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 Lessons of the Financial Crisis 
 
 THE ANNALS 
 
 OF THE 
 
 AMERICAN ACADEMY 
 
 OF 
 
 POLITICAL AND SOCIAL SCIENCE 
 
 ISSUED BI-MONTHLY 
 
 VOL. XXXI, No. 2. MARCH, 1908. 
 
 Editor: EMORY R. JOHNSON 
 
 ASSOCIATE editors: L. S. ROWE. SAMUEL McCUNE LINDSAY 
 
 CARL KELSEY, JAMES T. YOUNG, CHESTER 
 
 LLOYD JONES, WARD W. PIERSON 
 
 PHILADELPHIA 
 
 American Academy of Political and Social Science 
 
 36ih and Woodland Avenue 
 
 1908 
 

 PREFATORY NOTE 
 
 On Monday evening, December 2d, the Academy devoted a 
 special session to "The Lessons of the Financial Crisis." Those 
 taking part in the discussion were as follows: 
 
 Mr. Frank A. Vanderlip, New York City 
 
 Vice-President National City Bank and former Assistant 
 Secretary of the Treasury 
 
 Hon. William Barret Ridgely, Washington, D. C. 
 
 Comptroller of the Currency 
 Hon. Charles H. Treat, Washington, D. C. 
 
 Treasurer of the United States 
 Mr. Jacob H. Schiff, New York City 
 
 Senior Member of the firm of Kuhn, Loeb & Co. 
 Mr. Isaac N. Seligman^ New York City 
 
 Member of the firm of J. & W. Seligmcn & Co. 
 Mr. William A. Nash, New York City 
 
 President Corn Exchange State Bank 
 Mr. Andrew J. Frame, Waukesha, Wis. 
 
 President of the Waukesha National Bank 
 
 The addresses delivered at this session attracted widespread 
 attention throughout the United States, as well as abroad. Full 
 cablegraphic accounts were sent to the London Times and to 
 a number of the continental newspapers. The timeliness of the 
 topic, as well as the important material presented in the addresses, 
 made it desirable to make this series of papers available to a larger 
 public. To supplement the papers presented at the session the 
 Publication Board has been able to secure the co-operation of finan- 
 ciers from diflferent sections of the country. Thus the views of the 
 Far West and of the South have been presented as well as those 
 of the East. 
 
 By Transfer 
 Treasury Dept, 
 JUL 8 - 1938 
 
CONTENTS 
 
 PAGE 
 
 INTRODUCTORY NOTE BY THE SECRETARY OF THE 
 
 TREASURY i 
 
 Hon. George B. Cortelyou. 
 
 THE PANIC AS A WORLD PHENOMENON 2 
 
 Frank A. Vanderlip, Vice-President National City Bank, New York. 
 
 THE PANIC OF 1907 AND SOME OF ITS LESSONS 8 
 
 Myron T. Herrick, Chairman of the Board, Society for Savings, 
 Cleveland, Ohio. 
 
 AN ELASTIC CREDIT CURRENCY AS A PREVENTIVE OF 
 
 PANICS 36 
 
 Hon. Wm. Barret Ridgely, Comptroller of the Currency. 
 
 THE READJUSTMENT OF OUR BANKING SYSTEM AND THE 
 
 UNIFICATION OF THE CURRENCY 35 
 
 Hon. Charles H. Treat, Treasurer of the United States. 
 
 THE NEED OF A CENTRAL BANK 45 
 
 Hon. George E. Roberts, President Commercial National Bank, 
 Chicago. 
 
 A CENTRAL BANK AS A MENACE TO LIBERTY 55 
 
 George H. Earle, Jr., President Real Estate Trust Company, 
 Philadelphia. . 
 
 CLEARING-HOUSE CERTIFICATES AND THE NEED FOR A 
 
 CENTRAL BANK 61 
 
 William A. Nash, President Com Exchange State Bank, New 
 York. 
 
 FOREIGN EXPERIENCE A GUIDE TO CURRENCY REFORM 67 
 Isaac N. Seligman, of J. and W. Seligman & Co., New York. 
 
 RELATION OF A CENTRAL BANK TO THE ELASTICITY OF 
 
 THE CURRENCY 72 
 
 Jacob H. Schiff, Senior member of the firm of Kuhn, Loeb & Co., 
 Nfew York. 
 
 (iii) 
 
iv Contents 
 
 PAGB 
 
 DIAGNOSIS OF THE WORLD'S ELASTIC CURRENCY PROB- 
 LEMS 77 
 
 Andrew J. Frame, President Waukesha National Bank, Wauke- 
 sha, Wisconsin. 
 
 PANIC PREVENTIONS AND CURES 98 
 
 Henry W. Yates, President Nebraska National Bank, Omaha. 
 
 THE NORTHWEST IN THE RECENT FINANCIAL CRISIS.. . 113 
 A. L. Mills, President First National Bank, Portland, Oregon. 
 
 NEGLECTED ASPECTS OF CURRENCY AND BANKING 120 
 
 F. A. Cleveland, Ph.D., Author of "The Bank and the Treasury" 
 
 THE LESSONS OF THE PANIC OF 1907 148 
 
 S. Wexler, Vice-President Whitney-Central National Bank, New 
 Orleans, La. 
 
 THE OBSTACLES TO CURRENCY REFORM 154 
 
 Lyman J. Gage, Ex-Secretary of the Treasury. 
 
 A NATIONAL CLEARING HOUSE AS A SAFEGUARD AGAINST 
 
 PANICS 160 
 
 J. M. Elliott, President First National Bank of Los Angeles, Cal. 
 
 TRUST COMPANIES AND RESERVES 163 
 
 A. S. Frissell, President Fifth Avenue Bank, New York. 
 
 Copyright, 1908, by the American Academy of Political and Social Science. 
 
 All rights reserved. 
 
Treasury Department^ 
 Office of the Secretary. 
 
 Washington, November 2g, igo'j. 
 My Dear Professor Rowe: 
 
 It is a matter of keen regret that I am not able to be with you 
 at your meeting, but the pressure of my duties here just at this 
 time is so great that I am sure every one will understand why I am 
 unable to attend. I observe from the list of speakers that the 
 treasury Department will be ably represented in the persons of 
 the Treasurer of the United States and the Comptroller of the 
 Currency. These and the other speakers of the evening, who are 
 men of deservedly high prominence in the banking and business 
 world, will surely make the meeting a notably interesting and in- 
 structive one for those who are so fortunate as to be present. 
 
 The financial situation is, of course, engaging the earnest at- 
 tention of our people. The attitude of the Treasury Department 
 is and has been that of extending all possible relief and of using 
 every means within its power to help all sections. Its readiness 
 to go to the utmost in this direction has, I think, been amply evi- 
 denced — if further evidence were needed — by the events of the past 
 few days. The measures that have been taken from time to time 
 by the Department, and by bankers and business men acting in co- 
 operation, have greatly alleviated the severity of the stringency, 
 and, with the continued support of our patriotic citizens everywhere, 
 I look for the immediate future to bring even more gratifying 
 results. 
 
 The influence of such organizations as yours, through meet- 
 ings like the one you are holding Monday evening, can be made 
 very helpful in the direction of enlightening public opinion, in 
 restoring confidence and in maintaining our prosperity. 
 
 With congratulations and best wishes for your members and 
 their guests, believe me, 
 
 Very sincerely yours, 
 
 George B. Cortelyou. 
 Prof. L. S. Rowe, President, 
 
 American Academy of Political and Social Science, West Philadelphia, Pa. 
 
 (301) 
 
THE PANIC AS A WORLD PHENOMENON 
 
 By Frank A. Vanderlip, 
 Vice-President National City Bank, New York. 
 
 It might very properly be urged that the present is too early a' 
 date for us to draw wise conclusions from the lessons of the recent 
 financial crisis. Indeed, one can hardly speak of it, as I did just 
 now, as the recent crisis. It is the present crisis. If we are not 
 well in the midst of it, we at least continue to be surrounded with 
 many unpleasant features that have formed a part of that crisis. 
 We are still in a situation where a great majority of the banks of 
 the country have practically suspended cash payments. 
 
 Domestic exchanges are still seriously disorganized. After 
 the most heroic measures for relief, taken by the Treasury and by 
 banks generally, we continue to be surrounded by abnormal condi- 
 tions, and the day is somewhere in the future when we can look 
 back with anything like academic interest and comment with intel- 
 ligence on the true lessons which have been taught by this extraor- 
 dinary financial event. 
 
 Although it may be too early to speak with certainty about 
 these lessons, there is good excuse to give consideration to the 
 phenomena of the crisis, even at as early a date as the present. 
 Sufficient excuse may be found in the profound necessity which 
 exists for an understanding of the causes and a comprehension of 
 the principles which must underlie proper remedies for such a 
 financial panic. There has never been a time in our political history, 
 I believe, when there was more necessity for a broad educational 
 movement in relation to financial affairs, than at the present time. 
 The necessity for education so that the public will comprehend the 
 underlying principles governing sound banking and a proper cur- 
 rency is as great to-day as was the necessity for education in regard 
 to the standard of value ten years ago. 
 
 The causes of the remarkable financial disturbances which we 
 have been experiencing are more or less obvious. Still, men are 
 not agreed upon them nor upon the varying degree of importance 
 that should be allotted to those causes that are obvious. Some 
 
 (302) 
 
The Panic as a World Phenoincuo 
 
 II 
 
 men will trace the roots of the trouble to the policies of the Presi- 
 dent of the United States. Some will trace them directly to the 
 activities of the "gamblers" of Wall Street, as they choose to call 
 that portion of the community. Now the truth lies at neither of 
 these extremes nor indeed does it lie between them. It is much 
 broader, deeper and more comprehensive than either of these 
 suggestions. 
 
 If I were to attempt in just a word to outline the causes as 
 I see them, I should say that we must run back for some of the 
 roots to the terrific losses which the world's capital experienced as 
 a result of the Boer War, costing as it did one billion of dollars, 
 the Japanese-Russian War, which cost one and one-quarter billions, 
 and the losses of the San P'rancisco disaster, which footed another 
 half billion. Here we have figures of nearly three billions of dol- 
 lars direct loss to the world's capital. That loss too, came at a 
 moment when the world was just entering upon a most intense 
 industrial activity, an activity which created what was, I presume 
 the greatest demand for capital that the world has ever known. 
 
 The world has thus, in an unprecedented degree, been using 
 of its liquid capital. We have seen railroads and other corpora- 
 tions inexorably pushed to build new lines, to add to their equip- 
 ment and to extend plants. But although the corporations were 
 forced to make these expenditures by the demands which broaden- 
 ing industry and growing commerce made imperative, they became 
 at last, owing to the exhaustion of the world's investment fund, 
 unable to sell securities to provide money for their forced expendi- 
 tures. They were unable to sell bonds, even though the security 
 that was ofifered was wholly above criticism. The investment 
 capital of the world became well nigh exhausted. That phase of 
 the situation was by no means confined to America. It was inter- 
 national in its origin and world-wide in its eflfect. 
 
 This financial crisis, however, has by no means been altogether 
 a matter of money. It has, in large measure, been a matter of what 
 was in men's minds. I would again go back a few years in search 
 for the roots of our present difficulties and note that we have had 
 a period of so-called "muck raking." A period in which there has 
 been the most general criticism of leaders, both financial and po- 
 litical. Now, to tell the truth, we have had a good deal of honest 
 reason for criticism; at the same time, it is unquestionably true 
 
 (303) 
 
4 The Annals of the American Academy 
 
 that much of the criticism has been unfounded. There has, how- 
 ever, been brought forward evidence enough to show that no small 
 measure of criticism was merited. 
 
 The financial world approached the fall months of 1907 with 
 a situation in which investment capital was practically exhausted 
 and at a time when the confidence of the people in financial leaders 
 had been severely shaken. It was not alone the confidence of the 
 people in financial leaders that had been shaken, however. The con- 
 fidence of the financial leaders, the confidence of investors and of 
 men who control capital had been shaken in the people. The con- 
 fidence of those men, in the wisdom of legislation, in the fairness 
 of legislators, in the high-mindedness of courts and in the right 
 spirit and justice of public opinion, has been seriously shaken. We 
 approached these fall months then with a situation where confidence 
 was lost on the part of the people in the financial leaders and was 
 shaken on the part of those who directed large corporate affairs, in 
 the stability of conditions such as only an honest and fair public 
 opinion can insure. 
 
 We approached these months with a banking and currency 
 situation in which any withdrawal of money from the banking 
 centers, even such a withdrawal as comes with the ordinary legiti- 
 mate demands for the crop movement, meant, because of a bad 
 banking and currency system, a withdrawal of reserves from the 
 banks. We approached these trying months with a currency system 
 which had in it no expansive element. If more circulation were to 
 be needed, there M^ere only three places it could come from. It 
 might come from abroad in the shape of gold imports, it might come 
 from the treasury in the form of additional public deposits, or 
 failing a sufficient supply from these two sources, it must come from 
 the reserves of the banks. 
 
 We have been preaching about the necessity for an expansive 
 currency for years. We have now had an illustration of the need 
 of it, an illustration of the danger which we run to be without it, 
 which is going to go farther to convince the people that we require 
 legislation, than have all the meetings and all the addresses which 
 have been made on this subject in a great many years. 
 
 Of course, if one were to trace more minutely the causes of 
 the financial upheaval, he might find the direct, immediate cause 
 was intimately related to trust company development. A great 
 
 (304) 
 
The Panic as a World Phenomenon 5 
 
 number of trust companies have been organized in the last few 
 years. Bank depositors have been very greedy to obtain high 
 interest rates. The trust companies, with small reserve require- 
 ments, were in a position to pay higher interest rates than did the 
 commercial banks. In some cases they paid rates that were too 
 high, and in order to pay such rates they engaged their capital in 
 a way which was not the most conservative. That made the situa- 
 tion such, taken in connection with the general shock to confidence 
 which I have referred to, that when a breath was raised against the 
 credit of trust companies, it found quick lodgment in the minds of 
 the people and depositors, and made those suspicions promptly felt 
 by large withdrawals of deposits and a considerable hoarding of 
 cash. The hoarding, indeed, was not confined to the people alto- 
 gether. It soon extended to the banks themselves, and has finally 
 become one of the most important features of the situation. This 
 hoarding of money in excess of their normal reserve requirements, 
 by the banks, is one of the phenomena that will deserve close atten- 
 tion. The remedy for it lies outside the field of an elastic currency. 
 Now, as we have remarked, it may be rather early for a really 
 academic view of this crisis. Nevertheless, I believe the necessity 
 for a study of the lessons of the crisis is so great, the need for an 
 understanding of these lessons is so pressing, that now, while it is 
 all fresh m our minds, is the best of all times to begin a study of 
 the problems raised. 
 
 Recently the newspapers have contained interviews with a 
 large number of senators and congressmen as to the course of 
 probable financial legislation. To my mind it was shocking to read 
 the views of many of the members of Congress. They ran all the 
 way from those members who thought nothing at all was necessary 
 in the way of legislation to those who wanted to have the United 
 States Government guarantee all the deposits in all the national 
 banks and issue $300,000,000 of greenbacks. I am ashamed to 
 admit it, but I presume the truth is that a series of interviews with 
 well-known bankers, interviews with men bearing the most im- 
 portant relation to the country's financial work, would show as 
 great a variation of opinion as did these interviews with members 
 of Congress. I am afraid that the bankers would show, in some 
 cases, as great ignorance of what is needed, and as little compre- 
 hension of the principles underlying any really intelligent reform, 
 
 (305) 
 
6 ' The Jiuutls of the A}ncrican Academy 
 
 as our senators and congressmen. That leads me to believe that 
 there never was a time when education of the people in the princi- 
 ples of banking and currency w^as more seriously needed. The 
 necessity for such education is reason enough for this inquiry into 
 the lessons of the crisis. 
 
 The one great practical lesson, of course, is going to be that 
 some form of expansive currency, a currency which will be related 
 in volume to the commercial needs of the country, is necessary. 
 Whether such currency be secured as a result of an extension of the 
 powers of the treasury or by giving the right to all national banks 
 to issue asset currency, or by the organization of a central bank, is 
 one of the questions which a better educated public opinion is 
 needed to answer. Whatever the answer may finally be, there are 
 certain principles which we must learn to recognize and to apply 
 to all discussions of this subject of an expansive currency. 
 
 It is, perhaps, fortunate that we have had an illustration of an 
 expansive currency in the issue of clearing-house certificates which 
 have been put out in many cities in the form of circulating notes and 
 which will help many to see more clearly what really is the function 
 of an asset currency. 
 
 One of the valuable lessons which we have learned from this 
 financial disturbance is the interdependence of financial centers 
 upon one another. New York had shown evidences of the ap- 
 proaching crisis for several months. There had been disturbances 
 in the stock market, high rates for money, low reserves and other 
 indications of a possible period of strain, but the great West and 
 South, with seven billions of agricultural products, said, "We are 
 independent. We have divorced ourselves from the people of Wall 
 Street. They may have their troubles. We are strong enough to 
 take Care of ourselves." 
 
 London, Berlin and Paris did not feel the same financial inde- 
 pendence that was felt by Oskaloosa and Podunk. Oskaloosa and 
 Podunk believed that the wheels of prosperity would continue to 
 turn for them with unabated speed regardless of what happened in 
 New York. London, Berlin and Paris were deeply concerned over 
 the situation as it was reflected in Wall Street. Now the whole 
 country has come to see that there is no such thing as financial 
 independence. It took hardly twenty-four hours from the disturb- 
 ance resulting in clearing-house certificates in New York for the 
 
 (306) 
 
The Panic as a JTorld Phenomenon 7 
 
 difficulties to become national. The West and the South, rich and 
 independent as they are, can now see more clearly that the whole 
 country's welfare is pretty much bound together in a financial way. 
 Perhaps the most significant of all the lessons of the crisis, one 
 that will, in the end, sink more deeply into our understanding than 
 any of the others, will come to us when we comprehend the full 
 weight of what it means to destroy confidence: what it means to 
 destroy the confidence of the people in the financial leaders, to 
 destroy the confidence of capitalists in the fairness of the people 
 as reflected in legislation and in the decisions of the courts. 
 
 (307) 
 
THE PANIC OF 1907 AND SOME OF ITS LESSONS 
 
 By Myron T. Herrick, 
 Chairman of the Board Society for Savings, Cleveland, Ohio. 
 
 Every American panic has been characterized by very similar 
 events, which have followed each other in like sequence, — about 
 as follows : 
 
 (i) Failure of an important bank or "institution, — Ohio Life 
 Insurance and Trust Company in 1857 ; Jay Cooke & Co, in 1873 ; 
 Mitchell's Bank, and the Erie Railroad in 1893 ; and the Knicker- 
 bocker Trust Company in 1907. 
 
 (2) Heavy withdrawal of funds by depositors, and the failure 
 of many financial institutions. 
 
 (3) Demoralized stock market, — affecting banks and deposi- 
 tors alike. 
 
 (4) Hoarding of money in large amounts, not only by indi- 
 viduals but by banks, and the partial refusal on the part of banks 
 to pay out cash, resulting in a premium on currency. 
 
 (5) Large importations of gold, — $15,000,000 in 1873; $5^,- 
 000,000 in 1893 ; and over $100,000,000 in 1907. 
 
 (6) Gradual improvement in financial affairs, resumption of 
 specie payments, and disappearance of premium on currency. 
 
 (7) Acute trade reaction, discharge of many thousands of 
 employees, and realization that the country must pass through a 
 more or less severe industrial reconstruction. 
 
 The present financial disturbance apparently had its inception 
 on the 15th and i6th of October, when it was first known that the 
 Mercantile National Bank, of New York, was in difficulty. The 
 embarrassment of this bank was closely connected with an opera- 
 tion in the stock of the United Copper Company. The stock of 
 this company, which had declined severely, because of the fall in 
 the price of the metal, suddenly advanced, in a few days, from 
 thirty-seven to sixty, by reason of an attempt to corner the stock. 
 Unfortunately for the operator who was engineering the transac- 
 tion, stock which it was supposed could not be delivered was 
 produced, and the firm of brokers backing the deal was obliged 
 
 (308) 
 
The Panic of 190/ and some of Its Lessons 9 
 
 to suspend. So far the episode differed little from an ordinary 
 stock market fiasco, but when it was known that the Mercantile 
 National Bank had supplied the funds for the attempted corner 
 and was embarrassed thereby the affair took a more serious turn. 
 The bank was examined, found to be solvent, and help was ex- 
 tended to it. Up to this time the public was not much alarmed, 
 but on Monday, October 21, the Knickerbocker Trust Company, 
 one of the largest institutions of its kind in New York, made an 
 appeal for assistance, which was not granted and the company 
 closed its doors at noon the next day, after a run in which more 
 than $8,000,000 was paid over the counter. The failure of this 
 large company demoralized the stock market. Call money advanced 
 to 70 per cent and many stocks sold at new low records. Depos- 
 itors in other institutions now began to lose confidence and com- 
 menced to withdraw funds. The Trust Company of America and 
 the Lincoln Trust Company, both solvent institutions, were sub- 
 jected to severe and prolonged runs. In the week following it 
 was estimated that $40,000,000 was paid out by those two com- 
 panies. At the same time Western banks began to make drafts 
 on their New York depositories and during the week of October. 
 2 1st, $14,000,000 was sent from New York City to banks in the 
 interior. The withdrawal and hoarding of this vast sum by banks 
 and individuals produced a most acute condition. On October 
 24th the panic on the Stock Exchange seemed almost hopeless. 
 Call money was practically unobtainable, — only a few loans being 
 made at 125 per cent. At two o'clock, when the demoralization 
 was at its worst, a bankers' pool headed by J. P. Morgan loaned 
 $25,000,000 at 10 per cent, — thus tiding over a situation fraught 
 with the gravest danger. An appeal was made to the Secretary 
 of ihe Treasury for additional government deposits and gold in 
 large quantities was imported in spite of the fact that the Bank 
 of England, to protect its gold reserve, raised its discount rate to 
 7 per cent, the highest in thirty-four years. Before relief was ob- 
 tained from these measures, the reserve of the national banks of 
 New York City had declined to more than $54,000,000 below that 
 required by law. This was the largest deficit on record. Clearing- 
 house certificates were authorized to settle the balances between 
 the banks and a premium of 3>^ per cent was paid for currency. 
 The disturbance which, for a time, was confined to New York City 
 
 (309) 
 
10 The Annals of the Aiiiericaii Academy 
 
 gradually extended and banks in most of the larger cities were 
 obliged to use certified checks, clearing-house checks and clearing- 
 house certificates to make up the deficiency in currency caused by 
 its withdrawal from circulation. 
 
 At present, so far as the banks are concerned, the situation 
 is gradually improving. Money is being brought from its hiding 
 places and is again finding its way into the bank reserves and the 
 premium on currency has disappeared. The deficit in the reserves 
 of the New York associated banks has been made good and for 
 the week ending January nth a surplus was reported for the first 
 time since October 26th. The statements just issued, pursuant to the 
 call of the Comptroller of the Currency are, under the circumstances, 
 unusually good, showing most of the national banks to be in normal 
 condition, many of them holding a reserve in excess of that required 
 by law. Two facts evidence the widespread extent and the violence 
 of the panic. The premium on currency continued longer than in any 
 other period in the history of the country and with a single exception 
 it has taken the New York banks longer to repair the deficit in their 
 reserve. One of the most striking features of the panic is the re- 
 markable way in which the banks have stood up under the strain. 
 In 1893, 160 national banks failed, while in 1907 but twenty-one 
 were obliged to suspend, a number which has been exceeded many 
 times in years in which there has not been a panic. 
 
 Such, in brief, are the salient features of the history of the 
 past three months. If these facts afford an adequate explana- 
 tion of the disturbance, and if from them alone we are justified in 
 drawing a conclusion as to its probable length and extent, it would be 
 safe to say that within a few weeks at the most industry would 
 return to the highly prosperous state of a few months since. Such 
 a conclusion, however, is not warranted. The course of the events 
 of the immediate past is undoubtedly but the surface indication 
 of a deeper and more important economic phenomenon. This be- 
 lief is strengthened because we now know that the striking events 
 of past crises were but outward manifestations of industrial and 
 financial conditions. When the history of the panic of 1907 is 
 written and its significance fully appreciated, it will undoubtedly 
 rank with the epoch-making panics of 1893, 1873, 1857 and 1837. 
 That the sequel will be similar to that following any of these other 
 critical years, is not at all likely, for the immediate circumstances 
 
The Panic of igoj and some of Its Lessons ii 
 
 that produce a financial or industrial panic are never the same, and 
 it is these circumstances that determine the direction that the 
 disturbance is to take as well as the duration and the severity 
 of the depression that usually follows. 
 
 The periodicity of crises is undoubtedly a psychological phe- 
 nomenon and is an expression of the rhythmic movement between 
 hope and despair, optimism and pessimism, that has ever charac- 
 terized society. So long as a man is a creature whose judgment 
 is largely determined by his feelings, we are bound to have re- 
 curring periods of prosperity and depression. The form that 
 a crisis in modern times takes is, to a large extent, fixed by the 
 existence of credit in many forms and by the great accumu- 
 lation of loanable capital. The crisis occurs when credit has 
 been unduly extended and the supply of capital exhausted or 
 so involved in unproductive enterprises as not to be available. In 
 every period of business activity, capital is gradually absorbed, 
 there is a heavy demand for funds for investment in new enter- 
 prises. As these new enterprises take form and develop, there 
 arises an increased demand for all sorts of labor, from that of 
 the lowest grade manual labor to that requiring executive ability 
 of the highest order. Prices rise, partly because of the increased 
 cost of production and also by reason of the greater demand on the 
 part of better paid labor. The rise in prices, however, is always 
 out of proportion to the rise in wages and thus the ability to save 
 and create new increments to the store of capital is curtailed. If 
 the absorption of capital is not lessened to meet the diminution 
 in its creation, the time must surely come when the supply of capi- 
 tal is entirely inadequate to the demand and going enterprises are 
 then severely hampered by inability to obtain funds sufficient even 
 for ordinary betterments. It has probably never happened that 
 such a situation is appreciated in time to gradually and easily 
 curtail capital expenditures. It is of the nature of man to be 
 swept along on a current of optimism, overdiscounting the future 
 and investing large sums in enterprises whose present worth is 
 largely overvalued. It is only when the breaking point is reached 
 and the crisis is at hand that men come to a realization that credit 
 is unduly extended and capital exhausted. 
 
 Since 1897, the year in which were recognized the first sure 
 signs of the present cycle of prosperity, the train of events has 
 
 (311) 
 
12 l^lie .liuials of the American Academy 
 
 followed pretty closel}^ the lines just indicated. The average of 
 prices in 1907 was higher than at any time in over thirty years. 
 For more than a year past, not only new enterprises, but old well- 
 established industries and railroads have found it almost impossi- 
 ble to obtain the capital requisite to procure the equipment essen- 
 tial, because of the great trade activity. Some time since, many of 
 the important railroads found that the only method by which funds 
 could be secured was by the sale, at a discount, of short time 
 notes bearing an unusually high rate of interest. From 1896 to 
 1907 the proportion of capital of all national banks to deposits 
 has decreased from $1.00 to $2.46, to $1.00 to $4.82, and the pro- 
 portion of reserve to deposits has decreased from $1.00 to $5.13, 
 to $1.00 to $6.16. The aggregate resources of all banks was re- 
 ported in 1897 at $7,822,000,000, and in 1907 at $19,645,000,000. 
 On August 22, 1907, the loans of national banks amounted to $4,- 
 678,000,000, the largest total on record. The percentage of reserves 
 to deposits in national banks has shown a constantly declining ten- 
 dency from 1894, when it stood at 32.7 per cent, to 1907, when it 
 was but 21.33 PC'' cent. In 1896, banks of all classes reported 
 individual deposits of $4,000,000,000, with cash holdings of 10.72 
 per cent. In 1906, the banks of the United States had deposits 
 of $12,000,000,000, with cash reserves of 8.3 per cent. Moreover, 
 within the past ten years, there has been an enormous destruction 
 of capital. The Boer War, the conflict with Spain, the Russo- 
 Japanese War, the Baltimore fire, and the destruction of San 
 Francisco, involved a waste of capital so prodigious as undoubtedly 
 to weaken the stability of industry the world over. These facts 
 and figures are representative of only a few of the indications of 
 an overstrain on the capital and credit of the country. 
 
 If, then, what we have experienced in the few months just 
 past is a real economic crisis, is there anything in the condition 
 and circumstances of the country that would lead us to believe 
 that the depression that always follows such a crisis is to be of a 
 comparatively short duration and of less than usual severity? For 
 the sake of comparison, it is well to take the panic of 1893, inas- 
 much as the organization of industry and credit at that time was 
 more like that of to-day than at the time of any other crisis in the 
 history of the United States. In almost every respect the country 
 is in better condition than it was fourteen years ago. Possibly 
 
The Panic of ic^oy and some of Us Lessons 13 
 
 the most important factor is the status of government finance. In 
 the six months from January to June, 1893, the excess of govern- 
 ment expenditures over receipts was $4,198,000, and during the 
 fiscal year ending June 30, 1894, the excess increased to $69,000,- 
 000. It was even necessary to encroach upon the gold reserve for 
 current expenses, and for months this fund was less than caution 
 and prudence demanded. To-day the government has a working 
 balance of something like $200,000,000, and while expenditures are 
 now in excess of receipts, due to decreased imports, the balance 
 in the treasury is so large as to afford a safe margin for falling 
 revenues. The currency of the country is now safely on a gold 
 basis. In 1893, ^^""^ money of the country was in a chaotic state, 
 because of the coinage of silver dollars under the Bland Act, and 
 of the issuance of treasury notes of full legal tender to pay for the 
 4.500,000 ounces of silver bullion purchased each month under au- 
 thority of the Sherman Act of 1890. It was only when the panic 
 was well under way and the harm done, that Congress was suffi- 
 ciently aroused to repeal the Sherman Act. Even after this per- 
 nicious measure had been wiped from the statute books, the senti- 
 ment in favor of the coinage of silver was so strong as to unsettle 
 confidence for several years. The apprehension that existed, both 
 in tliis country and abroad, as to the ability of the government to 
 maintain gold payments, was one of the fundamental and effective 
 causes of the crisis of 1893. This fear led to a rush to realize on 
 all sorts of property before gold should disappear. British and 
 other foreign investors hastened to get rid of their holdings before 
 the distrust became so general as to cause a severe fall in prices. 
 The excess of merchandise exports in 1892 exceeded the imports 
 by $203,000,000, yet so great was the liquidation in securities of this 
 country by foreigners, that we exported more gold than we received, 
 by $495,000 in that year. Too much emphasis canngt be laid upon 
 this point of distinction, that in 1893 we were threatened with 
 repudiation, whereas, in 1907, the whole world has confidence in our 
 ability to pay our obligations in gold. As a matter of fact, the 
 favorable condition of tlic finances of the government, the stability 
 of banking institutions, and the soundness of our currency and 
 monetary systems, distinguish the panic of 1907 from that of any 
 other- in the history of the country. In 1837, speculative prosperity 
 led to an enormous increase in the note issues of the state banks 
 
 (313) 
 
14 The Annals of the American Academy 
 
 made possible by Jackson's destruction of the second United States 
 bank. Much of this circulation rested on inflated assets, and when 
 the treasury issued its famous specie circular, July, 1836, requiring 
 payment for public lands to be made in specie, the complicated 
 credit structure collapsed. The panic of 1857 was precipitated by the 
 vicious banking systems of the various states. In only a few states 
 was the least attempt made to limit bank note issues or to see that 
 the notes had proper assets behind them and the result was inev- 
 itable. The enormous issues of government securities, green- 
 backs, etc., to carry on the Civil War, resulted in overstimulating 
 industry and unduly inflating prices. The crash came in 1873 
 when the maladjustment of production to consumption broke down 
 the credit structure already overstrained. In recent times railroads 
 and railroad finance have played an important part in every eco- 
 nomic crisis. In the last decade, the increase in the mileage of rail- 
 roads has been comparatively small and wdiat expenditures have 
 been made have been for the improving and extending of estab- 
 lished lines rather than for the building of new roads into sparsely 
 settled and undeveloped territory. The gross receipts of railroads 
 are larger per capita of population than at any other period in the 
 history of the country, and this is true at a time when rates have 
 steadily decreased. There can be no question that our railroads 
 are now on a most substantial basis. In 1894, there were 156 rail- 
 roads operating a mileage of nearly 39,000 miles, in the hands of 
 receivers, — among them were the three great systems, — Erie, North- 
 ern Pacific and Union Pacific. It is inconceivable that any such 
 calamity should overtake us now. Of course, it is unsafe to pre- 
 dict the ultimate efifect of the falling off in business on the earnings 
 of railroads, but we do know this, that it was the poverty of the 
 West that caused the railroad receiverships in 1893, whereas, to- 
 day, one of the most reassuring signs is the great strength and 
 stability of the agricultural districts of the West. In 1893, the 
 railroads served a population of 66,000.000. They are now called 
 upon to transport the products of 86,000,000. The world's output 
 of gold has increased from $147,000,000 in 1892 to something over 
 $400,000,000 in 1907, and the fact that the balance of trade is now 
 well in our favor will enable us to secure and retain at least our 
 share of the new metal with which to strengthen our bank reserves. 
 The export of breadstuffs in November was of record propor- 
 
 (314) 
 
The Panic' of igoj and sonic of Its Lessons 15 
 
 tions, the value being $24,700,000 this year against only $15,416,- 
 000 for the same month last year. This is the first panic year in our 
 history when exports exceeded imports. For the year ending June, 
 1893, the import excess was $18,700,000, and in 1873 and 1857 
 the import excess was the largest on record. For the fiscal year 
 1907, exports exceeded imports by $446,000,000, which places us 
 in a very favorable relation to international exchanges. In 1893, 
 the exports of gold coin and bullion exceeded the imports by over 
 $87,000,000. We have had bountiful harvests, and the prices of 
 all products are high. The reverse of the condition obtained in 
 1893, when cotton was selling for 8 cents, wheat for 70 and 
 corn for 48. The farmers of the country are especially prosperous, 
 they are lenders, not borrowers, as they were fourteen years ago. 
 These are but a few of the circumstances that distinguish the situa- 
 tion of to-day from that of the last economic crisis. The aftermath 
 of the panic is now becoming apparent in the lessened bank clear- 
 ings which are running about 30 per cent below those of last year. 
 Prices of commodities are already substantially less than they 
 were four months since. Each of the last three months has re- 
 corded a decline in the average price from that of the month pre- 
 ceding, aggregating about 1 1 per cent. Funds are already showing 
 a tendency to flow to reserve centers, and it is quite possible that 
 in this respect, the history of the panic of 1893 will be repeated. 
 In February, 1894, about six months after the panic of the preced- 
 ing July, the surplus reserves of the New York banks amounted 
 to $111,000,000, the highest they have ever been either before or 
 since. The gross earnings of some railroads have declined 50 per 
 cent, and the average decrease for all the railroads of the country 
 for December was over 10 per cent., The decline in railroad 
 earnings can be attributed only in part to industrial conditions. 
 Unwise and drastic state laws are having a most serious effect on 
 the earning power of railroads. Already two large railroad sys- 
 tems have been obliged to ask for receiverships. It does not seem 
 likely, however, that these decreases in industrial and railroad 
 earnings will reach dangerous proportions and it is altogether 
 probable that a few months of lessened industrial activity will re- 
 store the equilibrium between the demand and supply of capi- 
 tal and relieve the strain. Much, however, depends on the good 
 sense with which the people meet the situation, and the extent 
 
 (315) 
 
i6 The Annals of {he American Academy 
 
 to which they retain their confidence in the basic stability of the 
 country's industry and finance. The people, so far, have faced the 
 changed conditions wisely and bravely. 
 
 Every such crisis brings into prominence some weak spot in 
 industrial or financial arrangements. The incidents of the past few 
 months have clearly demonstrated that our currency system is too 
 rigid to meet the varying demands made upon it. It seems to have 
 been a part of the sequence of every panic that an insistent demand 
 should be made for an increased volume of currency. Mr. Bolles, 
 in his financial history, says of the panic of 1873, "The number of 
 remedies was marvelous, the financier suddenly appeared every- 
 where, and maturing his plans at a sitting, forthwith sent them to 
 Washington." In 1873 the demand was so urgent that Congress 
 passed a bill increasing legal tender notes by $44,000,000, a pro- 
 ject which was wisely vetoed by President Grant. After the panic 
 of 1893, the people persuaded Congress to give its approval to a 
 measure providing for the coinage of $55,000,000 of silver, but 
 President Cleveland followed the excellent precedent of Grant and 
 blocked the bill by his veto. Both of these measures were the 
 result of the clamor of an excited people, made desperate by dis- 
 tress. In the present instance, the demand for a more elastic cur- 
 rency is not the result of the pending disturbance, but the need for 
 some change in our currency system has long been recognized. 
 The currency famine of the past few weeks is only an exaggerated 
 form of a trouble from which we have long suffered at the crop- 
 moving period. What is wanted is not an increased issue of per- 
 manent inelastic currency, but authority for the banks to put into 
 circulation, in response to the demands of trade, a bank note that 
 will return to the bank of issue and be canceled as soon as the need 
 is satisfied. A system of bond secured notes fails to adequately 
 satisfy the need for currency for four reasons : 
 
 (i) It is inelastic. (2) It lessens the loaning power of banks 
 by the amount invested in bonds. (3) It tends to withdraw funds 
 from the locality where needed to the section where funds are 
 cheap. (4) The volume of bond secured notes is determined by 
 the price of bonds, rather than by the commercial need for currency. 
 
 The system of national bank notes in this country, secured by 
 government bonds, is essentially irresponsive to the demands of 
 trade and commerce. The need for additional currency is most 
 
 (316) 
 
The Panic of iQoy and some of Its Lessons 17 
 
 urgent in the fall of the year, from August to December, and yet 
 from 1890 to 1906, a period of sixteen years, there was an actual 
 decrease of bank note currency in the fall of three of those years, 
 and in seven of those years the increase was not more than $3,000,- 
 000, whereas an expansion of $200,000,000 would not be excessive. 
 In Canada, with a population of less than 6,000,000, there is an 
 expansion and contraction of about $20,000,000 in the fall of each 
 year; and in Germany the amount of currency varies about $120,- 
 000,000 every three months. This inelasticity of our currency is, 
 in its final result, a tax on the agricultural interests of the West, 
 for it is there that the demand for currency is most insistent and the 
 inability of the banks to meet this demand is indicated by an in- 
 crease in the rate of discount at certain periods of the year. Even 
 in the face of great emergencies, bond secured notes have failed 
 to expand in anything like the amount they should, and whatever 
 expansion there has been has usually come after the crisis was 
 past. On June i, 1893, New York banks held a surplus reserve 
 of $21,000,000, and the volume of outstanding bank notes was 
 about $177,000,000. By the first of August of that year the de- 
 mand for currency had become so intense that the reserves of the 
 New York banks showed a deficit of $14,000,000, a loss of $35,000,- 
 000 in three months, and yet the outstanding bank notes had in- 
 creased by only $5,000,000. By September ist, when the urgency 
 was past and currency comparatively plentiful, the volume of bank 
 notes began to expand rapidly, reaching $209,000,000 on November 
 1st. In October, 1907, when currency was being hoarded and bank 
 reserves were far below the amount required by law, the volume 
 of bank notes increased by less than $6,000,000, but in November, 
 when the situation was improving $50,000,000 of bank notes were 
 issued. Not only do bond secured notes fail to expand in volume 
 when needed, but they fail to contract in proportion to the lessened 
 requirements of trade incident to the depression following a crisis 
 and the result is redundant circulation and exportation of gold at 
 a time when it is particularly needed in the rehabilitation of indus- 
 try. Of the panic of 1893, Professor Joseph Johnson says, "Dur- 
 ing 1893, the fours of 1907 sold down to 113, and the banks added 
 to their circulation $37,000,000. During the months of June, July 
 and August of that year, there was a most urgent need for an ex- 
 pansion of the currency, but during these months the new national 
 
 (317) 
 
i8 The Annals of the American Academy 
 
 bank notes did not appear. Not until the panic was over and the 
 money was piHng up in all the financial centers, a drug on the 
 market, did the increase in the national bank note circulation take 
 place. As a result of the panic, business being depressed, the 
 interest rate on prime commercial paper during 1894, 1895 and 
 1896 was between 3 per cent and 4 per cent. The money supply 
 of the country was in excess of its need, and gold was exported in 
 large amounts." By the amount that a bank is required to invest 
 in bonds to secure circulation is its loaning power curtailed. The 
 statement of a bank with a capital of $200,000, deposits of $500,000, 
 and bond-secured circulation of $100,000, would be as follows: 
 
 Assets. Liabilities. 
 
 Reserve $125,000 Capital $200,000 
 
 Bonds 100,000 Deposits 500,000 
 
 Loans 575,000 Notes 100,000 
 
 Total $800,000 Total $800,000 
 
 If, however, the same bank was permitted to issue notes based 
 on assets and secured by the same reserves as deposits, its state- 
 ment would appear as follows : 
 
 Assets. Liabilities. 
 
 Reserve $150,000 Capital $200,000 
 
 Loans 650,000 Deposits 500,000 
 
 Notes 100,000 
 
 Total $800,000 Total $800,000 
 
 From these two statements it is apparent that the loaning 
 ability of the bank is lessened $75,000 by a needless investment in 
 bonds. The need for currency is greatest in rural communities 
 where capital is scarce and rates of interest high and in so far as 
 bonds are purchased to secure circulation, are such communities 
 deprived of capital of which they have need. The amount is loaned 
 elsewhere at a low rate of interest, in the form of investments in 
 bonds. The record of the volume of national bank circulation, 
 since the passage of the National Bank Act in 1865, shows con- 
 clusively that the amount of bank note currency outstanding has 
 varied with the price of bonds and not with the needs of trade. 
 This results in redundancv at some periods and insufficiency at 
 
 (318) 
 
The Panic of ipo/ and sonic of Its Lessons 19 
 
 others, greatly to the detriment of industry. The use of railroad 
 and municipal bonds to secure circulation would possess no advan- 
 tage over the use of government bonds. A bond-secured circula- 
 tion is unscientific and economically extravagant. This country 
 has a great sufficiency of this kind of currency, and it would be 
 a serious mistake to extend the system by permitting the use of 
 other than government bonds. The Aldrich Bill, now before Con- 
 gress, provides for an emergency circulation secured by municipal 
 and railroad bonds. Such a measure does not reach the seat of 
 trouble, and at best will only provide a partial remedy of question- 
 able expediency. 
 
 After years of study and discussion, the American Bankers' 
 Association, through its currency commission, has reached the con- 
 clusion that the only kind of currency that will respond easily to 
 the need for such a medium of exchange, is that secured by the 
 assets of a bank in the same manner as deposits are secured. 
 The principles upon which the commission unanimously agreed are, 
 in brief, as follows: 
 
 (i) A credit currency should be issued by national banks of 
 the country under proper conditions. 
 
 (2) A bank note is essentially the same in principle as a de- 
 posit payable on demand. 
 
 (3) It is important in any plan seeking to provide a more flexi- 
 ble currency, that no measures should be taken that would impair 
 the market value of United States bonds. 
 
 (4) Credit notes should be taxed at a rate that will produce 
 a guarantee fund sufficient to redeem the notes of failed banks. 
 
 (5) Banks should keep the same reserve against credit notes 
 outstanding as is now required by law against deposits. 
 
 (6) Active daily redemption of credit currency is the proper 
 and only means of making it elastic, preventing redundancy and 
 automatically adjusting its volume to the actual requirements of 
 commerce. 
 
 Much of the opposition to the so-called asset currency arises 
 from the failure of people generally to appreciate the essential 
 similarity between a bank-note and a deposit, and also because 
 of the fact that until within a very few years before the passage 
 of the National Bank Act, note issues of banks exceeded deposits, 
 and hence the losses and disturbances occasioned by improper 
 
 (319) 
 
20 The Annals of the Aiiieriea)i Academy 
 
 banking were attributed to over-issue of notes. Therefore, the 
 absokite safety of bond-secured notes, as provided for in the 
 National Bank Act, has fostered a prejudice against bank notes 
 otherwise secured. It is probable, however, that had the propor- 
 tion of bank notes and deposits in the early days been reversed, 
 the losses due to unwise banking would have been equally severe. 
 Frequent bank failures were due, not so much to the form of the 
 demand liabilities of the bank, as to the nature of the loans that 
 the bank made. It is not likely that we shall have a rational re- 
 form of our currency system until the similarity between the bank 
 note and the deposit is clearly understood, and the prejudice against 
 any form of security for circulation, other than bonds, is dispelled. 
 That bank deposits constitute a medium of exchange as truly as 
 bank notes, is not a new discovery. The principle was clearly 
 enunciated by Alexander Hamilton in 1790, — "Every loan which 
 a bank makes is, in its first shape, a credit given to the borrower 
 in its books, the amount of which it stands ready to pay, either 
 in its own notes, or in gold or silver, at his option. But in a great 
 number of cases no actual payment is made in either. The bor- 
 rower, frequently, by use of a check or order, transfers his credit 
 to some other person to whom he has a payment to make. This 
 man, in his turn, is as often content with a similar credit, because 
 he is satisfied that he can whenever he pleases, either convert it 
 into cash or pass it to some other hands as an equivalent for it. 
 And in this manner the credit keeps circulating, performing in 
 every stage the office of money, till it is extinguished by a discount 
 with some person who has a payment to make to the bank to an 
 equal or greater amount." 
 
 To illustrate the contention that there is no vital difference 
 between a bank note and a deposit, take a specific instance. A 
 jobber sells a bill of goods on time, sixty or ninety days, and de- 
 sires to obtain the present use of his funds. He takes the note 
 that he has received, to the bank, and has it discounted. He does 
 not want gold, but what he does want is something that he can 
 use in payment of his obligations and, accordingly, he receives 
 credit on the books of the bank for the face of the note, less the 
 discount. This credit is a demand liability of the bank, and is used 
 by the depositor, by means of checks, as a medium of exchange. 
 It is currency in every true sense, having the same effect on prices 
 
 (320) 
 
The Panic of igoj and some of Its Lessons 21 
 
 as a like amount of bank notes. Suppose, however, that the bank 
 haci authority to issue, and the jobber desired and received bank 
 notes in exchang-e for the notes discounted. The result to the bank 
 and to the volume of currency in circulation is precisely the same. 
 The bank has added precisely the same amount to its demand 
 liabilities, and the volume of currency outstanding is the same, the 
 bank note taking the place of a deposit. By making a loan the 
 resources of the bank are increased in the form of a promissory 
 note and the deposit, or bank note, on the liability side of the ac- 
 count, has the security of the assets behind the loan. For example, 
 take the bank above referred to, with a capital of $200,000 and de- 
 posits of $500,000. If this bank issues no notes and holds a 
 25 per cent reserve against its deposits, its statement would be as 
 follows : 
 
 Assets. Liabilities, 
 
 Reserve $125,000 Capital $200,000 
 
 Loans 575,000 Deposits 500,000 
 
 Total $700,000 Total $700,000 
 
 If, however, the bank has the power to issue notes against 
 which it holds the same reserve as against deposits, the statement 
 would be as follows: 
 
 Assets. Liabilities. 
 
 Reserve $125,000 Capital $200,000 
 
 Loans 575,000 Deposits 400,000 
 
 Notes 100,000 
 
 Total $700,000 Total $700,000 
 
 So far as the bank is concerned, the situation in the first 
 supposition is the same as in the latter, except that $100,000 of its 
 loans had been made in notes instead of deposits. The aggregate 
 of the bank's liabilities is the same as well as its resources. With 
 the community that the bank serves, the situation is very different. 
 By being able to offer to its borrowers the choice of a deposit credit 
 or a note credit, the bank supplies the community with that form of 
 credit instrument Avhich it can use to the best advantage, thus 
 facilitating industrial transactions to a much greater degree than 
 would be the case could the bank only offer the deposit credit. 
 
 (321) 
 
22 The Annah of the American Academy 
 
 Mr. Henry Dunning McLeod, in his history of economics, gives a 
 very lucid explanation of the similarity between the deposit and 
 bank note. He says: "And as every advance a banker makes is 
 done by creating and issuing a right of action against himself to 
 his customers, and as a banker has an unlimited right of buying 
 any amount of debts or obligations from his customers, by creating 
 as many of these deposits, rights of action or issues, as he pleases, 
 it follows that every banker has the right of unlimited issue ; and 
 a sudden increase of deposits is, therefore, nothing more than an 
 inflation of credit, exactly similar to a sudden increase of bank notes. 
 Deposits are nothing but bank notes in disguise." With the ex- 
 ception of a few savings banks, every bank in the country has the 
 right to issue these credits, which are but bank notes in disguise. 
 This fact should make it very clear that there would be no risk 
 in permitting national banks to issue bank notes, called such, under 
 proper restrictions. It should also emphasize the great need for 
 legislation requiring banks organized under state charters, to carry 
 sufficient reserves. Loans are usually based on mercantile trans- 
 actions and, therefore, the deposits or bank notes have a security 
 equal to the soundness of business generally, which, as a matter of 
 fact, is all the security that is behind any credit instrument. The 
 objection that asset currency would lead to inflation, is unsound, 
 for the reason that whatever amount of such currency might be 
 issued, would simply displace a like amount of deposit currency, 
 as is shown in the two statements just given. Sound banking 
 depends, not upon the form of demand liability, but on the kind 
 of discounts made. It is on this point that great stress should be 
 placed. As long as a bank's loans represent legitimate, sound 
 business transactions and an adequate reserve is provided, the 
 amount of credits, whether deposit or bank note, is comparatively 
 unimportant. At the present time, the currency of the country 
 can be unduly inflated solely through the medium of deposits, by 
 the making of unwise and unsafe loans. It is proposed to further 
 secure the bank notes by requiring the same reserve of gold, or 
 its equivalent, as for deposits. Theoretically, there is no more reason 
 for taxing a bank note than a deposit, but to absolutely secure the 
 notes of failed banks, it is proposed to levy a tax sufficient to 
 provide for such notes, and inasmuch as an average of about 2 
 per cent is paid on deposit balances, the tax on notes should un- 
 
 (322) 
 
The Panic of igoy and some of Its Lessons 23 
 
 doubtedly be sufficient to off-set this. The notes of a bank differ 
 from its deposits in this respect, that they are intended to circu- 
 late over a much greater area than the representatives of deposits, 
 checks and drafts, and it is often impossible, or at least inconven- 
 ient, for the holder of a note to obtain reliable information as to 
 the solvency of the bank upon which a note is drawn. It is 
 essential, therefore, that a guarantee fund be provided to absolutely 
 secure every bank note issued, irrespective of the soundness of the 
 particular institution on which it is drawn. Approximately 95 per 
 cent of all the business of this country is transacted by means of 
 bank deposits, and this will continue to be the case, whatever form 
 the currency of the country may take because of the superior con- 
 venience of checks as a medium of exchange. When currency is 
 wanted, the need is imperative, as we have all learned to appreciate, 
 and the banks should be in a position to satisfy that need. De- 
 posits, since they originate in industrial transactions, and are per- 
 mitted to expand and contract practically unhampered by legisla- 
 tive restrictions, constitute the most elastic medium of exchange 
 ever devised, and if the banks of the country are ever to serve the 
 community as they should, like freedom must be given to note 
 issues. Unnecessary restrictions on the power of banks to issue 
 notes are a serious handicap to industry. The desirability of an 
 elastic currency is felt more strongly in the smaller towns oi rural 
 communities, where funds are needed to pay for farm labor, etc., 
 particularly during the harvest time. Could the banks serving 
 the agricultural districts offer to their clients bank notes instead 
 of a deposit, the necessity for withdrawing currency from the East 
 would be avoided as would also the return movement which creates 
 a plethora of loanable funds in New York, unduly stimulating 
 speculation and giving a wrong impression as to the plenti ful- 
 ness of capital and credit. An asset currency is not a new kind of 
 medium of exchange. Practically every civilized nation of impor- 
 tance permits note issues secured in part, at least, by the general 
 assets of banks. Canada, Scotland, France and Germany, all make 
 provision for bank notes of this nature. The Reichsbank, of Ger- 
 many, is permitted to expand its circulation without limit, but if 
 the amount of note issues uncovered by cash in bank, exceeds 
 450,000,000 marks, the bank must either increase its coin reserve 
 to cover the excess or pay a tax of 5 per cent on the amount over 
 
 (323) 
 
24 The Annals of the American Academy 
 
 the limit of 450,000,000 marks. Of this bank, Dunbar says: "The 
 efifectiveness of the elastic limit, in time of crisis, has never been 
 severely tested, but it has been found to meet with much success, 
 exceptional temporary demands for currency, which, under a rigid 
 system of issue, like that of the Bank of England, could only have 
 been satisfied by the withdrawal of specie or notes from the reserve. 
 It is noteworthy that with one exception the limit has been only 
 exceeded at the end of September and at the beginning of October, 
 or at the end of December and the beginning of January, at the 
 opening of the autumn or winter quarters of the year, when, 
 for various reasons, there is regularly an increased demand for 
 currency. In England, similar demands can be met only by with- 
 drawal from the reserve of the Bank of England and through the 
 temporary nature of such demands is well understood and in itself 
 causes no alarm, the difficulties of the situation are thereby en- 
 hanced when the bank is trying to strengthen its reserve against 
 more serious drain in other directions. Such demands the Reichs- 
 bank is enabled to meet, without difficulty, through the device of 
 the elastic limit." Representative Fowler has prepared a bill for 
 introduction into the House, which revolutionizes the entire cur- 
 rency system of the country, and its enactment would, without doubt, 
 unnecessarily disarrange existing financial methods to the detriment 
 of industrial conditions generally. 
 
 The laws of finance are as well known and as sure in their 
 operation as the laws of physics and the problem before us is 
 simply to apply these laws wisely. For many years, because of the 
 conditions peculiar to this country, we were obliged to conduct 
 our financial affairs along unknown and untried paths, the ex- 
 perience of the older countries did not afford suitable precedent 
 for our guidance, but to-day we have reached a stage of develop- 
 ment wherein we can learn much from the older countries, and it 
 certainly is the part of wisdom to profit by their experience. 
 
 Should the present financial disturbance be the means of in- 
 ducing Congress to pass a bill providing for an asset currency as 
 outlined by the currency commission of the American Bankers' 
 Association that would respond as easily and as readily to the 
 needs of trade and industry as docs the deposit currency, we 
 might feel almost repaid for the discomfort and distress of the 
 period. On the other hand, unless the present system of bank note 
 
 (324) 
 
The Panic of igoj and sonic of Its Lessons 25 
 
 currency is modified in a rational and scientific manner, we must 
 expect the periodical repetition of the disturbance through which 
 we have just passed, for of all the factors that tend to develop 
 unsound industrial conditions, a system of bank note currency 
 that fails to expand or contract when it should, is the most potent. 
 The plan proposed by the currency commission of the American 
 Bankers' Association is the result of years of experience and study 
 on the part of the leading bankers of the country, and for this 
 reason, if for no other, it merits most careful consideration. It 
 is undoubtedly the best plan now before the American people. 
 
 (325) 
 
AN ELASTIC CREDIT CURRENCY AS A PREVENTIVE 
 
 OF PANICS 
 
 By Wm. Barret Ridgely, 
 
 Comptroller of the Currency. 
 
 The commercial and financial conditions existing not only in 
 the United States, but throughout the world, in the early part of 
 October, 1907, which made a panic or crisis possible, were the 
 accumulated and composite results of the business transactions 
 of many years. A reaction in business was due and inevitable, in 
 fact, it had for some time been in progress. The exact incident 
 which precipitated the crisis and produced a panic, is not very 
 material. If it had not been the collapse of the corner in United 
 Copper stock, it might have come from the Westinghouse receiver- 
 ship a few days later, or from almost any one of a number of 
 similar developments which were not only possible, but probable. 
 
 The expansion of business and inflation of credits, whether 
 based on transactions which would be classed as perfectly sound 
 and legitimate, or on semi-speculative ventures, or on speculation 
 pure and simple, had reached the point where there had to be some 
 settlement and liquidation. While it might not be difficult to assign 
 any single transaction to one of the before-mentioned classes, it is 
 impossible to separate the results on the general business situa- 
 tion and say just which added to and produced the catastrophe 
 and which did not, how much was due to legitimate enterprise 
 and how much to speculation. The time had arrived when some one 
 had to pay the penalty for the indulgences of the past. The reaction 
 and liquidation were not only absolutely inevitable, but necessary 
 and desirable, in order to bring business of all kinds back to its 
 normal condition. This should have been accomplished, however, 
 in a much more orderly, quiet way, as it had been taking place 
 for months, without the resulting excitement and foolish sacrifices 
 incident to any condition of panic. 
 
 There never is any necessity for a panic and this, of all 
 others, should never have taken place because the conditions did 
 not justifv it in anv wav. Least of all, should we have had a 
 
 (326) 
 
Elas^tic Credit Currency as a Preventive of Panics 27 
 
 panic among the banks, and this particular panic might easily have 
 been avoided. In its place we might have had a more reasona- 
 ble and orderly readjustment of credits and values if we had had a 
 better system of currency and a better system of banking, both 
 national and state. A better system, I say ; not better banks. 
 
 We would also have been in a very much better position if 
 the relations between the business world and the Treasury Depart- 
 ment had been on a different basis: if the Treasury Department 
 had been either entirely out of business and free from responsibility 
 as to business conditions, as it ought to be, or if, being in business, 
 it had had the proper facilities to deal with the situation as it arose. 
 
 I have no criticism to make of the operations of the Treasury 
 Department, but on the contrary, from my experience during the 
 three administrations of Secretaries Gage, Shaw and Cortelyou, 
 I believe they are all entitled to the highest praise and commenda- 
 tion for what they have done to make the best of bad situations, 
 with antiquated, complicated and cumbersome facilities, often little 
 better than mere make-shifts. 
 
 Mr. Cortelyou, for instance, has done splendid work in the 
 relief he has rendered in the last few trying weeks, by distrib- 
 uting government deposits and stimulating bank circulation, when 
 it was so desperately needed. He has shown himself to be a strong, 
 courageous, resourceful man, in a great crisis, and is entitled to all 
 credit for it. The deposits of the government with the banks, 
 have been very potent in checking the panic and restoring confi- 
 dence, and on this account we find many men commending such a 
 system of government finance. It is true the most has been 
 made of it, and it has been done with not only fine ability, but with 
 absolute fairness, with no end in view but the public welfare. But 
 look at the situation. The United States Government has collected 
 from its people $245,000,000 surplus, above its necessary expen- 
 ditures, and in order to restore this money to circulation and repair 
 the damage done to business by its withdrawal, has had to deposit 
 $222,000,000 with the national banks ; and when the supply of gov- 
 ernment bonds gave out, has had to accept various other bonds 
 as security. 
 
 This is all that could be done under the circumstances, but 
 the surplus should never have been collected to such a vast sum. 
 The government should not take money from you and me when we 
 
 (327) 
 
28 The Annals of the American Academy 
 
 need it, just to keep it on hand as a panic fund. It is no proper 
 governmental function to tax people for such a purpose. If it is 
 conceded that the government should take a hand in such business, 
 what an awkward, complicated method it has of doing the business. 
 What a wasteful use of the money available. 
 
 The government should collect its revenues and make its pay- 
 ments as every one else does, through regular banking channels. 
 The money should stay in the banks and the smallest possible 
 amount should be withdrawn from circulation. If the national 
 banks are not satisfactory for such use, we should have a central 
 governmental bank to do the government business. The funds left 
 in its hands would be available for use by the other banks for 
 business of all kinds, either as reserves against circvilating notes 
 issued, or as loans and rediscounts to the banks. With such facil- 
 ities as this at its command, the Treasury Department could pre- 
 vent panics and keep business steady, instead of only being called 
 in like a doctor to see a patient after he has become desperately 
 ill. What we need is better hygienic and sanitary conditions and 
 less medicine. The whole system is wrong, and requires change 
 and readjustment. 
 
 While we are yet probably too close to the incidents of this 
 panic to be able to properly judge of the causes and effects, we 
 may now, while these matters are fresh in our minds, and their 
 results have been brought home to us with such force, take account 
 of those things which have made the trouble, and at once begin 
 to devise means not only to repair the damages done but, much 
 more important, to foresee the future, and make provision on 
 proper principles for such changes as will avoid such troubles, 
 or mitigate the effects of the disturbances which cannot be pre- 
 vented. 
 
 It is needless to go into details as to the events which produced 
 the business conditions existing in. the United States for the last 
 six months or a year. Everyone is familiar with the great expan- 
 sion in business of every kind which has taken place all over 
 the world. Probably the most potent factor in all of this, if it is 
 not the sole cause of it, has been the enormous increase in the 
 production of gold, which has more than quadrupled in the last 
 few years, and is now at the rate of about $430,000,000 per year. 
 It is this, more than anvthing else, that has more than doubled 
 
 (328) 
 
Elastic Credit Currency as a Preventive of Panics 29 
 
 selling prices of wheat, corn, cotton, pig-iron, steel, copper and all 
 the great staple articles of wealth which are the basis of all modern 
 commerce. While this was going on, it was absolutely inevitable 
 that there should be a great increase in the volume of credits not 
 only in all the banks, but between merchants and manufacturers, 
 between wholesale merchants and retail merchants and so on, 
 through all the lines of business transactions. There is no country 
 in the world, and no line of business, which has been free from it. 
 It has led to an increase of what may properly be called legiti- 
 mate investment values not only in mines, manufactures, and mer- 
 cantile concerns, but in real estate of all kinds; city and suburban 
 lots, farms, and tracts of timber. It has increased the prices of 
 not only sales and transfers of the actual properties themselves, 
 but of mortgages, stocks and securities based on them. 
 
 It is not only natural, but probably inevitable, that all this 
 expansion should be overdone, for side by side with the transactions 
 of men who are making such investments carefully and conserva- 
 tively, based on real values, were those of men who, some through 
 lack of judgment and over confidence, and others through dis- 
 honesty, were promoting schemes and issuing securities based on 
 far higher values than were justified. This universal process of 
 expansion and increase of values has been, on the whole, based on 
 sound conditions and justified by the facts, but it has been evident 
 for several years that we were approaching the crest of the wave, 
 and there must be some slackening of pace and almost inevitably 
 some reaction or decline in prices. 
 
 It must be remembered that this expansion started from the 
 abnormallv low values and basis which had followed the crisis and 
 depression of the year 1893, ^^^ the few years following. Wealth 
 at that time was measured on an abnormally low plane of values. 
 It was not only perfectly proper, but highly desirable, that they 
 should be increased. This has gone on, however, as events have 
 shown, until the limit has been reached. The natural limit of all 
 such movements is the amount of reserve money which can be 
 held by the banks as the basis of their credits. The proportion of 
 this has been growing less and less for several years, and for at 
 least two or three years there has been a condition of scarcity 
 of reserve money not only in the United States, but in all other 
 countries. 
 
 (329) 
 
30 The Annals of the American Academy 
 
 Another important factor, and in some respects the most mi- 
 portant, is that such an enormous proportion of the existing credits 
 has been transformed from liquid capital into fixed capital and in- 
 vestments, leaving a scarcity of liquid capital for the enterprises 
 which were in operation. It has been this, more than anything 
 else, probably, which has led to the necessity for a contraction of 
 credits and more or less liquidation. 
 
 During this whole period of active business, there have been 
 many times when conditions have brought about violent reactions 
 in the stock market. There have been several stock market panics, 
 notably such as the one which occurred March 9, 1901, any one of 
 which might have produced a far more serious bank panic than that 
 which occurred in October, 1907, if business conditions had not 
 been found so entirely sound that the disturbance was practically 
 confined to the stock market alone. 
 
 During the past few years there have been several periods 
 of marked depression although they have not been of long duration, 
 nor accompanied by any considerable number of failures. Why, 
 then, should we have had a banking panic of great severity in 
 October and November, 1907? It cannot be that it was entirely 
 due to speculation, for this existed in much less volume when the 
 panic occurred than it has in several other periods when it produced 
 stock-market panics. The more speculative loans were far 
 less in volume in October, 1907, than they were a year ago. The 
 main difference in the situation must have been that we were one 
 year farther along in the period ; that the whole world had come 
 to realize that there had to be a readjustment; that many of the 
 largest and strongest concerns, as is well-known, found difficulty 
 in renewing their old loans, and foresaw that they were soon to 
 be compelled to reduce the volume of their operations. 
 
 Conditions during the sununer of 1907 were becoming more 
 and more acute, and were greatly strained when the demand came 
 for the crop-moving funds. The total volume of credits was up to 
 the maximum that could be carried on the reserve money availa- 
 ble. When the withdrawal of deposits in the demand for crop- 
 moving money came, it was necessary for the banks to supply this 
 with reserve money. As far as this money had to go into circula- 
 tion outside the banks, it made a reduction in loans to that extent 
 inevitable. 
 
 (330) 
 
Elastic Credit Ciirroicy as a Prevcntiz'e of Panics 31 
 
 If our system had been such that the country bank first, then 
 the reserve city bank, and finally the central reserve city bank, could 
 have supplied some form of credit notes in payment of their de- 
 posits, the situation would have been entirely different. If we had 
 had such a system of notes as they have in Canada, for instance, 
 which expands quickly and automatically in the fall of every year, 
 when this demand comes, and contracts just as surely by February 
 of each year, there need have been no apprehension in regard to 
 the crop-moving period. There would have been no variation 
 in the volume of credits at all. Reserve money in the banks, which 
 was ample for the deposits, would have been ample for the credit 
 notes, if they had been available. 
 
 It need have made no difference at all in the total volume of 
 credits. The total of note credits and deposits would have remained 
 the same with the same reserve against them. No one need have 
 cared how much the people changed their credits from one form to 
 another, and there would have been no panic among the bankers 
 as to the effect of a demand for current cash. There need have 
 been no disturbance of payments, collections, or remittances. Peo- 
 ple who were insolvent or too badly extended might have suspended 
 or failed, but the man who was in good solvent condition need not 
 have been fearful, least of all panic-stricken. 
 
 Instead of this every banker was at once compelled, in self- 
 defense, to increase the amount of cash on hand. That is, instead 
 of maintaining his reserve at practically the same point and changing 
 his deposit credits into note credits, he had to meet his deposit 
 credits in reserve money, and to call upon his reserve and central 
 reserve agents for it. When a demand of this kind came suddenly 
 upon the country it was not surprising to find that deposits which 
 had been counted on as reserves were not reserves at all because 
 they were not available. This developed at once the two inherent 
 weaknesses and defects in our banking system ; the lack of any 
 elasticity or expansibility of the currency, and the uncertainty 
 of the system which piles reserve on reserve, first in the reserve 
 cities and then in the central reserve cities. 
 
 The way to cure this trouble and prevent recurrences of events 
 of this kind, is to give the banks and the people who are their 
 depositors some proper system of elastic credit notes and to compel 
 banks to carry against these notes and their deposits, larger reserves 
 
 (331) 
 
32 The Annals of the ^imerican Academy 
 
 in cash on hand, and keep their reserves in other banks where 
 they will surely be available. 
 
 The experience of all the rest of the world, in every important 
 country, has shown that the best way to accomplish this result 
 is by means of a strong central government bank which will handle 
 the finances of the general government, act as reserve agents for 
 other banks and have the sole right to issue credit bank notes. 
 This bank should be under government control, and subject to 
 severe government supervision and inspection. 
 
 Among students of these problems the opinion is steadily 
 growing that until something of this kind is done in the United 
 States, we shall never have such a financial system as we should. 
 With such an institution as this in operation, there could have been 
 no excuse at all for such a panic as occurred this fall. Months 
 ago, a central bank could have brought about such a gradual con- 
 traction of loans, and such reduction in the volume of business, 
 as would have enabled us to meet this situation quietly and calmly 
 without anything approaching a panic. Speculative corners might 
 have collapsed, trust companies with large lines of commercial 
 deposits unprotected by reserves, and invested largely in specula- 
 tive ventures might have failed or have been liquidated, manufac- 
 turing concerns with inadequate capital attempting to do too large 
 a volume of business with borrowed money might have been 
 forced to suspend or submit to receiverships,, mercantile concerns 
 which had been able, through note-brokers, to dispose of such a 
 volume of notes that their failure to renew brought on embarrass- 
 ment might have been tided over and given extensions ; — all without 
 any bank panic if we had only had the advantage of a great public 
 bank. The people who are engaged in smaller lines of business 
 would thus have been spared the losses and embarrassments due 
 to such conditions as have existed within the last few weeks. 
 
 As long as modern business is conducted on credit, as it must 
 be, there will inevitably be periods of expansion and inflation 
 which are inevitably followed by periods of liquidation. No one 
 has ever suggested any means by which this can be avoided. 
 With the knowledge that such conditions must exist, it is the 
 highest duty of the government to provide proper means for deal- 
 ing with them. Until this is done, we have only ourselves to blame 
 for such a panic as has occurred within the last few weeks. It is 
 
 -(332) 
 
Elasific Credit Currency as a Preventive of Panics ^^ 
 
 useless to blame it to speculation. It will not cure the evil to 
 prohibit speculation in grain futures, or trading in stocks on mar- 
 gins. These are all only incidental to the great movements which 
 we have been tracing. They do not cause the expansion of busi- 
 ness, and do not bring about its collapse. It is still more unjust 
 to blame such a condition upon the national administration, the 
 acts of the legislative authority, or of the administrative officers. 
 
 Nothing can be more unfair and unwarranted by the facts than 
 the efforts of his enemies and critics to put the blame of this panic 
 on President Roosevelt. He is in no way to blame for the general 
 conditions which were world-wide and far beyond the power of 
 any man to prevent. He is not in the least responsible for the 
 special incidents which started the feeling of panic among the 
 banks, and led them to go to clearing-house certificates and a partial 
 suspension of payments. There is far more blame due to those 
 critics of the President who, for months before there was any con- 
 dition approaching a panic, seized upon every remark made or ac- 
 tion taken by him, and predicted its disastrous effect on business. 
 
 If this panic is in any way due to talk and prediction, the 
 President's critics have done their utmost to produce it by their 
 doleful lamentations and pessimistic predictions of what would 
 happen if the President did not change his policies in regard to 
 the enforcement of the laws. It is significant that the trouble 
 started, and has been worst, in New York, where there has been 
 the most criticism and abuse of the President and where he is 
 supposed to have the most opposition. There has been less panic 
 and trouble in the country, in the West, and among the smaller 
 business men and the working people where the President has 
 always been the strongest, and where anything he has said or 
 done would surely have the greatest effect. 
 
 This whole episode has been more a panic among banks and 
 bankers than among the people. Except in the City of New York, 
 there has been sur])risingly little excitement among the people, 
 and very little distrust of the banks. That there have been so 
 few failures and that the panic has been no worse, has been due 
 to the intrinsically sound condition of the banks and the business 
 of the country, to the wonderful courage, patience and forbearance 
 of the business men and people. They have quickly adapted them- 
 selves to the necessities of the situation, and availed themselves 
 
 (333) 
 
34 The Annals of the American ^icademy 
 
 of every possible temporary expedient to get along until the ex- 
 citement was past. This has been especially true of the working 
 people and the smaller depositors, who in many notable instances, 
 have acted in concert with great coolness and deliberation, to 
 support their local banks and to share their portion of the burden. 
 The critical period has passed with surprisingly few failures. 
 Conditions are improving daily ; banks are resuming payments 
 and remittances, and the panic is a matter of history. We have 
 yet to face some depression in business, and have to undergo the 
 somewhat painful, but very necessary process of reducing expenses, 
 practicing economy, and paying our debts. But there is nothing 
 that pays an individual or people better, and when matters are 
 readjusted, and prices are on a better and more stable foundation, 
 no one who knows our country and people, our resources and 
 powers of recuperation, can doubt that in a short time our business 
 will again proceed on a sounder and more durable basis. Our 
 prosperity, while less spectacular and sudden, perhaps, will be 
 greater than ever before. 
 
 (334) 
 
THE READJUSTMENT OF OUR BANKING SYSTEM AND 
 THE UNIFICATION OF THE CURRENCY 
 
 By Hon. Charles H. Treat, 
 Treasurer of the United States. 
 
 The importance of remedying the confused condition of our 
 many issues of paper currency and reheving the stigma of discredit 
 that has attached thereto for a great nation Hke ours has been a 
 favorite topic of discussion for several years among students of 
 finance. It would seem desirable that such modifications should be 
 made as would bring about a more harmonious unification of 
 currency issues. 
 
 It is not to be denied that formidable obstacles to securing such 
 a result exist, more especially in overcoming the prejudices in the 
 public mind and the views of legislators, who hold with great tena- 
 city long-cherished ideas'on the efficacy and wisdom of a retention 
 of the "greenback," and the opinions of the silver doctrinaires who 
 believe in basic money as the safest and most desirable form of 
 circulating medium. Our conglomerate currency issues have been 
 largely the growth of a necessitous condition that has been met by 
 temporizing legislation ; therefore this must be the excuse for the 
 weakness and helplessness that has produced such an unsatisfactory 
 currency system. 
 
 As we come out into the light of national strength and inde- 
 pendence, we look back with a more critical eye upon present 
 financial aspects and their origin. It is, however, encouraging 
 that we as a people are restive over the disclosures thus made. There 
 is an undoubted sentiment that something should be done that shall 
 place our monetary system upon such a broad and comprehensive 
 basis as will be lasting in its beneficent workings and stand the 
 test of time, not only for half a century, but for an entire century. 
 
 In view of these facts, I oflfer a plan that is more in the nature 
 of a suggestion, but which I hope may incite intelligent exam- 
 ination and discussion that shall evoke something of value in re- 
 sponse to the yearnings of those who would like to see a remodelled 
 currency system, a plan for national finance that should not be 
 discreditable to our intelligence and our experience of to-day. 
 
 (335) 
 
36 The Annals of the American Academy 
 
 Retirement of United Sta^tes Notes 
 
 (i) I advise legislation by Congress, authorizing the Secre- 
 tary of the Treasury to retire United States notes in sums not less 
 than 50 millions nor exceeding 100 millions per annum. The pay- 
 ment of the United States notes and the releasing of the reserve 
 fund for their redemption would give a legal reserve of about 
 350 millions in gold for banking purposes. 
 
 Public sentiment is once again agitating the desirability of util- 
 izing the advantage of an overflowing national treasury for the 
 gradual retirement of United States notes or what are known as 
 "greenbacks." The minimum sum, $346,000,000, has not been 
 changed since Secretary McCulloch was instructed by Congress not 
 to retire any more of these notes and when Congress declared that 
 that amount should remain in circulation. Since that time there 
 has been periodical agitation by bankers and financial students to 
 secure a revival of the practice of Secretary McCulloch of retiring 
 "greenbacks" when the surplus of the treasury allowed such a step, 
 under the enactment of February 25, 1862. Various objections have 
 been raised to this among others, that it would cause a contraction 
 of the currency on the part of others, that it would destroy in a 
 measure the amount of reserve money which was not at all ex- 
 cessive for banking use ; and by others, that there would be a sav- 
 ing of interest. 
 
 The increased supply of gold would seem to be an assurance 
 that there need be no apprehension of a lack of a sufficient legal 
 reserve, in case 20 or 50 millions per annum of "greenbacks" were 
 replaced by gold coin. It has perhaps escaped popular attention 
 that we have over 150 millions of coin and bullion held in reserve 
 against the issue of 346 millions of greenbacks, which leaves an 
 approximate currency supply of $170,000,000 available for circu- 
 lation. 
 
 The permissive circulation of United States notes is 346 mil- 
 lions. Of this, there is an average of 26 millions held in the vaults 
 of the treasury, which, taken from this sum leaves 320 millions 
 in actual circulation. There is now a reserve fund of 150 millions 
 in gold for redemption of United States notes. Taking this from 
 the 320 millions leaves only a practical gain to circulation of United 
 States notes of 170 millions, provided that the reserve fund of 150 
 millions were not released. 
 
 (336) 
 
Readjustment of Our Banking System 37 
 
 The saving of interest can, therefore, only be reckoned on 
 170 millions, which, at 2 per cent, would amount fo about $3,700,- 
 000 annually. The saving of Interest to the government is but a 
 small item for a circulation of $170,000,000. 
 
 If the gradual retirement of greenbacks were known to be 
 the settled policy of the government, this would give rise to an 
 enhancement of the credit of the country, and the financial repute 
 therefrom would far outweigh any paltry saving of the interest 
 account. Such a step would convince the international investor 
 that gold was the legal and established standard of the country, 
 and that he might confidently feel that his investment would be 
 returned to him in gold, on demand. It would promote a larger 
 growth of the national banking system, which is doing so much 
 to uphold the credit of our securities. It follows, therefore, that 
 no apprehension need be felt of calamitous results from a grad- 
 ual retirement of the greenbacks. 
 
 Retirement of Silrer Certificates 
 
 2. I advise the retirement of all outstanding silver certifi- 
 cates — about 475 millions — and the issuance therefor of 2 per cent 
 United States fifty-year bonds for an amount not exceeding 50 to 
 100 millions per annum. The silver dollars so released from pledge 
 in paying off silver certificates could be utilized for the govern- 
 ment's need of subsidiary coin. This would do away with the 
 purchase annually of a large amount of bullion, which in the past 
 year amounted to nearly nine million dollars. 
 
 3. The retiring of these two kinds of money — United States 
 notes and silver certificates — would do much to complete the uni- 
 fication of the currency, as national bank notes and gold certi- 
 ficates would be the only currency used. 
 
 4. I would advise that the present issue of national bank notes 
 be retired, and that the government bonds so pledged for circula- 
 tion and payment be redeemed by a special bond known as a "bank- 
 ing bond," bearing interest at 2 per cent for a term of not less than 
 fifty years ; and that such bonds as are now held for "circulation 
 should be redeemed and paid for at a premium of 5 per cent to re- 
 imbvirse the average cost to the investor, as the government should 
 not require the banks to pay more money than they actually receive 
 therefor. 
 
 (337) 
 
38 The Annals of the American Academy 
 
 I advise that the sale and purchase of these banking bonds 
 should be under the absolute control of the government, and that 
 when a bank desires to retire its circulation, the government shall 
 buy the bonds at not less than par and without premium. This will 
 do much to prevent the daily speculation in government bonds 
 which not only causes fluctuations in price, but affects the volume 
 of circulation without regard to business conditions. The bonds 
 so purchased should be destroyed. The denominations of these 
 bonds should not be less than $10,000 nor more than $100,000. 
 The bonds to be issued for the retirement of silver certificates 
 should also be banking bonds as before described. This would 
 furnish the basis of additional circulation without contracting the 
 volume of currency and the total amount of 500 millions, which 
 is the measure of the volume of silver certificates, would then be 
 reissued during the term of ten years in the form of national 
 currency. 
 
 Some one might make objection to the retirement of silver 
 certificates, in that there may be no legal reserve money to take 
 its place, but in the gradual retirement of silver certificates to the 
 amount of 50 to 100 millions per annum we could fairly look for an 
 adequate supply of gold. The volume of gold production is now 
 over 400 millions annually, and our country is increasing its gold 
 output in comparison with other nations. 
 
 United States National Bank Currency 
 
 5. The new issue of bank notes should be known as "United 
 States National Bank Currency." This designation would give it 
 an international recognition, and the sentimental effect of such a 
 designation would inspire world-wide confidence in its genuineness 
 and its financial responsibility. 
 
 I would advise that simplicity of design of all notes be carried 
 out in the different denominations, and that the distinction should 
 mainly be upon two points: first, the denomination itself, and sec- 
 ond, a vignette differing for each denomination issued. This would 
 give such uniformity in size and appearance, that the note would 
 easily be recognized and would be more difficult to counterfeit. The 
 denomination numbers should be large, so that the counter could not 
 fail to see the same clearly at a glance. A vignette is said to be the 
 most difficult thing to counterfeit, and experience has proved that 
 
 (338) 
 
Readjustment of Our Banking System 39 
 
 the least embellishment on a note affords the greatest protection 
 against counterfeiting. The different banks using this new circu- 
 lation would be known only by the numbers printed on each note. 
 
 A sentimental objection might be made to the elimination of 
 the individuality of the bank note, but when the facts are taken 
 into consideration, it is well known that it is very seldom that the 
 holder of a bill looks at the signature, his only concern being that 
 it bears the impress of guarantee by the United States government. 
 
 This uniformity of size and design would be less expensive 
 to prepare, and a large quantity of currency could be kept on hand 
 which would be applicable to the needs of any banker. The only 
 names of officials attached to said notes would be those of the 
 Comptroller of the Currency and the Treasurer of the United 
 States, 
 
 These notes should be issued in such a percentage of denomi- 
 nations as would meet the existing and growing demands of busi- 
 ness conditions. All banks should be required to take out such 
 percentage of ones, twos, fives and tens as would meet the require- 
 ments of business- The same form of note would provide for a 
 permanent, as well as an emergency or "supplemental" currency. 
 
 The guaranty of the government on said notes would simply 
 be expressed thus: "This note is secured by bonds deposited zinth 
 and guaranteed by the United States." Three hundred millions 
 of these notes should be held in reserve for additional circulation, 
 and as they would be used in common by every national bank, 
 there would be no risk in so doing. There would also be a lessened 
 expense in repairing and issuing the same. 
 
 This re-adjustment would not only unify the currency, but 
 in its simplified design, would avoid the well-deserved criticism 
 of confusion in our monetary forms of currency, and make it more 
 acceptable in all the money markets of the world. This unifica- 
 tion of the currency has long been desired by large numbers of 
 the American people, but no feasible plan has been put forth. 
 These notes would be acceptable for taxes and other purposes in 
 the same way as the present national bank notes, which would be 
 in supply until all the silver certificates had been called in and 
 canceled. 
 
 There might be objections on the part of some devoted advo- 
 cates of silver, that it is the money of the people, and that they 
 
 (339) 
 
40 The Annals of the American Academy 
 
 would oppose its withdrawal. The records of the Treasury show 
 that the demand for silver dollars over that for currency, arises 
 mainly from the fact that the transportation of the silver dollar 
 is made free by appropriation from Congress, whereas there is a 
 charge for the transportation of currency. This was abundantly 
 demonstrated last year when the appropriation for free transporta- 
 tion of silver dollars was exhausted and the demand therefor was 
 reduced nearly seventy-five per cent! When a new appropriation 
 was granted silver dollars were given in demand because transpor- 
 tation was made free. 
 
 It might be further objected that the retirement of silver certi- 
 ficates would make an additional interest; charge of some ten 
 million dollars to the American people, but it must be considered 
 that there would be a great saving to the government in the profit 
 of utilizing the silver dollars for subsidiary coin, and also in the 
 lessened expense of furnishing currency of one simple uniform de- 
 sign, and in the saving of loss to the government by the abrasion 
 of silver dollars. This is a large item in the Treasury to-day, as 
 not less than a million dollars are short-weight, and probably on a 
 closer investigation, this amount might be largely increased. 
 
 The paramount question, however, is not simply one of sav- 
 ing a small amount of interest, but it is, what would be to the 
 greater advantage, convenience and profit to the American people? 
 It would seem to me that now is the time, when far-reaching 
 amendments are needed to the laws of our banking system, to so 
 construct a system of finance which, while it shall be absolutely 
 safe and desirable in its appearance, shall also have the elements 
 that are needed not only for a permanent but for an emergency 
 or supplemental circulation. 
 
 I append hereto my well-known views on the supply of a 
 supplemental currency, which needs no further elucidation. This 
 whole plan, as I have outlined it, would not only accomplish a 
 fundamental re-adjustment of our banking system, but would, I 
 believe, meet the demands of the American people to-day, and like- 
 Avise the needs of fifty years hence, when the population of the 
 country shall have largely increased and the business needs be 
 correspondingly enhanced. 
 
 It would seem that our requirements arc peculiar to ourselves 
 and cannot be likened to those of any other nation. We grow crops 
 
 (340) 
 
Readjustment of Our Banking System 
 
 41 
 
 to the value of over seven billion dollars and manufacture to 
 the amount of fifteen billions. Legislation should therefore be so 
 comprehensive that an adequate amount of currency could be 
 issued, under proper legal forms, that would always provide suf- 
 ficient funds to move the crops without an exorbitant tax such as is 
 advocated by the friends of asset currency, which would seem to 
 penalize the grower for producing excessive crops or the manufac- 
 turer for making an enlarged output. 
 
 There should be a broad distinction between the use of a 
 supplemental currency for recurring autumnal needs, and an emer- 
 gency currency in time of panic. What this country needs is not 
 only an enlargement of banking credit at crop-moving seasons, 
 but also the establishment of a system whereby the panicky condi- 
 tions that recur every seven or ten years may be met. 
 
 The present National Banking Act should be ^o amended 
 as to permit any national bank with not less than 50 per cent 
 of its capital invested in United States bonds, to issue national 
 emergency or supplemental currencv not exceeding the remaining- 
 50 per cent nor more than its capital stock. Such emergency notes 
 I would have similar in form and design to our present national 
 bank notes, but the guaranty thereon should be modified to read: 
 "This note is secured by bonds deposited with and guaranteed by 
 the United States." The issue of these notes might be made in 
 four, six or eight months, dating from August ist or September 
 1st, as may be needed at crop-moving periods. 
 
 I would accept collateral for this supplemental currency issue 
 in the form of state and municipal bonds that meet the requirements 
 of savings banks investments in the States of New York, Connecticut, 
 Massachusetts and New Jersey, such securities to be accepted at 
 70 per cent of their market value. I would have the bank make 
 a collateral note to the order of the Treasurer of the United States 
 on four, five or six months, and should it fail to meet the notes 
 at maturity, it should be penalized in the sum of 2 per cent per 
 month, until paid; the United States Government to guarantee 
 the redemption and payment of all notes so issued, at a charge 
 of about 3 per cent. I would not extend the selection of bonds 
 to other than those of states and nnniicipalilies which have the 
 government power of taxation behind them, as it would be well, 
 
 (341) ■ 
 
42 The Annals of the American Academy 
 
 in my judgment, to limit this class of bonds and not open the door 
 to the acceptance of railroad, industrial and real estate bonds- 
 
 How Inflation Would be Avoided 
 
 This plan requires a margin of 30 per cent on the amount 
 of notes issued, which, it would seem, would be ample in every 
 contingency to safeguard the government. These notes would 
 have a definite time for maturing and when they were paid for, 
 so much currency would be retired which, practically in a com- 
 pulsory way, would prevent any permanent or undue inflation 
 of the currency. As to the amount of issue, Congress could deter- 
 mine it, based upon the outstanding issue of national bank notes, 
 permitting an increase of 33V3 or 50 per cent, in addition to the 
 regular circulation. 
 
 This plan would give practically all the advantages of a great 
 central bank, as far as the issue of currency is concerned, without 
 the drawbacks of mixed responsibility or adding to the confusion 
 of another form of currency, which there would be if a great 
 central bank were permitted the right to issue its notes. It would 
 seem that making the interest rate about 2 per cent is already too 
 low. It might be increased to 3 per cent per annum — i per cent 
 more than interest on United States bonds — what the national 
 banks now pay in semi-annual duty and taxation on circulation. 
 If good collateral be furnished, why should the people be compelled 
 to pay any higher rate? 
 
 Some criticism has been made that a larger percentage of loans 
 than 70 per cent could be made on good state and municipal securi- 
 ties, but it is of importance that the price of United States 2 per 
 cent bonds should be safeguarded, and that their supremacy as a 
 security should be upheld, whereas if too large an advance was 
 made on other bonds, the credit of the 2 per cent would be impaired. 
 
 Interest should Not be Excessive 
 
 It has long been the practice in finance that the borrower 
 who gives the best collateral secures the loan at the lowest rate 
 of interest. If the currency was issued on the general assets of the 
 bank, without compulsory retirement, the risk would be greater 
 and the rate of interest increased. An excessive rate of tax is 
 not to be considered in this case, because the issue of supplemental 
 
 (342) 
 
Readjustment of Our Banking System 43 
 
 currency is applied to a normal condition of business that recurs 
 every autumn. 
 
 Adequate monetary facilities should be provided to move the 
 crops without disturbing the normal conditions of banking busi- 
 ness that prevail throughout the country. The crops cannot, under 
 present conditions, be moved without a great disturbance, by the 
 calling of loans amounting to $250,000,000 or $300,000,000. 
 
 To meet this exigency it is important that a supplemental cur- 
 rency should annually be issued at a low rate, at moderate cost and 
 with specific security, as is now required for the issue of all bank 
 notes. This supplemental currency should be so liberal and attain- 
 able in its terms that the burden of the accommodation would 
 scarcely be felt. 
 
 The advocates of asset currency propose that an issue of bank 
 notes be made, based upon the general assets of a bank and taxed 
 at a high rate of interest. To this conservative men demur, 
 because the security behind the notes would not be sufficient to 
 guarantee them, the assets of a bank not being proper security for 
 the issuance of notes, even with the addition of a reserve redemption 
 fund. 
 
 What the farmer, the manufacturer and business man generally 
 need is to have banking accommodations at a moderate cost. It 
 would seem that those whose productions are so large, whether 
 from the field, the factory or the mine, should not be penalized 
 by a high rate of interest for the use of money at every recurring 
 crop-moving season. If safe collateral be furnished the charge 
 should be at the lowest rate of cost of issuing and redeeming the 
 supplemental notes. 
 
 Repeal Tax on National Bank Circulation 
 
 The national government now has a monopoly of our currencv. 
 Therefore it should not withhold from the people this inestimable 
 service, when good collateral approved by bankers can be given 
 for the currency furnished. It might be well to repeal the tax of 
 one-half of one per cent on bank circulation and also permit banks 
 to take out additional supplemental circulation to the extent of the 
 premium on bonds now pledged for redemption of the bank notes. 
 
 I feel justified in making this suggestion that the charge 
 against issuing the supplemental currency be no more than 3 per 
 
 (343) 
 
44 The Annals of the American Academy 
 
 cent per annum, for as the government charges no interest on its 
 public deposits, why should it do so for loaning its credit? It is 
 only as rational an expansion of the privilege to loan the credit 
 of the government in the form of national bank notes as it is to 
 loan the government's money under the name of deposits. 
 
 It does not seem to me that any valid objection could be made 
 to the issue of such supplemental currency under government con- 
 trol. This plan would seem to me a natural evolution of the custom 
 of national banking. It does not commit the government to any 
 untried or hazardous experiment or confuse the public mind with 
 the idea that there is to be any radical departure from the present 
 system of banking. 
 
 No danger lurks in the plan. Seeing as I do every day the 
 importance of afifording additional relief to the business interests 
 of the country, I ofifer a plan that does not pretend to be a panacea, 
 but is, I believe, not the dream of a financial visionary. I am 
 no "faddist" on currency reform, and am looking only for the 
 attainable, and for a plan that shall commend itself to the common 
 sense of the American people as safe and practicable. 
 
 (344) 
 
THE NEED OF A CENTRAL BANK 
 
 By George E. Roberts, 
 President Commercial National Bank, Chicago, III. 
 
 The financial panic and general suspension of cash payments 
 by the banks of the United States, with the sudden paralysis of 
 business resulting therefrom, did more to convince the people of 
 the country that there were still serious defects in our currency 
 system than all the arguments to that effect that had ever .been 
 made. Wall Street had been suffering from hard times since 
 early in the year, quotations for securities had been going down 
 but the prosperity of the country's industries seemed to be un- 
 touched. No doubt it was inevitable that such conditions in the 
 security markets would eventually affect the industries, for when 
 stocks and bonds are unmarketable the supply of capital for new 
 enterprises is cut off. But a partial explanation for conditions in 
 Wall Street was to be found in the glut of securities which had 
 been poured out to support undertakings which are even yet uncom- 
 pleted. The fact is that no recession in business was observable 
 up to the date of the panic. The suspension of cash payments, the 
 consequent inability of employers to obtain money for pay-rolls, 
 the fright, and cancellation of orders, came on the general business 
 community like a stroke of lightning from a clear sky. Since then 
 few have disputed that currency reform is needed. 
 
 But there remains the difficult task of uniting public opinion 
 upon some plan. Broadly speaking, three policies are proposed. 
 First, a modification of our present system of bond-secured cur- 
 rency, by allowing, under a high tax, temporary, or emergency 
 issues upon miscellaneous bonds. Second, the plan adopted by 
 the American Bankers' Association, or something similar, allowing 
 all national banks to issue credit notes against their general assets, 
 secured only by a comuK^n guaranty fund. Third, the establish- 
 ment of a central bank of large capital, which should exclusively 
 perform the function of issuing credit notes to meet the varying 
 needs of trade. 
 
 The first of these plans is confessedlv a make-shift. Its advo- 
 
 (345) 
 
46 The Awials of the American Academy 
 
 cates do not claim that it should be accepted as a finality, but only 
 that it is the best measure that can be enacted in the present un- 
 settled state of public opinion. It would be inoperative in an emer- 
 gency unless the banks set aside permanently a part of their re- 
 sources for that class of investments, as a measure of insurance. 
 They might do this, but it would be at a sacrifice of earning power, 
 and effect a corresponding curtailment of the banking capital 
 available for current use. Furthermore, the plan contemplates 
 emergency issues solely, and there is no claim that they would be 
 responsive to the ordinary fluctuations of trade. 
 
 The second plan, offered by the American Bankers' Associa- 
 tion, is more comprehensive, and contemplates a genuine credit 
 currency. It is, however, something of a compromise, the issues 
 being limited to forty per cent of a bank's capital, and dependence 
 against over-issue is placed in part upon this restriction, in part 
 upon facilities for redemption and in part upon a graduated tax. 
 Without going into an extended discussion of this plan, it may be 
 said that it has never been tried under the conditions which exist 
 in the United States, and the very restrictions imposed add some- 
 thing to the uncertainties. The success of the plan would depend 
 upon the regularity and rapidity with which the notes were re- 
 deemed. The scheme itself contemplates that the self-interest of 
 the individual banks will prompt them to return the notes of all 
 other banks for redemption ; but that is a practical working detail, 
 the success of which, in view of the great number of banks outside 
 the system, cannot be positively foretold. The state banking insti- 
 tutions would have no interest in promoting redemptions, as they 
 are allowed to use the notes of national banks for reserves. 
 
 The first argument for a central bank is that such an institution, 
 organized into, and made a part of, our national banking system, 
 is needed to complete the latter, and all the more needed if im- 
 portant new powers as to currency issues are to be conferred upon 
 the individual banks. The defects and weakness of the national 
 system to-day are due to the isolation of, and lack of cohesion 
 among, the great number of scattered units. The recent crisis 
 has furnished ample demonstration of this. As a rule throughout 
 the interior the banks had their usual supply of currency, but they 
 restricted payments of cash, to the serious injury of business, 
 not so much from fear that money would be hoarded by the public, 
 
 (346) 
 
The Need of a Central Bank 47 
 
 as from fear that it would not find its way back to the identical 
 banks that paid it freely. For example, a bank which had the 
 account of a railroad company might decline to supply money for 
 its pay-rolls, because the large sum thus taken from it would be 
 scattered along a thousand miles of line, and although it might 
 replenish the reserves of other banks, there was no probability 
 that any would come back to the original source. In like manner 
 the absence of leadership and of common policy in the granting 
 of credits resulted in a more precipitous contraction of these than 
 was necessary. If contraction and liquidation are to be the order 
 of things, everybody understands that there are certain advantages 
 in being among the first to act, and so a crisis is accentuated by a 
 disorganized scramble to force collections just when the interests 
 of the country require judicious liberality in the matter of credits. 
 If our banking system had at its head a strong institution, conserva- 
 tively managed, and able to support any critical situation, it would 
 practically make the policy of the whole system at such a time, 
 for the individual banks would not feel that they stood isolated and 
 alone and compelled to think only of self-preservation. 
 
 One result of the great number of small banks is that banking 
 is not a trained profession, although it deserves to be. The bank- 
 ers of the United States are a capable body of business men, but 
 they have generally drifted into banking from some other occupa- 
 tion, without education in what is entitled to be regarded as a 
 science — the science of the exchanges. No better proof of this is 
 needed than the fact that so many of them see no reason why the 
 notes of one bank should not be good in the reserves of another. 
 This fact, that so large a proportion of the bankers of the country, 
 although good judges of credits in their localities, and practically 
 successful in the ordinary routine of their business, are not familiar 
 with some of the fundamental principles of finance to which the 
 country as a whole must conform, is a substantial reason why the 
 national banking system should be surmounted by a supervisory 
 institution. It is true that we already have a system of supervision 
 through a public official, the Comptroller of the Currency, and there 
 is no intention here of criticizing the administration of that office, 
 which has usually been very good and is ably conducted at the 
 present time. The Comptroller's supervision is largely exercised 
 through his force of examiners, and the personnel of this force and 
 
 (347) 
 
48 The Annals of the A^nerican Academy 
 
 the character of its work have been constantly improving as poHtical 
 considerations have lost influence in the making of appointments. 
 Nevertheless^, there is inevitably a degree of formalit}' and rigidity 
 about such ofificial supervision. The clearing-house associations of 
 the larger cities have found it advantageous to establish their own 
 system of examinations, and it is apparent that a central bank, 
 which w^as a part of the system, and to which the individual banks 
 were in the habit of applying for accommodations, would be able, 
 through its examiners and by the information constantly coming 
 to it through many channels, in the practical touch of business 
 relations, to exercise a most efficacious and wholesome influence. 
 This supervision would be particularly desirable if the note-issuing 
 powers of the individual banks were to be enlarged. The central 
 bank with its branches would then serve as the redemption agency 
 through which the notes of the individual banks would be cleared 
 or redeemed and through which the most active, effective and 
 practical supervision of the note circulation would be maintained. 
 
 One of the features in which our banking system compares 
 luifavorably with those of foreign countries is in the control of the 
 interest rate. The natural and proper corrective of a tendency to 
 over-expansion is a rising interest rate. It exercises a repressive 
 influence, the pressure gradually increasing as the demand for 
 credit enlarges, until the rate becomes high enough to curtail ex- 
 pansion. Some borrowers who want accomodations at five per 
 cent will reduce their requirements when the rate reaches six, and 
 some who will see a profit in using money at six, will drop out 
 when the rate reaches seven. It is better to stop a runaway horse 
 by heading him up a hill than by running him into a stone wall. 
 In the one case he will get discouraged and slow down, while in 
 the other there will be a smash-up. Under the competitive condi- 
 tions which govern the banking business in the United States, the 
 banks are accustomed to lend money to their depositors at practi- 
 cally uniform rates as long as they can make loans at all, and then 
 abrtjptly shut down entirely. This is the smash-up policy. With 
 a gradually rising rate the business man will hold in check any 
 inclination to enlarge his liabilities and make an effort to reduce 
 them, and he will have time to do so. There is an enormous dif- 
 ference to him between being obliged to pay high rates and not 
 being able to get accommodations at all. By this policy the climax 
 
 (348) 
 
The Xccd of a Central Bank 49 
 
 of a boom period is rounded over, expansion checked and contrac- 
 tion brought about without the shock which is unavoidable where 
 credit is suppHed freel\' at a uniform rate until there is no loaning 
 power left to be used. The uniform rate in this count r}- is due to 
 the competition of the banks for favor with depositors, and it is 
 useless to expect any other policy to be followed unless a strong 
 central bank becomes an important factor in the money market. 
 Such an institution would have reserve powers for making loans 
 after the individual banks were exhausted and when its aid was 
 called for it would have control of the rate. 
 
 The foreign state banks are able to exert an important influ- 
 ence upon the movement of gold by means of the interest rate, an 
 advance of the rate furnishing an inducement for the payment of 
 gold upon obligations due the bank, and a reduction serving to 
 relax its hold upon the metal. But even beyond this aid, in time 
 of crisis the credit notes of a central bank may be allowed to flow 
 out and take the place of gold in circulation, where the outgo of 
 the latter is imperatively required, thus saving the industries of 
 the country from shock. The Bank of France parts with important 
 sums of gold for the relief of other countries without reducing 
 the amount of its own notes in circulation, and hence without direct 
 influence upon trade in France. Indirectly it protects and benefits 
 conditions at home by helping to avert trouble in neighboring 
 countries with which France is intimately related. In this country 
 we lack the machinery for thus controlling the movement of gold 
 or protecting our industries from injury when the basis of our 
 system of credits is disturbed by conditions elsewhere. 
 
 The system of independent banks without a central organiza- 
 tion is costly to the country in requiring an unnecessarily large gold 
 reserve. In this respect the United States makes an especially 
 poor showing of efficiency compared with Great Britain and a poor 
 showing even when compared with the continental countries. The 
 gold reserve of England is practically all in the Bank of England, 
 and at the present writing is about $165,000,000. This is the 
 capital by means of which the gold standard is maintained, and upon 
 which the credits of the country rest, as other banks use Bank of 
 England notes for their reserves. In the United States we have 
 about $900,000,000 of gold in the treasury and some $250,000,000 
 or $300,000,000 in the banks. If this vast store of gold made 
 
 (349) 
 
50 The Annals of the American Academy 
 
 credits in this country more stable and secure than in England, 
 there might be a valid argument for it, but our system has practi- 
 cally broken down twice in the last fifteen years, while a general 
 suspension of cash payments in England is unknown. This gold 
 reserve is a part of the country's capital, and the interest on it is 
 a part of the cost of doing business in this country as truly as are 
 our transportation charges. If the latter were higher than in 
 foreign countries there would be great agitation about it. An 
 examination of the situation in every other country will show that 
 a central bank can be made to conserve and protect the gold 
 reserves of a country and accomplish an important economy in this 
 respect. 
 
 There is strong support for the central bank as a medium for 
 the issue of an elastic currenc}^ in the experience and conclusions 
 of foreign countries. One by one all of the other important 
 countries of the world have adopted it. Even Switzerland, which 
 had been served by twenty-six well-managed banks of issue, and 
 where regulation by reason of the small area over which they were 
 located, would seem to have been comparatively simple, in 1905 
 established a central bank to take over the function of issue. By 
 centralizing the issues in one strong establishment, which in its 
 organization is made a semi-official institution, this important func- 
 tion is performed not only immediately under the eye and with 
 the participation of the government, but with complete publicity 
 and subject to the criticism of the entire financial world. The 
 weekly statements of the great state banks of foreign countries 
 are scrutinized by the press and by economists, bankers, and critics 
 of the whole world. Manifestly these conditions are radically 
 different from those surrounding note issues by thousands of indi- 
 vidual and unrelated banks scattered over such a country as the 
 United States. 
 
 The central bank could amply meet the needs of every part of 
 the country by rediscounting the bills receivable of local banks or 
 loaning upon such collateral. The notes issued in making these 
 loans would have behind them, first, the original borrowers ; second, 
 the endorsement of the local bank, and third, the responsibility 
 of the central institution. The latter should have authority to 
 examine local banks applying for loans, and by so doing would 
 serve as an additional supervising authority over them and exert 
 
 (350) 
 
The Need of a Central Bank 51 
 
 a most salutary influence upon the whole banking situation. When 
 fully organized the bank should have a dozen or so offices located 
 in the more important cities of the different parts of the country, 
 in order to be convenient of access for the local banks of all sec- 
 tions. Instead of being adapted only for times of panic, like most 
 of the plans now offered, this system of note issues would be 
 useful at all times and serve to equalize interest rates over the 
 different seasons of the year, and to some extent over the different 
 sections of the country. The notes of the central bank should 
 gradually become an important part of the common circulating 
 medium of the country, eventually taking the place of the present 
 national bank circulation as the public debt is retired and increasing 
 in volume with the growth of the country. They would be a more 
 economical medium of exchange for the country than gold or gold 
 certificates. They would not, like a recognized emergency currency, 
 be in themselves a sign and symptom of financial trouble. As soon 
 as country bankers were accustomed to the regular practice of redis- 
 counting currency bills receivable and it became recognized as a per- 
 fectly legitimate method of aiding local customers, instead of being 
 regarded as discreditable, the central institution would prove itself 
 to be of great service to every part of the country, and particularly 
 to those sections which produce the great agricultural staples but 
 lack the free capital to handle them every year. They can furnish 
 unquestionable security and the central bank could supply all the 
 currency needed. 
 
 Let it be supposed that the capital of the central organization 
 was fixed at $100,000,000. That would be only about 11 per cent 
 of the capital of the banks in the national system, and of course 
 the amount for them to raise would be much reduced if state banks 
 were permitted to become shareholders. This capital might be in- 
 vested in high-class bonds, as in the case of the Bank of France, 
 thus serving simply as a guaranty fund. The central organization 
 might then issue its notes for say $300,000,000, and through its 
 constituent institutions exchange these for gold or gold certificates, 
 thus establishing its gold reserve. If, now, it was authorized to issue 
 notes upon the single condition that it should always keep a reserve 
 equal to 33V3 per cent of the amount outstanding, it would have 
 the capacity to put out $600,000,000 of uncovered notes. This 
 would be the measure of elasticity obtainable upon a reserve of 
 
 (351) 
 
52 The Annals of the American Academy 
 
 $300,000,000. It might take some time to acquire that reserve, 
 but as the stock of gold in the country increased, and as the central 
 institution became in fact the recognized custodian of the country's 
 reserves, it would become greater. A part of this note-issuing 
 capacity could be in current use. In time it might acquire almost 
 a monopoly of certain classes of commercial paper, notably that 
 based upon staple commodities and secured by public warehouse 
 receipts. It is in the annual movement of this class of commodities 
 that the greatest fluctuations in the demand for money occurs, and 
 the greatest need for elasticity is felt. The central institution 
 could finance the movement for local banks without any disturbance 
 to the money markets, and upon terms that would effect a saving 
 to the producers. When the crop movement was over, and the 
 loans based on the moving product were paid, the bank would be 
 back to a liquidated condition and ready to expand again as its 
 assistance was needed. With its power of note issue it would be 
 able to liquidate any of its constituent institutions that required 
 help. The method by which clearing-house certificates and checks 
 were issued during the late crisis affords a complete illustration 
 of the operations of such a system- 
 
 The usual objections to a central bank can be met in the organi- 
 zation. The opposing arguments in this country are usually based 
 upon the experience of the old Bank of the United States and the 
 political controversy which developed it. That bank was under 
 strictly private management, entered into active competition with all 
 state and private banks, and as the latter held no relation to it but 
 that of competitors, it was not strange that opposition was fostered. 
 Clearly, another central bank, if established, should be organized 
 into the national banking system and be a part of it. The capital 
 should be furnished by the individual banks and it should do busi- 
 ness only with them. The stockholders should be represented in the 
 management by a board of directors elected by territorial districts. 
 By this system every section of the country would be represented on 
 the board and likewise all shades of political opinion. The govern- 
 ment should be represented in the control of the bank by the prin- 
 cipal officers of the Treasury Department. The plan of the Bank of 
 Germany where there are two boards, one chosen by the stock- 
 holders and one appointed by the government, has worked satisfac- 
 torily there. The combination of government authority with the 
 
 C352) 
 
The Need of a Central Bank 53 
 
 practical advantages that inhere in private ownership and manage- 
 ment is thus secured. With such an organization, and the pubHcity 
 that is necessarily given to the conduct of such an institution, the 
 probability that it will be used to promote private or partisan inter- 
 ests is tt)o remote to be seriously considered. The executive officers 
 should be elected by the stockholders' board, but subject to approval 
 by the government directors. The experience elsewhere is that 
 trained bankers of known ability and tlie highest character are 
 chosen. 
 
 Finally, all other plans for reforming our monetary system leave 
 the relations of the United States Treasury to the money market 
 precisely what they have been, and this furnishes one of the strongest 
 reasons for preferring the central bank plan. In all other countries 
 the receipts and disbursements of the treasury are handled by these 
 institutions. The revenues go directly into the bank, the payments 
 are checked out of it, and whatever surplus there may be remains 
 in the bank, like any individual or corporate balance, subject to 
 commercial use. With our independent treasury any surplus of 
 revenues over expenditures remains in the vaults of the treasury 
 until the Secretary volunteers, in his discretion, to deposit it in such 
 national banks as he may select. During the fiscal year ended June 
 30, 1907, the government's revenue exceeded disbursements by the 
 enormous sum of $87,000,000, and in order that this drain might 
 not paralyze industry throughout the country, it was necessary for 
 the Secretary to make deposits in this amount. The transactions 
 of the treasury are increasing every year with the growth of the 
 country, and the discrepancy between receipts and disbursements 
 may reach very large figures. It is important that these sums be 
 kept in circulation, but highly desirable that they be handled and 
 distributed by an automatic system instead of by the voluntary and 
 arbitrary action of the Secretary of the Treasury. The determina- 
 tion of when deposits shall be made, and in what cities and banks 
 they shall be made, inevitably involves that official in the most un- 
 pleasant kind of criticism, and he should be relieved from it entirely 
 by the adoption of a different system. At this writing the treasury 
 deposits amount to about $250,000,000, scattered in 1,250 banks. 
 During the last two months of 1907 the declining revenue receipts 
 made it necessary for the treasury to replenish the working balances 
 in its offices, but with financial conditions in a state of intense strain 
 
 (353) 
 
54 The Annals of the American Academy 
 
 it was impracticable to draw on the deposits and an issue of certi- 
 cates of indebtedness was forced. 
 
 When all considerations are brought into the account it is' 
 found that a central bank answers the demands more completely 
 than any other plan proposed. It is comprehensive and final, while 
 other plans are incomplete and temporary. It is in harmony with 
 the development of the times toward higher organization, and it 
 has the advantage of being a working success elsewhere. 
 
 (354) 
 
A CENTRAL BANK AS A MENACE TO LIBERTY 
 
 By George H. Earle, Jr., 
 President Real Estate Trust Company, Philadelphia. 
 
 The solution of the problem of a central bank, with power to 
 control the currency of the United States, to be at all adequate, 
 must depend upon and be controlled by ultimate political principles. 
 The same principle that underlies the never-ending conflict between 
 the advocates of a strong centralized government and what are 
 called "states rights," governs this question. Taught in the school 
 of experience and adversity, the early English and American 
 patriots learned the salutary lesson that the development of peoples, 
 as well as their happiness, depended more upon hberty— that is,' 
 the power to control and govern themselves, rather than to be 
 controlled or governed by anybody else— than upon anv other 
 single thing; and they, therefore, in drafting our Constitution, 
 always viewed government as an evil made necessary by the 
 weakness and defects of human nature, and never extended it be- 
 yond that necessity. 
 
 Under the plan of freedom, of self-reliance, self-dependence, 
 self-government, we have become the greatest, the happiest, the 
 most powerful people of the world; but notwithstanding these 
 proofs to justify the work of the Fathers, we have more and more 
 concluded that we could have done a great deal better. We are 
 rapidly tending in the opposite direction, which must inevitably 
 destroy liberty by vesting all discretion in some form of central 
 government, rather than in the people as individual, independent 
 eritities. 
 
 Starting with the theory that government but existed because 
 of the defects of mankind, and was but an evil wherever it exceeded 
 the necessity of restraining evil human tendencies, we have now 
 reached the higher light wherein we produce schemes of regulat- 
 ing everything, until liberty is but a name, and we govern ourselves 
 by theories entirely independent of the characteristics of the people 
 to whom our systems are to apply. It is difficult to find any one, 
 nowadays, who has not some "counsel of perfection," and founded 
 
 (355) 
 
56 The Annals of the American Academy 
 
 on it, some theory of government that would work perfectly with 
 a perfect race, in whom neither self-interest nor passion existed and 
 that, consequently, did not need any government at all. 
 
 Among the radical reformers, the Nihilists are much more 
 logical than the Socialists because neither system would work 
 with human nature as it is, and no system would be required with 
 society so constituted as to make their theories practicable. But 
 the strangest development of modern times is that, concurrently 
 with the wildest theories against restraint, popular opinion is forc- 
 ing more and more restraint upon individvial freedom of choice, 
 that is liberty, year by year ; until business and everything else is 
 being stifled by the almost incomprehensible mass of liberty-re- 
 straining laws and regulations. I suppose to-day the American peo- 
 ple imagine they are a free people ; but in the sense that they were 
 free in the days of such lesser lights as Washington and Franklin 
 and Jefferson and Hamilton — that is, free to work out their indi- 
 vidual independence and salvation, unrestrained by any unneces- 
 sary laws — they are veritable slaves. Under the leadership of 
 the wonderful statesmen of our age who, not confined to either 
 party, have a legislative panacea for everything and are mak- 
 ing us happy by passing statutes binding us hand and foot on one 
 subject after another, all the while increasing public officials and 
 public burdens to enforce them, real liberty — liberty in the sense 
 that each man must, to the greatest possible extent, be given free 
 discretion to work out his own salvation — is rapidly ceasing to 
 exist. 
 
 But, it may be asked, what Jias all this to do with a central 
 bank? My answer is, everything. For this country to be great, 
 happy and prosperous, it must be really free; and freedom, just 
 as justice, consists in distributing power and opportunity as equally 
 as possible, and as much controlled by everybody's individual, un- 
 tram.meled discretion as the nature of things will permit. I am 
 as much opposed to undue centralization as I am to Socialism or 
 Nihilism, and for an identical reason : They are all enemies of 
 liberty; and it is only through liberty that mankind can reach the 
 highest forms of development. 
 
 Now, what effect will the central bank idea have upon these 
 principles which I have thus, I fear crudely, stated? If it will 
 tend to an equalization of power and opportunity, if it will tend 
 
 (356) 
 
A Central Bank as a Menace to Liberty 57 
 
 to placing, as near as may be, equal powers and equal restraints 
 upon everybody, it is consistent with the spirit of our institutions 
 and the purpose of our civilization ; and if not, being against them, 
 it must prove injurious. There is not the slighest doubt that the 
 placing of the power, in the hands of a single man or a small body 
 of men, to issue at his or their uncontrolled will the currency needed 
 for trade, would prove, at least for awhile, an effective measure/ 
 I doubt whether it would permanently prove so, because all history 
 has shown that, in the result, the placing of too much power any- 
 where, in its rotting-out effect upon peoples, has decreased effi- 
 ciency. There is no more doubt that the creations of dictatorial 
 powers, for short periods, in such times, for instance, as those of 
 Cincinnatus, were effective measures, than that they were enor- 
 mously and even to the point of destruction, inefficient as a perma- 
 nent system, under the Emperors. Where a single man can tem- 
 porarily wield the effective powers of millions of men developed 
 by freedom, he is nearly irresistible ; but the continuance of that 
 power, by destroying the value of the units, brings down the 
 totality of strength, even to the point of extinction. 
 
 And so, if we had a central bank, with the power of practi- 
 cally fixing the price of every commodity in the United States, 
 of aggregating to itself, or those who exercised its powers, just 
 such proportion of the production of wealth of the Union as they saw 
 fit; it would, in a little while, tend to a selfish use that could be 
 neither effective nor beneficial ; and. like all other forms of inor- 
 dinate and unequal power, it must become destructive of any repub- 
 lican form of government. Procuring efficiency, not through evo- 
 lution and development, but tyranny and inequality, is a means 
 that all human experience has demonstrated to be fallacious. 
 
 In my own judgment, our currency, like our other evils, is to 
 be remedied by greater freedom and greater distribution of choice 
 and discretion, rather than by a greater centralization or unequal 
 distribution of power. It is a fair question to ask, therefore, 
 whether conceding, as I do, that there is not sufficient elasticity of 
 the currency, I can suggest no remedy, but would prefer present 
 evils to those resulting from the creation of too centralized a 
 power ; and the answer, to my mind, is obvious. The true remedy 
 must be found, not in placing our dependence upon the discretion 
 
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58 The Annals of the American Academy 
 
 of any one, but of every one, — that is, again, upon liberty, rather 
 than upon power and restraint. 
 
 We have a very satisfactory system of regulating the invest- 
 ments of saving funds, that demonstrates that a line of investment 
 can be easily named in advance by statute that would be a safe 
 basis for currency, as well as for investments, as at present. In my 
 judgment, therefore, starting with government bonds, which should 
 always be given a great advantage in currency issues, as that 
 strengthens the credit of the Union, a list could be made upon which 
 any bank — and, again, the banking laws should be equally open to 
 all— could issue its notes. A system of taxation on such issues 
 should be so regulated as to make inordinate inflation impossible ; 
 but there should be no limit to the amount of circulation when the 
 tax had reached a point where it must become unprofitable to the 
 banks that take out that circulation, for then they would only take 
 it out to save the commercial community and their customers, and 
 for no dangerous purposes. And this currency so available should 
 be available at the discretion of everyone, without the necessity of 
 consulting any government official or any government bank. I do 
 not want to be misunderstood. The restrictions as to security 
 should be full and ample, the taxation large and on an ascending 
 scale. The currency should be made absolutely safe — as safe as 
 it is now — and the tax collected with such a system, if that tax 
 were properly applied, would not only be sufficient to guard every 
 holder of a note against loss, but would yield large revenues be- 
 yond this to the government in relief of general taxation- With 
 such a system worked out in detail, governmental power would not 
 be increased, the danger of depriving the people of any part of 
 their self-developing discretions would not be incurred. 
 
 This, as I have said, is all very crudely stated by a man who 
 has no opportunity to work out details or polish sentences ; but it 
 recommends itself to me, because my whole study of the constitu- 
 tional history of our peoples has convinced me that liberty is the 
 greatest friend of mankind, just as inordinate powers are the great- 
 est danger. We shall go higher and better and further, follow- 
 ing out, in all our troubles, a liberty as wide as human defects 
 will permit, than hunting around for benevolent despots in any 
 form, for I do not believe that even benevolent despots ever do 
 real good, because, however well thev mav govern, the injury to 
 
 (358) ' ' 
 
A Central Bank as a Menace to Liberty 59 
 
 communities inflicted by talcing from them the educational benefits 
 of self-government is incalculable. 
 
 Both religion and science teach us that human advance is but 
 to be gained through the slower methods of development of char- 
 acter—the one calling it "regeneration/' the other "evolution" or 
 "survival of the fittest," or what you will. Even in politics and by 
 politicians these principles are at times heeded — even now we are 
 daily told that the policy of the government is to educate the 
 Filipinos to a fitness for self-government, by gradually entrust- 
 ing them with widening discretions, increased liberty, as this in- 
 creasing liberty fits them for more. This is true political science— 
 the only K-a3'— these men are unquestionably Filipino patriots, but 
 what we need is American patriots— men who will "make way 
 for liberty" here as well as there; who will disregard popularity, 
 if need be, that they may abide with duty; and not piecemeal ex- 
 change our birthright of freedom for a mass of legislation and re- 
 straint only really efifective for evil. Many, many injurious steps 
 have already been taken toward the inequality and slavery of over- 
 government and benumbing restriction. But all of them will be 
 but a drop in the bucket, compared with the dangers of placing 
 in the hands of the few the entire discretion as to the volume of 
 the people's money. 
 
 In an ultimate analysis, our country is only languishing for 
 liberty and equality; and I do not hesitate to predict an instant 
 return of prosperity, at the first moment that honest men can 
 make investments and conduct important afifairs, without the neces- 
 sity of having a lawyer at their elbows, who, indeed, in most cases, 
 refuses the responsibility of advising what all the accumulating 
 mass of restrictive legislation means. We have evils enough in this 
 direction, without restraining the people's right to determine when 
 or to what extent their interests require a further supplv of cur- 
 rency on a sound basis. If we really need all the present restric- 
 tive mass of regulative legislation, we are, like the Filipinos, already 
 unfit for freedom ; and if. as I believe, we do not, by taking away 
 our personal right of choice, of initiative, we are being educated 
 as rapidly as possible, to be like them, unfit for self-government. 
 
 If these hasty suggestions should chance to reach the eye of 
 someone with a faculty for leadership, and a love of his country, 
 and invite him to battle again for freedom, to expose the shams 
 
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6o The Annals of the American Academy 
 
 under which the people are losing their freedom, under the pre- 
 tense that their enemies are being punished, I can promise him the 
 ultimate approval of his countrymen. For that, in the end and 
 permanently, only comes to real patriots, those that unite instead 
 of divide, those that love instead of hate ; those that, putting aside 
 "malice, envy and all uncharitableness." understand the potency of 
 "good will to men," while never forgetting that "eternal vigilance is 
 the price of liberty." 
 
 (360) 
 
CLEARING-HOUSE CERTIFICATES AND THE NEED FOR 
 
 A CENTRAL BANK 
 
 Bv William A. Nash, 
 President Corn Exchange State Bank, New York. 
 
 It is universally conceded that the present time is highly favor- 
 able for financial reforms. The great danger is that the remedies 
 will be so numerous, and the diagnoses so different that the patient 
 will linger and suffer. The doctors will assemble and discuss, but, 
 I hope, to use an old story, we shall not have to wait for the autopsy 
 to find out what is the matter. The brief contribution that I shall 
 make towards the solution of the riddle of American-finance is based 
 on my life as a banker in the City of New York, and what I have 
 learned in my relations with the New York Clearing House. 
 
 When I read the numberless projects for our financial well 
 being that fill the newspapers, our book shelves, and the Con- 
 gressional Record, I ask myself on what do these men base 
 their plans, on observation or actual contact and familiarity with 
 the subject they talk about, and I must conclude that much of it 
 is spun out of their inner consciences. The best known of our 
 Revolutionary orators said, "I have but one lamp by which my feet 
 are guided, and that lamp is experience," and I propose to use ex- 
 perience in the space at my disposal. 
 
 When I was a youth I saw the panic of 1857. The failure 
 of the Ohio Life and Trust Company created a general distrust 
 of banks all over the country. It began as always in New York. 
 Good and bad banks alike were attacked by uneasy depositors 
 and they were fought to a standstill and compelled to surrender. 
 The situation, however, soon righted itself because the depositor 
 had no safe place to keep his gold and soon returned it to the bank 
 he had been distrusting. We had not at that time that ingenious 
 device known as the safe deposit vault by which banks and trust 
 companies now connive at their own decimation. 
 
 The Civil War was marked by no less than four banking and 
 currency crises, in i860 and 1861 when the war broke out, and in 
 1863 and 1864 when the unwonted demand by the government 
 
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62 The Annals of the American Academy 
 
 and the creation of a new currency, threw the machine out of 
 gear. To remedy these derangements the most useful and effec- 
 tive device ever known in our finances was created. I mean the 
 loan certificate of the New York Clearing House. It was in- 
 voked four times during the war. In i860 we issued $7,357,000; 
 in 1861, $22,585,000; in 1863, $11,471,000 and in 1864, $17,725,000; 
 in all about $58,000,000, which Avas an immense sum for those days. 
 These certificates played an important part in the war for the Union. 
 While the banks and the people were subscribing for bonds with an 
 uncalculating patriotism, the clearing house stepped in with the 
 loan certificate and steadied the business situation by enlarging 
 credit and preventing the panics that always follow excesses of 
 any kind in the commercial world. The effect of the loan certifi- 
 cate is instantaneous. Credit is expanded upon the soundest basis 
 known to experienced financiers and the sufficiency of that basis 
 and the volume of the supply is regulated by bankers and men 
 of business whose character and antecedents are the strongest 
 guarantees of the honest and wise administration of the trust. 
 
 You are all familiar with the basis of the loan certificate, 
 yet a short re-statement may not be amiss. Every bank in the 
 clearing house has the privilege of coming to the loan committee 
 with its bonds, loans and commercial paper and obtaining seventy- 
 five per cent of their value in loan certificates of all denominations 
 with which they can pay their debts to each other. They naturally 
 bring their very best assets, so that in our experience in New York 
 not a single dollar of loss has ever followed our many issues. 
 Again, quite naturally, the banks are desirous of getting back their 
 gilt-edged assets, and the process of redemption and retirement 
 begins almost as soon as that of issue. The practical part of 
 this expansion is very interesting. The loan committee can issue 
 many millions in a single morning. There is no necessity of 
 waiting for a slow press to print the circulation. We, in New 
 York, make them in denominations of $5,000, $10,000, $20,000, 
 $50,000 and $100,000. We have not yet come to $5 and $10, but 
 the present crisis has shown the need and desirability of such 
 small notes. 
 
 After the war there ensued a season of speculation and de- 
 velopment, stimulated and fostered by the currency created for 
 the needs of the government and the people during the rebellion. 
 
 (362) 
 
Clearing-House Certificates 63 
 
 This lasted till 1873, when the inevitable reaction came, resulting 
 in that famous panic. Here the clearing house hesitated a day 
 or two before issuing certificates, and a hesitation even of that 
 time is a very serious matter. When a house is on fire you do 
 not want to walk your horses before the engine. In 1873 we issued 
 $22,400,000^, and the time between their first issue and their final 
 retirement was about four months. Then for eleven rears there 
 was no occasion for their use, until the Marine and Metropolitan 
 Bank panic in 1884, when about $25,000,000 were put out and 
 again four months was the limit of their existence. 
 
 In 1890 we felt the effects of the Baring panic and issued 
 sixteen millions, and in three months they were all retired. You 
 remember that in England in the Baring panic the joint-stock 
 banks, under the guidance of the Bank of England, substantially 
 adopted our loan-certificate system for their own relief. In 1893 
 the certificate performed its most useful and brilliant service. We 
 had a crisis of great and varying elements. The silver question 
 and the end of a long period of commercial extravagances con- 
 spired to produce an emergency that none of us will ever forget. 
 The New York Clearing House acted with superb energy and 
 promptness. We issued more thaii ever before, $41,500,000 in certi- 
 ficates were signed. Their issue began June 21, 1893, and the 
 last one was cancelled November i, 1893 — again a period of about 
 four months. In 1895, when the Venezuelan message was issued, 
 the clearing house forestalled and prevented a panic by authorizing 
 the usual issue, but the very promptness of their action prevented 
 the use of any of them by the banks. 
 
 Now we are in 1907, and the same agency is at work, and 
 you all realize how effective it has been to still the waters, so we 
 can shift the cargo and repair the ship for its further voyage. 
 When the history of 1907 comes to be written it will be a very 
 interesting and instructive chapter on finance. It is very well 
 known that there was a well meaning but injudicious attempt to 
 handle the situation without resorting to the time-honored remedy. 
 The clearing house delayed their issue several days out of re- 
 spect to the very distinguished gentlemen who hoped to get along 
 without their use, but finally the pressure of events left no alter- 
 native. I believe that much was lost in the few days of hesita- 
 tion that preceded the actual authorization of the issue, and that 
 
64 TJic Annals of tlic American Academy 
 
 a more prompt action would have warded off some of the sub- 
 sequent occurrences that we have had to deal with. Why there 
 should have been any hesitation in using- a remedy so long and 
 so often tested I have not yet been able to discover. It has again 
 taken its place as a great corrective and conservator — and to its 
 use we owe the subsidence of the more active features of the panic. 
 Excessive and alarming rates for money immediately disappeared, 
 and the banks were able to extend credits to their customers — 
 knowing that the source of supply was at their command. 
 
 This is the history of this great financial agent. It has been 
 used eight times in the past half century always with relief instan- 
 taneous, without loss, and with a period of existence from the 
 first one put in circulation to the last one retired of about four 
 months. As an emergency currency it is incomparable — as an 
 asset currency it is the only one that I can conceive of, that is not 
 fraught with dangers, greatly in excess of the benefits to be de- 
 rived from it. The secret of the whole matter lies in the character 
 of Lhe men who have managed it. I know of no more unselfish, 
 devoted and patriotic body of men than the Clearing House Com- 
 mittee of New York City. It has always been so, it is so to-day. 
 The business public have unlimited confidence in their judgment 
 and wisdom. The clearing-house certificate is the embodiment 
 of all these qualities and constitutes it as the most absolutely 
 valuable of all our financial devices. 
 
 Naturally the whole country follows New York. It is not 
 vainglory to say so — it is a fact. The clearing houses of all im- 
 portant and unimportant cities follow its lead. The panic is ar- 
 rested — credit is assured — the dangers of extreme distress are 
 eliminated, and the country finds time to readjust, repair and 
 resume. 
 
 Now, in view of this practical lesson, so often repeated, and 
 always successful, what should be done, and what do we learn. 
 The first lesson is, that expansion of credit and the issue of cur- 
 rency can best be done by some central responsible power and not 
 by a series of small powers scattered all over the country. The 
 first process gives confidence, the second will be followed by no 
 confidence. I do not hesitate to say that an asset currency 
 authorized on a forty per cent or any per cent basis and intrusted 
 to five thousand banks all over the country will surely result 
 
 (364) 
 
 ) 
 
Clearing-Honse Certificates 65 
 
 in a cataclysm of disaster, unparalleled in the history of the coun- 
 try. On the other hand, if we organize in a permanent form 
 the clearing-house loan certificate now issued so fitfully and at 
 a time when a crisis is already upon us, we will provide the country 
 in advance with a remedy, just as the New York Clearing House 
 prevented a panic in 1895. 
 
 But how shall we get this permanent form? To answer this 
 we come up against the most venerable and senseless prejudice 
 that obstructs the national well being, the dread of a great central 
 bank. This hobgoblin of the politician and the business man 
 has walked the earth for seventy years. The panic of 1837 has 
 not yet been forgotten although the country is radically different 
 from that day. We must kill this bugaboo and exorcise this 
 ghost. 
 
 The average politician is more afraid of it than any other 
 public question except the tariff. The magnetic needle does not 
 point more unerringly to the pole, than the clearing-house certi- 
 ficate points to a great central bank, and dodge this as we may, 
 and as we probably shall, finally we will come back to it and 
 hail it as the solution of all our difficulties. But such a bank must 
 be organized properly or it will never gain public confidence. The 
 government must be represented in it, but the dominant power 
 must reside in a board of directors to which the most eminent 
 bankers and business men shall be chosen. Let the clearing houses 
 of the great central reserve cities nominate those directors and you 
 will have a governing body as influential and as respected as the 
 Supreme Court of the United States. 
 
 Give us in good faith such a central bank with such manage- 
 ment and with such functions as the clearing houses all over the 
 country have to-day. and you will put us on a par with England 
 and France and Germany with their great benign national banks. 
 To-day we are suffering for lack of such a consolidated, salient 
 power. Our energies are scattered and inharmonious. They ought 
 to be solidified and present an unbroken front. The clearing hou'ses 
 and the loan certificate point the way with an unmoving finger, 
 and until their persistent and insistent demand is heeded and crys- 
 tallized, we shall not have permanent peace in our business or 
 financial world. 
 
 It is hardly necessary to sav that political or partisan features 
 
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66 The Annals of the American Academy 
 
 in such a bank will be fatal. To give it authority and respect 
 it must be divorced from party politics. Its creation on the basis 
 I have outlined will be a work of patriotism as signal as any we 
 have ever performed as a people. I believe that the necessities 
 of the hour, necessities that recur with every monetary disturbance, 
 will dictate a sound solution, and, without doubt, this conference 
 and others like it will be important steps to that end. 
 
 iZ^) 
 
FOREIGN EXPERIENCE A GUIDE TO CURRENCY 
 
 REFORM - 
 
 By Isaac N. Seligman, 
 Of J. and W. Seligman & Company, New York. 
 
 As Governor Hughes has admirably stated in a recent address 
 before the Civic Forum in New York, "The quaUty of the admin- 
 istration of local officers lies with the citizens of the community. 
 They will be good or bad as the public insists on the former or is 
 content with the latter." So it is with our currency problem. It 
 lies with us whether or not we shall have a sane, practical and 
 intelligent currency system. The great difficulty at present ap- 
 pears to be an overzealousness on the part of everyone to offer 
 some panacea for the present unsatisfactory monetary condition. 
 That the present crisis is not wholly due to our perverted and 
 immobile monetary system is possibly true, at the present time the 
 crisis might in a great measure have been mitigated if we had got 
 our own house in order. Until we have a stable and elastic cur- 
 rency system we will be constantly subjected from time to time 
 to the present acute and humiliating financial conditions like those 
 which now confront us. Fortunately the present crisis has fully 
 opened the eyes of the entire country to the importance of some 
 currency legislation, and has convinced the people — not Wall Street, 
 but the West and South as well — that some method must be found 
 to prevent a recurrence of the present acute and distressing crisis 
 and depression. Our national banking system worked fairly well 
 during the war period, but the panics of 'j'})^ '9^ and '93 have awak- 
 ened us from our dream, and have brought home to us sharply 
 the need of some elastic and responsive currency system. 
 
 Congress has not been able to enact as yet any permanent 
 plan of relief, and this has been chiefly due to two causes, first, 
 the fact that our legislators have not as yet given sufficient time 
 and thought to an intelligent, scientific and responsive currency 
 plan, and second, their inability to unite on any definite plan. The 
 country now imperatively demands some intelligent relief. 
 
 We have had numerous tentative schemes offered; the Balti- 
 
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68 The Annals of the American Academy 
 
 more plan, '97, the Carlisle and Fowler bills, the McCleary and 
 Gage bills, the Monetary Commission Indianapolis Convention, '98 
 plan, and later the New York Chamber of Commerce and American 
 Banking Association plan, '06. All these plans practically provide 
 for asset currency, i. e., the right to issue emergency currency based 
 on a certain proportion of their bond-secured circulation, having 
 first lien on the assets of the bank, subject to a tax to provide 
 for any possible losses. The weakness of these last two plans 
 has always appeared to lie in the fact that the graduated rate of 
 interest paid is not sufficiently high to insure the rapid redemption 
 in normal times, and also not sufficiently high tax rate to prevent 
 the issue of notes in instances of urgent requirements. It is likely 
 that some measure of relief would have been afforded to the country 
 if any one of these plans had been in operation during our present 
 crisis ; at the same time it would serve only as a palliative and not 
 as a cure. 
 
 There is truth in the statement of Lord Rothschild when he 
 characterized this country as financially uncivilized in its banking 
 methods. 
 
 M. Siegfried, Senator of France, my valued friend and an 
 expert on financial questions, has only lately stated that the French 
 may be reproached with a lack of the spirit of commercial enterprise 
 which characterizes the Anglo-Saxon, but it must be recognized 
 that in financial science they can give lessons to America which can 
 profitably be guided by the counsels of eminent French financiers 
 and bankers. Gentlemen, this is true and we may candidly make 
 the confession. 
 
 The spectacle presented to-day by our currency to the civilized 
 banking community of the world is simply shameful. 
 
 Emergency clearing-house certificates have been issued in nearly 
 all large cities ; cashiers' checks and scrips have been circulated to 
 take the place of currency, and all devices imposed on the commu- 
 nity to take the place of currency which has been hoarded. The 
 United States Government in the person of Secretary Cortelyou 
 has come to our assistance in the present juncture and has helped 
 the situation by depositing nearly all treasury funds in the banks, 
 and has also devised other measures of relief to prevent an actual 
 cessation of business. He has ably fulfilled the task. 
 
 These measures onlv accentuate more pointedly that in order 
 
 (368) 
 
Foreign Experience a Guide to Ciirreiiey Reform 69 
 
 to obviate such temporary provisions for relief measures some per- 
 manent, logical and intelligent plan must be thought out. 
 
 When confidence is shaken it is inevitable that the community 
 will tend to hoard gold and currency. Such conditions are sub- 
 stantially unknown abroad. Crises and panics are of course pos- 
 sible everywhere ; no monetary system can be devised to prevent 
 a panic ; but an intelligent and elastic banking system can always 
 be relied on to keep off widespread disaster. It is true, gentle- 
 men, that it is difficult to induce a community to depart from its 
 old traditions, but the time has now come when we should be 
 guided by such foreign systems as have been working satisfactorily 
 for centuries, and which, in times of panics and stress, have fully 
 met all expectations and conditions. I refer to some central bank- 
 ing system. 
 
 This is the system existing in France, England, Germany and 
 in all European countries. It is needless to dwell on the methods 
 and machinery of the central banks in European countries. Al- 
 though not ozvned by their respective governments they are prac- 
 tically controlled in a moral sense as the government is repre- 
 sented in its board of directors and the governmental policy sub- 
 stantially rules. Flexibility and safety are the two essentials in 
 currency problems, and the former is absolutely wanting in our 
 present system. 
 
 The fact that the government bank was used by President 
 Jackson for political purposes should not close our eyes to the im- 
 portance of now re-establishing such a bank purged of many of its 
 then evil features, and surrounded by reasonable safeguards and 
 legislation. I do not propose to enter into any details as to the 
 plan of a central bank and only give an outline. This central or 
 government bank should be owned jointly by the government and 
 the national banks. The Secretary of the Treasury and the Con- 
 troller of the Currency should be represented on its board. The 
 treasury funds should be deposited with the central bank, and the 
 government bank should have power to issue notes in certain 
 proportion to its gold reserve or capital. As it is likely that the 
 sole right of such note issue would be opposed by our national 
 banks, and any radical plan for a government bank would probably 
 not pass Congress at present, an alternative plan has been admira- 
 bly developed in an article lately published by Mr. Paul M. War- 
 
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JO The Annals of the American Academy 
 
 burg, a banker in New York, under the title, "Plan of a Modified 
 Central Bank." This appears to me the most practical of all plans 
 yet suggested, as it provides for a government bank limited chiefly 
 to transactions with the clearing houses of the various cities. The 
 bank is to deposit funds with clearing houses and national banks 
 against United States bonds and other approved security as well 
 as commercial paper and bankers' bills with proper margins. The 
 plan has the great advantage of providing additional currency, 
 and the rate of interest to be fixed by the board and the banks 
 would have been able to rediscount their paper and to obtain bank- 
 notes to relieve the currency strain. Clearing-house certificates 
 issued in different centers in times like the present make it well 
 nigh impossible to arrange for transfers of money from one city 
 to the other. Just now drafts on Philadelphia, Boston and other 
 banks sent for collection are being returned on the plea that momen- 
 tarily it is impossible to remit New York exchange. Each city 
 issuing its own clearing-house certificates under the present abnor- 
 mal conditions practically builds a Chinese wall againsit other 
 centers. 
 
 There is no doubt in my mind that if we had a modified cen- 
 tral banking system the forced closing of the Knickerbocker Trust 
 Company could have been avoided as it could readily have hypoth- 
 ecated on the first day of its run 25,000,000 or more of its good 
 securities with the central bank, and the heedless run on other 
 trust companies would have been prevented. 
 
 At the time of the failure of the Leipziger Bank in Germany 
 (an institution which had been grossly mismanaged by its direc- 
 tors, many of whom, by the bye, are now serving states prison 
 sentences) there was a run on one of the largest banks in Germany. 
 This bank turned over some 75,000,000 Rmx. of discount, i. e., 
 commercial and bankers' endorsed three and six months' bills, 
 to the Reichsbank, which in turn, furnished the funds and the 
 run ceased at once. 
 
 The Bank of France has been shipping gold to England, tak- 
 ing in payment finance bills, and it is prepared to ship us gold against 
 commercial bills, thus proving what substantial aid can be ren- 
 dered by a central or government bank to other countries. What 
 better proof is needed of the value of central or government banks 
 in such emergencies. It is needless for me to dwell longer on 
 
 (370) 
 
Foreign Experience a Guide to Currency Reform yi 
 
 the importance of some such central bank, and I refer you to a 
 careful study of Mr. Warburg's article which has been published 
 in pamphlet form. 
 
 I realize that it is no easy task to educate our representatives 
 in Washington to a radical change in our currency system, and any 
 hasty action in providing a remedy which, to our lawyers and 
 statesmen, may seem to be complicated and technical in its machin- 
 ery will likely end in defeat. I fully realize that there are many 
 well-intentioned citizens who are honestly opposed to any exten- 
 sion of credit-issuing powers by our national government. The 
 country must now realize, however, that some currency measures 
 must be enacted by Congress to mitigate the present evils. The 
 emergency currency plan proposed by the New York Chamber of 
 Commerce and modified by the Bankers' Association has been under 
 discussion for a year. As already pointed out such a plan advo- 
 cated by many students and business men has been strongly opposed 
 by many thoughtful, practical financiers. Has the thought ever 
 occurred to you, gentlemen, what would have been our present 
 situation if this plan had gone into effect, and if all of the additional 
 emergency circulation provided for by such plan had been issued 
 during the summer months when money was stringent? Would 
 we have been much better oi¥ now, and would we not be again 
 appealing to Secretary Cortelyou for help? 
 
 I am pleased to note that Mr. Ridgely, the Controller of Cur- 
 rency, has just strongly declared that a large central bank of issue 
 is the proper solution of this problem. Let us do our utmost to 
 study it from an unbiased standpoint, and let us give our support to 
 such plan as will give us permanent relief and place our currency sys- 
 tem on a par with those of all civilized nations. Congress will shortly 
 convene and many currency plans and bills will be introduced. It 
 is the duty of every citizen to have the courage of his convictions, 
 and not to temporize with the problem, and to bring pressure to 
 bear on his representatives in Washington in order that an intelli- 
 gent, rational and comprehensive currency bill shall be enacted. 
 As our noble President, Abraham Lincoln, has said, "Let us dare 
 to do our duty as we understand it." We will confer thereby a 
 lasting blessing on our country. 
 
 (371) 
 
RELATION OF A CENTRAL BANK TO THE ELASTICITY 
 
 OF THE CURRENCY 
 
 By Jacob H. Schiff, 
 Senior member of the firm of Kuhn, Loeb & Company, New York. 
 
 The storm which has recently broken loose has not yet en- 
 tirely subsided. The causes of the financial trouble which has come 
 upon us are hardly understood yet, but with typical American 
 courage, we are looking already for the remedies, not only to re- 
 trieve what has been lost, but also in the desire to gain protection 
 for the future against the recurrence of a disaster similar to that 
 which has overtaken us. 
 
 The physician who would want to find proper remedies must 
 first know and understand the origin and seat of disease. We should 
 therefore, carefully inquire into the causes of this crisis, which has 
 come upon us almost in the midst of an era of unprecedented pros- 
 perity. 
 
 To me it appears the answer is not surrounded by much doubt. 
 The origin of the crisis is to be sought mainly in too great an 
 expansion of enterprise of every nature, both corporate and indi- 
 vidual. This, as a consequence, caused a straining of financial 
 requirements, and particularly of credit, beyond legitimate limits. 
 "Prosperity run riot," expresses perhaps best the condition, which 
 existed and which brought us to our present plight. Nothing 
 is probably more largely responsible for the breakdown, than the 
 obstinacy with which new enterprise was fostered ; in the enormous 
 volume of business which was developed in every quarter, even in 
 the face of a steadily increasing money scarcity, and, further, in the 
 stubbornness with which it was insisted that the country was so 
 prosperous and rich that particular caution and prudence were 
 not needed, the march forward was made with a totally unpro- 
 tected rear. 
 
 Look only at the number of so-called trust companies, called 
 into being during recent years, which under a false flag bid for 
 and attracted millions upon millions of deposits, to be used not for 
 legitimate banking, but for illegitimate promotion, from which 
 
 (372) 
 
Relation of Central Bank to 4he Currency 73 
 
 funds could not be withdrawn when their return was asked for 
 by those to whom they belonged. And not alone in financial quarters 
 had developed this prosperity madness^ — in industry and commerce, 
 prudence had likewise been thrown to the winds. The manu- 
 facturer or merchant, when warned that he v;as expanding too 
 rapidly — that he was straining his credit in too great an extreme — 
 scornfully rejected the advice to go at a slower pace. His answer 
 almost invariably was that the demand for his goods was great ; 
 that his customers were in good condition, and that anxiety and 
 complications existed only in Wall Street. He overlooked the fact 
 that the basis of the large volume of business, which he thought 
 he was doing legitimately, rested, to a great extent, upon the very 
 over-expansion of enterprise represented by the inflation of corpo- 
 rate securities he was criticising, and that the collapse in security- 
 values would have inevitably to be followed by a breakdown of 
 the general business of the country. 
 
 And now, as a panacea for the ills vnider which we are suf- 
 fering, a sudden demand has sprung up throughout the country for 
 currency reform. Proposed by the few who foresaw and fore- 
 told what was coming, as a partially protective measure, the warn- 
 ing to reform the currency was, when it was sounded, decried 
 as a scheme of banks and bankers for selfish purposes, and became 
 almost lost, like a cry in the wilderness. Had it been heeded, the 
 present crisis might not have been entirely prevented, but it would 
 never have gone so far in upsetting the business of the entire 
 country. Let it be said, however, and well understood, at this 
 juncture, that currency reform, imperatively needed though it is, 
 can in itself never furnish protection against the consequences of 
 unsound and illegitimate business methods. A properly consti- 
 tuted circulating medium, can furnish in times of financial difficulty 
 a palliative, but without simultaneous reform in the unsound prac- 
 tices, which, to so considerable an extent, have governed the afifairs 
 of financial institutions, currency reform will be of little avail. 
 
 The Governor of the State of New York, with statesmanlike 
 sagacity, has just taken action with a view to correct the short- 
 comings, which have been laid bare. A commission has been 
 authorized which is to report upon a revision of the banking laws 
 of the state, action such as this should be particularly welcomed. 
 
 I shall not enter here into a discussion of any particular scheme 
 
74 The Annals of the American Academy 
 
 for the reform of the currency, to that I have already furnished 
 my quota upon earHer occasions. So much has already been said, 
 written and published upon the question of currency reform, so 
 many propositions have been made by all sorts and conditions of 
 men as to methods, ways and means, through which is to be 
 secured what is needed, that with the meeting of Congress just 
 upon us, it had perhaps now best be left to the wisdom of our 
 national legislators to embody some measure into the form of law, 
 which to them shall appear to best satisfy the demands and needs 
 of all sections of the country. Congress will, in any event, have at 
 its disposal rather a long catalogue of currency reform plans to 
 select from. 
 
 What we are most in need of at this juncture, is the enactment 
 of a measure, through which the circulating medium can be made 
 to respond promptly to a diminished money demand. We have, 
 during recent years, with the enormous expansion in enterprise and 
 general business, no less than in the few weeks since this crisis 
 has come upon us, been rather liberal in the creation of paper 
 currency. If we are not careful, we shall before long find our- 
 selves face to face with so large a volume of paper money, that 
 gold will inevitably be driven out. Otherwise, some day, when 
 this mass of paper can no longer be digested, we may be face to 
 face with a depreciation in the standard of credit of the government, 
 as expressed by the market value of United States bonds. 
 
 Expansion of the currency, when legitimately needed, will, 
 under proper provision for this, take care of itself, if only in any 
 scheme for the reform of the currency, proper provision be first 
 made for the promptest possible contraction of the circulating 
 medium, when its volume becomes too large for legitimate re- 
 quirements. Nor is it likely that any scheme for the issuance 
 of a circulating medium will prove permanently satisfactory, which 
 shall clothe 6,000 banks with the privilege of issuing credit currency, 
 each for itself. No matter how completely the safeguards proposed to 
 be established through the creation of a guarantee fund may appear 
 to be thrown around the exercise of this privilege, a single default, 
 even if only temporary, would likely create prejudice against the en- 
 tire volume of the outstanding currency, and no chances, however re- 
 mote, ought to be permitted to be taken in this respect. Whether 
 it shall be a central bank — if authority for the establishment of such 
 
 (374) 
 
Relation of Central Bank to the Currency 75 
 
 can be obtained — or a central association of national banks, to 
 possess no other function than to issue to the banks the circulating 
 notes, to which, under the stipulations and restrictions to be imposed 
 by law, they shall become entitled, there is needed a central authority, 
 to properly control and determine the issuance of any circulating 
 medium, based upon assets. Such a controlling central authority 
 should and can best be constituted by the banks themselves. An 
 association of national banks would, for the time being, at least, 
 probably prove more acceptable and practicable than a central bank- 
 The latter, to be of real advantage, would not only have to receive 
 a monopoly of the privilege of issuing circulating notes, but would 
 moreover have to become the depository of the funds of the gov- 
 ernment. It would have to undertake the discounting of commer- 
 cial paper, both for banks and for individuals, and it is not likely 
 that the country is, at this time, prepared to sanction so far-reaching 
 a scheme, which of necessity would revolutionize our entire national 
 banking system. 
 
 The one lesson, at least, which we should learn from recent 
 experiences, is that the issuing of clearing-house certificates in the 
 different bank centers, while no doubt it helped locally, has also 
 worked considerable harm. It has broken down domestic ex- 
 changes and has paralyzed to a large extent the business of the 
 country. Far better, as has recently been semi-officially proposed, 
 that the government itself should become authorized to issue, in 
 times of great stress, legal-tender loan certificates through the 
 clearing houses, to the banks, upon appropriate security, and 
 with stringent automatically acting provision for quick redemption. 
 Undesirable as such an expedient may be in itself, from an economic 
 point of view, it would at least prevent a breakdown of domestic 
 exchanges, such as we have just experienced, resulting in a large 
 premium upon currency— or, to state it more correctly, in a large 
 discount upon bank checks. We have seen how the suspension 
 of cash payment by the banks in the leading centers, compelled us 
 to throw upon Europe the burden of financing our cash require- 
 ments almost entirely during the important period of the crop move- 
 ment, and forced the Bank of England into a position, so mortifying 
 for us, where it had to assume this burden almost single-handed. 
 
 Comparisons are odious, but sometimes they are also profitable 
 if properly applied. Let us at least hope that the severe and costly 
 
 (375) 
 
^6 The Annals of the American Academy 
 
 lessons we have received, shall not be permitted to be forgotten, 
 until we have found appropriate remedies. It is certain, if this 
 be done, we shall emerge from the momentous period, through 
 which we are just passing, freed from many handicaps, which still 
 impede us in the financial, commercial and industrial aspirations 
 which we possess — fortunately be it said — both as a nation and as 
 individuals. 
 
 (376) 
 
DIAGNOSIS OF THE WORLD'S ELASTIC CURRENCY 
 
 PROBLEMS 
 
 By Andrew J. Frame, 
 
 President Waukesha National Bank, Waukesha, Wisconsin. 
 
 Professor Sumner, in his "History of American Currency," said, 
 m summing up tiie doctrines of the celebrated bulHon report which 
 was submitted to the House of Commons in 1810, "Its doctrines are 
 the alphabet of modern finance. They are no longer disputable." 
 Another section reads, "In the presence of a panic the duty of the 
 bank is to discount freely to all solvent parties." 
 
 I take it, a smile will pass over the features of my banker friends 
 the moment their ne'er-to-be-forgotten practical experiences of 1893 
 and 1907 loom up as a nightmare before them again. How can a 
 bank discount freely to all solvent parties when its panic-stricken 
 depositors want all the cash the bank holds, and very quickly too? 
 
 What is the meaning of the word panic? The Standard Dic- 
 tionary says: "The prevalence of unreasoning and overpowering 
 alarm in financial and commercial circles, or in both, leading to 
 sudden and stringent restrictions of credit and great shrinkage in 
 values, and precipitating mercantile and banking failures; often 
 the precursor of a financial panic." 
 
 Panics undoubtedly cannot be wholly prevented except in 
 theory by such dreamers as Bellamy, who support the impossible 
 idea that human nature can be changed, speculation cease and opti- 
 mism be eradicated from Anglo-Saxonism. 
 
 Notwithstanding this, I am a firm believer in ameliorating panic 
 conditions, both as to their frequency and as to their severity. But 
 how? My answer is: 
 
 (i) By studying history and profiting by the experiences of 
 the past. 
 
 (2) By passing conservative and sound banking laws, and then 
 enforcing them. 
 
 (3) By giving as much elasticity to the circulating medium as 
 can be safely attained, but never to reach an amount which engenders 
 
 {Z77) 
 
78 The Annals of the American Academy 
 
 doubt in the public mind as to its redemption in the world's standard 
 of value. 
 
 As to the problem of conservative and sound banking laws and 
 enforcement, the national banking system is the safest and best this 
 country has known. It is a well-known fact that some states have 
 good laws, some lax lawS;, and others none at all. It is also a matter 
 of gratification to know that many states are working along the line 
 of betterment. With thirteen thousand million dollars due to not 
 less than sixteen million depositors in the banks and trust companies 
 of the United States, in order that conditions leading to panics and 
 their paralyzing effects may be minimized, is it not the clear duty 
 of our statesmen to perfect, as far as possible, conservative laws on 
 sound lines? 
 
 These laws should demand ample capital paid in, limitations 
 on loans to any person or firm, and reasonable reserves according to 
 whether deposits are payable on demand or on time. As space 
 forbids further pursuit of this phase of the subject, I will confine' 
 myself to the knotty "elasticity problem." 
 
 The Elasticity Problem 
 
 The history of the progress of nations during the earlier cen- 
 turies shows an evolution from the use of bullocks as a medium 
 of exchange, as recorded in the Bible, to the later period of barter 
 by the use of beads, nails, skins, shells, etc. In later centuries, 
 in addition to the limited quantities of coin, the banks have indulged 
 more or less in the issue of so-called asset or credit currency, 
 dubbed "coined credit," by Professor Sumner, as well as cur- 
 rency secured by various kinds of collateral. All makeshifts have 
 in the most advanced and progressive nations given way to the 
 world's standard of value — gold, until to-day those progressive 
 nations which issue currency do so largely through one great cen- 
 tral bank. The immense coin reserves of these great. banks prac- 
 tically make their currency issues a gold certificate payable on 
 demand. They are practically banks of issue and not of deposit, 
 as will be seen by the table which follows. These banks issue more 
 or less currency in excess of coin held, but some are based on gov- 
 ernment securities, as in England ; all their loans are amply secured 
 and of a quick liquid character. In view of these facts, these 
 great banks, with immense capital, coin reserves and small liabilities, 
 
 (378) 
 
Diagtiosis of IVorld's Elastic Currency Problems 79 
 
 are in a position to expand currency issues to move crops without 
 distrust, and under panic conditions "to discount freely to all 
 solvent parties," also to furnish extra cash to banks with which 
 to meet the insane demands of frightened depositors, thus pre- 
 venting general paralysis of trade and industry in all branches, 
 which is inevitable if forced liquidation takes place which is so 
 destructive to labor and capital alike. 
 
 I am firmly convinced that if the United States had lately 
 had a large central bank of the banks, commensurate with our 
 greatness, notwithstanding the colossal pyramid of credit which 
 we have been building, we might have been let down by easy stages, 
 instead of falling off from the top of the building, producing a jar 
 that seems to have shaken the whole commercial world. I am also 
 convinced that if the last Congress had authorized asset or credit 
 currency on the American Bankers' Association plan, when the 
 1907 spasm struck us, our troubles would simply have doubled. 
 
 Let us briefly diagnose the reasons therefor by a comparison 
 of European conditions with those of the United States as they 
 exist to-day. 
 
 Capital, specie, circulation, etc., of the great European single hanks 
 of issue on or about June 50, ipod. 
 
 Table No. i. 
 
 In Millions. 
 
 Capital. Circula- Deposits. Total Loans. 
 
 tion. specie. 
 
 Imperial Bank of Germany $28.9 $412.0 $i49-9 $211.1 $345-7 
 
 Bank of Austria-Hungary 41.9 376.5 31.6 299.2 189.8 
 
 National Bank of Belgium 9.6 136.5 16.3 24.1 124.8 
 
 National Bank of Bulgaria 1.8 8.6 17.0 7.6 11.9 
 
 National Bank of Denmark 6.8 34.9 .8 27.2 13.7 
 
 Bank of Spain 28.9 305.7 134.2 200.2 1544 
 
 Bank of Finland 1.9 18.2 4.2 5.2 11. 7 
 
 Bank of France 35-2 908.8 189.1 803.4 255.3 
 
 National Bank of Greece 3-9 23.1 23.4 .4 21.6 
 
 Bank of Italy 28.9 213.3 90.6 152.7 91.6 
 
 Bank of Naples 11.6 66.6 16.1 32.8 34-5 
 
 Bank of Sicily 148 10.6 9.1 10.9 
 
 Bank of Norway 3-5 21.4 1.9 8.0 12.0 
 
 Bank of Netherlands 8.0 113.0 2.5 57-1 59-8 
 
 Bank of Portugal i4-6 74-5 29.3 13.7 26.5 
 
 (379) . 
 
8o The Annals of the American Academy 
 
 Capital. Circula- Deposits. Total Loans, 
 tion. specie. 
 
 National Bank of Roumania $2.9 $43.1 .... $15.0 $25.2 
 
 Imperial Bank of Russia 28.3 591.0 $109.8 455.9 208.3 
 
 Bank of England 70.8 146.8 280.3 187.8 156.8 
 
 National Bank of Servia i.i 6.6 .6 4.5 2.3 
 
 Royal Bank of Sweden 11.9 52.2 12.2 20.6 37.0 
 
 Total 20 banks $340-5 $3,567.6 $1,120.4 $2,525.6 $1,793.8 
 
 The foregoing, practically banks of issue and not of deposit, show de- 
 mand liabilities versus coin reserves, as compared to the national banks of 
 issue in the United States, as follows : 
 
 In Millions. 
 
 20 European 137 U. S. Nat'l 
 
 banks. banks. 
 
 Circulation outstanding $3,567.6 $517-9 
 
 Deposits 1,120.4 5,898.0 
 
 Total $4,688.0 $6,415.9 
 
 Coin reserves held 2.525.0 464.4 
 
 Mark the fact that the great issuing banks of Europe hold 54 per cent 
 of demand liabilities in coin, as against only 7 per cent in the United States. 
 
 Mark that, as records show, the total currency issues by all 
 the other great Eviropean banks of deposit on June 30, 1906, ap- 
 proximated but 150 millions of dollars, and when the charters of 
 the four German banks and those of Great Britain and Switzerland 
 expire, the right to issue currency by all of them being doomed, 
 there will be few left in Europe to issue currency except these 
 twenty great centralized banks and the new bank of Switzerland. 
 Do not the foregoing facts conclusively show that the progressive 
 European nations each have one great issuing bank, which might 
 be termed the governor to the engine, expanding and contracting 
 automatically without distrust, because they have immense coin 
 reserves and quick assets, and that the issue of credit or any other 
 kind of currency by small, independent banks has practically been 
 totally abolished all over Europe? 
 
 This result in Europe was evidently brought about through the 
 dear school of experience. Let us touch upon a few most salient 
 instances abroad. 
 
 (380) 
 
Diagnosis of World's Elastic Currency Problons 8i 
 
 France 
 
 John Law, nearly 200 years ago, after being turned down by 
 the keen Scotchmen, captured the French people with his plausible 
 populistic inflation scheme, and history tells us that France did not 
 recover from its terrible efifects for fifty years. The statesmen 
 of France, not content with the John Law experiment, in conse- 
 quence of business depression in 1789, instead of manfully waiting 
 for a natural return of better days, in response to the popular 
 clamor for "more money," sought to take a short cut to prosperity 
 by issuing heroic quack doses of fiat money for several years in 
 succession. Just as soon as the efifects of the first issues began to 
 show symptoms of a reaction upon business, another larger dose 
 was administered to the already staggering patient. 
 
 The statesmen of France, in most eloquent perorations — which 
 might be likened to some in these latter days — swayed the multi- 
 tude so far that the intoxication for assignats grew until nearly 
 40,000 millions of francs were outstanding in 1797, a sum aggre- 
 gating nearly three times our whole circulating medium to-day. 
 With one fell swoop the French nation repudiated the whole issue. 
 
 The Bank of France was organized in 1800 with about $6,000,- 
 000 capital, which at various times was increased, until to-day it 
 is about $35,000,000. It has power to issue notes with the fol- 
 lowing prerequisites, as dictated by Napoleon : "The notes shall be 
 covered either by coin held by the bank or by notes secured by 
 collateral or by notes signed by three responsible persons." A 
 strong efifort was made at that time to give the right of issue to 
 the banks generally in France, but Napoleon answered in sub- 
 stance, — It is easier to watch one bank of issue than it is to 
 watch great numbers. His logic exactly condemns the American 
 Bankers' Association plan to-day. What has been the result in 
 France ? The foregoing table shows : 
 
 Millions. 
 
 Circulation $908.8 
 
 Coin on hand is 88^ per cent of circulation 803.4 
 
 If we add the deposits of 189.1 
 
 to circulation outstanding, the bank still would show about 73 
 per cent of coin against all liabilities, as against 7 per cent for the 
 national banks of the United States. We must not forget also that 
 the $255.3 millions of loans are of a much more liquid character 
 
 (381) 
 
82 The Annals of the American Academy 
 
 than are those of the national banks generally throughout the United 
 States. 
 
 The Bank of France has been managed with such consummate 
 skill that even during the Franco-German war the depreciation of 
 its notes was only 4 per cent. It also during the past century ren- 
 dered invaluable aid by loaning coin to the Bank of England during 
 several crises in Britain. The bank, with its vast coin reserves and 
 quick assets has been enabled to loan freely to all solvent parties 
 under panic conditions, thus undoubtedly preventing panics at times, 
 and it has steadied the financial convulsions in France for a century. 
 The Bank of France has had the sole right of issue in France 
 since 1848. Its uncovered currency averages* about 120 million 
 dollars, which indicates no currency inflation in France as against 
 900 millions in the United States to-day. 
 
 England 
 
 The Bank of England was chartered in 1694. Although it 
 was of great value to mercantile interests in several financial crises, 
 yet as the bank had limitless authority to issue notes, and there 
 was no rule as to coin reserves from 1694 to 1844, at which date 
 Peel's Act "gave the Old Lady of Threadneedle Street the straight 
 jacket she has worn ever since," Bagehot, in his classic work 
 entitled "Lombard Street," says, "This unbridled authority was 
 in more than one instance used with the extremest unwisdom, so 
 that devastating panics followed hard upon the heels of the reck- 
 less speculation which too great facilities for borrowing had engen- 
 dered." Such dearly-bought experiences ought to warn us against 
 easy methods of inflation. English statesmen battled for a quarter 
 of a century with the subject of whether gold was at a premium 
 or a redundant quantity of Bank of England notes at a discount. 
 The question was finally settled in 1816 by the adoption of the pro- 
 found "Bullion Report of 1810." The integrity of her gold stan- 
 dard of payments has since been maintained with a fidelity that 
 commands the admiration and confidence of the whole world, to 
 the extent that London is the world's clearing house, and practi- 
 cally all the nations of the earth pay tribute to Britain. The para- 
 mount question to us is, how soon will New York City displace 
 London as the world's clearing house, if we keep on injecting more 
 non-standard currency into our already redundant currency issues? 
 
 (382) 
 
Diagnosis of World's Elastic Currency Problems S;^ 
 
 Under Peel's Act, the banks of Great Britain in 1844 were 
 restricted on issues of bank notes to the amount then outstanding 
 by the banks then existing. Seventy per cent of the right of issue 
 of those banks which have closed since 1844, ^i^s reverted to the 
 Bank of England, thus reducing the total uncovered issues allowed 
 to banks in general, all of which are subject to the unlimited 
 liability act as to note issues, to the small sum of approximately 
 i8,ooo,ooo, and has increased the issues of the Bank of England 
 since 1844 from £14,000,000 to about £18,175,000 based on securi- 
 ties. All other issues of the bank are covered with gold coin or 
 bullion, thus making, the notes practically gold certificates and giv- 
 ing the Bank of England the sole right of issue in Britain. The 
 total uncovered issues in Britain average about $120,000,000, of 
 which $90,000,000 are Bank of England notes based on govern- 
 ment securities. Scotch banks, so much harped about, can issue 
 but £2,676,350 uncovered notes. As extraordinary troubles require 
 extraordinary remedies, in order to ameliorate' some of the calami- 
 tous panic conditions which have overtaken Britain, history says, 
 the Bank of England in 1847, 1857 and 1866, after the panics had 
 paralyzed her progress, on the assurance of the government officials 
 that no prosecution would follow, suspended the bank act as to 
 issuing notes only on the deposit of a like amount of either coin 
 or bullion, and it issued notes to the banking department on deposit 
 by it with the issue department of ample securities. This was 
 an unlawful act, giving elasticity to the currency, but it placed 
 the banking department in an easy condition to "discount freely 
 to all solvent parties." Again, in 1838, the bank borrowed £2,500,- 
 000 from the Bank of France during panic conditions, and in 1890, 
 during the Baring troubles, she borrowed £3,000,000; besides 
 £2,000,000 from outside sources, and the panics were stayed. The 
 Barings failed for $105,000,000 and yet their indebtedness was 
 liquidated by the Bank of England with the aid of other local banks 
 without general suspension of cash payments as experienced in the 
 last months of 1907 in the United States. The apparent neces- 
 sity for these extraordinary acts was that the country had reached 
 a commercial crisis where good securities could not be sold for 
 cash. Suspension and consequent ruin were staring sound com- 
 mercial houses and banks in the face. 
 
 In each case the action of the bank afforded instant relief and 
 
 (383) 
 
84 The Annals of the American Academy 
 
 doubtless saved hundreds of millions of dollars to tottering houses 
 unable to meet payments except for uch relief. As soon as the 
 pressure was over the illegal issues were retired. 
 
 These unlawful acts were parallel to our clearing-house cer- 
 tificates, except that clearing-house certificates have but limited use, 
 whereas the Bank of England notes satisfy the insane demands 
 of frightened depositors and give sufficient elasticity to meet neces- 
 sary demands for loans to solvent parties so that the wheels of 
 commerce be not stilled. Should the Bank of England be legally 
 empowered to relieve extraordinary pressure on the same lines as 
 in 1847, 1^57 ^"d 1866 before paralysis takes place, the benefits 
 undoubtedly would be incalculable. Nearly all political economists 
 criticize this feature, which seems to be the only material defect, 
 without which the Bank of England would be ideal in practically 
 all respects. 
 
 Germany 
 
 With the exception of only four banks, which are allowed 
 to issue say eighteen millions of dollars of uncovered notes — and 
 these privileges are doomed — the Imperial Bank of Germany monop- 
 olizes that right. The bank is allowed to issue now about 
 $112,500,000 uncovered circulation under certain restrictions. Any 
 excess over that sum must pay 5 per cent interest per annum to 
 the government. This excess issue is the only true method by 
 which to obtain relief under panic conditions, as the interest rate 
 will certainly retire the redundant currency as soon as the pres- 
 sure for funds is over, thus preventing inflation. 
 
 It is a noteworthy fact that the Imperial Bank of Germany 
 has raised its discount rate to 7 per cent but once in thirty years, 
 except during our panic of 1907, when its rate was raised, to 
 yy2 per cent. It is also a noteworthy fact that during that 
 thirty-year period the bank issued such 5 per cent taxed currency 
 121 times as a relief measure under pressure. The Austro-Hun- 
 garian bank did likewise under similar conditions fifty-five times 
 in the past eighteen years. In the face of the fact that interest 
 rates are lower there than here, such 5 per cent taxed currency auto- 
 matically expands under pressure and contracts as soon as the 
 pressure is over, thus preventing inflation. This fact defies theory 
 and upsets the absurd claim that a high taxed currency imposes 
 
 (384) 
 
Diagnosis of JP^orld's Elastic Currency Problems 85 
 
 such a tax on commerce that banks will not use it. Germany's 
 uncovered currency averages say $150,000,000, which is a wide 
 contrast to our $900,000,000 and over to-day. 
 
 But enough. These details and the foregoing table are con- 
 clusive evidence that elastticity in Europe, by an evolutionary 
 process, has been achieved without producing distrust or inflation. 
 
 Issuing Currency is not a Necessary Banking Function 
 
 Further, it does not seem to be a necessary function of banks 
 generally in Europe to issue currency at all. As state and other 
 banks in the United States issue no currency, I assert the special 
 privilege ought to be abolished as to the other third, as soon as 
 the banks owning the abnormally low rate 2 per cent interest 
 bonds can obtain payment for them. Banks holding them run 
 great risk of material depreciation should the government for 
 any cause be compelled to issue large sums additional. Let the 
 United States sell its bonds strictly on their merits, as every 
 other nation does. This result ought to be brought about by 
 a slow evolutionary process, and under natural economic laws 
 the channels of circulation would automatically fill the vacuum 
 created with the world's standard — gold. Adam Smith gives an 
 illustration in point in his "Wealth of Nations" — "Money, like 
 wine, must always be scarce with those who have neither the 
 wherewithal to buy or the credit to borrow it. Those who have 
 either will seldom be in want of either the money or the wine 
 which they have occasion for, and a country that has where- 
 withal to buy gold or silver, will never be in want of those 
 metals." I am strongly impressed that the United States has 
 the wherewithal to buy all the gold and silver we need for a 
 basis of our circulating medium. If some of the poor sections 
 of our country are short on circulation, is it not because they 
 are also short on collateral or wherewithal to buy it? 
 
 The Lesson from American History 
 
 Let us turn to the United States without specific reference 
 to the disastrous results of continental currency in the eighteenth 
 century, which might be excusable, as the birth of the nation 
 was at stake. The "History of Banking in all Nations" says, 
 in referring to all banks of issue from 1739 to 1841, "The esti- 
 
 (385) 
 
86 The Annals of the American Academy 
 
 mated losses on their circulation were 18.1 millions of dollars." 
 Again, on page ^^y — under "Free and Safety Fund Banking in 
 New York State," "the notes of twenty-five of them were re- 
 jected, and all the safety fund notes were at a discount." Again, 
 "In December (1840), it was reported that few brokers would 
 buy the notes of any free banking association," "and the notes 
 of many of the safety fund banks of the interior are regarded 
 with great distrust." John J. Knox, in his history says that 
 from 1789 to 1864 "the probable losses to noteholders were 
 about 5 per cent per annum." Further, the circulating notes 
 of the state banks were subject to violent expansion in times of 
 confidence and sudden contraction when distrust occurred. The 
 runs on the banks were not made by the depositors (for they 
 were few), but by the noteholders. 
 
 The pages of these authorities, as well as many others, are 
 strewn with proofs of the sickening details of losses to noteholders, 
 caused by bank issues, some based on credit and others based on 
 various collaterals, clear through the eighteenth, and even past 
 the middle of the nineteenth century. Because much of the currency 
 issued during the latter period was secured by collaterals instead 
 of being a pure credit currency, the nineteenth century experiences 
 lessened materially the comparative losses to noteholders every- 
 where, but still they w-ere calamitous in results up to the end of 
 the "wild cat" days in the United States. Two generations have 
 passed since then wherein no man has lost a moment's sleep over 
 his absolutely secured national bank notes. We ought not to need, 
 like children, to be told to keep away from the fire. We ought to 
 profit by the experience of the past before trouble overtakes us 
 again. 
 
 That word "elasticity" is a sweet morsel to play upon the 
 credulity of an innocent public. It has worried the political econo- 
 mists of all ages. Its ghost still stalks forth in this enlightened day. 
 
 Panics and the Monetary Standard 
 
 All property was measured in depreciated currency in 1865, 
 when gold was 100 per cent premium and over. Then the premium 
 began to decline year by year, and all property in proportion, until 
 1873, by which time values had shrunk to about one-half of the 
 prices of 1865. This process undermined all prosperity and was 
 
 (386) 
 
Diagnosis of World's Elastic Currency Problems 87 
 
 the underlying cause of the panic of 1873. After specie payments 
 were resumed in 1879 confidence and prosperity revived with a 
 bound, and they have been forging onward and upward ever since 
 at a pace which has astonished the world. A campaign of education 
 has been constantly and successfully waged toward the establish- 
 ment of the world's standard — gold — upon an unequivocal founda- 
 tion. Distrust of our standard halted us from 1893 to 1896, when 
 the repudiators were repudiated, and since that date the Gold Stan- 
 dard Act of March 14, 1900, has been written into our statutes, 
 and thus the battle of the standards has been practically won. 
 There are two links missing to complete the chain. They are the 
 elimination of some of our redundant soft money issues, and the 
 adoption of some sound relief measure when panic threatens. 
 
 Since 1896, when confidence was restored as to the integrity 
 of our standard of value, the wave of prosperity has been almost 
 continuously rising higher and higher. Under the impetus of rapid 
 fortunes acquired by some Napoleons of finance since 1896, who 
 foresaw that a swelling tide of prosperity was at hand, the get-rich- 
 quick fever intoxicated the many. Nature has been generous in 
 her bounties to us, thus aiding in the development of the rising 
 tide. Another force has been the immense increase in the world's 
 production of gold for the past few years, which doubtless has 
 stimulated the activities and credit expansion of the whole com- 
 mercial world. 
 
 During this period our credit system has grown to collossal 
 proportions. As shown by official statistics, our banking power 
 has increased from 5,150 millions of dollars in 1890 to nearly 18,000 
 millions of dollars on January i, 1908, which nearly equals the 
 banking power of the rest of the world. The individual deposits 
 have more than trebled in that period, which largely represents 
 actual not fictitious capital. The gigantic general statistics of our 
 wonderful progress and present condition are too numerous and 
 too well knov/n to repeat. 
 
 During the past ten years our circulating medium has doubled 
 in quantity (from 1,500 to 3,000 millions of dollars), until, as a basis 
 for this mighty superstructure of credit, we hold the following 
 amounts of the world's standard of value, that stands through storm 
 as well as sunshine: 
 
 (387) 
 
88 The Annals of the American Academy 
 
 Table No. 2. 
 
 In gold coin, say $1,600,000,000 
 
 In addition we have : 
 
 In silver (say one-half fiat) about 700,000,000 
 
 Legal tender notes 346,000,000 
 
 National bank notes, about 690,000,000 
 
 $1,736,000,000 
 
 By way of comparison with the most progressive nations, 
 permit the following approximate : 
 
 Table No. 3. 
 
 In Millions. 
 
 Gold. Silver. Uncovered Per capita 
 
 currency. circulation. 
 
 United States holds $1,600 $700 $900 $35-5o 
 
 Great Britain holds 559 "7 "6 18.08 
 
 France holds 1,032 400 120 39.94 
 
 Germany holds 917 200 180 22.18 
 
 This table shows the United States has nearly as much silver 
 as Great Britain, France and Germany combined, and more than 
 twice as much uncovered currency as all combined. It also shows 
 a per capita circulation almost equal to that of France, where cash 
 instead of checks is used much more extensively than here. This 
 per capita circulation is also so far in excess of either Great Britain 
 or Germany that the redundancy of our currency must be apparent 
 to all. 
 
 The Barometric Signal 
 
 In view of all these facts, even before the explosion caused by 
 the wild speculation and pyramid banking of the Heinze, Morse, 
 Thomas, etc.. outfit ; in view of the fact that a high interest rate 
 the world over is the sure barometric signal that the great pyramid 
 of credit has grown beyond the limits of prudence ; in view of the 
 handwriting upon the wall as recorded by all the standard author- 
 ities on political economy that optimism had outrun conservatism, 
 and that the primary cause of our troubles is over-speculation, I will 
 only quote in proof from one standard authority. Professor Sum- 
 ner, in his "History of American Currency," tersely sums up the 
 case as follows : "Over-speculation is speculation which outstrips 
 
 (388) 
 
Diag)iosis of World's Elastic Currency Problems 89 
 
 the capital of the country ;" further, "When we lose our heads in 
 the intoxication of our own achievements, look on currency antici- 
 pations, which are only fictitious capital, as if they were real, use 
 them as already earned, build other expansions upon them, then 
 we bring a convulsion and a downfall ; some time or other a liqui- 
 dation must come: . . . then credit breaks down and there 
 must be a settlement, a liquidation, a dividend, a new start," I say, 
 in view of all these facts, I cannot understand why the powers that 
 be in the great American Bankers' Association, who ought to be the 
 leaders in conservatism, should undertake to bring about a senti- 
 ment to commit this country to eighteenth century fiatism again, 
 by the issue — on top of our vast volume of soft money issues — of 
 over two hundred million dollars of asset or credit currency, as a 
 starter only, according to one of the most aggressive advocates, 
 with only 5 per cent secured and 95 per cent fiat, under the plea 
 of providing an elastic currency to move the crops, notwithstanding 
 crops could not move faster, as transportation facilities have been 
 taxed to their utmost for years. Who wants to move the earth 
 to-day and lie idle to-morrow? 
 
 The American Bankers' Association Plan 
 
 The American Bankers' Association plan, boiled down and put 
 in cold type, can fairly be diagnosed in this way : 
 
 (i) National banks (none others need apply), big and little, 
 in city or country, can indite a letter as follows : 
 
 Comptroller of the Currency, 
 Washington, D. C. 
 
 Please send to this bank the $25,000, $50,000 or $100,000 
 of asset or credit currency to which it may be entitled; keep 
 5 per cent of it on deposit as collateral security; express the 
 other 95 per cent to us, and we will return the same to you at 
 our pleasure, plus 2% per cent per annum. 
 
 Very respectfully. 
 
 Cashier. 
 
 (2) The Comptroller of the Currency shall designate numer- 
 ous redemption cities conveniently located in various parts of the 
 
 (389) 
 
go The Annals of the American Academy 
 
 country. Through the agency of the banks in such cities ade- 
 quate facihties shall be provided for active daily redemption of 
 credit notes. (The advocates of this redemption plan now admit 
 it impractical, so no answer to it is necessary.) 
 
 (3) A bank (credit) note is essentially the same in principle 
 as a deposit payable on demand. This is an amazing conclusion. 
 Political economists say, "Coined credit" in the shape of I O U's. 
 issued by banks is fictitious capital. A deposit generally repre- 
 sents actual capital, so no further argument on that point seems 
 necessary. 
 
 In reply to the foregoing I issued the following five chal- 
 lenges in a debate before the State Bankers' Association of Minne- 
 sota in July, 1907, in response to John L. Hamilton, ex-President 
 of the American Bankers' Association, who advocated the Amer- 
 ican Bankers' Association plan, to wit: 
 
 (i) I respectfully challenge any member of the currency com- 
 mittee or any advocate of asset currency to point to a single pro- 
 gressive country on the earth where small, independent country 
 banks are allowed to issue currency backed by only 5 per cent 
 collateral, the remaining 95 per cent of such currency being purely 
 
 fiat. 
 
 (2) I challenge any man to prove that easy methods of issuing 
 currency have not been discarded in all progressive nations. 
 
 (3) I challenge any man to disprove the fact that, with but few 
 exceptions, where charters have not expired, in all progressive 
 nations, only great centralized banks, with very large reserves and 
 rigid restrictions as to loans, are allowed to issue currency at all, 
 and the right to issue is limited under rigid restrictions referred to 
 later. 
 
 (4) I challenge any man to prove that the method of redemp- 
 tion proposed — which the asset currency advocates claim as the 
 crucial test of success or failure — has any parallel on earth, or 
 afifords any practical assurance that it will work under our bank- 
 ing system. 
 
 (5) I challenge any man to prove that "a. bank note is essen- 
 tially the same in principle as a deposit payable on demand," or 
 that "it resembles in character ... a current deposit liability 
 of the bank." 
 
 (390) 
 
Diagnosis of World's Elastic Currency Problems 91 
 
 After the debate what was the verdict of the Minnesota jury? 
 The answer is found in the condemnation of the American Bank- 
 ers' Association plan, as will be seen by the passage of the follow- 
 ing resolution unanimously : 
 
 Whereas, The prosperity of our country is due in a large measure to 
 the absokite confidence of our people in our present currency, be it 
 
 Resolved, That while we are strongly in favor of some well-secured 
 method to relieve monetary stringencies that will not produce inflation, yet 
 we are unalterably opposed to any plan or change in our currency that does 
 not afford absolute security ; hence we do not look with favor upon the plan 
 proposed by the American Bankers' Association committee. 
 
 Later, after listening to John Perrin, President of the Ameri- 
 can National Bank of Indianapolis and member of the association 
 currency committee, in favor of its plan, the State Bankers' Asso- 
 ciation of Wisconsin passed the same resolutions with only two 
 dissenting voices. Still later, — after the meeting of the American 
 Bankers' Association at Atlantic City, when, with practically an 
 empty house and under discreditable conditions, the plan was 
 apparently endorsed, — the State Bankers' Association of Indiana, 
 after a full debate on the same subject, where O. A. Watts, Presi- 
 dent of the First National Bank, of Nashville, Tenn., took the afifir- 
 mative, and I had the honor of the negative side, notwithstanding 
 a strong effort to table the resolutions by able representatives of 
 the American Bankers' Association, the Hoosiers turned down the 
 plan by indorsing in full the same resolutions. 
 
 These facts, representing the judgment of bankers when a fair 
 hearing could be had, indicate clearly that the banks of the country 
 generally are against fiat money. The committee of the American 
 Bankers' Association evidently doubted the soundness of their own 
 proposition, as is evidenced by the self-indictment contained in the 
 following quotation taken from the Atlantic City currency com- 
 mittee reported to the convention : 
 
 In all our recommendations principle has, to a greater or less degree, 
 been subordinated to practicability. We have recommended, not what we 
 believe, in the light of experience and existing conditions, to be best for the 
 interests subserved, but what, in the light of existing political conditions, 
 we believe to be attainable, not what was best, but what we might reasonably 
 hope to obtain. 
 
 (391) 
 
92 The Annals of the American Academy 
 
 President Roosevelt's Opinion 
 
 President Roosevelt clearly grasps the essential weakness of 
 the plan, as will be seen in the following quotations from his last 
 message to Congress, when he refers to the absorbing currency 
 question : 
 
 We need greater elasticity in our currency; provided, of course, that 
 we recognize the even greater need of a safe and secured currency, . . . 
 Provision should be made for an emergency currency. The emergency issue 
 should, of course, be made with an effective guaranty, and upon conditions 
 carefully prescribed by the government. Such emergency issue must be based 
 on adequate securities approved by the government and must be issued under 
 a heavy tax. This zvould permit currency being issued when the demand for 
 it zvas urgent, ivliile securing its retirement as the demand fell off. 
 
 The Aldrich Bill 
 
 And now comes the Finance Committee of the United States 
 Senate with a bill, in all its essential features, demanding absolute 
 security for all issues to prevent distrust; with such a high tax — 
 6 per cent — as will bring such currency out only under stress, and 
 will surely retire it as soon as pressure is over, thus preventing 
 further inflation. These essentials seem to be ignored under the 
 American Bankers' Association plan, because, imder it, the currency, 
 if issued, would be practically unsecured and would still further 
 inflate our circulation. 
 
 The American Bankers' Association plan undoubtedly would 
 arouse distrust in the minds of the masses, especially in troublous 
 times, when it is of paramount importance to allay distrust. When 
 panic is on, as the asset currency advocates claim a deposit is the 
 same thing as asset currency, and local depositors are clamoring for 
 cash, why will not eighty million holders of such currency demand 
 coin on their notes, thus more than doubling our troubles under 
 panic conditions? This is exactly what occurred in fiat money 
 days. Taint our currency issues with a breath of suspicion, and 
 our prosperity will be undermined as by an insidious disease. Even 
 the first lien on assets, which would make the currency secure, but 
 which would rob the depositors, is eliminated under this plan, thus 
 increasing general distrust. Again, as the quick redemption theory 
 will not work, which is now admitted by asset currency advocates, 
 does any sane man believe that any bank in the United States 
 
 (392) 
 
Diasnosis of World's Elastic Currency Problems 93 
 
 with a right to issue asset currency, practically without collateral, 
 paying only 2>^ per cent per annum for the use of it, in the face 
 of a 6 to 10 per cent interest rate clear through 1907, would not 
 have kept out the whole permissible amount for the profit in it, 
 thus stretching the rubber currency to the limit. Under such con- 
 ditions the reservoir would have been empty when the panic of 
 1907 struck us. Would not the very object sought, relief under 
 panic conditions, be defeated? The result would simply spell in- 
 flation, and inflation spells disaster. Such currency would ex- 
 pand, but not contract. The currency committee seems to have lost 
 sight of the fundamental principle of Gresham's law. Britain, after 
 a campaign as long and as bitter as ours over the Gresham Law, 
 and the expulsion of her gold by the injection of too many bank 
 notes into her circulation, unequivocally adopted the gold standard 
 in 1816. The integrity of that standard, as against the uncertainties 
 of other national standards, has been maintained with a fidelity that 
 commands the confidence of the whole world to such an extent 
 that London has long been the world's clearing house. Will New 
 York soon win that position if we inject an additional quantity of 
 inferior currency into our circulation? 
 
 A wise man buildeth his house upon a rock, but the foolish 
 man upon the sand. When the rain descends and the floods come 
 and the winds blow, the wise man's house falleth not, but as to 
 the foolish man's house, great is the fall thereof. Is not this a 
 perfect simile to apply to the building up of the superstructure of 
 our credit system upon a sound metallic currency for a founda- 
 tion as against the shifting sands of a credit currency? The pages 
 of history are strewn with proofs that when the great instrument 
 of exchange is deranged, all trade, all industry, is stricken as with 
 a palsy. That instrument of exchange recognized by the world as 
 the solid foundation that does not totter when the storm rages in 
 its severest intensity, is the only foundation for a prosperous people 
 to rest upon and to-day our coffers hold sixteen hundred million 
 dollars of it. This is a billion dollar country, and we need these 
 resources. This gold has come to us since 1873 in the natural 
 course of trade, in response to the well-known principles of the 
 Gresham law and monetary science, as expounded by Adam 
 Smith, Ricardo, Jevons, Sumner and many other eminent econo- 
 mists, and as also clearly set forth in what Professor Sumner dubs 
 
 (393) 
 
94 The Annals of the American Academy 
 
 the most important document in financial literature, "The Cele- 
 brated Bullion Report of 1810 to the House of Commons." I 
 have quoted these maxims before, but deep-seated error requires 
 repetition of them again and again. Summed up these principles 
 are: 
 
 (i) The cry of all ages is for "more money." 
 
 (2) Rich countries will have all the coin they need, providing 
 no impolitic act of legislation mterferes to force it out of circula- 
 tion by the injection of inferior currencies. 
 
 (3) When the coin in any country exceeds the effectual de- 
 mand, no vigilance of government can prevent its exportation, 
 
 (4) It is the province of government to settle the quality ques- 
 tion of money, and the needs of commerce will settle the quantity. 
 
 In proof of the above maxims, history says, Chinese walls, jails, 
 shot guns or hanging did not prevent exportation of coin, and in 
 these modern days the object lesson of the exportation of more than 
 thirty millions of gold in May and June, 1907, in the face of high 
 interest rates and the plea of the asset currency advocates for 
 "more money in the United States," is more potent than pages 
 of logic. Let us fix the "quality" question and stop tinkering with 
 the "quantity," as the needs of commerce will settle that. 
 
 With over 1,700 million dollars of soft money in the United 
 States to-day, would not the injection of 200 to 300 millions of 
 inferior asset or credit currency drive the same amount of gold 
 out under the Gresham Law, thus undermining our metallic foun- 
 dation for our great credit superstructure? Let us bend our ener- 
 gies to increase our metallic foundation and reduce our redundant 
 soft money issues, if we would avoid trouble as far as human in- 
 genuity can accomplish it. The only true remedy to compel con- 
 servatism is to penalize over-expansion of credit, instead of adding 
 an unsecured asset currency stimulant. Throw a life line out to the 
 over-confident, and he will be swimming beyond his depth con- 
 tinually. 
 
 Asset Currency Fallacies 
 
 The asset currency advocates are continually referring to the 
 Canadian and Suffolk systems, also isolated cases in Indiana, Louis- 
 iana, Iowa and other states, as parallel to our conditions. Their 
 arguments are as full of holes as a skimmer, and so-called parallels 
 
 (394) 
 
Diagnosis of World's Elastic Currency Problems 95 
 
 are as closely related as the Equator is to the North Pole. They 
 are also continually quoting general European branch banking 
 methods as systems for us to adopt. I stand with the masses of 
 bankers of the country against a few great central banks owning all 
 the banks of the country, because under that system, the branches 
 practically pay no taxes where they are located ; there is no real board 
 of directors ; few, if any, stockholders to whom dividends would be 
 declared; in short the system simply skims the cream from the 
 country towns to enrich the exchequers of the great centers, as is 
 conclusively proved by the abnormally large profits made by the 
 great central banks owning such branches. 
 
 A National Reserve Bank 
 
 As our independent banking system has worked wonders in 
 the upbuilding of our hamlets and cities ; as the quality of our 
 money is unquestioned, and the quantity more than ample for nor- 
 mal conditions ; as Europe has more nearly solved the "Elastic 
 Problem" with fewer objectionable features than any plan yet 
 suggested ; why cannot we reject as entirely unnecessary the gen- 
 eral branch banking feature, continue, if thought best, the United 
 States sub-treasuries, with modifications as to cash holdings, and 
 bring about elasticity through a national reserve bank. Such a 
 bank would be owned by the banks of the country, and thus the 
 profits would be theirs. 
 
 The capital stock might be $50,000,000 and be taken in sirms 
 of not to exceed 5 per cent of the capital of each subscribing bank, 
 to prevent monopoly. The Comptroller of the Currency, Secretary 
 of the Treasury and United States Treasurer should be members 
 of the Board of Directors. The National Reserve Bank, if such 
 we mav call it, might have authority to issue up to $250,000,000 of 
 national bank notes, as an experimental limit, under a tax of 6 
 per cent to drive it home as soon as pressure is over. 
 
 Again, under strained conditions, or when frightened depos- 
 itors are demanding cash, and solvent merchants and manufac- 
 turers are calling for loans to pay bills and keep the wheels of 
 commerce from being stilled, where is the banker that will not 
 temporarily provide cash, if possible, at 6 per cent or even a higher 
 rate, if necessary, instead of slaughtering sound securities in a 
 hard market? Do not many bankers when capital demands exceed 
 
 (395) 
 
Cjd The Annals of the American Academy 
 
 supply, get rediscounts now, and is much comment made unless 
 rediscounts become excessive? 
 
 No interest should be paid upon deposits, nor should loans 
 be made upon stocks, thus giving no aid to the stock gambling 
 element. Such issues should be loaned only under conservative 
 restrictions on quickly convertible securities. I believe if such a 
 bank had been open in October, 1907, the patiic with its train of evils 
 might have been avoided, because the gamblers who were the 
 cause of the outbreak could have been refused aid and thus have 
 been weeded out as a future menace. The sound and solvent banks 
 of New York could have been furnished with all the cash needed, 
 because they have ample sound collateral. The country calls for 
 balances in New York could have been promptly met with cash. 
 Suspension of cash payments then would not have been necessary, 
 and the result would have been that the whole country would not 
 have been compelled to restrict cash payments nor to issue clearing- 
 house certificates. 
 
 On the other hand, if the American Bankers' Association's 
 23^ or 3 per cent currency plan had been authorized last winter, 
 the full limit would have been out for the profit in it when the 
 panic struck us. The National Reserve Bank plan will accomplish 
 the object sought in an absolutely sound manner; it will checkmate 
 locking up cash, as was done some months ago by a "bear" to the 
 extent of $5,000,000 in an attempt to bring on another Black Friday 
 onslaught. The banks of the country will not hoard money in 
 excess of needs, because they will know relief is at hand if needed. 
 
 It will not lead the bankers of the country generally to further 
 expand their credit and thus feed the fires of speculation which 
 have already gone beyond the. limits of conservatism. It will not 
 drive gold out of the country under Gresham's Law by the injec- 
 tion of any more inferior currencies, which must be avoided if our 
 standard of values is to be maintained, and if New York City 
 is ever to become the world's financial center. It will furnish 
 cash at times when necessary to move the crops, or under panic 
 conditions to loan to all solvent parties, that the wheels of com- 
 merce be not stilled and general paralysis result. The rate of 
 interest will automatically drive home the extra issues as soon 
 as confidence is restored ; inflation will not result and the machinery 
 will be ready for the next urgent call; 10, 20, 50, 100 per cent 
 
 (396) 
 
Diagnosis of JVorld's Elastic Currency Problems 07 
 
 money will be unknown ; the Secretary of the Treasury will heave 
 a sigh of relief from pressing importunities ; every bank in the 
 country, whether national, state, private, savings or trust company, 
 will, directly or indirectly, get relief if entitled to it. In the matter 
 under discussion clearly the trend of all progressive countries is 
 toward the concentration of the power to issue currency. 
 
 If this plan cannot be accomplished, then the plan brought out 
 by the Senate Finance Committee, as a modification of Treasurer 
 Treat's plan, will accomplish the relief sought, by the issue of 
 extra currency amply secured to prevent distrust, with a tax suffi- 
 ciently high to prevent inflation. These requirements are the main 
 essentials. 
 
 A third plan, which would accomplish the relief sought, would 
 be the issue of currency based on clearing-house certificates, such 
 as have been lately issued. Such certificates should be deposited 
 with the United States Treasurer as security for such issues. It 
 is cash that fills demands and kills panic. 
 
 I prefer the central bank plan, because the machinery works 
 smoothly and automatically, more so than under the second plan, 
 and much more so than under the third. All three are sound, and 
 infinitely better than asset currency, which will only produce dis- 
 trust and inflation. Confidence upbuilds, distrust destroys. States- 
 manship alone should reign. Whatever plan is provided, our stan- 
 dard of value should never be tarnished, because distrust breeds 
 panic. On the contrary our currency should be above suspicion, 
 that confidence, the great bulwark of all progress may be ours 
 to the fullest possible extent. 
 
 (397) 
 
PANIC PREVENTIONS AND CURES 
 
 By Henry W. Yates, 
 President Nebraska National Bank, Omaha, Neb. 
 
 The United States has periodically been afflicted with financial 
 cataclysms, popularly called "panics." They have marked turning 
 points in trade and development, where prosperity and "good times" 
 have given place to liquidations and "hard times." 
 
 Other countries have not experienced these almost regular 
 revulsions, and from this fact it may be inferred that they are 
 unnecessary here. Wild and speculative business enterprises and 
 dishonest or reckless banking and trading cannot be entirely pre- 
 vented or guarded against, but their effects ought to be confined 
 to the interests directly concerned, and not permitted to affect 
 entirely distinct and different affairs. And, on the other hand, the 
 peculiar character of our business operations — their great and vary- 
 ing magnitude, moving forward at one time with astonishing ra- 
 pidity and then subsiding with equal suddenness — clearly shows 
 that the conditions here are very different from the staid and 
 orderly movements in the business of the old world. 
 
 Panics or trade revulsions, therefore, may be unavoidable with 
 us at some periods, or at some stage of business progress. Those 
 which have occurred in the past can be clearly explained by natural 
 causes, and it therefore may be believed that no panic of the char- 
 acter described can occur unless there is some natural cause or 
 explanation for it. 
 
 In the present disturbance there does not seem to be a single 
 natural cause to account for its occurrence. We have had no crop 
 failures — that prolific cause for financial depression. On the con- 
 trary, our crops of all kinds have been unusually good and the 
 prices of farm products taken together have never been better. 
 The reduction of farm mortgages in the West and the growth of 
 bank deposits in rural communities indicate remarkable strength in 
 material wealth. 
 
 Our mines for both the precious metals and the crude products 
 have been operated to their fullest capacity with the largest pro- 
 
 (398) 
 
Panic Preventions and Cures 99 
 
 duction ever known, our factories and mills have been unable to 
 fill their orders, and business of all kinds has been expanded 
 apparently upon safe and conservative lines to an extent never 
 before known. Immigration of laborers from Europe has been 
 enormous, exceeding any period in our history, and yet all classes 
 of labor have been fully employed at good wages. This situation 
 is in strong contrast to 1892 or thereabouts, when Coxey's army of 
 the unemployed marched on Washington. Judging from these and 
 many other facts, it may well be doubted if this is a panic similar 
 to those which have formed such memorable epochs in our national 
 history. 
 
 It may prove to be more of the character of the spasms which 
 occurred in 1884 and 1890 and which have never been dignified 
 with the name of panics. Those who believe in the mysterious 
 theory of cycles must take notice of the fact that from 1857 to 
 1873 is sixteen years — while from 1873 to 1893 is twenty years, 
 indicating what would be expected, a lengthening and not a short- 
 ening of the periods ; counted in this way, the real crisis is not due. 
 But whether this is so or not, the situation is sufficiently serious to 
 call for the closest consideration. It proceeds apparently from 
 impulses in trade and commerce of annual recurrence, which only 
 need some special exciting cause to make them full of the gravest 
 possibilities. 
 
 If the trouble is due to some weakness in our banking estab- 
 lishment — if it is something that legislation can remedy — then 
 surely the needed legislation can be obtained. But until those 
 credited as experts in finance can agree among themselves upon 
 some plain and definite corrective procedure, instead of advancing 
 all kinds of revolutionary schemes — using the situation as a club 
 to advance them — it should not be a matter of surprise that public 
 sentiment cannot be roused in favor of the so-called reforms, and 
 legislators will be slow to adopt any of the schemes proposed. 
 
 Causes of Disturbance 
 
 The present disturbance has originated in New York. This 
 is no reflection upon New York. That city is the heart of our 
 financial system. We must look to it for all that is good in it, and 
 it would be singular if anything bad should not also be evolved and 
 developed there. 
 
 (399) 
 
lOO The Aiuials of the American .Icadeiny 
 
 We must go back at least as far as April, 1903, when the great 
 stock panic occurred, to discover the determining cause of the 
 present situation. The extent of the drop in prices at that time and 
 immediately following is indicated in the quotations of three first- 
 class railroad stocks, which are selected as ones that would be the 
 least affected by any depression : 
 
 1902. April, 1903- Subsequently 
 
 in 1903. 
 
 New York Central 168/^ 1281^ 1125^ 
 
 Pennsylvania i/o 132^^ iioi/4 
 
 Chicago and Northwestern 271 174 153 
 
 The average loss indicated by the above figures which must 
 be less than the average of all the stocks dealt in, if applied to the 
 aggregate of all stock listed, would reach a sum that would dazzle 
 the mind. It was a real shrinkage in apparent wealth, although the 
 fall occurred without regard to net earnings and dividends which 
 underwent no decrease. During the following years there was 
 more or less recovery, but nevertheless the New York money 
 market was seriously affected by the great capital loss shown in 
 the depreciation of stocks and has been in a sensitive condition 
 ever since. The same stocks have now fallen as low as 91 >^, I03>^ 
 and 126 respectively. 
 
 The reasons advanced for the tremendous fall in stocks and 
 bonds have been various. Many influences may of course have had 
 their bearings, but there is one fact which is undeniable, and is 
 sufficient of itself to account for it. This has relation to the 
 capital supply. 
 
 The productive resources of this country have been so enor- 
 mous that capital sufficient to carry through almost any enterprise 
 or undertaking, no matter how many millions or even hundreds 
 of millions were involved, seemed at hand for the asking. It is a 
 matter of wonder and bewilderment to the ordinary thinker where 
 all the capital has come from to swing the enormous undertakings, 
 which have been planned and carried through to successful termina- 
 tion during the last decade. 
 
 Notwithstanding these vast expenditures of the past, still 
 vaster ones are planned for the future. A French financial writer 
 has recently called attention to these tremendous proposed outlays 
 of capital. He estimates the annual requirements of the United 
 
 (400) 
 
Panic Preventions and Cures loi 
 
 States alone as $2,500,000,000.00, while our national income he 
 says does not amount to one-third of that sum. He also shows 
 that these extraordinary demands to be made upon capital are not 
 confined to the United States, but extend in growing volume all 
 over the world. Within the past decade the losses or wastes of 
 capital have also been enormous. In this country we have had the 
 Spanish War and San Francisco fire, while Europe has had to 
 finance the Boer and Russo-Japanese Wars — the latter estimated 
 alone at three billions of dollars. 
 
 The question of capital is, therefore, of world-wide application. 
 There must be a limit to the available supply, but the strain upon 
 the supply can only be developed in the course of events and can- 
 not be easily anticipated. It will of course be shown in the rise 
 of the interest rate. When new securities are placed upon the 
 market upon more advantageous terms for the lenders than previous 
 offerings, the price of the latter will naturally fall, and continued 
 drains upon the capital supply must have the same effect in 
 raising the interest rate that the ordinary law of supply and demand 
 under similar conditions has upon the price of commodities. There 
 is quite a difference in the value of a long-time security figured 
 upon, say, a 3}^ per cent basis and at 5 per cent or more. It is 
 therefore quite clear that the depreciation in stocks and bonds 
 caused enormous losses to their holders, and the effects of such 
 losses would also be evidenced in the money dealings. The direct 
 effect it had upon the banking business in New York is shown in 
 the loss in bank deposits. The statements of the national banks for 
 August 22d this year, compared with same period in 1906, showed 
 a loss for the New York City national banks, in individual deposits 
 alone, of $126,000,000.00, while the banks in the country outside 
 of New York had gained $245,000,000.00. 
 
 The Panic 
 
 The exposures of the methods pursued in the Heintze and 
 Morse banks, the troubles of the Mercantile and connected national 
 banks, and runs on the trust companies, culminating in the closing 
 of the Knickerbocker Trust Company, were sufficip'-'t to cause the 
 excitement which followed and rendered imperative the suspension 
 of currency payments by the New York banks. But this action 
 undoubtedly led to withdrawal of capital from active use in another 
 
 (401) 
 
102 The Annals of the American Academy 
 
 manner to a far greater extent than was indicated by the bank runs. 
 The suspension in New York, followed by similar action in all of 
 the reserve centers, was a severe shock to bankers everywhere. 
 The dread specter of bank runs possessed their minds, and a craze 
 to accumulate currency became a feature with nearly every bank 
 in the country. This action on the part of the country banks was 
 entirely natural and cannot be properly criticized. It is the almost 
 inevitable result of an erroneous banking system. When New 
 York is afflicted with a greatly depleted capital supply and cur- 
 rency is demanded to satisfy depositors, relief in time will be 
 obtained from London and other parts of the world and from the 
 United States Treasury, if it has any funds that can be deposited. 
 But the interior banks are in an entirely different position. Having 
 nothing to expect in the way of aid if needed from New York or 
 other clearing-house centers, they must rely solely upon them- 
 selves. Self-preservation is the first law of nature, and they must 
 accumulate all the currency possible in the expectation of a con- 
 tingency which may never materialize, but the fear of which is as 
 real in its effects as if it were an actuality. 
 
 The reserves not only of the country banks, but of all banks, 
 with few exceptions, everywhere, will be shown by the reports of 
 December 3d to be increased anywhere from 25 per cent to 50 per 
 cent over what they were on August 22d, and they were excessive 
 at that date. A contraction of active capital to this extent within so 
 limited a time must be of ominous portent to the business of the 
 country. 
 
 Temporary Cure 
 
 An emergency circulation of the character of that recom- 
 mended by President Roosevelt would without doubt be effective 
 as a temporary m-easure. The problem involved is a simple one. 
 In some manner the capital withdrawn by frightened banks and 
 bank depositors should be returned to circulation. The difficulty 
 is that it will come too late to serve the present disturbance. It 
 will take too long a time to enact the law and prepare the notes 
 to be circulated. The lesson, however, ought not to be lost even 
 if the measure should not become effective until a like disturbance 
 occurs in the future. It can plainly be seen that if an emergency 
 circulation had been at hand for immediate use, the present crisis 
 
 (402) 
 
Panic Preventions and Cures 103 
 
 would have been controlled at its inception, to the great gain of 
 the country at large, and at no expense or risk to the public. On 
 the contrary the public revenue would have been increased from 
 the tax collected. 
 
 There should not be any disagreement as to the particular 
 method to be adopted. The object of the emergency issue is to 
 relieve the business situation, and it is especially intended for those 
 banks carrying the loans of manufacturers and dealers, so that 
 these may not suffer too severely from the sudden contraction of 
 loanable funds. 
 
 If it is based solely upon approved municipal or corporation 
 securities, it will be of special benefit to the owners of such securi- 
 ties, and of only indirect benefit to the interests to be served. 
 Clearing-house loan certificates, secured by a pledge of actual 
 commercial securities guaranteed by strong banks, would seem to 
 be the most acceptable security for the purpose. The aid would 
 then be given exactly where it is needed, and the certainty of the 
 retirement of the notes within a reasonable time would also be 
 secured. Emergency circulation, however, is only an expedient 
 to relieve a condition which ought to be of almost impossible 
 occurrence. 
 
 Asset Currency 
 
 The peculiar weakness of our banking system has long been 
 recognized and commented upon, but the plans suggested for its 
 reform have almost uniformly favored the issue of uncovered bank 
 notes, generally called "asset currency." The weakness referred 
 to has been almost annually demonstrated — first a period of redun- 
 dancy then one of stringency, frequently accompanied by panicky 
 conditions. These varying circumstances are explained by many 
 as due to defects in our currency system. It is asserted that our 
 money is not elastic as it should be; that it does not expand and 
 contract with the demands of trade, and that in these respects our 
 currency is different from that used by other great commercial 
 countries, and hence tlie difference between the operations of their 
 money market and ours. To cure these defects, it is insisted 
 that authority should be given the national banks to utilize their 
 credit, or, as has been said, to "coin their credits," by the issue of a 
 
 (403) 
 
104 ^^^^ Annals of the American Academy 
 
 certain amount of bank notes without the security of government 
 bonds, or, in fact, without any pledged security. Judged by the 
 amount of brains exercised, and energy, as well as money, expended 
 during the past ten years in the furtherance of these views, it 
 would seem that some decided, favorable impression would have 
 been made upon the public mind. Doubtless many views have 
 been molded by what appears to be the unanimous conclusion of 
 financiers and money experts who have given the subject special 
 consideration. The American people, however, will go slow in 
 accepting these conclusions. The money question is not the 
 peculiar cult of a class, but, thanks to the education of the political 
 campaigns in recent years, it is one open to all classes, and espe- 
 cially business men, who will instinctively refuse support to meas- 
 ures which involve change — and perhaps radical change — in the 
 foundation of all business enterprises. 
 
 The arguments offered in favor of the scheme are also not 
 sound or convincing, and some misconceptions conveyed concerning 
 other currency systems can be easily corrected. 
 
 The quantity and character of our money supply on November 
 I, 1907, were as follows: 
 
 Gold coin and bullion $1,561,714,719 
 
 Silver dollars 568,249,982 
 
 Subsidiary silver 136,201,145 
 
 U. S. notes 346,681,016 
 
 National bank notes 656,218,196 
 
 $3,269,065,058 
 
 Population 86,666,000, per capita $37-72 
 
 Compared with other countries : 
 
 Great Britain, per capita 18.02 
 
 France, per capita 39-94 
 
 Germany, per capita 22.13 
 
 The total volume of money in Great Britain is $787,600,000, 
 which is only about one-fourth of ours, and yet with this supply 
 she manages not only her own finances, but those of a great part 
 of the world. 
 
 The per capita comparison is still more startling for that por- 
 tion of our circulation dependent upon gold for its parity therewith : 
 
 (404) 
 
Panic Preventions and Cures 105 
 
 U. S. notes and national bank notes $1,002,899,212 
 
 Deduct gold reserve 150,000,000 
 
 Total uncovered $852,899,212 
 
 United States, per capita $984 
 
 Great Britain, per capita 2.67 
 
 France, per capita 302 
 
 Germany, per capita 3-53 
 
 If we add to our uncovered currency, silver certificates $464,- 
 349,568, which are also dependent upon gold, the per capita is 
 increased to $15.20. 
 
 These comparisons show that we have the largest volume of 
 money of any country in the world, and that, with the exception of 
 France, which we nearly equal, we have the largest per capita. 
 Our uncovered paper has a per capita more than three times that of 
 any other country, not excepting France. This apparent over-abund- 
 ance of money is admitted by those who urge the asset currency 
 scheme. One of the members of the American Bankers' Associa- 
 tion has this to say : 
 
 "Commerce really suffers more in the long run from periods 
 of over-abundance of our present circulation than from those of 
 scarcity. The origin of each recurring period of tight money can 
 be traced to preceding periods of easy money. When the maximum 
 demand for currency occurs, so much of it is required that the 
 banks with difficulty maintain their legal reserves, but when the 
 demand is at its minimum, the currency accumulates in their vaults 
 and they resort to forced loans, inflated credits, cheap rates and 
 other artificial methods to keep it employed and earning some- 
 thing." 
 
 If it is as this writer states, the excessive quantity of our 
 existing currency which causes the over-abundance of loanable 
 funds at certain periods, in what manner can that situation be 
 improved by an addition to that quantity ? 
 
 Will not the additional circulation tend to intensify the evils 
 complained of? 
 
 The over-abundance, however, referred to is not necessarily 
 "currency," although this writer conveys that idea. In actual effect 
 it is an increase in casli resources by means of increased deposits 
 or by the payment of loans. If during this period, in order to keep 
 
 (405) 
 
io6 The Annals of the American Academy 
 
 the excess funds "employed and earning something," the banks 
 make "forced loans" and extend "inflated credits," it can easily be 
 seen that when the "tight money" period comes they are in no condi- 
 tion to make the legitimate loans which the bvisiness interests of the 
 community demand. To authorize the issue by the banks of a credit 
 currency under such conditions would be an economic error and 
 one that in the end would cause greater disasters than those its 
 issue was intended to prevent. 
 
 That it is not merely an excess or redundancy of currency 
 which causes the shifting periods can easily be seen by examining 
 statistics. The actual volume of cash held by the New York banks 
 does not vary greatly in the course of a year, and yet during the 
 same time large excesses or deficits in reserves will be shown in 
 the weekly reports. Comparison between the last summer state- 
 ment and the first fall one in the reports to the Comptroller for a 
 number of years past will show that the volume of cash held has 
 oftener been larger in the fall than in the summer, and disproves 
 the idea that it is solely a currency drain which marks the activity 
 of that period. 
 
 It is asserted that the proposed notes would not be a perma- 
 nent addition to the circulation — that having performed the service 
 for which they are intended, by some means not clearly shown, 
 they will be returned to the issuing banks and canceled. In the 
 American Bankers' Plan a tax of 23/2 per cent per annum is imposed 
 upon the first issue — this however would not be sufficient to cause 
 the return of the notes in even the easiest money period. It is pos- 
 sible that some eastern banks would then retire them, but the pro- 
 posed issue is for banks all over the country and in sections where 
 such a low interest rate is unknown. 
 
 Hon. Charles N. Fowler, the persistent advocate in Congress 
 of asset currency, in his plan wants no tax. In a recent speech he 
 says: 
 
 "Our bank notes must spring into existence precisely as checks 
 and drafts do, through business transactions. Our bank notes 
 should be related to and based upon the consumable commodities 
 of the country, going out with production and coming in with 
 consumption." These are brave words but highly figurative. It will 
 be easy enough to spring them into existence with or without pro- 
 duction, but what is there to bring them back with consumption? 
 
 (406) 
 
Panic Preventions and Cures 107 
 
 Where hangs the string to this kite that will anchor it safely and 
 bring it to land when desirable ? The American people of this gen- 
 eration are not accustomed to any but the best kind of paper money. 
 It has passed readily from hand to hand with unquestioned credit, 
 and has continued to circulate until worn out. The only thing 
 besides a tax that will force redemption is doubt as to the continued 
 goodness of the notes. 
 
 If the money Mr. Fowler has in his mind is similar to "checks 
 and drafts" — such money, for instance, as the banks throughout 
 the country have recently been forced to put out, much to their 
 own disgust as well as that of their customers, then we may be 
 able to understand what he means. It will come back, all right, 
 provided it ever gets out, but the country wants no such money as 
 a constant diet. 
 
 The assertions made concerning the use of similar currency 
 in other countries have very slight foundation to support them. 
 For instance, Mr. Fowler in this recent speech declared that "no 
 civilized country now has a bond-secured currency such as we have, 
 and no country ever did have such a currency." This statement is 
 made in face of the fact that the Bank of England's "fixed" issues 
 are against government securities, and aside from these issues, 
 that great bank does not put out a single pound that is not against 
 a similar amount of gold coin or bullion. 
 
 Much also is said concerning the elasticity of the Scotch bank- 
 note system. In a recent paper by Mr. George M. Coffin, this 
 elasticity is sought to be shown by figures. He states very cor- 
 rectly that no paper currency "uncovered by coin" can be issued 
 by the banks of Great Britain, except their "fixed issues," deter- 
 mined by Act of Parliament and limited to the circulation existing 
 at the time of the English Bank Act of 1844, extended to Scotland 
 in 1845, These "fixed issues" of the Scotch banks he gives as 
 £2,676,350 ($13,000,000). The elasticity of British currency he 
 says "is confined within the limits of the 'fixed' issues of uncov- 
 ered currency." 
 
 He then gives a table of circulation for a number of months 
 in 1905-06, the maximum during the period for the Scotch banks 
 being £8,091,692 and the minimum £6,906,103, the difiference being 
 the extent of the elasticity claimed. As the fixed issues only aggre- 
 gate £2,676,350, the figures in the table arc all at least three times 
 
 (407) 
 
io8 The Annals of the American Academy 
 
 the sum of the fixed issues, and if they show anything it is that 
 the entire fixed issues are constantly out, with neither accession nor 
 diminution to their quantity, and therefore are about as inflexible as 
 any money could be. The remainder of the note issues are covered 
 by coin. In this country we would not be willing to accept, as an 
 example to be followed, the currency system of Scotland, in which 
 the note circulation can only be increased as the gold reserve is 
 increased, and must be decreased as the gold reserve goes down. 
 
 Viewed from every standpoint, the proposed issue of credit 
 bank notes should be deprecated. Their use is not sustained by the 
 practice of the most enlightened financial power, nor is it demanded 
 to correct any defect in quality or lack in quantity of our existing 
 currency. That currency possesses in a high degree the elasticity 
 which gold possesses in a larger field, moving as the representative 
 of capital from one part of the country to the other, just where it 
 may be most needed. Its free movement however is trammeled 
 by law, whereas legislation has always failed to hinder the interna- 
 tional movement of gold. This leads to the consideration of the 
 real weakness in our banking system. 
 
 Inelastic Bank Reserves 
 
 The weakness lies in the immobility of our bank reserves. In 
 Great Britain no reserve is required by law to protect bank depos- 
 itors, but with us both under federal and state statutes a fixed 
 reserve of a stated ratio upon deposits is demanded. Dealing as 
 they must with such a multitude of banks our law-makers have 
 adopted this expedient as the best protection at hand. 
 
 Mr. W. R. Lawson, an English financial writer, in an article 
 published some years ago in the "London Bankers' Magazine" 
 (republished in the "New York Bankers' Magazine," February, 
 1903), comments upon this feature of our banking system as 
 follows : 
 
 "We wish to point out that a very large portion of United 
 States currency is a legislative fund only, and but for certain laws 
 might be dispensed with. The raison d'etre of such law-made 
 money is to guarantee bank deposits, in other words to insure safe 
 banking. Thus a large part of the currency exists not for purely 
 monetary but for banking reasons. It is the workman and not the 
 tools that are at fault. As a purely monetary proposition there is 
 
 (408) 
 
Panic Preventions and Cures 109 
 
 no proof whatever that the United States has an insufficient cur- 
 rency. The official statistics indicate that even eighty millions of 
 people have no real use for $2,336,000,000 of circulating medium. 
 Moreover 'elastic' banking is required then, rather than 'elastic' 
 currency." What this intelligent and observing foreigner says con- 
 cerning our money system will be admitted by every thoughtful 
 investigator. 
 
 It is this struggle between banks to maintain reserves that 
 almost annually brings the country to the verge of a panic. 
 
 The following figures will show the amount of cash reserve 
 required by law as shown in the national bank reports for August 
 22, 1907, and the cash actually held at that date: 
 
 Required. Held. 
 
 Central reserve banks $301,371,801 $321,361,557 
 
 Other reserve banks 177,929,155 205,397,797 
 
 Country banks 157,629,879 238,141,834 
 
 $636,930,835 $764,901,188 
 
 In the above statement the central reserve banks held 6.6 per 
 cent of legal reserve more than required, the other reserve banks 
 15.4 per cent, and the country banks 51.3 per cent — all of which 
 is ver}^ suggestive considering wdiat occurred only a few weeks 
 afterwards. This is the showing for 6,544 banks out of a total of 
 nearly 18,000 of all kinds. We are not prepared to agree with Mr. 
 Lawson as to the uselessness of these reserves. It is true that an 
 equal amount of protection would be given if a large portion of 
 them was composed of good interest-bearing securities instead of 
 money. The money reserve however serves a double purpose — it is 
 both security and money, and therefore the very best kind of reserve 
 under the conditions imposed by our multitudinous banking system. 
 No one would recommend the lessening of this required reserve 
 of cash on hand ; on the contrary there is a tendency to increase it. 
 
 The reform plainly needed is some plan by which these re- 
 serves may be utilized without impairing or endangering their value 
 as security for deposits. 
 
 In this connection a government bank is suggested and per- 
 haps is received with more favor than any other scheme proposed. 
 There is much to commend in the idea, provided its scope could 
 
 (409) 
 
no The Annals of the American Academy 
 
 be confined to transactions between banks. This limitation would 
 probably render the scheme impracticable, and an organization of 
 the kind for the prosecution of a general banking business would 
 be as little favored by bankers as it would be by the public generally. 
 
 So many plans have been offered as certain cures for our 
 financial ills that the writer hesitates to add to their number. But 
 if his diagnosis of the trouble is correct, if it is admitted that a 
 large volume of currency is constantly hoarded as bank reserves, 
 which, in times needed, should be utilized as working capital to aid 
 the legitimate business enterprises of the country, then it would 
 seem that the problem is a simple one. 
 
 In the opinion of the writer the difficulty may be largely if not 
 entirely solved in an effective manner along the lines of what we 
 already have in practice. 
 
 Measures Suggested 
 
 First. — The cash actually required on hand in banks should be 
 simplified and made to embrace the various kinds of our money held 
 under the general term "cash." A detailed statement is now re- 
 quired in reports showing the different kinds of money on hand, and 
 all of it is counted as reserve except national bank notes, nickles 
 and pennies. There is no just ground for this exclusion of national 
 bank notes. Our money is all of equal quality. The bond-secured 
 notes have more security back of them than the legal-tender notes. 
 They are public obligations and not ordinary bank notes, for the 
 government guarantees their payment, and is secured in so doing 
 dollar for dollar by its own bonds, and in addition thereto a reserve 
 of legal-tender money deposited with the Treasurer of the United 
 States. These notes have performed a valuable public service in the 
 support of the government credit. By their means the financial credit 
 of the United States has been made higher than that of any other 
 nation in the world, its long-time 2 per cent bonds selling in the 
 market at from $1.05 to $1.10, while 2^/2 per cent British consols 
 bring little more than eighty cents. 
 
 The public recognizes no distinction between legal-tender 
 money and other kinds which are not legal tender, such as gold 
 and silver certificates, as well as national bank notes. All have 
 equal credit and pass readily from hand to hand. 
 
 In fact dense ignorance prevails among all classes of people 
 
 (410) 
 
Panic Preventions and Cures iii 
 
 as to what is legal tender and what is not. An amusing illustra- 
 tion of this fact occurred in an editorial a few weeks ago in 
 one of the most popular New York banking journals. Under the 
 heading "Legal Tender" the article said : "Indifiference and ignor- 
 ance on the subject of legal tender is widespread and colossal. 
 Among the few wise things along currency lines which have been 
 done in this country is the adoption of the English system of com- 
 posite legal tender. Gold is our only legal tender in unlimited 
 amounts. Greenbacks and silver are legal tender up to a certain 
 fixed sum, beyond which the acceptance of them cannot be com- 
 pelled." 
 
 Of course the editor had not perused recently what is printed 
 on the back of every greenback and had forgotten all about the 
 "dollar of our daddies." It is not necessary that the bank notes 
 should be made legal tender, but in view of the fact that fixed 
 reserves are intended mainly for the protection of depositors, will 
 anyone maintain that this protection is weakened if national bank 
 notes are so counted? 
 
 Second. — The banks should be encouraged to keep a portion 
 of the fixed cash reserve with the Treasurer of the United States, 
 This would be accomplished if the balances maintained with the 
 Treasurer were allowed to be counted as cash on hand. In Great 
 Britain the banks in making reports include in their cash on hand 
 money on deposit in the Bank of England. 
 
 Third. — The existing practice of the Secretary of the Treas- 
 ury in lending public funds to the banks upon approved securities 
 should be further extended, so far at least as this bank fund is 
 concerned. Instead, however, of depositing with specially selected 
 banks, it should be arranged in the form of direct advances to 
 all banks supplying satisfactory securities. In order to effect this, 
 open accounts should be maintained with all the banks, and they 
 should be permitted at all times to draw on the Treasurer, first, 
 to the extent of their credit balances, and, second, to the extent of 
 the treasury value of the approved securities held by him. 
 
 In order to more formally pass on these securities a board of 
 treasury officials may be created, composed of say the Secretary 
 of Treasury, Secretary of Commerce, and Comptroller of Cur- 
 rency. To this board should be given the power to fix, from time 
 to time, the interest rate which should be charged on all daily debit 
 
 (411) 
 
112 The Annals of the .Inicrican Academy 
 
 accounts, the interest collected in this way to be distributed to 
 the credit accounts somewhat in the same manner as interest distri- 
 bution is now made in clearing-house associations upon loan cer- 
 tificates. The expenses should also be provided for by a just and 
 equitable tax upon the banks. 
 
 This plan would of course require more clerical force than 
 the department now accords to this business, but as both deposits 
 and checks would be in round sums, much of the complication of 
 a regular banking business would be avoided. 
 
 As the interest rate advanced, the greater would be the induce- 
 ment to increase deposits with the Treasurer, and this advance 
 and fall of the interest rate would supply in a steady and compre- 
 hensive manner a financial barometer of monetary conditions, which 
 is now absolutely lacking. It now requires but comparatively a 
 small drain upon the New York bank reserves to cause all kinds 
 of perturbations in the money market. 
 
 Estimating that one-half of the present fixed cash reserves 
 of the national banks should be deposited with the Treasurer, this 
 would alone provide a fund of over $300,000,000. No interference 
 would necessarily occur with that portion of the reserves which may 
 be maintained with national bank reserve agents. With this plan 
 in successful operation, it may easily be conceived that the instability 
 now afflicting our money system would in a large measure be cor- 
 rected, that the annually recurring periods indicating incipient 
 panics would be prevented, and the danger avoided of absolutely 
 uncalled for financial revulsions, with their attending commercial 
 and industrial losses and suffering. 
 
 (412) 
 
THE NORTHWEST IN THE RECENT FINANCIAL 
 
 CRISIS 
 
 By a. L. Mills, 
 President First National Bank, Portland, Ore. 
 
 The story of the panic of 1907 varies little from that of former 
 panics. If, however, we profit by its lessons and evolve from its 
 troubles proper financial legislation that in future will protect our 
 banks and commercial interests against danger and loss, the panic 
 of 1907 will not have been without compensation. As was the 
 case in 1857, this country in 1907 was seemingly most prosperous. 
 There was much railroad construction, involving the sinking of a 
 great amount of capital far beyond what was immediately produc- 
 tive ; speculation was rife, accompanied by much extravagance in 
 both public and private life ; graft and dishonest business methods 
 were exposed ; money was in increasing demand at steadily rising 
 rates ; there were many strikes and labor was dictatorial in its de- 
 mands ; real estate was active and there was a reckless expansion 
 of all credit. 
 
 These conditions are the familiar forerunners of every panic ; 
 but our people paid no heed to the warnings uttered by students 
 of finance, spoke jestingly of "a prosperity pinch,'' and went on 
 in search of easy wealth until the failure of the Knickerbocker Trust 
 Company in New York plunged the country into a senseless panic. 
 As in 1857, the failure of the Ohio Life and Trust Company of 
 Cincinnati ; as in 1873, the failure of Jay Cooke & Co. ; as in 1893, 
 the failure of the Philadelphia and Reading Railroad Company and 
 the National Cordage Company, so in 1907, the failure of the 
 Knickerbocker Trust Company marked the end for some years to 
 follow of our country's reckless financial operations. 
 
 The bankers of the Pacific Northwest were not altogether un- 
 prepared for financial trouble in the East ; they had read the hand- 
 writing on the wall and were warned of approaching danger. And 
 yet, when the storm broke, they were not prepared, for they found 
 themselves stripped of their Eastern balances and forced to depend 
 upon the actual coin within their vaults. Confidence, begat by the 
 
 (413) 
 
114 ^'^'^' '^ii"(^!''^' of ^^'t' American Acadony 
 
 knowledge that the Northwest was out of financial bondage to 
 the East, that the whole world was calling for its lumber, that 
 an immense wheat crop had just been successfully harvested, which 
 England was eager to buy at highly remunerative prices, was de- 
 stroyed in a second, and for a moment the people of the North- 
 west could see nothing before them but disaster. 
 
 Prior to October 28th the Pacific Northwest had watched with 
 interest, but with no concern, "the rich man's panic in Wall 
 Street," had noted the struggle of the Copper Kings, the failure 
 of the Knickerbocker Trust Company and the great run on the 
 Trust Company of America. The troubles in New York were 
 interestinsf, but did not closelv concern the Northwest. But on 
 October 28th all was changed. Telegrams poured into Portland 
 from bank correspondents all over the country, "Cannot ship you 
 coin or currency against your balance. Make your drafts payable 
 only through the clearing house. Advise you organize for your 
 own protection." The financial machinery of the United States 
 had broken down and in a flash business was paralyzed. 
 
 The Portland bankers then carried in their vaults but the usual 
 amount of coin necessary for the ordinary transaction of business. 
 When the shock came, October 28th, they had barely begun to shift 
 their balances westward, an action always necessary at crop-moving 
 time. Face to face with the problem of moving thirty millions 
 of bushels of wheat, threatened by frightened and hysterical deposi- 
 tors, with no funds other than those then in their vaults, they sought 
 aid from the governor of the state. His excellency at once grasped 
 the situation, and on October 29th declared a legal holiday that con- 
 tinued, with the exception of three days, from October 29th until 
 December i6th. On the latter date Portland returned to normal 
 conditions, the first of all the larger cities to remove all restrictions 
 on payments. The return was accomplished without trouble or 
 excitement ; the people had had time to cool down and the good 
 sense and loyalty of our citizens did the rest. But though there 
 was a legal holiday from October 29th to December i6th, the banks 
 of the state kept open. The holiday gave protection to the banks 
 against hysterical depositors, prevented attachments being levied 
 on the state banks and made possible the restriction of payments. 
 
 The moment a holiday was secured the Portland banks, on 
 October 29th, authorized the issuance of clearing-house certifi- 
 
 (414) 
 
The Northivest in the Recent Financial Crisis 115 
 
 cates for use between the banks in settling balances. One million 
 dollars in certificates were issued, but by December i6th six hun- 
 dred and thirty thousand dollars worth had been retired. The most 
 difficult problem to face was to finance and move the wheat crop. 
 There was not enough coin in the banks and some sort of a circulat- 
 ing medium to serve as an emergency currency had to be devised 
 and one that the people would take. 
 
 Printing-presses were set to work manufacturing what was 
 known popularly as "Wheat Money." The banks agreed to take 
 it on deposit or in payment of debts. This was necessary to give 
 the scrip negotiability. This emergency currency was in denomi- 
 nations of $1.00, $2.00, $5.00, $10.00, and $20.00, and in all over 
 a million dollars were placed in circulation. In the main it was 
 secured by wheat in warehouses, covered by insurance, and for 
 every dollar of scrip so issued there was in the warehouses $1.50 
 of wheat. Some small amount was issued also against approved 
 bonds in the same ratio. The currency was readily taken in all 
 the stores and by the railroads, and yet it was liked by no one. 
 Better secured even than national bank notes, since behind national 
 bank notes ultimately is only the tax-raising powder of the United 
 States, nevertheless Portland's wheat money, lacking the power 
 of legal tender, drifted quickly back into the banks. Such in brief 
 is the story of the panic from the view point of the Pacific North- 
 west. What of its lessons? 
 
 To him who was in the control and management of a national 
 bank in Oregon in the fall of 1907 two dangerous faults in our 
 existing financial laws were strikingly apparent, to-wit, the utter 
 weakness of the fictitious system of bank reserves, and the total 
 inadequacy of our present financial system to withstand the on- 
 slaught of unreasoning panic. 
 
 Fictitious Reserves 
 
 In an address delivered before the Washington State Bankers' 
 Association at Whatcom, July 2t,, 1903, the writer, in speaking 
 of bank reserves, said as follows : 
 
 "Under the present National Bank Act, in other than reserve 
 cities, a bank is permitted to loan all but 15 per cent of its liabilities ; 
 of this 15 per cent three fifths may be deposited in a reserve city; 
 and the banks of a reserve city are permitted to deposit one-half 
 
 (415) 
 
Ii6 The Annals of the American Academy 
 
 of their 25 per cent reserve in New York, Chicago or St. Louis, 
 where the national banks are required to keep but 25 per cent in 
 coin. Has it ever occurred to you how small an amount of coin 
 is thus behind the deposits of the country? How dependent all 
 the banks of the country are upon the resources of the great banks 
 of New York, Chicago and St. Louis? The restrictions of the 
 National Bank Act may, in the opinion of the framers of that law, 
 be sufficient protection to the depositors, but does anyone here think 
 it reasonably safe banking to have but a little over 6 per cent in 
 cash behind his deposits? And yet a compliance with the National 
 Bank Act requires but that much coin. For instance, a national 
 bank in Whatcom has $400,000 deposits ; of its $60,000 reserve 
 $36,000 may be kept in Portland ; against the $36,000 Portland 
 must keep a reserve of $9,000, of which $4,500 may be in New York, 
 and New York is required to keep but $1,125 o^ this on hand. To 
 meet the $400,000 in Whatcom the requirements of the National 
 Bank Act are fulfilled with only $29,625 cash, or a trifle over 7 
 per cent. This may be sufficient protection to the public, but when 
 Uncle Sam deposits his money, he requires as security dollar for 
 dollar in his own obligations. When we note how closely the banks 
 of the country are knit together, how dependent they are upon one 
 another, is it a matter of wonder that a panic in Wall Street is 
 felt throughout the length and breadth of the land? Is it wise 
 to be so dependent? Should our banks not be more mdependent? 
 And to do so should they not carry more of their reserve in their 
 vaults ?" 
 
 But these remarks only referred to national banks and their 
 reserves. When account is taken of the scanty reserves maintained 
 by state banks, private banks, savings banks and trust companies, 
 the amount of actual reserve behind the deposit liability of the 
 country dwindles to such small figures that one staggers with 
 amazement at the vast amount of credit that rests upon a single 
 dollar. With this thought in mind need one be surprised that a 
 run on the Trust Company of America caused a currency famine 
 in New York, the effects of which were felt throughout the length 
 and breadth of the land? 
 
 In framing the National Bank Act (of which most state bank 
 acts are but loosely-drawn imitations with more lax restrictions) 
 the theory seems to have obtained of concentrating the actual 
 
 (416) 
 
The Korthi^'cst in the Recent Financial Crisis iiy 
 
 money of the country in the large cities. A reserve that is on 
 deposit with another bank is not a cash reserve. The only cash 
 reserve is coin in the vault. It is a good asset of the bank, but 
 by no means cash. The present system of reserve on reserve, re- 
 serve on reserve, makes it more difficult to find the true reserve 
 than it is to find the elusive pea in a shell game. 
 
 The complete breakdown of the present system of reserve was 
 illustrated in the recent panic. Beyond permission to draw against 
 their balances in "Clearing; House Funds" the legal reserves main- 
 tained in the East by the banks of the Pacific Northwest were 
 almost valueless as a source from which to draw funds to meet 
 the demands of depositors. The banks were forced to depend 
 upon the actual coin in their vaults and to manufacture such other 
 circulating medium as the suffering public would endure. Does 
 not this experience prove that our system of reserves is a fiction, 
 false in theory and worthless in practice? 
 
 If banks were required to maintain in their own vaults the 
 full legal reserve there might be contraction of credit for a time, 
 but the financial institutions of the country would be on a sounder 
 basis. However, there is little hope for change, especially as long 
 as the payment of interest on daily balances exists to arouse the 
 avarice and befog the judgment of the average banker. 
 
 The Weakness of our Financial System 
 
 That a currency famine in New York should endanger every 
 financial institution in the Union, and in a year of bountiful crops 
 and great prosperity cause a widespread and senseless panic is 
 sufficient evidence of the extreme weakness of ovir system of 
 finance to cause every Doubting Thomas to favor currency reform 
 at once. Writing forty years ago Robert Baxter said, "provision 
 should be made for such a contingency as a panic, so that, when 
 hoarding interrupts the necessary flow of currency, a new stream 
 may, under proper safeguard, be created and the course of busi- 
 ness sustained." The necessity for such a provision, for the issu- 
 ance of some kind of an emergency currency, had ample illus- 
 tration in the fall of 1907. Every great city and many smaller 
 ones in October and November issued clearing-house certificates 
 for use in settlements between banks, and in addition, in order to 
 
 (417) 
 
ii8 The Annals of the American Academy 
 
 prevent the utter stagnation of business, issued in unlimited quan- 
 tities clearing-house scrip of small denominations. 
 
 Can there be a better example of what reform is needed in 
 our financial system than the fact that throughout the length and 
 breadth of our land local emergency currency was issued to dis- 
 charge the duties of a national currency that had largely disap- 
 peared from circulation? As a supplement to the national cur- 
 rency this suddenly-developed circulating medium served its pur- 
 pose well. Without concerted action on the part of the banks, 
 in a night, this local emergency currency sprang into existence 
 to perform the daily exchanges of business. The emergency 
 that called into existence having passed, it quickly gave way to 
 the better currency and was retired. 
 
 How much better a true emergency currency with legal tender 
 qualities would have been, any one who handled the hundred 
 different kinds of clearing-house scrip can bear witness. Had 
 there been provision for an emergency currency as in France and 
 Germany, and in a measure in England, the financial disturbance 
 in New York would not have involved the entire country. The 
 frightened depositors of that city would have been met with an 
 ample supply of funds and New York's financial institutions would 
 have paid the price, for no plan for an emergency currency should 
 ever be adopted that does not include a steadily rising tax to be 
 levied upon the banks taking out such currency ; and the tax 
 should be no light burden, such as three or four or even five 
 per cent, lest in avoiding panic we are ruined by expansion. 
 
 Sumner says, "Any device which has elasticity for its object 
 will have expansion for its effect." And expansion spells ruin for 
 our financial system. We therefore must beware of the expan- 
 sionists wdth their asset currency nostrums and keep ever before 
 us that the standard of value is gold and that gold can carry but 
 so much burden. Overload gold wdth too great an amount of 
 paper promises to pay and the precious metal will leave our shores 
 and we shall be dependent upon fiat money. Better a panic every 
 year than gold at a premium. 
 
 How should our laws be amended to permit the issue of an 
 emergency currency that shall be sound, be quickly issued when 
 required, and rapidly retired when the emergency is passed? The 
 best plan proposed is a central bank of issue, approaching as nearly 
 
 (418) 
 
The Northwest in the Recent Financial Crisis 119 
 
 as possible to the Imperial Bank of Germany. But it is to be feareJ 
 that the intelligence of the average congressman is not of high 
 enough order to rise above fear of local prejudice and to permit 
 him to vote for the good of the whole nation, if it does not suit his 
 local banker. Should the unexpected happen, how^ever, and Con- 
 gress rise to the needs of the country and pass a bill for the estab- 
 lishment of a central bank several points must be covered: — 
 
 1. The government must have a voice, and perhaps a con- 
 trolling one, in its management. 
 
 2. No one section of the country should be permitted to domi- 
 nate in the directorate; all parts of the country should be repre- 
 sented. 
 
 3. The bank should be a bank of issue and not of deposit. Its 
 profits should be derived from lending its circulation and its debtors 
 should be the banks of the country. 
 
 4. To it alone should be given the powder to issue an emergency 
 currency, and care should be exercised in the amount of gold 
 reserve. 
 
 5. The national bank currency and greenbacks should be retired. 
 If the central bank cannot be established and we have to work 
 
 with the tools we have on hand, which is more than likely since 
 changes come slowly, then to the national banks should be given 
 additional powers. They should be permitted to take out an 
 emergency currency to the extent of 50 per cent of their capital 
 on comparatively easy terms. This currency should be a legal 
 tender and in all forms like the present notes. It could be pro- 
 tected by a small tax on all the national banks as well as by deposit 
 of securities. Above all and before all it must be taxed on a 
 rising rate such as will make sure its retirement when the emergency 
 passes. Panics come quickly and do not last long, so that the 
 emergency currency should be promptly issued and as promptly 
 retired. 
 
 The panic of 1907 has passed into history ; whether its lessons 
 will have taught us aught of good or will bring about reform in our 
 financial system remains to be seen. 
 
 (419)" 
 
NEGLECTED ASPECTS OF CURRENCY AND BANKING 
 
 By Frederick A. Cleveland, Ph. D., 
 Author of "The Bank and the Treasury." 
 
 When in the early months of 1902, Mr. Shaw took the treasury 
 portfolio, the country was passing through a period of marvelous 
 financial activity. Four years of commercial and industrial con- 
 solidation, four years of trading in new corporate issues, "on 
 margin," had absorbed hundreds of millions of banking capital in 
 speculation. Moreover, this incumbering of current funds had 
 taken place at a time when commercial and industrial expansion was 
 multiplying its demands on our banks for credit accommodation. 
 True, on May 9, 1901, an unexpected corner in Northern Pacific 
 had brought speculation to a temporary standstill. But the quiet 
 which followed had been utilized by the large banking interests to 
 get together needed financial support with which to launch United 
 States Steel and other new gigantic promotions. From two to three 
 thousand millions of new issues had to be digested and assimilated 
 by the investing public before our institutions of commercial credit 
 could sufficiently relieve themselves from speculators' loans to meet 
 the growing demands of trade. 
 
 After 1898 the financial situation was at all times pregnant 
 with danger to business. So large was the proportion of new flota- 
 tions carried on bank credit, that in the early months of 1902 con- 
 servative financiers became alarmed ; serious question was raised as 
 to what the outcome would be. The fear expressed was that the 
 banking capital of the country was overloaded with credit obliga- 
 tions of a most dangerous sort. Within six years the national banks 
 had increased their demand obligations to individual depositors more 
 than $1,600,000,000, while during the same period their capital, 
 both subscribed and earned, had increased only $135,000,000. That 
 is to say, for every additional dollar put into the national banking 
 business during this period, twelve dollars of credit in the form 
 of new deposit accounts had been issued against it. 
 
 At the time that the national banks were thus extending their 
 credit obligations similar expansion was taking place in the deposit 
 obligations of state banks, private banks and trust companies. They 
 
 (420) 
 
Neglected .-ispects of Currency and Banking 121 
 
 had increased their demand credit over $2,000,000,000 while the 
 new capital added to the business was only $235,000,000, making 
 a total expansion in deposit accounts of $3,600,000,000 with a total 
 increase in capital of $370,000,000. The amount of credit expan- 
 sion in bank accounts alone — /. e., expansion in the form of cash 
 with which business is done — was equal to about two and one-half 
 times the total money circulation of the country outside of the re- 
 porting banks, while the total increase in banking capital was only 
 about one-seventh of the money stock of the nation. 
 
 To the end of aiding the banks to meet increasing money de- 
 mands, Secretary Gage had used the customary methods of relief. 
 He had refunded the bonded debt on a lower investment basis ; he 
 had made numerous purchases of bonds for retirement ; he had 
 made interest payments in advance ; he had added to the relief thus 
 given by loaning to the banks some eighty millions of dollars, in 
 the form of revenue deposits. Such was the situation when Mr. 
 Shaw came to the cabinet. 
 
 The Credit Climax of 1902 
 
 Within the next few months pressure on the banks was some- 
 thing extraordinary. The climax was reached in September and 
 October. Then it was that Mr. Shaw broke away from all prece- 
 dents and issued his famous order that savings-bank investments 
 be received as security collateral to additional revenue deposits. 
 This first order was soon followed by another which relieved the 
 banks from the necessity of holding a 25 per cent reserve against 
 the secured deposits of the government. The effect of these two 
 orders was to increase loans of the government to the banks from 
 $113,000,000 to $166,000,000 — producing a temporary result in 
 financial circles much the same as if $50,000,000 of new capital 
 had suddenly been added to the banking business. 
 
 During 1903 the financial stress of 1902 was gradually re- 
 duced. By concerted action of banks, by the continued aid of the 
 government, by the imposition of high interest rates on bank accom- 
 modations and by demands for added collateral to margins forcing 
 liquidation, the over-encumbered capital of banks in financial cen- 
 ters was again somewhat relieved. These acts of conservatism 
 were followed by months of wholesome trading during which time 
 speculation played the smaller part. 
 
 (421) 
 
122 The Annals of the American Academy 
 
 The latter part of 1904 and the years 1905 and 1906 were 
 another period of dangerous credit expansion. During 1904 
 clearing-house transactions of the United States amounted to 
 $102,000,000,000.00. The clearings for 1905 were $140,000,- 
 000,000.00. In the year 1906 they reached $157,000,000,000.00. 
 December, 1906, was a month of high tension at the financial center 
 to relieve which call-money sales were advanced to 36 per cent; 
 the average of call rates for the month was about 14 per cent; 
 third-day money commanded from 9 per cent to 15 per cent. 
 During a few days of the January following, as high as 50 per cent 
 was paid for call money. This was followed by two months of 
 comparative quiet. In March, 1907, however, speculative trading 
 and holdings on margin had again reached such proportions, that 
 in efforts to protect themselves, the banks were forced to call and 
 in a single day the market price of securities dropped from five to 
 twenty points. General prosperity and prompt relief from Wash- 
 ington alone saved our commercial and industrial institutions from 
 distress similar to that recently experienced through the sudden 
 contraction of bank credit. 
 
 It was during this period, of rapidly increasing business ac- 
 tivity and rapidly expanding bank credit and in anticipation of a 
 sudden need for increased support to bank-credit obligations, that 
 Secretary Shaw rendered another signal service to the country. 
 He saw the approaching storm and prepared for it by getting the 
 treasury in condition to come to the rescue of the country when 
 the banks would be unable to meet obligations for payment without 
 wholesale reduction of credit accommodation. In the first place 
 payment on the Panama Canal purchase was made by withdrawal 
 of the deposits of the government, diminishing by this amount the 
 demand loans of the treasury to the banks and the consequent 
 inducement to banking extravagance. After making the Panama 
 settlement — to provide for which a 20 per cent call had been made — 
 the treasury deposits were about the same as when Mr. Shaw had 
 been appointed to the cabinet three years before. Further than this 
 the Secretary gave notice to the banks that a call would be made, 
 first, for 25 per cent and later for 50 per cent of the balance of 
 government deposits, and although these demands were not enforced 
 to the letter, by November, 1906, the demand obligations of the 
 banks to the government were reduced to $50,000,000. Thus it 
 
 (422) 
 
Neglected Aspects of Currency and Banking 123 
 
 was that, by the tune the banks in financial centers had again 
 reached the danger point of credit expansion, Mr. Shaw was able 
 to come to the support of the money market ; and during the year 
 1906 and the early months of 1907, an added one hundred and 
 twenty million of dollars in the form of additional deposits were 
 loaned to the banks without embarrassing the treasury, enabling 
 them to maintain their money reserves without seriously contract- 
 ing business accommodations. 
 
 After the immediate need for collateral supports to the banks 
 had passed. Secretary Cortelyou announced that he would follow 
 the same general policy as had been pursued by his predecessor. 
 But during the months from May to November the demand of the 
 banks for money with which to maintain their reserves constantly 
 increased. Protests were made against reducing the treasury bal- 
 ances that had been loaned to the banks to tide things over the stress 
 which came earlier in the year. 
 
 Yielding to these importunities was a serious mistake. Instead 
 of calling attention to the present capital weakness of the banks, 
 the government permitted them to continue to use the large treas- 
 ury balance without interest. The banks found that it was not 
 necessary to increase their own capitalization ; in fact, the govern- 
 ment held out an inducement not to increase their capital, since 
 the present stockholders were able to increase their income by the 
 amount of the credit expansion supported by the treasury balance 
 without being required to share the increased profit with new 
 stockholders. Not only were the banks themselves weakened by 
 continuing aid, but the government was placed in a position where 
 it could not lend a strong helping hand in future emergencies. 
 
 The October and November Panic 
 
 When in October and November, 1907, panic days again were 
 reached, the government at Washington could not respond with the 
 liberality required. In May the $170,000,000 point had been 
 reached. August 22 the amount had been reduced to $143,000,000. 
 August 23 Secretary Cortelyou began increasing treasury deposits 
 with banks. November 11 $70,000,000 had been added to the 
 deposits, and during the month following practically the whole 
 available surplus of the treasury had been loaned to the banks. 
 But even this did not suffice to support the weight of obligations 
 
 (423) 
 
124 The Annals of the American Academy 
 
 that had been permitted to accumulate on the crumbHng founda- 
 tions of the banking institutions of the country. 
 
 The alternative to the banks was to force a violent credit con- 
 traction. The essential weakness, a first cause of credit collapse, 
 is found in the changed relations of credit outstanding to capital 
 supporting it. In 1897 the proportion of national-bank capital to 
 individual deposit obligations had been as i to 2.93 ; in 1906 their 
 proportions reached i to 5.03. In 1897 the proportion of national 
 capital surplus and undivided profits to individual deposit obliga- 
 tions was as I to 1.92; in 1906 this proportion reached 1 to 2.79; 
 in 1897 the proportion of money reserves held by national banks 
 to individual deposit obligations was as i to 5.35 ; in 1906, even 
 counting all the money borrowed by the banks from the govern- 
 ment and from state and private banks and trust companies, this 
 proportion had reached i to 6.71. 
 
 The institutions chartered by the government to supply credit 
 accommodations to the business public had been permitted to grow 
 top heavy. Worse than this : Not only was it permitted that they 
 issue a dangerous proportion of demand credit to capital and 
 money supporting it, but the character of commercial assets pur- 
 chased by the banks by means of this credit was even more dan- 
 gerous — a large part of the demand credit having been issued in 
 exchange for paper secured by collateral which had been pur- 
 chased "on margin," the market price of which was gradually 
 depreciating. As fast as speculation prices depreciated the demands 
 of bankers for additional collaterals became more tense. The net 
 result was to force sales and to still further depress the market. 
 When speculators reached their limit they made special pleas to 
 the banks for "time," till the market might change. 
 
 The Capital Weakness of the Banking System Revealed by Com- 
 mercial Demands from the Interior 
 
 The increasing demands from the commercial and industrial 
 constituency of the vast interior forced the issue. When the 
 country banks began to call the loans which they had made to the 
 reserve banks, when the reserve banks, in turn, were forced to call 
 their loans to the great central reserve banks that had used these 
 loans for money reserves with which to support the credit accom- 
 modations to speculators, then it was that the mutual props in the 
 
 (424) 
 
Neglected Aspects of Currency and Banking 125 
 
 form of "legal reserves'' began to give way and the whole business 
 constituency which depended on bank credit for "cash" was thrown 
 into a condition of distress. The resulting condition is what Mr. 
 Ridgely refers to as the loss of confidence of banks in each other. 
 To save themselves the central reserve city bank had to issue 
 clearing-house certificates, which is another name for the suspen- 
 sion of specie payment. This protective measure of the central 
 reserve banks forced the banks the country over to adopt the 
 same expedient. Mutual obligations within each community were 
 settled by means of clearing-house paper. 
 
 Relief finally came in the only way possible — through added 
 capitalization. This capitalization, however, was only temporarily 
 supplied. It was furnished by a syndicate of which the house of 
 Morgan & Co. was the head. The government also added all of its 
 remaining surplus available. A broader basis for credit liquida- 
 tion was established through the importation of approximately 
 $65,000,000 in gold, a large part of which was procured by means 
 of this new temporary capitalization furnished by the syndicate. 
 But the reduction of the demand credit used as "cash" in commerce 
 and industry was far greater than any possibility either of importa- 
 tion or money issue could supply — a contraction of the credit circu- 
 lating medium w^iich resulted in %-eduction in prices, temporary 
 receiverships and wholesale stagnation of business. Never has 
 there been a more tragic financial situation. Only the general pros- 
 perity of the commercial and industrial world saved us from the 
 worst of business calamities. 
 
 By the end of the year 1907 the credit stress was in a measure 
 abated. This was in part due to importation and in part due to the 
 largely decreased business demands, resulting from receiverships 
 and liquidations, forced on by the sudden withdrawal of hvmdreds 
 of millions of dollars of banking accommodations which had been 
 previously extended to legitimate enterprises. The remedy applied 
 was drastic, wrecking the fortunes of thousands of persons engaged 
 in useful employment. But the fundamental weakness of the sys- 
 tem still remains to be dealt with. If collapse may come at a future 
 time less prosperous than the present, failing credit may work 
 still greater havoc. 
 
 (425) 
 
126 The Annals of the American Academy 
 
 Dangers in the Present Readjustment 
 
 The present readjustment is essentially a dangerous one. Not 
 only is the added capital a temporary support, but in its method of 
 application dangerous. Practically the whole treasury surplus is 
 tied up in the settlement. January i, 1908, the banks were owing 
 to the United States Treasury, either in the form of direct loans 
 or as deposits of disbursing officers, about $256,000,000.00. A part 
 of this the government needs at once to meet its current expenses. 
 By a continued policy of loaning the treasury surplus to the banks 
 without interest, by permitting the banks to retain a large part of 
 the loan as money reserves for the support of obligations to depos- 
 itors during time of credit expansion, by permitting the banks to 
 find relief in added loans from the treasury and in a temporary 
 syndicate a plan of reorganization is accepted which does not take 
 care of the large floating debt and which does not provide adequate 
 working capital. Another element of weakness is found in the fact 
 that while the syndicate loans have a high rate of interest, the loans 
 of the government are without interest. The syndicate loans, there- 
 fore, will be paid as rapidly as possible while the government will 
 be further importuned not to reduce its balances. 
 
 In case it may happen that the country banks may again loan 
 their reserves to the reserve banks, and the reserve banks may loan 
 their reserves to the central reserve banks in sufficient amount, then 
 the government may again be able gradually to call its loans. But 
 with the first considerable pressure brought to bear on the system, 
 the experiences of last May and of last November will be repeated. 
 We may expect to suffer from alternating expansion and contrac- 
 tion, the one dangerous as a cause, the other dangerous as an 
 effect, so long as the banks rely on borrowed money for their 
 reserves. We may not expect the government to be in a position 
 to protect the country against the unbalancing effects of sudden 
 contractions so long as it places itself in the attitude of permitting 
 the banks permanently to use the government surplus in lieu of 
 adequate capitalization. 
 
 The government is now in a position such that one of three 
 courses is open to it:, (i) It may demand payment of loans 
 to the banks with the possibility of disrupting the whole fabric of 
 private credit based on the present reserve, (2) it may permit the 
 
 (426) 
 
Neglected Aspects of Currency and Banking 127 
 
 banks to use its fund without interest and borrow money at interest 
 with which to meet its own current expenses, (3) it may, by charges 
 of high rates of interest to the banks for loans in the form of deposit 
 and bank notes issued on collaterals deposited, force the banks to 
 add sufficient permanent capital to their business to enable them to 
 meet all their present emergency capital obligations and at the 
 same time insure the safety and stability of their own credit ac- 
 counts. In this situation President Roosevelt has appealed to 
 Congress urging that the last of the three courses be taken. His 
 specific recommendation, however, is confined to note issues. It 
 remains for someone in authority to seriously propose a measure 
 which will effectively apply the same regulative principle to the 
 loans of the government to the banks in the form of "deposits." 
 
 Within the first six weeks of the present Congress several bills 
 were introduced which provide for an interest charge on these 
 loans. In the House, Mr. Fowler (H. R. 12.677) ^"^1 Mr. Keifer 
 (H. R. 208) propose that banks be required to pay two per cent 
 on government deposits. That such a measure would prove 
 ineffective to cause banks to return government "deposits" after 
 an emergency were past is amply proved by some forty years of 
 experience with reserve loans. At such a rate banks have never 
 been known to return reserve deposits until "called." In the 
 Senate two bills have been introduced which aim to make "deposits" 
 emergency loans, but whose defects are apparent. Senator Culber- 
 son (S. 3026) would have banks pay two per cent from August 
 ist to November 30th, four per cent from December ist to March 
 31st, and six per cent from April ist to July 31st each year. This 
 proposal assumes that money demands and credit disturbances 
 regularly follow the seasons, an assumption which might do much 
 to produce expansion and contraction at the wrong time. The 
 banker is in the best position to know when money demands arc 
 such that he can afford to pay six per cent for government loans, 
 and these are times when the credit circulatioI^ should be increased 
 or when more money is needed to support that already outstanding. 
 Senator Piatt's measure (S. 108) would make the rate discretionary. 
 This might prove effective and without public danger if a minimum 
 of about six per cent were established to insure the use of the 
 government loans for purposes of steadying the market in time of 
 extraordinary demand. If the banks had the opportunity of either 
 
 (427) 
 
128 The Annals of the American Academy 
 
 borrowing from the government on proper security at six per cent 
 and the government had the option of supplying funds either in 
 the form of gold or paper money to be issued by it, the money rate 
 could never rise far above the established minimum. In such event 
 there would be no limit to the possibilities of expanding credit when 
 needed, except the limits of adequate security for the loans among 
 prospective borrowers. 
 
 Our Hopeless Philosophy of Panics 
 
 Those who have expressed opinion concerning the cause of 
 the recent panic use the same fatalistic philosophy as was employed 
 centuries ago in accounting for ravages of "black death" and the 
 scourges of small-pox and cholera. From time immemorial the 
 same conclusions have been reached. After learned discussion those 
 in position to command respect for knowledge of financial situations 
 have each time announced that sudden collapses of bank credit 
 have been due to an undefined, intangible, uncontrollable influence 
 called "lack of confidence." Comptroller Ridgely, by process of 
 induction, has given a new interpretation to this vague theory by 
 asserting that the conditions which led to the panic of last October 
 and last November were due "not to lack of confidence of the 
 people in the banks, but more to lack of confidence of the banks in 
 each other." 
 
 With such a diagnosis of the malady by those who are looked 
 to professionally for the prescription of remedies, question may be 
 raised as to whether we may ever hope to find relief from financial 
 ills. May we hope to correct a financial disease that is diagnosed 
 as the result of a mental attitude of persons who may not be located 
 and specifically treated? Congress is asked to pass remedial laws. 
 What legislation will make business safe as against "what some 
 people may think?" How may bankers be required to conduct 
 their business to prevent "some people" from losing confidence? 
 Does not such an analysis suggest that the philosophy of banking 
 is still surrounded by the ignorance and mysticism of the dark ages, 
 and that public inquiry is still lacking in method of scientific re- 
 search ? 
 
 Time was when a landslide was attributed to the mental atti- 
 tude of an evil one; when the breaking of a bridge or the falling 
 of a building was considered as the inscrutable act of some great 
 
 (428) 
 
Neglected Aspects of Currency and Banking 129 
 
 destroying force. The remedy proposed for such calamity is similar 
 to that at present urged to relieve business, viz., self-sacrifice and 
 prayer as a means of restoring lost faith in an influence for good — 
 a belief which has the power to protect the public against the 
 intrigues of the devil. Since the days of the South Sea Bubble 
 this same mystically vague remedy has been proposed for protec- 
 tion against the collapse of bank credit. Let us have confidence! 
 Restore our faith and we shall be saved ! 
 
 A Plea for a Scientific Method of Determining the Character of 
 Banking Legislation Needed to Protect the Public from Panic 
 
 In search for causes of structural collapse we have come to 
 apply scientific standards to judgment. Were the tower of the 
 capitol building to show signs of weakness during a storm the 
 government would not rest content to set up props till the storm 
 had abated. Were a great office building of New York to fall, 
 no one would think of the prayer of faith as protection against 
 future evils, to be suffered from collapses of similar kind, or of 
 importuning Omnipotence for justice to those responsible for loss 
 of life and property. Inquest would immediately go to the char- 
 acter of materials and workmanship used in construction. Neither 
 would there be mystery or fatalistic philosophy woven about legisla- 
 tion proposed for future safeguards to the community ; nor would 
 it be accepted as a satisfactory defense of building management 
 that those in control had yielded to the importunities of persons 
 wishing accommodation and as a consequence the building had been 
 built too high or had been overcrowded, or had had a run on it that 
 carried it and its tenants to destruction. If the structure had been 
 used for purposes other than those approved, or if the owners had 
 connived with officials, or if officers of the law had permitted the 
 superstructure to be carried beyond the point of safety, if the 
 foundation had been overloaded and had crumbled beneath the 
 weight, or if a superstructure had been erected of such physical 
 parts as to endanger tenants or the public, under any and all of 
 these circumstances, tenets of scientific inquiry, premised on experi- 
 ence, would guide in determining responsibility for loss, as well as 
 in the shaping of legislation for the correction of similar evils in 
 other structures built or to be built. 
 
 In engineering and architecture, as well as in building ordin- 
 
 (429) 
 
130 The Annals of the American Academy 
 
 ances, the guiding principle is: The greatest economy in construc- 
 tion that is compatible with safety. Whatever the cost, founda- 
 tion and materials must be of such strength and quality as to 
 make the structure safe. In estimating the depth and breadth of 
 foundation, or the strength of materials to be used in any part of a 
 building, a liberal margin of safety is allowed to provide for strain 
 greater than any that may ever be brought to bear. 
 
 Should a bridge be under contemplation, then calculations as to 
 the load or strain would depend on the character of use. After the 
 bridge was completed traffic regulations would be framed to protect 
 the public from danger of overloading, and the management would 
 be held liable for violations. Police control would also be exercised 
 to prevent catastrophe. ]\Iuch of the legislation proposed to prevent 
 collapses of bank credit throws this kind of reasoning to the winds. 
 The drift of opinion has been away from the theory of a coefficient 
 of safety. The banking world is urged by public officials to make 
 a still higher use of structural materials, i. e., to make such adjust- 
 ments between themselves as will permit the same capital to carry 
 a larger load. No attempt has been made to calculate what burden 
 a particular credit structure may bear without endangering the 
 business public from credit contraction. The argument has been 
 to further reduce the capital cost of banking. In estimating this no 
 account has been taken of the cost to the community of the peri- 
 odical wholesale demolitions, and the wrecking of other business 
 which have been induced by the banks to depend on them for cur- 
 rent funds. The banks may be safe. Yes. But what of those many 
 business interests that have come to rely on bank credit for "cash ?" 
 There seems to be an utter blindness to the public aspects of bank- 
 ing; no reckoning is taken of the fact that the forced contraction 
 of credit of even the smallest of banks may cause greater loss and 
 suffering to a community as a whole than would the collapse of 
 the largest of physical structures. 
 
 In the safety of a building structure the public is interested 
 as a matter of physical protection to tenants and passers-by. In- 
 creased charges for rent, due to the capital cost required to obtain 
 this protection, is not accepted as reason for permission to build an 
 unsafe edifice. At any and every cost pv;blic safety is insisted upon. 
 In the safety of a bank it is not physical safety alone that is in- 
 volved. The business, the fortunes, possibly the lives, of all those 
 
 (430) 
 
Neglected Aspects of Currency and Banking 131 
 
 who have made arrangements for their current financial needs are 
 directly at stake. Indirectly, a sudden contraction of bank credit to 
 protect the bank itself from collapse may unsettle well-founded 
 business judgments, and produce conditions which may cause busi- 
 ness concerns, not in any manner connected with the particular 
 institution which institutes the measure, to topple to ruin. Indi- 
 rectly, the business interests of a whole community or of a nation 
 may be affected. 
 
 Is it not worth our while to proceed in the determination of 
 questions of banking regulation, on the theory that no capital cost 
 is too great if it is necessary to protect the community against sud- 
 den contractions of bank credit? May not the same principle of 
 scientific inquiry be applied to the discovery of a margin of safety 
 to prevent collapses of credit, as has been applied to building 
 structures? Of far greater importance to the welfare of the com- 
 munity is it that bank credit shall not be constricted in time of need ; 
 of far greater importance that the capital foundation shall be ade- 
 quate to support every dollar of credit issued by banks, so long as 
 this credit may be needed by the borrower; of far greater import- 
 ance that a liberal margin of safety shall be required as against 
 extraordinary strain. Would it not seem the part of wisdom for 
 public men and public bodies to pass laws to prevent the over- 
 loading of the capital foundations of credit institutions, and over- 
 accommodation rather than that the government shall be content 
 to permit banks to -extend their credit ad Uhitiim? Is not legisla- 
 tion which requires a bank to do a safe business preferable to the 
 administration of palliatives to the injured, or reliance in the ability 
 of the treasury to prevent disaster by running to the support of 
 toppling credit walls as a means of relieving financial institutions 
 from the necessity of increasing the capital cost of doing business? 
 
 Elements of Certainty in the Problem of Elasticity 
 
 In this relation it is suggested that banking and credit are just 
 as susceptible to scientific analysis as are buildings and building 
 materials. With all the mystery that has been woven about the 
 subject, every feature and element in the problem of elasticity of 
 bank credit is as capable of exact determination as are the tensile 
 strength of iron, the crushing resistance of stone, or the wind 
 strain on an office building. 
 
 (431) 
 
132 The Aiiitals oj the Ainerieaii Academy 
 
 In law there is none of the mysticism about credit which is 
 commonly assigned. Credit is an unconditional contract for the pay- 
 ment of money, nothing more, nothing less. So clear is the law on 
 this point that it has been repeatedly decided that any other form 
 of contract or transaction is not credit. In business practice there 
 is absolutely no uncertainty about what credit is. Every business 
 man knows that if he be creditor he can insist on the payment of 
 the amount and kind of money contracted for, and that nothing 
 else may be substituted except by his consent, which amounts to a 
 new contract. If he be debtor he knows quite as well that he must 
 obtain and deliver the money in the amount and at the time con- 
 tracted for, or in default of such delivery the courts may be asked 
 to intervene and sell his entire estate if need be to procure this 
 money. In the common parlance of the street, credit is a "short 
 sale" of money ; this sale is governed by practically the same rules 
 as a "short sale" of bonds or a short sale of wheat. The only 
 alternative to "delivery" is "settlement," or the substitution of a 
 new contract for the original contract of credit. 
 
 There is nothing mysterious about bank credit. This is a con- 
 tract entered into by a banker with his customer, called a de- 
 positor, or (in case the bank may be permitted by law to issue) 
 with the holder of the banker's note. The contract is one for the 
 delivery of a definite amount of legal tender money on demand ; 
 if the creditor of the banker be a depositor then the evidence of 
 the credit contract is a memorandum of account on the books of 
 the bank and a corresponding memoranda kept by the customer in 
 his own cash book. It is a common credit relation — there is no 
 uncertainty about it. It is identically the same kind of a con- 
 tractual relation as is a demand credit evidenced by an account on 
 the books of a manufacturer. On discussing the question of bank 
 credit, therefore, we may speak in exact terms without any cavil 
 or misunderstanding. 
 
 The mysterious word "confidence" may also be resolved into 
 exact terms. Analyzed to its constituent elements, what has been 
 so vaguely spoken of as "confidence" may be clearly defined. In 
 banking relations that which has been called confidence is a conclu- 
 sion or judgment arrived at with respect to the value of a credit 
 contract at the time that the contract is made, or a subsequent judg- 
 ment which reflects itself in the exercise of the option under the 
 
 (432) 
 
Neglected Aspects of Currency and Banking 133 
 
 contract to demand payment. To illustrate: A merchant takes in 
 $1,000.00 in legal-tender money over his counter. He carries this 
 money to a nearby bank and exchanges it for a credit of $1,000.00, 
 a memorandum of which is entered in his pass-book, as well as 
 the customers' ledger of the bank. The merchant does this because, 
 at the time he makes his "deposit," it is his best judgment that he 
 would rather have the obligation of the bank to pay him $1,000.00 
 on demand than to have $1,000.00 in lawful money. If this were 
 not his best judgment he would not have made the exchange. 
 "Confidence" in the bank means that, for his own purposes he 
 values $1,000.00 of unsecured credit of this particular institution 
 more highly than he values $1,000.00 of gold coin of the United 
 States or other currency. 
 
 The reason why the merchant has "confidence" in the bank is 
 just as susceptible of analysis as is the definition of what consti- 
 tutes "confidence." Why does he value the contract of the bank 
 to deliver money at a future date more highly than money itself? 
 The customary answer shows the inconclusiveness of the present 
 method of approach. We are vaguely told that it is because the 
 merchant has "confidence." That is to say, the merchant has 
 "confidence" because he has "confidence," and conversely he does 
 not have "confidence" because he does not have "confidence." 
 Upon analysis it is found that the merchant's judgment as to the 
 value of the bank's credit is premised on three other conclusions: 
 (i) That "the banker is honest"— which being interpreted means 
 that, in the opinion of the merchant, the banker will do all in his 
 power to meet his credit contracts on demand without resort being 
 had to the court to enforce them; (2) that, in the opinion of the 
 merchant, the banker is conducting his business in such manner 
 that he will be able to fulfil every promise made by him to deliver 
 money on demand according to the terms of his contracts; (3) that, 
 in the opinion of the merchant, all persons with whom he currently 
 deals have, or will have, also arrived at the same conclusions as has 
 he with respect to this particular banker. 
 
 Elements of Danger and Uncertainty 
 
 It is in facts and conditions which warrant or fail to warrant 
 the second of these conclusions that the chief element of public 
 danger lies. Small loss has been suffered from nr.staken judgments 
 
 (433) 
 
134 The Annals of the American Academy 
 
 in arriving at the first conclusion — the honesty of bankers. Reputa- 
 tion for honesty is brought to a test with each transaction. A single 
 transaction which shows dishonesty will destroy all possibility of 
 further sales of credit — in other words, will destroy the business of 
 the banker. Dishonesty eliminates itself from the banking business. 
 For protection against dishonesty little or no legislation is needed. 
 Neither can legislation be made effective with respect to the third 
 conclusion. Legislation cannot compel a trading public to accept 
 the credit of any particular institution or class of institutions in 
 exchange. It is with the second conclusion only that laws may 
 effectively deal, and in the character of dealing with this lies the 
 whole problem of elasticity and the safety of our financial system. 
 The conditions under which the banker is permitted to offer his 
 credit for sale, the manner in which he shall conduct his business, 
 the amount of capital required, the character of equipments in 
 which his capital shall be invested, the amount of obligations to 
 depositors that he will be permitted to incur to each dollar of capital 
 invested in the business, the amount of minimum cash reserve re- 
 quired, the conditions under which he will be permitted to loan to 
 and borrow from other banking institutions, the conditions under 
 which he will be permitted to obtain aid from the government, the 
 character of business to which he will be permitted to extend credit, 
 the character of assets he will be permitted to buy in exchange for 
 demand credit, every phase and aspect of his business which enters 
 into the customer's judgment as to ability to pay, are subject to the 
 most exacting regulation and critical current examination of public 
 officers. 
 
 It is also to factors of this class that every question having 
 reference to panics, runs, collapses of credit, credit expansion, 
 credit contraction, and increased and decreased demand for money 
 relates itself. These factors are also subject of record and current 
 report and may be classified and summarized for purposes of exact 
 determination of elements of strength and weakness, of safety and 
 public danger. Not only may instruments of precision be used in 
 the diagnosis, but each remedial reagent may be scientifically tested 
 in its application. 
 
 (434) 
 
Neglected Aspects of Currency and Banking 135 
 
 The True Function of a Bank 
 
 Critical analysis and regulative measures must have reference 
 to the function and purpose of the commercial bank. This factor 
 of the problem also leaves no room for uncertainty. The business 
 of a commercial bank is essentially the business of selling its own 
 credit for the money and commercial paper offered in exchange for 
 the kind of "cash" which it created. The high value set on the 
 economy of bank credit as ''cash" for use in the making of pur- 
 chases and pa3'ments, has caused business men to take nearly 
 all the money and commercial paper received by them in their own 
 busiiaess to the bank, and to offer them in exchange for the bank's 
 credit accounts. The check and the draft are simply the instru- 
 ments by which the bank's customers demand payment, or transfer 
 certain portions of their bank credit to others — these transfers 
 being accepted in lieu of money. Selling stocks and bonds, under- 
 writing the purchase and sale of corporate issues, collecting 
 the purchase and sale of coin and bullion, are not banking. They 
 may be incidents or accessories to the business, but any one or all 
 of these functions may be exercised by those who have no powers 
 to engage in the business of banking. 
 
 From the point of view of ability to pay demand obligations, 
 money is the only equipment needed by a bank. With the question 
 of profit eliminated the only form in which a bank need carry either 
 capital or deposits would be legal-tender money. From the point 
 of view of making a profit, and at the same time of conserving its 
 money-paying ability when money is demanded, the banker seeks 
 to keep all his capital, as well as the money received in exchange 
 for his credit, invested in income-producing assets, which are readily 
 converted into cash when needed. If the capital of the bank alone 
 were held in reserve for the meeting of demands for money, the 
 business of the bank would be to exchange its own credit for 
 money and other cash assets, and to exchange these for commer- 
 cial paper, etc., bearing an attractive rate of interest. Were the 
 entire capital not currently needed as money reserves, then the 
 portion not currently needed might be invested in such manner that 
 the investments might at all times be converted into money without 
 loss, and without waiting for maturities. So considered, the busi- 
 ness of banking has two distinct sides, viz., a credit-trading side 
 and an investment side. 
 
 (435) 
 
136 The Annals of the American Academy 
 
 What Amount of Capital Is Required to Make a Bank Safe 
 
 Accepting the only logical definition of capital, viz., funds or 
 property contributed by shareholders or other proprietors, for the 
 purpose of providing an enterprise with the resources or equip- 
 ment permanently or continuously necessary to the safe and suc- 
 cessful operation of the business, and again we are on scientific 
 ground. Again the problem of elasticity lends itself to exact 
 analysis. The profits of a bank as such are derived from sales of 
 its credit. The amount of its banking profit depends on the amount 
 of credit it can exchange for money and other cash or income- 
 producing assets — or, to use the parlance of bankers, on the amount 
 of its "deposits." The equipment necessary to the highest success 
 of a bank is such an amount of money held in reserve as is neces- 
 sary to meet demands for payment on all the credit which it is able 
 to sell; or, again, to use the parlance of bankers, a money reserve 
 large enough to meet the demands of depositors. The amount of 
 capital needed by a bank, therefore, is such amount as is necessary 
 to provide it with its office equipment and with an adequate money 
 reserve. If the capital of a bank is not sufficient to do this with 
 safety, it is under-capitalized. In such circumstances the bank would 
 be in much the same situation as a railroad that is carrying a part 
 of its construction on floating debt, or a manufacturer who has sup- 
 plied himself with machinery by means of demand loans. If his 
 current loans are called he must sacrifice some of his product or 
 current business to meet them and possibly be forced to sell his 
 plant also. 
 
 This does not mean that a bank which does not capitalize all 
 its equipment, including its money reserves, is in danger of insol- 
 vency. A bank as well as a manufacturer may at all times be 
 solvent, and may so conduct its business as to meet every credit 
 obligation without a dollar of capital. If it rent its banking room 
 and furnishings, if it invest its credit in money or other assets 
 that may be quickly converted into money without loss, it may meet 
 all obligations, provided the income on its loans is sufficient to pay 
 expenses. But such a bank is in a position at any time to lose its 
 business by being forced into liquidation. In other words, it cannot 
 fall back on a capital fund to protect its deposit obligations, and, 
 therefore, as was the case with manv institutions in the recent panic, 
 
 (436) 
 
Neglected Aspects of Currency and Banking 137 
 
 it may lose its depositors while other institutions that are able to 
 protect all credit obligations without forcing loans will get them. 
 
 What Is the Public Interest in Bank Capitali::ationf 
 
 The bank is not the only one to suffer from lack of capitaliza- 
 tion. The customer is vitally interested, so vitally interested that 
 the bank always makes a point of advertising the amount of its 
 capital as an inducement to the customer to buy. The public, as a 
 whole, is interested, for the further reason that banking capitaliza- 
 tion is one of the prime factors in elasticity, both of the volume of 
 money and of credit. Public interest in the capital equipment, 
 therefore, may be said to be twofold : 
 
 (i) Each individual is interested in the bank as an institution 
 chartered to provide a convenient form of "cash." The one who 
 sells his note or his money to a bank in exchange for its deposit 
 obligations does so by reason of his desire to provide himself with 
 the current funds, in convenient form needed for his immediate 
 uses. In establishing a banking relation he desires to deal with an 
 institution that can safely sell sufficient credit to meet his current 
 financial wants. For the same reason, it is his desire also to deal 
 with a bank that at all times is able to maintain the account which 
 he has contracted for without calling his loan or diminishing his 
 accommodation, so long as accommodation is needed, provided he 
 has good commercial paper to offer in exchange. 
 
 (2) The public at large is interested in the manner in which 
 banks are managed on account of the effect zvhich a rapidly increas- 
 ing and decreasing volume of available "cash" has on prices. By 
 reason of the medium of exchange being so largely in the form of 
 bank credit instead of money, the country at large, or the combined 
 business interests of the community and of the nation, demand that 
 there shall not be an expansion of bank credit which cannot be 
 supported so long as the current funding need which created the 
 credit is present, and conversely, that there shall not be sudden 
 contractions in the medium of exchange brought about by efforts 
 of banks endeavoring to convert accommodations to customers 
 into money to enable them to make deliveries on deposit obligations. 
 
 It is such a condition as this that prevails in time of panic, and 
 these are the conditions that should be met by adequate and safe 
 capitalization. By application of methods of research, it is entirely 
 
 (437) 
 
138 The Annals of the American Academy 
 
 possible to know whether the past emergencies could have been 
 met if the banks of the United States had been required by law to 
 capitalize their equipment, including their legal reserves ; we would 
 also be able to reach a scientific conclusion as to whether much of 
 the present danger might be avoided if banking reserves were not 
 tied up in loans to speculators "on margin." 
 
 Conclusions That Have Been Reached as a Result of Experience 
 
 As a result of the experiences of the last few decades, and of 
 reflection on the numerous collapses sufifered in institutional credit, 
 certain conclusions have been reached that may be said to be gener- 
 ally accepted. These are as follows : 
 
 (i) That some provision should be made for increasing the 
 elasticity of our currency, as well as for increasing the elasticity of 
 bank credit. 
 
 (2) That the present law which permits the issue of bank 
 notes was framed for the purpose of stimulating a favorable market 
 for government bonds, and that in framing the National Bank 
 Act no thought was had to giving elasticity, either to the currency 
 or to bank credit. 
 
 (3) That the means employed by the government for encourag- 
 ing the banks to invest in government bonds (viz., permitting them 
 to hypothecate the bonds purchased for their par value in notes, 
 without the payment of interest on such notes sufficient to keep 
 them out of circulation in time when they are not needed) encour- 
 ages the banks to encumber their capital to such an extent that they 
 are unable to obtain notes from the government when needed. 
 
 (4) That the frequent and destructive panics and periods of 
 money stringency from which business has suffered have in every 
 instance been related to banks; that, in each stringency, the domi- 
 nant demand has been a demand for money which the banks are 
 unable to supply except at the expense of a very great contraction 
 of commercial credit. 
 
 (5) That under the operation of the present law the only 
 effective relief which may be given by the government to relieve 
 money demands on the banks is through treasury "deposits." 
 
 (6) That the National Bank Act and the several state acts are 
 defective in that they permit all the banks outside of the central 
 reserve cities to loan their "legal reserves" and still count these 
 
 (438) 
 
Neglected Aspects of Currency and Banking 139 
 
 loans as reserves for meeting obligations to pay depositors, the 
 eflfect of which has been, not only to permit the banks to unduly 
 expand their credits, but, also, to make a large part of the money 
 and credit of reserve institutions available for speculation only, thus 
 encouraging "margin trading," during periods of low interest rates, 
 unsettling the investment markets and endangering the whole sys- 
 tem of commercial credits, for the protection of which the reserves 
 are created. 
 
 Neglected Aspects of the Currency and Banking Question 
 
 While there is practical unanimity of opinion with respect to 
 the subjects above enumerated, banking opinion has scarcely gone 
 further than to conclude that something is wrong. Experience, 
 especially our recent experience, points to other aspects of the 
 currency and banking situation that have been entirely overlooked 
 or seldom referred to in discussion. Before constructive legisla- 
 tion may be intelligently enacted, the following questions must be 
 answered : 
 
 1. What amount of elasticity must he provided for? 
 
 The question has a double bearing, and suggests inquiry with 
 respect to two aspects of the financial situation: (a) What is the 
 variation in the business demand for money, and (&) what is the 
 amount of elasticity in bank credit required to meet legitimate 
 business demands? That no serious attempt has been made by 
 legislators even to approximate a scientific conclusion appears from 
 bills now pending. The limits to be placed on issue powers of 
 banks range from $250,000,000 to not less than $2,000,000,000. 
 
 2. What kind of protection is needed? 
 
 A large number of bills have been brought forward at Wash- 
 ington to the end that the deposit obligations of banks may be 
 insured. That this element of protection is seriously contemplated 
 is shown by the large proportion of all the banking bills containing 
 such provisions and the broad representation and high standing of 
 their authors. Among them may be named Senators Raynor, Cul- 
 berson, Brown, Nelson, Curtis, Gore, Scott, and Owen, and Repre- 
 sentative Fowler. Deposit insurance will doubtless be forced by 
 state legislation, if not by the federal law. But assuming that the 
 deposit obligations of banks had been fully insured, would this 
 have materially relieved business distress during the recent panic? 
 
 (439) 
 
140 The Annals of the American Academy 
 
 Assuming the average time of bank credit accommodation to be 
 sixty days, the actuarial risk of loss amounts to about 1-120 of one 
 per cent. Do stability of business and sane judgment require legal 
 protection against loss from insolvency of banks so much as legal 
 protection against the violent and dangerous expansions and con- 
 tractions of bank credit? Are not the direct losses to depositors 
 negligibly small as compared with the disasters which follow the 
 efforts of banks to obtain money with which to protect themselves 
 from insolvency, or from inability to maintain their own credit 
 accounts when demand is made by other banks for settlement of 
 balances ? 
 
 3. What are the iniluences which bring about dangerous expansions 
 in credit? 
 From 1904 to 1906 the expansion in deposit obligations of com- 
 mercial banks of the United States amounted to about $2,000,000,- 
 000. This was the amount by which this form of cash was 
 increased within the two years immediately before the present 
 stress for money became seriously felt. It is not suggested that 
 any danger lies in the mere fact of expansion, but it is now a 
 matter of experience that this particular expansion was dangerous. 
 It is also a matter of history that the havoc wrought by every 
 panic that has occurred during the last half century has been the 
 result of the contraction of a dangerous expansion of bank credit. 
 Looking toward a proper appreciation of the influences which bring 
 about expansion, the following questions seem pertinent. In time 
 of financial ease, has it not been the constant effort of banks to 
 increase their demand obligations to depositors without any regard 
 whatever to their own capitalization? As a means to this end, and 
 at the same time keeping within the money reserve requirements, 
 have not the national banks in reserve cities offered interest and 
 every known inducement to other institutions for money loans 
 which might be carried as reserves to support a credit expansion 
 that ultimately became dangerous ? 
 
 4. What are the incidents to credit contraction? 
 
 Without adverting to the results of contraction of credit so 
 disastrously felt and heroically met by the business community, the 
 recent panic suggests the following specific inquiry. Is the finan- 
 cial problem which confronts the community in time of panic pri- 
 
 (440) 
 
Neglected Aspects of Currency and Banking 141 
 
 marily a currency question, or is it essentially one of the inability 
 of banks to maintain a volume of credit which they had previously 
 issued to merchants and manufacturers for use as cash in their 
 current business? Is it not the purpose of these issues of credit to 
 increase the profits of the bank? Have not a large part of the 
 reserves which have been held by banks to support these increased 
 credit issues been borrowed from other banks, instead of being pro- 
 vided for by capitalization? Have not money stringencies been 
 largely due to demands created by these banks for the payment 
 of reserve loans as a means of protecting their own customers' 
 accounts? In these several relations the following statement of 
 facts taken from the report of the comptroller is illuminating: 
 
 Percentage Money borrowed 
 B^j^jj-g Individual Money of Money from Banks 
 
 Deposits. Reserves. Reserves and the U. S. 
 
 to Deposit. Treasury 
 
 Savings Banks $3,495,410,087 $28,666,882 .008 $ 8,179,275 
 
 Loan and Trust Com- 
 panies 2,061,623,035 104,258,066 .050 167,872,759 
 
 State Banks 3,068,649,860 254,001,570 .083 211,007,202 
 
 National Banks 4,319,035,402 701,623,532 .162 1,738,775,664 
 
 Private Banks 151,072,225 8,710,484 .058 2,844,638 
 
 $13,095,790,609 $1,097,260,534 .084 $2,128,679,538 
 
 There are two bills now before Congress which make a clean 
 breast of the reserve loan practice. Senator Culberson (S. 3027) 
 would have ''every national bank . . . keep on hand in its own 
 vaults the reserve of lawful money provided by law." Senator 
 Heyburn (S. 3044) would require that when a bank shall permit 
 its money reserve to fall below 20 per cent it "shall not increase its 
 liabilities by making new loans other than by discounting or pur- 
 chasing bills of exchange payable at sight," and would also during 
 such period forbid the payment of dividends. These measures 
 would seem to be weak at two important points, viz., (i) they do 
 not provide for the investment of reserves and the use of these 
 investments as security for government loans or issues; (2) they 
 do not attempt to co-ordinate reserves with capitalization, i. e., 
 under either measure the money reserves may be borrowed money. 
 5. What zvould be the effect of the capitalisation of legal reserve 
 requirements^ 
 
 To know what amount of capital would be required to provide 
 
 (441) 
 
142 The Annals of the American Academy 
 
 for redemption equipment equal to the amount of the legal reserves 
 required of banks (after taking out of the capital and surplus such 
 unavailable assets as the cost of banking houses, real estate and the 
 margins on securities deposited as collateral. for issues, government 
 deposits, bonds borrowed and other secured loans, and also after 
 providing for the necessary working balances to provide for ex- 
 changes in other cities) would require a special inquiry on the part 
 of the comptroller of the currency. As nearly as may be approxi- 
 mated, without an official inquiry, such a provision of law would 
 add not far from $500,000,000 to the capital of national banks, 
 as a prerequisite to incurring their present deposit obligations, and, 
 if applied to state institutions as well, would add not far from 
 $1,000,000,000 to the total bank capital of the country. Whatever 
 might be the amount, would not this added capital contribute 
 materially to give increased stability to business and increased 
 elasticity to bank credit? Even though it add to the capital cost 
 of bank credit, would it not be an economy to the business world? 
 Presumably some such result was in the mind of Senator Owen 
 when he introduced his bill (S. 3987) by which he would forbid a 
 national bank from incurring deposit obligations in excess of ten 
 times its capital and surplus. He would also limit speculative loans 
 to the amount of a bank's capital and surplus (S. 3986). In view 
 of the known facts, however, these measures would be of no prac- 
 tical effect. The ratio of capitalization to deposit obligations has 
 been reduced two-fifths since 1896. Should not immediate steps be 
 taken to make the foundation of our credit safe, and provide for 
 adequate expansion without endangering the public? 
 
 6. Is it either safe or expedient to have a large volume of bank 
 notes permanently outstanding^ 
 For two decades the banking interests fought against the con- 
 tinued use of greenbacks. The result of the agitation was a com- 
 promise limiting the form of credit money to $346,000,000. During 
 the last few years the bank note circulation permanently outstand- 
 ing has been increased over $400,000,000. In this relation the 
 question may be raised as to whether Gresham's law does not 
 operate on permanent issues of bank notes as well as on greenbacks. 
 Have we not in recent legislation and practice with respect to bank 
 notes employed a form of money that is cheaper to the banks than 
 greenbacks ? Have we not in the volume of bank notes permanently 
 
 (442) 
 
Neglected Aspects of Currency and Banking 143 
 
 outstanding a monetary device more dangerous than greenbacks, 
 
 for the reason that they not only drive gold and silver out of the 
 
 country, but at the same time encumber the banking capital, by 
 
 means of which gold and silver might be brought into the country 
 
 when such a need is felt. In the legislation now before Congress 
 
 few measures have any regard for this situation. The bills of 
 
 Senators Knox (S. 1239), Raynor (S. 2954), Aldrich (S. 3023), 
 
 and Owen (S. 3988) follow the recommendation of the President! 
 
 viz., that the bank note currency should be taxed sufficiently to 
 
 make it an emergency currency. Senator Knox would tax all 
 
 issues secured by United States bonds at five per cent and all issues 
 
 having other collateral security seven per cent. This is subject to 
 
 the criticism that such a tax imposed, without refunding the national 
 
 debt, would at once operate to reduce the price of United States 
 
 bonds, and therefore would amount to confiscation of the premium. 
 
 Senator Aldrich has met this moral question by providing that the 
 
 tax on issues against United States bonds remain practically as at 
 
 present, but would impose a tax of six per cent on all other issues. 
 
 His measure, however, becomes practically inefiFective in that it 
 
 makes no provision reducing the permanent bank note circulation ; 
 
 in fact, by the terms of his bill, the permanent note circulation 
 
 might be increased, and it specifically provides that all banks may 
 
 thus encumber 50 per cent of their capital and surplus. Senators 
 
 Raynor and Owen would impose six per cent during the first four 
 
 months of issue and eight per cent thereafter, permitting any 
 
 security to be accepted that may be approved by the Secretary of 
 
 the Treasury. 
 
 7. Should government funds he used to give more than temporary 
 relief? 
 
 In this relation it is to be conceded that bank notes are nothing 
 more nor less than loans of government money to the banks without 
 interest. The government loans unsigned notes to the bank for 
 issue in exchange for a collaterally secured obligation of like 
 amount to the government. Unquestionably government "deposits" 
 stand in the category of collateral loans without interest. Having 
 this fact in mind, the question is fairly presented: when business 
 interests are endangered by reason of the inability of banks to main- 
 tain the volume of credit needed, should government loans be looked 
 to to give more than temporary relief? Do not loans by the gov- 
 
 (443) 
 
144 T^^^c Annals of the American Academy 
 
 ernment without interest, or at a low interest rate, cause the banks 
 to rely on "deposits" instead of their own capital? Will not such 
 a practice cause the banks to retain these loans when not needed, 
 unless the government arbitrarily enforces payment against their 
 wishes? Do not deposits, without a rate of interest which will 
 cause the banks to repay the loans as soon as an en^ergency is 
 passed, leave the whole situation subject to the discretion of public 
 officials, instead of making regulation automatic? Does not a 
 large volume of government deposits or loans without interest to 
 the banks, weaken instead of strengthen the credit situation, and 
 leave the banks without the possibility of obtaining collateral aid 
 when a new emergency arises? 
 
 8. Is a "great central bank" a better institution to give collateral 
 support to our banks than the treasury? 
 The large bank idea has taken two distinct forms, one as ex- 
 pressed in Senator Hansborough's bill (S. 547), giving to an 
 institution controlled by other banks the widest banking powers, 
 both of loan and deposit, and the other as expressed in Congress- 
 man Frones' bill (H. R. 13,845), giving to a government controlled 
 institution, with capital of $100,000,000, powers of issue only — all 
 issues over $100,000,000 to be taxed on a graduated scale of from 
 six per cent to ten per cent per annum, thus making the issues in 
 excess of capital an emergency circulation. Assuming that a large 
 permanent issue of bank notes is not a good business expedient, 
 and narrowing this part of the problem down to a choice between 
 a great bank and the United States Treasury, in case the funds of 
 the United States Treasury were not permanently loaned to banks, 
 may not the United States Treasury do all that it would be safe for 
 a great central bank to do? In case the funds of the government 
 were loaned or deposited with a central bank, would they not 
 operate on the financial system in the same manner as if loaned to 
 other banks ? Having in mind the arguments of prominent bankers, 
 the further question may be asked : Does the cumulation of a 
 treasury surplus operate to deprive the business of the country of 
 the use of money held by the government, or is this surplus drawn 
 from the money stock of the world, thus increasing the money 
 stock of the United States? If the conclusion is reached that it 
 does operate to increase the money stock of the United States, with 
 adequate money reserves maintained by the banks, may not a 
 
 (444) 
 
Neglected Asfyects of Currency and Banking 145 
 
 treasury surplus be held with advantage as an emergency fund for 
 any use to which it might be applied, thus placing the United States 
 in a stronger position financially than any other nation — a situation 
 which might go far to relieve this country from the incidents of 
 falling markets and failing credit abroad ? Would not legislation 
 which would permanently encumber or tend to encumber the gov- 
 ernment surplus or lower the capital strength of the banks, operate 
 to make this country still more dependent on foreign states, and 
 to relinquish a financial advantage which by nature and trade 
 position it enjoys? 
 
 What the Federal Government May Do to Correct the Evils of 
 
 State Banking Legislation 
 
 One of the prime elements of weakness in our credit situation — 
 one that has done much to vmsettle business and cause violent 
 expansions and contractions of credit — has been the laws of states 
 permitting banks and trust companies to organize and do business 
 without adequate capitalization, or even the indirect restraint on 
 over issues of credit imposed through reserve requirements. Among 
 the worst institutional offenders have been trust companies. These 
 corporations have been strictly controlled so far as the initial capital 
 security given to trust estates and trust obligations are concerned, 
 but in their banking and common credit relations they have so 
 conducted themselves as to rank them with institutions that, in 1837, 
 would have been called "wildcat" banks. That is to say, their 
 capital has been largely for the protection of trusts ; they have 
 also been permitted to do a banking business ; for this banking 
 business no separate or extra capitalization has been required ; hav- 
 ing their capital largely tied up in security deposits with state 
 authorities, they have been permitted to incur obligations to depos- 
 itors without even the money-reserve requirements imposed on 
 state banks ; when similar money reserves are required, they have 
 been permitted to borrow them instead of being required to furnish 
 them out of their own capital; in fact the laws specifically permit 
 a portion to be in the form of loans to other institutions, enabline 
 them to carry mutual loans in lieu of money reserves, a fault which 
 attaches to state banks as well as to trust companies. They have 
 also been permitted to engage in underwriting and other practices, 
 
 (445) 
 
146 The Annals of the American Academy 
 
 from which national banking institutions, on grounds of public 
 policy, have been debarred. 
 
 The net result of such privileges has been : 
 
 (i) To force on national banks larger capital cost than is 
 required of state institutions. 
 
 (2) To enable the state banks and trust companies to offer to 
 customers interest on their own deposit obligations as an induce- 
 ment to purchase their credit, in some instances as high as 4 or 5 
 per cent being paid on their deposit liabilities. 
 
 (3) While they are thus stealing the customers of national 
 banks thev have been in a position to force them to carry the money 
 reserves on which the trust companies relied in time of emergency 
 to support their own credit. 
 
 By reason of these laws and the more favorable conditions for 
 profitable employment of capital, the state banks and trust com- 
 panies have been making large inroads on the business of national 
 banks. The following summary of individual deposits from New 
 York City and Brooklyn is taken from the last report of the Comp- 
 troller of the Currency : 
 
 Individual deposits. Increase. Decrease. 
 
 Banks. ,'.?,?^- ,,?,?°^- Millions. Millions. 
 
 Millions. Millions. 
 
 National banks 653.3 600.8 52.5 
 
 State banks 3237 336.9 13-2 
 
 Savings banks 92$.! 962.6 37.5 
 
 Loan trust companies 790.8 840.4 58.6 
 
 2,692.9 109.3 
 
 While the state institutions have been gradually taking the 
 business of national banks, two-thirds of the entire money reserves 
 are carried by national banks : 
 
 Money Money 
 
 Reserves Reserves 
 Banks igo6. 1907. 
 
 Millions. Millions. 
 
 National banks 227.5 234.6 
 
 State banks 54-6 65.9 
 
 Savings banks 6.4 6.4 
 
 Loan trust companies 334 56.8 
 
 The wisdom of attempting to directly control the banking 
 legislation of states may be questioned. There can be no question, 
 
 (446) 
 
Neglected Aspects of Currency and Banking 147 
 
 however, about the wisdom of making conditions so favorable to 
 national banks which are doing business in a manner to protect the 
 community that they can succeed. To this end, one of the points 
 of attack would be the present reserve law ; another would be to 
 refuse to permit a national bank to receive deposits or in any man- 
 ner to become directly indebted to or to do other than a collection 
 business with an institution having inferior capital requirements ; 
 again, by permitting national banks to increase their circulation 
 on collateral security ad libitum, as well as to procure collateral 
 loans from the United States Treasury in the form of deposits, 
 upon the payment of 5 or 6 per cent, the credit accounts to cus- 
 tomers of national banking institutions might always be protected. 
 If state banks and trust companies were required to carry their own 
 reserves, do their own clearing, support their own credit, and the 
 collateral aid of the United States Treasury were limited to the 
 national banking system, both the national bank customer and the 
 bank itself would soon recognize the advantage of compliance with 
 laws for the safe conduct of business. 
 
 (447) 
 
THE LESSONS OF THE PANIC OF 1907 
 
 By S. Wexler, 
 Vice-President Whitney-Central National Bank, New Orleans, La. 
 
 Notwithstanding the fact that panics have occurred in nearly 
 every decade of this century, in some one or more of the great com- 
 mercial countries of the world, all due more or less to the same 
 primary causes, and that volumes have been written for the en- 
 lightenment of future generations setting forth the causes and 
 lessons of each crisis as it occurred, the financial convulsion of 
 1907 proves that the lesson must be constantly relearned and that 
 the human will is too weak to resist the impelling greed for wealth 
 and ambition for commercial power. Every effort, therefore, to 
 teach the lessons of the panic of 1907 should be eagerly grasped 
 in the hope, however illusive, that it may point out to future gen- 
 erations of business men the dangerous currents that lead to disas- 
 ter, and how to avoid them. 
 
 Much of our trouble has been caused by the blind worship by 
 the lesser lights of the great commercial and financial luminaries. 
 Men famed for wealth, however acquired, in charge of the great 
 financial organizations, have allowed their names to serve as the 
 loadstone to draw the small investor into innumerable unsound 
 financial schemes which, had he carefully investigated as he does 
 matters pertaining to his own business, he would have scrupulously 
 avoided. The small investor may, therefore, learn that however 
 attractive the prospectus, however alluring the promised profit, 
 however great and high the promoter, his own careful investigation 
 and the application of his own sound business judgment must be 
 the only safe guide to his investment. 
 
 The promoter should learn from this panic that he must be 
 classed either as an honest architect of sound financial plans or an 
 ordinary grafter, and that there is a field for the wise and foreseeing 
 student of conditions and opportunities, which he can honestly make 
 attractive to investors, while for the unscrupulous promoter of 
 get-rich-quick concerns, the dishonest predator upon innocent 
 wealth, there vawns the jail or the suicide's grave. 
 
 (448) 
 
The Lessons of the Panie of ipoy j.q 
 
 „.»H^" T' ~""'=""°" "><> P--^^^. ftrough the medium of which 
 nearly ah great „„der.al<i„gs are advertised, may also learn its les 
 son. Many of our most prominent newspapers have for monev 
 payments, been accessory to the frauds which have been' perpeTrated 
 upon the pubhc. They have advertised mining compan eTXsf 
 
 dti^rrr wT'^h"' ^ "* '" *^ ^^°""^ ■" -- -° 
 
 wll I , We^t. and a sumptuous office in the neighborhood of 
 tlv S,';'=;'-;'°*-.'' «"' cuppings inspired and paid for, which 
 they w,dely d.ssemmate among the public. The proper ftnrt on 
 of a newspaper. v,z., the education of the people Ld the molding 
 of pubhc op,n,on in legitintate channels, seem to have be"n f^r^ 
 gotten m the mad rush to increase circulation and dividends and 
 many sheets n,ade famous by their great founders, to-day pub ish 
 anythmg for wh.ch pay is received, or which will makeThe' paper 
 
 th. '^^T- "T^Pf" *"' ^"^"""^ f^'i^P' 'riminis to many of 
 the w,nd-nflated schemes, the bursting of which", with their coLe 
 quent losses has helped to destroy confidence. While the reedom 
 
 mnocent mto a gambling den. 
 
 The merchant who has expanded his business upon the liberal 
 cred,, proffered by note brokers, to such an e.xten't tha h ha 
 looked upon such borrowed money as a oart of hi. . -,7 u 
 suffered likewise during these strenuous . m'es an h caT^:! an'd 
 profitably learn that unwieldy stocks of goods and too"l lines 
 of cred,t m t.mes of great business activity, may become The 
 boomerang of disaster in the kaleidoscopic changes whTh ou 
 affairs frequently undergo. He should also learn tot his capita 
 should be kept hquid and in his business, and not invest d Hhe 
 stocks of o her companies, which cannot be convertid Tnto cash 
 when needed, nor used as collateral for credit 
 
 The manufacturer has been a party to the mistake of the 
 merchant, m overselling his output, delaying shipments in the Ison 
 when the goods m.ght be sold and forcing the merchants to anticT 
 
150 The Annals of the American Academy 
 
 pate their wants long in advance of any certainty of proportionate 
 demand. The cancellation of orders he is compelled to accept and 
 the shutting down of his mills may well teach the folly and unfair- 
 ness of this course. The manufacturer may also learn that the 
 enlargement of plants, the installation of new machinery on bor- 
 rowed money, is a dangerous practice and that, though with apparent 
 success, he is building upon a foundation of sand. 
 
 The banker has also his lesson to learn, from the occurrences 
 of the past few months. He must know that the man entrusted 
 with the liquid capital of the nation and with the savings of the 
 multitude, should not be a gambler or speculator in real estate 
 and stocks. He must know that the funds entrusted to him are as 
 sacred from his own depredations as from the cracksman who 
 blows his vaults. He should see clearly that he must choose his 
 profession, and that if it be that of a banker in a state or national 
 institution, he must disassociate himself from speculation and 
 schemes, and devote his entire time, thought and energy to the inter- 
 ests he has sworn to conserve. The contrary course pursued in a 
 few instances, in New York and elsewhere, has done much to de- 
 stroy confidence and has caused the extraordinary hoarding of 
 money, resulting in the panic of 1907. 
 
 The public servants, such as the railroads, steamship lines, 
 trolley companies, etc., must have learned ere we reached the acute 
 stage of this panic, that the people cannot "be damned," that 
 monopoly, though in the nature of things an incident to their fran- 
 chises, cannot disregard the life and comfort of the public, that in 
 future they must not wait to be forced to treat the public fairly, 
 but must meet them and redress their wrongs willingly and even 
 anticipate their wants, unless they wish to imperil their very ex- 
 istence. On the other hand, the public must not be unreasonable 
 or unjust, and must not expect a service disproportionate to the 
 traffic. Our wonderful growth in the past century has been to a 
 large extent attributable to the rapid extension of our railroads 
 and their efforts to settle immigration along their lines. 
 
 The individual termed statesman, but more often deserving the 
 cognomen of politician, may well learn a most important lesson in 
 fidelity to his country and appreciation of her needs. He is most 
 often chosen, not for his peculiar fitness for his duties, but because 
 he is a "good fellow," a liberal spender and a good stump speaker. 
 
 (450) 
 
The Lessons of the Panic of igo; ^ci 
 
 B„ feTv t ^°"'I °" °' ^'' "^""""-y °-- °f his native state. 
 
 to^k ;„ r '■'^"""- '"°^' ""^"■■'= ^ 1"<^^"°" by how it will 
 
 look to their constttuents and often prefer to vote wronelv tiTa 
 correctly, subject to the necessity of explaining at 1 onte W 1 
 tha we must send better men to n,ake our laws and ha, rea 
 students, politically disinterested, should be consulted t fra.nni 
 our miportant measures. trannng 
 
 our lel°sfa''torfc"'t"'t "' *' ''* °' P^'^'°"^"> "' ^"ability of 
 our legislators can be shown, than their attitude on the currency 
 
 qu s,,on now pending. This question, involving the very fuXnen- 
 
 ubiect o7 rorr^rr' r' ''"^""'=" ^^■^'■="^' '^ =" ^^^'^.o^zi 
 
 ne nation Our Senate committee has framed an ininuitious bill 
 
 hold a large amount of unsold railroad and municipal bonds and 
 .s without a scmtila of the principles of sound finance ; bTtbeif 
 a party measure," we have still ,o hear the voice rf a' stall! 
 Republicanin protest. The House committee in turn has presnte] 
 
 a?e balk'fhan ^"^'"'"^ T'^""'^' P™"'''"^ "'^' 'he strong and 
 
 onducts Ws K,,!"" Vi'' ""^'" ""''• "^■''"S *^ bankef who 
 conducts his business safely and conservatively, pay for the defi- 
 ciencies of those who are reckless and inexperienced.' Yet we hear 
 no voien p.^^ests against this bill, which is contrary to eveTy co" 
 
 tituional principle of right. Must we learn from his that our" 
 
 afo THat'*e:'"'°r l'^ ^'?'''"^' '° '^^™^ => P™"" and c n s.e 
 aw, or that they are lacking m fidelity to their country and shirkinc- 
 
 their responsibility for fear of losing office? \ e,Z . ^ 
 
 learn the valuable lessons of the h^uf and read tr^XZ 
 
 renylg- i:r:'::/^^V'""-'^ ^'^ "°"^-- passed t^nd"::: 
 
 - comp^i-rL-rerpLZoTirr::^- r l- "- 
 
 the conservatives serious alarm ^"^^^ 
 
 (451) 
 
152 The Annals of the American Academy 
 
 thing from the law of the Sagas to bear kilHng in the swamps, that 
 the greatest men have been either the speciahsts or those who, with 
 the acumen and judgment of human nature, have had the capability 
 to select wise advisers. He should study conditions and apply 
 remedies in such doses as will cure and not kill the patient. He 
 should be careful in correcting evils and punishing wrongdoing, 
 not to inflict greater injury upon the innocent than on the guilty. 
 He should learn more the use of expert commissions, and have 
 more regard for their recommendations. Men can be selected in 
 this great country, capable of judiciously solving any question for 
 the public good, but they are men whose vocations, study and train- 
 ing have peculiarly fitted them. His hold upon the affections of 
 the public and his unimpeachable honesty and strong patriotism, 
 place him in a better position for the correction of existing evils 
 and the betterment of our conditions, than any other who has ever 
 sat in the Executive's chair, and it requires but the application of 
 carefully thought-out methods with sound and conservative prin- 
 ciples of good government, to bring about the restoration of con- 
 fidence and the return to normal social and financial conditions. 
 
 The people must learn that extravagance is not comfort and 
 that ostentatious display of wealth not only denotes illbreeding, but 
 promotes anarchy and socialism. They must learn something of 
 that quality which the Germans call "Gemuthlichkeit," which means 
 comfort and contentment, the willingness to be satisfied with pros- 
 perity without stretching every enterprise to the point of breaking. 
 They should become imbued with a greater desire for the modest com- 
 forts of home life, and in turn instill such ideas into their children, so 
 as to change at least that characteristic of our people, that we term 
 "strenuosity," into a more modified form of applied energy. They 
 must discontinue their antagonism to wealth and corporate power 
 when not exercised for evil, and must have the courage to do right 
 and to be fair to all men, whether they be the representatives of 
 millions or the toilers by the day. They must not believe, because 
 some railroad presidents employ their offices in stock jobbing, or 
 some bankers prostitute their offices for gain, or some politicians 
 are corrupt, that all men in such professions are of similar character. 
 
 Let us then all learn that industry and effort and venture must 
 have their reward ; that men do not traverse the Plains, tunnel the 
 Rockies and divert the courses of streams, simply to find investment 
 
 (452) 
 
The Lessons of the Panic of igoy 153 
 
 for capital to make a moderate interest; and that, therefore, pros- 
 pective results may be justly if not excessively capitalized. 
 
 Many more lessons might be referred to, but the salient ones 
 have been given, and v^e can learn to encourage our neighbor in 
 the conviction that we live in a land blessed with the sweetness of 
 health and plenty, needing but the magic touch of higher educa- 
 tion, deeper home patriotism and greater confidence in each other. 
 
 (453) 
 
THE OBSTACLES TO CURRENCY REFORM 
 
 By Lyman J. Gage^ 
 Ex-Secretary of the Treasury. 
 
 The first evidence that a financial crisis had arisen in the late 
 months of 1907, was found in the banking situation in New York 
 City. The conditions necessary to produce it had evolved slowly. 
 These conditions were an increasing expansion of bank credits, 
 payable on demand, given in exchange for obligations, whether 
 payable by their terms on demand, or at a future date, secured as 
 to payment by certificates of stock ownership in some corporation, 
 or by debt obligations, redeemable by their terms at some distant 
 period of time. There then was, and long had been, an accepted theory 
 that good investment securities dealt in on the New York Stock 
 Exchange were at any time convertible into cash through a sale 
 in the open market. One of the "lessons" learned is that the theory 
 stated is true to a comparatively narrow degree and, put to a serious 
 test, it utterly breaks down. We have learned that where all 
 become "would-be" sellers, there is no power to buy. We have 
 learned in a new and impressive way that expanding prices, stimu- 
 lated by expanding credits, will at last lead to a crisis which must 
 be faced. 
 
 Such a crisis was reached in the early autumn months of 1907. 
 It was precipitated by calls from the interior for money to "move 
 the crops." Response to these calls weakened the foundation of 
 cash reserve, in the New York banks, to which the great super- 
 structure of bank loans and bank "deposits" stood logically related. 
 Something similar has been witnessed at each recurring harvest 
 season for years past, and in truth it may be said, that in our system 
 of banking and currency, a financial crisis is an annual visitation. 
 Reference to the tabulated movements in loans, deposits and the 
 cash reserve, sufficiently prove it to be so. But did not the crisis 
 of 1907 differ from the crises of recent years? Yes, but rather in 
 the intensity, than in the nature of it. The crisis, with all its neces- 
 sary incidents of loss and distress, might have been met and over- 
 come as have the yearly recurring crisis to which reference has 
 
 (454) 
 
Obstacles to Currency Reform 
 
 155 
 
 been made, except for certain aggravating accessories of fake bank- 
 ing and reckless administration brought suddenly into the light of 
 publicity by the exactions of the occasion. 
 
 The situation of the Knickerbocker Trust Company and some 
 institutions similar to it changed the condition of things. What 
 would, rightly named, have been a grave crisis became something 
 else, something more fierce, dangerous and destructive. The crisis 
 was metamorphosed into a wild, unreasoning and destructive panic. 
 There is always danger of such an eventuation in every period 
 of crisis, or general financial strain, and our experience goes to 
 show that our financial system offers little or no hindrance to 
 the degenerative process which begins in crisis and ends in panic. 
 As with other peoples, a crisis is not an unfamiliar experience. 
 Our marked inferiority is shown in the method and machinery 
 which we employ to readjust the conditions which have become 
 acute and threatening. It may be profitable to compare our finan- 
 cial machinery with that of France, as indicated by familiar history. 
 In 1870-71 France was in a state bordering on complete 
 anarchy. She had fought an exhausting but futile war. She wit- 
 nessed the triumphant march of the enemy's victorious army 
 through the streets of her capital. She was under duress to pay 
 a thousand millions of dollars of war indemnity to her conqueror. 
 She was obliged to suffer the rise of the Commune— with its regime 
 of riot, arson, bloodshed and ruin. Under circumstances like these, 
 industry of course, suffered, trade and commerce were deeply 
 afflicted, but through all the trying period these were steadied 
 and supported by the continued operations of that great institu- 
 tion, the Bank of France. True, under the exigencies of events— 
 and in the interest of prudence the bank suspended for a time 
 specie payment upon its outstanding note issues, then amounting 
 to some five hundred millions of dollars. These notes, it must be 
 remembered, were not secured by the pledge of security in the 
 hands of independent trustees. They were what must be denomi- 
 nated credit notes, or, if you prefer a name more opprobrious, 
 they were an "asset currency." Nevertheless, bv their use the bank 
 continued to discharge its true and proper function with a minimum 
 of mterruption and derangement and at no time in all that trying 
 period did gold command a premium so high, measured by the notes 
 of the Bank of France, as did ordinary paper money command with 
 
 (455) 
 
156 The Annals of the American Academy 
 
 us, measured by clearing-house checks, at a period of profound 
 peace at the culmination of a year of unexampled prosperity, here- 
 after to be known as "The Panic Year 1907." 
 
 We had no Bank of France nor anything analogous to it. We 
 had, instead, some 6,500 national banks, besides numberless other 
 similar institutions, all of which, with a few remarkable exceptions, 
 suddenly ceased to perform their functions as intermediaries in 
 the exchanges and as lenders of money or credit. The quick con- 
 sequences, — trade interruption, individual and corporate bankrupt- 
 cies, the relegation of labor to distressful idleness, are too near 
 and too familiar to our knowledge to need description. We have, 
 I believe, received another painful lesson from which we may rightly 
 gather that our banking and currency system must be put on new 
 and better foundations. I shall not take space to mark out a "plan" 
 for such a system. It may be allowed me here to point out some 
 of the obstacles which must be met and removed as a necessary 
 part of any adequate reform. 
 
 These obstacles consist of certain -financial artificialities in 
 government finances which, while they exist, make a return to 
 principles dictated by economic law nearly or quite impossible. 
 These artificialities menace the financial strength of the government 
 and embarrass the true path to a wise and adequate system of bank- 
 ing and currency. What are some of these artificialities? When 
 and how were they born? To answer the last question first, they 
 were developed chiefly as a result of the necessities of the govern- 
 ment in the Civil War. Of what do they consist? I name them 
 briefly. 
 
 (i) The legal tender note — greenback. If it w'ere necessary 
 to issue them in the beginning they should long ago have been 
 retired. They were a device born of a temporary need. They 
 were false to the economic requirements of a true currency. Legally 
 equal to gold as a cash reserve, we witness the anomaly of a debt 
 obligation issued by the government made the legal basis for debt 
 obligations issued by banks, to an amount four times as great. 
 They thus weaken the foundation of metallic money — on which 
 the fabric of our whole credit system must finally rest. It is per- 
 ceived that non-interest notes payable on demand are an immediate 
 economy over time obligations charged with interest, and this 
 benefit the people refuse to surrender. 
 
 (456) 
 
Obstacles to Currency Reform 157 
 
 (2) The system of national bank notes was also a device 
 to create an artificial market for United States bonds. Their issue 
 and use bear no relation to the true law which should govern in 
 the field where paper money performs its true function. The result 
 is seen in two directions. In the first place it has artificialized 
 the price of government bonds to an extent of at least 20 per cent, 
 measured by the world's standard of value as found in a free and 
 open market, where similar securities are bought and sold. As an 
 incident to this artificialism, the government has become the guar- 
 antor of payment for some seven hundred millions of notes issued 
 by more than 6,500 so-called national banks. That is a false rela- 
 tionship. It ought not to continue. 
 
 (3) By the drift of events, and through political pressure, 
 there has been injected into the channels of our circulation some 
 six hundred millions of silver now possessed of a natural commer- 
 cial value, measured by gold, of about three hundred millions, but 
 maintained at parity with gold through the government's pledge 
 to maintain such a parity. 
 
 Looked at from the government's side, we have here a direct 
 or contingent liability consisting of United States notes, $346,000,- 
 000, silver currency parity, $300,000,000, national bank notes, $700,- 
 000,000. This liability is not at all embarrassing to the govern- 
 ment at the moment and is not likely to become so, provided we 
 can continuously avert foreign or domestic war, and provided 
 further, that the channels of trade where money circulates, can 
 be to a large degree monopolized by the greenbacks and by silver 
 or silver certificates. It is not germane to this discussion to consider 
 the financial embarrassment which would face the government 
 by reason of its artificial relation to money and currency, in 
 the event of a costly and expensive war. I cannot, however, for- 
 bear to invite consideration to what is now everywhere recognized ; 
 viz., that a strong military chest and an unimpeachable credit, 
 are as essential to success in war as are armies and navies. To the 
 support of these latter we devote an approximate hundred millions 
 each per annum, but for the sake of economizing a few millions 
 we neglect to fortify our financial defense, we drift along in a posi- 
 tion which must be confessed as weak if not inexcusable. It is, 
 however, to the reflex efifect upon our general industrial affairs 
 that my thought must be directed. I have said that the path to 
 
 (457) 
 
158 The Annals of the American Academy 
 
 more perfect conditions in banking and currency is blocked by the 
 artificialities developed by our financial legislation. 
 
 There would be no proper cause for complaint in this if it 
 were true, as to many minds it seems to be true that the banking 
 function, with its currency features, is a sort of privilege granted 
 by the grace of government to certain favored groups who are 
 thus -permitted to exploit the people for their own exclusive aggran- 
 dizement. If such a view were the correct one, then the more of 
 obstacles, restrictions and repression the better. But when a 
 correct understanding takes the place of these misapprehensions, 
 then it will be perceived that what hinders, restricts or prevents 
 the just economic exercise of the banking function, interferes to 
 embarass an agency which next below production and transporta- 
 tion ministers most directly to the industrial life wherein our mate- 
 rial prosperity must be found. 
 
 In every other relationship, existing between men, there is a 
 true law which, if discovered and obeyed, will bring in peace and 
 happiness. So, in the field of banking and currency, there are 
 principles which, recognized and adopted as the rule of action, 
 must bring in as a resultant the highest benefits to all. Our history 
 for the last forty years suggests in the most emphatic way that our 
 banking and currency system has at some points been out of har- 
 mony with the true laws which should govern it. Unhappily, too, 
 it is evident enough that if this be true the general apprehension 
 of the fact is not at present wide enough or deep enough to induce 
 the study of first principles, much less to give them the right of 
 way, even if cherished prejudices, or apparent temporary advan- 
 tages must needs be sacrificed. 
 
 Is it then possible for us to recast out statute laws so as to 
 forestall in the future, the shameful situation in which our commer- 
 cial and industrial interests now find themselves, as a consequence 
 of the sudden, yet necessary cessation of proper functioning by the 
 banking system, which we have been silly enough to call "the best 
 on earth?" Yes, undoubtedly, provided we are able to recognize 
 that principles are superior to make-shift policies. Patch-work leg- 
 islation will not accomplish it. Invention, however ingenious, will 
 only flatter, deceive and betray us. Only by complete recognition 
 of and conformity to economic law, now fairly well understood 
 by the thoughtful and experienced student — applied and tested as 
 
 (458) 
 
Obstacles to Currency Reform 159 
 
 it has been by older and more experienced nations — can the humil- 
 iating and costly lesson, furnished by the late "crisis" be made to 
 bear fruit for the healing of the nation. 
 
 Impressed by the lesson to be drawn from the late crisis, our 
 Senators and Representatives in Congress assembled, are engaged, 
 to some extent, in considering by what measures the future can be 
 guarded from the disasters Avhich have overtaken us in the past 
 and present time. Two bills of especial prominence are offered for 
 approval. One is known as the Aldrich Bill, offered in the Senate ; 
 the other is known as the Fowler Bill, offered in the House. The 
 first named seeks to bring relief to a financial crisis by providing 
 an artificial method through which currency may be issued by the 
 banks in a time of extraordinary pressure. It is a make-shift in- 
 vention, operating to supplement other artificialities, the existence 
 and continuation of which have been and will be disturbing, un- 
 settling factors in the department of our credit machinery, the right 
 working of which is hardly second in importance to continuous 
 production and uninterrupted facilities for transportation. The 
 Fowler Bill, in marked contrast, betrays in its author a thorough 
 comprehension of what may be called the fundamentals in banking 
 currency and exchange. Its scope is comprehensive, and it seeks 
 to establish foundations so firm that while mild forms of crisis 
 will and must of necessity occur, the degenerating tendency toward 
 panic will be next to impossible. It eliminates almost completely 
 the present injurous influence of government finances, to which I 
 have referred, and without cost to the government or the people, 
 enormously strengthens our public treasury to meet, if called upon, 
 the emergencies of war. It puts the bank into those natural rela- 
 tions under which it can safely and effectively serve the commercial 
 and industrial needs of the country. 
 
 The propositions involved in the two measures are radically 
 different. As the only two which have yet appeared, they justly 
 demand studious attention and careful thought from every citizen. 
 
 (459) 
 
A NATIONAL CLEARING HOUSE AS A SAFEGUARD 
 
 AGAINST PANICS 
 
 By J. M. Elliott, 
 President First National Bank of Los Angeles, Cal. 
 
 The panic of 1907 emphasized the closeness of even the remote 
 parts of the country to the financial centers, and also the practical 
 impossibility of any one banking institution's standing alone, no 
 matter how carefully managed, in a city large enough to contain 
 several competitors. There is a necessity of co-operation and a 
 need of some strong bond of union among all the banks of a 
 given locality. This may properly take the form of a clearing- 
 house corporation with a charter and capital, through which the 
 financial afifairs of the members and all institutions clearing through 
 them could be regulated. It is patent to all who have observed, 
 that a panic is but the converse of the tide of extravagance, high 
 prices and speculation, and if these latter could be curbed or even 
 modified, the former would not occur. If the clearing-house plan for 
 individual cities was extended and a national clearing house formed, 
 of which each one of the local clearing houses would be a con- 
 stituent part, the trade of the country might be so regulated as to 
 avoid the dangers which bring about these troubles, and though 
 our advance as a people would appear slower, it would be saner 
 and safer in every way. 
 
 These local clearing-house corporations w^hich I am suggesting 
 should, in addition to the usual exchange of checks and daily settle- 
 ment between its members, employ a high-priced auditor, whose 
 business would be to constantly and critically examine into the 
 afifairs of the members, and also of all banks clearing through them, 
 and to report to the committee any infraction of good banking 
 principles ; it being the rule that any bank offending, would be first 
 admonished, then fined, and finally expelled, if the practices were 
 continued. Among such practices to be reprobated I may inention, — 
 pyramiding bank deposits, paying too large rates of interest, loaning 
 too heavily to any one borrower or set of borrowers — especially 
 directors, organizing a clique to maintain a chain of banks, the use 
 
 (460) 
 
National Clearing House as a Panic Safeguard i6i 
 
 by the officers of the money or influence of their respective banks 
 for their personal benefit. 
 
 The national clearing house would be governed by a board 
 elected by the members, and it should have a competent staff which 
 would, through the reports of the local clearing houses, keep in 
 touch with the business of the country. The order of the central 
 association to all its members to decline to handle the checks of 
 any bank which had been for cause expelled from a local organiza- 
 tion, would be a penalty that few institutions would care to face. 
 If this national clearing house should fill its mission well, it would 
 not only inspire confidence in itself, but in all of its ramifications, 
 and it would uplift the whole banking business of the country to a 
 higher plane. It would in time surely attract the attention of 
 Congress, and it would be recognized as the proper channel through 
 which legislation would reach the banks of the country. It might 
 in the end so modify the existing laws that no institution would be 
 allowed to receive deposits unless it had a government charter 
 permitting it to do so, and government examination to assist in 
 correcting any untoward tendency. This national association could 
 adopt rules which would keep the commercial banks, the savings 
 banks and the trust companies closely confined to their own special 
 lines. 
 
 The bankers of a given locality know quite well the quality 
 of the management of their competitors, but under present condi- 
 tions, those who are conducting their business in careful and hon- 
 orable fashion feel compelled to keep silence while the speculative, 
 the unfit, the unfair, and sometimes the fraudulent, competitor is 
 following the road to ruin for himself and incidentally bringing 
 trouble, anxiety and loss to all honestly engaged in the business, be- 
 sides engendering that lack of confidence in the whole banking fabric 
 which has been built up by the reputable by years of honest dealing. 
 The confidence of its customers in any bank is as valuable as its 
 capital stock, and it is unfair to allow it to be damaged by any 
 one man or institution. If the government cannot provide protec- 
 tion for this valuable asset of ours which we have labored patiently 
 for years to build up, let the bankers of the country band together 
 in some way to protect themselves, their depositors and stock- 
 holders. 
 
 One other lesson of the financial trouble has been, I think, ap- 
 
 (461) 
 
i62 The Annals of the American Academy 
 
 parent, — that the bank officers who were interested in many out- 
 side institutions or affairs were handicapped thereby. In other 
 words, — the banker, to meet his obHgations in the best way, should 
 largely confine himself to his bank. 
 
 In the Far West practically the same means were taken as in 
 the East to tide over the recent time of distress. The country banks 
 were very much less affected than those of the cities, and in many 
 cases conducted their business almost on normal lines. In Los 
 Angeles, clearing-house loan certificates were issued, which have 
 at this writing been retired. The ratio of issue was 66-/3 to the 
 100 of approved securities. The scrip which was issued was 
 merely a certificate that securities representing twice the amount 
 of the face of each paper were held by the clearing-house committee, 
 and its redemption was guaranteed by all the clearing-house banks. 
 The non-clearing-house banks were allowed to avail themselves 
 of the facilities of the clearing-house association in proportion to 
 their needs and capital. There was some hesitation at first, princi- 
 pally by the laboring men, as to the acceptance of these certificates, 
 but after a short time they passed current without any question, 
 and their issuance had the approval of the large majority of thinking 
 people. About ninety per cent of the total amovmt issued has been 
 at this writing retired, and the ordinary circulation has very largely 
 resumed its place. 
 
 (462) 
 
I .' 
 
 TRUST COMPANIES AND RESERVES 
 
 By a. S. Frissell, 
 President Fifth Avenue Bank, New York. 
 
 The difference between a civilized and a barbarous country;, 
 from a commercial point of view, is that one uses credit largely, 
 and the other but little. Credit rests upon cash ; banking rests 
 upon cash. A reserve is the foundation on which the stiperstruc- 
 ture of credit rests, and it must be broad enough to carry the weight. 
 A reserve is little used in ordinary times, but it is kept not only for 
 a basis of credit, but for actual use in times like the present. In 
 1893, as well as this year, the clearing-house banks in New York 
 decreased their reserves from 25 per cent to 20 per cent, and 
 by so doing kept the Stock Exchange open, relieved the trust 
 company situation, shipped money to the interior, and in general 
 built a bulwark against extreme fright and loss. Another 
 important thing about reserve is mobility. The clearing-house 
 banks, by acting together without friction or trouble, and by the 
 issuance of clearing-house certificates, automatically helped their 
 weaker members, and the w'caker banks obtained such help as 
 was necessary without delay or humiliation. Even before the loan 
 certificates were issued, it was easy for the clearing-house banks, 
 with their accumulated reserves, to pay if necessary the deposits 
 of the three banks which needed assistance and reorganization. 
 Compare this with the halting, irregular, and protracted manner 
 in which the two trust companies were helped ! There were lines 
 of anxious depositors outside their doors for weeks. These trust 
 companies could not immediately obtain the requisite assistance. This 
 shows the difference between the disadvantages of the slight trust 
 company reserves, as now managed, and the tried and ample re- 
 serves of the clearing-house banks. The claim that additional cash 
 reserve takes money out of circttlation is without force if reserves 
 are insufficient. 
 
 Deposits of the clearing-house banks in the Citv of New York 
 
 (463) 
 
164 The Annals of the American Academy 
 
 have increased from $370,300,000 in 1893 to over one billion dollars, 
 owing in part to the large increase in the production of gold in the 
 w^orld. The clearing-house banks have built up their cash reserves 
 since 1893 from $93,000,000 to $256,000,000. The fact that the 
 trust companies in the Borough of Manhattan have not increased 
 their reserves correspondingly while their deposits have been in- 
 creasing, from about $224,000,000 in 1893 to over one billion dollars 
 in 1905 has contributed to the present panic. A billion dollars 
 in deposits is a superstructure that cannot be maintained on a 
 5 per cent cash reserve, and it was sure to topple over. 
 
 Time Favorable for Increasing Reserves 
 
 There is a difference between the periodical lock-up of funds 
 in the United States Treasury and the gradual increase of reserve 
 by banks and trust companies, because after the reserve has once 
 been accumulated it fluctuates only as the deposits rise and fall. 
 We are in a position similar to that of a country desiring to get on 
 a gold basis. Gold naturally flows where it is most desired. Just 
 at this time the accumulation of additional reserve can be easily 
 accomplished. In the panic of 1893, after the reserves of the 
 clearing-house banks had gone down to 20 per cent, as was the case 
 this year, they increased before the end of the year to about 
 eighty million dollars surplus reserve above 25 per cent. This was 
 on $506,000,000 deposits — less than half of our present deposits 
 in clearing-house banks. The same increase after the close of 
 our present stringency would give the banks over $160,000,000 
 surplus reserve ; should we succeed in getting this amount it would 
 be nearly enough for the reserves of the trust companies. Another 
 reason why this is an exceptionally good time for building up re- 
 serves is that the trust company deposits are low, and a relatively 
 smaller amount of cash will be required. A similar situation can- 
 not be expected to occur tmtil after the next panic. 
 
 If the trust companies, with or without legislation, will judi- 
 ciously lock up the coming plethora of money in their own vaults, 
 they will hold, in whole or in part, the gold which has been shipped 
 here in such large quantities, and the rates of discount will not be 
 high. 
 
 (464) 
 
Trust Companies and Reserves 165 
 
 Trust Companies Should Keep Their Ozvn Reserves 
 
 There is a reason for country banks keeping reserve accounts 
 in New York, because their business requires them to draw on New 
 York, but there is no economic reason for a trust company to keep 
 a reserve account in another institution in the same city, other 
 than in a central reserve bank Hke the Bank of England. A few 
 years ago, even as late as 1897, when the trust company deposits 
 were only $258,000,000, they were small compared with the de- 
 posits of the clearing-house banks, and it was not a matter of so 
 much importance, but now when the trust company deposits have 
 been nearly equal to those of the clearing-house banks, the situa- 
 tion is serious. 
 
 One objection to allowing the reserve of one institution to be 
 kept in another institution in the same city has developed in the 
 recent panic. Under the reciprocal reserve plan Trust Company A 
 deposits $500,000 with Trust Company B, Trust Company B de- 
 posits an equal sum with Trust Company C, and Trust Company 
 C deposits the same amount with Trust Company A, thus making 
 one-half million dollars counted as reserve three times. 
 
 A number of the recent reports of the joint-stock banks in 
 London show that even there they have leaned too much on the 
 Bank of England, and that it is necessary for the joint-stock banks 
 to keep a larger reserve in their own vaults. 
 
 Call Loans not a Substitute for Cash 
 It is objected that the cash reserves of trust companies are not 
 necessary, as they do not depend upon the cash, but upon their 
 call loans for fluctuations in deposits. This is no less true of the 
 national and state banks in New York City, but the stock market, 
 as well as all other business which is represented by dollars, de- 
 pends upon cash. One of the things that the clearing-house banks 
 have to do in a time like this is to see that sufficient money is lent 
 to share" and bond dealers, in order that there may be a market 
 for the purchase and sale of securities. In 1873 clearing-house 
 certificates were not issued early enough, and the condition of 
 affairs became so chaotic that it was necessary to close the Stock 
 Exchange for about ten days, and call loans could not be paid. 
 Support comes from the reserves, and the trust companies should 
 do their share. 
 
 (465) 
 
i66 The Annals of the American Academy 
 
 Difference in Reserr'cs Equivalent to a Rebate 
 
 If a town has >a railroad rebate, the competitive town without 
 the rebate goes to the wall. The press has shown how a system 
 of rebates has destroyed competition. The present discrimination 
 in favor of the trust companies, that is, between 25 per cent cash 
 reserve and 5 per cent cash reserve, is 80 per cent. If the trust 
 company cash reserves should be increased even to 20 per cent, the 
 rebate against the banks would be 20 per cent — that is, the difference 
 between 20 per cent and 25 per cent reserve. On the face of 
 it the comparative profits of the trust companies and banks may not 
 be of public interest, but a slight examination of the subject shows 
 that good banking is essential to the public good. The competition 
 of the trust companies, both in the city and state, has honeycombed 
 the banking situation ; it has tempted the banks, in order to meet 
 the competition, to take long loans for better rates and take undue 
 risks. It seemed necessary for the banks to do this in order that 
 they might pay the same rate of interest as the trust companies 
 did easily with their smaller reserve. The reports of the trust 
 companies, state and national banks in the Borough of Manhattan, 
 show that the trust companies get profit on 92.2 per cent of their 
 resources, as against 70.3 per cent and 70.9 per cent by the national 
 and state banks respectively ; these figures show how great the 
 rebate has been against the national and state banks in favor of 
 the trust company business. Even should the reserves of the trust 
 companies be increased to 20 per cent, they could frequently pay 
 I per cent more interest than the banks carrying 25 per cent 
 reserve. A few only of the old and established banks have, for 
 themselves, met the situation by refusing to pay interest at all, but 
 this is impracticable for the new or ordinary bank. 
 
 The Interest of a Fezv vs. Public Interest 
 
 The banking situation in New York is peculiar. There are 
 banks which have heavy deposits from country banks, and to this 
 extent they are protected from trust company competition. Other 
 banks in Wall Street have large trust company deposits ; this 
 enables them to accept the trust company competition with profit. 
 But the majority of the banks in the clearing house, as well as the 
 thirty other banks in the Borough of Manhattan which are not in 
 the clearing house, are not thus situated, and but few state and 
 
 (466) 
 
• 
 
 Trust Companies and Reserves 167 
 
 national banks throughout the State of New York have any of 
 the favorable conditions named above. They protest strongly 
 against the bad banking which is induced by this unfair competi- 
 tion. Two state institutions doing substantially the same business 
 should be under the same regulations as regards reserve, whether 
 called banks or trust companies. The report of the New York 
 State Commission appointed by Governor Hughes, properly tries 
 to help the situation as far as the countrv is concerned, but the 
 Borough of Manhattan is left to struggle with the difficulties alone 
 m a modified form. . ' 
 
 There are 404 national banks in the State of New York and 
 196 state banks, making 600 in all. Many of these banks have' long 
 and honorable records. The solution has been proposed by dif- 
 ferent trust company officers that the national and state banks should 
 become trust companies. It can fairly be asserted that this would 
 not be for the public good. 
 
 No Exclusive Right in Time Deposits 
 There is something amusing about the sacrosanct view re- 
 gardmg trust company deposits. There seems to be an implication 
 that tmie deposits belong to the trust companies of right Banks 
 have always favored deposits likely to remain, and in fact they 
 are the cream of the business. 
 
 The majority of the above-mentioned commission tried hard 
 to find some way of dififerentiating the trust companv deposits 
 so as to arrange for one reserve on deposits subject to check and a 
 different reserve on time deposits, but they found practical diffi- 
 culties in enforcing any such provision. 
 
 Then the commission tried to arrive at what should be the 
 reserve for total deposits. The statistics gathered by the commit- 
 tee, contained m the report, show that 
 
 The average gross deposits of the trust companies for three peri- 
 ods (January i, 1906; January i, 1907; August 22, 1907) 
 were . 
 
 Deduct from 'this $841,000,000 
 
 Average sums held as executor, etc ^c; 000 
 
 Which leaves net deposits of (to^^ ^„-. 
 
 ^ !})O00, 000,000 
 
 The average deposits represented by certificates were ?8i,ooo- 
 000, or only about 10 per cent of the net deposits. To represent 
 
 (467) 
 
i68 The Annals of the American Academy 
 
 this 10 per cent of time deposits, the report allows the trust com- 
 panies to keep 15 per cent cash reserve on their total deposits, 
 as against 25 per cent cash reserve proposed for the banks in 
 the Borough of Manhattan. This is really an allowance of 40 
 per cent in reserve to cover the 10 per cent of trust company de- 
 posits represented by certificates. 
 
 From my point of view this is not fair to the banks, as there 
 are probably many banks which have more than 10 per cent of 
 deposits which may fairly be called time deposits, such as funds 
 awaiting investment, etc. The bank I serve is one, and such banks 
 should be considered instead of discriminated against in new legis- 
 lation. Why should not those deposits of banks which are really 
 time deposits be considered as well as trust company time deposits? 
 The banks have been driven into paying interest by the trust com- 
 panies doing a banking business, and should have the same oppor- 
 tunities for receiving time deposits, on as favorable terms as the 
 trust companies. In fact, banks were organized to receive deposits, 
 while trust companies formerly only received deposits by inference. 
 Trust companies already have advantages over banks in that they 
 have a number of profitable functions other than receiving deposits. 
 
 Time Deposits Not Tested by Exchanges 
 
 The trust companies have argued that because the checks paid 
 over their counters daily are not as large in volume as those which 
 pass through the clearing house daily, it shows that their deposits 
 are permanent, and therefore less reserve is necessary. This may 
 or may not be true, because, taking a merchant for instance, while 
 his average balance may remain practically the same, the transac- 
 tions on his account may be very numerous. 
 
 Conclusion 
 
 A reserve for the state banks and trust companies in the 
 Borough of Manhattan of 25 per cent in cash will put them on a par 
 with the national banks, and will make the banking system uniform 
 as regards reserve. Should this reserve prove too high, or too 
 difficult of accomplishment, the reserve called for in the national 
 bank act could probably be modified. At present the national 
 banks are harassed by the unfair competition of the trust com- 
 panies, as shown by the introduction of bills in Congress tending 
 
 (468) 
 
Trust CoiiipcDiics and Reserves 169 
 
 to give them a better chance to compete with the trust companies. 
 The express intention of the legislature to equalize the reserves 
 of the national banks, state banks, and trust companies, would be 
 a basis unfler which all would be working together imder one re- 
 serve for sound banking, instead of working against each other, 
 as is the condition at the present time, and the advantages of sound 
 banking to the community as a whole can hardly be overestimated, 
 in view of the anxiety, loss, and depression of business caused by 
 the present panic. 
 
 (469) 
 
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