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The Suggested Plan For A National Reserve Association An Address Before The Bankers’ Club St. Louis, Oct. 31, 1911 By WILLIAM McCHESNEY MARTIN Mississippi Valley Trust Co. SAINT LOUIS THE SUGGESTED PLAN FOR NATIONAL RESERVE ASSOCIATION A A n A d dress D elivered by Willliam McChesney Martin Mississippi Valley Trust Co. St. L ou is 1 SSOUUI h a s a l w a y s stood f or sound banki ng. ] n t he d a y s w h e n St. L o u i s w a s a s t a t i o n f o r t r a p p e r s o n t he b o r d e r s o f a w i l d e r n e s s , tier t r a d e n o t e s w e r e t h e c u r r e n c y in u s e a s f a r N o r t h as C a n a d a , a s f a r S o u t h a s t he G u l f a n d a s f a r W e s t as t here w a s a ci vi l i zed ma n to r e c ei v e them. L a t e r t he n o t e s o f t he B a n k o f t he St at e o f M i s s o u r i t o o k t h e i r place and f o r thirty yea rs w e r e g l a d l y rec eived by trapper, trader, ri verman, merchant, w o o d s m a n , p l a i n s man and g o l d seeker. W hen a general bank ing law w a s p a s s e d in 3 857 it c o n t a i n e d a p r o v i s i o n c a l l i n g f o r e x a m i n a t i o n s a n d r e p o r t s f r o m b a n k s a n d if t hi s w a s no t t he first p r o v i s o n o f its ki nd, it w a s a m o n g t he v e r y first. O u r t r a d i t i o n s h o w s t ha t w e a r e c o n s e r v a t i v e e n o u g h to be s o u n d a n d p r o g r e s s i v e e n o u g h t o me e t c o n d i t i o n s . So, o f c o u r s e , w e a r e i n t e l l i g e n t l y i n t e r e s t e d in a n y p r o p o s e d p l a n t o m a k e m o r e c f l ' ec t i ve o u r b a n k i n g s y s t e m. M Our Banking System Unsatisfactory In an a u d i e n c e o f t hi s ki nd , it is u n n e c e s s a r y t o d o m o r e t h a n s t a t e t hat o u r p r e s e n t o n e is u n s a t i s f a c t o r y . W e a r e all s o c l o s e t o t he d a y s o f 11)07, t ha t w e h a v e s e e n t hi s f a c t d e m o n s t r a t e d . S o m e o f us d o u b t l e s s h a v e had it b r o u g h t s o c l o s e h o m e t ha t w e w e r e u n d e r t he n e c e s s i t y o f g i v i n g t he c o o k a c h e c k f o r h e r w a g e s a n d w h e n t hat i m p o r t a n t p e r s o n a g e l o o k e d d o u b t f u l , h a v e had t o e n t e r i n t o an e l a b o r a t e e x p l a n a t i o n , t he p u r p o s e o f w h i c h w a s t o c o n v i n c e h e r t ha t a w h i t e p i e c e y ^ ^ j w i r r ^ l f l / p n e d w i t h o u r n a m e w a s b e t t e r t ha n th r e e n bank-.^fujtes ' ° w h i c h s he w a s a ccu st ome d, l i o w e v e r , the e m barrassment m ay / v e S p B f U w sr . f o r t he c o o k may have postponed aCftSs} f j oCJanot her m o n t h , w a i t i n g t o get w f c h &' ^ OUl l t ^ a U real m o n e y . We l iav j heard o f a called John S m i t h a nd w e r e g r y f t ^ o take_-+fi'4'sfr'J^eks t h o u g h he w a s un i d e n t ified. f e w g r e y hairs In this room caused by perplexity over the problem "Shall we build up our reserves, by calling loans and ruining our community, or be extremely lenient in calculating the minimum necessary under the law ?” W e read that there was a money stringency through out the world, but we found that neither England, France, Germany, or even a country as newly modern as Japan, suffered as we. In no other nation would a period of six months show fluctuation in interest on demand loans from 2% in August to 126% in January. Before 1907 there were prophets in the land who delivered jeremiads against our system but we practical men, not having had our Angers burned, left the fire to what we were Inclined to call “ the alarmists” . However, it is different now. We have practically been forced to give the situation at tention. The result is that we have unanimously concluded that our system is defective at least in two respects. Chief Defects (1) Our currency is not elastic. It expands and stays expanded, or contracts and stays contracted with no regard to real business needs. Instead of acting like a rubber band and governing itself by the size of the package, it expands and contracts ac cording to a standard outside of itself,— the price o f government bonds. Foreigners have said it was the most unscientific system in the world. (2) Our reserves are really not reserves to be relied upon in times of need. A Banking System an Outgrowth Having found the vital defects that we agree upon, the next thing is to remedy them. But in considering any remedy, we must bear clearly In mind that a banking system id not a soil, but is an outgrowth. The bank was never first established and then the community taught its use. There was a need in the community, and the bank was established to meet that need, to meet the wishes and habits of that par ticular people. Human nature all the world over is pretty much the same, but its habitat has an in fluence and its manifestation in government is d if ferent. Know ing this we can study the experiences of other countries for our guidance, but we neces sarily cannot expect to use exactly the same means to an end. W e have to put in practice the ancient wisdom ‘'W h at’s meat to one man is poison to an- 2 4 | other,” in preparing a banking system as well as in other things. The proper course to follow then is to see if some at the remedies found effective in our own experience cannot be amplified and systematized until Our banking is at least the equal of any tn the world. Proven Remedfe* The panic of 18f>3, clearly indicated that banks as isolated units each striving for its own preservation regardless of others, resulted disastrously not only for the country as a whole, but generally for the individual bank. New York, profiting by this lesson, in 1860 when threatened with trouble by the impend ing war, knowing that self-preservation of the in dividual bank meant the preservation of all, through its Clearing House arranged for cooperation. They combined their reserves so that the reserve of the strongest was available for the deserving weakest. They also issued Clearing House Certificates, which we may call a clearing house currency, against the deposit of aproved securities with the clearing house committee, this currency to be accepted by banks in the settlement of obligations to other banks. The stringencies end panics follow ing 1853, Including 1907, emphasized this fact, that a bank in order to save itself must of necessity be altruistic and also em phasized the remedy of concerted action, combined reserves, and clearing house currency. The backbone of any banking system is confidence and cooperation helped to restore this. St. Louis, New York, Chicago, Boston, Philadelphia and other cities have proved the practicability of this course, so it would seem natural to try to apply it to the entire country. Conditions to be Met Let us now state our problem. The territory of the United States is of vast extent; part of it is fully developed and part of it is still in the pioneer stage. W e have a population of ninety million, served by 22,491 banking institutions, or an average of one banking institution to every thirty five hundred of our people, but these institutions differ greatly in size and are unevenly distributed. Of the above num ber of banks 6,893 are operated under Charters re ceived from the Federal Government; 13,459 under Charters from State Governments, and 1,497 have no Charters, that is, are private banks. W e are a re 3 public and our people believe neither in the divine right of kings, politicians nor plutocrats. Our intelli gence is o f the highest, our civilization of the best, our agriculture the most abundant, our manufactures the most effective, our mines productive) our industry and commerce the greatest in the world. Our financial ■jrstemi— and it is as important to the Nation as the nervous system to the body— has. been found weak In at least two ways. First our currency is not elastic, and second, our reserves are not real reserves. Our experience has shown that in times of stress cooperation, combined reserves and clearing house currency were effective. How then shall we apply the remedies as shown by experience, to the proved defects, and make such changes as w ill bring about a real improvement in the banking conditions of the United States, remembering alw ays that while we may profit by the experience of England, Canada, Prance, Germany and other countries, we are different in many respects from all of them. Investigation Necessary The common sense method is first to investigate, then to form ulate a plan. This is the order we have followed. A National Monetary Commission was ap pointed by Congress and its work has been of great value I speak from personal experience, for in the latter part of 1905, I began the attempt to investigate this question on my own account. I found it prac tically impossible to find proper books on the subject and even in such treatises as I found, the information w as so out of date or so scattered, that a man who spent his day in a financial Institution could make practically no headway. The Commission has gathered this information now in as compact shape as possible, and it is accessible to every one. This Commission as yet has not reported but Senator Aldrich, its Chairman, has drawn up a plan which he has sub mitted to the committee and which it has published throughout the country. On October 19th Senator Aldrich published a revision of his plan and it is this revision I propose briefly to discuss, but at the outsei we must bear clearly in mind that it is only a proposal. It is not a Bill before Congress, but as a beginning has to be made, is a starting point. Its purpose as I understand it, is to provoke study, discussion and criticism. The Commission Is holding public hearings on the plan traveling through the 4 cities from coast to coast. A ll interested will have a chance to express themselves. Membership in the Reserve Association In the plan as o r i g i n a l l y proposed only National Banks having a minimum capital of $25,000 shall own stock in a federal corporation to be called the Reserve Association of America. This was doubtless on the theory that National Banks are subject to a more rigid examination and supervision than State banks. In some States this is true, but not in Missouri. You who were at the last State Convention in Kansas City heard your Bank Commissioner state that it had been “ three and a half years in the State of Missouri since there had been lost to any depositor a single dollar in the banks of Missouri” . W hen you think that these three and a half years immediately follow a panic, I think that we can all be Justly proud of the banking institutions and their regulation in this State. And it was in Missouri that attention was ttrat called to this injustice. To the honor of the State be it said that the first public discussion of this measure was by the Bankers’ Club of St. Louis, and at that meeting Mr. Breckinridge .Jones protested against barring State institutions from the privileges of the measure. He maintained that the Federal Government did not have the power under the con stitution to charter National Trust Companies; and that under proper regulation State banks, Trust Com panies and Savings Banks should be admitted on an equality with National Banks. Later the Executive Council of the American Bankers’ Association ap proved such an amendment to the plan. Our State Association has also made a similar recommendation, and now the revision of the plan provides for the membership of State Banks and Trust Companies on an equality with National banks. It is not the purpose to compel any bank to own stock in this association. It may buy, or it may not, as it sees fit, but will have to own stock or it cannot receive the privileges of membership. If it does become a member it will have to buy stock in the Reserve Asosciation to an amount equal to twenty per cent of the purchasing bank’s capital. It cannot take more than this, nor less; it is twenty per cent of its capital or nothing, and one-half must be paid. I f the member bank increases its capital, it must increase its ownership in the Association, and if it decreases its capital, it must decrease its 5 ownership. A member can never transfer its stock, but in catfe of liquidation or suspension can surrender its stock at book value. These provisions are to keep any one bank from gaining a dominating influence in the Association through stock ownership, merger or otherwise. Dividends The dividends of the Reserve Association are limited to five per cent per annum and provision is made for a surplus equal to twenty per cent of the paid-in capital. W hen the surplus reaches this amount, then all earnings in excess of a five per cent dividend are to go to the government. It is obviously the purpose and correctly so that the Asociation shall not be considered a money m aking institution, and a limited dividend will serve to lessen the desire of any one faction for control. Organization For purposes of organization and operation the Reserve Association is composed of three divisions. The Central Asociation is approachcd through the District Association from the Local Association. The Local Associations are composed of banks, the District Associations are composed of Local Associations and the Central Association is composed of District A s sociations. Kach Local Association is to be com posed o f not less than ten banks with an aggregate capital and surplus of not less than five million dollars. Subject to these limitations, there may be any number of Local Associations, the District Associations are limited to fifteen to begin with, but may be increased if found neccssary, and each one is to have a branch of the Reserve Association located in it, so the Branches are limited at first to fifteen. Local A sso ciations, District Associations and Central Association are to be governed by directors the m ajority of whom are chosen by the banks having one vote each irre spective of capital and a minority by stock representa tion, the purpose being fully to safeguard the influ ence of the smaller members. The Local Association This machinery is necessarily complicated, but once set in motion it seems that it should work smoothly. Perhaps we can get a clearer idea of this matter if tonight, as the banks of St. Louis, including in our number not only the members o f the clearing house, 6 but those financial institutions located in the city that clear through members of the clearing house, but excluding those located in the county or in Illi nois, we proceed to organize a Local Organization. In this city national banks must have a capital of at least $200,000. and under the revised plan state banks would also have to have a capital of at least $200,000 to become members of the Association. There fore, there are in St. Louis seventeen banks, national and state, that could become members of a Local Association which we shall call the Local Association of St. Louis. Under the revised plan trust companies would have to have a capital of at least $500,000 and a surplus of 20% of the capital. There are four such trust companies in St. Louis. This gives a total of twenty-one financial institutions that could take advantage of the revised plan in this city, with an aggregate capital and surplus of $80,010,291.36. Of these, four financial institutions have each a capital and surplus of over $5,000,000, sufficient to qualify in this respect each for membership but it gives these four financial institutions no advantage, for a Local Association must have at least ten banks. The consequence is that St. Louis though it has capital and surplus enough to form sixteen Local Associa tions, could not possibly have more than two Local Associations because the number of financial institu tions that could qualify is only twenty-one, and doubtless the banks would find It much more con venient and practical to have only one, constituted as the clearing house is at present. Having formed ourselves into a Local Association, the first meeting is for the purpose of electing directors and is held right here in this room. The plan provides that only a president, vice-president or cashier can represent his bank, and no proxies are allowed, consequently we are pretty sure of having assembled here twenty-one bank officers. W e are supposed to enact our own by-law s and by them we make the number of directors of our Local Associa tion twenty-five. Three-fifths of this number, or fifteen, we proceed to elect by each bank casting one vote, that is the majority of the twenty-one votes elect them. The remaining two-fifths, or ten, we elect by each bank casting as many votes as It has shares in the Reserve Association. As our total capital (surplus is not considered in this) is $38,550,000 and twenty per cent of this would be the par amount o f sh ar es held by the L o c a l A s s o c i a t io n o f St. L ouis or $7,710,000, the tot al n u m b e r o f sh ares v o te d f o r this t w o - f i f t h s o f the n u m b e r o f d ir e c t o r s w o u ld be 77,100, and in this v o t i n g the b a n k s w ith the l a r g e r c a p ita l w o u ld ha v e the a d v an tag e. H o w e v e r , the nu m b er o f b a n k s w o u ld c o n t r o l s i x t y per cen t o f the boa rd , and the n u m b er o f sh ar es bu t 40%. At this m e e t i n g we w o u ld al so d o u b t l e s s elect ou r p r o x y h o ld e r to r eprese n t the St. L o u is ba n k s a c c o r d i n g to the ir s t o c k o w n e r s h i p in the R e s e r v e A s s o c i a tion. T his r ep r e sen ta tiv e w o u ld c ast 77,100 v o te s f o r d i r e c t o r s o f the D ist r ic t A sso c ia t io n , and the only d u t y he has is to vote. Our D istr ic t w o u ld p r o b a b ly c o n si st o f at least three st ates — sa y M isouri, A r k a n s a s and O klah om a, and the br an ch o f the A s s o c ia t i o n w o u ld d ou b t le ss be at St. Louis. In this D ist r ic t there w o u ld p r o b a b l y no t be o v e r 15 L o c a l A s s o c ia t io n s o f w h ic h the L oca l A s s o c ia t io n o f St. L o u is w o u ld be one. A s the board o f d i r e c t o r s o f St. Louis, w e w o u ld elect by b a llo t one d ir e c t o r o f the D istr ic t or B ranch A ssoc iatio n, and a c c o r d i n g to the plan as o r i g in a l ly p rop osed have little else to d o un le ss w e are ask ed to g u a ra n t e e p ap er f o r r ed isc ou n t w h ic h w o u ld p r o b a b ly be only on rare ocas ions. H o w e v e r , in the revised plan it is p ro v id ed that the L o c a l A s s o c i a t io n ha v e a c o m p le t e or g a n i z a t i o n w ith a pres ident, v i c e - p r e s id e n t and e x e c u t iv e c o m mittee. It is to ap p oint e x a m in er s w h o shall rep or t to it and w h o s e rep or t s are to be fu rn ish ed the Nat io na l R e s e r v e A s s o c ia t io n w h en desired. By a v ote o f t h r e e -fo u r t h s o f its m em b e r s wit h the a p p ro v a l o f the N at iona l R e se r v e A s s o c ia t i o n it m ay ex er cise such o f the p o w e r s and fu n c t io n s o f a c l e a r in g house as are not in c on s iste n t w ith the p ur pos es o f the plan and it can be c o m p e ll e d to f a cil it a t e d o m e s t i c e x ch an g e. It will also ha ve the p o w e r to su spend a m e m b e r b a n k w h ic h r e fu s e s to c o m p ly w ith the c o n d i t i o n s o f the L o c a l A sso c ia t io n . A s the L oca l (M|fociation is the p rim a r y unit o f the w h o le sy stem, "Tn^Nrfy. ju d g m e n t , those p r o v i s i o n s fo r a c o m p lete aHization are m ost e x c ell en t and w ill g r e a t ly help i m ^ t o su ccess. In b r i e f it so a r r a n g e s it that A. c3^ouis c l e a r i n g house, b y c a l li n g i t se lf a /A ssoc iation ins tead o f h a v in g a restr ic ted inat pres ent , b e c o m e s part o f a n a t i o n -w i d e f' efW ynd its d uties are p ra c t i c a l ly un chan ged . In L o c a l A s s o c i a t io n is m od eled a f te r the c l e a r in g hou se as k n o w n in St. L ouis and C h ic a g o wh ic h o r g a n iz a t io n s have alr ead y p rov en them se lv e s o f value in tim e o f trou ble in this cou ntry. E ac h o f the fifteen lo cal boa rd s o f d ire c t o rs in our d is tr i c t w o u ld d o as we and elect one d ir e c t o r to the D istr ic t A ssoc iation. This w o u ld g iv e us fifteen d i r e c t o r s el ec te d this way. Then ou r p r o x y ho ld er w ith his 77,100 votes, w h o m we had al read y elected w o u ld meet the p ro x ie s f r o m the othe r L oca l A s s oc ia t i o n s here in St. L o u is w h e re the br an ch is. The District Association T hese p ro x ie s w o u ld elect ten o f the D ist ric t d ir e c t ors and then w o u ld g o hom e with no other duties to p erform . T hes e ten w ith the fifteen elected by d ire c t o rs o f d ifferent L oca l A ss o c ia t i o n s g i v e s the D ist r ic t t w e n t y -fiv e d irec tor s, and these tw e n t y -fiv e w o u ld elect an ad ditiona l five d ire c t o rs w h o shall not be officers o f ba nks, but w h o fa irly re present i n dust rial, co m m erci a l, a g r ic u ltu r a l or othe r interests in the com m u n ity . The total nu mber o f d ire c t o rs then o f our M i s o s u r l -A r k a n s a s - O k l a h o m a D ist ric t w ou ld be thirty, o f w h ic h fif ty per ce nt w e r e elected by w h at we m ay call Individual r epr es en ta tion, 33%% elec ted by s t o c k r epr esen ta ti on and 16%% w er e elected by jo in t ind iv idual and s t o ck re pr ese nta tio n. The d istrict will have a m a n a g e r and d epu ty m a n a g e r appointe d by the G o v e r n o r o f the A s s o c i a t io n w it h the ap p rov al o f the E x e c u ti v e Comm ittee. T hese D ist ric t B ran che s will be the c h i e f m ean s by w h ic h the f u n c tio n s o f the R eser v e A s s o c i a t i o n are car ri ed out. The Central Association Let us n o w ex am ine the o r g a n iz a t io n o f the Central A so c iation . Its boa rd o f d ire c t o rs will con sist o f f o r t y -fi v e , o f w h ic h six are ex-off lcio, these b e in g the g o v e r n o r o f the R e s e r v e A ss o ciation, t w o dep uty g o v e rn o rs , the S ecre tary o f the T re asu ry, S ecretary o f C om m er ce and Lab or, and the C o m p t roller o f the C urrency. E ac h D ist ric t Boa rd is a llo w e d to elect one d irec tor , and this g i v e s fifteen. An additiona l twelve, are elected by v o t i n g re presen ta ti v es w h o cast the nu m b er o f sh ares ow n e d b y the District s. The n the t w e n t y - s e v e n elected d ir e c t o r s (the e x officio d ire ctor s, un der the revis ed plan, are not a l lo w e d to v ote f o r m em ber s o f the b o a rd ) elect t w e l v e ad d iti ona l men to the board, w h o shall fa irl y represe nt the industrial, c om m er cia l, ag r icu ltu r a l and o ther in terest s in the c om m u n ity . This m a k e s a board o f fo r t y - f i v e d ire ctors , o f w h ic h 13%% is ex-officio, 0 33V&% Is elected by individual votes, 2 6% % is chosen by votes according to stock, and another 26%% is chosen by the Joint individual and stock vote. In order to prevent the possibility of centralization of management the revised plan just presented to the Commission al30 provides that of the tw enty-four directors made up of the twelve elected by stock representation and the twelve selected from the in dustrial, commercial and agricultural and other in terests, not more than three can be chosen from any one district. W ith this additional safeguard, it seems the Central Association is fully protected from the possibility of sectional control. Even New York state in which it is said there is centered fully three-fourths of the money power in our country could not have more than four directors in the Central Association, the one elected by the directors of the District Association, and the three elected by stock representation from the industrial and other interests and the New York District could not by itself elect these three, the other Districts would have a voice in the matter. The same is true of our proposed M issouri-Arkansas-Oklahom a District; we could not have more than four directors. The Smaller Bank is Protected It is apparent that throughout the plan the purpose is to give the control to number of banks rather than to the capital of banks. It would seem that the interests of the smaller institution are thoroughly safeguarded. The local association is the fundamental unit and it seems to have been overlooked in discus sion that this unit is protected in two ways. The Local Association must have ten banks and must have $5,000,000 capital. As there are only tw entyone eligible banks in St. Louis, this means there could not possibly be more than two Local Associa tions in this city, and probably only one, which in spite of its capital of $38,550,000, would have no more privileges than exercised by a rural Local Associa tion with capital one-third as large. This same thing is true of New York and other big cities. The last statistics available showed that the New York Clear ing House had flfty-one members. This would mean that there would doubtless be not more than five local associations in that city, and the chances are there would be only one. James J. Hill’s Criticism Mr. James J. Hill in a recent address before the Illinois Bankers’ Association as reported by the press, 10 lias s u g g e s t e d t h a t t hi s m e t h o d o f o r g a n i z a t i o n is n o t e f f e c t i v e a n d s a y s t ha t s o m e l a r g e b a n k w i s h i n g t o d o m i n a t e t he R e s e r v e A s s o c i a t i o n c o u l d t a k e a mi l l i o n d o l l a r s a n d o r g a n i z e f o r t y b a n k s w i t h $25,000 c a p i t a l e a c h a n d s o g e t f o r t y v o t e s in t he l o c a l a s s o c i a t i o n . H o w f a r f e t c h e d a nd t h e o r e t i c a l t hi s o b j e c t i o n is, is s h o w n b y t he f a c t w h i c h s e e m s to h a v e b e e n o v e r l o o k e d b y Mr. Hi l l , t hat in o r d e r to h a v e a n y ef f ect o n t he R e s e r v e A s s o c i a t i o n i t s el f , t he f i na nc i a l i n t e r e s t s a t t e m p t i n g s u c h a t i l i n g w o u l d h a v e to f u r n i s h a m i l l i o n d o l l a r s t o e v e r y L o c a l A s s o c i a t i o n , a nd g o t h r o u g h t he p r o c e e d i n g s n e c e s s a r y t o e s t a b l i s h f o r t y b a n k s in e a c h L o c a l A s s o c i a t i o n . W h e n it is c o n s i d e r e d t hat p r o b a b l y t h e r e wi l l be at l east f i f t een L o c a l A s s o c i a t i o n s in e a c h d i s t r i c t a nd t hat t h e r e a r e f i f t e e n d i s t r i c t s , w h i c h m e a n s t he e s t a b l i s h m e n t o f J*,000 n e w b a n k s — m o r e t ha n t he t o t a l n u m b e r o f n a t i o n a l b a n k s n o w o r g a n i z e d — a nd t he f u r n i s h i n g o f $225,000,000 o f c a p i t a l w i t h t he p r o s p e c t o f a m o s t d u b i o u s r e t u r n , it is c l e a r t h a t s u c h an u n d e r t a k i n g is p r a c t i c a l l y i m p o s s i b l e . It w o u l d t a k e t i m e t o d o a t h i n g o f t hi s k i n d a nd it c o u l d not b o d o n e s u r r e p t i o u s l y , c o n s e q u e n t l y it s e e m s i n c r e d i b l e t ha t e v e n i f t h e m e a n s c o u l d he f o u n d , t h a t t he p e o p l e w o u l d a l l o w it. I f s u c h a t h i n g is p o s s i b l e , w e a r e i nd eed in a b a d s t at e. Safeguarded Against Political Control It s e e m s t o m e t ha t t hi s p l a n o f o r g a n i z a t i o n , e s p e c i a l l y s i n c e t he r e v i s i o n , c a n h a r d l y be i m p r o v e d u p o n a n d I d o n o t b e l i e v e t ha t u n d e r it a n y f i nanc i al i nterest can get control. 1 a l s o d o no t s ee h o w p o l i t i c s c a n d o m i n a t e it. It is t r u e t ha t t he g o v e r n o r is t o b e a p o i n t e d b y t he p r e s i d e n t , b u t he c a n o n l y s e l e c t f r o m n a m e s s u b m i t t e d b y t he B o a r d o f D i r e c t o r s a n d s u r e l y a b o a r d o f f o r t y - f o u r me n, s e l e c t e d i n t h e m a n n e r t h e y a r e s e l e c t e d wi l l n o t be s u b s e r v i e n t to any p art y or power. U n d e r t he r e v i s e d p l a n t w o d e p u t y g o v e r n o r s , w h o are al so ex- of f i ci o di rect ors, a r e t o b e e l e c t e d b y t he b o a r d , n o t a p p o i n t e d b y t he g o v e r n o r a n d t he g o v e r n o r h i m s e l f c a n b e r e m o v e d b y a t w o - t h i r d s v o t e o f t he b o a r d . Three others o f t h e b o a r d a r e g o v e r n m e n t off i ci al s, n a m e l y , t he S e c r e t a r y o f t he T r e a s u r y , t he S e c r e t a r y o f C o m m e r c e a n d L a b o r a n d t he C o m p t r o l l e r o f t he C u r r e n c y , b u t t h e s e w i t h t he g o v e r n o r m a k e o n l y f o u r o u t o f a b o a r d o f f o r t y - f i v e a n d it is r a t h e r s t u l t i f y i n g to A m e r i c a n c i t i z e n s h i p t o s a y t ha t t h e s e f o u r wi l l dominate. 11 Executive Committee It is al so ha rd to see h o w the e x e c u t iv e c o m m itt e e c ould be m ore c o m p le t e l y sa f e g u a r d e d . It is to be c o m p o s e d o f nine m em be rs, the g o v e r n o r , t w o d ep u ty g o v e r n o r s and C o m p t r o l le r o f the C u r r en c y ex -offlcio, and five ot h er s el ecte d b y the board, no t m or e than one o f w h o m can c o m e f r o m an y one district. In o t h er w o r d s five sec tion s o f the c o u n t r y will a lw a y s be represented. The C om p t r o l le r o f the C ur r enc y is the o n ly st r i c t l y g o v e r n m e n t official on this board, f o r w h il e the g o v e r n o r is ap p ointed by the presiden t, he is se lec te d f r o m na mes su bm itted by the board and can be r em ov ed b y the board. The t w o depu ties are elec te d b y the boa rd and w ith the five othe r m e m b er s m a k e a m a jo r i t y o f seven. Cooperation Possible Only Through an Association H a v i n g e x am in ed the plan and finding the t w o d a n g e r p oints o f p o litic a l c o n t r o l and fin ancial c o n t r o l p ro tec te d, let us see w h a t a d v a n t a g e s w ill c o m e fr o m this c o o p e r a t i o n o f the b a n k s t h r o u g h the R e s e r v e A sso c ia t io n . The re are those w h o say that no i n s t r u m ent like an a s s o c ia tio n is n ec es sa ry , and they point to the b a n k i n g sy s t e m s o f C an ad a and Scotland, s a y in g no Central Ins tit u t ion is needed in those countries. T his is true, but the fa ct see m s to be o v e r lo o k e d that there are on l y t w e n t y - n i n e b a n k s in Canada, and these c o n t r o l all the b a n k i n g bu sine ss t h r o u g h 2,000 bran ches. Of these head ba nk s, nin eteen are in T o r o n t o or M ontre a l and the entire t w e n t y - n i n e are so situat ed that th ey can g e t t o g e t h e r w ith as m uch ease as b a n k s can g o to a m e e tin g o f the C lea r in g H ou se A s s o c ia t io n in a city. In Scotla nd there are on l y eig h t head b a n k s and these find it e asy to c o op era te at an y time. W e ha ve 6,893 Nat io na l ba n k s and 13,457 State in s tit u t ion s so w id e ly sc atte red they c ould n ever g e t t o g e t h e r e x c e p t th r o u g h som e cen tra l mediu m. H i s t o r y al so s h o w s that C anada and S c o t land are e x c e p t i o n s to a g en er a l rule, f o r the fo u rt een la r g e r f o r e i g n cou ntr ies, even t h o u g h m ost o f them have not near ou r e x pa n se o p era te un der a Cent ra! bank. Let us not g e t con fu sed , h ow eve r , the plan un der d iscu ssion doe s not p ro p o se a ce ntral b a n k in the sense o f the Ban k o f the United States d estr oy ed by J a ck s on . Its purpoiie Is not profit. P r im a r i ly it is a m ediu m o f c o -o p e r a t io n . Present Banks Not to be Done Away With This R e s e r v e A s s o c i a t i o n does not enter into c o m p e tition w it h an y bank. It is not c on t em p la t ed that 12 an y c h a n g e be made in e x is t in g b a n k in g la w s ex cep t a possible c h a n g e a l l o w i n g Nat iona l ba n k s to have sa v i n g s d epa rt m en ts and un der g iv e n r estr ic ti on s to lend limited am ou n ts o f their s a v in g s d epo si ts on real estate. It is no t to be a llow ed to pay interest on deposits. It is to r eceiv e d epo si ts fr o m the United States G o v e r n m e n t and m em ber banks, and these d ep o sit s o f m em ber s are to be cou nted as part o f their reserves. All banks, lar g e or small, are to be tre ate d a l ik e and it shall be the duty o f the R eser v e A s s o c ia t io n and its bran ch es upon request to t ra nsf er an y part o f the depo si t balanc e o f any bank ha v in g an ac c o u n t w it h it to the cre dit o f any othe r m em ber bank. This, it seem s to me, w ill ev en t u a ll y do a w a y w it h the c h a r g i n g o f e x c h a n g e on o u t - o f - t o w n c h e c k s and m a k e ev er y to w n w h ic h has a m em ber o f the a s s ocia tion a par point, c ert a in ly an ad v a n t a g e to e v e r y one. Bank Notes It is als o p ro p osed that the r igh t o f issue be g r a d u ally taken a w a y fr o m na tio nal ba n k s and vested in the R e s e r v e A ssoc iation. Under the revised plan the am ou n t o f notes that m ay be issued b y the R ese rv e A s s o c i a t io n is unlimited but is sa feg u a r d ed in t w o w ay s. F irs t there m ust be a rese rve o f fifty per ce nt in g o l d o r o t h er m on ey o f the United States, w h ic h na tional ba n k s are n o w au th or iz ed to hold as part o f the ir le g a l reserves, a g a in st all demand liabilities,, i n c lu d in g d eposit s and c irc ulation, and when this res er ve fa lls b e lo w fifty per ce nt the A ssoc iatio n has to pa y a sp ecial ta x on the de ficie ncy o f reserve. Second, all no te issues m ust be c ov ered to the ex tent o f at least o n e - th ird by g o l d or o t h er l a w f u l m on ey and the r em a i n in g p ortion b y ba n k a b le c om m er cia l pap er o r o b l ig a t i o n s o f the Unit ed States. No fu rt her notes can be issued w h e n e v e r the l a w f u l m on e y fa lls b e l o w on e - th i r d o f the n ot es ou tst an d ing. This is a dead line b e y o n d w h ic h the r igh t o f issue cann ot go, and w h en the r ese rve o f the A s s o c ia t i o n a g ain st d eposits and o u t s t a n d in g n otes is less than fifty per cent, it can on ly ap p ro a ch this limit by a sp ecial tax on the d efic ienc y o f reserve. Upon the n ot es th em selv e s there is no ta x until the y a m oun t to o v e r $900,000,000, and this includes an y na tio nal ba nk notes that m ay be o u t s t a n d i n g at the time. W h e n this am ou n t is ex ceed ed unless the ex c e s s is c o v e re d b y an equal am oun t o f la w fu l 13 money it is subject to a tax of one and one-half per cent per annum. W hen the notes exceed ?1,200,000,000 and the excess is not so covered then it is taxed at the rate of five per cent per annum. This is an Ingenious combination and adaptation of several European methods for the regulation of note issues and would seem to combine safety with a proper elasticity. It will give us in place of our very faulty bond secured currency, a currency based on a self-liquidating security, commercial paper, and unquestionably will be a great improvement. Rediscounting Commercial Papers Probably the most important service to be performed by the proposed Reserve Association is in rediscount ing paper. None of us likes to do this under the present conditions as it is a reflection on our credit, but we must all realize that if a proper agency were afforded, we would be able to keep in such a liquid condition as to be safe at all times. In fact, we might call our commercial paper a secondary reserve and it would be practically the same as cash. The Reserve Asociation may rediscount commercial paper having not more than tw enty-eight days to run and made at least thirty days prior to the date of re discount having the indorsement of any bank having a deposit with it. It may also rediscount for any depositing bank commercial paper having more than 28 days to run, but not exceeding four months, but in such cases the paper must be guaranteed by the Local Association. There is in addition what may be called an emergency measure, whereby with the approval of the governor and the Executive Com mittee of the Association and also of the Secretary of the Treasury, the Association may discount the direct obligation of a depositing bank indorsed by its local association, provided the indorsement of the local association is fully secured by pledge, with the local association of satisfactory securities of one-third greater value than the obligation discounted. Creation of Discount Market These provisions mean of course that instead of sending our surplus money to New York to be lent on the stock market we will lend it on commercial paper at .a better interest return to ourselves than the two per cent we receive now and with Just as great certainty of turning it into cash when needed, as that we can get it from our correspondent when 14 needed now. This will be especially true when on account of banks accepting bills of exchange as the bill contemplates, a great discount market is estab lished. Those of us who send our money to central reserve cities now receive the customary rate of two per cent, it makes no difference whether the money is lent at 1 % or 100%. In European countries where discount markets are established the discount rate is usually fixed at from 1% to 1 % % higher than the rate established— say by the Bank of England. As the Reserve Association will be authorized to flx a uniform rate, we will have a standard by which banks can flx their rate in a fairer way both to themselves and to their correspondents. The Plan Based on Proper Principles It seems to me that the plan is founded on the proper principles. It takes co-operation as found effective in our different financial stringencies and offers it through the only medium suited to a country so large with so many needed and well established financial institutions, which it wishes to disturb as little as possible. It guards against both the politician and the plutocrat. Results to be Achieved The results attained would unquestionably seem to be: (1) Elimination of bonds as a basis for currency and an issue of bank notes truly elastic and re sponsive to the needs of business. (2) Bank reserves will be brought under control of a body which can use them so they really are re serves, especially during panics, and an institution which can go to the aid of a deserving subscribing bank when it gets into a dangerous position. (3) An institution which will rediscount paper at a uniform rate throughout the United States and thus put us on a commercial paper basis, which means a self-liquidation basis. (4) The creation of a general discount market so that surplus funds will not have to be sent to New York for investment in demand loans. (5) The substitution of a well organized system of credit banking in place of our dangerous and de fective system of Stock Exchange banking. These are among the chief ends to be attained, and if attained we will see no more scenes like those of 1907. On the contrary we will have one of the soundest banking systems in the world. W e will have all the advantages of co-operation so concentrated as to re 15 suit in quick decision and quick action. W hile re serves will be centralized and so mobile as to be used to strengthen any danger point, control in reality will be distributed between fifteen districts of our country and thus decentralized. It is a generally known fact that New York holds nearly all of our reserve now. It is also known that probably four or five New York banks hold three-fourths of the reserve in that City. In other words these four or five banks are the present central instrument. This situation is brought about by prevailing con ditions. New York has the only call money market, and the surplus funds of all of us find their way there. W hen such facilities for rediscounting are afforded as proposed by the Reserve Association and when bank acceptances result in a great discount market, instead of sending all our surplus money to New Y ork through our correspondents, we will lend a far greater amount to our home people for com mercial transactions, thus benefiting our community. The Stock Exchange will cease to be the governing factor on money rates. New York will be less of a central point. The Reserve Association will be an Instrument to the end of separating legitimate busi ness from the speculative. It will be a medium of co-operation and an instrument of decentralization. Bankers Must be the Nation’s Leaders Upon the bankers of the United States rests the chieT responsibility for reform. It is our business, and the people look to us for guidance. In these days of quick transportation and communication by telephone, telegraph and wireless, there are no iso lated places and the banker of the small town as well as of the large city must keep his hand on the pulse of country wide movements. If he is wise, he does not say a currency reform does not affect him. A ll banks, as I have said before, are now part of the Nation’s nervous system, and a shock to any one is felt by all. It is our duty to study this plan carefully and. from every viewpoint. The subject is too big and too vital to allow Its proper solution to be affected by political considerations. In con templating it we may have to give up some of our pet theories and get over our personal prejudices, so that we may act on that high plane of citizenship which places above self the good of the country as a whole. The record of Missouri bankers, however, speaks for itself. They have always stood for the best and their judgment can be relied upon now. 16
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