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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

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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,

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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,
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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
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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

)
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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.

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5 ON
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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

_-

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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

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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.

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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

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\'#"( 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

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I hi.

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ohli

Ili lc

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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.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102