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Author: 
 
 Gookin, Frederick William 
 
 Title: 
 
 Our defective American 
 banking system 
 
 Place: 
 
 [Chicago] 
 
 Date: 
 
 1909 
 
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 Gookin, Frederick William, 1853- 1936 • . 
 
 Our defective American banking system; a diagnosis 
 and a prescription, by Frederick William Gookin. [Chi- 
 cago] Chicago literary club, 1909. 
 
 2 p. 1., 7-52 p., 1 1. 18"". (0» cover: Club papers) 
 
 "This paper was read before the Chicago literary club, on the evening 
 of November the second, nineteen hundred and eight. This edition consists 
 of fiwe hundred and twenty copies, privately printed for members of the 
 club, in the month of February, nineteen hundred and nine." 
 
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 OUR DEFECTIVE 
 AMERICAN BANKING SYSTEM 
 
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 Our Defective 
 American Banking System 
 
 A Diagnosis and a 
 Prescription 
 
 1 
 
 By 
 
 Frederick William Gookin 
 
 Chicago , Literary. CluJ; 
 
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 Copyright, 1909 
 FREDERICK WILLIAM GOOKIN 
 
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 i OUR DEFECTIVE AMERICAN 
 BANKING SYSTEM 
 
 HE periodic recurrence in 
 the United States of se- 
 vere financial crises, from 
 which the other great na- 
 tions of the world are near- 
 ly if not quite exempt, in- 
 dicates that something is 
 fundamentally wrong with 
 our banking system and credit machinery. 
 It is, indeed, not uncommon to hear that 
 system denounced as the worst now to be 
 found in any civilized land. To this ex- 
 tent has a glimmering of the truth begun 
 to penetrate our minds. A few of us 
 are beginning to sit up and rub our eyes, 
 and to ask whether it is creditable to our 
 prescience as a nation, or to the acumen of 
 our men of affairs, that such an incubus 
 upon our prosperity should be allowed to 
 continue. 
 
1 
 
 ( 
 
 This much fruit has come of the ups and 
 downs of the last sixteen years, and of the 
 active discussion of economic principles and 
 banking science to which they have given 
 rise. The nature of the disease from which 
 we suffer may now be said to be fairly well 
 understood. The amazing thing in con- 
 nection therewith is the widespread inabil- 
 ity to perceive what must be the remedy 
 if a remedy is ever to be applied. In large 
 measure this inability is due to deliberate 
 shutting of the eyes. But truth is not the 
 less vital because we are reluctant to rec- 
 ognize it. As the old adage puts it, 
 ' ' There are none so blind as those who 
 will not see." The bankers, in particular, 
 are resolute in their averted gaze. Their 
 attitude may be likened to that of men 
 afloat in badly designed and leaky craft 
 that in stormy weather can be kept above 
 water only with the utmost difficulty, yet 
 who are unwilling to consider, even for a 
 moment, anything more efficacious than 
 some novel pump, and who repel with hor- 
 ror the idea of closing the seams, or of trans- 
 ferring their persons and property to 
 staunch and seaworthy vessels of approved 
 construction. 
 
 To some extent, it must be admitted, the 
 hostility of the bankers comes from unwill- 
 ingness to be thought unpractical through 
 advocacy of measures which they believe 
 
 8 
 
 ^ 
 
 V 
 
 y V 
 
 / 
 
 have no chance of adoption, since legisla- 
 tors are too ignorant of the intricacies 
 of finance to venture upon a complete 
 overturning of the present system, and 
 managers and owners of existing banking 
 institutions may be counted upon to oppose 
 with all their might any enactment likely to 
 have that effect. And so, while continu- 
 ally complaining of the ills that need cor- 
 recting, they are unable to propose any 
 effective plan for doing away with them. 
 If only some one could devise a reformation 
 that would leave things as they are ! That 
 apparently is what many desire. They 
 might with as much reason expect the art 
 of swimming to be acquired without ven- 
 turing into the water. 
 
 What, then, should be done ? Is it such 
 a simple matter? Have not many of our 
 most experienced financiers puzzled their 
 heads over it for years without reaching any 
 conclusion ? Are they not wise in hesitat- 
 ing to recommend innovations the conse- 
 quences of which cannot possibly be fore- 
 seen? 
 
 The last of these questions may be an- 
 swered first. The placing of our banking 
 and financial system upon a thoroughly 
 scientific and eminently sound basis involves 
 no experiment whatever. There is not the 
 slightest need of trying anything that has 
 not been tried over and over again, that is 
 
I 
 
 II 
 
 not subject to the test of every-day use in 
 other countries of the first rank. 
 
 Before answering the question, ''What 
 should be done?" it will be well to glance 
 at certain things in the situation with which 
 we have to deal. 
 
 There are in the United States about 
 21,400 banking institutions, national, state, 
 and private. Theoretically, each of these 
 stands upon its own feet, so to speak; prac- 
 tically, all are made mutually dependent 
 upon each other by the practice of deposit- 
 ing and redepositing a large part of their 
 reserves with one another. By this prac- 
 tice, which is an outgrowth of the necessity 
 of carrying balances for exchange purposes, 
 all are tied together in a complex credit 
 structure inherently weak and certain to 
 break down under any unusual strain. The 
 consequences of this practice are most per- 
 nicious. Virtually it amounts to a pooling 
 of the reserves, and to the making of the 
 banks in the city of New York the final 
 reserve agents for the banks of the entire 
 country. And as these reserve agents do 
 not set the reserve funds apart and hold 
 them in cash as ''special deposits," but 
 merge them with their other deposits and 
 pay interest upon them, they must lend as 
 nearly as possible seventy-five per cent 
 of the total to make the transaction profit- 
 able. Thus it will be seen, when a crisis 
 
 ^ 
 
 4 
 
 10 
 
 arrives, the actual reserves of the banks of 
 the interior consist of little more than the 
 cash in their own vaults; for, while their 
 balances in the hands of reserve agents are 
 ordinarily available, they become unavail- 
 able in time of stress, as any general demand 
 for currency to the extent of twenty-five 
 per cent of the total of such balances 
 would exhaust the entire amount of cash 
 held against them by the New York banks. 
 Experience shows that, as was the case in 
 October, 1907, a demand for much less than 
 this percentage may force suspension of 
 cash payments, not only by the New York 
 banks, but by those in the other so-called 
 ''central reserve cities." Nor, when a 
 pinch comes, can the banks in the interior 
 avoid making such demand. Usually it is 
 accompanied by urgent requests for redis- 
 counts, one inevitable consequence of the 
 practice of redepositing reserves being that 
 banks everywhere throughout the country, 
 except those in the city of New York, which 
 have nowhere to turn unless it be to 
 Europe, are tempted to lean upon some 
 other bank's credit to save their own. Just 
 before the panic of 1907, 6,178 national 
 banks not located in "reserve cities" show- 
 ed balances aggregating $420,000,000 due 
 to them from reserve agents in those 
 cities, but only about $201,000,000 cash in 
 their own vaults. That they could not 
 
1 
 
 tmmm 
 
 avoid calling upon these reserves plainly 
 appears from their published statements 
 as of December 3, 1907, which show that 
 they did not withdraw, or, to put it blunt- 
 ly, were unable to withdraw from their 
 reserve agents as much as was withdrawn 
 from them by their own depositors. 
 
 As the balances due to other banks form 
 only about forty per cent of the total de- 
 posit liabilities of the New York banks, it 
 may be wondered why the withdrawal of a 
 moderate portion of these balances should 
 have such far-reaching effects. Ordinarily 
 it does no more than form one of the con- 
 tributory causes that bring about the recur- 
 rent stringency in the ''money market" 
 that is experienced every autumn. But 
 when it is the result of disturbed confidence 
 in the financial equilibrium, the normal ef- 
 fect of the pressure for liquidation that it 
 produces is greatly intensified, with result- 
 ant marked increase in the stringency, and 
 heightened alarm which may easily reach 
 the proportions of panic. In considering 
 these things, it should constantly be borne 
 in mind that any pressure upon the banks 
 is instantly and of necessity transferred to 
 the business community as a whole, usually 
 with the effect of increasing the pressure 
 upon the banks and in turn upon the com- 
 munity, in a vicious circle, — a movement 
 which, when once fairly started, can only be 
 
 N^ 
 
 12 
 
 checked by general liquidation and very 
 considerable curtailment in the volume of 
 commercial transactions. ^ 
 
 It should also be borne in mind that in 
 the modern financial fabric the principal 
 function of money — actual cash that is, 
 which should he clearly distinguished from 
 loanable capital in the form 0} credit — is to 
 furnish the basis for credit, and, through the 
 medium of the banks, to make money, cap- 
 ital, and credit to a large extent convertible 
 terms. The loaning power of the banks, 
 therefore, is closely related to the percent- 
 age which the actual cash on hand bears to 
 their deposit liabilities, all credits in open 
 account being in American parlance spoken 
 of as ''deposits.*' Thus it comes about 
 that when the banks in the interior send 
 their surplus funds to their correspondents 
 in New York, so that these funds may earn 
 a little interest during the dull season of 
 the year, when, for lack of borrowers, they 
 cannot be employed at home, the loaning 
 power of the New York banks is, in the 
 aggregate, increased not merely by the 
 amount of such cash, but by nearly four 
 times that amount. This would not be 
 true were the New York banks to lend to 
 foreign borrowers who would call for the 
 cash and take it away ; but it is true to the 
 extent that loans are represented by cred- 
 its upon the books of the banks, which, 
 
 13 
 
(t 
 
 ' \ 
 
 when withdrawn by check, are redeposited 
 to the credit of other customers. What- 
 ever the experience of any individual bank, 
 the result for all is a considerable increase 
 in both loans and deposits. 
 
 Now, as the New York banks have estab- 
 lished the custom of paying interest upon 
 balances of other banks at a rate fixed for 
 the entire year and not governed by market 
 conditions as is customary in other coun- 
 tries, they must find employm.ent for nearly 
 all of their loanable funds if they are to 
 avoid loss. And in forcing these funds 
 into use at the dull season of the year, the 
 inevitable consequence is that the funds 
 find their way into the hands of speculators. 
 This is true of the other reserve cities as 
 well as of New York, the difference being 
 chiefly one of degree. Thus it is that our 
 banking system becomes a colossal machine 
 for fostering speculation; a machine in which 
 each bank is carried along by the general 
 current, without power successfully to resist 
 its sweep or to avert its consequences. 
 
 The banks have been severely criticised 
 for their part in this procedure. It has 
 been justly stigmatized as a disgrace to a 
 civilized community, and to the banking 
 fraternity in particular, that so large a part 
 of the free loanable capital upon which the 
 commerce of the country is dependent 
 should be locked up in stock exchange or 
 
 < ' ► 
 
 
 < } ^ 
 
 other speculations, thus fostering periodic 
 crises, with their attendant trail of paralyzed 
 industries, wide-spread disaster, and misery. 
 Let us, however, be fair to the managers 
 of the banks. As certainly as the sum- 
 mers come around does more or less of 
 this loanable capital, temporarily freed from 
 use, accumulate upon their hands. With 
 rare exceptions, here and there, they pay 
 interest upon it, unwillingly in the case of 
 very many of them, but nevertheless of 
 necessity, because their competitors do so. 
 The country bankers, having no use at 
 home for their accumulations, desiring to 
 earn even a little interest upon them, and 
 fearing to take the risk of robbery if they 
 carry unusual sums in their vaults, send 
 them to the cities. The banks in the small- 
 er cities, being similarly situated as regards 
 the plethora of loanable funds, pass their 
 surplus along to the banks in the larger 
 cities ; and they in turn deposit theirs with 
 the banks in New York. 
 
 What, then, should the metropolitan 
 bankers do under the circumstances ? Re- 
 fuse to take this capital on deposit and pay 
 interest upon it.'^ That would be the sane 
 and prudent course, but it is a course they 
 dare not take. Self-interest interposes. 
 The few who perceive the danger are help- 
 less in the face of the established custom : 
 should they turn away deposits for which 
 
 15 
 
■I — WW 
 
 m^ 
 
 r 
 
 i 
 
 their rivals clamor, they would merely in- 
 jure their own business without relieving 
 the general situation. As a matter of fact, 
 there is but one thing they can do if they 
 are to continue in business, and that is to 
 take the money and lend it as best they 
 can. This means that the capital — de- 
 posits, or credit balances in the language 
 of the banks, or ' ' money "as it is styled 
 in the jargon of the street — must be forced 
 into use regardless of the difficulty, if not 
 the impossibility, of withdrawing it when 
 needed for the active commerce of the au- 
 tumn and winter. If, in the effort to find 
 safe employment for the funds thus com- 
 mitted to their charge, the bankers play into 
 the hands of the millionaire speculators, 
 they are not so culpable as may seem when 
 viewed from without. These speculators 
 are among the very best customers of the 
 banks; they carry the largest balances 
 without interest; they offer what is under 
 ordinary circumstances the most readily 
 marketable security; they control, directly 
 or indirectly, many of the sources from 
 which the banks derive profitable business. 
 Moreover, the purpose for which loans 
 upon collateral are negotiated is not, as 
 a rule, known to the lenders. Even the 
 personality of the borrowers is frequently 
 hidden, the loans being negotiated through 
 brokers. Nor is this all: much of the 
 
 x6 
 
 A 
 
 J I 
 
 ^ I 
 
 . >\ 
 
 i 
 
 borrowing is from individuals, insurance 
 companies, trust companies, and to some 
 extent from country banks direct. But 
 whoever the lenders, when the autumnal 
 activity arrives the pressure bears with 
 most severity upon the New York banks, 
 where the credit balances are carried. 
 
 From their intimate relation to the 
 financial transactions that pass through 
 their hands, the bankers cannot plead 
 ignorance of what is going on in the field 
 either of legitimate business or of specu- 
 lation. But individually they are not free 
 agents ; the working of the system is more 
 powerful than they are. Collectively they 
 do not act; the number of independent 
 rival institutions precludes concerted action 
 except in great emergencies, whether for 
 their own protection or that of the general 
 public. 
 
 The truth is, that our present system — 
 if system it can properly be called — con- 
 sisting of several different kinds of banking 
 institutions, all engaged in more or less 
 cutthroat competition, all pushing each 
 other into unsound practices, but pulling 
 apart and forcing disaster when a crisis 
 becomes imminent, and only uniting to 
 a limited extent for mutual protection 
 through the medium of the Clearing House 
 Associations when, to use a convenient 
 metaphor, they have pulled the house 
 
 17 
 
Il 
 
 IN 
 
 i 
 
 
 down upon their heads, is fundamentally 
 and incurably weak. The weakness is an 
 inseparable concomitant oj the large number 
 of separate units. Nominally independent, 
 the relations they sustain to each other 
 and to the community make actual inde- 
 pendence impossible. 
 
 In itself, it is well to note, speculation 
 is not necessarily harmful to the common 
 weal. There is no hard-and-fast line of 
 demarcation between it and so-called legiti- 
 mate business. As a matter of fact, both 
 merge imperceptibly into one another. To 
 an extent much greater than is commonly 
 realized, speculation is a steadying force 
 so far as prices are concerned. The pro- 
 fessional speculators, sometimes known as 
 market gamblers, are, more especially the 
 larger operators, a remarkably astute set 
 of men. In general, they merely antici- 
 pate normal price movements and stand to 
 win only when they guess right, though of 
 course their dealings may at times bring 
 about artificial conditions with results some- 
 times profitable and sometimes disastrous. 
 The real service of speculation comes 
 through making a wide and quick market 
 for staple food supplies, bonds, and the 
 shares of joint-stock corporations. With- 
 out speculation the function of the stock 
 exchanges would be far less effectively 
 performed ; listless markets and wide fluc- 
 
 i8 
 
 tuations in prices would almost certainly 
 be the rule, and not the exception. 
 
 But it is just here that the harm arises, 
 and in connection with our banking system 
 the injury that results is of stupendous 
 magnitude. Because of the quick market 
 for * * securities , " as stocks and bonds are 
 dubbed in the language of ''the street, " 
 they have come to be regarded as the most 
 desirable basis for loans by the banks. 
 Nevertheless, they represent fixed capital, 
 the fluidity being only apparent and dis- 
 appearing when most desired. And it is 
 not sound banking for institutions whose 
 deposit liabilities are payable on demand to 
 invest a preponderate percentage of their 
 assets in loans upon securities representing 
 fixed capital. Yet that is just what the 
 banks and trust companies in New York and 
 the larger Eastern cities commonly do. Mr. 
 Charles A. Conant puts the truth tersely 
 in a significant sentence, when he asserts 
 that ''there is hardly a greater menace to 
 the security of the New York money mar- 
 ket than the vaunted fact that it is the 
 only strictly 'call money market' in the 
 world."' 
 
 While this is true, nevertheless it is not 
 so much the aggregate sums employed in 
 open market speculation or in attempted 
 
 ^ " The Regulation of the Stock Exchange," Atlan- 
 tic Monthly, September, 1908. 
 
 19 
 

 I' 
 
 market manipulation, nor yet the failure 
 of speculative enterprises to bear fruit as 
 quickly as the speculators expect, as it is 
 the financing of new issues of stocks and 
 bonds that tie up the floating capital and 
 put it into fixed form. When ''money 
 is cheap, ' ' or, to put it ^more accurately, 
 when, because of the accumulation in the 
 financial centers of a large part of the free 
 loanable capital of the country, rates of in- 
 terest are low,^ is naturally the time most 
 often selected for marketing large ' ' blocks ' ' 
 of new securities. The form of such 
 undertakings varies; but commonly the 
 new issues are underwritten by syndicates 
 of dealers who furnish the capital and 
 recoup themselves as the securities are 
 absorbed by the investing public. When 
 the public is slow to purchase, and the 
 securities have to be carried by the syndi- 
 cates, they are said to be ''undigested." 
 Whether the members of the syndicates 
 advance the capital from their own coffers 
 or borrow it from the banks or other 
 lenders makes no difference so far as the 
 effect upon the loan market is concerned. 
 There has been a conversion of fluid capi- 
 tal into fixed capital. Such conversion is 
 going on all the time, and so long as in the 
 
 ^ Not infrequently the current " call money *' rate in 
 New York is lower than the rate allowed by the met- 
 ropolitan banks upon balances of other banks. 
 
 20 
 
 aggregate it does not exceed the produc- 
 tion of fluid capital, no harm ensues. But 
 when the annual increment of fresh capital 
 is exceeded, a condition supervenes that is 
 necessarily fraught with grave peril to the 
 country. Inevitably, under our system, 
 the current loanable funds of the banks 
 which form the final reserve against their 
 deposit liabilities are either directly or indi- 
 rectly drawn upon and made unavailable to 
 liquidate these liabilities. ' ' The individual 
 institution, ' ' as Mr. Conant aptly expresses 
 the situation, "may protect itself by the 
 drastic sacrifice of securities when it needs 
 cash, but it does so only at the expense of 
 its clients, and with a disturbance to the 
 money market and the market for securities 
 which is abnormal and excessive.'' If the 
 losses made inevitable by such forced liqui- 
 dation fell only upon those who, by abstract- 
 ing from the market the supply of free 
 loanable capital that is its life-blood, were 
 chiefly instrumental in causing them, the 
 consequences would be bad enough. They 
 are intensified many fold when, as inevi- 
 tably happens, they fall alike upon "the 
 just and the unjust," and an embargo is 
 placed upon the general business of the 
 country, making property of almost all 
 kinds less marketable, values uncertain, 
 and ventures of any sort ultra-hazardous. 
 The poor borrower, who finds himself 
 
 21 
 
ill 
 
 III 
 
 fi 
 
 caught, and either forced to pay an extraor- 
 dinarily high rate of interest or is ''sold 
 out," has, in most instances, committed 
 no crime, economic or other, for which he 
 should be so severely punished. The bank- 
 er, on his part, may also hold himself blame- 
 less ; and indeed, as has been shown, he is 
 largely a mere cat's-paw, powerless in the 
 grip of a bad system. Nevertheless, the 
 bankers of the country cannot blink their 
 obligation to take a broader and more intelli- 
 gent view of their duty to the people as a 
 whole. The prevalent notion, that all a 
 banker is called upon to do is safely to 
 lend the funds in his care and to pay his 
 depositors' drafts upon demand, is unten- 
 able. Most causes in this world have dual 
 effects— direct and reflex— and the man 
 of affairs is as truly bound to consider the 
 one as the other. 
 
 To eradicate the weakness in our bank- 
 ing system the cause must be removed. 
 The regeneration must be radical and com- 
 prehensive. Real reformation will never 
 come from anything else. No half-way 
 measures will suffice. The sooner this is 
 comprehended the better will it be for all 
 concerned. None of the remedies that 
 have been proposed touch the root of the 
 difficulty; most of them would be more 
 likely to aggravate the trouble than to 
 ameliorate it. Of this nature is the prop- 
 
 I 
 
 f 
 
 22 
 
 til 
 
 osition that the banks should be permitted 
 to issue ''emergency circulation," based 
 upon bonds as security. It should be ob- 
 vious upon very little reflection that if such 
 circulation is not put out until the emer- 
 gency arrives, then it serves only the pur- 
 pose of "locking the stable-door after the 
 horse is stolen. ' ' If put out in anticipation 
 of the emergency, the most probable effect 
 is to postpone, but not to avert, the evil day. 
 All such measures ignore the fact that the 
 capacity of the community to absorb fresh 
 supplies of capital in times of speculative 
 excitement and extravagant business ven- 
 tures is absolutely unlimited. Moreover, 
 they fail to take into account a psychologi- 
 cal factor that should be reckoned with. 
 Though the bankers in the United States 
 are generally hard-headed men of affairs, 
 they are nevertheless in some respects as 
 timid as young gazelles. That is one of 
 the consequences of the dangers to which 
 our banking system exposes them. Such 
 is their dread that their depositors may 
 become alarmed and endeavor to transfer 
 their funds to safety-deposit boxes, that 
 when clouds appear upon the financial 
 horizon their fear of seeming to be afraid 
 is commonly greater than their fear of 
 the impending storm. Any bank issuing 
 emergency notes in advance of its fellows 
 would be hoisting a danger signal not 
 
 23 
 
I. 
 
 li 
 
 unlikely to precipitate a ' * run " by its de- 
 positors. The fact of such issue might be 
 concealed for a time, but not for very long. 
 If, in the mean time, similar issues have 
 become general, then they may have helped 
 to abate to some extent the eagerness of 
 borrowers and the alarm of depositors, but 
 if insufficient in amount to allay the strin- 
 gency, then little real benefit has resulted. 
 And in any case a violent check to busi- 
 ness is most probable. 
 
 In this connection it may be said that 
 a truly elastic currency, responsive at all 
 times to the needs of the commerce of the 
 country, and automatically adjusting itself 
 to these needs from day to day, is greatly 
 to be desired ; but, let it be clearly under- 
 stood, as an every-day affair and not merely 
 as an emergency measure. Between such 
 a currency and a bond-secured issue kept 
 in circulation as long as the issuing banks 
 elect, there is a whole world of difference. 
 In one case daily redemption in all the lead- 
 ing cities compels the issuing banks to be 
 prepared to meet their notes on presenta- 
 tion, and however they strive to keep them 
 outstanding, the adjustment to the needs of 
 the people as a whole is automatic ; where- 
 as, in the other case, the redemption ma- 
 chinery being, as at present in the United 
 States, a farcical shadow of the real thing, 
 the volume in circulation is determined 
 
 ■■^■™ 
 
 im^ 
 
 only by the cupidity or the necessities of 
 the issuing banks. The issue of circulat- 
 ing notes, automatically elastic in volume, 
 begets conservative banking : the issue of 
 circulating notes, however secured, that 
 may be kept out at the pleasure of the 
 issuer, tends to unwise inflation of credit, 
 and necessarily involves the danger of that 
 effect. 
 
 Recent discussion of the currency ques- 
 tion makes it evident that the term * ' elas- 
 tic currency" is not widely understood. 
 One banker who has read many papers op- 
 posing the idea of asset currency has repeat- 
 edly stated that in his opinion the elasticity 
 would be chiefly in the way of expansion, 
 and this opinion does not appear to have 
 been openly challenged in any of the gath- 
 erings of bankers that he has addressed. 
 It may not, therefore, be supefluous to 
 point out that in order to be truly elastic in 
 the sense in which the term is used by the 
 advocates of asset currency, the adjust- 
 ment must take place daily as the result of 
 a contest in which each bank endeavors to 
 make as wide a field as possible for its own 
 circulation, by presenting for payment all 
 notes of other banks coming into its pos- 
 session. Thus it becomes impossible for 
 any bank to keep more of its notes in cir- 
 culation than the people have use for, and 
 while expansion of the volume outstanding 
 
 25 
 
will be a normal experience during the 
 autumn, contraction will be equally certain 
 at other seasons. If necessary, every bank 
 issuing such currency should be prohibited 
 by law from paying out the notes of other 
 banks ; but self-interest should make such 
 a law needless. 
 
 When a thoroughly sound and scientific 
 banking system is established in the United 
 States, such an elastic currency will be one 
 of its important features. In time of stress 
 it will furnish an efficient ''safety-valve.'' 
 At all times it will operate to equalize inter- 
 est rates, and through free redemption and 
 cancellation when business is slack, will 
 tend to prevent the accumulation of the 
 large amounts of loanable funds that are 
 now such a menace to our stability. 
 
 For its economical working such a cur- 
 rency implies branch banking. It also im- 
 plies, for the protection of the public, that 
 the issuing banks should have large capital, 
 be subject to stringent regulations in the 
 interest of sound banking, with adequate 
 penalties for their infringment, — and that 
 government inspection should be of search- 
 ing thoroughness. True elasticity could 
 readily be imparted to our present national 
 bank currency by establishing daily re- 
 demption in all of the reserve cities, com- 
 pelling every bank having notes in circula- 
 tion to maintain a redemption agent in each 
 
 26 
 
 of these cities, and forbidding the banks 
 to pay out the notes of other banks, but in- 
 stead, requiring them to present such notes 
 for payment just as they present checks 
 drawn upon those banks. In this way, and 
 in this way only, can elasticity be achieved. 
 But elasticity would make a bond-secured 
 currency unprofitable. Even with the full 
 volume outstanding throughout the entire 
 year, the increment to the issuing banks in 
 our present national banking system is very 
 small ; and as banks are not eleemosynary 
 institutions, some profit to them must be 
 reckoned upon in any system they are 
 expected to maintain. 
 
 Desirable as is a properly constituted 
 elastic asset currency, it needs to be said 
 most emphatically that to authorize the 
 national banks, as at present constituted, to 
 issue unsecured circulating notes would 
 in all probability invite consequences appal- 
 ling to contemplate. Aside from the unwis- 
 dom of allowing a multitude of small banks 
 to emit unsecured circulation, the current 
 practice, to which reference has been made 
 in this paper, of the virtual pooling of re- 
 serves and the investment of the major part 
 of these reserves in loans on the New York 
 Stock Exchange, is alone a sufficient argu- 
 ment against it. But another and more 
 serious objection lies in the fact that the bills 
 receivable held by the banks in the United 
 
 27 
 
1 
 
 States are not liquid assets. Herein lies the 
 vital difference between banking practice in 
 Europe and America. And this difference 
 points clearly and unmistakably to the nature 
 of the change in our method of making 
 loans, which must be accomplished if we 
 are ever to have a scientific banking 
 system, and be even measurably free from 
 the violent disturbances and distressing 
 conditions to which we are now periodi- 
 cally subject. 
 
 A business man of high standing and 
 wide commercial experience told the writer 
 not long ago that when he accepted the 
 position of director of an important bank, 
 it was with something of a shock that he 
 discovered, as he did very soon after tak- 
 ing his seat as a member of the board, that 
 with the exception of * ' paper ' ' bought from 
 note brokers not more than fifteen per 
 cent of the notes in the bank's portfolios 
 could be relied upon to be paid when due. 
 The relations existing between the bank 
 and its clients were such as practically to 
 compel the granting of renewals if request- 
 ed. This is not an isolated experience. 
 It is substantially true of nearly every bank 
 in the country. Moreover, many of the 
 larger borrowers, who under ordinary cir- 
 cumstances place their paper through note 
 brokers, customarily fall back upon their 
 banks and expect to be taken care of very 
 
 28 
 
 liberally when the money market tightens 
 and the brokers are unable to sell their pa- 
 per. Demands of this sort must be met 
 by the banks under penalty of the loss of 
 valuable business, and met in general at a 
 moderate rate of interest, thus prevent- 
 ing them from reaping a harvest at the 
 high current rate, and not infrequently 
 compelling them to become borrowers in 
 order to grant the accommodation. 
 
 From these disabilities and disadvan- 
 tages the European banks are exempt. It 
 is not their custom to discount the simple 
 promissory notes of their clients, and then, 
 having held these notes until maturity, 
 to take in satisfaction of them similar 
 notes made by the same parties. The 
 practice, so common in the United States 
 as to be almost the general rule, for 
 banks to furnish their clients with what 
 amounts to fixed capital through a series 
 of renewals running, it may be, for years, 
 would be regarded as the height of bad 
 banking, and absolutely indefensible from 
 any point of view. The legitimate function 
 of banks is to lend temporary capital in 
 the shape of credit, not to enter into quasi- 
 partnerships in which either the capital of 
 the banks or the funds intrusted to their 
 custody are embarked in manufacturing, 
 merchandizing, farming, warehousing, or in 
 any other business enterprise, taking all 
 
 29 
 
 'lA 
 

 ll 
 
 
 the risks of the business, but gaining 
 only ordinary interest in return. To 
 assert that it is only temporary capital 
 that the banks lend, when they habitually 
 grant renewal after renewal, and that, if 
 they have used good judgment in making 
 the loans, they can always require payment 
 at maturity, is merely to beg the question. 
 Every banker in the United States knows 
 that in the majority of instances there are 
 circumstances that would make such a 
 course inexpedient if not impracticable; 
 and in time of stress the burden of ''car- 
 rying" the clients with whom such rela- 
 tions have been established is usually 
 imperative. 
 
 The European method of making loans 
 is in every way better and safer, and is in 
 strict conformity with sound banking prin- 
 ciples. It is not only safer for the lenders, 
 but the borrowers, considered en masse, 
 are served far better and more equitably . 
 than they are with us. This difference in 
 the method of making loans is the fun- 
 damental difference between banking in 
 Europe and in the United States. It goes 
 to the very root of all the questions involved 
 in the reformation and modernizing of our 
 banking system and banking practices. 
 Even the currency question is secondary 
 to it and is largely bound up in it. It is 
 not because they have elastic currency in 
 
 30 
 
 some European countries that Europe 
 weathers financial crises without the phe- 
 nomena of panics, sudden collapse of credit, 
 loss of confidence, violent contraction of 
 the volume of business, and all the attend- 
 ant distressing circumstances that we know 
 so well. The real reason why these things 
 are avoided is that the bills receivable^ which 
 with us are a fixed, immovable mass, are 
 with the European banks scarcely less liquid 
 than the cash in their vaults. 
 
 Although cash advances by the European 
 banks are not entirely unknown, they are 
 usually for small amounts. In general, 
 when a line of credit is granted, it means 
 that the bank agrees to accept the bills of 
 exchange of the client with whom the ar- 
 rangement is made, running not longer 
 than a specified time, — ninety days being 
 the usual limit. These bills, duly accepted 
 by the bank, are placed with a bill broker 
 for sale in the open market. As all the 
 European banks except the central banks 
 make a practice of accepting such paper, 
 based upon collateral security, or reliable 
 guaranty, or thorough knowledge of the 
 financial condition, habits, and ability of the 
 makers, the market is thus supplied with 
 bills of the highest class. To some extent 
 the standing of the makers influences the 
 rate at which the paper sells, but in general 
 the standing of the accepting bank deter- 
 
 31 
 
 % 
 

 Il 
 
 mines its salability and the question of 
 individual credit is largely eliminated. 
 But to the bank the preservation of its 
 credit is of vital importance. It is incum- 
 bent that sound judgment be exercised at 
 all times in accepting bills. The amount of 
 paper which any borrower can place upon 
 the market at any time is therefore limited 
 by the sum which his bank is willing to 
 accept. The bank on its part cannot pru- 
 dently lend its credit except upon the con- 
 dition that its client does not enter into 
 similar relations with any other bank. 
 Furthermore, it is customary to withdraw 
 the credit, wholly or in part, whenever it 
 appears that the financial strength of the 
 borrower is declining.' Over-extension of 
 credit is thus, for the most part, effectively 
 checked, and the whole course of business 
 made safer in consequence. 
 
 Such is the character of the paper held 
 by the European banks. There are, of 
 course, many varieties in the bills them- 
 selves, and there, as here, there are bills 
 drawn by merchants and manufacturers 
 upon their customers, against goods sold. 
 But all are readily marketable at any time, 
 and no stigma attaches to a bank when it 
 sees fit to dispose of any part of its holdings, 
 
 'As for renewals, it is usual for the banks to re- 
 quire that maturing acceptances be met by the makers 
 before other acceptances are given in their place. 
 
 32 
 
 t 
 
 <" 
 
 either because it needs cash or because it 
 can reinvest the funds to advantage; as, for 
 example, by selHng bills that are about to 
 fall due and buying others having two or 
 three months to run. For such paper the 
 market is not merelv local ; it is as wide as 
 the whole world. It is the rate of discount 
 that governs. For instance, when business 
 is active in England and the open market 
 rate in London is higher than that in Paris, 
 the French banks buy English bills. They 
 may not know much about the makers, but 
 they do know the standing of the accepting 
 banks. In this way conditions are equal- 
 ized for borrowers all over Europe. To- 
 day Austrian bankers may be investing in 
 Italian paper; six months hence the condi- 
 tions may be reversed. Only the United 
 States is out of the running, having no 
 modern bills to offer, save such as grow 
 out of foreign transactions, and which, be- 
 ing payable abroad, and bearing the accept- 
 ance ot European banks, are not strictly 
 in point. 
 
 It will be observed that under the Euro- 
 pean system the borrower is not affected, 
 as in the United States, by the ability or 
 inability of his bank to make him a cash 
 advance. If the bank feels that it can 
 prudently lend its credit by accepting his 
 paper, all the borrower has to consider is 
 whether he can sell it and at what rate. 
 
 33 
 
 i 
 
i 
 
 T 
 
 The banks, on the other hand, owe their 
 chents nothing that need cause the least 
 embarrassment. When they have already 
 loaned all that they should loan, they are 
 not subject to being called upon, as our 
 banks are, to make further advances that 
 they cannot avoid if they desire to retain 
 the business of the applicant. Moreover, 
 they have no relations to the makers, accep- 
 tors, or indorsers of the bills in their port- 
 folios that need deter them from reselling 
 the bills at any time they may desire, either 
 at home or abroad. And should they find 
 that they can get a better rate by adding 
 their indorsement, no loss of prestige 
 thereby ensues. Far otherwise is it in 
 the United States. Our banks sometimes 
 have to borrow, but all sorts of shifts are 
 resorted to to avoid showing rediscounts 
 in published statements, lest they be inter- 
 preted as indicating weakness. 
 
 To make commercial paper always a 
 liquid asset, it is essential that the market 
 for prime bills should never fail. In all 
 the countries of the world having modern 
 banking systems this certain market is in- 
 sured through the medium of a central 
 bank. ^ The primary junction of these central 
 hanks is solely to provide such a market. The 
 other functions that they may perform, 
 such, for instance, as the handling of the 
 government funds, and the issue of circu- 
 
 34 
 
 lating notes, are merely incidental, and 
 must be kept so, if the organization is upon 
 a right basis. The usual provision by 
 which these banks are kept from doing 
 an ordinary commercial business is their 
 restriction, in buying paper, to bills bearing 
 the names, as acceptors or endorsers, of at 
 least two banks or bankers in high stand- 
 ing. If, in addition to this regulation, the 
 power to give acceptances be denied, the 
 central bank becomes, as it should be, 
 chiefly a bank for other banks, that use it 
 to rediscount bankers' acceptances, with 
 their indorsement added, thus bringing the 
 paper within the requirement that it must 
 bear the names of two banks or bankers. 
 Through the power to issue circulating 
 notes, the ability of the central bank to 
 rediscount for them is made sufficiently 
 elastic to safeguard all emergencies. 
 
 Of all these central banks the German 
 Reichsbank is without doubt the most per- 
 fect in its organization and the most effi- 
 cient as a working machine. And in spite 
 of the fact that a part of its stock is owned 
 by the government, it demonstrates, beyond 
 cavil, that it is possible to keep such a bank 
 quite free from political influence. The 
 fact is, that the restriction of its functions 
 to those which it should properly perform 
 removes all reason for the bank being ^ ^ in 
 politics." To describe in detail the work- 
 
 3S 
 
 'A, 
 
 '1 
 f 
 
Ill 
 
 : I 
 
 ing of the Reichsbank or any other of the 
 European central banks would unduly ex- 
 tend this paper. The question may, how- 
 ever, be asked, how does the Reichsbank 
 get a supply of bills at times when the 
 money market is easy? The answer is, 
 that in ordinary times, as the Reichsbank 
 has branches in all the important towns in 
 Germany, the other banks find it a most 
 convenient collection agent. The custom 
 is to rediscount all bills payable at a dis- 
 tance. For this service the Reichsbank 
 deducts interest, for five or ten days accord- 
 ing to circumstances, at its published rate, 
 which is usually from one half to one per 
 cent above the open market rate, but makes 
 no collection or exchange charge. As the 
 money market hardens, bills having longer 
 time to run are offered for rediscount, and 
 when the offerings become so abundant 
 that the bank thinks its note issues need 
 to be restricted, a check is interposed by 
 raising the published rate of discount. 
 This published rate has an incidental use 
 of great value, as the rates allowed or 
 charged upon current accounts by the com- 
 mercial banks follow its fluctuations and 
 are regulated by them. For such a regu- 
 lator, it may be said, in passing, there is a 
 crying need in the United States. 
 
 When almost all of the banks' assets 
 are liquid, fixed requirements in the way 
 
 36 
 
 1/ 
 
 .^ 
 
 
 I 
 
 of cash reserves are obviously needless. 
 Nevertheless, the advantage of keeping the 
 volume of cash in the country in due pro- 
 portion to the credit fabric erected thereon 
 is also obvious, and so, when loanable cap- 
 ital is abundant and rates of interest are 
 low in any country having a modern bank- 
 ing system, the raising of the published 
 rate affords a check upon the tendency of 
 the capital to find employment in other 
 lands, with gold exports as a consequence. 
 Up to a certain point such exports are of 
 no importance, and efforts to prevent them 
 would do more harm than good. Beyond 
 that point the raising of the rate becomes 
 effective. Thus does a central bank act 
 as a regulator in more ways than one. 
 And if it have, as it should have, very large 
 powers as a bank of issue, it should also 
 operate, as it does in Germany, to prevent 
 all danger of a money squeeze such as 
 we in the United States experience almost 
 every autumn. 
 
 We may now, it would seem, address our- 
 selves with some clarity of vision to the 
 solution of the problem of what should be 
 done to reform our unwieldy and unstable 
 banking system. 
 
 The chief defects of the system may be 
 summarized as: 
 
 I. That the assets held by the banks 
 are not sufficiently liquid. 
 
 37 
 
 1 
 

 2. That the necessity for carrying 
 balances with other domestic banks for 
 exchange purposes ties up too large a 
 percentage of the cash resources of all of 
 the banks .brings about the artificial multi- 
 plication of deposit liabilities, and, through 
 the counting of these balances as a part of 
 the required legal reserves, results in 
 virtual pooling of these reserves and their 
 investment in loans upon stock exchange 
 collateral, thus fostering speculation and 
 inducing recurrent periods of financial 
 
 distress. 
 
 3. That when these periods of financial 
 
 distress come about, the banks are com- 
 pelled to assume a hostile attitude toward 
 each other, thus greatly aggravating the 
 
 distress. 
 
 The remedy for these defects is to adopt 
 the only known method by which the 
 assets of the banks can be made liquid, 
 and by which the necessity for carrying 
 balances with other domestic banks can be 
 avoided. Briefly stated, it implies the es- 
 tablishment of a branch banking system, for 
 which in its main features that of Canada 
 may well be taken as a model, and also 
 the organization of a central bank of issue, 
 closely following the lines of the German 
 Reichsbank, and having at least one branch 
 and a local board of directors in every 
 state in the Union. Whether the central 
 
 38 
 
 4' 
 
 bank should have a monopoly of the note- 
 issuing function is perhaps open to ques- 
 tion, but in the opinion of the writer of 
 this paper it would be unwise so to re- 
 strict it. One important reason is, that 
 through the use of their own circulating 
 notes as till money in their branch offices, 
 the commercial banks would be enabled to 
 maintain branches in smaller places than 
 would be profitable under other circum- 
 stances. As in Germany, the profits of 
 the central bank should be restricted ; and 
 other details, such as the provision that 
 the management must be in the hands of 
 trained bankers, may well be adopted. 
 
 With the inauguration of this system, 
 the organization of national banks under 
 the present law should be brought to an 
 end, and all the banks, old as well as new, 
 should be required to provide for the daily 
 redemption of their circulating notes in all 
 of the commercial centers. In founding 
 such a system, great care should be taken 
 to avoid introducing features that would 
 nullify its efficacy. Only banks with large 
 capital should be authorized to establish 
 branches, or to issue unsecured circulating 
 notes. Specific authority given to extend 
 credit by accepting time bills having a lim- 
 ited time to run, coupled with stringent 
 restrictions upon the power of the banks to 
 invest more than a small percentage of 
 
 39 
 
 :\\ 
 
 I 
 
 I 
 
 
 Hi 
 
. 
 
 M 
 
 their loans in paper not bearing the accept- 
 ance or endorsement of other banks or 
 bankers, should — and doubtless would — 
 suffice to introduce the European method 
 of making loans. Once introduced, it may- 
 be depended upon to take care of itself as 
 against any other form. 
 
 So, too, with branch banking. Under 
 a properly organized system the service 
 would be far more efficient than anything 
 the people of the United States have ever 
 known. Not only would there be a larger 
 volume of loanable funds from the same 
 amount of resources, but these loanable 
 funds would be equally available in all 
 parts of the country at all times. The 
 banks would be stronger and safer, and not 
 being tied together by depositing their re- 
 serves with one another, they would in fact 
 be independent. At the same time, being 
 comparatively few in number, there would 
 be more possibility of concerted action in 
 time of need than can ever be hoped for 
 under our present system. 
 
 Against branch banking it is often urged 
 that borrowers in the smaller places in 
 Canada do not fare as well as if they were 
 served by independent local institutions. 
 This criticism is not well founded; though, 
 as Mr. Herbert B. Walker, manager of the 
 Canadian Bank of Commerce, Montreal, 
 says in a letter to the writer, **It is prob- 
 
 40 
 
 ♦ 
 
 able that instances could be cited that 
 would seem to substantiate the statement 
 that the smaller towns do not always obtain 
 all the borrowing facilities to which they 
 imagine themselves entitled.'' Pertinent 
 also are Mr. Walker's further remarks. 
 He says: **It is one of the advantages of 
 the branch system that we are able to 
 gather deposits in the quiet and unenter- 
 prising localities, and lend the money in 
 the more active and enterprising places; 
 in effect, therefore, it is not necessary to 
 have an equilibrium of deposits and loans 
 at each branch in order to conduct a profit- 
 able banking business. As an illustration 
 of this, we have a number of branches 
 where the deposits are in excess of the 
 loans, and also many other branches where 
 the loans are greater in amount than the 
 deposits. In the main, this distribution of 
 capital is effected with the best of results 
 to the country at large. I am not pre- 
 pared to say that it always works perfectly 
 and without in any case causing injustice to 
 some borrowers whose claims for banking 
 credit might possibly receive more favor- 
 able attention from a local institution, the 
 directors and management of which would 
 have a greater personal knowledge of and 
 interest in the applicant for credit. These 
 cases, however, are of slight importance as 
 weighed against the fact that the smaller 
 
 41 
 
 
 I I 
 
t 
 
 towns and cities are provided with bank- 
 ing facilities of a high order, such as few 
 of them could possibly have if they were 
 obliged to depend upon the sort of local 
 banking concerns that would spring up 
 with insufficient capital and inexperienced 
 management. As it is, there is keen com- 
 petition for country business by the char- 
 tered banks, and each local manager is 
 anxious to make as good a showing as 
 possible for his branch, and is, therefore, 
 not likely to slight the claims of his own 
 customers for accommodation. ' ' 
 
 Naturally, the possible introduction of 
 branch banking is regarded with dismay 
 by many bankers throughout the country, 
 through fear of its effect upon their per- 
 sonal fortunes. It cannot be doubted that 
 in competition with well-equipped branch 
 banks many of the existing institutions 
 would find it unprofitable to continue in 
 business. But the change would not take 
 place overnight. Normally, it may be ex- 
 pected to be a slow process, a gradual 
 evolution, requiring many years for its ac- 
 complishment. Here and there an inde- 
 pendent institution would maintain itself, 
 as the experience of Canada and other coun- 
 tries proves. But also it cannot be doubt- 
 ed that the bankers of the United States 
 would soon perceive the clear advantage to 
 themselves of amalgamating their separate 
 
 42 
 
 i 
 
 institutions into larger ones, branch offices 
 taking the place of unrelated establish- 
 ments, and that in the end they would be 
 gainers, and not losers, by the change. 
 
 Under such a scientific system as is 
 proposed, the changes in current banking 
 practices would in many respects be little 
 less than revolutionary. Many of the ills 
 the bankers now combat with only indiffer- 
 ent success would be things of the past. 
 For instance, the competition of the note 
 brokers, of which many of our metropolitan 
 bankers have just reason to complain, would 
 be quite at an end. Under the revised 
 system the bill broker would be not the rival 
 but the indispensable adjunct of the banks. 
 The vicious practice of carrying unsecured 
 loans along from year to year would become 
 only a memory. Lines of credit would be 
 granted only after full and careful consid- 
 eration, and not, as too often at present, 
 upon nothing more substantial than brief 
 oral statements. The granting of credit 
 to and the acceptance of paper made by 
 firms or corporations in which the officers 
 of the bank are interested should be prohib- 
 ited; but even if not forbidden by statute, 
 the effect upon the credit of the bank in the 
 open market, as reflected by the discount 
 rate for paper bearing its acceptance, would 
 soon operate to reduce the practice to very 
 moderate limits. 
 
 43 
 
 I J 
 
 r •] ' 
 
 •A 
 
i 
 
 11 
 
 I 
 
 .i 
 
 III 
 
 In addition to the normal check upon the 
 present tendency of the surplus capital of 
 the country to gravitate to the New York 
 Stock Exchange, which a scientific system 
 would afford, only a definitely limited pro- 
 portion of any bank's total loans should be 
 permitted to rest upon the pledge of stocks 
 or bonds. In the case of the central bank, 
 it should be provided that, as in the case 
 of the Reichsbank, all loans upon collateral 
 should be made at one per cent above the 
 published discount rate, with strict limita- 
 tions as to the kind of collateral acceptable 
 and the percentage of the market price 
 that may be advanced. The reason for this 
 is, that the central bank should not ordina- 
 rily make loans upon collateral, but only in 
 times of emergency when it might be desir- 
 able for the public good that it should be 
 permitted to do so. The primary function 
 of the bank being to insure the liquidity of 
 the bills discounted by the commercial 
 banks, its loaning power should in general 
 be scrupulously reserved to that end. 
 
 That the present Sub-Treasury system 
 should be abolished and the central bank 
 should be constituted the fiscal agent of the 
 United States and made the depositary of 
 its funds, excepting only the reserve against 
 the legal-tender notes and the coin repre- 
 sented by the gold certificates and silver 
 certificates, is highly desirable, but not an 
 
 essential feature of the proposed scheme. 
 It is, however, essential that the central 
 bank should be effectively divorced from 
 political interference and political power. 
 It is not necessary that the government 
 should own all or any part of the stock, ^ or 
 that it should exercise any supervision 
 or regulation other than to see that in the 
 conduct of its affairs the mandates of the 
 Bank Act should be strictly obeyed. In 
 this connection the writer would suggest that 
 the Comptroller of the Currency or the 
 Superintendent of the Banks, as he might 
 more appropriately be designated, should 
 be given authority summarily to remove 
 from office any bank officer within his 
 jurisdiction whom he might find violating 
 the provisions of the bank act, and it should 
 be his duty to make such removal upon a 
 proper showing of culpability, the official 
 so removed having the right of appeal to a 
 trial board or court, which, however, should 
 have power to reinstate him only upon 
 clear showing that he had not been guilty 
 of any infraction of the law. To make 
 technical compliance with the statutory 
 provisions more certain, any bank officer so 
 deposed should be disqualified from hold- 
 
 ^Though not necessary, still for the sake of the 
 prestige it would give, government ownership of a 
 part of the stock, not, however, exceeding one fourth 
 of the whole, is, in the opinion of the writer of this 
 paper, highly desirable. 
 
 45 
 
Ill 
 
 till i 
 
 I! 
 
 ii ' 
 
 !li, 
 
 ing any official position in any other national 
 bank, and be personally liable for any 
 loss caused by his misconduct. This may 
 sound severe; but if restrictions upon 
 banking practices are demanded in the 
 interest of the public welfare, the punish- 
 ment of those who offend cannot be made 
 too drastic. 
 
 To prevent the control of the central 
 bank falling into the hands of any one man, 
 or small group of men, it should be pro- 
 vided that no one person should hold more 
 than say one-twentieth of the entire capi- 
 tal stock, also that no certificates of stock 
 should issue, but instead that the ownership, 
 which should vest absolutely in the nominal 
 owner, should be registered upon books 
 always open to public inspection at the 
 head office of the bank, and hypothecation 
 should be specifically prohibited, — the pur- 
 pose of these provisions, which might well 
 apply to the stock of all of the national 
 banks, being to prevent men from holding 
 shares in names other than their own, and 
 to obviate the possibility of borrowing 
 upon the stock of one bank to secure funds 
 to buy up a controlling interest in another. 
 But whether such a provision be incorpo- 
 rated in the bank act or not, there can be no 
 doubt that national banks should be prohib- 
 ited from loaning upon the shares of other 
 banks. 
 
 46 
 
 > 
 
 I- 
 
 h 
 
 With the establishment of such a system 
 as is here outlined, the bankers of the 
 United States would be weaned from sev- 
 eral infantile notions to which they cling 
 with great pertinacity. One of these is 
 the horror with which they contemplate the 
 acceptance of time bills; another is reluc- 
 tance to sell unmatured bills receivable. 
 It is true that under the present law the 
 national banks may not incur liability as 
 acceptor or endorser save to an extent so 
 limited as to be practically prohibitive. 
 It is also true that there is now neither oc- 
 casion for the acceptances nor a market for 
 the bills; but the attitude of mind goes 
 farther than these considerations, and the 
 quicker it is changed to a more cosmopoli- 
 tan point of view the easier will it be to 
 compass the reform we so greatly need. 
 
 Another of these crude notions is the 
 absurd worship of deposits that our present 
 system engenders. Under a modern sci- 
 entific system the relative value of deposits 
 would be much less than it is in the United 
 States at present. In far less degree than 
 now would they be created by book credits 
 against credit loaned, or in other words, 
 by discounting clients' notes and adding 
 the proceeds to their deposit accounts. 
 Perhaps, also, the useful distinction be- 
 tween ''current accounts'' and ''deposit 
 accounts, ' ' commonly made in other coun- 
 
 47 
 
 .1 
 
I 
 
 r 
 
 " J 
 
 I 
 
 
 III 
 
 tries, would come into vogue. Cash depos- 
 ited in one bank would not be passed along 
 from one bank to another until, before 
 reaching its final resting-place in New York, 
 it would, as is now often the case, have 
 swelled the deposits of three or four banks. 
 Banks' balances with other banks would be 
 confined to the accounts of the few inde- 
 pendent local institutions that might sur- 
 vive, and would be limited to the needs of 
 these institutions for facilities for selling 
 demand exchange. They would have no 
 object in keeping large balances with cor- 
 respondents for the sake of interest, since 
 the rates would always be regulated by the 
 official rate of the central bank, and the idle 
 funds might with equal availability and more 
 profit be invested in commercial paper. 
 
 Theoretically, under such a system as is 
 proposed, the banks should not be required 
 to carry any fixed reserve, arbitrary regula- 
 tions in that regard being calculated to 
 hamper the smooth working of the system. 
 Practically, however, some minimum should 
 be specified. This would not need to be 
 more than fifteen per cent, except for the 
 central bank. Experience shows that the 
 percentage of cash reserve that safety pre- 
 scribes is far higher under our present 
 halting and inflexible system than under 
 one properly constituted. In Canada the 
 banks get along comfortably and safely with 
 
 48 
 
 4 
 
 
 a fifteen per cent reserve, and they do not 
 have the advantage of a central bank and 
 of having their portfolios filled with modern 
 accepted bankers' bills, which would make 
 their position far more secure. 
 
 Only the more salient features of the 
 proposed system can be considered in this 
 paper. All of the details would require 
 careful thought in drafting an enabling act. 
 For any insurance fund to protect deposi- 
 tors there would be no need. A provision 
 in the Bank Act that any institution having 
 its capital impaired, in however small de- 
 gree must at once make good the deficiency 
 or close up its affairs and retire from the 
 field, would be sufficient. Granting, how- 
 ever, for the sake of argument, the neces- 
 sity for or the desirability of such guaranty, 
 then to be equitable the banks as a whole 
 should be given autocratic and plenary 
 powers to supervise and regulate the busi- 
 ness and practices of their fellows; they 
 should not be charged with responsibility 
 without at the same time being clothed 
 with authority. 
 
 It remains to be said that to graft a 
 central bank upon our national bank system 
 as it is now would be the height of folly. 
 There is no place in the system for such a 
 bank, no function that it can safely or 
 properly perform. Desirable as is such 
 a bank in a sound, well-considered, and 
 
 49 
 
 i 
 
I 
 
 thoroughly scientific system, it would be 
 worse than useless as an adjunct to the 
 nondescript system under which we are 
 working. 
 
 To the establishment of the better order 
 of things, ignorance and supposed self-in- 
 terest are the chief obstacles. Let us hope 
 the day is not far distant when they will be 
 overcome. One difficulty, however, arises 
 from the division of our nation into sepa- 
 rate states, each with its own code of laws. 
 To work effectively, a central bank should 
 not be hampered by usury statutes. The 
 effect of the establishment of a system of 
 branch banks, and a great central bank as 
 here outlined, would almost certainly be to 
 lower the average rates of interest, and to 
 equalize them throughout the country. But 
 in time of stress the central bank should 
 have power to mark up its published rate as 
 high as might be necessary. Restrictions 
 upon the rates that may be charged by pawn- 
 brokers and others making advances upon 
 chattels may perhaps be justified, but in 
 business transactions incalculable harm 
 may result, as every bank knows. 
 
 So utterly futile are usury statutes to ac- 
 complish the end aimed at, that it passes 
 comprehension that belief in their efficiency 
 should still persist and find expression in 
 statutory enactments. In New York the 
 prohibition of time loans at a rate above 
 
 50 
 
 7 
 
 » f 
 
 i t ► 
 
 six per cent compels borrowers to have 
 recourse to the ''call money'' market, 
 which in time of urgent demand is some- 
 times bid up to ruinous figures, and even 
 after paying the high rate, the borrower is 
 liable to be required to meet the obligation 
 at an hour's notice. Only those familiar 
 with the effects upon the New York money 
 market can have any conception of the 
 wide-spread damage that results from the 
 restriction upon interest rates imposed by 
 the state law. Unless the law should be 
 repealed in the event of a central bank 
 being established, that institution would be 
 shorn of a large measure of its utility. 
 As the only object it could have in raising 
 its published rate would be the protection 
 of the nation's reserve stock of gold, it 
 would be a pity if this resource should be 
 denied through the persistence of an un- 
 sound and antiquated notion. 
 
 Since we must eat and drink, and must 
 supply ourselves with clothing and shelter, 
 we may defy all the principles of finance 
 and still continue to exist; we may even, in 
 a country so liberally endowed by nature as 
 is this land of ours, manage to endure the 
 shocks and losses which such defiance en- 
 tails, and by ravishing the natural resources 
 of the land bring prosperity intermittently to 
 our doors: nevertheless the defiance is crass 
 stupidity, for which we pay a heavy price. 
 
 51 
 
I 
 
 We may struggle along for generations yet 
 with our wretched apology for a banking 
 system; but when at last we supplant it by 
 a system based upon scientific principles, 
 we shall all be amazed that we were so long 
 in seeing the light. 
 
 till 
 
 ^ ^ 
 
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