V) Az BJii THE GIFT OF ..YruerL V n... n.'.. ^l^»v^^^-v^ hh^^:£.'X\.. Villi |_i 7583 ...yyf.^ ^-'.}f^'-y^\'^*«mi7fJ%UMt^SM^^^ DATE DUE ^Hlo'-Mma^^^ ^0,0,mm Wm\\ tii^iyjibliltiJM CAVLORD PRINTED INU S * CORNELL UNIVERSITY LIBRARY 924 099 274 791 Cornell University Library The original of tiiis book is in the Cornell University Library. There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/cletails/cu31924099274791 BANKING AND CURRENCY REFORM HEARINGS BEFORE THE SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY HOUSE OF REPRESENTATIVES CHARGED WITH INVESTIGATING PLANS OF BANKING AND CURRENCY REFORM AND REPORTING CONSTRUCTIVE LEGISLATION THEREON TUESDAY, JANUARY 7, 1913 STATEMENTS OF MR. A. BARTON HEPBURN MR. VICTORiMORAWETZ MR, PAUL M. WARBURG PART 1 WASHINGTON , GOVERNMENT PRINTING 'OFFICE 1913 SUBCOMMITTEE OF THE COMMITTEE OX BANKING AND CURRENCY, House of Representatives. sixty-second congress. third session. CARTER GLASS, Virginia, Chairman. J. FRED. C. TALBOTT, Maryland. .lOHN .T. KINDRED, New I'orlf. GEORGE W. TAYLOR, Alabama. EDWARD B. VREELAND, New rork. JOHN M. MOORE, Texas. GEORGE D. McCRE.VRY, Pennsylvania. CHARLES A. .KORBLY, Indiana. JAMES McKINNEY. Illinois. ROBERT J. BDLKLEY. Ohio. R. W. FoxTENOT, Clerk. .\. M. McDer.mott. .Assistant Clerk. 2 BANKING AND OUEKENCY EEFOEM. SuBCOMMITa'EE OF THE Committee on Banking and Cubrency, House of Representatives, Tuesday, January 7, 191S. The subcommittee met at 10.45 o'clock a. m. Present: Messrs. Glass (chairman), Talbott, Taylor, Korbly, Bulk- ley, McCreary, and McKinney. Mr. Glass. Gentlemen, the subcommittee will come to order. The committee, I believe, has arranged to hear Mr. Hepburn first. This, Mr. Hepburn, is a subcommittee of the House Committee on Banking and Currency charged with the specific business of in- vestigating, considering, and reporting some measure of reform in the banldng and currency laws of the country, and we have invited you gentlemen here to give us your advice and opinions as to the best thing to be done. Perhaps I might say without impropriety that, speaking for the majority members of the committee, while we do not propose to restrict the gentlemen who appear in anything that they may desire to say, it is nevertheless a fact that we must recognize and deal with that the party of the majority members has specifically declared against what is known as the Aldrich bill. How- ever, if you, or any of the gentlemen who shall appear hereafter, de- sire to discuss that measure the committee will gladly hear you. We would like to find out from you, though, assuming that you think the Aldrich bill, so called, is the best thing to be had, what is the next best thing to get. Now, the committee will be glad to hear from you. STATEMENT OF MR. A. BARTON HEPBURN, CHAIRMAN OF THE BOARD OF DIRECTORS OF THE CHASE NATIONAL BANK, OF NEW YORK CITY. Mr. Glass. "Will you be kind enough to state for the record, Mr. Hepburn, what position you occupy? Mr. Hepburn. Mr. Chairman and gentlemen, my present banking connection is that of chairman of the board of directors of the Chase Xational Bank. I was formerly president, retiring from that posi- tion about two years ago. In order that I may make my relationship here perfectly plain, in justice to myself as well as others, I would like to say that T appear before you now at your request as an individual solely. The bill reported by the National Monetary Commission, commonly known as the Aldrich bill, is a composite measure and is the result of much research and study, covering a period of two or three years. It is the consensus of opinion of many men — or rather it involves the 3 4 BANKING AND OUEBENCY EEFOEM. concessions and compromises of many minds— endeavoring to agree upon a measure whicli would remedy the many defects m our mone- tary system. It is a carefully considered, intelligent, and P/acticai measure, and, if enacted into law, would be of great benefit to me country. j I was one of the men consulted, and I indorsed the measure, i am a member of the currency commission created by the American Bankers' Association, which commission approved the measure, as did also the American Bankers' Association itself m open conven- tion, after debate, at New Orleans about two years ago. ho you see I am pretty thoroughly committed to that measure and have nothing to modify or retract in relation to the same. I have been committed to other measures prior to that, which want to preserve my consistency, and hence I make this statement. I am aware, as you have stated, that the platform of the incoming administration specifically denounced the Aldrich measure— I sup- pose because of some special features. The general purpose of the bill is certainly a good one, and what- ever legislation you may devise would seek to accomplish the same ends, even if in a different manner. No one would claim that the Aldrich bill was the last word of wisdom, and if you gentlemen can de^'ise any other remedy that will accomplish the same results as well or better we will all rejoice; and if I can be of any service filong those lines it will afford me very great pleasure. In order to make the attitude of the American Bankers' Associa- tion perfectly understood, in this connection I want to say that the association did, at its last session, in Detroit, by resolution- unani- mously adopted, declare that it would gladly cooperate with anyone in support of any good measure which would place the industries of this country on a par with those of other great commercial nations. So that I think you gentlemen may assume at the outset that you will have a sympathetic and cordial cooperation in the labor you have before you from banks and business men throughout the country. . Before we proceed with the discussion let us ask ourselves some few questions, and in order to take as little time as possible I ha^■e written these down. How much do we lack of having a central bank now ? The United States Treasury is the greatest bank of deposit and issue in the world. It receives on deposit gold and silver coin from anyone and everyone, from anywhere and everywhere, and issues certificates Avhich pass as money and form the major part of our currency • witness $1,867,348,261 of gold and $565,465,020 of silver now in the United States Treasury, and corresponding certificate-^ out- standing. It receives Government bonds as security and issues three quarters of a billion of bank notes to the 7,300 national banks throughout ihl country. ^ It has branches in the important business centers of the countw witness the various subtreasuries and mints. It buys and sells -' change; almost all the money transfers between New York ^^\ Chicago, St. Louis, San Francisco, New Orleans, for illustration '\" BANKING AND CUERENCV REFORM. 5 made by the banks through subtreasuries, by telegraphic transfer, for which the banks pay current express rates. The advantage the banks enjoy is in having an immediate transfer, as compared with the time necessarily consumed in shipping money by express. It loans money upon collateral by making deposits in the banks, secured by bonds. In the early part of the Civil War, before Go-s- ernment bonds were abundant, it deposited money, or allowed money from internal revenue to be received by the banks, protected bj^ an obligation from the directors of the banks. That is not so very far removed from dealing in commercial paper. Under a recent order of the Secretary of the Treasury, the banking operations of the Government are, wisely, to be still further increased by using mod- ern methods in collecting its revenue and making its disbursements by the use of checks, just as similar transactions are accomplished by individuals and firms. As a matter of fact, we have a central bank at the present time. in all its essential features; all it needs is modernizing, vitalizing, humanizing. Why not be honest with ourselves and recognize that we have prac- tically at the present time a central bank and proceed to set the same in order? A centralized banking power, a fiscal power, is inevitable in every nation, whether it be little Switzerland, up in the mountains, or the greatest commercial nation in the world; it is inevitable because it is logical, natural, and in accordance with economic law. Congress can not regulate the money power and money influence of this cotmtry by decentralizing it. A central controlling influence is as essential to a proper monetary and currency system as a central heartbeat is to the physical system. It can only be done by taking it under the control of Congress and the Government. Can you think of any evils charged against a' central bank which are not alleged to exist at the present time in the extreme ? Is it not true that the other half of your committee is at the present time engaged in a Money Trust investigation, trying to run down and discover, if may be, and cor- rect the evils resulting from a centralized money power ? The concentration of business in large units, which has been going on all over the world — not alone in this country — ^has called for cor- responding increase in the size of financial units. It is " big busi- ness " that creates big banks. Banks are a barometer as well as a helpmeet. Is it not fair to assume that if we had a United States bank, exercising powers which similar institutions exercise in other countries, many of the alleged evils of the present financial methods would have been avoided? Have not banks, through the imperfec- tions of the law of Congress, been constrained through clearmg-house associations, syndicates, and otherwise, to meet business conditions and demands? The failure to have a central bank has prevented none ot the dreaded conditions. Is it not time that we had the power of a central bank to prevent, as far as may be, undesirable conditions and to ameliorate and control what can not be prevented? We have all of the conditions existing to-day against which An- drew Jackson made war in his time, and alleged to be existing in an exaggerated form. We have in its essential features a central bank in 3ie form of the United States Treasury. What it lacks that a central bank might do are the things which the business interests of 6 BANKING AND CURRENCY REFORM. the coimdv are clamoring to have done, and which you as a com- mittee are now sitting in session to devise ways and means to do. deem it only fair to myself and fair to the situation to call atteiition to the fact that the very thing which is so generally denouncea throughout the press and throughout the country exists to-day, ana I think the better way to remedy it would be to recognize it. Conspicuous among the many imperfections m our monetary system are three cardinal. defects: (1) The want of elasticity in our currency. (2) The want of a market for credit. (3) Competitive rather than cooperative management of reserves. It seems to me that any legislation which you may devise, in order to be effective, must deal with and remedy these defects. Our present bank currency is secured by Government bonds, and in order to lessen the burden of carrying these high-priced bonds th^ currencv is carried at the maximum practically all the time. Currency, in order to be elastic, must contract as well as expand ; but this currency, no matter how low the rates of interest, is con- tinually forced into the channels of trade or speculation. This cur- rency is a tax upon rather than a help to the resources of a bank, since a bank must pay a premium for the bonds at the present time and can only get par in bank notes. This currency furnishes a market for Government bonds at a fictitious valuation, but it serves no other good purpose, conceding even that purpose to be a good one. Commercial banks are created to aid commerce and conserve the interests of the people. Their investments should be limited in tlie main to presently maturing obligations for the payment of money. Well diversified promissory notes of acceptances, for the payment of which people are working and planning, in order to protect their credit and preserve their financial lives, are the best and most liquid assets that banks do or could possess. It is upon such assets that bank notes should be predicated, rather than compel banks to go out- side their business and buy bonds for such a purpose. Currency based upon commercial assets would naturally expand with business activity and contract with the lessened demand. There should be a market for credit, a government-controlled in- stitution, where any bank can go and within reason discount its goods receivable and receive the proceeds in currency, if need be, in order to satisfy the demands of its currency. Some years ago I called upon the Credit Lyonnais,in Paris, 07ie of the great banks of the world. The gentleman with whom I was in conversation passed over to me their last bank statement. I glanced it over and remarked : " Well, you owe a great deal of money." "What is that you say?" " You owe a great deal of money." "What do you mean?" " Your deposits are about $350,000,000." "Oh,^yes, we owe depositors; but we could pay them easily if we IlElCl tJO. ' " ^^l^^t7«" • Ho^ long" would it take vou to pay them in case of necessity?" -^ ■' " The element of time would not enter into the matter at all, excent m so tar as it required time to perform the physical labor." BANKIIsTG AND GUEEENCY EEPORM. 7 "But how ; tell me jnst how you would do it." Almost thinking I was questioning the condition of his bank, he took the balance sheet and proceeded : " Well, we have so much cash ; let us deduct that." les. " Then we have so much due from banks. We could value against that and deduct the same." " Yes." '• We have so much exchange, acceptances, etc., which have an im- mediate market. We could realize upon and deduct that." " Yes." "Now, we have reduced our obligations in this manner to some- thmg less than $200,000,000, and we have very, very much more than that in commercial paper." " Yes; but how are you going to pay debts with commercial paper ?" •' Take it to the Bank of France and get currency for it." '•Could you do that?" " Certainly." " Is there any law which would compel the Bank of France to dis- count your commercial paper without limit?" " Law — ^yes ; the law of its being ; that is what the bank was created for." I assured him his explanation was most interesting, but that no one could do that in my country. I explained that in case of a strong demand, we first bought gold abroad, and, if that was impracticable, or involved too much time, we sometimes had resort to clearing-house certificates — a form of currency suspension — and frequently perfectly solvent banks wer-e compelled to close their doors for want of cur- rency, notwithstanding they had plenty of good commercial assets. Currency reform is closely connected with and naturally brings us to the second cardinal defect in our system — the entire want of a credit market. There should be some power, somewhere, available for the discount of commercial obligations, the proceeds of which could be utilized in the form of currency, if desired. The only source of immediately available funds which we have in this country is the call-loan market of the New York Stock Exchange. These loans are of the most cold- blooded character, and brokers expect them to be called whenever the lenders of the funds need the same. In the commercial nations of Europe they have no such call-money market as obtains in New York, but they have a credit market, where drafts, or obligations of commercial houses and business firms, accepted by their bankers, have a ready, daily market, and bankers buy or sell acceptances for the sake of interest overnight, in accordance with the financial con- dition of their institutions. There should be some place, provided by law, where a bank in good^ condition, under good management, and with abundant good assets, representing the best credit of the country, could go, discount such portion of their assets as might be necessary, and receive cur- rency therefor, in order to supply the needs of their customers. That is the second cardinal defect of existing law, and the remedy which we should have. A third very serious defect in our present banking system is the method of handling the reserves, which the national bank act, and 8 BANKING AND CURRENCY REFORM. many State laws as well, require banks to keep for the protection of their depositors. There are over 25,000 banks in the country, and whenever a money stringency overtakes us these banks all seek to strengthen their cash resources ; they strongly compete in this re- spect, and thereby aggravate and accentuate the strmgency, all ot which tends to create a commercial crisis. . The reserve power of our banking system should be available, m the important money centers, not one center but several. It would take several days to ship money from New York to San Francisco. There ought to be reservoirs of reserve in the important points of the country, but under a general altruistic control— by that I mean Gov- ernment influence— a control in the interest of all the people, so that these funds could be used where pressure was greatest, and when one locality was served could be available in any other locality. There should be an elastic currency, predicated upon the commercial assets of a bank, and which may increase in volume as the commercial assets of the banks increase, in response to various demands, and then, having served its purpose, would contract, disappear, retire from circulation until again needed. Ninety per cent of the business of the country is consummated by means of checks and drafts, and these respond perfectly to the grow- ing or lessening demands of business. The main trouble is that when, because of extreme business activity, the currency supply is over- taxed, or because of distrust or fear on the part of the people, cur- rency may be hoarded and the supply thereby reduced, there is no means of relief provided by our law, or was not, prior to the enact- ment of the very cumbersome legislation known as the Aldrich- Vreeland Act. Banks were constrained to import gold from abroad at large expense, or, through their associations, to issue clearing house certificates, but there was no means provided by law to meet such a contingency, and there is no adequate means now. The Aldrich bill remedies these three defects in a perfectly prac- tical, and I believe efficacious, manner. It provides for a central reserve association, to be owned exclusively by banks, and with its business limited to banks. Conservative and altruistic manageinerit is sought to be assured by limiting dividends to 5 per cent— excess earning going to surplus and into the United States Treasury. If desired, I see no reason why the United States should not be a stockholder in any central bank, owning 51 per cent if need be. Anv one of you gentlemen can opcin an account with the Bank of Eng- land or the Bank of Fraiice, or the Imperial Bank of Germany and enjoy all the privileges that subsist between banker and customer. The Bank of France, at the time of the Baririg failure, loaned the Bank of England £3,000,000. The Bank of England needed this gold to strengthen its gold reserve and for temporary use in the exist- ing crisis. The loan not only helped London, it helped Frslnce, it helped America, by steadying the situation and restoring confidence JNow, It we are to have a national reserve association or bank, why should It not have the power to make such a loan, if need be « The last thing I would like to see a United States bank do would bb to enter into a general commercial business; and yet I would not deny them the power to do so. I can conceive of a condition of affairs, a crisis, m which it might be very helpful and very wise for such a bank to make loans direct to the commercial, manufacturin*^ BAXKING AI^D CUEEENCY EEFOEM. 9 or agricultural interests, and by so doins help the other bank-, rather than compete with them. One of the best educators, one of the best restraining influences, in all our activities, whether social, ethical, or economic, is example. The fact that a great central bank had the power to enter the fields of commercial activity would exercise a restraining influence upon all banks. Whatever you create, and whatever you call it, bank or central reserve association, it should be the dominant power in all com- mercial finance; it should be a fountain of support and of power of restraint and control. It can not be this if you put it in a strait- jacket. If it is to enter the field of commercial banking, it should do so with all the power possessed by commercial banks, which it may exercise in case of necessity — otherwise it might prove a poor second in competition. The proper control of such an institution can be secured liv limit- ing the voting power held by any one interest and by the direct appointment of a part of the board of control )jy the Government. the same as they do in the Reichsbank in Germany at the present time. The stock of the Reichsbank is all held by individuals or i-(;i- porations, but the management is appointed by the government. The stockholders have an advisory committee which aids in the man- agement and control of the bank. It seems to me that any proper regulation must be national, must be central, and reach the different States through branches. Thei'e is one danger in trying to regulate the currency i-sue through exist- ing national banks — the danger of inflation — and this is very difficult to regulate, difficult to make it contract during the dull business period, and I believe that if Andrew Jackson were alive to-day he would declare that the influences upon which he made war in his time could best be combatted in our day by means of a strong bank under Government control. The Government has realized a price for its bonds, way beyond their investment value, by making them a basis for bank notes : if this circulation privilege is to be taken away, in common justice some provision should be made for the redemption or funding of these bonds. One of the so-called Fowler bills, which was really prepared by a commission of the American Bankers' Association, of which I was then a member, and introduced by Mr. Fowler, dealt only and solely with the currency phase of the matter, and I think it dealt fairly well with that. The only feature about it which I did not ever quite like was the danger of inflation ; that banks would take the additional circulation to which they were entitled, and keep it out all the while. Mr. Glass. Are you referrmg now, Mr. Hepburn, to the bill adopted by the American Bankers' Association, or the bill reported by the Banking and Currency Committee, and known as the Fowler bill* Mr. Hepburn. I think they are identical. The bankers' associa- tion, at its session in Atlantic City in 1907 or 1908 — - Mr. Glass. And subsequently at Indianapolis, or Minneapolis—— Mr Hepburn (continuing). Indorsed that bill, and Mr. Fowler introduced it into Congress. That is the bill to which 1 refer. 10 BANKING AND CUERENCY EEFOEM. Mr. Glass. The bill familiarly known to us here in Congress as the Fowler bill was the bill establishing redemption districts. That was the only bill that the Banking- and Currency Committee ever reported out known as the Fowler bill. There preceded that the bill known as the bill of the American Bankers' Association. Mr. Hepburn. That is the one I referred to, the preceding one. ' This subject may be regulated by you gentlemen in various ways. You can divide the country into clearing house districts, or you may divide it into districts of any kind. That is not a novel proposition. Edward Atkinson and David A. Wells, as much as 30 years ago, in the bankers' association at Atlanta, Ga., advocated the regulation of this whole subject through the clearing houses by broa'dening the clearing house, incorporating it, and making it cover the whole coun- try, dividing it into districts. It is perfectly practicable and feasible to do it and improve very largely upon existing conditions. I have gone over this subject as I did to express what, in my judgment, is the most efficacious manner of handling this matter, and the solution we will eventually reach. Xow, I would like to say, only, in regard to the clearing house dis- tricts, or groups, or subdivisions, of the country, which may be made under any bill in contemplation, that in order to be efficacious there must be a centralization ; you must get them together. Chicago issues clearing house certificates — and did in 1907 — which served all the purposes of a local currency and satisfied their need. New York did the same thing. When you came to business between New York and Chicago, they did not relieve the situation a particle. There was still that embargo. Panic is business paralysis, and the only way to cure a panic is to get business to moving, get goods to market, get your pay for them in return, and let that flow back, and as soon as the fear on the part of the people is allayed, that will happen; and the clearing house certificates, as they have been used in this country on various occasions, have never exercised any good influence except a purely local one, and in dealing with the district question, dividing the country into districts, you must centralize it enough to make these instruments of credit, whatever they may be, good throughout the country. They must be as good in the State of Washington as they are m the city of Washington, and they must be as good in Maine as they are m Texas ; otherwise it will fall away short of accomplishing the desired result. ° I loiow that the Democratic platform, as I remember it, specificallv denounced the central bank, as well as the Aldrich bill I realize the conditions which confront you gentlemen here in dealing with this matter, and. as I said before, I have for vears agreed to com- promise measures which did not command my full approval but because I honght they were a decided improvement i^C the ex istmg conditions and the older I get and the more eLer ence I have, the less cocksure I am that I am absolutely right and the easier it is to get the other man's viewpoint, and see thfnos as other people see them. I know that everything that comes throu Hi Pnf oress in the form of legislation upon mooted quesSons u3 comes out m the form more. or less of a compromise and T war^+f!; '^ t, that I think the attitude of the AmSn Cter«' f J° '? ^^ -^ fairly represented in that resolution S^7as adopted at tt^ '' vention m Detroit last fall, and which was ;epli'dPbfthe cur'ren?; BANKING AND CUERENCV REFORM. 11 '■onmiission, of whi(;h I am a member. I think they pleged their cooperation along any lines in regard to any measure which would relieve these difficulties; and I think that is the attitude of the busi- ness men and bankers throughout the country, so far as I know, and I am quite sure it is in the city from which I come. I did not quite know Avhat was expected of me this morning, and I dictated this memorandum to be sure to cover the ground, and if there is any- thing else I can do, I shall be very glad to do it; and I apologize for having taken so much time. Mr. Glass. Mr. Hepburn, I would suggest you take your seat while you are being questioned. If we have already a central bank in the independent Treasury Department, you now have, at least, a part of what you want ? ^Ir. Hepburn. Yes; most of it. Mr. Glass. I would like to ask Mr. Hepburn if he thinks it feasible — assuming that we have already a central bank — to estab- lish in connection with that central bank regional reserve banlvs throughout the country, with a supervisory control from the Treas- ury Department, or the central bank that we already have? Mr. Hepburn. It is perfectly practicable. Of course, you would sef)arate that from the functions which the Treasury now performs, and I think the question of issuing circulation, and any reserve which may be required against that — and there would have to be a strong reserve in case it was predicated from the assets of the bank — should also be separated from the reserve which is required to be held against deposits. It is quite practicable to do that. I do not think vou will ever have any particular solution of this currency question, or this general control of monetary aflfairs, until it does hark back to the Government, and the whole tendency of legislation is along those lines. ]Mr. Glass. Would you have the Government issue the ntiles? Mr. Hepburn. No; I would not; and for this reason: You can not have anything better than the Government under which you live. You can not have any credit better than the credit of the C/overnment under which you live, and crises m- ill occur, and when tliev do occur, then let the banks come in for criticism and let the Government stand one side. I think that is one of the main reasons why all these Government banks are privately OAvned and managed, ujjfirt from the Government. There is a distinction preserved be- tween the credit of the Government in all these great commercial nations and the credit of the banks, and these banks ha\e something which is immediately available in their assets, their notes, Avhich tliey can realize upoii. The Government should not issue the notes, Ijccause the Government can never redeem a note except from the proceeds of taxation. The only way the Government has of realiz- hi'r money is through taxation and the sale of bonds, and the sale of bonds is simplv taxation deferred ; whereas the bank has something tliey can sell in the markets that people want, something that is in demand day by day. , , i, i i ■ i Mr Glass. Then, if you would not have the central bank which we already have issue the notes, would you give the divisional re- serve banks the exclusive right of issue, or would yon leave the right of issue with the individual banks, as now? 12 BANKING AND CURRENCY REFORM. JMr. Hepburn. I would make a separate corporation and leave it under the control of the Government, and have it done through ii separate corporation, known as a bank. The Reichsbank of Germany is the best model anybody can pick out. Mr. Glass. I understand that is your ideal; but, assuming that the Democratic administration is committed against a scheme of that sort, and that we should establish divisional reserve banks, ATould you have the right of issue with those banks, or would you have it with the individual banks, as now? Mr. Hepburn. I would have it primarily with one central institu- tion. It all emanates from the United States Treasury. All the currency you have in the country is Government currencj^ now, and it is good throughout the Nation. I would have it left thus. Xo; I would not take the circulation privilege away from existing banks, unless I took it away and gave it to a central and separately incoi-porated banking institution. Mr. Glass. Would you be willing to have a part of the national currency issued upon Government bonds and another part of it issued upon commercial assets? ^Iv. Hepburn. Yes. It is now issued upon Government bonds. and if you can not have it all issued upon assets, having a part of it so issued Avould be an improvement. Mr. Glass. Mr. Hepburn, it is said the Bank of France went to 1 he assistance of the Bank of England to the extent of $15,000,000 in gold when the Barings failed. Why may we not rely upon a regional liank, say, m the New York
  • ' $300,000,000 behind the to^i'ul-e'the noieJ'nnd'l? "'" the ability to get Government bonds urd • o oS $100 of i?^ ^'T ° P-^-^ ""t $105 of bonds in have aLL\ecf oV 1 f :Udn 'IryooVoTo^ Their.capital might BANKING AND CUEEENGY EEFOEM. 13 -Mr. Hepburn. Yes. the^itfWf?h;/''l! ^^^ there caJiie before cur .•...nmittee testimony to ind of nv.. -n^ m Philadelphia had Ciovernment deposits on ex tent nf K \ flh^n'^''^^''^.^' ''''^ ^^^^ ^^s own issues out to the .S,000,000. " ^ ' ' ^' ^ '^'^^^' ^^^"" '^ ^"igl^t have issued Mr. Hepburn. Of circulation? Mr. Glass. Yes. ^Ir. Hepburn. I should think that was a very badly manaoed bank. • ■' '^ Mr. Glass. That was the testimony before the committee. We now Have approximately 7,300 national banks in this country* ^Ir. Hepburn. Yes. Mr. Glass. Each one with the power of note issue ? Mr. Hepburn. Yes. Mr. Glass. And these various banks strive with one another, in time of stress and emergency, rather than cooperate with one another ? Ml-. Hepburn. Yes. Mr. Glass. If you were to form regional reser\-e banks would not that improve the present situation ? :Mr. Hepburn. I do not know. The extent of public sentiment, It ^eeias to me, is against cooperation and in favor of competition. I would maintain the competition of these banks as far as possible, and the cooperation should only exist so far as they come in contact in exercising this quasi governmental function of issuing currency, and that should be done under the practical domination of the Govern- ment. Mr. Glass. I understood you to say you were not in favor of Gov- ernment issuance of currency. Mr. Hepburn. No. I would not let the Government issue it, be- cause then you put the Government credit at issue, in every crisis, and the (jovernment has no way of meeting or redeeming its notes. I would let it be done through a bank, under Government domination. Mr. Glass. Then we do not get back to the same proposition of the Aldrich scheme, of a central bank that is not a Government bank? Mr. Hepburn. Yes; I suggested that. The Aldrich ])lan can lie varied in many ways, you know. It is not necessary to confine the ownership of this stock in banks. It is not necesesary to confine the activities of that institution to banks. Mr. Glass. It seems to me that right there is involved the one great objectionable feature of arbitrary control, and the possibilities. if not of mismanagement, certainly of such control as might be objec- tionable to the greater part of the country. Mr. Hepburn. As I remember it, in the case of the Second A'ational Bank, if a man owned 2 shares of stoclc he had one vote, if he owned 10 shares he had 6 votes, if he owned 30 shares he had 11 votes, if he owned 60 shares he had 16 votes, if lie owned 100 shares of stock he would be entitled to 21 votes, and one vote for every addi- tional 10 shares up to 30, and no corporation or individual could have more than 30 votes under any circumstances. There are various way- in which it could be rendered impossible to get stock control of any institution. You could certainly do it by the Government taking .il per cent of the stock. 14 BANKING AND CUEEENOY EEFOEM. Mr. Glass. Stock control does not always control, does it ? Mr. Hepbden. It should; it may. Mr. Glass. Is it not a fact that the strong men of any given mstitu- tion control, whether they own the stock or not ? Mr. Hepbuisn. The oi3Ject of owning stock is usually to make money, and if the management is a successful one that is all the stock- holders want. In that way they may be said to control it ; yes. Mi: Glass. That is what some of us fear. What we want to pro- vide is a safe ad satisfactory banking system, and not simply one to enable stockholders to make money. Mr. Hepbx'rn. But you limit the amount they can make to 4 or r, per cent. Mr. Glass. Do you think that is a real limitation? jMr. Hepbitrn. Oh, yes ; and it Avould take away any incentive on the part of the management to do anything else than most conserva- tive banking. Mr. Glass. Could it not practicably be operated under the Aldrich scheme— which I said I was not going to discuss because I think we are precluded from considering? Mr. I-Iepbt i!x. It is a basis of discussion, whether you oppose it or not. Mr. Glass. Could it not practically be operated so as to never show any earnings above the 5 per cent, but to give its members low rates of rediscount which they would not, in turn, be compelled to give to their customers, so as to aiford them as much advantage in the con- duct of the business as a 10 per cent dividend would ? JNIr. Hepburn. Oh, no; I do not think so. They would be obliged to publish their rates of discount, which would be known throughout the country, and if their discounts were at a 4 per cent rate, it would be pretty difficult, for instance, for a bank of Phoenix, Ariz., to charge its customers much above that. It would have a regulating eifect. ifr. Glass. Would not the rate of the customer of the Phoenix bank be determined by his necessities and his abilitj' in that partic- ular region to borrow money, rather than by the cliscount published by the central bank ? Mr. Hepburn. It possibly would, but that would have an influence, if the bank were borrowing at low rates from a central bank. There is no reason why the central bank might not loan money in that locality at the same rate. It would certainly have a competitive and salutory influence upon rates ; I mean, not to banks, but to individ- uals. Mr. Glass. I understand, then, that you do not think divisional reserves banks would be any improvement upon the existing system « ,J^f\^T'tr^- ^ ^"^ not know that I clearly understand you. I think that the reserve of the country should be in divisions, and so distributed that any bank would be able to get in one day currencv by express or by registered mail, insured, ft shJu^fbe cJsSutT/ but I think there should be general control of those reserves so that' W^ington, and that a sup^visor/cSStSS^S^^ ^ZZ^!Z BANiai>rG AND CUEEEXCY REFORM. 15 thwV?nf''''''fi ^ '"°"\'- r^ 'f^' ^^ '^'0"ld "ot; it might be. Any- oiis result, whether supervisory or other^vise, anythine that would msure the result, would be satisfactory. ^ ^ Mr. Glass The country itself seems to be coming fast to the proposition that we must haye an elastic currency, an! the basis of that currency must be very largely, if not wholly, "commercial assets* Mr. Hepburn, les. Mr. Glass. I think we will not haye a great deal of difficulty in agreeing upon a proposition of that sort. Mr. Hepburn. No. Mr. Glass. It is largely now a question of management, in the judgment of some of us; that is to say, whether it should be a local or territorial management, by people who know and understand the needs of their respective parts of the country, or whether it shall be a central management with the dangers inseparable from that. \\ ould it not be an improvement on the existing system to organize clearing-house districts into regional reserve banks with the broad powers of clearing houses ? Mr. Hepburn. I think it is perfectly practicable to work out a measure of that kind, that would be a great improvement upon ex- isting conditions— perfectly practicable. The most illuminating ar- tical I have seen is one in the current number of World's Work, by Woodrow Wilson, on the " New freedom," in which he says nothino- in this country is done now as it was 20 years ago. '^ He takes up the maxim of Jefferson, that that country is governed best that is governed least, and says that is no longer true, that con- ditions have changed and our legislation must change to correspond with them. I have not seen or read anything in years that so fully and fairly presents the situation as that article does, and I think that every member of this committee should read it ; I hope you all have read it. Mr. Glass. Mr. Wilson's article does not decry the Jeffersonian idea of local self-government, however? Mr. Hepburn. It does not abandon any of his principles, but the method of accomplishing the same results. I think if Andrew Jack- son were alive to-day he would think the evils he fought in his time could be best combated by a central bank now. I am perfectly con- fident of that. Mr. Glass. Some people think if Jackson and Biddle had not quarreled over patronage there never would have been any difficulty in that day. Mr. Hepburn. He did not want the bank used for favoritism or political reasons; and nobody does. Mr. Taylor. The question of elasticity of currency is a question I have never been able to understand, and I would like, if you can, for you to give a definition of the term " elasticity of currency." Mr. Hepburn. The object of currency is to supply that portion of the public needs which are not subserved by the use of checks or drafts, and of course the volume should be adequate to that pur- pose. In the fall of the year, when the crop-moving season demands, when the cotton pickers are in the field, and the harvesters are in the various fields throughout the country, they can only be paid in cur- 16 BANKINii AXD CUKKENCY REFOEM. rency. and there is a strong demand for currency at that season of the vear, stronger than at any other time. _ Mr. Tayloe. "We meet the same demand m the spring of the year and in the summer, when the wheat crop comes in ? Mr. Hepbuk.n. In planting the crops? Mr. Tayloe. No, sir ; when it is gathered, in the summer. Mr. Hepbfkx. Yes; when they are employing these laborers. ]ilr. Tayloe. There are two periods of crop gathering m this country— one. of the cereals, and the other practically of cotton, in the fall— and both conditions you speak of obtain periodically twice a vear ? ]Mr. Hepbuem. Yes. We ought to have currency enough to meet the maximum demand when that demand is on, and then during the dull periods — for instance, in midsummer and in midwinter — will contract and go out uf existence; that is, go back on the shelves of the bank issuing it, and not be a currency factor. Something is eleastic which will expand and contract. Our currency does not contract. The Canadian currency does. Mr. Tayloe. What would make a currency that would be elastic? Mr. Hepbuen. If a currency were issued against the assets of a bank, a bank could extend its currency when it was needed ; and then, when the need had gone by, it could without any loss put that cur- rency back in its vaults, awaiting another demand. But if, on the other hand, you are compelled to buy Government bonds at a pre- mium that only pay 2 per cent, pay one-half of 1 per cent tax on that circulation out of that 2 per cent, then j^ou have that currency there, and you have those low-priced bonds, and no bank can afford to carry them. Mr. Taylok. I understand what we have, and I understand and appreciate that we have not an elastic currency ; but I do not under- stand the term " elasticity of currenc}^," unless some one will explain to me how they expect to obtain a currency that is elastic within the definition that you give. Mr. Hepblex. If it were predicated upon the commercial assets of a bank, or of the banks of the country ; going up and down and meas- uring absolutely the business activities of the country. Mr. Taylcir. That Avould be expanding and contracting automatic- ally through the banks themselves? Mr. Hepbuex. Yes. :Mr. Tayloe. With the power of issues to the banks themselves? Mr. Hepbven. Yes. ]»Ir. Taylor. Nobody wants that; you do not want that. That would be expanding and contracting automatically through the ac- tivities and by the action of the banks themselves'; issuing currency as the need appeared and withdrawing it as the need appeared or a> vou say. putting it m their vaults and holding it until another need apiDeared. But the discretion to do that, as you defined it, as T understand you. would be with the banks? ^Ir. HEPBrEx. Yes. Mr. Tayloe. You do not want that, and I do not want it, because that IS giving the banks too much power, in my judgment and, I understand, m yours. " '' ° ' BANKING AND CUBKENCY SBFOEM. 17 Mr IfePBURN. I am afraid that it would expand, and vou would nave dilhculty in making it contract. We sought to by imposin« extra taxes upon it. ^ j f ^ Mr. Taylor. I understand that suggestion about the taxes; but as you just said, you were afraid it would expand and would not contract. So am I. Mr. Hepburn. There is the danger. . ^. , - explain to you. i was prosecuting attorney in my State, and we held peo- ple up who were road overseers to keep the roads in condition, and a term used there was, " The roads are passable." I never could find a_ definition for the word "passable." It simply excused responsi- bility, but did not give a concrete definition of the condition of the road. This term " elasticity " has been in my ear for a number of years, but it has never gotten into my head, and I was trying to see if you could put it there for me so that I could understand it. Mr. Hepburn. I would have no compunctions about that if the monejr power were reposed in a large bank like the Keichsbank of Germany. Mr. Taylor. That is, that the money-issue power for the determina- tion of the volume of the currency at one time or another should be left with a central bank ? Mr. Hepburn. Yes. Mr. Taylor. That is your idea? Mr. Hepburn. Dominated by Government influence. Mr. Taylor. Under Government influence, of course^ Mr. HJEPBURN. Yes ; I think that is the ideal. I would accept any- thing short of that if we can not get that. Mr. Glass. What I was trying to get at was whether Mr. Hepburn, feeling that we could not get that, would not cooperate with us in getting the next best thing ? Mr. Hepburn. I certainly will. Mr. Glass. And whether or not the next best thing might not be regional banks, vested largely with the power you give to a central bank, having a central supervisory^ control in the Treasury Depart- ment at Washington? Mr. Hepburn. It is prefectly practicable to draft a good measure along those lines. Mr. Taylor. I am now suggesting to you the idea that is in my mind. My idea is that if we should take away the Government bonds and should take away the credit of the Government, which it gives for the circulation of the currency of the country, we would destroy that which prevents elasticity. Now, the question is, what can we substitute for it? My idea is that the best substitute is a guaranty of all the banks. Mr. Hepburn. That would never do. Currency which passes from hand to hand and from moment to moment and nobody has any opportunity to examine they take on faith, and it is a governmental responsibility to see that it "is good. But where a man opens a bank account — — 74812— PT 1—13 2 18 BANKING AND CUEKENCY EEFOEM. Mr. Taylor. I do not mean that the bank should issue it them- selves. The Government should print it and issue it to them and confine it, in effect, to the capital of the bank. But all the banks m this country should guarantee the notes of all the other banks. Mr. Hepburn. That is not necessary at all m order to secure bank circulation. A moderate amount of tax upon such circula^ tions— one-eighth or one-quarter per cent per annum— would turmsn i> fund which would guarantee all that beyond preadventure. As to guaranteeing the deposits of the different banks, I do not want to work in my institution in order to make good the bad judgment or dishonesty of some fellow in some other bank anywhere m the country, and I will not. , Mr. Taylor. One moment, Mr. Hepburn. What protection has a depositor in depositing in a bank? . Mr. Hepburn. He has all the protection that any business man has in the conduct of any business transaction. Mr. Taylor. Is not a deposit a mere contract on the part of the bank to return it to him on demand ? Mr. Hepburn. Yes. Mr. Taylor. Is there any security for it ? Mr. Hepburn. Yes. Mr. Taylor. None whatever except the credit of the bank ? Mr. Hepburn. That is enough. Mr. Taylor. The depositors of the country should be protected as well as the banks, should they not? Mr. Hepburn. No. The people of this country do not need a guardian after they become 21 years of age. If a man sells a bill of goods as a merchant and trusts the man he sells it to Mr. Taylor. Is it not your suggestion here this morning that the banks need a guardian, and need a Government for their guar- dian ; that the financial condition of this country needs a guardian ? Mr. Hepburn. Yes. Mr. Taylor. As you find in France and as you find in England? What is that but a guardianship on the part of the Government of France and the Government of England for the banks of England and the banks of France ? Why not a guardian for the people ? My idea is that the banker is more capable of taking care of* himself and needs less protection and guardianship than the people. Mr. Hepburn. The Government does guard the people by requir- ing a verified report of the banks' condition four times a year. Mr. Taylor. I am not opposing our present national banking sys- tem of Government control and Government censorship. I think that is very fine so far as that is concerned. But at the bottom what is the basis of business? You said that 90 per cent of the business of this country was conducted by checfe of banlss ? Mr. Hepburn. That is what the statistics show. Mr. Taylor. That is what I thought. I thought it was more than 90 per cent. Mr. Hepburn. It is more. Mr. Taylor. That means in the payment by money or by bank check. There is an infinitely greater amount of business conducted on books, by accounts, and individual accounts that are never paid either by check or by money ? BANKING AND CUBEENCY REFORM. 19 Mr. Hepbuen. I do not know how. Mr. Taylor. In your part of the country tobacco ; in mv country cotton, brought to the merchant and sold. Mr. Hepburn. Oh, barter. Mr. Taylor. No ; it is not barter. It is credit. The very essence of American superiority to-day, in my judgment, in finance over the rest of the world — you complained of our financial situation as compared with that of Europe, and yet, though America is only 300 years old, England is a thousand or more years old, and Ger- many is older than that, America to-day, as I gather statistics, has accumulated in wealth one hundred and thirty-five billions. My own opinion is that that is not half the wealth of America, because the statistics do not reach all the wealth of America, and, almost as far as they go, those statistics reach only the taxable values of the properties in America, and, unfortunately for the people and the Government, taxable values are not more than one-fourth or one- third of the real value. England is not worth more than one-half so much, Germany scarcely more than one-third as much, and yet we have accomplished in 300 years more than all these powers in the accumulation of wealth. Is not that a fact that tests our financial ability, and is not our financial system a part of our financial ability ? If we are behind England and France as a matter of our system, why is it that we are so much wealthier than those countries? Mr. Hepburn. We are a new and wonderfully rich country. Let me correct that statement as to the statistics. Over 90 per cent of all the business transactions of the country that are consummated through banks are consummated by means of checks. Mr. Taylor. So I understood you. Mr. Hepburn. Of course we could not know as to others. Mr. Taylor. And would not your judgment teach you that others were infinitely greater ? Mr. Hepburn. Yes. Mr. Taylor. And what is the basis of all bank checks and other ways of dealing with business, the settlements really made? It is confidence, is it not ? Mr. Hepburn. You know your man. Mr. Tayi^r. Is there not more credit to-day in the United States, in the financial system that obtains among American people, than there is anywhere else in the world ? Mr. Hepburn. Yes. Mr. Taylor. And is not credit the real medium of exchange of values in its last analysis, anyhow ; of values, I speak, now? Mr. Hepburn. Of values, yes ; not of the mechanism of exchange. Mr. Taylor. My idea and thought is to get rid, if I can, of the bond as a basis of circulation, the Government bond, because in its nature, as it seems to me, that absolutely destroys what you term " elasticity." Mr. Hepburn. It does. . , . . Mr. Taylor. Further, my idea is that in order to obtain elasticity you must have specie payments preserved at all times. Mr. Hepburn. Yes. Mr. Taylor. The Government can not do that. Mr. Hepburn. No. ; 20 BANKING AND CUEKENCY BEFOEM. Mr. Tatlor. That is why we borrowed gold two years ago perhapf^ from England, when we had more gold m the vaults here than there was in Em'ope, is it not? Mr' ^SXAflong as our circulation is issued and predicated upon Goternment bonds the banks have not the business of preserv- ing specie payments, have they ? Mr. Hepburn. No. , , ,-, +9 Mr Taylor. It can only be done through our Government/ Mr. Hepburn. The Government is pledged to the redemption ot all Mr Taylor Do you not think it would be better for the system if every bank in this country were required to give specie for its circu- lation over its counter any day ? Mr. Hepburn. It certainly ought ; legal tenders, at least. Mr. Taylor. The legal tender is the Government issue of a fixed amount, of about three hundred and forty-two million, which remain there now, because, as you said about the banker, he put that in his reserve, in his vault, and did not know what to do with it until an- other time came. That is there, and we have to take it as a fact that it is there. But the point I want to make is, would it not be better if the banks themselves were required — every bank that issued a dollar in paper — to redeem its note at the will and option of the holder in, specie ? Mr. Hepburn. They could not have any objection to doing it. I think any bank would do it now. Mr. Taylor. If you take away the Government bond as the basis of credit for bank-note issue, wh}- not make the bankers themselves give the basis of credit by guaranteeing all note issues? Now, do not answer me too quickly about this, because I suppose your attention has been drawn lately to what they call the agricul- tural banks of Germany. "What is their basis ? Unlimited responsi- bility, liability of everybody connected with it, and a joint confidence in each other, and. a joint responsibility for each other. That is what I am asking to see if you, as a banker, would not indorse in your own system. Is it not the real thing that is lacking — coopera- tion? What is cooperation? In order to obtain cooperation, or even a willingness for cooperation or a desire for cooperation, you must first have confidence in each other. We are seekino- that now in every direction, and, as I view the situation, the real trouble with us and the real thing that we are looking for is some machinery by which we can bring about a cooperation and mutual confidence re- sulting therefrom. If every bank in this United States was united with every other, with a knowledge of the resources and responsi- bilities of each and a confidence in each, from that knowledge there would never be a panic. Wliy? What is a panic? Fear: nothing else. It IS simply fear. For what reason? Because confidence is gone, and when confidence is gone credit is gone, too. Eelieve the ifshed "^ confidence immediately springs up and credit is reestab- Mr. Hepburn. That is so. Mr Taylor. The panic is what we fear. And why not organize so that there can not be no panic ? There could not be if you hid the cooperation of all the banks and the confidence of all the banks in each BANKING AND CUBEENCY REFORM. 21 other and the pledge to the people of the United States that you would protect their paper that goes out to pay the country for its wealth and for its labor. That is the situation that I would like to bring to your atention and ask you if you see any objection to the organization in that line? Mr. Hepburn. That can be very easily accomplished. I would tax the banks and make a fund that would guarantee any possible loss. Mr. Taylor. I would do that, too. That would be in the nature of protection. That is all right. Would not that eliminate the ques- tion of reserves? Mr. Hepburn. Against the banks? Mr. Tayi^oe. Are we holding them now ? Mr. Hepburn. No. Mr. Taylor. Not altogether. Mr. Hepburn. There is no reserve against bank notes now, except Government bonds, which are on deposit. Mr. Taylor. But we are si)eaking of eliminating the Government bond and substituting something else for the credit of the bank note that is to be issued. I will go a little further, Mr. Hepburn. My idea is that every. bank note issued by this Government should not be issued to each individual bank, but it should be a bank note pay- able by the national banks of the United States, so much issued to one and so much issued to another. How much, I do not know. I would not hesitate to issue 90 per cent of the bank capital. I would not hes- itate to issue, myself, 100 per cent upon the capitalization of the banks, as they have to be capitalized with the scrutiny that is put upon them now, and with the much greater scrutiny, Mr. Hepburn, that will follow if the banks are g-uaranteeing each other and indors- ing each other and working together, because the banks will watch closely for the weak spots. In addition to that, I have this suggestion in my mind, to which I want to invite your attention, and the attention of men who have studied this question from the bankers' point of view. There ought to be, in my judgment, a governing body in reference to the amount of circulation that is to be issued. I am not satisfied with the Inde- pendent Treasury entirely. Like yourself, I think it is a good thing in its place. I am not satisfied with the Aldrich plan, because it, in my judgment, arms the bankers to-day with a greater power for harm and a smaller power for good than ithey ought to have. I say that not because of any lack of confidence in our bankers, because I am proud of the bankers of the United States and the position they hold in the world, and I am proud and willing to recognize the important part that you and ether bankers have already had in making the wealth and prosperity of this country. But I am anxious to see the organization of the banking system strengthened where it will do good, and not given any greater strength to do any possible harm- not suspecting vou of desiring harm, not at all. Now comes the sug- gestion as to that governing pOAver. which is to some extent nebulous in my mind, andl want vour assistance and the assistance of the other bankers in order to take it from the nebulous condition and put it into active practice, if it can be done. If it can not, and you show it to me I think I will be the first to recognize it. My idea is to have that governing bodv organized in this shape, not a banker amone; them. It is not reallv a banking function. I would have 48 members of the governing board, one from each State m this Union. 22 BANKING AND CUKHENCY EEFOEM. I have not formulated how each one Avould be selected, and I have not formulated what his qualifications should be, with the single ex- ception that he should not be a banker or a stockholder in a bank. Connected with the governing board should be the present inde- pendent Treasury of the United States, or the effective, efficient, active members of it with increased power, if necessary, because there is where I think, in its last analysis, the power I am seeking to put into operation ought to lie. I agree with you that you can not have cooperation without centralization. Cooperation means organiza- tion ; organization means centralization, whether it be in a committee room, whether it be in a company, a regiment, a brigade, or a nation. This Nation has to have a President of the United States, and that is cooperation, organization, centralization. But I want that centrali- zation to take place in such a way as to relieve the bankers as much as possible from those conditions which you just now referred to ; you did not say they should be separated, and I agree with what you said, that the Government ought not to have the issue of the money as a Govern- ment paper, because it would in time bring discredit upon the Govern- ment. I agree with you. But I want the Government to put through the Bureau of Engraving and Printing those issues, to engrave every paper that is issued, and I want only one, if I can get it. I do not want to see the silver certificate and the gold certificate and these other papers that we have. I would like to see one single National bank note issued by the Government. Withdraw the bond and pay the parties who have the bonds in those sort of notes, provided the bankers will come and guarantee that these notes will never be disputed in the hands of people. It is their note then, and it is their credit, and it is their duty to protect their credit, and I want some governing power outside to say how much of these shall be issued and upon what basis they shall be issued. I state, broadly, now, I would be satisfied to see an issue of that sort to every bank of the United States to-day to the full extent of its capital, if in the comptroller's office that bank was rated as first- class and had what all the national banks that I knoAv of that have been in existence three or four years have— a surplus to its credit, a real surplus. Money issued upon that would be just as safe as a Government bond and better. Why? Because there would be elas- ticity, which you want. I have suggested that to you. Do you condemn it altogether, or what would you approve? Mr. Hepburn. It is very interesting, indeed, and in the main I think you are right. I did not quite get your meaning as to one thing. Did I understand you would pay the Government bonds in these notes ? Mr. Taylor. Government bonds, the 2 per cent bonds, which to-day represent the national currency, I would pay for with that sor of notes and whatever was fair in addition, ^f am nrcertafn as to the details, because I am asking you to work thL out The banks would have nothing in the world to do with this exceutinff receive the notes Then I would have just one Ta ionSank papef or note. I would not have the Bank of Demopolis, Ala -excuse me; that is where I live. The Chase National Bank will pav so much, any national bank will pay so many dollars on drmand^^and If you add for your circulation a Governi^ent 2 per cent^oSd ' as I BANKING AND CTJKRBNCY EBFOEM. 23 suppose you have, I would redeem that by taking it up with that sort of paper and such other amounts, 1 per cent, or one and a half, or what is the real value to you. You should lose nothing, because I do not want the banks to lose anything in this last, as you sug- gested, substitute or makeshift for iinancial legislation, and then issue more, if the banks wanted it, according to what the governing board organized in some fashion, after the suggestion I have made, would permit and authorize. Then, in my judgment, you would have an American force, a force of confidence in each other, credit from one individual to another, from one community to another, from one business to another, greater than the force of all the armies that could be created in 50 years. That is what I meant when I said to you that the banks to-day are the market for credits for the individual. Do you not know, as a matter of fact, how few individuals there are in the United States who can practically reach that market? Do you not know, as a matter of fact, that the man who wants to bet on futures — and I am not criticizing him; I am simply illustrating — can go to any bank in New York City and give gilt-edged security and go and bet at long as his gilt-edged security lasts, whereas an earnest, hon- est, hard-worlring, producing man, a real American, could not bor- row $100 because he did not have the gilt-edged security ? I am not blaming the banks for that, though I intend now to say to you and ask you to consider it when you go home — it seems to me a very wise thing to put in the banking legislation that no bank shall lend money that is to be used in gambling. They can easily find it out. When they do, punish them by dismissing them from the banking association. You would like to see it done, I know, and so would I, because they bring more stringency and destroy more elasticity of currency than even the Government bond in my humble judgment. I thank you for having listened to me, Mr. Hepburn. I am not prepared to-day and did not expect to come in here and ask a ques- tion. I did not expect to be with you. It is a pleasure to have heard you, and I would be exceedingly glad if my suggestions receive your consideration and, later, your criticism. Mr. Hepburn. I have been very much interested in what you say. Of course, we are very anxious to know what the sentiment of you gentlemen is on this subject, quite as much so as you are to know what our thoughts are. Mr. Tatloe. I will add this, Mr. Hepburn : I do not see the differ- ence in a reserve, as we practically use it. What is it? Mr. ECepburn. Between a reserve and what? Mr. Tatlor. Between a reserve and hoarding money — putting it in a stocking. It impedes circulation, I do not care whether you call it a reserve or what you call it. It is what it is; it is a fact. It is that much taken away from the cooperative force. Mr. Hepburn. It is there to be used in case of necessity. It may go down, and when down should be restored. Mr. Taylor. Has it ever been used? Mr. Hepburn. Oh, yes. Mr. Taylor. All of it? Mr. Hepburn. No. -,-, ^ , Mr. Taylor. Before we touch the reserve do we not generally take up the mob law of finance— the clearing house? 24 BANKING AND CUEKBNCY EEFOEM. Mr. Hepbfex. It went down 14 per cent in my bank in 1907. Mr. Tavloe. That is a pretty good reserve. That reserve alone would cripple the elasticity of the currency ? Mr. Hepbuex. But we had to have money every day for use. Mr. Taylor. Of course. Mr. Hepbuex. And kept using it. I paid $78,000 in premiums on gold bought abroad and charged it to profit and loss in order to have money to use during that panic. Mr. Tayloe. Would that have been necessary if we had had specie payments ? Mr. Hepbuen. It would not have been necessary if we had had such a currency law as they have in France and Germany. Mr. Tayloe. That is specie payments, in its last analysis? Mr. Hepbuen. Yes. Mr. Tayloe. That is what provides the elasticity of France and Germany — the specie payments. It is a duty that involves their self- interest, as well as the interests of the community. I have no further questions to suggest. Mr. KoEBLY. I would like to ask Mr. Hepburn one or two ques- tions. What would be your idea as to the limit of the issue of cur- rency ? Mr. Hepbuen. I would limit it, as. for instance, the German bank does, to 33:1 per cent of metallic reserve, and notes should at all times be covered by two-name commercial paper in the possession of the bank. Mr. KoRBLY. If a creditor of your bank had a deposit and tried to convert it into a current credit, your limitation would prevent the creditor getting currency in some conceivable circumstances, would it not? Mr. Hepbuen. You mean under existing law ? Mr. KoEBLY. No ; under vour proposed limitation Mr. Hepbuen. No; I think not. Mr. KoBBLY. Then all of the deposit credits of the United States could be converted into current credit at the demand of the creditors oi the banks? Mr. Hepbuen We have about $3,300,000,000 of currencv in the country and we have about $15,000,000 of deposit'^ Mr. KoEBLY. If currency is going to be elastic 'and the creditors of the bank desire the currency to that extent, it ought to be con- vertible, ought it not? f^ ^v UK Lun Mr. Hepburn Oh, no You can not provide a currency that would permit everybody to withdraw his funds from the banks. Mr. KoEBLY. Would tliat be a withdrawal? Would it not be iust changing the evidence of the bank's indebtedness « ^ Mr. Hepbuen. It would be closine their accmmfs c^ ■(=„,. -^i. accounts in the banks, are concerned accounts so far as the cou^nt woiddT' cloS ""'' ''''-' ' "^^^^ ^-'^'^ «- ^-k and your ac- a c'u^rent"? ^^"' ^"' ' "^^^^ ^^^^ 5-"^- -'^dence in the shape of Mr. Hepbuen. Yes. BANKING AND CUKBENCV REFORM. 25 Mr. KoRBLY. So that the substance would be exactl v the same ? Mr. Hepburn. That is right. Mr. KoRBLY. Now, you propose that this evidence of indebtedness should be guaranteed by some system? Mr. Hepburn. I would guarantee that by a reserve. Mr. KoRBLY. It would be by some system" other than that of a credit and loan? Mr. Hepburn. Yes. Mr. KoRBLY. Now, if a man had an account with your bank and he came to you to get it in the shape of current notes, he would thereby have his deposit guaranteed? Mr. Hepburn. He might withdraw his funds, if he saw fit. Mr. KoRBLY. And get in place of it a guaranted note ? Mr. Hepburn. He would get currency ; yes. Mr. KoRBLY. Would not that be getting a guaranteed deposit by indirection ? Mr. Hepburn. I do not think it would be so characterized; but I get your idea. I understand what you mean ; yes. Mr. Korbly. What objection would you have to the interchange- ability of the two forms of credit, or the two evidences of credit, the notation in the bank book and the current bank note? Why should not the creditor at his option have either evidence of the indebtedness to him that he desires or that he needs ? Mr. Hepburn. The creditor should; but the difference arises from the fact of the use which he can make of those two. The credit on the books of the bank he can draw against by his cheek, which passes by indorsement; while the credit in the form of notes he can go out and pass around from hand to hand, and they are taken in the form of money, and it is a higher form of credit and ought to be, and is so regarded the world over, because it goes into the hands of the labor- ing people and people who can not read, perhaps; it goes into the hands of various people who can not and have not time to examine; and therefore that kind of money represents a credit, to be sure, but it is a higher order of credit and stands upon a higher plane, and is quite different. What you say is quite true, that they represent the obligations of banks, but the obligations of the two are not exactly the same. Mr. Korbly. Now, I want to ask you this question and see if you do not agree with me in believing that the importance rests with the deposits and not with the notes — the importance to the people of the United States generally. Mr. Hepburn. No ; I do not at all. Mr. Korbly. You do not ? The breaking down of the instrumen- talities of exchange, or of the mechanism of exchange, as we had it in 1907, is not of greater importance, then, to the Nation thiin the holder of a bank note ? Mr. Hepburn. Xo, sir. Mr. Korbly. You think not? You think that the greater im- portance rests with the Mr. Hepburn. One is a general obligation, with whieh the people must deal at sight and without investigation, and the other is a mat- ter of investigation between banks and business men. Mr. Korbly. Let me state my question in another way. Do you mean that the breaking down of the banking facilities iii 1007 Avas 26 BANKING AND CURBENCY EBFOKM. not of importance to the people of the United States-very much greater than the amount of outstanding bank notes j Mr. Hepbuen. What do you mean by the breaking down ? Mr KoKBLT. The paralyzing of the mechanism of exchange and the inability to effect exchanges between New York and Chicago. Mr Hepburn. It resulted in very great loss. Mr KoEBLT. "Was it not, in your opinion, very much greater than theamountof outstanding bank notes at that time? _ _ Mr. Hepbukn. I would not undertake to express an opinion. Mr! KoKBLY. It was unquestionably large ? Mr. Hepbuen. Yes ; it Avas very large. Mr. KoEBLY. I want to suggest, and to get you to give an opmion on the idea that the important thing to the American people is that the banking instrumentalities shall not break down and there shall not be any paralysis of the mechanism of exchange; that is the matter of great importance to the American people, rather than that the national holder of a bank note should be absolutely sure that the debt should be paid. Mr. Hepbuen. The argument is that if when this period of stress manifests itself, which alwa^'s precedes such a condition as you have described, there was reposed in the banks, or in some proper author- ity, the power to increase the supply of currency enough to offset the amount Avhich was hoarded it would pass the crisis over and they would not have anything like a crisis. That is the theory of an elastic currency. But' to go to the extent of undertaking to guarantee bank deposits, and making a good man and a good bank and good bank management responsible for the conduct of bad men or incompetent men would be to take away indi- vidual initiative, and produce much greater loss, and there would be a much greater disadvantage to the country than there would be in sustaining even the occasional losses in the crises, great as they are. Mr. Koebly. Could there not be devised some plan of control suffi- cient to offset the additional responsibility that is justified? Mr. Hepbuen. When you are devising a plan of control of 26,000 or 27,000 banks in this country, 7,300 of which are under your con- trol, as representing Congress,' representing the whole Nation, and the rest of them m the 46 States of the Union, it is a pretty difficult matter. In more than half of the States of the Union there is abso- lutely no supervision of State banks. ' The Chaieman. And no reserves? Mr. Hepbuen No law— nothing. In Illinois thev have not any requirement as to reserve. " •' Mr Koebly. I do not want you to understand that I would con- tend for a principle that would make you liable for my conduct with- out having some control of my conduct; but I wanted to ^et at vour Idea whether elasticity of the currency' was not finally the pro^^^' ^eposit accounts into notes, and converting i ts at the option of the creditors of the I plete extent « ' elasticity of the currency in its fullest and com- tZ l=^S^S^<^?,r"t -^n the point of administration and otherwise, could not the banks m the different localities keep what their advices were and notify the rest of the country of that condition, so that here would nuettfn.'' Hki fr ""^ i'^fo^aioii along that line; I mean in a broad question like the question of guaranteeing deposits, Mr. Hepburn? do^btit""- "' '°"^*^ ''^^ ^"^" ^'^y b^°^^«^ quLion.' I exSLe^s^rXr^h^Ites/^" ''^"'^^'^ ^^^^"^ ^^^^"^ ^° bank baJ!l'" wZttSO OoVonVI f ^'Z ^^°^^I' ^°^' i"«tance-take my own DanK, with Stl30,000,000 of deposits and the assets there— it tnk-e Mr. KoEBLY. In 1907, when we imported a great deal of gold, we gave a great deal of service and commodities for it; and when that gold was sent back Ave gave a large quantity of gold for a small quantity of service and commodities. We lost at both ends on the importation of 1907. Mr. Waebueg. That was not a question of weakness or strength of the country, but of high interest rates. We offered high interest for it, and that brought the gold from abroad. Mr. KoBBLY. And then we paid a premium to them to take it back. BANKING AND CUEBENCY EEFOKM. 57 Mr. Waebueg. No. Mr. MoEAWETz. No; we did not pay them a premium to take it back. Mr. KoisBLY. I think we did. It is my understanding. Mr. MoEAWETz. We did sell our securities at pretty low prices because we needed the gold. Mr. KoEBLT. We certainly sent a quantity of that gold back which paid for a very small amount of their services. Mr. Laughlin. We paid with our exports for it. Mr. KoEBLT. We paid with a verj' large quantity of exports to get gold, and then afterwards we exported the gold for goods and paid a large quantity of gold to get a very small quantity of goods. The gold flowed toward us and then from us. Bonamy Price is my authority for the principle I have enunciated, and I would like to have it overthrown, if it can be. It looks very clear to me. Mr. MoEAWETz. I am not quite sure I understand what you mean. but we certainly Imow that the jaoorer countries of Europe are tlie most hard up for gold, and have the least. Mv. KoEBLT. Where you use gold, credit is least eiRcacious. Where credit is good you need little or no gold. People exchange com- modity for commodity, valued in gold. They do not need the gold. They do not need gold to measure values. Gold is used as a measure of value in this country. Ninety-five per cent, I think Mr. Hepburn stated, in commodities and services of the country are exchanged without the use of gold except as a measure of value. Mr. MoEAWETz. Tha£ is true, partially. Mr. KoEBLY. And if you have a good credit system, pursuant to which you can exchange services and commodities, you need little or no gold, and it properly should be in the bank vaults and not in circulation. Mr. Waebtjkg. That is quite correct. Mr. MoEAWETZ. That is sound. ^Ir. KoEBLY. I should say that the gold throughout the United States which is in the bank vaults is in the most eminently proper place. Mr. MoEAWETz. I do not agree with that. I should dislike very much to see all the gold in the United States in the banks. Mr. KoEBLY. I would like mighty well to see the Government in a position where it did not have to maintain a gold reserve to maintain the parity of its money. Mr. iloBAWETz. I think it is very desirable to get the Government out of the note-issuing business, but the Government borrowed $3-16.- 000,000 by issuing its notes, and it got $346,000,000 of value, and it is now keeping $150,000,000 on deposit as a reserve for its $346.- 000,000 of indebtedness. Mr. KoEBLY. Plus the silver. Mr. MoEAWETZ. I am speaking noAV of the greenbacks alone. Sd that the Government to-day on that operation appears to be the gainer to the extent of about $200,000,000. It is still $200,000,000 debtor on its obligations which were issued for value. Mr. KoEBLY. You would not want to be in the attitude of main- taining that it is proper for the Government of the United States to keep a certain quantity of its notes outstanding? 53 BANKING AND CUEBBNCY EEFOKM. Mr': "^^Ir^lSLe they can borrow thereby without paying '""Mr^MoRAWETZ. No; I think it is all wrong. I think the green^ bafks sWd be redeemed and the Government should get out o the note issue business. But I say that ^^f ^P^J" |,f o'f curSy backs to-day are the least harmful of all our terms ot currencjr, because the ^Government now undertakes to P-yt^em on demand m gold, and agrees to keep an adequate reserve for their payment, it is not so in the case of the silver. n , , -i „+ „ Mr KoEBLy. Is it not required by law to-day to keep silver at a ^^M^MoeaweS Yes; but there is no definite machinery provided °Mr.1^0RBLT. Suppose a raid was made on the gold in the United States Treasury and the Secretary of the Treasury should find him- self unable to comply with the law, which is supposabie. Mr. MoKAWETZ. Yes. . ^^ , j Mr. KoRBLT. Would not we then go to a silver basis, or sell bonds to replenish the gold in the reserve? t ..u- i Mr. MoEAAVETZ. Yes; we would sell bonds. Personally, 1 think that danger, however, is a constantly diminishing one. If you should stop to-day the printing of national-bank notes, and practically it has been stopped Mr. Shaw. That is, the increase ? Mr. Mobawetz. The increase; yes. The growth of the country would soon absorb so fully the volume of paper currency which we have that no danger from that source would ever arise, because always we shall need in this country about, I should say, $1,75D,- 000,000 of currency in actual circulation. Mr. KoEBLY. Outside of that which may be in the Treasury of the United States and in the bank vaults. Do you count that ? Mr. MoEAWETz. No; I mean in actual circulation. I exclude that Avhich is in the Treasury and in the bank -faults. Mr. KoRBLY. Yes. Mr. MoEAWETz. Which is the reserve money. The Chairman. Mr. Morawetz wants to leave on an early train, and I would suggest that if any member of the committee desires to ask him any questions they be made as brief as possible. Mr. Laughlin. Might I ask him one question in regard to the dis- count of these divisional reserve banks? Would j^ou limit the dis- count solely to commercial paper and not at all to paper based on investment securities ? Mr. Morawetz. My inclination Avould be to restrict it to commer- cial transactions. Mr. Laughlin. That is what you said? Mr. Morawetz. Yes; partly because of the prejudice which exists throughout the country against so-called Wall Street transactions and partly because I would go slowly. I would start in the most conservative way and feel my way. Mr. MoCreary. A question was raised here in regard to the parity between silver and gold on these notes. Could that be obviated to a great degree by taking and recoining the silver Ave liaA-e into sub- sidiary coin, if there Avas a pressure, and using it in that M'ay, as BANKING AND CUEKENCY REFOEM. 59 England has done? Her standard is the shilling. We would get it out in circulation in that way and get rid of the silver certificate and the danger of some time having to take the silver and pav a gold value for it. "^ Mr. MoRAWETZ. I do not worry over that. In France they have a little more silver per capita of population than we have here! and the irench system is prefectly "sound because they have a sound banking system. Their currency is safe. We have, I think, about two and I halt times as much silver per capita of population as Germanv Is not that right? -^ Mr. Warburg. I think that is right. _ Mr. MoRAWETz. Gradually the silver could be coined into subsid- iary silver, as suggested. Mr. McCreary. And thus get rid of the silver? Mr. Morawetz. Yes, sir ; and if you do not increase it, it does not worry me. If you do not increase the amount of your paper or silver currency, I should not be worried about that. Mr. Willis. Would you be kind enough to state the functions which should be granted to this organization which you suggested that the divisional reserve banks should create among themselves ? Mr. MoRA-v^-ETz. Well, I have not worked that out in detail, but, in general,! may state that I would give the association formed by rep- resentatives of the various reserve banks ijower to establish uniform methods of doing business wherever this is deemed advisable, as, for example, regiilations fixing the interest rates on their deposits, and also to establish a system of exchanges among the various divisional reserve banks, so that this central association would act as a clearing house of the divisional reserve banks throughout the country. Mr. Willis. You mean to act as a clearing house in the technical sense of the term ? Mr. MoRAWETZ. Yes; practically as a clearing house. And ulti- mately I would give to the central association control of the issue of bank notes by the divisional reserve banks. Mr. Willis. What would be the relation between the divisional re- serve banks and clearing houses of the places in which they were sit- uated, if any? Mr. Morawetz. Well, that is a technical banking question. I should say that these divisional reserve banks could act independently of the clearing houses, or they could absorb the functions of the clear- ing house. Mr. Willis. That is, you would have them supersede the clearing house ? Mr. Morawetz. I think it would be desirable for them to do so. But in some cases a clearing house would be required where there is no divisional reserve bank. You should not mutiply them too much. Mr. Willis. And in those places where the divisional reserve bank was situated, that would perform the functions of a clearing house? Mr. Morawetz. Yes ; I think so. Mr. Willis. The central bank would act as the general national clearing house? The Chairman. That may be the effect of it, but I doubt very much whether we could require that by law. I doubt whether we should undertake to regulate the clearing house of New York City, for example, by law here. 60 BANKING AND CUEBENCY EEFORM. Mr. BuLKLEY. In your opinion is the national reserve associa- tions, as proposed by the Aldrich plan, a central bank ? Mr. MoRAWETz. That is a question of definition. Mr. BuLKLEY. How do you define " central bank," and what do you consider a central bank? Mr. MoEAWETz. I say, that is a question of definition. I think that the national reserve association is an admirably worked out plan. It has some faults. Some of the attempts at compromise in developing that plan seem to me to have not been fortunate. I think, however, it would have the power to accomplish its purposes. It would have the power of a great central bank, except that it would deal only with other banks. That is, not altogether. It would have power to buy current exchange and to buy gold. Mr. Waebubg. Only for the purchase of gold. Mr. MoRAWETZ. Only for the purchase of gold ? Mr. Waebueg. Yes. Mr. MoEA^\•ETz. And they would be restricted in their dealings to other banks. The plan provides for a certain measure of decen- tralization which is rendered necessary by reason of the expansion of the country. In other words, while first there is the general power vested in this central institution, it is again decentralized by givmg extensive powers to the branches throughout the country. The Chairman. We are very greatly obliged to you for coinine over, Mr. Morawetz. STATEMENT OF ME. PAUL M. WARBUEG. The Chaieman. Will you state to the stenographer what banking connections you have? Mr. Warburg I am a member of the banking firm of Kuhn, Loeb cVc Co., or New York. The Chairman. The committee will hear you now Mr. Warburg. I do not think, gentlemen, you have asked me to come here on account of my banking connections in New York fi? /tIi!''' -r," ^^^^ asked me here more on account of the part year 190?''^ '"^ discussion of currency reform since the The Chairman. That is true. I simply asked you to state your connection in order that we might have it on the record h.^'^'r.Tit^^^''- ^^,,«^ight possibly be useful to explain to the mem- bers of the committee my part in that discussion I came ov7r to Jus country m the year 1902, having been born and educated £ Cxermany_, educated in the banking business in Hamburg London and Pans, and having gone all around the world My traLiS Cfe'SftiT in'tf "r "^?^-^" '^'f'"'^ with Gyernmen! oanKs, particuiariy m the administration of the larjre sums th..*- Government banks hold in foreign countries f or the r rese??es so We no^' ""' *'""^"^ '"■ ^'''' ^^^ -^3^ ^"-tion that intS 'you than that. It was in^E'f all ^Z th rtaf tE Te^of "thos '^? cussions gomg on, as they have been going on ever siW as to wW to do. Some people said " We must legisfate that no Sk mayTafe BASKING AND CUKKENCY REFOEM. 61 iftore than 6 per cent for its money. That is the way to cure this evil." Othfefs, you will remeifiber, were in favor of asset currency issued bfbadcast, and so on. After I had been here three weeks 1 wrote a pamphlet about this thing, stating that the cause of this evil was in the decentralization of our reserves and in the immobilization of our paper more than anything else. I kept that paper in my desk for five years, because I did not want to write about a country that I had just learned to laiow. When the panic came on in 1907 I took out this very pamphlet, brought it up to date with very few changes, and it was the first thing that I published ; and I have stuck to the same thing in various other publications that I have made. If I mention this it is for this reason: I do not believe that any nation can disregard certain economic laws as the United States have done in the construction of their monetary and banking laws and methods. To try to invent things, to create new things, and to go to a very great effort not to take the means that have proved success- ful for 100 years or more in other countries, while in our country we have seen our methods fail, looks to me unwise, and I should urge very seriously, first, that all possibilities should be exhausted to try to proceed on lines that have been tried, and then if you find that it is impossible to do that, to try to invent something new. The subject of currency is of such tremendous sensibility that the least mistake means disaster. Quite recently, this summer, again while I was in Europe attending the banking convention that they had in Germany, I witnessed the discussion of those same questions. It was very interesting. In Europe you have now seen that during the most acute times of political panic there followed no financial panics. There was pressure and strain, but they were able to avoid panics. With all that, I saw how, even with a perfect system like that of France, hoarding began. Twenty-five per cent of the deposits of the French banks were withdrawn last year in the panic. If that had happened here, what would we have done? But the Bank of France went ahead and issued notes freely, and everybody trusted that bank, and everybody knew — ^the big banks and the public knew it, too, and they were scared — ^that nothing would happen. It was the same way in Germany. During that same time there hun- dreds of millions were withdrawn from there by foreign countries. How was it possible that they could stand that in a country not as rich as ours ? The Eeichsbank had accumxilated hundreds of millions of foreign exchange. They had bought the foreign bills on France, although the interest return was only 2^ to 3 per cent, while money was worth 5 and 6 per cent in Germany. Notwithstanding that, the Eeichsbank had bought those bills, losing some money as compared with what it might have made by investing in German bills, for the reason that they said " Now is the time for us to prepare for stress." And last year when the crisis arose they began to realize their foreign bills, and when the great demands began against them from foreign nations they warded off high rates of exchange and gold exports. That is the function that those central banks on the Continent of Europe perform, and it is a very essential function that I would like you gentlemen to bear in mind. There are two things which are essential. Unless confidence is absolutely sure, unless everybody has the highest confidence in the system, it is bound to go to pieces in time of stress. Here we have 62 BANKING AND CUBEENCY REFORM. not had any war panic, and I hope we will never have any, but if we had any, with a system which was imperfect — and a great many systems have been suggested that are makeshifts, and are not per- fect— it is bound to collapse. There is a tremendous responsibility on us if we go on experimenting on a basis that has not been tried, that will possibly be a good makeshift, and will meet a political necessity, but will come back to plague the country. It will be a pretty bad responsibility for those who have enacted a law which will not be perfect, or will not be at any rate as perfect as we can have it— because I am of the opinion that we can not have an ab- solutely perfect law right on top of the primitive conditions that we have now. I was not prepared to speak on the general subject, but I have prepared a short argument on one phase of the question, not going into the details of the defects of the present system, and with your permission, I would like to give you that. The earnest study that has been devoted during these last years to the question of monetary and banking reform has had this tan- gible result, that the roots of the evils of our present system are now clearly understood. While a few years ago the opinion generally prevailed that we were suffering primarily or even exclusively from the effects of an elastic note issue, it is not clearly recognized that this defect of oitrsystem is not the main question, but that the more important and fundamental shortcomings of our system are decen- tralized and therefore inefficient cash reserves, and the immobiliza- tion of the commercial paper held by our banks. It may be safe to add that with the clear recognition of the dis- ease, common agreement has been reached as to the organs that must be treated, and it is now generally conceded by the majorit}' of students of the question that a remedy for these three evils — de- centralized reserves, immobilized commercial paper, and inelastic note issue — will have to be found by any legislation that is to bring permanent and thorough relief. It is not as generally understood that of these three evils the decentralization of our cash reserves is the most fundamental one and that by creating a properly organized system of centralized reserves, the remedy for all three evils, and the defects that in turn follow them, can be, and must be found. The point that, with your kind permission, I Avish to emphasize is that this work of reform can not be done in a haphazard way by treating each phase separately, but that centralization of reserves, mobilization of credit, and elastic note issue po together — they follow automatically a properly organized concentration and cooperation of reserves. This interrelation becomes quite apparent to us when we stop to consider that, in case of the organization of such a central reserve, neither the banks nor the central reserve itself would be safe with- out the introduction of commercial or banking paper as a means of exchange. The banks would not be safe, because they could not permit a substantial portion of their cash reserves-to be kept by the central reserve, unless they could rely on two things : First, that at ail times they could obtain gold against their cash balances, if actual cash were required from them, and second, that they would at all times have the means wherewith to build up their cash balances with the central reserve, m case increased demands for cash would be made upon them. This means of exchange, the key, if you please BANKING AND OUBKENCY REFORM. 63 to the vaults of the central reserve is furnished hj commercial or banking paper. Without this key a central reserve would be abso- lutely useless and therefore impracticable for the banks. On the other hand, a central reserve would not be safe if it ^vere nothing but an automatic strong box, receiving cash as it would be paid in and paying it out as it might be required. In order to be safe and in order to be able to protect the Nation, the central reserve must be in a position to increase at will its investments in commercial paper and vice versa, to reenforce its cash holdings by collecting ma- turing paper, strengthening or loosening, whichever the case may be, its hold on the market, and protecting its own position as against its aggregate on demand-gold obligations at home and as against other countries. Without this ability of collecting or investing in local or foregn paper, both at home and abroad, the central reserve would not be safe. It would be a great national achievement in itself to bring about this mobilization of credit, and the creaticn of an important world- wide discount market, which in turn would have, as a sequence, the turning into a broad bill market the many millions that now flood and overflow Wall Street. But we must bear in mind that it is an incidental though necessary development following the creation of a central reserve, as inversely the creation of an effective central re- serve is dependent upon the system of free exchange of commercial and banking paper. The two can not be separated. An elastic note issue is an additional and most effective weapon of defense of a central reserve, without which it would be well-nigh im- possible for the latter to perform its main functions of maintaining, without exorbitant fluctuations in interest rates, a proper proportion between all on demand obligations and actual gold reserve,^. A ' scientific and effective elastic note issue must be co\-ered by gold and commercial paper in a safe proportion, just the same as the general- deposit obligations of a central institution. Bank notes of a central reserve are deposits in bearer form. ' They can be turned into deposits at will, as inversely deposits can be turned into notes at the will of the owner. Both deposits and notes are payable in gold and the cen- tralized reserves cover indiscriminately the one and the other. They therefore must be treated together and can not be dealt with by sep- arate laws. Elastic not« issue can not be created without a central reserve nor without the existence of liquid commercial paper, nor can an efficient central reserve be established without the power of elastic note issue. They all go hand in hand. Inasmuch as it is generally recognized that the creation of a dis- count market is most desirable and of the highest importance for the Nation, it has been frequently suggested that legislation might start with the creation of such a market and leave the rest to follow later. The object of my argument was to show that such a course would be impossible. American commercial paper will not be considered a quick asset and will not take the place of the stock exchange call loan unless the purchasers, both local and foreign, know that there will be a possibility of rediscounting a safe proportion of their hold- ings if need be with a central institution. While, as a matter of fact, the actual rediscounting by central institutions may be unimportant in normal times, the existence of such central institutions creates the ultimate basis of confidence without which a discount market can 64 BANKING AND CUHRENCY BEJORM. not be developed. No law can create a discount market Avithout a central reserve ; without the latter our paper would remain provincial and local, and a " look up " as heretofore. Others have advocated a banking legislation creating a net ot local reserve centers all over the country, having m mmd that a general scheme of connecting these local reserve centers into one central in- stitution could be perfected at some future time This, too, is not a practical plan. Unless a central reserve be endowed with a large capital of its own and unless we bring about a free return How ot all idle cash into one central reservoir, from where, without the least possible friction, it can be directed to wherever it is legitimately wanted, there can not be created that confidence which is the basis of the entire structure. The banks would not rely entirely upon the ultimate strength of their local reserve centers and consequently^ they would hold back in their vaults more cash than would be per- missible for the safety of the local reserve centers and the entire communitv. These local reserves, each in turn, would try to accumu- late the largest possible amount of cash, and, in times of stress, we would witness exactly the same conditions as we saw during the panic of 1907. Instead of a free return flow of idle cash, we would have created a large number of hoarding centers and we would ex- perience again a period of gold premium between one center and the other, and local runs and havoc would follow. Moreover, in the majority of the zones there would not exist a sufficiently important banking power to organize local reserves of adequate size. The strongest local reserve — no doubt that of the city of New York — would therefore dominate, because it would be to that center that all the country, in normal and abnormal times, would appeal for help. A system of that kind would enormouslj^ increase the financial power of New York even beyond the measure enjoyed to-day. Further- more, the power that lies in union would be lost by such a system of local reserve centers, which could neither accumulate a large re- serve of foreign exchange, as a weapon of warding off gold exports, nor would they have any of the protective or preventive powers which would benefit the Nation under a strong scheme of federated reserves. I might mention here that Mr. Morawetz's objection to the power that the central reserve would have applies equally to all these local reserves. I think it would be a much more dangerous thing to give these powers which he has just indicated to local men. You will find much more danger in getting the local boss, financial or political, into that local reserve institution than you would if you put the main responsibility upon a central body in Washington, and get your men from all parts of the country to administer this trust. "l think it is a much more dangerous thing, ilr. MoraAvetz mentioned something of a note issue by these centers, and he indicated that these reserves should pay interest on deposits. What would that mean? It would simply mean a comparatively weak institution. Let us suppose that the banks of Oklahoma, or some other zone, would be gettino- to- gether their local reserve; it could not be a verv strong reserve' be- cause it would represent a percentage of their own comparatively weak banking capital. Suppose this institution should allow interest on that. What would that mean ? It could not pay interest unless it did something with the monev. The consequence would be that the BANKING AND CUKEENCY KEFOEM. 65 reserve money of that entire district -would be invested. You would simply be minus those reserves, and if anything happened the posi- tion of the banks would be so much weaker and entail so many more dangers. This law alone could not create that confidence which is necessary. The few regional reserves that would create that confi- dence, and that would have considerable strength, would be those of Chicago and of Xew York. The Chairman. How could the cooperation in, say, 20 reserve districts be weaker than the utter lack of cooperation in 7,200 national banks that we have now? Mr. Warburg. There is not any actual cooperation at present. One bank is simply jumping on the other, and we are trying in our present efforts to counteract the effect of our present system of decen- tralization. The Chairman. You haAe absolutely no cooperation under your existing system? Mr. Warburg. No ; and we suffer the consequences. The Chairman. You have 7'5200 national banks and not one par- ticle of cooperation; is not that true? Mr. Warburg. That is correct. The Chairman. How could a system of regional cooperation, say, of 20 divisions of the country be more dangerous than the existing system of absolute lack of cooperation in 7,200 units ? Mr. Warburg. If properly organized, it might not be more dan- gerous. I was just explaining that Mr. Morawetz's suggestion of allowing this center to pay interest would mean that reserves which at present are reserves at any rate, though very poor ones, would be invested. That would be the consequence if this reserve money should become subject to a payment of interest. That would make it worse than it is now, because the banks would not have the reserves at home, and they would not be available in that local district. If you organized them all together, it would bring about a somewhat stronger structure than we have now, if you could do it properly. But the point I am making is that without any fail — and if you follow my argument, I do not think you can escape from it — you would strengthen New York and Chicago, because if you leave the regional centers independent those will be the strong centers to which all other centers will have to apply for assistance. I do not think you can escape from that. The Chairman. Where does trouble usually originate? Mr. Warburg. I think that differs very largely. I think people usually say that trouble originates in Wall Street. I do not think that is a fair statement. Wall Street is only an expression of the whole country. At one time they blamed Wall Street for that great expansion. You will remember that the Northern Pacific and the Great Northern all issued $100,000,000 of new stock. _ It was the development of the Northwest just as much as anything else that caused the expansion. But, of course, that sort of thing expresses itself in New York where the financing is being done. You can not really say where it starts and where it ends ; the interrelation is too intimate. The Chairman. We know pretty well where it ends, but the question is where it starts. 74812— PT ]— 1.3 5 66 BAN-KING AND CUERENCY KEFOEM. Mr. Warburg. You do not even know where it ends when it once '* if would appear, then, without much doubt that the solution for our country must be sought on the l^^es of centralized reserv^ the same system, though in a form not so highly developed, as that ot She European central institutions, the effectiveness of which we have admired again and again in these recent years. This system has helped comparatively weak nations to stand phenomenal strains without any such calamity as overcame us under much less trying conditions. ^ . . i.- u • That part of the plan of the Monetary Commission which is expressive of these principles has been generally recognized as sound aiid as containing no more than a practicable adaptation of methods which have been successfully tried by all other financial powers of the globe. I have refrained from dwelling upon the defects of our present system for fear of reiterating what, since 1907, 1 have repeatedly said alid written. I refer in particular to three articles upon the subject: "A united reserve bank for the United States "' and " Principles that must underlie monetary reform in the United States," published in the proceedings of the" Academy of Political Science in the city of New York, January, 1911. and"^ '' The discount system of Europe," published by the National Monetary Commission. For those Members of Congress who have not had the time for following the discussion. I beg permission to quote here, from the first-named pamphlet, an illustration that has proved helpful : If nfter a prolonged drouglit a tliuiiderstorm threatens, what would be the eohseqnenee if the wise mayor of the oriental town shonld attempt to meet the danger of fire by distributing the available water, one pailful to each house owner? When the lightning strikes the unfortunate householder will in vain fight the fire with his one pailful of water, while the other citizens will all frantically hold on to their own little supply, their only defense in the face of danger. The fire will spread and resistance will be impossible. If, however. Instead of uselessly dividing the water, it had remained concentrated in one reservoir, with an adequate system of pipes to direct it where it was wanted for effective use, the town would have been safe. Ridiculous as these conditions may appear, the parallel with our own financial organization is evident. Our reserves of cash are entirely disconnected; they are insufficient for even a single institution in times of serious stress, and Instead of being a protection they are a dangerous wealiuess, because the con- sciousness of InsufBcient protection causes one bank to try to draw on t^e re- serves of the others, and the very moment these mutual attacks begin panic inevitably follows. Our true conditions are, as a matter of fact, even more preposterous than those in the oriental town by reason of our law prescribing that a certain pro- portion of the deposits must be kept in cash — a law which must be observed if a bank wants to preserve Its credit. Not only is the water uselessly distributed into 20,000 palls, but we are permitted to use the water only in small quan- tities, in proportion :is the house burns down. If the structure consists of four floors we are practically forced to keep one-fourth of the contents of our pail for each floor. We must not try to extinguish the fire by nsiug the water freely in the beginning ; that would not be fair to the other floors. Let the fire spread and give each part of the house, as it burns, its equal and insufficient propor- tion of water. As long as the owners of houses threatened with fire know that the central water supply is well in hand, with one central power, available wherever danger may arise, everybody feels safe and is not frightened by the thought that if all the houses should bin-n at the same time there would not be enough water to go around. Though there may not be enough water for the last house that might burn down, ei'en the owner of the last house would not ask that some BANKING AND CUKEENCY EEFOKM. 67 water be kept back for bim, because be realizes tbat unless tbe Are be stopijed before it reacbes bim bis own little supply of water will not belp biui. If, however, a central system does not exist, everybody will board water, trying to steal it from bis neigbbor or from tbe community by tapping some source in order to create a supply of bis own. He will lessen thereby tbe full supply tbat ought to be let into tbe central reservoir without protecting biuiselt adequately in time of danger. Tbe main function and object of a central bank is to make every dollar which lies idle return to the central money reservoir to make it available to the fullest extent, wherever and whenever it can do sood legitimately, and to provide a system of mains by which it can l)e conveyed quickly to any pohit of danger. The difference of opinion concerning the proper methods to be applied in our country exists more regarding the shell than the kernel. The two questions that remain to be solved to the satisfac- tion of the Nation are mainly those of form and control. Less importance, I believe, is being attached to the first one. It "will not be difficult to reach an agreement as to whether this central reserve shall be a simple federation of banks, under some kind of a joint responsibility and without a capital of its own, or whether it shall be a corporation endowed with a large capital; and if so, whether the banks shall be its only stockholders, or whether the stock should be kept iiidiscriminately and widely scattered. The harder problem, on the proper solution of which the fate of the entire meastire appears to (fepend, is that of finding the formula for con- stititting control and management in a way that will create absolute confidence and at the same time satisfy the people. There are those who claim that the institution should be managed like the Bank of England — by business men alone, without any gov- ernment interference. (This is the scheme which evidently appealed most to the framers of the National Monetary Commission's plan.) There are those again Avho claim that the issuing of money Avith almost legal-tender powers is a semigovernmental function ; and that, therefore, the Government should have a larger share in the rimning ; of the institution, a principle applied by France and Germany. There are even those who claim that the Government should issue these tiotes directly, without the creation of any special independent organ therefor. It does not seem necessary to deal at length with this latter con- tention. Once we have recognized clearly that commercial paper must be the basis of a scientific note issue, we can see at a glance where it would lead if the Treasury should become the organ for the purchase and sale and the collection of such paper. It would end in disaster. The same argument applies, though to a somewhat lesser degree, with reference to the question of the management of a central mstitu- tion by exclusive Government administration — it, too, would be fatal. It woidd, without fail, bring politics into business and business mto politics. . „ , „ On the other hand, it is evident that if the power ot managing this institution would be placed exclusively in the hands of banks and business men, it would create alarm and suspicion. To niT mind a proper solution would be a division of power be- tween these two factors. If the Government appointed a little more than half of the members of the board of the central ofhce, and the other half were appointed by the banks from all parts of the country. 68 BANKING AND CUBBBNCY BEFOEM. and if the boards of the branches .vere constituted in a f^^^^^^J^ but giving a slight majority to the banking element on these t^iancn boards, and if the board could not appoint the managers without ihe nnnroval of the Government, it would appear that both smes vonlcf ro ed each other from temptation, insinuation, and suspicion. In tV'i'tire could not be an? difficulty ^-%^f^^^^^;^;^iZ bv which the Government would exercise an eflective supervision ::nd control over a management, the direction oij^^^cl.^oMl.aye the advantage of the experience and acumen of the business and '^\t"'g=lt understood that such a central institution would have to be restricted in its functions. It should deal on y with banks and trust companies and should be so constructed that it would protect and strengthen the independence of the more than 20,000 banking units now in existence. It should be restricted m its deal- ings to transactions in commercial and banking paper, both local and foreign, and investments in United States Government securities and Treasury notes. It should furthermore be restricted as to the amounts that it might purchase from each institution, and provisions should be made which would carefully safeguard the central institution, by a system of joint guaranties or otherwise, in case such limits would have to be surpassed. This would protect the banks of the country, and, incidentally, it would bring about a network of bulwarks, Avhich would shield the central institution from attacks both from within and from without. When once we shall have succeeded in creating a broad discount market with a large supply of standardized bank acceptances, some of these cumbersome restrictions may safely be abandoned. It is evidence why a central bank with all the wide powers enjoyed by the European institutions could not be conscientiously planned for our countiy. It Avould interfere with the business and independence of the existing banks, and bj^ the power of dealing with individuals and individual firms the door would at once be opened for dangerous abuses, which must be avoided at all hazards. I disagree with Mr. Hepburn in that respect. He said that the central bank of this country should have large powers. I think it would be most dangerous to do that. Control of such an institution, both at the head office and the branches, would give such vast power that, no matter whether Gov- ernment officials or business men were in charge, sooner or later it would become the instrument of selfish ambition. In framing this law we must clearly consider existing conditions. The business man who wants to help in this work must forget his own interests and must not try to belittle the possible dangers of sel- fish motives and boundless ambition on the part of business men or bankers, from which the future federation of reserves must be pro- tected with absolute certainty. The legislator, on the other hand must view the question with equal frankness and courage he dare not be blind to the dangers that would follow, with the rapid and extreme changes and the intensity of our political life, if Govern- ment would be dragged into business, and he dare not disregard the fact that, m order to serve the public interest best, this institution must have the hearty and healthy cooperation of the best business elements from all sections of the country. BANKING AND CtTEEENCY EEFOEM. 69 This central reserve, or whatever name we may give to it, must be a sacred institution, run for the public weal, without consideration of personal gain by anyone connected with it. If in order to secure this we have to forego the fullest satisfaction of our pride and ambition— by accepting the less perfect form of a strongly restricted central reserve instead of a highly developed cen- tral bank— it will none the less be the greatest public service to ha\-e estabhshed a strong system that will permit us to develop alono- modern hnes and that will give us safetv and immunity from panit" without becoming a danger to our political and social life. There is no difficulty in evolving such a plan. The country de- mands with impatience that it should be done without anv further delay. *^ The CnAiEJiAN. Would you say that we should do nothing if we can not at this time get a central reserve association? Mr. Warbtteg. That is a very hard question to answer, because it is a tremendous responsibility to say that. I feel very strongly that, as I have tried to explain in what I have said to vou! when you will come to write a law of regional reserves on the lines that Mr. Mora- wetz suggested, you would find very soon that either it would not be protection, or that it would depend on New York and Chicago, and would make those the centers, just the thing you want to avoid; or that, if you wanted to make the system effective, you would have to write so many conditions, how the various reserve centers shall place their funds at the disposition of each other, that it would be again a centralization of reserves. I think that when you will be well underway in trying to work this out, you will find that you will come toward a centralized reserve system in some form. There are several forms. It need not be done on the plan on which the Monetary Commission proceeded, but I think that the kernel of it must tend toward an effective centrali- zation of reserves, or I do not think j^ou will get anywhere. The Chairman. You do not agree with Mr. Hepburn, then, that the cooperation of banks throughout the country in the regional reserve associations would be infinitely better than the existing system ? Mr. Warburg. It may amount to something. I am very skeptical of these general plans of saying a system of that kind should be worked out. I have challenged Mr. Morawetz already in 1910 to produce a definite plan of that kind, and have told him then that he would find that he would have to take one horn or the other of the dilemma; that either he would produce an inefficient and dangerous system, or that it would lead toward a strong centralization of reserves in a very roundabout way, which would not be as effective as a straightforward central reserve. The Chairman. That is what you are trying to arrive at, a cen- tralization of reserves ? Mr. Warburg. It is not that I am trying to arrive at it, Mr. Chair- man. It is to my mind — and I have studied this thing very, very carefully for a great many years — ^the only way, the fundamental way, in which every other country in the world has been treating this ; and it is the only effective way in which it can be treated, and it need not be a central bank. We have forgotten in this country to make that clear. 70 BANKING AXD CUEEENOY EEFOEM. The CriAiEJiAx. Yes. ]Mr. Warbueg. It is not necessary to have that centralization of reserves in a central bank. I am opposed to a central bank for the United States. The Chaikjian. Do you think the so-called Aldrich plan is or is not practically that of a central bank? ^Ir. Warburg. I do not consider that a central bank for this reason. Of course we have to be technical, and we have to define it pretty clearly. A bank is an institution that does business broadly. A central bank in this country would have the right to deal with anybody else. It would have the right, as the European banks have, to make loans on stocks and bonds. It would have branches all over the country and would be the strongest competitor of the banks, as the European central banks are. The Reichsbank and the Bank of France are active competitors, and they claim that only through that can they hold that effective grip upon the market that they need. That is their excuse for it. Xow, it is conceded that a central reserve would not be as effective in its hold on the market as a central reserve bank would be. But in Europe they have not got the large cash balances that the banks have in this country, and if you could devise a scheme by which those balances could be made cooperative it would fulfill all require- ments, and you would get safety from panics without a central bank. You would not get safety from an occasional crisis; crises you can riot prevent. But a collapse of your system can be prevented under such a system. That I do not think can be prevented under a system of regional reserves if you get a real strain. Little things will not upset it; but if we should get into a real serious entanglement as the European countries did just now — and that may happen — a system of decentralized reserves tvoukl not stand the strain for a moment. The Chaiksian. What is the relative banking power of continental Europe to that of the United States? IVIr. AA^AEBTJEG. Taken in figures? The Chairman. Approximately. Mr. AVaebveg. I can give you 'the figures by looking them up. I have not got them in my mind. The banking power of the United States IS very much larger than that of any one of the European countries. The Chaieiman. Is it larger than the combined banking power of contmental Europe? Mr. Waebueg. I would not say as to the combined banking power ot P_.urope; but it is larger than that of any one of the European countries. *^ The Chairman. It is approximately as great, excluding Great Britain 5 '^ Mr. Warburg. If you exclude England, it may be. At any rate we can concede it to be very, very substantially greater than that of other countries. The CriAiEMAN. Continental Europe has no central bank doing the business of all those nations, has it ? Mr. Waebueg. No; but each part of continental Europe is strong enough m itself, or well organized enough in itself as a unit, to take care ot itselr. BANKING AND CUEEENCY EEFOEM. 71 The Chairjian. That is the question. Cciold not these regional reserve banks in this country be made strong enough to take care of themselves under their peculiar conditions? Mr. Warburg. No. The CuAiRiiAx. And if not, would not the other regional reserve banks come to the assistance of any particular division that might happen to be in difficulties, just as the Bank of France went to the rescue of the Bank of Englaiid in the Baring failure, and sent $15,000,000 in gold ? Mr. "Warbcrg. The difference is this : That in our country, whether you divide it up into 20 districts or not, conditions would be very much the same, if adverse times came, in all of them. Suppose we had a war, or that we had some financial period of overexpansion, after which a period of depression followed ; it would be the same in all 20 parts. It is not the same case in France or in England or in Germany. And, moreover, do not forget that Germany, with her 65,000,000 of people — and that, after all, is the thing that counts — and with her industry, which is larger than oi;rs if you take the absolute figures, is a very important unit in itself. The mere fact that they are geographically in contact all around does not mean that they should be all treated as one; but, as I say, if there is trouble in France there need not be trouble in Germany, while with us The Chairman. If there is trouble in Xew York there is trouble everywhere ? Mr. "Warburg. Probably. If the case was acute enough to make assistance necessary mutually, the danger is that it would be the same in every part. The CHAiRiiAx. That is just exactly what we are trying to correct. Mr. Warburg. Let us look at things as thev are. In the panic of 1907 the first suggestion I made was " Let us get a national clearing house so as to do away with the gold premium, and let the different clearing houses agree among each other to accept each other's certifi- cates." What was the answer. "New York clistrusted Pittsburgh, Boston distrasted St. Louis, and Chicago distrusted something else, and they would not act. Everybody was looking out for himself. And that is the very thing that you might be afraid of happening here again. Then there is this great objection that I would like to speak of. Some member of the committee raised the point this morning that if gold were sought to be withdrawn from all the banks at the same tune by everyone there would not be enough, and asked what would happen, because it could not be paid. The answer to that is that in a perfect system where general confidence exists, nobody has any interest in keeping gold idle, becaus it costs a lot in interest and it is a matter of great risk, and if there is a constant reliance that you can get your gold when you want it, it streams back to one center, and from thei'e you can get it whenever you want it, because it comes freely. It comew back freely because it goes freely. The moment you stop that and have 20 centers, each trying to grab that gold because they want to try to protect their own district, that confidence is undermined, and you can not get that free back flow of gold. The Chairjiax. Mr. 3Iorawetz said there is nothing the matter with our currency system, which was quite a revelation to one or 72 BAXKIXO AND CURRENCY REl-OEM. two members of the Bunkin-- and Cin-reney Committee, who have long been members of tlie committee, because the multitude of witnesses that M'e have been here within the last 10 years have united in agreement that here is something radically wrong m the currency ""■^ Was it not said during the panic of 1907 that if the banks of any given community could have converted their book credits into cur- rent credits they could have stopped all trouble in that particular community ? Mr. Warburg. Certainlv. The Chairman. You do not agree with JMr. Morawetz that there is nothing the matter with our currency system? Mr. Warburg. I did not understand him to say that. Mr. McKiNNET. Did you take him to say that ? The Chairman. Yes : I did. Mr. McKiNNEY. I understood him to say that there was so much of good in our present system that we should not throw it away, but should proceed cautiously and carefully. The Chairman. I understood him to decry utterly the proposition that there was no elasticity about our currency system. Mr. McKiNNEY. He went on to show where it Avas lacking, and he advised caution in making changes. The Chairman. Any of us would advise caution; but in short, I understood Mr. Morawetz to advocate the continuation indefinitely of our bond-secured currency system. Mr. Warburg. Mr. Chairman, he certainly did not mean that. He conveyed a wrong impression. I have read his books that he has jjublished, and I think they are here, and he is a strong advo- cate of reform, and a very severe critic of our present system. He did not explain himself very clearly on that. Mr. Willis. Mr. Morawetz said in distinct terms that in such legislation as might be adopted at the present time there should be no provision permitting the issue oi notes by divisional reserve banks, did he not ? Mr. Warburg. Yes, he did ; and I disagreed with him at that time. Mr. Willis. In other words, he suggested that there should be no currency legislation at the present time, but if it was needed it should come later and as a thing by itself. The Chairman. To get back to 'the practical situation as some of us view it: If we can not get your ideal sy^^tem of central reserve association, should we make no effort at all to help the existing situation? ^ Mr. Warburg. I should say no. I am not advocating an ideal system. Far from it. We will not be able to get an ideal system for years to come— possibly ten years yet^because vou can not get there as quickly as that, because we have no modern paper in this country. We have the old fashioned promissory note, and we have l^'markeT " ""^ '' '■'^*'"" °* ''^"^ acceptances, and then create The Chairman. We have n.j system of bank acceptances, and no money market as it is understood in Europe ' Mr. Warburg. Exactly; and this overflow of monev into New i^ork can not stop until you develop a broad bill market. There is BANKING AND CUEEEXCY EEFOEM. 73 no other means ; and you will find that these local reserve associations or whatever name you give to them, will interfere with that. They will not be able to do that. None of them will be able to accumulate foreign exchange to protect the country. The Chairman. Most of us feel that' we are precluded from adopt- ing a central reserve system such as is provided in the Aldrich plan. "Would you, then, suggest permitting matters to drift just as they are drifting now ? Mr. Wabbueg. No; I would not. I think you will take a terrible responsibility if you do. I think the country' has had several attacks of appendicitis, and it may come back at any moment. The Chaieman. You think public men in politics should represent, do you not? Mr. Waebueg. Yes ; I do. The Chaieman. The Democratic Party, in its platform, declared conclusively against the Aldrich ]Dlan and against a central bank, so that some of us are of the belief that we are precluded from con- sidering those two propositions. Mr. Waebueg. Well, Mr. Chairman, what I claim is this: You may attempt and succeed to write a central reserve plan, and, never- theless, you need not have an Aldrich plan nor a central bank. The Chaieman. But something else of the same sort under a less prejudicial name? Mr. Warburg. Well, do not forget that the Aldrich plan contains some things which are simply fundamental rules of banking. Those you will have to include in every plan, and I think that the Demo- cratic Party would make a great mistake, if I may say so, to say, " Because Senator Aldrich ate his soup with a spoon we are not going to eat with spoons but must use forks." Mr. BuLKLET. May I ask you what features you mean in the Aldrich plan ? Mr. Warburg. Those features are in the structure : but your aim must be the same — of centralizing reserves, of mobilizing commer-i cial credit, and getting an elastic note issue. I can not believe thatj the Democratic Party would say— and I am a Wilson man my- self—" The Democrats must not eat with spoons." I do not think the committee wants to go that far. Mr BuLKLEY. What you mean, then, is that the ob]ects which they sought to attain in the Aldrich plan are the objects which we must seek to attain? Mr. Waebueg. Absolutely. , , ■, , Mr. BuLKLEY. Although we may do it hx another method ( Mr. Waebueg. Absolutely. . Mr. BuLKLEY. You do not mean that there is any specihc provi- sion in the Aldrich plan ? .,-,•, i ^ ■ ^ *■ r.f Mr. Waebueg. No. You see, the Aldrich plan contains a lot ot routine provisions as to what a bank may do and what paper it may take, and so on. Those are routine matters which every plan must contain. But your aim must be the same. The Aldrich scheme d tinctly created a plan which would have cured certain defecte of our present system, and this new plan must correct those defects. I Eve that the country would blame the Democratic Party very severely for giving them a worse plan. 74 BANKING AND CUEBENCY EBFOEM. The Ci-iAiKMAX. I have not meant to imply that the pemocratic Party intended to denounce anything that is good m the Aiaricn Dlan'or to restrict its representatives in Congress from aoopring 'invthing that is good in the Aldrich plan; but if the declaration ot the partv platform M'as not primarily against the central-reserve feature of the Aldrich plan I do not know what is meant by de- nouncing the Aldrich plan. „ . , -J ^1. ^ ^i, Mr Warburg. The Aldrich plan, for instance, provides that the whole stock and the whole management be kept by the banks. You could take as the leading feature of the Aldrich plan the ownership through banking associations and the control by the banks. I could imagine a plan by which you could get at it m a different and a simpler wav. .-, , ■ -j. ^ The Chairman. I thought, on the contrary, that m its complex mechanism it had attempted to provide against absolute control by banks. j. • , Mr. Warburg. Yes; but let me mention one thing, tor instance. In the plan that I published in 1910 I provided that the stock should be held by the public in general, not by the banks, and that the Gov- ernment should guarantee 4 per cent of the stock. I do not know whether you remember that plan. The Chairman. Yes. Mr. Warburg. If you did that the chain would at once be a very different one in construction. You would at once get a bank that would be held by the country at large; and, the banks not contribut- ing the whole capital and the Government guaranteeing the 4 per cent interest, the Government would probably be entitled to a larger influence in the control than under the Aldrich plan. You would get an entirely different situation and a different structure. Then, for instance, take the clearing houses and incorporate them; create district centers of clearing houses and use these instead of " banking associations " (which are created really as a duplication of the clearing-house associations), and I think you can get a very simple affair. You then would have the clearing houses to guar- antee paper where you want guarantys. You eliminate the banks as interested holders for profit and you make the Government pri- marily responsible. You could use the clearing houses to designate a certain number of directors and let the stockholders elect from a list which the president would submit some member to represent the Government. I could see that you would then get a very different stiMicture as to control. The Chairjian. It was frequently said during and after the panic of liiOT that the issue of clearing-house certificates saved the day and rescued the various communities in which there were organiza- tions of clearing houses from the panic itself. Mr. Warburg. Yes. The Chairman. If that could be done by clearing houses operating outside the provisions of the law, why might it not be done by divi- sional associations of banks with clearing house functions, and with a central, supervisory control with the Government here in the Treasury Department? jSIr. AA'arbueg. The clearing house certificates were issued after the country had burned down half BANKING AND CUREENCY EEFORM. 75 The Chairjian. Why could not an institution such as I have de- scribed prevent fire? Mr. Warburg. In order to prevent fire you must have the broad power in quiet times to protect the country. Nobody can force the banks to do business with the clearing house association in normal times. The clearing house association, except for the automatic clearing of checks, has no function in quiet times. They have no capital which would remain actively em- ployed. The Chairman. These divisional reserve banks could have capital. Mr. Warburg. They could have only so much capital as that par- ticular banking zone could stand. Now, you will find where the money is most needed the banking power is the smallest. In a large part of the country you would not find very strong zones. I think, as I said in the beginning, if you come to work it out you will find it would not be satisfactory in the end unless you got those all tied up together. The _ Chairman. Would it not be more satisfactory than existing conditions ? Mr. Warburg. Very little. The Chairman. Mr. Hepburn said it Avould be infinitely more satisfactory. You do not agree with him? ^Ir. Warburg. No ; I do not agree with him. I do not think that Mr. Hepburn has worked out the plan in detail, as he himself said. The Chairman. Yes. Mr. Warburg. I have struggled with this thought very often. If it can be done, knowing the strong feeling against centralization in this country, it would be the wise way to go, and I have been want- ing to go that way. If you will proceed on such lines you will find before you are through that when the law will have been presented it will not be as good a law as the Monetary Commission, a mixed commission, submitted, and I do not think that is what the Demo- cratic Piirty wants. The ambition ought to be now to present the best plan possible, a plan that can stand all criticism and will give us immunity from panics. The Chairman. But we do not want to present a plan that our party has already condemned. Mr. Warburg. I agree with you there; but I can only repeat that it is not a central bank, because a centra], bank would be an entirely diflFerent affair. This is nothing but a cooperation of banks. Mr. BuLKLEY. In what respect would a central bank be a different affair? [ Mr. Warburg. What a central bank means as used in Europe, any- how, and those are the ones we have to bear in mind, is a bank run sometimes with little Government interference and sometimes with- out any, but entirely free to do any business that ordinary banks do, except they have a little stronger regulations in some respects. But they fire open to deal with individuals, they have deposit accounts, and they compete with other banks and make loans on stocks and bonds, and can do everything they please. Mr. BuLKLEY. Is the prohibition of competition with other banks the only feature that prevents this from bemg a central bank ? 76 BAisriaN(; and cubeency eefoem. Mr. Warburg. No. Think how far it is proposed to go in this country. The most important private firms, the capital of which in a o-reat many cases is stronger than that of a great many banks put together, would not be allowed to deal with this central reserve. That is a thing that Europeans could not understand at all, and the only excuse for it is that if we should provide a law that would allow pri- vate firms to deal with the central reserve there would be so much suspicion in this country that in order to make it palatable we have left it out. But think of the difference. You will find there are seven big banks in Germany and there are thousands who will coop- erate here. Mr. BuLKLEY. Yes; but what I am trying to get at is the thing which distinguishes this proposed national reserve association from a central bank. You say that it can not deal with anyone except other banks. I appreciate that that is an important distinction. Mr. Waebtjeg. Yes. Mr. Btjlkley. Is there any other distinction ? Mr. Wardurg. Yes; that it can not make any loans on stocks and bonds is a very important one. It can not buy any stocks or bonds except Government bonds. Mr. BuLKLEY. It can under certain circumstances, can it not ? Mr. Warburg. No. You mean the emergency loans? Those are practically clearing-house certificates. ]Mr. Willis. The Aldrich plan would have permitted the Secre- tary of the Treasury to make loans on stocks and bonds under certain circumstances. Mr. Warburg. Yes ; it would be a clearing-house certificate in that case. Mr. BuLKLEY. In order that we may get this perfectly clear, I will ask you if there are any other distinctions? Mr. Warburg. I think those are the main distinctions. Mr. KoRBLY. If I may, I would suggest that you extend your re- marks a little bit on the importance of the reserve concentration. What particular benefits would flow from the concentration of re- serves that we now do not have, assuming that you have had the other two points accomplished? Mr. Warburg. Yes. Mr. Korbly. Would not that, then, having been accomplished, di- minish the importance of reserve concentration? Mr. Warburg. That is just my argument. You mean an elastic note issue and the power of discount? Mr. KoRBLY. Yes. Mr. Warburg. You will not get them unless you have a strong reserve ; because, take the part that paper plays in Europe, if money is worth 4 per cent in Germany and 3 per cent in France, France will buy millions of German paper, and the same in England. The answer to the question, how can England do that tremendous busi- ness that it does with that small amount of gold, lies in the fact that they have such an effective discount market. If they raise their discount rate one-quarter per cent there will be millions coming there, as it did during the panic. They raised their discount rate and money came streaming in. Why ? Because there is centraliza- 'ticn of reserves, and the English banks and everybody who has any paper can go to the Bank of England and say, " Here are a million BANKING AND OTJKBBNOY BEFORM. 77 pounds of paper ; pass it to my credit," and it will be done. What happens? You naight say if a man takes out a million pounds he sucks the Bank of England dry. But what does he do with the gold ? He puts it in another bank, and it comes back. What can anybody do with that gold? The man, the individual holder, will seek to draw interest on it. Everybody has a tendency, in a country where there is safety, to push idle funds back as quick as possible. The big banks have very little of it in France and Germany. But here, be- cause we have no central reserve, we have that stupid condition that we cause every bank to tie up 25 per cent of its funds and put them into a safe-deposit box, where they are of no use ; and if there is a simultaneous demand on those various banks everybody is alarmed. Everybody says, " My reserve is going down ; I must build it up, "Where shall I get it?" The easiest way is to call in some call loans from the stock exchange and to collect them in cash in the clearing house. Then if the other bank does the same, where is it to come from? And then the pulling and hauling begins, and there is the trouble. Mr. KoRBLY. What instrumentality now saves the United States from excessive gold exportation? Mr. Waebueg. The fact that the United States is blessed with an inborn prosperity which it is very hard to kill. We have a tremen- dous export balance naturally in our favor, and even if we are ex- travagant in buying as many things abroad as Americans do, still we do not kill that balance. If we did gold would leave this country, Mr. KoKBLY. How much is due the United States during its his- tory on account of the balance of trade being in its favor ? Mr. Waebueg. I would have to look that up. Mr. KoEBLY. When is it going to be paid ? My. Waebueg. It is not going to be paid, because if we buy a pic- ture for $100,000 from some European country that takes the place of so much grain that we sell. Mr. Koebly. The balance of trade is nearly nine thousand millions of dollars. Mr. Waebueg. That may be. . . „r , , i Mr. KoEBLY. Although up to the time of the Civil War the balance of trade was the other way. . Mr. Waebueg. But that is a very intricate question, because there enters the question of bonds and stock sales. M^' Koebly. The point I wanted to bring out was that up to the present time we had not needed a central bank to prevent excessive exportations of gold or the loss of gold. . . Mr. Waebueg. But it happened during the Cleveland crisis, ihen we lost a tremendous amount of gold. a+„f^, Mr. Koebly. Could you not make the reserves of the United btates ^ mI-^ Waebueg. That is what my plan tries to do. But the moment you try to do that you get in difficulty, because you have to use some kind of expression which will be " cooperative" or federative oi " central " Mr. Koebly. If you are going to cooperate the banks you ha,ve got to lose something somewhere. What you gain in speed you lose m power. 78 BANKING AND CUEEENCY EEFOEM. Mr. Warburg. I am confident that centralization of reserves is one of the fundamental things that nobody could blame anybody tor using in this respect, because you can not do it without it. ,u j. u The Chairman. What did Mr. Hepburn mean by saying that he Would not oppose a law that required all the banks under the present system or under the proposed divisional system to keep the reserves in their own territory or in their own vaults ? . £ j.u- Mr. Warburg. I disagree with Mr. Hepburn there, too, tor this reason : It will satisfy a certain part of the criticism, m as much as the amount of the bank balances in New York would be- diminished to a certain degree. But you must not forget this, that if a bank has idle money during a certa,in seasonal period in Oshkosh, the bank must try to get interest on it. Now, if the bank would buy local paper or bonds or stocks the money would not be available for the bank after some time when the bank might want it. The CHAIE3IAN. If we had a system of acceptances in this country by which it might buy commercial paper and loan its money on real commercial transactions, woiild not that help some? Mr. Warburg. Yes ; and that is the only way of preventing^ the foolish concentration of funds in N6w York, which can not be avoided now. You may pass all the laws you please, the large banks must have sbme call moiiey. Everyone who has done business in a country bank knows that a local call loan is not a call loan. The Ghairjian. No; frequently when you call there is. no response. Mr. Warburg. Yes ; if a country bank wants to be safe, having no market for its commercial paper, it must be able to, when it wafits money, telegraph to its correspondent in Chicago, St. Louis, or New York, " Ship me so much against my on-call balance." ; and if you say they must keep all their lega:l ca'sh reserve at home they would take from their deposit inoney a safe pfopbr.tion and put it again on call somewhere, because otherwise they would not be safe. They have to do it and will continue to do it until you create a discount market, un- less you make commercial paper, as it should be, a liquid asset. Mr. Taylor. You spoke of creating and discounting bank accept- ances, and you laid a great deal of stress on that, but until we reach a period when we use bank acceptances we can not expect ideal con- ditions. Mr. Warburg. Yes. Mr. Taylor. Is that a matter of legislation or a matter of bank practice in Europe? Mr. Warburg. It it a matter of both. You can not bv law create a, discount market, and you can not create a discount market unless by law you create an elastic note issue and a central reserve. Mr. Taylor. They follow as the result of an elastic issue and an elastic currency? Mr. Warburg. Yes. Mr. Taylor. But they do not follow by the mere creation of the laws, either m Europe or here? Mr. Warburg. No. Mr. Taylor. What is it that produces it? Is it an elastic currency ? Mr. Warburg. We have no central reserve and no elastic note. That prevents us from getting it. The market develops there where people are willing to buy and sell. BANKING AND CUEKENCY EEFORM. 79 Mr. Taylor. Then does it result from the laws which are in force, and from the practices that are in existence ? Mr. Wabbueg. No; you must have the law underlying or the practice can not develop. The Chairman. National banks under the existing law are not permitted to make acceptances? Mr. Waebueg. No. The Chairman. So that after all it is somewhat the law. Mr. Waebueg. Yes. Mr. KoRBLY. The interference of law? Mr. Waebueg. Yes. The Chaieman. The inhibition? Mr. Waebueg. Yes. In the same way they are very much handi- capped in indorsing paper that they buy. Mr. KoEBLY. In fact, all our trouble is due to legislative inter- ference, is it not ? Mr. Waebueg. I think so ; yes, sir. Mr. Willis. As I have understood from your remarks, you do not think it would be safe to base the note-issuing power in the existing national banks, under any conditions, if for no other reason than because it would lead to inflation of bank currency ; am I right ? Mr. W^^™^^<^- Y^- Mr. Willis. As I understand it, you have favored the acceptance idea,? Mr. Warburg. Yes. Mr. Willis. For use by the national banks ? Mr. Warburg. Yes. Mr. Willis. Does not raise the same danger? Mr. Waebueg. No ; I do not see why that follows. Mr. Willis. I merely wanted to ask the question for information. If bank A, with $50,000 capital, situated in Waco, Tex., can accept paper, then if I follow your argument correctly, the beneficial effect of that is to make a market for the paper. The fact that it has been accepted by the Waco bank makes it acceptable all over the country, and it is a nation-wide security. Do I state that right? Mr. Waebueg. Yes. Mr. Willis. Now, the soundness of that paper has been decided solely by the gentlemen in the Waco bank who examined it in the first place and decided to accept it? Mr. Waebueg. Yes. -,■ >• Mr. Willis. Nothing, then, is supporting it except the credit ot the Waco Bank. Is there not the same danger of the injection of an element of bank paper there that might be found through the issue of notes unsecured by anything but the assets of the bank? Mr. Waebueg. No; there is a difference there. When that bank acceptance passes from one hand to another it has the signature ot the man who drew the acceptance on its face. Mr. Willis. Yes. . , , . j. ., ^ i.- Mr. Waebueg. And unless the commercial basis ot the transaction would be evident, the acceptance would not be within the meaning o± the law, and it would not be accepted broadly, because it would be shown as kiting paper. In addition to that, there would be a second signature on this, because Mr. Jones, who has drawn this bili on ttie bank in Oshkosh, sends it to another bank. 80 BAXKIXG AXD CUEBENCY EEFORM. Mr. Willis. Yes ; and it is quite possible the bank notes should be issued with two signatures or more? ^ ^ , , ^ . ^„,,,ki^ +« Mr Waebueg. It is of importance that a bank note is payable to- day or to-morrow, while the acceptance is payable after a certain ^m"!^ wiLLis. I would like to ask you why, in section 31 of the Mone- tary Commission bill, we find this language : The amount of such acceptances outstanding shall not exceed one-half the capital and surplus of the accepting bank, and shall be subject to section 5200 of the Revised Statutes. Mr. Waebueg. What is section 5200 ? I think that is very likely the clause that savs no one bank or trust company shall have in one risk more than 10 per cent— or some per cent— of its capital. That would be all right, because whether you buy the bill of Mr. Jones in Oshkosh for $50,000, or whether you let him draw on you for $50,000, the result is the same. Mr. Willis. Yes. Mr. Waebueg. There is danger in allowing people to go too fast in that. In Europe there is a certain rule. If the banks collectively should get so much of one acceptance, they would say, " Hello ! Some- body is going too fast." You must draw the line somewhere. Mr. Willis. Then the danger seems to me to be exactly that which exists. Mr. Willis. Then why not give the bank the power to issue notes if you grant it the acceptance power? Is not the acceptance power something that ought to be confined to the bank ? Mr. Waebueg. No ; I think the note power should be. Mr. Willis. I want to know why you should give the individual banks the acceptance power when you refuse them the note-issuing power. Evidently the framers of this bill must have thought there was some danger of their going too fast in issuing these acceptances. Mr. Waebueg. There is; otherwise it would be an instrument for the inflation of credit. Mr. Willis. Under this system the danger of currency inflation is overcome ? Mr. Waebueg. Yes; it would not be under the asset currency sys- tem. There is this difl'erence, though, that when you issue your bank acceptance you must have a purchaser for it or it will not be taken, whereas with the notes there is danger of their being sent to California or somewhere. Mr. Willis. That is, if you have a perfectly dishonest, rotten banker. But of course there are very few such bankers, and the notes go out through a man having a certain proposition presented to him as better than it is ; is not that true ? Mr. Waebueg. Yes; but another thing, I am strongly of the opinion that the note issue ought to be concentrated in the central reserve; otherwise you would lose control. ^Vliereas the central reserve has that one function of keeping a sufficient gold reserve against all its gold obligations, the other banks might get together and issue notes, all payable in gold, and your central reserve would not be in position to protect itself against that. Mr. Willis. Very little has been said about a uniform rate of dis- count. Was I right in inferring from what you said that one main BANKING AND CUEKENGY EEPORM. 81 object of the central reserve plan would be the establishment of a uniform rate of discount? Mr. Warburg.^ Or several rates of discount. Mr. Willis. A"ot a uniform rate for the whole country ? Mr. Warburg. Yes; it would be uniform for the whole country for each kind. For bank acceptances it Avould have a much lower rate than it would have for the commercial paper rediscounted by the bank ; otherwise it could not develop for the South American and other trade in which it is to compete with European acceptances. Mr. Willis. Then those different rates of discount would be accorded to the different parts of the country in which the different kinds of paper were to which they applied? Mr. Warburg. It would be one rate. If the rate was 2^ per cent, it would apply to all bank acceptances. Mr. Willis. Yes; but certain kind^ of paper originate more freely in certain parts of the country than in others. Mr. Warburg. That might be true. In the cotton season the cen- tral bank would finance a large share of that business which now goes to Europe. Mr. Willis. Then it would result in gi\ing larger facility and larger access to get banking capital for certain parts of the country than other parts ? Mr. Warburg. Yes. Mr. Willis. It would do that? Mr. Warburg. Yes, sir. Now the cotton grower has to go to Europe and pay an acceptance commission there, and that makes the United States tributary to Europe. A Boston bank or a Chicago bank might do that. Mr. Willis. Then I am correct in saying that there might be several rates of discount applicable to the several classes of trans- actions in different parts of the country? Mr. Warburg. Yes. Mr. Willis. And as a result those parts of the country that were most prolific in those classes of paper would have a lower or higher rate of discount, according as they had more or less of certain kinds of paper? Mr. Warburg. Yes. Mr. Bulklet. I Avould like very much if Mr. Warburg would give us his ideas about the guarantee of bank deposits. You heard Mt. Hepburn's testimony this morning. I would like to know how far you agree with him, and what you have to say generally along that line. Mr. Warburg. I thinli that guaranteeing of deposits is one of the most dangerous theories that are being discussed just now. It is one of those theories that have not been seasoned in any of the ,old countries, and while I agree in the way you put the question to-day to Mr. Hepburn, " Has some one got to suffer by his mistake in going to the wrong bank? " I think such mistake is the lesser evil. We can not provide by law for safe conditions, but the greatest of the evils now is that occasionally some one might lose. But I do think if some modern reserve system, such as we have discussed here this afternoon, could be developed, that of that first evil there would be much less. There would be much fewer bank failures, because 74812— PT 1—13 6 82 BANKING AND CUEBENCY KEFOKM. conditioiiH would become much more stationary, and fewer banks would work with too small a capital because the accommodation mat they would be entitled to from the central reserve would to a certain extent be in propoiiion to the capital that they represent. But it you just think to the bitter end what it would mean to have a system of deposit guaranties ,, , t j. ^ j- ■<- Mr BulIley. Now, this is so important that I want to get it very clear. You sav that you recognize that by refusing to allow a system of mutual bank guaranties occasionally depositors will lose money which need not have been lost to them had we had a system of mutual bank guaranties; that although these deposits could be protected by a very small assessment on the banks, still you would prefer that occasionally depositors should lose money because of the moral necessity of making them choose with care their bankers. Is that a fair statement of youi; idea ? Mr. Waebtjeg. Up to the point where you reach the conclusion. No; I do not say " on account of the moral necessity," though I think that is an impartant consideration, too, that moral phase of it. But if you just consider how it would work out — let me just sketch that. This morning it was said you might obviate the' difficulties follow- ing the guaranty of deposits by regulating interest rates that were to be paid by the bank. Mr. Hepburn said, correctly, that it would put a premium on reckless business ; that one bank might be willing to pay 5 per cent for deposits, where another might be willing, and with good reason, to pay only 3 per cent. The answer was that you might provide that nobody should paj^ more than a certain rate. Now, that is important so far as certain parts of the country are concerned. How are you going to legislate? Money may be worth 2 per cent in N,ew England, and 7 per cent in Texas; so that there, again, you would have local bodies that would have to pass upon that question. But suppose you could legislate that you could pay only the same interest, or no interest at all. That would not cover the whole case, because then, if I were a reckless or speculative bank manager, what would I do ? I would say to you " I want $100,000 deposit from you, and to secure that I give you a certain accommoda- tion." Now, either I may not be conservative in granting that ac- commodation, because I should not grant it, because a man may be entitled to $5,000 and I am offering him $25,000, or if he is entitled to it, where the normal rate is 5 per cent I might offer it for less. You would have to regulate all that, and even then the question of dividends would arise. The speculative manager would say : " I can not lose if I can build up my business." The Chairman. Well, can you not lose? Can you not lose your character ? Mr. Warburg. Character we will leave out for a moment, because that man would not care about it; but the point is that he might lose the stock capital, and the stockholder might lose. Mr. Btjlkley. Does he not lose all the stock of the bank and all the double liability of the stockholders? Mr. Warburg. Yes; but you know the ambition of being the big- gest man m town. That exists in every city. To be the biggJt bank they will take more chances than their neighbors; and inci- dentally, they have no reason at all to accumulate a surplus fund and why should they not pay out the surplus ? Therefore you would BANKING AND CUERENCT BEPOBM. 83 also have to control accommodation and dividend policy. I think that from the business point of view the necessaiy regulation would lead into a tremendous money trust, as Mr. Hepburn suggested. Mr. KoEBLY. In the panic of 1857 all of the free banks of Indiana went to pieces, whereas the banks of that State which were mutually responsible for each other weathered the storm without the winking of an eye. The mutuality banks of Indiana did not suspend specie payments until 30 days after the Government of the United States had suspended. Mr. WAKBrEG. They did suspend ? Mr. KoEBLY. Yes; but they held on longer than the Government. Mr. Warburg. I am not familiar with that phase. I can not discuss it, because I do not know that particular phase of the devel- opment; but there are two things which then were very different from what they are now. Mr. KoBBLT. The manifestation is more with the note issues. Mr. Warburg. Well, I do not know why they went out of exist- ence. Mr. Korblt. They were taxed to death. The Chairman. There is a 10 per cent tax on the State banks' notes. Mr. Warburg. I mean, from the business point of view. Mr. Korblt. Then, in an excess of iDatriotism, in 1866, the State Legislature of Indiana passed an act forbidding State banks to issue notes; and now the constitution of the State of Indiana provides that the legislature may grant a special charter for banks which are mutually resjionsible for each other, and that is the only instance in which the legislature can grant special charter. Experience there has operated exactly contrary to the way you say it would operate. Mr. Warburg. That was in a little corner, after all. Mr. KoEBLY. When you came to choose the first Comptroller of the Currency, you went down into Indiana, and you got a man that had learned all he knew under that system; and you organized the na- tional banks, so far as the Comptroller of the Currency has any in- fluence over the system, on the same lines. It is a perfect model. Mr. Warburg. I think, if you will just investigate what happened in Oklahoma Mr. Korblt. Yes; but Oklahoma is such a different thing from what we had in Indiana. They collect funds, which Indiana did not do. Indiana had no funds. Mr. BuLKLEY. I think that the Oklahoma law is very different from the suggestions we have in mind here. Mr. Warburg. What is the suggestion you have in mind? Mr. BuLKLET. Simply that banks within a certain local associa- tion having the power of mutual inspection and regulation within proper limits shall be responsible all for the debts of each, whether those debts be in the form of notes or of deposits. Mr. Korblt. Deposits or otherwise. Mr. BuLKLEY. It does not involve the collection of any fund; it does not involve any intervention by the State ; and in both of those respects it is quite different from the Oklahoma law. Mr. Warburg. Mr. Untermyer might base a charge of restraint of trade on that. It is really getting down competition to nothing at all. 84 BANKING AND CUKEENCy KEFOEM. Mr. BuLKLEY. Was not your fear that the competition would be too fierce and cause reckless competition ? Mr. Waebueg. If you regulated it, all right. I do not know how far you would want to go. Mr. BuLKLEY. I think your first objection was that it would cause fiercer competition. Mr. Wakburg. Between the good banks there would be very little competition. Do you see what I mean ? Mr. BuLKLEY. i do not see how it would witlidraw the incentive to competition. Mr. Waebueg. You yould kill the power to compete when you in- terfered Avith the rate of interest and the rate of discount, and all that. You would huxe to have some one in charge of all that — a group of managers in the center who should decide about all these questions. Mr. BuLKLEY. Within reasonable restrictions whicli might be made in advance? Mr. Waebiteg. You may only charge so-and-so mucli interest, and you can charge only one rate to good and bad customers; you must regulate the amount of each discount transaction, and God Imows what. I can not, from a business point of view, see how that is going to M'ork. Mr. KoEBLY. Let me suggest that it would cut off competition only in the matter of note issues. And grant that this is true, note issues such as Mr. Bulkley and I have in mind now would be infinitely better than the kind you have in view. You contend for note issues by one corporation exclusively. So far as note issues outside of btate banks are concerned, trust companies would offer an immense field that would cut off any suggestion of monopoly. Mr. Warburg. I do not know your plan. We have not had time to discuss it to-day. Mr. KoRBLY. It is an application of the Indiana plan to the United btates. Mr. Waebueg. Would you authorize the issue of notes ^ Mr. KoEBLY les; certainly. I would allow them to convert their deposit accounts into notes. Mr. Warburg. Where is your gold reserve for that ' thnt'nrP ^nwT; V\^ ^ame reserves would be used for the hanks' notes tuat are now used for their deposit accounts I do not see that the fact that they can issue notes would result IS a very great expansion of bank credits. It would simp v rasl t Mr. Warburg. But you see that the central reserve or the central Sal c^i'^ Ttmust'h'" °"t^\V^^- ^^^'^^^^^^^ «^ oyer\o ilrZlt actual caMi. It must have it. It is run on a verv different Drincinle hXifsrr tS: ':"e' r' '' vr, "^^^ ^-^ ii'v rf t^r st infhe fesLTof iT'Fnin^'' "^V"" ''"*' "'^^ ""ginates very largely iL e:;enf iTposi'^rr'" ^^"^•"-'"-t^ t« P^tect them^selvef in BANKING AND CURRENCY REFORM. 85 Mr. "Warbukg. Oh, no. Do not forget that with all our talk about war Germany has not had a war for 40 years. We had one in be- tween. The Chairman. I want to say that when my colleague, Mr. Bulk- ley, spoke about guaranteeing deposits as " a thing we have in mind," he meant what he' had in mind just then. The committee has not determined upon that question. Mr. Fowler stated repeat- edly in the committee and in the discussion of the currency question on the floor of the House that in the 4i years of the existence of the national banking system that it ^^'ould have required only thirty- seven thousandths of 1 per cent each year upon the total deposits to pay all the losses of the national banks for that period. That is rather an inconsiderable tax that would be required to guarantee deposits. Mr. Warburg. Does it not show, too, that the danger that you seek to. prevent is very small, and that you are considering an aAvfully wide step to obviate it? Mr. Willis. There the falling away comes in, because it is just as hard on the individual man whose house burns down as it is on any- body else's house. Mr. KoRBLY. But the difficulty does not manifest itself in that way. It manifests itself in the distress of the whole people of the United States through the breaking down of the mechanism of exchange. Mr. Warburg. I think it is very hard to-day that when a bank fails there is no machinery in existence to pay off the depositors, even though you may see that 80 per cent or par might be there. That is a regular thing for those European central banks to do. They step in, in such a'case, and liquidate the debts. The harm is not "so great if a depositor loses a fraction of his money. That is not what hurts him so much. That he was tied up in the meanwhile is what hurts and embarrasses. If you can find any machinery to avoid that I think it should be done, and it can be made one of the functions of a central reserve without interfering with the liberty and independence of all banks and without the disadvantage of pa- ternalizing by a system of guaranteeing deposits. Mr. KoRBLY. In 1857, when all the United States was prostrated by the breaking doAvn of the credit system, Indiana foUoAved out her course of existence without any trouble. The Chairman. AVe are greatly obliged to you for comng here, Mr. Warburg. We have been greatly interested and instructed by what you have had to say. Whereupon, at 6.35 o'clock p. m.. the subcommittee adjourned until to-morrow, Wednesday, January s. 1013, at 10.30 o'clock a. m. X BANKING AND CURRENCY REFORM HEARINGS BEFORE THE SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY HOUSE OF REPRESENTATIVES CHARGED WITH INVESTIGATING PLANS OF BANKING AND CURRENCY REFORM AND REPORTING CONSTRUCTIVE LEGISLATION THEREON WEDNESDAY, JANUARY 8, 1913 STATEMENTSiOr HON. LESLIE M. SHAW and PROF. J. LAURENCE LAUGHLIN PABT 2 •iVASHIXGTON GOVEilNMENT rPJNTING OFFICE 1913 SUBCOMMITTEE OF THE COMMITTEE OX BAXKIXG AND CURRENCY. House of Kepresextatives. sixty-second congress, third session. CARTER GLASS. Virgini.T, Chuiniinn. 3. FRED. C. TALBOTT, Maryland. .lOIIX .1. KINDRED. New York. GEORGE W, TAYLOR, Alabama. EDWARD B. VREELAND, New York. JOHN M. MOORE, Texas. GEORGE D. McCREARY, Pennsylvania. CH.VRLES A. KORBLY, Indiana. .TAMES licKINNEY, Illinois. ROBERT .T. BULKLEY, Ohio. R. W. FONTENOT, Clerk. A. M. McDbemott, Asststunt Clerk. II BAl^IvIXG AND CURllENCY liEFORM. subcojimitl'ee of the Committee on Banking and Cvrerncv, House of Representatives. Wednesday, Jnnuanj 8, JOl-l. _ The subcommittee met, pursuant to adjournment, at 10.30 o'clock a. m. Present: Eepresentatives Glass (chairman), Talbott. Korbly, Bulk- ley. Kindred, and McKinney. STATEMENT OF HON. LESLIE M. SHAW, OF PHILADELPHIA, PA. Mr. Glass. Mr. Secretary, you were here yesterday at the opening, and you know about what we want. Mr. Shaw. I am very glad of the invitation to appear. I suppose everybody is who has ever had any occasion to study this question, and most of us have had more or less. I remarked to one of your committee to-day that I have been privileged to study the question from quite a number of angles, and, v/hile I hope I am not a theorist, I ha\e some pretty well-defined ideas concerning the proposition. T have reduced to Avriting a feAV observations, with which I will begin and will read it into the record. The normal, volume of our currency is ample for our normal needs anrl the annual increase is sufficient to meet the annual increase of our business. Every other medium of exchange responds to immediate demands. There art- more checlcs given, more drafts drawn, more bills of lading issued, more cars used during crop-harvesting and crop-marketing months, when merchants are also filling not only their shelves, but their warehouses, than during the crop- growing months and when merchants are on their vacation. Our volume of money, however, is fixed. There are a few fundamental principles that must be borne in mind. First. We have sufficient money and sufficient currency to meet the demands of business under ordinary conditions. Second. The annual increase in circulating medium is ample. About $125,000,000 a year, as I remember it. Third. Its sole defect is its failure to respond to the extraordinary demands of commerce. I am speaking now of the currency, not of the system. The sole defect in the currency is that it does not respond to the extraordinary demands of commerce. P'ourth. The relief, which must consist of some form of supplemental cur- rency, should spring into existence when needed, where needed, in any volume needed, remain in use as long as needed, and then automatically retire with equal promptness. If you secure that, you will have cured the evil as it seems to me. Lastly, and equally important, this supplemental Currency must be of a char- acter identical with some form of currency in daily use, lest its very presence invite suspicion and disaster. 87 88 BANKING AND CUEEENOY EEFOEM. When people suggest legalized clearing-house certificates, or some other form of emergency currencj^ all you have to do is to think. Suppose a man goes to the bank and thev give him some ot this new kind of currency, and he says, " What is this?" They say, _" That is M-hat Congress authorizes us to use when we are up against it. Y ou know what the result will be. He wall have his book balanced. :Mr. Glass. You mean there ought to be a basis for it. ]tlr. Shaw. There must the same kind of currency given to him as supplemental, as he has every day; and it must be good beyond the peradventure of a doubt. . There are many ways by which this can be accomplished, but its accomplish- ment will, of course, relieve the country from dependence upon Wall Street, and it will relieve cities of 100,000 or less from dependence upon cities of a million or more. It will be financial emancipation, and for that reason, if for no other, the big banks of the country will oppose. That is not a criticism. It is the most natural thing in the world for everybody to think he is important. One thinks he is important in his district as the district boss. One thinks he is important to his State as the State boss. I know a man who thinks he is important to the Xation as the Nation's boss, and would not only like to dominate both parties but to build a new one. Mr. KoRBLT. Not naming any names. [Laughter.] ilr. SHAw^ No. But that is inherent in human nature ; and to make the big banks of Chicago and New York think that this country could run without dependence upon them is impossible. I have said before, and I am willing to repeat it, that I do not believe there is a man in the United States of greater patriotism than J. Pierpont Morgan, but his theory is like that of Alexander the Great. He thinks the success of the country is dependent upon his owning the banks and the rail- roads and the insurance companies. He desires this not so much for his own good as for the good of the country. Napoleon was probably the most patriotic man of his time. He did all for France, and did not know he was ambitious at all. There are men in politics and in business of that same type now. I will not mention any names. What most of the big banks want is the Aldrich plan, which fastens Wall Street control upon the' country for 50 years, the life of the proposed charter. My objections to the National Reserve Association are many. First, I do not believe it will accomplsh what Its friends claim for it. That it will result in dangerous inflation is probable, but I do not believe it will produce an annunl and responsive reduction in the volume of currency. It is conceded that we should have in ordinary times an annual expansion and contraction of $150,- 000.000, equal to 5 per cent of our present currency of all kinds. Admittedly, there is no contraction whatever in any of our present forms of currency. I am going to stop long enough to say there is a little. That is to say, when money is very scarce and interst very high, the national- bank currency does contract a little, and when money is very plentiful and very cheap it does expand a little. Your banker will be able to show you why it is profitable to the bank, when money is very ^-carce, to sell bonds and to increase reserve, and w-hen money is very plen- tiful and very cheap, how it is profitable for him to buy bonds and issue a little more. So there s a little bit of elasticity, but it works just the wrong way. Mr. Glass. The price of the bonds being the consideration ? ^Ir. ShaW'. Not necessarily. When the money is high a bank had better sell its bonds. I will not stop to figure that out. ioiy banker will tell you that is true. BANKING AND CUEEBNCY EEFOBM. 89 Mr. Glass. To replenish his reserve ? Mr. Shaw. Yes. Mr. KoRBLY. You think it contracts when it should exi^and and expands when it should contract ? i . ^ Mr. Shaw. Yes, but it is imperceptible. Couewling tbnt tlic notes of the National Reserve Ass.,eiati(m will he -i* respousn-e m ordinnry years as the Bank of Englancl notes are once In 10 rears and we will require an ordiiuirv issue of $1.. -,(10,000,000 to afford the annual contraction and exjiansion of .$150,000,000 conceded to be necessary each vea • say nothing of ,■, possible .$300,000,000 expansion on extraordinaW occai^ions like I ! to 1. If anybody eise has suggested anything along this line, I would like to see the literature. ilr. KoRBLY. You said a while ago one hundred and fifty millions and now you say a billion fire hundred million. Mr. Shaw. Both are right. The Bank of England notes once in 10 years have contracted 10 per cent. We will only have one kind of elastic currency. Admittedly the proposed issue of the Xationu'l Reserve Association is intended to be elastic and the only currency that will expand and contract, is it not? Nothing else wil lexpanll and contract. The Bank of England notes annually contract in ordinary years only 8 per cent, on an average; once in 10 5'ears it ccn- tracts 10 per cent. Suppose the volume of the Xational Reserve Association notes should be as responsive as the Bank of England note and contract the same — 10 per cent a year — you would need one I'ilion five hundred million in order to get one hundred and fifty million contraction through that 10 per cent contraction. Has tha't been discussed before you previously? They all go upon the theory that these notes are going to contract automatically. jNlr. Hepburn said yesterday, " Why, of course, when there is no demand for it, it will pile up." When there is no demand for money now, does it pile up? Not on your life. The banks simply lower the rate and Ivcep it in use all the time. There is more reserve in New York to-day than there was in the summer. There was more than three times the reserve last Saturday in New York than there was on the 31&t of August. All during the summer of 1902 the banks were below their reserve, and I warned them again and again to replenish their reserves. They were loaning money at 1^ per cent, and still below their reserve. Of course, I knew what would take place in the fall. I planned for it. I am just going to tell you what I did. Nobody ever gave me any credit for it, but I thought it was all right, and you can put it in the record as approved. There were lots of banks that had Govern- ment deposits secured by Government bonds that did not have their maximum issue of currency. Without consulting them at all, I had the currency printed for them and had it ready. Then, when the trouble came in the fall — when the banks of New York were figuring on going to clearing certificates the next morning, I broke the record and accepted security other than Government bonds, and released these Government bonds, and told the banks, "The currency is all printed ; put it out." I was ready to put out $50,000,000 expansion in 24 hours. Nobody gave me credit for it. I also told the banks to never mind their reserve. The newspapers of New York roasted me to a brown turn for this. They thought the reserve was to be kept, because the statute said to keep it. The 90 BANKING AND CUBEENCY BEFOEM. Statute does not sav that a reserve can be used. The statute says the banks shall maintain their reserve so and so. There is no authoriza- tion for deviation from it. It also says when they fail to keep this reserve, the comptroller "shall" notify them to make it good He " shall " And if they did not make it good, he may," with the con- sent of the Secretary of the Treasury, wind them up. I simply said "The Secretary of the Treasury will not consent. Oro ahead, btand by your guns. If you issue clearing-house certificates I will close vou up" We did not have any clearing-house certificates that tune. Mr BuLKLEY. I would like' to ask you one question right there. You pointed out that money is kept in circulation now, even though it is not needed, because of the desire to get a profit by getting in- terest on the money. Would that situation be affected any under the proposed Aldrich plan by the fact that the National Eeserve Asso- ciation can not, in any case, make a large profit, and therefore to some extent the incentive to keep money m use would be reduced i Mr. Shaw. I do not think so at all. The notes of the Bank of France they contract 10 per cent on an average. In Germany they get 30 per cent contraction. I_ am going to recommend to you the German plan before we are through. In order to get contraction money must come back for redemption, must it not? Is there any doubt about that? When it is issued we have expansion. In order to contract it, it has to be returned. How are you going to get it back from the Pacific coast if some of it should happen to get that far from home ? Somebody will have to express it back, will he not? ]SIr. KoEBLY. Would they not have to express the check that I drew on a Washington bank and sent to San Francisco, either send it by express or by mail? ]\ir. Shaw. By mail. But you just go over here to the Bureau of Eedemption, and you will see that the money they send back for redemption from the Pacific coast is worn to tatters, while in New York it is frequently returned for redemption before it is even folded. Mr. BuLKLEY. In the case of the national reserve issues, would not the branches be competent to redeem notes? Mr. Shaw. I grant you that; but what will be the object of us redeeming it, or contracting the currency? What will bring it back? There will be a demand for it at some rate. The assosciations will take commercial paper at 3 per cent, if it is necessary — 2 per cent, if it is necessary. Then, Mr. Bank in New York rediscounts its com- mercial paper and loans the money on stock-exchange collateral at two and a half. There is no particular occasion for contracting it, is there ? Do not get the impression that all this thing is going to do itself. It does it nowhere else; it will not here. I do not believe you will ever get a currency to contract without a tax upon it to compel its retirement when not actually needed. ;\Ir. BuLKLEY. The currency is to be put into circulation in the first place by the banks rediscounting their commercial paper with the reserve association. When that paper matures and has to be paid they will have to repay the reserve association in some way, unless they discount some more. ]Mr. Shaw. Yes ; and there will always be some more to discount at some rate. BANKING AND CX7EKENOY BBPOEM. 91 Mr. BT31.KLEY. In other words, you think the reserve association will keep this rate low enough to make it attractive to discount all the time? Mr. Shaw. Of course. And catch this illustration : There is to be a great association put into business. It has to make 4 per cent. It will want to do business 365 days in the year, barring Sundays and holidays. It has to keep out quite a volume of currency, has it not? It is not going to loan any money except the currency it issues. It was suggested yesterday that a bank note is a certified check. Call it a certificate of deposit, and you will come nearer to the truth. A certificate of deposit is payable to " John Jones or order " on a given date. A bank note is payable to " bearer on demand." In all essen- tial features it is a certificate of deposit of the bank that issues, payable to bearer on demand. Mr. KoEBLT. There is no difference in substance or nature, then, between a certificate of deposit and a bank note ? Mr. Shaw. No ; a certificate of deposit payable to bearer on de- mand is a bank note. Mr. KoEBLT. Is it not a bank note under another name ? Mr. Shaw. During the panic of 1907 certificates of deposit were used in the place of clearing house certificates in several places, and it was not a bad plan. Mr. KoRBLT. Did that violate the tax statute ? Mr. Shaw. We will not bother with that phase of it, if you will pardon me. Now, I want to show, in this connection, what effect the National Eeserve Association would have on local banks, to my mind. The bankers' association, when it passes resolutions, is about like a polit- ical convention that passes a platform at midnight, and it is fre- quently done about the same hour of the day, when most of the mem- bers are gone. Mr. Glass. And the rest of them are not listening or caring. Mr. Shaw. And because it is recommended by the big concerns. It is no criticism to say that the average lawyer — because I practiced law 20 years — does not think, the average merchant does not think, except of his own particular affairs. He does not stop to consider; neither do bankers think. Catch this: Suppose in Richmond the banks take their paper over and have it rediscounted — their good paper. If they do not get it rediscounted at the reserve association and be thus able to give their borrowers a pretty low rate of dis- count, their competitor will do it, will he not? I am going to say it will be to the' advantage, temporarily, at least, of the men of high credit. I do not see any reason why they should not support the measure. And there areadvantages in it. There are advantages and disadvantages in everything. No plan has ever been proposed, and no plan will, that is not Ml of trouble. What is that Richmond bank going to do with its money ? A friend of mine in New York was told to get control of 100 coun- try banks. He was told that the country bank needs locally about 60" per cent of the deposits to take care of its business. There would then be 40 per cent extra to use elsewhere. So they said, " You get control of the 100 country banks, and we will lend this 40 per cent of their deposits here, and we will divide the profits." The banks of Iowa, when the panic broke out in 1907, owned $50,000,000 of com- 92 BANKING AND CURRENCY REFORM. mercial paper purchased in the East.. What is this local bank in Eichmond going to do with its excess of money when the reserve association takes and carries the good commercial paper? I think the Aldrich plan is the most adroitly drawn plan I have ever seen. Of course, it is purely unselfish and altruistic. It provides that the central bank can not lend on stock exchange collateral. It can not buy bonds; but when it has done the business that the Eichmond banks ordinarily do, the Eichmond banks can buy bonds. Can you think of some people who can supply them? The Eichmond bank can lend money in New York on stock exchange collateral. Is that fairly slick? Mr. McKiNNEY. That is, Mr. Secretary, you argue that the Eich- mond bank would be compelled to seek elsewhere the business it for- merly did in another way ? Mr. Shaw. Of course. It must either do that, or carry commercial paper in its own vault at a very low rate. Mr. Glass. And they would not lend to the merchant at 4 per cent ; they would use it in some other way ? Mr. Shaw. They would have to lend the merchant at 4 per cent, or at a rate just a fraction above the discount rate of the National Eeserve Association. Mr. Glass. But I understood you to say that the Eichmond banks could engage in stock speculation or loan money ? ■ Mr. Shaw. Yes ; of course they can. Mr. Glass. And they would do that rather than loan at a low rate of interest to the merchant? Mr. Shaw. Eather than carry the paper at this low rate it would loan it to the merchant at a low rate and rediscount it to the National Eeserve Association. It would have to supply it to the merchant at a low rate or the other bank would get the business. There is much of merit in the proposition along these lines. I think I will be able to show you, however, how we can cover that in another way before we get through with it. Mr. Willis. Mr. Secretary, will you not speak to the question whether a change m the reserve system would have eliminated that danger ]\lr. Shaw. I do not think so. I do not care to discuss the reserve system. My own judgment is that that is overemphasized. Mr. Willis. Do you mean its relation to the stock exchange « Mr Shaw. I think the reserve system is about what it necessarily must be. I have a little bank in Philadelphia. I always feel uneasy when I have less than 10 per cent more reserve than the law requires me to keep. I have been interested in a private bank. We alwavs carried more reserve than the law required national banks to carry. That IS prudent, and I think any defect in our reserve system is over- estimated. But perhaps not. Now, to come back to this large issue : ciaoie extent. I can thmk of nothing that will cause the retirement nf thp sumnief ™eS timT?"°''' ""' '^ '^'' ^^ ''''''''' ^^^^^ ^ ^ '^^ ^^^ BANKING AND CUKEENCY REFORM. 93 Mr. Shaw. During the summer time they atouIcI not have a very large reserve. In 1908, right after the panic, the banlis had fifty millions, as I remember, of surplus reserve. They were very prudent for a year or so, but they gradually got careless, until finally they exhaust their surplus even during the summer. The farmer" need-. more grain sacks when he is harvesting than when the crop is grow- ing, but if there was no appropriate way by which those grain'backb can be piled away he will find them full of chaff in the fall, will be not? That is the way. we do with this money. When it is needed in the fall, we find it occupied with speculation. It must be borne in mind that this is a peculiar country. We ha^e 4S sov- ereign States, each with a bauljing system, and then a Union of States with a banking system. Only the one systexu is controlled by Congress. The notes of this National Reserve Association must come back and be canceled in order tn contract the currency. If any of them should get as far away from home as the Pacific coast or into the Gulf States, who will pay the express to get the notes back for cancellation? They will find their way into the vaults of savings banks and state banks and be available for reserve as well as any other kind of money. It was suggested to me yesterday that a tax could be imposed upon State banks for keeping national-bank currency in reserve. I do not believe it. If you will pardon me, I do not believe you can tax any concern or individual for holding in a vault the money that Congress authorizes. Mr. KoEBLY. That is perhaps true, but could it not be jDreveiited from holding it as a part of its cash reserve '< Mr. Shaw. You have nothing to do with State bank's reserve.r. It is out of your jurisdiction. Mr. KoRBLY. We have had something to do witli State bank note issues. Mr. Shaw. But you can not tax for holding money. If you can tax one bank for holding it as a reserve, you can tax me for holding- over a million dollars of it. There are some things you can not do. I do not care to discuss that question. Congress can say that every national bank shall return these notes for i;^- demption, but it can not prevent the national banks from relieving theuiselvt^s of this duty by turning them over to State banks. Thus far there is no pro- vision to compel redemption and retirement when not needed. The same as Xew York could if they would, and I urged it upon two or three bankers. If, during the summer time, when the reserve is abundant, they would go to the trust companies and the savings banks and say " Trade us all your national-bank notes and pack away these gold certificates and contract the reserve.'" Then, when trouble came in the fall, go and say, " AVe will trade you the bank notes now for your reserve money." They could work fifty mdlion elasticity in that way. Do you see how they could do it ? I did all I could in a small instiiution in New York just once, just to see how it worked. No. If we had just one Government, we could work that as they do in Canada. I just want to suggest to you how nicely it works in Canada. It was suggested here yesterday that Canada has thirty-odd banks, each with branches. A bank note is a certifi- cate of deposit as we have seen, without interest. All the banks doing business are of this order. So when one bank gets notes of another it immediately sends them back and issue its own. A man 94 BANKING AND CUEEENCY EEFOKM. lolcl me of a man coming up to his iovcn to buy a railroad. He had $100,000, and asked them how much they would charge him to keep the monfey over night. They told him they would not charge hmi anything. They put the money in the valuts, and the next day they gave him their own notes and got the equivalent of a deposit of $100,000 for 8 or 10 days without interest. Each one works against the other. Each one sends back the other's notes. You could not work it here, because of our 48 States. Auotlier objection to the National Keserve Association is the increased power it will give to the groups of men who are now so prominent in fluaiicial affairs. It is true the author of the plan claims to have devised a scheme li,v which the financial control of the country can be wrested from Wall Street. He and all those associated with him concede that this ccuitrol now exists. The fact of control being admitted I am a little surprised that all the banks owned or controlled by the Standard Oil people, and all the banks owned or controlled by the United States Steel people, and the entire group and all groups whom the author of the hill admits now dominate our financial affairs, should unite in support of the measure, if as its author claims, it is going to take that control away. I have seen no evidence that these people have become weary. There is some indication that the people are becoming weary. The plan if worked out will form a compulsory association of all national banks and a permissible association of all State banks and trust companies. There are quite a number of as.sociations in the United States, and if a political association, a scientific association, an industrial association, or a financial asso€-iatiou can be cited that is not dominated by a rehitively small coterie of men |i(jssessing aptitude for leadership, it will tend to remove the presumption that this association will be controlled by a small coterie of men of extraordi- nary aptitude for leadership in financial matters. Will some one name a successful association that is not dominated by a few men of brains? They say this thing is not going to be dominated that way. Then it will be the biggest failure in the world. _ The hope of it, if it is to exist, lies in the fact that it will be so dominated. The United States Steel Corporation was organized to effect a complete and worl;able assuciation between a large number or corporations engaged in the manufacture of st(^el and steel products. The International Harvester Co was iiliumed for a like purpose. The packers did not organize just that way, but It IS alleged that they associated nevertheless and controlled the associa- tion, ily contention is that when all the national banks in the United States are required by law, and all other banks permitted by express statute to associate, some few men will control the association the same as some few men ./ontrol every other association known to man. There never was and never will be an exception. The logic by which its friends claim that the people and not the interests will .control the institution has its alleged root in the fact that the stock of he central reserve association is to be owned by the banks in proportion to their capital, and can be voted only by an officer of the bank in person. I think that is a beautiful provision for insuring contral by a tew. If the banks could vote by proxy, and there should be widespread trouble m the country, somebodv might get proxies enough to control. But an officer of the bank must come and vote hU T ? 'f* o''''^ *''^^^ is ''^^y gi'^'^t danger of the big fro, t^fv^ '?*7^- ^"PP°'f " ^^^^1^ at Richmond gets a lettef here in -V^rYn? °°7;^P«"f^ent, who says, " Some of your friends meetino n7.t 1 ' "]T^'\}'\'i^P ^^^^ ^^ ^'^''^ y^" ^"end the annual meeting of stockholders." ^Vhat would he do? He will so across he stree and by a hat three sizes larger than he ordinarfly wears and go down. But he would not go down as an insurgent Sup- •BANKING AND CURKENCY BEPORM. 95 pose there were a great bunch of insurgents attended. How many candidates would there be? It does not cost much to bring out a candidate. Out in my State the Republican Party always used to pay the campaign expenses of the Populist Party. You could always get a man to run for governor on the Populist ticket, if we paid his expenses. The Democrats returned the compliment by paying the expenses of the candidate of the Prohibition Party. They could bring out any number of candidates to divide the insurgent votes if there should be any danger. But the provision that they shall not ^ote by proxy avoids any danger of that kind. It was a masterful stroke and insures centralized control. Tlie losic by which I cliiini xhv iiislituliou will be iiwler the absolute (jontrol n( ;i few uieu h;is its root in the same facts. All one has to do is to think. There will be an annual meeting of stockholders, iind it will be held, piesuni- iibly. in Washington. As I reason, the president of every Standard Oil bank, every United States Steel bank, and the president of every afhliated bank rhronghont the United States will attend that meeting of stockholders, I do not think the small banks will pay the expenses of an officer to attend the meeting, where he would attract no more attentiou than a dandelion iu a garden of roses. If he does attend and his identity happens to be discovered, there will be some kind things said to him, and they will be said in such a kindly manner that he will vote as all (lie rest vote. If he chooses to be an insurgent, he will have an oi)i)ortunity to cast a ballot for a candidate of his own creation, but he will neilher elect hfni or make friends for himself or his institution, and he will never try it more than once. I am going to stop here to say that that association can put any bank out of business in 12 months, if it pleases. I was talking with a banker, the biggest banker in a city of 100,000 people, a couple of weeks ago, and he said to me very frankly : " The banks of New York can put me out of business in a year's time if they want to." Mr. KiNDREB. Is it not true that they could put most banks that are not powerful out of business in less time ? Mr. Shaav. Yes. They can put them out in this way absolutely. Xo bank will have the timerity to make loans to objectionable I'vv- roAvers. They can make the credit and ruin the credit of anybody. Richmond is quite a city for the manufacture of cigarettes, I under- stand. I will assume that the Tobacco Trust has a few cigarette factories down there. The national reserve association is in opera- tion, and some bank down there in Richmond sees lit to loan to an independent cigarette company. Do you think that it Avould get \ery much paper discounted at the national reserve association ? Of course, by law they can not show partiality, but by law they can exer- cise discretion. They look over the paper of this insurgent bank, and they take a little of it. Jones's paper they will not discotmt. Then that bank can not give Jones this Ioav rate. But the competing bank can. ^V]w Avould have the timerity to loan to an independent packer, or to an independent manufacturer of automobiles, or any- thing else, that was tabooed? They can fix the price of cotton and corn. I do not say they will. I remember that Josh Billings adopted some resolutions for the control of his conduct during 1870, and 'one of these resolutions read : lie-soIvcd, That if a ujan tells me a nude won't kick. I will bclic\e liim. but I will not go near tlie mule. Suppose, if you please, the national reserve association is willing to discount paper against cotton in warehouse at 8 cents a pound. 96 BANKING AND CXJBEENCY EEFOEM. and then at 9, and then 10, and then 11, and then 12- ?« y^^^i 3" pose the price of cotton will ^11°^, ^hat_ they are wilmg to loan Suppose tW are willing to loan only 7, then 6i. WiU the price ot cotton follow? If I were those people I would nothaye this power committed to me for anything in the world. It ^^ /^ngerous^ I want to ask you, with such an institution, if the price of cotton should o-o down in your country, would there be a possibility of an impres- sion 2-etting' abroad that this institution was responsible^ it is the same with the price of corn. There are two men I have m nimd, each named John. One John lives in one city and the other John lives in another city. . , , i One man's credit is abundant. His notes circulate everywhere throuo-h note brokers. The paper of the other man does not circulate. The National Keserve Association can reverse that, can it not ? When this other John's paper comes in they snap it up, and when this first man's paper comes in they say: "I think that is enough of his. Thev can make and break credit. Wliat was charged as being done by the Steel Corporation with the Tennessee Coal & Iron Co. can be done even' day in the calendar year. Paper can be rediscounted and all go smooth until the time is ripe, and then all loans called. I want to say that you can not make regional associations without the suggestion'of a tacit association of these, and thus a centralized con- trol of all. Mr. Kindred. Pardon me ; is the suggestion as dangerous with ten as it would be with one? Mv. Shaw. Yes ; under the Aldrich plan they are to have the local associations and the district associations, and when you have a local association the centered control is assured. Suppose we have a local association in Indianapolis; can you not name the three men who would dominate that association?' And then can you not name the one man who would dominate the three? The same is true in Rich- mond and everywhere else. Then, the fellow who dominates Indian- apolis and the fellow who dominates Richmond will get acquainted, the same as the great political boss of Pennsylvania and the great political boss of New York used to get acquainted. With anything of this character we will have the possibility of the greatest political organization on the face of the earth. When you have associated in- directly the banks, hooked them together, they can have the greatest political influence of anything in this country except the newspapers. Much stress is laid on the fact that Ihe c!i rectors are to be geographically located. This argnmeut has weight with all those iiinoceut people who assume that the friends of strong financial people are not also geographically located. The country is to be divided into arbitrary geographic sections, and each section is to have a branch of the piirent reserve association and each branch is to have local management. This, it is claimed, will effectually safeguard against the domination of the East. All one has to do is to think again. Can one imagine an association, even on the Pacific coast, that will not be dominated by the strongest local men at the head of the strongest financial institutions of the Pacific coast'.' And can anyone imagine that group of financially strong and able and ambitious men refusing to fraternize, affiliate, and cooperate with a corresponding group in the EastV The National Reserve Association— if yon have one— will be controlled by the brains which to-day dominate the insti- tutions which are to be associated, and that is the way it ought to be. If we are to have such an institution. I shall regret exceedingly if the Tinited Stales Steel people and the Standard Oil people fail to control It. I am not worrying lest they fail. The plan makes their control absolute. And it would be a calamity if men of less caliber should get control. TJnless the most experienced BANKING AND CUEBENCY EBFOEM. 97 and strongest financial men of the country control this institution, more po- tential than anything ever before conceived by man. it will resnlt in widesnread ruin. I am not certain that even these experienced men who to-day dominate our industrial, commercial, and financial affairs will be able to mana'sfe it safelv even for themselves. We must bear in mind that some of the strongest of this group are getting old. Perhaps others will arise equally i>otentlal but their heads do not now appear above the horizon. If the National Eeserve V'soci- ation gets into weak hands, or ambitions hands, it will not only ruin those in control, but everyone else. Do not think you can run such an institution by the initiative and referendum or direct primary, or any of these methods. You will have to put it in the hands of men of brains. It is too bio' to be dominated by numbers. '^ I have been criticized because I have criticized this plan. I have been criticized because, they say, I have nothing to offer in its place. Then, when anybody has anything to offer in its place, they say he objects to it because he has a plan of his own. Aldrich said at New Orleans that anybody who had a plan of his own is a faker. I have no plan of my own, but I have seen a few thousand plans, and out of them, by the process of elimination, I have pretty well in mind what I think is the least objectionable. I do not say an unobjection- able plan, but the least objectionable, and I think it is workable. It was said here yesterday that the Treasury is a central bank. That is true. The national banks are its branches. Now, see if we can not work out a simple scheme that does not re\'olutionize our system. I want you to keep this in mind : If you install new engines in 'this great ship of state you will have to put her in dry dock or you will go on the rocks. Do not forget. You are dealing with a very dangerous subject. What I suggest does not invohe retiring- all the national-bank circulation to put something else in its place, or refunding the debt. I want to make one other observation concerning this National Eeserve Association. Its friends say it is not a central bank. If it is not, it will work like one. If, as they say, it is not a central bank, how do you know how it is going to work? If it is not a central bank, then it is something whose like does not exist in the heavens above or the earth beneath or the waters under the earth. It is something ne^-er yet tried, and therefore no one knows how it will work. It is patterned after nothing. What I am going to suggest to you is not novel. It has been criti- cized again and again because it is not novel. It is the German plan. I admit that. That is its merit. It has been tried. Start with the United States Treasury as the central bank. Let the national banks be considered its branches. The central bank in most countries is the bank of issue. It issues all the elastic currency. Suppose you give to these branches — the national banks — each a fraction of this function. You will then have in the aggregate the entire function, will you not? Now, if you can work out a scheme by which we will give to each national bank — though that is not essential. _ You can say each national bank wants a million capital, if you Avish. These are details. Give to these branches the functions, and only_ the func- tions, that they propose to give the National Eeserve Association. If you give to the national banks the functions of the Bank of England and the Imperial Bank of Germany you will accomplish the purpose, will you not? It seems that way. The only way I can prove a (.J^ BANKING AND CUEEENCY EEFOEM. case is to analyze it. Think it out and apply it to conditions that have existed. Suppose, if you please, you give to the banks m cities of a certain size the privilege of issuing covered currency equal to o;, per cent of their capital; in larger cities, .50 per cent : m la gei rities 75 per cent; and in the two large cities, twice their capital. I tSk New York should have the right to issue uncovered circula- tion equal to twice its capital— its aggregate capital. Mv McKiNNEY. Do you mean including the surplus^ Mr. Shaw. No; just the capital. Those are details. What I want you to keep in mind is this. New York is the center, and you can not move itf Be very careful that you do not strike at it. It is not vicious. It is a part of the great body politic, and it is essen- tial. You can not kill New York without killing the rest of the ^*^Mr^ Kindred. Do you mean it is not on the whole vicious? :Mr Siivw Not on the whole vicious, no. A very little town is vicious in part. Motives are usually good. Let us concede some things. Ambition is present everywhere. -, ■, ^■ I want to go a little further into detail. The proposed elastic cur- rencv, as I said to you, must be like the other currency. You must change the form of the national bank circulation and say that this note is guaranteed by the Government. You will wince at this a little, but the Government does now guarantee the national bank note, does it not? :\Ir. Talbott. Yes ; but it has a bond. Mr. Shaw. I grant you that, but it does guarantee that note, ho, if vou put upon it "Guaranteed," it will not do any particular harm. It will mean the same. That makes the notes acceptable. Now, then, you give the banks permission to issue, without a de- posit of collateral, and you will secure elasticity. There are a half a dozen ways to restrict and safeguard. I would suggest this re- striction. Whenever a majority of the bank capital of a city of 200,000 ask it, or when the majority of the capital of an aggregate of cities of 200,000 ask it, the Secretarj^ of the Treasury shall permit them to issue a certain per cent of their capital in circulation with- out a deposit of collateral. Then immediately you say "That is dangerous. The Government is taking a risk." That is in your mind, is it not ? Mr. Talbott. Yes ; that is in my mind. Mr. Shaw, Very strongly? Mr. Talbott. Very strongly indeed. Mr. Shaw. That contains all the good features of guaranteed de- posits. I will say that the local bank does not issue this because it IS in trouble. It will eliminate all danger, providing that the banks of a community shall ask it before the Secretary of tne Treasury can grant permission. That will indicate that it is a condition of the country and not the condition of a bank. Next, exclude every na- tional bank which has been criticized by the comptroller within a year. You would find quite a number of banks to be excluded. That will keep it prett;f clean, I want you to think this through. I want you to spend a little time on this and not dismiss it, because you are going to come to it by the process of elimination. What you are afraid of now is the Government guaranty. The guaranty, BANKING AND CUKEEXCV REFORM. 99 as was said here yesterday, is not one-tenth of 1 per cent, and you are going to charge the bank while the supplementary currencj^ is out at the rate of o or 6 per cent. The Government is going to under- write it and charge a premium at the rate of 5 per cent per annum, which will 20 times pay any possible loss. There is not a guar- anty company in the world that would not be glad to guarantee it, not for 5 per cent per annum, but at a quarter of 1 per cent. Mr. BuLKLEY. Is it your proposition that the Secretary shall allow these issues as a matter of right when the application is made or in his discretion ? Mr. Shaw. In his discretion. I am only throwing this out as a suggestion. Some will say they do not want to put that much dis- cretion in the Secretary of the Treasury. But that is a detail. The essential feature is that these banks can issue it, supplemental cur- rency identical with that which it issues secured by a deposit of bonds. That will make it absolutely good. It will spring into existence when needed, it will spring into existence where needed, it will spring into existence in any volume needed. Xow. how will you get rid of it ? Mr. McKixxEY. How are you going to compel these banks to issue it? You supposed a while ago a case where the bank itself was not in trouble. Mr. Shaw. It is not in trouble. Mr. MeKiNXEY. And it did no need it. Mr. Shaw. I do not mean to say it is not in trouble. I mean to say it is not insolvent. New York would have issued this in 1907 if they could in a volume of $200,000,000, and paid the Government 6 per cent on it before they would have issued clearing house certifi- cates. They would gladly have paid the Government a tax at the rate of 6 per cent and loaned it to their customers at 5, just fo-r a little while. It would have been needed only 60 days; 30 days probably would have carried them over, because the people would never have heard about it at all. It would have just gone out over the counter identically like existing national bank notes. Mr. Kindred. In respect to the New York banks, did I understand you to say that under your plan they might be allowed to issue un- secured notes to the amount of double their capital ? Mr. Shaw. Yes. Mr. Kindred. In other cases other banks might is'^ue unsecured notes within 25 per cent ? Mr. Shaw. Yes. Mr. Kin-deed. Why such a discrepancy? Mt. Shaw. I will show vou why ; I will give you an illustration. I want to show vou how tliis thing will work, and I would like your thought of it. It may not strike you favorably at first but I say you are going to come to it. My town is Denison, Iowa. "\Ye have three banks, a State bank, a national bank, and a private bank. I mention them in the order of their importance. Mine is the private bank. When that panic of 1907 broke out those banks were in splendid condition. They all had money in New York, m Chicago; and somewhere else, but they might have had thte money at the bottom of three seas just as well because they could not get a dollar of it. What did thev do? They were there without hope 100 BANKING AND CUEBENCY BEFORM. of reinforcement, and surrounded by Indians— depositors. They held a council of war. " How much ammunition have you « »o many thousand."' ''How much have you'"^ "So much. About equal. Each had confidence in the others. What did they do < Ther said : '■ We Avill stand together and pay as long as any one has a dollar. Then they started out to intensify the panic by hording every dollar they could get. They each increased its reserve quite a little durine- the troubled Suppose, if you please, in that town the national bank of $100,000 capital had said to the other banks : I have the right, with the consent of the Secretary of the Treasury, to issue $25,000 of additional circulation without a deposit of bonds or anything else. It is in my vatdt now already to issue. I have not .been criticized by the comptroller within a year. I have just asked permission." It' would have prevented insomnia in that town, and 25 per cent would ha\'e been all that would have been needed in that town. Five per cent would have been enough, just a little to equal what they had on deposit in the other cities. It is absolutely free of danger. " Notice this, that during those times there was not a poor loan made in Xew York. New York may make a poor loan when money is easy, but when money is as scarce as it was then, nobody makes poor loans. ^Ir. Talbott. Can you not give us a plan whereby we can increase the currency and still have it secured? ^Ir. Shaw. No ; that is impossible. No bond-secured currency can be elastic. I lay that down as elementary, that you can not have a secured currency elastic. It is absolutely impossible, because in ordei' to furnish the security you have to contract as much as you expand, and then it is unworkable and it is slow. You take the A^reeland bill, and I think that that bill, while it is awkward, if everything was ready, it would stop a repetition of the panic of 1907. Mr. KoRBLY. ]Mr. Secretary, in using the word " unsecured " are you not giving it a very doubtful meaning? You would not want the impression to ^o out to an untrained mind that the currency you are advocating is unsecured? ]Mr. Shaw. It is secured just the same as certificates of deposit are ^ecured. Nobody complains of them. ]Mr. KoEBLY. it is arajDle security, in fact ? Mr. Shaw. It is ample security, in fact; abundantly safe. Mr. Talbott. It is making the Government liable without security. Mr. Shaw. The Government does not take any risk at all. Mr. - Bank, when it issues this currency never parts with a dollar without a g'. Absolutely; and it ought to be as possible for the borrower to obtain one as the other, at absolutely the same cost, and interehangeabh'. Mr". KoKBLY. "Would not the manufacturer have had the same trouble, even though he had a credit at the bank, to get currency for his pay roll? Mr. Laughlix. If the bank could not furnish the notes. I am assuming, in this brief discussion of Government issues, that if we had a system of elastic note issues it would have allowed a bank to have furnished the notes under those emergencies. I am just saying it would be impossible for a government to occupy the position of discounting, because it could not create the account on which the borrower would have the right to ask for the note. These note issues arise from a banking operation, in manj' cases, where the notes are not in their function in any way distinguished from the check drawn on the deposit. That is my main contention, therefore, that a Gov- ernment issue never could be elastic, because the Government can not be in the banldng business, and that a large measure of our note issue must follow, increasing with the commercial paper, based upon busi- ness transactions, and diminishing with our commercial paper. That puts it outside of the purview of the Government. Mr. McKiNXEY. Let me aslv you a question. You speak of the supreme importance to a business man, in a time of stringency, of being able to secure a loan at a bank, and that a loan is made to him, and that a deposit account is opened with him, and that he would have no difficulty whatever in exchanging his account at the bank by giving checks. Mr. Latjohlin. That is for many operations. Mr. McKiNXEY. But in every one of such operations you admit that the bank, in taking the additional loans, would be decreasing its percentage of reserves. Where is anything you have suggested that would help the bank to go on? How would the bank be able to go on extending such operations ? , • . i Mr. Lacghlin. That is a question of the banks owning the re- serves As I said, a reserve can come in in connection with the reorganization of credit. Suppose you have a number of your divi- sional banks that have been spoken of here. If a bank finds itselt down to the point where its legal reserve, if you have that system— I do not believe in it— but if you had a 25 per cent law, and we estopped them from lending to a bank, that bank should have a secondary reserve in the form of short-time commercial paper that it could take to your district association and supply itself with the funds with which it could meet the necessary demands ot its bor- rowers As I said, the reserve function is tied up with the whole question of rediscounting, and I did not dwell on that at that time. Does that meet vour question? re j +^ Mr. McKiNNEY. Yes, sir. But, then, have you amplified as to what this district association would be that would supply this need "^Mr^ L^Sghlin. I would be very glad to. I do not wish to suggest or impose any of my opinions on the committee. Mr. McKiNXEY. We are seeking for light, you know. 74812— PT 2—13 3 118 BANKING AND CTJEBENCY EEFOBM. Mr. Laugiilikt. I have thought a good deal on that question. Mr. Glass. Did I understand you to say that you were opposed to the divisional reserve proposition? Mr. Laughlin. Not at all. Mr. KoEBLY. He is opposed to the 25 per cent fixed reserve, I understood him to say. Mr. Laughlin. I do not believe in the present reserve system. I think changes could be made, but we will leave that question of the reserves and percentages to one side now ; and to answer the question of Mr. McKinney, suppose you have a number of regional or district associations which are empowered to take care of what I have described as the reorganization of credit; that is, the fundamental banking functions of discount and deposit. They will receive the deposits of the national bank in that region, and only the deposits of the national banks with them ought to be counted as reserves. If they choose to carry reserves with other banks for other reasons, well and good; that is their own privilege; there is no compulsion. There are four things that make up the reserve items, or, rather, that touch the reserve problem. Any country bank will just have a certain amount of money in its vaults for till money to pay out now and then, every day, on the daily demands for cash. That is what they call " till money." They would have to keep those reserves at home anyway. In the second place, in almost any bank there would be persons in the region where any bank is situated who had been buying and selling in some great commercial center, like Chicago, St. Louis, or Xew York. The bank, therefore, must be empowered to draw drafts and checks for its customer on any great center, because people are buying there, and they must be able to get New York, Chicago, or St. Louis drafts. Mr. Glass. It would keep an exchange account in those centers? Mr. Laughlin. They would keep accounts in those centers. It has not anything to do with the ordinary reserve requirements. With regard to the reserves, they are now required by law — the country banks— to deposit 15 per cent in the reserve citv bank, and the reserve city bank to deposit 12^ with the central reserve bank. What I am concerned with is not with the first two; no regulation of law would touch those. They must take care of those things them- selves in the course of business. Whatever measures you propose for legal reserves must not touch those things. But if there is a tendency of reserves in idle times, as you know, in the summer, or the early spring, the idle money not being employed at home will go to the central cities, and they will use that idle money with the central reserve city and their correspondents and count it as reserves. Mr. KoEBLY. Do you mind enlarging a little bit on what you mean by idle money " ? Mr. Laughlin. Certainly not. Take the South, before the cotton crop comes in, and before there are demands for lending on cotton, m the latter part of the year, say, from March on to Julv, the banks Jiave not very considerable demand for their funds, their' idle money. What they do is, through the office of their correspondents, to buy paper from note brokers and try to employ it during that time. If they are not satisfied with that, they send it on to their corre- spondents' bank m the central reserve cities and get 2 per cent. Mr. KoEBY. Do they express it as currency? BANKING AND CUREEXCY KEFOEM. 119 Mr. Laughlin. Generally. Of course, if they have any exchange in those cities it will be simply the transfer of the exchange. That idle money is due to the seasonal conditions of busines's in this country. It is due to nature. We do not have our wheat and our cotton coming in at one time. Therefore, the banks have an easv time and an active time. Mr._ Glass. Is it not due somewhat to the inability of the banks to retire their note issues? Mr. Laughlix. I do not think so. Mr. Glass. Inelasticity? Mr. Laughlin. I do not believe that has any direct influence on the amount of funds to the central reserve cities. It is true that when the banks have their national bank note circulation out, tliey can not get it back. But it is not necessarily in their own haiuls. In fact, it is very difficult for national banks to get their own ciieu- lation. They can not get it unless it comes in in accumulated fcirm from the redemption agencies. So, when it is out, they have no control over it. It may be there is a redundant amount of bank circulation, more than we need. The only way that could operate would be that the banks shipping to New 'York would find that the Kew York correspondents would sort the money, take the national bank notes and turn them over to the redemption agency and it would come back more quickly, and they would have to provide lawful money for it. Mr. Glass. On that point, the banks are not permitted, in the aggregate, to retire more than $9,000,000 a month ? Mr. Laughlin. A month. That is, they are not permitted to present bonds and get back notes to that amount. They get back the lawful money. Have I answered your question, Mr. McKinney ? Mr. McKiNNEY. I wanted to laiow if you had some suggestion to • make as to some system. Mr. Laughlin. It may not be a wise one, but, of course, I have thought on this, and you have to think, too, of that thing which is practicable and sound and yet which would meet the difficulties of a political situation. Mr. McKiNNET. You see what is confronting this committee. "We are trjdng to find out, out of the various plans, the best plan. You have given years of study and attention, as I know personally, to such matters, and I thought perhaps you had some plan in mind. Mr. Laughlin. It would be impossible for a person who was in- terested in the subject and heard the discussions of the situation not to be thinking constructively to see how such a thing would work out. I will assume what has been mentioned here, a district associ- ation based upon certain clearing-house centers, and suppose there are anywhere from six or eight to twenty of them — the smaller the better, I think, because the expense of handling them would be great. Suppose you have one in Chicago, one in New Orleans, one in Den- ver, one in San Francisco, something like that. Their function pri- marily would be that of discount and deposit functions. They would receive the reserves of all the banks in that region. That is where they would get the largest part of their resources. I would first assume, of course — which I did not mention, but took for granted — that these associations would have a capital, and I am assuming that they would have a sufficient capital. 120 BANKING AND CUBRENCY EEFOKM. Mr. Kindred. Capital subscribed bj' the members? Mr. Laughlin. By the banks. I am assuming that ; I did not men- tion it. Their accounts would stand on the liability side, say a capital of ten millions, and on the other side of the account would be cash paid in, ten millions, and you would have that account started. Then, secondly, if they received deposits of the national banks m that country, or any bank that is obliged to conform to this law by presenting reserves, you would have then another item on the lia- bility side, bank reserves, and on the other side the lawful money paid in by them as their reserves. So, you would have the capital plus the reserves. If the national banks alone Tfeve obliged— I am using arbitrary figures— to keep 10 per cent of their reserves with these district associations, the total of the bank reserve accounts m all your district associations, published together, would amount to 10 per cent, or about fortv-eight hundred millions; that is, to get $480,000,000 of reserves paid in in lawful money, and the correspond- ing liability to pay that to the depositing banks. That would be the second account. Thirdly, when the discounting begins, the' bank being ready for busines-s. suppose — again to use an arbitrary figure — that the various banks, it doing business merely with banks and not with the public, again, unless you see fit to open those to any individual or establish- ment — suppose that district association does business only with the principal banks in its district; they are ready for business, for dis- counting, and suppose the banks bring up short-time commercial l^aper, not paper based upon any in^•estment security or Wall Street stocks; but suppose, roughly speaking, they have had a business of .me hundred millions, you would find an entry on the right-hand siuc of your account, " Loans, one hundred millions." It is not gradual. It is an abrupt figure. You Avould have on the other side of your account ' Bank deposits, one hundred millions," and both sides of your account would balance. It would do a legitimate discount busi- ness. Its profits would be the difference between the amount it credits to its borrowers and the amount of the loan item. You know if I would go to a bank and get a loan of $10,000 that is an addition to tlieir assets by the amount of my paper payable in 30, 60, or 90 days, and they Avould give me a deposit account for the amount of the $10,000 less the discount. Mr. Glass. ^Vnd that would be profit i Mr. Laughun. That is the profit to the bank. This was not profit, it is an issuing of notes. Suppose they had given me a de- posit account of $9,990, and they retained my promise to pay them $10,000 in 90 days. In 90 days they get the p'rofit, but. in the mean- time, as a mere banking function, they charge the difference of $10 to then- undivided profits so that the two things balance with $10,000 on each side. Suppose they had given me, at my request, $10,000 of notes — I had asked for notes — they would give me a demand applica- tion in the form of a note for $9,990. They would have gotten ex- actly the stiiae profit whether they had given me a note or a deposit accoimt. They gain no profit from the issuing of the notes. That is the point which seems to be in the minds of a good many people. Now, you are asking me to show the development of this process. You have the bank reserve account, you have the bank loan and de- posit account, and you are carrying"^ on a typical banking business. BANKIXG AND CUEEENCY EEFOEM. 121 The next step would come in, what about the reserves? You under- stand, that is what you are asking me. Do you care to have me go into that? Mr. McKiNXEY. Xo; I was trying to get your idea. It would ap- pear to me to be more or less along the lines of the Aldrich plan, would it not, except you have not yet indicated you woxdd have a central association. Mr. Laugpilix. 1 assumed in this that you had a number of dis- trict associations that would do discounting business. Mr. McKixxEY. Then, according to that plan, would you have a central association? Mr. Laughlix. Xo. Mr. McKixNEY. If you had, Avould not that be in effect the Aid- rich plan? Mr. Lai-ghlix. I think not. In the Aldrich plan, as I understand it, you had a capital of $300,000,000, so at least $200,000,000 must be paid in. subscribed by all the banks of the country in the hands of a central body who had the control of all that capital and did all the rediscounting for all the coimtry with branches in the different parts of the country. You will see the fundamental functions of banking, discount and deposit. Mr. KixDEED. Only doing business with banks ? Mr. Latjghlix. Only doing business with banks. Xow, you ask me, if I understand you correctly, what you would do with these di- visional banks, and I proceeded to say that each individual district bank would have those accounts in it. You would have the same account in each district association, but you could have, if you wished, by the simplest kind of bookkeeping, a combined account of all the institutions printed together in a common account. You would know what the whole situation in the country was from add- ing up the items in each district association. But you are asking me still further about another point. You are asking me whether I could offer anything constructively with regard to bringing these dis- trict associations into unified action. That is the point, is it not ? Mr. KixDRED. Yes, sir. Mr. Laughlix. On that point, of course, I can only give you my individual lucubrations. I think there are many ways by which it could be done. Mr. Glass. Up to that point. Prof. Laughlin, you have not the system provided by the Aldrich plan ? Mr. Lacghlix. Xot at all. As I understood you, I was taking an assumption of a number of these institutions. Mr. Willis. I would like to ask one question there, if I might. Did I understand you to say, Mr. Laughlin, that you thought these local district associations would include within their organization the State banks and trust companies or not ? Mr. Laughlin. Yes. Mr. Willis. I notice in an address which you delivered before the American Academy of Political Science a statement Mr. Laughlix. That was 1911? Mr. Willis. That was 1910— the statement that there should be an organization for national banks supervised by the Go\'ernmeut, but not under Government management. Xow you would include the State banks and trust companies also ? 122 BANKING AND CUEEENCY EEFOEM. Mr. Laughlin. Yes ; I think, on reflection, I should. That was a general suggestion, was it not? Mr. Willis. Yes. n c •+ :Mr. Laughlin. Before vie had got to anything like a dehnite proposition. Mr. Willis. If that should be done, if the State banks should be included, would there not be great difficulty in regulating the re- serves of these institutions, due to the fact that they are controlled by State law and that the Federal Government would not be able to control them ? Mr. Laughlin. In my judgment, no. I said you would meet the fact that there are a good many State regulations in regard to re- serves where they do business under the State, but there may be some regulations which Avould make it impossible for some State institutions to join this. That question was raised in Wisconsin very recently, and it was pointed out that a very slight change ^vould be necessary to allow the State banks of Wisconsin to enter any such system. This is the point in my mind : They are organiza- tions of discount and deposit ; they are commercial banks, and if you leave a large part of them out of existence you are going to leave untouched an immense part of the credit organization of the country. As I said earlier, they are all included in the clearing houses. To get directly to your point, Mr. Willis, I think that a general requirement as to reserves and qualifications which apply to national banks would be enforced upon the State banks and trust companies without the slightest degree, reason, or question as to their charters or as to the State laws under which they are doing business. That only means that if they should join one of your regional institutions it would be necessary for them to comply. Then, I think, there would be great advantage. If you were to admit from them only banking paper of the highest order — short-time commercial paper — you would force them to keep that kind of paper, and more of it, than they have ever kept before. The result, I think, would be to jack up, so to speak, the general character of banking in all the State institutions and bring them up to a higher level. If you wei'e then only to deal with the national bank, you would find your- self in a situation where an enormous amount of business is being done outside of the national bank, utterly uncontrolled, with no check upon the kind of paper that you should have in these organiza- tions, the same kind of organization that the clearing houses have introduced — and I am proud to say they were first introduced in Chicago— and apply it to all the banks that were admitted as mem- bers to the district associations, or whatever you call them. You would produce a higher standard of banking operations than we have ever had in this country before, and that -(vould be a reason why I should be inclined to include the State banks and trust companies. There is a tendency in those institutions to tie up with some large central bank, and we depend upon them for national-bank currency, wliich they use in their reserves, and the tendency, therefore, is to put tliese State banks and trust companies in the position of servitude, luorc (ir less, to the large national banks in the central cities. ^Ir. Kindred. Under any law that might be made covering this subject nationally, can there not be a lot of State banks and trust BANKING AND CUKEENCV EEFOEM. 123 companies precluded because there would be conflict with State law under which they were chartered ? Mr. La-ughlin. That was just the cfuestion Mr. Willis put to me. Mr. Kindred. Do you not think it is ^•ery forcible, after all ? Mr. Laughlin. I think that if every State law that is in existence were maintained that would be true, but I think you would find the bankers' association of each State very soon pressing all the legisla- tors to have the law changed. Mr. Glass. If you can not get a uniform law on marriage and divorce, how do you expect to get a uniform law on banking? Mr. Laughlin. Because we expect to marry credit to elasticity, and it would be a desirable thing for them to come in. Mr. Willis. I still do not quite understand why you would not get desirable results if you would simply organize the concern out of the national banks of the district and then allow the divisional bank to do business with all the others ; that is, the others would then meet your objection in that they would have to confine themselves to the kind of business that would produce paper suitable for rediscounting. Your end then would be attained and there would be no difference, it seems to me, between the two conditions, except that if they were members there would be presumably certain reserve requirements which they would have to comply with. The question whether they could comply with them is a serious question^ and it seems to me as thotigh it is a serious question if they do comply if, at the start, the concern would have any legal authority over them after they got in. Mr. Laughlix. They would have this authority: If the banks did not comply with the requirements they would drop them from the organization. Mr. Willis. They could legally do that, could they? Mr. Lattghlix. Here is another thing : Suppose you were to forbid clearing houses from' issuing clearing-house certificates, and if you assumed that these district associations would do the rediscounting, functions that were formerly performed by clearing houses, now regu- larized and normalized in these institutions, that alone would prac- tically force every bank that could possibly comply to come into your system. You would not want to stay out any more than you would want a State bank or a trust company to stay out of the clearing house in New York City to-day. Mr. Kindred. If they were in conflict with the State law they would have to stay out. Mr. Lacghlix. Of course, if they were in conflict with State law there is nothing else to be said, but you would find a strong pressure within 12 months to get the legislature to change the law so as to per- mit these banks to go in on a better basis, and my judgment would be that the banks would find advertising advantages in belonging to the association, and the banks that are in would parade that in large letters on their windows, and that would give them a certain au- thority and prestige in their community, and you would find the other banks all tumbling in. That does not change the fact that there may be State laws that are quite academic. Mr. KixDRED. Are you going to discuss the incorporation of clear- ing houses ? 124 BANKING AND CUREENCY REFORM. Mr. Lavghlin. I was not planning to do that, but I am perfectly Avilling to discuss any part of the question that you wish me to speak about. But yon asked me to raoAe in the direction of an explanation of how these district associations could be managed, and I discussed them in connection with the organization of credit as discounting jind reserve-holding institutions. There is a good deal more to be said along that line if you care to have me speak in that direction. Mr. Kindred. Mr. Chairman, some of us. I know, are very much interested in the subject which is going to be considered more and more — the rather pressing subject, I think — of the propriety of Fed- eral incorporation of clearing houses. The Chairman. I have understood that Prof. Laiighlin, in the plan that he is discussing or outlining, is proposing, if not exactly to supersede the clearing houses, to give certain institutions Mr. Laughlin. All their discounting functions. The Chairman (continuing). All the discount functions of the clearing houses and broader powers than the clearing houses. Mr. Laughlin. In other words, there has been Mr. Kindred. Pardon me right there. Suppose a voluntary asso- ciation, such as they are now, were to desire to continue to exist? Mr. Laitghlin. I should not legislate against that at all, but I should make clearing-house certificates unlawful. The Chairman. They are already unlawful. Mr. LAt'GHLiN. They are unlawful, but I would forbid them. The Chairman. They are forbidden now. Mr. Laighlin. I do not think there is any law against them, tech- nically, although they violate the law by issuing them. The Chairman. Then, there is a law against them. Mr. Laughlin. In that sense ; yes. I admit that. But nobody raises that question when they are faced with a great necessity. The Chairman. They eat the forbidden fruit every time they get a chance. Mr. Laughlin. However that legal question may stand, this is the point : It seems to me that the clearing houses have pointed the way, and if you are to establish institutions on the basis of clearing- house methods you have to take away from them or assume one of the two functions which I pointed out were the essential functions of clearing houses. One was the offsetting of checks, and the other was the rediscounting operation in time of panics, when they issue clear- ing-house certificates. These district associations would take up entirely the function of assisting weaker banks now performed bj' the issue of clearing-house certificates. There would be no reason for taking up the other function. They could not get that out of the clearing houses. Consequently it seems to me that if you had a divisional bank with a center, say, in Chicago .or St. Louis, you would not in the slightest interfere Avith their offsetting of checks in the daily round in the city. That Avould be left to itself; that is an un- important thing. It is a great convenience to the banks, and it does not touch the great organization of credit. Mr. Kindred. Would you care to say that you are absolutely in favor of this regional system of reserve associations rather than cen- tralizing ? Mr. Laughlix. If I were a benevolent autocrat and could impose upon tlie people of the Liiited States an ideal system, I should un- BANKING AND CUERENCY REFORM. 125 questionably try to place some centralized body that could be entirely trusted to do things in such a way that thev "would act for all part^ of the country. I think that would be the ideal. . Mr. Kindred. Is not that very diflicult to safegTiard^ Mr. Lafghlin-. I do not know that it would be. ' But, as any opportunist knows, there is not much use in discussing that. I still think It would be less expensiye. If you haye a great number of these diYisional institutions you ^yill haye a yerv considerable expense and it will be a question whether some of them will earn the diyidends on the capital. In that case there ought to be some pooling, by which the diyidends could be thrown together, so that there should be no loss to the shareholders anywhere. Mr. Kindred. Do you think the Aldrich scheme proyiding for this centralized system has sufficient safeguards^ Mr. Laughlin. For myself, I do not see any " jokers " in it, such as have been suggested by many people. I think if it had been passed it would haye worked fairly well. I haye great respect for a good many things in it. Xeyertheless, I think it is unnecessarily compli- cated. I think it could be greatly improyed and simplified, and if we were to introduce the method of separating the note issues from the essential banking functions of discount and deposit it would be a vast improyement on the monetary commission's plan. But, of course, as your chairman has said, I do not suppose there is any use in discussing what a central institution could do, and in answer to your request I haye tried to discuss an alternatiye. Mr. Willis. What should be the functions or duties of this gen- eral organization for pooling or controlling or overseeing the divi- sional banks ? Mr. Laughlin. You will remember that Mr. Korbly has referred to the Bank of Indiana, wliieh was established between 1834 and 185T. There was an institution, or 10 different institutions, each with a capital of $160,000, kept in a unified organic condition bj^ a central body, of which the president and four directors were appointed by ^the legislature. Afterwards they were changed. That body had con- trol over the business operations of each of those institutions, although each institution was more or less independent. They could control their discounts and their kinds of business. They could close up a branch, is necessary, and do a variety of things that I need not enter into. I have here a list of their functions, if you care to go over it. They were permitted, after the discounts of a branch had reached 125 per cent of the capital, to control any further discounts ; that is, the board were permitted to do that. Secondly, they could close the branch. They could equalize the public deposits among the branches and change those about. They could thoroughly examine all these branches. They could require reports. They could regulate the election of directors, and they could appoint three in each of those branches. They could regulate the dividends and create a surplus. They printed the notes for all the branches. There is one example. It seems to me that if you are speaking about a group of institutions, each of which has its own capital, you have got to leave a large i>art of liberty to them in regard to their discounts in doing business. But this supervising body that has no capital, closely under the supervision of the Government, could. I think, have considerable influence over the rate of discount, although 126 BANKING AND CUEEENCY EEFOEM. I should suppose that each of these divisional institutions would fix its own rate of discount within its own territory. But suppose me one in Iowa or Dakota entered into a land boom, and were leiiclmg considerable amounts of money for that purpose. It ought to be Jij the power of some central body to stop that and put up the rate of discount, if necessary. Those are the things that I should assign to a central or supervising body in the interest of the country and the banks themselves. Mr. Kindred. How long has that plan been in force in Indiana ? Mr. Laughlin. It expired about 1857, if I remember correctly. Is not that right ? Mr. KoEBLr. No; during the Civil War. Mr. Laughlix. Its charter ran from 1834 to 1857, and then it went out of existence when the tax was levied upon the issues of State banks, and I think they then passed into the form of national banks. Mr. KoEBLY. Yes; there were two banks, the State Bank and the Bank of the State. Mi: KixDRED. Would you not say that economic banking condi- tions have changed considerably since that time ? Mr. Laughlin. Very much. Mr. Kindred. Are they analogous, under the same laws? Under this very plan there might be groups of banks that would grab everything. Mr. Laughlin. "What would they grab? I do not quite under- stand. ^Ir. Kindred. They would control, or might control, the immense capital of the Central Reserve Association, to the exclusion of giv- ing credit in some directions and giving overmuch credit in other directions. The Chairman. What Central Reserve Association? Do you mean under the plan he is outlining? Mr. Kindred. I am talking about the Aldrich plan. ^Ir. Laughlin. Oh, yes; that is another thing. I was not think- ing of that. ]Mr. Kindred. I thought you were comparing a similar principle in the Indiana idea with the Aldrich Central Reserve Association. Mr. Laughlin. Oh, no. I said that if you were assuming a cer- tain number of district associations or divisional associations, there had been an example of that in the case of Indiana, in that there had been a certain supervising body without capital that exercised >ome control over these branches. ^Ir. Kindred. I misunderstood you. I thought it was a parallel with the Central Reserve Association idea of the Aldrich plan. ^Ir. Laughlin. Xo; Mr. Willis, if I remember correctly, asked me something as to what the functions of this supervising body would be, and I tried to illustrate that there had been a case of what they had done ; and then, too, in addition, that they ought to be able to bring some pressure to bear to prevent unnecessary and undue expan- sion in certain districts, and they ought to have some power to " sit on the lever " in certain other districts. That is important in the issuing of currency. I have more faith, I think, in our appointing power and in the people of the country than some have, in believing that you could find, in the proper course of time, by the proper methods, men that would be patriotic and high-minded, who would BANKING AND CUEEENCY EEFOEM. 127 be as satisfactory for these purposes, by a little trial (there are some mistakes made, always), as the men on our Supreme Bench. I think they could be found if we honestly tried to get them. Mr. BuLKLEY. Do we understand you to advocate that this district ussociation should have some functions similar to those exercised by ihe Indiana association? Mr. Laughlin. I was not advocating anything, Mr. Bulkley. They asked me, on the basis of the supposition that here were these di- visional institutions, how I thought they could be unified. Mr. Btjlkley. You merely suggested that that was one way that that might be done, without saying whether you thought it was the correct way or not ? Mr. Lacghlix. Yes; that was my position. I think this, if you will allow me to make one more point, in view of the things that seem to me so logically important — the elasticity of currency, which,] paradoxically enough, should be separated from the banking and de- posit functions, and yet which in another way should be very closely tied up to them. It seems paradoxical, but it is fundamentally true, that while they should be separated they are necessarily bound to- gether. They should be separated because the note-issuing function should be so protected that anyone can see the nature of the protec- ' tion behind the notes. It would be highly desirable if we could, byj this separation of the issue from the deposit function, get the condi-' tions of the note issue distinctly before the public. Then, if yon should have this separation of the note-issuing function and yet a, close relationship with the district associations and their discounts, you would have an ideal combination. That would separate the issue function from the purely banking function, and yet unite them. The union I should get through some .such supervising body, and I should get it in this way: According to the genius of our country, it useaj checks drawn on deposits, and not necessarily notes under all cir-'; cumstances, and vet it is required that we should issue notes based \ upon business loans when needed for the payment of wages or what \ not. I should have the spinal cord through these separate vertebra , of regional institutions supplied by this supervising body ; and not having any capital, it would be possible for this supervismg body to be empowered to supervise also the issue of the notes and take care merely of the funds behind the notes, viz, a certain stratum of law. ful money, and a certain stratum of bonds, if that is allowed. In the disposal of bonds which would be taken over by these divisional in- stitutions from the national banks you would inevitably, for a con- siderable time, have the 2 per cent bonds taken over and converted into threes, possibly, as a protection for your national-bank notes, until that was disposed of. 1 1 i u i • i But, leaving the question of bonds, I say you would have behind vour note issues a stratum of lawful money, cash, a ftratum ot bonds "(which in the final event ought not to be more than 40 per cent, we will say), and next beyond that picked short-time commercial paper which would furnish the elasticity for the issue of the notes, ihat short-time paper would come up from your district associations or your regional institutions; and, mark you, it would have this ad- vantage over the other things: It would not be a general mass of 128 BANKING AND CXTRKENCY EEFOEM. assets of a bank; it would be the picked assets of all the banks on which notes would be issued. Mr. BuLKLEv. I do not quite understand whether these notes would be issued by the association or by the individual banks. Mr. Laughlin. No; I should have them taken away from the banks and jDut into the hands of this supervising board that would be closely under the control and supervision of the Government. Mr. BuLKLEY. You would not allow the individual banks to issue any notes? Mr. Laughlix. No; I was just going to add, if you will allow me, at that point The Chairman. You would give this treasury board, we will say, the exclusive right of note issue? Mr. Laughlin. Entirely. The Chaiemax. Without the incentive of profit provided in the Aldrich plan? Mr. Laughlin. Yes; there would be no question of profit at all Tjonnected with it, because they would have no capital. The Chairman. The Aldrich plan provides a capital for the central association and a consequent profit upon its investment. Mr. Laughlin. Yes. There would be expenses for this treasury board, but they would be charged up to the various regional associa- tions, and they would have to pay them. Now, to meet your point, if you will allow me: If you were to go directly from a bond-secured circulation by individual national banks you would have to go to some alternative. AVe all accept the point that the bonds are now ruled out, and that we must get something else than a bond-secured circu- lation. The Chairjian. Would you do that immediately and altogether, or gradually ? Mr. Laughlin. I think that could be done at any time under a proper arrangement. I will tell you why in a moment, if you will allow me for the present to answer Mr. Bulkley's question. The Chairman. Yes. Mr. Laughlin. In 1898 the Monetary Commission recommended that national banks should be permitted to issue their notes solely on the basis of assets, and that was thought to be an advance. From my present experience I should go a little further than that, or amend that. This comes from my experience in the last 18 months, and from coming to know the kind of paper that exists in different banks of the United States. In some States we have banks that are holding paper that has no maturity. The makers do not expect to pay it off. A man will secure a loan of $10,000 and never expect to pay it back. He thinks it is ungentlemanly if you ask him to return it. There are certain regions of the country where the kind of paper that they are carrying is not safe paper on which to base note issues. That is especially so in the South. That being admitted as a basis of my judgment, I should think it indisputably unsafe to allow any individual national bank to issue notes on its general assets without very careful and, in fact, drastic provisions. Otherwise you would have overexpansion and a very uncomfortable state of affairs. You would have paper of different kinds BANKING AND CUEEEXCY REFORM. 129 Mr. BuLKLEY. Would it not be so difficult that vou would not attempt it at all? Mr. Laughlin. It would be, in effect, a retrograde movement back to the kind of notes we had in the country before the national bank- ing system was inaugurated, when they were based upon their assets. Mr. Kindred. Would it not be too dangerous to have ? Mr. Laughlin. It would be very dangerous — very dangerous. If you admit that point, it seems to me the inevitable logic and the prac- tical necessity would require us to devise a scheme by which only the picked assets of banks could be used as the basis, the stratum, that is behind the notes — ^not entirely, but only a stratum. If the individual banks in each section were to bring up their paper to your district association, or whatever you call it, and it passed through an inspec- tion there, it would have to run the gantlet there first. The regional banks would be the ones that jjassed out the notes of this department to the countiy. That is not the point now. Dis- trict associations, the regional banks that discounted the paper, would have the right to give to this board preferred and short -time paper. Mr. BuLKLEY. Is that a Federal board, a national board? Mr. Laughlin. You asked me about some body. I just called it a board. Mr. BuLKLEY. It would be a national body and not a district body ? Mr. Laughlin. Yes ; and would work for any district organization. That body, therefore, would receive the picked assets that come from the district associations that have already picked their assets. That brings a situation where you have the cream of the short-time paper of the country. Now, suppose your district association had agreed to discount 90-day paper for individual banks ; you might provide that this board which had issued notes on that basis, would accept paper that ran only 30 days. You would make your backing and commercial paper still more liquid. Mr. BuLKLEY. Is that board a national board? Mr. Laughlin. Yes. Mr. BuLKUEY. It is very similar, is it not, to the Aldrich plan ? Mr. Laughlin. Not at all. Mr. BuLKLEY. Does it not amount to a rediscount ? Mr. Laughlin. No; because its notes would be a general lien on all your organization. Mr. BuLKLEY. The only difference, then, is that the district asso- ciation would indorse the paper as it is offered for rediscount? Mr. Laughlin. No. Of course I do not claim that this is the only way ; I am only trying to outline what lies in my mind. I can con- ceive that if this supervisory board — call it a treasury board, if you please, for convenience — ^had charge of the issue function — the insti- tution has no capital — all it would have would be offices and a force, and the expenses would be levied upon the association. Mr. BuLKLEY. It does rediscount paper ? Mr. Laughlin. No ; it does not. Mr. BuLKLEY. Then I have not understood you correctly. Mr. Laughlin. No. Mr. BuLKLEY. How do you get notes into circulation? I have no( understood you at all, I am afraid. 130 BANKING AKD CUEEENCY EEFOEM. Mr. Laughlin. The whole order would be this: The individual bank would come up to the regional institution for rediscount. I ex- plained to you awhile ago how the account would stand. There Would be the loans and the discounts. Mr. BuLKLEY. Yes. Mr. Latjghlin. Now, if the time ever arrived when the district association did not have funds or cash to supply to any qualifying bank it could take a part of its picked assets, just as the banks do now in the clearing house, and for that get notes to a certain limit. That is the elastic stratum on which notes could be issued. They Would take the notes of this national organization based upon the combined assets of your district associations — absolutely safe — with other provisions behind the notes, of course, and they would take those around to the district association and they could feed them out to the individual banks and the banks could supply them to the public. They would take the place of national-bank notes by an easy process. If each district association would receive all the national bonds of the banks in that association that are now used as a pledge for national-bank notes, they would take those over with the assumption that they would redeem in national-bank notes all that came in, and that is a fair exchange at par, and they assume the bonds and the redemption. Now, suppose that the district associations having those bonds introduced a measure that would practically be a refunding measure into the treasury board, and the Government allowing the treasury board, if it possessed any of these bonds, to sell them with the consent of the Secretary of the Treasury, so that it would not interfere with any bonding operations of the country. Supposing the district association should pay into your central advisory body, the treasury board, all the national-bank notes that appeared in its till — put them into the treasury board and impound them there^and to the extent that that institution had the national-bank notes it would receive an equivalent amount of bonds from the district association. As the national-bank notes then were presented the treasury board — the issiie department — would issue its own notes to take the place of the national-bank notes and they would hold the bonds in return. If you were to have the worst happen ; I mean, in answer to Mr. Glass's question, suppose you were to be obliged to face the most extreme case— that all the national banks presented all their bonds at once, or within a few months— the only situation would be that these would be sent in to the issue department, and you would have all the bonds there, and you would have issued the notes of this treasury board, or whatever you call it, instead of the national-bank notes, and you would have no different situation than you have now to start with. But my idea would be that you would then give to the treasury board the right to demand of the Secretary of the Treasury the exchange of those 2 per cent bonds into threes without the circulation privi- lege. When you have it in that form— give your treasury board the right, m ]oint consultation with the Secretary of the Treasury, to dispose of those bonds in proper amounts and, in the long run with- out the needof any additional cooperation— you would find the bonds that lay behind the notes of the treasury board diminishing, and you would hll up your reserves with gold. BANKING AND CUREBNCY EEFOEM. 131 Mr. BuLKLEY. The board would then hold a gold reserve against all its notes? ^ ^ Mr. Laughlin. If you look further, it is not the whole proposi- tion of the loss of a small amount of money in interest upon the bonds. You would have to have bonds or a large reserve of gold, but a small stratum of short-time commercial paper, with great elasticity, that would come up in such form that it would be picked ; and you would avoid the danger or the possibility of overexpansion. The Chairman. The whole issue of the country, then, would be upon an asset basis? Mr. Latjghlin. Partly. The Chairman. Partly upon gold reserve and partly- upon assets? Mr. Laughlin. Yes. Mr. Kindred. But you would be very wary regarding the issue of notes upon ordinary assets? Would you go on and use Government bonds, or, for that matter, properly underwritten State bonds ? Mr. Laughlin. No, sir; I would agree with what Mr. Warburg said yesterday. He said that it was better to go slow. I agree with that. Mr. Kindred. Why not properly underwritten State bonds ? Mr. Laughlin. If you grant the privilege on securities of that kind, where are you going to draw the line? If there is any political objection to discounting any kind of Wall Street securities, the moment you allow securities of that kind to be used you are open to criticism. I am only assuming we are trying to devise a way by which we can avoid that criticism. Mr. Kindred. Why not use a State bond, where some proper un- derwriter has guaranteed it? It may or may not be a Wall Street, security ? Mr. Laughlin. Yes ; there is a great deal of it that is good. Mr. Kindred. Why is not (hat better than the best picked col- lateral ? Mr. Laughlin. Because it can not liquidate itself. If I have 30- day or 60-day paper, that has got to be taken up. It is based upon goods bought and sold, and somebody has to pay for them, and the paper will be renewed or taken up. If it is a bond, that bond does not renew itself. Now, suppose a general pressure, and it was not the question of one bond or $100,000 of them, but all the bonds in the country were behind the notes, and an attempt were made to liquidate those bonds, you could not do it. You can not liquidate bonds in actual cash. Mr. Kindred. Are not State bonds as readily liquidated as Gov- ernment bonds? Mr. Laughlin. The same thing is true of Government bonds. If you were to throw a considerable amount of Government bonds on the market, you could not get gold for them. In other words, if you could have an arrangement by which these bonds which were behind notes could be used by your Treasury board, and you could give them authority either to sell or to hypothecate them, you could borrow your three or five millions, as was talked of yesterday, at the Bank of France. Moreover, I should go still further, if I was permitted to organize such a system. In the refunding of these 2 per cent bonds into threes I should strongly advise that at least half of them should 132 BANKING AND OUERENCY EEFORM. be refunded into 1-year notes instead of 3-year long bonds. I thinli: a 30-year bond is undesirable. The whole experience of the Civil "War shows that it was a great advantage for us to have five- twenties; that is, those bonds the Government could redeem m 5 years and must redeem in 20 years. Our bonds are almost consols; they are almost permanent. That is not a good thing for the Gov- ernment if it wishes to pay them off. Now, suppose this seven hundred millions at 2 per cent were m the hands of the Treasury board, and they were to take them to the Secretary of the Treasury to get them exchanged, and suppose one half of them went into 30-year bonds, or allowing the Government a good leeway, 20 years, and the other half of them into 1-vear notes, with the privilege to the Government on one year's notice to the Treasury board to renew those, say, for 60 days, and that it could renew them for 10 or 20 years. What is the result ? You would get a 1-year Government of the United States note, which would be the best means you could have in the international market of borrowing gold. It would put your Treasury board in a position where it never could be cornered, and also there is no reason why they should not hold in their account gold exchange coming up from the dis- trict associations. It was mentioned the other day that it would be impossible for a number of these institutions to provide the country with the gold. If you had some supervisory body, it would be per- fectly patent that the district associations all over the country would have a very considerable amount of gold exchange, the San Fran- cisco one and the New York one, and the Chicago one, and if it had supervisory power, the Treasury board could get gold exchange from the district associations, and dispose of those in any foreign market and get gold. You must have such a body, with such judg- ment and business experience, that they would look ahead and pre- vent a cataclysm. That is what is done in Europe. Now, I think that this could be done by Congress, and judiciously defiiiing the powers of your supervisory board, which has no capital, but which is nothing but a unifying head or a capstone for your district associations. That is to conform to what I laid down in the beginning. If you look at it by and large, the two big things are the elasticity of the currency and organization of credit. Your grouping of credit would take care of the banking and discounting, of the reorganization of credit, and do away with the inability to get loans in time of panic; and then you would have your currency in a form where, it would be very difficult for it to be wrongly man- aged. And then, if I may add, it is a political advantage. Suppose there should arise a demand for Government issues. I do not say that it may not exist. Is not this as far as you could go toward Government issues, when you allow the Government to get the abso- lute supervision of them ? But the Government does not issue. Sup- pose you should issue, you would not have any expense of them of carrying reserves, as you have to-day in carrying the greenbacks. I should go further than that. I should allow the pooling of profits. After you paid 4 or 5 per cent on the capital that is re- quired, I would transfer all the profits to the United States Govern- ment account. Mr. Kindred. You would regulate the pooling process, would you not? BANKING AND CTJKKENCY REFORM. 133 Mr. Laughlin. You would have to pool so that the profits would be united, so as to see that some did not get more than others. But after a certain amount had been used to cover the dividends on the stock — ^because you have got to do that — I should not hesitate to direct that this treasury board, or whatever it may be called, should be allowed to use its profits in retiring greenbacks. In other words, you would have been able to take the earnings out of the private business operations in the country and use that to pay off the de- mand public debt of the United States, without any cost to the United States. The result of it would be eventually that instead of having a dime museum of curiosities, as we have now, in our various forms of currency, we would have one uniform system based on gold and a small amount of bonds and a flexible stratum of paper. Mr. BuLKLET. Would this treasury board fix the rediscount rate? Mr. Latjghlin. No; that would be done by the district association. Mr. BuLKLEY. Would the district association come up and get currency ? Mr. Latjghlin. It is not a rediscount association at all. Mr. BuLKLEY. They would simply buy the notes ? Mr. Laughlin. Buy the notes in exchange for paper. That is just what is done in the Bank of England when they suspend the bank law. The banking department takes from the item of other securities a certain amount of its securities and turns them over to the issue department, aiid violates the law and asks them to give them notes for those securities. Now, by this, instead of doing the British thing of violating the law and never changing it, when they must do the thing, and know that they must — not since 1866, of course — you take over your picked assets, lawfully and legally, and get notes for them. Mr. Btjlkley. Then the treasury board gets the interest that hap- pens to be running on them ? Mr. Latjghlin. No; that is entirely to the discount function of the district association. The expenses of your treasury board would be charged up jointly. Mr. Btjlkley. What did you- mean by the " earnings "? Mr. Latjghlin. If the district associations had earnings beyond 4 or 5 per cent, they would pool them and pass them in to the treasury board. The question would come up, what would you do with them ? I would suggest that instead of paying that into the treasury and letting the treasury do what it pleased with it, that should be used to retire greenbacks and simplify our monetary system. Mr. BuLKLET. The treasury board would be appointed entirely by the President? Mr. Latjghlin. That does not trouble me. If you saw fit that the President should appoint them, I should not see any difficulty. Mr. BuLKLEY. At any rate, it would be a public office, and they would not be elected by the banks. Mr. Laltghlin. I should say that that treasury board ought to represent three interests. It should represent, as in the district asso- ciations, the shareholders. . . The Chairman. Before we get away from the question of issue, I would like to ask you a question, with Mr. Bulkley's permission. 74812— PT 2—13 4 134 BANKING AND CUEEENCY EEFORM. Mr. Bui-KLEY. All right. . The Cjiairmax. As 1 understand, you say the treasury board,_ ii there should be such an establishment, should have the exclusive right of issue ? Mr. Latjghlin. Entirely. The ClIAIEJIA^■. Then the right of issue would be denied to the divisional reserve associations? Mr. Laughlin. Yes. The Chaieman. Then whj^ might not that treasury board be ar- bitrary? Do you propose to make the board arbitrary on the ques- tion of issue ? Take commercial paper. You gi^e that treasury board the ex- clusive right to say to what extent the issue shall be and precisely the sort of paper upon which it may be. ^Ir. Laughlix. I do not see how ycu can escape that. You have to depend upon good banking judgment. You can not legislate intelligence and good banking judgment into any board. T think you would have to be sure that you got men you could trust. The Ci-iAiRiMAN. Would it be feasible, in your judgment, to give the regional reserve banks the right to issue up to a certain point? Mr. Laughlin. I think in that case you would have paper of dif- ferent kinds in the country, and that is a thing I should avoid, and it would be a great deal better to have a unified and uniform system. Now, to-day, under the national bank system, although you do not have any danger about the safety of it under the bonds, you do have one important thing we never had before the Civil War; you have a uniform system, under which a note will be taken in any part of the country, and I know certain parts of the country to-day where, if it was known what kind of paper there was there' and that was being used on those district notes, there would be a question of the value of the paper they were issued on. You are coming right back to the situation that we had before the Civil War, and you want to avoid that, providing. I mean, that we could have the system in which theie would be no question raised about the notes. ]\Ir. AViLLis. Before leaving that reserve question, the notes issued by this treasury board would be legal tender, would they, or what would they be? In your discussion of bank notes and "so on you speak of having them used as lawful reserve. Mr. Laughlin. That was written from a very general point of view. I should modify that somewhat now. Mr. Willis. That is, they should be used as currency, the same as national-bank notes ? Mr. Latghlin. Yes. For instance, if this issue department could put these notes out in a form so that everybody knows what their basis and protection is, and they would be accepted and would be the main i-esei-ves of the di\-isional banks — that is, your separate nistitutions— they would supp]y notes of this sort to tlie individual banks whenever required. I should like to think upon this subiect I am not quite sure, but my judgment would be The Chairman. Eight 'there, let me get that clearly in Tninrl What would be the security behind the notes issued hv'iU mmu. Treasury board after the 2 per cent bonds should be disnn/T*7l The gold would be received on the sale of the bonds? ^^^P^sed of? Mr. Laughlin. Yes. BANKING AND CUEEENCY EEFOEM. 135 The Chairman. And that would be impounded here ? Mr. Laughlin. Yes; it would be there, serving that purpose to the extent that they felt it necessary to carry gold. Now that does not mean that there would be gold, dollar for dollar, for every one of the Treasury notes. You could carry whatever, in your iudo-- ment, seemed necessary. Suppose that oiie-third of all the issues of the Treasury board should be protected by gold ; I mean iust make that assumption. ' ' The Ctlyirman. Yes. Mr. Laughlin . You would then have 66 per cent covered either by bonds or short-time paper, and the issue of paper would then depend entirely upon the needs of the countrv arising from the pres- entation of picked commercial paper. The Chairman. And you would give the Treasury board the final say as to the value of the commercial paper? Mr. Laughlin. And the reason for that is that that board would be close up to the Government, and it is as near as you would ever get to the question of Government issues. Mr. BiTLKLEY. Professor, I am afraid I may be asking you to re- peat something, but it is not quite clear to me yet. When the dis- trict associations come up with the commercial paper to get currency for it, do they deposit that paper as collateral ? Mr. Laughij[n. No ; they bring up the paper, and that paper is deposited with the Treasury board, and the Treasury board gives them an equivalent. Perhaps you might indicate some percentage less than the value of it. Mr. Bdlkley. But do you mean that they buy the commercial paper ? Mr. Laitghlin. In the essence, you may put it that way; for which they pay the Treasury notes. Mr. Wn.Lis. And would collect that paper at maturity? Mr. Laughlin. At maturity? I could see the practical way by which you could cover that. A treasury board in Washington would be a, long distance from San Francisco. Now, the Treasury of the United States is not merely the treasury office or box here in Wash- ington. Any office in the United States is also a part of the Treasury. In a similar way, if your treasury board had a box, a vault, or office in the building of each district association throughout the country, that would be just as much a part of the treasury board's vaults as any other. Thus it would be perfectly possiblcj having a representa- tive of the treasury board in each of these associations, to have all the paper that was presented and passed on — you would have to have somebody competent to pass on it, you know, under general supervi- sion — kept in those vaults right there in the same building. Mr. BuLKLEY. That is perfectly practical, but here is what I do not understand : This paper is bearing interest all the time. Who is entitled to that interest? Mr. Laughlin. The district association. Mr. BuLKLEY. Do you mean to say that they can have paper ma- turing six months from now, and be entitled to interest during that six months, and yet get the currency far in advance ? Mr. Laughlin. Yes ; exactly. Mr. BuLKLEY. Is not that putting an undue premium on their go- ing out and getting the currency ? 136 BANKING AND CTJEHENCY BEFOEM. Mr. Laughlin. No. Let me take a typical example. Suppose the district association in New Orleans has a lot of cotton paper, per- fectly good, drawn in the ordinary way, and accepted — or whether it is accepted or not does not enter into it; I do not believe in the acceptance idea. Suppose that was in the hands of the district asso- ciation. It would be probably undesirable to have the district asso- ciation take paper running over four months. It ought to be mainly three months' paper. Suppose you were to say that they should not put up to the treasury board paper running longer than 30 days. It does not say how long they have kept it ; but every bank has paper falling in every day, running right along. This reserve association would have this paper discounted at 30 days; every day they would have a lot of that falling in that would have to be renewed, or else they would have to pay it off by returning Treasury notes; do you not see? Let me be more specific there. Suppose the district asso- ciation wanted $500,000 of notes, and it took short-time paper — cotton paper that came up from New Orleans to the central board or to the person representing it and got notes for it — whether at par or 90 per cent is a detail. The paper still belongs to the district associa- tion just as much as to-day the United States bonds belong to the bank of deposit. Mr. BtTLKLET. That I did not understand. Then, they really deposit them only as collateral? Mr. Laughlin. Only as collateral. Mr. BuLKusY. Then, they get the use of that currency free? Mr. Latjghlin. They get the use of that currency absolutely with- out expense, just as they would get a deposit account without ex- pense. That is to say, it still remains the property of the district association. It does not lose its property; it is simply pledged for these notes. They have to meet that obligation, and they can meet it to the Treasury board either by returning the notes or by giving them an equivalent in good short-time paper. Mr. BuLKi^Y. But what startles me is that you are giving them the use of that currency without charge. Mr. Latjghlin. Why should you not do so? They pay the whole expense of the Treasury board. _ Mr. BuLKusY. I know they pay the expense of running it, but here IS the creation of a credit which they get without paying for it. It seems to me it would be an undue inducement to them to go up and pledge paper. I would be inclined to pledge all I had all the time, because by pledging it I could get the use of money for nothing. Mr. Laughlin. That is on the supposition that you are going to have a Treasury board that will lend ad libitum to anybody that applies. "^ Mr. BuLKLEY. Of course, they would not lend unless the com- mercial paper was good. Mr. Laughlin. Yes; and, moreover, they must control the amount. You have got to use judgment. Mr. Btjlkley. Do you mean that the Treasury board is going to exercise discretion as to whether there is a real need for it o? not? Mr. Latjghlin. Certainly. The Chairman. Precisely. Mr. Btokley. And that they may refuse to rediscount absolutely good paper? ^ BANKING AND CUEEENCY EEFOEM. 137 Mr. Laughlin. Certainly. Mr. Kindred. Otherwise, you would have inflation. The Chairman. That is what I sought to bring out just now. Mr. Laughlin. Yes; you have got to have some central control, and you must have men you can believe in. The Chairman. In other words, you would make the central Treasury board the final arbiter both of the necessity for"the issuing in any given district Mr. Laughlin. And of the amount. The Chairman (continuing) . And of the amount and of the char- acter of the collateral upon which it is issued ? Mr. Laughlin. Yes. That is trying to find a practical way out as against the Government issuing paper without any connection whatever with business. Mr. KoRBLT. Why should not the regional bank give the central board credit and take the notes in place of it? Mr. Laughlin. I do not think it is desirable to have anything be- hind the notes but something tangible and safe. Mr. KoRBLY. Would not that leave the cream of the paper that is in the regional banks behind the notes? Mr. Laughlin. I think it is just the same case as the United States bonds at the present time. You ought to transfer them to the Treas- ury board. Mr. KoRBLT. Why should not the central board be merely an office of issue, without the exercise of discretion, leaving that discretion in the regional banks? Mr. Laughlin. In theory they ought to have discretion. In prac- tice I think you will find that if the paper has passed the gauntlet of the district association, you are not going to have very much difficulty in the way of their refusing paper the district association has taken. Mr. KoRBLY. What would be the objection to making the indorse- ment of the regional bank the sole requisite for the issuance of the currency, leaving the central office to carry it into effect? Mr. Laughlin. That is a question, not of principle, but of detail or judgment. Mr. KoRBLY. Would there be any strong economic objection to that? Mr. Laughlin. No; I do not think so, provided you have very careful oversight. Mr. Kindred. They would have to have the safest possible basis for the note issue. Do you propose to have the whole regional asso- ciation responsible for the issue? Mr. Laughlin. Yes. That is merely for public effect. They never would be called upon, but it would insure the safety of the currency, and the notes would be redeemable in gold at any district associa- Mr. KoRBLY. As a matter of fact. Prof. Laughlin, ' these notes would be the joint notes of all the regional banks, would they not^ Mr Laughlin. In theory ; that would be an assurance that there never could be any question about their safety, and that would give them as great protection in the minds of the public as any (jovern- ment issue. That is the point— j"st trying to adapt yourself to the situation. 138 BANKING AND CUKEENCY EEFOEM. Mr. BuLKLEY. I suppose you would not advocate extending that same security to deposits? Mr. Laughlin. To the deposit of individual banks? Mr. BuLKLEY. Yes. Mr. Laughlin. No; decidedly not. My reasons would be these: The notes being protected and guaranteed, you wonder why you should not also give that protection and guaranty to the deposits? Mr. BuLKLEY. Yes. Mr. Laugpilin. For this reason: The note issue passes out from the hands of the bank into the hands of the public. It differs thereby from a deposit account in that the note gets a quasi-public function. We regulate railroads to-day because .they have a quasi-public func- tion. There would be a reason, therefore, for trying to protect the innocent holder of a note, because it has a quasi-public function to travel here and there. A private contract between a bank and its depositor stands on an entirely differential level. If jou. go into that, you are going into an enormously big job. You have got to be willing to treat other people in the same way. If you are going to guarantee the depositor, why should you not guarantee the bank that the borrower of the bank should pay the bank ? The Chaieman. The bank itself takes care of that, does it not? Mr. Laughlin. Not always. They get losses, I think, that they have to write off sometimes. Mr. Bui/KLEY. I thinli the proposition is something like this: So far as I know, nobody is proposing that the Government should guarantee these depositors. The proposition is that the district asso- ciations should guarantee the deposits of all. Mr. Laughlin. And that one bank should guarantee for the other. That means this: That the banks that are well managed are guaran- teeing the transactions of the banks that are badly managed. That is fundamental. Let us just pass that for a moment. If you were to insist that the depositors should be gxiaranteed, I should not object; but I should object to a certain method of doing it. If I want to insure my life, I do not ask you to pay my premium. If you insist that I should insure my life, or if I think it is necessary, I ought to stand on my own legs. If it is desirable that the depositors of a" bank should be insured, let that bank get insurance from an institution that will insure its deposits in the interest of the depositors and not call upon somebody else to pay the premium. In that case, if insti- tutions are created that will guarantee the deposits of certain banks, ]ust as institutions are created for insurance against fire or burglary or anything of that sort, what will they do ? They will satisfy them- selves as to the kind of paper those banks are taking, and you will find low rates of insurance for the best banks and high rates of in- surance for those banks that are badly managed, and you will ac- comphsh your end in the same way. Mr BuLKLEY. Would you find the rates varying according to the way the bank was run ? ^ a ^ Mr. Laughlin. That would be a business proposition for the in- surance people. Mr. Kindred. You certainly would. Mr. Laughlin. That would settle the whole problem. But what 1 object to is having me pay for the other man BANKING AND CUKKENCY KEPOfiM. 139 Mr. BtTLKLET. Of course, that is rather a fine point, because some banks now accept deposits and pay no interest, and think that they are paying for the vise of the money mereh- by the service that they are giving to the customer Mr. Laughlin. Yes. Mr. Btji^kley (continuing). While others pay 2 per cent and some- times 3 and even 4 per cent interest on deposits. In any case an in- surance premium could not possibly run as high as that, so that the amount of it would be well within the variations which banks allow as it is. Mr. Latjghlin. My feeling, fundamentally — if I may add a word just there — is that you can have bad banking under a perfectly good system and perfectly good banking under a bad system. It all cen- ters upon the kind of paper thej' are willing to discount. The assets of the bank are the measure of the safety of the liabilities. The de- posit liability is just as sound and no sounder than the kind of paper you take in the assets. If you can do anything to strengthen the kind of assets you get, you are really guaranteeing the depositor, and on that line you may M'ork and work intelligently. If you make any re- striction, no matter how drastic, that carries with it a better kind of paper, you are really guaranteeing the depositor against loss. Mr. Bui.KLET. Yes; but is not our suggestion the very way to ac- complish that? In other words, by associating all the banks together do you not get the most efficient supervision over the operations of each ? Mr. Laughlin. I do not think so. Pardon me, may I ask you a question just there ? Mr. Btjlkley. Yes, sir. Mr. Latjghlin. Would it be an effective supervision if you found out that a bank had made a bad loan ? You can not change it after it is made. In order to get an effective supervision over their Avork you have got to be present when the loan is made and before it is made, and prevent its being made i f it is bad. It does not do any good to try to apply your pressure after a bad loan has been made. Mr. KoKBLY. But one bad loan would not impair the solvency of a bank. Mr. Laughlin. Oh, no; but if a bank suffers in any way through getting paper that is not legitimate, you ought not to make anybody else pay for it if they can not have a chance to be present when the loan is made. . The Chaieman. Without anv committal on that point, and assum- ing that what you have said "about guaranteeing bank deposits is theoreticallv sound, let us see what would be, in practical operation, the difference betAveen guaranteeing notes and guaranteeing deposits. Mr. Laughlin. Yes. ^. , i j! The Chairman. Suppose I have a book credit at your bank for $100,000, and I proceed to give a check to Mr. Bulkley for $oO,000. Mr. Bulkley does not want the book credit; he wants the ciirrency, and he draws $50,000 in currency from your bank. He has then $60,000 of guaranteed credit. Mr. Laughlin. Yes. ,i . • „+ The Chairjian. And I have $50,000 on deposit there that is not guaranteed. 140 BANKING AND CUEEENCY BEFOEM. Mr. Laughlin. Certainly; and they ought to be interchangeable, too. The reason that amount of $50,000 that Mr. Bulkley has should be guaranteed is because he drew it — assuming, now, that he drew it for a legitimate purpose . . The Chairman. No matter for what purpose, he has it, and it is guaranteed. Mr. Laughlin. Yes. There are just two uses he could make of it. If he retains that money in his hands, he is losing interest on it just as long as he holds it. In the second place, if he pays it out, as the other alternative, it goes into the hands of people who are using it in passing it around ; and it assumes, as I said, a quasipublic character, and ought to be protected for that reason. The Chairman. Yes ; but if, next day, that bank fails, Mr. Bulk- ley has his $50,000 guaranteed. Mr. Latjghlin. Yes; quite right. The Chairman. And it would be redeemed. Mr. Laughlin. Yes. The Chairman. But my $50,000 is gone. Mr. Laughlin. Yes; because you have entered into a private con- tract with the bank. If you think the bank is not sound, for that reason you will ask for notes, and you will soon close the bank up. The Chairman. But in the practical operation of it, can not that $100,000 of book credit that I have, that is not guaranteed, be trans- formed into a form of credit that is guaranteed ? Mr. Laughlin. Certainly. Mr. Bulkley. Prof. Laughlin, does not the operation, which you and Mr. Glass have just been outlining, illustrate how the guaranty of notes without the guaranty of deposits encourage people to draw out currency in time of stress of any sort? Mv. Laughlin. I do not think so. My judgment may not be worth any more than that of any other man, but I do not think it would operate in that way. Mr. BuT.KLEY. You admit that the safe thing to do, if I had any doubts about the bank, would be to go and get the currency ? Mr. Laughlin. Yes. Mr. Bulkley. Why would not that be an inducement for me to do it? Mr. Laughlin. If ycu want to Icse the interest on it, it Avould. Mr. Bulkley. We are assuming now that I am scared about the whole bank. Mr. Laughlin. Let us just trace that still further. Suppose you drew out your deposit and demanded cash, and that Mr. Glass and other persons did the same thing, and the constituency of that bank came for the purpose of drawing cash; that is what we call a run. Under this system, what would happen ? There would be an instant test of the kind of paper that the bank was carrying. If it had a secondary reserve of the j^roper kind of commercial paper the bank could protect itself against that run by presenting the commercial paper instantly and get notes which would meet any run of that sort, and it would stop then and there. If the bank was not sound, then instantly it would be closed up, and yiiu would have to wait for liqui- dation, "i'our district association, having charge of that, we will assum.e, can convert into paper any part of those assets that it finds BANKING AND CUKEENCY KEFOEM. 141 are legitimate and pay off the depositors, so that they would not hare to wait. Mr. BuLKLEY. If there happened to be enough. Mr. Laughlin. Yes ; you can do that as nearly as you can, humanly spealdng, with any ordinary institution. That is practically what the Bank of England did in the case of the Baring failures. Mr. BuLKLEY. Is not the net result of that that Mr. Glass and I and others who got scared and started the trouble are all clear and fine at the expense of the other fellows who stood by the ship and tried to talk down the panic? Mr. Laughliiv^ You have helped precipitate the run on that bank, to be sure ; but if you were certain the bank was wrong you could not be blamed. This is on the supposition of a bank under the present system. If you were to have a bank organized under some such sys- tem as you are talking about, with the safeguards that would give in addition to the national-bank examination and the stringent examina- tion that the clearing houses give, we never could have that thing happen. Mr. KoEBLY. Then what would be the objection to the guaranty? Mr. Latjghlin. Because, if there is no danger, there is no reason why you should violate your general principle of ethics. Mr' Bur.Ki>EY. What is that principle of ethics? Mr. Latjghlix. That I should not be responsible for the other man's villainies or mischances. Mr. BuLKtEY. I do not quite understand that. Mr. Latjghun. If bank X is carrying on bad banking— if the head of that institution is a rascal and has really been taking paper that he ought not to take, he should be punished. You know there are men who Avill sometimes carry on a bad banking busmess under the eyes of good directors. If, on the other hand, I am overcareful and zealous in looking after the interests of my bank, why should I suffer for that fellow's action over which I have absolutely no super- vision? . . Mr. BxJLKLEY. But you have supervision of mm. Mr. Laitghlin. Oh, no. Mr. BULKIJ5Y. Under our assumption you have. Mr. Laughlin. No; not unless I am present when his paper is ^Sf "BuLia^Y. Let me test that by asking this question: Why should the depositor suffer? He was not present when it was made out. „ Mr. Laughlin. How do you mean < Mr BiiLKUSY. Why should the innocent depositor suffer^ Mr! LATTGHI.IN. Then, you might say, why should y- ^^o* f * ^ . to insure that every doctor should be paid his fees? You are start Sg "ron a paterLlistic system by which you a- gmng to project people in their private contracts, and if you once begm that you ^%riZ:;r''S\ve not predicating it rather on the fact that '^a;j^r^! ' wX^d to notes it is, but not with re- ^^r.lS^Why is it not with regard to deposits? 142 BANKING AND CUERENCY EEFOEM. Ml'. Laughlin. That is a private contract. A man is not obliged to make any arrangement ivith a bank. Mr. KoEBLY. Bnt how would you differentiate the function of the bank in regard to a deposit account and a note account? Mr. LAropiLiN. For this reason: I have stated several times that the note goes out and performs a quasi public function. Mr. KoEBLY. Are we not regulating banks by State laws and na- tional laws because of their exercising a quasi public function ? Mr. Laughlin. Yes; and you are regulating insurance companies likewise. Mr. KoEBLY. And they do not issue notes. Mr. Laughlin. But if I wanted to get my life insured, I would not ask another person to pay my insurance premium, even though the Government does regulate insurance companies. Mr. KoRBLT. Is there not a strong and a striking analogy between banking and railroading, one transporting and the other effectuating exchanges ? Mr. Laughlin. You mean, now, between the purely banking func- tions and railroading? Mr. KoRBLY. Yes; including State banks. Mr. Laughlin. No; I think not. Because the use of a medium of exchange in the form of money under certain circumstances is an imperative necessity; somebody has to provide that. If it can be provided without expense to the Government in a way that will be connected with business transactions, the Government should do that kind of thing, and it should protect the innocent note holder from loss. But if you attempt to do anything like guaranteeing the deposits where they are voluntary transactions between a de- positor and a borrower, just imagine what it would mean. Think of the total amount of deposits merely in national banks — forty-eight hundred million dollars. If there were anything general, you might do that; but that is an extreme case. Not all the banks are going to go down. As you brought up here yesterday, the actual loss is very small. Why ? If you will look over the reports of the Comptroller of the Currency — I think I made that computation — you will find that in 1898 they amounted to only one-seventieth of 1 per cent, and the figure you mentioned yesterday is a little less. In the last few years that has been growing less and less. Why ? Because the banks are better managed and there is better paper being taken. The Chairman. If you had that guaranty, would or would not they be still better managed? Mr. Laughlin. You can judge as to that from the experience of Oklahoma. Mr. KoEBLY. Vvhj not take the experience of Indiana ? Mr. Laughlin. There, in Oklahoma, it has been rotten. Mr. KoRBLY. But why not take the experience of Indiana on that point ? Mr. Laughlin. I would be very glad to take up that question. Mr. KoRBLY. Why not consult Hugh McCuUoch ? Mr. Laughlin. As you or some one else said — I knew Hugh McCuUoch personally'— you did not have a thoroughgoing guaranty of deposits there. Mr. KoRBLY. They were mutually responsible for each other's debts, undertakings, and obligations. BANKING AND CUEKENCY BEFOBM. 14g section V:"™""- ^''■'' ^'"' '=''""' ""*'' '*'* ">«' "" ''"o «■« And in section 46 : solv^f bmnch'''' *° '°"'"'"*^ '"'^"- P-P^^-*-- to paying debts of any in- Those are the phrases you refer to? Mr. KoKBLY. Yes. o^^w■1^4''''^"''■ f -T^^^^, ;.'™g was tried in Xew York shortly after 1838; it was tried m Michigan, and here was tliis case in In- oiana. The reason I say that is not a fair test of the guaranteeing of deposits IS for the reasons I haye originally described here thil atternoon. lou had m those days a condition in which the chief demand liability of the banks was the note issue. You had yery httle deyelopment of the deposit function and the use of checks drawn on deposits in those earlier days, even in Indiana, because that was farther west, and the conditions Avere very primitiye in the period you speak about. The only liability to speak of in the Bank of Indiana Avas the note issue. Mr. KoRBLY. Your own institution, the Chicago Uniyersity, has published a monograph on Mr. Laughlin. General Political Economy. Mr. KoRBLY (continuing). On the Indiana Bank, which contains H chart that shows a yery decided diminution in the use of notes and a corresponding increase in the use of deposits that manifested itself, as you said this morning, along about 1855. Mr. Lax-ghlin. Yes. You began in 1834. May I look at that chart? Mr. KoRBLY. I do not knoAv whether it is in here or not. We op- erated that bank in Indiana until the Civil War. I think these are the charts. Mr. Laughlin. The circulation, you will see there, from 1855 all the way down to the end, fluctuated in proportion to the dis- counts. Mr. KoRBLY. And so did the deposits. Mr. Laughlix. I mean, that line there fluctuates in proportion to the discounts. The individual deposits are represented by one of these two lines running right across there. Do you see? The indi- vidual deposits did not grow, to speak of ; in fact, they fell off, pro- portionately, during these years. The thing that really grew in j)roportion to the business of the Bank of Indiana was the note issues. I mean that line corresponds with the note discounts. Wliat I mean to say is that the business was really done in those days by notes. I referred to the Michigan case and to the New York case where they tried it, and I should say that the guarantee, in fact, was largely a guarantee of notes, and that the deposit was an insignificant part of it. They had one reserve for both. Mr. KoRBLY. The guaranty in New York was a guaranty of both deposits and notes. Mr. LAroHLix. Yes ; and it went to pieces for that reason. Mr. KoEBLY. It was based on capital stock. Mr. Laughlin. Yes. 144 BANKING AND CUERENCY EEFOEM. Mr. KoHBLY. And for that reason also it failed. Mr. Laughlin. I mean to say the reserve was not sufficient for both. Mr. KoRBLY. The rate of insurance was not high enough. Mr. Latjghlin. No; what I mean to say is that during all this period the so-called insurance of deposits was really the insurance of notes, because the deposits played very little part, and therefore that is no test of what would happen to-day. The only test that would be legitimate to-day would be a careful examination of what took place in Oklahoma when the Bank of Columbia failed, and the following banks. Mr. KoRBLY. That was a guaranty without any power on the part of the guarantors in regard to the conduct of the banks. Mr. Laughlin. Yes ; it was certainly a very bad scheme. Mr. BuLiiLBY. Let me ask you this question: Do you assume that the Oklahoma law is at all similar to what we have proposed? Mr. Laughlin. No; I did not assume that. I only spoke of that as a case where deposits were guaranteed. I do not know what you have in mind. Mr. BuLKLEY. Perhaps we have not made it clear, but I only meant to call attention to the fact that if that is what you base your judg- ment on, we have not made it clear. Mr. Laughlin. I think, there is another reason. If you were to attempt to introduce the guaranty of deposits into a measure like this, it would give it a black eye with the public. They would say it was a cranky thing to do. Mr. KoRBLY. Will you let me read what McCulloch said in his " Men and Measures of Half a Century " ? It is only a few lines : Eiich bi-iuieh, nltbongli iuclependent in respect to its profits, was liable for the debts of every other brancb. Tbis responsibility of tbe brancbes for tbe debts of tbe i-espective briinc-hes created a genera) vigilance wliicb was productive of excellent results. No bank could make a wide departure fi-om tbe line of pru- dent banking, tbe other branches being responsible for its debts, without being subjected to a rigid overhauling and incurring tbe rislv of being closed. JMr. Laughlin. And the result of that was that the notes of the Bank of Indiana were comparatively safe. Mr. KoRBLY. They were accepted throughout the United States. Mr. I./AUGHLIN. Because that formed the largest part of the lia- bility or debts of the bank. Mr. KoRBLY. And the constitution of Indiana to-day contains a clause pursuant to which a like bank may be created, provided they are made mutually responsible for each other's debts and obligations and undertakings. The point I would like to ask you about is : Could not these Indiana banks have continued to operate notwithstanding the tax of 10 per cent ? Mr. Laughlin. Could they have continued? I think they could have gone on doing a banking business without issues. They could have. Mr. KoRBLY. Would the fact that guaranty existed or mutuality ex- isted have in any way retarded their efficiency ? Mr. Laughlin. Of course I could not say. The conditions are very different from anything that I am informed about. They could have done their banking business without the note issue. What effect the BANKING AND CUEEENCY EEFOEM. 145 guaranty of deposits would have I could not say. If it was a well- managed bank there would have been not the slightest difficulty Mr. Willis. May I ask a question there ? ' Mr. Latjghlin. With pleasure. Mr. Willis. If you did perfect this ideal supervision of banking through the comptroller's office— that is, if you had absolutely good examination of banks— then you would safeguard the business in such a way that guaranty of deposits Mr. Latjghlin (interrupting). Would not be needed. Mr. Willis. Notonly would not be needed, perhaps, but would be very useful as a safeguard against unfounded fear on the part of the depositors of a bank. Is not that true ? Mr. Latjghlin. That is exactly what I would like to convey Mr. Willis. If you strengthen the national-bank act in such a way as to get that kind of supervision, then is it not true that your guar- anty of deposits is not a danger or injustice to the safe banks and is a very useful safeguard against unfounded fear by the depositors « Mr._ Latjghlin. No ; I should not agree to that. I think if it were then introduced when the principal was wrong you would find a source of attack coming up from all over the country. Mr. Willis. You mean politically ? Mr. Latjghlin. Yes. And if it was not needed, then why intro- duce that as a point of attack ? Mr. Willis. Are there not many things in this world that are not needed except for the purpose of assuring people against fears that are otherwise particularly dangerous to the community, as in the case one gentleman here used as an illustration, of a crowd collecting out- side of a bank, people gathering and demanding cash, etc. ? Mr. Laughlin. If that bank were doing a good business and had its secondary reserve and good commercial paper it need not suffer. The whole question resolves itself down to the land of banking that is done and the kind of paper that is held. If you have good bank- ing — and you are assured of that through your bank examinations Mr. KoEBLT. And examinations by the banks themselves? Mr. Willis. By the banks themselves and by the Comptroller of the Currency Mr. Latjghlin. They should be as drastic as the clearing houses. Ml*. Willis. I believe when the present Comptroller of the Cur- rency took office more than half of the national banks were at times violating the law in some particular — that is, as to the extent of their loans or in some other respects. I do not recall the exact figures, but I think that was it. To-day you have a very much smaller percentage. Mr. Laughlin. Yes. Mr. Willis. If you have stringent examinations, and strengthen the national-bank act in its examination features, do you not largely eliminate the basis for a difference of opinion as to the guaranty of bank deposits ? Mr. Laughlin. You eliminate the danger, but you do not change the moral principle involved. Mr. Willis. It becomes purely a theoretical discussion ? Mr. Laughlin. Yes. Some of us like to stick to a principle, rightly or wrongly, even though we do not gain or lose by it. _ Mr. KoEBLT. Does not the existence of supervisory powers m con- nection with this joint liability remove your ethical objection? 146 BANKING AND CXJEBENCY EEFOEM. Mr. Laughlin. It does not remove the ethical objection. It re- raores the practical danger. Mr. BuLiiLEY. I would like to analyze that ethical objection, based en the proposition that we are asking somebody else to be insurance for the depositors. Mr. Laughlin. Yes. Mr. BuLKLET. For example, you send a package by express, and if it is lost in transit you have a claim against the express company for the value of the package? Mr. Laughlin. Yes. Mr. BuLiii.EY. You have paid a certain amount of money for the -sending of that package, and it certainly is not a moral question, is it, whether you pay separately for the insurance, or whether your single ]jayment of, say, 25 cents, pays the insurance, without your ever Icnowing how much of it went to the insurance fund; because, of c^urfe, the express company must set aside some insurance to make good losses. Is not that a parallel case? Do you not, when you make a deposit in the bank, give value, in that you give them the use of your money without interest, or at a low rate of interest? Mr. Laughlin. You are raising the whole question, then, as to vvhom the insurance funds belong to, and the insurance reserves. Mr.'BuLKLEY. The question I am raising is this: Given the situa- tion that you are giving some value to the bank, and taking some value from the bank, can you draw a moral line between how much shall be devoted to insurance and how much shall be devoted to other service? Mr. Laughlin. I can not see it in any other light than that I do not see why, if I entered into a voluntary arrangement with the bank, taking these things into account, whether I will get it from the bank or not, etc. — I do not see why there should be doubt as to the fact that I should not be held responsible for a disadvantage arising from somebody else's performance, not mine, over which I have no supervision. Mr. BuLKLEY. Of course you recognize that wherever these losses fall, they fall on an innocent party in every case, and it is only a question of which innocent party is better able to protect himself ? Mr. LAroHLiN. Yes ; but, under the same circumstances, you would not be willing to guarantee any individual in his judgment in regard to any business transaction. Mr. BuLKLEY. Do you think it goes as far as that ? Mr. Laxtghlin. I do, positively. It is the same principle. If I make a contract with the milk man, or anyone else, and he does not take care of it, I do not see why you should guarantee that. Mr. Btjlkley. Are you opposed to a city milk inspection for that reason ? Mr. Laughlin. Analogies do not go on all fours. Mr. BuLKLEY. No ; I do not think it is quite an exact analogy. Mr. Laughlin. I do not think that it quite a parallel case. I was not thmkmg about a perfect analogy there. The point I was thinlc- mg of was this: If I were a seller of goods, and I had losses on bad judgments, and with my dealer, I should not think that another person m the same business should be obliged to bear my losses on my understandmgs with my dealers. That would be a parallel case. That is a similar thing and runs through all our business transactions. BANKING AND CUKEENCY EEFOEM. 147 The Cpiairman. I think we are taking a pretty wide range of inquiry and are engaging in debate, but again, without committal upon the proposition, I would like to read what ex-Secretary Gage said about this subject when he was before the Banking and Currency Committee four years ago. He was asked the question if he thought that guarantee of deposits would lead to unsound banking, and his answer was: No, sii-. I tliiuk tlie fact that under tliis bill there would be a penalty for neglect of inspection, and that there \yould be the machinery for inspection, would lead to sound banking. The only restraint upon the baiik otflcer, really, is the fear of loss, not to the depositors but to the stockhoUlers. That fe.ar and -estralnt would be as operative under your bill as it is now, and would be influenced by the inspections and the restrictions thsit would be formulated by these associations; that would have to be formulated l)y those associates who have to bear part of the risk that man takes if he goes wrong. That is a pretty good insurance that he will go right, and if he goes right he will go in conformity with the principles of good banking instead of bad banking. On the same subject Mr. Conant made this point : The guaranty for deposits tends, in the same way that it tends to prevent the panic before it occurs, to prevent unnecessary and unwarranted runs on the banks of the country as a whole, and to remove the danger from the local banks; and it removes the motive from the local banks for appealing 'o the financial center at Xew York for an excessive and unnpcessary accumulation of money. Mr. Laughlin. I do not believe it. I wish you would aslv the president of the First National Bank of Chicago, who succeeded Mr. Gage, whether he would assent to that proposition, when he ap- pears before you. The Chairman. I simply read that to show that it is not alto- gether a freakish notion, but that men like Mr. Gage, who has been Secretary of the Treasury of the United States, very earnestly ad- vocated it, .and that it is not altogether a freakish proposition. Mr. Laughlin. May I add, Mr. Chairman, that possibly I was misinterpreted when I made my statement. Far be it from me to say that the man who differs from me in his opinions is necessarily freakish. The Chairman. Oh, no. I understand that you did not intend to convey that idea. Mt. Laughlin. What I am inclined to say is that there would come up from the country a feeling that they would attack this and regard it as rather a cranky thing. The Chairman. Do you mean that feeling would come up from the banks ? Mr. Laughlin. No; from the country. You would find it com- ing up from the country. That is my judgment. The Chairman. I quite agree with you that it would raise up a great obstacle to the passage of the law. Mr. Laughlin. I am speaking of its public effect, and that the discussion, would center on that kind of a thing, which is not the biggest thing or the most important thing ; and that the important things in the measure would be disregarded, and the public discus- sion would range around a thing that would be easily attacked. The Chairman. I agree that that would be the fact. Mr. Laughlin. That is all I meant to say. The Chairman. Mr. White was before this committee four years ago, and he was asked by Mr. Waldo of New York as to his views 148 BANKING AND CUEEENCY EEFOEM. in regard to the insurance of deposits, as he called it. Mr. White responded : I was against that at first, but I have gradually come to the conclusion that It would be safe and wise to let the banks themselves do it. I am not in favor of the Government guaranty of deposits. Mr. Burton, of Ohio, asked Mr. White if he would favor making it compulsory with all the banks. Mr. Laughlin. If I thought insurance was necessary, I could see a way of having it done without violating what seems to me a funda- mental principle — having them insure their deposits in a regular institution, just as they would insure themselves against burglary or fire. The Chairman. Let me continue. Mr. Whit« responded to that: The banks have to contribute a certain fund which it is presumed will be sufficient to pay the deposits, and then they have the right to examine each other, and they are compelled, for their protection, to examine each other; and if a bank fails and its own assets are not sufficient to pay the depositors, the other banks may be taxed a certain amount. Mr. Laughlin. I should like to add that the banks ab'eady have a fund for the guarantee of deposits. The Chairman. Yes. While I am on this particular point, let me conclude what Mr. White says, so as to get it in the record in order. Mr. Laughlin. Pardon me, Mr. Chairman; I thought you had finished. The Chairman. He seems to recognize the fact, or to pay attention to the argument that the bad banker gets some advantage by a system of that sort ; but he adds : The bad banker shares in all the benefits of all the good banking in the com- munity ; and evils resulting from bank failures are so great that I would be on the whole inclined to favor the provision of coinsurance. I simply quote those to indicate that it is not altogether a novel and freakish proposition; though I do not know whether I would favor it or not. Mr. KoRBLY. I would like to quote what Horace White said about the Indiana bank. [Reading:] Mr. Horace White, of the New York Reform Club, in a paper on " National and State Banks," characterized the State Bank of Indiana as a " monumental bank." " The earnings and dividends of each branch," said Mr. White, " be- long to their own shareholders exclusively, but each branch was liable for the debts of every other branch. They were independent of each other in the matter of assets, but were united as to liabilities. This was the admirable keystone of the arch." I wish to say further on this mutuality plan of Indiana that Mr. Samuel Merrill, a long-time resident of Indianapolis, and the first president ot the State Bank, and for many years treasurer of the State of Indiana, in a special report to the legislature in 1843, said: The branches having no share in each other's profits, and being responsible for their losses, are jealous and sensitive, and appeals are frequently made to me to take immediate steps to suspend any branch from which- there is an appearance of danger. This state of things has required such iXfeJLce five years sfnca'' '°'''' "^ *''" ^'^"''''' ''*' ^°"''^ °°t '^^^^ been thought o? Mr Laughlin And the result was that their chief form of in- debtedness was then the notes, and the effect of this protection was to strengthen the character of their notes, and not very much the character of their deposits. BANKING AND CUEEENCY BEFORM. 149 , -J^^' ¥°f^^^- T^^y ^^^^ ^°*^ equally protected by the responsi- bility of the banks. ^ Mr. Laughlin. But, in fact, the only thing protected was the notes. Mr. KoEBLT. There was a very considerable increase in the deposit accounts. ^ Mr. Laughlin That chart you showed me showed that thev rather declined than increased. "^ loH""- KoEBLY. They start out with 127,000 individual deposits in. 1835, and it at times ran up to beyond 600,000. Mr. Laughlin. Is your chart, then, correct or not ? Mr. KoRBLY. Here is a table that is a part of the same docu- ment. Mr. Lattghlin. Let me see that, will you ? Mr. KoRBLY. Here it is. There is the table from which I was reading. Mr. LArGHLi>\ The individual deposits rose, according to this statement, leaving out the Government deposits, from a little over $500,000 m the beginning, passed above the million limit, and by 1839 It dropped off, of course, after the panic, and it rose a little above the million line and. then dropped down below that in the forties. So that, roughly speaking, they ran along about the million line without ^•ery much increase all those years covered by this statement. Here is where the deposits move — this line [indicating on chart]. It is there about where it was in 1835. Mr. KoRBLY. That is the First Bank? Mr. Laughlin. Let me say that the business of the bank is indi- cated by its discounts. As the line of the business of the bank changes, increases, etc., the notes change accordingly. Therefore, the lesson bears more upon the notes than it does upon the deposits. Mr. KoRBLY. That is true with regard to the State Bank of In- diana. That was chartered in 1834 and wound up in 1855. Mr. Lafghlin. 1857. Mr. KoRBLY. But the Bank of the State of Indiana, that started in 1855 and wound up about 1863 or 1864, has a different tale. Mr. Latjghlin. Do not understand me as thinking the Bank of Indiana is not a very admirably managed bank. When you con- cede that you concede that the kind of paper it received was no doubt of a high character. Therefore you have the real protection to both deposits and notes in the high character of the paper dis- counted. Mr. KuRBLY. I agree with that. Mr. Latjghlin. Which is the fundamental thing. Mr. KoRBLY. I want to make the observation that if the mutuality of these banks did not contribute to their success, it is certain that it did not contribute to their failure, because they were not a failure. Mr. Laughlin. Certainly not. I did not suggest that. The Chairman. We will take an adjournment at this point until Thursday. Whereupon, at 5 o'clock p. m., an adjournment was taken until to- morrow, Thursday, January 9, 1913. 7481 2— PT 2—13 r> X BANKING AND CURRENCY REFORM HEARINGS BEFORE THE EE OF THE COMMITTEE ON BANKING AND CURRENCY HOUSE OF REPRESENTATIVES CHARGED WITH INVESTIGATING PLANS OF BANKING AND CURRENCY REFORM AND REPORTING CONSTRUCTIVE LEGISLATION THEREON THURSDAY, JANUARY 9, 1913 STATEMENTS OF MR. D. G. ENDY, MR. J. H. TREGOE, MR. CHARLES D. JOYCE, AND MR. W. W. ORR PART 3 WASHINGTON GOVERNMENT PRINTING OFFICE 1913 SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CUKRENCI. House of Representatives. sixty-second conqeess, thied session. CARTER GLASS, Virginia, Chairman. J. FRED. C. TALBOTT, Maryland. JOHN J. KINDRED, NeW York. GEORGE W. TAYLOR, Alabama. EDWARD B. VREELAND, New York. JOHN M. MOORE, Texas. GEORGE D. McCREARY, Pennsylvania. CHARLES A. KORBLY, Indiana. JAMES McKINNEY, Illinois. ROBERT J. BULKLEY, Ohio. R. W. PONTBNOT, Clerk. A. M. McDeemott, AasUtant Clerk. n BANKING AND CUEEENOY KBFORM. Subcommittee of the Committee on Banking and Cuerenct, House op Representatives, Washington, D. C, January 9, 1913. The subcommittee met at 11.30 o'clock a. m. Present: Messrs. Glass (chairman), Talbott, Taylor, Korbly, Bulkley, McCreary, and McKinney. STATEMENTS OF ME. D. G. ENDY, CHAIRMAN OF THE BANKING AND CURRENCY COMMITTEE OF THE NATIONAL ASSOCIATION OF CREDIT MEN, ACCOMPANIED BY MESSRS. J. H. TREGOE, CHARLES D. JOYCE, AND W. W. ORR, ALSO REPRESENTING THE NATIONAL ASSOCIATION OF CREDIT MEN. The Chairman. Mr. Endy, you are chairman, I believe, of the banking and currency committee of the National Association of Credit Men? Mr. Endt. Yes. Mr. Chairman and gentlemen, we are plain, ordinary, every-day business men. The Chairman. That is what we hoped you were. Mr. Endy. We left our desks and work to come down to see you gentlemen. We have been working on this proposition for several years quite diligently. We have tried to study all the plans and prmciples that have been brought before the public, and we na-turally feel very much interested in having the proper kind of legislation enacted. We have some views on the subject which we would like to see incorporated in legislation if it is possible. J will ask Mr. Tregoe to present our views, if you have no objec- tion. I will ask him first to read the leaflet that we are sending out to the members of our organization. First, I want to say that the Credit Men's Association is an organization of business men, merchants, and bankers, distributed all over the United States from Maine to Texas and from the Atlantic to the Pacific. It covers every distributing city of importance in the United States; it is an asso- ciation that is run on high ideals, absolutely only for the purpose of improving trade conditions generally. We get no salaries. Every- thing is done gratis. Just to give you a little idea of the character of work that we do, let me ask you to glance over this copy of our convention bulletin, which was issued ]ust at the close of our last convention. I have a copy for each member «* tl^^/^Jf'j^^^"^^^^^^^^^^ you can keep it and at your leisure glance over it and see the charac- ter of our work. 151 152 BANKING AND CUKEENOY EEFOEM. The Chaieman. I will do that. I would suggest that you would save time by not reading the leaflet. We will simply put it m the record. Mr. Endy. Very well. The pamphlet referred to is as follows : THE EXISTING BANKING AND MONETARY SYSTEM OF THE UNITED STATES BETABD8 COMMERCE AND IS A MENACE TO EVEET BUSINESS MAN. Because of its Inflexible and immobile system of bank reserves, there can be no centralization of banking resources to meet an unusual pressure or strain, with the result, as experience proves, that during the past 60 years there have been recurring panics more or less violent, but always exacting from business a heavy toll. Because of this inflexibility and the very large number of our independent banking institutions, there is, in panic periods, a disposition upon the part of each to strengthen its own position by the hoarding of funds, the contraction of loans, and the vcithdrawal of that support to legitimate business which is so necessary in these periods of quick and dangerous readjustment. Because it was solely an emergency measure with no adequate provisions for elasticity of plan to provide for the ebb and flow in business and to meet success- fully the strains upon the public confidence, such as always precede banking and business disturbances. Because currency secured by the public debt as represented by Government bonds is influenced more by the market value of the bonds than by the real needs of business and the currency requirements to finance large crop movements or other emergencies. A currency limited by the public debt, controlled by the availability of the bonds securing it, may tend to inflation in periods of inactive business and limited currency demand, and become dangerously inadequate in periods of activity and strain because no more currency can be issued than there are bonds upon the market available for currency Issue purposes. Because it makes no provision for a fixed and reliable market for discounting or rediscounting at reasonable rates, at all times, high-grade commercial paper, a vitally necessary condition in making it possible for business men to convert their sales into a marketable liquid asset in order legitimately to meet the necessities of a safely increasing business. Because it falls to legalize acceptances, which are a convenient and sound form of commercial paper, especially in the development of our international trading. Because it attracts the flow of banking funds into central reserve cities, where it is largely loaned by the banks on call upon fixed capital or stock- exchange securities, thus encouraging speculation to the prejudice at important times of agriculture and commerce. Because there is no provision for the encouragement of international trade by the establishment In foreign cities of American banking houses upon an adequate and sound basis, or any provision whereby the Nation's stock of gold may be mobilized, Increased, or protected when international balances may be against us. Because our financial history compares unfavorably with that of England and the commercial nations of the Continent, not only m deficiency of methods provided for the protection of commercial credits, but in that our Government through Its Treasury system, withdraws funds from the ordinary channels of ^,';filf I Treasury and subtreasury system is not only unsound in theory, but ss;r-»,"s.°'iSa~ 'Sfn'Ltbr""" ""'"■ " "^^'^£^"' .f^ZT"^^ ^^^ Y-^^^f "^^^ ^^'■'''"y ^ ^a"" measure, with no provision or thought fLTltT^''^^''"'^^ commerce, and because of Its inflexiblity and other d" ness man.'' ° ' '^'*''" ''^' ''''°'"" ^ ^"^^^^'^t "^'^^'^ to every progressive' bust- Mr. Tebgoe. I think that is perfectly right. Mr. Endv has asked me to present on behalf of the ^commitJee fome reconSSe/daSons. I would say that I would be very glad if you would not lookupon BANKING AND CtTEBENCY EEFOEM. I53 me as an official, but as a man trained in business. I spent a Quarter of a century in business, in credits, and I took up this work lust a year ago As Mr. Endy has stated, this is a business organization now tiie largest commercial organization in the world, and its Dur pose has been to improve and protect commercial credits to de velop commerce along sound lines, and it was thought about three years ago that this association should take under its cognizance the banking and currency question, and like all organizations, it floated around and was swept around by the billows of thought and con- tending ideas; but since last June the present committee has been diligently studying the question, and while the convention in Boston last June unanimously stood for the Monetary Commission's bill with some slight extensions, which you will find recorded in that journal, while a body of 1,100 delegates, representing the banking interests all over the country, stood unanimously for that bill with some slight modifications, yet this committee has felt that it was not bound by the resolutions of that convention, and so has gone along on individual lines to study this question from all angles. The committee believed, and in so assuming felt that it would have the support of the organization, that it would not recommend or urge upon your committee any detailed plans. It felt that our legis- lators in Congress should have the exclusive privilege of developing a system, of putting into that system the ideas and details which in their judgment they felt the Nation demanded; so that they have refrained, and will refrain, from indorsing any system whatever. We were solicited to undertake the support of this system and also the Monetary Commission's bill, but we have assumed the attitude that we will not indorse or urge upon you any system. We want, in- stead, to_ place before you certain principles which in our humble, commercial judgment, we believe you should incorporate in any sys- tem that is eventually adopted ; principles around which a system can be built up. There are two principles that we believe are fundamentally proper in any banking and currency system for this Nation, so that com- mercial credits and our commerce can be developed and protected, because we believe if this Nation is going to be great, it is going to be great commercially, and we have just consolidated the two principles or suggestions that we want to place before you, and the first is that we believe in a central institution. We do not say to you what character that institution shall take. We do not say to you whether it shall be independent, shall be a stock institution, or the United States Treasury should be converted into that institu- tion, but we believe that there should be a central institution with the function of a depositary for bank reserves and national funds, the issuance of currency upon proper reserves, the discount or redis- count of sound commercial paper, the establishment of banks in foreign cities of trading importance, and the protection of our stock of gold. The second principle that we want to suggest is that the country be divided into not less than 25 districts, each district to be organized upon a clearing-house basis, the banks in such districts subject to regulations that will insure reasonable safety to depositors and clean banking, and that in each district there be one central city designated where an agency of the central institution is to be located for con- 154 BANKING AND CUBKENCY BEFOEM. venience and the assembling of bank reserves, the discount and redis- count of sound commercial paper, and the clearance of checks ex- peditiously and economically. Mr. Chairman, those are our suggestions. Those are primary, and we believe they are fundamental. Mr. Endy. I want to supplement Mr. Tregoe's remarks by_ saying that while we believe in a central agency or a central organization, in view of the fact that there has been a great deal said about the danger of that central institution getting into the hands of the monied interests, we believe that it would be safe to advocate having that central power; that central organization, controlled absolutely by the Government. "We do not believe the monied interests can run away with the Government. Mr. Teegoe. Mr. Chairman, those are our ideas, and we are ready to be grilled by any members of your committee who would like to ask us questions or to elaborate upon those ideas. The Chairman. Mr. Tregoe, it seems to me that your idea of a central institution is quite similar to the idea of the plan of the Monetary Commission so far as its functions are concerned. As I gather your notion, it is to be an institution that will do a banking business ? Mr. Endy. Only with the banks. The Chairman. It is to hold reserves of the whole country, and it is to discount and rediscount paper, and it is to have Government deposits, and it is to have control and supervision of the various regional institutions. Is not that pretty much what the Monetary Commission proposes? Mr. Tregoe. We must be frank to say, Mr. Chairman, that in our idea, when you get us down to a frank basis, we can not but feel that that measure was very scientifically worked out; and really, setting that aside, we can not see how you would put the banking and cur- rency system of this country upon a proper and flexible, elastic, and adequate basis without having an institution performing those func- tions. Now, as I say, we do not advocate any definite plan as to the organization and the management and control of that institution; but if the Government is going to exercise supervision, there may be no objection; it may be concurred in by the best thought of the country that the Treasury Department go into the banking business, out and out, to perform these functions. I do not say that we ad- vocate that, but I mean that if these ideas can be met by such a plan it may do the work ; but that central institution with these functions certainly ought to be in any system that is adopted in this country, according to our judgment. The Chairman. Suppose it should appear that there are insuper- able obstacles to the adoption of such a plan as you suggest. I sup- pose you are aware of the fact that the platform of the Democratic Party adopted at Baltimore specifically declared against the central reserve plan as propounded by the Monetary Commission, known as the Aldrich plan. That being so, some of us think that there is an insuperable obstacle to the adoption of any such plan. Wbat would be the attitude of your association toward a regional reserve- bank plan, dividing the country, as you say, into not less than 25 districts, and conferring the functions and the powers that you sug- gest for a central reserve association upon these regional reserve BANKING AND CUBBENCY BEFOBM. 155 associations, with a central supervisory control over the regional reserve associations. Mr. Endy. The objection to that, Mr. Chairman, is that you re- quire some agency whereby the entire country can be knit together. Now, if you stop at the district organizations, in times of stress and crisis you simply have these isolated districts, instead of isolated banks, as we have now. The Chairman. Mr. Endy, what saved the situation in 1907? Mr. Endy. The patriotic work of the clearing houses. The Chairman. Very well, then. If the clearing houses could save the situation and rescue the business community from the evils of panic, right in the midst of panic, why might not the regional re- serve associations, with all of the functions of clearing houses, but with even broader powers, prevent a situation of that sort? Mr. Endy. I am quite sure it would improve the conditions, as compared^ with what they are at the present time ; but our thought was that in creating new legislation which might stand for a num- ber of years, we ought to have it as near complete as we can see our way to have it. The Chairman. But if you can not get what you want, you ought to take what you can get. Mr. Endy. All the time. Mr. Teegoe. Speaking about the Baltimore platform, I mentioned to you that this committee has really not repudiated, but has not thoroughly respected the platform adopted at their last convention. They would not permit the resolutions of that convention absolutely to bind their conscience in that work. They recognized their free- dom as business men to exercise their best business judgment upon this question, and I do not believe that you gentlemen will sacrifice that same spirit to the letter of a platform, when there are new ideas that come to you, when you must learn, as we are learning now, re- specting the wishes of other people, and are getting new views and angles on the question. The Chairman. You do not agree with Gov. Hill that a plat- form is merely constructed to get in on, do you? Mr. Teegoe. I have absolutely no respect for a platform which was adopted, such as I witnessed in Baltimore City, which is my native home. I do not believe it should bind the consciences of men. We must be free men, and must be willing to respect the ideas of others. The Chairman. Do you not believe that a representative ought to represent? i x ii, j. * Mr. Teegoe. That is not the idea. I have never thought that ot the representative government. I believe, of course, that repre- sentatives should represent the wishes of those represented; but those wishes are not supposed to bind the conscience of the representative. The Chairman. Then the representative who finds that his con- science will not permit him to represent ought to resign, ought he not? . ■ n 1 ■ 1 i. Mr. Teegoe. That is a matter of individual judgment. Mr. Endy. We have thought that your committee, with all the knowledge and information that they have received on this subject of banking and currency, could write a much better platform reiat- 156 BANKING AND CUREBNCy EEFOBM. ing to that particular plan than probably the gentlemen who con- structed that platform. The Chairman. Do not understand, gentlemen, that this com- mittee is at all proposing to introduce politics into the construction of a currency measure. But this committee, I thinkj speaking for myself and some of my colleagues, is obliged to recognize a condition that confronts it, and it is obliged to recognize the fact that the platform of the now dominant political party, the party which will have possession of this Government for the next four years, declared in terms against the central reserve plan of the Monetary Commis- sion, and against a central bank, the distinction between which two propositions some of us are unable to discover. Mr. Okk. Did they declare against a central organization of any sort? The Chairman. No; nor is this committee or any member of it against a central organization of any sort? Mr. Orb. You believe there should be a central organization of some sort? The Chairman. Yes. Mr. Endt. Well, that is all we feel. The Chairman. But, speaking my own views, we think that the powers of that central institution, whatever it may be, ought not to be as vast as the powers proposed in the Monetary Commission, and that the exercise of whatever powers that are given it should be well guarded. Mr. Orr. I do not think it is necessary that you should give the central organism such power, with the proper development of the regional organisms you speak of. They can take care of most of the discounting and rediscounting of commercial paper. The Chairman. You confine the issue to the central organization? Mr. Tregoe. We absolutely stand for that ; yes. Mr. Endt. Yes. Mr. Tregoe. That the currency should be issued by one institution. There is where we differ from Congressman Fowler's plan, and could not support it. We do not believe in the credit currency which he advocated. Mr. Endy. And that is another reason why we believe that the Government should have the absolute control of that particular agency. The Chairman. You believe in Government issues, then ? Mr. Endy. Yes. Mr. Joyce. If it is found that it can not be controlled, or that sat- isfactory plans can not be drawn up by which any possibility of any clique or system getting control of it can be eliminated, it seems to me that Congress can devise means, if it is found inexpedient for the Government to go into the banking business, to keep it out of such a system, to keep it out of what is commonly loiown as Wall Street. The Chairman. You would take away altogether from the indi- vidual bank the right of issue ? Mr. Joyce. Yes. The Chairman. You would not be willing to see the regional re- serve banks, should such a system be proposed, have the right of issue? Mr. Joyce. That would be an improvement. BANKING AND CTJKRENCY EEFORM. 157 The Chairman. You think a central association here at Washing- ton could better determine the needs of your particular section of the country than a divisional board, familiar with trade conditions and acquainted with the people of your country? Mr. Joyce. No; I think the needs should be determined by the regional institutions in conference with the central institution. The Chairman. Would you make it mandatory upon the central institution to respond to any requirement that the divisional associa- tion should present to it ? Mr. JoTCE. Not mandatory under all conditions. The Chairman. Would you make it absolutely discretionary ? Mr. Joyce. Not altogether discretionary. The Chairman. How wouM you strike the happy mean? Mr. Joyce. I would make it mandatory under the right conditions and at the same time discretionary. The Chairjiax. Who would determine when conditions were right ? Mr. Joyce. That would be a matter of detail, I think, for Con- gress to work out. It can be safeguarded. To my mind there is no question which can ever come before Congress which will be as abso- lutely nonpartisan as the question we are now discussing. It is a political question, admittedly, because everything that Congress touches must be political, but there is no way in which this question can be considered from an angle of partisanship. The Chairman. No; this committee does not propose so to dis- cuss it. It has been suggested that the divisional reserve banks, should a plan of that sort be seriously considered, might be given the exclusive right of issue up to a certain point, and beyond that the right of issue should be with some central institution. How would that strike you? Mr. Tregoe. Might I suggest just the thought that has come mto the working of the committee? Of course, the currency that is issued should have a reserve, part metallic, part commercial credit or sound two-name paper. The Chairman. No bonds? . Mr. Tregoe. Sure, if acceptable. I am speakmg now m general terms. , . -.^t , n i The Chairman. What I mean to ask is, Would you do away en- tirely with the Government bonds as a basis? Mr Tregoe. We are entirely opposed to a circulation based upon the national bonds; that is, not for its safety but owing to its inflexi- bility as now operated. We have set it forth in this little leaflet. The Chairman. Yes ; I have read that. ., • • « ^m, of Mr Tregoe. We have set forth here why it is inflexible Ut course in working out a plan for currency issue itmight be expedient it might be wise, to have the Government bonds received as a part of thi reserve, and other acceptable bonds But all currei cy issue should be secured by at least 33* per cent gold. Gold is the only money at present, and there should be a metallic reserve of at least Te third the cui'rency issue, and then the balance on cominerc al St or bonds. But what we want to create, if you can ee oui point of view, is that market, that fixed market, for the discount and St^ount of sound commercial paper; and commercial papei tech- 158 BANKING AND CUEKBNCY EBFOKM. nically is not one-name paper, it is at least two-name paper. That is commercial paper, technically. We want that market for two- name paper, a free market for discount and rediscount. Now, taking your central cities, we seem to agree upon that, that there is good reason to our minds — and I believe I speak for the committee — why the governing body in that district should not pass upon the acceptability of that two-name paper or commercial credit. Then their requirements handed on to the central institution should be the basis for the issuance of currency covering what requirements are needed in these regions — that is, the guarantee — part metallic and partly commercial credit or two-name paper, or bonds if also adopted. You can see how it would work, working from the regions into the central institution, whatever it may be ; but the central institution as the place for the issuance of the currency, and guarded by the regions acting as one coordinated body Avith the central institution at the heart of the system. The Chairman. With the final word and ultimate arbitrary power with the central authority? Mr. Teegoe. The regional districts should have the final word on the commercial paper ; but there are, of course, details in working out such a system, because there, must be certain authority reposed in the central system, because otherwise there would be no need of the cen- tral institution. But, departing from that a little, our attention has been directed \ery largely recently to international trade. You, gentlemen, would be surprised to notice the profound ignorance that exists in this country as to foreign trade, how it should be conducted, how it should be conducted in the foreign country, how our representatives should carry their funds. We are being appealed to almost every day for information ; and we will never be a nation of international traders until our banking system expands, until we can give to our representatives and to our buyers in these countries the facilities of .Vmerican banks, just as England and Germany have developed their tremendous foreign trade through a banking system and bank- ing facilities. Mr. Joyce. Germany never got it until she followed England in her foreign banking system. Mr. BuLKLEY. What do you propose in that connection ? Mr. Teegoe. We propose in that connection the establishment of banks which should be under the supervision somewhat of the cen- tral bank, or under the terms and regulations of the bank, if we want to put it so, whereby American banks can be organized in the large foreign cities, so that exporters from this country and the importers Irom that country can do their business direct through the banks. Mr. Bttlkley. What prevents American bankers from doine busi- ness in those foreign cities now? Mr. Teegoe. There is no encouragement for it. Mr. BumiLEY. What encouragement do you propose to give them now! Mr. Teegoe. I do not think we are prepared to give you details. Mr. KoEBLY Is It not a fact that we have taxed foreign goods or imports, and that we have sought to be an isolated Nationf and that is the reason we do not trade? We discourage foreign trd^e BANKING AND CURRENCY REFORM. 159 Mr. Teegoe. We have just taken up our commercial relations with foreign countries Our commercial thought has been entirely concen- trated domestically. Now we are going to look foreignward A great many of our foreign manufacturers are beginning to talk of exports to Cuba and Central and South American citiel, and those banking institutions niust be encouraged in order that there might be a tacility tor transacting business with foreign buyers Mr. BuLKLET. Can you tell us what encouragement England or Orermany offers in that connection? Mr. Teegoe As I understand, the large banks of Germany— and the Deutsche Bank is one of the large banks of Germany— help the Ger- man manufacturers. The Deutsche Bank is entirely a commercial bank, and it helps the manufacturers of Germany to do a foreieu business. ^ Mr. BuLKLEY. Yes; but what has the German Empire done to en- courage it; what has the Government done? Mr. Teegoe. The Government itself? Mr. Btjlki^t. Yes. Mr. Teegoe. It has only encouraged it by indorsing and sanction- ing the character of the bank they have in the country, which is all we are asking now, that the Government through regulation should not take a definite part in this, but should give us that system which will permit work of this kind to be done. Mr. BxiLKLEY. I do not quite understand what your suggestion is. I am interested in promoting foreign banking, but I would like to understand definitely what you would propose to do. Mr. Teegoe. Of course, you will bear in mind that we are not prac- tical bankers. We are speaking now from the standpoint of busi- ness men who have touched the banking business from simply one angle, and have studied the question from the angle of the commer- cial man. The first point necessary in developing international trade is to put our banks on a basis of commercial banks. Your large banks of this Nation are not commercial banks. You know that. They place such a large part of their funds in fixed capital securities. The Chaieman. They are strictly financial institutions. Mr. Teegoe. They are speculative institutions, Mr. Chairman, be- cause our system of reserves compels them to be. It is not their choice, but our present system of handling reserves has compelled the banks in central reserve cities to put their capital out on call, on fixed securities, so that when the inland bank says. "' Return me my reserves," they can return the money. Mr. Koeblt. Will you explain why that is so ? Mr. Teegoe. Why it is so? Mr. KoEBLY. Yes. How does our treatment of reserves compel the sort of investment you refer to? Mr. Teegoe. Because we have in this country over 25,000 banking institutions ? Those institutions which are under Go^•ernment regu- lation or the national-bank act are compelled to keep certain reserves at home. They can deposit a part in reserve cities, and those banks in reserve cities deposit a part in central reserve cities. Just as soon as a strain comes, as we show in this little leaflet, the inland banks become panicky and withdraw their reserves, and the institutions holding these reserves, even in the local communities, they begin to store hard money until their reserves are far above the legal require- 160 BANKING AND CUBBENCY BEFOEM. xiient. They Avithdraw their funds from the reserve and central I'eserve cities. AAlien the funds are all flowing into these cities, as they are begin- nning to do and are doing now after our strain of the last few months, they flow into those cities and the funds accumulate there. They can not loan those funds on good commercial paper at twv or three or four months. Mr. KoEBLY. AVhy? Mr. Teegoe. Because there will perhaps be another strain, and the inland bank has all those funds there subject to check and call, so that they must have their funds in that condition whereby they can call the funds to meet the demands of the inland banks. They can not loan those funds on one, two, and three months' paper, because that again is fixed. Mr. KoEBLY. AYould j'ou draw the inference that the inland banks should be compelled to keep their reserves at home? Mr. Teegoe. Those 25,000 institutions pile up their reserves in time of strain. Xow, if those reserves were consolidated The Chaibman. AVe can not control the 25,000 institutions here. AA"e can control only about 7,200 of them. Mr. Teegoe. You can control at present only 7,200, but you can control, by a system, as many as will come into that system; and, of course, I assume that it is going to be your purpose to bring about uniformity in banking. We need a uniform banking system. AA^e ought not to have private and trust and State banking, but we ought to have a uniform system of banks which would be subject to the same regulations. The Chaieman. How would your committee bring that about? How would the Congress bring that about? Mr. Teegoe. The only way you can bring it about would be through the regulations you would make, giving preference to those institutions that will become associated in the system you devise. For instance, if you establish a fixed market for the discount and rediscount of commercial paper, institutions must have the advantage of your system or they can not compete. Mr. KoEBLY. AA^ould not that be accomplished now by repealing' the statute which requires banks to report all their rediscounts? Would not that accomplish all you are contending for? In other words, do not banks now refuse to rediscount because they have to report it? Mr. Teegoe. It is a very tender spot at the present time. You wiU not find large banking institutions that are willing to rediscount. I had one of the largest bankers say to me, right in the heart of the recent strain when Ave were pretty close to another financial panic, " If I could only take some of that good paper I have in my safe and have it rediscounted ! " But he could not. Mr. KoEBLY. He could do- it if he would report it. Ml'. Teegoe. If he reported it, it would be taken as an evidence of weakness. Mr. KoEELY. Yould you take it as an inference that reserves should be kept at home? Mr. Teegoe. Keserves should be centralized. Mr. KoEBLY. In other words, the metallic reserves of the bank should be knit together. Now, Avill you develop to me your objec- BANKING AND CUEEENCY EEFOEM. 161 tions to knitting together the commercial reserves ? Why should thev not ^^so be kmt together? I would like to have your explanation of Mr. Tregoe. I believe they should be knit together— the metallic reserves and the commercial paper reserves as well. There should be in this central reserve city in each district a depository for bank rserves in that district. Mr. KoEBLT. What is the difference between knitting together the reserves of the banks in one vast fund for the protection of the credit machinery of the country, and the guarantee of deposits ? Is it not a different name for the same thing? Mr. Tregoe. Oh, no; I should not say that. We can not see any basis, really, for guarantee of deposits. Mr. Bulkley. May I ask a question about reserves before you get on the guarantee ? Mr. KoRBLY. I Avas not seeking to get off of reserves. Go ahead. Mr. BuLKLEY. Is it your idea that these several banks should be compelled to carry their reserves with a central institution ? Mr. Endy. At least a portion of them. Mr. Tregoe. They would have to have some portion at home, be- cause that is expedient, of course. Mr. Bulkley. That is, as between carrying them in the central institution and carrying them with banks in New York City as they do now, what would be your judgment? Mr. Tregoe. Oh, we stand for that district work, and that central city in that district which will act as the depository in that district, which will act as the place from which will radiate the control — that is, the regulation of the banks of that district. In other words, you see that we want to apply to the banks of the district that principle of safeguard and safety such as is exercised by some of the clearing houses to-day. Mr. Bulkley. But do you want to prevent the banks from carry- ing a part of their reserves with other banks in reserve cities? Mr. Endy. Not necessarily; but a considerable portion should be kept in the home district. Mr. Bulkley. Would you fix by law the amount that they should keep ? Mr. Endy. I think Congress could perhaps fix the percentage of thiit S/i.tiST9.ctonlv. Mr. Bulkley. Certainly, Congress could; but I am asking what you recommend. . . Mr. Tbegoe. The fixing of the legal reserve as it is now— lo per cent in the country banks, 7 per cent at home, and 8 per cent deposited in reserve cities. In times when things are moving right the bank has a good deal more than that 15 per cent, so that it can keep its legal reserve in a reserve city and yet use the New York bank as a depository for other funds. It is a natural law that funds will go where there is the best price. You can not alter that, but you can compel that bank to keep a certain portion of its reserves in that ''^Over aSlbove that is the subject of the regulations of the district. Mr. Bulkley. You were speaking of the getting together ot the reserves in the central reserve. How will you require that i 162 BANKING AND CUEKENCY KEFOKM. Mr. Tregoe. By requiring the bank to keep a certain portion of the reserves in the district city. Mr. BuLKLEY. Do you mean in any bank in the district city or in the association? Mr. Teegoe. Oh, no; that institution which is recognized in the system. Mr. BuLKLEY. So that the deposit should be in the association ? Mr. Tkegoe. It should be in the association. Mr. BuLKLEY. You think that is important, that they should be required to keep a part of it in the association ? Mr. Teegoe. I think so. Mr. BuLKLEY. In fact, if they were not required to keep a part of i1 that would not be centralizing reserves? Mr. Teegoe. That would not be centralizing reserves, because that is a centralization and mobilization of reserves right there. Mr. Btxlkley. Do you find anything of that kind in the Aldrich plan? Mr. Teegoe. I do not recall it. Mr. Endy. Yes ; it provides that a portion of the reserves be kept in the district association. Mr. BuijKley. It provides that they must be, or that they may be? The Chaieman. I did not suppose that the Aldrich plan bothered with the reserve requirements of the law. Mr. Endy. It says that at least a portion of the reserves shall be kept. I do not think there is any absolute compulsion. Mr. Bulkley. Is there any compulsion? Mr. Teegoe. There is no compulsion in the Aldrich bill. Mr. Bulkley. Is not the provision that they may count their de- posits as reserves? Mr. Teegoe. Yes. Mr. Bulkley. Is it not a fact that the association is not allowed to pay them any interest? Mr. Endy. Yes, sir. Mr. Bulkley. Is there any provision in the Aldrich plan against other banks allowing them interest ? Mr. Endy. No. Mr. Teegoe. The plan could not control banks that were not a part of the plan. Mr. Btjlkley. But what I am getting at is this: Does not the Aldrich plan leave every incentive to the banker to carry his reserve with the correspondent in the central city, as he does now, instead of depositing it with the reserve association, namely, by permitting the banker to pay interest and prohibiting the reserve association from paying interest? Mr. Teegoe. I would say, in answer to that, that it has been my impression from the study of the bill that the banks which become a part of the plan are required to deposit a part of their legal reserves either in the district or in the central association. Without that I do not see how the plan can be a well-lmit, good plan. I can not give you the phraseology of it. Mr. Bulkley. In other words, if it does not do that you might ioin w:th the Democratic platform in condemning the plan? Mr. Teegoe. You are trying to tangle me now. Mr. Bulkley. No ; I am trying to find out. BANKING AND CUEKENCY REFOBM. 163 Mr. Endy. I say no; it does not compel you to deposit any portion of your reserves, under the Monetary Commission plan. ^ ^ be so""? ^^^^^^- ^"^ y°" "^^^ *^^"^ i* is important that it should Mr. Endt. But the idea comes in here that it would be almost nec- essary if you wanted to avail yourself of the privileges. You can not thatXnk^''^ ^^^^'" """ ^^' ^°" ^^^^ ^°™^ ™°"^^ "" "^^P^si* ^i*^ Mr. Bttlklet. How much money? Mr. Endt. It does not stipulate. Mr. BuLKLEY. Is there any relation between the amount of redis- count privileges and the amount of deposits? Mr. Endt. I presume the managers would restrict your rediscounts unless you had a suitable balance there, the same as that precludes now and always would preclude. Mr. BnLKLET. Let me follow that thought up for a moment. The rediscount with the National Iteserve Association is handled through the branches, is it not? Mr. Endt. Yes ; it is practically the same thing. Mr. BuLKLEY. There is no relation fixed by law between the amount of deposits which any bank can have with the reserve association and the amount of commercial paper which it can get rediscounted « Mr. Endy. No. Mr. BuLKLEY. But it is your judgment that the branch manager- would it be of the reserve association ? Mr. Endy. I presume so ; yes, sir. Mr. Btjlkley (continuing). Would exercise the discretion? Mr. Endy. Whoever is in authority. Mr. BuLKLET. And would refuse accommodation to banks which had not a sufficient balance ? Mr. Endt. To warrant it ; that is my idea. Of course, under the Monetary Commission's bill it assumes that the thing would work out in that wa.j, because, in the first place, the banks are interested in making the measure a success because it is their money that composes the capital of the institution — of the reserve association — and they would naturally keep a portion of their reserves in this central insti- tution. Mr. BuLKLET. What I am trying to arrive at is whether they would keep enough of it so that you would have what you say you desire, namely, a centralization of reserves. You must remember that, while they would have the general incentive of trying to make the plan a success, they have as against that the specific incentive of being allowed interest on deposits. Mr. Endt. Yes. Mr. BxJLKLET. Now, is not that rather an important consideration for a bank to get interest on its deposits where it can ? Mr. Endy. I think it is -quite natural that they should want to place their money where they can get some return for it. Mr. BuLKLET. In other words, it would be natural that they should try to carry as small a balance with the reserve association as they possibly could? Mr. Endy. Yes. Mr. BuLKMiT. So that the tendency would be rather agamst cen- tralizing reserves? 164 BANKING AND CUEEENCY BEFOKM. Mr. Thegoe. Do you not believe there are certain advantages which come through centralization, and the ability to rediscount would be far more attractive to the banks than even a small interest on their deposits? When you take this matter you must, of course, take it from all sides. You have got to consider the disadvantages with the advantages ; and the advantage of a fixed market for the rediscount of sound commercial paper is the crying need, in order to commercial- ize our banks and make them commercial institutions. Mr. 'KoEBLi'. Coming back to the question I asked a while ago: If you remote the requirement of the Federal statute that banks must report rediscounts will you not naturally get a rediscount market? Mr. Teegoe. Not to the extent of legalizing the market, making it a legal arrangement or a legal plan. You will never overcome a certain amount of discredit that the large bankers now attach to the rediscounts by simply removing that one feature ; and also you must take into consideration this, that the regulation of banks for the reasonable safet}' of depositors and clean banking requires unlimited publication; that the public should be kept always appraised of the conditions of banks. We are entitled to it and we should do it. ]\Ir. KoRBLV. Now, coming back to the question of rediscount, do you think if Congress created a bank especially for the purpose of ]'ediscounting, the objection that exists in the minds of some bankers against rediscounting would be obviated? Mr. Teegoe. You would only be maldng one half of the thing by creating a bank for that one function. Mr. KoRBLY. That one function among others. And if. you cre- ated a bank for rediscounting, among other things would that ex- clude a bank from rediscounting through other banks? Mr. Teegoe. Oh, no; they do it now. Mr. KoRBLY. I want to ask you one or two questions. Is the Bank of England a central bank, pursuant to the terms of its charter ? Mr. Teegoe. The Bank of England, in its relation to other banks, is largely a bank of rediscount, is it not? Mv. KoEBLY. Of course, it is so, by the terms of its charter — ^by the law of its creation. Mr. Teegoe. That I can not say. It may be such by custom. Mr. KoRBLY. It is not the largest bank in England, is it? Mr. Tregoe. I understand that it is not the largest commercial bank : but you understand why that is. Mr. KoEBLY. It occupies its position naturally and pursuant to natural laws, rather pursuant to any parliamentary conditions con- tained in its charter, does it not? Mr. Teegoe. I should say it is a customary bank. It has devel- oped under the customs of that country as such an institution would grow here. It is not the largest bank in England, for the reason that ]t IS not the bank of individuals, it is the bank for bankers, just as we would have such an institution here. We do not want a com- petitive institution. Mr. KoRBLY. Could not you or I open an account with it « Mr. Endy. Yes. Mr. KoRBLY. Yes. Mr. Tregoe. I mean it is a customary bank, you understand. Mr. KoEBLY. Coming back to the centralization of the reserves— my whole purpose is that our minds may meet and that we mav BANKING AND CUEEBNCY EEFORM. 165 understand each other more thoroughly— the advantage of central- izing the reserves IS that the reserves may be used as a cSmmon fund? Mr. lEEGOE. That they may be used as a common fund. Mr. KoBBLY. That the money may flow where nature demands it, where demand anses for the protection of the credit machinery of the people of the United States; is that your understanding? Mr. Endt. Yes. ^ Mr. Tkegoe. Yes. AiiT^""' •?°.'^^J- ^ T"^* to insist upon an answer to this question: Why It It IS desired that the metallic reserves of the bank should be knit together so that protection may be given to the banking insti- tutions o± the country, otherwise called the mechanism of exchange IS it not also equally desirable that the two-name paper or commercial assets should be knit together for the protection of the mechanism of exchange? I should like to have you explain why one should be done and the other not done. Mr. Teegoe. Two-name paper is not a reserve. Mr KoEBLY. Oh, yes, it is. It is the biggest part of the assets of a bank. Mr. Teegoe. It is part of the assets, but it is not a legal reserve of the bank. Mr. KoKBLT. Let us do away with the term "legal reserve" and consider banking as it is. The biggest part of the assets of a bank that makes it solvent is its possession of sound commercial paper. Mr. Teegoe. That is an asset. Mr. KoEBLY. It is an asset also. Mr. Teegoe. Yes; and it is a reserve. Mr. KoEBLY. Gold is an asset also? Mr. Teegoe. Yes ; and it is a reserve. Mr. KoEBLY. So is standard commercial paper. We are differen- tiating on things that are unimportant. What I want to know is, why should not the commercial assets of the bank be united for com- mon protection just as well as the metallic assets should be united for common protection ? Mr. Teegoe. I do not see how you would effect that. The legal reserve of the bank now is the lawful money. Two-name paper of any character, commercial paper, is not lawful money. Mr. KoEBLY. Certainly not. Mr. Teegoe. The reserve of the bank now is lawful money. Mr. KoEBLY. Yes; but if you should pick out the one thing that they could lose with the least harm, you would say that they should lose their lawful money rather than their commercial paper? It is 19 parts out of 20 of the things that make a bank solvent, is it not ? Mr. Endy. How do I understand you ? I do not quite catch that question. Mr. KoEBLY. A banker is obliged to keep a certain percentage of reserve among his resources. Part of that is metallic and part is commercial paper. There is no reason at all why these elements should not be regarded as the same thing, simply as a common fund; absolutely no reason. I want to get at the reason why the commercial paper in the banks of the Nation should not be considered as a common fund, if gold and lawful money' is so regarded. 76112— PT 3—13 2 166 BANKING AND CUEKENCY EEFOEM. Mr. Teegoe. Anything that is a reserve is the same thing, whether it is Government bonds or two-name paper or single-name paper or gold. The Chairman. I want to suggest, when you shall have finished on this particular phase of the question, that, in niy judgment, we will make more progress and have the record more intelligible if we will first exhauht one phase of the matter before we get off on an- otlier. Mr. Joyce. Mr. Chairman, if we attempt to exhaust anything, we will be here all through the extra session. Mr. KoEBLT. I think we have made some progress toward getting together. The Chairman. I make that sugge^stion because it is a little con- fusing to an uninitiated mind like mine to jump indiscriminately from the definition of foreign banking to reserves, and from issues to organization, etc. I would like to see each phase in an orderly way discussed as completely as may be before we get on those abstruse questions and fine definitions. Mr. KoRBLY. Now, if I may continue, I want to take up your ques- tion of the elasticity of the currency. Will you mind telling us briefly what you understand by elasticity of the currency ? Mr. Teegoe. Elasticity of the currency is tlie ebb and flow of the currency according to currency requirements. Mr. KoEBLY. That is, that bank notes shall go out over the counter and come back to be paid in the natural course of trade ? Mr. Teegoe. That they shall go out over the counter and come back to be paid according to the natural requirements. Mr. KoEBLY. If you want an elastic currency, are you convinced that you will get it by requiring a fixed metallic reserve against it ? Mr. Teegoe. Oh, yes; surely, if the fixed metallic reserve is in a proper proportion. There should, in my judgement, be no currency issued that is not based partially on a metallic reserve of at least one- third. I take that as an arbitrary proportion. Mr. KoEBLY. Let us say we fix it at one-third, and the demand arises because of an immense crop and because of the commercial activities of the people for a large amount of currency ; there should be an expansion of currency to meet sound conditions in commerce. Mr. Teegoe. Yes. Mr. KoRBLY. Are you not restricted because of the fact that gold will not expand ? Mr. Teegoe. The large contraction of commercial credit will con- trol, and, also, the fixed rate of interest figures in the elasticity of the currency. Currency rises and falls according to the fixed rate of interest. Mr. KoEBLY. Yes; and you can not expand that currency if you have not got any more gold, and you can contract only by raising the rate of discount. Supposing that all the civilized countries in the world are enjoy- ing unusual commercial activity of a sound kind— not speculative— the exchange of commodities produces an immense demand for cur- rency ; you can not get an immediate response of more gold in order that you may have 33 per cent of gold or lawful money against your expanded currency. It strikes me that your limitation of 33J per cent IS an absolute limitation of the expanse of currency. BANKING AND CUEEENCY EBFOEM. 167 Mr. Tbegoe. Your rise and fall in discount rates is where your stock o± gold will rise and fall according to the natural laws of money. Mr. KoEBLY. Where will the gold come from ? Mr. Teegoe._ Where does it come from in England— if the chair- man will permit me to come back to that ? When England loaned us a very large portion of her gold stock to meet the situation in 1907 she immediately replenished her gold stock by raising her rate of interest. Mr. KoEBLT. It came from some other country. Mr. Joyce. This country had really much more than any other country. Mr. KoEBLY. This is what I wanted to get an idea about, so that you could obviate a difficulty that arises in my mind. A fixed me- tallic reserve is contradictory to the promise to pay on demand and is contradictory to expansion and contraction. If you have to have 33^ per cent of gold as part of a basis of your issue and have not the gold you can not expand for the want of gold; or, to state it in another way, if there should be mistrust in the minds of the people- not a well-founded mistrust, but an ill-founded one— as to the sol- vency of the banks and their ability to pay on demand, and a con- siderable number of people should go to the banks and withdraw their accounts and take down lawful money for it, there would be a shrinking of reserves at a time when banking ought to be expand- ing to meet the sound commercial needs of the country. Would not a fixed reserve be the greatest obstacle to the things you desire and advocate ? Mr. Teegoe. It would not prove an obstacle, I am sure. If our reserves are consolidated at that one reservoir, that controls it. That is where the advantage of the central institution comes, because it acts as a unit, controlling all the regional or district organizations. I think that the amount of gold that can be consolidated in that in- stitution would be a basis sufficient for reserve of any possible cur- rency that this country would need. Mr. KoEBLY. If the law requires the banks to keep 33^ per cent against their outstanding obligations and the course of business is such that their" possession of lawful money is decreasing because peo- ple are taking it away from them and at the same time business de- mands expansion of credit, do you not see any limitation arising from a fixed reserve ? Mr. Teegoe. No ; not to my mind. Mr. Endy. What would these people, who withdrew lawful money, do with it, would they hide it ? Mr. KoEBLY. They probably would take a strong box and put it in there and put the key in their pocket. Mr. Joyce. That is a condition we want to make impossible; we want to make it impossible to have a condition of that sort arise. Mr. Teegoe. In any system what we want to do is to keep the deposit dollar and the gold dollar on a parity; to give to both the same purchasing power. Mr. KoEBLY. That is absolutely necessary if you are going to have sound banking conditions. Mr. Teegoe. Yes ; to keep the two dollars on a parity. 168 BANKING AND CUBEENCY BBFOBM. Mr. KoRBLY. But I think I see where the keeping of a fixed reserve is an obstacle to the doing of that thing. I do not case to press the point. Perhaps Mr. Glass would like to take it up. The Chairman. Mr. Tregoe, I would, if I may, get back to the question of organization for a little while. You were speaking of the desirability of developing our foreign trade through our pro- posed better banking facilities. Are you disposed to insist that we can not do that without a central bank ? Mr. Tregoe. Oh, no ; that is simply an incident. We feel that that will be one of the consequences of the central institution, but more immediately the consequence, Mr. Chairman, of commercializing our banks, of making them commercial banks and not speculative banks. The Chairman. We now have in our national system about 7,300 independent units. Mr. Tregoe. Yes; just about 7,300. The Chairman. Do you not think it would be a vast improve- ment upon the present system if we could associate, in regional asso- ciations such as have been mentioned, those banks in the various proposed districts? Mr. Tregoe. According to our second suggestion here as to dis- tricts ? The Chairman. Yes. Mr. Tregoe. Regulating that association within itself? The Chairman. Within itself; yes. Mr. Tregoe. Yes. That is our second suggestion, and we believe that the capstone of that is the central idea. The Chairman. Then if this Congress and this administration does not yield to your proposition for a capstone, you think it would be a vast improvement upon existing conditions if we could organize these regional reserve banks? Mr. Endy. With the clearing house feature fully developed. The Chairman. With the clearing house features fully developed and broadened. Mr. Tregoe. With the depository for reserves. The Chairman. In the central city? Mr. Tregoe. In the central city. Mr. Endt. Yes. Mr. Tregoe. With the power of issue to each regional district ? The Chairman. Yes; the power of issue in each regional bank. Mr. Tregoe. Legalizing rediscounts. The Chairman. Yes. Mr. Tregoe. That is good progress. The Chairman. You think it would be a vast improvement on existing conditions, then, do you? Mr. Endt. Indeed, I do. Mr. Tregoe. It would, in our judgment, be an improvement on ex- isting conditions. Mr. Joyce. Any system should contemplate taking in every in- stitution that is in the banking business ; otherwise it will fall down, Mr. Chairman. Mr. KoRBLY. Those within certain classifications? The Chairman. It would not fall down as badly as we are already fallen down, would it? BANKING AND CUEEENCY EEPOEM. 169 Mr. Endt. It would very much enhance the difficulties if all the banking institutions were not obliged to enter it. The Chaieman. How can they all be compelled to enter it« Mr. Endt. Th^ can all be compelled Mr. Oke. By offering facilities which independent bankers would not have. Mr. Endt. Congress was entitled to prevent, through taxation, the State banks from issuing currency, and there ought to be some means found by Congress to induce them. The Chairman. You are taking the view of Mr. Roosevelt, then, that if a thing is not in the Constitution, some way should be found by construction to put it there? Mr. Endt. What I am trying to get at is that it would benefit the country and everybody if all the banks were under one regulation. The Chairman. But you realize that we must move within pre- scribed limits in accomplishing whatever we may develop ? Mr. JoTCE. If you give these reserve banks the right of issue, I believe these other things will follow, and the other banks will take out national charters. The Chairman. Yes; but it will have to come that way. Upon the question of issues, Mr. Tregoe at first insisted that the whole ex- istence of new legislation would depend upon giving the exclusive monopoly of issue to a single institution. I understand now that you modify that, and say that next to that you would give impor- tance to the regional reserve bank ? Mr. Tregoe. I would say that is an alternative, Mr. Chairman. I do not consider it a good alternative, but it may be within your views an expeditious alternative. I consider that the central institu- tion should be the bank of issuance. The Chairman. But what did the Monetary Commission do with it? Mr. Tregoe. It gave the right of issue to the central institution. The Chairman. How do you interpret section 65, which says : 65. There shall be no further issue of circulating notes beyond the amount now outstanding by any national bank. National banks may, if they choose, maintain their present note issue — and so forth. . , u • In other words, it continues to each individual national bank their present issues. Mr. Tregoe. Under that plan, Mr. Chairman, the bank notes were not to be immediately recalled and retired, but it expressly states, I am sure, if you will read it, that just as soon as the notes then out- standing were presented for redemption, they should not be reissued. The Chairman. That is true. j. xu i, i Mr. Tregoe. It provides for the gradual retirement ot the bant notes, and provides that they shall not reissue any more notes. The Chairman. A gradual, permissible retirement; but under that section the outstanding circulation could remain out mdefamtely, ana would remain out just as long as the individual banks considered it profitable to keep them out. Mr Tregoe. But they could not reissue any more i The Chahjman. Oh, no; but they might never retire the existmg issue; is not that a fact? 170 BANKING AND CUEBENCY EEFOEM. Mr. Teegoe. Oh, yes ; that is a fact. But you would not call that issuance ? The Chairman. I would call that issuance in a sense, because it would confirm an existing issue — of how many millions of dollars? Mr. Tebgeo. Seven hundred millions. The Chairman. Of some $750,000,000. I should think that was a pretty broad power of issuance. Mr. Tregoe. You could not call that issuance. That would be a perpetuity. Just as soon as they were retired, they could not be reis- sued ; no more could be issued. The Chairman. That could be very easily provided in a regional reserve-bank system — that they might have the exclusive right of issue hereafter. As to the suggestion that regional reserve banks should have the right of issue to a limited extent, and that all issues above that per- centage should be confided exclusively to some treasury board or central institution here at Washington, how would that strike you ? Mr. Tregoe. Would you say that again, Mr. Chairman ? The Chairman. Upon the question whether the regional reserve banks — say that there are 20 or 25 of them, as you gentleman sug- gest — should have the exclusive right of issue up to a certain amount, but beyond that percentage the right of issue should be with the treasury board, what have you to say? Mr. Tregoe. Mr. Chairman, of course I do not know how the committee would answer that question officially. The Chairman. That has been merely a suggestion. Mr. Tregoe. I should say personally that would be playing. I feel that the halfway policy of the Government, of not being and yet being in the banking business, is not good. The Chairman. You want to put the Government in the banking business, then, do you? Mr. Tregoe. I personally feel that we ought to have a central in- stitution. The Chairman. With all the powers of commercial banking? Mr. Endy. No. Mr. Tregoe. I personally feel that a central institution should be outside of the Treasury; should be an independent institution; but of course, necessarily and wisely, there should be that supervision upon the part of the Government, but not the introduction into the Government of a halfway policy. I really believe that we would prefer that the Treasury should be converted into a bank in order to have these facilities, and let it be a Government bank. The Chairman. All banking facilities ? Mr. Tregoe. To discount and rediscount commercial paper. The Chairman. To convert the Treasury into a bank? Mr. McCreary. Yesterday it was said in substance by Mr. Shaw, who was formerly Secretary of the Treasury, that if a central bank was established Wall Street would have, and for 50 years would have, a cmch" on the monetary system of the country. Do you believe that? •' •' Mr. Tregoe. I do not believe that. I think ex-Secretary Shaw is rather unsound in that position. And, Mr. Chairman, I want to say, it you please, that what I have remarked about the Treasury going into the banking business, is simply personal and not official. BANKING AND CUREENGY REFORM. 171 Mr. End^As the chairman of our committee, I would state that we are opposed to that. ' ^ ^'^^^ Mr KiNDEED. Mr. Chairman, may I ask the gentleman a question about something that was said a moment or twf ago? I wo2ld like for my information, of course, to ask the gentleman exactly what he Z^^^ ^r^f^ ^^"* l^ T^^^ ^.' playing^ith the questiohTf a so called Federal or central board of issue were empowered to issue under certain conditions representing the regional reserve banks I imderstood you to say that you would, and, in all seriousness, I want to know your opinion about It. Why would it be playing? Mr. Teegoe. Because I personally feel that there should be this centralization of these functions, such as we have guaranteed in our recommendations here, and that it should be performed by a central institution; that there should be a coordination of the regional banks or agencies m a central body, so that there should be uniformitv of movement through that control. But to simply have a board for one purpose only is not going far enough in this matter, to my mind We agree about the regions, do we not? We agree about the districts very largely, and we agree very largely about them except in the matter or the currency issue. Mr. Endt. Well, we are on that question now. Mr. Teegoe. All those regional functions, if they are consolidated together in that central institution, in which they may be all super- vised and brought together with that central institution, means a sole institution for issuing the currency, based upon a metallic re- serve and sound commercial paper that flows into it, and is, to my mind, almost the acme of a good banking and a good currency sys- tem. But if you have these districts all through the country, acting, - as it were, independently, where is the coordination going to come? The Chairman. What coordination have we now among the 7,200 banks? Mr. Teegoe. It is perfectly disastrous, Mr. Chairman. The Chairman. There is where the coordination is coming, in the regional bank and its constituent members. Mr. Teegoe. Let me ask you this question, Mr. Chairman: In Texas, in the Southern States, at certain seasons they need an unusual amount of currency for the moving of crops; in another season an- other section of the country needs an unusual amount of currency. How can there be coordination if these regions are independent? But can not you see how the coordination can be brought about when there is that central institution or heart of the system ? The request from that section flows into the central institution ; the district over yonder has the funds and they flow into the central institution, so that that section may be supplied. The Chaieman. How do they get it now ? Mr. Endt. They do not get it, Mr. Chairman. The Chaieman. I say, how do they get it now ? Mr. Teegoe. Mr. Glass, they get it now by calling in their reserves and putting the banks on the tender edge to supply the currency. The Chaieman. Would there be any less disposition, say, on the part of a Xew York regional bunk, to accommodate a regional bank within the jurisdiction of the Sta(c of Texas, and perhaps other States, than there is new upon the part of a Xew York bank to ac- commodate an individual bank in the State of Texas? 172 BANKING AND OUBBENOY EEFOEM. Mr. Teegoe. But, mind you, in this connection, undir the present conditions it is optional. The Chairman. Yes. Mr. Teegoe. It is optional. . . The Chairman. And under the plan of the Monetary Commission it is optional with that central bank as to whether it will accommo- date any of these various divisions. Mr. Tregoe. But if you legalize the system, you are taking it out of the field of option and you are putting it almost compulsory. The Chairman. It is iiot done in the plan of the commission— it is made absolutely optional, within the discretion of the Central E«serye Association, as to whether or not it will accommodate a certain territory of the country. Mr. Teegoe. Now, you see, Mr. Chairman, as I stated to you at the beginning, in this committee's investigations we just passed beyond the monetary bill ; we were not going to be trammeled by any system, but we were going to state to you our own convictions as we saw them. And, personally, I can not eradicate from my mind the picture I have formed of the functions to be performed by the central insti- tution. The Chairman. Well, Mr. Tregoe, if we find insuperable obstacle to a central institution (as some of us think we have found in the declaration of our party platform) , are you not willing to help us get what you think might be the next best thing, and what some of us think is an infinitely better thing than a central institution? Mr. Teegoe. I like that proposition, Mr. Chairman, because we have not said anything about it, but there is not one of you gentlemen present on this committee who does not represent a par of our organi- zaion, just as we represent it. There is not one of you who lias not a constituent or constituents who are associated with this work. The Chairman. That is true of my town, I know. Mr. Teegoe. When we reach some basis of agreement as to the influence that we want to bring to bear upon the commercial men in this country in your behalf and in behalf of the Nation, doing it in a sane and practical way, as we do, because we have always tried in our organization to keep out the paroxysms and do things iii a quiet and sane method, we want to reach an agreement with you that is of practical benefit, and we can, because this little leaflet is going to about 20,000 business men in this country, and you can see the result of it, and as we follow it with other leaflets, as we propose to do, we want to bring an influence to bear so there can be some agreement, and we can get a system that will head us in the right direction. _ Mr. Endt. To get back to your question about the bank that issues in these district associations The Chairman. Regional reserve banks, as they have been called here. Mr. Endy. Yes. What limit would you propose allowing them ]n the way of issuing, and under what arrangements? The Chairman. That would be a matter of detail. It has been suggested that they be confined to the aggregate capital of the sub- scribing banks, and that any amount above the aggregate capital of the subscribing banks of a given district should be within the dis- cretion of a treasury board. This committee, understand, nor I am BANKING AND CURRENCY REFORM. I73 committed to any specific thing in that regard. We iust want to o-pf your opmion upon it. •" ^ ^^ S^^ ■ ^^' ^^°^- pen you would require no support to be back of that issue, except the capital of the bank? " "« uacK or mat The Chairman. You mean the assets of the bank? Mr. Endt. Yes. alUhat^''^'^^''' ^""^ *^^ double -liability of the stockholders, and Mr. Endt. Yes. The Chaieman. That is an open question, which we have not un- dertaken to determine. Some people, for example, insist that there ! shall be a stratum of Government bonds and a stratum of eold re- ' serve, and so forth, but that is a queston we have not determined. The question upon which we would like you to express Yourselves is this: Mr. Tregoe, I believe, says it is his individual opinion that the monopolistic right of issue should be given the central bank What disposition would you make of the 2 per cent bonds « Mr. Teegoe. The 2 per cent bonds? I think the measure or the provision tor their retirement, according to the monetarv bill is verv sound. ' ■' The Chairman. You would lodge them with the central bank here to be disposed of at its discretion? ' Mr. Tregoe. They should be retired without any disturbance or without any loss upon the banks, if such an expedient could be worked out. That is a detail that is exceedingly technical. But you can see the bent of our thought in this matter. It is the found- ing of commercial credit as the basis of currency. The Chaieman. What you want is elasticity in the currency? Mr. Tregoe. Elasticity of currency and rediscount. Of course the elasticity is founded upon the rediscount. The Chairman. We are talking about issues now ; we are not talk- ing about credit or discount. What you want in the circulation of the country is a certain degree of elasticity? Mr. Teegoe. We want it elastic; we want it to rise and fall with the natural demands of trade. _ The Chairman. What would be the objection to partially basing circulation upon Government bonds? That is not playing with the question, unless you may say that the American Bankers' Association in two of its national conventions deliberately played with the ques- tion. The American Bankers' Association at Indianapolis, and subse- quently at Atlantic City, or at Atlantic City and subsequently at Indianapolis, advocated the plan of basing 62 per cent of the circu- lation upon Government bonds, and all above that upon the assets of the banks, the circulation to be subjected to a graduated tax. I im- agine that they did not regard that as playing with the proposition. Mr. Tregoe. Mr. Chairman, the question as propounded by the gen- tleman on your left (Mr. Korbly) would answer that, because of the limitation of the bonds. There is only a certain amount of bonds outstanding. You can not issue any more currency than there are available bonds for that purpose, and they are very limited. Sixty- two per cent based on the public debt would not give a flexible cur- rency and would not give an elastic currency, because you would not be able to increase the currency to the extent that might meet unusual strains. 174 BANKING AND CUEKENCY KBFOKM. The Chairman. The difference between 62 per cent and 100 per cent Mr. Tregoe. That is 38 per cent. The Chairman. Would not meet an emergency ? Mr. Tregoe. I Avould meet, of course, a slight emergency, but it may not meet an unusual emergency. The Chairman. It was said in 1907 that had all the national banks issued to their permissible limit there would have been no currency famine. ]Mr. Tregoe. That confirms, or should confirm, in your mind that the issuance of currency under our present system is governed more by the market for the bonds than by the real demands of trade. The Chairman. I understand that fully, but what I am trying to arrive at — because there is involved in this question of issue the other and very serious question of taking care of the United States bonds — is : Would it or not be best to adopt a system whereby we would go to the credit-currency proposition gradually, instead of all at once? ^Ir. Ekdy. The proposal in the Monetary Commission's plan of getting rid of those 2 per cent bonds back of the issue, I take it, is very sound; it is equitable all around. "i^he Chairman. The impounding of those bonds with the various regional reserve banks is just as feasible as impounding them with the centra>bank; it is a little more work. Mr. Endy. Yes ; it could be worked out on the same principle. Mr. Tregoe. They Could be impoimded, but not to be used as a re- quired reserve to that extent of currency issued. Really, a currency issue should be at least one-third upon metallic reserve in order that our own stock of gold might be protected. It is necessary to pro- tect it. The Chairman. You are in favor of the Canadian system of issue, then, are you ? Mr. Tregoe. I would not say so entirely, because I think this would be slightly different — ^by the metallic reserve and the balance oii sound paper or other securities that might be acceptable to the issuing body. But there should be that portion of metallic reserve, and the balance, 66f per cent, could be, if considered wise, sufficiently guaranteed by two-name commercial paper ; that is, the commercial credit. Mr. Kindred. What other classes of securities, in your opinion^ would you say should be acceptable to a board of control which had charge of issuance, other than those you mention ? Mr. Tregoe. I would answer that "by saying that those who know so well that the fire burns dread it, because I spent some few years of my life in securities, and I have followed the trend of some securi- ties, and I fear in some directions there is a tendency to inflation. So I would answer that question by saying that primarily the ac- ceptable securities should be lunited to Government, State, and mu- nicipal bonds. 1 think when you go beyond those you require a very close investigation. The Chairman. As the basis of issue? Mr. Tregoe. As the primary basis for issue outside of the com- mercial credit. I think, outside of the Government, State, and municipal bonds, you should require a very thorough board, who can understand when there is water injected, or whether it is all milk, and BANKING AND CUKEBNCY EEFOEM. 175 you would have to be extremely careful in opening up the field for securities generally. The Chairman. You would have these securities explicity pledged for the redemption of the issue ? Mr. Teegoe. You are asking me, I know, why I would favor com- mercial paper as opposed, say, to the bonds of a street railway, like the Capital Traction Co., whose 5 per cent bonds stand so very high with the investing public. It is this : Because commercial paper auto- matically clears itself, whereas any bond is a fixed capital security. Commercial paper automatically clears itself; it revolves around in two or three or four months; it is paid off, an^ it is automatically clearing itself all the time. It is the finest form for investment. Mr. Kindred. You would lay emphasis on the selectness of this commercial paper? Mr. Tregoe. It must be sound. We spell sound with capital letters. The Chairman. You would not include within the definition of commercial paper speculative transactions on the New York Stock Exchange ? Mr. Teegoe. Mr. Chairman, that is what we are trying to get away from. We are trying to build up commerce, and that is why we are dwelling so specifically upon commercial credit. Mr. Kindred. What percentage would you say should be backed by selected and picked commercial paper ; what is the maximum ? Mr. Tregoe. I should think we would be perfectly safe in placing a maximum of 66f per cent, and the remainder metallic reserve, pri- marily. Mr.' Kindred. That is, 66f per cent in bonds of the kinds you have described or picked commercial paper? Mr. Tregoe. Or picked commercial paper. The Chairman. Well, Mr. Tregoe, Mr. Hepburn ventured to say here the other day that he would not object to a provision of law pro- hibiting the sending of bank reserves to New York, as under the present system but requiring the banks to keep their reserves in their own vaults. How would you feel about that ? Mr. Endy. Keep it in their own vaults ? The Chairman. Yes. Mr. Endy. Or in their regional reserve vaults? The Chairman. I would say in their regional reserve vaults, but that is what Mr. Hepburn said. _ Mr. Teegoe. I would answer that by saying, m my judgment, you are going to be on the safest side, as well as do the country the most good, by making your system just as simple as you can at the outset, tnd that seems to involve a side which I do not think you ought to inject into it. If you want the centralization, make it necessary that those reserves should go into that central city— — The Chairman. But we do not want a central reserve. Mr. Tregoe. I mean the districts. The Chairman. Oh, well; that is different. _ ,,.,., •,• , Mr. Tregoe. That is what I mean; the regional district cities. You see, the money must be kept there. , „f Wali ^trePt The Chairman. The suggestion is to keep it out of Wall btreet. Mr Endy. Exactly. „ .1 . • Mr' Tregoe. You "can see what the drift would be. bay that in those'banks you compel 8 per cent of a legal reserve of 15 per cent. 176 BANKING AND CUBKENCY EEFOEM. or, if it is 25 per cent, 15 per cent in those regional districts ; when they have funds at their commandj those funds are going to find thfe best market, and if New York is the best market they will go there, and they will have offered to them, just as they have offered now, the commercial paper that comes to them from the institutions that have unusual requirements. Those funds above the legal reserve are going to find the best market, because that means a profit to the bank and means its perpetuation as an institution. But that portion should be The Chairman. Still, the sending of those funds above the reserve does not touch the reserve question. Mr. Tkegoe. It does not touch the reserve at all, but that portion of the reserve should be in that city. The Chairman. You can not prevent, and you ought not to pre- vent, an interior bank from keeping its funds with a correspondent in New York to meet the ordinary business exchanges that it has to meet. Mr. Tregoe. They are going to flow there, Mr. Chairman, accord- ing to economic laws. The Chairman. But that does not affect the question of reserve. Mr. Tregoe. That does not affect the question of reserve, and that reserve which has to be redeposited should go, to my mind, into that regional district. The Chairman. And be kept there? Mr. Tregoe. And be kept there. The Chairman. And not sent to New York ? Mr. Tregoe. Yes. Mr. BuLKLET. Mr. Chairman, I move for a recess to 2.30 this afternoon. The Chairman. We have gone a little bit beyond our regular hour for recess, but that was because of our beginning late due to a mis- understanding. At 1.30 o'clock p. m. a recess was taken until 2.30 o'clock p. m. after recess. The subcommittee met, pursuant to the taking of the recess, at 2.30 o'clock p. m. s > Present: Messrs. Glass (chairman), Korbly, Bulkley, McCrearv. McKinney, and Kindred. STATEMENT OF MESSRS. D. G. ENDY, J. H. TREGOE, CHARIES D. JOYCE, AND W. W. ORR, REPRESENTING THE NATIONAL ASSO- CIATION OF CREDIT MEN (Resumed). The Chairman. We have a quorum present and will resume. I believe, Mr. Tregoe, we were on the question of issues when we took the recess. Mr. Tregoe. Yes; we left off on the question of the issuance of currency by either the regional bank or the central bank. The Chairman. With a central authority? Mr. Tregoe. With a central authority; you did introduce that thought, of the board of control. BANKING AND CUEEENCY EEFORM. 177 The Chairman. Yes. Mr Tregoe Now, we were very highly entertained by the Congress- man from Indianapolis, and we only had a few minutes to discuss mtormally our thought upon that, and we thought it might be well i^,yo". would permit us to check up on that original thought first. 1 hat IS, in this way: When we issue our next leaflet, which is to be an educational leaflet for constructive principles, we wanted to ask you whether, in your judgment, we would help your work, as well u^i- ^Pi. country, by confining that leaflet to a statement of our belief that there should be this regional division of the country with that central location, with that branch or agency or bank, what- ever you may be disposed to designate it, which shall be a depositary for the reserves of that district, from which shall emanate the regu- l.ation and control of that district, which shall be the fixed place for discount and rediscount of commercial paper. Now, if we agree up to that point, and you believe that we ran help your work by stating to the commercial people of the Nation that that is a wise principle in any banking and currency system, we feel disposed to do that. And we simply come up now to" the question of whether we shall indicate, as one of the functions of that central city in that region, that it shall issue currency upon a proper basis. either subject or not subject to the control of a central board. We are not perfectly clear, Mr. Chairman, as to whether we should — having come here so thoroughly committed to the central institu- tion—we are not so thoroughly assured among ourselves that we ought to go that far and abandon the thought that we have so strenu- ously presented to you in the morning session. Up to that point, I think, we concur in all the functions of that regional city, or central city in that region; and we are willing to dedicate ourselves to the education of commercial men to that as a good basis for a proper banking or monetary or currency system. But we are not just ready to say whether we should designate that central or regional institution as a place of currency issue, either at its independent discretion or under the control of a central board. The Chairman. I would say, in answer to that inquiry, that this committee has not formulated any plan of its own. Had we agreed upon a plan, there would not have been a great deal of use of these hearings. We inaugurated these hearings in order to get enlighten- ment on the subject of banking and currency reform, and to get the opinions and advice of various national interests. Eesponding a little more directly and j)ersonally to the question which you asked, and not undertaking to give the views of this com- mittee, I would say that the National Association of Credit Men would do a great good if it could bring the organization to the sup- port of a proposition to establish throughout the country regional reserve banks, with somewhat of the functions that you have named, and other functions, without arbitrary central control; but, perhaps, with advisory and supervisory control in a treasury board of some kind. It is going to take the united effort and cooperation of the entire business community of this country, in my judgment, to get legislation. We have not had any for 37 years, and it is going to take a tremendous effort to get any. If we are radically divided m opinion and effort, we are not going to succeed. If we are united we may succeed. I think I am within the proprieties in saying that the 178 BANKING AND CUEKENCY EEFOBM. majority members of this committee feel absolutely committed against the central bank, or any central institution with the functions and arbitrary powers of a central bank, such as some of us conceive the plan of the Monetary Commission to be. I am not disposed, and I do not think of any of the members of this committee are disposed, to reject what we conceive to be good in the plan of the Monetary Commission ; but my notion is that the declaration of the Democratic platform at Baltimore against the so-called Aldrich plan was aimed directly at the central feature of the Aldrich plan. And therefore I think there is an insuperable obstacle — whether you call it political, practical, or theoretical — to the adoption by the next Congress of a monetary plan involving the establishment of a central bank. There- fore I think the sensible thing to do is to get the best thing that can be had. In this view I think the National Association of Credit Men Avould help a great deal should it put itself in the attitude of not per- sistently favoring a plan that seems to the majority members of this committee impracticable. Mr. Tkegoe. Of course that does not present a serious situatioiji. You see, what we decided upon, Mr. Chairman, is to defer the con- sideration of that central institution to the regional division. The committee is agreed that the first constructive principle to which they will direct the attention of the business men of this country is that of regional division, and they will not touch upon the central institution in presenting that, and will not confuse the two, but will make them two ideas, presenting that first; and with the functions in that region, as I have stated, bringing it up to that of the currency issue. XoAv, we are confronted with this: If we can not get the central institution The Chairman. You can not get it, in my belief. ]Mr. Tkegoe. If we can not get it, then, of course, the currency must be issued in the regions, because we need that. That is an im- portant factor. It would be like extracting the heart from the human system if we did not have that feature, because that means the healing of the wounds ; it means the rectification of a great many of the present defects. I certainly wish I could agree more fully Avith you. I am very much wedded to that central institution, from my studies, but there is a strong disposition on our part to work with you gentlemen, because we have a peculiar attitude ; we do not go off into paroxysms, but we have a machinery here that we want to use wisely, and when we exercise it, it is generally of considerable power, and we do want to set the business men of the nation right The Chairman. "Well, the difference between you and me, Mr. Tregoe--and I am not speaking for the committee, because, as I have said, this committee has not adopted any plan — ^is not a question of a central institution. I think there ought to be a central super- visory control. It is a question as to what powers you would give that central institution. As I understand, you would give it abso- lute power and I would not. Mr. Tregoe. Yes; I would invest it with the powers that are gen- erally designated in that paragraph of the little brief that we have preijared. That would be my inclination. But T am not at all doubtful in my own mind but what you would be driving a tremen- dously big stake in this question, and laying a splendid foundation. BANKING AND CUEEENCY REFORM. 179 to give US the regional division, if you feel that more can not be granted. That is one of the fundamental principles upon \shich we absolutely agree, except that currency-issuing power, and of (.'ourse if we can not get the central institution, that currency-issuing power, under proper regulations, must be in the region. The Chairman. The currency-issuing power is not the only power that 1 infer you would give the central bank. I infer from your almost unqualified indorsement of the so-called Aldrich scheme that you would give to the central bank arbitrary control of the banking corporations of the country. Mr. Tkegoe. Hardly that, Mr. Chairman. Do not locate me as an unqualified indorser of the so-called Aldrich bill. I am not. I feel that in many of its measures it is too cumbersome ; very scientific, I can say from my study, but very cumbersome in some of its meas- urses. No, I like the idea of the. central institution for its super- \isory function, which will answer that of the board of control. The Chairman. We like th^t point. Mr. Tregoe. Yes ; you like that. Then also as to the point of con- centration. If the regions into which the country is divided have no touch with one another through a central body, they are working too independently for the commercial good of tlie Nation. It is to concentrate in a central body these different regions; not that it should have arbitrary powers over banks. I would endow the re- gions with a tremendous amount of self-government. But it acts as the one centralizing factor in the whole system for the supervi- sion and then for the issuance of notes and for the protection of our stock of gold and also its increase ; for the fixing of a uniform rate of interest, which can not be done by the regions, because there could be no legal agreemeijt between them ; they can get together, but that is optional ; for the fixing of a rate of interest, which is an important factor in maintaining the elasticity of the currency, for the rise and fall of the interest rate is what forces currency out and forces it back. That is the function I have in mind. I do not see how the divisional system alone will meet that requirement. The Chairman. Is it safe to assume that regional reserve banks would have no touch with one another? Mr. Tregoe. Not at all. They would touch one another as their requirements prompted that. For instance, if Texas needed funds it would naturally go to that region where there were funds. But that is simply chance, as you might put it. It is perhaps working along a certain law, but it is largely chance. It would not be as scientific and systematic as though all the regions were concentrated mto one body and the needs of all flow through that. The needs of one are known to that body, and it draws legally and scientifically from the region where there is a plethora of funds and sends them into the region where there is a paucity of funds. The Chairman. That is very nice in theory, but there is nothing in the proposed law which you advocate, and I doubt if anything can be put into it, that would make a central bank necessarily re- sponsive to the needs of the various divisions of the country. Ihe Central Eeserve Association is not required by law to respond. Mr. Tregoe. I presume, Mr. Chairman, that the reason why some men have considered that, under the monetary bill, or the so-called Aldrich bill, it could fall under the control of interests was the tact 180 BANKING AND CURRENCY REFORM. that there was no compulsion stated in it, and it left it optional with the governing board ; that, in the final analysis, was nine men. That might be so. I have always questioned it. I never say any opening for risk in that direction at all. I do not believe it is possible to lay down definite rules to safeguard against any contingency and every emergency that may arise, but there ought to be certain regula- tions that would make that central institution respond when the conditions were such that they should be responded to, irrespective of the discretion and the judgment or the attitude of that governing board. Mr. BuLKLEY. Do you find any provision that makes it so re- sponsive, irespective of the attitude of the governing board? Mr. Tregoe. In that bill ? Mr. BuLKLEY. Yes. Mr. Teego. No; I can not. That may be the reason why it was thought that that institution, as constituted under that bill, might gradually fall within the grasp of the interests. Mr. Btjlkley. In fact, by prescribing a uniform discount rate, does not this plan render nugatory the ordinary method of drawing funds where they are most needed, by paying a higher rate of interest ? Mr. Teegoe. I would say no, there, because I find casually that in those countries where a uniform rate is established, as you will see it quoted, for instance, in the Bank of England, that that does not control every discount operation because the central institution should say the rate is 4 per cent does not mean that a merchant down in Texas can go to his bank and have his paper discounted at 4 per cent. He has to pay the legal rate. The Chairman. Therefore you do not contend there would be a imiform rate of discount throughout the country? Mr. Teegoe. The uniform rate of discount involves this function, as I see it : It involves the function of maintaining an elasticity of the currency and the prevention of overtrading in the times when there should be a little let-up, or that there should be conservatism in trade. , Mr. BuLKLEY. Let me ask you this question : Waiving the fact that England is a very small country territorially, and has a much greater uniformity of conditions than prevail in this country, you used that as an example to show that the fixing of a uniform rate by a central institution does not fix all banking rates throughout the country. I think that is absolutely true, but does it not do this — does it not pre- clude any -variation in the drawing of funds from the central in- stitution ? To make it more clear, we are talking about how to get funds into the section of the country that needs them most. Under the provisions of this plan, Texas can not pay the reserve associa- tion a higher rate of interest than Massachusetts, even though it may need the funds a great deal more. Of course, the individual banfa down in Texas may exact higher rates from their customers, but that section of the country is not allowed, under these rules, to pay any more for the accommodation than another section of the country which does not need the money as much. Mr. Teegoe. In the central institution plan the rate must be uni- form. There is one advantage, too, that I want to bring to your attention, whirh we must not lose sight of when we are talking of BANKING AND CTJEKENCY EEFOEM. 181 commercial credit, and that is agTicultural credit. We know the farmer of this countij has to pay too excessive an interest for his loans when he can offer as good a security as a good many of the mercantile or commercial men. That might bring about a stronger accommodation for agricultural men, too. It might put them on the basis of receiving accommodation on a more proper basis. Mr. BuLKtEY. You mean the uniform discount rate? Mr. Teegoe. a uniform discount rate might prevent the over- charging of discount. This is simply a side thought which came to me now, and I have not thought about it ; but we know the farmers of this country pay an excessive rate of interest, and their operations are frequently very much retarded by the fact that they can not secure the accommodations to carry on their farming operations as they should, and the country banks have made it exceedingly hard for the farmers. Mr. BiJLKLEY. Yes, Mr. Tregoe, I think if you will study the coop- erative credit societies of France and Gerniany you will recognize there is a much more direct method of helping out the farmers than by a uniform discount rate. Mr. Tkegoe. I agree with you that perhaps we will gradually evolve some such system here for agricultural credit. I stand com- mitted, gentlemen, to the thought of that uniform interest rate as one of the functions of the central institution, and one of its most impor- tant functions, entering finally and definitely into the elasticity of the currency. Mr. Kindred. Going back to the detailed workings of the proposed regional reserve associations, in your opinion, would the equalization of note issues in certain sections of the country, as needed, according to the transfer or the attraction of the strenuous money market in different regions, be promoted by some such mechanism as the Federal board or treasury board of control that has been mentioned here in addition to the function, within a certain degree, which would be exercised by the regional reserve bank itself. Would you think that that purpose of equalizing the note issues and getting the money in the different sections where it would be most needed, because of different circumstances, would be best promoted by having a Federal board, so-called, that would have supervisory power over or more or less control of the note issue ? Mr. Teegoe. That is a novel proposition to me, but I was just wondering whether in the event that there could be no central institu- tion such as I have described, with those primary functions cthat I have also stated, whether it is better and safer and wiser for a regional reserve institution to issue notes without the supervision of a Federal board of control, as you might call it, or whether it would be better to have such issue supervised. I like supervision; I like reasonable supervision. I do not like the supervision which goes into ihe destruction of independents. Mr. KoEBLY. Do you want me to supervise you, or do you want to supervise me? Mr. Teegoe. I expect that both of us need it. Mr. KiNDEED. But you do not want too much of it. t u- i Mr. Tregoe. No. I think we need reasonable supervision ; I think the growth of our country has been due to our composite nature, 76112— PT 3—13 3 182 BANKING AND OUBEENCY EEFOEM. which has made us peculiarly independent, and too much unreason- able supervision affects independence, undoubtedly ; it affects the in- dependence of thought and affects the self-reliance of man, which is a tremendously big item in the make-up of manhood. The Chairman. If I may suggest to you, if you will simply culti- vate that sentiment, you will pretty soon abandon the proposition to confine all power to a central board. The suspicion of an abuse of power by a central board is based upon human experience, and not upon mere guesswork. It is based upon human experience. Men do prevent things, and they do misapply the powers with which they are vested. But as I have said, if you will permit me, just simply cultivate the sentiment to which you gave expression awhile ago and I think you will be able to get away, or certainly get far enough away from this arbitrary central proposition to give us the aid and influence of the National Association of Credit Men for a divisional reserve system; that is, if the committee should agree upon such a system, and give us your assistance in getting that sort of legislation. Mr. Endy. Mr. Chairman, answering Mr. Kindred's question informally, how would it strike you if you had these regional reserve banks issuing currency up to a certain amount, and any amount issued over and above that certain amount to be issued by, say, this central institution — call it the supreme court of finance or whatever else you like — and have that court of finance exercise a certain super- vision over the regional districts without dominating them or inter- fering with the ordinary progress of their business, but just have sufficient supervision to insure safety and stability? The CHAiEnrAN. Would we not get along pretty well for 9 years out of 10, as heretofore; and then, when trouble seemed approaching, the central authority would relieve the situation? In other words, the suggestion you make is not a new one, it is practically the sug- gestion of the American Bankers' Association, twice made. Mr. Endy. You say the central organization would step into the breach ? The Chairman. I mean to say the regional reserve banks, vested with the power of issue, would have no trouble whatsoever for the greater part of the time in meeting all of the ordinary demands of business; and when the demands were of an extraordinary nature they would go up to the treasury board to meet the emergency. When that was suggested this morning Mr. Tregoe said he thought it would be trifling with the situation. I did not exactly think so. Mr. Tregoe. Mr. Chairman, I used to feel very cock sure of ray opinions, but since I have studied banking and currency I have altered my attitude; I am trying to learn to respect the opinions of other men, and I am not so cock sure nowadays that I can not touch my moorings from that central institution. The Chairman. I do not think we are so very far apart- if we could just get Mr. Tregoe to come a little further our way, we might agree. Mr._ Tregoe. I would tremendously like to bring you a little in my direction. ' '' Mr. KoRni-Y. Why not go as far as you suggested a little while ago and let the people m the western country relv upon their own powers to protect the mechanism of exchange and develop their BANKING AND CUKEBNCY EEFOEM. 183 self-reliance? Why should we be dependent upon a combination of people elsewhere? Mr. Teegoe. We have determined to go that far. This committee has determined that they are going to announce to the commercial men that they stand for the principle of regional division and of that regional reserve association, if we just use a catch phrase, and for it to perform certain functions. But we get at the point of depar- ture about the currency issuing power ; that is where the roads branch off. If the committee believes that they can recommend in addition that this regional reserve association shall have currency issuing powerj under proper regulations, it is all right; I will stand by the committee. The Chairman. AVe would not have it under improper regula- tions; we would try in every possible way to safeguard the power of issue. But the question is as to proper regulation. As I take it, you think proper regulation is to confine to a few men here at Wash- ington the arbitrary and absolute power of controlling the issue, and some of us think that that discretion, to a very large extent, should be lodged with the regional reserve association. Mr. Tregoe. No, Mr. Chairman ; I do not believe that the regional reserve association should have currency issuing power at all. That is my personal conviction. The Chairman. Yes. Mr. Tregoe. But if we concede to the regional reserve association the currency issuing power, then I would lean to this, that, up to a normal point, there should be discretion in that association. For abnormal purposes, then, it might be well to have some supervision under a central board of control. The Chairman. Yes. Mr. Tregoe. But for normal purposes, for normal business in a region, that the banks in it certainly have the intelligence and wisdom and have that public conscience, and you can never elimmate that factor The Chairman. And public patriotism. Mr. Tregoe. His public conscience, the position in which he stands to the public, to "be a clean banker— you must never eliminate that ; it is a great feature in the make-up and picture of a banker, or ought to be. You can rely upon that surely for normal purposes. But it is the disposition of men under strain to become panicky— you Imow what it means. If we get into a smash up or into certain conditions we lose our self-control. There ought to be some place where that can be steadied, where a man can be steadied, where an organization can be steadied. , , , -1^+1,^ Mr. Kindred. Would you extend the powers of such a board to the regional reserves as well as to note issues? , ut u ^ t Mr Tregoe. I think the reserves should be legally established i think there should be some regulation by law as to reserves and as to the basis of the note issue fundamentally. But now when it came to the matter of commercial credit and the acceptance of the two- name paper certainly that regional reserve association would have to pass'^upon the acceptability of that P^P^r which would be a tre- mendously big function to perform and would call for a great deal of wisdom from a body of men. 184 BANKING AND CUREENCY EEFOKM. Mr. Endy. They would have to do that under the Monetary Com- mission bill, too. Mr. Tregoe. Yes. The Chaieman. If there Avere any coordination by law of these various regional reserve associations, there would essentially and naturally be cooperation. If the Bank of France during the Baring failure could send £15,000,000 gold to England to help out the situa- tion, is it not conceivable that a strong divisional reserve bank in America would in time of stress help a weaker regional reserve? Mr. Tregoe. Mr. Chairman, that is the natural flow of money. Money always finds the place where it has the best use. Mr. Kindred. That is, assuming that the stress is not general, though. Mr. Tregoe. That is, assuming regional distress. We are talking now of just regional distress, when there would be a plethora of funds in one region and a great demand in another. Of course there would be a natural flow of funds from one to the other, but it is optional. Mr. BuLKLEY. Why would there be ? Mr. Tregoe. That is the way money goes. Mr. BtTLKLEY. Because of a higher rate, is it not ? Mr. Tregoe. It goes where it can earn the most ; that is what con- trols money now. But, you see, what I am fearful of is a continuation of the present system, which is a paternal system. We had incorpo- rated in this little leaflet that our present system fosters paternalism in banking, and our banking friends objected to it, but they did not see the viewpoint. We are in a paternal situation. The inland bank is dependent upon the graciousness of the larger bank for accom- modations. We want to make it so that there has to be this system- atic and scientific flow, not discretionary upon the attitude of the personal disposition of men, but a legal flow. The Chairman. But would you not accentuate that very proposi- tion by making it dependent upon the arbitrary disposition of a cen- tral board, clothed with monopolistic power? Mr. Tregoe. I would not clothe the central board with monopolis- tic power. I would not go that far. I would have certain regula- tions established, and certain conditions in which, if those conditions were met, it would control the central institution, and they would have no discretion. ~ Mr. KoRBLY. If the central institution had the exclusive power of issuing currency, that would be a monopoly, would it not? Mr. Tregoe. No ; I would not call it that ; would you ? I do not think that would be a fitting term for it. That would be a minis- terial power. I would not call it a monopoly, but it would be a min- isterial power, that they would be required, when called upon, to issue currency upon the metallic reserve and upon the sound two- name paper that would be offered them. The Chairman. Who would determine whether the paper was sound ? Mr. Tregoe. Absolutely, that should be controlled in the regions from which it emanates, because the bank where the paper was first- discounted has to indorse that paper for rediscount. Those func- tions, Mr. Chairman, can be performed in the region. I believe abso- lutely in a large, self-governing power in the regions, and the prin- BANKING AND CUEKENCY EBFORM. 185 cipal functions that I see in this central body are those of coordina- tion, ot the uniform rate, and the supervision Mr. Buckley. Is it your opinion that the central division should have no discretion in accepting paper which the regional district has pronounced to be good ? Mr. Tbegoe. It ought to be clothed with certain discretion, but not absolute discretion as to the class of securities which would be ac- ceptable. Mr. BuLKLEY. Where would you draw the line « Mr Teegoe. That is getting into details that I would fear to enter into, because Mr. BuLKLEY. When the district association has pronounced cer- tam two-name paper to be good, under what circumstances would you allow the central association to say it was bad ? Mr. Teegoe. They might not say it was bad, but they might think there were certain conditions which would make it inadvisable to accept it. There should be a division of discretion, but by no means absolutism in the central association. Mr. Btjlkley. Can you suggest any rule which would limit their discretion which you would advocate ? Mr. Teegoe. I would not care to do it without thought. Mr. Bulkley. You have a feeling that some such rules ought to be thought cf , but you do not know what they are ? Mr. Teegoe. I would not care to state, because I have not thought it out. I would prefer to give that some study. It is a very serious problem. Mr. Joyce. It would be a very delicate and large problem. Mr. Bulkley. I hope you gentlemen do not think I am trying to quibble over this, because to my mind this is the crux of the whole thing. If you have to give arbitrary power to that central board, that seems to be a very potent argument against having any central board. If you say we shall not give them arbitrary power, then we want to find out some practical way in which that power can be limited. Therefore, it seems to me to go to the very heart of the matter, and not to be a minor detail at all. Mr. Endy. The district association, or a regional association, which would tender these notes for currency, of course, would make them- selves liable and responsible for them. Mr. Bulkley. Yes. Mr. Endy. Now, the central association has no business whatever to turn them down. Mr. Bulkley. Then, you would advocate making a rule that they must accept whatever the district association indorses ? Mr. Endy. Absolutely. Mr. Bulkley. And to that extent you would say the Aldrich plan, as at present proposed, is wrong? Mr. Endy. What is the use of having these assets if they are not available at all times ? Mr. Joyce. If the Aldrich committee can find some way of rectify- ing that abuse of power or would not stand for it, that would be a different matter. But we did feel, in discussing this situation, that Congress, through this committee, could put enough safeguards around the decision of that national supervisory committee, so that 186 BANKING AND CXJEEENCY EEFORM. they would not be absolutely arbitrary, so we would be in no danger of their turning down proper requests from the regions. Mr. Blklet. Then, you would favor putting that right into the law? Mr. Endy. I would make it mandatory upon the central associa- tion. Mr. Kindred. What safeguards would you have? Mr. JoTCE, As I answered Mr. Bulkley, I think that is a problem that will take all your ingenuity to solve. Mr. Bulkley. That is the reason I asked the question. Mr. Joyce. Yes ; we can not have a monetary bill without it. Mr. Bulkley. You would not favor the bill without it ? Mr. Joyce. No. Mr. Bulkley. I quite agree with you. Mr. Joyce. Yes. Then you would have the commercial paper of John Jones acceptable, and John Smith, they would have something in for him, and that paper is no good ; the cotton bills are all right and the wheat is all wrong, and so on down the line. Mr. Bulkley. I am interested to hear you say that, because I fully agree with you, and I think we are coming — - Mr. Joyce. That was a detail, and a very important one, but we thought it could be worked out by conference. Mr. Kindred. Is it not more than a detail ? Mr. Joyce. Yes. Mr. Kindred. Is it not ruinous ? Mr. Joyce. It would be if it got through there. Then you would have the control by Wall Street, or I do not know what you would call it. You would have one class against another, cotton bills good and wheat bills not good, and the next day wheat good and cotton not good. The Chairman. Mr. Endy, what causes cooperation in the big money centers when trouble comes ? Mr. Endy. Self-preservation I should say. The Chairman. Is it altogether self-preservation, or is it the pres- servation of the community? Mr. Endy. Well, first the preservation of the banks, which neces- .sarily reflects on the community. The Chairman. I thought it was the feeling of self-preservation 0 per cent of its absolute capital and surplus. The Chairman. Do you think it ought to have that much? Mr. Tregoe. I do not believe 50 per cent is too much, because ac- ceptances relieve the bank of the usual discount credit. The Chairman. "Would it not be better to go slow as an experi- ment in a matter of that sort? Mr. Tregoe. You are asking my opinion as to safety, but as an ex- periment, I would not have it even that much, if you wanted to make the trial of it. But I think acceptances should be legalized, and I think they should be developed. The Chairman. That would, to some extent, create in this coun- try what is known as a money market, such as they have in Europe and that we have not here? Mr. Tregoe. It would create a very splendid form ot commercial paper for banks to buy. Mr. Joyce. But which has disappeared m recent years ; you do not see the two-name paper. Mr. Tregoe. It would make a splendid form of commercial paper for banks to buy. t n ^i The Chairman. Do any of you gentlemen want to ask further questions? .„ , ,, ., Mr BuLKUEY. I would like to ask, if the other gentlemen agree with what Mr. Tregoe said a minute ago about Government issue as against regional division issue? Mr. Joyce. "We would prefer it. Mr Btokley. You would prefer Government issue f Mr. Joyce. Government issue, against regional association < Mr. Btjl,kley. Yes. 200 BANKING AND CUBEENCY REFORM. Mr. Joyce. I think we would. That brings it down to one issue. Mr. Endt. As chairman of the committee, I oppose that. I do not believe in the Government issuing money. Mr. Joyce. As an alternative against 25 districts? Mr. Endy. But I do believe it would be preferable to having a reserve board, whatever you call it The CuArEMAN. The Treasury board or governing board ? Mr. Endy. Issue the notes. Mr. Joyce. You could not get it. Mr. Teegoe. If you could not get it, is it preferable to have the Government issue as a unit, or have 25 districts ? Mr. Endy. But if you had this Treasury board, could not they issue it? Mr. Teegoe. But if you can not get it? Mr. Endy. Why can you not get it? Mr. Teegoe. If you can not get it? Mr. BuLKLEY. We did not say you could not, but the proposition is this: Whatever plan we finally arrive at will mean a great many sacrifices of judgment upon the part of all of us, and I only wanted to get an idea as to your choice between these two plans, disregard- ing the question as to whether an issue by a central board might not be better than either of them. I simply asked you if you would prefer a Government issue to an issue by a number of regional di- visions. Mr. Endy. Personally I do not think the United States ought to go into the banking business. If issuing the notes means it is going mto the banking business, by discounting acceptances Mr. Bui/KUSY. No ; they are not connected at all. Mr. Endy. If they are going to issue the notes, they have to have something to back them up or redeem them. Mr. BuLKLEY. Unquestionably there would have to be reserve. Mr. KoEBLY. How would the Government get its notes out? Mr. Endy. Issue them to the regions or districts. Mr. KoBBLY. Would it lend it to them ? Mr. Endy. No ; I say they would have to have something for them, and therefore they would be going into the banking business, and that I object to. Mr. KoBBLY. Then you object to the Government issuing notes under any circumstances? Mr. Endy. I object to the Government going into the banking busi- ness. If it is necessary to entail that, then I am not in favor of it. _ Mr. KoBBLY.Can you conceive of some way of the Government issuing notes without going into the banking business? Mr. Endy. No; but this law to create a Treasury board The Chaieman. That is a different proposition. Mr. Joyce. That does not answer his question. The Chaieman. It is a question as to whether you favor direct Government issue of currency? Mr. BuLKLEY. Since that question is raised, it is perfectly con- ceivable that the Government could deposit currency in banks in order to get it into circulation. The Chairman. Upon what basis, Mr. Bulklev? Deposit notes in banks upon what basis? What would the Government have back for the notes? BANKING AND CUEEENCY EEFOEM, 201 Mr. BuLKLEY. I regret going into a full exposition of a plan at this late hour in the afternoon ; but it would get a deposit account, which, according to my judgment, should be guaranteed by all banks mutually. You would have all the banking resources of the United States behind every deposit. But I did not mean to open up that question at all. I simply wanted to know whether these gentlemen thought that a Government issue would be preferable to regional division issues, if they care to express an opinion upon it. Mr. KoEBLY. Your contention, Mr. Bulkley, is that the Government should act in more of a ministerial capacity ? Mr. Btjlkt,ky. Yes ; so far as I make any contention at all. I am not contending anything, but simply suggesting a possibility, and asking for suggestions about it. Mr. Joyce. Mr. Chairman, just in conclusion, because we have kept you here all day, would it be impossible for the committee to con- sider, and would it conflict with the declaration of the Democratic Slatform at Baltimore, that this Treasury board, which you evi- ently have in mind, should issue currency and be the sole issuer of currency ? The Chairman. "Well, I think not, giving you my individual opin- ion. This committee is competent to consider anything, and each member of the committee would have to determine for himself what he thinks the platform of his party means and whether it is binding upon him or binding at all, and there are members of the committee whose party platform has made no declaration on the question at all. It is competent for the committee to consider anything, but we have not determined upon anything, and we have not sufficiently inter- changed views, it seems, between one another to be in accord. Mr. Ore. If there were divisional issue, there would be some super- vision and control from Washington, would there not? The Chairman. I should think so. Mr. Orr. It seems that if there should be a very prompt redemp- tion of notes under the divisional plan, it would be perfectly safe. Mr. KoEBLY. Would not that depend upon the natural course of events ? Mr. Orr. Yes. The Chairman. In my mind we would have very much prompter redemption than we have now. Mr. Orr. Yes. We virtually have no redemption at all to-day. Mr. Endy. It strikes me that you go to your regional bank and say " I want $6,000 worth of currency," and you give a four months note for it, when it matures you certainly have to bring the currency back for it. Of course that means four months, but it would keep going every day, and all the notes would not mature on the same day, so I believe there would be a constant redemption of the issue. _ Mr. KoEBLY. These divisional bank notes that you are conceivmg or imagining now would be the joint notes of the banks that issue them, would they not? Mr. Teegoe. I beg pardon? . Mr KoRBLY. These original bank notes that we are considering would be all joint notes of the banks in that region, would they mH Mr. Tregoe. Yes; assuredly. , , . „ ^ Mr. KoRBLY. Based upon the credit of the banks in that region who were participating in the regional bank issue. 202 BANKING AND CUEEENCY EEFOEM. Mr. Tkegoe. If they were issued in that way, that would be some- what in the nature of the clearing-house certificates to-day. The Chairman. My idea is they would be a joint obligation of the entire banking system of the country, and that there would be a redemption fund provided for their redemption. Mr. KoEBLY. That leads me to the question I wanted to propound to you, as we have some time yet. What would be your objection to allowing the bank individually to utter those notes, they being the joint notes of the banks under the supervision that you contend for, even a supervision which came from a governing board ? Mr. Teegoe. Because of the confusion it would create. Mr. KoEBLY. They would be uniform, like the present national bank notes, and bear the imprint of the United States on the reverse side, if necessary. Mr. Teegoe. But not uniformly secured, as is the case at present. Mr. KoEBLY. They would be ujiiformly secured, because they would have all the assets of the banks in the United States behind them. Mr. Teegoe. Yes; but all the assets of the banks in the United States are not of uniform character. Some banks may be overloaned and have a great deal of very poor paper in their vaults, but the national debt is of a uniform character on which the currency is now based. Mr. KoEBLY. But you can not have any elasticity upon that. Mr. Teegoe. There is no elasticity now. Mr. KoEBLY. No; you can not have it with any single pledge of security. Mr. Teegoe. The chairman stated a thought just now that he had not before spoken of, that interested me very much, that I thought he contemplated personally some arrangement whereby all the notes of one district should be, as it were, secured by the notes of all other districts, and one central reservoir for redemption. "Was not that about what you suggested ? The Chaieman. Yes ; a central point for redemption. Mr. Teegoe. That is getting down to the central institution. The Chaieman. With facilities for redemption merely extended to the regional reserve banks. Mr. Teegoe. You know, I should not be surprised but what we are a little closer together than we think in some of our ideas. The Chaieman. I thought everyone understood that no member of this committee ever dreamed of proposing any measure of cur- rency reform that would fail to protect the notes of issue uniformly, and guarantee them. Mr. Teegoe. Kedemptive everywhere? The Chaieman. Why, certainly ! I never dreamed of anything ^r. Endy. And just as good here as in California? The Chaieinian. Just as good in California as here, under the shadow of the Treasury. Mr. KoEBLY With this distinction, that a bank note issued in V . ^oi;\and traveling to California would travel back to New York and be retired. It would come back in the natural course of events. BANKING AND CUBKENCY EEPOEM. 203 The Chairman. Yes. You have a tax upon all the banks now for current redemption, have you not? Mr. Endt. How is that ? The Chairman. You have a current redemption fund now, have you not, for .all national-bank notes ? Mr. Tkegoe. Yes; but it does not produce flexibility in the bank notes. The Chairman. No. Mr. Tregoe. I was just going to say, speaking for myself person- ally, and I think, perhaps, for the others, that certainly we appreciate the courteous treatment we have had at your hands and the privilege you have accorded us of expressing ourselves so liberally and gen- erously and frankly, and if our office or any of our departments can be of any help to you in this work, and if you want any information that we can collate for you, doing it in a perfectly quiet and unofficial and unobtrusive way, we want you to call upon us, because we want to do anything we can in this work. The Chairman. This committee is doing everything, and I sup- pose will continue to do it, in a quiet and serious way. We are not seeking to be in the limelight. Mr. Tregoe. You might think, if you wrote and asked our associa- tion to do a certain thing for you, we might publish it abroad, but I want to say whatever you ask us to do will be done without any publicity. The Chairman. I am sure we are obliged to you, and we shall feel at liberty to call upon you at any time. Mr. Tregoe. I wish you would. We are going ahead to see if we can not get this thing through. The Chairman. Gentlemen, the committee will stand adjourned until next Tuesday, January 14, 1913, at 10.30 o'clock a. m. Adjourned. BANKING AND CURRENCY REFORM HEARINGS BEFORE THE SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY HOUSE OF REPRESENTATIVES CHARGED WITH INVESTIGATING PLANS OF BANKING AND CURRENCY REFORM AND REPORTING CONSTRUCTIVE LEGISLATION THEREON TUESDAY, JANUARY 14, 1913 STATEMENTS OF MR. FESTUS J. WADE and MR. JAMES E. FERGUSON PAKT 4 WASHINGTON GOVERNMENT PRINTING OFFICE 1913 SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY. House of Representatitbs. sixty-second congress, third session, CAETEE GLASS, Virginia, Chairman. J. FEED. C. TALBOTT, Maryland. JOHN J. KINDRED, New York. GEOEGE W. TAYLOE, Alabama. EDWAED B. VEEELAND, New York. JOHN M. MOOEE, Texas. GEOEGE D. McCEEAEY, Pennsylvania. CHAELES A. KORBLY, Indiana. JAMES McKINNEY, Illinois. EGBERT J. BULKLEY, Ohio. E. W. FoNTE»OT, Clerk. A. M. McDeemott, Assistant Clerk II BANKING AND CUREENOY REFOEM. Subcommittee of the Committee on Banking and Cuerency, House of Eepeesentatives, Washington, D. C, Tuesday, January I4, 1913. The subcommittee met, pursuant to adjournment, at 10.30 o'clock a. m. Present: Messrs. Glass (chairman), Korbly, Kindred, Talbott, Taylor,^Bulkley, McCreary, and McKinney. Mr. Kindred. Mr. Chairman, what is the particular subdivision of the subject upon which we are to hold this hearing this morning? The Chairman. Just the general subject of currency reform. Mr. Wade is a member of the currency commission of the American Bankers' Association. He was invited, along with Mr. Hepburn and Mr. Forgan, but they could not make it convenient all to be here at the same time. STATEMENT OF MR. EESTUS J. WADE, ST. lOUIS, MO. The Chairman. Mr. Wade, you understand, I presume, the pur- pose of these hearings. It is to get the opinions of representatives of various national groups upon the question of what this committee should do with currency matters. Mr. Wade. Yes, sir. The Chairman. We have understood that the American Bankers' Association at one meeting indorsed the plan of the Monetary Com- mission and at a subsequent meeting passed a modified resolution indicating that it was willing to cooperate in any feasible plan for currency reform, and the committee wanted to hear you on the sub- ject. You may proceed in your own way. Mr. Wade. My reply to that will be very brief. In the first place I would like it understood that I am here as an individual and not in my capacity as a member of the currency commission of the American Bankers' Association. The Chairman. That is understood. Mr. Wade. And secondly, that after a study of this question for a period extending over the last six years I believe that the so-called Aldrich plan, or the plan submitted by the Monetary Commission, comes nearer to being a bill that will correct the existing evils and add to the monetary laws of the Nation than anything that has yet been submitted by anyone that has come under my observation. In the first place, that bill is not the Aldrich bill, as it is called, but it is a composite measure made up by suggestions from all over 205 206 BANKING AND CURRENCY REFORM. the country— that is, after the original draft of the Aldrich bill was submitted the bill that was finally submitted to Congress was very much modified. We believe that it is very important — in fact, vitally important— to the interests of this Government and its people that some measure should be adopted to correct the laws of the Nation as they now exist in relation to its monetary affairs. The American Bankers' Associa- tion has never in any manner or form retracted its recommendation of a bill that was passed at the congress ; but at a meeting at the last convention, which was held in Detroit, on behalf of the currency com- mission of the American Bankers' Association I submitted a resolu- tion which was adopted and which is as follows. I would like, if you will allow me, to insert this in the record. The Chairman. Yes; we would like to have it in the record. I have read it, but we would like to have it. The resolution referred to is here printed in the record as follows: In order tliat the imsition of the American Bankers' Association as to the re- form of our financial and banliiiig system may be fairly understood and cor- rectly placed before the public : Be it Resolved, That this association will cooperate with any and all people in devis- ing a financial system for this country which shall place us on a par with the other great commercial and competing nations, a system which shall give to the American people, all classes and conditions, the financial facilities and indus- trial advantages to which they are entitled. Mr. Wade. You will see by the essence of that resolution that the bankers are intensely interested in any form of financial legislation that this committee may take up and discuss and they are willing to lend their assistance in any way to furthering sound monetary legis- lation. Of course, I do not want to be understood as speaking for the American Bankers' Association, nor for the currency committee. I have no right to do so. But the resolution was adopted unani- mously and speaks for itself. I do not think I could say any more. The Chairman. As I recall that resolution, it did indicate — it did not, of course, retract its indorsement of the plan of the Monetary Commission, but it did indicate — that it would be willing to cooper- ate with any measure that would improve existing conditions. Mr. Wade. Unquestionably. That has always been the attitude of the banker, whether he comes from Corsicana, Tex., or from Bangor, Me., or from New York or St. Louis. The Chairman. The situation, frankly, has its political aspects. I do not mean to say that anybody is proposing to mix politics with reformation of the currency; but you understand that the majority members of this committee are confronted by the platform declara- tion of the Democratic Party against the so-called Aldrich plan? Mr. Wade. I am thoroughly cognizant of that fact. The Chairman. And that being true you will observe, as a prac- tical man, that the majority members of the committee — at least some of us think so — are precluded from reporting that plan and, therefore, it would seem to be — if I may say it^ — " up to us," even assuming that that is the best plan, to get the next best thing. Mr. Wade. WelL, I do not think that the committee would caj e to admit if this was the best plan that could be devised, that because it was a party measure it would adopt a secondary plan if this were the best plan for the whole people. BANKING AND CUEEENCY REFORM. 207 The Chairman. But the question is, Who is to determine whether it is ? The Democratic Party has declared that it is not. Mr. Wade. I say, assuming that it is the best plan. Mr. Kindred. We do not assume that. The Chairman. I assumed that from your point of view. Mr. Wade. That is all right. I can understand the political side of a proposition as large as this, and can realize that you gentlemen are confronted with the difficulty of adopting something that would be economically sound and politically wise. The Chairman. I may say, in that connection, that there are a great many Republicans who do not agree that the plan of the Mone- tary Commission is the thing, as well as many Democrats. Mr. Wade. Well, I would not be surprised at that. It would be almost beyond the range of possibility to take a measure as large as this and get a unanimity of sentiment on it of any party or class of people. The Chairman. Or bankers. Mr. Wade. Or bankers ; assuming that it is a very complex ques- tion, and one that requires a great deal of study, and one which the ablest minds differ on. The Chairman. Assuming that the majority members of this committee are precluded from reporting the plan of the Monetary .Commission, what modification of that plan or what other plan would you suggest to the committee? Mr. Wade. I do not think it would be becoming to me to make any such suggestions at this time, for this reason: In the first place, I have, after six years of labor, prescribed and subscribed to that plan. In the absence of something submitted for consideration of the com- mission, in which I still hold membership, and the absence of time to consider such a measure, I do not think it would be wise for me to come here in an individual capacity and try to inject my personal views. The Chairman. I understood you were here in an individual capacity, but you would not assume to make such a suggestion? Mr. Wade. No. I do not think I would want to inject my per- sonal views on a measure as large as this, unless it was to dissect some plan that is before us, the same as this plan is at present. The Chairman. I will state to you that the conmiittee has no plan as yet. The committee has not even attempted to agree upon any plan. We have scarcely thought it would be the thing to do to agree upon a plan and then have you gentlemen come here and give us opinions. Mr. Wade. Not agree upon a plan, but make suggestions looking toward the agreement on a plan, the same as the Monetary Commis- sion did originally. ^ ,^ „^ , ^, ^ • The Chairman. Well, it has been suggested, Mr. Wade, that m lieu of a Central Reserve Association, we might proceed upon the clearing-house idea and adopt a system of regional reserve banks, dividing the country up into 20 or more districts, and organize re- gional reserve banks with all the powers and even broader powers than clearing houses have undertaken to exercise, with a central supervisory board at Washington. 208 BANKING AND CUKEENOY KEFORM. Mr. Wade. That might be worked out; but, in my judgment, you will never have a sound financial monetary system in this country without the central-bank idea. It never has been The Chairman. Then, Mr. Wade, would you say that if there were insuperable political objections to that proposition, we should not do anything? Mr. Wade. No; I simply say- The Chairman. Do you not think there are insuperable political obstacles to a central bank? Mr. Wade. I think, Mr. Chairman, it is more or less sentimental than it is the real fact. The Chairman. Nevertheless it is a fact that objections exist. Mr. Wade. There are objections to every measure Congress passes. I never heard of one unanimously commended by the people, but The Chairman. Do you think it is possible to have Congress pass a central bank scheme? Mr. Wade. That I do not know. I have never been before a com- mittee of Congress in my life except the Banking and Currency Committee. I think it is possible, if this committee would recom- mend a plan of this kind, yes ; but without the recommendation, no. The Chairman. You know the traditional hostility of the Demo- cratic Party to a central bank? Mr. Wade. I do. The Chairman. Whether it be sentimental or vrhether it be the ghost of Andrew Jackson, as some say, the traditional hostility has existed. Mr. Wade. That is true, but The Chairman. Now, we have a Democratic administration. Do you think that it is possible to have a central bank under a Demo- cratic administration? Mr. Wade. I think it is. I think Democratic administrations, like all others, improve with age and experience. Let us see what that idea is. The great fear seems to exist that a central bank, from the days of Jackson, might be worked into a political machine. At that time the conditions were totally different from what they are to-day. There are 50 banks in this country to-day that are larger now than the first United States bank, and there are several which are larger than the second United States bank. And conditions are totally dif- ferent from what existed at that tihae. States have their banking laws, and many of them are just as good as the Government law. Many of the States scrutinize the banks and preserve them just as clean as the National Government, and conditions are totally differ- ent. But be that as it may, there has been no great country in the last 50 or 75 years that has had a successful banking system without the central bank, and I do not believe you can get it in this country or any other. Mr. Kindred. Mr. Chairman, may I ask a question just in that cou' nection? Aside from the alarm that may be felt in some quarters that the great reserves of the Central Reserve Association under the Aldrich plan might be used improperly by political cliques and groups, is there not also a reasonable fear that these great reser\'es iprovided for under the Aldrich scheme might not be used in the in* terest of the larger banking groups and financial cliques. BANKING AND OUEBENCY EEFOEM. 209 Mr. Wade. How can it be? We have, we will say, under that plan, a branch of that association in St. Louis. We are entitled, to our proportion of that reserve as long- as we have the assets to sub- mit to that branch. We are going to manage that branch. Mr. Kindred. But under that scheme is it not entirely possible that large banks and large groups of banks will control? Mr. Wade. Control the officers? Mr. KiNDEED. Yes. Mr. Wade. Yes. There is no question about that. Mr. Kindred. Is not that a great measure of control itself, of the reserves ? Mr. Wade. No ; absolutely not. Mr. Kindred. It is a step toward it, is it not ? Mr. Wade. No, sir ; let me illustrate that : The smallest bank in the national system to-day has exactly the same right to note circula- tion that the largest bank possesses; a bank of $25,000 capital can take out 100 per cent circulation, and a bank of $25^000,000 can not take out more than that per cent of circulation. And under this plan, a bank in Corsicana, Tex., or in St. Louis, Mo., or in Bangor, Me., can get out its full quota of reserve notes if it has the collateral to submit for them, and they all have them ; that is, all well-regulated banks. Mr. Kindred. Well, admitting, Mr. Wade, that there is no more fear of such control, as I have suggested, than is implied in the ad- mission that you make, that the larger groups of banks could control the officers; even that, I take it, is a step in the direction that I speak of. Mr. Wade. You misunderstood me. I might have implied it to your mind, but not to mine, but the larger groups of banks could not control the election of the directors under the plan as submitted, because the division of voting power is so nicely balanced that I think it would be out of the question. Mr. Kindred. It is a very complex thing, is it not? Mr. Wade. Well, it is a ample complex question ; it is very simple when you analyze it. The Chairman. We had the statement of ex- Secretary Shaw here last week that if the big interests should not control, the thing would collapse. He said the control was inevitable. Mr. Wade. I do not know what he classes as big interests in that direction. If that same doctrine would be applied as a general proposition, he never would have been Secretary of the Treasury, because he came from a small town and was a small banker. If it is'big interests in intellect, of course that would be one thing. Mr. Kindred. That is desirable control. Mr. Wade. Yes. Mr. Kindred. If it is directed in the right way. Mr. Wade. And yet, after all, this Nation, your Halls of Congress, your banking system, your commercial system, are now, always have been, and always will' be controlled by ability and intelligence and integrity. And if that ability and intelligence and integrity be con- fined to small country towns or to large_ municipalities you are going to draw from that source to get the ability. Mr. Tatlor. Is the banking business any less needing integrity than any other business ? 210 BANKING AND CUEHBNCY BEFOBM. Mr. Wade. Not a bit. Mr. Taylor. Does it not, rather, need it more? Mr. Wade. Not a bit. Mr. Taylor. Than any other business? Mr. Wade. Not a bit. Mr. Taylor. They are the same, one as the other? Mr. Wade. Absolutely. A man running a edrner grocery requires the same type of integrity that a man does in running the largest bank, if he wants to be an honest man. Mr. Taylor. Integrity and brains will win out in all cases, you think? Mr. Wade. Unquestionably. Of course that carries ability with it. Mr. Taylor. Integrity and ability? Mr. Wade. Yes. Mr. Kindred. Not in the controversial spirit at all, but simply to get your full opinion as to whether or not there are certain points that are not properly and well safeguarded under the Aldrich scheme in order to control this enormous fond controlled by the Central Eeserve Association. Mr. Wade. Eeally and candidly speaking, I think not. I have attended, I suppose, not less than 30 or 40 meetings on this subject, and I have debated the features of it for several hours in these com- mittee meetings or these meetings — that is, I mean combined — and if I thought for a moment that there was anything hidden in this scheme, I would be the last man in the world to advocate it. Mr. Kindred. Don't you think that the United States Government under that plan is committed to a much larger degree of responsi- bility? Mr. Wade. I do not understand. Mr. Kindred. That it is committed to a much larger degree of responsibility than it has power, commensurate power, to assert itself with regard to the plans concerning these reserve funds ? Mr. Wade. No ; I do not. Mr. Kindred. Is not this Government almost without power under that scheme? Mr. Wade. I think not. Mr. Kindred. I mean, except nominally? Mr. Wade. No; I think not. I think under the law the Govern- ment occasionally assumes that responsibility. You can control the banker if he does not do right. Mr. Kindred. I refer to the organization of the officials of the Central Reserve Association that is contemplated under the Aldrich scheme. Mr. Wade. I can iiot see why the Government is powerless. In the first place, there is the examiner. Mr. Kindred. There is what? Mr. Wade. They examine the bank. In the second place Mr. Kindred. I am particularly referring not to the general work- ings of the comptroller's office or the Government agencies over- looking and supervising the bank. That is all right. We know that, but I am particularly referring to the lack of power, as it strikes me, of the Government in the organization of the officials in control of this Central Reserve Association that is provided for in the Aldrich scheme. BANKING AND CURRENCY REFORM. 211 Mr. Wade. I do not see where your fear comes in; I can not imagine it. Mr. Kindred. The voting power of the representatives of the Gov- ernment there is nil? Mr. Wade. No, sir. Mr. Kindred. That is, practically nil, in the voting power. Mr. Wade. In any of the departments Mr. Kindred. In any of the departments or in the electorate, are we not shorn of power? Mr. Wade. No, sir ; when you have ability — not if you have ability. Mr. Kindred. But ability alone will not protect you against the majority. Mr. Wade. Yes; if you have honest men. Mr. Kindred. But you make too many ideal conditions. Mr. Wade. No; in the first place, you have the Government repre- sented. In the second place, it is fair to presume that you are going to have an honorable board of directors, at least a majority, in that extreme view ; in the third place, it is fair to assume that any set of honest men intrusted with the funds of great institutions of this kind are going to prohibit any officer or director from going wrong. Mr. Kindred. I assume that all the assumptions you make are fair under ordinary conditions, but in the organization of the enormous interests like this we are to safeguard against conditions that may not be ideal, are we not? Mr. Wade. That is true; but you must trust some one. Your con- stituency trusts you to come here and sit on this committee. Mr. 'Kindred. They also have practically the referendum and re- call about that. Mr. Wade. Not in our State. Mr. Kindred. They have practically; every two years they have that, under the Constitution. Mr. Wade. Under the organization of this plan, if you should adopt any measure here, has not Congress the right to put in the referendum ? Mr. Kindred. But my point is, as a practical man — which I take it and know that you are from your very able exposition of your side of this question — I am talking about safeguarding under condi- tions that might not be ideal, and you have always assumed the ideal. Mr. Wade. No; I have not always assumed' the ideal. I have assumed a practical, every day, business method of life. I am as- suming that the men that come from all parts of the United States as directors in this institution, first as bankers and, secondly, those that represent the agricultural and industrial business of the country, will be honest men. Mr. Kindred. No one agrees with that more than I. Mr. Wade. Yes; I am assuming that the majority of them will be good citizens of this great Kepublic. I am assuming that they will do their duty, and I think I have a perfect right to be safe m that assumption. , ,, -.j. » x- Mr Kindred I do not want to take up the committees time on this thing, drumming at one particular topic of it, but there is an important point involved here as regards the technical question ot committing the Government largely, immensely as ^ ^^ responsi- bility and giving it no power. Now, coming back to that, don t you 212 BANKING AND CUERBNCY EEFOEM. think that there should be some other provision than there is, that would give the Government more power, considering the great re- sponsibility which it has ? Mr. Wade. You mean — I do not see where it needs more than it has at present. It has the banking system. Mr. Kindred. I have not any doubt about that. That has always been good, so far as I know. • The comptroller generally does his duty ; but I am speaking of the specific question of the power of the Government over the control of the enormous sums in the Central Reserve Association. In that matter the Government is committed to a great deal of responsibility. Mr. Wade. What branch of the Government would you put that power into ? Mr. Kindred. We will assume, whatever branch it has been put into by the Aldrich plan. The President appoints in this case, as I understand it. Mr. Wade. Yes. Mr. Kindred. But I am talking about his lack of voting power in this organization. That is the point. Mr. Wade. The President appoints ambassadors to foreign coun- tries. Mr. Kindred. But that is not parallel. Mr. Wade. He appoints Cabinet officers. Mr. Kindred. But that is not parallel ; we are talking about, now, a matter of corporations, really; I am not a lawyer at all, but I am talking about the powers of officers and individuals in the great cor- porations. That is practically what it amounts to. Mr. Wade. What power has the governor of a bank that he might use to the detriment of the Nation ? Mr. Kindred. I am complaining that he has not enough power to wield for weal or woe. Mr. Wade. Yes; he has. The governor of this bank, his powers are defined. Mr. Kindred. But they are not extensive. Mr. Wade. Sufficient to meet requirements. Mr. Kindred. That is where we differ. I am complaining about the idea that his powers are almost nil, as a representative of this Government. Mr. Wade. In what respect ? Mr. Kindred. Because he has no voting power, as I have indicated. Mr. Wade. No ; but he stands there neutral ; there can be no serious objection to giving him the voting power. Mr. Kindred. Would you give him more power ? Mr. Wade. I would not; but I do not think there would be any serious objection to giving it to him. Mr. Kindred. Don't you think it would be an enormous advantage? Mr. Wade. I do not think so; there is no board of directors that would attempt to go against the advice of counsel of the bank ; other- wise there would be no use of having one. The Chairman. Let me ask a question or two along that line. Has the governor of the State voting power ? Mr. Wade. No, sir. The Chairman. Do you think he needs any voting power? Mr. Wade. I do not. BANKING AND CUEKENCY BBFOKM. 213 Mr. Kindred. But he has the veto power. The Chairman. You do not think he needs any voting power? Mr. Wade. No, sir. Mr. Tatloe. Do you think an executive officer or administrative officer needs the voting power ? Mr. Wade. I do not ; I think his veto power is very salutary. Mr. Kindred. May I interrupt? Mr. Taylor. Yes, sir. Mr. Kindred. Do you think the voting power which the governors and chief executives of all our units of government have very defi- nitely should not be vested and exercised here? Mr. Wade. I think so. Mr. Kindred. But is not vested here. Mr. Wade. Well, it might be vested; there is no serious objection. Mr. Kindred. Under the Aldrich scheme it is not. ]\Ir. Wade. It could be. Mr. Taylor. I was just seeking to bring out the very fact that you are bringing out now. You have already stated that you do not object to it. Mr. Wade. No. Mr. Tayloe. That could be added; that is a mere detail of the Aldrich bill. Mr. Wade. Yes, sir. Mr. Kindred. Do you consider it a detail? Mr. Taylor. Well, I will put it different. I ask, don't you think it is a detail of the Aldrich bill ? Mr. Wade. I think it is ; but it might be added. Mr. Taylor. It might be added? Mr. Wade. Yes, sir. Mr. Taylor. And you would not object to having that put in? Mr. Wade. Not the slightest. Mr. Talboti. How would that work ; would you give him the right to nullify the action of the board? Mr. Wade. He certainly would have the right to nullify the action of the governor also. Mr. Talbott. But the governor can veto almost anything; but that is not a purely financial arrangement. And if he had the power to disregard what the board did, then he would really be the whole thing. .1-^1 J. Mr Wade. The assumption is, if you give him the veto power there would be some check upon him again by a majority or, say, two-thirds of the vote. . -, , n ■ ^u t- i,„ » Mr. Talbott. Just the same as the president ol an institution has ? Mr. Wade. Unquestionably so. ,- j! ^u- Mr McKinney. We have had several gentlemen before this com- mittee who seemingly have been wi^h the Aldrich bill, the so-called Aldrich Monetary Commission bill, perhaps not in its entirety, but to the general plan of the Monetary Commission Proposition and after lling confronted with this platform of the par of e Democratic Party at Baltimore, which would seem to preclude the pSbiSy of that Monetary Commission plan being accepted or Corabi/ considered in Congress, they have been asked what moc - fications of the Monetary Commission's plan they might fa. i. Supposing that the central-bank feature was not entirely satisfactory, 214 BANKING AND CUBEENCY REFORM. whatever modifications do you thinlt would be valuable to the country? That has been discussed here, the plan of dividing the country up into districts or zones, 20 or 25 of them, and having some of the features of the Monetary Commission plan considered making discounts by a district-reserve branch, and has the district branch merely a sort of Treasury board, or something like that. Mr. Kindred. A note-issuing board ? Mr. Wade. You can get around it in any way you want to. Call the measure by any other name you choose, but in the last analysis there must be, in order to have success, central control. There must be a head to your monetary system under this Government. There is now, there always has been, and there always will be. You have had your central bank since the days of Andrew Jackson; you are going to have it until the Republic goes out of existence in one form or another. The Chairman. Where do we have the central bank to-day ? Mr. Wade. To-day it is the Secretary of the Treasury. The Chaiejian. Does he engage in the banking business, such as discounting paper, etc. ? Mr. Wade. No; but he is the father that we all look to in hours of distress. It is the Secretary of the Treasury we look to. The Chairman. For what? Mr. Wade. Assistance to relieve the banks of the Nation. Mr. KoRBLY. In what way ? j\Ir. Wade. By depositing Government funds in the banks. The Chairman. Don't you think there has been an abuse of that power ? Mr. Wade. Not in my institution; they have not deposited any. The Chairman. Mr. Taylor, are you through with the witness ? ]\Ir. Taylor. No; I am not; I want to ask a few questions there. I am ready to proceed if I can, if I am at liberty to proceed. May I ask a question or two with reference to the matter? If the Aldrich bill is approved, what are the three features or four features, the four principal features, as you regard them, of the Aldrich bill ? Mr. Wade. First, it provides the manner of disposing of the fic- titious financing of the Government of the United States by taking care of the 2 per cent Government bonds. It provides for their ultimate retirement, or, rather, makes it possible. Second, it brings Mr. Taylor. Would you object to my asking you there, before you take up the second proposition? As I understand you, your first statement was that the first prominent feature of the Aldrich bill was what? Mr. Wade. It provided to eliminate the fictitious financing of the Government of the United States through the 2 per cent bond. Mr. Taylor. As I understand you, to make that possible. Mr. Wade. It makes it possible to ultimately retire those bonds. Mr. Taylor. Does it make it certain and definite, or only a pos- sible way of retiring the bonds? Mr. Wade. It makes it definite if the Government so Avills it; in- definite unless it is directed by an act of Congress. Mr. Taylor. It prepares the way? Mr. Wade. Yes, sir. Mr. Taylor. But does not BANKING AND GUEKBNCY EEFOKM. 2 1 5 Mr. Wade. It provides the means, the avenue, by which the bond may be eliminted. Mr. Taylor. May be eventually eliminated? Mr. Wade. Yes, sir. Mr. Taylor. You think the 2 per cent bonds, then, ought to be eliminated ? Mr. Wade. Unquestionably. And I make this statement, that the old adage, " Good as a Government bond," is not a sound one when applied to the 2 per cent bond. In other words, as the trustee of estates, the president of a corporation representing a great many estates, which administers on estates that must be wound up at defi- nite periods, within 5, 10, 15, or 20 years, I do not believe that the Government bond is a safe investment for such estates. Mr. Talbott. I want to know why it is not. I want you to ex- plain it. Mr. Taylor. You need not go any further on that proposition as far as I am concerned. Mr. Wade. I want to explain it. The Chaiejian. Will you gentlemen permit me to suggest that we had better let one Member get through with his line of ques- tioning before he is interrupted. It does not suit Mr. Taylor to be interrupted. Mr. Kindred. I understood him to say he was through. Mr. Taylor. No ; I do not care to. go into that line, but my friend Mr. Talbott suggested here as to why Mr. Wade thought it was not. I did not think that that was necessary at this time, desiring to pursue another branch of the inquiry. Mr. Wade. But I would prefer to make that explanation, because that statement no doubt surprised a good many of you. Mr. Taylor. Very well. Mr. Wade. The 2 per cent Government bonds of the United States are not in the hands of the general public; they are practically all locked up in the Treasury Department to secure circulation. They are payable at no definite date. They are payable at the will of the Government at any time the Government elects, whether that be 30 years after their issue. There may be a time, and it may not be far distant — I hope it will be — that those bonds might not be worth 60, 70, 80 cents on the dollar. If such an assertion was made 20 years ago about the British consol, which was supposed to be the safest se- curity in the world, everybody would have laughed at it, and yet through the operations of 50,000 Dutch in South Africa, who created a revolution, requiring the British Government to borrow $350,- 000,000, it put down the British consol from 104 to 79. Mr. Taylor. How long did that remain ? Mr. Wade. Well, that is about 9 years ago, and it has only re- covered about 2 points — down permanently. If, perchance, in the next year or 5 or 10 or 15 years, while these bonds are outstanding in their present form, the Government was suddenly called upon to go to war with one or two great nations and would be obliged to issue five or six or seven or eight hundred millions of Go\-ernment bonds, they would be obliged to sell them at a much higher rate than 2 per cent or possibly 3 per cent, as we have experienced within the last 20 years. And if we were obliged to sell a Government bond on a 4 per cent basis it is manifest to all of you that a 2 per rent bond 216 BANKING AND CUEEENGY EEFOEM. would not be worth par. The theory, and mark you, I say the theory, running through the minds of the banking people of this country is that there is money to be made out of bank-secured circulation. It is all a theory and not a fact. Mr. Tayt.ok. Let me ask you this Mr. Wade. Let me explain this, and I will answer any question, if you will just retain it. If you name a bank in the United States of America that took out bank-secured circulation 10 years ago and has kept that circulation out for a continuous period of 10 years, I will show you the bank that has lost money on the circulation. "\^Tiy? Because through that fictitious operation of the Govern- ment's credit you put the 2 per cent bonds at one time up to 109 and 110, and to-day they are down to a little above par, and within three years they sold' actually below par for a few days. Now, then, 1 will answer your question. Mr. Taylor. No ; you answered it without my asking. I intended to ask you just that question, or in a different form. It was simply this, that the bond issue for circulation or the bond security for cir- culation made the circulation by the banks too little profitable for the banks to use it to its full capacity. Mr. Wade. There is a way of using it. I happen to be the head of an institution, a national bank, that makes money out of circula- tion, and makes handsome money out of circulation. Mr. Tai-lor. Will you explain that ? Mr. Wade. We borrow the bonds instead of owning them. Now, that is one of those simple complex questions again. Our institu- tion has $1,200,000 of circulation; it is entitled to take our $1,500,000, but we only take $1,200,000 because we have only been able to borrow $1,200,000 in bonds. We go to the holder of a Gov- ernment bond, and we say to him : " Your bonds are drawing you 2 per cent?" "Yes, sir." "You loan them to us, and we will let you have that 2 per cent that the bonds draw, and we will pay you ] J- per cent in addition, therefore you can make through that operation a Government bond pay 3^ per cent." That seems to be good business to a great many of the Government -bond owners, and they loan the bonds. Mr. Tayt^or. Then the circulation is increased by reason of that operation ? Mr. Wade. We then take that $1,200,000 of bonds to the Treasury Department, and we get $1,200,000 of national-bank notes for them, for which we pay a tax of one-half of 1 per cent plus the incidental <;osts, making it about 2| per cent that that money costs us. There- fore it is manifest if we lend it out at 5 per cent we make 2^ per cent on it. But that only shows the weakness of your system. It only shows the weakness of the Government bond, when in your great rich Nation, with a very limited amount of bonds outstanding, the people of the United States have no confidence in your bonds and will not own them and do not own them. Mr. Taylor. Mr. Wade, I recognize that as a fact, and have for a number of years. That is the fact. Now, how would you propose to get rid of those bonds in a definite way other than suggested by the Aldrich plan ? Mr. Wade. Well, I worked so long on that that I have not tried to formulate any other plan. BANKING AND CUEBENCY KEFOKM. 217 The Chairman. You do not mean to say, Mr. Wade, that there is no other way? Mr. Wade. Oh, no; I have always The Chairman. It is not essential to have a central bank in order to get rid o± the bond-secured currency ? Mr. Wade No; but it is absolutely essential to have a central bank in one form or another. You may call it a John Jones bank or a Bill Smith bank, but it is absolutely essential, in my opinion to have a central bank in order that you have a sound monetary system. •' Mr. Taylor. I understand that. Now, what is the second feature that you regard as essential ? _ Mr. Wade. The second important feature is the method by which linancial institutions, perfectly solvent institutions, may require relief in the hour of distress, such as we had in 1893, in 1904, and in 1907, and such as we will have again. Mr. Taylor. Do I understand by that that you mean the next im- portant feature is the organization' of the financial institutions of the country ? Mr. Wade. I did not quite understand your question. Mr. Taylor. Do I understand you, by what you have said, that you mean that the next important feature in the improvement of the bank- ing and currency system of the United States as outlined in the Aldrich plan is the organization of the financial institutions of the country into cooperation with each other? Mr. Wade. To the extent that it is outlined in the Aldrich plan, yes. But to get that cooperation without some such central organi- zation Mr. Taylor. I have not reached the central organization yet. Mr. Wade. Well, I have. To get that cooperation without some such central organization is, in my judgment, out of the question. Mr. Taylor. I understand. But I meant I have not reached it in my questions to you. I have reached it in my own mind as you have in yours, but what I wanted to reach first was the question of organization. I want to know, can you organize anything without centralization or reaching far ahead? Mr. Wade. You can not do it and continue it successfully. You could organize a mob, but you could not continue it successfully in an enlightened nation. Mr. Taylor. Unless that mob adjourned, having elected a body to represent it, which is a centralized body, is it not ? Mr. Wade. Yes ; it gets back to centralization of power. Mr. Taylor. That is the question I am asking. What is the pur- pose of organization ? Is it not centralization ? Mr. Wade. Yes. Mr. Taylor. To reach ahead? Mr. Wade. Yes, sir; and provide for the contingencies that will necessarily and constantly arise. Mr. Taylor. Now, I want to get, if I can, to this question of a regional organization independent of anything else. I will ask you, when you speak of organization, is there any difference between the organization of banks or banking units than there is in the organiza- tion of a military regiment? Mr. Wade. Yes ; there is some difference. 218 BANKING AND CUKRENCY RBPOBM. Mr. Tayloe. What difference ? Mr. Wade. I do not know that I know enough about the military regiment, because I hardly know a regiment from a company; I was not in the war. But I should think there would be some slight difference. Mv. Taylor. There would be some difference, but you can not state exactly the difference? Mr. Wade. No. Mr. Taylor. Would you think 10 companies organized as com- panies, left to wander over the country at their own will, would be as useful an organization as 10 companies put into one regiment under the control of a colonel? Mr. Wade. No; unquestionably not, in that respect. Mr. Taylor. Would you consider 24,000 banks as units acting in- dependently, as good for the financial success and business of this country as those 24,000 banks organized? Mr. Wade. No, sir. Mr. Taylor. Either for cooperation or competition? Mr. Wade. Well, in the first place Mr. Taylor. Now, if you organize them in regions, say, a dozen or 15, and left them in the regional organization, which would be the most harmful — leaving them in original units or in the regional organization ? Mr. Wade. In regional organizations of that size, decidedly the regional organization would be the most injurious. Mr. Taylor. That is, left in the units ? Mr. Wade. No; left in the small regional organizations, if you confine it to 12 or 15. Mr. Taylor. Well, that is what I want to understand. Mr. Wade. It would be more injurious. Mr. Taylor. If you organize regions or companies and let them work upon each other, then it would be worse than to leave the individual units? Mr. Wade. Yes; than it would be to leave it as it is to-day. Mr. Taylor. That is what I think, and that is what I ask you. Mr. Wade. I will explain to you why I thinl?: so, if you want me to. Mr. Taylor. I am going to ask you. If you catch my proposition, the proposition before us is that the banks to-day are independent and separate units. The proposition is to get them working to- gether, organized — I do not care what you call the term and I do not care what you call the plan. The object to be secured is organiza- tion. Now, is it advantageous to organize them and stop when you organize them into regional zones or companies ? Would it be more advantageous to the country to organize them as regional organiza- tions or zone organizations than if they were individual units, or would it be best to leave them as individual units, unless you organ- ize the zones and companies into one compact mass? I think that is what I meant to ask you, and you said you understood the proposi- tion. Mr. Wade. Yes. Mr. Taylor. I would be glad to have you answer it in your own way and give your reasons. BANKING AND CTJEKENOY EEFOEM. 219 Mr. Wade. In the first place, if you organize those little regional associations you get into the realm of petty jealousy in the banking business, lou get the old, staid, conservative banker on the one side and the active, progressive, optimistic banker on the other side Y ou have such an organization now in a great many parts of the United btates acting and operating under the laws of Congress, under the Aldrich and Vreeland bill; and I do not know any way on Ijod s earth for a set of men to bring about a panic quicker than by putting that law into effect in any central reserve citv. The moment it would be announced that the banks of St. Louis, or Boston, or JNew York, or Chicago, or Philadelphia had to resort to that regional system as laid down in the Aldrich and Vreeland bill, just that mo- mentalarm would be spread over the country. Those of us in the tar West would not realize the detail of what caused the alarm. We would take fear, and we would gradually draw in our reserves, lock up the money in our vaults, contract the currency, both credit and actual, of the Nation, and bring about a panic. Mr. Talbott. Without wanting to do it. Mr. Wade. Absolutely so ; innocently. _ Mr. Tatloe. Do I understand that the organization simply car- ried to regional or zone organization would tend to disorganize busi- ness and bring about panic, rather to prevent it ? Mr. Wade. To a very large extent. Let me give you an illustra- tion from practice. I preside over the destiny of an institution that had a run. I saw in our town in one day a run on 11 institutions at one time, and I believe that we had the honor of being the hardest run of all of them. I want to tell you when you get into that kind of a job you earn your salary for the time the run is going on. At the end of the business day the clearing house association got together and invited those of us that had the runs (we were not in the clearing house as active members) to come before them. They had that re- gional organization known as a clearing house. We were all pretty well frazzled and all frightened to death interiorly, but our nerve was up. The president said, " Gentlemen, you have had a pretty hard day. If any of you need assistance we would be glad to hear from you." Each of us that had the run on, no matter what our necessity might have been, would have known if we stepped up in that meeting and said, " I am the man that needs assistance," before 24 hours, 12 hours, 5 hours, had passed, the citizens of our town would have known that bank A or bank B or bank C required assistance. The institutions were perfectly solvent. They had ample securities to take care of all their obligations, but they had no place to go to get money, except to a competitor. If they had Government bonds stacked up as high as a mountain and the cleanest kind of commercial paper, the best kind of stocks and bonds, it would count just as so many bales of hay if they could not get Mr. Cash for it; because when a run comes the frightened depositor wants no conversation, wants no security ; he wants his money. The Chaieman. Did not that situation arise out of the defective currency system rather than out of organization of any sort? Mr. Wade. No. If we had such an organization as is outlined in this measure that your party has condemned, or if you prepared .some measure of that kind, then all we would have to do would be 76112— -PT 4—13 2 220 BANKING AND CUEEENCY EEFORM. to simply take a little piece of yellow paper and telegraph to the nearest location where we could get money and say, ' We have a million of such and such securities that passed the requirement of your organization, and ship us a niillion dollars of money and we will ship the securities to you to-night." The Chairman. Is that a question of organization Mr. Wade. Absolutely. The Chairman. Or a question of substituting for a bond-secured currency a different sort of security? Mr. Wade. No ; it is a question of organization. The Chairman. I can not see it. Mr. Wade. Well Mr. Taylor. It is to get your view that I am asking these ques- tions. Mr. Wade. Yes. Mr. Taylor. And I am endeavoring to put the questions to you in order to get your full view. The chairman has brought out exactly what I wanted to bring out. Mr. Wade. If we had some place to go, some central organization, where in times of placidity, in times of abundance of money, we could pour in our reserve, and knowing in times of distress that we could go and get them, then the runs would cease to be as violent, and a bank official would be able to meet his obligations and not do as we did in 1893 and in 1907; that is, violate every tenet of the National and State banking laws by repudiation, which is a lasting disgrace to this country. And yet we were obliged to do it; there was no way we could avoid it. In the institution that I represent we charged to expense account $30,000 for buying money on the streets of New York, and of that money that we bought we turned in one $10,000 bill a day, five days in the week, during the panic, to Uncle Sam, and it cost us $10,200 to give him $10,000 to give one of our customers stamps. He would not take our check. Mr. Taylor. Within two weeks? Mr. Wade. Yes ; in two months. Now, then, how did we buy the money ? That is a very interesting story. If we had money to buy money with, what did we want to buy money for ? We did not have it. But we had what is known as a foreign-exchange department. We had what is known in the city of St. Louis as a clearing-house association, issuing illegal clearing-house certificates, so we instructed our foreign department to buy every foreign bill of exchange that was available at any price reasonable and pay for it by a draft on us. Therefore, we would buy in New Orleans $100,000 of the cotton bills lo-day, and they would draw on us and it would go to some other bank, because they would not send it to us, having sent the bills to us, and that would be cleared through the clearing house. We would take off our shelf a certificate that we were paying at the rate of 8 per cent per annum for, and give it to the bank that had that credit ngiiinst us that day, and we would take those foreign exchange bills and we would mail them to Europe immediately. Then we would take another piece of paper and sell what we call a banker's bill on Europe against that account over there on the streets of New York and get a credit in the banks of New York; and then, having gotten a credit in the banks of New York, we would instruct the banks in New York to buy money with that credit from the money changers BANKING AND CUREENCY BEFOEM. 221 on the street Then in order to get that money which was in New York-and it might as well be in China, because we needed C ^re^'inTew &*^'*.^r^ °T. '^^ '^'^''^' ^' -* tht sub treasury m New York, aJid they would telegraph to the Treasury Department m Washmgton, and Washington would telegraph to the subtreasury m St. Louis, and at 60 cents a thousand, inlhSdle ot the panic the Government would do that service for us, which did not cost them 60 cents, except a lot of clerical hire, which we, as citizens^ were paying for. That is one way of getting money. faSn? ^^°^' ^^^ answered the question fully to ydur satis- , if ''%^^°^-/ think so. It is like the wrongs of Ireland— I could talk of it all day. Mr. Tatxoe. 1 am glad to hear you talk, but I am ready to ask you other questions. Mr. Wade. Go ahead. Mr. Tayloe. I would like to ask you something in relation to panics, and I want to make a suggestion to you, Mr. Wade, so that you can answer my question or what is in my mind, to illuminate the jproposition from my angle or my point of view, for the benefit of the committee, I hope, and I am sure for my own. A panic, as I re- gard it, is an unreasonable thing for which no reasonable man can give a reason. It happens, no one knows how, or when it starts, any more than he knows where the wind comes from. It blows whither it will, and we know not whence it comes, and we can not provide 100 years in advance against it. That is, the beginning of the panic is in that shape. In other words, it is lack of confidence, as I view it, in its beginning. But the results and disasters from a panic, I have an idea, and I wish you would clear it up, because my statement now in- volves a question about which I am sure your abundant experience will enable you to answer fully, are that' after this fear is started there are a lot of people on earth who hold and hoard money, prin- cipally in call loans to the banks, who watch for some such appear- ance in the financial world as a panic, and withdraw their moneys and continue to withdraw them, not from fear of the banks, but in order to enable them with their money to substitute themselves for the banks; and they take their money out and then lend it at high rates of interest, and they are the people that precipitate panics after they start it, and keep them going, as I am inclined to think. I can not believe, because I have tried to reason it out, that any bank would originate a panic, or any number of banks would want to see one, because my understanding of the banking business is that it it a legitimate business that goes on the theory of daily progress and prosperity by loaning money in the regular course of business, and that it would not be to the interest of a private banker, an indi- vidual banker, or any number of bankers to create a panic. It does not profit the individual banker or the bankers to have a panic, as I view the situation, but it does profit men who hoard and hold money when there is a special rise in the value of money. They get higher interest. Is there anything in that idea ? Mr. Wade. Absolutely nothing ; I do not believe that there would be 1 per cent, or one-tenth of 1 per cent withdrawn for the purposes which you have outlined. First, because it would be absolutely un- necessary ; there would be no profit coming from it ; there is no way 222 BANKING AND CUKRENCY REFORM. of making any money out of it, if you saw a panic coming, to with- draw the cash. Now, let us see how that would work out. You have $10,000,000 on deposit in a bank belonging to you, and being a far-seeing financier, and realizing that a panic is to come, you can go and you can actually draw $10,000,000 in cash and put it in your own private safe and lock it up. You might as well have 10,000,000 bales of hay locked up; it will not earn you anything when it is locked up, and you will wait until the time arrives that the market is so low that you can go and buy and thus make a lot of money out of it; consequently, that is where your profit comes in. But suppose you leave that money in the bank and you never draw it out, and wait until it is low, could you not check against it, and buy with your checks, just the same as you could with your money? What advantage would there be to take your money out, as long as you believe the bank is solvent, which you said you did? Consequently, there is no advantage in doing what jou say, and therefore there is nobody, in my judgment, that does it. Mr. Tatloe. Does not money go up when bankers have to buy it? Mr. Wade. Yes; you might make the highest price that money is sold for in New York, namely, 3 per cent. Mr. Taylor. Three per cent how ? Mr. Wade. Three per cent for the passing of that money from your hands to mine. Mr. Taylor. For what period of time ? Mr. Wade. Instantly, forever. You separate from the ten million. I buy it and pay 3 per cent. There is your profit; but you can lose 10 iDer cent interest waiting for that hiatus to arrive, and that panic to be called off, and you lose the 3 per cent. Therefore, you say, " I will wait until the market goes down." You say, " I think we will have a panic in six months, and therefore I will not use a dollar; I will keep $10,000,000, and instead of withdrawing the cash, I will leave it there and let that fool banker pay me 3 per cent per annum on my daily balance, and I will draw it out the minute I want it." And the market falls, the panic arrives, and stocks go down, and com- modities go down, and you can write on a piece of paper and check it. What is the sense of having your money in a safe and lose your in- terest on it for an indefinite period ? No ; therefore I say that your theory on that subject is entirely wrong. Mr. Taylor. My idea was that probably it was to make the interest higher in the fall when money becomes scarce, which occurs every year, as I read the signs of banking. Mr. Wade. No. Mr. Taylor. Twice a year, when the crops come in and the money market goes up and down, and gilt-edge securities are coming in, and the notes of the merchants are falling due, good merchants, the best on earth, the cream of the country, who need caph, and at those period"-, money could be loaned, I have been told, I do not know. The sug- gestion canie to me from a New York man who deals in money; he was not a billionaire, but he was a millionaire, and he told me that he was worried to death, and I said " Wliv." and he said, " In 1907 I was sick, and I lost the chance to loan $100,000 when money was tight here; loan it for two weeks for 10 per cent, and I lost 10 per cent on that proposition, and I had the money to loan." Mr. Wade. I have no doubt of it. ' BAKKING AND CUEKENCY EEFOEM. 223 Mr. Taylor. I do not know whether that is true or not, but I. believe him. Mr. Wade. I will not dispute it. Mr. Taxloe. That was in a fall month in the panic of 1907 ; but he got well soon enough to come in and make more than that — I mean the succeeding days. Mr. Wade. There is nothing new in that doctrine. Mr. Taylor. No ; but I wanted to know if it is true. Mr. Wade. Yes. Mr. Taylor. I am asking you if it is true ? Mr. Wade. It is true; but not practiced by bankers. Mr. Taylor. I did not say by bankers. Mr. Wade. What you are referring to is the pawnbroking business ; , that fellow was nothing more nor less than a pawnbroker. Mr. Taylor. No; he is a banker. Mr. Wade. No; he is not. Mr. Taylor. And a man that did business on the line of call loans. Mr. Wade. He is not a banker. Mr. Tay'lor. He is a pawnbroker? Mr. Wade. He is a pawnbroker, unquestionably. He may not pay a license, but he ought to have the balls out. Mr. Taylor. I agree with you about that ; I did not say he was a banker; he was a depositor in a bank. Pawnbrokers deposit in banks ? Mr. Wade. Sure* Mr. Taylor. And they withdraw their money sometimes ? Mr. Wade. Yes. Mr. Taylor. They do that for the purpose of withdrawing it from the bank — withhold it? Mr. Wade. No; I do not think so; unless through fear, probably they do. Mr. Taylor. Like anybody else? Mr. Wade. Yes. Mr. Tayix)e. And when the time comes they use it in the way they use all their money? Mr. Wade. Yes. Mr. Taylor. To take advantage of conditions? Mr. Wade. No ; a man who withdraws through fear, in my judg- ment, nine hundred and ninety-nine times out of a thousand he is too much of a coward to buy anything with it, and he locks it up. Mr. Taylor. I am glad of that explanation. Now, then, if it is not those people who foster those panics, I suppose I am right in thinking it is not bankers who foster panics ? Mr. Wade. You are undoubtedly right. _ Mr Taylor. If it is not they, who is it that fosters panics? Mr. Wade. The law of nature has fostered panics since the history of time, and will continue to do so until the end of the world. Mr. Taylor. Then they can not be produced artifacially^ Mr Wade. Yes; they are. . . Mr'. Taylor. Who would produce it artificially, whose interest is '* Mr^moK. Nobody's. It might be a selfish interest of one or two individuals, but I would not regard them as having any regard tor 224 BANKING AND CUKBENCY EEFOEM. humanity, for country, for flag, and certainly no good citizen would ever attempt to foster a panic. Mr. Taylor. I agree with you that no good citizen would ever attempt to foster a panic, but there must be somebody that does it; now, who is it that you bankers think do it? Mr. Wade. The law of nature. Mr. Taylor. In what way? Mr. Wade. If you will allow me to explain. I see you have a wrong conception of one feature of finance. Mr. Taylor. I want to get it right. In the fall of the year money rates are frequently high, are they not ? Mr. Wade. In the fall of the year money rates are frequently high. Mr. Taylor. Is it not true in the spring? I mean at crop-gather- ing time? Mr. Wade. Sometimes; yes. Mr. Taylob. Not absolutely, as it is in the fall? It is regularly in the fall? Mr. Wade. Relatively; all right. But this country, as we all know, is the great debtor Nation; it owes money everywhere, and it is not the New York banker that puts up money; it is not the needs of the wild and wooly West that puts up money; not the need of the Northwest or the Southwest that puts up money, but it is the European banker that puts up money, and he can play ball with us whenever he chooses to through the fact that we have the weakest financial system of any nation on earth. If you will follow the rate of dis- count of the Bank of England through a period of 5, 10, 15, or 25 years, you will find that when our needs are greatest their rates are the highest; when our exportations are at the highest limit, selling to them the products of our farms and our factories, you will find that the English bankers, through the operation of the so-called centralized bank, which you gentlemen condemn, is charging the people of the United States a high rate, prohibiting the use of his money, withdrawing his money to equalize that balance, and it is on the other side of the water that the rates are put up, not in Wall Street; not in the East or in the West or in the South or in the North. Mr. Taylor. Now, you say we have the poorest financial system, and that is the trouble with us? Is it not a fact that we are worth one hundred and thirty -five billions of money? Mr. Wade. Yes. Mr. Taylor. That is more than any two nations in Europe are worth ? Mr. Wade. Yes. Mr. Taylor. Is it not a fact that we are 300 years old and they are from 1,000 to 2,000 years old? Mr. Wade. Yes. Mr. Taylor. Then, how have we accumulated in 300 years more money than almost all of them put together- — than any two that we know? Mr. Wade. Oh, no; you are wrong about that. Mr. Taylor. What is it ? Our wealth is one hundred and thirty- five billions. What two powers have that much in Europe? Mr. Wade. I will not say oflPhand, but I should say that Great Britain and France could take care of that all right. BANKING AND CUEEENCY KEFOEM. 225 Mr. Taylor. I would like to have you look that up, because my in- formation is different; it may take three, I will not attempt to be accurate about it. Mr. Wade. Maybe, but you forget you are living in the most pro- ductive Nation on the face of the earth. Mr. Tatloe. I am glad of that every day. Mr. Wade. You have an admixture of the brain and the brawn of an enterprising people from all climes ; you have a country where you can worship your God and your political belief as you please. You have a country where you have a revolution every four years, po- litically, without disturbance. You have everything to make a great country here. Your one inherent weakness, the greatest weakness, the weakness which some day is liable to injure this country irre- vocably, is your financial system. Mr. Tayloe. What is the chief weakness in our financial system ? Mr. Wade. Fictitious borrowing of money on a fictitious basis, through issuance of your bonds, through bond-security circulation, first. Secondly, the lack of the central organization to supply the needs of comraeroe in times of distress. Third, that in times of war you are obliged through the operation of your laws, to ask Europe to supply you with the money to conduct the war. Mr. Tayloe. And in spite of it we have more money than any of the nations of Europe. Mr. Wade. No. Mr. Tayloe. A single one? Mr. Wade. No ; you have got it locked up. Mr. Taylor. More wealth ? Mr. Wade. More wealth, but it is intangible; you can not use it; you can not chew this building up ; you can not go out and take this building and buy a battleship with it. Mr; Taylor. Do you want any more circulation than we have in circulation, currency? Mr. Wade. No; not now. We have all we need, but we want a different kind of circulation. Mr. Tayloe. Tell me what different kind. I want to get to that question of circulation, about what the circulation is, not per capita. Mr. Wade. About three hundred thousand million. Mr. Taylor. You mean three billions? Mr. Wade. Yes; all kinds of money. Mr. Tayloe. We have what we call deposits of sixteen billions. Mr. Wade. Yes. Mr. Tayloe. Is that a fictitious situation ? Mr. Wade. Some of it ; yes. Mr. Taylor. Do we need any more than three billions in money ? Mr. Wade. In money, no. Mr. Tayloe. Then what makes the difference whether — — Mr. Wade. Wait a moment ; I have to answer that question quali- fiedly". We need a different kind of money. We need money flexi- ble, not inflexible, such as we have. Mr. Tayloe. I meant to ask you what you meant by flexible ; define it. Mr. Wade. It is a character of money that will nutomatically, through the operation of the financial situation, withdraw itself. Mr. Tayloe. Has that money ever yet been discovered f 226 BANKING AND CURRENCY REFORM. Mr. Wade. Yes; to some extent. It is quite active in Canada. England has a withdrawal of a contraction of its money; Franco has some, and Germany some. Mr. Taylor. We have some? Mr. Wade. We have not. Mr. Taylor. We have not ? Mr. Wade. Practically none. Mr. Taylor. Well, how do we increase our deposits to sixteen billion? Mr. Wade. We increase our deposits by credit. Mr. Taylor. Would you have us adopt the English system? Mr. Wade. No; but if I could not get anything else I would take any system that would be an improvement on the present one. Mr. Taylor. Is not the English system different from the Al- drich plan ? Mr. Wade. Yes. Mr. Taylor. In the fact that it has a governing board that con- trols the propositions that you were speaking of ]ust now, in your first remarks, that is absolutely and entirely independent of the banks ? Mr. Wade. Well, independent in what way, of the banks? Mr. Taixor. They are not bankers. They are forbidden by the constitution or charter of the English banking law to be bankers. Mr. Wade. They can be directors of banks? Mr. Taylor. No ; they can not be directors of banks. Mr. Wade. I think you are mistaken about that? Mr. Taylor. I think I am not; I may be. They are absolutely forbidden. Mr. Wade. A director of a bank can not be a director ? Mr. Taylor. Nobody connected with a bank can be a member of the governing board, that has all the power that you speak of that ought to be had under the Aldrich plan. Mr. Wade. You are mistaken about that. Mr. Taylor. I may be; I am not cocksure of anything. Mr. Wade. Nor am I. I used to be when I was as young as you are, but I got ovqr it. Mr. Taylor. I never was then, because when I was as young as you are there were men as old as I am that I thought knew more than I did, but you have not reached my period yet. Mr. Wade. I will in time. Mr. Taylor. I think you may never have occasion. I want to say I have purposely refused to permit myself, since I have been a member of the Banking and Currency Committee, to have any opinions at all. I have impressions and am receptive, and I want information from all sources, and there is no witness that has been called here from whom I expected more than I did from you. Mr. Wade. Thank you ; I am afraid I will disappoint you. Mr. Taylor. And there is no man whom I would ask with more respect and kindness than I do you. Mr. Wade. I appreciate that. Mr. Taylor. My questions are framed as well as I am able to frame them with a view to enabling you to see my error, and I will thank you when you have pointed it out. I simply wanted to say, and I want to say it now, that when you say that this institution BANKING AND CURRENCY REFORM. 227 of ours, this financial situation, is behind Europe and Canada and the others, I wanted to know why we should not adopt Europe's system, or that of England or Canada or France, because neither of them have the Aldrich currency plan. Now, so far as I have been able to gather, you have practically said that the American people, our people of the United States, are ahead of the rest of the world in everything but one — that of our financial system. The measure- please correct me about this, because I want to ask you the question. Mr. Wade. Yes, sir. Mr. Tatloe. The measure — in my judgment, the test of a financial system is the result in wealthy and when I inquired from you and found the fact to be, as I never have heard it disputed, that within 300 years this young, aggressive Nation, that has beaten the world in everything, you say, save one, is worth twice as much as any other jiation, as I learn it, in wealth, how could it do it if its financial system, which is the means of accumulating wealth, or else it ought to be, is worse than any other? I do not think our financial sys- tem is perfect. I do not expect to find anything perfect. Now, I want to ask you fairly about that, because you have been asked before, and I thought you had reached a point where perhaps your own mind suggested it. You are unwilling to make any sugges- tion, because you said you had committed yourself to the Aldrich plan. I can appreciate that. You did not want to do that. Now, the question is, You have in the course of your answers and questions said England had a better system than we had, and Canada had a better system than we had, and probably some other nation, but you alluded to those two, and I want to know whether you would suggest either of those systems, because you know them, I have no doubt^ and if so, which one? Because, if what you say is true, and I do not say it is not true, you say that Europe, or as I understand you to say, which has raked us fore and aft by reason of some banking sys- tem, I do not know what, I did not catch it fully, but I thought it was bank acceptances and conditions by which they have such a great advantage of us; I assume that is true. Now, would you tell me if there is any law that forbids our dealing in bank acceptances ? Do you know of any ? The Chairman. Of course there is a law prohibiting national banks Mr. "Wade. Let me answer your question first, now. Mr. Taylor. I have investigated that question three or four months ago. Mr. Wade. If you measure the soundness of an economic question by wealth Mr. Taylor. It is the wrong way ? Mr. Wade. By wealth, then you and I will always disagree. You might have all the money in the city of Washington — you might be the wealthiest land owner in the city of Washington — but that does not necessarily make you the soundest mind mentally nor the strong- est man physically. The wealth of a nation is a separate proposition from the operation of its monetary system.- The monetary system, as it is perfected, will aid in the development of a nation, but a poor monetary system will not prohibit the growth of the nation any more than a poor education will retard the development of a man naturally bright by the will of God. You have in the halls of Con- 228 BANKING AND CUKEBNCY EEFOEM. gress a great many men who had the honor and distinction of gradu- ating from universities and colleges. You have others that come less fortunate, but they stand side by side with them, and their names have gone down to fame equally with the college graduate; so that you can not measure the soundness of a financial ^stem with the wealth of a nation. They are two separate propositions. One will help the other, necessarily, but the wealth of a nation, of a sturdy people, will grow regardless of their system. Now then, you say, why not adopt England's system, or Germany's system, or France's system? My answer to you is that there ought to be enough intelli- gence among the Members of Congress and the people of the United States to create a system which will be better than any of those sys- tems, and that is what I believe is embodied in the general principles of the so-called Aldrich plan. Mr. Taylor. You think that is better than any of them ? Mr. Wade. I think it is better than any system in Europe to-day, and T have no doubt, not the slightest doubt, that it can be improved upon. Just where or how I am not prepared to state, for the reason that that seemed to me the proposition that was going to be adopted by the Congress of the United States. Therefore my mind went into finding out how it might be added to or subtracted from, so that when that was submitted to the halls of Congress it would contain the best and most enlightened proposition that could be devised. Mr. Taylor. Would you now undertake to give me a little more at large a definition of elasticity, because you have said, as I under- stand you; that elasticity meant automatic; there is nothing in the Aldrich plan that suggests automatic? Mr. Wade. Elasticity? Mr. Taylor. Not that I know of. Mr. Wade. No ; there is nothing there. Mt. Taylor. Therefore I ask you to point out to me where it was. Mr. Wade. There is nothing there. Mr. Taylor. Therefore I wanted to ask you to point out to me where it was. Mr. Wade. There is nothing there. Mr. Taylor. There is nothing in the Aldrich plan that I can see that produces anything in the nature of an elastic currency, if I understand the nature of elasticity. Mr. Wade. Yes; there is. Mr. Taylor. That must be automatic. Elasticity is in its nature automatic, and there is nothing automatic there. Mr. Wade. Yes. Mr. Taylor. I would ask you to show me where that is. Mr. Wade. It would be where they charge 5 per cent for the use of those notes ? Mr. Taylor. Is that automatic? Mr. Wade. That would work automatically. Mr. Taylor. It would ? Mr. Wade. Yes ; as the demand for money lessened. Let me give you a practical illustration of elasticity of the currency. Currency may be defined in two or three different ways in the administration of . a bank. Currency usually is money — understood to be money — gold or silver or paper. In times of extreme distress the clearing-house certificate takes the place of money. BANKING AND OUBRENCY EBFOBM. 229 Mr. Taylor. Is not that mob law in finance— in the financial •world ? Ml'. Wade. Yes— not quite mob law. Mr. Taylor. Outside of the law ? Mr. Wade. No; it is the law of the people, who are correcting the neglect of Congress. Mr. Taylor. Is not that mob law? Mr. Wade. Yes. Mr. Taylor. Of course it is mob law. Mr. Wade. It is protecting the people by adopting an expedient that will take care of the situation when no law is provided. Mr. KoRBLY. It is the law of nature. Mr. Wade. Yes ; the law of nature. Mr. Taylor. The law of nature. You can call it a law of nature if you desire. Mr. Wade. Self-preservation is the first law of nature, and that is what the clearing-house certificate is. It operates in this way: Bank A will have a credit against bank B for $100,000. Bank B has not got the $100,000. It has previously arranged to get a clearing-house certificate, for which it puts up security, and bank A agrees to accept those securities, knowing that there is an extreme situation at hand, and that they must in that extreme hour of distress stand together in localities — in communities. Mr. Taylor. Would you favor making the clearing liouse a- matter of law and taking it away from the domain of the law of nature ? Mr. Wade. No. Mr. Taylor. You would not? Mr. Wade. I am opposed to the issuing of clearing-house cer- tificates except as a last extremity when the Government as a govern- ment through its laws has provided no other means. Let the wheels of commerce roll ; then I am in favor of the issuing of clearing-house certificates, or the adoption of any other expedient that will allow the business of the country to go on and not be throttled through neglect. Mr. Talbott. You were talking about the depreciation in value of the Government's 2 per cent bonds. That is simply because the inter- est on them is only 2 per cent, is it not ? Mr. Wade. Yes. Mr. Talbott. That is all. Mr. Wade. If the rate was adequate for investment, you would have it as it is in other nations. You would have your bonds dis- tributed among young people. Mr. Talbott. We have a corporation in our State that is paying on some of its bonds 4 per cent and on some 5 per cent. The 4 per cent bonds are worth 96 and the 5 per cent bonds are worth over 100. They are all good bonds, but they do not all pay the same interest. The Chairman. Does any other member of the committee want to ask any questions? Mr. Talbott. I have nothing more. The Chairman. I understand you do not think -that the central bank is absolutely essential to the elimination of bonds as security for the currency. 230 BANKING AND OUBEENCY REFORM. Mr. Wade. I Avould not be prepared to say that that was so right now, because I have not found a way of eliminating the bonds, ui. The Chairman. You do not think a different sort of currency could be adopted through any other instrumentality rhan a central bank? Mr. Wade. You can adopt a currency measure a dozen different ways. I do not believe it will be as effective in any way as it will be by having a central organization. The Chairman. How long have you been a member of the currency committee of the American Bankers' Association? Mr. Wade. Since it was organized in 1906. The Ciiairiman. Did you not join in the recommendation of the bill approved by the American Bankers' Association at Atlantic City and subsequently at Indianapolis providing for an elastic currency? Mr. Wade. I joined in all of the measures that were submitted at that time. The Chairman. Did not that measure maintain what we call our system of independent banking just as thoroughly as it exists to-day? Mr. Wade. Yes ; but it had this central banking feature. The Chairman. It had the central banking feature? Mr. Wade. Yes. The Chairman. In what respect? Mr. Wade. The United States Treasury. The Chairman. Oh, well, we all are in favor of a central bank so far as the United States Treasury is concerned, but I do not conceive that the United States Treasury is in the banking business. Mr. Wade. Well, we did not put it in the banking business. The Chairjian. I understand you think, then, that all the clearing houses of the country ought to be abolished? Mr. Wade. Oh, no. The Chairman. Do you not take the position that the organization of a number of banks in various districts throughout the country would be worse than the existing system of 7,200 independent na- tional banks? Mr. Wade. No; you misunderstood my proposition. I think it is very essential that all of the banks in the community should be either directly or indirectly affiliated with the clearing house association; but I do not believe that each clearing house association should have the privilege of issuing currency. That is what we were discussing at that time. The Chairman. But I understood you to say in response to the inquiry from Mr. Taylor that you thought the division of this coun- try into regional reserve districts would be very much more danger- ous to the banking community and to the business public than the independent svstem of banking that we have now. Mr. Wade. Without the central head; yes. The Chairman. What do you mean by " without the central head " ? Do you mean a central head that will have all the powers and functions of a banking institution? Mr. Wade. That has control over the whole system at one time, in order that they jnay keep it in hand. The Chairman. Then, after all, it is the question of the control and the extent of the control Mr. Wade. Certainly. BANKING AND- CUERENCY KBFOEM. 231 The Chaieman (continuing). That would lodge in the control institutions, whether it be a Treasury board or whether it be a bank i Mr. Wade. Yes. 1,'^^! J Chairman. I have not heard any suggestion here that there should be no coordination of the various proposed regional reserve banks— that there should be no head at all— but a sort of " go as you please " institution. I have not heard any suggestion of that sort. Mr. Wade. I answered the question as I understood it was asked • that IS all. ' The Chairman. Mr. Wade, getting back to what I conceive to be the practical aspect of this matter, I take it that vou would have us forego any reformation of the banking and currency system of the country until this propaganda for the adoption of the Aldrich plan can be continued, so that we may eventually get that ? Mr. Wade. Oh, no; you have assumed more than I would ever be willing to stand sponsor for. The Chairman. Well, I inferred that that was your idea. Mr. Wade. I am emphatically in favor, without question or equivo- cation, of this committee submitting to the United States Congress, if possible, a bill which it can commend to the Congress for an im- provement in the monetary laws. I have no doubt that any bill you submit will be a vast improvement on our present system. I have no fear whatever in that direction, and I would not under any cir- cumstances, if I possessed the power complete, have you defer action one day if I could command you to move forward. • The Chairman. I have misunderstood you, then. Mr. Wade. Yes; unquestionably. What I wanted to convey to you, Mr. Chairman, and to the members of your committee, was that, having studied this subject, having gone over the various phases of this bill, I believe that that bill will be a great improvement over all the sj'stems of all the Governments of all the world. I do not pre- tend to say that the committee which succeds this will not be able to produce a more practical bill, a better bill. I am simply saying that I am confident in my own judgment that the bill is a great im- provement. Mr. Taylor asked me as to the four vital points that are recommended in this bill. I have answered as to two of them, elimi- nating the bond currency and providing an emergency currency. The Chairman. Yes ; and I understood you to admit that it is not necessary to have that system in order to eliminate the bond currency. Mr. Wade. Oh, no; there are a dozen different ways of doing all things. This bill has pointed out a way by which all banks may be brought into one general financial system, and that was not in the original Aldrich bill, for the simple reason that no one on th& Mone- tary Commission knew how to do it. That was not in the original recommendations of the American Bankers' Commission, because no one on that commission knew how to do it. I think it was through my persistency on account of the fact that it affected me more than anybody else on that commission, that the result was brought about only two years ago; and the solution was simple. We simply did not know how to get at it, and the moment we suggested it to the Monetary Commission they thought it was a good idea, gave it con- sideration, and adopted it. And you do not want to deal with this — 232 BANKING AND OTJKKENCY BEFOBM. bear this in mind, gentlemen, because it is a mistake that is always made in discussing this great question— to get a national DanKing system; but consider the monetary system of the Pelted States oi America, State banks, trust companies, savings banks, itiey are aii parts of it, equally important. The State system is more iniportant than the National system, in point of deposits and in point ot capital and in point of surplus and in point of developing the JNation; and that is the third most important feature of all. The Chairman. That could be embodied in some other ±orm< Mr. Wade. Unquestionably. The fourth point is providing spe- cifically for allowing financial institutions of the United States to deal in foreign exchange under the authority of law. The Chairman. May I ask you a question right there? Mr. Wade. Yes. The Chairman. Are not the provisions of the plan of the Monetary Commission relating to the establishment of foreign banks under American charters an entirely separate proposition? Could it not be transferred to some other plan which will not contain provision for a central bank in this country? Mr. Wade. Oh, yes. The Chairman. In other words, it might be separated from the 1)1 an of the so-called Aldrich bill? Mr. Wade. Oh, yes. The Chairman. And adopted as an independent proposition? Mr. Wade. Yes; just the same as you can separate the State from the National banks. But until you get them all under one blanket, under one supervision The CriAiEJiAN. The State and National banks affect this country more directly than the proposition of foreign banks? Mr. Wade. Possibly not. A big foreign bank, under whatever proposition you please, separate or collectively with other institu- liiins, might create great havoc in this country if it was not properly supervised. The CiiAiRjiAN. What I am trying to get at is that the establisk- mi-nt of American banks abroad under charter of this Government is not essential to the proposed Aldrich plan of a central bank? Mr. Wade. No ; they are not essential to the proposed Aldrich plan, the plan of the Monetary Commission; but it is essential for a perfect system for this country to be in a position to have banks in Europe to protect this country when it is necessary. The Chairman. Might not a regional reserve bank be established m New York City alone that would have greater resources and greater power than the Bank of England itself? Mr. Wade. I do not know about that. That would require a good deal of figuring to answer. Under the laws as they exist to-day, no. L-nder the laws without giving such regional bank of New York the r:ght to deal in foreign exchange, no. It must have an international eonnection; It must have international powers to balance the trade when the time arrives that the finances of Europe are in the as- cendency as against the finances of the United States of America. Ihe Chairman Would it be imperative to have a central bank in ^^^r^^^^T^ in order to grant a regional reserve bank those powers? Mr. Wade I think it would not be essential; but it would 'be highly important that that class of banks should be under the same BANKING AND CUBBBNCY KBFOKM. 233 control, the same supervision, the same centralization, as the banks in Texas. The Chairman. Well, nobody has suggested that they should not be under the same control and the same supervision that the banks in Texas are. In other words, I would like to say again that, as far as I know, no member of this committee nor anybody else has sug- gested that there shall be organized in this country regional reserve banks with a " go-as-you-please " process of doing business, without any central control whatsoever. I very decidedly think there ought to be central supervisory control ; but I question whether it is neces- sary to establish a central bank. If it is necessary to establish a central bank, it is my individual judgment that we might as well dis- band this committee and wait for the Democratic Party to recant its declaration against a central bank. Mr. Wade. I do not care what you call it, if you centralize the control. It will be a central bank in its final analysis. The Chairman. Not if it is not endowed with banking functions, it will not be a central bank. Mr. BuLKiET. What control do you mean ? Mr. Wade. That bank A, B, or C — or say you have 50 regional banks, or 25, or 10, the number is immaterial — that they will be directed by one common head. Mr. BuLKLEr. With respect to the discount rate ? Mr. Wade. With respect to discount rates, with respect to the issuance of notes, with respect to the control in the issuance of money and the security that is given for it. The Chairman. You do not think it would be safe or sound to leave to the regional reserve banks the power of note issue to a given point and then reserve to the central authority the sanction of note issue above a given point ? Mr. Wade. No ; I do not. I think it ought to be under the gen- eral ; supervision there ought to be one common head. The Chairman. Yet did you not indorse the plan of the American Bankers' Association to leave to the 7,200 units the existing right of these individual banks to issue notes up to a certain point?, Mr. Wade. I do not think you will find that in there. The Chairman. Well, you continue the existing note issue. Mr. Wade. No ; I do not think you will find that in there. The Chairman. Did not that plan provide that every national bank might issue its currency up to 62 per cent of its capital, and beyond that that there was to be a graduated tax upon its issue im- posed by the central authority ? Mr. Wade. By the control of the central bank at Washington ; yes. The Treasury Department. The Chairman. That is precisely what I said. Mr. Wade. You get back to that centralization. You can not get away from it, I think. I really wish you could, because I can under- stand your difficulty as a committee. I would be glad to see you work out some plan, and I have always believed in the doctrine that honest men can always work out any practical plan in America, and there is always a solution to every problem. Now, there in one other feature about this plan. I was asked to name four. I believe this plan, or the general principles laid down in the Aldrich plan, would do more to further the development of com- i34 BANKING AND CURRENCY REFORM. merce of this country than the plan of any other nation. I believe it would reduce to a proper and reasonable limit the rate of interest throughout the United States of America. The Chairman. Do you think the rate of interest can be made uni- form throughout this country ? Mr. Wade. No ; but it can be reduced through the operation of this plan. For instance, in some parts of the country they are paying 1 per cent a month for money; in some parts they are paying 15 per cent per annum, and in other parts money never goes beyond 6 or 7 per cent for reasonable rates. The limit in our State is 8 per cent and anything beyond that would be usury. The Chairman. Is it reasonable to permit regional reserve banks to control the rate of discount in their respective territories? Mr. Wade. My dear Mr. Chairman, if you can just work that out and confine it to St. Louis, you and I will agree in about three min- utes. If we could have controlled the rate in St. Louis for the first six months of this year, we would have regarded the man who could develop that plan as a Moses ; because we were lending money out at such a low rate that it was quite difficult to make dividends. Money can not be controlled that way. The Chairman. I thought you said it could be by a central bank. Mr. Wade. No; I said by the operation of this plan it will have a tendency to decrease it to a reasonable rate of interest, and not in- crease it. The Chairman. You do not contend, then, it will create a uniform rate of discount throughout the United States ? Mr. Wade. For the banks doing business, yes; but it will not to the borrower. The Chairman. The benefit will not be diffused or distributed to the borrower? Mr. Wade. Yes ; the benefit will be diffused to the borrower. The Chairman. Is there anything in the Aldrich law that requires that it shall be? Mr. Wade. No; except the law of average and the law of nature again. * In other words, it is perfectly natural that if your credit is good in Corsicana, Tex., and I am doing business there and running a bank and I want to charge you 8 per cent when you know I am getting these notes at 5 per cent in times of abundance or distress, you will simply step over the border and go to some other center and bor- row your money, the same as a great many of the merchants of the United States are doing to-day. The Chairman. Why could you not do that with a regional reserve bank system ? Mr. Wade. You could do it. but it would not be a perfect system again. I do not say you could not do it. You are living under the present system. The Chairman. I want to say for myself, Mr. Wade, that I have not undertaken to combat you upon the points of advocacy that you have presented of the Aldrich plan, although I think it is not as scientific a plan as you gentlemen contend that it is. Mr. Wade. If I were chairman of this committee I would believe like you do. The Chairman. And I think there are a good many very dangerous features in the plan which might easily be enumerated for discussion. BANKING AND CXJREENCY EBFOEM. 235 But I think we are precluded — if we have any regard for the declara- tion of our party platform — from considering the Aldrich plan. If you gentlemen think you can carry on a propaganda before the next Democratic Congress and administration which is likely to result in the adoption of the Aldrich plan, I think you are quite right to do that ; but I can not conceive that you will succeed, and that being so, what I am trying to get you to do, not as the representative of the American Bankers' Association, but as an individual who understands the question is to help us devise some other plan that we may enact into law. In other words, I think it is a question of what we may get, and not what you gentlemen want to get. Mr. Wade. Now, then, Mr. Chairman, let me call your attention to one fact. When I was honored by you with an invitation to appear before you, you in no sense, direct or indirect, intimated why I was invited here, except to express my opinion about the reformation of the present monetary laws. The Chairman. Oh, yes ; I think you are mistaken about that. I think I very definitely stated that we were undertaking to get before us the representatives of national groups and the representatives of various national interests, and that you and Mr. Forgan and Mr. Hepburn had been invited, as members of the currency commission of the American Bankers' Association. I think you will find in my letter that statement. Mr. Wade. To do what? To come before you for what purpose? The Chaieman. Why, to give us your views and your advice as to what should be done in the premises. Mr. Wade. Now, my interpretation of that was to tell you what I honestly believed. The Chairman. Well, that is very true, and you have done that. But you will recall that at the outset I told you what I honestly believed. Mr. Wade. Here ? The Chairman. Yes ; that we are precluded from accepting what you honestly believe is the ideal plan. Mr. Wade. But you tell me that, when I come here with my mind charged to recommend to you what I think is the best plan that has yet come under my supervision. The Chairman. Yes. Mr. Wade. And I give you the reasons why I believe that to be so. If you had intimated that you would like to have me, as an individual or as a member of that commission, suggest improvements or amend- ments or additions or subtractions, I can assure you I would have gone to work with all the power that I mightl^have possessed men- tally to try to make suggestions and aid you 'to carry out your pur- pose. But I did not know what your purpose was. The Chairman. We hope to do that by the process of questioning. Mr. Wade. And I have no doubt in the world that if you indicate a note to the currency commission, stating flatly and frankly, as you have here which is the way to get at these questions, that this plan will not be approved by your committee, but to submit some plan for the consideration of your committee that might be approved, that the currency commission would convene forthwith and would try to meet your views by making suggestions. 76112— PT 4 — 13 3 236 BANKING AND CURRENCY REFORM. The Chairman. Let me ask you, Mr. Wade, do you think party platforms ought to be regarded? Mr. Wade. Yes; I do. But you and I differ iu this respect. In dealing with this subject you are a representative of the people of the United States of America, the Prohibition Party, the Socialist Party, if you please, the Democratic Party, the Republican Party, the Pro- gressive Party — all parties ; and a measure should not be condemned or commended simply on party lines alone. It ought to be condemned or commended on its merit or demerit. The Chairman. Let me ask you this: The Democratic Party is committed to the proposition of a tariff for revenue. That is a fact, is it not ? Mr. Wade. Not exactly that ; not as broad as that, I do not believe ; not a tariff for revenue only. The CiiAiEjiAj;. I did not state it as broadly as I might have. The Democratic Party has in its platform frequently declared for a tariff for revenue only, and I left out the word " only." Mr. Wade. We are talking of the last platform. I can not go into ancient history. They do not come out and say in the platform " tariff for revenue only." The Chairman. It has indicated its unalterable opposition to passing the Payne- Aldrich tariff bill ? Mr. Wade. Unquestionably. The Chairman. What would you think of the next Democratic Congress and the President if that Congress were to pass the Payne- Aldrich bill and the President were to approve it ? Mr. Wade. I think they would have repudiated their pledges. The Chairman. Would they not have done the same thing if they report and pass and the President approves the Aldrich bill or a bill for a central bank? Mr. Wade. Unless you can submit something better or equally as good. The Chairman. That is what we want to do. Mr. Wade. All right; but we did not know that, or I did not when I came here. The Chairman. I supposed that would naturally be assumed — that we would not content ourselves with denouncing one plan without undertaking at least to get a better plan. That is what we want to do, and we want you to help us do it. Now, let me ask you one more question that does not exactly relate to this. I infer from what you say that you would not be in favor of extending the Vreeland- Ardrich bill for a period of two years or more, Mr. Wade. No; Indid not say that. If what I said in regard to the Vreeland-Aldrich> bill implied that, it was not my intention. What I did say was this, that the suddenly putting into operation of the Vreeland-Aldrich plan would have almost the same effect, if not the same effect, as if it were announced in to-morrow morning's paper that Chicago, St. Louis, or New York banks had gotten to- gether and issued clearing-house certificates. For the reason that it is a dangerous thing, and the people not on the inside of those clear- ing-house associations, not knowing what actuated those men to do it, would commence to withdraw and create fear in .the minds of other centers. And when New York went to clearing-house certifi- cates in 1907 at 1 o'clock in the afternoon, Chicago went at 2 and St. BAXKIXU AND CTJERENCY EEFOEM. 237 Louis went at 3. We called meetings just that rapidly, because we knew there must be a desperate situation when they resorted to it. And so we would knoAv if the national association, I think we call it, in St. Louis, which is organized, and of which I happen to be a di- rector, under the Aldrich and Vreeland bill — if we were called to- gether to-day and we said, " Here is bank A needs a million dollars, and here is the security; they are putting up $2,000,000, and the security is perfectly good." We take no risk; no explanation fur- ther would be offered ; it would go broadcast throughout the country that bank A did that, and they would say there is something the matter with St. Louis ; we had better look out ; and all the local banks and the big banks in the country would commence to withdraw their balances, and that would create trouble. The Chairman. I quite agree with you ; it would be a sign of dis- tress for any bank or set of banks to do that. Mr. Wade. But if you can not do anything else, continue it, be- cause when a period of great stress comes it would be a great relief. The Chairman. I will ask you this question : Would not its con- tinuation for a period of two years — say from June, 1914, when it shall expire — have a tendencjr to withdraw or to greatly lessen the pressure upon Congress to do something else? Mr. Wade. No ; it would be a confession by the Democratic Party that they were unable to supply a better measure. The Chairman. Precisely ; and I am glad to hear you say that. Mr. Wade. Yes. The Chairman. I quite agree with you that if it is extended for a period of two years it will demonstrate that the Democratic Party, every member of which in both Houses of Congress voted against it when it was pased, and the platform of which denounced it for hav- ing been passed, will place itself in the position of confessing that it can not do anything better. But what I wanted your notion about was whether it would not further operate to greatly lessen the sense of responsibility that ought to be upon the Democratic Party, and would it not greatly lessen the pressure upon the party to adopt something better and to get some real banking and currency reform? But the fact is this, that the bankers from all over the country and the business men and the textbook writers were coming up before the committee protesting against the passage of the Vreeland-Aldrich Mr Wade And as a further instance of the soundness of the view opposed to the adoption of the measure, I might remark m passing, it never has been used by any banks in the United States lu the four years it has been on the statute books. ^. , , ■ . The Chairman. I agree with you, and I predicted m a speech on the floor of the House that it never would be used. The fact is that Mr. Vreeland denounced the Aldrich end of it and Mr. Aldrich denounced the Vreeland end of it. Mr. Wade. And if it were used to-morrow it would do a great deal *°The"cHAiRMAN^'l agree with that, and I did want to know, be- cause it has been proposed, whether you thought a bill so apparently vicious in your opinion should be continued two years longer < 238 BANKING AND CXJEKENCY BEFORM. Mr. Wade. As a preventive against the dire disaster that we were confronted with in October and November of 1907, it is bett«r than nothing. The Chairman. I understood you a while ago to say that if they would undertake to avail themselves of it it would tend to create such a disaster. Mr. Wade. Yes; but conditions might arise which would make it absolutely necessary to avail oneself of it, for the reason that unless there is some expedient there to take care of conditions such as existed in October and November of 1907 we would find ourselves then in the same position as we did in 1907, of having to repudiate cash payments. The Chaieman. If you were to continue that law two years longer, besides exhibiting the Democratic Party in a most absurdly inconsistent attitude, would it not create a psychological situation that would result in the lessening of the pressure for real reforma- tion in the banking and currency system? Mr. Wade. I think not. The Chairman. Would not people say, " Here, we have this Vree- land-Aldrich law for two years longer. It will meet any situation that may present itself, so what is the use of hurrying legislation" ? Mr. Wade. No ; it will not meet any situation that presents itself. The Chairman. I do not think it will, either. Mr. Wade. It will not be a preventive, but it will only be an assistance in case of disaster. It never will aid in preventing a disaster. The Chairman. Mr. Aldrich said it would absolutely prevent it. Mr. Wade. Well, Mr. Aldrich is a very great statesman and I am only a little banker. Mr. Taylor. If I understand you^ Mr. Wade, and I am doing the best with the ability God has given me to understand you, you have said as to the Vreeland-Aldrich bill it could not accomplish what it was intended to accomplish, but since it has been put on the statute books it has never yet been sought to be put in operation, that if tentative steps were taken to put it in operation it would have a tendency to produce panic ? Mr. Wade. Fear. Mr. Taylor. Fear and panic being synonymous, as I understand it. Then, do you not think the best way to do with a thing of that kind is to let it die a natural death ? Mr. Wade. Not without providing something in the place of it to protect the commerce of the country against disaster. And I thinlc again it would be a reflection upon your party, a great party, to allow it to expire without adopting some measure that would be an im- provement on it. Mr. Taylor. But you still entertain the opinion you expressed, that it was without efficacy and without possibility of accomplishing good, and had a tendency to accomplish harm ? Mr. Wade. It would accomplish good in disaster, but not until the disaster arrived. There is quite a difference. I do not mean to say it never would accomplish any good. Mr. BuLKLEY. Do you say you believe it would be possible to figure out some improvement on the Aldrich plan? BANKING AND CXJERBNCY EEFOEM. 239 Mr. Wade. Why, unquestionably. There is improvement in every plan that can be made. Mr. BuLKLEY. But, as I understand your attitude, you would ad- vocate enacting it and then try to think of the improvement of it ? Mr. Wade. Oh, no ; I did not say so. I simply said this, that it vras the best plan that came under my observation of the numerous plans that were presented. By no means is this the last work that can be done to improve the monetary situation of this country. Mr. BuLKLEY. So in effect you approve of exactly what we are doing ; that is to say, trying to find some improvement before enact- ing the measure. Mr. Wade. Yes ; unquestionably ; and I made that clear in the early part of the discussion. Mr. BuLKLEY. Unfortunately, I was not here. I could not get here on time. The Chairman. I was a little confused in your statement, because I understood you to say it would be better to leave things as they are, with the 7,200 national bank units issuing currency ; and, in fact, we would better maintain our present independent banking system than adopt a system of regional reserve banks with more or less independ- ence in their respective spheres, and with a treasury board or some central control. But I understood further afterwards that T was mistaken in that understanding. Mr. Wade. Yes. I have no objection to any plan which you might formulate, but I expressed the opinion that you must have a central organization and central head to it, call it what you may. The Chairman. Yes; I think that. Mr. Wade. Yes. Whereupon, at 1.30 o'clock p. m., a recess was taken until 2.30 o'clock p. m. AFTER RECESS. The hearing was resumed at the expiration of the recess. STATEMENT OF MR. JAMES E. FERGXTSON. The Chairman. Will you state to the stenographer your name? Mr. Ferguson. James E. Ferguson, of Temple, Tex. The Chairman. What is your banking connection ? Mr. Ferguson. President of the Temple State Bank. The Chairman. Mr. Ferguson, the subcommittee on Banking and Currency has under consideration the matter of preparing a bank- ing and currency bill as a substitute for the so-called Aldrich bill, or the bill or plan of the Monetary Commission, and we would be glad to have any suggestions from you. Mr. Ferguson. Well, gentlemen, I desire to state, before rnaking any extended statement, that I do not envy the task that is incum- bent upon this committee to solve this question. I do congratulate you, however, on the democratic spirit and attitude you have as- sumed in inviting people from all over the United States to give their views upon these questions. It may be that you will adopt very few if any, of their suggestions, but at the same time I think it will 240 BANKING AND CUEKENGY BEFOBM. do more to restore the confidence in whatever legislation that is (-aacted than anything that can be done. I was struck this morning very much with the remark made by the chairman to the effect that the Aldrich bill could not be longer considered; that it was a question now of what we were gomg to do about it, in view of the declaration of the Democratic platform. That question, in my State, has been raised quite forcibly and urged with much vehemence and force by the proponents of the Aldrich bill, and we now have been driven almost to the position that the Aldrich bill ought to be passed, because there is nothing else offered in place of it, feeling, I will say, not stung by it, but realizing the force of the contention, and the Democratic Party being one of progress and not obstruction, that it is really incumbent upon us to protluce a bill which will meet the demands of business. I have imdeitaken, gentlemen, to formulate and write into the form of a statute a bill which, in my opinion, contains the essential provisions to be met by legislation. Some months ago in Chicago the National Citizens' League, which everybody now loiows is the satellite of the Aldrich organization, ^et forth seven very distinct grounds which should be embodied into legihlation. Their plan is to educate the people into the belief that the Aldrich bill meets these conditions. I believe a close study of the bill, however, will convince any man that it meets none of those conditions. However, the cardinal principles they have laid down for legis- lation, I think, are worthy of notice, and probably might meet all the demands of legislation. They say, first, that legislation should cuMn- the ground of cooperation. Mr. TayujI!. Wlio says that? Mr. Ferglscln. This is the National Citizens' League, which, as I siiy, everybody understands now is being fostered and maintained by what we know as the "interests." Their principle is good, their majiir premises is good, but the concrete bill which they produce does nut meet it, and I think we, as Americans, ought to be broad enough to judge everything on its merits, and not because Mr. Aldrich is against it or for it. It is a question whether it is right or wrong or jiood or bad. They say we should have cooperation and not dominant centralization of all banks by the evolution out of the clearing-house experience. Second, the protection of the credit sys- tem of the country from the domination of any group of official or political interests. Third, independent of the individual banks, National or State, and a uniform treatment in discounts allotted to all banks, large or small. Fourth, provision for making liquid the sound commercial paper of all the banks, either in the form of credit or bank notes redeemable in gold or lawful currency. Fifth, elas- ticity of currency and credit in times of seasonal demands and stringency, with full protection against their expansion. Sixth, legis- lation on aece])taiiees or time bills of exchange, in order to create n discount market at home and abroad. Now, these principles themselves in effect are good, and any bill which nieets these conditions should receive the approval and should '' ' " " ■ " The will read BANKING AND CUEEENCY EEFOEM. 241 you simply a two-page synopsis of the bill, and then make such expla- nations as this committee may deem fit. The hope of this plan is that it will produce a currency which will be stable to the extent of inspiring the confidence of the American people ; that it will be elastic to the extent of being responsive to the needs of expanding business and financial distress ; that it will be con- tracting to that degree which will prevent inflation. It is proposed that there shall be established in the Bureau of the Comptroller of the Currency, as a part of that department, what shall be known as the Currency Bank of the United States. There shall be issued by the National Government seven hundred millions of bank currency of the United States, which shall be under the control of the comptroller. Eight branches of the currency bank of the United States are to be located at convenient places in the United States, and are to be called currency stations. One million dollars of bank currency is to be deposited in each branch, and the amount shall be increased from time to time when taken out by banks obtaining loans from currency stations. The incorporation of currency associations by 10 or more banks having a combined capital of one million or more is provided. The 10 or more banks orgihally forming the currency association, being required to reside within 100 miles of each other, and shall be resi- dents of the sanie State. Directors in currency associations shall receive no salary, but the filling of such office shall be deemed honorable and patriotic service. Any bank in good standing in a currency association, and having the indorsement of two banks also in good standing in the currency association, can by depositing a certain kind of collateral in double the amount, obtain as a matter of right a loan of bank currency not to exceed the amount of its capital stock ; not more than fifty million to be loaned to the banks of any one State. * All loans from currency banks must be paid on or before six months from date of same, such payment to be either in bank cur- rency or in gold. Interest on loans obtained from currency stations shall be not less than 5 per cent, and must be the same rate as the highest rate borne by the collaterals deposited to secure the loan. National banks, State banks, and State banks and trust companies having a capital of $25,000 or more may obtain the privileges of the law by complying with the conditions set forth in the bill. All banks coming under the law must be examined at least four times each j'^ear. For the protection of the Government and the banks m general, the law provides a felony sentence for bank officials who knowingly permit worthless loans to be made, or when they make loans for their own benefit. . » » ■ The bill does not undertake to deal with the question ot foreign or international banking. Gentlemen, that is a rough synopsis of the bill. I must confess that it is not like any other idea that I have seen advanced by any- body. I saw a quotation from a newspaper extract some time ago of some statement of your honorable chairman setting forth, in a 242 BANKING AND CUEEENOY EEFOEM. measure, that idea, but not embracing the plan that I provide for — an automatic retirement of the currency. The CiiAiEMAN. I will say to you, Mr. Ferguson, that any news- paper report of any bill that I may have had in mind was purely imaginative. Mr. Ferguson. Oh, was it ? The Chairman. Yes. Mr. Ferguson. I want to set myself right about that. This ex- tract from the newspaper quoted you as saying that you had a bill which would probably embrace all the redeeming features of the Aldrich bill, eliminating all of the objectionable features in regard to a central bank. The Chairman. I did not say that, but had I said it it would have been a pretty general statement, would it not? It would not have indicated the advocacy of any particular bill ? Mr. Ferguson. No. Gentlemen, frankly, this proposition, as you see in a minute, means that the Government goes into the banking business. I take it for granted that if the Government should be in the banking business it should control that banking business and have supreme dominion over that which it is lending its name to, or that it should have nothing to do with it whatever. The question of control was quite fully discussed here this morn- ing, and the position taken that the Government would have no control under the Aldrich system, I think, is apparent to any man who will carefully read the bill. It was a serious question with me when I dropped on to this idea as to whether the Government would have a legal right under the Constitution to make a direct loan to John Jones, or to a corpora- tion owned by John Jones. However, when I began to examine into the question, I found that it^is supported by ample authority, .ind the principle is not new or novel. We have it in the postal sav- ings bank law, which is held to be valid, and in which the Govern- ment starts out with the theory that they are going to loan every dollar of the money, except a certain amount to be kept in the Treas- ury for current demands, to the banks of the country. It is true they call them depositories, but, at the same time, the relation of debtor and creditor is created, and it is nothing else in the world but a loan. Mr. Kindred. May I ask a question, Mr. Chairman ? The Chairman. Certainly. Mr. Kindred. I want to ask you this question, Mr. Ferguson, right along the line of what you have just said : Aside from the constitu- tionality of the question and the legality of the Government's going into the banldng business, to which you have just referred, is it de- sirable, on general principles, that the Government should go into it in the way you have outlined? Mr. Ferguson. I think the general demand all over the countrj is that some legislation must be enacted by the Government. I admit that it is a matter of some concern as to whether the Government should take charge of the banking interests of the country or not; but it seems to me we are now committed to the proposition that we must do something ; not that the banks must do it, but that the Gov- ernment must do something. I take it that if the Government must BANKINQ AND CUEBENCY EEFOBM. 243 do something it must take hold of it with an iron hand, and be able and qualified at all times to maintain its supremacy and power and dominion. Mr. Kindred. Of course that would drive private banking out of business, would it not? Mr. Feegttson. No, sir. Under the provisions of my bill the Gov- ernment will not receive any deposits whatever. In addition to that, it will not even extend its privileges except perhaps in heavy crop- moving seasons, or in times of panic or other distress, and when the season of demand has passed and the panic is passed the Govern- ment will immediately go out of business and confidence will be re- stored. Mr. KxNDEED. If I get your idea correctly, you would have the Government, then, according to the views you have expressed, go into the business in every sense of that word ? Mr. Ferguson. No, sir; not in every sense of that word. In every sense of the word would imply that the Government would receive deposits and handle checking accounts, and I do not mean that. Mr. Kindred. But, in all other senses? Mr. Ferguson. Not in all other things. That would probably be too broad a statement. The Government would occupy the function of a central bank to the extent of relieving panic conditions and un- usual demands. Mr. Kindred. Would not that be accomplished by confining this function of the Government to note issues ? Would it not be greatly accomplished by confining this function of the Government to note issues, through some proper agency? Mr. Ferguson. That is just what I am getting to, and what my bill provides. Mr. Kindred. I thought you went still further in that, and that the Government would go further in the banking business. Mr. Ferguson. What I meant to say was that the Government would go into the banking business of a rediscount market, when unusual demands came along, such as Mr. Wade spoke of this morn- ing, when we have no other place to get money; and to that extent the Government would go into the banking business. As stated in the bill I have provided that we should issue $700,000,000 of bank currency in the United States. The Aldrich bill, you will remember, provided for an issue of $900,000,000. They provided for a further increase of that amount to one billion two hundred and fifty million under certain conditions by paying a cer- tain tax. I arrived at the amount of $700,000,000 — and I am not wedded to that ; that is a mere matter of detail as to what the amount should be — by taking into consideration that we have something less than $2,000,000,000 total issue of money. That $700,000,000 would be in the neighborhood of a 40 per cent increase in actual money; and, in view of the fact that the Monetary Commission found as a fact that $200,000,000 would at all times handle the excessive amount needed for the movement of crops, that probably $500,000,000 would be ample to protect and to meet any panicky condition. If the banks in 1907 could have obtained $200,000,000 in actual money, conditions would have been relieved instanter. However, as I say, 244 BANKING AND CUEBENCY REFORM. that amount is u matter of detail, and can be increased or decreased as the occasion might demand'. I have provided in the bill that the money shall be Government money ; thit it shall be confined to the exclusive function of the Gov- ernment, that of issuing money. I think any other plan or attempt to delegate to somebody else the right to issue money, such as was proposed in the National Monetary Commission, would be a direct invasion of the constitutional provisions for Congress to issue money. But whether that was true or not, as a matter of fact, gentlemen, nothing but Uncle Sam's money is ever going to relieve a panic. Mr. Kindred. Does not that depend somewhat upon the basis of the money issued otherwise than directly under the Government, or rather issued directly nominally by the Government ? Mr. Ferguson. I think it should be issued by the Government and under the approval of the Government. Mr. Kindred. It would be issued under the approval of the Gov- ernment when it was issued by other agencies than nominally the Government, would it not? Mr. Ferguson. If the Government stands sponsor for it, then it would be a Government issue of money ; and that is the kind of money I am talking about. No man, except a' banker who has gone through the panic of 1907, could realize the demand for Government money, because they have seen listed bonds, real estate bonds, and commercial paper that was worth ten hundred times the amount of the paper, and yet it all looked like 30 cents, if you will pardon the use of a slang expression, when compared to the little greenback bill that bore nothing else but Uncle Sam's promise to pay. I might illustrate the point by saying that down in my State there was an old darky who had borrowed some money from a man who had formerly resided in New York, who had lived there, and was a lawyer and acquainted with banking in New York, but who had moved down into Texas and had become a money lender. The time of maturity came around for the notes that the old darky owed, and he went around to the man and said : " Boss, I want to give you a check on the bank for this money." The reply was : " No, I want the money, Uncle, I have got to have the money. You go around to the bank and get the money and come back and pay it to me." The old darky went around to the bank and told the cashier that he wanted to pay his loan and wanted to get the money so as to do it. The banker, under^he stress of the time, said : " Who do you owe that money to ? " The old darky said he owed it to this gentleman from New York, around here, and he said : " I want to get the money and go around and pay him." " Well," said the cashier, You tell him to come around here and I will give him the check of our bank." That was the Levy Bank & Trust Co., of Victoria, owned by the cattle kings of south Texas. Mr. Kindred. Does that mean the King estate ? Mr. Ferguson. No, sir ; it is right near the King estate. Mr. Kindred. I simply aslced because I happen to know about that. Mr. Ferguson. It is within 50 miles of the King estate. To continue my story, the old darkv said, "All right, boss, I'll go around and see him. He is kind of billious and looks like a man who don't understand this money question." The old darky came back a few minutes after that, and the banker said, "What did he say ?" The BANKING AND CUEEENCi' REFOEM. 245 darky replied, '• Boss, he said he would rather have my note than a check on your banlf." That is a striking illustration, certainly, when the note of a free negro in Texas passes for more than a check from a big bank in Texas on the biggest banls: in New Yoi-k. When you consider that, you can begin to realize the panicky condition of affairs as they existed at that time, and that nothing else in the world but Uncle Sam's money would ever restore confidence or prevent a panic. Mr. Wade emphasized that fact this morning and admitted it — that they have to have the money, and that nothing else will do. If you have corporation currency, issued by a corporation, the people now. with the distrust they have in remote parts of the Nation against large corporations, especially large financial cor- porations, will never be satisfied with anything but Government money. For that reason I have provided that it shall be Grovern- ment money, pure and simple. Mr. Tatloe. Are you going to give it to the banks, or what are you going to do about it? Mr. Feegtjson. I will show you how we Avill get it out to the pub- lic through the banks. For convenience of access and so that the people can realize fully that the Government is touching their lives and getting nearer to them, I have located eight currency stations at convenient parts of the United States, at places named in the bill, for the purpose of being easily accessible to banks needing the priv- ilege of the bank and where they can be reached in 24 hours. That currency station is placed in charge of a currency cashier, who shall be a man possessing certain qualifications and banking experience, and who shall give bond for the faithful performance of his duty. In that bank or currency station we deposit, to start with, $1,000,000. That is a starter which Avill be supplied from time to time as de- mand is made for it under the provisions of the bill. So I have the money put in the currency stations all over the United States. The question then is how to get it out to the people of the country. Mr. Kindred. Let me ask you right there, what is your ba.sis of issue? WTiat is it based upon? Mr. Ferguson. It is based upon John Jones's note and his financial responsibility. Mr. Kindred. Just upon commercial paper? Mr. Ferguson. Yes, sir; his commercial paper. Mr. Kindred. Exclusively? Mr. Ferguson. Exclusively. I will explain to you a little later why I do not think it should be any other kind of paper. Mr. Kindred. It should be partly gold, should it not ? In part it should be gold? Mr. Ferguson. It is payable in gold; that is, the note which the man brings to the Ijank to' get money is payable in gold. Mr. Kindred. I am speaking of the issue itself. Mr. Ferguson. The issue itself is based on John Jones's financial responsibility. That is, in effect, what it comes down to. The bank takes John Jones's note and uses it. As I say, we have the money issued • we have it distributed, and the question now is how to get it out to 'the people of the country so as to get its prompt I'eturn and in a way to meet the demands of the business. Here is where I have undertaken to develop and preserve the indi- viduality and the independence of the local bank and thereby escape 246 BANKING AND CUBEENOY EEFORM. the evils which everybody who looks at the question of the central bank and dominating control desired to be avoided. I provide that any 10 or more banks having the capital — and this idea is taken from the Aldrich bill, too ; I want to give credit where credit is due — may organize a local association, as provided in the Aldrich bill, but I would elect the directors differently from the plan provided in the Aldrich bill. Instead of electing three-fifths of the number by a vote to each bank, and two-fifths according to capital, I would make it democratic throughout and let each bank, irrespective of the size of its capital, vote one vote for the director in the currency asso- ciation. In my opinion, gentlemen, from an eight years' experience as a practical banker, the position of currency director would be sought after by every banker in the country. If you had been a member of the banking associations of our different States and had seen how men worth millions of dollars who stand well in their community and control millions of dollars and are a power in the community and in the politics and affairs in their States, will scramble and fight and pull and logroll to get to be elected seventh vice president of one of those associations, let alone president or vice president, but to get in on the seventh floor as the seventh vice president, you would come to the conclusion there would be no trouble in the world to get the best bankers in the country to act as directors of that association. However, anybody else can be elected whom the banks want to elect. Mr. Kindred. Do I understand that these currency associations shall be under the direction of the comptroller's office? Mr. Ferguson. Yes; any 10 or more banks located within 100 miles of each other and having a combined capital of $1,000,000 or more can organize themselves into a corporation without capital for the purposes of enabling the Government to loan its money safely. That is really the intention of the organization of the cur- rency association. For the purpose of letting us who live down in Texas say when we need money and when our securities are good, and for the purpose, at the same time, of preventing us from saying to New York that their paper is not good and ought not to be used by the Government, but giving to each State and to each community the right through its reputable business interests to say when the condition arises, when they need the money, and to pass upon the collateral which they shall deposit to secure the money. Now, I have provided that on proper forms to be prescribed by the comp- troller the bank desiring a loan shall first obtain a majority of its board of directors authorizing their president and cashier to bor- row the money ; they shall then apply to the currency association on forms prepared by the Comptroller of the Currency, describing the amount of money that they want, the maturity of it, which I have provided shall not be longer than 6 months (the Aldrich bill, you will recall, put it at 28 days, or 3 months at the outside) , and pre- scribing the maturity, rate of interest, and kind of collateral which it proposes to deposit, which shall be double the amount, as security for the loan. I further provide, to further protect the Government against being loaded with a bad loan, that this bank, in addition to depositing double the amount of collateral, shall have the indorse- ment of at least two banks also in good standing in the currency association. That idea is not new. In England they do it on the BANKING AND CUEEENCY EEFOEM. 247 indorsement of one bank. But I go on the theory that if a man in any community in the United States, operating a Government-con- trolled bank, can get the indorsement of two banks who are his neighbors, the Government will never lose a dollar and the loan will be paid. In view of the fact it is not necessary to really prove that proposition, I can simply call your attention to the fact now that the .people of this country are depositing nearly sixteen billions of dollars in the banks of the United States, with nothing to protect them Mr. Taylor. Do you mean real dollars ? Mr. Ferguson. Well, it is bank credit; but so far as the man is concerned, it is just the same as money to him. It is hard-earned money for his labor or his land ; it is good money, so far as he is concerned, and there is no protection for that — no deposit of collat- eral, no guarantee or recommendation of any reputable authority that it is good, nothing but the solvency of the bank, and yet in 50 years' time the people have lest a very small percentage of their money. Mr. Kindred. I do not quite understand your theory that you sug- gested, as to what should be the proper basis or conditions under which the Government should isue this seven hundred millions. Mr. Ferguson. They shall just start the printing press and have the money printed up there. However, they would not turn it loose until they have something back of it. I want to be understood — the question was asked me the other day, " What is the difference between that and the old greenback bill, and I said there is this difference: So far as the monejr being issued is concerned there is no difference, but the greenback bill was issued and sent out on the markets of the world with nothing else behind it. Under my proposition, before the money goes into the commerce of the world and begins to perform the functions of money, it gets behind it double collateral for the amount in which it is issued, and the indorsement of the banks." Now, then, the money is issued. Have I made myself clear on that, as to the issue ? Mr. Kindred. Yes. Mr. Ferguson. The money is then loaned. No bank shall borrow more than its capital stock in any one calendar year. The banks of any one State shall not borrow more than $50,000,000. That pre- vents the idea of first come first served taking up the whole propo- sition. Mr. Kindred. The banks in any one State shall not borrow more than $50,000,000, regardless of the security they offer? Mr. Ferguson. No, sir. Mr. Kindred. Suppose the business in one State is logically so much larger and therefore the banks have so much more security to offer than some other" smaller State? Mr. Ferguson. Well, if that condition should arise — I do not thmk it will, for even in the panicky condition of 1907 New York itself, if it could have got $50,000,000, would have had the situation relieved ; but eTanting, for the salie of argument, as you say, that it might arise, then instead of New York having got her quota, she could say to St. Louis " I want to get some money from you," and St. Louis could go over and get her quota, and if St. Louis loaned out her money then she could say to Denver, Colo., " I want to borrow some money," and we 248 BANKING AND CURRENCY REFORM. will have the Government's function distributed all over the United States, and whenever there is a demand for the money there will be a way to get it anywhere in the United States. Money will seek tha place where it can be employed. And by the provision of $50,000,000 to any one State, then there never could be an absorption of all the Government funds by large banking interests, who might, as the say- ing is, get there first. The Chairman. It took $200,000,000 to relieve the situation in New York City alone in 1907. Mr. Ferguson. That was bank exchange. The Chairman. $200,000,000 of clearing-house certificates. Mr. Ferguson. But if you had $50,000,000 of actual money— that was the trouble there. Mr. Kindred. They might have stopped it in the beginning. Mr. Ferguson. Yes. But the point is, no law should be passed, and that is a thing we are all hedging against, and the thing that the Democratic Party is committed to, and the thing that the National Citizens' League have said is good, that no one set of banks in the country should dominiite the situation. And if we got to the point where New York should be borrowing from the West that would be a consummation devoutly to be wished in this country, and we would all like to see it. The Chairman. Do you think the Monetary Commission has car- ried that principle into practical operation in the provisions of its bill ? Mr. Ferguson. No ; they have left that provision open where it is possible for the large banks of the country to get on the ground first and be considered first and get the whole $900,000,000, if necessary, as provided for in the bill. There is no limitation in that respect. Mr. Kindred. If you are ready to take this phase up, and it is agreeable to the chairman and the other gentlemen of the committee, I would like to ask your views on the question of guaranteed deposits. Have you given that any thought? Mr. Ferguson. It has worked out admirably in my State. Mr. Kindred. In Texas? Mr. Ferguson. Yes. Mr. Kindred. Have you a law similar to that of Oklahoma ? Mr. Ferguson. Yes, sir; similar to it. The Chairman. It is a permissible law in your State, is it not? It is not mandatory ? The Chairman. It is a permissible law in your State, is it not? It is not mandatory like it is in Oklahoma? Mr. Ferguson. It is optional in one of two ways, but if you operate a State bank in Texas you have to do it in one of two ways or go out of business. The Chairman. But you may guarantee your funds by an insur- ance company? Mr. Ferguson. Yes, sir; that is what I say. It is either bv a bond or an assessment fund. In that connection I Avould like to call at- tention in reference to guarantee of deposits. This question was originated some three or four years ago, and was agitated previous to that legislation. You will recall what a great howl went up from the bankers of the country that it was communistic, to the extent of making one man responsible for another, when they turned around BANKING AND CURRENCY REFORM. 249 and swallowed the whole cork by providing in the Aldrich bill that every bank, before it can get a dollar, must guarantee the other bank to the extent of 20 per cent of its capital stock. The principle of guarantee of deposits is better exemplified in the Aldrich bill than m any other class of legislation I have ever seen. Now, going on further, there is one theory to which I am really wedded Mr. Kindred. You then commend the working of the law in Texas? Mr. Ferguson. Yes, sir. Mr. KoKBLY. Would you mind describing a little more fully how the Texas plan works? Mr. Ferguson. Yes. I have no objection. The plan in Texas is that all banks operating under State charters shall secure their depositors in one of two ways, either by furnishing a bond equal to the amount of their capital stock, a new bond being required on the first of each year, which shall be equal to the capital stock and shall be signed by sureties who shall be worth the money over and above their exemptions, or you can adopt what is called the guarantee-fund plan, which is in substance that the banks permit themselves to be taxed; that is, they are required to be taxed under the law a per cent on their deposits which shall not in any event exceed 2 per cent of their average daily deposits in any one year. The Chairman. Only those banks are taxed which do not give a bond ? Mr. Ferguson. Under the bond plan ; yes, sir. Mr. Kindred. They are taxed too ? Mr. Ferguson. No ; they are not taxed. Mr. Kindred. Those who do give the bond, and prefer it to the other system of guaranty or liability policy, are not taxed? Mr. Ferguson. No; the bond system is an individual matter, so far as the banks are concerned. They are not liable for anybody else, and nobody else is liable for them. Mr. Kindred. Which system do most of the banks adopt? Mr. Ferguson. They have adopted the guaranty plan. Out of 700 State banks in our State, there are only about 41 bond banks in the State. Mr. KoRBLT. How many banks refused to go into either plan ? Mr. Ferguson. They could not refuse to do it. It is mandatory. Mr. KoRBLT. I mean, how many went out of business rather than comply with the law? • , , , , , The Chairman. How many banks took a national bank charter as the result of it? , n j. Mr. Ferguson. Not one that I ever heard of. The Chairman. Or quit business? , . -r -, Mr Ferguson. Not one that I ever heard of. I do not mean to say that after the passage of the law there were not some banks that went out of business, but not on account of the law. Under that law so far in Texas, it has never been found necessary to levy a tax ex- ceeding one-fourth of 1 per cent, and we now have a fund of $2,000,000 in Texas to secure the depositors in failed banks. Mr Kindred. That is on the basis of one-quarter per cent ' Mr'. Ferguson. That is what one-quarter of 1 per cent has pro- duced. 250 BANKING AND CURRENCY REFORM. Mr. KiNDEED. You levy on every bank that takes advantage of that system ? Mr. Ferguson. And it is working out admirably. Mr. Kindred. And are the bankers satisfied ? Mr. Ferguson. They are perfectly satisfied. To give you an illus- tration of how it works out: In Houston, Tex., the Harris County Bank & Trust Co. failed, and I happened to be in Houston two days after the bank had failed. It was on a main street in the town, and they had about 900 depositors, including a large number of wage earners, people who really get very apprehensive about their money in times of bank trouble. Under the law the commissioner was re"- quired to take charge of the bank and post a placard that this bank is in the hands of the State banking commissioners, and they had posted the usual placard, and underneath that they had said, " Drop your pass books in here to be balanced and you will get your money next week." I stood there inside the bank, and in one hour's time The Chairman. That is, by the State authorities. Mr. Ferguson. Yes. I stood there one hour with the commissioner of banking, Mr. Gill, who is a practical national banker, and who has been a man who has had nothing but national-bank experience, and he is carried away with this system, and there were 60 people came along, saw the sign, reached in their pockets, put their bank books in, and went right on and never asked a question about whether it would be paid, or what caused the bank to fail, or anything about it. Mr. Kindred. And they were promptly paid ? Mr. Ferguson. They were promptly paid on the spot — that is, the next week — just as soon as their pass books could be balanced. Now, imagine if that bank had failed, and there had not been any state- ment that they would be paid next week, every man, the old lady on the crutch, the colored man, the laboring man, and the well-dressed man Mr. Kindred. So far as j'ou have observed nobody hesitated to believe that that would be done promptly, and they would put their pass books in. Mr. Ferguson. Yes. They never asked any question about it. That has been the working of the bank law in Texas. They have sustained loss at probably three or four banks. Mr. Kindred. Does that guaranty of deposits depend upon the kind of deposits, real deposits of money Mr. Ferguson. No; noninterest-bearing deposits. Mr. Taylor. That is, it is real deposits in money or bank credits? Mr. Ferguson. No; bank credits or anything else, there is no discrimination. Mr. Taylor. They make no difference between them? Mr. Ferguson. You can go down there and deposit New York exchange and if the bank rails next week you get paid back with money. Mr. Taylor. All deposits of all kinds are received? Mr. Ferguson. There is no difference in deposits. Mr. Kindred. Does this law of the protection of deposits apply to deposits bearing interest? Mr. Ferguson. In bond banks it does ; in a guarantee- fund balance it does not. The banks that give a bond to protect depositors, that BANKING AND CUEEENCY EBFOEM. 251 depositor, if he gets interest, is protected just the same as if he did not get any interest. Mr. Kindred. That is, they are protected by bond? Mr. Ferguson. They are protected hj bond. Mr. Kindred. In your opinion would it be better to have a uniform system or levy, like most of the banks have conformed to, a levy of whatever it is, one-fourth of 1 per cent, or have a uniform sys- tem rather than an optional system? Mr. Ferguson. I think so. I think our legislature, when they meet to amend the banking law, will amend that also and abolish the bond feature entirely. When I came in — my bank is a bond bank — I conceived the idea that I did not want to be responsible for anybody else, and I made a bond. Mr. Kindred. Which cost you the most, the bond system or direct levy ? Mr. Ferguson. Direct levy. Mr. Kindred. Is there much difference? Mr. Ferguson. Oh, yes; there is quite a difference. You make a personal bond under the bond system, and in the other you give up money. Mr. Kindred. How about the surety companies? Mr. Ferguson. There are no surety companies in the United States that are writing a guaranty on deposits. Mr. Kindred. You put up a personal bond ? Mr. Ferguson. Put up a personal bond. We go around and get the reputable people in our community to sign bonds. Mr. Kindred. Those interested in the bonds ? Mr. Ferguson. Yes; and you make it three or four times the amount required by the Government. Now, gentlemen, if there is anything further you want to learn about my plan, I will be pleased to answer. Mr. KoRBLY. A^Tiat objection would you have to the banks issuing notes, if they were guaranteed under the same plan that deposit notes are guaranteed in Texas? Mr. Ferguson. I think the objection would be that the liabilitji would be too great, and in times of stress the fund would not be large enough to meet it; it would probably go a long way toward restoring and maintaining confidence, but in the actual demand for money the fund would be called upon to too large an extent to meet the re- quirements. Mr. KoRBLY. You do not differentiate between a deposit in a bank and a bank note in substance and nature, do you ? Mr. Ferguson. No ; I think probably they are in effect the same. Mr. KoRBLY. Are not the deposit accounts of the banks of the United States in excess of the notes outstanding? Mr. Ferguson. Yes. Mr. KoRBLY. Are they not away beyond any outstandmg notes pro- vided for in your plan ? Mr. Ferguson. They would be. Mr KoRBLY. They would be. Then, if the note issues never ex- ceeded the amount provided for in your plan, the danger that you hold as an objection would not exist, would it? 76112— PT 4—13- 252 BANKING AND CURRENCY REFORM. Mr. Ferguson. I do not appreciate the force of that contention. The plan is, in view of the fact that we have now nearly $2,000,- 000,000, in round numbers, actual money, if you issue $700,000,000 additional, which is available under proper conditions, that that under any circumstances which might arise, anything you might imagine, would meet the demands of business; but if you were to undertake to raise that seven hundred millions by tax on deposits you would simply impose an additional burden and not produce any actual money. Mr. KoKBLY. I do not understand you. Mr. Ferguson. Probably I do not understand you. I was trying to explain what I thought your question to be. Your question was as to why an additional guaranty of .deposits would not produce the same effect as my bill. Mr. KoRBLY. Let me ask you the question in a different form ? Mr. Ferguson. All right, sir. Mr. KoRBLY. Conceivably, all the deposits in the State of Texas, under your plan, could be converted into note accounts, at the option of the creditor of the bank, under the garanty system ? Mr. Ferguson. Not if called for all at one time. Mr. KoRBLY. If I had $10,000 credit at your bank, noted on my passbook, and I wanted currency, I could draw a check to myself for $10,000 and have it charged to me on the books of your bank, and then have issued to me in the shape of notes by your bank $10,000? Mr. Ferguson. Yes. Mr. KoRBLY. That would not be changing your liabilities in any sense, would it? Mr. Ferguson. No. Mr. KoRBLY. It would be just changing the form of the evidence of your debt to me? Mr. Ferguson. Yes. Mr. KoRBLY. And under the guaranty would not those notes be ]ust as good as they ought to be? Mr. Ferguson. I think not. Mr. KoRBLY. Why not? Mr. Ferguson. Because the amount that you might have to pro- duce under some stringency which would be produced by the guar- antee deposits would not be sufficient, would not be large enough. Mr. KoRBLY. You could convert the whole of the deposit accounts of the bank, under that system, into notes, could you not ? Mr. Ferguson. Yes ; but you will still have notes that would be no better than the original deposits, and you could not put them into money, because if you exhausted the entire fund in the guarantee fund you could not produce it. Mr. KoRBLY. But you would have as mvTch chance of paying out- standing notes as you would of paying outstanding deposits. Mr. Ferguson. But you could not pay either in times of stress if the demand was made on all of the banks at once. Mr. KoRBLY. Then the guarantee of deposits as you have it in Texas in times of stress would not be effective, in your opinion? Mr. Ferguson. I think not. I am frank to state that the guar- antee of deposits would not relieve a condition such as we had in 1907. BANKING AND CUEEENCY REFORM. 253 Mr. KoEBL-i . You think in 1907 conditions could have been relieved by the Government of the United States furnishing currency to meet every dollar of outstanding demand obligation in banks? Mr. FeecxUSon. Yes. Mr. KoEBLY. Do you think the Government of the United States could float $16,000,000,000 in promises to pay on demand, as the banks float them, at par? Mr. Feegusox. I would think that if the United States Govern- ment could not do it the National Reserve Association could never do it. Mr. KoEBLY. How near did the United States come to floating its greenbacks at par? Mr. Feegusox. Now, that is on another hypothesis. I am not go- ing to issue any greenbacks; I am going to issue money based on tangible collateral and provide a day certain for redemption ; and if not redeemed then you can go on and get somebody's hide, as the say- ing is, but you can not do it under the greenback issue. But, getting back to your question, in 1907 if the United States had issued $700.- 000,000 of money, or much less than that amount, I believe the people of this country have that faith in the United States Government that if they had issued two hundred and fifty millions of money, let alone seven hundred millions, it would have been like the Savior talking to the apostle of Jesus and saying : " Be still ; be ye not afraid. It is I." Mr. KoEBLY. Have you ever had any experience collecting claims against the United States Government? Mr. Feegt7Son. Not with money; nobody ever heard of anybody having any trouble. Mr. KoRBLY. You know you can not sue the United States, do you not? Mr. Ferguson. It is not necessary. When you have a bill that Uncle Sam says is good money, nobody questions it, and you never hear of anybody trying to collect a United States bill. Mr. KoEBLY. Let us examine the question a bit in the light of history. Is not the United States required to maintain a gold re- serve for the purpose of maintaining a parity between its outstanding notes and gold? Mr. Feegt7Sox. I hope to show you that a little later. :Mr. KoEBLY. Then the credit of the United States Government is measured somewhat by its present ability to fulfill its promises? Mr. Feegi'sox. Yes. Mr. KoRBLY. So that the people of the United States do not ac- cept the credit of the United States Government absolutely ? They require the Government to maintain cash or a gold reserve, in order to keep its notes at a parity. Is not that true? Mr. Fergi SOX. That is true, but at the same time, there are a great many millions or billions of money for which there is no gold reserve maintained, and the people receive it as money. , ,, , Mr. KoRBLY. 'What is that; what outstandmg obligation to that amount exists that is accepted. i ., , Mr FERorwox. As I understand it, under the law all money, whether coin, paper, gold certificates, or otherwise, is supposed to be liquidated in gold. Now, of all that kind of money we have m the neio-hborhood'of two billions of dollars. 254 BANKING AND CUBEBNCY REFORM. Mr. KoBBLY. Every gold certificate lias its proper piece of gold in the Treasury with which to redeem it specifically? Mr. Ferguson. But every silver certificate has not its proper piece of gold with which to redeem it. Mr. KoRBLY. And therefore the Government maintains a gold re- serve in order to maintain parity between the silver and gold, does itniit? Mr. Ferguson. Yes; but after all, it shows the confidence of the peo]j]e in the Government; it shows that is how they maintain the parity. Ml'. KoRBLY. You do not believe, I understood you to say, that the Government could maintain at par sixteen thousand million^ of dollars of promises to pay a dollar on demand? j\ii. Ferguson. No; it is unnecessary to ever do that. Mr. KoRBLY. Do the banks do it now in the United States? Mr. Ferguson. No, sir; I do not iTnderstand so; they maintain that much deposit. Mr. KoRBLY. Is not that a promise to pay a dollar? ^Ir. Ferguson. It is a promise to pay a dollar. Mr. KoRBLv. On demand. Mr. Fkiigusox. But the Government is not behind the bank credit, to maintain a gold reserve for it. JNlr. KoRBLY. But the banks maintain that outstanding obligation to pay sixteen thousand million dollars now in the United States? Mr. Fergison. Yes. Mr. KoRBLY. The banks do that ? Mr. Ferguson. Yes. M) KoRBLY. And your opinion is that the Government could not maititain that \ olume with outstanding obligations at a parity? Mr. FERfiusox. No; yini misunderstood rae. I did not so state. I stated that the limit to which the people are willing to trust this country has never been demonstrated. Mr. KoRBLY. You think the Government could maintain that much; as a banker, you, think that? .Mr. Ferguson. I do not know about that. That is going into the real'n of speculation, which I do not think will arise under any prac- tical condition. Mr. KoRBLY. But the banks do it ; they are doing it now ? ]\Ir. Ferguson. They did not do it in 1907, and that is what we want legislation about. Mr. KoRBLY. Yes; and the volume is growing every year, as Mr. Taylor, the acting chairman, suggests to me ? Mr. Ferguson. Yes; and on account of the banks, the ability of the bank to do that is not as clearly demonstrated now as it was be- lieved to be in former years. That is the demand for legislation, on account of the distrust of the banks themselves being able to maintain this great credit to the amount of sixteen billions. Mr. KoRBLY. Let us go back just a bit. The conditions that existed in 1907 did not disclose an impairment of banking resources, did it? Mr. Ferguson. No, sir. Mr. KoRBLY. The banks were solvent in 1907? Mr. Ferguson. They were supposed to be but for a period they were not, because they repudiated their obligations. BANKING AND OUKBENCy EEFOEM. 255 Mr. KoBBLY. They had the control of a sufficient amount of prop- erty to pay all of their outstanding obligations, if given time to unwind them. Mr. Ferguson. They were supposed to be solvent, but for a period of time they were not. Mr. KoEBLY. "Was there any serious impairment of banlc resources in 1907? Mr. Feeguson. No, sir ; but there was a serious impairment of the confidence of the people in banks. Mr. KoKBLY. If all the banks in the United States had been mutually responsible for each others' debts and obligations and un- dertakings, do you apprehend that there would be any such condition arising in 1907 as did arise? , Mr. Feeguson. If they might all get together, all banks in the United States, in my opinion ; but when a condition of panic arises, if they do not get some way to produce the money, as Mr. Wade said this morning, you will not stop the panic. Mr. KoEBLY. Let me ask you whether you know anything about the banks of the State of Indiana. Mr. Feeguson. No, sir. Mr. KoEBLY. Did you kno^v they had a guarantee of deposits prior to the Civil War? Mr. Feeguson. No. sir. Mr. KoRBLY. Do you know that these banks did not suspend specie payments until 30 days after the United States Government suspended ? Mr. Ferguson. I did not know that. Mr. KoEBLY. That is a historic fact that I wanted to bring to your attention. Mr. Ferguson. As I stated a while ago, I do not believe that the guarantee of bank deposits would relieve a condition like that of 1907. Mr. KoEBLY. In 1857, when the panic swept over the country, the banks of Indiana mutually guaranteed; there was no suspension; their notes did not go to discount even in Philadelphia, and during the Civil War the United States Government suspended specie pay- ments before the banks of Indiana, which were guaranteed, suspended. Mr. Feeguson. That might be true. Mr. Kindred. Is it not probably, almost certain, that had that busi- ness system of guarantee of deposits been in force there would not have been this loss of confidence which so recently swept over us? Mr. Feeguson. I think so. Mr. KiNDEED. That would have saved the panic ? Mr. Feeguson. It would have alleviated it to a certain extent ; yes ; it would probably have prevented the condition of 1907, under a general guarantee of deposits all over the United States. As I said before I do not believe, after the panic had reached its crest, a guarantee of deposits would have restored confidence. " Mr. KiNDEED. It would not have reached that? Mr! Feeguson. It might prevent it. ^^ .^ ^ „^ ^ , _ Mr KoRBUY. If the Government of the United States had guaran- teed bank deposits and a bank should fail, how would the Govern- ment get the wherewith to pay ? 256 BANKING AND CUEEENCY EEFORM. Mr. Feeuuson. It would pay it out of a fund which would be created for that purpose, by tax, if it went into the guarantee of deposits. Mr. KoEBLY. Could the Government, by any operation, create a fund that would be equal to the amount of deposits in the bank? Mr. Feeguson. Not all the deposits at any one time. It could, like we did in Texas, create a fund that would take care of an average number of failures that occurred. Mr. KiNDEED. And just as well in a large number of units as in one unit? Mr. KoEBLY. But I am asking you as to the sources of the Govern- ment's supply to meet the deficiency ? Mr. Feeguson. That would be raised by a tax, in the usual way, as we did in Texas. Mr. KoEBLY. In other words, if the United States Government would guarantee all obligations of the banks, how much would they add to the value of it ? Mr. Feeguson. I think that would add untold confidence. Mr. KoEBLY. Because of the ability of the Government to tax the people ? Mr. Feeguson. Tax the banks. Mr. KoEBLY. Tax the people to make up the deficiency? Mr. Feeguson. I would not think that the Government would go at it that way. They would not tax the people ; they would tax the banks. Mr. KoEBLY. If they can do that, why not provide by law that the banks shall be mutually responsible for each other; then the fund is unnecessary. Mr. Feeguson. That would be too great a responsibility, because it might reach a place where half of them might fail and put all the rest of them out of business; but if you have checkmated that by a tax of not to exceed so much in any one year Mr. KoEBLY. We did that in Indiana, and it was in 1834 that we adopted that plan. It was first adopted in 1829, in the State of New York, when Martin Van Buren was governor. It is not new, it is not Western, and it is not populistic. Mr. Ferguson. No; I think not. It is not near so much as the Aldrich bill, whereby they provide that these banks that go into it shall guarantee its money to the extent of 20 per cent of their capital, and our position never provided for more than 2 per cent tax in any one year. Mr. KoEBLY. y-ou spoke awhile ago in very high praise of the fact that banks were able to maintain these deposits at a parity and to do the business of the country with them upon their own responsibility and liability. Mr. Feeguson. Yes. Mr. KoEBLY. And credit? Mr. Ferguson. Yes. Mr. KoEBLY. And yet you do not believe that the same guaranty that now exists could be turned into any other form of credit, whereby the deposit credit would be wiped out in part, and that part which is wiped out expressed in notes? You say that could not be done effectively ? BANKING AND CUEEENCY EEPOEM, 257 Mr. Ferguson. I doubt the ability of any plan of legislation to meet the demands of the banks, if called upon all at one time. Mr. KoRBLY. I understand that ; I agree with you on that. There is no power on earth that will enable a bank to pay all of its outstand- ing obligations, if called upon to do it all at once; but if there is sixteen billions outstanding bank credits in the shape of deposits, and the creditors of the banks come in with their checks for a portion of that in cifsrent form, and it is then charged off by the banks — do you follow me? Mr. Ferguson. Yes. Mr. KoRBLT. And current notes issued by the banks in place of it, circulating notes ? Mr. Ferguson. You mean notes to pass as money ? Mr. KoRBLY. Promise of the bank to pay the bearer so much money on demand. Mr. Ferguson. I do not think that would be the same. Mr. KoRBLY. That would not change the volume of the outstand- ing obligations of the banks at all ? Mr. Ferguson. No, sir. Mr. KoRBLY. It would be just a different evidence of the bank's debt to any certain person ? Mr. Ferguson. Yes, sir. Mr. KoRBLY. Would not that give perfect elasticity to the currency ? Mr. Ferguson. I think not, because that would not be money. Mr. KoRBLY. I am not contending that a thing that promises to pay money is money, for my part, but it would be just the same as a clearing-house certificate, in effect. Mr. BuLKLEY. You mean it would not satisfy the people ? Mr. Ferguson. No, sir. Mr. KoRBLY. I am not inquiring into the psychological phases of it, but I am merely asking if it would not be the same? Mr. Ferguson. It would be a different evidence of the same debt? Mr. KoRBLY. Yes ; a different evidence of the same debt, and there would be no enlargement of the bank credit, no inflation at all m consequence of it? Mr. Ferguson. No, sir. Mr. KoRBLY. There would be the same outstandmg obligations, with this difference, that the one that wanted current credit would be able to get it, and the one that did not want it could leave it m the shape of a deposit credit. . Mr. Ferguson. But you have heard of the old story, m conditions that sometimes might arise, about the Dutchman, if he has the money he doesn't need it, but if he has not got the money he wants it very badlv? . , , • .1 -i- Mr KoRBLY. What I am trying to get at is the proposition that the people of your community and my community are well able to take care of their own exchange instrumentalities ; you can provide all the banking power you need m Texas without any help trom ^'^E fJrguson. Yes ; all we want is the place to get money. Mr' KoRBLY You trust these banks of Texas to issue credit upon which the business of Texas is largely transacted, do you not? Mr. Ferguson. Yes. 258 BANKING AND CUEEENCY EEFOEM. Mr. KoEBLY. Why can not you trust them to issue bank notes, if the bank notes and deposits both were guaranteed under some such system as you have there? Mr. Ferguson. I don't know. That might work out ; I am not pre- pared to say it would not. Mr. KoEBLY. I wanted to direct your attention to the Indiana ex- perience, where it did work out. I wanted to get your viewpoint. Mr. Ferguson. Yes. Mr. Tayloe. As I understand you, you think the Government could afford to guarantee sixteen billions of deposits? Mr. Feeguson. No, sir ; I do not. I do not think the Government could afford to do that. Mr. Tayloe. Yes. Mr. Feeguson. No, sir ; I do not. Neither does the State of Texas guarantee deposits of banks there. Mr. KoEBLY. I did not want to be understood as saying that I ap- proved of Government guaranty. Mr. Feeguson. They sunply say, " We will collect a fund from year to year and hold it as a stake." Mr. Tayloe. I understand you to say the Government of the United States could carry on a proposition by which they could make safe deposits to the extent of one hundred and sixty millions — I think that is what it is — about sixteen billions of deposits. Mr. Feeguson. Yes. Mr. Tayloe. By a tax on the banks ? Mr. Feeguson. Yes. Mr. Tayloe. And yet they could not maintain in the same way safely notes issued to the extent of two billions, because that is what I understood you to say is about the real circulating medium ? Mr. Ferguson. No; I did not say that, but we have gold and Treasury notes, and so forth — all kinds of money, to that amount. Mr. Taylor. It does not exceed three billions? Mr. Ferguson. No; about two. Mr. Taylor. And you think it could maintain one by a tax on the banks and could not maintain the other? Why, if one is five times as large as the other and you can maintain it, why can you not main- tain the smaller as well as the larger? Mr. Ferguson. I believe, as a general proposition, you could main- tain the integrity of the sixteen billion bank deposits by a tax in that form, as we have had in Texas. Mr. Taylor. On banks alone ? Mr. Feeguson. Yes ; on banks alone, without the liability on the part of the Government to any further extent than the fund which they hold for that purpose. Mr. KoEBLY. Why would not that cover notes as well as deposits? Why could it not cover notes as well as deposits ? Mr. Ferguson. It can. Mr. Tayloe. That is what I wanted to know. I understood you to say it could not, and I wanted to know why. Mr. Feeguson. No, sir. Mr. KoRBLY. In other words, the fund you spoke of could cover the outstanding demand obligations of the bank? Mr. Ferguson. Yes. BANKING AND CUKKENCY BEFOEM. 259 Mr. KoRBLY. Whether it was expressed in the form of a circulating note or on deposit account ? Mr. Ferguson. Any evidence of the promise to pay. Mr. KoEBLT. And now if the Government would unite these banks in their responsibility, making them mutually responsible for each other, would not the same thing be accomplished ? Mr. Ferguson. Well, there is such a thing as getting too much guaranty ; they might not come in, like the man who got yoked to a yearling, and the yearling ran away with him down the street, and somebody asked him, "Where are you going? " and he said, "Don't ask me, ask the yearling." Mr. KoEBLY. When we organized those banks in Indiana the New York bankers came out there and paid a big premium to get in. Mr. Ferguson. And they will do it again if they get the chance. Mr. Taylor. Is there anything else you wish to say, Mr. Ferguson ? Mr. Ferguson. I wanted to get through with my bill. There is one part I am actually wedded to, and I would like to explain it. Mr. Taylor. I simply asked if there was any other gentlemen who wnted to ask any questions. You may go on; no one seems to, and the committee will be glad to hear from you. Mr. Ferguson. Now, then, I have provided in the bill that elas- ticity that we referred to this morning. It is agreed on by all finan- cial authorities that we had better suffer the evils of tight money than loose money; that is, we had better have a little good money than a lot of worthless money, and that is the question that con- fronted me, and I gave it considerable thought, as to how this Gov- ernment can retire seven hundred millions of currency, which I do not think would ever be issued, and in case it should, in mid-seasonal demands and financial panics, that there should be some way that will make it automatically retire. Now, I have provided practically three ways which, in my opinion, and all taken collectively, will make it automatically retire. One is that you absolutely can demand the money in six months and that it shall be payable in gold. Mr. Taylor. You say you can absolutely demand the money ? Who can demand the money ? Mr. Ferguson. Of the bank who borrowed this money. I have provided in the bill that it shall be payable on or before six months from the date, and shall be payable either in bank currency itself, which the man took away from the Government, or the gold with which the Government can redeem it when it is presented. Mr. Taylor. That is, the security which is deposited? Mr. Ferguson. No; that is to automatically retire the currency which I am proposing to issue. Mr. BuLKLEY. Is that Government currency? Mr. Ferguson. That is Government currency which shall be a legal tender for all debts as provided for in the bill for which bank notes are now legal tender, and on equality with the national-bank note I'ust as good as the national-bank note. Now, then, I say you can retire in one way, by demanding its payment, and retire it in six months, and that it be payable in gold; but the greatest of all, that is the theory upon which I build my hopes; you notice in there that I do not fix an arbitrary rate of interest only in a minimum way I say you shall not get any money for any less than 5 per cent. 260 BANKING AND CUEKENCY KEFOBM. Any banker who borrows money from the Government in time of trouble to tide him over distress and meet his obligations, should never be allowed to have money for less than 5 per cent ; but the rate shall not only be 5 per cent, but it shall be the same rate as the rate borne by the securities which you deposit to secure the money. For in- stance, if I go over and get $50,000 of bank currency, and I have $100,000 of commercial paper in there, some of which is drawing 8 or 9 or 10 per cent or 6 per cent, that the Government shall get that interest and not me, that I shall not be allowed to profit by the Gov- ernment's privilege while it is tiding me over a rough place, but the Government shall have the profit. The result of that is, you could see in a minute, that it will be of no interest to any man to do busi- ness with the Government longer than the time of stress. Mr. BuLKLEY. How would you show just what interest those in- struments were carrying? Of course, (he instrument does not neces- sarily show on the face of it what the interest is. Mr. Ferguson. I have provided in the bill that it shall show that. Mr. BuLKLEY. It must show that? Mr. Ferguson. It must show that. Mr. Bulkley. And that securities which do not show the rate of interest are not available for this purpose? Mv. Ferguson. No, sir. Mr. Bulkley. And you say it shall not show a rate of interest which is not the truth? Mr. Ferguson. I provide in there that a man making a false state- ment about anything in reference to a bank shall receive a felon's sentence. Mr. Bulkley. It would be a felony to show a rate of interest which is other than the actual rate? Mr. Ferguson. That would be the effect of it; it is not expressly provided. That is a detail which can be worked out, but I have pro- vided in the bill that any man making a false statement about any material matter to a bank shall be considered guilty of a felony. Mr. Bulkley. That is your solution of it, whether it is in the bill or not? Mr. Ferguson. Yes ; that is a good suggestion, that a note which does not show the true rate of interest, or any false statement about what rate of interest it bears, shall be subject to criminal prosecu- tion. Under that plan human nature can always be depended on to do what is to its interest to do. A man naturally will not do business with the Government unless he can get interest on his collateral, and any man can go and get his debt. He will go where he can get the interest on his money and either pay it in gold or bank currency, and therefore automatically retire it. Mr. Bulkley. You mean he borrows Government currency? Mr. Ferguson. Yes. Mr. Bulkley. Somewhat similar to United States notes? Mr. Ferguson. Exactly; there is no difference in principle, only in the kind of collateral. The United States national bank note is nothing but this. The Government says to you, " If you will deposit a certain kind of collateral, to wit : United States bonds, I will give you paper, which I say is money, and people will receive it as money." ^ ■, a Mr. Bulkley. You mean by the present law i BANKING AND CUERENCY EEFOEM. 261 Air. Ferguson. My bill simply says that instead of depositing United States bonds that you should deposit a certain amount of collateral, and if you do that " I will give you some paper which people will take as money," and during the time that I am using the Government to tide me over I am not making any profit, and I shall not be allowed to make, any, and I can then administer to my custom- er's wants and needs and the Government gets the benefit of it and should have the benefit of it. Now, one other thing: The question is how to maintain a parity in the gold reserve. I might give you a great long list of my per- sonal opinions about it, but the thing was absolutely proven within the last week or two, I think, by the statement of Secretary Mac- Veagh, of the Treasury. A recent commimication from the honor- able Secretary of the Treasury, Mr. MacVeagh, contains the follow- ing statement: The Bank of England, regarded throughout the world as the strongest of all banking lustltntions, supports the great structure of English credit on a gold reserve of not less than $200,000,000. Our Treasury In addition to one billion of gold held in trust against gold certificates, carried a net gold surplus varying from $100,000,000 to $300,000,000. Our Treasury hoard of idle gold, in other words, would support a greater bank than the Bank of England. Xow, then, I say that the stupendous amount of our gold reserve proves the soundness of Mr. MacVeagh 's conclusions, and likewise proves how easj'^ it will be for the Government to maintain a gold reserve against the additional $700,000,000 issue of bank currency here suggested. In that connection, if you build up another institution in this country whose duty shall be to maintain a gold reserve, you build up a competitor with the Treasury itself. If they are struggling all the time to maintain their gold reserve, they will be continually pre- senting for redemption to the Treasury gold certificates which they accumulate and in turn put in their vaults to maintain their reserve. The National Monetary Commission laid down the proposition as safe and sound that 33^ per cent was both safe and conservative so far as the gold reserve was concerned, and it was not necessary to provide more than that in gold. They did provide for 50 per cent reserve, but only 33^ per cent of that was gold. So, as we have $1,000,000,000 in actual gold, under their own statement that 33| per cent is safe, we can maintain the parity of $3,000,000,000, and with this $700,000,000 we would only have about two and a half billion. It is hard enough to get gold in the markets of the world without having to have a scramble right after we do get it as to how it shall be divided, and that is what we would have if we built up a separate oro-anization which undertook to build up a gold reserve, too. Mr KoEBLY. In Texas have you ever discovered any inability to discount when good commercial paper is offered at any time in the year ? I do not mean to confine it to your experience m your own bank, but banking generally? Mr. Ferguson. No. .v, x • Mr. KoEBLY. They are able to discount all the good paper that is Mr. Febgusox. We have always been able to discount m proportion ^*^]Mr.^KoEBLT. Then you are limited by your cash balances? 262 BANKING AND CUBEENCY EEFOEM. Mr. Ferguson. Yes, sir. We have always been able, barring the unfortunate times in 1907, to get accommodations as our balances would allow, but controlled primarily by that. Mr. KoEBLY. That is the limitation of your ability to discount? Mr. Ferguson. Yes. Mr. KoEBLY. Without regard to the quality of the paper that is offered or tihe necessities of the man who offers it ? Mr. Ferguson. Yes; that is all. The New York banks absolutely lay down an iron-clad rule of four or five to one, and that is where we do most of our reserve business in Texas. Mr. KoEBLY. You are limited by the rule of the New York banks to that extent. Mr. Ferguson. Yes. Of course I do not mean to say they do not go out and buy commercial paper in easy times, but that is the limita- tion under which we have been at all times able to get the rediscount privilege. Mr. KoRBLY. Let us see if we understand each other. You have said, I believe, that the banks in Texas are limited on the discount of paper to their reserve without any regard to the quality of the paper offered or the needs of the people that offer it for discount? Mr. Ferguson. That is the limitation which always gives us a per- manent rediscount market. Sometimes when money is easy they are glad to buy from us our paper, but I am talking about the dependable rediscount function, and that has been controlled by balances. Mr. KoRBLY. Has that limitation been reached down there in Texas, to your knowledge ? Mr. Ferguson. Yes, sir; I think it has. Mr. Korbly. It has frequently been reached ? Mr. Ferguson. From conferences with bankers from time to time, they say you can get what your balances entitle you to and no more. Mr. KoRBLY. Do you not believe that banks ought to discount up to the limit of good commercial paper that is offered ? Mr. Ferguson. That would depend upon conditions, as to whether they should. Mr. KoRBLY. I mean regardless of the fixed reserve that is required, ought not banks to discount all good paper that is offered? Is not that the proper function of a bank ? Mr. Ferguson. Well, that should be ; yes. Mr. KoRBLv. Then the limit of reserve is an impediment to good banking ? Mr. Ferguson. Yes; and that is the occasion for the demand for additional legislation, to go out and increase. Mr. KoEBLY. In 1907 what occasioned the demand for currency, what was the original thing that started the uneasy feeling among the people of the country? Mr. Ferguson. The New York banks simply said they did not have it. Mr. KoRBLY. In other words, the bankers that had a surplus of funds, when money was what you call easy, made call loans to the New York bankers. Mr. Ferguson. As the saying is, we were broke with a pocket full of money. Mr. Korbly. You made call loans to the New York banks, did you not? BANKING AND CUKRENCY KEFOKM. 263 Mr. Fekguson. No ; I do not think we did. Mr. KoEBLY. "What kind of loans did you make ? Mr. Ferguson. They tried to collect.' They were not supposed to make any kind of loans. Mr. KoEBLY. When money was easy in Texas and you had more loanable funds than you could use, did you not send that up to the biffger cities, and did it not drift into New York ? Mr. Ferguson. Yes. Mr. KoEBLT. What did the New York bankers do with it ? Mr. Ferguson. I can tell that by hearsay. Mr. KoRBLY. They put it out on call loans, did they not? Mr. Ferguson. Yes. Mr. KoRBLY. When you wanted money to move the crops you could not get it ? Mr. Ferguson. No further than your balance would permit. ]Mr. KoRBLY. So your troubles in 1907 arose from the fact there was an enormous crop that had to be moved and banking, which ordi- narily does the moving, was unable to perform its functions; is not that the case ? Mr. Ferguson. We did not think that was true in Texas. Mr. KoRBLY. You had difficulties down there, did you not? Mr. Ferguson. We had an unusual demand for money that fall, but no more than we have every fall. Mr. KoRBLY. Was it a demand that arose because the people doubted the ability of the banks to pay? Mr. Ferguson. Not a bit. Mr. KoEBLY. Or was it because they wanted money ? Mr. Ferguson. Not either one. It never occurred to them that anything was wrong until we got a telegi-am from our reserve city down there that they would not ship us currency, and we asked them why, and they said, " The New York banks will not give it to us," and 'erervbody got busy right away. Mr. KoEBLY. It was, then, a question of inelasticity of currency m the beginning? Mr. Ferguson. No, sir. Mr. KoRBLY. If you had been able to convert your deposit ac- counts into note accounts, guaranteed under your present system of guarantv, would not that have satisfied all the needs of the people of Texas at that time? Would not they have been able to get all the currency they needed? . Mr Ferguson. If it was before the panic was inaugurated. Mr. KoRBLY. I am speaking about the time when there was an unusual demand for money and you could not supply it because the other banks would not ship it back. Mr, Ferguson. No; I think had that condition obtained nothing but the money would have relieved the situation. Mr KoRBLY. No; but if you had the elasticity of currency I have described by the conversion of deposits into notes you would have been able by that method to supply all the demands for currency m Texas that 'existed at the beginning. .;! xr„™ Vnrk Mr. Ferguson. All demands were being supplied until JNew YorJi """Mr i5rbly. I know ; but if vol, had had other methods you would not have had to depend upon New York at all, would you < 264 BANKING AND CTJBEENCY REFORM. Mr. Fergitson. I think so, because we tried the very thing you are talking about. We issued clearing-house certificates. Mr. KoEBLY. Did not they operate successfully? Mr. Fekgtjson. No. Mr. KoEBLY. Why not? Mr. Ferguson. It was like I said awhile ago; like the old darky said, he would rather have a free negro's note than to take a note on our bank, and you could not make them take it. Mr. KoRBLY. A check on your bank is not a clearing-house certi- ficate. Mr. Ferguson. It is not, probably, in the sense you have in mind, but we issued what we called cashier's checks. Mr. KoRBLY. That was your own bank's expression, but suppose that had been the joint and several expressions of the banks of Texas, do you think the uneducated negro would have rejected it then? Mr. Ferguson. Yes, sir. In my town, to show you how that worked out, while each bank issued its own cashier's check, yet the other banks all published in big broad letters that they would take this as money, and yet the people would not take it. A man would not take it when he knew that. Mr. KoRBLY. Was it universally rejected? Mr. Ferguson. Yes; and you could only get a man to take it on personal grounds, and by assuring him if he would take it you would give him a land note to secure him and swear to him on blood ties of relationship that it was good. Mr. KoEBLY. Suppose that had been a lawful currency, pursuant to law ; do you think there would have been any dilRculty ? Mr. Ferguson. Not at all, if it had been Uncle Sam's money. Mr. BuLKLEY. Is that the distinction, whether it is Uncle Sam's money or the bank's money? Mr. Ferguson. Yes. Mr. KoEBLY. That is a pisychological phenomenon, is it not? Mr. Ferguson. No ; I think it is true. Mr. Wade stated this morn- ing the same condition in his town-^the man wanted the money. Mr. KoRBLY. But the promise of the Government to give you an ounce of gold is not an ounce of gold, is it ? Mr. Ferguson. For practical purposes it is. Mr. KoRBLY. It was not in the days before the resumption of specie payments, was it? Mr. Ferguson. I know, but it will meet the demands of business now. Mr. KoRBLY. Practical purposes at that time were different than practical purposes now are? Mr. Ferguson. Yes. Mr. KoEBLY. Although history abundantly proves that the green- back was not on a parity with the thing that was promised, the Government note to pay a dollar was not floating at par with a dollar, yet the people persist in the belief that if the Government promises to do a thing it will be perfectly good and pass at parity? Mr. Ferguson. Yes. Mr. KoRBLY. Although the most recent example on the part of the Government to do it clearly demonstrated it could not do it? Mr. Ferguson. I think the greenback to-day is as good as a gold certificate. BANKING AND CURRENCY BEPOEM. 265 totifinre^XT' '"' ^--"--t - in a position presently Mr. Ferguson. Yes. Mr. Tatxok. Do you know what reserve the Government carries to protect the greenback circulation? ^-mment carries Mr. Ferguson. No; I only know the grand total of what the SL'aTdtlvercSn.*'^ "'"™ ^" ''' '""^^^' ^^^^^ ^^^ ^<^'^ -^tifi! .nw «■ ^^^^°^- ^° y°" 1™°^ the amount of greenbacks in circulation now 5 Mr. Ferguson. No. Mr. Tatlor. I think about $340,000,000. Mr. Ferguson. I think that is correct. Mr. Taylor. And the Government holds $150,000,000 in ffold Mr. Ferguson. Nearly 50 per cent. Mr. Taylor. That is the reason why it is so good • -A ™^soN. Yes; but there is 50 per cent that is founded on wind, nothing but confidence. Mr. Taylor. Would it be good without that? Mr. Ferguson. No; I do not think so. Mr. BuLKLEY. It was good without it for some years ? Mr. Ferguson. Yes. Mr. KoRBLY. It was not good until the Government put the gold in the Treasury. It did not come to a parity until after the Government put a hundred million and more of gold in the reserve. Mr. Taylor. It never became equal to gold until the 1st of Janu- ary, 1869, when the resumption of specie payments occurred. Mr. BuLKLEY. When was the $150,000,000 of gold put in? Mr. Ferguson. It was put in at the time it went to a paritv. Mr. Bulkley. When was that $150,000,000 put in? Mr. KoRBLY. It was put in at the time it went to a parity. Mr. Bulkley. When was the $150,000,000 put in ? Mr. KoRBLY. In 1900, when the so-called gold-standard act was passed, the reserve was raised from $100,000,000 to $150,000,000. Mr. Bulkley. Is that the first time it was at a parity ? Mr. KoRBLY. No; it was at a parity when more than $100,000,000 of gold was put into the Treasury. January 1, 1879, was the time. It was pursuant to the act of January 14, 1875. Mr. Taylor. In other words, when they retired that much green- backs and put $100,000,000 into the Treasury ? Mr. Korbly. In 1900 they passed what they called an act to strengthen the gold standard, and raised the reserve from $100,000,000 to $150,000,000. Mr. Taylor. In 1869, I think, was the first act that Grant ever approved as President, which was an act to strengthen the credit. Mr. KoRBLY. It was in 1879 when they got more than $100,000,000 of gold and put it in the Treasury. Mr. Taylor. Does any other gentleman desire to ask any ques- tions ? Mr. Ferguson, do you desire to say anything further ? Mr. Ferguson. No, sir ; only I desire to express my thanks to this committee for its courtesy. I have reduced what I had to say, em- bodying all the essential details of the statute as it should be written. Of course there are other details which could be worked out. I de- sire to have this incorporated. 266 BANKING AND CURRENCY EEFOBM. I will say that I have submitted that bill to two fowner members of the Supreme Court of Texas, and they say it is without constitu- tional objection or legal complication. Whereupon, at 4.30 o'clock p. m., the committee adjourned to meet Wednesday, January 15, 1913, at 10.30 o'clock a. m. Synopsis of a Bill to Establish as a Coordinate Branch op the National Government " The Citkrency Bank of the United States," Proposed by .Tames E. Ferguson, or Temple, Tex. The Lope of this plan is that it will produce a currency which will be stable to the extent of inspiring the confidence of the American people; that will be elastic to the extent of being responsive to the needs of expanding business and financial distress; that will be contracting to that degree which will prevent inflation. It is proposed that there shall be established In the bureau of the Comptroller of the Currency, as a part of that department, what shall be known as the " Currency Bank of the United States." There shall be issued by the National Government 700 millions of bank cur- rency of the United States, which shall be under the control of the comptroller. Eight branches of the Currency Bank of the United States are to be located at convenient places in the United States, and are to be called " currency sta- tions." One million dollars of bank currency is to be deposited in each branch, and tho amount shall be increased from time to time when taken out by banks obtaining loans from currency stations. Tlie incorporation of currency associations by 10 or more banks having a combined capital of one million or more is provided. The 10 or more banks originally forming a currency association, being required to reside within 100 miles of each other, shall be residents of the same State. Direeto]-s in currency associations shall receive no salary, but the filling of such office shall be deemed honorable and patriotic service. Any bank in good standing in a currency association, and having the indorse- ment of two banks also in good standing in the currency association, can. by depositing a certain kind of collateral in double the amount, obtain, as a matter of right, a lo-m of bank c\irrency not to exceed the amount of its capital stock; not more than ."{iSO.OOO.OOO to be loaned to the banks of any one State. All loans from currency banks must be paid on or before six months from the date of same, such payment to be either in bank currency or in gold. Interest on loans obtained from currency stations shall be not less than 5 per cent, and must be the same rate as the highest rate borne by the collaterals deposited to secure the loan. National banks. State banks, and State banks and trust companies having a capital of .$2.'5.000 or more may obtain the privileges of the law by complying with the c'lnrlltioDS set forth in the bill. Al! bnnks under the law must be examined at least four times each year. For the protection of the Government and the banks in general the law pro- vides a felony sentence for bank officials who knowingly permit worthless loans to be made or when they make loans for their own benefit. The bill does not undertake to deal with the question of foreign or inter- national banking. When Congress comes to the solution of the question of currency reform, there are certain axiomatic truths which must be kept constantly in mind. No bill which violates these fundamental pj-inciples of finance should or will be passed by our national lawmaking body. First. Congress, having the sole power to issue money, should not delegate that function to a private corporation. None but Government-issued money will receive the confidence of the American people. Second. At all hazards the present stable value of our money must be main- tained. One dollar must be kept jis good as another. Third. A contracting currency is just as essential as an expanding currency. We had better suffer the evils of " tight " money rather than " loose " money. Fourth. Any currency legislation which gives one set of men or one section of the country the right to dominate or control the other is unsound and must not be tolerated in any form. BANKING AND CtTERENGY EEFOKM. 267 Bearing iu luiud tlies« facts, I ilpsire to ofCer sunif statements, more in ex- planation of the Intentions of my bill rather than argument in Its favor, leaving that important feature to be taken c-are of l)y the good judgment of the Ameri- can people. In the first place all money should be issued and backed by the Government. Assuming that private corporations could be formed which would not abuse this privilege, yet Go\-ernment money is the only money that will inspire and retain the confidence of the public. The " long green " and the " yellow eagle " are the only saviors which can tread the financial storm and command the frightened Peter depositor to be not afraid. The late panic was the living evidence of the fact that corporation currency can never command the confidence of the American people like Government money. The bankers will never forget how in those dark days of 1907. how, with his cashier checks, his listed bond, with his real estate bond, with his commercial paper, all in reality backed by mil lions of real and tangible values, they looked like 30 cents beside the little green- back bill which bore nothing but Uncle Sam's promise to pay. There already exists in the minds of the American people such distrust of the corporations, especially large financial corporations, that every thinking man must know that corporation currency will never stop a panic or relieve financial distress. For these reasons I have provided that our new supply of money which is demanded tojj)resent conditions shall be bank currency of the United States. Again, th^present value and integrity of our currency must be maintained. Under the existing law and policy of the Nation every dollar of new currency must be redeemable in gold. Now, then the question that confronts us is, can the National Government maintain a gold reserve against an additional issue of 700 millions of new currency, such as is provided In the bill which I propose. The answer has given me great concern after due consideration, and I am clearly convinced that no embarrassment can ever come to the Government by not being able to maintain a gold reserve. In the first place there is not the remotest probability that the entire 700 million will ever be issued at one time. Should it be, however, in the maximum time of six months, the whole 700 million must be returned either in bank currency itself, thus relieving the (JO^•ernment of any obligation to maintain a gold reserve against that issue, or it must be returned in gold with which the Government can redeem the issue. The honorable Monetary Commission recently appointed by Congress after great deliberation, pronounced a plan feasible and urged Its adoption, whereby a gold reserve of only 33^ per cent of a 900 million issue of corporation cur- rency was provided for. All financial authorities agree that a 50 per cent gold reserve is both con- servative and safe. On June 11 our gold .reserve in actual possession of the Federal Treasury was over one billion and one hundred million, in June, 1912, it was over one billion and two hundred million. The entire amount of the outstanding obligation of the Government, for its issue of gold certificates, bank-note currency, and greenbacks amounted to less than two billion dollars. Now, if you add the entire 700 million which I proposed to issue you will still have approximately a 50 per cent reserve of gold. A recent communication from the honorable Secretary of the Treasury, Mr. MacVeagh, contains the following startling statement: "The Bank of England, regarded throughout the world as the strongest of all banking institutions, supports the great structure of English credit on a gold reserve of not less than 200 million dollars. Our Treasury in addition to one billion of gold held in trust against gold certificates, carried a net gold sur- plus varying from 200 to 300 million dollars. Our Treasury's hoard of idle gold, in other words, would support a greater bank than the Bank of England." The stupendous amount of our gold reserve proves the soundness of Mr. MaeVeagh's conclusions, and likewise proves how easy it will be for the Govern- ment to maintain a gold reserve against the additional 700 million issue of bank currency here suggested. 4. * j i,„„ The advisability of Government bank currency is clearly demonstratedwhen we remember that no private controlled or incorporated institution issuing to currency can so easily maintain a gold reserve, and in case it does it becomes a lively competitor of the National Treasury for gold. Such an institution would 7611 2— PT 4 — 13 5 268 BANKING AND CUEEENCY BEFOEM. be contiiiiiallj- acquiring anrl pi-escatiiijj gold ecilificates for redeniliriou in gold at the National Treasury in order to maintain its reserves. In time of panic, a private corporation issuing its own currency and not hav- ing tlie prestige or guarantee of the National Government behind It would find an apprehensive populace knocking at its doors demanding the redemption of its prn ate currency in the coin of the realm. In order to redeem and at the same time maintain Its gold reserve, It must compete with the Government for gold. And to the extent of such competition impair the confidence of the I'eople in the Government itself. Thus it will be seen that so long as we as a Nation are committed to the gold standard we must not by legislative enactment build up a con.petitor for gold at home. It is ditBcult enough in maintaining our gold reserve to compete with other nations without having a row In the family about how- It shall be divided after we get it. Again, any proposed reform in our currency must provide against overex- pansion, which invariably amounts to Inflation. A currency which does not automatically contract after the demand for its immediate issue has passed ought not to have been issued. In this connection let me say that no one should be allowed to use the Gov- ernment function of issuing currency for private profit. Such privilege should only be extended in times of great demand occasioned by unusual volume of business or in time of panic, or threatened, and far-reaching calamity. When the great demand has passed the money thus loaned b}a|be Govern- ment should be returned together with a reasonable charge for it^use. In the plan suggested, I have undertaken to provide for the automatic retire- ment of the bank currency in more ways than one. In the first place, I have provided that a loan of bank currency must be paid in six months, either in bank currency or in gold. Again, it Is provided that should the entire 700 million of bank currency be Issued and loaned, then no renewals or loans can be made until the expiration of the six months, during which time all loans must be collected. These provisions alone will prevent any overexpanslon for any great length of time. The chief cause, however, which will cause this bank currency to automati- cally retire after the unusual demand for it has passed, is the provision (sec. IS-a) which provides that the note secured by collaterals, upon which the ap- plying bank obtains the loan of bank currency shall bear interest at rate not less than 5 per cent, and said rate shall be equal to the highest borne by any of the collaterals deposited to secure payment of the note to the Government. By this means it will not be possible for any bank to borrow from rhe Gov- ernment at one rate and loan to its customers at a higher rate for any great length of time. There will be no Incentive to do business with the Gorernment after the panic or stringency has passed Moreover, while the bank has its collaterals tied up to secure its loan of bank currency, it will get no proflc from Its loans and It will, at the earliest moment, retire its bank currency by the exercise of its privilege to pay its loan at any time. The desire for gain is so prevalent in this age that lAiman agency can always be depended on to do what is to its Interest to do. " Where a man's treasure Is, there will his heart be also." Last of all, the plan here proposed Is democratic. Under the practical opera- tions of this law special privileges will be eliminated and sectional domination abolished. All banks possessing the required qualification will receive the aid of the Government as a matter of right instead of oflicial permission. Texas can not then dictate to New York, and New York will not dare to dictate to Texas. Chicago can not then say to San Francisco, " your securities are not good and your loan Is declined," and vice versa. But every section of our great country will be left to determine, through its reputable banking interests, when an emergency exists which calls for the aid of the National Government to meet. It is not considered necessary to more than refer briefly to the question of the safety of the Government loan. When we remember that of the more than fifteen billion of deposits now in the banks of the country, unprotected by any guaranty other than the banks' solving that there is comparatively no loss. The safety of the Government loan secured by collateral double the amount of the loan and the Indorsement of the local association ;ind two neighboring banks becomes a moral certainty. In conclusion, let me say that if there should be constitutional objection to the authority of Congress to pass a law permitting a loan from the National BANKING AND CTJREENCY EEFOEM. 269 However, there is no constitutional objection to the law as here Dronosprl t^ i^ ""S provision of the Constitution which prohibitsTuch a law On the o^Z.^^^^,' ^^-'^ '" ^'"P^^ ^^"^°t t° be found under the power express^v conferred to com money, to regulate commerce, and to pass all Zws nfcessarv to carry into effect the Constitution, to authorize the passage of tClawestab hshmg the currency bank of the United States l""'^, S.'S ■o-s ce ^ sa •^ o Pi a's ■a.£ 4} « P9 60 ® ^a U CO si -a^ BANKING AND CUEKENCV BEFOEM. 277 i i *■ s 1 P c ■§ i p ■a 1 la* ej it isl .i4 '? & bx) 1 .i ■o ll g s ; t .a o o P 00 •a 1 1 ll y «3 <:3 a 1 1 s i 1^ 1 Si 1^ 1": 1 ': o 1 t •o- S o il 1 ft a c 8 S ! .2:2 ^ o (J 1 Is •&I It to 1 1 ^ Id S ■p 5* 1 . P.-S & g. fci ^ 3 S=3 P il ■Ms It i 1 1 ^1 s 3 1 1 is r 1 1^ i P3 •c 1^" || r- oo Ol Q ^ « -f ,_. 3 00 QO "^ If i i-. 1 .2 6 il # 1 ^1. O V «] 2 "o o 1 >. ■g 5.g| i •9 § o 85 ^.^; 3 So Ill c ^ 11 «■£ gjo i o P. £ § || la ei £ 1 la 11 as ^ (-1 3 P 8£ n; o J is. eg 3 9 ll 3 o '5 "^ ■3-2 s . ■■g.a ill S.S ^ tt tt =i o M fe fe f^ Ea f^ ■g A c ■3 ^^ ftS iS 13 •s ^ s iC 2 ^ £ •"ti aJ §s C ■Soi o S i •s 1« 1! II 1 e 1 6 £ .11 Is. ft; si ^ T s E CO a> !!- o <3 So la •3 > |s ^1 il S .s-s 51 g^ ■2.2 11 si ^1 sP gs 0^ II ll il 278 BANKING AND CUKBENCVT BBFOBM. SB. s 2rtS a ^- <^ 53 ■S'-g .a 1-1 za 3 o e ■Sfe- ^r« ^ a ■an, §8 > a P3 BANKING AND CUEEENCY EEFOEM. 279 s 3 s d C Sa •-S o r: > s a "3 3" .£fe B. a g & a « go, a; - 75 J3 QQ Is ■^-o ^ 'S . ^S s si .5 3 C-S" CT3 ■a? 03 O 9 O ^3 "^ 9 s ■22 ;^'° 1^1 11 £=0 a. Sg".i "^3 g3 S: Ss S £S o ^ts ^ ■SE 50 'S'W lii o ■J So 03 > 2£: -S.E f;.i 4» O fc fc« O 6-0, S §2 2S is >> . ^s t. w» ?: 0) si; gg r55 t^a- 00 '^ ■ -Id , s« "^ Tl! ■^ •3 ® a^ &^ ed ^1 sll y "^ 3 1^ - e 6 Sf5 M o ,53 O §3 3 ■e ■is ^8 S£ sSs ae -Si-" " 3 ?1 fee O h ■sg. * 5 ^ ~ o " z& eS w « ea » ■SB 9ja 4A M 9 B-S a s e 1§ 0^ 3 2 o i~ si 5& 280 BANKING- AND CUKKENCY KEFOBM. Exhibit B. Relation 'bettveen volume of clearings and prices. De- pos- its. Mon- ey. Clearings. Stock prices. Commodity prices. Pop- ula- tion. Vol- ume ol com- modi- ties. 1887 to 1897... 1897 to 1907... 1899 to 1900... Per cent. + 61 H-iao Per cent. + 23 + 68 1900 to 1901. 1908 to 1908. 1908 to 1909. Per Month. ! cent. + 4 -1-185 (February i 1 August '... /....do ■\Mayi -I- 72 (September' \March2 - 38 do. Month. 25 [September 1. -1- 50 December 1.. September 2. do June' September!. Not., 1907 2 do Augusti Per cent. - 20 -1- 49 Month. + 90 -'39 + '66 Jan., 1900 >.. Apr., 19012- do Nov., 1902 1 Feb., 19071. May, 19082. do Dec, 19091. Per cent. - 21 -1- 44 Per cent. + 22 + 20 -1-7.8 -"u + 'i6 Per cent. -H8.4 +34.2 + 1.3 + 8.8 - 5.5 +15.3 'High. 2 Low. I have assumed that the simplest way to get the subject before you is to read a brief statement, and then I certainly hope that you will ask as many questions as you see fit. I have summarized here the principal points, so that you will have them in mind in the development of the subject. They are : The composite dollar. Hiph living costs caused by bad banking. Marginal control. Balanced board. "[Jnited States national reserve. The latter is characterized, as you will note, not as a bank or an association. The problem of banking reform is almost entirely a credit problem, and as the history of our financial experience for over 50 years has been a history of credit difficulties, it is obvious that a thorough con- ception of the principles involved must be the basis of any efficient change. Summarizing our financial and commercial history for the 50 years following 1856, they may be said to include 24 prosperous years, 18 dull years, and 8 crisis years. In the development of com- merce and industry, perhaps the chief instrument of civilization has been credit, and its use as a medium of exchange has been world-wide. If not properly controlled, however, it may also be an instrument of grave danger. Although the medium of exchange in banking is largely in credit form and presumably supported by tangible assets, yet the psycho- logical element is always present, with the result that in periods of optimism and good business there is the inevitable tendency to "push" credit to the straining point. Through the lack of definite regulations in our existing system the " straining point " is the " breaking point," and is invariably followed by a great force of de- flation, with the consequent disastrous banking and commercial fail- ures and serious disturbance to prices and wages. In countries where credit principles are more thoroughly understood there has been developed what may bo termed "marginal control "of credit in- flation and deflation, tending to stability in the media of exchange PLATE 1 Exhibit A. — Continued. PLATE 2 PLATE 3 PLATE 4 BANK OF FRANCE a 'Liabilities fo Reserve a Average of -Yearly Averages, ■a- from 1881-1908(1.46). BANK OF ENGLAND b fLiabilities to Reserve — Yearly Averages. b' Average o( "b" from 1881-1910 (2.19). NEW YORK ASSOCIATED BANKS c ILiabilities to Reserve — Yearly Averages. c' Average of 'V from 1881-1910 (3.37). c" Legal Limit, for National Banks at New York (4.00). 'Deposits and circulalioD. tTotal depoeiu. jNet deposits. PARIS— BANK OF FRANCE d Minimum Discount Rate — Yearly Averages. d' Averageof^i" from 1881-1910 (2.92%). 30 Year Range— Low, 2% ; High. 5%. LONDON— BANK OF ENGLAND e Minimum Discount Rate — Yearly Averages. e' Averaged "e" from 1881-1910 (3.34%). 30 Year Range— Low, 2%; High, 7%. NEW YORK / Prime Commercial Paper — Yearly Averages. /' Average of •'/" from 1881-1910 (4.95%). 30 Year Range-Low. 2^% ; High, 15%. g Call Money Rate— *Yearly Averages. g' Average of "g" from 1681-1910 (■'5.23%). 30 Year Range-Low, 0i% ; High. 1 100%. *Average8 of Low and High Rales by Weeks. NEW YORK ASSOCIATED BANKS A Loans and Discounts to Normal — Yearly Averages. h' Geometric Normal for "h" from 1881-1910. UNITED STATES / Total Clearings to Normal — Yearly Averages. I' Geometric Normal for 'T from 1881-1910. m Commodity Prices in the U. S. — Yearly Averages. m' Average of "m" from 1881-1910. n Stock Prices at New York — Yearly Averages. It' Average of "«" from 1881-1910. 187S 1 XVtfi J^-!^, J?nVr. /oot /L/)"/. A'y/ /6ff^ 1977 1878 / ' 1B79 1880 1881 1888 1884 1885 E- i- ^ 1—7- ^.. ^<=^^^*^l / z=:=^-^ •"- ^i0i^- ^ ^ ^ 1888 J 1887 1888 laas. 1880 ^% \ .^ \. .... .... -^^ ^.z:::..... ..■.:":\.j:. l::jj::vr::v 1891 %m IW ML IKS. ^^^;::S^ ^^ iSSH ^-^^ ~--==;s--__ < 1900 1801 1903 ISM 19W 1?0« 1997 \m w« mo MX 1819 ^ 1 fci: ^^^Sf~~- ^~ /7 .^:^^ I '""^^ ^3^ x^-^ r^ ==^ ^^ T==:-^ 7 I^ ^^i K^ - 'x + ' 1 1875 1«76 «.-,*' >,-'/ ,. _»/ ...^o/ a V/*> /tV A, ^'Af/C /^O /* 1 1877 ' ' lSt8 ;«,' ■i-i, 1880 in » 1881 >^ 1883 --^^'i ^ >^ 1884 1885 1886 1887 ^ " ^ *^. t ^,N 1888 1889 1891 1892 ^ 1893 1394 1896 1896 y^ ■^ ^^^ \ / u / \i 1897 ^. L 1898 1899 ^ ^s. 1900 ^ rs:^..^^ 1901 190! 1903 f jking. A review of theoretical advantages and disadvantages will not warrant a conclusion on the advisability of proposed reforms Theo- ' retical arguments alone would scarcely justify the view that it is de- sirable to abolish American banking. More important is a considera- '■ tion of the systems which have proved successful in actual operation, and an investigation whether such systems can be adapted to our needs, and whether measures can be taken, by legislation or other- wise^, to do away with such disadvantages as have developed in con- nection with them. Effects of Decentoalization in Actual Operation. The world's experience in banking practice can not be said to render a verdict favorable to decentralization — at least not for coun- tries in an advanced stage of economic development. Generally speaking, it has been proved that the theoretical advantages of de- centralization are not realized in actual operation, whereas the ad- vantages enumerated above make their appearance very early when- ever a country reaches a more complex business development.' Under decentralization there is no business policy looking to the good of the community as a whole. Competition is relied upon to produce most favorable results, and competition makes this well nigh impos- sible. With many individual banks of issue, each eager for business, the tendency is to overextend credit and to encourage overspecula- tion. Many illustrations of this may be quoted from the history of banking, especially in England during the earlier part of the nine- teenth centur}'. There the country was saved from the most serious consequences of disactivity on the part of smaller banks of issue, only because the Bank of England was already powerful and able 10 prevent complete ruin. Nevertheless, a considerable number of banks of issue failed at that time. Canada is frequently cited as an example for the successful opera- tion of decentralization in the issue of bank notes. It should be borne in mind, however, that Canada is as yet an undeveloped country ; it is still in its agricultural stage. The disadvantages of decentrali- zation have not yet made themselves felt, because they appear first under high developed economic conditions when the country has reached an active and complete industrial and commercial life. For that reason it is hardly significant to compare Canada's banking system with that of an industrial country, for in spite of the dominant 335g BANKING AND OUKBENCY EEFOKM. importance of agriculture in our economic life the United States must be classed among the industrial countries. It is true: that under the national banking law our banks of issue have not been guilty of speculatiA'e excesses. Special circumstances must here be considered. The law requires the note circulation to be covered by Goveinmeiit bonds, and further limited the issue to the amount of the bank's own capital. It is clear that an expansion in the note circulation could proceed only very slowly. The Amer- ican system has indeed the advantage of safeguarding against infla- tion. This safeguard, however, is dearly paid for in the inelasticity of currency, which was a direct consequence of these provisions of the law, .and which renders the note circulation incapable of properly performing its particular function in the monetary system. As a result the United States of America is seriously at a disadvantage as compared with othei- countries where modern economic conditions prevail. One of the greatest of these disadvantages in the American system lies in the accmnulation of a large part of the country's reserves in NeAv York under conditions which impair their mobility and make them practically imavailable in times of financial stress. This defect is undoubtedly due to the absence of an adequate money market in the United States. A money market is absolutely indispensable if the economic de- velopment of a country is not to be hampered and arrested by disturb- ances in its currency and ''redit syst(nn occurring at regular intervals. Without such an institution a normal movement of the rates of in- terest and equal able f-redit facilities for different parts of the country are not feasible. Time and again there will be periodb when funda- mental business conditions are sound but abnormally high rates of interest prevail, prompting to deficiency of a disorganized currencjf and credit system, which is doing serious liarm to the business of the nation. Under decentralized banking neither the United States nor any other country has been able to develop a modern money market to serve the coiuitry as a whole. Adequate money markets were de- veloped in European countries only after central banks were firmly "established. The reason is clear. Such a money market depends in the final analysis upon the existence of a powerful central institution and the assistance which it can render in times of financial stringency. Under a decentralized system there is no possibility of obtaining needed assistance in emergencies. Furthermore, a money market developed independently of a central bank, if it was possible, and not subject to guiding influence of such an institution, is likely to do more harm than good. The New York money market is a significant illustration. It is a center for surplus funds from all parts of the crimtr^'. This money is poured into Wall Street to be used in connec- tion with stock-exchange operations, for the reason that there are no facilities for employing such funds to advantage in other ways. The attempt hitherto made in the United States to overcome the drawbacks of existing situations without adopting a centralized sys- tem can hardly be pronounced successful. The Treasury Depart- ment, it is true, has endeavored to remedy conditions. Partly by an extensive system of supervision the attempt has been made to secure uniformity in banking policy and practice. More directly the Treas- ury Department has tried to assist iii making the currency more BANKING AND CUEEENOY EEPOEM. 335h elastic, depositing Government funds with the banks for this pur- pose. These efforts have not sufficed to meet the need. Moreover they never can suffice, because the activities of the Treasury can not be called into play early enough to protect the business of the country from serious injury. This is also true of the clearing houses They are not called upon until the crisis has reached an acute stage and mdustrial development suffered a severe setback. Currency organizations and similar institutions which have been proposed will operate in essentially the same manner, and for that reason they are not likely to achieve any better results. At bottom the efforts of the Treasury Department and the other makeshifts that have been adopted or proposed recognize the principle of cen- tralization without achieving its results. Their chief defect is that action is taken too late and is therefore ineffective. The essential element in a modern system of currency and credit may be found in an effective discount policy. Only through efforts along this line is it possible to check the overexpansion of credit before it results in a crisis or, at least, to minimize its effects. A dis- count policy, however, directed to this end, requires close touch with credit transactions and the business world generally, and it is of a direct and constant influence over the money market. Occasional efforts on the part of the Treasury Department or of emergency in- stitutions are obviously inadequate. Centralization in Actual Operation. defects in centralized systems. It can not be denied that in their early history several of the cen- tral banks committed gra^e errors and that the policy of the Govern- ments toward them was unsound. Originally central banks received their privileges to meet financial needs of the Government and not because a central institution appeared necessary for the proper regu- lation of the currency and credit system in the public interest. Wherever central institutions have failed to bring about the desired results their failure can be ascribed to these mistaken ideas on the essential nature of the bank note. The defects of the centralization in banking, manifested in the early history of these institutions, were due to the close relations of the central bank and the Government's finances. The Bank of Eng- land went too far in making loans to the Government and was obliged at the close of the eighteenth century to suspend specie pay- ment. The restrictions in its charter which were calculated to pro- tect the bank from excessive demands by the Government had been violated by the Government as well as by the bank's officers, and Parliament gave its sanction to the steps taken. The period during which specie payment was suspended and in fact forbidden by law (1797-1819) was, of course, attended by severe injuries to the country. It was, however, a time when the finances of Europe were in chaos as a result of Napoleon's wars, extended over a period of about 20 years. It is therefore very doubtful whether England would have fared better at the time without a central bank. We must not forget that many of the small-note banks then existing and still independent of the Bank of England had failed long before political complica- 335i BANKING AND CURBENCY EEFOEM. tions had reached a crisis, and that of the remaining banks of issue some were able to weather the storm only because of the support they received from the central institution. But even if allowance is made for these extraordinary events the Bank of England must be severely criticized for having committed grave errors in the conduct of its business. Without doubt it is largely responsible for the critical conditions prevailing in the twenties of the last century. By pursuing a very liberal credit policy and persistently maintaining low discount rates the English central bank brought an inflation of note circulation which stimulated a general speculative movement that ended in a collapse of business. The opponents of centralization have laid much stress on the dan- ger of an alliance between the central bank and partisan politics to the detriment of legitimate business interests. There is little ground in actual experience for such fears. In none of the European coun- tries having central banks has there been a single instance during the last century where a central bank has permitted itself to be used by a political party. Nor have there been any cases where individuals or interests have received favor from the central institution in virtue of their political affiliations. During the struggle over the Second Bank of the United States one of the strongest arguments used against it, was that it employed its powers m behalf of certain political or business interests. From the conflicting accounts of what happened it is difficult to-day to form an unbiased opinion. Most competent investigators, however, hold the Government rather than the bank responsible for the outbreak of the political strife. It is further claimed that up to a short time before the end the Second Bank of the United States performed its duties very satisfactorily, and that it did not abandon its policy of keeping aloof from politics until after it had been made the object of unfounded political attacks. Since the first quarter of the nineteenth century ther^ has not been an instance where a central bank has failed in a crisis. During the third quarter of the century the banking system in England found itself in difficulties. These, however, could not be ascribed to central- ization; they were caused by peculiar restrictions imposed by the English banking law. Whenever notes of the Bank of England, which are not covered by gold, reach a certain limit (£18,450,000) the bank is forbidden to issue additional notes unless they are se- cured by an equal amount in gold. As this limit approaches, the note circulation of the bank ceases to be elastic, and the public begins to be apprehensive that currency will cease to be available at the bank to meet the needs of business. It was on such doubts on the part of the public that produced the signs of panic which attended the crises of 1847, 1856, and 1866. These symptoms, however, disappeared as soon as this restriction on the note issue was suspended and the central bank permitted to emit notes not fully covered by gold. The experiences here cited may be used to show the inadequacy of the English bank act, but they certainly are not valid arguments against central banks. On the contrary, the immediate restoration of public confidence when the restriction on its note circulation was suspended is striking evidence of the public faith in the central bank. BANKING AND CUEEENCY EEFOEM. 335i SUCCESS OF CENTRAL BANKS. Since the incidents mentioned liere no serious difficulties have been encountered under central banking. Experience helped to enlighten the public on the essential nature of the bank note, its place it the credit system, and the functions of a central bank, with the result that the administration of the great central banks has become a much less difficult problem. Central banks proved successful beyond doubt. Ihe rules and regulations which must be observed in admin- istrating central banks, and the policies it must pursue, have to-day become matters of common knowledge and constitute a safe guide for the conduct of any such institution. In addition, the control exercised over central institutions by giving its affairs the widest possible publicity has materially increased the sense of responsibility of the officers. '' Under the conditions outlined above it is evident that a central bank properly managed can exert a most far-reaching influence and be a paramount factor in the welfare of the country. Through a far- sighted discount policy the central bank can stimulate industrial ac- tivity, and again, when necessary, it can use its influence to counteract overexpansion and speculative execesses. ' The history of tho last half century has amply demonstrated the fitness of a central bank for this task. It has also proved that without a central institution to exert this influence on financial and trade developments the serious evils connected with crises can not be avoided. Valuable testimony on this point is given by the governor of the Bank of France, M. Pail- lain, before the representatives of the National Monetary Commission : Qwestion. We have in America a numerous cl.nss of people who thinli the dis- count banlcs could better serve the interests of their customers if they had an additional right of note issued based on commercial assets. What is your opinion? Answer. My opinion is very clearly favorable to the principle of the unity of issue. In normal times the available funds arising from note issue should only be employed with moderation, so as to retain their efficacy in periods of crisis, and it appears to me that this moderation would be less well assured by the com- petition of a large number of establishments than by the control of a sole re- sponsible bank, which would become the supreme refuge of all the others in times of peril. In times of crises the services of central banks have been especially notable. They have demonstrated their ability to maintain the cur- rency and credit system under most trying conditions and to pro- tect the industrial welfare of the country. Experience has shown, further, that a central bank, having international standing, can count on the assistance and support of similar institutions of other countries in financial disturbances. Many illustrations of this can be cited. At the time of the Baring crisis, when the Bank of England found itself in jeoiDardy, it received liberal assistance from the Bank of France and the Russian Imperial Bank. In less critical times, as, for instance, in 1900 and 1907, it has always been the policy of the large central banks to cooperate and to assist one another. This co- operation is not simply an expression of friendly political relations among the countries concerned ; it rests on the recognition of the fact that the collapse of any central bank must necessarily bring a world- wide panic, with its ecomonic activity international in its character and affiliations. In establishing a central bank a country, therefore, 335k BANKING AND CUREENOY BBFOEM. strengthens its credit system, not onlj' through the concentration and efficient utilization of its reserves, but also because it insures assistance from abroad in emergencies. This advantage alone is a decisive argu- ment for centralization. Cooperation between the central banks of issue and a decentralized system is impossible, if for no other reason, because small-note banks have no securities to offer which justify assistance from foreign central banks. The advantages of centralization in the issue of bank notes are universally acknowledged in Europe. Banks and bankers recognize that their strength rests in a large measure on the support they are able to secure in emergencies from the central bank. This appears clearly from the statements of officers of European banks in their interviews with the delegates of the National Monetary Commission. This attitude is the more noteworthy in view of the undeniable fact that a central banking institution means a certain amount of com- petition with the other banks. In retuiTi, however, the latter derive \ery material benefits; the existence of the central bank insures for their increased safet}' in their business and greater freedom for ex- pansion. They have therefore declared themselves unanimously in favor of centralization. It is for the same reason that the large American banks desire to bring about centralization in the note issue in spite of the fact that this involves a limitation on their own powers. Since the experience of the English Government in the early part of the nineteenth centar^^ the relations of government and central bank have been maintained on a sound basis, and with mutual beneficial results. In the latter part of the nineteenth cen- tur}- central institutions indeed had occasion to place their re- sources at the disposal of the Government; but this was done with the consent of the entire nation and action was giA^en wide publicity. Above, it has been noted that conditions may arise which necessitate such a step. In an emergency of that kind the central bank is an invaluable agency to the state, capable of rendering the greatest serAice toward maintaining the existence of the nation. In this respect the Bank of France has rendered distinguished service during the seventies, contributing materially to the rapid recovery of the nation from the disastrous war. Inasmuch as central banks have been successfully operated in a number of countries it is evident that the task of procuring the right men for managing such institutions are not unsurmountable. More- over it is far easier to solve this ]Droblem to-dav than in the past. It matters little how the selection is made. In England the stock- holders of the bank elect the managers ; in France the two governors are both appointed by the Government, the other officers are elected bv the stockholders. In Germany the Government appoints all the officers and employees, and they are merely assisted by an advisory committee of stockholders. All" three systems have proved themselves successful in actual operation. Experience shows that in the case of central banks the sense of responsibility on part of the officers is well developed, and this is the best guarantee for the management of their institutions along safe and conservative lines. Moreover, the function of a central bank and the principles of its administra- tion have now become clearly defined. The possibilities of serious mistakes on the part of the management has accordingly been re- BANKING AND GUREENCY EEFOKM. 335] itture t?IT ^'""'K ^^"'^' ^"'^^y' '^ ^^ ^^^^y^ ope^ t« the legis- lature to adopt precautionary measures which will insure the con tinued and effective operation of a central bank. Xecessaey Legislative Precautions. «n?/S'*l°''-*'' ^'-^ restrictions relating to the securitv of notes and to the business m which the bank may engage, it is necessin to provide for the fullest publicity. Publicity "isMie bes" means of msuring a careful administration. If the central institution is compe led to publish at frequent intervals detailed information as to Its business, ample opportunity is afforded for the control of its policies and methods. Public criticism will early call attention to mistakes made by the bank, or to reckless business conduct and tend to bring alDout early reform. The argument that the Second Bank the United States pursued a policy dictated by partisan politics can hardly be used to-day against centralization. "" In the United States, as elsewhere, the sense of duty among employees and administrative bodies has grown rapidly, dnrino- the last few decades. Granted, however, that" these dangers exist "it is pos^le to take precautions which are quite effective in practice. _ When first established, a central bank should not be a Government iHstitution, but a corporation privately owned. It is. however, best that the Government be given a certain ^oice in the selection of its officers. If the central institution is privately owned, the directorate elected by the stockholders will naturally be made up of men repre- senting all political parties. This alone Avill suffice to insure unprejudiced treatment to all clients of the bank, and an avoidance of party politics. Thoroughgoing publicity will further expose abuses, and public criticism will early compel the discontinuance of undesirable practices. Private ownership of the capital of a central bank and control of its affairs by representatives of the stockholders afford further- more the most effective guarantee against an abuse of the bank and its funds by the Government. The provision of the German bank act against such a contingency may be cited here. The section of the law referred to, provides that in cases where the Government makes extraordinary demands on the central bank, these are to be acceeded to only, if approved by the "deputies" and the central committee, i. e., the representative body of the stockholders. Finally, in regard to the national danger involved in the failure of a central institution, it may be safely said that to-day such an occurrence is almost beyond possibility, unless the entire economic system, the world over, should break down. We are assuming, of course, that due legislative measures have been taken to limit the kind of business in which the institution may engage, so as to lessen the risks connected with its business, and furthermore, that due pvo- * The administratire problems connected with a central Institution were touched upon during the interview of the representatives of the National Monetary Commission and the representatives of the German Reichsbank, the vice president, Dr. von Glasenapp and Director Dr. von Lumm ; their answer is signiflcant. Question : " Is there no pro- vision made for the retirement of members of the Dircktorium for inefficienc.y or for other causes?" Answer: "No; in the history of the bank no such situation has pre- sented itself and it is not expected that any such occasion will arise." 335m BANKING AND CURRENCY REFORM. vision has been made for thoroughgoing publicity of its affairs. If its business is at all properly conducted, the position of the central bank becomes so powerful that no apprehensions need be felt for its safety in panics, and at worst the central banl?s of other countries can be relied upon to give it effective aid. Conclusions. A complete review of the situation leads to the conclusion that there are to-day no practical objections to a centralization and that the dangers apprehended can be adequately guarded against and have been successfully avoided in practice. If we contrast the large and undoubted advantages of a centralized note system for a nation that has reached a high stage of economic development with the in- adequacy and, in fact, the perils of decentralization for such a coun- try there can be no doubt that the situation urgently demands cen- tralization. Country after country in Europe have gone over to this system. A few years ago, even Switzerland, with its limited terri- torial area), decided that a decentralized note issue was inadequate and followed the example of the rest of Europe. As industrial development in the United States advances the evils connected with the present banking system become greater. There is no way out of the situation but to adopt a centralized system for our note circulation. An elastic currency system where the notes emanate from a great variety of issuing banks will not sufl&ce to caU into life an effective money market for commercial paper. The vital necessity for such a market is only to be met by a central note bank which will insure support to the money market during financial dis- turbances and which will exercise supervision over its operations and check specvilative excesses and credit inflation before they inflict irrep- arable injury on business activity. Finally, to repeat, history proves over and over that a decentralized system for the issue of bank notes is not an effective safeguard against the outbreak of panics and that it is unable to save the country from financial crises. The only institutions that have at all proved able to cope with such situations have been central banks keeping closely in touch with the monetary and credit operations of the country and exercising a directing influence over them through a systematic and farsighted discount policy. X BANKmG AND CURRENCY REFORM HEARINGS BEFORE THE SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY HOUSE OF REPRESENTATIVES CHARGED WITH INVESTIGATING PLANS OP BANKING AND CURRENCY REFORM AND REPORTING CONSTRUCTIVE LEGISLATION THEREON THURSDAY, JANUARY 16, 1913 STATEMENTS OF MR. WILLIAM A. NASH and MR. GEORGE M. REYNOLDS PART 6 WASHINGTON GOVERNMENT FEINTING OFFICE 1813 SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY House of Representatives. sixtt-second congress, third session. CARTER GLASS, Virginia, Chairman. J. FEED. O.TALBOTT, Maryland. . JOHN J. KINDRED, New York. GEORGE W. TAYLOR, Alabama. EDWARD B. VREELAND, New York. JOHN M. MOORE, Texas. GEORGE D. McCREARY, Pennsylvania. CHARLES A. KORBLY, Indiana. JAMES McKINNEY, Illinois. ROBERT J. BULKLEY, OUo E. W. FONTENOT, Cleric. A. M. McDekmott, Assistant Clerk. II BANKING AND CURRENCY REFORM. Si BCOJIMITTEE OF THE CoMjiiTTEE OX Banking and Cuhkency, House or Representatives, Washington, D. C, Thursday, Januaivj 16, 1913. The subcommittee met, pursuant to adjournment, at 10.30 o'clock a. m Present : Messrs. Glass (chairman), Taylor, Korbly, Bulkley, Kindred, McCreary, and McKinney. ^ STATEMENT OF MR. WILLIAM A. NASH. The Chairman. Gentlemen, we have with us this morning Mr. Nash, a former chairman of the Clearing House Association of New York City, and prominently identified with the banking interests there. Mr. Nash, this is a subcommittee of the Committee on Banking and Currency, charged with consideration of currency matters, with a view to reporting a bill to Congress reforming the banlring and currency system of the country; and we have invited you here, as a man of large experience, to give us your views as to what should be done. We should be glad to have you proceed in your own way. Mr. Nash. I would like to say, Mr. Chairman, of course I have no facility as a public speaker, and what I have to present I have written out here, and will take, perhaps, five or six minutes to read it, so I will not impose on your time. The light that has been thrown upon clearing houses and their oper- ations has in no way lessened public confidence in their essential use- fulness and good intentions. Whatever criticism has been made has come from weak institutions that have not been qualified for admis- sion to membership. Banks which have been unfortunate and mis- managed have complained of oppressive action on the part of the associated banks from which they have been excluded. These charges and complaints have principally centered on the New York Clearing House, the most important body of the kind in the country. That they have failed to successfully indict that institution as oppressive ,or restrictive may be confidently stated and maintained. The New York Clearing House has for over half a century been the most useful and beneficent of all financial bodies. Its helpfulness and construc- tive tendency has been imitated in all the clearing houses of the country. There has been created a body of agencies to foster good banking and to sustain business credit, which should not be discour- aged, and which it would be the height of folly to disturb. 338 BANKING AND CUBEBNCY EEFOEM. The system of banking in the United States is a growth out of the honest intentions and intelligent thought of the people. It is suited to their affairs and has been successful m most ways in handling them. I have no sympathy with the quotation of foreign banking methods as reflections on our own. What we have done in the establishing of banks and their consolidation into clearing houses is an American solution of the banking problem, and should be carefully considered in all legislation that seeks to improve banking and currency. The sensitiveness of credit has passed into an axiom. Only the inex- perienced or the reckless will seek to trifle with it. Therefore the conservation of existing and well-tried business machinery is the true policy for the legislator. Especially in finance the closer the law aligns itself with the familiar and the long established the greater will be the chances of success. I therefore urge that the clearing houses of the country, shall be- come the initial associations to which shall be committed the basis on which currency shall be issued. This is urged because the most com- petent judges of credit are the bank officers of the country, and acting through clearing houses, where their responsibility is a matter of grave concern to them, the prerequisites of a sound substructure for currency can not be excelled. I believe that in the creation of 20 clearing houses representing geographically the whole of the country and the protection of legality about their organization and acts, we take the first steps toward the solution of our so-called difficulties. I have an opinion that those difficulties are much less than are popularly asserted. This is proved by the fact that only once perha]:)s in 10 years do we have a taste or things that brings out dissatisfaction with our American system. It is at such times that the quotations of European models are most voluble — and I doubt if they proceed from American sources. I am mot averse to incorporation for clearing houses if the proper right of protection is given. To belong to a clearing house a bank must not only be solvent but possess habitually enough liquid assets and cash to settle its daily balances in gold or its equivalent. These requirements have fostered more good banking than any other known cause. Those who com- plain of such restrictions have no good excuse to exist as banking institutions. They are not banks except in name. The clearing houses if incorporated should be competent to admit such members as they believe would be able to pay their debts to each other when and how demanded. To insure this the system of clearing-house examinations has been instituted with very great success and never has the solvency and the safe management of banks been so assured as at the present time. The necessity of help and expansion of credit I have stated only occurs at long intervals. The present law for an emergency currency has lain unused since its enactment and will probably expire without Ibeing resorted to. The people do their business in a normal way year in and year out, and need no other checks or stimulus except that which is applied by the banks and themselves — a perfectly normal process which it is very dangerous to trifle with. But financial history shows that panics and crises do arrive, and probably, will during all time. That those convulsions are more vio- lent in our own country in contradistinction to other nations may be BANKING AND CUKEENCV REFORM. 339 attributed principally to the cash basis of most of our transactions. Especially on our stock exchanges the demand money feature causes violent fluctuations in rates, which the foreign exchanges are free from owing to their plan of semimonthly settlements, which places all their loans practically on time, while with us we have a demand and cash basis — and it is the activity of the demand for money and not the scarcity of money that creates the fluctuations in rates with Avhich we are so familiar. With the emergency currency bill on our statute books I do not hesitate to say that I believe that the issue of clearing-house loan certificates all over the country Avould be automatically resorted to in case of a financial panic. The reason is plain. The bankers and the people who trust them with their money understand this often-tried and perfectly successful device for expanding credit temporarily or until a distressing situation is overpassed. Why, then, should we dis- regard such a well-known method and seek for some plan that has it? hirth in the brain of the theorist in financed And the theorist in finance is more to be dreaded than a bull in a china shop. The history of loan certificates issued by clearing houses is that of the most brilliant device known to finance. The New York Clear- ing House has resorted to them nine times in the past 50 years, alwa^-s allaying thereby public excitement and checking forward liquidation, and the retirement and redemption has been accomplished at an average of four months' time from the first issue and without the loss of one dollar to the banks, which, by clearing-house rules, became joint indorsers upon every certificate issued. This joint indorsement led to the most careful selection of men to judge of the collaterals necessary to insure the repayment of loan certificates. The history of our panics has had one feature that it is our work to elinimate. With every issue of loan certificates there has come a hoarding of currency. " The necessary implement of the small exchanges of life, the pay of the laborer and the workman, becomes very scarce and at a premium. If the clearing-house loan certificate so carefully o-uarded by men and securities could be convertible into a Govern- ment currency upon demand, say, at 50 per cent of their face value, the entire currency defects so prominent m panics would be elimi- nated There would be no hoarding if there was a certainty of an abundant supply from the Government. Nay, more than this, there would be no use of such a currency if the certainty of issue were felt, because the normal condition would not be disturbed. In a panic it is credit that is clamored for and not currency. ^ , ■ -. It is my belief that the use of the existing system of clearing houses forms the best and the least disturbing basis for the expansion of 'Tj^t!^; S^cSelfarsTper cent of the clearing-house loan certificate immediately selves the troublesome question of inland ex- Tange wh"h 5ooms up in every panic^ Every city could pay its debts to each other with currency or with certificates. , » ,, The question naturally arises. Who will give the signal for the issue of loan certificates? Who better than the bankers whose m- erests are so deeply concerned in their validity, and who know sooner and better than any other class of men whether the necessit^y is real ormanufacured?^ Certainly such a source for the mitial step is much more reliable and less under suspicion than any central body of 340 BANKING AND CUKEENCY REFORM, men far away from the scene of the conflict which appeals to the clearing house for help. This view does away with all the necessity for a central body or a central capital, but leaves the business of the country in its normal state and able to cope with unusual and abnormal conditions. It is useless and dangerous to turn banking business over to any one but bankers, not to theoretical bankers, but to those who know the wants of the people and know in what measure help should be given. The banker prefers always to rely upon the natural course of business. His instincts are against changes or experiments. He knows that both are full of danger and uncertainty. The reluctance with which loan certificates have been issued in the past is the highest testimony to the honestj', the wisdom, the forbearance, and the fore- sight that are natural characteristics of those in charge of other people's money. In conclusion I would urge caution in taking unnecessary and purely hypothetical steps in currency reform. A moderate and re- stricted action is to be advised in preference to what is called sweep- ing reform. In no department of business do men act so cautiously as in banking. It is very close to the instinct which characterizes property rights, and the slightest overaction, however well meant and apparently irrefutable, sometimes is the signal for confusion, distrust, and panic. Moderation is not timidity, it is wisdom when' you are dealing with the money affairs of the people. A due regard for the sensitiveness of capital is advisable, because capital when disturbed is capable of excesses destructive to itself and the interests, of the people. These excesses are called panics, and arise not from intention or design, but from the instinct of self-preservation, which in panics is destructive and not helpful. Mr. Willis. That is very interesting news to some of us, Mr. Nash. I have one or two points. I would like to ask a little further about the clearing house organization. I understand you favor the legalization or incorporation of clearing houses, the 20 that you spoke of? Mr. Nash. Yes. The Chairman. Then you would have them ready to operate at any time? ikr. Nash. Yes. Mr. Willis. Eeady to issue the certificates at any time that was desired ? Mr. Nash. Yes. Mr. Willis. And the certificates would be issued practically on the same basis as clearing-house certificates in the past ? Mr. Nash. Yes. Mr. Willis. That is, they were to be redeemable where? Mr. Nash. Eedeemable at the clearing liouse which issued them. Mr. Willis. Not by any of the banks?" Mr. Nash. No, sir. Mr. Willis. Simply at the clearing house ? Mr. Nash. Yes. Mr. Willis. As I understand yon, they were to be convertible into Government notes. Hoav would that be managed? Mr. Nash. If the Government gave them the privilege of turning them over to them for 50 per cent of their face value in currency BANKING AND CURRENCY REFORM. 341 that would relieve the currency stringency that always attends the issue of loan certificates in a panic. Mr. Btjlkley. You mean turned over from the clearing house to the Government? Mr. Nash. To the Government for currency. Mr. McCreaey. For currency, yes. Mr. Willis. And those would be redeemable when issued by whom? Mr. Nash. They would be redeemable by the withdrawal of the certificates by the banks themselves. Mr. Willis. I mean currently redeemable; how would they be currently redeemable? Mr. Nash. It would depend a good deal upon the kind that was issued. If it was a note similar to the present greenback, we will say, why then the process would be that the bank desiring to redeem these clearing-house certificates would put up currency for them and take certificates. Mr. Willis. In the panic of 1907 how many clearing-house certifi- cates were issued in New York— $300,000,000? Mr. Nash. Oh, no; I have got the figures here. The total num- ber issued was $101,060,000. Mr. Willis. That was in New York? Mr. Nash. That was in New York. Mr. Willis. And for the country, how much ? Mr. Nash. I have not those figures. Mr. Willis. Was it about $300,000,000? Mr. Nash. Yes. Mr. Willis. If those were all converted— we have to contemplate an extreme use of this system— there would be issued $150,000,000 Government notes ? Mr. Nash. Yes. Mr. Willis. Those would have been redeemable, as I understand it; that is, Government notes issued in exchange for clearmg house f*GrtlIlC3- have been led to believe. Recognizing as I do how difficult It is at times to surmount or overcome a prejudice no matter how it has had its creation. I fully realize how many obstacles may be thrown in the way of the enactment of legislation along the line of the proposed National Reserve Association, and if it should be found Impossible to proceed along that line I feel that there should be enacted legislation providing for whatever other plan can be devised which will be calculated to be materially helpful i.nd which at the same time will find favor with Congress. There has been suggested a plan for the organization of several, say 20, separate associations, each to be incorporated and have its own capital and be under its own sepai-ate management, but working more or less in harmony^ with each other; that plan would provide for dividing the country into sections, each one t^ have an association with which banks would deal and toward the capital of which qualifying banks would subscribe. This plan could no doubt be worked out along lines which would provide for an elasticity In both credit and note issues, but without some general overseeing or governing board, authority of which would be the same over all the district associations, it could not provide for the interchange of credit which I regard as being so desirable if not necessary to a highly satisfactory plan. This would provide for another kind of a large bank to which national and State banks could go for discount accommodations, but the capital of the associations in some districts might not be as large as that of some of the present banks in that zone and naturally it would not command the same confidence that woud be inspired by an association with a capital of from $100,000,000 to $150,000,000, with branches, which together would no doubt have several hundred million dollars in deposits; then, too, separate district associations would not show the assembling of such a large amount of ■gold in reserve as would be the ease with the other plan where there would be a common ownership of assets in all tlie branches. This large accumulation of gold as a reserve is the basis for much of the efficiency as well as the confi- dence of the world in the Bank of France. A similar concentration of reserve in this country under the plan referred to would make it possible for the accumulation of a billion dollars or more of gold for reserve, which would stand as a bulwark of strength to ])rotect our organization of credit, and it' 356 BANKING AND CUEBENCY EEPOKM. would excite the ailmiration and comiiiand the confidence of the world and would make the United States the foremost financial nation on the earth, as it should be. Contrary to the belief of many, the concentration of reserves in this way and under that plan would not centralize the money power or the power of money in business, for since 95 per cent of the business of the country is done by the use of instruments of credit, credit at once becomes the most potent factor in business, and since the assembling of such a large reserve would be for the purpose of protecting the credit which would be extended to the banks of the country, members of the association, and through them to their customers all over the country, it would in fact decentralize credit and assure every section of the country the credit necessary for the conduct of business. If sectional associations are all that it will be. possible to secure now, I am in favor of the enactment of laws providing for them rather than to have no legislation at this time, for even though present legislation would provide for only a good start, if the start would be iij the right direction, I would expect subsequent legis- lation would complete the chain and give us ultimately an ideal system. In any legislation I would recommend a plan providing for proper discounting facilities to banks members of associations, would recommend the use of gold coin and commercial paper as the basis of security for bank notes, and would recommend some adjustment of the Government debt represented by its 2 per cent bonds which would be equable alike to the Government, the banks holding them, and whatever kind of institution or institutions legislation may provide for I would have the United States bond-secured note superseded by currency secured by gold and commercial paper. I do not believe there should be a uni- form interest rate in all sections of the country, for this would have a tendency for overexpansion of credit in some section where there is development work to be done which might be regarded as more or less experimental. The law of supply and demand should measure interest rates in any locality under normal conditions, but provision should be made by which money or credit for crop- moving purposes or under abnormal conditions could be secured by the people of every section at fair rates through the giving of banks in that section the light to discount the paper of their customers. The right for banks to give acceptances should be provided sufficient to meet the needs of the country, but it should be confined to banking centers or be allowed only in connection with foreign transactions, or both. While no one can speak for what action the American bankers' associations may take concerning any plan other than the proposed national reserve association, which plan it has approved, I am sure that individual bankers will, as the association will, be inclined to do all they can consistently to cooperate with your committee with a view of assisting in securing such legislation as it may be possible to secure, provided such legisla- tion is believed by them to be along a line which will be materially helpful to the situation. I can not refrain from expressing the hope your committee will come to feel that any legislation to be truly ideal should embrace the essential features of the plan recommended by the National Monetary Commission, especially with reference to one general association with as many branches as may seem neces- sary to give every section of the country proper service, same to be supervised or controlled by a general or central board, upon which a proper representation shall be given to the Government, thus insuring a plan through which, by reason of a common ownership of all branches, we may be able to have an interchange of credit and at the same time have an organization with capital and resources so large it will at once command the respect and confidence of the entire world. If you believe that these principles, as applied to a plan of banking and cur- rency are desirable, I sincerely hope you will make an earnest effort to secure legislation along that line, even though a plank in the platform of the party which will dominate legislation has been raised as a barrier against It. I say this because I believe very much of the prejudice against that plan was created through its having erroneously, through misapprehension or otherwise, been called a plan for a central bank, when such is not the case. Furthermore, I can not feel that opposition to at least the essential principles and features of th^ proposed plan represents the concensus of opinion of the masses of the members of any great political party, especially since the proposed has had the Indorse- ment of such a large number of business men, commercial organizations, and civic bodies in every section of the country. The successful man is the man of opinions who has decision, but the wise man is the man who is courageous enough to change his mind to-day when he finds his opinion of last week was BANKING AND CTJEEBNCY EEFOEM. 357 wrong, and I believe tliat any political party must have the courage to do and be right under all conditions, if it serves the people wisely and well and is continued in power, nnd its members should see to it that its creed is modified or changed when it is known to be wrong or out of harmony with the beliefs of its individual members. If you do not feel you can consistently support the principles I advocate, or believing in them that you can not secure legislation along that line, I want you to feel that I not only will not oppose other legisla- tion because I can not get what I want, but on the contrary I shall be glad to do anything I can to assist in formulating plans which will seem to provide for & materially improved system of banking and currency and will meet with the approval of your committee, and will be likely to be acted on favorably by Congress. I thank you for your courtesy to me and trust you will feel free to command my services or my influence if I can be of any service to your com- mittee. Geo. M. Reynolds. STATEMENT OF MR. GEORGE M. REYNOLDS. The Chairman. Mr. Reynolds, as you no doubt know, this is a sub- committee of the Banking and Currency Committee of the House, charged with the duty of investigating currency matters, and if possible reporting some measure of reform. We have invited you here, believing that you may give us some views and advice that will assist in the work, and we would be glad to have you proceed as you please. Mr. Eetnolds. The inference, then, in these meetings is that we need some revision of the currency law, the general impression being that we need a modification of it, and what you want is suggestions from individuals as to their opinion as to just how these modifications can be made and what they will mean? The Chairman. That is it. There is a fixed conviction on the part of the committee that something is wrong and something needs to be done. Mr. Reynolds. Of course, I think all students of our currency sys- tem are agreed that there are many weaknesses and deficiencies in it that should be overcome through the enactment of new legislation, conspicuous among which would be the lack of elasticity in both credit and note issues. And I might say with equal emphasis the inability under our present system to have a free exchange or inter- change of credit from one section of the country to the other. Under our present system there may be an abundance of money in one locality, for instance, in New York or Chicago, and California or Texas may have a crying need for that, but under our existmg laws it is a little difficult to get a free interchange of that credit, and I think it is almost as important, at least is closely approaches m im- portance to the question of elasticity and credit, or note issues, either one. . . ^, . 1 ■ , J Of course, I have had decided convictions upon this subject, and probably an expression of those convictions may run counter to possibilities; but I feel that you want my honest opinion on these matters, and I shall express myself freely and frankly upon the sub- ject • and if the things that I have m mind as constituting an ideal system of banking and currency are things that we can not get, then I would like to have the committee feel that my attitude will be that of doing everything I can to cooperate with them to the extent ot setting the best we can get. In other words, if what 1 regard as ideal is a condition that can not be reached, I do not want you to feel that 358 BANKING AND CUEBBNCY KEFOBM. I will oppose or in any way try to impede the getting of something else along other lines which will be helpful. The Chairman. That is a very encouraging statement to the com- mittee. Mr. Reynolds. I have all my life believed that if I could not get ii, whole loaf, I should take half a loaf; and I say this with a fairly general knowledge, probably, of the conditions as they exist with ref- erence to possibilities for legislation, in view of the present status of things political and jDublic sentiment, and so on. I might perhaps express mj'^ views just as explicitly by reviewing in as brief a way as I can a little of the connection that I have had with this work. You may or may not know that I was rather more or less intimately related to the work of the National Monetary Com- mission, the report of which has been made, and which seems now impossible of immediate adoption, at least, because of the state of public setitiment and other conditions existing. I want to say that at the outset I started into that work at the invitation of the committee by meeting them in London. I was in Europe, and they telegraphed me at Chicago and found I was already abroad, and I was invited to meet the subcommittee of the general committee that went to London to make an investigation of this subject. I went down there probably as violently opposed to anything that could be denominated a central bank as anybody could be; and I want to be specific at the outset and say that I am still opposed to anything which is generally denominated as a central bank. In order that I may make the proper distinction between what some people might call a central organization and what others would call a central bank, I want to say that my idea of my interpretation of a central bank would be an institution where the powers were cen- tralized and where the whole public had rights to do business with it. I am making this statement for a specific reason, as you will see as I go forward, because I want to try to distinguish what many of the witnesses who have appeared beiore your committee have called a central bank, from what I call a central bank. In the investigation of this subject abroad we found that every tendency, so far as the experience of foreign countries was concerned, leaned more and more toward some centralized supervisory power, at least, so that as I went forward with that work gradually I was forced to abandon my belief that there should not be any centraliza- tion in it anywhere, and came finally to be in full accord with the lecommendations as made by the National Monetary Commission, which recommended the adoption of the plan of what is known to you as a central or national reserve association. But I do not under- stand that that association, as it was recommended, in any sense would be a central bank, because it could not be a central bank if it was not a bank where the public covild go for the transaction of its busi- ness. The purpose of that Avas for the supervision of the banking system alone, and the customers of that institution were expected to be only banks and the Government itself. If I seem to be a little tedious in this, I want to make myself understood as going on record as saying that this is not a central [mnk. It has been criticized from some sources, and some prejudices liave been created against it, because the public have looked upon it as a central bank; and I think the criticism itself has been under BANKING AND CUEEENCY EEFOEM. 359 misapprehension, because it is always referred to as a central bank, nnd the public has been therefore led to believe that it ought not to favor a central bank, when in the same breath they have criticized This plan as being a central bank. I want to say that I do not think it even approaches a central bank. However, after all the study I have given it — and I have been a more or less close student of the matter for five years ; I have been in all the councils they have had on the subject, I think — I can not see where you can get a proper interchange of credit from one section of the country to the other without some sort of a central overseeing or supervising body. I can understand how you might get an elasticity in credit, how you might get an elasticity in note issue, with the proper supervision, through the establishment of district associations ; and I am frank to say that I believe some legislation along even that line is a step aAvay forward from what we now enjoy, even if it does not come into the full fruition of our ideas of an ideal situation. I can understand how these district associations can be (irganized with distinctly separate capital, providing for elasticity in both bank notes and credits, and, I think, it can perform some of the more important functions that the national banking system is deficient in. But I believe the ideal system must finallj' embrace a plan which will provide for some centralization of power, not a central liank, but some centralization of the overseeing power, if you choose to put it that way, through which, by reason of a common ownership, you can get interchange of credit between New York and San Francisco that you can not possibly get with distinctly different corporations exist- ing over the country and undertaking to serve the same purpose. To make myself clear on that, I will assume we have a district as- sociation in Chjcago, and that there may be 20 or 25 others in the country — the number is not important — and that we carry in that dis- trict association corporation's vaults a considerable portion of our reserve. Suppose we have reason to transfer a million dollars quickly, either to New York or San Francisco. If you go to the ofRce of the district association and ask them to transfer a million dollars to New York or San Francisco, with so many distinctly different cor- porations, without a combination of the assets in New York, Chicago, and San Francisco, it is not a matter of bookkeeping, you have to transfer the currency itself. In other words, a district association formed with a view of providing this elasticity of note issue and credit such, as I think, we are all agreed we must have to solve the deficiencies in our present plan, while it will go a long way toward creating an elasticity in credit and bank-note issues, does not go far enough to make a proper interchange of credit from one section to the other in the transmission of these large amounts of money ; and you will see it means a great deal when I tell you that the institution with which I am connected last year accepted and turned into cash or its equivalent, for immediate use on our counter, $2,506,000,000 of what we call outside items, represented by 19,000,000 different checks. You will, from that statement, get an idea a little better, perhaps, of what I mean by an interchange of credit. I believe the ideal plan will develop ultimately to be a plan wliich will have some centralized supervising powers at least. And while if I could have my way, after the experience I have had with this work I should unqualifiedly recommend something which would em- •360 BANKING AND CUBEENCY EEFOEM. brace that, because you would get with that everything else you can get with district associations, and have a free interchange of credit, which you can not have with the district association; they will be constituted no differently from our large banks that sell exchange on New York only because we have balances in New York against which we can check, and they could do nothing more than that themselves, ■and if they drew on New York they would have to have a little of •their reserve in New York, or vice versa. But if you had a general or common ownership, where the branches in San. Francisco, New York, and Chicago were all under common ownership, then you could make transfers of funds from one to the other merely by transfers of items upon the books. It is purely a matter of bookkeeping, then, that otherwise would have to be a matter of the shipping of currency. There are no statistics to show definitely what it is, but judging from our own experience and the amount of money we have to handle and ship into the country for crop-moving purposes, I should assume 'during about 60 days, or possibly 90 days, during the greatest activity in the crop-moving season you would have at least $100,000,000 to $150,000,000 in the express offices and in the express cars going back and forth. And really, taking that amount of money out of circu- lation whilst it is in process of transmission from one section to the other to pay for our crops when they are harvested is, after all, one ■of the things that makes stringency of money in the fall more than ■anything else. If that money could be left in the vaults of the banks under a 25 per cent reserve requirement — if it is $150,000,000 it would be reserve for $600,000,000 of credit. Six hundred million dollars of credit is almost the maximum spread between the minimum and maximum amount necessary in the fall for crop-moving purposes. I am going into this detail so much for the express purpose of informing you what I regard as one of the most important features, and one which I have not seen mentioned at these hearings. It may have been mentioned, but in the meager reports I have received I have not seen anything of it. With 28 districts over the country established in 28 different kinds of banks, with broader powers, and banks to which we, being a central reserve city bank, would have to go and get assets in the event we wanted to discount some of our paper, it would not and can not provide for this free interchange of credit. And if you do not catch that and embody it in the legis- lation which you enact, you have gone only halfway in the correc- tion of the evils that exist,. You take the $150,000,000 lying in the express cars on the way from New York to Texas and from Chicago to San Francisco, and so on; if it could be husbanded somewhere and be held by an institution or institutions as a reserve, it would supply an additional $600,000,000 as a maximum for public service and public use during the busiest time of the year, when there is a most urgent demand for money, and would thereby in a great meas- ure minimize the stringency which we have every fall and through which we have just passed, as you know. I do not believe there has ever been a time in my 32 years' experi- ence in banking when I have seen it more difficult for the large banks of the country to supply the needs for both money and credit — for legitimate purposes, too, for crop moving and other business enter- prises—than we have had it this fall. With the usual fluctuations incidental to the increased demand at home, we have had the diffi- BANKING AND CUBEENCY EEFOEM. 361 <;ulty of the foreign situation, unsettled conditions, their confidenct in public securities failing all the time, which has resulted in a constantly increasing greater amount of American securities being sent home. The banks of New York City particularly were put to the test early in October, November, and early December, to take care of those securities which had been thrown back upon the market in America, and at the same time to furnish money for crop-moving purposes in the West. Mr. KoKBLY. Will you develop that idea of the American securi- ties coming back, as to why that is ? Mr. Eetnolds. No ; I have not gone into that at all. Mr. KoHBLY. Can you do it conveniently? Mr. Reynolds. Yes; I think I can develop it to this extent: If you are a prosperous business man or peasant of that section of the country where there has-been an active warfare, I think you have been more or less disturbed about securities, and I think you have been inclined to want to turn your securities into money. In the first place, business in that section has been impaired, so they have had to use a great deal of their surplus money. The expense of the war, and the inability of people to continue to earn money, has made it necessary for many people to sell securities to live upon. The men have gone to the front in the war, and their income has been cut off, and if they have had anj' savings, it is like in times of depres- sion in this country ; people who had money in the savings banks had to draw it to live on. Mr. KoEBLY. It is not due to any inherent weakness in our sys- tem? Mr. Eeynolds. No ; I do not think it is due to any inherent weak- ness in our system. Mr. McCreaey. Would it not be due to the strength of our securi- ties, and because they could take them and realize on them, without any considerable loss? Mr. Eeynolds. In times of stress they sell the thing that sells the most readily and brings the best price, and American securities were the thing they had which they could sell most readily and at the best price. Mr. McCeeaky. Yes. Mr. Eeynolds. I think I know the prejudice which exists. I know to what this committee is committed with reference to a plan. I have an abiding faith that it would be an extremely difficult thing for this committee to undertake to enact a law along the lines I think ideal. But, because that can not be done, I am not ready to say I am willing to abandon the discussion of currency reform. On the contrary, I think I ought to do everything I can— I do not know that I can do much — to help in solving the problem as best we can. I have said for many years, and say now, that our political problem in the matter of currency legislation is an infinitely greater problem than the economic side of it. The Chaieman. If you were to go back home and run for Con- gress we might make you a member of the Banking and Currency Committee. . ^ -, t.^.,.- Mr Eeynolds. I do not suppose I could be elected. But that is my theory, in a nutshell. I might talk here for four days, and explain and go into details, and tell you how I found things were 362 BANKING AND CUBEBNCY EEFOEM. done abroad as compared with our own, and describe the things I thought were helpiul in their systems, and the things that were harmful; but that does not get anywhere. You have not got to a point, as I understand, where you have any specific plan you want to discuss. I regret that you have not, because I think I could be very much more helpful to the committee — if I can be helpful at all, and I do not presume to be any special authority on the subject — if I might sdt down and be permitted to criticize, if I may call it criticize, or at least discuss, some specific plan. In my business T have relations with 5,000 banks in every State in the Union. We have an average of over $100,000,000 from the outside, and by reason of that our horizon covers practically the ^\rhole United States. In our practical experience we have been taught some things that are not theory, but are practice. If I had some specific plan to discuss, I might be able to pick out what I re- gard as the weaknesses of that plan, and perhaps suggest some minor changes in it that would strengthen it, whereas in a general discus- sion like this it can not be more than a discussion of generalities. The Chairman. The fact that the committee has no bill is oc- casion (if some regret. It does not indicate, however, that the mem- bers of the committee have not some very definite ideas on the subject. Mr. Reynolds. I appreciate that, of course. The Chairman. Every phase of the matter was more or less discussed by members of the committee, and it was thought better, perhaps, that we should have no definite plan. Mr. Reynolds. I think I would agree with you at this stage of the game, although I regret that you have not. The Chairman. And we wanted to hear what you and other gentlemen of large experience would advise. I am glad to hear you say that you are not in favor of a policy of drifting. Mr. Reynolds. No; I certainly am not. The Chairman. And that you do not think we should do nothing simply because we may not be able to do what some people insist that we should do. Mr. Reynolds. If we can not get a whole stick of candy, we shoidd get half a one if we can, that is my theory ; providing that the half stick is not something that is going to be bad for us. I should like to have it perfect and ideal, and if my argument and my help* would bid fair to make that practicable, of course I should be unyielding in my attitude toward what I regard as an ideal system, which I think must be a system of supervision in some way by some central organization. I am not in favor of a central bank which Avould let ei^erybody deal with it ; I am not in favor of that at all, because that is a revolution from our present system. The only plan T would have would be The Chairman. That is the central bank of Europe, though, is it not? Mr. Reynoli^s. Yes ; that is the central bank of Europe. I am not in favor of that. In Germany and France and England the larger houses, individuals, and corporations all deal with these so-called central banks. I am opposed to that here because it is revolutionary in its character ; it would disarrange all the reserve relations between fi'ANKING AND CUBBBNCY EEFOKM. 363 the banks and their correspondents, and would make it necessarj'^ to have a completely new rearrangement of our credit system. Mr. Taylor, ft is in radical opposition to the system which has been built up b^- American enterprise, thought, and banking business. Mr. Keynolds. Yes. All I want to see is our present system main- tained, with the law changed to broaden the powers under which it can operate, so that we can do an entire banking business in all its branches under a national charter. There is no reason why we should have to have a State charter to operate a trust company or savings- bank business. Business under Government control ought to have at least as liberal a charter as under State supervision. A good maiiy of those minor things will be cured if you can get legislation which will broaden the powers of national banks and let them do business under the title of national banks. Mr. Tayloe. You think regional-reserve banks under a treasury board or central authority with fairly broad powers would be an im- mense improvement over the existing system ? Mr. Reynolds. If you get this supervising part so it can control it will be an immense improvement over what we have, as I see it. I have given a good deal of thought to, and indeed have discussed several specific plans that had in view the adoption of, these so- called district associations. Up to a certain point they are all right.» in a way. There are other objections than the ones I have named, and foremost among them would be the fact that in many sections of the country such an institution, which represented a corporation with independent capital, would not provide as large a capital a« many of the banks now in existence have. Therefore it would not command the same confidence and respect that it would if it could be said that it was a part of a general organization with $200,000,000 or $100,- 000,000 capital. Mr. Willis. That would depend upon the size of the district in wliich it was located? Mr. Reynolds. Yes. Mr. Willis. And if you had a suificiently small number of them that objection would not apply? Mr. Reynolds. Xo; the greater the number of the districts the ?maller your capital would be. If you restricted the districts to a point where you would have provided large enough capital toget at once the confidence of the entire public, a great deal of that objection would be done away with. Bat you must understand that under any centralized supervision the entire deposits and the entire capital and surplus, and so forth, would be assembled in one statement, and that would make a very much greater impression and command much more confidence, and t speak more particularly with reference to our foreign relations than to local conditions. Mr. Taylor. In these districts you speak of you would look more to the capital within the territory than to the extent of the territory? Mr. Reynolds. Yes ; for more reasons than one. Not only would you o-et a larger capital, which would command a greater confidence, but the smaller you make the area the more intelligently the associa- tion could be managed with reference to discounting paper and all that sort of thing, because the credit facilities of one institution, could cover 100 square miles in area much better than it could cover 364 BANKING AND CURRENCY REFORM. 1,000 or 10,000; although I do not think that is an important objec- tion. Mr. Tayloe. Because you have the telegraph anyway ? Mr. Eeynolds. Yes. Mr. Willis. What would be the maximum number of such districts or associations? Mr. Reynolds. That at once creates a question the answer to which Avould involve a political question; because when you get this up for consideration, if you decide you are going to proceed along that line, all sections will immediately begin to logroll, every section will try to show to your committee that there must be one in New Orleans,, and there must be one some place else, and everybody will try to show you there is a crying need for a large number. In my opinion the larger the number you get the worse it is, so long as you give service to every section of the country in equal efficiency. Mr. Willis. What would be the maximum number that should be provided ? There are 15, I think, in the Aldrich bill. Mr. Reynolds. I am not so sure but what 15 is a rather small number, considering the large area of our country and the diversified business that it has. Perhaps 20 ought to serve the country very well. I should be glad to have you ask questions, because I can get at what is in your minds in that way, and if I can not answer T will be glad to say so. , Mr. AViLLis. There was one remark which I think was very im- portant, where you said a central bank would result in the complete readjustment of reserve relations. Most of the witnesses before the committee have said they thought the present reserve system ought to be abolished; that is, depositing reserves in banks in central re- serve cities. What would be your position on that? Should those reserves be entirely transferred to these regional reserve banks or left as they are now? Mr. Reynolds. I should leave them as they are now, allowing each one of them to carry with this reserve association as much of their cash reserves as is noAV locked up in their vaults. This fall we have had an extremely heaVy demand for money. We have had every section calling on us for money and we have extended credit to our bank correspondents in excess of twenty millions of dollars. We have seen interest rates in New York go as high as 20 per cent on call money, and yet at the minimum point, after taking care of all the demands we have had on us — and we have not declined a single loan that they had any right to ask for — we have had a minimum of $30,000,000 actually locked up in our vault. If the district reserve association or a central reserve association could get a liberal part of the reserve, of all the money that is locked up in the banks of the country throughout every State, in my opinion they could and would in a short time accumulate a billion dollars of gold coin which would stand as a reserve to the credit of this country. You can not get that in 20 isolated different district associations. Mr. BuLKLEY. Where would that gold be drawn from ? Mr. Reynolds. A great deal of it would come from the Treasury Department; because if an organization is given the power of issu- ing notes, and the purpose of that organization is to assemble a large gold reserve as the basis of security for the credits of the country or for the organization of credits, it naturally follows that every time BANKING AND CUBEBNCY BEFOKM. 365 they got a gold certificate they would turn it into gold, would they not? It would be natural for them to do it; and particularly if the notes which it could issue could be secured in part by gold coin and in part by commercial paper. And I think we are all agreed upon that, that in order to get proper legislation you have to use commer- cial paper as part security for your bank notes. If I was associated with that sort of an institution I should keep every gold certificate that I could get, and would accumulate a billion dollars in a couple of years. Mr. Willis. In connection with the statement that a great deal of money is tied up in the express companies during the crop moving time, is not a large part of that due to the fact that under the present resex've system notes are deposited in New York and other places at times when they would be better kept at home? Mr. Eeynolds. I do not think that is true. There is not much shipping for that purpose. Of course they have to ship to protect reserves, and I suppose in the last analysis j'ou might say it is for the same purpose as 'to replenish their reserve. Mr. Willis. If you should do away with the present reserve sys- tem, you would do ,i,way with that necessity? Mr. Reynolds. You would if you did not keep the money at home> but if you had a central organization and a branch in Chicago that issued its own bank notes, then when the demand in that community exceeded the supply of lawful money, our institution or any other institution carrying a part of its reserve with this branch or with this divisional association, whichever you might see fit to make it, would go there and discount its paper and get these bank notes. It would not have to ship them from New York or Washington. And so with Omaha, if there was a branch there. So the necessity of this transfer of money all over the country, in actual money, Avould be largely done away with. Mr.' Willis. But it would be partly done away with by changing the present reserve system? Mr. Reynolds. Yes. And if you change the present reserve system and you make banks carry all their reserve at home, you are going to re- duce the amount of credit which the business interests in America can get. You would reduce about $2,000,000,000, because there is a dupli- cation of about $450,000,000 in reserves, as the statements in the comptroller's report show, between cash and that which is due from other banks. That is to say, a bank in a small town will keep part of its reserve in a bank near by. We will take a bank in Peoria. That bank is a reserve bank for a smaller institution, and the Peoria bank will open an account with us and keep part of its reserve with us. in that -way there are between four hundred and four hundred and fifty million dollars of so-called reserves shown which are a duplication. Mr. Willis. Is not that one of the bad features of the present system ? ' Mr. Reynolds. Yes, sir. Mr. Willis. I have not here in printed form the statement made bv Mr. Hepburn when we had him on the stand the other day, but he said he thought the reserve should be largely transferred from the existing reserve banks to the proposed association or central reserve association, and when we asked him what opposition there would be to it he said only the selfish interest of banks located in the centers. 366 BANKING AND CURBENCY EEFOBM. Jti there any other reason than that which would lead to opposition to such a plan? Mr. Reynolds. I do not think that is necessary. I will use the teim " reserve association " all the way through. Whether you call it a district or a central association is not important in the discussion. I said there was $30,000,000 at the minimum, but we very ofteix have a requirement for $40,000,000 reserve. If that went to a district asso- ciation or reserve association, 50 per cent of our legal reserve, by the time it would accumulate a sufficiently large amount of gold coin — -I say a billion dollars would be accumulated in a year or two. And then, if you take more money from the present channels of trade in order to talte it and lock it up and do away with it — that stuff gets musty in our vaults now and mildewed and we will take out packages of bills and they will smell as if they had been in the sewer. If half of the money which is locked up under our present reserve require- ments and is kept in our own hands and could be put into the district reserve association or central reserve association, it would form the basis of all the reserve that is ever needed in the worldj and in my opin- ion would enable them to secure their bank notes with one-third of the gold required. Mr. Willis. But there is no objection to the abolition of the present reserve requirement ? Mr. Reynolds. None, except that it would make a revolution in cur method of doing business ; and my theory is, and I think it is the theory of those who have to do with the banking business, that we should make just as few changes as we can and still provide for some system which will augment and expan Mr. Willis. The reason against the change is practically the diffi- culty in making the change? Mr. Reynolds. Practically so; yes. ^Ir. Willis. And it would be better if we started out or were in a position to start out with a reserve system which was in the nature of the reserve association? Mr. Reynolds. There is not a country in the world that requires anything like the reserve we do in this country. If you undertake to segregate your reserves and say you will reserve only that which you carry in your vaults ]\rr. Willis. And in the reserve associations? Mr. Reynolds. What is the use of taking out of the channels of trade the amount which is now carried with other banks if half, we will say, of the reserve locked up in the vaults of the bank provides a sufficiently large basis of reserve? Mr. Willis. Would not that result in economizing in the use of money and doing away with the unnecessarily large amount of money carried for reserves in this country? Mr. Reynolds. No; I do not think so. Mr. Willis. If such a central reserve board as has been spoken of were created to take charge of the district associations, what powers ought to be given it? Mr. Reynolds. If you should have such a board as that I think it ought to control absolutely the note-issuing power; and I think an additional reason why you would have to have some general board that would be more or less central in its effect would be that you would find that many district associations, formed of a number of banks that would become members of them, would not have sufficiently BANKING AND CUEKENCY EEFOEM. 367 large capital to at all times furnish such an amount of discount to the banks as they might require in the conduct of their business. Mr. Willis. You would have it do a rediscount business? Mr. Eeynolds. Each association might under certain circumstances have to go some place else for help in order to take care of its credit. They would be exactly as we are, if you stop at that point. Mr. Willis. Suppose this board had the power of compelling the association to rediscount; would that work, in your opinion? Mr. Reynolds. I do not think so. You could hardly expect to go in a domain of some other association with which you have any con- nection by any monetary investment. We are a kind of a reserve State bank now. We carry a reserve alike in a little town of 1,000 population, as we do a reserve in a bank in Philadelphia. Now we can go ahead for a bank in Podunk that needs $10,000 discount, and who are our correspondents. They sign the paper and so you discount it freely. Philadelphia, if it needs anything, can sign the discount, and then it is placed to their credit in our institution. It immediately amounts to a reserve with them. But the trouble with our system is that we, as a central reserve State bank, are the court of last resort. There is no place for us to go. If it is impossible in New York to realize on our assets there, we are in the same condition at home, and vice versa, because the same con- ditions govern in both places. One is as bad off as the other. If you organize 20 district associations, or wherever the system is involved, you are put in a bad position possibly when that exists. They can only show credit against reserves. You have not maintained reserves for them. You have to maintain gold or coin or something ; you have to have worth back of the note. Whenever they extend the credit to the best of their ability under the reserve they carry, which is a deposit of the reserves of the members that belong to it, they have to stop, and they will be in exactly the same shape as we are in. If you do not get some central overseeing body ; that is, a central reser- voir for all these reserves, so that thereby under the law of averages when one section of the country needs money another section can supply it, because that other section has put the money in there, you are not accomplishing anything in the ability to extend business credit, in the last analysis, in a locality where you have one of these district associations. The Chairman. You have to have the same conditions, then, as a central reservoir? Mr. Eetnolds. It would be to a lesser degree ; yes. Of course, there is a limit beyond which anything can not go. But, take Paris. In Paris the Bank of France has something like $700,000,000 of gold coin and the world applauds it, and says what a wonderful thing that is; what a bulwark of strength. I am willing to venture the assertion that you have in the Treasury Department alone $1,100,- 000,000. But what good does it do ? Not a dollar's worth. And in days of pressure what happens? What did we do in 1907, with $1,800,000,000 of gold coin in the vaults of the Treasury in Wash- ington and in the subtreasury and in the hands of banks? We de- pended on the Bank of England, with an average supply of gold coin of $160,000,000, and they sent us $120,000,000 in seven or eight weeks. That is how it works out in practice. 76112— PT 6—13 3 368 BANKING AND CURRENCY REFORM. If yoii have a central organization, Mich as I am talking about — mind you, I do not mean a central bank, I want you to keep that clear, because I am not in favor of a central bank^ but if you had an organi- zation which controlled the issue of notes — what would happen? Suppose they got one of these gold certificates issued by the Treas- ury Department? They would take the $20 or $20,000, as the case might be, and draw the gold coin^ and they would put it in their vault, and the minute they put it in their vault they would have the right to issue bank notes against it. The right, as a matter of fact, might be to issue against one-third of gold coin and two-thirds of commercial paper, or one-half and one-half ^ I do not care about the percentages. Immediately on doing that you would make that gold, which is locked up now and does not do anybody any good, the basis of a fluctuating amount of credit and an elasticity of credit which you can not possibly get under the present condition. Mr. Willis. Would the regional reserve banks do that same thing? Mr. Eeynolds. They would do it to the extent of their ability. We can do it more than a small bank can do it, but when we have loaned out as much as we dare to loan under the law, we have to quit, and they have to quit, because there would be no place for them to go, and we would be practically in the same fix. You will never have an ideal system until you can husband all the reserves which the banks do not need into one general reservoir. Immediately I think I can hear you say, "That is concentration of the money power again." It is nothing of the kind. What is the power of money? It is not money itself. What is the bill that represents a bank note worth intrinsically? Nothing. It is nothing but a yardstick by which you measure value. What is a gold coin ? What good is it to you ? You can not eat it, and it does not make you warm, and it does not contribute to the comfort and convenience of the American people; but you can exchange it for something that will do these things. Mr. MoCeeary. It is a standard of value. Mr. Reynolds. It is a standard of value. Mr. McCreaey. And it is a measure of exchange, so that a man who has a bushel of corn can trade it for so much meat or something like that and it becomes a standard of value. Mr. Reynolds. Yes. There has been a great deal of discussion in regard to the concentration of the money power. I want to make myself clear to the effect that my theory of the money power is that credit with money held as reserve against it will justify it. That is what I would call the power of money. The fact that 96 per cent of the business of the country is done upon credit makes credit the potent factor in all economics and not the money itself. You have to have the money as a reserve against those credits. What -would you do if you put every dollar of gold in America into one vault? Take the 25,000 banks, members of such an association as I have in mind ; what would you do ? You do not concentrate money. Well, you concentrate the money itself, but the money power is put back into the hands of the 25,000 banks. Why? Because they have the right under the law to take their paper out of those various branches and discount it, and at all times get credit, which constitutes 96 per cent of the thing which is used in business. BANKING AND CURRENCY REFOKM. 369 The Chairman. Do they have the right under the proposed law of the Monetary Commission ? Mr. Eeynouds. Yes. It is not obligatory. You can not put a law that would force me as a managing officer to lend a man money regardless, but, of course, every intent and purpose is that such an institution would not be for the purpose of profit, because there would be no advantage to make a big loan, particularly when the Gov- ernment gets the excess of it. Mr. Willis. There was also a distinction between different classes of paper ? Mr. Eetnolds. Yes. Mr. Willis. All the short-time paper would be in the hands of the larger banks ? Mr. Reynolds. Xo, sir; the same proportion would exist. There is misapprehension about that. Some of the country bankers believe "it would not help us to have 20-day paper discounted." Why? " We do not have but a little." He can send in every day the remains of that discount. The same scheme is in a lot of items for credit. Mr. Willis. "Where the paper comes in every 28 days ? Mr. Eeynolds. Yes ; every day ; and keep up his line. Mr. Willis. I think the Monetary Commission insisted upon that in their report. Mr. Reynolds. Surely. Mr. Willis. But many contended here that the small banks would not ha^e the same kind of paper that was accepted. Mr. Reynolds. They will if they run a conservative banking busi- ness, and if they do not I do not want to help to accommodate them. Mr. Willis. I think you said that they should be allowed to do a pretty widely diffused banking business like that of the trust com- panies. Mr. Reynolds. I do not mean that I will accept that idea. I will let the banks have a liberal charter enough. If I am manager of a bank I will keep enough liquidated assets that will come due at the time to take care of my requirements. I do not lend my money out in big notes, but I think we ought to have all kinds of banking. You understand what I mean. The national bank to-day can not legally accept savings deposits, but it is done by sufferance. The Chaikman. Back door? Mr. Reynolds. Back door. And they have to carry 25 per cent reserve against it, whereas 75 is ample deposits; but in competition the national bank can not live, taking 25 per cent on hand, against a bank carrying only 10, and there are many reasons for that. The Chairman. There are many banks that do not carry any. Mr. Reynolds. Many banks do not carrj' any. I would like to impress on the committee, if I can, the fact that if you took all the gold coin in America and carried it permanently as a reserve — and reserve means something locked up and secured— if you took a billion dollars of gold coin in America and had it all locked up in one vault here under a system of banking which would provide facilities so that the smaller bank in California or in Texas, which was organized and fulfilled the requirement, should have a discount against that, I say that would be a decentralization of the money power, or the power to give credit. You would give to the 370 BANKING AND CUBEENCY EEFORM. little bank in California or in Texas exactly the same ability to fur- nish credit to its friends as you do to one in New York City, whach has the lion's share of all the banks in the country. Mr. Willis. Allowing that the central board will not abuse its power. Mr. Reynolds. Why should you not assume that? What advan- tage would there be? ' Can you give a single reason why they would not want to do it that way ? ' I can not conceive of any. Some people said it would open the door for overexpansion of credit. Does everybody borrow all the money he wants now? If you are worth $1,000,000 you can borroAV a lot of money just now, but you do not exhaust your credit. Neither do I as a banker, simply because I have a little money to loan, encourage a man to borrow more than he wants to. And after all, you can not take out of this equation the question of personality, experience, skill, and ability. If I am responsible for the conduct of a business, I do not care what the law is, I am going to conduct that business to the best of my ability. The Chairman. That would be what we would call the equation of common sense. Mr. Reynolds. I will call it that if you want to. I do not care what your laws are to prevent overexpansion of credit. The best safeguard against that is the intelligence and ability and experience and skill of the American banker that is used in handling money in the right way. A man carries reserves in his vault? What for? To protect his credit. He knows he has got to pay on demand every check that is drawn on him ; and as I say, I do not care what the law is for the bankers in this country. Mr. McCreaey. Coming down to that, and what the reserve re- quirements are, you do not mean to disregard the law ? Mr. Reynolds. No ; but we would do better than the law. Mr. BuLKLEY. Do you think it would be advisable to give up hav- ing a law on that subject? Mr. Reynolds. No; I will not say that. In Germany, France, and England there are no laws governing general banking. They are organized under a general incorporation act. The Chair JiAN. No law requiring reserves at all? Mr. Reynolds. No law requiring reserves at all; no law requiring any statements, and no examination, and nothing of the kind. Of course, these central organizations have laws governing them; but when you take the banks of London and Paris and Berlin, there is no law. Mr. Bulkley. Do I understand that you would have that same condition here? You would not recommend giving up having any law, would you? Mr. Reynolds. That is a delicate problem that you can not get through any more than you can flfy. I do not pretend to say that the law does not do some good, and the more so in this country com- pared with Germany, because we have 25,000 banks here, whereas in England you have only 100 or 200 different organizations altogether, and, of course, you understand that the larger the number is the more restrictions you will have; and we have a lot of little banks serving an excellent purpose, which are necessary, which they do not have over there. BANKING AND CURRENCY EEFOEM. 371 Let me explain a little further. In England there was one bank that I went to — the London City & Midland City Bank — which has nearly 3,000 branches, and the only question that they would not answer freely when I put it to them was this: I was trying to get information about the actual conduct of their business, and how it was, and I tried to get the gentleman I was questioning to tell me what he thought about the proposition of having some man in London get a statement of some prospective borrower, a hundred miles away, and his judgTuent on the statement. I tried to get him to tell me whether or not every man was not measured exactly by the same rule; in other words, if every man was to make a state- ment showing himself to be worth $150,000, or whatever it was, they would all have the same line of credit. Now, you know that is not right. It does not follow, because everybody knows that there are two or three men in every little town in the country that are head and shoulders above their neighbors in skill and finesse. In other words, under their plan you can not capitalize the personality of individuals. You go out into some of these little towns in the country and you find that one man is worth $50,000, and you find that he is able to borrow twice as much as another man that is worth $50,000, because he is thrifty and he has been successful. They know it, and the bank has confidence in his ability to carry to a successful conclusion everything he undertakes. The next man is worth more money, we will say, but he is slow; he is not quick to see a point — he is not discerning — and his mind works slowly. When he embarks in busi- ness he does not succeed as well as his neighbor. That is what I call capitalizing the personality of individuals, and that would be true of any of the 25,000 individual banks owned largely by people in the town. Mr. Taylor. Taking it all together, having examined the systems in Europe and being familiar with them as well as with those in America, in your judgment which is the best? Mr. Reynolds. Many of the principles I think impossible of appli- cation to us here, in a democratic country as ours is. For instance, our people would never submit to a bank with $40,000,000 investments starting a lot of investments all over the State, and I would not change that if I could. i mi ■ i. Mr. Taylor. You would not change it if you could. That is the proposition I wanted to know about. Mr. Reynolds. I would not change it if I could. Mr. Taylor. You want to improve what we have? Mr. Reynolds. Disturb your present banking conditions the least you can. Augment the situation and provide for the few improve- ments that are needed, if you like, and we will work out all right, even if we do not get immediately all we want. Mr. Taylor. Would you name any other po]nt and tell us what you think about it ? , , -, , • ■ j; Mr Reynolds. I think, first of all, there should be a provision tor a more elastic credit and bank-note issue, because they are automatic; they must go together. Then I think, after that, you should provide for an interchange of credit from one section to the other, and 1 want to emphasize the importance of this interchange of credit 1 thinfc those three things will pretty nearly solve the whole problem. And 372 BANKING AND CURRENCY REFORM. it can be done, it seems to me, without any revolutionary methods at all. Augment our bank system if necessary, broaden its powers under the charter by modifying your national bank laws, and in my opinion you have then provided, in the last analysis, for an ideal condition, with the placing of your reserves in a common reservoir, having that reservoir standing as a reserve not to the individual credit, but to the common credit, controlled by the number of banks that belong to the association, through the ability on their part to discount the farmers' and merchants' notes, whether they are made in Texas or made in New York, with the reserve agent or branch in that territory or with the district association, whichever it may be, and restrict the use of credit strictly to commercial purposes and not allow anything that is speculative in its character, like stocks and bonds, to be used as collateral, and I think you have solved it. In Germany they call their central loans Lombard loans, at one- half of 1 per cent to 1 per cent on stocks and bonds, while in this country it is the cheapest money; and it is true there because they say it is slow. It is slow because, in the last analysis, if I accept it as collateral and they have to sell me out, they do not realize on it. A bond is not due for 40 years, or maybe it is not due in 50 years. They regard it as slow, but we regard it as quick, because we have no broad market for commercial paper. When you provide an elasticity for your bank notes or for your credit and a free inter- change of credit from one section of the country to the other, and then, on top of it all, when you establish some place where you have a broad open market for commercial paper and commercial credit, then you will take care of all the evils that exist, in my opinion. The Chairman. But would you not ver;f carefully safeguard the acceptance proposition? Mr. Eeynolds. Yes. I suppose I may be criticized for saying it, but I am frank to say that I do not think every little bank in the country ought to be given the right to accept paper. On the other hand, it is one of the most effective instruments of credit used throughout the world, and with it and through it our credit rela- tions abroad could be adjusted very well. But we must cover the right to accept by banks; that is. really exporting anything. You might do that, and then it would not make any difference whether it was $25,000 or $25,000,000. I do not think you could let a little bank m a country to\vn accept every farmer's draft made on it for a consideration and then take it to a larger town and discount it, be- cause it would create a tendency to overexpansion of credit, and there is no necessity for that. I should think that the larger cities and parts of the country where cities are situated that are dealing in foreign commodities, there ought to be some provision for. That is the only thing where I could conceive I would give more rights to larger banks than to little banks. As a matter of fact, in all candor and all reason, if the banks m the central resen^e cities had just a little leeway to get a little more credit through the discount of their paper, or a little more bank notes, it would serve the whole country just as well as to give everybody the right; but vou could not put that through and I would not ask you to do that, and I would not be put in the at- titude of being criticized for doinfi- it. BANKING AND CUBRENCY EEPOBM. 373 Mr. Taylor. If you had a proposition so framed that foreign ac- ceptances would be open to all banks, would not that change the situation, because the smaller banks did not have it? Mr. Reynold. No. Mr. Taylok. But it would be open, so far as the law is concerned* Mr. Reynolds. That is a plan you can follow without discrimi- nating; but you take it in the little towns where they raise com or wheat or oats, they have no foreign acceptance. But take us to-day : take the mayor. I know he is going abroad next week, and I know ho will come to our bank to get a letter of credit, and as he draws a draft on that in Pans or Hamburg or Berlin, he knows we will have to send the money to Europe to protect it. Mr Taylor. If you authorize a thing to be done, that will not do it? Mr. Reynolds. Not at all. _ Mr. Taylor. And it does not authorize a body incapable of doine it to do it? -^ L B Mr. Rey'nolds. No. Mr. Taylor. It only permits the ones who are capable to accept that proposition? Mr. Reynolds. Yes. Mr. Taylor. But they could not do it if they had it? Mr. Reynolds. Yes ; and vou can restrict that to the larger banks or the larger States, but as to these little inland, interior banks, I do not think you could allow them to accept notes purely for the sake of profit. The Chairman. You mean that the law could allow them to do it, but they could not do it? Mr. Reynolds. No, sir. The Chairman. They would not do it? Mr. Reynolds. No, sir. Mr. Taylor. And would not want to do it? Mr. Rey'nolds. No. The Chairman. Because they are not engaged in that kind of busi- ness; and it would be no hardship upon them? Mr. Reynolds. No. But you must give the little fellow as much and as many rights and facilities as you give us, and then you get back to what I said a little while ago ; that is, that the political prob- lem is greater than the economic problem. We can work out the economic problem that looks all right, but can you pass it? That is what I meant by a political problem. Mr. Willis. You have not said anything about the best waj' of issuing notes in dealing with bonds. Mr. Reynolds. One of the most important things, so far as banks are concerned, in proposed legislation is the treatment of the Gov- ernment bonds, and all I know is that when you mention that you are upon about the thinnest ice that any legislative body ever gets. I do not want to indict this body as being in any way prejudiced against national banks or anything of that kind, but I think I appre- ciate that we could not expect Congress to sit up nights in an en- deavor to try to find some way to protect Governmental bonds. The Chairman. I am sure this committee thinks Congress ought to do it. 374 BANKING AND CURBENCY EEFOEM. Mr, Reynolds. There is no question about it. But consider this fact, that these bonds are issued at 3 per cent.. Within a year Ger- man 4 per cent bonds have sold at par, and those 2i per cent bonds are sold as low as 78 and 79 ; and yet our bonds are good at 101 now, and that is due entirely to the fact that the national banking system, through the use of those bonds as security for circulating notes, has bolstered up a fictitious value for them. The Chaieman. Not only the question of dealing with banks, but the Government credit is involved. Mr. Reynolds. I am glad to have you say that, because it means a great deal ; because the question of the protection of the credit of the Government in connection with the handling of these Government bonds is something the average man never considers. He never stops to think about that at all. After all, in the last analysis, when you extend credit the Government must be treated the same as an indi- vidual is. It must be done upon its merits and its ability to pay, and the question of whether or not it will probably be able to pay at maturity, and all that sort of thing. Mr. Taylob. What would you think of a guarantee by all national banks of national-bank circulation as a substitute for the bond system ? Mr. Reynolds. I do not think that is as effective, or could be. I think that could be worked out. Mr. Taylor. Would it not cost less to the Government ? It would relieve it of the 2 per cent or 3 per cent tax or any tax. Mr. Reynolds. Possibly so, but you have those bonds outstanding and the Government is not ready to pay them, and I think it could be done through their utilization. There again comes into play the necessity for some centralized organization of some kind, because you can not have 20 different kinds of money issued by 20 different associations and you can not give each association the right to issue money freely. But I think that that has been worked out in the Monetary Commission's report as well as it could be. It was a problem over which more sleep was lost and more worry was ex- pressed than anything else. The plan was there, I think," the Gov- ernment gets a profit in a certain amount to increase the income on the bonds say 1 per cent and then use them for this purpose, giving the Government the right to pay them off. Mr. Taylor. How would it do to have an issue of national bank circulation now, where it is issued to national banks; just a general note payable by all national banks and the guarantee of all national banks of the payment of that note issue? Mr. Reynolds. That would not be a large liability to any in- dividual bank because the statistics show that the loss on national bank notes was so small that it did not amount to anything; but when you do that you go back immediately to the question of asset currency or bank notes being secured by first lien, and that is objected to by a great many people. Mr. Tayloe. It is already that way. Mr. Reynolds. But before you can exercise that lien you have the Government bond between you and the exercise of that lien. Mr. Tayloe. But the Government pays 2 per cent and the Mone- tary Commission suggests that they retire these 2 per cent or 3 per cent bonds; it would be increasing the interest to the Government bankijstg and currency reform. 375 by maintaining a circulation for the benefit of the banks as well as for the people; whereas, if that was eliminated, you would have the same circulation. Mr. Reynolds. What will you do with the bonds when Vou eliminate them? Mr. Taylor. They will be retired. You will substitute your gen- eral bank circulation. Mr. Reynolds. They have no maturity now ; they are never re- tirable. Mr. Taylor. They can be retired. Mr. Reynolds. They can be? Mr. Taylor. If we have a retirement of them, pay their value, and issue the money with which to pay with whatever market value there is to-day; that is, assume them at par; that is all you ask. Mr. Reynolds. On the other basis, you say increase the rate, but the profit they would make out of the institution you have in mind would very rapidly dispose of that. There is one important thing in the whole system of currency that has not been touched upon in the Monetary Commission's re- port and it was left alone purposely, and that was the outstanding $346,000,000 of greenbacks, and as a banker you know how I feel on that subject. You are carrying $150,000,000 reserve against it now. It was shown in 1908 that up to that time the expense of maintaining a gold payment against those greenbacks cost the Gov- ernment $1,180,000,000 or nearly $300,000,000 more than it would have cost if in 1872 they had been funded by 4 per cent bonds. There ought to be some bill courageous enough at least to grapple with that subject. I have no recommendations, but I will say that they do not represent the value; they are fiat entirely, and there is no more reason why a Government should have its credit used in a fiat way than you should do it. Mr. Taylor. Following that suggestion there is $700,000,000 of national bank notes issued now? Mr. Reynolds. That is right. Mr. Taylor. Which costs the Government for their issue 2 per cent because they pay the national bank 2 per cent. Mr. Reynolds. They borrowed the money — they got $700,000,000 of the public's money. Mr. Taylor. I agree, but they are paying 2 per cent. Mr. Reynolds. That is true. Mr. Taylor. And if they were to substitute notes that did not make them pay any interest, but made you guarantee your own banking sys- tem Mr. Reynolds. Are you going to cancel an obligation of $700,000,000 and give it back to the Government as a present to them in order to have it changed into a system of note issue? Mr. Taylor. Did you not give notes or money for the bonds ? Mr. Reynolds. Yes. Mr. Taylor. Get back the money and pay the additional value, whatever it was. Mr. Reynolds. Whv, bless your soul, that would suit me very well, if the Government would take up those bonds. It costs the banks 105 a hundred. A good many people believe that there lins been a to 376 BANKING AND CUKEENCY REFORM. great profit to the banks in the circulating-note privilege, but there lias not. Mr. Tayloe. Did they not give their own bank notes for it ? Mr. Reyin^olds. Not to the Grovernment. Mr. Taylor. How did they get the bonds ? Mr. Eeynolds. They bought the bonds and they had to pay gold to the Government. If they bought them in the open market they gave some evidence of wealth for them. Mr. Taylor. They were not bought by actual payment of gold, were they? Mr. Reynolds. Most of them were funded from othei- higher de- nominations down. Mr. Taylor. But there was no gold actually paid, and there has not been for a number of years actual payment of gold. Mr. Reynolds. There ought to be. That is what the law says they are salable for; if you can accept evidences of credit, that is prob- ably what they did. Mr. Taylor. Bookkeeping, credit ; that is the way it wap done, and I do not object. I think that is the more intelligent way. Mr. Reynolds. Yes. Mr. Taylor. Suppose it were not possible to provide for a refund of those bonds immediately, would it be a wise thing to leave them substantially as they are, with an additional issue of notes superim- posed on them, asset-secured notes protected by commercial paper, or not. and, if so, how rapidly could the bonds be withdrawn? Mr. Reynolds. That depends on how rapidly the Goverimient could take care of them. There have been suggestions to have these bonds taken up and issued in what are known as exchequer notes, as they call them abroad, the Government having a right to handle them and take care of them year by year. That is the way they do with the German debt ; they issue these exchequer debts and the central bank takes them and carries them along from year to year, and if the Gov- ernment has funds, possibly they are paid, and they are constantly changing in amount. Mr. Willis. Would it be safe and desirable to leave these notes outstanding at the present time, with the understanding that when- ever a bank withdrew its notes its right to issue should to that extent be curtailed ? Mr. Reynolds. That is what the Monetary Commission proposes. Mr. Willis. The new issue of notes to be in addition to the notes outstanding secured by bonds, do you think that would be all right? Mr. Reynolds. It could be done, but, of course, you get two differ- ent kinds of secured notes. It is not as desirable as uniform notes. Mr. Willis. It would not result in undue inflation, you think ? Mr. Reynolds. I am uncertain as to that. That is a new thought that I have not studied out. Mr. Willis. The Monetary Commission established conditions that made it pretty nearly certain that a bank would not turn them in inside of a year? Mr. Reynolds. Yes. Mr. Willis. I mean to leave them without any inducement to turn them in and cancel them as they saw fit to do it. Mr. Reynolds. That would be a guaranty of continuance of the protection of the parity. BANKING AND CXjBKENCY BEFOBM. 377 Mr. Willis. But the banks do not make a profit on the banli note now? Mr. Keynolds. Xot of any consequence. They do, if they could buy a bond at 2 per cent; but that would make a profit. Many 2 per cent bonds were sold to banks at 109. Mr. Willis. They do not make a profit as compared with other ways of using their fimds in banking service ? Mr. Reynolds. No. Mr. Willis. Would not that steadily retire their bank notes ? Mr. Reynolds. Yes; I think so. Mr. Willis. So there would be no hazard in that plan ? Mr. Reynolds. How retire them? Mr. Willis. Suppose suitable provision were made? Mr. Reynolds. I think that would do it gradually, and probably in five years it would solve itself. Mr. Willis. The point I want to make is the question, whether there would be any hazard to leave that large volume outstanding, at the same time that you make a provision for a new issue ? Mr. Reynolds. You would still have the Government bonds back of that, and they have stood the test for 50 years. The public has never _ questioned the goodness of a bank note. You would have two kinds of money then. The Chairman. The plan of the American Bankers' Association as adopted at Atlantic City, and subsequently at Indianapolis, con- templated two kinds of, currency. As I recall, it provided for main- taining the existing circulation up to 62 per cent of the capital, and above that the issuance of emergency notes with a graduated tax. Mr. Reynolds. Yes; what might be called asset currency notes. That was a recommendation made some years ago. I have been an active officer in the American Bankers' Association for years, and while I have no authority to commit that association, and I do not know that anyone has without a meeting of the currency committee, it is my opinion that the association as a whole would be only too glad to cooperate with this committee whenever the committee has got anything specific enough so that they can undertake to discuss it with them. They have approved of the bill as proposed in the Monetary Commission's report, and their present attitude now is that of doing nothing which can embarrass this committee in any way, and its action at Detroit meant nothing less than that. I know, because I was there, and had something to do with that action being taken, and the purpose of those who controlled the action at that time was to give this committee a free hand to the extent of letting you formulate what you thought it would be best for you to do. Of this I am satisfied, that you can count on at least good treatment and a reasonable measure of cooperation by the American Bankers' Association as an association. As I said, I am not authorized to talk for them — nobody was — because they are simply waiting to know what bill can be presented; and when it is presented they may come before vou. and tell you they do not think it is as ideal as this other, but "if it embodies things which will go part way at least toward solving these troubles we have been contending with, I am of the impression that there is a sufficient number of bankers: of the country who will be glad to cooperate with you. 378 BANKING AND CUREENCY EEFOEM. The Chairman. If they would all take that position I think we would accomplish something. Mr. Willis. What would be the effect of a plain refunding pro- vision converting 2 per cents into 3 per cents, without any machinery taking away the privilege of their use ? Mr. Reynolds. I think they could be sold on the market readily. Mr. Willis. You see no danger in that at all ? Mr. Reynolds. No; the last threes put out sold at a little pre- mium. Mr. Willis. Would not that be the simplest way ? Mr. Reynolds. Yes. Mr. Willis. It is far ahead of any plan ? Mr. Reynolds. It is far ahead of any plan, because it is a straight- forward business transaction on its merits. Mr. Willis. And the straightforward way would be the easiest to defend politically and in Congress ? Mr. Reynolds. I think so. That has been my theory all the time. I do not believe any man needs to be afraid to trust the public if he is right and takes the public into his confidence ; and if he is wrong, the less he says about it the better. I very much appreciate the courtesy, gentlemen, which you have shown me. The Chairman. We appreciate very much your coming, Mr. Rey- nolds. Mr. Reynolds. I am afraid a general, rambling talk like this does not mean much ; but if you get to the point where you have a con- cise plan worked out in your minds, if I could have the opportunity I could sit down with you, and 1 should be very glad to give you my experience as covering the entire country. My attitude is one of wanting to give aid and not wanting to throw stones or put im- pediments in your way, and I will cooperate to the best of my ability. Mr. KoRBLY. What is the limit now of a bank's ability to discount or to extend credit ? Mr. Reynolds. It is limited now entirely, in the last analysis— that is what I am speaking of now by this. So long as the banks in the central reserve cities are able to discount for their correspond- ents there is no limit ; but when we get our funds all out, under the law we can not go any further without impairing our reserves, and then the limit is reached. Mr. KoRBLY. It is the limit of reserves rather than of good bank- able paper ? Mr. Reynolds. It is always limited by reserves. Mr. KoEBLY. Ought it not to be a limitation of good, bankable paper ? Mr. Reynolds. It ought to be, if the paper offered is for good, legitimate commercial purposes ; and if you get good legislation you will get that. Mr. KoRBLY. Good commercial paper should be taken care of by the banks always ? Mr. Reynolds. It should be, if they can do it. They can not now always do it. Mr. KoKBLY. They can not always do it now, because the law re- quires n fixed reserve? BANKING AND CUEKENCY KEffOEM. 379 Mr. Reynolds. Because of the requirement for the reserve. Mr. KoRBLY. Under your plan, if you carried a part of your reserve in a central reserve institution, you could also carry part of it in your own reserve and part of it in several other banks ? Mr. Reynolds. We could not in Chicago ; but the outside banks ' could. Mr. KoRBLY. Your ability to discount as a banker, then, would be limited under your conditions by the quantity of reserve that was held m your own reserve by law, plus the quantity that was in the reserve association? Mr. Reynolds. If you made no difference in your reserve require- ments, it would be exactly the same as it is now. Mr. KoRBLY. Then if the central institution or association began to discount, would they not use a part of the gold already used by you as a reserve against their discounts? Mr. Reynolds. They would. Mr. KoRBLY. Would not that be in the nature of a duplication of reserves ? Mr. Reynolds. It would be, to that extent that they should be used. Under the law of averages it would be, of course, a duplica- tion to some extent. But if you take the coin held as reserve, or the gold in the hands of the National Reserve Association, as well as that in the hands of the banks, you are bound to get a duplication if you use that. Mr. KoRBLY. Using the term " resevoir " in connection with some central institution, of course you understand it as I do, I am quite sure, that you can not get anything out of that reservoir that has not been put into it heretofore. Mr. Reynolds. No, sir. That is the trouble now. We have no place to go. All the reservoirs, if therfe are any, are empty. There is nothing to be held as a reserve to credit. If you have an associa- tion, such as I have in mind should be forced, in my opinion, that would have any place from five hundred to seven hundred or eight hundred millions of dollars in deposits, the deposits would be very largely Government funds and reserves of banks, and under the law of averages. The trouble now is that we can not shift it. There is abundance of money in New York. Money is loaning to-day in New York at 2^ per cent on call, and yet in Texas they are getting 8 per cent, and in some of the remote sections they can not get all they need, at that. Mr. KoitBLY. Are there not banking institutions operating under the laws of the United States that are not required to keep fixed re- serves ? Mr. Reynolds. I do not know of any ; no, sir. Mr. Willis. Relative to the point of variation in rates of interest, do T understand that you think a plan like that of the Monetary Commission bill would bring about a uniform rate of interest ? Mr. Reynolds. I do not believe in that. I do not think it would ; I think every bank- in the district ought to get the same rate of in- terest, but I do not think that a rate that would apply in Texas should necessarily apply in New York, or vice versa. Mr. Willis. They could not, with that bill ? Mr. Reynolds. They could not do it. •380 BANKING AND CUKEENOY EEFORM. Mr. Willis. That is, the talk that has gone the rounds about a unifoj^m rate of interest as a result of the so-called Aldrich bill, has no basis? Mr. Reynolds. When you are talking about a uniform rate of dis- count, that refers to the commercial paper and not to the daily transactions. Mr. Willis. It would not do that? Mr. Reynolds. You could not get it, because if a bank in Texas discounted it would be at the current rate in the section of the country. I do not think it would be sound banking, of course, to say that every bank should have the same rate of interest, because you have to take into account the difference in location, and the difference in money, and the law of supply and demand will govern. Anybody who undertakes to disregard the law of supply and demand will come to disaster in time. Mr. KoRBLY. And to what extent will you say that the Monetary Commission system would reduce the rates of interest to the borrower at the small bank? Mr. Reynolds. I have never been attracted to that on the theory that it was going to reduce rates of interest. I think that the rates of interest ought to be measured by the law of supply and demand. Mr. KoEBLT. There is nothing in the Monetary Commission bill to guarantee a reduction of rates of interest ? Mr. Reynolds. Nothing except that they give the same rates. I think that is wrong. In Texas, if you can loan your money out of your pocket and earn 8 per cent, you do not want to buy bank stock if the bank stock will not earn 8 per cent. In every community there is a basis fixed for reasonable rates of remuneration in the way of interest. Whatever that rate is, if the money does not command that rate, it will not get into the service of the public. Mr. KoRBLY. Money would go, then, to the service of the public in so far as it would thereby benefit the banks and not through any direct measure of benefit to the public at all ? Mr. Reynolds. That is true ; the purpose being to do nothing that would disturb the present relations between banks and their custom- ers, but to augment our present condition a little rather than to have anything revolutionary. Mr. KoHBLY. The ability to increase the discount power of the banks of the United States through a central agency would be iu part dependent upon a duplication of reserves and in part upon getting Government deposits which are now withdrawn from commerce which could be used for that purpose ? Mr. Reynolds. It would mean if I am allowed to count $10,000,000 of deposits of my reserves, if I deposited $10,000,000 of my reserves with the Central Reserve Association, I would be allowed to count that as a reserve, as this bill provides, and as any district bill would provide, and that is the thing you want to encourage. When that is used as a basis for credit in our bank — ^for instance, if we needed a discount, it can not help but be in a sense a rediscount. Mr. KoEBLY. But the Government bank would also enable the bank to discount? Mr. Reynolds. My theory is that they would not have less than $500,000,000 of deposits ; and if gold was accumulated, as it would be in a little while if they turned every gold certificate into gold coin, BANKING AND CUKEENCY REFORM. 381 it would be a basis of five or six times as much credit as the countrv will ever need. •' The Chairman. In other words, the gold certificate now does not furnish any basis except dollar for dollar? Mr. Eeynolds. Except as the basis of paper. Mr. KoRBLT. Can you not count a gold certificate in your bank in Chicago as a legal reserve for the extension of credit « Mr. Eetnolds. Yes; that is right. But with that certificate you can go and get ]ust that amount of gold; and if that gold were accu- mulated with other gold m the vaults of the Central Reserve Associa- tion, when the banks were allowed to use 50 per cent gold and 50 per cent commercial paper you will readily see that it would tend to a vast increase in the credit of the country. Mr. KoRBLT. Then, elasticity of the currency in 1907 would have relieved to a great degree the demand for currency, would it not, so that the currency which is now used as reserves would have been left m the reserves ? Mr. Eetnolds. Legal money would have been kept in the vaults for reserves ; the banks throughout the country would have used their commercial paper for discount with the Central Reserve Association ; they would have taken bank notes, which they would have sent out into the country and which would have been a circulating medium and paid for the crops and come back. Mr. KoRBLr. And the legal money, gold coin and Government notes, -would have been left in the bank reserves, although there is no security back of the bank deposits beyond their credit ? Mr. Eeynolds. They would not have^ been disturbed ; that is the truth of the matter. Mr. KoRBLT. The existence, then, of an elastic currency then or now would considerably lessen the need for an instrumentality to provide for an extension of bank credits through a central bank, would it not? Mr. Eeynolds. I do not know that I quite understand what you are getting at. Mr. KoRBLY. If you provide for elasticity of the currency, you will then have less need to provide for greater elasticity of bank deposits ? Mr. Eeynolds. Well, yes. On the other hand, you could not get these bank notes except you put up something for them. A country bank, for example, if it wanted some notes, would have to discount its paper to get them. Mr. KoEBLY. That is assuming that you are going to get notes only through some central institution; but assuming that the prin- ciple is recognized that bank deposits and bank notes are essentially, substantially the same, that they are simply different forms of evi- dence of a bank debt to somebody, and that they are interchangeable ? Mr. Eeynolds. There is not a bit of difference in reality, except this, that a bank has got to be put in a position where it can exchange one form of credit into another form. Mr. KoRBLY. Yes; and that would be an expression of natural banking, would it not ? Mr. Eeynolds. Yes. Mr. KoRBLT. And that would furnish a perfect elasticity of the currency, would it not, and a very safe one ? 382 BANKING AND CUEBENCY EEFOEM. Mr. Reynolds. Yes; I think I understand 3^ou. Mr. KoEBLY. And that would then, operating under some rule of mutual inspection and liability, very greatly lessen the necessity of a central bank giving bank discounts and credits ? Mr. Reynolds. That depends very largely on the manner in which those bank notes are issued. My theory is that there should be a uniform instrument of exchange, that the note should be the same in every district, and if I had my way I would not allow 30 different districts each to issue its own different kind of note. I would have that done by somebody issuing all of them and each note uniform. Mr. KoEBLY. Could not each note be uniform and each note pri- marily a liability against the bank that issues it, and secondarily against a group of banks, and ultimately against all the banks in the system ; and could you not make that workable ? Mr. Reynolds. Yes ; you could make it workable. Mr. KoEBLY. Scientifically and economically, I mean ? Mr. Reynolds. I am not so sure about that. I appreciate your courtesy, gentlemen, very much. At 4 o'clock p. m. the subcommittee adjourned until Monday, January 20, 1913, at 10.30 o'clock a. m. X BANKma AND CURRENCY REFORM HEARINGS BEFORE THE SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY HOUSE OF REPRESENTATIVES CHARGED WITH INVESTIGATING PLANS OF BANKING AND CURRENCY REFORM AND REPORTING CONSTRUCTIVE LEGISLATION THEREON TUESDAY, JANUARY 21, 1913 STATEMENT OF HON. CHARLES N. FOWLER PAKT 7 WASHINGTON GOVERNMENT PRINTING OFFICE 1913 SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY. House op Representatives, sixty-second congress, third session. CARTEE GLASS, Virginia, Chairman. J. FRED. C. TALBOTT, Maryland. JOHN J. KINDRED, New York. GEORGE W. TAYLOR, Alabama. EDWARD B. VREELAND, New York. JOHN M. MOORE, Texas. GEORGE D. McCEEARY, Pennsylvania. CHARLES A. KORBLY, Indiana. JAMES McKINNEY, minoi-!. ROBERT J. BULKLEY, Ohio R. W. FONTENOT, Clerk. A. M. McDermott, Assistant Clerk. n BANKING AND CITRRENCY REFORM. Subcommittee of the COMMIITEE ON BANKING AND CuKRENCY, House of Eepeesentatives, WasMngton, D. C, Tuesday, Januai^ 21, 1913. ' The subcommittee met at 11.10 o'clock a. m. KindreT*' ^^'^'^'^' *^^^^ (chainnan), Taylor, Korbly, Bulkley, and STATEMENT OF HON. CHARLES N. FOWLER. Mr. Fo^yLEE Mr. Chairman, I would like to have put in the record at this point the outline which I have handed to the official stenog- rapher so that it may appear as preliminary to what I am going to say, because it contains the text of what I am going to say. That will relieve me of the necessity of reading it. (The paper submitted by Mr. Fowler is printed in full as follows) : The reforms I recommend are these: First. Holding companies in the banking Imsiness must be completely wiped Second. Every national bank should be authorized to do (1) a commercial banking business, (2) a savings bank business, (3) a trust company business, (4)^ a note issue business, precisely as the Canadian banks do. Third. All the various accounts — commercial, savings, trust, and note issue should be segregated. Fourth. Every bank in the United States should be compelled to carry the same amount of bank reserves. Fifth. All bank reserves should consist of gold or gold certificates, as soon as the United States notes can be converted into gold certificates. Sixth. Every bank in the United States should be brought under national control, because banking is essentially interstate commerce. Seventh. Every natural financial center in the United States should become the clearing center for all the checks, drafts, and bank notes that are payable In the territory that is economically and naturally tributary to the financial ; center. Such territory should constitute a commercial zone. / Eighth. There should be organized at each of these financial centers a clear- ing house, at which all the checks, drafts, and bank notes payable within the commercial zone shall be at par. Ninth. The banks of each commercial zone should elect a board of control to examine, supervise, and control all the banks within such commercial zone, precisely as the clearing-house bank examiners are examining and supervising all banks clearing through them to-day. Tenth. The banks of each commercial zone should also elect a court of appeals, or a bankers' council, composed of an equal number of business men and bankers, to settle all banking and business questions that would properly come before them. Eleventh. The board of control in each commercial zone should be presided over by a deputy United States comptroller for the purpose of securing imme- diate and efficient action. Twelfth. The banks of the United States should all contribute a percentage of their deposits to a central reserve, which should be composed of gold, and gold alone. The percentage of deposits should be Y per cent at the outset and be gradually increased to 10 per cent, which would amount at the present time to a central gold reserve of upward of $1,250,000,000. This reserve would correspond to the reserves held to-day by the clearing houses for their banks. 383 S84 BANKING AND CUEKENCY EEFOEM. Tliirteenth. This ceutral gold reserve should be held in trust by a body of men composed of one man from each commercial zone, for the benefit of all the commercial zones. Fourteenth. Each board of control should have access to this central gold reserve, and should have poveer to sell gold to any bank within Its zone and under its supervision, in case it desired it for the purpose of moving crops or for any other legitimate reason. The practical result would be that the gold would be held, to a large extent, at the financial centers and under the command of the board of control, precisely as the clearing house committee to-day hold the reserves of the banks constituting their respective clearing houses. Fifteenth. The use, distribution, and control of the central gold reserve should be under the management of the representatives of all the commercial zones, who should be composed equally of business men and bankers. Sixteenth. For the purpose of establishing responsibility and securing efl3- ciency the representatives of the zones should act through corporate powers granted by the National Government. Seventeenth. The purpose of a national centralization of gold to so large an extent is twofold: (1) It brings all the banking power of the United States to the defense of the commercial interests in every part of the United States instantaneously. (2) It will give to the representatives of the zones the power to control and idirect the movement of gold to and from the United States by fixing and enforc- ing the price for the use of gold, or a discount rate for gold transactions, throughout the United States. Eighteenth. Every national bank sh'ould have the right to accept any note, check, draft, or bill of exchange that has not more than four months to run, providing that it carries the same reserve against such acceptances as against its deposits. These reforms are based upon three distinct propositions: First. They incoi-porate the principle of a central gold reserve, as Illustrated by the Bank of England, where all the transactions are in gold and gold alone, without the use or intervention of bank credit in the form of bank credit notes, which could be used for reserves by the banks throughout Great Britain. Second. They incorporate the principle of bank credit currency, as illustrated t>j the bank-note system of Canada, which involves daily redemption in gold coins through the clearing house. Third. They extend to every economic or natural commercial sone the estab- lished and approved practices of the American clearing house; that is — (1) Bank supervision and control over all members. (2) A reserve created by all the members of the clearing house and held by the clearing house committee for the benefit of all the members. (3) A free check system over every commercial zone, precisely as New Eng- land has been since 1899, and as a large territory around New York has just become by the action of the New York clearing house. The result of these reforms would be — (1) To make each individual bank absolutely independent, because it has an unlimited resource in the cooperative central gold reserve. (2) To make every commercial zone as free and independent of every other commercial zone as England is of France or France is of Germany. (3) To completely decentralize all bank credit in the United States, while it centralizes the gold to a degree that would enable us, by raising the discount rate, to close the door of our markets against the demands for gold from abroad. In the first place, there is one thing that ought to be accomplished primarily and fundamentally, and that is that all holding companies in the banking busi- ness should be completely and utterly wiped out. It can only be done by giving to the Government banks the power to do a commercial business, a savings-bank business, a trust-company business, and a note-issuing business, because directly or indirectly they are doing all these things to-day through holding companies. Mr. Taylor. I would like to have you give a definition of a hold- ing company. Mr. Fowler. What I mean by " holding company " is that no bank should hold the stock of any other bank for any kind of business. I am speaking of the banking business. The fact is to-day that we have national banks that have the stocks of trust companies in their BANKING AND CUBRENCY REFORM. 385 treasury, the stocks of savings banks in their treasury, the stocks of btate banks m their treasury, and managing these institutions as collateral enterprises, upstairs or downstairs, or around the corner with their rear ends m proximity, the national banks being under National supervision and the State banks being under State super- vision, and the fact is that neither of them is under any supervision Mr. Tatloe. Would you extend that to deposits ? Mr. Fowler. It should cover the banking business absolutely. Mr. iATLOB. National banks should not be permitted to have de- posits even from these other companies ? Mr. Fowler. Oh, no; it has nothing to do with that. That would not include deposits, because that is their natural business. Mr. Taylor. When you say deposits you mean actual deposits? ihere is no harm m any bank loaning money? Mr. FoAVLER. Nor taking deposits and loaning them out. Mr. Taylor. Xor taking bank deposits and bank credit. That is the way they loan money. Mr. Fowler. That is their business, exchanging their credit for the credit of other persons and other banks. Mr. Taylor. You would only exclude the banks from handling securities and the other matters that you mention? Mr. Fowler. I would simply preclude them from holding the bank stocks of other banks for the purpose of controlling the other banks. Mr. Taylor. You would preclude them from directing them or working them as collateral ? Mr. Fowler. Not as collateral. They are the OAvners of them. I might as well discuss here this proposition of the note issue of banks. There is absolutely no difference between a deposit at a bank subject to check and a note issued by a bank. A note issued by a bank is the cashier's check against the credit of the bank. The check of the depositor is a check of a private person against the credit of the bank. They are both as good as the bank is. That is all. Until you realize that economic truth you never can think right about this question. It is fundamental, and if banks are permitted to work out their destiny without law they always arrive at that conclusion. Two hundred and seventeen years ago that principle was estab- lished in Scotland by the Scotch banks and is in operation there to-day. For the first 50 3'ears of the history of the United States it worked itself out here identically in the same way, and in 1860 there were banking systems in the United States that were as perfect as any that ever existed in the world, and far superior to anything we have in the United States to-day. Virginia passed a bank act in 1803 founded upon the Scotch system, and no person ever lost a dollar under that bank act, either of notes or deposits, because it was founded upon the principle of bank credit currently redeemed in coin. The statement of 1'860 showed that they had specie amounting to $3,000,000, that their deposits amounted to $7,700,000, and their circulation amounted to $9,800,000. This bank illustrates the principle that I do not want to revert to as I call your attention to the other States in which these various banking systems developed. I refer to the fact that if the banks were left to use their credit m the form in which the people wanted it the note issue might 386 BANKING AND OUBKENCY REFORM. he smaller or larger than the deposit account, according to the real conditions of trade and the habits of the people. It is simply a question of what form the people want the credit in. It is the business of the bank to give it to the people in the form in which it will best suit them, not the banks; the bank shall be the servant of the people. Now, if you have the right kind of bond credit currency in the United States there will be places where banks could not keep out 25 per cent of the circulation that was equal to their capital ; and there would be other sections in the United States where, without a doubt, banks could issue and the people would want 150 per cent of their capital in the form of bank notes, because the locality in which they live and the state of the business in which they are engaged, like cotton growing and cotton picking, would demand more currency than deposits subject to check. There was, in 1860, in Louisiana a bank system that was as good as any that ever existed in this world; rather a stiff proposition, be- cause they were compelled to carry 33 per cent reserve in coiti against their credit, whether they were note credits or deposits. There was no discrimination, and at that time they held more coin than any State in the Union with one single exception, and when Gen. Butler marched down the streets of New Orleans they were then redeeming their notes in gold. They had $12,000,000 of specie, they had $11,000,000 of circulation, and they had $19,000,000 of deposits. The State of Missouri had a banking system that worked perfectly, based on the same principle. They had $3,600,000 of specie, $3,434,000 of deposits, and $4,000,000 of circulation. The State Bank of Ohio was of the same high class, carrying 30 per cent of reserves, of which 15 per cent had to be in coin. In 1863 they had $3,000,000 of specie, $11,000,000 of deposits, and $9,000,000 of circulation. The State Bank of Iowa, founded upon the Bank of Indiana — and the Bank of Iowa was the basis of our national bank act — held reserves, 25 per cent of notes and deposits. I did not get the amount of specie in 1865, but in 1865 it had $1,439,000 of circulation and $2,851,000 of deposits. Mr. Taylor. Is that reserve you spoke of a legislative reserve? Mr. Fowler. It was by legislative enactment. Mr. Taylor. By legislative enactment? Mr. Fowler. Yes ; they were requisitions. The State of Louisiana required 33 per cent reserve of gold. There were very severe restric- tions around that act ; too restrictive. Mr. Taylor. Probably; but when you recollect that they were allowed a circulation of three times tliat amount, you would not be likely to call it restrictive, because that circulation you spoke of is $9,000,000, as compared with the other, so that it did not restrict circulation. Mr. Fowler. It did, provided you keep carrying that reserve. The State Bank of Indiana, which was the successor of the Bank of the State of Indiana Mr. KoRBLY. No ; the other way around. Mr. Fowler. The State Bank of Indiana was the last one. Mr. KoRBLY. The Bank of the State of Indiana was the successor of the State Bank. BANKING AND CURBENCY REFORM. 387 Mr. Fowler. That is right. They did not have a requisition of reserve, except they had to pay 12i per cent penalty if they did not redeem in coin. Mr. Taylor. That is right. Mr. FowLEE. That had the same effect on these people. And in 1862 they had $3,472,000 of specie, they had $2,033,000 of deposits, $4,979,000 banking-note issue, and there never was a more perfect banking system in this world evolved out of one single institution than that was. It had some peculiarities Mr. Tatloe. The living principle of that was convertibility, imme- diate convertibility of all bank-note issue, at the will and option of the holder of the paper, was it not ? Mr. Fowler. Into coin? Mr. Taylor. Into coin; yes. Mr. Fowler. Absolutely? Mr. Taylor. Is not that to-day the real and sole cause of the elas- ticity Mr. Fowler. The want of elasticity ? Mr. Taylor. No ; the elasticity in Europe— England, France, and Germany ? Mr. Fowler. I do not want to answer that general question, be- cause I think the state of things in Europe is very much mixed. I do not think you can talk about the Bank of France and the Bank of Germany and the Bank of England in the same breath at all. Mr. Taylor. I will put it, then, confining it to this country. Is not the fact that there is no such thing as redeemability at the option of the holder on account of the bank the main cause of inelasticity? Mr. Fowler. Xo; there is current redemiDtion to-day of j'our de- posits into coin, because it ultimately gets back to the bank — =^ Mr. Taylor. It is currency redemption in every bank of the United States? Mr. Fowler. Yes. Every bank would have to redeem its notes if vou presented them. Mr. Taylor. Where? Mr. Fowler. At its counter. Mr. Taylor. What notes? Mr. Fowler. The bank notes. Mr. Taylor. In what? Mr. Fowler. In United States notes and silver dollars, which he could then take to the United States Government. Mr. Tayix>r. In United States notes and silver dollars. That is all right. Then take them to the United States Government where? Mr. Fowler. At the first subtreasury you come to. Mr. Taylor. Then that would not be over the counter of any bank in the United States? ^ ^ , . ^. ^ Mr. Fowler. Yes ; it would be redemption, but it would be indirect redemption. -it t ^ Mr. Taylor. Direct redemption over the counter is what i speak ot. Mr. Fowler. But it requires some other things to give you elas- Mr! Taylor. That is all right. I asked you if that was not the main feature of the inelasticity of our currency. Mr. Fowler. I do not think so. 388 BANKING AND CURRENCY BEFOBM. Mr. Taylor. What is it? Mr. FowuER. I do not want to get on that question just yet, if you will excuse me. Mr. Taylor. Very well. Mr. Fowler. I will come to it later. Now, lastly, a critic inight say that while you have mentioned a few banks down in Louisiana, three or four banks in Ohio, one bank in the State of Indiana, two or three banks in Kentucky, one bank in the State of Iowa, yet, what about a large number of banks ? It happens that there was developed in New England, over all of the New England States, where there were 510 banks with capital ranging from $25,000 up to $500,000, a banking system that answers every conceivable question that can possibly be asked on this whole economic question outside of a national centralization of reserves. And it grew up without a law, absolutely covering that entire country — those six States. They had to redeem their notes in Boston in coin. These notes were printed by many of these banks in the back yards on hand presses. They had poor supervision. They had no methods of locomotion or trans- mission of thought such as we have to-day. And yet the life of those notes in New England was only 35 days. The life of the Scotch note is 18 days. The life of the Canadian bank note is 30 days. Now, gentlemen, you will hear people talking about a clearing house, and the historical books tell you that the first clearing house in V the United States was incorporated in New York in 1850, and the ' first one in the world in 1777 in London, and the first country clearing house in London in 1872, and the second one in Boston in 1899. But I tell you that the first clearing house established in the United States was in 1818. The Suffolk Bank in Boston was the first clearing house established in the United States. Second, it was the first free zone for bank credit in the United States, because the bank-note cir- culation of New England was gi-eater than the deposits subject to check. For the 20 years from 1840 to 1860 the bank notes of New England averaged $43,000,000 a year. Mr. Taylor. Would it interrupt you yariation ^a^.^oaw Per cent of Minimum 66* Vi;ii2 n 7 i:;. (To fnee )>at:o :!!)(».) BANKING AND CUEBENCY EEFOEM. 391 I submit to you, as gentlemen sitting in a court of justice, as be- tween bank and bank, whether it is right for one-half of the banks of this country to ride the other half. S^?/'/ submit to you as economists whether it is safe to have one-halt ot your banks carrying 7 per cent and the other half carry- ing 17 per cent, when they ought to carry an average of at least 17 per cent all the way round. It is this dislocation— complete dislocation— of the reserves on the one hand and the want of proper reserves on the other, that is to blame as much for these troubles that we are having as any other one thing. How could we bring the reserves of the State banks of this country up to the position where they ought to be ? Easily. We have in this country $1,878,000,000 of gold to-day. The banks are holding about $900,000,000 of gold. So that there is a billion more outside the banks. You have probably got a gold certificate. They are out in the corn fields, in the mines, in the tills of the stores, serving no purpose whatever as gold, but performing a service that could just as well be performed by a mere bank credit. If you will organize a banking system that will be so good, because so strong and protective, that no State institution can stay out of it, then all the State institutions Avill come into it; and if when they come into it they will increase their reserves so that they, too, will carrly 17 per cent, by simply exchanging their bank credit in the form of bank notes for gold and gold certificates when they come over their counter, to the extent of $750,000,000, you will increase your bank liability, gentlemen, only a little over 4 per cent, but you will increase your bank reserves 50 per cent. Your cash bank reserves are $1,500,000,000, in round numbers, and they then would be $2,250,000,000. Is not that a good banking proposition, if you only increase your bank liability between 4 and 5 per cent and at the same time increase the reserves 50 per cent in gold? Do you not think you have accomplished a great purpose if you do that? If you compel the banks to be fail with each other, each one carrying his own proper insurance for the prosperity of this country, and his own load, that he ought to carry, while the other banks are carrying their load, too? It is a mere matter of insurance, so far as the banks as a whole are concerned, as well as the individual banks are concerned, because, when you have once properly conceived the question of banking in this country, it is one single business ; you can not separate it anywhere. It is a unit — an economic fact. Now, gentlemen, as another proposition I state this: That all the various accounts — commercial, savings, trust, and the note issue^ should be segregated. Having permitted the banks to do all these various kinds of business, they should be compelled to do a depart- mental business. Why? Because a commercial account and a sav- ings account are two just as different things as your eye and your ear. They are both functions of the body. But your savings ac- count is a trust fund, an investment fund, and it should be applied to that sort of use, while the commercial fund is the productive fund, engaged in the production and transportation of commodities; and unless you segregate these accounts you do not know how much power you have for production ; you have no conception of your re- sources for production. What is the result? You get into these 392 ■ BANKING AND CUEEENCY EEFOEM. periods of the expansion of credit, and hundreds of thousands or millions or hundreds of millions of your commercial fund is con- verted into the investment fund, and your power of production is cut off. Gentlemen, you can no more produce and transport goods without commercial funds than you can produce steam without coal and water ; not a bit. If you are going to have a banking system in the United States, there is nothing more essential than that these accounts should be segregated in order that, at a glance, you may know what the commercial fund in the United States is, what the investment fund is. Then back of that comes the fixed capital and' real estate and railroad building. But it happens that when you> have once converted so large a part of your commercial fund into what may be called passive capital — bonds and investments of that sort — it becomes fixed when the panic comes, because you can not sell these things at any price. That part of your capital is just as fixed as though it was in real o-itate, for all commercial purposes. I said that the banks of this country should be compelled to carry the same amount of reserves, each for itself. Last, on that proposition : Fifth. All bank reserves should consist of gold or gold certificates, as soon as the United States notes can be converted into gold certifi- cates. How can that be done ? Why, gentlemen, if these banks came into your general system and issued their $750,000,000 of credit notes for $750,000,000 of gold and gold certificates that are out in the street, you would have in this country $1,500,000,000 of notes out. It is a conservative statement to say that on every good balance throughout the United States to-day they are paying 2 per cent interest. Therefore, since the issue of notes is nothing more nor less than another form of deposit, I would impose a tax of 2 per cent on these notes. It will give you $30,000,000 of income a year. If you will pay 1 per cent a year into the interest department of the Treas- ury upon the 2 per cent consols, or $7,300,000, and convert the 2 per cent bonds into 3 per cent bonds, it will leave you about $21,000,- 000 to the good a year. Gentlemen, with that amount of money you could actually convert these greenbacks in about 10 j'ears, because there is only about $200,000,000 more of greenbacks outstanding than there is of gold in the trust fund in the Treasury to-day. What have you accomplished? You have got the greenbacks out of the way, but in working out a system you could not apply that money immediately, for out of the tax on these notes you should create a guarantee fund of about 5 per cent on $1,500,000,000, which would make $75,000,000, so that it would take about 15 years to make enough out of the tax on your notes to convert the United States notes into gold certificates. Now, gentlemen, your reserves should be all held m gold or gold certificates. Then, INIr. Taylor, you would be in a position where your conversion would go on in 'gold over the counter of the bank, and at some convenient center, Avherever the notes might be sent. I say that every bank should be brought under national super- vision and control, because banking is interstate business. No man can deny that the banking business is interstate commerce, and interstate commerce is the interchange of property. Will anybody say that if a broker in New York handling notes should send a BANKING AND CUKKENCY KEFOKM. 393 million dollars' worth of notes of a business house in the East out to Chicago, and they should ship him back a million dollars' worth of gold, that that is not engaging in interstate commerce, that those notes are not property ? Does it become any less interstate commerce if a bank does the same thing? Certainly not. Seventh. Every natural financial center in the United States should become the clearing center for all the checks, drafts, and bank notes that are payable in the territory that is economically and naturally tributary to the financial center. Such territory should constitute a commercial zone. Mr. KoRBLY. Just a minute. Would you allow a community to determine for itself which zone it wanted to be in? Mr. FowM!R. To a very large degree; almost entirely. For instance, I will use Kansas City as an illustration of how a city might be a financial center, and its zone would be largely on one side of it. It probably would not draw more than one-third of Missouri on the West, because the other credits would flow to St. Louis ; but it would take 400 miles away out across Kansas, and down probably into Oklahoma and down into Arkansas. The credits should be allowed to go where nature or economic law sends them. Why should we do that ? There are several reasons for it. Every- thing that I suggest in these proposals is purely based upon the experience in banking — evolutionary experience. Wliat is the fact to-day about your clearing house? Ever since 1897 I have been urging a division of this country into these zones — I called them districts first. — and the bank supervision of banks by the banks them- selves. "What has happened since that time? Why, gentlemen, when they had the Walsh failure in Chicago they became satisfied that the thing for them to do was to have bank supervision of those banks, and they appointed a clearing-house examiner. Since 1906 there have been 20 cities that have adopted the same thing, so that now they are examining all their banks, and there has not been a bank failure in a single city in which they have had these bank examiners. I meant to have brought here a letter from Mr. Wilson, of Los Anegeles, written to me on this very question. Mr. Kindred. Does that statement apply everywhere, that there has not been a failure? Mr. Fowler. Not in one of the cities where they have had super- vision of banks by a clearing house ; not one. Mr. Kindred. Have they not had any in New York? Mr. Fowler. Not since the appointment of these bank examiners. There was one appointed last winer. Now, just notice. They know the credit conditions locally, and they know the situation; and their responsibility is immediate ; and they are not influenced by political considerations. Mr. Taylor. Where were they born? Mr. Fowler. The first resolution was passed m Chicago m 1906, after the Walsh failure. Mr. Taylor. No; I mean where were these people born who are not influenced bv political considerations? Mr. Fowler. That will be because they are connected with banks ; they will be subject to the supervision of examiners that are local, and they will be again responsible to the bankers themselves. Mr. Taylor. And they will be appointed by whom? 894 BANKING AND CUEEENOY EEFOBM. Mr. FowLEK. By the clearing house, to examine the banks which are members of the clearing house. Mr. Taylor. They will be entirely appointees of banks? Mr. FowLEB. Absolutely by the clearing house. Now, gentlemen, just follow me. What has happened? Up in Boston they have made a free zone for checks all over New England, and have had it since 1899. Just the other day, New York, after a fight, has made New York, with a large territory around it, a free zone for checks. If you will take care to investigate the United States, and locate every natural financial center, you will find between 30 and 40 of them are points to which credit flows. Now extend the clearing- house organization over every one of these zones, with a natural financial center, and make bank supervision of banks by the board of control created by the banks themselves, and make each a fcee- check zone. If you will do all that, you will be doing in law only what the people are now doing as the most approved practices of the clearing house. Mr. Kindred. Will you elaborate a little more on the board of control, if you are ready? Mr. Fowler. I am, and I am going to talk about it right now. There is the diagram. I would also like to have that other diagram, about which I spoke, inserted in my statement. O) o^ ' as: '^S. <^-: Ylh^C/^ u^ £ \, | / < DISTRfCT Ngl CE.NTRE e ot the year, do they not? Mr. Frame. I do not think they do very largely. 424 BANKING AND CTJERBNCY KEFORM. Mr. KoRBLY. They did a few months ago. Mr. Fkame. I do not think so. Mr. KoRBLY. I am glad to. know that they have reformed. I do not say this in relation to your bank, of course, but that is so in relation to some of the banks in Indiana. Mr. Frame. If they do, I should say that they ought to be jacked up by the Comptroller of the Currency or some proper authority. I am a great believer in good sound banking, and I have advocated the regulation of the banking business for a great many years, and have given a great many addresses in favor of it. I believe that every bank that opens its doors in the United States should put up ample capital ; it ought to be compelled to accumulate a surplus ; it ought to be limited as to its loans, and it ought to be regulated either by the State or by the Nation. Mr. KoRBLY. How would you limit it as to its loans? Mr. Frame. Somewhat upon the same principle as under the na- tional currency act. It limits loans to 10 per cent of the capital and surplus. I believe in it. Mr. KoRBLY. To any one person? Mr. Frame. To any one person or firm. Mr. KoRBLY. But you would not limit the ability of the bank to discount for its customers? Mr. Frame. I would. Mr. KoRBLY. How? Mr. Frame. To 10 per cent of the capital and surplus of the bank. You could not take an unlimited quantity of any one firm now. Mr. KoRBLY. I understand, and I think that is entirely proper. Mr. Frame. You mean from various firms? Mr. KoRBLY. Yes. I am trying to accept as a good principle that a bank should discount all good commercial paper that is offered ; as long as it takes that kind of paper which clears itself there is little or no danger. Mr.' Frame. That is all right as long as it is within its assets the money to do it Avith. For instance, if a bank has a deposit of $2,000,000, like our own, we are compelled to keep 15 per cent of our deposits in cash or due from banks. That means $300,000. Now, suppose our loans are $1,700,000. If a customer comes in and wants an additional discount and we are up to our limit. I think it is our duty to decline it, and we are compelled to do that under the law. Mr. KoRBLY. Is that by reason of the dictates of wisdom or the dictates of law of the United States? Mr. Frame. By reason of the dictates of common conservatism. Mr. Taylor. Common sense. Mr. Frajie. Common sense. Mr. KoRBLY. You think that the best commercial paper, arising out of goods sold and delivered, and acceptance of draft for the same, ought not to be discounted by a bank because it has not got some cash in its reserves? Mr. Frame. That question, I think, is answered right there in my point on "Loans and discounts, including other securities, except United States bonds, of all banks of the United States." They ap- proximate $18,500,000,000. The first thing that a bank takes care of IS live commercial paper, especially with bills of lading. Mr. KoRBLY. Because it is the niost desirable? BANKING AND CUEKENCV EEFOEM. 425 Mr. Frame. Because we want something that is liquid, somethin"- that will be paid when it is due. The next thing we take care of i" our merchants and manufacturers. Their demand is at certain pe- riods of the year reduced and at other periods of the year it is enlarged, and some of it is carried by more or less of the banks, year in and year out, as you all know. We have some of that paper -which we carry year in and year out. but that paper is of such a char- acter that all we have to do is to say to our customer, "That money must be paid." He will raise it, because those customers have ample real estate or securities or property on which they can raise it with- out trouble. Now, that is secondary. It is evident, however, that after we have made our loans on quick live paper, taking care of our customers, our merchants and manufacturers, if we have surplus money we either buy commercial paper or bonds. As far as the Waukesha National Bank is concerned, in the last 30 years, with the money that we have had we have bought bonds. Mr. Kindred. What class of bonds, in general? Mr. Frame. AVe have bought some municipal bonds, railway, elec- tric railway, sewer bonds of cities, and Aarious things of that kind. Of course we exercise a very careful discretion to see that we get something that is as close Mr. Kindred. Does the State law restrict the kinds of bonds which you can invest in? Mr. Frajie. No, sir ; we are a national bank. Of course, the bank examiner in making an examination of the bank scrutinizes the securities very carefully. He foots them up. He takes the market quotations and sees that they are equal in value to what we call them, And if they are deficient he compels us to charge it off. Mr. Kindred. I understand you to say that you prefer good bonds to commercial paper. Mr. Frame. We prefer it ourselves, yes. In our case I can un- derstand why we can do that, and why some others can not. Our deposits do not fluctuate very much, but stay at about the same figure from January to December; therefore we can buy bonds and keep them, although, of course, we have to keep a sufficient margin in other paper to meet any fluctuation in deposits that may occur. There is always a market for bonds, and if necessary we can realize on them. As I said, I went to Chicago and sold bonds in Chicago in 1893 and got the cash, when I could not on commercial paper. Mr. Kindred. There is a good margin for profit, too, is there not? Mr. Frame. As far as profit is concerned, there is no greater profit in it. The profit would average about 5 per cent. The average of the high-class commercial paper that is in the market will not exceed 5 per cent. I said that as far as this live commercial paper is concerned in the United States, there probably is not to exceed $4,500,000,000 of real, live commercial paper. The balance of it is secondary, or bonds and mortgages. There are $3,500,000,000 of real estate mort- gages, or as collateral security in the banks of the country. Mr. KoEBLY. You say there are $4,500,000,000 of commercial paper ? Mr. Frame. $4,500,000,000. Of course it fluctuates more or less. Mr. Tatlok. That would be between $4,000,000,000 and $5,000,- 000,000? 426 BANKING AND CURRENCY REFORM. Mr. Frame. Yes. It is about one-quarter of the total amount of Joans and discounts, including bonds. Bonds really are a part of loans and discounts. They are the same thing with us. Mr. KoRBLY. The point I want to get more particularly is this: If the bank's reserves are reduced because of withdrawals, and cus- tomers of the bank, substantial and reputable men, come to the bank with good, genuine commercial paper and offer it for discount, do you think that the bank ought to refuse to discount it because its reserves are declining? Mr. Frame. I think they ought to take care of that good paper, and they would take care of the good paper if those men were good customers. They would be taken care of practically everywhere if they were entitled to it. Mr. KoRBLY. Even though the reserve was declining rapidly? Mr. Frame. If we had an opportunity for getting additional cash, then, of course, we would not refuse. That is what has brought trouble upon the country and why the wheels of commerce have been stopped, because there is no place to replenish the reserve. Mr. KoRBLY. That would mean, in its final analysis, some place where you could go and guy gold ? Mr. Frajfe. Yes; where you could go and buy gold or where you could buy currency. I do not care whether it womd be gold or cur- rency — anything that will satisfy the depositor — whether it is gold or currency is immaterial. Mr. KoRBLY. If you could transfer your own accounts into note credits you could supply that very easily without going out and buy- ing gold? Mr. Frame. If we have $1,700,000 of paper on hand, our $300,000 of cash and reserve bank deposits are all paid out, we have nothing but paper on hand. Now, if we can get our good paper rediscounted somewhere, and get some cash, we can then take care of our customers. Mr. KoRBLY. Perhaps I have not made myself clear Mr. Frame. We can take care of our customers perhaps and give some additional discount. Mr. KoRBLY. You have outstanding a large amount payable on demand, known as the depositors' account. Mr. Frame. You mean on certificates or book accounts? Mr. KoRBLY. Credited in bank books. Mr. Frame. Yes. Mr. KoRBLY. The nature and substance of that obligation on the part of your bank would not be changed in any way if you charged a portion of that off on the books and gave your creditors notes? Mr. Frame. That would be a liability. Mr. KoRBLY. I understand, but no greater liability than you had before ? Mr. Frame. No, sir. Mr. KoRBLY. And would it not be cash, would it not be current cash ? Mr. Frame. Not to pay anything except currency or gold or coin. That is the only thing that I recognize as cash. Mr. KoRBLY. Currency? Mr. Frame. Currency or gold or silver. Mr. KoRBi.Y. Well, would not that be currency? Mr. Frame. By giving them some securities? BANKING AND CUREENCT REFORM. 427 Mr. KoRBLT Oh, no. You have outstanding, for instance, I have a thousand dollars on deposit m your bank, and I come in with my check for a thousand dollars payable to myself, and your bank issues to me a thousand dollars in current notes, reciting that your bank promises to pay me on demand or pay bearer on demand a thousand dollars. Mr. Frame. I understand. Mr. KoRBLY. You charge people on your books or charge me on your books with a thousand dollars, and give me a thousand dollars in notes? Mr. Frame. Yes, sir. Mr. KoEBLY. Am I not in exactly the same debtor and creditor re- lationship with your bank after that that I was before? Mr. Frame. You have withdrawn a thousand dollars out of our reserve. Mr. KoRBLY. No. Mr. BuLKUBY. Mr. Korbly means your own notes. Mr. Frame. You mean notes issued by a bank ? Mr. Taylor. Promissory notes. Mr. Kindred. Promissory notes, he means. Mr. Frame. On that question of the issuance of bank currency by each bank to pay its own debt Mr. KoRBLY. No. That does not pay the debt at all ; you still owe me a thousand dollars. Mr. Frame. Surely; but I have been in the banking business for 50 years. In the early days, when I first started, we used to issue currency practically on that same basis, and if you will read the great authorities on economics and banking Mr. KoRBLY. Who are these authorities? May I ask you to state them ? Mr. Frame. John J. Knox. Mr. KoEBLY. I do not regard Knox as a good historian at all. Mr. Frame. He gives a good deal of history that is true, anyway. Mr. KoRBLY. He gives a good deal that is untrue, because he got a man to write the history of banking in Indiana who was known as "Lying Bill " So-and-so. I will not give his last name. Every- thing he has written about the Indiana banking experience is notable for the fact that it is not true. Mr. Frame. Well, Sumner's History of American Currency. Mr. KoRBLY. I have Sumner's books. Mr. Frame. The History of Banking in All Nations. Mr. KoRBLY. All the writers that I have read take the contrary view, that that is a natural kind of a currency, and if we provide that kind of currency we could settle all our difficulties. Mr. Frame. Let me continue what I was going to say. That cur- rency, a wildcat currency Mr. KoRBLY. Not the Suffolk Bank currency? You would not call that wildcat currency ? Mr. Frame. Yes; the currency issued on the credit of the bank. Mr. KoRBLY. Let me see if I understand you; let us see if we understand each other. You say the Suffolk Bank currency was known as wildcat bank currency ? Mr. Frame. The Suffolk Bank currency? Mr. KoEBi/Y. Yes. 428 BANKING AND CUERENCy EEFORM. Mr. Frame. The Suffolk Bank currency was compelled by — well, I will not say a law, but they compelled every bank to redeeem its currency in coin or close its doors. Mr. KoRBLY. How about the bank notes that were issued by the State Bank of Indiana under the presidency of Hugh McCuUoch — was that wildcat currency? Mr. Frame. No, sir. Mr. KoRBLY. Was not that currency issued by the bank ? Mr. Frame. That is a different proposition entirely from the proposition that we are discussing now, in my judgment. That bank in Indiana was one of the best banks that laas ever been opened in the United States. Mr. KoRBLY. Yes; I agree 'with you there. Mr. Frame. But the method by which it did business is entirely out of date and Avould not apply to the present time. Mr. KoRBLY. Is it not exactly what takes place in Canada to-day? Mr. Frame. I thank you for calling my attention to Canada. I want to refer to the conditions there in a few moments, if you will allow me; but before that I would like to read something in regard to Indiana. Mr. KoRBLY. By the way, before you begin to read, I want to say that it took the stupid action of Congress taxing to death a bank like the one thej^ had in Indiana, and like the Suffolk banking sys- tem, to put it out of business and to force on the people the present unworkable scheme that you are complaining about right now be- fore this committee. Mr. Frame. Allow me to finish what I was going to say, first. Mr. KoRBLY. Yes. Mr. Frame. I have bought asset currency over the counter of the Waukesha National Bank starting in in the morning at & o'clock, when we opened our doors, and continuing until 4 o'clock in the after- noon, and in that time I would buy so much of the discredited cur- rency of Michigan, Illinois, Indiana, and the State of Wisconsin that I would not have enough current money to do business with the next day. Mr. KoRBLY. Those Indiana bank notes were bond-secured notes? Mr. Frame. Those Indiana notes were good. Mr. KoRBLY. No; the ones you bought, you say, were wildcat notes? Mr. Frame. The bond-secured notes? Mr. KoRBLY. Not the bond-secured notes ; no. Mr. Frame. There were more or less of them secured by bonds that were not good. Mr. KoEBLY. Ninety-three bond-secured banks were in existence before the panic of 1857, and the panic closed and wound up 91 of the 93, whereas the State Bank, or the Bank of the State of Indiana, was not affected in any way by the panic of 1857, although gold was at a premium of 10 per cent in Cincinnati, and the brokers in Cin- cinnati used the bank's notes for the purpose of taking gold away from them. They paid gold continuously, and they were the only banks in the country that did. Mr. Frame. They were compelled to redeem in gold, and the bank did redeem in gold. In my early days our farmers used to take their crops to Milwaukee. They would start at 4 o'clock in the morning and deliver their grain, get their check, go to the bank and get their BANKING AND CURRENCY REFORM. 429 money and get out home to the Waukesha Bank and deposit that money, because they did not dare to leave those notes in their pockets overnight. I assert issuing currency is not a necessary function of banking, a;id the right by small banks has been abolished the world over. Mr. Kindred. In the case you refer to, what did they get for their money ? Mr. Frame. Various kinds of currency, called " wildcat," and some of it was good. Take the New York currency; it was good. The Massachusetts currency was good, also ; it was amply secured. Mr. KoRBLY. How was it secured? Mr. Frame. By good bonds or good securities. Mr. KoRBLT. I want to direct your attention to the fact that there were two banks in Indiana, one under the general law, that put up the bonds of the State of Indiana, and other State bonds, to secure its notes. There were the wildcat banks of Indiana, also, according to the historians, even those you mention. Knox did not know much about it, but I believe he did get that one fact right. There were other banks in Indiana that were mutually responsible for each others' debts. They were wholly disassociated in every other partic- ular. Hugh McCulloch was the president of the board of control of these banks. Mr. Frame. There were 10 banks in the State Bank of Indiana. Mr. KoRBLY. There were 20 branches of that bank to which I have referred. That was chartered in 1855. That was the Bank of the State of Indiana. The State had nothing whatever to do with it. The panic of 1857 came on and the notes of those banks were re- deemed at the counters of the banks every hour in gold, and they were not at any time at a discount anywhere in the United States. Mr. Frame. Let me tell you why. Their assets were perfectly good Mr. KoRBLY. And how were they secured ? I want you to explain that. Mr. Frame. I want to tell you how they were able to pay in gold. The State Bank of Indiana, on all applications for loans above $500, required that there should be a majority vote of five-sevenths of the board Mr. KoRBLY. But this other was the Bank of the State of Indiana, an entirely different institution. The State Bank of Indiana had gone out of existence. Mr. Frame. That is not the bank to which you refer ? Mr. KoRBLY. No. Mr. Frame. This is the McCulloch bank. Mr. KoRBLY. Mr. McCulloch was president of the State Bank of Indiana. He was cashier of the bank at Fort Wayne, Ind. Mr. Frame. Perhaps you have got into deeper water than I am able to answer. Mr. KoRBLY. I have this proposition clear in my mmd, that we had .a pure unqualified asset currency under the State Bank of Indiana. Mr. Frame. The one that you are reading about now ? Mr. KoRBLY. And its successor, the Bank of the State of Indiana. There were no bonds set aside to secure the notes of those banks. Now, if you will allow me, I will say that the panic of 1857 demon- 76112— PT 8—13 2 430 BANKING AND CUKBENCY EEFOBM. strated the goodness of that bank and its notes, and the Government of the United States, in the Civil War, suspended specie payments 30 days before the Bank of the State of Indiana suspended specie pay- ments. It was asset currency pure and simple, and unqualified. Mr. KiNDEBD. Mr. Chairman, may I suggest to Mr. Frame, that after all the general principle involved by my colleague's question is as to whether or not a bank can well issue I O U's without any secur- ity behind them ? . Mr. KoEBLY. It does that all the time. Dr. Kindred, in the matter of its deposit accounts. If I established a trust relation with his bank, that would be an I O U relationship. Mr. Kindred. I understand that proposition, but the other propo- sition that Mr. Frame is trying to bring out is, I think, the difference between that I O U which goes out practically as a banking function of a currency and the secured Mr. Frame. I will draw a distinction between the great central- ized institution that is run on a large scale as against the general run of banks over the country. What I Avas trying to say was that all banks, regardless of size, should not have such a privilege; but I do say that so far as the issue of currency is concerned, it is practically discarded the world over, and I woulcl not care how soon it was dis- carded in the United States; that should come by evolution, while the process of retiring it goes on. If we had no national-bank cur- rency, it would not hurt us at all. Mr. KoRBLY. What kind of currency would we have if you could establish the system you wanted ? Mr. Frajie. I will give you what Adam Smith says. Adam Smith says: Money, like wiue, is always scarce with those who have neither the credit nor wherewithal to buy it. The cry of all ages is for more money. Rich countries will have all the coin they need, provided no imiiolitie act of legislation forces it out by the injection of inferior currencies. It is not the province of government to look to the quantity of money in any country, but to the quality, and the needs of commerce will fix the quantity. Mr. KoEBLY. With what will it pay for gold ? Mr. Frame. With exports. Mr. KoRBLY. Then you are not speaking of the United States as an entity Government, but you are speaking of the people of the United States. Mr. Frame. I am assuming that there is no currency issued, and in such a case, because we are rich, we will have all the coin we need. Mr. KoRBLY. I subscribe heartily to the last part of the quotation you have given. Mr. Frame. The consequence is that if we take awaj' the circulation we have to-day, it will automatically follow that we come under that law Mr. KoRBLY. That brings me to suggest that this talk about a gen- eral bank being needed to see to it that the gold stock of the United States is not depleted is all folderol. Mr. Frame. I do not take much stock in it. Mr. KoRBLY. If Adam Smith is right, gold will flow where it is needed, by natural process. Mr. Kindred. It will take some wisdom and possibly some law to prevent the gold from going out of the country. BANKING AND CURKENCY EEFOEM. 431 Mr. Frame. No, sir; neither jails nor shotguns nor anything else will prevent gold going out at certain times, because there have been laws against it being exported, laws with severe penalties, and still it has gone out. Mr. KiNDBED. It has been brought out here several times— a propo- sition I think you will agree with, after all— that there is not any relationship, necessarily, between our balance of trade in our favor and the gold that we can keep. The balance of trade is in our favor but there is no relationship between that balance of trade bein<^ in our favor and the gold we can keep. " Mr. KoRBLY. The fact of the matter is— if you will allow me to interpose— the balance of trade is largely in our favor, and we export more gold and silver every year than we import, and have done it constantly, except the year 1907, when the thing turned the other ivay. Mr. Kindred. That is just what I have said, that the balance of trade is in our favor, but that that has nothing to do with the amount of gold that we may keep. Mr. KoEBLY. But I would like to go back to the proposition as to just what funds Mr. Frame would like to give this bank in case there was a run that depleted his reserve, while his customers were offer- ing good commercial paper for rediscount. Mr. Frame. I want it in a pot, where I can get a rediscount occa- sionally. Mr. KoRBLT. I would then suggest, if you could turn your credit that is uncurrent into current credit in the shape of notes, whether that would give the kind of currency that you had in mind ? Mr. Frame. No, sir. Perhaps I can explain that in this way: In my early days we were short of surplus cash, surplus funds, in the county of Waukesha, in which I lived; as a matter of fact, I have lived there all my life. Rates of interest were from 10 to 20 per cent in the sixties. The supply of surplus money was less than the demand. We were in a state of development then, and our farmers needed money. We used to borrow money in New England. I have remitted hundreds of thousands of dollars of interest and principal on loans to New England capitalists who had loaned their surplus to the farmers of Wisconsin. By 1875 we had paid off every single dollar of those loans, principal and interest. We had taken it out ,of the soil. We had exported more than we had imported to live on. That is just exactly what the United States is doing to-day. We have paid off all of our debts to New England. Since then we have been gradually accumulating surplus money in the county of Waukesha. The rates of interest wei-e from 10 to 20 per cent in the sixties; in the seventies they were from 8 to 12 per cent; in the eighties they ran down to from 6 to 8 per cent; and since 1890, or from 1900 to date, the Waukesha National Bank has loaned all its customers who have wanted money and who could put up collateral that was good at 5 per cent. Mr. -Kindred. For how long? Mr. Frame. For the last 12 or 15 years. All of our customers only pay 5 or 10 per cent interest, and you can borrow money on a farm in' Waukesha, where the security is good, for 5 per cent and pay no commission for it. 432 BANKING AND CXJEBENCY EBFOEM. Mr. KoEBLY. I do not know whether I follow you Mr. Frame. One moment; I want to explain this. In these early days, when we were short of capital, then I say it used to be justifia- ble to issue asset currency, which are nothing but I O U's, but they facilitated trade. They were current if properly secured. Now, in those days it was justifiable, I think, to issue more or less of what might be termed asset currency. Now we have got to the point where we Mr. Kindred (interposing). What is the distinction between the asset currency and the I O IJ we have been talking about? Mr. Frame. They are practically the same thing. Now we have so much surplus capital in Waukesha County there is no occasion for our issuing any currency. Mr. Taylor. Let me see if I understand you. What you mean by the evolution of the business is that we have gotten now to the point where the real circulating medium is credit, and you do not need money, you do not need currency; you simply need credit. Is that your idea ? Mr. Frame. You need a certain percentage of the coin of the world, the standard of value of the world, in order to facilitate the transac- tions that take place. Mr. Taylor. That is gold money ? Mr. Feajie. Yes, sir. Mr. Taylor. You need that, but you do not need any paper money ? Mr. Frame. "Very little. Mr. Taylor. And the main reason is because you deal on credit, which is really the circulating medium of exchange. Mr. Frame. That supplies a large quantity of it, so we do not need as much money. As an illustration of that, when I was a boy I can remember very distinctly about our merchants buying their stock of goods once a year in New York. They would sell goods to our farmers around our section, and would carry those farmers for the whole year, and when the year rolled around the farmers would bring in their crops to pay what they owed. That was barter ; they did not have any cash, or very little cash ; they did not have any sur- plus money. Now there is an ample quantity and they are wealthy ; they pay their current bills as the months roll around now. As far as simply paying annually is concerned, when we have diversified our crops and the farmers are wealthy they pay as they go. They have surplus money themselves. There are over $5,000,000 of deposits in the banks of Waukesha County. Mr. Korbly. That is not real dollars, is it ? Mr. Frame. That is the real stuff that those fellows have sold the products of their farms for. Mr. Korbly. What is it that is in the deposits of the banks in your State? Mr. Frame. What is it? Mr. Korbly. Yes ; the real nature of it. Let us deal with the real nature of things, and see if we can understand each other. Mr. Frame. I think I understand the point that the gentleman raises there. Of course it is not paid in cash ; it is paid in a check upon the bank. But if they want the cash, they can have it. Mr. Korbly. Suppose Congress should pass a law that would prohibit a bank from issuing a promise to pay a dollar on any other BANKING AND CURRENCY REFORM. 433 condition than that it had a. doUar in its bank A^ault with which to meet that promise ; would you think that would be a wise law ? Mr. Frame. Do you mean that they should keep cash on hand? Mr. KoRBLY. Yes. Mr. Frame. That would be a warehouse. Mr. KoRBLY. Then you do not understand that a bank is a ware- house ? Mr. Frame. No, sir. Mr. KoEBLY. Then you do understand that a bank does issue promises to pay, or I O U's, which are used in the exchanges of the United States? Mr. Frame. I do not think it is necessary for a bank to issue cur- rency to do it. Mr. KoEBLY. No ; but they do issue an I O U ? Mr. Frame. All secured by Government bonds, now. Mr. KoRBLY. Are your deposits in the banks secured by Govern- ment bonds ? Mr. Frame. No, sir ; they are secured by the credit of the bank and the stability of it. Mr. KoRBLY. Your depositors have from you a promise that you will pay them a given number of dollars on demand? Mr. Frame. Yes. Mr. KoRBLY. That is an I O U issued by them to you, is it not ? Mr. Frame. That is not an I O U in the sense in which I have been speaking of an I O U. Mr. KoRBLY. That is the sense in which I have been trying to get at it all the time. Now, I would like to have you point out the dif- ference between the I O U's you have given your depositors, and the I O U that you might issue to them if you issued to them a note saying that the Frame Bank would pay to the bearer $10. What is the difference in the nature of those two things, in substance and in essence ? Mr. Frame. If you bring it a deposit to the Waukesha National Bank of $1,000, 1 have the stuff you have deposited with me. Mr. KoRBLY. Suppose it consists of a note; a note of $1,000 that Mr. Glass has indorsed. I have not deposited $1,000 in the bank. Mr. Frame. Then, I 'have loaned you that amount of money. Mr. KoRBLY. And you are willing to pay me that $1,000 in the future ? Mr. Frame. And you might draw your check for it very soon. Mr. KoRBLY. I might not. Mr. Frame. You Tnight not ? Mr. KoRBLY. Yes; I might not. Suppose I should ask you to issue to me, in exchange for my note for $1,000, indorsed by Mr. Carter Glass, 1,000 certificates of deposit for $1 each, payable to bearer. Mr. Frame. Yes. Mr. KoRBLY. Would there be any substantial or essential difference between that and taking the credit in a book known as a bank book ? Mr. Frame. Yes; I think there would. Mr. KoRBLT. What is it? Mr. Frame. You would be swapping credits, then. You would give me your note and I would give you mine. You would give me a big note and I would give you a lot of little ones. 434 BANKING AND CUEEENCY EEFOEM. Mr. KoEBLY. Are we not doing that when you put a credit on my bank book? Mr. Feajie. No, sir; I think not. It is different, entirely. I will tell yon why I am not in favor of the payment of that note of issue in small quantities, as you suggest. If I have not got the actual stuff on hand, actual cash or capital, I have no business to. That is swapping credit with you. Mr. KoEBLY. You just now admitted that Avhen I come in with my note for $1,000, payable to you in 90 days, with Mr. Glass as an indorser, and you give me a book entry in my bank book promising to pay me $1,000, less the discount, on demand, that is, in fact, a swapping of credit or a swapping of promises. Mr. FsAJtE. That is giving you the opportunity of drawing upon that account, and in ninety-nine cases out of one hundred a man who borrows money from a bank and pays interest on it does not borrow it and let it lie there idle. Mr. KiNDKER. Is there not a difference, then, in the relationship between you and the bank as debtor and creditor? Mr. KoEBLY. Not at all. Mr. KiNDEED. And as between 1,000 other persons ^vho might be asked to bear the same relationship, if you circulated around those 1,000 I O U's for a dollar each? A thousand other people might have the same relationship that ought to be restricted between you and the bank; do you agree to that, Mr. Frame? Mr. Feame. The trouble about that is that I expect that if I credit it to his account he is going to draw against it. Mr. KoEBLY. If I drew my check for $1,000 and gave it to you, I would transfer you, as the creditor, to the bank. What I want to get at is the substantial and essential difference between the bank note and the credit in the bank book to the depositor. Mr. Feame. I think they are vastly different. I would not credit it to your account unless I had the stuff to loan it to you — ^had the capital in hand to loan to you. Mr. KoRBLY'. How much currency is there in the United States ? Mr. Feame. $3,500,000,000 ; that is, gold and all. Mr. KoRBLY. How much deposits are there in the banks of the United States, excluding savings? Mr. Frame. $17,000,000,000. Mr. KoEBLY. How can you have $17,000,000,000 in the banks, if there are only $3,500,000,000 in existence, if I am not right in saying that it is a promise to pay? Mr. Frame. Certainly it is a promise to pay ; but if you are going to issue a sufficient quantity of currency every time a man comes in and wants to borrow some currency you will have a vast quantity of asset currency outstanding which would not represent anything ex- cept merely a promise to pay. Mr. KoRBLY. It would represent exactly what is represented by this $17,000,000,000, would it not? Mr. Frame. If you were going to draw this all out at once you would have a cyclone in the United States that would make all of us sit up and take notice. Mr. KoRBLY. The fact that there is $17,000,000,000 of currency in the United States, and that a large part of it is rejected by the people and put back in the banks, is pretty conclusive proof to my BANKING AND CURRENCY REFORM. 435 mind that they would not hold ont the quantity of these notes that you suggest. Mr. Frame. When you get into a proposition of that kind, it is rather abstruse, although I think I can clearly understand it. It may be difficult to explain. But so far as the liquidation of $17,000,- 000,000 of deposits is concerned, by the banks to the customers Mr. KoEBLY. You would not pay it by giving them another note? Mr. Frame. We would either give them the cash or give them a good note against some other fellow; or give them some other security, if we were going to liquidate entirely. Mr. KoRBLY. I would like to bring you back to the point where I started; namely, in the event that your reserves were declining, and good two-name paper came in for discount, you said that you would have to replenish your cash. Mr. Frame. If it was low. Mr. KoRBLT. And I ask if that meant that you were going to buy gold. You said then you would buy gold or some other currency. That was the point where I interrupted you. I may be very earnest, but I do not want to be rude, and I want to get you back to the point that I took you away from, so that you can proceed in an orderly way with your argument. Mr. Kindred. Mr. Frame, I unfortunately missed the first part of your statement. Have you yet come to the question of the mechanism for some coordination ? Are you in favor of the zone system ? Mr. Frame. The zone system of relief? Mr. Kindred. Well, of organization. Mr. Frame. I do not object to that. I do not object to even doing it through the clearing houses. Mr. Kindred. Would you have each zone have its own regional clearing house or reserve association ? Mr. Frame. There is a clearing house in Milwaukee, for instance. If any trouble ensues in Milwaukee and they wish to issue clearing- house certificates and there is some reservoir from which money can be obtained on those clearing-house certificates Mr. Kindred. Then, you would not object to have each region have its own clearing house? Mr. Frame. I do not think there is any particular objection to it. Mr. Kindred. Have you thought out anything that you would kindly enlighten me about as to some mechanism that would co- ordinate and equalize these different regional organizations? Mr. Frame. That is, clear throughout the country? Mr. Kindred. As regards the whole country ; yes. Mr. Frame. As regards the equalization of rates of interest, so tar as that is concerned . . Mr. Kindred. I mean as regards reserves; as regards supervision and as regards note issue; whatever you may want to have m the way of note issue. , , , • uj. « Mr. Frame. That is rather a difficult problem to answer right ofl- hand, but so far as the issue of the certificates of the clearing houses is concerned, as we did in 1907 and two or three times previous, it they could take those clearing-house certificates to Washington and even get some of that $500,000,000 that is now lying idle there as a reserve fund— I say if the banks of Milwaukee could get the cash on 436 BANKING AND CUBRENCY REFOKM. their clearing-house certificates, then if I wanted money on our bal- ances, they could give it to us. As a farmer put it in 1907 when they handed him some of these clearing-house certificates, ''This is a milk ticket ; I want the milk/' Cash for clearing-house certificates would be the same as a national-bank note, which is accepted by everyone without question. Mr. Kindred. Do you suggest legislation that would direct the Secretary of the Treasury to loan out a certain proportion of this surplus? Mr. Frame. Only for emergencies. Mr. Kindred. Deposits in the bank, I mean. Mr. Frame. Of deposits in the banks only in extraordinary times. It costs nothing but the printing, and should be held for emergencies. Mr. Kindred. It would be hard to formulate some mandatory leg- islation to make him do it. Mr. Frame. It would be necessary to expand the present facilities, especially if you are going to give the State banks the same privi- lege. We all know now that only the national banks have that privi- lege. They have ample bonds on which to get quite a quantity of currency in troublous times. These now hold about two hundred or three hundred millions, and that will keep the wheels of commerce moving. Mr. Kindred. Do you mean to have these facilities through the local clearing houses ? Mr. Frame. I would not object to that. Mr. Kindred. You mean that the State banks have these facilities now through the clearing house? Mr. Frame. Yes; but I would not give the privilege to a city of less than 100,000 population, because when you go into the small interior districts you must remember that panics are not bom in interior cities; they are born in the great, big cities where colossal promotions flourish. Mr. Kindred. Have you thought out a scheme to take in the whole country ? Mr. Frame. I have made something of a suggestion in this propo- sition here. The Chairman. I had necessarily to absent myself from the com- mittee meeting, and I would simply like to ask you if you have fin- ished your general statement? Mr. Frame. Practically. The Chairman. If you have not, we would be glad to have you do so. Mr. Frame. I think it would be taking up too much of your time, as I see you have other gentlemen present. Here is Mr. Farwell, and I certainly do not want to take up so much of your time. The Chairman. Have you indicated in your general remarks just exactly what you would like to see the committee do? Mr. Frame. This short statement here will cover it, as you sug- gested to me that I should make something of a brief. This covers practically the thoughts I have in mind. Mr. Taylor. You desire that that be published along with your oral testimony this morning? Mr. Frame. Yes ; if you will. These are the points which I wished to make more particularly. BANKING AND CUEEENCY EEFOEM. 437 The brief referred to will be found at the conclusion of Mr. Frame's statement. Mr. Frame. The thing that strikes me as the most serious proposi- tion about the Monetary Commission bill is the privilege of giving banks the opportunity for accepting customers' drafts on them, and allowing the customers to go out and sell those drafts wherever they see fit. I know that there ai-e more or less very able men that arc advocating that proposition. They think it will create a discount market. Now, as shown by the comptroller's report, there are about $4,500,000,000 of live commercial paper, or on bills of lading. If there is any more of this that is made by actual transactions, it is cared for promptly now, because there is a large amount of money that is loaned by the banks on other securities that is not quick, and we are always hunting for quick paper. Therefore, when you talk about enlarging our quick commercial paper by acceptances, I think you are pyramiding credit on credit, and it is entirely unnecessary, and to my mind it is one of the most unfortunate things that could possibly occur to the United States. I gave an address diagnosing the National Monetary Commission's bill before the bankers and business men at Memphis, Little Rock, Ark., San Antonio, Tex., and Milwaukee. I brought out that point as carefully as I could, and after talking with bankers all over the country, with few excep- tions they declare it a dangerous proposition. Mr. Tatloe. You say that there are between four and five billions of dollars worth of what? What did you call them? Mr. Frame. Quick, live paper. Mr. Taylor. What proportion of that is real estate ? Mr. Frame. None of it. Mr. Taylor. It is mortgages on real estate ? Mr. Frame. $3,500,000,000 besides that. That is in addition. The total amount of all bank loans in the United States, including bonds, is $18,500,000,000. There is about one-quarter of that that is live commercial paper. Mr. Taylor. $18,500,000,000? Mr. Frame. Yes. Mr. Taylor. That is eighteen billions and a half? Mr. Frame. Yes. Mr. Taylor. And about one-quarter of that is quick, live paper? Mr. Frame. Yes; I assert all the quick, live paper in the United States is cared for now. Therefore, when you talk about manu- facturing acceptances by allowing 7,400 national banks to accept their customers' drafts, I think it is a dangerous proposition. Mr. Taylor. Do you or do you not think that loans on land can be made liquid? Mr. Frame. Real estate? Mr. Taylor. Yes. Mr. Frame. Well, the history of banking I think shows that that should not be done except for savings banks or trust companies, or something of that kind, and savings banks require 60 or 90 days to pay depositors. . , _ . , , , Mr. Taylor. I have read considerable about it, and I simply wanted to get your individual opinion, and because there have been gentle- men here of considerable experience, one in particular, who said his 438 BANKING AND CURRENCY REFORM. experience was that you could make just as liquid on real estate as anything else. . Mr. Frame. That is according to the location in which you are situated. I have half a million of mortgages now, and I think it would take but a very short time to sell them right in Waukesha or in Milwaukee. , , , ■ j Mr. Taylor. Can you tell me what amount or real estate is owned by your bank? , . ^ , .u n Mr. Frame. We do not loan money on real estate, because the (jov- ernment will not let us. ■ ■, , . Mr. Taylor. I did not ask you about your loaning on real estate. I asked you what amount of real estate is owned by your bank? Mr. Frame. None, except the bank building. Mr. Taylor. What is the value of that ? Mr. Frame. It is on our books at $45,0{)0. Mr. Taylor. And your capital stock is what ? Mr. Frame. $150,000. Mr. Taylor. Then, one-third of it is in real estate ? Mr. Frame. Our surplus is $150,000 also. So really our capital and surplus amount to $300,000. Mr. Taylor. $45,000 worth of real estate would be what propor- tion? Mr. Frame. Less than one-sixth of it would be real estate. Mr. Kindred. May I ask right there? You spoke of accepted drafts. Do you make any distinction between what we call ordinary acceptances and what you are talking about now ? Mr. Frame. Yes ; a live acceptance, with a bill of lading attached for export abroad, is a perfectly legitimate loan, and I say it is taken care of now. Therefore, when you come to the question of saying that you can manufacture a lot of acceptances to create a discount market, I say it is practically impossible to do it. Mr. Kindred. That would be outside of the legitimate field? Mr. Frame. Yes ; and the legitimate field is cared for now. There- fore, how can you manufacture more of it? It is only by building credit on credit, that is all. The Chairman. How do you account for the statement of Mr. Warburg and other large bankers of the country, and also textbook writers on the subject, that we have no open money market in this country ? Mr. Frame. We have no open money market in this country? The Chairman. I mean, as compared with what is known as the European money market. Mr. Frame. I think I can understand that. As I stated a little while ago, I think, perhaps, when you [the chairman] were out, the total foreign trade of Great Britain, France, and Germany is about $900,000,000 a month. That brings about $900,000,000 of paid paper every month. That kind of paper is held by the banks. That is liquid paper, and paid when it is due. It has a market not only in Great Britain, but France and Germany, and the nation that raises its rate of interest drives all new undertakings to the others having lower interest rates. Thus current debts are paid in cash and gold flows into the country where the interest is raised. Our bill-of- lading paper has a market over there, too. We imported and ex- ported last year $4,000,000,000 worth of commodities. BANKING AND CURRENCY REFORM. 439 Mr. Kindred. This paper is practically underwritten bv the in- dorsement of some party that these European bankers know* Mr PRAME Sometimes, but not to the extent that you are led to except by reading the authorities on the subject, in my uidoment Mr Kindred. Would not the European banks be^4r?unwise to take It without some such underwriting? Mr. Frame. No; it is underwritten by acceptance or discount houses making It their busmess, and these bills of lading, of course, secure the draft. Now, because of the rate of interest in the United States being a little higher than it is in Europe, practically all of the drafts that are -drawn with bill of lading attached for exports to Europe go to Europe and are discounted over there, because of lower interest rates there. I do not believe that Mr. Schiff or anybody else in the United States can make a discount market for that uiitil we have accumulated sufficient surplus capital so that the rate of interest in the United States is a little bit less than it is over there. If you have a piece of paper to sell you will sell it in Europe, if you can, for 1 per cent lower rate than here. You all know, on account of the activities of the United States and its wonderful de- velopment, we have not come to the point like unto the old Euro- pean nations, with hundreds of years of development and accumu- lated surplus capital. We are making rapid strides as evidenced by my illustration, when talking about Waukesha County. We have been lowering the rate of interest, and the United States has been doing the same thing. As we increase surplus capital in the United States, so that interest rates here are as low or lower than those of European banks, then we can have a similar discount system but not before. -The Chairman. One question. You say jrou have talked with hundreds of western bankers and they agree with you on this propo- sition. Mr. Frame. On the question of acceptances? The Chairman. Yes. Mr. Frame. There are not over three out of a hundred who said they would loan their credit to their customers — that is, they would not accept a draft. The Chairman. Why didn't they make themselves heard when the American Bankers' Association gave its unqualified and, as we are assured, unanimous indorsement of the scheme as proposed by the Monetary Commission. Mr. Frame. I am glad you called my attention to that. When the last monetary bill was given to the country it was but a few days previous to the meeting of the American Bankers' Association in New Orleans in 1911. There was not one banker out of a hundred that had read that bill. The Chairman. It is, then, somewhat like Mr. Ingalls said of Paradise Lost, which he described as that " great epic poem that everybody praises and nobody reads." Mr. Frame. They had 12 addresses in favor of that bill. G«n. Hamby, of Austin, Tex., told me he wrote a letter to Mr. Watts, who was president of the American Bankers' Association, and asked for a hearing against that bill. He did not get a very courte- ous answer, and I do not believe I had better repeat what he said. They knew also that there were others. I would like very much to 440 BANKING AND CUKEENCY EEFOEM. have been heard, but because of the steam-roller process of forcing^ that bill through without giving the bankers of the United States an opportunity to be heard, I refused to vote, and I know there were a great many other bankers who did likewise. I said to myself then, " If they are not willing to have this matter thrashed out and let the concensus of opinion be drawn, which I am perfectly willing to accept after it is thoroughly thrashed out, then there is an open press in the United States, and we can get a hearing there. They will hear from me in the future." Mr. Btjlkley. Do you mean to say that at the New Orleans meet- ing no member of that association could be heard in opposition to the bill ? Mr. Frame. Practically. They practically thiottled all argument- Mr. KiNDKED. But the report went out that it was practically unanimous. Mr. Frame. And when the question came as to whether the bill should be indorsed or not, nobody having read it, and there having^ been 12 addresses in favor of it — and as you know, we are all anxious for relief in time of trouble, because we do not want to see the wheels of commerce stop; we do not want manufactures to close, and we do not want merchants to fail, but do want some relief — therefore, those who did vote for it, or the great bulk of them, did so without reading that bill. Mr. Kindred. How long did you say it was that that meeting was held if New Orleans before or after the publication of the bill ? Mr. Frame. I think about two days before. Mr. Taylor. Are those dates clear in your mind? Mr. Frame. It was very close to it. The bill had already been prepared by Senator Aldrich and presented to the executive council of the American Bankers' Association in the May previous, in 1911. As I was a member of the executive council of the American Bank- ers' Association, I received a copy of that bill just the day before' they acted upon it. Then when the amended bill came in at New Orleans it was just a few days before the committee met, so that the bankers of the United States had not read it. Mr. Taylor. It was impossible for them to have read it? Mr. Frame. Yes, sir. Mr. Kindred. And it was not freely discussed by those who op- posed it? Mr. Frame. It was not discussed at all, practically. No oppor- tunity was given for it. Mr. Kindred. Do you mean to say, or do we gather from what you say, which is very clear, that the presiding officer there simply ruled out those who wanted to discuss it negatively or were not in favor of it? Mr. Frame. Gen. Hanby took up the question before the meeting, but they evidently would not allow anyone on the program who was against the bill. Therefore, I say, they put those on that were in favor of the bill and barred others. Few care to ask to be put upon a program for the purpose of fighting something that they arc attempting to pass. I say the American Bankers' Association should be an open forum. BANKING AND CURRENCY REFORM. 441 The Chairman. Is there any significance to be attached to the fact that at the annual meeting of the Anierican Bankers' Association subsequently held at Detroit the association did not reiterate its indorsement of the plan of the Monetary Commission, known as the Aldrich scheme? Mr. Feajme. It did not reiterate the indorsement for the very reason that they made up their minds that they thought that they would have a pretty warm time on hand, and they concluded it was best to let it go by ' default. They had come to the conclusion that the bill would not probably be indorsed, and they allowed it to go without discussion. The only discussion at all was by Mr. Bonynge, and of course we all know he was in favor of the bill. Mr. Bonynge made one statement that I should take exceptions to. I wish I had the exact words, but I have not my papers here ; however, he gave the impression that they do not have panics in Europe. He called it bank panics. I made a slight reference here to a few of the trouble over in Europe: "Anyone, if he will read the standard authorities on banking, will find that in 1868,Overend, Gurney & Co. and their allies failed for $200,000,000. Read of the city of Glasgow and other bank failures in 1878 for $100,000,000." And, by the way, the loss thereunder exceeded the total losses of all the depositors in all the national banks from 1863 to the present time, 50 years, in two failures in Scotland. Mr. Taylor. Those two failures were in Scotland alone ? Mr. Frame. Those two banks, the City of Glasgow Bank and the West of England Bank. The City of Glasgow Bank had 131 l3ranches, and the West of England Bank some 50 or 60. They were what you might call insurance bank deposits to a certain extent. They were all glued together and they all fell at once. "Read of the failure of Baring Bros, and others in London in 1890 for over $100,000,000; read the history of failures of half the banks in Australia in 1892-93 for $450,000,000." One-half of all the banks in Australia failed in 1892 and 1893. Out of 17 central banks. 8 of them failed, with 800 or 900 branches. Mr. Taylor. Is not that using a distinction of words ? You claim they were panics at that time? Mr. Frame. Yes; they were panics. Mr. Taylor. Those facts you have read indicate it and demon- Mr. Frame. Yes. If I had time I could quote from some of my former papers, which cover those same points. They are taken from what I consider the authorities of the world on banking. Mr. Taylor. Were there similar failures m continental Europe? Mr Frame Yes; there have been failures over there m France and Germany. They have not suspended cash payment oyer there, because of some flexibility of their currency, because of their central banks. For instance, the Imperial Bank of Germany. That bank can issue currency by the payment of 5 per cent tax on it. there is flexibility. It comes out only under pressure, and retires immedi- ately after, as soon as the emergency has passed. Mr. Kindred. What is the security for the issue? Is it assets < Mr. Frame. The bank itself has very large capital. Mr. Kindred. Is it assets? 442 BANKING AND CURRENCY REFORM. Mr. Fea:\[e. It is practically the assets ; and, as I say, I do not fear asset currency with a big institution of that kind. Their immense capital is ample guaranty; but where it comes to giving a whole lot of little fellows, scattered all over the country, the privilege of doing that, I believe it is wrong. Mr. Tatix)r. What would you say as to currency guaranty, where, all the banks guarantee the currency, and instead of having a bank note reading " We will pay $500," have it read, "Any national bank will pay $500," and this paper is guaranteed by all national banks? Mr. Frame. I am not socialistic enough to believe one bank ought to be responsible for another bank's debts. Mr. Korbly. They did that in New York in 1829 ; you are aware of that? Mr. Frame. Yes ; I remember that. Mr. Taylor. But does not the Government now indorse a bank note with a bond? Mr. Frame. Yes ; but we have to buy the bond first. Mr. Taylor. But is not the Government doing that ? Mr. Frame. I think not. Mr. Taylor. What is the difference, from a socialistic point of view, between a Government indorsing paper and the banks them- selves being responsible? Mr. Frajie. I think that is an entirely different proposition. We buy the bonds the same as you would buy them, for investment. We pay cash for them and the Government has the money. Mr. KoRBLY. Where do you buy them? Mr. Frame. In the market; anywhere. Mr. KoRBLY. When yon want to use them for deposit with the Government you go out and buy them? Mr. FEA^NfE. When the Government is not issuing- new ones we must go into the market for them. Mr. KoRBLY. Did you get any of the 2 per cent bonds issued for the purpose of enabling the national banks to issue their currency? Mr. Frame. Yes. Mr. Taylor. Is it not your understanding that that combined issue was made for the purpose of enabling the national banks to get currency ? Mr. Frame. Yes, sir. Mr. Taylor. How many bonds of that kind have you got? Mr. Frame. $150,000. Mr. Taylor. Where did you get them ? Mr. Frame. Where did I get the bonds? Mr. Taylor. Yes. Mr. Frame. We either bought them in the New York market or bought them of the Government ; I have forgotten which, now. Mr. Taylor. Were those bonds ever ptit up for sale? Mr. Frame. No, sir. We deposited them here in the Treasury De- partment as security for our circulation. Mr. Taylor. I mean when you first obtained them; were they put on the market before you obtained them? Ml'. FRA:yiE. We may have bought some of them in New York. Mr. Taylor. You sav you max have bought some of them in New York? ■ ■ i\Ir. Fra:we. I think so. BANKING AND CUBEENCY EEFOEM. 443 Mr. Taylor. How did you get them together? Mr. Frame. Possibly we bought the whole of them in New York. I do not remember about it. Mr. Taylor. Did those bonds ever bring more than par ? Mr. Frame. Oh, the market was at a premium of 6 or 8 per cent at one time. Mr. Taylor. The 2 per cent bonds ? Mr. Frame. Yes, sir. Mr. Taylor. They were at a premium ? Mr. Frame. Yes. Mr. Taylor. "What put them to a premium ? Mr. Frame. A strong demand for them for security for circula- tion. Nobody else wants them. Mr. Taylor. They were for security for circulation? Mr. Frame. That is all. The Chairman. Do you mean to say that the United States Gov- ernment ever issued bonds expressly and solely for national bank cir- culation ? Mr. Frame. Simply to pay bonds that were due, the Government issued 2 per cent bonds and the banks were the only buyers of those bonds, because the banks could use them as collateral security for circulation. The Chairman. But the Government issued those bonds to dis- charge its indebtedness ? Mr. Frame. Yes. The Chairman. It did not issue them primarily for circulation purposes ? Mr. Frame. Oh, no. The Chairman. You have never bought any of your bonds from the Government itself for circulation purposes ? Mr. Frame. Except — oh, yes; when they were first issued. Mr. KoRBLY. Can you go there now and buy them for that purpose? Mr. Frame. No. Mr. KoRBLY. None are on sale? Mr. Frame. No. The Chairman. In other words the 2 per cent bonds were put out simply for refunding purposes, and they are incidentally issued for circulation ? Mr. Frame. That is true. The Chairman. As a basis for circulation ? Mr. Frame. Yes ; but nobody would have bought them except for circulation. The Chairjian. That was the real purpose of the legislation? Mr. Frame. Yes. The interest rate is abnormally low. The Chairman. But when you want to buy bonds you do not come here to the Federal Government to buy bonds. You go in the open market and pay the market price. Mr. Frame. Certainly— the New York price. When we want to buy we go to New York. The Chairman. The United States Government, Mr. Frame, was enabled to refund its bonds of a higher denomination into 2 per cent bonds because the national banks used Government bonds as a basis for circulation. It could never have done it otherwise. Is not that a fact? 444 BANKING AND CUEEENCY EEFOEM. Mr. Frame. I think that is correct. Of course originally, when they were sold on a 6 per cent basis, then we bought them for the purpose of helping the Government. The Chairman. That was a war measure? Mr. Frame. That was a war measure. Mr. Kindred. The 6 per cent rate was good enough to help the buyer as well. Mr. Frame. It was mutually advantageous, I think. I suppose the Government was hard up and wanted some money and paid a higher rate of interest than it would have done otherwise, and we purchased some of them Mr. KoRBLY. May I ask you a question, please? Mr. Frame. Certainly. Mr. KoRBLY. I do not want to weary you. AYere not some clear- ing-house certificates issued in your part of the country in 1907 ? Mr. Frame. In Milwaukee? Mr. KoRBLY. Yes. Mr. Frame. Yes, sir. Mr. KoRBLY. Genuine clearing-house certificates? Mr. Frame. They were just the same as any other clearing house in the United States issued. Mr. KoRBLY. Were there some certificates of deposit in small denominations issued by the banks up there also? Mr. Frame. Well, very rarely. There probably were a few. Mr. KoRBLY. There were some instances of that, were there? Mr. Frame. I think there were a few ; but we did not do anything of that kind. I think there were a few of the banks that did do that. Mr. KoRBLY. The fact that the clearing house association issued certificates of deposit, and that that made the banks in the clearing house jointly responsible for them was not a socialistic principle in your mind, was it? Mr. Frame. Under ordinary circumstances I think we can stand alone, and if my bank can not stand alone without anybody else helping it in times of peace, I want you to shut us up; but under extraordinary circumstances we have to have extraordinary means of preventing the suspension of cash payments and preventing the stoppage of the wheels of commerce. In those cases I am willing to accede to the point that we shall join together and help one another. Mr. KoRBLY. If there were no extraordinary occasions we would mot be sitting here. Mr. Frame. I think that is probably correct. Mr. KoRBLY. If we had fair weather all the time there would be jao difficulty. Mr. Frame. That is it exactly, and still ' Mr. KoRBLY. Now, that bank of Indiana that you spoke of a while ;ago had the joint responsibility of the banks for each other's notes and deposits, and it stood up pretty well in the panic of 1857, and its predecessor stood up pretty well in the panic of 1837 and did not suspend specie payments until after the Government of the United States suspended and all the other banks of the United States had broken down, and in the panic of 1857 it did not break down. Do you think that that socialistic principle, as you call it, is such a bad principle ? BANKING AND CURRENCY REFORM. 445 Mr. Frame. That was a bank with a number of branches. Mr. KoBBLT. They were not branches of a mother bank ; they were coordinated, independent banks. Mr. Frame. Well, that would be the same thing. Just let me read you why the State Bank of Indiana has stood through fire and water. On all applications for loans above $500 a majority vote of five-sevenths of the board was necessary, and this must be entered on the minutes with the names of the directors so voting. Directors were individually liable for losses- resulting from Infraction of the law, unless they had voted against the same, and caused their votes to be entered on the minutes, and had notified the gover- nor of the State of such infraction forthwith, and had published their dissent in the nearest newspaper. Any absent director to be deemed to have concurred in the action of the board, unless he should make his dissent Imown in like manner within six months. If you can find any bank in the United States that will loan money on that principle to-day and do any business, I am very much mis- taken. Such a bank would close its doors very quickly. Mr. KoRBLT. That bank had gone out of existence when the panic of 1857 swept over the countr3^ Mr. Fra^ie. But it is because of the overrigid regulations on which that institution was run that it was able to stand when the others failed. Mr. Korblt. But I tell you that that bank had gone out of existence and a new bank had come into existence. Mr. Frame. But I am referring to the new bank and the rules thev had. , , j. Mr. KoRBLT. I am talking about an entirely diflerent bank trom the one you are talking about— the one that Hugh McCuUough was president of. „ . , ^^ . ■ i Mr. Frame. Well, perhaps I am not referring to the particular bank you have in mind, but I am speaking of the State Bank o± Indiana. , , ^ -, ■ io^k j Mr KoRBLT. The Indiana State Bank was chartered m 18^(5, and gave up its charter in 1857. The bank of the State of Indiana was chartered in 1855. It was taxed out of existence m the Civil War. It was the national bank of the Stat« of Indiana. That bank with- stood the storm of 1857. So the bank you are readmg about was out of existence, and so the rule you would invoke there had nothing to do with the bank that succeeded it. „4! fK„=„ «lrl Mr Frame. According to my readmg the reason some of those old institutions did succeed was because of excessive care m loamng money. You could not do business nowadays that way; it would be """^ kSlt.^ In other words, we have to be more careless than they W6r6 ^ Mr Frame. No : I do not want to put it that way. Mr' KoRBLY. That is the way you are putting it, ]ust the same. Mr FRlMlone might say that, but I say those rules are over- rie-id- and therefore I would not call it careless. , ^, , , S' Korbly' Of course, the men that started the bank you are reading about had absoMely no banking experience when they "chairman. Gentlemen, it is past our usual hour for taking a recess. 76112— PT 8—13 3 446 BANKING AND CUEEENCY EEFOBM. Mr. BuLKLEY. There are two matters that I would like to bring up if I may do so. I can finish in a few minutes. The Chaikman. Well, perhaps we had beter finish with Mr. Frame before recess. Mr. Frame. I am at your service and will accede to any request which you wish to make. The Chairman. Mr. Bulkley says that he will be through in a few moments. Mr. Bulkley. Referring to the New Orleans meeting of the American Bankers' Association, I wish you would outline to the committee the machinery by Avhich the steam roller was put over. Mr. Frame. There are 8 or 10 men who have been running that affair for 10 years. They have a constitution. Mr. Kindred. A constitution and by-laws. Mr. Frame. Yes; a constitution and by-laws, so framed that the " ins " stay in. We have something in progress now that I hope may 'change that situation. At the last meeting in Detroit I had the honor of nominating a committee to redraw the constitution of the American Bankers' Association and to eliminate this close cor- poration, and I have hopes that it will be done. Mr. Bulkley. On the face of it is this a democratic organization, so that everyone is supposed to be heard freely ? Mr. Frame. That is what it ought to be. Mr. Bulkley. And instead of that they have framed it up in such a way that you can not be heard freely ? Mr. Frame. That is about what it is. It has been that way for about 10 years. I was honored with an invitation to speak before the American Bankers' Association in 1904, but with some limita- tions as to what I should say. Mr. Bulkley. How many members of the association are there? Mr. Frame. Twelve thousand. Mr. Bulkley. Do you suppose a large percentage of them agree with your view that the thing has been controlled by a small clique ? Mr. Frame. I should say so, most assuredly. Mr. Bulkley. You think most of them Avould agree with you? Mr. Frame. Yes, sir. Mr. Bulkley. Did I understand you correctly to say, a few mo- ments ago, that you are opposed to asset currency? Mr. Frame. I am for large and small banks all over the country, although a limited amount for large centralized institutions would be all right; but only with limited power of issue and with a tax sufficiently high to bring it out in time of trouble and retire it imme- diately after the trouble is over. Mr. Bulkley. What you object to, then, is the power of individual banks to issue notes; and you do not object to the character of the currency because it is asset currency, do you? Mr. Frame. No; but I say we have ample capital in the United States to-day. Two-thirds of the banks to-day can not issue cur- rency. State banks, savings banks, and private banks can not issue any currency. That special privilege is given to the national banks alone, and they can get along without it. Mr. Bulkley. But, as a matter of fact, is not this Aldrich-Vree- land provision an asset currency? Would not that provide asset currency ? BANKING AND CXJERENCY EEFOBM. 447 Mr. Frajie. The Aldrich-Vreeland act provides ample security for issues ; therefore I do not call it asset currency. Such issues are only temporary, because the tax is sufficiently high to drive it back as soon as trouble is over. Mr. BtJiaiLEY. But what I want to get at is whether you have anv objection to asset currency as such or whether your objection is sini- ply to the method of getting it out. Mr. Feasie. I want a temporary currency to relieve distress when it IS necessary, and with a tax sufficiently high so that it will not breed increased circulation or increased " inflation or an increased period of inflation or credit. Those three things must be guarded against. Mr. Bttlkley. One other thing I want to ask you about, and thai, is whether you have now fully explained to you own satisfaction to the committee as to why the methods of the State Bank of Indiana are out of date to-day ? Mr. Feame. I think they are entirely out of date; you could not do business under them to-day. Mr. Btjlkley. Did you explain that in those remarks you made a few minutes ago, or have you anything else to add? Mr. Frame. I do not know that there is anything I want to add. Mr. Taylor. Did you have anything more in that paper from which you read that you think would bear upon the subject that you would like to put in? Mr. Frame. No, sir ; I think there is nothing further. Mr. KoRBLY. May I ask what it is you are reading from ? Mr. Frame. This is from an address I made before the State Bankers' Association of the State of Wisconsin in 1903. I dug up a lot of information in reference to the old State Bank of Indiana, and the Suffolk banking system, and the Louisiana bank act of 1842, and the State Bank of Iowa, etc. Mr. KoRBLY. Have you an extra copy with you? Mr. Frame. I think I could give you this one. I have a few more of them. The Chairman. We are very much obliged to you, Mr. Frame. We will now take a recess. Whereupon a recess was taken until 2.30 o'clock p. m. Statement filed by Mr. Frame is as follows: The foUowiiiK, approved by the imclerRignea. covers .i brief of an argument made by Andrew .1. Frame, president of the Waukesha National Bank, of Waukesha Wis., before the Subcommittee on Banking and Currency of the House of Representatives, Washington, D. O., at 10,30 a. m. of above date. It is relief in the day of trouble \ve seek, not an overdose of monopoly, inflation, and overexpansion of credit in normal times. We respectfully ask your earnest consideration of these conservative essen- tials, to the end that cash suspensions Ijy banks generally, with their tram of evils, may be avoided in the future. Banking and Curkency. To the Congress of the TJirited fStates. Wdxliinf/fon. D. ('. The undersigned, having only the welfare of all the people at heart, be? leave to present herewith for your earnest consideration the t;'llowiu. . Whereas the dear school of experience proves foi^clusiyely that cash gus pensions by banks generally, when financial distrust or panic threatens, lesults- in paralysis to trade and commerce; and 448 BANKING AND CUEEENCY EEFOEM. Whereas we all concede the profound necessity to provide some sound remedy therefor; and Whereas the complex Monetary Commission bill was presented as a cure, but because of its many objectionable features is not acceptable to the country at large nor to thousands of bankers as its provisions become clarified; and Whereas the present Congress, apparently, realizes these facts and is now seek- ing further light, with a view of presenting a revised bill for passage as a true panacea for our troubles: Therefore We, the undersigned practical bankers, with all due respect to those advo- cating, with high motives, the passage of the original bill, beg leave to enter this brief, giving our general objections to what appears to us its subtle fallacies, to the end that a new bill, stripped of objections, may be perfected and become the law of the land. The need for some opportunity to obtain rediscounts when trouble threatens, at fairly high interest rates, and also extra cash to replace cash reserves paid to frightened depositors temporarily until confidence is restored and to the end that loaning to all solvent parties will prevent the wheels of commerce from being stilled is the paramount solution we seek, but we do seriously object to a great central bank with many branches monopolizing general banking func- tions in normal times, opening the door to greater inflation of our currency and further opening np easy methods of expanding our already inflated credit. Let us see. First. Certain sections of the bill provide arrogant supervision by the central bank of banks generally, practically superseding the work of the Comptroller of the Currency and the State bank examiners of the several States. This tends toward monopoly. Second. The proposition for one large central bank, with 1.5 branches to start on, plus as many more as the directors see fit to establish, spells monopoly, and because they enter so largely into competition with our independent banks these wings should be clipped for the same reason that Andrew Jackson, in 1836, destroyed the second United States bank with its branches. Third. As to rediscounts guaranteed through local associations, the prop- osition as outlined is so impractical that no bank except those who ought to bo denied the right would accept its provisions. As to giving 7,400 national banks the right to expand their credit as now authorized, to the limit of their assets ; then loan their credit by accepting customers' time drafts on them ; then permitting those customers to peddle such acceptances in any money market, is entirely unnecessary and also a danger- ous proposition. This is brokerage and not legitimate banking and should be confined to acceptance or discount houses making it their business and not to 7,400 banks of deposit. We assert the arguments giving experiences abroad as to acceptances are seriously misleading. The liability of a maker of a note or an acceptor of a draft are exactly alike ; therefore there is nothing miraculous in the power of an acceptance. When we find in the Comptroller of the Currency reports for 1912 that the total " loans and discounts " including other securities, except United States bonds, of all the banks of the United States approximate $18,500,000,000, divided about as follows, to wit : In various classes of bonds, etc., excluding United States bonds. $4, 500, 000,000 Real estate loans and mortgages , 3,500,000,000 Demand and time loans with various collaterals and single or firm paper, unsecured , 6,000,000,000 Live commercial paper, say 4,500,000,000 Total 18, 500, 000, 000 we are led to exclaim, with nearly one-half of the total bank loans in long- time bonds and mortgages; with nearly one-third in various nonquick liquid assets; and only one-quarter of it, which is promptly cared for, in live com- mercial paper. Including shipments with bill of lading attached; why should the air be surcharged with plans to manufacture acceptances in order to create a discount market for idle funds? We think the proposition absurd. The only way to create legitimately a larger discount market is to enlarge our internal and external commerce; expand by hook or crools; this ex- ternal commerce, not indirectly as now done largely through London, but through direct shipments to and from the world's ports. When this is accom- BANKING AND CUEEENCY EEFOEM. 449 SJ.r^;?'^'tif"® +'''''"• i'ltf^atlonal banking will pulsate quickly throughout the world thus turning trade and profits from London, Paris Berlin etc to American ports: we must also accumulate surplus capitS to compete with European low interest rates, so that our live bill-oMading paper does not automatically go abroad. There is no other sound cure. Filti^^us manfpula- Tf bankf hn"vf '°m' T^'f '"''''''''' ^-^^fPtances simply spells bubble bTwlug If banks have idle funds occasionally, so do individuals and firms, and If remedy is to slow down, not press on more steam .rfJ .^,?f^n^""7K"7® """^Kl ""^ ".""^ '■^"^'■^^ "ty banks that the moment they enter the field of brokerage through Indorsing for customers our accounts will be transferred to more conservative depositories. Such acceptances are prac- tically foreign to the subject under discussion, to wit, " Relief in the day of stress." They simply spell piling credit on credit on top of our present monu- mental pyramid. The beacon lights of past history are strewn with proofs as a warning against such perils. Let us heed them. Fourth. The proposition for the central bank to issue nine hundred millions of untaxed notes plus three hundred millions additional taxed but I4 per cent spells inflation. Then comes the true flexibility we seek, to wit: A tax of 5 per cent on currency issues in excess of twelve hundred million.'?. Herein alone lies expansion of currency and credit under stress, followed by con- traction as soon as trouble ceases, all arguments to the contrary not having any warrant in modem experiences. Wildcat currency went home quickly be- cause of distrust in it. To-day our currency stays out, as nobody distrusts it, and unless penalized sufficiently to make it unprofitable does not retire auto- matically, and that is the crux of our troubles. Fifth. As the bill does not require gold as reserves for liabilities and note issues, this twelve hundred millions of notes exceeds the uncovered notes of all Europe combined. New York City will never become the world's financial center unless we hold inviolate gold as our standard for reserves and payments. In view of these facts we assert the bill spells monopoly, infla- tion, and overexpansion of credit. Instead of a panic preventive, these provi- sions breed panics. Sixth. TS'e charge that because of the general urgent need for relief in troublous times many of those advocating in toto this bill desire to destroy the Independent banking system of the United States. V,'e deny the oft-repeated statement that other countries do not have bank panics, and respectfully refer those seeking light to standard authorities on banking. Read of Overend- Gurney & Co. and allied failures for $200,000,000 in London in 1S66; read of the city of Glasgow and other bank failures in 1878 for $100,000,000, the losses thereunder exceeding the total losses to all the depositors in all the national banks in 50 years ; read of the failure of Baring Bros, and others in London in 1890 for over $100,000,000 ; read the history of failures of half the banks in Australia in 1892-93 for $450,000,000. We pause for an answer. We plead that if we can not have a single central bank, with limited powers, to care for us in troublous times, and, like unto a water reservoir, keep from competition with existing banks in ordinary times, then give us this simple but efilective remedy : Enlarge the scope of the Aldrieh-Vreeland Act, which expires by limitation in 1914, by extending the right to issue uniform elastic currency, not only to national but to State and savings banks, also trust companies doing commercial banking, wherever they are under good State banking laws. The United States Treasury now holds five hundred millions of such currency subject to the call of the national banks, on deposit of high-grade State, county, township, or municipal bonds, and also through National Currency Association's guarantee of commercial paper, etc. The national banks now hold nearly two hundred millions of such bonds. If we include all banks, over one thousand two hundred millions of bonds are now on hand. Therefore, it is easy to command ample bonds on which to obtain this five hundred millions of extra currency m days of sfr^^s With the knowledge that "you got 'em, I no want 'em: you no got 'em I want 'em," the five hundred millions is ample to maintain confidence, ihe work is accomplished directly with the Treasury Department and therefore the indirect National Cuirency Association's guarantee method would rarely, if ever, be called into use. 450 BANKING AND CXJEHENCY REFORM. If thought best, as the national currency associations require new machinery, ■substitute therefor the old successful and always ready, nonexpansive method of clearing-house certificates, but legalize them for use to obtain this extra cash In time of need. These operations are so simple even a child can grasp them. Such currency would only come out in abnormal times, as a tax of 5 per cent per annum for the first month is charged, 6 per cent for the second, and so on up to 10 per cent. These rates would drive home the extra issues as soon as pressure ceases, to be ready for future requirements. The cure is effective because it would prevent inflation and overexpansion of credits. The bugbear of cash suspensions by banks generally would then be a nightmare to us no longer. Then stop further issues of national-bank notes and allow them to be re- duced by natural evolution through voluntary acts or through banks retiring from business, etc., and by the time the bonds securing bank notes are due most of the currency would be retired automatically and gold substituted, , because under the natural economic law that ." rich countries will have all the coin they need, providing no impolitic act of legislation forces it out by the Injection of inferior currencies," the vacuum would refill with the world's standard and now abundant gold. We care not what method is pursued, providing we do not breed monopoly. Inflation, and overexpansion of credit. We need only an elastic measure to pre- vent cash suspensions l)y banks generally. If we can not stand on our own re- sources in normal times with the aid of central-reserve banks now at our com- mand, we are unworthy weaklings that will never upbuild a strong Nation. Let us perfect this last link to our strong chain of sptendid independent banks, develop by direct methods world-wide trade and banking, and we will continue to outstrip the world in our wonderful progress. As the law is not specific, we respectfully recommend that it be nominated in the bond as an amendment to the national-bank act, to wit: " Internal branch banks shall not be permitted in the United States. A sav- ings-bank or trust-company section, or both, under the same or ad.ioining roof, not to be considered branches." The States would likely follow^ and when done, consolidations will be no menace and our splendid, independent banking system will be a continuing heritage in the future. Respectfully submitted by your petitioners. Andrew .lay Frame, president Waukesha (Wis.) National Bank: Wm. R. Hamby. president Citizens' Bank & Trust Co., Austin, Tex. ; Henry W. Yates, president Nebraska National Bank, Omaha, Nebr. ; J. H. Ingwersen, president People's Trust & Sav- ings Bank, Clinton, Iowa : Charles McCulloch, president Hamil- ton National Bank. Fort Wayne, Ind. ; H. L. Crandell, vice presi- dent Bank of Long Island, Jamaica. New York City; J. Blwood Cox, president Commercial National Bank, High Point, N. C. ; P. L. Hall, president Central National Bank, Lincoln, Nebr. ; F. E. Lyford, president First National Bank, Waverly, N. Y. ; William Macferran. president State Savings Bank, Topeka, Kans. ; W. J. Bayersdorfter. vice president First National Bank. Shreveport, La. ; A. E. Ramsay, vice president First National Bank, Muskogee, Okla. POSTULATES ON BANKIKO AND CfBRENOY. 1. The pyramid of credit in the United States, and in fact the civilized world, has assumed colossal proportions. 2. High interest rates is the true barometric signal that credit expansion has ■outrun sui'plus capital. 3. Conservatism should be our watchword; therefore let us not add fuel to the fires in our titanic race. ' 4. Easy methods of Inflating currency and credit by the overbuoyant should be penalized to insure conservatism; more live paper to insure a broader dis- count market can only conip from an enlarged internal and external commerce. 5. Oi)timism coupled with conservatism insures a more permanent progress. 6. Perfection is impossible, even in banking, as long as human error exists and nature is fickle in her gifts to man. BANKING AND CUEEENCY EEFOEM. 451 7. The United States has the best and also the most democratic Internal banking system in its general functions that the world has ever known, but as to the function of issuing currency, such issues are excessive in quantity and lack that all-absorbing quality, penalized flexibility. 8. Issuing currency is not a necessary banking function ; banks generally in all progressive nations have been deprived of this special privilege; limited issues are confined to single, central organizations, and penalization of over- issues covers their true flexibility; these central banks with many branches too often spell monopoly in their general functions. 9. Dr. Adam Smith says : " Money, like wine, is always scarce with those who have neither the credit nor wherewithal to but it." "The cry of all ages is for ' more money.' " " Rich countries will have all the coin they need, providing no impolitic act of legislation forces it out by the injection of inferior cur- rencies." " It is not the province of government to look to the quantity of money in anj- country, but to the quality, and the needs of commerce will fix the quantity." 10. Prof. Jevons says as to the maxim that "Cheap money (I O U's) drives out dearer money (coin)" that "many well-intentioned people have dis- believed in the Gresham law, to the great cost of States and the perplexity of statesmen who have not studied the principles of monetary science." 11. The celebrated bullion report of ISIO to the British House of Com- mons says : " In the presence of a panic it is the duty of the bank to discount freely to all solvent parties." Let us recognize the old Kaflr proverb that " He who will not profit by the experience of the past gets knowledge when trouble overtakes him." Further, let us not rock the boat too vigorously lest we experience Benjamin Franklin's expression — " I was well. I wanted to be better. I took physic and died." Finally, let us simply perfect penalized flexibility of currency issues in troublous times, thus adding to the prestige of the best and safest banking system the world has ever known. Andrew J. Frame. AFTER RECESS. The subcommittee met, pursuant to the taking of recess. STATEMENT = OF MR. JOHN V. FARWELL. The Chairman. Mr. Farwell, will you give your bank connections? Mr. Farwell. I am a merchant, of the John V. Farwell Co., of Chicago. I happen also to be a director in the National Bank of the Eepublic, of Chicago, but I am not speaking for that bank. The Chairman. You understand that this is a subcommittee of the Committee on Banking and Currency of the House, having under consideration currency matters, with a view of presentmg some measure of reformation. Mr. Farwell. Yes. The Chairman. I shall be glad to have you make your statement in your own way as to what you think should be done. •Mr. Farwell. Mr. Chairman and gentlemen, I come here not as an expert on the details of banking, but simply as a merchant. I have been engaged in business in Chicago for over 30 years, buying and selling large quantities of merchandise, and borrowing and lend- money, both in this country and abroad. Having been m business for that length of time, I "have come in contact with two or three panics, and I am more or less familiar with the working or the non- working of the banking system on that account. I speak also not as president of the National Citizens' League, of which I happen to be president, because it has no plan, but simply as an mdividual and a 452 BANKING AND CUKKENCY BEFORM. merchant in Chicago interested in this subject and willing to do whatever I can to get a better banking system. I have just gotted down a few of the fundamentals for a sound banking system, think- ing it could make a text on which I could go further, if so desired. First. A discount market where short-time commercial paper can be made liquid by transforming it into a demand credit or into cur- rency notes. Second. A cooperative control of a large proportion of the dead cash reserves of banks, so as to produce the effect of common owner- ship and prevent the present struggle between banks to grab reserves from one another in times of stress. Third. An elastic currency, based not on Government bonds, but on the assets of all the banks cooperating which would originate, as far as expansion is concerned, from the process of discounting in the discount market, and would be issued not by individual banks but by a common agency. In that I differ from Mr. Korbly, and if I can I shall be glad to explain the differences between notes issued by banks and a deposit account. Fourth. A provision for international banking. Fifth. The institutions organized for these purposes should not be money-making institutions, but should act as trustees of prosperity for all the people. The first of these principles could be put into action by the estab- lishment of district discount associations, similar in a general way to those created by the Monetary Commission bill. The second by a common agency similar in some respects only to the National Reserve Association. When I say " in some respects " I mean that there might be this essential difference, which from a democratic point of view — and I do not speak of this in a political sense, but rather in a broader sense of the word — is quite a funda- mental difference. In the Monetary Commission bill the district associations were, through the managers, the agents and servants of the National Re- serve Association. In a modified plan the cooperative association could be the agent and servant of the district association, controlling each for the common good of the whole country, that control, how- ever, to be exercised by the common consent of all the district' asso- ciations. It would also differ from the National Reserve Association in that it would have no capital stock. If this form of machinery were adopted I believe it to be essential that there should be five, or at the most only seven, district associa- tions, each having as many conveniently located subagencies as neces- sity would dictate. I say five, or at the most only seven, because they should all be strong enough to command the respect and confi- dence not only of one another but of large foreign government banks. Disraeli once said that people were ruled by their imaginations rather than by their reason. Whether that is true or not, in a panic we know that people are ruled more by their imaginations, and each association should be so large and strong that no flight of the imagi- nation could conceive of its geting into trouble. If you had 15 or 20 associations, some of them in all probability would not have a capital stock paid up of over $5,000,000. Such associations would not be as large as many national banks already in BANKING AND CURRENCY REFORM. 453 existence and would not occupy the position necessary for a sound system. As I said, these associations should cover a wide territory but might have as many subagencies as necessity and trade relations re- quired. As an illustration there should be undoubtedly one associa- tion west of the Rocky Mountains and one in the N"ew England States. There might also be one in the territory comprised by the States of New York, New Jersey, Pennsylvania, Delaware, and per- haps Ohio. In the Middle West and South combined there could be either two, three, or four, as seemed best. They should have authorized capital stock equal to, say, 10 per cent of the capital of the subscribing banks, half of which should be paid in. They should take a large proportion, say, 80 per cent, of the dead cash reserves of the banks and hold them for common use. The sub- scribing banks should also be obliged to so deposit these reserves. Banks only should be stockholders. They should also do business with banks only, their niain function being to discount mercantile notes and commercial paper having not over 60 days to run. They should not be allowed to discount paper made for carrying stock or bonds or mortgages, and they should be free from any connection v/ith investment banking. They should be the fiscal agents of the Government. Discounts and acceptances allowed to any one bank should not ex- ceed the amount of its capital stock. There should be a fixed rate of discount in each district, the same to all banks under like conditions. Overexpansion should be checked at its source, that is at the time and place of discounting of this com- mercial paper by the individual banks. In order to provide a •-•radual instead of a sudden check to overexpansion a bank should be allowed to discount, say, an amount equal to the first third ot its capital stock at the going district rate, but when it applied tor any- thing in excess it should be charged a higher rate, or the going rate, plus a commission. Also when it wished to exceed two-thirds ot its capital stock the rate should be still higher, or there should be a larger commission. This would probably prevent the banks from expanding to the limit when rates were low, and thereby encourage overtrading or possible speculation, and would not penalize con- servative bank.s which had held back from rediscounting only to find that the less conservative ones had taken most of the "lofey an-i that the rate had consequently been put up on them. By this me hod I believe a tendency to overexpansion would be checked at its source- that is, where the individual bank asks for rediscount. PerhaDS the first one-third I referred to would take caie ot the ord^Tr/ebb and flow in the crop movement and other business rans- Sons,^and it would be all ri^ht not to charge any e^tra rate for ''B^nkTceptrceTsZuld only be allowed when directly connected wifhte imp^orTation or exportation of -f^'hanchse or money^ In my judgment it would be very dangerous to '^^"^ ."^^^J ^he toks m the country to accept drafts as provided m the Monetary Commission %e district associations should be governed by a board of wMch one-half should be bankers and one-half business men. The Comp 454 BANKING AND CUERENCY EEFORM. Irolltr of the Currency should also have a deputy comptroller with some ;issiytant,s on each board in order to oversee its operations. As t'> the organization of the cooperative board, it seems to me that each district association should be represented by two members, ciations themselves acting individually, if that was the best way to do it ; or they could have the central board do it for them as their agent, raising the rate of discount; but of course they could do it if we Avanted to raise the rate of discount all over the country through the jjction of the central board, and it would bring gold here just as the Bank of England brings gold there by raising its rate of discount. Mr. KoEBLY. Would the State banks and other banking institu- tions use these notes as reserves? Mr. Faravell. No. Mr. KoEBLY. HoAv Avould you prevent it? Mr. Faravell. If they existed separately — I am assuming that feAV of them would. I thought you meant State banks in the association. Mr. KoRBLY. You Avould regard their use as very objectionable, Avould you not? Mr. Faraa'ell. Yes; I do. Mr. Charles N. Foavler. If the aAcrage maintenance of currency m the United States for business Avas a billion dollars a year, regu- lar demand, free, then it Avould cost 6 per cent to maintain' the billion dollars, Avould it not, or $60,000,000 a year— the average to the country ? Ml-. Faravell. If Ave got rid of this present circulation. BANKING AND CURRENCY REFORM. 491 Mr. Charles X. Fowler. It would cost j'ou $60,000 a year to maintain it? Mr. Faewell. Of course it goes back into the hands of the banks or the Government again. There is no particular cost to it. In that way of looking at it, it would cost the country the expense of running the system, whatever it is. Mr. Taylor. You mean it would not be an independent item of cost? ISIr. Faeavell. For the whole country? Xo. Mr. Tatlob. It would be simply the cost of the whole system ? Mr. Fakwell. Yes. Mr. Taylor. Mr. Farwell, I want to express the thanks of the committee to you for the statement you haA'e made and the questions you have answered. Mr. Faewt:ll. I am very glad to have been here. Mr. Taylor. I am very glad on my own account, and, in the absence of the chairman at this time, I want to say that the committee has been very glad to have heard you. Whereupon, at 5.20 p. m., the committee adjourned, subject to the call of the chairman. BANKING AND CURRENCY REFORM HEARINGS BEFORE THE SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY HOUSE OF REPEESENTATIVES CHARGED WITH INVESTIGATING PLANS OF BANKING AND CURRENCY REFORM AND REPORTING CONSTRUCTIVE LEGISLATION THEREON TUESDAY, JANUARY 28, 1913 STATEMENTS OF MR. WILLIAM T. CREASY, MR. T. J. BROOKS, and MR. WILLIAM H. BERRY PART 9 WASHINGTON GOVERNMENT PRINTING OFFICE 1913 SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY. House of Repebsentatives. sixty-second congress, third session. CAETER GLASS, Virginia, Chairman. 1. FRED. C. TALBOTT, Maryland. JOHN J. KINDEED, New York. GEORGE W. TAYLOR, Alabama. EDWARD B. VEEELAND, New York. JOHN M. MOOEE, Texas. GEOEGE D. McCEEAEY, Pennsylvania. CHARLES A. KOEBLY, Indiana. JAMES McKINNEY, Illinois. EOBEET J. BULKLEY, Ohio. R. W. FONTENOT, Clerk. A. M. McDebmott, Assistant Cleric. n BANKING AND CTTREENCY REFORM. Subcommittee of the CoiiMiTTEE or Banking and Currency, House of Representatives, Tuesday^ January 28, 1913. The subcommittee met at 11 o'clock a. m. Present: Messrs. Glass (chairman), Korbly, Bulklev, Kindred, and McCreary. STATEMENT OF MR. WILLIAM T. CREASY, MASTER OF THE PENNSYLVANIA STATE GRANGE. The Chairman. Mr. Creasy, this is a subcommittee of the Com- mittee on Banking and Currency of the House of Representatives, charged with the business of investigating currency conditions and reporting a measure of reform to Congress, and we have invited you here as a selected representative of the farmers in your section of the country, to indicate to us what you think ought to be done. . You may proceed in your own way. Mr. Creasy. Gentlemen of the committee, in answer to your invi- tation to appear before 5'^our committee to present some of our ideas as to needed changes in our banking and currency laws, I do so representing the organized farmers of our State. The grange in Pennsylvania numbers about 70,000 members. At several of the late meetings the following resolution was unanimously passed : We are opposed to the Aldrich central bank scheme or any other plan that looks toward the taking of control of our monetary system from the Federal Government. The National Grange has passed similar resolutions, and I believe the farmers of this country agree with these resolutions, whether they are members of the grange or outside of it. There are three things that ought to be included in any reform of the currency. First, an introconvertible bond. That is. Government bonds ought to be made the basis of currency issue when in the hands of individuals, as well as when in the hands of banks. Any holder of a Government bond ought to be able, after giving a reasonable notice, to draw the face value of the bond in currency, the interest on the bond to be sus- pended while the loan continues. This would induce business men to keep a part of the reserve in bonds, and thus make them inde- pendent of banks in time of stress, and it would at the same time re- lieve the strain upon banks. It is the one form of elasticity that is advantageous and free from danger. There may be no way of keep- ine the financier from buying Government bonds, but I think the ^ 493 494 BANKING AND CURRENCY REFORM. demand and supply will regulate that. The ordinary business man who wants the bond for use in emergency could afford to pay more for it than the big financier could. The second thing to be considered is the central bank feature. That ought to be avoided. Unless I am mistaken in my observations, big financiers are much more anxious to increase their control over the currency than they are to secure elasticity. I would suggest the following plan for meeting their demands : Let the United States be divided up into districts ; I do not care how large or small these may be. Each State might be a district, or sev- eral of the smaller States might be grouped together. Let the banks form associations, with power to bind all the banks belonging to the association. Let the associations borrow of the Government at such rates of interest as would tend to restrict the borrowing to a limited time, although I Avould be very liberal in the time. The money loaned by the Government to the association could be loaned by the association to the banks belonging to it. The Government need not require any security in loaning to the association, because the asso- ciation would have back of it the assets of all the banks in the dis- trict, but the association ought to require securities of the banks bor- rowing. The money loaned by the Government to the association and by the association to the laanks ought not to be loaned by the banks at a higher rate of interest than that fixed in the law. It might be the legal rate, or it might be arbitrarily fixed, for instance, at not more than twice the rate charged by the Government. Of course, there would be a maximum fixed bej'^ond which the association could not borrow, and likewise a maximum beyond which a bank could not borrow of the association. This maximum would be a per- centage of the capital and surplus. This plan would compel all the districts to deal directly with the Government, and therefore decentralize the system rather than centralize it. It would answer every possible need of an elastic currency, but it does not increase the power of the bank to issue money or to control it. The third point to be considered is the asset of currency. What the big banks really want is a central bank with asset currency. A democratic plan must, of course, avoid an asset currency. The above plan, as outlined, will give all the currency necessary. I would not be in favor of attempting to withdraw the privileges which the national banks now have, but I would oppose any increase in those privileges. I believe the national banking law should be amended so as to admit banks to loan on real estate — farm property. The percentage, however, ought to be limited so that they will not have too much of their money tied up in slow assets. It might be arranged that coupon interest-bearing bonds could be issued on mortgages held on farm property. In this way the banks could realize on these assets. That, of course, is a matter for the banks, so that if they want to get money on some of the mortgages that they have loaned on they can sell these bonds to other banks. The Chairman. Sell bonds? Mr. Creasy. I could illustrate it better by an example. Suppose I wished to borrow $4,000 from a national bank on my farm. The bank, after they would see that the loan was all right, would loan me the $4,000. They might have other loans on farm property, and they BANKING AND CUKRENCY REFORM. 495 might perhaps get a lot of money tied up in farm property Of course the percentage would be fixed. But if the bank, then, in turn could issue interest-bearing bonds on those mortgages, they could sell those notes to individuals in that section of the country ; so that an individual who might want to invest $500 in a bond could oet one of these bonds. " . "^^^ Chaieman. Do you mean a bank bond; a bond of the bank itself ? Mr. Creasy. Xo; a bond on mortgage. These mortgages would be on the farms. You might say the bank would simply act as a trustee, and perhaps charge an additional per cent interest for its work. That is only a suggestion. That is a matter of detail. Mr. Kindred. Would not the farmer himself have to issue bonds on the farm ? Would not that require an incorporation on the part of the farmer, which would be a tremendous expense ? Mr. Creasy. This plan I have suggested here we Avorked out on a property that I was delegated to work out. We had several of these properties, and we placed a mortgage on them, and then on the mortgage we issued coupon interest bearing bonds, payable semi- annually, and the different banks were willing to take those bonds because they were on an equal footing. Mr. Kindred. You did sell the bonds? Mr. Creasy. Oh. sure. They did sell. Mr. Kindred. To the banks? Mr. Creasy. Yes. The banks were willing to take the whole busi- ness after they found out that the other people wanted them. They were floated at 5 per cent interest, too. The above plan covers the case as I see it. First the introcon- vertible bond, which gives a certain amount of elasticity to the cur- rency without any evils or dangers. Second, a plan by which the Government will loan money to associations, and by which the asso- ciations can loan money to individual banks. Third, care to avoid asset currency, or anything that extends the privileges of the banks. Of course I have not discussed this farm-credit business, for the reason that I understand a commission is going abroad; but I think that kind of a system ought to be able to be put in with the system we have, whatever it may be. The Chairman. I "do not exactly understand the nature of your introconvertible bond. Mr. Creasy. I think I have explained that by saying that the holder of it could take it to the National Treasury and secure a loan on it. The Chairman. To the United States Treasury? Mr. Creasy. Yes. The Chairman. And secure a loan from the Government? Mr. Creasy. Yes. The Chairman. In other words, secure Government notes on a commodity bond ? Mr. Creasy. On these bonds, yes, sir. The Chairman. Would not that be asset currency ? Mr. Creasy. Oh, I would have the same kind of currency. I would not want to borrow money and get a kind of money that would not pay debts. 496 BANKING AND CURRENCY REFORM. The CiiAiKjrAN. What is asset currency but currency that is issued upon securities other than Government bonds? Mr. BuLKLEY. You meant Government bonds, did you not ? Mr. Creasy. Yes; sure. Mr. BuLKLEY. No other kind but Government bonds ? Mr. Creasy. That is what I said. They are to be made the basis of currency issue in the hands of individuals, as well as in the hands of banks. The Chairman. Suppose the Government should discharge its public debt ; how would you get a basis for currency ? Mr. Creasy. I guess we would have to get a new plan. I do not see that they are going to discharge their debt so quick. The Chair3ian. Do you know of any other government in the world beside our own that makes government indebtedness the basis of its circulating medium? Mr. Creasy. I have not studied foreign governments. I have studied what little I know about our Government. I might explain that my idea Avas this : I thought perhaps this was the least radical change that would answer the purpose. The Chairman. How would the individuals get the Government bonds ? Mr. Creasy. Simply by giving notice that they wanted to borrow money on them. Mr. Berry. They would buy them in the market ? Mr. Creasy. Oh, sure ; they would buy them in the market. The Chairman. Do you think individuals would invest in 2 per cent Government bonds as a general proposition ? Mr. Creasy. If they had this right I think they would. The Chairman. As an investment, do you think they would buy them when they can loan their money to banks at a minimum of 3 per cent, and usually loan it in commercial transactions at 6 percent? Mr. Kindred. Mr. Chairman, in order to get his proposition in my mind, I would like to ask him a question. I missed the early part of his statement, unfortunately. Does he or does he not mean that a farmer could borrow on his farm as security the regular note issue of the Government as it ex- ists now? Mr. Creasy. What I meant was that the banking law should per- mit the loaning of money on farms. That can not be done now. The Cpiairman. By national banks, no; it can not. Mr. Creasy. No. Mr. Kindred. Do you mean that the Government should loan? Mr. Creasy. No. Mr. Kindred. That is what you were discussing, is it not? Mr. Creasy. No, sir ; that is not what I was discussing. Mr. Bulkley. You have reallj^ advanced two independent propo- sitions ? Mr. Creasy. Yes ; one in regard to the bonds which the individual could borrow money on, and the other in regard to an association of the bankers. Mr. BcLKLEY. This bond that you refer to that the individual can borrow money on is a Government bond and nothing else? Mr. Creasy. It is. ^Ir. BtTLKLEY. I do not think Mr. Kindred understood that. BANKING AND OTJEEENCY BEFOEM. 497 Mr. Ceeasy. I do not tliink, really, that that part of it would be used much if the other part of it was put in force. But perhaps as a measure of safety it might be well to have that in. I think the other part would be the main plan of these associations getting together and borrowing money from the Government. Mr. "Wnxis. How would the Government get that money: simply have it printed ? Mr. Ceeasy. That depends. I think so. Mr. Willis. Simply have the Government have a large supply of notes printed and on hand? Mr. Ceeasy. You understand, this is simply for an emergency. Mr. "Willis. Who would redeem those notes after they had been issued ? Mr. Creasy. Who would redeem them? Mr. Willis. Yes. Mr. Ckeasy. I have said here that the rate of interest would so fix it that they would be anxious to redeem them. Mr. Willis. You mean to turn them in? Mr. Ceeasy. Yes. Mr. Willis. But there would be no one to redeem them in gold? Mr. Ceeasy. That is the association — I am not talking about the bonds. Mr. Willis. The notes that were issued by the Government to the association would not be redeemable any place? Mr. Ceeasy. Yes; but the interest would be so high on the loan that the bank would not want to have the loan any longer than nec- essary. Mr. Willis. But there would be no place where you could take those notes at any time and exchange them for gold or other forms of metallic money during the time they were outstanding? Mr. Ceeasy. In a money stringency I do not know whether that would be advisable or not. Mr. Willis. But at any rate there would not be any such condi- tions? Mr. Ceeasy. I do not think so. Mr. Willis. They would simply be a Government legal tender inconvertible note? Mr. Ckeasy. I think so. Mr. Willis. On the same basis as the United States note issued during the Civil War? Mr. Creasy. Yes. Mr. Willis. That is, we would go practically to a greenback basis during the panic, and you would trust to the high rate of interest to force a retirement of the notes after the panic ? Mr. Ceeasy. I think that is the idea. Mr. Kindred. Do I understand that is simply the Government loaning its credit by sticking its name on the paper during an emergency ? Mr. Willis. I so understand Mr. Creasy. Mr. Ceeasy. Yes. It seems to me you have got to have somebody's credit behind it. The Chairman. Gentlemen, do you want to ask Mr. Creasy any more questions? 498 BANKING AND CUKEENCY EEFOEM. Mr. Willis. I would like to ask, further, whether that plan that he has outlined has in so many words the approval of the grange, or whether the grange has merely passed a resolution that was read at the meeting. Mr. Creasy. Against the Mr. Willis. Against the Aldrich plan and the central bank? Mr. Creasy. Yes ; this has the approval of the Pennsylvania State Grange. Mr. Willis. That is, the plan you have suggested has the approval of the Pennsylvania State Grange? Mr. Creasy. Yes. Mr. Btjlkley. ^Vhat leads you to say that the Democratic Party is necessarily opposed to any plan of asset currency? Mr. Creasy. I infer that from what I hear them talk about in campaigns. Mr. Btjlkley. Did you find anything about that in the platform? The Chairman. Are you not proposing an asset currency? Is not a bond an asset — an evidence of debt ? Mr. Creasy. It may be, to a certain extent ; but if you call this an asset currency, it would be an asset currency that I think would have some regulation behind it and only be used in time of a panic or money stringency, and you have got to do something then, sure. You can not let some people that have a lot of money loan their money at 7 per cent interest and make the men that must have money pay such an enormous rate of interest. Mr. Willis. As I understood you to say, there would be no security of the association; the Government would just lend the money to this association? Mr. Creasy. To this association. Mr. Willis. Yes; to the association. Mr. Creasy. But the association is a part^of this plan itself, and all its securities and everything would be pledged. Mr. Willis. But the assumption is that this association has assets? Mr. Creasy. Yes. Mr. Willis. Then the security behind the Government notes — that is, the assurance that they will be ultimately returned — consists of those banks? Mr. Creasy. Yes. Mr. Wn.Lis. In that sense it is asset currency? Mr. Creasy. Yes ; looked at in that way. Mr. Willis. "Wlien you say you are opposed to asset currency, do you not mean that you are merely opposed to unrestrained issue of currency by banks on doubtful assets ? Mr. Creasy. Yes. Mr. Willis. You mean simply that? Mr. Creasy. Yes. Mr. Willis. You mean that you do not want the power of issue given unrestrainedly to banks which have questionable assets? Mr. Creasy. Yes; that is my idea. And if it would be in the hands of the Government it would be supposed to be safe. Mr. Willis. But in the sense that you want the assets of tke banks as security — good assets, that is to say — for the return of this cur- rency, there is no objection to an asset currency as such? BANKING AND CUKKENCY BEPOKM. 499 Mr' WiSJs ■ Yes^"*" consider that to be asset currency. .n?5';.wrr But what I had in view as to asset currency was a S Stry "'' "'"'^ '"^ '"^'^""^^ by "^^ banking poLr^of Mr. Willis You simply referred to a currency without the suoer- ^gS si fit'? '™"'"'' "'"'"^ 'bey could issife and relire as they Mr. Ceeasy. Yes. Mr. Willis. You do not refer to the particular thing on which the currency is founded or based ? n wmou me Mr. Ceeasy. No, sir. Mr. Kindred. May I ask for just a little' more elaboration of this? K a very interesting suggestion that Mr. Creasy has made in regard to taking the farms as security for money loaned. The bonds are to be issued by the banks who make the loan— by whosoever may make the loan ? -^ Mr. Ckeasy. Yes. Mr. Kindred. You say there was no question, in the instance you have given of your own experience, in disposing of that security in farm bonds? Mr. Ceeasy. No. Mr. Kindred. You say that it would travel around as a liquid security ? Mr. Ceeasy. Not altogether. I do not think that would be fair. But the man who had a few hundred dollars would be willing to put it in such a bond and give his money to the public. Of course, that is a matter of detail. The point I have made in this that would relate to this bill would be to have banks have a right to loan on farm property, which they have not now according to a strict interpre- tation of the law. Mr. Kindred. I am interested in that suggestion, and I would like to have your opinion as to how it would work. Mr. Creasy. Yes. Mr. Kindred. For instance, would there be any rule or law — even a business law, it might not be a statutory law — that would fix the amount of bond issue on securities ? Mr. Creasy. Yes; sure. Mr. Kindred. Would it be done by statutory law or business rule ? Mr. Ceeasy. By business rule and by the bank examiner who looks over it. Mr. KiNDEED. It would have to be done by reputable institutions who would act as underwriters for the bonds ? Mr. Ceeasy. The bank itself would be supposed to know the value of the property in its community. Mr. KiNDEED. In order to make it work in the best way possible,. would the bank give its security for those bonds or underwrite them in any way ? Mr. Creasy. The point that I wished to make in this was that we farmers believe that since the national banks really get their support from the farmers of a community, there certainly ought to be some plan by which banks could loan on farm property. The .Chaieman. That really could be done, could it not, by a very simple amendment to the national-bank act ? 500 BANKING AND CUEEENCY EEFOEM. Mr. Creasy. Sure. The Chairman. An amendment which would permit national banks to loan a certain percentage of their capital on farm lands ? Mr. Creasy. That is my suggestion. The Chairman. That could be done by a very simple amendment to the national-bank act ? Mr. Creasy. Sure. The Chairman. In fact, this committee has twice reported to Congress in favor of that very thing. Mr. Creasy. Yes. The Chairman. I quite agree with you that the farmers of the country ought not to be ^hut up entirely to trading with the State banks. They ought to have competing banks. Mr. Creasy. One reason that this should be done is, a lot of this money is sent to the money centers. I am a director in a small bank, and a lot of this money I know is sent by that bank to the money centers that could be used at home. Mr. Willis. Is your bank a State or a national bank ? Mr. Creasy. A national bank. Mr. Willis. As a matter of fact, do national banks make loans on real estate by indirect methods? Mr. Creasy. Yes; sure. Mr. Willis. How do you manage it? Mr. Creasy. We take a judgment note, in our State. Mr. Willis. So that you practically are getting what you want now, and you merely want your acts legalized ? Mr. Creasy. Yes. Mr. McCreary. You also get a note made by the man who gets an indorsement, and he has the farm there back of his indorsement as collateral ? Mr. Creasy. Yes; a judgment would be; but the ordinary note would not cut much ice. The Chairman. Practically, the basis of every farmer's loan is his farm ? Mr. McCreary. That is right. The Chairman. If you go to a national bank to borrow money and you have your neighbor or a farmer as indorser, the bank loans you the money really upon the basis of that man's landed possessions? Mr. Creasy. Certainly. But then, on the other hand, my neighbor may want some money, and I may be in a position where I have just enough to enable me to look after my own family and I ought not to take any risks. Therefore, when this neighbor has this prop- ertj', I should not be called upon to indorse that note. The Chairman. I quite agree with you; there ought to be some provision made to permit a national bank to loan a certain percent- age of its capital on farm lands. Ml'. Kindred. I would like to elaborate that suggestion. In re- gard to that feature of a bond issue on farm mortgages, I would like to get it in my mind what Mr. Creasy thought. Do you not think that the plan of having national banks lend money on real estate would be facilitated — that it would facilitate the sale of those bonds — if there was a uniform guaranty of them by this bank that put its real estate security into the form of bonds; if it underwrote BANKING AND CUEEENCV EEFOEM. 501 them? That is an important point to facilitate the working of the general princi])le? Mr. Ckeasy. The very fact that they issue the bonds on the mort- gage is a statement that they guarantee the payment of the bonds. Mr. Kindred. That is, the bank that issued them would guarantee the payment of them 'I Mr. Creasy. Yes. Mr. itiNDRED. That would certainly facilitate the sale of the bonds. Mr. Creasy. Perhaps I should not have put that in, because it is a matter of detail in working that out ; but I do think there ought to be something or other to help the farm interests in borrowing money. You can not destroy the individuality of the American farmer. If you want a dozen or two of them to put their land all in a kind of pool and issue a mortgage on it, I would say that you can not do that in this country. I do not know whether it is done in other countries, but I, for one, would not agree to that proposition. Mr. Kindred. On the other hand, we ought to encourage the energy of the farmer and his tendency toward development all the time. Mr. Creasy. That is my opinion. Mr. Willis. If you had a banking organization for the purpose of issuing currency and performing rediscount operations, if that were sufficiently safeguarded so that the Government got all the profits except the specified minimum, you would not object particularly to the form that that might take in the details of this organization, would you ? Mr. Creasy. As long as it stayed in the hands of the Govern- ment; no. Mr. Willis. As long as it was o^■erseen by the Government ? Mr. Creasy. I do not know about its being overseen. I would want the Government to control it. Mr. Willis. By " control " you do not mean an investment of cap- ital, but the exercise of a voting majority in the board of directors, or whatever it might be that managed it ? Mr. Creasy. I do not know. In this plan that I have outlined here I have left it in the hands of the Government ultimately to govern the issue of money, and that is where we think it ought to stay. Mr. Willis. But your objection to a central banking issue is that in that at ay the bank would get all the profits from the issue of the currency and from other banking operations? Mr. Creasy. Xot that alone ; but if a man should want to go into business they would have absolute control, and they would say, " We will not loan that fellow anv money." I know it is that way now. I know a man in my place who said, " I doubt very much whether I could get the money to undertake any large business proposition. I would have to get the consent of a whole lot of people." Mr. Willis. If that point was safeguarded there would be no peril in any specific form given to the organization so long as the Government kept a majority control? , • , t i Mr. Creasy. So long as it was kept along those lines which i have outlined here I would have no objection. Mr. Kindred. Would not something like a Federal board ot con- trol, controlling reserves of all banks— that is, I mean by controlling. 502 BANKING AND CUKKENOY BEFOEM. the Government having the voting power in such a board of control- be capable of carrying out the same idea ? Mr. Creasy. I would not be in favor of delegating any control. The Chairman. Who ought to control ihe business. Mr. Kindred. I said the Government controlling; with such a board of control that would control note issues, having general super- vision of banking, and the Government having the voting power- that is, the majority of the voting power— could not that be carried out by such a scheme? Mr. Creast. That might be worked out that way. Mr. Kindred. I mean, the Government having the voting power in such a board of control ? Mr. Creasy. Of course I do not know just how much of the power vou mean. Mr. Kindred. An absolute voting power, like that which a majority of the stockholders in a corporation would have; an unquestioned voting power. Mr. Creasy. If there is only a majority you can not always tell whether it will control. Mr. Kindred. I mean a majority that would carry out the idea fully. Mr. Creasy. I do not know whether it would or not ; but if it is in the hands of the Government we have somebody responsible for it who is supposed to represent the citizens of the United States. Mr. Kindred. I do not mean to quibble about it, but could not the Government be absolutely the responsible agency in such a plan? Mr. Creasy. My opinion is that I would keep it in the hands of the Government entirely. Mr. BuLKLBY. Do you mean to say you would not have any cur- rency issued by anybody except the Government? Mr. Creasy. That is practically what I say. Mr. BuLKLEY. Is that your meaning ? Mr. Creasy. Yes. Mr. Korbly. Do you distinguish between a certificate of deposit ond a bank note? Mr. Creasy. No. The plan that I have outlined here is the gen- eral plan. You can put a lot of details to it. I am not prepared to answer on details. That is not my business. Mr. Korbly. You can not answer my question ? Mr. Creasy. What have you reference to when you say " a certifi- cate of deposit " ? Mr. Korbly. Do not the banks now issue currency in unlimited quantities, both State banks and national banks ? Mr. Creasy. Our national banks in our section do not. Mr. Korbly. They do not? Mr. Creasy. No, sir. Mr. Korbly. What do you understand a deposit to be ? Mr. Creasy. A deposit in our country means that we deposit money in the bank for the purpose of either drawing on it or leav- ing it there, in which case you get a certificate of deposit. Mr. Korbly. How much money is there in the United States? Mr. Creasy. I am not posted on that. I could not give you those figures offhand. My memory is poor ; I am not posted on the details of it. BANKING AND CUEKENCY REFORM. 503 Mr. KoEBLY. You do not know how many dollars there are in deposits to-day in the banks of the United States? Mr. Creasy. No. Mr. KoRBLY. There- is a great deal larger amount of money de- posited than there is of actual money in the United States ? Mr. Creasy. Oh, yes. Mr. KoRBLY. Is not that the bank note, the difference between the money in the hands of the people and the amount on deposit? Mr. Creasy. It is credit. Mr. KoRBLY. Is not credit a bank note ? Mr. Creasy. I do not know exactly whether I would call it that. Mr. KoRBLY. The point I wanted to suggest to you was that the banks are now issuing currency in unlimited amounts, both State banks and national banks. Mr. Creasy. Yes ; but when we had the panic in 1907- their power to issue did not seem to cut much figure in our country. Mr. KoRBLY. How do you mean, that it did not cut much figure? Mr. Creasy. We could not get any money, even from the banks that we deposited in. We could not get it. This plan is trying to get around it. If you refer to the system that you had then, I would be against it, because it did not work in 1907. This plan that I have outlined here is a plan that will work, I think. Mr. KoRBLY. Do you object to the plan under which the banks are now issuing currency, both State and national banks ? Mr. Creasy. In our State I do not think that the banks are issuing much currency, on account of the tax ; but I would let them have the powers that they have now. I would not abridge those powers that they have now. The Chairman. Suppose a national bank in your country had $50,000 of bonds such as you describe, based upon farm assets, farm lands, in time of emergency, and it had not any more bond-secured currency — I mean United States bond-secured currency — would you be willing to allow that national bank to issue a certain percentage of currency on these $50,000 of land-secured bonds? Mr. Creasy. That would be taking it out of the hands of the banks. In this plan I have outlined I have outlined under what conditions they could get additional currency, and I do not think you ought to have so many plans. The Chairman. Your idea is that banks would take the $50,000 of farm-land bonds and get currency directly from the United States Treasury ? Mr. Creasy. No. In this association that they have organized they would likely determine some maximum rate. The Government likely would lay that down in the bill, the maximum that they would bor- row in this emergency. The Chairman. They would borrow it from the Government and issue it to the people? Mr. Creasy. They would borrow from the Government and turn around and loan it to the people. Mr. Willis. Whereabouts does your bank keep its surplus reserves? Mr. Creasy. Some in Philadelphia and some in New York. Mr. Willis. You receive a rate of interest on those deposits from the other banks ? Mr. Creasy. Yes. 504 BANKING AND CUEKENCY REFORM. Mr. WiLi-is. What would you say to abolishing the payment of interest between banks in order to diminish the tendency to send reserves aM'aj' from home? Mr. Creasy. The banks themselves are paying interest. Mr. Wiixrs. But suppose that you had a piece of legislation pro- hibiting the payment of interest between banks ? Mr. Creasy. 1 understand what you mean, and if you could extend it to the other banks and to the State banks, I do not know how you woidd work that. ]\Ir. Willis. Do you think it could be made effective ? Mr. Creasy. Yes ; if the thing could be hedged and guarded right I think it would have a tendency to reduce the rate of interest. Mr. KixDRED. Dr. Willis, would it not keep the reserves of the country out of certain wildcat banks that it happens are those that pay the most interest ? Mr. WiLL]s. I was trying to get an expression of opinion from Mr. Creasy upon that. Mr. Creasy. I am not posted on the details. I do not want to take up the time of the committee. AVe have a man here from Pennsyl- vania who is posted on those things. If you want the details, go for him. The Chairman. Nobody wants to embarrass you, Mr. Creasy. We can very readily comprehend that j^ou are not sufficiently well posted on banking details to cope with these gentlemen here, and we do not want to embarrass you. If you are through, we will excuse you. Mr. Barrett. Mr. Chairman, we would like to state that Mr. Brooks will represent the farmers" union. We have a number of other members of the organization present, if you care to have their names. The Chairman. We would be glad to have them. The members of the farmers' union present were : Charles S. Barrett, national president Union City, Ga. ; J. D. Brown, national vice president, Arlington, Oreg. ; A. C. Davis, national secretary, Rogers, Ark. ; J. H. Patten, general counsel, Washington, D. C. ; R. F. Duckworth, chairman national legislative committee. Union City, Ga. ; G. F. Dornblaser, of Nebraska, secretary national board of directors ; L. M. Rhodes, member board of directors, Huntingdon, Tenn. ; T. J. Douglas, member board of directors, Kennett, Mo. ; A. V. Swift, president Idaho-Oregon division. Baker, Oreg. ; R. F. Harnett, sec- retary-treasurer Kentucliy division, Paducah, Ky. ; O. P. Ford, State president Alabama division, Birmingham, Ala.; Peter Radford, State president Texas division. Fort Worth, Tex. STATEMENT OF MR. T. J. BROOKS, REPRESENTING THE FARMERS' EDUCATIONAL AND COOPERATIVE UNION OF AMERICA. The Chairman. The comniittee will be very glad to hear you now, Mr. Brooks. Mr. Brooks. Mr. Chairman and members of the committee, it is my purpose to discuss this subject of banking and currency in the light of present conditions and modern needs, with special reference to the farmer, as that is the import of your request. In order to get at the needs of the farmer we must understand his condition as compared to the condition of those following other vocations, and note if he has the same opportunities in a fmancial way that are open to those of other departments in our industrial and commercial activities. BANKING AND CURKENCY BEFOBM. 505 There is no agency for good or evil that is so vital in its direct influences on the welfare of the citizens of a country as that of the Government's financial system. Nothing so intimately concerns the industry, economy, and markets of a country as its currency, banking, and credit systems. In 1900 the total value of all farm property in the United States was $20,439,901,164. In 1910 it had reached' $40,991,449,090. This sudden increase in the value of farm property was not due to increase in intrinsic wealth so much as to increment due to inflation of land values. The productive power had not increased at the same ratio, nor had farming paid as large a per cent on investment as the other leading vocations. The total number of manufacturing establishments in the United States, exclusive of the hand and building trades, the neighborhood industries, and those whose products were less than $500 jjer annum in value, except in the cases of factories just starting or idle during part of the year, was 268,491 in 1909, an increase of 52,311 over 1904. The capital invested rose from $12,675,581,000 in 1904 to $18,428,270,000 in 1909. We see from these figures that the manufacturers had, in 1909, $18,428,270,000 invested and turned out a product valued at $20,627,052,000. And the number of hands employed was 6,615,046— at a wage cost of $3,427,038,000. The farmer had $40,000,000,000 invested, employed 12,500,000 hands, and produced only $9,000,000,000 worth in 1911, valued at the farm, which was the largest crop and of greatest value of any ever produced. •In the States of Kentucky, Tennessee, Mississippi, Louisiana, Texas, Arkansas, and Oklahoma tenant farms have increased 35 to 51 per cent during the last 30 years. In Mississippi and Georgia two-thirds of the farms are tilled by those Avho have no share in their ownership. In South Carolina 63 per cent of the farms are operated by tenants. The States with the largest average annual income per farm worker are decreasing in farm population. The average farm wages in the upper Mississippi Valley, where wages are highest, are less than $30 a month. At the present price of farms in the most productive States of Illinois, Indiana, and Iowa, if the wageworker saved every dollar it would take him from 35 to 45 years to earn enough to own an average farm. Half of the number of those hold- ing the plow handles of the United States are homeless. Taking the country as a whole, more than one-half of the families have an income of less than $600 a year, and more than 4,000,000 families have an income of less than $400 a year. General dissatisfaction with farm life and the inflated values of farm lands from $20,000,000,000 in 1900 to $40,000,000,000 m 1910 cause a loss of population in the States where the lands have advanced the most. In Iowa 71 per cent of the counties lost in population during the decade; in Missouri, 61 per cent; in Indiana, 60 per cent; m Illinois, 49 per cent; in Ohio, 44 per cent; in Tennessee, 38 per cent; in Kentucky, 36 per cent; in Pennsylvania, 28 per cent; in Virginia, 27 per cent. As many as 100,000 of our people, mostly farmers, have gone to Canada in a year. 506 BANKING AND CUBRENCY BEFOBM. Of the 19,000,000 families in the United States, about 200,000 are rich; 2,000,000 are well to do; 7,200,000 are poor; and 9,600,000 are very poor. The proportion of our population engaged in the production of wealth grows steadily less, while the proportion of our population engaged in distribution and consumption grows steadily greater. To check the drift toward poverty, tenancy, and overurbanization Avill require nothing short of a general program of elimination of the ATaste of labor, land, and capital. The manufacturer, from the nature of his business, must run as nearly continuously as possible, and the present condition of farm life offers no inducement to the larger per ■cent of the farmers to work between crop making and crop gathering in making improvements of a permanent nature on the farm. This is due to the fact that so large a per cent of the farms is not cultivated by the owner. The renter will not improve a place unless he is paid ior everything he does, and the landlord gets no income from his investment when he hires made all the improvements that are needed to keep the farm and improvements in good condition. The consequence is that very few farms are properly cared for when operated by other than the resident owner. Even owners can- not secure money with which to employ labor and make desirable improvements without paying more interest than the average in- crease in wealth justifies, and therefore deterioration marks millions of farms and idleness results in waste of labor power. This waste of labor power means neglect and waste of natural resources. There is demand for all the idle capital available to be advantageously employed in improving run-down farms, and equipping with modern improvements and tools for scientific cultivation. It is easier to find faults than it is to construct. Among the faults ■of our monetary system may be mentioned the following: 1. Insecurity. 2. Tendency to concentrate — to encourage speculation, voting trusts, and interlocking directorates. 3. Inelasticity breeds panics. 4. Inadequate provisions for time exchange. 5. Lack of coordination and uniformity ; noncooperative. 6. Narrowness of market for commercial paper. 7. Volume of money depends on national debt. 8. Does not provide for foreign markets. 9. Inadequate provisions for land loans. 10. Improper use of the postal savings deposits. 11. Allows clearing house to operate without Government super- vision; prescribe arbitrarily both the loan rates and interest rates of their members; refusal to "clear" for any banking house they care to exclude ; and issue receipts to pass as money in open violation of law. The stupendous total of about $1,000,000,000 are the liabilities of failed banks of the United States since the Civil War. Of these the national bank failures involved capital, surplus, and other liabilities to the aggregate of $350,000,000, of which total only $120,000,000 were made good. The State and private banks for the same period show failures of $660,000,000. The failed national banks netted their cred- itors 76 per cent of the stock — the stockholders losing all their capital and being assessed $20,000,000 besides. Many private bank failures BANKING AND CURKENCY EEFOEM. 507 are not included in these statistics. During the last score of years we have averaged a full week of bank failures every month. That money and financial power have become centralized and con- centrated is so plain as to be taken as a matter of fact. In round numbers the amount of money in the United States is $3,500,000,000, of which $1,700,000,000 is gold. From returns made directly to the Wall Street Journal by the various State treasurers, it is shown that the governmental expendi- tures in all the States have risen from $189,000,000 in 1901 to $423,000,000 in 1911. At a similar rate of increase the county and municipal taxes rose from $912,000,000 in 1901 to $2,082,000,000 in 1911, making a total for State and local purposes of $2,505,000,000. And to this the expense of the Federal Government of $650,000,000 and we have for yearly governmental expenditures alone the stu- pendous sum of $3,155,000,000. According to the sworn statements of the treasurers of 270,000 corporations, the net income of these corporations in 1911 was $3,300,000,000. And our statisticians tell us that the annual increase in new wealth, not including inflated values, is $4,800,000,000. Thus we contribute to Government and corporations yearly a sum equal to all the annual increase in wealth that results from the toil of the brain and brawn of ovir 93,000,000 people, and also $1,955,- 000,000 of our capital stock. The national, State, county, municipal, and district indebtedness of the United States is equal to the entire volume of money of the Government and costs in interest $120,000,000 annually. The indi- vidual indebtedness and cash transactions are yet to be included in the demands for money and credits in our 48 States. Our total bank clearings are some $150,000,000,000 annually, $97,- 000,000,000 of which are in New York. The total deposits in our 26,000 State and national banks in December, 1912, was given at $17,000,000,000. It would take $13,500,000,000 more money than there is in the country to pay depositors in cash all that is due them. Of course, these deposits are not all cash deposits, but consist of checks, drafts, coupons, bills of exchange, and other paper. It is evident that we must have some form of supplementary cur- rency, checks, and credits to meet these enormous demands. It takes $1,230,000,000 annuallv to move three of our staple crops, viz, cotton, $880,000,000; wheat, $760,000,000; and tobacco, $90,000,000. After crops have been started on their way from the producer to the consumer and the first step in the process of distribution takes place, a flood of money pours into the local banks and thence it fands its way back to New York City, where the final banking reserves are now held. Banks in the South and West have their correspondence banks, with which they keep their daily balances, and they also send money to New York City for the purpose of receiving interest on their daily balances, and because the accounts can be used more readily in that city than elsewhere, as a draft on New lork is good ^'Eney^is also sent to New York City as a result of our national- bank act, which requires the reserves to be kept, in a large measure, in the so-called central reserve cities. Our national-bank law divides 76112— FT 9—13 2 508 BANKING AND CUEEENCY EEFOEM. our banks into three classes as regards reserves — country banks, re- serve banks, and central reserve banks. The central reserve banks are located in three cities — New York, Chicago, and St. Louis. The banks of the central reserve cities must at all times have 25 per cent of their deposits in cash in their vaults. The banks of the reserve cities — 48 in number — must keep 25 per cent reserve, but may keep one-half of it on deposit in central reserve city banks. The country banks must keep 15 per cent reserve, but three-fifths of it may con- sist of a balance due them by the banks of the reserve cities. Then the country national banks may do business with cash in vaults equal to 6 per cent of the outstanding liabilities. The reserve city banks may do business with cash in vaults equal to only 12^ per cent of their liabilities. A feature of our postal savings-bank law regarding the character of securities which banks inust furnish to obtain postal deposits also has a tendency to send money to the bond-holding cen- ters. The legitimate function of money is to facilitate transfer of title. The legitimate end of finance is to facilitate production and distri- -bution. When prostituted to other purposes it becomes a tyrant. This country has shown the greatest industrial and commercial de- velopment ever seen in the history of the world. Finance and com- merce have joined hands and work together with consummate skill. Agriculture has stood aloof and paid the penalty of its isolation. Mr. Vreeland, in his defense of the report of the Monetary Com- mission on the floor of Congress, February 6, 1912 — less than a year ago — said : To-day the banks of New Torlv City act as a central bank for the country, and five or six of the great banks of New Xork hold three-fourths of the re- serves of banks deposited in that city. Under existing conditions the banks of New York are charged with the responsibility of maintaining credit and of maintaining cash payment in the United States. New York holds the ultimate reserves of the country. The surplus money of banks may be deposited in San Francisco or New Orleans, at St. Louis or Chicago, but ultimately those not needed at home find their way to the banks of New York. This is true because New York has the only real call market in the United States. It is a real call market 9 years out of 10, but in the tenth year they often call in vain. The New York bankers must put this money to work. They must put it where it can be recalled on short notice. The only big call- loan market New York bankers have for lending money is the stock exchange. As a result there has developed a dangerous system of loaning a large part of the surplus cash reserves of the Nation to the speculative exchanges. "We have also developed a system of financial banking which is superceding commercial banlring. The manufacture and sale of securities have grown to be an "industry " in the line of trust pro- motion. Plants are merged into an overcapitalized concern which is made to alasorb the mass of securities by holding out prospective prpfits flowing from the economies resulting and the power of its monopoly. When the investing public has purchased these securities they are then anxious for the trust to make good the promise of profits, and by this means a constantly increasing number of citizens become ac- complices in monopoly and foes of trust legislation and work against the common weal to make good the overcapitalized stock. The earn- ings of the company are capitalized until a trust, originally half BANKING AND CUREENCY KEFORM, 509 water, may get to be worth dollar for dollar at physical valuation for the entire stock issued. With the good money thus obtained by these promoters the securit}- sellers get a fresh grip on the country's solid resources. It must be borne in mind that it is only when a business has control of the market that overcapitalization makes for higher prices, for without monopoly competition would cut out the profits on fictitious stocks. It is possible to use the deposits of the people for these purposes, because of our faulty monetary and banking sys- tem. The stock exchange is only one of the instruments of the system and its abolition Avould not be a panacea. There is nothing in the entire business world that compares in im- portance Avith the present practice of forming interlocking direc- torals among our large corporations and financial houses. The band of directors of trust No. 1 can sell to themselves or directors of trust No. 2 the products of trust No. 1 at an exorbitant price. As directors of trust No. 3 they may pay to trust No. 2 an unwarranted charge, reimbursing trust No. 2 for the first extravagant charge it paid to trust No. 1. As directors of a chain of banks and of insurance and , trust companies to whom have been intrusted the people's deposits and the reserves of banks all over the country they can allow all three of the trusts the use of the people's money for the purpose of manipulating their securities on the exchanges. And as directors of the trusts and banks and as exchange manipulators they can furnish funds for corrupting the legislative, executive, and judicial branches of the State and National Government, and even the ballot box, in their career of business domination. By merging the largest banks, trust companies, and insurance companies masses of capital have been brought under one management to be employed, not as the servant of commerce and to facilitate exchange, but to subordinate commercial demands and to finance corporate securities controlled by the interlocking directorates. Through all the plans proposed by the bills that have been mtro- duced and widely discussed, and all the recommendations of the Monetary Commission, and all the plans advocated by the National Citizens' League for the Promotion of Sound Bankmg, we look m vain for anything covering the needs of the farmers on the foUowmg ^°L Time exchange extending for a year, so as to help him perform the carrying function in the marketing of his crops. 2. Long-time loans suitable for poor men to buy land and pay tor it by amortization, thereby checking the tenancy and promoting home ^T^Pro\ading for the investment of postal savings deposits in the '"'f Sovidtrdebentures for investment that will encourage home ownership by absentee landlordism. rtnvern- 5 Incorporation of clearing houses through which the C^ovem mentcouW provide an elastic feature to our currency system without caterinff to the speculation on the exchanges. By pledging s^ecurities, including commercial paper i^eprese^nting actual commeFcial transactions and bearing two or more responsible Sa ureTTnd running not more than four months natLonj ^^a^k notes can now be issued to national banks under the AWnch Vree knTbrn Sucli securities and paper must remain in the custody of 510 BANKING AND CURRENCY REFORM. the National Currency Association provided for under the law to which the bank applying for the circulation of the loan. The amount of notes issued thereon is not to exceed 75 per cent of the cash value thereof. All the banks in the association are jointly and severally liable for all the circulating notes so issued. Under this law notes may also be issued by the transfer to the custody of the Treasurer of the United States of any bonds or other interest-bearing obligations of any State of the United States or of any legally authorized bonds of any city, town, county, municipality, or district in the United States. Against such securities citculating notes may be issued not exceeding 90 per cent of their market value. As yet no notes have been issued under this act. It seems that this " emergency " currency law or " asset " currency law presiTpposes more stock and bonds emergencies than seasonal emergencies due to the moving of crops. All kinds of Government bonds are provided for, and all kinds of securities acceptable to the Nati(inal Ciii'rency Association are provided for if they do not run longer than four months. Crops are not distributed in four months. It takes a whole year • to distribute the great staple crops of grain, cotton, and tobacco, and it takes a whole year to distribute products of the facitofies. The emergency that does not last but a few days does not reach the farmer, and there should be no cyclonic demand recognized and catered to by the Government such as come from exchanges. To help the farmer perform the carrying function there is only one of two things to be done: (1) Allow notes to be issued on the securities representing- his perishable products properly stored and insured, said securities to be deposited with the banks empowered to issue said notes for the purpose of extending credits to the fatihfer, or (2) to proceed as we are doing and allow him to pay the peiialty of high rates of interest during the crop-moving period. When the marketing season comes the bulk of the crops are forfeed cm the market faster than they can be consumed. Southern and western banks have to pay cash for most of the crops, which forces them to borroAv money from the East. The $200,000,000 reqilirfed to be shipped south during the four months in the fall is $40,000,000 more than the combined capital stock of all the 1,491 national baiiks in the 13 cotton States, and costs the borrowing banks $40,000 to cause this money to merely shift its base of operation. We have two characters of loans based on the character of security, to wit, dynamic and static. Loans on real estate are based on static wealth; loans on stocks and bonds may also be classed as static. Loans on produce on the way to the consumer or store, preparatory to shipping, are dynamic. , Our credit machinery when in pfefffebt working order performs the service of money and is a marvelous commercial invention. Take the wheat raiser in the Central West. He sells his wheat to a local elevator ; the elevator sells to a Chicago elevator ; the Chicago elevator sells to a miller ; the miller sells the flour abroadto a jobber; the jobber sells to a baker; the baker sells to a housewife. In all this process of distribution it is quite pos- sible that not a cent of money passes from hand to hand in carrying the wheat to the table of the foreign consumer. Yet everyone con- cerned gets pay by a system of credit devices and bookkeeping. BANKING AND CUERENCY EEFOBM. 511 All this is dynamic credit and is concerned in the distribution of yearly products. If something happens to check the flow of these credits the com- mence of the country is halted, business paralyzed, the producer and consumer are kept apart, and everyone wonders what is the matter. The demand for money to satisfy credit starts the speculation ball rolling until thousands are caught in a financial crisis and find them- selves helpless. In devising a system free from money panics and credit stagnation, various suggestions have been made. The Aldrich bill for a central bank, to be the fiscal agent of the Government and the reserve center of the Nation, was presented and rejected. Hon. Leslie M. Shaw, Secretary of the Treasury under President Eoose- velt, said bef oe this committee on the 8th of this month : If the Aldrich plan for the proposed currency reform Is adopted, Wall .Street will be placed in absolute control of the country for a period of .50 years. The plans of the measure propose a compulsory association of all the national banks and trust companies. It proposes to take from the community one-fifth of its cash capital and pass it over to those who are in position to meet the requirements. The national and State banks and trust companies are capitalized at $2,000,000,000, which would give the corpoHition approximately $400,000,000 were State banks included. The Government is to deposit its money with the National Eeserve Association free of interest. The reserve association is to take over the bonds of the Government held by the banks and have the currency privilege attached to the same and assume responsibility for the redemption of the notes secured by the bonds. The reserve association shall issue its own notes on the terms named. If the Government issues more bonds at a higher rate than 2 per cent, the reserve association must have first chance at them. It is to be the policy to retire bank circulation and substitute notes of the reserve association. These notes are to be covered one-third by gold or law- ful money and the remaining portion to be bankable commercial paper, or be obligations of the United States. Thie reserve association could thus take $10,000,000 lawful money and $20,000,000 commercial paper and issue $30,000,000 in circulat- ing notes, and keep repeating this operation until the sum reached $900,000,000. So by the use of $300,000,000 lawful money this re- serve association may issue $300,000,000 of its own money and $600,- 000,000 more. It is allowed to issue its own money, secured by the collateral given for loans of the same from it by its own customers — which are the banks owning the reserve association. Going from the Aldrich plan to the recommendations of the Mone- tary Commission we have the reserve association without some of the features of the central bank. The National Reserve Association is to be a bankers' association, which is ready to take the papers taken by the ]banks in the course of their business and furnish them cash therefor, provided these papers are of approved kind. The associa- tion is to cash papers for the banks belonging to the association in like manner as the banks cash papers for their patrons. So the as- sociation will not deal with the public direct. The kinds of paper to be apcepted must be sound and safe and run for short periods only, and confined strictly to commercial transactions. Prime paper of 512 BANKING AND CUEEENCY EEFOKM. short maturity might be directly rediscounted for a bank as a branch of the association. Such paper, might be guaranteed by a group of banks formed in a local association. Under rigorous conditions only would it rediscount loans made even on high-class bonds and collat- eral as security. Transactions in foreign exchange guaranteed by the bank of the customer might be handled in a similar manner. Hon. Franklin MacVeagh, Secretary of the Treasury, in a speech before the "Western Economic Society, at Chicago, November 11, 1911, speaking in defense of the report of the recommendations of the Monetary Commission, said: 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 in 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 which are its owners. It will make loans only to the banks. It will not be run to make money, as central banks are. It wUI 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 n*^'ertheless 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. Now, what is it that the National Reserve Association is to do that could not be done by the National Treasury itself, except to buy and" sell exchange? It is to receive deposits and pay checks. The Treasury can do that. It is to issue currency. The Treasury can certainly do that under order from Congress, as the Constitution says: Congress shall have power to coin money and regulate the value thereof. It is to loan money. If the Government can borrow money, why can it not loan money? Has it not often loaned to national banks without interest? Has it not placed money on "deposit" with the States? It is to buy and sell gold. The Treasury need not do this to per- form all the functions necessary for it to assume. Banks can be allowed to do this. It is not necessary, says Secretary MacVeagh, for the reserve association to be privately owned or be a competitor of other banks. It is not necessary for it to accept general deposits, but only de- posits of the Government and of the banks which are its owners. If the Treasury deposits in banks without interest, why not allow banks to deposit in the Treasury on the same terms, if they so choose? If they do not so choose they may have greater avenues open for loaning through credit banks and land banks and investing in current debentures as should be provided. The reserve association is to make loans only to banks. The Treasury can do the same under proper regulations. It is to be organized not for profit, but for service. This would fit the Treasury exactly. It is to be an agency. The Treasury is an agency. It is to perform certain functions for the banks which they can not perform so long as they are unor- ganized. The Treasury can do the same. Can we not provide for BANKING AND CTJEEENCY EEFOKM. 513 the banks to buy and sell exchange \Yithout organizing a National Reserve Association, if that is the only thing that it is to do, which it would be improper for the Treasury of the United States to do ? Elasticity can be provided by the Treasury being authorized to furnish clearance notes of the Government to zone leagTies of banks on their indorsement, the zone leagues to indorse commercial paper based on dynamic wealth properly protected by value and insurance. The zone banks can operate separatelj? and secure ctirrency in private affairs and jointly in common affairs, and those in one zone can co- operate with those of another zone in offering securities and loans from one zone to another. And when these are exhausted the Treas- ury can furnish notes indorsed by a league, as here provided. At present the only normal function of a clearing house is to facilitate the daily settlement between banks in the same city. Each bank sends all checks and items it has for collection on the other banks, called " exchanges," to the clearing house, and is given credit for such amount by the clearing house. Every bank presents its exchanges with the items drawn upon each bank in a separate en- velope marked with the name of the bank which must pay the same. Having received credit for the total amount from the clearing house, these envelopes are distributed to the banks due to pay the balances by the delivery clerks, the banks tabulate the same, report the amount back to the clearing-house manager, and are charged by the clearing house. The exchanges taken to and carried away from the clearing house are the same differently combined, and the debits and credits must be equal. Cash is only used to settle balances. The clearing house is not incorporated, seldom has either asset or liability, yet performs daily and invaluable service. In the various schemes proposed for banking reform the possible usefulness of the clearing house has been overlooked or ignored. Its present power is exercised subject to no public supervision, regulation, or control, but is subject only to a small committee chosen by a majority of its members. The banks composing a clearing house have the privilege of rejecting any application for membership which they may choose for business or other reasons. This is necessary to keep out banks that refuse to abide bv the safest standards of business. But the practice of exclusion niay be extended for ulterior reasons under its present independent operation. As our system of banking and currency renders us quite suscep- tible to financial panics, when the reserves are locked up and com- mercial paper can not be discounted, the clearing house has at differ- ent times in the past stepped into the arena and provided a money substitute which was known to be unlawful but allowed because ot the service it performed. In some of the large cities clearing- house certificates are issued in large denominations for circulation only among members of the clearing-house associa,tions. In other cases, certificates have been issued in the form and size of current bank bills, which circulated as money. The first were not subject to tax, as they were used only to settle debit balances at the clearing house. But the latter were clearly subject to the 10 per cent tax which was designed to tax State-bank circulation out of existence. In the panic of 1907 clearing-house certificates were issued very generally in the smaller as well as the larger cities, and also the 514 BANKING AND CUEKENCY KEFORM. issuing of certificates of deposit and cashiers' checks by hanks designed to circulate as money. In this matter of converting com- mercial obligations into means of payment the operations of the clearing houses were unsatisfactory. There was no specified capital set apart, no legal authorization, no regularity of control, and no l^rmanency of operation or definite rule of cessation. And the same sporadic character would be manifested in the issue of the cur- rency now permitted under the national currency associations organ- ized "under the Aldrich-Vreeland emergency currency law. The cooperative principle embodied in the clearing house is pop- sible of much more extended use and application. There is no rea- son why clearing houses should not be utilized in their peculiar field regularly, permanently, and legally. They have already operated to compel members to avoid questionable practices and to live up to the best and safest professional methods in vogue, and they, too, should be subject to rigid supervision by public authority. They should be incorporated and be held strictly amenable to the courts. State banks should be made eligible on equal terms with the national banks. The clearing house can be made to perform the function which was sought to be legalized in the emergency currency act, the organization under supervision of the National Treasury, so as to give stability of method and extension of plan throughout the country. The clearing house could be permitted to establish a reserve and have all relief by note issues come through the zone clearing house from the Treasury and indorsed by the members of the zone clearing house. It could act as agent in securing gold from the Treasury or elsewhere, with which to meet redemption emergencies. A z«ne clearing house would be an exchange for its bank members, and the bank members of any other zone clearing house through their respective clearing house. It should have all the attributes and powers of a body corporate; receive, collect, and forward commer- cial paper and bills of exchange from- and to the banks which are members of such zone clearing house through the zone clearing houses of other banking units under a corporate clearing house to the bank members of the same, and indorsed by the bank wanting collection. It seems that there is no more difficult problem than the fair ad- justment of the finances of society. The further we go in our complex civilization the more difficult the adjustment on the lines of equity. The question of rural credits is both a question of rural economics and of markets. America is far behind European coun- tries in the question of rural credits. For one to suggest the average American is better off than the average European does not prove that there is no merit in the rural credit systems of the Old World. Were they abolished the people of those countries utilizing rural credits would suffer intensely from the economic calamities that would follow. The central idea in the rural credit systems of Europe is easily stated. By combining assets and owning institutions which receive and utilize deposits the farmers are in position to secure money at lower, rates of interest and in sufficient volume to carry on large en- terprises and be independent of a bank boycott, money trust, credit monopoly, or sporadic panic. BANKING AND CUBBENCY BEFOEM. 515 Certj^in financial " houses " have a virtual monopoly on ci-edits in this country. A monopoly of credit is as great a menace as a mo- nppoly pf money or industry. Agricultural credit banks may be divided as State controlled, joint stock or private profit sharing; cooperative. They may also be divided as land mortgage banks and personal credit ba,n]is. Anotlier division would be based on limited liability and unlimited li^ibility. Still another classification would be those run for profit with paid oUcials, run for use and not profit and gratuitous management. The immediate objects and purposes of these banks are the pro- vision of capital at low rates of interest, the purchase of agricultural requirements, the preparation and sale of agricultural products, and farm insurance. The general working principle is along the following plan : The individual who gets the money secures the local association; the local association secures the federated head; the federated head finds the money, secures it to the lender, and sends it to the local association, which turns it over to the borrower. It seldom sells con- sumptive credit, but sees to it that each loan is for productive use. The four great elements of material prosperity are : (1) Agriculture; (2) productive urban labor, including mine labor; (3) commerce; (4) finance. In the United States finance and commerce have locked shields in a common cause and have prospered amazingly. Agriculture and urban labor each stand aloof and are fighting a losing battle. Com- merce has a dynamic dollar and agriculture has a static dollar. Com- merce has a liquid credit and agriculture a viscous credit. Commerce can mobilize its capital credit and agriculture can not. Agriculture needs a system that will vitalize its resources, mobilize its capital, liqviefy its assets, and render dynamic its collateral. American farmers borrow billions of dollars. Millions could be saved by borrowing together. The same farmers have hundreds of millions on deposit, bringing in from nothing to 4 per cent. When a farmer deposits in the banks, by the interrelationship which exists and for which the individual banks are not to blame, the money is concentrated by a series of deposits in a few centers, but not avail- able for use by other farmers. When it is borrowed the rate is raised to double what is allowed for it on deposit All of this money might be better handled and put to profitable use instead of concentrating it. The same farmers sell billions ot dollars' worth of products a year, following hazardous and profligate methods. By wise cooperative marketing more millions a year could Tsaved A great per cent of these same farmers buy hundreds of milUoiL on credit and pay enormous prices. There is no greater load Si tirback of labor than credit buying. Hundreds of millions could '^Zllr^ir^T^etZSn^^^^^^ the last census report and thfbest S available, the farmers of the United States are indebted Qc "follows • Farm mortgages on land operated by owners *i' slo! OOo! 00ft ^X/'^^T^^-^-^-firr^^-^^oi^'lt ^' ^^^ ^^ ^ crops, chattels, etc 616 BANKING AND CUBKENCY EEFORM. This makes an approximate debt of $500 on fixed capital and a current debt of the same amount to each farmer at the head of a family. The rate of interest he pays, including the expense of secur- ing loans, is about 8| per cent, which means that the farmers are paying about $510,000,000 a year interest on borrowed capital. The corporation way of securing capital is to bond the company and market the bonds, debentures, mortgages, or other evidence of indebtedness and market them at the lowest rates of interest that can be secured. This enables the manufacturer, transportation com- pany, or franchise corporation to get money at 6 per cent or lower. Under our present banking system the national banks are not per- mitted to loan money on real estate securities. The larger banks are stuifed with stocks and bonds and with commercial paper as security for loans, while denying such loans to farmers. The country banks in like manner carry thousands of bonds and stocks of local indus- tries while shunning like accommodations to farmers. Country bankers are not willing to pay more than 3 or 4 per cent on time deposits, and these same bankers will not loan to the same men on real estate mortgage for less than 6 per cent, with interest paid semiannually in advance, or at a higher rate paid annually. The ordinary bank prefers to make short-time loans at high rates, and by turning over their accounts often it amounts to compounding the interest as often as a loan is made and collected. This kind of loaning and the regular discounting is more attractive than the long- time loans required by the farmer who is trying to pay for' a farm. The custom of everyone putting his money in bank rather than keep- ing it at home has greatly accelerated the movement of money. The small banks can then deposit with their correspondent banks a cer- tain per cent of these deposits ; these banks in turn can redeposit in larger banks, or loan direct. In either case the money finds its way to the big corporations which furnish their securities for loans at low rates. This process leads to inflation in certain lines of business and stringency in other lines of business. It is a mistake to measure prosperity by bank deposits. It ceases to be a good indication when it shows a dearth of local investment. The deposits in the savings banks alone in the United States, during the summer of 1912, amounted to $4,000,000,000. Thirty-two and a half per cent of this was in the New England States, with only 7 per cent of the population. This did not mean that the New England States were more prosperous than the agricultural States of the Middle West, where the deposits were much lower. The six Western States of Indiana, Wisconsin, Minnesota, Nebraska, Kansas, and Oklahoma had only $63,000,000. These States were more prosperous than the New England States. We find an anomaly in the fact that Iowa had $168,000,000 of savings-bank deposits. Iowa was pros- perous also. There are more wage earners in the New England States because of manufacturing, and the Western States named are mostly agricultural, which would account in part for the people putting more money in savings banks in the Eastern States than in the Western States named. But that difference does not apply in the case of Iowa, as it is no more a manufacturing State than the other Western States in the group named. BANKING AND CUEEENCY EEFOEM. 517 The tendency for farmers to move to town as soon as they get prosperous enough to afford it is developing an absentee landlord- ism m this country. If we had a system of rural credit operated so as to allow the absentee landowner to sell his land to the landless and find a safe investment which is as permanent as he may desire to have it, and at the same time be an investment on which he can realize at any time in case he decides to reinvest in land, it would be especially desirable to lessen the tenantry. A mortgaged home is bad enough, a rented home is worse. Tenancy is not the normal state of man, and any agency that tends to produce it is an agency to be avoided. Whether the rural credit systems in vogue in Europe lead to home ownership or to tenancy is a good criterion by which to judge it. As to whether the farm mortgage is an intermediate stage in an ascending scale from tenancy to land ownership or an intermediate stage in a descending scale from land ownership to tenancy is a question worth considering. It may very easily be either the one or the other. There is hardly a country on the Continent of Europe that does not have a system of rural credits. There are not in America. There are so many varieties and so many variations of varieties that it is only the fundamentals of the more important systems that we shall deal with. The money-lending shark has cursed every age; and the debt- shirking scoundrel has been his boon companion. Many money- lending concerns belong to individuals of disreputable character, dealing preferably with unfortunates. Cooperative credit eliminates both characters. The credit societies are controlled by the borrowing members ; the credit given is on personal property or realty. The realty credit takes little account of character. Personal credit takes both character and solvency into consideration. There are five departments of cooperative effort : 1. Cooperative credit societies (banks), which may be an associa- tion of producers or consumers or both. , 2. Cooperative agricultural societies, which are associations o± T)roQiiCGrs. 3. Cooperative urban workers' societies, which are associations of TDroducGrs 4. Cooperative mercantile societies, which are associations of con- sumers. . . , . , ... ^f 5. Cooperative industrial societies, which are associations ot pro- Sometimes the last two named are combined into one— as the Co- operative Wholesale Society (Ltd.) , of Manchester, England. ^On the question of land banks, or means of furnishing money for farmers to buy and pay for land there is no specific ironclad plan to which we hold ourselves; but for mere suggestions, I outline the ^'^ATand bank should have large capital which it can lo^n iridefi- nitely. This money must be secured (1) by selling stock; (2) by deoosita- C3) bv Government subsidy or subvention. It haS'been suggested that all national banks be required to deposit a certain per cfft of their capital stock, surplus, and undivided 518 BANKING ANP CUBBENOY EEFOBM. profits as a permanent land reserve, with the land banks in their respective States, it being an invesment on which the bante are to receive a fair rate consistent with the profits of the land bank run primarily to accommodate those who wish to buy farms for their personal use, supervision, and improvement. To require only 1 per cent on the capital, surplus, and undivided profits from all the national banks of the United States, would make a total of land-reserve capital in the 51 States and Territorias of $20,000,000. One national land bank would be sufficient in each State, and its large volume of business would make it possible to operate it on the most economical lines. But any State may incorporate mortgage banks with which any or all banks under State charters may affiliate. It would seem advisable to have land banks distinct from other banks, but cooperating with them. The land bank should be an auxiliary institution to the commercial bank. Without mixing long-time land credits with short-time com- mercial credits, drawing from the same fund both loans, thg two should be coordinated so as to let all capital flow readily through all banking channels. The capital reserve with which land banks begin business should be a permanent fund which can not be withdrawn except under such regulation as will not impair its stability and usefulness. Its management should be cooperative, recognizing each factor, necessary for its successful operation. These factors are, (1) stockholder, (2) depositor, (3) borrower, and if subsidized by the Government, (4) the State or National Gov- ernment furnishing part of the funds. The banks of tjie United States have been run by many for stockholders and promoters %ni not by men for the service of the people. Commercial banking is » profession and not a mere means to an end, and that end the service of business pigs. Each depositor in the land reserve bank — whether individual or bank or other corporation — over a prescribed' amount sho\ild h^ve one vote; the borrowers from each local bank through which loans are secured have one vote; each stockholder one vote; and if the Government has an interest it should have a vote for each interest in projjortion to all the other interests concerned. The mortgagi^s upon the property of the borrower are pooled into one individual security for all the bonds the land bank issues, and it will be to their interest to have it operated on the soundest basis and in the safest manner. For the purpose of buying land and permanently improving it the farmer should be able to make loans running through a series of years and at a rate below the average net increase of wealth resulting from such work and investment. The principal sources of re^l es,tE^te loans now open^to farmers are the insurance, savings banks, and trust companies. A dozen life insurance companies have outstanding farm loans amounting to $400,000,000. Experience has shown that the only practical method for a f arwer to pay a loan secured by his land is by amortization. T^e afUrjiual sum paid by the borrower to be composed of the interest, the pro- rate of the cost of the business, and an installment on the principal. By this process the amount of interest decreases and the amortization BANKING AND CtJKKBNCY EEFOBM. 519 item increases till the debt is extinguished, the. per cent of the capital, to be paid each year depending on the term of the loan. , The farmer executes a note in favor of the State land bank for a certain sum of money, in which note he agrees to abide by all the regulations, and this note is secured by a mortgage of the property drawn in favor of the land bank. This note is either negotiated through a local cooperative credit bank, a local commercial bank, vr direct with the land bank. Proper inspection nmst be provided in either case before the loan is made. A brokerage of one-eighth of 1 per cent is charged by the local bank, if handled by it, and charged by the land bank if handled direct. When payments are made the land bank puts the amortization into its redemption fund and the interest money into its' current receipts. The land bank markets land bonds secured by its mortgages at whatever they will bring in the open market in the form of deben- tures suitable for small purchasers as well as large ones. The annual payments upon the principal earn interest in the land bank or save interest when used to buy in and retire bonds, so the borrower gets the benefit. The borrower should also participate in all earnings of the land bank in profits above surplus. The larger the amortization and the lower the rate of interest the sooner will the annuity liquidate the debt. It could be provided that borrowers may pay their land debts slither in money or the debentures of the land bank at par. This would have a tendency to maintain the price of the bonds at face value. They could be registered or coupon bonds, as the investor pre- ferred, as is not the case with postal savings bonds. Each bank should act as an agency for buying and selling these bonds. Each bond is secured by all the assets of the land bank— reserve, surplus, and mortgages held. No bond is to be issued agamst any specific mortgage, but all are pooled as securitv for all outstandmg bonds. One of the curses of American agriculture is absentee landlordism and tenancy. Farmers who accumulate a competency, and for one reason or another move to the towns or cities and rent their farms, can not keep their farms as productive as they left them, m as good repair, and get a net income from the investment. It takes all of the rent to keep the farm and its improvements m proper repair. This leads to deterioration of most farms cultivated by other than the owners. If there were safe investments paying a reasonable per cent that was safe and unquestionable, requiring no attention or worry, these absent landlords would sell their farms to the home- rs a^nd invest the money in the land-bank bonds. But they woud prefer having the cash for the farms and not wait for slow pay- ments from the purchaser. This implies the need of a plan whereby Se puSer b^paying, say, one-fourth of the purchase price, can have^^he land ba^l^p^ayfhe oW three-fourths -.its debentures and allow the purchaser the regular terms to liquidate the debt by amortization direct to the bank. ,. ■.-. f„„™p,,c Why not have mortgage credit banks dealing direct with tarmeis '""Ssf ft'would be a case of bargain driving between individual faSSSs and Tdividual banks. The movement in the early eighties Mortgage banks set on foot by bankers ended disastrously. On 520 BANKING AND CUEEENCY EEFOEM. this point Ambassador Myron T. Herrick said on the 11th of Sep- tember last : I think it would be most unfortunate if after the public has awakened to an Interest in this matter ill-considered organizations should succeed in getting into the field and bringing about a repetition of the farm mortgage financial disasters of some 25 years ago. Therefore, I am most willing that authoritative warning be made on this point. Why not use land bonds as a basis for an issue of money ? Bond-secured currency has never been a success. Credit currency needs quick convertibility. Every effort to base credit currency on land or to overissue mortgage securities or to put mortgages in ad- vance of the development of a region has resulted in disastrous failure. We have examples in the John Law French assignats, based on untold natural wealth of French possessions; in the Cedular or Argentine land debentures, and kindred experiences. Mr. Yokum has pointed out that the average interest per year on $1,000 on United States bonds is from $20 to $35 ; call loans at New York, $25; time loans, $36; commercial paper, $41; French farm mortgages, $43 ; German farm mortgages, $44 ; good railroad bonds, $46; best public utilities, $50; city mortgages, $50; best industrials, $65 ; mortgages on farms in Egypt, $80 ; American farms, $85. Our postal savings bank law should be amended. It should pro- vide that such part of the postal deposits as are to be redeposited by the Government in banks should be offered to the banks of the local- ities where deposited — any solvent bank or banks subject to public supervision or examination in the State or Territory, and as nearly as possible in the immediate neighborhood in which the funds are received — at a rate of interest not less than 2^ per cent per annum. They should be allowed to furnish indemnity bonds or coUateralas security to the Government. In event that the local banks in the several States refuse to receive deposits on these terms then the funds thus refused should be deposited in the nearest bank offering to receive them on the terms required. These terms should not confine the securities demanded to those of a nonproductive nature. Our postal savings bank law provides that — Any depositor in a postal savings depository- may surrender his deposit, or any part thereof * * * and receive * * * the amount of the surrend- ered deposits in United States coupon or registered bonds * * * which bonds shall bear interest at the rate of 2^ per cent per annum •^ * * and * * * payable 20 years from date of their issue. The funds received from depositors from these bonds should all be placed in land banks to be loaned to bona fide purchasers of real estate under the restriction governing land-bank loans. Whereas the law now provides that 30 per cent of the deposits may be invested in Government bonds, and upon the will of the President 45 per cent may be invested in Government bonds, without re- striction as to kind or rate of interest — and whereas it provides that only bonds. Government or municipal, shall be accepted as security — thus concentrating the funds in money centers and draining the rural districts of the currency they need, we wish to register a protest against such provision in the postal savings bank law, and ask that it be so amended as to guarantee the use of the savings deposits in the community where they are deposited, unless the demand is too meager to cause the local banks to comply with the requirements. BANKING AND CUKEENCY EEFORM. 521 We do not conceive that this would often happen, especially if we had a system of cooperative credit banks in operation. • "^u® Government could call in all the registered and coupon bonds in the hands of depositors and hold them on deposit to the credit of their owners, a receipt for which could be issued, and for every negotiable bond issued by the farmers in cooperative groups on syndi- cated lands deposited with the Treasury as security for the postal bonds, let the Government furnish the farmers' cooperative groups in cash the money originally deposited in the postal savings bank, less 3 per cent to cover the 2J per cent which the Government pays and an extra | per cent to the postal-bond holders for the use of the bonds. The postal-bond o^^ners would be secured by the land bond as the law should provide for foreclosure without recourse to court proceed- ings and the Government would be secured by the deposit of the notes for which it had already received face value in cash. If we are to continue our national banking system we should rec- ognize the farmer on equal footing and allow him to pool his real estate, bond it, secure all the Government bonds not being used for note issues by paying the owners 1 per cent for their use, pledge his land bond for the Government bond and deposit both with the Treas- urer and receive notes on the same terms granted to national banks. There is no reason why one class of citizens should be furnished money by the Government to buy its interest-bearing bonds and throw in the privilege of banking on deposits of other people and on other people's business transactions in exchange and all other classes of citizens be debarred. The issue of bank notes to the face value of the bonds, when owned by a national bank, is equivalent to selling Government bonds and furnishing purchasers the money to pay for them. I believe that is all at present that I can say, unless there are some interrogations. The Chairman. Gentlemen, do you wish to ask Mr. Brooks any questions ? Mr. Willis. One point occurred to me in the course of your dis- cussion. Early in the discussion I understood you to analyze the Aldrich or Monetary Commission plan and then to say that most of the work which would have been given to the National Eeserve Asso- ciation could be just as well performed by the Treasury. Did I understand you correctly? Mr. Brooks. Yes. Mr. Willis. And then, later on, that you seemed to be advocating the organization of zone associations of banks, which should have certain powers. Was I correct in that ? Mr. Brooks. A suggestion. In case you decide m your report of a bill that it is absolutely necessary and unavoidable to have a kind of emergency currency, that emergency currency should not be issued under anv circumstances except for a legitimate cause, and we do not consider that that emergency currency could properly be issued on such securities as are handled on the stock exchange, but they should be based on such products as are dynamic, or on the way from pro- ducer to consumer. The Government now restricts the kind o± securi- ties that must be deposited in order to get notes. It restricts the kind of deposits a bank must furnish in order to get postal savings 522 BANKING AND CUEEEHTCY EEi'OBM. bank deposits. It has the same duty to perform, I think, tb dictate that this emergency currency shall be issued solely and only in Case of there being an extra supply of something thtown into the chatiilels of trade, that is to be held in the credit systems until it reaches the consumer. Mr. Willis. You have no objection to a zone association of banks issuing currency and doing business on the strength of pajier that has gi'own out of bona fide industrial and commercial transactions, have you? Mr. Brooks. If that was found necessary in order to keep from disturbing the business of the country, I would say no. Mr. Willis. In that event what would be the relation of such an association to the Treasury, under your plan? Mr. Brooks. We would want the Treasury to issue' that currency and furnish it on the call of these zone association banks, they to furnish it to their customers upon securities that they deposit, such as warehouse receipts, bills of lading, and so on, and they to guar- antee it themselves, and stand sponsor for it, so they Would not accejit anything that was not insurable and perfectly safe. Mr. Willis. Then, as I understand you, the zone association billks would take this paper such as you have described and would obtain notes from the Treasury? Mr. Brooks. Yes, sir. Mr. Willis. By simply applying to the Treasury, getting the .note, and then loaning the notes on the strength of this security that you have mentioned? Mr. Brooks. With the provision that those notes are to be redeemed as soon as the physical purchaser pays for them ; and as soon as the money arrives here it is to be deposited in a bank that holds securi- ties to redeem those notes. Mr. Willis. That is a provision to retire notes as soon as the need for them is over? Mr. Brooks. Yes. They are allowed to run a year. Mr. Willis. What capital do you think these zone association banks should have ? You say they should be incorporated. Mr. Brooks. Yes. I think .that would be rather immaterial, for the simple reason that while they are responsible for these notes, yet they would not accept collateral or a deposit or any kind of cofii- mercial paper that they were not willing to take the risk on them- selves, and inasmuch as it is to be redeemed by the purchase money of the goods themselves it would he perfectly safe. Mr. Willis. But for the purpose of current redemption — that is, keeping the notes conxertible into lawful money all the time— they would have to have some capital, would they not ? Mr. Brooks. They could be transferred from one to another, in- asmuch as they are good for paying debts, for the length of time that they are out; and every redemption is to be in actual money that is to be paid for the goods when sold. Mr. Willis. But it would be desirable for those zone association banks to start with a fixed capital of a modest amount, would it not? Mr. Brooks. I think so; yes, sir. Mr. Willis. Would you have those banks do business solely with existing banks, or with individuals also? BANKING AND CUREENCY EEFOEM. 523 Mr. Brooks. Solely with existing banks, because thej' would not be a separate kind of banking; they would simply be an agency be- tween the banks, in these banking units, and would never be an in- strument or a fiscal agency for the Government. Mr. Willis. Yes; and you would give to the zone association banks the power to buy and sell exchange and deal in Government securities when necessary ? Mr. Brooks. Yes. Mr. Willis. So that practically they would loe banks of rediscount doing business solely with banks? Mr. Brooks. Yes. Mr. Willis. And the relation of the Treasury to them would be that of oversight and control and the issue of notes ? Mr. Beooks. They would be absolutely under the direction and control of the Treasury to the extent that they are just like national banks are. Mr. Willis. The relation of the Treasury to these zone association banks would be analogous to that between the Treasury and national banks at the present time? Mr. Brooks. Pretty much so. Mr. Willis. And would you have public funds deposited in the zone association banks, or kept, as now, in the Treasury Department ? Mr. Brooks. I do not believe I would, unless it was necessary, in case of a panic, to furnish reserves that may have been deposited in the Trea.sury by banks. They could deposit with one another, or with the Treasury themselves, if they thought it proper to do so. They might be furnished redemption money to keep a panic from causing banks to go to the wall. Mr. Willis. That is, you would allow the Treasury to allow such funds to be deposited in these banks when necessary to furnish them with additional reserve money?' ]Mr. Brooks. It might be desirable. Mr. Willis. With reference to the agricultural phase, would it not be better to keep the provision for agricultural securities distinct from the general provision for short-time commercial paper? Mr. Brooks. "What do you mean — land loans? Mr. Willis. Yes. Ought it not to be a different piece of legisla- tion ? Mr. Brooks. Yes; I think so, because you can not use the same fund in commercial banking that it takes to handle land loans. Mr. Willis. That is an entirely different proposition? Mr. Brooks. Yes, sir. Mr. Willis. Do you think vou can get a wise and satisfactory system of land banking without first having a well-organized system of commercial banking? Mr. Brooks. I do not knoAv that it would be impossible to have it; but, as a matter of fact, it would be advantageous to have a com- mercial system perfected. Mr. Willis. As a starter? Mr. Brooks. Yes, sir. Mr Willis. So vou would suggest, first, a suitable commercial bank law and then' a land-bank system on the lines you have indi- cated? Y6112— PT 9—13 3 524 BANKING AND OUEBENCY EEPOKM. Mr. BeookS. They might be worked out coordinately, not neces- sarily one before the other. Mr. Willis. But it would not be possible, would it, to get a cheap capital, which is necessary in supplying funds to farmers, the kind you have spoken of, until you have succeeded in reducing and ren- dering more uniform the rate of commercial interest on short-time loans ? Mr. Brooks. It might take some time for the adjustment to meet your requirements after you make your change in the bank currency laws. Mr. Willis. Does this plan you have outlined meet the views of the Farmers' Union as such? Mr. Brooks. In the main. Of course, as to details, there is no faction or party or organization that has worked out all the details of a specific law ; but its general principles, yes. Mr. Willis. The farmers' union has considered this matter as an organization and has taken substantially this general ground, I see. Mr. Bulkle:s-. 1 do not quite understand the nature of that emer- gency currency you propose. Would it be in the form of Treasury notes ? Mr. Brooks. Yes, sir. Mr. Bulkley. Then the Government will be responsible for its redemption ? Mr. Brooks. Yes, sir. Mr. Bulkley. Do you feel that any plan of bank issue could be de- vised, however safe, that would satisfy the people of this country generally? I mean, do you think they would feel entirely safe in accepting currency which had bank responsibility behind it and not Government responsibility ? Mr. Brooks. I very seriously doubt it. Mr. Bulkley. In other words, you think that in order to make currency pass freely from hand to hand all over the country we must ask the Government to be responsible for it? Mr. Brooks. Yes. Mr. Willis. Have you ever considered the question of guaranty of bank deposits and liabilities? Mr. Brooks. I have not covered that in my discussion ; no. Mr. Willis. You have no special feeling on that subject at all, then, have you ? Mr. Brooks. I have not any special suggestion, I believe. The Chairman. Would you object to having the banks guarantee their deposits? ■Mr. Brooks. Which deposits do you speak of — ordinary deposits? The Chairman. All of their liabilities ; yes. Mr. Brooks. Well, of course, if that guaranty could be made so as not to be unfair to different members of the bank it would be most satisfactory to everybody to know that he is absolutely safe. One of the objections to the present system is its insecurity. There are so many failures. The Chairman. It appears from official statements compiled that an inconsequential tax upon the banks would enable them to guar- antee the deposits. In fact, the Comptroller of the Currency re- ports that thirty-five one-thousandths of 1 per cent would have cov- BAXKI^^G AND CURRENCY KEFOEM. 525 ered all of the losses to all the depositors of all the national banks of this conntry from the foundation of the system up to 1911. Mr. Brooks. Would that be worked on the plan of the Oklahoma guaranty ? The Chaiemax. Oh, no ; not necessarily ; not at all, I imagine. Mr. Brooks. I did not know what system you had in mind. The Chairjian. Some members of this committee imagine that the farmers of the country would not object to requiring the national banks to guarantee their depositors at a small tax on the banks. Mr. Brooks. We do not usually object to being made safe in any of our business transactions. Mr. Willis. You spoke of the use of the banks in New York City for the purpose of floating securities of a speculative character, I believe ? Mr. Brooks. Yes, sir. Mr. Willis. That was one point in your general remarks? Mr. Brooks. Yes. Mr. Willis. I did not notice that you suggested any plan for ob- viating that. Have you considered the reserve sj^stem and the changes desirable to be made in that ? Mr. Brooks. I do not think that the reserve system we have now, permitting one bank to have a part of its reserve deposited in another bank, is practicable. Mr. Willis. How would you remedy that ? Mr. Brooks. Well, what reserve is required to be kept should either be kept in the bank or with a bank which was part of the sys- tem ; for instance, if you adopted a zone association system, in one of those banks. Mr. Willis. Either there or in the bank's own vaults ? Mr. Brooks. Yes. Mr. Willis. You would not allow a deposit in a bank in a reserve city to count as a reserve, as now? Mr. Brooks. No; because it is not really a reserve. When the time comes it is proved that it does not act as a reserve. Mr. Willis. How about the payment of interest by banks to other banks? Have you any views on that? Mr. Brooks. What was your question? Mr. Willis. Have you any vifews as to the wisdom or otherwise of allowing national banks to pay interest on deposits made with them by other national banks? Mr. Brooks. I do not know that I have anything definite on that that I care to advance or any theory. The Chairman. In other words, Mr. Brooks, it has been stated that one reason why the money is drawn from the country banks to New York is that in slack times the New York banks pay the country banks interest on their deposits. _ , Mr. Brooks. The suggestions I have made this morning cover the principle of furnishing other means of investment, so that that would not be an alternative for the banks that had to make those deposits for those meager returns. I think with a proper adjustment of our banking system , , , , , , , a The Chairman. That those funds would be kept at home t Mr. Brooks. Yes; that those funds would be kept at home and invested locally. 526 BANKING AND CUEEENCY EEFOEM. The Chairman. There would not be any incentive to send them to New York and lend them on speculation on the stock exchange at a high rate of interest at times? Mr. Brooks. We could avoid that by creating an incentive to keep them home. ,r -n The Chairman. We are very much obliged to you, Mr. Brooks. We are anxious to have the granges and farmers' unions represented before this committee, and we are indebted to you for appearing here. Mr. Brooks. On behalf of the organization I represent I wish to thank the committee for their courtesy. At 1 o'clock p. m. a recess was taken until 2 o'clock p. m. AFTER recess. The subcommittee met, pursuant to the taking of the recess, at 2 o'clock p. m. STATEMENT OF MR. WILLIAM H. BEUEY. The Chairman. Mr. Berry, you understand what we want. Just give to the stenographer your full name. Mr. Berry. William H. Berry. The Chairman. You were formerly State treasurer of Pennsyl- vania ? Mr. Berry. Yes, sir ; I am a manufacturer at present. The Chairman. Have you any bank connection now? Mr. Berry. No; not directly. Gentlemen, I want to call your attention especially to a significant fact that is being overlooked or neglected by most of the investigators of the money question. The question consists of two parts, legal-tender money on the one hand, and " current " or circulating credit on the other. This latter form of currency is by far the most abundant, and appears mainly as bank checks, drafts, bills of exchange, bank notes, and so forth. Nine-tenths of our exchanges are made by its use. This form of currency is not money in a legal sense ; on the contrary, its concrete representatives are always promises to pay money, and involve the necessity of holding money in some convenient place with which to pay them when payment is demanded. The various banks are the designated places where such payment is made, and while many of the checks presented at the banks are simply deposited to the credit of the holder, a certain percentage of them demand the cash, and this makes it absolutely necessary for the banks to carry a certain reserve of cash against their deposit accounts. This undisputed fact places a physical limitation upon the power of the banks, collectively, to extend credit, which is fixed by the amount of reserve held. The exact amount of money necessary may be debatable, but the general fact is not. Actual money in some proportion is as necessary to a bank as fuel is to a locomotive. Furthermore, the law has recognized this necessity and requires the national banks to hold a certain reserve of legal- tender cash against deposits, so that in so far as national banks are concerned BANKING AND CUEEENCY EEFOEM. 527 a legal limitation of their power to extend credit is set up in addi- tion to the physical limitation referred to. Reserve money is the limiting factor in both cases. Outlying national banks must hold 15 per cent of cash against deposits. These banks are permitted to deposit three-fifths of this reserve with " reserve agents," or banks in the larger cities. These reserve agents are required to hold 25 per cent of cash against all deposits, but are permitted to deposit one-half of their reserves with the large banks in certain cities called central reserve cities. The central reserve banks must hold 25 per cent of cash intact against all deposits. The reserve money, being useless to a bank when held in its vaults, is sent to the reserve and central reserve cities to the largest extent that it can be spared, on the assumption that it will be earning some- thing and can be recalled at will. Enormous sums of money are thus drawn from the outlying country to the reserve cities, and thence to the central reserve banks in New York, Chicago, and St. Louis. Complaint is being made and the central bankers criticized for this concentration. They are not at fault unless they are responsible for the law as it now exists. The law alone is to blame for the ac- cumulation of millions upon millions of reserve money from the out- lying districts into the central reserve banks. The law compels its assembling in the outlying banks, makes it useless or unprofitable while held by them, and opens the way for its use in the centers. The published reports of the Comptroller of the Currency are in- teresting, though extremely deceptive and misleading. They are true, however, and according to the law. For instance, in his annual re- port for 1912,' he shows that the national banks held the required reserve. He says, on page 8 : On December 5, 1911, against deposits aggregating $6,670,804,612 * * * the aggregate means available to meet liabilities were $1,649,290,440, or 24.72 per cent. While in the table on page 2 he shows that the total cash held by 7.328 national banks was $908,359,000 including $3,000,000 of nickels and pennies, as well as $82,890,000 of clearing house certificates. Only $825,545,000 of actual money was m the banks, or almost ex- actly one-half of what is made to appear from the language on page 8, or 12.4 per cent instead of 24.72. i . i It also appears from the same table that (,328 national banks owed net to State banks and trust companies $824,727,532, leavmg only $800,000 that could be said to actually belong to the national banks— one-tenth of 1 per cent, or ju^t 1 cent of cash for every $100 "* It aroeaSfrom this that not only are the reserves of the national banks counted and recounted until they appear to be double what thev reallv are, but the reserves of all other banks must be absorbed by the national banks in order that they may have any reserve at ''Vhe'siWficant fact, however, is that with all the shifting of re- serve moSey from outlVing banks to the national banks m the centers thele hS are not able to gather sufficient cash to maintain the legal reser'i against deposits Ihen the demand for discounts is fully 528 BANKING AND CUKEENCY EEFOEM. met, and this, to my mind, is the reason and the only reason why this demand is not always met, and panic thereby made impossible. No bank can discount a note or extend credit unless it has a cer- tain (the legal) percentage of cash to hold in reserve against the deposit, and there has not been a moment in 10 years when the banks, collectively, held sufficient cash to enable them to grant all the legitimate credit that the country needed. This being true, an ex- cessive interest rate is certain and discrimination between borrowers is inevitable. In this sense a money trust does, and will continue to exist as long as it remains impossible for the banks, collectively, to increase their holdings of legal cash, so as to be able not only to meet but to com- pete for the privilege of meeting the entire demand for credit. An inspection of the table on pages 39 and 40 of the Comptroller's Report for 1912 will reveal the fact that the banks, collectively (25,195 of them), all kinds included, have been responding to the demand for credit far beyond the safe limit. I have charted this table so that a glance will reveal its startling lesson. [Mr. Berry here displayed the chart referred to.] Beginning in 1865, with the cash holdings at 25 per cent of obligations, credit was expanded until 1872 the reserve fell to 12 per cent, and the panic of 1873 followed. The expansion went on from 1874 to 1879, and the percentage of reserve fell to 9.7 per cent, and the panic was imminent and only prevented by the deposit of 250 millions of Government funds in banks. This raised the reserve to 12 per cent in 1880, but it steadily fell to 10 per cent in 1893, and panic followed. Three hundred mil- lions of credit was withdrawn, and widespread disaster followed. This depression continued with unremitting severity until the gold discoveries in 1897 and 1898 increased the money in the banks. Fol- lowing the increase of money, credit expanded with great speed, faster indeed than the money, and the reserve was again forced down to 7.9 per cent in 1906, and panic followed. New credit was denied, and 350 millions of existing credit was withdrawn in 1907, and reserves restored to 10 per cent in 1908, since which time expansion has again proceeded until the reserve was again down to 8.2 per cent in June, 1912. The Chairman. The total cash of all the banks, as compared with total liabilities of all the banks? Mr. Beret. Yes; 8.2 per cent. This expansion of credit is an absolute necessity to the growth of business, and there is a tremendous demand for credit, to which the banks can not respond. They have already gone far beyond the known safe limit, and panic may break at any time. I appeared before this committee in January, 1907, and pointed out the condi- tions then existing, and predicted the panic, which followed in Oc- tober. The conditions existing now are almost exactly similar to those preceding the panic of October, 1907, except as to the condition of the copper market ; and it is my opinion that unless this difficulty of scarce_ reserves is removed, another panic will occur. There is no other reason why credit does not expand. Unlimited resources, 23,300 solvent banks,' abundant wealth, bumper crops, and an ambitious and capable people are held in leash solely by the scarcity of reserve money. BANKING AND CUEEENCY EBFOEM. 529 A glance at the comptroller's report for 1912 (pp. 39 and 40) shows that the average expansion of bank credit in the last 10 years has been at the rate of 825 millions per year. If we exclude the panic year of 1907, in which no new credit was created and 300 millions of existing credit was withdrawn, the average would be 950 millions, and in the most active years it was above one billion. It is a fair assumption that the normal increase per year would be one billion or over, and to carry this credit on the legal basis of 12 per cent of cash would require the banks to secure 120 millions of additional money each year. It is the experience of the last 50 years that the banks get about one-half of the new money that comes into circulation, and therefore an annual increase of 240 millions per year is necessary in the country in order that the normal demand for credit may be safely met by the banks. This is, of course, only an approximation, but it is very close to the truth. Under the existing law there is no way in which our stock of legal tender money can be increased, except by the mining and minting of gold, or its importation. In the last 32 years the flow of gold in and out of the country has resulted in an annual average importation of $5,000,000 of gold. The production of gold in this country is now about $100,000,000 per year, 30 per cent of which is used in the arts, leaving $70,000,000 for the coinage. Seventy-five millions, therefore, is the dependable annual increase in money volume in this country. One-half of this, or $37,500,000, is the total amount of annual m- crease that the banks can hope to secure, as against the $120,000,000 they absolutely need. This is the most astounding economic fact with which we have to deal, and I am amazed to find that some of the professors of political economy in our large universities are proposing to reduce the sup- ply of money by exacting a seigniorage charge at the mint ! 1 his is the exact opposite of what is needed. ^, j! 4. ..i, j. • This idea that money is depreciating arises from the tact that m recent years the price of foods and other perishable products has risen, and still continues higher than formerly. This rise m the cost of living is fully accounted for by other circumstances than the increase of gold production. . -ij.^ „f First, the concentration of population m the cities and towns at *'sZiT pure^foodTw^ that have raised the average quality and ^frrcolHtorlge that makes possible the holding of perishable 530 BANKING AND CUEEENCY EEFOEM. ception of the period from 1898 to 1902, these forms of wealth have tended to lower prices when freely produced. Since 1905 the aver- age price of 30 stocks, 21 rails, and 9 industrials has fallen 21 points. Since 1902 Pennsylvania Kailroad stock has fallen from 160 to 122, or 38 points, and this in face of the fact the expansion has been prac- tically stopped. Mr. Hill affirms, and I think truly, that five billions of credit is now needed by the railroads of the country alone for legitimate expansion. With a condition set up in which the banks have their reserves re- duced to the minimum legal and physical limit, and no possible way is open to them by which they can convert any portion of their enormous surplus of assets into reserve money, a " corner " or " mo- nopoly " in credit is created, for which no man or set of men can be held responsible. Discrimination in granting to favored interests and denying to possible competitors such meager credit as the natural increase of money from the coinage of gold makes possible is as cer- tain to follow as day follows night. The interest rate will also be arbitrary and higher than normal. This condition is not chargeable to the banks or banlcers, large or small. The comptroller's report, to which I have referred (pp. 39 and 40), shows that the banks have an unimpaired capital and sur- plus of four billions, and liquid ( ? ) assets in the shape of stocks and bonds amounting to five billions ; but when this chronic condi- tion of depleted reserves which has existed in the banks, collectively, for the last 10 years is set up, these so-called liquid assets are not liquid at all. If they are forced to sell the price recedes, and when sold at any price the general situation is not and can not be helped at all. If one bank or city secures additional reserves by this means, another must lose it, and the general situation remains unchanged. But this discrimination is not the only evil result of this condi- tion. The work of the profesional stock gambler is made more safe and certain than marked cards or loaded dice can make the ordinary gambler safe from risk. I refer to gambling in the low and offensive sense in which we use the term, and not as synonymous with speculation. Some confound these terms. I think they are widely different. In most of our com- mercial and productive activities the element of speculation is neces- sarily and harmlessly present. I exchange my money for a horse because I think the horse will be more valuable to me than the money. The owner of the horse exchanges with me for exactly the same rea- son. Either of us may be mistaken, but both of us may be and generally are right. We may both profit by the exchange, but since the unknown future is involved, we are necessarily "speculating" or taking a chance. It is an honest chance, however, in which the success of one party does not depend upon the failure of the other. Eightly understood, I believe that all the material progress of the race is due to the fact that inventors, theorists, and business men have speculated or taken chances on the future. Gambling may be easily differentiated. If I bet on a horse race or anything else my success depends upon the failure of my competitor. A certain degree of honesty and decency may inhere in a fair horse race, but the introduction of tricks and deception reduces it to the low level of ordinary larceny. BANKING AND CURRENCY REFORM. 531 With the bank reserves at the lowest legal level, a coterie of men or even one man, may draw checks for, sav. ten millions on the Xew' York banks and put the money in safe-deposit vaults at 2 o'clock Ihis will make it necessary for the banks to call fortv millions of credit the next morning. The borrowers must furnish the monev at once by forcing the sale of stocks. The market goes down at once not because tlie earning power of the stocks, the true source of value IS impaired, but solely for the reason of forced sales. The con- spirators buy them, the ten millions are let loose and reach the banks again in due course, the credit is greatly expanded, and stock prices recover. The conspirators sell at the advanced rates and are readv to work the trick again. . This is no fancy sketch. Once in a while we catch a record of such a transaction, but they frequently occur and escape public notice In the week ending December i), 1911, the stock market in New Yorkwas "oflf" several points, and on December T, 1911, the follow- ing significant paragraph appeared in the financial column of the Philadelphia Evening Bulletin : I.nst week there was some $12,000,000 unaccounted for iu the bank figures; that is to say, the cash ]oss was that much hi excess of the visible movement'. Just how such a wide discrepancy could arise, with truM company figures also available, is not easy of solution, for there are but three directions in which money could go— through the subtreasury, interior moveineuts, and exports or imports. Twelve million dollars had disappeared by the invisible route. The conspirators had drawn it and placed it in safe-deposit vaults. Reserves were thus depleted, loans were called, sales forced, and the market depressed. In the following week the bank statement came around all right. The depressed stocks had been purchased with the hoarded money. The money again came into the banks, loans were expanded, and the market gained several points. With reserves abundant, and a way open for the banks to increase them ad libitum, at the expense of their bond holdings, outside of the regular market, this manipulation would be impossible, and the occupation of the low gambler would be gone. But these are both minor evils as compared to the condition of iioneraployment incident to the cessation of business in the panics that are sure to result from the stoppage of credit expansion, or from the prior restraints that are enforced to prevent panic. That any man should want work and not be able to find it is the crime of civilization, and I make the statement, without fear of successful contradiction, that no such case exists that is not traceable ultimately to this cause. We are seeking a remedy for the evil, and I am trying to direct attention to the cause of it, in order that the true remedy may be fjpplied. The lack of legal reserves is the basic cause of the trouble, and tlie remedy lies in one of only two possible directions. AA^e must either remove the legal restraints by reducing the required per cent of reserves or provide a means whereby the banks can liquefy at will certain of their assets outside of the regular market, and thus main- tain the required reserve while they extend ciedit iu sufficient xolume 10 meet the demand. 532 BANKING AND CUEEENCY EEFOEM. The question is simply one of method, and the method we employ should, first, be safe and involve no contravention of the principles of sound finance. Second. It should be easily adapted to the existing machinery of banking. It should involve as little change as is possible, consistent with absolute effectiveness. Third. It should look toward the restoration and maintenance of competition among independent bankers and the prevention of mo- nopoly in credit, rather than in the opposite direction. I will propose a remedy that I think will be found to meet all of these requirements. We have now a banking system composed of 25,195 independent banks. They are located in every part of the Nation. They have correspondents and clearing-house relations es- tablished on a universal scale. The system has grown up naturally in response to the development of the country, and so far as ma- chinery goes is capable of supplying the country with all the credit it needs. The banks collectively have four billions of unimpaired capital and surplus and easily convertible assets (stocks and bonds) amount- ing to five billions, so that no possible question of solvency or lack of capital can be raised. The banks collectively hold, however, only $1,572,900,000 of actual cash, including the bank-note redemption fund; $108,000,000 of this is in bank notes, leaving $1,464,900,000 of legal tender or reserve money against $17,791,000,000 of obligations, or 8.2 per cent. This is the weak spot in the system, for with all the provisions in the law by which the reserve cash is made to do double or triple duty, the banks have always been compelled to restrict the expansion of credit before it reached this point. They are at this moment in that situa- tion. From June, 1911, to June, 1912, the banks increased their ob- ligations by $1,150,000,000, and in the same period were only able to increase their cash holdings by $18,800,000, or 1.63 per cent of the new credit. This reduced the total reserve from 9.3 per cent to 8.2 per cent, which was about the breaking point in 1907. They are now compelled to refuse credit, and panic is threatened. The national banks are now permitted to hypothecate their Gov- ernment bonds and receive, practically free of interest, their equiva- lent in bank notes. All but one of the national banks have done this to a greater or less extent, some of them reluctantly and under pressure from the Treasury Department, but all but one has com- plied, so that a well-beaten path from each bank directly to the Treasury Department alrea,dy exists. The bank note, however, is a credit instrument and not money in the legal sense and can not stand in reserves as a basis of credit. Nor can it ever be justly empoAvered to do so as long as it remains a credit instrument. These notes are put into circulation by the banks, and to the extent that they can be kept out of the banks and in the hands of the people they serve their purpose well; but they come into the banks as deposits, against wliich legal tender money must be held, and to secure the legal tender thev are sent in for redemption. Out of $739,940,000 of them in circulation in 1912, $649,954,000 was sent in for redemption during the year, or 87.8 per cent. So great was the flow for redemption that the 5 per cent fund held for the purpose BANKING AND OUREENCY EEFOEM. 533 by the Treasury was entirely inadequate. This fund was overdrawn during the entire year and at times to the extent of over $26,000,000. Eight per cent instead of 5 per cent would ha^e been necessary to cover this rate of redemption. The bank note as a means of answering the demand for credit is a • failure. It is a convenient and mobile instrument, and, being payable at any bank to any bearer, one would think that a very small reserve would a,nswer for its redemption. These notes are manifestly over- issued, i. e., they are issued in excess of demand, as proven by the fact that a larger cash reserve is necessary to maintain them than is required to float the ordinary checks of many banks. This has been notably true in in the past five years. It has been assumed by some, and it would seem that the Treasury Department has entertained the idea that our currency problem could be solved by increasing the issue of these notes, and 1 am giving spe- cial attention to them for this reason. Credit notes of any kind are useless beyond the point of absorption in the hands of the people. To this extent they displace the legal tender and allow it to flow into the banks, but like all other credit instruments they require a legal-tender reserve, which becomes \ery large when they are overissued. We have seen that the difficulty lies in the lack of reserve cash in the banks. We have also seen that the mining and minting of gold is the only way we can increase our reserve cash. We also have seen that the gold supply from both mining and importation is insufficient, and I think that most of the practical men who have studied the problem have concluded that a supplement of legal-tender paper is the only safe remedy. At least, I have not heard the other alternative, i. e., to reduce the percentage of reserves required, seriously proposed. Convincing reasons may be given why reserves should be increased instead of diminished. The Aldrich plan proposes as a remedy a central reserve associa- tion where the cash reserves may be concentrated. The efficiency of this arrangement was illustrated to me by a gentleman from New York. He traced an analogy likening the present system to the old- fashioned well or cistern at each house, and the Aldrich bill to a city with a central reservoir in its water system, with pipes leading to each house. In case of fire in any locality, the "reservoir" was I thought the point ill taken, for the reason that our trouble does not arise from lack of machinery (reservoir and pipe lines) ; we already have them in profusion and to perfection. As we have seen from the comptroller's report, our reserves are already concen- trated," and I think the gentlemen who are managing the reservoir are past masters in the reservoir and pipe-line game; but reservoirs, pipe lihes, and past masters to manage them are no good without "^ Our banking system is all right now, but our supply of money is barely sufficient to fill the pipes, and there is none m tj^e feservoir that can be spared. If we open a spigot to put out a fire, or e^ en to wash down a payment in an outlying district, a conflagation . starts hi the r^rvoir (Wall Street). There is not sufficient water m the whole system to upply the ordinary daily needs of the people, and 534 BAXKING AND CUBEBNCY EEFORM. the extra drain on wash day creates a famine, to say nothing of a fire. I fail to see how a larger " reservoir " would help the situa- tion. More money is what we want, and I think that the promoters of the Aldrich plan are aware of it, though they do not frankly confess it. The bank note that is to issue from the new "reservoir" is the significant thing in the Aldrich plan. The vast and complicated machinery proposed is entirely unnecessary and immaterial. It only serves to befog the real question. If these notes are given legal-tender powers and thus made com- petent to stand in bank reserves, they will serve the, purpose and provide a remedy for our trouble. If they are not, they will be as useless as our present bank note. The Aldrich bill proposes to give them this power, and this is really the crucial point of the whole question. I shall oppose any and every plan that proposes to confer legal- tender power upon a credit note that issues from or directly benefits any private citizen or corporation. The public credit, in which cveiy citizen participates, is alone competent to carry such a power. The right of Government to issue notes in response to an equivalent sacrifice to the community and give them legal-tender powers can not be seriously questioned. It is universally conceded and has been practiced throughout the world in all ages. The right of Government to confer the legal-tender power upon a credit note issued by private citizens without the sacrifice of an equivalent can not be conceded by any stretch of the imagination. If the legal-tender notes of the Bank of England are of this character, their existence does not prove the practice to be either wise or expedient. The Bank of England is empowered to issue legal- tender notes up to 100 per cent of the Government bonds it holds, and also to issue notes equal to the amount of gold coin and buUion held in its vaults. The bank is also permitted to issue $36,000,000 of notes against "other securities " in place of two-thirds of the notes formerly circulated by other banks which have surrendered the privi- lege, so that $36,000,000 out of $259,000,000 (report of 1908), or about 15 per cent, of its notes are ".credit notes" in the meaning of our definition, i. e., their issue has involved no sacrifice of an equivalent, for the securities held against them still draw interest either for the bank or the note holder. The $53,000,000 of notes issued by the bank against the Govern- ment bonds it holds are of similar character, but the bank pays to the Government $1,000,000 per year (4 per cent) for its monopoly of the note-issuing privilege in a radius of 65 miles about London. In addition it must pay to the Government all the net profit upon the issue of notes against securities other than Government bonds or gold, making a total payment (in 1908) of about $2,000i000 on $90,000,000 of notes, or about 2 per cent. The balance of the circulation does involve the surrender of an equivalent of gold to disuse, the note being similar to our gold certificates. From all this we gather that the interests of the people are some- what conserved by Avhat is practically a 2 per cent tax on the credit circulation, but to the extent of the difference between 2 per cent and the total net earnings of the credit circulation, they are de- BANKING AND CUKEENCY EEFOEM. 535 frauded, and the principle is just as vicious as though the AThole benefit went to the bank. The credit of the national should alone circulate as legal tender, and the Xation should be the sole beneficiary. The legal-tender notes should emanate directly from the Govermiient in exchange for the bonds, and such other credit notes as are circulated should not be legal tender and therefore capable of use in a further expansion of seven or eight times their volume of bank credit. ]\Ioney is a community instrument, and should be created by and for the use of the community in such a vay as to automatically respond to the demands of business, and at the same time guarantee its imrity with the average of other forms of vealth, and its just relation to the debts it is empowered to cancel. Circidating credit is a private instrument created by and for the convenience of private citizens, and should rest entirely upon the solvency of those who create and use it. But waiving, for a moment, this basic objection, I affirm that the present bank note is as eligible to receive this power as any credit note can be, and that the extension of legal tender or reserve power to these notes will accomplish all that can be accomplished by the other form, and involves no new machinery whatever or a particle of change in the existing machinery. One billion of new legal ten- der money would be instantly possible by this process, and from three hundred to five hundred millions of it would appear in the banks, upon which from two to four billions of new credit would be ex- panded, the demands for business met, and the monopoly of credit broken up. These notes (the present bank notes) are absolutely secure, as secure as is the Government upon the credit of which they rest. Xot one of them was ever presented for redemption because of dis- trust, but solely because of mutilation or to secure legal tender for reserves. If we are to have a legal-tender credit note issued by pri- vate citizens, our present bank-note circulation is the ideal for that purpose. It can be instantly applied in every part of the country at a minimimi cost (almost nothing) and with maximum efficiency in every part of a competing system. . But such a course would be in contravention of every principle of sound finance, in that it provides for the creation of money with- out demanding an equivalent sacrifice, and would make possible the creation of 10 to 12 volumes of new credit upon 1 volume of exist- ing credit. For this reason, and the further reason that private interests would reap an unearned benefit from it, I would oppose it. The essential difference between money and circulating credi.. should be clearly in mind. Money, either metallic or paper is a^ concrete embodiment of government decree, which, when tendered by a debtor to his creditor, cancels the debt. Such money can only come into existence justly through the surrender of an equivalent ^The^^aw presumes that the mining of gold involves a sacrifice of time and labor in its production equivalent m va ue to the money into which it may be logically coined, and when the gold is coinen iSo money it can not bl used for any other purpose. The gold is saSiS to the money use. It may now be used to cancel debt or 536 BANKING AND CUEEENCY EEFOEM. other exchange purpose, but in no case can the miner get more for it from society than he sacrifices to society. If he elects to have his gold made into a watch chain, or an orna- ment, he can not have it made into money at the same time. He can, however, float a credit upon it. He may give a mortgage or other lien upon it to a bank, and receive a " credit " that will circulate as checks, and secure goods for him in exchange, while he still has the use of the watch or ornament. This is the essential difference between money and circulating credit. Money is a means of paying debt ; and circulating credit, in the form of checks, drafts, or bank notes, etc., is in itself a debt or promise to pay money. Money comes into existence in response to the sacrifice of an equivalent; a credit instrument comes into ex- istence without the sacrifice of an equivalent, and while it answers the purposes of currency, it must be considered as the exact opposite of money, so far as its origin is concerned. A national bank hypothecates its bond with the Government, but still owns and draws interest upon it, or has the use of it. The bank receives a credit in the form of a note, which it uses in exchange. This transaction as between the bank and the Government is exactly similar to the transactions between the bank and its customer. The bank takes the security of the borrower (expressed or implied) and gives him credit upon its books. This credit circulates as checks, etc., and secures the exchanges wanted, but the customer still has the use of his asset. No sacrifice has been made in either case, except the interest charge. With an equivalent sacrifice involved in its issue, a guarantee against overissue is to be presumed; but with no sacrifice involved, an overissue may easily occur. The banks of the Nation are perfectly solvent ; they have assets in ftbundance to cover all their liabilities. They reported in 1912 a sur- plus of $2,166,000,000 over all liabilities, including their stock— $2,010,000,000. The one thing they do not have is legal-tender money with which to safely carry credit in sufficient volume to main- tain business at full activity, nor is it possible for them, collectively, to secure it. Moving it from one bank or from one country to an- other does not avail. The banks are safe; they can and do call in their loans in an emergency, and refuse to extend credit at will. But business is not safe. The calling of loans and the refusal to extend credit — on good security — is disastrous to business; and, confronted with the con- stant menace of contracting credit, which will compel forced sales and destructive slaughter of prices, business men have sought and found the only possible remedy, to wit, trusts and combines that can and do limit the volume of business to the credit available, restrain production, sustain prices, and avoid disaster. By this means busi- ness, especially big business, can be and is made safe, while the final burden of reduced activity, partial or complete idleness is forced upon the workmen of the Nation and is without remedy. I know, of course, that the workmen of the Nation have sought, by the organization of unions and federations to relieve themselves of the direful consequences of restricted industry, but when the terrible BANKING AND CUBRENCY EEFOEM. 537 cost IS counted, and we remember that nothing more tlmn •i.i m proximate distribution of the effects af idleness has been Jreter .an be, effected by this means, we can understand the growh^c unrest and alarming tendency to socialism that is apparent " thJm,nTnl"*:^"'l?' Y""' 1 *''" Profl"etion of legal tender money to he inimng of gold alone, by reason of the lack of sufficient cmioo • tunity to mine gold, prevents the free flow of effort into a field where a scarcity and consequent tendency to high value exists, and the re exmnfioTo?SedV'^' tender money prevents a safe and adequate expansion of credit, and this sets up a continuous tendencv to lower prices in the permanent forms of wealth when such wealth is freely produced The gold mines are doing all they c-an; every na uS opportunity known is being worked to its utmost capacitv. and the relative scarcity continues. ' ' This tendency to lower prices in response to active production coin- pels the formation of trusts and combines in order that the produc- tive activity may be effectively restrained and a disastrous fall in prices prevented, and when formed as a weapon of defense they are easily transformed into weapons of aggression. ironopoly— restraint of production— in currency is not only bad in itself, but it sets up a condition that compels us to endure monopoly m all other lines, or, as the only alternative, submit to a decline of prices that will ruin everybody but the bankers, and even they would suffer. -^ I have no quarrel with the bankers, especially the bankers of the United States. I ha\e already stated, and now reiterate, that the bankmg system of the United States is superior to that of any coun- try {jn the globe. They have furnished credit of greater mobility and value to the business than any other; they have accumulated capital and built up surplus funds "to an extent' and in stability ca- pable of furnishing all the credit the Nation needs. The wealmess of the system is in the lack of reserve money, and my inquiry into and criticism of the currency reflects only upon the bankers when they assume to defend this inherent weakness of the currency system. There is but one argument that is or can be offered against the strengthening of the reserve fund behind our bank credit, to wit, " It will decrease the earning power of the banks." I submit that this is not a sufficient reason, even if true, and I will presently show that it is not true. We do not hesitate to compel railroads to use safety devices to protect travelers and employeas, even though the cost of such devices was certain to reduce their earnings. An ade- quate safety factor is just as important in our circulating credit as it is in bridges or elsewhere. I say a " safety factor," using the term as an engineer would use it in building a bridge. He knows by experiment the breaking strain of his material, and he proportions his elements so that the maximum load will put a strain upon them much less than he knows they will bear. He calls this his safety factor," and with it covers the possi- bility of failure from hidden defects in the material, deterioriation from weather influences, or sudden shocks. No sensible engineer would load a structure to anywhere near the final strength of its 538 BANKING AND CUEKBNCY EEFORM. members. Nor would a sensible banker load his cash with a burden of demand liabilities anywhere near the point of failure. The per cent of cash that is necessary to safely carry a unit of credit can not he definitely stated ; certainly it is variable, higher in some places than in others, and higher at some seasons of the year than at others, and differing in different years. But our margin of safety should cover all these differences, and provide always for the maximum strain. While the actual amount or proportion of cash necessary to carry credit may not be known, the necessity for some amount is generally recognized, and laws have been passed requiring national banks to hold a certain percentage of cash against deposits. This fixes a legal limit beyond which these banks can not expand credit. The banks are doing a safe business; they have accumulated vast assets, and a surplus above dividends of over $2,000,000 ; their stock is above par, some of it several hundred per cent, while general busi- ness, outside of certain trusts that are in absolute control of their special lines, is never safe, and has suffered untold losses time and again through the failure of credits and the general wreck of indus- trial enterprises. We should propose nothing that would reduce the safety factor of the banks or their total earnings. We should propose, however, a remedy that will increase the safety factor in general business. The banking business is safe ; our purpose should be to make gen- eral business equallj^ safe, and render unnecessary the trusts and combinations in restraint of trade. We should set up a condition of free and unrestricted production where the demand for labor will always equal or exceed the supply, and restore conditions under which all men may be free and self-respecting. The Aldrich bill is proposed as a remedy for existing weaknesses, and is approved by many of our bankers. We will now discuss it. Until all the details of the Aldrich plan are known it is not pos- sible to critically discuss it ; but so far as it is revealed, it fails to meet the necessities of the case, and is objectionable for the following reasons : First. It proposes a lot of new and complicated machinery, which is entirely unnecessary, and which, if effective, would be expensive and put, an added burden upon business. Credits are sufficiently ex- pensive already. Second. It proposes a unification and consolidation of the whole banking system of the country, bringing it into shape for central control, contrary to the growing sentiment against such concentra- tion. Third. It proposes no remedy whatever for the basic difficulty (scarce money). It only proposes an increase of credit without a corresponding increase of lawful money, which means a further re- duction of the percentage of actual reserve against demand obliga- tions. The remedy lies in the opposite direction. Fourth. It proposes to issue its notes against the miscellaneous assets of the banks — including the discount paper of individuals— and to give these credit notes the power to stand in bank reserves, thereby substituting a credit for lawful money in the reserves held s BANKING AND CUEBENCY EEFOBM. 539 to insure prompt payment of the checks of depositors. By this means, the fundamental prmciples of issuing money are violated m that no sacrifice whatever is demanded to check the issue The securities hypothecated continue as an interest-bearing asset of the The opportunity is thus given to the so-called big business interests to practically coin their securities into money and enjoy the use of the money, practically without interest, as a basis of expanding credit, while they still hold and use the property represented by the securities._ This may account for the support these interests are giving this plan. The power of these great interests is already a menace to free insti- tutions. This plan will practically multiply their holdings and in- crease their power of discrimination and their control of industry. Under this plan it will be possible for a bank in New York or other reserve city to take the note of one of its customers for, say, $100,000, having 28 days or less to run, and, by indorsing it, have it redis- counted at the central bank and receive in exchange bank notes that will stand in its reserves and upon which $400,000 of further dis- counts maj' be made. Unlimited inflation of credit upon credit is thus provided for, resulting in an enormously increased revenue in the banks without increasing either their investment or their responsibility. Fifth. The sole safeguard offered by the bill against panics or a violent collapse of credit is in the discretionary power to raise the discount rate and prevent the expansion of credit beyond a safe limit, which limit is to be determined by the discretion of the man- agers of the central association. This will simply anticipate, dis- tribute, and perpetuate the evil of restricted business and scarce employment, the very thing which we seek to remedy. Sixth. It provides no assurance whatever of automatic expansion or regulation of the volume of currency to the needs of business, and, in short, it serves no useful purpose whate^•er. Seventh. It proposes to take over into private hands, hands that are entirely removed from the reach of the people even in the ordi- nary course of an election, to say nothing of recall, the money-issu- ingfunction of the Government and the power to regulate its value, a function more potent and powerful to govern and control the industrial and political destinies of the Nation than all other agencies combined. A thorough understanding of the currency situation and the true philosophy of sound money will make it impossible for one to indorse the Aldrich bill. It is the most dangerous proposition ever presented to the American people. That there is imperative need of the immediate correction of the evils resulting from the defects in our currency which we have pointed out is obvious, and unless we can submit a satisfactory remedy our criticism of the Aldrich plan will amount to little, and having pointed out the evils and shown the danger, injustice, and inadequacy of the Aldrioh plan, we now submit a plan for relief. Vs the first step in this process, we would raise the percentage of legal tender reserves in all banks (collectively) to, say, 15 per cent 76112— PT 9—13 4 540 BANKING AND CUEKENCi' REFORM. of obligations. This would tend to reduce the percentage of profit now realized by the banks. Let us inquire how much. The banks collectively, in 1912, carried : Loans and discounts $13,953,000,000 Stocks and bonds 5,300,000,000 Total 19, 253, 000, 000 If we place tlie annual earnings at 5 per cent it equals 962, 650, 000 Tlie capital of the banks is 2,010,000,000 Surplus 2, 166, 000, 000 Total investment 4, 176,000, 000 Total earnings 962, 650, 000 This equals 23 per cent upon the entire investment. In other words, the general business of the country is paying to the banks for the use of the present unsafe credit $962,650,000 per year, yielding a gross revenue upon the money invested in banking of 23 per cent ;i what the net revenue is we do not know. If we require the banks to carry a 15 per cent reserve against their total liabilities, they would need $1,000,000,000 more of legal tender money for which they must sacrifice $1,000,000,000 of bonds or other securities and lose (at 4 per cent) $40,000,000 of revenue. This reduce their gross earnings to $922,650,000, or 22 per cent of capital and surplus, a loss of only 1 per cent out of 23 per cent, or 4.5 per cent out of 100 per cent of gross earnings. Whether the payment of $962,650,000 per year by the general business interests for the use of credit is too much or too little for the banks to earn, need not concern us, although it would seem thut $662,051,000 would easily cover operating expenses and leave $250,599,000, or 6 per cent dividend upon the capital and surplus of the banks. This would cause their stock to sell above 200. Bank stock usually sells for a good price, some of it as high as 1,200 per cent. What we should insist upon, however, is that whatever we pay lor credit we have a right to demand that it be issued upon a basis that will be safe for business as well as for the banks; safe for busi- ness in the twofold sense that a severe failure here or there would ]iot shake it into collapse ; and second, that it would always respond to legitimate demands for expansion. But the question at once arises as to how we can increase the factor of safety in cash reserves to 15 per cent. Certainly not by calling loans, for this would take at least $6,000,000,000 of credit out of circulation and paralyze business all over the land. Certainly not Ijy issuing more bank notes. ■ The issue of $1,000,0000,000 of bank notes secured by $1,000,000,000 of bonds would fail of the purpose for reasons that we have already discussed. Seven hundred millions of dollars are already issued, but $600,000,000 of them return in a single year for redemption. They are not money, but are a form of credit similar to checks, and our trouble is that, while we have too little credit for use in business, we have too much credit for the cash in hand. What we want is more money in the banks against existing credit; and the issue of more unsupported credit in any form is the exact opposite of what we need, and furthermore it is impossible. But the banks are holding BANKING AND CTJBBENCY BEFOEM. 541 $5,300,000,000 of stocks and bonds, and we have spoken of the sacri- fice of $1,000,000,000 of bonds. If the banks were to throw $1,000,000,600 of bonds on the market the market would go to pieces ; but even if it did not, the sale of the bonds in the open market at par would simply transfer money from one person or bank to another and add nothing to the reserve. If, however, we open a bureavi of issue and redemption in the Na- tional Treasury, and allow the banks to " sacrifice " or " coin " their billion dollars of bonds — or any desired amount — into new United States notes of full legal tender power, we will solve the problem. The banks, collectively, could strengthen their cash reserves at the expense of their bond holdings and safely respond to the demand for credit at any time. I would call this simple process the free coinage of public credit, a vastlj' different thing from the free coin- age of private credit. Every public bond is an assurance that an equivalent sacrifice has been made to the public, and that a com- munity asset or public utility exists to represent it. Private credit involves no sacrifice whatever to the community. By this process the present bank notes can be justly converted into legal-tender notes. The name and location of the issuing bank can be printed on one side of it and the law, legend, and seal of the United States upon the other. The plan in detail is as follows : First. Determine the percentage of cash reserves that will safely carry deposits and other demand obligations. An average of 1.5 per cent of legal-tender money against all demand obligations, in my judgment, would be sufficient. Second. Open the way for any and every bank in the Nation to "qualify" as a bank of issue by complying with certain conditions of inspection, etc. Third. Eequire every bank that is "qualified" (to issue money to "coin" its bonds) to carry its determined percentage in its own vaults. Fourth. Provide that any qualified bank could surrender the bonds of the Nation, and receive in exchange, new full legal-tender paper money, equal in amount to the market price of the bonds. Government bonds thus received to be cancelled as fully paid. (State and other bonds having the taxing power behind them might be included if found necessary.) „ , , , Fifth. The notes thus issued to be a full legal tender for all debts public and private in the United States, and redeemable on demand in gold of the standard weight and fineness of the coins of the United States. ^ ^ ,. ■ ,-, Sixth. Establish a department of issue and redemption in the United States Treasury and maintain therein a gold redemption fund of not less than 20 per cent of the outstanding notes, ihis fund to be maintained and replenished when necessary, by the sale of new 3 per cent Government bonds for gold m the open market. Seventh. Proclaim that after the expiration of a certain time the Government would no longer hold a dollar for dollar reserve of gold against the outstanding gold certificates or other paper currencj and would redeem any and all such paper on demand, in gold com or silver dollars, at the option of the holder. 542 BANKING AND CXJEEENCY EEFOBM. Eighth. Deposit the daily receipts and all other funds of the Government in the banks on approved security and at a rate of interest to be fixed by competition. Xinth. Make it a criminal offense for any two or more banks to " conspire " to fix the interest or discount rale or to limit the expan- sion of credit. This plan provides for the issue of legal tender paper money in- directly by the Government in exchange for service rendered by private citizens to the public in building roads, etc. ; and by reason of the indirect issue through the banks in exchange for bonds an automatic adjustment of the volume to the needs of business is se- cured, and all the principles underlying the free coinage of gold are complied with. The self-interest of the bankers, which is the most persistent and powerful commercial force with which I am acquainted, will operate to bring it into existence in response to demand, and the same irre- sistible force will prevent its issue in excess of demand. The oper- ation of this force will be made clear as I proceed. Before discussing this plan in detail I Avould say first that the plan in general conforms in every particular to the principles involved in the free coinage of gold. 'Whosoever holds a Government bond must be supposed to have made an equivalent sacrifice to get it, and whoever by this means adds to the legal-tender currency must make an adequate sacrifice to do so. He must sacrifice the bond (cease to count it as an asset or draAv interest upon it). But the bond is a time obligation, bearing the current rate of interest, for which he is to receive a noninterest- bearing demand obligation, and unless there is an opportunity to use the money to better advantage than in an investment at current rates he will not exchange it. There could be no inducement to an individual to make the ex- change. If an individual owned a bond for $1,000, and wished to pay a mortgage on his house, he could sell his bond in the home market for as much as he could get from the Government, and use the money to cancel his mortgage, so that there is no need to extend the coinage privilege to individuals, although there is no objection to it. But a qualified bank having a $1,000 bond in its assets, would see an inducement to make the exchange if its reserves were at the lowest limit (15 per cent) , and a customer with good security wanted a note . discounted for $7,000 at 4 or 5 per cent, and would do so whenever a demand for legitimate well-secured credit appeared, but unless the demand for credit appeared, the bank would hold on to its bond. Now, a demand for increased legitimate credit will appear when unpledged capital and idle labor exist together in a community, but will not and can not appear when there is no idle labor, no matter how much unpledged capital exists, so that we have in this fact an autoniatic check upon the issue of this form of legal-tender money. Legitimate demand alone, arising from idle labor, would call it out, and full activity would stop its issue.' The vice of issuing money directly for service is in that no auto- matic restraint is involved, and depreciation may result from over- issue. BANKING AND CUEEENCY EEFOEM. 543 This was the experience with the paper money issued during the Civil War. The exigencies of the Government called it out regard- less of, and in excess of the demands of commerce, and it depreciated from this cause as well as from its limited legal tender. The depreciation worked a hardship to all creditors, and when bonds were subsequentl}- issued to contract it or take it up its appre- ciation worked a corresponding hardship to all debtors. Had the war been financed by the issue of " coinable " bonds in the first place no inflation could have occurred. The bonds would have been issued only in response to expanding trade. The bonds would have disappeared as the notes appeared, and we would have arrived at the same place (reduced bonded debt) without inflation beyond demand or the subsequent arbitrary contraction that ruined so many debtors. Through the operation of this plan the principles involved in the free coinage of gold are as fully met as they would be if the oppor- tunity to mine gold was easy of access and unlimited in extent, but still involving an adequate sacrifice of time and labor; for in such case, a tendency to loss of price that would check general industry would simply and easily transfer labor to gold mining, and involve no congestion of the labor market. The automatic and efficient check upon the undue increase of money in either case would be the full employment of labor, and that is the great desideratum. Fully em- ployed men means free men and nothing else does. Fully employed labor will insure equitable wages and disband unions, and nothing else will. Continuously employed capital will insure steady divi- dends in needed industrj^ and render trusts unnecessary, and nothing else will. As to the first proposition, fixing the percentage of reserves, I think that enough has been said to justify an arbitrary rule upon the banks collectively to maintain a safe per cent of cash against deposits. We have also seen that the loss of revenue to the banks is inconsiderable, and if we follow the plan to its final conclusion we will discover that a large expansion of legitimate credit can be safely made without increasing capital or surplus at all, and that the gross revenue of the banks would be largely increased instead of decreased, and that an increased per cent of profit on the money invested by the bankers would certainly follow, unless competition would lower the discount rate to borrowers. Competition behind the bank counter as well as in front of it is a consummation devoutly to be wished. As to the second proposition, we would say that the local bank in any community is alone competent to determine the necessity for, or the value of, the assets offered to secure credit in the locality where its exists and should be empowered to respond to such demands upon its own initiative. If any local bank discounts paper upon made- quate security it should be compelled to suffer the consequences of its own folly, and an "espionage" of all "qualified" banks that will periodically reveal their condition is in the interest of the general public. General supervision for the benefit of the public is the only coni- bination of alliance that should be permitted among banks. It is iust as important that full and free competition should exist among the banks as it is elsewhere. Twenty-five thousand three hundred 544 BANKING AND CUEEENCY EEFOEM. competing banks is the safeguard of business against extortionate rates. As to the third proposition, we would say that the evils resulting from the shifting of the reserve funds from one bank that doe^ not make public its condition to another that does are but practically understood. It is doubtless true that a smaller basis of working cash is required in a country bank than in the cities and large commercial centers; but having determined the percentage necessary in any given case, we should insist that the local bank should hold its own reserve. The present method is deceptive and indefensible. The fourth proposition contains two elements : The retirement of Government bonds and the issue of full legal-tender paper money in their stead. The national banks now have the privilege of hypothecating Gov- ernment bonds and receiving an equivalent in national-bank notes. This, as between the banks and the Government, is exactly similar to the transactions between ordinary borrowers and the banks. Citizen A has a factory devoted to the production of some form of wealth and needs " currency " with which to operate it. The bank discounts his paper, taking, directly or indirectly, the factory as security. By this means a credit is established that circulated as currency, but it is not money; the essential difference (in its origin) being that the " factory " that sustains the credit is still in use in the hands of the borrower, while legal-tender money can only appear in use when an equivalent of other property disappears from use, as in the case of the coinage of gold. The bank note is a " credit " issued by the Government to the bank and secured by bonds " hypothecated," but still the property of the bank and " in use," or earning interest for the bank. This puts the Government into the banking business with the banks as its only customer. Under the original laws only Government bonds were accepted, most of them bearing only 2 per cent interest, and by floating credit upon them at one-half per cent interest (or tax) the banks can afford to hold them. If these bonds were not thus privileged they would depreciate. The reservation to the banks alone of this privilege of borrowing money from Government or using the Government credit for practi- cally nothing is putting the banks into the governing business with a vengeance. The Aldrich central-bank scheme is made attractive to bankers by indirectly extending this privilege to the'hypothecation of the 6 per cent notes of individuals as security for bank notes. Since there is no automatic check upon the issue of notes by this process, it can not be seriously considered, even if the injustice of it is ignored. The notes of a central bank can serve no useful purpose unless they are made a legal tender, and, as we have clearly shown, legal tender can only issue through the sacrifice of an equivalent, and this process does not involve a sacrifice at all. If securities bearing a higher rate of interest than 2 per cent are made available, the 2 per cent bonds must fall in price to a lower level than British consols. BANKING AND CUEEENCV BEFORM. 545 " w!lnf?'"''Pf \*j°'' ^' *° ".^'^^"'^ " *h«^ Government bonds that are now hypothecated" as security for bank notes and solve the 2 per ?ent bond problem at once and retire with them as many other bonds as necessary, and by issuing full legal tender money for them take the Government entirely out of the banking businesVand CreplacW Z gS?Ltrbust?s°^'^™"^^^ ""^''^ P"^ «- b-1- entfrei;^!S"of A/rTrlil^*''^'""™''* '^.°''^'^ ^"'^^ ^" t^^e money used in the countrv Money IS a community instrument, and whatever profit or Ssl; invo ved in Its creation should revert to the community. The banks should confine their activities to circulating credit! Circulate credit IS a private instrument, and whatever profit or loss isTnvolved m Its use should revert to the individuals that create it Ihe fifth proposition requires the most careful consideration, and we remark first that it requires the creation of no new machinerv. The agencies that now handle the currency will be more than suffi- cient to handle the new. No more high officials with fat salaries and discretionary powers are desirable; our currency is sufficiently costlv already. The Bureau of Engraving and Printing, the depkrtmen't that now redeems the coin certificates, the United States notes and the bank notes, and the mints that coin our gold and fractional silver, are all and more than we would need. A marvelous economy would be realized by the simplification involved in making all our paper money uniform. We propose that all our paper money shall be full legal tender for all debts, public and private, in the United States. This will entirely remove the necessity for gold or any other coin or coin certificate for domestic use. Any debt, duties on imports included, could be paid with any piece of money of metal or paper that cir- culated in the Nation, and all the money that came into the bank could be held in reserve. That our people prefer paper money to metallic money is manifest by the fact that the total money in circulation is as follows : Paper : Gold certificates $802, 745, 199 Silver certificates 478, 597, 2.SS United States notes 338,450,000 Banls notes 675, 632, 505 Total paper 2. 29.5, 425, 002 Metallic : Gold coin 590, 877, 998 Silver dollars 58, 061, 145 P'raetional silver 150, 000, 000 Total metallic 798, 939, 1.38 In banks 300, 000, 000 In hands of the people 498,939,138 Fractional silver 150, 000, OOt) 348, 939, 138 We see from this that only $348,939,138 of coin other than frac- tional silver is held by the people, or 15 per cent of the entire circu- lation and 17- per cent of the entire amount outside of the banks, and this from voluntary choice. 546 BANKING AND CUEEENCY EEFOEM. If all the paper was full legal tender, the necessity for holding coin would be entirely removed and less instead of more would be held. We propose redemption on demand in gold for every dollar extant, so that every paper dollar would be a gold certificate to all intents and purposes ; but, by reason of the full legal tender quality of the paper, redemption wovild never be sought except for curiosity or to settle foreign balances. The figures here given are from the comptroller's report of 1910. Against the total paper now in circulation ($2,584,000,000) there is now in the Treasury $1,207,464,000 of gold, which is $690,000,000 in excess of a 20 per cent reserve for redemption purposes. If we add the gold held by the banks and by the to that in the Treas- ury, we find a stock of $1,252,000,000 available for redemption pur- poses, or 70 per cent of the entire paper currency. If the banks can safely float their credit, which is not a legal tender, upon a 15 per cent basis of cash — and they can — surelj^, the Government can float its credit, which is a legal tender, upon a 20 per cent basis ; and with 50 to 70 per cent to start with and a constant inflow from the balance of trade with the world and a yearly home production of $100,- 000,000 there can be no possible question that the reserve would con- stantly increase, while an expansion of bank credit in sufficient volume to safely maintain business in full activity can be constantly supplied. This method, by making a more economical use of gold, promises the only safe and sure mamtenance of the gold standard throughout the world, and at the same time insures a prompt and safe response to any demand for expanding credit that may be made by idle capi- tal and labor. The first effect of it would be the cancellation of practically all the interest-bearing debt of the United States and substituting there- for an equivalent increase in demand obligations bearing no interest. This will effect a saving of $21,000,000 per year in the interest charge. This will cover many times over the cost of the transition. But if by any possible stretch of the imagination we can conceive of a balance of trade setting in against us tihat would take gold out of the country at a rate three times as fast as the average export for the last 50 years, which included the war period (say, $25,000,000 per year), we could stand it for 25 years before our reserves would fall to 20 per cent, even though we ceased to produce gold in this country entirely. As to the sixth proposition, we remark that assuming that the ex- ports of gold rose and continued until our stock was reduced to 20 per cent of the paper currency, the sale of bonds would have saved $400,000,000 in interest and could outbid any country on earth, if necessary, to get gold. We mention a 3 per cent bond simply for the purpose of fixing a rate approximating the commercial rate of interest_ for gilt-edged securities. If the rate rose or fell, the bonds would fall below or go above par, as the case might be, but as long as the Nation exists and gold continues in the world we can get it. As to the seventh proposition, we remark that an opportunity must be given to all who wish to exchange certificates for gold to do so ; and if the people prefer to take the gold, and do take all of it, a BANKING AND CUEBENCY BEFOEM. 547 sale of bonds must be made to establish the reserve fund of 20 per cent tigainst all the remaining notes; and since no further issue of nole.^ can occur except in exchange for gold coin or bonds, no further issue of bonds would follow, and no change in the volume of money could occur, except by decreasing the bond issue. The total issue of bonds required would be $20,000,000, provided all the gold was Avithdrawn by presenting certificates. If only $20,000,000 of gold certificates failed to be presented no bonds would be required. Tliere is no reason to suppose that any certificates Avould be presented, except to get gold for export. The people prefer paper for domestic puri)oses. They do not want, and would not use, gold for home circulation. As to the eighth proposition, we remark that the depositing of Government funds in favored banks without interest is an evil that ought to be remedied. When the security demanded in every case is the same, there is no reason why the deposit should not go where it is most needed. The greatest need will be indicated by the highest rate of interest offered. The money will finally reach that spot any- way, and give a rake-off to the bank that first received it. While treasurer of the State of Pennsylvania I had large sums of money deposited in the various banks of the State. The interest rate was fixed by law at 2 per cent, and there was nothing but the impor- tunity of the bankers to indicate where the money was most needed, and he reluctantly followed his best judgment in distributing the deposits at the uniform rate of 2 per cent, and upon the security prescribed by law. Competitive bids would have at once revealed where the need was greatest and netted a considerable revenue to the State. The arbitrary placing of Government funds without interest, or at a rate lower than competition sets up is monopolistic in princi- ple, and in no case necessary or advisable. The hoarding of funds in the Treasury vaults at times of plethoric revenue takes money out of circulation and affects business. Since our purpose is to take the Government out of the banldng business, Government officials should use the banks as other interests do. ,\s to the ninth and last proposition we can not be too emphatic. The tendency to monopolistic control of credits must be resisted with all the power of the state. The proposed plan of Mr. Aldnch and his "commission," by which the control of the currency is to be placed in the hands' of a central bank, has absolutely nothing to commend it. , ..i i -ii « ■ j^ The details of the plan have not been submitted with sufficient candor to make complete criticism of it possible but m a general v,av it seems to imitate the method of the Bank of England, the advantage of which, if it has any over the American system, lies m the power of the bank to arbitrarily raise the discount rate and thereby prevent an expansion of credit before the danger line is reached and thus avoid panics. This metliod involves a perpetual restraint upon business acti^ ity, regardless of whether labor is fully employed or not^; and the condi- tion of labor in the territory over which the Bank of England holds sway is by no means reassuring. Conditions are no better there than thev are here. What we want is a system that will remove the es7ra!nts upon industry and guarantee the safe conduct of general business at he highest point o'f productive speed and efficiency; and 548 BANKING AND CUEKBNCY EEFOEM. a full and free competition among the banks in furnishing credit i« as essential to this as is competition among those who use credit. Premeditated monopoly is a conspiracy against society and should be punished as a crime wherever it exists. Monopolistic control established by law is no less banefxd. Law (crystallized public opinion) should be invoked to j)revent monopoly, not to establish it. Through the operation of this plan all the gold offered for coinage comes into circulation. If it should come in sufficient quantity to keep up the 15 per cent reserve, no paper money would be issued, for there is no inducement to issue it except for reserve purposes, so that there can be no sui'plus of money except from the coinage of gold. This can and must be prevented, if gold should become too abundant, by legislation demonetizing gold. The coinage of bonds will insure an automatic adjustment of money to demand, whether gold is denied free coinage or not, and furnish continuously a safe basis for all the credit we need. When the paper is issued, and seven or eight times its volume of credit is issued upon it, it can not return for redemption unless the credit is withdrawn; and since credit is constantly expanding (see table), it woidd never return except when gold was wanted for export. Credit is a private instrument created for an individual by a bank for a consideration (interest), and the cost of carrying it compels its limitation in volume to the opportunities for its profitable use. No man would borrow money from a bank (on good security) and pay interest upon it unless he can use it in some profitable way, -so that the demand for credit can only arise out of an opportunity to use it in some profitable way. If there are unused natural resources and idle labor, the owners of nonliquid capital will see an oppor- tunity to profitably use credit. Unused natural resources infinitely abound; unpledged nonliquid capital also exists in large quantities, so that the final limiting factor is labor. Legitimate, well-secured credit can not expand beyond the point when all who wish to work are employed. In such case the work- jnan must be receiving all that his work is worth to the employer, and a scale of minimum profits will be established that will prevent a new employer from hiring him away from the old one. The full employment of labor, therefore, must be a final automatic check upon the demand for expanding credit. The cessation of de- mand for additional credit is the final automatic check upon the issue of legal-tender paper money. The full employment of labor is also the final check upon the min- ing of gold, and the full employment of labor, therefore, will be, and ought to be, the only check upon the production of all forms of wealth. The full employment of labor is now prevented by the fact that the currency does not, and can not under existing lavrs, expand with sufficient rapidity to sustain the price of the permanent forms of wealth when they are freely produced. The reason why a loss of price for these forms of wealth can not be endured is in that they are hypothecated as security for debt, and the loss of price spells bankruptcy for their owners. bajstking and cubeency kefoem. 549 The production of these permanent forms of wealth affords the only unlimited opportunity for the employment of labor, since they alone can be owned and enjoyed in practically unlimited quantities. The debts of the world rest upon labor, past or future, and can only be paid by the surrender of existing wealth or the creation of new wealth by the efforts of labor. Vast multitudes of men have no asset save their labor, and if de- nied the opportunity to use it beyond the mere necessities of existence, debts must continue to increase and perpetual slavery of the people to the debt owners of the world is inevitable. I thank you very kindly, gentlemen, for your attention. The Chairjian. Mr. Berry, some members of the committee may want to ask you some questions. Mr. Kindred. Mr. Berry, I want to clear up one of the many points that you have very well made. Did I understand you to say that you would have the banks, in order to increase their reserves, take to the Government certain of their bonds or assets for which the Government should issue notes, or something in that form, which in turn should be used to increase their reserves '. Mr. Berrt. Yes, sir. Mr. Kindred. What class of bonds would you suggest should be those used by the banks? Mr. Beeky. Government bonds first, and if they proved to be in- sufficient, and it was thought unwise to increase the Government debt for the purpose, State bonds I think might be safely used. Mr. Kindred. That is what I wanted to know. Mr. Berrt. I do not think you would need to use them. I think that the existing debt would be sufficient, if it was coinable into legal tender money. Mr. Kindred. You would use State bonds? Mr. Berry. Yes. Mr. Kindred. But no other class of bonds? Mr. Berry. No bond that was not a public bond ; no bond of any corporation. Mr. Kindred. No municipal bonds? Mr. Berry. Public bonds. State or municipal. Mr. Kindred. Or county bonds ? Mr. Berry. Or county bonds. That might possibly be done, if you wished to do it. But I rather think if I had more time to talk about it I might develop an idea in regard to the development of the Nation with convertible bonds which would supply all the needs of currency, ultimately. But that is a matter you can figure out for yourselves. Mr. Kindred. Let me ask you another question, to clear up a, point. You have said that if banks were careless in their transactions in such a way as to bring loss to those banks, discounting unwisely, and so forth, those banks .should suffer. Of course we agree, but the details of what the penalty should be and how the penalty should be visited upon them is what I would like to have your opinion about. Mr Berry. The loss of the money of those banks, you mean < Mr Kindred. By what machinery would the penalty reach them '. Mr Berry. By the ordinary machinery now used for the purpose. You do not want any new machinery for that; just the ordinary process of law. 550 BANKING AND CTJEEENCY EEFOEM. Air. KiJsDEED. That brings me to this : Naturally, in order to reach all the banks by the present machinery you must include in the Fed- eral system State banks and trust companies. I did not understand YOU to specifically say that. Air. Beeey. That is my thought, to include every bank of every kind. Mr. KiNDEED. That is what I supposed. Then, of course, you would have machinery present. j\Ir. Beeey. The local machinery I refer to as punishing a bank for making a bad loan. Mr. KiNDEED. What local machinery do you mean? Mr. Beeey. The courts. If I was running a bank and I loaned a fellow a thousand dollars on a bad security, I would have to lose it. Mr. KiNDEED. That is a question of crime. Mr. Beeby. Oh, no ; not in that sense. I jUst mean that they should suffer the consequences. Mr. KiNDEED. Eeally, then, you have a civil action in court. jNIr. Beeey. It is a commercial action. The thing takes it own course and punishes the fellow that makes a bad loan, as it does now. Mr. KiNDEED. He might be an agent of a bank who would not be personally responsible. I do not want to go into that unnecessarily, but I just wanted to clear that up. Air. Beeey. That is all that I mean ; that he would be punished by the loss of the money that he had foolishly loaned. That is all I had in view. Mr. KiNDEED. Just one more point and I am through. Your scheme, of course, is based on an increase of reserves which means an increase of soundness of the banking system? Mr. Beeey. Yes. Mr. KiNDEED. Under this banking plan you have not thought it necessary to refer to what has often been referred to, namely, emer- gency money ; some method of raising more money to meet a sudden stress than is obtainable now under ordinary conditions. Air. Beeey. AA'ith a thousand millions of bonds in existence, there is a potentially instant reservoir for any demand that may be made. Aly aim fundamentall}' is to get rid of the mergency. I do not thinlt there ever would be an emergency, because with a bond issue potentially coinable on the instant, the possibility of anybody jockey- ing the market would be gone, absolutely. Air. KiNDEED. That is, you do not think there Avould be any use in IDroviding for emergency money? Air. Beeey. Xo; because you have got your whole bond issue ready for instant conversion. Air. KiNDEED. The bonds that you have spoken of, which are the ordinary assets of the bank? Air. Beeey. Yes; the ordinary assets of the bank. Air. AViLLis. When these notes had been put out by the Govern- ment, where would they be redeemed? I understood you to say that a reserve of 20 per cent in gold would be kept in the Treasury? Air. Beeey. Yes. Air. AA^LLis. How would you manage to keep that intact, there? Air. Beery. By the sale of bonds. Air. Willis. That is, you would sell more bonds for gold? Air. Beery. Yes. BANKING AND CUEEENCY EEFOEM. 551 Mr. AViLLis. Yon would refuse to receive these notes that the Gov- ernment had put out? Mr. Berey. Yes; in that particular case. Mr. Willis. Would not that injure them a little? Mr. Beehy. No; because the effect would be the same if you took all the coin — the paper currency. Mr. Willis. How would that be? Suppose you needed gold — that your reserve was running down pretty rapidly, you would an- nounce a bond sale for gold only? Mr. Beeey. Yes. Mr. Willis. Then those bonds would be payable in gold, would they not? Mr. Beeey. Yes. Mr. Willis. How could you convert them into these notes afterwards ? Mr. Beeey. Only when people wanted it done. A'olitionallj^ on the part of the people that held them. Mr. Willis. But you would thereby have added to the amount of outstanding notes that might become a charge on your gold reserve ? Mr. Berey. If they were presented for that purpose. Mr. Willis. There would be nothing then to prevent the specu- lators you have spoken of from exhausting this gold reseive in just the same way that you say they exhaust the reserves of the banks? Mr. Beeey. Nothing but their self-interest. If it could be figured out how it would pay them to do it they would do it if they could. Mr. Willis. I understood you to say that there were crafty men who rigged the market by drawing out the funds and putting them in safety-deposit vaults, and then suddenly injecting them when stocks had run down sufficiently in price? Mr. Beeey. Yes. Mr. Willis. And they could do the same with this, could they not ? Mr. Berry. Yes. Mr. Willis. They could get the gold whenever they wanted it by presenting Government notes ? Mr. Berry. They could get the gold if they wanted it, by present- ing the paper. Mr. Willis. And the Government would have no way ot gettm|v further gold except by offering its paper in exchange ? IVTr Beerx. Ygs. Mr'. Willis. That is what President Cleveland did after the diffi- culties in 1893. . . , , T ,1 , Mr. Berey. Yes ; and if the conditions should supervene that con- fronted Mr. Cleveland it would have to be done to-day. Mr. Willis. So that at times it would be absolutely impossible to maintain gold redemption ? Mr. Beeey. No, sir; I think not. It was not then. They mam- *Mr WillS'. Was not the reason at that tinie not that the green- backs were increased in amount, but that Mr. Cleveland only had to strueele with the amount that was actually outstanding? Mr Beery. It did not need any increasing m amount to make the thiW infinite in its exhausting power. The opportunity for the pre- sentation of those notes was infinite. 552 BANKING AND OUEBENCY REFORM. ilr. Willis. It was limited, was it not, by the amount that the GoA-ernment actually paid out each day ? Mr. Beeky. Oh, no. ISlv. Willis. Xo more of them cou;ld get into circulation than the Government had on hand ? ilr. Berry. Well, they were in circulation. Hundreds of millions of them were out in circulation, and they were out in circulation all the time. ]Mr. Willis. They were not after they had been presented at the Treasurj' for gold? ]Mr. Berry. Not those that were bought up. Mr. Willis. Then, if there had been twice as many of them it would have been twice as difficult to maintain ? INIr. Beery. Xo. The limitation did not come from the lack of greenbacks. The limitation came from the turning of the supply of gold. The flow of gold had been very heavy outbound, and it turned. ^Nlr. Willis. What was it that changed that? 'Slv. Berry. The economic conditions. ]\Ir. Willis. Was not the effect of J. P. Morgan and others under this contract with the Treasury one of the reasons? Mr. Beery. Xo ; it had no more effect than the man in the moon, in my opinion. Mr. Willis. It was simply automatically turned? Mr. Beeey'. Yes : it automatically turned. If you will look at the statistical abstract you can see the movement of gold. Mr. Willis. But if for some reason it had not turned, would we not have gone to an irredeemable paper basis? Mr. Beery. Not necessarily. The simple point is that when you have a balance of trade against this country you have to supply the gold, and if you have not the gold to meet that demand you have to substitute something else. We had something else, to wit. Govern- ment bonds, and we sent Government bonds over there to make up the deficiency. That was made up with Government bonds. Mr. Willis. They sent Government bonds abroad? Mr. Berry. Yes. Mr. Willis. I thought they were coming the other way. I thought foreigners were sending them back to the United States. Mr. Berry. X^o; bonds were sent over there from the United States. It may be -that some came back ; but as a matter of fact, we sent them over there. Mr. Willis. Was it not a fact that Ave did not send them over but kept them in New York, and that the New York financiers sent other things OA^er there ? Mr, Berey. Well, I suppose the exact facts in regard to that are hardly knowable ; but if you will take the statistical abstract and go over it you atIU find that the flow of gold ceased, and you will find when It commenced to go the other Avay, and when anything has to be paid abroad the gold has to go, and the holder of a note imme- diately Avants it converted into gold for the purposes of sending it abroad. As long as that draft continues you have to supply it. Jlr. Willis. Under this plan of yours the Avhole outstanding credit of the country AAOuld be standing upon this 20 per cent of sold in 1 he Treasury? "^ , BANKING AND CUEEENCY EEFOEM. 553 Mr. Beret. Yes; if it should fall to 20 per cent. I doubt if it would. Mr. Willis. I thought you said 20 per cent, below which it Mould not be allowed to go. Mr. Beery. Yes ; 20 per cent is the minimum. Mr. Willis. And that would be the sole basis supporting the cred- its of the country? Mr. Beret. Yes. Mr. Willis. So that an inflation of credits would strain that in a, corresponding degree? Mr. Berrt. No; the more loans the bank made, the less strain would come on that. Mr. Willis. I do not quite understand that. Mr. Berry. Simply this. If you pass this book over to me this way I can pass it back to you very easily, but if we put a 10-pound weight on it it can not come back so easily. That is what the bank does when the bank loans money. It never could come back to me. Ex- cept in the case of decreasing credit, it never would come back. Mr. Willis. Such loans would give rise to more of this irredeem- able paper? Mr. Berrt. No ; not if it was secured, the loans would not. Well, perhaps concurrently both ways; the loans would give rise to the paper and the paper would give rise to the loans. Mr. Willis. The more outstanding loans there were, the more out- standing paper resting on this 20 per cent of gold ? Mr. Beret. Yes; but the percentage of gold is manitained against the total volume; but the proposition is that under this system of issue the paper would never go out except for use as reserve money, and once it gets into the bank's reserve it can not get away. Mr. Willis. The banks have to pay it to their creditors if they ivant cash? Mr. Berey. Yes; but that 15 per cent they are holding is working cash. That maintains their volume. Mr. Willis. But they haAe to pay it out to their creditors or else close their doors? Mr. Beret. Surely. , ^ ■ q t -4- Mr Kindred. In that connection may I ask one question « Is it, after all, absolutely correct to say that Mr. J. P. Morgan s action, his personal action, based on certain agreements— lirobably a cable to Europe— was not a direct means of bringing gold here during the crisis of the panic of 1907? i t ;i^ „^+ Mr Berrt. I am not in Mr. Morgan's confidence, and 1 do not kmn/: but this T do know, that the facts are presented from our statistical tables showing that the beginning o| the efflux of go d was four years before Mr. Cleveland was elected, ancl that the gold reserve was depleted by the time Mr. Cleveland came m. The Chairman. You mean 1893. . ■ i j.- Mr Berrt. The necessity of selling bonds to maintain redemption fofthe then existing paper^urrency which was altogether ^"^^^^^^^^^^^^ hitelv due to the outflow of gold under an unfavoral)le trade balance, had beeSlnticipa^ed by a predecessor. As soon as the trade balance changed the flow of gold came the other way, and the trouble was over. 554 BANKING AND CUEEENCY EEFOEM. Mr. McCeeaky. Was not Mr. Cleveland criticized not so much for the issuance of bonds, because they had to be issued to get the monej', but on account of his mode of doing it, because instead of making it public and giving everybody a chance to bid on it he favored, as it was alleged, certain men, and because they made a large amount of money out of it ? Mr. Berry. He was subject to a good deal of unfavorable criticism, but I never criticized him for it. He had to do it, and any other President would have to do the same tiling with the same situation confronting him. Mr. MoCreary. If we had had a popular subscription it would not have been new money or foreign money, but money from our- selves, whereas Morgan and the syndicate sent over to their cus- tomers in Europe and sold those bonds and therefore got the money back from the old country into this country, and that was prac- tically new money. Mr. Berrx. Well, I think that in so far as they exported the bonds they were doing the oiie thing needful. They were compelled to stop the outflow of gold, and that is what they did. Mr. McCreary. And get gold back? Mr. Berry. Yes. Mr. McCreary. The balance of trade was against us at that time. Mr. Berry. Yes. As long as the balance of trade is against us gold flows out, and when it is with us it comes in? Mr. KoRBLY. Is it not a fact that nearly every year for the past r)0 years the balance of trade has been in our favor ? ilr. Berry. Oh, no ; not the whole balance of trade. The balance of trade in merchandise is always in our favor, but the balance of trade, including American securities and our obligations abroad, and the general balance lias been frequently against us. • yiv. KoRBiA'. Ha\e we not almost uniformly in the past 50 years exported more gold than we have imported? ^Ir. Berry. We have, very largely. Have you a copy of the statis- tical abstract 'f I know for four or &ye years the reverse was true. ^Ir. KoRBr.v. But in the aggregate we have exported more gold (hail we have imported, in the past 50 years. Mr. Berry. No; I can tell you those figures exactly. The total average of the annual export of gold for the last 50 years has been $8,000,000 a year net, and that included the Avar period. Mr. KoRBLY, And what are the imports ? Mr. Berry. That is the net export. Mr. Korbly. "\'\Tiat are the imports for that period ? Mr. Berry. I could not tell you either the exports or the imports so far as the totals are concerned. Yes, I can tell you by reference to this statistical abstract. I have the figures here. Mr. KoRBLY. My impression is that we have exported vastly more than we ha\'e imported of gold, although the balance of trade 'was iii our favor. Mr. Berry. Here is a little book I have published, which has that fact 111 it. It shoMs that in the period of 50 years the result of the movement of gold has been an average of '$8,000,000 out of the countiy. Mr. Korbly. I take my figures from the historical table of exports and impoi-ts gotten out by the Bureaii of Statistics. BANKING AND CURRENCY REFORJI. 555 Mr. Berry. That is where I get my figures. jNIr. KoRBLY. I do not care to press that. I Avanted to ask your understanding Mr. Berry. Here it is. From 1859 to 1878 the net exports of gold were $oOO.OOO,000. That is the net export in that period. In the "next period, from 1878 to 1884, the net imports were $193,- 000,000. ' In the next period, from 1884 to 1896, the net export was $286,- 000,000. ' That is where Mr. Cleveland got caught, in that period. Mr. KoRBLY. May I ask you, where does the gold rest now that is in the United States ? Mr. Berry. Mainly in the United States Treasury. Mr. KoRBLY. By that you do not mean to exclude the gold certifi- cates ? Mr. Berry. Yes. The gold certificate redemption fund is the largest accumulation of gold, I guess, that ever existed. Mr. KoRBLT. If I had a gold certificate in my pocket, it might be said that that gold rested in my pocket. Mr. Berry. Well, it is not. Mr. KoRBLY. I mean from its personal use. Mr. Berry. Oh, yes. Mr. KoRBLY. So, loolring at it that way, where does the gold rest? Mr. Berry. It rests in the channels of business, in the banks, and in the pockets of the people. Mr. KoRBLY. How much in the banks and how much in the pockets of the people? Mr. Berry. I could not tell you the exact figures. Mr. KoRBLY. Approximately, if you can. Mr. Berry. I can tell you just about how much the Government holds. The Government has a redemption fund of $150,000,000 and reports about $60,000,000 of gold in its general fund; a little over that amount. Mr. KoRBLY. Do you know how much is in the bank vaults ? Mr. Berry. About $600,000,000, I think. Mr. KoRBLY. Then that leaves how much to be accounted for? Mr. Berry. About that much more. Mr. KoRBLY. About $600^000,000 more ? Mr. Berry. Yes. Mr. KoRBLY. And of that much more that is to be accounted for, how much did you say was in the Government vaults ? Mr. Berry. About $200,000,000. Mr. KoRBLY. That would leave about $400,000,000 among the people? , . , Mr. Berry. Yes. About $398,000,000. I have it here, exactly. Mr KoRBLY. What I wanted to get at was whether if there was some system of bank-note currencv by which that $400,000,000 should get into the bank vaults to be used as reserve money, it would not in large measure effect a remedy or give us a remedy for the evils you have spoken of ? , , , , i + /i,-„ :Mr Berry To the extent that a bank note may be made to dis- place'legal tender in the hands of the people it is u remedial thing 7G112— PT 9 — 13 5 556 BANKING AND OUEKENCY EEFOEM. and is helpful ; but to the extent the bank note comes into the bank,, it is a nuisance. Mr. KoEBLY. But if the bank note comes into a bank and is can- celled like a check, or lies there, just as a note that you might make payable to my order would be if you kept it in your own pocket and did not deliver it to me, would it then have the effect that you speak of? In other words, a bank note that is issued by a bank, if it is kept in its own vault, is a nullity, is it not ? Mr. Bebet. Yes ; and as long as the bank note coming into a bank is the note of its own issue it must retain it until it can put it out in its ordinary line of business ; but if it takes the note of another bank, then it immediately sends it in for redemption. Mr. KoEBLY. What differentiation do you make between the $17,- 000,000,000 of deposits in the banks of the United States to-day and a bank note, as to nature and substance ? Mr. Bebey. Well, there are certain legal privileges given to the bank note that are denied to the ordinary checks ; but so for as their purposes in currency are concerned, they are exactly the same. Mr. KoEBLY. The bank note, then, is equivalent to a cashier's check on his own bank ? Mr. Beeby. Yes; but it has certain legal privileges which enable it to pass in every other bank, which a check does not have. Mr. KoEBLY. The note of one bank that was put in another bank for deposit should be sent home for collection, should it not ? Mr. Bebey. Well, it is. It is practically the same thing in effect. I can not see any material difference, except that the bank note has some legal privileges. One would naturally think it would not re- quire a large reserve to maintain it ; and it would not — it would not require any — if it was not overissued. Mr. Koebly. You would not object to the issuance of bank notes and currency? Mr. Beeby. No. Mr. Koebly. In other words, if I had a deposit of $10,000 in the bank and wanted the bank to issue me $10,000 of notes for that de- posit, you would see no objection to it? Mr. Bebey. None at all as long as they did not give them a legal tender function; but I do not want the Government to give to the evidence of your debt or the bank's debt a legal- tender power with me, or with anybody else. Mr. Koebly. You recognize the bank note as being an expression of bank credit? Mr. Beeby. Yes, sir. Mr. Koebly. Just the same as a deposit? Mr. Beeby. Exactly. Mr. Koebly. Do you think, then, that if we had that sort of a bank note it would not induce this $400,000,000 of gold that is float- ing around to come in the banks ? Mr. Beeey. It does now. Mr. Koebly. We have not bank notes now. Mr. Bebey. We have $700,000,000 of them. Mr. Koebly. They are limited to the amount in existence of Gov- ernment bonds. Mr. Beeey. Oh, no; they are not. Mr. Koebly. They are not? BANKING AND CUEEENCY EEFOEM. 557 Mr. Beery. No. It never has been, and as long as it was limited to the demand — if you will take that table you will notice that the increase of redemptions has been very marked of late years. The Chairman. You do not mean to say that the bank notes could be issued on anything else but Government bonds ? Mr. Beret. Well, I am not so sure but what they could The Chairman. Under existing law ? Mr. Berry. No; not under existing law. Mr. KoEBLY. 1 am talking about one system of note issue and you seem to be talking about another. I am supposing that the banks should be able to convert the deposits into notes at the option of the creditors of the bank. You say you see no objection to that? Mr. Berry. I do not see any objection; no. Mr. KoRBLY. Therefore people could get as manv bank notes as they wanted ? Mr. Berry. Yes. Mr. KoEBLY. And when they did not want them they would de- posit them in the bank? Mr. Beeey. Yes. Mr. KoEBLY. Would not that supply a currency that the people are now using as gold certificates? Mr. Berry. No. Mr. KoBRLY. Why not? Mr. Berry. Because it is not money; it is not legal money at all; it can not be given a legal-tender function. That kind of a note can not be given a legal-tender function, and no credit note can.; it is not money at all ; it is a promise to pay money. Mr. KoRBLY. It would serve the purpose of currency. Mr. Berry. Yes. I have a bank credit and go out and write checks against it. I may have a hundred thousand dollars of circulation. It is the same thing. I have not affected the volume of the currency at all. What you want is not the privilege of converting that $100,000 of bank credit into some other kind of credit; what you want is some means of getting $100,000 of credit on the bank's books, and the bank can not take the credit. The Chairman. What you want is to expand credit and not notes. ^Ir. Berry. Surely. I do not care what form they put it in, whether they are notes or what. Mr. KoRBLY. That is not the point. What I want to find out is whether you deduce from all these facts the conclusion that this $400,000,000 stays in the pockets of the people and the money tills because of the demand for that much money for legal-tender pur- Mr' Beery. Well, I do not know what the reason is which forces the present issue of bank notes back in such volume that a 5 per cent redemption fund will not take care of it. Why it is I am not exactly prepared to say, but it is a fact. , , , • u <; Mr KoEr.Lv' You think that an elastic bank-note issue would not result in the gold flowing into the hank vaults to be used as reserve? Air Berry. No. Mr. KoEBi-v (continuing). In any grciitcr extent than now mani- Alr. r>i;Kitv. No: I would see no reiison Avhy they should. 558 BANKING AND CUKEENCY EEFOEM. Mr. KoKBLi'. I do not want you to think that I contend that a bank note should be given a legal-tender function. I would not have any- thing a legal tender but the thing itself. Mr. Willis. I do not want to press this too far, but do I correctly understand you to say that the 5 per cent redemption fund does not take care of the redemptions at the present time? Mr. Berei'. No ; it does not. Mr. Willis. Why is that? That is a new idea, is it not? Mr. Beeey. It is simply because the bank note is not a legal tender, and \vhen it comes into the vaults of the bank Mr. Willis (interposing). You are speaking of the 5 per cent redemption fund in the Treasury, are you not? Mr. Beery. Yes. Mr. "\^^iLLis. What is the monthly limit of the amount of notes that can be retired? Mr. Beery. There is not any limit. The Chairman. Oh, yes ; there is a limit of $9,000,000. Mr. Beery. There is no limit at all on that kind of redemption. You mean the retirement of bank notes? Mr. Willis. Yes ; the absolute retirement. Mr. Beeey. I am not talking about that. Mr. Willis. You mean ordinary current redemption? Mr. Beeey. Yes. Mr. Willis. I do not know how you can say that 5 per cent is not sufficient, when that fund is immediately restored by the banks upon their being notified of the reduction of the fund, and by the transmission of the notes presented for redemption to them. Mr. Beery. Here is the report of the Treasurer for 1912: Redemptions of national-bank notes during tlie year have constantly been in excess of this 5 per cent fund required under section 3 of the act of June 20, 1874, to be kept by the banks on deposit in the Treasury of the United States tor the redemption of their notes. Consequently that fund has been overdrawn during the whole year, and the Treasury has liad to advance payment for notes as they were presented out of the general fund. The largest overdraft at one time was $26,927,389.52 on February 3, 1912. Mr. Willis. That is merely a temporary proposition. Mr. Beeey. It is going on all the time, and it has been going on for the last five years. Mr. Willis. What I mean to say is that the Treasury has the power of drawing on the banks for any amount of money necessary to redeem their notes. Mr. Beery. And another statement here is that he has notified them time and again that they were overdrawn and they failed to respond. Mr. Willis., That means that they should be closed up, then, per- haps? Mr. Beeey. Well, we do not want a panic, and they try to nurse them along, let them go along, and do the best they can. Mr. Willis. The 5 per cent simply represents an amount that is temporarily there on deposit and which is filled up as the demand of a corresponding amount of offsetting cash is sent to a solvent bank? Mr. Beeey. Yes. Mr. Willis. The so-called deficit, then, is due to a failure on the part of the banks to transmit instantly the amount due ? BANKING AND CUEEENCY EEFOEM. 559 Mr. Beret. It is a question of physical impossibility, that is all, for them to get it back in force with sufficient rapidity. They do not do it, anyway. That is the most charitable construction you can put on it. Mr. Willis. Or that the officers of the Government have not ex- acted it? Mr. Beeet. Well, they have not taken any legal process, that I have learned of, to correct it. They have complained about it, though, in every one of the Treasurer's reports in the last three years. You will find the same complaint in every one of them. Mr. Willis. That is merely an administrative complaint. It is not a complaint of insufficiency of redemption ? Mr. Beeey. Surely; it is a direct statement fund, in so many words, of the insufficiency of the redemption, is it not ? Thereupon the committee adjourned until to-morrow, Wednesday, January 29, 1913, at 10.30 o'clock a. m. BANKING AND CURRENCY REFORM HEARINGS BEFORE THE SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY HOUSE OF EEPRESENTATIVES CHARGED WITH INVESTIGATING PLANS OF BANKING AND CURRENCY REFORM AND REPORTING CONSTRUCTIVE LEGISLATION THEREON WEDNESDAY, JANUARY 29, 1913 STATEMENT OF MR. WILLIAM W. FLANNAGAN PABT 10 WASHINGTON (JOVERNMENT PRINTING OFFICE 1918 SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY. House of Repbesentatives^ sixty-second conqbess, thibd session. CAETEE GLASS, Virginia, CTiairman. J. FEED. C. TALBOTT, Maryland. JOHN J. KINDRED, New York. QEOEGB W. TAYLOE, Alabama. EDWAED B. VEEELAND, New York. JOHN M. MOOEE, Texas. GEOEGE D. McCEEAEY, Pennsylvania. CHAELES A. KOEBLY, Indiana. JAMES McKINNEY, Illinois. EGBERT J. BULKLEY, Ohio. R. W. Fo.vTBNOT, Clerk. A. M. McDbemott, Aeaiatant Clerk. II BANKING AND CURRENCY EEFOEJil. Subcommittee or the Committee on Banking and Currency, House op Representatives, Wednesday, Januai^ 29. 1913. The subcommittee met at 11 o'clock a. m. Present: Messrs. Glass (chairman), Korbly, Bulkley, :\IcKinney, Kindred, and McCreary. STATEMENT OF MR. WILLIAM W. FLANNAGAN. The Chairman : Mr. Flannagan, you understand that this is a subcommittee of the Committee on Banking and Currency of the House of Representatives, charged with the business of making in- vestigation and getting advice and reporting a measure of currency reform, and we have invited you here as a practical man of long ex- perience in the banking business, and would be glad to haAe you pro- ceed in your own way. Mr. Flannagan. Mr. Chairman and gentlemen, I suppose you gen- tlemen in considering the difficult task which has been assigned to you have been struck, in the discussion which you have heard, with the importance given to effects — defects they are called — of our bank- ing and currency system. That these defects exist there can be no doubt, but I should like to direct your attention rather to the con- sideration of causes, if they can be discovered, so that your judgment may be utilized as to the best method of removing the causes without interfering with the business interests of the country and retarding the prosperity which has grown up in spite of these defects. I want to talk from the standpoint of a practical business man and bank officer of many years' experience, first in the country and after- wards in the city, so as to direct your attention toward practical remedies as affecting the mechanism of banking rather than to gen- eralities or theories in economics as applied to business. If you will analyze any or all of the defects of our financial sys- tem, I believe you will find the cause can be traced to unwise legis- lation in the past. I say unwise from an economic standpoint, for the legislation may have been, and probably was, a temporary neces- sity. The cause as evidenced in legislation may thus be stated : i. The destruction of the bank function of circulation. 2. The assumption that a statute law can make a promise of pay- ment equivalent to payment or, in other words, make a debt equiv- alent to coin. , 1 1 i! The want of elasticity in our currency, the lack ot reserves in times of panic, the suspension of solvent banks, the absence of normal ' .561 o62 BANKING AND CUEEENCY REFORM. banking facilities for moving the crops, the undesirable accumula- tion of idle funds in the business centers, and the speculative excesses yhom I was in conversation passed over to me their last bank statement, [glanced it over and remarked: "Well, you owe a great deal of money." " What is that you say?" " You owe a great deal of money." "What do you mean?" • Your deposits are about $350,000,000." " Oh. jes ; we owe depositors, but we could pay them easily if we had to." " Could you? How long would it take you to pay them in case of necessity?" " The element of time would not enter Into the matter at all, except in so far as it required, time to perform the physical labor." " But how ; tell me just how you would do it." Almost thinking I was questioning the condition of his bank, he took the bal- ance sheet and proceeded: ^ " Well, we have so much cash ; let us deduct that." " Yes." " Then we have so much due from banks. We could value against tiiat and deduct the same." " Yes." " We have so much exchange, acceptances, etc., which have an immediate market. We could realize upon and deduct that." " Yes." " Now, we have reduced our obligations in this manner to something less than $200,000,000, and we have very, very much more than that in commercial paper." " Yes ; but how are you going to pay debts with commercial paper?" " Take it to the Bank of France and get currency for it." ■ Is not that a proposition to pay a debt with a promise of somebody* else? BANKING AND CURRENCY REFORM. 573 Mr. Flannagan. Certainly. Mr. KoRBLY. And does not that involve all the objections that you have just urged against the greenback or fiat Government money? Mr. Flannagan. I think ft does. The Bank of France does a little business in the way of deposits ; that is, it circulates its debts almost exclusively in the form of notes. Those circulate among the people and they take it in that form. The Bank of France can cir- culate the notes. You have the same thing here in your reserve credit that I suggest, which would be the consolidation of these banks, allowing them to issue those notes. But I think the funda- mental thing to keep strong is that our primary obligations ought to be secured in gold; that we ought to get on a thorough gold basis and not attempt to utilize the substituted promises of payment for payment. Mr. KoEBLY. I do not understand you to contend that a bank might to be allowed to pay its promise to me by giving me some other promise. Mr. Flannagan. It does it every day. Mr. KoBBLY. But you are not contending for that as a soun^ prin- ciple? Mr. Flannagan. No. I say in the ordinary course of business the bank note which circulates every day, which we call money, is noth- ing but a bank debt. If we, by legislation, can keep that bank debt so that it will always command the coin when it is wanted, then we are on a sound basis. I think that is all you have got to do. Mr. Kindred. Something that you have said suggests to me another question that I would like to have you kindly answer. In organizing these banks into associations, have you thought of any plan by which you would designate any particular number, or would you have them arranged geographically in this country ? Mr. Flannagan. I think that the provision of the Aldrich-Vree- land law is that thev have to be contiguous and that they are limited in capital to a minimum of $5,000,000 and that they can not belong to but one association. There can be but one in New York. I would not have but one in each case. You do not need but one. Mr. Kindred. How many would you have ? Mr. Flannagan. Just as many as they chose to organize under thosG restrictions. Mr. Kindred. But they would not be voluntary, as they are now ? Mr. Flannagan. But you have them already organized. Mr. Kindred. Yes; but you would legalize them? Mr. Flannagan. No; they are legalized now— if we are speaking of the same thing. , , _ ,. . .-c j. • ^„;„^ Mr. Kindred. T mean you would legalize their certificate-issuing *'''m?*Fl!nnagan. Yes; that is what I have in this plan here. Mr Kindred. But what I wanted to do was to get your opinion as to how many they should have in this country according to the economic c^ndilions and the distribution of commercial aSairs as *''Mr^ FLrNNloAN. I would not limit the numbet, except as they arf now Wed with $6,000,000. But I would not let any bank belong to two associations. Mr/ Kindred. You would limit the capital 574 BANKING AND GTJREENCY KEFOKM. Mr. Flannagan. Yes. Mr. Kindred. You would limit the Capital of. the member banks to $5,000,000? Mr. Flannagan. Yes; to $5,000,000; what you ha,ve got now; $5,000,000 minimum capital and surplus for each association. Mr. Kindred. Would you suggest auy mechanism that might be called a coordinating mechanism that might be an arbiter between these associations if they got to grabbing and grasping to build up their reserves in time of stress, or grabbing for gold? _ Would that not be necessary to have some coordinating and equalizing mecha- nism ? Mr. Flannagan. There would be no occasion for banks to grab for reserves, because they always can go and utilize it under this plaWj Mr. Kindred. You have suggested a plan that would make that much more elastic, increasing their reserves? Mr. Flannagan. Yes. Mr. Kindred. But suppose, notwithstanding all those precautions and all those provisions you have suggested, there was need, in the minds of these associations, of more gold to build up their reseTv'es, and they did get to grabbing, is there not some mechanism that ought to come in and prevent that for the benefit of the whole country? Mr. Flannagan. I do not see where the necessity would ever arise for them to grab for it. Gold is always idle, it can not earn- them anything. It is only valuable for the purpose of reserve and for nothing else. It does not earn any interest, no matter who has it. Mr. Kindred. But in critical times ? Mr. Flannagan. Quite right; but they only want it for the pur- pose of meeting their liabilities. Mr. Kindred. Suppose they have difficulty in getting it, and then one association or one group of associations begins to do what each bank did in 1907. Mr. Flannagan. I do not believe that that is a practical question. I do not think it can arise. Mr. Kindred. Of course, if you do not believe it can arise, that is our difference in point of view. Mr. Flannagan. Yes. Consequently I do not believe that it wOlild be necessary to adopt any legislation to prevent it. At fifst blush I do not exactly see what legislation you could adopt that would pre- vent the grabbing for this gold. Mr. KoRBLT. Do you recognize that a bank note and a bank deposit are substantially the same thing ? Mr. Flannagan. They are identically the same thing. Mr. KoRBLY. In substance ? . ■ Mr. Flannagan. When they are classified as a debt. They are both debts of the bank. Mr. KoRBLY. Yes. Mr. Flannagan. A deposit is a debt where the creditor is known. A bank note is a debt where the creditor is unknown. That is the whole difference. You liever know the creditor holding a bank note until he presents the note for payment. You always know when he is^a dpositor. But in point of fact there is no material differ^ce between those indebtednesses, except as I have told you. ■• ; BANKING AND CUERENCY EEFOEM. 575 „.J^^'f?"'^?^J^''-u^^®"',^^^^*^"<^y «* the currency would practicallv 3d i^t'notr '"^^'^^'^'^ '' '''''' ''''' ^^™^ "f evident of debf, Mr. Flannagan. Yes. Mr. KoM^LY. May I ask if you have any notions concernin^r thp m^F^^^'iZT^T'' 1 ^^"'^e*^ oblations irbaS"^ ''" Mr. i - Mr. Kindred. Of course not. Mr. Flanxagan. Yes. Mr. Kindred. May I ask how that paper was l■e^ei^ed b^• the American Bankers' Association at that time ? Mr. Flanxagan. At that time? How it was received « Mr. Kindred. Yes. +u^^' F/l-^^'.^'^GAx. There was no vote taken on it at all, l)ut it was thoroughly indorsed all over the country. Mr. KoBBLY. You were not expelled from the association? Ml'. Flaxxagax. It was thoroughly indorsed all over the country. J^veTi the Evening Post and the Nation indorsed it. I have pub- lished extracts of indorsements from all over the country, and I believe it is a very good proposition now. Mr. Kindred. I personally believe that it is, but I was wondering now the American Bankers' Association received it. Mr. Korbly. I am going to suggest that those indorsements that Mr. Flannagan speaks of be put into the record. The Chairjiax. I have here the address of Mr. Flannagan, made at that time before the xVmerican Bankers' Association, and also the bill which he drafted and which was introduced in the House by Mr. Hutton, of Missouri. There are here 10 pages of brief extracts from letters from national bankers all over the United States in- dorsing the scheme. I believe, if the committee has no objection, I would like to insert it as an appendix to Mr. Flannagan's remarks. It was also indorsed by many of the leading metropolitan news- papers, by the Xew York Evening Post, and by Horace White, who was for a number of years connected with the Evening Post, and by the Nation and the Financial Review of New York. Mr. Flannagan's scheme was a little different from some of the schemes now proposed. He suggested that they should utilize the franchise tax on circulation to guarantee Mr. Flannagan. Deposits. The Chairmax^ (continuing). Bank deposits, and he showed that up to that time it might have been Used to discharge indebtedness on deposit accounts of all failed banks and still have left a balance of $48,000,000 to the credit of the fund, the total amount of failures up to that time being $9,000,000. 76132— PT 10—13 2 576 BANKING AND CURRENCY REFORM. Mr. Kindred. You have the same view now? Mr. FLANNAfiAN. Exactly. Mr. Kindred. Of making a fund out of a franchise tax? Mr. Flannagan. Making a guarantee fund, which I believe is good and sound, and there is only one single amendirient that I would suggest after these 25 years, and that is to limit the total indebted- ness of a bank in proportion to its capital and surplus. Mr. Kindred. And that you have suggested now? Mr. Flannagan. That I have suggested here. Mr. Korbly. Those limits that have been fixed heretofore in many of the charters of banks and many of the State bank laws have seldom been reached. Mr. Flannagan. I did not know that there was any legislation limiting the liabilities in proportion to capital and surplus. Mr. KoRULY. Yes; there was such a limitation in Indiana. They never had anj^ occasion to reach the limit. Mr. Kindred. That is not in the Federal law. Mr. KoRBLY. No; I am speaking of the State law, with a State charter. Mr. Kindred. That is proposed to be raised by a tax on what? Mr. Flannagan. The tax on circulation. The Chairman. The tax on circulation was to be appropriated to that use. Mr. Kindred. Who should hold the fund ? Mr. Flannagan. The Government. The Chairman. If it is agreed by the committee- I will insert this in the record as an appendix. [The document referred to will be found printed at the end of this day's proceedings.] Mr. KoRBLY. As to this proposition of paying depositors by the notes of a central bank, it is your understanding that the Aldrich plan, for which Mr. Hepburn contends, made the note of the central bank a legal tender, is it not? Mr. Flannagan. It makes it a legal reserve for other banks, that is what it does. It allows the debt of the central bank to be counted as a substitute for coin. Mr. KoRBLY'. I understand that; but does it not, Mr. Bulkley, make it a legal tender ?- Mr. Bulkley. No. Mr. Flannagan. No; it does not make it a legal tender for private debts. Mr. Kindred. Do you mean that the Aldrich plan does not make the note issue legal tender in any case? Mr. Korbly. I thought that it did, but Mr. Bulkley says it does not ; and he knows more about it than I do. Mr. Kindred. Do you mean to say that it does not make the note issue a legal tender in any case? Mr. BuLKLEY'. No; it does not. Mt. Flannagan. But it does alloAv them' to be used as legal reserve. Mr. Bulkley. Yes. Mr. Korbly. I understood so. • The Chairman. It makes it legal tender in a way, because it may be substituted for legal-tender notes as a reserve. Mr. Bulkley. Yes ; it might be so substituted. I should imagine that it might drive the legal-tender notes out of existence. BANKING AND CUEKENCY BEFOEM. 577 I would like to ask just one question about the convertibility of bonds into notes, and vice versa. Do you propose that the 2 per cent bonds be convertible, without limit, into United States notes ? Mr. Flannagan. Only the present issue; what we have got. We have about $846,000,000 that are authorized, and there are about $730,000,000 outstanding. Mr. Btjlkley. Yes. Your proposition is that anybody owning those bonds Mr. Flannagan. That anybody who owns a 2 per cent bond — anybody, you or I or any bank or trust company — can go to the Treasury and say. " Give me certificates of deposit for this in thfr shape of currency." Mr. Kindred. Up to 90 per cent? Mr. Flannagan. No; up to the face amount. "What is the differ- ence ? Why not give them 100 per cent I But it does not bear inter- est while it is in the shajae of currency. Mr. BuLKLEx. Would the^^ be United States notes, or would they" be a new form of currency that we do not have now ? Mr. Flannagan (reading) : There has been deposited iu the Treasury of the United States a (ioverumeut bond to the extent of $5. Mr. BuLKLEY. That would be a kind of a certificate that does not now exist? Mr. Flannagan. Yes. Mr. BuLKLEx. And it would not be redeemable in gold? Mr. Flannagan. Not at all. You do not want it redeemable in gold. That might embarrass the Government some time, as it was embarrassed in 1893. But it will circulate as currency, and will be used to discharge debts amongst individuals in trade, because the Government will receive it for its indebtedness to it, and the Gov- ernment can reissue it and put it out again. It would be an ideal currency. , • i , ]Mr. BuLKLEY. You would make it receivable for all mdebtedness to the Government? n, ■ t , ^^ i ^ ^x. Mr. Flannagan. Certainly ; receivable for all indebtedness to the Government, except customs, and to be reissuable just like a green- back is, or just like a national-bank note is. ..,,,,- ^ Mr. BuLKLEX. Did you say that it would be convertible back into bonds again % ^ . ,. , i i 1 1 ■ Mr. Flannagan. Certainly ; at the option of the holder. Mr. BuLKLEX. The same bonds. Mr. Flannagan. Two per cent bonds. Mrr BuLKLBX. Do you think that 2 per cent interest would be sufficient to retire those notes? ,, ^ . 4^ +u„i- ,,,„„irl v,o. Mr Flannagan. Certainly. Then, the effect of that ^^ ouid bfr thSn place of sending this accumulation of funds to New York m cuSency and getting 2^ cent on it there, they would give it o the Go™ment because then they would know that they could always ^etfwl per cent and getthe currency, too, whenever they needed I Then you would not have these shortages of currency, and you would not have the premium on currency as we had m 1907 and 1893 ^''i'^'T^^^KLEX In other words, it would take the place of sending money to^he banks in the central reserve cities? 578 BANKING AND CUERENCY REFORM. Mr. Flannagan. Right. This accumulation in New York comes from a currency that is redundant at times, and goes out in the form of currency. It goes to New York now, where it earns 2 per cent interest. The Government would say under this plan, " We will give you 2 per cent if you do not want it," which we are doing now. The Government would carry that debt at less than 2 per cent, because a large proportion of the debt would always be in the form of currency. The Chairman. I noticed you said that we were pledged against a central bank. Mr. Flannagan. I made that remark, Mr. Chairman, because I thought the platform of the party pledged you against it. The Chairman. It did. I wanted to ask you if you think public men ought to seriously regard the deliberate platform declarations of their party? Mr. Flannagan. Most undoubtedly I do. The Chairman. I dislike to have to ask you a question of that sort, but I do it because I was very much amazed to get in my mail this morning from representatives of one or two chambers of com- merce in Virginia a suggestion that I should deliberately repudiate the platform of the party. Mr. Flannagan. I can not indorse any such sentiment as that. The Chairman. We are very much obliged to you, Mr. Flannagan, for coming here and giving us your evidence. At 12.15 o'clock p. m. the subcommittee adjourned. The address of Mr. Flannagan, referred to in the hearing, is here printed in full, as follows: IThe following paper was submitted to the convention of the American Bankers' Associ- ation, which was held at Chicago, Sept. 2" and 24, 1883, and ordered to be printed with its proceedings.! Security for National-Bank Deposits. [By W. W. Flannagan, cashier of the Commercial National Banlt, New York.] Twenty-five years ago, if it had been proposed, in the abstract, to organize a system of banking whereby the circulating notes of banks, no matter wliere issued, should pass at par from Maine to Florida, and that not only the notes of solvent banks should thus pass current, but the notes of insolvent banks as well, the most experienced and wisest banker, under the State system then in vogue, would have pronounced it impossible. Familiar as we are to-day with the national banking system, which has gradu- ally developed this result, there appears to us nothing strange in this state of facts, and we only wonder that we endured the evils of the prior system for more than 50 years. Under the State system (with the exception of New York, Louisiana, and IMassachusetts) we had no real security for bank circulation, and to keep the issues of the banks afloat seemed to be the difficulty of the managers of that -day. They experienced no difficulty in the payment of their depositors as long i,is provision was made for their circulation, for with the latter, either directly or indirectly, they managed to prevent the former from feeling any uneasiness. Bank failures came from inability to redeem circulation, not from inability to pay depositors. Now, under the national banking system, failures never come from inability to redeem circulating notes (because their redemption is never ■demanded), but exclusively from inability to pay depositors. To-day the practical question arises : Can we not take another step forward in the improvement of the national banking system whereby the same con- fidence which now exists in the mind of the holder of a note shall also exist BANKING AND CUERENCi" EKi'OSM. 579 with «ie'olberv \^:^^T-"''- f "" '^"* rT""^^^' ^^'^ °°<^ ^^>«11 I^^ equally secure «im tne othei .' iins being done, we shall have no more runs on natioml hnnko Zrol^w'V"''"'^ ''"' ^•*'"^" °^ '^« f-^"!' of lo«« theiefrom,rciSg house Joan certificates, no needloss failures of national banks wlii -h nfWwn.Sr 300 cents on the dollar from assets: but faUure on"y as ti^^ result oJmim^an^ agement or fraud, which, when they occur, will be isolated and will not iuTOlv; others m the.r rum, as is now so frequently the case, it being fhrnatTralTesul? of our complex and closely Interwoven system of credit natural lesult To my mmd the solution of this question is intimately connected with the t-ix collected by the United States from national banks on their c^^^ulat on The abolishment of this tax has been urged upon Congress by this associ- ation and approved in an official report of the Comptroller of the Curiencv • but to-day we seem to be no nearer the accomplishment of this end than when the question was first mooted. If we say that much has been accomplished in the abolishment of the tax on capital and deposits, we are answered by the opponents of the system that that is true, and that it is a sulHcient relief that we are now paying a tax on a franchise, and that if we don't like it we can relieve ourselves by declining to exercise the franchise ; that is to say declin- ing to take out circulation. This is true, and it is unanswerable. We show by figures that there is no profit m circulation, but we are met with the fact that there are $317 000 000 outstanding. t , , ^ If the entire abolition of this tax is not conceded, it is possible, considering the redundant and unnecessary revenues of the Government, that Congress would agree to utilize the fund paid by the banks on account of this tax for the perfection of the national banking system, so that in the future when we have paid into the National Treasury a sufficient amount to secure all the creditors of such national banks as may hereafter be placed in the hands of a receiver, we may have a cessation from this onerous tax, not required by the necessities of the Government, until it is again needed for a similar purpose. The following table will show, year by year, the amount of tax on circula- tion paid by national banking associations, the amount of claims proven against insolvent national banks, and the amount of such claims remaining unpaid (omitting cents), beginning with 1865 and including 1884: Year of failure. Proved claims against insolvent national banks. Claims remaining impaid. Tax on cir- culation of national banks. 1865 SI 22, 089 1,103,699 3,358,103 307,804 239,886 851,277 871,192 889,991 82,797 53,125 $733,247 2,106,785 2,868,636 2,946,343 2,957,416 2,949,744 2,987,021 3, 193, 570 1866 1867 1868 1869 1870. 1871 2,463,704 516,648 6,677,712 331,997 2,366,818 1,332,410 4,745,541 2,010,294 465,685 778,966 2,703,285 3,148,022 522,332 5,285,815 1872 124, .587 1,687,201 144,753 1,725,1.35 •366,384 .357,826 3.52,773 32,799 1873.- 3,353,186 1874 3, 404, 483 1875 3,283,450 1876 3,091,795 1877 2,900,957 1878 2,948,047 3,009,647 3,153,636 1,081,314 2,633,230 386,240 4,038,036 3,121,374 1882 3,190,981 lgS3 3,132,006 1884 3,024,668 38,479,810 14,776,669 58,356,991 By assuming that those banks which have been in the hands of a receiver as long as 5 years will pay nothing more, and those which have not been for this period in the hands of a receiver will average as large a percentage of dividend to creditors as the failed banks for the 15 years previous, we have the 580 BANKING AND CUKBENCY BEFOBM. following approximate table, showing claims proven against insolvent national banks, actual losses thereby, and taxes paid on circulation : InsoJient iintionnl banlcn. . Year of failure. Proven claims. Losses sustained. Tax paid on circulation. 1866 to 1880, inclusive $26,820,356 2,703,285 3,148,022 522, 332 5,285,815 $6,638,839 669,063 779,136 129,277 1, 308, 239 $45,887,962 3,121,374 3,190,981 3,132,006 3,024,668 1881 18S2 1883 1884 Total 38,479,810 9,524,653 68,356,991 From this table we may deduce some curious facts : 1. The taxes paid each year to the Government on circulation have been much more in every instance than the losses for the corresponding year by depositors in national banks. 2. The taxes paid on circulation since 1865 exceed by more than 50 per cent the total amount of proved claims against insolvent national banks for the same time, so that if the insolvent national banks had had no assets whatever this tax would have paid all their depositors and left $19,877,181 in the Treasury excluding interest. 3. The taxes paid on circulation are more than six times the losses incurred by the public from insolvent national banks, and if these taxes had been applied to the payment of such losses as is contemplated by the bill which we shall suggest, such losses would have been paid in full and the fund remaining would amount to 148,832,438. disregarding accumulated interest. It must be borne in mind, also, this tax is not the total amount already paid In the way of taxes to the Government by the national banks, but. including tax on capital and deposits, the amount reaches (not including 1885) the enor- mous sum of $127,038,610, which is more than 3 times the total ,'imount of claims against insolvent national banks and 13 times the amount of losses thereby. To carry out these views the following bill is suggested : AX ACT To limit the taxation of the circulating notes of national banking associations, and to provide for the security of the deposits therein. Be it enacted bp the Senate and House of Representatives of the Uniied States ■of America, in Congress assemliled : 1. That the amount which shall hereafter be collected from national banking associations, under the provisions of section fifty-two hundred and fourteen, Kevised Statutes, on account of the semiannual dutv on notes in circulation issued thereby, shall be held and kept by the Treasurer of the United States as a separate and distinct fund, to be known as the guarantee deposit fund. 2. That whenever said fund, thus collected, shall amount to as much as the ^um of twenty millions of dollars at the end of any semiannual period, then the tax or semiannual duty on such circulating notes, imposed by said section fifty-two hundred and fourteen of the Revised Statutes, shall be inoperative until the said fund shall be reduced below the sum of fifteen millions of dollars, as hereinafter provided. 3. That the amount of said fund in excess of one million of dollars may from tiine to time be invested in the interest-bearing bonds of the United States, under the direction of the Secretary of the Treasury, which bonds shall be reg- istered in the name of the Comptroller of the Currency, in trust for the guar- antee deposit fund, and held in the possession of the Treasurer of the United States. The interest on said bonds, as It accrues and is paid, shall be added to the principal of said fund. 4. Whenever any national banking association shall be placed in the hands of a receiver, under the provisions of the laws now in force and satisfactory proofs of claims against said association have been made to the Comptroller of the Currency, upon his requisition therefor, wherein all cases of mutual in- debtedness shall have been adjusted, the Treasurer of the United States sliall BANKING AND CUEEENOY EEFOEM. 501 thereof, as of the^day of fiuure "f sa d naOon T' 'f^'^^^'^S to the amount shall be the duty of the Comntioller of tho n banking association, and it checks upon the Lid 'r^e.2T^']^'mltm!r^^'^^^^^ t° i^«"e his claimants. In case the available cash in thrTr^n^V? k ? ^'-^'y'' °* "^^^^^ «* said not sufficient to pay in full the amount of ,.?Zf '^^"'L''®'""^™^ *" ^'"d fund is Currency shall transfer therefoi^rtL VreasureHf f,^^ 1^' PT^''°''^'- «* '^^ cient amount of bonds held by him in tiust lo, .nir, f ^^"'^t'^ ^*^*®^' * suffi- vided, which bonds the said Treasurer shnll ^p 1 i?. '^' "' Jiereinbefore pro- of said fund. iieasuier shall sell in open market for the benefit Comp^roll^f^HL^'cSreU'te^ direction of the is now provided by law which amount nn'. If ^*^ '" '^^"'^^t ^^'^ ^"-e as Treasury to the credi?^f The guarZtee deDosit fnnd*^ tf .1," \''^l'' '"^^^ '""^ may have been charged with the navmen? o? tifo v', ?-.-''^ ''?®"^ "'^'d fund years, and the similar fund for the redemption of the circulating notes of anv banking association which has been in voluntary liquidation for the sCe period shall be paid to the credit of said guarantee deposit fund, and hereafta' after the expiration of five years from the appointment of a rt^eivei or the vote by Its shareholders to go into voluntary liquidation, of any naton^l bank tag association the fund available for the redemption of the circulaOng notes of such national banking association shall also be paid into the Treasurvfto the credit of said guarantee deposit fund, which fund shall be chargeable with the circulatmg notes of any such national banking association that niay thereafter be presented for redemption. 7. All acts or parts of acts inconsistent with the provisions of this act are hereby repealed. 8. This act shall be in force from its passage. Section 6 of said bill provides that the fund now in the Treasury, which has accumulated from the nonpresentation of circulation lost and destroyed in the hands of the people, shall also be used for the protection of national-bank depositors. This is merely incidental to the idea here presented, though decidedly de- sirable in the beginning, if the act is to take effect from its passage ; otherwise there will be no fund in the Treasury to promptly meet the liabilities of any national bank which may fail prior to July 1 or January 1 next succeeding the passage of the bill — these dates being the periods at which the semiannual duty on circulation of one-half of 1 per cent is collectible. This fund now amounts to $1,60.5,.321, in the case of banks which have been in voluntary liquidation for the period of five years, ' and to $541,182 in the case of banks which have been in the hands of a receiver for the same period, making a total of $2,146,503. It was never the intention of the Government to appropriate to itself a profit from lost and destroyed national-bank notes, and there seems to have been an omission in the national currency act which left unprovided for the excess of legal-tender notes deposited by a national bank for the redemption of its circulating notes. Clearly, neither in law nor in equity does this fund belong to the Government but rather to the note holder first, and then to the bank which made the deposit. As it is impracticable and undesirable to fix a limit of time for presentation for redemption, it would seem but reasonable to let the public reap the benefit of this fund, as is proposed in the above bill. Some objections to the plan have been suggested which it may be well to consider. Objection 1. — " State and private banks and bankers may object, because the effect of the bill may be to divert deposits to national banks." We maintain that any system which tends to add to the security of any portion of the custodians of the funds of others, as a class, will tend to add to the confidence in all de.serving confidence. 582 BANKING AND CURRENCY REFORM. This bill does not lessen the security and capital otfered by State and private banlis and bankers, nor affect the many cases in which business is the result of public confidence in personal integrity and capacity. Besides, the national banliing system is free to all, and if this plan makes it a more desirable system than private or State banking, why not adopt it rather than object to .the bettering of a system in order to retain a worse? Ohleotion 2. — " This proposal is but a mere assumption of the banks' debts, and a liability therefor on the part of the Government ; in other words, the pay- ment of private debts with public funds." To this objection it may be answered that the semiiinnual duty now levied by the Government on the circulation of national banks is not needed for revenue. To impose it is class legislation, and the only direct tax remaining as the result of the necessities of war. The banks propose to continue its payment in order to create a requisite fund forHhe security of all their depositors, and to con- stitute the Government the trustee for its proper investment and disbursement. It ceases to be public funds in a general sense, and would bear the same relation to the deposits of national banks that United States bonds now deposited in the Treasury by these same banks bear to their circulating notes, namely, a fund to secure the general public. The present deposit of bonds is made to secure the promissory notes of these banks taken by the people. The deposit under the proposed bill is made to secure the depositors in these banks which the people find organized in their midst, chartered by the General Government, subject to its laws, and amenable to its visitorial powers only. Objection 3. — " Bank officers, knowing their depositors are secure, would not exercise the same care and prudence in the management of their institutions." This is an objection on the surface merely. Bank officers are elected by theii' stockholders, and to them have they to render an account of their management. Usually they are large stockholders themselves. The failure of their institu- tions means utter ruin to them, and stockholders are relieved from no liability under the bill. The fact that their depositors will be paid will hardly be con- sidered sufficient compensation for the loss of their position and prestige. The laws remain for the punishment, of reckless management and fraud, and those v\iio are now willing to incur the loss of personal fortune and personal liberty, accompanied Avith lasting di^•s^lce, would be none the more and none the less willing because of this bill. Their liability remains the same in every respect. Objection J/. — " Large banks may claim that their accumulated assets will offer no better security to depositors than small banks." The public good ought never to be subserved to the apparent interest of few individuals or large corporations. But, in point of fact, the objection is not valid, because small banks can never extend the same facilities for business as the banks at the centers of trade, and these larger banks will then be enabled to extend more readily better facilities to their weaker customers since they can do so with absolute safety, and in this way trade and commerce will be promoted and capital less centralized without an outlet. The whole matter simply is that the banks come forward and propose to waive any further objection to the tax on circulation, as far as it may be necessary to subserve the public good; to willingly contribute the fund which shall create such confidence in our financial system as to prevent financial panics, which destroy more property and entail more misery than wars and conflagrations, and to present to the world a safer and better system of banking than it has ever known, in which both circulation and deposits are absolutely Secure. Respectfully submitted. W. W. Flannagan, Cashier Commercial National Bank, 78 Wall Street, New York. Opinions Concebnino the Pamphlet Submitted by W. W. Flannagan, Oashieb Commercial National Bank, New York, to Bankers' Conven- tion, at Chicago, September, 1885. [Extracts from some of the numerous letters .and newsp-ipers received.] ■Jlr. Horace White, New York, September 19: "It embodies, in my judgment, a very valuable suggestion." .T. W. Guest, cashier Citizens' National Bank, Baltimore, Md., September 23: "I have read the paper of Jlr. Flannagan with great interest, and heartily approve the measure." BANKING AND CUEKENCY EEFOEM. 583 The Evening Post. New York, September 26 : " Whenever it becomes entirely- clear that the t.ix on tirculntion can be spared, no better disposition can be made of it than to use It for completing and perfecting the national banking* system on the lines suggested in Mr. Flannagan's paper." Judge Hugh W. Sheffey, president Augusta National Bank, Staunton, Va., September 20 : " It would render the national banking system perfect in security if your plan should be carried out." The Nation. New York. October 1 : " That this plan, if carried into effect, would perfectly secure the deposits of all national banks, and relieve the public from all apprehensions regaixling the safety of the money intrusted to their safe-keeping, is quite certain." Financial Review, New York, October 6 : " The measure can hardly fail to be one of the most popular that has been proposed in financial legislation since the origin of the national banking system." Miscellaneous Security Report. New York, October 6 : " Should the ideas embraced in Mr. Flannagan's paper on Security for National Bank Deposits be followed out, there can be no doubt that a vast improvement on the present system will be the result." " Gen. F. H. Smith, superintendent Virginia Jlilitary Institute, Lexington, Va.. October 7 : " The scheme you present is good, and should be pressed through Congress." John S. Mcllvnine, cashier N:itional Bank of Chambersburg, Pemi., October 7 : "It has my unqualified indorsement. Nothing better has ever been pro- ]josed toward the perfecting of the national banking system." F. D. Kitchel. cashier Potters' National Bank. East Liverpool, Ohio, Octo- ber 7 : " I congratulate vou on the paper, and heartily approve of it." John N. Jacobs, cashier Perkiomen National Bank, East Greenville, Pa., October 7 : ■' I think the plan a practical one, and will see our Member of Congress in relation to it." ^ . r, W. H. Ainey, president Second National Bank, Allentown, Pa., October 7 r " I have read' your paper, Security for National Bank Deposits. That it is feasible and desirable will not be denied by anyone- who has given the subject proper consideration." - „ ^ ^ ,, o John H Kahler. cashier First National Bank, Millersburg, Pa., October 8: " I think 'it a good arrangement, if it can be effected. I send the copy you ^*^°;ohTGarZer,Te="-;-orwalk National Bank, Norwalk Ohio, October 8: "It is the only practical plan that has been divulged, which seems to meet the tipcessitv without being onerous to the banks." „ ^ , Jos^hFLarkta president Cincinnati National Bank, Cincinnati, October 8: "ft strikes me as a most admirable plan and ought to meet the approval of ^"independent New York. October 8: " The plan would promote the public ^^^IZ iL^r;Xnrfbl^kin?iri it -would grlatly improve a system which is to-day the best the 7°^lf has ever seem ^^ John Manier, cashier First Natwn^l Bank Blnghamton ^ , ^^^^^^^ 7Sr^r TTeirafe^3nf goVd Su?^s^ i'^ the^'ctrcular I wish to retain ''^rTRossla'shiei- "i'ercrnts' National Bank, Binghamton N. Y., October 9:'^^-The1.lfn i'fhrmost P-^f and -niplet^^^^^^^^ ,._ F. M. Durbin, cashier First National Bank Gratton, w ^ ^^^^^.^^ "We have perfect f '^."/'t^ ^°3„°.%^^^%'' t^e bm as presented by Cashier .^laSa^lsno??l^e1xLt^tS.'a^dd tJ^^'d%liminate^ntil it is the exact '^^^R. Anderson ^^a^ntB^ of Bns^ ^o.^^, Octob. ^ - think this plan f°i^H"asPnea^ w«jt as we can make it; one that will gi e and makes tbe system as near perreM_^^^^ ^^^^ ^.^^ ^^^^^ ^^ ^^.^^,,, such credit to banks ^^^'i. J ^j^^^^^tion many a dollar now dormant." and strong boxes auu i 584 BANKING AND CURRENCY EEFOEM. G. F. Reynolds, cashier First National Bank, Cheboygan, Mich., October 10: V The plan meets my hearty approval and can not fail to be of great good to us as national banks, and to the general public as well. Should Congress make it a law the system would be well-nigh perfect." I. H. Foust, cashier First National Bank, Salisbury, N. C, October 10 : " If we can not get rid of the iniquitous tax on circulation I guess the next best thing to do would be to have it applied so as to afford absolute protection to our depositors. It will be a ' clincher ' in the way of an argument to timid iLnd doubting ones." F. W. James, president First National Bank, Baird, Tex., October 10 : " W» heartily approve it, as it would make our financial system as near perfect as could be." C. 0. Crecelius, cashier Fifth National Bank, St. Louis, Mo., October 10 : " It meets with our unqualified approval. Will you please send us about a dozen copies, that we may send them to our Representatives and Senators?" J. M. Cornell, president Orleans County National Bank, Albion, N. Y., October 10 : " The idea Is a good one. It is quite as important to the banks as to the depositors that they should at all times feel perfectly safe." J. P. M.umford, cashier National Bank of the Republic, Philadelphia, Pa., October 12 : " If the national-bank act can be perfected to the point of the guaranty of deposits, as well as circulation, by the tax on circulation, as pro- posed by Mr. Flannagan. it will certainly put national banks upon a plane of public confidence no other orpanizntinn of b;\uks can hope to reach." E. S. Campbell, cashier National Bank of New Jersey, New Brunswick, N. J., October 12 : " Heartily approved." C. P. Williams, president National Exchange Bank, Albany, N. Y., October 12 ; " Many features of it seem to me commendable ; it is certainly a plan worthy careful consideration." B. B. Stamps, president State National Bank, Raleigh, N. C, October 12: " I think it is an able production, calculated to give great stability to the national-bank system and entirely preventive of ' runs ' in time of panic." J. W. Alspaugh, cashier First National Bank, Winston, N. C, October 12 : " I most heartily approve it. In my judgment it is the wisest disposition that could be made of the tax on circulation. I have not seen for years anything that I like so much, either before Congress or elsewhere." J. P. Alvey, cashier National Bank of Texas, Galveston, Tex., October 12: " I am sure were such a bill, or the purport of it, a law, the country would at once become trustful and! prosperous again, and the national banks have the confidence which the bill would give, even as the United States Treasury itself." J. D. Williams, president Fayetteville National Bank, Fayetteville, N. C, October 12 : "I have read the paper carefully and am unable to suggest any change or alteration for its betterment ; the plan will popularize and make the national-bank system the safest of any system of banking ever devised. It will materially aid in securing dormant deposits in the South certainly, and I sup- pose elsewhere." William McDermott. cashier Fii'st National Bank, C'onshohocken, Pa.. Octo- ber 12 : " You strike the keynote." Warren & Quarles, bankers, Richmond, Va., October 13 : " In our opinion it places depositors' in such banks beyond a doubt in a safe position. It will do away with anything like runs on such, panics, etc., and thereby save to the country untold millions. We can not see that any ob.iection will be raised to the plan except from that class of our citizens who, by nature, are opjJosed to anything of a national character." C. A. Sweet, president Third National Bank, Buffalo, N. Y., October 13 : " It would be a feasible and proper law for Congress to enact, and one that cer- tainly commends itself to the people. If it becomes a law it would compel the different States to provide some equally adequate protection for depositors in State banks." A. P. Wooldrldge, president City National Bank, Austin, Tex., October 13: "The scheme proposed by Mr. Flannagan for securing depositors in national banks seems to me a most admirable one." E. P. Wells, president James River National Bank, Jamestown, Dak. T., Octo- ber 13 : "I have carefully read your paper entitled ' Security for national-bank deposits,' and heartily approve the purpose in view. I can" see no objection to the proposed diversion of the revenue from taxation on circulation. The serious question seems to' be, Caii congressional action be secured?" BANKING AND CUERENCY EEFOEM. 585 Charles A. Mitchell, cashier First National Banli, Cherryvale, Kaus., October 13 : " The scheme is a grand one, and certainly ought to receive the hearty ap- proval of all national banlss at least, and of all persons interested in a solid and safe system of banking." P. Shlras, People's National Bank, Ottawa, Kans., October 13 : " The idea is a most excellent one, and we will urge its adoption." Miscellaneous Security Report, New York, October 13: "If passed will effectually achieve the purpose desired, and give the relief so sorely needed." L. M. Beman, president Centerville National Bank, Thurman, Ohio, October 13 : " The plan I think a good one In many respects." George A. Butler, cashier National Tradesmen's Bank, New Haven. Conn., Oc- tober 14 : " There is no real objection to it so long as it does not add to the expenses of banking, and all national banks would be somewhat benefited by it." George W. Phillips, president Homer National Bank, Homer, N. Y., October 14 : "I think the idea a capital one, and that some such plan would tend to draw deposits to national baulcs by giving depositors an absolute security for their money." Col. Thomas M. Semmes, professor Yiigiuia Military Institute, Lexington, Va., October 14 : " You have hit upon a most excellent plan, and one that will work great benefit in financial circles." Charles W. Bnrns, cashier National Bank of Commerce. New London, Conn., October 14 : " The plan for the security of national-bank deposits, as set forth by Cashier Flannagan, meets with our hearty approval, and we shall do all in our power to help the bill through Congress." Augusta (Ga.) Chronicle, Ocober 14; "The most memorable and practical suggestion yet made of a plan to secure depositors of national banks." Daily Times and Dispatch, Reading, Pa.. October 14: "It is earnestly to be hoped that the plan will be adopted by Congress at an early day." C. Cannon, cashier Traders' National Bank, Baltimore, Jld., October 14: "I concur in the object thus aimed at — so far as possible — to raise a guaranty fund from all the national banks as an insurance or protection to depositors of such of the national banks as become insolvent." David Lament, cashier Dillon National Bank, Dillon, Mont., October 14 : "I think the plan a good one in all respects, 'and trust that something can be done at the coming session of Congress to get a law passed to that effect." X. B. Hoblit, cashier National State Bank, Bloomlngton, 111,, October 15: " It meets the hearty approval of this bank, and I have little doubt that, when fully understood, it will be sustained by the great business interests of the country. With such a plan once in working order, I do not see how a panic, or distrust, could be started." ,^ „ ^ ,-, B. I. Hughes, cashier First National Bank, Rome, Ga., October 15: I like your views, and can see no objections." The Herald, Dallas, Tex., October 15: "Under such an arrangement as this, it does seem that the problem of positive security has been solved. * * * On the whole, the plan seems feasible and desirable." ^ A E Jefferson, cashier First National Bank, Hudson, Wis., October 15 : I am very favorably impressed by your proposition. Please send me a few copies. E B Young cashier Eufaula National Bank, Eufaula, Ala., October 15 : I have read with much pleasure and interest the plan for the Security of National -Bank Deposits, by Mr. Flannagan. The same has my entire and hearty sup- port, and I can not see that anything further could be suggested to perfect this '^''a °s" Garretson, cashier Sioux National Bauk, Sioux City, Iowa, October 15 : "Tlie idea and plan of Mr. Flannagan to have the tax on national-bank circu- laUon held ?or c^lms of depositors in national bnks that fail is a good feature, ""Thos' f'Low ca'shier'navana National Bank, Havana, 111., October 15 : " Mn ihos. if. ^;'3' .'''i°"^„„-„_„ tjjg encomiums of all for a practical and yet very diate and hearty support. j^ October 1.5: "It is attracting the Judge James f ^™i'^,^"/„^^"^f^*en^^ which attests its :S'a\fmerUr^'tfpro"4S arTne\ a'nd wise. From n^ careful reading of s^o^iS I am unable to see that it needs amendment.' 586 BANKING AND CITBEENCY EEFOEM. X. A. JIcMillau, cashier First National Bank, Waxahachie, Tex., October 15: " The idea of creating in ' depositors' minds the same confidence that exists In the minds of note holders ' is, I think, one of the most desirable ends that could be obtained, and would add more to our banking system than anything else that could be done : it is a progressive step, and if consummated, one for which we should all thauk Mr. F." H. H. Gardner, cashier Exchange National Bank, El Dorado, Kaus., October 15 : "I feel so much interested in the matter proposed, and see that the scheme covers, to use an old expression. " the long-felt want," that I shall do whatever I can with our Senators and Congi-essmen to have them favor the bill pro- loosed." S. G. Smith, cashier First National Bank, Beatrice, Nebr., October 15 : " The plan suggested by llr. Flauuagan would seem to afford undoubted protection to depositors, and with this result accomi)lished the national-banking system would no doubt be the most perfect system known." .James H, Brown, ^ice president Citizens' National Bank, Fort Scott, Kans., October 15 : " If passed by Congress, would undoubtedly make our banks much more desirable to depositors." «,. C. McDauiels, cashier Atlantic National Bank, Atlantic, Iowa, October 15: " The national bankers of Iowa will meet at Des Moines for tjie purpose of effect- ing a State organization. This bank will send a representative who will take your circular, and strongly urge the ooorieration of the association in further- ance of the scheme." H. C. Trviman, cashier Kentucky National Bank, Louisville, Ky., October 15. " If Congress could be induced to see the virtue in the plan suggested, and make it a law, it would seem quite .a feasible and practical measure — certainly a great step toward a perfect system of banking." J. S. Walker, jr., cashier Windsor National Bank, Windsor, Vt, October 16: "The proposed security and ultimate relief from taxation meet the full ap- proval of the otiicers of this bank." A. L. Ormsby, cashier First National Bank. Emmetsburg, Iowa, October 16: " The measure evidently is one of merit, and it should become a law." I''. M. Prince, cashier First National Bank, Stillwate'r, Minn., October 16 : "I have examined the plan proposed for Security of National Bank Deposits, and also discussed the matter in our directors' meeting, a full board being present. It was their unanimous opinion that it was an important and just measure, and its passage by Congress would be a great advance in our already excellent national-banking system." D. L. Holden, cashier South Pueblo National Bank, South Pueblo, Colo., Octo- ber 16 : "I have read the plan carefully, and it strikes me as being in all re- . spects admirable. It would certainly secure depositors perfectly, and thereby leave no excuse for runs, and I can not see why it would not put an end to panics. It would largely increase the deposits of all national banks from the first, and not necessarily to the detriment of other banks either, as such in- crease would come largely from hoards in both large and small amounts. This increase would, from its income, more than pay the tax on circulation." A. A. McFadan, cashier Commercial National Bank, Marshalltown, Iowa, October 16 : " It meets with our most hearty approval. We will join heart and hand in an effort to get such a bill passed." J. M. Elliott, cashier First National Bank, Los Angeles, Cal., October 16 : •' I tUiuk that it would be quite an advance toward a perfect banking system, and we will do what we can to bring the matter to the notice of our Repre- sentative in Congress." Public Opinion, Chambersburg. Pa., < >i'tober 16 : " The theory is a good one and should be carefully considered Viy Congress. To put it into practice would undoubtedly improve our present hanking system and create such confidence therein as to preclude the possibility of financial panics by runs on banks." Itobert Goldthwaite. cashier Merchants' and Planters' National Bank. Jlont- gouiery, Ala., October 16: "I have heard some comments upon it this morning, and it seems to be generally regarded as a ten strike for the people, and espec- ially for the national banks.'' A. (i. Click, cashier First National Bank, Marshalltown, Iowa, October 17: '■ We think the scheme an excellent one, and believe it will receive the support of every banker who has the interest of sound banking at heart." The Financier, New York. October 17 : " We believe that Mr. Flaimagan's plan to attain security for national-bank deposits is brilliant In conception, practical in its details, and it certainly ((.minends itself to the careful considera- BANKING AND CTEKEXCY EEFOEM. 587 tion of all those who have the interests uf the national-biiukiim system at heart. All depositors in national banks would welcome an act ot Coiitrress em- bodying Jlr. Flannagan's ideas." _Joseph Jlitchel, cashier Mutral Xational Bank. New Orleans, La., October IT : " Tie views therein expressed meet entirel.v the approbation of our presi- dent and board. We can not add anything to it to improve it " The Times, New Brnnswicli, N. J., October 17 : "A feeling of security would grow among depositors akin to that long felt by bill holders. The e.xistence of this sense of security would remove the greatest incentive to runs and panics with all their attendant evils. The proposition possesses decided merit, and we trust it will have wide consideration, and that it may be adopted." W. W. Taylor, president National Union Bank of Maryland, Baltimore. Md., October 17 : " I think that the scheme enhances the merits of our admirable banking system, and obviously should add to the confidence and security already reposed in the wise provisions of the currency act : and I doubt not' that the security proposed to indemnify depositors would tend to allay the evils which seasons of disaster and panic are prone to inflict upon our banking institutions." J. JI. Choat, cashier First National Bank, Metropolis, 111., October 17: "I heartily indorse your plan. If the pamphlet explaining it could be placed in the hands of the masses of our people throughout the T'nited States, there would be such a pressure brought to bear on our Representatives that no doubt it would become a law." H. B. Strange, cashier Oliver & Griggs, bankers, Dallas, Tex,, October 17: " It is quite an excellent and original idea, and has made a very favorable im- pression here among the bank men." James Scott, cashier, First National Bank. Carbondale, Pa., October 17: ■ Mr. Flannagan's plan contains some good features, and it deserves, as it will receive, the attention of thoughtful bank officers. His replies to anticipated objections are good." N, F. Follett, president Woodson National Bank, .latis Center, Kaus.. October 17: "I can't see any objection that would overbalance the benefits to be de- rived, nor could I make any suggestions for improving the plan," Edward Betts, president First National Bank, Wilmington, Del., October 17: 'Mr, Flannagan's plan would certainly be advantageous to the depositors, the public, who might be encouraged to become depositors, and to the national banks." J. E. Sands, cashier First National Bank. Fairmont, W. Ya,, October 19; " I am satisfied it is a proper move, and one that, when perfected by experience itself, will make the national-banking system of our country the best in the world." D, G. Phillips, cashier National Branch Bank, Madison, lud., October VJ ; '■ There is merit in Jlr. Flannagan's suggestions, and I hope Congress will digest his recommendations." The Telegraph, New London, Conn., October 20 : " One of the ablest articles that has been written in recent years on the present national-banking system and the advance made toward perfecting it during the past 25 years." ■ The Financial Review, New York. October 20 : " One of the excellent points of Mr, Flannagan's plan — in fact, the jiivotal point — is that instead of ' increas- ing the watchfulness ' of the depositor, it relie\es the depositor of the anxiety attendant on watchfulness. * * * While it places a higher premium on honesty, it puts the depositor even beyond the power of dishonest oflicials." Miscellaneous Security Report, New York, October 20 : " The suggestions con- tained therein are far-reaching in their results. Indeed, if ilr, Flannagan s bill is enacted into law, it affects favorably every many, woman, and child m this vast country." ,^.„ ^„ , ,^ ,,, .. H C Marchant, president Charlottesville Woolen Mills, Charlottesville, A a., October 20 • " One of the most important features ever suggested to popularize the national-banking system with the masses, and seems the keystone needed to Dorfcct tli6 3.rcli " H C Baglev. cashier People's National Bank. Aniericus, Ga., October 20: "I have examined carefully the plan for the Security of National-Bank De- nosits and take pleasure in giving it my unqualified indorsement. ^^ ith that idea en'.cted into law we will have without doubt the most perfect system in the world. A plan so simple and feasible, with such grand results, can hardly fnil to receive the support of all fair-minded men." „,^ ., t rf, H Titus cashier Union National Bank. Rochester, Minn., October 20: I commend the plan most heartily. It seems to complete and add to the national banking act an important provision." 588 BANKING AND CURRENCY REFORM. Jobu K. Pixley, cashier First NiUional Bauli, Wyoming, Iowa, October 20: " I did nut thiiilv that I should lilse any such plan as that of Mr. Flannagan, but on rending it carefully I was pleased with it and think him entitled to great credit for the ability and care displayed in his paper." E. P. Wright, cashier State National Bank, Denver, Colo,, October 20 : "I have carefully examined the law proposed. While it may be that the text of the proposed legislation can be improved, the Idea is an admirable one ; and, could it be wisely engrafted upon the national system of banking, it would be the most complete and perfect system in the world. I can see no valid objection to the plan proposed," C, M. Neel, jr,, cashier Firpt National Bank, Pine Bluff, Ark,, October 20 : " I have carefully read the article and heartily approve it and think it should be made a law by Congress, It will be a blessing to our system and prove of great satisfaction to the general public," Frank Miller, cashier National Bank of D, O, Mills & Co,, Sacramento, Gal., October 20 : " Your proposition for securing depositors meets with my approval and commendation," r. T, Walker, cashier German National Bank, Little Rock, Ark., October 21 : " I have read ilr, Flannagan's iiaper with care and interest and believe the plan to be an excellent one. It meets my unqualified approval." W, F. Tompkins, cashier First National Bank, Ellsworth, Kans., October 21 : " I have examined Jlr, Flannagan's paper and consider it an able article. It meets with m>- hearty approval." John T, ilcChesney, cashier Aberdeen National Bank, Aberdeen, S, Dak,, October 21 : "I thinl: it would make the system as far superior to what it now is as the present security for circulation is superior to the old plan," S, T, Seelye, president First National Bank, Easthampton, Mass,, October 21: " I heartily approve it and believe it can be carried out. If successful, it would increase the deposits, e\en if the banks refused to pay any interest thereon, and would thus more than repay the tax on circulation." Wesley Hooker, president National Bank of Cortland,. Cortland, N, T,, Octo- ber 21 , " While the tax on circulation ought to be removed. It probably will not be; therefore I approve the appropriation of the proceeds as recommended." C. H. Harman, cashier People's National Bank, Charlottesville, Va., October 22 : " The people will be with you. and only a jiortion of the banking world can or)pose it, whilst the larger portion must approve it." Hon. Henry Overstolz, president Fifth National Bank, St. Louis, Mo., October 22: "The scheme is one which certainly must commend Itself to every one who looks into it. It is the one thing needed to make the national banks a perfect system of banking. It will be impossible for anyone doing business with the banks as a depositor to lose money. There can be no serious objection to the scheme which can not be met and explained." ' Charlottesville (Ya.) Chronicle, October 23: "Mr. Flannagan's plan strikes us as practical as well as practicable, and we are glad to know that it is so regarded by many of the best financiers of the country." .Joseph H. Rieman, president Commercial and Farmers' National Bank, Balti- more, Md., October 26 : "I have rather hurriedly looked over the circular, I think well of the plan, but think some changes might be made when the matter is more fullj- matured," George A, Lewis, president Naugatuck National Bank, Naugatuck, Conn,, October 2o : "The end to be attained is certainly very desirable." H. J. Olcott, president National Central Bank, Cherry Valley, N. Y., October 26: "The plan will receive my hearty cooperation and advocacy, so apparent are its benefits to our national banking system. It will, I think, meet the cor- dial support of our national banks, as well as the people generally. The plan is simple and effective and the fund set apart ample beyond any reasonable contingency for the security of national-bank deposits." R. E, (Jraves, president Commercial National Bank, Dubuque, Iowa, October 26 : " If you will send me another copy, I will see that our Senator and Repre- sentative each have a copy and use my best efforts to secure their favorable action," 3. Saunders O'Neale, cashier Bank of Abingdon, Abingdon, Va., October 28: " Your idea seems to me to be veiy practical and one that would be productive of much good to banks." Observer and Gazette, Fayetteville, N. C„ October 29: "We, make no apology for the extent of space which we have devoted to the consideration of this sub- ject—of vital importance to our business interests throughout the whole coun- BANKING AND CUKEENCY EEFOKM. 589 try. Ill our judgment the bill suggested effectively meets the end proposed to be gained and will avail to afford full protection hereafter to depositors in national banks." A. C. Randall, president- National Iron Bank, Falls A'illage, Conn., October 30 : ■' The circular I have carefully read, and the scheme I heartily approve. I shall endeavor to see our Representative in Congress and expain to him the advilntages to be derived by the passage of such a bill." Charlottesville (Va.) Chronicle. October 30: "Mr. Flannagan's scheme for securing deposits in national banks is receiving universal and favorable atten- tion." T. R. Roach, cashier State National Bank, New Orleans, La., October 30: "You have certainly wrought out an excellent idea, and one that, I trust, will be adopted by Congress." Myrou Campbell, assistant cashier South Bend National Bank, South Bend. Ind., October 30 : "I regard the idea as good, very good, and the general details of your plan most excellent, except that I think that the fund should be chieiJy from a tax on deposits and not on circulation." L. M. Beck, cashier Hillsboro National Bank, Hillsboro, 111., October 31: "I think Mr. Flannagan is suggesting a plan that would result in great good not only to bankers but to all classes of people, if it is enacted into law, and I trust our next Congress will fee the wisdom of his plan and make it a law. I can see no objection to it and heartily indorse it." D. D. Cropsey. cashier First National Bank, Fairbury, Nebr., November 3 : " I fully Indorse the idea of making a law that will be a security to depositors. I think that is all that is necessary to make the national banking system com- plete." F. R. Green, cashier Fredouia National Bank, Fredonia, N. Y., November 5 : •' Our officers have looked over your plan lor the ' Security of National-Bank Deposits," and think it to be very practical and complete." The Other Side. an editorial froDD [That it may be seen tbe plan does not meet with universal approval, an editorial from the Inter Ocean, of Chicago, violputly opposing it, is given in full. .V letter addressed to the editor thereof, in reply thereto, is appended.] ?«.VTIONAL-BAKK T.VXES AND DEPOSITS. Among the papers submitted to the bankers' convention at Chicago in Seii- tember and ordered printed with the proceedings was one prepared by Mr. W. W. Flannagan. cashier of the Commercial National Bank of New York, entitled " Security for National Bank Deposits." It did not receive much atten- tion at the time. The Inter Ocean, however it may have been with others, gave it the go-by, thinking it undeserving of special consideration. It seemed to be merely the vagarv of one man, who was listened to out of courtesy and allowed to bury his balatling in the cemetery of an official report. _ But it appears from subsequent developments that a systematic effort is being made to secure the practical adoption of the plan, and this fact lifts it to an importance demand- ing for it critical examination. ,, . ^^ . .=, j-i,,y. The gist of the paper mav be stated in few words. (1) It is proposed that the proceeds of the tax on national-bank circulation be soi apart for paying the debts of the insolvent national banks to their depositors, the same to beknown as the guaranty deposit fund. (2) If the fund on hand reaches $20 000 000 then the tax Itself shall be suspended. (3) The fund ^"/f f %of $l;00<''<^,?,fii^"„^ invested in Government bonds and the interest added to the fund. There are three other provisions relating to insolvent banks and then, depos. ors but these need not be discussed, for they have no bearing upon the meuts ot the ''To^lppr^late the scope of this measure one needs to bear in mind a few sta- tists germane to the subject. The proved claims against insolvent banks from IRR^ to 1S84 inclusive, were $38,479,810; the claims remaining unpaid. S?4776 659 the tax on circulation for the same period, $58,356,999. For the Dresent year 1884 the figures were: Proved claims, $5,285,815 ; unpaid claims. wols036 tax, $3,024,668. The actual losses sustained durmg tHe long period l^ounted to $9 524 553 and for the last year they reached the sum of $1,308,239. 590 BANKING AND CUEKENOY BEFOBM. These figures explain the real motive of the proposition. It is a scheme to abolish ultimately the tax on the national-bank circulation. As . a matter of course, the insolvent banks would be made to pay a^U they can, and this guar- anty fund would apply only to losses over and above those assets. Since 1865 the tax has amounted to nearly $49,000,000 in excess of the losses sustained. It is safe to say that in the course of 10 years, on the Flannagan plan, the con- templated $20,000,000 would be accumulated and the Interest thereon would about meet the losses. But this is not all. The existence of such a guaranty to the depositors against any loss would be of very great advantage to the national banks, as against State banks. It would greatly increase their deposits, and from that point of view would be worth more to them than the tax. Such a guaranty fund would add many millions to their deposits. Now if the national banks see fit to raise such a fund among themselves that is their business. But we doubt if the conservative members of that chain of banks would wish to help the venturesome by guaranteeing their depositors. If so, let them go ahead in a straightforward and aboveboard way, and not attempt to divert the public money to any such purpose. The money realized by the tax on national-bank circulation belongs to the Government exactly the same as if it had be realized out of any other tax. This is the very point which seems to have been overlooked. The evident assumption is that the money still belongs to the national banks, or to the depositors in the insolvent concerns. Practically Congress might just as well take the money out of the general fund and be done with it. A few years ago an attempt was made to have the whisky tax set apart for educational purposes and the Chicago Tribune was taken captive by the idea. But it was soon abandoned, for a little sober reflection convinced the public that there was no point In setting apart the proceeds of a particular line of taxation for a specific •expenditure, and that the educational bill must stand on its intrinsic merits. The result was the utter abandonment of the scheme, and the pressing in its place of the Blair bill, which proposes a direct appropriation from the Treasury. ^Yill anybody have the temerity to reduce the Flannagan jiroposition to the same level of its actual merits'? It is hardly ,pgssible that a single Member of Congress would consent to do so absurd a thing. If the Government should pay the bad debts of mismanaged national banks it could not consistently stop short of becoming a genera) indorser for all debtors. Depositors in national banks have no special claim upon the Treasury of the United States. They do, indeed, have some claims uiJon the Government for protection, but that obligation is fully discharged by the surveillance main- tained over the national banl^s in their general business through the Comptroller of the Currency. In addition to these adverse considerations is the fact that such a fund, no matter how raised, would be demoralizing to the bnnlving business. It would be putting a premium upon unsound banking, or at least it would be putting such banking upon the same footing of public confidence as conservative bank- ing. Why, under the Flannagan plan, should depositors hesitate to put their money in any particular national bank because of a cloud upon its reputation? No matter whether the bank should fail or not, the deposit would be secure. The only reasonable anxiety with a depositor would be to get the largest pos- sible interest on his deposit, or the longest line of discount. The tendency would be altogether bad and Irresistably' strong. It is of very great importance that all banks should be conducted with a substantial degree of uniformity as regards conservation. To appreciate the Importance of this practical and inevitable tendency one has only to consider the difference between Chicago during the panic of the last decade and during the depression of the current decade of the century. When the former came this city had several national banks which had been impru- dent, to put it mildly, and in the shock they went down. We do not Include in this list the one which paid its depositors in full and had money left, and which never ought to have been closed, but only those which were really in- solvent and went down deservedly. Since the failures of that period the Chi- cago banks have been as secure as the pillars of Hercules. The city of Chicago has had no insolvent banks for years, and whatever tax our banks pay the General Government wants to be used for ordinary Government purposes, and not be made to serve as an incentive to national-bank insolvency. BANKING AND CUREENCY EBFOHM. 591 CoMMERciAi, National Bank, 'New York, November Jf, 1S85. To tlie Editok of the Daily Ixtf;!! Oikan. Sir: I have but a few days ago seen your editorial of October 19, with refi^r- ence to the paper entitled " Security for National Bank Deposits," which was submitted by me to the bankers' convention lately held in your city. If you had published the paper in question, in connection with your criti- cisms, I should be well content to let the matter rest, and for the public to judge as to the respective merits of the two articles. I know that an individual who attempts a newspaper controversy with an editor, In his own paper, always gets the worst of it; for, if the editor pub- lishes what the individual writes his comments thereon always i;ive him as the lawyers say, the " closing," and, if he don't take this advantage, he usually fails to publish. But as I believe, from the tenor of your artioler that you are willing for both sides to be heard. I venture to address you this letter. Disregarding the personal fling as to the -little 'bantling' listened to from courtesy." etc., with which the editorial opens, an analysis of your ob.i'ections to the plan offered for the secusity of the depositors in national banks seems to be as follows : 1. Because the real jnotive of the scheme is to abolish ultimately the tax. on the circulation of national banks, and that this motive is concealed in a plan to divert public moneys for the purpose of securing the depositors in such banks. 2. Because a fund for the security of deposits, no matter how raised, would be demoralizing to the banking business and putting a premium upon un- sound banking, or at least putting such banking upon the same footing of public confidence as conservative banking. As to the first objection, I readily acknowledge one motive of the scheme is to benefit the national banks by freeing them from the tax on cii-culatiou (after the payment of any losses by the depositors of insolvent national banks is provided), and I think this would be done in about seven years, as soon as the maximum amount of the guaranty deiKsit fund was once reached. But I think, in accomplishing this, great good would result to that great clasb known as depositors, and that we should have a system of banking which, for confidence (the necessary element of all business), security, and strength, would be superior to any heretofore attained. That there was no effort to conceal this motive is shown from the readi- ness with which you detected it. You seem rather to agree to the plan, if the national banks " see fit to raise such a fund among themselves " and " go ahead in a straightforward and aboveboard way." and yet on the supposition that the tfix now levied is not needed for revenue, this is all that is asked to be done. If raised among them- selves, who would more likely execute the trust Imposed to the satisfaction of all than the Genera! Government? The banks could never agree among them- selves on any other trustee. If the Government be not named as such trustee, rivalry and jealousy among themselves would defeat the object. And who, under the plan proposed, are asked to contribute anything to the fund except the national banks? Indeed, only such of them as are required to do so are those who find it to their pecuniary interest to issue circulating notes, notwith- standing the tax imposed thereon. You say " the existence of such a guaranty would be of very great advantage to the national banks as against State banks, and would add many millions to their deposits." Would you have the de- positors in the State banks guarant«ed as well by this fund to which they do not contribute, though the General Government has no control oj- surveillance over them? The State banks, if they should find the plan so desirable that deposits would be di-serted from them to national banks, could adopt either one or two remedies : 1. Adopt the national system. 2. Provide a similar security among themselves, or through their State legis- latures. Either of these results would be productive of public good. You say " the money realized by the tax on national-bank circulation belongs to the Government, exactly the same as if it had been realized out of any other tax." There is no disputing this proposition, and it is a mistake to say In the next sentence that " the evident assumption is that the money be- longs to the national banks, or the depositors in the insolvent concerns." 76n2— PT 10—13 3 592 BASKING AND CURRENCY REFORM. The tables given of proven claims, losses sustained, etc., wbicli figures you quote, were compiled from official sources to prove that the experience of the past 20 years would show that the fund derived from the tax on circulation \yas much more than sufficient to meet the losses sustained by the public from Insolvent national banks, but nowhere is it assumed that the depositors m national banks have any claim whatever on this fund. The only assumption is that the fund derived from this source is not needed to meet the expenses ■rof the Governinent, nor to pay the Interest on the public debt, and the proposi- tion is made, instead of repealing the tax entirely, which Congress has refused to do, that Congress shall limit the tax to the losses which may hereafter be sustained by reason of the failure of banks chartered by it. There Is no similarity whatever between this proposition and the one you t-ecall to utilize the whisky tax for educational purposes, unless you assume that such tax is not needed for revenue, that the distillers are the creatures of the Government, and the whisky drinkers are exclusively those needing education. The Prohibitionists may perhaps accede to the latter assumption, ibut I did not know the Inter Ocean was thus classified. If it be not true that the tax derived from circulation is not needed for -revenue, then, as you say, "practically Congress might just as well take the money out of the general fund," and I think that there will be some, and there may be many Congressmen, who can rise above party consideration and party measures, with the " temerity " to say that, call it " so absurd a thing " if you choose, this republican Government is " to produce the greatest good to the greatest number," and that the great public will be benefited by such a measure — the people — who, when they come to a bank with their little sav- ings, and desire a safe place of deposit, know that they have it in every bank bearing the name of national. You say " if the Government should pay the bad debts of mismanaged na- tional bank.s it could not consistently stop short of becoming a general indorser for all debtors." I fail to see where the " consistency " would come in. In the ■one case the payment vrould be made out of a fund contributed for this purpose, and only to the extent of the fund thus contributed, while in the other there would be no fund provided and no limit to the payment. In the one case the banks are the creatures of the Government, and in the other, if the Government should assume control, the result would be revolution. Yon acknowledge that depositors " do indeed have some claims upon the Government for protection," and you say " but that obligation is fully dis- charged by the surveillance maintained over the national banks in their general business through the Comptroller of the Currency." Is this obligation fully discharged? Is it not notoriously the fact that such surveillance is inadequate to prevent failures and to detect fraud? Does not $38,000,000 of proved claims against in- solvent national banks, and $9,000,000 of losses to depositors thereby prove the contrary? That these periodical official examinations and general supervision are great safeguards there can be no doubt, and the system would be much improved if such examinations were made oftener than once a year, as now. Now, as to your second objection. You say " such a fund, no matter how created, would be demoralizing to the banking business and would be putting a premium upon unsound banking." This objection, if valid, of course destroys the whole matter — it is not an ob- jection to the plan proposed, but an objection to the result to be attained. In other words, you do not consider it desirable that depositors in national banks should have any security whatever outside, of and independent of the immediate assets of the bank in which they may place their money, and that their confi- dence must and should be derived exclusively from their estimate of the conserv- atism of the management of the bank they trust. You must acknowledge de- positors, as such, have no voice in the management of a bank — that the great majority of them if they ever examine can not analyze and do not understand the figures of its published statements, and that their confidence is sometimes betrayed. And you maintain upon the assumption that a security to them, inde- pendent of the bank itself, will tend to produce reckless management on the part of the bank's officers; that the depositors must not therefore have this security. I do not think many people will indorse this reasoning, nor the conclusion ar- rived at. I can speak with certainty as to upward of 200 bank managers scat- tered throughout the whole United States who have written to me indorsing heartily, not only the result to be attained, but the mode proposed for attaining it, and among them some of the acknowledged leading financiers of the country. BANKING AND CUKBENCY EEFOEM. 593 When it was suggested more than 150 years ago to limit the losses to the sufferers from fires by a fund to be contributed for their protection, this was the argument urged against it: "It was putting a ijremium upon fraud" — the in- solvent or embarrassed householder would insure his house for more than its value and burn it to obtain the insurance money. This was the argument also used against marine insurance — it would induce dishonest skippers, in collusion with the supercargo, to scuttle their ships. And from the same standpoint iiF for undertaking to insure the honesty of an employee and guaranteeing his em- ployer against fraud, this was wild recklessness; without his relations and friends were responsible for him, it was indeed offering a premium upon fraud. And yet we have to-day fire insurance companies, marine insurance companies, and guarantee companies, all prospering, having paid millions to the unfortu- nate, with a general tendency toward lessening their restrictions and issuing: more liberal policies. The fundamental error you make in this second objection is in supposing that any legislation can be effected which may not be abused by men having an utter disregard of law, justice, and honor. Such men can only be reached by penalties prescribed and punishments In- flicted which shall serve as warnings to others. If such an objection was valid our whole system of jurisprudence should have to be altered. From your final illustration as affecting the city of Chicago, we may conclude that If the Inter-Ocean be the correct exponent, then Chicago, with her advanced ideas, desires to apply the evolution theory to banking and congratulate herself that in time of panic only those banks " go down " which " go down deservedly." Unfortunately for this theory the same sentence tells us of a Chicago hank which, after failure, paid its depositors in full and " never ought to have been closed." And the editor might have added that the records of the department at Washington show that 34 banks out of a total on 100 which have failed " never ought to have been closed " for the same reason. If there had been a security fund independent of these banks similar to the one now proposed, isn't it morally certain that these banks would not have been closed, and to this extent the communities In which they existed have been corre- spondingly benefited? The banks of the city of Chicago have found it to their interest to issue only about one-tenth of the maximum circulation to, which they are entitled, and of the $3,000,000 taxes paid to the Government annually on circulation they pay about $8,000. So that if the proposed plan be enacted into law they would pay this amount for about seven years, or say, $56,000 out of the total fund of $20,000 000 to be raised, which $56,000, according to your idea, they " want used for Government purposes " rather than the remaining $19,944,000 should be con- tributed by the remaining portion of the country for a great public good. Perhaps Congress would consider an amendment to the plan exemptmg the- said city from the provisions of the bill if the plan is to be considered from so narrow a point of view as its effect upon any one city. Yours, truly, ^ ^ Flannagai.. The Chairman. In connection with the statement of Mr. Flanna- gan concerning his proposal made 27 years ago for msiirmg national bank depositors against loss by failure of banks, and the wide in- dorsement of his proposition by bankers and business men, I would like to put in the record, simply as pertinent to that issue, two statis- cal abstracts compiled recently by the Comptroller of the Currency: 594 BANKING AND CITERENCY EEFOKM. Total deposits and circulation of national banks, 1863-1911, together with loss to depositors in insolvent national hanks. ^'cav. Total de- posits (on or about Tuno 30). Millions. S9.5 M6. 8 614.2 694.8 6S5.4 744.6 716.0 704.0 789.6 803. 9 834. .s 826.7 891.3 835.6 816. 12 4 25 26 23 596,890 633,569 977, 896 197, 965 169,000 479,497 806, 744 674,425 ,372,817 ,084,668 39,699 ,709,312 ,693,066 662,607 ,423,647 145, 447 ,288,603 127,156 065, 710 414,617 962,262 850, 630 810,042 312,320 776,358 908,034 378, 880 710, 496 392,833 ,231,905 045,460 , 649, 703 334, 583 , 269, 058 984,671 548,220 ,423,164 ,097,356 880,401 ,096,147 ,708,009 442,,S17 4, 395, 018 475,169 6,455,066 3, 338, 881 1, 123, 827 4, 629, 417 4,055,028 679,539 1, 075, 815 3,968,170 14, 829 10, 822, 933 15,174,066 525, 951 3, 326, 302 73,634 7,409,652 46, 265 6,480,683 24, 961, 740 919,466 * 3,164,623 1,443,941 '10,426,691 5, 438, 873 1,835,977 377, 767 5,550,237 3,635,450 1,677,177 7,316,597 3,092,656 277,217 1,165,896 782,861 2,712,219 12,671,339 9,358,382 776, 405 1,7.35,716 1.738,930 161, 804 466 51 214,203,034 34, 776, 788 176,961,144 5 26,704,068 617 248, 979, 822 203, 665, 202 • No loss to depositors by averaging. 2 Eeceiverships not finally closed. 3 Estimated. ' Includes Interest paid on claims. 5 Additional amount will be paid. Note.— As indicated above, the sum of $203,665,202 has been paid to creditors of insolvent national banks It should be borne in mind that of this sum, $21,913,556 was derived from assessment upon sharehoioers and «16:847 from premium on bonds to secure circulation, or a total of $22,230,403, which should be teken into considerationln estimating the probable loss to depositors in any proposed bankmg s/st^™ without a bond^ecured circulation or the right of assessment upon shareholders jfiie annual ^^'.^^^se^^^J^J^f^^^ itoiB by reason of national bank failures Is shown to be $898,328, or 0.035 per cent of the aimud average iSwuties (total deposits and circulation) of going banks. Deducting from the a^ets the ai™™* Pai° bj •shSldere in acSount of assessments and the premium on United States bonds, *e eshmated aniiual Ivwlee losTto depositors is $1,372,826, or 0.051 per cent of the average liabilities of gomg 5?°?/- ™^1X fa th^firet instance as shown 1^ slightfy less than one-thfrtieth of 1 cent, and in the second mstance slightly more than one-twentieth of 1 per cent. BANKING AND CURRENCY REFORM HEARINGS BEFORE THE SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY HOUSE OF REPEESENTATIVES CHARGED WITH INVESTIGATING PLANS OF BANKING AND CURRENCY REFORM AND REPORTING CONSTRUCTIVE LEGISLATION THEREON WEDNESDAY, FEBRUARY 5, 1913 STATEMENT OF MR. SOL WEXLER PABT 11 WASHINGTON GOVERNMENT PRINTING OFFICE 1913 SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY. House of Representatives. sixty-second congress, third session. CARTER .GLASS, Virginia, Chairman. J. FRED. C. TALBOTT, Maryland. JOHN J. KINDRED, New York. GEORGE W. TAYLOR, Alabama. EDWARD B.VEEELAND, New York. JOHN M. MOORE, Texas. GEORGE D. McCREARY, Pennsylvania. CHARLES A. KOEBLY, Indiana. JAMES McEDSTNEY, Illinois. ROBERT J. BULKLEY, Ohio. R. W. FONTENOT, Cleric. A. M. McDebmott, Assistant Clerk. II BAXKING AND CURRENCY REFORM. Subcommittee or the CoJIMITTTiE ON BANKING AND CURRENCY, HoirsE or Eepresentatives, Wedmsday, Fehruary 5, 1913. The subcommittee met at 11 o'clock a. m. Present: Messrs. Glass (chairman), Bulldey, Kindred, Taylor, and Talbott. STATEMENT OF SOL WEXLER. The Chairman. Mr. Wexler, you understand that this is a sub- committee of the Committee on Banking and Currency of the House^ charged with the business of investigating currency matters, with a ^•iew to submitting remedial legislation as some time in the future? ]Mr. Wexler. Yes, sir. The Chairman. And we have invited you here as a large banker of the South to give us the benfit of your advice, and would be glad to have you proceed in your own way. Mr. Wexler. I thank you very much, Mr. Chairman. I am very grateful for the opportunity to have a word to say to this committee, because I realize that the countrj^ at large needs this remedial legisla- tion, and we in the South particularly need it. We have felt, for some time, that what we need is emancipation in a measure from the centers; and we believe that this emancipation can only come about through some organization or bank with which we will be enabled to do business. I realize fully the difficulties that your committee has to contend with, particularly in view of the fact that the party platform em- braced a declaration against a central bank. At the same time, I believe that when all the light has been shed upon the subject you will probably come around to the conclusion that some form of a central bank or of a central organization will be necessary. Whether that takes the form of one institution or many scattered in diiferent parts of the country is really not material from my standpoint, pro- vided it is organized properly. We have suffered in the South and West particularly from the "scarcity of currency during the crop movings. We have no means of supplying that currency at the present time. The method that we pursue now is that we draw upon our funds in the reserve cities, and we pay a charge of 75 cents per thousand for bringing that money from New York to New Orleans, even though it is transferred through the subtreasury and is only a theoretical transfer. In other words the New Orleans subtreasury is charged, and the New York subtreasury is credited, and the money is paid out through the subtreasury in New Orleans ; and we pay 75 cents per thousand for this bookkeeping entry. 597 598 BANKING AND CUEEENCY EEFOEM. Mr. BiLKLEY. Who gets that 75 cents? Mr. Wexler. It has been going to the United States Express Co., under an old contract entered into between the Treasury Department and that company many years ago. That contract has expired by limitation but has gone on just the same. That has worked a hard- ship. It has cost the South and the West, I am satisfied, hundreds ■of thousands of dollars for the transfer of this money. To show you the absurdity of it — although it is not pertinent to this currency question at the moment — at certain seasons of the year the Treasury Department is forced to send five or six million dollars, and at times as high as $10,000,000, from New Orleans to New York, by reason of the accumulation of funds in the New Orleans Sub- treasury. Mr. BuLKLEY. Do you mean to say that 75 cents a thousand on that is paid over to the United States Express Co. under a contract that does not exist any longer? Mr. Wexlek. Yes; under an old contract that ha? just been con- tinued by acquiescence and has long since expired. If we tele- graphed to-morrow to our correspondent in New York to transfer through the subtreasury $100,000, say, they go to the subtreasury and gi^e them $100,000, and they telegraph to the subtreasury in New Orleans to pay us $100,000; and we are charged 75 cents per thousand, or $75 for that $100,000 transfer. The Chairman. And the express company gets it? Mr. Wexler. Yes, sir. Mr. BuLKLEY. What is the quid pro quo ? What does the express company do to get that? Mr. Wexler. They do nothing at all for it; but the theory of it is that at some time in the future the Government might have to send back that $100,000 from New Orleans to New York, to replace it ; and that in the event of their having to do so, that 75 cents would liave to be paid. In that event the United States Express Co. "would not make the charge for the retransfer of that. But that jiever takes place. Mr. Bulkley. That is to say, they are paid for all the service ■which they might be required to do? Mr. Wexler. Yes, sir; they are paid for all the service which they anight be required to do. Mr. Bulkley. And which they are not, in fact, required to do? Mr. Wexler. And which they are not, in fact, required to do. That is the situation. Mr. Kindred. That is the United States Express Co. ? Mr. Wexler. Yes, sir. Mr. Taylor. Before getting away from that proposition I would like to ask you a question. Mr. Wexler. Certainly. Mr. Taylor. Is not that a great deal less than you used to pay ■when they did really transfer the money backward and forward? Mr. Wexler. No, sir. You can transfer it backward and for- ward by registered mail for about 40 cents, and that, with the in- surance, makes it cost you the same amount. Since my time I do mot know that the charge has ever been more than that. The con- tract dates back nearly 20 years, providing for that 75 cents charge. BANKING AND CUBRENCY EEPOKM. 599 Mr. Taylok. And yet the business has really been conducted by merely a book transfer? Mr. Wexler. Yes. ]\'Ir. Taylor. And there has been no real passage of the money ? Mr. Wexlee. No. Mr. Taylor. What I am trying to arrive at is this: About the time when that contract went into force, what was the cost, and what was the cost preceding that contract? Do you know anything about that? Mr. Wexlee. Xo; I do not. Mr. Tay-loe. Is it not a fact that prior to that time, prior to that contract which you refer to, the Government had to send silver by express, actual silver? Mr. Wexler. Yes. Mr. Taylor. Backward and forward. And the express charges were considerably larger. And is it not a fact that this contract of which you have spoken was made as a compromise measure to reduce the cost ? It is my recollection that that is true. Mr. Wexler. That may have been the case. That goes a long way back, of course. You understand, of course, that the transportation of silver is very much more expensive than tlie transportation of paper. Mr. Taylor. Of course. Mr. Wexlee. If you sent $100,000 in one hundred $1,000 bills it would cost very little. There is no reason, however, why this embargo should be placed upon the commeixe of the country by levying this heavy charge. There should be, in whatever system is formulated, a means of transferring funds from one center of the country to another without this very high charge of 7.5 cents per thousand which, after all, comes out of the pockets of the people. Mr. Tayi-or. You do not recall what the charges really were before that contract was made? Mr. Wexlee. No; I do not. Mr. Taylor. Or upon whose suggestion that contract happened to be made? Mr. Wexler. No, sir; I do not. I imagme at the tnne the con- tract was originally made that it was probably an advantageous contract, but that, in the course of time, the conditions underwent a decided change ; and I believe, to-day, it would be all nght if the money were actually transferred. I think, however, where it is merely a bookkeeping entry— a theoretical transfer— that some re- form 'in that should be instituted. , • . ^ .i, ilr BrmcLEY. Did you say that the bankers pay this tee to the I'reasury, and the Treasury pays it over to the express company i Mr Wexler. Yes ; it finally gets to the express company. Mr. Kindred. And that is in instances where the express company does absolutely nothing? u i j- i Mr. Wexlee. Yes, sir; when the express company does absolutely "Vr^KiNDEED. Do you remember approximately when the old con- ^Ir Wexlee. About seven or eight years ago. There was no sub- stitute for it. There was a little change made recently, under which they were required to transfer mutilated money at a reduction in 600 BANKING AND CUKKENCY EEFOEM. 4he rate. They formerly received this high rate upon mutilated money which had no value whatever — money being sent here for destruction. That has now been reduced to some nominal charge. As I have endeavored to make clear, we are sadly in need, in all the agricultural sections of the country, of some means of transferring money from the centers to the points where it is needed, at a greatly diminished cost and with greater facility, during certain seasons of the year. We are also greatly in need of the ability -to increase the amount of circulation required at that time and to contract it when it is no. longer needed. Mr. Taylor. May I ask a question, Mr. Chairman, which may save half a dozen ? The Chairman. Certainly. Mr. Taylor. You say there are times when those requirements should be met. You refer to the crop-moving time? Mr. Wexler. Yes. Mr. Taylor. Do you mean that it is absolutely necessary, in the present condition of business, that the farmers shall have actual money in the movement of crops? Mr. Wexler. Absolutely necessar}^ Mr. Taylor. There is no way for them to get along with bank checks and under the methods of business as now practiced with merchants and in the ordinary way of banking? Mr. Wexler. There is absolutely none. Mr. Taylor. In other words, the banking business does not accom- modate itself to the needs of the farmer ? Mr. Wexler. No, sir ; it does not. Mr. Taylor. And the farmer absolutely needs, in crop seasons, actual money? Mr. Wexler. Yes. Mr. Taylor. Is that because of the large number of uneducated farmers ? Mr. Wexler. I can not say that it is entirely due to that; no. It is not.- Mr. Taylor. Is it due in part to the negro labor or the negro farmer ? Ml', "^'^''exler. No, sir; I do not think that is the case, because the demand exists just as greatly in the agricultural sections of the West at certain seasons of the year. Mr. Taylor. I intended to call your attention to that. Mr. Wexler. It exists in sections of the West just as much as it exists in the South. The reason of that is this Mr. Taylor. That is what I wanted to get at. Mr. Wexler (continuing). If a planter requires a certain amount of money to meet his weekly pay roll, he can not pay these people in checks. He has to pay them in cash, because the amounts are small, in many instances, and the man to whom the money is paid by check can not negotiate the checks without identification. He may be here to-day and laboring somewhere else to-morrow. Pie may want to use some of his money to buy a railroad ticket to go somewhere else, and the agent would not take his check. He requires the cash. Mr. Taylor. Absolutely ? Mr. Wexler. He requires the cash, absolutely. BANKING AND CUEEENCY EEFORM. 601 Mr. Taylor. You see no way to avoid that in an agricultural com- munity? Mr. Wexler. No, sir; none whatever. In other countries, in Canada, for instance, where similar condi- tions exist, the banks have this means of extending that circulation, and their system would be ideal in our situation if we were starting new to-day, and had nothing else to consider — if we did not have an old house to patch up. They put out more circulation at that season, and it forces itself back when this seasonal demand has expired. Mr. Taylor. How? Mr. Wexler. In this way : Their notes do not count as reserves for banivs, which is proper. There is profit to every bank in keeping this circulation out. Therefore every bank is laboring to create a vacuum in its own section, in which its own notes will circulate. Therefore the note of every other bank that comes to it it immediately sends in for redemption in order to get gold for it and create a reserve. So that there are these two opposing forces going on all the time, one endeavoring to put the circulation out and the other constantly endeavoring to force it in. When this money has been spent, when it goes into the hands of the farmer, we will say, and he has spent it with the merchant, and the merchant puts these bank notes in the bank, the moment that money reaches the bank that bank immediately sends it in for redemption in order to get something that will count for reserves— to get gold for it ; so that no note can stay out more than four or five days. Therefore, when the notes have all passed out of the hands of the farmer and gone into the hands of the merchant>— been spent, m other words, or deposited in a bank— they are ipso facto retired; you can not keep them out. No matter what effort you make, they will not stay out, until the time comes when circulation is again needed for pay rolls, when it again appears, performs its functions as a circulating medium, and again goes into automatic retirement; which exactly meets the requirements of circulation during that par- ticular time of the year. . Mr. Willis. When you speak of cash you do not mean necessarily monev, then, but, rather, banknotes? n-, ^, u- f Mr" Wexler. When I speak of money I mean gold, the ultimate money of redemption. When I speak of currency of circulation i mean bank notes. „ , j. i.i, i i-+ 9 Mr Willis. And in speaking of cash you meant the latter « Mr! Wexler. In Canada it means the bank notes m circulation. Mr. Willis. -AVhen vou spoke of the southern planter having to have cash, you included there bank notes? Wo hcv^ no Mr Wexler. That is the only thing we have to-day. We have no such bank notes that are subject to retirement. Mr. Willis. I mean under this scheme of reform the bank note ""Si^ W™r. Would be absolutely the proper thing, because by circulating the bank note we would keep our reserve money in our own hand!, and the medium,, the yard stick, f-^S^^X'balk^ uring the value of the service performed, would be this banK cur ""^E." Taylor. You mean a bank note redeemable in specie would be the ideal thing to use ? 602 BANKING AND CUEEENCY BEPOEM. Mr. Wexler. It is the only bank note. Mr. Taylor. Over the counter of every bank in the United States ? Mr. Wexlee. That is the only currency that it would be proper to use. Mr. Taylor. And would keep in circulation all the time, automati- cally? Mr. Wexler. Automatically. Mr. Taylor. And meet the situation that you speak of in crop sea- sons or other seasons? Mr. Wexler. Or other seasons. Mr. Taylor. Is that your idea of the real basis of the phenomena, in Canada that you speak of ? It is because of that redeemability or convertibility ? Mr. Wexler. Yes. That was brought home to me very forcibly by a Canadian banker a short time ago. He said that a banker had come into his bank with notes of another bank and asked him to keep them overnight for him, saying that he had to go up into a lumber district and pay this money out. He said to him, " I will not keep them for you, but you may deposit them and I will pay to you to-morrow morning a like amount." That was equally agreeable to that man, and he deposited those notes. That very evening the bank sent the notes to the bank that had issued them and got the gold for them, and in the morning, when the depositor called for them, they gave him their own notes, the notes of that particular bank, and they were taken up into the district and paid out there ; so that the bank made the little profit out of keeping their own notes out in circulation. Mr. Kindred. Did it not also increase the notes of that particular bank? Mr. Wexler. To the extent of those notes; but it diminished its reserves again to the extent of the proportion of reserve which it felt it was necessary for it to carry against the notes which it paid out in lieu of the notes of the other bank. So that every bank endeavoring all the time to keep the other banks' notes out of circulation and its own notes in circulation — that creates a quick redemption and absolute elasticity of circulation, which is what we want in this country and have not to-day, because, as you know, our national-bank notes have constantly climbed up in amount. The Chairjean. I would suggest that Mr. Wexler be allowed to first make his statement without interruption and that members should make memoranda of any questions they desire to ask and ask them after he has completed his statement. Mr. Wexler. Then I will proceed in that way. I take it that there are three essentials to what we are endeavoring to accomplish. One is certain amendments to the national banking act that will make it more desirable for a greater number of banks to enter the national system, in order to have greater supervision and uniformity of banks. That can be accomplished by including in the new law many of the present national banking law provisions, the amend- ment of some, the elimination of others, and the addition of quite a number. The second is to provide a currency that will be elastic, redeemable in gold, and that will absolutely meet the requirements of our com- merce and agriculture, and which can not be kept in circulation by BANKING AND CUEEENCY KEFOEM. 603 '^'J:zroT:;i~t^'' "'' "^^^^ "^^^ '^^ "^^^*^^' ^-^^^ ^^-^^ -^^ The third is the establishment of a bank of discount where any bank requiring additional credit during certain seasons of the year S'Ss'customers""' '"^ "'^'"^ '' ''^ rediscount the commercial pkper thifp'r^po^ei^;: W ^'"^'^ ^^ "^ ™^"*^ *^ ^^ accomplished under Now, as to the question of how to accomplish them: The national banking act of the present time prevents any savings department whatsoever for the reason that it requires the same reslrve to be car- ried against all deposits and a reserve against a fixed deposit, such as a savings deposit or a certificate of deposit for a fixed period, say, of SIX months ; a bank can not afTord to pay interest upon a deposit of that kind and carry the reserve of 15 per cent or 25 per cent as the case may be, in competition with other savings banks organized under fetate laws, which m most States are required to carry no reserves and m other States are required to carry very small re- serves. I can see no reason why the national banking act should not permit national banks to do a savings-bank business with a small reserve, say, of 5 per cent, which is adequate, and require a segrega- tion of these deposits and a stipulation of how they must be in- vested. The same statute prevails in Xew York as to how the funds of savings banks shall be invested. Then it should provide that a certain percentage may be invested in mortgage paper, based upon a certain percentage of the value of the property and a certain per- centage of-municipal bonds, and so on. It should segregate entirely the investment of savings funds from the commevcial funds. That is necessary for the reason that the savings deposits are usually taken with the provision that the bank may exercise the 60-day clause. That is, if there is a run or a panic, they may exercise the right of 60 days' delay upon such deposits. If in the interim this bank was constantly run on and its money taken away and the bank had exer- cised its privilege upon the savings deposits, you can readily see that if the quick assets of the bank had been paid out to the commercial depositor that the savings depositor Avould be left without anything. Therefore segregation of deposits is an absolute necessity. National banks are almost compelled in certain sections of the country to lend a certain amount of money on real estate. That per- centage should be moderate, and the loans should not be permitted to be made for a longer period than six months, or j^erhaps eight months. In other words, it should not be for the purpose of carrying mortgages, but should be for the purpose of making loans to farmers for making their crops, which is a perfectly legitimate demand. I take it that a. farmer who has a plantation or a farm equipped should have the same right to obtain credit for his standing investment in it as a merchant who has a stock of goods. That is not the case to-day, because he is not permitted to use that in a national bank to obtain credit. And if it were that the credit could be extended for the mak- ing of the crop for that season, limiting the length of time that the paper should run to, say, eight months — not more than that — I be- lieve that would be as sound and as liquid a class of loans as a bank could reasonably be expected to have in its portfolio. Mr. McKiNNEY. Would you suggest a percentage? 604 BANKING AND CUKBENCY EEFOEM. Mr. Wexler. I should suggest a percentage not exceeding 20 per cent of the total amount of loans. In the cities the loans would not run anything like such an amount; but in the country they would run fully up to 20 per cent, and as a matter of fact the national banks are doing that to-day in direct violation of the law, because they are compelled to do it, There is no way for them to get around it, and we are compelled to do it in our State. In order to get around it we organized a trust company and savings bank owned by the national bank, so that they can put that class of loans into it. In Mississippi and Alabama you will find all the banks are lending money upon mortgages and mortgage notes. Mr. Btjlkley. Taking the mortgages directly to the banks ? Mr. Wexlee. Taking the mortgages directly to the banks ; and we in turn loan those banks money, and the collaterals that they give us are these farmers' notes secured by deeds of trust and mortgages that they have taken. There is no way to get away from that. Not to do it would be a hardship and an injustice upon the farmers. Mr. McKiNNEY. Are you not criticized by the comptroller? Mr. Wexlee. AVe are not, because our loans are to the banks, and their loans are secured by the mortgages. The criticism goes to the banks making the initial loans, individually. Before we had these trust companies and savings banks we were at times compelled to take a mortgage, and we would occasionally then get a " call down " from the comptroller if we did it. I say it is an injustice to the agri- cultural element of the country that they are prevented from using any part of their assets upon which to obtain credit when the mer- chant or dealer in any other commodity can use his assets to obtain credit. Mr. Taylor. You do not think unlimited permission to loan on real estate would be wise ? Mr. "Wexlee. No, sir. Mr. Taylor. It has to be limited ? Mr. Wexlee. It has to be limited. Mr. Tayloe. And you would limit it to 20 per cent ? Mr. Wexler. I would limit it to 20 per cent. Mr. Taylor. Suppose a bank had invested 15 or 20 per cent of its money in real estate, a bank building, for instance ; would you permit that bank to loan 20 per cent of its capital in addition to that — ^the difference between its investment and 15 per cent in real estate in its bank building and the loan of 15 per cent? Mr. Wexler. There is the restriction that the paper should not run beyond a certain period. That would be a liquid loan, in a sense. If the bank was permitted to loan on paper running not over six months, that would mean that the farmer would come in and borrow in March and pay the money back in the fall when he made his crop, and that would be, in a sense, a liquid loan. The investment in the bank building which the bank would oc- cupy itself would be a fixed investment, absolutely, and would not be, strictly speaking, as good banking, if it was an 'excess amount, as the lending upon farmers' paper of that character that I have re- ferred to. Do you see the distinction that I make between the two ? Mr. Taylor. If I do see the distinction your view and mine do not differ. That is, if you authorize banks to loan 20 per cent of reserve on security limited as j^ou speak of, then whatever amount BANKING AND CURRENCY REFORM. 605 they had invested in real estate besides that should be deducted from the 20 per cent they were allowed to loan, to the extent of 20 per cent less what they had already invested in real estate, because whatever their capital put in real estate, they have taken away from the circulation in that fixed investment. Mr. Wexlee. I differ with you to the extent that I am not assum- ing that any part of the capital or surplus of the bank is going to be loaned on real estate, but it is presumable that part of their deposits they are loaning. I think the bank might be permitted to invest its surplus in its own bank buildings, or a portion of its surplus or accumulated earnings which it has not paid out to its stockholders, to whom it is really due. The Chairman. You said 20 per cent of its loans, and not capital? Mr. Wexlee. Of its loans. I do not think it has any relation to the capital. It has a certain percentage of these loans of this par- ticular character which are generally construed not to be liquid, but which I maintain, if made with due discretion, with that short limit of time will be, upon the average, as liquid as the average in the port- folio of the bank. Mr. BuLKLEY. Your idea is not to lend on the real estate itself, but to lend upon the expectancy of the crop for a given year ? Mr. Wexlee. That is the idea ; and you take the real estate as ad- ditional security. Why should you not? Many banks take it now, and do not note it on the note at 'all, but just put it in the safe. They lend a farmer the money. They are not permitted to loan it to him on the real estate, but they take the mortgage and do not enunierate it on the reverse of the note, and hide it away in their portfolio. ' Mr. BuLKLEY. In that respect would you make any limitation as to the percentage of the value of the land that should be loaned? Mr. Wexlee. I would. Mr. BuLKLEY. What percentage would you set ? Mr. Wexlee. I would say that it should not be more than 50 per cent of the assumed valuation of the land. Mr. BuLKLEY. Does it cost a man 50 per cent of the value ot the land to raise his crop ? oj. j. i j Mr Wexlee. It does in some instances. In our fetate lands are selling at a price which is often less than the yield of the crop per ^ Mr Tayloe. That is pretty much true all over the South. Mr Wexlee. That is pretty much true all over the South. Mr. KiNDEED. As to what crops, particularly? . Mr. Wexlee. Take a man, for instance anywhere along the Illinois Central, raising strawberries. That land is worth $3o an acre, and he will get $400 or $500 worth of strawberries per acre per annum. Mr. KiNDEED. That is exceptional. -, j f „,v r.f Mr. Wexlee. That applies to beans and peas and garden tiuck ot ^^TlkTsitlv, which is one of our staple crops. The average price of sugar S 'in a small section where there are small --ers is about $100 In acre, and the yield from an acre we will say will a>e.age 18 tons, and that is worth $3.50 a ton which is $63 per acre. Mr. Taylor. How about cotton? 606 BANKING AND CUBRENCY BEFORM. Mr Wexlee. You can buy cotton land for from $15 to $25 an acr^, in the hills, that will produce $45 worth of cotton and the seed wiU be worth another $10. You realize that that can be done. Mr Tatxoe. Oh, I recognize that; yes. You can buy lands tor $10 an acre that will make one-third to three-quarters of a bale of Mr. Kindred. Are you not speaking of exceptional conditions? Mr. Wexlee. No ; I am speaking of average conditions on crops that we raise in our section. Of course, that would not apply in Illinois, where the average yield is not over $40 an acre on corn and the land is worth $200 an acre. I should think a 50 per cent valuation would be entirely sate tor the bank. Of course, I would not lend that unless it really was safe, but I would make that the maximum amount. And I would have the same limitiation which now exists as to the percentage of capital and surplus that a bank should be permitted to lend to any one indi- vidual. I believe that with those two amendments a great many of the present State banks would come into the national system, and the ■more banks we could get into the national system the better super^ vision we would have and the more uniform it would be. The Chaieman. The greater would be the uniformity ? Mr. Wexlee. The greater the uniformity would be; so that we might accomplish something by which we could get into the system practically all the trust companies and have them permitted, under the law of every State where they are located, to do only a strictly trust business. To-day a trust company means' a company that does a commercial business and a trust business and everything else. Mr. KiNDEED. Is it not possible to work out a scheme by which the trust companies could be taken in also? Mr. Wexlee. That has been spoken of, but I have never been able to see how it could be done. Mr. KiNDEED. What is the trouble about it? Mr. Wexlee. The chief trouble is in the laws of particular States, having reference to trust companies. Take the State of Louisiana, where we have the Code Napoleon, the French law. That law is altogether different from what they have in the common-law States. I can not see how a law could be framed under which we could handle a trusteeship in the same manner in which you might handle it in Alabama. Mr. KiNDEED. There are several questions that I would like to ask in that line, but I see the force of your suggestion, Mr. Chairman, that Mr. Wexler be allowed to finish uninterrupted with his direct statement. The Chaieman. You are on that field now, and I think you had just as well exhaust it. Mr. KiNDEED. It has been suggested here that if a system were concei^•able that would be uniform and just and scientific, etc., and yet might avoid dangers that certain other systems proposed, the respective States would change their laws so that even these trust companies and that class of banks could and would come in. What do you think of the probability of securing that result? M)-. Wexlee. In time it might be accomplished ; but the variety is so great in the different States of the Union with regard to trustee- ships that it is doubtful. The differences in some of the States are BANKING AND CUERENCY REFORM. 607 in the fundamental laws, as in our State, \Yhere they differ so ma- terially. For instance, in any of the other States a parent can leave his estate in trust to a child. In our State it can not be done. There the child inherits by operation of the law, and the parent can not will his money in trust for the benefit of the child. The child inherits ifr without regard to the wishes of the parent, except for two or three causes, which rarely ever occur, such as a child striking a parent, etc. Mr. Kindred. You can not create ii trustee fund ? Mr. "VYexlee. You can not create a trustee fimd to operate after your death. It is absolutely impossible. The child inherits, and you have nothing to say. Mr. Kindred. Then you think it is rather hopeless to hope that any system that might be constructed would be such that the various States would change their laws ? Mr. Wexlee. I think it is very, doubtful ; but I do not think it is necessary, because the business of a trust company, in a strict sense, has no relation to the banking business at all. I can see no reason why a bank should not, if it desired to, have a trust company affilia- tion, under the laws of its own State, for the purpose of doing such trust-company business as might be necessary. That would be only in regard to the trusteeships. Suppose a bond or mortgage is exe- cuted and a trustee is desired. There is no reason why that trustee- ship should not be under the law of the particular State. I can see no reason for Federal interference. That is a side line to the bank- ing business. To-day the trust companies are really doing a banking ' business, and that is what I would like to eliminate. Mr. Kindred. How are you going to eliminate that feature by a Federal law? Mr. Wexlee. By making it so advantageous for banks of deposit and savings banks to come under the national system that all of them would organize under the national act, maintaining as a side issue a small trust company for doing trust business. Mr. Kindred. What can you do to prevent a company from going on and doing its legitimate trust-company business and also adding to its business a little banking business by taking advantage of the system? xi ^ i. i. Mr Wexlee. I am not sufficiently a lawyer to answer that, but we accomplished it here when we put a tax of 10 per cent on State-bank issues. We put an absolute stop to that by the nnposition of that Mr. Kindeed. Would not that be a very direct discrimination aeainst a certain class of banks? n u j; j ^Mr Wexlee. It is not my notion that the banks should be forced into the national system, but it is my notion that it should be made so advantageous for them to come into the national system that they rmild and would do so advantageously. Mr. SrED. In New York I know that the trust compames are doing an absolutely banking business. Mr KindS. This suggestion would be that there should be a discrimSon specificallfagainst that class m order to keep them *Tr wJ£^*H.^I think it would be well within the right to say that 608 BANKING AND GTJEEENCY EEFORM. certain requirements and regulations, and those requirements will tend to force them into the national system. That does not interfere with their trust business, for which they were organized, and which they are doing. Mr. Kindred. It would not interfere by direct operation of law. It would be simply the incidental operation of law, giving such ad- vantages to the national system as that they would be disposed to abandon the banking features of the trust business ? Mr. Wexlee. That is my idea exactly. Of course, as trust com- panies, they would obtain trust funds, all of which the State laws would regulate. But I am referring to bank deposits and checking and savings banks. You could so frame your law that it would be so advantageous to them to come into the national system, that that branch of the business they would throw into a new institution organized for that purpose, or put into a new company organized for that purpose, with which they were affiliated. Mr. Kindred. But if we were not to have a specific tax or dis- crimination against trust companies they could go on and do a trust- company business and also a banking business under these general laws which you have spoken of? Mr. Wexler. They would not do so unless it was more advan- tageous. Mr. Kindred. Unless there was a discrimination against them they could and would? Mr. Wexlee. Would it be a discrimination, saying that the banks receiving deposits of the public, must do so and so? You are not really saying that they must do so and so, but every bank receiving deposits of the public must do so and so. That leaves them with their trust business by itself. I think that can be done. Take a case in point. We have a trust company and a national bank. If we were permitted to do all those things in th§ national bank which we now do in the trust company, which are correluted to the banking business, we would never have started this trust com- pany. If we were permitted now to do that business, we would transfer these savings accounts, aggregating some $5,000,000, into the national bank, and we would maintain our trust company as a small auxiliary institution to handle the trusteeships. There would be the proposition. Mr. Willis. You spoke of the interest of a bank and rediscount, etc. Mr. Wexlee. Yes. Mr. Willis. Assuming that that bank was organized in a way that has been suggested in some of the plans that have been put forward from various sources — that is, by existing banks — do I understand that you would not allow State banks and trust companies to become stockholders in that bank? Mr. Wexler. I do not think, if that were the case, that we could ever pass the measure. Mr. Willis. Even if you kept that out ? Mr. Wexler. If you kept that out. Mr. Willis. I was not clear, from your discussion, whether you meant that. BANKING AND CTJKEENCY EEFOEM. 609 Mr. Wexler. I had not reached that yet. I was merely mentioning the fundamentals that were necessary in the plan. I am coming to that presently. Mr. Willis. It seemed to me you were suggesting that they should not become stockholders. Mr. Wexlee. No ; I am suggesting that the national bank law be so changed that it will be desirable for the State banks of deposit and the savings banks to come under the national system. Mr. Taylor. You propose to reorganize or to formulate a system of banking which would admit the people of the country and the bankers of the country to its advantages ? Mr. Wexlee. That is the idea. Mr. Tatloe. And Avhen they understand it you expect them volun- tarily to come into that association, because it is advantageous to them' rather than to adopt means that would be in a measure punitive or forcing them to do this or that or the other? Mr. Wexlee. That is precisely my idea. Mr. Taylor. You do not want to bring that about by coercion ? Mr. Wexler. Xo, sir. Mr. Taylor. But rather by education ? Mr. Wexler. By education and advantage. That is the only sure way to accomplish it without opposition. I had a banker from Mis- sissippi come to me some time ago who wanted to nationalize. He went over his affairs with me and showed me what he had, and he said, " Our people in our country would think much more of us if we nationalized. Do vou think we can " ? I looked it over and found that he had 35 per cent of his loans on real estate. I said, " You can not nationalize without breaking the law. You have got to remain a State bank until you eliminate these loans on real estate." There was not any other" answer to give him. I could not advise a man to break the law. . Mr. Taylor. Eight there I would like to ask you this question, simply because it is in connection with your suggestion: Is it not a matter of fact that many State banks jire really organized as what you call adjuncts to national banks? Mr. Wexlee. Yes. ., , , • q Mr. Tayloe. For the purpose of doing that business t Mr. Wexler. Yes. ■ ■, ^ Mr Tayloe. That they could not otherwise do t Mr. Wexlee. Yes; a great many more every day. , , . Mr Taylor That grows out of the desire of the national banks Mr. Wexlee (interposing). To comply with the law Mr. Taylor. That grows out of their desire to obey the law if they can? Mr! WiL^ir'Ald'that has been held to be illegal by the Attorney General ? Mr. Wexler. It has not as yet. , ,. „x ^^^^. Mr. Willis. He has written an opinion to that eflect. Mr Taylor. He wrote an opinion about it. Mr T\We. As to the legality of it, I think it is Perfectly legal as a separate entity, for a bank to organize a trust company of that character. 610 BANKING AND CUEBENCY BEFORM. Jklr. Taylor. You think it is perfectly legal for a bank to organize a trust company of that character under the influence of the bank itself? ' Mr. Wexler. Yes. Mr. Taylor. To do business which the original bank has not the power to do? Mr. Wexler. Yes. Mr. Taylor. I wish you would explain that. Mr. Wexler. I will explain that to you. Mr. Taylor. I wish you would explain where you get your idea that it is either legitimate or, to use an expression that I employ, of course with perfect courtesy to you Mr. Wexler. Certainly. Mr. Taylor (continuing). Or that it is ethical. Mr. Wexler. If a bank takes out of its own resources the money with which to organize this trust company, I think it is in direct violation of the law. Even though it does it in a roundabout way, by declaring an extra dividend for that purpose, I think it is contrary to the spirit of the law that a national bank may hold stock in another bank, because it is using its funds for the purpose of pur- chasing or organizing such bank. However, if the capital is con- tributed outside, and it is a separate entity, though it may be managed by the same officers and perhaps by the same directors, I do not be- lieve Mr. Taylor. You do not believe, then, that it is either inethical or illegal? Mr. Wexler. Certainly not inethical; and I do not think it is illegal. Mr. Tay-loe. I understood you to say, in answer to my former question, that you meant that where national banks have had these side issues — as I believe you call them? Mr. Wexler. Yes. Mr. Taylor. In the shape of a State bank, that i t was not with the capital of the bank itself? Mr. Wexler. Yes. Mr. Taylor. But with independent capital? Mr. Wexler. Absolutely. The Chairman. As a matter of fact, Mr. Wexler, it was not the national bank itself organizing the trust company, but the persons pecuniarily interested in the national bank were likewise pecuniarily interested in the trust company? Mr. Wexler. That is exactly the point. Mr. McKiNNEY. And the two institutions governed by two differ- ent sets of laws? Mr. Wexler. Yes, sir; governed by two entirely different sets of laws and no relation between them except as I have stated. Mr. Willis. It would be interesting to know your opinion on the cases where the stock of one can not be transferred unless the stock of the other is transferred ; where the stock must be simultaneously transferred. ;, ' Mr. Wexler. That is an embarrassing point, I am free to admit. It is contrary to law, and there is no doubt about that, in my opin- ion ; but it has been made necessary, because if you do not do that the BANKING AND CUEEENCY EEFOEM. gH control of the affiliated institution would soon be scattered to such n point Mr. Willis. It strikes me that if you admit that your ethical theory, which was very interesting, rather disappears ^■^^^^^r'^';''- ^ ^f® y^y'^' P°^^*- I<^ is a very hard thing to get around. \Ve have done that very thing Mr. Willis. I was under the impression that you had. That is the reason I brought the matter up. Mr. Wexlee. I will tell you how we did it : We organized a little bank with $200,000 capital, and four of the officers of the bank sub- scribed the entire $200,000 and paid in the money. Then all the dividends that were earned were declared to those four, and m about two years the dividends paid the $200,000. The stock then was turned over to the cashier of the national bank, to be held in trust for all of the stockholders of the national bank as their property. They have never seen a certificate, however, and they could not sell it if they wanted to, because they could not get possession of it. Mr. Willis. So that, to all intents and purposes, the two banks are identical? Mr. Wexler. There is nothing on our certificate of stock to show that one carries the other with it, but it is an asset of all our stock- holders, held in trust by an officer of the national bank for their benefit. Mr. '\^^iLLis. Yes. Mr. Wexlee. If one stockholder would came in and say " I have to have my stock," and should mandamus the officer to cleliever it, I do not know what the decision might be. The Chaiejian. That is doing a little violence to the spirit of the law, is it not? Mr. Wexler. It is; in the sense that it is an affiliated institution; but then, it has accomplished great good, and we have found no other way of doing that which you prohibit us from doing in the national banking system. Mr. Kixdbed. Do all the stockholders of the parent bank share in the profits of this subsidiary bank? Mr. Wexler. Every one. Mr. BfLKLEY. Do you carry that stock as an asset ? Mr. Wexler. No. It does not appear on our books at all. It is a donation to our stockholders. Mr. Kindred. It was simply paid out of the pockets of the four who organized the subsidiary bank? Mr. Wexler. Yes. It was eventually paid out of the earnings of the thing itself. Mr. Kindred. You do not account for those earnings, then, that are invested in this bank ? j. -, ^ x oe Mr. Wexler. Oh, yes. We declare regular dividends ot 15 to 25 per cent semiannually. Mr. Kindred. You paid it up out of dividends i Mr Wexler. We made it up out of dividends, and paid ourselves back this monev. We could have kept it, but we turned it o^^r, voluntarily, to the cashier of the bank, to be held m trust for all the stoclcholders of the bank. 76112— PT n— 13 2 612 BANKING AND CUEBENCY BFFORM. Mr. Taylor. That was done by the four officers who originally- subscribed for the purpose of establishing this subsidiary bank? Mr. Wexler. Yes. Mr. Taylor. After you got the money back you turned it into the whole concern? Mr. Wexi^r. Yes. Mr. Kjndred. You paid yourselves back, however, with good dividends ? Mr. Wexler. No ; with 5 per cent on the money. Mr. Kindred. And that made a good thing for all the stockholders ? Mr. Wexler. Yes ; we did that to keep the identity of the one with the other, so that no man could say : " You are throwing too much profits into the national bank," or " You are throwing too much into the savings bank." There can be no jealousy, because every man is interested to the proportion that $200,000 bears to $2,500,000. Mr. Kindred. Is not that a case where, if it works well, it is moral and right, and if it works badly, it might be questioned? Mr. Wexler. I do not see how it could work badly. Mr. Kindred. But if it did, I say? Mr. Wexler. I do not think it could be questioned. If it had worked badly we would have lost nur money, we four who organized the bank. The national bank would have had nothing to do with it. It would have been a personal transaction. Our interest in the two is so great that it paid us to do it. Mr. WiLus. If arrangements were made for the changes in law recommended by you, I suppose you would have no objection to a provision prohibiting that relationship of national banks and trust companies ? Mr. Wexler. I would not, provided you managed it so that we could do all the business we now do. in the trust companies except the trusteeships. Mr. Willis. With that provision you would not object to such a separation of national banks and trust companies, by law? Mr. Wexler. I would not. Mr. Taylor. You would be glad to see some law that would enable you to do it? Mr. Wexler. Yes. Mr. Willis. You think a separation of those banks that now exist in that way could be effected without doing any serious harm? Mr. Wexler. None whatever. The Chairman. Now, will you proceed, Mr. Wexler, with your general statement? I think the record on that phase of the matter is made up. Mr. Wexler. Yes, Mr. Chairman. Of course there are many other minor changes in the national-bank act that I would like to see made, but I do not think it is necessary for me to take up your time with detailed matters at present. With regard to the question of currency, which is the next propo- sition that I referred to, I have previously stated the necessity of having an elastic currency. I want to say 'that the fundamental of that currency must be the inability of anybody to keep it out. That must be kept in mind all the time. That, no matter how powerful rai institution may be, it can not keep that currency in circulation unless the people require it. It was illustrated years ago by some one BAXKING AND CURRENCY REFORM. 613 stating that it was like a piece of elastic rubber — that you could stretch it out, but the moment that you released it it would come back of its own accord. That is the ideal currency. You may be able to put it out, but you can not keep it out without holding it there, and you must not have the power to hold it there, it must go back and be retired in gold. Mr. Taylor. This elasticity that requires you to bring it out does not seem to be elasticity. Do you want the power to put it out any more than the power to bring -it back? Because the power that cbntracts is incidental, is a part of the nature of the rubber of which you speak; it comes from its nature. Mr. Wexi^ee. Yes. Mr. Tatloe. It does not expand from its own nature. It expands from an outside pressure. Mr. "Wexuee. Yes; but that pressure is the demand Mr. Taylor. You want that pressure, as I understand, the bring- ing of that money out ; but that it shall not be left where it can stay out. You want something that acts against the pressure, in the way of contraction? Mr. Wexlee. That is the idea. Mr. Taylor. And not through any other outside power ? Mr. Wexlee. No; the outside force is this: The demand of the public for the circulation. The inherent property of the currency must be its own nature to contract, of itself. In other words we must have a kind of circulation that will not stay out more than five or six days, but must find its way back to the issuing bank's window as quickly as it can get there in order to be the right kind of circula- tion, and' must be, then, redeemable in gold. Mr. Taylor. Then it should go out without pulling ( Mr. Wexlee. It goes out by the force of the public demanding the circulation. Mr. Tatloe. Yes. Mr. Wexlee. Not by the bank pushing it out, but by the public demand pulling it out. For instance, from the first of September the demand tor cur- rency is simply enormous in agricultural sections of the country. We have ordered out $1,300,000 currency from New York, and at the end of the week we had to begin to order more. It disappeared, going to the sugar plantations, the sawmills, and so on. to pay labor bills It is now coming in from every country bank. They are expressing this money back, and have been doing so for the last 30 days We are getting more than Ave know what to do with. (Jur vaults are full. We send it to New York and they send it to Wash- ington, and have the national bank notes redeemed. But. instead o± being eliminated they send it from Washington right back to New Orleans; and we are all paying the express charges of running it around in this circle. ,.r , ■ . i -^ \ i + Vo „ n,. Mr. KiNDEED. Why does Washington send it back to ^ew Ur- Mr.' Wexlee. Because they are our notes. The Chairman. The national-bank act does not allow their retire- ment except a certain amount per annum ? Mr. Wexlee. That is right. 614 BANKING AND CUKEENOY EEFOKM. Mv. Tayloi:. If .you had a national-bank note that was one single issue by all of the banks, instead of having an issue to any individual bank, would not that destroy this objection? Mr. Wexlee. It would, provided ample redemption facilities and agencies were provided. I do not Avant to have to send them all to Washington. It is too expensive and too cumbersome. Mr. Tayloe. Suppose you had every note redeemable; at every bank's counter? Mr. Wexlek. Provide that every note shall be redeemable at that bank's counter? Mr. Taylor. Not every bank? Mr. Wexler. No. That would not do. Mr. Taylor. The notes I suggested to you would not be issued in the name of an individual bank, but every bank note would be the bank note of every national bank. Mr. Wexlee. I understand. Mr. Tay-loe. And guaranteed by the new national bank. Mr. ^A^exlee. Yes. Your idea is that a note issued by some or- ganization that represented all the national banks in the country would be redeemable at the counter of any national bank? Mr. Tayloe. And every national banlc-. Mr. Wexlee. And every national bank, in gold, upon presenta- tion? Mr. Tay-lor. Yes. That would prevent its being sent back. Mr. AVexler. That would be all right; then you would have to have some place where that national bank would get its redemption of that note in coin ; because you do not want those notes to be counted as reserve. Mr. Tayloe. The question of reserve would be a separate question. T am simply speaking of the other point. Mr. Wexler. Coming back to this question of circulation: I liave laid doAvn the idea that the note must be redeemable in gold, when- ever and wherever presented, immediately ; that any bank failing to redeem it is a failed bank, at that instant ; that there must be a means of issuing an increased amount during the crop-moving period and of retiring by the inherent quality of the note that excess amount when it is no longer needed. Those are the fundamentals of the note issue. How to accomplish that? There are, to my mind, only two ways: One is by having a central organization somewhere that will have the sole note issuing privilege; the other is by injecting into our system something similar to the Canadian system, which would be permit- ting each bank to issue a certain amount of circulation under certain restrictions, redeemable in gold at their windows, or at the windows of their redeinption agents whom they would appoint in their section of the country. My second plan would be for the notes being emitted from the central institution. I think it would create a great deal less confusion, and would be more practicable under our present system. It could be accomplished in another manner, and that is by having, instead of one central institution, 20 or 25 particular institutions, located in different States or different sections of the country, they having the note-issuing privilege, and they being guaranteed ))y all the banks in the particular district in which they are located. Some such system as that might be worked up, but none BANKING AND CURRENCY REFORM. 615 of them would be as good as if we had some central institution with branches located through the country that would have the sole note- issuing privilege. Mr. Taylor. That is one of the features of the Aldrich plan ? Mr. Wexleb. That is one of the features of the Aldrich plan. I think that is fundamentally sound. Of course everything depends, then, upon the management of the bank; whether favoritism is going to be shown ; whether it is going to be used for improper pur- poses or for proper puiposes ; whether it is going to be used for the advantage of every bank in the country, regardless of where located ; all of those things have to be taken into consideration. Mr. Kindred. Would you restrict the function of such a central mechanism to the note issue? Mr. Wexler. Xo, sir. Mr. Kindred. To what would you extend its function? Mr. AVexlee. To the rediscounting of strictly commercial paper having a short time to run. I would also permit it to have branches in Europe. I would i^ermit it to buy bullion abroad, so as to main- tain the gold reserves of the United States ; and it would fix the rate of rediscounts. Mr. Taylor. And it would fix the reserves? jNIr. Wexler. I believe that it should handle the reserves of the country. I believe they should be deposited there. I know that, in making that statement, I am making a statement contrary to the view of nearly all of the bankers of this country. Also, in making that statement, I am making an altruistic statement, because it is not to the interest of the banks in this country to in any manner alter the existing relations between banfe, which are that certain banks carry their reserves with me and others with some other bank and so on; and we would lose that business. We would lose those deposits. But, as a matter of fact, thev are not reserves to-day, because the country bank that keeps deposits with me and that I carry a reserve on, I in turn deposit with New York, and they in turn keep a reserve on it, and there is such a duplication of reserves to-day that we can hardly figure what the actual reserve from a dollar on deposit is. Mr. Taylor. And that duplication of reserves is one of the gravest dangers toward bringing on a panic? xr v^ v ]^& Wexler. It is. When we need our money from New York, when the system breaks down, we can not get it, because they have it loaned out ; and we can not expect to get it. The CH4IEMAN. Does not the so-called Aldrich plan accentuate that very difficulty? Does it not provide for an increased duplica- tion and multiplication of reserves by permitting the notes of the central institution to be used as reserved ^HHino- tn p-o Mr. Wexler. Yes, sir; and that is a mistake. I am willing to go on record as saying hat the use of those notes as reserve is a mistake. Mr WiELis Yt Ts true, also, is it not, Mr. Wexler, that the Aldrich pl^ left present conditions in that regard just where they are-made no provision for correcting them? t:' WnSrY^r would favor the transfer of the reserves to the proposed central bank or the zone banks that you have suggested? 616 BANKING AND CUERENCY EEFOEM. Mr. "Wexler. I should think nothing should count as reserve ex- cept actual reserve money and deposits in the central reserve asso- ciation. Mr. AViLLis. And, in that event, how would you arrange the per- centages of reser^'e? Would you allot them the same as at present, to the three classes of banks — country banks, reserve cities, and cen- tral reserve cities i Or what change in percentages would you make, if any ? , Mr. Wexlee. I think the percentages couM be reduced under this plan. Mr. Willis. All around? Mr. WexijEe. The 15 per cent reserve, I think, should remain; but I think the 2-') per cent reserve might be i-educed to 20 or 15, even, with perfect safety, with these branches located as they are right in every particular vicinity. I think your reserves are entirely too high. There would be nothing to prevent a bank carrying more than the legal requirement and, as a matter of fact, that is what we would do. If only cash in vault and money on deposit in the reserve associa- tion counted as reserve we would have, in addition to that, probably, as much more in banks throughout the country which would be sub- ject to checks, and which it would be necessary for us to carry in order to meet our daily exchanges in the business we necessarily carry on. So that we could very readily reduce the enforced cash reserve to be carried in vaults and in the reserve association, because that would be reenforced by a strong secondary reserve necessary to be carried in doing a banking business. jSIr. Willis. In that case the reserve cities and central reserve cities would be largely historical? Mr. Wexler. Wes. Mr. Willis. If the percentage of reserve were not changed do you think that would be unjust to the banks in the cities if it were not cut, but if thejr had to keep 25 per cent in their own vaults? Mr. AVexlek. I think 25 per cent would be too much, and that it would be unjust to them to require them to continue to carry under these pro\isions a reserve of 25 per cent. Mr. Willis. How about 20 per cent? Mr. Wexlee. I think that would be a proper cut in the beginning, and that in time we could further reduce that to 15. In the begin- ning 20 per cent would be all right. Mr. Willis. Do you see any harm in making that change at once, or do you think it ought to be spread out over a considerable period of time — over a series of years? , Mr. Wexler. Cutting it to 15 per cent immediately, you mean? Mr. Willis. No; making the transfer from the present reserve holding banks to the proposed banks of rediscount. Could that safely be done at one blow, or ought it to be spread out over a con- siderable period of time, several years time ? Mr. AVexler. I judge that it would have to be spread out over a considerable period of time. New York has that money pretty well spread out, and Chicago and St. Louis. Mr. Willis. Over how many years do you think it would be neces- sary to spread it ? Mr. AA'^EXLEE. AVell, not more than three years, I should say. BANKING AND CURRENCY REFORM. 617 Mr. Willis. That is, at the end of three years the complete trans- ter would be accomplished to the reserve-holding institutions « Mr. \^EXLER. Yes. In other words, provide that a certain per- centage o± reserve must be m the reserve association and the re- mainder in reserve cities, and increasing it the second year and make it the entire amount the third year. Mr. Willis. As an integral part of that, would you prohibit banks paying interest on deposits of other banks with them? Mr. Wexler. No, sir; I would not. I would allow banks to pay interest on deposits if they wanted to do so, but I would not let the reserve association banks pay interest on deposits. Mr. Willis. But take the case of the ordinary bank in the central reserve city, which carries these reserves to-dav." Would you allow it to go on paying interest to country banks on' deposits ? Mr. Wexler. Yes. I see no objection to that. In other words, if we had a large excess of cash on hand, that surplus would be carried where it could be loaned out. It would go to New York which is the only call-loan market that we have in the United States' to-day, and they would lend it, and it would come back as soon as we needed it. The Chairman. Has not that been a source of great difficulty here- tofore — the inability to get it back when you needed it ? Mr. Wexler. It has, in these times of stress, but the proportion we would have there would be in excess of our legal reserve and would not make so much difference to us. Before we could not get our legal reserve out. If we sent a dollar to New York in 1907, during the panic, we could not get it out. Mr. Willis. At least theoretically, might it not be that under such a condition as that it would be an accentuation to some extent of the present evil? For example, banks in New York, we will say, would induce country banks to deposit with them by paying them interest, but at the same time an amount equal to their present reserve would be held by the reserve institutions for rediscount in New York. Might it not be that the total amount of reserves held in New York would be greater than at present? Mr. Wexler. No. I think it would diminish very much. We would have to have a certain amount of money in New York all the time. It could not be avoided. There is no reason why New York should enjoy the privilege of using that money free of interest, because the business of the country is so constructed that our money eventually finds its way to New York. If we are going to have it there, we' should not turn it over to them without getting anything for it. Mr. Willis. What I mean is this: The country bank, if it could not get the interest from a national bank in New York City to-day- suppose that you had a reserve bank organized there— would just as soon place its funds with the reserve bank in New York as it would with an existing national bank in New York City. If you allowed the national bank to pay interest on deposits, it would tend to keep merely its required legal reserve with the reserve bank at rediscount, and everything beyond that it would put into the national bank to get interest on it. Mr. Wexler. Yes. 618 BANKING AND CUEEENCY BBFOEM. Mr. Wirxis. If you did not have the interest payment, then would 5'ou not tend to greater concentration of reserves in the hands of a bank of rediscount, thereby giving much more of the combined re- Serve system which you advocate? Mr. Wexler. Yes ; but you do not want to eliminate the banks in the centers. You have to have a financial center in every country, where the large transactions of the country can go ; and that is New York to-day, essentially, just as it is London in England, Paris in France, and Berlin in Germany. Mr. McCreary. It is created by the demand? Mr. Wexler. Yes. Mr. Willis. It will always be so without the payment of interest? Mr. Wexler. Yes. Mr. Willis. Whether you pay interest on deposits or not ? Mr. Wexler. It will go there anyhow ; and since it has to go there, I do not see any reason why banks throughout the rest of the coun- try should not have a fair percentage of that which they are going to receive for the money. Mr. Kindred. I think it is easy to see the force of what you say as to the natural creation of money centers and the natural conditions operating in that direction ; but relative to paying interest by cer- tain reserve banks, is it not true that the reserve banks, or I will say outside of reserve banks, those banks that paid the highest in- terest during the recent panic for money from the outlying districts, out of New York, I mean — ^those banks in New York that paid the highest rate were those that went under in the panic most quickly, or went imder to a certain extent and recovered less rapidly than others? I have heard that stated frequently. Is that your concep- tion of it? Mr. Wexler. Your point is that the bank that pays the highest rate of interest is the bank that needs the money the most? Mr. Kindred. This is the logic of it ; that it paid a larger rate of interest in order to get large rates out of it, and in order to get large rates of interest it lent itself to wildcatting schemes. Mr. Wexler. I do not know but what that is true ; but I do not believe you can devise any bill that will regulate human nature in the conducting of the banking business. Mr, Kindred. I want to confine that statement to one phase, and that is this : One national bank should have the right to loan money to another national bank at a certain rate that is not usurious ? Mr. Wexler. Yes. Mr. Kindred. But should the national reserves — in this case it would be a regional reserve Mr. Wexler. A secondary reserve. Mr. Kindred (continuing). A regional reserve which would take money at interest from another regional reserve bank; if the money from New Orleans went to New York at interest, it would be a case of either the individual national banks in the New Orleans re- gion or zone, or the New Orleans reserve association in that region lending money either in the case of the individual bank or the reserve banks to the New York reserve banks, or to individual banks in New York? Mr. Wexler. Yes. BANKING AND CUKEENCY REFORM. 619 Mr. KiNDEED. Either way? Mr. Wexlee. You might call it lending money. Mr. Kindred. At interest, I mean. Mr. Wexlee. Yes. Let me show yon how it would A¥ork out : Say we are located at a port, as we are, Avhere we buy a great deal of foreign exchange. Practically all of our money in the crop-moving season converts itself into exchange on Europe. The only market we have for that exchange in quantitj^ is New York. We remit these bills as we buy them — maybe a million or a million and a half a week — to Europe; and we sell against them checks payable on de- mand at sight in Xew York, against the balances which our remittance abroad has created. When we sell them in New York we receive credit in Xew York. That money may remain there a day or it may remain there a week, or it may remain there a month. We check against it in the ordinary course of business. That money is lying in New York and should pay a reasonable rate of interest, say 2 per cent. In turn, when a bank in the interior, say at Mobile, where we liave a number of bank accounts, gets exchange upon New Orleans, they send that over to us and receive credit for it, and they check against it in the ordinary course of business ; and as long as they are receiving a small rate of interest on it there is no great tendency for the bank to force its money out. They can better afford to wait until the business offered them is entirely satisfactory, because they are getting a small remuneration upon it while it remains in the hands of the other banks. Mr. Kindred. Would vou limit the rate of interest m order to avoid the tendency to what I spoke of— to having it lend its money in turn at high rates for speculative purposes ^ Mr. Wexlee. It would be very desirable to have it limited to 2 per Mr. Kindred. Would that avoid the so-called overspeculative tend- ency ? T -i ■. T il ■ 1 Mr Wexlee. I do not think it is necessary to limit it. i think you have to trust something to the banker himself. 1 ou can not make a piece of machinerv out of him, so to speak, lou have to give him some initiative, and give him credit for some knowledge of the proper method of conducting his business. Mr. Kindred. Has it not been shown at times that if you do not limit him he will, under certain conditions, which he ought to with, stand-certainlv in New York, at least m many cases-indulge in wildcatting, which will rum everything^ ,.,-,, n -c ^ Mr WeILer. That is true; but I do not thmk it should go as far as the rate of interest. You might.as well say that you will limit the amoimt of interest he will have a right to charge. . M^WiLiirWhat is the reason, at the present time, that you leave thl funSs on deposit in New York -ft^^/^^trforcommerck balance there « Is it because there is no good market tor commercial mner in this country ? If you had such a good market for commer- c a?na^er S this co^untry you would invest it immediately m that, wouWrou noS You wouW not keep so much on deposit m New ^^Mr' wiirin sections of the country like -rs we -vex go Vn biiv outside paper, because we have not sufficient money. I'Takl all otJ^r funds to^a^e'care of our own business at home. 620 BANKING AND CUEEENCY EEFOEM. Mr. A^'iLLis. Take Chicago, for instance, which invests very largely in commercial paper. They do buy these commercial houses' commercial paper to a large extent, and most of that paper is pay- able in New York. If that commercial-paper market were improved and broadened, as it would be under any good rediscount plan, there would be always a fair field for the employment of those surplus funds, would there not? Mr. Wexler. I should think so. Mr. Willis. Much better than is now the case ? Mr. Wexlee. Yes. Mr. Willis. And the inducement, then, to keep funds on deposit in New York in order to get the 2 per cent interest would be greatly lessened, would it not? Mr. Wexler. Yes; but in the very operation of this business there is bound to be a certain amount of money carried in New York and Chicago and St. Louis and New Orleans and San Francisco and these various centers. That is unavoidable. It is like water going to its natural level. It is bound to go there. Mr. Willis. If you carried that money with the reserve bank in those places — ^the bank of rediscount — that would mean that that would be in a better position, in a stronger position, to extend credit to those who wanted it, would it not? That is, it would have a larger reserve fund on hand ; and hence it could extend more credit at a lower rate of interest than if it was kept down to the bare margin the banks had to keep with it in order to stay in the system ? Mr. Wexlee. But I think by doing that you would make that bank too active an institution. Mr. Willis. In other words, it would compete too strongly with existing banks in New York ? Mr. Wexlee. Oh, it would compete too strongly with existing banks everywhere, and it would make it too active.. The operation of it would become much more difficult. Mr. Willis. Yes. Mr. Wexlee. The expense of operation would enormously in- crease. Mr. Willis. It would be too great a competitor of existing banks ? Mr. Wexlee. It would be a competitor of existing banks, and not the right kind of a competitor, because its business should be con- fined to certain business. The excess reserve would be constantly checked out. It would not be a source of great profit, and I do not believe it would be a function of this reserve association to do that business. My idea is that you want to keep that reserve association a reserve association for banks. Mr. Willis. Should that be a fundamental proposition all through? The more reserves it had on hand the more able it would be to re- discount the paper of banks that wanted accommodation and the less rate it would charge. Is not that true ? Mr. Wexlee. That is true ; but that excess reserve would be such a fluctuating amount that they would practically have to carry it all on hand. They could not employ it or do anything with it. Mr. Willis. Why could they not, just as well as the large national banks now ? BANKINCi AND CUEKENCY KEFOEM. 621 Mr. Wexlek. For the reason that the national banks lend it on the quickest kind of stuff that it is possible to get in the business — mostly on stock exchange collateral. Mr. Willis. We have heard that stock exchange collateral was the slowest kind of collateral, and that in Germany it was so specified in the law. Mr. Wexlee. It is in Germany, but that is not so in New York. If the loans are properly made you can turn out and sell the security behind them at a moment's notice. Mr. Willis. In normal times. Mr. Wexlee. Or in abnormal times. Mr. Willis. At the expense of closing out a lot of people and caus- ing them to lose everything. Mr. Wexlee. If you have this large amount of money, of excess reserves, for use in making exchanges between the cities it would not be a particle of benefit to the reserve association. Mr. Willis. Do you think that the transfer of the reser\es en bloc to the reserve association, as would be had by the refusal to pay in- terest on deposits, would too greatly curtail the amount that would be loaned on stock exchange collateral? Mr. Wexlee. I understand that to be this way : That if the entire reserves now carried in the reserve cities should be transferred to the central bank it would contract loans so that it would do a great injury if it was done all at one time. Mr. Willis. Yes. I understood you to say that the injury would be that there would not be enough to lend on stocks. Mr. Wexlee. Yes. Mr. Willis. Then the effect of prohibiting the payment of inter- est on deposits would be a tendency to contract the amount of loans on stock-exchange collateral? Mr. Wexlee. It certainly would. It would be just that much less money that they would have to lend on anything. Please disabuse your mind of the idea that there is anything wrong in lending on stock-exchange collateral. Mr. Willis. Oh, I ha^e no idea that there is. Mr. Wexlee. It is just as necessary that there may be means of finding funds to lend against collateral of that kind as it is to lend to merchants. Mr. Willis. Absolutely. Mr. Wexlee. We are building all over this country electric lines and electric-light svstems, railroads, and other public improvements, and we must have "a market for those securities, and if you can not borrow on them you can never develop a market for them ; and it is necessary that there should be a market for them. , m , Mr Willis. It is desirable, however, that that business should be separated from the strictly commercial business in paper, or else why would we pretend to limit the business of the reserve association to commercial paper and not let it go into this business at all ? Mr Wexlee. For the reason that commercial paper has a tixed maturity and is essentially credit, and the circulation that you would issue for the purpose of making such a loan would retire itseit. ■Mr. Willis. I quite understand that. . ■. ^^f Mr Wexlee. By means of the retirement of that amount itseit. Now,' a loan against stock-exchange collateral is a constantly shitt- 622 BANKING AND CUREENCY KEFOEM. ing loan. You can go to a bank if you are a broker and borrow $1,000,000 against certain collateral and that collateral may change every day in the week and the loan may remain for months. It may be retired to-day and taken again to-morrow. It is necessary that there should be a market in the United States where securities of that kind should be handled freely. Mr. Willis. But it is not desirable that that should be confused too greatly with purely commercial banking? Nor should there be a fictitious demand which would induce banks to place their reserve funds with banks that do business in that way. Mr. Wexleb. No; there is no reason why you should be prompted' by any desire to allow New York to do that business, in framing the law. Mr. Willis. Nor should you leave in existence practices which would tend unduly to stimulate that business ? Mr. Wexlee. No; but on the other hand you should not do any- thing that would tend to destroy the business, either. You have to be very careful on that point. I want to say to you that it is as necessary an adjunct to the banking business as anything. In our city we have a little stock exchange, and people come to us with securities and we lend on them. Mr. Willis. I used New York as an illustration. The same is true of all other places. I am not one of those who regard New York as an essentially very wicked place. Mr. Wexlee. The reserves of banks, if you create the reserve asso- ciation, should be carried either in the vault of the bank itself or in the reserve association. I think that in any amount in excess of that tliey ought to be perfectly free to carry them anywhere they please. The banks frequently open an account with a bank in order to get reciprocal business from it or to handle its collections. There may be benefits in doing business with banks with which they would carrj these excess reserves, and I think it is an advantage to have in some one or two or three centers in the United States this excess money, and I think it is an advantage to have it come to the center where the funds can find employment and where men needing these funds can go to get them. The CiiAiEJiAN. You think, then, it would be quite sufficient in law to transfer the reserve required by law from New York, if I may say so, to the regional reserve association or bank and stop at that and not provide that national banks could not pay interest on deposits from other institutions? Mr. Wexlee. No; I certainly would not provide that they should not pay interest. The CiiAiEMAN. You woidd transfer the reserves? Mr. Wexlee. I would transfer the reserves gradually. Mr. Kindred. But you would limit the rate of interest? Mr. Wexlee. I think you should leave that free to the individual transaction. I may make an arrangement with one bank that may otfer me 2 per ceiit, which I would prefer to an arrangement with another bank that might offer me 3 per cent. There may be col- lateral benefits arising from one that you would not get from another. Then this condition might arise: Tliis central bank will only redis- count paper of a certain character. We may have a certain class of business coming to us but which would not be fit to rediscount with BANKING AND CURRENCY REFORM. 623 the central l)ank or as a basis of circulation, and I ATOuld still want this facility in New York or elsewhere. Mr. Kindred. You are speaking of excess reserves? jMr. Wexlee. I am speaking of excess reserves. Mr. Kindred. In regard to the reserves of the Xew York banks de- posited with the regional association, jou have already stated that jov would not alloAv any payment of interest on sucli reserve deposits. Mr. Wexler. No. Mr. Kindred. Eight there I would like to get Mr. Wexler's view as to this: I understand from the functions you would give to the central bank body — whatever you may call it^that it would require capital, of course : would it not ? Mr. Wexler. Oh, yes. Mr. Kindred. That is, it would require capital to control or to reg- ulate gold bullion? Mr. Wexler. Yes. Mr. Kindred. It would require capital to rediscount? Mr Wexler. Yes. Mr Kindred. How much capital, if you have thought it over, would vou give it ? Mr. Wexler. If it is going to handle these reserves it should have a proper margin of safety, of invested capital, and I should say a capital of $100,000,000 would be the proper amount, in my opinion. Mr. Kindred. It amounts, in the Aldrich scheme, to $300,000,000. ]Mr. Wexler. Yes ; that was the authorized amount. That was not proposed to be paid in at the time. Mr. Willis. $160,000,000 was the amount. Mr. Wexler. $1.50,000,000 was the amount which was supposed to be paid in. I think $100,000,000 of cash capital paid in would be adequate. Mr. Willis. If you had a number of zone banks such as you spoke of, what should be the capital? j\Ir. Wexler. To give each bank a separate capital ? Mr. Willis. If you were to do that ? Mr. Wexler. That is a matter that would have to be carefully figured out, with regard to the location of the particular bank. Mr Willis. What should be the minimum capital of each bank? Mr. Wexler. Surely not less than $10,000,000. Mr. Kindred. Would it not be somewhat dependent upon the aggregate capital of the member banks? Mr. Wexler. Of that vicinity? Mr. Kindred. Of the member banks of that regional reserve aaso- ciation ? Mr. Wexler. That would have a bearing upon it. . , , ,, Mr. Kindred. It would have a bearing as an indicator ot the bulk of business required to be done ? Mr. Wexler. Yes ; but it would be better The Chairjian. It would have to be a minimum set m the case ot each organization. , , , , n i + Mr. Wexler. Yes; but I should not say that a bank called upon to perform those functions should have less than $10,000,000 capital. But it seems to me it would be very much better that the entire one hundred million, if that was the figure fixed upon, should be applicable to all than it would be if it was subdivided. 624 BANKIKG AND CXJEKENCY BBFOEM. The CHAIE3IAN. Mr. Wexler, there is something I intended to ask you after you had finished your direct statement, but we have broken in so much upon you that I am afraid we will have to wade through a lot of matter to find out just what your statement is. You understand that the Democratic platform declared against the central bank, or the so-called -Aldrich scheme? Mr. Wexler. Yes; I do. The Chairman. You understand also that the platform of the Progressive Party did the same thing? Mr. Wexler. Yes. The Chairman. What particular feature of the Aldrich scheme do you imagine those platforms intended to condemn? Mr. Wexler. It has occurred to me that perhaps the one feature that they condemned more than any other, is the fact that the stock of that, bank should be owned exclusively by banks. I have thought that you could make this measure popular without doing the institu- tion any harm if a certain percentage of the stock of the bank was permitted to be subscribed to by the public at large — by the people. You would then eliminate The Chairman. Could not the public very easily subscribe to the stock of a central bank? Mr. W^exlek. Yes; that is what I say. The Chair5ian. And yet those platforms condemned the proposi- tion of a central bank. Do you not imagine that they meant to con- demn the centralizing feature of the Aldrich plan — ^that is the ex- traordinary power with Avhich that central reserve association was vested ? Mr. Wexler. I do not believe that the great bulk of either the Democratic Party or the Progressive Party really meant to condemn a central bank. The Chairman. You do not? Mr. Wexlek. No ; I do not. I think that emanated from the minds of a very few, who thought that it would be popular with the public at large. I live in a thoroughly Democratic section, I myself have been a Democrat all my life, and I know that there is no sentiment against a central bank in our community. There is not any in any section of the country where I have discussed it. It has been more politics than it has been any real sentiment against it ; and I believe that the people have become educated to the idea that our system is antiquated, that we can pattern after the systems in vogue in other countries of the world that have been a success, and I believe they will be entirely pleased with a central bank provided the management of it is properly safeguarded against undue influence. The Chairman. What is your conception of the obligation of a public man to stand for the apparently serious and deliberate declara- tions of his party platform? Mr. Wexler. My idea is that if his party is wrong and he is right, and he is absolutely convinced that he is right, and a plank has been injected into that j^latform which should not have been injected in there • The Chairman. You are making suppositions. Mr. Wexler. Then, let us put it the way you put it. The Chairman. Yes. Mr. Wexler. That his view is contrary to that of his platform. BANKING AND CUKEBNCY REFORM. 625 The Chairman. Yes. Mr. Wexler. And he is convinced of it. I say that his patriotism should call upon him to do that ^vhich he thinks is right rather than that which the party has set out in its platform as being right. The Chair jiAN. Do you not think that common honesty should impel him to resign his representative position if he is not prepared to discharge the pledge of the party which elected him? Mr. Wexij:r. No ; I do not think so at all. The Chairman. You do not ? Mr. Wexlee. Xo ; I do not ; not by any means. The Chairman. You think, then, that he ought to permit himself to be elected on a platform declaration, and then repudiate the decla- ration ? Mr. Wexler. My dear sir, how many voters do you Imow who have gone to the polls and put their votes into the box with the idea " I am voting because of every plank in the platform being in accord- ance with my ideas " ? You know that is not the case. "We hear about platforms; but, as a matter of fact, we do not stand on them when we go to the polls to vote. The Chairman. Is not that one reason why business men generally are so disposed to decry and sneer at politicians, because they too often fail to keep their pledges ? Mr. Wexler. I do not think so. I think that they are more apt to criticize them for putting into their platforms those things that they know can not be worked out in practice. There is where the criticism comes. The Chairman. And so you think a public man ought to permit himself to be elected upon a party declaration, and then repudiate it? Mr. Wexler. I think that a public man who has thrust upon him a platform which is contrary to his views has this duty ; I think it is his duty to his people and his country to correct a mistake before it is too late. The Chairman. Should he not be man enough to repudiate the platform before the election rather than wait until after the election ? Mr. Wexler. That is what he should do; but such a man is an individual that you do not find in these days. The Chairman. You believe in ideal banking,' but not in ideal politics ? Mr. Wexler. I think ideal politics would be a fine thing, but I have never seen it. Mr. Kindred. You hope for it? Mr. Wexler. I hope for it, but I have never seen it. Xow, you go out and are elected upon a platform that embraces 10 or 15 different planks. Is it expected that every man that is run- ning upon the ticket is in favor of every plank that is m the plat- form 2 That is the general policy of the party you go on. The Chairman. Let me ask you this: Suppose the next Demo- cratic Congress should pass and the next Democratic President should app?ove the Payne-Aldrich tariff bill as a suitable measure of tariff reform, what would you think of it? Mr. Wexler. In its entirety? I should think it would be wrong for them to do it, entirely. , „ n j The Chairman. Why? Because the party platform denounced the Pavne-Aldrich tariff bill? 626 BANKING AND CUEEENCY BEFOEM. Mr. Wexlee. But that would not indicate, to my mind, that there is not anything in the Payne-Aldrich tariff bill that this party should not be in favor of, or that it implied that all articles should be free of tariff. The Chairman. Oh, that is not the suggestion here at all. Mr. Wexler. The bill as a whole? I would not say you had a right to pass it ? Ti>e Chairman. Very well ; the Democratic Party just as delib- erately declared against a central bank as against a high tariff. Mr. Wexler. This is not a central bank. The Chairman. But the party also declared against the so-called Aldrich scheme. Mr. Wexler. You are not going to take the Aldrich scheme The Chairman. Now, why should we not be bound by the party declaration against the central bank just as much as by the declara- tion against the Payne-Aldrich tariff bill? Mr. Wexler. If you found you were wrong The Chairman. I do not want you to assume that members of the committee do find that they are wrong in opposing the Aldrich scheme. Ml'. Wexler. No. The Chairman. But I contend that if they find they are wrong, and are not willing any longer to stand for the platform on which they were elected, they ought to resign their places in Congress and let somebody else be elected. Mr. Wexler. I know the position that the committee is in exactly. I claim that you can frame a bill that will answer all purposes, which will not be the Aldrich bill. The Chairman. That is what we want to do. Mr. Wexler. Exactly. I claim you can frame a bill providing for a bank that will not be a central bank, but will be a central agency for banks. The Chairjfan. Well, that is what we want to do. Mr. Wexler. You can do that, and accomplish all the purposes that we require without in any manner stultifying the party or any individual member of it. The Chairman. That is what I intend to do, or quit. Mr. Wexler. Yes ; that is right. I will not come out and say that we are pledged against the Aldrich bill or any form of central bank, and ^ve will be stultifying ourselves if we do not vote against it and let the country go to the bow-wows in consequence of it. I am not in favor of that. The Chairman. I am glad to hear you say that. Attention need not be given to every hastily written detail of a platform, but only to its deliberate and well-considered utterances. I understand how platforms are made, and also how certain measures are indorsed. For instance, we had a national banker, Mr. Andrew J. Frame, before us the other day. He is a member of the executive council of the Americah Bankers' Association. He made the distinct dec- laration that not one banker in one hundred of the American Bank- ers' Association had read the Aldrich bill before the American Bankers' Association indorsed it; and so platforms are sometimes made and indorsements obtained with the same sort of indifferent understanding of a problem. BANKING AND CUBBENCY EEFOEM. 627 Mr.'WEXLER. There is no doubt of it. The Chairman. We ha^-e interrupted you too much in your state- ment, and I think that we had better let you go on. Mr. Kindred. Do you not think, Mr. Wexler, that the Democratic Party repudiated, and justly so, the highly centralized national re- serve association of the Aldrich plan? Mr. Wexler. Yes. Mr. Kindred. In certain particulars, namely and especially in that particular of that plan in which that plan gave to the large banks the control really of reserves; that is correct, is it not? According to the fundamental Aldrich scheme it gave to the larger banks the control rather than to the banks at large ? Mr. Wexler. It left the reserves where they are to-day, namely, in the three central reserve cities. New York, Chicago, and St. Louis; and there the larger banks, of course, are located. Mr. Kindred. That is tantamount to what I have said? Mr. Wexler. Yes. Mr. Kindred. This is simply to get your view. It also gave the Federal Government grave responsibilities without giving it any voting power to speak of, or any control, as to the voting power? Mr. Wexler. Yes: it did that. Mr. Kindred. In your opinion did not the Democratic Party act wisely in repudiating at least those features ? Mr. Wexler. Yes; I agree with you in that. I think that if the Government is going to do business with these banks it should have some voice in the matter. Mr. Kindred. Now, coming right to what we have said, as to another phase of this matter, do you believe that the Federal Gov- ernment should have some voting power or a control of voting power in the central board, or whatever you wish to call it, that you have designated ? Mr. Wexler. That the Government should have some voice in the management of it, you mean ? Mr. Kindred. Yes. Mr. Wexler. That depends upon how much of the Government business you are going to put into it. Mr. Kindred. How much of the Government business would you have in it ? Mr. Wexler. I think that the Government should do its business through this bank and make it the fiscal agent. Mr. Kindred. Make it the fiscal agent ? How much further would the Government be engaged in it ? ... Mr. Wexler. I think the Government should carry its working accounts in there. . Mr. EaNDRED. That it should deposit its Federal accounts in the bank? Mr. Wexlee. Yes. Mr. Kindred. That is, its Treasury balances? Mr. Wexler. Its Treasury balances should be deposited m there. Mr. Kindred. That would make it a pretty big participant. Mr. Wexlee. Yes. ^. • x- i. u Mr Kindred. Then, in payment for such participation how would (he Government participate in the voting in such a central body? 76112— PT 11—13 3 628 BANKING AND CUEEfiNCY EEEOEM. Mr. Wexlee. I think the Government should have a certain" repre- sentation on the board of directors. Mr. KiNDEBD. What proportion would you say ? Mr. Wexlee. Do you propose to have the Government take any stock in it ? Mr. KiNDEBD. No; I would not personally have the Government hampered in that way. I want to get your views rather than niine. Mr. Wexlee. Of course if the Government had no financial in- terest in it Mr. KiNDEED. And deposited its balances? Mr. Wexlee. And deposited its balances with it; I should think it would be in line to have the Secretary of the Treasmry and the Treasurer of the United States and the Comptroller of the Cur- rency and perhaps the Director of the Mint as a part of the adminis- trative force of the bank. Mr. Kindred. Should^here be any other officials whose exclusive and sole duty it might be to assist in administering the interests of the Government? Mr. Wexlee. No ; I think that would be sufficient. Mr. KiNDEED. Are not these officials already burdened with pretty heavy duties? Mr. Wexlee. They would be relieved of some of them if you had this bank. Mr. Kindred. But in their supervisory capacity they would not be relieved. Mr. Wexlee. Well, no. Mr. KiNDEED. In their examinations they would not be relieved ? Mr. Wexlee. They might be if they desired. The Government might have a comptroller in the bank, if it liked. Mr. KiNDEBD. Some one representing the Government ? Mr. Wexler. Some one who would be active, like the comptroller^ like the Canadian banks all have; an officer who is next to the president. Mr. Kindred. Who might more exclusively look after the board of control. Mr. Wexlee. And the supervision of the bank at all times. I do not think there would be any objection at all on that point. If this thing is run properly, no one is going to mind how much the Gov- ernment is represented. Mr. KiNDEED. That would be a detail ? Mr. Wexlee. That would be a detail. Mr. KiNDEED. Of course the officials by whom the Government was represented woidd be a detail ; but the principle as to how much the Government share should be in the voting power would be fundamental. Mr. Wexlee. Yes; I think that is fundamental, and the Govern- ment should be represented. Mr. Kindred. Just one more question, and that is as to your views on the matter of the guaranty of deposits. Mr. Wexlee. I am opposed to the guaranty of deposits, first, last, and always. I think a guaranty of deposits puts a premium upon bad banking and a discount upon good banking. I do not think that a man who conducts his bank properly, conservatively, and builds up a large surplus instead of paying out all his earnings to BANKING AND CUREBNCY -EEPOEM. 629 his stockholders, shoiild be called upon to guarantee the deposits of •a bank whose policy is to the contrary. I think that is fundamen- tally unsound. The banking business is a profession which every one ought not to go into, but unfortunately there are many men who go into the banking business who do not conduct it properly, and there is no reason why a man who does conduct it properly should guarantee the other man. You may have here a man who is a good hand shaker and who entertains lavishly and who gets a good deal of business in that way, while I may be careful and straight, and conduct my business carefullj' and conservatively ; but this man may be drawing my customers away from me by reason of his methods. It is neither fair nor sound that I should guarantee his depositors. Mr. Taylor. What objection, if any, do you find to developing what we have had for many years known as the independent treas- ury system of our Government into this controlling power over note issue and regulation of the circulation and of the currency. Mr. Wexler. My objection to that is this: That we change parties frequently and with parties we change policies, and the moment you do that you are bound to inject into this bank a political element which would be fatal to its success. I think the Government should have a voice, but should certainly not have the control of this bank. Mr. Tatloe. Now, you do not catch me. If the independent treas- ury was developed and given the additional powers you speak of, which it never has been given, it would not be necessary to have any bank? Mr. Wexlee. But, in a sense, the Government would perform the functions of the bank, and it would be controlled politically. Every four years you would have a new Secretary of the Treasury and a new Treasurer, and you would never know what the policy of that new official would be. Mr. Taylor. It is not necessary that it should perform the func- tions of a bank. It is not necessary that the Government should go into the banking business in the independent treasury as developed along the lines which I thought may be your attention had been directed to. , i , • Mr. Wexler. That might perhaps, if it was worked out scien- tifically, solve the circulation problem, but I do not see how it could solve the question of discount. I do not see how the independent treasury could ever furnish the means of rediscounts which banks do not enjoy to-day. I do not see how it could operate successfully m cantroUing the foreign exchanges or bringing the gold over from the other side. , , . Mr. Taylor. That is purely a banking proposition. Mr. Wexler. It is a banking proposition, and could be handled by the banks if they were not hampered. • , , • u • f Then you would find very soon that the entire banking business ot the country would be controlled by a half a dozen large banks which would be big enough to afford these facilities, and the independence that we are looking for coming from anj. particular center we woidcl never get. I think that what we want is some institution in which we can all participate and in which every man, no matter from what State he comes, will stand as an equal when he comes to the counters of that bank and will receive identically the same treatment, that that bank- will perform the same duties and functions which we are 630 BANKING AND CUBEBNCY EBFORM. as individuals too weak to do for ourselves ; and if you do not fur- nish us with an institution of that kind or a proper substitute for it you will have three or four combinations of four or five large banks in large cities to do it. They may do it, and do it fairly and honestly, and conduct it properly and for the benefit of everybody, or they may not, depending upon who is in charge of it. Mr. Tayloe. If I understood you— and if I did I agree with you— the real objection to the Aldrich system was that it strengthened the banks and produced the very situation that you say now would be produced by combinations among banks, and that the Aldrich plan really strengthened the banks and the banking system for the benefit of the banks, and left out the public benefit that all of us want to see Mr. Wexlee. No ; I do not say that, Mr. Taylor. Mr. Tati^or. And that you want to see ? Mr. Wexlee. I say that a bank, whether you call it the Aldrich plan or any other — because Senator Aldrich did not conceive this plan ; the fundamentals of sound currency existed long before Sen-, ator Aldrich was ever thought of. Mr. Tayloe. Hundreds of years ago? Mr. Wexlee. Yes. He has simply put it down in a pamphlet and designated it by his name, with a lot of details, many of which can be improved upon and many of which are very good. I con- tend that people at large will benefit by the establishment of such an institution, because there will be no further scarcity of currency dur- ing the crop-moving period and because there should be no scarcity of credit when it is properly required and can be properly safe- guarded. Of course, there may come a time, even with the estab- lishment of a bank of this kind, when we may expand too fast — too greatly — where the credit can not be extended by a bank of that kind and should not be extended by it. There will come times when a halt should be called. But a bank of this kind will benefit every man, woman, and child in the United States. It will only benefit the banker in giving him a greater sense of security. He will sleep better. He will feel that he can not have the props knocked out from under him over night. He may make more money or he may make less money if you establish a bank of this kind ; his profits may in- crease or may diminish, but he will get a feeling of safety that he is not getting to-day. If his bank is loaned up to-day and he has a demand for still more money from perfectly legitimate sources, he has nowhere to go to get it. He can not take a good 90-day note or 60-day note and go any- where and rediscount it. The Chairman. Do you agree with Mr. Hepburn and Mr. Key- nolds and several other gentlemen who have appeared here that it is perfectly feasible to organize regional reserve banks with a central board of strict control, without any capital for the central board ? Mr. Wexlee. I can see no reason why that could not be done. I think it is perfectly feasible. The Chairman. That would not be contrary to the declarations of any party platform ? Mr. Wexlek. No. That could be done, and I can see no I'eason now why that is not perfectly feasible. BANKING AN^D CUEEBNCY EEFOEM. 631 The Chairman. May I ask you a question, which you need not answer i± you do not care to do so? Would you or not think it would be preferable to do that, and thus comply with the Demo- cratic I'arty platform than to adopt something that the party plat- form condemns? f j f Mr. Wexlee. I think it would be preferable to do that and comply with the party platform. I say that for the reason that you can accomplish a double purpose. You can remedy a great many of our evils and live up to the party platform; and if, in the evolution of thmgs, it were deemed advisable at some time in the future to con- vert the capital of all the regional banks into a central bank and let them emanate from it instead of the capital in all the regional banks being merely accountable as to management and reporting to the central reserve without any capital, I think that reversion could take place at some time m the future without any disastrous results at all. The Chairman. And maybe without contravening any party plat- Mr. Wexler. And without contravening any party platform. Mr. Tatloe May I say this to you : That was in my mind when I asked you if there was not some way in which the subtreasury system could be developed into being the controlling power? Mr. Wexlee. I see. Mr. Taylor. And then they would not need any banking capital. Mr. Wexlee. But, as I understand Mr. Glass, these particular regional banks would have capital? Mr. Tatloe. Oh, yes. The Chairman. Yes. Mr. Wexlee. They would have to have. Mr. Tatloe. They would be obliged to have. Mr. Wexlee. The central body to which you refer would simply be, as I understand it, the controlling body of these others, without any capital. The Chairman. And would have certain broad powers? Mr. Wexlee. And would have certain powers of supervision. The Chairman. Yes. Mr. Wexlee. And of direction. The Chaieman. With reference to the discount rate. Mr. Tatloe. And note issues and circulation. Mr. Wexlee. I see. Mr. Willis. There is one point, Mr. Wexler, that has not been brought out in any of the discussions here and which I would like to raise right now. Do you think it is desirable to limit the amount of rediscounts that any given bank can make by reference to its capital ? If so, what limitation should be placed on it ? Mr. Wexlee. I think the present limitation under the national- bank act, which is that no bank shall borrow any more money than its capital—! — Mr. Willis. You would not let any bank get any more rediscounts from a central reserve or regional bank than a sum equal to its capi- tal stock? Mr. Wexlee. I should start out that way. I believe in the evolu- tion of this business that limitation would probably be dropped and g32 BANKING AND CTJEEENCY EEFOBM. it would be left to the discretion of the bank itself in time, which it should be. -, • x, . Mr. Willis. Should not its surplus be considered m that connec- tion, too? Mr. Wexler. It is not under the present national-bank act. Mr. Kindred. Do you think it should be? Mr. Wexler. The only trouble about it is this : It is a hard ques- tion to answer — — Mr. Kindred. Let me explain to you what I mean. It may enable you to answer the question more specifically. Mr. Wexler. I think I know what you mean. Mr. Kindred. Just a minute. I may be able to give you a sugges- tion which you can adopt in your answer. Take the Corn Exchange Bank, in New York, with a surplus larger than its capital, and such banks as that. The surplus must be a factor with regard to its loan- ing power? Mr. Wexler. There is one reason why it would be desirable to have the surplus a factor. It would tend to cause the building \\p of a greater surplus on the part of the bank, because it would be diesir- able for them to be able to borrow more money, to rediscount more. I know that in certain parts of the country banks botrow two or three times their capital. Eight now, in the cotton sections and portions of Mississippi, where this enormous business in cotton is dolle, they borrow three or four times the amount of their capital. They have cotton for every dollar of it, which is perfectly legitimate, and good, and necessary. The ideal condition would be to place no IMic upon it; to leave it in the discretion of the association. The only question is whether that would be popular among the people who are to vote upon this bill. Mr. Taylor. And whether it would be safe to start with that? Mr. Wexler. Yes. Mr. Willis. It would not be popular among the bankers ? Mr. Wexler. No. I believe it should be left to the individual bankers, however. Mr. Willis. It would not be popular among the bankers to leave it unlimited? Mr. Wexler. I think it would not be with Mr. Frame, but it Would be with a great many bankers broader than Mr. Frame. I have the highest regard for Mr. Frame, and the greatest esteem for him, but he is in a community where people do not borrow money, in a very rich community, and does not appreciate the needs of many sections of the country. Mr. Willis. Take the case of the small active banket, with a capital of $50,000. It is quite conceivstble that he, being an active man and an efficient man, may get a gfeat deal of good business, and if there is no limit he may bring a great deal of that business' to the banks of rediscount for rediscounting. When you limit hiffi to an amount equal to his capital you limit his efficiency as compared to that of the banker with a larger capital and per'haps sma;fleT pro rata business? Mr. Wexler. Yes. Mr. WiLtis. The tendency would be, then, on the part of the larger banker, to desire this limitation ? BANKING AND CUEEENCY EEFOEM. 633 Mr. Wexler. I think tlie tendency would be with the larger banker to desire it. Mr. Willis. Yes. Mr. Wexler. But I really do not believe that there should be a limitation. However, from motives of policy in the beginning and in order to popularize this measure, it may be necessary to put that limitation upon it, which is the present limitation of the Na- tional bank act; but it is frequently exceeded. We have exceeded it ourselves. Mr. Willis. Just one final question about the acceptances. You remember the provision of the Aldrich bill with reference to ac- ceptances ? Mr. Wexler. Yes. Mr. Willis. Do you indorse that or not ? Mr. Wexler. Permitting banks to accept? Mr. Willis. Yes. Mr. Wexlee. I will tell you why that is necessary. All of the business of Central America and South America and foreign coun- tries is done to-day upon acceptances; and we are excluded from doing that business. Mr. Willis. If you confine it to foreign trade operations and those growing out of the importation and exportation of goods and travelers' letters of credit, would that be satisfactory to you? Mr. Wexler. It would not be the forward step that was contem- plated Tinder the Aldrich bill, but in Europe the business is done upon acceptances. Mr. Willis. You see no danger in giving them that ? Mr. Wexler. I can see no danger in giving them that ; but it would count as a part of their liability. If they put their name on a bill they owe the money just the same as if they had signed a note. Mr. Willis. It is a contingent liability ? Mr. Wexler. Yes ; it is a contingent liability. It is their obliga- tion that the other man does not pay. Mr. Willis. Should they keep a reserve against that? Mr. Wexler. I do not think they should keep a reserve against that. In connection with, for instance, the importation of coffee, all that business goes to Europe to-day and we stand behind it, but get not revenue from it. We open credits with the London banks for millions of dollars for the importation of coffee and guarantee these credits, and they get the commission. I think we should be per- mitted to do that business. It would be desirable to build up in this country an acceptance business as it is done in Europe. It would give two and three name paper, which we have not got to-daj^. The Chairman. Ought it not to be done cautiously, to begin with? Mr. Wexlee. Very. . , u j t^ Mr. Willis. I wish to ask you a question about the bonds: Uo you think the 3 per cent bonds would remain at par if the whole volume of 2 per cent bonds were immediately converted into threes in this country? Mr. Wexlee. I do not think so. . Mr. WiLUS. About what would be the absorptive power ot the country ? Mr. Wexler. About $50,000,000 a year. Mr. Willis. Not to exceed that? 634 BANKING AND CUEEENCY EEFOEM. Mr. Wjjxleh. No. If more than that were attempted to be put out it would be difficult to hold them at par. Mr. Willis. What would be the shrinkage in their value below par if seventy-five or one hundred millions were put out? Mr. Wexlee. I should think they might go to 3| per cent under present conditions and, under stringent conditions, to a 4 per cent basis. Mr. Willis. But a plan which would provide for the conversion of fifty millions to sixty millions a year on the 3 per cent basis would be equitable to existing banks? Mr. Wexler. I think so. Mr. Willis. And to the holders of the bonds ? Mr. Wexlee. I think so. I think the country would take that without any difficulty at all. Mr. Willis. On a 3 per cent basis? Mr. Wexlee. Yes. Mr. KiNDEED. Several questions asked lately have suggested one to me about which I should like to get your opinion. You spoke of reserves, and the fact that according to the Canadian system the. note issue was not allowed to be counted as a basis for reserves. What, in your opinion, should our reserves consist of? Mr. Wexlee. I think our reserves should consist of our gold cer- tificates, and I think that we ought to redeem our greenbacks, or put enough gold behind them to make them the equivalent of our gold certificates, and then, if you do that, let them count. Mr. KiNDEED. If you put gold behind them ? Mr. Wexlee. Yes. Mr. KiNDEED. And only in that case ? Mr. Wexlee. Only in that case. I think we ought to put about 20 or 25 per cent of gold behind our silver notes, because you have a direct mandate to the Secretary of the Treasury that the parity be- tween gold and silver shall be maintained. In order to do that you should be able to redeem silver notes in gold or in silver. I think that with the reserve of 20 or 25 per cent Mr. KiNDEED (interposing). Can you not do that now? Mr. Wexlee. No.. They are now merely warehouse receipts for £0 much silver. If you want and demanded gold and you were re- fused it, say in a period of stress, your silver notes would go to a dis- count, because the basic value is not there. I think we should re- enforce our silver with 20 or 25 per cent of gold. Mr. KiNDEED. Behind the silver issue? Mr. Wexlee. Yes. _ Mr. McCeeaet. Is it not a fact that while you could not on your silver certificates get gold, you could on your silver certificates get silver, and under the present law, with that silver you could demand gold for it? Mr. Kindred. On a certain ratio. Mr. McCeeaet. No ; on parity. Mr. Wexlee. You could do that, but you can readily understand that if it were done to a great extent we could not do it. We would not have the means. Mr. McCeeaet. That is the very question. Mr. Wexlee. For that reason l' want to reenforce the silver issue so that we can do it. BAXKING AND CUEKENCY EEFOKM. 635 practicait^?^^" ^°" *^^" ^° ^* theoretically, but you can not do it Mr. Wexusb. Yes. MoCeeart. You can do it legally, but not actually? Mr. Wexlee. Yes. Mr. Kindred. Does that finish your idea as to what our reserves should consist of ? _ Mr. Wexler. As the matter stands, I do not think we have any single item of genuine reserve money except our gold certificates. Mr. Kindred. On a gold basis? Mr. Wexlee. That is the only real reserve money we have to-day. One hundred and fifty million dollars of our Treasury notes are good reserve money, because we have $150,000,000 of gold behind them. Mr. Kindeed. On a gold basis absolutely? Mr. Wexlee. Yes. Mr. Kindred. As to the proper basis of note issue, what would you suggest ? Mr. Wexlee. You mean the amount of gold reserve ? Mr. Kindeed. Anything behind it. Mr. Wexlee. I think we should provide a gold reserve against the note issue of not less than, say, 35 per cent. Mr. Kjndbed. N"ot less than 35 per cent? Mr. Wexlee. It is probable we will never get down as low as that ; but I think that should be the minimum of gold that should be against our notes. The Chaieman. You favor the retirement of the present bond secured notes? Mr. Wexlee. Absolutely; yes. Mr. Kindred. That is, as an exclusive basis of issue? Mr. Wexlee. Yes. Mr. Kindeed. What else, besides that 35 per cent of gold ? Mr. Wexlee. As long as you have these Government bonds you have to be able to use them "in some way. You would have to pro- vide some plan and issue notes against them by these various asso- ciations. Mr. Kindeed. What per cent would you suggest should be in that ? Mr. Wexlee. That brings on the question of how many of these bonds you are going to take up. If you take them all up from the national banks and have seven hundred million of them on hand Mr. Kindeed. Just suppose that. Mr. Wexlee. Suppose you do that? Mr. EJNDEED. Yes. . .„ Mr. Wexlee. I think you would have a pretty po9r mstitution, it you loaded it with 2 per cent bonds. Mr. WiMJS. The Aldrich plan proposed that' Mr Wexlee. Yes; but we enunciated m this Aldrich plan that we were opposed to the bank taking over all these 2 per cent bonds, unless there was some provision for their retirement on the part ot the, Government or their conversion into threes. , ^ .u Mr wSlis. But they could be converted into threes only at the rate of $50,000,000 a year? Mr. Wexlee- Yes. 636 BANKING AND CUEBENCY HBFOKM. Mr. Willis. For several years — for 10 years — they would have been loaded up in that way with a large volume of bonds ? Mr. Wexlee. Yes. Mr. Kindred. Assuming— — Mr. Wexler (interposing). Assuming that all of them were taken over ? Mr. Kindred. Yes. Mr. Wexlee. I would dislike to see more than 25 per cent of the circulation based upon them. Mr. Kindred. What else? Mr. Wexler. The balance upon paper. Mr. Kindred. Upon picked commercial paper? Mr. Wexler. Upon commercial paper maturing not beyond 60 days. Mr. Kindred. Carefully selected? Mr. Wilms. Suppose you left existing circulation outstanding, with a provision for annual retirement of something like the amount you have mentioned? Mr. Wexler. Yes. Mr. Willis. And then you gave to any zone banks you might organize the power of issuing over and above that? Mr. Wexler. Yes, Mr. Willis. What would you say to that plan ? Mr. Wexler. I have thought of that plan. The banks to-day hold an average of about 55 per cent all over the United Sta,tes. Mr. Willis. Of bonds? Mr. Wexler. Of bond-secured circulation related to capital. We provided in our original plan of the American Bankers' Association that banks holding 62^ per cent might issue 37-J per cent in asset currency or credit currency, of which a portion was to be without tax and the remainder with tax. That is perfectly sound. I see no objection to doing that. I think if a bank was required to have 50 per cent of bond-secured circulation, it might issue the other 50 per cent against paper maturing not beyond a certain length of time. The Chairman. But you further provided that whenever any of that bond-secured currency is retired it shall not be reissued ? Mr. Wexler. Absolutely; and then, in the redemption of these notes, in the taking up of the bonds, take them up ratably from every bank — not call for bids or anything of that kind. So thab the whole statement comes down to this: When 10 per cent of that bond-secured circulation has been eliminated, permit 10 per cent more of the credit currency to be issued. Mr. Willis. Do I understand that in that event you would ^ve the power of issuing this new currency to banks themselves or that you would give it to the reserve association or zone banks, as the case might be? Mr. Wexler. You understand my preference always is for a strictly centralized institution. I believe that is ideal. Mr. Willis. You would, then, give the central institution or insti- tutions the power of issuing this new currency, and confine the bond- issue currency to the banks that now have it ? Mr. Wexler. That woiild be a makeshift. Mr. Willis. A temporary makeshift? BANKING AND CUEBENCY REFORM. 637 ..iW.'i: i"^'^- Sj^t for the present, as a means of sustaining the ex- sudXT'rangf-^"'*^ '' P^^ '^^ ^^"^^<^ ^^« ---I -f too Mr. Wexler (interposing) Let me say this in connection with that. I had intended to say that I felt if you could not see your way clear m the face of the party platform to advise a central ba^k some ^ ft/l°l7- ^K-lf f^ or with the same principles as those contained in the Aldrich bill that it might be possible to have organized a bank of discount for the time being, a central bank of discount, which the (xovernment would do its business with, and which need not have the note-issiung privilege for the time being, and then let the various banks issue 50 per cent of circulation against their bond secured and the other 50 per cent against strictly commercial paper up to the equivalent of their capital, 100 per cent. For the time being that might answer our purpose just as well, because the 50 per cent of circulation would be equal to the general requirements of the country and the remaining 50 per cent would take care of the fluctuating requirements of the country. Mr. Willis. Suppose that you had a reserve association organized on the plan of the Aldrich bill ? Mr. Wexlee. Yes. Mr. Willis. Would you think it a good plan, as a temporary transition measure, to leave the present banks authorized to go on issuing their bond-secured currency up to the present maximum, while an additional kind of currency, secured by quick commercial paper, was issued by the reserve association? Mr. Wexlee. No, sir. Mr. Willis. You would not think so? Mr. Wexlee. I would not think so. Mr. Willis. Not even as a temporary means of change? Mr. "Wexlee. I can not see any disaster that could arise fi'om it, but it would not be an ideal condition to have national-bank notes and the central-bank notes. It would create a confusion of issues. I think it would be very much more desirable to have the amount taken away from the retired thirty or forty or fifty million and let the central bank put out its circulation to a certain extent against these notes. If they were in threes, make them pay the additional 1 per cent tax to the Government, so that the Government would not lose any inteiest. In other words, if we could convert this whole issue of twos into threes and then have, say, 25 per cent in the circu- lation issued against the bonds, it might be possible that the country or foreign countries might take a much larger percentage than 30.000.000, if we had it on hand. Mr. Willis. Issued simultaneously by the central reserve associa- tion and by the banks? Mr. Wexlee. No; the banks would be eliminated then. Mr. Willis. Leaving them out? Mr. Wexler. Yes. ^Ir. Willis. You see no injurious results arising from leaving the present bond-secured currency outstanding with annual reductions and placing in the hands of .some other institution or institutions the power of putting out note issues secured by fommercial paper? 638 BANKING AND CXJEEENCY KEFOEM. Mr. Wbxler. I can see no disaster that would arise from it; but, as I say, it would not be an ideal condition, by any means. If you did that, you should provide ample redemption facilities for these national-bank notes, so that when they appeared at a bank's window they would not be constantly reissued ; and then there should be some prohibition against their being counted as reserves by State banks and trust companies. Otherwise they would stay out indefinitely. Mr. WiijjIS. I am not putting this forward as an ideal plan, but T am trying to get your judgment of the conditions. Imagine that you did leave them out, and suppose, for the sake of the, .argument, that the bank did not retire them by converting the twos into threes, even as far as they were allowed to. Imagine, for the sake of the argu- ment, that the whole volume of the national-bank currency remained out for two or- three years, while it was possible, through some new mechanism, to issue, on top of that an elastic currency growing out of short-time commercial paper, would not that measurably relieve the difficulties described by you, and furnish the kind of money you have indicated ? Mr. Wexlee. Yes; it would. Mr. Tatloe. But you would regard that as a sort of patchwork ? Mr. Wexler. It would be patchwork of the worst kind. Mr. Taylok. It would be patchwork, and a makeshift ? Mr. Wexler. And a makeshift. I think a better solution can be found than to do that. Mr. ICiNDRED. How would you carry into effect the quick redeem- abilitj^ or quick retiring of the note issue so that, as you have stated it, a note should come back to the bank that issued it within five or six days ? Ml'. Wexler. By not counting it as reserve. Mr. Kindred. Will that do it, alone ? Mr. Wexler. Absolutely. That will do it immediately. If I have a note that I can not count as reserve, it is nothing more to me than a piece of paper, and I would immediately send it in for redemp- tion and get gold for it, which would count as reserve. Mr. Kindred. Under all the circumstances, and as a banker of ex- perience, you believe that? Mr. Wexler. Yes. The Chairman. You can not count bank notes as reserve now? Mr. Wexler. No ; and we do not keep them a minute. The Chairman. Yes; but a great many banks do. .What is the average time of redemption of a bank note? Mr. Wexler. Of these national-bank notes, I think they are out over 100 days. Mr. Willis. And sometimes over two years, are they not ? Mr. Wexler. Yes. In that case, however, they have come back and gone out again. Mr. Willis. Just one word more. I do not like to insist too much on this, but I simply want to get the matter clear: You say this plan I have suggested hypothetically would be patchwork. If you pro- vided for a gradual transition from that bond-secured currency to a pure elastic currency over a period of, say, 10 or 15 years, through the retirement of $50,000,000 bank notes annually, and the con- >-ersion of twos to threes— I think you said that amount could be absorbed by the country? BANKING AND CUEEENCY KEPOEM. 639 Mr. Wexleu. Yes. Mr. Willis (continuing). Would not that be a tolerably satis- tactory solution, if you should achieve that end in, say, ]() oi' 1.") years i " ; . ' Mr. Wexlke. If we could achieve that through permitting the in- dividual banks to do it, we could achieve the same result by letting the re^onal or central bank do it, and thereby would not cTeate the confusion of having 7,000 national banks issuing notes and the reg- ional banks doing it as well. In other words, it is going to be nece"=- sary to do the thing you suggest to be done, because you have no other means to get rid of these 2 per cent bonds in the interim; but it will be much better to have it done by the central bank or the regional banks than by these 7,000 national banks. That is tlie point. And you will accomplish the same purpose. You have to do something like that. The Chairman. You have that same patchwork scheme in the Aldrich plan? Mr. Wexlee. Absolutely. There was no way of getting around it. It just simmers down to this one thing: If we are going to have a central institution, or regional banks, let us give them the note-issu- ing power. If we are going to give it to them at all, let us give them the whole note-issuing power. If we are not going to give them the whole note-issuing power, let us leave the note-issuing power where it stands to-day, with certain corrections, and let us organize a great big bank of discount that will perform all the other functions we intend for this bank. Mr. Willis. Without any note issue? Mr. W^exlee. Yes ; one of the two. I believe if you can not work out some scheme by which the regional bank or central bank can perform all of these functions that the thing can be worked out if "we would organize a big $100,000,000 bank of discount, with inter- national facilities, and the various banks to issue 50 per cent of bond- secured and the remainder of credit currency. I think in tAvo or three years we would find relief from that, but it would not be as good as if we adopt the regional or central bank. The Chairman. But you do think it is feasible to devise a scheme which will give to the regional bank the exclusive right of issue for new currency, gradually superceding the issue by individual banks ? Mr Wexlee. Yes, sir ; I do. I think that is perfectly feasible. I think it will ultimately lead to the regional bank becoming a con- solidation into one bank. Of course, we are not discussing that now. The Chairman. That might ensue should the dominating party in the country proclaim it through its platform ? „ . , ^ , „, . Mr Wexme. Yes. Would it be, as a matter of f ac^ Mr. Chair- mnn \ violation of party principles if there were a certain number "f ?;£ona bi eLbi^sLd-we will say 20--and the capital o these Tegional banks was furnished by a central organization? The function of the central organization would be simply supervisory, but instead of the capital being paid into each bank ni each locality it wS be paid into the advisory one, which would give it an excuse It wf "^^l f^ P;. ion „,hich it proposes to exercise. for he si^per^n «^_ ^ ^P.^^ .^ ^^^^^ ^^ ^^^ ^^^^.^^^ ^^,^^,^^^ ^ littlfin disguise, and yet not the Aldrich scheme. 640 BANKING AND CtrKKENCY KEFOKM. Mr. Wexler. It would not be the Aldrich scheme, and it would give an excuse for this supervision ? The Chairman. My notion of it would be — -I can not say that it is a conclusion — but my thought is that the central board should be an institution without capital, with Government membership upon it — ^not necessarily Government control — with large powers of exami- nation and supervision and ample powers of control. I do not mean to intimate that the Democratic platform intended to condemn in toto every provision of the Monetary Commission's plan. Mr. Wexlee. No. The Chairman. But I do believe that it meant to speak against the central feature of it. Mr. Wexler. In working it out I would endeavor to work it out, if you can, so that the capital, whatever it may be— say it is $100,- 000,000 — will be contributed to this advisory body, this central body, on which the Government will have strong representation, and that it then allot from its capital to these various subdivisions, if you like, a certain amount. I would like to have those va 652 BANKING AND CTJEBENCY EEFOBM. Sir Edmund Walker. Let us take that up. You know what has happened in the United States under the note broker system; you know of the very large failures that have taken place. It is of course always possible for a man to invent a fraudulent balance sheet, and the bank will perhaps thereby lose its money; but it comes down to the question of who is most likely to know the inherent merits of the balance sheet, the note broker who has no close relation with his cus- tomer or the Canadian bank. We can take the customer's state- ment, and we can see that he claims to have a certain amount in out- standing receivables. We know the terms on which he sells, and we know the collections that he has made and the payments through the bank. We have therefore all sorts of ways of knowing whether the balance sheet is consistent with the credit he wants and the business that he does, and I would therefore merely allege that the probability of loss through a fraudulent balance sheet is infinitely less under our system than under a system where the customer produces his balance sheet to a note broker and no one bank ever sees all his conditions. Mr. Kindred. Do you have many losses in such large transactions as you have mentioned ? Sir Edmund Walker. No ; the losses are very small indeed in well administered banking; but when you have a loss it almost always means a padded, or in some sense a false, balance sheet. Mr. McCreaey. Then you have recourse against him, whenever he makes a false statement. Sir Edmund Walker. Oh, yes. Mr. McCreary. Coming back to the question of loans to customers, you say you take care of a customer. Do you do that based on his balance ? Do you give him a certain ratio in proportion to his balance, or do you take care of him in a general way ? Sir Edmund Walkee. I am sorry to say that our customers do not keep large credit balances in the same way as yours do. We are unable, because of the competition in banking in Canada, to make any covenant with a customer that he should keep a credit balance proportionate to his loans. Mr. McCeeary. That is practically buying paper ? Sir Edmund Walker. But the paper that we buy we buy from a customer who does not do business with anybody else. That is the poiat. Mr. McCreary. In New York and Philadelphia and those other cities where they have the note-broker system, the customer goes to the note broker, and he gives him, or he should give him, a full state- ment of his condition in regard to everything, and the note broker buys the paper outright and sells it again, assuming the responsibility until he has sold it ? Sir Edmund Walker. Yes. Mr. McCreary. If the paper is fraudulent, the man can be pro- ceeded against legally ? Sir Edmund Walker. Yes. Mr. McCreaey. So that it is practically the same as your system? Sir Edmund Walker. Oh, no; you have missed the vital differ- ence. The man who gives that balance sheet to us gives it to us every year, and we generally have his balance sheets so that we can compare thern for 8 or 10 years, and he pays in to us every dollar in connection with his business, and disburses every dollar in con- BANKING AND CUKEENCY REFORM. 653 nection with the business by check. That is the vital difference, we can by that means tell very much better whether the credit he r^CLuu-es IS natural. Then we require him to pay up every year. Ail ol our loans to a manufacturer are supposed to be paid up once a Mr. McCreary. That is, they clean up once a year? Sir Edmund Walker. Yes. The bank sees the entire operation of the account of the customer. No one bank here can do that It can have the books examined by expert accountants, and all that, but we all know of failures which have been disastrous in spite of those exammations. I was in Wall Street in 1873. Of course they are lessenmg m proportion to the volume of business, but they are occurring all the tmie. I say we minimize these failures to a great degree, because the naturalness of the balance sheet is apparent to ns. If a man says, "Yiy terms are so and so and my prices are so and so," a clever clerk can take that man's statement and his account and see whether it is jn-obably true or not, because his bank account ought to help to show whether it is correct or not. That point we lay great stress upon, having these balance sheets year after year, in connection with a running account. Mr. McCreary. In other words, you get a practical knowledge of his business because of the business going through your bank? Sir Edmund Walker. Yes. The manager of any one of our branches will take the checks of his customers every day and go over them, and he is always thinldng, regarding every check, "What is that for?" If the customer speculates in real estate or in Wall Street, or does any abnormal thing, if he wants to, he can check him up. But there is that intimacy that you can not establish through a note broker, on which we base these large credits. Of course, Canadian banking has not been a very large business, except within the last 20 years, but we have given credit in that way successfully for many years and we have never felt that we would like to have somebody else lend a part of the money unless we wanted them to lend all the money. Mr. McCreary. Of course, that is customary in our banks also, for the paying teller and the cashier to watch out and see whether there is anything unusual or unnatural. Sir Edmund Walker. You have in the United States many cases where the bank does lend all of a customer's requirements ; but I was speaking about the fact that your banking generally has not scaled up to your other industries. 1 am speaking about the necessity that the big industries should be granted credits on which they can rely and that a man should not be left in a time of panic with 40 or 50 or 60 or 70 creditors, no one of whom will help him bear his burden. Mr. McCreary. The consequence of that is that in many cases^-he has pyramided his loans, and his losses are greater in proportion. The Chaikmax. What is there in the Canadian system that compels quick redemption of notes '. Sk Edmund Walker. The fact that every bank wants to keep its own notes in circulation and sends back th(^ notes of every other bank to the clearing house oyevy .lay. , Mr. Kindred. What is the profit on the note issue ot Canadian banks ? 654 BANKING AND CUEEENCY EEFOEM. Sir Edmund Walker. We are allowed to issue notes to the extent of the unimpaired capital, just as your State banks were permitted to issue notes before the war. The notes cost about 1^ per cent, I sup- pose, for the reserves and the cost of printing the notes, and so on, and there is therefore a profit in the circulation. That brings me to anotlier thing which I might as well go into now. We have in Canada more banks per thousand people than you have, which might strike one as strange when one thinks how thinly popu- lated our country is. That is really due to this privilege of note cir- culation. Of course, the uncirculated notes serve as till money to the branches, and there is a profit on these notes in each branch bank established, many of them being established where even a private bank could not be established in this country. Here in the United States in 1912, counting 27,000 banks and 92,000,000 people at that time, there was one bank for every 3,407 people; and in Canada, with 2,641 branches of banks, there was one bank for every 3,029 people. In the cities the comparison is very much more favorable. In the cities in Canada there is one bank to every 3,100 people, while in the United States, at the time when this calculation was made, 'there was one bank to every 9,107 people. Whether that be an advantage or not, the main reason for it is the note privilege and the fact that the tills of these offices are filled with our notes not yet issued, and the profit on the notes issued enables offices to be established which could not otherwise be established. The Chairman. And yet you have a limitation upon the privilege of note issue there ? Sir Edmund Walker. Yes; it is limited to the amount of the paid-up capital. It really ought to bear a relation to the activity and volume of a bank's business. Mr. McCreary. Coming back now to the question I asked a while ago, I think you said you did not approve of subsidiary banks being owned by the central bank. Is not that the case in Canada, that you have a number of subsidiary banks ? Sir Edmund Walker. You have got it reversed. I did not approve of the central bank being owned by the other banks. Mr. McCreary. Oh, I misunderstood. Mr. Willis. Before you leave the note-issue question I would like to have you speak about the relation of these notes to reserves. Under the Aldrich plan the notes of the so-caUed central bank were to be used m reserves. What is the Canadian practice on that? Sir Edmund Walker. Of course our notes are a part of our debts. Th^ could not be a part of the reserves. Mr. Willis. No bank can hold the notes of any other bank as a part of its reserve ? Sir Edmund Walker. No. The Chairman. The reserves there are gold? Sir Edmund. Walker. The reserves are gold, or Government cer- tificates which are all covered by gold. Mr. Willis. And that is the principal element in forcing their redemption ? Sir Edmund Walker. Yes. BANKING AND CUKEENCY EEFOEM. 655 sy^mTor nStell"''^'^ "^^^ ^^^'^^ ^^"^^ '^ ''^^^'^ ""^ *^^ redemption Sir Edmund Walkee. Practically there are clearing houses in coDiparatively small towns in Canada, just as there are in the United btates. ihe clearmg-house system is very largely developed there as It IS here. The check system is also largely developed. People use checks lor paymg their debts just the same as they do here Now wherever there is a clearing house, each bank sends to the clearinc^ house the notes of every other bank. The notes are iust debts of tht issumg bank, the same as checks are, and they go in just the same. xu iL ^,^^Y^- That IS the point; the notes are cleared iust as we clear the checks ? Mr. Willis And there is the same reason for sending them home promptly as there is for sending checks home promptly « Sir Edmund Walkee. Yes. Mr. Willis. So that there is no difference between the note and a deposit credit ? Sir Edmund Walkee. No. In the old systems of banking they did not distmguish between a deposit obUgation and a note obhga- tion. In the early history of the United States the restriction was that the bank must not have liabilities of more than so many times its capital, say three or four times. There was no distinction as to what the obligation might be; they might be notes or they might be deposits. There is no distinction with us, except in one great matter, and this is a subject of more or less controversy at home at the time, that we make the notes a prior hen and that we guarantee the notes by an insurance fund, while of course we do not attempt to guarantee the deposits. The Chairman. Why is that ? Sir Edmund Walkee. Because if you want to establish a good currency in a country you must have a note which being held by an involuntary credit or is bound to be good. A depositor is a voluntary creditor, but in trade a man has no chance to select the good from the bad. Therefore we make the notes so good that if a bank fails the notes of that bank are just as good as the notes of any other bank, and nobody demurs at taking them. Of course almost all the pecuhar features of Canadian banking are derived either from the first bank of the United States, or from the experience of the United States at a later time. We have, for instance, a double liability on our stock. Mr. Tayloe. Do you mean that they embody the Hamilton ideas ? Sir Edmund Walkee. The first two or three charters granted in Canada have a great many sections from Hamilton's sj^stem, copied exactly; and our system to-day is a development from that system. And that is also contributed to by the fact that many of the bankers in Canada have been Scotch, and the Scotch system and Hamilton's system are much alike. We have been somewhat influenced also by the object lessons of the United States. Mr. 'Tayloe. Then you do not regard your banking as being entitled to be called the Scotch banking system ? Sir Edmund Walker. No; that is an erroneous idea. It is really the Hamilton system. Mr. Kindred. Before you leave the matter of guaranteeing, as you have said, you have a guaranty of the note issue ? 656 BANKING AND CUBKBNCY REFOKM. Sir Edmund Walker. Yes. Mr. Kindred. Do you look upon banks as discharging such a quasi pubhc function that it might be the duty of the Government to pro- tect the public in the way of deposits as it would protect the public in the matter of health ofhcers, in that the Governnient might require — to carry out the simile — only licensed physicians to be turned loose on the public? Sir Edmund Walker. But you would not make the surgeon who did not kill his patient while operating for appendicitis responsible for the surgeon who did ? Mr. Kindred. No; if they were licensed physicians. Sir Edmund Walker. No ; but if they were both licensed ? An- swering your question, the last paper that I read in the United States, at Buffalo, is called "Banking as a Public Service." I do beUeve that banking is a public service. But, of course, in any democracy, the question is how far a government can possibly protect the public. Mr. Kindred. That is what I wanted to get at. Sir Edmund Walker. Anyone can read for himself the history of the safety fund, in New York State, which commenced in 1829, and from that down to the present experience in Oklahoma, and will arrive at the conclusion that it is simply impossible to insure deposits. The deposits of our country amount to over a billion dollars, and your own, of course, are tremendously more than that. It is not possible to insure deposits. The Chairman. For any bank ? Sir Edmund Walker. It is being agitated in Canada now, in imita- tion of Oklahoma. But I was gomg to say, if you could imagine that it could be done, the first effect would be the strongest kmd of promotion of bad banking. The Government would really have used its iafluence to produce bad banking. You would be protecting the persons who deposited with the reckless banker by sajdng that the careful banker should take care of them. To take care of all the depositors you would load onto every borrower in the country who paid his debts a tax in order to take care of the people of the country who did not pay their debts. That is what the thing would be in the last analysis, The banks would not pay it out of the air; they would pay it out of a charge levied upon the borrower, and every borrower would be called upon to contribute money to buUd up a fund. Ml'. Kindred. Make them pay it out of their note profits, so that their profit from note issues might be sl'ghtly less. Sir Edmund Walker. Banks are awfully human. I notice that the dividends of your banks are in some States heavily taxed. If you take the different sections in the United States where bankmg is heavily taxed, you will find that interest rates are higher. Mr. Willis. I should like to have you take into consideration the fact that losses under the national banking system have been very small on deposits. I should infer that you think that those losses would be enormously increased under a guarantee of deposits? Sir Edmund Walker. I think bad bankmg would be encouraged. The system would also be shamefully unjust. There is no reason why you should not apply it to any other business than banking. Mr. Willis. Would that occur if you had a specially stringent oversight of Government authorities ? BANKING AND CUEEENCY EEFOEM. 657 Sir Edmund Walker. I do not believe in Government inspection myself. Mr. Willis. Assuming that you had a fairly stringent and suc- cessful Government oversight, and assuming that you had your banks organized as you have suggested, it is of course practically a legalized form of clearing house ? Sir Edmund Walkee. Yes. Mr. Willis. With the mutual inspection that is developed in the clearing-house centers, and which presumably would be developed in like manner under these new organizations, would it not be possible to keep bad banking down to a very distinct minimum ? Sir Edmund Walker. I would not like to answer that question, because I do not myself believe that the supervision you speak of is possible. It costs my own bank, to do what you speak of, over $100,000 a year. Mr. Willis. That is, you mean to oversee its branches? Sir Edmund Walker. To inspect its branches and to protect against frauds. I do not believe there is any kind of outside inspec- tion that will do that adequately. Mr. Biilkley. One thing in which we agree with you is that gov- ernmental inspection is not nearly as good as bank inspection, and we propose that banks which should not be mutually liable for each other's deposits should have the power of mutual inspection. Do you not think that in that case you could prevent bad banking ? Sir Edmund Walker. Have you studied the conditions in Okla- homa ? I did not bring those papers with me. Mr. Bxjlkley. So far as I know, that is not the provision in Okla- homa. It is governmental supervision in Oklahoma, is it not ? Sir Edmund Walker. I suppose it is governmental supervision in Oklahoma. Mr. BuLKLEY. Supposing we abandoned the idea of governmental supervision and turned the supervision over to the banks and required them to be responsible 1 Sir Edmund Walker. If you gave the banks the power of really discovering the value of the credits granted by their rivals, that would hardly do, would it ? Mr. BuLKLEY. I am tryii^ to find out. Sir Edmund Walker. What would happen, for instance, if a strong and well-managed bank was to say to some new bank that was established that in their opinion some of their credits were weak and unsound; you would have the evening press and the people saymg that the stronger was simply crushing the other bank out of existence. I do not see how banks could exercise a real repression on their fellows in the matter of bad business unless they had the judgment of Solomon, you know, and everybody admitted that they had. The Chairman. What of the efficient method of examination insti- tuted in Chicago since the failure of the Walsh banks, and also in New York by the clearing-house banks ? Sir Edmund Walker. That is used in San Francisco, too. The Chairman. Yes. ^ . ■ ^ a n^h^ Sir Edmund Walker. That is a very good system indeed. Ihe banks are inspected for the clearing house by a clearing-house ex- aminer. I do not know how efficient it is, but I imagine that it is 76112— PT 12—13 2 658 BANKING AND CUEEENCY EBFOEM. efficient. But if they were to turn around and say to a bank not "You are so bad that we are going to close you up," but "You are making some losses here that may some day cause us to suffer through having to guarantee your deposits," what would be said if you could not absolutely establish the fact that those things were wrong ? That could be, after all, a matter of mere judgment. The Chairman. What is said now when the clearing-house exam- iner in Chicago or New York admonishes a bank that it will not be cleared if it does not alter some bad business habit ? Sir Edmund Walker. Things have gone very far when it goes so far as to say that the other banks will not clear. It must have gone bad in many different directions. I know the San Francisco condi- tions better than those in Chicago, because our own agent there was the man whom the San Francisco banks selected for the purpose. There he might discuss with the cashier of a bank the wisdom of a loan, as a mere matter of friendship and monitorship, without refer- ring to the committee. He might report to the committee, undoubt- edly, but only when things were dangerous ; but if a case of bad bank- ing was hkely to biing a loss on the other banks that had guaranteed deposits, or if his judgment was simply that a transaction was unsafe, and yet he was not able to prove it, what would be the feeling of the community toward the banks which because of his opinion exercised apositive pressure upon a bank to prevent such loans being made? With us it would be practically fatal, because the newspapers, if a big bank was to criticize a small bank, would at once raise the cry, "You are trying to crush out a rival." Mr. Taylor. You are trying to draw a distinction between the inspection that is necessary in the clearing house and the inspection that would be necessary in the case of deposits ? Sir Edmund Walker. Yes. Mr. Taylor. So that it may be fully understood, let me catch your idea. Sir Edmund Walker. If a bank with an unimpaired capital and a surplus has an occasional debt that is not as good as it might be, the inspector may draw that fact to the attention of the other banks, and he may even draw the attention of the directors to it. Mr. Taylor. That is the function of a clearing-house examiner. Sir Edmund Walker. That is the function of the ordinary clearing house ; and if he sees things going very badly, he reports the condi- tion of affairs to the committee. But suppose that the course of a bank is beginning to be more or less reckless or improvident, and that the failure of that bank would result in a loss to the other banks as guarantors of deposits; now, when is the moment when, for the sake of protecting themselves, the other banks should step in and say "You must not go any further, because you may fail" ? Unless their judgment was absolutely sound beyond any peradventure they would be accused, of course, of trying to crush out a rival. The Chairman. Then you thuik that, in order to avoid that sort of accusation and that sort of criticism in the public press, they would run the risk of failure and loss rather than compel good banking ? Sir Edmund Walker. I am getting at the fact that there is a great deal of difference between the point where it would be unsafe to deal with the banks of the clearing house and the point where a bank by BANKING AND CURRENCY REFORM. 659 going into bad courses would ultimately fail and cause you to have to pay off its depositors. That is the distinction that I am making, and there is some difference between the two positions. The CHAiRsfAN. As I understand, you think that a system of guar- anteeing deposits would necessitate either severely good banking, at the risk of adverse comment in the press, or the banks would be dis- posed to avoid such comment by letting the other bank fail ? Sir Edmund Walker. They could not afford to let the bank fail if they guranteed its deposits, could they? The Chairman. Assuming they could not afford to let it fail, but did halt its bad business processes, that would not be bad banking, would it ? Sir Edmund Walker. But do you think that because of your desire to guarantee deposits you could justify a condition where you would practically make every banker a judge of every other banker's business, under conditions where a severe and restrictive policy on his part was necessary for his protection ? The Chairman. I am not undertaking to justify it as a fair propo- sition. What I am undertaking to arrive at is whether or not it would lead to bad banking. Sir Edmund Walker. It would in my opinion lead to bad banking unless the banks exercised over their fellows a restraint which would certainly lead to most unfair criticism. Mr. Willis. Is it not a fact that to-day you have substantially that condition of affairs; that is to say, that banks, after panic and diffi- culty has passed during which they have been carried over, are prac- tically forced out of business through the public opinion in the com- mercial community, and they are either amalgamated with other banks or their assets are turned over, and the incident is closed as quietly as possible? Is not that just the condition that we have to-day? ^ ■ , • TitTi Sir Edmund Walker. What you do have to-day is this; When you have a good banking community with broad enough views to take a bank over and save it, so far as paying its debts is concerned, they save it; but occasionally they have a bank that has not enough salt in it to make it possible to save it, and they let it go. Mr. Willis. Yes. . „ • . The Chairman. One of the striking instances m this country m recent years was the action of the Chicago banks m the matter ot the Walsh failures. " , , ■ .1 .. wSir Edmund Walker. They lost a lot of money m that. The Chairman. Yes. , , . ,1, 1 ^ t Mr Willis What I mean is that the bank is not allowed to repeat the experience; it is practicaUy forced out of busmess as a result of ^^Sir^EDMUND Walker. I think in the big cities that is the case to some extent I doubt whether in the thinly settled parts of the erntry that is the case, Of course, you have to apply your system to new communities, and where there are not any monitors and where the Xle thing is different from what it is m Chicago and New York I do not think'that drawing an analogy from the cities would '^Mv TAYLOR. Do you accept the statement that I have heard that, th^e' has been a very small amount of loss to depositors and that 660 BANKING AND CURRENCY REFORM. the cost of guaranteeing deposits would have been very small; in other words, that the loss on deposits is exceedingly small ? Sir Edmund Walker. The loss to creditors — that means deposit- ors — is exceedingly small. Mr. Taylor. I tried to separate the different kinds of creditors and apply it especially to deposits. Sir Edmund Walker. It always means depositors. Mr. Taylor. It is given here — and you can teU me whether I am correct or not — at less than one-thirtieth of 1 per cent. If that be true, it that is the result of the experience of a number of years, is it not better to suffer that small loss than to run the risk of dangers which you apprehend ? Sir Edmund Walker. No; I think that the loss would actually be a great deal larger. I do not think you can possibly get over the fact that the moment you have said that practically every deposit in every bank in the United States is safe, you have begun a carnival of bad banking in the United States. Mr. Taylor. My question meant the reverse of that answer. I say, admitting that the loss of deposits has been very small extending over a number of years, it being given as less than one-thirtieth of 1 per cent, is it not better to accept that loss and charge it up to profit and loss account, than to get into a condition from which you antic- ipate greater loss 1 Sir Edmund Walker. Yes; I should say so, decidedly. Mr. Taylor. It is better to bear the loss we have Sir Edmund Walker. Than to fly to others that we know not of. Mr. Taylor. That is your idea ? Sir Edmund Walker. That is my view exactly. Mr. McCeeary. Do you not thuik that that small loss speaks well for the Government inspection ? Sir Edmund Walker. It speaks well for your banking. So far as lending money and getting it back again is concerned, there are not any better bankers in the world than there are in the United States. There is nothing the matter with the man who sits behind the desk and lends the money in the United States. The trouble is that the system does not do the things that it ought to do for the country. The Chairman. It does not enable you to lend enough money in an emergency ? Mr. Kindred. If you have finished that phase of the testimony, I would like to ask you another question that comes under something you spoke of a little while ago. You made a reference to the fact that there are a large number of banks. Does not the larger number of banks have the tendencjr to rather prevent what might be called strait-jacketing or injustice; or, in other words, does it not prevent a restriction of credit more than a smaller number would, more than a system in which there would be a smaller number of banks. Sir Edmund Walker. By that you mean that the local bank is apt to serve its community better than a larger bank; is that the idea? Mr. Kindred. Yes; the general tendency is in that direction. Sir Edmund Walker. And you mean that a local institution with its directorate is more apt to look after the interests of its community than a larger one ? Mr. Kindred. Yes. BANKING AND CUEEENCY REFORM. 661 Sir Edmund Walker. I am quite certain from my exi)erience that that is entirely a wrong view. It is one of those popular views that is repeated over and over again, but I am quite positive that under the branch system we serve the customer better than the individual system can. Mr. Willis. In other words, you think there is nothing in the claim that the small bank in this country is interested in the local industry and in building it up more rapidly ? Sir Edmund Walker. Yes; I am quite certain that it is not so. Everj'- banking manager in Canada is as keen as you can be to build up his personahty. He throws himself into the life of his town. He is as good a citizen as they have, while he is there. He is sometimes, I admit, there for too short a time. Canadian banking is a great clear- ing house. You borrow at one point and you do not really get the money there; you just get a credit there. The money may exist somewhere else. The effect of that is that in the east or somewhere else, in unprogressive towns, the money moves automatically to the place where it is needed. The bank simply knows that its business IS in such condition that it can afford to take up new accounts, and it takes up accounts at new places in the west, and sends the money there from the east, where it has been found in these quiet places where there is no use for it. In this country you have no way by which money can go out to flourishing and enterprising western places except through the clumsy intervention of the note broker. I claim that we are undoubtedly better able to serve the people in that way than through an individual type of bank. Then in your small places you often find that the banks are in cliques and that they are really anxious to help particular industries. Our man is there in a professional capacity; he is there to lend money and not for any other purpose than to lend money well and get it back again. He has more money than the local bank is likely to have. He has the surplus money of these places that are without enterprise, and he is there without any local interest but that of the bank. He is not a member of a local bank board; he is not interested in the local industries there. IVIr. Willis. Do you limit the amount that he can lend in any one place, granting that the paper is good ? Sir Edmund Walker. No. He sends his applications for credits in to the head office, and if it is good business and we have the money we lend it. Mr. BuLKLEY. Do you have a board or a single manager 1 Sir Edmund Walker. A single manager. There is nothing more impopular in a small place than for the people to know that there is a local director who can see into people s affairs. There is no doubt about it that what people want is to go to a bank and say 1 will tell you everything, but I do not want you to let anybody else know." . 1 •, n Mr Bulkley. Do you pay interest on your deposits ( ' Sir Edmund Walker. On 60 or 70 per cent of them, but they are not current accounts, they are all savings deposits. Mr. Willis. You pay no interest on current deposits ? Sir Edmund Walker. No, sir. Mr. Willis. Or on daily balances ? 662 BANKING AND CUKEENCY EEFOliM Sir Edmund Walker. No, sir ; but every bank has a savings-bank department. The Chairman. What is your rate of interest ? Sir Edmund Walker. Three per cent. Mr. BuLKLEY. That is very seldom changed ? Sir Edmund Walker. It is very seldom changed. Mr. Kindred. May I go back to another observation of yours ? I understood you to say that in your view it would be better for the capital of individuals to back a so-called central bank or central institution, or something of that kind, rather than to have the capital of the member banks of the community or of the country ? Sir Edmund Walker. Yes. Mr. Kindred. Is not that capital, after all, of tndividual interests and banking interests rather identical in its motives — would it not be in its motives and objects ? Sir Edmund Walker. I also said that I thought the central bank should do business with the general public and not be confined to doing business with the banks alone, as proposed in the Aldrich bill. I remarked that the central banks of the world elsewhere are owned largely by private stockholders and do business with others than banks, while the proposed central bank here was to be owned by banks and to do business only with banks. Mr. Kindred. There is one thing I want to understand about the operation of one of your Canadian rules or laws — I presume it is fixed by law — and that is, is there a tax on the notes issued by banks which leads to their quick redemption ? Sir Edmund Walker. No. Mr. Kindred. It just increases the gold reserve of the bank? Does it do that by retiring them quickly ? Sir Edmund Walker. We send back every other bank's notes. Mr. Kindred. Just as you would checks ? Sir Edmund Walker. Yes. There is no object whatever in hold- ing them. They are not available as currency to us. Mr. Kindred. Does the quick retirement of such notes in any way affect your gold reserves ? Sir Edmund Walker. No. Of course they might affect the gold reserve. As a matter of fact, the expansion of our circulation through- out the country fits very closely the expansion of business. If it is in some part where it is a one-crop country, our notes go out to help to pay for the movement of that crop, and when they come back they help to pay debts, but they might cause you to pay out gold. You must pay out gold if it is required. The Chairman. When you pay a balance, you pay it in gold. Sir Edmund Walker. Yes, practically. The Chairman. When you send in notes for redemption, the balance is paid in gold ? Sir Edmund Walker. Yes, in gold. We use a certificate that is practically gold. For instance, I might say that I have here a memo- randum of the differences between the highest and lowest circulation of our bank notes m recent years. It runs 37, 27, 24, and 30 per cent. That is the difference between the highest and the lowest. The high point is usually in October or November, when money is needed for the crop movement. When those notes come back, people are largely paying their debts and you do not have to use gold to any extent. BANKING AND CUEEENCY EEFOKM. 663 havVL^us^goTl™ ''°' ^^^'""^ *^''' '^'^'^' *^'^' °^ '^"'■^"' y°" ^°"1^ baifk«^^^°^™' '^''^ *^^°®® ^^°*^® redeemable at the counters of any Sir Edmund Walker We follow the old Suffolk bank system of New England. Every bank in Canada is required to maintain the redemption ol its notes at the commercial center, generally the capital • A,°?.u''^''*'''f ''"^T *^''*' ^ ^^"^^y ProAdnce in Canada, and the result IS that the notes all pass just as your bank notes do. Every bank and every mdividual would- take any bank note. Mr. Taylor. Is there such a thing as legal tender in Canada « Sir Edmund Walker. The notes under $5 happen to be issued by the Government; but practically, no. There are some $5 Govern- ment notes, but they are practically not much circulated The change-makmg notes under $5 are Government notes. ]\Ir. Taylor. Do you know whether there is anycountryin the world where there is such a thing as a legal tender, simply a bank note ? Sir Edmund Walker. I do not know. A Baiik of England note may be a legal tender. Mr. Meeker. It is. Sir Edmund Walker. It is, is it ? i\fr. Meeker. Yes. Mr. Kindred. I am sorry not to have caught all that I wished to catch in regard to the redemption of the notes by the reserves. Will you make it a little more clear to me ? The Chairman. They do not have any definite reserves in Canada. Mr. Kindred. I laiow; no fixed reserves ? Sir Edmund Walker. I did not say that the redemption of our notes strengthened our reserves. Mr. Kindred. There is no relation, then ? Sir Edmund Walker. No. Of course if your notes came in quickly — you might have your notes come in in such a way that you might have to pay them out of your reserves, but as I explained, they usually come in at the time when people are paying off their debts, and the expansion and contraction generally do not much affect the reserves. Mr. Willis. In Canada, as I understand you, there are 27 banks'^ Sir Edml'nd Walker. Twenty-seven banks. Mr. Willis. A great deal has been said in this country about the necessity of a uniform banking policy, uniform rates of discount, and so forth. As I understand it, the rate of discount is very nearly uni- form thoughout Canada. Sir Edmund Walker. The western people pay more than the eastern people. Mr. Willis. Not very much? Sir Edmund Walker. Not very much. They do not like it, however. Mr. Willis. Would you enlarge upon tlie relations that exist between these Canadian banks and the extent_ to which, by some means, a uniform banking policy is established in that country ? Sir Edmund Walker. I do not know what you mean by a uni- form banking poHcy. 664 BANKING AND CXJEEENCY KEFOKM. Mr. Willis. Is it not true that there are consultations between the managers of these 27 banks for the purpose of establishing some unity of action on that question? Sir Edmund Walker. No. Mr. Willis. There is no such relationship between them, at all? Sir Edmund Walker. No ; there is nothing that Mr. Wilson would describe as a trust. Mr. Willis. I did not mean that. Sir Edmund Walker. I mean that there is not. Mr. Willis. No. Sir Edmund Walker. There is really a very strenuous competition and rivalry. Mr. Willis. I did not mean to suggest that there was not such. But it is true that the banks have a general esprit de corps that leads them to work together? Sir Edmund Walker. Let me put it in a different way. There are only 27 heads of the institutions in the country — only 27 units of opinion. The charters of the banks are revised decennially. When that idea came up originally it was because the first charter granted after Canadian confederation, in 1868, was supposed to be a tentative thing, and it was thought that it was best to come together every 10 years and see if it could not be improved. The time came when the Government might have granted a lengthy charter, but the banks still thought that the decennial revision was a good idea. The result of that is that every 10 years the bank act is thrashed out and dis- cussed, and the bankers at that time come together and, as there are only 27 of them, it is not difficult for them to arrive at an opinion, although they do not always agree. If you will read our papers you will find there are the same kind of opponents of banking revision as there are here and there are the same kind of propositions as you have here. Mr. Willis. How does the Canadian banking system regulate the flow of gold into and out of the country ? Sir Edmund Walker. Trade regulates it. I do not think the banks do. Mr. Willis. You have nothing corresponding to the effect of the Bank of Englaind ? Sir Edmund Walker. No. If there is trouble, every bank in Canada is interested in the country as a whole. We can not afford to take a local view; we must have regard to the operations as a whole. The six or eight large banks practically perform all the functions of the Bank of England so far as our foreign trade relations are concerned; but there is no one bank in Canada which tries to fix the conditions of the money market. That is still done by the competition of the banks with each other. Mr. Willis. Then you would not attach much importance to the argument so often put forward as to the necessity of some one insti- tution to do that ? Sir Edmund Walker. Of course our country is a small country alongside of the United States, and as I have often said I am not trying to have it understood that our conditions have any bearing upon your conditions. We have no need for a central bank, having large banks. Mr. Willis. Would you say the same tjiing for the United States? BANKING AND CUREENCY EEFOEM. 665 to^set^n'moH ^t^^""' I^^'^^^^IJ' I think what you want to do is insJftutTpnT "^ *^' machinery that will create a'good many large Mr. ^A iLLis. In other words, you think we can get a unitv ^f^\^l^'i;^ZSt,, appointed b, the witnesses who appeared before t^e committee financial ''?; Thfire^slat^rn :lS?hin.^-^^^^ long wl.ile I have before you has been ado^ted^^ ^^^^^ t^lUfXe countJ^ Sii'n^arthe'investigations which have taken place. 698 BANKING AND CXJEEBNCY RBFOEM. I thank you, gentlemen, for your attention and assure you that it is my most earnest desire to contribute everj^thing in my power toward the proper solution of this montary question, which I believe to be the most important in its far-reaching results and benefits of any now before this Congress or likely to come before the next. STATEMENT OF MR. GEORGE BLUMENTHAI, OF THE FIRM OF lAZARD FRERES, BANKERS, NEW YORK. The Chairman. Mr. Blumenthal, this is a subcommittee of the ' Committee on Banking and Currency of the House of Representa- tives, charged with the investigation of banking and currency mat- ters with a view to reporting at some time in the near future remedial legislation. Senator O'Gorman, of New York, was kind enough to suggest your name to us, and we have invited you to come here to give your views and your advice on the subject as to what should be done. You may make your statement in your own way. Mr. Blumenthal. Mr. Chairman, as you know, having looked into it, this is a very broad subject, and, of course, different people have different ideas. I have had occasion to follow this whole cur- rency question in the United States for a great many years, and ever since 1893 I might almost say my firm have been foremost in importa- tions and exportations of gold, and have thereby come in contact with everybody who had anything to do with it, and I have become thoroughly familiar with it. Mr. Taylor. Have you a statement there as to the part that you have had in the importation of gold into the United States ? Mr. Blumenthal. No ; I have nothing at all on that, because it is not bearing upon the question. My remarks are not based entirely upon imagination, but are developed from what I have seen. I believe, Mr. Chairman, that it is a very risky thing for any country of the size of the United States — of 90,000,000 of inhabitants, and with such enormous business interests — to make a radical change in its monetary system. I believe that our system, as far as it goes, has worked out in a general way reasonably well, and I believe that changes could be made without making a perfect revolution. I also believe that this country could very safely substitute for quite a large amount of the national-bank notes outstanding United States bank notes, because to-day, perhaps because the credit of the United States and the stability of the United States are recognized, the national-bank notes are good. The bank note, of course, is an obligation of the bank; but, on the other hand, the Government is responsible for it and it is secured by Government bonds. If it was not for the strength of the deposit, those notes would not have the same value in the minds of the peofjle. I can not see any objection whatever to the Government redeeming an amount equal to the out- standing national-bank notes and issuing its own notes, secured, cer- tainly, partly in gold. There is now outstanding $346,000,000 of greenbacks, against which there is a reserve of $150,000,000 ; but the reserve of $150,000,000 is not only against greenbacks, but also against the large volume of silver certificates that is outstanding. That amount I have not in mind now, but it is between $300,000,000 and $400,000,000, is it not? NANKING AND CURBENCT EEFOEM. 699 Mr. Lew. Yes; il is $500,000,000. m gold fhen they are presented. Of course, the Government can £? f ?fi' ^r^' afterwards and get its money back, except on tie silver certificates where they have absolutely no way to get their money back. J & An additional issue of currency should be made by the Govern- ment to bring the total amount to $1,500,000,000. A part of this issue should be applied to redeem the $745,000,000 of United States bonds now deposited against bank-note circulation, and the proceeds of the sale ot these bonds to the Government would furnish the national banks the funds to redeem their outstanding notes. The amount of gold now in the hands of the Government and of the banks would easily permit you to set aside $350,000,000 in gold, making, with the $150,000,000 already held, a total reserve of $500,000,000, constituting a cash reserve of 33Jj per cent against the issue of $1,500,000,000 notes, which would seem fully adequate. Mr. Bt^lklet. Do you propose to have any other assets behind that issue of $1,500,000,000 of United States notes? Mr. BLUME^-THAL. No; except that they would be straight Govern- ment obligations. Mr. BuLKLEY. Straight Government obligations, with a reserve of one-third gold, and no other assets behind them? _ Mr. Blumenthal. Xo, sir. The United States bonds would prac- ticallv all be redeemed. I believe that the United States are fully' good for the $1,000,000,000, and they would be good for $10,000,000,000. But there would be no demand to redeem any of these notes. Ever since the $150,000,000 has been set aside, there never has been a demand on the Government to use one dollar for redemption. The only time that the Government was called upon to redeem notes it was not really called upon to redeem notes, but it was frimply that the receipts of the Government were so far below the expenditures of the Government that every few months the Treasury was empty, and those people who were in favor of the gold standard, and who wanted some change in the monetary conditions, said that this Avas on account of the lack of gold. It was not, at all. If in those davs the revenue of the United States had been large enough to always keep their drawers full of cash, there would have been no " endless chain." What was called the endless chain operated in this way that $100,000,000 of bonds was sold, and the money was in the Treasury and it was paid out for expenses of the Army and for pen- sions and all kind of expenses. AATien that $100,000,000 was pretty nearly exhausted, there was no more money there, and they had to issue another $100,000,000 worth of bonds. It was said that that was done to replenish the currency reserve, but it was not. Mr Taylor. Do you know of any other Government that ever had its revenues so arranged as to have cash always in the treasury? 700 BANKIXG AKD CUEEENCY EEFOKM. Mr. Blujienthal. I do not believe there is any other civilized nation that has not always cash on hand, or a project worked out so that they know exactly when the cash will come in. If they need money, they provide for it beforehand. For instance, suppose the German Government wants to make certain changes in the Army, and they want to increase their expenses. The German Government is going to issue on the 7th of March an amount of, I think, $125,- 000,000 worth of bonds, and that money will then be expended prob- ably in the next tAvo years. They never allow any money to be spent before the money is provided. That can not be done, because they have their budget, and no money can be paid out unkss the budget contains provision for it. If a budget is brought in and there is no absolute surety that the money is coming in at some time in the future, laws are brought in providing new taxation, or they provide the money by a loan. Mr. Taylor. They provide for it by loans, just as we do? Mr. Bltjmenthal. Yes; they provide by loans where necessary; but the point is that they provide in advance and not when their money is all gone. That is the great difference. That makes a great difference in the eyes of the people. When you say that you want to spend $100,000,000 of money, and you borrow that money because 3'ou want to spend it in the next two j^ears, that is one thing. But if you borrow the money because you say "We have no money in the Treasury," that is an entirely different thing and gives an entirely different impression. Mr. BuLKLEY. You are proposing a fiat money, are you not? Mr. Blumenthal. I propose an absolutely fiat money; but, as I said before, I consider an absolute fiat money issued by the United States — ^fiat only to the extent of two-thirds, and one-third secured by gold — fully as safe as any money issued by banks on the basis of a United States obligation. If the credit of the United States is not good, then the bonds of the United States are not good, and if the bonds of the United States are not good, then that money of the banks based upon the bonds of the Government is not good. Mr. Btjlkley. But all the assets of the banks are behind that, also. Mr. Blumenthal. If the credit of the United States is not good, I would not give very much for the assets of the banks. If the United States Treasury was not good, I think most of the banks would be bankrupt, and most of the individuals would be bankrupt. There is only one way in which that condition could come about, and that would be in time of an unfortunate war; and in time of an unfor- tunate war you know what every country does. If there was a war with any of the great nations of Europe "to-day the first thing would be to declare a moratorium, which would be saying that nobody need pay any debts up to the time that it was stated that the moratorium should end. The Chaieman. Were the notes of the Bank of France at a dis- count during the Franco-Prussian War? Mr. Blx^ienthal. I could not answer that question. I do not think so. But they could not be redeemed, you know. The Chairman. Every demand for redemption was met, and the notes were at par during that whole period. Mr. Blumenthal. 1870 was before my time. The Bank of France does not redeem any notes to-day. You can not go to-day to the Bank BANKING AND CUEEENCY EEFOEM. 701 of France and ask for 100,000 francs in gold and get it. They would notgive It to you if you paid 100 per cent premium for it. We have had an experience with gold here— or, not with gold, but when any kind of circulating medium here was at a premium of 2 and 3 per cent. The Chaikjiax. What is the tremendous reserve in the Bank of France tor except to pay its outstanding obligations? Mr. BnuitENTHAL. They simply hoard it, and they will not give it out. It is absolutely dead. The fact is that in France in the last six months you could not get 50 francs in gold. If vou had a 100-franc bill and had to pay somebody 30 francs, you would get back 60 francs in 5-franc silver piec'es-. There is absolutely no gold in circulation in France. Mr. Taxtx)e. I understood you to say in answer to jNlr. Bulkley that you advocated an absolutely fiat money. Why do you want that $500,000,000 in gold? Why have a reserve of one-third in gold against your proposed issue of United States notes ? Mr. BntiMENTHAn. Because a currency issued by the United States with a reserve of one-third gold I do not consider to be fiat money. I consider it a very good money for circulation ; and at the same time, if some gold is wanted, you can pay it out. Mr. Tayloe. Then the proposition that you have made of a cur- rency issue of $1,500,000,000, with a reserve of one-third in gold, is not, as I just understood you to say, a proposition for fiat money. Mr. Bltjmenthal. It is a circulating medium based on part gold reserve. You can not base it all on gold reserve, because there is not gold enough in the world. I consider it an absolutely safe currency for the United States. The United States has the same obligation to-day, with the issue of United States bank notes, that it would have then; and if the United States issued this currency itself, it would make a saving of between $15,000,000 and $18,000,000 a year in intGrGst. Mr. Tayxoe. Your idea is that the United States should not pay out any of that $500,000,000 that it retained as reserve? Mr. Bltjmenthal. If anybody came and asked for the redemption of any of those notes, the gold would have to be paid out. Mr. Tatloe. They could not follow the French system and not pay it out? J. -J. i. Mr. Bltjmenthal. Oh, they must pay it out. Mr McCeeaet. I understood Mr. Blumenthal to say that it was an impo^ibility to get gold because there is no gold m circulation m SSS. May I read a little clipping from a newspaper which I have here ? Mr^ MccSe? Th£ is dated February 1. It reads as follows : Paris, February 1. , ■ ^ ■ ,^„, .Tt on fPTits nremium on $100, has almost entirely dis- Gold, which IS. now at 20 ce^ts piem ^ ,^^^ .^ ^^^,^ ^^^^^ ^^^^ appeared f^^o^^ «rcn aUon ^^/J^°'=|^,i, branches of American banks. The coin can now I'® °i'Vo 'hand over even one 20-franc piece to their customers. French banl^s refuse to hand over e ^^^ ^^^^^ ^^^^^^^ ^^.^^ ^^ ^p_ The hoarding of goWha^^been^^^^ I^^ S ^^ ^^^^^ ^^^^^ ^_^^^^^^^^ ^^^^^ ^^^^^ prehensions of ^^pos^ ^.^^^^^ ^ ^^^ ^^j^ ^.^^^^ ^^^.^^ to reappear in circulation, bnt these have once more vanished. 702 BANKING AND CUEEENCY EEFOEM. That is in line with what you said. Mr. Bltjmenthal. Absolutely in line. It is an absolute fact. The only thing on which I do not agree is that at the American banks they can get gold. There are no American banks there. A few of the trust companies have offices, but nobody asks much gold there. Mr. McCeeaet. Yes; but the United States has more gold than any other country. Mr. Bltjmenthal. Yes, sir ; but they speak of New York bankers, there. Mr. McCreaet. Well, they might. Mr. Blumenthal. I do not think they had any there, either. Let us look at Germany. In Germany they have drawn out of cir- culation in the last two years all the gold they could, and they have substituted therefor bank notes of 50 and 20 marks, which formerly hardly existed, and they hare done that in order to keep some reserves in the banks. I have here an extract from a paper, which was published about two weeks ago, which shows what happened in Germany on similar lines. Shall I read it ? Mr. Tatloe. Yes ; read it. Mr. Blumenthal. The heading is " Eeichsbank wants more gold." It says : Berlin, January 10. In the budget committee of tie Reichstag to-day the president of the Imperial Banlf, Rudolf Havenstein, made an Important statement about the insufiBciency of the bank's gold reserve and gave extraordinary figures regarding the strain caused by the recent fear of war. The committee's proceedings were private, and Herr Havenstein seems to have made some confidential statements. According to the published report, he said that the rule, laid down in 1906, forbidding the issue of 20 and 50 mark notes to an amount exceeding £15,000,000 ($75,000,000), would have to be abolished in view of the requirements of trade and exchange, the increase of population, and other considerations. During 1912 they had had to exceed the limit of £15,000,000 by about £17,500,000 ($67,500,000). The gold reserves of Germany increased by about £3,500,000 ($17,500,000) yearly, and part of the increase, he said, must be secured to the Imperial Bank. The bank's stock of gold ought to be brought up to £60,000,000 ($300,000,000) or, still better, to £75,000,000 ($375,000,000). I think to-day it is £38,000,000. In the interest of national security, he urged, the bank must have a strong gold supply in grave political times. During the last 11 years the bank had, put into circulation £125,000,000 ($625,000,000), half of it gold. They must increase the issue of notes in the interest of a gold reserve, and also in the interest of a sound bank-rate policy. Herr Havenstein went on to say that during the last few months many classes of the population had been seized by a panic and behaved as if they were living in remote ages. From September to December the bank had had to put into cir- culation in coin and notes £25,350,000 ($126,750,000). The corresponding fig- ures in the previous year were only about £2,750,000 ($13,750,000). The rapidly growing wealth of the United Stales is bringing with it a constant increase in the deposits in national banks. State banks, and trust companies. An annual increase of $600,000,000 in such deposits is more likely to be an underestimate than an overestimate for the coming decade; $600,000,000 additional deposits means about $100,000,000 additional requirements in gold and legal tender for reserve purposes, which is equivalent to drawing out of circulation that amount of money. You will see in what I have to say afterwards BANKING AND CURBENCY BEFOEM. 703 of\?'countrv'"1f "'"'^'''''i^'^^^f -r.^^o*^'^ circulation and currency 01 me country, if you place United States notes in the iDlace of national-bank notes, because the United States bank notes Tre Te^al tender and the national-bank notes are not legal tender Such a withdrawal is becoming more difficult, as the amount of circuktinj r.lfedTr''b^ ' '°"''' ■^' '^°'^.?°^ ¥^P P^*^^ ^'i^h the requirement! called for by increase in wealth and increase in population; and, in fact, the volume of circulating medium should increase considerably from year to year to permit a smooth working of the financial ma- chinery of the country. A change in the present statutes which would involve a reduction m the reserves to be held by banks and trust companies, while in the opmion of some people desirable, does not seems practicable, and the only other avenue of relief and possibility of preventing serious trouble is to increase in one way or another the amount of money considered legal for all purposes. The substitution of United States notes, which are legal tender, for United States bank notes, which are not legal tender, will add somewhat over $800,000,000 to the amount of legal-tender money available. It makes a change from nonlegal to legal tender money, the amount itself not being increased. Every bank note to-day is not legal tender. The Chaieman. Does it not make another very radical change? Does it not substitute fiat money for bank notes which represent all of the assets of the banks and a double liability of the stockholders, and commercial transactions involving assets of the banks? Mr. Blumenthal. It substitutes for one-third of the amount out- right, gold, which is better than they have to-day, and for the other two-thirds it substitutes the credit of the Government. The Chairman. For the commercial transactions of the country. Mr. Blumenthal. Instead of those of the bank. I think the coun- try is just as safe with the one as with the other. That is my feel- ing — that it is just as safe. The Chaieman. How does the Government get anything to redeem those credit notes? Mr. Blumenthal. Those credit notes are so absolutely needed for circulation that they will never come in. You could not take that money out of circulation. But for the first $500,000,000 of it they would have gold there. The Chairman. Suppose we were going to have a war and the Government notes were to be depreciated and gold was to be at a premium ; do you not think those notes would havi to be redeemed ? Mr. Blumenthal. I do not think they would have to be redeemed, because part of them you could redeem and the balance, I think, would stay out; because, if you had an unfortunate war the national- bank notes would also not be taken. Whenever your United States bank notes would not be taken at par under the same conditions the national-bank notes would not be taken at par, for the Government is iust as responsible for the redemption of the national-bank notes ac if w^nlrl bp for the redemption of these United States bank notes. as It woum oej. wanted gold for their bank notes, they wo,^W come to the United^States Treasury and ask for the gold, an^ WOUIU OUJl c ^^^ ^^ .^ ^^ ^^^^ . ^^^ -jf y^^ ^Q ^^^ g^yg j^ yp^^ ^j,g S Is much insolvent as if you do not give it for your own notes. 704 BANKING AND OTJEEBNCY EEPOEM. So your position would not be any worse than it is now. The national banks can not give you gold, because they have not got it. The Chairman. Do you know of any civilized nation that performs the function of note issue ? Mr. Blumenthal. There is a small amount of notes issued in Germany. The Ohaieman. It is a small issue? Mr. Blumenthal. Yes. The Chairman. And there is a small amount issued in Canada, too. Mr. Blusienthal. Yes. I do not know whether it amounts to $100,000,000 or not, but they issue some. Mr. Taylor. The power to issue notes by the Government is a great reserve for use m time of war, as I understand it. Is not that your understanding? Mr. Blumenthal. A reserve? Mr. Tayi^or. That power is a real reserve of credit for use in time of war ? Mr. Blumenthal. I do not think so. In time of war you can issue notes, but that is not a time when you can issue something against nothing. Mr. Taylor. Suppose the Government should continue to issue its notes after you had a billion and a half of notes in circulation ; what would you do with them? Mr. Blumenthal. It would require a new law. The United States could make a law any time to issue notes. The gate is now closed on the note issue at $346,000,000. I propose now to open the gate and close it again at $1,500,000,000. Mr. Taylor. On the idea that $1,500,000,000 would be sufficient forever ? Mr. Blumenthal. No; not by any means. Mr. Taylor. You intend to develop that point later in your state- ment? Mr. Blumenthal. Yes. The $1,500,000,000 would not give more money. The addition is needed to redeem the present outstanding national-bank notes, and to provide $350,000,000 additional in gold. Mr. Taylor. You have something additional to say on that? Mr. Blumenthal. Yes. Mr. Taylor. I will wait and hear you on that. _ Mr. Blumenthal. I do not cut off the national-bank notes en- tirely. You will need national-bank notes. My. idea is not that we shall not have national-bank notes, but I do not want national-bank notes secured by United States bonds. I think as long as the credit of the United States is back of the bank notes, to that amount the Government itself can assume the responsibility, because it has it, anyhow. Mr. Taylor. I want to hear your views before I, individually, in- terrupt you further. Mr. Blumenthal. Here is a point that I raised years ago before the Aldrich committee, but they said at that time that they would never listen to any such thing. The issuing of gold certificates by the United States and the Treas- ury constituting itself a warehouse of gold, free of charge, seems < be a pernicious custom which was inaugurated when nobody could BANKING AND CXJEBENOY SEFOEM. 705 fWpr^i*onn nnn'^mn'^ r"" n^?*? '"'^'^ amounts as it now has come to. Over $1,000,000,000 of gold in the hands of the Government, held m trust against outstanding gold certificates, involves risks aAd re- sponsibilties no Government should undertake. _ Suppose, for instance, that there should be a war and that a for- eign force should land on American soil; there is a thousand million dollars to-day m trust in the hands of the United States Government against which there are out demand obligations. Unless the people who hold those certificates were quick enough to get the gold out of your vaults the foreign enemy who came could absolutely seize that gold, because it is the gold of the United States ; so that you, for no purpose whatsoever, constitute yourselves the guardians for a thou- sand million dollars of gold, which quantity in the course of prob- ably 10 years may increase to two thousand million dollars. I think the responsibility alone is sufficient reason not. to have that gold ; but there is another reason, which comes afterwards, which shows you why it is a great mistake in the whole currency situation to have gold certificates out. Much has been said in late years of the large production of gold and its influence on prices and the cost of living in general. This is nothing but a fallacy, and has its basis in confounding increase of wealth and increase in the production gold. The world's gold production at present is about $460,000,000 per annum; of this not less than $200,000,000 per annum is used in the arts and industries. You may want details on these figures as we go along. That fig- ure of $200,000,000 perhaps may seem large ; it may seem larger than any figure you have heard here before. Mr. Taylor. You say that much is used in the arts and industries? Mr. Bltjmenthal. The annual use of gold in the arts and indus- tries amounts to $200,000,000. If this figure is wrong, it errs not on the side of being too large, but on the other side. When I was in Europe not long ago I obtained official figures, and those figures show that the use in Germany and France amounts to over $80,000,000 per annum. In the United States it amounts to over $40,000,000. So that in these three countries alone there is used $120,000,000 of gold per annum in the arts and industries. I will later speak sepa- rately of India; but, including Italy, Spain, Austria, Russia, and Australia, it is certainly a conservative estimate to say that these uses will amount to $80,000,000 for all those other countries. That makes a total of $200,000,000. I do not know whether you want to *SeToSs XSct'ion is at P«-} «''»tSSroo .So' thie not less than $200,000,000 is used m the arts and $100,000 000 goes' to India, where it is hoarded mostly in the shape of small bars 't^MtcSi;.' Ett^hTrS's production is $460,000,000 per annum ? Mr McC^THTThaTmeans new gold every year? . Mr. ^c<-™;^^i- Yes; $200,000,000 of that is consumed m the Mr. B^^^r;^.f;^^,;iaired befo;e that $200,000,000 is rather below arts, and i na\e '^^ i than above the tme amount. 76112— FT lo—l'J 706 BANKING AND CUBKENGY KEFOEM. As to'the $100,000,000 which it is estimated goes to India, there has been quite a controversv, and we have found that the average for the last 10 years has been $135,000,000 and not $100,000,000. Tliere remains, then, less than $200,000,000 of new gold, of which a very large amount goes yearly to Argentina and Brazil, leaving for ail other countries of the world probably not much more and probably considerably less than $100,000,000 per year, an insignificant amount when compared to the increase in wealth and to the additional requirements caused by increased population in all civilized countries with the exception of France. I suppose that does not need any further explanation. In other words, it shows that in spite of what is said of there being a tre- mendous gold production, all that can be used for monetary purposes is considerably less than $100,000,000 a year. Mr. Kindred. What did you say about France ? Mr. Blumenthal. The population is increasing in all these coun- tries with the exception of France. That means simply this: You take this country. It has 90,000,000 inhabitants. You have here a per capita circulation of about $32. The next year you have a mil- lion and a half more inhabitants. You will need $32 per capita additional for those 1,500,000 new inhabitants. You can not get your per capita down every time the population increases. If you want to keep the same per capita in circulation you must add enough to keep up with the increase in population. The same thing is true of Germany and England and all these other countries, which are all increasing in population except France, which is not increasing in population. Since the gold standard has been established in the United States no financial uneasiness could properly be ascribed to fear as to the soundness of our currency, except during the perior of the free-silver movement. In the panic of 1907 it was simply a question of getting money, and anybody who wanted it, either banks or individuals, cared not whether they received gold certificates, greenbacks, silver cer- tificates, or bank notes. The only trouble was that there was not a sufficient supply of any one of those fout tokens of money. It is, of course, another fallacy when people believe that they can get money for the balances they have in banks. Deposits in banks and trust companies of about $16,000,000,000 can not be paid in cash when there is only about 15 per cent cash to pay it with, and, as the number of people who have money in bank in this country is tre- mendously much larger than in any other country of the world, the attempt ojf some of them to get cash, for fear that later on they might not be able to get it, is followed by so many others that within a very brief period, a period of probably only a few days, sufficient cash has been drawn out to make it impossible for the banks thus depleted to replenish their reserves ; and as, under the present law, no bank having less than the reserve required by statute is allowed to make any new loans — ^that is, to do any new business — the business of the banks is bound to come to a standstill. This explains what was mentioned by one of the gentlemen here as to the reasons for the panic of 1907. Some people wanted cash. They saw that some of the banks had not much cash. They thought that in a little while there would be a great demand for cash, and they would not be able to get it. There was absolutely no demand for BANKING AND CUEEENCY EEFOEM. 707 the cash: were e the cash; the banks of the far West did not need it but thev afraid that the banks in the East could not give cash CertainlV they could not, because it was not there. So tl^e banks of Califomfa and Oregon took out all the money they could and got it in their Xn hands unti they got their reserves up to 60 or 70 per cent, men hysteria takes possession of people, in a few days there is no gold The people must be educated to understand that the money in bank does not mean cash, but that the money in bank means the privilege ot the transfer of a certain amount to somebody else in payment to somebody else. They must understand that if they do not put cash in the banks they can not get it out, because it is not there. The Chairman. Was not the panic caused more by a lack of credit than it was by a lack of currency, and should not the remedial leo-isla- tion be directed to a prevention of the psychological situation that we had m 1907, or may have hereafter, so that people will not think that they must go to a bank and get cash? Mr. Blumenthal. I do not believe, Mr. Chairman, that you can prevent certain ideas taking hold of certain people at a given time. However, if you put the banks in condition to pay out enough, so that the people, after a few days, see that they can get cash, or so that you make them believe that they cafi get it, they will stop wanting it. The Chairman. '\Vhy did they not have a panic in 1907 in Canada, just across the imaginary geographical line, when we had the panic here in 19(>7 ? Mr. Blumenthal. Because they did not go into hysterics. They were perfectly satisfied to believe that everything was sound, as it was sound. The Chairman. That is precisely what I am saying, that we need to present some remedial legislation that will make our people believe that. Mr. Blumenthal. I do not see how you can make people believe something by legislation. The Chairman. Was it not the difference between the banking sys- tems of Canada and this country that prevented a panic in Canada . at the same time that we had one here in 1907 ? They had the same sort of stress that we had. Mr. Blumenthal. Mr. Chairman, in Canada they have not got that large number of State and national banks that we have in this country. The Chairman. That is true. Mr. Blumenthal. But I tell you in 1907 it was only a question of two or three days when the Bank of England would have suspended payments — when the national banking act of England was to be suspended— and I will tell you that correspondence was going on; and if it had not been for very strong cables sent from here to Eng- land the Bank of England would have suspended, and you could not have' gotten another dollar of gold in England. The act was sus- pended here simply by the banks shutting down and issuing clearing- house certificates. That answers exactly the same purpose as the suspension of the national banking act in England. The Chairman. Suppose somebody in authority could ha^e sus- pended the reserve requirements of the national banking act ot this country • would it not have helped the situation gi-eatly i 708 BANKING AND CUEEENCY EEFOEM. Mr. Bltimenthal. I believe if you have a statute on the books — and I will come to that afterwards — under which the reserves are allowed to be drawn upon to a certain extent the situation will be helped tremendously, and you may never have that scare again. Mr. Kindred. To what extent would you suggest? Mr. Blumenthal. That the reserves Mr. Kindred. Should be drawn upon ? Mr. Blumenthal. I will go out of my way to take that up out of its order — right here. The Chairman. No ; suppose you proceed in your direct statement, and we will make notes and ask you questions afterwards. Mr. Blumenthal. I have that right here. The Chairman. I think it would be better if you would go on with your statement as you were going. Mr. Blumenthal. Very well. There are at present carried in the pockets of the people of the United States sums of money unheard of in other countries, and a great part of it, if not the greater part, is in gold certificates. If there were no gold certificates, they could not carry it in that form, and they certainly would not carry it in gold coin. I want to dwell on this for a minute. I do not know how it is in the South and the West ; but if you get any number of men together in New York and say to them, " Let us see how much money you have in your pockets," you will find that is true. A few days ago there were three of us together, and one was Judge Gary, and some ques- tion came up about currency, and I said, " How much money have you in your pocket ? " Judge Gary said, " I do not know ; some- where between a thousand dollars and two thousand dollars." I said, " Let us have a look at it." He pulled out his pocketbook, and there on top were two or three gold certificates of $500 each. This is another reason, and a strong reason, why you should not have any gold certificates in this country. Why should you make it so easy for the people to carry this money, which is so scarce in the world, around with them? Mr. Kindred. You do not mean to say that you think that is a ' common thing? Mr. Blumenthal. It is a common thing for people to have from $10G to $500 in gold certificates in their pockets. You see what I have here in my pocket [producing money] . Mr. Kindred. But you are on a trip now. Mr. Blumenthal. I carry $200 or $300 always. Mr. Kindred. I will not interrupt you further. Mr. Blusienthal. I do not object to being interrupted at all. This is a very important thing as a reason why the Government should not issue gold certificates. As it is now, you have these gold certificates scattered everywhere. Currency issued by the banks should in time provide a much larger proportion of the circulating medium in the pockets of the people than it does now. Now, this is additional circulation after the United States notes, and it is new circulation for the banks again. Mind you, I do not mean at all that these figures should guide you in any way. These are simply suggestions, and I have not attempted to frame any legis- BANKING AND CUEBENOY BBFOBM. 709 lation. All that I have attempted to do is to give a little information, as it may be m my power. It would be perfectly safe to allow the national banks to issue, say the hrst year 10 per cent of their capital and 5 per cent additional every- year until it has reached 50 per cent, and then, perhaps, a smaller amount annually until the circulation comes up to the full capital of the national banks. Such notes could be secured by deposits of two-thirds of their face value of savings-bank securities ; the char- acter of such securities, however, to be approved by a committee of three or five, to have its domicile in Washington, and of which the Secretary of the Treasury should be one, and under necessary safe- guards as to the character and proportion of securities to be accepted. One-third of these notes should be covered by a reserve of either gold or legal-tender money, and a tax of not less than 1 per cent on all the Qutstanding notes should be levied by the Government, and it should constitute a guaranty fund which would, no doubt, be fully sufficient for any deficiency which might occur through the insolvency of any bank and the less value of securities deposited for the outstanding notes of such insolvent banks. A tax of 1 per cent means a cost to the banks of 1^ per cent, be- cause they have to keep one-third in gold. The notes to be issued by the Government should to the largest extent be of the higher denominations, and as soon as practicable none should be issued for less than $10. The issue of notes of one, two, and five dollars should be left entirely to the banks, which would result in bank notes remaining in circulation and in Government notes to the greatest extent being lodged in the banks as reserve money. As the cost of plates for the notes of small denominations might be somewhat burdensome for banks of a small capital, who can take out only a small amount of notes, there is no reason why the Gov- ernment should not assume that cost, as the 1 per cent tax will imme- diately reimburse the Government for such outlay. That is all I have to say on the subject. . , . , ^, . . (ti Korv Now, I have a little synopsis showing how the increase to Sbl,500,- 000,000 would work out 'in fact. The present issue of United States notes is $346,681,016. The bonds now deposited against circulation are to be purchased by the Government. The part of the new issue at the disposal of the Treasury would be $1,153,000,000 The differ- ence between $346,000,000 and $1,500,000,000 means that the new issue of the Government notes would be $1 153 000,000. Now we come to the point of how these new notes should be used. The Gov- ernment should purchase all the bonds which are now outstanding deposited against circulation, at a fair price Just m order to put down something, I put down the prices as follows: For 2 per cent bonds, 102J. Three per cent bonds of 1898, 100. Four per cent bonds, 116f. , .„„ For the Panama^ per^tb„„a^^l02^ b"-* ">"? ™°M ''i'^' ?S/,°r„™ a/SnTiSit^oy K There would be needed fOT this, $745,000,000. 710 BANKING AND CUEEENCY EEFOEM. To increase the reserve from $150,000,000 to $500,000,000 would require $350,000,000, so that out of the total of $1,153,000,000 which would be in the hands of the Government out of the sum of $1,500,- 000,000 there would be needed $1,095,000,000, which would leave a difference of $58,000,000 available in the hands of the Government, out of which they could redeem the outstanding 3 per cent bonds which are in the hands of the public and not deposited as security for currency. The result of this would be that there would be only $58,000,000 more of money in the Treasury, but there would be $803,- 000,000 more of legal-tender money than we have now. No gold certificates should be issued hereafter, and the outstanding gold cer- tificates not in the hands of the banks are $520,000^000; so that that $520,000,000, if you stopped issuing gold certificates — and no doubt you could easily find a way to make a law to call in the gold certifi- cates — would practically all find its way into the banks in the coun- try, and make them so much the stronger in cash holdings. That is all, so far as this plan is concerned, and unless you want to ask some questions on this, I come now to the question of elasticity of the currency. The Chairman. I would like to ask you a question right there, before you get off of this. Where would the Government get this gold for the 33-| per cent reserve against these outstanding issues? Mr. Bltjmenthal. The greater part of it is now in the Treasury. The Chairman. There is $150,000,000 of it there; that is all. Mr. Blumenthal. No ; in the actual working balance of the Treas- ury there is a great deal of gold. You have gold certificates and other certificates. The Chairman. My information is that the working balance in the Treasury does not amount to much; that the outgo equals the income. Mr. Blumenthal. The working balance in the Treasury — ^what they call, I believe, the net working balance — -is probably $74,000,000. 'the Chairman. That is to meet current expenses ? Mr. Blumenthal. Yes; but you see you have in the Treasury to-day $74,000,000 and about $80,000,000 or $90,000,000 for current expenses, all in ^old. All you have to do is to take out that $150,- 000,000 and put it into the gold reserve and issue or pay out $150,- 000,000 of the new notes. That works automatically. The Chairman. But you are paying that out all the time. You can not take the working balance of the Government and use it as a reserve. Mr. Blumenthal. If you issue this money, it is absolutely United States money. AU you do is to put this money into the Treasury and take out the gold which you have in there, because for paying out these notes are just as good as the gold that you have lying there. I do not know if I make myself clear. The Chairman. No ; you do not ; because the credit of the Govern- ment is not as good as the gold. Mr. Blumenthal. If you claim that the credit of the Govern- ment, secured by one-third gold, is not as good as gold, then the whole scheme is impossible. If this proposed United States note is not as good as a national-bank note is at present, it is no good. But if you BANKING AND CUEEENCY KEFOEM. 711 K ^'l «^i®n JnAf^r.7 ^eP^^tment you will find that the Treasury has about $100 000,000— between $100,000,000 and $140,000,000, or some- thing like that— m their actual banking department of gold and gold certihcates. Now, this part forms at once one part of your reserve, because you substitute those new United States bank notes for it if they are wanted. But, as you know, the balance does not change much. Money comes m as it goes out. And the other gold we will have no difficulty in getting from the banks for the legal tender. _ Mr. Kindred. Did I understand you to say that the average balance m the United States Treasury was around $70,000,000 ? Mr. Bltjmenthal. No ; the net balance in the Treasury to-day is about $70,000,000 ; but there is a great deal more money in the Treas- ury. The Chairman. The working balance in the Treasury is about $49,000,000. Mr. Bltjmenthal. I thought that it was about $70,000,000 to-day. The Chairman. Perhaps so. Mr. BuLKLEY. Is not the difference due to the fact that they have the checks or gold there, but they deduct the amounts which stand to the credit of disbursing officers? Mr. Blumbnthal. Exactly; all their appropriations are deducted already. Mr. Kindred. This represents the amount of money that is actually there; but the chairman is referring to the amount available after deducting the amounts Mr. Bltjmenthal. Yes; but, of course, if you take this out and put the bank notes in instead of the gold The Chairman. But you can not count as reserves a fund that has been appropriated and may be called on to be used. Mr. Blttmenthal. I do not do that. You have it lying there in cash. Say that you have in the Treasury at this time $80,000,000 — that is, $80,000,000 lies to-day in the Treasury in gold and gold cer- tificates. Now, all you do is you take that gold and the gold certifi- cates, which are gold The Chairman. I do not understand that it is necessarily m gold and gold certificates. It may be in greenbacks or in Treasury notes. Mr. Blujmenthal. They have about that much in gold. I looked it up some time ago. ■ ^i x ^i i The Chairman. That may be. My understanding is that the only gold reserve that the United States Government possesses is $150,- 000,000, which is held against the greenbacks outstanding, ihey may have a billion dollars in the trust fund. Mr. Bltjmenthal. No ; the trust fund I do not count. Mr. Btjlklet. Would it not be proper to read into the record here the figures from one of the treasurer's daily statements, and be The' C^rKMAN' It is not necessary. I have accomplished all that ^ Mn Bti^KTHAL. It can easily be had from the banks. S^;•|^ST^A^fSit^l7att^^^^^^^^^ ^t least, of ^^ M %t™'Do?ou mean in addition to the $150,000,000? ^l- 5l™nthaZ ?n addition to the $150,000,000 ; yes, sir. 712 BANKING AND OXJEEENCY EEFOEM. Mr. Kindred. Is that $120,000,000 as reserve against the $346,- 000,000 of greenbacks ? Mr. Blltmenthal. No ; not against that, but absolutely independ- ent of that; in the assets of the Government. That could be taken out for the new notes put in there. It would work automatically. You would put something else in there and take the gold out. In my opinion the $500,000,000 of gold necessary could be easily obtained with the stock of gold in hand now. The Chairman. Do you mean to say that under a system of that kind the banks would exchange their gold for fiat Government notes ? Mr. Blumenthal. Yes; they would be perfectly willing. This is only a small percentage of the holding. The Chairman. We have not found the bankers who have usually appeared here so obliging as that. They have not indicated that they would be willing to exchange their gold for fiat Government money. Mr. Bdiklet. Would not that amount merely to this, that as the Government talces in from day to day a large amount of money, a certain part of it must necessarily be in gold certificates ? Mr. Blumenthal. Absolutely. Mr. BuLKLBT. Suppose they simply cancelled those gold certifi- cates and took the gold out of that fund and put it into the other fund and issued the United States notes in place of the gold certifi- cates when they had to make disbursements ? Mr. Blumenthal. Quite correct. Mr. BuLKLEY. Would not that exceed $150,000,000? Mr. Blumenthal. As I say, how to get it in the best way I have not studied ; but that you can get $500,000,000, and that it will remain there, is the easiest proposition in the world. Mr. BuLKLEY. You could get it from a single banker here in Washington ? Mr. Blumenthal. That you could get it I have not the slightest doubt. The Chairman. That would increase the gold to $500,000,000? Mr. Blumenthal. That would increase the gold to $500,000,000. Of course, that is a matter of opinion, whether 33^ per cent is neces- sary, or whether 30 per cent or 40 per cent is necessary. This is simply held out as a suggestion. The Chairman. In other words, that would mean that the Govern- ment, instead of paying its immediate-demand obligations in real money, would impound the real money and pay its demand obliga- tions in credit notes? Mr. Blumenthal. To a small amount; yes. On the other hand, the Government would redeem immediately $745,000,000 of its out- standing obligations. The Chairman. In other words, the Government under a project of that sort would cancel its interest-bearing obligations and issue to the holders thereof noninterest-bearing obligations of the Govern- ment? Mr. Blumenthal. Yes. The Chairman. I understand that point. Now, what I do not understand is where the Government is going to get the gold as a reserve against these proposed noninterest-bearing obligations. BANKING AND CUKEENCY EBFOEM. 713 _ Mr. Blxjmenthal. There is $300,000,000 here, right away; and it IS only necessary to get $200,000,000, and it can obtain that $200,000,- 000 absolutely in the process of redeeming the gold certificates. The Cpiaieman. That would mean a further increase of the non- interest-bearing indebtedness of the Government? Mr. Blumenthal. No, Mr. Chairman; the entire transformation which takes place is this : That the Government puts out noninterest- bearing debts and cancels the same amount of interest-bearing debts, and the circulation does not increase, because the Government re- deems as much of national bank notes as it issues of United States bank notes. In other words, whereas the Government is now re- sponsible for $1,500,000,000 — because the Government is responsible for $745,000,000 of Government bonds, and is further responsible for $745,000,000 of national bank notes, so that the Government is re- sponsible for $1,490,000,000 — after this change is accomplished the Government will be responsible for an obligation of only $745,000,- 000. That is the way it works. The Chairman. I do not understand that at all. Just for illustra- tion, say there are $745,000,000 of outstanding national bank notes, represented by United States Government bonds as a basis. Mr. Blumenthal. In the first place, there are $745,000,000 of out- standing national bank notes for which the G&vernment is responsible. The Chaie3ian. No; the Government is not responsible for one cent of them. Mr. Blumenthal. I think it is. The Government has to pay them. The Chairman. The assets of the banks and the double liability of the stockholders and Government bonds owned by the banks, which are an asset of the banks, are responsible for those national- bank notes, and the Government is not responsible for a cent of them. The Government is responsible for those bonds and to see that they are paid when they fall due. Mr. Blumenthal. If the notes are presented here, you must give other money for them for redemption. . , • • n r< The Chapman. That is under the process of maintaining all Gov- ernment money at a parity; but the national-bank notes are not Gov- ^^m!-!'bi!Sj™nthal. Yes; but you have to pay them first, and you have to look to somebody else afterwards. The Chairman. We are getting off the question of where the Gov- ernment™ing to get this gold from to f«™/he. reserve against Hs fiat notes Let us say that there are now outstanding $700,000,000 of nationaliank notes7with the 2 per cent Government bonds as a basis for that is,sue of $700,000,000. ¥£ ^h^a^Tan"! Jd%pose l\^o.ern^^totS^Oo7Stt to retire those bonds and bank notes by issuing $700,000,000 ot l^ov emment notes and destroy the bonds. Government notes there must >» « Sf'^^^'fto-et the soM from. "'X.%*™B'i'Il'Yo?rrSr ln&&„r.v $233,000,000 in gold. 714 BANKING AND CUEEENCY EEPOEM. The Chairman. But suppose there is now in the Treasury $233,- 000,000 of gold. Mr. Blumenthal. Yes. The Chairman. That is being now appropriated by this Congress for Government purposes. Mr. Blijmbnthal. Yes. The Chairman. If you undertake to impound that gold, and to have the Government hold that gold, it has got to issue noninterest- bearing obligations for it, and to that extent increase the outstanding amount of currency. Mr. Blumenthal. No ; you need not increase it at all. The Chairman. I do not see that. Mr. BxTLKLEY. I have this Treasury statement, which is the state- ment at the conclusion of business February 26, 1913. Let me read it. Mr. Kindred. I am very much interested in the conclusion of this discussion between the chairman and Mr. Blumenthal. Mr. BuLKLET. I am not going to interrupt the conclusion. I just want them to have the facts before them. There are now in the Treasury offices gold coin to the amount of a little over $22,000,000 and geld certificates to the amount of $9/3,500,000. The Chairman. Yes; jDut do you not understand that that is the current working fund of the Government, to be paid out on appro- priations made by the Congress? Mr. Btjlkley. But Mr. Blumenthal's suggestion is that you put the gold into the reserve and substitute for it United States notes. The Chairman. But to the extent to which you do that, you in- crease the circulating medium, do you not ? Mr. BuLKLBY. No; because you withdraw the gold from circula- tion and substitute the United States bank notes for it. The Chairman. In other words, the Government holds this gold money and puts out its credit notes in place of it. Mr. BuLKLET. I understand that the Government would hold the gold and pay out United States notes. Mr. Blumenthal. Yes; but not up to that amount. We have $1,153,000,000 of notes. That is what we started from before. Of that $1,153,000,000 there is $745,000,000 used to pay off the national- bank notes. The Chairman. But that is an addition to the national-bank notes. You are talking about retiring the gold certificates now. Mr. BuLKLEY. May I make this suggestion? Here are gold coin and gold certificates in the Treasury. The Chairman. Yes. Mr. BuLKLEY. Those are not in circulation now. Your suggestion is that they may be brought into circulation The Chairman. How do you mean ; that they are not in circulation now? Mr. BuLKLEY. They are in the Treasury. The Chairman. They are in circulation. They are counted as money in circulation. Mr. Taylor. All money has, at times, to be held a little back, but it is really in circulation. The Chairman. These gold certificates and this gold coin are in circulation, because they will be paid out to meet the expenses that the Government incurs every day. BANKING AND CTJBEENCY REFORM. 715 ^u" ^.^LioLET. You T,Yithdraw them from circulation « ine Chairman. Yes. Mr. BtJLKLEj. You withdraw from circulation $118,000,000 of gold and gold certificates ? ' ' s The Chairman. Yes. Mr. BuLKL.Er. If you replace them with United States notes, you have not increased the amount of money in circulation? _ The Chairjian. You will have increased the volume of credit notes m circulation. Mr. BuLKLEY. Yes : but not the volume of currency in circulation. You will have only replaced one thing with another. Mr. Kindred. What do you do with the gold itself Mr. Btjlkley. It is a part of the reserve. Mr. Kindred. You are increasing the reserve in that way. Mr. Blumenthal. If you want to have a reserve against a note, you must get the gold from somewhere. If you want $500,000,000 of reserves, you must procure the gold. There may be a lot of differ- ent ways of procuring that gold, but you can easily procure it. From the large stock of gold in this country you can easily set aside $500,- 000,000. You already have $150,000,000 and $118,000,000. There is $268,000,000 ; so that all vou have to take out of the circulation of gold is $232,000,000. The Chairman. Then, explain this mystery to me. If it is so easy to obtain gold bj' issuing Government fiat notes for gold, why did Mr. Cleveland issue $260,000,000 of bonds to replenish the gold reserve in 1893? Mr. Blumenthal. Mr. Cleveland never issued a dollar of bonds to replenish the gold reserve. That in my opinion at that time was an absolutely unfair statement. Under Mr. Cleveland's administration the expenditures of the Government away outran the income of the Government, and every few months the Treasury was dry, because there was no money left. That was the reason for the issue of bonds. There were between $200,000,000 and $300,000,000 of bonds, and they said that it was a kind of endless chain. If the receipts of the Government had equaled its expenditures and they had not issued any bonds, there would have been perhaps $50,000,000 or $75,000,000 of gold imported, and by that time money would have been so tight and would have commanded such a high rate in New York that no more gold would have gone out of this country. But when a country runs short all the time, the money must be obtained somewhere to pay the expenses of the Government. The administration at that time did not wish to admit that it was a lack, an insufficiency, of funds which made it necessary for them to issue bonds, as that they put it upon the ground that it was necessary in order to keep up the gold standard. But it was not, at all. If you will look over the figures ^"Somebodv comes to-day and wants $50,000,000 of gold, brings in the greenbacks and demands the gold. The Government does not issue any bonds for it, because it is all there. If the Government took that $50 000 000 of greenbacks and paid it out right away, the man who had received the gold or anybody else could get the notes and come back and sav " I want gold, again." That is a different matter. If I was a man that had a claim against the Government and I came and wanted my money and it was given to me and I asked gold for 716 BANKING AND OUEEENCY EEFOEM. it, g-old would have to be given me. Then, if the Government was obliged to pay out the paper again, because it had nothing else to pay out, the paper would be out and it would be brought back and gold demanded for it again, and bonds would have to be issued to get that gold. That was the trouble in 1893. The same money was out all the time, simply because the Government did not have enough income. The Chairman. That has not been the general understanding in the country. The general understanding in the country was that the gold reserve was being depleted; that it had run down to $70,000,000; and that the Government had to issue bonds in order to replenish the gold reserve. Mr. Blumenthal. Yes ; but it was not so. The Chairman. If it is so easy for the Government to get gold in exchange for its noninterest-bearing obligations, as you propose, it seems to me that it was a great mistake to issue interest-bearing obligations to get gold. Mr. Blumenthal. Mr. Chairman, it is all a question of the jfinanc- ing of the Government. Now, you have seen this gold fund of $150,000,000 was created about 10 years ago. Never once was a ser- tificate or never once was one bank note presented for redemption against that fund. AVhy? Because since that time the income of the Government has been equal to the expenditures. Mr. Taylor. You speak of $150,000,000 of gold that is now as a reserve behind the greenbacks. Mr. BLUMteN'rHAL. Yes. Mr. Taylor. That reserve was created before 1879. Mr. Blujienthal. No ; it was at that time $100,000,000 and it was afterwards increased to $150,000,000. The $150,000,000 has been in existence only about 12 years. It used to be $100,000,000. But, mind you, this $150,000,000 is not only against the $340,000,000 of green- backs, but it is also against $460,000,000 of silver certificates, so that we have $150,000,000 gold reserve to-day against $800,000,000 of cer- tificates and notes. Mr. Taylor. Do not the silver certificates pass on a parity with the gold certificates ? Mr. Blumenthal. You have kept the silver certificates at a parity, but as the silver is worth only half the face value of the certificates, it means nothing. If you will look it up you will find that it was only because the income of the Government was not sufficiently large that bonds were issued during Cleveland's administration, but it did not suit the New York bankers to make that clear, because they wanted to certain law repealed, and it was repealed, and it was prob- ably a very good thing that it was. Mr. Taylor. Is your bank a national bank, or not? Mr. Blttmenthal. It is a private banking firm. Mr. Taylor. I thought that it was so, but I just wanted it to ap- pear in the record. What is your firm ? Mr. Blumenthal. It is the firm of Lazard Freres. Gentlemen, I really believe, unless you want to ask further ques- tions, there is nothing more on this ; but there is another thing which is entirely independent of this one and which refers only to the elas- ticity of the currency. This, in my opinion, could be enacted inde- pendent of anything else. In my opinion the less legislation you pass the better you are off, because there has to be legislation some BANKING AND CUEEENCY EEFOEM. 717 time or other in the near future — ^vhen I say in the near future I mean within five years or so — all over the world, because there is not enough circulating medium in the world to-day. There will not be, unless things change, certainly. For instance, supposing that India should not take any more gold and Brazil should not take any more gold, things might be better. But the outlook is that these demands wlU continue and that we will have a further additional demand from China, which will probably become a competitor for gold. There not being sufficient gold, this world will have to live on fiat money because it can not live on gold. The gold is not there. Mr. KiNDEED. Is not that like the balloon that floats along beauti- fully and all at once collapses ? Mr. Blumenthal. If you can not get the gold in the world you will have to do something. You can not stop building and produc- tion because there is not sufficient gold. But I think the United States would make a mistake if they should pass any legislation to make it easy for the rest of the world to take gold away from us. I would warn you against making any law which would make a large circulating medium here and make money easy, and as a consequence gold would flow away from here. Protect your gold as much as you can and put the onus of making new legislation on the foreign coun- tries ; because the moment we do it they will say, " Well, they have a bad system." If we had a system such as they have in France, under which we did not give gold, they would say that we were bankrupt. In Europe they say, " "We do not give it." That is the difference. In New York the deposits of the national banks are $1,300,000,000. The deposits of the State banks and trust companies amount to the same figure. Any of the requirements which are indicated or asked for by the Government are generally required also by the clearing house for those institutions which are not under the Federal Govern- ment, so that we can say that the $2,600,000,000 would fall under the same provision. To give elasticity to the currency, the national- bank act might be amended in the following ways : When banks loan money below 3 per cent their reserves must be at a minimum ; 27^ per cent in reserve cities and 17^ per cent m other places. When banks loan money below 2^ per cent, the reserve to be a minimum of 30 per cent in reserve cities and 20 per cent m other I do not know whether that is clear. Just as in Europe the bank rate is put up and down as money is scarce of plenty, you know, m order to regulate it, this would regulate it, to make money not too easy. To-day banks can loan money at any rate so long as they have 25 per cent reserve. There are certam times of the year when money naturally flows to New York because there is no use for it in the country. Of course the idea of the banks m New York is that the moment they get deposits they must be utilized because they have to pay a small rate of interest for them. Now, let them utilize that moSev as much as they want to within the 25 per cent reserve, up to the time w^en they can not get 3 per cent for their money any more Wlien ttily can not get rid of it at 3 per cent and have to loan it below why not contract the currency by telling the banks. You can ^ot loan money at 2 per cent unless you increase your reserves It woukl me^n that before the banlc loaned money at 3 per cent they 718 BAlvKING AND CUEEENCY EEFOEM. would have to accumulate $65,000,000 of money as reserve, money, which would be an advantage in the country, because this $65,000,000 could be drawn out without making any difference in the position of the banks. They could pay out $65,000,000 and still have their 25 per cent reserve, and another $65,000,000 when it comes down to 2 per cent. In order to work it out on both sides, why not say that banks may continue to loan money until their reserve be reduced to 20 per cent, but they shall pay a tax at the rate of 2 per cent per annum on the shortage in their reserve from 25 to 22^ per cent and a tax of 4 per cent on a shortage from 22| to 20 per cent. This, again, will allow the banks, without any special law, in the natural course of business, to get rid of $130,000,000 more cash when they need it for the purposes of the country. They could not leave that money out because they would have to pay 2 per cent on the first $65,000,000 and 4 per cent on the second $65,000,000. When they pay 4 per cent they can not loan that money at less than 8 or 9 per cent, which will immediately put that restriction on money which ought to come to make the people more careful in the use of it and which corresponds entirely to the raising of the discount rate in Europe when money goes away. It seems to me a very simple matter, almost so simple that it seems impossible ; and still I believe that it deserves consideration because 1 believe that it could be done. The Chairman. Mr. Blumenthal, getting back to the question of the Government getting gold with such facility, what is a reserve? Is not a reserve a part of the circulating medium of the country? Mr. Blumenthal. It is that part of a circulating medium which does not circulate. The Chairman. Nevertheless it is counted as a part of the volume of circulation? Mr. Blumenthal. It is counted as a part of the volume of money in the country, absolutely. The Chairman. Yes ; of the circulation ? Mr. Blumenthal. Absolutely. The Chairman. In other words, you deposit $100,000 in the cen- tral reserve bank, and that bank is required to hold $25,000 of that deposit against its outstanding obligations? Mr. Blumenthal. Yes. The Chairman. So that holding a reserve is not retiring any part of the circulation? It is holding it in readiness to meet demands; is not that a fact? Mr. Blumenthal. No. Practically, under our present law, as we stand with the 25 per cent reserve, it is simply withdrawing it from circulation. The Chairman. Withdrawing it from circulation? Mr. Blumenthal. Practically. The Chairman. Is it not the theory that it is held there to pay the average bank demands? Mr. Blumenthal. Yes ; it is. The Chairman. Then it is not withdrawn from circulation ? Mr. Blumenthal. If you say 25 per cent must be held, you with- draw that much from circulation, because it can not be paid out unless BANKING AND CXJEEENCY RBFOEM. 719 io^dav^nS?rVK°''?^'^*^- 1 ^""^ put $100,000 of new gold in the bank rS^^' ^^^ ^^^^' ^^^ °^n lo'in out of that only $75,000 Ihe Chairman. The reserves of all the banks are' counted as a part of the circulation of the country? i-ouniea as a co^tr^''^''''''™^'" '^^'^^ ^^^' ^' ' P""* "^ *^^ ^°^^y ^t«*=k of the The Chairman. Yes; of the circulation of the country? Mr. Blujiextiial. Yes. The Chairman A Government reserve is also. What is the mean- gation "'"""'^ mat IS It held for? It is held to pay an obli- nn^^nnn^'^'^^r'T-T^''' "^^"^ ^^""^ $500,000,000 against the $1,500,- 0UU,UO0, so that it some one comes and wants $500,000,000 of that in gold, you may give it. _ The Chairman. So that, I say, it is a part of the circulation, and is counted as a part of the circulation of the country, just as the re- serves of the banks are counted as a part of the circulation? Mr. Bltjmenthal. They are counted The Chairman. So that if the Government takes in a gold certifi- cate and holds it m the reserve and pays out its own credit note instead of that gold certificate, to that extent it increases the circu- lating medium ? Mr. Blumenthal. It does not increase it, because this $500,000,000 does not count. There are $1,500,000,000 of notes out. Now, you can not count the $1,500,000,000 and the $500,000,000, because any part of that $1,500,000,000 may come in there, and you must have in the Treasury always either the $500,000,000 or part of it in gold to redeem the notes. If the Government to-day Was short of money, you could not touch that $500,000,000 gold and take one dollar of it to pay a pension bill. The Chairman. I can readily understand that if the revenues of the Government far exceed its requirements, and the Government wants to establish a' surplus of $500,000,000 out of its net receipts and hold that, that is a different proposition. But if the Government simply wants, out of its current funds, to subtract the gold certificates and impound them and issue in their stead Government credit notes, to that extent it increases the volume of the currency. Mr. Blumenthal. The volume of the currency is absolutely deter- mined by the fixed amount of $1,500,000,000 against which you have $500,000,000 'in gold. The Chairman. But what I am trving to arrive at is where does the Government get the $500,000,000 of gold ? Mr. Blumenthal. Let us say that they buy that $500,000,000 of gold, if they can not get it any other way. The Chairman. I grant you that the Government can buy $500,- 000,000 of gold ; but it has got to have the money to buy it or it has got to issue its bonds before it can get it. People are not going to give the Government $500,000,000 in gold. But i^ they do that, to that extent the volume of credit money is increased by $500,000,000. ' Mr Blumenthal. $300,000,000 of this $500,000,000 we have m the Treasury, so that there is only $200,000,000 to be gotten. 720 BANKING AND CXJEEBNCY EEFOEM. Mr. BuLKEEY. Mr. Chairman, the amount of gold certificates varies from day to day. There is not anything to prevent the Government from retiring gold certificates, from taking the gold out of that trust fund which it is pledged to hold against gold certificates, and putting it into another trust fund. The Chairman. If I have $500,000,000 of gold certificates repre- sented in a trust fund in the Treasury, and the Government under- takes to retire that $500,000,000 of gold certificates that I hold, it has got to give me the gold. It can not give it to me and put it in a trust fund, too. Mr. BuLKLET. That is not the situation. The situation is that the Government itself has about $118,000,000. That includes gold coin as well as gold certificates. Mr. Blttsienthal. Yes ; they are the same thing. Mr. BuLKLET. It has $96,000,000 of gold certificates that are held in the general fund in the Treasury. The Chairman. Yes ; that is the general fund. Mr. BuLKLET. Those certificates could be taken over and canceled and gold, to the extent of $96,000,000, could be drawn out of the trust fund which is held to redeem gold certificates. The Chairman. That is true; but when Government obligations are coming in every day against that $96,000,000, how would the Gov- ernment pay those obligations? Mr. BuLKixET. According to Mr. Blumenthal's suggestion, it would pay them with United States notes. The Chairman. If it did that, it would be utterly fiat money, and it would increase the amount of credit notes in the country to the extent of $500,000,000. Mr. Blumenthal. No ; Mr. Chairman. Mr. Bulkley. There is no question about that, but it would not be an increase of the circulation in the country. The Chairman. I think it would be. If you are holding $500,000,000 as a reserve against the $1,500,000,000 of credit notes in this country, issued as a part of the scheme — are not bank reserves a part of the circulation of the country ? Mr. BmDKLEY. That is a different matter altogether. The Chairman. I must confess to a great mental confusion on the subject. Mr. Blumenthal. I think that I can make it clear. If the total limit of the issue of fiat money — if you call it so — is $1,500,000,000, you must have $500,000,000 reserve. There can never be more than $1,000,000,000 in circulation. That is the total amount of circulation that can never exist, because against this $1,500,000,000 you must have $500,000,000 reserve. If a part of that $500,000,000 is taken for redemption of the notes, then there are so many less notes outstanding. You can not get more than $1,000,000,000 of notes outstanding. The Chairman. Where are you going to get the $500,000,000 to start with? In order to get the $500,000,000 you have got to have $2,000,000,000 outstanding. Mr. Blumenthal. No; I have shown you the figures. You think that you have to buy $200,000,000 of gold. As Mr. Bulkley says, you can withdraw that $200,000,000 out or the incoming money in a short time without taking the other. BANKING AND CUEEENCY EEFOEM. 721 fofano'^h^"""""" '''' y°" ""^P^^- ^'^b^tit^te one fom of money The Chairjian But you can not substitute, for a current fund in the Treasury that has l>een appropriated by Congress to some otl.er use^a c^dit note, ^-ithout increasing the volume ffeu nine; Mr. Blumexthal. les you can, absolutely. I do not think we understand each other, but I think that it can be done abso telv . Mr._ Taylor. If the $150,000,000 now in the presTnt' reserve Ld IS estimated m estimating the amount of currency in circulation I fully agree with Mr. Glass that when you issue $l,.50o'oOOOOoTf notes It does not make any difference what vou do, if vou take that gold and put it somewhere else and issue notes, that is also a part of the circulation and would be an increase to that extent T i BuLKLEY Absolutely not. It is not a part of the circulation. ~ T/c aemonstrate that from these figures in a few minutes Mr. Taylor. If it is not considered as that, it does not increase the circulation ; but I have always understood that the $150,000,000 was a part of our circulation. Mr. BtJLKLEY. How much circulation do you think we have ? Mr. Taylor. A little over three billions.' It is a little over three billions, according to my recollection. Mr. BrLKLEY. You have in the trust-fund gold certificates out- standing com and bullion to the amount of $1,083,000,000; silver dollars, $469,000,000; silver dollars of 1890, a little over $2,000,000- making $1,555,000,000. Mr. Taylor. Yes. Mr. BuLKLEY. In the reser\-e fund vou have coin and bullion to the extent of $150,000,000 more. Mr. Taylor. Yes. Mr. BuLKLEY. That will give a total of $1,700,000,000. Now, you have gold reserves outstanding, $1,083,000,000; silver certificates out- standing, $469,000,000: Treasury notes outstanding $2,000,000; United notes outstanding, $346,000,000; giving a total of about $1,900,000,000. If you add those two together, which you are at- tempting to do if you say that thej^ are all circulation, you have got a total of $3,600,000,000, and you have not begun to take into con- sideration Mr. Taylor. But you have already put in there Mr. BuLKLEY. I am counting it twice, as you are proposing to do, and I am demonstrating to you that it is not the correct way to do it. That makes a total circulation, as you would count it, of $3,600,- 000,000, and that does not take into consideration at all the actual gold that is in circulation or the bank notes. I have simply made that calculation to demonstrate the absurdity of counting the reserve as circulation. Mr. Taylor. I really do not think it -ought to be counted as cir- culation. Mr. BuLKLEY. It is not. It is money in the country. The CiiviKaiAN. Suppose the Government wants $500,000,000 of gold Say it has $500,000,000 to its current credit down here at the Treasury,' but that $500,000,000 has been appropriated for Govern- 76112— PT 13—13 3 722 BANKING AND CTJEEENCY BEFOEM, ment expenses. Suppose the Government takes that $500,000,000 that it has on current account and buys $500,000,000 of gold with it ; how is it going to pay the $500,000,000 that has been appropriated without issuing $500,000,000 more, unless it has a surplus fund, with- out increasing the outstanding circulation. Mr. BuLKLEY. It can pay its debts with United States notes, and for every United States note that is issued it has got out The Chairmak. It will have to pay for the gold with the United States notes. Mr. BuLKLEY. The gold is there in the Treasury. Mr. Blttmenthal. It is already provided, except about $150,000,000. The Chairman. It looks to me like an attempt on the part of the Government to get something for nothing. Mr. Blumenthal. That can not be done; I freely admit that. The Chairman. But you can not take the funds that are already appropriated for Government expenses and buy a gold reserve with them without substituting something else. Mr. BuLKiiEY. When money is appropriated is it ever provided that it shall be paid in gold ? Can not the Treasury pay it in United States notes or in silver certificates or whatever it has in hand ? The Chairman. Yes; but it has got to give something for what- ever it gets. Mr. Kindred. That is not the proposition. The proposition is to pay specifically in gold bullion, now. Mr. BuLKLEY. There would not be anything in an appropriation bill to prevent the Government from paying out under an appropria- tion those United States notes. Mr. Kindred. But you do see the practical impossibility of paying in gold bullion ? Mr. BuLKLEY. Certainly there would be; but there is nothing in the law to prevent the payment in United States notes. Nor is there anything in the law to prevent the use of gold bullion; nor has it anything to do with the question. The Chairman. Here is the problem, in its. simplicity : The Gov- ernment has not a cent that is not already appropriated for obliga- tions contracted bv the Government, but the Government wants $500,000,000 of gold now. It will issue $500,000,000 of Government credit notes for the $500,000,000 of gold. Just to that extent, it seems to me, it increases the volume of outstanding credit notes. Mr.. Taylor. There is no doubt about that. Mr. BuLKLEY. There is no question about that. Nobody is taking the opposite view. The Chairman. Well? Mr. BuLKLEY. One point is that when you do that you have de- creased by that much the amount of gold in circulation ; so that you have not increased the net circulation, although you have increased your fiat circulation. Mr. Taylor. I agree on that; but my point is and has been that the reserve in gold has been included as a part of our circulation, when the circulation has been calculated to be a little over three bil- lions in money ; and if that be a fact, then I hold that you have increased the circulation. The Chairma>\ The same proportion, it seems to me, is involved in counting the reserves of the banks. BANKING AND CUEEENCY EEFOEM. 723 Mr. Tayijik. T think so. T'le CiTAiiniAx. They are simply held to meet obligations of the banks. Mr. Taylor. That is it. Thej^ are counted in, though, as part of our circulating medium. Mr. BuLKi^EY. Xobody knows how much the reserves of the banks are on a given day. but everybodv knows what the reserves of the Government are from day to day. INIonev that is held as reserves in these trust fimds. the so-called reserve fund and the so-called trust fund to secure circulating medium, is not itself a part of the circu- lating medium because it can not be touched except where the cir- culating medium is reduced pro tanto. It stands on an entirely different basis from bank notes. The Chaie.man. I can not see it. Mr. BLrMEXTHAL. Mr. Chairman, it seems to me there are two entirely different propositions, or two entirely different matters, to be considered. The first matter for your committee to consider is whether it would be advisable to substitute United States notes for national-bank notes and to redeem a certain part of the national debt. The second consideration would be to see, if in principle that part would be admissible or advisable, to find out The Chairman. But would that be a redemption of the debt? It would simply be a change in the form of the debt. You would simply retire an interest-bearing obligation with a noninterest-bearing obli- gation. Mr. Blloiemhal. I will put it in this way: The first thing is to consider whether it is advisable to substitute a noninterest-bearing debt of the United States against an interest-bearing debt, and to the same amount, practically, reduce the national-bank note circulation. The CHAimiAN. And to that extent to put an obligation upon the Government to redeem in gold $780,000,000 of outstanding demand notes. Mr. Bltimenthal. Yes. Then the next question is, if this in prin- ciple should be considered advisable and feasible, which is the way to get that gold to make a reserve of $500,000,000 ; and that is a sec- ondary question, because I do not believe there can be any doubt m the rnind of anybody that in one way or another that $500,000,000 can be obtained. In reality, all that we would have to obtain would be $150,000,000. because $350,000,000 in gold is here now. The Chaiemax. Oh, yes; I think the $500,000,000 in gold can be obtained. , , ,- , Mr. Blitmenthal. So that there are those two questions to con- sider. The first is whether this is at all feasible. The Chairman. Whether it is a feasible thing to do; and if so, how it can be done. . ,, ■ ,, .i- i,- i. t Mr. Bltjmenthal. Yes. Now, there is this other thing which I would submit for your very careful consideration, and which I think is a much easier matter than this one, because I believe there are cer- iain features in this which might work out very well and the whole San mi'ht work out very well. I did not come here to advocate it WoT^v mean= I refer to this proposition of making an automatic ^c^ease a "decrease in the res^erv^s from 25 down to 20 per ceiit^ I believe you could accomplish with a very short amendment to the natS-banking act just what we have been looking for for so long. 724 BANKING AATD CUERENCY EEFOEM. Mr. KiNDEED. That is very arbitrary, is it not ? Mr. Blumenthal. The 25 per cent is very arbitrary. Mr. Kin DEED. I mean to make your reserves in the ratio of the percentage that the market is paying for money is arbitrary. That is the proposition, is it not? Mr. Blumenthal. Do not forget, gentlemen, that there is very little money loaned in this country below 3 per cent. Mr. KiNDEED. Would it not require on the part of the members of this committee a great deal of calculation such as you have had the opportunitj' to do, and to do very thoroughly, to come to such a con- clusion as that? Mr. Blu:menthal. No ; I believe you would not have to make much calculation. You see, when money goes below 3 per cent reserves ought to be higher, because that is the low point for money, and they can accumulate reserves. Mr. Kindred. I understand the principle of it, and the principle may be ever so correct ; but I do not know that the ratio as based on your figures would carry out the principle. Mr. Blumenthal. You can only go by amounts. Of course, if you figure over the whole country, it means that money can very rarely go below 2 per cent. But if during the time when it went be- tween 2-J per cent and 3 per cent you accumulated large reserves, it would take a very long time to absorb that ; and if you absorb it, we have a way to pay out some more. You want some way to make it easier to pay out more money. We are approaching a condition of the world in which there will be no money anywhere. Nobody can tell when that time will come, but when it does come there will be very serious difficulties. Improvements are going on all the time everywhere. They want to build modern schoolhouses and have electric light and water plants everywhere. They have not got the money for these things, and they have to borrow the money to get them. Mr. Kindred. Xow, about the possible scarcity of gold — let us con- fine it to this country. I see the possible force of it as applied to some of the European countries you have mentioned, but here is what I would like to have your opinion about. Our gold supply from our part of Alaska has been keeping up wonderfully, has it not? Mr. Blumenthal. The gold produced in the United States, in- cluding Alaska, has shown a slight tendency to decline in the last few years, and I believe it is down now, including Alaska, to about $89,000,000, is it not? Mr. Kindred. I presume you are correct. Then the other point to be considered in regard to keeping up gold reserves here would be in some measure related to the balance of trade in our favor. Not altogether is that relationship true in all cases, but it certainly is related. That is, the amount of gold that we can gather from abroad is measured to a great degree by the general balance of trade in our favor. Mr. Blumenthal. By the general balance of trade, including the visible and invisible. Mr. Kindred. Yes. If we go on in the development of our great I'esources and continue to get from Alaska as much gold as we have been getting Mr. Blumenthal. I think it is a very small amount, is it not? BANKING AND CUBBENCY BEFOBM. 725 Mr. Kindred. Well, and from all the ^vorld. If we continue to mamtain the balance of trade in our favor, and if we maintain our gold reserves by some safe and sane methods, how are we going to be hurt m the next one or two decades by this scarcity of gold? Mr. Blumenthal. Do you want me to answer that? Mr.KiNDEED. I do. Is not that a fair proposition? Mr. Blttmenthal. Yes; that is a very fair proposition. Perhaps it is one of those things which is much easier to ask than to answer. Still, I will try to answer it. So far as getting gold in any large amount from outside is concerned, of course it is always a question only of whether it is owing to you. It has been demonstrated time and time again that if something is due to you, you can get it, and something you owe you have to pay. I have seen gold exported from the United States when money in London was ruling at 14- per cent per annum and money Avas ruling in Xew York at 6 and 8 and 10 per cent. Still, gold was exported. In the same way, gold can be exported when money is high here and low outside. It can not be imported if money is high here and low outside, because at times when the money was exported from here, and when the money was at li per cent in London, it was simply because there was distress here, and people wanted their money here anyhoAV. When there is a balance of trade in favor of this country we can get the gold; but a balance of trade in favor of this country is a yery uncertain thing. We have had a balance of trade which will probably be, by the end of the year ending June 30, the largest in the history of the country. It will probably be around $700,000,000. Mr. Kindred. In our favor? Mr. BLXJsrENTHAL. In our favor. But, Mr. Chairman, when you take that $700,000,000 and analyze it, it shrinks tremendously. Mr. KiNDEED. In what case ? Mr. Blumenthal,. In every case, every year. From this $700,- 000,000 you have probably to deduct about $200,000,000 and perhaps $250,000,000 for interest on what we owe abroad on the amount of securities which is held abroad. Mr. Kindred. That will leave $500,000,000. Mr. Bltjmenthal. That will leave $500,000,000. Then there_ is the amount of money which we pay, which you do not see but which we nevertheless pay, for freight and insurance. :Most of the freight on goods imported and exported from and to Europe you do not see. It is in the price of the goods. You see the cost price on the goods imported and in the goods which are exported you see the value, but you do not see the freight. , -ij- , . ^^,. Mr Kindred. That is a good argument for building- up oui mei- chant marine and getting that freight ourselves is it not Mr. Blumenthal. It is a wonderful argument. I wish you would Vr Kindred. I do not want to interrupt you „.■■,, , ivir. ^ijNL»KJiLr. T .1^ „ot mind at all. This item of freight and 726 BANKING AND CTJKEENCY EEFOEM. Mr. Blumenthal. No, Mr. Kindred ; there is a certain amount of it. It might increase or decrease a little in accordance with general prosperity ; but let me tell you now that general prosperity has not nearly the bearing on those questions to-day that it had 10 or 20 years ago, because in this countiy to-day there are so many people who are so rich that they are not affected by general conditions. If that money is spent it has to be remitted in the form of exchange. No matter how little the individual who spends that money feels it, it takes it out. Let us say that there are 90,000 people going to Europe each year. That is a small number. They spend at least $125,7 000,000. That is the minimum amount. Mr. McCeeary. It has been estimated at $200,000,000. Mr. Blumenthal,. Yes; but I do not include in that number the 60,000 or 80,000 people who live in Europe permanently and get from here the entire money which they spend, and not only their spending money, but they buy a castle in England to-day and a chateau in France to-morrow, and they furnish those places and spend millions and millions. You can figure probablj^ another $100,000,000 there. In other words, we have reached the position to-day — ■ — ■ Mr. Kindred. That is only $100 a head. Mr. Blumenthal. $100,000,000, I say. Mr. Kindred. That would be $100 per capita. Mr. Blumenthal. No ; $1,000 per capita. Mr. Kindred. $1,000 per capita ; yes. Mr. Blumenthal. So you have here $525,000,000 in these various items. Mr. BuLKLEY. How much money do you think is taken out of this country by foreign laborers who go back to their homes in Europe ? Mr. Blumenthal. The amount that is sent from this country to Italy alone can not be less than $50,000,000. Mr. Kindred. I have known Italy to take out $2,000,000 alone from New York. Let us grant all that ; what does it all come to ? Mr. Blumenthal. I think we can safely say that it takes a trade balance of five or six hundred millions in our favor to make us even. When you see our trade balance and see that we have exported $500,- 000,000 more than we have imported, you may know that we are about even. Mr. Kindred. In other Avords, there is nothing to it? Mr. Blumenthal. Tliere is nothing to it. We ought to build up our trade all the time to cope with it. This spending of money in Europe is increasing all the time. There are more people going over and living over there, and they are spending more money there. Mr. Kindred. But, granting all that, we have been getting gold when we needed it. Mr. Blumenthal. There is yevj little gold that comes over. Mr. Kindred. We got it in good quantities in 1907. Mr. Blumenthal. And we paid dearly for it. Mr. Kindred. Of course, we got it. Mr. Blujienthal. Of course, we got it. Have vou any idea what we paid for that gold at that time ? We imported $40,000,000 of gold and we probably paid $80,000,000 or more for that gold. What hap- pened? Europe did not owe us anything at all, but there was a panic here. The prices of securities were dwindling. They went away BAISTKING AND CUKEENCY EEFOEM. 727 down below the price that everybody knew they were worth Xow what happens in a case like that? There is a inan in England who has consols, or who has money in bank. He does not care one iota whether the rate of the Bank of England is 1 per cent or 2 or 6 or 10 per cent. He does not care whether the Bank of England suspends payment. He says, " St. Paul is selling at 70. I want some of that." So that those men will buy here 100,000 shares of stock in one day, SIX or seven million dollars' worth, and $20,000,000 the next day again ; and if exchange goes down and we get to the point where we can not import the gold, for that gold we sell securities at 50 per cent less than they sold for two or three years before. After the people here are through with their hysterics they bring the money, which they got when they sold their securities at those low prices, back to the bank, and they have it there. The securities go up in price again, and then what happens? Those people in Europe who bought the securities at bottom prices send them back to us and get high prices for them again. They will send back securities which they bought for $10,000,000 and get $15,000,000 for them. So the price that you pay for gold is a tremendously high one. Mr. Kindred. Here is the point. Your argument is in the direc- tion of a great scarcity of gold throughout the world. To a certain extent that is going to cripple human affairs. That is the point I see. Mr. Blumenthal. I want to make this very clear. I say so far as the outlook is concerned to-day there is absolutely not enough gold, and the trouble with the system now is partly due to it, and it is becoming more serious. There may be new conditions arising which will upset the whole theory. Mr. Kindred. There may be enormous new placer mines discov- ered? Mr. Bli'menthal. There may be ; but I think that is the last thing to be considered. Mr. Kindred. I think so, too; but my point is that with due care, maintaining our own gold reserves, and guarding against what all Europe must guard against and is guarding against, probably— namely, undue extravagance— we can cease spending $125,000,000 in Europe. Mr. Blumenthal. Xo; we can not. ., • ^i ., f Mr. Kindred. Yes; we will have to. Necessity is the mother ot invention. Mr ?SDSTf'wfgo on and conserve what we have and then gufrd 0111 fimnces wfth^ certain degree of conservatism, I can not believe that we are going to be among those Eui-opean countries which hlvfnot our refourc\s. and that there is going to be a crippling of all human ^ff^Jfh^-iVtdl';tllft Editions I do not think Mr. Blumexthal. Let me teii y ^.^^ retrench. Srf aTe'Srfi/^eopTrho Sn. but there a"re'to-5ay in the United ^MfKSED"^ That i?a matter of national need, whether the peo- pV' BTrW™r"1t waT but it is not so much so to-day because the^e 'is too largJa proportion of people in this country to-day whp 728 BANKING AND CUREENCY KEFOEM. are so wealthy that times make absolutely no difference to them. Just as I said to you before, this man who lives in Nottingham or Birming- ham does not care a cent for the Bank of England; he does not care if the Bank of England goes broke, so long as he can buy some cheap stock. He has the money in bank, and he says, " I will draw my check and pay for it." Just so there are people here who are wealthy, and there are very many of them now; and they do not care, and when there is trouble here they want to get away from it. There are many people now who spend in Europe anywhere from $200,000 to $500,000 ; and you can not stop that. Mr. KiNDEED. I am speaking of the time when this dearth comes. Mr. Blumenthal. Do not think that I am painting calamity. I am not, by any means. Mr. Kindred. No ; I am not trying- to overdraw that, by any means ; but that is the trend of your argument. Mr. Blumenthal. My argument is that this will become more material. Mr. Kindred. When we come up to this condition and face it, along with other first-class powers, we will have to retrench naturally. Mr. Blumenthal. America, you know, has always been relying to some extent on foreign capital; not because we are poorer — because we are the richest coujitry of the world — but we advance quicker than they do in any other country. All the people of this country want things done quicker than they want them done anywhere else. In every little place now they want to get schoolhouses and to get elec- tric-lighting plants, and all that. The time when we can call on Europe to take our securities has passed, to a great extent; and they have taken on balance always large amounts. Through the rate of interest going up all the time, American se- ciuities have become less attractive. The loan that Germany is issuing now is at 98.5, which is about the same price at which our 4 per cent railroad bonds are sold to-day. You can readily under- stand that a 4 per cent railroad bond does not offer any attraction any more to the European, when he can buy the German Government bonds at 98^, although some think that an Atchison 4 per cent bond is better than a German Government bond. Still things go that way. If you had told somebody last September that we would export in the months of January and Februaiy $40,000,000 of gold from New York, the}' would have laughed at it and would not have thought it possible, and still we have done it. Mr. Kindred. Do you, in conclusion, agree to this, that the chief element in the high cost of living is the cost of high living? Mr. Blumenthal. I believe that the chief cause of the high cost of living is the cost of high living; and I will go further, if you will permit me to say just a few words on that. The cost of high living will be increased considerably within the next few years. I tell you, gentlemen, that education has brought about the present condition, and it will show rather stronger later on. The people at large have come to the conclusion, and justly so, that everybody in- this world is not only entitled to live as an animal lives, but is entitled to have some play and some pleasure out of this life. BANKING AND CUEEENCY EEFOEM. 729 Mr. Kindred. And everybody wants a porterhouse steak? Mr. Blumenthal. They will not want a porterhouse steak, but they will not live as they used to, and they will not work as they used to work, and as they work m Europe, from morning to night men women, and children. They will not live as they used to live. 'Man-' ual labor has to be compensated in such a way that they can get some ]oy out of hfe. Otherwise they will not let the rich people enioy it but there will be a revolution and anarchy. ' Mr. -Kindred. I want to say that personally I think your views are very sound and humane. Mr. Blumenthal. Mr. Chairman, I have taken up a great deal of your time. There is one thing more, if you will bear with me for a minute. Of course, I have not the slightest belief that any legisla- tion can be passed, even if it was considered desirable, on the lines of substituting United States notes for national-bank notes, although I think it would be a very good thing if it could come before the people so that the people can think about it. I think, however, that aside from this proposition which I have made, and which I thought was quite feasible, of changing the ratio of reserves, the banks could safely be authorized to issue, not an " emergency " currency — I wish everybody would avoid that word, because provision should be made for larger business, and I think it should be considered a boon and a pleasure, and we should call it " prosperity currency " instead of " emergency currency " — but I think that the national banks should be authorized to issue additional amounts of notes secured partly by bonds and partly in any other way you want, but so, for instance, as to put a restriction on if the Government bonds could not be had. The. bonds to be deposited must be State, municipal, or railroad iirst-mortgage bonds, being a legal investment in any State, and having been approved by a commission of five members to be ap- pointed by the President, the Secretary of the Treasury being one of the members. The bonds to be deposited at not more than 90 per cent of their market value and not above their par value, and not more than 10 per cent of the bonds, other than United States bonds, to be of one kind. Not more than 30 per cent of any one issue to be held by the United States Treasury as security for cir- culation. A certain part of these bonds should be secured by bills receivable, such bills receivable to be passed upon and deposited with the clear- ing house of the district, and the clearing house of the district to be responsible for the whole, and everything to be responsible for the outcome of those bills receivable. Banks should be allowed to issue, in addition to otherwise authorized issues, bank notes up to 10 per cent of their capital, paying thereon a tax of 2 per cent; and raising the tax '> per cent more with each 10 per cent additional issue, 1 think you will have a prosperity currency when you need it and avoid having these extreme measures in time of stress. STATEMENT OF ALFRED 0. CROZIER, OF CINCINNATI, OHIO, Mr Croziee. Gentlemen, I will venture to outline an ideal system •md machinery for accomplishing monetary and banking reform and for thereafter- regulating the volume and disposition of the publio currency to secure elasticity and other needed improvements in the 730 BANKING AND GUEEENOY EEFOBM. interest of all the people. Then, a definite plan for reorganizing the xjountry's entire money supply on a sound gold basis will be sug- gested. The aim has been to eliminate the objectionable and utilize the valuable portions of other proposed plans and thus construct a compromise that conservative business men as well as the masses will consider reasonable, fair, and just to all concerned, and yet safe, patriotic, and economically sound. PUBLIC CONTEOL. It is assumed that private control of the public currency now is impracticable and impossible. The Democratic and Progressive Parties in their platforms oppose the private-control plan, and two- thirds and possibly 90 per cent of the voters favor Government tooney and object to corporation currency. As public control is inevitable, it should be the best attainable. The plan adopted must absolotely bar out so-called Wall Street influences and partisan politics. The public body or Government agency controlling the country's three billions of cash and over fifteen billions of bank credit based on such cash will to a large extent have supervision and direct control over the 25,000 banks and, throug:h the loans of such banks, indirect power over the business activities of every individual and corporation. President Garfield once said that whoever controls the supply of x;orrency and bank credit will largely control all American business. Thomas Jefferson when opposing the issuing of public currency by a private central bank declared that a private bank issuing and con- trolling the volume of the public currency would be more dangerous to the country and the liberties of the people than a standing army. Andrew Jackson when President took the same position. That his- torically is the Democratic policy. It is now the view of the pro- gressives of all parties. Authorities agree that the prices of all securities, property, and human labor can easily be raised and lowered simply by increasing and decreasing the volume of money in circulation, or the general discount rate, thus vitally and constantly affecting the material wel- fare of all the people. Therefore, it is imperative that the public body, wielding this life and death power over the prosperity of the country and the welfare of all banks and individuals, be honest, disinterested, efficient, intelligent, independent, deliberative, business- like, patriotic, and law-governed. That is too much power and discretion to put into the hands of one public official or a small appointive commission, or the executive committee or board of directors of one private corporation run for profit, like the proposed Aldrich central bank. Even a lawful misuse of such power by intentionally or ignorantly inflating and contracting excessively the volume of currency or improperly manip- ulating the general discount rate may unjustly increase the interest burden on all business and the living cost of every American home, or, on the other hand, wreck prices, demoralize industry, close fac- tories, plunge millions into idleness and distress, and perhaps cause panic and general ruin. The forced or voluntary wholesale contrac- tion of bank credit (bank loans) excessively by the big banks acting in concert will always quickly create a general financial stringency BANKING AND CURRENCY REFORM. 731 that may precipitate a panic. In the wrong hands this power of elasticity may be a dangerous engine of destruction, but properly safeguarded and in wise and patriotic hands it will be the most useful and beneficent means for regulating and stabilizing prices and promoting a sound and steady and permanent prosperity for the good of all the people of the United States. The Treasury Department is part of the executive branch. So are commissions, like the Interstate Commerce Commission. These are under the President and subject to his power of appointment and removal. There is danger that this great power over the banks and country some time might be improperly used for partisan purposes or be secretly bartered to the powers of privilege for campaign funds or support if exercised by the Treasury or an appointive commission. When it thus became a football of politics and an instrument for granting favors and practicing unjust discrimination the aroused people soon would abolish the system. No plan will be permanent unless it is right, sound, patriotic, scientific, just, and impartial, as well as efficient. "\¥hat is most needed is a scientific and sound system that satisfies all the people as well as the banks and business men. Then it will be permanent. REPRESENTATIVE BODY NEEDED. No system will long satisfy the people unless they have a reasonable voice in it. Therefore this power should be in the hands of a repre- sentative body. At least a majority of the members should be chosen by popular vote. The people of each State should elect one repre- sentative, because every State has its own special currency and credit needs. And it is wise to be sure that no section of the country ever will feel that its rights and interests are being ignored. The States have the right to demand representation to guard the welfare of State banks and trust companies and those business inter- ests dependent upon such institutions, for over two-thirds of all banks are State banks. Also because States legally can authorize the issu- ing of currency, but now are prevented by a prohibitory 10 per cent Federal tax on such State currency. On the other hand, the Federal Government should be well repre- sented. It has a constitutional right to issue currency and exclusive right to coin money and regulate its value. For 50 years practically all currency has been issued under its exclusive authority, and this Tw^lit totSuJ^nry S,^ exclusively b/ Federal .ulhonty, ^""ng lo ud^vc J choose the members of the public LTSttr rSate% have the disposition of their Doay uidi lb Lu eg n' ijjte the volume of bank credit. '^^''t'^^^'^Sh the FeS Government and each State is repre- ^ 5^1f 'Ltet fit the needs of the present emergency. To make sented sh^^^l**^^/ "^eme over its functions it should be a coordinate It permanent and sup ^^.^ ^.j^ ^^^^^^ ^^ amendment to the branch ot the Lro -jj^^- t^j gu^h amendment can be adopted. Federal Constitution^^^ power to create such a body and put it to Meantime o s^^ ^^^^^^ ^^ ^^ without unnecessary delay, for the work at onc^^ .^ defective and dangerous. The following plan is 732 BANKING AND CUEEENCY EEFOEM. tentative and, of course, subject to such modification of details as dis- cussion and thought may prove to be wise. UNITED STATES MONETARY COUNCIL. A new branch of the Federal Government shall be created by act of Congress. It shall be called " Financial Department." Ulti- mately it shall be made a fourth coordinate branch by amendment to the Federal Constitution. It shall have the same supreme and exclusiA'e control of all matters of banking and currency and other matters committed to it by Congress that the executive, legislative, and judicial departments have over their respective functions, and no more. The financial department shall consist of the United States Mone- tary Council and its appointee subordinates. The council shall be composed of 75 members, called councilors. One of these shall be elected by the qualified electors of each of the 48 States, subject to recall by vote of such electors. The other 27 shall represent the Federal Government. Of these the Vice President, Speaker, Secre- tary of the Treasury, Secretary of Commerce and Labor, and Attor- ney General shall be ex officio members, the other 22 to be appointed by the President, without regard to party affiliations, with the advice and consent of the Senate. Any appointed councilor can be recalled by the President and Senate on the initiative of either. The term shall be four j^ears, but half of the elective and half of the appointive councilors shall be chosen every two years. Council shall meet regularly in February of each year and spe- cially when called by its governor, managing board, or on request signed by a majority of the councilors. It shall elect from its mem- bership a governor and two deputy governors. After the first ad- justment each deputy governor shall serve as such four 3'ears and then automatically become governor for two years. Council shall select from its membership 12 councilors, 3 each to serve 4 years. These, Avith the governor and two deputy governors as ex officio members, shall comprise the "managing board" of 15. Such 1.5 appointees at all times shall be subject to recall by the council. The United States Monetary Council shall have authority to adopt " ordinances," civil and criminal, pertaining to all matters within its jurisdiction, same to have the status, character, force, and effect of laws passed by Congress and be enforced in the same manner. The "managing board" shall have full charge and conduct from day to day of all the business and affairs of and for council, subject to supervision, approval, or revocation by council. The managing board shall not adopt "ordinances," but it may make, alter, and repeal rules and regulations for the conduct of the business, guid- ance of its agents and employees, and the control of individuals and "-■orporations subject to the regulation or supervision of council. The board shall appoint, discharge, and fix the compensation of all agents and employees, and direct their work. It shall employ seven advisers, who may or may not be members of council, to be "business managers." These shall be financial and business experts of the highest skill, knowledge, and ability, paid whatever salary their val- uable services may be worth. The business managers are to actively BANKING AND CXJEKENCY BEFOSM. 733 manage the business of the council, under the direction of the man- aging board. The business managers and members of the managing board must divorce themselves from all outside business and entanglements and give their whole time to council's affairs. Each shall take the usual ojth of public servants. They and all agents and employees on or before February 1 every year, each shall file with council a sworn declaration that during the preceding fiscal year he has faithfully aijd honestly discharged his official duties free from all partisan and iniproper influences, and that he has not sought, received, or been o#ered any pecuniary or other consideration or benefit other than that paid by council for any act or omission pertaining to his official duties or given out any information about council's business or pro- ceedings without express authority to do so. A false declaration shall be made perjury, punishable as such. The compensation of the councilors slaall be fixed by Congress in the law. Preferably no salary shall be paid. Each councilor might be allowed, say, $25 per day during council's sessions and actual railroad fare. This would remove the position from the scramble of ordinary partisan politics and insure councilors of the highest character, standing, and busi- ness experience — men who will serve for the honor and as a high patriotic duty. It should not take more than a month's time in any year. Council shall fix the salaries of its officers and of members of the managing board. The managing board shall fix the salaries of the business managers and all other agents and employees. All salaries, compensation, and expenses shall be paid by council from funds under its control. Council Avill be entirely self-sustain- ing, and also will produce a large, steady, annual revenue for the support of the Federal Government. council's functions AND POWERS. No doubt the country would consider it perfectlv safe to leave, without reserve, to a dignified and representative body of such high character and intelligence the whole duty and authority of devising and executing in the public interest a progressive and practical sys- tem of banking and currency. No other plan yet ^"ff ^^f /^^f an agency so representative, responsible, disinterested, and compe- tent or a svstem so safeguarded and scientific. ., . ^ ■ But the?e can be no obiection, if Congress deems it wise, to impos- in^unS the council, in the act of Congress or otherwise, certam spe- mg upon the council, i" -^ the necessary powers, such as, say : ^' / J K„'fV,P Federal Government. guaranteed b^ *^® ^^^fL full legal tender, each dollar always good 3. AH money |han be n. ^^^.^,^ ^^^^^^^ ^^ ^^^,^^ ^^ ^^^^^^^^ i u] c n-encv shall at all times be covered by a reserve of at least ^- ^^ ^t ofactual gold, except that for purposes of elasticity and •^^ P'^ t^Lporaiv emergencies the gold reserve may be reduced to ;° t"Je1s than 33* per cent. 734 BANKING AND CUEBENCY EEFOBM. 6. It shall be the policy gradually, and as soon as practicable, to retire all kinds of money except subsidiary coin and substitute just one kind of gold-secured, legal-tender national currency in conven- ient denominations. 7. Silver not needed for subsidiary coin may be held as part of the reserve at its current gold value. 8. As bank-note currency is gradually retired and canceled by council, it shall purchase at par from the banks the 2 per cent United States bonds used to secure such currency. 9. All bank reserves shall be merged into one general fund for the protection of all banks and be deposited with the United States monetarj' council, except that any bank may retain in its own vaults not exceeding two-fifths of the minimum legal cash reserve, which minimum cash reserve for every bank shall be equal to 15 per cent of its total deposits. 10. Council may use j)ortions of such deposited reserves and other money under its control to rediscount for the banks, under strict safeguards, short-time genuine commercial paper; also in emergen- cies to otherwise protect the banks and relieve the legitimate business of the country through the banks. 11. Council from time to time may fix its. general discount rate, which shall be uniform throughout the United States. 12. Council shall not be a bank or do a general banking business in competition with banks. It shall accept deposits only from banks and the Government. 13. Council shall not unfairly discriminate or indulge in favorit- ism in the administration of its business. Each sound bank shall be entitled to equal treatment as a legal rightj and to adequate relief in time of trouble on application to council direct. This right shall ex- lend to State banks and trust companies, including savings banks, so far as practicable, on some basis to be devised by council. 14. The Government shall deposit with council as received its pub- lic revenues and funds, including postal-savings bank receipts, and shall make its disbursements through council. 15. Council may issue " United States exchange " and authorize banks to sell such exchange against their free deposit balances with council. 16. Council may establish and maintain such branches and agencies as it may deem necessary. 17. Council shall have the custody and administration of the Fed- eral mints, gold reserve and trust funds, and exclusive charge of all currency and monetary matters, and of the authorization, supervision, and regulation of banks. 18. Holders of national currency shall be entitled to exchange it for all gold needed for any legitimate purposes, but the organiza- lion or execution of deliberate raids on the gold reserve for the pur- pose of embarrassing council or forcing the Government to issue bonds shall be made a treasonable felony punishable by severe fine and imprisonment. 19. The private disclosure of confidential information about the business or action of council to unauthorized persons in advance of official publication, made by any officer, agent, or employee of council, ^^hall be punished by fine or imprisonment, or both. BANKING AND CURRENCY REFORM. 735 .int t'^l attempt, improperly and privately, to influence-any officer, Ea'l °^; ^f^PloyeV^-^*""""'^ \'^? ^" °"^^* ^"y ^^t pertaining to his oacial duties, by offermg reward, benefit, or otherwise shall be madt an offense punishable by fine or imprisonment, or both. And it shall oe a like offense with the same punishment for any officerfaiVt o" '%^ Tn 1°*^""^^^ t« ««°^Pt ?^ s«li"t any such reward or' bS . oi^ h,^r ?f ' ^^^""^^ or employee shall, while in the service of coun. cil, buy or sell or cause to be bought or sold for himself or others any securities or property quoted on any stock exchange or board of trade, or privately advise others as to any sale or purchase of such securities or property. Violation of this shall be an offense punish, able by fine or imprisonment, or both. 22. Council shall annually prepare and publish to the country a full report showing the monetary condition of the Government, and such other information as council may consider necessary to keep the people informed. Except in extreme emergencies, weekly changes in the discount rate and other acts likely to influence the range of prices or the course of private business shall be made public at 4 p. m oii Saturdays, and not before. CAUSE OF HIGH PRICES. Since 1890 the country's stock of gold has increased from about $600,000,000 to over $1,800,000,000. The total volume of money of all kinds has increased from $1,700,000,000 in 1890 to $3,600,000,000 in 1912. But the banking power of the United States, chiefly loans of bank credit, has grown from $6,000,000,000 (7,909 banks) in 1890 to $26,000,000,000 (25,195 banks) in 1912. It is conceded by all economic and financial authorities that an in- crease of the purchasing power of the peojjle by increasing the vol^ ume of money of any kind in circulation tends to raise prices of com- modities, securities, and other property by increasing the demand. A-lso that reducing the quantity of available money produces the op- posite effect. It is immaterial whether such increase is gold or good paper currency. It is also conceded by all that an equal increase or decrease of the volume of bank credit (bank loans) available for bus- iness produces precisely the same effect on prices and to the same extent as inflation and contraction of the supply of money, and for the same reasons. Such " credit " is used as a substitute for money. The demand and price for a horse is increased when two want to buy, notwithstanding only one has money, provided the other has bank credit against which he can draw a good check, even if his bank account was created solely by discounting his promissory note. And over fifteen billions of bank deposits were created that way> without deposit of any cash, the total cash owned by the 25,000 banks being only one and a half billion dollars. Since 1890 the volume of money (including the gold increase of twelve hundred millions) has increased nineteen hundred millions, while the volume of bank credit or " banking power " has been in- flated nineteen thousand millions of dollars. Whatever advance m the general range of prices has been caused by increase of the supply of gold and other money, the enormous inflation of bank credit has caused 1.000 per cent greater effect in increasing the cost of living. 736 BANKING AND CTJKRENCY EEFOEM. The forty-six nations of the world together possess only thirteen billions of all kinds of money, of which less than seven billions is gold. The world's banking power, chiefly bank credit in the shape of business loans, is about sixty billions. The United States has 20 per cent of all the money in the world, but 40 per cent of the earth's " banldng power," much of it inflated bank credit. Since Columbus discovered America in 1492 the whole world has produced only thirteen billions of dollars of gold. Yet during the 22 years since 1890 the banks of the United States alone have created and put into circulation nineteen billions of bank credit, that is used as a substitute for money and often in place of gold. Thus bank credit, mere financial wind, is coming to largely subvert if not sup- plant gold as the measure and regulator of all values. It is destroy- ing the gold standard, which is good in theory but growing useless in practice. While 23.22 grains of gold under the law is a dollar, that dollar and that quantity of gold will buy little more than half as much commodities or property as it did before bank inflation raised prices, or in other words cheapened money and gold by reducing its purchasing power. Indirectly through the international channels of credit, finance, I'nd commerce this American bank inflation has largely caused the in- crease of prices throughout the world. Because wages have not in- creased as fast as commodity prices, the United States is chiefly re- sponsible for increasing the burden on the entire human race by in- creasing relatively the cost of living. The monetary experts and economists of the world largely hold that rising prices and disturbed values are chiefly due to increase in the output of gold. It would seem that in thus blaming gold and ignoring the tenfold greater increase of bank credit they are " strain- ing at a gnat and swallowing a camel." Some even propose as a cure- all that gold be " watered " like stocks, by increasing the proportion of alloy or the charge for coinage. BRIDLE THE BANKS. The need of the hour is some effective means for putting a rea- sonable check on this wild and reckless and dangerous inflation of bank credit. It has been shown that banks will not check them- selves and lose the chance of increasing their interest profits for the food of the country and to maintain sound and stable prices. The lame can not be fixed upon any one bank, so all go on inflating their credit to the utmost legal limit, and new banks are being organized constantly. It is the duty of government to gradually put on the brakes. It can stop further unhealthy inflation even if it may be difficult to safely reduce the present volume of bank credit. This must be done quickly or the wildest financial crash in the world's history will gather and break and engulf all. Only the National Government has sufficient power, and it is powerless until Congress provides the necessary machinery. The council plan is best suited to this purpose. No harm will come to the legitimate interests of the banks, but banks must be restrained so they will not harm everv- body else to unnecessarily increase their own profits. The only legal limitation on the inflation of " deposits " of bank credit by discounting paper is the requirement that each bank must BANKING AND CXJEKENCY REFORM. 737 have a reserve of cash equal to 25 per cent of such deposits if in a reserve city, and 15 per cent elsewhere. The volume of credit loans of the 25,000 banks now is 10 times their aggregate cash, because some money sustains a volume of inflated credit in two banks. Country banks may lawfully deposit three-fifths of their cash re- serves in central reserve banks. The United States monetary council by contracting the volume of currency could thereby at once automatically shrink the cash reserves of the banks and force them to reduce the volume of their credit loans at least 10 times such shrinkage of cash reserves. And when legitimate business expands and requires more bank credit, council by increasing the currency available will cause a corresponding in- crease of bank cash reserves and thereby increase the loaning power of the banks 10 times such increase. It all will be very simple and easy and effective as soon as Congress empowers the Government to create and use the necessary centralized machinery for doing it scientifically and safely. It can be accomplished by increasing and decreasing from time to time the quantity of commercial paper redis- counted for the banks by the United States monetary council. PRIVATE CONTROL DANGEROUS. It was this imperial power over all banks and business that was sought by the powerful interests promoting the Aldrich private- central-bank plan, for with it they could at will force all banks to do their bidding, and for the speculative profit of such interests arbi- trarily and automatically put prices up and down over and over by inflating and contracting the corporate currency and raising and lowering the rate of discount. In the hands of a central bank owned and run by the banks this dangerous credit inflation would be certain to get worse instead of better, for further expansion would increase bank profits. Safety can be had only by absolute and ex- clusive public control by a government body in charge of the whole public currency, with practical scientific machinen' for using the power of currency elasticitv to promote safe prosperity and check dangerous speculation and" improper increase of prices by auto- maticallv regulating the aggregate volume of the credit loans of the 25,000 banks of the United States. , ,. n There can be no reasonable objection to one centralized agency handling the situation if it be a public instead of a private agencv, provided control of these great powers is not centralized or sectional, but is widelv distributed by being vested m a large, deliberate, repre- sentatiTe bodv composed of influential men from every one of the StatS rcentralized power under the decentralized control seems to be the onlv way to obtain both popular con rol and business effi- to t>e tne oni^ •^ j^r control the plan will not be permanent, :T^ithIfbusLe^s?efficiency it will be impossible to cure the dan- SeroiTs defects of the present evil system. COJIMERCIAL PAPER. When banks increase their deposits by discounting genuine com- ^- 1 r^rTier it is healthy and sound and not improper inflation, ""^matter how great the volume may be. It all represents legitimate 76132 — PT I.'?— 13 1 738 BANKING AND CTJEEENCY KEFOEM. commercial transactions, and such paper when due will be paid and the triangular deal finished. But bank loans of credit instead of cash to customers to use for purchasing stocks and bonds and other permanent investments is improper and unsound credit inflation, No one knows when such loans will be liquidated. For these rea- sons council should largel;^? require genuine commercial paper as security for currency supplied by rediscounting for the banks in a guarded and restricted way. As the volume of commercial paper rises and falls automatically with the volume of legitimate commer- cial business, this plan will establish a sound, wholesome, and useful currency elasticity for the good of the people and all business. Such rediscounting is not ordinary banking. The chief object is to get public currency into circulation. The plan uses commercial paper instead of United States bonds as security for currency, loaned to the banks to get out among the people. A special distinguishing form of blank promissory note can be pre- pared and furnished by council for the use of those having genuine commercial paper discounted at banks, and council shall rediscount only such marked paper. Severe penalties can be provided against any person or corporation using such a blank note except for genuine commercial transactions. The interest or discount rate charged by banks on this high grade paper soon would be much reduced, prob- ably to 4 per cent, because the banks could rediscount it with council. This has been the result in Europe. It would greatly reduce the bank tax on business and lighten the burden on consumers and their cost of living, for such interest is an expense that is added to the cost of commodities. The use of United States bonds to secure bank currency, reduced in like manner the interest rate on nearly a billion dollars of Govermnent bonds to a 2 per cent basis. The banks will lose nothing by this reduction of interest rates, because they will handle more paper with less risk. Because interest paid on other paper, discounted for investment or speculation purposes, is largely only a tax on the person giving his note, the General Government in its monetary policy should, in the interest of the general welfare, discriminate in favor of commercial paper. If all banks perma- nently merge three-fifths of their $1,500,000,000 of present cash re- serves and deposit same with council, that body will have for its steady use nearly a billion dollars of actual cash, a sum equal to half the total stock of the 25,000 banks. PROFITS OF BANKS. The inflation of bank-note currency has been 100 per cent since 1900. Such currency now is about $750,000,000. Banks easily could make the volume elastic if they would. The increase and decrease of bank currency is largely optional with banks. That is one of the chief objections. It is private control of the public currency. The law allows contraction of bank currency $9,000,000 per month, or $108,000,000 each year. The banks will expand and not contract such currency, because that course is the most profitable for the banks. Banks can be expected always to do whatever is most profitable irre- spective of its effect on the range of prices or the general welfare. That is one good reason why regulation of the volume of the public BANKING AND CUKEENCY EEFOEM. 739 currency and the national discount rate can not safely be left to the banks or a central corporation owned and run by the banks Banks have their rights and should be fully protected therein. But they are not suffering for lack of profits. This valuable law- given special privilege (denied to individuals and other corpora- tions) of inflating and loaning credit, that costs relatively nothing, for interest profits largely explains the fact that the 25;000 banks with an aggregate capital stock of but $2,000,000,000 are getting in- terest regularly on nearly twenty-five billions. Xot every bank, however, can equal the record of the First National Bank 'of New lork, that m 5,0 years on an original investment of $500,000 has made over $80,000,000 of net profits. BANKS AID WALL STREET. There is direct relation between this enormous inflation of bank credit and the still greater inflation of trust and other corporate securities. Trusts could not be formed and floated without this bank inflation. Inflation of watered securities has raised prices only be- cause inflation of bank credit (bank loans) has enabled the public to buy such securities. The stock exchange, assisted by the banks of the country, now is able to keep the prices of billions of dollars of listed securities far above intrinsic values. The country would be astonished if it could learn the number of billions of such securities owned or held by the banks as security for loans made to assist the purchase of such securities. That is not legitimate commercial bank- ing, and it is dangerous. The evils of the present system are growing' at a compound ratio. T^nless soon cured, they can not be at all. They may get beyond even t!:e power of Governniont to remedy. No temporary expedient v.'ill answer. A patchwork makeshft may delay the crash a little, but it will be worse when the inevitable comes. These are the warnings of conservatism, not an alarmist. The official figures speak for them- selves, and so plainly all can understand. The price-raising inflation of the volume of available bank credit during the one fiscal year end- ing June 30, 1912, was $1,200,000,000. This is exactly equal to the total increase in the country's entire stock of gold during the 22 years since 1890. ' , The bridle of law must Ije put on the banks so that they may be restrained and guided for the good of all. including the banks. The public currency is the onlv effective means, and its control must be ■public instead 'of private. ' A United States monetary councd of the character herein outlined would be the best machinery for handling these powers with iustice and safety to all and for the general welfare. This plan, if adopted, would also greatly strengthen the founda- tions of the Republic bv increasing the dependence of the most powerful financial interests on the Government and its patriotic institutions. NEW ar()^'EY plan. Vp ideal monetary system now is possible. For the first time in its bistm- the United States is in position to make the change. Never before was there sufficient gold in its possession. The Government 740 BANKING AND CUEEENCY EEFOEM. now has more than a billion dollars of the yellow metal, nearly a fifth of the world's entire stock of gold. A conspiracy of events, political, financial, monetary, banking, international and national, after a century of shifting imcertainty and repeated monetary chaos have culminated in 1913 in a perfect condition for reorganizing on a sound and permanent basis the monetary system of the greatest of all nations. This opportunity may never again occur. Therefore the situation should be promptly handled with courage, intelligence, and progressive statesmanship. The entii'e public money supjjly should be reorganized on a perma- nent, sound, scientific basis. All kinds of money, except" subsidiary coin, shoidd be gradually replaced by just one kind of currency. This should be full legal-tender Government money, in convenient de- nominations, redeemable in and secured by gold. Every dollar of this national currency should have behind it the faith and credit and the entire taxing and borrowing power of the Federal Government and whatever gold reserve may be necessary to make it safe and sound. It must be legally good for the payment of any debt or pur- chase. Xo one ever can question the soundness of such a currency. It never could deiDreciate. And one of the highest duties of Congress is to provide the people with an ample quantity of currency' that always will be Avorth ])ar in gold. That is an obligation of sov- ereignty. It is one of the Government's greatest constitutional functions. (irold certificates and bank currency comprise over half of the coun- try's entire money suppl_y. Yet both are mere optional currency that anybody can lawfully refuse when tendered for any private debt or purchase. Such currency is not made legal tender by law. Why? Of the money in actual circulation among the people it is believed that less than 10 jjer cent is lawful money — legal tender. Most people are unaware of this fact so vital to their interests. Some have lost valu- sible pro]ierty by foreclosure because through ignorance or oversight gold certificates and bank currency were at the last moment offered to redeem, the tender being legally refused. The Government is a party to this fraud on the rights of the people. Every dollar put into circulation under any act of Congress should be real money, a full legal tender — "lawful money."' Gold should be used as collateral security in the Government's currency re.serve and paper based on such gold for circulation pur- poses. This will be more practicable and convenient and save the great loss by coin abrasion. It is a nuisance to the banks to handle and store actual gold and to the people who tote it for pocket use. No one desires to carry the heavy gold, but all want to be sure their paper currency always will be equal with gold in value and purchas- ing power. Currency elasticity is needed to facilitate business and protect the banks in times of panic. That is a detail easily arranged if selfish interests will stojj trying to gain control of the public currency for pi'ivate profit and special ad\'antage at the expense of all the people. But it is vastly more important right now to reorganize the char- acter of all public money so that it will forever be scientifically sound as well as elastic. If Congress will go to the root instead of tinker- ing to mend some of the branches, it will Avork a complete and lasting BANKING AND CUBEEXCY BEFOEM. 741 ALDIUCH ilOKEY PLA^- . and ho-^TSLT"'-' ^'^T- ^^1^'^^^^tely would take out of circulation nnmi,? yI nnnl ^ "'" ^^ v'"' l-";"''^ corporation-the central bank named National Reserve Association-all public currency. Under the provisions of the pending bill every dollar of Government money-gold, silver, gold and silver certificates, greenbacks, and bank-note currency— could be permanently taken away from the peo- ple and put beyond their reach. That corporation could and would take from the (jovernment and convert to its own use the entire public gold reserve of more than a billion dollars without the corpo- ration paying or the Government receiving a single dollar of actual benefit. The corporation's entire expense, practicallv. would be the cost of ink, paper, and printing of the corporate currency that it would run off on its printing press to the extent of two or three dol- lars issued against each dollar of gold or Government money until all public money Avas thus gathered into its private reserve. The banks owning all the stock of the central bank could deposit a billion dollars of their billion and a half of cash reserves with the central bank. Against this cash (say, gold certificates) the central bank could print and issue two billions of corporate currency. This, handed over to the banks and put into bank reserves, would increase the credit loaning power of the banks over ten billions of dollars with relativeh' no extra cost to the banks. The banks then could perma- nently redeposit their reserves at interest in Wall Street, for the Aldrich bill allows it. The central bank takes the billion dollars of gold certificates to the Government and demands and receives in exchange a billion of actual gold, the certificates being permanently canceled. Thus the corporation acquires and the Government forever loses the biggest stock of actual gold in the world. The Government and the people gain nothing. All this can be accomplished in one week if the Aldrich bill should become law. In place of all this hoarded public money will be substituted corporate currency not guaranteed by the Government. It will not be full legal tender. It will be optional currency that anyone legally can refuse when ten- dered for a private debt or purchase. Yet it can be issued practically in unlimited quantities, billions of dollars, by a corporation with but $200,000,000 of net capital. Only a .50 per cent gold reserve is pro- posed arid 33i per cent is legalized. And there is no penalty if the gold reserve is run down to r, per cent, or to nothing. Moreover, fection 41 of the Monetary Commissions bill now before Congress nuVbnrizes " a reserve of gold or other money of the United States whk-h the national banks are now authorized to hold as a part of tTie legal reserve." This makes all kinds of com and currency jegai lebe .j^j f yge as a substitute for gold to "3 e " t^h'^ "orporaTcui' ency. While present bank currency can Jt be counted as part of bank reserves the corporate currency to be fssued by this coiToration owned by the banks can be so counted. 742 BAXKIXG AND OUEKENCY EEFOKM. The $5()r),000,000 of silver, worth intrinsically about 53 cents on the dollar, would be a lawful reserve, without a dollar of actual gold, to sustain $1,130,000,000 of corporate currency on a 50 per cent basis or $1,695,000,000 on a 33^ per cent basis. The $346,000,000 of green- backs and no gold legallv would secure on a 50 per cent basis $692,- 000,000 of corporate currency and on a 33 J per cent basis $1,038,000,000. Instead of a genuine gold reser-s-e as represented, the bill legalizes the inflation of corporate paper currency to $1,822,000,000 on a 50 per cent basis, of $2,T33,000,000 on a 33^ per cent basis by using silver and greenbacks in the central bank's reserve, without a single dollar of actual gold. If the $1,057,464,264 of paper gold certificates also were drawn into such reserve, the corporate currency could be swelled (without a dollar of gold in the reserve) to $3,936,000,000 on a 50 per cent basis or $5,894,000,000 on a 33^ per cent basis. It is only a question of time when such optional corporate currency will become discredited and depreciate and cause ruinous losses to the people and all business. The present paper currency (except gold certificates secured by 100 per cent of gold) is only $346,000,000 greenbacks (secured bv $150,- 000,000 of gold), $480,000,000 silver certificates (secured by an equal amount of silver), and $744,000,000 of bank-note currency (secured by an equal amount of United States bonds) ; total, $1,570,000,000. The Aldrich money plan is wildcat inflation and not " reform." Those who contended that its possible unlimited issues of corporate currency with that kind of doubtful reserves and no Government guarantee would be sound will not challenge the soundness of a lim- ited issue of public currencj\ guaranteed by the United States, made full legal tender by law for all purposes, redeemable in and secured by actual gold in adequate volume. The American Bankers' Association and distinguished financiers now officially committed to the Aldrich corporate currency can not successfully attack the safety and soundness of this proposed gold- secured Government money. No cry of " rag baby," " irredeemable greenbacks," " unsound inflation," " unlimited paper currency," or "fiat," can be raised to prejudice the people against this patriotic plan, for all currency will be founded on, redeemable in, and limited by actual gold. And it also will help maintain the existing gold .standard. CUE BIG STOCK Or GOLD. The United States Government had in its possession June 30, 1912, $1,207,464,264 of actual gold. Of this, $1,057,464,264 is held to pro- tect an equal amount of gold certificates (a 100 per cent gold reserve) and $150,000,000 to "secure" the $346,000,000 of greenbacks. Be- sides this, there is $623,818,171 of gold in banks and in circulation. Our total stock of gold October 1, 1912, was $1,841,382,435. During the fiscal year 1912, original deposits of gold with the Gov- ernment in exchange for gold certificates aggregated $151,929,883. Of this the mines of the United States produced $96,890,000. As the industrial consumption of new gold was $31,439,347, and $151,929,883 was sold to the Government for monetary uses — total, $183,369,230 — • there must have been $86,479,230 of gold from abroad or sources other than the year's production of our own mines. If there is no BANKING AND CURRENCY REFORM. 743 further increase in the yearly gold output and the 1912 average pro- yLtwiiradr?6tl^o'fi?rr"P*^"" ^^ maintained, our minef Tach year will add $65 450 653 to our monetary gold reserve without a doUar of gold coming from abroad. This gold would enabll a yearly Z'SlmZT" ^^,|i30'000,000 on a 50 per cent gold-reserve\asis^ or $256 000,000 on a 33^ per cent basis. But if the same amount comes . T ^iTnno^n^^^'"''' ^^^ T?" i^^rease of monetary gold continues to be $loO,000,000 annually, this, put into the reperve,^would permit an annual currency increase of $300^000,000 on a 50 per cent or $450 - 000,000 on a 33^ per cent basis. If gold increased faster than the need for currency^ the gold reserve can be raised above 50 per cent. The actual increase in the general stock of money of the United States during the fiscal year of 1912 was only $92,911,673, the total stock of money of all kinds now being $3,648,870,650. This indicates that without issuing bonds or resorting to any unusual effort or ex- pense, the Government will get enough gold^simply by exchanging at par therefor its gold-redeemable paper currency to enable it to increase the public currency much faster than the growth of popula- tion and still always maintain behind all currency a reserve of actual gold of 50 per cent or more. WORLD STRUGGLE OVER GOLD. TMs will put the United States in a stronger monetary position than any other Government in the world. It has a fourth and soon will have a third of all the gold in the world. It Avill be impregnable, with practicable means for defending the commerce and business of this country, if in future years a declining gold production should cause a titanic struggle between the great nations of the earth for physical possession of gold with which to settle international balances and pay the interest on Government bonds and other gold obligations. It is possible, if not probable, that such a contest will occur. It may be years ahead or very soon, according to future conditions. Gold mines are being worked out and abandoned every year. It is considerable of a gamble whether new discoveries will keep pace with the exhaustion of known bodies of gold ore. On the other hand^ the demand for gold for both industrial and monetary uses is steadily and enormously increasing. China, with a quarter of the world's population, soon will change from silver to a gold basis. Other countries will likely do the same. The volume of international commerce that is settled for with gold is growing prodigiously. There are 39,000,000,000 of the bonds of various governments all payable, principle and interest, in gold. The gold-payable State, city, country, school and corporation bonds Sreatly exceed this volume of Government bonds. ^Vars and rumors of wars are constantly increasing the total of the world s bond obliga- tions The 46 nations of the earth together possessed m 1908 but <^e. 604 000 000 of eold The total now is less than seven billions. Much of this is holrded in Government reserves and is not available Srcurrent commercial use. The yearly interest on all kinds of bonds thit are payable in gold nearly equals the world's entire stock of gold. Besides this, probably more of the principal of such bonds mature S year than all the gold in existence. What will happen if at some 744 BANKING AND GUEKENGY EEFOBM. future time payments, principal and interest, are demanded in actual gold, according to the provisions of such bonds ? When that day comes, if ever it does, the United States will be in the best position of any country, provided its monetary system...is recrganized and perfected on a practical basis that will enable it Xp hold and use its vast gold accumulations in an effective and rational way. Its resources, increasing wealth, large international trade balance in its favor, and its comparatively low expense for military establishment all tend to strengthen its relative position year by year. But it should develop and improve its monetary defenses now in tijne of financial peace before any crisis comes. Particularly so because tlie gold-standard law of March 14, 1900, granted the power and imposed on the Government the obligation to issue its interest-bearing bonds in unlimited quantities whenever necessary to get gold with which to maintain the gold standard and make gold payments for cur- rency and other obligations. As the Government is now legally liable to an unlimited extent to maintain the gold standard and all kinds of money on a part with gold it would seem wise that it be equipped v/ithout delay with the best possible machinery for protecting itself and the people against such liability in the possible event of future trouble. As this liability is on the Government itself, the machinery for dealing with the situation should be absolutely and exclusively controlled by the Government for the common good. To put the currency machinery under the control of private interests and still leave the Government liable for maintaining the gold standard and gold payments would be unbusinesslike, a reckless and inexcusable folly. If such control, even indirectly, ultimately fell into the hands of American representatives of the great private and corporate inter- national owners of the billions of maturing gold bonds of the world, thej' would have in their own hands a perfect instrument for forcing the United States into debt countless millions of dollars and saddle upon the people an annual interest burden of enormous proportions, all without the slightest benefit to the Government or the people. By demanding gold payments they could in time force the Government to issue bonds to buy back from them at high prices the same gold. And this could be worked again and again, an endless chain, a great bond trap baited with gold. But so long as the Government retains in its own hands exclusive control of the gold reserve and the public currency it is safe, provided it reorganizes the S3rstem in the public interest instead of for the benefit of selfish special privilege. The plan adopted should give the Government power to compel the 25,000 ' banks to aid the Government in maintaining the gold standard and the gold I'eserve. Otherwise the Government always will be in a dangerous position. MONEY REORGANIZATION PLAN. Congress should by law provide for the gradual cancellation of all gold certificates, silver certificates, greenbacks, and bank-note cur- rency as such currency comes in from time to time, and the substitu- tion of one kind of Government money issued against a gold reserve of at least 50 per cent. On June 80, 1912, the Government had on hand $1,207,464,264 of gold. By June 30, 1913, it will have $1,350,- BANKING AND CTJRBENCY BBPOHM. 745 000,000 This does not include the $623,000,000 of gold in circulation, most ot which soon would flow into and swell the gold reserve. On a ou per cent reserve this will enable an issue of $2,700,000,000 of Gov- ernment currency, or more than enough to retire all kinds of §o Ron n!^^nn ^^' (mcludmg gold certificates), which now totals about ^i.bOO.OOO.OOO. And when the exchange is completed the Government will own the $744,000,000 of 2 per cent United States bonds now owned by the banks and used to secure an equal amount of bank-note currency. The banks will be paid par for the bonds in the new national currency. The Government will have converted most of its interest -bearing bonds into noninterest-bearing currency. AH these rhmgs can be done in a relatively short time and practically without expense to the Government. And it will save the people more than a billion dollars of future interest expense that would have to be paid if the 2 per cent bonds were refunded at 3 per cent and run for 50 years, as proposed by the Aldrich plan, besides final payment of the principal of the bonds. The only thing that stands in the way of the adoption of such a patriotic and simple plan for practical and scientific reorganization of the Nation's money supply is the selfish desire of private interests to get control of the public currency away from the Government and into their private hands for their own special profit and advantage. They pretend to fear that if the people control they sometime might overinflate the volume of money. There is greater danger to the country from panics or stringencies clue to sudden, excessive, and re- peated contraction of the currency under private control than from inflation under public control. And with a fixed minimum gold re- serve provided in the law there can be no danger of any excessive currency inflation. If the law permits the running of the gold reserve down to not less than 33^ per cent (a basis considered entirely safe in European countries) the difference between 50 per cent and 33^ per cent will also provide a splendid special emergency circula- tion of $1,350,000,000 that can be used when necessary under proper safeguards to impart the desired elasticity to the public currency and protect the banks and all business in times of panic. This besides a billion of bank reserves. A law thus reforming our present currency and banking systems on a progressive, permanent, and sound basis in the interest of all the people would be a great national blessing Second only to the Con- stitution. If we play the game right, the United States, with its grip on a big share of the world's gold, soon Avill largely control m the in- terest of all its inhabitants the world's finances and commerce. At 1.40 o'clock p. m. the subcommittee adjourned. X