financial disrepute and shaken confidence in its 
 credit-issues. The Currency Law of 1873 had es- 
 tablished the gold standard and had made it the 
 duty of the Treasurer to maintain all issues at par, 
 but the only means placed in the hands of the 
 Treasury to do this was the gold-reserve fund ($100,- 
 000,000 for redemption of United States notes 
 
266 THE BANK AND THE TREASURY 
 
 created by the Resumption Act of 1878) and the 
 loan power given to the Secretary. Notwithstanding 
 this and the fall in the price of silver, measure after 
 measure by Congress was made law which forced 
 into circulation such volumes of silver and silver 
 obligations as to render impossible the maintenance 
 of parity of money-issues by means of the fund at 
 the Treasurer's disposal. The results were a vio- 
 lent shock to national credit, Government bor- 
 rowing to support an inadequate reserve, and the 
 sound money campaign. 
 
 The Baltimore Plan 
 
 Just emerging from this situation the Baltimore 
 Plan (a proposition made by a committee of bankers 
 to the American Bankers' Association meeting at 
 Baltimore in October, 1897) became a subject of 
 general interest. Though primarily intended as a 
 currency measure, the plan proposed also bears a 
 close relation to the bank, since the Treasury prob- 
 lem was to be solved by placing its burdens on the 
 bank. Currency was to be furnished to the country 
 by permitting the banks to issue to the extent of 
 seventy-five per cent of their capital. No bond de- 
 posits with the Treasury were to be required, (i) be- 
 cause the National debt was fast being paid, and 
 (2) because it was thought the currency could just 
 as well be secured,and the fluctuating demands could 
 better be met without such a provision. To make 
 
EFFORTS TO MAKE FURTHER ADAPTATIONS 267 
 
 the bank currency "sound," current redemptions 
 were to be made through the Treasury out of a five 
 A sound cur- per cent "redemption fund" as at 
 rency provided present. Ultimate redemption was to 
 '"'' be provided for by the creation of a 
 
 common "guarantee fund" equal to five per cent of 
 the total circulation, and by making the issues of 
 each bank a first lien on its assets. This would have 
 met every requirement as to soundness, since so long 
 as the bank remained solvent the redemptions would 
 currently be met out of the "redemption fund," and 
 as soon as the bank became insolvent the very cause 
 of its insolvency (credit expansion) would add 
 strength to the notes; that is, the greater the credit 
 liabilities incurred by the bank the greater would be 
 the amount of the assets acquired on which the note- 
 holders would have a first lien. 
 
 In the event of the adoption of this plan, therefore, 
 sound currency would have been obtained through 
 decreased banking strength. The capital of institu- 
 tions created for the purpose of supplying sound 
 commercial credit-accounts to the community would 
 have been impaired by using it to capitalize the 
 credit currency issues — to do for the credit-money 
 Sound currency circulation what the Treasury had 
 at the expense 0} failed to do. By placing their re- 
 banking strength ^^^^^^^ ^^^^ ^j ^^^ ^^^^^ circulation 
 
 their banking capital would have been encumbered 
 and to that extent rendered unavailable for support 
 
268 THE BANK AND THE TREASURY 
 
 of credit-accounts — the true banking purpose. This 
 impairment would have resulted in two ways: (i) By 
 permitting the banks to issue notes equal to seventy- 
 five per cent of their capital and to use these notes 
 for money, their current money needs would have 
 been met by their own obligations to deliver legal- 
 tender or standard money in the future — thus en- 
 couraging low capitalization; (2) by making these 
 note-issues a first lien on commercial assets and 
 requiring no deposit or specific reservation of capital 
 assets for their ultimate redemption, the capital 
 assets to be used for banking support as well as the 
 commercial assets for the final redemption of out- 
 standing accounts would be reduced without making 
 this fact apparent to the public. 
 
 Provision was made for elasticity in money-supply 
 by permitting the banks to issue notes equal in 
 amount to fifty per cent of their capital at a nominal 
 
 tax (one-half of one per cent per an- 
 Provisions for n j r • i ^i • 
 
 elasticity num) , and tor issues above this amount 
 
 subject to a tax heavy enough to com- 
 pel retirement except when money rates "were high. 
 This was a true principle for an "emergency circula- 
 tion," and the amount provided would have been 
 adequate to supply all ordinary money-demands. 
 Btit if at any time an extraordinary demand were 
 made for standard money this emergency currency 
 would have been an added cause for the contraction 
 of credit-accommodations. In other words, while 
 
EFFORTS TO MAKE FURTHER ADAPTATIONS 269 
 
 the method proposed provided for an increase in 
 credit-money circulation to meet the bank's fluctuat- 
 ing money-demands, it did not provide for an ex- 
 panding standard money base of credit expansion; it 
 did not provide for "elasticity" in the very sort of 
 funds in which greatest elasticity is required — 
 credit-accounts. As a banking measure it was weak, 
 both from the point of view of "soundness" and of 
 "elasticity." 
 
 The Carlisle Plan 
 
 Under similar circumstances Mr. Carlisle (then 
 Secretary of the Treasury) suggested a measure of 
 relief. Like the Baltimore Plan, this was also in- 
 The primary tended to solve the sound money 
 purpose of the problem. Again the Government is- 
 measure ^^^^ ^^^^ ^^ ^^ Strengthened by shift- 
 
 ing the credit-money load from the Treasury reserves 
 and placing it on the banking reserves. Instead of 
 increasing the capital support of the Treasury for 
 meeting its own current monetary obligations, as was 
 finally done in the Currency Law of 1900, the credit 
 issues of the Government were to be supplanted by 
 credit-issues of the banks. Not only were the 
 National banks to be permitted to issue notes to the 
 amount of seventy-five per cent of their capital and 
 surplus, but under like conditions the State, banks 
 and institutions were to be given the same issue 
 privileges. 
 
270 THE BANK AND THE TREASUHY 
 
 As a money measure this one was also, in principle, 
 eminently "sound." Current redemptions were to 
 be made by the banks and through such agencies as 
 were to be officially designated. Security for ulti- 
 mate redemption of issues was to be 
 "IT' provided by a deposit of Treasury 
 issues equal to thirty per cent of the 
 amount of circulation taken out; a common guaran- 
 tee fund was also set up similar to that contained in 
 the Baltimore Plan, and the notes were to be a first 
 lien on all assets and on the contingent stockholders' 
 liability of the individual bank issuing them. The 
 notes, therefore, had all the security that might be 
 desired. 
 
 As a banking measure, all that has been said con- 
 cerning the Baltimore Plan may be urged with 
 reference to this, except that the banking capital 
 would not be so seriously impaired. A bank must 
 capitalize thirty per cent of its note-issues before ob- 
 Unsoundness 0} taining them, but the remaining 
 the plan as a seventy per cent of notes outstanding 
 bank measure ^^^^ ^^ encumbrance on the capital 
 intended for commercial-credit support. The banks 
 were to assume these public money burdens, which 
 with a $100,000,000 gold-reserve the Treasury had 
 been unable to bear up under, and without making 
 any provision for an increase in capital. The anoma- 
 lous position was again taken that what had proved 
 a burden on the Treasury would not prove a burden 
 
EFFORTS TO MAKE FXJRTHER ADAPTATIONS 271 
 
 to the banks. The credit-accounts of the banks 
 were to be sacrificed as a means of giving financial 
 strength to the money circulation. If adopted, the 
 measure would have crippled the banks for perform- 
 ing the commercial-credit functions for which they 
 are created. 
 
 In the Carlisle Plan no provision was made for an 
 elastic money medium. Every inducement was 
 offered the banks to force out notes and to make them 
 the permanent money stock of the community. If 
 they failed to keep out all their notes it would be only 
 
 because the country could not use as 
 No provision for , , , ^i • j 
 
 elasticity much money as they were authorized 
 
 to put out, and in case the full amount 
 were absorbed, then no provision was made for an 
 increase. But even if they did not succeed in keeping 
 out the full amount of the authorized issue and an 
 extraordinary demand were made for gold or legal- 
 tender issues of Government, then the volume of 
 bank-notes outstanding would force a contraction of 
 credit-accounts as a means of obtaining a supply of 
 legal-tender Government issues for banking reserves. 
 Any extraordinary money-demand would therefore 
 increase the weakness of the credit-accounts of the 
 banks and would cause still more violent credit 
 
 reactions. 
 
 The Fowler Bill of 1897 
 
 Like the Carlisle Plan, the Fowler Bill of 1897 was 
 intended to relieve the Treasury as well as amend the 
 
272 THE BANK AND THE TREASURY 
 
 Bank Act. As a currency measure it proposed to 
 supplant completely the credit-issues of the Treasury. 
 This was to be accomplished by requiring all banks 
 
 availing themselves of the issue-privi- 
 The general plan lege to purchase and surrender to the 
 
 Treasury for cancellation, legal-tender 
 notes, Treasury notes of 1890, and gold certificates 
 equal to their "legal reserve" requirements, and to 
 receive in return an equal amount of gold and silver 
 coins. This would have taken care of the Treasury 
 issues by forcing the Government to pay them. The 
 ordinary money requirements for general circulation 
 were to be supplanted by bank-notes secured by 
 bonds ($700,000,000). Besides the gold and silver 
 banking-reserves, and the bank-notes for general 
 circulation, an "emergency currency" in the form of 
 bank-notes was provided for equal to the combined 
 capital and surplus of banks availing themselves of 
 the issue-privilege. This emergency currency was to 
 be taxed at a graduated rate from one to ten per cent, 
 the tax ranging from six to ten per cent after the 
 amount of issues reached sixty per cent of capitaliza- 
 tion. As the average rate of taxation below this 
 amount was only two and one-third per cent, it is to 
 be presumed that at least sixty per cent of the "emer- 
 gency currency" might have been used to supply 
 ordinary money-demands, only the amount above 
 sixty per cent being intended for retirement after the 
 extraordinary money-demands had passed. 
 
EFFORTS TO MAKE FURTHER ADAPTATIONS 273 
 
 Considering the question of "soundness" the 
 Treasury issues were practically to be ehminated by 
 Sound currency payment. The bank-notes were to 
 and sound bank- be partly secured by bonds, and the 
 mg provisions remainder were secured by a first lien 
 on assets and a first claim against stockholders. 
 Besides, a common guarantee fund was to be created 
 by the several forms of tax levies, which fund was to 
 be used (i) to redeem the bond-secured notes, and 
 (2) for the redemption of emergency notes. This 
 fund was to take the place of the bonds as they were 
 gradually retired. Provision was also made for se- 
 curing the current bank liabilities through the crea- 
 tion of an insurance fund of five per cent of the 
 average deposits. The customer was to be further 
 protected by closer supervision and control. Branch- 
 banking was to be permitted under conditions which 
 gave the public the same protection as with individual 
 banks. 
 
 Had the measure become a law and been enforced 
 on all of the banks. State as well as National, the 
 Treasury would have been completely relieved from 
 its credit-money obligations, a sound credit-money 
 would have been provided, the banking reserve re- 
 quirements would have restricted the 
 Dejects in the , . . • ^ tx. i j 
 
 ^lll credit-money-issues to the amount de- 
 
 manded for general circulation, the 
 banks would have been forced to increase their 
 initial capital, and an increasing capital surplus 
 
274 THE BANK AND THE TREASURY 
 
 would have been accumulating as a guarantee fund 
 for note redemptions. Furthermore, the competi- 
 tion between the banks would have forced them to 
 insure their accounts, thus again increasing the 
 capital surplus for the protection of holders of credit- 
 accounts, and the interest of the stronger banks in a 
 common insurance fund would have forced a rigid 
 inspection and official control of the affairs of the 
 less provident. To meet these requirements the rel- 
 ative capitalization of banks for redemption of notes 
 and credit-accounts must have at least doubled. 
 But the law had two weaknesses: (i) That its accept- 
 ance by National banks was made optional; (2) the 
 capital requirements were so great that if made com- 
 pulsory it would have driven all National banks out 
 of business in competition with State banks. Such 
 a law could never have been made effective unless 
 State and private, as well as National banking institu- 
 tions — all concerns permitted to do a banking busi- 
 ness — had been required to adopt its provisions or 
 as a penalty for non-acceptance be placed under a 
 still more serious disability. 
 
 The Plan of the Monetary Commission 0} the 
 Indianapolis Convention 
 
 Immediately after the election in 1896, the presi- 
 dent of the Board of Trade of Indianapolis issued an 
 invitation for a National sound money conference. 
 In response a convention assembled January 12, 
 
EFFORTS TO MAKE FURTHER ADAPTATIONS 275 
 
 1897, the principal result of which was the appoint- 
 ment of a commission to prepare a report and memo- 
 rial representing the best "sound money" ideals. 
 As a part of their work a bill was drafted, which was 
 introduced into the House of Representatives by Mr. 
 Overstreet. This was the first reflection of the direct 
 "Soundness" 0} spirit of the campaign which required 
 "^^l^'prnided ^^ adequate capitalization of Govem- 
 for ment credit-money-issues. The Treas- 
 
 ury was to have a special division of Issue and Re- 
 demption, to which were to be transferred all funds 
 created for the redemption of Government monetary 
 obligations. The outstanding issues were to be made 
 sound by transferring from the general fund to this 
 division gold to the amount of twenty-five per cent 
 of all United States and Treasury notes of 1890. 
 Silver coins and silver certificates were to be made 
 exchangeable for gold, and besides the value of the 
 silver contained in the coins and held against cer- 
 tificates, five per cent of all silver obligations was to 
 be added to the gold-reserve to insure current re- 
 demption. This solution of the money problem, 
 however, was to serve a temporary purpose only, 
 since the gradual retirement of all obligations of the 
 Treasury except silver was specifically provided for. 
 The ultimate solution of the money problem was to 
 be by the same method as proposed in the Baltimore 
 Plan, — to shift the burden of money issue from the 
 Treasury to the banks, and to secure their payment 
 
276 THE BANK AND THE TREASURY 
 
 by a current "redemption fund" (five per cent) and 
 a common "guarantee fund" (five per cent), and by 
 making the issues a lien on all assets of the bank 
 issuing them, besides by assessment making all of the 
 banks in the system responsible for a deficit. The 
 money provision was eminently "sound." 
 
 The "soundness" of the commercial-credit system 
 was not so well guarded. No additional capital 
 strength was to be given to the commercial banks 
 undertaking to carry this new financial load. On 
 the other hand the capital requirements of banks 
 were to be distinctly lowered. The bond deposits 
 to be originally made were only twenty-five per cent 
 of the capital, while the banks were to be permitted 
 to issue to the full amount of "unimpaired capital." 
 Banks were to But these original deposits might ulti- 
 he greatly mately be withdrawn. The only 
 
 weakened banking capital that was to be set 
 
 aside for note redemption was the five per cent fund, 
 which was not to be counted as a part of the reserve 
 for the redemption of credit-accounts. 
 
 Elasticity in the currency was to be attained by 
 taxing all notes issued above sixty per cent of the 
 capital of the bank issuing them at six per cent. In 
 other words, sixty per cent of the bank-notes was 
 intended to supply the permanent de- 
 mand for a circulating medium, and 
 forty per cent of the authorized issue was to serve 
 to supply extraordinary demands — this emergency 
 
EFFORTS TO MAKE FURTHER ADAPTATIONS 277 
 
 currency to be retired through the autonomous 
 action of the tax after the extraordinary demand had 
 passed. But for ultimate redemption in standard 
 money, only twenty-five per cent of the banking re- 
 serve was to be in coin, and this might be silver. 
 Such a National currency provision needs no further 
 comment. That such a measure would not in- 
 crease the elasticity of bank credit-accounts is cer- 
 tain. Under circumstances similar to those that 
 had prevailed when the Treasury found difficulty in 
 meeting its outstanding obligations, it is to be fairly 
 presumed that our National credit would receive a 
 more serious shock than in 1893 ^^^ the years 
 
 following. 
 
 The McCleary Bill 
 
 Closely following the Commission Bill came the 
 McCleary measure, introduced into the House May 
 II, 1898. In this we again have reflected the spirit 
 of the campaign of 1896. In its Treasury features it 
 was almost a direct copy of the Commission Bill. By 
 its provisions the several forms of issues of the 
 Credit-money to Treasury were specifically recognized 
 be made sound by as obligations of the Government to 
 gold redemption ^^^ g^^^ ^^ demand, and all forms of 
 
 money-issue were to be made interchangeable. By 
 this the financial needs of the Treasury for redemp- 
 tion of its credit-issues were also to be independently 
 capitalized. A division of Issue and Redemption 
 was to be created, similar to that provided for in the 
 
278 THE BANK AND THE TREASURY 
 
 Act of 1900; this was to be made guardian of the 
 fund created to protect money obligations. The 
 reserve was to be equal to twenty-five per cent of all 
 legal- tender notes, and silver Treasury notes of 1890, 
 and five per cent of all silver coinage. The principle 
 of shifting the burden, however, was not abandoned. 
 National banks were to be permitted to obtain notes 
 on deposit of bonds as at present, the provision being, 
 however, that the bonds might be gradually with- 
 drawn. In addition, they would be required to issue 
 "reserve notes" to an amount equal to at least 
 twenty-five per cent of their capital, on deposit of an 
 equal amount of United States notes. They were to 
 receive as a bonus the privilege of issuing an equal 
 amount of "national currency notes" not to exceed 
 forty per cent of their capitalization — the total 
 amount of note- issues (bank-notes, reserve notes, and 
 currency notes) not to exceed one hundred per cent 
 of the unimpaired capital. While, therefore, the 
 Treasury obligations were clearly recognized, and 
 adequate provision was made for their redemption, 
 every inducement was given to the banks to grad- 
 ually assume the Government's monetary responsi- 
 bilities. These bank issues were also to be rendered 
 ■"sound" by all of the methods before suggested. 
 
 As with the measures previously proposed, the 
 McCleary Bill was one which would have operated 
 to weaken capital support to bank accounts — the 
 principal form of funds with which business is done. 
 
EFFORTS TO MAKE FURTHER ADAPTATIONS 279 
 
 The amount of direct capital requirement for support 
 
 of money-issues, however, was increased, and to this 
 
 „ , , extent it was superior to the several 
 
 Results on sound , . , , ^ , 
 
 banking P^^^^ previously proposed. Before 
 
 issues might be had, the bank must 
 invest at least sixty per cent of the amount of notes 
 applied for in collateral securities or Government 
 notes for deposit, as a fund for final redemption. 
 The bank with $100,000 capital could not issue 
 $100,000 of notes unless it first purchased $20,000 of 
 bonds, and $40,000 of United States notes. Its 
 available "cash" from such a capitalization, there- 
 fore, would not exceed $140,000; and of this only 
 $40,000 (the emergency circulation) would be a prior 
 lien on the other assets — that is to say, $60,000 of 
 capital-resources would be left for the final redemp- 
 tion of current banking accounts. The notes could 
 not wipe out the entire capital and leave stranded the 
 holders of accounts. In addition to these provi- 
 sions, fifty per cent of the "money-reserves" of the 
 bank was required to be in gold (double the amount 
 of coin required by the Commission Bill), thus pre- 
 venting gold exportation with increasing credit-issues. 
 A very definite provision was also made for elas- 
 ticity in the money supply. All issues over eighty 
 per cent of capitalization were to be taxed at the rate 
 of one-half of one per cent per month or six per cent 
 per annum. This would have been adequate to 
 meet all usual fluctuations in money-demand. As a 
 
280 THE, BANK AND THE TREASXIRY 
 
 funding measure its weakness lay in decreasing 
 rather than increasing the capital support to be pro- 
 ElasticUy pro- vided for in the banking business — a 
 vided for in the capital support which had proved too 
 currency weak to sustain credit-accounts in 
 
 time of financial strain. 
 
 The Gage Bill 
 
 Secretary Gage's measure for currency reform was 
 the immediate forerunner of the Currency Act of 
 1900, which adequately capitalized the Treasury to 
 protect its credit-issues. It contained the provisions 
 proposed by the Monetary Commission Bill and the 
 McCleary Bill for the erection of a special division of 
 Capitalization of the Treasury to be known as the 
 currency de- "Division of Issue and Redemption." 
 ^""^ ^ To this division was to be transferred 
 
 $125,000,000 in gold, to be held in trust for the re- 
 demption of Treasury credit-issues, and a lien was to 
 be given on the general fund to reimburse the reserve 
 fund for redemptions made. It was deficient, how- 
 ever, in specific provisions for support of the general 
 fund. 
 
 Secretary Gage still clung to the idea of ultimately 
 relieving the Treasury from credit-money functions 
 by enlarging the bank-note circulation and shifting 
 the financial burdens of the Government on the 
 banks. To the end of encouraging the banks to 
 supply the ordinary money-demands, they were to be 
 
EFFORTS TO MAKE FURTHER ADAPTATIONS 281 
 
 permitted to issue to the minimum amount of fifty 
 per cent of their capital, on deposit of bonds, United 
 Bank issues to States notes. Treasury notes of 1890, 
 supplant Treas- and silver certificates, and after which 
 ury issues minimum amount had been reached, 
 
 to permit an additional issue of twenty-five per cent 
 of such deposits without further collateral security 
 — i.e., two-thirds of the issues were to be collaterally 
 secured. The total issues were not to exceed the 
 amount of the paid-up capital. For the current re- 
 demption of bonds a ten per cent fund was to be 
 deposited with the Treasurer. For final redemption 
 a guarantee fund was provided for by taxing the 
 "unsecured circulation" two per cent per annum; a 
 lien was to be given on the general assets of the bank 
 of issue ; and the notes were to be guaranteed by the 
 Government. As in the other plans proposed, the 
 notes were to be "sound" beyond question. 
 
 As a banking measure it was the same in kind as 
 those which had preceded, but better in a degree, in 
 
 that it required the banks to capitalize 
 Banking features a minimum of sixty-six per cent of the 
 
 gross amount of issues by collateral 
 deposits, and a ten per cent redemption fund; they 
 were also required to create a surplus fund for the 
 guarantee of ultimate payment of notes. While it 
 was a stronger banking measure than the several 
 previous propositions, it was weaker than the National 
 Bank Act. No provision was made for increasing 
 
282 THE BANK AND THE TREASURY 
 
 capitalization, whUe the banks were to be encouraged 
 to do a larger credit business proportionate to capital 
 invested — to further encumber the resources used 
 for current banking equipment. It is a logical con- 
 clusion that if such a measure had become a law, 
 whatever could have been gained by increasing 
 elasticity in the money circulation would be more 
 than lost in decreased ability to extend business 
 accommodations. 
 
 The Currency Act of 1900 
 
 This was the first bill which did not confuse the 
 functions and obligations of the two independently 
 organized national funding institutions — the Treas- 
 ury and the National bank. It was a measure di- 
 rectly in line with the evolution of American financial 
 ideals of the century. The people had given unmis- 
 takable expression to opinion with respect to the 
 Treasury and its obligations — since the passage of 
 the National Bank Act they had not directly con- 
 sidered the bank. Four years after the election of 
 i8g6 the first positive legislation pertaining to the 
 currency was spread on the statute books, reaffirming 
 the gold standard law of 1873, and providing for the 
 
 Credit-issues 0} the redemption of credit- money-issues in 
 
 Treasury made 1 1 » 
 
 sound by adequate gold. A negative measure had pre- 
 
 capUalization viously passed repealing the Sherman 
 
 Act, thereby relieving the Treasury from increasing 
 
 burdens in the form of silver obligations, but the 
 
EFFORTS TO MAKE FURTHER ADAPTATIONS 283 
 
 Act of 1900 undertook adequately to capitalize the 
 redemption demands of the Treasury. At that time 
 there were outstanding about$i,ooo,ooo,ooo of credit- 
 issues. To provide for current redemptions of the 
 different forms of monetary obligations, the device 
 suggested by the Monetary Commission, by the 
 McCleary Bill and by the Gage Bill was adopted, 
 creating a special department of the Treasury to be 
 known as the Division of Issue and Redemption, and 
 to this was transferred $150,000,000 of gold coin 
 (about fifteen per cent of the credit-issues to be re- 
 deemed). To guarantee ultimate redemption of all 
 Treasury obligations, the Secretary was enjoined at 
 all times to maintain the value of issues at a par with 
 gold, and as a means to this end gave to the Division 
 of Issue and Redemption a first lien on all revenue 
 funds of the Government ; collateral to this, the Law 
 placed in the hands of the Secretary of the Treasury 
 the power to make unlimited use of the credit of the 
 Government to procure gold to replenish the general 
 fund whenever such might be found necessary to 
 reimburse the Division of Issue for redemptions. 
 The effect of this Act was to fortify the Treasury 
 issues against all possibility of discredit, and to place 
 behind the public institution of credit-money circu- 
 lation the united revenue and loan powers of the 
 nation. 
 
284 THE BANK AND THE TREASURY 
 
 The Fowler Bills of 1902 and 1903 
 
 After the enactment of the gold standard currency 
 Law of 1900 the two bills which take title from the 
 Chairman of the Committee on Currency and Bank- 
 ing come as voices from the tomb. The Currency 
 Act of 1900 was in direct line with the development 
 of our funding system and had finally established the 
 credit currency of the country on a financially sound 
 basis. There remained only two other steps to be 
 taken to perfect the adaptation to our funding needs, 
 and these were both primarily banking questions: 
 (i) How may the banks obtain money to meet the 
 extraordinary money-demands of their customers; 
 and (2) how may they equip themselves to expand 
 their credit to meet fluctuating demands for credit- 
 accommodation and at the same time maintain safe 
 proportionate money-reserves for current redemp- 
 tions. Legislation which would accomplish these 
 results must be banking legislation. To attain either 
 of these results would require that provision be made 
 for a capitalized reserve which would be adequate to 
 obtain the cash necessary both for increasing the 
 money circulation and for maintaining increased 
 credit-accounts. That such reserve must be a capital 
 reserve follows for the reason that a reserve of assets 
 acquired in exchange for bank-credit would defeat 
 the very purpose for which it was held — on con- 
 version of such a reserve commercial accommoda- 
 
EFFORTS TO MAKE FtTRTHER ADAPTATIONS 285 
 
 tions would be reduced instead of expanded. The 
 Fowler Bills referred to made no provision for either 
 of these desirable banking results. They attempt 
 again to solve the "sound money" problem which 
 was already solved by the Currency Act of 1900. 
 The excuse for reopening the money situation is to 
 provide "elasticity." But in the measures proposed 
 the character of the demand, as well as the necessary 
 means successfully to meet the demand, were over- 
 looked. The first principle of business, so far as 
 obtaining money is concerned, is to have something 
 to offer for it. The measures here introduced would 
 permit the banks when in straits to obtain money 
 from the Division of Issue and Redemption to meet 
 demands on their own credit-accounts without hav- 
 ing anything to pledge for it. That is, the banks 
 would be relieved from doing for their credit what 
 the United States Treasury had found it necessary to 
 do — to capitalize their redemption demands, and, in 
 lieu of the current redemption reserve proving too 
 small, to have another fund or reserve which it might 
 draw upon for collateral support. A large part of 
 Mr. Fowler's Bills was designed to break down the 
 Treasury system now established on a sound basis, 
 and in lieu of the Treasury reserve to do what many 
 others had proposed — to secure the bank-note by 
 depriving the bank depositor of his security. It 
 cannot be thought that such a system will ever add 
 to the "soundness" (the capital strength) of our 
 
286 THE BANK AND THE TREASURY 
 
 banking institutions, nor that increased banking 
 weakness can contribute to "elasticity" in bank- 
 credit. 
 
 The Payne Bill, 1903 
 
 The measures proposed by Mr. Payne in the House 
 and by Mr. Aldrich in the Senate are steps in the 
 right direction. The principle here invoked is one 
 that carries with it the largest possibilities for elas- 
 ticity, both in the currency and in bank-credit, if 
 carried to its logical conclusion. The Bill proposed to 
 place in the hands of the Secretary of the Treasury 
 the power to receive from banks invested capital 
 reserves ("bonds of the United States, bonds or 
 other interest-bearing obligations of any State of the 
 United States, or any legally authorized bonds for 
 municipal purposes . . . which for a period of ten 
 years previous to such deposit has not defaulted 
 . . . and the first mortgage bonds of any railroad 
 company which had paid dividends of not less than 
 four per centum per annum regularly and continu- 
 ously on its entire capital stock for a period of not 
 less than ten years") as collateral for loans. The 
 banks were to be encouraged to carry surplus capital- 
 resources in the form of gilt-edge securities. A 
 bank, therefore, which is not suffering from under- 
 capitalization, which has not already increased its 
 credit-obligations beyond a safe proportion to total 
 unimpaired capital (capital available for redemp- 
 tions) even though its cash reserve provided for 
 
EFFORTS TO MAKE FURTHER ADAPTATIONS 287 
 
 current redemptions were threatened, could obtain 
 the cash needed. If it had an invested capital-reserve 
 to fall back upon it might immediately convert this 
 into cash at the Treasury. Assuming this measure 
 had passed, that it had been supplemented by a law 
 which restrained banks from incurring credit liabili- 
 ties to exceed three or four times its unimpaired 
 capital, and that it were also required to keep this 
 redemption capital "reserved" in the form of cash, 
 or investments such as the Treasury would receive, 
 under such circumstances the bank would be re- 
 quired to capitalize its customers' greatest needs. 
 It would at times of low credit-demand have a capital 
 reserve largely in excess of the requirement, the sur- 
 plus of which could be invested. This would place 
 in the hands of the banks the power to increase the 
 money circulation and credit-accommodations at any 
 time an increase in money or credit-funds was 
 needed, and with entire safety to the community. 
 By such an extension of the principle we would have 
 attained for our funding system both elasticity and 
 increased financial stability. 
 
 The measure proposed by Mr. Payne is essentially 
 an amendment of the Bank Act. If the amendment 
 were so changed as to permit the issue of Treasury 
 notes (whether they be in the form of bank-notes, 
 greenbacks, currency certificates, or what not), as 
 well as to deposit (loan) its revenue surplus against 
 such collaterals, then the question of general Treas- 
 
288 THE BANK AND THE TREASURY 
 
 ury condition would be completely eliminated. Fur- 
 ther, if interest were to be charged on such loans at 
 the rate of, not one and one-half per cent, as pro- 
 posed, but five or six per cent, the notes issued — 
 whatever their form — would be promptly retired 
 when they were not needed for circulation. 
 
 The Payne measure (together with an extension of 
 the same principle to include increased capitalization 
 of banking needs, and a proper interest charge on 
 emergency issues) would do for bank credit-funds 
 and for the business of banking (selling commercial 
 credit-accommodations at a profit) what the Cur- 
 rency Law of 1900 has done for our credit-money. 
 An adequate capitalization of bank credit-accounts 
 would complete the evolution in the American fund- 
 ing system, adapting it to the nation's fluctuating 
 business needs. 
 
APPENDIX OF DOCUMENTS 
 
"THE BALTIMORE PLAN" OF CURRENCY 
 REFORM 
 
 1896 
 
 OUTLINES OF THE PLAN 
 
 (^Digest taken from "Sound Currency") 
 
 Section i. The provision of the National Bank Act re- 
 quiring the deposit of bonds to secure circulating notes here- 
 after issued, shall be repealed. 
 
 Sect. 2. Allow the banks to issue circulating notes to the 
 amount of 50 per cent of their paid up, unimpaired capital, 
 subject to a tax of one-half of i per cent per annum upon the 
 average amount of circulation outstanding for the year; and an 
 additional circulation of 25 per cent of their paid-up, unim- 
 paired capital, subject both to the tax of one-half of i per 
 cent per annum and to an additional heavy tax per annum 
 upon the average amount of such circulation outstanding 
 for the year; said additional 25 per cent to be known as "emer- 
 gency circulation." 
 
 Sect. 3. The tax of one-half of i per cent per annum upon 
 the average amount of circulation outstanding shall be paid 
 to the Treasurer of the United States as means of revenue, 
 out of which the expense of the ofi&ce of the Comptroller of 
 the Currency, the printing of circulating notes, etc., shall be 
 defrayed. 
 
 The excess over one-half of i per cent of the tax imposed 
 upon the "emergency circulation" shall be paid into the 
 "guarantee fund," referred to in Sect. 6. 
 
 Sect. 4. The banks issuing circulation shall deposit and 
 maintain with the Treasurer of the United States a "redemp- 
 
 [291] 
 
292 APPENDIX 
 
 tion fund" equal to 5 per cent of their average outstanding 
 circulation, as provided for under the existing law. 
 
 Sect. 5. The redemption of the notes of all banks, solvent 
 or insolvent, to be made as provided for by the existing law. 
 
 Sect. 6. Create a "guarantee fund" through the deposit 
 by each bank of 2 per cent upon the amount of circulation 
 received the first year. Thereafter impose a tax of one-half 
 of I per cent upon the average amount of outstanding circu- 
 lation, the same to be paid into this fund until it shall equal 
 5 per cent of the entire circulation outstanding, when the col- 
 lection of such tax shall be suspended, to be resumed when- 
 ever the Comptroller of the Currency shall deem it necessary. 
 
 The notes of insolvent banks shall be redeemed by the 
 Treasurer of the United States out of the "guarantee fund," 
 if it shall be sufficient, and, if not sufficient, then out of any 
 money in the Treasury, the same to be reimbursed to the 
 Treasury out of the "guarantee fund," when replenished, 
 either from the assets of the failed banks or from the tax afore- 
 said. 
 
 National banking associations, organized after this plan 
 shall have gone into operation, may receive circulation from 
 the Comptroller of the Currency upon paying into the "guar- 
 antee fund" a sum bearing the ratio to the circulation applied 
 for and allowed that the "guarantee fund" bears to the total 
 circulation outstanding, and to be subject to the tax of one- 
 half of I per cent per annum, as called for by the Treasurer 
 of the United States for the creation and maintenance of this 
 fund. 
 
 No association or individual shall have any claim upon any 
 part of the money in said "guarantee fund," except for the 
 redemption of the circulating notes of any insolvent national 
 banking association. Any surplus or residue of said "guar- 
 antee fund" which may be hereafter ascertained or deter- 
 mined by law shall inure to the benefit of the United States. 
 
 Sect. 7. The Government shall have a prior lien upon the 
 assets of each failed bank and upon the liability of shareholders, 
 and for the purpose of restoring the amount withdrawn from 
 
APPENDIX 293 
 
 the "guarantee fund" for the redemption of its circulation, 
 not to exceed, however, the amount of the failed bank's out- 
 standing circulation after deducting the sum to its credit in 
 the "redemption fund" (Sect. 4) already in the hand of the 
 Treasurer of the United States. 
 
 Sect. 8. Circulation can be retired by a bank at any time 
 upon depositing with the Treasurer of the United States law- 
 ful money in amount equal to the sum desired to be with- 
 drawn, and immediately upon such deposit the tax indicated 
 in Sects. 2, 3 and 6 shall cease upon the circulation so retired. 
 
 Sect. 9. In the event of the winding up of the business of 
 a bank by reason of insolvency, or otherwise, the Treasurer 
 of the United States, with the concurrence of the Comptroller 
 of the Currency, may, on the apphcation of the directors, or 
 of the liquidator, receiver, assignee, or other proper official, 
 and upon being satisfied that proper arrangements have been 
 made for the payment of the notes of the bank and any tax 
 due thereon, pay over to such directors, liquidator, receiver, 
 assignee, or other proper official, the amount to the credit of 
 the bank in the "redemption fund" indicated in Sect. 4. 
 
 "THE CARLISLE PLAN" 
 1896 
 
 Be it enacted by the Senate and House of Representatives of 
 the United States oj America in Congress assembled: 
 
 That so much of all acts and parts of acts as require or 
 authorize the deposit of United States bonds to secure circu- 
 lating notes issued by national banking associations, or as 
 require such associations to deposit or keep on deposit United 
 States bonds for any purpose except as security for public 
 money, be, and the same are hereby, repealed as to associa- 
 tions taking circulation under this Act; and notes issued under 
 this Act shall not contain the statement that they are so secured. 
 
 Sect. 2. That any national banking association .... may 
 
294 APPENDIX 
 
 take out circulating notes to an amount not exceeding 75 per 
 centum of its paid-up and unimpaired capital upon deposit- 
 ing with the Treasurer of the United States currency certifi- 
 cates .... or United States legal-tender notes, including 
 Treasury notes .... and other lawful money of the United 
 States, at the discretion of the Secretary of the Treasury, as 
 a guaranty fund equal to 30 per centum of the circulating 
 notes applied for. The association making such deposit shall 
 be entitled to receive from the Comptroller of the Currency 
 circulating notes in blank, registered and countersigned as 
 provided by law; and all such notes shall constitute, and are 
 hereby declared to be, a first lien upon all the assets of the 
 association issuing the same. . . . 
 
 Sect. 4. That each national banking association shall re- 
 deem its notes at par on presentation at its own office and at 
 such agencies as may be designated for that purpose by the 
 Comptroller of the Currency; and whenever such association 
 desires to retire the whole or any part of its circulation, the 
 notes to be retired shall be forwarded to the Comptroller of 
 the Currency for cancellation, and thereupon a sum equal to 
 30 per centum of such cancelled notes shall be returned to 
 the association, in lawful money of the United States. . . . 
 
 Sect. 5. That in order to provide a safety fund for the 
 prompt redemption of the circulating notes of failed national 
 banking associations each such association .... shall pay 
 the Treasurer of the United States, .... a tax of one-fourth 
 of I per centum for each half year upon the average amount 
 of its circulating notes outstanding, .... until the said fund 
 amounts to a sum equal to 5 per centum upon the total amount 
 of such national bank notes outstanding, and thereupon the 
 collection of said tax shall be suspended All circulat- 
 ing notes of failed national banks taken out under this Act 
 not redeemed on presentation to the Treasury of the United 
 States, or an assistant treasurer of the United States, shall 
 bear interest at the rate of 6 per centum per annum from the 
 date of suspension of the bank until thirty days after public 
 notice has been given that funds are on hand for their redemp- 
 
APPENDIX 295 
 
 tion, and such notes shall constitute a first lien upon all moneys 
 thereafter received into the safety fund. 
 
 Sect. 7. That every national banking association hereto- 
 fore organized and having bonds on deposit to secure circu- 
 lation may withdraw such bonds upon the deposit of lawful 
 money of the United States, as now provided by law; and there- 
 after such association may take out circulation under this 
 Act and be entitled to all rights, privileges, and immunities 
 herein conferred. 
 
 Sect. 9. That the Secretary of the Treasury may, in his 
 discretion, use from time to time any surplus revenue of the 
 United States in the redemption and retirement of United 
 States legal- tender notes, and notes issued under the Act of 
 July 14, 1890, but the amount of such notes retired shall not 
 in the aggregate exceed an amount equal to 70 per centum of 
 the additional circulation taken out by national banks and 
 State banks under the provisions of this Act 
 
 Sect. 10. That the use of circulating notes of and above 
 the denomination of ten dollars issued by a banking corpora- 
 tion duly organized under the laws of any State, and which 
 transacts no other than a banking business, shall be exempt 
 from taxation under the laws of the United States when it is 
 shown to the satisfaction of the Secretary of the Treasm:y 
 and the Comptroller of the Currency: 
 
 First — That such bank has at no time had outstanding its 
 circulating notes in excess of 75 per centum of its paid-up and 
 unimpaired capital; 
 
 Second — That its stockholders are individually liable for 
 the redemption of its circulating notes to an amount equal to 
 the par value of the stock owned by them; .... 
 
 Third — That the circulating notes constitute by law a 
 first lien upon all the assets of the bank; 
 
 Fourth — That the bank has at all times kept on deposit 
 with an ofl&cer of the State, authorized by law to receive and 
 hold the same, a guaranty fund in currency certificates issued 
 under Section 5193 of the Revised Statutes of the United 
 States, or United States legal-tender notes, including Treasury 
 
296 APPENDIX 
 
 notes of 1890, equal to 30 per centum of its outstanding cir- 
 culating notes ; and 
 
 Fifth — That it has promptly redeemed its notes at par on 
 demand at its principal office, or at one or more of its branch 
 offices, if it has branches. 
 
 Whenever the Secretary of the Treasury and the Comptroller 
 of Currency shall be satisfied that any banking corporation 
 duly organized under the laws of any State, and which trans- 
 acts no other than a banking business as provided in this 
 section, has been incorporated under the laws of the State 
 in which it is located, and that such laws require 
 
 First — That its stockholders shall be individually hable 
 for the redemption of its circulating notes to an amount equal 
 to the par value of the capital stock owned by them; 
 
 Second — That the circulating notes thereof shall constitute 
 a first lien upon all the assets of the bank; and, 
 
 Third — That such bank shall keep on deposit at all times 
 with an official of the State authorized by law to receive and 
 hold the same, a guaranty fund as required in the fourth para- 
 graph of this section. There shall thereupon issue to said 
 bank a certificate to that efEect. Said bank may then issue 
 its notes .... 
 
 FOWLER BILL OF MARCH 15, 1897 
 
 Be it enacted by the Senate and House oj Representatives of 
 the United States of America in Congress Assembled: 
 
 That there shall be and there is hereby created and estab- 
 lished a Department of Finance, which shall have entire and 
 exclusive control and supervision of all national debts, their 
 right to take out secured circulation and issue their notes. 
 
 Sect. 2. That there shall be three ministers of finance, 
 who shall take the place of the Comptroller of the Currency 
 and constitute a board of finance; and said board of finance 
 shall conduct the said Department of Finance 
 
 Sect. 3. That any national bank now doing business, or 
 
APPENDIX 297 
 
 any other financial institution doing a similar business, .... 
 may, in accordance with existing law, .... organize upon 
 the following terms and conditions: 
 
 If any corporation or association of persons described as 
 aforesaid shall deposit with the United States Government 
 any of the United States bonds now outstanding, or any that 
 may be hereafter issued which, at their stated value as herein 
 set forth, .... circulation known as United States Govern- 
 ment bond notes shall be issued to said corporation .... 
 
 (a) That the United States Government bonds now out- 
 standing shall be received at the following prices, to wit: 
 
 2S, reg Q, Mar. 95^ 
 
 4S, 1907, reg Q, Jan. 109 j 
 
 4S, 1907, coup Q, Jan. iioj 
 
 4S, 1925, reg Q, Feb. i2oi 
 
 4S, 1925, coup Q, Feb. laoj 
 
 SS, 1904, reg Q.Feb. 113 J 
 
 Ss, 1904, coup Q, Feb. 113! 
 
 6s, cur'cy, '98, reg J- & J- io2f 
 
 6s, cur'cy, '99, reg J- & J- 105 
 
 4s, (Cher), 1897, reg March 102 
 
 4s, (Cher), 1898, reg March 102 
 
 4s, (Cher), 1899, reg March 102 
 
 and that from and after the passage of this Act said bonds shall 
 be received upon the same income basis, respectively. 
 
 (b) All banks organized under this Act shall take out for 
 issue United States Government bond-notes in proportion to 
 their respective capital .... and each bank shall pay into 
 the United States Treasury one-fourth of i per centum per 
 annum upon the notes so taken out for issue as a part of the 
 fund to be created and known as "United States National- 
 Bank Note Redemption Fund." 
 
 Sect. 5. That at the same time that said corporation, if 
 located in a reserve city, shall deposit United States Govern- 
 ment bonds as aforesaid it shall also deposit with the United 
 States Government United States legal-tender notes or gold 
 
298 APPENDIX 
 
 certificates, or both, of such an amount that it, together with 
 the gold said corporation has on hand, will equal 15 per 
 centum of its deposits; and the United States Government shall 
 deliver to said corporation gold coin in lieu of said legal- 
 tender notes and said gold certificates. Said corporation shall 
 also deposit at the same time with the United States Govern- 
 ment United States Treasury notes or United States silver 
 certificates, at the option of said ministers, or both, which, 
 with the silver coin then held by said corporation, shall amount 
 to 10 per centum of its deposits, and the United States Govern- 
 ment shall deliver to said corporation in lieu thereof silver coin 
 of an equal amount; and said legal-tender notes, gold certifi- 
 cates. Treasury notes, and silver certificates shall be thereupon 
 cancelled. Said corporation shall thereafter keep as a reserve 
 25 per centum of its deposits in the following kinds of money: 
 At least 60 per centum of said reserve shall be in gold coin, 
 and the remaining 40 per centum of said reserve may be in 
 silver coin or United States Government bonds notes: Pro- 
 vided, however, That in lieu of one-half of such reserve cash 
 on deposit, subject to check, may be held in reserve cities. 
 
 Sect. 6. That at the same time the said corporation, if 
 located outside a reserve city, shall deposit United States 
 Government bonds as aforesaid, it shall also deposit with the 
 United States Government United States legal-tender notes, 
 or gold certificates, or both, of such an amount that it, together 
 with the gold coin said corporation has on hand, will equal 
 9 per centum of its deposits; and the United States Govern- 
 ment shall deliver to said corporation gold coin in lieu of said 
 legal-tender notes and said gold certificates. Said corporation 
 shall also deposit at the same time with the United States 
 Government United States Treasury notes or United States 
 silver certificates, at the option of said ministers, or both, 
 which, with the silver coin then held by said corporation, shall 
 amount to 6 per centum of its deposits, and the United States 
 Government shall deliver to said corporation in lieu thereof 
 silver coin of an equal amount; and said legal- tender notes, 
 gold certificates. Treasury notes, and silver certificates shall 
 
APPENDIX 
 
 be thereupon cancelled. Said corporation shall thereafter 
 keep as a reserve 15 per centum of its deposits in the follow- 
 ing kinds of money: At least 60 per centum of said reserve 
 shall be in gold coin, and the remaining 40 per centum of 
 said reserve may be in silver coin, or United States Govern- 
 ment bond notes: Provided, however, That in lieu of one- 
 half of such reserve cash on deposit, subject to check, may be 
 held in reserve cities. 
 
 Sect. 7. That the United States shall not pay out or reissue 
 any United States legal-tender notes or gold certificates from 
 and after the ist day of January, eighteen hundred and ninety- 
 eight, but the same when received shall be cancelled and 
 destroyed; and further that the United States Government 
 shall not pay out, issue or reissue any United States Treasury 
 notes or silver certificates from and after the ist day of January, 
 eighteen hundred and ninety-nine, but the same when re- 
 ceived shall be cancelled and destroyed. 
 
 Sect. 8. That any corporation organized under this Act 
 may .... issue its own circulation, which shall be furnished 
 by the United States Government, and be known as United 
 States national-bank notes. Said United States national-bank 
 notes shall be issued in denominations of ten dollars and mul- 
 tiples thereof, and shall be a first lien upon the assets of the 
 bank issuing the same, and also upon the liability of the stock- 
 holders, and may be issued only in the following manner and 
 upon the following conditions: 
 
 First — Every bank issuing United States national-bank 
 notes shall at all times maintain against the amount of such 
 notes outstanding a reserve corresponding to that required 
 against its deposits. 
 
 Second — Any bank that shall have complied with this law 
 may, with the consent and under the supervision and control 
 of the board of finance, issue an amount of United States 
 national-bank notes equal to 20 per centum or one-fifth of its 
 paid-up and unimpaired capital, and shall pay upon such an 
 amount thereof as may be outstanding at any time a tax at the 
 rate of i per centum per annum, 
 
300 APPENDIX 
 
 Third — Said bank may issue a second amount of such 
 notes, equal to 20 per centum or one-fifth of its paid-up and 
 unimpaired capital, and shall pay upon such an amount thereof 
 as may be outstanding at any time a tax at the rate of 2 per 
 centum per annum. 
 
 Fourth — Said bank may issue a third amount of notes 
 equal to 20 per centum or one-fifth of its paid-up and unim- 
 paired capital, and shall pay upon such an amount thereof as 
 may be outstanding at any time a tax at the rate of 4 per 
 centum per annum. 
 
 Fifth — Said bank may issue a fourth amount of notes 
 equal to 20 per centum of its paid-up and unimpaired capital, 
 and shall pay upon such an amount thereof as may be out- 
 standing at any time a tax at the rate of 6 per centum per 
 annum. 
 
 Sixth — Said bank may issue a fifth amount of notes, equal 
 to 20 per centum or one-fifth of its paid-up and unimpaired 
 capital, and shall pay upon such an amount thereof as may be 
 outstanding at any time a tax at the rate of 8 per centum per 
 annum. 
 
 Seventh — If the amount of United States national-bank 
 notes issued by any bank shall exceed at any time the paid-up 
 and unimpaired capital of said bank, a tax at the rate of 10 
 per centum per annum shall be paid by said bank on such 
 excess. 
 
 Eighth — That said ministers of finance are hereby author- 
 ized and empowered to suspend one-half of said tax upon any 
 one or all of the said several issues of United States national- 
 bank notes at any time after nineteen hundred and ten, and 
 at any time after nineteen hundred and twenty said ministers 
 of finance are further authorized and empowered to suspend 
 any portion of the tax then remaining except the 10 per centum 
 tax referred to in paragraph seven. 
 
 Sect. 9. That all taxes so paid to the Government upon 
 said United States Government bond notes and said United 
 States national bank notes shall constitute and be known as 
 the "United States National-bank Note Redemption Fund," 
 
APPENDIX 301 
 
 and be held exclusively for the redemption, first, of the United 
 States Government bond notes; second, for the United States 
 national-bank notes in the event of the liquidation of any bank 
 organized under this law: Provided, however, That when said 
 "redemption fund" shall exceed 5 per centum of both the 
 United States Government bond notes and the United States 
 national-bank notes such excess shall belong to the United 
 States Government, and may be used by it to defray its general 
 expenses. 
 
 Sect. 13 Second — That under such regulations 
 
 and restrictions as shall be established by the said ministers 
 of finance, national banks organized under this Act may 
 establish branch banks by and with the consent of said min- 
 isters, such branch banks to have the right to receive deposits, 
 make loans, grant discounts and buy and sell exchange, but in 
 no case to be permitted to issue circulating notes other than 
 those of the parent bank. It shall in all respects be considered 
 as a part of the parent bank and in each case where such 
 branches are maintained the ministers of finance shall receive 
 in the reports of the central bank a statement, properly sworn 
 to and attested, of the condition of its branches. 
 
 Sect. 14. First — That in the event of the liquidation of 
 any national bank organized under this Act the United States 
 Government shall redeem upon presentation, after notice given 
 as herein provided, any of said United States Government 
 bond notes or said United States national-bank notes, re- 
 imbursing itself for the full amount thereof out of the assets of 
 said bank, and distribute the remaining assets among the de- 
 positors and all others having claims in the same manner as 
 now provided by law. 
 
 Second — That from the time of the suspension of said bank 
 up to the date set by said ministers of finance for the redemp- 
 tion of said United States national-bank notes, they shall bear 
 interest at the rate of 5 per centum per annum. Such notice 
 shall be given in some newspaper printed in the clearing-house 
 city where said notes were cleared ; but nothing herein contained 
 shall be construed to impose any liability upon the Govern- 
 
302 APPENDIX 
 
 ment of the United States, or any of its representatives, beyond 
 the amount available from time to time out of said "United 
 States National-bank Note Redemption Fund." 
 
 Sect. 15. First — That any bank organized under this 
 Act may at any time after nineteen hundred and five, with the 
 consent of the ministers of finance, insure its depositors against 
 loss by paying into the United States Treasury 1 per centum 
 upon the average balance of deposits of the preceding fiscal 
 year, and one-half of i per centum upon the average annual 
 balances thereafter until the amount so paid into the United 
 States Treasury by said bank shall amount to 5 per centum 
 of the average balance of said bank for the last preceding year, 
 and that said ministers of finance may then suspend said tax 
 for the time being. If the deposits of said bank shall increase, 
 or for any reason the amount of the insurance fund to the 
 credit of said bank shall be less than 5 per centum of the 
 deposits, said ministers may reimpose said tax of one-half of 
 I per centum upon the deposits of said bank; and if said bank 
 shall fail to pay such tax at any time after the payment of said 
 I per centum the amount already paid by said bank shall be 
 forfeited to the United States Government and the insurance 
 of said depositors shall thereupon cease. 
 
 Second — That the amounts of money so received shall 
 constitute and be known as the "Depositors' Insurance Fund." 
 
 Sect. 21. That it shall be unlawful for any national bank 
 to engage in the promotion of any enterprise, or to loan the 
 funds of the bank upon the bonds or securities of incomplete 
 and partially developed projects of any kind, such as partially 
 constructed railroads, street-car lines, electric-light, gas, water, 
 mining, manufacturing, or irrigation plants. 
 
APPENDIX 303 
 
 INDIANAPOLIS MONETARY COMMISSION BILL 
 
 January 6, 1898 
 Be it enacted, etc. : 
 
 Sect. 4. That there is hereby created a division in the 
 Treasury Department, to be known as the Division of Issue 
 and Redemption, under the charge of an Assistant Treasurer 
 of the United States, who shall be appointed by the President, 
 by and with the advice and consent of the Senate. 
 
 Sect. 5. That to the Division of Issue and Redemption shall 
 be committed all functions of the Treasury Department per- 
 taining to the issue and redemption of notes and certificates, 
 and to the exchange of coins, and the said Division of Issue and 
 Redemption shall have the custody of the Bank Note Guaranty 
 Fund and of the Redemption Funds of the national banking 
 associations, and shall conduct the operations of redeeming 
 the circulating notes of national banking associations, as pre- 
 scribed by law 
 
 Sect. 6. That a reserve shall be established in the Division 
 of Issue and Redemption aforesaid, by the transfer to it by 
 the Treasurer of the United States from the general funds of 
 the Treasury of an amount of gold, in coin and bullion, equal 
 to 25 per centum of the amount of both United States notes 
 and Treasury notes issued under the Act of July 14, 1890, 
 outstanding, and a further sum in gold equal to 5 per centum 
 of the aggregate amount of the coinage of silver dollars. . . . 
 
 Sect. 7. That it shall be the duty of the Secretary of the 
 Treasury to maintain the gold reserve in the Division of Issue 
 and Redemption aforesaid at such sum as shall secure the 
 certain and immediate redemption of all notes and exchange 
 of all silver dollars presented, as hereinafter provided for, and 
 the preservation of public confidence; and for this purpose he 
 shall from time to time transfer to the Division of Issue and 
 Redemption any funds in the Treasury not otherwise appro- 
 priated, and in addition thereto he is hereby authorized to 
 issue and sell, whenever it is in his judgment necessary to the 
 ends aforesaid, bonds of the United States, bearing interest at 
 
304 APPENDIX 
 
 a rate not exceeding 3 per centum per annum payable in gold 
 coin at the end of twenty years, but redeemable in gold coin 
 at the option of the United States after one year; and the pro- 
 ceeds of all such sales shall be paid into the Division of Issue 
 and Redemption for the purposes aforesaid. 
 
 Sect. 16. That, to provide for any temporary deficiency 
 vifhich may at any time exist in the Treasury of the United 
 States, the Secretary of the Treasury be and he is hereby 
 authorized, at his discretion, to issue certificates of indebted- 
 ness of the United States 
 
 Sect. 18. That any national banking association organized 
 under the laws of the United States shall, if its capital be 
 wholly paid up and unimpaired, be entitled to receive from 
 the Comptroller of the Currency circulating notes of denomi- 
 nations hereinafter provided, in blank, registered and counter- 
 signed as provided by law, to an amount not exceeding the 
 amount of such paid-up and unimpaired capital, after deduct- 
 ing therefrom its investment in real estate: Provided, That 
 during the five years first succeeding the passage of this Act, 
 any national banking association receiving from the Comp- 
 troller of the Currency circulating notes in blank under the 
 provisions of this Act, shall maintain on deposit with the 
 Treasurer of the United States, bonds of the United States 
 to an amount, at a valuation computed as hereinafter pre- 
 scribed, equal to that of the circulating notes so received, when- 
 ever such notes shall not exceed 25 per centum of the capital 
 stock. And for each succeeding year after the expiration of 
 five years from the passage of this Act, the amount of bonds 
 required to be deposited before issuing notes in excess of such 
 deposit shall be decreased by 20 per centum of the original 
 25 per centum of capital stock hereinbefore specified, and 
 from and after the expiration of ten years from the passage 
 of this Act no such bond deposit shall be required. And no 
 further deposit of bonds shall be required than is herein pre- 
 scribed; and any national banking association having at any 
 time bonds of the United States deposited with the Treasurer 
 in excess of the amount required by law to be at such time 
 
APPENDIX 305 
 
 deposited, may withdraw the whole or any part of such excess. 
 But nothing herein contained shall be construed to authorize 
 or permit the withdrawal of bonds required to be deposited 
 under the provision of Section 5153 of the Revised Statutes 
 of the United States, as security for the safe keeping and prompt 
 payment of public moneys deposited with any national bank- 
 ing association. 
 
 Sect. 20. That every national banking association shall at 
 all times keep and have on deposit with the Division of Issue 
 and Redemption for the purpose hereinafter specified a sum 
 in gold coin equal to 5 per centum of its outstanding circula- 
 tion. The amounts so kept on deposit shall constitute a fund 
 to be known as "The Bank Note Guaranty Fund," which 
 fund shall be held for the following purpose, and for no other, 
 namely: — 
 
 Whenever the Comptroller of the Currency shall have be- 
 come satisfied .... that any association has refused to pay 
 its circulating notes on demand in lawful money, he shall 
 direct the redemption of such notes from the Bank Note 
 Guaranty Fund aforesaid, and such notes shall thereupon be so 
 redeemed. After the failure of any national banking asso- 
 ciation to redeem its notes shall have been thus ascertained, 
 the bonds deposited with the Treasurer of the United States 
 shall be sold, as provided by law, and the proceeds of such 
 sale shall be paid into the Bank Note Guaranty Fund. The 
 Comptroller of the Currency shall forthwith collect, for the 
 benefit of said fund from the assets of the bank and from the 
 stockholders thereof, according to their liability, as declared 
 by this Act, such sum as, with the bank's balance in the Bank 
 Note Guranty Fund, shall equal the amount of its circulating 
 notes outstanding. And for this purpose the United States 
 shall, on behalf of the Bank Note Guaranty Fund, have a para- 
 mount lien upon all the assets of the association; and such fund 
 shall be made good out of such assets in preference to any 
 and all other claims whatsoever, except the necessary costs 
 and expenses of administering the same. 
 
 Sect. 21. That whenever the Comptroller of the Currency 
 
306 APPENDIX 
 
 shall ascertain what deficiency, if any, exists between the 
 aggregate collections for the benefit of the Bank Note Guaranty 
 Fund in the case of any failed bank and the amount of its out- 
 standing notes redeemed and to be redeemed from the said 
 fund, he shall assess such deficiency upon all the national 
 banks in proportion to their notes outstanding at the time of 
 the failure of such bank. 
 
 Sect. 25. That every national banking association shall 
 pay, on or before the last day of every month, to the Division 
 of Issue and Redemption, a duty imposed at the rate of 2 per 
 centum per annum upon the average daily amount of its 
 circulating notes outstanding in excess of 60 per centum of its 
 capital stock, and not in excess of 80 per centum of such capi- 
 tal stock, and a duty imposed at the rate of 6 per centum per 
 annum upon the average daily amount of such notes out- 
 standing in excess of 80 per centum of its capital stock. 
 
 Sect. 30. That no national banking association shall count 
 or report any of its own notes as a part of its cash or cash 
 assets. 
 
 McCLEARY BILL 
 
 May II, 1898 
 Be it enacted, etc. : . . . . 
 
 That there is hereby created a division in the Treasury De- 
 partment to be known as the Division of Issue and Redemp- 
 tion. 
 
 There is hereby created a board consisting of three members, 
 to be known as the Comptrollers of the Currency. The said 
 board shall have the management of the Division of Issue and 
 Redemption, and shall take the place of the Comptroller of 
 the Currency 
 
 Sect. 2. That to the Division of Issue and Redemption 
 shall be committed all functions of the Treasury Department 
 pertaining to the issue and redemption of notes and certifi- 
 cates, and to the exchange of coins; and in the said Division 
 of Issue and Redemption shall be held the guaranty fund and 
 
APPENDIX 307 
 
 the redemption fund of the national banking associations, and 
 through it shall be conducted the operations of redeeming the 
 circulating notes of national banking associations, as pre- 
 scribed by law 
 
 Sect. 3. That a reserve shall be established in the Division 
 of Issue and Redemption aforesaid by the transfer to it by the 
 Treasurer of the United States from the general funds of the 
 Treasurer of an amount of gold, in coin and bullion, equal to 
 25 per cent of the amount, both of United States notes and 
 Treasury notes issued under the Act of July 14, 1890, outstand- 
 ing, and a further sum in gold equal to 5 per cent of the aggre- 
 gate amount of the coinage of silver dollars 
 
 Sect. 4. That it shall be the duty of the Secretary of the 
 Treasury to maintain the gold reserve in the Division of Issue 
 and Redemption aforesaid at such sum as shall secure the 
 certain and immediate redemption of all notes and exchange 
 of all silver dollars presented, as hereinafter provided for; 
 and for this purpose he may, from time to time, transfer to the 
 Division of Issue and Redemption any funds in the Treasury 
 not otherwise appropriated, in excess of an actual cash balance 
 of $50,000,000; and in addition thereto he is authorized to 
 issue and sell, for gold, whenever it is in his judgment necessary 
 to the ends aforesaid, and for no other purpose, certificates of 
 indebtedness of the United States bearing interest at a rate not 
 exceeding 3 per cent per annum, payable in gold coin at the 
 end of five years, but redeemable in gold coin at the option of 
 the United States after one year, and the proceeds of all such 
 sales shall be paid into the Division of Issue and Redemption 
 for the purpose aforesaid. 
 
 Sect. 12. That the circulating notes provided for in this 
 Act shall consist of three classes, namely, national reserve notes, 
 national bank notes and national currency notes. 
 
 The words "national reserve notes," when used in this Act, 
 shall be understood to mean notes issued to a national bank- 
 ing association in exchange for United States notes, and for 
 whose current redemption in gold coin the banking association 
 receiving the same shall be made immediately liable, and whose 
 
308 APPENDIX 
 
 ultimate payment shall be made by the Government of 
 United States. 
 
 That the words "national bank notes," when used in 1 
 Act, shall mean circulating notes issued by national bank 
 associations, and secured by deposits of United States bor 
 
 That the words "national currency notes," when used 
 this Act, shall be understood to mean circulating notes issi 
 by a national banking association, and constituting a dii 
 and ultimate liability of the said banking association as p 
 vided in this Act. 
 
 Sect. 13. That any national banking association, on co 
 plying with the provisions of this Act, shall, if its capital 
 wholly paid up and unimpaired, be entitled to receive from 1 
 Comptrollers of the Currency national bank notes or natio) 
 currency notes, or both, of the different denominations he 
 inafter specified (none, however, being less than $10) in blai 
 registered and countersigned as provided by law, to the amoui 
 and in the manner following, and on the following terms a 
 conditions, but in no case exceeding in the sum 0} their ha 
 notes and currency notes * the amount of such paid-up and i 
 impaired capital. 
 
 Subdivision A. That any national banking association m 
 deposit with the Treasurer of the United States under su 
 regulations as the Secretary of the Treasury may appro- 
 United State notes to an amount not exceeding its paid-up a 
 unimpaired capital, and shall then be entitled to receive 
 exchange therefor from the Comptrollers of the Currency 
 equal amount of National Reserve notes, of the kind and c 
 nominations described in Sections 12 and 15 of this Act. 
 
 United States notes received into the Division of Issue a 
 Redemption in exchange for national reserve notes shall 
 cancelled as received. 
 Subdivision B. That upon the deposit by any natior 
 
 banking association of United States bonds it sh 
 
 be entitled to receive from the Comptrollers of the Curren 
 
 *The insertion of the words in italics is recommended in the repc 
 
APPENDIX 309 
 
 national bank notes of different denominations in blank, as 
 provided by this Act, equal in amount to the par value of the 
 bonds so deposited 
 
 Subdivision C. That any national banking association, 
 having deposited with the Treasurer of the United States, 
 United States notes and received in exchange therefor national 
 reserve notes, shall be entitled to receive and issue, in addition 
 thereto, an amount of national currency notes equal to the 
 amount of national reserve notes received as aforesaid: Pro- 
 vided, however, that the amount of national currency notes thus 
 issued shall not exceed the amount of its national bank notes 
 outstanding ; And provided further. That the notes thus issued 
 shall not exceed 40 per cent of the paid-up and unimpaired 
 capital of the bank, but an additional amount of the national 
 currency notes may be issued. 
 
 Sect. 23. That every national banking association shall 
 at all times keep and have on deposit with the Division of 
 Issue and Redemption for the purpose hereinafter specified, 
 a sum in gold coin equal to 5 per cent of the outstanding cir- 
 culation of national currency notes. The amount so kept on 
 deposit shall constitute a fund to be known as the "guaranty 
 fund," which fund shall be held for the following purpose, and 
 for no other, namely: 
 
 Whenever the Comptrollers of the Currency shall have be- 
 come satisfied that any association has refused to pay any of 
 its circulating notes on demand, they shall direct the redemp- 
 tion of its national currency notes from the guaranty fund 
 aforesaid, and the redemption in gold coin of the United States 
 from the reserve fund in the Division of Issue and Redemption 
 of the national reserve notes issued to it. After the failure of 
 any national banking association to redeem any of said notes 
 shall have been thus ascertained the bonds deposited by it with 
 the Treasurer of the United States shall be sold as provided 
 by law, and the proceeds of such sale shall be applied first to 
 the redemption of the notes for which they are held and the 
 balance, if any, shall be paid into the guaranty fund, so far as 
 
310 APPENDIX 
 
 may be necessary to provide for the final redemption of any 
 other outstanding notes of such bank. 
 
 The Comptrollers of the Currency shall forthwith collect, 
 for the benefit of said guaranty fund, from the assets of the 
 bank and from the stockholders thereof, according to their 
 liability as declared by this act, such sum as, with the bank 
 balance in the guaranty fund as aforesaid, shall equal the 
 amount of its national currency notes outstanding. And for 
 this purpose the United States shall, on behalf of the guaranty 
 fund, have a paramount lien upon all the assets of the asso- 
 ciation; and such fund shall be made good out of such assets 
 in preference to any and all other claims whatsoever, except 
 the necessary cost and expenses of administering the same. 
 
 Sect. 27. That the fund of 5 per cent of outstanding national 
 bank notes required to be kept on deposit by every national 
 banking association for the current redemption of the circu- 
 lating notes of such association shall be required to be equal 
 to 5 per cent of the national reserve notes issued to it and of 
 its national bank notes outstanding, and shall be in gold coin 
 of the United States; and the Comptroller of the Currency shall 
 have authority to provide for the redemption of said national 
 bank notes and national reserve notes at any or all of the sub- 
 treasuries of the United States. Said note shall be paid in 
 gold coin of the United States, and shall thereupon be returned 
 to the banks to which they were originally issued. 
 
 Sect. 30. That when the amount of the National Currency 
 notes of any national banking association issued under this 
 Act shall, together with its national banking notes outstanding, 
 exceed 80 per cent of its capital, every such national banking 
 association shall pay, on or before the last day of every month, 
 to the Division of Issue and Redemption a tax imposed at the 
 rate of one-half of i per cent per month upon the average daily 
 amount of said National Currency notes in circulation in excess 
 of 80 per cent of its capital stock, and which shall not have 
 been returned to the comptrollers for cancellation or covered 
 by an equal amount of gold coin deposited with the first comp- 
 troller for the retirement of such notes. 
 
APPENDIX 311 
 
 Sect. 35. That it shall be lawful for any national banking 
 association to establish branches under such rules and regu- 
 lations as may be prescribed by the Comptrollers of the Cur- 
 rency. 
 
 ALDRICH BILL 
 
 December ig, 1899 
 Be it enacted, etc. : 
 
 That the dollar consisting of twenty-five and eight-tenths 
 grains gold, nine-tenths fine, shall, as established by Section 
 3511 of the Revised Statutes of the United States, continue 
 to be the standard unit of value, and all forms of money issued 
 or coined by the United States shall be maintained at a parity 
 of value with this standard; and United States notes, and 
 Treasury notes issued under the Act of July 14, 1890, when 
 presented to the Treasury for redemption shall be redeemed 
 in gold coin of such standard. 
 
 Sect. 2. That it shall be the duty of the Secretary of the 
 Treasury, in order to secure the prompt and certain redemp- 
 tion of United States and Treasury notes as hereinbefore pro- 
 vided, to set apart in the Treasury a reserve fund of $150,000,- 
 000 in gold coin, which fund shall be used for such redemption 
 purposes only, and whenever and as often as any of said notes 
 shall be redeemed from said fund it shall be the duty of the 
 Secretary of the Treasury to use said notes so redeemed to 
 restore and maintain such reserve fund, in the manner follow- 
 ing, to wit: First, by exchanging the notes so redeemed for 
 any gold coin in the general fund of the Treasury; second, by 
 accepting deposits of gold coin at the Treasury or at any sub- 
 treasury in exchange for the United States notes so redeemed; 
 third, by procuring gold coin by the use of said notes, in ac- 
 cordance with the provisions of section thirty-seven hundred 
 of the Revised Statutes of the United States. If the Secretary 
 of the Treasury is unable to restore and maintain the gold 
 coin in the reserve fund by the foregoing methods, and the 
 amount of such gold coin in said fund shall at any time fall 
 
312 APPENDIX 
 
 below $100,000,000, then it shall be his duty to restore and 
 maintain the same by borrowing money on the credit of the 
 United States. 
 
 Sect. 7. That upon deposit with the Treasurer of the 
 United States, by any national banking association, of any 
 bonds of the United States in the manner provided by exist- 
 ing law, such association shall be entitled to receive from the 
 Comptroller of the Currency circulating notes in blank, 
 registered and countersigned as provided by law, equal in 
 amount to the par value of the bonds so deposited; and any 
 national banking association now having bonds on deposit 
 for the security of circulating notes, and upon which an amount 
 of circulating notes has been issued less than the par value of 
 the bonds, shall be entitled, upon due application to the 
 Comptroller of the Currency, to receive additional circulating 
 notes in blank to an amount which will increase the circulating 
 notes held by such association to the par value of the bonds 
 deposited, such additional notes to be held and treated in the 
 same way as circulating notes of national banking associa- 
 tions heretofore issued, and subject to all the provisions of 
 existing law affecting such notes 
 
 SECRETARY GAGE'S BILL 
 
 Be it enacted, etc.: 
 
 That there be established in the Treasury Department, 
 as a part of the office of the Treasurer of the United States, a 
 division to be designated and known as the Division of Issue 
 and Redemption, to which shall be assigned, under such 
 regulations as the Secretary of the Treasury may approve, all 
 records and accounts relating to the issue, redemption and 
 exchange as hereinafter provided of the several classes of 
 United States paper money. 
 
 There shall be transferred from the general fund in the 
 Treasury of the United States and taken up on the books of 
 said division as a redemption fund the sum of $125,000,000, in 
 
APPENDIX 313 
 
 United States gold coin and bullion, and such further sums 
 of standard silver dollars and silver bullion, purchased under 
 the Act of Congress approved July 14, 1890, as shall equal 
 the silver certificates outside the Treasury and Treasury notes 
 of i8go outstanding on the date when this Act shall take eflfect; 
 and thereafter the gold and silver coins and bulUon hereby 
 transferred from the general fund in the Treasury as herein 
 provided shall be increased or diminished, as the case may be, in 
 accordance with the provisions of this Act, and in no other way. 
 
 Sect. 2. That all United States notes, Treasury notes of 
 1890 and silver certificates presented for redemption shall be 
 redeemed from the redemption fund herein provided, in ac- 
 cordance with the terms of existing law; but the notes and 
 Certificates so redeemed shall be held in and constitute a part 
 of said fund, and shall not be withdrawn from said fund nor 
 disbursed, except in exchange for an equivalent amount of the 
 coin in which said notes or certificates were redeemed; but to 
 enable the Secretary of the Treasury more thoroughly to 
 carry out the provisions contained in this act, he is hereby 
 authorized to exchange any of the funds in the Division of 
 Issue and Redemption for any other funds which may be in 
 the general fund of the Treasury Department. 
 
 Sect. 5. That any national banking association whose 
 deposit of bonds is less than the amount of its capital may 
 deposit with the Treasurer of the United States, under such 
 regulations as the Secretary of the Treasury may approve. 
 United States notes. Treasury notes of 1890, and silver certifi- 
 cates, and shall be entitled to receive from the Comptroller 
 of the Currency and to issue an equal amount of its circulating 
 notes; but the aggregate amount of bonds. United States notes, 
 Treasury notes of 1890 and silver certificates deposited by any 
 national banking association shall not exceed the amount of its 
 capital: 
 
 Provided, That the total amount of United States notes. 
 Treasury notes of 1890 and silver certificates deposited with 
 the Treasurer of the United States under authority of this 
 section shall not exceed the sum of $200,000,000. 
 
314 APPENDIX 
 
 Sect. 6. That the Secretary of the Treasury shall issue, 
 from time to time, in his discretion, bonds of the same character 
 and class as those described in the third section of this act, 
 and shall substitute the same with the Treasurer of the United 
 States for equal amounts of the United States notes. Treasury 
 notes of 1890 and silver certificates deposited by national 
 banking associations, and the bonds so issued and substituted 
 shall be charged to the respective national banking associations, 
 and be accounted for by them at such prices, not less than par, 
 as shall represent the market value of such bonds; and the 
 United States notes. Treasury notes of 1890 and silver cer- 
 tificates released as herein provided shall become a part of 
 the general redemption fund ; and the Secretary of the Treasury 
 is hereby authorized to exchange any of said Treasury notes 
 of 1890 and said silver certificates for a like amount of United 
 States notes; 
 
 Provided, That the amount of bonds issued under the author- 
 ity of this section shall not exceed the sum of $200,000,000. 
 
 Sect. 7. When any national bank now existing or here- 
 after organized shall have deposited such United States bonds, 
 United States notes. Treasury notes of 1890 or silver certifi- 
 cates, to an amount of not less than 50 per centum of its capital, 
 it shall be entitled to receive from the Comptroller of the Cur- 
 rency, and to issue, national bank notes, in addition to the 
 50 per centum thus provided, to the amount of 25 per centum 
 of such deposits; but the circulation issued by any national 
 banking association shall never be in excess of its paid-up 
 capital stock, and the additional notes so issued shall not be 
 secured by said deposit, but shall constitute a first lien upon 
 all the remaining assets of the association issuing such notes. 
 Upon the failure of any association to redeem its circulating 
 notes above provided, whether the same are issued against 
 deposited security or against general assets, the same shall be 
 promptly redeemed by the Treasurer of the United States. 
 To secure the United States against any Joss arising from its 
 guarantee to pay and redeem such additional circulating notes, 
 it shall be the duty of the Comptroller of the Currency to levy 
 
APPENDIX 315 
 
 upon and collect from every national banking association 
 issuing such unsecured circulation a tax at the rate of 2 per 
 centum per annum on such unsecured circulation; which said 
 tax of 2 per centum per annum shall be paid to the Treasurer 
 of the United States in equal semi-annual payments in January 
 and July of each year, and when so collected it shall constitute 
 a safety fund out of which the United States shall be reimbursed 
 for any redemption of said unsecured circulation it may make 
 as herein provided. The safety fund thus created shall be 
 invested by the Secretary of the Treasury in such Govern- 
 ment bonds as he may consider advisable. Said tax of 2 per 
 centum per annum shall be in addition to the tax of one-half 
 of I per centum per annum on circulating notes hereinafter 
 authorized. 
 
 Sect. 8. That each national banking association shall 
 deposit and maintain in the Treasury of the United States a 
 sum of lawful money equal to 10 per centum of its aggregate 
 circulation, said sum to be in lieu of the 5 per centum redemp- 
 tion fund now required by Sect. 3 of the Act approved June 
 20, 1874, to be maintained, and to be subject to all the pro- 
 visions of existing law respecting said redemption fund not 
 inconsistent with the provisions of this Act; and, in considera- 
 tion of the deposits of bonds. United States notes. Treasury 
 notes of 1890 and silver certificates, and the tax of 2 per cen- 
 tum on the unsecured circulating notes of national banking 
 associations, and of the deposit of lawful money provided in 
 this section, the faith of the United States is hereby pledged to 
 the redemption in lawful money of the United States of all 
 the circulating notes of said national banking associations. 
 
316 APPENDIX 
 
 GOLD STANDARD ACT 
 
 March 14, 1900 
 
 an act to define and fix the standard of value, to 
 maintain the parity of all forms of money issued 
 or coined by the united states, to refund the 
 public debt, and for other purposes. 
 
 Be it enacted by the Senate and House of Representatives oj the 
 United States of America in Congress Assembled: 
 
 That the dollar consisting of twenty-five and eight-tenths 
 grains of gold, nine-tenths fine, as established by Section 351 1 
 of the Revised Statutes of the United States, shall be the 
 standard unit of value, and all forms of money issued or coined 
 by the United States shall be maintained at a parity of value 
 with the standard, and it shall be the duty of the Secretary of 
 the Treasury to maintain such parity. 
 
 Sect. 2. That United States notes, and Treasury notes 
 issued under the Act of July 14, 1890, when presented to the 
 Treasury for redemption, shall be redeemed in gold coin of 
 the standard fixed in the first section of this Act, and in order 
 to secure the prompt and certain redemption of such notes as 
 herein provided it shall be the duty of the Secretary of the 
 Treasury to set apart in the Treasury a reserve fund of $150,- 
 ooo,cxx3 in gold coin and bullion, which fund shall be used for 
 such redemption purposes only, and whenever and as often as 
 any of said notes shall be redeemed from said fund it shall be 
 the duty of the Secretary of the Treasury to use said notes so 
 redeemed to restore and maintain such reserve fund in the 
 manner following, to wit: First, by exchanging the notes so 
 redeemed for any gold coin in the general fund of the Treasury; 
 second, by accepting deposits of gold coin at the Treasury or 
 at any sub-treasury in exchange for the United States notes so 
 redeemed; third, by procuring gold coin by the use of said 
 notes, in accordance with the provisions of Sect. 3700 of the 
 Revised Statutes of the United States. If the Secretary is un- 
 
APPENDIX 317 
 
 able to restore and maintain the gold coin in the reserve fund 
 by the foregoing methods, and the amount of such gold coin 
 and bullion in said fund shall at any time fall below $100,000,- 
 000, then it shall be his duty to restore the same to the maximum 
 sum of $150,000,000 by borrowing money on the credit of the 
 United States .... and the gold coin received from the sale 
 of said bonds shall first be covered into the general fund of the 
 Treasury and then exchanged, in the manner hereinbefore 
 provided, for an equal amount of the notes redeemed and held 
 for exchange, and the Secretary of the Treasury may, in his 
 discretion, use said notes in exchange for gold, or to purchase 
 or redeem any bonds of the United States, or for any other 
 lawful purpose the public interests may require, except that 
 they shall not be used to meet deficiencies in the current 
 revenues. That United States notes when redeemed, in ac- 
 cordance with the provisions of this section, shall be reissued, 
 but shall be held in the reserve fund until exchanged for gold 
 as herein provided; and the gold coin and bulUon in the reserve 
 fund, together with the redeemed notes held for use as pro- 
 vided in this section, shall at no time exceed the maximum sum 
 of $150,000,000. 
 
 Sect. 4. That there be established in the Treasury Depart- 
 ment, as a part of the office of the Treasurer of the United 
 States, divisions to be designated and known as the Division 
 of Issue and the Division of Redemption, to which shall be 
 assigned respectively, under such regulations as the Secretary 
 of the Treasury may approve, all records and accounts re- 
 lating to the issue and redemption of the United States notes, 
 gold certificates, silver certificates, and currency certificates. 
 There shall be transferred from the accounts of the general 
 fund of the Treasury of the United States, and taken up on 
 the books of said divisions respectively, accounts relating to 
 the reserve fund for the redemption of the United States notes 
 and Treasury notes, the gold coin held against outstanding gold 
 certificates, the United States notes held against outstanding 
 currency certificates, and the silver dollars held against out- 
 standing silver certificates, and each of the funds represented 
 
318 APPENDIX 
 
 by these accounts shall be used for the redemption of the notes 
 and certificates for which they are respectively pledged, and 
 shall be used for no other purpose, the same being held as 
 trust funds. 
 
 Sect. io. That Sect. 5138 of the Revised Statutes is hereby 
 amended so as to read as follows: 
 
 "Sect. 5138. No association shall be organized with a 
 less capital than $100,000 except that banks with a capital 
 of not less than $50,000 may, with the approval of the 
 Secretary of the Treasury, be organized in any place the 
 population of which does not exceed 6,000 inhabitants, 
 and except that banks with a capital of not less than 
 $25,000 may, with the sanction of the Secretary of the 
 Treasury, be organized in any place the population of 
 which does not exceed 3,000 inhabitants. No associa- 
 tion shall be organized in a city the population of which 
 exceeds 50,000 persons with a capital of less than $200,000." 
 
 Sect. ii. That the Secretary of the Treasury is hereby 
 authorized to receive at the Treasury any of the outstanding 
 bonds of the United States .... and to issue in exchange 
 therefor an equal amount of coupon or registered bonds of 
 the United States in such form as he may prescribe, in de- 
 nominations of $50 or any multiple thereof, bearing interest 
 at the rate of 2 per cent per annum, payable quarterly 
 
 Sect. 12. That upon the deposit with the Treasurer of the 
 United States by any national banking association, of any 
 bonds of the United States in the manner provided by existing 
 law, such association shall be entitled to receive from the 
 Comptroller of the Currency circulating notes in blank, 
 registered and countersigned as provided by law, equal in 
 amount to the par value of bonds so deposited; .... pro- 
 vided, That the total amount of such notes issued to any such 
 association may equal at any time but shall not exceed the 
 amount at such time of its capital stock actually paid in 
 
APPENDIX S19 
 
 FOWLER BILL 
 
 April 4, 1902 
 Be it enacted, etc.: . . . . 
 
 That there shall be, and is hereby, created and established 
 in the Treasury Department a Division of Banking and Cur- 
 rency, which shall be in charge of a board consisting of three 
 members 
 
 Sect. 2. That if any national bank shall assume the cur- 
 rent redemption, as hereinafter described, of an amount of 
 United States notes equal to 20 per centum of its paid-up 
 capital, it shall have the right, without depositing United States 
 bonds as now provided by law — 
 
 First — To immediately take out for issue and circulate an 
 amount of bank notes equal to 10 per centum of its paid-up 
 capital, by paying a tax, on the first days of January and July 
 of each year, of one-eighth of i per centum upon the average 
 amount of such notes in actual circulation during the pre- 
 ceding six months. 
 
 Second — To take out for issue and circulate an amount of 
 bank notes equal to 10 per centum of its paid up-capital at any 
 time after the expiration of one year from the date of the 
 assumption aforesaid; and it shall pay into the Treasury of 
 the United States, on the first days of January and July of each 
 year, a tax of one-eighth of i per centum upon the average 
 amount of such notes in actual circulation during the preceding 
 six months 
 
 Third — To take out for issue and circulate an amount of 
 bank notes equal to 10 per centum of its paid-up capital at 
 any time after the expiration of two years from the date of the 
 assumption aforesaid ; and it shall pay into the Treasury of the 
 United States, on the first days of January and July of each 
 year, a tax of five-eighths of i per centum upon the average 
 amount of such notes in actual circulation during the pre- 
 ceding six months. 
 
 Fourth — To take out for issue and circulate an amount of 
 
320 APPENDIX 
 
 bank notes equal to lo per centum of its paid-up capital at any 
 time after the expiration of three years from the date of the 
 assumption aforesaid; and it shall pay into the Treasury of the 
 United States, on the first days of January and July of each 
 year, a tax of five-eighths of i per centum upon the average 
 amount of such notes in actual circulation during the pre- 
 ceding six months. 
 
 Fijth — To take out for issue and circulate an amount of 
 bank notes equal to lo per centum of its paid-up capital at any 
 time after the expiration of four years from the date of the 
 assumption aforesaid; and it shall pay into the Treasury of the 
 United States, on the first days of January and July of each 
 year, a tax of five-eighths of i per centum upon the average 
 amount of such notes in actual circulation during the pre- 
 ceding six months. 
 
 Sixth — To take out for issue and circulate an amount of 
 bank notes equal to lo per centum of its paid-up capital at 
 any time after the expiration of five years from the date of the 
 assumption aforesaid ; and it shall pay into the Treasury of the 
 United States, on the first days of January and July of each 
 year, a tax of five-eighths of i per centum upon the average 
 amount of such notes in actual circulation during the preceding 
 six months. 
 
 Seventh — With the approval of the Board of Control, to 
 take out for issue and circulate an amount of notes equal to 
 20 per centum of its paid-up capital at any time after the 
 expiration of six years from the date of the assumption afore- 
 said; but it shall pay into the Treasury of the United States, 
 on the first days of January and July of each year, a tax of one 
 and one-half per centum upon the average amount of such 
 notes in actual circulation during the preceding six months. 
 
 Eighth — With the approval of the Board of Control, to take 
 out for issue and circulate an amount of notes equal to 20 per 
 centum of its paid-up capital at any time after the expiration 
 of seven years from the date of the assumption aforesaid; but 
 it shall pay into the Treasury of the United States, on the first 
 days of January and July of each year, a tax of two and one- 
 
APPENDIX 321 
 
 half per centum upon the average amount of such notes in 
 actual circulation during the preceding six months. 
 
 The manner and form of the assumption of the current re- 
 demption of the United States notes, as aforesaid, shall be as 
 follows: Each note shall bear the endorsement: 
 
 "For value received, the national bank of (city), 
 
 (State), will currently redeem this note in gold coin until the 
 same has been paid and canceled in accordance with the pro- 
 visions of law." .... 
 
 Whenever a national bank shall present any United States 
 notes at the United States Treasury for indorsement, as afore- 
 said, it shall at the same time surrender to the United States 
 Treasury an additional amount of United States notes equal 
 to one-half of the United States notes presented for such in- 
 dorsement and receive in exchange therefor gold coin ; and the 
 United States notes so redeemed shall not be reissued, but shall 
 be canceled and destroyed. 
 
 Sect. 3. That when the national banks of the United States 
 shall have assumed the current redemption of United States 
 notes amounting in the aggregate to $130,000,000, and the 
 United States has redeemed and canceled United States notes 
 amounting to $65,000,000, no national bank shall thereafter 
 pay out any United States notes the current redemption of 
 which has not been assumed by some national bank, but shall 
 return the same to the United States Treasury for redemption, 
 and the Secretary of the Treasury shall redeem the United 
 States notes so returned out of the gold coin in the issue and 
 redemption of the Treasiny, and they shall not be reissued, 
 but shall be canceled and destroyed. But it shall be the duty 
 of the Secretary of the Treasury to maintain the reserve fund 
 at an amount not less than thirty-three and one-third per cen- 
 tum of the United States notes at any time outstanding. 
 
 From and after the first presentation for redemption and 
 cancellation of any United States notes in accordance with the 
 provisions of this section, the Secretary of the Treasury shall 
 not pay out or issue any gold certificates. 
 
 Sect. 4. That after the national banks shall have assumed 
 
322 APPENDIX 
 
 the current redemption of $120,000,000 of United States notes, 
 and the United States shall have redeemed, canceled, and 
 destroyed $65,000,000 of United States notes, in accordance 
 with Section 2 of this Act, any national bank which has not 
 assumed the current redemption of any United States notes as 
 hereinbefore provided may then take out an amount of cir- 
 culation equal to 10 per centum of its capital, and from year 
 to year thereafter additional amounts of circulation in accord- 
 ance with the provisions of Section 2 of this Act; but upon 
 the first 20 per centum of the total circulation to which it is 
 entitled under this Act it shall pay into the Treasury of the 
 United States, on the first days of January and July of each 
 year, five-eighths of i per centum upon the average amount 
 of such notes in actual circulation during the preceding six 
 months, and upon all such notes taken out for issue in excess 
 of said 20 per centum the taxes prescribed in Section 2 of 
 this Act 
 
 Sect. 6. That all the bank notes taken out for issue in 
 accordance with the provisions of this Act shall be furnished 
 by the United States at the expense of the respective banks 
 issuing them, and shall be in denominations of ten dollars and 
 multiples thereof. 
 
 Sect. 7. That such notes shall be a first lien upon the assets 
 of the respective banks issuing them, and shall be received upon 
 deposit and for all purposes of debt or liability by every national 
 bank at par and vdthout any charge of whatsoever kind, and 
 such notes shall be receivable for all public dues except 
 duties on imports, and when so received may be paid out again. 
 
 Sect. 8. That the total amount of circulating notes of all 
 kinds of any national bank may equal, but shall not at any 
 time exceed, the amount of its paid-up capital 
 
 Sect. 10. That the Secretary of the Treasury is hereby 
 authorized, in his discretion, to deposit all the money of the 
 United States in excess of $50,000,000, except that in the Issue 
 and Redemption Division of the Treasury, in national banks, 
 upon the condition that said banks shall first deposit in 
 the United States Treasury United States bonds equal in 
 
APPENDIX 323 
 
 amount at par to the sum to be so deposited; and such banks 
 shall, on the first days of January and July of each year, pay 
 interest thereon to the United States at the rate of i per centum 
 per annum upon the average balances of the preceding six 
 months, but such banks shall not be required to hold any 
 
 reserve against such deposits 
 
 "Any national banking association may amend its articles of 
 association vsrith reference to the places where its banking 
 operations are to be carried on upon the unanimous vote of its 
 board of directors by and vifith the approval of the Board of 
 Control of Banking and Currency: Provided, however, That 
 authority to estabhsh branches in the possessions of the United 
 States and in foreign countries shall be given only to banks 
 having a paid-up capital of not less than $5,000,000." 
 
 PAYNE BILL 
 
 February 26, 1903 
 
 Be it enacted by the Senate and House oj Representatives of the 
 United States oj America in Congress assembled: 
 "Sect. 5x53. All national banking associations, designated 
 for that purpose by the Secretary of the Treasury, shall be 
 depositories of public money, under such regulations as may 
 be prescribed by the Secretary, and they may also be em- 
 ployed as financial agents of the Government; and they shall 
 perform all such reasonable duties as depositories of public 
 moneys and financial agents of the Government as may be 
 required of them. The Secretary of the Treasury may de- 
 posit in such designated depositories public money received 
 from all sources, and shall require such depositories to give 
 satisfactory security, as hereinafter authorized, for the safe- 
 keeping and prompt payment of the pubhc money so de- 
 posited with them and for the faithful performance of their 
 duties as financial agents of the Government. The Secretary 
 of the Treasury may accept as security for the safe-keeping 
 of public money deposited with national banking associations, 
 
324 APPENDIX 
 
 as herein authorized, the deposit of bonds of the United States, 
 bonds or other interest-bearing obligations of any State of 
 the United States, or any legally authorized bonds issued for 
 municipal purposes by any city in the United States which has 
 been in existence as a city for a period of twenty-five years, and 
 which for a period of ten years previous to such deposit has 
 not defaulted in the payment of any part of either principal 
 or interest of any debt authorized to be contracted by it, and 
 which has at such date more than fifty thousand inhabitants as 
 established by the last national census, and whose net indebted- 
 ness does not exceed lo per centum of the valuation of the 
 taxable property therein, to be ascertained by the last pre- 
 ceding valuation of property for the assessment of taxes; or 
 the first-mortgage bonds, not including street railway bonds, 
 of any railroad company which has paid dividends of not less 
 than 4 per centum per annum regularly and continuously 
 on its entire capital stock for a period of not less than ten years 
 previous to the deposit of the bonds. The Secretary of the 
 Treasury may accept the securities herein enumerated in such 
 proportions as he may from time to time determine, and he 
 may at any time require the deposit of additional securities, 
 or require any depository to change the character of the securi- 
 ties already on deposit. National banking associations having 
 on deposit public money shall pay to the United States for the 
 use thereof interest at the rate of not less than one and one- 
 half per centum per annum, such rate to be fixed from time 
 to time by the Secretary of the Treasury, and all public moneys 
 in any depository shall be payable on demand upon the draft 
 of the Treasurer of the United States. The United States 
 shall have a lien on the current assets of banks in which public 
 moneys are deposited for the repayment of the same on de- 
 mand of the Treasurer of the United States as aforesaid; but 
 the securities deposited with the Secretary of the Treasury for 
 the safe-keeping of such moneys shall be sold before the said 
 lien is enforced and the proceeds applied to the discharge of 
 said lien to the extent of the proceeds of sale : Provided, That 
 no reserve shall be required on account of such deposits." 
 
APPENDIX 325 
 
 FOWLER BILL 
 
 February 26, 1903 
 Be if enacted, etc.: .... 
 
 That any national bank may, with the approval of the 
 Comptroller of the Currency, take out for issue and circulation 
 an amount of national-bank notes not exceeding 25 per centum 
 of its paid-up and unimpaired capital without depositing 
 United States bonds with the United States Treasury in the 
 manner provided by existing law. 
 
 Sect. 2. That said national-bank notes shall be furnished 
 by the United States at the expense of the respective banks 
 issuing them, and shall be in the denominations of ten dollars 
 and multiples thereof. 
 
 Sect. 3. That before any national bank shall receive any 
 of the bank notes referred to in this Act it shall first deposit 
 in the Treasury of the United States as a guaranty of the pay- 
 ment thereof an amount of United States bonds or gold coin, 
 or United States notes, or in all equal to 5 per centum of the 
 amount of the notes so taken out 
 
 Sect. 4. That every national bank taking out such notes 
 for issue and circulation shall, on the first days of January and 
 July of each year, pay into the Treasury of the United States, 
 in gold coin, a tax of one-quarter of i per centum upon the 
 average amount of such notes in actual circulation during the 
 preceding six months, and the tax so paid into the Treasury 
 shall, with the 5 per centum deposited as a guaranty for the 
 payment of the notes, constitute a guaranty fund. 
 
 Sect. 5. That such notes shall be a paramount lien upon 
 the assets of the respective banks issuing them 
 
 Sect. 6. That any national bank having notes outstand- 
 ing in excess of 75 per centum of its paid-up capital, to secure 
 the payment of which United States bonds have been deposited, 
 may, upon the deposit of lawful money for the redemption of 
 such excess, take out for circulation the notes provided for in 
 this Act, without reference to the Umitation of $3,000,000 each 
 
326 APPENDIX 
 
 month prescribed in Section 9 of the Act approved July 
 twelfth, eighteen hundred and eighty-two. 
 
 Sect. 7. That the provisions of the law contained in Section 
 9 of the Act approved July twelfth, eighteen hundred and 
 eighty-two, limiting the amount of notes that may be retired 
 to $3,000,000 in any calendar month, shall not apply to the 
 notes taken out in accordance with the provisions of this Act. 
 
 Sect. 8. That every national bank taking out such notes 
 for issue shall maintain at all times the same reserve against 
 such notes when in actual circulation as is now prescribed by 
 law for deposits 
 
 Sect. 12. That upon the failure of a national bank any 
 national-bank notes that have been taken out by it in accord- 
 ance with the provisions of this Act shall, upon presentation 
 to the United States Treasury, be paid in gold coin out of the 
 guaranty fund; but the United States Treasury shall recover 
 from the assets of the failed bank an amount equal to its out- 
 standing notes, and the same shall be paid into the guaranty 
 fund 
 
 Sect. 15. That in addition to the provisions of Section 5153 
 of the Revised Statutes, concerning the designation of public 
 depositaries and the deposit of public moneys therein, the 
 Secretary of the Treasury may also deposit in such designated 
 depositaries any public money received from whatever source, 
 including receipts from customs, without requiring security 
 by the deposit of United States bonds and otherwise, as pro- 
 vided in said section, but no such deposit shall in any case 
 exceed 75 per centum of the paid-up and unimpaired capital 
 of any such depositary. National banking associations hav- 
 ing on deposit public money in accordance with the provisions 
 of this Act shall pay to the United States for the use thereof 
 interest at the rate of two per centum per annum, payable 
 semi-annually on the first days of January and July of each 
 year. The United States shall have a paramount lien on the 
 assets of banks in which public moneys are deposited in ac- 
 cordance with the provisions of this Act for the repayment of the 
 same on demand of the Treasurer of the United States. . . .