EVERYBODY’S MONEY WHAT IT IS; WHAT IT SHOULD BE BY EDWIN R. A. SELIGMAN, LL.D. McVICKAR PROFESSOR OF POLITICAL ECONOMY, COLUMBIA UNIVERSITY [The National Monetary Commission, to which Professor Seligman refers in the following article, was created in 1908, by Congress, to collect data and make recommendations for a reform of National banking and currency systems. The Commission consists of members of the United States Senate and House of Representatives. The Chairman of the Commission is the Hon. Nelson W. Aldrich, at the time of his appointment Senator from Rhode Island. The Vice-Cnairman is the Hon. Edward B. Vreeland, ex-Representative from New York, and the author of the well-known Vreeland Bill. The other members are Secretary of State Knox, ex-Senator Burrows, of Michigan, ex-Senator Hale, of Maine, ex-Senator Teller, of Colorado, ex-Senatdr Money, of Mississippi, ex-Senator Flint, of California, ex-Senator Taliaferro, of Flor- ida, Senator Burton, of Ohio, and Senator Bailey, of Texas. The House of Representatives’ side of the Commission is made up of Messrs. Weeks, of Massachusetts, Bonynge, of Colorado, Padgett, of Tennessee, Burgess, of Texas, Pujo, of Louisiana,and Prince, of Illinois. The Commission is thus a distinctly Congressional affair. It has engaged in a careful study of the various monetary systems of America and Europe, and in that effort has had the valued assistance of Dr. A. Piatt Andrew, Assistant Secretary of the Treasury, who has been made officially “Assistant to the National Monetary Commission.” On another page will be found an editorial on this subject, in the form of a “little catechism,” which may very properly be read by the non-technical reader as a preparation for Professor Seligman’s scientific and authoritative paper.—THE EDITORS.] questions involved in the report of the National Monetary Commission, or rather in the plan suggested by Senator Aldrich to the Commission, it seems best to take up four points : I. Why should the public be interested in the report ? II. What are the chief defects of the pres- ent system ? III. In what way does the new plan pro- pose to remove these defects ? IV. What will probably be the results of the scheme if put into operation ? I. Why Should the Public be Interested? The objects of every currency and banking system are twofold: first, to provide a satis- factory supply of money; and, second, to furnish adequate credit facilities to business enterprise. Money is the universal medium of exchange, and every individual who uses money is interested in having a safe, suitable, and uniform currency. It is the foundation upon which modern economic life rests. Less direct, but none the less important, is the interest of every one in the furnishing of proper credit facilities to business. Mod- ern business is based, to avery large extent, on credit, and any obstacle placed in the way of borrowing on the part of the solvent business man is therefore a check to enter- [' attempting to explain the fundamental prise. Not only the merchant, however, but every other class is concerned in the main- tenance of adequate credit facilities. The country’s crops annually require vast sums to move them to the consumer, perhaps thou- sands of miles away. An inadequate credit system will, to the extent that it is inadequate, narrow the market and reduce farmers’ profits. Again, the laborers are almost more interested in the steadiness of employment than in the rate of wages; for high wages at half-time are illusory. Yet unsatisfactory credit con- ditions are largely responsible for the period- ical embarrassment and shutting down of industrial plants. Thus the prosperity of every class in the community is more or less directly bound up with an adequate currency and banking system. To provide such a system is the work partly of government, partly of private initia- tive. Upon the government devolves the primary obligation to furnish a satisfactory money supply, so far as this consists of coin ; but in the case of paper currency banks are needed to provide the elastic and flexible element adapted to the rapidly changing needs of the business world. A proper sys- tem of bank notes is everywhere regarded as an eminently desirable adjunct to a country’s coinage. In the money supply, therefore, the government is primary, the banks sec- ondary. On the other hand, to the modern 1055 1056 business man credit facilities are more im- portant than actual money. When a mer- chant borrows, he rarely takes the loan in cash. Although the total currency of the United States—that is, coin, Government paper money, and National bank notes—is more than four thousand millions, the loans and discounts of our banks are several times that sum. In the case of credit facilities, therefore, the banks are of primary impor- tance, while the influence of the Government is seen chiefly in the supervision that is exercised over the banks in the public in- terest. Several years ago the great controversy in this country revolved about the question of money—that is, primarily, coin or govern- ment money. ‘To-day the discussion centers around the problem of credit—that is, bank facilities and bank currency. The present problem, although arousing less heated polit- ical controversy, is scarcely inferior in impor- tance to the former. The question of coin- age and of the money standard has been satisfactorily settled. The question of credit remains to be adjusted. Ll. The Defects of the Present System The existing National bank system is a product of the Civil War. Its twofold ob- ject was, first, to provide a safe and uniform currency, and, second, to make a market for the Government bonds on which the war was financed. At the outbreak of the war the currency consisted of notes of thousands of local banks in all degrees of goodness and badness—especially the latter. Under the new system, the State bank notes were taxed out of existence, and the right of note issue devolved upon the National banks. As security for these notes the banks were com- pelled to investin Government bonds. Thus a market was found for the bonds and abso- lute safety was secured for the new and uni- form National currency. With the lapse of time, however, the de- fects of this system have become increasingly apparent. In the first place, other elements than safety have come into the foreground ; and in the second place, the system itself is no longer really safe. Safety is indeed indispensable, but flexi- bility and elasticity are nolessso. Ina huge country like ours, currency needs are exceed- ingly fluctuating. At crop times hundreds of millions are required, at other times such a volume of bank notes is unnecessary. Any THE OUTLOOK system which is to fit business needs mt be capable of instant expansion and contrac. tion. than by the changing needs of the business community. Moreover, under our system there is even a legal obstacle to prompt con- traction of bank note issues—a point no less important than their expansion. Both safety and flexibility are needed. Foreign systems attain both ends. Our system sacrifices flex- ibility for safety. But, in the second place, our system no longer really provides safety. Safety in modern times means safety not only to the note-holder, but to the business man. The test of the safety of a banking system comes in times of trouble. We are not concerned with safety when there is no danger. Trou- ble in the business world is periodic, and assumes the form of commercial crises and financial panics. With the deeper causes of these phenomena we have no occasion to deal here. But, taking these periodical oscil- lations for granted, a banking system discloses its soundness, not only when the banks are enabled to withstand a run, but also and especially when the confidence in their secu- rity is so great as to preventarun. Intimes of stress a sound bank must be prepared to come to the aid of the business community, and not to withhold its credit. The European banking systems have, time and time again, helped to minimize the evils of crises, whereas the American banks have woefully failed. The experience of 1907, which would have been impossible under a well-regulated system, 1s still fresh in our minds. A banking system is not safe when it breaks down under the first strain. When bank notes so far exceeded deposits as they did fifty years ago, it might have been excusable to think that the safety of the note-holder meant the safety of the business community ; but nowadays the test of safety has been shifted from notes to deposits, and our system provides no safety for the latter. In fact, at present our system no longer insures safety even to the note- holder. Ultimately, indeed, the deposited bonds may be sold and the note-holder get his money back; but when, as in the panic of 1907, note-holders cannot secure cash except at a considerable discount, safety can no longer be predicated of our system. In short, to secure safety we sacrificed A note issue based upon the deposit _ of Government bonds, however, is governed _ more by fluctuations in the price of the bonds and by the necessities of the Government q 9 f ; ‘ 4 ‘the body. 1911 flexibility ; and now we have neither the one -nor the other. Another fundamental evil of our present system is its undue decentralization. Every bank is supposed to stand on its own feet, entirely separate from every other bank. In time of trouble, however, these feet are found to be entirely too slender to support Decentralization is the result of a laudable desire to afford local facilities, but the kind of decentralization that we have prevents local facilities. In our political government we have both centralization and decentralization. Certain functions are rele- gated to the Federal Government because they are unfit for State or local administra- tion. The centralization involved in the army, the post-office, or the control of inter- State commerce makes possible very effective decentralization in other matters. So ina good banking system, in order to secure decentralization of facilities we need cen- tralization of reserves. As Mr. Paul M. Warburg has so tellingly put it, our present system is comparable to a method of fire prevention which relies on a few water- pails in each house, instead of collecting the same quantity of water into a huge reservoir, with mains to each street. When the fire breaks out—that is, when the crisis occurs— the bank is obliged to depend upon the pails rather than the reservoir. Centralization of reserves would make possible the real decen- tralization of facilities. As a matter of fact, however, under our present system we already have a virtual, though illusory, centralization of reserves. The banks outside of our large cities may keep a large part of their reserves on deposit in the so-called central reserve cities—prac- tically in New York. The reserves of the whole country are therefore loaned on call by the New York banks for stock exchange purposes. Not only do the immense fluctu- ations in the amount of “call money ” pro- duce the most violent changes in discount rates—utterly unknown elsewhere in the world—but the entirely.impossible burden of caring for the safety of a host of country cor- respondents is imposed upon the individual New York banks. Accordingly, in times of stress these banks have attempted to unite their reserves through the Clearing-House - Associations and to extend facilities and issue 3 a notes in an extra-legal, and even perhaps illegal, manner. Incidentally many other shortcomings of EVERYBODY’S MONEY 1057 our present system have developed. With excessive decentralization, it becomes diffi- cult to transfer currency or bank facilities from section to section. ‘This is the only country of the world where the rates for domestic exchange are so inordinately high. Furthermore, our method of handling com- mercial paper has engendered several addi- tional shortcomings. If a man desires to borrow money anywhere else in the world, he will sell to a bank his own three months’ bill drawn on some private banker willing to extend him credit. Or, if he is a mer- chant who has sold goods, he will draw on his customer, get his banker to indorse the bill or draft, and sell it to the bank in the same way. ‘The bank which purchases this paper can always dispose of it to some one, usually by having it rediscounted by one of the large central banks. If‘ money tightens ” in any country, the central banks in the other countries increase their investments in bills of exchange in the country where the rate goes up, and, by purchasing the short-time paper, tend to prevent the export of specie, sending bills of exchange instead. In the United States, on the other hand, when a man borrows money from a bank, the latter keeps the note until it falls due. It becomes a dead, or illiquid, asset. Since the American banks do not invest their funds in the bill market, they loan on call in the stock market, which thus attracts the surplus funds of the entire country and produces all the perturba- tions to which we have alluded. In this way, also, the American banks are prevented from entering the international market and partici- pating in the profits of international finance. Thus from every point of view our pres- ent system is lame and halting. It does not provide elasticity ; it does not insure safety ; it restricts the activity of our banks, whether large or small; and it retards the prosperity of the farmer, the laborer, and the general public. It is an archaic and inadequate sys- tem, unfitted to modern needs. ITT, The New Scheme It is to overcome these difficulties and dangers that the new plan has been framed. It possesses four principal features : L. Centralization of reserves. The key- stone of the arch is a so-called National re- serve association whose entire capital stock— about three hundred millions—is to be held by National banks, State banks, and trust companies, with earnings limited to five per 1058 cent, the excess over an additional surplus of twenty per cent of the capital going to the Government. The subscribing banks are to be formed into local associations grouped into fifteen districts, with a branch of the National association in each. The banks in each local association are to elect a board of directors, while each branch is to have its board elected by the local associa- tions, with additional members representing the business interests. The board of the National association is to consist of forty-five directors, elected by the branch boards, to- gether with the Secretary of the Treasury, the Secretary of Commerce and Labor, and the Comptroller of the Currency. The Gov- ernor or head of the National association is to be selected by the President of the United States from a list submitted by the board of directors. The National reserve association is to be the agent of the United States Government and to keep the Government funds. Its business is to be limited to transactions with subscribing banks and with the Government, except that it may purchase domestic and foreign government securities or coin and bullion. The separate banks may count, as a part of the reserve which the law requires them to keep, anv balance with or any notes of the National reserve association, which is itself to have a reserve of fifty per cent against its liabilities, with a tax upon any defi- ciency, increasing as the deficiency grows. It is expected, in short, to keep substantially the entire reserve of the country. 2. The discount of commercial paper. Every subscribing bank is authorized to accept com- mercial paper drawn upon it having not more than four months to run, properly secured and arising out of commercial transactions. A member of a local association may then apply to the association for a guarantee of such paper. Where the commercial paper— from which is expressly excepted paper issued for carrying stocks, bonds, or other investment securities—is very short-time paper, with a maturity of not more than twenty-eight days, the National reserve asso- ciation may rediscount it when it bears the indorsement of the bank. In the case of longer-time paper, having not more than four months to run, the paper must be guaran- teed by the local association. The National reserve association may also purchase prime bills or acceptances of banks or private houses, shall have power to establish agen- THE OUTLOOK cies in foreign countries, and shall transfer on demand the balance of any subscribing bank to any other subscribing bank. Thus by one blow, as it were, the character of our credit facilities is completely changed. It may be added that National banks are given the power to establish savings: depart- ments and to loan these deposits, under proper restrictions, upon productive real estate. 3. Note issue. The plan proposes to transfer the right of note issue by gradual steps to the National reserve association. That is to say, the National banks are pro- hibited from issuing any notes over and above those now in circulation ; but when- ever a bank retires any part of its present issue it shall permanently surrender its right to reissue them. On the other hand, the National reserve association is to issue bank notes, on an entirely new basis. In- stead of being secured by: bonds, they must be covered, to the extent of at least one-third, by gold or other lawful*money, and as to the remaining portion, by bankable commer- cial paper, as explained above, or by obliga- tions of the United States. The elasticity which is lacking in the present system is secured by the provision that any notes of the reserve association in circulation in ex- cess of nine hundred million dollars which are not covered by an equal amount of lawful money held by it shall be taxed at the rate of one and one-half per cent for the excess up to twelve millions, and five per cent for: the excess over twelve millions. The object of this provision, which follows the German plan, is to render possible an unlimited issue of bank notes at the time of the year, or at peculiar junctures, when there is great need for them; but at the same time to provide for their speedy retirement when the exigency 1s past. 3. The bond security. The projected abandonment of reliance upon Government bonds as security for note issues makes it necessary to provide in some way for a disposition of the bonds now held by the banks. These are two per cent bonds, and, if thrown on the market, would sell far below par, their present value being a ficti- tious one, due to the special demand created by law. National reserve association must, for a period of one year, offer to purchase, at a price not less than par and accrued interest, the bonds held by the subscribing National 30 December 4 It is therefore provided that the — 1911 banks, the reserve association assuming responsibility for the redemption of outstand- ing notes secured by the bonds, and substi- tuting its own notes. Furthermore, upon the application of the reserve association, the Secretary of the Treasury shall exchange these two per cent bonds for three per cents running for fifty years. The reserve asso- ciation agrees to hold these bonds indefinitely, ‘but the Secretary of the Treasury may permit it to sell not more than fifty millions a year, and he may at any time pay off the bonds. On the other hand, the reserve association pays to the Government a tax of one and one-half per cent annually upon the amount of bonds transferred to it by the subscribing banks. The net result is that the greater part of the existing public debt of the United States will hereafter cost the Government only one and one-half per cent interest—far less than any- where else in the civilized world. LV. The Results If we were to sum up the advantages of the above scheme, we should put them under the following five heads : 1. Mobilisation of credit. The substitution of bankable commercial paper in the place of bonds not only insures a flexibility of credit, which is lacking at present, but greatly en- larges the field of banking operations. The banks, instead of being restricted to call loans on the stock exchange and to investment in illiquid assets which repose quietly in their portfolios, will now have an opportunity of extending their operations to a far wider field of business activity, and of immediately converting the commercial paper into cash, if need be. Instead of remaining immobile, the assets of the American banks at once become mobilized and flexible. 2. Insurance against disaster. Under the present system, at the least sign of trouble each banker sits tight on his own little hoard of reserve and becomes suspicious of his neighbor. Under the new system, he has this gigantic reserve of all the associated banks to fall back upon. Instead of jealousy, there will be co-operation; instead of fear, there will be confidence. Just as the indi- vidual householder makes use of the fire insurance company against the risk of confla- gration, so the individual bank will use the reserve association as its insurance against catastrophe. A repetition of the disgraceful events of 1907 will be impossible. 3. Democratization of facilities. The small EVERYBODY’S MONEY 1059 bank is now dependent upon its own little capital and insignificant credit. Under the new system its assets will no longer be locked up, but it can at once rediscount its paper at the reserve association, and thus it will be able largely to increase its facilities to local constituents. Instead of centralizing banking power, the new plan will decentralize or democratize banking power. 4. Internationalization of business risks. At present, if the credit situation differs in this country from that abroad, we are vir- tually prevented from taking prompt advan- tage of the difference. In the crisis of 1907, for instance, when the replenishment of our gold supply became necessary, it was impos- sible to secure a large remittance from France, although in a similar emergency a decade previous England was in this way able to ward off disaster. Under the new system the United States will enter the concert of nations and will be able to take advantage of reciprocal facilities through its power to deal in foreign commercial bills and to conclude loans of gold. Just as the reserve associa- tion, in its National transactions, will decrease the risks of local banks, so in its international transactions it will still further diminish the risks of all banks. 5. Participation in world-wide profits. Nowadays, when an American has commer- cial dealings with South America or Asia, he pays by bills drawn, not on New York, but on London. London has been for over a cen- tury the world’s financial center, and the banking commissions of the world’s busi- ness amount to many millions a year. With the prodigious foreign trade of the United States there is no reason why a substantial share of these millions should not come to this country. What has prevented it is our primitive method of banking; what will render it possible is the new system. The American banker of the future will have a wider horizon and a broader opportunity, and if he avails himself of his opportunity there is no reason why the world’s financial center should not ultimately be shifted from England to the United States, just as at the close of the eighteenth century it was shifted from Holland to England. As over against all these salutary results which may be expected from the new scheme, we hear but two words of criticism—the dan- ger of political interference, and the fear of control by some vast financial interest. The ingenious provisions of the law, however, 1060. should convince every unpartisan mind that these risks have been admirably guarded against. The advantages of the plan will accrue primarily to the small bank, not to the large one, for in time of trouble the large bank can generally take care of itself. But THE OUTLOOK it is ultimately not the bank at all, but the general community, that will benefit. The projected revolution in financial methods is a beneficent one. We have groped long enough in the dark regions of finance; it is now high time to emerge into the light. HIS MOTHER’S APRON-STRINGS BY ISABEL C. BARROWS HEY were never taut, unless, when he was a little boy, he used them as thongs to bind her as the ‘ white captive’? when they “ played Indian.” In- deed, his mother was sometimes criticised because she held them too slack, leaving the little fellow to his own devices. Her fear that when the hour of freedom struck he might slash and toss them away in the joy of independence had influenced her to give him a share of that independence as the childish years melted into youth and youth approached manhood. ‘You are spoiling him,” folks said, but her instinct was her safe guide. The boy might be restrained by love, but not by bonds which by and by he could break. So the years sped and the friendship between mother and son strengthened, and the ties that bound them to each other held firmer as life hurried on. He had not been given to her by birth, though his baby head had rested on her breast, but the dear mother who bore him and died could not have loved him more. People said—poor people who did not know the joys of adoption on both sides— ‘* How queer that he should still be tied to her apron-strings !”? They did not say which was the slave, because really there seemed no com- pulsion either way, the strings were so slack. It was always the same—when he was at school in France (sending her a postal card every day), or at boarding-school in his own land ; in the public high school, or at college ; in the university, or away in the forest and among the mountains busy with Government duties, the bonds that held mother and son together were lightly worn, yet through them ran an electric cord that pulsed as it felt the heart-beats of the two. The mother was twoscore when the baby boy came into her arms. She is now nearly threescore and ten. The Psalmist’s limit stands in full sight of her still unabated vision. The son is in the prime of his strength. I saw them the other day as I passed through Canada. Which one had gathered up the apron-strings and drawn the other I could not tell, but here they were, one coming from the South and one from the East, for ten days of Indian summer on a Northern lake. I accepted their hospitality and saw the com- radeship between them. A log cabin with an open fire was their shelter. The surrounding hills were gleam- ing with frost and the mountain tops were hooded with snow, but the sun smiled on the wintry landscape, as the fire in the cabin cheered the hearth. Life in this little camp was at its simplest. A farm a mile away supplied milk, butter, eggs, and honey, and a neglected garden still held potatoes, beets, carrots, and onions, all to be roasted in the hot cinders and ashes, while a shivering cabbage yielded up its heart for a salad. Biscuit browned before the fire and drenched with cream and maple syrup made the “ guiltless feast,” as Goldsmith’s hermit calls it, surpass those described by Latin poets. Agate-ware dishes, washed and wiped in companionship by mother and son, matched the homely fare. Ticks filled with oat straw, with heavy blankets, furnished the beds, whose only luxury con- sisted of white-covered pillows. Peace reigned within and without. No human sound reached the cabin hidden in the woods. The wild things drew near un- afraid, for no gun would frighten them thence. Loons and ducks plashed in the cold water of the lake. Wild geese honked their way southward in a great ‘“‘V” overhead. In the cedar-bush partridges were feeding, while robins, chickadees, blue jays, and crows were rejoicing in the prolonged Indian sum- mer, and bear and deer were not far off in the denser wood. I came upon mother and son unexpectedly 30 December 4 ;