! iM24 W w - '.i-^' w&: $' .» xv^ ^ A""^' V •to ■>. .■...■.-. -"i' ■ ^ V, •??-"-i!i' u^l r %% j<*„ ^=.j^ . ^r^^ -«*«, , ■X V " -ir^'-aJV:/ i'^ \ •v"/r/7"; -^, n/*' c ^< ;^>^-:a#'|i;" ^-.^If •:f |W ■Ayy-™'' % If" Cornell University Library HG2481.M24 Banking and currency reform.lts necessit 3 1924 013 900 596 &7r} «E^^^^ {''^o.'^r lANKING AND CURRENCY REFORM ITS NECESSITY-ITS POSSIBILITY-ITS METHOD AN ADDRESS BY JAMES THOMPSON McCLEARY Secretary of the American Iron and Steel Institute Member of Congress from Minnesota, 189S-1907 Committee on Banking and Currency, 1895-1899 BEFORE A JOINT SESSION OF THE AMERICAN CIVIC ALLIANCE AND THE AMERICAN ASSOCIATION FOR THE ADVANCEMENT OF SCIENCE AT WASHINGTON, D. C, ON DECEMBER 29, 1911 REVISED AND ENLARGED EDITION PRESENTED BY MR. SUTHERLAND February 6, 1912. — Ordered to be printed Mahch 1, 1912 — Ordered to be printed with corrections WASHINGTON 1912 TABLE OF TOPICS. Page. A distinction with a difference 3 Bank failures in the United States 3 Bank failures in Europe and Canada 4 Bank losses in United States and Canada 4 Comparison of results in crises 5 Our unequaled gold stock 5 How England protects her gold reserve 5 Our expensive and dangerous method 6 Bank currency versus Government currency 6 Business personal not political 7 We need a banking system 7 The National Monetary Commission 8 Central banks in foreign countries 9 The national reserve association 10 Proposed bank union resembles oiu National Union 10 Capital and membership 11 Earnings and dividends 11 Neither Wall Street nor Washington to control 12 General outline of organization 13 The small banks will control 13 The South and West will dominate 14 Bank patrons on boards 14 Disadvantages of National Treasury plan 16 Present law promotes speculation 16 President Vanderlip 's statement 17 Some of the ends to be attained 18 This reform will benefit all 18 Proposed plan nonpartisan 19 Concluaion 19 2 BANKING AND CURRENCY REFORM. Mr. McCleabt said : This would be a dreary world if its problems were aU solved. The unsolved problems of each generation offer opportunities to the oncoming generation. We Americans have conquered many diffi- culties, but there are still many problems demanding solution at our hands. In numerous fields we lead the world ; in some we are far in the rear. This evening I invite your attention briefly to an unsolved problem of vast importance, affecting every human being in this country. Here is an opportunity for real progress, for a movement that is really forward and not backward. The United States has three undesirable monopolies. First, this is the only civilized country in the world that ever has a serious finan- cial panic. Second, this is the only civilized country in the world that has a series of banks instead of a system of banks. Third, this is the only civilized country in the worlu that keeps the funds of the nation in a national treasury. The first is a result of which the second and third are prime causes. A DISTINCTION WITH A DIFFERENCE. Here let us distinguish between a financial panic and a business depression. They are alike in being very troublesome business expe- riences; otherwise they are largely unlike in cause and course. To point out one distinction between them: In a financial panic business men are anxious to get money or its equivalent, but, however solvent they may be, they are unable to do so except possibly in very limited amounts and with extreme difficulty; in a business depres- sion, on the other hand, money is easily obtainable, but men are timid about accepting and using it. In a financial panic men are seeking money; in a business depression money is seeking men. From business depressions we probably suffer less than any other country; from financial panics we are the only important country that now suffers seriously at all. It is entirely practicable for us to banish our financial panics and to reduce very greatly the extent and severity of our business depressions. BANK PAILUEES IN THE UNITED STATES. The annual report of the Comptroller of Currency for 1911 shows that during the 20-year period, 1890-1910, nearly 400 of our national banks became insolvent and were closed. During the same period State and private banks and trust companies to the number of nearly 1,400 had the same experience; that is, we have in the United States an annual average of about 20 failures of national banks knd about 70 of banks other than national. In other words, our mortality expectation among banks in this country is on the average one failure every four days, the irretrievable losses to depositors averaging about 3 4 BANKING AND CUBEENOT EEFOKWL $1,000,000 a month. Even these losses, however, are small com- pared with those resulting directly and indirectly from financial panics like those of 1893 and 1907, both of which have occurred within the period under consideration. BANK FAILUIIES IN ENGLAND AND CANADA. England has not always been immune from financial panics and bank failures. One hundred years ago, during the Napoleonic wars, she was suffering very greatly in that direction. In 1825 there was another panic, and 63 English banks failed. Other financial panics occurred there in 1836, 1847, and 1857. The last one occurred in 1866. Thus during the first two-thirds of the nineteenth century panics occurred in England about every 10 years, which was a worse record than ours. Since 1866, however, there has not been in Eng- land a single financial panic; that is, a single case in which there was a general breakdown of credit facilities. Within the memory of men stiU comparatively young England was subject to the same financial catastrophies from which we now periodically suffer. The encourag- ing thing is that she has succeeded in completely ridding herself of these disastrous experiences. Even more interesting in this connection than the experience of any European country is that of our neighbor to the north. Very like the United States in extent and in history is the Dominion of Canada. The area of the Canadian Dominion is substantially the same as that of the great Repubhc, but her population is much more scattered than ours. During the period we have under con- sideration, in which the United States has had nearly 1,800 bank failures, Canada has had just 7, all of them small banks. With 12 times as many people, we have had more than 250 times as many bank failures as Canada. BANK LOSSES IN THE UNITED STATES AND CANADA. The loss to our bank depositors in the 20-year period has run up into the hundreds of miUions of dollars. The total loss to Canadian bank depositors during the same period has been only $3,197,329, our average loss every three months. In three of the Canadian bank failures the depositors lost not one cent. In the failure of the largest of these banks, a bank whose liabilities exceeded the aggregate lia- biUties of the other six, there was not even a temporary lock up of the depositors' funds. On the very day of the failure the Bank of Montreal assumed the failed bank's liabihties, and all demands on the bank were paid as presented. During our panic of 1907 the Canadian banks had about $60,000,000 tied up m New York, and yet throughout the entire period, when thousands of our banks had suspended cash payments, every Cana^ dian bank day by day performed its duty to the business of Canada. Though her business affairs are so intimately connected with ours, Canada had no panic. Nowhere throughout the Dominion were cash payments at the banks suspended for a single day. Moreover, the wheat crop of our Northwestern States was largely moved through accommodations from Canadian banks. Some oi the great American cities of our northern border were very glad indeed during that trying period that they had Canadian connections. BAliTKING AUD CUKEBNOT EEFOEM. 5 A COMPAEISON OF KESTJLTS IN CEISES. In 1890 a business house in New York failed for $12,000,000. About the same time in London the great international financial house of Baring Bros, failed for $125,000,000, "the largest single commercial failure known to history." In New York a panic ensued, and the interest rate on call loans ran up above 80 per cent. Time loans could hardly be had at any rate, no matter what security was offered. Throughout the United States a large number of perfectly solvent business houses found themselves suddenly and without warning driven into bankruptcy. In London a failure ten times as large was taken care of promptly and efficiently; not a single legitimate commercial failure followed in the United Eangdom, and every solvent business man in that country was able to secure day by day all the bank accommodations to which he was entitled at a rate never exceeding 6 per cent, and as high as that for only one week. In this country scores of bank failures followed; in the United Kingdom not one. OUE UNEQUALED GOLD STOCK. A recent compilation by the Director of the Mint shows the follow- ing stocks of gold in this country and in Europe : Russia $961,400,000 France 926, 400, 000 United Kingdom 650, 000, 000 Germany (in banks and public treasuries only) 185, 900, 000 All other European countries 925, 000, 000 United States 1,710,000,000 This country, therefore, has nearly half as much gold as have all the countries of Europe combined. Omitting Russia and France, we have about as much as all the remaining countries of Europe. We have more than twice as much as the combined stocks of our two greatest rival commercial nations, Great Britain and Germany. We have several times as much as the German Empire, with its world- wide commerce. The Annual Report of the Treasurer of the United States for 1911 shows that of our entire holdings we have in our National Treasury gold to the amount of $1,163,901,183. Nowhere else on earth has there ever been anything like such a stock of gold gotten together in one place. It is incomparably the greatest gold reserve in the world — and proportionally the least effective. HOW ENGLAND PROTECTS HEE GOLD EESEEVE. To illustrate: In 1907, to tide us over the panic, we had to send abroad for gold. We got nearly $100,000,000 from the Bank of England. And how much gold did the bank have at that time. It had less than $200,000,000. With more than five times as much gold locked up in our Treasury as the Bank of England possessed alto- gether, we had to appeal to her for aid. On the other hand, the Bank of England, out of her comparatively small stock, was able to help us without embarrassing herself or failing for one moment to discharge fully her functions as the financial center of the mighty 6 BANKING AND CUEEENCT EEPOEM. commerce of the British Empire. Our stock of gold was and is enor- mously greater than hers, but it did not and does not compare with hers in efficiency. How did the Bank of England proceed to secure the gold with which to help us ? Chiefly by raising her rate of discount. Her usual interest rate is about 4 per cent. The bank rapidly raised the rate to 7 per cent. Following the law of supply and demand, gold flowed to England. It came from 24 countries, including British possessions, and promptly restored the gold reserve of the Bank of England to its normal amount of about $175,000,000. OXm EXPENSIVE AND DANGEROUS METHOD. By contrast let us now, without a thought of criticism of those responsible for the management of our national affairs at that time, consider the method to which President Cleveland was compelled to resort during his second administration in restoring and mamtaining the gold reserve in our National Treasury. He secured the gold required in the only way available to him, by three issues of national bonds aggregating more than $262,000,000, on which amount inter- est at 4 per cent has had to be paid by the Nation for a long period of years. In other words, the Bank of England was able to secure not only for herself, but also for us, the vast quantities of gold required to meet the situation by simply raising her interest rate 3 per cent for a short time, to a point that was even then by no means high. On the other hand, to meet a similar condition, our National Treasury had to continue needlessly for many years paying 4 per cent interest, the total cost amountmg to more than $150,000,000. It cost us more than twenty times as much to protect our gold reserve in our Na- tional Treasury as it cost England to protect her gold reserve in her great bank. Moreover, in England there was no panic and no serious mterruption of business, while in the United States the loss to the business of the country was by far the most expensive part of the experience. BANK CUERENOT VERSUS GOVERNMENT CURRENCY. This suggests another illustration that may not be amiss at this Eoint. Shortly after the breaking out of our Civil War our banks ad to cease making specie payments. Our National Government itself did hkewise and issued greenbacks. These greenbacks, which became our currency, depreciated rapidly and greatly. At one time in 1863 they were worth only about 35 cents on the dollar. After Vicksburg had been captured and Gettysburg had been won by the Union forces the value of the greenbacks gradually increased, but it was not until 14 years after the war had closed that greenbacks rose to par. By contrast, in 1871 France was vanquished by Germany. After many victories, the German Army surrounded Paris. The French Emperor was a fugitive; the French Government was in the hands of a mob. After Paris had fallen and the war had ended France was required to pay Germany the enormous war indemnity of 5,000,000,000 francs, about a thousand million doUars. This was BANKING AND CTTBKENCY EEFORM. 7 promptly financed by the Bank of France as the fiscal agent of the Government. Dunng the war this . bank loaned to France 1,470,000,000 francs and to the city of Paris 210,000,000 francs. It also paid 16,500,000 francs requisitioned by the Commune, nearly half of which was never repaid. An J yet during all that trying period there was in France no financial panic. All over France busiaess men had day by day the accommodations to which they were entitled, and at a rate of interest never above 6 per cent and as high as that for only a short time. Moreover, the notes of the Bank of France, which were the currency of the country, never went below 3 per cent discount, measured in gold, and even this small depreciation continued for only a very short time. Victory perched on our banners; France suffered defeat. Yet our paper currency, issued by our National Government, depreciated greatly and continued for 18 years below par; while the paper cur- rency of France, issued by its great bank, depreciated very Uttle and for only a few weeks. It was Because her paper currency was and is issued "by her great bank, and not by her Government, that France was saved the enormous losses that the people of a country always suffer from a depreciated currency. BUSINESS PERSONAL, NOT POLITICAL. This proud and powerful country will not lie down under needless disaster, saying, in the spirit of Mohammedan fatalism, "It is the will of Allah," but wUl calmly proceed to solve its problems in the interest of the American people. My purpose to-nignt is to contribute my part toward indicating the urgency of our need of banking and cur- rency reform, the possibility of it, and the general direction that it must take to be successful. It is as persons, not as citizens, that we grow hungry and need food; tired, and need rest and sleep; cold, and need clothiag and shelter. It is as persons, and not as citizens, that people produce and exchange to meet their several needs. Commerce is, therefore, an individual, not a governmental function. Banking grows out of and is a part of commerce; so banking, too, is an iudividual, not a governmental, function. The Government should not be expected either to protect and maintain the national gold reserve or to issue the paper currency of the country. In the nature of the case, it can not perform either function well. It can wisely supervise, but it can not weU perform this service. WE NEED A BANKING SYSTEM. During the 100-year period ending in 1866, England had nearly a dozen financial panics and hundreds of bank failures, entailing upon the people of that country enormous business losses and unspeakable personal suffering. In Scotland during those same years there was not one financial panic and only one bank failure. Why the difference? In England at that time they had a series of banks, while in Scotland they had a system of banks. Dining the last 20 years, as I have already shown, we have had two serious financial panics and nearly 1,800 bank failures, while our neigh- bor on the north has had no financial panics and only 7 bank failures. BANKING AND OTJUEENOT EEFOKM. Why haa our record been thus discreditable ? Our bankers are as hon- est and aa able as any in the world. The blame does not rest on them. The trouble is that we have only a series of banks, whereas we should have a system of banks. The seven banks that failed in Canada were all small isolated institutions. Among the banks in the Canadian sys-- tem there was not dming the entire period one sohtary failure; nor, what is almost as important, was there ever any fear oi one. In a small village the water needed for domestic use is usually obtained from individual wells, as is also the water occasionally needed for fighting fires. As population increases the necessity arises for a better and more abundant water supply. Then, as the conamu- nity progresses, comes the water-supply system — the great reservoir, holding ample water for all purposes, connected by pipes with aU parts of the city. Properly planned, this system will provide a better water supply for domestic uses and greater protection for life and property against destruction by fire than would be possible through the use of individual wells. Under our laws each bank is an independent unit. In time of stress, instead of cooperating with each other for the general good, each bank is under the necessity of looking out for itself. At the critical time, when extension of credits is the veiy thing needed in the interest of industry, each bank feels compelled in the interest of its depositors and stockholders to cut down loans and strengthen its reserves. As President A. B. Stickney, of the Chicago Great Western Railway, has well said, "This isolated weakness compels each bank to prey on other banks and to adopt David Harum's golden rule, 'Do unto the other banks what they will do unto you, but do it fust.' " In the interest of the American people it is necessary to substitute among our banks neighborUness for isolation, cooperation for antagonism. That is, our series of banks should be confederated into a system of banks. THE NATIONAL MONETARY COMMISSION. In the fall of 1907, with an abundant harvest and with our funda- mental economic conditions favorable to great and continued pros- perity, the United States had a financial panic which caused losses to our people amounting to hundreds of milHons of dollars. Two- thirds or the banks throughout the country suspended cash payments. Multitudes of men were thrown out of employment. The men engaged in legitimate business and their employees, who were in no sense responsible for the panic, were the greatest sufferers. Students of the subject in all parts of the United States had long known that in other countries ways had been devised to prevent dis- astrous panics and to confine the evil results of overspeculations and bad business methods largely to the people immediately responsible for them. It was known that with a good banking and currency system the wrongdoers could be quite effectively quarantined and the innocent could be largely protected from undeserved disaster. With this object in view, in May, 1908, Congress provided for a commission, to report "what changes are necessary or desirable in the monetary system of the United States, or in the laws relating to banking and currency." In order that this Monetary Commission might command the full confidence of the country, by reason of non- BANKING AND CXTREENCY REFORM. . 9 gartisanship and recognized ability, it was composed of prominent enators and Representatives of both political parties, men whose experience in Congress had especially fitted them for this service. The commission has employed expert assistants and has thoroughly investigated the experience of the great commercial countries of the world. It has consulted with prominent business men in all parts of this country. It has been open-minded in receiving well-considered suggestions. After nearly four years of careful study, the commis- sion has devised a plan for a banking and currency system which if put into operation may reasonably be expected to save this country from financial panics m the future and to accomplish several other desirable results in the promotion of domestic industry and foreign commerce. CENTRAL BANKS IN FOREIGN COUNTRIES. Investigation showed the commission that in each of the other great commercial countries the vital feature of their banking and currency system is a great central bank, the national monetary reservoir, which serves as the fiscal agent of the national govern- ment, the custodian of the nation's gold reserve, and the bank of the other banks. In none of those countries is the central bank the only large bank. France has two banks with a larger subscribed capital than that of its central bank, another with subscribed capital almost as large, and several others with very large capital. In England there are three banks with larger subscribed capital than that of her central bank, three others with capital almost as large, and many others with very large capital. In Germany the central bank has the largest capital. But hair a dozen others almost equal it in that respect, and there are many others of large capital. Each of these large banks has branches throughout the country, thus carrying the best of banking facilities into every neighborhood. As a result, the rates of interest in those countries are low and are practically uniform at all times and in all sections of each country. Only to a limited extent do the central banks compete with the other banks. In no case is the central bank the most profitable of the banks to the stockholders of it. In each case the central bank is conducted primarily for public service and only secondarily for profit. In each country the people and the other banks regard their central bank as their most beneficent secular institution. They have con- fidence that the management of their great central bank will at all times, alike in prosperity and in adversity, in peace and in war, pro- tect the interests of all the people and sustain both pubhc and private credit. The Bank of France was founded by Napoleon the Great, who regarded its estabUshment as a greater achievement than the winning of any one of his mihtary victories. Maurice Patron, the noted French financial writer, voices French opinion when he speaks of the Bank of France as "the safeguard of French commerce, the guaranty of our prestige abroad, the palladium of our independence. * * * It assures low rates for money to everybody, everywhere, sometimes at the expense of its own interests, but always for the greater benefit of the national commerce and industry." 10 BANKING AND CtTRKENCT BEFOEM. THE NATIONAL RESEKVE ASSOCIATION. Investigation showed the commission that the imperative financial need of this country is an institution which shall perform for us the great public service performed in other countries by the central bank. The commission was wise enough, however, to recognize and respect the fact that in this country there is much popular objection, for reasons of varying vahdity, to the establishment here of a central bank. The commission is to be congratulated on having solved the problem in a way harmonious with our history and with the spirit of our institutions, proposing "something new, but also something nor- mally evolved from pur present system." The proposed new insti- tution is called the national reserve association. In an address delivered last November before the Western Eco- nomic Society, Chicago, Hon. FrankUn MacVeagh, Secretary of the Treasury, thus aptly described the proposed national reserve asso- ciation : It ia not a central bank that is proposed. Of course the reserve association will perform some of the work of a bank. It will receive deposits and pay checks. It will issue currency. It will buy and sell gold. It will buy and sell exchange. And it will loan money . But these things don't make it a bank m any sense in which a central bank is objected to. In the first place, it will not be privately owned, as a central bank would be. It will not be a competitor of the banks, as a central bank would be. It will not accept general deposits, as a central bank would, but only deposits of the Government and of the banks. It will not be run to make money, as central banks are. It will be organized exclusively for service and not for profit. But what, then, will it be if it will not be a bank? It will be an agency of the banks. It will be an organization to perform certain functions for the banks which, unorganized, they can not perform — functions which are, nevertheless, wholly necessary if the banks are to perform their part in the conduct of the business of the country continuously and adequately. It will be an agency of the general nature of a clearing house, though Immensely broader and more useful. PROPOSED BANK UNION RESEMBLES OUR NATIONAL UNION. France and the United States are both Republics, but they are built on different fundamental principles. In France the power of the nation is all centered in Paris, the departments into •miich the country is divided being merely divisions for administrative purposes. On the contraiT, the United States is a Union of almost h^f a hun- dred units, called States, each of which is absolutely self-governing in aU matters pertaining exclusively to its own affairs. France is built on an autocratic basis, the United States on a democratic basis. In France a great central bank with branches located throughout the country is in harmony with the national spirit. Such a bank in this country would be foreign to the spirit of our institutions. Our fathers realized from sad experience the necessity of uniting the States into a Nation in order to provide for the common defense and promote the general welfare." For like reasons and for similar purposes it is proposed to form a union of the banks of this country, each bank, like each State in our National Union, preserving its inde- pendence and self-control. Our fathers created a new institution, a Federal Government, called the United States of America, and endowed this new institution with certain powers which they believed it could exercise in the general interest better than those powers BANKING AND CURKENCT EEFOBM. H cotild be exercised by the States individually. Similarly, it is pro- posed to create" a new financial institution, the national reserve asso- ciation, to exercise for the banks in the interest of the people certain powers better than the banks individually can possibly exercise them. The adoption of our Federal Constitution was opposed by Patrick Henry and many other men whose intelligence and patriotism are beyond question, men who honestly feared that the proposed big and powerful National Government would subvert the hberties of the American people. It required the utmost efforts of men like Wash- ington, Madison, Marshall, and Hamilton to secure the ratification of our Constitution. The experience of a century and a quarter has proved that the fears of Henry were unfounded and that the hopes of Washington were justified. The proposed national reserve associa- tion will probably meet opposition much like that made to the Con- stitution Dy men hke Patrick tienry. But those who have faith in the intelligence and integrity of the American people hopefully anticipate the adoption by Congress of the Monetary Commission plan, and firmly believe that time will vindicate its wisdom. OAPrTAL AND MEMBERSHIP. Before considering the form of organization of the proposed national reserve association it may be well to consider its proposed capital and the basis of membership in it. This will indicate the motive of its organization and the method of its service. According to the tentative plan outhned by the Monetary Com- mission, the authorized capital of the national reserve association shaU be 20 per cent of the capital of the banks eligible for member- ship, or approximately $300,000,000. The charter is to be for 50 years. Membership in the association is open to aU national banks and to all State banks and trust compames which comply with certain reasonable requirements to insure safety. Each bank desiring to become a member must subscribe for an amount of the capital stock of the national reserve association equal to 20 per cent of the capital of the subscribing bank, no more ana no less, and become a member of one of the local associations hereafter described. This stock can be obtained only by the banks which become members of the asso- ciation and it is nontransferable. So a controlling interest in the national reserve association can not be bought up by either outsiders or insiders. Half'of each bank's subscription to the capital stock of the association shall be paid in cash, the other half remaining subject to call. When subscriptions giving it a cash capital of $100,000,000 have been received, the national reserve association may begin business. Under these conditions, membership in and benefits from the association can be had by every section of every State in the Union. This dispersed ownership is one of the marked features of the proposed plan. EARNINGS AND DIVIDENDS. In order to make sure that the national reserve association wiU be run primarily for public service and only secondarily for profit, the 12 BAITKINQ AND CTJEBENCT EEFOBM. following provision for the distribution of earnings is to become a part of its charter: After the payment of all expenses and taxes the stockholders shall receive 4 per cent. Further earning shall be divided, one-half to go to the surplus of the national reserve association until that surplus shall amount to 20 per cent of the paid-in capital, one- fourth to go to the Government of the United States, and one-fourth to go to the stock- holders! but when tie stockholders ' dividends shall reach 5 per cent they shall receive no additional distribution. After the stockholders receive 5 per cent the earnings shall be divided, one-half to be added to the surplus of the national reserve association and one-half to go to the Government. After the stockholders receive 5 per cent per annum and the surplus of the national reserve association amounts to 20 per cent of the paid-in capital, all excess earnings shall go to the Government. The minimum divi- dends to tie stockholders shall be cumulative. It is important to note that the stockholders of the association can never under any circumstances receive more than 5 per cent per amium on the par value of their stock, and that after the surplus of the association amounts to 20 per cent of its paid-in capital all excess earnings go to the Govermnent of the United States. By this pro- vision the hope of large financial gain through the association itself is removed, and the management will find its highest reward in the feeling of satisfaction over rendering a great public service whose benefits are t» be shared by all our people. To any right-minded man opportunity to participate in such service would be one of life's most cherished prizes. NEITHEE WALL STREET NOR WASHINGTON TO CONTROL. In every community there are two classes of people, those who build up and those who tear down, the constructive element and the destructive element. A small minority of vicious people can, and often does, bring undeserved reproach upon a whole community.. Wall Street and Washington are no exceptions to this rule. Some of the men who operate in Wall Street are simply and only gamblers. Whether the country has prosperity or adversity is com- paratively unimportant to them. Steady and undisturbed progress for the country would take away their opportunity for personal gain. What is needed in their business is constant fluctuation in the price of stocks. Whether the movement be temporarily up or down is immaterial to them. War and pestilence serve them better than do peace and plenty. To produce frequent movements in "the market" they deliberately promote sundry agitations. Their one aim is change; their one study is to forecast the movement of prices and profit by it. They are mere parasites. They can not be disHked more by the country at large than they are by the constructive ele- ment in Wall Street, by the men there whose character and abihty command such confidence as to enable them to gather funds in large quantities with which to finance great projects and thus advance the interests of the American people. In Washington, corruption among Members of Congress or admin- istrative officers is so rare that anything of the kipd is noticed and remembered, as is always the case with the unusual and exceptional. The vast majority of men in Washington pubUc life sincerely desire the welfare of their country, and a good percentage of them would rather retire from office than betray their trust. True, the tempta- tion to consider unduly poUtical results is very strong. But those who bring discredit upon public life are a, smaU minority. BAKKING AND CUKEENCY REFORM. 13 It is vitally necessary to the success of banking and currency reform that the people of the country shall have entire confidence in the beneficent operation of the proposed system. It must not be subject to possible control for either speculative or political purposes. The plan for this reform must be such as to assure the people that the national reserve association wiU not be influenced for evil by either Wall Street or Washington. The control of the association must be kept in the country at large for the coromon good, with such govern- mental supervision as will justify and secure public confidence in the system. GENERAL OUTLINE OF PROPOSED ORGANIZATION. To be efficient an army must be well organized. The unit of military organization is the regiment. Regiments are united into brigades, brigades into divisions, and the divisions make up the army. In the proposed banking system the unit of organization is the individual bank. These individual banks, State and National, are to be united into cooperative organizations called local associations by grouping together subscribing banks located in contiguous terri- tory. Each of these local associations must have at least 10 banks, with an aggregate capital of not less than 15,000,000. In ordinary times these local associations will steadily promote good banking methods, thereby reducing or eliminating the danger of bank failures. In times of stress the local associations wiU enable the banks to cooperate for mutual protection and to secure aid from the national reserve association, to the end that the banks shaU be able at all times and under all circumstances to render the people of their respective communities that continuous and adequate service so essential to industrial prosperity. The various local associations are to be suitably united into a number of divisions covering the entire country. In the plan of the Monetary Commission the number of these divisions is tentatively fixed at 15, but this number may be increased as experience shows such increase to be desirable. The 15 divisions are to be united into 1 national reserve association with headquarters at Washington. These divisions are to be the intermediaries through which the national reserve association will serve the local associations and the individual banks. THE SMALL BANKS WILL CONTROL THE ASSOCIATION. In the convention which formed our National Constitution, under which during the last century and a quarter we have attained the growth and prosperity that has been the wonder and admiration of the world, one of the difficulties was to devise a plan under which the small States would feel safe in becoming a part of the proposed Union. Under the Articles of Confederation the Congress had pos- sessed practically no power. It consisted of one house, in which each State had one vote. It was simply a convention which could propose things to be done but could do none of them. The "more perfect union" established through our Constitution created a Government that could really "do things." 14 BANKING AND 0T7EBENOT REFORM. The large States felt that now legislative power should in faimesa be proportionate to population. The small States were naturally reluctant to give up tlieir equality of power with the large States in the lawmaking body. To adjust this difference a new Congress, consisting of two Houses, was devised. In the House of Representatives the States have voting power proportioned to population; but in the Senate the States have equal voting power, regardless of size. To become a law, however, a bill must pass both Houses. Under this arrangement the small States have always been able to protect their interests. Under the proposed umon of banks, the small banks will in fact have even more power than the small States have in Congress. Out of every five votes in the board of directors of each local association the small banks will have three and the large banks two. That is, three-fifths of the directors will be elected by the banks regardless of capital, each bank having one vote. The other two-fifths will be chosen by the banks in proportion to share ownership in the national reserve association. As the small banks are the more numerous, they will choose the three-fifths. The large banks, being less numerous but having the greater aggregate capital, may choose the two-fifths. Upon this principle, which is carried all the way up, the small banks will control the division or branch associations, the national reserve association itself, and the executive committee of that association. This is shown to the eye with remarkable clearness by means of col- ored charts in a pamphlet by William C. Cornwell, entitled "The National Reserve Association," which can be had free from the National Gtizens' League, 223 West Jackson Boulevard, Chicago. THE SOUTH AND WEST WILL DOMINATE. The plan of the Monetary Commission provides that the divisions or branches of the national reserve association shall be apportioned as follows: One to the New England States; two to the Eastern States (New York, New Jersey, Pennsylvania, and Delaware); four to the Southern States ; four to the Middle Western States ; and four to the Western and Pacific States. New divisions "may from time to time be created by the directors of the national reserve association whenever, in their opinion, the business of the country requires." From the very begmning the South and West will dominate the national reserve association. To secure fair play for all sections the banking reform bill provides : The national reserve association shall have authority to fix its rate of discount from time to time, which when bo fixed shall be published and shall be uniform throughout the United States. BANK PATRONS RECOGNIZED IN BOARD OF DIRECTORS. The invention of the national reserve association — an institution built up from below, typically American, and republican in form and operation — as the agency of the banks of the country through which they can secure for the American people the great benefits secured in European countries through central banks, was a stroke of genius on the part of the commission. lake other products of genius, the BANKING AND CUBEENCY EEFOKM 15 solution 13 SO simple and natural that the wonder is that some one did not work it out before. The Monetary Commission's plan contains another remarkable feature, the value of which wiU appear as time passes. It is the recognition of the fact that, inasmuch as the proposed banking system is intimately connected with the business prosperity of the country, the men outside of banks who are developing the comitry's resources and carrying on its enterprises should have a voice ux the management of the national reserve association. This recognition of the value to the country of business men's coun- sel in the management of oiir Nation's banking system is provided for as foUows: The board of directors of each division association shall contain not less than 12 members. One-half of these directors shall be elected in such a way as to represent the views of the smaU banks, and one-third to represent those of the large banks. "The remaining one-sixth of the directors shall be chosen by the directors already elected and shall fairly represent the agricultural, commercial, industrial, and other interests of the district and shall not be officers nor, while serving, directors of banks, trust companies, insurance companies, or other financial institutions." In the selection of these "nonbanker" direc- tors, the small banks will again have 3 votes to every 2 votes of the large banks, and will therefore control. The method proposed for electing the members of the board of directors of the national reserve association itself, consisting of 46 members, carries out the same idea. The board of directors of each of the 15 divisions shall choose 2 of the directors of the reserve association^ one of whom shall be a banker and the other a nonbanker. Nine additional directors shall be chosen by the division directors on the basis of shares in the national reserve association held in each division. To these 39 shall be added 7 ex officio members — the governor and the two deputy governors of the national reserve asso- ciation, the Secretary of the Treasury, the Secretary of Agriculture, the Secretary of Commerce and Labor, and the Comptrofler of the Currency. Thus, of the 46 directors of the national reserve association, 30 will be chosen in a way to protect the interests of the small banks and 9 in a way to secure consideration for the rights of the large banks. Of the other 7 directors, 4 are executive officers of the National Government. Throughout the whole system the interests of the small banks are securely protected and the needs of industry are strongly voiced. The board of directors of the national reserve association is to choose from among its members an executive committee, consisting of nine members, of winch the governor and the two deputy govern- ors of the national reserve association and the Comptroller of the Currency shall be ex officio members. The governor is to be appointed by the President of the United States from a list submitted to him by the directors. So in the make-up of the executive committee, too, the small banks control. 16 BANKING AND CURRENCY REFORM. PROPOSED RESERVE ASSOCIATION SUPERIOR TO OUR PRESENT SUB- TREASURY PLAN. In our cities, counties, and States, tlie money collected as taxes is, almost without exception, deposited daily in banks and is thus kept constantly in circulation. And in other countries, not only do the municipalities follow this practice, but so also does the nation itself. The funds collected for national uses are deposited in the great bank which in each country acts as the fiscal agent of the nation, the national government checking against the deposits just as do indi- vidual citizens and business corporations and municipalities. Including postal receipts, our National Government collects annually over $900,000,000. Of this vast sum a large part is kept in the National Treasury or one of its Subtreasuries. In this way large amounts of money are withdrawn by the Government from the charmels of trade. To overcome this difficulty and get the money back into commercial use, our National Government has frequently had to go into the open market and buy its own bonds before they were due, paying on them a high premium. The Secretary of the Treasury has authority under certain con- ditions to deposit certain sums of pubhc money in national banks throughout the country. In times of stress the demands upon the Secretary of the Treasury for these funds come from all parts of the country, and the banks outside of New York have sometimes felt that they were getting less than their share. Under the Monetary Commission plan, the national reserve asso- ciation is to be both the bank of the banks and the fiscal agent of the National Government. National funds are to be deposited with the association, and are to be thus kept available for use in the different parts of the country as needed. In view of the fact that the South and the West will control the national reserve association, the interests of those sections will always be adequately provided for. Indeed, the interests of aU parts of the country will be safeguarded. To summarize : Under our present Subtreasury arrangement large sums of money belonging to the National Government are withdrawn from circulation ; while under the plan proposed by the Monetary Commission the surplus revenues of the Government wiU be con- stantly available for business uses through the channels of the national reserve association. THE PRESENT BANKING LAW PROMOTES SPECULATION. The present national-bank act requires each bank in the smaller cities and towns to hold as a reserve $15 for each $100 of its deposits. The object of this requirement is to protect depositors. But m this very laudable purpose the device largely fails, the real effect being to reduoe the ability of the local banks to help their borrowing customers at the time of their greatest need. The law permits 60 per cent of this reserve to be held by the country banks on deposit in banks of reserve cities. These large banks are required to keep as reserves $25 on every $100 of deposits, but they may keep half of their reserves in one or more of the three central reserve cities. New York, Chicago, and St. Louis. Such deposits in other banks are called "secondary reserves." BANKING AND CTJEEENCT KEFOBM. 17 If kept in the vaults of the local bank as a primary reserve this money earns nothing. Deposited in a banlc m a reserve or cen- tral reserve city this money earns 2 per cent. Naturally the local bank avails itself of this opportunity for gain. Thus do hundreds of millions of dollars of the country's cash flow into the three central reserve cities, especially New York. In order that the big city banks may make any profit on such deposits these banks must lend the money at a slight advance, say at 3 or 4 per cent interest. But the deposits of the country banks are subject to check without notice, so the loans of these funds by the big city banks must be largely "on demand." The greatest market for such "call money" is from Speculators in stocks; so the present f)lan drives vast amounts of the country's money into stock specu- ation. One of the purposes of the Monetary Commission plan is to reduce this speculative use of the country's cash and make it avail- able for commercial purposes. PRESIDENT VANDERLIP'S CLEAR STATEMENT. This is clearly set forth in an address before the Commercial Club of Chicago by Hon. Frank A. Vanderlip, formerly Assistant Secretary of the Treasury, now president of the National City Bank of New York, as follows: To-day the secondary reserves of the banks of the whole nation flow to one center, and must of necessity be employed in one way. Such part of our banking funds as experience has taught may be needed on instant notice can be loaned in just one place in the United States where the lender can get them back with substantial cer- tainty on demand. That place is Wall Street. The collateral for such loans is specu- lative corporate securities. Under our system it is absolutely necessary that funds of that type — that is to say, the secondary reserves of the banks — ^must flow in that direction and find lodgment in that quarter. Such a condition is unfortunate from every point of view. It ia most unfortunate for commerce that hundreds of mil- lions of dollars are diverted from commercial uses and put to the purpose of carry- ing speculative seciu-Lties. It is equally unfortunate for the owners of speculative securities themselves; for, while a period of excessively low money may tempt them to increase their holdings, a sudden demand for the repayment of those loans brings them quickly into a disorderly crisis and one that may involve not only them but also disturb the position of the institutions that are the lenders of demand money. Under ordinary conditions the Wall Street call-loan market is the only place where loans can be made which will be repaid on demand. At the same time, however, that type of loan is one which will not inherently, in the very nature of it, work itself out toward a repayment. To get such a loan paid there can be only a shifting of the burden. When such a collateral loan is called, either some other institution must take it on or the borrower must sell the collateral. There is nothing in the nature of the loan that will in the end liquidate it, such as is the case with loans made upon raw material that is to be manufactured, or upon manufactured products that are to be sold, or upon grain that is to be transported and ultimately consumed, or upon any of the commodities of the earth that form the really correct basis for banking loans. Now, if we had such a discount market as has London, such a discount market as has done so much to foster British trade, we would find that several hundred miUion dollars now of necessity devoted to the carrying of speculative securities would become available for commercial uses. With such a discount market, banks could invest in commercial paper that had been accepted and indorsed by other banks, so that all thought of the credit of the maker of the paper was lost sight -of and its value would be gauged solely by the money market. With such a discount market we would find banks ready to invest in commercial paper of that type because, if they bought it to-day, they would know they would be m a position to sell it with entire propriety to-morrow, if their requirements made that desirable. With a great mass of commercial paper so accepted and indorsed, banks all over the country would be ablate dip into that form of mvestment to-day and pour it back to-morrow, or whenever their position changed; and the result would be that there S. Doc. 295, 62-2 2 18 BANKING AND CUERENCT REFORM. would become available for commercial uses a great fund of money that now can not be so used because the banks must be in a position to know positively that some por- tion of their assets is perfectly liquid — some portion of their loans can be, at an hour's notice, converted back into legal reserve. The creation of such a discount market will divert to commercial uses a large part of the fund that now of necessity flows into Wall Street and into Stock Exchange loans. SOME OF THE ENDS TO BE ATTAINED. What may we reasonably expect to accomplish by the proposed banking and currency reform? At least the following: (1) It should secure the American people absolute immimity from extensive financial panics and practical immunity from serious bank failures, limiting business suffering to those who have earned it. (2) It should free our business men in all sections of the country from the habitually recurring ordinary stringencies in the money market, such as those occiu-ring diu-ing crop-moving times. (3) It should provide more money for legitimate business and less for mere speculation, by providing the banks a better way of holding their reserves. (4) It should vastly improve our facilities for international exchange, thus helping greatly to increase and make more profitable our foreign commerce. (5) It should promote equality of opportunity throughout the country by making interest rates substantially the same for equiva- lent security at the foot of the Rocky Mountains as in Ohicago or New York. Prof. J. Lawrence Laughlin, of Chicago University, has admirably summarized the matter in these words : Thus shall we have a scheme, if enacted, that will give us cooperation instead of demoraEzation ; evolution, but not destruction; combination and economy of reserves; loans for legitimate borrowers in periods of distress; safety for every bank with sound assets; protection from derangement of business and consequent unemployment of labor; escape from the domination of stock-market speculation, and the union of all credit institutions, State or national, for mutual defense in time of peril. The Monetary Commission plan does not pretend to be a solution of all our financial problems, but it does solve some of them and it is a long step in the right direction. THIS EEFOEM WILL BENEFIT ALL. The cost of any article ready for consumption is primarily made up of three items — raw material, labor, and interest. Between the plant- ing of the wheat and the eating of the bread, between the growing of the wool and the wearing of the coat, between the felling of the tree and the building of the house, time must elapse. At each stage of production money or credit is invested for a period of time. The cost of money or credit for a period of time is called interest. The length of time between the beginning of the production of the raw material and the finishing of the product ready for use is consid- erable; so interest is an important item of production cost. By standardizing credit and thus equalizing and lowering interest all over the country, as proposed in this reform, an interest-saving machine has been invented whose benefits, like those of so-called labor-saving machines, will soon mean more Work at better wages, BANKING AND CURRENCY REFORM. 19 an increase in the production of the good things of life and their dis- tribution among more and more of our people, thus raising our standard of living. Freedom from panics means more and steadier employment for labor, and thus as a consequence a better market for farm products and their production at lower cost. Every person earning an honest living will be benefited by the proposed reform, but the largest benefit will come to those who till the soil and those who work with their hands. PROPOSED PLAN NOT PARTISAN BUT PATRIOTIC. Time forbids my doing more this evening than to point out thus briefly some of the fundamental principles that underly the proposed reform and must underly any successful plan, to review the experiences out of which it has grown, and to help make known its motive and method. A full understanding of the plan can be had only by careful study of the report of the commission. This plan is the product of able men of both political parties. Everythmg indicates that in approaching this problem these men thought only of the great patriotic service which they had the oppor- tunity to render and not at all of partisan advantage to be obtained. We, the American people whom tney have served so well, owe it to ourselves as well as to them to foUow their fine example in this respect and consider the proposed plan wholly on its merits, with minds single to the public good. CONCLUSION. In potentiality, what country can compare with ours ? In natural resources the United States is to be compared not with other, coun- tries, but with continents, and in many lines the comparison must be with the rest of the world. Our business men and bankers are unsurpassed in character and capacity. Our banking power — which includes the capital, surplus, deposits, and circulating notes of the national. State, and savings banks and trust companies — amounts in round numbers to $20,000,000,000. This is more than one-third of the total banking power of the entire world. The monetary standard of the leading commercial nations is gold. Of this we possess about one-fifth of the world's total. Having one-fifth of the world's gold and one-third of its banking power, our financial position as a nation can be and should be incomparably the strongest in the world. Our financial ship should be able to weather any storm, carrying our country safely and surely to the foremost place among the nations of the earth and helping us to achieve a higher destiny than was ever before reached by the sons of men O amphiet Binders Gaylord Bros. Inc. Makers Syracuse, N. Y. Pal. Jan. 21, 190B tsm^ -r':Mw %iW <1 .i :M //I .^yi '>v ^' ^^ ii?^/ A r«2i^' '^>^^4p^ . dl§m^m. tJM 'Ts -^-.*.:- -Vfl 9^-'-%l '.:!>.:??