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IE CURRENCY PROBLEM
AND THE

PRESENT FINANCIAL SITUATION

SERIES OF ADDRESSES DELIVERED

COLUMBIA UNIVERSITY
1907-1908

THE COLUMBIA UNIVERSITY PRESS
1908

rights

COPYKIGHT, 1908,

BT THE COLUMBIA UNIVERSITY PRESS.
Set

up and clectrotyped.

Published February, 1908.

Norfaooti
Berwick
J. 8. Cashing Co.

k Smith Co.
Norwood, Mass., U.S.A.

CONTENTS
MM
The

1907 in the Light of History
EDWIN R. A. SELIGMAN, McVickar Professor of Political
Economy, Columbia University.

Introduction.

Crisis of

The Modern Bank
FRANK

vii

A. VANDERLIP, Vice-President of the National City

Bank.

The Stock Exchange and the Money Market
THOMAS F. WOODLOCK, former Editor of

1$^

the Wall Street

Journal.

....
....

Government Currency vs. Bank Currency
A. BARTON HEPBURN, President of the Chase
Gold Movements and Foreign Exchanges

ALBERT STRAUSS,

of Messrs. J.

The New York Clearing House
WILLIAM A. NASH, President

& W.

National Bank.

Seligman

95
of Fourth National Bank.

American and European Banking Methods and Bank Legislation Compared
PAUL M. WARBURG, of Messrs. Kuhn, Loeb & Co.

The Modern Corporation
GEORGE W. PERKINS,

Corn Exchange Bank.

Clearing Houses and the Currency

JAMES G. CANNON, Vice-President

Co.

......

of the

119

l/s.s

of Messrs. J. P.

Morgan

Co.

INTRODUCTION
THE

CRISIS OF 1907 IN

THE LIGHT OF HISTORY

EDWIN

SELIGMAN

INTRODUCTION
THE
THE

CRISIS OF 1907 IN

THE LIGHT OF HISTORY

occasion of the addresses collected in this volume

was a

desire to contribute to the understanding of the
crisis of 1907, and to lay down some principles which

might be of service in the reconstruction of our currency
system.
present

The
itself,

question, however, that will obviously
as to whether the crisis of 1907 was

first
is

primarily a financial or an industrial crisis ; and it may be
well, before taking up the specific problems raised by the
addresses, to consider this question a little more closely.
From one point of view, indeed, every economic crisis
is a financial crisis.
For since values are expressed in

terms of money, and since the modern business superstructure is erected on the basis of credit, every economic
revulsion expresses itself through the medium of a change
in prices;

and since the bank

the center of credit

operations, every
inevitably involves a revolution
in the conditions of credit.
From this point of view, all
crisis

may be declared to be
From another standpoint,

crises

financial crises.

however, a distinction may
proper and commercial
or industrial crises in the larger sense.
There may be
a financial panic or crisis due primarily to temporary and

be drawn between financial

crises

sudden

oscillations in the condition of the money market
or in the price of securities.
Such oscillations, sharp and

sudden though they be, may have but little relation,
whether of effect or of cause, to the general commercial
and industrial interests. Of this character, for instance,
were the original Black Friday in England, in 1745, and
iz

INTRODUCTION

namesake, the famous Black Friday in 1867 in New
York, as well as many spasmodic fluctuations due either
to political rumors like that which followed the Veneits

zuelan Message of 1895, or to temporary speculative
manipulations, like the Northern Pacific "squeeze" of
1901.
Of a distinctly different nature are those wider
disturbances which are traceable to more general economic
causes and which, even though they culminate in acute
financial trouble, are followed

by an

industrial

and com-

mercial depression of more or less magnitude.
Into which category is to be put the crisis of 1907; and
if in the latter, what were its causes ?
At the outset it must be remembered that crises are

modern phenomena. We have had financial
transactions, and that, too, on a large scale, for many
But crises, in concenturies and in many civilizations.
essentially

tradistinction to

temporary panics, have existed in Eng-

land only since the middle of the eighteenth, and in
other countries only since the beginning of the nineteenth,

The

England, barring the financial
flurry connected with the South Sea Scheme in 1720, was
that of 1763, followed by the minor disturbances of 1772
century.

first crisis

and 1783, and the more wide-spread convulsions of 1793,
1810, and 1825. The first crisis in the United States
was that of 1817; and it was not until 1837 that we find
the first international crisis, spreading from the United
States to England and then to France.
In Germany the
period of important crises was ushered in even later.
Crises, in other words, are products of modern economic
life.
Modern economic life, however, has as its basal
characteristic industrial capitalism, with the factory system and the newer methods of production for a wide

market.

This transition to modern industrial capitalism

England in the latter half of the eighteenth
was
initiated in America in the first two decades
century,
began

THE

CRISIS

1907

of the nineteenth century, and took place
nent at a later date, last of all in Germany.

on the Conti-

The

explana-

must therefore be sought in some feature
of our modern capitalistic life.
The current explanations may be divided into two
Of these the first includes what might be
categories.
termed the superficial theories. Thus it is commonly
stated that the outbreak of a crisis is due to lack of conas if the lack of confidence was not in itself
fidence,
the very thing which needs to be explained. Of still
a crisis with some
slighter value is the attempt to associate
particular governmental policy, or with some action of
a country's executive. Such puerile interpretations have
commonly been confined to countries like the United
States, where the political passions of a democracy have
had the fullest sway. Thus the crisis of 1893 was ascribed
by the Republicans to the impending Democratic tariff
of 1894; and the crisis of 1907 has by some been termed
tion of crises

the "Roosevelt panic," utterly oblivious of the fact that
from the time of President Jackson, who was held responsible for the troubles of 1837, every successive crisis

has had its presidential scapegoat, and has been followed
by a political revulsion. The crisis of 1857 helped to
weaken the Democrats; the crisis of 1873 resulted in a
popular majority for Tilden; the crisis of 1884 put
Cleveland into the presidential chair; and the crisis of
1893, with the ensuing depression, brought the Republicans back to power.
Opposed to these popular, but wholly unfounded,
interpretations is the second class of explanations, which
seek to burrow beneath the surface and to discover the
more occult and fundamental causes of the periodicity
of crises.

Here we

find

an interesting and progressive

attempts to grapple with the difficulties of the
problem. For a long time economists and business men

series of

INTRODUCTION

xii

advanced the theory of overproduction, forgetful of the
be any such phenomenon

fact that there really cannot

as too

much

actual production of wealth.

With the

dis-

appearance of this doctrine there came into prominence
its variant, which put the emphasis on relative, rather than
absolute, or universal overproduction, that is, the overproduction of some things and the underproduction of
This theory also failed to command general
assent, for the reason that no one could show in what

others.

respects there was any underproduction of wealth, or
any lack of particular products during the years preceding
a crisis. Others, again, have sought the causal fact in

underconsumption, alleging that the larger consumption
of wealth will in itself take up all the slack of producThis explanation also is
tion, and thus obviate a crisis.
inadequate, because it overlooks the fact that the real
falling off in consumption comes after the crisis has
in fact, the period of prosdeveloped and not before
which
a
crisis
is generally marked
precedes
perity
by a
:

prodigious increase of consumption.
The socialists, again, seek to explain crises by the existence of private property in the means of production,

and contend that

the laborer by the

would

we were
modern

to cease the exploitation of
capitalistic method, crises

however, agreeing in this
disappear.
differ
in their detailed analyses.
general conclusion, they
Thus Rodbertus maintains that the secret of crises is to
While,

be found in the fact that the progress of industry causes a
continually greater output of product, while the exclusion
of the laboring classes from any participation in this
increased productivity involves a relative diminution in

demand, and thus ultimately a fall in price, culminating
in a crisis.
Marx, on the other hand, puts the emphasis
on the fact that the necessary fall in the rate of profits
(which, according to him,

a result of the surplus value,

THE

CRISIS

1907

xiii

or exploitation theory) is incompatible with the greatly
increased productivity of fixed capital inherent in the
present system, and that the clashing of these two incon-

gruous tendencies of modern industrial life brings about
a relative overproduction of capital, and gives rise to
This view, finally, is sharply
periodical explosions.

by the latest and
Tugan-Baranowsky, who
are due primarily to the
criticized

system

it is

ablest of the socialist theorists,
in turn maintains that crises
fact that

under the modern

impossible to invest the fresh accumulations

of capital proportionally in all branches of industry,
and that it is this relative disproportion of accumulated
capital to the particular demand that causes the anarchy
of the market and the recurrent convulsions of industry.
While the socialist scholars have undoubtedly made

valuable contributions to the discussion of the problem,
they, like the earlier economists, have erred in laying

on the question of technical production rather
than, as is done by the more recent economic thinkers,
on that of business enterprise and capitalization. This
stress

manifestly not the place to elaborate a general theory
If we attempt, however, to give the bare

of crises.

outline of the

modern explanation,

would be approxi-

mately as follows.
The problem of crises or industrial depressions is one
of relative capitalization.
Under the present system of
enterprise, production is carried on in mass for a prospective market, rather than as formerly in small quantities

fill

a definite order.

Even

be contended that

nowadays are busy with producing to
none the less true that numerous plants are

certain factories
order,

it is

continually being erected in the expectation that orders
will be received in the future.
The good times, or periods
either in
of rising prices, may be due to many causes

general to an augmented gold output, or in particular

INTRODUCTION

xiv

to the increase in the

demand

for

some

special product,
in the iron industry through a new navy proor in the clothing industry through the outbreak

whether
gram,

of a war, or in any other industry through a change of
fashion or what not. Prices first rise in the particular
enterprise, production augments, the movement spreads

and the new enterprises are
financed by loans from the banks or trust companies, or
by the sale of securities on a capitalization proportionate
In times of buoyancy we
to the anticipated earnings.
are continually capitalizing anticipated earnings and
future hopes, and we do this through the utilization of
We build railways, put millions
credit on a large scale.
land sites, and form combina"boom"
steel
into
plants,
to other lines of business,

tions of all kinds,

employing the credit

facilities

granted

by the banks, or throwing the securities on the stock
"water" the stock or, if that be forbidden
market.

by law, we drive the market quotations to a high point,
because we think that this is warranted by prospective
Sometimes we say that we capitalize the
earnings.
will or, in the case of quasi-public enterprises, the
franchise ; but in all cases we capitalize the future, because

good

believe that

shall

earn an income which will

justify this capitalization.

The
which

peculiarity, however, of an up-grade movement
rests on modern credit facilities is that we wear

magnifying glasses or look at the future in too roseate
a light. It is a natural tendency of human nature to
capitalize one's hopes and expectations too liberally.
If this is done on a continually larger scale, the capitalization becomes so great that actual earnings do not come
up to our anticipations or the fear of a discrepancy
between actual and estimated earnings begins to obsess
It becomes necessary to reduce the capitalization
us.
to its true dimensions, i.e. to a sum proportioned to

THE

CRISIS

1907

This process of readjustment of overactual earnings.
values
obviously involves loss; but readjustcapitalized

ment there must

If the realization of its
necessity

be.

sudden, we have a

In the height of
the period of exaltation or prosperity, something happens
A chance occurrence, a mere
to disturb confidence.
is

crisis

or panic.

Some bank considers its credit too
or
heavily engaged,
suspects the adequacy of the collateral.
at
the
of
Just
flood
the tide, when new demands are
rumor,

may

suffice.

constantly being made,
to respond.

finds itself unable or unwilling

Its refusal starts

or intensifies the feeling

and with the inability of some important
concern to meet its obligations, a failure occurs and the
crisis is precipitated.
If, on the other hand, the situation
is well handled, and if the
readjustment of the overto
values
actual
capitalized
earning capacity can be
about
more
we
have, in lieu of a crisis,
brought
gradually,
a liquidation and a period of depression which lasts
of insecurity,

until the

up-grade movement again

Crises,

therefore,

increased

technical

not production,

are

not

sets in.

necessarily

the

result

production. The important point
but capitalization. There may be

overcapitalization, without overproduction.
duction of particular things may indeed

Overpro-

accompany

overcapitalization, but the stress must be laid, not on the
relation between production and consumption, as the

older writers assumed, but on the discrepancy between
the investment and its returns.

While the general features of a crisis are thus everywhere the same, the details differ in each case. Sometimes it is the banks that fail first, sometimes the general
business enterprises. Sometimes it is the railway securities that first feel the strain, at other times "the indusSometrials," and at still other times the raw materials.
times the bolt comes out of the clear sky with prices

INTRODUCTION

xvi

maximum, sometimes

it is
only the last stage of a
with
progressively lower prices.
period
liquidation
But however unpredictable and seemingly inscrutable
the actual course of events, the fundamental explanation
is always the necessary readjustment of capitalization

at a

to actual earning capacity.
That this is true of all our crises

can be seen from a
1817 was the result of the
utilization of modern capitalist methods in America.
period of the War of 1812 was marked by three facts

hasty review.
first

The
first,

The

crisis of

the industrial revolution in

New

England and the

introduction of the factory system in the textile industry;
second, the great development of internal improvements
through canal and turnpike companies ; third, the sudden
multiplication of banks to finance the new enterprises.
The consequence was the so-called "Golden Age," which
lasted for several years, until checked by the immense
imports from England after the war, and destroyed by

the collapse of the overcapitalized undertakings. It was
well into the twenties before the country recovered from

and then came the second
which
culminated in 1837. This
up-grade movement,
was primarily a land and transportation, rather than a
purely industrial, phenomenon. The canals and turnpikes in the East were now being replaced by railways,
and the spread of slavery caused a rush of cotton planters,
not only to the black belt, but to the pine barrens and
hill country of the South.
It was primarily land values
that were being overcapitalized, and the process went on
to such an extent that the annual land revenues of the
the industrial depression,

government now exceeded the total governmental receipts
from all sources of a few years before. Finally, to finance
this land movement there were called into being hundreds
of the "coon-box" banks, who found a champion in
President Jackson in his war against the Bank of the

THE
United States.

CRISIS

1907

xvii

had been

the period of exaltation

unexampled, so the collapse was proportionately great.
The crisis of 1837, followed as it was by those of 1839
and 1841, was still more serious than that of 1817.

was again well-nigh a decade before the readjustment
of values had been completed. The following decade
was in turn marked by five striking facts first, the gold
discoveries of California and Australia, which soon inIt

a general rise of prices; second, the consummation of the revolution in the media of transportation by
itiated

land and water, and the settlement of the entire Mississippi Valley, the most fertile portion of the continent;
third, the abolition of the corn laws in England and the
opening up of a market for our incipient surplus of wheat ;
fourth, the era of industrial invention which resulted in
the application of capitalistic methods to new classes
of enterprise beside the old textile industries;

and

fifth,

the development of free banking with the "wild-cat"
institutions to provide the credit facilities for this prodigious overcapitalization. The crisis
was the inevitable result, was perhaps

1857, which
more acute

of
still

predecessors. The continuance of its depressing
influence on industry, however, was checked by the

than

its

economic

effects of the Civil

War, which gave an

artificial

many forms of enterprise.
In the period immediately succeeding the war, great
changes again occurred. The transcontinental roads
were completed and the Eastern trunk lines consolidated ;
the great wheat fields of the country were opened up under
stimulus to

the

new homestead

laws,

and the period

of large exports
revolutionized the iron

the Bessemer process
industry, and the factory system was

began;
boots,

sewing-machines, and

now

agricultural

applied to

implements;

the great copper and silver deposits were developed, and
the petroleum output grew apace; while the greenbacks

INTRODUCTION

xviii

and the greenback movement fomented the process of
The discrepancy between the capitalization
and the actual earning capacity of the country's business
enterprises again became so overwhelming that the
necessary readjustment took the form of the convulsion
of 1873
a convulsion the depressing effects of which
inflation.

were

with almost increasing severity for six years.
crises of 1884 and 1893 were both less intensive

felt

The

and more short-lived than their predecessors, for reasons
which it is now not difficult to explain. The resumption
of specie payment in 1879 was rendered possible, and
was followed, by a series of abundant crops which revivified enterprise, and which were aided by the use of
The energy
agricultural machinery on a large scale.
and the capital of the nation, however, were devoted in
increasing measure to the transportation industry. This
resulted in a perfect orgy of new railroad construction,
the entire mileage of the country increasing in five years
by fifty per cent. As the overcapitalization was primarily

a railway overcapitalization, the resulting reaction of
1884 was essentially a railway crisis, leading to but

and temporary disturbances in industry at large.
Within a year or two recovery was general, and the
prosperous years from 1886 onward were reflected in

indirect

the existence of a huge surplus of governmental revenues.
The live-stock and meat-packing business attained its

high-water

mark;

the

textile

industries

made

great

and the ready-made clothing
industry assumed vast dimensions; the iron and steel
industry was revolutionized anew by the invention of
the open-hearth process and the utilization of cheap ore
from the Lake Superior region; the South was being
quickly developed by the Northern capital that poured
into the cotton mills and the coal and iron mines; electricity was applied to industry on an increasing scale,
progress in the finer grades,

THE

CRISIS

1907

xix

and the country took rapid strides in its evolution from
an agricultural to an industrial community.
The movement of overcapitalization, however, was
somewhat checked by two important facts the downward tilt of world prices in general, which had been
falling since 1873 and which were fast reaching their
:

lowest point; and the relative shrinkage, not only in the
amount of the wheat crop, but also in the value of both
the wheat and the cotton crops. The resulting reaction
of 1893, which was itself partly due to the ill-timed experiments with silver legislation, was as a consequence neither

so profound nor so long-continued, since the discrepancy
between anticipated and actual values turned out not
to be so excessive.

When we come particularly to the crisis of 1907, we
find that the general causes were very much the same.
The

decade has been characterized by the most
unexampled prosperity in our history. The most striking
last

initial

cause

the prodigious increase in the gold supply.

Whereas the annual average value of the output of gold
was under one hundred millions in the first half of the
eighties, and only a hundred and twelve millions in the
second half, it has grown with such enormous strides that
during the past two years it has reached an annual value
of about four hundred millions.
The result has been a
constant rise of prices from the minimum level of 1896.
The rapid accumulation of gold, much of which went
into the bank reserves, enabled the financial institutions
to expand their credit facilities many fold, and as a consequence enterprise flourished in every direction. During
the last decade the record crops of cereals and cotton,
the extension of dry farming, the effects of irrigation on
fruit

culture, the

development of truck farms, and the

unparalleled increase of immigration led to a remarkable
enhancement of land values throughout the length and

INTRODUCTION

breadth of the land; the output of coal doubled, that of
petroleum more than doubled, and that of pig iron, as
well as of steel, actually trebled ; the huge combinations
of capital, now spreading to every form of enterprise,
effected prodigious economies and revolutionized business

and the

from the agricultural to
economic development proceeded
with unlooked-for celerity. Values were pushed up on
all sides and the hopes of a prosperous community were
capitalized with a recklessness born of unbounded faith.
The pace was too rapid; the reaction was bound to
In the late autumn of 1907 the revulsion was
ensue.
methods;

transition

the industrial phase of

with

the familiar accompaniments of
an acute panic such as the collapse of several financial
institutions, the sudden curtailment of loans, leading to
precipitated,

all

the failures of some prominent business concerns, the
hoarding of money, the appearance of a premium on
currency, going to over three per cent, and the frantic
by the

efforts of the financiers to relieve the situation

importation of gold, the issue of clearing-house certificates
of government through the dubious

and the interference

expedients of the placing of a new bond issue and the
emission of Treasury loan certificates.
The crisis of 1907, however, is on the whole not com-

parable either to that of 1857 or to that of 1873, for
reasons which have thus far perhaps not been adequately
discussed.
These reasons may be classed under five
heads.

In the

first

place, the very

magnitude of the country's

resources has been a favorable factor.
prosperity

of the

past decade has

The
made

unparalleled
possible the

accumulation of a vast reserve in the case, not only of
the great corporations, but also of the average business
man. This reserve has acted as a buffer to the shock
of reaction, and has softened the impact through a speedy

THE

CRISIS

1907

restoration of confidence in the excellence of the country's
assets and in the real solvency of business.

Secondly, the crops, while not those of a

bumper

year,

have been large and valuable. It is significant that
almost each of our great crises in the past has been preceded either by the failure of the harvest at home or by
the existence of such a bountiful output abroad as greatly
It must be remembered that, notwithto reduce prices.
recent developments, this country is still
primarily agricultural, and that upon the varying extent
of our great staple crops depends in large measure the
all

standing

effective

demand which

sets

and keeps

motion the

wheels of business activity. By a fortunate coincidence,
the crisis was attended by a phenomenon which in ordinary times would have spelled prosperity, and which
in this extraordinary conjuncture helped to bring

back

normal conditions.
In the third place, the overcapitalization of values was
somewhat less conspicuous than hitherto in our greatest

Some of our former
that of transportation.
industry
crises have, as we know, been brought on primarily by
the speculative building of railroads. But whereas in
the early eighties the annual increase of construction
reached ten and eleven thousand miles, during the past

with a railway system three times as large, the
annual increment of new construction was only four or
five thousand miles.
The consequence has been that
five years,

with the rapid upbuilding of the country the railways

have grown up to their capitalization, until it is now
reasonably certain that there has been for some little
time scarcely any actual overcapitalization. A striking
proof of the absence of any real discrepancy between
normal values and the capitalization of actual earning
capacity is afforded by the congestion of traffic of a year
or two a^<>; and even with only normal business activity

INTRODUCTION

xxii

computed that, in order to prevent
future and to maintain the railways
it is

this congestion in
at a reasonable

standard of efficiency, there will be required an annual
investment of over a billion dollars.
Fourthly, the crisis of 1907 was preceded by a period
General prices of commodities,
of gradual liquidation.
with a few notable exceptions like that of copper, were
indeed high until well-nigh the outbreak of the panic.
But the prices of securities had for some time undergone

a marked shrinkage. Some, quite mistakenly, attribute
this shrinkage to lack of confidence engendered by the
governmental policy toward industry; others, with equal
readiness and no less extravagance, ascribe it to the distress
caused by the exposures of the methods of "high finance"
In reality, however, the
in positions of trusteeship.
in
securities
was
caused
chiefly by the rise
depreciation
In fact the one phenomenon is
in the rate of interest.

where earnings remain unchanged,
the capitalization of the earnings depends on the rate of
If it be objected that the price of stocks fell
interest.
really the other;

for

because of the apprehended decrease of future earnings,
due to lack of confidence, the retort is obvious that this
would not suffice to explain the equal or still greater fall
in the capital value of bonds, private or public, with a
The depreciation was not national,
fixed rate of interest.
but international, in character; and it applied not only
to our railway and industrial securities, but to the English

"Consols"

The

as well.

the interest rate, which explains the fall
in the capital value of securities, was due to several
causes.
First and foremost is the increase in the gold
rise in

For, as is now well established by economic
and
reinforced by the observations of practical
theory
men, while any increase in the supply of loanable funds
"
on the call-money market temporarily reduces the money
output.

THE
rate,"

money

an increase

CRISIS

1907

xxiii

the general supply of standard
in the community, on the contrary, raises not only
in

the price level of all commodities, but the price for the
use of capital, which we call the general rate of interest.
The increase of money as the standard of value inevitably

tends to increase the general rate of interest. Again,
since the rate of interest is always adjusted to the earnings
of the fund of capital at the margin of its employment,
the rate of interest has risen because there has been

The
relatively less capital available for employment.
fund of free capital has been rapidly diminishing during
the past few years. Hundreds of millions were destroyed
in the Boer and Japanese wars; hundreds of millions
more disappeared through the destruction of San Franana Valparaiso and countless millions in addition
cisco^
have been utilized to finance the more or less dubious
schemes which have sprung up in all countries during the
years of prosperity. Even though there was no great
overcapitalization of railroads and even though many
of the industrial enterprises were really legitimate, the
discounting of the future was not quite ample, and the
capital was invested more rapidly than the immediate
returns would warrant. The replacement fund, in other
words, was neither quite large enough nor quite active
enough and with the gradual exhaustion of the available
free capital, interest rates necessarily rose and security
;

;

values as a consequence

fell.

The period of liquidation was thus a fortunate event.
By checking the movement of exaltation and preventing
the level of prices from being so extreme, it kept the reaction from being so great.
Where the crest of the wave is

Had the ascent of
lower, the shock of its break is less.
prices and values gone on unhindered, the convulsion of
1!M>7

would have been far more

of view, even those

who

severe.

From

this point

mistakenly persist in ascribing

INTRODUCTION

xxiv

the lack of confidence to the President ought in reality
to be grateful to him ; for to the extent that he may be
said to have superinduced the liquidation of the spring
and summer, he assuredly contributed to mitigate the

shock of the inevitable reaction in the autumn.
The fifth and final cause of the lesser magnitude of the
crisis is the development of trusts.
Until we attain the
it is
difficult
to get a correct
always
right perspective,
view of the far-reaching changes which are taking place
under our very eyes. Especially true is this of such a
veritable revolution as

centration

typified by the modern conof industry into the vast

and integration

known

There are indeed many
disquieting and untoward symptoms in the development
of which this is not the place to speak.
But as against
the undoubted perils of what we are all now coming to
recognize as an inevitable process, we sometimes forget
to put at least one countervailing advantage which is of
The modern
especial importance in this connection.
trust, as typified in its most developed form by the United
States Steel Corporation, is apt to exert an undeniably
steadying influence on prices. Precisely because of the
immense interests at stake, and the danger of a reaction,
combinations

as trusts.

its consummately able management tends
toward conservatism. As compared with the action of
a horde of small competitors under similar conditions, it
is apt during a period of
prosperity to refrain from marking up prices to the top notch, and is likely to make a

the trust with

more adequate provision for the contingencies of the
market. With this greater moderation is apt to be associated a more accurate prevision, which succeeds in a
more correct adjustment of present investment to future
needs. The drift of business enterprise in its newer
form is thus toward a relative checking of the discrepancy
between estimated and actual earnings or, in other words,

THE

CRISIS

1907

toward a retardation

The

in the process of overcapitalization.
history of trusts is still too recent, and in not all of

them are we

yet able to discern the working out of what
ultimately will come to be recognized as the real laws of
To those, however, who comprehend
their evolution.
what this revolution in business enterprise really implies,

can scarcely be doubtful that the fruit of this steadying
influence and of the better adaptation of the present to
the future is already perceptible. Notwithstanding the
quite unexampled prosperity of the last decade, the tempo
of overcapitalization has been relatively less rapid and
it

the process of readjustment throughout the world of
enterprise has therefore been less extreme.
Industry

has slackened rather than collapsed, and the disturbance
has been comparatively short-lived, with the prospects
of an early rebound.
The influence of trusts in moderatitself

ing crises and in minimizing depressions will doubtless
become more apparent with each ensuing decade in the
history of

modern

industry.

While the general causes which are responsible for the
crisis of 1907 have been recounted above, there still
remains one point of fundamental importance. If we
compare our economic history with that of Europe, we
observe that acute financial crises have there almost
passed away. England has had no severe convulsion
since 1866, and in France and Germany also the disturbances are more and more assuming the form of
periodic

industrial

financial crises.

depressions

The

rather

than

acute

responsibility for the continuance

in this
country of a phenomenon which is in large measure vanishing elsewhere rests beyond all peradventure of
doubt on the inadequacy of our currency system. Its

defects

have frequently been pointed out, but never

perhaps so fully and so convincingly as in the following

INTRODUCTION

xxvi

proverbially difficult in a democracy
to secure a hearing for the conclusions of experts; and
yet no lasting progress can otherwise be made.
addresses.

All important reforms in currency legislation have been
due to the influence of the practical expert.

in great part

Ricardo was a stock-broker Lord Overstone and Gilbart
were prominent bankers; and in France and Germany
the names of the financiers who have shaped legislation
are legion. In view of the fact, however, that most successful men of affairs have neither the time nor the talent for
the exposition of principles, the professorial reformer
may be permitted to quote in their defense the witticism
of Bernard Shaw: "He who can, does; he who cannot,
;

however, fortunate in New York in
possessing among our foremost bankers men who can not
only do things, but who can teach, and who can put their

teaches."

are,

teaching into effective language.
In these addresses, which were delivered to large audiences at Columbia University on successive Fridays from
to February, 1908, two facts are espebe
cially to
emphasized. The first is that the contributors
to this volume are not only speaking out of the fullness
of their practical experience, but that they have thought
deeply on various subtle points of theory. In fact, the
student will seek in vain in the scientific literature for

November, 1907,

so clear and so satisfactory an exposition of some important topics as can be found here.
This is true, for instance, of the principles underlying call-money fluctuations,
international gold movements, the

issue

emergency

currency through clearing-house certificates, and the
nature and effects of commercial paper abroad. Even
more valuable and significant, however, is the fact that
there runs through the entire volume an unexpected harmony of thought and a close agreement, not only as to
the ultimate ideal to be attained in our financial relations,

THE

CRISIS

1907

xxvii

but as to the next step to be taken in the legislative reform
of our currency.
For all the speakers virtually agree
that even more important than the inelasticity of our note

The struggle which has
been victoriously fought out everywhere else must be
undertaken here in earnest and with vigor.
To have gathered upon one platform these distinguished
men of affairs and to have induced them to put their
ideas into print was not an easy task.
Columbia was,
convinced
here
that
was
both
an
however,
opportunity
and an obligation
an opportunity to experts to give
to the public the benefit of their mature convictions, and
an obligation on the part of the university to assume its
share in the education of the community and to make a
significant contribution to one of the most live and urgent
issue

its

decentralization.

of present-day problems.

THE MODERN BANK
BY

FRANK

VANDERLIP

THE MODERN BANK
THE

cost of the financial crisis of 1907,

measured by

whatever standard you choose, measured either by the

di-

rect financial losses, by the disorganization of industry, by
the destruction of confidence, or by the discouragement of
thrift, makes it one of the great calamities of history, the

by no means have been confined to
That burden falls with severity on every

burden of which
wealth alone.
class

and on

Financial

all

will

sections of the

community.
have occurred with such periodic
the United States that many have, with Mocrises

regularity in

hammedan

stolidity,

of Allah,"

and

come

to regard

to look alike

them

"The

Will

upon banking panics and

crop failures as dispensations of an inscrutable Providence, just as we once regarded visitations of plagues and
fevers.

In no other great nation of the world are such financial
Nowhere else may be
catastrophes regularly enacted.

found an important financial system subject to such violent turbulence as is the money market of the United
States.

any lesson to be learned from history, then
none clearer than that the financial system of this
country inadequately fulfils its functions and ineffectively
If there
serves the interests of commerce and industry.
is any lesson to be learned from
and
example,
experience
there is none more obvious than that the other great
n;i lions have evolved
orderly systems of finance which in
their application to the
problems of banking and currency
are immeasurably superior to our own, and that there are
no inherent reasons in the position of our affairs whieh
If there is

there

THE CURRENCY PROBLEM

would prevent our

profiting

their

experience

and

example.
If these general statements are true,

their force

not

exaggerated, then there can be few subjects that are of
If
greater importance for general public consideration.
the

crisis,

the effects of which

still

surround

us,

has been

a national calamity if similar crises have come and under
unchanged conditions are likely to continue to come, with
;

periodic regularity if intelligent examination indicates that
such disturbances bear no relation of necessity to general
commercial development if the example of other nations,
working under financial systems different from ours, shows
then clearly it is
comparative freedom from such crises,
time to give to these somewhat intricate problems the con;

;

which their importance merits. I believe it is
a wise and valuable step for this University to undertake
to add something to general public knowledge on the
sideration

subject.

The Modern Bank

the subject which has been as-

signed for opening the series of discourses which have
been planned. In developing the subject I shall under-

stand

mean

bank as distinct from
trust companies, and shall more parthe consideration to the development and
the commercial

savings banks and
ticularly limit
operation of

commercial banking under the national

banking system.
The fundamental proposition which I first wish to
establish in regard to all commercial banking, is that the
business of the
of credit,
of credits.

modern bank

to use a clear but

almost solely the exchange

homely phrase, the swapping

The business of a bank is not in the main the
reception of money and its safe keeping, nor is it the loaning of money. The money transactions of a bank are,
under ordinary conditions, comparatively insignificant:
almost its entire business consists of receiving from its

THE MODERN BANK

customers their evidences of indebtedness, which have a
narrow currency, and giving to those customers in exchange the bank's evidences of indebtedness, which have
a wide currency. These evidences of a bank's indebtedness are then transferred from one individual to another
and from one bank to another, and in that way the credits
created serve the purpose of the medium of exchange by
which perhaps ninety-five per cent of the exchange tran-

commerce take place.
a misconception to suppose that a bank first accumulates deposits and then loans them out to borrowers.
sactions of
It is

The

operation is the reverse. The bank first makes a
loan to the borrower and in so doing creates a deposit.
The borrower exchanges his credit, his evidence of in-

debtedness, for the bank's credit, a deposit balance.
creation of these credits has relation to production

The
;

their

If production
liquidation is related to consumption.
the
demand
for
this
increases,
exchange of individual
credit for bank credit increases; and the indebtedness
incurred is liquidated as the articles upon which the

financial credit

was based enter

into consumption.

The manufacturer buys raw material and, in order that
he may pay for it, exchanges his credit for the bank's
credit.
The raw material is converted into a finished
product and sold, and by its sale the means are provided
by which the indebtedness may be liquidated. The merchant who in turn buys the manufactured product may

bank credit which he will use
to make the purchase; and when in turn he sells to the
retailer or to the consumer, he provides the means for the
That is the true business
liquidation of his indebtedness.
of a modern bank.
It swaps its credit, which has a wide
currency, for the credit of its customers, and the bank
deposits thus created become the medium of exchange for
exchange

his credit for the

the greater part of the transactions of commerce.

THE CURRENCY PROBLEM

Obviously erroneous is the conception that so-called
When the
deposits represent an actual deposit of money.
nature of fundamental banking transactions is understood,
the error is made plain but the conception is a persistent
one and confuses much discussion of banking questions.
There is comparatively little money deposited in a bank.
No person can say that he has money on deposit. What
he has is a credit on the bank's ledger. Such money as
the bank holds belongs to the bank rather than directly
;

to the depositor.
Resolved to its simplest analysis, the

bank's statement are, on the one

main

figures in a
side, the totals of the

promises of individuals to pay the bank money and on the
other side, the promises of the bank to pay the individuals
money. The one results from the other the one has been
exchanged for the other. Now while this accumulation
;

;

of evidences of indebtedness

this total of credits, called

are promises to pay money, they become in
deposits
the aggregate an amount vastly greater than all the money
that might by any possibility be available for such purIt should be evident that it is not possible nor deposes.
sirable that a bank should keep itself in a position to pay
in money all its deposits if demanded at once ; just as it is

customers could not redeem in money
their promises to pay the bank if such demand should
be made by all banks at once. There is a cooperative
quality in the functions of a bank which should be underevident that

its

stood by the bank's customers and, whether understood
or not, must be accepted by them; as, for instance, in a
time of panic, when they have impressed upon their minds

how solvent a bank may be, it cannot posin
be
a
sibly
position to redeem all the credits that are
evidenced on its books in cash at a given time.
This cooperative quality ought to be more clearly under-

that no matter

stood by bank customers.

They

are clear

enough

in their

THE MODERN BANK

desire to enjoy the advantages of the modern banking
system. They wish to convert their credit into a credit

may be used as a generally acceptable medium of
exchange. They expect to share in the profits from the use
that

of capital temporarily idle in the

hands of

its

owners.

They demand
offers

them

the facilities which the banking system
for making credits instantly and cheaply

available at distant points

from

But even though they gain

all

their places of business.

these advantages, they fre-

must
must
nature
of
the
the
and
comsystem
cooperative
recognize
are
not
so-called
of
that
deposits
deposits
money,
prehend
but are the book entries resulting from an interchange of
credits, and that they are of a nature where their wholesale
quently see with indistinctness that they themselves
play their part in the financial mechanism ; that they

redemption at a particular time

impossible.

One of the principal functions of money is that of a
medium of exchange. In the modern system of finance,
however, money

so used only in petty transactions.

transactions important in amount, money is seldom or
never the medium of exchange, the medium in such cases

As I have said before, it is estimated
that ninety-five per cent in value of all commercial exchanges are effected by an interchange of bank credits
rather than by the use of money. It is, of course, obvious
that a bank credit must be related to money and in the
being bank credits.

ordinary course must be redeemable in money. It is
for this reason that a bank, after giving its customers

upon its books, permits its credits freely to be transferred from one customer to another, and agrees to honor
credit

demand by redeeming it in money. The
bank must keep itself in a position to fulfil that obligation
by having constantly in its vault an amount of money equal

the credit upon

ordinary demands that may be made
All banks must, therefore, hold a cash reserve

least to all of the
it.

THE CURRENCY PROBLEM

against deposit liabilities. The minimum amount of that
reserve in relation to the deposit liabilities may be fixed
by law, as in the case of national banks, or it may be left

permitted by the laws
be
of some states.
may
Ordinarily
anticipated that the
amount deposited in a bank will approximately equal the
amount withdrawn. The reserves are held against those
unusual occasions when demands predominate. Reserves
are the only part of the bank's assets that can immediately
be used to pay off depositors. Should the predominance
of demand develop into a run on a bank, its ability to meet

to the discretion of the bankers, as

the situation must depend upon its reserves, plus the amount
of its assets that may be quickly converted into cash.

Reserves, however, have another extremely important
They furnish a natural and necessary check to

function.

inflation.

Were

there no immediate necessity for the

any portion of a bank's promises
it found customers who would
borrow and whose obligations it was willing to take in
exchange for its own, could go on indefinitely expanding
The relation which must be maintained
its liabilities.
between total deposit obligations and cash reserves forms
a definite check upon such inflation. Under proper
banking methods deposits cannot expand without a pro-

redemption

in cash of

to pay, the bank, so long as

portionate increase of reserves.

Conversely, supposing a bank's book credits to have
expanded to the limit permitted by the legal relation be-

tween deposits and reserves, then

and the bank

make good from

without means to

the reserve be reduced
outside

sources the deficit in reserve, it must meet the situation by
the calling of loans. It must induce its customers to cancel a portion of the bank's indebtedness to them, through
the bank, on its part, canceling an equal amount of the
customers' indebtedness to it.

This intimate relation between loans, deposits, and

THE MODERN BANK

an extremely important one to comprehend.
with the legislation concerning
I
in
and
shall
recall
it
but
the briefest words.
it,
Under
our National Banking Law, banks in the three central
reserve cities are required to hold a reserve in lawful
money
reserve

You

are, of course, familiar

equal to twenty-five per cent of their net deposit
in their vaults.

Banks

in the forty reserve cities

liabilities

must

also

hold a reserve equal to twenty-five per cent of their deposit
liabilities, but they may keep half of their reserve on de-

Banks located
posit in banks in central reserve cities.
in neither the reserve nor the central reserve cities are
required to keep reserves equal to fifteen per cent of their
deposits, although only two-fifths of that reserve must be
in their vaults and three-fifths may be with their reserve
agents either in reserve cities or central reserve cities.
As one of the primary objects in the organization and
operation of a

bank

to earn profits for the stockholders,
and as under ordinary conditions these profits are increased
in proportion to the size of the loan account of the bank,
it

natural that banks will habitually keep their loan

account as large as possible ; that is to say, they will swap
their credit for their customers' credit until the total credits
which have been created on their books bear as high a relation as the law will permit to the cash reserves which they
hold in their vaults. The governing factors are the ability
of the
loans,

which
which

bank to make what it regards as safe and profitable
and its ability to secure and to hold a cash reserve

sustain the proper legal ratio to the credits
it thus creates and calls
deposits.
Two consequences of enormous importance to the whole
will

community flow from the condition
been

set forth.

l>;mk reserves

One

is,

of affairs

which has

that, to avoid dangerous inflation,

must be maintained

in gold or its equiva-

seems to me obvious that the danger which would
follow the plan, which many bankers favor, of counting in
lent.

THE CURRENCY PROBLEM

reserves the notes of other national banks, would be exSuch action would break off the interrelation of

treme.

of credit to the gold stock, and would open the
door to an inflation which would be limited only by the
bounds that the laws might place upon the issue of bank-

volume

notes.

These

limits are

now marked by

the total of inter-

est-bearing obligations of the United States and the total
Should the law remain unchanged,
capital of the banks.
it

easy to see

how some

national disturbance might

sharply increase the total of interest-bearing obligations,
create a basis for dangerous inflation, result in extraor-

dinary exports of gold, and bring our whole financial systo face with a crisis at the very moment when
such a crisis might be most dangerous to the life of the

tem face

Whatever new legislation we may have, there
should always be and remain embodied in it the principle
that a bank reserve must be definitely related to the stock
nation.

of gold in the bank's vaults.

The

other important consequence to which I have
referred follows from the fact that, while two of the funda-

mental qualities of money are that it must be a medium
of exchange and a store of value, its use for either of these
purposes is a varying one. Under the development of our
banking system very little money is ordinarily used as a
store of value.

Occasionally,

when

confidence

disturbed,

banks widespread, and panic conditions prevail,
that function of money assumes the utmost consequence.
distrust of

If the disposition to use

money

as a store of value increases,

is to say, if hoarding becomes general, the entire
credit fabric may fall in ruins.

that

Under perfectly normal conditions the use of money as
a medium of exchange shows a considerable variation.
Nearly fifty per cent of the people of the United States are
engaged in agriculture. The results of their year's labor
That harvest
are concentrated in the autumn's harvest.

THE MODERN BANK

period marks an extraordinary demand for money as a
medium of exchange. It has been estimated that during
the

autumn months two hundred

currency

in active use as a

which there

million dollars additional

medium

of exchange, for

no such use during the remaining months

The total amount of cash in the vaults of
of the year.
national banks is roundly seven hundred million dollars.

The

relation

which the extra demand for two hundred

million dollars of currency bears to the total reserve requirements of the national banks is thus seen to be extremely

important.

During, say, nine months of the year the medium of
exchange for ninety-five per cent of the transactions

commerce are bank

These credits answer
and
convenience
and answer
safety
every purpose
those purposes in a degree far greater than would money
itself.
During three months of the year a large portion of
the population of the country have a very considerable need
for a medium of exchange, but, having no relations with
banks, are unable to make use of bank credits in the form
of the ordinary bank deposit.
A bank credit in the form
of

deposits.

of a circulating note answers their purpose perfectly, but
our laws have been so contrived that the natural right of
a bank to issue its credit in the form that its depositor
A prohibitory
most desires has been greatly curtailed.
tax prevents all but national banks from issuing circulating
notes under any conditions, while a national bank, in
order to issue its notes, must first part with its funds in
order to buy government bonds. As the bonds sell at a
premium, it must part with more funds than the amount of

circulating notes it will obtain.
governor of the Bank
of England has wisely said that success in banking depends
upon being able to distinguish between a note and a

perhaps more of the correct science
of successful banking in that sentence than in any other
mortgage.

There

THE CURRENCY PROBLEM

that

was ever

uttered.

The business of a bank is the facili-

tation of the current operations of commerce, the exchange
of its credits for the credit of the merchant, and when it

departs from that and devotes its funds to the purchase of
long-term obligations in the form of mortgages and bonds,

even though they be government bonds, it has departed
from the banking ideal.
There may be reasons in the enormous development of
corporations and the great issue of corporate securities
which warrant a bank in departing from strictly commercial business but there is no adequate reason in the natural laws which govern good banking to compel a bank to
;

funds in a long-term investment as a prerequisite
for issuing its circulating notes. As our laws stand, there
is no relation between the volume of circulating notes
and the commercial demand for currency. The motive
for issuing notes does not lie in the need for currency, but
in the profit arising from an investment in bonds which
can in part be paid for by circulating notes obtained
against the collateral deposit of these bonds.
For more than forty years, under the operation of the
National Banking Act, we have seen the annual recurrence
of the fall demand for a larger amount of currency for use
In no single year since the
as a medium of exchange.
passage of that act has the volume of notes shown a natural
tendency to increase with this fall demand and decrease
when it has ceased and currency become redundant. The
issue and retirement of national bank-notes is almost entie

its

regulated by investment considerations affecting
government bonds, and is influenced but slightly by addi-

tirely

tional

demands or decreased needs

for currency.
will normally increase their

have noted that banks
loans and deposits to as large a total as the reserve which
they hold will legally permit them to do. At all times,
under normal conditions, reserves with the banks of the

THE MODERN BANK

whole country stand at practically the legal minimum.
When the period comes that our currency is called upon
largely to increase the work which it does as a medium of
exchange, the only place from which this additional currency can come is the bank reserves, and a financial dis-

much regularity as the
harvests follow the spring plantings.
It would seem to be one of the most obvious of conclu-

turbance follows with almost as
fall

if banks were
permitted to issue their credits in
form
the
of circulating notes, so restricted as properly to
safeguard the involuntary holder, the part which bank
credits play as a medium of exchange would be practically
uniform throughout the year, instead of there recurring
such a condition as now comes with every fall, where
two hundred million dollars must be taken for this purpose from the bank reserves.
If the banks are unable to make good some part of this

sions that

vast withdrawal through gold imports or through treasury
deposits, the effect must be that they must reduce their

loans and deposits until they can bring about the legal
relation.
If no fresh supplies of reserve money can be

would mean that loans and deposits must be
reduced eight hundred million dollars in order again to
establish a legal relation after the withdrawal from the
reserve cities of two hundred million dollars of reserve
money. Of course, in practice part of the burden falls
on other than national banks, and part of the reserve loss
is made
up from gold imports and treasury deposits; but
;i!'lrr
every device has been utilized to soften the blow, the
obtained,

withdrawal of reserve money almost invariably leads to
<Ii-turbance and frequently to crisis in the money market.
There is another consideration affecting reserves, as
\
tii
operate under our banking laws, which is of the most
vitiil
consequence. We have no banking system; that is
to say, we have no related organization of banks.
Instead

THE CURRENCY PROBLEM

of that,

we have

fifteen

thousand individual banks, each

a financial unit, each operated in regard to its own position rather than with regard to its relation to the whole
few state banks have branches, it is true, but
situation.

in the

main the statement

rect.

E pluribus

unum

of absolute individuality

has been conspicuously

left

cor-

out of

our banking legislation.
In a time of crisis two things are likely to happen. The
public becomes suspicious of the banks and resorts to
money as a store of value, converting its bank credits
At the same time, the
into cash and hoarding the cash.
bankers are likely to become suspicious of one another as
well as apprehensive of the probable demands on the part
of their customers, and there begins a scramble for reserve
money. Each institution stands alone, concerned first
for its own safety, and using every endeavor to pile up
reserves without regard to what the effort may cost the
financial situation at large.
The result is an absolute immobility of reserves, and the
effect upon the general situation is probably far more dis-

astrous than that produced by all the private hoarding.
are, at the moment, in the midst of such a situation.

Many banks
needs.

are carrying reserves far in excess of their
They will neither increase loans and thus build

their deposit credits to a

normal

ratio to the reserve

they hold, nor will they remit their surplus reserve to their
reserve agents in the financial centers, for fear that they
might be unable to get the money back again promptly if
they should need it. It requires but a moderate develop-

ment

produce a most disasThere are twelve to fourteen billion dollars
of deposits in all the banks in this country.
The decision
on the part of the managers of each individual bank to
of fear of such character to

trous result.

increase that bank's reserve but one per cent above the
normal would absorb one hundred and twenty to one

THE MODERN BANK

hundred and forty million dollars, and would become
hoarding on a gigantic scale.
If our laws permitted branch banking by banks of issue,
such a condition could not arise. In respect to branch
banking our

legislation

The laws

unique.

of every other

encourage branch banking, and the
have never tended to enslave the people, to

important nation
results of

build

up dangerous monopolies, or

to increase the interest

The result, in fact, has been quite the reverse.
Rates are kept uniform over a wide territory, the tendency
toward violent fluctuations is reduced, and the privileges
rate.

and

benefits of safe

banking are widely disseminated.

believe that there are groundless fears in many directions
in regard to the possibility of evil from monopolies, but of

commodities the last one that
monopolized will be credit.
all

Throughout the

terrific crisis

will ever

be successfully

which we have been ex-

periencing, affecting as it has every banking institution in
the United States, and bringing many of them to a point
where they were forced temporarily to suspend full cash

payments, we have heard no word of difficulty beyond
Canada has been going through
the international border.
a land speculation more important, when compared to her
total resources, than any speculation that has been engaged
in here for many years she has experienced all the difficulties that have followed the world-wide strain upon capital
which the industrial activities of the last two or three
years have engendered she has had no wiser bankers and
no more conservative business men than are the average
in this country
but there has been hardly a ripple on the
surface of her financial affairs, and to our shame we have
;

;

great service in moving the crops of our own Northwest, while we stood finanthe
cially paralyzed, with our credit fabric shaken to

seen the banks of

foundation.

Canada perform a

THE CURRENCY PROBLEM

Is there not

some obvious reason

for this?

not

apparent from the most casual reading of financial history
that business interests of the United States are subject to
periodical financial disasters which are avoided by the
business interests of every other important nation ? Is it
difficult to see that the reason for this lies in our laws, which

have warped and twisted the natural development of
banking out of normal lines ? We know that our banknote system grew out of an ingenious device of a harassed
government to sell bonds; that the need for the device
long ago disappeared, while the unfortunately hampering
laws relating to it still remain.

Some bankers

are apt to answer any suggestion for fresh
declaration that the present notes are
the
with
legislation
safe, and that they know of no requisite in banking greater
than safety. Such an answer is no answer at all. A bank
vault that cannot be unlocked may be safe, but it will

poorly answer the purposes of business. A bank-note
currency that has no relation to the demands of commerce

may be

safe,

but

has in

disaster, the extent of

nary

the elements of commercial

which cannot be measured by

ordi-

totals.

lawmakers and bankers are ignorant of the
If they were not, we
principles underlying this subject.
and
have
had
scientific
should long ago
adequate legislation, or rather, perhaps, we never should have had the
legislation that has so warped and hampered the natural
development of our banking system as to make it what it

Many

of our

to-day.
I believe that there

is a grave responsibility upon the
York City is
financial metropolis of the country.
the financial center. The recognized financial leaders are

New

here,

and the country may well look here

guidance.

for advice

true that the awful panic

which we have been passing can

in great

and

through
measure be laid

THE MODERN BANK

door of improper and inadequate legislation, and I
believe that to be true, then what a solemn responsibility
rests upon every one who is in a position to form public
thought and to influence national legislation. It is a
at the

hopeful sign that this University recognizes
responsibility.
I have attempted the briefest outline of
,

its

share in that

what

I believe

some of the principles that must be recognized in any
correct solution of the problems of banking and currency.

to be

The more

clearly these principles are apprehended, the
one dogmatically to believe that he has arrived

less likely is

at the only correct solution of the problems.
There are many solutions, in
opinion, that will

measure true by an application of these principles. I believe that one ideal solution would combine the Scotch system of branch banks with the German system of a central

bank

of issue.

I recognize that there is profound political
prejudice against both of these ideas, but I believe that it
is a
prejudice absolutely lacking in sound foundation.

That

there are other solutions I have no doubt.

mobility of reserves

and which

which

essential to safe

The

banking

insured by the branch-banking system, may
possibly be secured through a utilization of clearing-house
is

relationships.

Such

relationships have been signally
the present financial crisis, and it is not un-

developed by
likely that a legalization and expansion
which clearing-houses have evolved in the
gencies of the crisis may offer a solution
more in harmony with the present political

of the
stress

powers

and

exi-

which will be
ideas than will

either the branch-banking system or the central bank.
The disposition to provide merely for an emergency

currency to be secured by bonds other than government
bonds, would, I believe, fail almost utterly to recognize
those principles which should govern a solution of the problem. Any solution that leaves the fifteen thousand banks

THE CURRENCY PROBLEM

of this country compelled to prey upon
a time of panic, with reserves immobile,

one another in

and with man-

agement isolated and having such secondary regard for
the general welfare, will fail of its ultimate purposes.
There are some sound objections to extending to every
bank in the national banking system the power of currency
If completely adequate redemption
were provided, however, I believe that the danger
would be minimized, if, indeed, it would not entirely

issue against assets.
facilities

That the result aimed at, a currency expandand
contracting with the larger or smaller need for
ing
currency as a medium of exchange, will be better met by
a central bank having the power of issue and covering its
notes in part by a gold reserve and in part by legitimate
commercial paper, created against actual commercial
transactions, I have no doubt; nor do I believe that the
political prejudice against a central bank will be found to
be so serious as is apprehended. If a well-considered and
definite plan for a central bank were presented for public
discussion by those whose duty it is to offer a proper solution of the problem, much of the political prejudice would
disappear.

disappear.

The

Opinions formed without a
grasp of fundamental principles and conditions are without
value.
The verdict of the uninformed majority gives no
promise of being correct. In this country we have had one
subject

technical.

The majority of
great campaign of financial education.
the voters of the nation now know that the free and unlimited coinage of silver was a financial fallacy.
If to
secure proper banking legislation now it is necessary for a
similar

begun.

campaign

of public education,

it is

time

were

THE STOCK EXCHANGE

AND
THE MONEY MARKET
BY

THOMAS

WOODLOCK

THE STOCK EXCHANGE AND THE MONEY
MARKET
THE

subject of this address

relation to the
first

money

to recall certain

commonly known

market.

the Stock Exchange in

It is desirable,

however,
fundamental facts concerning what is

as the

function of banking

money market.

The

essential

the mobilization of capital in the
form of banking credit for use in the multifarious activities
of industry and commerce.
Banks, as Mr. Vanderlip
is

pointed out in the preceding address, in a sense bring
credit into practical being

and

set this credit to

work

various ways. Taking the banking business of the country as a whole, the largest use is found for credit in bringing
about or assisting the actual production, manufacture,
transportation, and distribution of commodities of general
use, such as food, fuel, and clothing.
Credit of this kind is made in the shape of commercial

paper, which is discounted by the banks, this paper being
simply the note of an individual or individuals or of a cor-

a promise to pay on a certain date. The
general theory of commercial paper is that it represents
borrowing of a purely temporary nature for a purpose
poration

purely temporary in character. This purpose is, stated
very simply, the financing of commodities in process of

manufacture and distribution up to the point where they
enter into consumption, it being understood that the consumer's purchase provides the means of repaying the credit
borrowed.
In other words, commercial paper provides a very large
part of the business

community with
21

its

working

capital,

THE CURRENCY PROBLEM

capital or credit thus provided goes for the most
part into the materials of production, being returned by
conversion of those materials into usable commodities

and the

sale thereof.

It is contrary to the general

nature

of things that the proceeds of temporary loans should be
used as fixed capital and sunk in the instruments of produc-

such as land, buildings, and machinery, and the like,
whence in the ordinary course of events it is not quickly
recallable.
It must be remembered that banks cannot

tion,

safely tie up depositors' money in fixed loans of this kind,
for they are always liable to be called on by those depositors

a bank arranges its purchases of
commercial paper in such a way that there is a constant
a constant stream of
process of repayments going on

for payment.

As a

rule,

This credit is, of course, put out
maturities falling in.
work again as fast as it comes in, but it is the essence

sound commercial banking that

return to

its

should periodically

source.

Probably two-thirds at least of the banking credit of the
United States in use in the form of bank loans is employed
as working capital in this

way and

represented in

bank

by commercial paper. And while there is at times
as in the last year or two probably
a certain amount
of unwise temporary borrowing for the purpose of fixed
investment, the great bulk of this credit truly represents
safes

working capital employed in the preparation and distribuNext to commercial
tion of commodities of general use.
in the United
the
use
of
credit
banking
paper,
principal
States is found in loans upon securities.
These loans
differ fundamentally in more respects than one from loans
which are made in the form of commercial paper. In
the latter case a bank advances credit to an individual or
individuals without security, trusting entirely to what is

commonly called the individual credit of the borrower.
In the case of loans on securities the bank takes, not

STOCK EXCHANGE AND MONEY MARKET

merely the borrower's note, but also collateral security in
the form of stocks or bonds of corporations, states, or mu-

Thus

is a secured loan in the ordiwhile
the former is not. The bank,
nary sense of the word,
moreover, in the case of security loans, is secured further
in that it does not advance to the borrower the full market

nicipalities.

the latter

value of the collateral security deposited, but only a portion
thereof.
The practice is that the borrower deposits secuthe extent of at least twenty per cent market value
over the amount of the loan, and that this margin of twenty
per cent is kept up during the life of the loan, whether it be

rities to

call

Thus in the case of
bank which makes the advance is

loan or a time loan.

securities, the

loans on
fortified,

not merely by the note of the borrower, but also by securities
of a market value twenty per cent greater than the amount
of the loan.

As a matter

be said that in
apt to be mainly on the

of fact

practice the reliance of lenders

may

collateral of the borrower.

The character of a security from the point of view of the
banker who lends upon it is determined by the ease or cer- - in other words the detainty with which it can be sold
gree of

market

Consequently the existence of a
convertibility.
for securities is the first requisite for any system

its

Without such a market there
and for that
would be very little credit used in this way
matter we may say that there would probably be very
few securities in existence. For while the corporation
of lending

securities.

and, indeed, is to some extent
quite practicable
-- in the case of
practised
enterprises where but a few

idea

men

are concerned and where ownership of interest is
permanent and unchanging, its great extension has been

rendered possible only by enlisting the active interest of
tin multitude, and for this a wide and free market is an
indispensable piece of machinery.
of the stock exchange, without

Hence the

existence

which the modern system

THE CURRENCY PROBLEM

the railroads being the most
would certainly not have attained to

of corporate enterprise

notable example

anything like its present growth.
Corporation securities, whether evidences of ownership
such as stocks, or evidences of debt such as bonds, practically all represent capital mobilized for the purpose of
fixed investment in the instruments of production and distribution of commodities such as land, machinery, railJust as a bank mobilizes
roads, buildings, and the like.
for
in
use
capital
temporary
discounting commercial paper,

a corporation mobilizes capital for permanent use in fixed
It divides this capital into convenient shares,
plant.
which are readily transferable from one owner to another,
thus enabling small capitalists to invest in enterprises
which would otherwise be closed to all who could not

command capital in very large amounts. Just as commodities of general use are manufactured with a view to
their consumption by individuals, so we may also say that
the ultimate destiny of securities is lodgment in the hands
of people who practically consume them, namely, investors.
to all intents and purposes securities placed with in-

For

considered as more or less consumed. At
removed from what may be called stocks on
hand. The investor buys securities in order to obtain a
return from them, and usually also with the hope that they
vestors

may be

least they are

will increase in value while in his hands.
The greater
the security of the yield from a bond, the greater the stability of dividends on a stock, the more attractive it is from

the investor's point of view

;

and we may set it down as a
the margin of safety increases

principle that, according as
in the case of bonds and according as the earning capacity)
represented by stocks increases, both bonds and stocks

tend to be more largely consumed by investors.
The production of commodities of general use is carried
on by manufacturers ahead of current needs. Goods are

STOCK EXCHANGE AND MONEY MARKET
made

advance of the actual demand for them.

They

are carried in stock pending their sale to the retailer,
and frequently are made many months ahead of the time

when they

In other words,
are needed for consumption.
the needs of the consumer are carefully studied in advance
for as far as the ingenuity of man can provide
What is true of commodities is in the main true

and provided
for them.

of securities.

The methods

of that portion of the financial

world which is generally concerned with the making and
the merchandizing of securities are such that there is
always in existence a large mass of securities, both stocks

and bonds, which are intended ultimately for consumption
by investors. I must not be understood as saying that
securities are always created in good faith and with the
idea that they will ultimately qualify for the conservative
investor,

very far from

saying that securities are

it.

all

But

I feel entirely safe in

created originally with the idea

that they can be sold for money, and they cannot be sold
for money unless the buyer thinks that he at least can sell
them again. This he cannot do unless they possess, or
real value, actual or potential; that is,
unless they have, or seem to have, the power to return interest or dividends.
The only value that a security can have

appear to possess,

is,

in the long run, the

kind of value that appeals to the

in-

vestor; namely, that which rests on the capacity of these
Not even a specusecurities to yield interest or dividends.

any kind unless he thinks he
it, and this value must have
nl ti mate reference to its
income-paying capacity. There
must be some potentiality of this kind, however remote;
otherwise the securities cannot be sold even to a speculator,
and if they cannot be sold they will not be made.
lator will

sees

some

buy a

security of

potential value in

reason of these conditions there

always in existence
a large mass of securities which have been created with an
eye to their ultimate sale to and consumption by investors,

THE CURRENCY PROBLEM

this mass of securities may be regarded as undergoing
a process of preparation for the investor. In this mass
there will be bonds and stocks of every kind and every

and

grade of value, ranging from new bond issues of the most
undoubted character which are ready to pass almost immediately into consumption, down to common stocks which
possess at the best barely enough potentiality of ultimate
value to warrant an occasional speculative purchaser
"taking a flyer in them." It may be here pointed out,

moreover, that in the preparation of securities for investors
time is a more or less necessary element a bond must be
seasoned to some extent by regular payment of coupons
unless it be a bond of the highest character made by a
:

borrower of the

first

rank

before

finally finds its

way

permanent home; and a stock

also requires time
to demonstrate its ability to yield regular dividends at a

into a

Again, speculation, that most potent
satisfactory rate.
in
human
of all factors
activities, operates so as to bring
into existence the securities at the very earliest
a potentiality of value can be demonstrated,

moment that
and

takes

time to develop this potentiality into an actuality. The
merchandizing and distributing of securities give employment to a large class of people, who have a most elaborate

system and

who carry

as jobbers, wholesalers, and dealers
a very large stock of securities to suit all tastes
at retail
from the most speculative to the most cautious. The term

"Wall Street"

the community.

commonly used
It includes all

to describe this class in

who make

a business of

manufacturing, distributing at wholesale or

retail,

and

speculating in securities of all kinds.
in

Just as the manufacturers, distributors, and dealers
commodities of general use must of necessity be bor-

rowers of money on a large scale, so is Wall Street necessarily a borrower of money on a large scale, with securities as
collateral,

pending the placing of these

securities with the

STOCK EXCHANGE AND MONEY MARKET
investor as the ultimate consumer.

The

process, therefore,

and merchandizing them after they
making
are made gives employment to an entire class of people, all
of whom must borrow money.
At every stage of the process the use of banking credit is required, from the
original syndicate which forms the corporation at the start or
of

securities

underwrites the issue, to the dealer who sells to the invesAnd to this is due the fact that so large a sum of bank-

tor.

ing credit is loaned on collateral security. That this credit
can be safely loaned in this way is due to the existence of a
free

and wide market

for securities, a

market which

supplied by the New York Stock Exchange.
We need not stop to consider in any detail the constitution of the Stock Exchange.
All that is necessary to note
a purely voluntary association, depending upon
no monopoly privilege other than that which nature grants
is

that

to the

it is

most

efficient,

and that

has attained to and holds

by right of many scores of years of efficient
Other exchanges exist elsewhere in the United
States, but all are practically tributary to, and dependent
on, the New York Stock Exchange as the primary market
for securities in this hemisphere.
This body has taken and
its

position

service.

habitually enforces every possible precaution to protect
the freedom of its market and to prevent
so far as it can

be prevented --its use for fraudulent or improper purIt cannot prevent rash speculations, it cannot
poses.
guarantee the value of securities admitted to dealings on
its floor
but it can and does do all that can be done to make
and to keep a fair market for securities on its list, a market,
that is to say, where buyer and seller can meet and do business openly at a fair market price.
Whatever its faults
may be, it is at least in every sense of the word a true mar;

ket for securities.

In two things New York differs from every other financial center of the world.
One is that the business of the

THE CURRENCY PROBLEM

Stock Exchange is conducted on the basis of daily settlements, whereas practically all the important exchanges of

Europe do business on the basis of monthly or semimonthly settlements. The other is that in New York
there is a "call-money" market of large dimensions, the
The
like of which exists nowhere else on the globe.
could
not
the
former
and
rendered
latter is
possible by
The rules of the New York Stock Exexist without it.
which may be called futures or
contracts
change permit
time bargains under certain conditions. Stocks can be
bought or sold at "sellers'" or "buyers' option" for thirty
As a matter of fact, however, practically all
or sixty days.
the business is conducted either for cash or as it is termed
"regular way." Transactions for cash are settled on the
day the transaction is made. Transactions made "regular way," which account for nearly ninety- nine per cent of
all the transactions made on the Exchange, are settled on
seller of securities shall

make

The

rules require that the
delivery of them on the next

the day following their making.

business day following the sale, not later than 2.15 P.M.
If at that time, which' is known as "delivery hour," the
seller has not delivered the securities which he has sold to

full

the buyer, the buyer can, if he so pleases, enforce delivery
by having the securities bought in on the Stock Exchange
" under the
at the cost of the seller who failed to
rule,"

make

delivery. If he does not do this, the transaction goes
over to the next business day, when the same conditions
rule.

now

may be stated here that the clearing-house system
use for many years by the Exchange saves an im-

mensity of trouble to everybody by eliminating the duplication of deliveries. It in no way, however, affects the main
principles of the case and hence need not be considered
here. The chief point is that the New York Stock Exchange
furnishes a free market for securities on the basis of cash
at twenty-four hours.

Consequently

call loans

on security

STOCK EXCHANGE AND MONEY MARKET

are possible, for the stock market furnishes
the means of paying loans if liquidation is necessary.
You are doubtless familiar with the nature of a call
collateral

from a time loan merely in that repayment can be demanded by the lender on call or tendered
by the borrower at will. The only restriction which is
loan.

It differs

observed in the matter of

call loans is that it is not customWall Street to demand or to tender payment of
loans on any day after 1 P.M. on that day. A time

ary in
call

made

loan, of course,

rate of interest

and

rate

call

loans

for a definite period at a definite
has a definite maturity; the interest

may change from day

to day.
the feature

The

existence of a large call-loan market is
which
is characteristic of the New York money market, which
distinguishes it from other money markets, which most
definitely expresses the relations of the Stock

with the

money market, and which forms

the

Exchange
main subject

of present consideration.
Of the total mass of credit used in security loans in connection with the operations of the financial community,

probably two-thirds at least is loaned "on time." Houses
which are engaged in the process of merchandizing securities
chiefly bonds
naturally have to provide for their
requirements mainly in this way, as their stock consists
largely of securities which are not quickly convertible
into cash because speculation is a comparatively small
factor in the

market

therefor.

Houses and individuals

which are engaged in semi -speculative operations such ;is
promotions are governed by the same necessities and must
be sure of their resources; at least they cannot safely
place themselves in a position where they may have to
find large sums of money at a day's notice.
Stock-brohouses
houses
known
commission
as
kerage
commonly
-who conduct a general investment and speculative
business for clients also find that

very advisable to

THE CURRENCY PROBLEM

provide themselves with "time money" to the extent of at
If a house
least one-half of their normal requirements.
of this character has a general borrowing capacity of
five million dollars --which means a capital of someit will
where between one and one and a half millions
in normal times, when doing business up to its capacity,
carry probably two million dollars of time money, relying
on the call-money market for the balance.
Generally

speaking,

true that in times of extreme monetary
reserves are large, the proportion of money

ease, when bank

loaned on security time loans tends to decrease because
borrowers are willing to take the chance of daily borrowing at low rates. Also when the money market is notably
stringent, the proportion

borrowed on

call

tends to rise

because lenders are loath to make fresh time loans as the
old ones mature, preferring to keep their money out on
call.
Thus the volume of call loans tends to swell at
either extreme of money rates, in the one case being forced

on the market by lenders who are overstocked, and in the
other case being eagerly sought by borrowers who must
have accommodation. This is one reason for the wide

fluctuations in call-money rates recorded every year.
shall presently see that there are others.
Time loans in the financial district are privately made,

a large business being done by money brokers who put
out money on commission for the lenders. Their task is
to seek borrowers or lenders, as the case may be, and to

Of course a great many loans are
bring them together.
made without the intervention of brokers at all, the borrower himself "shopping" for his money and making his

own negotiation. For "call loans" there has been established on the Stock Exchange a regular and open market,
where a large business

is done
every day in normal times.
while a large call-loan business is done privately outside of the Exchange, the transactions at the money post

And

STOCK EXCHANGE AND MONEY MARKET

have a large influence in making the ruling
The call-money market on the Stock Exchange
rates.
usually opens at about 11 o'clock on full business days.
Saturday being a half day's business only, there is no delivery of securities on that day, and Friday's and Saturday's
transactions are settled on the following Monday. There
At about 11 o'clock
is no call-money market on Saturdays.
the banks in New York City know more or less what their
balances are as a result of that day's clearings, and by that
time they have called such loans as they need to call in
order to meet their requirements if they have such requirements. Sometimes occasions arise when they have to
call loans for payment a little later in the day, but as a rule
they know more or less how they stand at about 1 1 o'clock
and have acted accordingly. Brokers also know more or
less what the day's requirements are and whether they
have "money over" or need money. At about 11 o'clock
they gather at the money post on the floor of the Stock

on the

floor

and lending
representing banks and insti-

Exchange and the business

of borrowing

Brokers are there,
begins.
tutions with balances to lend

other brokers are there with

;

balances which will not be needed
their own surplus,
that day and which represent perhaps their own private
capital that is temporarily unemployed or money borrowed
record of
on time for which they have no present use.

an informal character is kept at the post of the loans as they
are made, with amount and interest rate, and a fair average
of the transactions up to about 11.30 A.M. is struck; and
the fair average rate resulting from these transactions is in
normal times taken as the renewal rate on standing loans
for that day.
Of course, this rate is really determined in
the main by the banks themselves, for the amount of bank

money at the post really makes the market rate. Brokers
who have call loans standing with each other renew these
loans for the day at this renewal rate. The banks them-

THE CURRENCY PROBLEM

selves

make

their

own renewal

rates directly with their

own

borrowers, and the renewal rate at the Exchange governs
principally the loans between Stock Exchange firms.

While there

is, as a rule, general correspondence between
rate on the Exchange and renewal rates made
renewal
this
by banks and other institutions, it not infrequently happens that the renewal rate on the Exchange, especially in
times of stringency, tends to be somewhat lower than the
rates made by the banks.
By reason of the unwritten law in Wall Street that call

loans shall not be disturbed after

1 P.M.

borrowers

know

hour how they stand as regards existing loans.
may happen that securities which they expect to
receive may not be delivered to them, or that securities
which they expect to deliver cannot be delivered on that
day, and at 2.15 P.M., when the delivery of securities ceases
for the day, they may have "money over" or may "need
money." As a consequence there is, around this time,
usually a fresh outburst of activity in money after two hours
of dullness, those brokers with "money over" supplying
the needs of those who want money, and by 3 P.M., the
at that

But

process

completed for the day.

In ordinary times the amount of money loaned at the
money post in the Exchange is not very large. But in
abnormal times, when there is disturbance in the money

market and activity in the security markets, very large
amounts are borrowed and lent on the floor. There were
days during the recent stringency when probably twenty
or thirty million dollars were borrowed and lent, and when
the money post in the Exchange was the storm center
of the entire disturbance.

This was notably the case on

when

the famous twenty-five million dollars
bankers' pool was hurriedly formed to supply the needs
of the Stock Exchange.
In point of fact, it may be said

that afternoon

that the

money market on

the Exchange

a very faithful

STOCK EXCHANGE AND MONEY MARKET

index or barometer to the call-loan market generally and
when little business is done there, it means that there is
little change in conditions, standing loans being renewed
Whenever there is a general disturbinstead of shifted.
;

ance or shifting of call loans, it is quickly reflected on the
floor of the Stock Exchange.
One disadvantage sometimes results from the workings
of an open call-money market on the floor of the Stock
Exchange, and it arises from an extension of the principle
of equality in the matter of credit so far as purchase or
sale of securities is concerned - - which is one of the fundamental principles of the Exchange
to the matter of
which
is
another
The rate
borrowing money,
quite
thing.
for strong borrowers with good collateral is frequently
made by the bids of weak borrowers with poor collateral,
which should not be the case, even when, as I have previously pointed out, the main reliance of lenders is apt to
be on collateral. Individual credit should count for some-

thing at all times in the money market, and to the extent
that the Stock Exchange system of call-money borrowing
and lending tends to obscure this, it may be considered as
defective.

have seen whence comes the demand for loans on
It comes from the people who, as promoters,

securities.

syndicators, merchants, jobbers, brokers, or speculators,
are carrying that floating mass of securities of all kinds

(ranging from savings-bank bonds to non-dividend-paying
stocks) which has not as yet gone into the hands of per-

manent
viduals.

investors,

whether they be corporations or indithe money that is loaned to these

Whence comes

people on these securities?
New York's position as the financial center of the United
is, of course, the principal answer to that question.
Tli is city, offering employment for capital under conditions of almost absolute safety, naturally attracts capital

States

THE CURRENCY PROBLEM

very strongly as against any other section.
there no National Bank Act creating reserve

Even were
cities,

New

York's banks would naturally tend to become to a very
large extent the depositaries of the nation's surplus cash.
Under the National Bank Act New York is in effect the
of a great deal of cash, representing a
portion of the reserves of country banks deposited with
York national banks at interest. This country

permanent holder

New

money is one of the most important factors in determining
money rates in New York. Besides this there is, of course,
a large volume of private capital of all sorts in New York
which finds employment

in connection with the Stock ExInsurance
change.
companies, savings banks, large corporations whose principal offices are in New York, all these
add their quota to the great volume of banking capital
But probably the country bank
available in this city.
as
it is called, is the most
money,
powerful determinant of
call-money rates in the long run. Every year there are
certain important pulsations of money circulation in the
United States, arising chiefly from the planting and har-

vesting of the crops in the spring and the fall. To carry
through these operations and the moving of the crops when

harvested, cash has to be sent in great volume into the
country, where it is scattered as a fine rain, so to speak,

over a large area, paying farm hands for their labor and
farmers for their crops. This money returns again gradually through the small streams and rivers of trade to the
reservoirs or storage lakes where it is kept until it is again

New York is such a storage lake; it is drawn
down in the spring and in the fall, and it is filled up in
the summer and the winter. New York also distributes
most of the interest and dividend money disbursed by the
needed.

large corporations, which makes a small monthly pulsation
in circulation, and it also is the center of mercantile settleto say nothing of its being the foreign exchange
ments

STOCK EXCHANGE AND MONEY MARKET
market of the country as

The

play of the various
factors connoted in these things upon the call-money
market, which is also acted upon by the forces of speculation in the stock market, necessarily makes the call-money
well.

market a most delicate and sensitive piece of machinery,
the equilibrium of which tends to be considerably unstable,
except in periods of general business inactivity,
masses of capital are out of employment.

when

large

Inasmuch

as the call-money market consists largely of
the fluctuating surplus cash of lenders and the fluctuating

requirements of borrowers,

quite natural that

should
subjected to an ebb-and-flow

it is

fluctuate violently, for it is
of dimensions very large in proportion to its
total volume as a result of the movements of cash already

movement

referred to.
is

Moreover,

must be remembered that there

no central governing influence

in the

call-money market,

either in the shape of concentration of borrowing or in that
The open market estabof concentration of lending.
lished on the floor of the Stock Exchange cannot be con-

sidered a governing influence at

word.

There

all in

the true sense of the

open competition among lenders at all
is easy, and only in the face of
panic
there, as a rule, anything like concerted action on their
is

times when money
is

In times of ease competition among lenders is very
keen in character and has the effect, in all probability, of
Condriving rates lower than they would otherwise go.
part.

versely,

when money commences

become

stringent with-

out the danger point of panic having been reached, the
absence of concerted action on the part of lenders leads to

perhaps unnecessary alarm and unnecessary shifting of
loans.
This brings about an unnecessary restriction of
accommodation which would bo avoided if concerted action
were the rule. So far as borrowers are concerned, of
course, competition becomes extremely active whenever
the market hangs out danger signals. The absence of a

THE CURRENCY PROBLEM

central governing factor in the money market such, for
example, as is the Bank of England in London, the Bank
of

France

in Paris, or the Imperial

Bank

Germany

very noticeable and must be considered one of
the factors which tend to aggravate the fluctuations in call
Berlin,

late years, moreover, another somewhat aginfluence
has been felt in the shape of what have
gravating
come to be known as "out-of-town" bank loans. These

money.

made by out-of-town institutions acting through
New York banks and trust companies, these banks and
trust companies lending money on instructions from the
are loans

out-of-town banks and holding as custodians for account
of these banks the securities deposited as collateral for the
loans made.

This practice grew
desire of out-of-town

several years ago as a result of the
banks to get the benefit of the high
call-money rates ruling at the Exchange. Instead of leaving their money on deposit with the New York insti-

tutions, allowing the latter to lend this

money for

their

own

account, the out-of-town banks concluded to make direct
In these cases the New York institution
loans themselves.

acted simply as agent under instructions, having no control
over the loans made and being simply the temporary de-

This practice first attracted attenpositary of collateral.
tion as a dangerous element in the situation in the summer

At that time a quiet investigation developed the
that something over one hundred million dollars was

of 1902.
fact

being lent in this

way by out-of-town

the call of those institutions.

institutions, subject to

was a time

of consider-

able stringency in the money market, and New York
bankers felt that the existence of a mass of credit of these

dimensions not subject to control had within it the potency of disaster. These loans do not figure in the weekly
bank statement and, of course, are supported by the New
York cash reserve. It is not generally known that a year

STOCK EXCHANGE AND MONEY MARKET
ago the same condition
tent.

In December of

existed, but to a
last

year
four hundred million dollars of
in

much

greater ex-

was estimated that over

money were being loaned

New York

which

City for account of country institutions, over
loans the New York banks had no control whatever.

In view of what has happened in the last three months we
may be truly grateful that the storm did not break as it

might have broken twelve months ago, instead of coming,
as it did, after many months of very severe liquidation,
during which these direct loans by country banks were
enormously reduced.
We may summarize, therefore, the factors which combine to make the call-loan market a very unstable thing in
the matter of rates as follows First, the fluctuations caused
in the volume of credit naturally offered at call by the seasonal ebb and flow of cash in connection with agricultural
needs.
Second, the lack of unity of action on the part of
:

lenders generally.

Third, the intervention of outside lend-

ers acting independently of the local banks ; and fourth,
the fact that the call-loan market is really the storage place

for the nation's surplus credit, and consequently has to
take up all the stress resulting from changes of stress at

other parts of the credit system. To these factors we
must add another most powerful factor at times, and that

We have already noted

speculation in the stock market.
the fact that according as securities
is

more clearly demonstrate the stability of their values they tend to pass out of
the floating mass of securities into the hands of investors.
It is

necessary

now to note certain

other general truths with

The first
respect to consumption of securities by investors.
is that
or
decline
in
severe
every panic
every
prices brings
market with their cash, looking for barThis year has furnished a very notable demonstragains.
tion of this fact, for "odd lot" buying has been a conspicuinvestors into the

ous feature during the very worst times of the panic.

THE CURRENCY PROBLEM

The second

that speculation carried to unwise extremes

advancing prices has a precisely contrary effect, tending
to attract securities from investors' hands back into the
floating mass whence they were taken by those investors.
in

Remembering that investors' purchases, by taking securiaway from Wall Street, enable repayment of money

ties

borrowed on those
that here

and conversely that
borrowing by Wall Street,

securities,

sales force increased

one reason

active tends to absorb

why

speculation

when

investors'

clear

it is

becomes

more money

in security loans.
Anin
is that
a period of ac-

other reason
fully as potent
tive speculation there is much shifting of loans,

and in a
a
time
loan
is
shifted
it means
period of rising prices every
the borrowing of more money on the same securities, for
rising prices mean more security in the same certificate or
bond. Thus, speculation in securities tends to attract
securities to "Wall Street" to begin with and causes, in
addition, the same securities continually to absorb more
credit, which, of course, has a powerful effect upon call-

money

rates.

Conversely, a period of liquidation in securities, such as
we have had this summer and fall, tends to attract investors

and, in addition, by lowering prices, to relieve a certain
the whole
amount of credit on the shifting of loans

tending to lessen the strain on the call-money market, other
things, of course, being assumed to be equal.
Viewing the whole matter generally, so far as the callmoney market is concerned, it is not difficult to undertends to swing constantly to one or to the
other extreme, namely, pronounced ease or downright
It is a curious fact, proved by experience,
stringency.

stand

why

practically no middle course for it.
are either down to two per cent or thereabouts or

that there

Rates

twenty

per cent and upwards. Rates on call loans rarely remain
for any length of time around four to six per cent.
They

STOCK EXCHANGE AND MONEY MARKET

either quickly fall away or quickly rise above these figures ;
it is
usually a feast or a famine for the borrower. The

fundamental reason

is,

we have

seen, the fact that the

New York money call-loan market is the essentially mobile
surplus portion of the nation's banking credit, whose volume
is relatively small in comparison to the total mass and
upon

which very powerful

strains are exerted,

most of the time,

in either direction.

What
of call

general judgment are we to pass upon this system
loans and its bearing upon the business community

at large ?
Is it on the whole a good system ?
I shall not venture to urge upon you any opinion of

own, but will ask you to note certain plain facts. The first
is that its
very existence depends upon the system of daily
settlements of the New York Stock Exchange, without
which no call-loan market would be either necessary or possible.
The second is that both in the case of security
prices on the Stock Exchange and in the case of call-loan
system tends to make fluctuations more violent than otherwise might be the case.
The
third is that the wide attention necessarily attracted by
violently fluctuating call-money rates must, to a considerable extent, influence money rates generally, not merely
as regards time loans or securities, but also as regards
commercial paper. For in the making of rates on money
loans sentiment is a most powerful factor, and sentiment
rates, this daily settlement

necessarily very sensitive

to violent

changes

call

money.

On the other hand, there can be no doubt that the system
on the Stock Exchange is a great reupon reckless gambling, beyond the
means of either the speculator or his broker, which in a
country like this, where speculation is so powerful a factor
in enterprise generally, is no small benefit.
The main thing that seems to be needed is some stabilizing
of daily settlements
st
mining influence

THE CURRENCY PROBLEM

force in the call-money market, and, if I may be permitted
the suggestion, it might be possible to find this force in some

method

of concerted action

by lenders

money

the bankers' clearing-house might play a part.
prepared with a plan and shall not presume to
gestions as to details, but there does not

seem

in
I

which

make

not
sug-

to be

any fundamental

difficulty in adjusting the daily supplies
to
the
money
daily needs without unrestricted competition on both sides, and without wild fluctuations in

of call

money

which are a perennial source of amazement,
contempt, to our foreign banking friends.

rates,

and, I fear,

GOVERNMENT CURRENCY
vs.

BANK CURRENCY
BY
A.

BARTON HEPBURN

GOVERNMENT CURRENCY

VS.

BANK

CURRENCY
I.

THE SUBTREASURY

discussion of the currency question in this country
be complete or well understood, unless it be considered
with reference to our subtreasury system, which exercises
a most important influence upon our affairs. The charter
of the second United States Bank expired in 1836, following
the memorable controversy with President Jackson. Public sentiment in opposition to the bank was roused almost
to the point of virulence and so continued for several years.
This bank, during its existence, was the most important
will

supporter as well as regulator of commerce. With it
eliminated, the country was largely dependent upon state
banks for its circulating medium, specie performing a
minor part of the currency functions of the time. State

banks were extended both as to credit and as to currency
far beyond the danger point and failed utterly to command
public confidence. Another United States Bank was demanded. Harrison, committed to the establishment of
such a bank, was elected President with a friendly Congress.
Death soon followed his inauguration, and Tyler, who
succeeded him, vetoed two successive measures providing
for such a bank, upon hair-splitting constitutional grounds.
This was a period of enormous expansion of credit as
well as of note issues by the state banks, and general distrust of their condition drove Congress, in 1846, to the
Its establishestablishment of the subtreasury system.

ment at that time and under those circumstances, two
bank measures having failed, was undoubtedly justified,
43

THE CURRENCY PROBLEM

but

is inexplicable.
The
in banks, or the disposition of

retention ai the present time

its

depositing of public

them

money
other than in payment of treasury
manner
any
or transfer orders, was prohibited. After January

drafts

1847, revenues were all to be paid in specie or treasury
notes, and the officers of the government were required to
1,

Because very little revenue was received at Washington, where the Treasury is situated, subtreasuries were located in the important cities of the counhold them safely.

the purpose of facilitating the collection and for the
safe-keeping of the revenue, and hence the existence of

try, for

what is popularly known as the subtreasury system. It
was and is a safety deposit system. Whenever the government's receipts exceed its payments, it draws into the
Treasury and locks up money that should be left in
This tends to
circulation at the service of commerce.
produce a stringency

in the

money market,

to raise the

and to reduce the value of property.
the
various states, counties, cities, towns,
that
Suppose
and villages, as their taxes or revenues were received, should

rates of interest,

lock

them up, only

be paid out in meeting their expen-

under such conditions, how much currency
would it require to transact the business of the country ?
This is not a banking system, it is the system of the
ditures

safety-deposit vault, or the stocking of the ignorant or

suspicious citizen, who needs must have within his
grasp the actual money, who has no faith in credit, and

own
who

refuses to contribute anything to maintaining the affairs
of a business world, carried on and enlarged by instru-

ments of

credit.

of funds in the

early as 1853-1854, the accumulation

Treasury produced such

distress in the

country that Secretary Guthrie, in order to relieve the
situation, purchased government bonds at a very great
premium, thereby restoring money to the channels of trade.

From

that time until now, successive secretaries have

GOVERNMENT CURRENCY

VS.

BANK CURRENCY

largely nullified the subtreasury law by buying bonds and
since 1864 by depositing money, which the law of that date

Such a law and such a
funds
makes
the government a partup
ner in every man's business. Merchants, manufacturers,
financiers, must study the various conditions at home and
abroad to determine their business hazard, but before actpermitted, with national banks.

system of locking

ing they must consider the personal idiosyncrasies of the
secretary and gauge, as nearly as may be, his probable ac-

--whether he

permit money to accumulate and
money rates to advance, or whether he will adopt a course
tending to prevent these results.
Commerce should be free and untrammeled so far as
may be, and the business interests of the country should be

tion

will

relieved of the "steady-by-jerks"

method

the money-hoarding tendencies which
system renders inevitable.
II.

PRIVATE

vs.

overcoming

the subtreasury

PUBLIC ENTERPRISE

Experience has shown that private enterprise, within
its proper sphere, is more efficacious and calculated to produce better results than public enterprise
that is to say,
than governmental adventure.
The range of ambition and the stimulus to exertion are
much greater in private than in public life one's standing
in the estimation of his fellows is very largely determined
by his measure of success in whatever vocation may com;

mand

Success in

in its better sense, plus
success in life in a business sense, seems to attend in greater

his efforts.

life,

degree upon private rather than public enterprise. For
this reason matters of fundamental importance are entrusted to private interests under government control.
The highways and byways and routes of trade and the

transmission

intelligence

a governmental responsibility.

by mail or otherwise are
Such responsibility is in

THE CURRENCY PROBLEM

large measure delegated to municipal divisions of the state,
as well as to corporate enterprise.
Money, that is money of ultimate redemption, is and

should be issued by the government only. Such money
constitutes the standard of value by which all property,
all labor, all effort, is measured.
The aim of the govern-

ment

have the

intrinsic value, or better, the

value, equal the coin value of
be.
lion

its

money

market

as nearly as

Where

free coinage exists, the coin value
value naturally differ only by the cost

may

and the buland regula-

This is true at the present time of gold,
tion of coinage.
as to which free coinage exists generally throughout the
world. Not so, however, with silver. The bullion value
about one-half the coin value. Silver coin
circulates on a par with gold in the United States because
the government guarantees such parity, the government's
of .silver

credit thus offsetting the deficiency in value.
The power and responsibility of the government

respect to currency are, in part, delegated to private enterprises, by empowering banks to issue their notes to circulate

and perform the

The

stock of

office of

money

money.

in the country,

was as follows
Gold (including bullion

January

1908,

in the

Treasury)

unlimited

legal tender, $1,604,530,493.
unlimited legal tender, except
Silver dollars
otherwise expressed in the contract, $562,770,982.

where

United States notes, commonly called "greenbacks,"

War

legal tender for all debts,
private, except duties on imports and interest

issued during the Civil

public and
on the public debt,

$346,681,016.

United States notes, issued for the purchase of

silver

legal tender at face value in payment of all debts, public or private, except when otherwise
expressly stipulated in the contract, $5,479,000.

bullion (law of 1890)

GOVERNMENT CURRENCY

VS.

BANK CURRENCY

Subsidiary, or fractional silver
ten dollars,
$139,630,994.

legal

tender up to

Nickels and pennies --legal tender up to twenty-five
cents, $1,159,205.72.

National bank-notes, $690,130,895.
Circulating notes are issued by the government to na-

banks applying, upon a deposit of government bonds
The banks are also required
to secure their redemption.
to maintain a redemption fund with the Treasury at Washtional

ington, equal to five per cent of their outstanding circuwhich notes bear upon their back the following:

lation,

'This note

receivable at par in all parts of the United
States in payment of all taxes and excise and all other dues
is

to the United States, except duties on imports, and also
for all salaries and other debts and demands owing by the

United States to individuals, corporations, or associations
within the United States, except interest on the public
debt."

The government

bound

presentation, protected in turn

redeem these notes upon
by bonds and a deposit

Any national bank is obliged to receive at par the
note of any other national bank in payment of any obligation owing to it. It therefore appears that these bank-notes
fund.

possess legal-tender qualities, are virtually an obligation of
the government, and lack the essential characteristics of a

bank-note as the same

generally understood and gener-

ally in use in other countries.
The people of this country do not like metallic currency,

and barring subsidiary
used

in current affairs.

coins, very little hard money is
More than four-fifths of all the

lodged in the Treasury of the
United States and are represented by silver certificates in
These cercirculation, the amount being $467,731,347.
tificates recite on their face "This certifies that there have
been deposited in the Treasury of the United States of
silver dollars in existence are

THE CURRENCY PROBLEM

America - silver dollars payable to the bearer on demand." On the back of the note are found the words
"This certificate is receivable for customs, taxes and all
public dues, and when so received may be reissued."
-

Silver certificates are issued in denominations of $1, $2,

and $10.
Gold certificates possess the same money function as

$5,

are issued in denominations ranging
from $10 to $10,000, and amount to $706,612,349.
The grand total of money in the country, January 1,
silver

certificates,

1908,

amounts

to $3,349,223,380;

excluding the amount

United States Treasury, we have in actual circulation $3,078,989,298, which equals $35.48 per capita.
in the

During the recent silver propaganda, when the government was buying silver bullion monthly in the market and
coining it into silver money, and later purchasing bullion
and issuing legal-tender notes in payment therefor, we
were very nearly forced upon a silver basis, because of the
volume of our silver currency. The policy of the government in this respect finally changed, and in order to
afford protection in the future, Congress has limited the
denominations of silver certificates to $1, $2, $5, and $10,
thereby seeking to chain their use to everyday industry and
to prevent their return to the Treasury in sufficient volume
to disturb the relationship between the two metals.
With
the same end in view, Congress also forbade national banks

from issuing notes

denominations than $5, and
permits only a portion of their issue to be in that denomination.
The government does not redeem silver certificates in gold at the Treasury, nor does it
exchange gold
for silver, but it does redeem silver and silver certificates
in smaller

by receiving them for customs, taxes, and all public dues.
Every source of revenue which the government possesses
may be paid in silver, and should the parity with gold be
disturbed, the entire revenue would be received in silver.

GOVERNMENT CURRENCY

VS.

BANK CURRENCY

the government does redeem its silver money
and must do so under existing law, so long as the
parity is maintained between the two metals, and the
maintenance of such parity is the settled policy of the government. The law provides a gold reserve fund of
one hundred and fifty millions, directs the secretary to
maintain the same, and gives him unlimited power to issue
and sell government bonds for that purpose.
Joseph's coat had many colors, and yet I have never
heard it claimed that it was not a good coat. It screened

effect, then,

in gold

his person, thus satisfying the tenets of

tected

modesty;

pro-

him against inclement weather, and thus preserved

even though it provoked the
criticism of his neighbors and their descendants down to
his

physical well-being;

the present time.

Our currency system possesses many varying qualities,
not hues, but it is good beyond peradventure.
It is not
scientific; it ought to be unified and rendered homogeneif

does not represent a carefully devised system,
for our people as yet will not follow expert opinion in mat-

ous.

ters of legislation.

has

variations in debt-paying
power, every phase representing the result of an earnest

conflict

for

all

many

between contending interests, yet it is
the currency which requires redemption

all
is

good

;

certain

to be replaced upon demand by money of final payment.
Briefly, then, this is the money provided to meet the retail

and the broader recommerce, as well as the

necessities of our domestic livelihood

quirements of home and foreign
revenues of the nation.

Each

different kind of currency possesses, in different

"
degrees or respects, a legal-tender power.
Legal tender,"
with respect to currency, means that a debtor may legally

tender such currency to his creditor in payment of the debt
and the creditor is bound to accept the same, and may be
held to such obligation in the courts. Any form of cur-

;

THE CURRENCY PROBLEM

rency that has the power of extinguishing a debt (legaltender power) ought to be money.
This, unfortunately,
is not true as to United States currency, if we give the word
"money" the meaning which economists give, and which

adopted by the leading commercial nations.
The fiat of the government gives the currency its legaltender power; the government's mandate compels its
acceptance under certain circumstances and for certain
is

Gold

which is legal-tender money in
in Great Britain.
merchandise
simply
As we have seen, the government itself is bound to redeem these various forms of paper currency in a manner
which amounts practically to a redemption in gold.
This makes it all the more difficult to understand why
Congress neglects to systematize and to unify the same.
I have entered into much detail in order to show that
all the currency in the United States is governmental curWhat is generally understood as bank-note currency.
rency does not exist in the United States. A bank-note
is issued in a form with which you are all familiar, convenient for passage from hand to hand, and recites that the
on
bank issuing the same will pay the bearer $
demand. It is the bank's I. O. U. It is not money, and
any one may refuse to receive the same. It is, as it recites
on its face, a demand obligation, and in this respect banknotes are the same as a bank's deposits, which are also
demand obligations. A bank's deposits are valued against
by checks and drafts, which pass by indorsement, and such
obligations constitute ninety per cent of our domestic
purposes.

coin,

this country, is

exchange. Ninety per cent of the business of the country
When a business man
is done with checks and drafts.
he
has no use for his money,
deposits it in his bank when
;

he has use for it, he withdraws the same and perhaps
borrows from the bank in order to supply additional
needs.

GOVERNMENT CURRENCY

VS.

BANK CURRENCY

bank's deposit liabilities fluctuate in amount as its
customers increase or reduce their balances, and such increase or reduction of course corresponds to the varying
conditions of business.

increase in a bank's deposits is regarded as evidence
of public confidence and increased banking power ; whereas

an increase in a bank's note obligations, which are precisely of the same general nature and character, is looked
upon by some people with misgiving, as though possessing
for, for every bankdanger ?
possible danger.
note issued, some good asset, presumably the promissory
note of a solvent customer, goes into the assets of the

Why

bank, thereby offsetting
III.

its

note

liability.

BANK-NOTES

There are two theories in respect to bank-note issues
-the "currency principle" and the "banking principle."

The "currency
ing the Bank

by the law governof England.
Beyond a moderate fixed
amount it can issue notes only in exchange for gold coin
or bullion, and the theory is that a paper currency possesses
practically the same characteristics as actual money and
should be subject to the same regulations as to volume
and in other respects generally.
The "banking principle," which appears to me to be
principle"

illustrated

the correct principle, is that bank-notes should represent
the credit of the bank, that they should be issued against
the assets of the bank, and that the volume thereof should

be regulated by the credit needs of the bank's constituency.
A bank located in the cotton belt, while the cotton crop
was being made and marketed, would be gradually expanding its note issue, and as returns from the marketed
crop were received and the notes of its customers paid, its
own notes issued would come in for redemption. Thus the
maximum and the minimum amounts of a bank's note issue

THE CURRENCY PROBLEM

would be determined by the commercial demands which it
serves, in the same manner as the volume of its loans and

The

first

ing.

essential of

A bond-secured

safety.

but

determined.

deposits

efficient

currency

may

bank-note issue

lay claim to safety,

in violation of every principle of commercial bankThe object of allowing a bank to issue its notes is

not to enable

make money, but

to enable

better to

bond security is good and adea
bank
must
invest
more money in its bond security
quate,

serve the public.

than

If the

permitted to issue in notes.

illustrate:

bank may buy $100,000 United States two-per-cent
bonds, costing $105,000, and by depositing such bonds

national

with the Treasury, it is permitted to issue $100,000 in
notes.
It has paid out $105,000 and may issue $100,000

Whatever the

in notes.

profit of the transaction may be,
$5000 of its own money by the

the bank has locked up
transaction, and has to that extent diminished

its

power

to serve the public.
The utter failure of our bond-secured currency to respond to or to serve the needs of commerce is poignantly
illustrated

are

now

by the events

of the crisis through

which we
in need

The government, though not
passing.
has just made an issue of Panama bonds,

of funds,
in order
that the banks might buy them as a basis for circulation.
It also offered a $100,000,000 issue of one-year certificates
of indebtedness, drawing interest at three per cent, printed
in the form and size of bank-notes, in order that they might

serve as currency and also as a basis of bank-note circulation. At the same time the Treasury had over $200,000,000

working balance. Was there ever a parallel
in governmental financiering?
Borrowing money which
which might and
it did not need, and
interest
paying
should have been avoided, in order to create a condition
which would permit the creation of more bank-notes
in excess of

its

GOVERNMENT CURRENCY
notes,

VS.

BANK CURRENCY

bond secured and government guaranteed

were quite as

which

likely to go into hoarding as into circulation

when issued
Our government,
!

Civil

War,

sorely pressed for funds to finance the
created the national bank system with a bond-

secured currency, in order to make a market for its bonds.
It imposed a ten per cent tax on state bank circulation in
order to force

out of "existence and at the same time to
into the national system.
The

force the state banks

needs of that period were well served, no doubt; but the
at the present time hold commerce
in a strait-jacket, to the infinite loss of all.

same laws continuing

study of the several financial crises since the Civil
War will compel any student to condemn a bond-secured
currency as wholly inadequate to the needs of a commercial
nation.
If not secured

by bonds, how

shall safety

be guaranteed

annual tax of one-fourth of one per cent levied upon the
outstanding circulation of the national bank system would
have raised a sum more than sufficient to redeem the notes
of every bank that has failed, and that without recourse to
the bonds held as security. A careful study of the national system during the forty-three years of
will leave no doubt in the minds of candid

its

existence

men that a
moderate annual tax upon circulation would produce a
fund ample for its protection and redemption.
Life

insurance

predicated upon mortality tables
gleaned from vital statistics of the human race, and such
business is conducted with safety and in enormous volume.
is

Fire insurance

is
predicated upon the destruction of propover
a
erty by
period of years, and the amount of premium necessary to cover the risk ascertained with reasonable certainty.
How much easier and with how much

fire

greater certainty is the mortality or longevity of banks
ascertained.
With more than forty years of complete

THE CURRENCY PROBLEM

statistical history of the national

are justified in

banking system before us,
assuming that a moderate guarantee or

safety fund is quite sufficient to protect a credit currency
and to insure the redemption of any bank-notes that may

in default.

The experience of other nations, as well as the antebellum experience of many of our states, furnishes historical evidence that the safety-fund principle will afford proand insure redemption without imposing a burden
bank such as the purchase of bonds
upon
It gives to the currency safety and to the bank
involves.
Such notes should be
greater power to serve the public.
a lien upon all the assets of the bank and not upon any
tection

the resources of a

segregated portion

The government

first lien, if

you

please.

that holds the redemption fund should

redeem the notes of failed banks upon presentation, and
would thereby, by subrogation, become possessed of a
note-holder's claim or lien against the assets of the failed

bank. Such provisions would protect all against loss on
account of the notes of failed banks. The redemption
of the notes of going banks should be insured by a gold
reserve of not less than twenty-five per cent.
Thus fortified and protected, we may with business certainty conclude that such a note issue would be safe as well as
efficient.

IV.
Its

REDEMPTION

redemption should be sure and prompt and made at

the expense of the bank of issue.
So much is due to the
public who are asked to make use of the bank-notes.
also imperative in order
to insure elasticity, for retirement when the demand for
If currency
its use slackens is an essential of elasticity.

Redemption

of this character

to circulate throughout the country, the redemption famust follow in its wake, in order that lawful money

cilities

GOVERNMENT CURRENCY

BANK CURRENCY

VS.

be received therefor at the desire of the holder, and
anything approximating inflation may be
Checks and drafts, which consummate such a
avoided.
large percentage of our business transactions, are possessed of perfect elasticity. They are born at command
and are extinguished by use. The Stock Exchange,
Produce Exchange, Cotton Exchange, all the exchanges

may

in order that

dealing in commodities, as well as all the varied interests
of any considerable magnitude in the city of New York,
the certified check.
have a currency of their own

Actual money, or currency in any form,

unknown

in the city of

of a retail character.

is elastic,

practically

New York in any transaction except
The bank check performs

payment, and
thousands, the check is
of

tion

the

amount reaches

certified.

It is

the funcinto

the

a perfect currency,

responding in volume to any demand;

predicated upon the credit of the parties to the transaction.
Its

redemption

speedy and

unvexed by arbitrary

not subject to governmental interference. It is
absolutely responsive to the demands of trade, and without
it the commerce of that great city would be impossible.

laws.

It is

Checks and drafts cannot, however, serve the retail currency demands of a community, nor are they available for
shipment to other localities in order to settle the balance
In order, therefore, to conserve the interests of
of trade.
the public, banks should be permitted, within certain limitations with respect to capital, to issue circulating notes.

Such notes should be protected by a

lien

upon the general

assets of the bank, should be further protected by a lawful
money reserve of not less than twenty-five per cent, and

should, finally, be protected by a redemption fund in tlic
hands of the government, accumulated and kept good by

means of an annual tax levied for that purpose. They
should be redeemable over a bank's counter, at the United
States Treasury, and at convenient points throughout the

THE CURRENCY PROBLEM

country, thereby maintaining the notes at par throughout
the country. They should be subject to a moderate tax,
as the higher the tax the higher the rate of interest

Such a currency would serve the
retail demands of the immediate constituency of each
bank. Its volume would respond automatically to commercial demands. The small banks of the country
would first feel the need and be the first to issue notes,
in response to crop-making and crop-moving demands.
When their limit of issue was reached, they would, as
they do now under existing conditions, call upon the reserve
cities for funds.
This would enable the reserve cities to
charged the public.

make
tricts.

use of their note issue, by shipment to the rural disTheir limit reached, the reserve cities would in

turn call upon the central reserve

cities,

and

such a

New

York, for instance, could issue and ship its
notes
to the interior.
Under no other condicirculating
tions could they be made use of by the city of New York,
condition,

except in supplying the local currency demands in our
everyday transactions. This would enable the money cen-

money, at the same time supplying the crop-moving and other commercial demands of the
interior.
It would make the rural portion of our country
less dependent upon the cities; it would relieve the cities

ters to retain their reserve

of the congestion of money in the duller portion of the year
and also relieve them from the severe demands that char-

acterize the periods of greatest business activity.

would

tend to stability and uniformity in the rates of interest.
It would give to business affairs a greater degree of certainty, which is a cardinal need in all commercial transactions.

would be
tional amount

permit the issue of an addiof currency, subject to a very high tax,
that might be availed of in just such a crisis as the one
through which we are at present passing.
It

well, also, to

GOVERNMENT CURRENCY

VS.

BANK CURRENCY

Such a

credit currency system could be well and successfully applied to our existing banking system, and in this
connection I commend the plan devised by a commission

created by the American Bankers' Association and indorsed by that association at their annual convention held
at Atlantic City last fall.
While I believe that such a currency can be successfully
applied to the sixty-five hundred banks now in existence,

yet judged from an historical and scientific standpoint,
the currency system of a country can best be admin-

through the instrumentality of a central bank of
England proved this and created a central bank
of issue and provided that the note-issuing privilege then
possessed by existing banks should revert to this central
bank of issue whenever for any cause the various banks
should surrender or forfeit the same. United Germany
istered
issue.

taught us the same lesson, closely following the example of
England, but greatly improving upon the English system
in respect to elasticity and ability to serve commercial
interests.
Yet in this country the manifest advantages of

a central bank of issue are brushed aside on the assumpPublic
tion that public sentiment will not tolerate it.
sentiment changes with great rapidity and has undergone,
and is undergoing, pronounced change in the matter of
centralization of

power and centralization

of the control

should
of corporations in the national government.
not those who essay to champion the interests of the people
as opposed to the banks favor a central bank with a

Why

board of direction, a majority of whom are appointed by
the government, very much as in the case of the Reichsbank in Germany ? Such a bank, like other business enterprises, should earn a reasonable increment upon the
capital invested, but at the same time the altruistic influences, personated by the government, would largely
control.

All dividends in excess of a fixed rate should

THE CURRENCY PROBLEM

into the United States Treasury, in order to exercise a reThe notestraining influence in its business management.

issuing privilege and the rate-making power would be exerThe
cised, not in the interest of one locality, but of all.

Bank
Bank

England

Germany

rate, the

Bank

France

rate,

and the

rate exercise a controlling influence in

those countries by force of example and force of compeThe Bank of France has branches throughout
tition.

France, and the same rate of
branches on the same day.

discount obtains

all

example, as well as money power, similar institutions
could be made to exercise a most wholesome influence in
bringing about a more uniform rate of interest throughout
our country. A central bank could render even greater
service in preventing the wide and wild fluctuations in the
rate of interest which, under our present system, have such

a disturbing influence upon business affairs. A disturbance in money rates seems to characterize crop-moving
It is natural, perhaps, that a higher rate of
periods.
interest should

accompany periods

in accordance with the

of business activity,

law of supply and demand; but

fluctuations at the rapid rate which obtains in this country
are properly chargeable to our defective currency system.

Were an adequate

note-issuing

power given

to such a

central bank, interest rates could be kept reasonably uni-

form in this country, precisely as they are in other great
commercial nations of the world. With a pronounced trend
in favor of centralization, with the popular and growing
demand that all corporations, national in their scope and
character, be regulated by the national government, is it
not logical and fair to assume that public sentiment will
presently demand that the government's receipts and dis-

bursements shall be made through a central bank, thereby
keeping funds in the channels of commerce and avoiding
the embarrassment and injury which result from the ab-

GOVERNMENT CURRENCY

VS.

BANK CURRENCY

sorption of funds and their subsequent deposit in a lump
sum in the banks, which is the practical working of our

subtreasury system; and will not an intelligent public
sentiment demand that our currency --the life-blood of

--be regulated and

controlled through the
instrumentality of a government-controlled central bank
of issue ? The very people who inveigh against banks
all

industry

demand this
now have at heart.

as a whole should

poses they

Why
issue,

will

in furtherance of the pur-

not a government-controlled central bank of
of the country in good credit can,

where the banks

within proper limitations, discount their receivables, receiving the proceeds thereof in bank-notes, afford the best
solution of the currency question ?

GOLD MOVEMENTS AND THE FOREIGN
EXCHANGES
BY

ALBERT STRAUSS

GOLD MOVEMENTS AND THE FOREIGN
EXCHANGES
FOREIGN exchange

the

medium by means

which we

pay our foreign creditors and collect from our foreign
debtors when the supply of exchange fails, we pay our
debts by exporting gold when the demand for exchange
So long as
fails, we collect our debts by importing gold.
both supply of and demand for exchange exist, we settle
our accounts through the foreign exchange market which,
like all markets, fluctuates with the relative
eagerness of
:

;

and buyers. We speak loosely of New York owing
money to London; of Berlin owing to Paris. What we
mean, of course, is that on balance, New York individuals
owe to London individuals. But we are the slaves of our
phrases; what begins by being metaphor ends by dominating our thinking, and so we are apt to picture London
sellers

as one huge creditor, malignantly collecting the last penny
from unfortunate New York; and we often reason about

these matters as though the pictures that our words call
up were real. Platitude though it be, I repeat that international commercial and financial relations are the relations of individuals to individuals;
settles

with individual.

There

individual that

solid block of indebted-

London as an entity can call for payment from
New York as an entity, or of which, if inclined to be graness that

cious,

can extend the payment.

The

transactions are

the transactions of individuals, and are determined by
the judgment of each individual as to what is to his individual advantage; if American stocks seem cheap to
London individuals, and they have or can borrow the
means of paying, they cannot be prevented from buying
63

THE CURRENCY PROBLEM

them, just as Americans. cannot be prevented from buying
French motor cars if they have the money to pay for them.
So when foreign individuals commit what the Stock Ex-

change regards as the offense of selling securities in this
market, remember that the American individuals that buy

the shares are equally guilty.
seller without the corresponding buyer cannot close a transaction, and the balance
of trade is unaffected by the desire of foreign individuals
unless there be a corresponding desire of native
individuals to buy
supported by ability to pay. The
to

sell,

daily settlement of all these individual transactions makes
the exchange market, and in the mechanism of that market

we have an instrument powerful and economical, automatically making the most delicate adjustments, actuated
by that most constant and

reliable of all

motive powers

self-interest.

foreign exchange, we mean bills of exchange drawn
on foreign countries, each bill being payable in the currency of the country on which it is drawn. The buyer

of such a bill here, pays the equivalent of its value in United
States money; the cost per unit of the foreign money is
called the rate of exchange.
Such bills are payable on
demand (demand bills) or at a fixed number of days after
sight or after date (long bills), although sometimes money
is
paid on cabled orders, known as cable transfers. In this

market, bankers are the traders

;

they stand ready to buy

at prices varying from minute to minute all bills offered for
sale, and at a slightly higher rate they stand ready to
satisfy the

requirements of buyers by selling their

own

bills.

Bankers compete closely with each other both in buying
the bills offered and in selling their own bills to supply the
requirements of buyers, and thus is created a market in
which there is but little margin of profit. The bills
offered for sale may be the bills of merchants with money
to their credit abroad, or of brokers that have bought

GOLD MOVEMENTS AND FOREIGN EXCHANGES

foreign customers and are drawing on
reimburse
themselves for the cost, etc. By far
them to
the greatest volume of exchange, however, is that created
securities for

by the

grain and cotton exporters. The demand
comes from importers that must pay for sugar,

bills of

for bills

purchased abroad; from corporations
that must remit for interest or dividends payable to foreign
coffee, silks, etc.,

The
holders; from American travelers, and the like.
market created by these conflicting requirements fluctuates
within limits fixed on the one

hand by the

cost of exporting

That
gold, and on the other by the cost of importing it.
is to say, the rates for demand bills fluctuate between these
long bills involve other elements as well for the
present, however, we will confine ourselves to the conlimits

;

sideration of

When

demand

there

bills.

a heavy

demand

for exchange

and

supply, the price of exchange gradually advances.

little

The

banker, called on by his customers to draw exchange for
them, finding few bills in the market that he can remit
to cover his drafts, sends gold and directs its equivalent
in foreign coin to be placed to his credit, and against
There may be no market abroad
this credit he draws.

for our crops or manufactures; but gold need not be
sold in order to produce money; it need only be

coined.

this process

can be carried on

indefinitely,

the cost of sending gold is obviously the limit beyond
which the price of demand bills cannot advance. Let

The pure gold
follow this transaction in detail.
contained in one English sovereign is exactly equal to the
pure gold contained in $4.8665 of our gold coins so that,
rt from
.i[>.!
charges and expenses, $4.8665 of our gold will,
us

;

sent abroad, produce a credit of 1 to this cost must
be added freight, insurance, and other expenses, amounting
to about one-fourth of one per cent.
This brings the cost
of
1
of
to
about
$4.88, which is,
gold
through shipment

when

;

THE CURRENCY PROBLEM

roughly, the gold export point for full weight coin. The
exporting banker obtains his gold either by drawing gold
coin from his bank or else by drawing suitable currency

from

bank, and obtaining gold coin for it at the subIn either case, he obtains coin that has suffered
treasury.
more or less abrasion by handling, and this loss of weight
his

to perhaps one-tenth of one per
cost of his remittance.
Generally,

by abrasion, amounting
cent,

increases the

however, the banker can obtain gold bars from the United
States Assay Office at the nominal charge of one twentyfifth of one per cent, although at times a
larger charge is
made. The banker prefers bars, because on these there
is no loss by abrasion
the government can afford to give
because
their
bars,
export prevents the export of coin, and
;

so saves the cost of coining

new money

to replace that

shipped.

Now

When

a large volume of
bankers, perhaps by grain and cotton exporters, and but little demand from buyers of exchange,
the market gradually declines in price, while New York
for gold import.

there

bills offered to

bankers, sending abroad the

bills

they buy, with

little

occa-

draw against them, accumulate large sums to their
credit in London, with no way of getting the money back
to New York through operations in the exchange market.
sion to

are not, however, helpless they can order gold sovereigns sent here, and, once here, can have them melted
down at the United States Assay Office and coined into

They

;

eagles and double eagles, which they can deposit with their
banks. Obviously, the amount received in dollars for
each melted sovereign will mark the price the banker
can afford to pay for sterling bills, and competition among
bankers will prevent the rate of exchange from declining
below this point by more than a fair margin of profit.
The British sovereign, if full weight, will, when sent here
and melted down, yield gold for which the United States

GOLD MOVEMENTS AND FOREIGN EXCHANGES

will pay $4.8665; the expense of
sending
the sovereign, freight, insurance, cartage, and kegs, will
amount to about one-quarter of one per cent, so that the
net yield of the full weight sovereign in dollars will be

Assay Office

But between the day on which the banker buys
the bill of exchange in New York and the day on which
he receives in New York the gold which the bill entitled
him to collect in London, there must elapse the time
needed to send the bill to London, plus the time needed to
send the gold back (roughly fifteen days), during which
$4.85J-.

period the banker loses the use of the money. This loss
of interest must be deducted from the net yield of the im-

ported sovereign, and thus, if money is worth six per cent
per annum, the net yield of full weight sovereigns is

down to about $4.84J, which is the gold import
point for demand exchange, when money is worth six per
cent per annum.
Losses by abrasion will bring down
brought

by perhaps one-tenth of one per cent to about
is higher, the
$4.83f
import point will be
There is therefore a margin of
lower, and vice versa.
in
demand
bills and importing gold soverprofit
buying
the
eigns against
purchase, whenever the rate for demand
bills falls below the
Active exgold import point.
bankers
take
change
advantage of this profit whenever
decline
to the proper point, and their comexchange prices
this point
.

When money

petition in

cover their gold importations
further
decline
in
stops
exchange rates. It is interesting
to note that during the recent crisis, when
gold and cur-

buying

bills to

rency were at a premium, bankers could sell the imported
gold at a premium, and this constituted an additional and
very large profit ; gold importers could therefore pay higher
prices than ordinarily for exchange bought to cover the
importations, and the stress of competition so drove up
the rate of exchange that gold was
being imported at a
profit,

though exchange rates

stood

what, under

THE CURRENCY PROBLEM

ordinary circumstances, would have been the gold export
point.

Gold is, however, not always imported from England
form of sovereigns. The Bank of England has in
its vaults large quantities of American eagles and double
eagles exported to England in the past and held without
The Bank also holds foreign coin and bar gold.
melting.
in the

Any

holder of

Bank

England notes can get sovereigns

on demand

other gold he can get only as the result of
a special bargain. When gold is wanted for export, the
Bank is often glad to sell bar gold or double eagles at rates
somewhat more advantageous to the exporter than would be
the export of sovereigns this the Bank can afford to do,
for the expense of coining sovereigns to replace those
exported is thus saved, while the exporter, if he can get
bar gold on the same basis as sovereigns, avoids the losses
;

Eagles are even more advantageous to the
exporter, for they are bought in England by weight and
used in America by count; the banker therefore gets an
advantage if they are light, so long as that lightness is not
so great as to make them uncurrent
practically he buys
of abrasion.

The quotaas light and uses them as full weight.
tions for bar gold and double eagles, as they appear in the
newspapers, may seem confusing, owing to the fact that
them

double eagles are quoted in shillings per ounce gross weight,
900 fine (the American coinage standard), while bars are
quoted per ounce of gross weight, 916f fine (the English
coinage standard) the quotation for double eagles, therefore, always seems lower. When gold bars from South African mines and elsewhere arrive in London, the owners deposit them with the Bank of England, receiving sovereigns
;

by law, unless a higher price is bid therefor
market for the purpose of export to other quarters.
The price of gold in the market cannot, of course, rise above
at the rate fixed

in the

the cost of obtaining gold

by withdrawing

sovereigns.

GOLD MOVEMENTS AND FOREIGN EXCHANGES

The mechanism of gold import to, and export from,
Germany is practically the same as with England, the
Reichsbank being required

to give gold coin in

exchange

At times, however, German
circulating notes.
exchange has fallen below the theoretical gold import point,

for

its

owing, not to the refusal of the Reichsbank to give gold,
but to the practical obstacles that at times are somehow
placed in the way of free export of gold. The Reichsbank
does not refuse gold for its bank-notes, but German bank"
Don't ask us to get gold
ers say to their correspondents
for you, or we shall lose caste," and on such occasions German exchange rates drop to a point that is theoretically
I do not mean to criticize them
German
impossible.
:

banks, when they refuse to demand gold of the Reichsbank,
do no more than our own banks and bankers did recently,
when asked by foreign correspondents to collect in gold the

maturing obligations of railroads and other corporations.
As will be remembered, clearing-house funds rather than
cash were at that time current here, and New York banks
and bankers sent to their foreign correspondents the
same answer as the Germans have at times sent us. I

German instance in partial mitigation of censure
of our own course, rather than as a reproach to them.
The Bank of France is not compelled to give gold in
exchange for its circulating notes it may at its option give
silver.
Thus, when it is inconvenient to give gold, the
cite the

;

bank can

can exact a premium.
This power has been very moderately and very wisely
used by the bank to modify foreign demands on the one
hand, and, on the other, to keep interest rates low for the
requirements of internal trade. Of course, when a premium is exacted, the French gold import point drops
refuse, or,

if it

prefers,

accordingly.

Between the gold export point and the gold import
point, exchange fluctuates under the sway of conflicting

THE CURRENCY PROBLEM

currents and tendencies - - 1 had almost said emotions,
for these currents and tendencies have their rise in emo-

and passions as varied as life itself, whether
be
hunger as expressed in the grain bill, or love of
they
tions, needs,

elegance in the importation of silk, or forethought in the
profitable investment of capital.

This brief review

will

have made clear what

meant by

a market in which current money
a free gold market
can at all times be exchanged for gold without delay and

Such a market has great commercial
advantages its stability draws business to it. London is
such a market, and its commercial and financial preeminence is in great measure due to that fact. Paris is not
such a market and does not pretend to be; Berlin pretends to be, but cannot always be counted on New York
was believed to be before our recent panic.
I have spoken of the exchange market as an economical
without premium.
;

;

mechanism, automatically making delicate international
adjustments. In justification of that observation, let me
direct attention to the manner in which gold, in moving
from financial center to financial center, always travels
by the most direct route, and that, too, not because some
public official is charged with the duty of preventing
waste, but because a private trader is trying to make a
profit, and is incidentally serving the community; serving
it

perhaps better than

to serve

he had consciously determined

it.

Useful acts springing from self-interest have one very

we need have no misgivings as to their
comforting aspect
continuance. Charity may grow weary or disgusted, but
self-interest, once enlisted, may be counted on to continue
in operation, whether it be the business man's self-interest
in a profit or the professional man's self-interest in ad-

vancement and fame. Of course, both the business man
and the professional man, in addition to seeking the direct

GOLD MOVEMENTS AND FOREIGN EXCHANGES

rewards of their labor, take an interest in their work as

work and make

it
yield them pleasure.
therefore satisfactory to know that, so long as the
banker looks after his profits, gold will move by the most

Let us suppose the United States to be exporting a large quantity of cotton to England at a time
when little merchandise is being imported here from EngIf
land, but when much is being imported from France.
the volume of exports to England and of imports from
France were large enough, we might conceivably be importing gold from England in payment of our produce,
and exporting it to France in payment for her luxuries;
but, in practice, gold does not move that way.
Every
morning, the New York exchange banker learns by cable
the Paris market rate for demand bills on London. When,
therefore, he finds a large volume of bills on London
offered for sale, and little demand for such bills, while there
is large demand for bills on Paris and little
supply, he
determines, instead of drawing from New York against
direct route.

his purchases of

London

bills, to let his

Paris agent

draw

against these purchases, placing the proceeds to his credit
in Paris; against this credit in Paris, the New York

banker draws

his bill in francs,

having thus supplied via

London the New York demand for
knows how many dollars each pound

bills

Paris.

him in
New York, and the Paris rate for bills on London tells him
how many francs each pound sterling will net him in Paris,
sterling costs

and so he can calculate how many cents each franc will
cost him.
Moreover, he is not the only banker in New
York that receives cable quotations and so with a large
volume of London bills offered and little direct demand for
such bills, and large demand for Paris bills with little
direct supply, we get a situation where New York bankers,
;

competing with each other to buy the London bills for use
via Paris, prevent the price of sterling from
falling to the

THE CURRENCY PROBLEM

gold import point and then, as a result, these same bankers, competing with each other to supply the demand for
;

Paris

bills,

their competition prevent the Paris rate

from

Lastly, they compete with
rising to gold export point.
each other in Paris, where all are sellers of bills on London

against their New York purchases of London bills, and
by that competition they reduce the rate for London bills
in Paris to the point, at which, other things being equal,
gold will go from London to Paris. What has happened,
therefore,

don, and then exporting

London

Lonfrom

that instead of our importing gold from
it

Why

Paris.

to Paris,
?

has gone direct

Not because some one has

deliberately set himself to benefit the community, but simply as the result of the blind working of economic forces,

under the actuating impulse of individuals seeking their
own profit. This tendency to work out advantageous
economic results under the pressure of selfish impulses,
appears again and again in all phases of business it cannot be too strongly brought to view, because of the practical conclusion to which it points.
The community will
if
most
commerce
and
its
benefit
instruments be free
from arbitrary interference by government. Violations of
economic, as of natural laws, in time wreak their own
;

vengeance.
Transactions such as those described above, where a
bill on one market is bought in a second market, and sent
into a third market, are called exchange arbitrage, and they

drawn on Paris against
drawn on Scandinavia against
remittances to London; the proceeds of bills on Switzerland or Italy are sent to Paris or to London, etc. and
many of these combinations are daily calculated by numerare of infinite variety.

Bills are

German exchange

are

;

bills

;

ous active bankers all over the world, who take advantage
of every one sixty-fourth of one per cent of margin.
Thus are the markets kept from drifting apart. It may

GOLD MOVEMENTS AND FOREIGN EXCHANGES

be asked who benefits by this competition. The answer
is that the merchant benefits, the importer as a result buying his exchange more advantageously, and the grain and
cotton exporter selling his

bills at

a better price.

So much for checks or demand exchange.

Cable

transfers require but a word.
They differ from demand
exchange in that the proceeds are paid out at once at

destination, instead of awaiting transit of a bill by steamer
- hence the seller of cable transfers loses interest
during

the time of transit at the rate of interest current in the

market to which the transfer

made, and

his rate for

selling cable transfers is accordingly higher by so much.
In abnormal times, however, the difference may be much

during last November, for instance, when London banks were unwilling to advance money to facilitate
the shipment of gold, the possession of funds in London
was an advantage, the value of which was measured by the
profit on gold shipments, and this profit, owing to our currency premium, was great enough to make cable transfers
unusually valuable.
Hitherto we have considered only the exchange of the
money of one currency into that of another, and the
mechanism by which this is effected ; with long bills we
Credit is a
enter the domain of international credit.

greater;

hardy
strange thing, delicate, sensitive, and yet hardy,
condiunder
work
heaviest
to
do
the
sympathetic
enough
tions,

and yet so delicate and

false note will cause

to shrink

sensitive that the slightest

and withdraw and when
;

withdraws, neither coaxing nor force (least of all force)
can draw it back until conditions are again suitable to

temperament. When credit ceases to work for us,
the burden is thrown upon coin, a slow, lumbering substitute.
It is as though the main engine of a huge factory
had broken down, and the workmen were attempting to do
with hand tools what the machines had before been doing.
its

THE CURRENCY PROBLEM

Before discussing long bills drawn by bankers here on
their correspondents abroad, which bills are the principal
medium whereby money rates between markets are equalA merchant
ized, let us consider commercial long bills.
here buys goods in India or China the seller desires to be
paid when he ships the goods the buyer cannot afford to
pay for the goods before he receives them, perhaps not
until he has had time to deliver them to his customers
;

;

What happens ? It may be asked, why not let the
China merchant draw on the New York merchant, and
attach to the drafts the bills of lading and insurance
There are
policies representing title to the goods shipped.

here.

several reasons.

In the

first

place,

banks in China prefer bills on London

;

not only are they mostly English banks, which do not
keep well informed on New York rates of exchange, but
in addition the pound sterling has always been the current
You might as well defy a law of
international money.

nature as a trade custom; such customs cannot be reasoned with. As Walter Bagehot well puts it: "In every
market a dealer must conduct his business according to the
customs of the market, or he will not be able to conduct it

Again, the China merchant's bank may not want
to incur the risk of buying the bill of exchange, even with
at all."

shipping documents attached, for fear that the New York
merchant should on some pretext refuse payment, in which
case the China bank, instead of cash to its credit, would
have a shipment of merchandise on its hands in New York.
Further, the China merchant himself may not know the
New York merchant well enough to ship goods and to take
the chance of their being refused. Lastly, as the draft
would generally reach New York before the shipment, the
New York merchant would have to pay for the goods before he actually had them in hand.
To overcome these
obstacles, it has been for years a custom, in cases where

GOLD MOVEMENTS AND FOREIGN EXCHANGES
the

New York

merchant

trusts the

China merchant, for

the former to get from his New York bankers, who must
be a firm of world-wide reputation, a letter addressed to
their London agent directing the London banker to accept
the sixty-day or ninety-day or four-months bill of exchange
of the China merchant, when such bill of exchange is

insurance policy, consular
invoice, etc., in respect of a shipment of merchandise, the
nature of which is specified in the letter. This is called a
letter of credit, and this letter of credit the New York

accompanied by

bills of lading,

China merchant with his order for
goods. When the shipment is ready, the China merchant
draws his bill on London at ninety days' sight, let us say,
and takes it, together with the letter of credit and the
shipping documents, to his own bank in China. This
bank, on the authority of the New York banker's letter of
credit, buys the bill on London at the current rate for
such bills. The China bank sends the bill to its London
merchant sends

to the

agent, who presents it to the London agent of
York banker for acceptance; upon acceptance
to the accepting banker,

the

New

the ship-

who thereupon

ping papers go
sends them to the New York banker. Neither the New
York banker nor his London agent has so far paid any
cash they have simply lent their credit. When the goods
;

New York,
New York merchant

New York

banker permits the
them and to
deliver them to his customers, from whom he receives payment for them. The New York merchant must pay his
New York banker in ample time to permit the latter to
arrive in

remit to his

due

the

to take possession of

London agent

before the

bill

of exchange falls

in London.
Let us now turn back and follow the fate of the bill
of exchange after it has been accepted and handed
back to the London agent of the China bank. It is now
a bill luivin^ ninety days to run, drawn by the China

THE CURRENCY PROBLEM

merchant, accepted by the London agent of the New
York banker, and indorsed by the China bank as well
as by its London agent
a very substantial commercial
instrument. In this form, it is offered for discount to
one of the great English discount houses, which pays
over to the London agent of the China bank the proIn
ceeds, less interest to maturity at the current rate.
anticipation of the discounting of this bill in

London, the
China bank has drawn a demand bill on its London agent,
and so has reimbursed itself for the money paid to the
China merchant in buying his bill. The whole transaction
has thus been handled by means of credit through the
creation of a commercial instrument of high character,
in which the London discount house was glad to invest its
deposits; these deposits themselves being but credits in
another form -- but that is another story.

So much for the part played by long

our import of
commodities. Now for a typical case touching exports.
Let us take cotton. For some reason, perhaps because
buyer and seller are separated by only a week's trip, and so
know each other better, letters of credit are not customary in connection with our exports of cotton. When we
export cotton, the China case is practically repeated; a
opened, only no letter of credit is actually issued.
English buyer arranges with his banker to accept the

credit

The

bills in

American cotton dealer and notifies the American dealer to draw his sixty-day bill on the London
bank, with shipping documents attached. The American
cotton dealer borrows from his local bank to buy cotton
from the farmer, whom he pays in cash; when he has
drafts of the

gathered enough cotton for a shipment, he ships on, through
bills of lading, from his Southern home direct to Liverpool
these bills of lading he attaches to his sixty-day draft on
London, and the London draft with its documents he
;

attaches to a draft on his

New York

agent.

With

this

GOLD MOVEMENTS AND FOREIGN EXCHANGES

New York

The New

York

London

draft he repays the local bank.
agent, in turn, sells this sixty-day bill on

a New York banker, and with the proceeds meets the cotton
On the other hand, the exchange
dealer's draft on him.
banker sends the sixty-day bill to London for discount,
and against the proceeds draws a demand bill on London.
It is the China case over again.

The London

discount houses, bill brokers, and others
dealing in acceptances and other commercial instruments
can, under regulations and within limitations prescribed
by that Bank, at any time rediscount at the Bank of England, at its posted rate, the commercial instruments they

German banks can do the same at the Reichsbank,
and French banks at the Banque de France. When the

hold.

volume of such rediscounts increases beyond the limit
deemed advisable by the bank, the bank raises its discount
rate, with the immediate effect not only of checking rediscounts, which thus involve losses, but with the further

making unprofitable the drawing of foreign
bankers' long bills, these bills being drawn for the purpose
of lending the proceeds in some dearer money market, as
explained hereafter. The raising of the bank rate, by its
effect

tendency to check the drawing of foreign long bills, reduces
the credit balances of foreign bankers, and so tends either
to attract gold to London, or else to decrease the chance of

export but, while thus tending to protect the Bank's
gold, it has the incidental effect of penalizing domestic
business by its high rates, and as a consequence it is usually
its

;

resorted to with reluctance.

In London, Paris, and Berlin, and, in

fact, at all the

foreign centers, the quick assets of banks are to a great
extent invested in acceptances having three months or less

The volume

is enormous;
and
the prothese acceptances are constantly maturing,
ceeds are constantly being reinvested. Being always in

to run.

of capital so invested

THE CURRENCY PROBLEM

a state of

ready at a moment's notice to
most remunerative market. These banks

flux, this capital is

depart for the

regard foreign acceptances as very desirable investments,
and are eager to take them when their rates are more

remunerative than

home

rates.

For should home

rates

advance, the possession of maturing foreign bills enables
any bank to extend additional assistance to its customers,
without calling on other home industries to contract their
lines of credit; furthermore, the possession of such bills
enables gold to be drawn from abroad, if needed.
When a bank rate is so raised, it has the further effect of
increasing the rate of interest charged on securities carried
in that market, and this tends to make brokers and dealers

pay

their indebtedness in the dearer market,

transfer their loans to a cheaper market.
dency of making all international debtors

and to

has the ten-

pay their indebt-

edness in that market and borrow in cheaper markets.
These tendencies all combine to lower rates in the market

and to raise them in cheaper money markets.
The vast mass of fluid credits at the disposal of the London and Paris markets give these markets their supremacy.
American capital has been and is so fully employed in the
affected,

development of native resources that it is not generally
available for investment abroad, and so New York cannot

hope for many years to occupy the central position in the
financial world.
Important New York certainly is, and
its importance is growing; the large exports of American
grain and cotton give it the capacity at times to dominate
other markets by drawing gold, and this makes it at such
has acquired a vast
fund of fluid capital ready to seek temporary investment
in the best-paying market, it will not be a financial arbiter
times a formidable factor

among nations.
The most elusive
cussed, viz.,

;

but, until

part of the subject remains to be disbankers' long bills.
They constitute, as be-

GOLD MOVEMENTS AND FOREIGN EXCHANGES

tween the United States and Europe, the principal medium
of equalizing money rates, and, as pointed out by Mr. Paul
M. Warburg in his very able pamphlet, they are far too
limited in their scope to do justice to our requirements.
When English discount rates rise, French bankers buy
English acceptances, thereby employing their funds more
profitably than at home their buying tends to lower London rates, and their abstention from the Paris market to
raise rates there.
Berlin bankers do the same, both in
London and in Paris. The bankers of the European
1

;

centers are constantly scanning the possibilities of
one another's money markets. But they cannot operate
thus directly in the New York market, because we have
not created a commercial instrument responsive to their
demand. Where we in the United States allow debts
between merchants to stand as open accounts, debtor
merchants abroad furnish their creditors with bank

money

and these the creditor discounts through

acceptances,
his

bank.

tool

makes

in bills

Our

failure

provide such a commercial

impossible for foreign banks to invest here
bearing the number of responsible commercial
it

and banking names

which they are accustomed, and so
our ability to attract for temporary use the funds of other
markets is limited to the long bills of such of our banks and
bankers as do a foreign exchange business.
If the rate of discount in London is three per cent, and if
a New York banker can draw a sixty-day bill on his London agent and sell it in New York at a price based on the

London
tion will

discount, the drawer's profit or loss in the transacdepend on two factors first, on the rate of interest
:

which he can employ the proceeds in New York, and,
secondly, on the rate of exchange that he will have to
pay for demand bills sixty days hence, for then he must
meet his maturing long bill in London. If money here
at

Defects

and Needs of our Banking System, by Paul M. Warburg, 1907.

THE CURRENCY PROBLEM

can be invested for those sixty days at four per cent per
annum, he will have a margin of interest at the rate of one
per cent per annum for sixty days, or one-sixth of one per
cent, out of which to pay his London commissions, to meet
exchange, and to find his profit. If, when his
matures, demand bills on London are again
sixty-day
selling at the same rate as when he drew the bill, his profit
will be one-sixth of one per cent less his London com-

any

loss of

bill

If the exchange rate is then lower, he will
additional profit; if higher, he may make no
he may even face a loss. If the general level of

missions.

make an
profit

high when he draws his bill, he will be more
likely to make a profit on exchange, and will therefore be
content with a smaller interest profit, while, with exchange
very high, he may be content with no interest profit at all,
So, too, the season
relying on the exchange profit alone.
when
his
bill
matures
will
influence him ;
of the year
long
other things being equal, exchange is likely to be lower in
the autumn, when our exports reach their maximum,
and higher at the end of the year, when interest remittances
In reliance on, or rather in anticipation
are to be made.
of, these seasonal fluctuations, bankers are apt in July

exchange

and August

draw long

bills,

so that these

may mature

about the time when cotton and grain bills come into the
market, hoping to cover at a profit by purchasing the
export

bills.

The

requirements of bankers, seeking to cover these
summer-drawn bills, provide a good market for exporters'

summer, however, London houses,
mistrusting the state of American credit, discriminated
against American bankers' bills, and as a result comThis cirparatively few were outstanding last autumn.
bills.

During

last

cumstance led to a situation containing perhaps certain
elements of retribution. The exchange market had adjusted itself to these new conditions before autumn. At

GOLD MOVEMENTS AND FOREIGN EXCHANGES

that time grain and cotton bills began to come forward in
great quantity, for Europe's harvests had been scant, and

our produce was needed there.
bankers to meet maturing long
large

amount

of gold

was

With
bills,

inevitable,

little

demand from

the importation of a

and

this

import move-

ment gained added impetus from the very considerable
purchases of our securities by Europeans at panic prices.
In other words, by discriminating against American bills
during the summer, the London financial houses had put
out of action the automatic governor that tends to hold
things even, with the result that in the autumn they were
entirely defenseless against our large demands for gold.
But to return to bankers' long bills. Such bills when

sold here are bought by other bankers who happen to need
remittances, for, when these bills have been discounted
in London, they are cash and answer the same purpose as

demand

Involving, as they do, however, a slight
risk for sixty days, they sell an infinitesimal fraction lower
than a precise calculation of the discount would warrant,
and are to that extent a more economical remittance. Bankers

bills.

buy such

bills to

cover the

sold to their customers.

demand

drafts they have
banker may therefore

The same
own demand

bills, and
same time be selling long bills in order to lend out the
proceeds. It was by means of long bills that, in 1895,
gold exports from New York, when they had reached a

be buying long

bills to

cover his

at the

were checked by a syndicate headed by
Morgan and Company. This syndicate comprised
all the
leading drawers of foreign exchange, and the purof
its formation was to create a sufficient volume
pose
of exchange by drawing of long bills (whether at a profit

menacing

point,

J. P.

or at a loss) to prevent further exports of gold. It was
successful in accomplishing this purpose.
Bearing in mind, then, that the general level of exchange
rates will in part determine the decision of the

banker

THE CURRENCY PROBLEM

drawing long

bills,

are prepared to understand the

automatic operation by which economy of gold movement
is secured, through postponing exports or imports until
conditions

make them

imperatively necessary.

Should exchange rates rise very high and approach the
export point at a time when money rates here are higher
than they are abroad, we should have at work two causes
tending to create additional bills of exchange, and so, by
keeping
gold.

down exchange

postpone the export of
rate and the high
both, as explained, strong inducements
rates, to

These causes are the high money

exchange rate,
When interest rates in the
drawing long bills.
two markets are about equal, the interest motive is inoperative, and only the exchange motive for drawing long
the effect of that alone, though of less force,
bills exists
would again be to retard exports.
With gold imports, we see corresponding forces at work.
To make gold import probable, exchange must be low;
under those circumstances there is little inducement to

for

;

draw long
indeed.

bills,

unless

money

rates here are very high

To the extent that they are

drawn, however, they

imports by forcing down exchange, and so hasten
the journey of gold to the dearer money market but this
occurs only when the money market is in great need.
On
the other hand, when, with low exchange rates, money

facilitate

;

rates are also low, bankers will hold commercial long bills
without discounting them abroad, and without drawing
against the proceeds, not only because the higher foreign

on the basis of which the bills are bought, is
more remunerative, but also because there is the chance of
interest rate,
selling the

exchange

at higher rates later.

When

exchange

so held without discounting or drawing against it, it is
virtually taken out of the market, thus raising exchange
is

and deferring imports.
So once more we see the trader's eager quest for a

rates

profit,

GOLD MOVEMENTS AND FOREIGN EXCHANGES

regulating, automatically, financial adjustments that paternal oversight by government might bungle, but could,
in no event, improve.
Some of the great foreign banks, notably the Bank of

France, seek at times to stimulate the import of gold into
their market by lending to private banks, without interest,
the cash needed for the operation.
Leslie M. Shaw, when
Secretary of the Treasury, made similar loans to national
banks here, returnable on receipt of the imported gold

from abroad. Secretary Shaw did this at a time when
exchange had fallen to a point at which importations
would have been possible, had interest rates been at six
per cent; interest, however, was much higher than six
per cent, and so no gold was being imported. Interest
may be regarded as the friction of commercial machinery,
and in the case in question the friction was so great that the
gold-importing machinery needed unusual power to start it.
The secretary overcame the friction. This action of
Secretary Shaw has been much discussed, and different
views in regard to it are entertained. Certainly greater
justification for such action existed than often exists when
the Bank of France takes similar action. The sufferers
from failure to import gold promptly had been our exporters, who, by reason of the unusually low level of exchange rates, had been receiving low rates for the export
bills they had for sale, though they probably succeeded in
shifting a part of this load to the shoulders of foreign
buyers. In connection with this action of the secretary,
two questions provoke discussion first, whether or not the
:

gold imported in this frictionless

manner would have come

Critics of the secretary believe that
have continued to drop, and that in the

to us in any event.

exchange would
end the gold would have come. The advocates of
matic adjustment must, however, recognize that, like all
markets, the exchange market is ever in motion at every
;

THE CURRENCY PROBLEM

84
it

point

subject to a multitude of tendencies of ever

varying force.

advances a point, new supplies

may

be attracted and a part of the existing demand may be
withdrawn if it declines, the reverse may take place

;

at every

moment new elements of supply and demand enter,

gold is not imported to-day, to-morrow the occaOn the other
sion and the need of it may have passed.
known
that
the
is
once
if
it
hand,
gold import point
has been permanently raised, these forces will inevitably

and

assume new

relations to the market.

When

these

new

relations are once definitely established, we shall probably
import no larger amounts of gold than we would have done

under the old conditions. The gold imported under Secretary Shaw's offer might not have come to us without his
aid; but, if his aid was really instrumental in drawing

was because, the offer being unexpected, the
market had not sufficient time to adjust itself to the new
conditions, and being of uncertain duration, it was im-

here,

possible to operate for the future in reliance

upon

their

continuance.
Secondly, having thus imported, by the frictionless
method, gold that we will assume we would not otherwise
have secured, does it follow that we shall for that reason
reexport

it?
By no means. The exchange market,
draws away from the gold import point, does not

when

shoot

to the export point;

thousand tendencies that buffet

may

runs the gauntlet of a

up and down, and

not reach the export point for many months. It is
we see on water tanks when the water
below a certain level, the pump is started automati-

like the valves that
falls

and when the water rises to another level, the pump is
automatically cut out. Between its cutting in and cutting
out, the water may be drawn quite low and then again be
raised by rain or otherwise, and then drawn down again
but no matter how near the water may get to either limit,

cally,

;

GOLD MOVEMENTS AND FOREIGN EXCHANGES
provided

does not reach that limit,

many

causes

may

interfere to postpone its setting the pump in motion.
I can see no objection, practical or theoretical, to the f rictionless movement of gold.
Whatever feeling it evoked

abroad would vanish, if it were understood, once for all,
that this would be our usual custom.
By establishing
this custom, we should somewhat narrow the extreme
range of exchange fluctuations; but this in itself would
be an advantage. The purpose could be easily accomplished by permitting banks to count as part of their reserve gold actually in transit it is immaterial whether that
gold be in the banks' vaults or only on its way there.
Rarely will any bank be so hard pressed that it cannot
:

spare a portion of its reserve for a week or two, knowing
it will be received at the end of that time, and, moreover, a bank so situated that it could not spare the cash
that

from its reserves would not attempt to import gold. The
one real risk would be loss in transit, and that risk being
protected by insurance, the only risk would be of delay.
This automatic import and export of gold furnish to the
currency of every country a very considerable element of
automatic elasticity. France and Germany have other
elements of elasticity arising from the note issues of their

but gold movement is the only element
of elasticity in the currency of Great Britain, Bank of England notes being merely certificates of deposit for sov-

government banks

;

ereigns held on storage, except
18,450,000, uncovered notes.

the

fixed

amount

Our currency is, therefore, more elastic than that of
Great Britain, for we have the elasticity imparted by our
national bank-notes
a sluggish, inert elasticity
the
of
an
old rubber band; such bands, like our
elasticity
national bank-note circulation, will expand a certain limited distance, but neither the old rubber bands nor our
bank-note circulation will contract. Of course, with a vast

THE CURRENCY PROBLEM

country and huge crops raised in remote sections, our currency requirements are entirely different from those of
Great Britain. Beyond question our currency machinery
should be remodeled and improved; but recognition of
the need of change has, to many, come so recently and so

suddenly that we are, at the present time, in greater danger from hasty and unmatured action than we have hitherto
We need action, enlightened
been from failure to act.
action but, in order to secure it, we need, first, a thorough
;

That topic in its
understanding of the requirements.
details is beyond the province of this paper but a word on
the subject is proper here, because consideration of the
nature of those requirements follows logically on the dis;

of elasticity as imparted by gold movements.
elasticity, in addition to that imparted by the
import and export of gold, in order that the periodical,
temporary, hand-to-hand currency requirements of crop-

cussion

need

moving and holiday seasons may be met without disturbing credit lines; but this elasticity must be so planned
cannot be used, except perhaps in times of great
emergency, for the purpose of erecting a larger credit
structure upon our cash reserves.
It is my opinion that
these requirements can best be met by a central bank

that

properly organized and administered, and I believe that
a form of organization can be devised for such a bank
that will effectually protect it from the danger of political
control or influence.

High

interest rates, like high temperatures in the

human

symptoms of disease, and when they show themwe
must seek to cure the disease, not doctor the
selves,
body, are

symptoms. Except when caused by need of currency for
hand-to-hand purposes, high interest rates indicate an
overextension of credit that calls for contraction and liquidation, and in former days they brought about that contraction and liquidation.
During the last few years, how-

GOLD MOVEMENTS AND FOREIGN EXCHANGES

have failed to do this, because the
has
come to rely more and more upon
community

ever, high interest rates

business

keep interest rates down.
such rates would prevail
for but a short period, business men have been willing to
pay rates that a few years ago would have brought about
prompt liquidation, and with it, relief. Under our present

Washington intervention

Accordingly, in the belief that

awkward currency arrangements,

it is
perfectly proper
in slack seasons
should
that the Treasury Department
gather in surplus currency, in order to place it again in

circulation at crop-moving seasons,

and that

should at

other times redeposit surplus revenues with banks, so as
not to cause unnatural contraction. But this necessary
Treasury action has accustomed us to look to Washington

from high money rates, however caused, with the
result that high rates have for the last few years lost their
terrors, and have failed to bring about needed liquidation.
In remodeling our currency, we must devise a system
which provides for the currency requirements of cropmoving seasons without liquidation of credit lines, and
which keeps Treasury money in the channels of trade, thus

for relief

taking

away the power

of the Treasury over interest rates.

When
will

that shall have been brought about, interest rates
once more have become a valuable indication of

credit conditions,

and the business community 'will again

heed their timely warnings.

THE NEW YORK CLEARING HOUSE
BY

WILLIAM

NASH

THE NEW YORK CLEARING HOUSE
WORDS OF INTRODUCTION,

AS PRESIDING OFFICER

APPRECIATE very highly the honor of presiding over
this meeting, as it gives me an opportunity to make some
personal references to the Clearing House of this city and
a few brief comments upon some phases of the present
I

state of affairs.

can speak more freely to this audience, as
the
through
suggestions of your former President Low,
the bank with which I am connected, and in which a
large number of the students of Columbia are deposiI feel I

opened its University Branch very near here. If
through that agency I have in any way assisted in the
work of education by impressing upon those young men
the value of accuracy and the wisdom of a strong cash
reserve as leading principles of commercial morality, I
hope I shall not have been unworthy of being named
among your most useful professors and educators.
It is very easy to understand the keen public interest
in all that relates to clearing houses and especially the
great one in New York City.
Money and credit are two
interests
that
come
home
to our business and
great
bosoms, and the men who handle them, in distinction
from those who talk about them, are the subjects of
tors,

natural curiosity.

As an organization of power and influence in financial
matters, I know of none that excels or equals the New York
Clearing House. It has its usual daily duty of making
the practical exchanges between the banks, by which
91

THE CURRENCY PROBLEM

your check arrives for payment in an incredibly and
sometimes uncomfortably short space of time, and it has
its

occasional function as the conservator of business

interests

and the potent agency by which panics are stayed

and the baleful
and regulated.

effects of public

Nine times

excitement are arrested

in its history the Clearing

House has come

to the rescue of the business community
and the public at large by the issue of loan certificates,
a remedy now so well understood that its aid is eagerly
clamored for at these times of emergency. These loan
certificates constitute the only experiment in asset and
emergency currency that this country has ever had. In
the half century of its existence this method of help has,
as I have said, been used nine times, and without the
I have no doubt that the present
loss of a single dollar.
I had the honor
issue will have the same happy solution.

recently to say in public that the pointings of the loan
certificates now in existence all over the country wher-

ever there are clearing houses were unerringly to a great
central bank.

Without enlarging on this idea at this time, I want to
emphasize one phase of such a central bank that is absoI refer to the character
lutely necessary for its success.
of its management.
I contend that only the men who

are experts in banking should dominate and control such
an institution. I draw the idea from my experience with

the

men who have

New York
unselfish

so brilliantly served the public in the

Clearing House, and with whose grand and
I have been familiar all my business life.

work

The

Clearing House Committee is composed of five
bank officers and the president of the Association. The
best bankers of

New York

have been selected for

mem-

bership on this committee.

Clearing House Committee man to be successful
must be a practical banker, of broad and enlightened

The

THE NEW YORK CLEARING HOUSE

and unselfishness, and with
promptness and decision to meet unexpected and unusual
These conditions arise no more suddenly and
conditions.
in no more perplexing forms than in financial matters
in a time of panic and disturbance.
The emergency is
dramatic
and
and
I do not wonder
often
intense,
very
at the curiosity and interest that centers around the
Committee in exigencies similar to that through which we
have just passed. I have been filled with admiration
at the foresight, the discretion, and the boldness of these
giants of finance, in the several crises where their decisions
and judgments have had far-reaching results. The public
confidence in this Committee has never been impaired.
I should like to point to some of the men who are honored
and cherished for their services in the Clearing House.
I recall the magnetic George S. Coe, one of the most
resourceful of thinkers; Jacob D. Vermilye, for many
years the Nestor of our banking fraternity; George G.
Williams, of the Chemical Bank; Edward N. Perkins, of
sympathies,

courage

the Importers
Traders' Bank; Henry W. Cannon, of
the Chase, and later his successor in that office, A. Barton
Hepburn; J. Edward Simmons, of the Fourth National

Bank; Dumont Clarke, of the American Exchange; James
T. Woodward, of the Hanover; and Alexander Gilbert, of
the Market and Fulton, now president of the Association.
might enlarge the list very greatly, but the thoughts of
every banker turn to one man, who during a long term of
years rendered the most brilliant and useful services to
the banking world and who centered in himself all the
admirable traits imaginable in a master of finance. I
refer to the late Frederick D. Tappen, whose name has
been on our lips many times during the past months.
Genial, magnetic, courageous, bold, courteous, and discerning, he was for years the controlling power in financial
circles.
He was not the president of a large bank, nor a
I

THE CURRENCY PROBLEM

man

of great wealth, but held his control of affairs by the
force of his individuality, his personal character, and
experience as a banker. The prominence and power of

Mr. Tappen illustrates the leading principle of Clearing
House control. It is not held by large banks but by large
men. Often the president of a small bank has been the
most influential in our councils, and the character and
force of the man have always counted more than the size
of his bank.

When

the present financial crisis broke upon us, it was
instantly felt that the growth of our banking interests

demanded a

larger force for the management than on
and the Loan Committee, which was
occasions,
previous
the Clearing House Committee, was authorized to associate
five

other

bank

officers to assist

them.

gave a

fine

opportunity of initiating the younger bank officers into
the working force of the Clearing House, and the result
of the experiment has been to add to our available men
these rising men in our profession.
always too small
The Chairman of that Associated Committee is the speaker

He is not only practically conversant
with Clearing House work, but his book on clearing houses
The Clearing House
is a standard work on the subject.
Committee is under great obligations to the committee
of the afternoon.

over which he has presided so ably.

have the pleasure

of presenting to you Mr. James G. Cannon, Vice-President
of the Fourth National Bank of New York.

CLEARING HOUSES AND THE CURRENCY
BY

JAMES

CANNON

CLEARING HOUSES AND THE CURRENCY
THE Supreme Court of one of our states has defined
"
a Clearing House as an ingenious device to simplify and
facilitate the work of the banks in reaching an adjustment
and payment of the daily balances due to and from each
other at one time and in one place on each day." In
practical operation, it is a place where all the representatives of the banks in a given city meet, and under the
supervision of a competent committee or officer, selected

by the associated banks, settle their accounts with each
other, and make or receive payment of balances, and so
"clear" the transactions of the day for which the settlement is made.
But we must go farther than this, for though originally
designed as a labor-saving device, the Clearing House has
expanded far beyond those limits, until it has become a
medium for united action among the banks in ways that
did not exist even in the imagination of those who were

A Clearing House, thereits inception.
to simplify and facilitate
as
a
device
be
defined
fore, may
the daily exchanges of items and settlements of balances
among the banks, and a medium for united action upon
all questions affecting their mutual welfare.
The clearing houses in the United States may be
divided into two classes, the sole function of the first of
which consists in clearing notes, drafts, checks, bills of
exchange, and whatever else may be agreed upon; and
the second of which, in addition to exercising the functions
of the class just mentioned, prescribes rules and regulations
for the control of its members in various matters, such as
instrumental in

THE CURRENCY PROBLEM

98
fixing

uniform rates of exchange, interest charges,

collec-

tions, etc.

Clearing houses may also be divided into two classes
with reference to the funds used in settlement of balances
those clearing houses which make their settlefirst,
:

of balances entirely on a cash basis, or, as stated in
the decision of the Supreme Court above referred to,

ment

"by such form

acknowledgment or

certificate as the

may agree to use in their dealings with
each other as the equivalent or representative of cash";
and second, those clearing houses that make their settlements by checks or drafts on large financial centers.
associated banks

The primary object of a Clearing House is, as stated,
the exchange of checks and drafts between the banks
associated together for that purpose, and the settlement of
balances resulting from such exchanges but this is not
the only function exercised. As already shown, this
single function constitutes a Clearing House of the first
class, while the addition of other functions puts the
;

organization into another class. The tendency has been
marked, especially in recent years, to include within the
legitimate field of clearing houses all questions affecting
the mutual welfare of the banks and the community as a

whole.

The bankers west

of the Mississippi have given

to the country the most striking examples of the possibilities of clearing houses exercising various special

functions, while the great associations of the East, and
especially that of New York, have exemplified the utility
and value of Clearing House loan certificates.

The most important
ing House

of the special functions of a Clear-

(a) the extending of loans to the governmutual assistance of the members, (c) fixing

are

ment, (6)
uniform rates of interest on deposits, (d) fixing uniform
rates of exchange and of charges on collections, (e) the
issue of Clearing

House loan

certificates.

CLEARING HOUSES AND THE CURRENCY

Less than a decade after the inauguration of the
Clearing House system in America, the Civil War broke
out and threw the government into a condition of acute
The ordinary sources of income
financial embarrassment.
were insufficient to meet the demands of the approaching

Thereupon the banks, members of the clearing
houses in New York and Boston, responded with praccrisis.

unanimity to the call of the government for loans,
by which the latter was enabled to put armies in the
field and to maintain the struggle for national unity.
In times of panic, it is not infrequently the case that a
bank in good standing becomes temporarily embarrassed.
Unfortunate report may cause a run upon it, and, being
unable to call in a sufficient amount of its outstanding
loans to meet the demands of its frightened depositors,
it must either secure a loan or fail.
In such an emertical

gency, the other members of the Clearing House are usually
willing to render assistance until the strain is relaxed.

secure such aid, however, a bank must be sound in its
management and of good repute in every respect; otherwise, the members of the Clearing House are likely to
decline assistance, being quite willing to get rid of a

weak

and ill-managed member.
Another of the special functions of a Clearing House is
the fixing of uniform rates of interest on deposits. In

some

associations the legality of such action is still regarded as a moot question, and hence they are reluctant

Other associations have not
hesitated,
regulate their members on this
As early as 1881, the rates of interest were agreed
point.
in
Buffalo, and were observed practically without
upon

to enforce such

a rule.

however, to

fraction

or violation, for

some nine years

thereafter.

They were broken at last only because of their nonobservance by new banks, which at the outset refused to
become members

of the Clearing

House

organization.

100

THE CURRENCY PROBLEM

another of the special functions which I have
is the fixing of uniform rates of
exchange and
of charges on the collection of items.
In 1881, also in
Buffalo, a prominent banker in that city succeeded in
Still

mentioned

uniting the banks on rates. The promoter of the enterprise, though well known for rate-cutting, was a successful
banker, and had always been able to meet competition

Hence, when he proposed a uniform rate
system, the other banks were only too glad to consider
his propositions.
The rates were not high, but were
arranged so as to do justice, so far as possible, to the
banks on the one hand and the depositors on the other,
and so satisfactory was the new regime that it remained
in harmonious operation for nearly nine years.
As was
the case with the agreement fixing the uniform rates of
interest on deposits, the non-observance of the collection
exchange rules by the new banks made its continuance an
successfully.

injustice to the member banks.
The matter of collecting checks

of the city of
had received

New York

and other items outside

a subject that for

many

years

most careful thought on the part of the
officers and members of the New York Clearing House.
An amendment to the constitution was adopted March 13,
1899, directly bearing upon this point and embodying a
policy that was so radical as not only to attract attention
throughout the entire financial community, but at the
more or less opposition. As time has
passed, however, the justness of the provisions has become
apparent, and the business community has acquiesced in
what is manifestly an entirely reasonable measure. The
clearing houses of Boston and Chicago have since put

outset to incite

rules of this character in force.

Briefly, its

important

after naming certain of the
provisions are as follows
East
as
in
the
cities
points upon which it is optional
larger
as to whether the banks make a charge for collecting
:

CLEARING HOUSES AND THE CURRENCY
items,

specifies certain states,

101

mostly east of the Missis-

sippi, and including Virginia and West Virginia on the
south, upon which a charge of not less than one-tenth
of one per cent must be made by the collecting bank, and
upon all other states in the Union, and for items upon
Canada, the collecting banks shall charge not less than
one-quarter of one per cent of the amount of the items,

The amendment also provides penalties for
respectively.
the violation of its provisions, the penalty for the first
violation being a five-thousand-dollar fine, and in case
of a second violation, any collecting bank may be expelled
from the association.

daily routine of the New York Clearing House is as
follows each business day, at ten o'clock, the exchanges

The

take place between the banks. The two essential representatives of each bank are the "delivery clerk" and
the "settling clerk." The former delivers the packages
brought, and the latter receives the return packages from

the messengers of the other banks.
Each member sends its items for the other banks

made

out separately and inclosed in envelopes, with the amounts
listed on the "exchange slip" attached to the outside.

their arrival at the Clearing House, the settling clerks
furnish the proof clerk, sitting at his desk in the manager's
gallery, with the "first ticket,"

upon which

entered

amount brought or "credit exchange," and which
the latter transcribes on the Clearing House proof under
the head of "Banks Cr." The total of the amounts thus
the

brought by the several clerks constitutes the right-hand

main column
The bank

of that sheet.

representatives usually gather at about a
quarter to ten, and a few minutes later the manager
a pears in his gallery.
At one minute before ten he sounds
>

a gong as a signal for each of the clerks to station himself
in his proper place.
Each bank's settling clerk has his

THE CURRENCY PROBLEM

102

own

desk, back of which he stands, while the delivery
clerks form on the outside with their exchanges carried

a box. The delivery clerks arrange themselves in
consecutive order, and stand ready for delivery as they
pass along the counter. They carry with them "dein

livery

clerk's

amounts

receipts," or

little

bank arranged

for each

slips

containing

in order,

the

upon which

the several settling clerks, or their assistants, give receipts
for the packages delivered.

now

a position for the exchange. The
manager calls "ready," and promptly at ten o'clock he
sounds the gong again and the delivery of the packages
All

are

down

four columns of men, moving
simultaneously like a military company. At the start
each advances to the desk in front where his first delivery

begins.

looks

is to be made.
He deposits the package of items and also
the receipt slip, on which the assistant of the settling clerk
(or in the case of small banks the settling clerk himself)

writes his initials opposite the amount of the package
delivered in the blank space provided for that purpose.

At the same time,

an opening

in the desk,

which serves

for that purpose, he deposits a small ticket containing the
amount of the package. If correct, it must agree with

amount

on the "exchange slip." This process
desk of each of the banks, each delivery
clerk making the complete circuit in ten minutes to the
point from which he started.
Being now at liberty, each delivery clerk takes back to

the
is

listed

repeated at the

bank the exchanges deposited by the other messengers,
while the settling clerks remain until the proof is made.
The settling clerks, immediately upon the completion of
the exchange of packages, sum up, as quickly as possible,
his

the amounts entered on their statements under the head
of "Banks Dr."
Upon ascertaining the total, they make

out another ticket containing the credit and debit ex-

CLEARING HOUSES AND THE CURRENCY

103

changes and the balance, and send the same to the
"
proof clerk," who transcribes the debit exchange under
the head of "Banks Dr." (the credit exchange having
already been entered) and the balance on the credit
side or debit side, as the case

may

be.

While this is being done, the settling clerks are checking back from the small tickets, to ascertain whether the
amounts agree with the amounts listed on their statements from the exchange slips. By this time the proof
clerk has footed the four columns on his sheet, viz., the
credit and debit exchanges and the credit and debit
If the former two agree with the latter two,
balances.
the work is correct, and the result is announced by the
manager, who then calls off credits and debits.
Thus far no money has entered into the transaction.
Checks, notes, drafts, and other items have passed through
the exchanges, but as yet no occasion has arisen for the
use of a single penny. Evidently, however, the clearing
Each member has in its possession
is not yet complete.

paper drawn upon itself which the other members have
credited on their books, and likewise each member has
given in exchange to each of the other members paper
drawn upon them respectively and which it has credited
upon its own books. But the possibility is very remote
that the amounts of the items delivered by any member
to the other banks will exactly balance the sum total
received from them.
Indeed, so slight is the chance
of such an agreement, that in the whole history of the
Association there has not been a single instance of this
kind, although the approach on one occasion was within
one cent of an exact exchange. Hence, each day after the
exchange, the general proof will show a debit on the part
of some banks and a corresponding credit on the part of
others.

complete the clearings, therefore,

sary for the banks to settle these balances.

it is

neces-

THE CURRENCY PROBLEM

104

Accordingly, before half-past one o'clock, each debtor
bank, in compliance with the requirement of the constitution, pays into the Clearing House the amount of
its debtor balance, and obtains a
receipt for the same,
After half-past one,
signed by the assistant manager.
the creditor banks receive at the Clearing House their
respective balances, and give their receipt for the same
in a book provided for that purpose
but in no case can
;

a creditor bank receive
banks have paid in.

With the exception

its

balance until

all

the debtor

of fractional amounts, balances are
United States

settled with legal-tender notes, gold coin,

and Clearing House gold certificates, and during panic
times with Clearing House loan certificates.
By resolution and amendment, covering nearly the
whole period of its history, the New York Clearing House
Association has been developing the present system for
regulating the conduct of those outside, or non-member
institutions,

House.

which enjoy the

privileges of the Clearing
other Association in the United States even

approximates that of New York in the rigorous conditions
imposes upon non-member banks, and in the consequent
safeguards it has thrown around its members. This

subject of members clearing for outside institutions is
one that is just now receiving a great deal of attention
from the Clearing House authorities.
member bank,

being responsible to the Association for the clearances
of a non-member bank for at least twenty-four hours after
notice of ceasing to clear has been given, it has always
been customary for the clearing bank to take securities
from the non-member institution for which it clears, to

provide against the contingency of loss; but on account
of complications arising from the failure of one or two

where large blocks of the most desirable
were found to be in the possession of the clearing

state institutions,

assets

CLEARING HOUSES AND THE CURRENCY

105

bank, to cover their clearances, a law was passed by the
Legislature, called the Saxe Bill, which states in brief
that the effect of the statute

to forbid the enforcement

lien against the

moneys or securities so deposited
any
for any clearances made after notice or knowledge that
the banking superintendent has taken possession of a
of

non-member

institution.
Hereafter, therefore, the former
lien
of
of
a
this
character
is
validity
absolutely annulled,
so far as respects the assets of a state bank or individual

banker.
is

made

appears, however, that where such clearing

for a trust

company non-member,

this

statute

not apply, since the words used are merely state bank
or individual banker, and since section 2 of the banking
law does not include a trust company in its definition
will

of the terms

"bank"

or "individual banker."

This makes it extremely dangerous for bank members of
the Association to clear for non-member banks, organized

under the laws of the state of New York, and this statute
might some day be construed by the courts to apply also
This is one of the things that
to the trust companies.
has helped the agitation for the admission of the trust
companies to the privileges of the Clearing House, and at
a meeting of the Association, held on January 13, 1908,
a resolution was adopted authorizing the admission of
trust companies to full membership in the Clearing
House, provided they will keep a reserve in cash equal to
Full membership
twenty-five per cent of their deposits.
carries with it, besides the privilege of clearing checks,

the right of having representatives on committees, a voice in the entire management of the Association, and the privilege of taking out Clearing House
etc., direct,

when they are authorized. At the same
meeting an amendment was offered, but laid over for
three months, providing for a new class of members in
the Association, to be known as associate members. Such
loan certificates

THE CURRENCY PROBLEM

106

members would have

the privileges and benefits of the
a
voice in its management, and
Clearing House, except
would be obliged to keep a reserve on their deposits of
all

only fifteen per cent.
Until January 16, 1908, there was nothing in the constitution of the New York Clearing House requiring its
to keep a cash reserve.
The twenty-five per
is so often
in connection with
of
spoken

members

cent reserve which

bank statement was kept by the banks without any
law of the Clearing House. At a meeting of the Association, held on January 16th, an amendment to the constitution was adopted, requiring that thereafter all memthe

bers of the Association, or those

who should

become members, should maintain

thereafter

in their vaults a cash

reserve of twenty-five per cent of their deposits.
By
all
of
its
members
to
a
compelling
keep
twenty-five per
cent reserve, and by making this reserve a condition to

the admission to the privileges of the Clearing House, of
trust companies as well as banks, the general banking
situation in this city will be greatly strengthened.
By the admission of the trust companies to full or

membership in the Clearing House, the bank
statement, which is published every Saturday, will be
much more comprehensive than ever before, because it
associate

will henceforth include nearly all the financial institutions
in the city.

There

statement.

much
As

to be said

this subject of the
before stated, it is the custom in

bank

New

York City

to publish the details of the banks' standing
each Saturday noon, and in many instances, because of
this incompleteness, I believe it is a disturbing factor.

Boston and Philadelphia also publish their bank statements in detail, but Chicago has never done more than
give the totals to the public.
the bank statement because

Many
it is

people find fault with
of averages ; but

made up

CLEARING HOUSES AND THE CURRENCY

107

they would only stop to consider, they would readily
see that that is the only way a statement could be made up
that would not be a disturbing factor to the financial
if

situation.

of each

a statement was published of the condition

bank

in the Clearing

House

stood at the close

of business on Friday afternoons, it would necessitate
the very heavy calling of loans on Thursday and Friday

preparatory to such a statement, and Saturday, being a
half holiday, the banks would be obliged to carry very

sums

large

week end; in fact, the
banking would be disarranged, and

money over

the

whole business of
money would always be easier at the beginning of the
week than at the end. With the present system of averages, if through some combination of circumstances a
bank swings under its required reserve in the beginning
of the week, it knows that by calling a few loans each day
it has several
days in which to readjust itself, and in that
secure a

more or

average for the
week. I, therefore, believe that a bank statement based
upon averages is the only one to be given to the public.
As a guide, however, to the Clearing House authorities,
but not for publication, possibly a statement showing
the actual condition of the banks at the close of business

way

on Friday might be

less satisfactory

of great assistance

indicating

whether the statement had been made up on rising or
falling averages.

come

finally to the subject of

Clearing House loan

which has been receiving much attention of
late, and which deserves especial mention.
Clearing House loan certificates may be defined as
temporary loans made by the banks associated together
certificates,

as a Clearing House Association, to the members thereof,
for the purpose of settling Clearing House balances.

obtain an intelligent understanding of the real
character and purpose of such certificates, it will be well

THE CURRENCY PROBLEM

108

moment

to consider for a

the circumstances under which

they are issued. In the course of the last hundred years,
the United States has undergone periodical derangements
business affairs, when confidence was displaced by
mistrust, when the payment of debts became difficult,
when property values declined and business houses
of

failed,

when industry and trade were paralyzed and

In
general stagnation ensued in all lines of enterprise.
such times, depositors in banks, stricken with fear and
sometimes pressed with need, drew out their deposits,

an extent as to render it difficult
or even impossible for the banks to contract their loans
sufficiently to meet the demands thus made upon them.
Under our present currency system there is no method
of expanding the money volume as occasion demands,
whereby the banks can continue their usual loans and
in

many instances

to such

and thus prevent a panic, with all its evil
consequences. Hence it is left in a large measure to the
financiers of each community to work out their own
remedy, supplemented by such mutual assistance as a
discounts

courteous regard for each other
relations

may dictate,

or as business

may demand.

Quick to see the deficiency in our currency system, and
the desirability of in some way supplying it, the bankers
of New York, over forty years ago, devised the scheme of
issuing Clearing

House loan

certificates as a

method

from monetary stringencies. Subsequently, nearly
the clearing houses in the great centers adopted the
same device, and by their heroic resort to the measure, they
relief
all

have

at different times relieved the

disaster,

community

of untold

for which invaluable service they have justly

received the grateful recognition of the entire country.
The great value of Clearing House loan certificates
consists in the fact that they take the place of money in
settlements at the Clearing House,

and hence save the use

CLEARING HOUSES AND THE CURRENCY

109

much

actual cash, leaving the amount to be used by
the banks in making loans and discounts and in meeting
other obligations. The volume of currency, to all intents
of so

and purposes,

expanded by this means to the full amount

of the certificates issued.

The
House

loan certificates are taken out by the Clearing
members through loan committees especially ap-

pointed, and are used, as a rule, only in the payment
of balances among the associated banks.
Thus, when

the stringency in the money market seems sufficient to
demand it, the Clearing House Association meets and

appoints a committee, called the loan committee, consisting usually of five bank officers, to act in concurrence
with the president of the Clearing House Association,

who

serves as ex-officio member.
It is the duty of such
committee to meet each morning at the Clearing House
and examine the collateral offered as security by the
banks, and to issue loan certificates thereon in such
denominations and proportions to collaterals deposited
In the history of the past, the
as may be agreed upon.
denominations have varied from twenty -five cents to
twenty thousand dollars in the different associations, and
in proportion varying from fifty dollars to one hundred
dollars of certificates to one hundred dollars of collateral

deposited.
These loan certificates bear interest at rates varying
from six to nine per cent per annum, payable by the

banks to which they are issued to the banks receiving

Hence
certificates in settlement of daily balances.
the interest charged against certain banks must exactly
such

equal and offset that credited to certain other banks.

The aim

to fix the rate sufficiently high to insure the

retirement of the certificates as soon as the emergency
which called them forth has passed by. As a rule they

are retired by the banks which take

them out

as soon

THE CURRENCY PROBLEM

110

as they have obtained sufficient cash to meet their daily
Notice is given by the debtor banks to the
obligations.

committee calling for such certificates as they wish to
retire, and the committee gives notice to the banks
holding the same, stating that the interest will cease after
a specified date. In due course, the holders send the
through the Clearing House for redemption.
the retirement of the certificates, the collateral

certificates

Upon

deposited as security is surrendered by the committee
the same proportion to certificates surrendered as

was required

for deposit.

The first issue of
made in 1860, and

Clearing House loan certificates was
the last is still outstanding. These

certificates have been more extensively and generally
used in the panic of 1907 than in any previous panic,
and there has been developed a tendency to use them,
in the smaller denominations, as a circulating medium

throughout the country, to take the place of currency
that has been withdrawn from circulation and I believe
that one of the most potent factors in stopping the force
;

of the recent panic

was the

issue of these Clearing

House

loan certificates by the clearing houses throughout the
country.

Owing

to a popular misconception of the character
of these loan certificates, much adverse

and purpose
criticism has

been indulged

in, especially in

ground that such issues were
ten per cent prohibitive tax

made
on

1893, on the

in violation of the

bank-note currency,

Such objecon the assumption that Clearing House
loan certificates were a form of national bank currency
an assumption which is ill founded in both theory and
fact.
The certificates were and are essentially temporary
loans made by the banks banded together as a Clearing
House Association to the members of such Association,
other than national-bank note circulation.

tions were based

CLEARING HOUSES AND THE CURRENCY

111

available to such banks only for the purpose of
due from and to each other. In the
balances
settling
words of the Comptroller of the Currency, they are but
due bills, and their sole function consists in discharging
In New York an
obligations at the Clearing House.

and were

attempt on the part of a Clearing House bank to use

them otherwise would insure a

fine

and other

penalties

the rules governing the Association. The
provided
courts have decided that they shall not be regarded as
in

money, and the imposition of a tax upon them, therefore,
would be a serious blow to one of the most effective and
ingenious contrivances for the delivery of the country from
the throes of panic that has yet been devised.
In reading the newspaper discussions in connection

with the so-called Aldrich Currency Bill, which is now
before Congress, I notice that it has been suggested that
the issuance of Clearing House loan certificates should

be prohibited by law. It does not seem possible that
any student of finance who is familiar with the uses of
these certificates could, for one moment, make such a
recommendation. Had it not been for the issuance of
Clearing House loan certificates by the associated banks
of New York during the recent crisis, we should not have
been able to import any considerable amount of gold
from Europe. Very few people realize that in importing
gold it is necessary to create a credit on the books of a
bank, upon which the gold importer may draw, through
the Clearing House, in payment of the cable transfers and
bills of

exchange necessary to cover the amount of gold

Clearing House loan certificates
make these credits, and that is the
reason we were able to import such a large volume of gold
during the past few months. The banks extended their
facilities to the importers, who brought over the gold on
"trust receipts," which were deposited with the banks

to be brought over.
enabled the banks to

THE CURRENCY PROBLEM

112

as collateral security, pending the arrival of the gold.
These issues of Clearing House loan certificates also

provided credit with which the banks were enabled to

buy and pay

for large

United States

amounts

certificates

of the

Panama bonds and

indebtedness which were

by the government as a measure of relief. The
bonds and certificates so purchased were then placed on
deposit in Washington, as security for new nationalUnder the present laws, and
bank note circulation.
issued

according to the provisions of the Aldrich Bill, so called,
is imperative that the banks should first buy bonds,
send them on to Washington, and wait for its preparation

before they can receive the new circulation. The credit
to purchase these bonds, in times of panic, must be

obtained in some way, as there would be no sense in
paying out reserve money to buy bonds for circulation,
and receive no return on the same for a week or ten days,

and then only

national-bank notes which cannot be

counted as reserve.

The custom has grown up

of late of

national banks borrowing bonds, which they have deposited with the Treasurer of the United States as

government deposits, and for the purpose of
I do not
releasing government bonds for circulation.
believe that the National Bank Act ever contemplated
anything of the kind, and I think it is one of the outgrowths
security for

It was, however, absoof our present financial system.
lutely necessary to issue Clearing House loan certificates

to enable the

banks

to purchase

United States bonds, and

thus secure additional circulation.
It was also imperative, in the panic through which we
have just passed, to issue Clearing House loan certifi-

cates to save the trust

company

situation.

The

trust

companies, having no Clearing House of their own, were
compelled by the very nature of things to ask the Clearing
House Association to assist them in saving the situation,

CLEARING HOUSES AND THE CURRENCY

113

by the issue of Clearing House loan certificates to enable
them to liquidate the large deposits of the trust companies
of which they were taking care. The methods pursued
by the committee in charge of the trust companies was to
place certain collateral, which had been deposited with it,
in the hands of the trust companies which had subscribed
to the fund for upholding those that were in trouble.
Such of the companies as desired to do so made their
own notes, and with the collateral received from the
committee, borrowed from the Clearing House banks
with which they did business the amount necessary to
meet their subscription to the trust company "pool,"
at the same time giving authority to the banks to hypothecate their note and collateral with the New York Clearing
House Association, and receive Clearing House loan

Had

not been that the
New York banks were able to take out Clearing House
loan certificates in connection with this phase of the
matter, a very grave situation would certainly have
certificates

for the same.

developed.
It might be well to remember in connection with this
matter that the banks themselves also subscribed a very

amount of money to assist the trust company "pool,"
and if necessary, in order not to interfere with the handling
of their regular business and the accommodation of their
customers, they could at any time have taken out more
Clearing House loan certificates.
These illustrations will show what an important part
Clearing House loan certificates played in the panic, and
the absolute necessity for their creation and use.
Clearing House loan certificates create an elasticity in
the assets of banks. In times of panic what is wanted is
assets that are readily convertible, and that will pay deIn such times banks
positors as well as permit new loans.
need expansion in the right direction, and not contraction.

large

THE CURRENCY PROBLEM

114

now

midst of a discussion of the
currency problem in this country, and one of the strange
things about the matter is that no two persons can exactly
Every one has a "special plan"
agree on the subject.
which he thinks will solve the problem. I am one of a
growing number of bankers who believe that in the
are just

in the

adaptation of the Clearing House loan certificates we
have the solution of the problem. We do not need
more fixed currency in this country, but we need flexi-

meet emergencies such as we have been passing
through. This class of currency should be retired immebility to

diately, as

soon as

its

usefulness

ended.

In times of panic or extremely tight money, banks
something that will enable them to
convert their fixed assets into liquid assets without calling

need two things

for payment, and with these new liquid
assets extend further credit to their customers, because

upon borrowers

in such times the

demands

of occasional borrowers

upon

the banks are very great. This is really the purpose of
Clearing House loan certificates, as they allow banks to
take to the Clearing House their fixed assets and convert
them into a medium of exchange between themselves, thus

allowing an extension of further credit, which credit is
utilized by their depositors through the Clearing House.
Add to this function one more, and you will give us

needed to meet any emergency, viz., a currency
The hoardto take the place of that which is hoarded.
ing of money always accompanies panics. Panic always
produces fright, not only among the people at large, but
among the banks themselves, and if at such a time we
could have a safe currency which would fill in the gap
temporarily, we should have solved the problem as far as
all

that

panics are concerned.
The reserve balances of the country banks are, as a
rule, kept in the large money centers, and upon these

CLEARING HOUSES AND THE CURRENCY

115

centers they depend for their excess supply of currency.
I would, therefore, have in every large city where there
is a subtreasury the Clearing House incorporated, recog-

nized by law, and prepared to do business with the
I would have a "United
United States government.
States Emergency Currency" printed in large quantities
and held under proper safeguards in each subtreasury.
I would permit the Treasurer of the United States, on
proper application, to receive Clearing House loan certificates of the associated banks in any of these cities as
collateral security, and advance fifty per cent of the
amount of such certificates deposited, in emergency cirSuch circulation should
culation, to such associations.
bear six per cent interest, so that it would be retired at

once when not needed.
This circulation would cost the banks twelve per cent,
as they would be obliged to pay six per cent on the full
face value of the Clearing House loan certificates taken
The Clearing House could make rules and reguout.
lations for apportioning this currency among its members,
and I would have the "United States Emergency Cur-

rency" retired by the deposit of lawful money with the
Treasurer of the United States, just as the national-bank
note circulation

now

You can have no

retired.

better security for a circulation of

than Clearing House loan certificates, issued
under proper safeguards and carrying, as they do, the
joint guaranty against loss of all the members of the
Association.
Of course this would mean a change in
our laws, and injecting into our currency another kind of
money; but it would be secured beyond peradventure.
Its retirement would be provided for promptly, and when
outstanding in the hands of the public would be covered
by ample collaterals or by lawful moneys of the United
this character

States, deposited against its retirement.

THE CURRENCY PROBLEM

116

Such currency must be issued by the United States
government to be of value, as the membership of the
clearing houses does not consist entirely of national banks,
but includes state banks and trust companies ; and to be
of assistance to the general situation, in times of panic,
these institutions must also have the benefit of an emer-

gency circulation,

we desire

the stability of

all

the finan-

cial institutions of this country.

would include

in the act of incorporation of the
houses
a
clearing
provision that Clearing House loan
certificates could be issued at such other times as in the
wisdom of the members of the Association they were
I

needed, and thus also provide a flexible currency for cropmoving periods or other money stringencies. An emergency currency of any character whatever must be quickly
retired

and canceled, and not be permitted

remain

outstanding as a further inflation of our already much
inflated currency ; by providing for its redemption by
the deposit of lawful money, you throw around it another safeguard.

currency of this character would also meet the requirements of the mercantile community. If a merchant

borrowed from his bank, say, two hundred thousand
dollars, on his single-name paper, the bank could give
him credit on its books for that amount less the discount,
upon which he would be at liberty to draw through the
Clearing House, and if it became necessary the bank
could borrow from the Clearing House, through the pooled

members, Clearing House loan certificates to the amount of one hundred and fifty thousand
dollars (the Clearing House requiring a margin of thirtythree and one-third per cent).
The merchant would then inform his bank that he
needs currency for pay-rolls. His bank could provide
credits. of all its

for his needs in this respect

by requesting the Clearing

CLEARING HOUSES AND THE CURRENCY

117

to deposit the one hundred and fifty thousand
dollars of certificates with the subtreasury, and receive

House

seventy-five thousand dollars in emergency circulation,
which in turn could be handed to the depositor.
In times of very active money and panic periods, the

bank and the merchant are willing to pay a high rate of
interest for this privilege, and as soon as the stress and
storm are over and money returns to its accustomed channels, lawful money could be deposited and the emergency

The

merchant's collections would be
made, his paper retired, and it would have served the
purpose for which it was created. This same method
currency retired.

could be pursued with

all

borrowers

who needed

assist-

ance, either merchants or banks.

This would seem to me to provide a safe emergency
circulation, having behind it: first, the credit of the
institution and its collateral as passed upon by a committee of bank officers; second, the fact that a large
is required before certificates are
the
fact
that the government is asked to
issued; third,
advance only fifty per cent on Clearing House loan certificates ; and fourth, the certainty of its prompt retirement

margin of

in lawful

collateral

money

of the United States.

AMERICAN AND EUROPEAN BANKING METHODS
AND BANK LEGISLATION COMPARED
BY

PAUL M. WARBURG

AMERICAN AND EUROPEAN BANKING METHODS AND BANK LEGISLATION COMPARED
A

COMPARISON of European and American banking
methods and legislation is so broad a subject that it cannot
be fully dealt with in a single address. It will, therefore,
be necessary to limit ourselves to the broad outlines of
the subject. We shall endeavor to state the general
basis of the banking business in Europe and to compare
it with our own, and where
European methods differ
from each other in detail, we shall single out for the
purpose of comparison that system which is generally
acknowledged to be the most efficient. Furthermore,
in speaking of Europe, we shall understand the term to

mean

primarily the three prominent financial powers,
England, France, and Germany.
Let us begin by establishing the line on which modern

banking has developed. From the primitive method
of bartering goods for goods, exchange gradually develops
to the acceptance of an acknowledged standard or measure, be it the accepted value of an ox, a slave, a woman,
a measure of grain, or a certain weight of metal. Those
means of exchange which prove the most durable and,
at the same time, are the handiest because, being the most
precious, they absorb the least space, are finally evolved as
the best measures of value. Thus gold and silver of offici-

weight and fineness have developed as the
coin and currency of nations. The next evolution is that,
instead of accepting and carrying about clumsy masses
of metal coins, the owner is satisfied to
accept a certificate
of
of
Here
we see the first
metal
the
note.
ownership
ally certified

121

THE CURRENCY PROBLEM

122

appearance of
it

credit.

faith in the

Credit

means,

literally, faith;
issuing the paper
reach a state of modern

bank or government

representing the bullion.

banking, however, only when to this credit, which still
means payment for each transaction in coin or coin
certificate, are finally added other bank credits, which

become part and parcel of the banking system. This
means that instead of paying by money only, the vast
majority of the payments are effected through transfer of
I need not dwell
credits; it means payment by check.
at length on this question of deposits and checks, as it
has been fully dealt with in some of the preceding addresses.
The check, however, is only one of the factors, although a
very important one, that constitute a modern banking

system many other currency-saving devices which prevent the use and absorption of cash have to be added
We must add a
to render the system a perfect one.
:

modern system of bills of exchange (by which we mean
two- or three-months paper drawn on banks or bankers
or indorsed by them) well regulated by clear and simple
As the check acts as a means of transfer of cash
laws.
credits from one owner to another, so the transfer of the
acceptance of a bank is the transfer of credits on time ;
it is like the transfer of banks'
interest-bearing certificates of deposit

on time.

We shall have to

deal fully with

important question a little later. As parts of a modern banking system we must further add well-organized
stock and produce exchanges and clear and simple laws

this

regulating the administration of corporations, and the
All
issue, the transfer, and ownership of securities.
these refinements of our business intercourse, if I may
so call them, have the object and effect of minimizing the

physical transfers of property, and of reducing to a minithe dangers of such transfers by establishing well

mum

defined

and generally accepted laws and regulations

AMERICAN AND EUROPEAN BANKING

123

governing such transactions, by avoiding unnecessary
payments (through clearings), by liquidating whatever
balances remain to be settled with the smallest possible
use of currency, and by concentrating into large centers
all offers for purchase or sale, so that on a common

meeting ground of buyers and sellers the exchange of
properties can be effected with the least expense, the
least risk,

and the

least delay.

To transform the unsalable individual part-ownership
or individual indebtedness into stocks and bonds having
a wide market, and to standardize merchandise,

an im-

portant step in the development of this time-, risk-, and
currency-saving device, without which modern banking
inconceivable.

have to add one more factor and a most important
one: the partial replacement of money by instruments
of credit must needs bring about, as a logical consequence,
the necessity of reserves of money to meet these credit
tokens, to redeem which cash may of right be demanded.
How large these reserves must be depends largely on the
the credit
upon which the
strength of the confidence
general structure is erected, and on the degree of perfection with which these reserves may be made available.
An ideal banking system is that which provides for the
legitimate needs of a country at moderate rates with the
use of credit and the minimum use of cash,
which checks illegitimate or dangerous expansion or speculation, and which avoids or minimizes as far as possible

maximum

all

violent convulsions.

need not emphasize the fact that the European
system comes very near accomplishing this ideal, while
our system has proved palpably inefficient. Recent
events have again brought it home to us that the richest
and soundest country of the world went into a disgraceful
state of

temporary insolvency, while European nations,

THE CURRENCY PROBLEM

124

poor by nature and loaded down with much heavier
burdens than we, have weathered similar storms without
any such panic and wholesale destruction of property
values.
Let us consider, then, wherein our system differs
from theirs, and let us see which component parts are
missing in our machinery.
II
If

we may

our methods

anticipate our conclusions, we may say that
are completely opposed to those of European

countries.

The European system aims
centralization.

Europe

at centralization, ours at debelieves in and has established

a system of central banks, issuing an elastic currency
which follows the requirements of commerce and trade
and is based, more or less, on bills of exchange while
the United States has so far refused to reestablish a cen;

bank and

maintaining a system of inelastic
6500
banks. The European system
by
is built on modern bills of
exchange, which form the quickest assets while in the United States, the rediscounting of
paper by banks being practically unknown, the chief quick
assets relied upon by the banks are call loans on stockexchange collateral.
Europe has a system of general
banks with large capitals and branch banks all over
the country; we prohibit a similar branch-bank system, and prefer a network of 20,000 small independent banks and trust companies. Europe believes in
a system of monthly or half-monthly liquidations for
stock-exchange transactions, while the United States
maintains daily settlements. Europe has succeeded in
working out for each country clear, generally observed,
and uniform laws, regulating all commercial and financial
questions while in the United States not only do the laws
differ in the various commonwealths, but the
underlying
tral

persists in

currency issued
;

;

AMERICAN AND EUROPEAN BANKING

125

principles are not so clearly and so definitely laid down
as abroad, and every now and then the basis of the business
structure is violently shaken by some new interpretation

or legislation, or temporarily upset

and endangered by

sweeping injunctions.
In order fully to understand the European system, it
will be necessary to explain at the outset the importance
of the bill of exchange in Europe in the financial intercourse amongst individuals as well as amongst nations.

In the United States our commercial paper is the old
promissory note, it is a BILL in Europe commercial paper
is a bill of EXCHANGE.
I think that I cannot more forcibly
the
difference
between the two. In the United
express
States this promissory note is an investment, in Europe
it is a means of
exchange. If, in the United States, this
note
has
entered the bank, it usually remains
promissory
there until it falls due if a New York bank, under normal
conditions, would try to rediscount such paper, it would
create suspicion and distrust.
This means that every
dollar invested by a bank in American commercial paper,
;

;

every dollar invested to satisfy the most legitimate
requirements of business, leads, without fail, to a locking
that

is,

of cash in unsalable assets.

have been shown

Hammurabi, the Babylonian monarch, evidencing the sale of a crop and similar transactions, and I am inclined to believe that it was as easy, if
bricks of the time of

indeed not easier, to transfer the ownership of these
bricks from one owner to another, as it is to-day for an
American bank to realize upon its discounted paper.
Let us now observe the absolutely reverse method of
the European countries. In Europe there are scores of

banks and private banking firms that give their two or
three months' acceptances for the commercial requirements of trade, or that make it their specific business
to indorse commercial bills.
A commercial borrower

THE CURRENCY PROBLEM

126

who

in those countries

do one of two things
his broker his

own

does not get a cash advance will

firm willing to give

him

drawn by him on

his

bank or
drawn on a banking

will either sell to his

three-months'

bill,

he will sell the bill
customer in payment for goods
sold to him, which bill may be subsequently passed on
with the indorsement of the banker. Through the addithis credit; or

tion of the established credit of the acceptor, or by the
various indorsements on the bills, the quality of the bill

becomes such as practically to eliminate the question of
credit and risk, and the conditions of the sale will depend
only on the rate of interest. From being a scarcely salable
promissory note, the ownership of which entails a more or
less pronounced commercial risk, the paper has been
transformed, if I may call it so, into a standard investment, the equivalent of which in cash can be easily
secured at any time.

This prime constituent of the European banking machinery is entirely missing with us. Its existence is, however,
most important. Without such paper, the government
banks of Europe could not accomplish their work; and
vice versa, the role which this paper generally plays
in Europe's financial household is dependent on the
The two cannot be sepaexistence of central banks.
rated.

one of the main duties and privileges of the government banks to buy legitimate commercial paper,
It is

with

bankers'

acceptances

bankers'

indorsements.

As the government banks buy this paper, the circulation
of the notes which they issue in payment increases, and
on the other hand, as they collect this paper upon maturity
and reduce their discounts, their outstanding circulation
This means that they expand or contract
decreases.
according to the requirements of trade. However, this
For as those intrusted
is not a merely automatic process.

AMERICAN AND EUROPEAN BANKING

127

with the management of the government bank see the
necessity of exercising a restraining influence, they raise
the rate at which the

bank

discounts, and in this they are
generally followed by the other banks of the country.
In the same way, if the government bank finds it advisable

for any reason to discriminate against the paper or the
securities of certain groups or individuals, general discrimination by the other banks will usually follow. It

might be well to add that the European government
banks are not limited to the purchase of paper, but that
they also have the privilege of making advances within
certain limits upon securities up to a fixed percentage
of the market value, according to stated published schedules.
The rate, however, at which such advances may
be made as well as the government bank's discount rate
is uniform for
everybody and is, as a rule, so much higher
than that of the general banks, and the restrictions as
to the character of the securities on which the government
bank may advance are so much more rigid, that in normal
times the bulk of the business is done by the general
banks. Only when the demand for money increases, does
the rate of the general banks begin to approach that of
the government bank; but in that case the government
bank will, as a rule, raise its rate, so as again to increase
the margin over that of the general banks. The government banks consider themselves, more or less, as constituting the national reserve, ready to take an active part in the
nation's business only in times of emergency.
A distincis, however, carefully to be drawn between the abnormal crisis and what we may call the normal emergency
which arises regularly in consequence of certain economic

tion

developments, like crop movements or particular requirements for special industries at fixed periods, and which, as
experience has shown, subside after a time as regularly
as they occur.
When these normal emergencies arise,

THE CURRENCY PROBLEM

128

the banks do not unduly raise their rate, but, for the time
being, meet all the requirements at a given rate, and allow
their circulation to increase, while the reserves

When

go down.

the government banks anticipate, however, that

more than a normal emergency

will

have to be dealt

with, they continue to raise the rates in order to protect
their reserves and to force liquidation, and in order to

branches of industry and trade from entering upon
far-reaching new engagements.
The notes which the government banks are allowed to
deter

all

are limited by the amount of gold and bullion
which must be held to cover them in full, or, as in Germany,
issue

up to at least thirty-three per cent.

would, however, lead

too far astray to go into the details of these special regulations which govern the issue of notes in the different countries.

will

suffice

here to outline the general rule.

Each government bank has a very decided

interest in

its gold holdings as large as possible, and in prethe
venting
gold from leaving the country. If an augmented demand for money and credit accommodation

keeping

increases the

amount

ment bank, by

of notes outstanding, the governraising its rate, purposes not only to en-

courage a general contraction of business, and to force the
general banks of the country to contract, but also to
attract

foreign

money

into

has a private discount rate
if

first-class

the

country.

England

per cent, that is,
commercial paper accepted or indorsed by
of, say, six

banks can be bought on an interest basis of six per cent,
and if, at the same time, there is in France a discount rate
of four per cent, it stands to reason that the big French
banks and the French public will invest in English bills,
and that French money will go to England. The same
holds good, of course, as to German, Austrian, Russian,
or Scandinavian bills. It is, for instance, well known
that at present, while rates in

Germany

are high

and

AMERICAN AND EUROPEAN BANKING

129

France comparatively low, hundreds of millions of German paper are held by the French banks.
The French banks would not buy the individual note
of an English, German, Russian, or Scandinavian merchant whom they do not know; but they do know, and
must know, the value of the acceptance or the indorsement of the foreign banks, which offer and indorse or
accept this paper. They would not buy this paper, unless
they knew that it can be rediscounted at any time through

bank in the home country.
of the business transacted
bulk
the
None the less, however,
by a central bank is only a fraction of the total business of

the existence of a central

the country, and is, in normal times, limited almost enThe
tirely to the purchase and collection of short bills.

mere existence of the central bank, however, enables the
general banks to discount freely and as everybody thus
discounts freely, there is the widest possible market for
;

discounts even without any active purchases by the central
bank.
While we cannot attempt to give any full description
of the working of central banks, it may be well to add that
some, like the Banque de France and the Reichsbank,
have hundreds of branch offices, spread all over the country, which, in Germany in particular, have developed
an admirable system of collection and of transferring
moneys from one place to another. It may also be interesting to note that, contrary to a wide-spread idea, the central
banks of Europe are, as a rule, not owned by the governments. As a matter of fact, neither the English, French,
nor German government owns any stock in the central
bank of its country. The Bank of England is run en-

a private corporation, the stockholders electing
the board of directors, who rotate in holding the presidency. In France the government appoints the governor
In Germany the
and some of the directors (regents).
tirely as

130

THE CURRENCY PROBLEM

government appoints the President and a supervisory
board of five members, while the stockholders elect the
board of directors.
The German government receives
of
the
three-quarters
profits after the stockholders have
received a dividend of three and one half per cent. Thus
the central banks are independent of direct government
interference, or there is a joint control by government and
stockholders. But the government is the largest depositor
of the bank, and is thus obviously, both for its own credit
and for the welfare of the nation, vitally interested in
maintaining its credit at the highest possible notch.
The consequence of a broad bill market is, that, whereas
our banks keep against their deposits primarily call loans

on stock-exchange collateral, a European bank or banker
will keep against his demand obligations a large amount of
banking paper, which he can sell at any time at the discount rate, without causing any such commotion as is
created with us when call money is rapidly withdrawn
from the stock exchange.
Call-money rates and their daily fluctuations do not

European stock exchanges. Europe has
developed a system of monthly or half-monthly settlements on its stock exchanges, which means that from
one settlement to the other, the amount of cash required
directly affect

by the stock exchange remains stationary. If, at the
settlement, it develops that commitments on the stock
exchange have increased, and that a larger amount of
money is needed for stock-exchange loans under normal
circumstances, so much more money will be withdrawn
from the bill market and go into the stock exchange. If
less money is wanted
by the stock exchange, so much
more will go into the bill market. We cannot dilate
fully on the interesting question of the comparative merits
of daily versus monthly stock-exchange settlements.
It

may, however, be said that

if it is

a saving not to settle

AMERICAN AND EUROPEAN BANKING

131

each transaction by individually delivering and
paying
for each purchase and sale, but to pay and deliver
only
the balance of the whole day's transactions by one clearing (without which it would be impossible to deal in a
million shares a day), then the saving would be still further
increased if the clearings covered not only one day, but

a whole week or a whole month. It might, however,
be asked: Why not then clear only once a year? The
answer is that, until the transaction is actually paid for,
there is a risk that with wide fluctuations one of the contracting parties may not be able to pay the difference
between the price on the day on which the business was
concluded and on the day when it would be finally settled.
That is the reason why settlements in England do not
exceed two weeks, and why in New York they should
probably not exceed one week, for which period some

method of clearing the differences daily or of securing
them by collateral might easily be devised.
The present American system of daily settlements,
however, combined with the lack of a central bank and of
modern paper, brings about the shocking conditions from
which we are suffering. It is a fact that in Europe, where
settlements exist, such wild fluctuations as prevail with
us are unknown, except in our own securities.

Our much maligned
of the nation

;

stock exchange is the scapegoat
trade contracts, the surplus money from

the Atlantic to the Pacific
creating easy

thrown on the stock exchange,

money and encouraging

speculation

securities just at a time when speculation ought to be
slow.
If industry and trade thrive, and are in need of

loans are withdrawn from the stock exchan<:<\
more money is required by commerce and industry, the more the stock exchange will be depleted.
The usual consequence is our annual money panic, and

money,
jind,

call

the

a resulting violent collapse of prices of

securities.

THE CURRENCY PROBLEM

132

This obnoxious system of cash dealings is forced upon
us as the result of our unreasonable usury law, which,
although making it unlawful to take more than six per
cent on time loans, is in reality the direct cause of an
almost confiscatory rate being charged from day to day
We shall dwell upon this law later.
for weeks at a time.
The fact remains that with a legal limit of six per cent
for time money, and with the desire of the banks not to
charge merchants a higher rate, and with the lack of any
modern paper which we could offer to other nations, there
remain practically only two means of relieving the stringency and of attracting foreign money. These are the
through long bills drawn by
our banks or bankers on Europe (and these could hardly
be used during the last crisis in consequence of England's
utilization of foreign credit,

measures) and incredibly high rates for call
money, that bring about wholesale realizations, and attract foreign buyers at our bankruptcy prices.
Banks have been blamed for the high rates and for having had so much money on the stock exchange. They
are absolutely helpless with regard to both. How could
a bank withstand a run, if it had all its money in unsalable
commercial paper, and how is a bank to meet the demands
made upon it otherwise than by drawing upon its quick
It is our system that is wrong
assets, viz. its call loans.
from top to bottom it is this and not the individual that
is to be blamed in this respect.
drastic

;

The aggregate amount invested in trade and commerce
must vary. Its grand total should be many times the
amount invested in stock-exchange loans, which represent
the

securities

way

of doing business

carried

reservoirs, a small

for

speculative

investors.

Our

may be illustrated by two adjoining
one and a very large one. The small

one represents the stock exchange and contains the call
loans the large one represents the general business of
;

AMERICAN AND EUROPEAN BANKING

133

the country, as expressed by commerce and industry.
In Europe they regulate the small reservoir by pumping

water into

from the large one, or by withdrawing water

from the small
way, the outflow

In this
reservoir into the large one.
and inflow in the large reservoir are

scarcely perceptible, and there is no difficulty in regulating
the small one. With us, we do the reverse. If there is
a shortage of water in the large reservoir, we begin to

draw on the small one and,
in the large reservoir by an

water
inch, we empty the small one
the amount of water in
decrease
in
order
to
altogether or,
the large reservoir by an inch, we fill the small one to the
overflowing point. Moreover, Europe can tap a third
reservoir, the additional currency issued by a central
in order to increase the

bank, with which to regulate the large reservoir if it
tuates more than a few inches, while with us no such

fluc-

final

As a consequence, fluctuations of several
feet appear to be inevitable and regular occurrences with
us.
It may be added that not for many years has the European reservoir shown such variations as this year, and
we must sadly admit that Europe's abnormal rates were
due largely to our own unbalanced conditions. Unable to
regulate our own household and to use our own gold, we
have accustomed ourselves to use and to abuse Europe,
which suffers intensely from our lack of a proper system.
reserve exists.

Ill

Let us

now add

a few words about European and

American banks in general.
We have in the United States national banks, state
banks, and trust companies, practically without any
they are all, more or less,
proper line of demarcation
doing a similar business, except that the national banks
have the privilege and duty of providing currency against
;

government bonds.

In Europe

find the privilege of

THE CURRENCY PROBLEM

134

note issue restricted to the government banks, which are
hemmed in by such regulations as to keep them out of
speculative business or general commercial transactions.
note-issuing bank desires to enter upon
general business, it has to abandon the privilege of issuing
notes.

Whenever a

Outside of the note-issuing banks the only European
banks that are regulated by law as to their investments
and their way of doing business are the savings banks.
For all other banks there is no government supervision, no laws as to their reserves against deposits, and
no restrictions as to indorsing or establishing branch
banks,

etc.

the

contrary,

accepting,

discounting,

and indorsing paper form the essence of Europe's banking, which is built up on a system of old, established,
very important, general banks with large capital and with
a network of branch offices and agencies all over the country, and in the centers with many branch offices in a
single town.

the whole, this system of making large
responsible banks and their branches the custodians of
the people's money is preferable to our system of allowing
a few, often irresponsible,

men

to get together, hire

some

marble and bronze, and
ground-floor corner,
up
call it a bank, with a capital of $100,000, and often less,
and a corresponding surplus paid in, not earned. Small
banks constitute a danger, particularly so, if they accumulate deposits which are out of proportion to their
own resources. There is an old French and Italian
fit it

banking rule that deposits ought not to exceed four or
This rule
five times the amount of capital and surplus.
is certainly a wise one for a country with such an imperfect banking organization as the United States.
While Germany and France may claim the best government bank organization, there has been too much concentration in the business of the general banks of these

AMERICAN AND EUROPEAN BANKING
two

countries.

135

The German and French banks have

accomplished a wonderful piece of work, but their system
it all," being banks of deposits, discounters,

of "taking

acceptors, indorsers, brokers, and underwriters at the
Not that there is
time, is not free from danger.
risk of their getting involved, but there is too much elim-

same

ination of independent firms, which constitute a valuable
backbone, especially in times of need. In Germany,

has been most marked, there is a strong
movement on foot to undo the harm that has been done.

where

this process

The

English system has, in this respect, so far proved
the best, for the reason that, while they have large deposit
banks with branch offices all over the country, they have

kept these deposit-and-check banks comparatively free
from commission, investment, underwiting, and kindred
In England the investment and the commisoperations.
sion business remains mainly with the broker, while the
contracting of large loans and the formation of syndicates
is generally left to private firms, or if it is a question of
South- American, Oriental, or colonial loans, to the banks
which confine themselves to business with these countries.
Again, there are foreign exchange houses and firms
conducting exclusively an accepting and indorsing business and finally, there are the big discount companies.
One might say that every branch of these various enterprises is taken care of in an able and efficient manner in
;

England

business

done

at fair rates and, at the

same

time, substantial profits are earned.
In Europe the general banks are not required to hold
gold reserves. Gold reserves are kept exclusively by

the note-issuing central banks, which have outstanding

on demand obligations payable in gold.
We ought carefully to draw the line between a working
reserve and a gold reserve.
A general bank has no need
of a gold reserve.
But every general bank or financial

136

THE CURRENCY PROBLEM

ought to have a large working reserve against its
demand obligations. Such working reserve, however, need
not consist of legal tender notes, but of such assets as
can be quickly turned into cash credits; be it call loans,
bank paper, British Consols, or whatever can readily
be made available in times of stress. In addition, the
European banks generally have very large on-demand deposits especially with the central bank of the country,
and, of course, a substantial amount of actual cash as it is
required for the daily needs of the business.
But why should state banks or trust companies or
national banks, if they happen not to issue notes, carry
gold reserves ? For their own protection they need strong
working reserves, but, if it were not for our lack of a central bank and for the shortcomings of our Treasury system,
why must they lock up legal tender notes to such an extent ?
In Europe the gold reserve and the emergency reserve
of the country are kept and managed by the central bank.
We have already shown how the government bank acts
institution

in protecting the country

and

in providing for its needs.

Let us clearly understand, that without the bank rate, that
is, without the ability to regulate the rate of interest in
times when the government bank's cooperation is needed,
A system of modern banking
its efficacy would be nil.

paper is absolutely necessary to establish this power of
the bank, and furthermore, a credit so firmly established,
that the higher rate of interest will act as an inducement
to invest and not as a breeder of distrust and an incentive
to realize. A further requirement is a system of large and
conservative banks that will cooperate, and that, as a matcannot afford to abstain from falling in line
with the general tendency initiated by the central bank.
With such a system, a panic like the one from which
we are just emerging should be impossible. For no matter
whence money is withdrawn, it would turn up in another

ter of fact,

AMERICAN AND EUROPEAN BANKING
bank.

It is inconceivable that conditions

137

would now-

or France where

arise in either

England, Germany,
adays
people would lose entire confidence in all banks, government banks and savings banks, so that actual hoarding
and locking away of money would occur.
Our worst
hoarders, the banks and trust companies, would, under

a European system, have no reason to lock up actual
money, since they would be fully protected by accumuThe unheard-of
lating a balance with the central bank.
fact that during a scarcity of currency the banks, instead
of disbursing their cash, begin to accumulate and actually
to hoard currency, would be an impossibility.

There are two different kinds of panics or crises with
which a nation may have to deal. One is a domestic
drain, created by strong domestic demands, degenerating
into a panic by some catastrophe engendering the fear that
the supply of money will reach an end. Such panics
must be met by paying out freely and boldly. Bagehot
"
A panic, in a word, is a species of neuralgia; and
says
according to the rules of science, you must not starve it.
The holders of the cash reserve must be ready, not only to
keep it for their own liabilities, but to advance it most
:

In wild periods of
freely for the liabilities of others.
and
the
best way to prealarm one failure makes many,
vent the derivative failures is to arrest the primary failure

And

further on he says
our ultimate treasure in

which causes them."

"It

not

unreasonable that
particular
cases should be lent ; on the contrary, we keep that treasure for the very reason that in particular cases it should
be lent."
Another kind of panic may arise through a drain from
without.

Such drain must be met

by increasing the
until

modern

countries

rate of interest until the tide has turned,

the
profitable to leave
brings attractive interest than to with-

the creditor finds

money where

THE CURRENCY PROBLEM

138

draw

it.

Both kinds

of panics have

met, or have been entirely averted, in

been successfully
Europe by central

banks and by a firmly established credit. Germany,
for instance, without such a system, would now be in the
midst of a panic ; but she has safely avoided it, in spite of
her being, by nature, a poor country, while we, Nature's
spoilt children, need only be wise to be rich and safe.

neither can protect ourselves by a discount
rate, there being no discount system, no central bank, and
no legal rate beyond six per cent ; nor can we meet an init is,

ternal panic because, irrespective of other shortcomings
of our system, it forces each bank to look out for itself

and to try to draw away the cash from the others, in order
to increase the amount in its own vaults, thus aggravating
the panic. While the only way to meet a panic should
be to pay freely, any bold action is paralyzed by the
frightful thought that there is no way of creating additional currency, and by the knowledge that, if the
drain continues, there are no means of preventing wholesale individual failures unless general suspension of cash
While one thousand millions
payments is adopted.
of dollars were lying idle in our banks and trust companies as so-called reserves, that is, as the final resort
in case of need, this money, by virtue of the law, could
What, then, is the use of such rescarcely be touched
!

serves, if they are not available in such times, and if,
even in contravention of the law, they could not be used
by one bank without fear of being ruined, unless all banks
agreed to use them freely ? And as it is impossible, even
without such a law, to make all banks act in the same
bold way, it follows that reserves should be concentrated, as they are in Europe, and that while the banks
may be asked to cooperate, they must be governed in
this respect

The

by one

central organ.

question of treasury

and government-bond secured

AMERICAN AND EUROPEAN BANKING

139

bank-notes has been so fully and so ably dealt with by
Mr. Hepburn in a preceding address, that I can limit
myself to the hearty indorsement of what he said in this
respect.

The
of gold

net result of our system is that immense amounts
and currency are wastefully locked up, and that,

in spite of our immense gold treasure, which is four times
as large as that of England, and notwithstanding our
enormous per capita circulation of thirty-five dollars, we

suffer almost annually from acute scarcity of money.
If we only had the means energetically to contract

currency, and

to use our gold in a scientific

and a

our

practical

way, we should have gold and currency enough to meet any
As it is, the amount of notes outstanding is about
panic.
stationary in times of activity or stagnation alike, while
as a consequence the rates for money vary between zero

and two hundred per

cent.

rates are fairly stationary

In Europe

the reverse;
of notes out-

it is

and the amount
With a cash balance

standing contracts and expands.
of $260,000,000 during the recent

crisis, our government
had to incur new indebtedness to enable and to induce the
banks to issue additional currency. Within three months

the circulation increased through this artificial process by
eighty million dollars, but the government had to lose

about $1,000,000 of the people's money to reach this
result. On the other hand, the German Reichsbank issued
in one week, at the end of last December, M. 320,000,000
and the government received a five per cent tax on this
issue, which is borne by those who received the money.
These notes returned to the Reichsbank within less than
three weeks.

Our present system of maintaining and selling government bonds on a basis so high that only national
banks can buy them results in constant inflation of our
currency by about seventy-five per cent of the amount

THE CURRENCY PROBLEM

140

new government

from time to time.
It would be
no contraction

securities issued

Inflation with practically

cheaper and more straightforward
instead

would
thing,

issuing

issue

the government,

government bonds,
amounts to the same

interest-bearing

new greenbacks.

and the government would

in addition not lose the

interest.

Furthermore, our one-man-power system of the Treasury
contrary to European ideas it is harmful to the country
and unfair toward the incumbent of the office. While
our generation has been particularly fortunate in seeing
this office occupied by honest and able men only, the
is

;

danger remains, nevertheless, that this vast power may
one day be vested in less desirable men.
Besides, the
laws governing the functions and powers of the Secretary
of the Treasury are old-fashioned, in parts too loose and
in parts too extreme, and not clearly defined, so that even
under the same President we find a radical change from
one method to another, according to the individual interpretation by the incumbent of the office.
This lack of continuity is deleterious. Europe does
not give such vast and arbitrary powers to one single
political official,

holding

office

only for a comparatively

short time, and often without proper business training.
the contrary, the powers, clearly defined and properly

restricted, are vested in a

of business

men

a system which

permanent non-partisan body

of the highest standard, thus constituting
insures clear legal conditions, safety, and

continuity.

similar difference exists between the United States

and Europe

as to general legislation governing

transactions

and corporations.

questions

it is

not

banking

In dealing with these
intention to accuse anybody nor to

AMERICAN AND EUROPEAN BANKING

141

excuse anybody; the only object of this investigation is to
explain certain fundamental shortcomings of our system.

and confidence.
Modern banking is built upon gold
The question of how to estimate working reserves, business risks and profits, as well as the general valuation of
securities, all these are indissolubly interwoven with the

other question of how firmly established is the confidence
on which the whole structure rests and how far this confi-

dence

liable to

be shaken

normal and

in troublous

an immutable

belief in the

times.

The

basis of confidence

continuity of political and social conditions, which are
held to be safe and sacred. There must be faith in the

continuity of the form of government, in the continuity
and in the fair observance of law by

of the legal status,

government and governed alike. There cannot, however,
be confidence in the continuity of the laws until they rest
on a broad, equitable basis, and are fairly uniform over
the entire country. There is nothing so harmful and so
dangerous as the existence of two laws, the one a written
law, unenforced and often impossible of enforcement,
the other a customary law, which stands unchallenged
for generations and which the written law cannot overbecause the latter, enacted in haste or hate, is
incompatible with reasonable business usages and necessity.
Just and uniform laws, universally observed and equably
ride, often

Loose
enforced, imply wholesome government regulation.
or extreme laws that cannot be observed and that,
therefore, are not generally enforced, but that

may be

suddenly and spasmodically enforced according to the

whim

of the people or of the party in

power (yesterday

a dead letter and to-morrow a firebrand), imply anarchy
or an or nicy.
In financial matters Europe has advanced
far in attaining the former condition ; we have made little
t

progress in emerging from the latter condition.

THE CURRENCY PROBLEM

142

cite

only a few instances

on capital, at present about 1.68 per
were exacted and paid, no capitalist could remain
in New York.
If banks did not overcertify, our financial centers
would have to stop business.
If it had not been possible to pay rates far exceeding
six per cent for time loans, it would not have been possible a few weeks ago to draw so much gold from Europe,
where money rates were above six per cent, and the catastrophe would have been still worse than it was.
If the full taxes

cent,

we venture

to ask, why is it necessary to force
people to evade the laws in order to carry on business ?
Among the important laws that have a distinct bearing

But,

on the banking

situation,

and that are

in great

need of

revision, I should specify the following:
In the first place is to be put the usury legislation of
York. The
our separate states and especially of

New

usury laws in Europe, where they exist at all, apply only
where the borrower is in dire distress when seeking and
accepting a loan, and where the individual or corporate
lender knowingly profits from his helpless situation when
exacting usurious rates. Usury can be judged only in the
and usury laws in
light of the surrounding circumstances
;

Our law,
Europe generally apply only to individuals.
which prevents solvent firms of bankers, merchants, manufacturers, or brokers
at

more than

from contracting for money on time

six per cent, implies not only undignified

unsound business judgment. The recent
it was not
taking advantage of people in need to give them money on time at over six per
cent; on the contrary, it would have been a blessing,
and in many cases their salvation, if they had been able
This
to receive the money at even a much higher rate.
unsound and completely indefensible usury law is, howtutelage, but
crisis

has shown that

AMERICAN AND EUROPEAN BANKING
ever, the reason
in this

why we must have

and other ways

vulsions of our

143

money

daily settlements, and
leads
to frequent conindirectly

rates.

Secondly, the lack of a modern system for discounting
commercial paper in the United States is due to the want
of uniformity and precision in the laws governing bills of

exchange, bankruptcy, etc. This uncertainty as to procedure forces us to prefer the well-defined promissory
note
however unsalable
to the business of accepting

and indorsing commercial paper at the low commissions
customary in Europe. Furthermore, since our commercial business is chiefly financed by the national banks, it is
a foolish regulation that prevents their indorsing or accepting such paper to any extent, in order that they may carry

out the purely secondary object of issuing bank-notes.

Another difference between Europe and America that
banking business is the regulation of the issue

affects the

of securities.

"Stock watering," that is, capitalization of earning
power and of good will, is permitted in England and France,
while it is not allowed in Germany. While, personally,
I prefer the German system, it is a mistaken idea to think
that the capitalization of earning
taking advantage of somebody.

power necessarily means
If the

German

sells at

two hundred per cent an industrial stock paying ten per
cent dividends, it amounts to the same as if the Englishman had sold at par twice the amount of shares on which
five per cent dividend is
But whether we adopt the
paid.
one system or the other, it is of the first importance that
the public should be fully informed as to the real value
of the stock which it acquires, and that the law should
be clear and definite in its terms and equal, rather than
enforcement.
Germany the law makes

erratic, in its

securities

and applications

all public offerings of
for listing on the stock exchange

THE CURRENCY PROBLEM

144

dependent on the publication of a

document must contain

all facts

ing the security offered and

full

prospectus.

This

of importance concern-

must be submitted

approved by, a state commissioner.

to,

and

Anybody withhold-

ing information, or furnishing wrong and misleading
information, is criminally liable. At the same time, the
law requires that balance sheets be published regularly

and, where the issue deals with a new flotation, the
prospectus must state clearly the value and the price of
the properties transferred to the corporation at the time
of its incorporation, and in certain cases also the names

whom

they were bought.
We come finally to one of the most important of the
subsidiary points affecting our banking system, namely,
the relation of the directors to the corporation. In most
of those

of the

France

from

countries, particularly in Germany and
and, to a certain extent, in England, this relation

European

departs radically from our custom. The French and German corporation is managed by a board of directors and

The latter are not members of the
salaried managers.
board, as is the managing president with us. The board
of directors in

Europe supervise the managers, who have

to report to the board about their acts and proposed acts,
The rule is that both the
in order to secure their sanction.

managing officers, whose fixed salaries are comparatively
small, and the board of directors share in the profits of
the company. The stockholders ordinarily receive the
first four per cent, while of the surplus over four per cent,
a certain proportion goes to the managing officers and

and to the board of directors. As the corporation
the
grows,
percentage going to the directors and the managers is frequently modified to whatever the shareholders

their staff

consider a fair compensation.

The

net profit of the forty-

important German banks for 1906 was M. 231,000,000.
The aggregate capital of these banks was M. 2,198,000,000
five

AMERICAN AND EUROPEAN BANKING
with a surplus

M. 542,000,000, making

their

145
total

M. 2,740,000,000.
net profit about
M. 200,000,000 were paid out about one-seventh, viz.
M. 28,000,000, was paid to the managers and staff and
Of

resources

this

;

the directors, while the remaining six-sevenths, being
171,000,000, were paid to the stockholders, being an
average dividend of 8.07 per cent.

The

a very different one from our
own. The European maintains that, in order to hold
any one liable in case he does not perform his duty, one
ought to pay him if he does. In Germany, for instance,
if a director does not act with what would be deemed
ordinary business prudence, and if he neglects his duties,
so that the company suffers loss, he is made personally
liable.
In the very rare cases of bad bank failures which
Germany has witnessed, like that of the Leipziger Bank,
-which, however, owing to Germany's admirable systhe directors, amongst
tem, passed by without any panic,
whom were men of many millions, lost all they posunderlying idea

sessed.

thus very rigid, it does, on the other
hand, not require the director to be anything more than
honest, or than to use the utmost possible care. But the

While the law

board members in a bank, who receive quite a large
income through their share of the profits, realize that
they must in turn devote a good part of their time
and energies to the interests of the bank. All corporations, like the big shipping lines, the industrial concerns,

and the insurance companies, are run exactly on the same
system. As a result, the so-called dummy director, so
familiar to us, does not exist, because every director is
materially concerned in seeing to it that the interests of

the

are fully safeguarded at all times, and that
one director or manager receives any profits that

company

might be detrimental to the corporation; while at the

THE CURRENCY PROBLEM

146

same time

this

system makes the directors disinclined

to consent to over-capitalization.

With

us, on the other hand, the laws and usages reguthe
relations of director to stockholder need much
lating
modernizing. We do not pay our directors, for ten dollars

or so per meeting cannot be considered a remuneration.
Under the old system it was considered good style to be
on the board of a bank, as it was to be on philanthropic,
or educational boards; membership was, in
Or, on the other hand,
largely a social function.

religious,
fact,

some individuals were

willing to join a board without any
compensation, because it was their own business that
they were managing; e.g. their own railroad, for which
they had to supply the wherewithal themselves, and the

which they had to open by taking up farming
In such cases
or mining or by starting other industries.
made
and
sometimes
suffered
sometimes
money
they
heavy losses but on the whole, it was this system of directors as chief stockholders and ever active prospectors,

territory of

;

assuming large risks themselves, that developed the
country and made it what it is to-day.
In the course of time, however, as the corporations grew
in size and number, directorship ceased to be a social
function, and the corporations ceased to be the property
of a few.
They became the property of a large comof
stockholders, and the directors, from being
munity
majority stockholders, slowly became trustees.
With the evolution of the modern conception of trusteeship has come the present tendency to endeavor to tie the

and to hold him
goes wrong with the corporation. But
director

hand and

foot

liable
let

anything

ask,

what

right has one shareholder substantially to say to the other
"
Go on the board, work for me, worry for me, give your
time and spend your energy we shall not pay you for it
:

but

I shall

hold you

strictly accountable if

;

anything happens

AMERICAN AND EUROPEAN BANKING

147

you chance to have a business of your
own, and you
anytime left for it, be very careful not to
do any business with my company. Leave that privilege to
me. Because you work for me, you lose that privilege and
I retain it."
because I do not work for you
That is
of
American
attitude
the
the
stockholder
present
virtually
and to a certain degree the legal status of the director.
Let us do as the Europeans do, let us remunerate our

my company.
if

find

;

directors in proportion to the dividends they earn for us,
and then we shall not only have the full right to hold
them liable and to ask them to give up certain privileges,

but we shall at the same time have greater certainty that
every director will be careful to do his best.
Banking, like almost all other commercial transactions,
is in reality an insurance business.
For each risk, we
ask and receive a premium commensurate with the hazard
of the transaction.
In a city built on volcanic ground the
insurance premium is high. Bankers' profits in America
are higher than in Europe; but they must be high so
long as, for lack of modern banking methods and of uniform and well-established laws, we live financially on
volcanic ground. We have just passed through a pretty
lively earthquake, and the losses which wiped out the
profits of years show conclusively that the premiums
earned were not too large, in proportion to the risk. Do
not let us blame the insurance company, but let us be
doubly careful to build only in steel and stone and let us
build on solid ground. For, luckily, in this instance it
within our power to transform that volcanic ground into
a solid foundation.
is

are apt to think that our problems are peculiar to
us and that we must find our own way of solving them.

we had only

American and European
history is being written with the same ink, that man is
man, with similar virtues and similar vices, on both sides
If

realized that

THE CURRENCY PROBLEM

148

of the Atlantic,

we might have

much from exavoid much ama-

learned

perience, and might have been able to
teurish and harmful legislation.

also had many sovereign states which ultiformed
a union. In each of these states there was
mately
a different legal system,
German law, Roman law,
Code Napoleon and all kinds of local laws. Yet
Germany organized a commission, which worked for
twenty-five years and which finally completed a code
of laws to govern the entire country.
A uniform commercial code had, in fact, been created far earlier, and
Germany has now for many years been enjoying the ad-

Germany

vantages of uniformity.

With

us, also, there are surely

on which
the East and the West, the North and the South, can
agree, and where uniformity of state legislation can be
if for no other reason than to avoid the much
secured

many

questions, social as well as commercial,

disliked federal regulation.

In Germany, Sweden, and Switzerland

the last of

we find that
the countries to adopt a central bank
obstinate opposition was long directed against the creation
of such a central institution, chiefly by the then existing numerous banks of issue, which feared lest their business might suffer. In each country in turn the very
banks that were forced to abandon the right of issue

become banks of discount and deposit acknowledge to-day that they have derived nothing but profit from
the change, and that the central bank has conferred unalloyed benefit on the entire country.
in order to

V
While our investigation has disclosed the nature of the
has, at the same time, also made it evident that
are still far removed from this ideal ; so far, in fact,

ideal,

that any attempt to reach

immediately would be

futile.

AMERICAN AND EUROPEAN BANKING

149

We can, indeed, advance only step by step, but I am convinced that we shall never attain the summit of our ambitions or reach a completely satisfactory condition until
we have worked our way to a central bank and to the adop-

and equitable statutes. We cannot secure
uniform laws promptly, but we can begin by modifying
some of the laws mentioned above, which are incompatible

tion of clear

with

common

sense,

and by creating

truly responsible

boards of directors like those in Europe.
We cannot have an effective modern central bank, because there are no modern American bills of exchange,
and we cannot create a sufficient amount of modern paper
without a central bank. We cannot have stock -exchange
settlements without the abolition of the usury law; but
even after its abolition we must have a bill market, before
we can do away with daily settlements and call loans,
based on these daily transactions. Nevertheless, every
one of these changes will have to be effected some day, and
it is all
important that each successive step in currency
and banking reform be made with this end in view.

From
Aid rich

this standpoint
bill

nor the Fowler

step in the right direction.

evident

why

neither the

can be deemed to be a
Every measure is bad which
bill

accentuates decentralization of note issue and of reserves ;
or which exclusively uses bonds as a basis for additional
circulation;

or which gives to commercial banks power to issue
additional notes against their general assets without restricting them in turn in the scope of their
general business, and without creating some additional independent control, indorsement, or guaranty;

or which gives arbitrary powers exclusively to political
officers, often untrained in business, and usually holding office only for a short period.

THE CURRENCY PROBLEM

150

central clearing house, with power to issue against
clearing-house certificates notes to be guaranteed by the

United States, would, in my judgment, form the best
solution for the time being.
The creation of a central
with
house
a
of
its own and with a limited
clearing
capital
the
revenue
dividend,
surplus
going to the United States^
would leave present conditions undisturbed, and, while
offering immediate relief, would at the same time form
a sound basis for future developments.' The plan would
possess the following advantages
1.

The
It

clearing house would have its own gold reserve.
centralize the additional note issue and

would

would therefore do better service

in permitting legitimate

expansion as well as in forcing effective contraction,
which, with sixty-five hundred independent note issuers,
is

well-nigh impossible.

While additional notes issued by a bank mean an increase of deposits, which may perhaps be called any day
or which, on the other hand, may remain forever, an
advance by the central clearing house would be made to
the banks for a given period, after which the money must
be returned. It would, therefore, be safer for the banks,
and would at the same time insure contraction after a
certain time, as in Europe.
3. The central
clearing house

would be able to accommodate commerce and industry in times of need by accepting
commercial assets, provided that they are recognized
as legitimate and safe by the indorsement of the local
clearing houses.
would leave our national banks without any further
independent note-issuing power, and would in this respect be beneficial; for additional note-issuing power
4.

should logically carry with it further restrictions as to
their privilege of doing a commercial business, whereas
their privileges in this respect should rather be increased.

AMERICAN AND EUROPEAN BANKING

151

Through the share in the profits reserved for the government, the latter would receive some return on the funds
5.

would deposit with the banks through the central
clearing house, whereas at present the government does
not receive any such return.
6. It would form a medium through which gold loans
might be contracted with European government banks in
a way similar to that by which transactions have been
concluded between the Bank of England and the Banque
de France.
7. If there were formed to supervise the management of the central clearing house a central board administered by salaried managers, as in Europe, and
comprising business men, largely selected from the
which

clearing-house committees, as well as political officials, it
would eliminate the arbitrary powers which the Secretary of the Treasury is now called upon to exercise,
and it would create a continuity of policy, which is most
essential for the development of the country.
it would show that this country is able to
a
produce body of men as honest, as trustworthy, and as
efficient as those into whose hands Europe has confided

Finally,

the care of

its

body grows,

central banks.

as the

banks come

As the confidence

in this

to feel its beneficent in-

powers of this clearing house may gradually
be increased, and thus from the joint indorsement by the
clearing houses we may gradually gain our way to the
indorsement and acceptance by individual banks, so that
we may finally be able to develop a central organ which,
safeguarded from political and from financial domination and rigidly restricted as to its scope of business, will
place us financially in a sound and healthy condition and
which will cause us in this domain, as in others, to be
respected as a modern and a completely civilized nation.
fluence, the

THE MODERN CORPORATION
BY

GEORGE

W. PERKINS

THE MODERN CORPORATION
IN the modern corporation we are confronted with a
and not a theory. Whatever may be the individual
attitude toward it, the corporation is here.
What caused
what
it
is
and
what
is
to
become
of it are live
it,
doing,

fact

questions, vital to

all

the people.

corporation, in a

way,

but another

name

for an

Broadly speaking, the first form of organiorganization.
zation between human beings, of which we know, was
the clan or tribe, in which the everyday conduct of the

was determined by the necessities of the
group. This passed on into national organization, and
then came the church as a growing and vast organizaindividuals

has come the organizing of business.
in the very beginning of things,
the universe was organized; and all that man has done
in society, in the church, in business, and all that he ever
can do in the centuries to come, can never bring to pass
so complete a form of organization, so vast a trust, so
tion.

Latest of

But before

all

this,

form of control, as passes before our eyes
each twenty-four hours of our lives as we contemplate
that all-including system of perfect organization called
the Universe. It does not require a very vivid imaginacentralized a
in

tion to picture the waste, the destruction, the chaos, that
would follow if there were not perfect organization, perfect
cooperation, perfect regulation, perfect control in the

How

could

live, for example,
between
there were constant competition
day and
night or a constant struggle for supremacy between tin*
seasons? Does any one, for a moment, think that he

affairs of the universe.
if

THE CURRENCY PROBLEM

156

would prefer such a condition to the cooperation that

now

through all the affairs of the universe ?
Organization being the all-permeating principle of the
universe, the presumption is, therefore, in favor of organization wherever we find it or wherever it can be used.
exists

The
its

corporation of to-day is entitled to that presumption ;
underlying cause is not the greed of man for wealth

and power, but the working

natural

causes

evolution.

Business was originally done by individuals trading with
one another then by a firm of two or more individuals
then by a company; then by a corporation, and latterly
;

;

by a giant corporation or what

commonly (though

perhaps inaccurately) called a "trust." Each step was
brought about by some great change that took place in
the conditions under which the people of the world lived
and worked; each step was, in fact, mainly determined
by discoveries and inventions of the human mind.

With the ox-team and the hoe we had men trading as
individuals with individuals; with the sailing vessel and
the stage-coach we had trade carried on by firms; with
the advent of the company we had the locomotive, the
steamboat, the reaping machine, and the telegraph;
with the birth of the larger corporation we had the express
train, the Atlantic cable, the

ocean

liner,

the local tele-

phone, the seeder, the reaper, and the binder; with the
giant corporation came the Twentieth Century Limited,
the crossing of the ocean in five days, the long-distance
telephone, wireless telegraphy, and a great extension of

machinery into agricultural work.
In our forefathers' time it took about half as long to
sail down the Hudson River from Albany to New York
as

now

takes to cross the Atlantic.

The

actual distance

from Albany to New York is no less, nor is the distance
from New York to London any less, now than then; but

THE MODERN CORPORATION

157

the inventions of man have so compressed both space
and time that the financial and commercial markets of
America and Europe are in constant exchange with one

another every moment of the day. The business man in
New York or Chicago can exchange several cable messages
with London or Paris during the business hours of a day,
and whenever an hour is clipped off the record of an ocean
greyhound the people of the world are drawn so much

Because of the inventions of man, the
American
desert
of our boyhood geographies has,
great
a
within
comparatively few years, largely become a vast
nearer together.

and, again because of these inventions,
with
coupled
organized business methods, the product of
this vast field is being marketed in remote parts of the
fertile

field;

globe.

The days when business was a local affair of individual
with individual were the days when people were scattered,
knowing little of each other and having no dealings with
each other outside the radius of a few miles. Then
later, electricity came into man's service;
and then, by leaps and bounds, the possibilities of trade
became extended to a radius of hundreds of miles, even of

steam and,

thousands of miles.
trade loomed up.

Vast

The

possibilities

of international

corporation sprang into active

being as an inevitable result of this expansion of trade;
for no one man, no firm, no small company, could provide
the capital or the organization to cope with such opportunities.
The only bridge that can span the ocean is the

The real cause of the corporation was not
corporation.
so much the selfish aims of a few men as the imperative
necessities of all

men.

The first stage of corporationism was one of conflict
the old destructive competition carried forward under
the new business forms. Trade could be carried farther,

much

farther than before

;

and so

A invaded

B's territory

THE CURRENCY PROBLEM

158

and

furious,

hand

The

retaliated.

and the war

The
men who

fighting became faster and more
in commerce became a hand-to-

trenches were being filled with able,
in the colossal struggles.
Cut
splendid
rates and rebates became the order of the day.
Many
conflict.

fell

and many houses which had been successful in
legitimate lines of business went down in bankruptcy.
Labor suffered and the public suffered. The cost of
doing business steadily increased, for war costs money.
It became imperative that something be done to end
the havoc.
Prosperity could come only with peace. Inrailroads

in a way unconsciously, men began to get
not
so much for profit as for protection
and
together,
so, under conditions which, in the mechanical developstinctively,

;

ment

came on as naturally as day follows
corporation came into existence and is the

of the world,

night, the great
live, burning issue of to-day.
Perhaps the most useful achievement of the great corporation has been the saving of waste in its particular
line of business.

assembling the best brains, the best

genius, the best energy in a given line of trade, and coordinating these in work for a common end, great results
have been attained in the prevention of waste, the utilizing of by-products, the economizing in the manufacture
of the product, the expense of selling,
and more uniform service.

and through

better

This same grouping of men has raised the standard of
their efficiency.
Nothing develops man like contact with
other men. A dozen men working apart and for separate
ends do not develop the facility, the ideas, the general
effectiveness that will become the qualities of a dozen
men working together in one cause. In such work emulation plays a useful part
it does all the good and none of
;

the

did

harm
:

that the old method of destructive competition
the old competition was wholly self-seeking and often

THE MODERN CORPORATION
ruinous, while the

same

organization,

new
is

159

rivalry, within the limits of the

constructive

and

uplifting.

Thus

the great corporation has developed men of a higher order
of business ability than ever appeared under the old conditions ; and what a value this has for the coming generation

The

opportunity, the inducement it provides to
all-around larger men than those of earlier

become

generations could

become

We have heard many warnings that because of the great
corporation
tion

we have been robbing

the oncoming generaNothing is more absurd.

its

opportunities.
the
corporation, the more certain is the office
larger
boy ultimately to reach a foremost place if he is made
of the right stuff, if he keeps everlastingly at it, and

The

determined to become master of each position he

occupies.
In the earlier days the individual in business left his
the firm to its relations.
business, as a rule, to his children

Whether or not they were competent did not determine
the succession. But the giant corporation cannot act
Its management must have efficiency,
in this way.
above and beyond all else it must have the highest order
of ability; and nothing has been more noticeable in the
of corporations in the last few years than that
so
called, as an element in selecting men for
"influence,"
Everyresponsible posts, has been rapidly on the wane.

management

thing

giving

way and must

give

way

to the one

supreme

test of fitness.

And

not possible that the accumulating of large
fortunes in the future may be curtailed to a large extent
is

through the very workings of these corporations? Are
there not many advantages in having corporations in
which there are a large number of positions carrying with
them very handsome annual salaries, in place of firms
with comparatively few partners, the annual profits of

THE CURRENCY PROBLEM

160

whom

were often so large that they amassed
few years ? A position carrying a salary so
great as to represent the interest on a handsome fortune
can be permanently filled only by a man of real ability,
so that in case a man who is occupying such a position
dies, it must, in turn, be filled by another man of the
same order; while the fortune might be, and most likely
would be, passed on regardless of the heir's ability. Therefore, the more positions of responsibility, of trust, and of
honor, that carry large salaries, the more goals we have
for young men whose equipment for life consists of integrity, health, ability, and energy.
Furthermore, the great corporation has been of benefit
each one of

fortunes in a

to the public in being able to standardize

wares, so that
Wages are un-

its

they have become more uniformly good.
questionably higher and labor is more steadily employed,
for, in a given line of trade, handled to a considerable

by a corporation, there are practically no failures
while, under the old methods of bitter, relentless warfare,
failures were frequent, and failure meant paralysis for
extent

;

labor as well as for capital.

The great
business

corporation is unquestionably making general
conditions sounder. It is making business

one reason, because firms inevitably change
dissolve, while a corporation may go on indefinitely.
It is making business steadier, for another and more
potent reason, because it is able to survey the field
much better than could a large number of firms and individ jals, and, therefore, vastly better able to measure the

steadier, for

and

demand for its output and, if properly managed, to prevent
the accumulation of large stocks of goods that are not
needed
a condition which often arose under the old
methods, when many firms were in ruthless competition
with one another in the same line of business, oftentimes
producing serious financial difficulties for one and all.

THE MODERN CORPORATION

161

Broadly and generally speaking, the corporation as we
know it to-day, as we see it working and feel its results,
In many cases actual and desis in a formative state.
it to be
put together
perately serious situations caused
serious
have been
cases
mistakes
In
many
hurriedly.
in
the methods of
made in the forms of organization,
have
ends
that
been
in
the
and
sought. In
management,
for
some instances the necessity
corporations has grown
faster than has the ability of men to manage them.
Yes, mistakes have been many and serious. But the corit is a condition, not a theory, and
poration is with us
to kill it or to
there are but two courses open to us
;

you would kill it, you must kill the cause, or
the thing will come back to plague you. The principal
causes are steam and electricity.
Could anything be more dangerous to the public welfare
than steam and electricity themselves? Then why not
keep

it.

?
prohibit their use and, so far as possible, abolish them
Has any one ever suggested this ? No. Why ? Because

were too apparent and so we have bent our
energies towards regulating and controlling them by using
all that is good in them and carefully protecting ourIf we are not willing
selves from all that is injurious.
of
cause
the
to exterminate
corporations, we can never

their benefits

;

permanently exterminate the corporation itself. There is,
then, but one thing left to do, viz. to regulate and control
them, to treat them as we have treated steam and electricity, to

selves

use the best that

from the worst that

is
is

them and

to protect our-

them.

A large percentage of the mistakes of corporate management have occurred because managers have

failed

that they were not in business as individuals,
but were working for other people, their stockholders,
n-jilize

whom

they were in honor bound honestly and faithfully
to serve; further, that they owed a duty to the general

THE CURRENCY PROBLEM

162

public and could, in the long run, best serve themselves
and their stockholders by recognizing that duty and respecting

it.

of our corporations, being of comparatively recent origin, have, at the outset, been managed
by men who were previously in business, in some form or

Then,

too,

many

another, for themselves

;

and

has been very

difficult for

- - to cease from
change their point of view
looking at questions from the sole standpoint of personal
gain and personal advantage, and to take the broader

such

men

view of looking at them from the standpoint of the com-

munity of interest principle.
It is by no means clear that the danger point in the
development of corporations is found in the giant corporation.
Indeed, it is more likely to be found in the corporation of lesser size, because the latter does not attract the

eye of the public sufficiently to have its managers impressed
with the fact that they are semi-public servants
responsible, not only to their stockholders, but to the public as
It is easier and more natural for a giant corporation
well.
to adopt a policy of publicity with the public and of fair
dealing with its associates in the same trade, because such

a course, from the broad, far-reaching view of the great
corporation, becomes the wisest, most successful course.
again, the relation of the giant corporation to its
labor is an entirely different relation from that of the small

Then

corporation or the firm to its labor the officers and trustees
of a giant corporation instinctively lose sight of the interest
of any one individual because such interest at best is in;

This places the
trustees
of
the
giant corporation in a position
J>
where they can look on all labor questions without bias
and without any personal axe to grind
solely from the
finitesimal
officers

compared with the whole.

and

broadest possible standpoint of what is fair and right between the public's capital, which they represent, and the

THE MODERN CORPORATION
public's labor,

which they employ.

163

In short, they assume

such matters the attitude of the real trustee, the

all

impartial

the

judge,

intelligent,

well-posted,

and

fair

arbitrator.

The great semi-public business corporations

of the coun-

whether they be insurance, railroad, or industrial,
have in our day become not only vast business enterprises,
but great trusteeships; and there would be far less
attacking of corporations if this truth were more fully

try,

and respected. The larger the corporation bex
the
comes,
greater become its responsibilities to the entire
community. Moreover, the larger the number of stockrealized

holders, the

assumes the nature of an institution

for savings.

not sufficient in corporate management to do the
best one can from day to day.
Corporate responsibility^,
extends beyond to-day. It is the foresight, the planning^
It is

ahead, the putting the house in order for the storms of
the future, that are the true measure of the best and
highest stewardship as well as of the highest order of

managerial

ability.

The

corporations of the future must be those that are
semi-public servants, serving the public, with owner-

among the public, and with labor so
and
fairly
equitably treated that it will look upon the
corporation as its friend and protector rather than as an
ever-present enemy, above all believing in it so thorship widespread

oughly that

will invest its savings in the corporation's
become working partners in the business.

and
would have been impossible,

securities

day of the ox-team,
for people in every State of this Union to be partners in
any one business; and yet to-day we have at least one
It

giant

corporation

made up

in the

partners

resident

not

only
every one of our States, but in almost every
country in the world, and reinforced by thousands of
in

THE CURRENCY PROBLEM

164
its

own employees having become

stockholders them-

selves.

During the past few months, when the campaign against
corporations was most intense, and when our country was
in a turmoil of business perplexity and doubt, the people
who, we are told, have so suffered because of the trusts and
are so bitterly opposed to their existence, have been
investing in these very securities to an unprecedented
extent.

illustrate:

holders of the Great
in

number from 2800

during the past year the stockNorthern Railway have increased
to over 11,000.

The

stockholders

of the Pennsylvania Railroad have increased from 40,000
The stockholders of the
York Central
to 57,000.

New

have increased from 10,000 to over 21,000.

During the

same period the number of the stockholders
Corporation increased by over 30,000: the

in the Steel
total

num-

ber of individuals holding stock in that corporation
now exceeds 100,000, and the average holding of the
$868,000,000 of stock of the Steel Corporation is to-day
about 98 shares per person. Can there, then, be any
question that these great institutions have become semipublic, and when we contemplate the alternative of ex-

terminating or of regulating them, must we not realize
that they are owned, not by a few individuals, but by a
vast number of people representing our thriftiest class ?
.That these corporations have thus become not only vast
^N business enterprises, but great and growing institutions
for savings, surely imposes a new and more sacred responsibility,

not only upon corporation managers, but

legislators as well.
If the managers of the giant corporations feel

upon

themselves

to be semi-public servants, and desire to be so considered,
they must, of course, welcome supervision by the public,

\exercised through its chosen representatives who compose
the government. Those who ask the public to invest

THE MODERN CORPORATION
money

165

an enterprise are in honor bound to give the

public, at stated intervals, evidence that the business in

question

be not only
constituted

ably and honestly conducted ; and they should
willing, but glad, that some authority, properly

by our government, should say to stockmanage-

holders and the public from time to time that the
ment's reports and methods of business are

correct.

They should be willing to do this for their own relief of
mind, since the responsibility of the management of a
giant corporation is so great that the men in control should
be glad to have it shared by proper public officials representing the people in a governmental capacity.
There is scarcely a corporation manager of to-day,
who is alive to his responsibilities, to the future growth
of this country, and to the enormous opportunities before
us for foreign trade, who would not welcome this kind of
supervision could he but feel that it would come from the

national government, acting through an intelligent and
fair-minded official. To be faced, however, with the requirement to report to and to be supervised and regulated
forty or fifty governments, with varying ideas and laws,
of course suggests difficulties that are almost insurmount-

For business purposes, at least in the
larger business affairs of this country and from a practical
standpoint, state lines have been obliterated. The telegraph, the express train, and the long-distance telephone
have done their work. For business purposes in this
able obstacles.

country the United States government is a corporation
\\ith fifty subsidiary companies, and the sooner this is
realized the sooner we can get the right kind of supervision
of semi-public business enterprises and, in this way, give
the public the publicity and the protection to which it is

conduct of business by corporations. In
no other way can the public be protected from evils in

entitled in the

corporation management.

THE CURRENCY PROBLEM

166

The

criticism

often

made

that this would

amount

bringing business into politics. That depends. We have
at Washington a Supreme Court.
Membership in that

most honorable body
If,

is the goal of every aspiring lawyer.
for distinguished service and ability, we honor lawyers
promoting them to decide our most difficult legal

questions,

why should we

promoting them

not honor our railroad men by
our most difficult railroad

to decide

questions, our industrial

men

the industrial questions

For example if we had at Washington a Railroad Board
of Control, and that board were composed of practical railroad men, would not membership in such a board come
:

gradually to be the goal of railroad men ? And does any
one, for a moment, think that if such a board were com-

posed of practical railroad

men

partial to railroad

such a board, a

interests

man

could not

would be especially
Once on
Certainly not.
it

recognize the great
responsibility and honor of the office and administer it
for the best interests of the public and of the railroads
fail to

the business man would
no
longer controlled by the
merge
mere business view, and would act the part of a statesman, to the improvement of governmental administration
and not to the lowering of its level.
This kind of expert, high-minded supervision would
at

one and the same time.

Thus

into the public official,

not be opposed by the business interests of the country.
What they dread is unintelligent, inexperienced adminis-

National supervision, under a law requiring
who supervise should be practical men, thoroughly versed in the calling, would solve most of our difficult problems and be of the greatest possible benefit and
protection to one and all.
To such rational supervision may we not look forward
as a result of the sober second thought of the people and
our legislators, of their calming down from the bitter

tration.

that those

THE MODERN CORPORATION

167

denunciation of corporations which has been the prevailing outcry for some years?
In spite of what apparently has been an almost persistent determination to misunderstand his real purpose,
the fact is that President Roosevelt, from the time that

he was governor of New York down to his message to
Congress in January, 1908, has repeatedly proclaimed his
belief that modern industrial conditions are such that
combination is not only necessary but inevitable; that
corporations have come to stay, and that, if properly
managed, they are the source of good and not evil.
The next period in corporation development should be
a constructive one, constructive as to the relations of the
corporation to its labor and to the public, and this can
best be accomplished by the method of cooperation with
supervision.

almost heresy to say that competition is no longer
of trade.
Yet this has come to be the fact, as applied to the old unreasoning and unreasonable competiThe spirit of
tion, because of the conditions of our day.
> cooperation is upon us. It must, of necessity, be the
It is

the

life

next great form of business development and progress.
At this moment many people are looking askance upon
the change, still believing in the old doctrine. They hold
first, because they have inherited
because
second,
they think that competition
means lower prices for commodities to the public; third,
because they think it provides the best incentive to make
men work. This may have been the best-known method
at one time, but it is not and cannot be true in the

for several reasons

the belief;

mechanical, electrical age in which

live.

Tin*

lii^lily developed competitive system gave ruinously
low prices at one time and unwarrantedly high prices at
another time. When the low prices prevailed, labor was

cruelly hurl

bills.

when the high

prices prevailed, the public

THE CURRENCY PROBLEM

168

From every point of view the cooperative principle is to
be preferred. It is more humane, more uplifting, and,
with proper supervision, must provide a more orderly
conduct of business,
freer from failure and abuse,
guaranteeing better wages and more steady employment
more favorable average price to the
consumer, one on which he can depend in calculating

to labor, with a

his living expenses or

So much for
moment longer

making

his business plans.

Now may I detain you a
corporations.
while I say a word to the young men who

are here to-day.

How

hopeless would your condition be if the world
were perfect, if there were nothing left for you to do to
improve conditions, if those who had gone before had
finished the job!
Really, can you imagine a condition

more discouraging, more hopeless
tion

Happily, this

tions have

made

an oncoming genera-

not your situation.

mistakes.

Many

Our

of these

corpora-

have been

Things have been done wrongly. Many
wrongs are now being corrected. But in those
mistakes, in that mismanagement, lies the opportunity of
the man of to-day and of the young man of to-morrow.
Your task will be to search out and eliminate the bad in
pointed out.
of these

all

that has preceded you, retaining the good, preserving
it for the benefit of
yourselves and of those

and adding to

who

follow you.
us, then, take the best that

Let
that

find,

we find, cut out the worst
improve, develop, make more useful and

beneficial.

In this great country of ours there stands out preeminently the inventive genius, the masterful ability, the resourcefulness, the courage, the optimism of America's busi-

At no period in the world's development have
there been in any given country at any one time so many
ness men.

THE MODERN CORPORATION
men

169

from twenty to

to embrace so

many

thirty years of age, standing ready
opportunities and to move on to such

splendid achievements, as we have in our United States
It cannot be possible that these young men will
to-day.
be pessimists, that they will miss the legion of opportunities that are theirs

if
many of you realize how fortunate in one
alone
you are as compared with the young men
respect
You are not obliged to spend
in many other countries.

wonder

a number of the most impressionable years of your lives
compulsory military service, learning to obey orders
which have no relation to the realities of life and its
in

Those precious years in this country
are given to you to observe, to learn, and to prepare for
the practical work of the world. Your individuality is
not hampered or circumscribed by your being molded
into a machine in your early manhood.
You are free
to make of yourself what you will.
What would the young
men of Europe give for their opportunities if some magic
wand could give them one currency, one language, one
government, one people, from London to Moscow
Success does not come by chance. It is an opportunity
that has been lassoed and organized.
I doubt if a man
ever met with success, worthy to be called success, who
was not an optimist, who did not believe in something,
heart and soul, and who did not play fair. And remember
that when you set about a task which you really want
to accomplish, the work involved is not drudgery, it is
actual successes.

the most invigorating sort of play.
Do not lose your red blood ; whatever you are, wherever
or however you are situated, keep your heart warm and

your humanity at par. Push forward be of good cheer.
Believe in our people, in our methods, in our country,
;

your neighbor and in yourself; and remember, if
you are going into business, that, after all is said and

THE CURRENCY PROBLEM

170

your fortune is made, however great it
be, --in the small hours of the night, in your heart

done,

may

after

of hearts, the thing
satisfaction in, and

you are really going to enjoy, take
be proud of, the thing that will
over
the
carry you
rough places, that will keep your
and
heart strong
your brain clear, will be the thought of
what you have done to help others, what you have left
to a world that has offered so

much

to you.

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September, 1907.

HENRY

Trade Unions and Trusts
Party of New York
Slave Labor in the Charleston District

FRANK

R. SEAGER

CARLTON
ULRICH B. PHILLIPS
CHARLES R. LINGLEY
K. RICHARD WALLACH
GEORGE H. HAYNES

The Workingmen's
Burgoyne's Troops
De Facto Office

The Education of Voters
The Ethics of Empire

HENRY

JONES FORD

December, 1907.

WM. Z. RlPLEY
HENRY R. SEAGER
HAROLD HARPER
,WM. BENNETT MUNRO
G. W. BOTSFORD
WM. A. DUNNING

Railroad Valuation

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The Office of Mayor in France
The Roman Gens
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