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Mone r Wkik11110101011%/1 1 1 • 2 ON MONO. SEC. MONETARY PLAN. SCOPE O ,TufE REpoki. The National Monetary Commislon, constituted by ection 18 of the act "to amend tl4e national banking laws," approved May 30, 1908, s bmits herewith the report which it was therein directe to make on the subject, "What changes are necessa - or desirable in the monetary system of the United states or in the laws relating to banking and currency.'i This act gave to the Commission authority to examqie Witnesses "and to make such investigations and (laminations, in this or other countries, of the subjects ceimmitted to their charge as they shall deem necessary.' The act also, in prescribing certain conditions unde which additional circulating notes might be issued by ational banks, was made temporary in tie term of its o cration by the provision of the last section, that "this ct shall ,expire by limitation on the 3oth day of June, I914..' The Commission, therefore, submits this report o Congress, in compliance with its order, two and a'.half ve3rs before the expiration of the act of May 30,, 1908, order that Congress may take such action. on tile su ject-matter thereof as they may deem expedient. The passage of the act of May 30, 1908, sometimes referred to as the." Aldrich-Vreeland law," was the outgrowth of defects in the currency and banking system of the United States. brought into reliOf by the monetary ptnic of 1907. It can not be said that these defects were then disclosed for the first time, Since _they had been emphasized by the suspensispn of cash payments by the banks in 1893 and had been the subject of frequent criticism by monetary experts; but they were brought into especial prominence by the events of October and November, 1907, because the country was then in a state of profound peace, the monetary system had been established upon the gold standard, an4 up to a short time before the panic prosperity and credit expansion had been going on apparently without clanger. BANKING FEATURES OF THE Cidsis OF 1907. Without undertaking at this point to give a detailed account of the crisis of 1907, some of the events which were most obviously related to defects in the banking system may be summed up thus: 1. Suspension of two important national b nks and several smaller national banks in New York pity, and the suspension of '0 banks and trust compaiiips in that city, including the suspension on October 22 of he Knick8 erbocker Trust Company, with deposits of :':4;48,3' , 7,0o0. 2. Serious runs on two important trust companies in New York, which compelled the lending of large sums to them by other banks in order to check the pread of distrust. 3. The decision on October 26 of the New York Clearing lino.... to issoo r•ii•r1titnr-110USC eertiacates,- in order to miti- general 4 VV 11.110111 imuCilat,Ilit.; ..LL ‘111J 1/,/111.. W , 4.4. 81V s.,..,..-4..., ., some of the events which account of the crisis of 1907,. were most obviously related to defects in the banking system may be summed up thus: 1. Suspension of two important national b nks and several smaller national banks in New York pity, and the suspension of mo banks and trust compan s in that city, including the suspension on October 22 of he Knickerbocker Trust Company, with deposits of $48,387,000. 2. Serious runs on two. important trust cortanies in New York, which compelled the lending of larg sums to them ,by other banks in order to check the spread of I general distrust. • 3. The decision on October 26 of the New York leari-ng House to issue clearing-house certificates,.in order to mitigate the further impairment of legal tender reserves, such issues rising to a maximum of $88...,42o,000. 4. The issue of clearing -house certificat2s in infore than N w York, 50 other important cities, representing,. with 0u1 /standing total issues of $248,279,700, with a maximum of $219,857,500.° t manager of the New Figures compiled by William J. Gilpin; assistan of and printed in annual report of the Comptroller York Clearing House, tes. were issued under varying conthe Currency for roo8, p. 66. Certifica complete record. ditions in many other places, of whleh thereAs no a pay5. The general suspensiOn.,on October .,?8,1:3,4 the the ment of currency of checks and other obligations, by• . , :. banks of New York and generally bY banking institutions in other parts of the country. , . 6. The Appearance of a 'premium op curr6cy, rising as . , . this high as 4 per cent, and continuing:for two.,months, nt of premium naturally operating to prevent the payme and currency freely even by institutions otherwise ready ,competent to do so. to 7. The rise of the rate of foreign exchange to $4.91 normal the pound sterling, when par of exchange under norconditions is $4.866 and the gold import point under mal •conditions is reckoned at $4.895. i h ressly 8. Refusal of some corporations owing interest ex cause payable in gold to make such payments in gold of the loss on exchange. from 9. Decline in amount of clearings at New York 30, $103,754,100,091 for the year ending September 1906, to 573,630,971,913 for 1908. mu. Increase of deposits of public funds by the SecreAugust 22 tary of the Treasury in national banks between to relieve the and December 3 by $79,834,689, in order pressure for currency. Decem1 i . Net imports of gold, from November 1 to above the nge ber 31, 1907, largely at rates of excha 0,1,770.a usual gold import point, of 5'06,4 a Sever .): . of the Treasury to Senate y operations, certain information in regard to Treasur Senate Document No. 208. pp. '3-15. first session, 1 A N.IAN4.4. ) ' rtiLf .. riey—e-1 11 , vi..,.. ......... t- . V-), */ GlAA.4 j X.f.rr . ; iotifr 61.- a • 3 ON C. . SE MONO New York bankers with Failure of negotiations by the direct shipment of gold to the Bank of France for igned reason that there was no New York, for the ass rica with which the Bank of central , institution in Ame 12. France could deal. boration of particulars like these, It does not require ela urivy decline in the value of sec nor reference to the hea s cantile business, and the seriou ties, the paralysis of mer ntly failures, • to put in. a sufficie increase of commercial t American financial conditions striking light the fact tha and that the derangement was were gravely deranged, ks ree to the inability of the ban due in a considerable deg in perform their usual fanctions under existing law to credit and cusre-ey throughmaintaining the free flow of out the country. these'events, from the legisThe immediate outcome of an effort to cure the lack of lative point of view, was s of note issue, by the provision elasticity in the system ch 1908, already referred to, whi of the act of May 30, l to issue circulation additiona permitted national banks graded ized by law, under a tax to that previously author such additional issues of notes according to the time that fact hat the very act which mikht be in circulation. The r circuit ton authorized furthe provided for this additional etar Commission and also inquiry by • the National Mon of he act, was interpreted limited the time of operation ressin the view of Congress, by the Commission as exp s def cts than those enryected that there Were other seriou sv em of banking and curby this law in the existing igation and rtmedv. rency which called for invest A S. EIGN BANKING SYSTEM INVESTIGATION OF FOR tructions of Cr nTess, the In accordance with these ins proceeded to examine the members of the Commission s in other otintries. They evolution of banking system ns not sim sly by the study conducted these investigatio ls chiefl1 with the system of printed literature, which dea may be i eseribed as differof note issue and with what rather ian differences of ences of law and structure visited ading banks, perbanking methods; but they officers, d discus:et methsonally conferred with their cial pa er, discounts, and ods of dealing with commer tem of ote issue.. .k; the deposits as well as the sys they wee convimed that it result of these investigations, nsplant t e English, French, would be impossible to tra this co ntrv i.1 its entirety, German, or any other system to system under the environin spite of the merits of these ir functions. They were ment in which they perform the With the fact that there strongly impressed, however, tain general priLciple:3 of prevail in European systems cer ts of the banking system coordination of the different par deration for their hearing which would repay careful ,consi the United States. upon the problems to be solved in o that by careful The Commission were satisfied als of these other countries, study of the banking experience general prilciples of light would be thrown upon the so far as this e::perience commercial banking, at least of local organization and disclosed, beneath differences g principles and common conditions, certain underlyin obtaining this information tendencies. With a view to points at issue, brought in concrete form, covering the the Commission date rind in the English language, ;•I :4„tr ttl e IC 10 - Corte, -7— 9-2f 111 v. 4...- _ y were . ment in which they perform their functions The h the fact that there strongly impressed, however, ivit n general principles of prevail in European systems certai parts of the banking system coordination of the different nsideration for their hearing which would repay careful .co ved in the United States. upon the problems to be sol sfied also that by careful The Commission were sati , ence of these other countries study of the banking experi n the general principles of light would be thrown upo st so far as this e::perience commercial banking, at lea es of local organization and disclosed, beneath differenc on ying principles and comm conditions, certain underl on to obtaining this informati tendencies. With a view ught ng the points at issue, bro in concrete form, coveri n lish language, the Commissio up to date, and in the Eng s writers in Europe and in thi obtained from competent methaphs on the history and country a series of monogr the n banking systems. While ods of the principal foreig sion were directe.: princiinvestigations of the Commis m the relations between the pally to the banks of issue, not neglected, because these and other institutions were of most important features relations form one a the take inquiry which did not European %systems, and an ld be, far from, complete and them into consideration wou The monographs written on in some respects misleading. x••... . foreign systems-4 ar.—have alreaq.„:been subican-,---afi4--4-ayauese_ay.staa proposed in this report to mified to Congress. It is wn by the inycsLigation of analyze briefly the facts sho le single out as far as possib these foreign systems, to r rated with the g- eaLest benethe features which have ope ss ity and the economic progre fits to the business commun consider how far these features of eachicountry,and then to e grown up under them are and the practices which hav and without undue disturbapplicable with advantage, banking /conditions in this ance of existing customs, to • country. RICAN CONEXPERIENCE TO AME RELATION OP EUROPEAN DITIONS. opean counties of the The general adoption in Eur k suggests the inqui7y how principle of the central ban m their experience are applicafar the lessons derived fro In a broad sense financial ble to American conditions. in all cases rise to the digprinciples, while they do not universal application under nity of laws, are of nearly followed by banks hi govsimilar conditions. The rules precious metals operate erning the movements of the ed commercial countries most successfully in those advanc is most fully de :eloped. where the system of credit ted States occ•ipies an Among such countries the Uni of defects in the coordinaimportant place, and, in spite 1 4.4160 d 71. 44 1 ) C--Sh•- CN MONO. SEC„ tion of the banking system, it can hardly be denied that the rules deduced from European experience are applicable in a large degree to American conditions. This: is more strictly true, however, of what may be called financial principles than of the principles governing the forms of banking organization. The fOrm. of organization of the European banks of issue is highly centralized. Up to a certain point centralization is required in order to 'enable these banks to perform their functions effectively but such a high degree of centralization as actually exists would not be acceptable in the United States, where individual initiative has developed a system of numerous local banks, and legislation prohibiting branch banking has made these banks independent in their form of organization and isolated in many respects from other banking institutions. If the uniform experience of the leading commercial countries of Europe has demonstrated the advantage of a central organism for the financial system, in the form of a central bank of issue, the question becomes worthy of serious consideration if the same benefits could be .obtained in the United States by the adoption of such a modification of this system as would retain its efficiency while giving a more democratic character to its ownership and management. The essential advantages of the European systems over the existing American system are the concentration of reserves in single hands, where they can be made effective; a position of leadership in the market, which permits periods of stress to be anticipated and provided for instead of being dealt with after conditions have become acute; and the ability to issue notes under comparatively few restrictions for the rediscount of legitinmte commercial paper. The questions which arise in regard to obtaining these benefits under the American system are: How far do American banks already fulfill the functions of European banks of issue? Would it be possible for them to fulfill them more efficiently under a modification of existing law, without the adoption of the system of a .central bank ? Whatever may be the defects of the existing banking system of the United States, they have not prevented a remarkable development of internal pi-oduetion and foreign trade. The system has adapted itself in a large measure to the requirements of credit in a country where the frontier of settlement and of business has been rapidly extending, and on the other hand, American business practice has been adapted to the conditions of credit created by the system. To overturn a system whose tendrils are thus interwoven with the evolution of the business of the country could only be justified upon the ground of serious evils in the system, which could not be remedied without its entire destruction and the creation of a new system. Such a change would be contrary to American political traditions and even to the experience ) 91.t. &L'i any extending, alai oil 1ILC ui ness practice has been adapted to the conditions of credit created by the system. To overturn a system whose the tendrils are thus interwoven with the evolution of business of the country could only be justified upon the ground of serious evils in the system, which could not be remedied without its entire destruction and the creation of a new system. Such a change would be contrary to American political traditions and even to the experience of those countries which have found an efficient financial organ in a central bank. If the benefits derived by the principal financial centers of Europe from the system of a central bank can be obtained in the United States by the cooperation of the existing banks, then such a means of attaining these ends is much to be preferred to a more radical change in existing law and practice. This method of accomplishing results has been adopted in the plan of the National Reserve Association. Before entering in detail upon the method by which this result is to be accomplished, it seems advisable to deal with certain collateral consideration which differentiate conditions in the principal countries of Europe from those in the United States. The United States represents perhaps the largest homogeneous area over which a single banking system operates, except the Empire of Russia, where, in spite of the magnitude and solidity of the State Bank, credit methods have not been greatly developed or widely extended. In addition to dealing with a large area, moreover, it is necessary in the United States to deal with existing conditions which could not be wiped out or arbitrarily forced into new Channels without serious disturbance to business and credit. There are, according to the reports 'made to the Commission, not less than 24,000 banking institutions—national, State, and private banks and trust companies—doing busines in the United States. They operate under not less than 49 State and Territorial laws, in addition to the national banking law, and national banks themselves are subject in their ordinary commercial operations to the civil law of the States in which they . do business. To this great mass of institutions, possessng to the recent reports of the Comptroller, ing, accordi siAsets of more than twenty-three thousand millions of dollars, any change in the form of the banking organization is of vital interest, and such changes must be made, ;f they are not to cause disturbance, with careful consideration not merely for vested legal rights, but for those rights also which have arisen froiii long established practice and business customs. . L-e 7 5 ON C. MONO. SE it It has seemed, therefore, to the Commission that possiwould be undesirable, even if it were practically a 'sysble kgally and politically, to tear up by the roots the extem which has in many respects served so well purely panding needs of the country and which in its from those banking features rEIPresents an evolution has been to needs. What has been sought, therefore, some develop from the existing system, and as a part of it, g new organ which would serve the requirements arisin r from the concentration of industry and capital in greate e masses in recent times and thus enable American financ power to confront such concentration abroad with equal home. on the part of its financial machinery at PRINCIPAL OBJECTS OF THE PROPOSED PLAN. The criticism directed against the Ameiican currency system, so far as it related to the banks, prior to the panic — of 1907, was directed chiefly to the system of note issue which notes were the character of the security upon issued, the alleged separation of this security from comto mercial banking, and the inability of such a currency busiexpand and contract) in accordance with legitimate e conness requirements. The Commission soon becam • vers that the vinced, 111---e0Yrininn • farerrors to be corrected were much deeper and more m reaching than those pertaining exclusively to the syste bankOf note issue. Careful 'study of the evolution of cally ing methods in other countries showed that in practi banking all such countries where the system of credit and on was well deyeloped,_there was/ degree of coordinati in the banking system which added greatly to its capacity in to resist strain in time of pressure and lw its operation so acute this respect prevented the strain from becoming or so disturbing to industry and finance as in countries where such coordination was lacking. As a result of the investigations made and of comparison of American conditions with those of other countries, the Commission are unanimous in the conclusions that can the following reforms should be sought in the Ameri banking system as it now exists: i. Greater concentration of reserves. 2. Greater elasticity in the system of note issue. bank3. A more strict distinction between commercial ing and financial operations. ination , 4. A higher degree of cooperation and coord (- r 7 and trust among existing banks, including Staie banks companies. the money 5. The recognition of some influence in interests market responsible for safeguarding the public banks. as well as those of the stockholders of the banking system do These five changes in the exis ing in detail not by any means complete th list of reforms Congress. which the Commission desire t recommend to t, They do, however, represent time chief ends to be sough Comand they are ends* upon which, in the opinion of the unanimous. As 16 mission, expert opinion is now all hut opinion the methods of attaining these ends, differences of ission no doubt still exist, but it is the hope _dthc-Comm and that such differences can e reconciled by comparison United consultation in a manner which will give to the ed States a monetary and banking system as well adapt of to national financial dev6lopment as the systems England, France, Germany, and other advanced cointheir ' tinN'P ,-Iroved to be adapted to _- ct, ic interests market responsible for safeguarding the publ , as well as those of the stockholders of the banks. ing system do These five changes in the existing bank reforms in detail not by any means complete th list_ of d to Congress. -which the Commission desire t recommen esent t e chief ends to be sought, They do, however, repr opinion of the Coin and they are ends* upon which, in the unanimous. As to mission, expert opinion is now all hut rences of opinion the methods of attaining these ends, diffe thz-Cominission . ._ no doubt still exist, but it is the hope of comparison and (b that such differences can e--.reconciled by 4to the United consultation in a manner which will give L. well adapted States a monetary and banking system as • systems of to national financial development as the advanced comEngland, France, Germany, and other ted to their merical countries have proved to he adap development. ring upon It will now be set forth broadly, before ente ion, how it is a full analysis of the plan of the Coinmiss strengthen and sought to remedy these defects and to the existing coordinate, without changing radically, system of national and State banks. evil requiring • 1 . Concentration of reserves.—The first em--lack of conreform in the existing AmeriCan syst ect by the creacentrated reserves—it is proposed to corr Reserve Assocition of an insiitution called the National tution is to be the ation of the United States. This insti United States and . fiscal agent of the Government of the become members the reserve institution of such banks as banks for which of the cooperative associations of local to endow the Rethe plan provides. It is the inteition functions which beserve Association with certain of he but not with kIll of long to the central banks of Euiope, make it a central these functions. It is Opposed to h local banks can reservoir of gold and credit, upon whic 1 paper for rediscount, draw in time of need by presenting and to preclude its but to restrict it closely to this field intrusion into other fields. , if the plan is acThere appears to be no 'doubt that Association will be cepted by the banks, the Reserve impressive stock of gold. equipped from the start with an s to count deposits with The authority given to local bank of their cash reserves is the Reserve Association as a part now held by the local likely to release milch of the gold depoiits of the Governbanks for reserve purposes. The in free gold, which will -6 ment will add about `:•', o,000,000 the deposit of the public he maintained from day to day by _ • -"a % (.2)r Y . \I ; 42.1 It I %taw? revenues. It is probabL ;Aso that v,ithin a short time a large proportion of the gold held in the Treasury against outstanding gold certificates will gravitate toward the coffers of the Reserve Association and be replaced in circulation by the notes of the Assoeiaticn, thus making this great mass of gold available for credit operations instead of an unproductive cover for coin certificates. From the , operation of these influences, it Seel: S a not unreasonable conclusion that, within a very short time, the Reserve Association would be in possession of a fund of ;600,000,oao to $700,000,000 in gold, equal to that of the Bank of France or the Bank of Russia, and would derive from it a power like theirs to inspire confidence in its ability to meet the legitimate demands of trade and to weather without peril the severest storms. 2. Elasticity of the note issuc.—The purpose of making. the metallic reserves adequate and effective will be accomplished by the method proposed in the plan for increasing the elasticity of note issue. Without dwelling at present upon the details of the system, it is sufficient to say that its effect will be to permit the substitution in local banks of the notes of the Reserve Association for gold coin and other lawful money• which they are now required by law to hold as reserves. With the power to issue notes to the amount of at least twice its gold reserve, and to deliver such notes to local banks upon the surrender of first-class bills of exchange or their best discounted paper, it is obvious that the country would be equipped with a mechanism for sustaining its great volume of transactions, at the crop-moving season and at other times, in a manner which. has been lacking under the existing organization of the banking system. These notes would tend to flow back to the Reserve Association when they were no longer required in circulation, because the Association would serve to some extent as a clearing house. Its volume of outstanding circulation will be governed to a large degree by the volume of its loans and discounts, and as these are paid off they will be settled substantially in notes or in checks upon local banks, which will be paid through the clearing houses in notes of the Reserve Association or in legaltender money. The deposit daily of the receipts of the Government will also consist largely in notes or in checks convertible into such notes or into lawful money. The. Reserve Association can not reissue such notes unless there is a demand for them through applications for rediscounts or the offer of bills of exchange, and a current of notes back into the vaults of the Association will tints be established more rapid and efficient in checking redundancy than would be any system of redemption, through exterior agencies, of the notes of the local banks. 3. Restriction of business to commercial banking.—The third reform aimed at by the Commission—a more strict separation bet ween commercial banking and financial operations—is embodied in the rules defining the classes of business in which the Reserve Association is permitted to engage. The association is restricted, even more closely than are some of the European banks, to dealing in liquid assets in the form of commercial paper in opposition to loans upon securities. It is limited in its dealings in bonds to United States bonds and short-term obligations of the United States, or of any State, or of certain foreign Governments. Apart from acting as a distributor for public loans, this is the only ciass of busi- thus be established more rapid and efficient in checking redundancy than would be any system of redemption, through exterior agencies, of the notes of the local banks. 3. Restriction of business to commercial banking.—The third reform aimed at by the Commission—a more strict separation between commercial banking and financial operations—is embodied in the rules defining the classes of business in which the Reserve Association is permitted to engage. The association is restricted, even more closely than are some of the European banks, to dealing in liquid assets in the form of commercial paper in opposition to loans upon securities. It is limited in its dealings in bonds to United States bonds and short-term obligations of the United States, or of any State, or of certain foreign Governments. Apart from acting as a distributor for public loans, this is the only class of business relating to stock exchange securities in which the Reserve Association is permitted to engage. This limit upon the power of the institution is designed for keeping its large assets in a form quickly convertible and for withdrawing the commercial business of the country from the perturbations of stock-exchange speculation. 4. Coordination of the banking system.—The higher degree of cooperation and coordination among existin g banks, which is sought by the proposed plan, is accomplished by organizing the existing national banks and certain State banks and trust companies into associations, each electing its own officers and directors, which associations in their turn are to elect the officers and directors of larger groups, which control the Reserve Association. The effect of these provisions is to create a banking democracy in , which every bank, however small, has a voice, instead of a banking oligarchy, where the policy of the local branches is dictated from the head downward, as in the case of some of the European banks. Of the exact methods by which democratic control of the new institution is accomplished it is proposed to speak more fully further along in this report. It is obvious, however, that this feature is one which marks off the proposed plan sharply from European systems, with their high degree of centralization and numerous branches, and adapts it to American conditions, without disturbing the franchises of existing banks or the relations of bankers and their clients,under the system which has grown up in this country. Ar- 777 CN MONO. SEC. The plan has been so framed as to prevent competitio n on the part of the Reserve Association with existing banks . To this end the association is specifically excluded from doing business except with the Government and with subscribing banks. It is forbidden to pay interest on depos its, and even in buying foreign bills is restricted to buyin g from banks which are among its own depositors. The branc hes beilig subject to the same restrictions, they can not corn\ pete with local banking institutions of any type. It is not contemplated that branches of the Reserve Association shall be established Ageopt in440.4 financial and : , geographical centers, where their facilities for suppl ying circulating notes will be conveniently accessible to Ile hasks of all parts of the country. it is proposed to leave intact the American system of independent local banks , but to knit them together for mutual protection by new and closer relations with each other in their local assoc iations and through these with the Reserve Association. 5. Leadership in the money market.—The final essen tial reform sought by the plan of the Commission—a nd in some respects the most vital—is the recognition of some influence in the money market responsible for safeguarding the public interests as well as those of the stockholde rs of the banks. One of the grayest defects which has been revealed in the operation of the American system is that in periods of emergency there is no one charged by statu te or by custom with taking the lead in measures for stopping panic and restoring confidence. When this duty has been assumed, either by a private individual or by a high official of the Government, it has resulted in recri minations and censure as well as praise. Almost inevi tably the strongest inducement has been held out to publi c officials under such circumstances to delay action until conditions were acute, in order that it might be clear to all men that extraordinary action was required. For them to take action of an unusual character or of debatable legality, under their limited powers as public officials, in order to anticipate and prevent panic, would expose them to criticisms, against which they would have no tangi ble defense. Quite different is the position of an institutio n (lowered with banking power and leadership in the market. It becomes an object of legitimate censure if it waits for danger to become acute before taking defensive action. The end aimed at in this respect is met prima rily by the creation of the Reserve Association, and by its endowment with the custody of a large gold reserve and with the right to issue notes under reasonable restrictions up to the amount demanded by the legitimate business of the country. Such powers would impose a high degre e of responsibility to the financial community and to the enlig htened opinion of the country, even if they were exercised by a joint-stock bank entirely under the control of its shareho Xt. CN MONO. SEC. The pe,v.-ers conferred upon the National Reserve Association are in many respects broad powers, but they ore to be exercised under the authority of the representatives of the banks of the country, together with such participation:and supervision by the Government as will insure due regard for the public interest. It is the belief of the Commission that the powers thus conferred are ample for guarding effectively the gold reserve of the country, protecting local banks in case of need, and preventing financial crises. Other plans, embodying the same principle— of cooperation through the federation of the clearing houses—have been defective, in the opinion of the Commission, in failing. to confer adequate powers upon the central organism. Experience has shown, in countries much smaller than the United States, that a mere loose confederation of existing banks through cJmmittees, without legal corporate powers, have failed to correct the deficiencies of isolated and independent banking. This was the case in Sweden, which was finally compelled to take the power of note issue away from the local banks by a law of 1897 and to confer it upon the State Bank. It was the case in Switzerland, wheie for more than twenty-five years— from 1881 to 1907—repeated efforts to bring about harmony of policy among the thirty-odd local banks of issue, through agreements in regard to rates of discount, the retirement of notes, the regulation of reserves, and the appointment of representative connnittees, entirely failed to establish that control of the foreign exchanges which was established promptly, even on the eve of the crisis of 1907, when finally the control of the note issue and the foreign exchanges was vested in the National Swiss Bank. From these and many other experiences it is clear that in order to accomplish the object sought through clearinghouse associations, in protecting the solvency and sutE, ciencv of the monetary stock, there must exist at the apex of the banking system an institution which is in itself a legal and financial entity, apable of making contract§ and carrying them out, of influencing the market through the purmase and sale of foreign bills, and of guarding through the discount rate the ultimate metallic reserve. :-;uch objects can not be accomplished by a committee, no matter how able its membership, nor by a loose confederation of banks without an organization capable of acting quickly and effectively and as if with a single mind, in the international market. It has been the continaous aim of the Monetary Commission to avoid the high degr:_.e of financial centralization which now exists at European monetary centers; but it is believed that the plan submitter to Congress will seeure the beneficial features of this es -itralization, while avoiding those features which are ill adapted to American conditions. The broad principle of the greaer equality in the distribution of capital which will be promoted by a higher degree of cooperation among local banks is discussed elsewhere in this report. It is intended to po:nt out here merely that even in the mechanical operation of the proposed plan a mechanism is created for facilitating domestic exchange which will 1,end to a much freer movement of capital and credit than takes place under kkIL. ....•••••••••-•-• mission to avolu LIIt ilr4liu.gree oi itilaitcial.. which now exists at European monetary centers; but it is believed that the plan submitted to Congress will secure the beneficial features of this ez;ritralization, while avoiding those features which are ill adai.,•..(1 to American conditions. The broad principle of the grea.`,er equality in the distribution of capital which will be promoted by a higher degree of cooperation among local banks II, disCussed elsewhere in this report. It is intended to point out here merely that even in the .mechanical operation of the proposed plan a mechanism is created for facilitating domestic exchange which will tend to a much freer movement of capital and credit than takes place under existing law. The Reserve Association will thus fulfill many of the functions of a clearing house for the interior banks. It will no longer be necessary for .them to remit currency or even New 'York drafts to meet obligations to other banks, if they have a deposit balance with the Reserve Association. It will only be necessary to direct, upon prescribed forms, that a transfer be made on the books of the Reserve Association from the balance of one institution to that of another. In this respect the system of the Reserve Association will follow that of the Bank of France, the Imperial Bank of Germany., the National Bank of Belgium, and other European banks, which have .0eveloped to a high degree of perfection the manner of transferring credit from one account to another. These arrangements at European banks, although little understood in this country, are more econotnical in some respects than the system of checks and drafts and have obviated some of the defects arising in European financial :practice from the incomplete development of the check and deposit system. The comparatively small volume of operations at some of the European clearing houses is •explained by the fact a great clearing system exists in the .central bank of issue, through which are transacted a very large proportion of the transfers of credit between ,one bank and .another and from one part of the country to another. It is not expected that in the United States the system • of transferring credits in this manner will supersede the use of the check and deposit sysn. Under the plan ,of the Commission, the operations of die National Reserve Association arc restricted to banking institutions and are, therefore, not open to individuals directly. It will he in the power of local banks, however, to sell transfer orders upon their (:cp,xi7s with 'he Reserve AssociacFenissarid .11;.'re!-•y to place he system of tipublic. It is pro;yible • ..r .•rs • wnere 'there is a branch of the Reserve Association, and wheri: cicaring, houses are in operation, banks which are members of the dulling house will keep balances with the Reserve Association and will settle kLir i 4 1 / 0 lit 10 CN MONO. SEC. their balances at the elearing house by such drafts. liv this measure, the great mass of clearing operations in the principal cities of the country will be performed without the direct exchange of a dollar in currency. If the balance at the clearing house is large against a single institution, it will simply be necessary for the Reserve Association to compel that institution to increase its deposit in order to cover the adverse balance. Thus, a new step will be taken in the economy of currency and banking credit, which will be based upon the solidarity of interest and confidence existing among the banks by reason of their mutual cooperation and their power to use their combined resources for a common end and for the common good. In the plan of the Commission are embodied several steps toward that policy of uniformity which in recent years has been the tendenc: both at home and abroad, but they are not steps involv:nr, radical changes in existing banking methods. It is nth proposed to substitute the system of branch banking for that of independent; banks ser,ving the interests of local communities. For this reason the power to establish branch s not con. .ferred by the plan upon existing banks, exccpi for certain special purposes which will be explained here:- fter, . nor is it proposed to permit the Reserve Association to establish branches except in a few principal cities, where such branches will serve as a convenience to member banks in obtaining currency and rediscounts. Thus no door iS left open for competition by the Reserve Associ4tion or its branches with existing banks, and if there Were a suspicion that such a door existed, it would be excluded by the provision of the plan, that all donh‘stic transactions of the Reserve Association shall be confined. to the Government and the subscribing banks, with the ption of the purchase or sale of Government or State securities or securities c4 foreign Governments or of gold coin or bullion. In laving down this rule the Comm is-" sion desired to confine the functions of the Reserve Association to the two objects of guarding the financial security of the country by regulation of the gold moveMent and affording adequate accommodation to legitimate commerce at all times by means of its powers of rediscount and note issue. Under the plan propow.d. existing relations between local banks and their clients will not be altered or disturbed, except that the banks will not be compelled to reject properly secured applications for loans upon the ground that they have exhausted their credit or their supply of currency. At is the belief of the Commission that the 1, serve Z Association will not be less efficient in influencing the exchanges and affording adequate accommodation to commerce with a limited number of branches than it would be with a branch system reaching into all parts of the country. There would be little difficulty, even under the existing relationship between the banks, for the smallest bank in the most obscure community to obtain AL i &ne uenta oi inc / 4 1 .-orra1,11.bio11 Max. tne rerve Association will not be less efficient in influencing the exchanges and affording adequate accommodation to commerce with a limited number of branches than it would be with a branch system reaching into all parts of the country. There would be little difficulty, even under the existing relationship between the banks, for the smallest bank in the most obscure community to obtain rediscounts from its depositary bank in a reserve city without direct dealings with the Reserve Association, because the reserve city hank would be in a position at all times to obtain reasonable accommodation from a 1 arger bank in a central reserve city or directly from the Reserve Association. Much easier will be this means of securing additional accommodation when banks are knit together in the local associations provided for by the plan and when the system of rediscounts and acceptances is more generally established in American banking practice. Proper influence over the foreign exchanges does not, in the opinion of the Commission, require a wide ramification of branches of the Reserve Association. The pressure for the export or import of gold and for increased credit accommodation in times of pressure falls ultimately upon one or a few financial centers in each country. In those centers rates for foreign exchange are fixed by the law of supply and demand and lw the staLe of the visible gold stock. Upon those centers converges the demand for foreign exchange and for additional credit accommodation in case of pressure. In such centers itt other countries exist the surplus stocks of gold and. credit, and under a system of concentrated reserves it is the fluctuations in these stocks which determine the policy of the central banks. It has been one of the defects of the American system that there has been in the past no conomtrated gold stock from which the-le demands could be met, except the stock of the United States Treasury, and there has been no guiding mind to determine what measures should be taken or when they should be taken to protect the gold stock and to carry out a consistent and effective policy. It is the purpose of the project of the Reserve Association, therefore, to establish a marginal stock of gold and credit, which will afford the means at once of meeting foreign demands if they arise and of maintaining the unfettered movement of the wheels of domestic exchange by extending accommodation (through its powers of note issue and rediscount) to domestic trade, without changes in the rate for the loan of credit beyond those required to regulate the exchanges. In view of the system of intercommunication and solidarity among the local ly,nks established by the plan through the system of local associations, it is the belief of the Commission that the functions of the Reserve Association will be accomplished adequately by a limited number of branches, from 8 to r2 in number, at the financial centers of the country. ft) 11 CN MONO . SEC. OPERATION AND ADEQUACY OF THE PROPOSED PLAN. The essential features of the proposed plan for the National Reserve Association are, as has been pointed out, the possession of a large reserve in lawful :money and the power to use this reserve tffectiv ely through the system of rediscounts and the issu e of circulating notes. The method by which these resource s would be employed by the Reserve Association to avert pres sure in the money market and prevent panic and curr ency famine will now be set forth more in detail. Perhaps the simplest manner of illustra tion of the operation of the new system will be to foll ow the paper of a borrower through his local banking inst itution up to the Reserve Association. There will be no direct loans to individual borrowers by the Reserve Association. Its character will be that which its name impl ies, an asEociatioj. of the local banks of the country for the purpose of cooperation among themselves in main taining adequate reserves and meeting demands upon their own resources. The local borrower, therefore, will continue his present relations with his local bank. That institution will continue to discount his paper upon the same terms, or better terms, than discounts have previous ly been granted. If the money market is easy, and the loca l bank which grants the discount has ample funds, it will be under no-sity of an appeal to the Reserve Asso ciation. It is probable also that its first appeal, in case of pressure on its own resources, will be to its corresponden t bank in a reserve city. That bank will naturally prefer to keep a good correspondent by accepting its paper for rediscount or aiding it in other ways while its own resources are adeqiilate. It will have the power to keep them adequate and to maintain its reserves unim paired by rediscounting some of its good paper with the Reserve Association. In case such aid is refused, however, the local country hank will have its protection in a large measure in its own hands. • bse i t A bank which is a member of a local association organized under the plan is given by section 38 of the plan h power to rediscount directly with the National Reserve Association notes and bills of exch ange which a out of commercial transactions. Such notes and s can not be rediscounted, however, unti l within 28 days of their maturity, nor until they have already run for 30 days. The amount so rediscounted is limited to the amount of the capital of the bank whic h applies for the rediscount, and the aggregate rediscou nt for any one hank, bearing the signature and indo rsement of any one person, corporation, or firm shall not exceed io per cent of the capi tal and surplus of the bank. This limitation in regard to the amount of credit extended to a single party in inte rest follows the policy long establis hed by section 5200 of the Revised Statutes as amended by the act of June 22, 1906. For most institutions this powe r of rediscount, up to the amount of its capital, for paper which has already run for approximately half its term, woul d he adequate to replenish its resources. If this privilege were availed of by all the national banks of the United States, except those of •.• -• • ••••• • amount of credit extended to a single party in interest follows the policy long established by section 5200 of the Revised Statutes as amended by the act of June 22, 1906. For most institutions this power of rediscount, up to the amount of its capital, for paper which has already run for approximately half its term, would be adequate to replenish its resources. If this privilege were availed of by all the national banks of the United States, except those of the three central reserve cities of New York, Chicago, and St. Louis, the total capacity for expanding the lending power of these institutions according to their capital on September 1, 1911, would be about SKI.o,000,000, obviously a much greater volume of expansion than would be called for at any one time. Taking certain groups of States where the demand for rediscounts would probably be greater than in others, the amount of capital shown by reports to the Comptroller of the Currency as of September 1, '9'1, which would be the ultimate limit of the power of national banks to obtain direct rediscounts of shortterm paper, was as follows: Southern States Western States Pacific States 8159,927,430 69,88o, loo Si, 290, 650 These figures show that it lies fully within the power of the national banks of those States, without taking account of the banking power of State and private institutions, to meet by direct rediscount any probable needs of the crop-moving season of special emergencies. In the State of Texas, for example, capital resources of more than $45,000,000 are at the command of the national banks, and rediscounts to this amount could be obtained during the season when the cotton crop was being moved if the bank had a sufficiency of short-term commercial bills acceptable to the Reserve Association for rediscount. In Mississippi, the capital of national banks on September 1, 1911, was $3,230,000. Among the wheat and corn growing States the national banks of Kansas had a capital of $12,012,500; Nebraska, S16,185,1°0; North Dakota, $5,285,000; and South Dakota, S4,2o5,000. Obviously, the power to obtain rediscounts up to maximum amounts like these would remove the fear and the possibility of undue stringency in the supply of credit or currency necessary in these States to finance the movement of the crops. The gross shipments of currency by the banks of Chicago to their country correspondents for the period from October i to Dece-rtber 3 12 CN MONO. SEC. in the three years 1905, 1906, and 1907 were reported to the Secretary of the Treasury, after a careful examination by Mr. James 13. Forgan, president of the First National Bank, as follows ((ioth Conga, 1st sess., S. Doc. No. 208, p. 218): .chipmeitts of currenrillom 1901 : .1906 rgo7 (Ictot: eceittber i to i) SsS,(Dor,: 806 5o. 157, 156 55.984. 225 If this resource of direct rediscount should in any case prove inadequate, provision is made in section 39 of the plan for a still further grant of credit to local banks. The Reserve Association is authorized under certain conditions to rediscount notes and bills of exchange arising out of commercial transaotions,even when they may have more than 28 days to run. Such paper may be accepted for rediscount having a maximum maturit V of four months. It wit be accepted, ho\Vever, by the National Reserve Association only with the guaranty of the local association of which .the subscribing bank is a member. In other words, in case the pressure upon a bank or a community becomes such that direct rediscounts of acceptable paper up to the limit of the capital and surplus of the banks seeking such rediscounts will not meet the requirements of the situation, then the board of directors of the local association may obtain still further credits from the Reserve Association by massing their resources by way of indorsement and guaranty behind the security given for further credits. To this power of accommodation to the local banks through the resources of the National Reserve Association no limit to ratio of capital or surplus of a borrowing bank is prescribed. Still another method is provided by section 40 of the plan, for extending credit to local institutions whose commercial paper may not be of such a character as to be acceptable for rediscount. This consists in a direct loan to a member bank upon its own paper by the Nationa l Reserve Association. Such a loan can only be made, however, when the obligation of the member bank is indorsed by the local association and fully secured by the deposit of satisfactory securities, and when the loan has the definite approval of the Secretary of the Treasury. This is obviously an emergency provision and is to take effect only when in the opinion of the governor of the National Reserve Association, with the concurrence of its executive committee, the public interests require such action. It is a power which would be used only in case of severe stress, either upon an individual bank or in the general monetary situation, and would probably be availed of rarely, if at all, under the system of cooperation and security for credit which would result from the working of the Reserve Association. It remains to define the manner in which accommodation, when thus sought by local banks, would be granted. It would be granted by two methods, both of the simplest and most direst character, the choice of \vhich would be substantially at the option of the borrowing bank. The bank might he content, as in the case of individual borrowers, with the transfer of the proceeds of the rediscount to its d:_po,;it balance with the Reserve Association. This and security for credit which would result from the working of the Reserve Association. It remains to define the manner in which accommodation, when thus sought by local banks, would be granted. It would be granted by two methods, both of the simplest and most direst character, the choice of which would he substantially at the option of the borrowing bank. The bank might be content, as in the case of individual borrowers, with the transfer of the proceeds of the rediscount to its depo3it balance with the Reserve Association. This balance, under the plan of the commission, may be kept, at the option of the borrowing bank, at one of the principal offices of the Reserve Association, as at New York, Washington, Chicago, or St. Louis, or at any other of its branches. Obviously, against these balances drafts may be sold and checks drawn to meet direct demands upon the bank or demands for the transfer of the funds of depositors and other clients. If, however, the borrowing bank desires more direct control of its funds, it may, under section 47 of the plan, request the Reserve Association to transfer any part of its deposit balance to the credit of any other bank having an account with the Reserve Association. Provision is made also for similar transfers between branches of the Reserve Association. If the demand for accommodation from the borrowing bank is in the form of a demand for currency, direct provision for meeting this demand is also made. Under section 72 of the plan, "the National Reserve Association and its branches shall at once, upon application and without charge for transportation, forward its circulating notes to any depositing bank against its credit balance." Thus, in case a bank is in pressing need of currency, it may forward for rediscount to the Reserve Association commercial paper of the character already defined for direct rediscount, with the request that against the credit thus created the notes of the Reserve Association be forwarded at once in the desired denominations from the nearest branch. Still further resources for giving greater flexibility to the movement of credit are afforded by the provisions of the proposed plan set forth in section 42 in regard to acceptances. The system of acceptances which prevails extensively at Cu-opcart ba•iks has for its object to give an immediately convet tibk character to commercial bills. The acceptance has some of the elm raeteriqics of check VS 140N MONO. SEC. ,arinr on this subject, prepared for the CommiAon ly,p. 1 !.7). thus S. Due. N:). 2(1 ,.1 the conduct of that part of its business, which consists in the purchase and sak of foreign bills and metallic currency, the element of profit liqs not been perinitied to be more than an ulterior object in the policy' of the 4 Austro- unga Tian Bank." With a deposit balance standing always to its credit at the National Reserve Association, it becomes possible for any member bank, however small, to arrange for the purchase of drafts on foreign countries for the benefit of its clients or to sell such drafts, when of a proper character, to the Reserve Association. Thus, the free movement of foreign exchange will be greatly facilitated and banks in the smaller communities will be brought into more direct touch with the exchange market than is the case under existing law. librough the combined mechanism of the authority to rediscount short-term bills directly at the Reserve Association, the authority to discount bills for longer terms, with the indorsement of the local banking association, the ability in grave emergencies to obtain a direct loan from the Reserve Association, and the means of quickly disposing of accepted bills and foreign drafts, the local banks will have at their command a machinery for their own protection and that of their clients which has heretofore been lacking or has been afforded in many cases by the clumsy and friction-producing mechanism of indirect, expensive, and dilatory communication through intermediary institutions. THE CONCENTRATION OF RESERVES. *%---One of the most important features of the plan presented by the Commission—transcending in some respects even the powers of note issue and of rediscount which are conferred upon the National Reserve Association—is the massing of the money reserves of the country in a single institution. The gold and other lawful money resources of the American banking system are at present divided, not only among some 7,300 national banks, but also among more than 16,000 State and private banks, trust cornpanics, and savings banks. These institutions are required by law, in most cases, to hold lawful money to the amount of a certain percentage of their demand liabilities. The need for these requirements it-is--not prop6Sed to dispute, so long as there is no central accumulation of gold and notes to which the 24,000 banking institutions of the country may resort in time of need. To leave the ratio of reserve kept entirely to the discretion of the bank, under such a system, would be to offer a premium to the banker who skirted most closely to the danger line in offering inducements to depositors which his more conservative competitors could not afford to give. The defect of this system is not in requiring that there shall be reserves, hut. in the fact that they are so widely scattered as to be ineffective in meeting emergencies. It is the purpose of the plan submitted by the Monetary Commission to gather a portion of this scattered mass of gold and lawful money in a central reservoir, where the supply can be tapped by any member bank which has Special need for it. With such a central reservoir of money the financial world will be in a position to meet unexpected attacks or to carry on aggressive operations on behalf of American commerce 0A- -- conservative ..lutu- —*lents to ,....posiLors which his more of this competitors could not afford to give. The defect be reserves, but system is not in requiring that there shall to be inefin the fact that they are so widely scattered as fective in meeting emergencies. It is the purpose of the plan submitted by the Monetary Commission to gather a portion of this scattered mass of gold and lawful money in a central reservoir, where the supply can be tapped by any member bank which has Special need for it. With such a central reservoir of money the financial world will be in a position to meet unexpected attacks or to carry on aggressive operations on behalf of American commerce and finance upon somewhat the same principle as a competent commanding general, who should have his forces massed at a strategic center, with power to hurl them quickly upon a threatened point, instead of having them scattered in small detachments over the entire field of military activity. Another simile, which has become almost classic, is that presented by an eminent, American banker in one of the monographs of the Commission (Paul M. Warburg, the discount system in Europe, 6ist Cong., 2d sess., S. Doc. No. 402, p. 33): "If, V.;‘,.. f after a prolonged drought, a thunderstorm threat- ens, what would be the consequence if the wise mayor of a town should attempt to meet the danger of fire by distributing the available water, giving each houseowner one pailful? When the lightning strikes, the unfortunate householder will in vain fight the fire with his one pailful of water, while the other citizens will all frantically hold on to their own little supply, their only defense in the face of danger. The fire will spread, and resistance will be impossible. If, however, instead of uselessly dividing the water, it had remained concentrated in one reservoir, with an effective system of pipes to direct it where it was wanted for short, energetic, and efficient use, the town would have been safe." This simile is the image of the existing conditions of the American banking system. The time has long passed when the stock of gold and lawful money in the country was not adequate for its financial needs if it was properly concentrated and employed.. The gold stock of the United States is larger than that of any other country, and even the supply per capita is not far below that of the richest countries of Europe. Yet, in the face of a limited pressure for currency in certain ,quarters in 1907, the banking system broke down, and in time of profound ••••••••.•••••• 13 CN MONO. SEC. certification as practiced by American hank. It is the promise of the accepting bank that the paper will be paid at ii:aturity. Acceptances under the European practice differ, however, from certified checks in America by the fact that they represent commercial paper growing out of actual transactions rather than mere drafts against a 'deposit account. Necessarily an arrangement must have been made by the drawee of a bill with the accepting bank to honor bills drawn upon him. When a bill has thus been accepted it becomes an instrument of credit which is readily accepted by other parties in the settlement of obligations, because it bears the promise to pay of the acceptor. Hence, if it falls into the hands of an intermediary bank, it bears the character of convertibility and security which is lacking in singlename paper, or even in double-name paper which does not emanate from a well-known banking or accepting house. Where such acceptances are based upon international transactions, as is largely the case in European countries, they form an important factor in the general movement of credit. Commercial bills which have been accepted in this manner are regarded at many European banking institutuons as the equivalent of gold and as even better than gold for the purpose of making foreign remittances, because they do not involve the costs of shipment. While it is not expected that acceptances will come into wide use at once among interior banks in the United States, they form an auxiliary resource which will strengthen the assets of those banks which hold hem and ai 1 the banks -of the reserve cities in meeting demands for. credit, hether with or without the assistance cf the Reserve- Association. Under existing law acceptances are not a 'permissible part of the assets of a l'iational bank; but it is proposed by section 48 of the plan that bills may be 'accepted hereafter by national banks to an amount not exceeding one-half the capital and surplus of the accepting bank, under the restrictions of section 5200 of the Revised Statutes and the amendments thereof, limiting the amount for any one person, firm, or corporation. The manner in which acceptances will become directly converi ible into cash, under section 42 of the proposed plan, is. through their purchase by the National Reserve Association from its member banks. It is not necessary that the acceptance shall be that of the bank offering the bill to the National Reserve Association for purchase, provided the bill bears the acceptance of banks or houses of unquestioned financial responsibility and the bills arise out of commercial transactions have not exceeding 90 days to run and arc of a character known in the market as prime bills. Closely linked with the system of acceptances in giving greal-,T flexibility and scope to the resources of the -1 _ tillta Like _• uris, out of commercial transactions have not exceeding 90 days to run and are of a character known in the market as prime bills. Closely linked with the system of acceptances in giving greaf.r flexibility and scOpe to the resources of the NationA Reserve Association is the provision of section 45. of the plan, giving wide powers to the association in dealing in foreign exchange. The association is authorized to purchase from subscriliing banks and to sell checks oi- bills of exchange in such foreign countries as may be prescribed by the board of directors of the Reserve Association. Such bills must be based upon commercial transactions, must not have exceeding 90 days to run, and must bear the signatures of two or more responsit,le parties, of which the last one shall be that of -il,ing bank. a subsc! The power to deal in foreign exchange under the most favorable conditions is given to the Reserve Association by section 46 of the plan, authorizing the opening of accounts and the creation of agerfeies in foreign countries. In giving this authority to the Reserve Association the Commission are following the precedents of many of the chief ban!:-; of continental Europe, which have established agencies in London, Paris, and elsewhere for the buying and selling of bills under favorable conditions, And have thus reduced to a minimum the movement of gold in the settlement of international balances. Dealing in foreign bills in large amounts by the central bank is a comparative innovation in Europe, except at the National Bank of Belgium, where it has long been employed as an auxiliary to the protection of the metallic reserve. The most notable case of such dealings on a large scale has been at the Austro-Hunkarian Bank, which practically took the control of the market for kit-6m exchange out of the hands of private bankers by an agteement with them in the year 1901. While it1 Iot proposed that the National Reserve AsSociaticin shall assume such complete control of the ex'change market as Wits assumed by the Austro-Hungarian Bank, there is af .dvantage to the country in the exchange operations conducted by the central banking organism, because It is at once able to exercise greater foresight and to deal in larger gross sums than private bankers, in anticipating the variations in the demand for exchange, and is able in so doing to disregard to a Certkin ext,:nt the question of profit in meeting the monetary nettis of the country. Thus in the case of the Austro-Iiwagarian bank it is stated in the monograph 17 CN MONO. SEC. only keep any part of their required legal reserves on deposit with the Reserve Association, but they may also count as a part of the required reserve any notes of the National Reserve Association which they may hold. This signifies that if the subscribing banks so desire, their holdings of currency, either for the purposes of till money or for unusual demands (except currency of small denominations), may be entirely in the form of notes of the Reserve Association. Inevitably, if they should pay out such notes to depositors they would tend to become the chief instrument of circulation and thc lawful money which they displaced whould find its Way into the vaults of the Reserve Association. While it is not to be expected that such results would be attained at once, it is to be reasonably expected that as the Reserve Association received the existing Treasury gold certificates and other forms of lawful money in the course of current business, from the deposits of the Federal Government or from the deposits of subscribing banks, it would husband this lawful money, especially that which was in the form of gold, and would pay out its own notes in response to requests for currency. Thus, in view of the volume of transactions which would be in effect cleared through the National Reserve Association by its member banks and by the Government, there would soon occur such a wide distribution of its notes in the hands of the people that they would become the most common form of currency in use, and the lawful money which formerly circulated in their place would be free to find lodgment in the vaults of the Reserve Association. Thus would be realized the ideal which is indorsed by many monetary experts, that the circulation should consist of redeemable bank notes, responding in volume to the needs of trade by their issue against commercial paper and by their redemption when such paper is retired, protected by the concentration in a single reservoir of the metallic resources of the country. Under such a system and with the stock of gold now forming a part of the monetary supply of the United States, it is the conviction of the Commission that no doubt could ever arise of the ability of the Reserve Association and of its member banks to meet without strain all legitimate demands for currency and credit and to dispel forever the shadow which has so long hung over the ability of American banks to fulfill their obligations in times of pressure. The proportion of the world's stock of gold which has fallen to the United States in recent years makes the present a peculiarly opportune time for putting the financial house in order. How rapidly this stock of gold has increased in its ratio to other forms of money is discussed more in detail under another head. For the purposes of this section, it is sufficient to give the figures in summary form for repre. sentative years. As presented in the official reports of Treasurer of the United States, they are as follows: the Gold Stock of the United States. • Total enck cif I (Ink' Lae pit. A _ opportune time for putting the financial house in order. How rapidly this stock of gold has increased in its ratio to other forms of money is discussed more in detail under another head. For the purposes of this section, it is sufficient to give the figures in summary form for representative. years. As presented in the official reports of the Treasurer of the United States, they are as follows: Laaca.n.es Cold Stock of the United States. June 30--- Total stock Of money. Gold. 1895 $1,818.461.534 8636.168,989 1900 99,180 2.341.8 1.036,031.645 0 19 5 2,1953,109,864 6 1•.157, 55,98g 1910 3.419,591.4 3 8 I .636.043,478 That suspension—not of gold payments alone, but of payments of any form of currency—should occur, as in 1907, in a country whose financial system was thus buttressed by gold, points to serious defects in the existing organization of American banking. These defects, so far as they related directly to the deficiency of currency, were-chiefly two, the lack of concentration or reserves and the lack of means under existing law to issue convertible credit obligations in the form of notes against the available stock of gold; and these defects it is the object of the plan presented by the Commission to remedy. EVOLUTION OF PRESENT CURRENCY 'CONDITIOWS. How far the existing banking system of the United States is defective and how far it has gradually adapted itself to national requirements can perhaps best he judged from a brief examination of its evolution since the 'creation of the national banking system in 1864, having special but not exclusive reference to gnatters affecting the currency. Severe as have been criticisms on the national banking system in recent years, its adoption in 1864 represented a. considerable advance over banking conditions before the Civil War. It is not necessary to review those conditions further than to recall the fact that, while many admirable local systems existed, the lack of uniformity or 'even of any degree of coordination among them, left the banking organism in the aggregate ill adapted to the 'closely-knit commercial and financial relations \Which grew up with the settlement of the frontiers, the extension of the railway network, and the improvement in means of communication by mail, telegraph, and cable. In these respects the evolution of banking experience in America duplicates in some degree the similar experiences of Euorpean countries, where the need for absolute security and comparative uniformity in banking methods resulted in the creation of central banking institutions and the withdrawal of the power of note issue from local banks. 1.6 CN MONO. SEC. Central reserve cities (New York, Chicago, and St. Louis), 25 per cent, substantially all of which must be kept in their own vaults. Reserve cities, 25 per cent, of which one-half may be kept on deposit with national Auks iti'cential reserVe cities. Country banks, 15 per cent, of which 9 per cent may be kept on deposit with national banks in reserve cities or cential reserve.cities. Under the provisions of the plan reported by the Commission, as above set forth, either part of the reserve of a national bank—that heretofore required to be kept in its own vaults or that permitted to be kept in other national banks—may hereafter consist either of a deposit credit with the National Reserve Association or of its notes in the vaults of the member bank. Obviously this would give a flexibility to the resources of merriber banks which would enable them to quickly concentrate wherever it would be most useful any form of credit which they desired—deposit credit, domestic or foreign exchange, notes, or gold. It is not expected that under the operation of the plan for the National Reserve Association all the subscriang banks will denude themselves absolutely of currency in order to keep it on deposit with " the association. If the fact that interest is paid by national banks in reserve cities upon reserves deposited with them were the cdntrolling motive with the country banks, they would can' tinue to keep the whole of their surplus cash not required at home *,ith other tational banks, lard thesarne wouid be true in the relations of the banks of the reserve cities with those of the three central reserve cities. The latter, however, are not authorized by law to redeposit any part of their reserves in other institutions, and they can, therefore, draw from them no interest. Theoretically, therefore, it might happen that the only change in the distribution of gold and other lawful money would be the transfer to the National Reserve Association of the lawful money of the national banks cif the central reserve cities. This sum alone, without cbunting the adhesion to the Reserve Association of any of the State banks or trust comimnies in these cities would amount, according to the reports of the condition of the natiotal banks on Septerhber 1, 1911, to a sum of about $432,000,000, and would represent a concentration of reserve money sufficient to make die new institution a potent factor in the monetary system. While it is not to be expected that even the national banks of the central reserve cities would denude themselves entirely of currency—because they would require it to a certain extent as till money for meeting daily demands— it is not to be expected, on the other hand, that the banks outside of the central reserve cities would refrain entirely from making deposits with the Reserve Association. On the contrary, if they become members of the association, they would be persuaded by every consideration of cot- even the national banks of the central reserve cities would denude themelves entirely of currency—because they would require it to a certain extent as till money for meeting daily demands— it is not to be expected, on the other hand, that the banks outside of the central reserve cities would refrain entirely from making deposits with the Reserve Association. On the contrary, if they become members of the association, they would he persuaded by every consideration of cotvenience in their daily transactions, as well as by the protection afforded them through the'sy4teth of rediscounts in times of pressure, to keep at least a portion of their available funds on deposit with the Reserve Association. For it is distinctly provided that the rediscounts granted by the Reserve Association shall be granted only to "any bank having a deposit with it; and this privilege would " form a much more important inducement to deposits that the payment of a trifling rate of interest on credit balances. It seems reasonable to conclude, therefore, that substantially all the banks of those reserve cities which are outside the central reserve cities, having holdings of lawful money on September I, 1911, of about $238,000,000, would keep accounts with the Reserve Association. Thtse accounts would be available for selling drafts on New York, for buying for clients foreign bills issued by the Reserve Association, and for obtaining the transfer of funds *fthout cost; Under paragraph 47 of the plan; from one part of the country to another. In the case of other banks which tvetd Members of the local associations from which would spring the Nation al Reserve Association, it seems reasonable to believe that they would keep balances with the Reserve Associ ation at New York, Chicago, or St. Louis, for the same purposes as those just set forth in the case of the banks in 'the reserve cities, and for the additional purpos e of enabling themselves to obtain the rediseount of first-class commercial paper directly with the Reserve Association under the provisions of section 38 of the plan. Even those banks which failed to keep such beilanc et wottid contribute indirectly toward their insiintenance by the balances which they would 'keep with the larger banks in reserve cities, which would in their turn increa se their Vla tine It is noL to De rxpecLeu Mat balances with the Reserve Association, in order to be able to rediscount paper and obtain currency and credit in case of need. In addition to the inducements thus held out, by the form of organization and the powers of the Reserve Association, to its member banks to maintain 'balan ces with it, another strong influence in concentratin g the gold reserves of the country in the Reserve Association would be exercised through the system of note issue. Under the provisions of section 51, subscribing banks may not • 15 CN MONO. SEC. peace currency payments were wholly or partially suspended at nearly every bank in the United States. One of the most important reasons was the subdivision of reserve money. The cash resources of national banks --alone on August 22, I907—the date of the last reports to the Comptroller of the Currency before the panic of that year—amounted to 5701,600pm This was more by many millions than the reserve of the Bank of France or the State Bank of Russia, and was more than five times the banking reserve of the Bank of England, which sustains the weight of the international exchanges of the • world. Even the resources of the New York City banks would have afforded a sufficient fund, there is every reason to believe, for maintaining the solvency of the banking system and affording relief to the interior, where it was really . needed, if these resources had been effectively massed. Even at the lowest point of the lawful money reserves of the clearing-house banks, as shown by their weekly averages, for November 23, 1907, they held in cash $215,9oo,00o, and the ratio of legal reserve to liabilities was at no time below 20 per cent.. It was the fact that this reserve was subdivided among some 54 different institutions, some of which were in tottering condition, and that there was no authority recognized as having the right to take the lead in financial policy, which made the situation an alarming one, and had already led to suspension of currency payment, on October 26, when average reserves were 5254,700,000. It is a significant fact, as ppinted out by one of the experts consulted by the:Commission (Prof. 0. M. W. Sprague, History of Crises Under the National Banking System, National Monetary Coinmission, 61,,t Cong., 2d sess., S. Doc. No. 538, p. 278), , , that the much smaller banking reserve ,of the bank of England was reduced during two weeks of this period from about S120,000,000 to 585,000,000, without the remotest thought of suspension being entertained by any . one, either in London or elsewhere. Had the lawkil monov reserves of the New York clearitig-house banks been concentrated in a strotigt institution, rcenforced by some of the excessive reserves of interior banks--with authority to employ thcse resources in rediscounts and in shipments of currency to threatened points—suspension of specie payments would not have been necessary, and such symptoms of monetary distress as might have occurred would have been much; less violent than was actually the ease. The plan submitted by the Commission to Congress provides for a central reserve of lawful money in the hands of the National Reserve Association; it fixes the ratio to demand liabilities at which such a reserve must "--• - as might have occurred would have been much,less violent than was actually the case. The plan submitted by the Commission to Congress provides for a central reserve of lawful money in the hands of the National Reserve Association; it fixes the ratio to demand liabilities at which such a reserve must be maintained; it so modifies the relations of the local, banks with the Reserve Association, as to diminish the motive on their part for holding excessive stocks of lawful money; and it puts in the hands of the Reserve Association power both to use its monetary stock in aiding the market, even in the most remote localities, and power to protect and increase this stock. There are two essential provisions of the new plan which are designed to insure the maintenance of adequate metallic reserves by the National Reserve Association. The first is embodied in section 68, which requires that the note issue of the association shall be covered to the extent of at least one-third by gold or other lawful money, The other provision is embodied in section 55 of the plan, which requires that all demand liabilities, including deposits and circulating notes of the National Reserve Association, shall be covered to the extent of 50 per cent by a reserve of gold (including foreign gold coin and gold bullion) or other lawful money of the United States which the national banks are now authorized to hold as a part of their legal reserve. The provisions which are made to insure the protection of the reserve by graded taxes upon deficiencies in its amount and the manner in which it is computed are discussed upon the head of the system of note issue. It is proposed here to refer simply to the manner of constituting the lawful money reserve and the relations which it will bear to the reserves of local banks. It has not been thought desirable by the Commission to change radically the provisions of existing law regarding the reserves of national banks. The ratio of reserve to be kept by such banks against their liabilities has not been altered, but it has been provided, by section 51 of the plan, that deposit balances in the National Reserve Association to the credit of subscribing banks may be counted as a part of their reserves required by law, and that notes of the Reserve Association may also be so counted. The effect of the first of these provisions is to enable the existing banks to surrender their lawful money to the Reserve Association and to receive in exchange a deposit credit which will enable them to obtain credit transfers, notes, or gold against such balances according to their needs. To make clear the effect of the proposed change, it is well to set forth the reserves required by existing law of national banks. They are divided into three classes, as follows: 20 CN MONO. SEC. twenty years note :or i , S2, and S5 increased during the more than between June 30, 1890, and June 30, 1910, by [nited S432,000,000. The total increase in the amount of cerlificates States notes, Treasury notes of 1890, and silver This during the same period was only about S9o,000,000. of permitted the absorption into small denominations which $342 000,000 in these forms of Government paper char* had, formerly been in larger denominations. The nations acter of the increase in notes of small denomi appears in the following table: Total small notes outstandiny. a June 30, 1890. Denomination. June 30, 1910. .323 S34.795 25.615.949 211.871.811 .862 St.13.400 272,286.083 r 'One '''two dollars dollars Five 0 35,737 7 4.0 Total 61.576.608 499.058.267 in 1910, $140,372.105. a Includes national-bank notes in 1890, 552.571,068; been How completely these two forms of currency have gold absorbed into notes of small denominations, leaving denomicertificates to fill the demand for notes of larger from „nations, appears in an even more striking manner the statement in detail of the denominations of United States notes and silver certificates outstanding at an interval of twenty years. From this table it appears that of the silver certificates only about S18,000,000, and of .,the United States notes only $79,000,000, are in denominations above Si o. The details are as follows: Denominations of United States notes and silver certificates. United States notes. Silver certificates. Denomination. June 30. 1890.1 June 30. 1910. June 30. 1890. June 30.191o. One dollar..... 1 . ifv‘ ) dollars FiVeidotlars Ten dol:Ars Twenty dollars Fifty ddlars One hundred dollars Five hundred dollars One thousand dollars Five thousand dollars , Ten thousand dollars Total. $31.134.482 $440.819.339 $3.292.353 $1.842.555 2.872.878 1.388.277 57.730,384 114.790.330 102,127.156 243.561.297 26.898,271 22,557.760 . 59.762.172 90.410.800 149.794,446 111,471.016 111.486.350 20.081,582 26.280,856 7.720.590 21.462.400 2.307.625 3.254,860 9,098,610 32.524.350 6.826,200 4.289,120 603,220 11.328,500 6.417.000 253.500 26,500 16,538.000 44,223,000 171.000 27,000 301,539,751 489.117,000 25,000 10.000 10,006 4347,681,010 0 347.081.016 S Subject to deduction d SI,000,000, denominations unknown or destroyed. these figures bring into relief the fact that the increase irk the total amoult of currency and in the demand for small notes have been such that those forms of money which constituted such a serious menace to the impaired gold resources of the country in 1893 are now a subordinate factor in the currency stock and are so distributed an the pockets of the people as to be practically unavailable for raids upon the gold reserves of the Government. With the substitution for the existing national-bank notes and gold certificates of the issues of the proposect Reserve Association, the demand for gold would fall almost entirely upon the Reserve Association, and upon would devolve the duty of protecting its gold stock "by the employment of banking methods similar to those employed by the great issuing banks of Europe. If the plan of the Commission is carried out, the existing national-bank notes based upon bonds will be replaced rt, , in : r' the National R eservp A - Lit ciy Upian tt.•.- - v ca • r • of protecting its gold stock it would devolve the duty ing methods similar to those t's by the employment of bank s of Europe. employed by the great issuing bank is carried out, the existIf the plan of the Commission bonds will be replaced ing national-bank notes based upon rve Association. This by notes of the National Rese substitution of the 'will not be the limit, however, of the forms of currency. iotes of the association for existing stock arising from Future •increments .to the currency of gold and the the growth of the country will consist 'increment to the notes of the Reserve Association. The the vaults of the • gold stock will find its way chiefly into notes. More Reserve Association as a cover for the new accumulated in than this, the great stock of gold now secure gold certifithe Treasury of the United States to of the Reserve cates will tend to flow into the vaults lation by the Association and to be represented in circu certificates notes of the association instead of by the gold efficiency of ,of the Government. By this proems the anced by putthis great stock of gold will be greatly .enh n capable of ting it under the control of an institutio in the discount protecting it, on the one hand, by chavges le, on the rate and by other banking methods,(And capab nd for addi,other hand, of meeting any sudden dema nd the bare tional currency by the issue of notes beyo possible under •'face value of the coin, which is all that is the existing monetary system. ilation of , With this gradual tendency toward the assim of flexible the currency of the country toward a system been thought bank-note issues secured by gold, it has not ge in the necessary by the Commission to make any chan might be existing status of Government paper issues. It to the desirable, in order to encourage the tendency Assoaccumulation of gold in the vaults of the Reserve ficates; ciation, to prohibit the further issue of gold certi in the but this might cause temporary inconvenience and, be taken opinion of the Commission, is a step which could operates at a later date without friction if the new system tity of gold in the manner which is expected. The quan on if the certificates outstanding will suffer steady diminuti st cerbank receives them in large amounts, as will almo rntainly be the case, in the form of reserve deposits, Gove ment deposits, and subscriptions for capital, and presents Even if them to the Treasury for redemption in coin. of currency they are simply sorted out from other forms n, the only and kept in the vaults of the Reserve Associatio gold will difference will be that the physical custody of the of ownership remain with the Treasury, while the title a proper will vest in the Reserve Association and will form cover for the issue of its notes. 4 4es, 19 CN MONO. SEC. Ratio of hank noter to monev in circulation. • JIIIIC l'ot ,,lock. United States notes. Nat ional-bank • notes. Sçst 800,65 t 8 977.0 6,579 660,457 18 0 9 1.429.496.191 323.046.526 181.396.823 1900 .. 2 .062.425.496 316 .614. 114 300.161.552 3.102.355.605 334.787.870 683.639. 535 3.557.87.. 252 . 340 540. sbo 690.848,663 1880 . .. . • •• 1910. . 1911 CjIllY .• _ In considering a material change in he system of paper currency it is obvious from the above table that serious consideration must be given to the relation of the new issue to other forms of currency now in circulation. In this respect the proposed change comes at a time when there is little cause for apprehension .regarding the safety of the currency system as a whole. In t88o United States notes and national bank notes—both resting ultimately upon Government credit—made up practically two-thirds of the circulation. In two they made up considerably less than one-thitd, and this proportion was not materially different in 5910, in spite of the .increas in bank notes. The remaining two7thirds of the currency .contains another element which has been at times a cause of uneasiness, in the form of standard silver dollars, represented largely in circulation by silver certificates. Even this form of currency, however, has become a steadily diminishing ratio to the whole by reason of the increase in the stock of gold, which will presently be .referred to. In view of these facts, it has not been thought necessary td recommend any new legislation in regard to United States notes. If they have constituted at times a menace 'to the soundness of the currency system, it . has been bmuse they have formed too large a proportion of the total stock of currency. From a proportion of nearly one-third of the actual circulation in 188o, it is 'shown by the table presented above that they now constitute less than i i per cent 0f the circulation. Like the gtrtlir aarmottept+44-government notes issued-in-Gerwariy.._Canada, and .British India, the Unkd States notes and silver wertificates have fallen to the position of a mere substratum of the currency, upon which are superimposed the more elastic elements consisting of gold and bank notes. The automatic improvement in the character of the mone.tary stock has been brought out in the recent reports of the Treasurer of the United States by a comparison of the ratio of gold to the total stock of currency :in the country. How important has been this change since the resumption .of specie payments in 1879 may be judged by the following figures: Ratio of gold to total stock of money. iDate. Total stock of motley. Gokl. Per cent of gold. June 3o. ifIRci $1,190 134,679 S351.FI41. 206 June 30,1890 696.008.805 June 3o. 1895 1,674,739,64 6 1.818,461.534 636,168.989 July 1,1897 1.905,996.619 696.239.016 July 1.29.0o 2.339.700.673 .1.034,384.444 44.21 2 .85 , 2,99,864 3 1.357.655.9 88 1,636,043.478 47.09 r ly 1, 1905 i ll y 1, tom ! 3.419.591.4 3 8 29.57 4I.5 36.52 47.85 When the proportion of United States notes and silver certificates is compared with the great stock of gold now tl• $' t r•'' •' , L 14 .4•411-" " r, t,.• VIP" - , •4 ' I r1 ,• A ot C"," c7,- , of specie payments in 1879 may he judged by the following figures: Ratio of gold to total stock of money. iDate. June 30, iMo June 3o, 1890 June 30, 1895 July 1, 1897 July 1, woo 4ply t, 1903 July 1, 1910 Total stock of money. Gold. Per cent of gold. $1,190,134,679 3351.841.206 29.57 1,674,739,646 696,008.805 41.56 1.318,461.534 636,168.989 34.99 1.905,996,619 696,239,016 36.52 2,339.7 .673 00 ,1.0 34,3 4.444 8 44.2Z 2.88 3,499186 4 1.357,655.9 88 47.0 9 3.419.591.483 6 6 43,478 3 .0 47.8 5 When the proportion of United States notes and silver certificates is compared with the great stock of gold now in the Treasury, it becomes apparent how insignificant a part they play in the total circulation. The fact that the past five years have shown no material increase in the ratio of gold to the total stock of money is due probably to the steady increase during this period in the circulation of the national banks, which has afforded all the increase in the total stock which has been required during the years of comparative business inactivity since the 'panic of 1907. If this substitution of notes for gold consisted of notes having a proper degree of responsiveness to business requirements, it might be credited with bringing about an economy in the use of gold, which is not in any way objectionable so long as the gold stock remains adequate for maintaining the parity of money and confidence in the soundness of the monetary system. Unfortunately, however, the character of the notes issued under existing law does not conform to these requirements. While the increase which has taken place during the past half dozen years has not done serious harm, artd-trarTrtirtraps-rvettcerrtritrated-te-eeettenry-ot-gettt, the defects of the existing system would undoubtedly be disclosed in a striking manner if business expansion should again cause a large demand for currency and credit accommodation. A potent factor in detracting from any adverse influence of the existing volume of United States notes and silver certificates upon the soundness of the currency as a whole found in the great extension of the demand for small notes. Where such notes are absorbed into the circulation, it is obvious that they are less available for raids upon the gold reserve, even if directly redeemable in gold, than where they are in large denominations, which are usually in the hands of banks and bankers. The expansion of the business of the country has resulted in a steady growth in the demand for notes of denominations below o, which has been met by several acts of Congress providing for the conversion of silver certificates and United States notes into small denominations. The stock of • 1 t.) / T.es, is 4-1 1.71 A ' /, 2 -Z /4-4 - 4 18 ON MONO. SEC. The national banking system brought about uniformity in the system of note issue throughout the United'States; it insured safety to the extent that bank notes vrr..'re kept at par with Government notes; and it insured theconvertibility of bank notes into gold after the resumption of specie payments in 1879, except on those occaSions of crisis in 1893 and 1907 when general suspension of currency payments occurred. Even on those occaiions fair criticism -would involve the admission that it was .not the safety of the notes which was in question so .much as the sufficiency of the supply. The question was not whether the banks were able to redeem notes in gold or other lawful money, but whether they had sufficient notes or other currency to meet demands from depositors for the withdrawal of their funds. Serious and discreditable in a way as was the suspension of cur4ency payments by the banks, it can not be ascribed in a strict sense to the lack of convertibility of the notes, but rather to the lack of elasticity in the currency and , credit system. To the national banking system may fairly be granted, therefore, the credit of establishing uniformity of banknote currency throughout the entire area of the United States, without the necessity on the part of a note holder for making examination or discrimination as between the notes of different banks. Incidentally also, but most important to the Government of the United States, was the market arbitrarily created for the bonds of the Golvernment, issued originally for carrying on the Civil War. Unsound as may have been this and some other features of the financial policy of the war, they were adopted at a time when financial science was much less advanced than at present and their effects have been gradually overcome, at least in part, by the resolute 'measures taken from time to time by Congress to maintain the national credit by discharging the public obli- • gations in the best available form of money. In dealing with the question of the lack of elasticity in the national-bank currency,it has to be considered that this form of currency has never formed a large proportion of the total currency supply of the country. Prior to the resumption of specie payments in 1879, that part of the currency not made up of bank notes consisted chiefly of Government notes issued to meet the necessities of the Civil War. After the volume of these notes became fixed by the resolution of May 31, 1878, at $346,681,016—the amount then outstanding—the field might have been left open for the gradual expansion of the bank-note currency and its adaptation to the requirements of elasticity, if it had been in the power of the banks under the law to issue notes upon their general banking assets against a certain percentage of metallic reserve. In other words, the system of a fixed minimum quantity of Government paper would have left a vacuum for the growth of the bank-note currency with the growth of business, if the bank-note currency had been of a character adapted to such an opportunity. It was in this respect that the syster I broke down. The ratio of bank-note circulation in the United States to the total .circulation has seldom been large enough to afford any considerable degree of elasticity without very wide fluctuations in the amount of bank notes outstanding. Thus, in 1880, the first year after the resumption of specie payments, the bank notes outstanding *'ere only about - ..e .1,— fm-n1 eireilint1011 of money in the United • _ elasticity, LI it adaptation to the requirements of es upon to issue not in the power of the banks under the law t a certain percentage their general banking assets agains the system of a fixed of metallic reserve. In other words, ment paper would have left minimum quantity of Govern k-note currency with a vacuum for the growth of the ban ote currency had been the growth of business, if the bank-n opportunity. It was in of a character adapted to such an down. this respect that the system broke ion in the United States The ratio of bank-note circulat dom been large enough to to the total .circulation has sel elasticity without very afford any considerable degree of bank notes outstanding. wide fluctuations in the amount of r the resumption of specie Thus, in 188o, the first year afte nding were only about payments, the bank notes outsta of money in the United 35 per cent of the total circulation temporary influence of States, and in 1890, owing to the n 13 per cent of the total special causes, constituted less tha ulation to the money circulation. The ratio of note circ year 4900 by reason of stock increased rapidly after the March 14, two, to estabthe authority given in the act of eeding $25,000, and to lish banks with a capital not exc 2 per cent refunding bonds. issue notes upon the deposit of details of these operations, Without dwelling here upon the increase in circulation was it is sufficient to state that the ms upon which bonds could obviously due to the better ter ricted relation to the inbe obtained and had only a rest There was a forced increase creased demand for currency. ds at the time of the panic of of circulation secured by bon June 30,1907, to $643,459,896 19o7, from $553,614,574 on vices of the existing system on January 31, 1908; but the sed by the fact, that in spite of note circulation were disclo unts of notes to the Treasury .of ihe return of great amo which did not involve cancellafor current redemption, es issued to meet the requiretion and retirement, the not very slowly,and such retirements of the panic were retired offset by demands for addiments were soon more than n the condition of the market tional circulation based upo the past year, the circulation for bonds. Thus, within equaled more than one-fiftili of of the national banks has circulation, but it has been the total stock of money in es prevailing for money and demonstrated, by the low rat t redemption to the Treasury, the return of notes for curren ote circulation afforded no inthat the increase in bank-n for currency and afforded no dex of commercial demand increase or decrease in such means of elasticity in case of sets forth in brief form the demand. The following table al amount of money in cirratio of bank notes to the tot strating the relatively small culation, with a view to illu e of bank notes in the curpart played by the existing typ rency system of the country:' 21 ON MONO. SEC. TIIE SYSTEM OF NOTE issuE. Ii. is one of the necessary incidents of coordinating existing banking institutions, in order to afford a common fund for protection against unusual demands for credit, that the power of note issue upon a broad scale 'should be conferred upon the central organ of the coordinated banks. To this end the plan of the Commission proposes to discontinue the present system of notes issued by local banks as soon as this can be clone without impairing rights which these banks now possess by law. 'rue object of eliminating the circulation of the existing banks might be accomplished without revoking existing legal rights, either by the method of offering new concessions or privileges for the voluntary abandonment of the right of circulation or by granting such privileges to the central organ as would give it an advantage over the local institutions. By offering new privileges in exchange for the surrender of the old, a combination of influences in favor of the new system may be set in motion, which will accomplish the desired result. It is intended by the plan of the Commission that the national banks of the United States—the only class having ..rights of note issue practically under existing law— shall find such important advantages in membership in the local associations of which the National Reserve Association is the central organ, that they will substantially all within a short time become m?mbers of these associations and partners in the Reserve Association. The more important inducements offered to them to take this course are twc—the opportunity of disposing of their existing holdings of 2 per cent bonds now pledged to secure circulation, and the privileges of rediscount and mutual support afforded by the general plan of the Reserve Association. Without entering at length at this point into the provisions made by the proposed plan for the disposition of the 2 per cent bonds, it may be observed that it is the availability of these bonds as security for bank notes which gives them their present market value. Any plan which should arbitrarily revoke the privilege of using bonds as security for circulation, without making some provision for protecting the value of the bonds, would cause a decline in their price which would in the case of many national banks wipe out their surplus and in some cases even make serious inroads upon their capital. The artificial character of the present market price of the bonds therefore affords a strong inducement to the banks to accept any plan which relieves them of these bonds at par and guards them against the losses which might result from fluctuations in their value. While the plan permits an existing national bank to continue its circulation, even after becoming a member of the National Reserve Association, it is believed that the provisions in regard to the taking over of the bonds will persuade practically all the banks to surrender their 2 per cent bonds to the Reserve Association and with them the power to issue the notes which have been based upon them. The National Reserve Association is compelled by section 66 of the plan to offer for a period of one year to purchae net- rent bonds held by subscribing national banks winch,ieiicve banks to accept any plan against the losses which bonds at par and guards them value. While the might result from fluctuations in their to continue its plan permits an existing national bank National circulation, even after becoming a member of the provisions in Reserve Association, it is believed that the persuade pracregard to the taking over of the bonds will cent bonds tically all the banks to surrender their 2 per the power to to the Reserve Association and with them upon them. The issue the notes which have been based National Reserve Association is compelled by section 66 of the plan to offer for a period of one year to purchae the 2 per cent bonds held by subscribing national banks and to secure their circulation at a price not less than par n assumes reaccrued interest. The Reserve Associatio sponsibility for the outstanding notes covered by these bonds and for both their current redemption and their retirement. As fast as such notes are received into the National Reserve Association, its own notes are to be substituted. The ultimate purpose of these provisions is "to retire as rapidly as possible, consistent w?i-h the public interests, bond-secured circulation and to stfbstitute therefor notes of the National Reserve Association." Thus will be States a uniform established throughout the United * of note issue, emanating from a single authority. system Even those notes of existing banks which remain in circulation will have been converted into a liability of the Reserve Association and will gradually be retired and canceled as they come into its hands in the ordinary course of business. The security for the notes of the National Reserve Association will be, under the provisions of section 68 of the plan, gold or other lawful money, bankable commercial paper, and obligations of the United States. Ultimately, the obligations of the United States thus provided for will be reduced to short-term bills and certificates of the classes which are accepted within defined limits at leading European banks as the equivalent of short-term commercial paper. Until the 2 per cent bonds of the United States, transferred to the Reserve Association by the national banks, have been otherwise disposed of in the manner defined in the sections relating to bonds, the provisions of this section will apply also to these bonds. While from a theoretical point of view it would be highly desirable to have the outstanding notes of the National Reserve Association covered entirely by lawful money and short-term commercial paper, it is not 'believed that the temporary possession of United States bonds win impair the soundness of the circulation. The amotint of circulatkin issued by the Reserve Association based upoh bonds can not in any case exceed the amount 220N MONO. SEC. of national bank notes outstanding at the time when the plan takes effect. In this respect, the quality of the currency of the United States, and the proportion of bondsecured notes which it contains, will not be different from the conditions before the creation of the Reserve Association. From that time, even if the amount of bonds thus taken over from the existing national banks were not reduced, all increments to the circulation due to the growth of population and the expansion of business would be in the form of notes of the National Reserve Association based upon short-term commercial paper or lawful money. The concentration into single hands of the whole function of note issue, with the means of contracting or expanding the circulation by limiting the volume of discounts, dealing in foreign bills of exchange, and importing or exporting gold, would in itself add greatly to the security of the existing currency and banking system. Objectionable as long-term bonds may be from a theoretical point of view as security for circulating notes, there is little ,doubt that had there been a central organ of the . banking system in existence during the crisis of 1907, with the function of note issue by means of rediscount and with power to change the rate of discount, which are conferred by the proposed plan, there would have been no distrust of the sufficiency of the currency supply and no general suspension of currency payments. Gradually, however, as provided in those parts of the plan relating to the disposition of United States bonds, the security of this character held by the Reserve Association against its outstanding notes will diminish and more flexible and quickly convertible security will be substituted. It has been the aim of the Commission to adopt a plan of note issue which would at once meet all probable demands of the country for legitimate commercial accommodation and for the increase in time to come in its wealth and volume of credit operations, and at the same time to provide restrictions which would work to a certain extent automatically, to prevent undue expansion of issues beyond a safe and sufficient specie basis and beyond the legitimate needs of healthy am! uninfla ted commercial operations. One of the defect s to Nvliich attention has been called most frequently in the existing system of note issue is that when expansion occurred it was rarely followed by a corresponding contraction of the circulation when the need for expansion had passed. This defect is less apparent in any system of note issue emanating from a single institution. because such an institut a ,n op'erotes in effect as a clearin .:',- house for the marginal supply of creciit which is exro-essed by notes redeemable in coin on demand zmd secured by gold and commercial paper. Whether such a system affords in itself, without special limitations, a complete safeguard against the inflation of the paper currency end of credit, it is not necessary to discuss, becaus e in the plan submitted by the Commission several special limitations are provided. These limitations may he thus defined: i. The requirement of ample reserves in gold and other lawful money against both outstanding notes and other demand liabilities. .f2s , 4 mercial paper. Whether such a system affords in itself, without special. limitations, a complete safeguard against the inflation of the paper currency and of credit, it is not necessary to discuss, because in the plan submitted by the Commission several special limitations are provided. These limitations may he thus defined: 1. The requirement of ample reserves in gold and other lawful money against both outstanding notes and other demand liabilities. 2. Special taxes upon deficiencies in the lawful money reserve. 3. Special taxes upon the excess of notes in circulation above a fixed point when such notes are not fully covered by lawful money. . 1. Thc requirement of minimum reserves.—At several of the central banks of Europe, including the Bank of France, there is no legal requirement in regard to the amount of lawful money to be held by the bank against its outstanding notes. At several other European banks, where such Festrictions exist, they are of a character which exercises little influence upon the discount policy of the bank. In the case of the. National Reserve Association, however, it is proposed . by section 68 of the plan that all note issues must be covered to the extent of at least one-third by gold or other lawful money. This would in itself put a definite limit upon the amount of currency which could be issued without the addition of gold or other lawful money to the reserves of the association; but there are also other provisions still more stringent, which will bave the effect of keeping the reserve of lawful money .,against notes considerably higher than one-third, unless,.heavy taxes are paid upon the excess issues. The.provisions of section 68 may be considered, therefore,. simply as a base line below which the reserve in gold or other lawful money shall never be permitted to fall, even under the most severe stress. 2. Special taxes on deficiencies in reserves.—The first of. the restrictions imposed upon unwarranted inflation of the circulation of the Reserve Association is a system of .special taxes upon deficiencies in the reserves held. These taxes are so adjusted that there will be, under normal conditions, a larger reserve held than the Minimum requirement against notes, and there will thus be created, between the upper limit of the metallic reserve which it will be sound policy to hold, in order to escape the payment of special taxes, and the lower limit required by law, a wide margin of power to issue notes, which will obviate the difficulty which has been encountered in nearly every crisis in this country, and even arises under some European banking systems—that there is no reserve power of note issue available for periods Of pressure. \../b17"--)Ni 23 CN MONO. SEC. It will be in the interest of the .Reserve Association 'to maintain under normal conditions a reserve of not less than 50 per cent of its demand liabilities, the latter being defined to include deposits payable on demand or-ittetturingiyithiii-thirs, as well as circulating notes The provici itsic• — 1 this subject embodied in section 55 of the oi-plan are as follows: "All e_emand liabilities, including deposits and circulating notes, of the National Reserve Association shall be covered to the extent of 5o per cent by a reserve of gold (including for,ign gold coin and ;old bullion) or of other money of the United States which .the national banks are now authorized to hold as a part of their legal reserve; provided, however, that whenever and so long as such reserve shall fail and remain below 5o per cent the National Reserve Association shall pay a special tax upon the deficiency of reserve at a .rate increasing in prcportion to such deficiency as follows: For each 2 per cent or fraction thereof that the reserve falls behw 5o per cent the percentage of taxation shall increase at the rate of i< per cent per annum." These provisions are qualified in a measure by section 56 of the plan, which provides that in computing the demand liabilities of the assoc;ation, a sum equal to onehalf of the amount of United States bonds held by the association, purchased from national banks, shall be deducted from total demand liabilities. This provision applies only to the reserve against liabilities other than notes and does not qualify or impair the provision of section 68, that outstanding notes shall be covered by not less than one-third of their amount in gpld or other lawful money. If the total amount of United States bonds on deposit in the Treasury on September I, 1911, to secure circulation were turned ever to the National Reserve Association, the amount would be $707,204,380. As these bonds would conlitute an asset of high character, but one which wold not be readily convertible in the open market during the process of transition from the old conditions to the new, it has seemed proper to treat them as representing a practical reserve to the amount of one -half of their face value. By deducting from actual demand liabilities, which, apart from notes, will consist chiefly of deposits, one-half of the amount of these bonds, the amount of gold required to be held will be reduced, and the marginal resources of the Reserve Association for coming to the aid of credit in periods of stress will be correspondingly increased. The provision for a reserve of 5o per cent against all demand liabilities, as defined by the plan, will put the National- Reserve Association,.even with the 'deduction just defined in respect to bond holdings, upon a strong basis in respect to its resources in lawful money. In view of the tax imposed upon caQh decline of the lawful-money reserve below the limit of 50 per cent, ordinary business policy will suggest that a reserve to this full amount be maintained unimpaired in times of tranquillity and that it he redured only when necessity arises for inerensecl tie provision lot a reserve of 50 per cent against all demand liabilities, as defined by the plan, will put the National- Reserve Association,.even with the 'deduction just defined in respect to bond holdings, upon a strong basis in respect to its resources in lawful money. In view of the tax imposed upon each decline of the lawful-money reserve below the limit of 50 per cent, orainary business policy will suggest that a reserve to this full amount be maintained unimpaired in times of tranquillity and that it be reduced only when necessity arises for increased accommodation to commerce. The tax upon the deficiency of the reserve increases so rapidly that unless discount rates in other countries from which gold might be derived have risen to a high point, it will be more economical to import gold and strengthen the metallic resources of the Reserve Association than to pay the tax upon the impairment of such resources. The following table illustrates the rapidity with which the tax will increase, both in rate and amount, upon each $1,000,000 of outstanding notes: Ratio of tax on deficiency of reserve. Amount of notes. Ratio of reserve. Rate tax oofn deficiency. Amount subject to talPes* Total tax paid. Per cent. $1,000,000 47% r T% 1p000,000 45 3 1,000.000 % 42 a% 10200,000 ao b $26.000 $375 50.000 1.125 75.000 2,250 100.000 3,750 Thus, upon an impairment of the reserve down to the ratio of 40 per cent—without carrying the calculation farther—there would be a total tax amounting to $3,750, which would represent an average of 3.75 per cent upon the amount of Sioo,000 by which the reserve was deficient. It would be upon the average rate at different points in the decline of the reserve that the calculation would be based whether it was more economical to import gold or to submit to a further impairment of the reserve. Obviously, the power would lie in the Reserve Association to raise the rate for rediscount to offset this increased cost in maintaining the reserve. It should not be overlooked that the entire reserve, even in periods of tranquillity, represents a cost to the Reserve Association equal to the current rate of interest upon the amount of reserve held. If this rate were taken as 3 per cent, the total cost of a reserve of $soo,000 under normal conditions would be $15,000; but this cost would be increased by $750 by the special tax, in case the reserve were reduced from so per cent to 40 per cent of the notes outstanding. 240N MONO. SEC. While the increased cost to the Reserve Association: of the impairment of the reserve would not be large upon a small amount, it would reach, upon total demand liabilities of Si poo,000,000, so considerable a sum as 53,750,000 for the total amount of the special tax and ,•175o,000 the actual increase in the net cost of the reserve to the bank in the face of its serious impairment. It would seem to be clear, therefore, that the officers of the Reserve Association would not permit its metallic resources, even in extreme cases, to fall below 40 per cent of its demand liabilities, upon the last portion of which they would be paving a special tax of 6 per cent. Under normal conditions of financial tranquility, moreover, they would be under the strongest motive to avoid the payment of any special taxes by keeping the reserve at 5o per cent, and. in doing so they would have a margin of io per cent of the amount of outstanding notes with which to meet demandz., for additional accommodation before the rate of the special tax became oppressive. Between these two points, therefore, of 50 per cent of the circulation and cent — representing in the case of a circulation o: 1 $1,000,000,000, an amount of S oo,000,000—wou.1:. lie a portion of the margin of elasticity which would belong to the National Reserve Association. For restricting undue expansion in times of low rates for money, the provisions already set forth in regard to the reserve required against demand liabilities would seem to be sufficient. Only when rates rose to a point which would either justify the importation of gold oh-. tamed at lower rates abroad or would justify the payment ! of special taxes upon the deficiency of metallic resery, s, would the Reserve Association be under any inducement to increase discounts beyond its untaxed resources. By the exercise of its authority to issui:. notes under the graduated scale of taxation upon the deficiency of the reserve, a means would be afforded for meeting additional demands for accommodation, as the money market became slightly more stringent, instead of abruptly suspending such accommodation, upon the ground, so common in recent crises, of lack of resources for granting it without violation of legal reserve requirements. The system of taxing the deficiency of the reserve is, in the opinion of the Commission, much more scientific and effective than the system of taxing directly the increase in the issue of notes. The power to issue additional notes under a special tax, which is given to the Imperial Bank of Germany, the Austro-Hungarian Bank, and the National Bank of Japan, has proved in practice a great improvement over the absolute restrictions which are imposed upon the circulation of the Bank of England and upon the circulation of the national banks of the United States. The German, Austro-Hungarian, and Japanese tax has the defect, however, of being uniform in rate, at 5 per cent, without regard to the magnitude of the increase in circulation or the occasions which call for such increase. In the case of the Imperial Bank of Germany, notes have leen issued in large amount s to the tax at times when there was no outflow of gold to rips whim the bnuk did not feel justified jA/ etr-vtAL 4, and the National Bank Ur 17:pan, has prove(' in praL Lice a great improvement over the absolute restrictions which are imposed upon the circulation of the Bank of England and upon the circulation of the national banks of the United States. The German, Austro-Hungarian, Japanese tax has the defect, however, of being uniform in rate, at 5 per cent, without regard to the magnitude of the increase in circulation or the occasions which call for such increase. In the case of the Imperial Bank of Germany, notes have leen issued in large amount s ul)ject to the tax at times when there was no outflow of gold to foreign countries and when the bank did not feel juqified by the condition of the domestic and international markets in advancing the rate of discount even so high as the rate of the tax upon the excess of note issue. The principle adopted in section 55 of the plan of the Monetary Commission was recommended by several members of the German commission of 1908 on the renewal of the bank charter as superior to the imposition of a direct tax upon the excess circulation above a fixed point. 3. Special taxes on excess circulation.—In order to guard. against the possibility of unwarranted inflation of the paper circulation, the restriction is imposed by section 69 of the plan, that when the amount of the notes of the Reserve Association actually in circulation shall exceed $9043,000,000, and the excess is not covered by laNvfut money, further issues up to an amount not exceeding $3oo,000,000 shall pay a special tax at the rate of per cent per annum, and that issues in excess of $1,200,000,000 under the same conditions shall pay a special tax at the rate of 5 per cent per annum. The operation of this provision would be in some respects similar to that of the German law, imposing a tax at the rate of 5 per cent upon notes in excess of the legal limit, which was fixed by the law of 1909 at 550,000,000 marks ($13o,94o,000). The plan of the Commission differs in an important respect, however, from the German law in establishing an intermediate zone, within which issues of notes may take place up to the amount of $300,000,000, subject to a tax at the rate of only i per cent before the point is reached at which the rate of 5 per cent comes into operation. This provision is designed to afford a margin of elasticity for meeting special demands in somewhat the same manner as the graded tax to be imposed upon deficiencies in lawful money reserves. The notes subject to the lower rate of tax could be issued under conditions of special demand—as during the movement of the crops—at a charge which would be sufficiently high to drive theni back to the Reserve Association for redemption when they .,eased to be needed, but would not impose an excessive 25 CN MONO. SEC. burden upon commerce; since the rate of I,L; per cent per annum \yould amount to only a half of i per cent for a period of four months or only a quarter of i per cent for two tr.° lths, and the amount paid under such taxes would constitute a trifling percentage of the whole volume of circulation. The payment of the special tax upon this sum of S300,000,000, if required at certain seasons of the year, in order to avert monetary stringency a,t1 .-1 facilitate the movements of commerce, would be a low price to pay for the benefits obtained. It is not anticipated that the provisions for the payment of a tax on excess issues at the rate of 5 per cent will often become operative, if it ever does, under the conditions which would exist under the new plan. Such a tax has often become operative in Germany, because no intermediate zone is established by the German law for :he issue of notes under a lower rate of taxation. Had Germany possessed such a margin of issue under a low tax it would have averted many of the complaints which have been heard against the German system during the last few years. In fixing a limit of S9oo,000,00o up to which notes may be issued which are not fully covered by lawful money, it is believed that no serious fetters will be imposed upon the legitimate expansion of the paper currency by reason of the growth in population and volume of business. Under the provisions Of section 55 of the plan a circulation of $900,000,000 would be covered under conditions of tranquillity by a reserve of 5o per cent in lawful money, or $450,000,000. Before the special tax provided for in section 69 could come into operation, the reserve against notes must have fallen to its legal minimum of one-third of the limit of untaxed circulation, or to 63oo,000,000; or, conversely, the amount of the circulation might increase, if the lawful money reserve remained stationary, to an amount which would equal three times the amount of such reserve, or to a total of S1,35o,000,000. Thus in effect, the 'Reserve Association would be free, even under the Irestrictiony.of section 69 of the plan, either to face a considerable loss of gold, without its notes becoming subject to the special tax, or, in case there were no loss of gold, to expand the domestic cirCulation by the sum of $450,000,000 before the special tax of 1,r, per cent came into operation. It would be necessary, if the lawful money reserve was allowed to fall below 5o per cent, to pay the taxes on the deficiency in such reserve prescribed in section 55; but even in paying such taxes on a considerable deficiency of reserve, there would remain a considerable margin for the issue of additional notes without the special tax provided in section 69 before the minimum 3 reserve of 33Y per cent was reached. As has already been pointed out, it is not probable that it would ever be deemed expedient by the officers of the Reserve Association to permit the lawful money reserve tn f^11 fn the legal miniminn of 33!, ner rent. If there , ; siderable margin for the issue of additional notes without the special tax provided in section 69 before the minimum reserve of 33;.1 per cent was reached. As has already been pointed out, it is not probable that it would ever be deemed expedient by the officers of the Reserve Association to permit the lawful money reserve to fall to the legal minimum of 33y per cent. If there •was a considerable internal demand for currency, while the lawful money reserve (in ease of a circulation of $900,000,000) remained unimpaired at $45o,000,000, it would be possible to increase the outstanding circulation by $too,000,000 and still to leave the lawful money reserve equivalent to 45 per cent of the outstanding circulation. The increase would not be subject to the special tax provided in section 69, but only to the taxes on the deficiency of the reserve provided for in section 55. The total amount of such taxes6 would be for a complete year $150,000, btit for a period of four months would be only $5o,000. A further increase in the circulation which reduced a reserve of $450,000,000 to the ratio of 40 per cent Would permit an increase of the untaxed and uncovered circulation to $1,125,000,000, or an increase of $225,00o,000, without becoming subject to the special tax on excess of note issues. The rate of taxation on the deficiency of the reserve would rise to $3,750 for each $1,000,000, or to a total sum of $843,750 if the deficiency of the reserve continued for an entire year. For a period of four months the tax on the deficiency of the reserve tkwould be $281,250, which would be about one-eighth of per cent of the increase in circulation and would not be•a higsh price to pay for the benefits of elasticity to the amount of $225,000,000. Obviously, therefore, the restriction imposed in section 69 upon issues not covered' by lawful money would come into operation only , in extreme cases and even then would permit issues to the amount of $300,000,000, covered by a reserve of one-third or more before the higher tax at the rate of 5 per cent would come :into operation. The figures of $900,000,000 and $z,200,000,000 should not be regarded as imposing any fixed and arbitrary limit upon the point which would be attained by the total circrulation of the Reserve Association. This follows from the fact that there is no limit upon the amount of notes which may be issued when they are ftilly covered by gold or Otherlawful money. In the case of the Imperial Bank of Germany, where the legal limit of note issues not fully covered 'by gold is only 550,000,000 marks, the amount of gold in thebank is such that the actual circulation has been in recent years about three times the authorized amount beyond which additional notes must be fully covered. 26 CN MONO. SEC. Inevit,bly, the strength of the instittition and the security of the circulation are greatly increased—not 'weakened—by additions to the circulation in the form 0;7 notes which are fully coveted by lawful money. The notes issued by the Re.,zerve Association only upon deposits of gold to their full a:alount would not differ in storm or in the nature of the liability which they created from the notes based upon aki :erentage of lawful money reserve. The gold deposited . or the issue of additional notes is not "earmarked "—that is, it is not iil.).xifically set aside to protect particular notes, as in thease of the ' gold and silver certificates issued by the Government of the United States. T1 result of this situation is that -..e the average ratio of gold to notes would steadily increase with every is!--,tte of additional notes fully covered by gold. There is no reason to doubt that ultimately the circulation of the Reserie Association wouid greatly exceed $900,000,00d, and that its gold reserve would be so large that the special tax on excess issues not fully covered by lawful money would rarely come into operation. Thus in effect the plan is believed by the Commission to provide such a range of elasticity in die supply of currency and at the same time such requirement; as to the ratio of the lawful-money reserves and money penalties upon their impairment as would keep the circulation„ of the association at once adequate to future needs and beyond question as to its solidity and security. . Legal status of the notes.—The notes of the National Reserve Association, in the strong reserve of gold upon which they would rest, and in the other provisions for maintaining their parity with gold, would be of a sounder and more convertible character in many respects than the notes of the existing national banks based upon government bonds. They are, therefore, given a limited legal-tender quality, but not to such an extent as to impair the obligation of gold contracts. It is provided by section 70 of the plan that "the notes are to constitute a first lien upon all the assets of the National Reserve Association, and shall,be redeemable in lawful money on presentation at the head stlice of the National' Reserve Association or any of its 6ranches." It is further provided in. section 71 that these notes shall be "received at par in Payment'of all taxes, excises, and other dues'to the United States, and for all salaries and other debts and demands owing by the United States to individ4als, corporations, or associations, except obligations of the Government which are by their tens specifically Payable in gold, and for all debts due from or by one bank to another, and for all obligations due to a bank." 'Thus the notes of the Reserve Association are not made legal tender for all debt§ public and private; but they are;, in effect, given the legal tender quality in public transactions and in transactions between the banks. In endowing them with this limited legal tender quality the evolution of banking legislation in other commercial countries has been followed without going so far as such legislation has gone in recent years. The notes of the Bank of England have been for a long time legal tender, except at the bank, where they are entitled to redemption in coin on the demand of the holder of the notes. At the r.; ble in gold, and for all debts due from or by one bank to an.9ther, And for all obligations due to a bank." 'Thus the notes of the Reserve Association are not made legal tender for all debt§ public and private; but they are, in effect, given the legal tender quality in public transactions and in transactions between the banks. In endowing thcin with this limited legal tender quality the evolution of banking legislation in other commercial countries has been followed without going so far as such legislation has gone in recent years. The notes of the Bank of England have been for a long time legal tender, except at the bank, where they are entitled to redemption in coin on the demand of the holder of the notes. 4t the Bank of France the legal tender quality which was conferred on the notes of the bank at the time of the suspension of specie payments in 1870 was not withdrawn after the resumption of coin payments in 1875, and the notes possess substantially the same quality as those of the Bank of England—that they are legal tender in private, transactions, but are redeemable at the bank in coin, at its option to pay either gold or silver. The notes of the Imperial Bank of. Germany became a legal tender only by the law of 1909. It was even pre-, scribed by the old law that "there exists no obligation , to -accept bank bills for payments which are legally due in specie, and. no such obligation can be established by the legislation of any State with regard to the banks of the State." At the time of the renewal of the charter of the Imperial Bank, however, in 1909, after thorough discussion of the subject, the law was changed to give the legal tender quality to the notes of the bank and to substitute the words "German gold coin" for the words "German currency" in section 18 of the act of 1874, with the result of requiring that the bank shall redeem its , notes in gold coin and may not redeem them in the notes of the Government where coin is demanded. In providing for a limited acceptance of the notes of the National Reserve Association by,the Government and by the banks, the plan of the Reserve Association thus stops considerably short of the policy adopted by the three chief commercial States of Europe. It leaves unimpaired the provisions of the gold standard act of March 14; 1900, which declared the gold dollar of the existing . weight and fineness to be "the standard unit of value" of the United States and provided for maintaining at parity of value with this standard "all forms of money issued or coined by the United States." It leaves unimpaired also the right, which was so often asserted even prior to the law of 19oo, of the legal recognition of special contracts for payment in gold. (AZ .27 ON MONO. SEC. , RESOURCE. OF TIIE RESERVE ASSOCIATION FOR MEETING PERIODS OF PRESSURE. The occasions on which the defects in the existing Arierican Lanking system become most obvious are periods of pressure for crreacy and credit. Especially do theze defects become conspicuous when periods of pressure become accentuated, partly as the result of these very defects, into actual panic. It can not be contended for any banking system that it will obviate all the evil results of the over-expansion of credit and the miscalculations of those engaged in industrial and financial operations. It is practicable, however, as evidenced by the experimce of European countries, to confer powers on a central banking mechanism which will diminish the intensity of pressure in the money market and afford reasonable accommodation to sound and legitimate business. The plan of the Reserve Association has been framed with the object of conferring upon it such reserve powers as will enable the Association to afford benefits in this respect to American commerce and finance similar to those which are afforded in Europe by the central banking .ations to their national commerce and finance. , organi: The character and manner of operation of these powers will be briefly discussed under the following .heads: r. The concentration of reserves. 2. Authority to grant rediscounts. 3. The power of note issue. 4. Changing the rate of discount. 5. Authority to deal with foreign banks. 6. Dt2aling in foreign bills. 7. Fc.cilitating domestic exchange. 1. The concentration of reserves.—It is one of the essential purposes of the proposed plan to concentrate in the custody of the National Reserve Association a considerable part of the gold and other lawful money of which an ample stock now exists in the United States, but which is rendered largely unavailable in periods of pressure by the manner in which it is scattered among 24,000 existing banking institutions under the reserve requirements of existing laws. The plan provides, in section 51, that "the deposit balance of any subscribing bank in the National Reserve Association and any notes of the National Reserve Association which it holds may be counted as a part of its required reserve." This provision alone would afford to the local banks an opportunity to exchange gold coin and United States notes now held in their reserves for deposit accounts with the National Reserve Association at New York, Chicago, and the various branches. The holdings of actual legal-tender money reported by national banks on September I, 1911, were as follows: Specie. $711, 522, 344. 8r Legal-tender notes. 183,953,062. oo Total. 6 895,475,40 .8x If only half of this large sum were gradually received into the vaults of the Reserve Association, its fund of specie and legal-tender notes would be nearly $450,000,000. In addition to this means of accumulating a strong reserve in lawful money, the ordinary working balance of the Treasury of the United Sta`tes, which would be in the custody of the association, would amount to not less than v li1l11 •31 Las., — . the Reserve Association at New York, Chicago, and -tender various branches. The holdings of actual legal money reported by national banks on September r, 191r, were as follows: Specie. Legal-tender notes Total. $711, 522, 344. 81 183, 953,062. oo 895, 475, 406. 81 If only half of this large sum were gradually received into the vaults of the Reserve Association, its fund of specie and legal-tender notes would be nearly $45o,000,000. In addition to this means of accumulating a strong reserve in lawful money., the ordinary working balance of the Treasury of the United States, which would be in the custody of the association, would amount to not less than $6o,000,000, and probably.to a much larger sum. It is reasonable to believe, in view of the wide diffusion of the existing stock Of United States notes in the form of small dc laminations, that a large proportion of the amount thus hid in the Reserve Association in lawful money would con7ist of gold coin or bullion Or Treasury certificates issued against such coin or bullion. It will not be essentially misleading, therefore, to refer to this large accumulation of lawful money as the metallic reserve or the gold reserve of the association. As the existing gold stock of the country was computed by the Director of the Mint on September 1, 1911, at $1,775,000,000, of which about ,S553,000,000 was in the custody of the national banks, the country is so well supplied with gold that no serious doubt could arise of the ability of the Reserve Association to maintain an adequate stock of the metal for meeting all legitimate demands when the association was once clothed with power to concentrate a portion of this stock in its own hands and use it to meet the demand for gold for export and for the protection of the domestic exchan 2. Authority to grant rediscounts.—It is by means of the authority to grant rediscounts to banking institutions that the National Reserve Association would be able to emplcy its resources for the relief of the money market in periods of pressure. The association is authorized by section 38 of the plan to "rediscount for and with the indorsement of any bank having a deposit with it, notes and bills of exchange arising out of commercial transactions." Such notes and bills must have a maturity of not more than 28 days and must have been made at least 30 days prior to the date of rediscount. Paper having a longer term to run, but not exceeding four months, may also be accepted by the National Reserve Association for rediscount, but in such cases the paper must be guaranteed by the local association of which the bank asking for the rediscount is a member. A 280N MONO. SEC. used It is this power of rediscount, comparatively little is the up to the presm; time in ;he United States, which issue in effective weapon lw which the central banks of private Europe come to the aid of the joint-stock and le to banks when the latter iind it necessary or desirab power of increase their cash resources. So freely is this Imperial rediscount used at the Bank of France, the an Bank of Germany, and other banks of the Europe pointed out Continent, that it is customary, as has been carry elsewhere in this report, for these institutions to They very little actual currency in their own vaults. to redisrely absolutely upon the central bank of issue to count their best paper in case of need and thereby credit supply them with the currency or the deposit legitimate which they may require in order to meet the redemands of their clients. Obviously, so long as the these sources of the central institution are adequate for antable presdemands, a means exists for averting unwarr the sure which is, in theory at least, limited only by possession of sound assets on the part of the bank seeking the rediscount. 3. The power of note issue.—The comparatively -broad to power granted to the National Reserve Association authorissue its notes would supplement and support the ion ity given to it to grant rediscounts. It is the possess which of comparatively unrestricted powers of note issue and other prevents apprehension in France, Germany, countries where such powers exist in the central banking institution, that the supply of credit will be suddenly curtailed by arbitrary provisions of law, as it often has been by the existing requirement in the United States that the national banks of the reserve cities must keep constantly unimpaired an amount in currency equal to 25 per cent of their deposit liabilities. The possession of powers like this is a safeguard in itself against hoarding and the locking up of reserve money by local banks, because they afford assurance that there will be no sudden curtailment of credit accommodation through exhaustion of the lending, or rediscounting, power of the central institution. There are reasons of public policy which, in the opinion of the Commission, have justified imposing certain limits upon the power of note issue by the National Reserve Association; but it is intended that these limits shall not hamper its power to aid banking institutions during the crop-moving season and to protect them against the consequences of any unusual pressure. Power is conferred upon the association to issue circulating notes up to the limit of $9oo,000,000 against a reserve in lawful money of 33 per cent. Additional notes may be issued above the amount of $9oo,000,00o under a special tax at the rate of 134 per cent per annum, and notes may be issued in excess of $1,2oo,000,000 under a special tax at the rate of 5 per cent per annum. Furthermore, the power of the Reserve Association is unrestricted to issue notes above $9oo,000,000 not subject to special taxes, so long as they are fully covered by lawful money. The retention of an adequate margin of unused power of issue is enforced upon the Reserve Association by the provisions of section 55 of the proposed plan, that whenever the lawful money reserve of the association shall cnn halow co t,Dr eent the de4ciencv shall be subject to 4- f upon the association to issue circulating notes up to the limit of $900,000p00 against a reserve in lawful money of 3334 per cent. Additional notes may be issued above the amount of $9oo,000,000 under a special tax at the rate of i per cent per annum, and notes may be issued in excess of $1,200,000,000 under a special tax at the rate of 5 per cent per annum. Furthermore, the power of the Reserve Association is unrestricted to issue notes above $900,000,000 not subject to special taxes, so long as they are fully covered by lawful money. The retention of an adequate margin of unused power of issue is enforced upon the Reserve Association by the provisions of section 55 of the proposed plan, that whenever the lawful money reserve of the association shall fall below so per cent, the deficiency shall be subject to per cent per a progressive special tax at the rate of i annum for each 234 per cent that the reserve falls below 50 per cent of the note issue and other demand liabilities. If under this provision the reserve should fall to 45 per cent, the taxes paid would reach 434 per cent upon the deficiency, but there would still remain a power of issue of i 2 per cent of the existing volume of outstanding notes before the minimum legal reserve was reached, which upon an initial circulation of $900,000,000 would amount to $1o8,000,000. 4. Changing the rate of discotint.7—The authority which is conferred upon the Reserve Association by section 41 of the plan, to change from time to time the rate of discount for commercial paper, gives it a power which has never before, since the influence of the discount rate was well understood, been concentrated in any single institution in the United States for the protection of the gold stock of the country and for drawing gold from abroad. Heretofore, while the discount rate charged by banks in the leading cities of the United States has naturally varied in accordance in some degree with the demand for capital and credit, such variations have not been governed by a continuous and consistent policy. The result is that they have taken a wide range, according to the strength or impairment of the reserves of individual banks. It is the function of the central banking institutions of Europe, universally recognized by the banking community, to scan the financial horizon and to make changes in the rate of discount which will anticipate financial needs and obviate sudden and violent changes due to alarm and lack of cooperation among the banks. 290N MONO. SEC. It is the powers granted to the Reserve Association in concentrating a large gold fund and in employing that fund in aiding local banks in case of need, supplementing and protecting the use of the gold stock by the power of note issue, and, finally, its ability to change the rate charged for rediscounts, which constitute the combination of powers and of responsibility shown by the experience of other countries to be necessary at the financial centers in order to enforce a consistent and effective monetary policy. A policy can not be enforced which runs counter to existing economic conditions, because the attempt to levy an excessive discount rate when it is not required is defeated by the ability of the local banks, if they possess abundant supplies of credit, to underbid the central institution. This frequently happens at European financial centers, where the central bank, in the current financial phrase, "loses control over the market." It is only when the stock of credit and capital become impaired that this control can be easily reasserted through the appeals of the local institutions for rediscounts which can then be granted upon such terms as will afford the required protection to the national stock of gold. Even with the highly concentrated powers, backed by the authority of the Government, which are possessed by the the central banking institutions of Europe, there is no serious complaint of the exercise of excessive and arbitrary authority over the market; and still less would there be occasion for such fears in the case of the proposed National Reserve Association of the United States, in view of its cooperative character as the representative of all its member banks. 5. Authority to deal with forcian banks.---The existence of a single central institution, possessing the concentrated metallic reserve of the country and authotitv to grant rediscounts by means of the issue of notes, would make it possible for the American market to obtain aid much more readily from foreign bankiag institutions in caw of serious disturbance than can be done under existin:; conditions. It is possible, of course, for the strong, banks now in operation in New York, Chicago, and other centers to obtain extended credits in 14:mope, even under conditions of considerable pressure. It was through their energetic action that itnports of gold to the amount of Stoo,000,o(x) were made into the United States in the panic of 1907 within a period of less than flue,. mouths. The negotiations which went On it tl.at i jmc NNiAl the leading banks of Europe indicated 113w mtich more easily and promptly aid could have been obtained from Europe, at a time when plompiness was of vital importance, if there had been a central institution like tlw Reserve Association prepared to deal direetly with the European banks of issue. The Bank of Vrance, AVith its great gold reserve, stood ready to extend its aid to almost any neces!,ary amount to the New York market. In the absence of any assurance from the Government of the United States that it would guarantee the repayment of loans which it might make to) the independent banks oi New York., the Bank of Vrant-e was 'mai& to make direct loans or advances. ;,' • -A • •• •-• 4.4 / a. , and promptly aid could have been obtained from Europe at a time when p:omptaess was. of vital importance, if there had bee!l a central institution like the Reserve Asso, dation pl-epared to deal directly with the European banks of issue. The Bank of Vrance, with its great gold reserve, stood ready to extend its aid to almost any necessary amount to the New York market. In the absence of any assurance from the Government of the United States that it would guarantee the repayment of loans which it might make to the independent banks oi New York., the .Bank of France was pinable t.o make direct loans or advances. Its aid was obtained indirectly through the London market, because there existed there a central banking institution—the Bank of England—which was ready to deposit short-term treasury 'bills as a guarantee for the loan made to the Bank of England, whose proceeds were 'transferred by .various banking operations to New Yofk. 'Thus, in effect, the Bank of France came to the aid of the New York market to an amount of about •Si6,000poo, ;but in a more roundabout manner and with greater delay than if there had existed an institution like the National Reserve Association, prepared to deal directly with its .peers among the banks of the world. 6. Dealing in foreign bills.—The authority given to the 'Reserve Association to deal in bills of exchange is an authority which is already possessed by existing banking institutions. While their operations influence in the aggregate the rate of exchange and the movement of gold, their power to protect the market as a whole suffers from the lack of unity already referred to in the matter .of rediscounts and changes in the discount rate. Modern experience in Eurfipe, especially in Germany, AustriaHungary, and Belgium, shows that the possession by the central banking institution of a large fund of foreign bills gives an influence over the money market which is only second to the possession of great stocks of gold, and, in fact, tends to prutect the gold stock by permitting the substitution of bills for the precious metals as a means of making foreign remittances. Obviously, also, intelligent discrimination in the amount of bills offered or purchased from time to time affects in itself the rate of foreign kixchang.:'. By taking bills off the market at a time when the supply may he excessive and holding them until there is a scarcity of exchange, the central institution may nat only make a considerable profit for itself, but may maintain a comexchange, which parative steadiness in the rate is much more advantageous to the import and export trade than are violent fluctuations in the rates. While measures of a similar character may be taken to a certain 300N C. MONO. SE institutions are govextent by independent banks, such t, and in directing erned solely by the motive of profi h less likely to afford their operations to this end are rmuc le rates than are tile the benefits of stable and reasonab institutions, which operations ,of the central banking than permit undue sometimes sacrifice profit rather arance of what may stringencyjn excjiange, or the appe 'domestic currency appear to .be a depreciation of the py a premium on gold. ne of the most 7. Facilitating domeslic exclianac.—O the mechanism of • important safeguares afforded Aby against panic is conthe National Reserve A,-,sociation plan,for maintamed in the provisions of the proposed It is believed that taming parity of domestic exchange. to facilitate the the prpvisions on this subject will tend country to another tranF,fer of credit from one part of the cost and in the with the greatest ecopomy in actual physical movement of currency. is "the duty Under section 47 of the proposed plan, it its branches of the National Reserve Association or any of sit balance upon request to transfer any part of the depo credit of of any bank having an account with it to the National any other bank 'paving an aceoupt with the for transReserve Association." Provision is also made the Reserve fers by mail or telegraph between branches of rities of Association at rates to be fixed by the autho s of transthe association. Herein is afforded a mean different ferring funds at the minimum of cost between rces will be parts of the country. Such ample resou Association found at the chief branches of the Reserve of credit that payments required to meet such transfers of currency. can usually be met without any shipment they will If actual shipments of currency are required, many transrepre-ent the ultimate clearing operation of institutions, fers oF credit in different directions for local and from instead of the direct shipment of currency to the United such institutions and between thcm and g on. States Treasury wilich is now constantly goin plan of great imAnother provision of the proposed try an portance in maintaining throughout the coun section adequate supply of currency is the provision of its 72, that "the National Reserve Association and out branches shall at once, upon application and with notes charge for transportation, forward its circulating " In to any depositing bank against its credit balance. as it this provision, comparatively insignificant a part almost may seem of the proposed new mechanism, lies an of domesimpregnable safeguard against such a paralysis t financial tic exchange as took place between importan of the most centers during the panic of 1907. One was an exag. serious difficulties. which arose at that time lly intensified gerated demand for currency—abnorma and that banks by the fear that the supply was deficient nds of their in the larger cities wotAld not honor the dema of currency interior correspondents for the shipment proposed plan for against their balances. Under the with the Reserve Association a bank having a balance t any of it branches /nay convert ,-;,.• I - •-• .•., A %ay may seem of the proposed new inechanism, lies an almost ,impregnable safeguard against such a paralysis of domestic exchange as took place between important financial centers during the panic of 1907. One of the most serious difficulties. which arose at that time was an exag. gerated demand for currency—abnormally intensified by the fear that the supply was deficient and that banks in the larger cities wou,ld not honor the demands of their interior correspondents for the shipment of currency against their balances. Under the proposed plan for the Reserve Association a bank having a balance with the association or at any-s its branches thav convert of . that balance into currency on demand. Suspension of currency payments by the Reserve Association could not occur so long as the institution was solvent. Not only would it have the power, almost without restriction, as has already been set forth, to issue its notes to meet such demands, but it would be bound by every obligation of its existence to replenish its gold reserve sufficiently to enable it to issue the notes required. Inasmuch as the reserve required must be in the same ratio against all demand liabilities, whether they be deposits or circulating notes, no cost is imposed upon the Reserve Association in substituting a note liability for a deposit liahility, in case its member banks see fit to demand that their deposit balances be paid to them in notes. Thus the Reserve Association is clothed with every proper power and is persuaded by every reasonable inducement affecting its own interests to comply at all times and under the most severe periods of stress with the requirement that it shall furnish its notes without charge to any member bank having need for them to meet demands for currency. V VI.... " ADVANTAGES OF THE PROPOSED PLAN TO THE BUSINESS COMMUNITY. In considering the modification of existing laws in regard to the banking and monetary system, the Commission have kept steadily in view the consideration that the most important end to be sought was the advantages to be obtained for the business community. The influence of the banking and currency systems is so widespread ih its ramifications that it nsgar affects for good or evil all classes. While the influence of a sound system is most obvious, first, in its effect upon the operation of the banking system itself, and„ secondly, in the ad. vantages conferred on the manufacturer and merchant by uninterrupted' and adequate accommodation at low rates of discount, the benefits derived by these classes inevitably extend to the consumer and laborer by their influence upon the cost of producing commodities, the regularity in the supply of such commodities, and the steady employment of labor in their production. j" . ,/. 31 ON MONO. SEC. Taking up in order a few of the more obvious advantages which it is believed will be derived for the producer and laborer from the coordination of the locattbanks through the proposed Reserve Association and elk 'Other changes proposed in the „existing Jaw, they will the.. 41scussed under the following heads: 1. The better aistribution oLcapital. 2. $tability ant, uniformity.; in discount rates. 3. The encouragement of commei-cial bankiir. 4. Competition in foreign ...Markets. 5. Security .4ainst panic. i. The better distribution ..of raOita:. —It is one of the yprithary objects of banking to furnish .Jneans for,: the transfer 'of capital from one locality to' another, With the least friction and delax nnd at a minimum of cost. This involves not merely the mechanical facilities for transferring credit .claims, or currency, but the broader policy of making 'it' easy for the capital of one sxtion to find safe investment in another.: section. In theory, capital seeks the point at which it earns the highest returns. If there were no question anywhero of the security of an investment or the ability to convert it , into cash within a short time, without loss, there would be a tendency much,. more marked than acttially exists , toward the free movement of capital throughout the world. The surplus savings of rich and settled cor7.- nuni. ties, not required for new enterprises in their midst, would flow almost automatically to the poorer communi•ties,' where capital was in active demand for converting 1 the wildeiness into arable land and for creating the necessary tools of production,..and transportation. Unfortunately for the poorer communities, they are no always bJe to give those guarantees of security and '_•onvOrtibility in their investments which are: demanded by the owners of surplus capital. Furthermore, even where spelt guarantees may exist, the lack of complete information and ready faeilitics, for. transferring .capital • result ,. in obstructions., to ,'its.. free movement, which find their expression chiefly n the rate of interest .on loans. It is not in the power of any . new banking plan to entirely abolish these elements of friction' in the movement of capithl; bnt it should be its purpose and tendency 7 r")r/ -to reduce this' friction to its lowest terms. To promote this end is one of the chief objects of the plait of the Commission. Directly, the operation of 'a banking plan must be.Flirected essentially to promoting the distribution and iree flow of such loanable funds as are 'employed only for short terms. Put in more concrete forni, the effect of such a plan should be to make it xquitlly easy for the manufacturer of cotton goOds or of agricultural implements to obtain discounts under like conditions in the newer portions of the country, where capital is scarce, as in the older portions, where the supply is redundant. The attainment of this end will in turn tend to promote the free flow of capital for permanent investment Hence it will result that the onern- -4— c4aLitiuuti anU iitL 1LOW & SUCli lud,tictuic funds a are employed only ‘for short terms. Put in ino..-e concrete form, the effect of such a plan should be to make it equitlly easy for the manufacturer of cotton goods or of agricultural implements to obtain discounts under like conditions in the newer portions of the country, where capital is scarce, as in the older portions, where the supply is redundant. The attainment of this end will in turn tend to promote the free flow of capital for permanent investment. Hence it will result that the operation of a system which promotes the free flow of commercial capital will tend to equalize both rates of discount and rates for investment. The movement of loanable capital between Cie financial centers and the more remote sections of the country will be encouraged under the proposed plan by three important influences—the organiuttion of the local. association;; the ability to obtain rediscounts; and the provisio!is made by . the plan for the quick transfer of funds and currency from the Reserve Association to any subscribingl bank. The manner in which the organization ofi the local associations will aid in the distribution of capit41 will be based upon the fact that the guarantee of a 1oc41 association of the .soundness of commercial paper presnted for rediscount will permit discounts and rediscour4s of local paper which under the -existing banking orga+ation can not easily be obtained. The character of loc41 paper and the conditions under which it is created, while they may be unknown to the banks of the reserve cities, may be eminently satisfaetory to the governing boairds of the local associations. As the guaranty of these associations, vided for in section 29 of the plan, will, give the highest character of con vertibility to the papcir which is presented with such guaranty for rediscount, it will become possible fo r communities which:how suffeir from a scarcity of capital and inadequate means of obiiiiiting it, to tap the great reservoirs of the communities whili have a surplus. It dges not require elaboPate argument to derdonstrate that the discreet use of the powers of the kocal associations in • promoting the interests of their me ber banks' may remove obstacles to the free flow of capitlil in their-direction and thereby promote the mutual inteNst of liottower and Ignder; As already indicated, it is through the instrumentality of rediscounts that the free floi+ of capital will be encouraged. The system of rediscounts is not at present employed upon a large scale in this country and has not been greatly encouraged by the banks of the larger cities. A prejudice has grown up in some quarters in favor of the rule that each community shall rely upon its own banking resources and that the appeal of a bank in a small com- z_te-/C JLAAA-41,0t-,, c0A-v1 kip 320N MONO. SEC. munity to a larger bank for redi is a sign of weakness. It is the aim of the plan prow -e.1 bv the Monetary Commission to modify this attitude, which creates an artificial isolation and segregation of coinmullities, in order to turn into the channels of the poorer L'omtnunities having need of capital the means of obtaiiiin; it without discredit from the richer commuaities. The system of rediscounts is so thoroughly estab!i .ted 1 in the countries of the European Continent that the large-,t institutons of Paris, Berlin, and Vienna consider it no reflection whatever upon their credit or standing to rely upon the central bank of issue for such additional capital or currency as they may need from time to:timein carrying on their business. It is the uniform rule with the banks at these financial centers to carry very limited amounts of cash, because it is known that cash can be obtained, practically without limit, upon sound commercial paper by presenting it to the central bank for rediscount. So well established is this custom that it is lnade a vehicle by the joint-stock and private banks for collecting the paper which they have discounted. Even if they do not fear any serious pressure for additional credit or currency, they submit their paper for rediscount a short time before its maturity, in order that it may be collected through the well-organized and economical machinery of the central bank. The purpose of the Monetary Commission, in recommending the adoption of this system in the United States, is to at once strengthen local banks against any fear of the exhaustion of their resources and to enable them to in. crease their ability to serve their local communities by obtaining a part of the great store of unused capital which now accumulates in the reserve cities and often finds its way into speculative operations on the stock exchanges because of the absence of any other means of employing it. The plan aims to dissolve the feverish and—congestei1.A7 capital which have formed in isolated parts of the econornic body and to encourage its free circulation through the entire system '2.*.StcOility and uniformity in‘ discount rates.—As the rate, of discount is the price which the manufacturer or merchant, pays for the use of borrowed capital, it is obviously of great importance to him that it should be as low as.possible and also that it should vary as little as possible from one time to another. Stability is in some respects even ,more important than the rate paid, since it enables the producer to make closer calculations of the cost of production and distribution with a view to fixing the prices of his ; products. If he'ran borrow at a given moment at a low rate, but is uncertain whether that rate may soon be doubled or trebled before the execu,ion of ;future contracts by him for the delivery of his goods, then ! is compelled to base his calculations of cost of produc.i )ie, tion and profits upon a possible high rate of discount e 'law rate which MP" at the moment enables even ,more; important than the rate paid, since it the producer to make closer calculations of the cost of production and distribution with a view to fixing the prices, of his: products. If he -can borrow at a given moment at a low rate, but is uncertain whether that rate may soon be doubled or trebled before the execu Lion of ;future contracts by him for the delivery of his goods, then lie,is compelled to base his calculations of cost of production and :profits upon a possible high rate of discount ,instead of the flow rate which may at the moment be . available. Comparative stability of rates, therefore, is an end toward =which the efforts of European bankers 'have been steadily directed and an end which has been attained in large measure in those countries best equipped =with loanable capital. If the United States were in the aggregate a poor country it could not be expected that a low rate of discount .would prevail, even under the most efficient banking system, because the supply of capital would always be .unequal to the demand for it. In the present state of the .country, however, it is reasonable to believe that if the instrumentalities should be put in operation which are proposed by the Monetary Commission for producing the free flow of capital from one part of the country to another, there would ensue both greater stability of discount rates at different times and also greater uniformity in rates between different parts of the country. Under the existing banking mechanism the differences are wide in the rates of discount charged in different sections. The following table, taken from the report of the Comptroller of the Currency for the fiscal year 1910 (pp. 776-777), exhibits the average rates of interest charged on loans by national banks on June 30, 1910, in different sections of the country: Rate of interest on loans by national banks. Time loans. Section. Banks reporting. Demand loans. Banks Rate. reporting. Per cent. Per cent. New England Eastern States Southern States Middle States Western States Pacific States United States a Rate. 433 5.53 412 5.3r 1,449 5.66 1,343 7,117 7.99 1,013 3 5.6 7.63 1,709 6.55 1,630 6.25 986 9. 17 8-70 371 3 7.8 915 362 6,069 7.33 0 5,68 7.00 a Including dependencies. 7. 76 330N MONO. SEC. These figures show a minimum interesi. rate on demand loans of 5.53 per cent at the national kanks of the New England States and a maximum rate in the States of the far West of 9.27 per cent. The corresponding averages for demand loans are 5.3 iper cent at the New England banks and 8.7o per cent in the Western States. These averages, however, are far from indicating the variation between the maximum and minimum points. Considering the averages by States alone, the minimum rate of time loans is found among the national banks of Rhode Island, where the average is 5.3o per cent, and the high points (outside of Alaska) in Oklahoma, 12.60 per cent; North Dakota, io..1.3 per cent; and New Mexico, 10.12 per cent. Under demand loans the minimum average appears in Massachusetts, 5.10 per cent, and the maxima appear in New Mexico, 10.12 per cent; Oklahoma, 9.85 per cent; and Nevada, 9.82 per cent. Even these figures by States, representing only averages, fail to'show the variations in the rate charged to individuals, according to the quality of their securit , or their need for capital. They also fail to show the rates which may be charged by institutions pursuing methods which in sonic cases might be less systematic and less equitable than those of the national banks. In the case of the reports Made to the Comptroller Of the Currency on State banks the range of variation is upon the whole about the same as at national banks, but with a tendency toward a slightly higher rate. Thus in the time loans made by State banks in Western States the average rate for Oklahoma is 12.02 per cent; New Mexico, 10.97 per cent; North Dakota, 10.73 per cent; Montana, 10.45 per cent; Wyoming, 9.93 per cent; and Colorado, 9.71 per cent. While the average does not rise to io per cent at the national banks in any of the Southern States, yet it reaches in such prosperous and developing States as Texas, 9.57 per cent; Arkansas, 9.1 o per cent; Alabama, 8.74 per cent; Mississippi, S.00 per cent; Georgia, 8.49 per cent: and Florida, 8.35 per cent. While it Would be misleading to claim for the plan submitted by the Monetary Commission that it would result at an early date in bringing these variations in discount rates to an absolute equality, it is firmly believed that a tendency toward such equality would de established, through the system of rediscounts and facilities for domestic exchange, which would enable the new portions of the country, and those with inadequate saved capital for the development of their industries, to obtain with less difficulty and upon better terms than at present the accumulated capital of the richer and more fully developed sections. Obviously, any measure which does this can not fail to contribute to the prosperity of all sections and of practically every member of the community in those sections, whether capitalist, manufacturer, merchant, farmer, or laborer. 3. The encouragement of commercial banking.—Incidental to the operation of the new plan is another factor which it is the opinion of the Commission would contribute greatly to the benefit of the commercial interests of the country. This is the discouragement given by the plan to the idle accumulation of surplus funds in the banks of New York and the encouragement given to the extension of come diffidevelopment of their industries, to obtain with less at present the accumuculty and upon better terms than developed lated capital of the richer and more fully this can not sections. Obviously, any measure which does ons and of fail to contribute to the prosperity of all secti y in those praCtically every member of the communit , merchant, sections, whether capitalist, manufacturer farmer, or laborer. —Incidental 3. The encouragement of commercial banking. r which it to the operation of the new plan is another facto ribute greatly is the opinion of the Commission would cont the country. to the benefit of the commercial interests of plan to the idle This is the discouragement given by the s of New York accumulation of surplus funds in the bank extension of come and the encouragement given to the nization of credit mercial banking. Under the present orga e tendency for in the United States, there is a regrettabl to accumulate idle funds in the hands of interior banks and especially in in the banks of" central reserve cities, depositing banks New York, because interest is paid to the s of the central by the reserve banks. Thus the bank of a mass of reserve cities find themselves in possession em of note issue idle funds, which under the existing syst llation,of note can not readily be reduced by the cance are under the obligations, and, which, therefore, they low rates, for strongest temptation to lend, even at very lation. 'the purposes of st'(_)ck exchange specu of the Commission to inIt is not proposed in the plan ing banks in terfere with the freedom of action of exist its, but it is regard to the payment of interest on depos n for employing believed that the greater facilities give ounts under safe capital to advantage for commercial disc t currency by conditions and the reduction of redundan tend to diminish the cancellation of unused notes, will eby to abate one this accumulation of idle funds and ther her speculaof the inducements for speculation. Whet it will no longer intion proceeds at its old pace or not, anization of the fluence sharply, under the proposed reorg commercial purbanking system, the supply of credit for ndant supply of pbses. Under existing conditions a redu ulate specula'credit in New York has a tendency to stim len to a point tion until the prices of securities are swol els the banks which outruns the credit supply and comp il their accommodaand trust companies to hastily curta their opportion—both to speculators who have abused way responsible tunities and to merchants who are in no for such abuses, „ 34 ON MONO. SEC. In the rates for loans lirinted by the Conlutrollcr of thL Currency in his annual report for 1906, furiii - hed to him by the New York Convliercial and Financial Chronicle, it appears that the range of interest rates for call loans on the stock exchange in November, 1905, was from a rate of from 3 to 25 per ma; in Dc-cember, 905, from 3 to'123 per cent, and in _fa:au:Irv, 1906, from 12 to 6o, per . Cut. The rates charged by banks and trust companies uTlon call loans are rep•.-)rted as varying in November, 1905, from 5 to 20 per cent; in December, 1905, from 5 .to ioo per cent, and in jam:arv, 1906, from 4 to 5o per cent. These high rates reacted upon those charged upon :tommercial paper. Choice double-name paper, running from sixty to . ninety days, was report-4.1 in November, 1905, as ranging from 5 to 6 i-xr cent, and in December from 5! to 6 per cent. These rates, however, were only for the very highest class of paper. Si0g12-nanie paper reported as,gx)od, running from four fO'six months, ranged in November, 1905, from 5;4 to 6 r cent, and in December, 1905,from 6 to 7 per cent. While these rates fc: commercial paper do not compare in the violence of their fluctuations with those charged for money on call on the stock exchange, it is obvious that .they are high for 9rs-".-class paper, and that they are an index of still higher charges, including commissions, for paper lackinglin the essential requisites of unquestioned notoriety and security. While there are occasions on which rates in New York fall for the very best paper as low as 3 per cent, they are comparatively exceptional, and such rates do not extend to any considerable proportion of the local discounts throughout the country. It was testified before the Ccrnmission by a prominent commission Merchant in texliles that the range of variation in New York for the best paper might fairly be considered to be from 3 to 6 per cent, or a variation between maximum and minimum rates of 3 per cent, while in France the rate came near to averaging 2!'; per cent and the range of fluctuation rarely exceeded in any year half of i per cent. -A'is proposed in the plan of the Commission to consecrate the National Rci§erve Association to commercial banking. In this respect the lesson taught by bitter experience at the European banks is adhered to—that loans upon securities should not form any considerable part of the assets of banks of issue. Thus., at the Imperial Bank of Germany, it is required by section 17 of the banking law, that the note issue shall be covered only by gold and other lawful German money, or by bills of exchange running for not more than three months. In other words, such loans as are permitted to the Imperial Bank upotr securities must be male from capital and deposits and must not be used as a cover for the note issue. As deposits are comparatively restricted at the European banks of issue by the policy of paying no interest upon them, the Imperial Bank of Germany and most of the other European banks are limited substantially to commercial banking in the form of discounts and rediscounts of commercial paper. This policy has been followed in prescribing the powers and functions of the Reserve Association. It is expressly prescribed by section 38 of the plan that its authority to rediscount "notes and bills of exchange arising out of . • • :.; d such loans as are permitted to the Imperial Bank upotr securities must be male from capital and deposits and must not be used as a cover for the note issue. As deposits are comparatively restricted at the European banks of issue by the policy of paying no interest upon them, the Imperial Bank of Germany and most of the other European banks are limited substantially to commercial banking in the form of discounts and rediscounts of commercial paper. This policy has been followed in prescribing the powers and functions of the Reserve Association. It is expressly prescribed by section 38 of the plan that its authority to rediscount "notes and bills of exchange arising out of commercial transactions," is intended to apply "to all notes and bills of exchange issued or drawn for agricultural, industrial, or commercial purposes, and not for carrying stocks, bonds, or other investment securities." The power of investment of the Reserve Association in securities is definitely restricted by section 43 of the plan to United States bonds and "shot-term obligations—that is, obligations having not more than one year to run—of the United States or its dependencies, or of any State, or of foreign Governments." Thus, both for purposes of investment and of loans, there are excluded from the operations of the.Reserve Association not only all industrial stocks, but also all railway stocks, and not only industrial bonds, hut rrilway bonds. Investment in long-time obligations is not even permitted in the securities of the States or of foreign Governments, but only in obligations redeemable within one year in cash. 4. Competition in foreign markets.—In seeking to put American producers upon an equality with foreign producers in foreign markets, the plan of the Commission is intended to facilitate relations with foreign markets as well as to provide for steadiness and sufficiency in the supply of credit at h,,me. The facts already given in regard to variations in the rate of discount, in different parts of the United States and at different times, indicate one of the most serious handicaps under which the Ameriin can producer labors in manufacturing goods for sale producer of foreign markets in competition with the European countries. If the French manufacturer can and 3 per cent, count upon a discount rate never above periods, and varying only a half of i per cent over long than the he can make much closer calculations of profit in the rate American manufacturer, liable to fluctuations 6 per cent. In of discount on his paper ranging from 3 to cotton goods Calculating the competitive price of a yard of purchasers, a differ to be offered to Chinese or Japanese yard often determines ence of a quarter of a cent per — 35 ON MONO. SEC. whether the order shall come to an American mill or go abroad. Such a difference may easily arise, to the disadvantage of the American manufacturer, if he is compelled to pay double the rate of discount which his foreign competitor pays. Even if ultimately the aCtual rate of discount charged to him is nht higher than that of his competitor, vet the potentialltN- of a high rate is a fact which he can not ignore in - making- his calculations of profit. Under this head, it is obvious that if greater uniformity and greater stability of rates from year to year are promoted by the Reserve Association, it will render a high service to American coanetition in international markets and will broaden the demand for the employment of American labor. Under existing conditions, while many measures are taken by the Government and others are strongly urged to p:omote the extension of American trade—such as protective tariffs, meat inspection, consular reports, and subsidies to American shipping—the advantages which might be derived from such provisions are negatived to a considerable degree by the lack of coordination, efficiency, and stability in the existing banking system. In promoting the successful competition of American production with that of other countries in foreign markets, the plan of the Reserve Association embodies several functions which are likely to give greater facilities and stability to exchange operations than under existing laws. Among these functions is the authority given to the Reserve Association to purchase to a limited amount from a subscribing bank acceptances of banks or houses of unquestioned finaticial responsibility. The introduction of the system of acceptances will require undoubtedly a certain education as to their use among American merchants and exporters. They have proved, however, of high value in Europe—both in putting in the custody of the central bank a secure and quickly convertible asset, and also in permitting exporters to extend credit on favorable terms to clients in the undeveloped countries. It has long been the complaint of American consuls in Latin America and the Orient, that the extension of American trade was greatly hampered by the refusal of • American shippers to employ European methods of credit. It is the purpose of the provision for acceptances to encourage t'../adoption in the United States, especially by exporters of American products, of methods for encouraging trOe with other countries similar to those which have ben so successful on the part of European manufacturers and exporters. To this end the system of acceptances and rediscount will materially contribute. 5. Security against panic.—An important contribution which would be made by the mechanism of the National Reserve Association, in the opinion of the Commission, to the benefits of the business community would be the . -• fr,ed •/ t WhiCh J.S haVe "e be , ,n •...LJOAL. so successful on the part of European manufacturers and exporters. To this end the system of acceptances and rediscount will materially contribute. 5. Security against panic.—An important contribution which would be made by the mechanism of the National Reserve Association, in the opinion of the Commission, to the benefits of the business community would be the safrguard which it would afford against periods of intense stringency in the money market, culminating in panic. The varied and potent resources at the command of the Reserve Association for meeting periods of pressure will be separately discussed. It is only necessary to say here that if the association is able to accomplish the result which is confidently expected, of preventing panic, it will afford a guaranty of security to American manufacturers and merchants in carrying on their business which is not afforded under existing conditions. The stringency in the money market which often embarrasses the merchant, even in the absence of actual panic, is due to the lack of elasticity in the present system of note issue and to the concentration of surplus capital in New York, where it is loaned for stock exchange speculation. When stringency sets in, the merchant or manufacturer who feels its effects most severely is the very one whose credit should be the best, because it is the most negotiable—the borrower who sells high-class paper through note brokers. As computed by Professor Sprague, in his review of "Crises under the national banking system" (6i st Cong., 2d sess., S. Doc. No. 538, p. 302), the sales of paper in this manner are probably reduced much more than one-half in emergencies like those of 1893 and 1907. Borrowers are forced to resort almost entirely to their own banks, and the shifting of loans involves much strain and uncertainty, in some cases accompanied by disaster. The operation and logic of these conditions are defined by Prof. Sprague as follows: "Those who place paper only through note brokers naturally suffer, because the banks take such paper either to employ temporarily idle funds or as a peculiarly liquid resource, a sort of quasi reserve. For such borrowers the banks feel no responsibility, but with the inevitable increase of such borrowing, on account of the increasing _ Size of the reproducing and distributing unit, there is coming to be a greater need somewhere in our banking system for a reserve of lending power for emergencies." The situation thus set forth brings into a strong light the need for a cooperative organ of reserve lending, which can give fluidity to commercial assets of a high grade in periods of pressure. Such an organ is afforded in European countries by the central bank of issue, the custodian of the concentrated metallic reserve and clothed with the power of utilizing this reserve by the function of note ,‘„4111b. 36 CN MONO. SEC. ISS111'. t11(4)IV, "11 pccishatIV II IUIIIIII ;IS %%111 ;IS 111 4 ,1 quasi ,sol I hank 111141 ‘‘'11:11('‘'cl 14lI14)11111 the hank 4'011111(11 idienevet Mill 1(111, . H1)1416 41, its 4.111,11 lc finds necessaiv holds it 1:111 11"-4)111ov. 1.111 1111C:)11 11V lie taken to the liceMISC it which IS, 111 1):11IkS i\',11( S111rk :11111 j01111 11C111 111111(1 1"11S1 Class 011111111'1(1;11 c.ip.ildc %vit li the ere:Ilion 44,011 i/i4ititt soinces ail I lw II'''. of so-vicc III I ' 1)1 1111(1(1 111g „ acceptances 111141 high Ii !Mir 1'()ilIIlIlI 1 pawl I4c dc\ ii' 444(1 .t 111 1 11C 1)1111 111,t MC041111'011 11V VIC:11 111}4 ;1 WW1 VC 1111111 III till tem"Viii);till ivat 11111 1114. 1)1 11(1 " 4)11 (14,1114 ,tir ' 1 ))1 "'"I'V 1111(1 \'#"( 411111 : advantage, , 'rel.(' gallIel 111 1111' 1111S1111'SS (1)111111111111 V . :11111‘'1".1.1 110 11, :11111 111 IIISII14' 1 11111 11111'1:1 W111C11 11:1 VII' 1)1(41 1111 111:111:111C1' :11111 SCC111 itV 11111S 014;11 t11111 1111(111 :Ohl in 1111‘1111` till Hfl h v "chang" may 1)(' Sion, the plan fin 11111114 114', 4114111 ;1(:111:11)1c 111 1.1t11 11111111' cin11111eIcial 1 1111CS 101 the CX1S1 1111., C:111`.1 4111C 11114111 41111 a p()%vei 1111 stimulus to the milet tiled anil . IS ‘‘1fill(1 111 11)1 of 4)111 legitimate i11',\14,\NTIt,ES 41c M ‘N \i',V,NlItiNT IN TIM 1.1 .111,1C I hi. '1,‘• ohli Ili lc T W O of 14111 ha v i. !will I I)(,,,1 :11,1kli II I'm III 4 ,1 %mom gi v,. for t ill. N a t ion:11 111' 111(':1`,111 Ct; 1:1k1'11 1111 1/1 111 1'11 11 1111i1 Vilf111 14111 1V1111'SS 111 mill III resurvy :Ind :lid Ihr honking 114 ' lt 1(111 high &greet' 44 l'l'llIillhu/l , milt' ( hilt' Ihr' : :ffilung 11 111 01)(1111 ill OVtl('t '.1111) hull (1)116 1 " 4 It ‘v11, . hank, public American how the beginning 1 hat the felt .lied he sati. %void(' not %vith which concentrated in the hands of a few ment In Ali. Ile \‘' gain/al nil! policV of placing tlic I. m()1)(1111 0)111111n". : most men, wit hunt the manage siipei vision hy many the testi:lint system NMI id the r1'imi411114. 41 ; Intele, , of the II ‘Vhole above 111:11 of the ',lUlit'IiI)hlil'l', III the (1)111111V . 11Ie central hank is sought and obtained 11% the:164.1i intei ...1)vciiiiiient in the selection of the lending ( ld These officer, ate to a officers IJI the institiition huge ; till' 1111'111'1S . degree the ',11•V1111, of 1111' '1:111' t:11 1111 1 11:111 Of ' Of the hank. Again and again %vas the statement crated, ill till' intei %,;(.%%-. of 1111' member.: tell till' Commission I 111pcii111 Kink that tlic ifililk %%Iv, it rtmotiv, :01(1 folic) 011ircv, \\Tic 10\11 111.11 by tl:itiHtlhli :11111 in.,t it lit III I iii. %V;IV Ilic coneclitIatioll 4)1 0 !lir with the olficeis of the Ilank , 1:innel. the Own/A.:hi1) of 111c 111.111 111 11111 111 I/1 1V:11(' 11111111', 1', 110 ;11'1'11111 'MIMI, 1/V 1 111' Pcdlicies possible under the 111)1141. lIt possible hy the ..1140 'sighted pinch. private iminagement.Ill United States, with its democratic institutions and not seem I lic varying interests of different sections, it did absolute to the Commission to he desirable to set up nil and exclusive appointing Itese:- vc Association any power for the officers' of the more than exclusive control by the shareholders. an absolute and Hence, the under- lying principle of the plan of the Reserve Association is IV v eco, nue IIlilt:rests. I v v ' • • -- -. own( hip of the insutution in private hands is not accompa d by the possible abuse or by the .shoilt!sighted policies possible under purely private management. In the United States, with its democratic institutions and the varying interests of different sections, it did not seem to the Commission to be desirable to set up an absolute and exclusive appointing power for the officers of the Reserve Association any more than an absolute and exclusive control by the shareholders. Hence, the underlying principle of the plan of the Reserve Association is that of cooperation rather than consolidation, cooperation among existing banks in forming the new institution.; cooperation between the GovernMent and the banks in choosing its officers; and cooperation in its management between the Government, the local banks, and the independent representatives of the business community. Among those features of the plan reported by the Commission which will tend, in its opinion, to instare the consecration cif the new institution to public interests and prevent its control by private interests soine of the most obvious may be summed up under the following Vv v heads: . The democratic form of organization of the Reserve Association. 't 2. The participation of the Government in the manage./ thent of the association. 3. The limitation of the profits of the association. 4. The restrictions upon thE character of business 1 permitted. • 5. Position of responsibility of the associatiOn at the head of the financial SyStem. 6. Publicity of the opqratiOn of the association. L. The denwcratic form of organization of the Reserve A3sociation. —The form"of organization _proposed for the National Reserve Association under the plan of the Corn- ..jpisSiOn is that of di representativ,e detnocracy. This 'democracy is made up of all banks which become subscribers to the capital of the association. The only restriction upon the size :of banks *Iiicti may become subscribers is that they shall have a !minimum capital of $25,0 . Each such institution i4 permitted to subscribe 00 20 per cent of the amount of its capital to the shares of the .Reserve Association, and such shares can not be alienated except upon dissolution of the subscribing bank or reduction of its capital. The subscribing bank must increase its subscription to the capital stock of the Reserve Association upon any :increase of Its own capital, so that its ratio of investment in the Reserve Association vill always equal '20 per cent of its Own capital. VL ' 37 CN MONO. SEC. / fully It is not proposed under thii head to set forth iations, the details of the organization of the local assoc sentative except to emphasike their democratic and repre district character.. They are to be grouped into 15 smallest associittibns,. through which the influence 0:4 the Reserve SUbscribing banks will reach up to the Nationgt the. Weal 'L. Association.. In the clwice of directogsot in weight is associations the bank as a unit ‘ giverk a certa In the case of independent of the number of its, shares.. the individuaL the district associations also the rights of tance are to institution as well as its monetary impor election of influence the number of votes cast in the cdtters of the association. organization it In recommending these principles of under which the has been, sought to follow the system been built up, Government of the Federal Union has r in the ceziaral riot by the concentration of absolute powe s, by which government but by a 'coordination of power the government towns and counties are represented in turn represenIted of ' the States, and States are in their government by their ;Senators and Representatives in the of the Union. runs Another important feature of the plan, which qf direcs througla the organization of the district board on of the National 44ts ?as 'well as into the organizati elecAeserve Association, is a ,special provision for the trial, tion of directors who shall fairly represent the indus the disr commercial, agfieultural, and other interests of s nor trict or country, and shall not be officers of bank er shareholders in the Reserve Association. The numb ve of these additional directors of the National Reser nal AssoCiation is fixed at 12. The'full hoard of the Natio tors, •Reserve Association is to be made up of 45 direc association itself, ' but of these 3 are the officers of the and 3 are .Government officials, leaving 27 to represent sent the local and the district associations and 12 to repre y is afthe business community. Thus the opportunit geforded, and is indeed made obligatory upon the mana de in 'ment of the National Reserve Association, to inclu but who its governing board men who are not bankers nal represent the most important phases of the natio e inchistry and commerce. With the eyes of the entir ng community fastened upon the action of the 27 banki no directors in making these selections, there would be -. ; .doubt, in 'the opinion of the Commission, that repre me memsentative men of the highest type would beco mg board. bers of its fov iplete democracy of control there is no For sue' tliI charter of any Eurppean bank. In provision Zks—as in Russia, Norway, and Bulgaria—the several eat: y all , bank is o4med •by the Government. In practicall other cases, except that of the Bank of England, the nt officers of the bank are appointed by the Governme except 'an have wide powers in disposing of its resources, ,the interests of the upon certain sp&ial points where . of the assets shareholders are protected against abuse °fhb& bank to meet Gpvernment needs. in the manageThe participation of the Government the Goveratnent ment of the association.—Participation by National Reserve . in the management of the proposed 2. .11 the several ea. min • tn iurpean ti.tly 4,1 —a40410KUSSia, Norway, and Bulgaria--the In practically all Other cases, except that of the Bank of England, the officers of the bank are appointed by the Government an have wide powers in disposing of its resources, except ,the interests of the upon certain special points where . shareholders are protected against abuse of the assets ) bank is ownedr by the Government. ofttlie bank to meet Government needs. 2. The participation of the Government in the management of the association.—Participation by the Government in the management of the proposed National Reserve Associltion is provided forathrough at least three different .channels. First, the governor of the Reserve Association is to be selected by the President of the United States from a list, submitted by the, board of directors. This is only a slight modification of the method of appointment prevailing in most countries of continental Europe, where the nomination, while emanating in some cases-from the Grown, comes practically from the minister of finance. In order to guard against unnecessary political influence in the management of the Reserve Association, it is provided by section 20_ of the plan that no member of any National or State legislative0b9dv shall be a director of the National Reserve Association, nor . of any of the branches, nor cd„,any local association. The second point at which the Government comes into close contact with the operations of the National Reserve Association is found in the provisions of section 14 of the plan, that three leading Government officials— the Secretary of the Treasury, thc,Secretary ..commerce and Labor, and the Comptroller of the Currency—hall be members ex officio of the board of directors of the Reserve Association. It is also provided, in section 22 of the plan, that the Comptroller of the Currency and the governor of the Reserve Association shall, be . members of the executive committee of nine, which is to exercise Such authority as may be delegated by the board of directors. The third safAguard afforded to the public against the • diversion of the great powers of the Reserve Association to private ends is the provision of section 23 of the plan, that there shall be a board of supervision elected by the board of directors from among its number, of which the Secretary of the Trgasury of the United States shall be ,ex Officio the chairman. Obviously, with the Comptroller of the Currency sitting on the executive committee and the Secretary of the Treasury acting as chairman of a supervisory committee, every opportunity will be afforded those officials to enforce upon the Reserve Association a broad policy consonant with the public interest. No important 380N MONO. SEC; loans can be granted.;.110 changes can be made in the rate of discount, nor can any, measure of general policy be adopted which is not known to the Comptroller of the Currency through his membership of the executive committee, --and which he may report at once, therefore, to the Secretary of the Treasury and to the President of the United States, and which the Secretary of the Treaur; in his turn ir will not be hound, to discover independently through his position as chairman of the speci41 board of supervision. 3. The limitation of ths-oprofits of the association.—In detemining the rate of dividend to be paid upon the share • capital of the National Reserve Association, the Monetary Commission have gone further than have most Govern• ments in restricting the allotment of profits to shareholders. There has been in Europe during the past 20 years an almost uninterrupted tendency to reduce the proportion of the earnings allotted to the shareholders, but in practically all casets, even where the Government receives, after allotment of a certain amount to shareholders, the lion's share of what remains, the proportion of the remainder going to the shareholders is still sufficient to afford considerable- dividends beyond the minimum allotment. In the plan presented for the National Reserve Association, the limitatiern-iil diyidends to be paid to shareholders is absolute after they have reached 5 per cent. The sharer •1.A..lAolders are first allotted 4 per cent of dividends earned. 4..4 • Further earnings are to be divided, one-half to the surplus of the National Reserve Association until that surplus and one, shall amount to 20 per cent of the capital paid in, ••• half of the remainder to the Government of the United States and one-half to the stockholders. When the stockholders' dividends, however,reach 5 per cent,it is distirctly provided that "they shall receive no additional distribution," but that the earnings not applied to surplus shall IA be paid entirely into the Public Treasury. Obviously,under this provision, the control of the Central Reserve Association by sinister interests would not be directly useful to them from the standpoint of possible earnings. 4. The restrictions upon. the character of business permitted.LL-What: would constitute the strongest safeguard against control of the National Reserve Association for sinister purposes is found, in the opinion of the Commission, in those provisions of the plan which define the classes of business which the association is permitted to do. All through these provisions run restrictions upon loans and upon advances on securities which exclude the use of the resources of the association for any .speculative purpose. In section 38 of the plan it is provided that the association may rediscount for, and with the indorsement of any bank having a deposit with it, notes, and bills of exchange arisof commercial transactions. The meaning of this f n is further defined as follows: language, whenever used, is intended to apply to 10* s and bills of exchange issued or drawn for agricul. 'flustrial, or commercial purposes, and not for carocks, bonds, or other investment securities." manner in which the functions of the bank are to _Jrcised in making rediscounts. and loans .has already diseussed in detail in their relation to existing bank- r commercial transactions. The meaning of this n is further defined as follows: language, whenever used, is intended to apply to s and bills of exchange issued or drawn for agricul-rcial purposes, and not for car'Iustrial, or comme ities." _ocks, bonds, or other investment secur are to manner in.. which the functions of the bank already _rcised in making rediscounts, and loans has l in their relation to existing bank2n discussed in detai e the 4'g methods. It is intended here simply to emphasiz by the, fundafact that where an institution is, restricted ercial paper, mental law of its creation to dealing in comm for short terms, bills of exchange, and other obligations, all 1ie, to invest and has no authority, either express or irnp pt in ,the bonds in any form of long-term obligation exce it could not be of the Government of the United States, even if its manused to promote or sustain speculation, ate indiyiduals, agement were entirely in the hands of priv or to intelligent not responsible either to the Government ly, if possible, is financial opinion. Much more complete sactions in stocks such separation from .speculative tran powers vested iti leading officials .and bonds insured by the torate and by the of the Government serving on the direc nization of the broad democratic character of the orga association. of the financial 5. Position of responsibility at the head Reserve Associasystem.—The facts that the National pivot of the bank! tion had been created,by law as the officers T-id directors ing system of the country and that its down with this had been chosen and its functions laid d strong guarend in view would in themselves affor be perverted from antees that the association would not sed upon it from tliese purposes. It would havg , impo to enlightened the beginning a sense of responsibility h would make public opinion on financial questions whic e its powers, it very difficult for the association to abus bankers througheven if it were conceivable that the local es would look out the country whose banks held its shar would come complacently upon such abuses. The facts ler of the Curat once to the attention ot..t.te Comptrol utive committee; rency thribugh his position on the exec to the Secretary , thej would be communicated by him the United States, of the Treasury or the President of h could be wisely and if.theS? iniiolvedrany proposal whic ion of the country, checked by an appeal to the public opin e officials in persuch an appeal would be made by thes the Constitution formance of their sworn duties under for any such official of the United States. The necessity of the Commission, intervention would, in the opinion that suet' powers be effectually obviated by the tuct:c fact existed. 39 ON MONO. SEC. The governor of the Reserve Association, chosen with the understanding that his functions involved public responsibilities, and that his selection had been.approved I) by the President of the United Statles because was believed to be fitted for those responbilities, wou1d.ha\ e no sufficient motiye for diverting the association from its drgal purposes at the.sacrifice of his reputation and position. His position and obligations would be, very different from those of • the presidenz ,of a natio nal or State bank under the present system, because they, have p practically only one obligation—to make the best possible showing for their ,stockholders. Experience has shown that very different policies will be pursued, even by the sames:man, under different sets of conditions. It is-this fact which gives the asstiram e to the countrAi that a man `• • elevated to the office ofTresident, Just-ice of the Supreme Court, or Attorney General will in those office s sever him.5e1f from -private obligations and prejudices and pursue a policy,,based upon his conception of public duty. In tb office of governor of the National Reser ve Association a man would occupy substantially.-the position of chief justice of the supreme financial court of the Nation, and it is hardly conceivable that any motiv e would find • lodgment in his mind strong enough to swerv e him from a sense of hi-4 public _duty. 6. Publicity of the operations of the associ ation.---The position of the Reserve Association in exerc ising its powers would differ from that of. any instit ution under the existing banking system by the very fact that it would be the focus upon which would converge the scrutiny of the banking and financial comm unity and of the financial press. Just as in Lond on, Paris, and • Berlin the changes in the discount rate made by the central bank, the state of its balance sheet , and any ' departure from its previous establishe d policy are the subject of constant discussion by the best financial minds of the country—by bankers, economists , and editors of financial journals—so a light of publi c and intelligent analysis would be concentrated upon the operations of such an institutipn,,in this country stron ger and more steady than "that fierce light which beats upon a throne." Very different in this respect would be the position of the National Reserve Association from that of the 011 ,existing independent banks , , no matter how large a part they may play in the financial opera tions of leading centers like New York, Chicago, or St. Louis. Whatever may be the interest of a few bankers or experts t? the balance sheets and policies of local institutions, se balance sheets represent only the status of one or few institutions among 24,000, and those policies are !Wed upon in secret conclave by a few powerful indiuals and are rarely disclosed, except indirectly by effects upon movements in the market for securi ,. While much has been accomplished in recent trs by the more severe requirements of the Comptroller the Currency in regard to certain details of bank management, there nevyr has been any attempt by him 0 limit investments in speculative securities ,so 'long as the marviri (If mnrier•t V. one or halance sheets represent only the status of policies are few institutions among 24,000, and those ided upon in secret conclave by a few powerful indiuals and are rarely disclosed, except indirectly by effects upon movements in the market for securi,. While much has been accomplished in recent irs by the more severe requirements of the Comptroller the Currency in regard to certain details of bank management, there nev.yr has been any attempt by him to, limit investments in speculative securities ,so !long as the, margin of market value at a given moment above the amount of the loan- upon such 'securities was adequate. There would be neither legal authority in the Reserve Association to engage in such operations, nor the secrecy which is so essential to their success, r.pr the disposition to undertake them under the form of organization and the powers granted by the proposed plan or under the obligations imposed by the enlightened financial opinion of the country. So far from aiding in the control of credit and currency by any special or sinister interests, it is one of the almost inevitable results of the plan of the Com,mission to remove the possibility of such control. The plan will bring about for the first time a certain degree of unity in the banking system of the country, but it is the unity,whicli will come from the coordination of local banks and which will give them much greater power than before in their relations with the larger banks of the central reserve cities. In periods of pressure these larger banks have to a certain extent been sovereigns, but sovereigns whose means of aiding even their most loyal subjects were not adequate to the demands upon them. For the first time in the history of ..the country it is proposed by the plan of the Commission to confer upon the 24,000 local and neighborhood banking institutions, so far as they choose to become subscribers of the Reserve Association, a share in the management of banking at the financial centers. This Power they will be able to exert through the selection of , the directors of their local associations and of the district branches of the Reserve Association. So long as local associa4ons are able to act with sympathy and a spirit of cooperation among themselves, they will be able to secure financial support, directly or indirectly, from the National Reserve Association, which they have heretofore been able to ask only as a favor from the independent and isolated banks of the ee ntral reserve cities. 40 ON MONO. SEC; Under the proposed new system the existing b:iiks of the central reserve:cities will be shorn of much ci their power over the money market. Whether this power has been exercised in the past in an arbitrary manner, or whether it has seemed at times to be arbitrary bec:iuse of • the deficiency in the resources of the larger banks, such an exercise vf power will in any case come to Ln end. If the new plan is welcomed by far-sighted owners o: officers of the existing banks of the central reserve cities, the reason may easily be found, apart from motives of -dublic spirit, in the fact that these larger banks will themselves be protected against the humiliation and discredit cf suspending currency payments in a time of profound p,- ace and thereby- deranging the entire monetary mechanism, as they felt compelled to do in the crises of 1893 and 19o7. It must necessarily follow from the creation of an institution in winch is centered the coordinated banking power of the country and which will hold a large part of the reserve money of the country that any existing institution in a central reserve city—whatever its magnitude or the prestige of its officers and owners—must be overshadowed by the new institution. With the new institution it will be compelled by banking conditions to keep a considerable portion of its metallic reserve. To that institution it must look for rediscounts in time of need, if it is not to confess impotence to aid its clients and its corresponden t banks. To the suggestions of the governor of such an institution that speculative manipulation has been carried too far by the clients of the independeni bank, and that if it does not extend greater aid to commer ce and less aid to speculation, its facilities at the Reserv Associa e tion may be curtailed, it will be bound to give an attenti ve ear. In other words, so far as there is any truth in the impression current in some quarters, that the existing banking mechanism is controlled, at least at the fountain of credit in New York, by special and selfish interests, the reverse will be true under the new system. Instead of being controlled by "Wall Street," the National Reserve Associa tion will have the means and the disposition to put a curb on Wall Street. It, will overshadow the existing banks and point out to them the paths of conservatism and sound . banking. It will discountenance the diversi on to speculative purposes of funds which should be at the command of commerce, but it will possess the resourc es to protect the money market even from the errors and excesses of the independent banks. The aim and tenden cy of the new system will be t ield into a harmonious and ,efficient wl the scattered democracy r,If the present --banking sy In the ,rield o comPlcial banking it will substit le system of ordered self-government, as it exists in the American political world, for the appeartI ance at recurring intervals of a financial dictato r, without any other recognized authority than that which a strong man commands in time of peril when he seizes the helm V and stears the craft off the rocks. Into the ranks of the country banks the Reserve Association will infuse the spirit of confidence which flows,from the knowledge that V. they are marching shoulder to shoulder, under competent leadership emanating from themselves, instead of each fighting a guerrilla warfare to save himself at the expens e of the ruin of the system and of the busines s community.