Full text of Nelson W. Aldrich Papers : Monetary Commission : Miscellany, Reel 57, Box 82, Folder 3

View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

ESON ALDRICH

termid11

111121Wim

-4

41101010

All national banking associations designated as special or tem.
, depositaries of publio money, snbect to oall, shall pay upon
pore*
all sums so deposited not less than one per contain per annum upon the
average monthly amounts of such deposits, under Each regulations as the
Secretary of the Treasury may prescribe; Provide, bmeever, That this
tax shall not apply to the regular and active depositaries of publie
money: Provi4414, furthey, That the rate of interest charged shall be
equal and uniform throughout the United States: and Provided, farther,
That nothing contained in this Act 0111 be construed to change or
modify the Obligation of any national banking association or any of its
officers for the safekeeping of public money.
That a sum sufficient to carry out the purpose of this Act is here—
), money in the Treasury of the United States
by appropriated out of az.
not otherwise appropriated.

Balance of pablio moneTs held in ,special, depositary banks Z12,236,000.
Number of banks, 1007.
Balance of public noneys subject to draft in active and
regular depositary banks..•••••••••.•••••••••••••••• *12,264,513,
NUmber of banks, 424.
lay 26, 1908.

The conditions vt ich require an adCitional vollt-le of money are,
first, the annually recurring (10:•ianet -"or curre:.cy to move the crops.
T is demand occurs from Octoc
moasttro(1.

to January in each

roxilate

Second, an imue tc .-)revcnt co
times of 1'inone.c.1 crises,
- oo.ole
and t•He p

apse c.22d. sericus disaster in

on confidclice is destroyed and baiffs

ro :ov,r(ling currercy.

Any mov,sure
n(2, .

Lnd can be

2•elief

should, if possible3 cover b

c.L.sses of

"rotes to lie issued should be either national hank notes

or United 11ta too notes, havin7• in either case, the same charz.-%c
and ten( r, and

same provisions for prompt

o'-

6tand.int7 notes.

01' c11 t;

as Outs'

The nutes to bo iLisuod by or to t.11(; i)an:s u-ooli the

deposit cf .‘eler..uate

•1.nd to be taxed to such an extent
•

that their

I.- •

wLh,lJ.

say

)1.H,3C -

the de_.u.ne. for 1,71.eir use has cez*.sod.
Coness t...Q.!.ould fix a maximum limit of isime s -Jut

time.v/laun

is -li.ted and the amount to "..)e is:iimod in .:):Lrtic1.11:...i• caseslould Le deterilin•!d

soot! ce,ltra

t',e Comptroller o.7 the

Cu. -ency with the a 3--.1rov1 of t...e Secretary of V.I.

Treb.sury.

acticu of the Treasury o .f.'T'icL:„ls mirTh.t be taken upon the reciu,:st of
officer

ropresentil.-: cicaring-house associations of one or raore

The0:0neral class of securities, say flta,to
C

717.-unicti-i al, or first

.00nds, Eihould be naried in the act.

r..lrod

The cliaructor

and :),;:e uo,c7r of nL.rticular securities to be deposited in ez2.ch case
shou4.d, if this plan is feasible, be decided by the clearing-house
•

associationsof t'le city or district in vide:la-the bank makinr!, the
deposit is locaLed, sabjact to final ap:)rovul
the

T V.(r.,

It :light bo well to hay::

sur-•

t ion r,uaran tee the deposits.

;.,,u,Aar.i.nr,-hot,.se as SO C 111 es'

in this case thv.) securities would,

of curse, -0 kept in the custody of the
maininr,

the Soon) ,ary of

t;fie title re-

the r:ovc:rni'lent•

If 'bank notes are to be used, the limit of issue tc any bank
II
fixed at the amount of capital and uninparied surplus, instead

To insure ,;)/-

a ital [done, as now.
t

\; tiro.

t it mirht, perhaps, be weal to :..(tve

a pl*,)nressive tax, sa:,' . t one rate Icr
L.21
u.don

1.t.,tcd3 .1: r

Lgnount of

oteS

1)vt,n:

prid of not exceedinc;

pei.i.cds•

Thist n

11uitt ions

.be .,:otirecl in Li.n,y raont:r.i.

1- .d not LT:01, to t:Li; not .1') provided for in the act, and perhaps
allli.a11.,;...t.. c1 ,1)
/14 i..1

;

,
e,J •

•....A.,

notes are used, ban'....s thou.1(1

::.11.owed to deposit

of :-..Lny ntdonI bn1:1 ac wiL.A.s1.awlui .1.:ioney, in the Treasury
to effect their retire:gent.

TREASUR'r DEPARTMENT
WASH I NGTON

7hn Worldto prof!n(,t )"

:0;" tbc, cr1411,:ar

tad to :lave nivroximated ;.4,W,24L,S00 711d the pot of Hilver
Z,1ó,123 fine ounces of the dommomial value of 112,120,500. Of
the

stock of gold (estimated) )ecamber 31st, 1906, amountirE;
6,888,900,000
1,593,300,000.
United 2tates
emsnty••••••••••••••••••••••••••••• 1,050,00u,000.
9261400,0n0.
F
959,40,000.
n
486,700,000.
Great Britain..•••••••••••••••••••••
0004400000410.

tnn0341041011005800,41004100044441•000•00

, 44,0•05401,e06454
UE9140460.1144••06460e 0

$4,975,80),000.
Leaving a Varnce frr the
orld of.•••.•.••••••••••••••••••••

1,915,103,W0.

TREA.)URY DEPARTMENT,
THE MINT,

,190

Director of the Mint.

SUBJECT

NO. OF INCLOSURES,

rt
,
/
1
4

' .

.-, •

t. •

- el

Z17 -0

601,805,985

Total circulation
..„.t ion

r" — "1

•

1208

Ja:. 1

•-,••S.•
"

‘A

•

,•

73unk Stutument of Comotrc -' .cr cf Currency, Dec.3, 1907.
U.S. 7:',ondc 77:.:ld to uerlAre c 1cuit±on
U.S. Bone

72,3C9,400

held tL sc-urc dr:.;osits

U.S. :7- onds hold "0:: trust col.:17.0nius

,329,n70

714,32,682
Tot,1 "J.• S.

rufothndir- ,)ec 1/07.

8581(4-15,1,10

A-4
Oh-d-Z—
obi
z €74/
7.t7
-AL

•4
4.11,1.- tt/
Ir4:7-

9yui_ t_et ttL-,„
1
Lr-t-'2

efoOt-%
,
-

ct,4

n
04-a

4,v-1HM

( 444

4 1-

et.r

z
Int

tr77t.„.

/A42k

Le_

/t;

Lie7i-c)

L
r

)
71
;

L-L- c'L- L.-v,- ,t_ Z rt...L,

zi. .(
1.,‘,‘....-

1
4-t-4

'
f er7•.
,.:-- 0a

d
71.4-4-14../ (U2- eitA....e..-&--0
4P---fr ,

t,--de____

(7747

, .
/vt kr-7-1,A.

ad 142L et/
/•
76-

,1_,
Z
rzzz
-i
'7-

,t-f /•

3.4

eAA.A7C--€AA c-c-1

(>7.41_‘t (4-tA-1.1

tAt-

fiaz

4:N-4-4-4)

-t) 4"./fr

41-0

411V1 216-1
'
-4-

airzt,.-t-411)
Z-e-0>4-trx-cy

"tfyi

P--11
A.'
V:afx44, ai•44
A_

Ca-4-441-0

4.4.7

it;;

/CA-LA-d

t-t

la,'d1ctc.

zA_Ar

tid.„..A...4v

a_
4,ru.e
CV

/fin

eir-)1.5vra,fA4

SI4Ager still

holds its position as a money metal

in spite o

anti-silver laws

)71,44
70

while it has been to some extent degraded and de led the privilege

of soinage and 1egal tender in certain nations

02‘

4
.31,1

(c.
,
&clA
9
01

••

•

4%;:c-.)

Cfr.e.

±77

6._

Gt-

0
_
/
71-

14,
--4-2
A
,
ktA

A-1.;;4-

"rz.4.-crY1-1__

91,--frt-e7

e,710A

/IL
k
j

•
- C-7/
;
A4fr

K/17/

40.-

c/
p-v—x,01

.c
e...-Z_.4e4
.4...e...)

,PAA___42-4-4t-t

0
C:N.7

..F (-1.---7,-"VVL4..k.07
,

i
1t. --

(2_

(het. LI
FFL N-k4,
S-ca *47-v-

ett.p.,a‘c

41A. ri.3,

eh% vp%.4-41

(fvu..ti

cat,11--rAl /3 4- ca-4,
--dpg-

4,v-it/vt."

er, t-

/ij;12 4t,"-ty
•

Professor Nicholson in his recent work on Money and

Monetary Problems, says:

The value of the precious metals compared with

commodities, in other words, general movements in prices, and the

relative values of gold and silver which largely deterNine the

course of trade between gold and silver usiqg colintrdes are now

more than ever beyond the power of any single nation to control.

•

'"kt

jzi-44-ATC)

01_1-

44" &iv evx-rp
g 01; IttA-(t.

4441

‘,/IC

ftLt

4r44. 'Lea- c€A4

gel

4;ft.tiX4L-i---t-

fr*frayliael I 447 lAgAl

• ,
rfpne

I
(

ieL

-€_7C/a-e•--1-t

YA_

4- ,,--teL,0t)
iazt-

e 1._

4J1.-

•

,
X
?

ZZI

44A.

C1/4".

rej

cc-a-4

fLJ“--1-;te:t
(.1

zeLl--&-.

Ciev..-4----e"-4AL-47

c..-‘2% .4.--a-(2

7ree/C

C - 1

•

Caé

ot.41duleA.-f,Y 1- if-14fraz---.../
1
4 I

7A-44—)C,

Z-4

•
- I

--'--4--

;
C.- 7
(

gri

41/21-,

k Lel-4

e--C

d rec.

Eee-

02
17-1/7

!
r,

Z-a

0--

-12.4

Gee_ --t-

CAL"' ,

A-)

1-7

Cae
< 0,14a'
11

.G9 4.

r
4.1
dt

-74

It
fr"

„

.)"-cvw.lp

400+t

-11-

)""'":7Z-”

2
1

d
)
112

11,7

v-L.-

ci-71- wt.1/
a-e3_.jT

)7-

1,-"saLl
9
1)

—Air' •

71/

A.4 ‘,2_,„_e
C4-14424,4,

ete

)"
A
l

aar1irmes.6_

7t'z'", ,

42--dr

fyx

10L-42—A091

%1
7"l_ 44- tEX:
4(
-04

42.4-

-C
"
C1'

•.7

244:44i--"?

--4-‘14:-

ear4_4_,

lc,

1-17

c__-

-- •
e
W-C‘;'4.

)(t)
ordtfP,i44„
•

ca.- CA-

•

I
A ay

--oftra

/114r1 ILA/
L-

/Jac-, aLe-g:71.4)

dth_LO

43..
-4
.
-

A--cr/A--/

4rr-t-

44, Ifr £04-4-t it/fist/ft ene44

01140-4

i-1447;4.

1,
AA". at

4,4144.

•

kir

di/

•

NIS

•

•••••••••-.

)/7

(>3

)

Ace„alat.4.,,

••.

)
1
„.

tt_ -

%LK..

r3-7 ,a-go

11t-4.1

A,L

‘‘(

.,"-rissuaLj

l'ILI/L1r)t-)

ri44-1
4--t_ex_4_ t_
/
4c-:f 2E"

aier. •

er-E? e=die
)
f%4

41,1

,
or

7-L-ov-z
°
Pz-0

e•-e/
4
t-‘-

/41A—A
6
--Y
.

7
cLf

Z._

,&44/00c
ntc-7-LA- ackx
•

• It;
norP4,

1 /1

tit
Y7
1

•

1.2e4.7
,
(
-41,41.7

7
‘.
z

7st---trZeti

c._ _<,_ L

VLE,04
c_ee414_, •ce-LAz-k_
z-‘1

e-e7 0/1-eia
tit-v

opi
410,

clo

•

(14.42.c.

iz&
_AD4
,

c . kz

77L`Z_.i-A--1"--4-‘---

%.-

77 444'14

XV‘ Cc
4
6

‘44

71„EA

44.9

47.

e-P4

e—v7;-'7
4;4._

7-vs

Z4E-1

da4&.6it:- to. ci

C-r--fru4-ce—f

211

..P

042,17,,

deicaz,,e

con.1.4.1

L /4z_

9
-11AL.

11
.̀ `

A
'7
7•CftC

4.-1e7

aN- •r

/
•

et7 d4-i-C-e---;)

414
°0
11/tk

•

..4.44410

131-

•••

jjj

cLA
C.CTZA-•o914.-4I'LL1.4LAd
6 147ritr.

•LE/

-4- 114L-11S-401-4.-

L
,

ry•

Cart
,
-,c-r-

0.).

vCt 'iv Lt.t_q
'

4)--) a'1914-4- e

trY.

1
„
12
.
10
„/
C11
.
9
f
."

arvi

424.4_ (AZ

4--

l/v`

4-.4...*Ze--C

ex_

dre-J

Ive t.,,k. ,._.._
iLi

•
I1.4.,

-'4.

-1
)3"-

e.C%-::

hAIAA-1

v:Vi...) j17
A (.1

•

Jct

, ( A.... .._

Z%.....

4,,..-

C-0")1.4.A.%....

-cA

/
.. ,

7,L'-C-f/L
%.

(

C7CLIZ-Lt-A-1.-41-

4
C-10%A.A -

t‘,

`Ak`-`

cA/k.

jfc

ZI
L1

AN. c

eti

t2-4.%))

do,%.4v&MNA.-

%.12
t.".iL
t-

et-c-t-A-4:111

3--A.-J.-

eth,,1
et.71

agiA (2,

-12-47 -4-4.4-

„

7.,
7
C.0-4-41C--

•
‘4*
-1

4.6
cr5i

742e-i-fer-it

/i7

---34
4
4e

24/

f' c

•

4
-4

04,

/c17-7ff

4-7
•
GILA

1147---7)

/
)
I
OMNI.

•

/6- zi

017‘A._

(-Zr)

Py-t-v Lie

111

a-v7
,)

)

b) )
I

7-eirt,-Y71I

(11

renx

_0 a

17v.
Z

Q's /J-/ r/ 1

"
N4
4.%44

4772(/,

—7

r---ne
rar,

LYJ

,7-72

"INP

0
.1

‘/1/ isv
)7v ( 17

j
1/ .7)
-

-1?

.Y/

(
17'./
1

,
2
7d ;(

/1 1/

?'"

rip Yr'ir

1ø
"
0"1-t,

_c) —

"77-770-(6 (

1
,—
,

(
-Eli -Av-7
04
)

-1f
f

..J,7v17

Ar •4`

.1 -7

V"'"*".7

LL
)

)

.57r-- 7
74-

acz

*3-‘)
'

I-a_

0L1/

'Pk

f27i
>74aL2
/
.11

19r<431.--

(7-ta

coe—rf)-11
,
1,_a-

z-e,t

(741

eAr

Atftr..e..-4c-

147:

111.
4
Z

Ars-C

el0-

GLe-43.
c.7

fa_g_17.

4.4-44)

c.-

iiCrY

Ifr

isf-7,40

. o51-de_42,CDLL
7

•

-7

z)'

PUBLICATIONS OF ME NATIONAL MONETARY

oozassioN

*************

I - MISCLILANEOUS
Interviews on the Banking and Currency systems of England, France, Germany and.
Switzerland.
(430 pages)
>(The Public Debts of Great Britain, Germany and France, by Francis J. Hirst.
(Galley proof, 19 pages)
Articles: :
g tc, Discount System in Europe, by Paul Li. 'Wartirg. (43 puges)
"BaLk Acceitances, by Lawrence Merton Jacobs, (18 pages)
II - UNIZSD STATES
'Statistics for the United States, 1857-1909.
(260 pages)
Digest of State Banking Laws, by S. t. Welldon. (Galley proof,
pages)
PIrticle: History of the National Bank Currency, by Alexander Dana :oyes.
(Galley proof, 6 pages)
III - CANICA
Hiztory of Banking in Canada, by Roland Morton Breckenridge. (310 pages)

Iv - mcflarip
The English Banking System, with a chapter on the London Stock Exchange,
by Hartley Withers. (1X pages)
}<Statistics for reat Britain, 1867-1908. Prepared by R. H. Inglis Palgrave,
F.R.S., and "The Economist".
(Galley proof, 67 pages)
V './`volution of Credit and Banks in Fraace, from the foundint; of the
until the present time, by Andre Liesse.
(271 pages)
)(The Bank of France in its relations to National And International
Maurice Patron.
(Galley proor, 54 pages)
t‘
r,
4tatistics for France, furnished by the Credit Lyonnais. (Galley
he History and Methods or the Paris Bourse, by 7.Vidal. (Galley

Bank of France
Credit, by
proof, 26 pages)
proof, 65 pages)

VI - BLLGIUL
The National Bank of Belgium, by Charles A. Conant.

(238 pages)

VII - GLflMAY
Y The Great German Banks and their Concentration in connectior with the Economic
Development of Germany, by Dr. J. Riesser. (Galley proof, 6t3 rages)
VIche Reichsbank, 1876-1900. (Jubilaumsschrift, (355 pages)
tZ4,Stat1stIcs for Germany.
(Galley proof, 56 pages)
N Gelman Imperial Banking Laws, edited by Dr. R. IP:Doh. (Galley proof, 72 pages)
X/ Miscellaneous Articles on German Banking. (Covering the organiz,tion of credit,
directors' fees, the land mortgarse ass)ciations, the savings banks,
the co-operative societies, etc.) (Galley proof, 93 pages)
In Re: Renewal of Reichsbank Charter. (Including articles covering the renewal
of the charter and discussions of this subject in bankers' conventions
and elsewhere, with a draft of the bill) (Galley proof, 83 pages)
k(he Bank Inquiry of 1908: Stenographic Reports. (About 900 pavs)
)(Selected Documents on Bourse Legislature. (Galley proof, 33 pa:ses)
VIII - 3?4T Dr
The

Swiss

Banking Law, by Dr. Julius LalAriarlyl e

(2.12

***********

)c Development of the German Banking System, by Robert Franz. (Galley proof, 33
pages)

,, ..
0.0•41.0T4IIMI.r........\\14

In t:-)e fa7;.e of the record I have disclosed no political

party can afford t.e- place new and unneceusary burdens upon

the industries and people of the United States, and I
should

regret extremely if the party of wL.Ich 1 ac.

member shuuld

assue any silch responsibility.

04)4011'...*No7v.?
-4,
•••

.
".44.

•V.

•

.77

P.,..'1
- ••••••:7“j•

..4(•

h.,4.• • •

.4"44".
iwwiskSP'

•

Pt*
,

411111111111111111110.

lb%

1.111.11%
.

t—HERRICK—ANNALS—
THE PANIC OF 1807 AND SOME OF ITS LESSONS
BY MYRON T. HERRICK,
Chairman of the Board Society for Savings, Cleveland, Ohio.

Every American panic has been characterized by very similar
events, which have followed each other in like sequence,—about
as follows:
(t) Failure of an important bank or institution,—Ohio Life
Insurance and Trust Company in 1857; Jay Cooke & Co. in 1873;
Mitchell's Bank, and the Erie Railroad in 1893; and the Knickerbocker Trust Company in 1907.
(2) Heavy withdrawal of funds by depositors, and the failure
of many financial institutions.
(3) Demoralized stock market,—affecting banks and depositors alike.
(4) Hoarding of money in large amounts, not only by individuals but by banks, and the partial refusal on the part of banks
to pay out cash, resulting in a premium on currency.
(5) Large importations of gold,—$15,00o,000 in 1873; $56,000,000 in 1893; and over $too,000,000 in 1907.
(6) Gradual improvement in financial affairs, resumption of
specie payments, and disappearance of premium on currency.
(7) Acute trade reaction, discharge of many thousands of
employees, and realization that the country must pass through a
more or less severe industrial reconstruction.
The present financial disturbance apparently had its inception
on the 15th and t6th of October, when it was first known that the
Mercantile National Bank, of New York, was in difficulty. The
embarrassment of this bank was closely connected with an operation in the stock of the United Copper Company. The stock of
this company, which had declined severely, because of the fall in
the price of the metal, suddenly advanced, in a few days, from
thirty-seven to sixty, by reason of an attempt to corner the stock.
Unfortunately for the operator who was engineering the transaction, stock which it was supposed could not be delivered was
produced, and the firm of brokers backing the deal was obliged
to suspend. So far the episode differed little from an ordinary
stock market fiasco, but when it was known that the Mercantile
National Bank had supplied the funds for the attempted corner
and was embarrassed thereby the affair took a more serious turn.
The bank was examined, found to be solvent, and help was extended to it. Up to this time the public was not much alarmed,
but on Monday, October 21, the Knickerbocker Trust Company,
one of the largest institutions of its kind in New York, made an
appeal for assistance, which was not granted and the company
closed its doors at noon the next day, after a run in which more
than $8,000,000 was paid over the counter. The failure of this
large company demoralized the stock market. Call money advanced
to 70 per cent and many stocks sold at new low records. Depositors in other institutions now began to lose confidence and commenced to withdraw funds. The Trust Company of America and
the Lincoln Trust Company, both solvent institutions, were subjected to severe and prolonged runs. In the week following it
was estimated that $4o,000,000 was paid out by those two companies. At the same time Western banks began to make drafts
on their New York depositories and during the week of October
21st, $14,000,000 was sent from New York City to banks in the
interior. The withdrawal and hoarding of this vast sum by banks
and individuals produced a most acute condition. On October
24th the panic on the Stuck Exchange seemed almost hopeless.
Call money was practically unobtainable,—only a few loans being
made at 125 per cent. At two oclock, when the demoralization
was at its worst, a bankers pool headed by J. P. Morgan loaned
$25,000,000 at to per cent,—thus tiding over a situation fraught
with the gravest danger. An appeal was made to the Secretary
of the Treasury for additional government deposits and gold in
large quantities was imported in spite of the fact that the Bank
of England, to protect its gold reserve, raised its discount rate to
7 per cent, the highest in thirty-four years. Before relief was obtained from these measures, the reserve of the national banks of
New York City had declined to more than $54,000,000 below that
required by law. This was the largest deficit on record. Clearinghouse certificates were authorized to settle the balances between
2 per cent was paid for currency.
/
the banks and a premium of 31
The disturbance which, for a time, was confined to New York City
gradually extended and banks in most of the larger cities were
obliged to use certified checks, clearing-house checks and clearinghouse certificates to make up the deficiency in currency caused by
its withdrawal from circulation.
At present, so far as the banks are concerned, the situation
is gradually improving. Money is being brought from its hiding
places and is again finding its way into the bank reserves and the
premium on currency has disappeared. The deficit in the reserves

•

-ika,

• .....4.-P•••.
v

11....•-•••••.“."1•41.4.•

t.,•-• V

l &&&&&

%.1%.1."Jak11...3

401.11ll

1,44...J1ll

All

large quantities was imported in spite of the fact that the Bank
of England, to protect its gold reserve, raised its discount rate to
7 per cent, the highest in thirty-four years. Before relief was obtained from these measures, the reserve of the national banks of
New York City had declined to more than $54000003 below that
required by law. This was the largest deficit on record. Clearinghouse certificates were authorized to settle the balances between
the banks and a premium of 3Y2 per cent was paid for currency.
The disturbance which, for a time, was confined to New York City
gradually extended and banks in most of the larger cities were
obliged to use certified checks, clearing-house checks and clearinghouse certificates to make up the deficiency in currency caused by
its withdrawal from circulation.
At present, so far as the banks are concerned, the situation
is gradually improving. Money is being brought from its hiding
places and is again finding its way into the bank reserves and the
premium on currency has disappeared. The deficit in the reserves
of the New York associated banks has been made good and for
the week ending January 'all a surplus was reported for the first
time since October 26th. The statements just issued, pursuant to the
call of the Comptroller of the Currency are, under the circumstances,
unusually good, showing most of the national banks to be in normal
condition, many of them holding a reserve in excess of that required
by law. Two facts evidence the widespread extent and the violence
of the panic. The premium on currency continued longer than in any
other period in the history of the country and with a single exception
it has taken the New York banks longer to repair the deficit in their
reserve. One of the most striking features of the panic is the remarkable way ill which the banks have stood up under the strain.
In 1893, tho national banks failed, while in 1907 but twenty-one
were obliged to suspend, a number which has been exceeded many
times in years in which there has not been a panic.
Such, in brief, are the salient features of the history of the
past three months. If these facts afford an adequate explanation of the disturbance, and if from them alone we are justified in
drawing a conclusion as to its probable length and extent, it would be
safe to say that within a few weeks at the most industry would
return to the highly prosperous state of a few months since. Such
a conclusion, however, is not warranted. The course of the events
of the immediate past is undoubtedly but the surface indication
of a deeper and more important economic phenomenon. This belief is strengthened because we now know that the striking events
of past crises were but outward manifestations of industrial and
financial conditions. When the history of the panic of 1907 is
written and its significance fully appreciated, it will undoubtedly
rank with the epoch-making panics of 1893, 1873, 1857 and 1837.
That the sequel will be similar to that following any of these other
critical years, is not at all likely, for the immediate circumstances
that produce a financial or industrial panic are never the same, and
it is these circumstances that determine the direction that the
disturbance is to take as vell as the duration and the severity
of the depression that usually follows.

2—HERRICK—ANNALS—
The periodicity of crises is undoubtedly a psychological phenomenon and is an expression of the rhythmic movement between
hope and despair, optimism and pessimism, that has ever characterized society. So long as a man is a creature whose judgment
is largely determined by his feelings, we are bound to have recurring periods of prosperity and depression. The form that a
crisis in modern times takes is, to a large extent, fixed by the existence of credit in many forms and by the existence of the great
accumulation of loanable capital. The crisis occurs when credit
has been unduly extended and the supply of capital exhausted or
so involved in unproductive enterprises as not to be available. In
every period of business activity, capital is gradually absorbed,
there is a heavy demand for funds for investment in new enter\s these new enterprises take form and develop, there
arises an increased demand for all sorts of labor, from that of
the lowest grade manual labor to that requiring executive ability
of the highest order. Prices rise, partly because of the increased
cost of production and also lw reason of the greater demand on the
part of better paid labor. The rise in prices, however, is always
()tit of proportion to the rise in wages and thus the ability to save
and create new increments to the store of capital is curtailed. If
the absorption of capital is not lessened to meet the diminution
in its creation, the time must surely come when the supply of capital is entirely inadequate to the demand and going enterprises are
then severely hampered by inability to obtain funds sufficient even
for ordinary betterments. It has probably never happened that
such a situation is appreciated ill time to gradually and easily
curtail capital expenditures. It is of the nature of man to he
swept along on a current of optimism, oyerdiscounting the future
and investing large sums in enterprises whose present worth is
largely overvalued. It is only when the breaking point is reached
and the crisis is at hand that men come to a realization that credit
is unduly extended and capital exhausted.
Since 1897, the year in which were recognized the first sure
signs of the present cycle of prosperity, the train of events has
followed pretty closely the lines just indicated. The average of
prices in 1907 was higher than at any time in over thirty years.
For more than a year past, not only new enterprises, but old wellestablished industries and railroads have found it almost impossible to obtain the capital requisite to procure the equipment essential, because of the great trade activity. Some time since, many of
the important railroads found that the only method by which funds
could be secured was by the sale, at a discount, of short time
notes bearing an untisually high rate of interest. From 1896 to)
1907 the proportion of capital of all national banks to) deposits
has decreased from $1.00 to $2.46, to $1.00 to $4.82, and the proportion of reserve to deposits has decreased from $1.00 to $5.13,
to $1.00 to $0.16. The aggregate resources of all banks was reported in 1897 at $7,822,000,000, and in 1907 at $19,645,000,000.
On August 22, 1007, the loans of national banks amounted to $4,678,000,000, the largest total on record. The percentage of reserves
to deposits in national banks has shown a constantly declining- tendency from 1894, when it stood at 32.7 per cent, to 1907, when it
was but 21.33 per cent. In 1896, banks of all classes reported
individual deposits of $4,000,(x)0,000, with cash holdings of 10.72
per cent. In 1906, the banks of the United States had deposits
of $12,000,000,000, with cash reserves of 8. per cent. Moreover,
within the past ten Years, there has been an enormous destruction
of capital. The Boer War, the conflict with Spain, the RussoJapanese War. the Baltimore fire, and the destruction of San
Francisco, involved a waste of capital so prodigious as undoubtedly
to weaken the stability of industry the world over. These facts
and figures are representative of only a few of the indications of
an overstrain on the capital and credit of the country.
If, then, what we have experienced in the few months just
past is a real economic crisis, is there anything- in the condition
and circumstances of the country that would lead us to believe
that the depression that always f, hi,,ws stich a crisis is to be of a
comparatively short duration and of less than usual severity? For
the sake of comparison, it is well to take the panic of 1893, inasmuch as the organization of industry and credit at that time was
more like that of to-day than at the time of any other crisis in the
history of the United States. In almost every respect the country
is in better condition than it was fourteen years ago). .)ossibly
I
the most important factor is the status of government finance. In
the six months from January to June, 1893, the excess of government expenditures over receipts was $4,198.((x), and during the
fiscal year ending- June 30; 1894, the excess increased to $09,0(x),000. It was even necessary to) encroach upon the gold reserve for
s., 4

.1 •

past is a real economic crisis, is there anything in the condition
and circumstances of the country that would lead us to believe
that the depression that always follows such a crisis is to be of a
comparatively short duration and of less than usual severity? For
the sake of comparis( n, it is well to take the panic of 18()3, inasmuch as the organization of industry and credit at that time was
more like that of to-day than at the tune of any other crisis in the
history of the United States. In almost every respect the country
is in better condition than it was fourteen years ago. Possibly
the most important factor is the status of government finance. In
the six months from January to June, 1893, the excess of government expenditures over receipts was $4,198,000, and during the
fiscal year ending June 30; 1894, the excess increased to $69,000,000. It was even necessary to encroach upon the gold reserve for
current expenses, and for months this fund was less than caution
and prudence demanded. To-day the government has a working
balance of something like $2oo,000,000, and while expenditures are
now in excess of receipts, due to decreased imports, the balance
in the treasury is so large as to afford a safe margin for falling
revenues. The currency of the country is now safely on a gold
basis. In 1893, the money of the country was in a chaotic state,
because of the coinage of silver dollars under theland Act, and
of the issuance of treasury notes of full legal tender to pay for the
4,500,000 ounces of silver bullion purchased each month under authority of the Sherman Act of 189o. It was only when the panic
was well under Nvav and the harm done, that Congress was sufficiently aroused to repeal the Sherman Act. Even after this pernicious measure had been wiped from the statute books, the sentiment in favor of the coinage of silver was so strong as to unsettle
confidence for several years. The apprehension that existed, both
in this country and abroad, as to the ability of the government to
maintain gold payments, was one of the fundamental and effective
causes of the crisis of 1893. This fear led to a rush to realize on
all sorts of property before gold should disappear. British and
other foreign investors hastened to get rid of their holdings before
the distrust became so general as to cause a severe fall in prices.
The excess of merchandise exports in 1892 exceeded the imports
by $203,000,000, yet so great was the liquidation in securities of this
country by foreigners, that we exported more gold than we received,
by $495,000 in that year. Too much emphasis cannot be laid upon
this point of distinction, that in 1893 we were threatened with
repudiation, whereas, in 1907, the whole world has confidence in our
ability to pay our obligations in gold. As a matter of fact, the
favorable condition of the finances of the government, the stability
of banking institutions, and the soundness of our currency and
niGnetary systems, distinguish the panic of 1907 from that of any
other in the history of the country. In 1837, speculative prosperity
led to an enormous increase in the note issues of the state banks
made possible by Jackson's destruction of the second United States
lank. Mud! of this circulation rested on inflated assets, and when
the treasury issued its famous specie circular, July, 1836, requiring
payment tor public lands to be made in specie, the complicated
credit structure collapses. The panic of 1857 was precipitated by the
VICIOUS banking systems of the various states. In only a few states

3—H ERRICK—AN NA LS-was the least attempt made to limit bank note issues or to see that
the notes had proper assets behind them and the result was inevitable. The enormous issues of government securities, greenbacks, etc., to carry on the Civil War, resulted in overstimulating
industry and unduly inflating prices. The crash came in 1873
when the maladjustment of production to consumption broke down
the credit structure already overstrained.. In recent times railroads
and railroad finance have played an important part in every economic crisis. In the last decade, the increase in the mileage of railroads has been comparatively small and what expenditures have
been made have been for the improving and extending of established lines rather than for the building of new roads into sparsely
settled and undeveloped territory. The gross receipts of railroads
are larger per capita of population than at any other period in the
history of the country, and this is true at a time when rates have
steadily decreased. There can be no question that our railroads
are now on a most substantial basis. In 1894, there were 156 railroads operating a mileage of nearly 39,000 miles, in the hands of
receivers,--among them were the three great systems,—Erie, Northern Pacific and Unit m Pacific. It is inconceivable that any such
calamity should overtake us now. ( )f course, it is unsafe to predict the ultimate effect of the falling off in business on the earnings
of railroads, but we do know this, that it was the poverty of the
\Vest that caused the railroad receivership in 1893, whereas, today, one of the most reassuring signs is the great strength and
stability of the agricultural districts of the West. In 1893, the
railroads served a population of 66,000moo. They are now called
upon to transport the products of 86,000,000. The world's output
of gold has increased from $147,000,000 in 1892 to something over
$400,000,000 in 1907, and the fact that the balance of trade is now
well in our favor will enable us to secure and retain at least our
share of the new metal with which to strengthen our bank reserve.
The export of breadstuffs in November was of record proportions, the value being $24,700,000 this year against only $15,416,000 for the same month last year. This is the first panic year in our
history when exports exceeded imports. For the year ending June,
1893, the import excess was $18,70o,o00, and in 1873 and 1857
the import excess was the largest on record. For the fiscal year
1907, exports exceeded imports by $44(,000.000. which places us
in a very favorable relation to international exchanges. In 1893,
the exports of gold coin and bullion exceeded the imports by over
$87,000,000. We have had bountiful harvests, and the prices of
all products are high. The reverse of the condition obtained in
1893, when cotton was selling for 8 cents. wheat for 70 and
corn for 48. The farmers of the country are especially prosperous,
they are lenders, not borrowers, as they were fourteen years ago.
These are but a few of the circumstances that distinguish the situation of to-day from that of the last economic crisis. The aftermath
of the panic is now becoming- apparent in the lessened bank clearings which are running about 30 per cent below those of last year.
Prices of commodities are already substantially less than they
were four months since. Each of the last three months has recorded a decline in the average price from that of the month preceding, aggregating about I I per cent. Funds are already showing
a tendency to flow to reserve centers, and it is quite possible that
in this respect, the history of the panic of 1893 will be repeated.
In February, '894, about six months after the panic of the preceding July, the surplus reserves of the New York banks amounted
to $111,0m000, the highest they have ever been either before or
since. The gross earnings of some railroads have declined 50 per
cent, and the average decrease for all the railroads of the country
for December was over to per cent., The decline in railroad
earnings can be attributed only in part to industrial conditions.
Unwise and drastic state laws are haying a most serious effect on
the earning power of railroads. Already two large railroad systems have been obliged to ask for receiverships. It does not seem
likely, however, that these decreases in industrial and railroad
earnings will reach dangerous proportions and it is altogether
probable that a few months of lessened industrial activity w ill re_
store the eq0;libr:.01 between the demand and mipplv of capital and relieve the strain. Ikluch, however, depends on the good
sense with which the people meet the situatit )n. and the extent
to w hich they retain their confidence in the basic stability of the
country's industry and finance. The people, so far, have faced the
changed conditions wisely and bravely.
Every such crisis brings into prominence some weak spot in
industrial or financial arrangements. The incidents of the past few
months have clearly demonstrated that our currency system is too
rigid to meet the varying demands made upon it. It seems to have
been a part of the sequence of every panic that an insistent demand
should be made for an increased volume of currency. Mr. Bolles,
.0.... "mi.
„
r

LCI 11N

*Set V 1.:

t,,•-•1

Lk,

CL,11",

/AAA

i •

•

••

likely, however, that these decreases in industrial and railroad
earnings \yin

reach

dangerous proportions and

it is alt( g-ether

probable that a few months of lessened industrial activity vill restore the equilibrium between the demand and supply of capital and relieve the strain. Much, however, depends on the good
sense with which the people meet the situation, and the extent
to which they retain their confidence in the basic stability of the
country's industry and finance. "Ishe people, so far, have faced the
changed conditions wisely and bravely.
Even- such crisis brings into prominence some weak spot in
industrial or financial arrangements. "Ilw incidents of the past few
months have clearly demonstrated that our currency system is too
rigid to meet the varying demands made upon it. It seems to have
been a part of the sequence of every panic that an insistent demand
;hould be made for an increased volume of currency. Mr. Bolles,
in his financial history, says of the panic of 1873, -The number of
remedies was marvelous, the financier suddenly appeared everywhere, and maturing his plans at a sitting, forthwith sent them to
Washington.- In 1873 the demand was so urgent that Congress
passed a bill increasing legal tender notes by $44.000,000, a project which was wisely vetoed by President Grant. After the panic
of 18q3, the people persuaded Congress to give its approval to a
measure providing- for the coinage of $55,000,000 of silver, but
President Cleveland followed the excellent precedent of Grant and
blocked the bill b\ his veto. I toth of these measures were the
result of the clamor of an excited people, made desperate by distress. in the present instance, the demand for a more elastic currency is not the result of the pending disturbance, but the need for
sonic change in our currency system has long been recognized.
The currency famine of the past few weeks is only an exaggerated
form of a trouble from which we have long suitered at the cropmoving period. What is wanted is not an increased issue of permanent inelastic currency, but authority for the banks to put into
circulation, in response to the demands ot trade, a bank note that
will return to the bank of issue and be canceled as soon as the need
is satisfied. A system of bond secured notes fails to adequately
satisfy the need for currency for four reasons:
) It is inelastic. (2) It lessens the loaning power of banks
by the amount invested in bonds. (3) It tends to withdraw funds
from the locality where needed to the section where funds are
cheap. (4) The volume of bond secured notes is determined by
the price of bonds, rather than by the commercial need for currency.
The system of national bank notes in this country, secured by
government bonds, is essentially irresponsive to the demands of
trade and commerce. The need for additional currency is most
urgent in the fall of the year, from August to December, and vet
from 1890 to wo(), a period of sixteen years, there was an actual
decrease of bank note currency in the fall of three of those years,
and in seven of those years the increase was not more than $3,000,000, whereas an expansion of $2o0,00o.000 would not be excessive.
In Canada, with a population of less than n.000,000, there is an
expansion and contraction of about $20,00o,000 in the fall of each
year ; and in Germany the amount of currency varies about $120,000,000 every three months. This inelasticity of our currency is,
in its final result, a tax on the agricultural interests of the West,

4—HERRICK—ANNALS—
for it is there that the demand for currency is most insistent and the
inability of the banks to meet this demand is indicated by an increase in the rate of discount at certain periods of the year. Even
in the face of great emergencies, bond secured notes have failed
to expand in anything like the amount they should, and whatever
expansion there has been has usually came after the crisis was
past. On June 1, 1893, New York banks held a surplus reserve
of $21,000,000, and the volume of outstanding bank notes was
about $177,000,000. Ity the first of August of that year the demand for currency had become so intense that the reserves of the
New York banks showed a deficit of $14,000,0oo, a loss of $35,000,000 in three months, and yet the outstanding- bank notes had increased by only $5,000,000. Ity September 1st, when the urgency
was past and currency comparatively plentiful, the volume of bank
notes began to expand rapidly, reaching- $2o9,000,000 on November
1st. In October, 1907, when currency was being hoarded and bank
reserves were far below the amount required by law, the volume
of bank notes increased by less than $6,000,000, but in November,
when the situation was improving $5o,000,000 of bank notes were
issued. Not only do bond-secured notes fail to expand in volume
when needed, but they fail to contract ill proportion to the lessened
requirements of trade incident to the depression following a crisis
and the result is redundant circulation and exportation of gold at
a time when it is particularly needed in the rehabilitation of industry. Of the panic of 1893, Professor Joseph Johnson says, "During 1893, the fours of I9o7 sold down to 113, and the banks added
to their circulation $37,000moo. During- the months of June, July
and August of that year, there was a most urgent need for an expansion of the currency, but (luring these months the new national
bank notes (lid not appear. Not until the panic was over and the
money was piling up in all the financial centers, a drug 011 the
market, did the increase in the national bank note circulation take
place. As a result of the panic. business being depressed, the
interest rate on prime commercial paper during 1894, 1895 and
1896 was between 3 per cent and 4 per cent. The money supply
of the country was in excess of its need, and gold was exported in
large amounts.- I tv the amount that a bank is required to invest
in bonds to secure circulation is its loaningf over curtailed. The
statement of a bank with a capital of $2(x),000, deposits of $5oo,000,
and bond-secured circulation of $toomoo, would he as follows:
Assets.
Reserve
Bonds
Loans

Li(1bilities.
$125,000
[mow

575,000

$800,000

Total

Capital
Deposits
Notes

$2oo,000
500,000
100,000

'1()tal

$800,000

If, however, the same bank was permitted to issue notes based

on assets and secured by the same reserves as deposits, its statement would appear as follows:
.1ssets.
Reserve
Loans

Total

Liabilities.
$15o,000
65o,000

$80o,o0o

Capital
Deposits
Notes
Total

$200,000
500,000
100,000
$800,000

From these two statements it is apparent that the loaning
ability of the bank is lessened $75,000 by a needless investment in
bonds. The need for currency is greatest in rural communities
where capital is scarce and rates of interest high and in so far as
bonds are purchased to secure circulation, are such communities
deprived of capital of which they have need. The amount is loaned
elsewhere at a low rate of interest, in the form of investments in
bonds. The record of the volume of national bank circulation,
since the passage of the National Ilank Act in 1865, shows con=
elusively that the amount of bank note currency outstanding- has
varied with the price of bonds and not with the needs ()f trade.
This results in redundancy at some periods an.1 iiisufficienev at
others, greatly to the detriment of industry. Mn' use of railroad
and municipal bonds to secure circulation would possess no advantage over the use of government bonds. A bond-secured circulation is unscientific and economically extravagant. This country
has a great sufficiency of this kind of currency, and it would be
a serious mistake to extend the system by permitting the use of
other than government bonds. The Aldrich !till, now before ('ongress, provides for an emergency circulation secured by municipal
and railroad 1)041(1s. Stich a measure does not reach the seat of
trouble, and at best will only provide a partial remedy of question-

others, greatly to the detriment of industr. The use of railroad
and municipal bonds to secure circulation would possess no ad vantage over the use of government bonds. A bond-secured circulation is unscientific and economically extravagant. This country
has a great sufficiency of this kind of currency, and it would be
a serious mistake to extend the system lw permitting the use of
other than government bonds. The Aldrich Ili11, now before Congress, provides for an emergency circulation secured by municipal
and railroad bo mots. Such a measure does not reach the seat of
trouble, and at best \yin only provide a partial remedy of questionable expediency.
After Vears
study and discussion, the American Bankers'
Association, through its currency commission, has reached the conclusion that the only kind of currency that will respond easily to
the need for such a medium of exchange, is that secured by the
assets of a bank in the same manner as deposits are secured.
The principles upon which the commission unanimously agreed are,
in brief, as follows:
(f) A credit currency should be issued by national banks of
the country under proper con(litions.
(2) A bank note is essentially the same in principle as a (Ieposit payable on demand.
(3) It is important in any plan seeking to provide a ino)re flexible currency, that no measures should be taken that would impair
the market value of United States bon(ls.
(4) Credit notes should be taxed at a rate that will produce
a guarantee fund sufficient to redeem the notes of failed banks.
( 5) !tanks should keep the same reserve against credit notes
outstanding as is now required lw law against deposits.
(6) Active daily redemption of credit currency is the proper
and only means of making it elastic, preventing redundancy and
automatically adjusting its volume to) the actual requirements of
commerce.
Much of the opposition to the so-called asset currency arises
from the failure of people generally to) appreciate the essential
similarity between a bank-note and a deposit, and also because
of the fact that until within a \Try few years before the passage
of the National Bank Act, note issues of banks exceeded deposits,
and hence the losses and disturbances occasioned by improper
banking were attributed to over-issue of notes. Therefore, the
absolute safety of bond-secured notes, as provided for in
the
National Rank Act, has fostered a prejudice against bank notes
otherwise secured. It is probable, however. that had the proportion of hank notes and deposits in the early days been
reversed,
the losses due to unwise banking would have been equally
severe.
Frequent bank failures were due, not so much to the form
of the

5—HERRICK—AN N ALS—
demand liabilities of the hank, as to the nature of the loans that
the bank made. It is not likely that we shall have a rational reform of our currency system until the similarity between the bank
note and the deposit is clearly understood, and the prejudice against
any form of security for circulation, other than bonds, is dispelled.
That bank deposits constitute a medium of exchange as truly as
bank notes, is not a new discovery. The principle was clearly
enunciated by Alexander Hamilton in .179o,----Every loan which
a bank makes is, in its first shape, a credit given to the borrower
in its books, the amount of which it stands ready to pay, either
in its own notes, or in gold or silver, at his option. But in a great
number of cases no actual payment is made in either. The borrower, frequently, by use of a check or order, transfers his credit
to some other person to whom he has a payment to make. This
man, in his turn, is as often content with a similar credit, because
he is satisfied that he can whenever he pleases, either convert it
into cash or pass it to sonic other hands as an equivalent for it.
And in this manner the credit keeps circulating, performing in
every stage the office of moneN, till it is distinguished by a discount
with some person who has a payment to make to the bank to an
equal or greater amount.
To illustrate the contention that there is no vital difference
between a bank note and a deposit, take a specific instrument. A
jobber sells a bill of goods on time, sixty or ninety days, and desires to obtain the present use of his funds. He takes the note
that he has received, to the bank, and has it discounted. He does
not want gold, but what he does want is something that he can
use in payment of his obligations and, accordingly, he receives
credit on the books of the bank for the face of the note, less the
discount. This credit is a demand liability of the bank, and is used
by the depositor, by means of checks, as a medium of exchange.
It is currency in every true sense, having the same effect on prices
as a like amount of bank notes. Suppose, however, that. the bank
had authority to issue, and the jobber desired and received bank
notes in exchange for the notes discounted. The result to the bank
and to the volume of currency in circulation are precisely the same.
The bank has added precisely the same amount to its demand
liabilities, and the volume of currency outstanding is the same, the
bank note taking the place of a deposit. By making a loan the
resources of the bank are increased in the form of a promissory
note and the deposit, or bank note, on the liability side of the account, has the security of the assets behind the loan. For example,
take the bank above referred to, with a capital of $2oo,000 and deposits of $500,000. If this bank issues no notes and holds a
25 per cent reserve against its deposits, its statement would be as
follows:
Liabilities

ASSCIS.
$125,000
575,000

Reserve
Loans

$700,000

Total

$200,000
500,000

Capital
Deposits

$700,000

Total

If, however, the bank has the power to issue notes against
which it holds the same reserve as against deposits, the statement
would be as follows:
Liabilities.

ASSOS.
Reserve
Loans

Total

$125,000
575,000

$700,000

Capital
Deposits
Notes
Total

$200,000
400,000
100,000
.$700,000

So far as the hank is concerned, the situation in the first
supposition is the same as in the latter, except that $too,ouo of its
loan had been made in notes instead of deposits. The aggregate
of the bank's liabilities is the same as well as its resources. With
the community that the bank serves, the situation is very different.
I ty being able to offer to its borrowers the choice of a deposit credit
or a note credit, the bank supplies the community with that form of
credit instrument which it can use to the best advantage, thus
facilitating industrial transactions to a much greater degree than
would be the case could the bank only offer the deposit credit.
Mr. Henry Dunning- NIcLeod, in his history of economics, gives a
very lucid explanation of the similarity between the deposit and
bank note. I le says: "And as every advance a banker makes is
done by creating and issuing a right of action against himself to
his customers, and as a banker has an unlimited right of buying
any amount of debts or obligations from his customers, by creating
as man of these deposits, rights of action or issues, as he pleases,
it follows that every banker has the right of unlimited issue; and

ot
thus
best
advantage,
the
credit instrument which it can use to
facilitating industrial transactions to a much greater degree than
would be the case could the bank only offer the deposit credit.
Mr. Henry Dunning McLeod. in his history of economics, gives a
very lucid explanation of the similarity between the deposit and
le says: "And as every advance a banker makes is
bank note.
done by creating and issuing a right of action against himself to
his customers, and as a banker has an unlimited right of buying
any amount of debts or obligations from his customers, by creating
as man\ of these deposits, rights of action or issues, as he pleases,
it follows that every banker has the right of unlimited issue ; and
a sudden increase of deposits is. therefore, nothing more than an
inflation of credit, exactly similar to a sudden increase of bank notes.
Deposits are nothing but bank notes in disguise.- With the exception of a few savings banks, every bank in the country has the
right to issue these credits, which are but bank notes in disguise.
This fact should make it very clear that there would be no risk
in permitting national banks to issue bank notes, called such, under
proper restrictions. It should also emphasize the great need for
legislation requiring banks organized under state charters, to carry
sufficient reserves. Loans are usually based on mercantile transactions and, therefore, the deposits or bank notes have a security
equal to the soundness of business generally, which, as a matter of
fact, is all the security that is behind any credit instrument. The
objection that asset currency would lead to inflation, is unsound,
for the reason that whatever amount of such currency might be
issued, would simply displace a like amount of deposit currency,
as is shown in the two statements just given. Sound banking
depends, not upon the form of demand liability, but on the kind
of discounts made. It is on this point that great stress should be
placed. As long as a bank's loans represent legitimate, sound
business transactions and an adequate reserve is provided, the
amount of credits, whether deposit or bank note, is comparatively
unimportant. At the present time, the currency of the country
can be unduly inflated solely through the medium of deposits, by
the making of unwise and unsafe loans. It is proposed to further
secure the .bank notes by requiring the same reserve of gold, or
its equivalent, as for deposits. Theoretically, there is no more reason
for taxing a bank note than a deposit, but to absolutely secure the
notes of failed hanks, it is proposed to levy a tax sufficient to
provide for such notes, and inasmuch as an average of about 2
per cent is paid on deposit balances, the tax on notes should undoubtedly be sufficient to off-set this. The notes of a bank differ
from its deposits in this respect, that they are intended to circulate over a much greater area than the representatives of deposits,
checks and drafts, and it is often impossible, or at least inconven-

or a note creuit, toe Dank supplies the community with that torm

6—HERRICK—ANNALS—
ient, for the holder of a note to obtain reliable information as to
the solvency of the hank upon which a note is drawn. It is
essential, therefore, that a guarantee fund be provided to absolutely
secure every bank note issued, irrespective of the soundness of the
particular institution on which it is drawn. Approximately 95 per
cent of all the business of this country is transacted by means of
bank deposits, and this Nv i11 continue to be the case, whatever form
the currency of the country may take because of the superior convenience of checks as a medium of exchange. When currency is
wanted, the need is imperative, as we have all learned to appreciate,
and the banks should be in a position to satisfy that need. Deposits, since they originate in industrial transactions, and are permitted to expand and contract practically unhampered by legislative restrictions, constitute the most elastic medium of exchange
ever devised, and if the banks of the country are ever to serve the
community as they should, like freedom must be given to note
issues. Unnecessary restrictions on the power of banks to issue
notes are a serious handicap to industry. The desirability of an
elastic currency is felt more strongly in the smaller towns of rural
communities, where funds are needed to pay for farm labor, etc.,
particularly during the harvest time. Could the banks serving
the agricultural districts offer to their clients bank notes instead
of a deposit, the nesessity for withdrawing currency from the East
would be avoided as would also the return movement which creates
a plethora of loanable funds in New York, unduly stimulating
speculation and giving a wrong impression as to the plentifulness of capital and credit. An asset currency is not a new kind of
medium of exchange! Practically every civilized nation of importance permits note issues secured in part, at least, by the general
assets of banks. Canada, Scotland, France and Germany, all make
provision for bank notes of this nature. The Reichsbank, of Germany, is permitted to expand its circulation without limit, but if
the amount of note issues uncovered by cash in bank, exceeds
450,000,000 marks, the bank must either increase its coin reserve
to cover the excess or pay a tax of 5 per cent on the amount over
the limit of 450000,000 marks. Of this bank, Dunbar says: "The
effectiveness of the elastic limit, in time of crisis, have never been
severely tested, but it has been found to meet with much success,
exceptional temporary demands for currency, which, under a rigid
system of issue, like that of the Bank of England, could only have
been satisfied by the withdrawal of specie or notes from the reserve.
It is noteworthy that with one exception the limit has been only
exceeded at the end of September and at the beginning of October,
or at the end of December and the beginning of January, at the
opening of the autumn or winter quarters of the year, when,
for various reasons, there is regularly an increased demand for
currency. In England, similar demands can be met only by withdrawal from the reserve of the Bank of England and through the
temporary nature of such demands is well understood and in itself
causes no alarm, the difficulties of the situation are thereby enhanced when the bank is trying to strengthen its reserve against
more serious drain in other directions. Such demands the Reichsbank is enabled to meet, without difficulty, through the device of
the elastic limit." Representative Fowler has prepared a bill for
introduction into the House, which revolutionizes the entire currency system of the country, and its enactment would, without doubt,
unnecessarily disarrange existing financial methods to the detriment
of industrial conditions generally.
The laws of finance are as well known and as sure in their
operation as the laws of physics and the problem before us is
simply to apply these laws wisely. For many years, because of the
conditions peculiar to this country, we were obliged to conduct
our financial affairs along unknown and untried paths, the experience of the older countries did not afford suitable precedent
for our guidance, but to-day we have reached a stage of development wherein we can learn much from the older countries, and it
certainly is the part of wisdom to profit by their experience.
Should the present financial klistuibctme be Llie IlleallS of inducing Congress to pass a bill providing for an asset currency as
outlined by the currency commission of the American Bankers'
Association a currency would respond as easily and as readily
to the needs of trade and industry as does the deposit currency,
we might feel almost repaid for the discomfort and distress of the
period. On the other hand, unless the present system of bank note
currency is modified in a rational and scientific manner, we must
expect the periodical repetition of the disturbance through which
we have just passed, for of all the factors that tend to develop
unsound industrial conditions, a system of bank note currency
that fails to expand or contract when it should, is the most potent.
The plan proposed by the currency commission of the American
Bankers' Association is the result of years of experience and study
on the part of the leading bankers of the country, and for this
reason, if for no other, it merits most careful consideration. It
is undoubtedly the best plan now before the American people.

1—ANNALS—FRAME—
DIAGNOSIS OF THE WORLD'S ELASTIC CURRENCY
PROBLEMS

ANDREW J. FRAME,

President Waukesha National Bank, Waukesha, Wisconsin.

M•I

Professor Sunnier, in his "History of American Currency," said,
in summing up the doctrines of the celebrated bullion report which
was submitted to the House of Commons in 181o, "Its doctrines are
the alphabet of modern finance. They are no longer disputable."
Another section reads, In the presence of a panic the duty of the
bank is to discount freely to all solvent parties."
I take it, a smile will pass over the features of my banker friends
the moment their ne'er-to-be-forgotten practical experiences of 1893
and 1907 loom up as a nightmare before them again. How can a
bank discount freely to all solvent parties when its panic-stricken
depositors want all the cash the bank holds, and very quickly too?
What is the meaning of the word panic? The Standard Dictionary' says: "The prevalence of unreasoning aml overpowering
alarm in financial and commercial circles, or in both, leading to
sudden and stringent restrictions of credit and great shrinkage in
values, and precipitating mercantile and banking failures ; often
the precursor of a financial panic."
Panics undoubtedly cannot be wholly prevented except in
theory by such dreamers as Bellamy, who support the impossible
idea that human nature can be changed, speculation cease and optimism be eradicated from Anglo-Saxonism.
Notwithstanding this, I am a firm believer in ameliorating panic
conditions, both as to their frequency and as to their severity. But
how? My answer is:
( ) By studying history and profiting by the experiences of
the past.
(2) By passing conservative and sound banking laws, and then
enforcing them.
(3) By giving as much elasticity to the circulating medium as
can be safely attained, but never to reach an amount which engenders
doubt in the public mind as to its redemption in the world's standard
of value.
As to the problem of conservative and sound banking laws and
enforcement, the national banking system is the safest and best this
country has known. It is a well-known fact that some states have
good laws, some lax laws, and others none at all. It is also a matter
of gratification to know that many states are working along the line
of betterment. With thirteen thousand million dollars due to not
less than sixteen million depositors in the banks and trust companies
of the United States, in order that conditions leading to panics and
their paralyzing effects may be minimized, is it not the clear duty
of our statesmen to perfect, as far as possible, conservative laws on
sound lines?
These laws should demand ample capital paid in, limitations
on loans to any persons or firm, and reasonable reserves according to
whether depositors are payable on demand or on time. As space
forbids further pursuit of this phase of the subject, I will confine
myself to the knotty "elasticity problem."
The Elasticity Problem
The history of the progress of nations during the earlier centuries shows an evolution from the use of bullocks as a medium
of exchange, as recorded in the Bible, to the later period of barter
by the use of heads, nails, skins, shells, etc. In later centnrieq.
in addition to the limited quantities of coin, the banks have indulged

more or less in the issue of so-called asset or credit currency,
dubbed "coined credit," by Professor Sumner, as well as currency- secured by various kinds of collateral. All makeshifts have
in the most advanced and progressive nations given way to the
world's standard of value—gold, until to-day those progressive
nations which issue currency do so largely through one great central bank. The immense coin reserves of these great banks practically make their currency issues a gold certificate payable on
demand. They are practically banks of issue and not of deposit,
as will be seen by the table which follows. These banks issue more
or less currency in excess of coin held hut .:(1111e rsCf.11
!Nil

ille use oi ueaus, nails, Skills, snens, etc. in later centuries,
in addition to the limited quantities of coin, the banks have indulged
more or less in the issue of so-called asset or credit currency,
dubbed "coined credit," by Professor Sumner, as well as currency secured by various kinds of collateral. All makeshifts have
in the most advanced and progressive nations given way to the
world's standard of value-gold, until to-day those progressive
nations which issue currency do so largely through one great central bank. The immense coin reserves of these great banks practically make their currency issues a gold certificate payable on
demand. They are practically banks of issue and not of deposit,
as will be seen by the table which follows. These banks issue more
or less currency in excess of coin held, but some are based on government securities, as in England ; all their loans are amply secured
and of a quick liquid character. In view of these facts, these
great banks, with immense capital, coin reserves and small liabilities,
are in a position to expand currency issue,; to move crops without
distrust, and under panic conditions "to discount freely to all
solvent parties," also to furnish extra cash to banks with which
to meet the insane demands of frightened depositors, thus preventing general paralysis of trade and industry in all branches,
which is inevitable if forced liquidation takes place which is so
destructive to labor and capital alike.
I am firmly convinced that if the United States had lately
had a large central bank of the banks, commensurate with our
greatness, notwithstanding the colossal pyramid of credit which
we have been building, we might have been let down by easy stages,
instead of falling off from the top of the building. I am also convinced that if the last Congress had authorized asset or credit
currency on the American Bankers' Association plan, when the
1907 spasm struck us, our troubles would simply have doubled.
Let us briefly diagnose the reasons therefor by a comparison
of European conditions with those of the United States as they
exist to-day.
in

Capital, specie, circulation, etc., of the great European single banks
of issue on or about June 30, 1906.
TABLE No. I.
In Millions.
Capital. Cmculation.

Imperial Bank of Germany
Bank of Austria-Hungary
National Bank of Belgium
National Bank of Bulgaria
National Bank of Denmark
Bank of Spain
Bank of Finland
Bank of France
National Bank of Greece
Bank of Italy
Bank of Naples
Bank of Sicily
Bank of Norway
Bank of Netherlands
Bank of Portugal
National Bank of Roumania
Bank of England
Imperial Bank of Russia
National Bank of Servia
Royal Bank of Sweden

$28.9
41.9
9.6
T.8
6.8
28.9
1.9
35.2
3.9
28.9
i1.6

3.5
8.o
14.6
2.9
70.8
28.3
I.'
11.9

$412.0
376.5
136.5
8.6
34.9
305.7
18.2
9o8.8

Deposits.

Total
specie.

Loans.

$149.9

$211.1
299.2
24.1

$345.7
189.8
124.8

17.0

7.6

11.9

.8
134.2
4-2
189.r

27.2

131

200.2

154.4

11.7
255.3
21.6
91.6
34.5
10.9

37.0

31.6
16.3

23.1

23.4

213.3
66.6
14.8
21.4

90.6
16.1
io.6
1.9

113.0

2.5

74.5
43.1
146.8
591.0
6.6

29.3
280.3
1o9.8
.6

5.2
803.4
.4
152.7
32.8
9.1
8.o
57.1
13.7
15.0
187.8
455.9
4.5

52.2

12.2

20.6

12.0

59.8
26.5
25.2
156.8
208.3
2.3

$340.5 $3,567.6 $1,120.4 $2,525.6 $1,793.8
Total 20 banks
The foregoing, practically banks of issue and 'not of deposit, show demand liabilities versus coin reserves, as compared to the national banks of
issue in the United States, as follows :

2—ANNALS—FRAME—
In Millions.
20

European
banks.

6,137 U. S. Nat'l
banks.

Circulation outstanding
Deposits

$3,567.6
1,1204

$517.9
5,898.0

Total
Coin reserves held

$4,688.0
2,525.0

$6,415.9
464.4

Mark the fact that the great issuing banks of Europe hold 54 per cent
liabilities in coin, as against only 7 per cent in the United States.
demand
of

Mark that, as records show, the total currency issues by all
the other great European banks of deposit on June 30, 1906, approximated but 150 millions of dollars, and when the charters of
the four German banks and those of Great Britain and Switzerland
expire, the right to issue currency by all of them being doomed,
there will be no one left in Europe to issue currency except these
twenty great centralized banks and the new bank of Switzerland.
Do not the foregoing facts conclusively show that the progressive
European nations each have one great issuing bank, which might
be termed the governor to the engine, expanding and contracting
automatically without distrust, because they have immense coin
reserves and quick assets, and that the issue of credit or any other
kind of currency by small, independent banks has practically been
totally abolished all over Europe?
This result in Europe was evidently brought about through the
dear school of experience. Let us touch upon a few most salient
instances abroad.
France
John Law, nearly 200 years ago, after being turned down by
the keen Scotchmen, captured the French people with his plausible
populistic inflation scheme, and history tells us that France did not
recover from its terrible effects for fifty years. The statesmen
of France, not content with the John Law experiment, in consequence of business depression in 1789, instead of manfully waiting
for a natural return of better days, in response to the popular
clamor for "more money,- sought to take a short cut to prosperity
by issuing heroic quack doses of fiat money for several years in
succession. Just as soon as the effects of the first issues began to
show symptoms of a reaction upon business, another larger dose
was administered to the already staggering public.
The statesmen of France, in most eloquent perorations—which
might be likened to some in these latter days—swayed the multitude so far that the intoxication for assignats grew until nearly
40,000 millions of francs were outstanding in 1797, a sum aggregating nearly three times our whole circulating medium to-day.
With one fell swoop the French nation repudiated the whole issue.
The Bank of France was organized in 1800 with about $6,0oo,000 capital, which at various times was increased, until to-day it
is about $35,000,000. It has power to issue notes with the following prerequisites, as dictated by Napoleon: "The notes shall be
covered either by coin held by the bank or by notes secured by
collateral or by notes signed by three responsible persons.- A
strong effort was made at that time to give the right of issue to
the banks generally in France, hut Napoleon answered in substance,—It is easier to watch one bank of issue than it is to
watch great numbers. His logic exactly condemns the American
Bankers' Association plan to-day. What has been the result in

France? The foregoing table shows:
Millions.
Circulation

Coin on hand is 88T/2 per cent of circulation
If we add the deposits of

$908.8
803.4
T

water' great numbers. IL 1 is tugic exactly coIluellijis we 41111‘..i
Bankers' Association plan to-day. What has been the result in
France? The foregoing table shows:
Millions.

Circulation
Coin on hand is 88V2 per cent of circulation
If we add the deposits of

$908.8
803.4
igg.t

to circulation outstanding, the bank still would show about 73
per cent of coin against all liabilities, as against 7 per cent for the
national banks of the United States. We must not forget also that
the $255.3 millions of loans are of a much more liquid character
than are those of the national banks generally throughout the United
States.
The Bank of France has been managed with such consummate
skill that even during the Franco-German war the depreciation of
its notes was only 4 per cent. It also during the past century rendered invaluable aid by loaning coin to the Bank of England during
several crises in Britain. The bank, with its vast coin reserves and
quick assets has been enabled to loan freely all solvent parties under
panic conditions, thus undoubtedly preventing panics at times, and
it has steadied the financial convulsions in France for a century.
The Bank of France has had the sole right of issue in France
since 1848. Its uncovered currency is about 120 million dollars,
which indicates no currency inflation in France as against 9oo
millions in the United States.
En gland
The Bank of England was chartered in 1694. Although it
was of great value to mercantile interests in several financial crises,
vet as the bank had limitless authority to issue notes, and there
was no rule as to coin reserves from 1694 to 1844, at which date
Peel's Act "gave the Old Lady of Threadneedle Street the straight
jacket she has worn ever since.- Bagehot, in his classic work
entitled "Lombard Street,- says, "This unbridled authority was
. in more than one instance used with the extremest unwisdom, so
that devastating panics followed hard upon the heels of the reckless speculation which too great facilities for borrowing had engendered." Such dearly-bought experiences ought to warn us against
easy methods of inflation. English statesmen battled for a quarter
of a century with the subject of whether gold was at a premium
or a redundant quantity of Bank of England notes at a discount.
The question was finally settled in 1816 by the adoption of the profound "Bullion Report of
to." The integrity of her gold standard of payments has since been maintained with a fidelity that
commands the admiration and confidence of the whole world, to
the extent that London is the world's clearing house, and practically all the nations of the earth pay tribute to Britain. The paramount question to us is, how soon will New York City displace
London as the world's clearing house, if we keep on injecting more
non-standard currency into our already redundant currency issues?
Under Peel's Act, the banks of Great Britain in 1844 were
restricted on issues of bank notes to the amount then outstanding
by the banks then existing. Seventy per cent of the right of issue
of those banks which have closed since 1844, has reverted to the
Bank of England, thus reducing the total uncovered issues allowed
to banks in general, all of which are subject to the unlimited
liability act as to note issues, to the small sum of approximately
i8,000,000, and has increased the issues of the Bank of England
since 1844 from 114,000,000 to about D8,175,000 based on securities. All other issues of the bank are covered with gold coin or
bullion, thus making the notes practically gold certificates and giving the Bank of England the sole right of issue in Britain. The
total uncovered issues in Britain average about $12o,000,000, of
which $90,000,000 are Bank of England notes based on government securities. Scotch banks, so much harped about, can issue
but £2,676,350 uncovered notes. As extraordinary troubles require
extraordinary remedies, in order to ameliorate some of the calamitous panic conditions which have overtaken Britain, history says,
the Bank of England in 1847, 1857 and 1866, after the panics had
paralyzed her progress, on the assurance of the government officials

3—ANNALS—FRAME--that no prosecution would follow, suspended the bank act as to
issuing notes only on the deposit of a like amount of either coin
or bullion, and it issued notes to the banking department on deposit
by it with the issue department of ample securities. This was
an unlawful act, giving elasticity to the currency, but it placed
the banking department in an easy condition to "discount freely
to all solvent parties." Again, in 1838, the bank borrowed 12,500,000 from the Bank of France during panic conditions, and in 1890,
during the Baring troubles, she borrowed £3,000,000 besides
12,000,000 from outside sources, and the panics were stayed. The
Barings failed for $105,000,0oo and yet their indebtedness was
liquidated by the Bank of England with the aid of other local banks
without general suspension of cash payments as experienced in the
last months of 1907 in the United States. The apparent necessity for these extraordinary acts was that the country had reached
a commercial crisis where good securities could not be sold for
cash. Suspension and consequent ruin were staring sound commercial houses and banks in the face.
In each case the action of the bank afforded instant relief and
doubtless saved hundreds of millions of dollars to tottering houses
unable to meet payments except for such relief. As soon as the
pressure was over the illegal issues were retired.
These unlawful acts were parallel to our clearing-house certificates, except that clearing-house certificates have but limited use,
whereas the Bank of England notes satisfy the insane demands
of frightened depositors and give sufficient elasticity to meet necessary demands for loans to solvent parties so that the wheels of
commerce be not stilled. Should the Bank of England be legally
empowered to relieve extraordinary pressure on the same lines as
in 1847, 1857 and 1866 before paralysis takes place, the benefits
undoubtedly would be incalculable. Nearly all political economists
criticize this feature. which seems to be the only material defect,
without which the Bank of England would be ideal in practically
all respects.
Germany
With the exception of only four banks, which are allowed
to issue say eighteen millions of dollars of uncovered notes—and
these privileges are doomed—the Imperial Bank of Germany monopolizes that right. The bank is allowed to issue now about
$i 12,500,000 uncovered circulation under certain restrictions. Any
excess over that sum must pay 5 per cent interest per annum to
the government. This excess issue is the only true method by
which to obtain relief under panic conditions, as the interest rate
will certainly retire the redundant currency as soon as the pressure for funds is over, thus preventing inflation.
It is a noteworthy fact that the Imperial Bank of Germany
has raised its discount rate to 7 per cent but once in thirty years,
except during our panic of 1907, when its rate was raised to
7y; per cent. It is also a noteworthy fact that during that
thirty-year period the bank issued such 5 per cent taxed currency
121 times as a relief measure under pressure. The Austro-Hungarian bank did likewise under similar conditions fifty-five times
in the past eighteen years. In the face of the fact that interest
rates are lower there than here, such 5 per cent taxed currency automatically expands under pressure and contracts as soon as the
pressure is over, thus preventing inflation. This fact defies theory
and upsets the absurd claim that a high taxed currency imposes
such a tax on commerce that banks will not use it. Germany's
uncovered currency averages say $15o,000,000, which is a wide
contrast to our $9oo,000,000 and over.
But enough. These details and the foregoing table are conclusive evidence that elakicity in Europe, by an evolutionary
process, has been achieved without producing distrust or inflation.
Issuing Currency is not a Necessary Banking Function
Further, it does not seem to be a necessary function of banks
generally in Europe to issue currency at all. As state and other

uncovered currency averages say $150,000.000. which is a wide
contrast to our $90o,000,000 and over.
But enough. These details and the foregoing table are conclusive evidence that ela4ticity in Europe, by an evolutionary
process, has been achieved without producing distrust or inflation.
Issuing Currency is not a Necessary Banking Function
Further, it does not seem to be a necessary function of banks
generally in Europe to issue currency at all. As state and other
banks in the United States issue no currency, I assert the special
privilege ought to be abolished as to the other third, as soon as
the banks owning the abnormally low rate 2 per cent interest
bonds can obtain payment for them. Banks holding them run
great risk of material depreciation should the government for
any cause be compelled to issue large sums additional. Let the
United States sell its bonds strictly on their merits, as every
other nation does. This result ought to be brought about by
a slow evolutionary process, and under natural economic laws
the channels of circulation would automatically fill the vacuum
created with the world's standard—gold. Adam Smith gives an
illustration in point in his -Wealth of Nations"—"Money, like
wine, must always be scarce with those who have neither the
wherewithal to buy or the credit to borrow it. Those who have
either will seldom be in want of either the money or the wine
which they have occasion for, and a country that has wherewithal to buy gold or silver, will never be in want of those
metals." I am strongly impressed that the United States has
the wherewithal to buy all the gold and silver we need for a
basis of our circulating medium. if some of the poor sections
of our country are short on circulation, is it not because they
are also short on collateral or wherewithal to buy it?
The Lesson from American History
Let us turn to the United States without specific reference
to the disastrous results of continental currency in the eighteenth
century, which might be excusable, as the birth of the nation
was at stake. The "History of Banking in all Nations" says,
in referring to all banks of issue from 1739 to 1841. "The estimated losses on their circulation were i8.1 millions of dollars.
Again, on page 337—under "Free and Safety Fund Banking in
New York State,- "the notes of twenty-five of them were rejected, and all the safety fund notes were at a discount." Again,
"In December (1840), it was reported that few brokers would
buy the notes of any free banking association,- "and the notes
of many of the safety fund banks of the interior are regarded
with great distrust." John J. Knox, in his history says that
from 1789 to 1864 "the probable losses to noteholders were
about 5 per cent per annum." Further, the circulating notes
of the state banks were subject to violent expansion in times of
confidence and sudden contraction when distrust occurred. The
runs on the banks were not made by the depositors (for they
were few), but by the noteholders.
The pages of these authorities, as well as many others, are
strewn with proofs of the sickening details of losses to noteholders,
caused by bank issues, some based on credit and others based on
various collaterals, clear through the eighteenth, and even past
the middle of the nineteenth century. Because much of the currency
issued during the latter period was secured by collaterals instead
of being a pure credit currency, the nineteenth century experiences
lessened materially the comparative losses to noteholders everywhere, but still they were calamitous in results up to the end of

4—ANNALS—FRAME—
the "wild cat" days in the United States. Two generations have
passed since then wherein no man has lost a moment's sleep over
his absolutely secured national bank notes. We ought not to need,
like children, to be told to keep away from the fire. We ought to
profit by the experience of the past before trouble overtakes us
again.
That word "elasticity" is a sweet morsel to play upon the
credulity of an innocent public. It has worried the political economists of all ages. Its ghost still stalks forth in this enlightened day.
Panics and the Monetary Standard
All property was measured in depreciated currency in 1865,
when gold was Too per cent premium and over. Then the premium
began to decline year by year, and all property in proportion, until
1873, by which time values had shrunk to about one-half of the
prices of 1865. This process undermined all prosperity and was
the underlying cause of the panic of 1873. After specie payments
were resumed in 1879 confidence and prosperity revived with a
bound, and they have been forging onward and upward ever since
at a pace which has astonished the world. A campaign of education
has been constantly and successfully waged toward the establishment of the world's standard—gold—upon an unequivocal foundation. Distrust of our standard halted us from 1893 to 1896, when
the repudiators were repudiated, and since that date the Gold Standard Act of March 14, 1900, has been written into our statutes,
and thus the battle of the standards has been practically won.
There are two links missing to complete the chain. They are the
elimination of some of our redundant soft money issues, and the
adoption of sonic sound relief measure when panic threatens.
Since 1896, when confidence was restored as to the integrity
of our standard of value, the wave of prosperity has been almost
continuously rising higher and higher. Under the impetus of rapid
fortunes acquired by some Napoleons of finance since 1896, who
foresaw that a swelling tide of prosperity was at hand, the get-richquick fever intoxicated the many. Nature has been generous in
her bounties to us, thus aiding in the development of the rising
tide. Another force has been the immense increase in the world's
production of gold for the past few years, which doubtless has
stimulated the activities and credit expansion of the whole commercial world.
During this period our credit system has grown to collossal
proportions. As shown by official statistics, our banking power
has increased from 5,150 millions of dollars in 1890 to nearly 18,0oo
millions of dollars on January 1, 1908, which nearly equals the
banking power of the rest of the world. The individual deposits
have more than trebled in that period, which largely represents
actual not fictitious capital. The gigantic general statistics of our
wonderful progress and present condition are too numerous and
too well known to repeat.
During the past ten years our circulating medium has doubled
in quantity, using I ,500 to 3,000 millions of dollars, until, as a basis
for this mighty superstructure of credit, we hold the following
amounts of the world's standard of value, that stands through storm
as well as sunshine:
TABLE No. 2.
In gold coin, say
In addition we have:
In silver (say one-half fiat) about
Legal tender notes
National bank notes, about

$1,600,000,ocio
700,000,000
346,000,000
690,000,000
$1,736,000,000

By way of comparison with the most progressive nations,
permit the following approximate:
TABLE No. 3.

/n Millions.
United States holds
Great Britain holds
France holds
Germany holds

Gold.

Silver.

Uncovered
currency.

$1,600

$700
117

$900
116
120
180

559
1,032

917

400
200

Per capita
circulation.

$35.50

18.08
39.94
22.18

This table shows the United States has nearly as much silver

In silver (say one-halt hat) about
Legal tender notes
National bank notes, about

700,000,000
346,000,000
690,000,000
$1,736,000,000

By way of comparison with the most progressive nations,
permit the following approximate:

TABLE No. 3.
In Millions.
United States holds
Great Britain holds
France holds
Germany holds

Gold.

Silver.

Uncovered
currency.

$1,60o

$700
117
400
200

$900

559

1,032
917

116
120
180

Per capita
circulation.

$35.50
18.o8
39.94

22.18

This table shows the United States has nearly as much silver
as Great Britain, France and Germany combined, and more than
twice as much uncovered currency as all combined. It also shows
a per capita circulation almost equal to that of France, where cash
instead of checks is used much more extensively than here. This
per capita circulation is also so far in excess of either Great Britain
or Germany that the redundancy of our currency must be apparent
to all.
The Barometric Signal
In view of all these facts, even before the explosion caused by
the wild speculation and pyramid banking of the Heinze, Morse,
Thomas, etc., outfit: in view of the fact that a high interest rate
the world over is the sure barometric signal that the great pyramid
of credit has grown beyond the limits of prudence ; in view of the
handwriting upon the wall as recorded by all the standard authorities on political economy that optimism had outrun conservatism,
and that the primary cause of our troubles is over-speculation, I will
only quote in proof from one standard authority. Professor Sumner, in his "History of American Currency," tersely sums up the
case as follows: -Over-speculation is speculation which outstrips
the capital of the country ;" further, "When we lose our heads in
the intoxication of our own achievements, look on currency anticipations, which are only fictitious capital, as if they were real, use
them as already earned, build other expansions upon them, then
we bring a convulsion and a downfall some time or other a liquidation must conic: . . . then credit breaks down and there
must be a settlement, a liquidation, a dividend, a new start." I say,
in view of all these facts, I cannot understand why the powers that
be in the great American Bankers' Association, who ought to be the
leaders in conservatism, should undertake to bring about a sentiment to commit this country to eighteenth century fiatism again,
by the issue—on top of our vast volume of soft money issues—of
over two hundred million dollars of asset or credit currency, as a
starter only, according- to one of the most aggressive advocates,

with only 5 per cent secured and 95 per cent fiat, under the plea
of providing an elastic currency to move the crops, notwithstanding
crops could not move faster, as transportation facilities have been
taxed to their utmost for years. Who wants to move the earth
to-day and lie idle to-morrow?

The American Bankers' Association Plan
The American Bankers' Association plan, boiled down and put
in cold type, can fairly be diagnosed in this way:

6—A N NALS—FRA ME—
panic conditions? This is exactly what occurred in fiat money
days. Taint our currency issues with a breath of suspicion, and
our prosperity will be undermined as by an insidious disease. Even
the first lien on assets, which would make the currency secure, but
which would rob the depositors, is eliminated under this plan, thus
increasing general distrust. Again, as the quick redemption theory
will not work, which is now admitted by asset currency advocates,
does any sane man believe that any bank in the United States
with a right to issue asset currency, practically without collateral,
paying only 2 2 per cent per annum for the use of it, in the face
of a 6 to 10 per cent interest rate clear through 1907, would not
have kept out the whole permissible amount for the profit in it,
thus stretching the rubber currency to the limit. Under such conditions the reservoir would have been empty when the panic of
1907 struck us. Would not the very object sought, relief under
panic conditions, be defeated? The result would simply spell inflation, and inflation spells disaster. Such currency would expand, but not contract. The currency committee seems to have lost
sight of the fundamental principle of Gresham's law. Britain, after
a campaign as long and as bitter as ours over the Gresham Law,
and the expulsion of her gold by the injection of too many bank
notes into her circulation, unequivocally adopted the gold standard
in 1816. The integrity of that standard, as against the uncertainties
of other national standards, has been maintained with a fidelity that
commands the confidence of the whole world to such an extent
that London has long been the world's clearing house. Will New
York soon win that position if we inject an additional quantity of
inferior currency into our circulation?
A wise man buildeth his house upon a rock, but the foolish
man upon the sand. When the rain descends and the floods come
and the winds blow, the wise man's house falleth not, but as to
the foolish man's house, great is the fall thereof. Is not this a
perfect simile to apply to the building up of the superstructure of
our credit system upon a sound metallic currency for a foundation as against the shifting sands of a credit currency? The pages
of history are strewn with proofs that when the great instrument
of exchange is deranged, all trade, all industry, is stricken as with
a palsy. That instrument of exchange recognized by the world as
the solid foundation that does not totter when the storm rages in
its severest intensity, is the only foundation for a prosperous people
to rest upon; and to-day our coffers hold sixteen hundred million
dollars of it. This is a billion dollar country, and we need these
resources. This gold has come to us since 1873 in the natural
course of trade, in response to the kell-known principles of the
Gresham laws and monetary science, as expounded by Mr. Adam
Smith, Ricardo, Jevons, Sumner and many other eminent economists, and as also clearly set forth in what Professor Sumner dubs
the most important document in financial literature, "The Celebrated Bullion Report of i8io to the House of Commons." I
have quoted these maxims before, but deep-seated error requires
repetition of them again and again. Summed up these principles
are•
( ) The cry of all ages is for "more money."
(2) Rich countries will have all the coin they need, providing
no impolitic act of legislation interferes to force it out of circulation by the injection of inferior currencies.
(3) When the coin in any country exceeds the effectual demand, no vigilance of government can prevent its exportation.
(4) It is the province of government to settle the quality question of money, and the needs of commerce will settle the quantity.
In proof of the above maxims, history says, Chinese walls, jails,
shot guns or hanging did not prevent exportation of coin, and in
these modern (lays the object lesson of the exportation of more than
thirty millions of gold in May and June, 1907, in the face of high
interest rales and the plea of the asset currency advocates for
"more money in the United States," is more potent than pages
of logic. Let us fix the "quality" question and stop tinkering with
the "quantity," as the needs of commerce will settle that.
With over 1,700 million dollars of soft money in the United
States to-day, would not the injection of 200 to 300 millions of
inferior asset or credit currency drive the same amount of gold
out under the Gresham Law, thus undermining our metallic foundation for our great credit superstructure? Let us bend our eller-

Liatrty

1111111k/11S

gum' III

41I1ity

111

LAM.

LCULA_

for
interest rales and the plea of the asset currency advocates

"more money in the United States," is more potent than pages
of logic. Let us fix the "quality" question and stop tinkering with
the "quantity," as the needs of commerce will settle that.
With over 1,7oo million dollars of soft money in the United
States to-day, would not the injection of 200 to 300 millions of
inferior asset or credit currency drive the same amount of gold
out under the Gresham Law, thus undermining our metallic foundation for our great credit superstructure? Let us bend our energies to increase our metallic foundation and reduce our redundant
soft money issues, if we would avoid trouble as far as human ingenuity can accomplish it. The only true remedy to compel conservatism is to penalize over-expansion of credit, instead of adding
an unsecured asset currency stimulant. Throw a life line out to the
over confident, and he will be swimming beyond his depth continually.
Asset Currency Fallacies
The asset currency advocates are continually referring to the
Canadian and Suffolk systems, also isolgted cases in Indiana, Louisiana, Iowa and other states, as parallel to our conditions. Their
arguments are as full of holes as a skimmer, and so-called parallels
are as closely related as the Equator is to the North Pole. They
ng
are also continually quoting general European branch banki
s of
methods as systems for us to adopt. I stand with the masse
g all
bankers of the country against a few great central banks ownin
es
the banks of the country, because under that system, the branch
practically pay no taxes where they are located: there is no real board
be
of directors; few, if any, stockholders to whom dividends would
the
declared; in short the system simply skims the cream from
is
country towns to enrich the exchequers of the great centers, as
conclusively proved by the abnormally large profits made by the
great central banks owning such branches.
A National Reserve Bank
As our independent banking system has worked wonders in
our
the upbuilding of our hamlets and cities; as the quality of
money is unquestioned, and the quantity more than ample for normal conditions; as Europe has more nearly solved the "Elastic
Problem" with fewer objectionable features than any plan yet

7—ANNALS--FRAME—
suggested ; why cannot we reject as entirely unnecessary the general branch banking feature, continue, if thought best, the United
States sub-treasuries, with modifications as to cash holdings, and
bring about elasticity through a national reserve bank. Such a
bank would be owned by the banks of the country, and thus the
profits would be theirs.
The capital stock might be $5o,000,000 and be taken in sums
of not to exceed 5 per cent of the capital of each subscribing bank,
to prevent monopoly. The Comptroller of the Currency and Secretarv of the Treasury should be members of the Board of Directors.
The National Reserve Bank, if such we may call it, might have
authority to issue up to $250,000,000 of national bank notes, as an
experimental limit, under a tax of 6 per cent to drive it home as
soon as pressure is over.
Again, under strained conditions, or when frightened depositors are demanding cash, and solvent merchants and manufacturers are calling for loans to pay bills and keep the wheels of
commerce from being stilled, where is the banker that will not
temporarily provide cash, if possible, at 6 per cent or even a higher
rate, if necessary, instead of slaughtering sound securities in a
hard market? Do not many bankers when capital demands exceed
supply, get rediscounts now, and is much comment made unless
rediscounts become excessive?
No interest should be paid upon deposits, nor should loans
be made upon stocks, thus giving no aid to the stock gambling
element. Such issues should be loaned only under conservative
restrictions on quickly convertible securities. I believe if such a
bank had been open in October, 1907, the panic with its train of evils
might have been avoided, because the gamblers who were the
cause of the outbreak could have been refused aid and thus have
been weeded out as a future menace. The sound and solvent banks
of New York could have been furnished with all the cash needed,
because they have ample sound collateral. The country calls for
balances in New York could have been promptly met with cash.
Suspension of cash payments then would not have been necessary,
and the result would have been that the whole country would not
have been compelled to restrict cash payments nor to issue. clearinghouse certificates.
On the other hand, if the American Bankers Association's
2Y2 or 3 per cent currency plan had been authorized last winter,
the full limit would have been out for the profit in it when the
panic struck us. The National Reserve Bank plan will accomplish
the object sought in an absolutely sound manner ; it will checkmate
locking up cash, as was done many months ago by a bear to the
extent of $5,000,000 in an attempt to bring on another Black Friday
onslaught. The banks of the country will not hoard money in
excess of needs, because they will know relief is at hand if needed.
It will not lead the bankers of the country generally to further
expand their credit and thus feed the fires of speculation which
have already gone beyond the limits of conservatism. It will not
drive gold out of the country under Gresham's Law by the injection of any more inferior currencies, which must be avoided if our
standard of values is to be maintained, and if New York City is
is ever to become the world's financial center. It will furnish
cash at all times when necessary to move the crops. Under panic
conditions it will loan to all solvent parties that the wheels of
commerce be not stilled and general paralysis result. The rate
of interest will automatically drive home the extra issues as soon
as confidence is restored ; inflation will not result and the machinery
will be ready for the next urgent call; 10, 20, 50, mo per cent
money will be unknown ; the Secretary of the Treasury will heave
a sigh of relief from pressing importunities ; every bank in the
country, whether national, state, private, savings or trust company,
will, directly or indirectly, get relief if entitled to it. In the matter
under discussion clearly the trend of all progressive countries is
toward the concentration of the power to issue currency.
If this plan cannot be accomplished, then the plan brought out
by the Senate Finance Committee, as a modification of Treasurer
Treat's plan, will accomplish the relief sought, by the issue of
extra currency amply secured to prevent distrust, with a tax sufficiently- high to prevent inflation. ,These requirements are the main
essentials.
A third plan, which would accomplish the relief sought, would
be the issue of currency based on clearing-house ertificates, such
as have been lately issued. Such certificates should be deposited
with the Cnited States Treasurer as security for such issues. It
is cash that fills demands and kills panic.
I prefer the central bank plan, because the machinery works
smoothly and automatically, more so than under the second plan,
and much more so than under the third. All three are sound, and
infinitely better than asset currency, which will only produce distrust and inflation. Confidence upbuilds, distrust destroys. Statesmanship alone should reign. Whatever plan is provided, our standard of value should never be tarnished, because distrust breeds
panic. On the contrary our currency should be above suspicion,
that confidence, the great bulwark of all progress may be ours
to the fullest possible extent.

5—ANNALS—FRAME—
(i) National banks (none others need apply), big and little,
in city or country, can indite a letter as follows:
COMPTROLLER OF THE CURRENCY,
WASHINGTON, D. C.
Please send to this bank the $25,000, $50,4300 or $1oo,000
of asset or credit currency to which it may be entitled; keep
5 per cent of it on deposit as collateral security; express the
other 95 per cent to us, and we will return the same to you at
/
2 per cent per annum.
our pleasure, plus 21
Very respectfully,
Cashier.

(2) The Comptroller of the Currency shall designate numerous redemption cities conveniently located in various parts of the
country. Through the agency of the banks in such cities adequate facilities shall be provided for active daily redemption of
credit notes. (The advocates of this redemption plan now admit
it impractical, so no answer to it is necessary.)
(3) A bank (credit) note is essentially the same in principal
as a deposit payable On demand. This is an amazing conclusion.
Political economists say, "Coined credit" in the shape of I 0 U's.
issued by banks is fictitious capital. A deposit generally represents actual capital, so no further argument on that point seems
necessary.
In reply to the foregoing I issued the following five challenges in a debate before the State Bankers' Association of Minnesota in July, 19o7, in response to John L. Hamilton, ex-President
of the American Bankers' Association, who advocated the American Bankers' Association plan, to wit:
(z) I respectfully challenge any member of the currency committee or any advocate of asset currency to point to a single progressive country on the earth where small, independent country
banks are allowed to issue currency backed by only 5 per cent
collateral, the remaining 95 per cent of such currency being purely
fiat.
(2) I challenge any man to prove that easy methods of issuing
currency have not been discarded in all progressive nations.
(3) I challenge any man to disprove the fact that, with but few
exceptions, where charters have not expired, in all progressive
nations, only great centralized banks, with very large reserves and
rigid restrictions as to loans, are allowed to issue currency at all,
and the right to issue is limited under rigid restrictions referred to
later.
(4) I challenge any man to prove that the method of redemption proposed—which the asset currency advocates claim as the
crucial test of success or failure—has any parallel on earth, or
affords any practical assurance that it will work under our banking system.
(5) I challenge any man to prove that -a bank note is essentially the same in principle as a deposit payable on demand," or
that "it resembles in character . . . a current deposit liability
of the bank."
After the debate what was the verdict of the Minnesota jury?
The answer is found in the unanimous condemnation of the American Bankers' Association plan, as will be seen by the passage of
the following resolution:
WHEREAS, The prosperity of our country is due in a large measure to
the absolute confidence of our people in our present currency, be it
Resolved, That while we are strongly in favor of some well-secured
method to relieve monetary stringencies that will not produce inflation, yet
we are unalterably opposed to any plan or change in our currency that doe.:
not afford absolute security; hence we do not look with favor upon the plan

proposed by the American Bankers' Association committee.

Later, after listening to John Perrin, President of the American National Bank of Indianapolis and member of the association
currency committee, in favor of its plan, the State Bankers' Association of Wisconsin passed the same resolutions with only two
dissenting voices. Still later,—after the meeting of the American
Bankers' Association at Atlantic City, when, with practically an
empty house and under discreditable conditions, the plan was
apparently endorsed,—the State Bankers' Association of Indiana,
after a full debate on the same subject, where 0. A. Watts, President of the First National Bank, of Nashville, Tenn., took the affirmative, and I had the honor of the negative side, notwithstanding
a strong effort to table the resolutions by able representatives of
the American Bankers' Association, the Hoosiers turned down the
plan by indorsing in full the same resolutions.
These facts, representing the judgment of bankers when a fair
hearing could be had, indicate clearly that the banks of the country
generally are against fiat money. The committee of the American
Bankers' Association evidently doubted the soundness of their own
proposition, as is evidenced by the self-indictment contained in the
following quotation taken from the Atlantic City currency committee reported to the convention:
In all our recommendations principle has, to a greater or less degree,
been subordinated to practicability. We have recommended, not what we
believe, in the light of experience and existing conditions, to be best for the
interests subserved, but what, in the light of existing political conditions.
we believe to be attainable, not what was best, but what we might reasonably
hope to obtain.

President Roosevelt's Opinion
President Roosevelt clearly grasps the essential weakness of
the plan, as will be seen in the following quotations from his last
message to Congress, when he refers to the absorbing currency
question:
We need greater elasticity in our currency; provided, of course, that
we recognize the even greater need of a safe and secured currency, . .
Provision should be made for an emergency currency. The emergency issue
should, of course, be made with an effective guaranty, and upon conditions
carefully prescribed by the government. Such emergency issue must be based
on adequate securities approved by the government and must be issued under
a heavy tax. This would permit currency being issued when the demand for
it was urgent, while securing its retirement as the demand fell off.

And now comes the Finance Committee of the United States
Senate with a bill, in all its essential features, demanding absolute
security for all issues to prevent distrust; with such a high tax6 per cent—as will bring such currency out only under stress, and
will surely retire it as soon as pressure is over, thus preventing
further inflation. These essentials seem to be ignored under the
American Bankers' Association plan, because, under it, the currency,
if issued, would be practically unsecured and would still further
inflate our circulation.
The American Bankers' Association plan undoubtedly would
arouse distrust in the minds of the masses, especially in troublous
times, when it is of paramount importance to allay distrust. When
panic is on,as the asset currency advocates claim a deposit is the same
thing as asset currency, and local depositors are clamoring for
cash, why will not eighty million holders of such currency demand
coin on their notes, thus more than doubling our troubles under

I—ANNALS—RIDGELY—
AN ELASTIC CREDIT CURRENCY AS A PREVENTIVE
OF PANICS

BY Wm. BARRET RIDGELY,
Comptroller of the Currency.

The commercial and financial conditions existing not only in
the United States, but throughout the world, in the early part of
October, 19o7, which made a panic or crisis possible, were the
accumulated and composite results of the business transactions
of many years. A reaction in business was due and inevitable, in
fact, it had for some time been in progress. The exact incident
which precipitated the crisis, and produced a panic, is not very
material. If it had not been the collapse of the corner in United
Copper stock, it might have come from the Westinghouse receivership a few days later, or from almost any one of a number of
similar developments which were not only possible, but probable.
The expansion of business and inflation of credits, whether
based on transactions which would be classed as perfectly sound
and legitimate, or on semi-speculative ventures, or on speculation
pure and simple, had reached the point where there had to be some
settlement and liquidation. While it might not be difficult to assign
any single transaction to one of the before-mentioned classes, it is
impossible to separate the results on the general business situation and say just which added to and produced the catastrophe,
and which did not. The time had arrived when some one had
to pay the penalty for the indulgences of the past. The reaction
and liquidation were not only absolutely inevitable, but necessary
and desirable, in order to bring- business of all kinds back to its
normal condition. This should have been accomplished, however,
in a much more orderly, quiet way, as it had been taking place
for months, without the resulting excitement and foolish sacrifices
incident to any condition of panic.
There never is any necessity for a panic and this, of all
others, should never have taken place because the conditions did
not justify it in any way. Least of all, should we have had a
panic among the banks, and this particular panic might easily have
been avoided. In its place we might have had a more reasonable and orderly readjustment of credits and values if we had had a
better system of currency and a better system of banking, both
national and state. A better system, I say ; not better banks.
\Ve would also have been in a very much better position if
the relations between the business world and the Treasury' Department had been on a different basis: if the Treasury Department
had been either entirely out of business and free from responsibility
ts to business conditions, as it ought to be, or if, being in business,
it had had the proper facilities to deal with the situation as it arose.
I have no criticism to make of the operations of the Treasury
Department, but, on the contrary, from my experience during the
three administrations of Secretaries Gage, Shaw and Cortelyou,
I believe they are all entitled to the highest praise and commendation for what they have done to make the best of bad situations,
with antiquated, complicated and cumbersome facilities, often little
better than mere make-shifts.
Mr. Cortelyou, for instance, has done splendid work in the
relief he has rendered in the last few trying weeks, by distributing- government deposits and stimulating bank circulation, when
it was so desperately needed. I le has shown himself to be a strong,
courageous, resourceful man, in a great crisis, and is entitled to all
credit for it. The deposits of the government with the banks,
have been very potent in checking the panic and restoring confidence, and on this account we find many men commending such a
system of government finance. It is true the most has been
made of it, and it ints.4.
11eren done with not only fine ability, but with
absolute fairness, with no end in view but the public welfare. Hut
look at the sittMtif mi. The rnited States (;overnment has collected
from its people $245,000,000 surplus, above its necessary expenditures, and in order to restore this money to circulation and
repair
the damage done to business by its Nyithdrawal, has had to deposit
$222,000,000 with the national banks ; and when the supply of government bonds gave (ut, has had to accept various other 1)011(15
as security.
This is all that could be done under the circumstances, but
the surplus should never have been collected to such a vast sum.
The government should not take money from von and me vhen we
need it, just to keep it on hand as a panic fund. It is no proper
governmental function to tax people for such a purpose. If it is

ULILNN
N 1111t. ct1J1111.,
0111.
maue 01 It, Mill IL saw, tAcun ttonu
absolute fairness, with no end in view but the public welfare. llut
look at the situation. The United States Government has collected
from its people $245,000,000 surplus, above its necessary expenditures, and in order to restore this money to circulation and repair
the damage done to business by its withdrawal, has had to deposit
of goy$222,000.000 with the national banks ; and when the supply
eminent bonds gave out, has had to accept various other bonds
as security.
This is all that could be done under the circumstances, but
the surplus should never have been collected to such a vast sum.
The government should not take money from you and me when we
need it, just to keep it on hand as a panic fund. It is no proper
governmental function to tax people for such a purpose. If it is
conceded that the government should take a hand in such business,
what an awkward, complicated method it has of doing- the business.
\\That a wasteful use of the money available.
The government should collect its revenues and make its payments as ever one else does, through regular banking channels.
The money should stay in the banks and the smallest possible
amount should be withdraw n from circulation. If the national
banks are not satisfactory for such use, we should have a central
governmental bank to do the government business. The funds left
in its hands would be available for use by the other banks for
business of all kinds, either as reserves against circulating notes
issued, or as loans and rediscounts to the banks. With such facilities as this at its command, the Treasury Department could prevent panics and keep business steady, instead of only being called
in like a doctor to see a patient after he has become desperately
ill. What we need is better hygienic and sanitary conditions and
less medicine. The whole system is wrong, and requires change
and readjustment.
While we are yet probably too close to the incidents of this
panic to be able to properly judge of the causes and effects, we
may now, while these matters are fresh in our minds, and their
results have been brought home to us with such force, take account
of those things which have made the trouble, and at once begin
to devise means not only to repair the damages done, but, much
more important, to foresee the future, and make provision on
proper principles for such changes as will avoid such troubles,
or mitigate the effects of the disturbances which cannot be prevented.
It is needless to go into details as to the events which produced
the business conditions existing in the United States for the last
six months or a year. Everyone is familiar with the great expansion in business of every kind which has taken place all over
the world. Probably the most potent factor in all of this, if it is
not the sole cause of it, has been the enormous increase in the
production of gold, which has more than quadrupled in the last
few years, and is now at the rate of about $43o,00o,000 per year.

2—AN N ALS—RIDGELY—

It is this, more than anything else, that has more than doubled
selling prices of wheat, corn, cotton, pig-iron, steel, copper and all
the great staple articles of wealth which are the basis of all modern
commerce. While this was going on, it was Asolutely inevitable
that there should be a great increase in the volume of credits not
only in all the banks, but between merchants and manufacturers.
between wholesale merchants and retail merchants and so on,
through all the lines of business transactions. There is no country
in the world, and no line of business, which has been free from it.
It has led to an increase of what may properly be called legitimate investment values not only in mines, manufactures, and mercantile concerns, but in real estate of all kinds city and suburban
lots, farms, and tracts of timber. It has increased the prices of
not only sales and transfers of the actual properties themselves,
but of mortgages, stocks and securities based on them.
It is not only natural, but probably inevitable, that all this
expansion should be overdone, for side by side with the transactions
of men who are making such investments carefully and conservatively, based on real values, were those of men who, some through
lack of judgment and over confidence, and others through dishonesty, were promoting schemes and issuing securities based on
far higher values than were justified. This universal process of
expansion and increase of values, has been. on the whole, based on
sound conditions and justified by the facts, but it has been evident
for several years, that we were approaching the crest of the wave,
and there must be some slackening of pace, and almost inevitably
some reaction or decline in prices.
It must be remembered that this expansion started from the
abnormally low values and basis which had followed the crisis and
depression of the year 189j. and the few years following. Wealth
at that time was measured on an abnormally low plane of values.
It was not only perfectly proper, but highly desirable, that they
should be increased. This has gone on, however, as events have
shown, until the limit has been reached. The natural limit of all
such movements is the amount of reserve money which can be
held by the banks as the basis of their credits. The proportion of
this has been growing less and less for several years, and for at
least two or three years there has been a condition of scarcity
of reserve money ; not only in the lvnited States, but in all other
countries.
Another important factor. and in some respects the most important, is that such an enormous proportion of the existing credits
has been transformed from liquid capital into fixed capital and investments, leaving a scarcity of liquid capital fou the enterprises
which were in operation. It has been this, more than anything
else, probably, which has led to the necessity for a contraction of
credits and more or less liquidation.
During this whole period of active business, there have been
many times when conditions have brought about violent reactions
in the stock market. There have been several stock market panics,
notably such as the one which occurred March 9, i9ot, any one
of
which might have produced a far more serious bank panic than that
which occurred in October, i9o7, if business conditions had not
been found so entirely sound that the disturbance was practical
ly
confined to the stock market alone.
During the past few years there have been several perioas
of marked depression although they have not been of long duration
,
nor accompanied by any considerable number of failures.
Why,
then, should we have had a banking panic of great severity in
October and November, 1907? It cannot be that it was entirely
due to speculation, for this existed in much less volume when
the
panic occurred that it has in several other periods when it produced
stock-market panics. The more speculative loans were far less in
volume in October, wo7, than they had been a year ago.
The
main difference in the situation must have been that we were
one
year farther along in the period ; that the whole world had
come
to realize that there had to be a readjustment ; that many of
the

largest and strongest concerns, as is well-known. found
difficulty
in renewing their old loans, and foresaw that they were soon to
be compelled to reduce the volume of their operations.

during the summer of 1907 were becoming- more
and more acute, and were greatly strained when the demand came
for the crop-moving- fluids. The total volume of credits was up to
the maximum that could be carried on the reserve money available. When the withdrawal of deposits in the demand for cropmoving money came, it \'as necessary for the banks to supply this
with reserve money. As far as this in7)ney had to go into circulation outside the banks, it made a reduction in loans to that extent
Conditions

largest and strongest concerns, as is wen-known, found difficulty
in renewing their old loans, and foresaw that they were soon to
be compelled to reduce the volume of their operations.
Conditions during the summer of 1907 were becoming more
and more acute, and were greatly strained when the demand came
for the crop-moving- funds. The total volume of credits was up to
the maximum that could be carried on the reserve money available. When the withdrawal of deposits in the demand for cropmoving money came, it was necessary for the banks to supply this
with reserve money. As far as this 'Ailey had to go into circulation outside the banks, it made a reduction in loans to that extent
inevitable.
If our system had been such that the country bank first, then
the reserve city bank, and finally the central reserve city bank, could
have supplied some form of credit notes in payment of their deposits, the situation would have been entirely different. If WC had
had such a system of notes as they have in Canada, for instance,
which expands quickly and automatically in the fall of every year.
when this demand comes, and contracts just as surely by February
of each year, there need have been no apprehension in regard to
the crop-moving period. There would have been no variation
in the volume of credits at all. Reserve money in the banks, which
was ample for the deposits, would have been ample for the credit
notes, if they had been available.
It need have made no difference at all in the total volume of
credits. The total of note credits and deposits would havy remained
the same with the same reserve against them. No one need have
cared how much the people changed their credits from one form to
another, and there would have been no panic among- the bankers
as to the effect of a demand for current cash. No) disturbance
of payments, collections, or remittances. People who were insolvent or too badly extended might have suspended or failed, but the
man who was in good solvent condition need not have been fearful,
least of all panic-stricken.
Instead of this every banker was at once compelled, in selfdefense, to increase the amount of cash on hand. That is, instead
of maintaining his reserve at practically the same point and changing
his deposit credits into note credits,• he had to meet his deposit
credits in reserve money, and to call upon his reserve and central
reserve agents for it. When a demand of this kind came suddenly
upon the country it was not surprising to find that deposits which
had been counted on as reserves were not reserves at all because
they were not available. This developed at once the two inherent
weaknesses and defects in our banking system the lack of any
elasticity or expansibility of the currency, and the uncertainty
of the system which piles reserve on reserve, first in the reserve
cities and then in the central reserve cities.
The way to cure this trouble and prevent recurrences of events
of this kind, is to give the banks and the people who are their
depositors some proper system of elastic credit notes and to compel
banks to carry against these notes and their deposits, larger reserves
on hand in cash, and kept there reserves in other banks where
they will surely be available.
The experience of all the rest of the world, in every important

•

411

3—ANNALS—RIDGELY—
country, has shown that the best way to accomplish this result
is by means of a strong central government bank which will handle
the finances of the general government, act as reserve agents for
other banks and have the sole right to issue credit bank notes.
This bank should be under government control, and subject to
severe government supervision and inspection.
Among students of these problems the opinion is steadily
growing that until something of this kind is done in the United
States, we shall never have such a financial system as we should.
With such an institution as this in operation, there could have been
no excuse at all for such a panic as occurred this fall. Months
ago, a central bank could have brought about such a gradual contraction of loans, and such reduction in the volume of business,
as would have enabled us to meet this situation quietly and calmly
without anything approaching a panic. Speculative corners might
have collapsed, trust companies with large lines of commercial
deposits unprotected by reserves, and invested largely in speculative ventures might have failed or have been li•quidated, manufacturing concerns with inadequate capital attempting to do too large
a volume of business with borrowed money might have been
forced to suspend or submit to receiverships, mercantile concerns
which had been able, through note-brokers, to dispose of such a
volume of notes that their failure to renew brought on embarrassment 1-night have been tided over and given extensions ;—all without
an bank panic if we had only had the advantage of a great public
bank. The people who are engaged in smaller lines of business
would thus have been spared the losses and embarrassments due
to such conditions as have existed within the last few weeks.
As long as modern business is conducted on credit, as it must
be, there will inevitably be periods of expansion and inflation which
culminate and are inevitably followed by periods of liquidation.
No one has ever suggested any means by which this can be avoided.
With the knowledge that such conditions must exist, it is the
highest duty of the government to provide proper means for dealing- with them. Until this is done, we have only ourselves to blame
for such a panic as has occurred within the last few weeks. It is
useless to blame it to speculation. It will not cure the evil to
prohibit speculation in grain futures, or trading in stocks on margins. These are all only incidental to the great movements which
we have been tracing. They do not cause the expansion of business, and do not bring about its collapse. It is still more unjust
to blame such a condition upon the national administration, the
acts of the legislative authority, or of the administrative officers.
Nothing can 1)e 1W)C unfair and unwarranted by the facts than
the efforts of his enemies and critics to put the blame of this panic
on President Roosevelt. lie is in no way to blame for the general
conditions which were world-wide aml far beyond the power of
any man to prevent, lie is not in the least responsible for the
special incidents which started the feeling of panic among the
banks, and led them to go to clearing-house certificates and a partial
suspension of payments. There is far more blame due to those
critics of the President who, for months before there was any condition approaching a panic, seized upon every remark made or action taken by him, and predicted its disastrous effect on business
If this panic is in any way due to talk and prediction, the
President's critics have done their utmost to produce it by their
doleful lamentations and pessimistic predictions of what would
happen if the President (lid not change his policies in regard to
the enforcement of the laws. It is significant that the trouble
started, and has been worst, in New York, where there has been
the most criticism and abuse of the President and where he is
supposed to have the most opposition. There has been less panic
and trouble in the country, in the West, and among the smaller
business men, and the working people where the President has
always been the strongest, and where anything he has said or
done would surely have the greatest effect.
This whole episode has been more a panic among banks and
bankers than among the people. Except in the City of New York,

suspension of payments. There is far more blame due to those
critics of the President who, for months before there was any condition approaching a panic, seized upon every remark made or action taken by him, and predicted its disastrous effect on business
If this panic is in any way due to talk and prediction, the
President's critics have done their utmost to produce it by their
doleful lamentations and pessimistic predictions of what would
happen if the President did not change his policies in regard to
the enforcement of the laws. It is significant that the trouble
started, and has been worst, in New York, where there has been
the most criticism and abuse of the President and where he is
supposed to have the most opposition. There has been less panic
and trouble in the country, in the West, and among the smaller
business men, and the working people where the President has
always been the strongest, and where anything he has said or
done would surely have the greatest effect.
This whole episode has been more a panic among banks and
bankers than among the people. I...xcept in the City of New York,
there has been surprisingly little excitement among the people,
and very little distrust of the banks. That there have been so
few failures and that the panic has been no worse, has been due
to the intrinsically sound condition of the banks and the business
of the country, to the wonderful courage, patience and forbearance
of the business men and people. They have quickly adapted themselves to the necessities of the situation, and availed themselves
of every possible temporary expedient to gt along until the excitement was past. This has been especially true of the working
people and the smaller depositors, who in many notable instances,
have acted in concert with great coolness and deliberation, to
support their local banks and to share their portion of the burden.
The critical period has passed with surprisingly few failures.
Conditions are improving daily ; banks are resuming payments
and remittances, and the panic is a matter of history. We have
vet to face some depression in business, and have to undergo the
somewhat painful, but very necessary process of reducing expenses,
practicing economy, and paying our debts. But there is nothing
that pays an individual or people better, and when matters are
readjusted, and prices are on a better and more stable foundation,
no one who knows our country and people, our resources and
powers of recuperation, can doubt that in a short time our business
will again proceed on a sounder and more durable basis. Our
prosperity, while less spectacular and sudden, perhaps, N'ill be
greater than ever before.

1—SCHIFF—ANNALS.
RELATION OF A CENTRAL BANK TO THE ELASTICITY
OF THE CURRENCY

JACOB

H. SCHIFF,

Senior member of the firm of Kuhn, Loeb & Company, New York.

The storm which has recently broken loose has not yet entirely subsided. The causes of the financial trouble which has come
upon us are hardly understood yet, but with typical American
courage, we are looking already for the remedies, not only to retrieve what has been lost, but also in the desire to gain protection
for the future against the recurrence of a disaster similar to that
which has overtaken us.
The physician who would want to find proper remedies must
first know and understand the origin and seat of disease. We should
therefore, carefully inquire into the causes of this crisis, which has
come upon us almost in the midst of an era of unprecedented prosperity.
To me it appears the answer is not surrounded by much doubt.
The origin of the crisis is to be sought mainly in too great an
expansion of enterprise of every nature, both corporate and individual. This, as a consequence, caused a straining of financial
requirements, and particularly of credit, beyond legitimate limits.
"Prosperity run riot," expresses perhaps best the condition, which
existed and which brought us to our present plight. Nothing
is probably more largely responsible for the breakdown, than the
obstinacy with which new enterprise became fostered ; the enormous
volume of business which was developed in every quarter, even in
the face of a steadily increasing money scarcity, and, further, the
stubbornness with which it was insisted that the country was so
prosperous and rich that particular caution and prudence were
not needed. The march forward was made with a totally unprotected rear.
Look only at the number of so-called trust companies, called
into being during recent years, and which under a false flag bid for
and attract millions upon millions of deposits, to be used not for
legitimate banking, but for illegitimate promotion, from which
funds could not be withdrawn when their return was asked for
by those to whom they belonged. And not alone in financial quarters
had developed this prosperity madness—industry and commerce,
prudence had likewise been thrown to the winds. The manufacturer and merchant, when warned that he was expanding too
largely—that he was straining his credit in too great an extreme—
scornfully rejected the advice to go at a slower pace. His answer
almost invariably was that the demand for his goods was great ;
that his customers were in good condition, and that anxiety and
complications existed only in Wall Street. He overlooked the fact
that the basis of the large volume of business, which he thought
he was doing legitimately, rested, to a great extent, upon the very
over-expansion of enterprise represented by the inflation of corporate securities he was criticising, and that the collapse in securityvalues would have inevitably to be followed lw a breakdown of
the general business of the country.
And now, as a panacea for the ills under which we are suffering, a sudden demand has sprung up throughout the country for
currency reform. Proposed by the few who foresaw and foretold what was coming, as a partially protective measure, the warning to reform the currency was, when it was sounded, described
as a scheme of banks and bankers for selfish purposes, and became
almost lost, like a cry in the wilderness. Had it been heeded, the
present crisis might not have been entirely prevented, but it would
never have gone so far in upsetting the business of the entire
country. Let it be said, however, and well understood, at this
juncture, that currency reform, imperatively needed though it is,
can in itself never furnish protection aainst the consequences of
unsound and illegitimate business methods. A properly constituted circulating medium, can furnish in times of financial difficulty
a palliative, but without simultaneous reform in the unsound practices, which, to so considerable an extent, have governed the affairs
of financial institutions, currency reform will be of little avail.
The action of theGovernor of the State of New York, who,
with statesmanlike sagacity, has just taken action with a view to
correct the shortcomings, which have been laid bare, through the
medium of a commission, which is to report upon a revision of the
banking laws of the state, should be particularly welcomed.
shall not enter here into a discussion, to which I have already
furnished my quota upon earlier occasions, of any particular scheme
for the reform of the currency. So much has already been said,
written and published upon the question of currency reform, so
many propositions have been made by all sorts and conditions of
men as to methods, ways and means, through which is to be
secured what is needed, that with the meeting of Congress just
upon us, it had perhaps now he best left to the wisdom of our
national legislators to embody some measure into the form of law,
which to them shall appear to best satisfy the demands and needs
of all sections of the country; Congress will, in all events, have at

2-SCHIFF-A N NALS.

its disposal rather a long catalogue of currency reform plans to
select from.
What we are most in need of at this juncture, is the enactment
of a measure, through which the circulating medium can be made
to respond promptly to a diminished money demand. We have,
during recent years, with the enormous expansion in enterprise and
general business, no less than in the few weeks since this crisis
has come upon us, been rather liberal in the creation of paper
currency. If we are not careful, we shall before long find ourselves face to face with so large a volume of paper money, that
gold will inevitably be driven out. Otherwise, some day, when
this mass of paper can no longer be digested, we may be face to
face with a depreciation in the standard of credit of the government,
as expressed by the market value of United States bonds.
Expansion of the currency, when legitimately needed, vill,
under proper provision for this, take care of itself, if only in any
scheme for the reform of the currency, proper provision be first
made for the promptest possible contraction of the circulating
medium, when its volume becomes too large for legitimate requirements: Nor is it likely that any scheme for the issuance
of a circulating medium will prove permanently satisfactory, which
shall clothe 6,000 banks with the privilege of issuing credit currency,
each for itself. No matter how completely the safeguards proposed to
be established through the creation of a guarantee fund may appear
to be thrown around the exercise of this privilege, a single default,
even if only temporary, would likely create prejudice against the entire volume of the outstanding currency, and no chances, however remote, ought to be permitted to be taken in this respect. Whether
it shall be a central bank—if authority for the establishment of such
can be obtained—or a central association of national banks, to
possess no other function than to issue to the banks the circulating
notes, to which, under the stipulations and restrictions to be imposed
by law, they shall become entitled, there is needed a central authority,
to properly control and determine the issuance of any circulating
medium, based upon assets. Such a controlling central authority,
should and can best be constituted by the banks themselves. An
association of national banks would, for the time being, at least,
likely prove more acceptable than a central bank. The latter, to
be of real advantage, would not only have to receive a monopoly
of the privileges to issue circulating notes, but would moreover
have to become the depository of the funds of the government.
It would have to undertake the discounting of commercial paper,
both for banks and for individuals, and it is not likely that the country is, at this time, prepared to sanction so far-reaching a scheme,
which of necessity would revolutionize our entire national banking
system.
The one lesson, at least, which we should learn from recent
experiences, is that the issuing of clearing house certificates, while
no doubt it helped locally, has also worked considerable harm. It
has broken down domestic exchanges and has paralyzed to a large
extent the business of the country. Far better, as has recently been
semi-officially proposed, that the government itself should become
authorized to issue, in times of great stress, legal-tender loan certificates through the clearing houses, to the banks, upon appropriate
security, and with stringent automatically acting provision for quick
redemption. Undesirable as such an expedient may perhaps in
itself be, from an economic point of view, it would at least
prevent a breakdown of domestic exchanges, such as we have just
experienced, resulting in a large premium upon currency—or, to
state it more correctly, in a large discount upon bank checks. We
have seen how the suspension of cash payment by the banks in the
leading centers, compelled us to throw upon Europe the burden
of financing our cash requircmentA almost entirely (luring the
important period of the crop movement, and forced the Rank of
England into the position, so mortifying for us, where it had to
assume this burden almost singlc-handed.
Comparisons are odious, but sometimes they are also profitable,
if properly applied. Let us at least hope that the severe and costly
lessons we have received, shall not be permitted to be forgotten,
until we have found appropriate remedies. It is certain, if this
be done, we shall emerge from the momentous period, through
which we are just passing, freed from 111a11V handicaps, which still
impede us in the financial, commercial and industrial aspirations,
which we possess—fortunately be it said—both as a nation and as
individuals.

2-M ILLS-A NNALS.

National Bank Act may, in the opinion of the framers of that law,
be sufficient protection to the depositors, but does anyone here think
it reasonably safe banking to have but a little over 6 per cent in
cash behind his deposits? And yet a compliance with the National
Bank Act requires but that much coin. For instance, a national
bank in Whatcom has $.100,000 deposits; of its $6o,000 reserve
$36,000 may be kept in Portland ; against the $36,000 Portland
must keep a reserve of $9,000, of which $4,500 may be in New York,
and New York is required to keep but $1,125 of this on hand. To
meet the $400,000 in Whatcom the requirements of the National
Bank Act are fulfilled with only $29,625 cash, or a trifle over 7
per cent. This may be sufficient protection to the public, but when
Uncle Sam deposits his money, he requires as security dollar for
dollar in his own obligations. When we note how closely the banks
of the country are knit together, how dependent they are upon one
another, is it a matter of wonder that a panic in Wall Street is
felt throughout the length and breadth of the land? Is it wise
to be so dependent ? Should our banks not be more independent?
And to do so should they not carry more of their reserve in their
vaults?
lint these remarks only referred to national banks and their
reserves. When account is taken of the scanty reserves maintained
by state banks, private banks, savings banks and trust companies,
the amount of actual reserve behind the deposit liability of the
country dwindles to such small figures that one staggers with
amazement at the vast amount of credit that rests upon a single
dollar. With this thought in mind need one be surprised that a
run on the Trust Company of America caused a currency famine
in New York, the effects of which were felt throughout the length
and breadth of the land?
In framing the National I iank Act (of which most state bank
acts are but loosely-(lrawn imitations with more lax restrictions)
the theory seems to have obtained of concentrating the actual
money of the country in the large cities. A reserve that is on
deposit with another bank is not a cash reserve; the only cash
reserve is coin in the vault. It is a good asset of the bank, but
by no means cash. The present system of reserve on reserve, reserve on reserve, makes it more difficult to find the true reserve
than it is to find the elusive pea in a shell game.
The complete breakdown of the present system of reserve was
illustrated in the recent panic. Beyond permission to draw against
their balances in "Clearing I louse Funds" the legal reserves maintained in the East by the banks of the Pacific Northwest were
almost valueless as a source from which to draw funds to meet
the demands of depositors. The banks were forced to depend
upon the actual coin in their vaults and to manufacture such other
circulating medium as the suffering- public would endure. Does
not this experience prove that our system of reserves is i fiction,
false in theory and worthless in practice?
If banks were required to maintain in their own vaults the
full legal reserve there might be omtraction of credit for a time,
but the financial institutions of the country would be on a sounder
basis. However, there is little hope for change, especially as long
as the payment of interest on daily balances exists to arouse the
avarice and befog the judgment of the average banker.
The Weakness of our Financial System
That a currency famine in New York should endanger every
financial institution in the Union, and ill a Year of bountiful crops
and great prosperity cause a widespread and senseless panic is
sufficient evidence of the extreme weakness of our system Of
finance to cause every Donliting "Ishomas to favor currency reform
at once. Writing forty years ago Robert Ilaxter said, "provision
should be made for such a contingency as a panic,
that, when
hoarding- interrupts the necessary flow of currency, a new stream
mav, under pn Ter sa feguard, be created and the course of business sustained." The necessity for such a provision, for the issuance of sonic kind of an emergency currency, had ample illustration in the fall of 1907. Every great city and many smaller
ones in ( )ctober and November issued clearing-house certificates
for use ill settlement between banks, and in addition, in order to
prevent the utter suq,z-nation of business, issued in unlimited (luau•

:„..........;

•..,

I ,ttttt .... ,

hoarding- interrupts the necessary flow of currency, a new stream
may, under proper safeguard, be created and the course of business sustained.- The necessity for such a pn)yision, for the issuance of sonic kind of an emergency currency, had ample illustration in the fall of Iop7. Fyery great city and many smaller
ones in October and November issued clearing-house certificates
for use in settlement bet‘k cell hanks, and in addition, ill order to
prevent the utter stagnation of business, issued in unlimited quantities clearing-house scrip of small denominations.
Can there be a better example of what reform is needed in
our financial system than the fact that throughout the length and
breadth of our land local emergency currency was issued to discharge the duties of a national currency that had largely disappeared from circulation? As a supplement to the national currency this suddenly-developed circulating medium served its purpose well. Without concerted action on the part of the banks,
nevertheless, in a night, this local emergency currency sprang into
existence to perform the daily exchange business. The emergency that called it into existence having passed, it quickly gave
way to the better currency and was retired.
I low much better a true emergency currency with legal tender
qualities would have been, any one who handled the hundred
different kinds of clearing-house scrip can bear witness. Had
there been provision for an emergency currency as in France and
Germany, and in a measure in England, the financial disturbance
in New York would not have involved the entire country. The
frightened depositors of that city would have been net with an
ample supply of funds and New York's financial institutions would
have paid the price, for no plan for an eniergency currency should
ever be adopted that does not include a steadily rising tax to be
levied upon the banks taking out such currency ; and the tax
should be no light burden, such as three or four or even five
per cent, lest in avoiding panic we are ruined by expansion.
Sumner says, "Any device which has elasticity for its object
ill wil have expansion for its effect.- And expansion spells ruin for
IV our financial system. We therefore must beware of the expansionists with their asset currency nostrums and keep ever before
us that the standard of value is gold and that gold can carry but
so much burden. Overload gold with too great an amount of
paper promises to pay and the precious metal will leave our shores
and we shall be dependent upon fiat money.. Better a panic every
year than gold at a premium.
How should our laws be amended to permit the issue of an
emergency currency that shall be sound, be quickly issued when
required, and rapidly retired when the emergency is passed ?
The
best plan proposed is a central bank of issue, approaching as
nearly
as possible to the Imperial Bank of Germany ; but it is to be
feared
that the intelligence of the average congressman is not of
high
enough order to rise above fear of local prejudice and to
permit
him to vote for the good of the whole nation, if it does not
suit his
local banker. Should the unexpected happen, however,
and Congress rise to the needs of the country and pass a bill for
the estab-

I---VANDERLIP—ANNALS—
THE PANIC AS A WORLD PHENOMENON

BY FRANK A. VANDERLIP,
Vice-President National City Bank, New York.
It might very properly be urged that the present is too early a
date for us to draw wise conclusions from the lessons of the recent
financial crisis. Indeed, one can hardly speak of it, as I did just
now, as the recent crisis. It is the present crisis. If we are not
well in the midst of it, we at least continue to be surrounded with
many unpleasant features that have formed a part of that crisis.
We are still in a situation where a great majority of the banks of
the country have practically suspended cash payments.
Domestic exchanges are still seriously disorganized. After
the most heroic measures for relief, taken by the Treasury and by
banks generally, we continue to be surrounded by abnormal conditions, and the day is somewhere in the future when we can look
back with anything like academic interest and comment with intelligence on the true lessons which have been taught by this extraordinary financial event.
Although it may be too early to speak with certainty about
these lessons, there is good excuse to give consideration to the
phenomena of the crisis, even at as early a date as the present.
Sufficient excuse may be found in the profound necessity which
exists for an understanding- of the causes and a comprehension of
the principles which must underlie proper remedies for such a
financial panic. There has never been a time in our political history,
I believe, when there was more necessity for a broad educational
movement in relation to financial affairs, than at the present time.
The necessity for education so that the public will comprehend the
underlying principles governing sound banking and a proper currency is as great to-day as was the necessity for education in regard
to the standard of value ten years ago.
The causes of the remarkable financial disturbances which we
have been experiencing are more or less obvious. Still, men are
not agreed upon them nor upon the varying degree of importance
that should be allotted to those causes that are obvious. Some
men will trace the roots of the trouble to the policies of the President of the United States. Some will trace them directly to the
activities of the "gamblers- of Wall Street, as they choose to call
that portion of the community. Now the truth lies at neither of
these extremes nor indeed does it lie between them. It is much
broader, deeper and more comprehensive than either of these
suggestions.
If I were to attempt in just a word to outline the causes as
I see them, I should say that we must run back for some of the
roots in the terrific losses which the world's capital experienced as
a result of the Boer War, costing as it did one billion of dollars,
the Japanese-Russian War, which cost one and one-quarter billions,
and the losses of the San Francisco disaster, which footed another
half billion. Here we have figures of nearly three billions of dollars direct loss to the world's capital. That loss too came at a
moment when the world was just entering upon a most intense
industrial activity, an a :tivity which created, what was, I presume,
the greatest demand for capital that the world has ever known.
The world has thus, in an unprecedented degree, been using
of its liquid capital. We have seen railroads and other corporations inexorably pushed to build a new lines, to add to their equipment and to extend plants. But although the corporations were
forced to make these expenditures by the demands which broadening industry and growing commerce made imperative, they became
at last, owing to the exhaustion of the world's investment fund,
unable to sell securities to provide money for their forced expcnditures. They were unable to sell bonds, even though the security
that was offered was wholly above criticism. The investment
capital of the world became well nigh exhausted. That phase of
the situation was by no means confined to America. It was international in its origin and world-wide in its effect.
This financial crisis, however, has by no means been altogether
a matter of money. It has, in large measure, been a matter of what
was in men's minds. I would again go back a few 'ears in search
for the roots of our present difficulties and note that we have had

do'

Ole S1111a11011

With uy

110 111Lili1s Luilitue0 it/ 11111Li ILct.

It. vs, an

national in its origin and world-wide in its effect.
This financial crisis, however, has by no means been altogether
a matter of money. It has, in large measure, been a matter of what
was in men's minds. I would again go back a few years in search
for the roots of our present difficulties and note that we have had
a period of so-called "much raking." A period in which there has
been the most general criticism of leaders, both financial and political. Now, to tell the truth, we have had a good deal of honest
reason for criticism ; at the same time, it is unquestionably true
that much of the criticism has been unfounded. There has, however, been brought forward evidence enough to show that no small
measure of criticism was. merited.
The financial world approached the fall months of 1907 with
a situation in which investment capital was practically exhausted
and at a time when the confidence of the people in financial leaders
had been severely shaken. It was not alone the confidence of the
people in financial leaders that had been shaken, however. The confidence of the financial leaders, the confidence of investors and of
men who control capital had been shaken in the people. The confidence of those men, in the wisdom of legislation, in the fairness
of legislators, in the high-mindedness of courts and in the right
spirit and justice of puha opinion, has been seriously shaken. We
approached these fall months then with a situation where confidence
was lost on the part of the people in the financial leaders and was
shaken on the part of those who directed large corporate affairs, in
the stability of conditions such as only an honest and fair public
opinion can insure.
We approached these months with a banking and currency
situation in which any withdrawal of money from the banking
centers, even such a withdrawal as comes with the ordinary legitimate demands for the crop movement, meant, because of a bad
banking and currency system, a withdrawal of reserves from the
banks. We approached these trying months with a currency system
which had in it no expansive element. If more circulation were to
be needed, there were only three places it could come from. It
might come from abroad in the shape of gold imports, it might come
from the treasury in the form of additional public deposits. or
failing a sufficient supply from these two sources, it must come from
the reserves of the banks.
We have been preaching about the necessity for an expansive
currency for years. We have now had an illustration of the need
of it, an illustration of the danger which we run to be without it,

2-V A NDERLIP-AN NALS—

which is going to go farther to convince the people that we require
legislation, than have all the meetings and all the addresses which
have been made on this subject in a great many years.
Of course, if one were to trace more minutely the causes of
the financial upheaval, he might find the direct, immediate cause
was intimately related to trust company development. A great
number of trust companies have been organized in the last few
years. Bank depositors have been very greedy to obtain high
interest rates. The trust companies, with small reserve requirements, were in a position to pay higher interest rates than did the
commercial banks. in some cases they paid rates that were too
high, and in order to pay such rates they engaged their capital in
a way which was not the most conservative. That made the situation such, taken in connection with the general shock to confidence
which I have referred to, that when a breath was raised against the
credit of trust companies, it found quick lodgment in the minds of
the people and depositors, and made those suspicions promptly felt
by large withdrawals of deposits and a considerable hoarding of
cash. The hoarding, indeed, was not confined to the people altogether. It soon extended to the banks themselves, and has finally
become one of the most important features of the situation. This
hoarding of money in excess of their normal reserve requirements,
by the banks, is one of the phenomena that will deserve close attention. The remedy for it lies outside the field of an elastic currency.
Now, as we have remarked, it may be rather early for a really
academic view of this crisis. Nevertheless, I believe the necessity
for a study of the lessons of the crisis is so great, the need for an
undertanding of these lessons is so pressing, that now, while it is
all fresh in our minds, is the best of all times to begin a study of
the problems raised.
Recently the newspapers have contained interviews with a
large number of senators and congressmen as to the course of
probable financial legislation. To my mind it was shocking to read
the views of many of the members of Congress. They ran all the
way from those members who thought nothing at all was necessary
in the way of legislation to those who wanted to have the United
States Government guarantee all the deposits in all the national
banks and issue $300,000,000 of greenbacks. 1 am ashamed to
admit it, but I presume the truth is that a series of interviews with
well-known bankers, interviews with men bearing the most important relation to the country's financial work, would show as
great a variation of opinion as did these interviews with members
of Congress. I am afraid that the bankers .would show, in some
cases, as great ignorance of what is needed, and as little comprehension of the principles underlying- any really intelligent reform,
as our senators and congressmen. That leads me to believe that
there never was a time when education of the people in the principles of banking and currency was more seriously needed. The
necessity for such education is reason enough for this inquiry into
the lessons of the crisis.
The one great practical lesson, of course, is going to be that
some form of expansive currency, a currency which will be related
in volume to the commercial needs of the country, is necessary.
Whether such currency be secured as a result of an extension of the
powers of the treasury or by giving the right to all national banks
to issue asset currency, or by the organization of a central bank, is
one of the questions which a better educated public opinion is
needed to answer. Whatever the answer may finally be, there are
certain principles which we must learn to recognize and to apply
to all discussions of this subject of an expensive currency.
It is, perhaps, fortunate that we have had an illustration of an
expansive currency in the issue of clearing-house certificates which
have been put out in many cities in the form of circulating notes and
which will help many to see more clearly what really is the function
of an asset currency.
One of the valuable lessons which we have learned from this
financial disturbance is the interdependence of financial centers
Upon one another. New York hail shown evidences of the approaching crisis for several months. There had been disturbances
in the stock market, high rates for money, low reserves and other
indications of a possible period of strain, but the great West and
South, with seven billions of agricultural products, said, "We are
independent. We have divorced ourselves from the people of Wall
Street. They may have their troubles. We are strong enough to
take care of ourselves."
London, Berlin and l'aris did not feel the same financial independence that was felt by Oskaloosa and l'odunk. Oskaloosa and

V •

•

proaching- crisis for several months. There had been disturbances
in the stock market, high rates for money, low reserves and other
indications of a possible period of strain, but the great West and
South, with seven billions of agricultural products, said, "We are
independent. We have divorced ourselves from the people of Wall
Street. They may have their troubles. We are strong enough to
take care of ourselves."
London, Berlin and Paris did not feel the same financial independence that was felt by Oskaloosa and Podunk. Oskaloosa and
Podunk believed that the wheels of prosperity would continue to
turn for them with tmbated speed regardless of what happened in
New York. London, Berlin and Paris were deeply concerned over
the situation as it was reflected in Wall Street. Now the whole
country has come to see that there is no such thing as financial
independence. It took hardly twenty-four hours from the disturbance resulting in clearing-house certificates in New York for the
difficulties to become national. The West and the South, rich and
independent as they are, can now see more clearly that the whole
country's welfare is pretty much bound together in a financial way.
Perhaps the most significant of all the lessons of the crisis, one
that will, in the end, sink more deeply into our understanding than
any of the others, will come to us when we comprehend the full
weight of what it means to destroy confidence ; what it means to
destroy the confidence of the people in the financial leaders, to
destroy the confidence of capitalists in the fairness of the people
as reflected in legislation and in the decisions of the courts.

•

1—TREAT—ANNALS—
THE READJUSTMENT OF OUR BANKING SYSTEM AND
TIIE UNIFICATION OF THE CURRENCY

BY HON. CHARLES H. TREAT,
Treasurer of the United States.

The importance of remedying- the confused condition of our
many issues of paper currency and to relieve the stigma of discredit
that attaches thereto for a great nation like ours has been a favorite
topic of discussion for several years among students of. finance.
It would seem desirable that such modifications should be made as
would bring about a more harmonious unification of currency issues.
It is not to be denied that formidable obstacles exist to securing
such a result, more especially in overcoming the prejudices in the
public mind, the views of legislators, who hold with great tenacity
long-cherished ideas on the efficacy and wisdom of a retention of
the "greenback," and the opinions of the silver doctrinairies who
believe in basic money, as the safest and most desirable form of
circulating medium.
Our conglomerate currency issues have been largely the growth
of a necessitous condition that has been met by temporizing legislation ; therefore there must be some excuse for the weakness and
helplessness that has produced such an unsatisfactory currency
system.
As we come out into the light of national strength and independence, we look back with a more critical eve upon present
financial aspects, their origin and condition. It is, however, encouraging that we are restive over such disclosures. There is
an undoubted sentiment that something should be done that shall
place our monetary system upon such a broad and compfehensive
basis as vill be lasting in its beneficent workings and stand the
test of time, not only for half a century, but for an entire century.
In view of these facts, I offer a plan that is more in the nature
of "a suggestion," but which I hope may incite intelligent examination and discussion that may evoke something of value to the
yearnings of those who would like to see a remodelled currency
system, a plan for national finance that would not be discreditable
to our intelligence and our experience of to-day.
Retirement of United States Notes
I. I advise legislation by Congress, authorizing the Secretary of the Treasury to retire United States notes in sums not less
than 50 millions nor exceeding too millions per annum. The payment of the United States notes and the releasing of the reserve
fund for their redemption would give a legal reserve of about
350 millions in gold for banking purposes.
Public sentiment is again agitating the desirability of utilizing
the advantage of an overflowing national treasury for the gradual
retirement of United States notes or what are known as "greenbacks."
The minimum sum, $346,o00,000, has not been changed since
Secretary McCulloch was instructed by Congress not to retire any
more of these notes, and when Congress declared that that amount
should remain in circulation. Since that time there has been periodical agitation by bankers and financial students to secure a revival
of the practice of Secretary \1c( ulloch of retiring "g-reenbacks"
when the surplus of the treasury allowed such a step tinder the
enactment of February 25, 1862. Various objections have been
raised to this among others, that it would cause a contracthm of
the currency ; on the part of others, that it would destroy in a
measure, the amount of reserve money which was in )t at all excessive for banking use, and still others, that there would be saving of interest.
The increased supply of gold ‘vould seem to he an assurance

that there need be no apprehension of a lack of a sufficient legal
reserve, in case 20 or 50 millions per annum of -greenbacks" were
replaced by gold coin.

It has perhaps escaped popular attention

that we have over 150 millions of o)in and bulli(m held in reserve
against the issue of 346 millions of greenbacks, which leaves an
approximate currency supply of $170.000,000 available for circulation
The permissive circulation of United States n(les is 346 millions. ( )f this, there is an average of 26 millions held in the vaults
of the treasury, which, taken from this sum. leaves 120 millions

• .0

•11:1,611.41

that there need be no apprehension of a lack of a sufficient legal
reserve, in case 20 or 50 millions per annum of "greenbacks- were
replaced by gold coin. It has perhaps escaped popular attention
that we have over 150 millions of coin and bullion held in reserve
against the issue of 346 millions of greenbacks, which leaves an
approximate currency supply of $170.000,000 available for circulation
The permissive circulation of United States notes is 346 millions. Of this, there is an average of 26 millions held in the vaults
of the treasury, which, taken from this stun, leaves 320 millions
in actual circulation. There is now a reserve fund in gold for redemption of United States notes of 150 millions. Taking this
from the 320 millions, leaves only a practical gain to circulation
of United States notes of 170 millions, provided that the reserve
fund of 150 millions were not released.
The saving of interest can, therefore, only be reckoned on
170 millions, which, at 2 per cent, would amount to about $3,700,000 annually. The saving of interest to the government is but a
small item for a circulation of $170,000,000.
If the gradual retirement of greenbacks were known to be
the settled policy of the government, this would give rise to an
enhancement of the credit of the country, and the financial repute
therefrom would far outweigh any paltry saving of the interest
account. Such a step would convince the international investor
that gold was the legal and established standard of the co untr\
and that he might confidently feel that his investment would be
returned to him in gold, on demand. It would promote a larger
growth of the national banking system, which is doing so much
to uphold the credit of our securities. It follows, therefore, that
no apprehension need be felt of calamitous results from a gradual retirement of the greenbacks.
Retirement of Silver Certificates
I advise the retirement of all outstanding silver certificates—about 475 millions—and the issuance, therefor, of 2 per cent
United States fifty-year bonds for an amount not exceeding 50 to
mo millions per annum. The silver tlollars so released from pledge
in paving off silver certificates, could be utilized for the government's need of subsidiary coin. This would do away with the
purchase annually of i large amount of bullion, which in the past
year amounted to nearly nine million dollars.
3. The retiring of these two kinds of money—United States
notes and silver certificates—would do much to complete the unification of the currency, as national bank notes and gold certificates would be the only currency used.
4. I would advise that the present issue of national bank notes
be retired, and that the government bonds so pledged for circulation and payment be redeemed by a special bond known as a "banking bond,- bearing interest at 2 per cent for a term of not less than
fifty years; and that such bonds as are now held for circulation
shall be redeemed and paid for at a premium of 5 per cent to re2.

2—TREAT—AN NALS—

imburse the average cost to the investor, as the government should
not require the banks to pay more money than they actually receive
therefor.
I advise that the sale and purchase of these banking bonds
should be under the absolute control of the government, and that
when a bank desires to retire its circulation, the government shall
buy the bonds at not less than par and without premium. This will
do much to prevent the daily speculation in government bonds
which not only causes fluctuations in price, but affects the volume
of circulation without regard to business conditions. The bonds
so purchased should be destroyed. The denominations of these
bonds should not be less than $1o,000 nor more than $wo,000.
The bonds to be issued for the retirement of silver certificates
should also be banking bonds as before described. This would
furnish the basis of additional circulation without contracting the
volume of currency and the total amount of 500 millions, which
is the measure of the volume of silver certificates, would then be
reissued during the term of ten years in the form of national
currency.
Some one might make objection to the retirement of silver
certificates, in that there may be no legal reserve money to take
its place, but in the gradual retirement of silver certificates of 50
to mo millions per annum, we could fairly look for an adequate
supply of gold. The volume of gold production is now over 400
millions annually, and our country is increasing its gold output
in comparison with other nations.
United Statcs National Bank Currency
5. The new issue of bank notes should be known as "United
States National Bank Currency." This designation would give it
an international recognition, and the sentimental effect of such a
designation would inspire world-wide confidence in its genuineness
and its financial responsibility.
I would advise that simplicity of design of all notes be carried
out in the different denominations, and that the distinction should
mainly be upon two points: first, the denomination itself, and second, a vignette differing for each denomination issued. This would
give such uniformity in size and appearance, that the note would
easily be recognized and would be more difficult to counterfeit. The
denomination numbers should be large, so that the counter could not
fail to see the same clearly at a glance. A vignette is said to be the
most difficult thing to counterfeit, and experience has proved that
the least embellishment on a note affords the greatest protection
against counterfeiting. The different banks using this new circulation would only be known by the numbers printed on each note.
A sentimental objection might be made to the elimination of
the individuality of the bank note, but when the facts are taken
into consideration, it is well known that it is very seldom that the
holder of a bill looks at the signature, his only concern being that
it bears the impress of guarantee by the United States.
This uniformity of size and design would be less expensive
to prepare, and a large quantity of currency could be kept on hand
which would be applicable to the needs of any banker. The only
names of officials attached to said notes would be those of the
Comptroller of the Currency and the Treasurer of the United
States.
These notes should be issued in such a percentage of denominations as would meet the existing and growing demands of business conditions. All banks should be required to take out such
percentage of ones, twos and five and tens, as would meet the
requirements of business. The same form of note would provide
for a permanent, as well as an emergency or. "supplemental"
currency.
The guaranty of the government on said notes would simply
he expressed thus: "This note is secured by bonds deposited a'ith
and guaranteed by the United States.- Three hundred millions
of these notes should be held in reserve, and as they would be
used in common by every national bank, there would be no risk
in their being utilized. There would also be a lessened expense
in preparing- and issuing the same.
This re-adjustment would not only unify the currency, but
in its simplified design, would avoid the well-deserved criticism
of confusion in our monetary forms of currency, and make it more
acceptable in all the money markets of the world. This unification of ihe currency has long been desired by large numbers of
the American people, but no feasible plan has been put forth.
These notes would be acceptable for taxes, etc., in the same way
as the present national bank notes, which would be in supply
until all the silver certificates had been called in and canceled.

•
of these notes should be held in reserve. and as they would be
used in common by every national bank, there would be no risk
in their being utilized. There would also be a lessened expense
in preparing and issuing the same.
This re-adjustment would not only unify the currency, but
in its simplified design, would avoid the well-deserved criticism
of confusion in our monetary forms of currency, and make it more
acceptable in all the money markets of the world. This unification of the currency has long been desired by large numbers of
the American people. but no feasible plan has been put forth.
These notes would be acceptable for taxes, etc., in the same way
as the present national bank notes, which would be in supply
until all the silver certificates had been called in and canceled.
There might be objections on the part of some devoted advocates of silver, that it is the money of the people and that they
would oppose its withdrawal. The records of the treasury show
that the demand for silver dollars over that for currency, arises
mainly from the fact that the transportation of the silver dollar
is made free by appropriathm from Congress, whereas there is a
charge for transportation of currency. This was abundantly demonstrated last year when the appropriation was exhausted for free
transportation of silver dollars and the demand therefor was reduced
nearly Sei'ClitY-fiVe per cent. When a new appropriation was
granted, silver dollars were again in demand because transportatio'n
was made free.
It might be further objected that the retirement of silver certificates would make an additional interest charge of some ten
million dollars to the American people, but it must be considered
that there would be a great saving to the government in the profit
of utilizing the silver dollars for subsidiary coin, and also the
lessened expense of furnishing currency of one simple uniform design, and the saving of loss to the government by the abraiding
f silver dollars. This is a large item in the treasury to-day, as
not less than a million dollars are short-weight, and probably on a
closer investigation, this amount would be largely increased.
The paramount question, however, is not simply one of saving a small amount of interest, but it is, what would be to the
greater advantage, convenience and profit to the American people?
It would seem to me that now is the time, when far-reaching
amendments are needed to the laws of our banking system, to so
construct a system of finance that, while it shall be absolutely

3—TREAT—AN NALS—
safe and desirable in its appearance, it shall also have the elements
that are needed not only for a permanent but for an emergency
or supplemental circulation.
I append hereto my well-known view on the supply of a
supplemental currency, which needs no further elucidation.
This whole plan, as I have outlined it, would not only accomplish a fundamental re-adjustment of our banking system, but
I believe would meet the needs of the American people here to-day
and likewise the needs of fifty years hence, when the population
of the country shall have largely increased and the business needs be
correspondingly enhanced.
It would seem that our requirements are peculiar to ourselves
and cannot be likened to that of any other nation. We grow crops
to the value of seven billion dollars and we manufacture to the
amount of fifteen billions of dollars. Legislation should therefore
be so comprehensive that an adequate amount of currency could be
issued, under proper legal forms, that would always provide sufficient funds to move the crops without an exorbitant tax such as is
advocated by the friends of asset currency, that would seem to
penalize the grower for producing excessive crops or the manufacturer for making an enlarged output.
There should be a broad distinction between the use of a
supplemental currency for recurring autumnal needs and an emergency currency in time of panic.
What this country needs is not only an enlargement of banking credit at crop-moving seasons, but also the establishment of
a system whereby the panicky conditions that recur every seven
or ten years may be met.
The present National Banking Act should be so amended
as to permit any national bank with no less than 50 per cent
of its capital invested in United States bonds, to issue national
emergency or supplemental currency not exceeding the remaining
50 per cent nor more than its capital stock. Such emergency notes
I would have similar in form and design to our present national
bank notes, but the guaranty thereon should be modified to read :
"This note is secured by bonds deposited with and guaranteed by
the United States." The issue of these notes might be made in
four, six or eight months, dating 'from August 1st or September
1st, as may be needed at the time of crop-moving periods.
I would accept collateral for this supplemental currency issue
in the form of state and municipal bonds that meet the requirements
of savings bank investments in the States of New York, Connecticut,
Massachusetts and New Jersey, such securities to be accepted at
70 per cent of their market value. I would have the bank make
a collateral note to the order of the Treasurer of the United States
on four, five or six months, and should it fail to meet the notes
at maturity, it should be penalized in the sum of 2 per cent per
month, until paid ; the United States Government to guarantee
the redemption and payment of all notes so issued at a charge
of about 3 per cent. I would not extend the selection of bonds
to other than those of state and municipal bonds which have the
government power of taxation behind them, as it would be well
to limit this class of bonds and not open the door to the acceptance
of railroad, industrial and real estate bonds.
How Inflation Would be Avoided
This plan requires a margin of 30 per cent on the amount
of notes issued, which, it would seem, would be ample in every
contingency, to safeguard the government. These notes would
have a definite time for maturing and when they were paid for,
SO much currency would be retired, which, practically, in a compulsory way, would prevent any permanent or undue inflation
of the currency. As to the amount of issue, Congress can determine it, based upon the outstanding issue of national bank notes,
permitting an increase of 33V„ or 50 per cent, in addition to the
regular circulation.
This plan would give practically all the advantages arising
from a great central bank, as far as the issue of currency is concerned, without the drawbacks of mixed responsibility or adding
to the confusion of another form of currency, which there would
be, if a great central bank were permitted the right to issue its
notes. It would seem that making the interest rate about 2 per
cent is already too low. It might be increased to 3 per cent per
annum—I per cent more than interest on United States bonds—
what the national banks now pay in send-annual duty and taxation
on circulation but if good collateral be furnished, why should the
people be compellel to pay any higher rate ?
Sonic criticism has been made that a larger percentage of loans
than 70 per cent could be made 011 good state and municipal securities, but it is of importance that the Driee of United States 2 ner

from a great central bank, as far as the issue of currency is concerned, without the drawbacks of mixed responsibility or adding
to the confusion of another form of currency, which there would
be, if a great central bank were permitted the right to issue its
notes. It would seem that making the interest rate about 2 per
cent is already too low. It might be increased to 3 per cent per
annum—f per cent more than interest on United States bonds—
what the national banks now pay in semi-annual duty and taxation
on circulation ; but if good collateral be furnished, why should the
people be compellel to pay any higher rate?
Some criticism has been made that a larger percentage of loans
than 70 per cent could be made on good state and municipal securities, but it is of importance that the price of United States 2 per
cent bonds should be safeguarded, and that their supremacy as a
security should be upheld, whereas if too large an advance was
made on other bonds, the credit of the 2 per cent would be impaired.
Interest should Not be Excessive
It has long been the practice in finance that the borrower
who gives the best collateral secures the loan at the lowest rate
of interest. if the currency was issued on the general assets of the
bank, without compulsory retirement, the risk would be greater
and the rate of interest increased. An excessive rate of tax is
not to be considered in this case, because the issue of supplemental
currency is applied to a normal condition of business that recurs
every autumn.
Adequate monetary facilities should be provided to move the
crops without disturbing the normal conditions of banking- business that prevail through the country. The crops cannot, under
present conditions, be moved without a great disturbance, by the
calling of loans from $25o,000.000 to $300,000,000.
To meet this exigency it is important that a supplemental currency should annually be issued at a low rate, at moderate cost and
with specific security, as is now required for the issue of all bank
notes. This supplemental currency should be so liberal and attainable in its terms that the burden of this accommodation should
scarcely be felt.
The advocates of asset currency propose that an issue of bank
notes be made, based upon the general assets of a bank and taxed
at a high rate of interest. To this conservative men demur,
because the security behind the notes would not be sufficient to
guarantee them, the assets of a bank not being proper security for
the issuance of notes, even with the addition of a reserve redemption
fund
What the farmer, manufacturer and business man generally
needs is to have banking accommodations at a moderate cost. It
would seem that those whose productions are so large, whether
from the field, the factory or the mine, should not be penalized
by a high rate of interest for the use of money at every recurring
crop-moving season. If safe collateral be furnished the charge
should be at the lowest rate of cost of issuing and redeeming the
supplemental notes.

4—TREAT—ANNALS—
Repeal Tax on National Bank Circulation
The national government now has a monopoly of our currency.
Therefore it should not withhold from the people this inestimable
service, when good collateral approved by bankers can be given
for the currency furnished. It might be well to repeal the tax of
one-half of one per cent on bank circulation and also permit banks
to take out additional supplemental circulation to the extent of the
premium on bonds now pledged for redemption of the bank notes.
I feel justified in making this suggestion that the charge
against issuing the supplemental currency be no more than 3 per
cent per annum, for, as the government charges no interest on its
public deposits, why should it do so for loaning its credit? It is
only as rational an expansion of the privilege to loan the credit
of the government in the form of national bank notes as it is to
loan the government's money under the name of deposits.
it does not seem to me that any valid objection could be made
to the issue of such supplemental currency under government control. This plan would seem to me a natural evolution of the custom
of national banking. It does not commit the government to any
untried or hazardous experiment or confuse the public mind with
the idea that there is to be any radical departure from the present
system of banking.
No danger lurks in the plan. Seeing as I do every day the
importance of affording relief to the business interests of the country, 1 offer a plan that does not pretend to be a panacea, but one
which is, I believe, not the dream of a financial visionary. I am
no -faddist" on currency reform, and am looking only for the
attainable and for a plan that shall commend itself to the common
sense of the American people as safe and practicable.

•

1—EARLE—ANNALS—
A CENTRAL BANK AS A MENACE TO LIBERTY

BY GEORGE H. EARLE_, JR., .
President Real Estate Trust Company, Philadelphia.

The solution of the problem of a central bank, with power to
control the currency of the United States, to be at all adequate,
must depend upon and be controlled by ultimate political principles.
The same principle that underlies the never-ending conflict between
the advocates of a strong centralized government and what are
called "states rights,- governs this question. Taught in the school
of experience and adversity, the early English and American
patriots learned the salutary lesson that the development of peoples,
as well as their happiness, depended more upon liberty—that is,
the power to control and govern themselves, rather than to be
controlled or governed by anybody else—than upon any other
single thing; and they, therefore, in drafting our Constitution,
always viewed government as an evil mad necessary by the
weakness and defects of human nature, and never extended it beyond that necessity.
Under the plan of freedom, of self-reliance, self-dependence,
self-government, we have become the greatest, the happiest, the
most powerful people of the world ; but, notwithstanding these
proofs to justify the work of the Fathers, we have, more and more,
concluded that we could have done a great deal better, and are
rapidly tending in the opposite direction, which must inevitably
destroy liberty by vesting all discretion in some form of centra
l
government, rather than in the people as individual, independen
t
entities.
Starting- with the theory that government but existed becau
se
of the defects of mankind, and was but an evil wherever it excee
ded
the necessity of restraining evil human tendencies, we have
now
reached the higher light wherein we produce schemes of
regulating everything, until liberty is but a name, and we govern
ourselves
by theories entirely independent of the characteristics of the
people
to whom our systems are to apply. It is difficult to
find any one,
nowadays, who has not some "counsel of perfection,- and
founded
on it, some theory of government that would work
perfectly with
a perfect race, in whom neither self-interest nor passion
existed and
that, consequently, did not need any government at all.
Among the radical reformers, the Nihilists are much
more
logical than the Socialists because neither system
would (work
with human nature as it is, and no system would be
required with
society so constituted as to make their theories practi
cable. But
the strangest development of ny)dern times is that,
concurrently
with the wildest theories against restraint, popular
opinion is forcing more and more restraint upon individual freed
om of choice,
that is liberty, year by year ; until business and every
thing else is
being stifled by the almost incomprehensible mass
of liberty-restraining laws and regulations. I suppose to-day the
American people imagine they are a free people ; but in the sense
that they were
free in the days of such lesser lights as Washington
and Franklin
and .Jefferson and I lamilton—that is, free to work
out their individual independence and salvation, unrestrained by
any unnecessary laws—they are veritable slaves ; and under the
leadership of
the wonderful statesmen of our age, who, not confin
ed to either
party, have a legislative panacea for everything, and
who are making us happy by passing statutes binding us hand and
foot on one
subject after another, all the while increasing public
officials and
public burdens to enforce them, real liberty—libe
rty in the sense
that each man must, to the greatest possible extent
, be given free
discretion to work out his own salvation—is rapidl
y ceasing to
exist.
But, it may be asked, what has all this to do with
a central
bank? My answer is, everything. For this count
ry to be great,
happy and prosperous, it must be really free ; and
freedom, just
as justice, consists in distributing power and opportunit
y as equally
as possible, and as much controlled by everybody's
individual, untrammeled discretion as the nature of things will
permit. I am
;ts much opposed to undue centralization as I am
to Socialism or
Nihilism, and for an identical reason : They are all
enemies of
liberty ; and it is only through liberty that mankind
can reach the
highest forms of development.
Now, what effect will the central bank idea have upon
these
principles which I have thus, I fear crudely, stated?
If it will
tend to an equalization of power and opportunity, if it
will tend
to placing, as near as may be, equal powers and equal restra
ints
upon everybody, it is consistent with the spirit of our institutions
and the purpose of our civilization ; and if not, being agains
t them,
it must prove injurious. There is not the slighest doubt that
the

tm, it sat%
raputly ceasing to
exist.
Hut, it may be asked, what has all this to do with a central
batik? My answer is, everything. For this country to be great.
happy and prosperous, it must be really free ; and freedom, just
as justice, consists in distributing power and opportunity as equally
as possible, and as much controlled by everybody's individual, untrammeled discretion as the nature of things will permit. I am
as much opposed to undue centralization as I am to Socialism or
Nihilism, and for an identical reason : They are all enemies of
liberty ; and it is only through liberty that mankind can reach the
highest forms of development.
Now, what effect will the central bank idea have upon these
principles which I have thus, I fear crudely, stated? If it will
tend to an equalization of power and opportunity, if it will tend
to placing, as near as may be, equal powers and equal restraints
upon everybody, it is consistent with the spirit of our institutions
and the purpose of our civilization ; and if not, being against them,
it must prove injurious. There is not the slighest doubt that the
placing of the power, in the hands of a single man or a small body
of men, to issue at his or their uncontrolled will the currency needed
for trade, would prove, at least for awhile, an effective measure.
I doubt whether it would permanently prove so, because all history
has shown that, in the result, the placing of too much power anywhere, in its rotting-out effect upon peoples, has decreased efficiency ; hut there is no more doubt that the creations of dictatorial
powers, for short periods, in such times, for instance, as those of
Cincinnatus, were effective measures, than that they, enormously
and even to the point of destruction, were inefficient as a permanent system, under the Emperors. Where a single man can temporarily wield the effective powers of millions of men developed
by freedom, he is nearly irresistible ; but the continuance of that
power, by destroying the value of the units, brings down the
totality of strength, even to the point of extinction.
And so, if we had a central bank, with the power of practically fixing the price of every commodity in the United States,
of aggregating to itself, or those who exercised its powers, just
such proportion of the production of wealth of the Union as they saw
fit ; would, in a little while, tend to a selfish ttse that could be
neither effective nor beneficial ; and, like all other forms of inordinate and unequal power, it must become destructive of any republican form of government. Procuring efficiency, not through evolution and development, but tyranny and inequality, is a means
that all human experience has demonstrated to be fallacious.
In my own judgment, our currency, like our other evils, is to
be remedied by greater freedom and greater distribution of choice
and discretion, rather than by a greater centralization or unequal
distribution of power. It is a fair question to ask, therefore,
whether conceding, as I do, that there is not sufficient elasticity of
the currency, I can suggest no remedy, but would prefer present
evils to those resulting from the creation of too centralized a
power ; and the answer, to my mind, is obvious. The true remedy
must be found, not in placing our dependence upon the discretion
of any one, but of every one,—that is, again, upon liberty, rather
than upon power and restraint.
• • ••

•

a•

10-1

2—EARLE—ANNALS—

We have a very satisfactory system of regulating the investments of saving funds, that demonstrates that a line of investment
can be easily named in advance by statute that would be a safe
basis for currency, as well as for investments, as at present. In my
judgment, therefore, starting with government bonds, which should
always be given a great advantage in currency issues, as that
strengthens the credit of the Union, a list could be made upon which
any bank—and, again, the banking laws should be equally open to
all—could issue its notes. A system of taxation on such issues
should be so regulated as to make inordinate inflation impossible ;
but there should be no limit to the amount of circulation when the
tax had reached a point where it must become unprofitable to the
banks that take out that circulation, for then they would only take
it out to save the commercial community and their customers, and
for no dangerous purposes. And this currency so available should
be available at the discretion of everyone, without the necessity of
consulting any government official or any government bank. I do
not want to be misunderstood. The restrictions as to security
should be full and ample, the taxation large and on an ascending
scale. The currency should be made absolutely safe—as safe as
it is now—and from the tax collected with such a system, it would
be utterly impossible, if that tax were properly applied, that it
would not only not be sufficient to guard every holder of a note
against loss, but would yield large revenues beyond this to the government and in relief of general taxation. With such a system
worked out in detail, governmental power would not be increased,
the danger of depriving the people of any part of their self-developing discretions would not be incurred.
This, as I have said, is all very crudely stated by a man who
has no opportunity to work out details or polish sentences ; but it
recommends itself to me, because my whole study of the constitutional history of our peoples has convinced me that liberty is the
greatest friend of mankind, just as inordinate powers are the greatest danger ; and that we shall go higher and better and further,
following out, in all our troubles, a liberty as wide as human defects
will permit, than limiting around for benevolent despots in any
form ; for I do not believe that even benevolent despots ever do
real good, because, however well they may govern, the injury to
communities inflicted by taking from them the educational benefits
of self-government is incalculable.
Both religion and science teach us that human advance is but
to be gained through the slower methods of development of character—the one calling it "regeneration,- the other "evolution" or
"survival of the fittest," or what you will. Even in politics and by
politicians these principles are at times heeded—even now we are
daily told that the policy of the government is to educate the
Filipinos to a fitness for self-government, by gradually entrusting them with widening discretions, increased liberty, as this increasing liberty fits them for more. This is true political science-the only way—these gentlemen are unquestionably Filipino patriots,
but what we need is American patriots----men who will " make way
for liberty" here as well as there ; who will disregard popularity,
if need be, that they may abide with duty ; and not piecemeal exchange our birthright of freedom for a mass of legislation and restraint only really effective for evil. Many, many injurious steps
have already been taken toward the inequality and slavery of overgovernment and benumbing- restriction. Hut all of themw..ill. be
but a drop in the bucket, compared with the dangers of placing
the entire discretion as to the volume of the people's money in the
hands of the few.
In an ultimate analysis, our country is only languishing for
liberty and equality ; and I (10 not, hesitate to predict an instant
return of prosperity, at the first moment that honest men can
make investments and conduct important affairs: without the necessity of having a lawyer at their elbows, who, indeed, in most cases,
rtfuses the responsibility of advising what all the accumulating
mass of restrictive legislation means. We have evils enough in this
direction, without restraining the people's right to determine when
or to what extent their interests require a further supply of currency on a sound basis. If we really need all the present restrictive mass of regulative legislation, we are, like the Filipinos, already
unfit for freedom ; and if, as I believe, we do not, lw taking away
our personal right of choice, of initiative, we are being- educated
to be like them, unfit for self-government, as rapidly as possible.
If these hasty suggestions should chance to reach the eve of
someone with a faculty for leadership, and a love of his country,
and invite him to battle again for freedom, to expose the shams
under which the people are losing their freedom, under the pretense that their enemies arc being punished, I can promisc him the
ultimate approval of his countrymen. For that, in the end and
permanently, only conies to real patriots, those that unite instead
of divide, those that love instead of hate ; those that, putting aside
"malice, envy and all uncharitableness.- understand the potency of
"good will to men,- while never forgetting- that "eternal vigilance is
the price of liberty."

Full text of Nelson W. Aldrich Papers : Monetary Commission : Miscellany, Reel 57, Box 82, Folder 3

FRASER